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ACCOUNTING FOR INCOME TAX (PAS 12)

PRACTICAL ACCOUNTING I MICHAEL B. BONGALONTA,CPA,MICB,MBA

SAMPLE PROBLEMS

PROBLEM 1(adapted): The following differences between financial and taxable income were
reported by Dider Corporation for the current year:

(a) Excess of tax depreciation over book depreciation .... $60,000

(b) Interest revenue on municipal bonds .................. 9,000
(c) Excess of estimated warranty expense over actual
expenditures ......................................... 54,000
(d) Unearned rent received ............................... 12,000
(e) Fines paid ........................................... 30,000
(f) Excess of income reported under percentage-of-completion
accounting for financial reporting over
completed-contract accounting used for tax reporting . 45,000
(g) Interest on indebtedness incurred to purchase tax-exempt
securities .................................... 3,000
(h) Unrealized losses on marketable securities recognized
for financial reporting .............................. 18,000

Assume that Dider Corporation had pretax accounting income [before considering items (a)
through (h)] of $900,000 for the current year. Compute the taxable income for the current
year.

PROBLEM 2 (adapted): Walsh Services computed pretax financial income of $220,000 for its
first year of operations ended December 31, 2008. In preparing the income tax return for
the year, the tax accountant determined the following differences between 2008 financial
income and taxable income:

1) Nondeductible expenses ............................ $40,000

2) Nontaxable revenues ............................... 14,000
3) Temporary difference--Installment sales reported in financial
income but not in taxable income ........ 70,000

The temporary difference is expected to reverse in the following pattern:

2009 ................................................... $14,000

2010 ................................................... 32,000
2011 ................................................... 24,000
$70,000

The enacted tax rates for this year and the next three years are as follows:

2008 .................................................. 40%

2009 .................................................. 35%
2010 .................................................. 32%
2011 .................................................. 30%

(1) Compute the amount of income taxes payable and deferred tax assets or
liabilities as of December 31, 2008.
(2) Prepare journal entries to record income taxes payable and deferred
income taxes.
PROBLEM 3 (adapted): Millcroft Inc. computed a pretax financial income of $40,000 for the first
year of its operations ended December 31, 2008. Analysis of the tax and book basis of its
liabilities disclosed $360,000 in unearned rent revenue on the books that had been
recognized as taxable income in 2008 when the cash was received.

The unearned rent is expected to be recognized on the books in the following pattern:

2009 .................................................... $ 90,000

2010 .................................................... 160,000
2011 .................................................... 70,000
2012 .................................................... 40,000
$360,000

The enacted tax rates for this year and the next four years are as follows:

2008 .................................................... 40%

2009 .................................................... 36%
2010 .................................................... 33%
2011 .................................................... 30%
2012 .................................................... 32%

(1) Compute the amount of income taxes payable and deferred tax assets or
liabilities as of December 31, 2008.
(2) Prepare journal entries to record income taxes payable and deferred
income taxes.

PROBLEM 4 (adapted): Among the items reported on Cord, Inc.’s income statement for the
year ended December 31, 2003, were the following:

Payment of penalty $ 5,000

Insurance premium on life of an officer with Cord
as owner and beneficiary 10,000

Compute the amount of temporary difference.

PROBLEM 5 (adapted): Caleb Corporation has three financial statement elements for
which the December 31, 2003, book value is different than the December 31, 2003, tax
basis.
Book value Tax basis Difference
Equipment $200,000 $120,000 $80,000
Prepaid officers insurance policy 75,000 0 75,000
Warranty liability 50,000 0 50,000

As a result of these differences, future taxable amounts are:

PROBLEM 6 (adapted): Bart, Inc., a newly organized corporation, uses the equity method
of accounting for its 30% investment in Rex Co.’s common stock. During 2003, Rex paid
dividends of $300,000 and reported earnings of $900,000. In addition

• The dividends received from Rex are eligible for the 80% dividends received
deductions.
• All the undistributed earnings of Rex will be distributed in future years.
• There are no other temporary differences.
• Bart’s 2003 income tax rate is 30%.
• The enacted income tax rate after 2003 is 25%.

In Bart’s December 31, 2003 balance sheet, the deferred income tax liability should be

PROBLEM 7 (adapted): Venus Corp.’s worksheet for calculating current and deferred
income taxes for 2003 follows:
2003 2004 2005
Pretax income $1,400
Temporary differences:
Depreciation (800) $(1,200) $2,000
Warranty costs 400 (100) (300)
Taxable income $1,000
Enacted rate 30% 30% 25%

Venus had no prior deferred tax balances. In its 2003 income statement, what amount
should Venus report as:

a. Current income tax expense?

b. Deferred income tax expense?

PROBLEM 8 (adapted): Dix, Inc., a calendar-year corporation, reported the following

operating income (loss) before income tax for its first three years of operations:

2001 $100,000
2002 (200,000)
2003 400,000
There are no permanent or temporary differences between operating income (loss) for
financial and income tax reporting purposes. When filing its 2002 tax return, Dix did not
elect to forego the carryback of its loss for 2002. Assume a 40% tax rate for all years. What
amount should Dix report as its income tax liability at December 31, 2003?

