INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

Department of Accountancy 2019

FINANCIAL ACCOUNTING & REPORTING

INCOME TAX
REVIEW QUESTIONS: THEORETICAL
1. The objective of accounting for income taxes is
a. Objectivity in the calculation of periodic expense
b. Recognition of assets and liabilities
c. Proper matching of periodic expense to periodic revenue
d. Consistency of tax expense measurement with tax planning strategies
2. Taxable income of a corporation
a. Differs from accounting income due to differences in intraperiod allocation between the two methods of
income determination
b. Differs from accounting income due to differences in interperiod allocation and permanent differences between
the two methods of income determination
c. Is based on generally accepted principles
d. Is reported on the corporation’s income statement
3. According to the PAS 12, what is the difference between taxable profit and accounting profit?
a. While taxable profit is the profit (loss) for a period determined in accordance with the rules established by the
tax authorities upon which income taxes are payable (recoverable), accounting profit is the net profit or loss
for the period before tax, as shown in the financial statements.
b. While accounting profit is the profit (loss) for a period determined in accordance with the rules established by
the tax authorities upon which income taxes are payable (recoverable), taxable profit is the net profit or loss
for the period before tax, as shown in the financial statements.
c. While accounting profit tax is the amount of income taxes payable (recoverable) in respect of the taxable
profit (tax loss) for a period, taxable profit is the net profit or loss for the period before tax, as shown in the
financial statements.
d. While taxable profit tax is the amount that the tax authorities assess to be payable for the period, calculated
according to their own rules, accounting profit is the net profit or loss for the period before tax, as shown in
the financial statements.
4. If the carrying amount of an asset exceeds its tax base, the difference is a
a. Deductible temporary difference c. Deferred tax asset
b. Taxable temporary difference d. Deferred tax liability
5. This causes the profit determined under PFRSs to be greater than the taxable profit determined under tax laws.
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a. Deductible temporary difference
b. Taxable temporary difference
c. Deferred tax asset
d. Deferred tax liability
6. This causes the profit determined under PFRSs to be less than the taxable profit determined under tax laws.
a. Deductible temporary difference c. Deferred tax asset
b. Taxable temporary difference d. Deferred tax liability
7. Taxable temporary difference multiplied by the tax rate equals
a. Income tax expense c. Deferred tax asset
b. Current tax expense d. Deferred tax liability
8. Deductible temporary difference multiplied by the tax rate equals
a. Income tax expense c. Deferred tax asset
b. Current tax expense d. Deferred tax liability
9. It is the sum of the net changes in deferred tax liabilities and deferred tax assets during the period.
a. Income tax expense (benefit) c. Income tax payable
b. Current tax expense d. Deferred tax expense (benefit)
10. If the increase in deferred tax liability exceeds the increase in deferred tax asset during the period, there is
a. Income tax expense (benefit) c. Deferred tax benefit
b. Current tax expense d. Deferred tax expense
11. If the increase in deferred tax asset exceeds the increase in deferred tax liability during the period, there is
a. Income tax expense (benefit) c. Deferred tax benefit
b. Current tax expense d. Deferred tax expense
12. If the current tax expense is greater than the income tax expense during the period, there must be a
a. Deferred tax benefit c. Income tax payable
b. Deferred tax expense d. Prepaid income tax
13. If the current tax expense is less than the income tax expense during the period, there must be a
a. Deferred tax benefit c. Income tax payable
b. Deferred tax expense d. Prepaid income tax
14. A deferred tax asset or liability is computed using
a. The current tax law, regardless of the enacted future tax law
b. Expected future tax law, regardless of whether this expected law has been enacted
c. Current tax law, unless enacted future tax law is different
d. Either current or expected future law, regardless of whether the expected law has been enacted
15. Interperiod tax allocation accounts for
a. All differences between tax regulations and GAAP
b. Tax effects of specific income statement items in the same period
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Department of Accountancy 2019
FINANCIAL ACCOUNTING & REPORTING

