posted by Steve on .
Sherrod, Inc., reported pretax accounting income of $89 million for 2006. 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 2006 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 2005 and 2006 installment sales), expected to be collected equally in 2007 and 2008.
Sherrod was assessed a penalty of $2 million by the Environmental Protection Agency for violation of a federal law in 2006. The fine is to be paid in equal amounts in 2006 and 2007.
Sherrod rents its operating facilities but owns one asset acquired in 2005 at a cost of $79 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions):
Income Statement Tax Return Difference
2005 $ 20 $ 27 $ (7 )
2006 20 35 ( 15 )
2007 20 12 8
2008 20 6 14
$ 80 $ 80 $ 0
Bad debt expense is reported using the allowance method, $3 million in 2006. For tax purposes, the expense is deducted when accounts prove uncollectible (the direct write-off method), $2 million in 2006. At December 31, 2006, the allowance for uncollectible accounts was $2 million (after adjusting entries). The balance was $1 million at the end of 2005 .
In 2006, Sherrod accrued an expense and related liability for estimated paid future absences of $5 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 ($2 million in 2007; $3 million in 2008).
During 2005, accounting income included an estimated loss of $2 million from having accrued a loss contingency. The loss is paid in 2006 at which time it is tax deductible.
Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2006, were $1.2 million and $2.8 million, respectively. The enacted tax rate is 40% each year.
Determine the amounts necessary to record income taxes for 2006 and prepare the appropriate journal entry.
What is the 2006 net income?
Show how any deferred tax amounts should be classified and reported on the 2006 balance sheet.
is it possible that the cost of an asset can be less than the total depreciation? (in this case 79 is less than 80)