Lm-Intermediate Accounting Module 2

MODULE 6 Module Title: Accounting for Income Tax
PROGRAM: BSMA Year Level: II Section ________
COURSE CODE: ACCT15 COURSE DESCRIPTION: Intermediate Accounting

Part 2
LEARNING OUTCOMES
At the end of this module, the students should be able to:
(1) know the distinction between accounting income and taxable
income.
(2) distinguish permanent differences and temporary differences

between accounting income and taxable income.
(3) identify temporary differences that result to a deferred tax

liability.
(4) identify temporary differences that result to a deferred tax

asset.
(5) know the recognition and measurement of deferred tax asset

and deferred tax liability.
Prepared Reviewed and Checked
AFRO L. REYES, CPA, MBA WILMA WENG P. CASALME, PhD

Instructor Program Head
Recommending Approval Approved
JASCELYNN N. OLIMPIADA, PhD MARCIAL V. GOGUANCO, JR.

Vice President for Academic Affairs College Administrator
TANAUAN CITY COLLEGE COURSE CODE: ACCT15/MODULE NUMBER 6COURSE NAME: INTERMEDIATE ACCOUNTING
PART 2
LEARNING MODULE
Program: BSMA Topic: Accounting for Income Tax

Course: Intermediate Accounting Part 2 Instructor: Afro L. Reyes, CPA, MBA
Code ACCT15 Module #: 6 of 8 Weeks #: 12 and 13 #of Pages: 20
I. Preliminaries
Introduction to the This module tackles the accounting for income tax, in particular, the differences between the
Module Objective accounting income and taxable income, the permanent and temporary differences, the
deferred tax liability and the deferred tax asset.
Selected problems on the topics are included in the learning activities.
This module is intended for the twelfth and thirteenth weeks, out of 18 weeks of meetings in
the semester.
The content of this module was contributed by the students enrolled in the course, taken from
the textbook and reviewer, under the direction and review of the instructor.
Assessment/
Section Topics Learning Outcomes Evaluation Modality
1. Differences between At the end of this module, the students The performance Visual and
Accounting and should be able to: indicators will be auditory
Taxable Income the scores modalities will be
2. Permanent and achieved by the adopted thru in-
(1) know the distinction between
Temporary Differences students in the person and on-
3. Taxable and Deductible accounting income and taxable income. written works and line meetings.
Temporary Differences performance tasks.
4. Tax Base of an Asset (2) distinguish permanent differences These are detailed
and a Liability and temporary differences between further in section IV
5. Deferred Tax Liability accounting income and taxable income. of this module,
6. Deferred Tax Asset below.
7. Income Statement and (3) identify temporary differences that
Statement of Financial result to a deferred tax liability.
Position Approach
8. Illustrations (4) identify temporary differences that
result to a deferred tax asset.
(5) know the recognition and

measurement of deferred tax asset and
deferred tax liability.
II. Instructions
KEYWORDS AND CONCEPTS
Content Lecture/ Discussion
BSMA 2A, Second Semester, AY 2022 - 2023
(Reported by FOJAS, PRINCESS , pp 486 - 489, Textbook)
ACCOUNTING INCOME
Accounting income or financial income is the income for the period before deducting income tax
expense.
Accounting income is the income appearing on the traditional income statement and computed in
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accordance with accounting standards.
TAXABLE INCOME
Taxable income is the income for the period determined in accordance with the rules established
by the taxation authorities upon which income taxes are payable or recoverable.
Taxable income is the income appearing in the income tax return and computed in accordance
with the income tax law.
Taxable income may be defined as the excess of taxable revenue over tax deductible expense
and exemptions for the period as defined by the Bureau of Internal Revenue.
The differences between accounting income and taxable income may be classified into two,
namely permanent differences and temporary differences.
Permanent differences
Permanent differences are items of revenue and expense which are included in either accounting
income or taxable income but will never be included in the other.
Actually, permanent differences pertain to nontaxable revenue and nondeductible expenses.
Permanent differences do not give rise to deferred tax asset and liability because they have no
future tax consequences.
Examples of permanent differences
a. Interest income on time deposits

