Question
Sherrod, Inc., reported pretax accounting income of $80 million for 2016. The following information relates to differences between pretax accounting income and taxable income: a.
Sherrod, Inc., reported pretax accounting income of $80 million for 2016. The following information relates to differences between pretax accounting income and taxable income: |
a. | Income from installment sales of properties included in pretax accounting income in 2016 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 2015 and 2016 installment sales), expected to be collected equally in 2017 and 2018. |
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 $76 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions): |
Income Statement | Tax Return | Difference | |||||||
2015 | $ | 19 | $ | 25 | $ | (6 | ) | ||
2016 | 19 | 32 | (13 | ) | |||||
2017 | 19 | 11 | 8 | ||||||
2018 | 19 | 8 | 11 | ||||||
$ | 76 | $ | 76 | $ | 0 | ||||
d. | Warranty expense of $6 million is reported in 2016. For tax purposes, the expense is deducted when costs are incurred, $4 million in 2016. At December 31, 2016, the warranty liability was $4 million (after adjusting entries). The balance was $2 million at the end of 2015. |
e. | In 2016, Sherrod accrued an expense and related liability for estimated paid future absences of $10 million relating to the companys new paid vacation program. Future compensation will be deductible on the tax return when actually paid during the next two years ($8 million in 2017; $2 million in 2018). |
f. | During 2015, accounting income included an estimated loss of $6 million from having accrued a loss contingency. The loss is paid in 2016 at which time it is tax deductible. |
Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2016, were $3.2 million and $2.8 million, respectively. The enacted tax rate is 40% each year. |
Required: |
1. | Determine the amounts necessary to record income taxes for 2016 and prepare the appropriate journal entry.
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