Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

ACCOUNTING FOR INCOME TAX

Accounting 122
TRUE OR FALSE. Determine whether the following statements are correct or not. Write A if the
statement is correct and write B if not. Final answers should be written on the answer sheet
provided with this questionnaire. Erasures are strictly not allowed.
1. Deferred tax accounting is applicable to all entities, whether public or non-public entities.
A
2. Accounting income or financial income is the net income for the period before
deducting income tax expense and computed in accordance with accounting
standards whereas taxable income is the income appearing on the traditional income
statement and computed in accordance with the income tax law. B
3. The current tax liability is computed using the current tax law unless a future enacted law
is different. B
4. An entity should report deferred income tax expense or benefit equal to the amount of
the current tax liability plus the sum of the net changes in deferred tax assets and
deferred tax liabilities. B
5. Deferred tax liabilities are the amounts of income taxes payable in future periods in
respect of taxable permanent differences. B
6. If the tax base for a machine for tax purposes is greater than the carrying amount in the
financial statements up to the end of the reporting period, then a deferred tax liability
should be recognized. B
7. A deferred tax asset shall be recognized when it is probable that accounting income will
be available against which the deferred tax asset can be used. B
8. An increase in prepaid insurance, an increase in rent receivable and a decrease in
warranty obligation during the current year will cause the deferred tax liability of an entity
that prepares accrual basis financial statements and pays tax on a cash basis to increase.
B
9. Tax assets and liabilities shall be presented separately from other assets and liabilities in the
statement of financial position. A
10. Deferred taxes and liabilities shall not be discounted unless it will reverse in subsequent
periods longer than one year. B
11. Justification for the method of determining periodic deferred tax expense is based on the
concept of recognition of assets and liabilities. A
12. Taxable amount pertains to the amount attributable to an asset or liability for tax
purposes. B
13. Development costs that have been capitalized and amortized but were deducted in
determining taxable profit in the period in which they were incurred will give rise to a
deferred tax asset. B
14. Intraperiod tax allocation associates tax effect with different items in the income
statement. A
15. When an entity makes a distinction between current and noncurrent assets and liabilities,
it shall not classify deferred tax assets and liabilities as current. A
16. Interest expense accrued but included in taxable profit on a cash basis shall be classified
under deductible temporary differences. A
17. In accordance with PAS 12, the tax bases of major items on which deferred tax has been
calculated need not be disclosed separately. A
18. Deferred tax assets are the amount of income taxes recoverable in future periods in
respect of future deductible amounts and carryforward of unused tax losses. A
19. The result of interperiod tax allocation is to recognize an asset or liability for the tax
consequences of temporary differences that exist at the end of the reporting period. A
20. Deferred tax assets and liabilities shall be distinguished from current tax assets and
liabilities. A
21. The statement of financial position approach in accounting for deferred taxes considers
all temporary differences including timing differences and is required to be used by PAS
12. A
22. An example of a timing difference that results to a deferred tax asset is when an asset is
revalued downward and no equivalent adjustment is made for tax purposes. B
23. PAS 12 prohibits a deferred tax liability for goodwill on initial recognition or where any
reduction in value of goodwill is not allowed for tax purposes. However, a deferred tax
liability could be recognized to the extent that it does not arise from initial recognition. A

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 1
 24. The tax base of an asset is normally the carrying amount less the amount that will be
deductible for tax purposes in the future. B
25. Tax penalties, surcharges and fines do not give rise to deferred tax asset and liability
because they have no future tax consequences. A

