CHAPTER INCOME TAXES PROBLEMS 5-1 a b c d e f g Nontaxable Nondeductible Nondeductible Temporary difference Temporary difference Temporary difference Temporary difference – – – – Future Future Future Future taxable amount taxable amount deductible amount deductible amount 5-2 Pretax financial income Add Nondeductible expenses (b + c) 600,000 + 40,000 Less Nontaxable income (a) Financial income subject to tax Add Future deductible amounts (f + g) 750,000 + 400,000 Less Future taxable amounts (d + e) 1,500,000 + 1,000,000 Taxable income Income tax expense – Current Income tax payable 30% x 7,290,000 P11,000,000 640,000 (3,000,000) P 8,640,000 1,150,000 (2,500,000) P7,290,000 2,187,000 2,187,000 Income tax expense – Deferred Deferred tax liability 30% x 2,500,000 750,000 Deferred tax asset Income tax expense – Deferred 30% x 1,150,000 345,000 750,000 345,000 or one compound entry may be made as follows: Income tax expense – Current Income tax expense – Deferred Deferred tax asset Income tax payable Deferred tax liability 5-3 (Luzon Corporation) (a) Pretax financial income Future taxable amount Taxable income Income tax payable: 30% x 1,200,000 (b) Income tax expense – Current Income tax expense – Deferred Income tax payable Deferred tax liability 30% x 1,200,000 = 360,000 30% x 1,800,000 = 540,000 2,187,000 405,000 345,000 2,187,000 750,000 P3,000,000 (1,800,000) P1,200,000 P360,000 360,000 540,000 360,000 540,000 Chapter - Income Taxes 5-4 (Visayas Corporation) (a) Pre tax financial income Future deductible amount Taxable income Income tax payable: 30% x 3,550,000 (b) Income tax expense-Current Deferred tax asset Income tax payable Income tax eenefit-Deferred P2,000,000 1,550,000 P3,550,000 P1,065,000 1,065,000 465,000 1,065,000 465,000 5-5 (Mindanao Corporation) Income tax expense – Current 1,560,000 Deferred tax asset 600,000 Deferred tax liability 185,000 Income tax expense – 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 5-6 (Samar, Inc.) Income tax expense – Current (30% x 2,000,000) Income tax expense – Deferred (180,000 – 159,000) Income tax expense – Total Income tax payable (see above) P 600,000 (21,000) P 579,000 P 600,000 Deferred tax asset: 30% x (360,000 + 240,000) Deferred tax liability: 30% x 530,000 P 180,000 P 159,000 5-7 5-8 (Bohol Company) Taxable income Future deductible amount: Book depreciation in excess of tax depreciation Nontaxable income: Proceeds from life insurance policy upon death of officer Pretax financial income (Wall Services) (a) Schedule of reversal of the temporary differences 2013 140,000 x 32% 2014 320,000 x 34% 2015 240,000 x 36% Total Pretax financial income Add nondeductible expenses Less nontaxable revenues Financial income subject to tax Future taxable amounts Taxable income Tax rate Income tax payable Deferred tax liability (see above) 61 P11,998,000 (430,000) 1,250,000 P12,818,000 P 44,800 108,800 86,400 P240,000 P2,200,000 400,000 ( 140,000) P2,460,000 ( 700,000) P1,760,000 x 30 % P 528,000 P 240,000 Chapter - Income Taxes (b) (c) 5-9 Income tax expense – Current Income tax payable 528,000 Income tax expense – Deferred Deferred tax liability 240,000 528,000 240,000 Income from continuing operations before income tax Income tax expense: Current P528,000 Deferred 240,000 Net income P2,200,000 768,000 P1,432,000 (Daniel Company) (a) 2012 2013 2014 2015 Straight Line 500,000 500,000 500,000 500,000 