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PRACTICAL ACCOUNTING 1 – REVIEW

ACCOUNTING FOR TAXES & EMPLOYEE BENEFITS

PROF. U.C. VALLADOLID

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. Tris Company computed a pretax accounting income of P5,000,000 for its first year of operations ended December 31,
2018. In preparing the income tax return for 2018, the following differences are noted between accounting income and
taxable income.

Nondeductible expenses 200,000

Nontaxable revenue 500,000
Gross income on installment sales reported in accounting income but not in taxable
income (expected to reverse in 2019) 1,000,000
Provision for doubtful accounts 100,000
Income tax rate 35%

What is the "current tax expense"?

a. 1,330,000 b. 1,645,000 c. 1,750,000 d. 1,295,000

2. Christian Company has one temporary difference at the end of 2018 that will reverse and cause taxable amounts of
1,100,000 in 2019, 1,200,00 in 2020 and 1,200,000 in 2021. The entity has also a deductible temporary difference of
1,500,000.

The pretax accounting income for 2018 is 6,000,000 and the tax rate is 30%. There are no deferred taxes at the
beginning of 2018.

1. What amount should be reported as taxable income?

a. 5,000,000 b. 4,000,000 c. 3,000,000 d. 2,000,000
2. What is the current tax expense for 2018?
a. 1,800,000 b. 1,920,000 c. 1,200,000 d. 2,400,000
3. What is the net deferred tax expense for 2018?
a. 1,050,000 b. 1,200,000 c. 600,000 d. 450,000

3. Emerson Corp.'s 2018 income statement showed pretax accounting income of 750,000. To compute the income tax
liability, the following 2018 data are provided:
Income from government bonds 30,000
Depreciation deducted for tax purposes in excess of depreciation
deducted for financial statement purposes 60,000
Estimated income tax payments made 150,000
Enacted corporate income tax rate 30%
What amount of current income tax liability should be included in Hagg's December 31, 2018 statement of financial position?
a. 48,000 b. 66,000 c. 75,000 d. 198,000

4. John Corporation prepared the following reconciliation for its first year of operations:
Pretax financial income for 2019 1,200,000
Tax exempt interest (100,000)
Originating temporary difference (300,000)
Taxable income 800,000
The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate
for 2019 is 28%. What amount should be reported in its 2019 income statement as the current portion of its provision for
income taxes?
a. 224,000 b. 320,000 c. 336,000 d. 480,000

5. Ivan, Inc. began operations in year 1. Included in Ivan’s year 1 financial statements were bad debt expenses of 1,400 and
profit from an installment sale of 2,600. For tax purposes, the bad debts will be deducted and the profit from the
installment sale will be recognized in year 2. The enacted tax rates are 30% in year 1 and 25% in year 2. In its year 1
income statement, what amount should Ivan report as deferred income tax expense?
a. 300 b. 360 c. 650 d. 780
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6. On January 1, 2018, Kris Corp. purchased 40% of the voting common stock of Tris, Inc. and appropriately accounts for its
investment by the equity method. During 2018, Tris reported earnings of 360,000 and paid dividends of 120,000. Kris
assumes that all of Tris's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate
will be 30%. Ignore the dividend-received deduction. Kris's current enacted income tax rate is 25%. The increase in Kris's
deferred income tax liability for this temporary difference is
a. 72,000. b. 60,000. c. 43,200. d. 28,800.

7. Jostine Company at the end of 2018, its first year of operation prepared reconciliation between pre-tax financial Income
and taxable income as follows:
Pre-tax financial income P 900,000
Estimation litigation expense 500,000
Installment sales ( 400,000)
Taxable income P 1,000,000

The estimate of litigation expense of P500,000 will be deductible in 2019 when it is expected to be paid. The gross profit
from the installment sales will be realized in the amount of P200,000 in each of the next two years. The estimated liability
for litigation is classified as non-current and the installment accounts receivable are classified as P200,000 current and
P200,000 non-current. The income tax rate is 32% in 2018 enacted tax law which will be implemented early next year. Tax
rate will be 33% for all years.