SHORT PROBLEMS. Compute for the amount/s asked by each problem. Final answers should be
written on the answer sheet provided with this questionnaire. Solutions are to be written in a
separate sheet of paper to be submitted along with the answer sheet. Erasures are strictly not
allowed.
PROBLEM 1: Xavier Company provided the following information for its first year of operations
ended December 31, 2011 in connection with the preparation of its income tax return:
Taxable income P 4,000,000
Non-deductible expenses 200,000
Non-taxable revenue 300,000
Deferred income on installment sale included in financial
income but taxable in 2012 450,000
Doubtful accounts recorded 100,000
Financial depreciation 300,000
Tax depreciation 350,000
Estimated warranty cost accrued in 2011 but not
deductible for tax purposes until paid 100,000
Income tax rate 30%
1. Prepare the entries to record the current tax expense, deferred tax liability and deferred
tax asset of Xavier Company.
2. Determine the deferred tax expense or benefit of Xavier Company. 90,000 expense
3. Determine the total income tax expense of Xavier Company. 1,290,000
PROBLEM 2: Complex Company reported the following information relating to income before
the 30% tax for accounting purposes:
2011 P 2,000,000
2012 3,000,000
2013 4,000,000
2014 5,000,000
In 2011, Complex Company recognized doubtful accounts of P100,000. Such accounts were
considered worthless or uncollectible in 2012, P40,000 and 2013, P60,000. Analysis of the tax and
book records disclosed P120,000 in unearned rent income on December 31, 2011 that has been
recognized as taxable income in 2011 when the cash was received. Also, on December 31,
2011, estimated warranty cost of P300,000 had been recognized as expense on the books in
2011 when the product sales were made but is not deductible for tax purposes until paid. The
unearned rent income on December 31, 2011 is realized and the actual warranty payments
were made as follows:
Rent income per books Actual warrant payments
2012 P 40,000 P 20,000
2013 40,000 80,000
2014 40,000 200,000
4. The current tax expense of Complex Company for 2011 is: 756,000
5. The net deferred tax expense or benefit of Complex for 2012 is: 30,000 expense
6. The deferred tax asset of Complex Company as of December 31, 2013 is: 72,000
7. The total income tax expense of Complex Company for 2014 is: 1,500,000
PROBLEM 3: Simplex Company reported the following information for the year ended December
31, 2011:
Operating loss P (1,000,000)
Interest income* 1,300,000
Loss on inventory writedown (300,000)
Loss before income tax P (100,000)
*P100,000 arises from bank deposits and the remaining from notes receivable.
There are no temporary differences at the beginning of the year. The income tax rate is 30%.
8. The current tax expense of Simplex Company for 2011 is: 60,000
PROBLEM 4: Shangrila Company reported a pre-tax accounting income of P7,900,000 for the
year ended December 31, 2011. Temporary differences have been identified as follows:
Tax depreciation in excess of accounting depreciation P 1,000,000
Litigation loss accrued for financial accounting purposes 400,000

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 2
 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 purposes by 300,000
The warranty liability is classified as a current liability in the entity’s statement of financial position.
The income tax rate is 30%. There are no temporary differences at the beginning of the current
year.
9. Determine the net deferred tax expense or benefit for 2011. 90,000 expense
PROBLEM 5: The following information was extracted from the records of Aloha Company on
December 31, 2011:
Carrying amount Tax base
Accounts receivable P 1,500,000 P 1,750,000
Motor vehicle 1,650,000 1,250,000
Provision for warranty 120,000 Nil
Deposits received in advance 150,000 Nil
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 been raised against accounts receivable for accounting
purposes but such accounts are deductible only when written off as uncollectible. Alpha
Company showed net income of P8,000,000 in its 2011 income statement. There are no
temporary differences at the beginning of the current year. The tax rate is 30%.
10. Determine the deferred tax liability on December 31, 2011. 120,000
11. Determine the deferred tax asset on December 31, 2011. 156,000
12. Determine the current income tax expense. 2,436,000
PROBLEM 6: West Company has the following assets and liabilities at carrying amount on
December 31, 2011:
Property P 1,000,000
Plant and equipment 400,000
Inventory 300,000
Trade receivables P 1,000,000
Trade payables 400,000
Cash 300,000
The value for tax purposes for property and for plant and equipment was P7,000,000 and
P4,000,000 respectively. The entity has made provision for inventory obsolescence of P2,000,000
which is not allowable for tax purposes. Further an impairment charge against trade receivables
of P1,000,000 has been made. This charge will not be allowed in the current year for tax
purposes. West Company showed taxable income of P9,000,000 in its 2011 income statement.
There were no temporary differences at the beginning of the current year. The tax rate is 30%.
13. Determine the total deductible temporary differences. 3,000,000
14. Determine the total taxable temporary differences. 4,000,000
15. The total income tax expense of West for 2011 is: 3,000,000
PROBLEM 7: Rona Company started to manufacture in 2011 copy machines that are sold on
installment basis. Rona Company recognizes revenue when equipment is sold for financial
reporting purposes and when installment payments are received for tax purposes. In 2011, Rona
Company recognized gross profit of P6,000,000 for financial reporting purposes and P1,500,000
for tax purposes. The amounts of gross profit expected to be recognized for tax purposes in 2012
and 2013 are P2,500,000 and P2,000,000 respectively.
Rona Company guarantees the copy machines for two years. Warranty costs are recognized on
the accrual basis for financial reporting purposes and when paid for tax purposes. Warranty cost
accrued in 2011 is P2,500,000 but only P500,000 of warranty cost is paid in 2011. It is expected
that in 2012 and 2013, P1,000,000 and P1,000,000 respectively of warranty cost will be paid. In
addition during 2011, P500,000 interest, net of 20% final income tax, was received and earned
and P100,000 insurance premium on life insurance policy that covered the life of Rona
Company’s president was paid. Rona Company is the beneficiary for this policy. The tax rate is
30%. Pretax accounting income in 2011 was P2,000,000. Any 2011 operating loss will be carried to
2012.
16. What is the net deferred tax expense or benefit for 2011? 480,000 expense
17. What is the total income tax expense for 2011? 480,000

