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In: Accounting

Arndt, Inc., reported the following for 2018 and 2019 ($ in millions): PLEASE FILL IN THE...

Arndt, Inc., reported the following for 2018 and 2019 ($ in millions):
PLEASE FILL IN THE BLANKS

2018 2019
Revenues $ 995 $ 1,055
Expenses 798 838
Pretax accounting income (income statement) $ 197 $ 217
Taxable income (tax return) $ 185 $ 255
Tax rate: 40%

  1. Expenses each year include $40 million from a two-year casualty insurance policy purchased in 2018 for $80 million. The cost is tax deductible in 2018.
  2. Expenses include $3 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 2018 and 2019 were $38 million and $67 million, respectively. Subscriptions included in 2018 and 2019 financial reporting revenues were $35 million ($13 million collected in 2017 but not recognized as revenue until 2018) and $43 million, respectively. Hint: View this as two temporary differences—one reversing in 2018; one originating in 2018.
  4. 2018 expenses included a $29 million unrealized loss from reducing investments (classified as trading securities) to fair value. The investments were sold in 2019.
  5. During 2017, accounting income included an estimated loss of $7 million from having accrued a loss contingency. The loss was paid in 2018 at which time it is tax deductible.
  6. At January 1, 2018, Arndt had a deferred tax asset of $8 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 2018.

Prepare a schedule that reconciles the difference between pretax accounting income and taxable income. (Amounts to be deducted should be indicated with a minus sign. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

($ in millions) Current Year 2018 Future Taxable Amounts [2019] Future Deductible Amounts [2019]
Pretax accounting income $197 $0 $0
Permanent difference:
Life insurance premiums 3 $0 0
Temporary differences:
Casualty insurance expense (40) 40 0
Subscriptions—2017 (13) 0 0
Subscriptions—2018 0
Unrealized loss 29 0 (29)
Loss contingency (7) 0 0
Taxable income $206
$40 $(29)
Enacted tax rate (%) 40% 40% 40%
Tax payable currently
Deferred tax liability 0
Deferred tax asset 0
Deferred tax liability Deferred tax asset
Ending balances (balances currently needed)
Less: Beginning balances
Changes needed to achieve desired balances $0 $0

Solutions

Expert Solution

Solution 2:

Tax schedule showing reconciliation between pre tax financial income, taxable income, deferred tax account (In millions) - Arndt Inc.
Particulars Current Year - 2018 Future Taxable Amount Future Deductible Amount
FT - DTL FD - DTA
Pretax accounting income $197.00
Permanent Differences:
Life insurance premium $3.00
Temporary Differences:
Casualty insurance expense -$40.00 $40.00
Subscriptions - 2017 -$13.00
Subscriptions - 2018 $16.00 $16.00
Unrealized loss $29.00 $29.00
Loss contigency -$7.00
Taxable Income $185.00
$40.00 $45.00
Tax rate 40% 40% 40%
Tax payable currently $74.00
Deferred tax liability $16.00
Deferred tax assets $18.00
Deferred tax liability Deferred tax Assets
Ending balances (balances currently needed) $16.00 $18.00
Less: Beginning balances $0.00 $8.00
Changes needed to achieve desired balances $16.00 $10.00
Journal Entries
Date Particulars Debit Credit
31-Dec-18 Income tax expense Dr $80.00
Deferred tax Assets Dr $10.00
           To Income tax payable $74.00
           To Deferred tax liability $16.00
(To record income tax expense and deferred taxes)

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