PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY, INC

MAY 2020 CPALE (BATCH NO. 05)

Financial Accounting and Reporting (FAR) Nenita S. Robles/ Floyd C. Paguio

INCOME TAXES
(PAS 12)
CLASSROOM DISCUSSION QUESTIONS
Identification of temporary differences
1. Required
a. Determine the asset or liability account affected in the balance sheet.
b. Determine the carrying amount of the asset/liability in the balance sheet and the tax base as of December 31,
20A1.
c. Determine the amount of temporary differences as of December 31, 20A1 and determine whether the difference
is deductible or taxable.
d. Determine the amount of deferred tax asset or deferred tax liability to be recognized as of December 31, 20A1.

Notes and solution

Requirement No. 1 Requirement No. 2 Requirement No. 3 Requirement No. 4

Carrying amount Tax base Temporary difference Taxable/Deductible Tax rate Amount DTA/DTL

a Accounts payable 5,625,000 5,250,000 (375,000) Deductible 40% 150,000 DTA

b Inventories 2,500,000 2,700,000 (200,000) Deductible 30% (60,000) DTA

c Investment 1,500,000 1,200,000 300,000 Taxable 10%/20% 50,000 DTL

d Trademark 350,000 400,000 (50,000) Deductible 25% (12,500) DTA

e Investment property 2,200,000 1,800,000 400,000 Taxable 20% 80,000 DTL

Not Not Not Not

f Equipment 800,000 applicable Not applicable Not applicable applicable applicable applicable

g Investment 5,000,000 4,000,000 1,000,000 Taxable 10% 100,000 DTL

Not Not Not Not

h Goodwill 600,000 applicable Not applicable Not applicable applicable applicable applicable

Note: For item (g), no DTL will be recognized if Radcliffe controls the reversal of temporary differences. Effectively, items (f), (g) and (h) are considered
exceptions in the recognition of deferred income tax.

Deferred tax assets and liabilities; fixed and varying tax rates; offsetting of deferred income taxes
2. Required
1. Show how the balance of PRIA’s deferred tax asset (net) as of January 1, 20A1 of P22,500 was calculated.
Show the carrying amounts and tax bases of the related assets and liabilities.
2. Compute PRIA’s taxable income, current tax expense, deferred tax expense (benefit) for the year ended
December 31, 20A1, and deferred tax asset (liability) as of December 31, 20A1. Show the carrying amounts
and tax bases of the related assets and liabilities in calculating the deferred income taxes.
3. Prepare the journal entries to record income taxes for 20A1.
4. Prepare a partial income statement for PRIA beginning with "Income before income taxes" for the year ended
December 31, 20A1.
5. Prepare the following reconciliations:
a. Numerical reconciliation between tax expense (income) and the product of accounting income multiplied by
the tax rate.
b. Numerical reconciliation between the average effective tax rate and the applicable tax rate (round-off the
percentages to the nearest two decimal places)
6. Assume that the tax rates are as follows: 20A0 – 32.5% , 20A1 – 30%, 20A2 – 27.5%, 20A3 – 25%, 20A4 –
22.5%, and 20A5 and onwards – 20%:
a. Show how the balance of PRIA’s deferred tax asset (net) as of January 1, 20A1 of P22,500 was calculated.
Show the carrying amounts and tax bases of the related assets and liabilities.
b. Compute PRIA’s taxable income, deferred tax expense (benefit) for the year ended December 31, 20A1,
and deferred tax asset (liability) as of December 31, 20A1. Show the carrying amounts and tax bases of
the related assets and liabilities in calculating the deferred income taxes.