b. Dividends received
c. Life insurance premium – When the entity is the beneficiary of a life insurance policy on an
officer, the premium paid by the entity is not tax deductible but said premium is an expense for
accounting purposes.
d. Tax penalties, surcharges, and fines are nondeductible.
Temporary differences
Temporary differences are differences between the carrying amount of the asset or liability and the
tax base.
Temporary differences include timing differences.
Timing differences are difference between accounting income and taxable income that originate in
one period and reverse in one or more subsequent periods.
Timing differences are items of income and expense which are included in both accounting
income and taxable income but at different time periods.
For every temporary difference, eventually that item’s treatment will be the same in accounting and
taxable income.
Accordingly, temporary differences give rise either to:
a. Deferred tax liability

b. Deferred tax asset
Kinds of temporary difference
a. Taxable temporary difference is the temporary difference that will result in future taxable amount
in determining taxable income of future periods when the carrying amount of the asset or liability
is recovered or settled.
In other words, a taxable temporary difference is a future taxable amount that will give rise to a
b. Deductible temporary difference is the temporary difference that will result in future deductible
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amount in determining taxable income of future periods when the carrying amount of the asset
or liability is recovered or settled.
In other words, a deductible temporary difference is a future deductible amount that will give rise
to a deferred tax asset.
Tax base
The tax base of an asset or a liability is the amount attributable to the asset or liability for tax
purposes.
Worded in another way, the tax base of an asset or a liability is the amount of the asset or liability
that is recognized or allowed for tax purposes.
Tax base of an asset
The tax base of an asset is the amount that will be deductible for tax purposes against future
income.
For example, if an entity has appropriately capitalized P1,000,000 as software development cost,
the carrying amount is P1,000,000 for accounting purposes.
However, if this amount is allowed as a one-time deduction for tax purposes, the tax base is zero
because the entire amount is expensed in the current year.
Tax base of a liability
The tax base of a liability is normally the carrying amount less the amount that will be deductible
for tax purposes in the future.
For example, if an entity has recognized an estimated warranty liability of P500,000, the carrying
amount is P500,000 for accounting purposes.
However, an estimated warranty cost is deductible only when actually paid.
Thus, the tax base is zero because the estimated warranty cost is the future deductible amount.
The carrying amount of warranty liability for accounting purposes of P500,000 minus future
deductible amount of P500,000 equals zero tax base.
Deferred tax liability
Deferred tax liability is the amount of income tax payable in future periods with respect to a
taxable temporary difference.
A deferred tax liability is the deferred tax consequences attributable to a taxable temporary
difference or future taxable amount.
Actually, a deferred tax liability arises from the following:
a. When the accounting income is higher than taxable income because of timing differences.
b. When the carrying amount of an asset is higher than the tax base.
c. When the carrying amount of a liability is lower than the tax base.
Accounting income higher than taxable income
Temporary differences that result in accounting income higher than taxable income include the
following:
1. Revenues and gains are included in accounting income of the current period but are taxable in
future periods.
For example, an installment sale is included in accounting income at the time of sale and
included in taxable income when cash is collected in future periods.
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2. Expenses and losses are deductible for tax purposes in the current period but deductible for
accounting purposes in future periods.
a. Accelerated depreciation for tax purposes and straight line depreciation for accounting
purposes.
b. Development cost may be capitalized and amortized over future periods in determining
accounting income but deducted in determining taxable income in the period in which it is
paid.
c. Prepaid expense has already been deducted on a cash basis in determining taxable income
of the current period.
(Reported by: Galindez, April L., pp 490 - 493, Textbook)
OTHER TAXABLE TEMPORARY DIFFERENCES
Most taxable temporary differences a rise because of differences in the timing of the recognition of
the transaction for accounting and tax purposes.
However, there are other taxable temporary differences that technically are not timing differences
but nevertheless give rise to deferred tax liability.
Such other taxable temporary difference include:
a. Asset is revalued upward and no equivalent adjustment is made for tax purposes.
b. The carrying amount of investment in subsidiary, associate or joint venture is higher than the tax
base because the subsidiary, associate or joint venture has not distributed its entire income to the
parent or investor.
c. The cost of a business combination accounted for as an acquisition is allocated to the

