CHAPTER 16 ACCOUNTING FOR INCOME TAX fr oeemad TECHNICAL KNOWLEDGE To know the distinction between accounting income and taxable income. To distinguish permanent differences and temporary differences between accounting income and taxable income. To know the recognition and measurement of deferred tax asset and deferred tax liability. To know the recognition and measurement of current tax asset and current tax liability. To distinguish interperiod tax allocation and intraperiod tax allocation. 519Introduction Deferred tax accounting is applicable to all entities, whether public or nonpublic entities. A public entity is an entity: 14. Whose equity and debt securities are traded in a stock ‘exchange or over-the-counter market. b. Whose equity or debt securities are registered with Securities and Exchange Commission in preparation for sale of the eecurities Accounting income Accounting income or financial income i the net income for the period before deducting income tax expense. ‘This is the income appearing on the traditional income ‘statement and computed in accordante with accounting standards, Taxable income Taxable income is the income for the period determined in iccordance with the rules established by the taxation authorities upon which income taxes are payable oF ‘Taxable income is the income appearing on the income tax return and computed in accordance with the income tax law ‘Taxable income may be defined also as the excess of taxable revenue oer tx deduce expen an exenptoes te period a defined bythe Boras feat Be 820 Differences between accounting and taxable income Differences between accounting income and taxable income may be classified into two, namely a. Permanent differences b. Temporary differences Permanent differences Permanent differences are items of revenue and expense ‘which are included in either accounting income or taxable income but will never be included in the other. Actually, permanent differences pertain to nontaxable revenue and nondeductible expenses, Permanent differences do not give rise to deferred tax asset and liability because they have no future tax consequences. Examples inglude the following: ‘a. Interest income on deposits b. Dividends received Life insurance premium When the entity is the beneficiary of « life insurance policy on an officer or employee, the premium paid by the entity is not deductible as expente for tax purposes Dut anid premium is an expense for financial reporting purposes. 4. Tax penalties, surcharges and fines are nondeductible, sa‘Temporary differences Temporary differences are differences between the carrying amount of an asset or lability and the tax base. ‘Temporary differences include timing differences Timing differences are differences between accountin Income and taxable income that originate in one period and reverse in one or more subsequent periods Timing differences are items of income and expenses which far included in both scounting income and tana but at different time pera oe For every temporary difference, eventual treatent willbe the samen scsounting and taxation, Accordingly, temporary differences give rise either to: 8 Deferred tax linbility D. Deferred tax asset Kinds of temporary difference ee Fini pasive whtten A 22 Tax base ‘The fax base of an asset or a liability is the amount attributable to the asset or liability for tax purposes. \Worded in another way, the tax base of an asset or a liability is the amount of the asset or liability that is recognized or collowed for tax purposes. ‘Tax base of an asset ‘The tox base of an osset is the amount that will be deductible for tax purpose againet future income. For example, if an entity has appropriately capitalized 1,000,000 as software development cost, the carrying ‘amouint 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 tax bose of a liability is normally the carrying amount less the amount that wil be deductible for tax purposes in the future. For example, if an entity has recognized an estimated warranty lisbility of P500,000, the carrying amount is 500,000 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 amount. 523Deferred tax liability Deferred tax lability ig the amount of income tax payable in fatare periods with respect to a faxable femporay difference. ‘porary A deferred tax liability isthe deferred tax consequence attributable to a taxable temporary difference or funy taxable amount. porary ae Actually, a deferred tax liability arises from the following ‘When the accounting income is higher than taxa Income because of tshing differences, ‘"*" ***able When the carrying amount of an assets higher than the € When the carrying amount of a lability is {bea fhe carrying amount of «lability is lower than Accounting income higher than taxable income Temporary differences that result in accounting higher than taxable income include the flowing “"°O™™ 1. Revenues and gains are included in acco of the current period but are tsxable in future penea® hewn ieinentep maitre Berit tetererieetaeta gee a eae tie 2 Expenses and losses are ded Expenses fe deductible for tax purposes in {Re gurrent pened but deductible for ccounting foroscn 4 Accelerated depreciation for tax purposes and "ght line depreciation for accounting parseoas: Development cost may be capitalized and amortized ‘over future periods 1a But deducted sous. ig determining accounting income period in which age" teanble income tn the © Prepaid expense has alread esi, Genes ha ilready been deducted on a cash panis in determining tarable income of the worsen 524 ~~ Other taxable temporary differences Most taxable temp Miflerences in the timing ofthe recognition of the tra for accounting and tax purposes. However, there are other taxable temporary differences that Eehnically are not timing differences but nevertheless ive tie to deferred tax lisblity. ‘Such other taxable temporary differences include: ‘a. Asset is revalued upward and no equivalent adjustment js made for tax purposes. in subsidiary b. ‘The carrying amount of investment i diary, ‘associate or joint venture is higher than the ta Recnuse the subsidiary, associate or joint venture has not stributed its entire income to the parent oF investor cost of business combination that is acounted for The com quinine ilocted tothe identifiable sets Huabalies aoqared fie value Recognition of a deferred tax liability 1D, paragraph 1, prides that deferred eax ability Fe Reem te or ll taxable temporary diferences recognized when However, a deferred tax lability is mot recog the taxable temporary difference arises from: ‘a. Goodwill resulting from a business combination and which indedvuibe for to purpose hit recogiton of on ost or iii transaction bo oem ses combination and affects nelther saa lng income no tobe income Undistributed profit of subsidiary, adit fe paren aver or ventaer inne to Yenture we ofthe reversal of the temporary ettorence ssociate or joint 525Deferred tax asset A deferred tax asst i the amount of income tax recoverable 1m future periods with respect to deductible tempore! difference and operating loss carryforward. y In other words, a deferred tax asset is the deferred tay consequence attributable to a future deductible amount gat ‘operating loss carryforward, ‘A deferred tax asset arises from the following: ‘2. When the taxable income is higher than accounting income because of timing differences. +. When the tax base of asset is higher than the carrying amount. © When the tax ase ofa liability is lower than the carrying amount. Taxable income higher than accounting income ‘Temporary differences that will result to taxable income higher than accounting income because of timing differences Include the following: 1. Revenues and gains are included in taxable income of current period but are included