Since 1977

FAR OCAMPO/SOLIMAN/OCAMPO
FAR.2935-Income Taxes OCTOBER 2020

DISCUSSION PROBLEMS
1. Tax expense is c. Expense that is included in the tax return after it is
a. The aggregate amount included in the included in accounting profit.
determination of profit or loss for the period in d. Expense that is included in the tax return before it
respect of current tax and deferred tax. is included in accounting profit.
b. The amount of income taxes payable in respect of
the taxable profit for a period. 5. Which of the following is an example of a temporary
c. The profit for a period before deducting tax difference that could result in a deferred tax asset?
expense. a. Prepayments of expenses in year of payment;
d. The profit for a period, determined in accordance recognition of expense for accounting purposes in
with the rules established by the taxation a later year.
authorities, upon which income taxes are payable. b. Use of straight-line depreciation for accounting
purposes and an accelerated rate for income tax
2. A major distinction between temporary and permanent purposes.
differences is c. Gross margin on installment sales is recognized for
a. Permanent differences are not representative of accounting purposes before it is included in taxable
acceptable accounting practice. income in the income tax return.
b. Temporary differences occur frequently, whereas d. Gain on disposal of an asset when included in
permanent differences occur only once. taxable profit before it is included in accounting
c. Once an item is determined to be a temporary profit.
difference, it maintains that status; however, a
permanent difference can change in status with the 6. Tax base is the amount attributed to asset or liability
passage of time. for tax purposes. Which statement is incorrect
d. Temporary differences reverse themselves in regarding tax base of an asset or liability?
subsequent accounting periods, whereas a. Tax base of liability is its carrying amount, less any
permanent differences do not reverse. amount that will be deductible for tax purposes in
respect of that liability in future periods.
3. Under PAS 12, temporary difference is b. Tax base of an asset is the amount that will be
a. A difference between the carrying amount of an deductible for tax purposes against any taxable
asset or liability and its tax base. economic benefits that will flow to an entity when
b. A temporary difference that will result in taxable it recovers the carrying amount of the asset.
amounts in the future when the carrying amount of c. If the economic benefits embodied in an asset will
the asset is recovered or the liability is settled. not be taxable, the tax base of the asset is equal
c. A temporary difference that will result in amounts to its carrying amount.
that are tax deductible in the future when the d. None of the above.
carrying amount of the asset is recovered or the
liability is settled. 7. D’Silva Limited has a product warranty liability
d. A difference between taxable profit and accounting amounting to P10,000. The product warranty costs
profit that originate in one period and reverse in are not tax deductible until paid out to customers. The
one or more subsequent periods. company tax rate is 30%. The company has:
a. a deductible temporary difference of P10,000
b. an assessable temporary difference of P10,000
c. a tax base of P10,000
d. a future deductible amount of P0

8. The current liabilities of an entity include fines and

penalties for environmental damage. The fines and
penalties are stated at P10 million. The fines and
penalties are not deductible for tax purposes. What is
the tax base of the fines and penalties?
a. P10 million c. P13 million
b. P 3 million d. P 0

9. An entity has spent P1,000,000 in developing a new

product. These costs meet the definition of an
intangible asset under PAS 38 and have been
recognized in the statement of financial position.
These costs have been recognized as an expense for
tax purposes. At the year-end the intangible asset is
4. A future taxable amount is exemplified by:
deemed to be impaired by P100,000. Assuming tax
a. Revenue that is included in the tax return before it
rate is 30%, which statement is correct?
is included in accounting profit.
a. The tax base of the intangible asset at year-end is
b. Gain that is included in the tax return before it is
P900,000.
included in accounting profit.
b. The entity has a taxable temporary difference at
year-end of P900,000.

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c. The entity should recognize deferred tax asset of Use the following information for the next two questions.
P270,000 at year-end.
The following facts relate to Whammy Corporation for the
d. The entity should recognize deferred tax liability of
current year:
P300,000 at year-end.
• Taxable profit, P430,000.
• Deferred tax liability, January 1, P48,000.
10. Which statement is incorrect regarding measurement of
• Deferred tax asset, January 1, P16,000.
income taxes?
• Cumulative temporary difference at December 31,
a. Current tax liabilities shall be measured at the
giving rise to future taxable amounts, P230,000.
amount expected to be paid to the taxation
• Cumulative temporary difference at December 31,
authorities, using the tax rates that have been
giving rise to the future deductible amounts, P95,000.
enacted or substantively enacted by the end of the
• Tax rate for all years, 35%.
reporting period.
b. Deferred tax assets and liabilities shall be
14. What is the deferred tax expense?
measured at the tax rates that are expected to
a. P15,250 c. P 32,500
apply to the period when the asset is realized or
b. P17,250 d. P165,750
the liability is settled, based on tax rates that have
been enacted or substantively enacted by the end
15. What is the total tax expense?
of the reporting period.
a. P17,250 c. P150,500
c. The measurement of deferred tax liabilities and
b. P32,500 d. P165,750
deferred tax assets shall reflect the tax
consequences that would follow from the manner
LECTURE NOTES:
in which the entity expects, at the end of the
reporting period, to recover or settle the carrying
amount of its assets and liabilities.
d. Deferred tax assets and liabilities shall be
discounted.

