TOPIC 7: Accounting for Income Tax

Lecture 01 - Basic Principles of Accounting for Income Tax

Reference: Intermediate Accounting 2 (2020 edition), Valix, Peralta, Valix; Practical Accounting 1, Volume 2 (2016 CPA Exam Edition), Valix, Peralta, Valix

General jutsu:

DIFFERENCE OF ACCOUNTING INCOME AND TAXABLE INCOME

Accounting Income - also known as financial income, the net income for the period before deducting income tax expense.
Taxable Income - the income for the period determined in accordance with the rules established by the taxation authorities upon
which income taxes are payable or recoverable.

The differences can also be classified into two:

a. Permanent differences - items of revenue and expense with are included in either accounting income or taxable income but
will never be included in the other. These pertain to nontaxable revenue and nondeductible expenses . They do not give rise to
deferred tax assets and liabilities because they have no future tax consequences. Examples include:
- Interest income on deposits
- Dividends received
- Life insurance premium
- Tax penalties, surcharges, and fines (nondeductible)

b. Temporary differences - differences between the carrying amount of an asset or liability and the tax base.
Tax base of an asset - the amount that will be deductible for tax purposes against future income.
Example: If an entity has appropriately capitalized P1,000,000 as software development cost, the carrying amount is
P1,000,000 for accounting purposes. However, if this amount is allowed as a one-time deduction for tax purposes, the
tax base is zero because the entire amount is expensed in the current year.
Tax base of a liability - the carrying amount less the amount that will be deductible for tax purposes in the future.
Example: If an entity has recognized an estimated warranty liability of P500,000, the carrying amount is P500,000 for
accounting purposes. However, an estimated warranty cost is deductible only when actually paid. Thus, the tax base is
zero because the estimated warranty cost is a future deductible account.

Accordingly, temporary differences give rise either to:

a. Deferred tax liability - the amount of income tax payable in future periods with respect to a taxable temporary
difference. This is the deferred tax consequence attributable to a taxable temporary difference or future taxable amount.
b. Deferred tax asset - the amount of income tax recoverable in future periods with respect to deductible temporary
difference and the operating loss carryforward. This is the deferred tax consequence attributable to a future deductible
amount and operating loss carryforward.

ACCOUNTING FOR DEFERRED TAX ASSET AND LIABILITY (Interperiod Tax Allocation approach)
Determining the taxable income:
Income tax expense XXX
Income tax payable (Tax rate x current tax expense) XXX
Current tax expense is the amount of income tax paid or payable for a year as determined by applying the provisions of the
enacted tax law to the taxable income)

Determining taxable temporary differences:

Income tax expense XXX
Deferred tax liability (Taxable temporary difference x
XXX
Tax rate)

Determining deductible temporary differences

Deferred tax asset (deductible temporary differences x
XXX
tax rate)
Income tax benefit XXX

Determining total income tax expense for the year:

Current tax expense XXX
Add: Deferred tax expense arising from deductible
XXX
temporary differences
Less: Income tax benefit arising from deductible
(XXX)
temporary difference
XXX

Determining taxable income for the year:

Accounting income XXX
Add: Nondeductible permanent differences XXX
Less: Nontaxable permanent differences (XXX)
Accounting income subject to tax XXX
Add: Future deductible temporary differences XXX
Less: Future taxable temporary differences (XXX)
XXX

Assuming there is no future enacted income tax rate, the total income tax expense for the year is the accounting income subject
to tax multiplied by the tax rate.

TIPS! FOR BEGINNERS!

1. Always remember that tax accounting is cash basis. This means that an income is recognized when cash is collected, and
expenses are recognized when it is paid. An exception in this case is depreciation and amortization since tax accounting still
recognizes them in the methods they appropriately choose.
2. Always compute first the taxable income before making journal entries.
3. Some temporary differences that lead to:
a. Deferred tax liability (future taxable differences)
- Asset is revalued upward or appreciated and no equivalent adjustment is made for tax purposes.
 - Carrying amount of investment in subsidiary, associate, or joint venture.
- Cost of business combination that is accounted for
- Excess tax depreciation
- Gross income on installment sale but is future taxable (revenue recognized at point of sale under financial reporting but is
taxable only when installment payments are received)
- Capitalizable expenses
- Prepayments capitalized and amortized as expense under financial reporting while deducted in full upon payment under
taxation.
b. Deferred tax asset (future deductible differences)
- Probable and measurable litigation loss
- Estimated product warranty cost
- Research and development cost
- Impairment loss
- Doubtful accounts
- Unearned income, or advanced cash collection
4. Some permanent differences include:
a. Nondeductible permanent difference (usually expenses)
- Life insurance premium on officers
- Meals and entertainment expenses
- Goodwill amortization or impairment
- Penalty and fine payments
b. Nontaxable permanent difference (usually revenues)
- Life insurance proceeds
- Interest income on government bonds
- Interest income on deposits
- Dividends received
- Lotto winnings

ABC Company reported pretax financial income of P2,000,000 for the year ended December 31, 2020. The taxable income as
PROBLEM
P1,500,000.

The difference is due to accelerated depreciation for income tax purposes.

The income tax rate is 30% and ABC Company made estimated tax payments of P200,000 during the current year.

REQUIRED Prepare journal entries for 2020.

2020
Dec 31 Income tax expense PHP 450,000.00
Income tax payable (1,500,000 x 30%) PHP 450,000.00
to record current tax expense for the year

Income tax expense PHP 150,000.00

 Deferred tax liability (500,000 x 30%) PHP 150,000.00
to record deferred tax liability

Income tax payable PHP 200,000.00

Cash PHP 200,000.00
to record estimated tax payment

Zeus Company reported pretax financial income of P3,000,000 for the year ended December 31, 2020. The taxable income was
PROBLEM
P4,000,000. The difference is due to rental received in advance. Rental income is taxable when received.

The income tax rate is 30% and Zeus Company made sestimated tax payment of P500,000 during the current year.

REQUIRED Prepare journal entries for 2020.

