Answered Essay: Sheffield Company Income Statement (Partial)

Sheffield Company reports pretax financial income of $71,400 for 2017. 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 $16,800.

2. Rent collected on the tax return is greater than rent recognized on the income statement by $23,700.

3. Fines for pollution appear as an expense of $10,900 on the income statement.

Sheffield’s tax rate is 40% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2017.

a) Compute taxable income and income taxes payable for 2017.

Taxable Income $____

Income Tax Payable $____

b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017.

c) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income taxes.”

Sheffield Company Income Statement (Partial)

d) Compute the effective income tax rate for 2017. (Round answer to 1 decimal places, e.g. 25.5%.)

Effective Income Tax Rate _____%

Sheffield Company Income Statement (Partial)

Expert Answer


a)Taxable income and income taxes payable for 2017

Taxable Income $89,200

Income Tax Payable $35,380


Pretax fnancial income For 2017                                            $71,400

Excess depreciation per tax return                                         $(16,800)

Excess rent collected over rent earned                                  $23,700

Non deductible fines                                                                  $10,900

Taxable income                                                                           $89,200

Taxable income                                                                           $89,200

Enacted tax rate                                                                            40%

Income tax payable                                                                    $35,680


Income tax expense                                                             $32920

Deferred tax asset (23,700 X 40%)                                    $9480

Income tax payable                                                         $35,680

Deffered tax Liability(16,800X40%)                              $6,720


Sheiffield company

Income Statement

Year ended 31st Dec 2017

Income before income taxes                                                               $71,400

Income tax expense –Current                              $35,680

Income tax expense – Deferred                           ($2760)               ($32920)

Net income / (loss)                                                                                 $38480

d) Effective income tax rate = $32920/$71,400 = 46.11%

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