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IA3 - Chapter 4

Intermediate Accounting 3 (Manuel L. Quezon University)

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CHAPTER 4
INCOME TAXES

Problems

4-1. 1. C 6. D 11. C
2. D 7. C 12. B
3. B 8. A 13. D
4. B 9. A / C*
5. D 10. C

*Based on IAS 12, a deferred tax asset results when the carrying amount of Goodwill is less than
its tax base.

4-2. (Carlos Corporation)

(a) a. Permanent difference - Nontaxable

b. Permanent difference - Nondeductible
c. Neither a permanent nor a temporary difference
d. Temporary difference Ð Taxable temporary difference
e. Temporary difference Ð Taxable temporary difference
f. Temporary difference Ð Deductible temporary difference
g. Temporary difference Ð Deductible temporary difference

(b) Pretax financial income P10,000,000

Add Nondeductible expenses (b) 400,000 400,000
Less Nontaxable income (a) (2,000,000)
Financial income subject to tax P 8,400,000
Add Future deductible amounts (f + g) 750,000 + 400,000 1,150,000
Less Future taxable amounts (d + e) 1,500,000 + 1,000,000 ( 2,500,000)
Taxable income P7,050,000

(c and d)

Income Tax Expense Ð Current 2,115,000

Income Tax Payable 2,115,000
30% x 7,050,000

Income Tax Expense Ð Deferred 750,000

Deferred Tax Liability 750,000
30% x 2,500,000

Deferred Tax Asset 345,000

Income Tax Expense Ð Deferred 345,000
30% x 1,150,000

or one compound entry may be made as follows:

Income Tax Expense Ð Current 2,115,000

Income Tax Expense Ð Deferred 405,000
Deferred Tax Asset 345,000
Income Tax Payable 2,115,000
Deferred Tax Liability 750,000

(e) Income tax expense:

Current P2,115,000
Deferred (750,000 Ð 345,000) 405,000
Total income tax expense P2,520,000

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Chapter 4 - Income Taxes

4-3. (Luzon Corporation)

(a) Pretax financial income P3,000,000

Future taxable amount (1,800,000)
Taxable income P1,200,000

Current income tax expense (30% x 1,200,000) P 360,000

Deferred tax liability, December 31, 2022

(1,800,000 x 30%) P 540,000

(b) Income Tax Expense Ð Current 360,000

Income Tax Expense Ð Deferred 540,000
Income Tax Payable (30% x 1.2M) 360,000
Deferred Tax Liability (30% x 1.8M) 540,000

4-4. (Visayas Corporation)

(a) Pre tax financial income P2,000,000

Future deductible amount 1,550,000
Taxable income P3,550,000

Current income tax expense (30% x 3,550,000) P1,065,000

Deferred tax asset, December 31, 2022

(1,550,000 x 30%) P 465,000

(b) Income Tax Expense-Current 1,065,000

Deferred Tax Asset 465,000
Income Tax Payable 1,065,000
Income Tax Benefit-Deferred 465,000

4-5. (Mindanao Corporation)

Income Tax Expense Ð Current 1,560,000

Deferred Tax Asset 600,000
Deferred Tax Liability 185,000
Income Tax Expense Ð Deferred (Benefit) 415,000
Income Tax Payable 1,560,000
30% x 5,200,000 = 1,560,000
30% x 2,000,000 = 600,000
(30% x 500,000) + (35% x 100,000) = 185,000

4-6. (Samar, Inc.)

Income Tax Expense Ð Current (30% x 2,000,000) P 600,000

Income Tax Expense Ð Deferred (267,000 Ð 72,000) 195,000
Income Tax Expense Ð Total P 795,000

Income Tax Payable (see above) P 600,000

Deferred Tax Asset (30% x 240,000) P 72,000

Deferred Tax Liability (530,000 + 360,000) x 30% P 267,000

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Chapter 4 - Income Taxes

4-7. (Bohol Company)

Taxable income P12,000,000

Future deductible amount:
Book depreciation in excess of tax depreciation (430,000)
Nontaxable income:
Interest on government securities 450,000
Pretax financial income P12,020,000

4-8. (Wall Services)

(a) Schedule of reversal of the temporary differences

2023 140,000 x 32% P 44,800
2024 320,000 x 34% 108,800
2025 240,000 x 36% 86,400
Total P240,000

Pretax financial income P2,200,000

Add nondeductible expenses 400,000
Less nontaxable revenues (140,000)
Financial income subject to tax P2,460,000
Future taxable amounts (700,000)
Taxable income P1,760,000
Tax rate x 30 %
Income tax payable P 528,000

