Question

Buffalo Inc.’s only temporary difference at the beginning and end of 2016 is caused by a $3,300,000 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 2017 and 2018. The related deferred tax liability at the beginning of the year is $1,320,000. In the third quarter of 2016, a new tax rate of 34% is enacted into law and is scheduled to become effective for 2018. Taxable income for 2016 is $5,500,000, and taxable income is expected in all future years.

Determine the amount reported as a deferred tax liability at the end of 2016.

Deferred tax liability

$

Prepare the journal entry necessary to adjust the deferred tax liability when the new tax rate is enacted into law. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

Draft the income tax expense portion of the income statement for 2016. Begin with the line “Income before income taxes.” Assume no permanent differences exist. (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Buffalo Inc.’s Income Statement (Partial) December 31, 2016For the Year Ended December 31, 2016For the Quarter Ended December 31, 2016
AdjustmentCurrentDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues		$
AdjustmentCurrentDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues
Adjustment    Current    Dividends    Expenses    Income before Income Taxes    Income Tax Expense    Net Income / (Loss)    Retained Earnings, January 1    Retained Earnings, December 31    Revenues    Total Expenses    Total Revenues	$
Adjustment    Current    Dividends    Expenses    Income before Income Taxes    Income Tax Expense    Net Income / (Loss)    Retained Earnings, January 1    Retained Earnings, December 31    Revenues    Total Expenses    Total Revenues
AdjustmentCurrentDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues

Answer 1

Determine the amount reported as a deferred tax liability at the end of 2016.
		Future Years
	2017	2018	Total
Future taxable (deductible) amounts	$  1,650,000.00	$1,650,000.00	$ 3,300,000.00
Tax Rates  ($1320000/3300000 = 40%)	40%	34%
Deferred tax liability (asset)	$     660,000.00	$   561,000.00	$ 1,221,000.00
Deferred tax liability	$  1,221,000.00
b) Prepare the journal entry necessary to adjust the deferred tax liability when the new tax rate is enacted into law. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation	Debit	Credit
Deferred Tax Liability	$       99,000.00
Income Tax Expense		$     99,000.00
Deferred tax liability at the end of 2016  (computed in (a))	$  1,221,000.00
Deferred tax liability at the beginning of 2016	$  1,320,000.00
Deferred tax benefit for 2016 due to change in enacted tax rate	$     (99,000.00)
c)Draft the income tax expense portion of the income statement for 2016. Begin with the line “Income before income taxes.” Assume no permanent differences exist. (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Buffalo Inc.’s
Income Statement (Partial)
For the Year Ended December 31, 2016
Income before income taxes		$5,500,000
Income tax expense
Current (5500000 x 40%)	$2,200,000
Adjustment due to change in tax rate	$     (99,000.00)	$2,101,000.00
Net income		$3,399,000.00