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ACCOUNTING FOR INCOME TAXES – Quiz Material

1. Interperiod tax allocation accounts for:


(a) all differences between tax regulations and GAAP
(b) tax effects of specific income statement items in the same period
(c) permanent differences
(d) temporary differences D

2. Which of the following could never be subject to Interperiod tax allocation?


(a) rent revenue (c) estimated warranty expense
(b) depreciation expense on operational assets (d) interest revenue on government bonds D

3. Which of the following is the most likely item to result in a deferred tax asset?
(a) using straight line depreciation for the books and accelerated depreciation for tax
(b) prepayment of insurance
(c) rent received in advance
(d) point of sale revenue recognition for the books and cost recovery method of revenue
recognition for tax C

4. Interperiod tax allocation is not appropriate when:


(a) contingent loss is recognized for accounting purposes
(b) accelerated depreciation is used for tax purposes and the straight line method is used for
accounting purposes
(c) goodwill is amortized for the period
(d) different depreciable lives are used for machinery for tax and accounting purposes C

5. Permanent differences differ from temporary differences in that:


(a) permanent differences occur more frequently than temporary differences
(b) a permanent difference cannot change its status once designated, but a temporary
difference may be reclassified in a later period
(c) permanent differences do not reverse themselves in subsequent periods
(d) permanent differences are both unusual and infrequent C

6. Deferred income tax does not need to be recorded when:


(a) temporary differences will reverse within 5 years.
(b) the company does not know when the temporary difference will reverse.
(c) the future repayment of taxes is sufficiently far off that the present value of the payment
approaches zero.
(d) accelerated depreciation is used for both financial reporting and tax purposes. D

7. A temporary difference which would result in a deferred tax asset is:


(a) tax, penalty or surcharge
(b) dividend received on stock investment
(c) excess tax depreciation over financial depreciation
(d) rent received in advance included in taxable income at the time of receipt but deferred for
financial accounting purposes D

8. A temporary difference which would result in a deferred tax liability is:


(a) interest revenue on municipal bonds.
(b) accrual of warranty expense.
(c) excess of tax depreciation which over financial depreciation.
(d) subscription received in advance. C
9. The amount of income tax applicable to transactions that are not reported in the continuing
operations section of the income statement is computed:
(a) by multiplying the item by the effective income tax rate.
(b) as the difference between the tax computed based on taxable income without including
the item and the tax computed based on taxable income including the item.
(c) as the difference between the tax computed on the item based on the amount used for
financial reporting and the amount used in computing taxable income.
(d) by multiplying the item by the difference between the effective income tax rate and the
statutory income tax rate. B

Items 10 to 14:
T Company reports the following revenues and expenses in its pretax financial income for the
year ended December 31, 2003:
Revenues P229,600
Expenses (160,100)
Pretax financial income P 69,500
The revenues included in pretax financial income are the same amount as the revenues
included in the company’s taxable income. A reconciliation of the expenses reported for
pretax financial income to the expenses reported for taxable income, however, reveals four
differences:
a. Depreciation deducted for financial reporting exceeded depreciation deducted for income
taxes by P11,000.
b. Percentage depletion deduction for income taxes exceeded depletion deducted for
financial reporting by P15,600.
c. Warranty costs deducted for income taxes exceeded warranty expenses deducted for
financial reporting by P8,900.
d. Legal expense of P9,800 was deducted for financial reporting, it will be deducted for
income taxes when paid in a future year.
The company expenses its percentage depletion to exceed its cost depletion in each of the
next 5 years by the same amount as in 2000. At the end of 2000, the other three expenses
are expected to result in total future taxable or deductible amounts as follows:
Totals
Future taxable amounts
Depreciation expense difference P63,000
Future deductible amounts
Warranty expense difference 48,400
Legal expense difference 9,800
At the beginning of 2003, the company had a deferred tax liability of P22,200 related to the
depreciation difference and a deferred tax asset of P17,190 related to the warranty
difference. The income tax rate for 2003 is 35%, but in 2002 Congress enacted a 30% rate
for 2004 and thereafter.

