In: Accounting
Sherrod, Inc., reported pretax accounting income of $86 million
for 2021. The following information relates to...
Sherrod, Inc., reported pretax accounting income of $86 million
for 2021. The following information relates to differences between
pretax accounting income and taxable income:
- Income from installment sales of properties included in pretax
accounting income in 2021 exceeded that reported for tax purposes
by $5 million. The installment receivable account at year-end 2021
had a balance of $6 million (representing portions of 2020 and 2021
installment sales), expected to be collected equally in 2022 and
2023.
- Sherrod was assessed a penalty of $2 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.
- Sherrod rents its operating facilities but owns one asset
acquired in 2020 at a cost of $92 million. Depreciation is reported
by the straight-line method, assuming a four-year useful life. On
the tax return, deductions for depreciation will be more than
straight-line depreciation the first two years but less than
straight-line depreciation the next two years ($ in millions):
|
Income Statement |
|
Tax Return |
|
Difference |
2020 |
|
$ |
23 |
|
|
|
$ |
30 |
|
|
|
$ |
(7 |
) |
|
2021 |
|
|
23 |
|
|
|
|
40 |
|
|
|
|
(17 |
) |
|
2022 |
|
|
23 |
|
|
|
|
14 |
|
|
|
|
9 |
|
|
2023 |
|
|
23 |
|
|
|
|
8 |
|
|
|
|
15 |
|
|
|
|
$ |
92 |
|
|
|
$ |
92 |
|
|
|
$ |
0 |
|
|
|
- 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).
- In 2021, Sherrod accrued an expense and related liability for
estimated paid future absences of $12 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; $2 million in 2023).
- 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.
Balances in the deferred tax asset and deferred tax liability
accounts at January 1, 2021, were $1.8 million and $2.0 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.