Question

Shwonson Industries reported a deferred tax asset of $8.50 million for the year ended December 31, 2020, related to a temporary difference of $34 million. The tax rate was 25%. The temporary difference is expected to reverse in 2022, at which time the deferred tax asset will reduce taxable income. There are no other temporary differences in 2020-2022. Assume a new tax law is enacted in 2021 that causes the tax rate to change from 25% to 15% beginning in 2022. (The rate remains 25% for 2021 taxes.) Taxable income in 2021 is $44 million. Required: 1. Prepare the appropriate journal entry to record Shwonson's income tax expense in 2021. 2. What effect, will enacting the change in the 2022 tax rate, have on Shwonson's 2021 net income? & Answer is not complete. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare the appropriate journal entry to řecord Shwonson's income tax expense in 2021. (If no entry is required for a transaction/event, select "No journal entry required in the first account field. Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).) No Transaction General Journal Credit Income tax expense Deferred tax asset Income taxes payable Debit 10.00 8.5 X 11.00 Required 2 < Prey 12 of 19 . Next >

Answer 1

1. Prepare the journal entry to record S Industries income tax expense in 2021 as follows: No. Credit Debit $ 14.4 Transaction General Journal Income Tax Expense ($ 3.4 million + $ 11 million) Deferred Tax Asset Income Tax Payable ($ 44 million x 25%) (To record the reversal of deferred tax asset due to reduction in tax rate from 2022 $ S 3.4 11 2. Determine the effect of tax rate change in 2022 on S Industries net income for 2021 as follows: Difference in Difference in Tax Income Rate $34 25%-15% 10% Effect on net income $ 34 x (25%-15%) S 3.4 Hence, with the increase in tax rate from 15% to 25%, there will be a decrease in net income by $ 3.4 million.