PROBLEMS

PROBLEM 1.

You are given the following information for Carlos Corporation for the year ended December 31, 2014

1) Capital gains subjected to final withholding tax P2,000,000.

2) Fines and penalties for violations of law , P400,000.
3) Premium payment for life insurance policy on president, P40,000.
4) Tax depreciation in excess of book depreciation, P1,500,000
5) Excess of income on installment sales over income reportable for tax purposes, 1,000,000.
6) Rent collected in advance of period earned, P750,000.
7) Warranty provision accrued in advance of period paid, P400,000.

Pre-tax financial income is P10,000,000 and income tax rate is 30% for the current and future years.

Required: (5 Questions)

a) Indicate which of the above items permanent differences are and which are temporary
differences. Classify the permanent differences whether non-taxable revenues or non-
deductible expenses. Classify the temporary differences whether taxable temporary differences
or deductible temporary differences.
b) Calculate the taxable income
c) Compute income tax payable , deferred tax asset, and deferred tax liability
d) Prepare all entries relating to income tax.
e) Compute the total income tax expense, identifying separately the current income tax expense
and the deferred tax expense.

Answer and Solution

A.

a) Nontaxable
b) Nondeductible
c) Nondeductible
d) Temporary difference – Future taxable amount
e) Temporary difference – Future taxable amount
f) Temporary difference – Future deductible amount
g) Temporary difference – Future deductible amount

Pretax financial income P10,000,000

Add Nondeductible expenses (b + c) 400,000 + 40,000 440,000
Less Nontaxable income (a) (2,000,000)
Financial income subject to tax P 8,440,000
Add Future deductible amounts (f + g) 750,000 + 400,000 1,150,000
Less Future taxable amounts (d + e) 1,500,000 + 1,000,000 (2,500,000)
Taxable income P7,090,000 B.
C.
Deferred Tax Asset 1,150,000 x 30%= 345,000
Deferred Tax Liability 2,500,000 x 30%= 750,000
Income tax Expense 750,000 – 345,000= 405,000

D and E.
Income Tax Expense – Current 2,127,000
Income Tax Payable 2,127,000
30% x 7,090,000

Income Tax Expense – Deferred 750,000

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

Deferred Tax Asset 345,000

Income Tax Expense – Deferred 345,000
30% x 1,150,000

PROBLEM 2.

Luzon Corporation has one temporary difference at the end of 2014 that will reverse and cause taxable
amounts of P550, 000 in 2015, P600,000 in 2016 and P650,000 in 2017. Luzon’s Pre-tax Financial income
for 2014 is P3, 000,000 and the tax rate is 30% for all years. There are no deferred tax asset and deferred
tax liability at the beginning of 2014.

Required: 2 Questions
a) Compute the taxable income and income tax expense-Current for 2014. Compute also the
deferred tax liability at December 31, 2014.
b) Prepare journal entries to record income tax expense for 2014.

Answer and Solution:

(a) Pretax financial income P3,000,000
Future taxable amount (1,800,000)
Taxable income P1,200,000
Income tax payable: 30% x 1,200,000 P360,000

(b) Income Tax Expense – Current 360,000

Income Tax Expense – Deferred 540,000
Income Tax Payable 360,000
Deferred Tax Liability 540,000
30% x 1,200,000 = 360,000
30% x 1,800,000 = 540,000

PROBLEM 3.
Visayas Corporation has one temporary difference at the end of 2014 that will reverse and cause
deductible amounts of P500, 000 in 2015, P650, 000 in 2016 and 400,000 in 2017. Visayas Pre-tax
income for 2014 is 2,000,000 and the tax rate is 30% for all years. There are no deferred tax assets or
liabilities at the beginning of 2014. Visayas expects profitable operations to continue in the future.

Required: 2 Questions
a) Compute the taxable income and income tax expense-Current for 2014. Compute also the
deferred tax asset at December 31, 2014.
b) Prepare journal entries to record income tax expense

Answer and Solution:

(a) Pre tax financial income P2,000,000
Future deductible amount 1,550,000
Taxable income P3,550,000
Income tax payable: 30% x 3,550,000 P1,065,000

(b) Income Tax Expense-Current 1,065,000

Deferred Tax Asset 465,000
Income Tax Payable 1,065,000
Income Tax Benefit-Deferred 465,000

PROBLEM 4.