How much shall be the income tax expense?

a) P 287,000 b) P 288,000 c) P 297,000 d) P 353,000

8. The following information was extracted from the records of Cooper Company on December 31, 2018:
Carrying amount Tax base
Accounts Receivable 1,500,000 1,750,000
Motor Vehicle 1,650,000 1,250,000
Provisions for warranty 120,000 0
Deposit received in advance 150,000 0

The depreciation rates for accounting and taxation are 15% and 25% respectively. The deposits are taxable when
received and warranty cost are deductible only when written off as uncollectible. The tax rate is 30%. Cooper Company
should report a deferred tax liability on December 31, 2018 at
a. 120,000 b. 156,000 c. 81,000 d. 36,000

9. Joshtin Company's income statement for the year ended December 31, 2018 shows pretax income of P1,000,000. The
following items are treated differently on the tax return and in the accounting records:
Tax return Accounting record
Rent income 70,000 120,000
Depreciation 280,000 220,000
Premiums on officers' life insurance 90,000
Joshtin's tax rate for 2018 is 35 percent.

What is the amount of income tax payable for 2018?

a. 420,000 b. 350,000 c. 343,000 d. 381,500

10. Ozz Company has three financial statement elements for which the December 31, 2018 book value is different from the
December 31, 2018 tax basis:
Book value Tax basis Difference

Equipment 200,000 120,000 80,000

Prepaid officers'
Insurance policy 75,000 0 75,000
Warranty liability 50,000 0 50,000

As a result of these differences, future taxable amounts are

a. 205,000 b. 155,000 c. 80,000 d. 50,000

11. Ozz Company deducts insurance expense of 105,000 for tax purposes in 2019, but the expense is not yet recognized for
accounting purposes. In 2020, 2021, and 2022, no insurance expense will be deducted for tax purposes, but 35,000 of
insurance expense will be reported for accounting purposes in each of these years. Ozz Company has a tax rate of 40%
and income taxes payable of 90,000 at the end of 2019. There were no deferred taxes at the beginning of 2019.
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1. What is the amount of the deferred tax liability at the end of 2019?
a. 42,000 b. 36,000 c. 15,000 d. 0

2. What is the amount of income tax expense for 2019?

a. 132,000 b. 126,000 c. 105,000 d. 90,000

12. The following information is available for Kaila Company after its first year of operations:
Income before taxes 250,000
Federal income tax payable 104,000
Deferred income tax (4,000)
Income tax expense 100,000
Net income 150,000
Kaila estimates its annual warranty expense as a percentage of sales. The amount charged to warranty expense on its
books was 95,000. Assuming a 40% income tax rate, what amount was actually paid this year for warranty claims?
a. 105,000 b. 100,000 c. 95,000 d. 85,000

13. On its December 31, year 2 balance sheet, Angel Co. had income taxes payable of 13,000 and a current deferred tax
asset of 20,000 before determining the need for a valuation account. Angel had reported a current deferred tax asset of
15,000 at December 31, year 1. No estimated tax payments were made during year 2. At December 31, year 2, Angel
determined that it was more likely than not that 10% of the deferred tax asset would not be realized. In its year 2 income
statement, what amount should Angel report as total income tax expense?
a. 8,000 b. 8,500 c. 10,000 d. 13,000

14. For calendar year 2018, Kris Corp. reported depreciation of 1,200,000 in its income statement. On its 2018 income tax
return, Kris reported depreciation of 1,800,000. Kris's income statement also included 225,000 accrued warranty expense
that will be deducted for tax purposes when paid. Kris's enacted tax rates are 30% for 2018 and 2019, and 24% for 2020
and 2021. The depreciation difference and warranty expense will reverse over the next three years as follows:
Depreciation Difference Warranty Expense
2019 240,000 45,000
2020 210,000 75,000
2021 150,000 105,000
600,000 225,000
These were Kris's only temporary differences. In Kris's 2018 income statement, the deferred portion of its provision for
income taxes should be
a. 200,700. b. 112,500. c. 101,700. d. 109,800.

