ACCOUNTING FOR INCOME TAX QUESTIONS

SUBMITTED BY:

GROUP 3

DIU, JEAN CLARE

SATURINAS, SHERYL
SERVACIO, ROLAND

MTH 7:30-9:00

PROBLEM 1-2

EYASI, INC. began operating on January 1, 2014. At the end of the first year of
operations, Eyasi reported P7,500,000 income before income taxes on its income
statement but only P700,000 taxable income on its tax return. Analysis of the P6,800,000
difference revealed that P6,200,000 was a permanent difference and P600,000 was a
temporary difference related to a current asset. At the end of 2015, the accumulated
temporary tax liability difference related to future years is P1,100,000. The enacted tax
rate is 30% for 2014 and 2015.

1. The journal entry to adjust the deferred tax liability at the end of 2015 should include a

A. Debit to Deferred tax liability of P150,000

B. Credit to Deferred tax liability of P150,000
C. Debit to Deferred tax asset of P150,000
D. Credit to Deferred tax liability of P330,000

2. Assume that at the end of 2015, the accumulated temporary tax liability difference
related to future years is P550,000. What journal entry should be made to adjust the
deferred tax liability at the end of 2015?

A. Income tax expense-165,000

Deferred tax liability-165,000

B. Deferred tax asset-15,000

Income tax benefit-15,000

C. Deferred tax liability-15,000

Income tax expense-15,000

D. Deferred tax liability-15,000

Deferred tax asset-15,000
 Solution:

Deferred tax liability, 12/31/15 (1,100,000x30%) 330,000

Deferred tax liability, 12/31/14 (600,000x30%) 180,000
Increase in Deferred tax liability 150,000

Journal Entry:

Income tax expense-150,000

Deferred tax liability-150,000

Answer: B

Deferred tax liability, 12/31/15 (550,000x30%) 165,000

Deferred tax liability, 12/31/14 (600,000x30%) 180,000
Increase in Deferred tax liability (15,000)

Journal Entry:

Deferred tax liability-150,000

Income tax expense-150,000

Answer: C

Source: Auditing Problems by Gerardo S. Roque 2014 Ed.

PROBLEM 3-7

The following data pertain to the CARROLL COMPANY

1. At December 31, 2014, the company has a 900,000 liability reported for estimated
litigation claims. The 900,000 balance represents amounts that have been charged to
income but are not tax deductible until they are paid. The company expects to pay the
claims and thus have tax-deductible amounts in the future in the following manner:

YEAR PAYMENTS
2017 150,000
2018 690,000
2019 60,000
900,000

2. The company uses different depreciation methods for financial reporting and tax
purposes. Consequently, at December 31, 2014, the company has a cumulative temporary
difference due to depreciable property of P2,400,000. This P2,400,000 cumulative
temporary difference is to result in taxable amounts in future years in the following
manner:
 YEAR AMOUNT
2015 480,000
2016 480,000
2017 480,000
2018 480,000
2019 480,000
2,400,000

The income tax rate is 30%.

Taxable income for 2014 is P2,400,000. The company expects to report taxable income
for the next five years.

No temporary differences existed at the end of 2013.

3. The deferred tax liability to be reported in the statement of financial position at

December 31, 2014 is

A. 720,000
B. 480,000
C. 450,000
D. 270,000

4. The deferred tax asset to be reported in the statement of financial position at December
31, 2014 is

A. 270,000
B. 150,000
C. 450,000
D. 720,000

5. The amount of current income tax payable to be reported in the statement of financial
position at December 31, 2014 is

A. 630,000
B. 546,000
C. 549,000
D. 720,000

6. Pretax accounting income for 2014 is

A. 3,900,000
B. 900,000
C. 2,874,000
D. 2,400,000
7. Net income for 2014 is

A. 2,730,000
B. 3,630,000
C. 1,230,000
D. 4,350,000

Solution:

3. 480,000 x 5 x 30% 720,000

Answer: A

4. 900,000 x 30% 270,000

Answer: A

5. 2,400,000 x 30% 720,000

Answer: D

6. Taxable income for 2014 2,400,000

Future taxable temporary difference - depreciation 2,400,000
Future deductible temporary difference - litigation (900,000)
Pretax accounting income for 2014 3,900,000

7. Pretax accounting income for 2014 3,900,000

Income tax expense
Current 720,000
Deferred (720,000-270,000) 450,000 (1,170,000)
Net Income 2,730,000

Answer: A

Source: Auditing Problems by Gerardo S. Roque 2014 Ed.

