Multiple differences; taxable income given; two years;
• LO16–4, LO16–6, LO16–8
Arndt, Inc., reported the following for 2018 and 2019 ($ in millions):
2018 | 2019 | |
Revenues | $888 | $983 |
Expenses | 760 | 800 |
Pretax accounting income (income statement) | $128 | $183 |
Taxable income (tax return) | $120 | $200 |
Tax rate: 40% |
a. Expenses each year include $30 million from a two-year casualty insurance policy purchased in 2018 for $60 million. The cost is tax deductible in 2018.
b. Expenses include $2 million insurance premiums each year for life insurance on key executives.
c. Arndt sells one-year subscriptions to a weekly journal. Subscription sales collected and taxable in 2018 and 2019 were $33 million and $35 million, respectively. Subscriptions included in 2018 and 2019 financial reporting revenues were $25 million ($10 million collected in 2017 but not recognized as revenue until 2018) and $33 million, respectively. Hint: View this as two temporary differences—one reversing in 2018; one originating in 2018.
d. 2018 expenses included a $17 million unrealized loss from reducing investments (classified as trading securities) to fair value. The investments were sold in 2019.
e. During 2017, accounting income included an estimated loss of $5 million from having accrued a loss contingency. The loss was paid in 2018, at which time it is tax deductible.
f. At January 1, 2018, Arndt had a
Required:
1. Which of the five differences described are temporary and which are permanent differences? Why?
2. Prepare a schedule that (a) reconciles the difference between pretax accounting income and taxable income and (b) determines the amounts necessary to record income taxes for 2018. Prepare the appropriate
3. Show how any 2018 deferred tax amounts should be classified and reported on the 2018 balance sheet.
4. Prepare a schedule that (a) reconciles the difference between pretax accounting income and taxable income and (b) determines the amounts necessary to record income taxes for 2019. Prepare the appropriate journal entry.
5. Explain how any 2019 deferred tax amounts should be classified and reported on the 2019 balance sheet.
6. Suppose that during 2019, tax legislation was passed that will lower Arndt’s effective tax rate to 35% beginning in 2020. Repeat requirement 4.
1.
Temporary Difference
Temporary difference refers to the difference of one income recognized by the tax rules and accounting rules of a company in different periods. Consequently, the difference between the amount of assets and liabilities reported in the financial reports and the amount of assets and liabilities as per the company’s tax records, is known as temporary difference.
Multiple Temporary Difference
It is very unlikely to have a single temporary difference in any company. In that case, the same concept of temporary difference will be applicable for multiple temporary difference. In case of multiple temporary difference, we have to categorize all temporary difference into future taxable amount and future deductible amounts. The total amount of future taxable amounts multiplied by future tax rate will generate deferred tax liability and total amount of future deductible amount multiplied by future tax rate will generate deferred tax asset.
To explain: The described differences
Explanation of Solution
Among the five described differences, only the life insurance premium expense is a permanent difference each year as it has been stated in the income statement and is not tax deductible in any year; whereas all other described differences are temporary differences which can be reversed.
2.
To prepare: The appropriate journal entry, a schedule that, reconciles the difference between pre-tax accounting income and taxable income and determines the amounts necessary to record income taxes for 2018.
