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Accounting For Income Tax

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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194 views3 pages

Accounting For Income Tax

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.

Uploaded by

Daniel Kahn Gillamac
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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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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