Sky Time Media Corporation’s only temporary difference at the beginning and end of 2014 is caused by a $2.5 million litigation accrual that is expected to be settled in 2016. The related deferred tax asset at the beginning of the year is $1,000,000. In the third quarter of 2014, a new tax rate of 45% is enacted into law and is scheduled to become effective for 2016. Taxable income for 2014 is $7,250,000, and taxable income is expected in all future years.

Instructions

(a) Determine the amount reported as a deferred tax asset at the end of 2014. Indicate proper classification(s).

(b) Prepare the journal entry (if any) necessary to adjust the deferred tax asset when the new tax rate is enacted into law.

(c) Draft the income tax expense portion of the income statement for 2014. Begin with the line “Income before income taxes.” Assume no permanent differences exist.