Chapter 14

Special Liabilities – Income Taxes

Total Tax Expense Versus Current Tax Expense
Numbers 1 and 2
Hopeful Company is preparing its 2021 year-end income tax returns and the following differences were noted between
financial reporting and tax reporting:
Financial Tax
Reporting Reporting
Warranty expense 360,000 200,000
Revenue from installment sales 1,800,000 1,200,000
Premium on officer’s life insurance for which the company as the beneficiary 120,000 -0-
Hopeful Company reported a pretax income of P4,500,000 in its financial reporting. Income tax rate is 32% for all
years.

1) What is the total tax expense?

A. 902,400
B. 1,017,600
C. 1,478,400
D. 1,721,600

2) How much is the current portion of Hopeful’s income tax expense?

A. 902,400
B. 1,017,600
C. 1,337,600
D. 1,721,600

Total Tax Expense Versus Current Tax Expense Versus Deferred Tax Expense
Numbers 3, 4 and 5
Acierto Company reported net income for the current year 2019 at P10,000,000 before taxes. Included in the
determination of the said net income were:

Permanent differences
Non deductible expenses P 100,000
Non taxable income 500,000
Temporary differences
Accrued warranty expenses 250,000
Rental payments made in advance 400,000
Advance collections from customers 500,000
Provision for probable losses 900,000
Income tax rate is 40% and is not expected to change in the future.

3) How much is the total tax expense?

A. 4,340,000
B. 4,000,000
C. 3,840,000
D. 3,340,000
4) How much is the is the current portion and deferred portion of the total tax expense?

Current Tax Deferred Tax

A. 4,340,000 660,000 expense
B. 4,000,000 160,000 expense
C. 3,840,000 500,000 benefit
D. 3,340,000 500,000 expense
5) What is the net deferred tax expense?

Deferred Tax Asset Deferred Tax Liability

A. 100,000 660,000
B. 660,000 560,000
C. 660,000 160,000
D. 460,000 360,000

FAR by: John Bo S. Cayetano, CPA, MBA Page 1 of 5

Income Tax Payable
6) Toro Company reported P6,750,000 income before provision for income tax. To compute provision for income tax,
the following data are provided for 2018:

Rent received in advance 1,200,000

Income from exempt municipal bonds 1,500,000
Depreciation deduction for income tax purposes in excess of depreciation reported for financial
accounting purposes 750,000
Estimated tax payment for 2018 375,000
Enacted corporate income tax rate 30%
What amount of current tax liability should be reported on December 31, 2018?
A. 1,335,000
B. 1,700,000
C. 1,935,000
D. 2,160,000

DTL and DTA

Numbers 7, 8, 9 and 10
The accountant of Monkey King Company presented to you the following information in line with your 2022 audit of
Monkey King Company’s income tax related balances:
Pre-tax financial income 3,000,000
Impairment loss on Machinery 50,000
Unearned rental income 350,000
Prepaid advertising expense 250,000
Interest income on time deposit 80,000
Excess tax depreciation over accounting depreciation 420,000
Installment sale which will be recognized as taxable income upon collection 900,000
Bad debts expense using a method under accrual basis 75,000
Provision for warranty 180,000
Unrealized loss on trading securities 20,000
Impairment loss on goodwill 30,000
Capitalized development cost 100,000
Income tax rate is constant 30%
7) How much is the total income tax expense for the year 2022?
A. 1,183,500
B. 885,000
C. 586,500
D. 360,000
8) How much is the current tax expense for the year 2022?
A. 1,183,500
B. 885,000
C. 586,500
D. 360,000
9) How much is the deferred tax asset at December 31, 2022?
A. 586,500
B. 501,000
C. 298,500
D. 202,500
10) How much is the deferred tax liability at December 31, 2022?
A. 586,500
B. 501,000
C. 298,500
D. 202,000

FAR by: John Bo S. Cayetano, CPA, MBA Page 2 of 5

Change In Tax Rates – One Time Change
Numbers 11, 12 and 13
EX Company reported in the first year of operations pretax financial income of P6,000,000. The year tax rate is 30%
and the enacted rate for future years is 25%.

