Problem 16-7 (Algo) Multiple differences; calculate taxable income; balance sheet classification [LO16-2, 16-3, 16-5, 16-8]Sherrod, Inc., reported pretax accounting income of $92 million for 2021. 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 2021 exceeded that reported for tax purposes by $6 million. The installment receivable account at year-end 2021 had a balance of $8 million (representing portions of 2020 and 2021 installment sales), expected to be collected equally in 2022 and 2023.Sherrod was assessed a penalty of $3 million by the Environmental Protection Agency for violation of a federal law in 2021. The fine is to be paid in equal amounts in 2021 and 2022.Sherrod rents its operating facilities but owns one asset acquired in 2020 at a cost of $104 million. Depreciation is reported by the straight-line method, assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions): Income Statement Tax Return Difference2020 $26 $34 $(8) 2021 26 45 (19) 2022 26 16 10 2023 26 9 17 $104 $104 $0 For tax purposes, warranty expense is deducted when costs are incurred. The balance of the warranty liability was $1 million at the end of 2020. Warranty expense of $3 million is recognized in the income statement in 2021. $2 million of cost is incurred in 2021, and another $3 million of cost anticipated in 2022. At December 31, 2021, the warranty liability is $2 million (after adjusting entries).In 2021, Sherrod accrued an expense and related liability for estimated paid future absences of $13 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 ($7 million in 2022; $6 million in 2023).During 2020, accounting income included an estimated loss of $6 million from having accrued a loss contingency. The loss is paid in 2021, at which time it is tax deductible.Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2021, were $1.75 million and $2.50 million, respectively. The enacted tax rate is 25% each year. Required:1. Determine the amounts necessary to record income taxes for 2021, and prepare the appropriate journal entry.2. What is the 2021 net income?3. Show how any deferred tax amounts should be classified and reported in the 2021 balance sheet.

SOLUTION:- 1. Pretax accounting income (given) 92 b. Add back permanent difference – fine 3…

Answered: 1. Determine the amounts necessary to…

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter18: Accounting For Income Taxes

Section: Chapter Questions

Problem 4E: Single Temporary Difference: Multiple Rates At the end of 2019, Fulhage Company reported taxable...

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Problem 16-7 (Algo) Multiple differences; calculate taxable income; balance sheet classification [LO16-2, 16-3, 16-5, 16-8]

Sherrod, Inc., reported pretax accounting income of $92 million for 2021. 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 2021 exceeded that reported for tax purposes by $6 million. The installment receivable account at year-end 2021 had a balance of $8 million (representing portions of 2020 and 2021 installment sales), expected to be collected equally in 2022 and 2023.
Sherrod was assessed a penalty of $3 million by the Environmental Protection Agency for violation of a federal law in 2021. The fine is to be paid in equal amounts in 2021 and 2022.
Sherrod rents its operating facilities but owns one asset acquired in 2020 at a cost of $104 million. Depreciation is reported by the straight-line method, assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions):

	Income Statement		Tax Return	Difference
2020		$	26		$	34	$	(8	)
2021			26			45		(19	)
2022			26			16		10
2023			26			9		17
		$	104		$	104	$	0

For tax purposes, warranty expense is deducted when costs are incurred. The balance of the warranty liability was $1 million at the end of 2020. Warranty expense of $3 million is recognized in the income statement in 2021. $2 million of cost is incurred in 2021, and another $3 million of cost anticipated in 2022. At December 31, 2021, the warranty liability is $2 million (after adjusting entries).
In 2021, Sherrod accrued an expense and related liability for estimated paid future absences of $13 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 ($7 million in 2022; $6 million in 2023).
During 2020, accounting income included an estimated loss of $6 million from having accrued a loss contingency. The loss is paid in 2021, at which time it is tax deductible.

Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2021, were $1.75 million and $2.50 million, respectively. The enacted tax rate is 25% each year.

Required:
1. Determine the amounts necessary to record income taxes for 2021, and prepare the appropriate journal entry.
2. What is the 2021 net income?
3. Show how any deferred tax amounts should be classified and reported in the 2021 balance sheet.

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Answer is complete but not entirely correct.
Required 1 Required 2 Required 3
Determine the amounts necessary to record income taxes for 2021, and prepare the appropriate journal entry. (If no entry is
required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions
rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).)
General Journal
No
1
Event
1
Income tax expense
Deferred tax asset
Deferred tax liability
Income tax payable
Debit
23.75 X
2.00 X
Credit
6.25
19.50

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