Question 1

Recognizing tax benefits in a loss year due to a loss carryforward requires

Select one:
A. creating a deferred tax asset.
B. only a footnote disclosure
C. creating a deferred tax liability.
D. creating a new carryforward for the next year.

Question 2
At the beginning of 2014, Elephant, Inc. had a deferred tax asset of ₱4,000 and a deferred tax liability
of ₱6,000. Pre-tax accounting income for 2014 was ₱300,000 and the enacted tax rate is 40%. The
following items are included in Elephant’s pre-tax income:
Interest income from government bonds -
P24,000
Accrued warranty costs, estimated to be paid in 2014 -
P52,000
Operating loss carry forward -
P38,000

Installment sales revenue, will be collected in 2014n -

P26,000
Prepaid rent expense, will be used in 2014 - P12,000
Which of the following is required to adjust Elephant, Inc.’s deferred tax asset to its correct balance at
December 31, 2014?

Select one:
A. A debit of ₱16,800
B. A debit of ₱20,800
C. A debit of ₱15,200
D. A credit of ₱15,200

Question 3
At the December 31, 2017 balance sheet date, Garth Brooks Corporation reports an accrued receivable for
financial reporting purposes but not for tax purposes. When this asset is recovered in 2018, a future
taxable amount will occur and

Select one:
A. pretax financial income will exceed taxable income in 2018.
B. Garth will record an increase in a deferred tax asset in 2018.
C. Garth will record a decrease in a deferred tax liability in 2018.
D. total income tax expense for 2018 will exceed current tax expense for 2018.
Question 4
Which of the following creates a temporary difference between financial and taxable income?
Select one:
A. Accelerated cost recovery on plant and equipment
B. Premiums paid for officer's life insurance (company is beneficiary)
C. Interest on municipal bonds
D. Fines from violation of law

Question 5
Which of the following differences would result in future taxable amounts?
Select one:
A. Revenues or gains that are taxable before they are recognized in financial income.
B. Expenses or losses that are tax deductible before they are recognized in financial income.
C. Revenues or gains that are recognized in financial income but are never included in taxable
income.
D. Expenses or losses that are tax deductible after they are recognized in financial income.

Question 6
On January 1, 2013, Montreal Company purchased investment securities for ₱1,500,000. The securities
are classified as investments at fair value through profit or loss. At December 31, 2013, the securities had
a fair value of ₱2,100,000 but had not yet been sold.
The company also recognized a ₱400,000 restructuring charge during the year. The restructuring charge
is composed of an impairment write-down on a manufacturing facility. Tax rules do not follow a
deduction for the write-down unless the facility is actually sold. The facility was not sold by the end of
the year.
After including the unrealized gain on the trading securities and the restructuring charge, the accounting
income before tax for the year
was ₱5,000,000. The income tax rate for the current year and future years is 30%.
What is the amount of Montreal’s current tax expense?
Select one:
A. ₱1,560,000
B. ₱1,440,000
C. ₱1,500,000
D. ₱1,920,000

Question 7
On June 30, 2013, Mania Corporation prepaid a ₱380,000 premium on an insurance policy. The
premium payment was a tax-deductible expense in Mania’s 2013 cash basis tax return. The accrual basis
income statement will report a ₱190,000 insurance expense in 2013 and 2014. Assume the tax rate is
32%.

Select one:
A. ₱ – 0 –
 B. ₱121,600
C. ₱60,800
D. ₱182,400

Question 8
The following are the carrying amounts and tax bases for assets and liabilities of Mezza Company as of
December 31, 2013:
Book base Tax base
Cash P500,000 P500,000
Trade and other receivables (net) P1,500,000 P1,780,000
Property, plant, and equipment (net) P4,500,000 P2,800,000
Trade and other payables 2,000,000 P2,000,000
Accrued warranty obligation P800,000 P0

Any difference in carrying amount and tax basis is a temporary difference. Taxable income for 2013
is ₱1,800,000. The December 31, 2012 state-ment of financial position shows deferred tax asset
of ₱300,000 and deferred tax liability of ₱240,000. Income tax payments during the year 2013 amounted
to ₱400,000, including ₱150,000 relating to 2012 taxable income. Any resulting deferred tax asset is
fully realizable. Income tax rate is 30%. How much is the total income tax expense recorded for the year
ended December 31, 2012?
Select one:
A. ₱786,000
B. ₱270,000
C. ₱246,000
D. ₱540,000

Question 9
Which statement is incorrect concerning tax assets and liabilities?
Select one:
A. Tax assets and liabilities should be presented separately from other assets and liabilities in the
statement of financial position.
B. Deferred tax assets and liabilities should be discounted.
C. Deferred tax assets and liabilities should be distinguished from current tax assets and liabilities.
D. When an entity makes a distinction between current and non-current assets and liabilities, it
should not classify deferred tax assets and liabilities as current.

