CHAPTER 5

INCOME TAXES

PROBLEMS

5-1. a. Nontaxable
b. Nondeductible
c. Nondeductible
d. Temporary difference – Future taxable amount
e. Temporary difference – Future taxable amount
f. Temporary difference – Future deductible amount
g. Temporary difference – Future deductible amount

5-2.
Pretax financial income P11,000,000
Add Nondeductible expenses (b + c) 400,000 + 40,000 440,000
Less Nontaxable income (a) (2,000,000)
Financial income subject to tax P 9,440,000
Add Future deductible amounts (f + g) 750,000 + 400,000 1,150,000
Less Future taxable amounts (d + e) 1,500,000 + 1,000,000 (2,500,000)
Taxable income P8,090,000
Income tax expense – Current 2,427,000
Income tax payable 2,427,000
30% x 8,090,000
Income tax expense – Deferred 750,000
Deferred tax liability 750,000
30% x 2,500,000
Deferred tax asset 345,000
Income tax expense – Deferred 345,000
30% x 1,150,000
or one compound entry may be made as follows:
Income tax expense – Current 2,427,000
Income tax expense – Deferred 405,000
Deferred tax asset 345,000
Income tax payable 2,427,000
Deferred tax liability 750,000

5-3. (Luzon Corporation)

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

(b) Income tax expense – Current 360,000

Income tax expense – Deferred 540,000
Income tax payable 360,000
Deferred tax liability 540,000
30% x 1,200,000 = 360,000
30% x 1,800,000 = 540,000

5-4. (Visayas Corporation)

(a) Pre tax financial income P2,000,000
Future deductible amount 1,550,000
Taxable income P3,550,000
Income tax payable: 30% x 3,550,000 P1,065,000
Chapter 5 - Income Taxes

(b) Income tax expense-Current 1,065,000

Deferred tax asset 465,000
Income tax payable 1,065,000
Income tax benefit-Deferred 465,000

5-5. (Mindanao Corporation)

Income tax expense – Current 1,560,000
Deferred tax asset 600,000
Deferred tax liability 185,000
Income tax expense – Deferred (Benefit) 415,000
Income tax payable 1,560,000
30% x 5,200,000 = 1,560,000
30% x 2,000,000 = 600,000
(30% x 500,000) + (35% x 100,000) = 185,000

5-6. (Samar, Inc.)

Income tax expense – Current (30% x 2,000,000) P 600,000
Income tax expense – Deferred (267,000 – 72,000) 195,000
Income tax expense – Total P 795,000
Income tax payable (see above) P 600,000

Deferred tax asset: 30% x 240,000 P 72,000

Deferred tax liability: 30% x (530,000 + 360,000 ) P 267,000

5-7. (Bohol Company)

Taxable income P12,000,000
Future deductible amount:
Book depreciation in excess of tax depreciation (430,000)
Nontaxable income:
Interest on government securities 450,000
Pretax financial income P12,020,000

5-8. (Wall Services)

(a) Schedule of reversal of the temporary differences
2014 140,000 x 32% P 44,800
2015 320,000 x 34% 108,800
2016 240,000 x 36% 86,400
Total P240,000
Pretax financial income P2,200,000
Add nondeductible expenses 400,000
Less nontaxable revenues ( 140,000)
Financial income subject to tax P2,460,000
Future taxable amounts ( 700,000)
Taxable income P1,760,000
Tax rate x 30 %
Income tax payable P 528,000
Deferred tax liability (see above) P 240,000

(b) Income tax expense – Current 528,000

Income tax payable 528,000

Income tax expense – Deferred 240,000

Deferred tax liability 240,000

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

Income tax expense:
Current P528,000
Deferred 240,000 768,000
Net income P1,432,000

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5-9. (Daniel Company)

(a)
Straight Line SYD Difference
2013 500,000 800,000 (300,000)
2014 500,000 600,000 (100,000)
2015 500,000 400,000 100,000
2016 500,000 200,000 300,000