2020
Dec 31 Income tax expense PHP 1,200,000.00
Income tax payable (4,000,000 x 30%) PHP 1,200,000.00
to record current tax expense for the year

Deferred tax asset (1,000,000 x 30%) PHP 300,000.00

Income tax benefit PHP 300,000.00
to record deferred tax asset

Income tax payable PHP 500,000.00

Cash PHP 500,000.00
to record estimated tax payment

In 2020, Argentina Company received an advance payment of P1,000,000 which was subject to tax but not reported in accounting
PROBLEM
income until 2021.

The income statement and tax return showed the following:

2020 2021
Income before tax per income statement PHP 6,000,000.00 PHP 9,000,000.00
Income before tax per tax return PHP 7,000,000.00 PHP 8,000,000.00
Income tax rate 30% 30%

REQUIRED Prepare journal entries for 2020 and 2021.

2020
Dec 31 Income tax expense PHP 2,100,000.00
Income tax payable (7,000,000 x 30%) PHP 2,100,000.00
 to record current tax expense for the year

Deferred tax asset (1,000,000 x 30%) PHP 300,000.00

Income tax benefit PHP 300,000.00
to record deferred tax asset

2021
Dec 31 Income tax expense PHP 2,400,000.00
Income tax payable (8,000,000 x 30%) PHP 2,400,000.00
to record current tax expense for the year

Income tax expense PHP 300,000.00

Deferred tax asset (1,000,000 x 30%) PHP 300,000.00
to record deferred tax liability

REQUIRED Present the income tax expense for each year.

2020
Income before income tax PHP 6,000,000.00
Less: Income tax expense
Current tax expense PHP 2,100,000.00
Less: Income tax benefit PHP (300,000.00) PHP 1,800,000.00
Net income PHP 4,200,000.00

2021
Income before income tax PHP 9,000,000.00
Less: Income tax expense
Current tax expense PHP 2,400,000.00
Deferred tax asset decrease PHP 300,000.00 PHP 2,700,000.00
Net income PHP 6,300,000.00

Colombo Company included in 2020 a deferred income on installment sale of P500,000 in accounting income. This deferred
PROBLEM
income is expected to reverse for tax purposes in 2021.

2020 2021
Accounting income PHP 5,500,000.00 PHP 7,000,000.00
Taxable income PHP 5,000,000.00 PHP 7,500,000.00
Income tax rate 30% 30%

REQUIRED Prepare journal entries for 2020 and 2021.

2020
Dec 31 Income tax expense PHP 1,500,000.00
 Income tax payable (5,000,000 x 30%) PHP 1,500,000.00
to record current tax expense for the year

Income tax expense PHP 150,000.00

Deferred tax liability (500,000 x 30%) PHP 150,000.00
to record deferred tax asset

2021
Dec 31 Income tax expense PHP 2,250,000.00
Income tax payable (7,500,000 x 30%) PHP 2,250,000.00
to record current tax expense for the year

Deferred tax liability (500,000 x 30%) PHP 150,000.00

Income tax expense PHP 150,000.00
to decrease deferred tax liability

REQUIRED Present the income tax expense for each year.

2020
Income before income tax PHP 5,500,000.00
Less: Income tax expense
Current tax expense PHP 1,500,000.00
Add: Deferred tax liability PHP 150,000.00 PHP 1,650,000.00
Net income PHP 3,850,000.00

2021
Income before income tax PHP 7,000,000.00
Less: Income tax expense
Current tax expense PHP 2,250,000.00
Deferred tax liability decrease PHP (150,000.00) PHP 2,100,000.00
Net income PHP 4,900,000.00

On January 1, 2020, Valley Company entered into a 3-year construction contract that had an estimated gross revenue of
PROBLEM
P3,000,000.

The entity used the percentage of completion method in recognizing income and reported construction income as:

2020 PHP 600,000.00

2021 PHP 1,500,000.00
2022 PHP 900,000.00

The cost recovery method is used for income tax purposes and the entity reported income on the tax return as:
 2020 PHP -
2021 PHP -
2022 PHP 3,000,000.00

This is the only timing difference between pretax accounting income and taxable income.

The entity reported income before construction income and tax as:

2020 PHP 2,400,000.00

2021 PHP 3,600,000.00
2022 PHP 3,200,000.00
Income tax rate 30%

REQUIRED Prepare journal entries for 2020, 2021, and 2022.

Financial accountant's books 2020 2021 2022

Income before construction income and tax PHP 2,400,000.00 PHP 3,600,000.00 PHP 3,200,000.00
Construction income PHP 600,000.00 PHP 1,500,000.00 PHP 900,000.00
Income before tax PHP 3,000,000.00 PHP 5,100,000.00 PHP 4,100,000.00
Less: Income tax expense PHP 900,000.00 PHP 1,530,000.00 PHP 1,230,000.00
Net income PHP 2,100,000.00 PHP 3,570,000.00 PHP 2,870,000.00

Tax accountant's books 2020 2021 2022

Income before construction income and tax PHP 2,400,000.00 PHP 3,600,000.00 PHP 3,200,000.00
Construction income PHP 600,000.00 PHP 1,500,000.00 PHP 3,000,000.00
Income before tax PHP 3,000,000.00 PHP 5,100,000.00 PHP 6,200,000.00
Less: Income tax expense PHP 900,000.00 PHP 1,530,000.00 PHP 2,490,000.00
Net income PHP 2,100,000.00 PHP 3,570,000.00 PHP 3,710,000.00

2020
Dec 31 Cash PHP 2,400,000.00
Income PHP 2,400,000.00

Income tax expense PHP 720,000.00

Income tax payable (2,400,000 x 30%) PHP 720,000.00

Income tax expense PHP 180,000.00

Deferred tax liability (600,000 x 30%) PHP 180,000.00

2021
Dec 31 Cash PHP 3,600,000.00
Income PHP 3,600,000.00

Income tax expense PHP 1,080,000.00

 Income tax payable (3,600,000 x 30%) PHP 1,080,000.00

Income tax expense PHP 450,000.00

Deferred tax liability (1,500,000 x 30%) PHP 450,000.00

2022
Dec 31 Cash PHP 3,200,000.00
Income PHP 3,200,000.00

Income tax expense PHP 1,860,000.00

Income tax payable ((3,200,000 + 3,000,000) x 30%) PHP 1,860,000.00

Income tax expense PHP 630,000.00

Deferred tax liability ((6,200,000 - 4,100,00) x 30%) PHP 630,000.00

On January 1, 2020, Aye Company purchased an equipment for P1,000,000. The equipment has an estimated useful life of 4 years
PROBLEM
and no residual value.

