Question

Sherrod, Inc., reported pretax accounting income of $98 million for 2021. The following information relates to differences between pretax accounting income and taxable income: a. Income from installment sales of properties included in pretax accounting income in 2021 exceeded that reported for tax purposes by $9 million. The installment receivable account at year-end 2021 had a balance of $10 million (representing portions of 2020 and 2021 installment sales), expected to be collected equally in 2022 and 2023. b. Sherrod was assessed a penalty of $3 million by the Environmental Protection Agency for violation of a federal law in 2021. The fine is to be paid in equal amounts in 2021 and 2022. c. Sherrod rents its operating facilities but owns one asset acquired in 2020 at a cost of $116 million. Depreciation is reported by the straight-line method, assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions): 2020 2021 2022 2023 Income Statement $ 29 29 29 Tax Return $ 38 50 20 Difference $ (9) (21) 9 29 8 21 $116 $116 d. For tax purposes, warranty expense is deducted when costs are incurred. The balance of the warranty liability was $1 million at the end of 2020. Warranty expense of $5 million is recognized in the income statement in 2021. $3 million of cost is incurred in 2021, and another $3 million of cost anticipated in 2022. At December 31, 2021, the warranty liability is $3 million (after adjusting entries). e. In 2021, Sherrod accrued an expense and related liability for estimated paid future absences of $15 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 ($10 million in 2022; $5 million in 2023). f. During 2020, accounting income included an estimated loss of $6 million from having accrued a loss contingency. The loss is paid in 2021, at which time it is tax deductible.

Answer 1

solutions Required -1' Journal Entry : is in millions Event General Journal Debit (6) credit (6) 1 Tax Expense. $25.24 DTA (25:). x [2+15-6))..$2.8 DIL/251.X[9+2) $7.5 Tax payable (251x$82) : $20.5 ..(to record 2021 Income Taxes) Esuplanation's . ........ Amount ($ in millions) Pretan accounting income (given) $98 Add: b. Add back permanent Difference-fine $3 Adjusted pretax accounting. Income s101 a. Deduce excess from Installment sales $ 9) C. Deduct excess har depreciation $(21) d. Add excess warranty expense (65-$3) $2 e. Add expense for future absences . . $15 f . Deduct Loss contingency reverseil $(6) $22 : Tascable Income

Notes D Point (a) will produce a DTL : 2) Point (b) is a permanent difference and added 1. back to in determining taxable income, . 3) Point(e) will produce a DTL and will begin. - reversing in 2022. W point (d) will produce a DTA solnte wy P%b8ace aOTA 6 point (1) will produce a OTA and that will : reverse. in 2021. . DDTL = Deffered Tax & DTA - Deffered Tax Liability Asset.

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