Question

Corning-Howell reported taxable income in 2018 of $140 million. At December 31, 2018, 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	$	14	million		$	20	million
Prepaid insurance		32	million			0
Prepaid advertising		7	million			0
Noncurrent
Investments at fair value with changes in OCI*		6	million			0
Buildings and equipment (net)		380	million			290	million
Liabilities
Current
Liability—subscriptions received		14	million			0
Long-term
Liability—postretirement benefits		540	million			0

*Gains and losses taxable when investments are sold.

The total deferred tax asset and deferred tax liability amounts at January 1, 2018, were $230 million and $45 million, respectively. The enacted tax rate is 40% each year.

Required:
1. Determine the total deferred tax asset and deferred tax liability amounts at December 31, 2018.
2. Determine the increase (decrease) in the deferred tax asset and deferred tax liability accounts at December 31, 2018.
3. Determine the income tax payable currently for the year ended December 31, 2018.
4. Prepare the journal entry to record income taxes for 2018.

Answer 1

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1	Deferred Tax assets and Liabilities
	Deferred Tax Asset:	Working	$ Million
	Bad Debt Allowance	(14-20)*40%	2.4
	Subscription Liability	14*40%	5.6
	Post Retirment Benefit	540*40%	216
	Deferred Tax Asset:		224
	Deferred Tax Liability:
	Prepaid Insurance	32*40%	12.8
	Prepaid Advertising	7*40%	2.8
	Investment Realisation gain	6*40%	2.4
	Building	(380-290)*40%	36
	Deferred Tax Liability		54
2	Increase or Decrease
		Deferred Tax Asset	Deferred Tax Liability
	Closing Balance (From 1)	224	54
	Less:Beginning Balance	230	45
	Increase (Decrease)	-6	9
3	Tax Payable	Taxable income*40%	140*40%=56 M
4	Journal
		Debit	Credit
	Tax Expense (56+9+6)	71
	Deferred Tax Asset (Decrease in asset, hence credit)		6
	Deferred Tax Liability		9
	Taxes Payable (140*40%)		56