PRIA: Income Taxes (HO. No. 14)

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 PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY, INC
MAY 2020 CPALE (BATCH NO. 05)
Financial Accounting and Reporting (FAR) Nenita S. Robles/ Floyd C. Paguio

Notes and solution

Requirement No. 1
Carrying
amount Tax base Temporary diff Tax rate DTA (DTL)
Machinery 400,000 400,000 - 30% -
Investment property 475,000 400,000 (75,000) 30% (22,500)
Provision for losses 150,000 - 150,000 30% 45,000
Total 75,000 22,500

Requirement No. 2

Financial income before tax 1,000,000.00

Permanent differences
Tax-exempt interest (200,000.00)
Non-deductible expense 100,000.00 (100,000.00)
Taxable financial income 900,000.00
Temporary differences
Impairment loss 90,000.00
Fair value gain (125,000.00)
Provision for loss 75,000.00 40,000.00
Taxable income/Total 940,000.00
Tax rate 30%
Tax due 282,000.00
Tax payments 100,000.00
Tax payable 182,000.00

Carrying
amount Tax base Temporary diff Tax rate DTA(DTL)
Machinery 210,000.00 300,000.00 90,000.00 30% 27,000.00
Investment property 600,000.00 400,000.00 (200,000.00) 30% (60,000.00)
Provision for losses 225,000.00 - 225,000.00 30% 67,500.00
DTA, end. 34,500.00
DTA, beg. 22,500.00
Adjustment 12,000.00

Accounting for the adjustment:

Movement in temporary differences (see current tax calculation)
Deferred tax
Temporary dif Amount Tax rate effect
Machinery 90,000.00 30% 27,000.00
Investment prop (125,000.00) 30% (37,500.00)
Provision 75,000.00 30% 22,500.00
12,000.00

Requirement No. 3
Income tax expense - current 182,000.00
Income tax payable 182,000.00

Deferred tax asset 12,000.00

Income tax benefit - deferred 12,000.00

Requirement No. 4
Income before income tax 1,000,000.00
Income tax expense
Current 282,000.00
Deferred (12,000.00) 270,000.00

PRIA: Income Taxes (HO. No. 14)

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 PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY, INC
MAY 2020 CPALE (BATCH NO. 05)
Financial Accounting and Reporting (FAR) Nenita S. Robles/ Floyd C. Paguio

Net income 730,000.00

Requirement No. 5
Tax expense 270,000.00
Tax effect of:
Tax-exempt interest 60,000.00
Non-deductible interest (30,000.00)
Product of financial income and statutory rate 300,000.00

Effective tax rate 27.00%

Tax effect of:
Tax-exempt interest 6.00%
Non-deductible interest -3.00%
Statutory tax rate 30.00%

Requirement No. 6(a)

Year of reversal
Carrying Temporary Beyond
amount Tax base diff 20A3 20A5 Tax rate DTA(DTL)
Machinery 400,000 400,000 - 0% -
Investment property 475,000 400,000 (75,000) (75,000) 20% (15,000)
Provision for losses 150,000 - 150,000 150,000 25% 37,500
Total 75,000 22,500

Requirement No. 6(b)

Financial income before tax 1,000,000.00

Permanent differences
Tax-exempt interest (200,000.00)
Non-deductible expense 100,000.00 (100,000.00)
Taxable financial income 900,000.00
Temporary differences
Impairment loss 90,000.00
Fair value gain (125,000.00)
Provision for loss 75,000.00 40,000.00
Taxable income/Total 940,000.00
Tax rate 30%
Tax due 282,000.00
Tax payments 100,000.00
Tax payable 182,000.00

Deferred income tax on revalued assets, financial instruments, provisions

3. Required
1. Show how the balance of PRIA’s deferred tax liability (net) as of January 1, 20A1 of P3,680 was calculated.
Show the carrying amounts and tax bases of the related assets and liabilities.
2. Compute the initial amount of deferred income tax recognized arising from convertible bonds during 20A1.
3. Compute PRIA’s taxable income, current tax expense, deferred tax expense (benefit) for the year ended
December 31, 20A1, and deferred tax asset (liability) as of December 31, 20A1. Show the carrying amounts
and tax bases of the related assets and liabilities in calculating the deferred income taxes.
4. Prepare all journal entries for 20A1.
5. Prepare a partial income statement for PRIA beginning with "Income before income taxes" for the year ended
December 31, 20A1.