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 3
PROBLEM 8: Occidental Company provided the following statement of financial position on
January 1, 2011:
Property, plant and equipment P 7,000,000
Goodwill 3,000,000
Intangible assets 2,000,000
Financial assets 6,000,000
Trade receivables 7,000,000
Other receivables 1,600,000
Cash and cash equivalents 700,000
Total assets P 27,300,000

Share capital P 7,500,000

Retained earnings 6,130,000
Loans payable 8,000,000
Trade payables 4,000,000
Employee benefits payable 1,000,000
Current tax liability 70,000
Deferred tax liability 600,000
Total equity and liabilities P 27,300,000
Additional information follows:
A. Tax bases of the assets and liabilities are the same as their carrying amount, except for
the following:
Property, plant and equipment P 1,400,000
Trade receivables 7,500,000
Loans payable 8,500,000
Financial assets 7,000,000
B. The financial assets are all classified as at fair value through profit or loss and the fair
value is P6,500,000.
C. The intangible assets are development costs that are allowed as deduction for tax
purposes when the costs are incurred. Intangible assets of P400,000 do not qualify for
recognition.
D. Included in trade payables is an accrual for compensation to be paid to employees. It is
allowed as deduction for taxation when the payment is made and totals P200,000.
E. A pension liability of P50,000 is to be recognized. The tax base of such liability is zero.
18. The deferred tax liability should be increased (decreased) on January 1, 2011 by: 1,710,000
increased
19. The deferred tax asset should be increased (decreased) on January 1, 2011 by: 375,000
increased
PROBLEM 9: Pat Company reported a pretax accounting income of P5,000,000 for the year
ended December 31, 2011. The following items are included in the determination of the
accounting income:
Estimated litigation loss which will become tax
deductible when settled in the future P 300,000
Dividend received 100,000
Revenue from an installment sale which will be
recognized as taxable income as received over the
next three years 600,000
Income tax rate 30%
20. What amount should be reported as total income tax expense? 1,470,000
PROBLEM 10: For the year ended December 31, 2011, Marie Company showed a pretax
accounting income of P5,000,000. To compute taxable income, the following items are noted:
Depreciation deducted for tax purposes in excess of
book depreciation P 200,000
Proceeds received from life insurance on death of
officer 500,000
Cash received included in accounting income of which
P120,000 will be taxable in 2012 200,000
Income tax rate 30%
21. What amount should Marie Company report as net deferred tax expense or benefit for the
year ended December 31, 2011? 96,000 expense