Deferred tax liability (see above) P 240,000

(b) Income Tax Expense Ð Current 528,000

Income Tax Payable 528,000

Income Tax Expense Ð Deferred 240,000

Deferred Tax Liability 240,000

(c) Income from continuing operations before income tax P2,200,000

Income Tax Expense:
Current P528,000
Deferred 240,000 768,000
Profit P1,432,000

4-9. (Daniel Company)

(a)
Straight Line SYD Difference
2022 500,000 800,000 (300,000)
2023 500,000 600,000 (100,000)
2024 500,000 400,000 100,000
2025 500,000 200,000 300,000

Carrying Amount Tax Base Difference

12/31/2022 1,500,000 1,200,000 300,000
12/31/2023 1,000,000 600,000 400,000
12/31/2024 500,000 200,000 300,000
12/31/2025 0 0 0

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Chapter 4 - Income Taxes

2022 2023 2024 2025

Taxable income 800,000 890,000 1,200,000 1,500,000
Future taxable amount 300,000 100,000
Additional taxable amount
(reversal) ( 100,000) (300,000)
Pretax accounting income 1,100,000 990,000 1,100,000 1,200,000

(b) Deferred tax liability at the end of each year is as follows:

2022 300,000 x 30% P 90,000

2023 400,000 x 30% 120,000
2024 300,000 x 30% 90,000
2025 0 0

Journal entries to record income tax:

December 31, 2022

Income Tax Expense (30% x 800,000) 240,000

Income Tax Payable 240,000

Income Tax Expense-Deferred 90,000

Deferred Tax Liability 90,000

December 31, 2023

Income Tax Expense Ð current (30% x 890,000) 267,000

Income Tax Payable 267,000

Income Tax Expense Ð Deferred 30,000

Deferred Tax Liability 30,000
120,000 Ð 90,000 = 30,000

December 31, 2024

Income Tax Expense Ð Current 360,000
Income Tax Payable 360,000
30% x 1,200,000

Deferred Tax Liability 30,000

Income Tax Expense-Deferred (Benefit) 30,000
90,000 Ð 120,000 = 30,000 decrease

December 31, 2025

Income Tax Expense Ð Current 450,000

Income Tax Payable 450,000
30% x 1,500,000

Deferred Tax Liability 90,000

Income Tax Expense-Deferred (Benefit) 90,000
0 Ð 90,000 = 90,000 Decrease

(d)
2022 2023 2024 2025
Income Tax Expense:
Current P 240,000 P 267,000 P 360,000 P 450,000
Deferred (Benefit) 90,000 30,000 ( 30,000) (90,000)
Total Income Tax Expense P 330,000 P 297,000 P 330,000 P 360,000

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Chapter 4 - Income Taxes

(e)
2022 2023 2024 2025
Income before income tax P1,100,000 P 990,000 P1,100,000 P1,200,000
Less income tax expense
(see d) 330,000 297,000 330,000 360,000
Profit P 770,000 P 693,000 P 770,000 P 840,000

4-10. (Jude Company)

(a) Future taxable amount

Carrying amount of inventories > Tax Base P 100,000
Carrying amount of building & equipment > Tax Base 1,800,000
P 1,900,000
Future Deductible Amount
Carrying amount of accounts receivable < Tax Base P 200,000
Carrying amount of warranty > Tax Base 800,000
Carrying amount of unearned rent > Tax Base 500,000
P 1,500,000

(b) Income Tax Payable (5,000,000 X 30%) P 1,500,000

Deferred Tax Assets (1,500,000 x 30%) P 450,000
Deferred Tax Liability (1,900,000 x 30%) P 570,000

(c) Income Tax Expense-Current 1,500,000

Income Tax Payable 1,500,000
Income Tax Expense-Deferred 75,000
Deferred Tax Asset 75,000
450,000 Ð 525,000
Deferred Tax Liability 830,000
Income Tax Benefit-Deferred 830,000
1,400,000 Ð 570,000

4-11. (Emenem Company)

(a) Income Tax Expense Ð current 900,000

Income Tax Payable 900,000
30% x 3,000,000

Deferred Tax Asset 90,000

Income Tax Expense Ð Deferred 60,000
Deferred Tax Liability 150,000
30% x 800,000 = 240,000
240,000 Ð 150,000 = 90,000
30% x 1,500,000 = 450,000
450,000 Ð 300,000 = 150,000