identifiable assets and liabilities acquired at fair value.
RECOGNITION OF A DEFERRED TAX LIABILITY
PAS 12, paragraph 15, provides that a deferred tax liability shall be recognized for all taxable
temporary differences.
However, a deferred tax liability is not recognized when the taxable temporary difference arises
from:
a. Goodwill resulting from a business combination and which is nondeductible for tax purposes.
b. Initial recognition of an asset or liability in a transaction that is not a business combination and
affects neither accounting income nor taxable income.
c. Undistributed profit of subsidiary, associate or joint venture when the parent, investor or venturer
is able to control the timing of the reversal of the temporary difference.
DEFERRED TAX ASSET
A deferred tax asset is the amount of income tax recoverable in future periods with respect to
deductible temporary differences and operating loss carryforward.
In other words, a deferred tax asset is the deferred tax consequence attributable to a future
deductible amount and operating loss carryforward.
A deferred tax asset arises from the following:
a. When the taxable income is higher than accounting income because of timing differences.
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b. When the tax base of asset is higher than the carrying amount.
c. When the tax base of liability is lower than the carrying amount.
TAXABLE INCOME HIGHER THAN ACCOUNTING INCOME
Temporary differences that will result to taxable income higher than accounting income because
of timing differences include of the following:
1. Revenues and gains are included in taxable income of current period but are included in
accounting income of future periods.
For example, rent received in advance is taxable at the time of receipt but deferred in future
periods for accounting purposes.
2. Expenses and losses are deducted from accounting income of current period but are deductible
for tax purpose in future periods.
FUTURE DEDUCTIBLE TEMPORARY DIFFERENCES
Future deductible temporary differences of future deductible amounts include the following:
a. A probable and measurable litigation loss is recognized for accounting purposes but deducted in
determining taxable income when actually incurred or paid.
b. Estimated product warranty cost is recognized for accounting purpose in the current period but
deducted in determining taxable income when actually incurred or paid.
c. Research cost is recognized as expense in determining accounting income but not permitted as
a deduction in determining taxable income until a later period.
d. An impairment loss is recognized for accounting purposes but ignored for tax purposes until the
asset is sold.
e. Doubtful accounts are recognized as expense for accounting purposes but deductible for tax
purposes only when written off as worthless.
Other deductible temporary differences
Temporary differences that technically are not timing differences but nevertheless give rise to
deferred tax asset include the following:
a. Asset is revalued downward and no equivalent adjustment is made for tax purposes.
b. The tax base of investment in subsidiary, associate or joint venture is higher than the carrying
amount because the subsidiary, associate or joint venture has suffered continuing losses in
current and prior years.
RECOGNITION OF DEFERRED TAX ASSET
PAS 12, paragraph 24, provides that a deferred tax asset shall be recognized for all deductible
temporary differences and operating loss carryforward when it is probable that taxable income will
be available against which the deferred tax asset can be used.
OPERATING LOSS CARRYFORWARD
Operating loss carryforward is an excess of tax deductions over income in a year that may be
carried forward to reduce taxable income in a future year.
Certain entities registered with the Board of Investments are permitted to carry over net operating
loss for tax purposes subject to limitations of the relevant law and implementing regulations of the
Board of Investments.
METHOD OF ACCOUNTING
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a. Income statement approach
The income statement approach focuses on timing differences only in the computation of
deferred tax asset or deferred tax liability.
As the method suggests, timing differences affect the income statement of one period and will
reverse in the income statement of one or more subsequent periods.
b. Statement of financial position approach

The statement of financial position approach considers all temporary differences including timing
differences.
There are temporary differences that affect the statement of financial position only and therefore
technically are not timing differences but nonetheless are recognized in computing deferred tax
asset or deferred tax liability.
(Reported by: Puno, Rica Jane, pp. 494 – 498 Textbook)
Accounting procedures
The recognition of a deferred tax asset or deferred tax liability is known as interperiod tax
allocation.
1. Determine the taxable income
The taxable income multiplied by the tax rate equals the current tax expense.
Income tax expense xx

