Class Activities (Millan, 2019)

1. In 2003, the Worf Company, reported pretax financial income of P500,000. Included in that pretax financial
income was P90,000 of nontaxable life insurance proceeds received as a Aresult of the death of an officer; P120,000
of warranty expenses accrued but unpaid as of December 31, 2003; and P20,000 of life insurance premiums for a
policy for an officer. Worf is the beneficiary. Worf is subject to an income tax rate of 40%.

Requirements:
a. How much is the income tax expense for 2003?
ANSWER: P88, 000
Solution:
Current Tax Expense P220,000
Multiply by: Income tax rate 40%
Income Tax Expense P88,000

b. How much is the current tax expense for 2003?

ANSWER: P220, 000
Solution:
Pre-tax income P500,000
Less by: Life insurance proceeds 90,000
P410,000
Add to: Warranty Expense 120,000
Life insurance premiums 20,000
550,000
Multiply by: Income tax rate 40%
Current Tax Expense P220,000

c. How much is the deferred tax expense (benefit) for 2003?

ANSWER: P132, 000
Solution:
Current Tax Expense P220,000
less by: Income Tax Expense 88,000
Deferred Tax Expense P132,000

d. Provide the year-end adjusting entry to record the income tax expense.
Answer:
Income tax expense P88, 000
Deferred tax expense 132,000
Current tax expense P220, 000

2. The books of the Tracker Company for the year ended December 31, 20x2, showed pretax income of P360,000.
In computing the taxable income, the following differences were taken into account:
Depreciation deducted for tax purposes in excess of depreciation recorded in the books P16,000
Income from installment sale reportable for tax purposes in excess of income recognized
In the books 12,000

Description of items Multiply by tax rate Description of items

Pretax income P 360,000
Accounting profit subject to tax 360,000 x 30% Income tax expense P 108,000
Temporary differences:
Less: Excess of depreciation (16,000) x 30% Less: Deferred tax liability (4,800)
Add: Sale reportable tax 12,000 x 30% Add: Deferred tax asset 3,600
Taxable profit P 356,000 x 30% Current tax expense P106,800

Requirements:
a. How much is the income tax expense for 20x2?
ANSWER: P108, 000
Solution:
Income tax expense = deferred tax expense + current tax expense
Deferred tax expense P 1,200
Current tax expense 106,800
Income tax expense P 108,000

b. How much is the current tax expense for 20x2?

ANSWER: P106, 800
Solution:
Taxable profit P356, 000
Multiply by: 30%
Current tax expense P106, 800

c. How much is the deferred tax expense (benefit) for 20x2?

ANSWER: (P1, 200)
Solution:
Deferred tax expense = increase in DTL – increase in DTA
Increase in DTL (P 4,800)
Less: Increase in DTA 3,600
Deferred tax expense (P 1,200)

d. Provide the year-end adjusting entry to record the income tax expenses.
ANSWER:
December 31, 20x1
Income tax expense P108, 000
Deferred tax asset 3,600
Deferred tax liability 4,800
Income tax payable 106,800

3. Frey Corporation’s income statement for the year ended December 31, 20x2, shows pretax income of P1,000,000.
The following items are treated differently on the tax return and in the accounting records:
Tax return Accounting records
Rent Income P70,000 P120,000
Depreciation expense 280,000 220,000
Premiums on officers’ life insurance - 90,000

Tax return Accounting records Differences

Rent Income P70,000 P120,000 P50,000
Depreciation expense 280,000 220,000 60,000
Premiums on officers’ life insurance - 90,000 90,000
Description of items Multiply by tax rate Description of item
Pretax income P 1,000,000
Permanent differences:
Add: Non-deductible expense
Premium life insurance 90,000
Accounting profit subject to tax 1,090,000 x 30% Income tax expense P 327,000
Temporary differences:
Less: Taxable temporary difference
Depreciation expense (60,000) x 30% Less: Deferred tax liability (18,000)
Rent income (50,000) x 30% (15,000)
Taxable profit P 980,000 x 30% Current tax expense P 294,000

Requirement:
a. How much is the income tax expense for 2002?
ANSWER: P327, 000
Solution:
Income tax expense = deferred tax expense + current tax expense
Deferred tax expense P33, 000
Current tax expense 294,000
Income tax expense P327, 000

b. How much is the current tax expense for 2002?

ANSWER: P294, 000
Solution:
Taxable profit P980, 000
Multiply by: 30%
Current tax expense P294, 000

c. How much is the deferred tax expense (benefit) for 2002?

ANSWER: (P33, 000)
Solution:
Deferred tax expense = increase in DTL – increase in DTA
Increase in DTL (18,000+ 15,000) (P33, 000)
Increase in DTA 0
Deferred tax expense (P33, 000)
d. Provide the year-end adjusting entry to record the income tax expense
ANSWER:
December 31, 20x1
Income tax expense P327, 000
Deferred tax asset 0
Deferred tax liability P33, 000
Income tax payable 294, 000

4. Inventive Corporation’s income statement for the year ended December 31, 2002, shows pretax income of
P300,000. The following items treated differently on the tax return and in the accounting records:
Tax returns Accounting Records
Warranty expense P170, 000 P185, 500
Depreciation expense 150,000 100,000
Premiums on officers’ life insurance - 60,000