Explanation of Solution
Determine the amount of income tax payable and deferred tax liability:
Current Year |
Future Taxable Amount | Future Deductible Amount |
|
(All Amounts are in $ Millions) | |||
2018 | 2019 | 2019 | |
Pretax accounting income | 128 | ||
Permanent Difference: | |||
Life Insurance Premiums | 2 | ||
Temporary Difference: | |||
Casualty insurance expense | (30) | 30 | |
Subscriptions (2017) (Reversing) | (10) (1) | ||
Subscription (2018) | 18 (1) | 18 | |
Unrealized loss | 17 | 17 | |
Loss contingency | (5) | ||
Taxable income (tax return) | 120 | ||
30 | 35 | ||
Enacted tax rate | |||
Income Tax Payable | 48 (4) | ||
Deferred Tax Liability | 12 | ||
Deferred Tax Assets | 14 |
Table (1)
Determine desired balance of deferred tax liability and deferred tax asset:
Deferred Tax Liability | Deferred Tax Assets |
|
Ending balance (current balance needed) | $0 | $8 |
Less: Beginning balance | $(12) | (14) |
Change needed to achieve desired balance | $(12) | $(6) |
Table (2)
The journal entry at the end of 2018 to record the income taxes in the books is as follows:
Date | Account Titles and Explanation | Post Ref. | Debit ($) (in millions) |
Credit ($) (in millions) |
|
2018 | |||||
Income Tax Expense (5) | 52 | ||||
Deferred Tax Asset (3) | 8 | ||||
Deferred Tax Liability (2) | 12 | ||||
Income Tax Payable (4) | 48 | ||||
(To record income taxes) |
Table (3)
Working Notes:
Compute the temporary differences for the subscriptions:
Details | 2017 | 2018 | 2019 |
Earned in current year (Reported in income statement) | $25 | $33 | |
Collected in prior year, earned in current year (Reversing Difference) | (10) | (18) | |
Collected in current year, earned in following year (Original Difference) (1) | $(10) | 18 | 20 |
Collected in current year (Reported on tax return) | $33 | $35 |
Table (4)
Calculate the value of income tax expenses
- Income Tax Expense is an expense account and it decreases the value of shareholders’ equity account. So, debit Income Tax Expense account with $52 million.
- Deferred tax asset is an asset and is increased by 8 million. Therefore, debit deferred tax asset account with $8 million.
- Deferred tax liability is a liability and is increased by $12 million. Therefore, credit deferred tax liability account with $12 million.
- Income Tax Payable is a liability account has increased because the taxable income has increased. So, credit Income Tax Payable account with $48 million.
3.
To explain: How 2018 deferred tax amounts to be classified and shown in the 2018 balance sheet.
Explanation of Solution
In the balance sheet all deferred tax liabilities, deferred tax assets and valuation allowances are treated as non-current items. If the deferred tax accounts belong to the same tax jurisdictions then, they are netted against each other and shown as a single number (after the adjustments) in the balance sheet. If deferred tax liability amount is more than deferred tax asset, then it will report as a liability. Similarly, it will report as an asset when deferred tax asset is more than deferred tax liability.
Here the deferred tax amounts are:
Deferred tax asset = $14 million
Deferred tax liability = $12 million
So, the net non-current deferred tax asset is $2 million
4.
To prepare: The appropriate journal entry, a schedule that, reconciles the difference between pre-tax accounting income and taxable income and determines the amounts necessary to record income taxes for 2019.
Explanation of Solution
Determine the amount of income tax payable and deferred tax liability:
Current Year |
Future Taxable Amount | Future Deductible Amount |
|
(All Amounts are in $ Millions) | |||
2019 | 2020 | 2020 | |
Pretax accounting income | 183 | ||
Permanent Difference: | |||
Life Insurance Premiums | 2 | ||
Temporary Difference: | |||
Casualty insurance expense | (30) | ||
Subscriptions (2018) (Reversing) | (18) | ||
Subscription (2019) | 20 | (20) | |
Unrealized loss (Reversing) | (17) | ||
Taxable income (tax return) | 200 | ||
0 | (20) | ||
Enacted tax rate | |||
Income Tax Payable | 80 (7) | ||
Deferred Tax Liability | 0 | ||
Deferred Tax Assets | (8) |
Table (5)
Determine desired balance of deferred tax liability and deferred tax asset:
Deferred Tax Liability | Deferred Tax Assets |
|
Ending balance (current balance needed) | $0 | $8 |
Less: Beginning balance | $(12) | (14) |
Change needed to achieve desired balance | $(12) (8) | $(6) (9) |
Table (6)
The journal entry at the end of 2019 to record the income taxes in the books is as follows:
Date | Account Titles and Explanation | Post Ref. | Debit ($) (in millions) |
Credit ($) (in millions) |
|
2019 | |||||
Income Tax Expense (10) | 74 | ||||
Deferred Tax Liability (8) | 12 | ||||
Deferred Tax Asset (9) | 6 | ||||
Income Tax Payable (7) | 80 | ||||
(To record income taxes) |
Table (7)
Working Notes:
Compute the temporary differences for the subscriptions:
Details | 2017 | 2018 | 2019 |
Earned in current year (Reported in income statement) | $25 | $33 | |
Collected in prior year, earned in current year (Reversing Difference) | (10) | (18) | |
Collected in current year, earned in following year (Original Difference) | $(10) | 18(6) | 20(6) |
Collected in current year (Reported on tax return) | $33 | $35 |
Table (8)
Calculate the value of income tax expenses
- Income Tax Expense is an expense account and it decreases the value of shareholders’ equity account. So, debit Income Tax Expense account with $74 million.
