(Deferred Tax Liability, Change in Tax Rate, Prepare Section of Income Statement) Novotna Inc.’s only temporary difference at the beginning and end of 2006 is caused by a $3 million deferred gain for tax purposes for an installment sale of a plant asset, and the related receivable (only one-half of which is classified as a current asset) is due in equal installments in 2007 and 2008. The related deferred tax liability at the beginning of the year is $1,200,000. In the third quarter of 2006, a new tax rate of 34% is enacted into law and is scheduled to become effective for 2008. Taxable income for 2006 is $5,000,000, and taxable income is expected in all future years.

Instructions

(a) Determine the amount reported as a deferred tax liability at the end of 2006. Indicate proper classification(

s).

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

(c) Draft the income tax expense portion of the income statement for 2006. Begin with the line “Income before income taxes.” Assume no permanent differences exist.