Income tax payable xx
Current tax expense is the amount of income tax paid or payable for a year as determined by
applying the provisions of the enacted tax law to the taxable income.
2. Determine the taxable temporary differences
The amount of taxable temporary differences multiplied by the tax rate equals the deferred tax
liability.
Income tax expense xx

Deferred tax liability xx
3. Determine the deductible temporary differences
The amount of deductible temporary differences multiplied by the tax rate equals the deferred tax
asset.
Deferred tax asset xx

Income tax benefit xx
The income tax benefit account reduces the current tax expense for the year and is a deduction
from current tax expense.
The deferred tax asset may be credited directly to income tax expense.
4. The total income tax expense for the year is the current tax expense plus the deferred tax
expense arising from taxable temporary differences minus the income tax benefit arising from
deductible temporary differences.
The total income tax expense for the year is equal to the accounting income subject to tax
multiplied by the tax rate, assuming there is no future enacted income tax rate.
Illustration 1 - Deferred tax liability
In 2022, an entity reported in accounting income a gross income on installment sale of P1,000,000
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but not in taxable income.
The temporary difference is expected to be reported in taxable income equally in 2023 and 2024.
The income tax rate is 25%.
2022 2023 2024
Accounting income 4,000,000 5,000,000 7,000,000

Taxable income 3,000,000 5,500,000 7,500,000
Since the temporary difference results to a higher accounting income in 2022, there is a deferred
tax liability.
Journal entries in 2022
1. To record the current tax expense:
Income tax expense 750,000

Income tax payable (25% x 3,000,000) 750,000
2. To record the deferred tax liability:
Income tax expense (25% x 1,000,000) 250,000

Deferred tax liability 250,000
Total tax expense (25% x 4,000,000) 1,000,000

Current tax expense (25% x 3,000,000) 750,000
The current tax expense is the amount of tax that is actually payable. Thus, the excess of the total
tax expense over the current tax expense is a deferred tax liability.
Income statement presentation for 2022
Income before income tax 4,000,000

Income tax expense:
Current tax expense 750,000
Deferred tax expense 250,000 1,000,000
Net income 3,000,000
Observe that the accounting income subject to tax of P4,000,000 multiplied by 25% equals
P1,000,000 which is the total income tax expense for the year. The total tax expense is the amount
shown in the statement.
Income tax expense 1,375,000

Income tax payable (25% x 5,500,000) 1,375,000
2. To decrease the deferred tax liability:

Income tax expense (25% x 500,000) 125,000

Income tax expense:
Current tax expense 1,375,000
Decrease in deferred tax liability ( 125,000 ) 1,250,000
PART 2

2. To decrease the deferred tax liability:

The deferred tax liability on December 31, 2024 has a zero balance because the taxable
temporary difference is now fully reversed.

Income tax expense:
Decrease in deferred tax liability ( 125, 000 ) 1,750,000
Total tax expense (25% x 7,000,000) 1,750.000
Illustration 2 - Deferred tax asset
In 2022, as entry received advance rental payment of P2,000,000 which was subject to tax but not
reported in accounting income until 2023. The income tax rate is 25%.
The income statement and tax returns showed the following:
2022 2023
Accounting income subject to tax 5,000,000 8,000,000

Taxable income 7,000,000 6,000,000
Since the temporary difference results to a higher taxable income in 2022, there is a deferred tax
asset.

2. To record the deferred tax asset:
Deferred tax asset 500,000

Income tax benefit (25% x 2,000,000) 500,000
Current tax expense (25% x 7,000,000) 1,750,000

The current tax expense is the amount of tax that is actually payable. Thus, the excess of current
tax expense over the total tax expense is a deferred tax asset or in effect a prepaid income tax.
PART 2
Income tax expense:
Income tax benefit ( 500,000) 1,250,000

2. To decrease the deferred tax asset:
Income tax expenses 500,000


Income tax expense:
Decrease in deferred tax asset 500,000 2,000,000
Total tax expense is the amount shown in the income statement as a deduction from income
before income tax.
(Reported by: Burgos, Hannah Rose, pp. 499 – 503 Textbook)
Illustration 3 - Deferred tax asset and liability
An entity reported the following for the year ended December 31, 2022.
Accounting income per book 6,000,000