Requirements:
 Tax returns Accounting Records Differences
Warranty expense P170, 000 P185, 500 P15, 500
Depreciation expense 150,000 100,000 50,000
Premiums on officers’ life insurance - 60,000 60,000

Description of items Multiply by tax rate Description of items

Pretax income P300, 000
Permanent differences:
Add: Non-deductible expense
Premium life insurance 60,000
Accounting profit subject to tax 360,000 x 40%
Income tax expense P144, 000
Temporary differences:
Less: Taxable temporary difference
Depreciation expense (50,000) x 40% Less: Deferred tax liability (20,000)
Add: Deductible temporary difference
Warranty expense 15,500 x 40% Add: Deferred tax asset 6,200
Taxable profit P 325,500 x 40% Current tax expense P130, 200

Requirements:
a. How much is the income tax expense for 2002?
ANSWER: P144, 000
Solution:
Deferred tax expense P13, 800
Current tax expense 130,200
Income tax expense P144, 000

b. How much is the current tax expense for 2002?

ANSWER: P130, 200
Solution:
Taxable profit P325, 500
Multiply by: 40%
Current tax expense P130, 200

c. How much is the deferred tax expense (benefit) for 2002?

ANSWER: (P13, 800)
Solution:
Deferred tax expense = increase in DTL – increase in DTA
Increase in DTL (P20, 000)
Increase in DTA 6,200
Deferred tax expense (P 13,800)

d. Provide the year-end adjusting entry to record the income tax expense.
ANSWER:
December 31, 20x1
Income tax expense P144, 000
Deferred tax asset 6,200
Deferred tax liability P20, 000
Income tax expense 130, 200
5. Eden Company had pretax accounting income of P24,000 during 2002. Eden’s only temporary difference for
2002 relates to a sale made in 2000 and recognized for accounting purposes at that time. However, Eden uses the
installment sales method of revenue recognition for tax purposes. During 2002 Eden collected a receivable from the
2000 sale which resulted in P6,000 of income under the installment sales method. Eden is subject to a 30% income
tax rate.

Requirement:
Description of items Multiply by tax rate Description of items
Pretax income P 24,000
Permanent differences: -
Accounting profit subject to tax 24,000x 30% Income tax expense P7, 200
Temporary differences:
Add: Deductible temporary difference
Sale receivable collected 6,000 x 30% Add: Deferred tax asset 1,800
Taxable profit P30, 000 x 30% Current tax expense P9, 000

a. How much is the income tax expense for 2002?

ANSWER: P7, 200
Solution:
Accounting profit subject to tax P24, 000
Multiply by: 30%
Income tax expense P7, 200

b. How much is the current tax expense for 2002?

ANSWER: P9, 000
Solution:
Taxable profit P 30,000
Multiply by: 30%
Current tax expense P9, 000

c. Provide the year-end adjusting entry to record the income tax expense.
ANSWER:
December 31, 20x1
Income tax expense P 7,200
Deferred tax asset 1,800
Deferred tax liability P0
Income tax payable 9,000

6. Taken from the records of SCHOLIAST ANNOTATOR Co. as of December 31,20x1 is the following
information:
Carrying amount Tax base Difference
Computer software cost 2,000,000 - 2,000,000
Machinery 4,000,000 2,400,000 1,600,000
Accrued liability- health care 800,000 - 800,000
 Development costs of software after technological feasibility was established were capitalized for financial
reporting. Such costs were recognized as outright deductions for tax purposes.
 Straight line method is used in depreciating the machinery while sum-of-the-years’ digits method is used
for tax purposes.
 Health care benefits are accrued as incurred but are tax deductible only when cash is actually paid.
 Pre-tax profit for 20x1 is P4, 000,000. Income tax rate is 30%
 There were no temporary differences as of January 1, 20x1.

Requirements:
a. How much is the deferred tax liability as of December 31, 20x1?
ANSWER: P1, 080,000
Solution:

Assets:
Excess of carrying amount of software over its tax base P2, 000,000
Excess of carrying amount of machinery over its tax base 1,600,000
Taxable temporary difference (TTD) 3,600,000
Multiply by: tax rate 30%
Deferred tax liability- Dec. 31, 2001 P1, 080,000

b. How much is the deferred tax asset as of December 31, 20x1?

ANSWER: P240, 000
Solution:
Liability:
Excess of carrying amount of accrued liability over its tax base P800, 000
Deductive temporary differences (DTD) 800,000
Multiply by: tax rate 30%
Deferred tax asset- Dec. 31, 2001 P240, 000

c. How much is the income tax expense for the year?

d. How much is the current tax expense for the year?
ANSWER: P1, 200,000
P360, 000
Solution:
Description of items Multiply by tax rate Description of items
Pretax income P 4,000,000
Permanent differences: -
Accounting profit subject to tax 4,000,000 x 30% Income tax expense P1, 200,000
Less: TTD (3,600,000) x 30%Less: Deferred tax liability (1,080,000)
Add: DTD 800,000 x 30% Add: Deferred tax asset 240,000
Taxable profit P 1,200,000 x 30% Current tax expense P360, 000

e. How much is the deferred tax expense (benefit) for the year?
ANSWER: (P840, 000)
Solution:
Deferred tax expense = increase in DTL – increase in DTA
Increase in DTL (P1, 080,000)
Increase in DTA 240,000
Deferred tax expense (P840, 000)