Question

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

	2018				2019
Revenues	$	913			$	988
Expenses		770				810
Pretax accounting income (income statement)	$	143			$	178
Taxable income (tax return)	$	135			$	200
Tax rate: 40%

1. 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.
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 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.
4. 2018 expenses included a $12 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 $5 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 $5 million and no deferred tax liability.

Compute the deferred tax amounts that should be reported on the 2018 balance sheet. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Answer 1

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For Arndt Inc.	$ (Millions)		Reconciliation of pretax accounting and taxable income for:
Particulars	2018	2019		Particulars	2018	2019	Deferred Tax @ 40%	Remarks
Revenues	913.00	988.00		Pre tax accounting Income	143.00	178.00
Expenses	770.00	810.00		Add/(Less): Adjustments
Pre tax accounting Income	143.00	178.00		Premium on casualty insurance booked in 2019	(30.00)	30.00	12.00	Premium on casualty insurance is tax deductible as and when paid. So entire amount is tax deductible in 2018.
Taxable Income	135.00	200.00		Life Insurance premium of Key Executives	2.00	2.00	-	Life Insurance premium is not tax deductible. It is a permanent difference and will not impact deferred tax. It will be a tax expense to Arndt Inc.
Tax Rate	40%	40%		Subscription revenue booked	(21.00)	(29.00)	(11.60)	Sales are taxable on collection basis and not accrual basis. So sales accrued/booked under accounting deducted.
Income Tax Expense		80.00		Subscription revenue collected	34.00	31.00	12.40	Sales are taxable on collection basis and not accrual basis. So sales collected during the year added.
				Book loss on valuation of trading securities	12.00	-		Losses are tax deductible on actual basis and not accrual basis. So losses accrued are added back.
				Actual loss upon sale of trading securities	-	(12.00)	(4.80)	Losses are tax deductible on actual basis and not accrual basis. So actual loss is deducted.
				Loss on contingency	(5.00)	-		Losses are tax deductible on actual basis and not accrual basis. So loss incurred in 2017 is actually paid in 2018. So amount is deducted.
				Taxable Income	135.00	200.00	8.00
				Taxable Income as given in question	135.00	200.00
				Difference	-	-	Balances reconciled