Nondeductible expenses 500,000
Nontaxable revenue 300,000
Doubtful accounts 200,000
Estimated warranty cost that had been recognized as
expense in 2022 when the product sales were
made but deductible for tax purposes when paid 400,000
Accounting depreciation 600,000
Tax depreciation 800,000
Gross income on installment sale included
in accounting income but taxable only in 2023 100,000
Income tax rate 25%
Computation
Accounting income per book 6,000,000

Permanent differences:
Nondeductible expenses 500,000
Nontaxable revenue (300,000)
Accounting income subject to tax 6,200,000

Future deductible temporary differences:
Estimated warranty cost 400,000
PART 2
Future taxable temporary differences:
Excess tax depreciation (200,000)
Gross income on installment sale (100,000)
Taxable income 6,500,000
The permanent differences do not give rise to deferred tax asset or deferred tax liability and thus
eliminated from the reported accounting income. In other words, the accounting income subject to
tax must exclude permanent differences.
The future deductible temporary differences are added back to accounting income to get taxable
income because such differences are already deducted from accounting income but deductible
only for tax purposes in future periods.
The future taxable temporary differences are deducted from accounting income to get taxable
income because such differences are already included in accounting income but taxable only in
future periods.

2. To record the deferred tax asset:

Income tax benefit 150,000

Estimated warranty cost 400,000
Total future deductible temporary differences 600,000
Multiply by 25%
3. To record the deferred tax liability:

Excess tax depreciation 200,000

Gross income on installment sale 100,000
Total future taxable temporary differences 300,000
Multiply by 25%

Income tax expense:
Income tax benefit (150,000)
Deferred tax expense 75,000 1,550,000
Net Income 4,450,000
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Observe that the accounting income subject to tax of P6,200,000 multiplied by 25% equals
P1,550,000 which is the total income tax expense for 2022.
Net deferred tax expense or benefit
The difference between the change in deferred tax asset and the change in deferred tax liability is
the net deferred tax expense or benefit.
Observe the following using the preceding illustration:
Tax benefit from increase in deferred tax asset (150,000)

Tax expense from increase in deferred tax liability 75,000
Net deferred tax benefit (75,000)
Needless to say, if the tax expense from the increase in deferred tax liability is more than the tax
benefit from the increase in deferred tax asset, there is a net deferred tax expense.
Current tax liability and current tax asset
A current tax liability is the current tax expense or the amount of income tax actually payable and
appropriately classified as current liability.
Under our income tax law, income tax for corporations is payable every quarter.
If the amount of tax already paid for the current period exceeds the amount actually payable for the
period, the excess is recognized as a current tax asset.
Actually, a current tax asset is a prepaid income tax and shall be classified as current asset.
A current tax liability or current tax asset shall be measured using the tax rate that has been
enacted and effective at the end of the reporting period.
Presentation of deferred tax asset or liability
PAS 12, paragraph 70, provides that when an entity makes a distinction between current and
noncurrent assets and liabilities, it shall not classify deferred tax assets as current assets and
deferred tax liabilities as current liabilities.
Accordingly, a deferred tax asset shall be classified as noncurrent asset and a deferred tax liability
shall be classified as noncurrent liability regardless of reversal period.
Moreover, a deferred tax asset or deferred tax liability shall not be discounted.
Offset of deferred tax asset and liability
Under PAS 1, assets and liabilities shall not be offset unless required or permitted by another
standard.
PAS 12, paragraph 74, provides that an entity shall offset a deferred tax asset against a deferred
tax liability when:
a. The deferred tax asset and deferred tax liability relate to income taxes levied by the same
tax authority.
b. The entity has a legal enforceable right to set off a current tax asset against a current tax
liability.
Measurement of deferred tax asset and liability
A deferred tax liability or deferred tax asset shall be measured using the tax rate that has been
enacted by the end of the reporting period and expected to apply to the period when the asset is
realized or the liability is settled.
PART 2
For example, the tax rate of 30% is applicable to the taxable year 2022. By December 31, 2022, a
new tax law has been enacted imposing a 25% tax rate effective 2023 and future years.
The current tax liability or current tax asset is measured at 30% but the deferred tax liability or
deferred tax asset is measured using the new enacted tax rate of 25%.
Intraperiod and interperiod tax allocation
Intraperiod tax allocation is the allocation of income tax expense to the various revenues that
brought about the tax.
Thus, the total income tax expense is allocated to income from continuing operations, income from
discontinued operations and prior period errors or items directly charged or credited to retained
earnings.
Interperiod tax allocation is the recognition of a deferred tax asset or deferred tax liability.
(Reported by: Manito, Carlo H., pp. 288 - 291 Reviewer)
ACCOUNTING FOR INCOME TAX