The entity used the straight line method of depreciation for accounting purposes and the SYD method for tax purposes. The
comparative depreciation charges for each of the four years are:

Straight line SYD method

2020 PHP 250,000.00 PHP 400,000.00
2021 PHP 250,000.00 PHP 300,000.00
2022 PHP 250,000.00 PHP 200,000.00
2023 PHP 250,000.00 PHP 100,000.00

The depreciation charge is the only timing difference between the accounting income and taxable income.

Aye Company generated P4,000,000 income before depreciation and tax for each of the four years and that the applicable tax
rate is 30%.

REQUIRED Prepare journal entries relating to income tax for 2020, 2021, 2022, and 2023.

Straight line SYD method (Taxable

(Accounting income) income)
Income before tax (4,000,000 less depreciation)
2020 PHP 3,750,000.00 PHP 3,600,000.00
2021 PHP 3,750,000.00 PHP 3,700,000.00
2022 PHP 3,750,000.00 PHP 3,800,000.00
2023 PHP 3,750,000.00 PHP 3,900,000.00
 2020
Dec 31 Income tax expense PHP 1,080,000.00
Income tax payable PHP 1,080,000.00

Income tax expense PHP 45,000.00

Deferred tax liability PHP 45,000.00

2021
Dec 31 Income tax expense PHP 1,110,000.00
Income tax payable PHP 1,110,000.00

Income tax expense PHP 15,000.00

Deferred tax liability PHP 15,000.00

2022
Dec 31 Income tax expense PHP 1,140,000.00
Income tax payable PHP 1,140,000.00

Deferred tax liability PHP 15,000.00

Income tax expense PHP 15,000.00

2023
Dec 31 Income tax expense PHP 1,170,000.00
Income tax payable PHP 1,170,000.00

Deferred tax liability PHP 45,000.00

Income tax expense PHP 45,000.00

PROBLEM Complex Company reported the following information relating to income before tax for accounting purposes:

2020 PHP 2,000,000.00

2021 PHP 3,000,000.00
2022 PHP 4,000,000.00
2023 PHP 5,000,000.00
Income tax rate 30%

In 2020, the entity recognized doubtful accounts of P100,000. Such accounts were considered worthless or uncollectible in 2021.

Analysis of the tax and book records disclosed P120,000 in unearned rent income on December 31, 2020 that has been
recognized as taxable income in 2020 when the cash was received.

Also, on December 31, 2020, estimated warranty cost of P300,000 had been recognized as expense on the books in 2020 when
the product sales were made but is not deductible for tax purposes until paid.
 The unearned rent income on December 31, 2020 is realized and the actual warranty payments were made as follows:

Actual warranty
Rent income per book
payment
2021 PHP 40,000.00 PHP 20,000.00
2022 PHP 40,000.00 PHP 80,000.00
2023 PHP 40,000.00 PHP 200,000.00

REQUIRED Prepare journal entries relating to income tax arising from temporary differences for 2020, 2021, 2022, and 2023.

Accounting income Taxable income

2020 PHP 2,000,000.00 PHP 2,520,000.00
2021 PHP 3,000,000.00 PHP 2,840,000.00
2022 PHP 4,000,000.00 PHP 3,880,000.00
2023 PHP 5,000,000.00 PHP 4,760,000.00

The taxable income is computed as follows:

2020 2021 2022 2023
Accounting income PHP 2,000,000.00 PHP 3,000,000.00 PHP 4,000,000.00 PHP 5,000,000.00
Doubtful accounts PHP 100,000.00 PHP (100,000.00)
Rent income PHP 120,000.00 PHP (40,000.00) PHP (40,000.00) PHP (40,000.00)
Warranty cost PHP 300,000.00 PHP (20,000.00) PHP (80,000.00) PHP (200,000.00)
Taxable income PHP 2,520,000.00 PHP 2,840,000.00 PHP 3,880,000.00 PHP 4,760,000.00

2020
Dec 31 Income tax expense PHP 756,000.00
Income tax payable PHP 756,000.00

Deferred tax asset PHP 156,000.00

Income tax benefit PHP 156,000.00

2021
Dec 31 Income tax expense PHP 852,000.00
Income tax payable PHP 852,000.00

Income tax expense PHP 48,000.00

Deferred tax asset PHP 48,000.00

2022
Dec 31 Income tax expense PHP 1,164,000.00
Income tax payable PHP 1,164,000.00

Income tax expense PHP 36,000.00

 Deferred tax asset PHP 36,000.00

2023
Dec 31 Income tax expense PHP 1,428,000.00
Income tax payable PHP 1,428,000.00

Income tax expense PHP 72,000.00

Deferred tax asset PHP 72,000.00

Shangrila Company reported a pretax accounting income of P7,900,000 for the year ended December 31, 2020. Temporary
PROBLEM
differences have been identified as follows:

Tax depreciation in excess of accounting depreciation PHP 1,000,000.00

Litigation loss accrued for financial accounting purposes
PHP 400,000.00
but will be deducted for tax purposes in the distant future
Warranty cost expensed for financial accounting purposes
exceeded the amount currently deductible for tax PHP 300,000.00
purposes by

The warranty liability is classified as a current liability in the entity's statement of financial position. Income tax rate is 30%. There
are no temporary differences at the beginning of the current year.

REQUIRED Prepare journal entries to record the income tax and deferred tax for 2020.