in accounting income of future periods, For example, rent received in advance is taxable at the time of receipt but deferred in future periods for sccounting purposes, Expenses and losses are deducted from accounting income of current period but are deductible for tax Purposes in future periods, Future deductible temporary differences Future deductible temporary differences include the follow ‘8. Approbable and measurable tigation loss is recognized for sccounting Purposes but deducted in determining taxable income when actually incurred or paid b, Estimated product warranty cost is recognized for accounting purposes in the current period but deducted in determining taxable income when actually incurred or paid. Research cost is recognized as expense in determining accounting income but not permitted as a deduction in determining taxable income until a later period 4. An impairment los is recognized for accounting purposes bbut ignored for tax purposes until the asset is sold fe. Doubtful accounts are recognized a8 expense for ‘accounting purposes but deductible for tax purposes only when written off as worthless, Other deductible temporary differences ‘Temporary differences that technically are not timing differences but nevertheless give rise to deferred tax asset include the following 18, Asset is revalued downward and no equivalent adjustment is made for tax purpotes, b. The tax base of investment in subsidiary, associate or joint venture is higher than the carrying amount because the subsidiary, associate or joint venture has suffered continuing losses in current and prior years, B27Recognition of deferred tax asset PAS 12, paragraph 24, provides that a deferred tax asse, shall be recognized for all deductible temporary differences ‘and operating loss earryforward when it is probable thar taxable income will be available ogainst which the deferred tax asset con be used. Operating loss carryforward Operating loss corryforward is an excess of tax deductions over grons income ina year that may be carried forw reduce taxable income in a future year. aoe Certain entities registered with the Board of Investments are permitted to carry over net operating loss for tax Purposes subject to limitations of the relevant lew and ‘implementing regulations of the Board of Investments, ‘Method of accounting ‘8 Income statement approach “his method focuses on tim on timing differences only in the computation offered tax auto deferred tax Hating As the method suggests, timing differences affect the income statement of one period and will reveree in the income statement of one or more subsequent periods. b. Statement of financial position approach ‘This method considers of Thar mete considers ll temporary diferencesinluding ‘There are tempora Of hanced ecru differences thet affect the statement timing differences bat and therefore technically are not Bat sonethrace Sapiens are regio yr Accounting procedures ‘The recognition ofa deferred tax aset or deferred tax ability iB inown a interperod tax allocation. 1. Determine the taxable income ‘The taxable income multiplied by the tax rate equals the current tax expense. come tax expense xt “neome tax payable xe Current tax expense is the amount of income tax paid oF payable for a year as determined by applying the provisions of the enacted tax law to the taxable income. 2. Determine the taxable temporary differences ‘The amount of taxable temporary differences multiplied by the tax rate equals the deferred tax liability. Income tax expense re Deered tax ability xe 8. Determine the deductible temporary differences ‘The amount of deductible temporary differences multiplied by the tax rate equals the deferred tax asset Deferred tax asset a Tnsome tax benefit "The “income tax benefit account” reduces the current tax ‘expense for the year and is a deduction from current tax ‘expense, ‘The deferred tax income tax expense", 4. ‘The total income tax expense for the year is the current tax expense plus the deferred tax expense arising from taxable temporary differences minus the income tax benefit arising from deductible temporary differences, ‘The total income tax expense forthe year is equal to the ‘accounting income subject fo tax multiplied by the tax rate, ‘Gssuming there it Ro future enacted income tax rate. st may be credited directly to 529Illustration 1 - Deferred tax liability 1n020, an entity reported in aerating nce roy eeaRiiment ele of 1,000,000 but tot enable ncoge ‘This temporary dference is expected to be reported in tax {income equally in 2021 and 2022, The income tax rate is 30%, “tm Acounengimome 4000000 50000007000, ‘Mabie nome ‘Hono Ss00.000 —Fsclene ‘Since the temporary difference results to a higher accounting income in 2020, there is a deferred tax liability. Journal entries in 2020 1 To record the current tex expense: Income ax expense s,000 Tncome tox pape 90% 3.000000 sea.00 2 To record the deferced tax ibility: Income taxexpense Os 1.000000) 200000 ‘Deferred titty sa. Totataxexpense (90% 4.000.000 L Carrentiaxexpenes G5 3,000000) "Seon Detered a ibility 300,000, Income statement presentation for 2020 ioninepese ‘coo ‘Curent erpence son000 mnt 500000 1.200000 Observe that the ace Paseo Sobenaetncusting income subject to tax of eal ely $8 us 1,200,000, which sth 580 >a Journal entries in 2021 1, To record the current tax expense: 1,650,000 Income taxexpense 1,680,000 Tncome tx payable (90% x 5,500,000) 2, To decrease the deferred tax lability Deferred tax liability 150.000 Toone tax expense (30% x 500,000) 180,000 Income statement presentation for 2021 Income before income tax 5,000,000 Incoe x expense farrent ta expense Decrease in deferred tax abiity 1,500,000 2,500,000 Netincome Journal entries in 2022 1. To record the current tax expense: Tncome tax expense 2,280,000 Tneome tax payable (30% x 7,500,000) 2,280,000 2 To decrease the deferred tax liability: Deferred tax ability 180,000 Toome tax expense 190,000 ‘The deferred tax linbility on December 31, 2022 has a zero balance because the taxable temporary difference is now fully reversed. Income statement presentation for 2022 Income before income tax 7,000,000 Tncome tax expense: ‘Current taxexpense 2,280,000 Decrease indeferredtarlibiity (160,000) [Net income 581—_——— IMustration 2- Deferred tax asset eos an drane rental peymen Sonn i ewe oe re In 2020, an entity 'P600,000 which wat sccounting ineome until ‘The income statement and tax return showed the following =a peomntnmmanincis “$0000 104 sein SS tame ‘erable income Since the temporary difference reoulta to a higher taxa income in 2000, there isa deferred tax asset =) Journal entries in 2020 |. To record the current tax expense: sencpan oe Tose aoe 2 mend trated ae — so = Rete oorsomng Sar. Sis Deena na Income ttn presen 8 a eine sone a Tncome tax benefit Neen as a 32 Journal entries in 2021 1. To record the current tex expense: Income tax expense 1,920,000 Income tax payable (90% x 6 400,000) 1,920,000 2, To decrease the deferred tax asset: Income tax expense 190,000 ‘Deferred tax asset 180,000 Income statement presentation for 2021 7,000,000 Income before income tax come tax expense: ‘Current tax expense Decrease in deferred tax asset 1,920,000 NetincomeMustration 3 - Deferred tax asset and liability An entity reported the following for the year engey December 31, 2020. ‘Accounting income per bok 6,000,009, experues ‘00,069 Nontarable revenue 200,065 Doubtful accounts 200,000 [stimatod warranty cost that had been recognized ‘ssexpense in 2020 when the preducteales were made butis deductible fortax purposes when paid 400.009 ‘Accounting deprecation 600.060 ‘Tax deprecation 800,000 Gross income on installment sae included im accounting income bu taxable only in 2021 100 ¢00 Income tax rate 8 Computation