12/31/2012 12/31/2013 12/31/2014 12/31/2015 Taxable income Future taxable amount Additional taxable amount (reversal) Pretax accounting income SYD 800,000 600,000 400,000 200,000 Carrying Amount 1,500,000 1,000,000 500,000 2012 800,000 300,000 2013 890,000 100,000 1,100,000 990,000 Difference (300,000) (100,000) 100,000 300,000 Tax Base 1,200,000 600,000 200,000 Difference 300,000 400,000 300,000 2014 1,200,000 2015 1,500,000 ( 100,000) 1,100,000 (300,000) 1,200,000 (b) Deferred tax liability at the end of each year is as follows: 2012 300,000 x 30% P 90,000 2013 400,000 x 30% 120,000 2014 300,000 x 30% 90,000 2015 0 (c) Journal entries to record current income tax: 2012 2013 Income tax expense-Current 240,000 267,000 Income tax payable 240,000 267,000 (30% x 800,000) (30% x 890,000) 2014 2015 Income tax expense-Current 360,000 450,000 Income tax payable 360,000 450,000 (30% x 1,200,000) (30% x 1,500,000) 62 Chapter - Income Taxes Journal entries to record deferred income tax: December 31, 2012: Income tax Expense-Deferred Deferred tax liability 90,000 90,000 December 31, 2013: Income tax expense – Deferred Deferred tax liability 120,000 – 90,000 = 30,000 30,000 30,000 December 31, 2014: Deferred tax liability Income tax expense-Deferred (Benefit) 90,000 – 120,000 = 30,000 decrease 30,000 30,000 December 31, 2015: Deferred tax liability Income tax expense-Deferred (Benefit) – 90,000 = 90,000 Decrease (d) 2012 2013 Income tax expense: Current P 240,000 P 267,000 Deferred (Benefit) 90,000 30,000 Total income tax expense P 330,000 P 297,000 (e) 2010 2011 90,000 90,000 2014 2015 P 360,000 ( 30,000) P 450,000 (90,000) P 330,000 P 360,000 2012 2013 Income before income tax P1,100,000 P 990,000 P1,100,000 P1,200,000 Less income tax expense (see above) Net income 330,000 P 770,000 297,000 P 693,000 330,000 P 770,000 360,000 P 840,000 5-10 (Jude Company) (a) Future taxable amount Carrying amount of inventories > Tax Base Carrying amount of building & equipment > Tax Base Future Deductible Amount Carrying amount of accounts receivable < Tax Base Carrying amount of warranty > Tax Base Carrying amount of unearned rent > Tax Base (b) Income tax payable Deferred tax assets (1,500,000 x 30%) Deferred tax liability (1,900,000 x 30%) (c) Income tax expense-Current Income tax payable Income tax expense-Deferred Deferred tax asset 450,000 – 525,000 63 P 100,000 1,800,000 P 1,900,000 P200,000 800,000 500,000 P 1,500,000 P1,500,000 P 450,000 P 570,000 1,500,000 1,500,000 75,000 75,000 Chapter - Income Taxes Deferred tax liability Income tax benefit-Deferred 1,400,000 – 570,000 830,000 830,000 5-11 (Capetown Company) Tax rate = 180,000/600,000 = 30% Income tax expense – current Income tax payable 30% x 1,000,000 300,000 300,000 Deferred tax asset Income tax benefit – deferred End (30% x 800,000) = 240,000 Beg 180,000 Increase 60,000 5-12 60,000 (Conchita Corporation) (a) Deferred tax liability, 12/31/2012 2M x 30% (b) Income tax expense – current Income tax payable 3M x 30% Deferred tax liability Income tax expense – deferred Beg 640,000 End, revised due to change in tax rate 600,000 Decrease in DTL 40,000 5-13 60,000 P600,000 900,000 900,000 40,000 40,000 (Britanny Company) (a) Income tax expense – current 3M x 30% Previous payment in 2012 Income tax payable, 12/31/2012 (b) Income tax expense – current Income tax payable Deferred tax liability Deferred tax asset DTL, 