Tax return Accounting record

Uncollectible accounts expense 200,000 300,000
Depreciation expense 800,000 500,000
Tax exempt interest revenue -- 150,000
11) What is the current tax expense?
A. 1,695,000
B. 1,755,000
C. 1,740,000
D. 1,600,000
12) What is the next deferred tax expense or benefit?
A. 75,000 expense
B. 25,000 benefit
C. 50,000 expense
D. 50,000 benefit
13) What is the total tax expense?
A. 1,755,000
B. 1,462,500
C. 1,795,000
D. 1,745,000

Change In Tax Rates – Multiple Changes

14) Demonic Shield Company prepared the following reconciliation for the first year of operations:

Pretax financial income for 2019 9,000,000

Tax-exempt interest revenue (750,000)
Temporary difference (2,250,000)
Taxable income 6,000,000
The temporary difference will reverse evenly in 2020 and 2021 at an enacted tax rate of 35% in 2020, and 32% in
2021. The tax rate for 2019 is 30%.
What amount should be reported as deferred tax asset or liability on December 31, 2019?
A. 720,000 deferred tax asset
B. 753,750 deferred tax asset
C. 720,000 deferred tax liability
D. 753,750 deferred tax liability

Squeeze Technique
15) Free Willing Co. paid of P5,000,000 for 2020 estimated income taxes. The changes in assets and liabilities are as
follows:
12/31/20 12/31/19
Deferred tax asset P 1,000,000 P 800,000
Deferred tax liability 450,000 600,000
Income tax payable 500,000 200,000

The deferred tax liability was caused by accelerated depreciation and the deferred tax asset is for rentals received
in advance.
What amount of total tax expense should be recognized in 2020?
A. 4,650,000
B. 4,950,000
C. 5,350,000
D. 5,650,000

FAR by: John Bo S. Cayetano, CPA, MBA Page 3 of 5

Income Tax Payment
16) For the year 2021, Meowski Company reported income tax expense of P110,000. Income tax payable at the end of
2020 was P90,000 and at the end of 2021 was P100,000. The deferred tax liability that resulted from the use of
accelerated depreciation for tax purposes and the straight-line method for financial reporting purposes increased
from P105,000 at the beginning of 2021 to P130,000 at the end of 2021.

How much cash was paid for income taxes during the year?
A. 105,000
B. 95,000
C. 85,000
D. 75,000

Balance Sheet Method

Numbers 17 and 18
The following information was provided to you by Shackles Company:

Book Value Tax Base

Receivable 150,000 200,000
Building – net 300,000 100,000
Machinery and equipment – net 500,000 550,000
Unearned revenue 100,000 ---
Estimated warranty obligation 80,000
Current and future tax 30%. Taxable income for the year P300,000.

17) Deferred tax asset

A. 90,000
B. 84,000
C. 60,000
D. 30,000
18) Deferred tax liability
A. 90,000
B. 84,000
C. 60,000
D. 30,000

Tax Base – Depreciable Asset

19) An equipment cost P4,000. For tax purposes, depreciation of P2,400 has already been deducted in the current and
prior periods and the remaining cost will be deductible in future periods, either as depreciation or through a
deduction on disposal. Revenue generated by using the equipment is taxable, any gain on disposal of the
equipment will be taxable and any loss on disposal will be deductible for tax purposes.

How much is the tax base of the equipment?

A. 4,000
B. 2,400
C. 1,600
D. 0

Tax Base – Asset & Liabilities That is Taxable or Deductible Using Cash Basis
20) An entity has spent P600,000 in developing a new product. These costs meet the definition of an intangible asset
under PAS 38 and have been recognized in the statement of financial position. These costs have been recognized
as an expense for tax purposes. At the year-end the intangible asset is deemed to be impaired by P50,000.
The tax base of the intangible asset at year end is
A. 600,000
B. 550,000
C. 50,000
D. Nil

FAR by: John Bo S. Cayetano, CPA, MBA Page 4 of 5

Tax Base – Asset & Liabilities Arising From Income or Expense Reflected to Both Reports
21) Trade receivable have a carrying amount of P4,000. The related revenue has already been included in taxable
profit.

How much is the tax base of the asset?

A. 4,000
B. 2,400
C. 1,600
D. 0

22) Tax Base – Asset & Liabilities Arising From Permanent Differnece
23) The current liabilities of an entity include fines and penalties for environmental damage. The fines and penalties are
stated at P10 million. The fines and penalties are not deductible for tax purposes.

What is the tax base of the fines and penalties?

A. 13,000,000
B. 10,000,000
C. 3,000,000
D. 0

Offsetting
24) Sosa Company located its business in two jurisdictions, France and Germany. In both countries, Sosa has the legal
right to offset the taxes receivable and payable. The following information related to deferred tax assets and
liabilities:

Classification Amount Taxing Jurisdiction

Deferred tax asset 800,000 France
Deferred tax liability 300,000 Germany
Deferred tax liability 600,000 France
How should Sosa represent as deferred taxes at year-end?
Deferred tax asset Deferred tax liability
A. 800,000 900,000
B. 0 1,000,000
C. 200,000 600,000
D. 200,000 300,000

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