Notes and solution

Requirement No. 1
Carrying
amount Tax base Temporary diff Tax rate DTA(DTL)
AFS - - - 30% -

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 PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY, INC
MAY 2020 CPALE (BATCH NO. 05)
Financial Accounting and Reporting (FAR) Nenita S. Robles/ Floyd C. Paguio

Building 480,000 400,000 (80,000) 30% (24,000)

Provision 67,735 - 67,735 30% 20,320

Total (12,265) (3,680)

Requirement No. 2
DIT on convertible bonds
Face value 300,000.00
Liability component 186,276.00
Difference 113,724.00
Tax rate 30%
Deferred tax liability 34,117.20

Liability component 186,276.00

Deferred tax liability 34,117.20
Equity component 79,606.80
Total 300,000.00

Requirement No. 3

Financial income before tax 200,000.00

Temporary differences

Depreciation on revaluation surplus 5,000.00

Interest expense on convertible bonds 18,627.60
Interest expense on provision 6,773.45 30,401.05
Taxable income/Total 230,401.05
Tax rate 30%
Tax due 69,120.32

Carrying Tax Temporary Tax

amount base diff rate DTA(DTL) Equity P&L
AFS 104,000 100,000 (4,000) 10% (400) (400) -
Building 450,000 375,000 (75,000) 30% (22,500) (22,500)
Convertible bonds 204,904 300,000 (95,096) 30% (28,529) (28,529) -
Provision 74,508 - 74,508 30% 22,352 22,352
DTA (DTL), end (99,588) (29,077) (28,929) (148)
DTA (DTL), beg (3,680) (3,680)
Adjustment (25,397) (28,929) 3,532
DTL on AFS (400)
DTL on Convertible bonds (34,117)
Net adjustment 9,120

Requirement No. 4
Available for sale securities 100,000
Cash 100,000

Available for sale securities 4,000

Unrealized gain/loss - OCI 3,600
Deferred tax asset/liability 400

Depreciation expense 30,000

Accumulated depreciation 30,000

Revaluation surplus 5,000.00

Retained earnings 5,000.00

PRIA: Income Taxes (HO. No. 14)

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 PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY, INC
MAY 2020 CPALE (BATCH NO. 05)
Financial Accounting and Reporting (FAR) Nenita S. Robles/ Floyd C. Paguio

Interest expense 6,773.45

Provision for potential tax liabilities 6,773.45

Cash 300,000.00
Convertible bonds 186,276.00
Deferred tax asset/liability 34,117.20
Equity component 79,606.80

Income tax expense - current 69,120.32

Income tax payable 69,120.32

Deferred tax asset/liability 9,120.32

Income tax benefit - deferred 9,120.32

Requirement No. 5
Income before income tax 200,000.00
Income tax expense
Current 69,120.32
Deferred (9,120.32) 60,000.00 30.00%
Net income 140,000.00

Net operating loss carryover; adjustments in deferred tax assets

4. Required
a. Compute PRIA’s financial and taxable income (loss), current tax expense (benefit), deferred tax expense
(benefit) for the years ended December 31, 20A1, and 20A2, and deferred tax asset (liability) as of December
31, 20A1, 20A2, and 20A3.
b. Prepare the journal entries to record income taxes, deferred income taxes and payment of income taxes, if any,
in 20A1, 20A2 and 20A3.
c. Prepare partial income statements for PRIA beginning with "Income (loss) before income taxes" for the years
ended December 31, 20A1, 20A2 and 20A3.

