IFA, IL 01, FR222

Intermediate Financial Accounting

Topic:
Accounting for Income Taxes

IAS-12
(Theory + MCQ + Math & Previous Year Questions)

Mizanur Robel,

WhatsApp: +8801710500610

https://www.facebook.com/mizanur.robel.9

ICMAB Previous Year Questions Scenario 2021 Syllabus

January_2022 May_2022 September_2022 January_2023 May_2023 September_2023 January_2024
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Accounting for Income Taxes

IAS 12, Income Taxes, deals with taxes on income, both current tax and deferred tax. Income tax
accounting is complex, and preparers and users find some aspects difficult to understand and
apply. These difficulties arise from exceptions to the principles in the current standard, and from
areas where the accounting does not reflect the economics of the transactions.

The current tax expense for a period is based on the taxable and deductible amounts that will be
shown on the tax return for the current year. Current tax assets and liabilities for the current and
prior periods are measured at the amount expected to be paid to or recovered from the tax
authorities, using the tax rates and tax laws that have been enacted or substantively enacted by
the date of the financial statements.

The tax base of an asset or liability is the amount attributed to it for tax purposes, based on the
expected manner of recovery. IAS 12 focuses on the future tax consequences of recovering an
asset only to the extent of its carrying amount at the date of the financial statements.

Deferred tax is provided in full for all temporary differences arising between the tax bases of
assets and liabilities and their carrying amounts in the financial statements. There are exceptions
where the temporary difference arises from:

 Initial recognition of goodwill.

 Initial recognition of an asset or liability in a transaction that is not a business combination
and that affects neither accounting profit nor taxable profit.
 Investments in subsidiaries, branches, associates and joint ventures where certain criteria
apply.

Pretax financial income is a financial reporting term. It also is often referred to as income
before taxes, income for financial reporting purposes, or income for book purposes. Companies
determine pretax financial income according to GAAP. They measure it with the objective of
providing useful information to investors and creditors.

Taxable income (income for tax purposes) is a tax accounting term. It indicates the amount used
to compute income taxes payable. Companies determine taxable income according to the Internal
Revenue Code (the tax code). Income taxes provide money to support government operations.

A deferred tax liability is the deferred tax consequences attributable to taxable temporary
differences. In other words, a deferred tax liability represents the increase in taxes payable in
future years as a result of taxable temporary differences existing at the end of the current
year.
A deferred tax asset is the deferred tax consequence attributable to deductible temporary
differences. In other words, a deferred tax asset represents the increase in taxes refundable
(or saved) in future years as a result of deductible temporary differences existing at the end
of the current year.

MCQ

1) Which of the following terms agrees with this definition: “profit or loss for a period before
tax expense”?
 Accounting profit
 Taxable profit
 Gross profit
 Operating profit

2) Current tax for current and prior periods shall, to the extent unpaid, be recognized as
__________.
 a liability
 a deferred tax liability
 an asset
 a deferred tax asset

3) Deferred tax assets or liabilities that will be recovered within 12 months are presented as
current assets or current liabilities in the balance sheet. True or false?

a. True
b. False

4) When the carrying amount of an asset is more than its tax base, is there a:

a. C100
b. C nil

5) Where can interest paid be classified?

a. financing activities;
b. operating activities;
c. operating or financing activities; or
d. operating, investing or financing activities.
6) When is a deferred tax liability recognized in a business combination?

a. When there is a temporary difference on goodwill that is not tax deductible

b. When there is temporary difference on acquisition accounting adjustments to the
carrying amount of identifiable assets and liabilities
c. When there are temporary differences both on goodwill that is not tax deductible and on
acquisition accounting adjustments to the carrying amount identifiable assets and
liabilities

7) Where is the adjustment to the deferred tax balances arising from the change in tax rates
in question 7 above recognized?

a. In profit or loss, as it arises from a change in tax law that is independent of the activities
of the entity
b. In equity, as it relates to deferred taxes arising prior to the change in tax rates
c. Either in profit or loss, other comprehensive income or equity depending on where
deferred tax was previously recognized

8) The income tax rate for undistributed profits is 30%. The income tax rate for distributed
profits is 40%. For many years, the entity has distributed 50% of its profits. How should the
deferred tax of undistributed profits be measured when no dividends have been declared?

