Question

Required information [The following information applies to the questions displayed below.) Arndt, Inc. reported the following for 2021 and 2022 ($ in millions): Revenues Expenses Pretax accounting income (income statement) Taxable income (tax return) Tax rate: 25% 2021 $ 942 798 $ 144 $ 102 2022 $1,034 854 $ 180 $ 214 a. Expenses each year include $60 million from a two-year casualty insurance policy purchased in 2021 for $120 million. The cost is tax deductible in 2021. 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 2021 and 2022 were $61 million and $77 million, respectively. Subscriptions included in 2021 and 2022 financial reporting revenues were $55 million ($40 million collected in 2020 but not recognized as revenue until 2021) and $61 million, respectively. Hint. View this as two temporary differences-one reversing in 2021; one originating in 2021. d. 2021 expenses included a $44 million unrealized loss from reducing investments (classified as trading securities) to fair value. The investments were sold and the loss realized in 2022. e. During 2020, accounting income included an estimated loss of $34 million from having accrued a loss contingency. The loss was paid in 2021, at which time it is tax deductible. f. At January 1, 2021, Arndt had a deferred tax asset of $4 million and no deferred tax liability. ca .

Answer 1

1. Casually insurance policy purchased for 2 years in 2021. Since whole cost for insurance for 2 years is deductible in 2021 itseld as per taxation. So It will be considered as temporary diffrences because we are enjoying tax benefits for 2022 cost also. So in 2022 we have to pay more taxes. So it is temporary diffrences. 2. Since life insurance premium paid amounting to 2million $ is to be considered as permanent difference since permanent diffrence are those items of incomes and expenses which makes diffreence between acocunting and taxable incme for a period but does not make difference between accounting and taxable income of subsequent period. So in this it does not make diffreence between accounting and taxable income for subsequent period. So it will be classfied as permanent differences. 3. As difference arises because of recognition of revenue as per financial reporting and as per taxation in different years. Since in this case Revenue recognised in 2021 and 2022 as per taxation is differrent and as per Financial reporting it is differemnt. As these are to be considered as temporary difference because these differences between taxable income and accounting income is not for a period but these are going to effect for a subsequent period also. 4.Since unrealised loss on securities will be classifies as temporary differences because it is going to make differences between taxable income and accounting income for subsequent period i.e. in 2022 5.Since loss included in accounting income in 2020 only and it was paid and deductibles as per taxation in 2021 is considered as temporary difference since these differences are making difference between accounting income and taxation income for 2020 and 2021 as well. So it will be considered as temporary difference. (Ctrl) -

Particulars Casualty insurance expenses Life insurance premium Subscriptions Unrealised loss on trading securities Loss contingency Staus Temporary difference Permanent difference Temporary difference Temporary difference Temporary difference