Accounting income per book 6,000,000 Permanent differences: ‘Nondeductible expenses 500,000 Nontaxable revenue (300003 ‘Alcpunting ince subject to tax 6,200,000, luctible temporary diferences Doubtful accounts 200.000 Extimated warranty cost ‘400000 Taxable temporary diferences ‘Excess tax depreciation 200,000) Grows income on installment sale (4100.00), ‘Taxable income 6,500,000 ‘The permonent differences do not give rise to deferred (ax asset or deferred tax liability and thus eliminated from the reported accounting income. In other words, the accounting income subject to tax must exclude permanent differences, 534 Journal entries in 2020 1, To record the current tax expense: conn tx expense 1,950,000 Income tax payable (20% x6, 800-000) 1.950.000 2, To record the deferred tax as Deferred tax asset Teome tax benefit Doubtful accounts ‘Estimated warranty cost ‘Total deductible temporary diferences Maltplyby Deferred tax asset 3. To record the deferred tax lability Income tax expense Deferred tax ability 90000 200,000 Bacees tan depreciation Gross income on instaliment ale 300.000 ‘Total taxable temporary aiferences Multiply by Deferred tax hsblity Income statement presentation for 2020 Income before income ax Tieome tax expense ‘Current taxexpense Tncome tax benest Deferred tax expense Netincome a total inceme tax expense for the yearNet deferred tax expense or benefit ‘The difference between the change in deferred tax asset a the change in deferred tax liability is the net deferred ‘expense or benefit, >! Observe the following using the preceding illustration; Tes bnefiom inne in aired a at Tiepemteonowendkredariay a Neder (ona, Needlns tomy if he ta expente frm the inezense fered tax abit is mre than the tax benefit fom the inernae im deferred tx ase, there ie a net deferred tax Current tax liability and current tax asset A current tax liability is the current tax expense or the ‘amount of income tax actually payal eee ania ally payable. This is classified as Under our income tax law, parable eremonme (2 law, income tax for corporations is If the amount of tax already paid for the current period exceeds the aunt etal sce sctually payable forthe perc, he ‘Tecognized as a current tax asset. aan ‘Actually, a current Aecuay {tax asset ia a prepaid income tax and ‘8 current asset. Acurrent tax liability oe LETERE iat ibility or current ax aset shall be measured end 6 the ap iat ha ben enacted and effective at the Presentation of deferred tax asset or liability PAS 12, paragraph 70, provides thet when an entity makes @ distinction between current and noncurrent assets and Iiabilities, it shall not classify deferred tax assets as current fgevcts and deferred tax Labilties as current liabilities ‘Accordingly a deferred tax asset shall be classified as oncurrent asset and a deferred tax liability shall be classified Tnoncurrent liability regardless of reversal period, Moreover, a deferred tax asset or deferred tax liability shall not be discounted. Offset of deferred tax asset and liability Under PAS 1, assets and liabilities shall not be offset unless required or permitted by another standard. PAS 12, paragraph 74, provides that an entity shall offset a deferred tax asset against a deferred tax lability when: a. The deferred tax asset and deferred tax liability relate to income taxes levied by the same tax authority. 1b. Theentity has a legal enforceable right to set off a current tax asset against a current tax habilty. Measurement of deferred tax asset or liability [A deferred tax liability or deferred tax asset shall be measured using the tax rate that has been enacted by the tend of the reporting period and expected to apply to the period when the asset is reslized or the liability is eettled. For example, the tax rate of 30% is applicable to the taxable ‘year 2020, By December 31, 2020, a new tax law has been Tnacted imposing a 25% tax rate effective taxable year 2021. ‘The current tex lability or current tax asset is measured at 30% but the deferred tax liability or deferred tax asset is, measured using the new enacted tax rate of 25%, 537Intraperiod and interperiod tax allocation ic act ae ‘Thus, the total income tax expense is allocated to ino from continuing operations, income from discontie perations and prior period erzors o items directly chars oF credited to retained earnings. {nterperiod tx allocation is the recognition ofa deferred ty ‘asset or deferred tax liability Statement of financial position approach To account for a deferred tax asset or lability of financial postion that shows all the assets an at their carrying amount is first prepared, The following procedures are then followed: 1. Determine the tax base of the the statement of financial position, ts and Liabilities in % Compare the carrying amounts with the tax base. 3. The difterence between the carrying amount and tax base normally will result to a de at ris ferred tax see or habe 4 Permanent diferences do ot give rise to deferre asset or liability. eee 5 Apply the tax rate to the temporary dferencen, 6. Determine the beginning and endin, lar tax asset or liability. ames % Recognize the the net change between the beginni and ‘nding balance of deferred tax asset or labiken 538 Comprehensive illustration (On December 31, 2020, the accounts of Easy Company have the same basis for accounting and tax purposes, except Carrying amount Tax bate Difference Computersofarecot 4c00cc0 © 4.000.000 Sanding 47500000 45,000.00 200.000 in January 202, Bary Company incurred cost of P8:00.000 for the development ow simpietsaltware pats Considering the technical feasibility of the product, this cost was capitalized and amortized over 5 yeare for accounting purposes using the straight line method. Computer software cost ‘Amortization fr 2020 (8,000,000) Carrying amount December 31,2020 ‘The computer software cost has a zero tax base because the otal emount was expensed in 2050 fr tax spe ding was acauredon Janay 1,202 for P50,00-000 ted daprecied ang the wnght tn a3 for econ purposes and 10% fri purr, Buailing 50,000,000 ‘Accumulated depreciation (50,000,000 x 5%) (2.500000) Carrying amount December 31,2020, aiding ‘Accumulated depreciation ($0 000,000 108) ‘Tax bane —December 31.2020 Computer sctimare cot Busing (47500000 4,00,00) ‘Total taxable temporary difference Deferred tax lability ~ December 31,2020, (@0% x 6,500,000) 539Journal entry If the carrying amount of an asset is higher than the tay ‘ase, the difference is a future taxable temporary difference and therefore, there is a deferred tax liability. The income tax rate i 30%, Journal entry to record the deferred tax liability on December 31, 2020: Income tax expense ‘Deferred tax habity 1,980,000 1.950,000, Computation of taxable income If the pretax accounting income for 2020 is P10,000,000, taxable income is computed as: veces Pretax a ning income ‘Computer software cost enurely expensed 0.000.009 penn .00 000-1 000,00) (4.000 000) bee nn ibm 200 he inome 3,500.00 Current taerpente (00% 8 0,00) 1.00 000 Journal entry to record the current tax expense fo 2020 Ince a exponen Income tax payable *os0000 1,050,000 Income statement presentation for 2020 Iocome befor tax 00, come tax expence: aman ret ta erpenue 50.000 te aoe ‘As a prot tince there are no al pees ate Permanent differences, the ve is equal of 10,000.00 malted by 20% or P3000 000 me 540 Continuation 7 Continuing the illustration, on December 31, 2021, the Gatement of financial position accounts have the same basi for accounting and tax purposes, except the following: Carryingamount Taxbase Difference Computer sofware cost 3,000,000, 03,000,000 Balding 448,000,000 40,000,000 8,000,000 [Rocrud Labilty heath care” 2,000,000, ‘© 2,000,000 In January 2021, Easy Company entered into an agreement