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Chapter 9
Income Taxes

PROBLEM 1: TRUE OR FALSE

1. TRUE
2. TRUE
3. TRUE
4. TRUE
5. FALSE
6. TRUE
7. FALSE - The reversals of deferred taxes affect only the current
tax expense (income tax payable). They do not affect the
income tax expense. The reversal of a deferred tax asset
decreases current tax expense.
8. FALSE – The reduction in deferred tax asset increases income
tax expense but does not affect current tax expense.
9. FALSE – legal right and intention to settle net
10. FALSE - interperiod

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. C
2. A
3. A
4. A
5. D
6. C
7. C
8. D
9. B
10. D
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PROBLEM 3: EXERCISES
1. Solution:
Requirement (a):
Multiply by
Description of items Description of items
Tax rate
Pretax income 900,000
Permanent differences:
Penalty 30,000
Interest on borrowings 3,000
Interest income (9,000)
Acctg. profit subj. to tax 924,000 30% ITE 277,200
Temporary differences:
Less:  TTD Less:  DTL
Excess depreciation (60,000) 30% (18,000)
Excess revenue (45,000) 30% (13,500)
Add:  DTD Add:  DTA:
Excess provision 54,000 30% 16,200
Advanced rent 12,000 30% 3,600
Unrealized loss 18,000 30% 5,400
Taxable profit 903,000 30% CTE 270,900

 DTL (18,000 + 13,500) 31,500

 DTA (16,200 + 3,600 + 5,400) 25,200
Deferred tax expense 6,300

Requirement (b): Current tax liability

 270,900 equal to the current tax expense

Requirement (c): DTL and DTA

Deferred tax liability
0 beg.
31,500 Increase (18,000 + 13,500)
end. 31,500

Deferred tax asset

beg. 0
Increase (16,200 + 3,600 + 5,400) 25,200
25,200 end.
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Requirement (d): Journal entry

Income tax expense 277,200
Deferred tax asset 25,200
Income tax payable 270,900
Deferred tax liability 31,500

2. Solutions:
Requirement (a) – DTL and DTA

Assets:
Excess of carrying amount of Trade A/R over its tax base 1,000,000
Excess of carrying amount of Equipment over its tax base 800,000
Taxable temporary difference (TTD) 1,800,000
Multiply by: Tax rate 30%
Deferred tax liability – Dec. 31, 20x1 540,000

Liability:
Excess of carrying amt. of accrued expenses over its tax base 400,000
Deductible temporary difference (DTD) 400,000
Multiply by: Tax rate 30%
Deferred tax asset – Dec. 31, 20x1 120,000

Requirement (b) – Income tax expense and Current tax expense

Description of items Tax rate Description of items
Pretax income 2,000,000
Permanent diff. -
Acctg. profit subj. to tax 2,000,000 30% ITE 600,000
Increase in TTD (1,800,000) 30% Increase in DTL (540,000)
Increase in DTD 400,000 30% Increase in DTA 120,000
Taxable profit – 20x1 600,000 30% CTE 180,000

Requirement (c) – Deferred tax expense/benefit

Increase in DTL (540,000)
Increase in DTA 120,000
Deferred tax expense ( 420,000)
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Requirement (d) – Journal entry

Income tax expense 600,000
Deferred tax asset 120,000
Deferred tax liability 540,000
Income tax payable 180,000
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PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. C
Description of items Tax rate Description of items
Pretax income 180,000
Permanent differences:
Impairment 40,000
Fines 16,000
Interest income (5,000)
Acctg. profit subj. to tax 375,000 30% Income tax expense 112,500
Temporary differences:
Depn. (FI>TI) (28,000) 30% Less:  DTL (8,400)
Premium (FI<TI) 25,000 30% Add:  DTA 7,500
Advances (FI<TI) 18,000 30% 5,400
Taxable profit 390,000 30% Current tax expense 117,000

Increase in DTL (8,400)

Increase in DTA (7,500 + 5,400) 12,900
Deferred tax benefit 4,500

2. D
Current tax expense 117,000
Less: Quarterly income tax payments (29,000)
Income tax payable 88,000

Deferred Tax Liability Deferred Tax Asset

6,000 beg.* beg.* 4,500
8,400 Increase Increase 12,900
end. 14,400 17,400 end.

