Module 8: Income Taxes − gain on sale of real

properties/shares (subject to capital

A. Income Statement
gains tax)
Revenue XX
Illustration 1: On December 31, 2021, AAA
Expenses (XX) Company received P 100,000 as a proceeds
from a life insurance of the company’s vice
Accounting Income XX
president who just died recently. How
- based on PFRS, PAS, Interpretations, should the P 100,000 be reflected in the
GAAP, Conceptual Framework, and the like. 2021, 2022, and 2023 income statement and
income tax return?
- applying accrual basis of accounting.
(recognize income when earned and Income Income Tax
expense when incurred) Statement Return
2021 100,000 0
B. Income Tax Return 2022 0 0
Gross Income XX 2023 0 0
Total 100,000 0
Allowable Deduction (XX)

Taxable Income XX ▪ Non-Deductible Expenses

- based on NIRC, TRAIN Law, CREATE Law,
and other tax laws.
- applying cash basis of accounting.
(recognize income when cash is received
and expense when cash is paid)
− fines and penalties for violations of
law
− premium of life insurance –
beneficiary is the company
− expropriation losses
− impairment of goodwill

Illustration 2: On December 31, 2021, the

DENR confiscated the inventory of tree logs
I. Types of Differences
of AAA Company because it was taken from
a. Permanent Differences – items of a restricted forest. The value of asset
revenue and expense which are included in expropriated amounted to P 600,000. How
either accounting income or taxable income should this loss be reflected to the
but will never be included in the other. company’s income statement and ITR for
the next years?
▪ Non-Taxable Income
− proceeds from life insurance Income Income Tax
− interest income from government Statement Return
bonds 2021 (600,000) 0
− interest income from banks (subject 2022 0 0
to final taxes) 2023 0 0
− dividend income Total (600,000) 0
− royalty income
b. Temporary Differences – items of revenue Illustration 4: On January 1, 2021, AAA
and expense which are included in either Company incurred P 900,000 for research &
accounting income or taxable income but development and immediately established a
will include in the other in different period. technical feasibility and completed the
project on the next day. The useful life of the
▪ Future Taxable Amount
project is estimate to be three (3) years
− income recorded in income
starting January 1, 2021. How should this
statement not yet in income tax
expenditure be reported in the company’s
return.
income statement and ITR?
− examples:
1. installment receivable Income Income Tax
2. accrued income (rent receivable) Statement Return
3. revaluation surplus 2021 (300,000) (900,000)
4. unrealized gain of investments 2022 (300,000) 0
5. investment income from associate 2023 (300,000) 0
Total (900,000) (900,000)
Illustration 3: On January 1, 2021, AAA - accounting income > taxable income
Company sold P 200,000 worth of inventory (future taxable amount, FTA)
on an installment basis. On December 31,
2021, P 150,000 of the installment - deferred tax expense (deferred tax liability)
receivable was collected. The balance of P
50,000 was collected in 2022. How should
this income be reflected in the income ▪ Future Deductible Amount
statement and ITR for 2021, 2022, and 2023. − income recorded in the income tax
return not yet in income statement.
Income Income Tax − examples:
Statement Return 1. advances from customers
2021 200,000 150,000 2. unearned income (e.g., unearned
2022 0 50,000
rent)
2023 0 0
Total 200,000 200,000 Illustration 5: On January 1, 2021, AAA
- accounting income > taxable income Company received P 450,000 as a rent
(future taxable amount, FTA) payment for the years 2021, 2022, and 2023.
How should this income be reflected in the
− expense recorded in income tax
company’s income statement and ITR for
return not yet in income statement.
the next three years?
− examples:
1. prepaid expenses (e.g., property Income Income Tax
insurance) Statement Return
2. excess depreciation in taxation 2021 150,000 450,000
3. capitalized research and 2022 150,000 0
development 2023 150,000 0
Total 450,000 450,000
- accounting income < taxable income Gross Income XX
(future deductible amount, FDA)
Allowable Deduction (XX)
− expense recorded in income
Taxable Income XX
statement not yet in income tax
return. x Tax Rate X%
− examples:
Current Tax Exp. XX
1. warranty payable
2. provision for bad debt - unpaid current tax expense becomes
3. provision for lawsuit income tax payable.
4. unrealized losses
- deferred tax expense that is unpaid
5. impairment of inventory
becomes deferred tax liability.
6. impairment of PPE

