P16-7 Multiple differences; calculate taxable income; balance sheet classification
Sherrod, Inc. reported pretax accounting income of 76 million for 2011. 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 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.
b. 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.
c. 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 ($ in millions).
Income Statement Tax Returns Differences
2010 $20 $26 $(16)
2011 20 35 (15)
2012 20 12 8
d. Baddebt expense of 3 million is reported using the allowance method in 2011. For tax purposes the expense is deducted when accounts prove uncollectible (the direct write-off method): 2 million in 2011. At December 31, 2011, the allowance for uncollectible accounts was 2 million (after adjusting entries). The balance was 1 million at the end of 2010.
e. In 2011, Sherrod accrued an expense and related liability for estimated paid future absences of 7 million relating to the company’s new paid vacation program. Future compensation will be deductible on the tax return when actually paid during the next two years (4 million in 2012; 3 million in 2013).
f. During 2010, accounting income included an estimated loss of 2 million from having accrued a loss contingency. The loss is paid in 2011 at which time it is tax deductible.
Balances in thedeferred tax asset and deferred tax liability accounts at January 1, 2011, were 1.2 million and 2.8 million, respectively. The enacted tax rate is 40% each year.
1. Determine the amounts necessary to record income taxes for 2011 and prepare the appropriate journal entry.
2. What is 2011 net income?
3. Show how any deferred tax amounts should be classified and reported in the 2011 balance sheet.
E 17-10 Determine pension expense
Abbott and Abbott has a noncontributory, defined benefit pension plan. At December 31, 2011, Abbott and Abbott received the following information:
($ in the millions)
Projected Benefit Organization
Balance, January 1 $120
Service Cost 20
Interest Cost 12
Benefits paid (9)
Balance, December 31 $143
Balance, January 1 $ 80
Actual return on plan assets 9
Contribution 2011 20
Benefits paid (9)
Balance, December 31 $100
The expected long-term rate of return on plan assets was 10%. There was no prior service cost and a negligible net loss- AOCI on January 1, 2011.
1. Determine Abbott and Abbott’s pension expense for 2011.
2. Prepare the journal entries record Abbott and Abbott’s pension, funding, and payments for 2011.
E 17-19 Record pension expense, funding, and gains and losses; determine account balances
Beale Management has noncontributory, defined benefit pension plan. On December 31, 2011 (the end of Beale’s fiscal year), the following pension-related data were available.
Projected Benefit Obligation ($ in millions)
Balance, January 1, 2011 480
Service Cost 82
Interest cost, discount rate, 5% 24
Gain due to changes in actuarial assumptions in 2011 (10)
Pension benefits paid (40)
Balance, December 31, 2011536
Balance, January 1, 2011 500
Actual return on plan assets 40
(Expected return on plan assets, 45)
Pension benefits paid (40)
Balance, December 31. 2011 570
January 1, 2011, balances:
Pension asset 20
Prior service cost –AOCI (amortization $8 per year) 48
Net gain-AOCI (any amortization over 15 years) 80
1. Prepare the 2011 journal entry to record pension expense.
2. Prepare the journal entry (s) to record any 2011 gains and losses.
3. Prepare the 2011 journal entries to record the contribution to plan assets, and benefit payments to retirees.
4. Determine the balances at December 31, 2011, in PBO, plan assets, the net gain-AOCI and prior service cost-AOCI and show how the balances changed during 2011. (t-accounts may be useful).
5. What amount will Beale report in its 2011 balance sheet as a net pension asset or net pension liability for the funded stat s of the plan?