Sherrod, Inc,reported pretax accounting income of $62 million for 2018. The foll

Question

Sherrod, Inc,reported pretax accounting income of $62 million for 2018. The following information relates to difflerences between a. Income from installment sales of properties included in pretax accounting income in 2018 exceeded that reported for tax purposes b. Sherrod was assessed a penalty of $4 million by the Environmental Protection Agency for violation of a federal law in 2018 The fine 30 pretax accounting income and taxable income by $7 million. The installment receivable account at year-end had a balance of $8 milion (representing portions of 2017 and 2018 Installment sales), expected to be collected equally in 2019 and 2020 s to be paid in equal amounts in 2018 and 2019 straight-ine method assuming a four-year useful life. On the tax returm, deductions for depreciation will be more than straight-ine c. Sherod rents its operating facilities but owns one asset acquired in 2017 at a cost of $44 million. Depreciation is reported by the depreciation the first two years but less than straight-line depreciation the next two years (S in millions d. Warranty expense of $5 million is reported in 2018 For tax purposes, the expense is deducted when costs are incurmed $3 milion n 2018. At December 31, 2018, the warranty iability was $3 milion lofter edjusting entries) The balence was $1 million at the end of h, 2018, Sherrod accrued an expense and related istity for estimated paid Mare absences of$14 milon 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 (58 milion in 2019 $6 milion in 2020 t 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 lalances in the deferred tax asset and deferred tax lability accounts at January 1 2018, were $12 mition and $16 million, sespectively 540% each year. 1 Denenmine the amounts necessary to record income taxes for 2018 and prepare the appropriate journal entry 2. What in the 2018 net income? . Show how any deferred tax amounts should be classuifed and reported in the 201l belance sheet MacBook Air 5 option command

Explanation / Answer

1) Determining the Amounts Necessary to Record the Income Taxes for 2018 and Preparing the Journal Entry: Pretax accounting income (given) $62 b. Add back permanent difference – fine $4 Adjusted pretax accounting income $66 a. Deduct excess from installment sales ($7) DTL c. Deduct excess tax depreciation ($9) DTL d Add excess warranty expense $2 DTA e. Add expense for future absences $14 DTA f. Deduct loss contingency reversal ($2) DTA (Reversal) Taxable Income $64 Event General Journal Debit a Tax expense (plug) $26.40 Deferred tax asset [40% x (2+14-2)] $5.60 Deferred tax liability [40% x (7+9)] Taxes payable (40% x 64) 2) Calculation of the 2018 Net Income: Pretax accounting income (given) $62 Less: Tax expense (computed in Part 1) ($26.40) Net Income $35.60 3 A deferred tax asset is recorded on the balance sheet when a business has overpaid taxes, or taxes have been paid in advance. These taxes are eventually returned to the business in the form of tax relief, which results in an asset to the company. A carry over of losses is the most popular instance of a deferred tax asset. If a business incurs a loss in a financial year, it usually is entitled to use that loss in order to lower its taxable income in following years. In that sense, the loss is an asset. A deferred tax liability is an account on a company’s balance sheet that is a result of temporary differences between the company’s accounting and tax carrying values, the anticipated and enacted income tax rate, and estimated taxes payable for the current year. This liability may be realized during any given year, which makes the deferred status appropriate. Since there are differences between what a company can deduct for tax and accounting purposes, there is a difference between a company’s taxable income and income before tax. A deferred tax liability is recorded and reflects that, in the future, the company will pay more income tax because of a transaction that took place during the current period. A common source of deferred tax liability is the difference in depreciation expense treatment by tax laws and accounting rules. The depreciation expense for long-lived assets for financial statements purposes is typically calculated using a straight-line method, while tax regulations allow companies to use an accelerated depreciation method. Since the straight-line method produces lower depreciation when compared to the amount claimed on the tax return, a company’s accounting income is temporarily higher than its taxable income.

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