Question

Sheffield Company reports pretax financial income of $76,500 for 2020. The following items cause taxable income to be different than pretax financial income.

1. Depreciation on the tax return is greater than depreciation on the income statement by $15,700.

2. Rent collected on the tax return is greater than rent recognized on the income statement by $23,400.

3. Fines for pollution appear as an expense of $10,500 on the income statement. Sheffield’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2020.

Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020.

Prepare the income tax expense section of the income statement for 2020, beginning with the line “Income before income taxes.

Answer 1

Solution:

Computation of Pretax financial income - Sheffield Company
Particulars	Amount
Pretax financial income	$76,500.00
Permanent differences:
Fines for pollution	$10,500.00
Temporary differences:
Less: Depreciation as per tax higher than depreciation as per income tax	-$15,700.00
Add: Rent collected in advance	$23,400.00
Taxable income for 2020	$94,700.00

Journal Entries - Sheffield Company
Date	Particulars	Debit	Credit
31-Dec-20	Income tax expense Dr	$26,100.00
	Deferred tax Assets Dr ($23,400*30%)	$7,020.00
	To Income tax payable ($94,700*30%)		$28,410.00
	To Deferred tax liability ($15,700*30%)		$4,710.00
	(To record income tax expense and deferred taxes)

Income Statement (Partial) Sheffield Company For 2020
Particulars		Amount
Pre tax financial income		$76,500.00
Income tax Expense:
Current tax	$28,410.00
Deferred tax Liability	$4,710.00
Deferred tax Assets	-$7,020.00
		$26,100.00
Net Operating Income		$50,400.00