Question

ONLY NEED REQUIRMENTS 1 AND 3

Sherrod, Inc., reported pretax accounting income of $78 million for 2018. The following information relates to differences between pretax accounting income and taxable income:

1. Income from installment sales of properties included in pretax accounting income in 2018 exceeded that reported for tax purposes by $3 million. The installment receivable account at year-end had a balance of $4 million (representing portions of 2017 and 2018 installment sales), expected to be collected equally in 2019 and 2020.
2. Sherrod was assessed a penalty of $4 million by the Environmental Protection Agency for violation of a federal law in 2018. The fine is to be paid in equal amounts in 2018 and 2019.
3. Sherrod rents its operating facilities but owns one asset acquired in 2017 at a cost of $72 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions):

	Income Statement					Tax Return					Difference
2017		$	18				$	23				$	(5	)
2018			18					29					(11	)
2019			18					11					7
2020			18					9					9
		$	72				$	72				$	0

4. Warranty expense of $4 million is reported in 2018. For tax purposes, the expense is deducted when costs are incurred, $3 million in 2018. At December 31, 2018, the warranty liability was $3 million (after adjusting entries). The balance was $2 million at the end of 2017.
5. In 2018, Sherrod accrued an expense and related liability for estimated paid future absences of $8 million relating to the company’s new paid vacation program. Future compensation will be deductible on the tax return when actually paid during the next two years ($5 million in 2019; $3 million in 2020).
6. During 2017, accounting income included an estimated loss of $4 million from having accrued a loss contingency. The loss is paid in 2018 at which time it is tax deductible.

Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2018, were $2.4 million and $2.4 million, respectively. The enacted tax rate is 40% each year.

Required:
1. Determine the amounts necessary to record income taxes for 2018 and prepare the appropriate journal entry.
2. What is the 2018 net income?
3. Show how any deferred tax amounts should be classified and reported in the 2018 balance sheet.

& Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Show how any deferred tax amounts should be classified and reported in the 2018 balance sheet. (Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) Deferred tax amounts ($ in millions) Classification Amount Net noncurrent deferred tax liability $ (6.0) Required 2 Required 3 )

Answer 1

Event	Particulars	Amounts	Hint
	Pretax accounting income (As per given)	$          78
B	Add: Permanent difference in fine	$             4
	Pretax accounting income adjusted with Permanent difference	$          82
A	Less: excess from installment sales	$          (3)	Deferred tax liability
C	Less: excess tax depreciation	$        (11)	Deferred tax liability
D	Add: excess warranty expense (4-3)	$             1	Deferred tax asset
E	Add: expense for future absences	$             8	Deferred tax asset
F	Less: loss contingency reversal	$          (4)	Reversal of deferred tax asset
	Taxable Income	$          73

Date	General Journal	Debit	Credit
Dec 31, 2018	Tax Expenses (82*40%)	$    32.80
	Deferred tax asset ((1+8-4)*40%)	$       2.00
	Deferred tax liability ((3+11)*40%)		$             5.60
	Taxes payable (73*40%)		$           29.20
	(To record Income tax expense.)

Income statement
Pretax accounting income (As per given)			$           78.00
Less: Tax expense (As per above entry)			$           32.80
Net Income			$           45.20

Event	Remarks		Amounts
A	From the Installment Receivable
	Current deferred tax liability (Year 2019 = 2*40%)		$       0.80
	Non-current deferred tax liability (Year 2020 = 2*40%)		$       0.80
B	Not Applicable
C	From the Depreciation
	Non-current deferred tax liability (For Year 2019 & 2020 = ((18+18-11-9)*40%)		$       6.40
D	From the Warranty
	Current deferred tax asset (3*40%)		$       1.20
E	Expense for future absences
	Current deferred tax asset (Year 2019 = 5*40%)		$       2.00
	Non-current deferred tax asset (Year 2020 = 3*40%)		$       1.20
F	Not Applicable
	Current:
	Deferred tax asset (1.20+2)		$       3.20
	Deferred tax liability		$       0.80
	Net Current Deferred Tax Asset (3.20-0.8)		$       2.40
	Non-Current:
	Deferred tax asset		$       1.20
	Deferred tax liability (0.80+6.40)		$       7.20
	Net Deferred Tax Liability (7.20-1.20)		$       6.00
	Net Current Deferred Tax Asset		$       2.40
	Net Deferred Tax Liability		$       6.00
	Net Noncurrent Deferred Tax Liability (6-2.40) (Your answer)		$       3.60