 And welcome to the session in which we will discuss the future tax rate as it relates to the third tax asset and the third tax liabilities. Simply put, how do we book the third tax asset and the third tax liabilities when the tax rate is expected to change in the future? What does that mean? Simply put, today, let's assume today is year one, the tax rate is 28%. Year two, the tax rate is 35%. In year three, the tax rate is 32%. So notice what's happening. The tax rate is changing. So when we book those, the third tax asset and the third tax liabilities, which rate do we use? Do we use the current rate? Do we use the future rate? What do we have to do? Well, we use the presently enacted means in law changes in the tax rate that become effective for a particular period. Once we know that year two by law is 35%, then we have to book the third tax asset and the third tax liability that's going to reverse in year two at 35%. Let's assume initially it was 30, then we book the entry based on 30, then they change it to 35. Well, if that's the case, we have to make an adjustment. So record the effect on the existing, the third income tax account immediately. Simply put, report the effect as an adjustment to income tax expense in the year, in the period of change. What does that mean? It means it's either going to increase your expense or it's going to decrease your expense. And as a result, if it's going to increase your expense, you might have to increase your liability. If it's going to decrease your expense, you're going to credit your expense. You might have to debit at the third tax asset or if you are reducing a liability, the third tax liability. But the adjustment will be to income tax expense. Let's take a look at this example. In X1, Adam Company has 200,000 of cumulative temporary difference that will reverse in future taxable amount. Future taxable amount means in the future, we're going to have those taxable amount. Therefore, it's going to give us the third tax liability in that $200,000. It's going to reverse 80,000 in year two, X2, 50,000 in year three, 40,000 in year four and 30,000 in year five. Hopefully, if we add them up, that's $130,000. Let's want to make sure that we have in this $70,000, the total is $200,000. I want to make sure that we already it's going to reverse. Now, the current tax rate is 40 percent. Year two and year three, the tax rate is 30 percent. Year four and going forward, it will be 25 percent. The 20 X1 taxable income for Adam is 320. The taxable income is expected for all future years. It means we don't need an allowance account because we expect to have taxable income. Well, let's start to compute the income tax expense, the deferred taxes, and the income taxes payable. Starting, as always, I mentioned, start with the income taxes payable. How much do you have to pay to the IRS? Well, it's the taxable income, 320 times the current tax rate because you have to pay them this year. X1, 128,000 is income taxes payable. We're going to start to book the journal entry. Credit income taxes payable, 128,000. It means this is the amount that we have to pay to the IRS. This is the current income tax expense. Now, we have to also compute the third component and we have to compute the income tax expense for gap purposes. Before we proceed and compute those figures, I would like to remind you, whether you are a student or a CPA candidate, I can help you. The reason you are watching this recording is because you are looking for some help. This is how you end up on YouTube. Find them me. Look, I'm going to give you an additional help. Go to farhatlectures.com. There I have additional lectures, multiple choice, true, false, whether you are a CPA candidate using those courses. That's fine. Keep them. I can help you along those courses or you are taking accounting courses. This is a partial list of all my accounting courses. All my lessons are organized by chapters, so it's very easy to follow. My CPA material is aligned with your Becker, Wiley, Gleam, Roger, Miles. I give you access to 1500 previously released AI CPA questions with detailed solution, detailed explanation. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation like this recording. The mere fact that you're watching this, it means it's benefiting you. Please click on the like button and share it with other connect with me on Instagram, Facebook, Twitter and Reddit. And recently I started a group me account CPA exam support group. Please join me and other CPA candidates studying for the exam. Now let's compute the deferred tax liability and I already told you to deferred tax liability. When I told you it's those 200,000 would result in future taxable amount means we have a deferred tax liability. How do we compute the deferred tax liability? We're going to assume we have no prior deferred taxes. We're going to do the following. For 20x2, we're going to take 80,000 and we're going to multiply it by the enacted tax rate of 30%. That's 24,000. 20x3, we're going to take 50,000, 50,000 reverse and we're going to apply it to the 30%, that's 15,000. 20x4, we have 40,000, we're going to use 25%, 20x4 and going forward we're going to be using 25%, 30,000 with reverse at this time. Notice the total reverse is 200,000. We add up all the deferred tax liability and they add up to be 56,000. 500, it means in the future we are responsible for this amount of taxes which is it will be represented by 56,500 as the third tax liability. Now what's left is we have to book the income tax expense. What is the income tax expense? The income tax expense is the current taxes and here our liabilities went up plus the third component. So the current is 128 and the liability was zero. Simply put this is how you have to look at your deferred liability. It was zero, it went up to 56,500. It means you added to the future 56,500. Therefore my current income tax expense is those two together because my liability changed which is 184,500. Now we're going to change the example a little bit. Same sets of fact. We're going to assume that we already have in the third tax liability 20,000. Simply put we're not starting with zero. We are starting with a previously 20,000 dollar. So this is what we are looking at here. We already have 20,000 dollar. So our income tax payable does not change because 320 times 40 percent. That means we book income taxes payable. Now we have to book our income at the third tax liability. The ending balance should be 56,500. However, we already have 20,000. It means there's a net increase and the net increase is 36,500. So this is the journal entry, the third tax liability, 36,500. Now income tax expense is the total of these two put together which is 164,500. So this is what you have to know about the future enacted tax rate. What should you do now? Go to my website farhatlectures.com. Don't shortchange yourself. Work multiple choice, true, false. Look at additional exercises, additional resources that's going to help you do better in your class on your CPA exam. I'm here to help you. Good luck. Study hard. And of course, stay safe.