PART 1: OBJECTIVE

West Company leased a building and received P4,000,000 annual rental payment on June 15,
2018. The beginning of the lease was July 1, 2018. Rental income is taxable when received.
The income tax rate is 30%. The entity had no other permanent or temporary differences.
1. What amount of deferred tax asset should be reported on December 31, 2018?

Zambal Company reported depreciation of P2,500,000 in the tax return for the current year.
However, in the income statement, the entity reported depreciation of P1,000,000. The
difference in depreciation is a temporary difference that will reverse over time. The tax rate is
30%.
2. What amount should be added to the deferred tax liability at year-end?

Cascade Company is determining the amount of the pretax accounting income for the current
year by making adjustment to taxable income from the 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. The
entity provided the following items that may be required to determine pretax accounting income
from the amount of taxable income:
 Accelerated depreciation for income tax purposes 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 these investments.
3. What is the pretax accounting income for the current year?

Viking Company reported pretax income of P1,000,000 in the income statement for the current
year. Income tax rate 30%

Tax return Accounting record

Rent income 70,000 120,000

Depreciation 280,000 220,000

Payment of penalty - 10,000

Premiums on officer’s - 90,000

life insurance

4. What is the current provision for income tax for the current year?
5. What is the total tax expense?
During the current year. Tiger Company reported pretax financial income of P5,000,000.
Included in the pretax financial income are P900,000 of nontaxable life insurance proceeds
received as a result of the death of an officer, P1,200,000 of estimated warranty expense
accrued at year-end and P200,000 of life insurance premiums for a policy for an officer. No
income tax was previously paid during the year and the income tax rate is 30%.
6. What is the income tax payable at year-end?
7. What is the total tax expense?
On its December 31, 2014 balance sheet, Mother Company had income tax payable of
P520,000 and a current deferred tax asset of P800,000. Mother had reported current deferred
tax asset of P600,000 at December 31, 2013. No estimated tax payments were made during
2014. In its 2014 profit or loss of Mother Company.
8. what amount should be reported as total income tax expense?
On June 30, 2014, Glory Corporation prepaid a P380,000 premium on an insurance premium
payment was a tax-deductible expense in Glory's 2014 cash basis tax return. The accrual basis
income statement will report a P190,000 insurance expense in 2014 and 2015 Assume the
income tax rate is 32%.
9. Using the income statement liability method, In Glory's December 31, 2014
statement of financial position, what amount related to the insurance should be
reported se deferred liability?
10. Using the balance sheet liability method, In Glory's December 31, 2014 statement
of financial position, what amount related to the insurance should be reported as
deferred liability?
Stabilizer Company reported taxable income of P8,000,000 in the income tax return for the first
year of operations. The entity revealed the following temporary differences between financial
income and taxable income for the year: Income tax rate 30%

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

11. What is the deferred tax asset at year-end?

12. What is the deferred tax liability at year-end?
13. What is the deferred tax expense for the first year?
14. What is the total tax expense for the first year?

Chamber Company reported the following differences between the book basis and tax
basis of assets and liabilities on December 31, 2018 which is the end of the first year of
operations: taxable income 7,000,000, income tax rate 30%.
Carrying amount Tax base
Installment accounts receivable 1,000,000 0
Litigation liability 200,000 0
The difference in accounts receivable will result in taxable amounts of 600,000 in 2019 and
400,00o in 2020.
15. What is the current tax expense?
16. What is the deferred tax expense for the first year?
17. What is the total tax expense for the first year?

Shear Company began operations in 2018. Included in the 2018 financial statements were bad
debt expense of 400,000 and profit from an installment sale of P1,000,000.For tax purposes, the
bad debts will be deducted and the profit from the installment sale will be recognized in 2019.
The tax rate is 30%.