Basic Problems
Problem 21-1 (IAA)
Hilton Company reported pretax financial income of P6,200,000 for the current year. Included in
other income was P200,000 of tax-exempt interest revenue from the government bonds held by
the entity.
The income statement included depreciation expense of P500,000 for a machine with cost of
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
Solution Answer c
Financial income 6,200,000

Interest revenue on government bonds ( 200,000)
Tax depreciation in excess of financial depreciation
(600,00 – 500,000) ( 100,000)
The current tax expense is based on taxable income.
Problem 21-2 (IAA)
Tantrum Company began operations at the beginning of the 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 rate for
the current year and future years is 30%.
1. What is the current tax expense?

a. 1,800,000
b. 1,530,000
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c. 1,380,000
d. 1,680,000
2. 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 21-2
Question 1 Answer b
Question 2 Answer c
Accounting or financial income 6,000,000

Permanent difference ( 500,000)
Accounting or financial income subject to tax 5,500,000
Total income tax expense (30% x 5,500,000) 1,650,000
The total income tax expense is based on accounting or financial income subject to tax.
In computing financial income subject to tax, permanent difference is excluded.
Problem 21-3 (IAA)
During the current year, Tiger company reported pretax financial income of P5,000,000. Included
in the pretax financial income are P900,000 of nontaxable life insurance proceeds received as a
result of the death of an officer, P1,200,000 of estimated warranty expense accrued at year-end
and P200,000 of life insurance premiums for a policy for an officer.
No income tax was previously paid during the year and the income tax rate is 30%.
1. What is the income tax payable at year-end?

a. 1,500,000
b. 1,230,000
c. 1,290,000
d. 1,650,000
2. What is the total tax expense?

a. 1,500,000
b. 1,290,000
c. 1,230,000
d. 1,560,000
Solution 21-3
Question 1 Answer d
Financial income 5,000,000

Nontaxable life insurance proceeds ( 900,000)
Nondeductible life insurance premium for an officer 200,000
Financial Income subject to tax 4,300,000

Estimated warranty expense 1,200,000
The income tax payable is actually the current tax expense since there is no income tax payment
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during the year.
Question 2 Answer b
Problem 21-4 (PHILCPA Adapted)
Viking Company reported pretax income of P1,000,000 in the income statement for the current
year.
Tax return Accounting record

Rent income 70,000 120,000
Depreciation 280,000 220,000
Premiums on officers’ life insurance 90,000
Income tax rate 30%
1. What is the current provision for income tax for the current year?
a. 360,000
b. 300,000
c. 294,000
d. 327,000
2. What is the total tax expense?

a. 300,000
b. 273,000
c. 267,000
d. 327,000
Solution 21-4
Question 1 Answer c
Pretax accounting income 1,000,000

