Question

Required information [The following information applies to the questions displayed below.] Arndt, Inc., reported the following...

Required information

[The following information applies to the questions displayed below.]

Arndt, Inc., reported the following for 2018 and 2019 ($ in millions):

2018 2019
Revenues $ 990 $ 1,042
Expenses 790 830
Pretax accounting income (income statement) $ 200 $ 212
Taxable income (tax return) $ 190 $ 230
Tax rate: 40%
  1. Expenses each year include $30 million from a two-year casualty insurance policy purchased in 2018 for $60 million. The cost is tax deductible in 2018.
  2. Expenses include $3 million insurance premiums each year for life insurance on key executives.
  3. Arndt sells one-year subscriptions to a weekly journal. Subscription sales collected and taxable in 2018 and 2019 were $29 million and $48 million, respectively. Subscriptions included in 2018 and 2019 financial reporting revenues were $31 million ($13 million collected in 2017 but not recognized as revenue until 2018) and $39 million, respectively. Hint: View this as two temporary differences—one reversing in 2018; one originating in 2018.
  4. 2018 expenses included a $24 million unrealized loss from reducing investments (classified as trading securities) to fair value. The investments were sold in 2019.
  5. During 2017, accounting income included an estimated loss of $5 million from having accrued a loss contingency. The loss was paid in 2018 at which time it is tax deductible.
  6. At January 1, 2018, Arndt had a deferred tax asset of $8 million and no deferred tax liability.

Required:
1. Which of the five differences described are temporary and which are permanent differences?

Life insurance

casuality insurance expense

unrealized loss

subscription received

loss contingency

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Answer #1
Life insurance Permanent Difference
Casualty insurance expense Temporary Difference
Unrealized loss Temporary Difference
Subscription received Temporary Difference
Loss contingency Temporary Difference
The items causing differences in Accounting and Taxable income are classified as Temporary and permanent differences
Temporary difference are those which originate in one year and reverse in the subsequent periods.
Permanent differences are those which do not reverse.
Life insurance is a permanent different as it is not allowed as deduction for tax deduction purposes.
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