CHAPTER

BLUE NOTES
34 S
L
Accounting Income Taxable Income
 or financial income is the net income before  income for the period determined in
deducting income tax expense accordance with the rules established by the
taxation authorities upon which income taxes
are payable or recoverable

Permanent Differences Temporary Differences Timing Differences

 items of revenue and expenses  differences between the  differences between
which are included in either in carrying amount of an asset or accounting income and
accounting income or taxable liability and its tax base taxable income that
income but will never  include timing differences originate in one period
be included in the other  give rise to either deferred tax and reverse in one or
 pertain to non-deductible asset or liability more subsequent periods
expenses and non-taxable
revenue
 do not give rise to either
deferred tax asset or liability

Taxable Temporary Difference Deductible Temporary Difference

 temporary difference that will result in future  temporary difference that will result in future
taxable amount in determining taxable income of deductible amount in determining taxable
future periods when the carrying amount of the income of future periods when the carrying
asset or liability is recovered or settled amount of the asset or liability is recovered or
settled

Deferred Tax Liability is the amount of income tax payable in future periods with respect to a taxable temporary
difference.
Deferred tax liability arises from the following:
 the accounting income is higher than the taxable income because of timing differences
 the carrying amount of an asset is higher than its tax base
 the carrying amount of a liability is lower than its tax base*
Note: *Tax base is the amount attributable to the asset or liability for tax purposes

Recognition of Deferred Tax Liability

Shall be recognized for all taxable temporary differences
Exception:
When taxable temporary differences arises from:
 goodwill resulting from business combination and which is non-deductible for tax purposes
 initial recognition of an asset or liability in a transaction that is not a business combination and affects
neither accounting income nor taxable income
 undistributed profit of subsidiary, associate or joint venture when:
 the parent, investor or venturer is able to control the timing of the reversal of the temporary

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Chapter 34 – Accounting for Income Tax USL Blue Notes 131

difference
 it is probable that the temporary difference will not reverse in the foreseeable future

Temporary differences that technically are not timing differences but nevertheless give rise to deferred tax
liability:
 asset is revalued upward and no equivalent adjustment is made for tax purposes
 the carrying amount of investment in subsidiary, associate or joint venture is higher than its tax base because
the subsidiary, associate or joint venture has not distributed its entire income to the parent or investor
 the cost of a business combination that is accounted for as an acquisition is allocated to the identifiable assets
and liabilities acquired at fair value and no equivalent adjustment is made foe tax purposes

Deferred Tax Asset is the amount of income tax recoverable in future periods with respect to deductible temporary
difference and operating loss carry forward.
A deferred tax asset arises from the following:
 the taxable income is higher than the accounting income because of timing differences
 the tax base of an asset is higher than its carrying amount
 the tax base of a liability is lower than its carrying amount

Temporary differences that technically are not timing differences but nevertheless give rise to deferred tax
asset:
 asset is revalued downward and no equivalent adjustment is made for tax purposes
 the tax base of an investment in subsidiary, associate or joint venture is higher than its carrying amount
because the subsidiary, associate or joint venture has suffered continuing losses in the current and prior years
 financial asset is carried at fair value which is less than cost but no equivalent adjustment is made for tax
purposes

Recognition of Deferred Tax Asset

Shall be recognized for all deductible temporary differences and operating loss carry forward when it is probable
that taxable income will be available against which the deferred tax asset can be used

Measurement
Current Tax Liability And Current Tax Asset Deferred Tax Liability And Deferred Tax Asset
measured using the tax rate that has been enacted and measured using the tax rate that has been enacted by
effective at the end of the reporting the end of the reporting period and expected to apply to
the period when the asset is realized or the liability is
settled

Income Tax Expense = Current Tax Expense + Deferred Tax Expense

Presentation of Deferred Tax Liability and Deferred Tax Asset

 classified as both noncurrent regardless of reversal period
Note: Offsetting is not allowed except when
a. levied by same taxing authority
b. has legal enforceable right to offset a current tax liability against a current tax asset

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132 USL Blue Notes Chapter 34 – Accounting for Income Tax

Deferred tax consequence of revaluation of asset is recognized in other comprehensive income (deducted from the
revaluation surplus)

Illustrative Problems

1. Deferred tax asset and liability

Solana Co. reported the following for the year ended December 31, 2014:

Accounting income per book 6,000,000

Nondeductible expenses 500,000
Nontaxable revenue 300,000
Doubtful accounts 200,000
Estimated warranty expense thathad been recognized as expense in
2014 when the product sales were made but is deductible for tax
purposes when paid 400,000
Accounting depreciation 600,000
Tax depreciation 800,000
Gross income on installment sales included in accounting income
but taxable in only in 2015 100,000
Income tax rate 30%

Computation of accounting income subject to tax and taxable income:

Accounting income per book 6,000,000 x 30% = 1.8M

Permanent differences:
Nondeductible expenses 500,000
Nontaxable revenue (300,000)
Accounting income subject to tax 6,200,000 x 30% = 1.86M
Deductible temporary differences:
Doubtful accounts 200,000
DTA- 600K x 30% = 180K
Estimated warranty cost 400,000
Taxable temporary differences:
Excess tax depreciation (200,000)
Gross income on installment sale (100,000) DTL -300K x 30% = 90K
Taxable income 6,500,000
x 30% = 1.95M

Tax Expense 1,860,000

DTA 180,000

Tax Payable 1,950,000

DTL 90,000

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Chapter 34 – Accounting for Income Tax USL Blue Notes 133

2. Revaluation

On January 1, 2009, Solana Co. acquired an equipment for 6,000,000. Life of 15 years depreciated on straight
line method. On January 1, 2014, it was revalued at a replacement cost of 6,750,000. Income tax rate is 30%.

Cost Replacement cost Appreciation

Equipment 6,000,000 6,750,000 750,000
Accum Dep'n 2,000,000
2,250,000 250,000
CA/SV/RS 4,000,000 4,500,000 500,000

Computation of taxable temporary difference:

Equipmentt at replacement cost 6,750,000

AD 2,700,000
Carrying amount 4,050,000

Equipment at cost 6,000,000

AD 2,400,000
Tax base 3,600,000

Carrying amount 4,050,000

Tax base 3,600,000
Temporary difference 450,000

Theory of Accounts Practical Accounting 1