ACT150

ASSIGNMENT

Name: April Rania Dimaampao

Course & Year: BS Accountancy 4th Year Class Schedule: 1:30 PM to 3:00 PM

I. Solve the following problems. Write your answers on the space provided after each requirement.

Problem 1:

S Company reported taxable income of P8,000,000 in the income tax return for the first year of
operations.

The entity revealed the following temporary differences between financial income and taxable income

Tax depreciation in excess of book depreciation 800,000

Accrual for product liability claim in excess of actual claim 1,200,000
Reported installment sales income in excess of taxable installment sales income 2,600,000
Income tax rate 30%

1. What amount should be reported as deferred tax asset at year-end? 360,000

2. What amount should be reported as deferred tax liability at year-end? 1,020,000
3. What amount should be reported as deferred tax expense? 660,000
4. What amount should be reported as total tax expense? 3,060,000

Solution:
1.) Accrual for product liability claim in excess of actual claim 1,200,000
30%
360,000 Deferred Tax Asset

2.) Tax depreciation in excess of book depreciation 800,000

Reported installment sales income 2,600,000
Total future taxable amount 3,400,000

3,400,000 x 30% = 1,020,000 Deferred Tax Liability

3.) Increase in Deferred Tax Liability 1,020,000

Increase in Deferred Tax Asset (360,000)
Deferred Tax Expense 660,000

4.) Taxable Income 8,000,000

Excess tax depreciation 800,000
Accrual for product liability claim (1,200,000)
Installment sales income 2,600,000
Accounting income subject to tax 10,200,000

10,200,000 x 30% = 3,060,000 Total tax expense

Problem 2:

On January 1, 2018, E Company acquired an equipment for P8,000,000. The equipment is depreciated
using straight line method based on useful life of 8 years with no residual value.

On January 1, 2021, after 3 years, the equipment was revalued at a replacement cost of P12,000,000
with no change in the useful life.

The pretax accounting income before depreciation for 2021 is P10,000,000. The income tax rate is 30%
and there are no other temporary differences at the beginning of the year.

1. What amount should be reported as deferred tax liability on January 1, 2021 arising from the
revaluation? 750,000
2. What amount should be reported as current tax expense for the current year? 2,700,000
3. What amount should be reported as deferred tax liability on December 31, 2021 arising from
the revaluation? 600,000
4. What amount should be reported as total tax expense for the current year? 2,550,000
5. What amount should be reported as revaluation surplus on December 31, 2021? 1,400,000

Solution
1.)

Cost Replacement cost Appreciation

Equipment 8,000,000 12,000,000 4,000,000
Accumulated depreciation
(8,000,000 x 3/8) 3,000,000
(12,000,000 x 3/8) 4,500,000 1,500,000
CA/SV/RS 5,000,000 7,500,000 2,500,000

Equipment 4,000,000
Accumulated depreciation 1,500,000
Revaluation surplus 2,500,000

Revaluation surplus 750,000

Deferred Tax Liability (2,500,000 x 30%) 750,000

2.) Pretax accounting income before depreciation 10,000,000

Depreciation on cost (5,000,000/5) (1,000,000)
Taxable income 9,000,000

3.) Equipment at replacement cost 12,000,000

Accumulate depreciation:
January 1, 2021 4,500,000
Depreciation on revalued amount for 2021
(7,500,000/5) 1,500,000 6,000,000
Carrying amount – December 31, 2021 6,000,000
 Equipment at cost 8,000,000
Accumulated depreciation:
January 1, 2021 3,000,000
Depreciation on cost for 2021 1,000,000 4,000,000
Tax base – December 31, 2021 4,000,000

Carrying amount – December 31, 2021 6,000,000

Tax base – December 31, 2021 (4,000,000)
Taxable temporary difference 2,000,000

2,000,000 x 30% = 600,000 Deferred tax liability – December 31, 2021

Deferred Tax Liability – Dec 2021 600,000

Deferred Tax Liability – Jan 2021 750,000
Decrease in deferred tax liability (150,000)

Deferred tax liability 150,000

Income tax expense 150,000

4.) Current tax expense 2,700,000

Decrease in deferred tax liability (150,000)
Total tax expense 2,550,000

5.) Revaluation surplus – January 1, 2021 2,500,000

Deferred tax liability (750,000)
Adjusted balance – January 1, 2021 1,750,000
Realization in 2021 (1,750,000/5) (350,000)
Revaluation surplus – December 31, 2021 1,400,000

Revaluation surplus 350,000

Retained earnings 350,000

Problem 3

W Company reported the following assets and liabilities at year-end:

Carrying Amount Tax base

Land 10,000,000 7,000,000
Machinery and equipment 5,000,000 4,000,000
Inventory 2,500,000 4,000,000
Accounts receivable 2,000,000 3,000,000
Liabilities 6,000,000 5,500,000

The entity had made a provision of inventory obsolescence of P1,500,000. Further, an impairment loss
against accounts receivable of P1,000,000 has been made. The tax rate is 30%.
 1. Deferred tax liability? 1,200,000
2. Deferred tax asset? 900,000
3. Deferred tax expense? 300,000

Solution
1.) Land:
Carrying amount 10,000,000
Tax base 7,000,000 3,000,000
Machinery and equipment:
Carrying amount 5,000,000
Tax base 4,000,000 1,000,000
Future taxable amount 4,000,000

4,000,000 x 30% = 1,200,000 Deferred tax liability

2.) Inventory:
Tax base 4,000,000
Carrying amount 2,500,000 1,500,000
Accounts receivable:
Tax base 3,000,000
Carrying amount 2,000,000 1,000,000
Liabilities:
Carrying amount 6,000,000
Tax base 5,500,000 500,000
Future deductible amount 3,000,000

3,000,000 x 30% = 900,000 Deferred tax asset

3.) Increase in deferred tax liability – tax expense 1,200,000

Increase in deferred tax asset – tax benefit (900,000)
Net deferred tax expense 300,000