Question 10
A major distinction between temporary and permanent differences is

Select one:
A. temporary differences reverse themselves in subsequent accounting periods, whereas
permanent differences do not reverse.
 B. once an item is determined to be a temporary difference, it maintains that status; however, a
permanent difference can change in status with the passage of time.
C. permanent differences are not representative of acceptable accounting practice.
D. temporary differences occur frequently, whereas permanent differences occur only once.

Question 11
A temporary difference which would result in a deferred tax liability is —
Select one:
A. accrual of warranty expense
B. excess of tax depreciation over financial depreciation
C. subscription received in advance
D. interest revenue on municipal bonds
Question 12
The following are the carrying amounts and tax bases for assets and liabilities of Mezza Company as of
December 31, 2013:
Book base Tax base
Cash P500,000 P500,000
Trade and other receivables (net) P1,500,000 P1,780,000
Property, plant, and equipment (net) P4,500,000 P2,800,000
Trade and other payables 2,000,000 P2,000,000
Accrued warranty obligation P800,000 P0

Any difference in carrying amount and tax basis is a temporary difference. Taxable income for 2013
is ₱1,800,000. The December 31, 2012 state-ment of financial position shows deferred tax asset
of ₱300,000 and deferred tax liability of ₱240,000. Income tax payments during the year 2013 amounted
to ₱400,000, including ₱150,000 relating to 2012 taxable income. Any resulting deferred tax asset is
fully realizable. Income tax rate is 30%. How much is reported as income tax payable at December 31,
2012?

Select one:
A. ₱540,000
B. ₱140,000
C. ₱400,000
D. ₱290,000

Question 13
Edelweiss, Inc. began operations in 2013. Included in its 2013 financial statements were bad debts
expense of ₱140,000 and profit from installment sales of ₱260,000. For tax purposes, the bad debts will
be deducted and the profit from installment sales will be recognized in 2014. The enacted tax rates are
30% in 2013 and 34% in 2014.
In its 2013 profit or loss, what amount should Edelweiss report as deferred income tax expense?
Select one:
A. ₱78,000
B. ₱42,000
C. ₱40,800
D. ₱48,000

Question 14
These are the differences between the carrying amount of an asset or liability in the statement of financial
position and its tax base.
Select one:
A. Tax differences
B. Permanent differences
C. Accounting differences
D. Temporary differences

Question 15
Which of the following items results in a temporary difference deductible amount for a given year?
Select one:
A. Premiums on officer's life insurance (company is beneficiary)
B. Vacation pay accrual
C. Accelerated depreciation for tax purposes; straight-line for financial reporting purposes
D. Premiums on officer's life insurance (officer is beneficiary)

Question 16
Which of the following creates a permanent difference between financial income and taxable income?
Select one:
A. Interest received on municipal bonds
B. Unearned rent revenue
C.
Completed contract method of recognizing construction revenue
D.
Accelerated cost recovery on plant and equipment

Question 17
An example of a "deductible temporary difference" occurs when
Select one:
A. the installment sales method is used for tax purposes, but the accrual method of recognizing sales
revenue is used for financial reporting purposes.
B. warranty expenses are recognized on the accrual basis for financial reporting purposes but
recognized as the warranty conditions are met for tax purposes.
 C. the completed-contract method of recognizing construction revenue is used for tax purposes, but
the percentage-of-completion method is used for financial reporting purposes
D. accelerated depreciation is used for tax purposes but straight-line depreciation is used for
accounting purposes

Question 18
Statement 1: Taxable temporary differences will result in taxable amounts in future years when the
related assets are recovered.
Statement 2: Examples of taxable temporary differences are subscriptions received in advance and
advance rental receipts.

Select one:
a. Both statements are incorrect
b. Both statements are correct
c. Only the 1st statement is correct
d. Only the 2nd statement is correct

Question 19
Link Sink Manufacturing has a deferred tax asset account with a balance of ₱300,000 at the end of 2012
due to a single cumulative temporary difference of ₱750,000. At the end of 2014, this same temporary
difference has increased to a cumulative amount of ₱1,000,000. Taxable income for 2014 is ₱1,700,000.
The tax rate is 40% for all years.
Assuming it’s probable that 70% of the deferred tax asset will be realized, what amount will be reported
on Link Sink’s statement of financial position for the deferred tax asset at December 31, 2014?

