INTERMEDIATE ACCOUNTING 3

CJEZEREI D. VERDADERO BSA 2

ACCOUNTING FOR INCOME TAX

(CHAPTER 16)

Problem 16-14
Hilton Company reported pretax financial income of P6, 200,000 for the current year.
Included in other income was P200, 000 of interest revenue from government bonds held by
the entity.
The income statement also included depreciation expense of P500, 000 for a machine costing
P3, 000,000. The income tax return reported P600, 000 as depreciation on the machine.
The enacted tax rate is 30% for the current year and future years.
What is the current tax expense for the current year?
a. 1,860,000
b. 1,800,000
c. 1,770,000
d. 1,830,000
SOLUTIONS:
Financial income 6,200,000
Interest revenue (200,000)
Excess Depreciation (100,000)
Taxable income 5,900,000
Tax rate x 30%
Current tax expense 1,770,000

Problem 16-15
Tantrum Company began operations at the beginning of current year. At the end of the first year
of operations, the entity reported P6, 000,000 income before income tax in the income
statement but only P5, 100,000 taxable income in the tax return.
Analysis of the P900, 000 difference revealed that P500, 000 was a permanent difference and
P400, 000 was a temporary tax liability difference related to a current asset.
The enacted tax rate for the current year and future years is 30%.
What is the total income tax expense to be reported in the income statement for the current
year?
a. 1,800,000
b. 1,530,000
c. 1,650,000
d. 1,950,000
SOLUTION:
Financial income, per book 6,000,000
Permanent difference (500,000)
Taxable financial income 5,500,000
Tax rate x 30%
Total income tax 1,650,000

Problem 16-16
Huskie Company reported in the income statement for the current year pretax income of P400,
000.
The following items are treated differently on the tax return and on the book.
Tax return Per book
Royalty income 20, 000 40, 000
Depreciation expense 125, 000 100, 000
Payment of a penalty None 15, 000

The enacted tax rate for current year is 30% and 25% for all future years.

What amount should be reported as current portion of income tax expense in the income
statement for the current year?
a. 111,000
b. 102,000
c. 115,500
d. 92,500
SOLUTION:
Pretax income 400,000
Royalty income (20,000)
Excess Depreciation expense (25,000)
Payment penalty 15,000
Taxable income 370,000
Tax rate x 30%
Current tax expense 111,000

Problem 16-17
Pine Company reported pretax income of P800, 000 for the current year.
In the computation of income taxes, the following data were considered:
Nontaxable gain 350,000
Depreciation deducted for tax purposes in
excess of depreciation for book purposes 50,000
Estimated tax payments during current year 70,000
Enacted tax rate 30%

What amount should be reported as current tax liability at year-end?

a.135, 000
b. 120,000
c. 50,000
d. 65,000

SOLUTION:
Pretax income 800,000
Nontaxable gain (350,000)
Excess Depreciation (50,000)
Taxable income 400,000
Tax rate x 30%
Current tax 120,000
Estimated tax payments (70,000)
Current tax liability 50,000

Problem 16-18
Grim Company reported pretax accounting income of P200, 000 and taxable income of P150,
000 for the current year.
The difference is due to the following:

Interest income on saving deposit 70,000

Premium expense on keyman life insurance ( 20, 000 )

Total 50,000

The income tax rate is 30%.

What amount should be reported as current provision for income tax expense in the income
statement for the current year?
a. 45,000
b. 50,000
c. 60,000
d. 0
SOLUTION:
Taxable income 150,000
Tax rate x 30%
Current tax expense 45,000

Problem 16-19
Viking Company reported in the income statement for the current year pretax income of P1,
000, 000.
The following items are treated differently in the tax return and in the accounting records:

Tax return Accounting record

Rent income 70,000 120,000
Depreciation 280,000 220,000
Premium on officers’ life insurance 90,000

The tax rate is 30%. The entity is the beneficiary of the officers’ life insurance policies.
What is the total tax expense for the current year?
a. 360,000
b. 300,000
c. 294,000
d. 327,000
SOLUTION:
Pretax income 1,000,000
Premium on life insurance 90,000
Financial income 1,090,000
Tax rate x 30%
Total tax expense 327,000

Problem 16-20
Thorn Company reported the following tax effects of temporary differences at year-end:
Deferred tax asset (liability) Related asset classification
Accelerated tax depreciation (75,000) Noncurrent
Additional cost in inventory
for tax purposes 25,000 Current
(50,000)

The entity anticipated that P10, 000 of the deferred tax liability will reverse next year.
What amount should be reported as noncurrent deferred tax liability at year-end?
a. 40,000
b. 50,000
c. 65,000
d. 75,000
SOLUTION:
Deferred tax liability will always remain as non-current.

