ADVANCED TOPICS IN FINANCIAL ACCOUNTING AND REPORTING (MODADV3)

UNIT 7 INCOME TAXES (IAS 12, SIC 25)

ESTIMATED TIME: 4 HOURS

Problem 1 Deferred Tax Assets and Liabilities, single tax rate

Crispy Crme had financial income before income tax of P1,000,000 for the year ended
December 31, 20A1. It has income items exempt from income tax of P200,000 and non-
deductible expenses of P100,000. The partial statement of financial position of Crispy Crme as
of December 31, 20A1 is as follows: (showing assets and liabilities which may have temporary
differences):
Assets: Liabilities:
Machinery P500,000 Provisions for losses P225,000
Accumulated Depreciation (200,000)
Accumulated Impairment (90,000)
P210,000

Investment Property P600,000

The following are the additional information concerning the tax bases of the above items:
Machinery this asset was depreciated for 5 years both for income tax and financial
accounting purposes. It was tested for impairment on December 31, 20A1. The asset had a
remaining economic life of 3 years. no impairment loss was recognized in prior years.
Investment Property this pertains to a land which is held for lease. It is valued at fair value
under IAS 40. The asset was acquired on January 1, 20A0 for P400,000. The fair value
increased by P125,000 for the year ended December 31, 20A1. The asset is expected to be
sold at the end of 10 years. Said expectation was determined at the time of acquisition.
Provision for losses this pertains to potential losses that was recognized in 20A0 at
P150,000 with the expectation that it will be settled in 20A3. However, additional provision of
P75,000 was recognized during 20A1. The entity still expects to settle this obligation in
20A3. The impact of discounting was ignored since it is not material.
The entity adopts the calendar year accounting period and the enacted income tax rate is 30%.
The carrying amount of the entitys deferred tax asset (net) as of January 1, 20A1 was P22,500.
Crispy Crme paid quarterly income tax during 20A1 of P100,000 which can be credited against
its annual income tax liability. The annual income tax is payable every April 15 of the
subsequent year. It is also probable that the entity will be able to realize taxable income in the
future.
Required:
1. Show how the balance of Crispy Crmes net deferred tax asset (liability) as of January 1,
20A1 of P22,500 was calculated. Show the carrying amounts and tax bases of the related
assets and liabilities.
2. Compute the balance of the net deferred tax asset (liability) as of December 31, 20A1. Show
the carrying amounts and tax bases of the related assets and liabilities.
3. Compute Crispy Crmes taxable income (loss) for the year ended December 31, 20A1.
4. Prepare the journal entries to record the income taxes for 20A1.
5. Prepare a partial income statement for Crispy Crme beginning with Income before income
taxes for the year ended December 31, 20A1.
6. Prepare an explanation of the relationship between tax expense (income) and accounting
profit in both of the following forms:
a. Numerical reconciliation between tax expense (income) and the product of accounting
profit multiplied by the applicable tax rate(s)
b. A numerical reconciliation between the average effective tax rate and the applicable tax
rate, disclosing also the basis on which the applicable tax rate is computed
` Page 1 of 4
Problem 2 Realizability of deferred tax assets; change in enacted tax rate
Hawke Company computed pretax financial loss of P100,000 for the first year of its operations
ended December 31, 20A1. Hawke considered the following items in determining financial loss:
Unallowable entertainment, amusement and recreation (EAR) expenses P30,000
Interest income exempt from income tax 10,000
In addition, the analysis of the tax and book basis of its assets and liabilities disclosed the
following:
Hawke had P150,000 in accrued warranty expenses in the books that had not been
deductible from taxable income in 20A1, but would be deductible in future years when the
warranty expenses are actually paid. As of December 31, 20A1, the future warranty
payments are expected to occur in the following pattern:
20A2 P50,000
20A3 30,000
20A4 45,000
20A5 25,000
Total P150,000
Hawke had foreign currency denominated accounts receivable with carrying amount of
P300,000 as of December 31, 20A1. Its historical peso amount is P288,000 which is lower
than the carrying amount since peso is depreciating. It is collectible in 20A3. Discounting
was ignored since it is not material.
Hawke expects to incur tax losses in 20A2 and 20A3, hence, it may not be able to benefit from
its deductible temporary differences during these taxable years. The entity however expects to
realize taxable income in 20A4 and onwards from which temporary differences can be claimed. .
The enacted tax rate was 30% for the current and future periods. Income tax for a given taxable
year is payable in April of the subsequent year.

