Isaac Inc. began operations in January 2011. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments. In 2011, Isaac had $653 million in sales of this type. Scheduled collections for these sales are as follows: 2011 $ 70 million 2012 128 million 2013 126 million 2014 156 million 2015 173 million $653 million Assume that Isaac has a 30% income tax rate and that there were no other differences in income for financial statement and tax purposes. Ignoring operating expenses and additional sales in 2012, what deferred tax liability would Isaac report in its year-end 2012 balance sheet? (Round your answer to the nearest whole million.) $196 million $158 million $59 million $137 million American Food Services, Inc., leased a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2011. The lease agreement for the $5 million (fair value and present value of the lease payments) machine specified four equal payments at the end of each year. The useful life of the machine was expected to be four years with no residual value. Barton and Bartons implicit interest rate was 10% (also American Food Services incremental borrowing rate). (Use Table 4) Required: (1) Prepare the journal entry for American Food Services at the inception of the lease on January 1, 2011. (Enter your answers in dollars not in millions. Omit the "$" sign in your response.) Date General Journal Debit Credit Jan 1, 2011 (Click to select)Leased assetsAccumulated depreciationLease receivableInterest expenseCashInterest payableLease payableDepreciation expense (Click to select)Interest expenseInterest payableLeased assetsLease payableAccumulated depreciationCashLease receivableDepreciation expense -------------------------------------------------------------------------------- (2) Prepare an amortization schedule for the four-year term of the lease. (Input all amounts as positive values.Enter your answers in dollars not in millions. Leave no cells blank - be certain to enter "0" wherever required.Round "PV Factor" to 5 decimal places, intermediate and final answers to the nearest dollar amount.) Lease Amortization Schedule Lease Payments Effective Interest Decrease in Balance Outstanding Balance 2011 2012 2013 2014 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- (3) Prepare the journal entry for the first lease payment on December 31, 2011. (Enter your answers in dollars not in millions.Round "PV Factor" to 5 decimal places and final answers to the nearest dollar amount.) Date General Journal Debit Credit Dec 31, 2011 (Click to select)Interest payableLease payableLeased assetsDepreciation expenseCashInterest expenseLease receivableAccumulated depreciation (Click to select)Depreciation expenseInterest payableLeased assetsLease receivableLease payableInterest expenseAccumulated depreciationCash (Click to select)Lease payableInterest payableLease assetsInterest revenueDepreciation expenseAccumulated depreciationCashInterest expense -------------------------------------------------------------------------------- (4) Prepare the journal entry for the third lease payment on December 31, 2013. (Enter your answers in dollars not in millions.Round "PV Factor" to 5 decimal places and final answers to the nearest dollar amount.) Date General Journal Debit Credit Dec 31, 2013 (Click to select)Accumulated depreciationInterest payableCashInterest expenseLease payableLeased assetsDepreciation expenseLease receivable (Click to select)CashLeased assetsAccumulated depreciationInterest expenseLease receivableInterest payableDepreciation expenseLease payable (Click to select)Depreciation expenseInterest payableLease assetsInterest expenseCashLease receivableInterest revenueAccumulated depreciation -------------------------------------------------------------------------------- Arndt, Inc., reported the following for 2011 and 2012 ($ in millions): 2011 2012 Revenues $ 880 $ 970 Expenses 730 760 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Pretax accounting income (income statement) $ 150 $ 210 Taxable income (tax return) $ 159 $ 216 Tax rate: 35% -------------------------------------------------------------------------------- a. Expenses each year include $25 million from a two-year casualty insurance policy purchased in 2011 for $50 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 $38 million and $40 million, respectively. Subscriptions included in 2011 and 2012 financial reporting revenues were $23 million ($14 million collected in 2010 but not earned until 2011) and $38 million, respectively. Hint: View this as two temporary differencesone reversing in 2011; one originating in 2011. d. 2011 expenses included a $23 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 $6 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 $6 million and no deferred tax liability. Required: (1) Which of the five differences described are temporary and which are permanent differences? Difference Life insurance premiums (Click to select)TemporaryPermanent Casualty insurance expense (Click to select)TemporaryPermanent Unrealized loss (Click to select)PermanentTemporary Subscriptions received (Click to select)TemporaryPermanent Loss contingency (Click to select)TemporaryPermanent -------------------------------------------------------------------------------- (2) Prepare a schedule that reconciles the difference between pretax accounting income and taxable income. Using the schedule, prepare the necessary journal entry to record income taxes for 2011. (Enter your answers in millions of dollar rounded to 2 decimal places. Amounts to be deducted should be indicated with a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Ending balances (balance currently needed - enter amounts as positive). Omit the "$" & "%" signs in your response.) ($ in millions) Current Year 2011 Future Taxable Amounts Future Deductible Amounts [2012] [2012] Pretax accounting income Permanent difference: Life insurance premiums Temporary differences: Casualty insurance expense Subscriptions-2010 