INTERMEDIATE ACCOUNTING 2 /RGP, CPA.

ACCOUNTING FOR INCOME TAXES

MULTIPLE CHOICE THEORIES:

1. The amount of income tax applicable to transactions that are not reported in the continuing operations section of the income
statement is computed
a. By multiplying the item by the effective income tax rate
b. By multiplying the item by the difference between the effective income tax rate and the statutory income tax rate
c. As the difference between the tax computed on the item based on the amount used for financial reporting and the amount
used in computing taxable income
d. As the difference between the tax computed based on taxable income without including the item and the tax computed
based on taxable income including the item

2. Which of the following creates a taxable temporary difference?

I. Prepaid expense III. Unearned income
II. Estimated liabilities IV. Installment receivable

a. I, II and IV d. I and IV
b. II and IV e. II and III
c. I, II and III

3. If the carrying amount of a liability is higher than its tax base, the difference is a
a. Deferred tax asset c. Deductible temporary difference
b. Deferred tax liability d. Taxable temporary difference

4. S1: According to intra-period tax allocation, current and deferred taxes are usually presented in profit or loss
S2: No current and deferred taxes are presented directly in equity
a. True, false c. False, false
b. False, true d. True, true

5. An item that would create a permanent difference in pretax financial and taxable income would be
a. Paying fines for violation of laws
b. Purchasing equipment previously leased with an operating lease in prior years
c. Using the percentage of completion method on long-term construction contracts
d. Using accelerated depreciation for tax purposes and straight line depreciation for book purposes

6. A deferred tax asset shall be recognized for all deductible temporary differences and operating loss carry forward when
a. It is probable that taxable income will be available against which the deferred tax asset can be used
b. It is possible that taxable income will be available against which the deferred tax asset can be used
c. It is probable that accounting income will be available against which the deferred tax asset can be used
d. It is possible that accounting income will be available against which the deferred tax asset can be used

7. Which of the following is incorrect regarding PAS 12?

a. Deferred tax asset and deferred tax liability are based on future tax rates while current tax asset and current tax liability
are based on current tax rates
b. DTA and DTL are DISCOUNTED and are presented as non-current items
c. Deferred tax expense or benefit is the net change in DTL and DTA for the period. If the increase in DTL exceeds the increase
in DTA, the difference is a deferred tax expense
d. When DTA reverses, income tax payable is reduced, while when DTL reverses, income tax payable is increased
e. If the current tax expense is greater than the total income tax expense during the period, there must be a deferred tax
benefit

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INTERMEDIATE ACCOUNTING 2 /RGP, CPA.
8. Recognizing tax benefits in a loss year due to a loss carry-forward require
a. Only a footnote disclosure c. Creating a deferred tax asset
b. Creating a new carry-forward for the next year d. Creating a deferred tax liability

9. S1: Only public enquired to prescribe the accounting requirements of PAS 12

S2: Financial income is for external reporting purposes while taxable income is for compliance purposes
a. True, false c. False, false
b. False, true d. True, true

10. An entity reported deferred tax assets and deferred tax assets and deferred tax liabilities at the end of the prior year and at
the end of the current year. For the current year, the entity should report deferred income tax expense or benefit equal to the
a. Decrease in the deferred tax assets
b. Increase in the deferred tax liabilities
c. Sum of the net changes in deferred tax assets and deferred tax liabilities
d. Amount of the current liability plus the sum of the net changes in deferred tax assets and deferred tax liabilities

PROBLEM 1

On each of the following independent cases, determine the tax base:

(a) The company spent P200,000 in developing a new product. The costs met the definition of an intangible asset and the
recognition criteria prescribed by PAS 38, and thus, capitalized. The intangible asset is being amortized over 5 years. Under
taxation, the whole amount was expensed on the day it was incurred.
(b) An entity has recognized an estimated warranty liability of P240,000. However, an estimated warranty cost is deductible only
when actually paid.
(c) The company recognized a dividend receivable amounting to P60,000. The dividend receivable was from a subsidiary which is
also a domestic corporation, thus, not taxable.
(d) The company accrued fines and penalties amounting to P90,000, which is treated by taxation as non-deductible.
(e) The company acquired a PPE at a cost of P2,000,000. It is to be depreciated in the books over 5 years using the straight-line
method. Under the tax code, such PPE shall be depreciated using the double-declining balance method.

PROBLEM 2

In 2022, FORGIVENESS CORP. received interest income of P100,000 on government obligations and P400,000 in royalties under a
foreign licensing agreement. Royalties are reported as taxable income in the year received, but in the financial statements, royalties
are recognized as income in the year earned and amount to P100,000 for the year ended December 31, 2022.

Early in 2022, FORGIVENESS recognized an installment receivable of P600,000. Income from installment sales is recognized under
the tax code in the year received. The entity is subject to an effective income tax rate of 30%.

REQUIRED: (1) Using the income statement method, by what amount would the deferred income tax asset and deferred income
tax liability account balances increase? (2) Using the balance sheet method, by what amount would the deferred income tax asset
and deferred income tax liability account balances increase?

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INTERMEDIATE ACCOUNTING 2 /RGP, CPA.
PROBLEM 3

As of the current year ended, December 31, 2022, PEACE, INC. has a before-tax income of P1,400,000. The following information
was available in connection with the entity’s computation of its income tax payable:

Fines and penalties on late business registration P 20,000

Payments of premiums on life insurance of the entity’s
key employees (PEACE was the irrevocable beneficiary) 80,000
Property expropriation losses 60,000
Interest income earned from government debt securities
(i.e., treasury bills) 40,000
Accrued warranty expense 48,000
Bad debts recognized under allowance method 104,000
Excess of accelerated depreciation used in taxation over
straight-line method in financial accounting 160,000
Advance rental received 120,000
Interest receivable 32,000

Other information:
• The current tax rate and expected enacted tax rate in the future is 30%.
• Beginning balance of taxable and deductible temporary differences was P120,000 and P200,000, respectively.
• The quarterly tax payments of the company (cumulative from first to third quarter) was P200,000.
• For income tax computation, the tax law prescribes cash basis of accounting for the company’s revenues and expenses. All of
the expenses and revenues are recognized by PEACE under accrual basis.

