Question
Arndt, Inc., reported the following for 2013 and 2014 ($ in millions): 2013 2014 Revenues $ 978 $ 1,014 Expenses 776 816 Pretax accounting income
Arndt, Inc., reported the following for 2013 and 2014 ($ in millions): 2013 2014 Revenues $ 978 $ 1,014 Expenses 776 816 Pretax accounting income (income statement) $ 202 $ 198 Taxable income (tax return) $ 195 $ 235 Tax rate: 40% a. Expenses each year include $40 million from a two-year casualty insurance policy purchased in 2013 for $80 million. The cost is tax deductible in 2013. 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 2013 and 2014 were $32 million and $54 million, respectively. Subscriptions included in 2013 and 2014 financial reporting revenues were $24 million ($10 million collected in 2012 but not earned until 2013) and $32 million, respectively. Hint: View this as two temporary differencesone reversing in 2013; one originating in 2013. d. 2013 expenses included a $27 million unrealized loss from reducing investments (classified as trading securities) to fair value. The investments were sold in 2014. e. During 2012, accounting income included an estimated loss of $4 million from having accrued a loss contingency. The loss was paid in 2013 at which time it is tax deductible. f. At January 1, 2013, 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?
Life insurance premiums
casualty insurance expense
unrealized loss
subscriptions revieved
loss contingency
requirement 2
Prepare a schedule that reconciles the difference between pretax accounting income and taxable income. Using the schedule, prepare the necessary journal entry to record income taxes for 2013.
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