15. Coleen Consulting sometimes performs services for which it receives payment at the conclusion of the engagement, up to
six months after services commence. Coleen recognizes service revenue for financial reporting purposes when the
services are performed. For tax purposes, revenue is reported when fees are collected. Service revenue, collections and
pretax accounting income for 2018-2021 are as follows:

Year Service Revenue Collections Pretax Accounting Income

2018 650,000 620,000 186,000
2019 750,000 770,000 250,000
2020 715,000 700,000 220,000
2021 700,000 720,000 200,000

There are no differences between accounting income and taxable income other than the temporary difference described
above. The enacted tax rate for each year is 40%.

1. What should be reported as taxable income and income tax payable for 2018?
a. 62,400 b. 156,000 c. 620,000 d. 186,000

2. What should be reported as taxable income and income tax payable for 2019?
a. 270,000 b. 108,000 c. 250,000 d. 750,000
3. What should be reported as taxable income and income tax payable for 2020?
a. 205,000 b. 220,000 c. 82,000 d. 700,000
4. What should be reported as taxable income and income tax payable for 2021?
a. 200,000 b. 220,000 c. 700,000 d. 88,000
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16. On January 1, 2019 Angel Company had the following balances related to a defined benefit plan:

Fair Value of Plan Asset 8,710,500

Projected Benefit Obligation 10,500,500

Angelika provided the following data for the current year:

Current service cost 710,000

Settlement discount rate 8%
Actual Return on Plan assets 850,000
Contribution to the Plan 999,000
Benefits paid to retirees 195,500

1. What is the employee benefit expense?

a. 675,000 b. 600,000 c. 853,200 d. 650,000

2. What is the remeasurement gain on plan assets?

a. 700,000 b. 125,000 c. 575,000 d. 153,160

3. What is the defined benefit costs?

a. 435,960 b. 900,000 c. 298,960 d. 700,040

17. On January 1, 2019, Kaila Company reported fair value on plan assets at 6,500,000 and projected benefit obligation at
7,500,000.

During the current year, the entity determined that the current service cost was 1,200,000 and the discount rate is 10%.
The actual return on plan assets was 800,000 during the year.

The entity provided the following information during the year related to the defined benefit plan.

Contribution to the plan 1,200,000

Benefits paid to retirees 1,500,000
Decrease in projected benefit
obligation due to change
in actuarial assumptions 200,000

1. What is the employee benefit expense?

a. 1,300,000 b. 1,950,000 c. 1,200,000 d. 1,100,000

2. What is the total remeasurement gain?

a. 350,000 b. 150,000 c. 200,000 d. 800,000

3. What is the fair value of plan assets on December 31?

a. 7,000,000 b. 8,500,000 c. 8,350,000 d.7,550,000

4. What is the projected benefit obligation on December 31?

a. 7,750,000 b. 8,700,000 c. 9,250,000 d. 7,950,000

18. Ozz Company had a noncontributory defined benefit pension plan. On December 31, 2019, the entity received the
projected benefit obligation report from the independently actuary.
Pension benefits paid 135,000
PBO on December 31, 2019 2,160,000
Interest expense 120,000
Discount rate 8%

What is the current service cost for 2019?

a. 675,000 b. 810,000 c. 540,000 d. 255,000

19. Caticlan Company provided the following information:

January1 December 31
Fair value of plan assets 3,500,000 3,900,000
Market related value of plan assets 2,800,000 2,900,000
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Contribution to the plan 280,000

Benefits paid to retirees 250,000

What is the actual return on plan assets for the current year?
a. 400,000 b. 370,000 c. 430,000 d. 100,000

20. Angel Company had the following balances relating to the defined benefit plan on December 31, 2019:
Fair value of plan assets 37,000,000
Projected benefit obligation 33,000,000
Asset ceiling 2,500,000

What is the prepaid benefit cost on December 31, 2019?

a. 4,000,000 b. 1,500,000 c. 2,500,000 d. 0