PROBLEM 8

Lara Company reported P5,000,000 revenue in 2015, of which P2,200,000 will not be
included in the tax return until 2016. The enacted tax rate is 30% for 2015 and 25% for
2016.

What amount of deferred tax should be reported on December 31, 2015?

A. 550,000 deferred tax liability

B. 550,000 deferred tax asset
C. 660,000 deferred tax liability
D. 660,000 deferred tax asset
 Solution:

2,200,000 x 25% 550,000

Answer: A

Source: Practical Accounting One Volume 2 by Valix 2015 Ed.

PROBLEM 9

On January 1, 2013, Marilyn Company purchased a P600,000 machine, with a five-year

useful life and no residual value. The machine was depreciated by an accelerated method
for book and tax purposes. The carrying amount was P240,000 on December 31, 2014.
On January 1, 2015 the entity changed to the straight-line method for financial reporting
purposes. The income tax rate is 30%.

On January 1, 2015, what amount should be reported as deferred tax liability as a result
of the change?

A. 120,000
B. 72,000
C. 36,000
D. 0

Answer: D

A change in depreciation method is accounted for as a change in estimate. Since

the treatment is prospective, there is no deferred tax liability.

Source: Practical Accounting One Volume 2 by Valix 2015 Ed.

PROBLEM 10

On January 1, 2015, North Company has spent P600,000 in developing a new product.
This cost meets the definition of an intangible asset. The tax law allows this cost to be
deducted for tax purposes when paid. Thus, the entity has recognized this amount as
expense in 2015 for tax purposes. On December 31, 2015, the intangible asset is deferred
impaired by P50,000.

What is the tax base for the intangible asset on December 31, 2015?

A. 600,000
B. 550,000
C. 650,000
D. 0
 Answer: D

The carrying amount of the intangible asset is P600,000 less the impairment loss
of P50,000or P550,000 but the tax base is zero because the total amount is expensed
in the current year for tax purposes.

Source: Practical Accounting One Volume 2 by Valix 2015 Ed.

Theory

11. Which of the following statements is incorrect concerning tax assets and liabilities?

A. Deferred tax assets and liablilities shall be discounted.

B. Tax assets and liabilities shall be presented separately from other assets and liabilities
in the statement of financial position.
C. Deferred tax assets and liabilities shall be distinguished from current tax assets and
liabilities.
D. When an entity makes a distinction between current and noncurrent assets and
liabilities, it shall not classify deferred tax assets and liabilities as current.

Answer: A

12. Temporary differences arise when revenues are taxable

I. After they are recognized in financial income

II. Before they are recognized in financial income

A. Both I and II
B. I only
C. Neither I nor II
D. II only

Answer: A

13. These are differences that will result in future taxable amount in determining taxable
profit of future periods when the carrying amount of the asset or liability is recovered or
settled.

A. Temporary differences
B. Taxable temporary differences
C. Deductible temporary differences
D. Permanent differences
Answer: B

Problem

14. West Company reported the following carrying amount of assets and liabilities on
December 31, 2013:

Propert 10,000,000
Plant and Equipment 5,000,000
Inventory 4,000,000
Trade Receivables 3,000,000
Trade Payables 6,000,000
Cash 2,000,000

The value for tax purposes for property and for plant and equipment was P7,000,000 and
P4,000,000, respectively. The entity has made a provision for inventory obsolescence of
P2,000,000 which is not allowable for tax purposes. Further, an impairment loss against
trade receivables of P1,000,000 has been made. This charge will not be allowed in the
current year ofr tax purposes. The tax rate is 30%. What amount should be recognized as
deferred tax expense for 2013?

