Chapter 17, Problem 17.5P

Temporary Differences, Deferred Tax Liabilities, Change in Tax Rates. Kimm-Mills Incorporated (KMI) acquired a piece of equipment at a total cost of $5,400,000. KMI uses the straight-line method of depreciation for financial reporting purposes and an accelerated method for tax purposes. The asset has a 6-year life for book purposes and for tax purposes. There is no estimated scrap value KMI is subject to a 40% tax rate. We present the income and depreciation summary for both tax and GAAP

Year	Income before Tax and Depreciation	Tax Depreciation	GAAP Depreciation
1	$1,200,000	$1,080,000	$ 900,000
2	1,880,000	1,728,000	900,000
3	1,980,000	1,036,800	900,000
4	2,100,000	622,080	900,000
5	1,750,000	622,080	900,000
6	1,200,500	311,040	900,000
Totals		$5,400,000	$5,400,000

Required

1. a. Determine the balance of the deferred tax account at the end of each year.
2. b. Prepare the journal entries to record the tax provision for each year.
3. c. Prepare the journal entry to record the effect of a 35% income tax rate that is enacted into law effective as of the beginning of Year 4.