Sample Problem #1

Animo Company leased a facility and received Php 600,000 annual rental payment on June 16, 2020. The beginning of the
lease was July 1, 2020. Rental income is taxable when received. The income tax rate 32%. Animo had no other permanent
or temporary difference.

1. Using the income statement liability method, what amount of deferred tax asset should Animo report on December
31, 2020 balance sheet?
Answer:
Accounting Income < Taxable Income

Accounting income (600,000 x 6 / 12) 300,000

Add: DTD 300,000
Taxable Income 600,000

Deferred Tax Asset = DTD x Tr

Deferred Tax Asset = 300,000 x 32%
Deferred Tax Asset = 96,000

2. Using the balance sheet liability method, what amount of deferred tax asset should Animo report on December 31,
2020 balance sheet?

Answer:
Carrying Amount of liability > Tax Base

Carrying amount of Unearned Rent 12/31 300,000

Less: Tax Base 0
Deductible Temporary Difference 300,000
Tax rate 32%
Deferred tax asset 96,000

Sample Problem #2
An entity reported the following information during the first year of operations:
Pretax financial income 9,000,000
Nontaxable interest received 1,000,000
Long-term loss accrual in excess of deductible amount 1,500,000
Tax depreciation in excess of financial depreciation 2,000,000
Income tax rate 30%
1. What is the current tax expense?
Answer: 2,250,000

2. What is the total tax expense?

Answer: 8M x 30% = 2,400,000

3. What is the deferred tax liability at year-end?

Answer: 2M x 30% = 600,000

4. What is the deferred tax asset at year-end?

Answer: 1,500,000 x 30% = 450,000

Accounting Income 9,000,000

Permanent difference: Nontaxable interest 1,000,000
Income subject to tax 8,000,000
Long-term loss accrual in excess of deductible amount 1,500,000
Excess depreciation (2,000,000)
Taxable Income 7,500,000
Tax rate 30%
Current Tax Expense 2,250,000

Problem 1
Viking Company reported pretax income of P1,000,000 in the income statement for the current year.

Tax return Accounting record

Rent income 70,000 120,000
Depreciation 280,000 220,000
Premiums on officers’ life insurance 90,000
Income tax rate 30%

1. What is the current provision for income tax for the current year?
Answer:

Pretax accounting income 1,000,000

Premium on officers’ life insurance – nondeductible 90,000
Accounting income subject to tax 1,090,000
Rent income – temporary difference (70k – 120k) - 50,000
Depreciation – temporary difference (280k – 220k) - 60,000
Taxable income 980,000

Current provision for income tax (980,000 x 30%) 294,000

2. What is the total tax expense?

Answer: Total tax expense (1,090,000 x 30%) 327,000
Problem 2
Huskie Company reported in the income statement for the current year pretax accounting income of P400,000.

The following items are treated differently per tax return and per book:

Tax return Book

Royalty income 20,000 40,000
Depreciation expense 125,000 100,000
Payment of a penalty None 15,000
Income tax rate 30%

1. What amount should be reported as current portion of income tax expense?

Answer:

Pretax accounting income 400,000

Payment of penalty – nondeductible 15,000
Accounting income subject to tax 415,000
Royalty income in excess of taxable amount (20,000)
Excess tax depreciation (25,000)
Taxable income 370,000

2. What is the total tax expense?

Answer:

Current tax expense (370,000 x 30%) 111,000

Total tax expense (415,000 x 30%) 124,500

Problem 3
Jasco Company is in the first year of operations and reported pretax accounting income of P4,000,000. The entity provided
the following information for the first year:

Premium on life insurance of key officer 100,000

Depreciation on tax return in excess of book depreciation 200,000
Interest on municipal bonds 50,000
Warranty expense 40,000
Actual warranty repairs 30,000
Bad debt expense 60,000
Beginning balance in allowance for bad debts 0
Ending balance in allowance for bad debts 40,000
Rent received in advance that will be recognized evenly
over the next three years 300,000

What is the taxable income for the first year?

Answer:

Pretax accounting income 4,000,000

Premium on life insurance 100,000
Excess tax depreciation (200,000)
Interest on municipal bonds (50,000)
Excess warranty expense (40,000 – 30,000) 10,000
Excess of bad debt expense over write-off (60,000 – 20,000) 40,000
Rent received in advance 300,000
Taxable income 4,200,000

Beginning allowance for bad debts 0

Bad debts expense 60,000
Total 60,000
Write-off (squeeze) (20,000)
Ending allowance for bad debts 40,000
II. CHECKING FOR UNDERSTANDING
1. In its December 31, 20x0 balance sheet, Quinn Co. reported a deferred tax asset of ₱9,000 and no deferred tax
liability. For 20x1, Quinn reported pretax financial statement income of ₱300,000. Temporary differences of
₱100,000 resulted in taxable income of ₱200,000 for 20x1. At December 31, 20x1, Quinn had cumulative taxable
differences of ₱70,000. Quinn's effective income tax rate is 30%. In its December 31, 20x1, income statement, what
should Quinn report as deferred income tax expense?

