Question

Sherrod, Inc., reported pretax accounting Income of $92 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 $6 million. The installment receivable account at year-end 2021 had a balance of $8 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 $104 million. Depreciation is reported by the straight-line method, assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ In millions): 2020 2021 2022 2023 Income Statement $ 26 26 26 26 $184 Tax Return $ 34 45 16 9 $ 104 Difference $ (8) (19) 18 17 $ @ 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 $3 million is recognized in the Income statement in 2021. $2 million of cost is incurred in 2021, and another $3 million of cost anticipated in 2022. At December 31, 2021, the warranty liability is $2 million (after adjusting entries). e. In 2021, Sherrod accrued an expense and related liability for estimated paid future absences of $13 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 ($7 million in 2022; $6 million in 2023). f. During 2020, accounting Income included an estimated loss of $6 million from having accrued a loss contingency. The loss is pald In 2021, at which time it is tax deductible. Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2021, were $1.8 million and $2.5 million, respectively. The enacted tax rate is 25% each year. Required: 1. Determine the amounts necessary to record Income taxes for 2021, and prepare the appropriate Journal entry. 2. What is the 2021 net Income? 3. Show how any deferred tax amounts should be classified and reported in the 2021 balance sheet.

Answer 1

Answer D Pageno in millions/ DTAIDEL 92 Poutax accounting Income b. Penalty-Permanent difference 3 None 95 - 6 DTL -19 DIL 1 DIA a. Excess of installment Sales Excell tax depreciation Id. Exckcoriardy Experk C $3- $2) Excel Expenas for future absenal f. Reversal of loss contingency Taxable Income 13 DTA Reverse of DTA 78 Event Credit General Journal Debit Income tax expende $23.75 Deferred tax asset Deferred tax liability Income tax payable (To Record the 202 lincome Hoxesy $6:25 $19.5

pageno Deferred tax alleet = 25% *($1+*13-06 = 25%. * ($8) = $2 Deferred tax liability = 28% *($6+$19) = 254.X $25 = $6.25 Income tax payable 25% x $78 = $19.5 a) net income for 2021 = poutax accounting Pn.com -Income tax expense = $92-23. 75 $68-25 million 3 Deferred tax allet: Horran ty Expense (25% x2) Future Com pensation accurd (25%<$13) Total deferred tax allet & Defemned tax liabilit4:- Pinstalment Sales (25%, x3) Deporeciation (as%. xC$2G+26) - C$168) Total defeaned tax liability Net defeared tax liability 6.25. os 3.25 3.75 3.25 75 _lo Deferred tax liability 6.25