No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

INCOME TAXES

Learning Objectives

1. Determine the difference between Accounting Income and Taxable Income specifically
how they are separately computed and the rules that are followed for their
computations.
2. What are the examples of permanent differences and how is it different from temporary
differences.
3. The two types of temporary differences and both their income statement and statement
of financial position implication when they occur and at the time of their reversal.
4. Reconciliation between Pretax Accounting Income, Accounting Income Subject to
Tax and Taxable Income.
5. The computation of current tax expense and income tax payable when tax payments
have been made in the previous three quarters of the calendar or fiscal year.
6. The correct presentation of deferred tax assets and deferred tax liabilities in the
statement of financial position and the exceptions.
7. The breakdown of total tax expense between the deferred tax expense as a non-
current tax expense and income tax benefit which is a contra tax expense account.
8. Accounting for temporary differences arising from adjustments to assets and liabilities
that have a direct impact in shareholders’ equity.

MULTIPLE CHOICE PROBLEMS

1. For the year ended December 31, 2021, Cynthia Company reported pretax financial income
of P6,500,000. Its taxable income was P6,000,000. The difference is due to an additional
P500,000 charge for depreciation expense because accelerated depreciation is used for
income tax purposes. The income tax rate is 20% and Cynthia made estimated tax payments
during 2021 of P1,000,000. There were no permanent differences in 2021. What should
Cynthia report as current tax expense for 2021?
a. 1,300,000
b. 2,300,000
c. 2,200,000
d. 1,200,000

2. For the year ended December 31, 2021, Brando Company reported pretax financial income
of P6,000,000. Its taxable income was P6,800,000. The difference is due to rental received in
advance. Rental income is taxable when received but reported in financial income when the
earnings process is complete. The income tax rate is 20% and Brando made estimated tax
payments of P1,500,000 in 2021. There were no permanent differences in 2021. What
amount should Brando report as 2021 current tax expense?
a. 1,500,000
b. 1,350,000
c. 1,360,000
d. 1,200,000

3. For the year ended December 31, 2021, Rose Company reported pretax financial income of
P4,500,000. Its taxable income was P6,000,000. The difference is due to the full collection of

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

revenue that was recognized using the installment sales method for accounting purposes in
prior years but under the cash collection basis for income tax purposes. The income tax rate
is 20% and Rose made estimated tax payments during 2021 of P500,000. There were no
permanent differences in 2021. What should Rose report as total tax expense for 2021?
a. 1,700,000
b. 700,000
c. 1,200,000
d. 900,000

4. For the year ended December 31, 2021, Marian Company reported pretax financial income
of P7,000,000. Its taxable income was P6,500,000. The difference is due to warranty
expenditures paid that was recognized in profit or loss using the accrual method in 2020.
Warranty expense is a deductible expense for tax purposes when paid but recognized using
estimated amounts as expense even though unpaid for accounting purposes. The income tax
rate is 20% and Marian made estimated tax payments of P400,000 in 2021. There were no
permanent differences in 2021. What amount should Marian report as 2021 total tax
expense?
a. 1,400,000
b. 1,350,000
c. 1,300,000
d. 1,600,000

5. Meredith Company reported income before depreciation and taxes of P5,000,000. Meredith
provided the following information for its first year of operations ended December 31, 2021, in
connection with the preparation of its income statement and income tax return. Meredith’s
tax rate is 20% and Meredith paid P300,000 income taxes in previous quarters for 2021.

Interest on bank deposits net of final tax 100,000

Premiums paid on life insurance 400,000
Deferred income on installment sale included
in financial income, but taxable in 2022 1,000,000
Financial depreciation 300,000
Accelerated depreciation for income tax purposes 500,000
Rent received in advance 700,000
Dividends received from domestic corporations 800,000

1. What was Meredith’s income tax payable?

a. 740,000
b. 440,000
c. 640,000
d. 880,000

6. On December 31, 2021, Raiders Corporation’s accounting profit is P8,000,000. The following
items are the temporary differences that caused Raiders’ income tax in the tax return to differ
from the amount reported in the income statement, future deductible amounts expected to
reverse in 2022 of P1,000,000 and future taxable amounts expected to reverse in 2022 and
later years of P1,200,000 and P1,800,000, respectively. Raiders’ income tax rate is 30%.
What amount should be reported as income tax payable on December 31, 2021, assuming
no taxes have been paid by Raiders?
a. 1,200,000 c. 2,000,000
b. 2,400,000 d. 1,500,000

7. Vincent Company, organized on January 1, 2021, had pretax accounting income of

P15,000,000 and taxable income of P16,500,000 for the current year. The only temporary

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

difference is accrued product warranty cost that is expected to be paid in 2022. The enacted
tax rates are 25% for 2021 and 20% for 2022 and the years thereafter. What amount should
be reported as total income tax expense in the income statement for 2021?
a. 4,125,000 c. 3,450,000
b. 3,750,000 d. 3,825,000

8. On December 31, 2021, Elmo Company reported a deferred tax liability of P500,000 and a
deferred tax asset of P350,000. At the end of 2021, Elmo Company reported a deferred tax
liability of P1,100,000, and a deferred tax asset of P700,000. What is the deferred tax
expense for 2021?
a. 450,000 c. 600,000
b. 150,000 d. 250,000

9. On December 31, 2021, Amy Company reported a deferred tax liability of P500,000 and a
deferred tax asset of P350,000. At the end of 2021, Amy Company reported a deferred tax
liability of P1,100,000, and a deferred tax asset of P700,000. How much is the deferred tax
liability to be presented?
a. 400,000 c. 1,800,000
b. 1,100,000 d. 250,000

10. The following information was extracted from the records of Hawaii Company as at December
31, 2021:

Carrying amount Tax base

Accounts receivable 1,500,000 1,750,000

Motor vehicle 1,650,000 1,250,000
Provision for warranty 120,000 0
Deposits 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 costs are deductible when paid. An
allowance for doubtful debts of P250,000 has been raised against accounts receivable for
accounting purposes but such debts are deductible only when written off as uncollectible. The
tax rate is 20%. Hawaii Company should report a deferred tax liability o December 31, 2021
at
a. 104,000 c. 80,000
b. 184,000 d. 130,000

11.On January 1, 2021, Dexter Company owns a building with a carrying amount of P3,000,000.
The building is depreciated using straight-line method based on a useful life of 10 years with
no residual value. On the same date, the building is revalued. The fair value of the building is
P4,800,000 with no change in the remaining useful life of 6 years. The 2021 pretax accounting
income before depreciation is P5,000,000. The income tax rate is 20% and there are no other
temporary differences at the beginning of 2021.

1. What is the deferred tax liability arising from the revaluation on January 1, 2021?
a. 900,000 c. 360,000
b. 540,000 d. 0

2. What is the 2021 current tax expense?

a. 1,350,000 c. 1,260,000
b. 1,500,000 d. 900,000

3. What is the deferred tax liability on December 31, 2021?

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

a. 540,000 c. 300,000
b. 450,000 d. 0

4. What is the 2021 total income tax expense?

a. 620,000 c. 750,000
b. 840,000 d. 900,000

5. What is the revaluation surplus on December 31, 2021?

a. 1,200,000 c. 1,500,000
b. 1,440,000 d. 975,000

end

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