Answer:
Decrease in DTA (the beginning balance) P9,000
Increase in DTL (70k TTD x 30%) 21,000
Deferred tax expense P30,000

2. Dunn, Inc. uses the accrual method of accounting for financial reporting purposes and appropriately uses the
installment method of accounting for income tax purposes. Installment income of $1,500,000 will be collected in the
following years when the enacted tax rates are:
Collection of Income Enacted Tax Rates
2020 150,000 35%
2021 300,000 30%
2022 450,000 30%
2023 600,000 25%

The installment income is Dunn's only temporary difference. What amount should be included in the deferred income tax
liability in Dunn's December 31, 2020 balance sheet?

Answer:
DTL = CI x ETR
Collection of Income Enacted Tax Rates Deferred tax liability
2020 P150,000 35% P52,500 (not included)
2021 P300,000 30% P90,000
2022 P450,000 30% P135,000
2023 P600,000 25% P150,000
P375,000

PROBLEM 1
The records for Siemens Inc. show this data for 2020:
• Gross profit on installment sales recorded on the books was Php 360,000. Gross profit from collections of
installment receivables was Php 240,000.
• Non-deductible premium on life insurance was Php 3,800.
• Machinery was acquired in January for Php 300,000. Straight-line depreciation over a ten-year life (no salvage
value) is used. For tax purposes, Siemens may deduct 14% for 2020.
• Interest received on tax exempt government bonds was Php 9,000.
• The estimated warranty liability related to 2020 sales was Php 21,600. Repair costs under warranties during 2020
were Php 13,600. The remainder will be incurred in 2021. Pretax financial income is Php 600,000. The tax rate is
30%.

Requirements:
Accounting Tax

360,000 240,000 120,000 TTD

3,800 PD

30,000 42,000 12,000 TTD

-9,000 PD

21,600 13,600 8,000 DTD

Accounting Income 600,000

Add: Non-deductible expense 3,800

Less: Non-taxable income (9,000)

Accounting profit subject to tax 594,800 30% 178,440

Less: Taxable temporary difference (120,000 +
12,000) (132,000) 30% (39,600)
Add: Deductible temporary difference (21,600 +
13,600) 8,000 30% 2,400

Taxable Income 470,800 30% 141,240

a. What is the income tax expense to be recognized?

Answer:
Tax Expense P178,440
 b. How much is the deferred tax liability and deferred tax asset?
Answer:
Deferred Tax Liability P(39,600)
Deferred Tax Asset P2,400

c. Provide the journal entry to record the income taxes for 2020.
Answer:
Income Tax Expense P178,440
Deferred Tax Asset 2,400
Deferred Tax Liability P39,600
Income Tax Payable 141,240

PROBLEM 2
Bee Corp. prepared the following reconciliation between book income and taxable income for the year ended December
31, 20x0:
Pretax accounting income 500,000
Taxable income 300,000
Difference 200,000

Interest on municipal bonds 50,000

Lower depreciation per financial statements 150,000
Total differences 200,000

Bee's effective income tax rate for 20x0 is 30%. The depreciation difference will reverse equally over the next three years
at enacted tax rates as follows:
Years Tax rates
20x1 30%
20x2 25%
20x3 25%

Requirements:
a. In Bee's 20x0 income statement, the current portion of its provision for income taxes should be
Answer:
Taxable income P300,000 x Tax Rates 30% = P90,000 Current Tax Expense

b. In Bee's 20x0 financial statements, the deferred portion of its provision for income taxes should be

Answer:
Year *Reversals Tax rate Deferred tax
20x1 P50,000 30% P15,000
20x2 P50,000 25% P12,500
20x3 P50,000 25% P12,500
P40,000

Solution:
*Lower depreciation per financial statements P150,000
Divided by: 3 years
Equal amounts of reversals P50,000

PROBLEM 3
In 2020, its first year of operations, SEA Corp. has a Php 1,000,000 net operating loss when the tax rate is 30%. The
Bureau of Internal Revenue has extended to five years the carry-over period for net operating losses incurred by businesses
in 2020 and 2021 due to the impact of the coronavirus pandemic.

2020 2021
Accounting Income (Loss) P(1,000,000) P400,000
Allowable deduction (400,000)
0

a. What is the entry in 2020 to record the tax loss carryforward?

Answer:
*-1M x 30% x -1
Deferred Tax Asset *P300,000
Income Tax Benefit P300,000

b. In 2021, SEA Corp has Php 400,000 taxable income and tax rate remains to be 30%. What entry would be
made in 2021 to recognize the loss carryforward?
Answer:
*-400k x 30% x -1
Income Tax Expense *P120,000
Deferred Tax Asset P120,000