Question

Required Information Problem 16-8 Multiple differences; taxable income given; two years; balance sheet classification; change in tax rate (L016-4, 16-6, 16-8] [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: 40% 2018 2019 $ 913 $988 770810 $ 143 $ 178 $ 135 $ 200 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 $2 million Insurance premlums 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 $34 million and $31 million, respectively. Subscriptions Included in 2018 and 2019 financial reporting revenues were $21 million ($10 million collected in 2017 but not recognized as revenue until 2018) and $29 million, respectively. Hint: View this as two temporary differences-one reversing in 2018; one originating in 2018. d. 2018 expenses Included a $12 million unrealized loss from reducing Investments (classified as trading securities) to falr 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

Req1.

Working as follows:

Compute subscription originating in the year 2018 as follows:

	Amount
Subscription sales collected and taxable in 2018	34 million
Less: Subscription included in 2018 financial reporting revenues	($21 million)
Add: Subscription collected in 2017 but recognized in 2018	$10 million
Subscription originating in 2018	23 million

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Req1.

	(Amount in millions)
	Current year	Future Taxable Amount	Future Deductible Amount
	2018	2019	2019
Pre-tax accounting income	$143
Permanent Difference:
Life insurance premiums	$2
Temporary Difference
Casualty insurance expense	($30)	$30
Subscription (2017 Reversing)	($10)
Subscription (2018 originating)	$23		$23
Unrealized loss	$12		$12
Loss contingency	($5)
Taxable income	$135	$30	$35
Enacted tax rate	40%	40%	40%
Income tax payable ($135*40%)	$54
Deferred tax liability ($30*40%)		$12
Deferred tax asset ($35*40%)			$14

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Req. 2

Working as follows:

Compute Deferred tax asset for the year 2018 as follows:

Deferred tax asset required for the year 2018	$14 million
Less: beginning balance of deferred tax asset	($5 million)
Deferred tax asset debit bal.	$9 million

Prepare journal entry as follows:

Credit Account title Income tax expense Deferred tax assets Income tax payable Deferred tax liability Debit $57 million $9 million $54 million $12 million