Arnold Industries has pretax accounting income of $34 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 inceptio of the lease was December 28, 2018. An $4 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. 2. Prepare the appropriate journal entry to record Arnold's income taxes for 2019. Pretax accounting income was $42 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. Complete this question by entering your answers in the tabs below. Required 1 Calculation Required 3 Calculation Required 1 GJ Required 2 Required 3 GJ Complete the following table given below to record Arnold's income taxes for 2018. (Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) (S in millions) Tax Rate % Таx $ Recorded as: Pretax accounting income Rent costs reversing in: 34.0 2019 %3D 2020 %3D 2021 %3D 2022 %3D Total deferred tax amount Income taxable in current year < Required 1 Calculation Required 1 GJ > I ||||
Arnold Industries has pretax accounting income of $34 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 inceptio of the lease was December 28, 2018. An $4 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. 2. Prepare the appropriate journal entry to record Arnold's income taxes for 2019. Pretax accounting income was $42 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. Complete this question by entering your answers in the tabs below. Required 1 Calculation Required 3 Calculation Required 1 GJ Required 2 Required 3 GJ Complete the following table given below to record Arnold's income taxes for 2018. (Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) (S in millions) Tax Rate % Таx $ Recorded as: Pretax accounting income Rent costs reversing in: 34.0 2019 %3D 2020 %3D 2021 %3D 2022 %3D Total deferred tax amount Income taxable in current year < Required 1 Calculation Required 1 GJ > I ||||
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:**Arnold Industries Tax Accounting for 2018 and 2019**
Arnold Industries reported a pretax accounting income of $34 million for the year ending December 31, 2018, with a tax rate applicable of 40%. The only variance between accounting income and taxable income pertains to an operating lease under which Arnold is the lessee. At the inception of the lease on December 28, 2018, the company made a $4 million advance payment, deductible for tax purposes in 2018, but recognized as prepaid rent for financial reporting over a four-year lease term.
**Tasks:**
1. **2018 Income Tax Recording:**
- Complete the table to determine Arnold's income taxes for 2018.
- Prepare the journal entry to record this tax adjustment.
2. **2019 Income Tax Recording:**
- Arnold's pretax accounting income for 2019 is $42 million.
- Record the income taxes for 2019.
3. **2020 Tax Rate Adjustment:**
- Assume a new tax regulation effective in 2020 reduces the tax rate from 40% to 30%.
- Determine and record the journal entry for Arnold’s 2019 income taxes with this new information.
**Table Completion for 2018:**
The table is designed to compute income taxes for 2018 by accounting for variations in rent costs that reverse over the subsequent four years and the effect on deferred tax amounts. The process involves:
- Listing pretax accounting income at $34 million.
- Adjusting for rent cost recognition across 2019-2022.
- Calculating tax impacts using respective rates for each adjustment and reversing year.
- Determining total deferred tax amounts.
Once data is entered, it will reflect the taxable income for the current year and the associated tax recorded. The adjustment accommodates future tax implications of reversing lease payment treatments.
**Educational Goals:**
- Understand differences between accounting and taxable income.
- Record tax entries reflecting deferred payments and future rate changes.
- Analyze the impact of tax law changes on corporate financial statements.
This exercise reinforces comprehension of lease accounting, deferred taxation, and the strategic impact of changing fiscal policies.
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