In 2017, Franklin Company reported pretax GAAP income of$500,000. The tax rate was 40%. The following items may be relevantto Franklinâs calculation of tax expense in 2017.
In 2017, Franklin sold land under an installment sales contractand included total gross profit of $200,000 in GAAP income. Only$120,000 of the gross profit is taxable in 2017. The remainder ofthe gross profit is taxable in 2018.
In 2017, Franklin recorded depreciation for financial accountingof $800,000. The allowable tax depreciation for 2017 was$850,000.
In 2017, Franklin recorded an expense for a $20,000 fine paidfor violating pollution laws.
In 2017, Franklin recorded warranty expense of $50,000. Onlyactual warranty costs paid in 2017 of $10,000 are deductible fortax purposes.
In 2017, Franklin included $70,000 for unrealized holding gainson trading securities in GAAP income. This amount is not includedin taxable income until the security is sold.
Requirement 1: Compute 2017 taxable income.
Requirement 2: Compute 2017 tax payable.
Requirement 3: Determine the change(s) in the deferredtax account(s).
Requirement 4: Record the 2017 tax expenseentry.
Requirement 5: Determine 2017 net income.
In 2017, Franklin Company reported pretax GAAP income of$500,000. The tax rate was 40%. The following items may be relevantto Franklinâs calculation of tax expense in 2017.
In 2017, Franklin sold land under an installment sales contractand included total gross profit of $200,000 in GAAP income. Only$120,000 of the gross profit is taxable in 2017. The remainder ofthe gross profit is taxable in 2018.
In 2017, Franklin recorded depreciation for financial accountingof $800,000. The allowable tax depreciation for 2017 was$850,000.
In 2017, Franklin recorded an expense for a $20,000 fine paidfor violating pollution laws.
In 2017, Franklin recorded warranty expense of $50,000. Onlyactual warranty costs paid in 2017 of $10,000 are deductible fortax purposes.
In 2017, Franklin included $70,000 for unrealized holding gainson trading securities in GAAP income. This amount is not includedin taxable income until the security is sold.
Requirement 1: Compute 2017 taxable income.
Requirement 2: Compute 2017 tax payable.
Requirement 3: Determine the change(s) in the deferredtax account(s).
Requirement 4: Record the 2017 tax expenseentry.
Requirement 5: Determine 2017 net income.
Related questions
Sherrod, Inc., reported pretax accounting income of $68 millionfor 2016. The following information relates to differences betweenpretax accounting income and taxable income: |
| a. | Income from installment sales of properties included in pretaxaccounting income in 2016 exceeded that reported for tax purposesby $6 million. The installment receivable account at year-end had abalance of $8 million (representing portions of 2015 and 2016installment sales), expected to be collected equally in 2017 and2018. |
| b. | Sherrod was assessed a penalty of $4 million by theEnvironmental Protection Agency for violation of a federal law in2016. The fine is to be paid in equal amounts in 2016 and 2017. |
| c. | Sherrod rents its operating facilities but owns one assetacquired in 2015 at a cost of $56 million. Depreciation is reportedby the straight-line method assuming a four-year useful life. Onthe tax return, deductions for depreciation will be more thanstraight-line depreciation the first two years but less thanstraight-line depreciation the next two years ($ in millions): |
| Income Statement | Tax Return | Difference | |||||||
| 2015 | $ | 14 | $ | 18 | $ | (4 | ) | ||
| 2016 | 14 | 22 | (8 | ) | |||||
| 2017 | 14 | 8 | 6 | ||||||
| 2018 | 14 | 8 | 6 | ||||||
| $ | 56 | $ | 56 | $ | 0 | ||||
| d. | Warranty expense of $5 million is reported in 2016. For taxpurposes, the expense is deducted when costs are incurred, $4million in 2016. At December 31, 2016, the warranty liability was$4 million (after adjusting entries). The balance was $3 million atthe end of 2015. |
| e. | In 2016, Sherrod accrued an expense and related liability forestimated paid future absences of $14 million relating to thecompanyâs new paid vacation program. Future compensation will bedeductible on the tax return when actually paid during the next twoyears ($8 million in 2017; $6 million in 2018). |
| f. | During 2015, accounting income included an estimated loss of $2million from having accrued a loss contingency. The loss is paid in2016 at which time it is tax deductible. |
| Balances in the deferred tax assetand deferred tax liability accounts at January 1, 2016, were $2.0million and $2.4 million, respectively. The enacted tax rate is 40%each year. 1. Determine the amounts necessary to record income taxes for2016 and prepare the appropriate journal entry. 2. What is the 2016 net income? 3. SHow how any deferred tax amounts should be classified andreported in the 2016 balance sheet. |
Sherrod, Inc., reported pretax accounting income of $62 millionfor 2016. The following information relates to differences betweenpretax accounting income and taxable income: |
| a. | Income from installment sales of properties included in pretaxaccounting income in 2016 exceeded that reported for tax purposesby $7 million. The installment receivable account at year-end had abalance of $8 million (representing portions of 2015 and 2016installment sales), expected to be collected equally in 2017 and2018. |
| b. | Sherrod was assessed a penalty of $4 million by theEnvironmental Protection Agency for violation of a federal law in2016. The fine is to be paid in equal amounts in 2016 and 2017. |
| c. | Sherrod rents its operating facilities but owns one assetacquired in 2015 at a cost of $44 million. Depreciation is reportedby the straight-line method assuming a four-year useful life. Onthe tax return, deductions for depreciation will be more thanstraight-line depreciation the first two years but less thanstraight-line depreciation the next two years ($ in millions): |
| Income Statement | Tax Return | Difference | |||||||
| 2015 | $ | 11 | $ | 14 | $ | (3 | ) | ||
| 2016 | 11 | 20 | (9 | ) | |||||
| 2017 | 11 | 6 | 5 | ||||||
| 2018 | 11 | 4 | 7 | ||||||
| $ | 44 | $ | 44 | $ | 0 | ||||
| d. | Warranty expense of $5 million is reported in 2016. For taxpurposes, the expense is deducted when costs are incurred, $3million in 2016. At December 31, 2016, the warranty liability was$3 million (after adjusting entries). The balance was $1 million atthe end of 2015. |
| e. | In 2016, Sherrod accrued an expense and related liability forestimated paid future absences of $14 million relating to thecompanyâs new paid vacation program. Future compensation will bedeductible on the tax return when actually paid during the next twoyears ($8 million in 2017; $6 million in 2018). |
| f. | During 2015, accounting income included an estimated loss of $2million from having accrued a loss contingency. The loss is paid in2016 at which time it is tax deductible. |
Balances in the deferred tax assetand deferred tax liability accounts at January 1, 2016, were $1.2million and $1.6 million, respectively. The enacted tax rate is 40%each year. |
| Required: |
| 1. | Determine the amounts necessary to record income taxes for 2016and prepare the appropriate journal entry. (If no entry isrequired for an event, select "No journal entry required" in thefirst account field. Enter your answers in millions rounded to 1decimal place (i.e., 5,500,000 should be entered as5.5)) | ||||||||||
| Journal Entry Worksheet Record 2016 income taxes.
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