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FINANCIAL ACCOUNTING AND REPORTING

DEFERRED TAX ACCOUNTING

Learning Objectives

1. Determine rules used to compute for financial income and financial income
subject to tax.
2. Determine rules used to compute for taxable income.
3. Differentiate permanent differences from temporary differences.
4. Determine taxable temporary differences and deductible temporary differences.
5. What is current tax expense and total tax expense.
6. What is deferred tax expense and income tax benefit.
7. What are deferred tax liabilities and deferred tax assets.
8. What occurs when taxable temporary differences and deductible temporary
differences reverse.
9. The effect of a change in an enacted tax rate.
10. How to account for the taxable temporary difference in revaluation of assets

MULTIPLE CHOICE PROBLEMS

1. Libra Company provided the following information for its first year of operations ended
December 31, 2019, in connection with the preparation of its income tax return. Libra’s tax
rate is 30%

Pretax financial income 3,200,000

Premiums paid on life insurance 400,000
Deferred income on installment sale included
in financial income, but taxable in 2020 450,000
Financial depreciation 300,000
Accelerated depreciation for income tax purposes 350,000
Rent received in advance 100,000
Dividends received from domestic corporations that was
not included in the tax return for the year 2019 500,000

1. What was Libra’s current tax expense?

a. 1,080,000
b. 810,000
c. 840,000
d. 1,110,000

2. What was Libra’s total tax expense?

a. 960,000
b. 930,000
c. 900,000
d. 870,000

2. For the year ended December 31, 2019, Signal Company reported pretax financial income
of P5,500,000. Its taxable income was P5,000,000. The difference is due to an additional
P500,000 charge for depreciation expense because accelerated depreciation is used for
income tax purposes. The income tax rate is 30% and Signal made estimated tax payments
during 2019 of P900,000.

1. What should Signal report as current tax expense for 2019?

a. 1,200,000
b. 1,350,000
c. 1,500,000
d. 1,650,000

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2. In 2021, Signal’s pretax financial income amounted to P6,000,000 and the taxable
income was P6,500,000. The difference was due to the reversal of the taxable
temporary difference in 2019. There were no permanent differences in 2021. What is
Signal’s 2020 current tax expense?

a. 1,950,000 c. 1,500,000
b. 1,800,000 d. 1,650,000

3. For the year ended December 31, 2019, Rocky Company reported pretax financial income
of P6,000,000. Its taxable income was P7,000,000. The difference is due to rental received
in advance. Rental income is taxable when received but reported in financial income when
the rent is actually earned. The income tax rate is 30% and Rocky made estimated tax
payment of P1,500,000 in 2019. There were no permanent differences in 2019.

1. What amount should Rocky report as 2019 total income tax expense?

a. 1,500,000 c. 1,800,000
b. 1,650,000 d. 2,100,000

2. In 2020, Rocky’s pretax financial income amounted to P7,500,000 and the taxable
income was P6,500,000. The difference was the inclusion of the rental income
recognized in 2020 that was received and included in taxable income in 2019. There
were no permanent differences in 2020. What is Rocky’s 2020 total tax expense?

a. 2,250,000 c. 1,650,000
b. 1,950,000 d. 1,400,000

4. At December 31, 2018, Sonic Corporation’s accounting profit is P8,000,000. The following
items are the temporary differences that caused Sonic’s income tax in the income tax return
to differ from the amount reported in the income statement, future deductible amounts
expected to reversed in 2017 of P1,000,000 and future taxable amounts expected to reverse
in 2019 and later years of P1,200,000 and P1,800,000, respectively. Sonic’s income tax
rate is 30%. What amount should be reported as income tax payable on December 31,
2018, assuming no taxes have been paid by Sonic?

a. 1,800,000 c. 2,000,000
b. 2,400,000 d. 1,500,000

5. Vincent Company, organized on January 1, 2018, had pretax accounting income of

P5,000,000 and taxable income of P7,000,000 for the current year. The only temporary
difference is accrued product warranty cost that is expected to be paid in 2019. The
enacted tax rates are 30% for 2018 and 25% for 2019 and the years thereafter. What
amount should be reported as total income tax expense n the income statement for 2018?

a. 1,500,000 c. 1,250,000
b. 2,100,000 d. 1,600,000

6. On December 31, 2017, Briggs Company reported a deferred tax liability of P500,000 and a
deferred tax asset of P350,000. At the end of 2018, Briggs Company reported a deferred
tax liability of P900,000, and a deferred tax asset of P100,000. What is the deferred tax
expense for 2018?

a. 450,000 c. 300,000
b. 150,000 d. 650,000

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7. The following information was taken from Stanford Corporation's 2018 income statement:

Income before income taxes P1,500,000

Income tax expense:
Current P408,000
Deferred 42,000 450,000
Net income 1,050,000

Stanford’s first year of operations was 2018. The company has a 30 percent tax rate.
Management decided to use accelerated depreciation for tax purpose and the straight-line
method of depreciation for financial reporting purposes. The amount charged to depreciation
expense in 2018 was P600,000. Assuming no other differences existed between book
income and taxable income, what amount did Stanford deduct for depreciation on its tax
return for 2018?
a. 600,000 c. 740,000
b. 570,000 d. 460,000

8. Pomona Company reported income tax expense of P3,000,000 in its 2020 statement of
comprehensive income. The following changes in Pomona’s tax assets and liabilities are
available:

December 31, 2020 December 31, 2019

Deferred tax asset 100,000 250,000
Income tax payable 300,000 600,000
Deferred tax liability 350,000 700,000

The deferred tax liability was caused by accelerated depreciation and the deferred tax asset
is for rentals received in advance. How much is Pomona’s current tax expense?
a. 2,800,000 c. 3,100,000
b. 2,500,000 d. 3,200,000

9. On January 1, 2015, Ace Company acquired a building for P5,000,000. The building is
depreciated using straight-line method based on a useful life of 10 years with no residual
value. On January 1, 2019, the building is revalued at a replacement cost of P8,000,000 with
no change in useful life. The 2019 pretax accounting income before depreciation is
P5,000,000. The income tax rate is 30% and there are no other temporary differences at the
beginning of 2019.

1. What is the deferred tax liability arising from the revaluation on January 1, 2019?
a. 900,000 c. 360,000
b. 540,000 d. 0

2. What is the 2019 current tax expense?

a. 1,350,000 c. 1,260,000
b. 1,500,000 d. 1,000,000

3. What is the deferred tax liability on December 31, 2019?

a. 540,000 c. 750,000
b. 450,000 d. 0

4. What is the 2019 total income tax expense?

a. 1,350,000 c. 1,260,000
b. 1,750,000 d. 1,000,000

5. What is the revaluation surplus on December 31, 2019?

a. 1,260,000 c. 1,500,000
b. 1,050,000 d. 975,000

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