ta nthe employees to prowde health care benefits. The cont of uch plan for 2021 is 2,000,000 ‘This amount was accrued as expense in 2021 for accounting Darposes, Homever, health care benefits are deductible for tax urposes only when actually pad Computer sfoware cost 3,000,000, Building $5,000,000 ‘Total taxable temporary diferences Deferred tax labiltyDecember 81,2022 100% 8,000,000) 2.400000 Deferred tax linhiity -December 31,2020 11980.000 Increase in deferred taxnbity $50.000 ‘Accrued ibilty healthcare 2.0,000 Deferred tax auct~-December 81,2021 (90%x 2,000,000) 600,000 ower than the carrying amount, Ifthe tax base ofa lability id therefore, the difference is a future deductible amount a there is a deferred tax asset. Journal entries in 2021 1. To record the incre in deferred tax liability: Tncome tax expense 450,000 ‘Betered tax libity 450.000 2 To record the deferred tax asset Deferved tax anset 00,000 income tx benefit 600.0 541‘Computation of taxable income for 2021 If the pretax accounting income for 2021 is P16, 000, taxable income is computed as: 000, the Pretax scouring came 35.0000 Reversal of emorsatio ofsftrare cont 1.0005, Excenstax depreciation (2.500.069, Healhcarebeohisastyet deductible tx purposes "2.00 0 Tanableincome 1.800009 Current ax expente (90% 116,500,000) Aste Journal eotry to reord the curent tax expense for 2021 Income ax expense 4880.00 Troome a payable 4620.00 Income statement presentation for 2021 Tocome before tax Ire 15,000,000 Current teense me 4.880.000 Tocmme tarteett &o0.00) a £20000) _4.500000 {0.500000 Ae 8 proof the total income tax ex 000 malupied by 30% or a.soooag, |” “8! Net deferred tax Deferred a expense Income tax tence [Net deferred tax benefit oan y_ Illustration - revaluation On January 1, 2016, Simple Company acquired an equipment for P6,000,000. ‘the equipment is depreciated using a straight line method pased on 16-year life with no residual value. ‘On Janusry 1, 2020, after 5 years, the equipment was fevalued ata replacement cost of P6,750,000. ‘The income tax rate is 30%. Replacement Cost cost Equipment ‘000,000 6.750.000 750,000 ‘Asrumulated depreciation %6,000,000/15%5) 2.000.000 {6,750,000/18%8) 2.250.000 250,000 Carrying amountsound vale! evaluation ewrplus 000,000 4,500,000. $00,000 Equipment at cost 16,000,000 ‘Accumulated depreciation 2,000,000) ‘carrying amount January 12020 4,000,000 6,750,000 (2.280.000) Sound value 500,000 Carrying amount ',000,000 Revaluation narplus- January 1, 2020 500.000 Deferred tax habity (0% x 800,000) 130,000) 350.000 [Netrevaluation eurplus ‘The revaluation surplus is a future taxable amount and therefore, there is a deferred tax liability 543Journal entries in 2020 1. To record the revaluation: Bguipmient 750,000 “Accumulated deprecation 250.000 Revaluation surplus ‘00,000 2. To recognize the deferred tax lsblity on the revaluation surplus: Revaluation surpas 180,000 Deferred tx ability 150.000 [Note that the deferred tax liability is charged to equity, ‘meaning, revaluation surplus. 7 13, To record the annual depreciation subsequent to revaluation (remaining life of equipment is 10 years): Depreciation (4,500,00010) 450,000 "Accum depreciation 450,000 ‘The depreciation is based on the sound value or depreciated replacement cost for accounting purposes. 4. To record the annul realization ofthe revaluation surplus Tevahato upan os ‘Retained earnings as 35000 eplstion cin Boca tig gene, eterna ae ‘Annual realization (350,000/10) The revaluation surplus is a component of other comprehensive income and subsequently reclassified fhruehequiy-or aoe eurnags Computation of taxable income ifthe ince before depreciation and before tx F2,00.000 ‘the taxable income is computed coe Igcome before depreciation and tax 13,000,000 Jeep ecistion based on cost b00,000710) 400,000) ‘Taxable income 560,000, Current tax expense (30% x2:60,000) o.0c0 Journal entry to record the current tax expense: Income tax expense a0 000 =p -a0.000 ncome tax payable Computation of deferred tax liabi ‘On December 31, 2020, the taxable temporary difference as qtesult of the revaluation is computed as Equipment at replacement comt 6.750.000 ‘aged depression FER don on revabud amour for 2020 2,700,000 Carrying amount - December 31,2020 Equipment at cost 6,000,000 abrulited deprecation enuary 1, 2000 BameeZationon cost for 2020 ‘Tax bave ~ December 31,2020 Carrying amount ‘Taxbase “Taxable temporary difference Defersed tax hubiity - 12/31/2020 (30% x 490.000) Before tas inatty - January 12020 Decrease in deferred ta ability “Journal entry to record the deerease in deferred tax ability Defered tax ability 15,000 Thome tx expense 15.000 545,Income statement presentation for 2020 mn fre ein an a — homanieeetacnee (me ae me = aimee rs0o00 Se rtaiy C18) Tay Netincome mies SS ele natoion sue faltered rings Tome ‘The total income tax expense i equal to the account ‘income of P2,660,000 multiplied by 30% or P765,000, 546, Disclosures Josure requirements for income tax are quite However, the key elements are: 1. Components ofthe total income tax expense, for example, ccurrent tax expense, deferred tax expense and deferred tax benefit, 2. An explanation of the relationship between total income tax expense and accounting profit ‘This essentially discloses the accounting profit subject to tax which is the accounting profit after considering permanent differences. 3. The applicable tax rate, the basis on which the tax rate hhas been applied, and the explanation for any change in the applicable tax rate 4. ‘The ageregate amount of current and deferred tax relating to items recognized directly in equity. 5. ‘The aggregate amount of temporary differences associated with investments in subsidiary, associate and joint venture Tor which no deferred tax lability has been recognized. 6, Analysis of the beginning and ending balance of deferred tax asset and deferred tax liability. 547QUESTIONS 1 Wha enti re requir torpor deterred a or liability? 12 Explain accounting income and taxable income, 8. Explain permanent differences, 4. Explain temporary differences, 5. Explain taxable temporary differences 6.Bplain deductible temporary differences, 7. Bxplain the tax base of an asset. ‘8 Explain the tax base of a lability. 9. What ina defored tax lability? 10, When dove deferred tax liability arise? 1.Give examples of temp lomporary differences reli ‘Neher taxable income than soountog incase ot 12 Explain the recognition of a deferred tax Bablity. 18, What in dfered tax asset? 1M. When does u deferzed tax asset arise? 18. Give examples of te porary differences resu taxable income then secure ste Telting te 16. Explain the recognition of a deferred tax asset. 17, What is an operating loss carryforward? 18, What are the two methods of accounting for deferred income tax? 19, Explain current tax asset and current tax liability. 20. Explain the statement presentation of current tax asset fand current tax liability. 21. Explain the statement presentation of deferred tax asset and deferred tax liability. 22, Explain the offset of deferred tax asset and deferred tax liabibty. 