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Summer Sage, Inc. starts the year with a cumulative favorable temporary difference (due to accelerated depreciation) of $100,000. During the year, the enacted tax rate on Summer Sage increases from 35% to 40%; however, book and tax depreciation are equal and the cumulative temporary difference does not change. What journal entry must Summer Sage record for deferred taxes this year

Sagot :

Anthougoidn

Answer:

Summer Sage, Inc.

Journal Entry for deferred taxes this year:

Debit Deferred tax asset $5,000

Credit Tax expense $5,000

To adjust the deferred tax asset from $100,000 to $105,000 because of the 5% increase in tax rate from 35% to 40%.

Explanation:

When the tax rate increases, it also increases the deferred tax asset balance.  To record the increase, the deferred tax asset account is debited while the tax expense is credited.  This effectively reduces the tax expense for the current period while increasing the tax expense for the future.

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