A. 1,400,000
B. 1,200,000
C. 350,000
D. 300,000

Answer: D

Property:
Carrying Amount 10,000,000
Tax Base 7,000,000 3,000,000
Plant and Equipment:
Carrying Amount 5,000,000
Tax Base 4,000,000 1,000,000
Future Taxable Amount 4,000,000

Inventory:
Tax Base 4,000,000
Carrying Amount 2,000,000 2,000,000
Trade Receivables:
Tax Base 3,000,000
Carrying Amount 2,000,000 1,000,000
Future Deductible Amount 3,000,000

Deferred Tax Liablility (30% x 4,000,000) 1,200,000

Deferred Tax Asset (30% x 3,000,000) 900,000
Net Deferred Tax Expense 300,000
15. On December 31, 2013, Thorn Company reported the tax effects of temporary
differences as follows:

Deferred Tax Asset (Liability) Related Asset Classification

Accelerated tax
Depreciation (75,000) Noncurrent

Additional cost in
inventory for
tax purposes 25,000 Current

The entity anticipated that P10,000 of the deferred tax liability will reverse in 2015. On
december 31, 2013, what amount should be reported as Noncurrent Deferred Tax
Liability?

A. 40,000
B. 50,000
C. 65,000
D. 75,000

Answer: D

16. Aris Company computed a pretax accounting income of P5,000,000 for the first year
of operations. The tax rate is 30%.

Nondeductible expenses 200,000

Nontaxable revenue 500,000
Gross income on installment sales
reported in accounting income
but not in taxable income 1,000,000
Provision for doubtful accounts 100,000

What is the current tax expense?

A. 1,140,000
B. 1,410,000
C. 1,500,000
D. 1,110,000

Answer: A

Pretax accounting income 5,000,000

Nondeductible expenses permanent 200,000
Nontaxable revenue permanent (500,000)
Accounting income subject to tax 4,700,000
Gross income on installment sales temporary (1,000,000)
Doubtful accounts temporary 100,000
Taxable income 3,800,000

Current Tax Expense (3,800,000 x 30%) 1,140,000

Total Income Tax expense (4,700,000 x 30%) 1,410,000

Problem

17. Ranger Company located business in two jurisdictions, Singapore and Malaysia. In
both countries, the entity has the legal right to offset the taxes receivable and payable.
The following information related to deferred tax assets and liabilities:

Classification Amount Taxing Jurisdiction

Deferred tax asset 800,000 Singapore

Deferred tax liability 300,000 Malaysia
Deferred tax liability 600,000 Singapore

How should the entity present deferred taxes at year-end?

Deferred tax asset Deferred tax liability

a. 800,000 900,000
b. 0 1,000,000
c. 200,000 600,000
d. 200,000 300,000

Soltuion: Answer D

Deferred tax asset Singapore 800,000

Deferred tax liability Singapore 600,000
Net deferred tax asset Singapore 200,000

Deferred tax liability Malaysia 300,000

Problem

18.Aries Company reported a deferred tax asset of P9,000 on January 1, 2015. The entity
reported pretax financial income of P300,000 for 2015. Temporary differences of
P100,000 resulted in taxable income of P200,000 for 2015. On December 31, 2015, the
entity had cumulative taxable differences of P70,000 and no cumulative deductible
differences. The income tax rate is 30%.

What amount should be reported as deferred tax expense for 2015?

a. 12,000
b. 21,000
 c. 30,000
d. 60,000

Solution: Answer C

Decrease in deferred tax asset 9,000

Increase in deferred tax liability (30% x 70,000) 21,000
Deferred tax expense 30,000

Problem

19. Clark Company had depreciation of P300,000 in the income statement for 2015. In
the tax return, Clark had deprecation of P500,000. Clarks income statement also included
P50,000 accrued warranty expense that will be deducted for tax purposes when paid. The
tax rates are 30% for 2015 and 25% for future years. These were the only temporary
differences.

