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) 400,000 + 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 8,090,000

P11,000,000
440,000
(2,000,000)
P 9,440,000
1,150,000
(2,500,000)
P8,090,000

2,427,000
2,427,000

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)

5-4.

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

(Visayas Corporation)
(a)
Pre tax financial income
Future deductible amount
Taxable income
Income tax payable: 30% x 3,550,000

2,427,000
405,000
345,000
2,427,000
750,000
P3,000,000
(1,800,000)
P1,200,000
P360,000
360,000
540,000
360,000
540,000

P2,000,000
1,550,000
P3,550,000
P1,065,000

Chapter 5 - Income Taxes

(b)

Income tax expense-Current

Deferred tax asset
Income tax payable
Income tax benefit-Deferred

1,065,000
465,000

(Mindanao Corporation)
Income tax expense Current
Deferred tax asset
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

1,065,000
465,000

5-5.

1,560,000
600,000

5-6.

(Samar, Inc.)
Income tax expense Current (30% x 2,000,000)
Income tax expense Deferred (267,000 72,000)
195,000
Income tax expense Total
Income tax payable (see above)
Deferred tax asset:

P 600,000
P 795,000
P 600,000

30% x 240,000

72,000
Deferred tax liability: 30% x (530,000 + 360,000 )
5-7.

5-8.

P 267,000

(Bohol Company)
Taxable income
Future deductible amount:
Book depreciation in excess of tax depreciation
Nontaxable income:
Interest on government securities
Pretax financial income

P12,000,000
(430,000)
450,000
P12,020,000

(Wall Services)
(a)
Schedule of reversal of the temporary differences
2014 140,000 x 32%
P 44,800
2015 320,000 x 34%
108,800
2016 240,000 x 36%
86,400
Total
P240,000

(b)

(c)

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)

P2,200,000
400,000
( 140,000)
P2,460,000
( 700,000)
P1,760,000
x 30 %
P 528,000
P 240,000

Income tax expense Current

Income tax payable

528,000

Income tax expense Deferred

Deferred tax liability

240,000

528,000

Income from continuing operations before income tax

61

240,000
P2,200,000

Chapter 5 - Income Taxes

5-9.

Income tax expense:

Current
Deferred
Net income
(Daniel Company)
(a)
Straight Line
2013
500,000
2014
500,000
2015
500,000
2016
500,000
12/31/2013
12/31/2014
12/31/2015
12/31/2016
Taxable income
Future taxable amount
Additional taxable
amount (reversal)
Pretax accounting
income

P528,000
240,000

768,000
P1,432,000

SYD
800,000
600,000
400,000
200,000

Difference
(300,000)
(100,000)
100,000
300,000

Carrying Amount
Tax Base
1,500,000
1,200,000
1,000,000
600,000
500,000
200,000
0
0
2013
800,000
300,000

2014
890,000
100,000

1,100,000

990,000

Difference
300,000
400,000
300,000
0

2015
1,200,000

2016
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:

2013
300,000 x 30%
P 90,000
2014
400,000 x 30%
120,000
2015
300,000 x 30%
90,000
2016
0
0

(c)

Journal entries to record current income tax:

2013
Income tax expense-Current 240,000
Income tax payable
240,000
(30% x 800,000)

2014
267,000
267,000
(30% x 890,000)

2015
2016
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)
Journal entries to record deferred income tax:
December 31, 2013:
Income tax Expense-Deferred
Deferred tax liability
December 31, 2014:
Income tax expense Deferred
Deferred tax liability
30,000
120,000 90,000 = 30,000
December 31, 2015:
Deferred tax liability
Income tax expense-Deferred (Benefit)
30,000
90,000 120,000 = 30,000 decrease

62

90,000
90,000
30,000

30,000

Chapter 5 - Income Taxes

December 31, 2016:
Deferred tax liability
Income tax expense-Deferred (Benefit)
0 90,000 = 90,000 Decrease

90,000
90,000

(d)
2013
Income tax expense:
Current

2014

2015

2016

P
240,000
90,000

P
267,000
30,000

P
360,000
( 30,000)

P
330,000

P
297,000

P
330,000

2013
P1,100,000

2014
P 990,000

2015
P1,100,00
0

Deferred (Benefit)
Total income tax
expense

450,000
(90,000)
360,000

(e)
Income before income
tax
Less income tax
expense (see above)
Net income

330,000
770,000

297,000
693,000

330,000
P 770,000

2016
P1,200,00
0
360,000
840,000

5-10.

(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)

(c)

Income tax payable (5,000,000 X 30%)

Deferred tax assets (1,500,000 x 30%)
Deferred tax liability (1,900,000 x 30%)
Income tax expense-Current
Income tax payable
Income tax expense-Deferred
Deferred tax asset
450,000 525,000
Deferred tax liability
Income tax benefit-Deferred
1,400,000 570,000

5-11.

P1,500,000
P 450,000
570,000

1,500,000
1,500,000
75,000
75,000
830,000
830,000

(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

63

Chapter 5 - Income Taxes

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, 12/31/2013
2M x 30%
(b)

5-13

60,000

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

P600,000
900,000
900,000
40,000
40,000

(Britanny Company)
(a)
Income tax expense current
3M x 30%
Previous payment in 2013
Income tax payable, 12/31/2013
(b)

Income tax expense current

Income tax payable
Deferred tax liability
Deferred tax asset
DTL, 12/31/13 (400,000 x 30%)
DTL, 1/1/13
Decrease in DTL
DTA, 12/31/13 (200,000 x 30%)
DTA, 1/1/13
Decrease in DTA

(c)

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

Total income tax expense

Current
Deferred
Total income tax expense

P900,000
-0P900,000

Pretax profit
Income tax expense
Profit

P2,800,000
900,000
P1,900,000

MULTIPLE CHOICE QUESTIONS

Theory
MC1
MC2
MC3
MC4
MC5

C
A
C
C
D

Problems
MC17
B
MC18
B
MC19
B

MC6
MC7
MC8
MC9
MC10

D
C
D
A
D

MC11
MC12
MC13
MC14
MC15
MC16

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

64

C
C
C
D
B
B

Chapter 5 - Income Taxes

MC20
MC21
MC22

D
C
B

MC23
MC24
MC25
MC26
MC27
MC28
MC29

C
B
D
C
D
C
D

MC30
MC31

C
B

MC32
MC33
MC34
MC35
MC36

B
D
C
D
D

MC37
MC38
MC39
MC40
MC41

C
C
D
D
B

MC42

MC43

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
(3,000,000 x 30%) (5,000,000 x 30%) + (4,000,000 x 30%) = 600,000
OR 2,000,000 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 37 and 38:

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)

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

65

P 1,000,000
1,200,000
(5,000,000)
P 2,800,000

P 1,500,000
P

360,000
336,000

P
P

696,000
804,000