ACCOUNTING FOR INCOME TAXES

PROBLEM SOLVING

1. Hilton Company reported pretax financial income of 6,200,000 for the current year. Included
in other income was 200,000 of interest revenue from government bonds held by the entity.
The income statement included depreciation expense of 50,000 for machine with the cost of
3,000,000. The income tax return reported 600,000 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:

Financial Income 6,200,000

Interest revenue on government bonds (200,000)
Tax depreciation in excess of financial depreciation
(600,000-500,000) (100,000)
Taxable Income 5,900,000

Current tax expense (5,900,000x30%) 1,770,000

2. Tantrum Company began operation at the beginning of the current year. At the end of the
first year of operation, the entity reported 6,000,000income before income tax in the income
statement but only 5,100,000 taxable income in the tax return. Analysis of the 900,000
difference revealed that 500,000 was permanent difference and 400,000 was temporary tax
liability difference related to a current asset. The enacted tax rate for the current year and
future year 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:

Accounting or Financial Income 6,000,000

Permanent differences (500,000)
Accounting or Financial income subject to tax 5,500,000

Total income tax expense (5,500,000x30%) 1,650,000

3. In 2018, Tiger Company reported pretax financial income of 5,000,000. Included in the pretax
financial income are 900,000 of non-taxable life insurance proceeds received as a result of the
death of an officer, 1,200,000 of estimate warranty expense accrued on December 31, 2018 and
200,000 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%.

What is the income tax payable on December 31, 2018?

a. 1,500,000
b. 1,230,000
c. 1,290,000
d. 1,650,000

Solution:

Financial income 5,000,000

Non-taxable life insurance proceeds (900,000)
Life insurance premium for an officer 200,000
Financial income subject to tax 4,300,000
Estimate warranty expense 1,200,000
Taxable Income 5,500,000

Income tax payable (5,500,000x30%) 1,650,000

4. Viking Company reported in the income statement for the year ended December 31, 2018
pretax income of 1,000,000.

Tax return Accounting record

Rent income 70,000 120,000
Depreciation 280,000 220,000
Premiums on officer’s life insurance 90,000
Income tax rate 30%

What is the current provision for income tax for 2018?

a. 360,000
b. 300,000
c. 294,000
d. 327,000
 Solution:

Pretax accounting income 1,000,000

Premium on officer’s life insurance-non-deductible 90,000
Accounting Income subject to tax 1,090,000
Rent income - temporary difference ( 50,000)
Depreciation - temporary differences ( 60,000)
Taxable income 980,000

Current Provision for income tax (980,000x30%) 294,000

5. Pine Company reported pretax income of 800,000 for the year ended December 31. 2018. In
the computation of income taxes, the following data were considered:

Non-taxable gain 350,000

Depreciation deduction tax purpose in excess of
depreciation deducted for book purposes 50,000
Estimate tax payment in 2018 70,000
Enacted tax rate 30%

What amount should be reported as current tax liabilities on December 31, 2018?

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

Solution:

Pretax financial income 800,000

Non-taxable gain (350,000)
Financial income subject to tax 450,000
Excess tax depreciation ( 50,000)
Taxable Income 400,000

What is the total income tax expense?

a. 120,000
b. 135,000
c. 240,000
d. 85,000
 Solution:

Current tax expense (400,000x30%) 120,000

Estimate tax payment (70,000)
Current tax liability 50,000

Total tax expense (450,000x30%) 135,000

6. Huskie Company reported in the income statement for the current year pretax income of
400,000. The following items are treated differently per tax return and per book:

Tax Return Book

Royalty income 20,000 40,000
Depreciation expense 125,000 100,000
Payment of a penalty NONE 30%

What amount should be reported as current portion of income tax expense?

a. 111,000
b. 106,500
c. 138,000
d. 114,000

Solution:

Pretax income 400,000

Payment of penalty- non-deductible 15,000
Accounting income subject to tax 415,000
Royalty income in excess of taxable amount (20,000)
Excess tax depreciation (25,000)
Taxable income 370,000

