Question

At the end of December 2013, Rosenfeld Co. had $10,000 of Deferred Tax Assets related to its Allowance for Doubtful Accounts. In response to low public approval ratings (and after a particularly boisterous holiday party), the US Congress passed a law to reduce the Federal Statutory Tax Rate from 35% to 20% on December 31, 2013. As a US company, Rosenfeld had to immediately adjust the balance of its DTAs based on the new law. Which of the following items would be decreased by the entry to adjust the balance in Deferred Tax Assets?

a. Income Tax Payable.b. Income Tax Expense.c. Net Income.d. Deferred Tax Assets.e. Cash from Operating Activities.

Answer 1

Rosenfeld Co.

The item decreased by the entry to adjust the balance in Deferred Tax Assets is:

d. Deferred Tax Assets.

Step-by-step explanation:

Deferred Tax Assets on December 31 = $10,000

Federal Statutory Tax Rate = 35%

New Federal Statutory Tax Rate = 20%

The balance in the Deferred Tax Assets will be reduced to $5,714 ($10,000/35% * 20%)

This means that the Deferred tax assets will be decreased by $4,286 while the net income will be increased by $4,286.