Problem 16-21
In the year-end statement of financial position, Sheen Company had income tax payable of
P260, 000 and a deferred tax asset of P400, 000.
The entity had reported a deferred tax asset of P300, 000 at the beginning of current year. No
estimated tax payments were made during the current year.
The entity determined that it was probable that the deferred tax asset would be realized.
In the income statement for the current year, what amount should be reported as total income
tax expense?
a. 260,000
b. 150,000
c. 170,000
d. 160,000
SOLUTION:
Income tax payable 260,000
Increase in deferred tax asset (100,000)
Total income tax expense 160,000

Problem 16-22
Caleb Company has three financial statement elements for which the year-end carrying amount
is different from the tax base:

Carrying amount Tax base Difference

Equipment 2,000,000 1,200,000 800,000
Prepaid officers
insurance policy 750,000 0 750,000
Warranty liability 500,000 0 500,000

The entity is the beneficiary of the officers’ life insurance policy.

As a result of these differences, what is the future taxable amount?
a. 2,050,000
b. 1,550,000
c. 800,000
d. 500,000

Problem 16-23
Boom Company prepared the following reconciliation of financial income and taxable income
for the current year:
Pretax financial income 6,000,000
Permanent difference (500,000)
Financial income subject to tax 5,500,000
Temporary difference-capitalized interest
For book and expensed for tax (200,000)
Taxable income 5,300,000
Cumulative taxable temporary difference is P300, 000 on January 1 and P500, 000 on December
31. The tax rate is 30%.
What amount should be reported as deferred tax liability on December 31?
a. 150,000
b. 90,000
c. 60,000
d. 0
SOLUTION:
Cumulative taxable temporary difference, Dec. 1 500,000
Tax rate x 30%
Deferred tax liability 150,000

Problem 16-24
On January 1, 2020, Bolton Company reported a deferred tax liability of P1, 000, 000 and a
deferred tax asset of P400, 000.
On December 31, 2020, the entity reported a deferred tax liability of P1, 500, 000 and a
deferred tax asset of zero.
What is the net deferred tax expense for the current year?
a. 500,000
b. 900,000
c. 400,000
d. 100,000
SOLUTION:
Increase of Deferred tax liability
Beg. 1,000,000
Ending 1,500,000 500,000
Decrease of Deferred tax Asset
Beg. 400,000
Ending 0 400,000
Net Deferred Tax expense 900,000

Problem 16-25
Tower Company began operations on January 1, 2020. For financial reporting, the entity
recognized revenue from all sales under accrual method.
However, in the income tax return, the entity reported qualifying sales under the instalment
method.
The gross profit on these instalment sales under each method was:
Accrual method Installment method
2020 3,200,000 1,200,000
2021 5,200,000 2,800,000
8,400,000 4,000,000

The income tax rate is 30%. There are no other temporary or permanent differences.
What amount should be reported as deferred tax asset or liability on December 31, 2020?
a. 1,320,000 asset
b. 1,320,000 liability
c. 720,000 asset
d. 720,000 liability
SOLUTION:
Accrual Method 8,400,000
Installment Method 4,000,000
Future taxable Difference 4,400,000
Tax rate x 30%
Deferred tax liability 1,320,000