- Deferred tax liability is a liability and is decreased by 12 million. Therefore, debit deferred tax liability account with $12 million.
- Deferred tax asset is an asset and decreased by $6 million. Therefore, credit deferred tax asset account with $6 million.
- Income Tax Payable is a liability account has increased because the taxable income has increased. So, credit Income Tax Payable account with $80 million.
5.
To explain: How 2019 deferred tax amounts to be classified and shown in the 2019 balance sheet.
Explanation of Solution
The net non-current deferred tax asset is $8 million to be shown in the 2019 balance sheet.
6.
To prepare: The appropriate journal entry, a schedule that, reconciles the difference between pre-tax accounting income and taxable income and determines the amounts necessary to record income taxes for 2019.
Explanation of Solution
Determine the amount of income tax payable and deferred tax liability:
Current Year |
Future Taxable Amount | Future Deductible Amount |
|
(All Amounts are in $ Millions) | |||
2019 | 2020 | 2020 | |
Pretax accounting income | 183 | ||
Permanent Difference: | |||
Life Insurance Premiums | 2 | ||
Temporary Difference: | |||
Casualty insurance expense | (30) | ||
Subscriptions (2016) (Reversing) | (18) | ||
Subscription (2017) | 20 | (20) | |
Unrealized loss (Reversing) | (17) | ||
Taxable income (tax return) | 200 | ||
0 | (20) | ||
Enacted tax rate | |||
Income Tax Payable | 80 (11) | ||
Deferred Tax Liability | 0 | ||
Deferred Tax Assets | (7) |
Table (9)
Determine desired balance of deferred tax liability and deferred tax asset:
Deferred Tax Liability | Deferred Tax Assets |
|
Ending balance (current balance needed) | $0 | $7 |
Less: Beginning balance | $(12) | (14) |
Change needed to achieve desired balance | $(12) (12) | $(7) (13) |
Table (10)
The journal entry at the end of 2019 to record the income taxes in the books is as follows:
Date | Account Titles and Explanation | Post Ref. | Debit ($) (in millions) |
Credit ($) (in millions) |
|
2019 | |||||
Income Tax Expense (14) | 75 | ||||
Deferred Tax Liability (12) | 12 | ||||
Deferred Tax Asset (13) | 7 | ||||
Income Tax Payable (11) | 80 | ||||
(To record income taxes) |
Table (11)
Calculate the value of income tax expenses
- Income Tax Expense is an expense account and it decreases the value of shareholders’ equity account. So, debit Income Tax Expense account with $75 million.
- Deferred tax liability is a liability and is decreased by 12 million. Therefore, debit deferred tax liability account with $12 million.
- Deferred tax asset is an asset and decreased by $7 million. Therefore, credit deferred tax asset account with $7 million.
- Income Tax Payable is a liability account has increased because the taxable income has increased. So, credit Income Tax Payable account with $80 million.
Want to see more full solutions like this?
