Question

For the year ended Dec 31, 2021, Arndt Inc. reported pretax accounting income of $700 million. Select information is listed below: 1) The company begins selling one-year subscriptions to a weekly journal. Subscription sales collected and taxable in 2021 were $530 million. Subscriptions included in 2021 for financial reporting revenues were $470 million. 2) In 2020, the company purchased a piece of equipment with a cost of $500 million. For financial reporting purposes, the company used the straight-line method over a 5-year service life with no residual value expected. For tax purposes, the equipment was scheduled to be depreciated by $180 million, $150 million, $100 million, $50 million and $20 million in years 2020 through 2024, respectively. 3) During 2021, the company prepaid an insurance for year 2022 in the amount of $60 million. The insurance payment is tax deductible in 2021. 4) In 2021, the company paid $100 million fines to settle trading misconduct allegations brought by the US government. The fines are non tax deductible. Arndt Inc.’s income tax rate is 30%. At January 1, 2021, the company had a deferred tax liability of $24 million and no deferred tax asset.

Required: a) What is taxable income for 2021?

b) What is the ending balance of DTL on 12/31/2021?

c) What is the ending balance of DTA on 12/31/2021?

d) Prepare journal entries to record income taxes in 2021.

e) What are current income tax expense and total income tax expense for year 2021?

Answer 1

a) What is taxable income for 2021?
		(Amt in Million $)
Particulars	Tax Books	Remarks
Pre Tax Accounting income	700
Add : Excess disclosure of Revenue in Tax Books	60	DTA to be created
Less : Insurance payment is tax deductible in CY	-60	DTL to be created
Add : Disallowance of Fines in Tax books	100	No Deferred Tax computed for permanent dis-allowance
Less : Add depreciation as per Tax books	-50	DTL to be created
Taxable Income	750
b) What is the ending balance of DTL on 12/31/2021?
Opening Balance (01/01/2021)	24
Add : DTL for Insurance payment of 60M	18
Add : DTL for Additional depreciation as per Tax books of 50M	15
Closing Balance (31/12/2021)	57
c) What is the ending balance of DTA on 12/31/2021?
Opening Balance (01/01/2021)	0
Add : Excess disclosure of Revenue in Tax Books of 60 M	18
Closing Balance (31/12/2021)	18
d) Prepare journal entries to record income taxes in 2021
Particulars	Debit	Credit
Tax Expense (P&L) Dr.	225
To Provision for Income Tax		225
(Being provision made for tax payable for current year)
Deferred Tax Expense (P&L) Dr.	15
To Deferred Tax Liability		15
(Being Deferred Tax Liability made)
e) What are current income tax expense and total income tax expense for year 2021?
Current Tax Expense (225+15)	240
Income Tax Expense	225