NAME: ____________________________________

Problem 1. CMU Company provided the following information for the first year of operations:
Accounting income 4,000,000
Nontaxable expenses 150,000
Nontaxable revenue 300,000
Deferred income on
installment sale included in
financial income but taxable
next year 850,000
Doubtful accounts recorded 200,000 Required:
Financial depreciation 300,000 1. Prepare journal entries to record the current tax
Tax depreciation 450,000 expense, deferred tax liability and deferred tax
Estimated warranty cost asset.
accrued in the current year 2. Present the income tax expense in income
but not deductible for tax statement.
purpose until paid 345,000 3. Determine the net deferred tax expense or benefit.
Income tax rate 35%

Problem 2. South company disclosed the following assets and liabilities at carrying amount on December 31, 2015:

Property 10,000,000 Further, an impairment charge against trade receivables of

Plant and equipment 5,000,000 P1,000,000 has been made. This charge will not be allowed
Inventory 4,000,000 in the current year for tax purposes.
Trade receivables 3,000,000
Trade payables 6,000,000 Required:
Cash 2,000,000 1. Prepare journal entries to record the current tax
Valuation - Property 7,000,000 expense, deferred tax liability and deferred tax
Valuation – Plant and equipment 4,000,000 asset.
Net income 9,000,000 2. Present the income tax expense in income
Income tax rate 30% statement.
The entity has made a provision for inventory obsolescence 3. Determine the net deferred tax expense or benefit
of P2,000,000 which is nor allowable for tax purposes. and the total income tax expense.

Problem 3. On January 1, 2015, Shaira Laine Company acquired a FORD Ranger for 6,000,000. The motor vehicle is
depreciated using a straight line method based on a 15-year life with no residual value.
On January 1, 2020, the equipment was revalued at a replacement cost of 6,750,000. The income tax rate is 30%.
Required:
1. Prepare journal entries to record the revaluation, deferred tax liability on January 1, 2015, annual depreciation,
annual realization of RS, current tax expense, and deferred tax liability on December 31, 2019.
2. Present the income tax expense in income statement.
3. Determine the net deferred tax expense or benefit, the total income tax expense, and revaluation surplus on
January 1, 2015.

Problem 4. On January 1, 2013, Midland Company purchased a machine for P1,400,000. This machine has a 5-year
useful life, a residual value of P200,000 and is depreciated using the straight line method for financial statement purposes.
For tax purposes, depreciation was P500,000 for 2013 and P400,000 for 2014. The income before tax and depreciation
was P2,000,000 and the tax rate was 30%. The entity made estimated tax payment of P200,000 during 2014.
Required:
1. Income tax payable
2. Total income tax expense
3. Deferred asset and liability
Problem 5. Cascade company is determining the amount of the pretax accounting income for 2013 by making adjustment
to taxable income from the 2013 by making adjustment to taxable income from the 2013 income tax return. The tax return
showed taxable income of P4,000,000 on which a tax liability of P1,200,000 has been recognized. Following is the list of
items that may be required to determine pretax accounting income from the amount of taxable income:
 Accelerated depreciation for income tax purpose was P500,000. Straight line financial depreciation on these
assets is P400,000.
 Goodwill impairment loss of P300,000 was not included as a deduction in the tax return but may be deducted in
the income statement.
 Interest income on treasury bills was not included in the tax return. During the year, P600,000 was received on
the investments.
Required:
1. Pretax accounting income
2. Total income tax expense
3. Deferred asset and liability

Problem 6. McGee Company deducts insurance expense of P84,000 for tax purposes in 2008, but the expense is not yet
recognized for accounting purposes. In 2009, 2010, and 2011, no insurance expense will be deducted for tax purposes,
but P28,000 of insurance expense will be reported for accounting purposes in each of these years. McGee Company has
a tax rate of 40% and income taxes payable of P72,000 at the end of 2008. There were no deferred taxes at the beginning
of 2008.
Required:
a. What is the amount of the deferred tax liability at the end of 2008?
b. What is the amount of income tax expense for 2008?
c. Assuming that income tax payable for 2009 is 96,000, the income tax expense for 2009 would be what amount?

Problem 7. Tyler Company made the following journal entry in late 2008 for rent on property it leases to Danford
Corporation.
Cash 60,000
Unearned Rent 60,000
The payment represents rent for the years 2009 and 2010, the period covered by the lease. Tyler Company is a cash
basis taxpayer. Tyler has income tax payable of 92,000 at the end of 2008, and its tax rate is 35%
Required:
a. What amount of income tax expense should Tyler Company report at the end of 2008?
b. Assuming the taxes payable at the end of 2009 is 120,000, what amount of income tax expense would Tyler Company
record for 2009?

Problem 8. The following information is available for Nielsen Company after its first year of operations:
Income before taxes 250,000
Income tax expense 104,000
Deferred income tax (4,000)
Income tax expense 100,000
Net income 150,000

Nielsen estimated 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?

Problem 9.
Meyers Co. had a deferred tax liability balance due to a temporary difference at the beginning of 2007 related to 600,000
of excess depreciation. In December of 2007, a new income tax act is signed into law that lowers the corporate rate from
40% to 35%, effective January 1, 2009. If taxable amounts related to the temporary difference are scheduled to be
reversed by 300,000 for both 2008 and 2009, Meyers should increase or decrease deferred tax liability by what amount?