Carrying Amount Tax Base Difference

12/31/2013 1,500,000 1,200,000 300,000
12/31/2014 1,000,000 600,000 400,000
12/31/2015 500,000 200,000 300,000
12/31/2016 0 0 0

2013 2014 2015 2016

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

(b) Deferred tax liability at the end of each year is as follows:

2013 300,000 x 30% P 90,000
2014 400,000 x 30% 120,000
2015 300,000 x 30% 90,000
2016 0 0

(c) Journal entries to record current income tax:

2013 2014
Income tax expense-Current 240,000 267,000
Income tax payable 240,000 267,000
(30% x 800,000) (30% x 890,000)

2015 2016
Income tax expense-Current 360,000 450,000 Income tax
payable 360,000 450,000
(30% x 1,200,000) (30% x 1,500,000)

Journal entries to record deferred income tax:

December 31, 2013:
Income tax Expense-Deferred 90,000
Deferred tax liability 90,000

December 31, 2014:

Income tax expense – Deferred 30,000
Deferred tax liability 30,000
120,000 – 90,000 = 30,000
December 31, 2015:
Deferred tax liability 30,000
Income tax expense-Deferred (Benefit) 30,000
90,000 – 120,000 = 30,000 decrease
December 31, 2016:
Deferred tax liability 90,000
Income tax expense-Deferred (Benefit) 90,000
0 – 90,000 = 90,000 Decrease

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(d)
2013 2014 2015 2016
Income tax expense:
Current P 240,000 P 267,000 P 360,000 P 450,000
Deferred (Benefit) 90,000 30,000 ( 30,000) (90,000)
Total income tax expense
P 330,000 P 297,000 P 330,000 P 360,000
(e)
2013 2014 2015 2016
Income before income tax P1,100,000 P 990,000 P1,100,000 P1,200,000
Less income tax expense
(see above) 330,000 297,000 330,000 360,000
Net income P 770,000 P 693,000 P 770,000 P 840,000

5-10. (Jude Company)

(a) Future taxable amount
Carrying amount of inventories > Tax Base P 100,000
Carrying amount of building & equipment > Tax Base 1,800,000
P 1,900,000
Future Deductible Amount
Carrying amount of accounts receivable < Tax Base P 200,000
Carrying amount of warranty > Tax Base 800,000
Carrying amount of unearned rent > Tax Base 500,000
P 1,500,000

(b) Income tax payable (5,000,000 X 30%) P1,500,000

Deferred tax assets (1,500,000 x 30%) P 450,000
Deferred tax liability (1,900,000 x 30%) P 570,000

(c) Income tax expense-Current 1,500,000

Income tax payable 1,500,000
Income tax expense-Deferred 75,000
Deferred tax asset 75,000
450,000 – 525,000
Deferred tax liability 830,000
Income tax benefit-Deferred 830,000
1,400,000 – 570,000

5-11. (Capetown Company)

Tax rate = 180,000/600,000 = 30%

Income tax expense – current 300,000

Income tax payable 300,000
30% x 1,000,000

Deferred tax asset 60,000

Income tax benefit – deferred 60,000
End (30% x 800,000) = 240,000
Beg 180,000
Increase 60,000

5-12 (Conchita Corporation)

(a) Deferred tax liability, 12/31/2013
2M x 30% P600,000

(b) Income tax expense – current 900,000

Income tax payable 900,000
3M x 30%

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Deferred tax liability 40,000

Income tax expense – deferred 40,000
Beg. 640,000
End, revised due to
change in tax rate 600,000
Decrease in DTL 40,000

5-13 (Britanny Company)

(a) Income tax expense – current
3M x 30% P900,000
Previous payment in 2013 500,000
Income tax payable, 12/31/2013 P400,000

