Question

Arnold Industries has pretax accounting income of $62 million for the year ended December 31, 2018. The tax rate is 40%. The only difference between accounting income and taxable income relates to an operating lease in which Arnold is the lessee. The inception of the lease was December 28, 2018. An $12 million advance rent payment at the inception of the lease is tax-deductible in 2018 but, for financial reporting purposes, represents prepaid rent expense to be recognized equally over the four-year lease term.

Required:
1. Complete the following table given below and prepare the appropriate journal entry to record Arnold’s income taxes for 2018.
2. Prepare the appropriate journal entry to record Arnold’s income taxes for 2019. Pretax accounting income was $49 million for the year ended December 31, 2019.
3. Assume a new tax law is enacted in 2019 that causes the tax rate to change from 40% to 30% beginning in 2020. Complete the following table given below and prepare the appropriate journal entry to record Arnold’s income taxes for 2019.

Answer 1

Required 1 :
	($ in millions)		Tax Rate(%)		Tax($)	Recorded as :
Pretax Accounting Income	$ 62
Rent costs reversing in :
2019	$ 3	*	40%	=	$ 1.2
2020	$ 3	*	40%	=	$ 1.2
2021	$ 3	*	40%	=	$ 1.2
2022	$ 3	*	40%	=	$ 1.2
Tax Deferred Tax Amount					$ 4.8	Deferred tax liability
Income Taxable in current year ($62 -($3 *4 Years))	$ 50		40%	=	$ 20	Income tax payable

Year	General Journal	Debit	Credit
2018	Income Tax Expense (20+4.8)	$ 24.8
	Deferred Tax Liability		$ 4.8
	Income tax payable		$ 20
	(To record Arnold income taxes for 2018 )

Required 2 :
Year	General Journal	Debit	Credit
2019	Income Tax Expense ($49*40%)	$ 19.6
	Deferred tax liability ($3*40%)	$ 1.2
	Income tax payable (19.6+1.2)		$ 20.8
	(To record Arnold income taxes for 2019 )

Required 3 :
	($ in millions)		Tax Rate(%)		Tax($)	Recorded as :
Temporary Difference-Beginning of Year	$ 12		40%		$ 4.8	Deferred tax liability- Beginning
Temporary Difference-Ending of Year	$ 9		30%		$ 2.7	Deferred tax liability- Ending
Change in Deferred Tax Account					($2.1)	Change in Deferred tax liability
Income Taxable In Current Year ($49+$3)	$ 52		40%		$ 20.8	Income tax payable

Year	General Journal	Debit	Credit
2019	Income Tax Expense ($20.8-$ 2.1)	$ 18.7
	Deferred tax liability	$ 2.1
	Income tax payable (52*40%)		$ 20.8
	(To record Arnold income taxes for 2019 )