12/31/12 (400,000 x 30%) DTL, 1/1/12 Decrease in DTL DTA, 12/31/12 (200,000 x 30%) DTA, 1/1/12 Decrease in DTA (c) Total income tax expense Current Deferred P900,000 500,000 P400,000 400,000 400,000 30,000 30,000 120,000 150,000 30,000 60,000 90,000 30,000 P900,000 -0- 64 Chapter - Income Taxes Total income tax expense P900,000 Pretax profit Income tax expense Profit P2,800,000 900,000 P1,900,000 MULTIPLE CHOICE QUESTIONS Theory MC1 MC2 MC3 MC4 MC5 C C C D D MC6 MC7 MC8 MC9 MC10 C D D D C MC11 MC12 MC13 MC14 MC15 C C D B B Problems MC16 MC17 MC18 MC19 MC20 MC21 B B B D C B MC22 MC23 MC24 MC25 MC26 MC27 MC28 C B D C D C D MC29 MC30 C B MC31 MC32 MC33 MC34 B D C D MC35 MC36 MC37 MC38 MC39 MC40 MC41 D C C D D B A MC42 A 1,800,000 x 35% = 630,000 Excess of Book Value > Tax Basis of Equipment 2,000,000 x 30% + (1,000,000 x 35%) = 950,000 10,000,000 x 30% = 3,000,000 (8,000,000 – 4,000,000) x 30% = 1,200,000 [(700,000 x 30%) + (1,400,000 x 35%)] – [(500,000 x 30%) + (1,000,000 x 35%)] = 700,000 – 500,000 = 200,000 (all non-current) 1,200,000 – 750,000 = 450,000; 450,000 x 35% = 157,500 1,500,000 x 30% = 450,000 6,000,000 x 30% = 1,800,000 9,000,000 x 30% = 2,700,000 42,000 / 30% = 140,000; 600,000 + 140,000 = 740,000 150,000 x 30% = 45,000 5,000,000 – 900,000 + 1,200,000 + 200,000 = 5,500,000; 5,500,000 x 30% = 1,650,000 200,000 – 40,000 = 160,000; 160,000 x 30% = 48,000 150,000 x 35% = 52,500; 150,000 x 35% = 52,500; 150,000 x 30% = 45,000 52,500 + 52,500 + 45,000 = 150,000 95,000 x 38% = 36,100 6,500,000 x 30% = 1,950,000 – 900,000 = 1,050,000 (2,600,000 – 1,400,000) x 38% = 456,000 The deferred tax asset cannot be offset against the deferred tax liability because they will not reverse simultaneously (3,000,000 x 30%) – (5,000,000 x 30%) + (4,000,000 x 30%) = 600,000 See computation below See computation below 172,500 / 30% = 575,000; 3,000,000 + 575,000 = 3,575,000 1,800,000 – 80,000 + 60,000 = 1,780,000; 1,780,000 x 30% = 534,000 2,000,000–100,000–120,000+180,000 = 1,960,000; 1,960,000 x 30%=588,000 5,000,000 – 500,000 + 200,000 – 4,000,000 + 1,800,000 = 2,500,000 2,500,000 x 30% = 750,000 (5,000,000 + 400,000 – 600,000) x 30% = 1,440,000 Items 36 and 37: Pretax accounting income Future deductible amount (accrued warranty cost) Future taxable amount (accrual basis profit > cash basis profit Operating loss carry-forward (for tax purposes) 65 P 1,000,000 1,200,000 (5,000,000) P 2,800,000 Chapter - Income Taxes Income tax expense Increase in deferred tax liability 5,000,000 x 30% Less: increase in deferred tax asset (from accrued warranty cost) = 1,200,000 x 30% (from operating loss carry forward)= 2,800,000 x 30% x 40% Total deferred tax asset Income tax expense 66 P 1,500,000 P 360,000 336,000 P 696,000 P 804,000 ... 150 ,000 x 35% = 52 ,50 0; 150 ,000 x 30% = 45, 000 52 ,50 0 + 52 ,50 0 + 45, 000 = 150 ,000 95, 000 x 38% = 36,100 6 ,50 0,000 x 30% = 1, 950 ,000 – 900,000 = 1, 050 ,000 (2,600,000 – 1,400,000) x 38% = 456 ,000 The... payable Income tax eenefit-Deferred P2,000,000 1 ,55 0,000 P3 ,55 0,000 P1,0 65, 000 1,0 65, 000 4 65, 000 1,0 65, 000 4 65, 000 5- 5 (Mindanao Corporation) Income tax expense – Current 1 ,56 0,000 Deferred tax asset... 740,000 150 ,000 x 30% = 45, 000 5, 000,000 – 900,000 + 1,200,000 + 200,000 = 5, 500,000; 5, 500,000 x 30% = 1, 650 ,000 200,000 – 40,000 = 160,000; 160,000 x 30% = 48,000 150 ,000 x 35% = 52 ,50 0; 150 ,000