(b) Income tax expense – current 400,000

Income tax payable 400,000

Deferred tax liability 30,000

Deferred tax asset 30,000
DTL, 12/31/13 (400,000 x 30%) 120,000
DTL, 1/1/13 150,000
Decrease in DTL 30,000

DTA, 12/31/13 (200,000 x 30%) 60,000

DTA, 1/1/13 90,000
Decrease in DTA 30,000

(c) Total income tax expense

Current P900,000
Deferred -0-
Total income tax expense P900,000

Pretax profit P2,800,000

Income tax expense 900,000
Profit P1,900,000

MULTIPLE CHOICE QUESTIONS

Theory
MC1 C MC6 D MC11 C
MC2 A MC7 C MC12 C
MC3 C MC8 D MC13 C
MC4 C MC9 A MC14 D
MC5 D MC10 D MC15 B
MC16 B

Problems
MC17 B 1,800,000 x 35% = 630,000
MC18 B Excess of Book Value > Tax Basis of Equipment
MC19 B (2,000,000 x 30%) + (1,000,000 x 35%) = 950,000
MC20 D 10,000,000 x 30% = 3,000,000
MC21 C (8,000,000 – 4,000,000) x 30% = 1,200,000
MC22 B [(700,000 x 30%) + (1,400,000 x 35%)] – [(500,000 x 30%) + (1,000,000 x
35%)] = 700,000 – 500,000 = 200,000 (all non-current)
MC23 C 1,200,000 – 750,000 = 450,000; 450,000 x 35% = 157,500
MC24 B 1,500,000 x 30% = 450,000
MC25 D 6,000,000 x 30% = 1,800,000
MC26 C 9,000,000 x 30% = 2,700,000
MC27 D 42,000 / 30% = 140,000; 600,000 + 140,000 = 740,000
MC28 C 150,000 x 30% = 45,000

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MC29 D 5,000,000 – 900,000 + 1,200,000 + 200,000 = 5,500,000;

5,500,000 x 30% = 1,650,000
MC30 C 200,000 – 40,000 = 160,000; 160,000 x 30% = 48,000
MC31 B 150,000 x 35% = 52,500; 150,000 x 35% = 52,500; 150,000 x 30% = 45,000
52,500 + 52,500 + 45,000 = 150,000
MC32 B 95,000 x 38% = 36,100
MC33 D 6,500,000 x 30% = 1,950,000 – 900,000 = 1,050,000
MC34 C (2,600,000 – 1,400,000) x 38% = 456,000
MC35 D
MC36 D (3,000,000 x 30%) – (5,000,000 x 30%) + (4,000,000 x 30%) = 600,000
OR 2,000,000 X 30% = 600,000
MC37 C See computation below
MC38 C See computation below
MC39 D 172,500 / 30% = 575,000; 3,000,000 + 575,000 = 3,575,000
MC40 D 1,800,000 – 80,000 + 60,000 = 1,780,000; 1,780,000 x 30% = 534,000
MC41 B 2,000,000–100,000–120,000+180,000 = 1,960,000; 1,960,000 x 30%=588,000
MC42 A 5,000,000 – 500,000 + 200,000 – 4,000,000 + 1,800,000 = 2,500,000
2,500,000 x 30% = 750,000
MC43 A (5,000,000 + 400,000 – 600,000) x 30% = 1,440,000

Items 37 and 38:

Pretax accounting income P 1,000,000
Future deductible amount (accrued warranty cost) 1,200,000
Future taxable amount (accrual basis profit > cash basis profit (5,000,000)
Operating loss carry-forward (for tax purposes) P 2,800,000

Income tax expense

Increase in deferred tax liability 5,000,000 x 30% P 1,500,000
Less: increase in deferred tax asset
(from accrued warranty cost) = 1,200,000 x 30% P 360,000
(from operating loss carry forward)= 2,800,000 x 30% x 40% 336,000
Total deferred tax asset P 696,000
Income tax expense P 804,000

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