Question

Arndt, Inc. reported the following for 2011 and 2012 ($ in millions):
a. Expenses each year include $30 million from a two-year casualty insurance policy purchased in 2011 for $60 million. The cost is tax-deductible in 2011.
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 2011 and 2012 were $33 million and $35 million, respectively. Subscriptions included in 2011 and 2012 financial reporting revenues were $25 million ($10 million collected in 2010 but not earned until 2011) and $33 million, respectively. Hint: View this as two temporary differences—one reversing in 2011; one originating in 2011.
d. 2011 expenses included a $17 million unrealized loss from reducing investments (classified as trading securities) to fair value. The investments were sold in 2012.
e. During 2010, accounting income included an estimated loss of $5 million from having accrued a loss contingency. The loss was paid in 2011 at which time it is tax deductible.
f. At January 1, 2011, Arndt had a deferred tax asset of $6 million and no deferred tax liability.

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 2011. Prepare the appropriate journal entry.
3. Show how any 2011 deferred tax amounts should be classified and reported on the 2011 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 2012. Prepare the appropriate journal entry.
5. Explain how any 2012 deferred tax amounts should be classified and reported on the 2012 balance sheet.
6. Suppose that during 2012, tax legislation was passed that will lower Arndt's effective tax rate to 35% beginning in 2013. Repeat requirement 4



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  • CreatedJuly 05, 2013
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