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.

1. When analyzing a firm’s financial performance, should the analyst focus on the incremental after-tax profits or the incremental after-tax cash flows of the firm? Explain your reasoning!

2. Holding all else constant, how would a significant increase in interest bearing debt impact the measure of the firm’s Free Cash Flow? Explain!

3. If a firm uses an accelerated depreciation expense method (MACRS) versus straight line depreciation expense for a newly acquired asset, what would be the impact on the firm’s operating profit after taxes in the first year the asset was in use? What would be the impact on the firm’s free cash flow after taxes in the first year the asset was in use? Which method of depreciation would you recommend?

4. In 2019, the firm’s operating profit after taxes decreased significantly, however, the firm’s free cash flow increased in 2019. Assuming the firm’s depreciation expense and W/C did not change, what is a likely explanation for the set of performance measures for this firm in 2019? Based on this information, was the firm’s performance in 2019 good, bad, or unclear?

5. In 2019, the firm’s operating profit after taxes was constant, the firm’s free cash flow decreased significantly, and the firm’s EVA was constant. What is a likely explanation for the set of performance measures for this firm in 2019? Based on this information, was the firm’s performance in 2019 good, bad, or unclear?

6. What could account for the fact that the firm’s economic value added and ROIC was positive and significantly greater than their peer firm in 2019, while the firm’s abnormal stock return compared to their peer was negative in 2019?

7. In January of 2020, Ford Motor Corporation is going to announce their plans to start constructing a production facility in Kenya in the second quarter of 2020. It is expected that Ford will not begin selling cars and trucks in Kenya until the fourth quarter of 2021 (depreciation expense will not begin until the firm starts to utilize the assets in their operations). Along with the announcement to expand into Kenya, Ford announced their expectations of a very high return on invested capital from this investment opportunity. The project will be financed at the firm’s current debt to asset ratio (w_d) of around 25%. What is the likely impact of this decision for Ford’s performance in fiscal year 2020? More specifically, explain your predicted impact on the following performance measures:

Operating Margin:

Operating Return on Assets:

Free Cash Flow:

Economic Value Added:

Total Shareholders’ Return:

The comparative balance sheets for 2021 and 2020 and the statement of income for 2021 are given below for Dux Company. Additional information from Dux’s accounting records is provided also. DUX COMPANY Comparative Balance Sheets December 31, 2021 and 2020 ($ in thousands) 2021 2020 Assets Cash $ 129.0 $ 36.0 Accounts receivable 64.0 66.0 Less: Allowance for uncollectible accounts (5.0 ) (4.0 ) Dividends receivable 19.0 18.0 Inventory 71.0 66.0 Long-term investment 31.0 26.0 Land 86.0 40.0 Buildings and equipment 161.0 266.0 Less: Accumulated depreciation (6.0 ) (130.0 ) $ 550.0 $ 384.0 Liabilities Accounts payable $ 29.0 $ 36.0 Salaries payable 18.0 21.0 Interest payable 20.0 18.0 Income tax payable 23.0 24.0 Notes payable 46.0 0 Bonds payable 91.0 50.0 Less: Discount on bonds (2.0 ) (3.0 ) Shareholders' Equity Common stock 210.0 200.0 Paid-in capital—excess of par 24.0 20.0 Retained earnings 99.0 18.0 Less: Treasury stock (8.0 ) 0 $ 550.0 $ 384.0 DUX COMPANY Income Statement For the Year Ended December 31, 2021 ($ in thousands) Revenues Sales revenue $ 440.0 Dividend revenue 19.0 $ 459.0 Expenses Cost of goods sold 152.0 Salaries expense 57.0 Depreciation expense 2.0 Bad debt expense 1.0 Interest expense 40.0 Loss on sale of building 35.0 Income tax expense 48.0 335.0 Net income $ 124.0 Additional information from the accounting records: A building that originally cost $168,000, and which was three-fourths depreciated, was sold for $7,000. The common stock of Byrd Corporation was purchased for $5,000 as a long-term investment. Property was acquired by issuing a 13%, seven-year, $46,000 note payable to the seller. New equipment was purchased for $63,000 cash. On January 1, 2021, bonds were sold at their $41,000 face value. On January 19, Dux issued a 5% stock dividend (1,000 shares). The market price of the $10 par value common stock was $14 per share at that time. Cash dividends of $29,000 were paid to shareholders. On November 12, 12,500 shares of common stock were repurchased as treasury stock at a cost of $8,000. Required: Prepare the statement of cash flows for Dux Company using the indirect method. (Amounts to be deducted should be indicated with a minus sign. Enter your answers in thousands (i.e., 10,000 should be entered as 10).)