* 20K beg. TTD x 30% = 6,000 beg. DTL

15K beg. DTD x 30% = 4,500 beg. DTA

3. B
Description of items Tax rate Description of items
Pretax income 2,700,000
Permanent differences:
Interest income (7,000)
Insurance 50,000
Impairment loss 20,000
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Acctg. profit subject to tax 2,763,000 30% ITE 828,900

Temporary differences:
Less:  TTD (FI>TI): Less:  DTL:
Sales revenue (1.9M – 1.25M) (650,000) 30% (195,000)
Depreciation (600K – 280K) (320,000) 30% (96,000)
Add:  DTD (FI<TI): Add:  DTA:
Rent (320K – 540K) 220,000 30% 66,000
Warranty (280K – 120K) 160,000 30% 48,000
Taxable profit 2,173,000 30% CTE 651,900

Profit for the year, before tax 2,700,000

Income tax expense (828,900)
Profit for the year, after tax 1,871,100

4. A
Multiply by
Description of items Description of items
Tax rate
Pretax income 600,000
Permanent differences:
Less: Non-taxable income
Income from exempt bonds (60,000)
Proceeds from life
insurance (100,000)
Accounting profit subject Income tax
to tax 440,000 30% expense 132,000
Temporary differences:
Less:  Taxable temporary Less:  Deferred
difference (TTD) 'FI>TI': tax liability (DTL):
Excess depreciation (120,000) 30% (36,000)
Current tax
Taxable profit 320,000 30% expense 96,000

5. C
Income tax expense 40,800
Increase in DTL (6,600 – 3,600) (3,000)
Increase in DTA (9,600 – 2,700) 6,900
Current tax expense 44,700
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6. C
Income tax payable
8,960 Jan. 1
Income tax payments 67,600 71,520 Current tax expense (squeeze)
Dec. 31 12,880

Income tax expense 65,280 (squeeze)

Increase in DTL (10,560 – 5,760) (4,800)
Increase in DTA (15,360 – 4,320) 11,040
Current tax expense 71,520 (start)

7. D
Pretax income (squeeze) 209,000
Add: Non-deductible expense:
Political contributions 20,000
Less: Interest income subject to final tax (10,000)
Accounting profit subject to tax 219,000
Less:  Taxable temporary difference (TTD) 'FI>TI':
Excess revenue (60,000)
Add:  Deductible temporary difference (DTD) 'FI<TI'
Excess warranty expense 9,000
Excess book depreciation 12,000
Taxable profit (start) 180,000

8. A
Description of items Tax rate Description of items
Pretax income 4,000,000
Permanent differences: -
Acctg. profit subj. to tax 4,000,000 30% Income tax expense 1,200,000
Temporary differences:
Trade N/R (CA>TB) (2,000,000) 30% Less:  DTL (600,000)
Bldg. (CA>TB) (1,600,000) 30% (480,000)
Provision 800,000 30% Add:  DTA 240,000
Taxable profit 443,000 30% Current tax expense 360,000

 DTL: 600,000 + 480,000 = 1,080,000

 DTA: 240,000
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9. A
CA TB Difference
Equipment 800,000 654,545 (a) 145,455 TTD
Trade N/R 1,000,000 0 1,000,000 TTD
Unearned rent 540,000 0 540,000 DTD
Interest payable 60,000 60,000 permanent diff. (b)
Dividends payable ignored (c) ignored ignored

Carrying amount
(a) 800,000
Divide by: (100% - 10% depn. in Yr. 1 - 10% in Yr. 2) 80%
Historical cost 1,000,000

Historical cost 1,000,000

Multiply by: SLM rate 10%
Annual depreciation (SLM) 100,000

Historical cost 1,000,000

Divide by: Annual depreciation 100,000
Useful life 10 years

SYD rate = 10 x [(10 + 1) ÷ 2] = 55

Historical cost 1,000,000

SYD depreciation:
Year 1 (1M x 10/55) (181,818)
Year 2 (1M x 9/55) (163,636)
Tax base 654,545

(b)The interest creates a permanent difference because it is

recognized as expense under financial reporting but will never be
included in taxation.

(c)The dividends declared do not create any permanent or

temporary difference because the dividends affect neither taxable
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income nor financial income (i.e., the dividends are tax-exempt

and also not recognized as expense).

 Deferred tax liability, end. = (145,455 + 1,000,000) x 30% = 343,637

 Deferred tax asset, end. = (540,000 x 30%) = 162,000

Description of items Tax rate Description of items

Pretax income 2,600,000
Permanent differences:
Interest 60,000
Acctg. profit subj. to tax 2,660,000 30% Income tax expense 798,000
Temporary differences:
30% Less:  DTL (d) (73,637)
30% Add:  DTA (e) 98,000
Taxable profit 30% Current tax expense 822,363

Deferred Tax Liability Deferred Tax Asset

270,000 beg. beg. 64,000
73,637 (d) Increase Increase 98,000 (e)
end. 343,637 162,000 end.

