POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

College of Accountancy and Finance

Updates in Financial Reporting Standard
Quiz 1 (Midterm): INCOME TAXES
1st Semester A.Y. 2024-2025

Name : _______________________Course, Year & Section: __________Date:_________Score: ____________

General Instructions: Faith is the confidence that what we hope for will happen; it gives us assurance about things
we cannot see. Have faith and always bear in your mind that you can answer everything to the best that you can.
Always observe HONESTY during the examination. GODBLESS!

THEORIES (1pt. each)

1. Which of the following creates a permanent difference between financial income and taxable income?
A. Interest received on government bonds
B. Unrealized gain (loss) at FVPL
C. Unearned rent revenue
D. Accelerated cost recovery on plant and equipment

2. A major distinction between temporary and permanent differences is

A. permanent differences are not representative of acceptable accounting practice.
B. temporary differences occur frequently, whereas permanent differences occur only once.
C. once an item is determined to be a temporary difference, it maintains that status; however, a permanent
difference can change in status with the passage of time.
D. temporary differences reverse themselves in subsequent accounting periods, whereas permanent
differences do not reverse.

3. Discounting of tax expense is allowed for

A. Current tax expense
B. Deferred tax expense
C. Current tax and deferred tax expense
D. None of the foregoing

4. Which of the following guidance on measuring deferred taxes is incorrect?

A. Where the tax rate or tax base is impacted by the manner in which the entity recovers its assets or settles
its liabilities, the measurement of deferred taxes is consistent with the way in which an asset is recovered
or liability settled.
B. Where deferred taxes arise from revalued non-depreciable assets, deferred taxes reflect the tax conse-
quences of selling the asset.
C. Deferred taxes arising from investment property measured at fair value reflect the rebuttable presump-
tion that the investment property will not be recovered through sale.
D. If dividends are paid to shareholders, and this causes income taxes to be payable at a higher or lower
rate, or the entity pays additional taxes or receives a refund, deferred taxes are measured using the tax
rate applicable to undistributed profits.

5. For deferred tax accounting, which of the following will have a carrying amount of zero?
A. Revenue received in advance
B. Case when tax bases not immediately apparent
C. Unrecognized items with tax base
D. All of the foregoing

6. A temporary difference which would result in a deferred tax liability?

A. Accrual of estimated litigation loss
B. Provision for uncollectible accounts
C. Unearned subscription revenue taxable when collected
D. An installment sale included in accounting income at point of sale and taxable when collected

7. Tax expense to be recognized for the current period includes

A. Current tax expense
B. Deferred tax expense
C. Current tax plus deferred tax expense
D. Current tax expense minus deferred tax expense

8. Deferred tax assets and deferred tax liabilities may be offset in the statement of financial position if
A. They qualify to be recognized as current assets and current liabilities, respectively.
B. The entity has the legal right to settle current tax amounts on a net basis and the deferred tax amounts
are levied by the same taxing authority.
C. The entity expects that the temporary difference will reverse within a period of 12 months or less.

Quiz 1 (MT) 1- NAB

 D. The entity has the legal right to settle current tax amounts on a net basis and the deferred tax amounts
are levied by different taxing authority.

9. When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be
A. handled retroactively in accordance with the guidance related to changes in accounting principles.
B. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases
a deferred tax asset.
C. reported as an adjustment to tax expense in the period of change.
D. applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax
rate change, but not subsequent to the date of the change.

10. Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance
sheet if
A. it is probable that a future tax rate change will occur.
B. it appears likely that a future tax rate will be greater than the current tax rate.
C. the future tax rates have been enacted into law.
D. it appears likely that a future tax rate will be less than the current tax rate.

11. Recognition of tax benefits in the loss year due to a loss carryforward requires
A. the establishment of a deferred tax liability.
B. the establishment of a deferred tax asset.
C. the establishment of an income tax refund receivable.
D. only a note to the financial statements.

12. Accounting for income taxes can result in the reporting of deferred taxes as any of the following except
A. a current or long-term asset.
B. a current or long-term liability.
C. a contra-asset account.
D. All of these are not acceptable methods of reporting deferred taxes.
E. All of these are acceptable methods of reporting deferred taxes.

