INCOME TAX

AND
EMPLOYEE MODULE 11

BENEFITS
INTERMIDIATE ACCOUNTING
MOTIVATION
 MALONZO

OBJECTIVES

To know the distinction

between accounting income To understand post
and taxable income employment benefits

To know the recognition and To Distinguish defined

measurement of deferred tax contribution plan and defined
liability and deferred tax asset benefit plan

To know the recognition and To identify the components of

measurement of current tax define benefit cost
assets and current tax liability
INCOME TAX
 MALONZO
INTRODUCTION

Deferred tax accounting is applicable to all entities, whether public or non-public entities

A public entity is an entity:

A. Whose equity and debt securities are trade din a stock exchange or over the counter market
B. Whose equity or dent securities are registered with (SEC) in preparation for sale of the securities.

ACCOUNTING INCOME

Also called financial income is the net income for the period before deducting income tax expense.
This is the income appearing on the traditional income statement and computed accordance with
accounting standards

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 may be defined also as
the excess of taxable revenue over tax deductible expense and exemption for the period as defined by the
BIR,
 MALONZO

DIFFERENCES BETWEEN ACCOUNTING AND TAXBLE

INCOME
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 order. Actually, permanent differences pertain to non taxable revenue and
nondeductible expenses. It does not give rise ti deferred tax asset and liability because they have no future
tax consequences.
Examples:
a. Interest income on deposits

b. Dividends received
c. Life insurance premium
d. Tax penalties, surcharges and fines are non deductible
 MALONZO
TEMPORARY DIFFERENCES
are differences between the carrying amount of an asset or liability and the tax base.It includes timing
differences which are the differences 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 expenses which are included both accounting income and
taxable income but at different time periods.

Accordingly , temporary differences give rise either to

A. Deferred tax liability

B. Deferred tax asset

Taxable temporary differences the differences 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.

Deductible temporary differences the differences that will result in future deductible amount in determining
the taxable income of future periods when the carrying amount of the asset or liability is recovered or
settled.
 JOSUE
TAX BASE
The tax base of an asset or a liability is the amount attributable to the asset or liability for tax purposes

TAX BASE ON ASSET

is the amount that will be deductible for tax purposes against future income

For example, IF an entity has appropriately capitalized 1,000,000 as software development cost , the carrying
amount is 1,000,000 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

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 500,000, the carrying amount is
500,000 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 a future deductible amount.
 JOSUE

DEFERRED TAX LIABILITY

is the amount of income tax payable in future periods with respect to a taxable temporary difference. Also it is
the deferred tax consequences attributable to a taxable temporary difference or future taxable amount

Actually, a deferred tax liability arises from the following:

When the accounting income is higher than taxable income because of timing differences

When carrying amount of an asset is higher than the tax base

When carrying amount of liability is lower than the tax base

RECOGNITION OF A DEFERRED TAX LIABILITY

PAS12, 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 differences arises from:
 JOSUE
a. GOODWILL resulting from a business combination and which is non deductible 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 differences

DEFERRED TAX ASSET

is the amount of income tax recoverable in future periods with respect to deductible temporary differences and
operating loss carryforward

A deferred tax asset arises from the following:

When the taxable income is higher than accounting income because of timing differences

When the tax base of asset is higher than the carrying amount

When that tax base of a liability is lower than the carrying amount

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.
ACCOUNTING PROCEDURES JOSUE
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

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 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

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
 ORTIZ

ILLUSTRATION- Deferred tax liability

In 2020 ,an entity reported in accounting income a gross profit on installment sale of P1,000,000 but not in taxable
income

This temporary difference is expected to be reported in taxable income equally in 2021 and 2022.The income tax rate
is 30%
2020 2021 2022
Accounting income 4,000,000 5,000,000 7,000,000
Taxable income 3,000,000 5,500,000 7,500,000

ENTRIES IN 2020

1. To record the current tax expense

Income tax expense 900,000
Income tax payable (30% x 3M) 900,000
2. To record the deferred tax liability
Income tax expense (30% x 1,000,000) 300,000
Deferred liability 300,000
 ORTIZ

INCOME STATEMENT FOR 2020

Income before income tax 4,000,000

Income tax expense:

Current tax expense 900,000
Deferred tax liability 300,000 (1,200,000)

NET INCOME 2,800,000

Observe that the accounting income subject to tax of P4,000,000 multiplied by 30% equals P1,200,000,
which is the total income tax expense for the year
 ORTIZ

ENTRIES in 2021

1. To record the current tax expense:

Income tax expense 1,650,000
Income tax payable(30% x 5,500,000) 1,650,000

2. To decrease the deferred tax liability:

Deferred tax liability 150,000
Income tax expense(30%x 500,000) 150,000

INCOME STATEMENT FOR 2021

Income before income tax 5,000,000

Income tax expense:

Current tax expense 1,650,000
Decrease deferred tax liability (150,000) (1,500,000)

NET INCOME 3,500,000

 ORTIZ

ENTRIES in 2022

1. To record the current tax expense:

Income tax expense 2,250,000
Income tax payable(30% x 7,500,000) 2,250,000

2. To decrease the deferred tax liability:

Deferred tax liability 150,000
Income tax expense(30%x 500,000) 150,000

The deferred tax liability on December 31,2022 has a zero balance because the taxable temporary difference is now
fully reversed

INCOME STATEMENT FOR 2022

Income before income tax 7,000,000

Income tax expense:

Current tax expense 2,250,000
Decrease deferred tax liability (150,000) (2,100,000)

NET INCOME 4,900,000

 ORTIZ

ILLUSTRATION- Deferred tax asset

In 2020 an entity received an advance rental payment of 600,000 which was subject to tax but not reported in
accounting income until 2021. The income tax rate is 30%

The income statement and return showed the following

2020 2021
Accounting income subject to tax 5,000,000 7,000,000
Taxable income 5,600,000 6,400,000

ENTRIES in 2020

1. To record the current tax expense

Income tax expense 1,680,000
Income tax payable(30% x5,600,000) 1,680,000

2. To record the deferred tax asset

Deferred tax asset 180,000
Income tax benefit (30% x 600,000) 180,000
 ORTIZ

INCOME STATEMENT FOR 2020

Income before income tax 5,000,000

Income tax expense:

Current tax expense 1,680,000
Income tax benefit (180,000)(1,500,000)

NET INCOME 3,500,000

 ORTIZ
ENTRIES in 2021

1. To record the current tax expense:

Income tax expense 1,920,000
Income tax payable(30% x 6,400,000) 1,920,000

2. To decrease the deferred tax asset:

Income tax expense 180,000
Deferred tax asset 180,000

INCOME STATEMENT FOR 2021

Income before income tax 7,000,000

Income tax expense:

Current tax expense 1,920,000
Decrease deferred tax asset 180,000 (2,100,000)

NET INCOME 4,900,000

 PLACIENT
E

ILLUSTRATION- Deferred tax asset and liability

An entity reported the following for the year ended December 31,2020

Accounting income per book 6,000,000

Nondeductible expenses 500,000
Non taxable revenue 300,000
Doubtful accounts 200,000
Estimated warranty cost that had been recognized
As expense in 2020 when the product sales were made
But is 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 2021 100,000
Income tax rate 30%
 PLACIENT
COMPUTATION E

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

Deductible temporary differences
Doubtful accounts 200,000
Estimated warranty cost 400,000
Taxable temporary differences
Excess tax depreciation (200,000)
Gross income on installment sale (100,000)

Taxable income 6,500,000

Note: The permanent differences do not give rise to deferred tax asset or tax
liability and thus eliminated from the reported accounting income
ENTRIES In 2020 PLACIENT
E
1. To record the current tax expense
Income tax expense 1,950,000
Income tax payable(30% x 6,500,000) 1,950,000

2. To record the deferred tax asset

Deferred tax asset 180,000
Income tax Benefit 180,000

Doubtful accounts 200,000

Estimated warranty cost 400,000

Total Deductible temporary Differences 600,000

Multiply by tax rate 30%

3. To record the deferred tax liability

Income tax expense 90,000
Deferred tax liability 90,000

Excess tax depreciation 200,000

Gross income on installment 100,000
total taxable temporary differences 300,000
Multiply by tax rate 30,000
 PLACIENT
E

INCOME STATEMENT FOR 2020

Income before income tax 6,000,000

Income tax expense:

Current tax expense 1,950,000
Income tax benefit (180,000)
Deferred tax expense 90,000 (1,860,000)

NET INCOME 4,140,000

Observe that the accounting income subject to tax of 6,200,000 multiplied by 30% equals 1,860,000 which
is the total income tax expense for the year
EMPLOYEE
BENEFITS
 STA.ROSA
EMPLOYEE BENEFITS

are all forms of consideration given by an entity in exchange for services rendered by employees or
for the termination of employment
NOTE FOR THE REPORTER: tell that
The employee benefits include only the postemployment benefit will be
discuss and Also under the
a. Postemployment benefits (CPALE BASED) postemployment benefits the only plan
b. Short-term employee benefits will be highlighted in the report later on is
c. Other long term employee benefits the defined benefit plan as according to
d. Termination benefits PCR CPALE. (this note will be deleted in
the presentation)