On December 31, 20A2, Hawke generated pretax financial income of P200,000. The following
were considered in determining its financial income for the said year:
Unallowable entertainment, amusement and recreation (EAR) expenses P20,000
Interest income exempt from income tax 30,000
In addition, the analysis of the tax and book basis of its assets and liabilities disclosed the
following:
Hawke recorded warranty expenses of P120,000. However, only P40,000 warranty
expenses were paid during the year. The warranty liabilities as of December 31, 20A2 are
expected to be paid as follows:
20A3 40%
20A4 30%
20A5 20%
20A6 10%
Hawke estimated a potential loss from lawsuit of P30,000 which was recognized in the
books under IAS 37. It expects to settle the said lawsuit in 20A5.
Hawkes foreign currency denominated accounts receivable had carrying amount of
P310,000 as of December 31, 20A2 sine the peso continues to depreciate. It is collectible in
20A3.

During 20A2, congress enacted a law changing the enacted tax rate to 35% effective year 20A4
and onwards. Hawke expects to realize taxable income in the future from which deductible
temporary differences can be applied. However, it only expects to realize taxable income of
P20,000 in 20A3 before considering the temporary differences.

` Page 2 of 4
Required:
1. Compute the balance of the net deferred tax asset (liability) as of December 31, 20A1 and
20A2. Show the carrying amounts and tax bases of the related assets and liabilities.
2. Compute Hawkes taxable income (loss) for the year ended December 31, 20A1 and 20A2.
3. Prepare the journal entries to record the income taxes for 20A1 and 20A2.
4. Prepare a partial income statement for Crispy Crme beginning with Income before income
taxes for the year ended December 31, 20A1 and 20A2.
5. Prepare an explanation of the relationship between tax expense (income) and accounting
profit in both of the following forms:
c. Numerical reconciliation between tax expense (income) and the product of accounting
profit multiplied by the applicable tax rate(s)
d. A numerical reconciliation between the average effective tax rate and the applicable tax
rate, disclosing also the basis on which the applicable tax rate is computed

Problem 3 Net operating loss carry-over

At December 31, 20A1, Columbia Enterprises Inc. has a net operating loss (NOL) of P200,000.
This is the first time that Columbia incurred net operating loss. Under the current tax law, this
can be carried over on the next three taxable years. Columbia expects to realize taxable income
in 20A2 and thereafter, and it will be able to utilize the NOL as follows: 20A2-P150,000; 20A3-
P50,000. The enacted tax rate in the current and future periods was at 30%. There were no
temporary and permanent differences. Income taxes for a given taxable year is payable in April
of the subsequent year.
On December 31. 20A2, Columbia realized a taxable income of P75,000 (before NOL).
Columbia expects to utilize the balance of the NOL in 20A3.
On December 31, 20A3, Columbia incurred a NOL of P300,000. Because of adverse business
conditions, it does not expect to realize any taxable income for the next 5 years.
On December 31, 20A4, Columbia realized a taxable income of P150,000 (before NOL). It
expects to have a taxable income of P100,000 for 20A5 but it does not expect to realize any
taxable income for 20A6 and 20A7.
Required:
1. Compute the balance of the DTA account as of December 31, 20A1, 20A2, 20A3 and 20A4.
2. Prepare the journal entries to record the income taxes for 20A1, 20A2, 20A3 and 20A4.
3. Prepare a partial income statement beginning with Income before income taxes for the
year ended December 31, 20A1, 20A2, 20A3 and 20A4.

