ACCT3103_Intermediate financial accounting II
Exercise- Income taxes
Change in tax rates; calculate taxable income
Arnold Industries has pretax accounting income of $33 million for the year ended Dec 31, 2020. The
tax rate is 20%. The only difference between accounting income and taxable income relates to an
operating lease in which Arnold is the lessees. The inception of the lease was Dec 28. 2020. An $8
million advance rent payment at the inception of the lease is tax-deductible in 2020 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 2020 and prepare the
appropriate journal entry.
2. Determine the amounts necessary to record Arnold’s income taxes for 2021 and prepare the
appropriate journal entry. Pretax accounting income was $50 million for the year ended Dec
31, 2021.
3. Assume a new tax law is enacted in 2021 that causes the tax rate change from 20% to 15%
beginning in 2022. Determine the amounts necessary to record Arnold’s income taxes for 2021
and prepare the appropriate journal entry.