Question

Corning-Howell reported taxable income in 2021 of $184 million. At December 31, 2021, the reported amount of some assets and liabilities in the financial statements differed from their tax bases as indicated below: Carrying Amount Tax Basis $ 76 million $ 72 million 84 million 68 million Assets Current Net accounts receivable Prepaid insurance Prepaid advertising Noncurrent Investments in equity securities (fair value) * Buildings and equipment (net) Liabilities Current Deferred subscription revenue Long-term Liability-compensated future absences 68 million 424 million 344 million 76 million 0 658 million 0 Gains and losses taxable when investments are sold. The total deferred tax asset and deferred tax liability amounts at January 1, 2021, were $188.25 million and $25 million, respectively. The enacted tax rate is 25% each year. Required: 1. Determine the total deferred tax asset and deferred tax liability amounts at December 31, 2021. 2. Determine the increase (decrease) in the deferred tax asset and deferred tax liability accounts at December 31, 2021. 3. Determine the income tax payable currently for the year ended December 31, 2021. 4. Prepare the journal entry to record income taxes for 2021.

Answer 1

Deferred taxes originate when amount of tax is paid or has been carried forward but yet to be shown in the income statement. On the other hand, deferred tax liabilities are likely to reverse due to arising of temporary of differences which results in future cash flows when the taxes are paid.

1	Allowance for bad debt (72-76) X 25%	$                1.00
	Subscription liability (25 X 25%)	$                6.25
	Post retirement benefits obligation (658X 25%)	$            164.50
	Deferred tax asset	$            171.75
	Prepaid insurance (84 X 25%)	$              21.00
	Prepaid advertising (68 X 25%)	$              17.00
	Investments unrealized gain (68 X 25%)	$              17.00
	Buildings (424-344) X 25%	$              20.00
	Deferred tax liability	$              75.00
2	Deferred tax asset
	Ending balance	$            171.75
	Less: Beginning balance	$            188.25
	Decrease	$            (16.50)
	Deferred tax liability
	Ending balance	$              75.00
	Less: beginning balance	$              25.00
	Increase	$              50.00
3	Income tax payable = 184 X 25% =$ 46 million
4	Journal entry	Debit ($)	Credit ($)
	Tax expense ( to balance)	$            112.50
	Deferred tax asset		$             16.50
	Deferred tax liability		$             50.00
	Taxes payable		$             46.00
	(To record tax expense)