Problem 10. Bennington Corporation began operations in 2004. There have been no permanent or temporary differences
to account for since the inception of the business. The following data are available:
Year Enacted Tax Rate Taxable Income Taxes Paid
2006 45% 750,000 337,500
2007 40% 900,000 360,000
2008 35%
2009 30%

In 2008, Bennington had an operating loss of 930,000. What amount of income tax benefits should be reported on the
2008 income statement due to this loss?

Problem 11. On January 1, 2007, Lebo Inc purchased a machine for 720,000 which will be depreciated 72,000 per year
for financial statement reporting purposes. For income tax reporting, Lebo elected to expense 80,000 and to use straight-
line depreciation which will allow a cost recovery deduction of 64,000 for 2007. Assume a preset and future enacted
income tax rate of 30%. What amount should be added to Lebo’s deferred income tax liability for this temporary difference
at December 31, 2007?

Problem 12. On January 1, 2007, Magee Corp, purchased 40% of the voting common stock of Reed Inc. and
appropriately accounts for its investments by the equity method. During 2007, Reed reported earnings of 360,000 and
paid dividends of 120,000. Magee assumes that all of Reed’s undistributed earnings will be distributed as dividends in
future periods when the enacted tax rate will be 30%. Ignore the dividend received deduction. Magee’s current enacted
income tax rate is 25%. The increase in Magee’s deferred income tax liability for this temporary difference is

Problem 13. Foyle Corp prepared the following reconciliation of income per books with income per tax return for the year
ended December 31, 2008.

Book income before income taxes 1,200,000

Add temporary difference
Construction contract revenue which will reverse in 2009 160,000
Deduct temporary difference
Depreciation expense which will reverse in equal amounts in
each of the next four years (640,000)
Taxable Income 720,000

Foyle’s effective income tax rate is 34% for 2008. What amount should Foyle report in its 2008 income statement as the
current provision for income taxes?

Problem 14. In its 2007 income statement, Hertz Corp, reported depreciation of 1,110,000 and interest revenue on
municipal obligations of 210,000. Hertz reported depreciation of 1,650,000 on its 2007 income tax return. The difference in
depreciation is the only temporary difference, and it will reverse equally over the next three years. Hertz’s enacted income
tax rates are 35% for 2007, 30% for 2008, and 25% for 2009 and 2010. What amount should be included in the deferred
income tax liability in Hertz’s December 31, 2007 balance sheet?

Problem 15. Karr Inc uses the accrual method of accounting for financial reporting purposes and appropriately uses the
installment method of accounting for income tax purposes. Installment income of 900,000 will be collected in the following
years when the enacted tax rates are:
Collection of Income Enacted Tax Rates
2007 90,000 35%
2008 180,000 30%
2009 270,000 30%
2010 360,000 25%

The installment income is Karr’s only temporary difference. What amount should be included in the deferred income tax
liability in Karr’s December 31, 2007 balance sheet?
Problem 16. Nevitt Co., organized on January 2, 2007, had a pretax accounting income of 880,000 and taxable income of
1,600,000 for the year ended December 31, 2007. The only temporary difference is accrued product warranty costs which
are expected to be paid as follows:

2008 240,000
2009 120,000
2010 120,000
2011 240,000
The enacted income tax rates are 35% for 2007, 30% for 2008 through 2010, and 25% for 2011. If Nevitt expects taxable
income in future years, the deferred tax asset in Nevitt’s December 31, 2009 balance sheet should be

Problem 17. On January 1, 2010, easy company acquired an equipment for P8,000,000. The equipment is depreciated
using straight line method based on a useful life of 8 years with no residual value. On January 1, 2013, after 3 years, the
equipment was revalued at a replacement cost of P12,000,000 with no change in the useful life. The pretax accounting
income is 30% and there are no other temporary differences at the beginning of the year.
Required:
1. What is the deferred tax liability on January 1, 2013, arising from the revaluation?
2. What is the current tax expense for 2013?
3. What is the deferred tax liability on December 31, 2013 arising from revaluation?
4. What is the total tax expense?
5. What is the revaluation surplus on December 31, 2013?

Problem 18. Stabilizer company reported taxable income of P8,000,000 in the income tax return for the year ended
December 31, 2013, the first year of operations. Temporary differences between financial income and taxable income for
the year are as follows:

Tax depreciation in excess of book depreciation 800,000

Accrual for product liability claim in excess of actual claim 1,200,000
Reported installment sales income in excess of taxable
Installment sales income 2,600,000
Income tax rate 30%

Required:
1. What is the deferred tax asset on December 31, 2013?
2. What is the deferred tax liability on December 31, 2013?
3. What is the deferred tax expense for 2013?
4. What is the total tax expense?

Problem 19. Zeff Company prepared the following reconciliation of pretax financial statement income to taxable income
for the year ended December 31, 2013, the first year of operation:
Pretax financial income 1,600,000
Nontaxable interest received ( 50,000)
Long-term loss accrual in excess of deductible amount 100,000
Depreciation in excess of financial depreciation ( 250,000)
Taxable income 1,400,000
Required:
1. If the income tax is 30%, what amount should be reported as income tax expense- current portion in the 2013
income statement?
2. What amount should be reported as deferred tax liability on December 31, 2013?
3. What amount should be reported as deferred tax asset on December 31, 2013?
4. What amount should be reported as total tax expense for 2013?