Inc., reported pretax accounting income of $76 million for 2011. 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 2011 exceeded that
reported for tax purposes by $3 million. The installment receivable
account at year-end had a balance of $4 million (representing portions
of 2010 and 2011 installment sales), expected to be collected equally in
2012 and 2013.
Sherrod was assessed a penalty of $2 million by
the Environmental Protection Agency for violation of a federal law in
2011. The fine is to be paid in equal amounts in 2011 and 2012. Sherrod
rents its operating facilities but owns one asset acquired in 2010 at a
cost of $80 million. Depreciation is reported by the straight-line
method assuming a four-year useful life. On the tax return, deductions
for depreciation will be more than straight-line depreciation the first
two years but less than straight-line depreciation the next two years ($
Income Statement Tax Return Difference
2010 $20 $26 ($6)
2011 20 35 (15)
2012 20 12 8
2013 20 7 13
$80 $80 $0
Bad debt expense of $3 million is reported using the allowance method
in 2011. For tax purposes, the expense is deducted when accounts prove
uncollectible (the direct write-off method): $2 million in 2011. At
December 31, 2011, the allowance for uncollectible accounts was $2
million (after adjusting entries). The balance was $1 million at the end
5. In 2011, Sherrod accrued and expense and related
liability for estimated paid future absences of $7 million relating to
the companyâs new paid vacation program. Future compensation will be
deductible on the tax return when actually paid during the next two
years ($4 million 2012; $3 million in 2013).
6. During 2010,
accounting income included as estimated loss of $2 million from having
accrued a loss contingency. The lost is paid in 2011 at which time it is
tax deductible. Balances in the deferred tax asset and deferred tax
liability accounts at January 1, 2011, were $1.2 million and $2.8
million, respectively. The enacted tax rate is 40% each year.
1. Determine the amounts necessary to record income taxes for 2011 and prepare the appropriate journal entry.
2. What is the 2011 net income?
3. Show how deferred tax amounts should be classified and reported in the 2011 balance sheet.