Question

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Arndt, Inc. reported the following for 2021 and 2022 ($ in millions):

	2021				2022
Revenues	$	944			$	1,036
Expenses		800				856
Pretax accounting income (income statement)	$	144			$	180
Taxable income (tax return)	$	100			$	238
Tax rate: 25%

1. Expenses each year include $62 million from a two-year casualty insurance policy purchased in 2021 for $100 million. The cost is tax deductible in 2021.
2. Expenses include $2 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 2021 and 2022 were $63 million and $79 million, respectively. Subscriptions included in 2021 and 2022 financial reporting revenues were $57 million ($42 million collected in 2020 but not recognized as revenue until 2021) and $63 million, respectively. Hint: View this as two temporary differences—one reversing in 2021; one originating in 2021.
4. 2021 expenses included a $46 million unrealized loss from reducing investments (classified as trading securities) to fair value. The investments were sold and the loss realized in 2022.
5. During 2020, accounting income included an estimated loss of $36 million from having accrued a loss contingency. The loss was paid in 2021, at which time it is tax deductible.
6. At January 1, 2021, Arndt had a deferred tax asset of $4 million and no deferred tax liability.

2. Prepare a schedule that reconciles the difference between pretax accounting income and taxable income. Using the schedule, prepare the necessary journal entry to record income taxes for 2021.

Answer 1

Solution 2:

Tax schedule showing reconciliation between pre tax financial income, taxable income, deferred tax account (In millions) - Arndt Inc.
Particulars	Current Year - 2021	Future Taxable Amount	Future Deductible Amount
		FT - DTL	FD - DTA
Pretax accounting income	$144.00
Permanent Differences:
Life insurance premium	$2.00
Temporary Differences:
Casualty insurance expense	-$62.00	$62.00
Subscriptions - 2020	-$42.00
Subscriptions - 2021	$48.00		$48.00
Unrealized loss	$46.00		$46.00
Loss contigency	-$36.00
Taxable Income	$100.00
		$62.00	$94.00
Tax rate	25%	25%	25%
Tax payable currently	$25.00
Deferred tax liability		$15.50
Deferred tax assets			$23.50
		Deferred tax liability	Deferred tax Assets
Ending balances (balances currently needed)		$15.50	$23.50
Less: Beginning balances		$0.00	$4.00
Changes needed to achieve desired balances		$15.50	$19.50

Journal Entries
Date	Particulars	Debit	Credit
31-Dec-21	Income tax expense Dr	$21.00
	Deferred tax Assets Dr	$19.50
	To Income tax payable		$25.00
	To Deferred tax liability		$15.50
	(To record income tax expense and deferred taxes)