CABRIA CPA REVIEW CENTER
INCOME TAX
LECTURE
Corporation – an artificial being created by operation of
Definition of terms
Accounting profit is profit or loss for a period before
deducting tax expense.
Taxable profit (tax loss) is the profit (loss) for a period,
determined in accordance with the rules established by the
taxation authorities, upon which income taxes are payable
(recoverable).
Tax expense (tax income) is the aggregate amount included
in the determination of profit or loss for the period in respect
of current tax and deferred tax.
Current tax is the amount of income taxes payable
(recoverable) in respect of the taxable profit (tax loss) for a
period.
Deferred tax liabilities are the amounts of income taxes
payable in future periods in respect of taxable temporary
differences.
Deferred tax assets are the amounts of income taxes
recoverable in future periods in respect of:
(a) deductible temporary differences;
(b) the carryforward of unused tax losses; and
(c) the carryforward of unused tax credits.
Temporary differences are differences between the carrying
amount of an asset or liability in the statement of financial
position and its tax base. Temporary differences may be
either:
(a) taxable temporary differences, which are temporary
differences that will result in taxable amounts in determining
taxable profit (tax loss) of future periods when the carrying
amount of the asset or liability is recovered or settled; or
(b) deductible temporary differences, which are temporary
differences that will result in amounts that are deductible in
determining taxable profit (tax loss) of future periods when
the carrying amount of the asset or liability is recovered or
settled.
The tax base of an asset or liability is the amount attributed
to that asset or liability for tax purposes.
Tax expense (tax income) comprises current tax expense
(current tax income) and deferred tax expense (deferred tax
income).
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ERNIE M. LAT II
Current Tax
Current tax for the current and prior periods should be
recognized as a liability to the extent that it has not yet been
settled, and as an asset to the extent that the amounts
already paid exceed the amount due. The benefit of a tax
loss which can be carried back to recover current tax of a
prior period should be recognized as an asset. Current tax
assets and liabilities should be measured at the amount
expected to be paid to (recovered from) taxation authorities,
using the rates/laws that have been enacted or substantively
enacted by the end of the reporting period.
Recognition of Deferred Tax Liabilities
The general principle in PAS 12 is that deferred tax liabilities
should be recognized for all taxable temporary differences.
There are 3 exceptions to the requirement to recognize a
deferred tax liability, as follows:
 liabilities arising from goodwill for which
amortization is not deductible for tax purposes;
 liabilities arising from the initial recognition of an
asset/liability other than in a business combination
which, at the time of the transaction, does not affect
either the accounting or the taxable profit; and
 liabilities arising from undistributed profits from
investments where the enterprise is able to control
the timing of the reversal of the difference and it is
probable that the reversal will not occur in the
foreseeable future.
Recognition of Deferred Tax Assets
A deferred tax asset should be recognized for deductible
temporary differences, unused tax losses and unused tax
credits to the extent that it is probable that taxable profit will
be available against which the deductible temporary
differences can be utilized, unless the deferred tax asset
arises from the initial recognition of an asset/liability other
than in a business combination which, at the time of the
transaction, does not affect the accounting or the taxable
profit.
Deferred tax assets for deductible temporary differences
arising from investments in subsidiaries, associates,
branches and joint ventures should be recognized to the
extent that it is probable that the temporary difference will
reverse in the foreseeable future and that taxable profit will
be available against which the temporary difference will be
utilized.
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The carrying amount of deferred tax assets should be
reviewed at the end of each reporting period and reduced to
the extent that it is no longer probable that sufficient taxable
profit will be available to allow the benefit of part or all of
that deferred tax asset to be utilized. Any such reduction
should be subsequently reversed to the extent that it
becomes probable that sufficient taxable profit will be
available.
A deferred tax asset should be recognized for an unused tax
loss carryforward or unused tax credit if, and only if, it is
considered probable that there will be sufficient future
taxable profit against which the loss or credit carryforwards
can be utilized.
Measurement of Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities should be measured at the
tax rates that are expected to apply to the period when the
asset is realized or the liability is settled (liability method),
based on tax rates/laws that have been enacted or
substantively enacted by the end of the reporting period.
The measurement should reflect the entity's expectations, at
the end of the reporting period, as to the manner in which
the carrying amount of its assets and liabilities will be
recovered or settled.
Deferred tax assets and liabilities should not be discounted.
Recognition of Tax Expense or Income
Current and deferred tax should be recognized as income or
expense and included in net profit or loss for the period,
except to the extent that the tax arises from:
 a transaction or event that is recognized directly in
equity; or
 a business combination accounted for as an
acquisition.
If the tax relates to items that are credited or charged
directly to equity, the tax should also be charged or credited
directly to equity.
If the tax arises from a business combination that is an
acquisition, it should be recognized as an identifiable asset
or liability at the date of acquisition in accordance with PFRS
3 Business Combinations (thus affecting goodwill or negative
goodwill).
Presentation
Current tax assets and current tax liabilities should be offset
on the statement of financial position only if the enterprise
