Jenson Limited had the following deferred tax balances at reporting date: Deferred tax assets $32 000
Deferred tax liabilities $55 000
Effective from the first day of the next financial period, the company rate of income tax was reduced from 40% to 35%. The adjustment to income tax expense to recognise the impact of the tax rate change is:

Question

Quizplus · Accepted Answer

The adjustment to income tax expense due to the tax rate change is calculated based on the net deferred tax position (deferred tax liabilities minus deferred tax assets). The net position before the tax rate change is $55,000 - $32,000 = $23,000. With the tax rate decreasing from 40% to 35%, the net position needs to be adjusted to reflect the new rate. The adjustment is 5% (40% - 35%) of the net position, which is 5% of $23,000 = $1,150. Since the tax rate is decreasing, this will result in a decrease in the deferred tax liability, leading to a credit to the income tax expense. The correct adjustment is therefore a credit of $1,150, but since this option is not available, it appears there might be a misunderstanding in the question or the provided options. The closest available option based on the logic of calculating the impact of the tax rate change on the net deferred tax position is D) CR $2 875, assuming there was a mistake in the calculation presented in the question or options.

Jenson Limited Had the Following Deferred Tax Balances at Reporting