Question

Problem 16-9 (Algo) Determine deferred tax assets and liabilities from book-tax differences [LO16-2, 16-3]

Corning-Howell reported taxable income in 2021 of $168 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	$	56	million		$	60	million
Prepaid insurance		68	million			0
Prepaid advertising		52	million			0
Noncurrent
Investments in equity securities (fair value)*		52	million			0
Buildings and equipment (net)		408	million			328	million
Liabilities
Current
Deferred subscription revenue		60	million			0
Long-term
Liability—compensated future absences		642	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 $180.25 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

1. Determine the total deferred tax asset and deferred tax liability amounts at December 31, 2021.

	Carrying amount	Tax basis	Difference	Multiply: tax rate	DTL (DTA)
Current Assets
Net accounts receivable	$       56.00	$    60.00	$      (4.00)	25%	$         (1.00)
Prepaid insurance	$       68.00	$           -	$      68.00	25%	$         17.00
Prepaid advertising	$       52.00	$           -	$      52.00	25%	$         13.00
Noncurrent Assets
Investments in equity securities (fair value)	$       52.00	$           -	$      52.00	25%	$         13.00
Buildings & Equipment (net)	$     408.00	$ 328.00	$      80.00	25%	$         20.00
Current Liabilities
Deferred subscription revenue	$       60.00	$           -	$   (60.00)	25%	$       (15.00)
Noncurrent Liabilities
Liability—compensated future absences	$     642.00	$           -	$ (642.00)	25%	$    (160.50)

Deferred Tax Asset (DTA):
Net accounts receivable	$         1.00
Deferred subscription revenue	$       15.00
Liability—compensated future absences	$     160.50
Total Deferred Tax Asset	$     176.50
Deferred Tax Liability (DTL):
Prepaid insurance	$       17.00
Prepaid advertising	$       13.00
Investments in equity securities (fair value)	$       13.00
Buildings & Equipment (net)	$       20.00
Total Deferred Tax Liability	$       63.00

2. Determine the increase (decrease) in the deferred tax asset and deferred tax liability accounts at December 31, 2021.

	DTA	DTL
Ending balance	$     176.50	$    63.00
Less: beginning balance	$180.25	$    25.00
Increase (Decrease)	$       (3.75)	$    38.00

3. Determine the income tax payable currently for the year ended December 31, 2021.

Taxable income	$     168.00
Multiply: Tax rate	25%
Income tax payable	$       42.00

4. Prepare the journal entry to record income taxes for 2021.

Date	Accounts title	Debit	Credit
December 31, 2021	Income tax expense (Balancing figure)	$       83.75
	Deferred tax asset		$       3.75
	Deferred tax liability		$    38.00
	Income tax payable		$    42.00
	To record the income tax expense.

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