Current tax expense (370,000x30%) 111,000

What is the total tax expense?

a. 120,000
b. 124,500
c. 115,500
d. 117,000
 Solution:

Pretax income 400,000

Payment of penalty- non-deductible 15,000
Accounting income subject to tax 415,000

Total tax expense (415,000x30%) 124,500

7. Aris Company computed a pretax accounting income of 5,000,000 for the first year of
operation.

Non-deductible expenses 200,000

Non-taxable revenue 500,000
Gross income on instalment sales reported in
Accounting income but not in taxable income 1,000,000
Provision for doubtful accounts 100,000
Income tax expense 30%

What is the current tax expense?

a. 1,140,000
b. 1,410,000
c. 1,500,000
d. 1,110,000

Solution:

Pretax accounting income 5,000,000

Non-deductible expense – permanent 200,000
Non-taxable revenue – permanent (500,000)
Accounting income subject to tax 4,700,000
Gross income on instalment sales – temporary (1,000,000)
Doubtful Accounts – temporary 100,000
Taxable income 3,800,000

Current tax expense (3,800,000x30%) 1,140,000

 What is the Total income tax expense?

a. 1,770,000
b. 1,410,000
c. 1,475,500
d. 1,650,000

Solution:

Pretax accounting income 5,000,000

Non-deductible expense – permanent 200,000
Non-taxable revenue – permanent (500,000)
Accounting income subject to tax 4,700,000

Total income tax expense (4,700,000x30%) 1,410,000

8. Herbie Company had cumulative taxable temporary differences on December 31, 2018 and
December 31, 2017 of 1,350,000 and 960,000, respectively. The tax rate for 2018 is 40% while
the tax rate for future year is 30%. Taxable income for 2018 is 2,400,000 and there are no
permanent differences.

What is the pretax financial income for 2018?

a. 3,750,000
b. 2,790,000
c. 2,010,000
d. 1,050,000

Solution:

Cumulative taxable temporary difference-12/31/2018 1,350,000

Cumulative taxable temporary difference-12/31/2017 (960,000)
Taxable temporary difference 2018 390,000

Taxable income in 2018 2,400,000

Taxable temporary differences 2015 390,000
Pretax Financial Income 2,790,000
9. On June 30, 2018, Ank Company prepaid a 1,000,000 premium on an annual insurance policy.
The premium payment was a tax deductible expense in the 2018 cash basis tax return. The
accrual basis income statement will report a 500,000 insurance expense in 2018 and 2019. The
income tax rate is 30%

On December 31, 2018, what amount should be reported as deferred tax liability?

a. 300,000
b. 150,000
c. 200,000
d. 0

Solution:

Deferred Tax liability (500,000x30%) 150,000

10. Zambal Company reported depreciation of 2,500,000 in the 2018 tax return. However, in the
2018 income statement, the entity reported depreciation of 1,000,000. 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 on December 31, 2018?

a. 300,000
b. 750,000
c. 450,000
d. 0

Solution:

Tax depreciation 2,500,000

Book depreciation 1,000,000
Future taxable amount 1,500,000

Increase in deferred tax liability (1,500,000x30%) 450,000

11. West Company leased building and received 4,000,000 annual rental payment on June 15,
2018. The beginning of the lease was July 01, 2018. 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, 2018?

a. 1,200,000
b. 300,000
c. 600,000
d. 0

Solution:

Deferred tax asset (2,000,000x30%) 600,000

12. Regal Company paid 200,000 in January 2018 for fire insurance premiums on two-year policy.
Additionally, the financial statements for the year ended December 31, 2018 revealed that the
entity paid 1,050,000 in income tax during the year and also accrued estimated litigation loss of
2,000,000. The lawsuit was resolved in February 2019 at which time a 2,000,000 loss was
recognized for tax purposes. The entity used the cash basis for tax purpose. The tax rate is
30% for both 2018 and 2019.

