In: Accounting
Sherrod, Inc., reported pretax accounting income of $60 million
for 2018. The following information relates to...
Sherrod, Inc., reported pretax accounting income of $60 million
for 2018. 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 2018 exceeded that reported for tax purposes
by $5 million. The installment receivable account at year-end had a
balance of $6 million (representing portions of 2017 and 2018
installment sales), expected to be collected equally in 2019 and
2020.
- Sherrod was assessed a penalty of $3 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.
- Sherrod rents its operating facilities but owns one asset
acquired in 2017 at a cost of $40 million. Depreciation is reported
by the straight-line method assuming a four-year useful life. On
the tax return, deductions for depreciation will be more than
straight-line depreciation the first two years but less than
straight-line depreciation the next two years ($ in millions):
|
Income Statement |
|
Tax Return |
|
Difference |
2017 |
|
$ |
10 |
|
|
|
$ |
13 |
|
|
|
$ |
(3 |
) |
|
2018 |
|
|
10 |
|
|
|
|
16 |
|
|
|
|
(6 |
) |
|
2019 |
|
|
10 |
|
|
|
|
6 |
|
|
|
|
4 |
|
|
2020 |
|
|
10 |
|
|
|
|
5 |
|
|
|
|
5 |
|
|
|
|
$ |
40 |
|
|
|
$ |
40 |
|
|
|
$ |
0 |
|
|
|
- Warranty expense of $4 million is reported in 2018. For tax
purposes, the expense is deducted when costs are incurred, $3
million in 2018. At December 31, 2018, the warranty liability was
$3 million (after adjusting entries). The balance was $2 million at
the end of 2017.
- In 2018, Sherrod accrued an expense and related liability for
estimated paid future absences of $5 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 ($3 million in 2019; $2 million in 2020).
- During 2017, accounting income included an estimated loss of $4
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 $2.4 million and $1.6 million,
respectively. The enacted tax rate is 40% each year.
Required:
1. Determine the amounts necessary to record
income taxes for 2018 and prepare the appropriate journal
entry.
2. What is the 2018 net income?
3. Show how any deferred tax amounts should be
classified and reported in the 2018 balance sheet.