Illustration 6: On January 1, 2021, AAA

Company acquired machinery for P II. Total Tax Expense
1,200,000 with a useful life of 3 years. On
- alternative 1:
December 31, 2021, the machinery was
impairment amounting to P 300,000. How Accounting Income XX
should the impairment and depreciation be
Non-Taxable Income (XX)
presented in the income statement and ITR?
Non-Deductible Expense XX
Income Income Tax
Statement Return Accounting Income Subject to Tax XX
2021 (700,000) (400,000)
2022 (250,000) (400,000) x Tax Rate X%
2023 (250,000) (400,000) Total Tax Expense XX
Total (1,200,000) (1,200,000)
- accounting income < taxable income
(future deductible amount, FDA)
- alternative 2:
- deferred tax benefit (deferred tax asset)
Current Tax Expense XX

Net Deferred Tax Expense XX

Revenue XX
Total Tax Expense XX
Expenses (XX)

Accounting Income XX
III. Current Tax Expense
x Tax Rate X%
- alternative 1:
Total Tax Exp. XX
Accounting Income XX
- total tax expense: (1) current tax expense
Non-Taxable Income (XX)
and (2) deferred tax expense.
Non-Deductible Expense XX - alternative 2:

Accounting Income Subject to Tax XX Current Tax Expense XX

Future Taxable Amount (XX) Net Deferred Tax Expense XX (squeeze)

(multiplied by tax rate equals deferred tax Total Tax Expense XX

expense; added to deferred tax liability)

Future Deductible Amount XX

Illustration 7: Hopeful Company is preparing
(multiplied by tax rate equals deferred tax its 2021 year-end income tax returns and the
benefit; added to deferred tax asset) following differences were noted between
financial reporting and tax reporting:
Taxable Income XX
Warranty Expense
x Tax Rate X%
360,000 (financial 200,000 (tax
Current Tax Exp. XX reporting) reporting)
Revenue from Installment Basis
1,800,000 (financial 1,200,000 (tax
- alternative 2: reporting) reporting)
Premium on Officer’s Life Insurance for
Current Tax Expense XX (squeeze) which the company as the beneficiary
120,000 (financial
Net Deferred Tax Expense XX 0 (tax reporting)
reporting)
Total Tax Expense XX Hopeful Company reported a pretax income
of P 4,500,000 in its financial reporting.
Income tax rate is 32% for all years.
- alternative 3:

Income Tax Payable

Accounting Income 4,500,000
XX – Beg. Balance
XX – Current Tax Non-Taxable Income (XX)
XX – Taxes Paid
Expense (squeeze)
XX – End. Balance Non-Deductible Expense 120,000

Accounting Income Subj. to Tax 4,620,000

IV. Net Deferred Tax Expense (Benefit) (Total Tax Expense = 1,478,400)
- alternative 1: Future Taxable Amount (600,000)
Deferred Tax Expense (FTA x Tax) XX Future Deductible Amount 160,000
Deferred Tax Benefit (FDA x Tax) (XX) Taxable Income 4,180,000
Net Deferred Tax Expense (Benefit) XX x Tax Rate 32%

Current Tax Exp. 1,337,600

Accounting Inc. Subj to Tax 4,620,000 Deferred Tax Liability
XX – Beg. Balance
Tax Rate x 32%
XX – Deferred Tax
Total Tax Expense 1,478,400 Expense
XX – End. Balance

Future Taxable Amount 600,000 Deferred Tax Asset

XX – Beg. Balance
Tax Rate x 32%
XX – Deferred Tax
Deferred Tax Expense 192,000 Benefit
XX – End. Balance
Future Deductible Amount (160,000)

Tax Rate x 32% Illustration 8: Acierto Company reported net

Deferred Tax Benefit (51,200) income for the current year at P 10,000,000
before taxes. Included in the determination
Net Deferred Tax Expense 140,800 of the said net income were:

Permanent Differences:
Total Tax Expense 1,478,400 Non-Deductible Expenses 100,000
Non-Taxable Income 500,000
Net Deferred Tax Expense (140,800) Temporary Differences:
Accrued Warranty Exp. 250,000
Current Tax Expense 1,337,600
Rental Payments in Adv. 400,000
Adv. Collection from Cust. 500,000
Provision for Prob. Losses 900,000
Income Tax Expense 1,478,400
Income tax rate is 40% and is not expected
Deferred Tax Asset 51,200 to change in the future.

