Sherrod, Inc., reported pretax accounting income of $70 million for 2013. The fo

Question

Sherrod, Inc., reported pretax accounting income of $70 million for 2013. 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 2013 exceeded that reported for tax purposes by $4 million. The installment receivable account at year-end had a balance of $6 million (representing portions of 2012 and 2013 installment sales), expected to be collected equally in 2014 and 2015.

Sherrod was assessed a penalty of $1 million by the Environmental Protection Agency for violation of a federal law in 2013. The fine is to be paid in equal amounts in 2013 and 2014.

Sherrod rents its operating facilities but owns one asset acquired in 2012 at a cost of $60 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions):

  

  

Warranty expense of $4 million is reported in 2013. For tax purposes, the expense is deducted when costs are incurred, $3 million in 2013. At December 31, 2013, the warranty liability was $3 million (after adjusting entries). The balance was $2 million at the end of 2012.

In 2013, 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 ($6 million in 2014; $2 million in 2015).

During 2012, accounting income included an estimated loss of $4 million from having accrued a loss contingency. The loss is paid in 2013 at which time it is tax deductible.

  

Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2013, were $2.4 million and $2.8 million, respectively. The enacted tax rate is 40% each year.

Show how any deferred tax amounts should be classified and reported in the 2013 balance sheet.(Enter your answers in millions rounded to 1 decimal place.)

Sherrod, Inc., reported pretax accounting income of $70 million for 2013. The following information relates to differences between pretax accounting income and taxable income:

Explanation / Answer

From the Installment Receivable (a):

Current deferred tax liability (2013: 40% x $3M)

$0.12

Noncurrent deferred tax liability (2014: 40% x $3M)

$0.12

From the Depreciation (c):

Noncurrent deferred tax liability {40% x [(15+15) – (9+7)]}

$0.56

From the Warranty Expense/Payable (d):

Current deferred tax asset (40% x $3)

$0.12

From the Accrued Expense/Payable (e):

Current deferred tax asset (40% x $4)

$1.6

Noncurrent deferred tax asset (40% x $3)

$1.2

Current Deferred Tax Asset (0.12 + 1.6)

$1.72

Current Deferred Tax Liability

-$0.12

Net Current Deferred Tax Asset

$1.6

Noncurrent Deferred Tax Asset

$1.2

Noncurrent Deferred Tax Liability (0.12 + 8.4)

-$8.52

Net Noncurrent Deferred Tax Liability

$8.4

From the Installment Receivable (a):

Current deferred tax liability (2013: 40% x $3M)

$0.12

Noncurrent deferred tax liability (2014: 40% x $3M)

$0.12

From the Depreciation (c):

Noncurrent deferred tax liability {40% x [(15+15) – (9+7)]}

$0.56

From the Warranty Expense/Payable (d):

Current deferred tax asset (40% x $3)

$0.12

From the Accrued Expense/Payable (e):

Current deferred tax asset (40% x $4)

$1.6

Noncurrent deferred tax asset (40% x $3)

$1.2

Current Deferred Tax Asset (0.12 + 1.6)

$1.72

Current Deferred Tax Liability

-$0.12

Net Current Deferred Tax Asset

$1.6

Noncurrent Deferred Tax Asset

$1.2

Noncurrent Deferred Tax Liability (0.12 + 8.4)

-$8.52

Net Noncurrent Deferred Tax Liability

$8.4

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