Accounting income PHP 7,900,000.00

Less: Taxable temporary differences
Tax depreciation in excess of accounting depreciation PHP (1,000,000.00)
Add: Future deductible temporary differences
Litigation loss accrued for financial accounting purposes
but will be deducted for tax purposes in the distant PHP 400,000.00
future
Warranty cost expensed for financial accounting
purposes exceeded the amount currently deductible for PHP 300,000.00
tax purposes by
Taxable income PHP 7,600,000.00

2020
Dec 31 Income tax expense PHP 2,280,000.00
Income tax payable PHP 2,280,000.00

Income tax expense PHP 300,000.00

Deferred tax liability PHP 300,000.00
 Deferred tax asset PHP 210,000.00
Income tax benefit PHP 210,000.00

On December 31, 2020, the statement of financial position accounts of Simple Company have the same basis for accounting and
PROBLEM
tax purposes, except the following:

Carrying amount Tax base Difference

Computer software cost PHP 4,000,000.00 PHP 4,000,000.00
Equipment PHP 15,000,000.00 PHP 12,000,000.00 PHP 3,000,000.00
Accrued liability - health care PHP 2,000,000.00 PHP 2,000,000.00

In January 2020, the entity incurred cost of P6,000,000 in relation to the development of a computer software product.
Considering the technical feasibility of the product, this was capitalized and amortized over 3 years for accounting purposes using
straight line. However, the total amount was expensed in 2020 for tax purposes.

The equipment was acquired on January 1, 2020 for P20,000,000. The useful life of the equipment is 4 years with no residual
value. This is depreciated using the straight line for accounting purposes and sum of year's digits method for tax purposes.

In January 2020, the entity entered into an agreement with the employees to provide health care benefits. The cost of such plan
for 2020 was P2,000,000. This amount was accrued as expense in 2020 for accounting purposes. However, health care benefits
are deductible for tax purposes only when actually paid.

The pretax accounting income for 2020 is P13,000,000. The tax rate is 30% and there are no deferred taxes on January 1, 2020.

REQUIRED Prepare journal entries to record the income tax and deferred tax for 2020.

In this statement of financial position approach, we are already given the information given. All we have to do is just compute the
taxable temporary differences to determine how much will be taxed.

Accounting income PHP 13,000,000.00

Less: Taxable differences
Computer software cost PHP 4,000,000.00
Equipment PHP 3,000,000.00 PHP 7,000,000.00
Add: Future deductible differences
Accrued liability - health care PHP 2,000,000.00
Taxable income PHP 8,000,000.00

Income tax expense PHP 2,400,000.00

Income tax payable PHP 2,400,000.00

Income tax expense PHP 2,100,000.00

 Deferred tax liability PHP 2,100,000.00

Deferred tax asset PHP 600,000.00

Income tax benefit PHP 600,000.00

On January 1, 2017, Easy Company acquired an equipment for P8,000,000. The equipment is depreciated using straight line
PROBLEM
method based on a useful life of 8 years with no residual value.

On January 1, 2020, 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 2020 is P10,000,000. Income tax rate is 30% and there are no other
temporary differences at the beginning of the year.

REQUIRED Prepare journal entries for 2020.

Cost Replacement cost Appreciation

Equipment PHP 8,000,000.00 PHP 12,000,000.00 PHP 4,000,000.00
Less: Accumulated depreciation
Per cost (8,000,000 x 3/8) PHP 3,000,000.00
Per replacement cost (12,000,000 x 3/8) PHP 4,500,000.00 PHP 1,500,000.00
Carrying amount / sound value / revaluation surplus PHP 5,000,000.00 PHP 7,500,000.00 PHP 2,500,000.00
Less: Deferred tax liability (2,500,000 x 30%) PHP 750,000.00
Net revaluation surplus PHP 1,750,000.00

2020
Jan 1 Equipment PHP 4,000,000.00
Accumulated depreciation PHP 1,500,000.00
Revaluation surplus PHP 2,500,000.00
to record the revaluation of the equipment

Revaluation surplus PHP 750,000.00

Deferred tax liability PHP 750,000.00
to record the deferred tax liability

To compute for the taxable income:

Accounting income PHP 10,000,000.00

Less: Tax depreciation based on carrying amount on cost
PHP 1,000,000.00
(5,000,000 x (8 - 3 years)
Taxable income PHP 9,000,000.00
 To compute for the deferred tax liability:

Carrying amount at replacement cost

Equipment in replacement cost PHP 12,000,000.00
Less: Accumulated depreciation
January 1, 2020 PHP 4,500,000.00
Depreciation on revalued amount for 2020 (7,500,000 /
PHP 1,500,000.00 PHP 6,000,000.00 PHP 6,000,000.00
5 years remaining)
Less: Tax base
Equipment at cost PHP 8,000,000.00
Less: Accumulated depreciation
January 1, 2020 PHP 3,000,000.00
Depreciation on cost for 2020 (5,000,000 / 5 years
PHP 1,000,000.00 PHP 4,000,000.00 PHP 4,000,000.00
remaining)
Taxable temporary difference PHP 2,000,000.00
Multiplied by tax rate 30%
Required deferred tax liability for 2020 PHP 600,000.00
Less: Deferred tax liability, Jan 1, 2020 PHP 750,000.00
Increase (decrease) in deferred tax liability PHP (150,000.00)

2020
Dec 31 Income tax expense PHP 2,700,000.00
Income tax payable PHP 2,700,000.00

Deferred tax liability PHP 150,000.00

Income tax expense PHP 150,000.00

Revaluation surplus PHP 350,000.00

Retained earnings PHP 350,000.00

PROBLEM Aloha Company provided the following information on December 31, 2020:

Carrying amount Tax base Difference

Accounts receivable PHP 1,500,000.00 PHP 1,750,000.00 PHP (250,000.00)
Motor vehicle PHP 1,650,000.00 PHP 1,250,000.00 PHP 400,000.00
Provision for warranty PHP 120,000.00 PHP 120,000.00
Deposits received in advance PHP 150,000.00 PHP 150,000.00

The depreciation rates for accounting and taxation are 15% and 25% respectively.