10. How much is the taxable income at December 31, 2003?


(a) P65,800 (b) P69,500 (c) P73,200 (d) P74,700 A
11. How much is the deferred tax asset at December 31, 2003?
(a) P17,460 (b) P25,500 (c) P16,920 (d) P18,900 A
12. How much is the deferred tax liability at December 31, 2003?
(a) P17,460 (b) P25,500 (c) P16,920 (d) P18,900 D
13. How much is the current tax income tax expense for 2003?
(a) P23,030 (b) P22,400 (c) P19,460 (d) P26,600 A
14. How much is the net income after income tax provision at December 31, 2003?
(a) P69,500 (b) P46,470 (c) P50,040 (d) P65,930 C

15. Elf Company prepared the following reconciliations of its pretax financial statement income to
taxable income for the year ended December 31, 2000, its first year of operations:
Pretax financial income P1,600,000
Nontaxable interest received ( 50,000)
Long-term loss accrual in excess of
deductible amount 100,000

Depreciation in excess of financial


statement income ( 250,000)
Taxable income P1,400,000
Assume the income tax is 32%, what amount should Elf report as income tax expense –
current portion of its 2000 income statement?
(a) P416,000 (b) P448,000 (c) P496,000 (d) P512,000 B
16. Red Company was organized on January 2, 2002, had pretax accounting income of
P1,500,000 and taxable income of P2,400,000 for the year ended December 31, 2002. Red
expected to maintain this level of taxable income in future years. The only temporary
difference is for accrued product warranty costs expected to be paid as follows:
2003 P300,000 2005 P150,000
2004 150,000 2006 300,000
The applicable enacted income tax rate is 32%. In Red’s December 31, 2002 balance sheet,
the deferred income tax asset and related valuation allowance should be:
Deferred tax asset Valuation allowance Deferred tax asset Valuation allowance
(a) P0 P0 (c) P288,000 P0
(b) P288,000 P288,000 (d) P0 P288,000 C

17. R Corp. prepared the following reconciliation of income per books with income per tax return
for the year ended December 31, 2002:
Book income before income taxes P900,000
Add: Construction contract revenue which
will reverse in 2005 120,000
Less: Depreciation expense which will reverse
in equal amounts in each of the next 4 yrs (480,000)
P540,000
R’s effective income tax rate is 32% for 2002. What amount should R report in its 2002
income statement as a current provision for income taxes?
(a) P38,400 (b) P288,000 (c) P172,800 (d) P326,400 C

18. R Corp.’s income statement for the year ended December 31, 2002 shows the following:
Income before income tax and extraordinary item P1,260,000
Gain on life insurance coverage – included 140,000
Extraordinary item – loss due to earthquake damage 420,000
R’s tax rate for 2002 is 32%. How much should be reported as the provision for income tax
in R’s 2002 income statement?
(a) P224,000 (b) P268,800 (c) P358,400 (d) P403,200 C

19. Unity Corp. prepared the following reconciliation between pretax accounting income and
taxable income for the year ended December 31, 2002:
Pretax accounting income P1,500,000
Taxable income ( 900,000)
Difference P 600,000
Analysis of difference:
Interest on money market funds P 150,000
Excess of tax depreciation over book
depreciation 450,000
P 600,000
Unity’s effective income tax rate for 2002 is 32%. The depreciation difference will reverse in
equal amounts over the next three years at an enacted tax rate of 32%. In Unity’s 2002
income statement, what amount should be reported as the current portion of its provision for
income taxes?
(a) P288,000 (b) P432,000 (c) P480,000 (d) P528,000 A

20. S Corp. received cash of P200,000 that was included in revenues in its 2002 financial
statements, of which P120,000 will not be taxable until 2003. S’s enacted tax rate for 2002
and 2003 is 32%. What amount should S report in its balance sheet as deferred income tax
liability?
(a) P25,600 (b) P30,720 (c) P38,400 (d) P46,080 C