Question

The following information is available for Sheffield Corporation for 2020.

1.		Depreciation reported on the tax return exceeded depreciation reported on the income statement by $126,000. This difference will reverse in equal amounts of $31,500 over the years 2021–2024.
2.		Interest received on municipal bonds was $10,500.
3.		Rent collected in advance on January 1, 2020, totaled $65,100 for a 3-year period. Of this amount, $43,400 was reported as unearned at December 31, 2020, for book purposes.
4.		The tax rates are 40% for 2020 and 35% for 2021 and subsequent years.
5.		Income taxes of $326,000 are due per the tax return for 2020.
6.		No deferred taxes existed at the beginning of 2020.

a.  Compute taxable income for 2020.

b.  Compute pretax financial income for 2020.

c.  Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2020 and 2021. Assume taxable income was $480,000 in 2021.

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

Answer 1

Part 1

Income taxes as per income tax	$        326,000
Divided by: Tax rates	40%
Taxable income	$        815,000

Part 2

Taxable income	$        815,000
Add: Excess depreciation in tax return	$        126,000
Add: Interest received on municipal bonds	$          10,500
Less: Unearned rent	$        (43,400)
Pretax financial income	$        908,100

Part 3

Date	Account title and explanation	Debit	Credit
Dec 31, 2020	Income tax expense (balancing figure)	$       354,910
	Deferred tax assets (43400*35%)	$         15,190
	Deferred tax liability (126000*35%)		$    44,100
	Income tax payable (815000*40%)		$ 326,000
	(To record income tax expense for the period.)
Dec 31, 2021	Income tax expense (balancing figure)	$       164,570
	Deferred tax liability (31500*35%)	$         11,025
	Deferred tax assets ((65100/3)*35%)		$      7,595
	Income tax payable (480000*35%)		$ 168,000
	(To record income tax expense for the period.)

Part 4

Sheffield Corporation
Income statement
For the year ended Dec 31, 2020
Income before income taxes		$ 908,100
Income tax expense
Current	$       326,000
Deferred (44100-15190)	$         28,910
		$ 354,910
Net Income		$ 553,190