Question

Sheridan Company began operations at the beginning of 2021. The following information pertains to this company.

1.		Pretax financial income for 2021 is $85,000.
2.		The tax rate enacted for 2021 and future years is 20%.
3.		Differences between the 2021 income statement and tax return are listed below:
		(a)		Warranty expense accrued for financial reporting purposes amounts to $6,900. Warranty deductions per the tax return amount to $2,100.
		(b)		Gross profit on construction contracts using the percentage-of-completion method per books amounts to $90,200. Gross profit on construction contracts for tax purposes amounts to $73,000.
		(c)		Depreciation of property, plant, and equipment for financial reporting purposes amounts to $64,300. Depreciation of these assets amounts to $76,900 for the tax return.
		(d)		A $3,300 fine paid for violation of pollution laws was deducted in computing pretax financial income.
		(e)		Interest revenue recognized on an investment in tax-exempt municipal bonds amounts to $1,400.
4.		Taxable income is expected for the next few years. (Assume (a) is short-term in nature; assume (b) and (c) are long-term in nature.)

Compute taxable income for 2021.

Taxable income for 2021

$

  

Compute the deferred taxes at December 31, 2021, that relate to the temporary differences described above.

Deferred tax liability		$
Deferred tax asset		$

    

Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2021. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

    

Draft the income tax expense section of the income statement, beginning with “Income before income taxes.” (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Sheridan Company Income Statement (Partial)                                                                       December 31, 2021For the Year Ended December 31, 2021For the Quarter Ended December 31, 2021
CurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues		$
CurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues
CurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues	$
CurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues
CurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues		$

Answer 1

1)Taxable income for 2021

Pretax financial income	85000
Permanent differences:
Fine for pollution	3300
Tax-exempt interest	-1400
Adjusted income	86900
Originating temporary differences:
Excess warranty expense per books
($6900 – $2100)	4800
Excess construction profits per books
($90200 – $73000)	-17200
Excess depreciation per tax return
($64000 – $76900)	-12900
Taxable income	$61600

.

2)

Temporary Difference	Future Taxable (Deductible) Amounts	Tax Rate	Deferred Tax
(Asset)	Liability
Warranty costs	4800	20%	-960
Construction profits	-17200	20%		3440
Depreciation	-12900	20%		2580
Totals	-25300		-960	6020

.

Deferred tax assets = 960

Deferred tax liabilities = 6020.

.

3)

Account	Debit	Credit
Income tax expense (86900 *20%)	$17380
Deferred tax Asset	$960
Deferred tax liability		$6020
Income tax Payable (61600 * 20% )		$12320

.

4)

Income before income taxes		$85000
Income tax expense
Current	$12320
Deferred (17380-12320)	$5060	-17380
Net income		$67620