Chapter 9

Income Taxes

PROBLEM 1: TRUE OR FALSE

1. TRUE 6. TRUE
2. FALSE 7. FALSE
3. FALSE 8. FALSE
4. FALSE 9. TRUE
5. TRUE 10. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. A

2. B

3. A

4. C

5. D

6. D

7. C

8. B

9. D

10. C

11. Solutions:

Multiply by
Description of items Tax rate
Description of items
Pretax income 900,000
Permanent differences:
Add: Non-deductible
expenses:
(e) Fines paid 30,000
(g) Int. exp. – Tax exempt 3,000
Less: Non-taxable
income
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 (b) Interest rev. from
gov’t. (9,000)
Accounting profit 924,00 30 Income tax 277,20
subject to tax 0 % expense 0
Temporary differences:
Less:  Taxable Less: 
temporary difference Deferred tax
(TTD) 'FI>TI': liability (DTL):
(60,000 30
(a) Excess depreciation ) % (18,000)
(45,000 30
(g) Excess income ) % (13,500)
Add:  Deductible
temporary difference Add:  Deferred
(DTD) 'FI<TI' tax asset (DTA):
30
(c) Excess warranty 54,000 % 16,200
30
(d) Unearned rent 12,000 % 3,600
30
(h) Unrealized losses 18,000 % 5,400
903,00 30 Current tax 270,9
Taxable profit 0 % expense 00

Answers:
Requirement (a): Income tax expense ₱277,200

Requirement (b): Current tax expense ₱270,900

Requirement (c): Deferred tax expense (18,000 + 13,500 – 16,200 – 3,600 –

5,400) = ₱6,300 Deferred tax expense

Requirement (d): Current tax payable ₱270,900

Requirement (e): Ending balance of deferred tax liability

Deferred tax liability
0 beg.
31,500 Increase (18,000 + 13,500)
end. 31,500

Requirement (f): Ending balance of deferred tax liability

Deferred tax asset
beg. 0
Increase (16,200 + 3,600 +
5,400) 25,200

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 25,200 end.

Requirement (g): Adjusting journal entry

Income tax expense 277,200
Deferred tax asset 25,200
Income tax payable 270,900
Deferred tax liability 31,500

12. Solutions:
Requirement (a) – DTL and DTA

Assets:
Excess of carrying amount of software over its tax base 1,000,000
Excess of carrying amount of machinery over its tax base 800,000
Taxable temporary difference (TTD) 1,800,000
Multiply by: Tax rate 30%
Deferred tax liability – Dec. 31, 20x1 540,000

Liability:
Excess of carrying amount of accrued liability over its
tax base 400,000
Deductible temporary difference (DTD) 400,000
Multiply by: Tax rate 30%
Deferred tax asset – Dec. 31, 20x1 120,000

Requirement (b) – Income tax expense and Current tax expense

for the year
Mul
-
tipl
Description of
Description of items y
by items
Tax
  rate  
Pretax income 2,000,000
Add/Less: Permanent
differences -
Accounting profit 2,000,00 Income tax 600,00
subject to tax 0 30% expense 0
(1,800,0 30% Deferred tax (540,000
Less: Taxable 00) liability (DTL): )
temporary

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difference (TTD)

Add: Deductible
temporary 400,00 Deferred tax 120,0
difference (DTD) 0 30% asset (DTA): 00
Taxable profit – 600,00 Current tax 180,0
20x1 0 30% expense 00

Answer to Requirement (b): P600,000 income tax expense and

P180,000 current tax expense

Requirement (c) – Deferred tax expense/benefit

Increase in DTL (540,000)
Increase in DTA 120,000
Deferred tax expense ( 420,000)

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PROBLEM 3: EXERCISES

1. Solutions:

Requirements (a) and (b):

Multiply by
Description of items Tax rate
Description of items
Pretax income 500,000
Permanent differences:
Add: Non-deductible
expenses:
Life insurance premium 20,000
Less: Non-taxable
income
(90,000
Life insurance proceeds )
Accounting profit 430,00 40 Income tax 172,00
subject to tax 0 % expense 0
Temporary differences:
Less:  Taxable Less: 
temporary difference Deferred tax
(TTD) 'FI>TI': - liability (DTL): -