What amount should be reported as deferred tax asset on December 31,2018?

a. 630,000
b. 540,000
c. 600,000
d. 570,000

Solution:

Deferred Tax asset (2,000,000x30%) 600,000

13. In arriving at the profit before tax for the year ended December 31, 2018, Jerry Company has
accrued royalties receivable of 200,000 and interest payable of 250,000. Both royalties and
interest are dealt with on cash basis in tax computations.

What is the net temporary difference on December 31, 2018?

a. 450,000-taxable temporary difference

b. 450,000-deductible temporary difference
c. 50,000-deductible temporary difference
d. 50,000-taxable temporary difference

Solution:

Taxable temporary difference 200,000

Deductible temporary differences 250,000
Net deductible temporary differences 50,000

14. Jillian Company has a non-current asset which had a carrying amount of 1,800,000 on
December 31, 2018. The tax written down value or tax base of the asset at that date was
900,000. The tax rate is 30%.

What is the deferred tax balance in respect of the asset on December 31, 2018?

a. 900,000 asset
b. 270,000 liability
c. 270,000 asset
d. 900,000 liability

Solution:

Future taxable amount (1,800,000-900,000) 900,000

Deferred Tax liability (900,000x30%) 270,000

15. At year-end, South Company has revalued a property and has recognized the increase in the
revaluation in the financial statements. The carrying amount of the property was 8,000,000
and the revalued amount was 10,000,000. However, the tax base of the property was only
6,000,000. The income tax rate is 30%.

What is the deferred tax asset or liability at the year-end?

a. 1,200,000 asset
b. 1,200,000 liability
c. 600,000 asset
d. 600,000 liability

Solution:

Future taxable amount (10,000,000-6,000,000) 4,000,000

Deferred tax liability (4,000,000x30%) 1,200,000

16. Chamber Company reported the following differences between the book basis and tax basis of
asset and liabilities on December 31, 2018 which is the end of the first year operation:

Carrying amount Tax base

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

It is expected that the litigation liability will be settled in 2019. The difference in account
receivable will result in taxable amount of 600,000 in 2019 and 400,000 in 2020. The entity has
a taxable income of 7,000,000 in 2018 and expected to have taxable income in each of the
following two years. The income tax rate is 30%.

What is the current tax expense?

a. 2,400,000
b. 2,040,000
c. 2,100,000
d. 2,460,000

Solution:

Current tax expense (7,000,000x30%) 2,100,000

 What is deferred tax expense?

a. 300,000
b. 360,000
c. 240,000
d. 60,000

Solution:

Increase in deferred tax liability (1,000,000x30%) 300,000

Increase in deferred tax asset (200,000x30%) (60,000)
Deferred tax expense 240,000

What is the total tax expense?

a. 2,460,000
b. 2,400,000
c. 2,340,000
d. 1,860,000

Solution:

Current tax expense (7,000,000x30%) 2,100,000

Deferred tax expense 240,000
Total tax expense 2,340,000

17. Zeff Company prepared the following reconciliation of pretax financial statement income to
taxable income for the first year of operations:

Pretax financial income 1,600,000

Non-taxable 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 1,400,000

If the income tax is 30%, what amount should be reported as income tax expense-current
portion in the income statement?

a. 465,000
b. 420,000
c. 480,000
d. 390,000

Solution:

Current tax expense (1,400,000x30%) 420,000

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

a. 30,000
b. 45,000
c. 75,000
d. 0

Solution:

Deferred tax liability (250,000x30%) 75,000

Note: excess in tax depreciation will result to deferred tax liability because it is future taxable
amount.

What amount should be reported as deferred tax asset at the year-end?

a. 30,000
b. 75,000
c. 45,000
d. 70,000

Solution:

Deferred tax asset (100,000x30%) 30,000

Note: long-term loss accrual will result to deferred tax asset because it is future deductible amount.

What amount should be reported as total tax expense for the first year?

a. 480,000
b. 465,000
c. 420,000
d. 435,000

Solution:

Pretax financial income 1,600,000

Non-taxable interest received (50,000)
Financial income subject to tax 1,550,000

Total tax expense (1,550,000x30%) 465,000