Chapter 16 Solutions
GEN COMBO LOOSELEAF INTERMEDIATE ACCOUNTING; CONNECT ACCESS CARD
- x Company reports the following pretax income (loss) for both book and tax purposes. Year. Pretax income tax rate 2018 120,000 20% 2019 93,000 20% 2020. (82,000) 25% 2021 110,000 25% The tax rates listed were enacted by the beginning of 2018 Prepare the journal entries for years 2018-2021 to record income tax expense (benefit) and income taxes payable and the tax effects of the loss carryforward assuming that based on the weight of available evidence it is more likely than not that one half of the benefits of the loss carryforward will not be realized.arrow_forwardQ1. Taxable income and applicable tax rates for C.J. Company’s first four years are shown below. For each year, taxable income and pretax financial income are identical. In the table below, taxable income is before any consideration of NOL carryback and carryforward. The enacted tax rates were known at 1/1/2018. Taxable Income Enacted tax rate 2018 $200 20% 2019 ($300) 15% 2020 $340 25% 2021 $210 25% Now assume that C.J. opted to carryback its 2019 NOL and carryforward any unused NOL to future years. Complete the table below for 2018 through 2021 to show the amount of income tax payable to the IRS or the refund due from the IRS for each year. Put your answer in the table below. Show tax payable as a positive number and tax refund as a negative number. Year Tax…arrow_forward4. The following information is for Z Corp's first year of operations. Amounts are in millions of dollars. The enacted tax rate is 25%. Accounting income Temporary differences: Rental Income Depreciation Expense Permanent Difference: Taxable income Year 2021 $80 6 -12 2 $76 Future Taxable Amounts 2022 2023 88 75 0 -4 $4 $3 2024 2025 63 58 Future Amount Total -1 -1 -6 $3 $2 $ 12 Required: Prepare the journal entries to record the income tax expense for each year. (show the computing process and precise journal entries)arrow_forward
- (Situational amounts are stated in thousands) Situation 1 Situation 2 Situation 3 Situation 4 $ 85 $ 215 $ 195 $ 260 Taxable income Total Future deductible amounts 15 20 20 Total Future taxable amounts 15 15 30 Balance at beginning of year: Deferred tax asset Deferred tax liability 2 9. 4 The enacted tax rate is 40%. Required: 1. For each situation (1-4), determine your responses for a. through f. and fill in the table appropriately: 1 2 3 4 a. Income taxes payable b. Deferred tax asset balance c. Deferred tax asset change d. Deferred tax liability balance e. Deferred tax liability change f. Income tax expense 2. For each situation, prepare the journal entry for taxes. Situation 1 Situation 2 Situation 3 Situation 4arrow_forwardStatus Single DATA TABLE Total Tax Payments $ 8,342 Taxable Income $ 55,060.00 20,000 30,000 Total Tax $ 7,972 40,000 Refund Amount Amount Owed Use Goal Seek to find the Taxable Income (C5) that results in the Total Tax (C7) shown. Answer to the nearest 0.01. Do not include any punctuation ($ or ,) in your answer! Example of accepted answer: 12345.67Examples of incorrect answers: $12,345.67, 12,345.67, $12345.67 Taxable Income Total Tax Answer $2,600 Answer $4,200 Answer $8,500 Answer $10,500 Answer $22,000 Be sure to answer to the neared 0.01.arrow_forwardComplex Company reported the following information relating to income before tax for accounting purposes: Problem 16-7 (IAA) 2,000,000 3,000,000 4,000,000 5,000,000 2020 2021 2022 2023 Income tax rate 30% In 2020, the entity recognized doubtful accounts of P100 000 Such accounts were considered worthless or in 2021. uncollectible Analysis of the tax and book records disclosed P120.000 in unearned rent income on December 31, 2020 that has been recognized as taxable income in 2020 when the cash was received Also on December 31, 2020, estimated warranty cost of P300,000 had been recognized as expense on the books in 2020 when the product sales were made but is not deductible for tax purposes until paid. The unearned rent income on December 31, 2020 is realized and the actual warranty payments were made as follows: Rent income per book Actual warranty payments 2021 2022 2023 40,000 40,000 40,000 20,000 80,000 200,000 Required: 1. Prepare journal entries for 2020, 2021, 2022 and 2023 w…arrow_forward