Problem 16-26
Quinn Company reported a deferred tax asset of P900, 000 on January 1, 2020. During the year,
the entity reported pretax financial income of P3, 000, 000.
Temporary differences of P1,000,000 resulted in taxable income of P2,000,000 for the year. On
December 31, 2020, the entity had cumulative taxable differences of P700,000. The income tax
rate is 30%.
What amount should be reported as deferred tax expense for the current year?
a. 120,000
b. 210,000
c. 300,000
d. 600,000
SOLUTION:
Cumulative Taxable differences 700,000
Tax rate x 30%
Increase in deferred tax liability 210,000
Decrease in deferred tax asset 90,000
Deferred tax expense 300,000
Problem 16-27
Ranger Company located business in two jurisdictions, Singapore and Malaysia.
In both countries, the entity has the legal right to offset the taxes receivable and payable.
The following information related to deferred tax assets and liabilities:

Classification Amount Taxing Jurisdiction

Deferred tax asset 800,000 Singapore
Deferred tax liability 300,000 Malaysia
Deferred tax liability 600,000 Singapore

How should the entity present deferred taxes at year-end?

Deferred tax asset Deferred tax liability
a. 800,000 900,000
b. 0 1,000,000
c. 200,000 600,000
d. 200,000 300,000

SOLUTION:
Deferred tax assets and Deferred tax liability from Singapore may be offset against each other
since they are levied by the same taxation authority.

Problem 16-28
Zeff Company prepared the following reconciliation for the first year of operations:
Pretax financial income 1,600,000
Nontaxable interest received (50,000)
Long-term loss accrual in excess of deductible amount 100,000
Depreciation in excess of financial depreciation (250,000)

Taxable income (Tax rate is 30%) 1,400,000

1. What amount should be reported as current tax expense?
a. 480,000
b. 420,000
c. 465,000
d. 495,000
SOLUTION:
Taxable income 1,400,000
Tax rate x 30%
Current tax expense 420,000

2. What amount should be reported as total income tax expense?

a. 495,000
b. 480,000
c. 465,000
d. 420,000
SOLUTION:
Pretax Financial Income 1,600,000
Permanent difference:
Nontaxable interest (50,000)
Financial income 1,550,000
Tax rate x 30%
Total tax expense 465,000

3. What amount should be reported as deferred tax liability?

a. 90,000
b. 45,000
c. 75,000
d. 30,000
SOLUTION:
Depreciation in excess of financial depreciation 250,000
Tax rate x 30%
Deferred tax liability 75,000

4. What amount should be reported as deferred tax asset?

a. 30,000
b. 90,000
c. 45,000
d. 75,000
SOLUTION:
Long-term loss accrual in excess of deductible amount 100,000
Tax rate x 30%
Deferred tax asset 30,000

Problem 16-29
Chamber Company revealed the following differences between the book and tax basis of the
assets and liabilities on December 31, 2020:

Book basis Tax basis

Installment accounts receivable 1,000,000 0
Litigation liability 200,000 0

It is expected that the litigation liability will be settled in 2021. The difference in accounts
receivable will result in taxable amounts of P600,000 in 2021 and P400,000 in 2022.
The entity has a taxable income of P7,000,000 in 2020. The income tax rate of 30%. This is the
first year of operations of the entity.
1. What amount should be reported as current tax expense?
a. 2,100,000
b. 2,400,000
c. 2,460,000
d. 2,040,000
SOLUTION:
Taxable income 7,000,000
Tax rate x 30%
Current tax expense 2,100,000

2. What amount should be reported as total tax expense?

a. 2,400,000
b. 2,340,000
c. 2,160,000
d. 2,400,000
SOLUTION:
Taxable income 7,000,000
Installment AR 1,000,000
Litigation liability (200,000)
Financial income 7,800,000
Tax rate x 30%
Total rate expense 2,340,000

3. What amount should be reported as deferred tax liability?

a. 240,000
b. 360,000
c. 300,000
d. 0
SOLUTION:
Installment AR 1,000,000
Tax rate x 30%
Deferred tax liability 300,000

4. What amount should be reported as deferred tax asset?

a. 300,000
b. 300,000
c. 60,000
d. 0
SOLUTION:
Litigation liability 200,000
Tax rate x 30%
Deferred tax asset 60,000
Problem 16-30
Pecorino Company had pretax financial income of P2,500,000 in the current year.
The entity made corporate estimated tax payment in the amount of 180,000 during the current
year.
To compute the provision for income tax, the following information was provided:
Interest income received 360,000
Tax depreciation in excess of financial statement amount 160,000
Rent received in advance 280,000
Corporate tax rate 30%

