Sherrod, Inc., reported pretax accounting income of 590 million for 2016. The fo

Question

Sherrod, Inc., reported pretax accounting income of 590 million for 2016. The following information relates to differences between pretax accounting income and taxable income ncome from installiment sales of properties included in pretax accounting income in 2016 exceeded that reported for tax purposes by $3 million. The installment receivable account at year-end had a balance of 54 million (representing portions of 2015 and 2016 instalment sales), expected to be collected equally in 2017 and 2018. a. b. Sherrod was assessed a penalty of $2 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 c. Sherrod rents its operating facilities but owns one asset acquired in 2015 at a cost of 5100 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 (5 in millions): Income Statement Tax Return Difference S (8) 2015 2016 2017 2018 S 25 S 33 25 25 $ 100 $ 100 d. Warranty expense of S5 million is reported in 2016. For tax purposes, the expense is deducted when e. In 2016, Sherrod accrued an expense and related liability for estimated paid future absences of $10 f. During 2015, accounting income included an estimated loss of 54 million from having accrued a loss costs are incurred, 53 million in 2016. At December 31, 2016, the warranty liability was $3 million (after adjusting entries). The balance was $1 million at the end of 2015. 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 (57 million in 2017; S3 million in 2018). contingency. The loss is paid in 2016 at which time it is tax deduct ble. Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2016, were $2.0 million and $3.6 million, respectively. The enacted tax rate is 40% each year

Explanation / Answer

Answer 1. Pretax Accounting Income         90.00 Add: Permanent difference - Fine           2.00 Adjusted pretax accounting Income         92.00 Less: Excess from Installment Sales         (3.00) DTL Less: Excess Tax Depreciation      (18.00) DTL Add: Excess Warranty Expenses           1.00 DTA Add: Expense for future absences           7.00 DTA Less: Loss Contingency Reversal         (4.00) DTA reversal Taxable Income         75.00 Journal Entry Date Particulars Dr. Amt. Cr. Amt. 2016 Income Tax Expenses                          Dr.         36.80 $92 X 40% Deferred Tax Assets                             Dr.           1.60 ($1 + $7 - $4) X 40%    To Deferred Tax Liability           8.40 ($3 + $18) X 40%    To Income Tax Payable         30.00 $75 X 40% Answer 2. Pretax Accounting Income         90.00 Less Tax Expenses         36.80 Net Income         53.20 . Answer 3. From the Installment Receivable Current Deferred Tax Liability - $2 X 40%           0.80 Non-Current Deferred Tax Liability - $2 X 40%           0.80 From the Depreciation Non-Current Deferred Tax Liability - 40% X [(25 + 25) - (15 + 9)]         10.40 From the Warranty Expenses / Payable Current Deferred Tax Asset - 40% X $3           1.20 From the Accrued Expenses / Payable Current Deferred Tax Asset - 40% X $7           2.80 Non-Current Deferred Tax Asset - 40% X $3           1.20 Current Deferred Tax Asset           3.60 Current Deferred Tax Liability         (0.80) Net Current Deferred Tax Asset           2.80 Non Current Deferred Tax Asset           2.00 Non Current Deferred Tax Liability      (11.20) Non Current Deferred Tax Liability         (9.20)

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