Arndt, Inc., reported the following for 2018 and 2019 ($ in millions):

2018 2019

Revenues....................................................$888.............$983

Expenses......................................................760..............800

Pretax accounting income (income statement).........$128............$183

Taxable income (tax return) ..............................$120............$200

Tax rate: 40%

a. Expenses each year include $30 million from a two-year casualty insurance policy purchased in 2018 for $60 million. The cost is tax deductible in 2018.

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 2018 and 2019 were $33 million and $35 million, respectively. Subscriptions included in 2018 and 2019 financial reporting revenues were $25 million ($10 million collected in 2017 but not recognized as revenue until 2018) and $33 million, respectively.

d. 2018 expenses included a $17 million unrealized loss from reducing investments (classified as trading securities) to fair value. The investments were sold in 2019.

e. During 2017, accounting income included an estimated loss of $5 million from having accrued a loss contingency. The loss was paid in 2018, at which time it is tax deductible.

f. At January 1, 2018, 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 2018. Prepare the appropriate journal entry.

3. Show how any 2018 deferred tax amounts should be classified and reported on the 2018 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 2019. Prepare the appropriate journal entry.

5. Explain how any 2019 deferred tax amounts should be classified and reported on the 2019 balance sheet.

6. Suppose that during 2019, tax legislation was passed that will lower Arndt's effective tax rate to 35% beginning in 2020. Repeat requirement 4.