Premium on officers’ life insurance – nondeductible 90,000
Accounting income subject to tax 1,090,000
Rent income – temporary difference ( 50,000)
Depreciation – temporary difference ( 60,000)
Taxable income 980,000
Current provision for income tax (980,000 x 30%) 294,000
Question 2 Answer d
Total tax expense (30% x 1,090,000) 327,000
(Reported by: Lopez,Bernadeth, pp. 300 - 303 Reviewer)
DEFERRED TAX ASSET AND LIABILITY
Problem 22-1 (AICPA Adapted)
On June 30, 2017, Ank Company prepaid a P1,000,000 premium on an annual insurance policy.
The premium payment was a tax deductible expense in the 2017 cash basis tax return.
The accrual basis income statement will report a P500,000 insurance expense in 2017 and 2018.
The income tax rate is 30%.
PART 2
On December 31, 2017, what amount should be reported as deferred tax liability?
a. 300,000
b. 150,000
c. 200,00
d. 0
Solution 22-1 Answer b
Deferred tax liability (500,000 x 30%) 150,000
Since the impact of the temporary difference is a higher accounting income than taxable income,
there is a deferred tax liability.
Actually, a deferred tax liability arises from a future taxable temporary difference.
The prepaid insurance of P500,000 is a future taxable amount and therefore will result to a
Problem 22-2 (IAA)
Zambal Company reported depreciation of P2,500,000 in the tax return for the current year.
However, in the income statement, the entity reported depreciation of P1,000,000.
The difference in depreciation is a temporary difference that will reverse over time. The tax rate is
30%.
What amount should be added to the deferred tax liability at year-end?
a. 300,000
b. 750,000
c. 450,000
d. 0
Solution 22-2 Answer c
Tax depreciation 2,500,000

Book depreciation 1,000,000
Future taxable amount 1,500,000
Increase in deferred tax liability (30% x 1,500,000) 450,000
West Company leased a building and received P4,000,000 annual rental payment on June 15,
2017. The beginning of the lease was July 1, 2017. Rental income is taxable when received. The
income tax rate is 30%.
The entity had no other permanent or temporary differences.
What amount of deferred tax asset should be reported on December 31, 2017?
a. 1,200,000
b. 300,000
c. 600,000
d. 0
Deferred tax asset (2,000,000 x 30%) 600,000
Since the impact of the temporary difference is a higher taxable income than accounting income,
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there is a deferred tax asset.
Actually, a deferred tax asset arises from a future deductible temporary difference.
Problem 22-4 (IAA)
Regal Company paid P400,000 in January 2017 for fire insurance premiums on a two-year policy.
Additionally, the financial statements for the year ended December 31, 2017 revealed that the
entity paid P1,050,000 in income tax during the year and also accrued estimated litigation loss of
P2,000,000.
The lawsuit was resolved in February 2018 at which time a P2,000,000 loss was recognized for tax
purposes.
The entity used the cash basis for tax purposes. The tax rate is 30% for both 2017 and 2018.
1. What amount should be reported as deferred tax asset on December 31, 2017?
a. 630,000
b. 540,000
c. 600,000
d. 0
2. What amount should be reported as deferred tax liability on December 31, 2017?
a. 120,000
b. 90,000
c. 60,000
d. 0
Solution 22-4
Question 1 Answer c
Deferred tax asset (30% x 2,000,000) 600,000
Only the estimated litigation loss will result to a deferred tax asset because it is a future
deductible amount.
Question 2 Answer c
Deferred tax liability (30% x 200,000) 60,000
The prepaid insurance of P200,000 will result to a deferred tax liability because it is a future
taxable amount.
Caleb Company has three financial statement elements for which the year-end carrying amount is
different from the tax basis:
Carrying amount Tax basis Difference
Equipment 200,000 120,000 80,000
Prepaid officers’ 75,000 0 75,000

Insurance policy
Warranty liability 50,000 0 50,000
What is the total amount of future taxable differences?
a. 205,000
PART 2
b. 155,000
c. 80,000
d. 50,000
If the carrying amount of an asset is higher than the tax base, the difference is a future taxable
amount and therefore there is a deferred tax liability.
Thus, the difference in the equipment of P80,000 is a future taxable amount.
The difference of P75,000 is a permanent difference because the officers' insurance premium is
nondeductible. Therefore, this difference has no deferred tax consequence.
If the carrying amount of a liability is higher than the tax base, the difference is a future deductible
amount and therefore there is a deferred tax asset.
Thus, the difference of P50,000 in warranty liability is a future deductible amount.
III. Viable and Vibrant Activities
Learning Activities
The teaching-learning process will be conducted through individual reporting by the student of an
assigned portion of the module. Questions and answers will follow every reporting.
The content of the module is contributed by the students enrolled in the course, taken from the
textbook and reviewer, or downloaded from the internet, under the direction and review of the
instructor.
Problems
IV. Opportunity to reflect and articulate students’ acquired knowledge.
Purpose of the activity
It is hoped that the class activity will give each student the opportunity to vocalize a portion of the
learning material, thus allowing the student to experience deeper attachment with the subject
matter on hand.
Criteria for Evaluation
Written Works (WW)

