Arnold Industries has pretax accounting income of $33 million for the year ended December 31, 2018. The taxrate is 40%. The only difference between accounting income and taxable income relates to an operating lease inwhich Arnold is the lessee. The inception of the lease was December 28, 2018. An $8 million advance rent payment at the inception of the lease is tax-deductible in 2018 but, for financial reporting purposes, represents prepaidrent expense to be recognized equally over the four-year lease term.Required:1. Determine the amounts necessary to record Arnold’s income taxes for 2018, and prepare the appropriate journal entry.2. Determine the amounts necessary to record Arnold’s income taxes for 2019, and prepare the appropriate journal entry. Pretax accounting income was $50 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 in2020. Determine the amounts necessary to record Arnold’s income taxes for 2019, and prepare the appropriate journal entry.4. Why is Arnold’s 2019 income tax expense different when the tax rate change occurs from what it would bewithout the change?
Arnold Industries has pretax accounting income of $33 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 inception of the lease was December 28, 2018. An $8 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. Determine the amounts necessary to record Arnold’s income taxes for 2018, and prepare the appropriate
2. Determine the amounts necessary to record Arnold’s income taxes for 2019, and prepare the appropriate journal entry. Pretax accounting income was $50 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. Determine the amounts necessary to record Arnold’s income taxes for 2019, and prepare the appropriate journal entry.
4. Why is Arnold’s 2019 income tax expense different when the tax rate change occurs from what it would be
without the change?
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