a. At 30%
b. At 40%
c. At an average tax rate based on 30% and 40%
Math - Accounting for Income Taxes
1) Prime Ltd. commenced operations on 1 July 2006. The following financial information is
available for the years ended 30 June 2007 and 2008:
2007 2008
Taxable income 1,20,000 1,50,000
Assets and liabilities as disclosed in the balance sheet
ASSETS
Cash 30,000 45,000
Inventory 35,000 65,000
Accounts receivable 1,20,000 1,35,000
less allow. for doubt. debts (10,000) 6,000
1,10,000 1,29,000
Prepaid insurance 14,000 13,000
Plant –cost 1,50,000 1,50,000
less accumulated depreciation (30,000) 60,000
120,000 90,000
Total assets 3,09,000 3,42,000
LIABILITIES
Accounts payable 45,000 66,000
Unearned revenue 5,000 3,000
Provision for annual leave 4,000 6,000
Total liabilities 54,000 75,000
Net assets 2,55,000 2,67,000
Other information:
(1) The plant is depreciated over 5 years for accounting purposes, but over 3 years for taxation
purposes.
(2) Revenue received in advance by the company is assessable for tax purposes in the year in
which it is received.
(3) The tax rate is 30 per cent.
Required:
(i) Determine the deferred taxes, and prepare the journal entries to account for the income tax
for the year ended 30 June 2007. Use a tax worksheet.
(ii) Determine the deferred taxes, and prepared the journal entries to account for the income tax
for the year ended 30 June 2008. Use a tax worksheet.
(iii) Show the ledger accounts for the deferred tax asset and the deferred tax liability after the
above entries.
[CMA Exam January 2023]
 2) Wise Company began operations at the beginning of 2018. The following information
pertains to this company.
1. Pretax financial income for 2018 is €100,000.
2. The tax rate enacted for 2018 and future years is 40%.
3. Differences between the 2018 income statement and tax return are listed below:
(i) Warranty expense accrued for financial reporting purposes amounts to €7,000. Warranty
deductions per the tax return amount to €2,000.
(ii) Income on construction contracts using the percentage-of-completion method per
books amounts to €92,000. Income on construction contracts for tax purposes amounts
to €67,000.
(iii) Depreciation of property, plant, and equipment for financial reporting purposes
amounts to €60,000. Depreciation of these assets amounts to €80,000 for the tax return.
(iv) A €3,500 fine paid for violation of pollution laws was deducted in computing pretax
financial income.
(v) Interest revenue recognized on an investment in tax-exempt bonds amounts to €1,500.
4. Taxable income is expected for the next few years.
Instructions
1) Compute taxable income for 2018.
2) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes
payable for 2018.
3) Draft the income tax expense section of the income statement, beginning with “Income before
income taxes.”
[Kieso P19-9, CMA Exam September 2022]

3) The accounting records of Shinault Inc. show the following data for 2015.
1. Equipment was acquired in early January for $300,000. Straight-line depreciation over a 5-year
life is used, with no residual value. For tax purposes, Shinault used a 30% rate to calculate
depreciation.
2. Interest revenue on governmental bonds totaled $4,000.
3. Product warranties were estimated to be $50,000 in 2015. Actual repair and labor costs related
to the warranties in 2015 were $10,000. The remainder is estimated to be paid evenly in 2016 and
2017.
4. Sales on an accrual basis were $100,000. For tax purposes, $75,000 was recorded on the
installment sales method.
5. Fines incurred for pollution violations were $4,200.
6. Pretax financial income was $750,000. The tax rate is 30%.
Instructions:
(i) Prepare a schedule starting with pretax financial income in 2015 and ending with taxable
income in 2015.
(ii) Prepare the journal entry for 2015 to record income taxes payable, income tax expense, and
deferred income taxes.
[Kieso P19-4, CMA Exam May 2022]
 4) The following information has been obtained for Gocker Corporation.
1. Prior to 2017, taxable income and pretax financial income were identical.
2. Pretax financial income is $1,700,000 in 2017 and $1,400,000 in 2018.
3. On January 1, 2017, equipment costing $1,200,000 is purchased. It is to be depreciated on a
straight-line basis over 5 years for tax purposes and over 8 years for financial reporting purposes.
(Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.)
4. Interest of $60,000 was earned on tax-exempt municipal obligations in 2018.
5. Included in 2018 pretax financial income is a gain on discontinued operations of $200,000,
which is fully taxable.
6. The tax rate is 35% for all periods.
7. Taxable income is expected in all future years.
Instructions
(a) Compute taxable income and income taxes payable for 2018.
(b) Prepare the journal entry to record 2018 income tax expense, income taxes payable, and
deferred taxes.
(c) Prepare the bottom portion of Gocker’s 2018 income statement, beginning with “Income from
continuing operations before income taxes.”
(d) Indicate how deferred income taxes should be presented on the December 31, 2018, balance
sheet.
[Kieso P19-3]

5) The following information is available for Remmers Corporation for 2015.