POSTEMPLOYMENT BENEFITS

are employee benefits other than termination benefits and short term employee benefits which are
payable after completion of employment. Most of these plans are formal arrangements between the
employer entity and the employees. The plans may also be established by law whereby entities are required
to contribute to national benefit plans. Postemployment benefit plan are classified as either defined
contribution plan or defined benefit plan. Such plans may be contributory or non contributory and funded
or unfunded
 STA.ROSA

CONTRIBUTORY PLAN

The employer and employee make contributions to the retirement benefit plan but they do not
necessarily contribute equal amounts. Both the employer and employee share in the retirement benefit cost

NON-CONTRIBUTORY PLAN
Only the employer makes contributions to the retirement benefit plan. The employer shoulder all the
retirement benefit cost

FUNDED PLAN
Is the transfer of assets to an entity , called the retirement fun which separates from the reporting
entity for the purpose of meeting obligations arising from a retirement benefit plan. The entity sets aside
funds for future retirement benefits by making payments to a funding agency, such as a trustee, bank, or
insurance company.

UNFUNDED PLAN
The entity retains obligation for the payment of retirement benefits without the establishment o
separate fund
 STA.ROSA

DEFINED CONTRIBUTION PLAN DEFINED BENEFIT PLAN

an entity pays fixed contributions into a an entity’s obligation is to provide the

separate entity known as the fund agreed benefits to the employees

the entity has no legal or constructive In other words, an employee is guaranteed

obligation to pay further contributions of the specific or definite amount of benefit which is
fund does not hold sufficient assets to pay all usually related to his salary and years of service.
employee benefits relating to employee service
in the current or prior periods. The benefit is definite but the contribution is
indefinite
The contribution is definite but the benefit
is indefinite

ACCOUNTING FOR DEFINED BENEFIT
PLAN
Is complex because actuarial assumptions
are required to measure the obligation and the
expense and there is a possibility of actuarial
gains and losses
Moreover, the obligations is measured on a
discount basis
Defined benefit plans may be unfunded,
fully funded, partly funded by the contributions
of the entity
Consequently , under this plan the expense
recognized is not necessarily the amount of
contribution for the period.
JUAN
The benefit plan shall be viewed as a sub
entity separate and distinct from the primary
entity which is the employer entity
The sub entity maintains information that
does not appear In the financial statements of the
primary entity
Such information is kept only by means of
memorandum records and therefore not reflected
in the general ledger accounts of the primary
entity.
 JUAN
ILLUSTRATION – UNDERFUNDING ILLUSTRATION – OVERFUNDING

To simplify the example, the only component of Again, the only component of the benefit expense
the benefit expense is the current service cost of is the current service cost of P500,000
P500,000
The entity made a contribution of P600,000 to the
The entity made a contribution of P450,000 to the defined benefit plan for the current year
defined benefit plan for the current year
The journal entry to record the expense and the
The journal entry to record the expense and the contribution is
contribution is
Employee benefit expense 500,000
Employee benefit expense 500,000 Prepaid benefit cost 100,000
Cash 450,000 Cash 600,000
Prepaid benefit cost 50,000

PREPAID/ACCRUED BENEFIT COST

Observe that the “ prepaid /accrued benefit cost” account is the balancing figure. As the year goes by
this account will build up and it may have debit credit balances at the end of current reporting period.
If the account has a debit balance , it is classified as non current asset presented as prepaid benefit cost.
Otherwise, if the account has credit balance , it is classified as noncurrent liability presented as accrued
benefit cost
 JUAN
DISCLOSURE- DEFINED BENEFIT PLAN

a. Characteristic of the define benefit plan and risk associated with the plan

b. Reconciliation for the fair value of plan assets and the present value of the defined benefit obligation

c. Separate showing of current service cost , past service cost, interest expense or income and remeasurements

d. Disaggregation of the fair value of plan assets into classes that distinguish the nature and risk of assets

e. A sensitivity analysis for each significant actuarial assumption showing the effect on the defined benefit obligation
for any changes

f. Description of any funding arrangement and policy

g. Expected contribution to the plan for the next period

h. Maturity profile of the defined benefit obligation

 STA.ROSA

SUMMARY

ACCOUNTING INCOME DEFERRED TAX LIABILITY

TAXABLE INCOME EMPLOYEE BENEFITS

PERMANENT DIFFERENCES POST EMPLOYMENT

BENEFIT PLAN
TEMPORARY DIFFERENCES
DEFINED CONTRIBUTION
DEFERRED TAX ASSETS PLAN

DEFINED BENEFIT PLAN

 THANK
YOU!
GROUP 6

ORTIZ,JAN BILL P.
JOSUE ,CHRISTIAN JERIC
JUAN, JESUS BENIDICT
MALONZO, ARBY
PLACIENTE, PAOLO
STA.ROSA,JOHN KYLE