has the legal right and the intention to settle on a net basis.
Deferred tax assets and deferred tax liabilities should be
offset on the statement of financial position only if the
enterprise has the legal right to settle on a net basis and
they are levied by the same taxing authority on the same
entity or different entities that intend to realize the asset and
settle the liability at the same time.
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REVIEW QUESTIONS
1. What is the basic principle for accounting for income
taxes under IAS 12?
a. There must be no large fluctuation in an
enterprise’s income tax expense from period to
period.
b. The income tax expense must be related to the
income or expense item that results in income
tax.
c. An entity is required to recognize deferred tax
liability or asset when the book basis for the
asset or liability is not equal to its tax bases and
the difference is due to temporary difference.
d. An entity is required to recognize deferred tax
liability or asset when the book basis for the
asset or liability is not equal to its tax base and
the difference is due to permanent difference.
2. The differences between accounting profit and
taxable income that do not have tax consequences
are called
a. Permanent differences
b. Non-temporary differences
c. Temporary differences
d. Timing differences
3. If during the current year, taxable profit is greater
than accounting profit and the difference is a
temporary difference
a. A deferred tax asset is recognized at the end of
the current year.
b. A deferred tax asset will be recognized in future
years.
c. A deferred tax liability is recognized at the end
of the current year.
d. A deferred tax liability will be recognized in
future years.
4. Profit or income determined after applying the
financial reporting framework at a particular time is
called
a. Accounting profit
b. Gross income
c. Taxable income
d. Taxable revenues
5. Profit or income determined after applying the
provisions of the NIRC is called
a. Accounting income
b. Gross income
c. Taxable income
d. Taxable revenues
6. A major difference between permanent differences
and temporary differences is
a. Permanent differences do not represent
generally accepted accounting practices.
b. Temporary differences occur less frequently
than permanent differences.
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c. Temporary differences may become permanent 12. Carpet Company has three financial statement
differences with the passage of time, but elements for which the December 31, 2016 book
permanent differences can never become basis is different form the December 31, 2016 tax
temporary differences basis:
d. Temporary differences reverse themselves Book Tax basis Difference
in subsequent reporting period, whereas basis
permanent differences do not reverse Equipment P2,000,000 P1,200,000 P800,000
Prepaid officer’s 750,000 0 750,000
7. Which of the following shall be classified as insurance policy
permanent differences between pretax Warranty liability 500,000 0 500,000
financial income and taxable income?
a. Payment of premiums for life insurance
b. Depreciation expense As a result of these differences, future taxable
c. Fines for violations of law amounts are
d. Product warranty costs a. P500,000
b. P800,000
8. Which of the following would create a permanent c. P1,550,000
difference between pretax financial income and d. P2,050,000
taxable income?
a. Using accelerated depreciation for tax purposes 13. L Corp.’s worksheet for calculating current and
and straight-line depreciation for accounting deferred income taxes for 2016 (000 omitted):
purposes.
b. Purchasing equipment previously leased with an 2016 2017 2018
operating lease in prior years. Pretax accounting P14,000
c. Using the percentage of completion method on profit
long term construction contracts Temporary
d. Recoding interest revenue on government- differences:
issued securities Depreciation (8,000) (P12,000) P20,000
Warranty costs 4,000 (1,000) (3,000)
9. Which of the following would create a deferred tax Taxable income P10,000
liability?
a. Interest revenue on municipal bonds Enacted rate 30% 30% 35%
b. Accrual of warranty expense.
c. Excess of tax depreciation over financial
accounting depreciation L had no prior deferred tax balances. In its 2016
d. Subscriptions received in advance income statement, what amount report as current
income tax expense?
10. Which of the following creates a deferred tax asset? a. P4,900,000
a. Tax depreciation exceeding book depreciation b. P4,200,000
b. Using installment sales method for tax purposes c. P3,500,000
and accrual basis for accounting purposes d. P3,000,000
c. Recognition of prepaid expenses
d. Recognition of unearned revenues 14. Use same info from 13. What amount should L
report as income tax expense – deferred in its 2016
11. Q Co. leased a building and received the P3,600,000 statement of comprehensive income?
annual rental payment on June 15, 2015. The lease a. P2,050,000
starts on July 1, 2015. Rental income is taxable b. P1,400,000
when received. Q’s tax rates are 30% for 2015 and c. P1,200,000
35% thereafter. Q has no other permanent or d. P550,000
temporary differences. Q determined that any
deferred tax asset is fully realizable. 15. At the end of 2016, its first year of operations, G Co
prepared a reconciliation between pretax financial
What amount of deferred tax asset should Q report income and taxable income as follows:
in its December 31, 2015 SFP?
a. P540,000 Pretax financial income P4,500,000
b. P630,000 Estimated litigation expenses 6,000,000
c. P1,080,000 Excess depreciation for taxes (9,000,000)
d. P1,260,000 Taxable income P1,500,000

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CABRIA CPA REVIEW CENTER
The estimated litigation expense of P6,000,000 will
be deductible in 2017 when it is expected to be paid.
Use of the depreciable assets will result in taxable
amounts of P3,000,000 in each of the next three
years. The income tax rate is 30% for all years.

Assuming no payment yet has been paid for income

taxes, what is the income tax payable at the end of
2016?
a. P0
b. P450,000
c. P900,000
d. P1,350,000

16. Use same info from 15. What is the amount of

deferred tax asset recorded at December 31, 2016?
a. P450,000
b. P900,000
c. P1,350,000
d. P1,800,000

End

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