Question

Corning-Howell reported taxable income in 2021 of $140 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
Assets
Current
Net accounts receivable	$	28	million		$	32	million
Prepaid insurance		40	million			0
Prepaid advertising		24	million			0
Noncurrent
Investments in equity securities (fair value)*		24	million			0
Buildings and equipment (net)		380	million			300	million
Liabilities
Current
Deferred subscription revenue		32	million			0
Long-term
Liability—compensated future absences		614	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 $166.25 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

Solution:

1)

Computation of Total deferred tax asset:

Particulars	Amount (in million)
Allowance for bad debts(28 -32)*25%	$1
Deferred subscription revenue (32*25%)	$8
Compensation future absence - liability (614*25%)	$153.5
Deferred tax asset	$162.5

Computation of Deferred tax liability:

Particulars	Amount (in million)
Prepaid insurance (25% *40)	$10
Prepaid advertising(25%*24)	$6
Investments unrealized gain(25%*24)	$6
Buildings(380 - 300)*25%	$20
Deferred tax liability	$42

2)

Computation of increase or decrease in deferred tax asset and liability:

Deferred taax asset	Amount (in million)
Ending balance	$162.5
Less: Beginning balance	($166.25)
Decrease	($3.75)
Deferred tax liability
Ending balance	$42
Less: Beginning balance	($25)
Increase	$17

3)

Income tax payable = Taxable income * tax rate

=$140 million * 25%

=$35 million

4)

Journal entry:

Date	Account title and explanation	Debit	Credit
	Tax expense	$55.75
	Deferred tax asset		$3.75
	Deferred tax liability		$17
	Income tax payable		$35

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