Subscriptions-2011 Unrealized loss Loss contingency (reversing) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Taxable income (income tax return) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Enacted tax rate % % % -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Tax payable currently -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Deferred tax liability Deferred tax asset Deferred tax liability Deferred tax asset Ending balances (balance currently needed): $ $ Less: beginning balances: -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Changes needed to achieve desired balances $ $ -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- General Journal Debit Credit (Click to select)Deferred tax assetIncome tax payableInsurance expenseUnearned revenuesIncome tax expenseCashDeferred tax liabilityPrepaid insurance (Click to select)Deferred tax assetUnearned revenuesInsurance expenseDeferred tax liabilityPrepaid insuranceIncome tax payableIncome tax expenseCash (Click to select)Deferred tax assetPrepaid insuranceCashUnearned revenuesIncome tax expenseDeferred tax liabilityIncome tax payableInsurance expense (Click to select)Unearned revenuesInsurance expenseCashDeferred tax liabilityIncome tax payableDeferred tax assetPrepaid insuranceIncome tax expense -------------------------------------------------------------------------------- (3) Compute the deferred tax amount that should be reported on the 2011 balance sheet. (Enter your answers in millions of dollar rounded to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.) Current asset $ Long-term asset $ Current liability $ Long-term liability $ -------------------------------------------------------------------------------- (4) 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 2012. (Enter your answers in millions of dollar rounded to 2 decimal places. Amounts to be deducted should be indicated with a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Ending balances (balance currently needed - enter amounts as positive). Omit the "$" & "%" signs in your response.) ($ in millions) Current Year 2012 Future Taxable Amounts Future Deductible Amounts [2013] [2013] Pretax accounting income Permanent difference: Life insurance premiums Temporary differences: Casualty insurance (reversing) Subscriptions-2011 Subscriptions-2012 Unrealized loss (reversing) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Taxable income (income tax return) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Enacted tax rate % % % -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Tax payable currently -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Deferred tax liability Deferred tax asset Deferred tax liability Deferred tax asset Ending balances (balances currently needed): $ $ Less: beginning balances: -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Changes needed to achieve desired balances $ $ -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- General Journal Debit Credit (Click to select)Deferred tax assetIncome tax payableIncome tax expensePrepaid insuranceUnearned revenuesCashDeferred tax liabilityInsurance expense (Click to select)Income tax payableDeferred tax assetPrepaid insuranceDeferred tax liabilityInsurance expenseCashUnearned revenuesIncome tax expense (Click to select)Insurance expenseDeferred tax assetCashIncome tax payableDeferred tax liabilityUnearned revenuesPrepaid insuranceIncome tax expense (Click to select)Deferred tax assetUnearned revenuesIncome tax expenseDeferred tax liabilityCashInsurance expensePrepaid insuranceIncome tax payable -------------------------------------------------------------------------------- (5) Compute the deferred tax amounts that should be reported on the 2012 balance sheet. (Enter your answers in millions of dollar rounded to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.) Current asset $ Long-term asset $ Current liability $ Long-term liability $ -------------------------------------------------------------------------------- (6) Suppose that during 2012, tax legislation was passed that will lower Arndts effective tax rate to 30% beginning in 2013. 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 2012. (Enter your answers in millions of dollar rounded to 2 decimal places. Amounts to be deducted should be indicated with a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Ending balances (balance currently needed - enter amounts as positive). Omit the "$" & "%" signs in your response.) ($ in millions) Current Year 2012 Future Taxable Amounts Future Deductible Amounts [2013] [2013] Pretax accounting income Permanent difference: Life insurance premiums Temporary differences: Casualty insurance (reversing) Subscriptions-2011 Subscriptions-2012 Unrealized loss (reversing) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Taxable income (income tax return) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Enacted tax rate % % % -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Tax payable currently -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Deferred tax liability Deferred tax asset Deferred tax liability Deferred tax asset Ending balances (balances currently needed): $ $ Less: beginning balances: -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Changes needed to achieve desired balances $ $ -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- General Journal Debit Credit (Click to select)Deferred tax assetUnearned revenuesDeferred tax liabilityPrepaid insuranceInsurance expenseIncome tax expenseIncome tax payableCash (Click to select)Deferred tax assetInsurance expenseCashIncome tax expenseIncome tax payableDeferred tax liabilityUnearned revenuesPrepaid insurance (Click to select)Income tax expenseIncome tax payableCashUnearned revenuesDeferred tax liabilityDeferred tax assetPrepaid insuranceInsurance expense (Click to select)Deferred tax assetDeferred tax liabilityIncome tax payablePrepaid insuranceInsurance expenseIncome tax expenseCashUnearned revenues