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 4
PROBLEM 11: For the year ended December 31, 2011, Grim Company’s accounting income
before the 30% income tax was P200,000 which differs from its taxable income due to the
following:
Interest income on saving deposit P 70,000
Premium expense on keyman life insurance 20,000
Payment of penalty 10,000
22. What is the total amount of temporary differences? 0
23. In its 2011 income statement, Grim Company’s current provision for income tax expense
compared to its total income tax expense would be higher (lower) by: 0
PROBLEM 12: Cascade Company, an entity subject to the 30% income tax rate, is determining
the amount of its pretax income for 2011 by making adjustments to taxable income from the
entity’s 2011 income tax return which showed a current tax liability of P1,050,000. Following is the
list of items that may be required to determine pretax accounting income from the amount of
taxable income:
A. Accelerated depreciation for income tax purposes was P500,000. Straight line financial
depreciation on the asset is P400,000.
B. Goodwill impairment loss of P300,000 was not included as a deduction in the tax return
but may be deducted in the income statement.
C. Interest income on treasury bills was not included in the tax return. During the year,
P600,000 was received on these investments.
24. What is the pretax accounting income for 2011? 3,900,000
25. What is the total income tax expense for 2011? 1,080,000
PROBLEM 13: Canterbury Company made an accounting profit of P4,000,000 for the year ended
December 31, 2011. Included in the accounting profit were the following items of income and
expense:
Donation to political parties (non-deductible) P 1,000,000
Depreciation – 20% 1,600,000
Annual leave expense 700,000
Rent revenue 1,200,000
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 follows the cash basis for tax purposes. The income tax rate is
30% and Canterbury made estimated tax payments in 2011 of P1,000,000.
26. What is the current tax liability? 290,000
PROBLEM 14: Jasco Company is in its first year of operations. The entity has pretax income of
P4,000,000. The entity has the following items recorded in its records:
Premium on life insurance of key officer P 100,000
Depreciation on tax return in excess of book depreciation 120,000
Interest on exempt government bonds 53,000
Warranty expense 40,000
Estimated warranty liability, beginning 115,000
Estimated warranty liability, ending 120,000
Bad debt expense 14,000
Allowance for bad debts, beginning 50,000
Allowance for bad debts, ending 47,000
Rent received in advance that will be recognized evenly
over the next three years 240,000
27. What is the taxable income for 2011? 4,169,000
PROBLEM 15: On January 1, 2011, Bolton Company reported a deferred tax liability of P1,000,000
and a deferred tax asset of P400,000. On December 31, 2011, Bolton Company reported a
deferred tax liability of P1,500,000 and a deferred tax asset of zero. In its financial statements for
2011, Bolton reported the following amounts:
Total income tax expense P 1,600,000
Estimated tax payments during 2011 600,000
28. What is the current tax liability of Bolton Company as of December 31, 2011? 100,000
PROBLEM 16: Regal Company paid P200,000 in January 2011 for fire insurance premiums on a
two-year policy on the entity’s premises. Additionally, Regal Company’s financial statements for
the year ended December 31, 2011 revealed that the entity paid P1,050,000 in income tax
during the year and also accrued estimated litigation loss of P2,000,000. The lawsuit was resolved
in February 2012 at which time a P2,000,000 loss was recognized for tax purposes. The entity
follows the cash basis for tax purposes. The tax rate is 30% for both 2011 and 2012.

