Question

Sherrod, Inc., reported pretax accounting income of $76 million for 2018. 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 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. b. Sherrod was assessed a penalty of $2 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. c. Sherrod rents its operating facilities but owns one asset acquired in 2017 at a cost of $80 million. Depreciation is reported by the straight-line method, assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions): Income Statement Tax Returns 2017 $20 $26 2018 $20 $35 2019 $20 $12 2020 $20 $7 d. Warranty expense of $3 million is reported in 2018. For tax purposes, the expense is deducted when costs are incurred, $2 million in 2018. At December 31, 2018, the warranty liability was $2 million (after adjusting entries). The balance was $1 million at the end of 2017. e. In 2018, Sherrod accrued an expense and related liability for estimated paid future absences of $7 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 ($4 million in 2019; $3 million in 2020). f. During 2017, accounting income included an estimated loss of $2 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 $1.2 million and $2.8 million, respectively. The enacted tax rate is 40% each year.

Total Taxable Income for year 2018 was (millions):

A.68

B.76

C. 66

D. 74.

Total future( deductible) amount for Warranties was (millions);

A. (3)

B.(2)

C. (1)

D .All of the above can be possible.

Which of the following was the correct journal entry to describe at the end of year 2018 ?

A. Income Tax Expense 30.2 Deferred tax asset 7.2 Income tax payable 37.2

B. Income Tax Expense 31.2 Deferred tax liability 4.8 Income tax payable 26.4

C. Income Tax Expense 31.2 Deferred tax asset 4.8 Income tax payable 26.4

D. More than one answer is correct.

Answer 1

Total Taxable Income for year 2018 was (millions):

Option C:66

Pretax accounting income (given)		76
b. Add back permanent difference – fine		2
Adjusted pretax accounting income		78
a. Deduct excess from installment sales		-3	DTL
c. Deduct excess tax depreciation		-15	DTL
d. Add excess warranty expense		1	DTA
e. Add expense for future absences		7	DTA
f. Deduct loss contingency reversal		-2	DTA reversal
Taxable Income		66

Total future( deductible) amount for Warranties was (millions);
Option B:(2)
It is the amount not allowed as deduction untill end of 2018 i.e.,opeing balance(1 million)+Expense not allowed in 2018(1 million)=2 million
Which of the following was the correct journal entry to describe at the end of year 2018 ?
Option B:
Income Tax Expense                             Dr.	31.2
Deferred tax liability		4.8
Income tax payable		26.4