Sherrod, Inc., reported pretax accounting income of $74 million
for 2018. 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 2018 exceeded that reported for tax purposes by $7
million. The installment receivable account at year-end had a
balance of $8 million (representing portions of 2017 and 2018
installment sales), expected to be collected equally in 2019 and
2020. Sherrod was assessed a penalty of $3 million by the
Environmental Protection Agency for violation of a federal law in
2018. The fine is to be paid in equal amounts in 2018 and 2019.
Sherrod rents its operating facilities but owns one asset acquired
in 2017 at a cost of $68 million. Depreciation is reported by the
straight-line method assuming a four-year useful life. On the tax
return, deductions for depreciation will be more than straight-line
depreciation the first two years but less than straight-line
depreciation the next two years ($ in millions): Income Statement
Tax Return Difference 2017 $ 17 $ 22 $ (5 ) 2018 17 29 (12 ) 2019
17 10 7 2020 17 7 10 $ 68 $ 68 $ 0 Warranty expense of $3 million
is reported in 2018. For tax purposes, the expense is deducted when
costs are incurred, $2 million in 2018. At December 31, 2018, the
warranty liability was $2 million (after adjusting entries). The
balance was $1 million at the end of 2017. In 2018, Sherrod accrued
an expense and related liability for estimated paid future absences
of $14 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 ($8 million in 2019; $6
million in 2020). During 2017, accounting income included an
estimated loss of $2 million from having accrued a loss
contingency. The loss is paid in 2018 at which time it is tax
deductible.