What is the deferred portion of the provision for income taxes?

a. 37,500
b. 50,000
c. 60,000
d. 45,000

Solution: Answer A
Deferred tax expense (25% x 200,000) 50,000
Deferred tax benefit (25% x 50,000) (12,500)
Net deferred tax expense 37,500

Problem

20. In 2015, Lobo Company reported for financial statement purposes the following
revenue and expenses which were not included in taxable income:

Premiums on officers life insurance under

Which the corporation is the beneficiary 50,000
Interest revenue on municipal bonds 100,000
Estimated future warrant cost to be paid in 2016 and 2017 600,000

The tax rate is 30%. There were no temporary differences in prior years.
What is the deferred tax benefit to be applied against current tax expense?

a. 210,000
b. 225,000
c. 195,000
d. 180,000
Solution: Answer D

Deferred tax benefit (30% x 600,000) 180,000

The premiums and interest revenue on municipal bonds are considered permanent
differences.

Problem

21. Reylisa Company, organized on January 1, 2015, had pretax accounting income of
P500,000 and taxable income of P800,000 for the year ended December 31, 2015. The
only temporary difference is acctued product warranty costs that are expected to be paid
in 2016 P100,000, 2017 P50,000, 2018 P50,000 and 2019 P100,000. The entity has never
had any net operating loss and does not expect any in the future. The enacted income tax
rates are 35% for 2015, 30% for 2016 through 2018, and 25% for 2019.

On December 31, 2015, what amount should be reported as deferred tax asset?
a. 105,000
b. 75,000
c. 85,000
d. 60,000

Solution: Answer C

2016 (100,000 x 30%) 30,000

2017 ( 50,000 x 30%) 15,000
2018 ( 50,000 x 30%) 15,000
2019 (100,000 x 25%) 25,000
Total deferred tax asset 85,000

Problem

22. Zambal Company reported depreciation of P2,500,000 in the 2015 tax return.
However, in the 2015 income statement, the entity reported depreciation of P1,000,000.
The difference in depreciation is a temporary difference that will reverse over time. The
tax rate is 30%.

What amount should be added to the deferred tax liability on December 31, 2015?
a. 300,000
b. 750,000
c. 450,000
d. 0

Solution: Answer C
Tax depreciation 2,500,000
Book Depreciation 1,000,000
Future taxable amount 1,500,000

Increase in deferred tax liability (30% x 1,500,000) 450,000

23. Problem

Regal Company paid P200,000 in January 2015 for fire insurance premiums on a two-
year policy. Additionally, the financial statements for the year ended December 31, 2015
revealed that the entity paid P1,050,000 in income tax during the year and also accrued
estimated litigation loss of P2,000,000. The lawsuit was resolved in February 2016 at
which time a P2,000,000 loss was recognized for tax purposes. The entity used the cash
basis for tax purposes. The tax rate is 30% for both 2015 and 2016.

What amount should be reported as deferred tax asset on December 31, 2015?
a. 630,000
b. 540,000
c. 600,000
d. 570,000

Solution: Answer C

Deferred tax asset (30% x 2,000,000) 600,000

Only the estimated litigation loss will result to a deferred tax asset because it is a future
deductible amount.
The prepaid insurance of P100,000 will result to a deferred tax liability because it is a
future taxable amount.

Problem

24. In arriving at the profit before tax for the year ended December 31,2015, Jerry
Company has accrued royalties receivable of P200,000 and interest payable of P250,000.
Both royalties and interest are dealt with on a cash basis in tax computations.

What is the net temporary difference on December 31, 2015?

a. 450,000 taxable temporary difference
b. 450,000 deductible temporary difference
c. 50,000 deductible temporary difference
d. 50,000 taxable temporary difference

Solution: Answer C

Taxable temporary difference 200,000

Deductible temporary difference 250,000
Net deductible temporary difference 50,000