13. All of the following are procedures for the computation of deferred income taxes except to
A. identify the types and amounts of existing temporary differences.
B. measure the total deferred tax liability for taxable temporary differences.
C. measure the total deferred tax asset for deductible temporary differences and operating loss carryforward
on the extent realizable.
D. All of these are procedures in computing deferred income taxes.

14. Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is
recognized in financial income?
A. Subscriptions received in advance.
B. Prepaid royalty received in advance.
C. An installment sale accounted for on the accrual basis for financial reporting purposes and on the
installment (cash) basis for tax purposes.
D. Interest received on a municipal obligation.

15. Assuming a 25% statutory tax rate applies to all years involved, which of the following situations will give rise
to reporting a deferred tax liability on the balance sheet?
I- A revenue is deferred for financial reporting purposes but not for tax purposes.
II- A revenue is deferred for tax purposes but not for financial reporting purposes.
III- An expense is deferred for financial reporting purposes but not for tax purposes.
IV- An expense is deferred for tax purposes but not for financial reporting purposes.
A. item II only C. items II and III only
B. items I and II only D. items I and IV only

16. On December 31, 2023, statement of financial position, Sowoozoo Corporation reports an accrued receivable for
financial reporting purposes but not for tax purposes. When this asset is recovered in 2024, a future taxable amount
will occur and
A. pretax financial income will exceed taxable income in 2024.
B. Sowoozoo will record a decrease in a deferred tax liability in 2024.
C. total income tax expense for 2021 will exceed current tax expense for 2024.
D. Sowoozoo will record an increase in a deferred tax asset in 2024.

17. Taxable income of a corporation

A. differs from accounting income due to differences in intraperiod allocation between the two methods of
income determination.
B. differs from accounting income due to differences in interperiod allocation and permanent differences
between the two methods of income determination.
Quiz 1 (MT) 2- NAB
 C. is based on generally accepted accounting principles.
D. is reported on the corporation's income statement.

18. Which of the following items results in a temporary difference deductible amount for a given year?
A. Premiums on officer's life insurance (company is beneficiary)
B. Premiums on officer's life insurance (officer is beneficiary)
C. Vacation pay accrual
D. Accelerated depreciation for tax purposes, straight-line for financial reporting purposes

19. On the statement of cash flows using the indirect method, an increase in the deferred tax liability would be shown
as
A. an addition to net income after tax. C. an increase in investing activities.
B. a deduction from net income after tax. D. an increase in financing activities.

20. Which of the following is not a disclosure related to income taxes based on IAS 12?
A. Any adjustments recognized in the period for prior tax of current period.
B. The amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new
taxes.
C. the amount of tax expense (income) relating to those changes in accounting policies and errors that are
included in profit or loss in accordance with IAS 8, because they cannot be accounted for retrospectively.
D. The amount of deferred tax expense (income) relating to the origination and reversal of temporary
differences.

PROBLEMS (2pts. each)

21. Hershey Corporation has one temporary difference at the end of 2024 that will reverse and cause taxable amounts
of P55,000 in 2025, P60,000 in 2026, and P65,000 in 2027. Hershey’s pretax financial income for 2024 is P300,000,
and the tax rate is 25% for all years. There are no deferred taxes at the beginning of 2024. How much is the income
tax payable as of December 31, 2024? __________________

22. Hershey Corporation has one temporary difference at the end of 2024 that will reverse and cause taxable amounts
of P55,000 in 2025, P60,000 in 2026, and P65,000 in 2027. Hershey’s pretax financial income for 2024 is P300,000,
and the tax rate is 25% for all years. There are no deferred taxes at the beginning of 2024. How much is the net
income after tax as of December 31, 2024? ________________________

23. The following information is available for Hershey Corporation for 2023 (its first year of operations).
1. Excess of tax depreciation over book depreciation, P40,000. This P40,000 difference will reverse equally over the
years 2024–2027.
2. Deferral, for book purposes, of P20,000 of rent received in advance. The rent will be recognized in 2024.
3. Pretax financial income, P300,000.
4. Tax rate for all years, 25%.
How much is the total income tax expense on Dec. 31, 2024 if the taxable income for 2024 is P325,000? ________