Any specified written task that the instructor will give to the student, (20%).
Performance Tasks (PT)

Reporting in class of an assigned learning material, (30%).
Attendance in meetings, (15%). Joining an on-going Google meet or joining an in-person
PART 2
meeting will be denied for those coming late, more than 45 minutes after the official start
time of the meeting.
Punctuality in the submission of every task, attitude and behavior, and bonuses earned in
class, (15%).
Term Assessments (TA)

Midterm or final term examination, (20%).
Term Grade (TG) = 20% WW + 60% PT + 20% TA

Semestral Grade = 60% Final Term Grade + 40% Midterm Grade
V. Textbooks and Other References
Valix, C.T., Peralta, J.F. & Valix, C.A.M. (2022). Intermediate accounting volume 2. Manila: GIC.
Valix, C.T., Peralta & Valix, C.A.M. (2017). Practical financial accounting volume 2. Manila: GIC.
PART 2

Lm-Intermediate Accounting Module 2

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MODULE 6 Module Title: Accounting for Income Tax

PROGRAM: BSMA Year Level: II Section ________

COURSE CODE: ACCT15 COURSE DESCRIPTION: Intermediate Accounting

(2) distinguish permanent differences and temporary differences

(3) identify temporary differences that result to a deferred tax

(4) identify temporary differences that result to a deferred tax

(5) know the recognition and measurement of deferred tax asset

Prepared Reviewed and Checked

AFRO L. REYES, CPA, MBA WILMA WENG P. CASALME, PhD

JASCELYNN N. OLIMPIADA, PhD MARCIAL V. GOGUANCO, JR.

Program: BSMA Topic: Accounting for Income Tax

Selected problems on the topics are included in the learning activities.

(5) know the recognition and

Content Lecture/ Discussion

BSMA 2A, Second Semester, AY 2022 - 2023

(Reported by FOJAS, PRINCESS , pp 486 - 489, Textbook)

Actually, permanent differences pertain to nontaxable revenue and nondeductible expenses.

Examples of permanent differences

a. Interest income on time deposits

Temporary differences include timing differences.

Accordingly, temporary differences give rise either to:

a. Deferred tax liability

Kinds of temporary difference

Tax base of an asset

Tax base of a liability

However, an estimated warranty cost is deductible only when actually paid.

Deferred tax liability

Actually, a deferred tax liability arises from the following:

Accounting income higher than taxable income

(Reported by: Galindez, April L., pp 490 - 493, Textbook)

OTHER TAXABLE TEMPORARY DIFFERENCES

Such other taxable temporary difference include:

c. The cost of a business combination accounted for as an acquisition is allocated to the

RECOGNITION OF A DEFERRED TAX LIABILITY

DEFERRED TAX ASSET

A deferred tax asset arises from the following:

TAXABLE INCOME HIGHER THAN ACCOUNTING INCOME

FUTURE DEDUCTIBLE TEMPORARY DIFFERENCES

Other deductible temporary differences

RECOGNITION OF DEFERRED TAX ASSET

OPERATING LOSS CARRYFORWARD

b. Statement of financial position approach

(Reported by: Puno, Rica Jane, pp. 494 – 498 Textbook)

1. Determine the taxable income

Income tax expense xx

2. Determine the taxable temporary differences

Income tax expense xx

3. Determine the deductible temporary differences

Deferred tax asset xx

Illustration 1 - Deferred tax liability

2022 2023 2024

Accounting income 4,000,000 5,000,000 7,000,000

Journal entries in 2022

1. To record the current tax expense:

Income tax expense 750,000

2. To record the deferred tax liability:

Income tax expense (25% x 1,000,000) 250,000

Total tax expense (25% x 4,000,000) 1,000,000

Income statement presentation for 2022

Income before income tax 4,000,000

Journal entries in 2023

1. To record the current tax expense:

Income tax expense 1,375,000