c. Permanent differences
d. Temporary differences
16. Interperiod tax allocation causes
a. Tax expense shown in the income statement to bear a normal relation to the tax liability
b. Tax expense shown on the income statement to equal the amount of income taxes payable for the current
year plus or minus the change in the deferred tax asset or liability balances for the year.
c. Tax expense in the income statement to be presented with the specific revenues causing the tax.
d. Tax liability shown in the balance sheet to bear a nominal relation to the income before tax reported in the
income statement.
17. The process of reporting discontinued operations, net of income tax on the income statement is known as
a. Interperiod tax allocation c. Intraperiod tax allocation
b. Deferred tax recognition d. Accrued tax recognition
18. Intraperiod tax allocation
a. Involves the allocation of income taxes between current and future periods
b. Associates tax effect with different items in the income statement
c. Arises because certain revenue and expenses appear in the financial statements either before or after they are
included in the income tax return
d. Arises because different income statement items are taxed at different rates
19. Because ABC Company uses different methods to depreciate equipment for financial statement and income tax
purposes, ABC has temporary differences that will reverse during the next year and add to taxable income.
Deferred income taxes that are based on these temporary differences should be classified in ABC Company’s
statement of financial position as
a. A current liability
b. A noncurrent liability
c. A contra account to non-current assets
d. A contra account to current assets

TAX BASE
The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
Tax base of assets
• Is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an
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entity when it recovers the carrying amount of the asset.
• If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount.
Tax base of liabilities
• Its carrying amount
• Less any amount that will be deductible for tax purposes in respect of that liability in future periods.
Tax base of income received in advance
• Is its carrying amount
• Less any revenue that will not be taxable in the future.

Income statement liability method (income-liability method)

1. You have taken the following information from the records of NCPAR Company as of December 31, 2019:
Gain from settlement of insurance company (company is the beneficiary) ₱ 50,000
Intercompany dividends from a domestic corporation 60,000
Interest income on time deposits. 35,000
Interest revenue on government bonds 10,000
Interest income on treasury bills 8,000
Fines penalties for violations of laws 3,000
Charitable contribution in excess of tax limits. 12,000
Premiums on life insurance for officers and employees 15,000
Depreciation in excess of financial depreciation 12,000
Gross income from installment sales are recognized as goods are sold but are taxed only
when installment payments are collected. 10,000
Bad debt expense recognized using the allowance method 6,000
Excess of depreciation recognized for financial reporting over depreciation recognized for
taxation purposes due to shorter depreciation period used for financial reporting 13,500
Rent received in advance 9,800
Additional information:
Pretax profit for 2019 ₱ 250,000
Income tax rate 30%
Required: Based on the above data, compute for the following assuming the enacted tax rate is 30%:
a. Accounting income subject to tax ₱117,000
b. Taxable income ₱124,300
c. Total income tax expense ₱35,100
d. Deferred tax asset ₱8,790
e. Deferred tax liability ₱6,600
f. Current tax expense ₱37,290

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 INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
Department of Accountancy 2019
FINANCIAL ACCOUNTING & REPORTING

g. Income tax payable – current ₱37,290

h. Net income tax expense (benefit) (₱2,190)
g. Net income after tax 214,900

Income statement liability method (income-liability method)

