In: Accounting
Sherrod, Inc., reported pretax accounting income of $68 million for 2021. The following information relates to differences between pretax accounting income and taxable income:
Income Statement | Tax Return | Difference | |||||||||||||
2020 | $ | 14 | $ | 18 | $ | (4 | ) | ||||||||
2021 | 14 | 22 | (8 | ) | |||||||||||
2022 | 14 | 8 | 6 | ||||||||||||
2023 | 14 | 8 | 6 | ||||||||||||
$ | 56 | $ | 56 | $ | 0 | ||||||||||
Balances in the deferred tax asset and deferred tax liability
accounts at January 1, 2021, were $1.3 million and $1.5 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.
Part 1
Pretax accounting income (given) |
68 |
||
b |
Add back permanent difference – fine |
4 |
|
Adjusted pretax accounting income |
72 |
||
a |
Deduct excess from installment sales |
(6) |
DTL |
c |
Deduct excess tax depreciation |
(8) |
DTL |
d |
Add excess warranty expense |
1 |
DTA |
e |
Add expense for future absences |
14 |
DTA |
f |
Deduct loss contingency reversal |
(2) |
DTA reversal |
Taxable Income |
71 |
No. |
Event |
General Journal |
Debit |
Credit |
1 |
1 |
Tax expense (25%*72) |
18 |
|
Deferred tax asset (25%*(1+14-2)) |
3.25 |
|||
Deferred tax liability (25%*(8+6)) |
3.5 |
|||
Taxes payable (25%*71) |
17.75 |
Part 2
Pretax accounting income (given) |
68 |
Less: Tax expense |
(18) |
Net Income |
$50 million |
Part 3
Current Deferred Tax Asset (1+3.50) |
4.50 |
Current Deferred Tax Liability |
(0.75) |
Net Current Deferred Tax Asset |
3.75 |
Noncurrent Deferred Tax Asset |
1.50 |
Noncurrent Deferred Tax Liability (0.75+3) |
3.75 |
Net Noncurrent Deferred Tax Liability |
2.25 |
Net Current Deferred Tax Asset |
3.75 |
Net Noncurrent Deferred Tax Liability |
(2.25) |
Net Current Deferred Tax Asset |
$1.50 |
Explanation:
current deferred tax liability |
0.75 (3*25%) from d (for 2019) |
noncurrent deferred tax liability |
0.75 (3*25%) from d (for 2020) |
noncurrent deferred tax liability |
3 (25%*((14+14)-(8+8))) from C |
current deferred tax asset |
1 (25%*4) from d |
current deferred tax asset |
3.5 (25%*14) from e |
noncurrent deferred tax asset |
1.50 (25%*6) from e |
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