Question

Required information {The following information applies to the questions displayed below.) Arndt, Inc., reported the following for 2018 and 2019 ($ in millions): Revenues Expenses Pretax accounting income (income statement) Taxable income (tax return) Tax rate: 408 2018 $ 896 766 $ 130 $ 125 2019 $ 993 806 $ 187 $ 210 a. 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 b. Expenses include $3 million insurance premiums each year for life insurance on key executives c. Arndt sells one-year subscriptions to a weekly journal. Subscription sales collected and taxable in 2018 and 2019 were $32 million and $31 million, respectively. Subscriptions included in 2018 and 2019 financial reporting revenues were $19 million ($8 million collected in 2017 but not recognized as revenue until 2018) and $27 million, respectively. Hint: View this as two temporary differences-one reversing in 2018; one originating in 2018. d. 2018 expenses included a $14 million unrealized loss from reducing investments (classified as trading securities) to fair value. The investments were sold in 2019 e. 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. f At January 1, 2018. Arndt had a deferred tax asset of $5 million and no deferred tax liability.

Answer 1

1	Temporary/ Permanent Differences
	Life Insurance Premiums	Permanent - This shall never be tax deductible
	Casualty Insurance expense	Temporary - As per the question, this is tax deductible
	Unrealised Loss	Temporary - This is tax deductible in the year of actual loss
	Subscription Received	Temporary - This is taxable
	Loss Contingency	Temporary - This is tax deductible in the year of actual loss

3	Deferred Tax Amount as on closing of 2018
	Particulars	Difference type	Amount ($ mn)	DTA/DTL
	Opening Deferred Tax Asset - 2018		5	DTA
	Two year Casualty Insurance Expense	Taxable Temporary Difference	(30)	DTL
	Insurance Premium on Key Executives	Permanent Difference	-
	Additional Taxable Revenue $ (32-19) m	Deductible Temporary Difference	13	DTA
	Unrealised Loss	Deductible Temporary Difference	14	DTA
	Contingency Loss	Taxable Temporary Difference	(5)	DTL
	Closing Deferred Tax Liability - 2018		(3)	DTL