Thornton Industries began construction of a warehouse on July 1, 2018. The project was completed on March 31, 2019. No new loans were required to fund construction. Thornton does have the following two interest-bearing liabilities that were outstanding throughout the construction period:

Construction expenditures incurred were as follows:

The company’s fiscal year-end is December 31.

Required:
Calculate the amount of interest capitalized for 2018 and 2019.

Jack & Mary Jones are married in December 30, 2018, they have no children or dependents. Their divorce became final on December 31, 2018. Of the Income earned, Jack’s total income is $500,000 but his taxable income is $425,000.  

1. What is Jack’s Filing Status for 2018?

2. What is their Marginal Tax Rate for 2018?

3. What is his Tax Liability for 2018?

4. What is his Average Tax Rate

5. What is his effective Tax Rate of taxable income?

6. If Jack discover he has an additional tax deduction of $40,000 what is his new Marginal Tax Rate?

7. What is his Tax Savings at the New Rate?

The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed $2.6 million in long-term debt, $740,000 in the common stock account, and $5.95 million in the additional paid-in surplus account. The 2018 balance sheet showed $3.8 million, $965,000, and $8.05 million in the same three accounts, respectively. The 2018 income statement showed an interest expense of $200,000. The company paid out $570,000 in cash dividends during 2018. If the firm's net capital spending for 2018 was $670,000, and the firm reduced its net working capital investment by $155,000, what was the firm's 2018 operating cash flow, or OCF?

Sherrod, Inc., reported pretax accounting income of $68 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 $6 million. The installment receivable account at year-end had a balance of $8 million (representing portions of 2017 and 2018 installment sales), expected to be collected equally in 2019 and 2020.
Sherrod was assessed a penalty of $4 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 $56 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions):

Income Statement Tax Return Difference
2017 $ 14 $ 18 $ (4 )
2018 14 22 (8 )
2019 14 8 6
2020 14 8 6
$ 56 $ 56 $ 0

Warranty expense of $5 million is reported in 2018. For tax purposes, the expense is deducted when costs are incurred, $4 million in 2018. At December 31, 2018, the warranty liability was $4 million (after adjusting entries). The balance was $3 million at the end of 2017.
In 2018, Sherrod accrued an expense and related liability for estimated paid future absences of $14 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 ($8 million in 2019; $6 million in 2020).
During 2017, accounting income included an estimated loss of $2 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 $2.0 million and $2.4 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.

Sherrod, Inc., reported pretax accounting income of $60 million for 2018. 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 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.
2. 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.
3. 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):

4. 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.
5. 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).
6. 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.

Problem 16-7 Multiple differences; calculate taxable income; balance sheet classification [LO16-4, 16-6, 16-8] Sherrod, Inc., reported pretax accounting income of $74 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 $7 million. The installment receivable account at year-end had a balance of $8 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 $68 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions): Income Statement Tax Return Difference 2017 $ 17 $ 22 $ (5 ) 2018 17 29 (12 ) 2019 17 10 7 2020 17 7 10 $ 68 $ 68 $ 0 Warranty expense of $3 million is reported in 2018. For tax purposes, the expense is deducted when costs are incurred, $2 million in 2018. At December 31, 2018, the warranty liability was $2 million (after adjusting entries). The balance was $1 million at the end of 2017. In 2018, Sherrod accrued an expense and related liability for estimated paid future absences of $14 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 ($8 million in 2019; $6 million in 2020). During 2017, accounting income included an estimated loss of $2 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 $1.2 million and $2.4 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.

Sherrod, Inc., reported pretax accounting income of $60 million for 2018. 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 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.
2. 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.
3. 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):

4. 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.
5. 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).
6. 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.

Pig and Whistle Company, a small company following ASPE, is adjusting and correcting its books at the end of 2017. In reviewing its records, it compiles the following information.

a) Pig and Whistle has failed to accrue sales commissions payable at the end of each of the last two years, as follows:

B) In reviewing the December 31, 2018 inventory, Pig and Whistle discovered errors in its inventory-taking procedures that have caused inventories for the last three years to be incorrect, as follows:

Pig and Whistle has already made an entry that recognized the incorrect December 31, 2018 inventory amount.

C) In 2018, Pig and Whistle changed the depreciation method on its office equipment from double-declining-balance to straight-line because of a change in the pattern of benefits received. The equipment had an original cost of $160,000 when purchased on January 1, 2016. At that time, it was estimated that the office equipment had an eightyear useful life and no residual value. Depreciation expense recorded prior to 2018 under the double-declining- balance method was $70,000. Pig and Whistle has already recorded 2018 depreciation expense of $22,500 using the double-declining-balance method.

D) Before 2018, Pig and Whistle accounted for its income from long-term construction contracts on the completed- contract basis because it was unable to reliably measure the degree of completion or the estimated costs to complete. Early in 2018, Pig and Whistle changed to the percentage-of-completion basis for financial accounting purposes. The change was a result of experience with the project and improved ability to estimate the costs to completion and therefore the percentage complete. The completed-contract method will continue to be used for tax purposes. Income for 2018 has been recorded using the percentage-of-completion method. The following information is available:

Required:

1) Prepare the necessary journal entries at December 31, 2018 to record the above corrections and changes as appropriate. The books are still open for 2018. As Pig and Whistle has not yet recorded its 2018 income tax expense and payable amounts, tax effects for the current year may be ignored. Pig and Whistle’s income tax rate is 25%. Assume that Pig and Whistle applies the taxes payable method of accounting for income taxes.