ACCOUNTING

ACCOUNTING FOR INCOME TAX

FOR INCOME
TAX
PAS 12
ACCOUNTING

ACCOUNTING FOR INCOME TAX

INCOME
- net income for the period before deducting
income tax expense.
- computed in accordance with accounting
standards.

TAXABLE
INCOME
.- income for the period computed in accordance
with the rules established by the taxation
authorities upon which income taxes are payable
and recoverable.
DIFFERENCES BETWEEN
ACCOUNTING AND
TAXABLE INCOME
- PERMANENT DIFFERENCES
- TEMPORARY DIFFERENCES
 ACCOUNTING FOR INCOME TAX
PERMANENT
DIFFERENCES

NONTAXABLE NONDEDUCTIBLE
REVENUE (-) EXPENSES (+)
TEMPORARY DIFFERENCES

- are differences between CA of an

Asset or Liability and Tax Base.
- It includes Timing Difference

METHODS OF ACCOUNTING
- STATEMENT OF FINANCIAL
POSITION
- INCOME STATEMENT APPROACH
TEMPORARY DIFFERENCES

ACCOUNTING FOR NCOME TAX

TAXABLE DEDUCTIBLE
TEMPORARY TEMPORARY
DIFFERENCE Since 2012
DIFFERENCE Since 2012

FUTURE TAXABLE FUTURE DEDUCTIBLE

AMOUNT AMOUNT
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DEFERRED TAX
LIABILITY
a. ACCOUNTING INCOME is HIGHER than
TAXABLE INCOME because of timing
differences.
b. Carrying amount of Asset is HIGHER
than the TAX BASE.
c. Carrying amount of Liability is LOWER
than the TAX BASE.
OTHER TAXABLE

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TEMPORARY
DIFFERENCE
INCLUDES THE FOLLOWING:

1. Asset is revalued Upward and no equivalent

adjustment is made for tax purpose.
2. The carrying amount of investment is higher than the
tax base.
3. The cost of a business combination that is accounted
for as an acquisition is allocated to the identifiable
assets and liabilities acquired at fair value and no
equivalent adjustment is made for tax purposes.
RECOGNITION OF DEFERRED TAX LIABILITY

ACCOUNTING FOR INCOME TAX

- ALL TAXABLE TEMPORARY DIFFERENCE

NOT RECOGNIZED when the taxable temporary difference arises

from:
- Goodwill
- Initial Recognition of an asset or liability in a transaction that is not a
business combination and affects neither AI nor TI.
- Undistributed Profit of subsidiary, associate or joint venture when:
The parent, investor, or venturer is ABLE TO CONTROL the
timing of the reversal of the temporary difference.
It is probable that the temporary difference will not reverse in the
foreseeable future.
DEFERRED TAX ASSET
1. When the taxable income is higher than
accounting income because of the timing
differences.
2. When the tax base of asset is higher than the
carrying amount.
3. When the tax base of a liability is lower than
the carrying amount.
OTHER DEDUCTIBLE
TEMPORARY
DIFFERENCES
1. Asset is revalued downward and no
equivalent adjustment is made for tax
purposes.
2. The tax base of investment in subsidiary,
associate or joint venture is higher than
its carrying amount because the
subsidiary, associate or joint venture has
suffered continuing loosein current and
prior years.
 ACCOUNTING FOR INCOME TAX
RECOGNITION OF
DEFERRED TAX
ASET
- Recognized for all deductible temporary
differences and operating loss carryforward when it
is probable that taxable income will be available
against which the deferred tax asset can be used.

ACCOUNTING PROCEDURES
ILLUSTRATION 1: DEFERRED TAX LIABILITY
In 2021, an entity reported in accounting income a gross profit on
installment sales of P1,000,000 but not in taxable income. this
temporary difference is expected to be reported in taxable
income equally in 2022 and 2023. The income tax rate is 30%.

Since the temporary difference results to a higher accounting income in

2021, there is a deferred tax liability.
1. How much is the current tax expense for 2021?
2. How much is the deferred tax liability for 2021?
3. How much net income should be reported for 2021?
COMPUTATION & JOURNAL ENTRIES:

INCOME TAX EXPENSE 900,000

INCOME TAX PAYABLE 900,000
CURRENT LIABILITY
INCOME TAX EXPENSE 300,000
DEFERRED TAX LIABILITY 300,000
NONCURRENT
LIABILITY
ILLUSTRATION 2: DEFERRED TAX ASSET
In 2021, an entity received an advance rental payment of
P600,000 which was subject to tax but not reported in accounting
income until 2022. The income tax rate is 30%

The income statement and tax returnshowed the following:

1. How much is the current tax expense for 2021?

2. How much is the deferred tax asset for 2021?
3. How much net income should be reported for 2021?
COMPUTATION & JOURNAL ENTRIES:
INCOME TAX EXPENSE 1,680,000
INCOME TAX PAYABLE 1,680,000

DEFERRED TAX ASSET 180,000

INCOME TAX BENEFIT 180,000
ILLUSTRATION 3: DEFERRED
TAX ASSET AND LIABILITY
An entity reported the following for the year ended
December 31, 2021:
QUESTIONS:
1. How much is accounting income
subject to tax?
2. How much is taxable income?
3. How much is the current tax expense?
4. How much is the deferred tax asset?
5. How much is the deferred tax liability?
6. How much should be reported net
income at December 31,2021?
COMPUTATION & JOURNAL ENTRIES:
COMPUTATION & JOURNAL ENTRIES:

