Question

Corning-Howell reported taxable income in 2018 of $290 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 $ 17 million $ 24 million Prepaid insurance 59 million 0 Prepaid advertising 7 million 0 Noncurrent Investments at fair value with changes in OCI* 4 million 0 Buildings and equipment (net) 560 million 460 million Liabilities Current Liability—subscriptions received 33 million 0 Long-term Liability—postretirement benefits 680 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 $300 million and $55 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 and Deferred tax liability
Particulars	Amount
Deferred Tax Asset
Allowance for bad debts ($24 - $17)*40%	$2.80
Subscription liability ($33*40%)	$13.20
Post Retirement Benefit liability ($680*40%)	$272
Deferred Tax Asset	$288
Deferred Tax Liability
Prepaid Insurance ($59*40%)	$23.60
Prepaid Advertising ($7*40%)	$2.80
Investment Unrealized Gain ($4*40%)	$2
Building ($560 - $460)*40%	$40
Deferred Tax Liability	$68

(2) Decrease in deferred Tax asset = ($288 - $300) = $12

Increase in deferred Tax liability = ($68 - $55) = $13

(3) Income Tax Liability = ($290 * 40%) = $116

(4) Journal Entry
Accounts Title and Explanation	Debit	Credit
Tax Expenses	$141
Deferred Tax Asset		$12
Deferred Tax liability		$13
Income Tax payable		$116
(Tax expenses entered)