24. Hershey Company shows P1,000,000 pretax net income for Year 1. Tax rate is 30%. The following items and
amounts were observed in the tax return and income statement, respectively:
• Rent income- P70,000; 120,000
• Depreciation- P280,000; P220,000
• Premium on officers life insurance (the company is the beneficiary)- P90,000
The provision for income tax for Year 1 is
A. P294,000 B. P300,000 C. P327,000 D. P360,000

25. Hershey Co. is in the first year of operations during 2024. The entity reported pretax accounting income of
P4,000,000 and provided the following items:
• Premium on life insurance of key officer (company is the beneficiary)- P100,000
• Depreciation on tax return in excess of book depreciation- P120,000
• Interest on government bonds- P53,000
• Warranty expense- P40,000
• Actual warranty repairs- P33,000
• Bad debt expense- P14,000
• Beginning balance in allowance for uncollectible accounts- P0
• Ending balance in allowance for uncollectible accounts- P8,000
• Rent received in advance that will be recognized evenly over the next three years 240,000
What is the taxable income for 2024?
A. P4,182,000 B. P4,102,000 C. P4,047,000 D. P4,082,000

26. Cadbury Co. reported the following information during the first year of operations:
• Pretax financial income- P8,000,000
• Nontaxable interest received- P250,000

Quiz 1 (MT) 3- NAB

 • Long-term loss accrual in excess of deductible amount- P500,000
• Tax depreciation in excess of financial depreciation- P1,250,000
• Income tax rate- P30%
What is the total tax expense?
A. P2,400,000 B. P2,325,000 C. P2,100,000 D. P2,175,000

27. Cadbury Company had cumulative taxable temporary differences on December 31, 2024 and December 31, 2023
of P1,350,000 and P960,000, respectively. The tax rate for 2020 is 40% while the tax rate for future year is 30%.
Taxable income for 2024 is P2,400,000 and there are no permanent differences. What is the pretax financial income
for 2024?
A. P3,750,000 B. P2,790,000 C. P2,010,000 D. P1,050,000

28. Cadbury Company paid P200,000 in January 2024 for fire insurance premiums on two-year policy. Additionally,
the financial statements for the year ended December 31, 2024, revealed that the entity paid P1,050,000 in income
tax during the year and also accrued estimated litigation loss of P2,000,000. The lawsuit was resolved in February
2025 at which time a P2,000,000 loss was recognized for tax purposes. The entity used the cash basis for tax purpose.
The tax rate is 30% for both 2024 and 2025. What amount should be reported as deferred tax asset on December
31, 2024?
A. P630,000 B. P540,000 C. P600,000 D. P570,000

29. In arriving at the profit before tax for the year ended December 31, 2024, Cadbury Company has accrued royalties
receivable of P200,000 and interest payable of 250,000. Both royalties and interest are dealt with on cash basis in
tax computations. What is the net temporary difference on December 31, 2024?
A. P450,000-taxable temporary difference C. P50,000-deductible temporary difference
B. P450,000-deductible temporary difference D. P50,000-taxable temporary difference

30. Cadbury Company has a non-current asset which had a carrying amount of P1,800,000 on December 31, 2024.
The tax base of the asset at that date was P900,000. The tax rate is 30%. What is the deferred tax balance in respect
of the asset on December 31, 2024?
A. P900,000 asset C. P270,000 asset
B. P270,000 liability D. P900,000 liability

31. Ferrero Rocher Company reported the following differences between the book basis and tax basis of asset and
liabilities on December 31, 2024, which is the end of the first-year operation:
• Installment accounts receivable- P1,000,000 where there is zero tax base
• Litigation liability- P200,000 where there is zero tax base
It is expected that the litigation liability will be settled in 2025. The difference in account receivable will result in
taxable amount of P600,000 in 2025 and P400,000 in 2026. The entity has a taxable income of 7,000,000 in 2024
and expected to have taxable income in each of the following two years. The income tax rate is 30%. What is the
current tax expense in 2024?
A. P2,400,000 B. P2,040,000 C. P2,100,000 D. P2,460,000