- MITOL ir ir ※ ed hu nu าน nu mo Data table (Click the icon here in order to copy the contents of the data table below into a spreadsheet.) TABLE 1.2: Tax Rates and Income Brackets for Joint Returns (2018) Tax Rates 10% 12% 22% 24% 32% 35% 37% Taxable Income Joint Returns $0 to $19,750 $19,751 to $80,250 $80,251 to $171,050 $171,051 to $326,600 $326,601 to $414,700 $414,701 to $622,050 Over $622,050 Mike and Julie Bedard are a working couple. They will file a joint income tax return. This year they have the following taxable income: 1. $125,000 from salary and wages (ordinary income). 2. $1,000 in interest income. 3. $3,000 in dividend income. 4. $2,000 in profit from sale of a stock they purchased two years ago. 5. $2,000 in profit from a stock they purchased this year and sold this year. Use the federal income tax rates given in Table 1.2, to work this problem. a. How much will Mike and Julie pay in federal income taxes on 2 above? b. How much will Mike and Julie pay in federal income…arrow_forwardx Company reports the following pretax income (loss) for both book and tax purposes. Year. Pretax income tax rate 2018 120,000 20% 2019 93,000 20% 2020. (82,000) 25% 2021 110,000 25% The tax rates listed were enacted by the beginning of 2018 Prepare the income tax section of the 2020 income statment beginning with the line "operating loss before income taxes" Prepare the income tax section of the 2021 income statment beginning with the line "operating loss before income taxes" I have the journal entries I need the income statment -prepare journal entries for years 2018-2021 to record income tax expense (benefit) and income taxes payable and the tax effects of the loss carryforward assuming that based on the weight of available evidence it is more likely than not that one half of the benefits of the loss carryforward will not be realized.arrow_forward2023 TAXABLE INCOME FIRST $53,359 OVER $53,359 TO $106,717 OVER $106,717 TO $165,430 OVER $ $165,430 TO $237,675 OVER $235,675 Budget & Fiscal Policy FILL IN THE BLANK TAX RATE 15.00% 20.50% 26.00% 29.32% 33.00% A) The marginal rate of tax for someone making a salary of $52,000. type your text here Based on the Canadian Federal Income Tax Brackets for 2023 shown above, calculate and input the numeric answers to the questions below. Round off your answers to the nearest dollar. Do not use $, decimals or comma. For example, instead of $23,486.52, write 23487. For answers requiring a tax rate, enter only the numeric value with two decimal places, with "%" symbol. For example, 20.50%).arrow_forward
- Problem 2: KAY Co. reported net income for the current year 2021 at P4,180,000 before taxes. Included in the determination of the said net income were: Current tax rate 30% P 84,000 P 205,000 Non-deductible expenses Non-taxable income At the beginning of the year: Cumulative temporary difference creating future deductible amount Cumulative temporary difference creating Future taxable amount P 1,110,000 P 567,000 At the end of the year: Cumulative temporary difference creating future deductible amount Cumulative temporary difference creating P 720,000 P 632,000 Required: 9. What is the total deferred tax asset to be presented in the 2021 Statement of Financial Position? 10. What is the total deferred tax liability to be presented in the 2021 Statement of Financial Position?arrow_forwardProblem 16-9 (Algo) Determine deferred tax assets and liabilities from book-tax differences; financial statement effects [LO16-2, 16-3] Corning-Howell reported taxable income in 2024 of $200 million. At December 31, 2024, the reported amount of some assets and liabilities in the financial statements differed from their tax bases as indicated below: Assets Current Net accounts receivable Prepaid insurance Prepaid advertising Noncurrent Investments in equity securities (fair value) * Buildings and equipment (net) Liabilities Current Deferred subscription revenue Long-term Liability-compensated future absences Gains and losses taxable when investments are sold. Carrying Amount Tax Basis $ 88 million $ 92 million 100 million 0 84 million 84 million 0 440 million 360 million 92 million 0 674 million 0 The total deferred tax asset and deferred tax liability amounts at January 1, 2024, were $196.25 million and $25 million, respectively. The enacted tax rate is 25% each year. Required: 1.…arrow_forwardStatus Single DATA TABLE Total Tax Payments $ 8,342 Taxable Income $ 55,060.00 20,000 30,000 Total Tax $ 7,972 40,000 Refund Amount Amount Owed Create two IF statements to fill in the Refund Amount and the Amount Owed. The Total Tax Payments are the amount withheld from your paycheck, plus any other sources of tax. The Total Tax is calculated based on your Taxable Income. The Refund Amount (cell C9) is only present if your Total Tax Payments exceed your Total Tax. If it is shown, it will display the amount you overpaid. If your payments did not exceed your total tax, then the cell should be blank or "". The Refund Amount should never be a negative number. The formula for Refund Amount is =IF( Answer , Answer , Answer ) The Amount Owed (cell C11) is only present if your Total Tax Payments does not exceed your Total Tax. If it is…arrow_forward