1. Depreciation reported on the tax return exceeded depreciation reported on the income
statement by $160,000. This difference will reverse in equal amounts of $40,000 over the years
2016–2019.
2. Interest received on governmental bonds was $10,000.
3. Rent collected in advance on January 1, 2015, totaled $90,000 for a 3-year period. Of this
amount, $60,000 was reported as unearned at December 31 for book purposes.
4. The tax rates are 40% for 2015 and 30% for 2016 and subsequent years.
5. Income taxes of $320,000 are due per the tax return for 2015.
6. No deferred taxes existed at the beginning of 2015.
Instructions:
(i) Compute taxable income for 2015.
(ii) Compute pretax financial income for 2015.
(iii) Prepare the journal entries to record income tax expense, deferred income taxes, and income
taxes payable for 2015 and 2016. Assume taxable income was $980,000 in 2016.
[Kieso P19-1, CMA Exam January 2022]
 6) South Carolina Corporation has one temporary difference at the end of 2017 that will
reverse and cause taxable amounts of $55,000 in 2018, $60,000 in 2019, and $65,000 in
2020. South Carolina’s pretax financial income for 2017 is $300,000, and the tax rate is 30%
for all years. There are no deferred taxes at the beginning of 2017.
Instructions:
(a) Compute taxable income and income taxes payable for 2017.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income
taxes payable for 2017.
(c) Prepare the income tax expense section of the income statement for 2017, beginning with the
line “Income before income taxes.”
[Kieso E19-1]

7) Bandung Corporation began 2017 with a $92,000 balance in the Deferred Tax Liability
account. At the end of 2017, the related cumulative temporary difference amounts to
$350,000, and it will reverse evenly over the next 2 years. Pretax accounting income for
2017 is $525,000, the tax rate for all years is 40%, and taxable income for 2017 is $405,000.
Instructions
(a) Compute income taxes payable for 2017.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income
taxes payable for 2017.
(c) Prepare the income tax expense section of the income statement for 2017 beginning with the
line “Income before income taxes.”
[Kieso E19-3]

8) Zurich Company reports pretax financial income of $70,000 for 2017. The following items
cause taxable income to be different than pretax financial income.
1. Depreciation on the tax return is greater than depreciation on the income statement by $16,000.
2. Rent collected on the tax return is greater than rent recognized on the income statement by
$22,000.
3. Fines for pollution appear as an expense of $11,000 on the income statement.
Zurich’s tax rate is 30% for all years, and the company expects to report taxable income in all
future years. There are no deferred taxes at the beginning of 2017.
Instructions
(a) Compute taxable income and income taxes payable for 2017.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income
taxes payable for 2017.
(c) Prepare the income tax expense section of the income statement for 2017, beginning with the
line “Income before income taxes.”
(d) Compute the effective income tax rate for 2017.
[Kieso E19-4]
 9) The following facts relate to Krung Thep Corporation.
1. Deferred tax liability, January 1, 2017, $40,000.
2. Deferred tax asset, January 1, 2017, $0.
3. Taxable income for 2017, $95,000.
4. Pretax financial income for 2017, $200,000.
5. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts,
$240,000.
6. Cumulative temporary difference at December 31, 2017, giving rise to future deductible
amounts, $35,000.
7. Tax rate for all years, 40%.
8. The company is expected to operate profitably in the future.
Instructions
(a) Compute income taxes payable for 2017.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income
taxes payable for 2017.
(c) Prepare the income tax expense section of the income statement for 2017, beginning with the
line “Income before income taxes.”
[Kieso E19-5]

10) The following facts relate to Duncan Corporation.

