ACCOUNTING FOR INCOME TAX

DEFERRED TAX LIAB vs. DEFERRED TAX ASSET

ACCOUNTING INCOME TAXABLE INCOME
- net income for the period before
(1) AI > TI AI < TI
deducting income tax expense
- income computed in accordance with - income computed in accordance with AR > TR AR < TR
accounting standards tax laws AE < TE AE > TE

Net income in income statement Net income in income tax return

(2) CA of A > TB of A CA of A < TB of A

usually
(3) CA of L < TB of L CA of L > TB of L
≠

DIFFERENCES

PERMANENT DIFFERENCES TEMPORARY DIFFERENCES

- nontaxable revenue - differences between carrying amount of
- nondeductible expenses asset or liability and tax base

NO FUTURE TAX CONSEQUENCES HAS FUTURE TAX CONSEQUENCES

[timing differences]

Nontaxable revenue Taxable Temporary Difference ILLUSTRATION

 Interest income on deposit - Future taxable amount 1. P6,000,000 income before income tax expense a. What is the current income tax
 Dividends received - Deferred Tax Liab (Tax Expense) P5,100,000 taxable income in income tax return expense?
Nondeductible expenses Deductible Temporary Difference b. What is the total income tax
 Life insurance premium (entity is - Future deductible amount P500,000 permanent difference expense?
beneficiary) - Deferred Tax Asset (Tax Benefit) P400,000 temporary difference c. What is the deferred income tax
 Tax penalties, surcharges, and fines expense?
Enacted rate = 30%
CARRYING AMOUNT TAX BASE
- Amount on asset/liability reported - Amount attributable to asset or liability for tax
2. Viking Company reported pre-tax income of P1,000,000 in the income statement for the current
in accordance with accounting purposes
year:
standards TAX BASE OF AN TAX BASE OF A
ASSET LIABILITY
Tax Return Accounting Record
Ex: Capitalized cost that are Ex: Warranty liability
Rent Income 70,0000 120,000
- Capitalized as an asset - Liab in balance sheet
Depreciation 280,000 220,000
- Deducted one-time in the - Deductible only when
Payment for penalty 10,000
tax return paid
Premiums on officer’s life insurance 90,000
Income tax rate 30%
 a. What is the current provision for income tax? Rent received 35,000
b. What is the total tax expense? Rent income per books 48,000
Tax rate 30%

3. Dunn Company reported in income statement of current year P900,000 income before provision a. Determine the deferred tax liability on December 31, 2021
for income tax. b. Determine the deferred tax asset on December 31, 2021
c. Determine the net deferred income tax expense or benefit
Rent received in advance 150,000 d. Determine the current income tax expense for 2021
Interest income on time deposit 200,000 e. Determine the total income tax expense for 2021
Depreciation deducted from income tax purposes 100,000
in excess of financial depreciation
Income tax rate 30% 6. Margaret Company provided the following information on December 31, 2021:

a. What is the current income tax expense? Carrying Amount Tax Base
b. What is the total income tax expense? Accounts receivable 1,500,000 1,750,000
Motor vehicle 1,650,000 1,250,000
Provision for warranty 120,000 0
4. Canterbury Company made an accounting profit for P4,000,000 for the current year which Deposits received in advance 150,000 0
included the following items of income and expense.
The depreciation rates for accounting and taxation are 15% and 25% respectively.
Donation to political parties (nondeductible) 1,000,000
Depreciation – 20% 1,600,000 The deposits are taxable when received and warranty costs are deductible when paid.
Annual leave expense 700,000
Rent revenue 1,200,000 An allowance for doubtful accounts of P250,000 has been raised against accounts receivable for
Income tax rate 30% accounting purposes but such accounts are deductible only when written off as uncollectible.

For tax purposes, the depreciation rate is 25%, the annual leave paid is P800,000 and the rent The entity showed net income of P8,000,0000 in the income statement for 2021. The income tax
received is P1,000,000. The entity followed the cash basis for tax purposes. What amount should rate is 30%.
be reported as current tax liability at year-end? P1,290,000
There are no temporary differences at the beginning of the year.