18. What amount should be reported as deferred tax expense in the income statement
for 2018?
West Company reported the following carrying amount of assets and liabilities at year-end:
Property 10,000,000
Plant and equipment 5,000,000
Inventory 4,000,000
Trade receivables 3,000,000
Trade payables 6,000,000
Cash 2,000,000

The value for tax purposes for property and for plant and equipment was P7,000,000 and
P4,000,000, respectively. The entity has made a provision for inventory obsolescence of
P2,000,000 which is not allowable for tax purposes. Further, an impairment loss against trade
receivables of P1,000,000 has been made. This charge will not be allowed in the current year
for tax purposes. The tax rate is 30%.
19. What amount should be recognized as deferred tax expense?

Flames Corporation has three financial statement elements for which the December 31, 2014
book value is different than the December 31, 2014 tax basis:
Carrying Amount Tax Base Difference
Equipment 1,000,000 600,000 400,000
Prepaid officers’ insurance 375,000 -0- 375,000
Accrued Liability-health care (250,000) -0- (250,000)

20. As a result of these differences, future taxable amounts are.

Presented below are the differences between the book basis and tax basis of the assets and
liabilities of Photograph Company at the end of 2014:
Carrying amount Tax base
Installment accounts receivable 300,000 0
Litigation liability 60,000 0
It is estimated that the litigation liability will be settled in 2015. The difference in accounts
receivable will result in taxable amounts of P180,000 in 2015 and P120,000 in 2016.
Photograph has taxable income of P1,050,000 in 2014 and is expected to have taxable income
in each of the following two years. Tax rate is 32%. The company's operating cycle is two years
and this is the first year of the company's operation.
21. What is the net deferred tax expense?
22. What is the current tax expense?
23. What is the income tax expenses of the company?

Dainty included the following items in pretax accounting income for 2014:
 Litigation loss estimated at P75,000 which will become tax deductible when settled in the
Future.
 Goodwill impairment of P87,500 which will never be deductible for income tax purposes
 Revenue from an installment sale of P112,500, which will be recognized as part of
taxable income as received over the next three years
 Pretax financial income is P437,500.

24. How much should be the pretax financial income subject to income tax?
25. What is the net deferred tax expense?

PART 2: JOURNAL ENTRIES

On January 1, 2020, Aye Company purchased an equipment for P1,000,000 The equipment has
an estimated useful life of 4 years and no residual value. The entity used the straight-line
method of depreciation for accounting purposes and the SYD method for tax purposes.

The comparative depreciation charges for each of the four years are:

Straight line SYD

2020 250,000 400,000
2021 250,000 300,000
2022 250,000 200,000
2023 250,000 100,000

The depreciation charge is the only timing difference between the accounting income and
taxable income. Aye Company generated P4,000,000 income before depreciation and tax for
each of the four years and that the applicable tax rate is 30%.

Required:
1. Prepare journal entries to record income tax and deferred tax for each of the four
years.
2. Present the deferred tax liability on December 31, 2021.

Complex Company reported the following information relating to income before tax for
accounting purposes: Income tax rate 30%
2020 2,000,000
2021 3,000,000
2022 4,000,000
2023 5,000,000
In 2020, the entity recognized doubtful accounts of P100,000. Such accounts were considered
worthless or uncollectible in 2021.
Analysis of the tax and book records disclosed P120,000 in unearned rent income on December
31, 2020 that has been recognized as taxable income in 2020 when the cash was received.
Also on December 31, 2020, estimated warranty cost of P300,000 had been recognized as
expense on the books in 2020 when the product sales were made but is not deductible for tax
purposes until paid.
The unearned rent income on December 31, 2020 is realized and the actual warranty payments
were made as follows:
Rent income per book Actual warranty Expense
2021 40,000 20,000
2022 40,000 80,000
2023 40,000 200,000

Required:
3. Prepare journal entries for 2020, 2021, 2022 and 2023 to record income tax expense
and deferred income tax arising from the temporary differences.
4. Present the deferred tax liability on December 31, 2021.