1. What amount of permanent difference between book income and taxable income existed at
year-end?
a. 520,000
b. 360,000
c. 800,000
d. 280,000
SOLUTION:
Interest income received 360,000

2. What amount of current tax expense should be reported?

a. 786,000
b. 510,000
c. 750,000
d. 678,000
SOLUTION:
Pretax Financial income 2,500,000
Permanent Different
Interest income received (360,000)
Temporary Difference
Excess depreciation (160,000)
Rent income advance 280,000
Taxable income 2,260,000
Tax rate x 30%
Current tax expense 678,000
3. What amount of income tax payable should be reported?
a. 498,000
b. 606,000
c. 330,000
d. 570,000
SOLUTION:
Current tax expense 678,000
Estimated tax payment (180,000)
Income tax payable 498,000

4. What amount of total tax expense should be reported?

a. 714,000
b. 726,000
c. 642,000
d. 594,000
SOLUTION:
Pretax Financial income 2,500,000
Permanent Different
Interest income received (360,000)
Taxable income 2,140,000
Tax rate x 30%
Total tax expense 642,000

Problem 16-31
Lakeshore Company reported the following selected information for the current year:
Accounting income before tax 9,700,000
Interest income on tax-exempt municipal bonds 300,000
Depreciation claimed on the tax return in excess of
financial depreciation 500,000
Carrying amount of depreciable asset in excess of tax basis 800,000
Warranty expense reported on the income statement 200,000
Actual warranty expenditures 50,000
Income tax rate 30%

1. What is the current tax expense for the current year?

a. 2,715,000
b. 2,625,000
c. 2,655,000
d. 2,745,000
Solution:
Financial income 9,700,000
Permanent Different
Interest income (300,000)
Temporary Difference
Excess depreciation (500,000)
Excess warranty expense 150,000
Taxable income 9,050,000
Tax rate x 30%
Current tax expense 2,715,000
2. What is the total tax expense for the current year?
a. 2,820,000
b. 2,730,000
c. 2,700,000
d. 2,550,000
Solution:
Financial income 9,700,000
Permanent Different
Interest income (300,000)
Financial income 9,400,000
Tax rate x 30%
Total tax expense 2,820,000

3. What is the deferred tax liability at year-end?

a. 240,000
b. 150,000
c. 210,000
d. 120,000
Solution:
Excess warranty expense 500,000
Tax rate x 30%
Deferred tax liability 150,000

4. What is the deferred tax asset at year-end?

a. 60,000
b. 45,000
c. 15,000
d. 75,000
Solution:
Excess warranty expense 150,000
Tax rate x 30%
Deferred tax asset 45,000

Problem 16-32
Stabilizer Company reported taxable income of P8,000,000 in the income tax return for the first
year of operations. The enacted income tax rate is 30% for the current and future years.
Temporary differences between financial income and taxable income for the year are:
Tax depreciation in excess of book depreciation 800,000
Accrual for product liability claim in excess of actual
claim 1,200,000
Reported installment sales income in excess of taxable
installment sales income 2,600,000
1. What is the deferred tax asset at year-end?
a. 240,000
b. 360,000
c. 780,000
d. 0
SOLUTION:
Accrual of excess product liability claim 1,000,000
Tax rate x 30%
Deferred tax asset 360,000

2. What is the deferred tax liability at year-end?

a. 1,020,000
b. 780,000
c. 240,000
d. 0
SOLUTION:
Excess depreciation 800,000
Financial installment income 2,600,000
Future taxable amount 3,400,000
Tax rate x 30%
Deferred tax liability 1,020,000

3. What is the net deferred tax expense for the current year?
a. 1,020,000
b. 1,380,000
c. 660,000
d. 360,000
SOLUTION:
Deferred tax asset (360,000)
Deferred tax liability 1,020,000
Net deferred tax expense 660,000

4. What is the total income tax expense for the current year?
a. 3,060,000
b. 2,400,000
c. 2,640,000
d. 2,820,000
SOLUTION:
Taxable income 8,000,000
Tax rate x 30%
Current tax expense 2,400,000
Net deferred tax expense 660,000
Total tax expense 3,060,000