23, Explain the measurement of current tax asset and current. ‘tax Liability 24, Explain the measurement of deferred tax asset and deferred tax liability 25, Distinguish interperiod tax allocation and intraperiod tax allocation 549PROBLEMS Problem 16-1 (ACP) ANC Company reported pretax financial income g 200000 forthe yar ended December 31,2020. The tay The dierece ia duet acest depreciation for tax purposes, Prelation for ocony The income tax rate in 20% and ABC Company m, ‘sntimatd tax payment of P200.000 during the cose nt Required: ‘% Prepare journal entries for 2020, 5 Compute the total income tax expense for 2020, Problem 16-2 (ACP) Th income 1 Fate 850% an tiated tx payment of veo Required: 's Company made luring the current year | Problem 16-3 (ACP) 1m 2020, Argentina Company received an advance payment ‘of P1,000,000, which was subject to tax but not reported faccounting income until 2021 ‘The income statement and tax return showed the following 2020 2021 0 9,000,000 Income before tax per income statement 6,600,000 retax per tax return F.0e0,000 5,000,000 Income before tax oe 000 Required: 1. Prepare journal entries to record the income tax and deferred tax for 2020 and 2021 2. Present the income tax expense in the income statement for 2020 and 2021 Problem 16-4 (ACP) Colombo Company included in 2020 a deferred income on. installment sale of P500,000 in accounting income, ‘This deferred income is expected to reverse for tax purposes in 2021 2020 2021 Accounting income 5,500,000 7,000,000 ‘Taxable income ‘8,000,000 7,500,000 Tmcome ux rate 30% 50% Required: 1. Prepare journal entries to record the income tax and deferred tax for 2020 and 2021. 2% Present the nome tax expende inthe income statemen for 2020 and 2021. *Problem 165 (IAA) On January 1, 2020, Valley Company ente construction contact that had etme) 02 ny of P3,000,000. ry ‘The entity usd the percentage of income nd reported conaruction se 28 "nia no = es Fs a The cost _ recovery method tnd the entity reported income onthe seem Pu 2020 zea : 2022 2 3.000.006 ‘This is the only timing differe Income and tata name, "DONE rte acung The entity reported The entity ‘income before construction ineome and 2020 2021 2,400,000, 20x 3,600,000 Income tax rate 8,200,000, 0% Required: Prepare journal entries to record tax for 2020, 2021 and 2022, ‘income tax and deferred 352 | Problem 16-6 (IAA) (Qn January 1, 2020, Aye Company purchased an equipment for P1,000,000. “ ame “= ‘The equipment has an estimated useful life of 4 years and to 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 sv 20 250000 400,000 aoa 250000 300,000, one 2000 200.000 2003 250.000 100,000 ‘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 tas for ench of the four years and thatthe spplicnble tax rate i 90% Required: tax and deferred 1. Prepare journal entries to record income tax for each of the four years. 2 Present the deferred tax liability on December 81, 2021 553Problem 16-7 (IAA) Coupes Coapanyrepored the flowing int rg ie sr acu | 20m im 200 fe i ma ‘ teens re ime om tn 2025, teeny eso Suh accounts were coniered woohoo P1000 in zoel ees oF uncoleet Also on December 31, 2020, at 2020, estimated warranty cot Sone iit had been recognized a expen on a yet pone = the product sales were made but ie de ie ™ tax purposes until paid. ease = mo neo = 000 Required: ‘L. Prepare journal: arise from the temporary difereneas Problem 16-8 (ACP) Shangrila Company reported a pretax accounting income of 'P7,900,000 forthe year ended Deceraber 31, 2020, Temporary differences have been identified an follows: ‘Taxdepreciaton inexcoss of axountine depreciation 1,000,000 Litigation les accrued fr financial accounting ‘Purpees but willbe deducted for ax purposes Inthe distant future 400,000 Warranty cost expensed fr financial scsounting ‘purposes exceeded the amount currently deductble fortax purpocesby 100,000 ‘The warranty lability in classified as a current liability in the entty’s statement of financial position. The income tax rate is 30%, ‘There are no temporary differences at the beginning of the ‘current year Required: 1 Prepere journal entries to record the income tax and deferred tax for 2020, 2 Prepare a partial income statement and partial statement ‘of financial position to show the income tax expense and deferred tax account, ‘The entity has no legal enforceble right to set off» Curent tat ant againet a current tx lability. 8. Determine the net deferred tax expense or benefit 555Problem 169 (FRS) (On December $1, 202, the statement of financial Qkounes af Simple Company have the aame ba counting and tax purposes, except the following Carrylag amount Tax base Differenc, Computer safwarecot 408,000 ° Equpment 1,000,000 12,000,000 ° ‘Accrued habiitybeath care 2,000,000, In Janae 20, he nity incured ext of 6.00 Sele tcieantsfcamponrsbese aot Considering the technical feasibility ofthe product, Stn cptalied and amortind over 8 years for aomunene Purposes using straight line. However, the tota! amount =f ‘expensed in 2020 for tax purposes. ™ The equipment was acquired on January 1, 2020 for 20,000,000. The useful i to reockoal vibe, ful life ofthe equipment is 4 yeare with Feet dons st mi ho Eocmerrr sfonde rete tc the employees to provide healt rot pr a ‘This amount was accra Purposes ‘8 expense in 2020 for accounting However healthcare beneSt a only when actually paid» A" deductible for tax purposes The prtas axons Th prota scouting icome for 2020 ig AE 908 aod thre ae ao dad ecm DD Te Fe journal entries ability, deterred tan wang’ 2 f6C0Pd the defe eet leferred tax ‘Current tax expense. oe Problem 16-10 (IFRS) on Samuary 1 2017 Bay Company acquired an equipment £2 poo mn the equipment ie deprecated wing sr Fa el ho 8 are with 0 January 1, 2020, after 9 yearn he equine . 4 Jf P12,000,000 with no change ght line method ual value fovalued ata replacement cost of in the useful life. ‘The pretax accounting income before depreciation for 2020 is P10,000,000. ‘The income tax rate is 30% and there are no other temp: differences at the beginning of the year. Required: 1. Prepare journal entry to record the revaluation on Sanuary i, 2020, 2. Prepare journal entey to record the deferred tax liability con January 1, 2020. ‘3. Prepare journal entry to record the current tax expense for 2020. |. Prepare the adjustment of the deferred tax liability on December 31, 2020. 5. Prepare the adjustment of the revaluation surplus on December 31, 2020. 6. Present the income tax expense in the income statement for 2020 857Problem 16-11 (IFRS) ‘Aloha Company provided the following information «, December 31, 2020: Carryingamount Tex bau Acca necirte 110000017, “Motor vehicle 11,650,000 ae Proviso for waranty 120000, 1250.00 Doicmcenedinaiane 11000 ° The depreciation rates for accounting and taxatio and 25% respectively ting and tation are Toy Ihe yet ied ‘are deductible when paid. an Ae sean dk ety P00 a es earan iaay Sirona Tre entity showed acount for 2000 The income tax rate ie 30% e800 There are not smporay differences a current year. Hy differences at the beginning of the Required: 1. Determine the dete ferred tax lisbility on December 31, 2 Determine t i a he deferred tax asiet on December 31, 2020. termine the net deferred tax expense oF benefit. 4. Determine the eu ve trent tax expense for 2020, termine the total income tax expense for 2020. 