The comparative balance sheets for 2021 and 2020 and the statement of income for 2021 are given below for Dux Company. Additional information from Dux’s accounting records is provided also.

Additional information from the accounting records:

1. A building that originally cost $72,000, and which was three-fourths depreciated, was sold for $7,000.
2. The common stock of Byrd Corporation was purchased for $5,000 as a long-term investment.
3. Property was acquired by issuing a 13%, seven-year, $34,000 note payable to the seller.
4. New equipment was purchased for $27,000 cash.
5. On January 1, 2021, bonds were sold at their $29,000 face value.
6. On January 19, Dux issued a 5% stock dividend (1,000 shares). The market price of the $10 par value common stock was $14 per share at that time.
7. Cash dividends of $17,000 were paid to shareholders.
8. On November 12, 12,500 shares of common stock were repurchased as treasury stock at a cost of $8,000.

Required:
Prepare the statement of cash flows for Dux Company using the indirect method. (Amounts to be deducted should be indicated with a minus sign. Enter your answers in thousands (i.e., 10,000 should be entered as 10).)

You have just been hired as a new accountant by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash.

Because you are well trained in budgeting, you have decided to prepare a budget for the last quarter of the 2020 calendar year in order to show management the benefits that can be gained from an integrated budgeting program. The company sells many styles of earrings, but all are sold for the same price — R90 per pair. Actual sales of earrings for the last three months and budgeted sales for the next three months follow:

The company does not keep earrings in stock. All sales are on credit. The company has found that only

20% of a month’s sales are collected in the month of sale. An additional 60% is collected in the following month, and 15% is collected in the second month following sale. The remaining 5% is usually written off as irrecoverable in the third month following sale.

Suppliers are paid R36 for a pair of earrings. Eighty percent of a month’s purchases is paid for in the month of purchase; the remaining twenty percent is paid for in the following month. Monthly operating expenses for the company amount to R248 000 and comprise advertising, rent, salaries, utilities, insurance, machine depreciation and bad debts. Cash expenses are paid each month. The company uses a machinery that was acquired at a cost of R1 500 000 two years ago and is being depreciated at 20% per annum on cost using a straight-line method.

The company had a bank balance of R50 000 on 30 September 2020 in line with the minimum monthly cash balance that it retains. All borrowings are done at the beginning of a month; any repayments are made at the end of a month. The company has an agreement with the bank that allows the company to borrow in increments of R1 000. The interest rate on these loans is 15% per annum and is payable at the end of the quarter. The company would pay the bank as much of the loan as possible (in increments of R1 000, while still retaining at least R50 000 in cash).

REQUIRED

a) Prepare a monthly cash budget of Earrings Unlimited for each of the three-month period ending 31 December 2020. You do not need to show the total quarter.

On January 1, 2019 Roberts Corporation acquired 100% of the outstanding voting stock of Williams Company in exchange for $726,000 cash. At that time, although Williams book value was $560,000, Roberts assessed Williams total business fair value at $726,000.

The book values of Williams individual assets and liabilities approximated their acquisition-date fair values except for the equipment account which was undervalued by $100,000. The undervalued equipment had a 5-year remaining life at the acquisition date. Any remaining excess fair value was attributed to goodwill.

Separate financial statements for both companies on December 31, 2019 are shown below:

Required:

1. Assuming that Roberts accounts for its investment in Williams using the equity method, prepare the general journal entries (i.e. "real entries") for the year ending December 31, 2019. When posted to t-accounts, these entries should allow you to "prove" both the investment in Williams and the Equity in Income of Williams (i.e. investment income) balances of $786,000 and $120,000, respectively, as shown on the statements above.

2. Next, prepare all of the necessary eliminating entries (i.e. "worksheet entries") needed at December 31, 2019 and prepare the necessary worksheet to consolidate the two companies as of December 31, 2019. Your worksheet should include the amounts which would be reported on the income statement and statement of retained earnings as well as the balance sheet.

3. Finally, assume that Williams earns net income of $180,000 and paid dividends of $50,000 during the following year (i.e. 2020). Repeat requirements 1 and 2 above for the year ending December 31, 2020. You are not required to prepare the worksheet for 2020.

The comparative balance sheets for 2021 and 2020 and the statement of income for 2021 are given below for Dux Company. Additional information from Dux's accounting records is provided also.

Additional information from the accounting records:

1. A building that originally cost $40,000, and which was three-fourths depreciated, was sold for $7,000.
2. The common stock of Byrd Corporation was purchased for $4,000 as a long-term investment.
3. Property was acquired by issuing a 14%, seven-year, $20,000 note payable to the seller.
4. New equipment was purchased for $37,000 cash.
5. On January 1, 2021, bonds were sold at their $25,000 face value.
6. On January 19, Dux issued a 5% stock dividend (1,000 shares). The market price of the $10 par value common stock was $14 per share at that time.
7. Cash dividends of $11,000 were paid to shareholders.
8. On November 12, 1,000 shares of common stock were repurchased as treasury stock at a cost of $8,000.

