Question

Jewett Enterprises had a deferred tax liability balance due to a temporary difference at the beginning of 2019 related to $200,000 of excess depreciation. In December of 2019, a new income tax act is signed into law that raises the corporate rate from 20% to 25%, effective January 1, 2021. If taxable amounts related to the temporary difference are scheduled to be reversed by $100,000 for both 2020 and 2021, Jewett should increase or decrease deferred tax liability by what amount?

Answer 1

Answer: increased by $5,000

Step-by-step explanation:

Given the following

Old tax rate = 20%

New tax rate = 25%

New tax rate takes effect in the year 2021 (January 1st)

Temporary difference scheduled = $100,000

Difference in tax rate = 25% - 20% = 5%

Therefore deferred tax liability is given as the temporary difference scheduled to be reversed in 2021 multiplied by the difference between the old and new tax rates.

Difference in tax rate = 5%(signifies an increase in tax rate) and ultimately an increase in Deferred tax

Temporary difference scheduled to be reversed = $100,000

(5÷100) × 100,000

0.05 × 100000 = $5,000

Therefore deferred tax liability should be increased by $5,000