UPDATES IN FINANCIAL REPORTING STANDARDS

MULTIPLE CHOICE QUESTIONS - THEORIES

1. These are the differences between the carrying amount of an asset or liability in the statement of financial
position and its tax base.
a. Temporary differences
b. Tax differences
c. Permanent differences
d. Accounting differences

2. Which statement is incorrect concerning tax assets and liabilities?

a. Deferred tax assets and liabilities should be discounted
b. Tax assets and liabilities should be presented separately from other assets and liabilities in the
statement of financial position.
c. Deferred tax assets and liabilities should be distinguished from current tax assets and liabilities
d. When an entity makes distinction between current and non-current assets and liabilities, it should not
classify deferred tax assets and liabilities as current.

3. Which of the following is the most likely item to result in a deferred tax liability?
a. Expenses and losses that are deductible after they are recognized in financial income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Expenses and losses that are deductible before they are recognized in financial income.
d. Revenues or gains that are recognized in financial income but are never included in taxable income.

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

a. Interest revenue on municipal bonds
b. Accrual of warranty expense
c. Excess of tax depreciation over financial accounting depreciation
d. Subscription received in advance.

5. Which of the following transaction would not result in a temporary difference between pretax financial
income and taxable?
a. Payment of premiums for life insurance
b. Depreciation expense
c. Contingent liabilities
d. Product warranty cost

6. Which of the following is the most likely item to result in a deferred tax assets?
a. Using accelerated depreciation for tax purposes but straight line depreciation for accounting
purposes
b. Using the completed-contract method for financial reporting purposes
c. Prepaid expenses
d. Unearned revenues

7. Recognizing the tax benefits in a loss year due to a loss carrying forward requires
a. Only a footnote disclosure
b. Creating a new carrying forward for the next year
c. Creating a deferred tax asset
d. Creating a deferred tax liability

8. A deferred tax liability is computed using

a. The current tax laws, regardless of expected or enacted future tax laws
b. Expected future tax laws, regardless of whether those expected laws have been enacted
c. Current tax laws, unless enacted future tax laws are different
 d. Either current or expected future tax laws, regardless of whether those expected laws have been
enacted

MULTIPLE CHOICE QUESTIONS - PROBLEMS

KZ Company, a domestic corporation, started operations in the latter part of the first quarter of 2023. The
company opted to report its financial statement for the nine month ended December 31, 2023. The pretax
financial income for the period was P1,200,000. In preparing the income tax return for the period, the tax
accountant determined the following difference between 2023 financial income and taxable income.
a. Because of non-compliance with some local government requirements, the city treasurer assessed
fines and penalties totaling P22,500
b. The company made a donation to Hospicio de San Jose amounting to P25,000. Tax laws consider a
donation of this kind as non-deductible in full amount.
c. Cash dividends received from equity investment in a domestic corporation, P5,200
d. Rent was paid in advance for one year amounting P240,000. The financial statements of KZ Company
reported prepaid rent of P60,000.
e. The company uses straight line method depreciation for all its depreciable assets and sum-of –the
years’ digits for tax purposes, resulting to a difference in depreciation expense of P50,000

Currently, the income tax rate is 20%. These are no changes in tax rates that have been enacted or substantially
enacted for future years.

1. How much is the deferred tax liability at December 31, 2023?

a. P22,000
b. P20,000
c. P12,000
d. P10,000

2. Taxable income is
a. P1,352,300
b. P1,132,300
c. P1,242,300
d. P1,200,000

3. Total income tax expense is

a. P248,460
b. P240,000
c. P226, 460
d. P202,460

Karen Company reports taxable income of P1,658,000 on its income tax return for the year ended December 31,
2023. Temporary differences between financial income and taxable income for the year are:
 Book depreciation in excess of tax depreciation, P160,000
 Accrual of product warranty claims in excess of actual claims, P250,000
 Reported installment sales revenue, P530,000

4. What is Karen Company’s financial income subject to tax for the year ended December 31, 2023?
a. P2,598,000
b. P1,778,000
c. P1,658,000
d. P1,538,000