558 - Problem 16-12 (IFRS) wots and liabilities West Company disclosed the following tecarrying amount at year-end: Property 10,900.00 Plant and equipment $5,000,000 Inventory “4,000,000 ‘Trade receivables 3,000,000 ‘Trade payables 6,000,000 ea 2,000,000 the value for tax purposes for property and for plant and ‘TeSipment was P7,000,00 and PS,000,000 respectively “The entity has made a provision for inventory obsolescence Tg 000,000 which is not allowable for tax purpose® 1 trade receivables of not be allowed Further, an impairment charge a& 1.000.000 has been made. This charge wil Jn the current year for tax PURPOSES: ‘West Company reported accounting income before tax of 9,000,000 for the current year. “There are no temporary differences at the beginning of the Gurrent year. The tax rate is 30%. Requires 1. Prepare journal entry to record the current tax expense 2. Prepare journal entry to record the deferred tax liability 5. Prepare journal entry to record the deferred tax ascet Determine the net deferred tax expense or benefit 5. Determine the total income tax expense.Problem 16-13 (FRS) Complex Company reported pretax accounting income PEERS ,oGe te bo ted P18, 300,000 for 2021. "The ince? fax rate i 30% ‘teome On January 1, 2020, the e: tty had deferred tax aa 450,000 and io deferred tax lability to The deferred tax ast wat dut to provision of P500 059 Freogised on December 31,2019 seed im 2020 at wie me ie tax Sedctible ‘The other reason for the deferred tax asset was rent of 1,000,000 collected in 2019 but earned only in 2020, fe insurance premiums of P20,000 were recognized ea year on key officers for 2020 and 2021. cee The entity paid for a two-year casualty insuran 6,000,000 on January 1, 2020. The entire premium ao deductible when paid. Premiim is tex The entity collected rent from leasing some ofits equ some ofits equipment The Fete ecgnzed us revenue when earned bu tanale 2020 20m Rent callectod 3.900.000 3.500.000 Rene 200,000 3.300000 investments ll guns and losses are recognited for tax purpose when the ineectoents ea Daring 202, the entity eon Dur fotity recognized P1,700,000 unre loses on tang investments which were see a SOS Required: 1. Compute taxable income for 2020 and 2021 2 Compute current pute current tax expense and total tax expense for 3. Compute deferred tax December 31,2020 and goni. "+ “tered tax lability on ‘4 Prepare journal entries for 2020 and 2021, 360 -_ Problem 16-14 (IAA) Hilton Company reported pretax financial in 176,200,000 for the current year. come of Included in other income was P200,000 of interest revenue Hom government bonds held by the entity. int also included depreciation expense chine costing 2,000,000. The income eprecatonon the machine ‘The income stateme (of P500,000 for a ma {ax return reported P600,000 ‘The enacted tax rate is 30% for the current year and future years. What ‘= 1,860,000 100,000 1,770,000 4. 1,880,000 Problem 16-15 (IAA) ‘Tantram Company began operations at the beginning of hsfent year Atte cn ofthe fr ea of operations the caret Jevied PG,000.000 income before come tax 1 ESN TERtament but only P9100 000 taxable income inthe ter etn [Anayeis ofthe P900.000 diflerence revealed that 500,000 Antti ot Sete daference nid 00,000 wae a temporary Tor iabiy difference Tela to a current acco, id future years is, the current tax expense for the current year? ‘The enacted tax rate for the current year 30%, ‘What is the total income tax expense to be reported in the income statement for the current year? ‘a 1,800,000 1,530,000 &11680,000 4. 1,960,000 561Problem 16-16 (AICPA Adapted) Huskie Company reported in the income statement fog ‘current year pretax income of P400,000. he gli ams diet Doster “ent oe tg Texretura Per tooy 2000 pest 1 Payment ofa penalty "Nome 10000, ‘The enacted tax rate for curre Ti gnaced ax rate for current year i 90% and 25% for gy What amount should be reported com reported as current port tax expense In the income statement forthe casey ame ‘111,000 b. 1021000 © 115,500 4. 92500 Problem 16-17 (AICPA Adapted) Pine Company re curren PANY Feported pretax income of P800,000 for the sets Computation of income taxes, the following da considered were Nontaxable gin Depreciation deducted for tax purposes in 380,000 lpreciaton for book purposes payment during 0,000 Enacted rate nt uring currentyear ‘70,000 0% * should be reported as current tax liability at 562 Problem 16-18 (AICPA Adapted) Grim Company reported pretax accounting income of 200,000 and taxable income of P150.000 for the current year. ‘The difference is due to the following: Interest income on aving deposit ‘0.000 Premium expense on keyman hfe :niurance (20,000) 50.000 ‘Tal ‘The income tax rate is 30% What amount should be reported as current provision for income tax expense in the income statement for the current y a. 45,000, B 50,000, 60,000, 4 0 Problem 16-19 (AICPA Adapted) Viking Company reported in the income statement for the ‘current year pretax income of P1,000,000 ‘The following items are treated diferently in the tax return and in the accounting records: ‘Taxreturn Accounting record Rentinoome 70.00 120,000 Depreciation 280,000, 220,000 90,000 Premium on officers’ hfe insurance ‘The tax rate is 30%. The entity is the beneficiary of the officers’ life insurance policies What is the total tax expense for the current year? 360,000 300,000 ©. 294000 327/000Problem 16-20 (AICPA Adapted) Thorn Company reported the following tax effeq, of temporary differences at year-end: Deferredtax Related save aig) cami ‘Accelerate ax depreciation 0) ‘tional ota ovenary « Noocurea, fortaxpurpanes, 2500 Cam (32.000) The entity anticipated that P10,000 of the deferre, ity will reverse next year. a What amount should be reported as noncurrnt liability at year-end? deferred tx & 40,000 . 50,000 © 66,000 @. 76,000 Problem 16-21 (AICPA Adapted) In the year-end statement of financial Company had meets lament of financial position, Sheen tax anac! of anane t8x payable of P260,000 and m defence ‘The entity had reported dterzed the beginning of current yen. No wotasned eet were made during the eutnt si ‘The entity det it waa tae anset aicterpined that it was probable thatthe deferred Jn the income statement forthe curren - should be reported as total income tar eee ‘amount 2. 260,000 ® 130.000 © 170000 @ 160,000 Problem 16-22 (AICPA Adapted) Caleb Company has three financial statement elements for which the yearend carrying amount is different from the tax base: ‘Taxbase Difference Carrying amount Equipment 2.000.000 1,200,000 800.000 eid ery Pima poly 780000 ° 130.000 Warranty habiity 500,000 0 see.000 ‘The entity is the beneficiary of the officers life insurance policy. ‘As a result of then. differences, what is the future taxable ‘a. 2,050,000 1,580,000 ©. "300,000 500,000 Problem 16-23 (AICPA Adapted) Boom Company prepared the following reconciliation of financil income fod taxable income forthe current Year: Pretax financial income 6.000.000 Permanent difference 500,000) sso.000 Financial income subject tax taporary erence capalaed nee Tem Dek anf crpenedfrtax 210.000 Taxable income £300,000 umulative tunable tomporay diferonce in P300,000 on Ssauat Vd P50 0000u Decober Ph ax rate 8 3080 What amount should be reported as deferred tax Liability on December 31? 150,000 ‘90,000 60.00 565,Problem 16-24 (IAA) 1, 2020, Boon Company reported & defen On January 000000 and a deferred tx asset of Paap gh teria ofPL tn Decmber 3, 2020, the entity reported a deere (x Dec e000 and deferred tax asset of ers ‘What is the net deferred tax expense for the current yeqy a $00,000 900,000 400,000, 4. 100,000 Problem 16-25 (AICPA Adapted), fee Cagayan apetioos Joan 3, financial reporting, the entyrecoghiaed revene from tales under acrusi method. ae Hower, inthe income tx eter the entity 14 unin ele under the instalment method.” "4 ‘The gross profit on these insta The eon» these installment sales under each ‘Accrualmethod Installment method = 8,200,000, oa $200,000 400.009 The ine as rte ince in ati SON. Ther are no ther temper What amount shouldbe lah on December 3, abai7"|“* “erred tax asset 2199000 ast B00 tay < "randon ant 4720000 tbey — Problem 16-26 (AICPA Adapted) {Quinn Company reported a deferred tax euary 1, 2020. During the year, the entity Fe financial income of P3,000,000. ifferences of P1,000,000 resulted in taxable ‘000,000 for the year. On December 31, 2020. ferences of P700,000. ‘asset of P90,000 on ported pretax ‘Temporary di income of P2, the entity had cumulative taxable di ‘The income tax rate is 30% What amount should be reported as deferred tax expense for the current year? Problem 16-27 (IFRS) , Ranger Company located busin Singapore and Malaysia. Im both countries, the entity taxes receivable and pay ‘The following information related to deferred tax assets and liabilities: ess in to jurisdictions, hhas the legal right to offsot the Classification ‘Amount Taxing jurisdiction Deferred tax asset 500.00, Singapore Deferred taxliablity 300.000 Malaysia Deferred tax bablity 600,000 Singapore How should the entity present deferred taxes at yearend? Deferred tax asset Deferred tax liability a. 800,000 900,000 b ° 1,000,000 © 200,000 {600,000 4. 