Select one:
A. ₱700,000
B. ₱400,000
C. ₱280,000
D. ₱680,000

Question 20
Charmee Corporation is determining the amount of pre-tax financial income for 2012 by making
adjustments to taxable income from the company’s income tax return. The tax return indicates taxable
income of ₱760,000 on which a tax liability of ₱228,000 has been recognized. Following is the list of
items that may be required to determine pre-tax financial income from the amount of taxable income.
Accelerated depreciation for tax purposes was ₱268,000 while straight-line depreciation on these assets in
the books is ₱160,000.
Impairment loss on goodwill of ₱90,000 was not included as a deduction in the tax return but deducted
from financial income.
Interest on treasury bills was not included in the tax return. During the year, ₱49,400 was received on
these investments.
What is Charmee’s deferred tax liability at December 31, 2012?

Select one:
 A. ₱32,400
B. ₱248,220
C. ₱108,000
D. ₱20,220

Question 21
An example of a permanent difference is
Select one:
A. interest expense on money borrowed to invest in municipal bonds.
B. all of these.
C. insurance expense for a life insurance policy on officers.
D. proceeds from life insurance on officers.

Question 22
Claudia Company had pre-tax accounting income of ₱2,400,000 during 2013. Claudia’s temporary
difference for 2013 relates to a sale made in 2012 and recognized for accounting purposes at that
time. However, Claudia uses the installment sales method of revenue recognition for tax
purposes. During 2013, Claudia collected a receivable from the 2012 sale which resulted in ₱600,000 of
income under the installment sales method.
What is the amount of Claudia’s taxable income for 2013?
Select one:
A. ₱1,800,000
B. ₱2,400,000
C. ₱3,000,000
D. P600,000

Question 23
Statement 1: Taxable amounts increase taxable income in future years.
Statement 2: A deferred tax liability represents the increase in taxes payable in future years as a result of
taxable temporary differences existing at the end of the current year.
Select one:
A. Only the 1st statement is correct.
B. Only the 2nd statement is correct.
C. Both statements are correct.
D. Both statements are incorreect.

Question 24
Which of the following statements is not correct?
Select one:
 A. Deferred tax assets related to carryforwards shall be classified as current or noncurrent on the
balance sheet based on their expected date of reversal.
B. All current deferred tax liabilities and assets shall be offset and presented as a single amount on
the balance sheet.
C. All current and noncurrent deferred tax assets shall be offset and presented as a single amount on
the balance sheet.
D. Deferred tax liabilities and assets shall be classified as current or nocurrent on the balance sheet
based on the classification of the asset or liability giving rise to the deferred tax item.

Question 25
Statement 1: Permanent differences do not give rise to future taxable or deductible amounts.
Statement 2: Companies should classify the balances in the deferred tax accounts on the balance sheet as
noncurrent assets and noncurrent liabilities.
Select one:
A. Only the 1st statement is correct
B. Only the second statement is correct
C. Both statements are correct
D. Both statements are incorrect

Question 26
Which of the following temporary differences ordinarily results in a deferred tax liability?
Select one:
A. Accrued warranty costs
B. Subscription revenue received in advance
C. Depreciation
D. Unrealized losses on marketable securities

Question 27
The justification for the method of determining periodic deferred tax expense is based on the concept of
—

Select one:
A. recognition of liabilities and assets
B. objectivity in the calculation of periodic expenses
C. consistency of tax expense measurements with
actual tax
planning strategies
D. matching of periodic expense to periodic income
Question 28
Laurie Company started to manufacture in 2013 copying machines that are sold on installment
basis. Laurie recognizes revenue when an equipment is sold for financial reporting purposes and when
installment payments are received for tax purposes. In 2013, Laurie recognized gross profit
of ₱10,000,000 for financial reporting purposes and ₱7,000,000 for tax purposes. The amounts of gross
profit expected to be recognized for tax purposes in 2014 and 2015 is ₱1,500,000 each.
Laurie guarantees the copying machines for two years. Warranty costs are recognized on the accrual
basis for financial reporting purposes and when paid for tax purposes. Warranty expense accrued in 2013
is ₱2,500,000 but only ₱1,200,000 warranty was actually paid in 2013. It is expected that in 2014 and
2015, ₱600,000 and ₱700,000 respectively, of the warranty costs will be paid.
In addition, during 2013, ₱50,000 dividends from a domestic corporation was received and earned,
and ₱200,000 insurance premium on a life insurance policy that covered the life of Laurie Company’s
president was paid. Laurie Company is the beneficiary of this policy. The tax rate is 30%. Pre-tax
accounting income in 2013 was ₱5,000,000.
Assuming Laurie has not made any tax payments in 2013, how much would be reported as income tax
payable?