REQUIRED:
(a) How much is the taxable income under taxation law?
(b) Compute for the current tax expense.
(c) How much is the current tax payable?
(d) How much is the deferred tax expense or benefit?
(e) How much is the total income tax expense?
(f) What amount is to be presented in the statement of financial position as deferred tax liability on December 31, 2022?
(g) What amount is to be presented in the statement of financial position as deferred tax asset on December 31, 2022?

PROBLEM 4

BRAVE CORP. was organized on January 1, 2022. The entity had pretax accounting income of P300,000 and taxable income of
P600,000 for the year ended December 31, 2022. The only temporary difference is accrued product warranty costs that are expected
to be paid as follows:

2023 P 80,000 2025 P 50,000

2024 120,000 2026 50,000

The entity has never had any net operating losses and does not expect any in the future. The enacted income tax rates are 35% for
2022, 30% for 2023 through 2025, and 25% for 2026.

REQUIRED: On December 31, 2022, what amount should be reported as deferred tax asset?

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INTERMEDIATE ACCOUNTING 2 /RGP, CPA.
PROBLEM 5

FAITH CORP. reported net income for the current year 2022 at P10,000,000 before taxes. Included in the determination of the said
net income were non-deductible expenses and non-taxable income amounting to P300,000 and P100,000, respectively.

Additional information pertaining to FAITH’s temporary differences follow:

Temporary differences at the beginning of the year:

Cumulative deductible temporary difference P2,400,000
Cumulative taxable temporary difference 1,600,000

Temporary differences at the end of the year:

Cumulative deductible temporary difference 3,200,000
Cumulative taxable temporary difference 1,000,000

The income tax rate is 40% and is not expected to change in the future.

REQUIRED:
(a) Compute for the current tax expense.
(b) How much is the total income tax expense?
(c) What amount is to be presented in the statement of financial position as deferred tax liability on December 31, 2022?
(d) What amount is to be presented in the statement of financial position as deferred tax asset on December 31, 2022?

PROBLEM 6

HOPE CORP. started operations on January 4, 2022. Information of temporary and permanent differences during the first two years
of operations was as follows:

December 31, 2022 (all amounts in pesos)

Carrying amount Tax base Difference

Assets P600,000 P520,000 P 80,000
Liabilities 300,000 200,000 100,000

December 31, 2023 (all amounts in pesos)

Carrying amount Tax base Difference
Assets P640,000 P540,000 P100,000
Liabilities 240,000 180,000 60,000

The pretax income for the years 2022 and 2023 was P660,000 and P760,000, respectively. On 2022, the entity accrued an interest
as an income from its investment on government bonds amounting to P90,000. The income tax rate for December 31, 2022 was
30% and the enacted income tax rate for the subsequent years will be 35%.

The quarterly tax payments in 2022 and 2023 of HOPE CORP. are as follows:

2022 2023
st
1 Quarter P10,000 P 8,000
2nd Quarter 20,000 16,000
3rd Quarter 8,000 6,000

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INTERMEDIATE ACCOUNTING 2 /RGP, CPA.
REQUIRED:
(a) How much is the taxable income under taxation law in 2022 and 2023?
(b) Compute for the current tax expense in 2022 and 2023.
(c) How much is the current tax payable in 2022 and 2023?
(d) How much is the deferred tax expense or benefit in 2022 and 2023?
(e) How much is the total income tax expense in 2022 and 2023?
(f) What amount is to be presented in the statement of financial position as deferred tax liability on December 31, 2022 and
December 31, 2023?
(g) What amount is to be presented in the statement of financial position as deferred tax asset on December 31, 2022 and
December 31, 2023?

PROBLEM 7

JOY CORP., a calendar year entity, started its business in 2022 in relation to the manufacturing of lawn mowers that are sold on
installment basis. The entity follows the revenue recognition rule: when the lawn mower is sold for the financial reporting purposes,
and when installment payments are received for tax purposes. The following information is provided for the computation of income
tax expense:

• During the current year, JOY recognized gross profit of P6,000,000 for financial reporting purposes, and P1,500,000 for tax
purposes. The amounts of gross profit expected to be recognized for tax purposes in 2023 and 2024 are P2,500,000 and
P2,000,000, respectively.
• JOY provides warranty of two years for every lawn mower sold. Warranty costs are recognized on the accrual basis for financial
accounting purposes and when paid for tax purposes. Warranty expense accrued in 2022 is P2,500,000, but only P500,000 of
warranty costs is paid in 2022. It is expected that in 2023 and 2024, P1,000,000 and P1,000,000, respectively, of warranty costs
will be paid.
• In addition, during 2022, P500,000 interest was received and earned, andP100,000 insurance premium on life insurance policy
that covered the life of the president was paid. The entity is the beneficiary.
• The tax rate is 30%, Pretax accounting income in 2022 was P2,000,000. Any 2022 operating loss will be carried to 2023.

REQUIRED: (1) What is the deferred tax asset and deferred tax liability on December 31, 2022? (2) What is the total income tax
expense in 2022?

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INTERMEDIATE ACCOUNTING 2 /RGP, CPA.