The deposits are taxable when received and warranty costs are deductible when paid.
 An allowance for doubtful accounts of P250,000 has raised against accounts receivable for accounting purposes but such
accounts are deductible only when written off as uncollectible.

The entity showed accounting income before tax of P8,000,000 for 2020 and the income tax rate is 30%. There are no temporary
differences at the beginning of the year.

Determine the deferred tax liability and the deferred tax asset and the net deferred tax expense on December 31, 2020. Also
REQUIRED
compute for the current tax expense and determine the total income tax expense for 2020.

Accounting income PHP 8,000,000.00

Add: Deductible temporary differences
Warranty provision PHP 120,000.00
Doubtful accounts PHP 250,000.00
Deposit earned in advance PHP 150,000.00 PHP 520,000.00
Less: Taxable temporary differences
Equipment PHP 400,000.00 PHP 400,000.00
Taxable income PHP 8,120,000.00

Deferred tax liability (400,000 x 30%) PHP 120,000.00

Less: Deferred tax asset (520,000 x 30%) PHP 156,000.00
Net deferred tax expense PHP (36,000.00)

Current tax expense (8,120,000 x 30%) PHP 2,436,000.00

Add: Net deferred tax expense PHP (36,000.00)
Total income tax expense PHP 2,400,000.00

OTHER METHOD
Accounting Income Taxable Income Deferred Tax Liability Deferred Tax Asset
Income before temporary difference PHP 8,370,000.00 PHP 8,370,000.00
Doubtful accounts PHP (250,000.00) PHP 250,000.00
Depreciation PHP (400,000.00) PHP 400,000.00
Provision for warranty PHP (120,000.00) PHP 120,000.00
Deposit earned in advance PHP 150,000.00 PHP 150,000.00
Income after temporary difference PHP 8,000,000.00 PHP 8,120,000.00 PHP 400,000.00 PHP 520,000.00
Multiplied by tax rate 30% 30% 30% 30%
Total PHP 2,400,000.00 PHP 2,436,000.00 PHP 120,000.00 PHP 156,000.00

Therefore, taxable income amounts to P8,120,000, Net deferred tax benefit is P36,000, and total income tax expense amounts
to P2,400,000.

Complex Company reported pretax accounting income of P12,800,000 for 2020 and P18,300,000 for 2021. The income tax rate is
PROBLEM
30%.
 On January 1, 2020, the entity had deferred tax asset of P450,000 and no deferred tax liability. The deferred tax asset was due to
a provision of P500,000 recognized on December 31, 2020 recognized on December 31, 2019 settled in 2020 at which time it was
tax deductible.

The other reason for the deferred tax asset was rent of P1,000,000 collected in 2019 but earned only in 2020.

Life insurance premiums of P200,000 were recognized each year on key officers for 2020 and 2021.

The entity paid for a two year casualty insurance for P6,000,000 on January 1, 2020. The entire premium is tax deductible when
paid.

The entity collected rent from leasing some of its equipment. The rent is recognized as revenue when earned but taxable when
collected.

2020 2021
Rent collected PHP 3,300,000.00 PHP 3,500,000.00
Rent earned PHP 2,500,000.00 PHP 3,300,000.00

The entity had trading investments. All gains and losses are recognized for tax purposes when the investments are sold. During
2020, the entity recognized P1,700,000 unrealized losses on trading investments which were sold in 2021.

REQUIRED Compute for the taxable income for 2020 and 2021.

2020 2021
Pretax accounting income PHP 12,800,000.00 PHP 18,300,000.00
Nondeductible permanent differences
Life insurance premium PHP 200,000.00 PHP 200,000.00
Nontaxable permanent differences
Provision settled but recognized in 2019 PHP (500,000.00) Taxed in 2019
Rent earned but collected in 2019 PHP (1,000,000.00) Taxed in 2019
Accounting income subject to tax PHP 11,500,000.00 PHP 18,500,000.00
Add: Future deductible temporary differences
Rent collected PHP 3,300,000.00 PHP 3,500,000.00
Unrealized loss on trading investment PHP 1,700,000.00 PHP (1,700,000.00)
Casualty insurance provision PHP 300,000.00 PHP 300,000.00
Less: Future taxable temporary differences
Casualty isnsurance paid PHP (600,000.00)
Rent earned PHP (2,500,000.00) PHP (3,300,000.00)
Taxable income PHP 13,700,000.00 PHP 17,300,000.00

Therefore the taxable income amounts for 2020 and 2021 amount to P13,700,000 and P17,300,000 respectively.
PROBLEM Howard Realty reported the following revenues and expenses for the current year:

Debits:
Cost of properties sold PHP 770,000.00
Loss on suit for damages PHP 30,000.00
Operating expenses PHP 135,000.00

Credits:
Sale of commercial properties PHP 900,000.00
Rental revenues PHP 120,000.00
Oil royalties received PHP 40,000.00

Additional information:

a. 30% tax rate

b. Following are items with different treatment between accounting and tax issues:
- PROPERTY SALES: Of the gross profit earned on property sales, only 60% is subject to tax in the current year; the remaining
40% is deferred
- CAPITALIZABLE EXPENSES: Interest and taxes during construction are capitalized. For tax purposes, these are expensed as
incurred. Included in the inventory of properties was P 28,000 of interest and taxes.
- ROYALTIES: Oil royalties have no cost basis for tax purposes. A deduction for percentage depletion, equal to 27.5% of
royalties received, is allowed in computing taxable income.
- RENT: In addition to rent income reported, P 10,000 in rent has been received in advance and subject to income tax in the
current year.
- DAMAGE SUIT: The loss on the damage suit is only an estimate and not deductible for tax purposes until the final verdict is
rendered.

