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Sol. Man. - Chapter 9 - Income Taxes - 2021
Sol. Man. - Chapter 9 - Income Taxes - 2021
Sol. Man. - Chapter 9 - Income Taxes - 2021
Chapter 9
Income Taxes
8. FALSE – no effect.
9. FALSE
10. FALSE
PROBLEM 3: EXERCISES
1. Solution:
Requirement (a):
Multiply by
Description of items Description of items
Tax rate
Pretax income 900,000
Permanent differences:
Penalty 30,000
Interest on borrowings 3,000
Interest income (9,000)
924,00
Acctg. profit subj. to tax 0 30% ITE 277,200
Temporary differences:
Less: TTD Less: DTL
Excess depreciation (60,000) 30% (18,000)
Excess revenue (45,000) 30% (13,500)
Add: DTD Add: DTA:
Excess provision 54,000 30% 16,200
Advanced rent 12,000 30% 3,600
Unrealized loss 18,000 30% 5,400
903,00 270,90
Taxable profit 0 30% CTE 0
25,200 end.
2. Solutions:
Requirement (a) – DTL and DTA
Assets:
Excess of carrying amount of Trade A/R over its tax base 1,000,000
Excess of carrying amount of Equipment over its tax base 800,000
Taxable temporary difference (TTD) 1,800,000
Multiply by: Tax rate 30%
Deferred tax liability – Dec. 31, 20x1 540,000
Liability:
Excess of carrying amt. of accrued expenses over its tax base 400,000
Deductible temporary difference (DTD) 400,000
Multiply by: Tax rate 30%
Deferred tax asset – Dec. 31, 20x1 120,000
2. D
Current tax expense 117,000
Less: Quarterly income tax payments (29,000)
Income tax payable 88,000
3. B
Description of items Tax rate Description of items
Pretax income 2,700,000
Permanent differences:
Interest income (7,000)
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Insurance 50,000
Impairment loss 20,000
Acctg. profit subject to 2,763,00
tax 0 30% ITE 828,900
Temporary differences:
Less: TTD (FI>TI): Less: DTL:
Sales revenue (1.9M –
1.25M) (650,000) 30% (195,000)
Depreciation (600K –
280K) (320,000) 30% (96,000)
Add: DTD (FI<TI): Add: DTA:
Rent (320K – 540K) 220,000 30% 66,000
Warranty (280K – 120K) 160,000 30% 48,000
2,173,00 651,90
Taxable profit 0 30% CTE 0
4. A
Multiply by
Description of items Description of items
Tax rate
Pretax income 600,000
Permanent differences:
Less: Non-taxable income
Income from exempt
bonds (60,000)
Proceeds from life
insurance (100,000)
Accounting profit 440,00 Income tax 132,00
subject to tax 0 30% expense 0
Temporary differences:
Less: Taxable Less: Deferred
temporary difference tax liability
(TTD) 'FI>TI': (DTL):
Excess depreciation (120,000) 30% (36,000)
320,00 Current tax 96,00
Taxable profit 0 30% expense 0
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5. C
Income tax expense 40,800
Increase in DTL (6,600 – 3,600) (3,000)
Increase in DTA (9,600 – 2,700) 6,900
Current tax expense 44,700
6. C
Income tax payable
8,960 Jan. 1
Income tax Current tax expense
payments 67,600 71,520 (squeeze)
Dec. 31 12,880
7. D
Pretax income
(squeeze) 209,000
Add: Non-deductible expense:
Political contributions 20,000
Less: Interest income subject to final tax (10,000)
Accounting profit subject to tax 219,000
Less: Taxable temporary difference (TTD) 'FI>TI':
Excess revenue (60,000)
Add: Deductible temporary difference (DTD) 'FI<TI'
Excess warranty expense 9,000
Excess book depreciation 12,000
Taxable profit
(start) 180,000
8. A
Tax
Description of items Description of items
rate
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9. A
CA TB Difference
Equipment 800,000 654,545 (a) 145,455 TTD
Trade N/R 1,000,000 0 1,000,000 TTD
Unearned rent 540,000 0 540,000 DTD
Interest payable 60,000 60,000 permanent diff. (b)
Dividends payable ignored (c) ignored ignored
(a)
Carrying amount 800,000
Divide by: (100% - 10% depn. in Yr. 1 - 10% in Yr.
80%
2)
Historical cost 1,000,000
(b)
The interest creates a permanent difference because it is
recognized as expense under financial reporting but will never be
included in taxation.
(c)
The dividends declared do not create any permanent or
temporary difference because the dividends affect neither taxable
income nor financial income (i.e., the dividends are tax-exempt
and also not recognized as expense).
Tax
Description of items Description of items
rate
Pretax income 2,600,000
Permanent differences:
Interest 60,000
Acctg. profit subj. to tax 2,660,000 30% Income tax expense 798,000
Temporary differences:
30% Less: DTL (d) (73,637)
30% Add: DTA (e) 98,000
Taxable profit 30% Current tax expense 822,363
10. D
(a)
Pretax income 400,000
Less: Gain on involuntary conversion (20,000)
Accounting profit subject to tax 380,000
(1,052,000
Less: TTD )
Add: DTD before Operating loss carryforward 100,000
Operating loss carry forward (572,000)
11. B
The higher depreciation recognized in financial reporting
compared to taxation makes financial income less than taxable
income (FI<TI). Therefore, the ₱8,000 difference represents a
deductible temporary difference – an addition in the formula.