Problem 4 Excess minimum corporate income tax (MCIT) credits,

As of December 31, 20A1, DiCaprio Inc. had a regular corporate income tax (RCIT) liability of
P350,000 and minimum corporate income tax (MCIT) liability of P500,000. Under the current
income tax law, the excess MCIT over the RCIT can be carried over as credit against RCIT in
the next three subsequent years. DiCaprio expects to pay the RCIT in the next three years.
In 20A2, the financial performance of DiCaprio was affected by financial crises. It had a RCIT
liability of P260,000 and MCIT liability of P420,000. DiCaprio expects to pay MCIT in 20A3 and
20A4, while it expects to pay RCIT of P100,000 in 20A5.
In 20A3, DiCaprio had an RCIT liability of P280,000 and MCIT liability of P250,000. It expects to
pay RCIT in the future.
The RCIT rate is 28% while the MCIT rate is 2%. There are were no temporary and permanent
differences. Income taxes for a given taxable year is payable in April of the subsequent year.
Required:
1. Prepare the journal entries to record the income taxes for 20A1, 20A2 and 20A3.
2. Prepare a partial income statement beginning with Income before income taxes for the
year ended December 31, 20A1, 20A2 and 20A3.
` Page 3 of 4
Problem 5 Excess minimum corporate income tax (MCIT) credits, Net operating loss carry-
over
Pineapple Orange Company computed its taxable income for the year as follows:
Total Taxable Revenues (a) P10,500,000
Deductible Expenses (b) 8,700,000
Net Taxable Income (before NOL) P1,800,000
The entity had the following additional information at the end of 2017:
(a) The total taxable revenues do not include dividend received from one of its investment in a
non-publicly listed domestic corporation worth P60,000 and tax-exempt interest income of
P20,000.
(b) Total expenses for the year amounted to P8,950,000. Of these amounts, P200,000 pertain
to fines and penalties paid to several regulatory agencies for the late filing of business
permit and taxes. An additional amount of P50,000 difference relates to excess
entertainment expenditures which were beyond the limit allowed by the BIR (Bureau of
Internal Revenue).
(c) The entity had an allowance for doubtful accounts of P60,000 at the end of the year, wrote-
off P80,000 worth of accounts receivable and recognized a total of P40,000 doubtful
accounts expense. Adjustments recognized for financial accounting purposes based on the
expected credit losses but are deductible for tax purposes upon actual write-off, after
considering all possible means for collecting the receivable.
(d) The entity also had accrued other income at the end of the year amounting to P195,000,
collections of accrued other income worth P240,000 during the year and other income of
P90,000 recognized for the year. Generally, taxes are being imposed on gross receipts.
(e) A total of P150,000 was paid in the first three quarters of the year using the enacted tax
rate. The entitys regular corporate tax rate is 30% in the current and future periods. The
entity is also subject to the minimum corporate income tax (MCIT) which is equivalent to 2%
of the total taxable revenue. It has been the practice of the entity to recognize and account
for deferred tax asset (liability) on a net basis because the entity has a legal enforceable
right to such offset. The entity expects to continue its business indefinitely and does not
forecast any future losses despite the losses incurred in the prior years. The tax effect of
any temporary differences, carryforward of unused tax losses and carryforward of unused
tax credits was appropriately recognized in the previous years and was expected to be fully
realizable. The entity has the following unutilized NOL and excess MCIT credits from the
previous years which are allowed to be utilized within three years from the year of
recognition:
2016 2015
NOL 360,000 150,000
Excess MCIT over RCIT 10,000 45,000
1. How much is the deferred tax asset (liability), net at the beginning of the year?
2. How much is the minimum corporate income tax (MCIT) for the current taxable year 2017?
3. How much is the regular corporate income tax (RCIT) for the current taxable year?
4. How much is the current tax expense/income tax expense-current for the year?
5. How much is the income tax payable as of December 31, 2017?
6. How much is the deferred tax asset (liability), as of December 31, 2017?
7. How much is the deferred tax expense/income tax expense-deferred for the year?
8. How much is the financial income/income before income tax for the current year?
9. How much is the average effective tax rate for the current year?

` Page 4 of 4