(b) 1. Current income tax P 900,000

Deferred income tax 60,000
Total income tax expense P 960,000

2. Taxable income P3,000,000

Future taxable amount
1,500,000 Ð (300,000/30%) 500,000
Future deductible amount
800,000 Ð (150,000/30%) (300,000)
Accounting profit subject to tax P3,200,000

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Chapter 4 - Income Taxes

3. Accounting profit subject to tax P3,200,000

Non-taxable revenue 200,000
Non-deductible expense (600,000)
Accounting profit before income tax P2,800,000

4-12. (Capetown Company)

Tax rate (180,000/600,000) = 30%

Income Tax Expense Ð Current 300,000

Income Tax Payable 300,000
30% x 1,000,000

Deferred Tax Asset 60,000

Income Tax Benefit Ð Deferred 60,000
End (30% x 800,000) 240,000
Beg 180,000
Increase 60,000

4-13. (Conchita Corporation)

(a) Deferred tax liability, 12/31/2022

2M x 30% P600,000

(b) Income Tax Expense:

Current P900,000
Deferred (decrease in DTLiability) (40,000)
Total income tax expense P860,000

(c) Income Tax Expense Ð Current 900,000

Income Tax Payable 900,000
3M x 30%

Deferred Tax Liability 40,000

Income Tax Expense Ð Deferred 40,000
Beg. 640,000
End, revised due to
change in tax rate 600,000
Decrease in DTL 40,000

4-14. (Britanny Company)

(a) Income Tax Expense Ð Current

3M x 30% P900,000
Previous payment in 2022 500,000
Income Tax Payable, 12/31/2022 P400,000

(b) Income Tax Expense Ð Current 400,000

Income Tax Payable 400,000

Deferred Tax Liability 30,000

Deferred Tax Asset 30,000
DTL, 12/31/22 (400,000 x 30%) 120,000
DTL, 1/1/22 150,000
Decrease in DTL 30,000

DTA, 12/31/22 (200,000 x 30%) 60,000

DTA, 1/1/22 90,000
Decrease in DTA 30,000

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Chapter 4 - Income Taxes

(c) Total income tax expense

Current P900,000
Deferred -0-
Total income tax expense P900,000

Pretax profit P2,800,000

Income tax expense 900,000
Profit P1,900,000

4-15 (Persistent Company)

(a) Income Tax Expense Ð Current 700,000

Income Tax Payable 700,000

Deferred Tax Asset 100,000

Income Tax Benefit Ð Deferred 100,000

(b) Income Tax Expense Ð Current 700,000

Income Tax Payable 700,000

MULTIPLE CHOICE QUESTIONS

Theory

MC1 C MC6 D MC11 D MC16 C

MC2 A MC7 C MC12 C MC17 D
MC3 A MC8 D MC13 A MC18 B
MC4 A MC9 C MC14 D MC19 B
MC5 C MC10 C MC15 C MC20 D

Problems

MC21 B Deferred Income Tax Asset

3.6 M x 6/12=1.8M; 1.8M x 35% P630,000

MC22 B Future taxable amount (2.M Ð 1.2M) P800,000

MC23 B Future taxable amounts (2023-2025) 2,000,000

Future taxable amount (2026) 1,000,000
Deferred tax asset, December 31, 202
2.M x 30% 600,000
1M x 35% 350,000 P950,000

MC24 D Current income tax expense (10M x 30%) P3,000,000

MC25 A Income tax expense-deferred (DTL)

12,000 x 30% = (3,600)
20,000 x 35% = 7,000 3,400,000
Income tax benefit (DTA)
1,000 x 30%. = 300
3,000 x 35%. =1,050 1,350,000
Net deferred income tax expense P2,050,000

MC26 B Deferred tax asset (30% x 700,000) + (35% x 1,400,000) P700,000

Deferred tax liability (30% x 500,000) + (35% x 1,000,000) 500,000
Net deferred tax asset (has right to set off)-noncurrent P200,000

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Chapter 4 - Income Taxes

MC27 C Deferred Income Tax Asset, December 31, 2022

1,200,000 Ð 750,000 = 450,000; 450,000 x 35% P157,500

MC28 B Income Tax Payable, end of 2022

30 x 1,500,000 P450,000

MC29 D Deferred Income Tax Asset, December 31, 2022

30% x 6M P1,800,000

MC30 C Deferred Income Tax Liability, December 31, 2022 (all

noncurrent) 30% x 9M P2,700,000

MC31 D Difference in depreciation (42,000/30%) P140,000

Depreciation expense for financial reporting purposes 600,000
Depreciation Expense in the tax return P740,000