Income under financial reporting (equity method) 35,000
25,000
Dividends received
Tax deduction (80% x 25K) (20,000)
Taxable income 5,000
Taxable temporary difference (FI>TI) –
deduction 30,000
P a g e | 11
Multiply by
Description of items Description of items
Tax rate
Pretax income 100,000
Permanent differences: -
Accounting profit 100,00 Income tax
subject to tax 0 30% expense 30,000
Temporary differences:
Less: Taxable Less: Deferred
temporary difference tax liability
(TTD) 'FI>TI': (DTL):
Income (equity method) (30,000) 30% (9,000)
Add: Deductible
temporary difference Add: Deferred
(DTD) 'FI<TI': tax asset (DTA):
Excess depreciation 8,000 30% 2,400
Current tax 23,40
Taxable profit 78,000 30% expense 0
12. A
Tax
Description of items Description of items
rate
Pretax income 420,000
Permanent differences: -
Acctg. profit subj. to 420,00 30
tax 0 % Income tax expense 126,000
Temporary differences:
Add: Reversal of
TTD Add: Reversal of DTA
Collection of revenue 920,000 276,000
Less: Reversal of
DTD Less: Reversal of DTA
Settlement of (42,000
warranty (140,000) )
30 360,00
Taxable profit 1,200,000 % Current tax expense 0
P a g e | 12
13. A
304,00
DTA, year-end before adjustment 0
(91,200
Allowance (304,000 x 30%) )
212,80
DTA, year-end after adjustment 0
DTA, beg. 197,600
Increase in DTA in current year 15,200
174,80
Income tax expense 0 (squeeze)
Add: Increase in DTA in current year 15,200
Current tax expense (equal to income tax 190,00
payable) 0 (start)
14. A
Warranty cost Applicable tax Deferred tax
Year expected to be paid rate asset
20x2 100,000 32% 32,000
20x3 75,000 35% 26,250
Total 58,250
15. D
Tax rates
Pretax income START 1M
Permanent differences: -
Investment income (60K)
Life insurance proceeds (120K)
Share in profit (a) (580K)
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75.5
Acctg. profit subj. to tax 240K N/A ITE SQUEEZE
K
Temporary differences:
(52.5K
(150K) 35% DTL
Less: Depreciation (FI>TI) )
DT
Add: Accrued expenses (FI<TI) 80K 35% 28K
A
Taxable profit 170K 30% CTE 51K
(a)
The share in profit of associate is a permanent difference because
dividends received from the associate are tax-exempt. Thus, any
income (loss) recognized on the investment affects only financial
reporting but never taxation.
Solution guide:
Pretax income xx
Fines and penalties xx
Interest income on bank (xx
deposits )
Multiply by:
Acctg. Income subj. to tax xx 30% ITE xx
(xx Multiply by: (xx
Excess depreciation ) 30% DTL )
Multiply by:
Bad debt expense xx 30% DTA xx
Taxable profit xx CTE xx
(xx
DTL )
DTA xx
(Deferred tax expense)/ benefit xx
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1. Solutions:
Requirements (a): Income tax expense & Current tax expense
Tax
Description of items Description of items
rate
Pretax income 500,000
Permanent differences:
Penalties 5,000
Interest income (20,000)
Acctg. profit subj. to tax 485,000 30% Income tax expense 145,500
Temporary differences:
Excess revenue (FI>TI) (100,000) 30% Less: DTL (30,000)
Bad debts (FI<TI) 40,000 30% Add: DTA 12,000
Advances (FI<TI) 18,000 30% 5,400
Taxable profit 443,000 30% Current tax expense 132,900
2. Solutions:
Requirement (a): Deferred tax liability and Deferred tax asset
Assets:
Excess of carrying amount of software over its tax base 500,000
Excess of carrying amount of machinery over its tax base 400,000
Taxable temporary difference (TTD) 900,000
Multiply by: Tax rate 30%
Deferred tax liability – Dec. 31, 20x1 270,000
Liability:
Excess of carrying amount of accrued liability over its tax base 200,000
Deductible temporary difference (DTD) 200,000
Multiply by: Tax rate 30%
Deferred tax asset – Dec. 31, 20x1 60,000
3. Solution:
CA TB Difference
(a) A/R 10,000 0 10,000 TTD
(b) Prepaid insurance 20,000 20,000 -
(c) Interest payable 30,000 30,000 -
(d) Accrued expenses 40,000 0 40,000 DTD
5. Solution:
Financial Difference (FI >
Year Taxation
reporting TI)
20x1 960,000 360,000
20x2 1,560,000 840,000
Totals 2,520,000 1,200,000 1,320,000
Multiply by: Tax rate 25%
Deferred tax liability - Dec. 31, 20x2 330,000
6. Solution:
Description of items Tax rates
Pretax income START 1M
Permanent differences -
P a g e | 17
Alternative solution:
Deferred tax
Current tax
Income tax expense = expense/(benefit +
expense
)
Journal entry:
P a g e | 18
7. Solution:
Dec. Income tax expense (1.2M x 32%) 384,000
31,
Deferred tax liability (decrease) 64,000
20x1
Deferred tax asset (decrease) 96,000
Income tax payable 352,000
[(1.2M + 200K – 300K) x 32%] or
(384K + 64K – 96K)