11. The Waloneke Company has a policy of using non-

current assets until they can no longer be operated and
are worthless. On 1 January 2020 it acquired an item of
plant and machinery for P100,000. It is being 16. The following differences enter into the reconciliation
depreciated over 10 years on a straight-line basis. For of financial income and taxable income of Celtics
tax purposes there is an allowance of 20% per annum Company for the year ended December 31, 2020, its
on a reducing balance basis. There are two rates of tax: first year of operations.
15% on trading profits and 25% on gains on disposals.
Accounting profit P4,500,000
What deferred tax balance should Waloneke recognize at Excess tax depreciation 3,000,000
31 December 2020, according to PAS12 Income taxes? Litigation accrual 450,000
a. Deferred tax asset of P2,500 Unearned rent income deferred on the
b. Deferred tax asset of P1,500 books but appropriately recognized
c. Deferred tax liability of P2,500 in taxable income 250,000
d. Deferred tax liability of P1,500 Interest income from long-term
certificate of deposit 100,000
12. Black Co., organized on January 2, 2020, had
Additional information:
accounting profit of P500,000 and taxable profit of
• Excess tax depreciation will reverse equally over a
P800,000 for the year ended December 31, 2020. The
four-year period, 2021-2024.
only temporary difference is accrued product warranty
• It is estimated that the litigation liability will be
costs that are expected to be paid as follows:
paid in 2024.
Year Amount • Rent income will be recognized during the last year
2021 P100,000 of the lease, 2024.
2022 50,000 • Interest income from long-term certificate of
2023 50,000 deposit is tax exempt.
2024 100,000 • Tax rate is 30%.
Black has never had any net operating losses (book or Compute for the current income tax expense for 2020.
tax) and does not expect any in the future. There a. P660,000 c. P510,000
were no temporary differences. The enacted income b. P630,000 d. P480,000
tax rates are 35% for 2020, 30% for 2021 through
2023, and 25% for 2024. In Black’s December 31, 17. Salisbury Ltd made an accounting profit before tax of
2020 statement of financial position, the deferred P40,000 for the year ended 31 December 2020.
income tax asset should be Included in the accounting profit were the following
a. P105,000 c. P70,000 items of revenue and expense.
b. P 85,000 d. P60,000
Donations to political parties
(non-deductible) P 5,000
13. D Company had the following deferred tax balances at
Depreciation - machinery (20%) 15,000
reporting date - Deferred tax assets, P1,200,000;
Annual leave expense 5,600
Deferred tax liabilities, P3,000,000. Effective from the
Rent income 12,000
first day of the next financial period, the company rate
of income tax was reduced from 40% to 30%. The For tax purposes the following applied:
adjustment to income tax expense to recognize the Annual leave paid P 6,500
impact of the tax rate change is: Rent received 10,000
a. DR P600,000 c. DR P450,000 Depreciation rate for machinery 25%
b. CR P600,000 d. CR P450,000 Income tax rate 30%