The Powers Company had taxable income of P1,200,000 during 2023. Powers Company used accelerated
depreciation for tax purposes (P340,000) and straight-line method for financial accounting purposes (P200,000)
 5. Assuming Powers Company had no other temporary difference, what is the pretax accounting income for
2023?
a. P1,000,000
b. P1,060,000
c. P1,200,000
d. P1,340,000

The information below is taken from Zalameda Company’s 2023 profit and loss:
Profit before income taxes P3,000,0000
Income tax expense
Current P1,128,000
Deferred 84,000 1,212,000
Profit P1,788,000

Zalameda Company’s first year of operation was 2023. The company has a 20% tax rate. Management decided to
use accelerated for tax purposes and the straight-line method for financial reporting purposes. The amount
charged to depreciation expense in 2023 was P1,200,000

6. Assuming the temporary difference existed between the book income and taxable income, what amount
did Zalameda Company deduct for depreciation on its tax return for 2023?
a. P1,013,333
b. P1,200,000
c. P1,253,333
d. P1,620,000

Claudia Company had pretax accounting income of P2,400,000 during 2023. Claudia Company’s temporary
difference for 2023 relates to sale made in 2022 and recognized for accounting purposes at that time. However,
Claudia Company uses the installment method of revenue recognition for tax purposes. During 2023, the company
collected a receivable from the 2022 sales resulted to P600,000 of income under the installment method.

7. What is Claudia Company’s taxable income for 2023?

a. P 600,000
b. P1,800,000
c. P2,400,000
d. P3,000,000

For the year 2023, Eduardo Company reported income tax expenses of P110,000. Income tax payable at the end of
2022 was P90,000 and at the end of 2023 was P100,000. The deferred tax liability that resulted from the use of
accelerated depreciation for tax purposes and the straight-line method for financial reporting purposes increased
from P105,000 at the beginning of 2023 to P130,000 at the end of 2023.

8. How much cash was paid for income taxes during the year?
a. P 75,000
b. P 85,000
c. P 95,000
d. P 105,000

Key Answers
MCQ – THEORIES
1. A
2. A
3. C
4. C
5. C
6. D
7. C
8. C

MCQ- PROBLEMS
1. Future taxable amounts
Rent paid in advance P 60,000
Tax depreciation in excess of book depreciation 50,000
Total P110,000

Deferred tax liability (P110,000 x 20%) P22,000 (a)

2. Pretax financial income P1,200,000

Non-deductible expenses
Fines and penalties paid 22,500
Donation to Hospicio de San Jose 25,000 47,500
Non-taxable revenue
Dividends from domestic corporation (5,200)
Financial income subject to tax P1,242,300
Future taxable amounts (see No. 3) (110,000)
Taxable income P1,132,300 (a)

3. Financial income subject to tax P1,242,300

Income tax rate x 20%
Total income tax expense P 248,460 (a)
or

Current income tax expense P 226,460

(1,132,300 x 20%)
Deferred income tax expense 22,000
(110,000 x 20%)
Total income tax expense P 248,460

4. Taxable income P1,658,000

Book depreciation in excess of tax (160,000)

depreciation (FDA)
Accrual of product warranty claims in (250,000)
excess of actual claims (FDA)
Reported installment sales revenue (FTA) 530,000

Financial income subject to tax P1,778,000 (b)

5. Taxable income P1,200,000
Excess of tax depreciation over book
depreciation (FTA) 140,000
Pretax accounting income P1,340,000 (d)
6. Future taxable amount (84,000/20%) P 420,000
Depreciation expense per books 1,200,000
Depreciation expense per tax return P1,620,000 (d)

7. Pretax accounting income P2,400,000

Collection from 2020 installment sale 600,000
Taxable income P3,000,000 (d)

8. Income taxes payable, beg P 90,000

Current income tax expense for the year
Income tax reported 110,000
Increase in deferred tax liability
(130,000-105,000) 25,000 85,000
Income taxes payable, end (110,000)
Cash paid for income taxes P 75,000 (a)