200,000 $300,000 567Problem 16-28 (AICPA Adapted) Zeft Company prepared the following reconciliatio first year of operations: "8 for thy Pretax financial name Nontaxable interest received 760000) Long-term lose accrual in excess of deductible amount 8000 Deprecaticn im excmoffinancal deprecation ed ‘Taxable income (Pax rate is 90%) 1,400,009 1. What amount should be reported as current tax expeng? ‘480,000 420,000 465,000 . 495,000 2 What amount shou! bet amount should be reported as total income tax 496,000 480,000 465,000 420,000 ‘ What amount should be reported as deferred tax ail? &. 90,000 b. 45,000 75,000 4. 30,000 ‘ What amount should be reported as deferred tax asset? 30,000 ae b. 90,000 ©. 45,000 4. 75,000 Problem 16-29 (AICPA Adapted) Chamber Company revesled the following differences between the book and tax basis of the assets and libili ‘on December 31, 2020: Wook basis Tax basis Installment accountereeivable 1,000,000 ° Litigation aba ‘20,000 ° It ie expected that the litigation liability will be settled in 2021. The difference in accounts receivable will result in taxable amounts of P600,000 in 2021 and P400,000 in 2022, ‘The entity has a taxable income of P7,000,000 in 2020. The income tax rate is 30%, Thia is the first year of operations of the entity. 1, What amount should be reported as current tax expense? 1. 2,100,000 2'400,000 ‘¢ 2,460,000 4. 7080,000 2 What amount should be reported es total tax expense? 1. 2,400,000 b. 2340,000 «2,160,000 @. 2,400,000 8. What amount should be reported as deferred tax liability? 240,000 360,000 800,000 a 0 4. What amount should be reported as deferred tax asset? ‘a. 300,000 300,000 & 60,000 a 0 569Problem 16-30 (IFRS), Pecorino Company had pretax nancial income of P2509 9, in the current year. ‘The entity made corporate estimated tax payment in ‘amount of 180,000 during the current year. the To compute the provi information was provi n for income tax, the folowing Interest income received 7 Tecderecnton nest nunca statementamoune $52 Reserveinueine at Caprese a 1. What amount of permanent difference between income and taxable income existed at year. end? Lo) 520.000 cB 360.000, © 800.000 4. 230000 2% What amount of current tax expense shy ld be reported? rere etm toane a b. 510,000 , 750,000 ut c '@) 678,000 ee & 498,000 crt 606.000 i ©. 330,000 x 4. 570,000 fe ‘4 What amount of total tax expense 8. 714,000 ? b. 726.000 Y ‘©, 642,000 Pos 4. 594.000 1 570 Problem 16-31 (IFRS) Lakeshore Company reported the following selected information for the current year: Accounting income before tax 9,700,000 Inerstinsome on arcxempt municaltonds ||” a0 Depreciation claimed onthe tax returm an ence "fnandal deprecation 500,000 Carrying amount of depreciable aaetn exces of tax basis 600,000 Waray eran rpoedontheimame statement 90000 Atul waren expendtee 20 A the beginning of current year, the entity reported deferred anc st ero and deferred tae ibility at POO 000 1. What is the current tax expense for the current year? 8. 2,718,000 . 21625,000 © 2,655,000 @. 2'745,000 2 What is the total tax expense for the current year? ‘&. 2,820,000 b. 2,730,000 © 2,700,000 4. 2'850,000 ‘3. What is the deferred tax ability at year-end? a. 240,000 > 150,000 ‘& 210,000 4. 120,000 ‘4. What is the deferred tax asset at year-end? 160,000 45,000 15,000 75,000 onProblem 16-32 (IAA) ‘Stabilizer Company reported taxable income of P8,000,009 in the income tax return for the first year of operations. The fnacted income tax rate is 30% for the current and future years, ‘Temporary differences between financial income and taxable income forthe year are “Taxdeprecation in exces ofbook deprecation 800.000 Accrual for produc ability caum in exces of ‘seal clase 1.200.000 Reported cataliment sales ncomeinexces of ‘taxable netalinent sles income 1 What is the deferred tax asset at yearend? 2 240,000 360.000 780,000 4 ° 2,600,000 2 What is the deferred tax liability at yearend? What the net deferred tax expense for the current year? = 1.020.000 b 1380,000 © 660,000 4 360.00 4 What is the total income tax expense for the current year” 2 306,000 b 240.000 < 2610.000 4 2820000 sr Problem 16-83 (PHILCPA Adapted) Rona Company started to manufacture in 2020 copy machines that are sold on the installment basis Rona Company recognizes revenue when equipment is sold for finencial reporting purposes, and when installment ryments are received for tax purposes. {In 2020, the entity recognized gross profit of P6,000,000 for ‘inancial reporting purposes and P1,500,000 for tax purposes ‘The amounts of gross profit expected to be recognized for tax purposes in 2021 and 2022 are P2, 500,000 and 2,000,000, respectively. ‘The entity guaranteed the copy machines for two years. Warranty co! recognized on the accrual basis for financial reporting purposes end when paid for tax purposes, Warranty cost accrued in 2020 is P2,500,000 but only P500,000 of warranty cost is paid in 20 in 2021 and 2022, P1,000,000 and aid It is expected th 1,000,000 respectively. of warranty cost will be In addition during 2020, 500,000 interest, net of 20% final income tax, was received and earned. Insurance premium of P100,000 on life insurance policy that ‘covered the life of entity’s president was pad The entity 1s the beneficiary for this policy. (000,000, Any 2020 2 Pretax accounting income in 2020 was operating loss will be carried forward to ‘The tax rate 18 30%, 8731. What is the accounting income subject to tax? ‘2,000,000 b. 1,600,000 ©. 2,100,000 4. 1,500,000 2% What is the deferred tax asset on December 31,25 ‘&. 870,000 . 600,000 ©. 270,000 4. 480,000 3. What is the det Dopey i the deferred tax liability on December 91 1,800,000 . 1,350,000 ©. 1,500,000 4. 1,320,000 om Problem 16-4 Multiple choice (PAS 12) 1. Which entities are required to apply deferred tax accounting? a. Public entities b. Nonpublic entiti ¢ Both public and nonpublic entities d. Neither public entities nor nonpublic entities 2. [tis the profit for a period determined in accordance with the rules established by tax authorities upon which income taxes are payable. 4. Accounting profit b. Taxable profit Net profit 4. Accounting profit subject to tax 43 It is the profit for a period before deducting tax expense. a Accounting profit b. Taxable profit Gross profit d. Net profit 4. These are differences that will result in future taxable ‘omount in determining taxable profit of future periods. 