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If the income tax paid during 2020 is P10,000, the expense accrued in 2020 is P2,500,000, but only
current tax liability at 31 December 2020 is P500,000 of warranty cost is paid in 2020. It is
a. P11,505 c. P3,005 expected that in 2021 and 2022, P1,000,000 and
b. P 6,080 d. P1,505 P1,000,000, respectively, of warranty costs will be
paid. In addition during 2020, P500,000 interest, net
18. A deferred tax liability shall be recognized for all of 20% final income tax, was received and earned, and
taxable temporary differences, except to the extent P200,000 insurance premium on life insurance policies
that the deferred tax liability arises from: that covered the life of Entity Y’s president was paid.
a. The initial recognition of goodwill. Entity Y is the beneficiary for this policy. The tax rate
b. The initial recognition of an asset or liability in a is 35%. Accounting profit in 2020 was P2,000,000.
transaction which is not a business combination
Assuming any 2020 net loss will be carried to 2021,
and at the time of the transaction, affects neither
how much is the deferred tax asset to be recognized as
accounting profit nor taxable profit.
of December 31, 2020?
c. Both a and b.
a. P700,000 c. P 980,000
d. Neither a nor b.
b. P770,000 d. P1,575,000
19. A deferred tax asset shall be recognized for all
23. Jenkins Limited acquired an item of Property at a cost
deductible temporary differences to the extent that it
of P50,000. At reporting date accumulated
is probable that taxable profit will be available against
depreciation amounted to P15,000. The asset was
which the deductible temporary difference can be
revalued on reporting date to P45,000. If the
utilized, unless the deferred tax asset arises from the
company rate of tax is 30%, the deferred tax item that
initial recognition of an asset or liability in a
must be recognized at reporting date is:
transaction that:
a. deferred tax asset P3,000
a. Is not a business combination
b. deferred tax liability P3,000
b. At the time of the transaction, affects neither
c. deferred tax liability P7,000
accounting profit nor taxable profit.
d. deferred tax asset P7,000
c. Both a and b.
d. Neither a nor b.
24. Which statement is incorrect regarding presentation of
income taxes?
20. The following information was extracted from the
a. Current and deferred tax shall be recognized
records of Obduracy Corporation as at 31 December
outside profit or loss if the tax relates to items that
2020:
are recognized, outside profit or loss.
Carrying b. Current and deferred tax that relates to items that
Asset (liability) amount Tax base are recognized, in other comprehensive income,
Accounts receivable P 150,000 P175,000 shall be recognized in other comprehensive
Motor vehicles 165,000 125,000 income.
Provision for warranty (12,000) 0 c. Current and deferred tax that relates to items that
Deposits received in are recognized, directly in equity, shall be
advance (15,000) 0 recognized directly in equity.
The depreciation rates for accounting and taxation are d. Deferred tax assets and liabilities are classified in
15% and 25% respectively. Deposits are taxable the statement of financial position as either current
when received, and warranty costs are deductible or noncurrent depending on the related asset and
when paid. An allowance for doubtful debts of P25,000 expected timing or reversal.
has been raised against accounts receivable for
accounting purposes, but such debts are deductible 25. Sagay Company provides the following tax effects of
only when written off as uncollectible. temporary differences at the end of 2020:
Deferred Related
The net journal entry to record deferred tax for the tax asset asset
year ended 31 December 2020 assuming no deferred (liability) classification
items had been raised in prior years, will increase Accelerated depreciation (P500,000) Noncurrent
(decrease) profit by Additional cost in
a. P3,600 increase c. P12,000 increase inventory for tax
b. P3,600 decrease d. P15,600 decrease purposes 200,000 Current
(P300,000)
21. Deferred tax assets do not arise from
a. Taxable temporary differences Sagay anticipates that P150,000 of the deferred tax
b. Deductible temporary differences liability will reverse in 2021. In its December 31, 2020
c. The carryforward of unused tax losses statement of financial position, what amount should
d. The carryforward of unused tax credits Sagay report as noncurrent deferred tax liability?
a. P300,000 c. P150,000
22. Entity Y sells equipment on installment basis. Entity Y b. P500,000 d. P200,000
recognizes revenue when equipment is sold for
accounting purposes, and when installment payments 26. Companies allocate income tax expense (or benefit) to
are received for tax purposes. In 2020, Entity Y all of the following except
recognized gross profit of P6,000,000 for accounting a. Discontinued operations.
purposes, and P1,500,000 for tax purposes. The b. Prior period errors.
amounts of gross profit expected to be recognized for c. Gross profit.
tax purposes in 2021 and 2022 are P2,500,000 and d. Other comprehensive income.
P2,000,000, respectively. Entity Y guarantees the
equipment for two years. Warranty costs are
recognized on the accrual basis for accounting - now do the DIY drill -
purposes and when paid for tax purposes. Warranty

