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DEFERRED TAXES (PAS 12)

Taxable Income VS. Accounting Income

- Taxable income is computed using tax laws.
- Accounting income is computed using GAAP.

GRAND FORMULA:
Accounting Income per book
+ Non-deductible Expenses
- Non-taxable Revenues
Accounting Income Subject to Tax x Tax Rate = Total Tax Expense
- Taxable Temporary Differences x Tax Rate = Deferred Tax Liability
+ Deductible Temporary Differences x Tax Rate = Deferred Tax Asset
Taxable Income x Tax Rate = Income Tax Expense

- Accounting income after excluding permanent differences equals accounting income subject to tax.
- Current tax expense is the taxable income time the tax rate. This is the tax due for the year and the tax payable balance
unless there are estimated tax payments made (in that case, tax payable is income tax expense due less tax payments
made).
- Total tax expense is the current tax expense plus deferred tax expense minus income tax benefit. If the deferred tax
expense is higher simply add the net deferred tax expense. If the income tax benefit is higher, deduct the net income tax
benefit.
- If the enacted future tax rates are the same as the current tax rate, the total tax expense is simply computed by multiplying
the tax rate to the accounting income subject to tax.

Permanent Differences: Non-Taxable Revenues and Non-Deductible Expenses

- Permanent Differences do not result to a Deferred Tax Asset and Deferred Tax Liability
- Examples of taxable revenues are interest income on deposits, dividends received from domestic and resident
corporations, life insurance premiums
- Examples of deductible expenses are penalties, surcharges and fines

Taxable Temporary Difference VS Deductible Temporary Difference

- Taxable temporary differences will cause taxable income to be lower than accounting income (AI > TI). This will also
result in the Carrying Amount of an asset to be higher than the tax base (CA - Asset > TB – Asset) and the Carrying
Amount of a liability to be lower than the tax base (CA – Liability < Tax Base – Liability). The taxable temporary
difference will result to deferred tax expense and deferred tax liability.
- If the taxable temporary difference reverses, this will cause accounting income to be lower than taxable income. This will
result in a decrease in the deferred tax liability and current tax expense. The credit will be to “income tax benefit” and as a
deduction from current tax expense to get total tax expense.
- Deductible temporary differences will cause taxable income to be higher than accounting income (AI < TI). This will
also result in the Carrying Amount of an asset to be lower than the tax base (CA - Asset < TB – Asset) and the Carrying
Amount of a liability to be higher than the tax base (CA – Liability > Tax Base – Liability). The taxable temporary
difference will result to an income tax benefit and deferred tax asset.
- AI < TI may be due to WIRRLED: estimated product Warranty, Impairment loss, Revenue/gain, Research cost, probable
and measurable Litigation loss, Expenses, Doubtful accounts
- If the deductible temporary difference reverses, this will cause accounting income to be higher than taxable income. This
will result in a decrease in the deferred tax asset and deferred tax expense.

The deferred tax asset and deferred tax liability are presented separately and not offset as noncurrent. However, as an
exception the net amount can be presented if both items are expected to reverse within one year, levied by the same taxing
authority and the entity has the legal right to offset or settle at net.

THEORIES:
1. Accounting profit is
A. The profit or loss for a period before deducting tax expense
B. The profit or less for a period determined in accordance with tax law.
C. The profit or loss for a period after deducting tax expense
D. The profit or loss after current tax expense determined in accordance with tax law

2. It is the income tax payable in future periods in respect of taxable temporary differences
A. Deferred tax liability C. Current tax liability
B. Deferred tax asset D. Current tax asset

3. Which temporary difference would result in a deferred tax liability?

A. Interest revenue on municipal bonds same
B. Accrual of warranty expense
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C. Excess tax depreciation over financial depreciation

D. Subscription revenue received in advance

4. Which temporary difference would result in a deferred tax asset?

A. Tax penalty or surcharge
B. Dividend received on share investment
C. Excess tax depreciation over accounting depreciation
D. Rent received in advance included in taxable income but deferred for financial accounting

5. Which is correct about the presentation of deferred tax assets and liabilities?
A. Deferred tax assets are always netted against deferred tax liabilities
B. Deferred tax assets are never netted against deferred tax liabilities
C. Deferred tax assets of one jurisdiction are offset against deferred tax liabilities of another jurisdiction
D. Deferred tax assets and liabilities are classified only as noncurrent

6. When accounting for income taxes, a temporary difference occurs when

A. An item is included in the calculation of net income in one year and taxable income in a different year.
B. An item is included in the calculation of net income but is neither taxable nor deductible.
C. The accrual method of accounting is used.
D. An item is no longer taxable due to a change in the tax law.