8. Temporary differences b. Thiable temporary differences ¢. Deductible temporary differences 4. Permanent differences 5. These are differences that result in future deductible ‘omount in determining taxable profit in future periods. ‘Taxable tomporary differences Deductible temporary differences ‘Taxable temporary and permanent differences Deductible temporary and permanent differences 3156 It is the deferred tax consequence attributable taxable temporary difference, & a. Deferred tax liability b. Deferred tax asset ¢ Current tax Liability 4. Current tax asset 7. It is the deferred tax consequence attribut; deductible temporary difference and operating 8 carryforward. ™ a. Deferred tax liability b. Deferred tax asset © Current tax liability . Current tax asset 8 It is the amount of income tax payable i taxable profit. pas 12 reenact 4. Current tax expense Total income tax expense © Deferred tax expense 4. Deferred tax beneht 9. leas the aggregate amount inc amount included in the deter of net profit for rmination nee a the period in respect of current, tax and & Tex expense Current tax expen: © amt pene 4. Deferred tax benefit 10. The deferred tax expense is equal to & Increase in deferred 4, shferred tax labiliy increase in defern seer Setetred tax liability less increase it & Increase in deferred tax asset, 4 Increase in deferred tax lability tax asset less increase in 576 Problem 16-85 Multiple choice (IFRS) 1A deferred tax asset is recognized for deductible temporary differences and operating lose carryforward when 1. It is probable that taxable income will be available jainst which the deferred tax asset can be used. it is probable that accounting income will be available against which the deferred tax asset can be used. ¢. Itis possible that taxable income will be available against which the deferred tax asset can be used. 4. Itis possible that accounting income will be available ‘against which the deferred tax asset can be used. 2. An entity shall offset a deferred tax asset and deferred tax liability ‘a. When the income taxes are levied by different taxing authority. b. When the entity has no 1 offset. cc. When the income taxes are levied by the same taxing. authority and the entity has # legal enforceable right to offset a current tax asset against a current tax liability 4. Under all circumstances. al enforceable right to 8. Which is correct about deferred tax assets and liabilities? a. Current deferred tax assets are netted against current deferred tax liabilities. b. All noncurrent deferred tax assets are netted against noncurrent deferred tax liabilities. ¢. Deferred tax assets are never netted against deferred tax liabilities. 4. Deferred tax assets are netted against deferred tax liabilities if they relate to the same tax authority. 877‘4 Which statement is incorrect conce: abit RING C0 age 7 te Deterred tex Terry Problem 16-36 Multiple choice (AICPA Adapted) 2 assets ani be. Tax sats and Lslies shal resented ers 1. Justification for the method of determining periodic other assets and liabilities in a deferred tax expense is based on the concept of ‘financial position. e Htatemen — © Gulrred tan eeets and liabilities ahqy FO erin expense to period revenue dbstinguished from curent tax assets nt atl be tivity in the calculation of periodic expense When an entity makes a distinction ber: *biit, cc. Recognition of asset and liability. and not = ren cue 4. Consistency of tax expense measurement with actual sae aint nd AEENTey it shale tax planning strategies, ‘sree andishlities as came? 5. Allot : 2 Which of the following differences would result in future “Ne lowing mst be dnloned mpartely, ey taxable amount? The tax bases of ‘major items on which dete 1. Expenses or losses that are deductible ater they are has been red b Te On calculated, a recognized in accounting income. 'b. Revenues or gains that are taxable before they are recognized in accounting income, ¢. Expenses or losses that are deductible before they fare recognized in accounting income, 4. Revenues or gains that are recognized in accounting {income but are never included in taxable income comprehensiy 3. A temporary difference which would result in a deferred ‘income. tax liability is &. Interest revenue on municipal bonds b. Accrual of warranty expense «. Excess tax depreciation over accounting depreciation 4. Subscription received in advance 4. A temporary difference which would result in a deferred tax asset is ‘Tax, penalty or surcharge Dividend received on share investment ‘Excess tax depreciation over accounting depreciation. Rent received in advance included in taxable income At the time of receipt but deferred for accounting purposes. 578 5785. An entity, cash basis taxpayer, prepares aceryg) financial statements. In the year-end stateny financial position, the deferred tax liabilities inca compared to the prior year. Which of the fj changes would cause this increase in deferrey liabilities? te ‘An increase in prepaid insurance ‘An increase in rent receivable An increase in warranty obligation ‘An increase in prepaid insurance and increase receivable poor in ee 6. An entity reported deferred tax assets and def libiities at the end ofthe prior year and atthe east fhe current year. For the curent year, the entity chal Yeport deferred income tax expense or benefit equa 1 Decrease in the deferred tax assets 1 Inerease inthe deere tax heblites © fogs of the current liability plus the sum of the net change in deferred tax arta an mee ce and deferred 41 Suu ofthe net changes in deferred tax ae deferred tax liabilities a a 7. Because an entity uses different methods to deprecits 2 rent m to de ‘equipment for accounting and income tax purposes, ie entity has temporary differences that will reverse durist the next year and add to taxable income. Deferred incoat ‘ fare based on these temporary differences shal ‘©. Contra account to current assets b. Contra account to noncurre1 ¢. Current liability at asseta 4. Noncurrent liability 8 At the current year-end, an entity had a deferred tax liability arising from accelerated depreciation that exceeded a deferred tax asset relating to rent received in advance which is expected to reverse in the next year. Which of the following shall be reported in the current year-end statement of financial position? fa. The excess of the deferred tax liability over the deferred tax asset as a noncurrent liability b. The excess of the deferred tax liability over the deferred tax asset as a current hbility ¢. The deferred tax liability as a noncurrent lability. 4. The deferred tax liability as a current liability. Which statement is true regarding reporting deferred income taxes in the financial statements? re always netted a a. Deferred tax aseets deferred tax liabilities. b. Deferred taxes of one jurisdiction are offset against ‘another jurisdiction in the netting process. c. Deferred tax assets and liabilities may only be classified as noncurrent. 4. Deferred tax assets and liabilities are cl ‘current and noncurrent based on expiration date 10.A deferred tax Liability is computed using ‘a, Current tax law regardless of expected or enacted future tax law b. Expected future tax law regardl enacted or not c. Current tax law unless @ future enacted tax law is different 4. Bither current or expected future tax law regardlet of whether the expected future tax law is enacted or rot 2 of whether 581Problem 16-37 Multiple choice (IAA) 1. The purpose of interperiod tax allocation is to ili rd loss. ities to utilize carryforwai 8. ae earities whose tax liabilities vary SigNifca, : fo eae year to smooth tax payments. th c. Recognize an asset or liability for the tax conseqy, "of temporary differences that exist at year-enq d. Amortize the deferred tax liability. 2. Intraperiod tax allocation a. Involves the allocation of income taxes betwee, current and future periods. _ b. Associates tax effect with different items in the income statement. c. Is not generally acceptable. : d. Arises because different income statement items ay, taxed at different rates. 3. Which is true about intraperiod tax allocation? a. Intraperiod tax allocation arises because certain items are recognized for accounting and tax purposes. b. Intraperiod tax allocation is required for the effect of accounting policy. c. The purpose is to allocate income tax expense evenly over a number of accounting periods. d. The purpose is to relate the income tax expense to the items which affect the amount of tax. 4. All would require intraperiod tax allocation, except a. Discontinued operation b. Prior period error c. Change in accounting estimate d. Income from continuing operations 5. Tax expense should be allocated to all, except . Discontinued operation Prior period error Gross profit Other comprehensive income Beep 582