Question

Arnold Industries has pretax accounting income of $62 million for the year ended December 31, 2018. The tax rate is 40%. The only difference between accounting income and taxable income relates to an operating lease in which Arnold is the lessee. The inception of the lease was December 28, 2018. An $12 million advance rent payment at the inception of the lease is tax-deductible in 2018 but, for financial reporting purposes, represents prepaid rent expense to be recognized equally over the four-year lease term.Required:1. Complete the following table given below and prepare the appropriate journal entry to record Arnold’s income taxes for 2018.

($ in millions) Tax Rate % Tax $ Recorded as:Pretax accounting income $40.0 Rent costs reversing in: 2019 x = 2020 x = 2021 x = 2022 x = Total deferred tax amount Income taxable in current year 2. Prepare the appropriate journal entry to record Arnold’s income taxes for 2019. Pretax accounting income was $49 million for the year ended December 31, 2019.3. Assume a new tax law is enacted in 2019 that causes the tax rate to change from 40% to 30% beginning in 2020. Complete the following table given below and prepare the appropriate journal entry to record Arnold’s income taxes for 2019.

Answer 1

Required 1

($'millions) Tax Rate(%) Tax($) Recorded as :

Pretax Accounting Income $62

Rent costs reversing in:

2019 $3 * 40% = $1.2

2020 $3 * 40%= $1.2

2021 $3 * 40%= $1.2

2022 $3 * 40%= $1.2

Tax Deferred Tax Amount $4.8 (Deferred tax liability)

Income Taxable in current year $ 50 * 40%= $20 (Income tax payable) ($62 -($3 *4 Years))

Year General Journal Debit Credit

2018 Income Tax Expense (20+4.8) $24.8

Deferred Tax Liability $4.8

Income tax payable $20

(To record Arnold income taxes for 2018)

Required 2

Year General Journal Debit Credit

2019 Income Tax Expense ($49*40%) $19.6

Deferred tax liability ($3*40%) $1.2

Income tax payable (19.6+1.2) $20.8

(To record Arnold income taxes for 2019)