On June 1, Jenni invested $4,000 into a mutual fund. By December 31, the value of the mutual fund had decreased to $3,200. Jenni did not sell any portion of the mutual fund during the year. Assuming Jenni's income tax rate on this investment will be 35%, the journal entry to record the income tax expense is

Question

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The income tax expense is calculated on the decrease in the value of the mutual fund, which is $800 ($4,000 - $3,200). This expense is recognized on Jenni's income statement, but since she has not sold any portion of the mutual fund, there is no cash inflow to pay for the tax expense. Therefore, the journal entry would be a deferred tax liability, which would decrease Jenni's taxable income for the year and ultimately reduce her tax liability. The entry would be:

Income tax expense                    $280 (35% of $800)
Deferred tax liability                   $280

Option A is incorrect because it records the decrease in value of the mutual fund as a loss, which is not correct as Jenni has not sold any portion of the mutual fund. Option C is incorrect because it records the decrease in value of the mutual fund as a gain, which is also not correct. Option D is incorrect because it records the decrease in value of the mutual fund as a dividend, which is not accurate as dividends are distributions of earnings, not declines in value.

On June 1, Jenni Invested $4,000 into a Mutual Fund