December 31, 2020, the statement of financial position accounts of Simple Company has the
same basis for accounting and tax purposes, except the following:
Carrying Amount Tax Base Difference
Computer Software cost 4,000,000 0 4,000,000
Equipment 15,000,000 12,000,000 3,000,000
Accrued Liability-health care 2,000,000 0 2,000,000

In January 2020. the entity incurred cost of P6,000,000 in relation to the development of a
computer software product. Considering the technical feasibility of the product, this cost was
capitalized and amortized over 3 years for accounting purposes using straight line. However, the
total amount was expensed in 2020 for tax purposes.
The equipment was acquired on January 1, 2020 for P20,000,000. The useful life of the
equipment is 4 years with no residual value: The equipment is depreciated using the straight
line for accounting purposes and sum of year's digits method for tax purposes.
In January 2020, the entity entered into an agreement with the employees to provide health care
benefits. The cost of such plan for 2020 was P2,000,000. This amount was accrued as expense
in 2020 for accounting purposes.
However, health care benefits are deductible for tax purposes only when actually paid. The
pretax accounting income for 2020 is P13,000,000. The tax rate is 30% and there are no
deferred taxes on January 1, 2020.

Required:
5. Prepare journal entries to record the deferred tax liability, deferred tax asset and
current tax expense.
6. Present the income tax expense in the income statement.
PART 3:
1. Justification for the method of c. Expenses or losses that are deductible
determining periodic deferred tax expense before they are recognized in financial
is based on the concept of income.
d. Revenues or gains that are recognized in
a. Matching of periodic expense to periodic financial income but are never included in
revenue. taxable income.
b. Objectivity in the calculation of periodic
expense. 5. Dunn Co.’s year 1 income statement
c. Recognition of assets and liabilities. reported 90,000 income before provision for
d. Consistency of tax expense income taxes. To compute the provision for
measurements with actual tax planning federal income taxes, the following year 1
strategies. data are provided:

