Sherrod, Inc., reported pretax accounting income of $68 million for 2016. The fo

Question

Sherrod, Inc., reported pretax accounting income of $68 million for 2016. 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 2016 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 2015 and 2016 installment sales), expected to be collected equally in 2017 and 2018.

Sherrod was assessed a penalty of $4 million by the Environmental Protection Agency for violation of a federal law in 2016. The fine is to be paid in equal amounts in 2016 and 2017.

Sherrod rents its operating facilities but owns one asset acquired in 2015 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)

2. What is the 2016 net income? (Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5)

3. Show how any deferred tax amounts should be classified and reported in the 2016 balance sheet.(Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5))

Sherrod, Inc., reported pretax accounting income of $68 million for 2016. The following information relates to differences between pretax accounting income and taxable income:

Explanation / Answer

2.

Pretax accounting income (given)

$68.00

Add back permanent difference – penalty

$4.00

Adjusted pretax accounting income

$72.00

Deduct excess from installment sales

$6.00

Taxable Income

$66.00

Tax expense

Tax payable ($66 * 40%0

$26.40

Deferred tax liability

$2.40

$28.80

Net income

$37.20

3.

From the Installment Receivable:

$1.60 as a current deferred tax liability (2017: 40% x $4)

$1.60 as a noncurrent deferred tax liability (2018: 40% x $4)

Pretax accounting income (given)

$68.00

Add back permanent difference – penalty

$4.00

Adjusted pretax accounting income

$72.00

Deduct excess from installment sales

$6.00

Taxable Income

$66.00

Tax expense

Tax payable ($66 * 40%0

$26.40

Deferred tax liability

$2.40

$28.80

Net income

$37.20

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