Question

At December 31, 2017, Fell Corporation had a deferred tax liability of \(680,000, resulting from future taxable amounts of \)2,000,000 and an enacted tax rate of 34%. In May 2018, a new income tax act is signed into law that raises the tax rate to 40% for 2018 and future years. Prepare the journal entry for Fell to adjust the deferred tax liability.

Short answer

Taxable amountis the type of amount an organization calculates aftersubtracting all of its deductions. Theeffective tax rateis implied on thetaxable amounttocalculate the tax.

Step-by-step solution

Computation of deferred tax liability

$\begin{array}{rcl}\mathrm{Deferred}\mathrm{Tax}\mathrm{Liability}& =& \mathrm{Taxable}\mathrm{income}\times \mathrm{Difference}\mathrm{in}\mathrm{the}\mathrm{tax}\mathrm{rate}\\ & =& \$2,000,000\times (40\%-34\%)\\ & =& \$120,000\end{array}$

Journal entry

Fell Corporation
Journal Entry
Date	Particulars	Debit	Credit
2017	Income tax expense	$120,000
	Deferred tax liability		$120,000
	(To record the deferred tax liability)