In: Accounting
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 Statement | Tax Return | Difference | |||||||||||||
2020 | $ | 23 | $ | 30 | $ | (7 | ) | ||||||||
2021 | 23 | 40 | (17 | ) | |||||||||||
2022 | 23 | 14 | 9 | ||||||||||||
2023 | 23 | 8 | 15 | ||||||||||||
$ | 92 | $ | 92 | $ | 0 | ||||||||||
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.
Answer:-
1) Amount necessary to record income taxes for 2021
Pretax Accounting income Given |
$86 |
||
b |
Add back permanent difference - fine |
$2 |
|
Adjusted pretax accounting income |
$88 |
||
a |
Deduct excess from installments sales |
-5 |
DTL |
c |
Deduct excess tax Depreciation |
-17 |
DTL |
d |
Add excess warranty expenses |
1 |
DTA |
e |
Add expense for future absences |
12 |
DTA |
f |
Deduct loss contingency reversal |
-6 |
DTA reversal |
Taxable amount |
73 |
Deferred Tax Assets = 25% x (1+12-6)
= 1.75
Deferred Tax Liability = 25% x (5+17)
= 5.5
Taxes Payable = 25% x 73
= 18.25
Sherrod Inc. |
|||
Journal Entries |
|||
No. |
Particulars |
Debit |
Credit |
1 |
Tax Expenses |
$22 |
|
Deferred tax Assets |
$1.75 |
||
To Deferred tax liability |
$5.50 |
||
To Taxes payable |
$18.25 |
2) Net Income of 2021
Pretax Accounting Income(given) |
86 |
LESS:- Tax expenses |
22 |
Net Income |
64 |
3) Classification of diferred tax amount and 2021 Balance sheet
Current Deferred Tax Asset (25% x $5) |
1.25 |
Current Deferred Tax Asset from waranty expenses (25% x $2) |
0.5 |
Net Current Deferred Tax Asset Accrued expenses (25% x $10) |
2.5 |
Non current Deferred Tax Asset Accrued expenses (25% x $2) |
0.5 |
Current Deferred Tax Liability (25% x $5) |
1.25 |
Noncurrent Deferred Tax Liability from depreciation {25% [(23+23)-(14+8)]} |
6 |
Net Non current Deferred Tax Asset (0.5+2.5-1.25) |
1.75 |
Net Noncurrent Deferred Tax Liability (6-1.25) |
4.75 |