Required:
Prepare the statement of cash flows of Dux Company for the year ended December 31, 2021. Present cash flows from operating activities by the direct method.

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.

The comparative balance sheets for 2021 and 2020 and the statement of income for 2021 are given below for Dux Company. Additional information from Dux’s accounting records is provided also.

Additional information from the accounting records:

1. A building that originally cost $168,000, and which was three-fourths depreciated, was sold for $7,000.
2. The common stock of Byrd Corporation was purchased for $5,000 as a long-term investment.
3. Property was acquired by issuing a 13%, seven-year, $46,000 note payable to the seller.
4. New equipment was purchased for $63,000 cash.
5. On January 1, 2021, bonds were sold at their $41,000 face value.
6. On January 19, Dux issued a 5% stock dividend (1,000 shares). The market price of the $10 par value common stock was $14 per share at that time.
7. Cash dividends of $29,000 were paid to shareholders.
8. On November 12, 12,500 shares of common stock were repurchased as treasury stock at a cost of $8,000.

Required:
Prepare the statement of cash flows for Dux Company using the indirect method. (Amounts to be deducted should be indicated with a minus sign. Enter your answers in thousands (i.e., 10,000 should be entered as 10).)

The comparative balance sheets for 2021 and 2020 and the statement of income for 2021 are given below for Dux Company Additional information from Dux's accounting records is provided also. DUX COMPANY ,   COMPARATIVE BALANCE SHEETS DECEMBER 31, 2021 AND 2020   ($ IN THOUSANDS) ASSETS    2021 -- 2020 CASH CASH $ 39.0 --$21.0 ACCOUNTS RECEIVABLE, $49.0 - $51.0 LESS: ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS (3.0) -- (2.0) DIVIDENDS RECEIVABLE, 4.0 -- 3.0 INVENTORY,56.0 - 51.0 LONG-TERM INVESTMENT 16.0-11.0, LAND 71.0 -----40.0 BUILDINGS AND EQUIPMENT 221.0-251.0 LESS: ACCUMULATED DEPRECIATION(26.0) --- (55.0) $427.0-371.0 LIABILITIES ACCOUNTS- PAYABLE ACCOUNTS PAYABLE $ 14.0 - $ 21.0 SALARIES PAYABLE 3.0- 6.0 INTEREST PAYABLE 5.0 -- 3.0 INCOME TAX PAYABLE 8.0 - 9.0 NOTES PAYABLE 31.0-0  BONDS PAYABLE 96.0-70.0 LESS:DISCOUNT ON BONDS (2.0) = (3.0) SHAREHOLDERS' EQUITY COMMON STOCK  210.0 -------- 200.0 PAID-IN CAPITAL-EXCESS OF PAR 24.0-20.0 RETAINED EARNING 46.0--------- 45.0 LESS: TREASURY STOCK (8.0)-0        427.0 ---------- 371.0

DUX COMPANY , INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2021 ($ IN THOUSANDS) REVENUES SALES REVENUES  $ 215.0 DIVIDEND REVENUE 4.0 = $219.0 EXPENSES COST OF GOODS SOLD- 122 SALARIES EXPENSE 27, DEPRECIATION EXPENSE 7, BAD DEBT EXPENSE 1.0 INTEREST EXPENSE 10.0 LOSS ON SALE OF BUIIDING 5.0 INCOME TAX EXPENSE 18.0 ------ 199.0 NET INCOME    $29 Additional information from the accounting records: a.    A building that originally cost $48,000, and which was three-fourths depreciated, was sold for $7,000. b.    The common stock of Byrd Corporation was purchased for $5,000 as a long-term investment. c.    Property was acquired by issuing a 13%, seven-year, $31,000 note payable to the seller. d.    New equipment was purchased for $18,000 cash. e.    On January 1, 2021, bonds were sold at their $26,000 face value. f.      On January 19, Dux issued a 5% stock dividend (1,000 shares). The market price of the $10 par value common stock was $14 per share at that time. g.    Cash dividends of $14,000 were paid to share at that time . h.    On November 12, 12,500 shares of common stock were repurchased as treasury stock at a cost of $8,000. Required: Prepare the statement of cash flows for Dux Company for the year ended December 31,2021. Present cash flows from operating activities by the indirect method. (Do not round your intermediate calculations. Enter your answers in thousands. Amounts to be deducted should be indicated with a minus sign.)