10. D
Analysis TTD DTD
Revenue (1.8M – 900K) FI>TI 900,000
Unrealized gain FI>TI 12,000
Impairment loss FI=TI - -
Bad debts expense FI<TI 60,000
Retirement benefits (280K – 420K) FI>TI 140,000 -
R&D expense (60K – 20K) FI<TI 40,000
Totals 1,052,000 100,000
Operating loss carryforward (a) 572,000
Totals 1,052,000 672,000
Multiply by: 30% 30%
DTL and DTA, respectively 315,600 201,600
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Pretax income
(a) 400,000
Less: Gain on involuntary conversion (20,000)
Accounting profit subject to tax 380,000
Less: TTD (1,052,000)
Add: DTD before Operating loss carryforward 100,000
Operating loss carry forward (572,000)

11. B
 The higher depreciation recognized in financial reporting
compared to taxation makes financial income less than taxable
income (FI<TI). Therefore, the ₱8,000 difference represents a
deductible temporary difference – an addition in the formula.
 Income under financial reporting (equity method) 35,000
Dividends received 25,000
Tax deduction (80% x 25K) (20,000)
Taxable income 5,000
Taxable temporary difference (FI>TI) – deduction 30,000

Multiply by
Description of items Description of items
Tax rate
Pretax income 100,000
Permanent differences: -
Accounting profit subject Income tax
to tax 100,000 30% expense 30,000
Temporary differences:
Less:  Taxable temporary Less:  Deferred
difference (TTD) 'FI>TI': tax liability (DTL):
Income (equity method) (30,000) 30% (9,000)
Add:  Deductible
temporary difference Add:  Deferred
(DTD) 'FI<TI': tax asset (DTA):
Excess depreciation 8,000 30% 2,400
Current tax
Taxable profit 78,000 30% expense 23,400
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12. A
Description of items Tax rate Description of items
Pretax income 420,000
Permanent differences: -
Acctg. profit subj. to tax 420,000 30% Income tax expense 126,000
Temporary differences:
Add:  Reversal of TTD Add:  Reversal of DTA
Collection of revenue 920,000 276,000
Less:  Reversal of DTD Less:  Reversal of DTA
Settlement of warranty (140,000) (42,000)
Taxable profit 1,200,000 30% Current tax expense 360,000

13. A
DTA, year-end before adjustment 304,000
Allowance (304,000 x 30%) (91,200)
DTA, year-end after adjustment 212,800
DTA, beg. 197,600
Increase in DTA in current year 15,200

Income tax expense 174,800 (squeeze)

Add: Increase in DTA in current year 15,200
Current tax expense (equal to income tax payable) 190,000 (start)

14. A
Warranty cost expected Applicable tax Deferred tax
Year to be paid rate asset
20x2 100,000 32% 32,000
20x3 75,000 35% 26,250
Total 58,250
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15. D
Tax rates
Pretax income START 1M
Permanent differences: -
Investment income (60K)
Life insurance proceeds (120K)
Share in profit (a) (580K)
Acctg. profit subj. to tax 240K N/A ITE 75.5K SQUEEZE
Temporary differences:
Less: Depreciation (FI>TI) (150K) 35% DTL (52.5K)
Add: Accrued expenses (FI<TI) 80K 35% DTA 28K
Taxable profit 170K 30% CTE 51K

(a)
The share in profit of associate is a permanent difference because
dividends received from the associate are tax-exempt. Thus, any
income (loss) recognized on the investment affects only financial
reporting but never taxation.

PROBLEM 5: CLASSROOM ACTIVITY

Solution guide:

Pretax income xx
Fines and penalties xx
Interest income on bank deposits (xx)
Acctg. Income subj. to tax xx Multiply by: 30% ITE xx
Excess depreciation (xx) Multiply by: 30% DTL (xx)
Bad debt expense xx Multiply by: 30% DTA xx
Taxable profit xx CTE xx

DTL (xx)
DTA xx
(Deferred tax expense)/ benefit xx
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PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solutions:
Requirements (a): Income tax expense & Current tax expense
Description of items Tax rate Description of items
Pretax income 500,000
Permanent differences:
Penalties 5,000
Interest income (20,000)
Acctg. profit subj. to tax 485,000 30% Income tax expense 145,500
Temporary differences:
Excess revenue (FI>TI) (100,000) 30% Less:  DTL (30,000)
Bad debts (FI<TI) 40,000 30% Add:  DTA 12,000
Advances (FI<TI) 18,000 30% 5,400
Taxable profit 443,000 30% Current tax expense 132,900

Requirement (b): Deferred tax expense/benefit

Increase in DTL (30,000)
Increase in DTA (12,000 + 5,400) 17,400
Deferred tax expense (increase in DTL greater than increase in DTA) 12,600

Requirement (c): Current tax payable

Current tax expense 132,900
Less: Quarterly income tax payments 0
Income tax payable 132,900

Requirement (d): Deferred tax liability and Deferred tax asset

Deferred Tax Liability Deferred Tax Asset
6,600 beg.* beg.* 4,200
30,000 Increase Increase 17,400
end. 36,600 21,600 end.

