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

2013 20 7 13

$80 $80 $0

d. 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 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 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 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

Plan Assets

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, 2011 536

Plan Assets

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?

P 17-6 Determine the PBO; plan assets; pension expense; two years

Stanley-Morgan Industries adopted a defined benefit pension plan on April 12, 2011. The provisions of the plan were not made retroactive to prior years. A local bank, engaged as trustee for the plan assets, expects plan assets to earn a 10% rate of return. A consulting firm, engaged as actuary, recommends 6% as the appropriate discount rate. The service cost is 150,000 for 2011 and 200,000 for 2012. Year-end funding is 160,000 for 2011 and 170,000 for 2012. No assumptions or estimates were revised during 2011.


Calculate each of the following amounts as of both December 31, 2011, and December 31, 2012.

1. Projected benefit obligation

2. Plan assets

3. Pension expense

4. Netpension asset or net pension liability

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