MC32 C Deferred Income Tax Liability

30% x (250,000 Ð 100,000) P45,000

MC33 D Pretax accounting profit P5,000,000

Nontaxable life insurance proceeds (900,000
Warranty expense incurred but unpaid (1,200,000)
Impairment loss on goodwill 200,000
Taxable income P5,500,000
Income tax rate 30%
Income Tax Payable P1,650,000

MC34 C Current income tax payable, December 31, 2022

200,000 Ð 40,000 = 160,000; 160,000 x 30% P48,000

MC35 B Deferred Income Tax Liability, December 31, 2022

(150,000 + 150,000) x 35% 105,000
150,000 x 30% 45,000 P150,000

MC36 B Deferred Income Tax Liability, December 31, 2022

95,000 x 38% P36,100

MC37 D Current income tax (6.5M x 30%) P1,950,000

Income tax payments (900,000)
Income Tax Payable, December 31, 2022 P1,050,000

MC38 C Future taxable amount P2,600,000

Future deductible amount 1,400,000
Net future deductible amount P1,200,000
Income tax rate in 2023 38%
Deferred portion of income tax expense P456,000

MC39 D Given P750,000

MC40 D Pretax financial income P2,000,000

Current income tax rate 30%
Income Tax Expense for 2022 P 600,000
or
Current income tax expense (3M x 30%) P900,000
Less deferred income tax benefit (5M Ð 4M) x 30% (300,000)
Income Tax Expense P600,000

MC41 C See MC42

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Chapter 4 - Income Taxes

MC42 C Pretax financial income P1,000,000

Future deductible amount (accrued warranty costs) 1,200,000
Future taxable amount (accrual basis profit>cash basis) (5,000,000)
Operating loss carryforward (for tax purposes) (P2,800,000)
Increase in deferred tax liability (5M x 30%) P1,500,000
Less increase in deferred tax asset
Warranty costs (1.2M x 30%) P360,000
Operating loss carryforward (2.8M x .4 x .3) 336,00 696,000
Income Tax Expense for 2022 P 804,000

MC43 D Difference in the amount of depreciation (172,500/30%) P 575,000

Depreciation expense recognized in the books 3,000,000
Depreciation Expense in the tax return P3,575,000

MC44 D Pretax financial income P1,800,000

Excess of tax depreciation over book depreciation (80,000)
Excess of income from installment for tax purposes over FI 60,000
Taxable income P1,780,000
Income tax rate 30%
Current income tax liability, December 31, 2022 P 534,000

MC45 B Pretax profit P2,000,000

Excess of rent income per books (240,000 Ð 140,000) (100,000)
Tax depreciation in excess of book depreciation
(560,000 Ð 440,000) (120,000)
Nondeductible life insurance premiums 180,000
Taxable profit P1,960,000
Income tax rate 30%
Income tax payable, December 31, 2022 P 588,000

MC46 A Pretax accounting profit P5,000,000

Non-taxable interest (500,000)
Non-deductible life insurance premiums 200,000
Future taxable amount (2,800,000 Ð 1,000,000) 1,800,000
Future deductible amount (10M Ð 6M) (4,000,000)
Taxable income P2,500,000
Income tax rate 30%
Income Tax Payable P 750,000

MC47 A Pretax accounting income P5,000,000

Restructuring charge recognized in the books but not
deductible for tax purposes (FDA) 400,000
Unrealized gain on FA at FVPL recognized in the books-FTA (600,000)
Taxable income P4,800,000
Income tax rate 30%
Current income tax expense P1,440,000

MC48 C Minimum Corporate Income Tax (MCIT) 2% x 35M) 700,000

Normal income tax (30% x 2.2M) 660,000
Deferred tax asset 40,000

MC49. C Deferred tax asset = (390,000 Ð 340,000) x 30% = P 15,000

Deferred tax liability = (500,000 Ð 420,000) x 30%= 24,000

MC50. A Income tax expense Ð current P200,000

Increase in deferred tax liability taken to profit or loss 24,000
Total income tax expense in profit or loss P224,000

Note: The amount of deferred tax benefit arising from recognition of deferred tax asset of
P15,000 relating to Financial Asset at FV through other Comprehensive Income shall be
taken as income tax benefit in other comprehensive income.

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