Colegio de San Juan de Letran

COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

THEORY OF ACCOUNTS

NAME_____________________________________________SECTION_______________

ACCOUNTING FOR INCOME TAX

PROBLEM I
DONABELLE Company provided the following information for the first year of operations:

Accounting income 4,000,000

Nondeductible expenses 200,000
Nontaxable revenue 300,000
Deferred income on installment sale included in financial income but taxable 450,000
next year
Doubtful accounts recorded 100,000
Financial depreciation 300,000
Tax depreciation 350,000
Estimated warranty cost accrued in the current year but not deductible for tax 100,000
purposes until paid
Income tax rate 30%

Required:

1. Prepare journal entry to record the current tax expense.

2. Prepare journal entry to record the deferred tax liability.

3. Prepare journal entry to record the deferred tax asset.

4. Present the income tax expense in income statement.

5. Determine the net deferred tax expense or benefit

PROBLEM II
ABC Company provided the following information on December 31, 2017:

Carrying amount Tax base

Accounts receivable 1,500,000 1,750,000
Motor vehicle 1,650,000 1,250,000
Provision for warranty 120,000 0
Deposits received in advance 150,000 0

The depreciation rates for accounting and taxation are 15% and 25% respectively. The deposits
are taxable when received and warranty costs are deductible when paid. An allowance for
doubtful accounts of P250,000 has been raised against accounts receivable for accounting
purposes but such accounts are deductible only when written off as uncollectible. The entity
showed net income of P8,000,000 in the income statements for 2017. The income tax rate is
30%. There are no temporary differences at the beginning of the current year.
Required:

1. Determine the deferred tax liability on December 31, 2017.

2. Determine the deferred tax assets on December 31, 2017.

3. Determine the net deferred tax expense or benefit.

4. Determine the current tax expense for 2017.

5. Determine the total income tax expense for 2017.

PROBLEM III
West Company disclosed the following assets and liabilities at carrying amount on December
31, 2017:

Property 10,000,000
Plant equipment 5,000,000
Inventory 4,000,000
Trade receivables 3,000,000
Trade payables 6,000,000
Cash 2,000,000

The value for tax purposes for purposes for property and for plant and equipment was
P7,000,000 and P4,000,000 respectively. The entity has made a provision for inventory
obsolescence of P2,000,000 which is not allowable for tax purposes. Further, an impairment
charge against trade receivables of P1,000,000 has been made. This charge will not be allowed
in the current year for tax purposes. ABC Company reported net income of P9,000,000 for
2017. There are no temporary differences at the beginning of the current year. The tax rate is
30%.

Required:

1. Prepare journal entry to record the current tax expense.

2. Prepare journal entry to record the deferred tax liability.

3. Prepare journal entry to record the deferred tax asset.

4. Determine the net deferred tax expense or benefit.

5. Determine the total income tax expense.

PROBLEM IV
Roma Company started to manufacture in 2017 copy machine that are sold on the installment
basis. Rona Company recognizes revenue when equipment is sold for financial reporting
purposes, and when installment payments are received for tax purposes.

In 2017, the entity recognized gross profit of P6,000,000 for financial reporting purposes, and
P1,500,000 for tax purposes. The amount of gross profit expected to be recognized for tax
purposes in 2018 and 2019 are P2,500,000 and P2,000,000 respectively. The entity guaranteed
the copy machine for two years. Warranty costs are recognized in the accrual basis for financial
reporting purposes and when paid for tax purposes. Warranty cost accrued in 2018 and 2019,
P1,000,000 and P1,000,00 respectively, of warranty cost will be paid.

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In addition during 2017, P500,000 interest, net of 20% final income tax, was received and
earned. Insurance premium of P100,000 on life insurance policy that covered the life of entity’s
president was paid. The entity is the beneficiary for this policy. The tax rate is 30%. Pretax
accounting income in 2016 was P2,000,000. Any 2017 operating loss will be carried to 2018.

Required:

1. What is the accounting income subject to tax?

2. What is the deferred tax asset on December 31, 2017?

3. What is the deferred tax liability on December 31, 2017?

4. What is the current income tax expense for the year?

5. What is the total income tax expense for the current year?

PROBLEM V
Aragona Company reported net income of P4,000,000 before income tax expense for the
current year. The entity had been profitable in the past and expected to continue to be
profitable.

The entity expensed warranty cost in the current year for P350,000 that is expected to impact
the tax return after 2 years.

The entity also had P600,000 in revenue that will not be taxed until next year. The tax rate for
the current year is 30% and 40% beyond the current year.

Required:

1. What is the taxable income for the current year?

2. What is the current tax expense for the current year?

3. What amount should be reported as net deferred tax expense?

4. What amount should be reported as total income tax expense

PROBLEM VI
Chamber Company revealed the following differences between the book and tax basis of the
assets and liabilities on December 31, 2017:

Book basis Tax basis

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

It is expected that the litigation liability will be settled in 2018. The difference in accounts
receivable will result in taxable amounts of P600,000 in 2018 and P400,000in 2019. The entity
has taxable income of P7,000,000 in 2017. The income tax rate is 30%. This is the first year of
operations of the entity.

Required:

1. What amount should be reported as current tax expense?

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 2. What amount should be reported as total tax expense?

3. What amount should be reported as deferred tax liability?

4. What amount should be reported as deferred tax asset?

PROBLEM VII
On January 1, 2014, Easy Company acquired an equipment for P8,000,000. The equipment is
depreciated using straight line method based on a useful life of 8 years with no residual value.
On January 1, 2017, after 3 years, the equipment was revalued at a replacement cost of
P12,000,000 with no change in the useful life. The pretax accounting income before
depreciation for 2017 is P10,000,000. The income tax rate is 30% and there are no other
temporary differences at the beginning of the year.

Required:

1. Prepare the journal entry to record the revaluation on January 1, 2017.

2. Prepare journal entry to record the deferred tax liability on January 1, 2017.

3. Prepare journal entry to record the current tax expense for 2017.

4. Prepare the adjustments of the deferred tax liability on December 31, 2017.

5. Prepare the adjustments of the revaluation surplus on December 31, 2017.