2. Manapla Company computed a pretax financial income of ₱15,000,000 for the year ended December 31, 2019. In
preparing the tax return, the following differences are noted between financial income and taxable income.
Nondeductible expense ₱2,000,000
Nontaxable revenue 1,000,000
Estimated warranty cost that was recognized as expense
in 2019 but deductible for tax purposes when paid 1,500,000
Excess tax depreciation over financial depreciation 500,000
Required: Based on the above data, compute for the following assuming the enacted tax rate is 30%:
a. Accounting income subject to tax 16M
b. Taxable income 17M
c. Total income tax expense 4.8M
d. Deferred tax asset 450,000
e. Deferred tax liability 150,000
f. Current tax expense 5.1M
g. Net income after tax 10.2M
3. B/S Liability Method – Tax Base
Under the following independent situations, determine the tax base of the related asset or liability.
Case Tax base
TAX BASE OF ASSET
1. A machine cost ₱130,000. For tax purposes, depreciation of ₱50,000 has already been ₱80,000
deducted in the current and prior periods and the remaining cost will be deductible in
future periods, either as depreciation or through a deduction on disposal. Revenue
generated by using the machine is taxable, any gain on disposal of the machine will be
taxable and any loss on disposal will be deductible for tax purposes. For financial
accounting purposes, depreciation of ₱70,000 has already been deducted in the
current and prior periods.
2. Interest receivable has a carrying amount of ₱124,000. The related interest revenue Nil
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will be taxed on a cash basis.
3. Trade receivables have a carrying amount of ₱135,000. The related revenue has 135,000
already been included in taxable profit (tax loss).
4. Dividends receivable from a subsidiary have a carrying amount of ₱12,000. The 12,000
dividends are not taxable.
5. A loan receivable has a carrying amount of ₱200,000. The repayment of the loan will 200,000
have no tax consequences.
6. An asset which cost ₱150,000 has a carrying amount of ₱100,000. Cumulative 60,000
depreciation for tax purposes is ₱90,000 and the tax rate is 30%.
TAX BASE OF LIABILITIES
7. Current liabilities include accrued expenses with a carrying amount of ₱210,000. The Nil
related expense will be deducted for tax purposes on a cash basis.
8. An entity recognizes a liability of ₱150,000 for accrued product warranty costs. For tax 0
purposes, the product warranty costs will not be deductible until the entity pays
claims. The tax rate is 30%.
9. Current liabilities include accrued expenses with a carrying amount of ₱160,000. The 160,000
related expense has already been deducted for tax purposes.
10. Current liabilities include accrued fines and penalties with a carrying amount of 180,000
₱180,000. Fines and penalties are not deductible for tax purposes.
11. A loan payable has a carrying amount of ₱300,000. The repayment of the loan will 300,000
have no tax consequences.
TAX BASE OF INCOME RECEIVED IN ADVANCE
12. Current liabilities include interest revenue received in advance, with a carrying amount Nil
of ₱90,000. The related interest revenue was taxed on a cash basis.
TAX BASE OF EXPENSE
13. Research cost amounting to ₱800,000 recognized as an expense in determining 800,000
accounting profit in the period in which they are incurred but may not be permitted as
a deduction in determining taxable profit (tax loss) until a later period.

Revaluation
On January 1, 2014, Manapla Company acquired a building for ₱5,000,000. 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 ₱8,000,000 with no change in useful life. The 2019 pretax accounting income
before depreciation is ₱9,000,000. The income tax rate is 30% and there are no other temporary differences at
the beginning of 2019.
4. What is the deferred tax liability arising from the revaluation on January 1, 2019?
a. ₱540,000 b. ₱360,000 c. ₱450,000 d. Nil

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 INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
Department of Accountancy 2019
FINANCIAL ACCOUNTING & REPORTING

5. What is the 2019 current tax expense?

a. ₱2,550,000 b. ₱2,460,000 c. ₱2,700,000 d. ₱2,610,000
6. What is the deferred tax liability on December 31, 2019?
a. ₱540,000 b. ₱450,000 c. ₱360,000 d. Nil
7. What is the 2019 total income tax expense?
a. ₱2,460,000 b. ₱2,700,000 c. ₱2,550,000 d. ₱2,610,000
8. What is the revaluation surplus on December 31, 2019?
a. ₱1,260,000 b. ₱1,050,000 c. ₱1,200,000 d. ₱ 840,000

Different Tax Rates

9. Black Co., organized on January 2, 2019, had pretax financial statement income of ₱500,000 and taxable income
of ₱800,000 for the year ended December 31, 2019. The only temporary differences are accrued product warranty
costs, which Black expects to pay as follows:
2020 ₱ 100,000 2022 ₱ 50,000
2021 ₱ 50,000 2021 ₱ 100,000
The enacted income tax rates are 32% for 2019, 30% for 2020 through 2022, and 35% for 2021. Black believes
that future years' operations will produce profits. In its December 31, 2019 statement of financial position, what
amount should Black report as deferred tax asset?
a. ₱50,000 b. ₱75,000 c. ₱90,000 d. ₱95,000

Limitation on recognition of deferred tax asset

Mikee Co. has the following information:
• Deductible temporary differences on December 31, 2019 is ₱4,000,000.
• There are no temporary differences as of the beginning of the year.
• Pretax income in 2019 is ₱5,200,000 on which income tax expense of ₱1,560,000 was recognized. Income tax
rate is 30%.
• Taxable income in 2019 is ₱9,200,000 on which current tax expense of ₱2,760,000 was recognized.
Mikee’s results of operations have been declining. This has raised doubt on whether deferred tax assets will be
realized in the future. Mikee then reassessed its deferred tax asset and concluded that it is more likely than not
that only half of the deferred tax asset will be realized in the future.
10. How much is the adjusted deferred tax asset?
a. ₱1,200,000 OPEN USING ADOBE READERd. AND
b. ₱600,000
c. ₱800,000 Nil PC.
11. How much is the adjusted income tax expense?
a. ₱1,560,000 b. ₱1,200,000 c. ₱2,160,000 d. ₱960,000
12. How much is the adjusted deferred tax expense (benefit)?
a. (₱600,000) b. ₱600,000 c. (₱1,200,000) d. ₱1,200,000
13. How much is the adjusted current tax expense?
a. ₱2,760,000 b. ₱2,160,000 c. ₱3,360,000 d. ₱960,000

