Yen
Inc.’s only temporary difference at the beginning and end of 2011 is caused by
a $3.3-million deferred gain for tax purposes on an instalment sale of a plant
asset. The related receivable (only one half of which is classified as a
current asset) is due in equal instalments in 2012 and 2013. The related future
tax liability at the beginning of the year is $1,320,000. In the third quarter
of 2011, a new tax rate of 39% is enacted into law and is scheduled to become
effective for 2013. Taxable income is expected in all future years.
Instructions
(a)
Determine the amount to be reported as a future tax liability at the end of
2011. Indicate its proper classification(s).
(b)
Prepare the journal entry (if any) that is necessary to adjust the future tax
liability when the new tax rate is enacted into law.
(a)
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Future Years
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2012
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2013
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Total
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Current
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Non- current**
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Future taxable amounts
Tax rate
Future income tax liab.
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$1,650,000
40%
$ 660,000
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*
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$1,650,000
39%
$ 643,500
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$3,300,000
$1,303,500
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* The prior tax rate of 40% is calculated by dividing
the $1,320,000 balance of the future income tax liability account at
January 1, 2011, by the $3,300,000 temporary difference at that same date.
** One-half of the instalment receivable is
classified as a current asset and one-half is non-current. Therefore, the
future income tax liability related to the portion of the receivable coming due
in 2012 is current and the future income tax liability balance related to the
portion of the receivable coming due in 2013 is non-current.
(b)
Balance
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(Taxable)
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Sheet
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Temporary
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Tax
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Future
Tax
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Account
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Differences
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X
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Rate
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(Liability)
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Receivable
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($3,300,000)*
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several
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($1,303,500)
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Future income tax
liability, as revised (1,303,500)
Future income tax liability before
rate adjustment (1,320,000)
Decr. in future income tax
liability and future
income tax
benefit for 2011 from tax rate change $16,500
Future Income Tax Liability............. 16,500
Future
Income Tax Benefit....... 16,500