REQUIRED Prepare one compound journal entry to record the income tax

Sale of commercial properties PHP 900,000.00

Less: Cost of properties sold PHP 770,000.00
Gross profit earned on property sales PHP 130,000.00
Rental revenues PHP 120,000.00
Oil royalties received PHP 40,000.00
Total revenue PHP 290,000.00
Less: Expenses
Loss on suit for damages PHP 30,000.00
Operating expenses PHP 135,000.00
Pretax accounting income PHP 125,000.00
Less: Nontaxable royalty income (27.5% x 40,000) PHP (11,000.00)
Accounting income subject to tax PHP 114,000.00
Add: Future deductible differences
Loss on suit for damages PHP 30,000.00
Rent received in advance PHP 10,000.00
 Less: Future taxable differences
40% of gross profit earned on property sales deferred PHP (52,000.00)
Capitalizable expenses PHP (28,000.00)
Taxable income PHP 74,000.00
Current tax expense (Taxable income x 0.30) PHP 22,200.00

Income tax expense PHP 34,200.00

Deferred tax asset PHP 12,000.00
Income tax payable PHP 22,200.00
Deferred tax liability PHP 24,000.00

PROBLEM The comparative income statement of a business is shown below:

YEAR 2 YEAR 1
Net sales PHP 920,000.00 PHP 810,000.00
Cost of goods sold PHP 485,000.00 PHP 444,000.00
Operating expenses PHP 285,000.00 PHP 276,000.00
Income before tax PHP 150,000.00 PHP 90,000.00
Income tax expense PHP 81,108.00 PHP 17,500.00
Net income PHP 68,892.00 PHP 72,500.00

There was a question as to why year 2’s net income went down despite the substantial increase in before-tax net income from
year 1.

In year 1, the firm recorded in its tax return a P 40,000 tax deductible loss on the sale of a warehouse. In year 2, there was a
gambling gain of P 126,600 (taxed at final tax of 60%) included in revenue at its gross amount. Dividends of P 20,000 were paid in
both years. The business is taxed 48% on income over P 25,000 and 22% on the first P 25,000.

REQUIRED Prepare the journal entries to record the CORRECT income tax provision for each year.

YEAR 2 YEAR 1
Net sales PHP 920,000.00 PHP 810,000.00
Less: Gambling gain PHP (126,600.00) This just corrects the sales where the
gambling gain should be presented net of
Gambling gain, net of 60% final tax PHP 50,640.00 final tax.
Correct sales PHP 844,040.00 PHP 810,000.00
Less: Cost of goods sold PHP (485,000.00) PHP (444,000.00)
Gross profit PHP 359,040.00 PHP 366,000.00
Less: Operating expenses PHP (285,000.00) PHP (276,000.00)
Income before income tax PHP 74,040.00 PHP 90,000.00
Income tax expense PHP 5,148.00 PHP 17,500.00
Net income PHP 68,892.00 PHP 72,500.00
 Accounting income PHP 74,040.00 PHP 90,000.00
Permanent difference because this is
Deductible loss PHP (40,000.00)
already a deductible loss
Permanent difference because this was
Nontaxable gambling gain PHP (50,640.00)
already subjected to final tax
Taxable income PHP 23,400.00 PHP 50,000.00
22% on first 25,000,
Income tax rate 22% on first 25,000
48% on above 25,000
Income tax payable PHP 5,148.00 PHP 17,500.00 ((50,000 - 25,000) x 0.48) + (25,000 x 0.22)

Y1 Income tax provision PHP 17,500.00

Income tax payable PHP 17,500.00

Y2 Income tax provision PHP 5,148.00

Income tax payable PHP 5,148.00

Hilton Company reported pretax financial income of P6,200,000 for the current year. Included in other income was P200,000 of
interest revenue from government bonds held by the entity. The income statement included depreciation expense of P500,000
PROBLEM
for a machine with cost of P3,000,000. The income tax return reported as P600,000 as depreciation for the machine. The enacted
tax rate is 30% for the current and future years.

REQUIRED What is the current tax expense for the current year?

Pretax financial income PHP 6,200,000.00

Less: Nontaxable permanent difference (interest from
PHP (200,000.00)
government bonds)
Accounting income subject to tax PHP 6,000,000.00
Less: Excess in depreciation (600,000 - 500,000) PHP (100,000.00)
Taxable income PHP 5,900,000.00
Income tax rate 30%
Current tax expense PHP 1,770,000.00

Therefore, current tax expense amounts to P1,770,000.

Tantrum Company began operations at the beginning of the current year. At the end of the first year of operations, the entity
reported P6,000,000 income before tax in the income statement but only P5,100,000 taxable income in the tax return. Analysis of
PROBLEM
the P900,000 difference revealed that P500,000 was a permanent difference and P400,000 was a temporary tax liability
difference related to a current asset. The enacted tax rate for the current year and future years is 30%.

REQUIRED What is the total income tax expense for the current year?
 Income before tax PHP 6,000,000.00
Less: Permanent difference PHP (500,000.00)
Accounting income subject to tax PHP 5,500,000.00
Income tax rate 30%
Total income tax expense PHP 1,650,000.00

Therefore, total income tax expense amounts to P1,650,000.

In 2013, Tiger Company reported pretax financial income of P5,000,000. Included in the pretax financial income are P900,000 of
nontaxable life insurance proceeds received as a result of the death of an officer, P1,200,000 of estimated warranty expense
PROBLEM
accrued on December 31, 2013, and P200,000 of life insurance premiums for a policy for an officer. No income tax was previously
paid during the year and the income tax rate is 30%.

REQUIRED What is the income tax payable on December 31, 2013?

This pertains to the current tax expense for 2013 because there was no income tax previously paid during the year.

Pretax financial income PHP 5,000,000.00

Less: Nontaxable life insurance proceeds PHP (900,000.00)
Add: Nondeductible life insurance premium PHP 200,000.00
Accounting income subject to tax PHP 4,300,000.00
Add: Future deductible warranty provision PHP 1,200,000.00
Taxable income PHP 5,500,000.00
Income tax rate 30%
Current tax expense (credit as income tax payable) PHP 1,650,000.00

Therefore, income tax payable amounts to P1,650,000.