* 22K beg. TTD x 30% = 6,600 beg. DTL

14K beg. DTD x 30% = 4,200 beg. DTA
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Requirement (e): Journal entry

Dec. Income tax expense 145,500
31, Deferred tax asset 17,400
20x1 Deferred tax liability 30,000
Income tax payable 132,900

2. Solutions:
Requirement (a): Deferred tax liability and Deferred tax asset

Assets:
Excess of carrying amount of software over its tax base 500,000
Excess of carrying amount of machinery over its tax base 400,000
Taxable temporary difference (TTD) 900,000
Multiply by: Tax rate 30%
Deferred tax liability – Dec. 31, 20x1 270,000

Liability:
Excess of carrying amount of accrued liability over its tax base 200,000
Deductible temporary difference (DTD) 200,000
Multiply by: Tax rate 30%
Deferred tax asset – Dec. 31, 20x1 60,000

Requirement (b): Income tax expense and Current tax expense

Multiply by
Description of items Description of items
Tax rate
Pretax income 1,000,000
Permanent differences -
Acctg. profit subj. to tax 1,000,000 30% Income tax expense 300,000
Less:  TTD (900,000) 30% Less:  DTL (270,000)
Add:  DTD 200,000 30% Add:  DTA 60,000
Taxable profit 300,000 30% Current tax expense 90,000

Requirement (c): Deferred tax expense/benefit

Increase in DTL (270,000)
Increase in DTA 60,000
Deferred tax expense (210,000)
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Requirement (d): Journal entry

Dec. Income tax expense 300,000
31,
Deferred tax asset 60,000
20x1
Deferred tax liability 270,000
Income tax payable 90,000

3. Solution:
CA TB Difference
(a) A/R 10,000 0 10,000 TTD
(b) Prepaid insurance 20,000 20,000 -
(c) Interest payable 30,000 30,000 -
(d) Accrued expenses 40,000 0 40,000 DTD

 Deferred tax liability: (10K TTD x 30%) = 3,000

 Deferred tax asset: (40,000 DTD x 30%) = 12,000

4. Answer: (300,000 + 50,000) x 30% x ¾ = 78,750

5. Solution:
Year Financial reporting Taxation Difference (FI > TI)
20x1 960,000 360,000
20x2 1,560,000 840,000
Totals 2,520,000 1,200,000 1,320,000
Multiply by: Tax rate 25%
Deferred tax liability - Dec. 31, 20x2 330,000

6. Solution:
Description of items Tax rates
Pretax income START 1M
Permanent differences -
Acctg. profit subj. to tax 1M N/A ITE 298K SQUEEZE
Less: Revenue (FI>TI) (200K) 32% DTL (64K)
Add: Warranty (FI<TI) 300K 32% DTA 96K
Taxable profit 1.1M 30% CTE 330K
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Alternative solution:
Deferred tax
Income tax expense = + Current tax expense
expense/(benefit)

Deferred tax expense (benefit) is computed as follows:

Increase in Taxable temporary difference (FI>TI) 200,000
Multiply by: Substantially enacted future tax rate 32%
Increase in Deferred tax liability 64,000

Increase in Deductible temporary difference (FI<TI) 300,000

Multiply by: Substantially enacted future tax rate 32%
Increase in Deferred tax asset 96,000

Increase in Deferred tax liability 64,000

Increase in Deferred tax asset (96,000)
Deferred tax benefit (increase in DTA exceeds increase in DTL) (32,000)

Current tax expense is computed as follows:

Pretax income 1,000,000
Add: Increase in Taxable temporary difference (200,000)
Less: Increase in Deductible temporary difference 300,000
Taxable profit 1,100,000
Multiply by: Tax rate for the current year – 20x1 30%
Current tax expense 330,000

Income tax expense is computed as follows:

Income tax expense = (32,000) + 330,000
Income tax expense = 298,000

Journal entry:
Dec. 31, Income tax expense 298,000
20x1 Deferred tax asset 96,000
Deferred tax liability 64,000
Income tax payable 330,000
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7. Solution:
Dec. Income tax expense (1.2M x 32%) 384,000
31,
Deferred tax liability (decrease) 64,000
20x1
Deferred tax asset (decrease) 96,000
Income tax payable 352,000
[(1.2M + 200K – 300K) x 32%] or
(384K + 64K – 96K)