1. Deferred tax liability, January 1, 2017, $60,000.
2. Deferred tax asset, January 1, 2017, $20,000.
3. Taxable income for 2017, $105,000.
4. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts,
$230,000.
5. Cumulative temporary difference at December 31, 2017, giving rise to future deductible
amounts, $95,000.
6. Tax rate for all years, 40%. No permanent differences exist.
7. The company is expected to operate profitably in the future.
Instructions
(a) Compute the amount of pretax financial income for 2017.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income
taxes payable for 2017.
(c) Prepare the income tax expense section of the income statement for 2017, beginning with the
line “Income before income taxes.”
(d) Compute the effective tax rate for 2017.
[Kieso E19-10]
 11) Jennifer Capriati Corp. has a deferred tax asset account with a balance of $150,000 at the
end of 2016 due to a single cumulative temporary difference of $375,000. At the end of
2017, this same temporary difference has increased to a cumulative amount of $450,000.
Taxable income for 2017 is $820,000. The tax rate is 40% for all years. No valuation account
related to the deferred tax asset is in existence at the end of 2016.
Instructions
(a) Record income tax expense, deferred income taxes, and income taxes payable for 2017,
assuming that it is more likely than not that the deferred tax asset will be realized.
(b) Assuming that it is more likely than not that $30,000 of the deferred tax asset will not be
realized, prepare the journal entry at the end of 2017 to record the valuation account.
[Kieso E19-12]

12) The differences between the book basis and tax basis of the assets and liabilities of Castle
Corporation at the end of 2016 are presented below
Book Basis Tax Basis
Accounts receivable $50,000 $–0–
Litigation liability 30,000 –0–
It is estimated that the litigation liability will be settled in 2017. The difference in accounts
receivable will result in taxable amounts of $30,000 in 2017 and $20,000 in 2018. The company
has taxable income of $350,000 in 2016 and is expected to have taxable income in each of the
following 2 years. Its enacted tax rate is 34% for all years. This is the company’s first year of
operations. The operating cycle of the business is 2 years.
Instructions
(a) Prepare the journal entry to record income tax expense, deferred income taxes, and income
taxes payable for 2016.
(b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2016.
[Kieso E19-20]

13) A company reports an accounting profit of $350,000. Included in the profit is $100,000 of
proceeds from a life insurance policy for one of the key executives who passed away during
the year. These proceeds are not taxable. As well, the company charged accounting
depreciation that was $20,000 greater than the capital allowances claimed for tax
purposes.
Required:
Calculate the amount of taxes payable and the income tax expense for the year. The current tax
rate is 20%.
[Roestel, E15-2]
 14) In 2021, Pryderi Inc. completed its first year of operations and reports a net profit of
$3,500,000, which included revenue from construction and other projects. During the year,
the company started a large construction project that it expected would take two years to
complete. The company uses the percentage of completion method for accounting
purposes and reported a profit from this project of $900,000. All other projects were
completed during the year. For tax purposes, the company reports profits on construction
projects only when the project is finished. Also, the company reported the following with
respect to its property, plant, and equipment:
Total cost $6,800,000
Accumulated depreciation 1,200,000
Tax base 4,500,000
Note: The currently enacted corporate tax rate is 30%.
Required:
a. Calculate the year-end balances for deferred taxes and current taxes payable.
b. Prepare the journal entries to record the taxes for 2021.
c. Prepare the income statement presentation of the tax amounts.
[Roestel, E15-3]

15) In Y8, Lyons Inc. has accounting income of $347,800. Lyons has a tax rate of 30%, has a
year end of December 31 and follows IFRS Prior to Y8, Lyons had no temporary differences.
In Y8, Lyons incurred a fine of $10,250 and paid the CEO’s life insurance of $14,550. Neither
of these items are deductible for tax purposes. Lyons recorded warranty accruals at
December 31, Y8 of $75,000. The reversing difference will cause deductible amounts of
$36,000 in Y9 and $39,000 in Y10. Because of specific incentives, CCA (Capital Cost
Allowance) was $124,900 higher than straight-line depreciation.
Required:
1. Determine the taxable income.
2. Prepare the entry to record Y8 taxes.
3. Prepare the appropriate income statement section relating to income taxes
[Roestel, E15-13]

16) In 20X8 Darton Ltd had taxable profits of CU120,000. In the previous year (20X7) income
tax on 20X7 profits had been estimated as CU30,000.

Calculate tax payable and the charge for 20X8 if the tax due on 20X7 profits was
subsequently agreed with the tax authorities as:
(a) CU35,000; or
(b) CU25,000.
Any under or over payments are not settled until the following year's tax payment is due.
Assume a tax rate of 30%.
[CA Manual P-69]