32. Ferrero Rocher Company reported pretax financial income of P6,200,000 for the current year. Included in other
income was P200,000 of interest revenue from government bonds held by the entity. The income statement included
depreciation expense of P50,000 for machine with the cost of P3,000,000. The income tax return reported P600,000
as depreciation on the machine. The enacted tax rate is 30% for the current year and future years. What is the current
tax expense for the current year?
A. P1,860,000 B. P1,800,000 C. P1,770,000 D. P1,830,000

33. Ferrero Rocher Inc.’s only temporary difference at the beginning and end of 2024 is caused by a P3,000,000 total
collectible amount for tax purposes for an installment sale of a plant asset, and the related receivable (only one-half
of which is classified as a current asset) is due in equal installments in 2025 and 2026. The related deferred tax
liability at the beginning of the year is P1,200,000. In the third quarter of 2024, a new tax rate of 34% is enacted into
law and is scheduled to become effective for 2025. Taxable income for 2024 is P5,000,000, and taxable income is
expected in all future years. How much is the deferred tax liability on December 31, 2024? _________________

34. Ferrero Rocher Inc., in its first year of operations, has the following differences between the book basis and tax
basis of its assets and liabilities at the end of 2024:
• Book basis equipment (net)- P400,000
• Tax basis Equipment (net)- P340,000
• Book basis estimated warranty liability- P200,000
• Tax basis estimated warranty liability- P0
It is estimated that the warranty liability will be settled in 2025. The difference in equipment (net) will result in
taxable amounts of P20,000 in 2025, P30,000 in 2026, and P10,000 in 2027. The company has taxable income of
P520,000 in 2024. As of the beginning of 2024, the enacted tax rate is 34% for 2024–2026, and 30% for 2027.
Ferrero Rocher expects to report taxable income through 2027. How much is the net deferred tax benefit on
December 31, 2024? _________________________

Quiz 1 (MT) 4- NAB

35. The following information is available for Ferrero Rocher Corporation for 2024.
1. Depreciation reported on the tax return exceeded depreciation reported on the income statement by P120,000. This
difference will reverse in equal amounts of P30,000 over the years 2025–2028.
2. Interest received on municipal bonds was P10,000.
3. Rent collected in advance on January 1, 2024, totaled P60,000 for a 3-year period. Of this amount, P40,000 was
reported as unearned on December 31, 2024, for book purposes.
4. The tax rates are 40% for 2024 and 35% for 2025 and subsequent years.
5. Income taxes of P320,000 are due per the tax return for 2024.
6. No deferred taxes existed at the beginning of 2024
How much is the pretax accounting income for 2024? _______________________

36. The accounting records of M&M Inc. show the following data for 2024 (its first year of operations).
1. Life insurance expense on officers (where the company is the beneficiary) was P9,000.
2. Equipment was acquired in early January for P300,000. Straight-line depreciation over a 5-year life is used, with
no salvage value. For tax purposes, M&M used a 30% rate to calculate depreciation.
3. Interest revenue on Bangko Sentral ng Pilipinas bonds totaled P4,000.
4. Product warranties were estimated to be P50,000 in 2020. Actual repair and labor costs related to the warranties
in 2024 were P10,000. The remainder is estimated to be paid evenly in 2025 and 2026.
5. Gross profit on an accrual basis was P100,000. For tax purposes, P75,000 was recorded on the installment-sales
method.
6. Fines incurred for pollution violations were P4,200.
7. Pretax financial income was P750,000. The tax rate is 30%.
If the company pays income taxes amounting to P100,000 during the year, how much is the income tax payable
at the end of 2024? _________________________

37. M&M Company’s income statement for the year ended December 31, 2020 (considered as the fifth year of
operations), shows pretax income of P3,000,000. The company’s tax rate for 2020 is 30%. The following items are
treated differently on the tax return and in the accounting records:
Tax Return Accounting Records
Rent revenue P140,000 P240,000
Depreciation expense 560,000 440,000
Premium on officers' life insurance and the family is
the beneficiary 280,000
The records also show that the net sales are P60M; cost of goods sold is P29M; sales returns and allowances,
P550,000; & sales discounts, P650,000. What is the income tax payable for 2020? (Apply the pre-CREATE law
rulings) __________________________________

