Corning-Howell reported taxable income in 2018 of $220 million.
At December 31, 2018, the reported amount of some assets and
liabilities in the financial statements differed from their tax
bases as indicated below:
Carrying Amount | Tax Basis | ||||||
Assets | |||||||
Current | |||||||
Net accounts receivable | $ | 13 | million | $ | 18 | million | |
Prepaid insurance | 42 | million | 0 | ||||
Prepaid advertising | 6 | million | 0 | ||||
Noncurrent | |||||||
Investments at fair value with changes in OCI* | 7 | million | 0 | ||||
Buildings and equipment (net) | 420 | million | 350 | million | |||
Liabilities | |||||||
Current | |||||||
Liability—subscriptions received | 20 | million | 0 | ||||
Long-term | |||||||
Liability—postretirement benefits | 620 | million | 0 | ||||
*Gains and losses taxable when investments are sold.
The total deferred tax asset and deferred tax liability amounts at
January 1, 2018, were $260 million and $45 million, respectively.
The enacted tax rate is 40% each year.
Required:
1. Determine the total deferred tax asset and
deferred tax liability amounts at December 31, 2018.
2. Determine the increase (decrease) in the
deferred tax asset and deferred tax liability accounts at December
31, 2018.
3. Determine the income tax payable currently for
the year ended December 31, 2018.
4. Prepare the journal entry to record income
taxes for 2018.
ANSWER
1) | ||
Deferred Tax Asset: | ||
Allowance for Bad Debts [40% x($13-$18)] | $2.00 | |
Subscription Liability (40% x $20) | $8.00 | |
Post retirement Benefits Liability (40% x $620) | $248.00 | |
Deferred Tax Asset | $258.00 | |
Deferred Tax Liability: | ||
Prepaid Insurance (40% x $42) | $16.80 | |
Prepaid Advertising (40% x $6) | $2.40 | |
Investments Unrealized Gain (40% x $7) | $2.80 | |
Buildings [40% x ($420 - $350)] | $28.00 | |
Deferred Tax Liability = | $50.00 | |
2) | ||
Deferred Tax Asset: | ||
Ending Balance (from Part 1) | $258.00 | |
Less: Beginning Balance | -$260.00 | |
Decrease | -$2.00 | |
Deferred Tax Liability: | ||
Ending Balance (from Part 1) | $50.00 | |
Less: Beginning Balance | -$45.00 | |
Increase | $5.00 | |
3) | ||
Income tax payable = 40% x $220 Million | $88.00 | Million |
4) | ||
Journal Entry | Debit | Credit |
Tax expense | $95.00 | |
Deferred Tax Asset | $2.00 | |
Deferred Tax Liability | $5.00 | |
Income Tax Payable | $88.00 |
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