Question

You are the new accounting manager at the Barry Transport Company. Your CFO has asked you to provide input on the company's income tax position based on the following:

1. Pretax accounting income was $41 million and taxable income was $8 million for the year ended December 31, 2018.
2. The difference was due to three items:

1. Tax depreciation exceeds book depreciation by $30 million in 2018 for the business complex acquired that year. This amount is scheduled to be $60 million in 2019 and to reverse as ($50 million) and ($40 million) in 2020 and 2021, respectively.
2. Insurance of $9 million was paid in 2018 for 2019 coverage.
3. A $6 million loss contingency was accrued in 2018, to be paid in 2020.

3. No temporary differences existed at the beginning of 2018.
4. The tax rate is 40%.

   
Required:
1. Determine the amounts necessary to record income taxes for 2018 and prepare the appropriate journal entry.
2. Assume the enacted federal income tax law specifies that the tax rate will change from 40% to 35% in 2020. When scheduling the reversal of the depreciation difference, you were uncertain as to how to deal with the fact that the difference will continue to originate in 2019 before reversing the next two years. Upon consulting PricewaterhouseCoopers' Comperio database, you found:

Answer 1

Requirement 1

	Amount in Millions
Account Titles	Debit	Credit
Income Tax Expenses(Balancing Figure)	$16.40
Deferred Tax Assets (Loss contingency $6 x 40%)	$2.40
Income Tax Payable ($8M x 40%)		$3.20
Deferred Tax Liability ($30M Depreciation + $9M Insurance) x 40%		$15.60

Requirement 2
	Amount in Millions
Account Titles	Debit	Credit
Income Tax Expenses(Balancing Figure)	$15.20
Deferred Tax Assets (Loss contingency $6 x 35%)	$2.10
Income Tax Payable ($8M x 40%)		$3.20
Deferred Tax Liability ($30M Depreciation x 35% + $9M Insurance x 40%		$14.10