38. M&M Company made the following journal entry in late 2024 for rent on property it leases to a lessee:
Cash 60,000
Unearned Rent 60,000
The payment represents rent for the years 2025 and 2026, the period covered by the lease. M&M Company is a cash
basis taxpayer. M&M has income tax payable of P92,000 at the end of 2024, and its tax rate is 35%. What amount
of income tax expense should M&M Company report at the end of 2024?
A. P53,000
B. P71,000
C. P81,500
D. P113,000

39. For calendar year 2024, M&M Corp. reported depreciation of P1,200,000 in its income statement. On its 2024
income tax return, M&M reported depreciation of P1,800,000. M&M's income statement also included P225,000
accrued warranty expense that will be deducted for tax purposes when paid. M&M's enacted tax rates are 30% for
2024 and 2025, and 24% for 2026 and 2027. The depreciation difference and warranty expense will reverse over the
next three years as follows:
Depreciation Difference Warranty Expense
2025 P240,000 P 45,000
2026 210,000 75,000
2027 150,000 105,000
P600,000 225,000
These were M&M 's only temporary differences. In M&M's 2024 income statement, the deferred portion of its
provision for income taxes should be
A. P200,700
B. P112,500
C. P101,700
D. P109,800

40. M&M Company began operations in 2024. Included in its 2024 financial statements were bad debts expense of
P1,400,000 and profit from an installment sale of P2,600,000. For tax purposes, the bad debts will be deducted and
Quiz 1 (MT) 5- NAB
the profit from the installment sale will be recognized in 2024. The enacted tax rates are 35% in 2024 and 38% in
2025. In its 2024 income statement, what amount should M&M report as deferred portion of income tax expense?
A. P1,520,000
B. P1,400,000
C. P456,000
D. P420,000

41. Lindt & Sprüngli Company leased a building and received the P3,600,000 annual rental payment on June 15,
2020. The lease starts on July 1, 2020. Rental income is taxable when received. Lindt & Sprüngli’s tax rates are 30%
for 2020 and 35% thereafter. Lindt & Sprüngli had no other permanent or temporary differences. Lindt & Sprüngli
determined that any deferred tax asset is fully realizable. What amount of deferred tax asset should Lindt &
Sprüngli report in its December 31, 2020, balance sheet?
A. P540,000
B. P630,000
C. P1,080,000
D. P1,260,000

42. Lindt & Sprüngli Company reported depreciation of P250,000 on its 2024 tax return. However, in its 2024 income
statement, Lindt & Sprüngli reported depreciation of P100,000. The difference in depreciation is a temporary
difference that will reverse over time. Assuming that Lindt & Sprüngli’s tax rate is constant at 30%, what amount
should be added to the deferred income tax liability in 2024?
A. P75,000
B. P45,000
C. P37,500
D. P30,000

43. For the year ended December 31, 2024, Lindt & Sprüngli Company, reported pretax financial income of
P7,500,000. Its taxable income was P6,500,000. The difference is due to accelerated depreciation for income tax
purposes. Income tax rate for all years is 30% and Lindt & Sprüngli made estimated tax payments during the year
amounting to P900,000 relating to 2024 profit. What amount should Lindt & Sprüngli report as tax payable on
December 31, 2024?
A. P2,250,000
B. P1,950,000
C. P1,350,000
D. P1,050,000

44. The following facts relate to Lindt & Sprüngli Corporation.

1. Deferred tax liability, January 1, 2024, P60,000.
2. Deferred tax asset, January 1, 2024, P20,000.
3. Taxable income for 2024, P105,000.
4. Cumulative temporary difference on December 31, 2024, giving rise to future taxable amounts, P230,000.
5. Cumulative temporary difference on December 31, 2024, giving rise to future deductible amounts, P95,000.
6. Tax rate for all years, 25%. No permanent differences exist.
7. The company is expected to operate profitably in the future.

How much is the net income after tax to be presented in the statement of comprehensive income for 2024?
_____________________

45. BONUS. Write a joke/pick-up line about income taxes.

--- End of Examination --

God bless ☺

Don’t be afraid. Just believe.

(Mark 5:36)

/nabergonia2024

Quiz 1 (MT) 6- NAB