Add:  Deductible
temporary difference Add:  Deferred
(DTD) 'FI<TI' tax asset (DTA):
40
Accrued warranty 120,000 % 48,000
550,00 40 Current tax 220,0
Taxable profit 0 % expense 00

Requirement (c):
(48,000 change in DTA – 0 change in DTL) = 48,000 deferred tax benefit

Requirement (d):

Income tax expense 172,000

Deferred tax asset 48,000
Income tax payable 220,000

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2. Solutions:

Requirements (a) and (b):

Multiply by
Description of items Tax rate
Description of items
Pretax income 360,000
Permanent differences:
Add: Non-deductible
expenses: -
Less: Non-taxable
income -
Accounting profit 360,00 30 Income tax 108,00
subject to tax 0 % expense 0
Temporary differences:
Less:  Taxable Less: 
temporary difference Deferred tax
(TTD) 'FI>TI': liability (DTL):
(16,000 30
Excess depreciation ) % (4,800)
Add:  Deductible
temporary difference Add:  Deferred
(DTD) 'FI<TI' tax asset (DTA):
30
Excess taxable income 12,000 % 3,600
356,00 30 Current tax 106,8
Taxable profit 0 % expense 00

Requirement (c):
(4,800 increase in DTL – 3,600 increase in DTA) = 1,200 deferred tax
expense

Requirement (d):

Income tax expense 108,000

Deferred tax asset 3,600
Income tax payable 106,800
Deferred tax liability 4,800

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3. Solutions:

Requirements (a) and (b):

Multiply by
Description of items Tax rate
Description of items
1,000,00
Pretax income 0
Permanent differences:
Add: Non-deductible
expenses:
Life insurance
premium 90,000
Less: Non-taxable
income
Accounting profit 1,090,0 30 Income tax 327,00
subject to tax 00 % expense 0
Temporary differences:
Less:  Taxable Less: 
temporary difference Deferred tax
(TTD) 'FI>TI': liability (DTL):
(50,000 30
Rent income ) % (15,000)
(60,000 30
Depreciation ) % (18,000)
Add:  Deductible
temporary difference Add:  Deferred
(DTD) 'FI<TI' tax asset (DTA):
980,00 30 Current tax 294,0
Taxable profit 0 % expense 00

Requirement (c):
(15,000 increase in DTL + 18,000 increase in DTL – 0 increase in DTA) =
33,000 deferred tax expense

Requirement (d):

Income tax expense 327,000

Income tax payable 294,000
Deferred tax liability 33,000

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4. Solutions:

Requirements (a) and (b):

Multiply by
Description of items Tax rate
Description of items
Pretax income 300,000
Permanent differences:
Add: Non-deductible
expenses:
Life insurance
premium 60,000
Less: Non-taxable
income -
Accounting profit 360,00 40 Income tax 144,00
subject to tax 0 % expense 0
Temporary differences:
Less:  Taxable Less: 
temporary difference Deferred tax
(TTD) 'FI>TI': liability (DTL):
(50,000 40
Depreciation ) % (20,000)
Add:  Deductible
temporary difference Add:  Deferred
(DTD) 'FI<TI' tax asset (DTA):
40
Warranty 15,500 % 6,200
325,50 40 Current tax 130,2
Taxable profit 0 % expense 00

5. Solutions:

Requirements (a) and (b):

Multiply by
Description of items Tax rate
Description of items
Pretax income 24,000

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Permanent differences:
Add: Non-deductible
expenses: -
Less: Non-taxable
income -
Accounting profit 30 Income tax
subject to tax 24,000 % expense 7,200
Temporary differences:
Add: 
Add:  Reversal of TTD
Reversal of DTL: 1,800
Collection on
receivable 6,000
30 Current tax
Taxable profit 30,000 % expense 9,000

Requirement (c):

Income tax expense 7,200

Deferred tax liability 1,800
Income tax payable 9,000

6. Solutions:

Requirement (a):
DTL = (2M + 1.6M) x 30% = 1,080,000

Requirement (b):
DTA = (800K x 30%) = 240,000

Requirement (c):
(4M x 30%) = 1,200,000

Requirement (d):
1,200,000 – 1,080,000 + 240,000 = 360,000

Requirement (e):
(1,080,00 - 240,000) = 840,000 deferred tax expense

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PROBLEM 4: CLASSROOM ACTIVITY

