INCOME TAXES

THEORY

1. The objective of accounting for income taxes is

a. Objectivity in the calculation of periodic expense

b. Recognition of assets and liabilities

c. Proper matching of periodic expense to periodic revenue

d. Consistency of tax expense measurement with tax planning strategies

2. It is the profit for a period determined in accordance with the rules established by taxation
authorities upon which income taxes are payable

a. Accounting profit c. Net profit

b. Taxable profit d. Accounting profit before tax

3. It is the amount of income taxes payable in respect of taxable profit

a. Current tax expense c. Deferred tax expense

b. Tax expense d. Deferred tax benefit

4. Taxable income of a corporation

a. Is reported on the income statement

b. Is based on international financial reporting standards

c. Differs from accounting income due to differences in inter-period allocation between the two
methods of income determination

d. Differs from accounting income due to differences in inter-period allocation and permanent
differences between the two methods of income determination

5. Which of the following statements is true?

a. Temporary differences occur because accounting standards and income tax laws differ as to
when they recognize assets, liabilities, owner’s equity, revenues, gains, expenses and losses
b. The term “future taxable amounts” relates to a deferred tax asset

c. “Future taxable amounts” include revenues and gains that are included in the tax return

before they are recognized for accounting purposes

d. “Future deductible amounts” include expenses and losses that are included in the tax

return before they are recognized for accounting purposes

6. Intra-period tax allocation

a. Involves the allocation of income taxes between current and future periods

b. Associates tax effect with different items in the income statement

c. Arises because certain revenue and expenses appear in the financial statements either before or
after they are included in the income tax return

d. Arises because different income statement items are taxed at different rates

7. This is the recognition of a deferred tax asset or deferred tax liability

a. Intra-period tax allocation c. None of the above

b. Inter-period tax allocation d. All of the above

8. Differences between taxable income and pretax accounting income arising from transactions
that, under applicable tax laws and regulations, will not be offset by corresponding differences or turn
around in future periods is a definition of

a. Temporary differences c. Deductible differences

b. Permanent differences d. Taxable differences

9. These are differences between carrying amount of an asset or liability in the statement of
financial position and its tax base

a. Temporary differences c. Permanent differences

b. Timing differences d. Accounting differences

10. A pretax income always results when

a. Revenues exceed operating expenses

c. The gross margin exceeds operating expenses

d. The cost of goods sold exceeds operating expenses

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Any violation gives Pinnacle the right to seek legal recourse.

11. The deferred tax consequence attributable to a deductible temporary difference and operating
loss carry forward is known as

a. Current tax c. Deferred tax expense

b. Deferred tax asset d. Deferred tax liability

12. How do you call a taxable temporary difference?

a. Current tax asset c. Deferred tax asset

b. Current tax liability d. Deferred tax liability

13. Which of the following differences would result in future taxable amounts?

a. Revenues or gains that are taxable before they are recognized in financial income

b. Expenses or losses that are deductible after they are recognized in financial income

c. Expenses or losses that are deductible before they are recognized in financial income

d. Revenues or gains that are recognized in financial income but are never included in taxable
income

14. The deferred tax expense is the

a. Decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability

b. Increase in balance of deferred tax asset plus the increase in balance of deferred tax liability

c. Increase in balance of deferred tax asset minus the increase in balance of deferred tax liability

d. Increase in balance of deferred tax liability minus the increase in balance of deferred tax asset

15. Current tax expense plus deferred tax expense is

b. Income tax expense d. None of these

16. Total tax expense is based on

a. Taxable income

b. Financial income

c. Financial income excluding temporary and permanent differences

d. Financial income excluding permanent differences but including temporary differences

17. According to PAS 12, deferred tax assets and liabilities should be reported in the balance sheet

a. As noncurrent asset and noncurrent liability

b. Always net noncurrent asset or net noncurrent liability

c. As current and noncurrent depending on the order of liquidity or maturity

d. As current and noncurrent assets and liabilities depending on the balance sheet classification of
the related tax basis of the temporary difference

18. X Company’s financial reporting basis of its plant assets exceeded the tax basis because it uses a
different method of reporting depreciation for financial reporting purpose and tax purposes. If there is
no other temporary differences, X should report a

a. Current tax asset c. Deferred tax asset

b. Current tax payable d. Deferred tax liability

19. A temporary difference that would result in a deferred tax asset is

a. Accrued warrant expense

b. Accrual commission income

c. Interest revenue on government bonds

d. Excess of tax depreciation over financial accounting depreciation

20. All of the following would result in a deferred tax asset, except

a. The tax base of an asset is greater than carrying amount

c. The financial accumulated depreciated is greater than tax accumulated depreciation

d. Development costs have been capitalized and amortized but were included in determining
taxable income in the period incurred

