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Accounting For Income Tax Questions
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%)
Deferred tax liability, 12/31/14 (600,000x30%)
Increase in Deferred tax liability
330,000
180,000
150,000
Journal Entry:
Income tax expense-150,000
Deferred tax liability-150,000
Answer: B
Deferred tax liability, 12/31/15 (550,000x30%)
Deferred tax liability, 12/31/14 (600,000x30%)
Increase in Deferred tax liability
165,000
180,000
(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
2017
2018
2019
PAYMENTS
150,000
690,000
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
2015
2016
2017
2018
2019
AMOUNT
480,000
480,000
480,000
480,000
480,000
2,400,000
720,000
4. 900,000 x 30%
Answer: A
270,000
5. 2,400,000 x 30%
Answer: D
720,000
2,400,000
2,400,000
(900,000)
3,900,000
3,900,000
720,000
450,000
(1,170,000)
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%
Answer: A
550,000
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.
II.
A.
B.
C.
D.
Both I and II
I only
Neither I nor II
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.
B.
C.
D.
Temporary differences
Taxable temporary differences
Deductible temporary differences
Permanent differences
Answer: B
Problem
14. West Company reported the following carrying amount of assets and liabilities on
December 31, 2013:
Propert
Plant and Equipment
Inventory
Trade Receivables
Trade Payables
Cash
10,000,000
5,000,000
4,000,000
3,000,000
6,000,000
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.
B.
C.
D.
1,400,000
1,200,000
350,000
300,000
Answer: D
Property:
Carrying Amount
Tax Base
Plant and Equipment:
Carrying Amount
Tax Base
Future Taxable Amount
Inventory:
Tax Base
Carrying Amount
Trade Receivables:
Tax Base
Carrying Amount
Future Deductible Amount
Deferred Tax Liablility (30% x 4,000,000)
Deferred Tax Asset (30% x 3,000,000)
Net Deferred Tax Expense
10,000,000
7,000,000
5,000,000
4,000,000
4,000,000
2,000,000
3,000,000
2,000,000
3,000,000
1,000,000
4,000,000
2,000,000
1,000,000
3,000,000
1,200,000
900,000
300,000
15. On December 31, 2013, Thorn Company reported the tax effects of temporary
differences as follows:
Deferred Tax Asset (Liability)
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.
B.
C.
D.
40,000
50,000
65,000
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
Nontaxable revenue
Gross income on installment sales
reported in accounting income
but not in taxable income
Provision for doubtful accounts
200,000
500,000
1,000,000
100,000
1,140,000
1,410,000
1,500,000
1,110,000
Answer: A
Pretax accounting income
Nondeductible expenses permanent
Nontaxable revenue permanent
Accounting income subject to tax
5,000,000
200,000
(500,000)
4,700,000
(1,000,000)
100,000
3,800,000
1,140,000
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
800,000
300,000
600,000
Singapore
Malaysia
Singapore
Soltuion: Answer D
Deferred tax asset Singapore
Deferred tax liability Singapore
Net deferred tax asset Singapore
800,000
600,000
200,000
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
Increase in deferred tax liability (30% x 70,000)
Deferred tax expense
9,000
21,000
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)
Deferred tax benefit (25% x 50,000)
Net deferred tax expense
50,000
(12,500)
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.
b.
c.
d.
210,000
225,000
195,000
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%)
2017
( 50,000 x 30%)
2018
( 50,000 x 30%)
2019
(100,000 x 25%)
Total deferred tax asset
30,000
15,000
15,000
25,000
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
Book Depreciation
Future taxable amount
2,500,000
1,000,000
1,500,000
200,000
250,000
50,000