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    Accounting For Income Tax

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    Daniel Kahn Gillamac
    Maximo Inc. reported pretax income of P100,000 in 2022. There were differences between financial reporting and tax reporting amounts for warranty expenses, construction contract profits, depreciation, fines, and interest revenue. The company's taxable income for 2022 was P55,100. Journal entries were made to record a deferred tax asset of P1,200, deferred tax liability of P20,000, and current tax expense of P22,040. In 2023, Maximo reported a pretax operating loss of P100,000, resulting in a deferred tax asset of P40,000 being recorded.

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    Accounting For Income Tax

    Uploaded by

    Daniel Kahn Gillamac
    70 views3 pages
    Maximo Inc. reported pretax income of P100,000 in 2022. There were differences between financial reporting and tax reporting amounts for warranty expenses, construction contract profits, depreciation, fines, and interest revenue. The company's taxable income for 2022 was P55,100. Journal entries were made to record a deferred tax asset of P1,200, deferred tax liability of P20,000, and current tax expense of P22,040. In 2023, Maximo reported a pretax operating loss of P100,000, resulting in a deferred tax asset of P40,000 being recorded.

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    Accounting for Income Tax

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    Maximo Inc. reported pretax income of P100,000 in 2022. There were differences between financial reporting and tax reporting amounts for warranty expenses, construction contract profits, depreciation, fines, and interest revenue. The company's taxable income for 2022 was P55,100. Journal entries were made to record a deferred tax asset of P1,200, deferred tax liability of P20,000, and current tax expense of P22,040. In 2023, Maximo reported a pretax operating loss of P100,000, resulting in a deferred tax asset of P40,000 being recorded.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    70 views3 pages

    Accounting For Income Tax

    Uploaded by

    Daniel Kahn Gillamac
    Maximo Inc. reported pretax income of P100,000 in 2022. There were differences between financial reporting and tax reporting amounts for warranty expenses, construction contract profits, depreciation, fines, and interest revenue. The company's taxable income for 2022 was P55,100. Journal entries were made to record a deferred tax asset of P1,200, deferred tax liability of P20,000, and current tax expense of P22,040. In 2023, Maximo reported a pretax operating loss of P100,000, resulting in a deferred tax asset of P40,000 being recorded.

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    of 3

    Maximo, Inc. began operations in 2022 and has provided the following information.

    - Pretax financial income for 2022 is P100,000.


    - The tax rate enacted for 2022 and future years is 40%.
    Differences between the 2022 income statement and tax return are listed below.
    - Warranty expense accrued for financial reporting purposes amounts to P5,000. Warranty deductions per the tax return amount to P2,000.
    - Gross profit on construction contracts using the percentage-of-completion method for books amounts to P92,000. Gross profit on construction contracts for tax purposes amounts to P62,000.
    - Depreciation of property, plant, and equipment for financial reporting purposes amounts to P60,000. Depreciation of these assets amounts to P80,000 for the tax return.
    - A P3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income.
    - Interest revenue earned on an investment in tax-exempt government bonds amounts to P1,400.
    - Taxable income is expected for the next few years.

    Requirement 1: Compute for taxable income

    Initial pretax financial income 100,000


    Permanent difference:
    Violation paid 3,500
    Interest revenue -1,400
    Accounting income subject to tax 102,100

    Deductible temporary difference:


    Estimated warranty cost (5,000 - 2,000) 3,000

    Taxable temporary difference:


    Gross profit (92,000 - 62,000) -30,000
    Excess depreciation (60,000 - 80,000) -20,000

    Taxable income 55,100

    Requirement 2: Compute the deferred taxes at December 31, 2022

    Estimated warranty cost 3,000


    Deductible temporary difference 3,000
    Tax rate 40%
    Deferred Tax Asset 1,200
    Gross profit 30,000
    Excess depreciation 20,000
    Taxable temporary difference 50,000
    Tax rate 40%
    Deferred Tax Liability 20,000

    Taxable income 55,100


    Tax rate 40%
    Current Tax Expense 22,040

    Requirement 3: Prepare the journal entries to record income tax expense, deferred taxes, and income taxes payable for 2022

    Deferred tax asset 1,200


    Income tax benefit 1,200
    To record deferred tax asset

    Income tax expense 20,000


    Deferred tax liability 20,000
    To record deferred tax liability

    Income tax expense 22,040


    Income tax payable 22,040

    Requirement 4: Fill in the amounts of the following

    Income before income tax 100,000


    Income tax expense:
    Current income tax expense 22,040
    Income tax benefit -1,200
    Deferred tax expense 20,000 40,840
    Net income 59,160

    Requirement 5: Assume that in 2023 Maximo reported a pretax operating loss of P100,000. There were no other temporary or permanent differences in tax and book income for 2023.
    Prepare the journal entry to record income tax expense for 2023. It is probable that Maximo will return to profitability in 2024

    Deferred tax asset 40,000


    Income tax benefit 40,000
    To record deferred tax asset
    Pretax operating loss 100,000
    Multiply by: Tax rate 40%
    40,000

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