Question

*Gains and losses taxable when investments are sold. The total deferred tax asset and deferred tax liability amounts at January 1, 2021, were $166.25 million and $25 million, respectively. The enacted tax rate is 25% each year. Required: 1. Determine the total deferred tax asset and deferred tax liability amounts at December 31, 2021. 2. Determine the increase (decrease) in the deferred tax asset and deferred tax liability accounts at December 31, 2021. 3. Determine the income tax payable currently for the year ended December 31, 2021. 4. Prepare the journal entry to record income taxes for 2021.

Answer 1

1. $160.75 million

$42 million

2. Decrease ($5.5 Million)

Increase $17 million

3. $35 million

4. Dr Tax expense $57.5 million

Cr Deferred tax asset $5.5 million

Cr Deferred tax liability $17 million

Cr Taxes payable $35 million

Step-by-step explanation:

1. Calculation to determine the total deferred tax asset and deferred tax liability amounts at December 31, 2021.

Allowance for bad debt $1 million

($28 million-$32 million)* 25%

Add Subscription liability $6.25 million

($25million*25%)

Add Post retirement benefits obligation $153.5 million

($614 million*25%)

TOTAL DEFERRED TAX ASSET $160.75 million

Prepaid insurance $10 million

($40 million *25%)

Add Prepaid advertising $6 million

($24million * 25%)

Investments unrealized gain $6 million

$24million * 25%)

Add Buildings $20 million

[($380 million-$300 million) * 25%]

TOTAL DEFERRED TAX LIABILITY $42 million

Therefore the total deferred tax asset is $160.75 million and deferred tax liability amounts at December 31, 2021 is $42 million.

2. Calculation to determine the increase (decrease) in the deferred tax asset and deferred tax liability accounts at December 31, 2021

DEFERRED TAX ASSET

Ending balance $160.75 million

Less Beginning balance $166.25 million

Decrease ($5.5 Million)

DEFERRED TAX LIABILITY

Ending balance $42 million

Less Beginning balance $25 million

Increase $17 million

Therefore the increase (decrease) in the deferred tax asset and deferred tax liability accounts at December 31, 2021 is :

Deferred tax asset: Decrease ($5.5 Million)

Deferred tax liability:Increase $17 million

3. Calculation to determine the income tax payable currently for the year ended December 31, 2021

Income tax payable = $140 million *25%

Income tax payable=$35 million

Therefore the income tax payable currently for the year ended December 31, 2021 is $35 million

4. Preparation of the journal entry to record income taxes for 2021.

Journal entry

Dr Tax expense $57.5 million

($5.5 million+$17 million +$35 million)

Cr Deferred tax asset $5.5 million

Cr Deferred tax liability $17 million

Cr Taxes payable $35 million

(To record tax expense)