Solution guide:

Pretax income xx
Fines and penalties xx
Interest income on bank (xx
deposits )
Multiply by:
Acctg. Income subj. to tax xx 30% ITE xx
(xx Multiply by: (xx
Excess depreciation ) 30% DTL )
Multiply by:
Bad debt expense xx 30% DTA xx
Taxable profit xx CTE xx

(xx
DTL )
DTA xx
(Deferred tax expense)/ benefit xx

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PROBLEM 5: MULTIPLE CHOICE - THEORY
1. B 6. D
2. B 7. D
3. A 8. C
4. D 9. A
5. C 10. B

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PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. A
Solution:
Multiply by
Description of items Tax rate
Description of items
Pretax income 800,000
Permanent differences:
Less: Non-taxable
income
Gain on involuntary (350,000
conv. )
Accounting profit 450,00 30 Income tax
subject to tax 0 % expense 135,000
Temporary differences:
Less:  Taxable Less: 
temporary difference Deferred tax
(TTD) 'FI>TI': liability (DTL):
(50,000 30
Excess depreciation ) % (15,000)
400,00 30 Current tax 120,0
Taxable profit 0 % expense 00

Current tax expense

120,000
Estimated tax payments during 20x1
(70,000)
Income tax payable - Dec. 31, 20x1
50,000

2. A
Solution:
Multiply by
Description of items Tax rate
Description of items
Pretax income 600,000
Permanent differences:
Less: Non-taxable
income
Income from exempt (60,000
bonds )
Proceeds from life (100,000
insurance )
Accounting profit 440,00 30 Income tax 132,00
subject to tax 0 % expense 0
Temporary differences:
Less:  Taxable Less: 
temporary difference Deferred tax
(TTD) 'FI>TI': liability (DTL):
Excess depreciation (120,000 30 (36,000)

12
 ) %
320,00 30 Current tax 96,0
Taxable profit 0 % expense 00

3. B
Solution:
Analysis:
 The higher depreciation recognized in financial reporting
compared to taxation makes financial income less than taxable
income (FI<TI). Therefore, the ₱8,000 difference represents a
deductible temporary difference – an addition in the formula.
 Income under financial reporting (equity method) 35,000
25,000
Dividends received
Tax deduction (80% x 25K) (20,000)
Taxable income 5,000
Taxable temporary difference (FI>TI) –
deduction 30,000

Multiply by
Description of items Tax rate
Description of items
Pretax income 100,000
Permanent differences: -
Accounting profit 100,00 30 Income tax
subject to tax 0 % expense 30,000
Temporary differences:
Less:  Taxable Less: 
temporary difference Deferred tax
(TTD) 'FI>TI': liability (DTL):
30
Income (equity method) (30,000) % (9,000)
Add:  Deductible
temporary difference Add:  Deferred
(DTD) 'FI<TI': tax asset (DTA):
30
Excess depreciation 8,000 % 2,400
30 Current tax 23,40
Taxable profit 78,000 % expense 0

4. C (650,000 taxable income x 30%) = 195,000 current tax

expense

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 5. C
Solution:
Multiply by
Description of items Tax Description of items
rate
Pretax income before
depn. 100,000
(12,000
Depreciation expense * )
Pretax income after
depn. 88,000      
Permanent differences: -
30
Acctg. profit subj. to tax 88,000 % ITE 26,000
Less: Excess depreciation
in taxation over financial
reporting (FI>TI) 30 (2,000
(20,000 – 12,000*) (8,000) % Less:  DTL )
30
Taxable profit - 20x2 80,000 % CTE 24,000

*(70,000 – 10,000) ÷ 5 = 12,000

6. C (12,000 x 25%) = 3,000

7. B
Solution:
Rent income - Financial reporting (36,000 x 6/12) 18,000
Rent income - Taxation 36,000
Deductible temporary difference (FI < TI) 18,000
Multiply by: Future tax rate 40%
Deferred tax asset 7,200

8. C
Solution:
Accrual Installment
Year Difference
method method
20x8 800,000 300,000
20x9 1,300,000 700,000
Totals 2,100,000 1,000,000 1,100,000
Multiply by: Tax rate 25%
Deferred tax liability - Dec. 31, 20x9 275,000

9. A (25,000 taxable temporary difference x 35%) = 8,750

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