ACCT 4050 Study Guide - Midterm Guide: Deferred Tax, Income Tax, Preferred Stock
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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 thecompany’s 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. |