Sherrod Inc reported pretax accounting income of 74 million

Sherrod, Inc., reported pretax accounting income of $74 million for 2018. 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 2018 exceeded that reported for tax purposes by $7 million. The installment receivable account at year-end had a balance of $8 million (representing portions of 2017 and 2018 installment sales), expected to be collected equally in 2019 and 2020. Sherrod was assessed a penalty of $3 million by the Environmental Protection Agency for violation of a federal law in 2018. The fine is to be paid in equal amounts in 2018 and 2019. Sherrod rents its operating facilities but owns one asset acquired in 2017 at a cost of $68 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions): Income Statement Tax Return Difference 2017 $ 17 $ 22 $ (5 ) 2018 17 29 (12 ) 2019 17 10 7 2020 17 7 10 $ 68 $ 68 $ 0 Warranty expense of $3 million is reported in 2018. For tax purposes, the expense is deducted when costs are incurred, $2 million in 2018. At December 31, 2018, the warranty liability was $2 million (after adjusting entries). The balance was $1 million at the end of 2017. In 2018, Sherrod accrued an expense and related liability for estimated paid future absences of $14 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 ($8 million in 2019; $6 million in 2020). 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.

Solution

1). Particulars Amounts ($ in Million) Pretax accounting Income (Given) 74 Add : Back Premanent Difference 3 Adjusted Pretax Accounting Income 77 Deduct : Excess from Installment Sales -5 Deduct : Excess tax depreciation -12 Add : Excess Warranty Expen 1 Add : Expense for future adsences 14 Deduct : Loss contingency revesal -2 Taxable Income 73 Journal Entry :- Date Particulars Debit ($) Credit ($) Tax Expense A/c Dr. 30.8 Deferred Tax Asset A/c Dr. ((1+14-2)*40%) 5.2 To Deferred Tax Liability ((5+12)*40%) 6.8 To Taxes Payable ($73*40%) 29.2 2). Particulars Amounts ($ in Million) Pretax Income 74 Less : Tax Expense (from above) $30.80 Net Income $43.20