2. Among the items reported on Cord, Inc.’s Rent received in advance

income statement for the year ended 16,000
December 31, year 1, were the following: Income from exempt municipal bonds
20,000
Payment of penalty 5,000 Depreciation deducted for income tax
Insurance premium on life of an officer with purposes in excess of depreciation reported
Cord as owner and beneficiary for financial statements purposes
10,000 10,000
Enacted corporate income tax rate 30%
Temporary differences amount to If the alternative minimum tax provisions are
a. 0 ignored, what amount of current federal
b. 5,000 income tax liability should be reported in
c. 10,000 Dunn’s December 31, year 1 balance
d. 15,000 sheet?
a. 18,000
3. Temporary differences arise when b. 22,800
revenues are taxable c. 25,800
After they are recognized in financial d. 28,800
income
6. Pine Corp.’s books showed pretax
Before they are recognized in financial
income of 800,000 for the year ended
income December 31, year 1. In the computation of
a. first statement is true, second is false federal income taxes, the following data
b. first statement is false, second is true were considered:
c. both statements is true
d. both statements is false Gain on an involuntary conversion
350,000 (Pine has elected to replace the
4. Which of the following differences would property within
result in future taxable amounts? the statutory period using total proceeds.)
a. Expenses or losses that are deductible Depreciation deducted for the tax purposes
after they are recognized in financial in
income. excess of depreciation deducted for book
b. Revenues or gains that are taxable purposes
before they are recognized in financial 50,000
income.
Federal estimated tax payments, 9. Mill, which began operations on January
70,000 1, year 1 recognizes income from long-term
Enacted federal tax rates, year 1 30% construction contracts under the
percentage-of-completion method in its
What amount should Pine report as its financial statements and under the
current federal income tax liability on its completed-contract method for income tax
December 31, year 1 balance sheet? reporting. Income under each method
a. 50,000 follows:
b. 65,000 Year
c. 120,000 Complete
d. 135,000 contract
Perce
ntage-of completion
Year 1 —
300,000
Year 2 400,000
600,000
7. For the year ended December 31, year 1, Year 3 700,000
Tyre Co. reported pretax financial statement 850,000
income of 750,000. Its taxable income was
650,000. The difference is due to accelerated The income tax rate was 30% for year 1
depreciation for income tax purposes. Tyre’s through year 3. For years after year 3, the
effective income tax rate is 30%, and Tyre enacted tax rate is 25%. Thereare no other
made estimated tax payments during year 1 temporary differences. Mill should report in
of 90,000. What amount should Tyre its December 31, year 3 balance sheet a
report as current income tax expense for deferred income tax liability of
year 1? a. 87,500
b. 105,000
a. 105,000 c. 162,500
b. 135,000 d. 195,000
c. 195,000
d. 225,000 Zeff Co. prepared the following
reconciliation of its pretax financial
8. On June 30, year 1, Ank Corp. prepaid a statement income to taxable income for the
19,000 premium on an annual insurance year ended December 31, year 1, its first
policy. The premium payment was a tax year of operations:
deductible expense in Ank’s year 1 cash
basis tax return. The accrual basis income Pretax financial income
statement will report a 9,500 insurance 160,000
expense in year 1 and year 2. Ank’s income Nontaxable interest received on municipal
tax rate is 30% in year 1 and 25% securities
thereafter. In Ank’s December 31, year 1 (5,000)
balance sheet, what amount related to the Long-term loss accrual in excess of
insurance should be reported as a deferred deductible
income tax liability? amount
10,000
a. 5,700 Depreciation in excess of financial
b. 4,750 statement
c. 2,850 amount
d. 2,375 (25,000)
Taxable income Asset
140,000 Liability
Zeff’s tax rate for year 1 is 40%. Current (30)a
10. In its year 1 income statement, what Noncurrent (before netting) (75)b
amount should Zeff report as income tax 140c
expense current portion? a [(100) × 30%]
a. 52,000 b [(300) × 25%]
b. 56,000 c [(1,200) × 30%] + [2,000 × 25%]
c. 62,000 Venus had no prior deferred tax balances.
d. 64,000 In its year 1 income statement, what amount
should Venus report as
11. In its December 31, year 1 balance
sheet, what should Zeff report as deferred 13. Current income tax expense?
income tax liability? a. 420
a. 2,000 b. 350
b. 4,000 c. 300
c. 6,000 d. 0
d. 8,000 14. Deferred income tax expense?
a. 350
12. West Corp. leased a building and b. 300
received the 36,000 annual rental payment c. 120
on June 15, year 1. The beginning of the d. 35
lease was July 1, year 1. Rental income is
taxable when received. West’s tax rates are 17. Bart, Inc., a newly organized
30% for year 1 and 40% thereafter. West corporation, uses the equity method of
had no other permanent or temporary accounting for its 30% investment in Rex
differences. West determined that no Co.’s common stock. During year 1, Rex
valuation allowance was paid dividends of $300,000 and reported
needed. What amount of deferred tax asset earnings of $900,000. In addition
should West report in its December 31, year • The dividends received from Rex are
1 balance sheet? eligible for the 80% dividends received
a. 5,400 deductions.
b. 7,200 • All the undistributed earnings of Rex will
c. 10,800 be distributed in future years.
d. 14,400 • There are no other temporary differences.
• Bart’s year 1 income tax rate is 30%.
Venus Corp.’s worksheet for calculating • The enacted income tax rate after year 1 is
current and deferred income taxes for year 25%.
1 follows: In Bart’s December 31, year 1 balance
Year 1 Year 2 Year sheet, the deferred
3 income tax liability should be
Pretax income 1,400 a. 10,800
Temporary differences: b. 9,000
Depreciation (800) (1,200) c. 5,400
2,000 d. 4,500
Warranty costs 400 (100)
(300) 18.In year 1, Rand, Inc. reported for
Taxable income 1,000 financial statement purposes the following
Enacted rate 30% 30% items, which were not included in taxable
25% income:
Deferred tax accounts
Installment gain to be collected
equally in year 2 through year 4
1,500,000

Estimated future warranty costs to be

paid equally in year 2 through year 4
2,100,000

There were no temporary differences in

prior years. Rand’s enacted tax rates are
30% for year 1 and 25% for year 2 through
year 4. In Rand’s December 31, year 1
balance sheet,

what amounts of the deferred tax asset

should be classified as current and
noncurrent?
Current Noncurrent
a. 60,000 100,000
b. 60,000 120,000
c. 50,000 100,000
d. 50,000 120,000