Problem - Sherrod, Inc., reported pretax accounting income of $76 million for 2009. The following information relates to differences between pretax accounting income and taxable income:
a. Income from installment sales of properties included in pretax accounting income in 2009 exceeded that reported for tax purpose by $3 million. The installment receivable account at year-end had a balance of $4 million (representing portions of 2008 and 2009 installment sales), expected to be collected equally in 2010 and 2011.
b. Sherrod was assessed a penalty of $2 million by the Environmental Protection Agency for violation of a federal law in 2009. The fine is to be paid in equal amounts in 2009 and 2010.
c. Sherrod rents its operating facilities but owns one asset acquired in 2008 at a cost of $80 million. Depreciation is reported by the straight-line method assuming a four -year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years($ in millions):
Income Statement Tax Return Difference
2008 $20 $26 $(6)
2009 20 35 (15)
2010 20 12 8
2011 20 7 13
100 100 0
d. In 2009, Sherrod accrued an expense and related liability for estimated paid future absence of $8 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 ($4 million in 2010; $4 million in 2011).
f. During 2008, accounting income included an estimated loss of $2 million from having accrued a loss contingency. The loss is paid in 2009 at which time it is tax deductible.
Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2009 were $0.8 million and $2.8 million, respectively. The enacted tax rate is 40% each year.
Required:
1. Determine the amounts necessary to record income taxes for 2009 and prepare the appropriate journal entry.
2. What is the 2009 net income?
3. Show how any deferred tax amounts should be classified and reported on the 2009 balance sheet.