5. Isabela Corporation reported the following for the year ended December 31, 2021 in connection a. Determine the deferred tax liability on December 31, 2021
with the preparation of its income tax return: b. Determine the deferred tax asset on December 31, 2021
c. Determine the net deferred income tax expense or benefit
Taxable income ? d. Determine the current income tax expense for 2021
Accounting income 4,000,000 e. Determine the total income tax expense for 2021
Dividend income 20,000
Doubtful accounts 49,000
A/R written off 40,000 7. Joy Corporation computed a pretax financial income of P6,000,000 for the year ended December
Interest income on deposits 70,000 31, 2019. In preparing the tax return, the following differences are noted between financial income
Interest income on notes 29,000 and taxable income:
Accounting depreciation 30,000
Tax depreciation 55,000 Nontaxable revenue P600,000
Warranty expense per books 60,000 Nondeductible expense 200,000
Actual warranty cost 25,000 Provision for warranty that was recognized as expense
 in 2019 but deductible for tax when paid 300,000 11. Eckert Corporation’s partial income statement after its first year of operations is as follows:
Excess tax depreciation over financial depreciation 250,000
Excess of financial revenue over tax revenue 200,000 Income before income taxes 3,750,000
Income tax expense
What is the total income tax expense assuming the tax rate for 2019 is 32% and 30% for 2020 and Current 1,035,000
all future years? Deferred 90,000
Net income 1,125,000
2,625,000
8. Taft Company leased out a facility and received P600,000 for a one-year rent effective July 1,
2020. Rental income is taxable when received. The income tax rate is 32%. Taft had no other Eckert uses the straight line method for depreciation for financial reporting purposes and
permanent or temporary differences. What amount of deferred tax asset should Taft report in its accelerated depreciation for tax purposes. The amount charged to depreciation expense on its
December 31, 2020 financial position? books this year was P1,500,000. No other differences existed between book income and taxable
income except for the amount of depreciation.

9. At the beginning of 2020, Pittman Co. purchased an asset for P600,000 with an estimated useful Assuming a 30% tax rate, what amount was deducted for depreciation on the corporation’s tax
life of 5 years and an estimated residual value of P50,000. For financial reporting purposes the return for the current year?
asset is being depreciated using the straight line method; for tax purposes the double-declining
method is being used. Pitman Co.’s tax rate is 40% for 2020 and all future years.
12. Tiger Company reported current tax expense of P2,500,000 for 2022. The change in assets and
liabilities are as follows:
a. At the end of 2020, what is the book basis and tax basis of the asset respectively?
b. At the end of 2020, what amount of deferred tax asset/liability should be reported on Dec 31, 2022 Dec 31, 2021
Pitman’s Statement of Financial Position? Deferred tax liability 225,000 300,000
Deferred tax asset 500,000 400,000
Income tax payable 250,000 100,000
10. Hopkins Co. at the end of 2020, its first year of operations, prepared a reconciliation between
pretax financial income and taxable income as follows: The deferred tax liability was caused by accelerated depreciation and the deferred tax asset is for
rentals received in advance. What amount of total tax expense should be recognized in 2022?
Pre-tax financial income 750,000
Estimated litigation expense 1,000,000
13. Ferguson Company has the following cumulative taxable temporary differences:
Extra depreciation for tax purposes (1,500,000)
Taxable income 250,000 12/31/21 12/31/20
P1,350,000 P960,000
The estimated litigation expense of P1,000,000 will be deductible in 2021 when it is expected to be The tax rate enacted for 2021 is 40%, while the tax rate enacted for future years is 30%. Taxable
paid. Use of the depreciable assets will result in taxable amounts of P500,000 in each of the next income for 2021 is P2,400,000 and there are no permanent differences. Ferguson’s pretax
three years. financial income is:

The income tax rate is 30% for all years.

14. Lyons Company deducts insurance expense of P84,000 for tax purposes in 2020, but the expense
is not yet recognized for accounting purposes. In 2021, 2022, and 2023, no insurance expense will
a. Income taxes payable is:
be deducted for tax purposes, but P28,000 of insurance expense will be reported for accounting
b. The net deferred tax expense to be recognized is:
purposes in each of these years. Lyons Company has a tax rate of 40% and income taxes payable
of P72,000 at the end of 2020. There were no deferred taxes at the beginning of 2020.

a. What is the amount of the deferred tax liability at the end of 2020?
b. What is the amount of income tax expense for 2020?
c. Assuming that income tax payable for 2011 is P96,000, the income tax expense for 2021
would be what amount?