After preparing a preliminary version of its financial statements, a company found that it made a mistake in computing bad debt expense on the books. The company needed to reduce Bad Debt Expense on its books by $100,000.
This correction will reduce Bad Debt Expense, which will increase Pre-Tax Income. Because Pre-Tax Income goes up, Income Tax Expense will be higher. There is no change for tax purposes, so the journal entry has to be Dr. Income Tax Expense, Cr. Deferred Tax Assets. Thus, only Income Tax Expense will increase.
