Question

novotna inc.'s only temporary difference at the beginning and end of 2024 is caused by a $3 million deferred gain for tax purposes for an installment sale of a plant asset, and the related receivable (only one-half of which is classified as a current asset) is due in equal installments in 2025 and 2026. the related deferred tax liability at the beginning of the year is $900,000. in the third quarter of 2024, a new tax rate of 20% is enacted into law and is scheduled to become effective for 2026. taxable income for 2024 is $5,000,000, and taxable income is expected in all future years. prepare the journal entry necessary to adjust the deferred tax liability when the new tax rate is enacted into law.

Answer 1

To adjust the deferred tax liability when the new tax rate is enacted into law, a journal entry is made to reflect the change in the liability.

Step-by-step explanation:

To adjust the deferred tax liability when the new tax rate is enacted into law, the journal entry would be as follows:

1. 
   
3. Debit Deferred Tax Liability - Current ($450,000)
4. 
   
6. Debit Deferred Tax Liability - Non-Current ($450,000)
7. 
   
9. Credit Deferred Tax Liability ($900,000)

This journal entry reflects the decrease in the tax rate from 25% to 20%, resulting in a decrease in the future tax liability of Novotna Inc. The debit entries reduce the deferred tax liability, while the credit entry offsets the decrease.