Deferred tax asset from loss carry forward

14. Information on Cloudette Co.’s operations during the year is shown below.
• Revenues are recognized for financial reporting at point of sale while revenues are taxed on cash basis. Gross
profit recognized for financial reporting amounted to ₱4,000,000 while taxable gross profit is ₱3,200,000.
• Retirement benefit costs are deducted for financial reporting as services are rendered by employees but are
tax deductible only when actually paid to retiring employees. Current service cost recognized during the year
is ₱400,000 while benefits paid to retiring employees amounted to ₱600,000.
• Research costs amounting to ₱360,000 are expensed immediately during the year for financial reporting. For
taxation purposes, research costs are amortized over a three-year period. Amortization of research cost
deducted for taxation purposes is ₱120,000.
• Unrealized losses of ₱40,000 was recognized during the year in profit or loss on an investment in held for
trading equity securities. No equivalent adjustment was made for taxation purposes. Any gain or loss on
actual disposal of such securities is taxable (tax deductible).
• Payments during the year for fines, surcharges, and penalties arising from violation of law amounted to
₱160,000.
• Cloudette reported pretax income of ₱400,000. Income tax rate is 30%.
• Any operating loss can be carried over to the next period. Cloudette expects to realize the economic benefit of
any operating loss carry forward.
How much are the deferred tax asset and deferred tax liability, respectively?
Deferred tax asset Deferred tax liability
a. ₱300,000 ₱132,000
b. 84,000 300,000
c. 300,000 84,000
d. 132,000 300,000

Measurement of current tax liability and deferred tax liability

Edwin Co. follows a fiscal year that ends on June 30. On January 1, 2019, there has been a change in the tax rate
in the jurisdiction where Edwin Co. operates. The tax rate prior to January 1, 2019 is 30% while the newly
enacted tax rate that will apply from January 1, 2019 onwards is 35%. Edwin reported pretax profit of ₱1,280,000
for the fiscal year ended June 30, 2019. The only temporary difference pertains to a ₱16,000, one-year fire
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 INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
Department of Accountancy 2019
FINANCIAL ACCOUNTING & REPORTING

insurance premium taken by Edwin on its building on January 1, 2019. The premium paid is tax deductible in full
upon payment. There were no temporary differences as of July 1, 2018. There were also no payments for income
tax during the year.
15. How much is the deferred tax liability as of June 30, 2019?
a. ₱28,000 b. ₱8,000 c. ₱2,800 d. Nil
16. How much is the current tax liability as of June 30, 2019?
a. ₱381,600 b. ₱450,800 c. ₱384,000 d. ₱413,400
17. How much is the income tax expense for the fiscal year ended June 30, 2019?
a. ₱416,200 b. ₱413,400 c. ₱448,000 d. ₱410,600

Presentation of Deferred Taxes

18. At December 31, 2019, Bren Co. had the following deferred income tax items:
• A deferred income tax liability of ₱15,000 related to a noncurrent asset
• A deferred income tax asset of ₱3,000 related to a noncurrent liability
• A deferred income tax asset of ₱8,000 related to a current liability
Which of the following should Bren report in the noncurrent section of its December 31, 2019 statement of
financial position?
a. A noncurrent asset of ₱3,000 and a noncurrent liability of ₱15,000.
b. A noncurrent liability of ₱12,000.
c. A noncurrent asset of ₱11,000 and a noncurrent liability of ₱15,000.
d. A noncurrent liability of ₱4,000.
“A mind troubled by doubt cannot focus on the course to victory.”
“Thoughts of accomplishment enable us to see that accomplishment in every detail. And whatever we can see, we can
find a way to be.”
☺ -- END OF HANDOUT -- ☺

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