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DO-IT-YOURSELF (DIY) DRILL

1. In arriving at its profit before tax for the year ended 31 Accelerated depreciation for income tax purposes was
December 2020 The Ryan Company has accrued P2,000,000 and straight line financial depreciation is
royalties receivable of P200,000 and interest payable of P1,500,000.
P250,000. Both royalties and interest are dealt with on
Insurance premium of P100,000 on the life of an
a cash basis in tax computations. What are Ryan's net
officer with La Carlota Company as beneficiary was not
temporary differences at 31 December 2020 according
included as a deduction in the tax return.
to PAS12 Income taxes?
a. Taxable temporary differences of P50,000 Interest on treasury bills was not included in the tax
b. Deductible temporary differences of P450,000 return. During the year, La Carlota received
c. Deductible temporary differences of P50,000 P2,500,000 on these investments.
d. Taxable temporary differences of P450,000
What was La Carlota Company’s accounting profit?
2. The Huang Company has a non-current asset which had a. P15,500,000 c. P18,000,000
a carrying amount in the financial statements of b. P17,400,000 d. P17,900,000
P18,000 at 31 December 2020. Its tax written down
value (the tax base) at that date was P9,000. The tax 7. On January 2, 2019, Midland Company purchased a
rate is 30%. In accordance with PAS12 Income taxes, machine for P1,400,000. This machine has a 5-year
what is the deferred tax balance in respect of this asset useful life, a residual value of P200,000, and is
at 31 December 2020? depreciated using the straight-line method for financial
a. P9,000 asset c. P2,700 asset statement purposes. For tax purposes, depreciation
b. P2,700 liability d. P9,000 liability expense was P500,000 for 2019 and P400,000 for
2020. Midland’s 2020 income before tax and
3. For the year ended December 31, 2020, Talisay depreciation expense was P2,000,000 and its tax rate
Company reported accounting profit of P9,500,000. was 35%. If Midland has made no estimated tax
Its taxable profit was P9,000,000. The difference is payments during 2020, what amount of current income
due to accelerated depreciation for income tax tax liability would Midland report in its December 31,
purposes. The income tax rate is 35% and Talisay 2020 statement of financial position?
made estimated tax payment during 2020 of a. P385,000 c. P525,000
P1,000,000. What should Talisay report as current tax b. P560,000 d. P700,000
payable as of December 31, 2020?
a. P3,150,000 c. P3,325,000 8. Porter Limited owned Land that had been previously
b. P2,150,000 d. P2,325,000 revalued up ward by P600,000. The Land will be
revalued downwards at the current reporting date by
4. At December 31, 2020 Mindoro Corporation’s taxable P200,000. If the company rate of tax is 30%, the
profit is P5,000,000. The following items are the impact of this revaluation on the ‘asset revaluation
temporary differences that caused Mindoro’s income in surplus’ account is:
the income tax return to differ from the amount a. DR P420,000 c. DR P140,000
reported in the income statement: Future deductible b. CR P180,000 d. CR P60,000
amounts expected to reverse in 2021 of P400,000 and
future taxable amounts expected to reverse in 2021 9. Which of the following statements is correct regarding
and 2022 of P500,000 and P900,000, respectively. deferred taxes under PAS 12?
Mindoro’s income tax rate is 35%. The income tax a. Income tax payable plus or minus the change in
expense reported by Mindoro in its December 31, 2020 deferred income taxes equals income tax expense.
income statement is b. The current portion of income tax expense is the
a. P2,100,000 c. P1,750,000 amount of change in deferred taxes related to the
b. P1,400,000 d. P1,785,000 current period.
c. In computing income tax expense, a company
5. On its December 31. 2020 statement of financial deducts an increase in a deferred tax liability to
position, Rexa Company had income tax payable of income tax payable.
P260,000 and a deferred tax asset of P400,000. d. All of the choices are correct.

Rexa had reported a deferred tax asset of P300,000 at 10. A Company reported a tax loss in its first year of
December 31, 2019. No estimated tax payments were operations. The company’s management believes it is
made during 2020. At December 31, 2020, Rexa more likely than not that the tax loss will be utilized in
determined that it was probable that the deferred tax the future. There were no temporary differences during
asset would be realized. the year. Which of the following best describes the
impact of the tax loss on the financial statements?
In its 2020 income statement, what amount should
a. Tax receivable increases assets; net loss is
Rexa report as total income tax expense?
reduced; retained earnings increases.
a. P260,000 c. P170,000
b. Deferred tax asset (loss carryforward) is
b. P150,000 d. P160,000
recognized; net loss is increased; retained
earnings decreases.
6. The tax return of La Carlota Company indicates taxable
c. Deferred tax liability (loss carryforward) is
profit of P15,000,000 on which a tax liability of
recognized; net loss is reduced; retained earnings
P5,250,000 has been recognized. Following is a list of
increases.
items that may be required to determine accounting
d. Deferred tax asset (loss carryforward) is
profit from the amount of taxable profit.
recognized; net loss is reduced; retained earnings
increases.

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