Question

Arndt, Inc., reported the following for 2018 and 2019 ($ in millions):

	2018				2019
Revenues	$	893			$	992
Expenses		764				804
Pretax accounting income (income statement)	$	129			$	188
Taxable income (tax return)	$	130			$	200
Tax rate: 40%

1. Expenses each year include $20 million from a two-year casualty insurance policy purchased in 2018 for $40 million. The cost is tax deductible in 2018.
2. Expenses include $2 million insurance premiums each year for life insurance on key executives.
3. Arndt sells one-year subscriptions to a weekly journal. Subscription sales collected and taxable in 2018 and 2019 were $26 million and $31 million, respectively. Subscriptions included in 2018 and 2019 financial reporting revenues were $18 million ($7 million collected in 2017 but not recognized as revenue until 2018) and $26 million, respectively. Hint: View this as two temporary differences—one reversing in 2018; one originating in 2018.
4. 2018 expenses included a $15 million unrealized loss from reducing investments (classified as trading securities) to fair value. The investments were sold in 2019.
5. During 2017, accounting income included an estimated loss of $4 million from having accrued a loss contingency. The loss was paid in 2018 at which time it is tax deductible.
6. At January 1, 2018, Arndt had a deferred tax asset of $4 million and no deferred tax liability.

4. Prepare a schedule that reconciles the difference between pretax accounting income and taxable income. Using the schedule, prepare the necessary journal entry to record income taxes for 2019.

Answer 1

Solution:

Tax schedule showing reconciliation between pre tax financial income, taxable income, deferred tax account (In millions) - Arndt Inc.
Particulars	Current Year - 2019	Future Taxable Amount	Future Deductible Amount
		FT - DTL	FD - DTA
Pretax accounting income	$188.00
Permanent Differences:
Life insurance premium	$2.00
Temporary Differences:
Casualty insurance expense	$20.00
Subscriptions - 2018	-$15.00
Subscriptions - 2019 ($31 - $26 + $15)	$20.00		$20.00
Unrealized loss	-$15.00
Taxable Income	$200.00
		$0.00	$20.00
Tax rate	40%	40%	40%
Tax payable currently	$80.00
Deferred tax liability		$0.00
Deferred tax assets			$8.00
		Deferred tax liability	Deferred tax Assets
Ending balances (balances currently needed)		$0.00	$8.00
Less: Beginning balances		$8.00	$12.00
Changes needed to achieve desired balances		-$8.00	-$4.00

Journal Entries
Date	Particulars	Debit	Credit
31-Dec-19	Income tax expense Dr	$76.00
	Deferred tax Liability Dr	$8.00
	To Income tax payable		$80.00
	To Deferred tax Assets		$4.00
	(To record income tax expense and deferred taxes)