PROBLEM Viking Company reported in the income statement for the year ended December 31, 2016 pretax income of P1,000,000.

Tax return Accounting record

Rent income PHP 70,000.00 PHP 120,000.00
Depreciation PHP 280,000.00 PHP 220,000.00
Premiums on officers' life insurance PHP 90,000.00
Income tax rate 30%

REQUIRED What is the current provision for income tax for 2016?

Pretax financial income PHP 1,000,000.00

Add: Nondeductible premium on life insurance PHP 90,000.00
 Accounting income subject to tax PHP 1,090,000.00
Less: Future taxable depreciation excess PHP (60,000.00)
Less: Future taxable rent income PHP (50,000.00)
Taxable income PHP 980,000.00
Income tax rate 30%
Current tax expense (credit as income tax payable) PHP 294,000.00

Therefore, current tax expense amounts to P294,000.

REQUIRED What is the total tax expense?

Pretax financial income PHP 1,000,000.00

Add: Nondeductible premium on life insurance PHP 90,000.00
Accounting income subject to tax PHP 1,090,000.00
Income tax rate 30%
Total income tax expense PHP 327,000.00

Therefore, total tax expense amounts to P327,000.

Pine Company reported pretax financial income of P800,000 for the year ended December 31, 2016. In the computation of
PROBLEM
income taxes, the following data were considered:

Nontaxable gain PHP 350,000.00

Depreciation deducted for tax purposes in excess of
PHP 50,000.00
depreciation deducted for book purposes
Estimated tax payment in 2016 PHP 70,000.00
Enacted tax rate 30%

REQUIRED What amount should be reported as current tax liability on December 31, 2016?

Pretax financial income PHP 800,000.00

Less: Nontaxable income PHP (350,000.00)
Accounting income subject to tax PHP 450,000.00
Less: Future taxable depreciation excess PHP (50,000.00)
Taxable income PHP 400,000.00
Income tax rate 30%
Income tax payable, before tax payment PHP 120,000.00
Less: Estimated tax payment PHP (70,000.00)
Income tax payable, after tax payment PHP 50,000.00

Therefore, current tax expense amounts to P294,000.

REQUIRED What is the total tax expense?

Pretax financial income PHP 800,000.00

Less: Nontaxable income PHP (350,000.00)
Accounting income subject to tax PHP 450,000.00
Income tax rate 30%
Total income tax expense PHP 135,000.00

Therefore, total tax expense amounts to P135,000.

Huskie Company reported in the income statement for the current year pretax income of P400,000. The following items are
PROBLEM
treated differently per tax return and per book:

Tax return Accounting record

Royalty income PHP 20,000.00 PHP 40,000.00
Depreciation PHP 125,000.00 PHP 100,000.00
Payment of a penalty PHP 15,000.00
Income tax rate 30%

REQUIRED What amount should be reported as the current portion of income tax expense?

Pretax financial income PHP 400,000.00

Add: Nondeductible penalty payment PHP 15,000.00
Accounting income subject to tax PHP 415,000.00
Less: Depreciation excess PHP (25,000.00)
Less: Future taxable royalty income PHP (20,000.00)
Taxable income PHP 370,000.00
Income tax rate 30%
Current tax expense (credit as income tax payable) PHP 111,000.00

Therefore, current tax expense amounts to P111,000.

REQUIRED What is the total tax expense?

Pretax financial income PHP 400,000.00

Add: Nondeductible penalty payment PHP 15,000.00
Accounting income subject to tax PHP 415,000.00
Income tax rate 30%
Total income tax expense PHP 124,500.00

Therefore, total tax expense amounts to P124,500.

 During the current year, Everlasting Company reported accounting income of P9,000,000 before income tax. The entity revealed
PROBLEM
the following information for the current year:

Interest income on government bonds PHP 700,000.00

Depreciation in excess PHP 1,300,000.00
Warranty expense on accrual basis PHP 600,000.00
Actual warranty payment PHP 300,000.00
Income from installment sale reported for tax purposes in
PHP 200,000.00
excess of income recognized per book
Income tax rate 30%

REQUIRED What is the current tax liability at year-end?

Pretax financial income PHP 9,000,000.00

Less: Nontaxable warranty payment PHP (300,000.00)
Less: Nontaxable interest income PHP (700,000.00)
Accounting income subject to tax PHP 8,000,000.00
Less: Depreciation in excess PHP (1,300,000.00)
Add: Income from installment sale reported for tax PHP 200,000.00
Add: Warranty provision PHP 600,000.00
Taxable income PHP 7,500,000.00
Income tax rate 30%
Current tax expense (credit as income tax payable) PHP 2,250,000.00

Therefore, current tax liability amounts to P2,250,000.

Canterbury Company made an accounting profit of P4,000,000 for the current year which included the following items of income
PROBLEM
and expense:

Donation to political parties PHP 1,000,000.00

Depreciation - 20% PHP 1,600,000.00
Annual leave expense PHP 700,000.00
Rent revenue PHP 1,200,000.00
Income tax rate 30%

For tax purposes, the depreciation rate is 25%, the annual leave paid is P800,000, and the rent received is P1,000,000. The entity
followed the cash basis for tax purposes.

REQUIRED What is the current tax liability at year-end?

Pretax financial income PHP 4,000,000.00

Add: Nondeductible donation to political parties PHP 1,000,000.00
 Accounting income subject to tax PHP 5,000,000.00
Less: Rent revenue in excess of amount recognized PHP (200,000.00)
Less: Future taxable Depreciation excess PHP (400,000.00)
Less:Annual leave paid in excess of amount recognized PHP (100,000.00)
Taxable income PHP 4,300,000.00
Income tax rate 30%
Current tax expense (credit as income tax payable) PHP 1,290,000.00

Therefore, current tax liability is P1,290,000.

