Accounting for Income Tax

SEATWORK

Instruction: Answer the following questions and journalize the transactions. Submit your answers
on March 11 before 12:00 noon.

1. Cup Company’s income statement for the year ended December 31, 2021 shows pretax
income of P5,000,000. The following items are treated differently on the tax return and in
the accounting records:
Tax return Accounting records
Rent income P 350,000 P 600,000
Depreciation expense 1,400,000 1,100,000
Premiums on officers’ life insurance 450,000
The tax rate for 2021 is 25%. What is the amount of income tax payable for
2021?__________________

2. On January 2, 2021, Might Company purchased machine for P1,400,000. This machine
has a 5-year useful life, a residual value of P200,000, and is depreciated using the
straight line method for financial statement purposes. For tax purposes, depreciation
expense was P500,000 for 2021 and P400,000 for 2022. Might’s 2022 income before
tax and depreciation expense was P2,000,000 and its tax rate was 25%. If Might has
made no estimated tax payments during 2022, what amount of current income tax
liability would Might report in its December 31, 2022 balance sheet?___________

3. For calendar year 2021, B Corp. reported depreciation of P660,000 in its income statement.
On its 2008 income tax return, B reported depreciation of P1,100,000. B’s income statement
also included P110,000 accrued warranty expense and will be deducted for tax purposes when
paid. B’s enacted tax rate is 25% for 2021 and thereafter. Taxable income is expected in all
future years. The depreciation difference and warranty expense will reverse over the next
three years as follows:
Depreciation Warranty
Expense Expense
2022 P176,000 P 22,000
2023 154,000 33,000
2024 110,000 55,000
P440,000 P110,000
These were B’s only temporary differences. In B’s 2021 income statement, the deferred
portion of its provision for income taxes should be:__________

4. Mar Company is determining the amount of its pretax financial income for 2021 by making
adjustment to taxable income from the company’s 2021 income tax return. The tax return
indicates taxable income of P5,000,000 on which a tax liability of P1,250,000 has been
recognized (P5,000,000 x 25%). Following are the items that may be required to determine
pretax financial income from the amount of taxable income:
I. Straight line depreciation for income tax purposes was P500,000; accelerated
depreciation for financial accounting purposes is P800,000.
 II. Estimated warranty cost was P1,000,000 but only P200,000 was deducted in the tax
return because it is the amount actually paid in the current year.
III. Cash dividend was not included in the tax return because the said cash dividend is tax-
exempt. During the year, cash dividend received was P400,000.
What was Mar Company’s pretax financial income for 2021?____________

5. Elf Company prepared the following reconciliations of its pretax financial statement income to
taxable income for the year ended December 31, 2021 its first year of operations:
Pretax financial income P1,600,000
Nontaxable interest received ( 50,000)
Long-term loss accrual in excess of
deductible amount 100,000
Depreciation in excess of financial
statement income ( 250,000)
Taxable income P1,400,000
Assume the income tax is 25%, what amount should Elf report as income tax expense – current
portion of its 2021 income statement?________________

6. The differences between the book basis and tax basis of the assets and liabilities of Chubby
Company at the end of 2021 are presented below:
Book basis Tax basis
Installment accounts receivable P1,000,000 P 0
Litigation liability 200,000 0
It is estimated that the litigation liability will be settled in 2022. The difference in accounts
receivable will result in taxable amounts of P600,000 in 2022 and P400,000 in 2023. Chubby
has a taxable income of P7,000,000 in 2021 and is expected to have taxable income in each of
the following two years. The income tax rate is 25%. This is the first year of operations of
Chubby and the operating cycle of the business in two years. What are the net deferred tax
expense, current tax expense and income tax expense of Chubby respectively?
________________________

7. On December 31, 2021, the balance sheet accounts of Simple Company have the same basis
for accounting and tax purposes, except the following:
Carrying amount Tax base Difference
Computer software cost P4,000,000 P 0 P4,000,000
Equipment 15,000,000 12,000,000 3,000,000
Accrued liability – health care 2,000,000 0 2,000,000
In January 2021, Simple Company 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 2019 for tax purposes.
The equipment was acquired on January 1, 2021 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 2021, Simple Company entered into an agreement with its employees to
provide health care benefits. The cost of such plan for 2021 was P2,000,000. This amount
was accrued as expense in 2021 for accounting purposes. However, health care benefits are
deductible for tax purposes only when actually paid.
 The pretax accounting income for 2021 is P13,000,000. The tax rate is 25% and assume
there are no deferred taxes on January 1, 2021.

The December 31, 2021 balance sheet shall report deferred tax liability at:___________
The December 31, 2021 balance sheet shall report deferred tax asset at: ___________
What is the 2021 current tax expense? ___________
The 2021 income statement shall report total income tax expense at: ___________