PROBLEM 9 (adapted): Hilton Company reported pretax financial income of P6,200,000 for
the calendar year 2011. Included in the other income section of the income statement was
P200,000 of interest revenue from government bonds held by the entity. The income
statement also included depreciation expense of P500, 000 for machine that cost P3,
000,000. The income tax return reported P600, 000 as depreciation on the machine. The
enacted tax rate is 30% for 2011 and future years. What is the current tax expense for
2011?

PROBLEM 10 (adapted): Tantrum Company began operations on January 1, 2011. At the

end of the first year of operations, Tantrum reported P6, 000,000 income before income tax
in its income statement but only P5, 100,000 taxable income in its tax return. Analysis of
the P900,000 difference revealed that P500,000 was permanent difference and P400,000
was a temporary tax liability difference related to a current asset. The enacted tax rate for
2011 and future years is 30%. What is the total income tax expense to be reported in the
2011 income statement?

PROBLEM 11 (adapted): Aris Company computed a pretax accounting income of P5,000,000

for its first year of operations. The following differences are noted between accounting
income and taxable income.
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
Income tax rate 30%

What is the current tax expense?

PROBLEM 12 (adapted): Cascade Company is determining the amount of its pretax

accounting income for 2011 by making adjustment to taxable income from the 2011 income
tax return. The tax return indicates taxable income of P4,000,000 on which a tax liability of
P1,200,000 has been recognized. Following is the list of items that may be required to
determine pretax accounting income from the amount of taxable income:

 Accelerated depreciation for income tax purposes was P500,000. Straight line
financial depreciation on these assets is P400,000.
 Goodwill impairment loss of P300,000 was not included as a deduction in the tax
return but may be deducted in the income statement.
 Interest income on treasury bills was not included in the tax return. During the year,
P600,000 was received on these investments.

What is the pretax accounting income for 2011?

PROBLEM 13 (adapted): Jason Company is in its first year of operations. The entity has
pretax income of P4,000,000 and provided the following items:
Premium on life insurance of key officer 100,000
Depreciation on tax return in excess of book depreciation 120,000
Interest on municipal bonds 53,000
Warranty expense 40,000
Actual warranty repairs 33,000
Bad debt expense 14,000
Beginning balance in allowance for uncollectible accounts 0
Ending balance in allowance for uncollectible accounts 8,000
Rent received in advance that will be recognized evenly
over the next three years 240,000

What is the taxable income for 2011?

PROBLEM 14 (adapted): On its December 31, 2014 balance sheet, Mother Company had
income tax payable of P520,000 and a current deferred tax asset of P800,000. Mother had
reported current deferred tax asset payments were made during 2014.
In its 2014, profit or loss of Mother Company, What amount should be reported as total
income tax expense?

PROBLEM 15 (adapted): Daughter Corporation reported a pretax financial income of

P6,000,000 for the year 2014. Among the items reported in the 2014 profit or loss are:
Interest on time deposit 240,000
Proceeds received from life insurance on death of officer 1,200,000
Income tax rate is 32% for all years
There are no timing or permanent differences in prior years.

What amount should Daughter report as deferred tax liability on December 31, 2014?

PROBLEM 16 (adapted): The 2014 tax return of Harmony Company indicates taxable income
of P950,000, on which a tax liability of P304,000 has been recognized (tax rate is 32%).
The company is determining the amount of its pretax financial income for 2014 by making
adjustments to taxable income from its 2014 income tax return.
The list of items that may be required to determine taxable financial income from the
amount of taxable income follows:
 Accelerated depreciation for income tax purposes was P335,000; straight line
depreciation on these assets is P200,000.
 The p112,500 goodwill impairment was excluded as a deduction in the tax return,
but may be deducted in the income statement.
 Several expenses were included in the income tax return on an estimated basis.
These items will be shown in the income statement at the same amount but are
subject to change if new information in the future indicates that the original
estimates were inaccurate.
 Interest on treasury bills was excluded in the tax return. During the year,P61,750
was received on these investments.

How should Harmony’s taxable financial income?

PROBLEM 17 (adapted): Passion Company, which started operations on July 1, 2012,

recognizes income from long term construction contracts under the percentage of
completion method in its financial statements and under the cost recovery method for
income tax reporting. Income under each method follows:
Cost Recovery Percentage of Completion
2012 P 0 P900,000
2013 1,200,000 1,800,000
2014 2,100,000 2,550,000
Te income tax rate was 32% for 2012 through 2014. Assuming that a new law provides that
for years after 2014, tax rate shall be 33%. There are no temporary differences. How much
should Passion report as deferred income tax liability in its December 31, 2014 statement of
financial position?

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“WISDOW IS SUPERIOR THAN KNOWLEDGE”…mikecpamicbmba@125487