PROBLEM Punk Company reported the following partial income statement after the first year of operations:

Income before income tax PHP 3,750,000.00

Income tax expense
Current PHP 1,035,000.00
Deferred PHP 90,000.00 PHP 1,125,000.00
Net income PHP 2,625,000.00

The entity used the straight line method of depreciation for financial reporting purposes and accelerated depreciation for tax
purposes. The amount charged to depreciation expense per book was P1,500,000.

No other differences existed between book income and taxable income except for the amount of depreciation. The income tax
rate is 30%.

REQUIRED What amount was deducted for depreciation in the tax return for the current year?

Accounting income subject to tax PHP 3,750,000.00

Less: Depreciation expense in excess
Per book PHP 1,500,000.00
Per tax return (SQUEEZE) PHP 1,800,000.00 PHP (300,000.00)
Taxable income PHP 3,450,000.00
Income tax rate 30%
Current tax expense (credit as income tax payable) PHP 1,035,000.00

Therefore, tax return depreciation amounts to P1,800,000.

PROBLEM Dunn Company reported in the income statement for the current year P900,000 income before provision for income tax.

Rent received in advance PHP 150,000.00

Interest income on time deposit PHP 200,000.00
 Depreciation deducted for income tax purposes in excess
PHP 100,000.00
of financial depreciation
Income tax rate 30%

REQUIRED What is the current provision for income tax for the current year?

Pretax financial income PHP 900,000.00

Less: Nontaxable revenue (interest income) PHP (200,000.00)
Accounting income subject to tax PHP 700,000.00
Less: Depreciation excess PHP (100,000.00)
Add: Future deductible rent received in advance PHP 150,000.00
Taxable income PHP 750,000.00
Income tax rate 30%
Current tax expense (credit as income tax payable) PHP 225,000.00

Therefore, current provision for income tax amounts to P225,000.

Cascade Company is determining the amount of pretax accounting income for the current year by making adjustment to taxable
PROBLEM income from the income tax return. The tax return showed taxable income of P4,000,000 on which a tax liability of P1,200,000
has been recognized.

The entity provided the following items that may be required to determine the pretax accounting income from the amount of
taxable income:

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

REQUIRED What is the pretax accounting income for the current year?

Pretax accounting income (SQUEEZE) PHP 4,400,000.00

Less: Nontaxable revenue (interest income) PHP (600,000.00)
Add: Nondeductible impairment loss PHP 300,000.00
Accounting income subject to tax PHP 4,100,000.00
Less: Depreciation excess PHP (100,000.00)
Taxable income PHP 4,000,000.00
Income tax rate 30%
Current tax expense (credit as income tax payable) PHP 1,200,000.00

Therefore, pretax accounting income for the current year is P1,200,000.

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

Premium on life insurance of key officer PHP 100,000.00

Depreciation on tax return in excess of book depreciation PHP 200,000.00
Interest on municipal bonds PHP 50,000.00
Warranty expense PHP 40,000.00
Actual warranty repairs PHP 30,000.00
Bad debt expense PHP 60,000.00
Beginning balance in allowance for bad debts PHP -
Ending balance in allowance for bad debts PHP 40,000.00
Rent received in advance that will be recognized evenly
PHP 300,000.00
over the next three years:

REQUIRED What is the taxable income for the first year?

Pretax accounting income PHP 4,000,000.00

Add: Nondeductible premium on life insurance PHP 100,000.00
Less: Nontaxable interest on municipal bonds PHP (50,000.00)
Accounting income subject to tax PHP 4,050,000.00
Add: Future deductible differences
Rent received in advance PHP 300,000.00
Bad debt provision, net of written off accounts PHP 40,000.00
Warranty expense, net of actual warranty repairs PHP 10,000.00 PHP 350,000.00
Less: Future taxable differences
Depreciation excess PHP (200,000.00)
Taxable income PHP 4,200,000.00

Therefore, taxable income amounts to P4.200,000.

Princess Jasmin Corporation reported the following for the year ended December 31, 2021 in connection with the preparation of
PROBLEM
its income tax return:

Taxable income ?
Accounting income PHP 4,000,000.00
Dividend income PHP 20,000.00
Doubtful accounts PHP 49,000.00
A/R written off PHP 40,000.00
Interest income on deposits PHP 70,000.00
Interest income on notes PHP 29,000.00
Accounting depreciation PHP 30,000.00
 Tax depreciation PHP 55,000.00
Warranty expense per book PHP 60,000.00
Actual warranty cost PHP 25,000.00
Rent received PHP 35,000.00
Rent income per books PHP 48,000.00

REQUIRED What is the current income tax expense for 2021?

Pretax accounting income PHP 4,000,000.00

Less: Nontaxable revenues
Dividend income PHP 20,000.00
Interest income on deposits PHP 70,000.00 PHP 90,000.00
Accounting income subject to tax PHP 3,910,000.00
Add: Future deductible differences
Doubtful accounts, net of writeoff PHP 9,000.00
Warranty expenses, net of actual cost PHP 35,000.00 PHP 44,000.00
Less: Future taxable differences
Depreciation in excess of tax depreication PHP 25,000.00
Rent income in excess of rent received PHP 13,000.00 PHP 38,000.00
Taxable income PHP 3,916,000.00
Income tax rate 30%
Current tax expense (credit as income tax payable) PHP 1,174,800.00

OTHER TECHNIQUE
Deferred Tax Asset Deferred Tax Liability
Financial POV Income tax return
(positive answers) (negative answers)
Income before temporary difference (SQUEEZE) PHP 4,001,000.00 PHP 4,001,000.00
Doubtful accounts / writeoff PHP (49,000.00) PHP (40,000.00) PHP 9,000.00
Depreciation PHP (30,000.00) PHP (55,000.00) PHP 25,000.00
Warranty PHP (60,000.00) PHP (25,000.00) PHP 35,000.00
Rent income PHP 48,000.00 PHP 35,000.00 PHP 13,000.00
Accounting income subject to tax / taxable income PHP 3,910,000.00 PHP 3,916,000.00 PHP 38,000.00 PHP 44,000.00

Therefore, current income tax expense amounts to P3,916,000.