INCOME TAX EXPENSE 1,950,000

INCOME TAX PAYABLE 1,950,000

DEFERRED TAX ASSET 180,000

INCOME TAX BENEFIT 180,000

INCOME TAX EXPENSE 90,000

DEFERRED TAX LIABILITY 90,000
PRESENTATION

ACCOUNTING FOR INCOME TAX

- DEFERRED TAX ASSET is
classified as NONCURRENT
ASSET.
- DEFERRED TAX LIABILITY is
classified as NONCURRENT
LIABILITY.
- Deferred tax asset or liability
shall not be discounted.
ACCOUNTING FOR INCOME TAX OFFSET OF DEFERRED TAX
ASSET AND LIABILITY

- Under PAS 1, asset and liabilities shall not

offset unless require or permitted by another
standard.
- PAS 12, an entity shall offset a deferred tax
asset against a deferred tax liability when:
The deferred tax asset and deferred tax
liability relate to income taxes levied by
the same tax authority.
The entity has a legal enforceable right to
set off a current tax asset against a current
tax liability.
MEASUREMENT

- DEFERRED TAX
ASSET OR DEFERRED
TAX LIABILITY shall be
measured using the
TAX RATE.

ACCOUNTING FOR INCOME TAX

INTRAPERIOD TAX

ACCOUNTIMG FOR INCOME TAX

ALLOCATION
is the allocation of income tax expense to the various
revenues that brought about the tax.

INTERPERIOD TAX
ALLOCATION
is the recognition of a deferred tax asset or deferred tax
liability.
COMPREHENSIVE ILLUSTRATION

ACCOUNTING FOR INCOME TAX

On December 31, 2021, the statement of financial position accounts of EASY Company have the
same basis for accounting and tax purposes, except the following:

In January 2021, EASY Company incurred a cost of P5,000,000 in relation to the development of a
computer software product. Considering the technical feasibility of the product, this cost was
capitalized and amortized over 5 years for accounting purposes using the straight-line method. The
building was acquired on January 1, 2021, for P50,000,000 and depreciated using the straight-line
at 5% for accounting purposes and 10% for tax purposes. The income tax rate is 30%. The pretax
accounting income for 2021 is P10,000,000.
1. What amount should be reported as deferred tax liability in December 31, 2021?
2. How much is the current tax expense for December 31, 2021?
3. What amount should be reported as net income in December 31, 2021?
COMPUTATION AND JOURNAL ENTRIES

Income Tax Expense 1,950,000

Deferred Tax Liability 1,950,000
COMPUTATION AND JOURNAL ENTRIES

Income Tax Expense 1,050,000

Income Tax Payable 1,050,000
CONTINUING ILLUSTRATION

ACCOUNTING FOR INCOME TAX

On December 31, 2022, the statement of financial position accounts of EASY Company have the
same basis for accounting and tax purposes, except the following:

In January 2021, EASY Company entered into an agreement with its employee to provide health
care benefits. The cost of such plan for 2022 is P2,000,000. The pretax accounting income for
2022 is 15,000,000.
1. What amount should be reported as deferred tax asset in December 31, 2022?
2. How much is the increase in deferred tax liability?
3. How much is the current tax expense for December 31, 2022?
4. What amount should be reported as net income in December 31, 2022?
COMPUTATION AND JOURNAL ENTRIES

Deferred Tax Asset 600,000

Income tax Benefit 600,000

Income Tax Expense 450,000

Deferred Tax Liability 450,000
COMPUTATION AND JOURNAL ENTRIES

Income Tax Expense 4,650,000

Income Tax Payable 4,650,000
ILLUSTRATION-REVALUATION

ACCOUNTING FOR INCOME TAX

On January 2016, Simple Company acquired an equipment for P6,000,000. The equipment is
depreciated using a straight line method based on a 15-year life with no residual value.
On January 2021, after 5 years, the equipment was revalued at a replacement cost of P6,750,000.
Income before depreciation and before tax is P3,000,000. The income tax rate is 30%
1. What amount should be reported as revaluation surplus?
2. What amount should be recognized as deferred tax liability on revaluation surplus?
3. How much is the annual depreciation subsequent to revaluation?
4. How much is the annual realization?
5. How much is the current tax expense?
6. How much is the decrease in deferred tax liability?
7. How much is the total effect on retained earnings?
COMPUTATION AND JOURNAL ENTRIES
Equipment 750,000
Accum. Dep. 250,000
Revaluation surplus 500,000

Revaluation Surplus 150,000

Deferred Tax Liability 150,000

Depreciation 450,000
Accum. Depreciation 450,000
COMPUTATION AND JOURNAL ENTRIES

Revaluation Surplus 4,650,000

Retained Earnings 4,650,000

Income Tax Expense 780,000

Income Tax Payable 780,000
COMPUTATION AND JOURNAL ENTRIES

Deferred Tax Liability 15,000

Income Tax Expense 15,000
COMPUTATION AND JOURNAL ENTRIES
 DISCLOSURE
1. Components of the total tax expense.
2. An explanation of the relationship between
total income tax expense and accounting profit.
3. The applicable tax rate, the basis on which the
tax rate has been applied and the explanation
for any change n the applicable tax rate
4. The aggregate amount of current and deferred
tax relating to items recognized directly in
equity
5. The aggregate amount of temporary
differences associated with investments in
subsidiary, associate and joint venture for
which no deferred tax liability has been
recognized.
6. Analysis of the beginning and ending balance of
deferred tax asset and deferred tax liability.