Sherrod, Inc., reported pretax accounting income of $76 million for 2021. The following information relates to differences between pretax accounting income and taxable income:

1. Income from installment sales of properties included in pretax accounting income in 2021 exceeded that reported for tax purposes by $3 million. The installment receivable account at year-end 2021 had a balance of $7 million (representing portions of 2020 and 2021 installment sales), expected to be collected equally in 2022 and 2023.
2. 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.
3. Sherrod rents its operating facilities but owns one asset acquired in 2020 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):

4. For tax purposes, warranty expense is deducted when costs are incurred. The balance of the warranty liability was $2 million at the end of 2020. Warranty expense of $4 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).
5. In 2021, 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 2022; $3 million in 2023).
6. During 2020, accounting income included an estimated loss of $2 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 million and $2.5 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.
  

Sherrod, Inc., reported pretax accounting income of $86 million for 2021. The following information relates to differences between pretax accounting income and taxable income:

1. 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.
2. 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.
3. 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):

4. 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).
5. 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).
6. 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.

Sherrod, Inc., reported pretax accounting income of $86 million for 2021. The following information relates to differences between pretax accounting income and taxable income:

1. 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.
2. 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.
3. 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):

4. 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).
5. 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).
6. 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.

Sherrod, Inc., reported pretax accounting income of $78 million for 2021. The following information relates to differences between pretax accounting income and taxable income:

1. Income from installment sales of properties included in pretax accounting income in 2021 exceeded that reported for tax purposes by $3 million. The installment receivable account at year-end 2021 had a balance of $4 million (representing portions of 2020 and 2021 installment sales), expected to be collected equally in 2022 and 2023.
2. Sherrod was assessed a penalty of $4 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.
3. Sherrod rents its operating facilities but owns one asset acquired in 2020 at a cost of $72 million. Depreciation is reported by the straight-line method, assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions):

4. For tax purposes, warranty expense is deducted when costs are incurred. The balance of the warranty liability was $2 million at the end of 2020. Warranty expense of $4 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).
5. In 2021, Sherrod accrued an expense and related liability for estimated paid future absences of $8 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 ($5 million in 2022; $3 million in 2023).
6. During 2020, accounting income included an estimated loss of $4 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 $1.5 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.

Edible Chemicals Corporation owns a $2 million whole life insurance policy on the life of its CEO, naming Edible Chemicals as beneficiary. The annual premiums are $72,000 and are payable at the beginning of each year. The cash surrender value of the policy was $22,000 at the beginning of 2018.

1. & 2. Prepare the appropriate 2018 journal entries to record insurance expense and the increase in the investment assuming the cash surrender value of the policy increased according to the contract to $28,200. The CEO died at the end of 2018.

Ramon de la Cruz, CEO for Big Four Corporation, announced to his executive management team that he has decided to implement ________ at the Lakeview plant. The CEO stated, “With this implementation, I want to eliminate unnecessary steps in the production process and continually strive for improvement. We must emphasize productivity, quality, and cost-effectiveness. We must eliminate underused staff positions and waste.”

just-in-time delivery

computer-integrated manufacturing

formalization

lean manufacturing

mass customization

Select the correct choice for each question

Workers at station producing output in a process would probably be considered

Natural gas to heat office space where the CEO/CFO work would probably be considered

Electricity to run machines that produce output would probably be considered

Costs that change as output level changes are considered CEO and CFO salaries would probably be considered

Costs that do not change as output level changes are considered

Pick from these options: Variable cost fixed cost

Assume that we are now at the beginning of year 2020 and are trying to evaluate Company A using different valuation models. Answer all of questions below.   
1) The current leveraged beta of Company A is estimated to be 2.0 and the marginal tax rate is 40%. The risk-free rate for all the maturity is 3% and the market risk premium is 6.62%. Its debt-to-equity ratio is 1.00 currently. Next year, Company A expects to increase its debt-to-equity ratio to 1.50. Please calculate Company A’s current cost of equity, and estimate its cost of equity after it increases its debt-to-equity ratio.
2) Company A is facing a very competitive market condition and the projected free cash flow to the firm for the next five years are 500 million, 550 million, 600 million, 620 million, 650 million. Then it is expected to grow at a 3% beyond the fifth year. The WACC of the firm is estimated to be 10% and will not change in the future. Please use the “Perpetuity Growth Method” and estimate the firm’s enterprise value at the beginning of the year 2020(now).
3) The following table presents the EV/EBITDA information about Company A’s comparable companies.
Comparable Firm Information
Company Name EV/EBITDA
Company B 8.5 Company C 8.0 Company D 7.8
Besides, we also know that the EBITDA of Company A is 1500 million and its net debt is 6500 million. Its number of fully diluted shares is 100 million. Please estimate the firm’s share price range (+/- 1*standard deviation).