Mindanao Corporation, in its first year of operations has the following differences between the book
basis and tax basis of its assets and liabilities at the end of 2014

Book Basis Tax Basis

Equipment (net) 4,000,000 3,400,000
Estimated warranty liability 2,000,000 -0-
It is estimated that the warranty liability will be settled in 2015. The difference n equipment(net) will
result in taxable amounts of P200,000 in 2015, 300,000 in 2016 and P100,000 in 2017. The company has
taxable income of P5,200,000 in 2014. As of the beginning of 2014 the enacted tax rate is 30% for 2014-
2016 and 35% in 2017. Mindanao expects to report taxable income through 2017.

REQUIRED: 1 QUESTION
Journal entries to record income tax expense, current and deferred for 2014

ANSWER:
Income Tax Expense – Current 1,560,000
Deferred Tax Asset 600,000
Deferred Tax Liability 185,000
Income Tax Expense – Deferred (Benefit) 415,000
Income Tax Payable 1,560,000
30% x 5,200,000 = 1,560,000
30% x 2,000,000 = 600,000
(30% x 500,000) + (35% x 100,000) = 185,000
PROBLEM 5.
Samar Inc. reports taxable income of P2,000,000 on its income tax return for the year ended December
31, 2014. Timing Difference between financial income and taxable income for the year are:

Tax depreciation in excess of book depreciation- P360,000; Accruals of product liability claims in excess
of actual claims- P240,000; reported installment sales income in excess of taxable installment sales
income P530,000. Income tax rate 35%

Required: 3 questions

a) Compute for Income tax expense-total and current portion

b) Deferred tax and liability
c) Income tax payable to be recorded in Samar’s book

Answers:

Income Tax Expense – Current (35% x 2,000,000) P 700,000

Income Tax Expense – Deferred (185,500 – 210,000) (24,500)
Income Tax Expense – Total P 675,500 a.
Income Tax Payable P 700,000 b.

c.
Deferred Tax Asset: 35% x (360,000 + 240,000) P 210,000
Deferred Tax Liability: 35% x 530,000 P 185,500

PROBLEM 6.

Bohol Company reported taxable income of P12,000,000 for the year ended December 31, 2014. The
controller is unfamiliar with the require treatment of temporary and permanent differences in
reconciling taxable income to pretax financial income and has contracted your firm for advice. You are
given company records that list the following differences:
Book Depreciation in excess of tax depreciation P430,000
Interest earned on government securities P450,000

Required: 1 question
a. Determine the pre tax financial income

Answer:
Taxable income P12,000,000
Future deductible amount:
Book depreciation in excess of tax depreciation (430,000)
Nontaxable income:
Proceeds from life insurance policy upon death of officer 450,000
Pretax financial income P12,020,000

PROBLEM 7.
Wall services computed pre-tax financial income of P2,200,000 for its first ear of operations ended
December 31, 2014. In preparing the income tax return for the year, the tax account determined the ff.
differences between 2014 financial income and taxable income.
a. Non Deductible expenses P400,000
b. Non Taxable revenues P140,000
c. Temporary Differences-installment sale reported in
financial income but not in taxable income P700,000
The temporary difference is expected to reverse in the following pattern:
2015- 140,000 ; 2016-320,000 ; 2017-240,000
Enacted tax rate for this year and the next three years are as follows
2014-30% ; 2015-34% ; 2016-33% ; 2017-32%

Required: 5 Questions
a. Prepare a schedule showing the reversal of the temporary difference
b. Computation of income tax payable
c. Compute for deferred tax asset and deferred tax liability as of December 31, 2014
d. Prepare journal entries to record income taxes payable and deferred income taxes
e. Prepare the section of the statement of comprehensive income of wall services, beginning with
“Income from continuing operations before income taxes” for the year ended December 31,
2014

Answers:
(a) Schedule of reversal of the temporary differences
2015 140,000 x 34% P 47,600
2016 320,000 x 33% 105,600
2017 240,000 x 32% 76,800
Total Deferred tax liability P230,000 c.

