Question

You are the new accounting manager at the Barry Transport Company. Your CFO has asked you to provide input on the company's income tax position based on the following: Pretax accounting income was $75 million and taxable income was $13 million for the year ended December 31, 2018. The difference was due to three items: Tax depreciation exceeds book depreciation by $60 million in 2018 for the business complex acquired that year. This amount is scheduled to be $70 million in 2019 and to reverse as ($70 million) and ($60 million) in 2020, and 2021, respectively. Insurance of $10 million was paid in 2018 for 2019 coverage. A $8 million loss contingency was accrued in 2018, to be paid in 2020. No temporary differences existed at the beginning of 2018. The tax rate is 40%. Required: 1. Determine the amounts necessary to record income taxes for 2018 and prepare the appropriate journal entry. 2. Assume the enacted federal income tax law specifies that the tax rate will change from 40% to 35% in 2020. When scheduling the reversal of the depreciation difference, you were uncertain as to how to deal with the fact that the difference will continue to originate in 2019 before reversing the next two years. Upon consulting PricewaterhouseCoopers' Comperio database, you found:

Answer 1

Accounting Income	$    75,000,000.00
Taxable Income	$    13,000,000.00
Difference	$    62,000,000.00
Reconcilation:
Additional Depreciation in Income Tax	$ (60,000,000.00)
Prepaid Insurance- Disallowed	$ (10,000,000.00)
Loss Contingency	$      8,000,000.00
	$ (62,000,000.00)
Deffered Tax Liablity on Depreciation Difference (35% of 60,000,000)	$ (21,000,000.00)
Deffered Tax Liablity on Prepaid Insurance (40% of 10,000,000)	$    (4,000,000.00)
Deffered Tax Assets on Loss Contingency (40% of 8,000,000)	$      3,200,000.00
Income Tax @40% of Taxable Income	$      5,200,000.00

Account Description	Debit	Credit
Income Tax	$      5,200,000.00
To Provision for income Tax		$    5,200,000.00
Deffered Tax Assets	$      3,200,000.00
To Profit & Loss A/C		$    3,200,000.00
Profit & Loss A/C	$    25,000,000.00
Deffered Tax Liablity		$ 25,000,000.00

Note:

The last paragraph of the question is missing. I have solved the maximum data available in the question including deferred tax entries