Notes and solution

Requirement No. 1
20A1
Financial income (loss) and taxable income (loss) (200,000.00)
Utilization DTA
20A2 150,000.00 30% 45,000.00
20A3 50,000.00 25% 12,500.00
200,000.00 57,500.00

20A2
Financial income (loss) and taxable income (loss) 75,000.00
Less: NOL 75,000.00
Taxable income -

NOL, beg 200,000.00 DTA

Utilization 75,000.00
NOL, end 125,000.00 25% 31,250.00
DTA, beg. 57,500.00
Adjustment (26,250.00)

20A3
Financial income (loss) and taxable income (loss) (300,000.00)

DTA, end -

PRIA: Income Taxes (HO. No. 14)

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 PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY, INC
MAY 2020 CPALE (BATCH NO. 05)
Financial Accounting and Reporting (FAR) Nenita S. Robles/ Floyd C. Paguio

DTA, beg 31,250.00

Adjustment (31,250.00)

Requirement No. 2
20A1
Deferred tax asset 57,500.00
Income tax benefit - deferred 57,500.00

Income tax expense -

20A2 deferred 26,250.00
Deferred tax asset 26,250.00

Income tax expense -

20A3 deferred 31,250.00
Deferred tax asset 31,250.00

Requirement No. 3
20A1 20A2 20A3
Income (Loss)
before tax (200,000.00) 75,000.00 (300,000.00)
Current tax expense - - -
Deferred tax expense
(benefit) (57,500.00) (57,500.00) 26,250.00 26,250.00 31,250.00 31,250.00
Net income (142,500.00) 48,750.00 (331,250.00)

Excess minimum corporate income tax (MCIT) credits

5. Required
a. Compute PRIA’s financial and taxable income, current tax expense, deferred tax expense (benefit) for the years
ended December 31, 20A1, and 20A2, and deferred tax asset (liability) as of December 31, 20A1, and 20A2.
b. Prepare partial income statements for PRIA beginning with "Income (loss) before income taxes" for the years
ended December 31, 20A1, and 20A2.

Notes and solution

Requirement No. 1
20A1 20A2 20A3
RCIT 350,000.00 260,000.00 280,000.00
Tax rate 28% 28% 28%
Taxable income/Financial income 1,250,000.00 928,571.43 1,000,000.00

RCIT 350,000.00 260,000.00 280,000.00

MCIT 500,000.00 420,000.00 250,000.00
Excess MCIT over RCIT 150,000.00 160,000.00 -
Add: Excess MCIT over RCIT, beg 150,000.00 310,000.00
Total Excess MCIT over RCIT, end 150,000.00 310,000.00 310,000.00
Unrealizable/Utilization - 210,000.00 280,000.00
Realizable balance, DTA, end 150,000.00 100,000.00 30,000.00
DTA, beg - 150,000.00 100,000.00
Difference 150,000.00 (50,000.00) (70,000.00)
Reinstatement of DTA 280,000.00
Adjustment 150,000.00 (50,000.00) 210,000.00

RCIT/MCIT, whichever is higher 500,000.00 420,000.00 280,000.00

MCIT credit, if RCIT 280,000.00
Tax payable 500,000.00 420,000.00 -

Requirement No. 2
20A1 20A2 20A3

PRIA: Income Taxes (HO. No. 14)

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 PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY, INC
MAY 2020 CPALE (BATCH NO. 05)
Financial Accounting and Reporting (FAR) Nenita S. Robles/ Floyd C. Paguio

Income before income tax 1,250,000.00 928,571.43 1,000,000.00

Income tax expense
Current 500,000.00 420,000.00 280,000.00
Deferred (150,000.00) 350,000.00 50,000.00 470,000.00 210,000.00 490,000.00
Net income 900,000.00 458,571.43 510,000.00

DO-IT-YOURSELF (DIY)

1. C 11. D 21. A 31. D

2. D 12. C 22. D 32. C
3. A 13. D 23. D 33. C
4. A 14. B 24. B 34 D
5. D 15. A 25. D
6. D 16. D 26. C
7. B 17. C 27. C
8. D 18. D 28. D
9. D 19. D 29. C
10. B 20. A 30. C

***
"In order to succeed, your desire for success should be greater than
your fear of failure."
-- Bill Cosby

PRIA: Income Taxes (HO. No. 14)

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