(b) Pretax financial income P2,200,000

Add nondeductible expenses 400,000
Less nontaxable revenues ( 140,000)
Financial income subject to tax P2,460,000
Future taxable amounts ( 700,000)
Taxable income P1,760,000
Tax rate x 30 %
Income tax payable P 528,000

(d) Income Tax Expense – Current 528,000

Income Tax Payable 528,000

Income Tax Expense – Deferred 230,000

Deferred Tax Liability 230,000

(e) Income from continuing operations before income tax P2,200,000

Income tax expense: Current P528,000
Deferred 230,000 758,000
Net income P1,442,000
PROBLEM 8.
Daniel company purchase and equipment costing P2,000,000 on January 1, 2014. The
equipment has estimated useful life of 4 years with no residual value. Daniel company
depreciates this equipment using straight line method for accounting purposes, but uses sum of
the years digit method for tax purposes. Assume a 35% tax rate for all years. Daniel company
reports the following income tax return for years 2014, 2015, 2016 and 2017:

2014-800,000 ; 2015-890,000 ; 2016-1,200,000 ; 2017-1,500,000

Other than for the difference in depreciation for the equipment described, there is no other
difference between Daniel’s accounting income and taxable income for years 2014-2017

Required: 5 questions

a. Pre-tax financial income for 2014-2017

b. Deferred tax liability for 2014-2017
c. Entries for current income taxes and deferred income taxes for 2014-2017
d. Compute for income tax expense for 2014-2017
e. Compute for profit for years 2014-2017

Answers:

(a)
Straight Line SYD Difference
2014 500,000 800,000 (300,000)
2015 500,000 600,000 (100,000)
2016 500,000 400,000 100,000
2017 500,000 200,000 300,000

Carrying Amount Tax Base Difference

12/31/2014 1,500,000 1,200,000 300,000
12/31/2015 1,000,000 600,000 400,000
12/31/2016 500,000 200,000 (300,000)
12/31/2017 0 0 0

2014 2015 2016 2017

Taxable income 800,000 890,000 1,200,000 1,500,000
Future taxable amount 300,000 100,000
Additional taxable amount
(reversal) ( 100,000) (300,000)
Pretax accounting income 1,100,000 990,000 1,100,000 1,200,000

(b) Deferred Tax Liability (Asset) at the end of each year is as follows:
2014 300,000 x 35% P 105,000
 2015 400,000 x 35% 140,000
2016 300,000 x 35% ( 105,000)
2017 0 0

(c) Journal entries to record current income tax:

2014 2015
Income Tax Expense-Current 280,000 311,500
Income Tax Payable 280,000 311,500
(35% x 800,000) (35% x 890,000)

2016 2017
Income Tax Expense-Current 420,000 525,000
Income Tax Payable 420,000 525,000
(35% x 1,200,000) (35% x 1,500,000)

Journal entries to record deferred income tax:

December 31, 2014:
Income Tax Expense-Deferred 105,000
Deferred Tax Liability 105,000

December 31, 2015:

Income Tax Expense – Deferred 35,000
Deferred Tax Liability 35,000

December 31, 2016:

Deferred Tax Liability 35,000
Income Tax Expense-Deferred (Benefit) 35,000

December 31, 2017:

Deferred Tax Liability 105,000
Income Tax Expense-Deferred (Benefit) 105,000

(d) 2014 2015 2016 2017

Income tax expense:
Current P 280,000 P 311,500 P 420,000 P 525,000
Deferred (Benefit) 105,000 35,000 ( 35,000) (105,000)
Total income tax expense P 385,000 P 346,500 P 385,000 P 420,000

(e) 2014 2015 2016 2017

Income before income tax P1,100,000 P 990,000 P1,100,000 P1,200,000

Less income tax expense
(see above) 385,000 346,500 385,000 420,000
Net income P 715,000 P 643,500 P 715,000 P 780,000
PROBLEM 9.
The Jude company has taxable income for the year 2014 amounting to P5,000,000. The tax bases for its
assets and liabilities at December 31, 2014 are equal to their carrying amounts except for the following
items:
Carrying Amount Tax Base
Accounts Receivable 1,900,000 2,100,000
Inventories 950,000 850,000
Building and Equipment 10,000,000 8,200,000
Provision for warranty 800,000 0
Unearned Rent 500,000 0

The company’s statement of financial position at December 31, 2013 showed deferred tax liability of
P1,400,000 and deferred tax asset of P525,000.
The enterprise is subject to income tax rate of 35%. It is believed that any deferred tax asset is fully
realizable. The company paid no income tax during 2014.

Required: 5 questions
a. Future Taxable amount and future deductible amount as of December 31, 2014
b. Income Tax Payable
c. Deferred tax Asset
d. Deferred Tax liability
e. Journal Entries in the books of Jude Company relating to income taxes