Income Tax Payable 1,337,600 FTA

FDA
Deferred Tax Liability 192,000

Accounting Income 10,000,000

V. Income Tax Payable, Deferred Tax
Non-Taxable Income (500,000)
Liability, Deferred Tax Asset
Non-Deductible Expense 100,000
Income Tax Payable
XX – Beg. Balance Accounting Income Subj. to Tax 9,600,000
XX – Current Tax
XX – Taxes Paid (Total Tax Expense = 3,840,000)
Expense
XX – End. Balance Future Taxable Amount (400,000)

Future Deductible Amount 1,650,000

Taxable Income 10,850,000 income tax, the following data are provided
for 2018?
x Tax Rate 40%
Rent received in advance 1,200,000
Current Tax Exp. 4,340,000
Income from exempt
1,500,000
municipal bonds
Depreciation deduction for
Accounting Inc. Subj to Tax 9,600,000 income tax purposes in
Tax Rate x 40% excess of depreciation 750,000
reported for financial
Total Tax Expense 3,840,000 accounting purposes
Estimated Tax Payment for
375,000
2018
Future Taxable Amount 400,000 Enacted Corporate Income
30%
Tax Rate
Tax Rate x 40%

Deferred Tax Expense 160,000 FTA

Future Deductible Amount (1,650,000) FDA
NDE
Tax Rate x 40% NTI
Deferred Tax Benefit (660,000)
Accounting Income 6,750,000
Net Deferred Tax Benefit (500,000)
Non-Taxable Income (1,500,000)

Accounting Income Subj. to Tax 5,250,000

Total Tax Expense 3,840,000
(Total Tax Expense = 1,575,000)
Net Deferred Tax Benefit 500,000
Future Taxable Amount (750,000)
Current Tax Expense 4,340,000
Future Deductible Amount 1,200,000

Taxable Income 5,700,000

Income Tax Expense 3,840,000
x Tax Rate 30%
Deferred Tax Asset 660,000
Current Tax Exp. 1,710,000
Income Tax Payable 4,340,000

Deferred Tax Liability 160,000

Income Tax Payable
0 (beg.)
Illustration 9: Toro Company reported P 375,000 (paid) 1,710,000 (cur.)
6,750,000 income before provision for 1,335,000 (end.)
income tax. To compute provision for
Illustration 10: EX Company reported in the Current Tax Expense 1,695,000
first year of operations pretax financial inc.
Net Deferred Tax Expense 50,000
of 6,000,000. The year tax rate is 30% and
the enacted rate for future years is 25%. Total Tax Expense 1,745,000

Uncollectible Accounts Expense

200,000 (tax) 300,000 (acct.)
Illustration 11: Shield Company prepared
Depreciation Expense
the following reconciliation for the first year
800,000 (tax) 500,000 (acct.)
Tax-Exempt Interest Revenue of operations:
0 (tax) 150,000 (acct.) Pre-Tax Financial Income 9,000,000
Tax-Exempt Interest Inc. (750,000)
Accounting Income 6,000,000 Temporary Difference (2,250,000)
Taxable Income 6,000,000
Non-Taxable Income (150,000)
The temporary difference will reverse evenly
Accounting Income Subj. to Tax 5,850,000 in 2020 and 2021 at an enacted tax rate of
Future Deductible Amount 100,000 35% in 2020, and 32% in 2021. The tax rate
Future Taxable Amount (300,000) for 2019 is 30%.
Taxable Income 5,650,000
x Tax Rate 30%
Accounting Income 9,000,000
Current Tax Exp. 1,695,000
Non-Taxable Income (750,000)
Accounting Income Subj. to Tax 8,250,000
Future Taxable Amount 300,000
Future Taxable Amount (2,250,000)
Tax Rate x 25%
Taxable Income 6,000,000
Deferred Tax Expense 75,000
x Tax Rate 30%
Future Deductible Amount (100,000)
Current Tax Exp. 1,800,000
Tax Rate x 25%
Deferred Tax Benefit (25,000)
Future Taxable Amount 1,125,000
Net Deferred Tax Expense 50,000
Tax Rate x 35% (2020)
Deferred Tax Expense 393,750
▪ Note:
Future Taxable Amount 1,125,000
- current tax expense: current rate Tax Rate x 32% (2021)
- deferred tax expense/benefit: future rate Deferred Tax Expense 360,000
Deferred Tax Liability 753,750
- total tax expense: use alternative 2
method.
Current Tax Expense 1,800,000 Illustration 13:

Net Deferred Tax Expense 753,750

Total Tax Expense 2,553,750

Illustration 12: Free Willing Co. paid P

5,000,000 for 2020 estimated income taxes.
The changes in assets and liabilities are as
follows:

12/31/19 12/31/20
Deferred Tax Ass. 800,000 1,000,000
Deferred Tax Liab. 600,000 450,000
Income Tax Pay. 200,000 500,000
The deferred tax liability was caused by
accelerated depreciation and the deferred
tax asset is for rentals received in advance.

Income Tax Payable

200,000
5,000,000 5,300,000 – cur.
500,000

Deferred Tax Liability

600,000
(150,000) – ben.
450,000

Deferred Tax Asset

800,000
200,000 – ben.
1,000,000

Current Tax Expense 5,300,000

Net Deferred Tax Benefit (350,000)

Total Tax Expense 4,950,000