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 5
 29. What amount should Regal Company report as net deferred tax expense or benefit in its
income statement for 2011? 570,000 benefit
PROBLEM 17: Reylisa Company, organized on January 1, 2011, had pretax accounting income
of P5,000,000 and taxable income of P8,000,000 for the year ended December 31, 2011. The only
temporary difference is accrued product warranty costs that are expected to be paid as
follows:
2012 P 1,000,000
2013 500,000
2014 500,000
2015 1,000,000
The entity has never had any net operating losses and does not expect any in the future. The
enacted income tax rates are 40% for 2011, 35 for 2012, 33% for 2013, 30% for 2014 and 25% for
2015.
30. On December 31, 2011, what amount should be reported as current tax liability? 3,200,000
31. On December 31, 2011, what amount should be reported as deferred tax asset under
current assets? 0
32. On December 31, 2011, what amount should be reported as deferred tax asset under non-
current assets? 915,000
PROBLEM 18: Caleb Company has three financial statement elements for which the December
31, 2011 carrying amount is different from the December 31, 2011 carrying amount is different
from the December 31, 2011 tax base:
Carrying amount Tax base
Equipment P 200,000 P 120,000
Prepaid officer’s insurance
policy* 75,000 Nil
Warranty liability 50,000 Nil
*Caleb Company is the beneficiary of the officer’s life insurance policy.
33. As a result of these differences, what is the future taxable amount? 80,000
PROBLEM 19: Zeff Company prepared the following reconciliation of its pretax financial
statement income to taxable income for the year ended December 31, 2011, its first year of
operations:
Pretax financial income P 1,600,000
Nontaxable interest received (50,000)
Long-term loss accrual in excess of deductible amount 100,000
Depreciation in excess of financial depreciation (250,000)
Taxable income P 1,400,000
The entity has no legal enforceable right to offset a current tax asset against current tax liability.
Zeff Company is subject to an income tax rate of 30%.
34. What amount should be reported as total income tax expense for 2011? 465,000
35. In its December 31, 2011 statement of financial position, what should Zeff report as
deferred tax liability? 75,000
PROBLEM 20: The current liabilities of an entity included fines and penalties for environmental
damage. The fines and penalties are stated at P10 million. For tax purposes, the fines and
penalties are not deductible.
36. What is the tax base of the fines and penalties? 10,000,000
PROBLEM 21: A reconciliation of the financial statement and taxable income for 2011 of Boom
Company follows:
Pretax accounting income P 6,000,000
Permanent difference (500,000)
Accounting income subject to tax P 5,500,000
Temporary difference* (200,000)
Taxable income P 5,300,000
*Capitalized interest for book and expensed for tax.
Cumulative temporary difference (future taxable amount) on January 1, 2011 is P300,000 and
on December 31, 2011 is P500,000. The income tax rate is 30%.
37. What is Boom Company’s deferred tax liability in its December 31, 2011 statement of
financial position? 150,000
PROBLEM 22: Diane Company had the following deferred tax balances at reporting date:

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 6
 Deferred tax assets P 1,200,000
Deferred tax liabilities 3,000,000
Effective from the first day of the next financial period, the company rate of income tax was
reduced from 40% to 30%.
38. The adjustment to income tax expense to recognize the impact of the tax rate change is:
450,000
PROBLEM 23: Porter Company owned land that had been previously revalued upward by
P600,000. The land will be revalued downwards at the current reporting date by P200,000. The
company’s tax rate is 30%.
39. The impact of this revaluation on the asset revaluation surplus account is: 140,000
decreased
PROBLEM 24: Wonderland Company incurred an accounting loss of P750,000 for the year ended
December 31, 2011. The current tax calculation determined that the entity had incurred a tax
loss of P1,200,000. The entity had the following temporary differences on December 31, 2011:
Deductible temporary differences:
Accounts receivable P 1,500,000
Plant and equipment 500,000
Taxable temporary differences:
Interest receivable 1,000,000
Prepaid insurance 200,000
On December 31, 2011, Wonderland Company had recognized a deferred tax asset of
P450,000. No adjustment has yet been made for temporary differences on December 31, 2011.
The temporary differences are expected to reverse in 2012. The income tax rate is 30%. There is
strong evidence that future taxable profit may not be available.
40. On December 31, 2011, what amount should be reported as deferred tax asset? 360,000
PROBLEM 25: On January 1, 2009, Easy Company acquired an equipment for P8,000,000. The
equipment is depreciated using straight line method based on a useful life of 8 years with no
residual value. On January 1, 2011, the equipment was revalued at a replacement cost of
P12,000,000 with no change in useful life. The pretax accounting income before depreciation for
2011 is P10,000,000. The income tax rate is 30%and there are no other temporary differences at
the beginning of the year.
41. What is the revaluation surplus on January 1, 2011? 2,100,000
42. What is the current tax expense for 2011? 2,700,000
43. What is the total income tax expense for 2011? 2,550,000
44. What is the deferred tax liability on December 31, 2011 arising from revaluation? 750,000
45. What is the revaluation surplus on December 31, 2011?1,750,000

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 7