CEBU CPAR CENTER INC.

Unit 103, MGA Arcade, A.C. Cortes Ave., Mandaue City

Theory of Accounts Angelito R.

Punzalan, CPA, MBA
Accounting for Income Tax (PAS 12)
21st Batch

Accounting Income – or pretax accounting income is the net income for the period
before deducting income tax expense.
Taxable Income (Loss) – the income (loss) for a –period determined in accordance
with the rules established by the taxation authorities, upon which
income taxes are payable or recoverable.
Current Tax Expense – the amount of income taxes payable or recoverable in
respect of the taxable income (tax loss) for a period as
determined by relevant rules of various taxing authorities to
which it is subject.
Deferred Tax Expense – may be based on the current period difference between

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taxable and financial statement income or may be based on a

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projection of changes in the future implications of differences

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between certain tax and financial amounts.
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Income Tax Expense – is comprised of current tax expense and deferred tax

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expense.
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Tax Base of an Asset – the amount that will be deductible for tax purposes against
any taxable economic benefits that will flow to an entity when it
recovers the carrying amount of the asset.
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Tax Base of a Liability – is its carrying amount, less any amount that will be
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deductible for tax purposes in respect of that liability in future

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period.
Current Tax Asset – the excess of the amount already paid in respect of current and
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prior periods over the amounts due for these periods.

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Current Tax Liability – the unpaid current tax for current and prior periods.
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Permanent Difference – items of revenue and expenses that enters in the

computation of either taxable income or pretax accounting
income but does not enter into the computation of the other. (Ex.
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Interest Income, Dividends Received, Life Insurance Premium,

Tax Penalties, Surcharges, and Fines)
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Temporary Difference – is the difference between the carrying amount of an asset

or liability in the balance sheet and its tax base. (Ex. Deferred
Tax Liability: Unearned rent, Prepaid expenses, etc.; Deferred Tax
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Asset: Advances from Customers, Warranty Expenses, etc.)

Taxable Temporary Difference – temporary difference that will result in taxable
amounts in determining taxable profit (tax loss) of future periods
when the carrying amount of the assert or liability is recovered or
settled.
Deductible Temporary Difference – temporary difference that will result in amounts
that are deductible in determining taxable profit (tax loss) of
future periods when the carrying amount of asset or liability is
recovered or settled.
Asset/Liability Method – Under this method, the future tax consequences arising
from temporary differences at the end of the accounting period
are recorded as deferred tax assets or deferred tax liabilities
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Deferred Tax Assets – are expected future tax benefits arising from temporary
differences existing at the end of the accounting period that will
reduce taxable income relative to pretax accounting income in
future periods.
Deferred Tax Liabilities – are expected future tax obligations arising from
temporary differences existing at the end of the accounting
period that will increase taxable income relative to pretax
accounting income in future periods.
Deferred Tax Asset – Valuation Allowance – a deferred tax asset should be reduced
by a valuation allowance if it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
Operating Loss Carry-forward – an excess of tax deductions over gross income in a
year that may be carried forward to reduce taxable income in a
future year. Thus, an operating loss carry-forward will give rise to
a deferred tax asset.

1. It is the amount of income tax paid or payable for a year as determined by

applying the provisions of the enacted tax law to the taxable income.
a. Current tax expense c. Deferred tax benefit
b. Deferred tax expense d. Income tax expense

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2. It is the deferred tax consequence attributable to a taxable temporary

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a. Deferred tax liability c. Current tax liability

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b. Deferred tax asset d. Current deferred tax asset
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3. It is the deferred tax consequence attributable to a deductible temporary

difference and operating loss carry-forward.
a . Deferred tax liability c. Current tax liability
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b. Deferred tax asset d. Current tax asset

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4. It is the excess of taxable revenues over tax deductible expenses and

exemptions for the year as defined by the Bureau of Internal Revenue.
a. Taxable income c. Operating loss carry-forward
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b. Accounting income subject to tax d. Tax consequence

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5. A temporary difference, which would result in a deferred tax asset is

a. Tax, penalty or surcharge.
b. Dividend received on stock investment.
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c. Excess tax depreciation over accounting depreciation.

d. Rent received in advance included in taxable income at the time of
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receipt but deferred for accounting purposes.

6. A temporary difference, which would result in a deferred tax liability is

a. Interest revenue on government securities.
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b. Accrual warranty cost.

c. Subscription revenue received in advance.
d. An installment sale, which is included in accounting income at the time of
sale and included in taxable income when collected.

7. Which of the following is the best description of the current PAS approach to
interperiod tax allocation?
a. An application of the matching concept c. The enacted method
b. Partial allocation d. The asset/liability approach

8. Interperiod tax allocation accounts for

a. All differences between tax regulations and PAS.
b. Tax effects of specific income statement items in the same period.
c. was
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d. Temporary differences.

9. A future deductible amount is exemplified by all of the following except

a. Revenue that is included in the tax return before it is included in pretax
accounting income.
b. Gain that is included in the tax return before it is included in pretax
accounting income.
c. Expense that is included in the tax return after it is included in pretax
accounting income.
d. Expense that is included in the tax return before it is included in pretax
accounting income.

10. Which of the following does not help explain why income tax expense is
different from the product of pretax income and the current tax rate?
a. Permanent differences c. The fact that future and current tax rates
are different
b. Temporary differences d. A change in the valuation allowance for the
deferred tax asset

11. In computing the change in deferred tax accounts, which tax rates are used?
a. Current tax rate c. Enacted tax rate

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b. Estimated future tax rate d. Past years’ tax rate

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