Select one:
A. ₱2,055,000
B. ₱1,545,000
C. P945,000
D. ₱1,035,000

Question 29
Statement 1: Deductible amounts cause taxable income to be greater than pretax financial income in the
future as a result of existing temporary differences.
Statement 2: A deferred tax asset represents the increase in taxes refundable in future years as a result of
deductible temporary differences existing at the end of the current year.
Select one:
A. Both statements are correct
B. Only the 2nd statement is correct
C. Both statements are incorrect
D. Only the 1st statement is correct

Question 30
Which of the following is the most likely item to result in a deferred tax asset?

Select one:
A. Prepaid expenses
B. Unearned revenues
C. Using the completed-contract method of recognizing construction revenue tax purposes, but using
percentage-of-completion method for financial reporting purposes
 D. Using accelerated depreciation for tax purposes but straight-line depreciation for accounting
purposes

Question 31
Pretax financial income is the amount used to compute income tax payable.
Select one:
True
False

Question 32
For the year 2013, Eduardo Company reported income tax expense of ₱110,000. Income taxes payable at
the end of 2012 was ₱90,000 and at the end of 2013 was ₱100,000. The deferred tax liability that resulted
from the use of accelerated depreciation for tax purposes and the straight-line method for financial
reporting purposes increased from ₱105,000 at the beginning of 2013 to ₱130,000 at the end of 2013.
How much cash was paid for income taxes during the year?
Select one:
A. ₱75,000
B. ₱95,000
C. ₱85,000
D. ₱105,000

Question 33
Calgary Company prepared the following reconciliation between pre-tax financial income and taxable
income at December 31, 2013, the end of its first year of operations.
Pre-tax financial income - ₱ 600,000
Rent collected in advance of period earned -
P200,000
Tax depreciation in excess of book depreciation -
(P900,000)
Taxable income -
(P100,000)

The deferred tax asset resulting from the operating loss carryforward is believed to be 100%
realizable. Assuming a tax rate of 30%, how much is the income tax expense (benefit) for the year 2013?
Select one:
A. ₱180,000
B. ₱210,000
C. ₱240,000
D. P60,000
Question 34
Which of the following is the most likely to result in a deferred tax liability?
Select one:
A. Expenses and losses that are deductible after they are recognized in financial income.
B. Revenues or gains that are recognized in financial income but are never included in taxable
income.
C. Revenues or gains that are taxable before they are recognized in financial income.
D. Expenses and losses that are deductible before they are recognized in financial
income.

Question 35
Which of the following temporary differences ordinarily creates a deferred tax asset
Select one:
A. Installment sales
B. Accrued warranty costs
C. Prepaid insurance
D. Depreciation

Question 36
At the beginning of 2014, Elephant, Inc. had a deferred tax asset of ₱4,000 and a deferred tax liability
of ₱6,000. Pre-tax accounting income for 2014 was ₱300,000 and the enacted tax rate is 40%. The
following items are included in Elephant’s pre-tax income:
Interest income from government bonds -
P24,000
Accrued warranty costs, estimated to be paid in 2014 -
P52,000
Operating loss carry forward -
P38,000

Installment sales revenue, will be collected in 2014n -

P26,000
Prepaid rent expense, will be used in 2014 -
P12,000
What is Elephant, Inc.’s taxable income for 2014?

Select one:
A. P452,000
B. P300,000
C. P252,000
D. P348,000
Question 37
All of the following can result in a temporary difference between pre-tax financial income and taxable
income except —

Select one:
A. payment of premiums for life insurance
B. depreciation expense
C. product warranty costs
D.
contingent liabilities
Question 38
Viva Company has the following cumulative taxable temporary differences:
12/31/13 12/31/12
₱ 640,000 ₱ 900,000
The tax rate enacted for 20132 is 40%, while the tax rate enacted for future years is 30%. Taxable income
for 2013 is ₱1,600,000 and there are no permanent differences. Viva’s pre-tax financial income for 2013
is —
Select one:
A. P1,340,000
B. P960,000
C. P1,730,000
D. P2,240,000

Question 39
Taxable income is a tax accounting term and is also referred to as income before taxes.
Select one:
True
False

Question 40
In 2013, Simon Corporation reported pre-tax financial income of ₱5,000,000. Included in the pre-tax
financial income was ₱900,000 of non-taxable life insurance received as a result of the death of an
officer; ₱1,200,000 of warranty expenses accrued but unpaid as of December 31, 2013; and ₱200,000 of
impairment loss in goodwill.
Assuming that no income taxes were paid during the year and an income tax rate of 30%, what is the
amount of income taxes payable at December 31, 2013?

Select one:
A. ₱1,650,000
B. ₱2,200,000
C. ₱1,230,000
D. P930,000