7. When temporary difference will result in taxable amounts in future years

A. A deferred tax liability is recognized in the current year.
B. A deferred tax asset is recognized in the current year.
C. A deferred tax asset may be recognized in the current year if certain conditions are met.
D. A deferred tax liability may be recognized in the current year if certain conditions are met.

8. At the most recent year-end, a noncurrent deferred income tax asset exceeded a current deferred income tax liability. Which
of the following should be reported at the most recent year-end given that the entity has the authority to offset?
A. The excess of the deferred tax asset over the deferred tax liability as a current asset.
B. The excess of the deferred tax asset over the deferred tax liability as a noncurrent asset
C. The deferred tax asset as a noncurrent asset
D. The deferred income tax asset as a current asset.

9. Which is correct about the presentation of deferred tax assets and liabilities?
A. Current deferred tax assets are netted against current deferred tax liabilities
B. All noncurrent deferred tax assets are netted against noncurrent deferred tax liabilities
C. Deferred tax assets are never netted against deferred tax liabilities
D. Deferred tax assets are netted against deferred tax liabilities if they relate to the same taxing authority.

PROBLEMS:
I. For the year ended December 31, 2019, Jan Company reported pre-tax financial income of P5,500,000. Its taxable
income was P4,000,000. The difference is due to interest income of P1,000,000 earned from government treasury bill
and an additional P500,000 charge for depreciation expense. Interest income from government securities is subject to
final tax and the accelerated depreciation for income tax purposes. The income tax rate is 30% and Jan made
estimated tax payments during 2019 of P900,000.

1. What should Jan report as current tax expense for 2019?

a. 1,200,000 c. 1,350,000
b. 1,500,000 d. 1,650,000

2. In 2021, Jan’s pre-tax financial income amounted to P6,000,000 and the taxable income was P6,500,000. The
difference was due to the reversal of the taxable temporary difference in 2019. There were no permanent
differences in 2021. What is Jan’s 2021 current tax expense?
a. 1,950,000 c. 1,800,000
b. 1,500,000 d. 1,650,000

II. For the year ended December 31, 2019, Rheinold Company reported pre-tax financial income of P6,000,000. Its
taxable income was P7,000,000. The difference is due to rental received in advance. Rental income is taxable when
received but reported in financial income when the rent is received. The income tax rate is 30% and Rheinold made
estimated tax payment of P1,500,000 in 2019. There were no permanent differences in 2019.
1. What amount should Rheinold report as 2019 total income tax expense?
a. 1,500,000 c. 1,650,000
b. 1,800,000 d. 2,100,000

2. In 2020, Rheinold’s pre-tax financial income amounted to P7,500,000 and the taxable income was P6,500,000.
The difference was the inclusion of the rental income recognized in 2019 that was received and included in
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taxable income in 2019. There were no permanent differences in 2020. What is Rheinold’s 2020 total tax ex-
pense?
a. 2,250,000 c. 1,950,000
b. 1,650,000 d. 1,400,000

III. At December 31, 2019, Mark Corporation’s accounting profit is P8,000,000. The following items are the temporary
differences that caused Mark’s income tax in the income tax return to differ from the amount reported in the income
statement: future deductible amounts expected to reverse in 2020 of P1,000,000 and future taxable amounts expected
to reverse in 2021 and later years of P1,200,000 and P1,800,000, respectively. Mark’s income tax rate is 30%. What
amount should be reported as income tax payable on December 31, 2019, assuming no taxes have been paid by Mark?
a. 1,800,000 c. 2,400,000
b. 2,000,000 d. 1,500,000

IV. Anthony Company, organized on January 1, 2019, had pre-tax accounting income of P5,000,000 and taxable income
of P7,000,000 for the current year. The only temporary difference is accrued product warranty cost that is expected to
be paid in 2020. The enacted tax rates are 30% for 2019 and 25% for 2020 and the years thereafter. What amount
should be reported as total income tax expense in the income statement for 2019?
a. 1,500,000 c. 2,100,000
b. 1,250,000 d. 1,600,000

V. The following information is taken from Reymond’s 2019 financial records:

Pre-tax accounting income P15,000,000
Excess tax depreciation (450,000)
Taxable income P14,550,000
Assume the excess tax depreciation was created entirely in 2019 and will result in equal net taxable amounts in each
of the next three years.
If tax rates are 40% in 2019, 35% in 2020 and 2021, and 30% in 2022, the total deferred tax liability that Siargao
should report on its December 31, 2019 statement of financial position is
a. P135,000 c. P157,500
b. P150,000 d. P180,000

VI. Julmer Company began operations in 2019. Included in Julmer’s 2019 financial statements were bad debts expense of
P1,400,000 and profit from an instalment sale of P2,600,000. For tax purposes, the bad debts will be deducted and the
profit from the instalment sale will be recognized in 2020. The enacted tax rates are 35% in 2019 and 38% in 2020. In
its 2019 statement of comprehensive income, what amount should Julmer report as deferred portion of income tax
expense?
a. P1,400,000 c. P456,000
b. P1,520,000 d. P420,000