You have just joined a company as a new staff accountant. Your company is in an acquisition mode (acquiring 5 to 10 smaller companies each of the last 4 years). You are excited to hear that you are going with an acquisition team to facilitate another acquisition (Company X). You have been instructed to sit down with Company X’s controller and explain some pre-acquisition (before the acquisition is finalized) accounting expectations.

Expectations for Company X before the acquisition is finalized.

a) Company X is expected to accelerate the payment of liabilities

b) Company X is expected to delay recording the collections of revenue

d) Company X is expected to increase the estimated amounts in reserve accounts

As you are driving to the Company X headquarters, your gut is telling you something is not right? You pull your car over and call your old classmate who is now an auditor for Ernst and Young. You explain the “expectations” and your old classmate provides the following feedback…

(Old Classmate) There are ways that the three expectations could be managed within the rules provided by GAAP, but would be regarded by many as pushing the limits of GAAP.

Not satisfied with your old classmates answer you call your old accounting professor. Your accounting professor reminds you what he used to say in class,

(Old Professor) “There are gray areas in accounting that many accountants will be influenced to step into. Often, this results in unethical behavior (at a minimum) and in many cases results in illegal acts.” “It’s a dangerous path and I recommend that you stay away from gray.”

answer the following questions…

1) What effect does each of the three items have on the reported net income of the acquired company before the acquisition and on the reported net income of the combined company in the first year of the acquisition and future years?

2) What effect does each of the three items have on the cash from operations of the acquired company before the acquisition and on the cash from operations of the combined company in the first year of the acquisition and future years?

3) If you are the controller of Company X, how would you respond to these suggestions?

Company C is a US C Corporation. It builds and operates energy plants that produce electricity. Country P has significant needs for energy, but it does not have the expertise or financial capability to borrow in the public markets to fund projects of this magnitude. Country P has determined that the best way to entice foreign power investors to invest, operate, and accept the risks inherent with this market is by offering a 10-year income tax holiday on profits derived from constructing and operating the power plant. This would also include any potential withholding taxes on distributing profits. By offering a tax holiday Country P will offer to pay a reduced rate to purchase the power produced by the power plant. In this way the local citizens will benefit by having electricity at a reduced rate. Company C is interested in pursuing this project and is now asking you to determine the US tax consequences of the operating results. You learn that the expected investment is $1B and that 95% of the investment would be funded by offering debt in the public market. Company C would set up a CFC in the Netherlands and subscribe the debt offering. The coupon rate on the debt will be 7%. Company C expects that the Operating Cash Flows in Country P to be 15% of the total investment. The total investment would be the sum of public borrowings plus Company C’s contribution to equity of $50M. Company C does not desire to leave excess cash flow in Country P due to the risks associated with that market and would like the flexibility to invest elsewhere in the world for other projects (i.e. the money is not needed in the US). Consequently, the Company wishes to assert permanent reinvestment under GAAP (ASC 740). The excess cash flow would go to an intermediate holding company in the Netherlands to service the interest expense on the public borrowing. Assume that the Netherlands does not have a tax and that the loan balance is not amortizing (i.e. interest only). Thus, the structure of entities is a U.S. Parent (USP), owning as a first tier CFC (CFC1), a Netherlands Company. CFC1 would be funded with a $50M investment in equity from USP. CFC1 would borrow $950M in the public market. CFC1 would then invest $1B into CFC2 as equity. CFC2 would operate in Country P.

a) Using Pre 2017 rates and rules assume that neither Sec. 904(c) look through nor check the box is available. What, if any, is the expected annual U.S. tax and the underlaying tax rate on the investment?

b) Using Pre 2017 rates and rules assume either 904(c) look through or check the box is implemented. What, if any, is the expected annual U.S. tax and the underlying tax rate on the investment?

c) Using Post 2017 Act rates and rules what, if any, is the expected U.S. tax and tax rate on the investment (rather than guessing what year in service the asset is in assume this is year 1). Further assume that the entity holding the debt has checked open the operating entity (i.e. its one aggregate calculation)