Question

Corning-Howell reported taxable income in 2018 of $190 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	$	10	million		$	12	million
Prepaid insurance		37	million			0
Prepaid advertising		7	million			0
Noncurrent
Investments at fair value with changes in OCI*		6	million			0
Buildings and equipment (net)		460	million			350	million
Liabilities
Current
Liability—subscriptions received		28	million			0
Long-term
Liability—postretirement benefits		585	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 $260 million and $60 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

1)
Deferred Tax Asset:
Allowance for Bad Debts [40% x($10-$12)]	$0.80
Subscription Liability (40% x $28)	$11.20
Postretirement Benefits Liability (40% x $585)	$234.00
Deferred Tax Asset	$246.00
Deferred Tax Liability:
Prepaid Insurance (40% x $37)	$14.80
Prepaid Advertising (40% x $7)	$2.80
Investments Unrealized Gain (40% x $6)	$2.40
Buildings [40% x ($460 - $350)]	$44.00
Deferred Tax Liability =	$64.00
2)
Deferred Tax Asset:
Ending Balance (from Part 1)	$246.00
Less: Beginning Balance	-$260.00
Decrease	-$14.00
Deferred Tax Liability:
Ending Balance (from Part 1)	$64.00
Less: Beginning Balance	-$60.00
Increase	$4.00
3)
Income tax payable = 40% x $190 Million	$76.00	Million
4)
Journal Entry	Debit	Credit
Tax expense	$94.00
Deferred Tax Asset		$14.00
Deferred Tax Liability		$4.00
Income Tax Payable		$76.00