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. 2. 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 2018.   
7. Required 1
8. Required 2

9. Prepare a schedule that reconciles the difference between pretax accounting income and taxable income. (Amounts to be deducted should be indicated with a minus sign. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

   ($ in millions)	Current Year 2018	Future Taxable Amounts [2019]	Future Deductible Amounts [2019]
   Pretax accounting income	$129selected answer correct	not attempted	not attempted
   Permanent difference:
   Life insurance premiums	2selected answer correct	not attempted	not attempted
   Temporary differences:
   Casualty insurance expense	(20)selected answer correct	20selected answer correct	not attempted
   Subscriptions—2017	(7)selected answer correct	not attempted	not attempted
   Subscriptions—2018	15selected answer correct	not attempted	(15)selected answer correct
   Unrealized loss	15selected answer correct	not attempted	(15)selected answer correct
   Loss contingency	(4)selected answer correct	not attempted	not attempted
   Taxable income	$130
   		$20	$(30)
   Enacted tax rate (%)	40%selected answer correct	40%selected answer correct	40%selected answer correct
   Tax payable currently	52selected answer correct
   Deferred tax liability		8selected answer correct	0selected answer correct
   Deferred tax asset		not attempted	not attempted
   		↓	↓
   		Deferred tax liability	Deferred tax asset
   Ending balances (balances currently needed)		$8selected answer correct	$12selected answer correct
   Less: Beginning balances		0selected answer correct	(4)selected answer correct
   Changes needed to achieve desired balances		$8	$8

   prepare the necessary journal entry to record income taxes for 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

   No	Event	General Journal	Debit	Credit
   1	1	Income tax expense	59
   		Deferred tax asset	8
   		Income tax payable		52
   		Deferred tax liability		8

10. Required 1

Answer 1

$ in millions)	Current Year 2018	Future Taxable Amounts [2019]	Future Deductible Amounts [2019]	Remarks
Pretax accounting income	129
Permanent difference:
Life insurance premiums	2			Since this is a permanent difference, no effect to 2019.
Temporary differences:
Casualty insurance expense	-20	20	0
Subscriptions—2017	-7	0	0	Since this is related to 2017, the timing difference is reversed and hence no impact to 2019.
Subscriptions—2018	15	0	-15
Unrealized loss	15	0	-15
Loss contingency	-4	0	0	Since this is related to 2017, the timing difference is reversed and hence no impact to 2019.
Taxable income	130
		20	-30
Enacted tax rate (%)	40%	40%	40%
Tax payable currently	52
Deferred tax liability		8	-12
Deferred tax asset
		Deferred tax liability	Deferred tax asset
Ending balances (balances currently needed)		8	-12	Based on given information, the beginning balance may be wrong. Hence, the movement amount is adjusted to arrive at correct closing balance.
Less: Beginning balances		0	-4
Changes needed to achieve desired balances		8	-8
Journal Entry:
General Journal	Debit	Credit	Remarks
Income tax expense (Current Tax)	59		Though there is movement in net temporary differences during the year, it is knocked off along with the adjustment of Deferred Tax asset with opening balance. Hence, no deferred tax expense is needed.
Deferred tax asset	8
Income tax payable		52
Deferred tax liability		8