VII. Jesson organized on January 2, 2017, had pre-tax accounting income of P880,000 and taxable income of P1,600,000
for the year-ended December 31, 2017. The only temporary difference is accrued product warranty costs which are
expected to be paid as follows:
2018 P240,000
2019 120,000
2020 120,000
2021 240,000
The enacted income tax rates are 35% for 2017, 30% for 2018 through 2020, and 25% for 2021. If Jesson expects taxable
income in future years, the deferred tax asset in Jesson’s December 31, 2017 balance sheet should be:
a. 144,000 c. 204,000
b. 168,000 d. 252,000

VIII. On December 31, 2018, Phil Company reported a deferred tax liability of P500,000 and a deferred tax asset of
P350,000. At the end of 2019, Phil Company reported a deferred tax liability of P900,000, and a deferred tax asset of
P100,000. What is the deferred tax expense for 2019?
a. 450,000 c. 150,000
b. 300,000 d. 650,000

IX. Cedrick Company is determining the amount of pre-tax financial income for 2019 by making adjustments to taxable
income from the 2019 tax return. The tax return indicates taxable income of P6,000,000 on which a tax liability of
P1,800,000 has been recognized. The following is the list of items that may be required to determine pre-tax financial
income:

Tax depreciation in excess of book depreciation P 1,000,000

Estimated warranty cost for 2019 2,000,000
Actual warranty cost paid in 2019 500,000
Proceeds from life insurance policy upon death of officer in 2019 received by Cedrick 4,000,000
Company as the beneficiary not included in the tax return
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Cash dividend received but not included in the 2019 tax return because it is from a 1,500,000
domestic corporation
Interest revenue on treasury bill received but not included in the 2019 tax return because 3,000,000
this revenue is subject to a final withholding tax

1. What was Cedrick’s pre-tax financial income?

a. 14,000,000 c. 3,500,000
b. 8,000,000 d. 12,000,000

2. What was Cedrick’s total tax expense?

a. 1,650,000 c. 1,800,000
b. 4,200,000 d. 1,500,000

3. What is the deferred tax expense or benefit?

a. 150,000 expense c. 150,000 benefit
b. 350,000 expense d. 350,000 benefit

X. Christopher Company has three financial statement elements for which the December 31, 2018 book basis is different
from the December 31, 2018 tax basis:
Book Basis Tax Basis Difference
Equipment P2,000,000 P1,200,000 P800,000
Prepaid officers’ insurance policy 750,000 0 750,000
Warranty Liability 500,000 0 500,000

As a result of these differences, future taxable amounts are

a. P500,000 c. P1,550,000
b. P800,000 d. P2,050,000

XI. Ricel’s income statement for the year ended December 31, 2019, shows pre-tax income of P2,000,000. The following
items were treated differently on the tax return and in the accounting records:
Tax Return Accounting Record
Rent Revenue P140,000 P240,000
Depreciation Expense 560,000 440,000
Premiums on officer’s life insurance 180,000
Assume that Review’s tax rate for 2019 is 30%.

What is the amount of income tax payable for 2019?

a. P534,000 c. P648,000
b. P588,000 d. P660,000

XII. An entity had the following financial statement elements for which the December 31, 2016 carrying amount is
different from the December 31, 2016 tax basis:

Carrying amount Tax basis Difference

Equipment 5,500,000 4,000,000 1,500,000

Accrued liability – health care 500,000 0 500,000
Computer software cost 2,000,000 0 2,000,000

The difference between the carrying amount and tax basis of the equipment is due to accelerated depreciation for tax
purposes.
The accrued liability is the estimated health care cost that was recognized as expense in 2016 but deductible for tax
purposes when actually paid.
In January 2016, the entity incurred P3,000,000 of computer software cost. Considering the technical feasibility of the
project, this cost was capitalized and amortized over 3 years for accounting purposes. However, the total amount was
expensed in 2016 for tax purposes.
The pre-tax accounting income for 2016 is P15,000,000. The income tax rate is 30% and there are no deferred taxes on
January 1, 2016.

1. What amount should be reported as current tax expense for 2016?

a. 5,400,000 c. 3,300,000
b. 3,600,000 d. 5,700,000

2. What amount should be reported as total tax expense for 2016?

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a. 4,500,000 c. 4,050,000
b. 4,950,000 d. 3,900,000

3. What amount should be reported as deferred tax liability on December 31, 2016?
a. 1,050,000 c. 900,000
b. 1,200,000 d. 150,000

4. What amount should be reported as deferred tax asset on December 31, 2016?
a. 750,000 c. 150,000
b. 600,000 d. 0