ILLUSTRATIVE EXAMPLES: ACCOUNTING FOR INCOME TAX

Illustrative Example 1: Tax Base and Accounting Base

Q - 1. During December 2022, an entity billed a customer amounting to P10 for services rendered during December. The said
income will be collected in January 2023.
The entity reported profit amounting to P210 for the year 2022.
Q: Is the billed income during December 2022 already taxable for the year 2022?

Q - 2. On January 1, 2022, an entity paid in advance a 3-year rent for an office space amounting to P300,000. The advance rental
payment covers the years 2022 through 2024.
For accounting purposes, the prepaid rent is amortized over 3 years. The entity reported profit amounting to P2,500,000 for the
year 2022.
Q: How much rent expense is allowed to be deducted from the taxable income for the year 2022?

Q - 3. On January 1, 2022, an entity received in advance a 3-year rent for an office space amounting to P300,000. The advance
rental payment covers the years 2022 through 2024.
For accounting purposes, the unearned rent income is amortized over 3 years.
The entity reported profit amounting to P2,500,000 for the year 2022.
Q: How much rental income is reported for tax purposes in 2022?

Q - 4. An entity set up a provision for doubtful accounts amounting to P100 on December 31, 2022. These accounts are actually
written off in January 2023.
The entity reported profit amounting to P500 for the year 2022.
Q: What amount of income should be taxable for the year 2022?

Illustrative Example 2: Permanent Difference vs Temporary Difference

Mitsuha Company reported a net income of P1,000,000 for the year 2023. However, its taxable income was different from its
accounting income. The difference was due to the following items:
 A P10,000 fine for violating environmental regulations.
 A P50,000 depreciation expense on its equipment, which was calculated using the straight-line method for financial reporting
purposes and P100,000 for the double-declining balance method for tax purposes.
 A P5,000 interest income from municipal bonds.
 The entity collected a P80,000 payment in advance from a customer. The item will be delivered the following year.
 At the beginning of the year, the entity paid P100,000 rent in advance to a landlady for leasing the building. The payment is
for a 2-year rental payment.
 An annual life insurance premium of its managing employee paid by the entity amounting to P25,000 to SunDeath Insurance
Company. The beneficiary of the insurance is the entity.
 At the end of the year, the company has total net sales of P2,500,000 of which 5% is to be collected next year.
 A P50,000 dividends received from a domestic corporation and a P10,000 interest income from its deposit from CDO Bank.
 Requirement:
Q - 1. Determine the items due to permanent differences.
Q - 2. Determine the items due to temporary differences.
Q - 3. Calculate the taxable income should Mitsuha Company must report at year end.

Illustrative Example 3: DTL vs DTA – Timing Difference

In 2020, King Company reported a net income of P1,000,000. The following transactions happened during the year:
 A customer ordered goods amounting to P300,000 but only 60% had been paid so far.
 A customer ordered goods amounting to P120,000 paid in advance and 75% had been delivered already. The balance will be
delivered the following year.
 The company uses straight-line depreciation, and it recorded a P250,000. If the company uses double-declining method, the
company will record P500,000. The BIR only allows the use of the double-declining method in depreciating fixed assets.
 The company paid an advertisement amounting to P90,000 that will be used and amortized for 3 years.
 At the end of the year, the company recognized a provision for warranty cost amounting to P500,000 but only 20% of its
customers claimed the warranty.
 The company has a policy to set a provision for uncollected accounts receivable, that is 5% based on net sales, but the
company only written-off P25,000 for the year. The company has a total of P2,300,000 net sales for the year.

Compute for the Deferred Tax Liability and Deferred Tax Asset for the year assuming the enacted tax rate is 30%.

Illustrative Example 4: DTL vs DTA – Tax Base vs Carrying Amount

West Company disclosed the following assets and liabilities at carrying amount on December 31, 2020:
 Property 10,000,000
 Plant and Equipment 5,000,000
 Inventory 4,000,000
 Trade receivables 3,000,000
 Trade payables 6,000,000
 Cash 2,000,000
The value for tax purposes for property and for plant and equipment was P7,000,000 and P4,000,000 respectively.
The entity has made a provision for inventory obsolescence of P2,000,000 which is not allowable for tax purposes.
Further, an impairment charge against trade receivables of P1,000,000 has been made. This charge will not be allowed in the
current year for tax purposes.
West Company reported net income of P9,000,000 for 2019. There are no temporary differences at the beginning of the
current year. The tax rate is 30%
Requirements:
Q - 1. Compute for deferred tax liability and deferred tax assets.
Q - 2. Compute for net deferred tax expense.
Q - 3. Compute for current tax expense.
Q - 4. Compute for total income tax expense.
Illustrative Example 5: Comprehensive Problem

During 2022, Plank Company reported accounting income P9,000,000 before income tax. The company revealed the
following information for the current year:

Interest income on government bonds 700,000

Life insurance annual premium (Plank Company the beneficiary
of this insurance policy) 100,000
Tax penalties and surcharges 40,000
Depreciation claimed on income tax return 2,700,000
Depreciation per accounting records 1,400,000
Rental payments made in advance 400,000
Provisions for probable losses 100,000
Warranty expense on the accrual basis 600,000
Actual warranty payment 200,000
Advance collections from customers Income tax rate (not expected
to change in the future) 30%
Q - 1. How much is the income subject to tax?
Q - 2. How much is the taxable income?
Q - 3. How much is the current income tax expense?
Q - 4. What amount shall be presented as deferred tax liability on December 31?
Q - 5. What amount shall be presented as deferred tax asset on December 31?
Q - 6. How much is the total income tax expense?