21. A temporary difference which would result in a deferred tax liability is

a. Accrual of estimated litigation loss

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b. Accrual of estimated warranty cost

c. Subscription received in advance

d. An installment sale which is included in accounting income at the time of sale and included in
taxable income when collected

22. Which temporary difference would result in a deferred tax asset?

a. Tax penalty or surcharge

b. Dividend received on share investment

c. Excess tax depreciation over accounting depreciation

d. Rent received in advance included in taxable income but deferred for financial accounting

23. Under PAS 12, which temporary difference would result in a deferred tax liability?

a. Accrual of warranty expense

b. Interest revenue on municipal bonds

c. Subscription revenue received in advance

d. Excess tax depreciation over financial depreciation

24. When accounting for income taxes, a temporary difference occurs when
a. An item is included in the calculation of net income in one year and taxable income in a different
year

b. An item is included in the calculation of net income but is neither taxable nor deductible

c. The accrual method of accounting is used

d. An item is no longer taxable due to a change in the tax law

25. All of the following would result to deferred tax asset, except

a. Interest expense is accrued but included in taxable income on a cash basis

b. The accumulated depreciation on an asset is greater than accumulated tax depreciation

c. Development costs have been capitalized and amortized but were deducted in determining
taxable income in the period incurred

d. The tax base for a machine is greater than the carrying amount

26. An entity shall offset a deferred tax asset and deferred tax liability when

I. The deferred tax asset and deferred tax liability relate to income taxes levied by the
same taxing authority

II. The entity has a legal enforceable right to offset a current tax asset against a current tax liability

a. I only c. Both I and II

b. II only d. Neither I nor II

PROBLEMS

1. An entity reported P9,000,000 income before provision for income tax. The following data are
provided for the current year:

Rent received in advance 1,600,000

Income from exempt municipal bonds 2,000,000

Depreciation deduction for income tax purposes in excess of depreciation

reported for financial reporting purposes 1,000,000

Tax payment during the current year 500,000

What amount of current income tax liability should be reported at year-end?

a. P1,780,000 c. P2,580,000

b. P2,280,000 d. P2,880,000

2. Roann Company is determining the amount of its pretax financial income for 2021 by making
adjustments to taxable income from the company’s 2021 income tax return. The tax return indicates
taxable income of P380,000, on which a tax liability of P121,600 has been recognized (P380,000 x 32% =
P121,600). Following is a list of items that may be required to determine pretax financial income from
the amount of taxable income:

• Accelerated depreciation for income tax purposes was P134,000; straight line depreciation on
these assets is P80,000.

This document is strictly private and confidential and should not be shared or distributed to a third party.
Any violation gives Pinnacle the right to seek legal recourse.

• Goodwill amortization of P45,000 was not included as a deduction in the tax return but may be
deducted in the income statement.

• Several expenses were included in the income tax return on an estimated basis. These items will
be in the income statement at the same amount but are subject to change if new information in the
future indicates that the original estimates were inaccurate.

• Interest on treasury bills was not included in the tax return. During the year, P24,700 was
received on these investments.

The pretax financial income amounts to:

a. P458,700 c. P359,700

b. P389,000 d. P413,700

3. An entity had the following financial statement elements for which the December 31, 2021
carrying amount is different from the December 31, 2021 tax basis:

Carrying amount Tax basis Difference

Equipment 5,500,000 4,000,000 1,500,000

Accrued liability – health care 500,000 0 500,000

Computer software cost 2,000,000 0 2,000,000

The accrued liability is the estimated health care cost that was recognized as expense in 2021 but
deductible for tax purposes when actually paid.

In January 2021, the entity incurred P3,000,000 of computer software cost. Considering the technical
feasibility of the project, this cost was capitalized and amortized over 3 years for accounting purposes.
However, the total amount was expensed in 2021 for tax purposes.

The pretax accounting income for 2021 is P15,000,000. The income tax rate is 30% and there are no
deferred taxes on January 1, 2021.

Question 1: What amount should be reported as current tax expense for 2021?

a. P5,400,000 c. P3,300,000

b. P3,600,000 d. P5,700,000

Question 2: What amount should be reported as total tax expense for 2021?

a. P4,500,000 c. P4,050,000

b. P4,950,000 d. P3,900,000

Question 3: What amount should be reported as deferred tax liability on December 31, 2021?

a. P1,050,000 c. P900,000

b. P1,200,000 d. P150,000

Question 4: What amount should be reported as deferred tax asset on December 31, 2021?

a. P750,000 c. P150,000

b. P600,000 d. P0