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CHAPTER 5

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 5 - 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 5 - 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
0
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
0

Difference
300,000
400,000
300,000
0

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
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 5 - 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)
0 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

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 5 - 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 5 - 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

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
2,000,000100,000120,000+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 5 - 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