No. 125 Brgy.
San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
INCOME TAXES
I. Definitions
A. Accounting Income – Income appearing on the income statement and computed in accordance
with generally accepted accounting principles.
B. Taxable Income – Income appearing on the tax return and computed in accordance with income
tax laws.
C. Permanent Difference – Items of revenue or expense that are recognized in either accounting
or taxable income but will never be recognized in the other.
D. Temporary Difference – Are differences between the carrying amount of an asset or liability
and its tax base. Temporary differences may also arise from timing differences, meaning items
of revenue and expense that is recognized for both accounting and taxable income but at
different periods. There are two types of temporary differences
a) Taxable: A temporary difference that will result in taxable amounts in the future when the
carrying amount of the asset is recovered or the liability is settled. Taxable temporary
differences are also revenues or gains that are recognized in accounting income but taxable
at a later period and expenses or losses that are deductible before they are recognized in
financial income.
b) Deductible: A temporary difference that will result in amounts that are tax deductible in the future
when the carrying amount of the asset is recovered or the liability is settled. Deductible temporary
differences are also revenues or gains that are taxable before they are recognized in financial income
and expenses or losses that are deductible after they are recognized in financial income.
E. Deferred tax liability – Are the amounts of income taxes payable in future periods in respect of
taxable temporary differences. Deferred taxes may arise from the following:
a. When the carrying amount of an asset is higher than its tax base.
b. When the tax base of a liability is higher than its carrying amount
F. Deferred tax asset – Are the amounts of income taxes recoverable in future periods in respect
of deductible temporary differences and operating loss carry forward. Deferred tax assets may
arise from the following:
a. When the tax base of an asset is higher than its carrying amount.
b. When the Carrying amount of a liability is higher than its tax base.
G. Tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes
H. Tax expense (tax income) is the aggregate amount included in the determination of profit or
loss for the period in respect of current tax and deferred tax.
I. Current tax expense is the amount of income taxes payable (recoverable) in respect of the
taxable profit (tax loss) for a period.
II. Measurement of Deferred Tax Assets and Liabilities
1|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
a) Deferred tax assets and liabilities should be measured at the tax rates that are expected to
apply to the period when the asset is realized or the liability is settled (liability method), based
on tax rates/laws that have been enacted or substantively enacted by the end of the reporting
period.
b) The measurement should reflect the entity's expectations, at end of the reporting period, as to
the manner in which the carrying amount of its assets and liabilities will be recovered or settled.
c) Deferred tax assets and liabilities should not be discounted.
III. Presentation of deferred tax assets and liabilities:
Deferred tax assets and liabilities are now presented in the statement of financial position as
noncurrent assets and liabilities regardless of their reversal period and regardless whether related
to any other asset or liability account.
For presentation purposes an entity shall offset current deferred tax assets and current deferred
tax liabilities if and only if:
a. The deferred tax asset and deferred tax liability relate to income taxes levied by the same
taxing authority, and
b. The entity has the legal enforceable right to set off a current tax asset against a current tax
liability.
IV.APPLICATION GUIDANCE
a) Taxable income is computed using tax laws.
b) Accounting income is computed using GAAP.
c) Accounting income after excluding permanent differences equals accounting income subject to tax.
d) Current tax expense is the taxable income times the tax rate. This is the tax due for the year and the
remaining tax payable unless there are estimated tax payments made before the balance sheet date.
(Ex. quarterly tax payments).
e) Total tax expense is the current tax expense plus deferred tax expense minus income tax benefit. If the
deferred tax expense is higher simply add the net deferred tax expense. If the income tax benefit is
higher, deduct the net income tax benefit.
f) If the enacted future tax rates are the same as the current tax rate, the total tax expense is simply
computed by multiplying the tax rate to the accounting income subject to tax.
g) Taxable temporary differences will cause taxable income to be LOWER than accounting income. This
will also result in the CA of an asset to be higher than the tax base and the CA of a liability to be lower
than the tax base. The taxable temporary difference will result to deferred tax expense and deferred tax
liability.
h) If the taxable temporary difference reverses, this will cause accounting income to be lower than taxable
income. This will result in a decrease in the deferred tax liability and current tax expense. The credit will
be to “income tax benefit” and as a deduction from current tax expense to get total tax expense.
i) Deductible temporary differences will cause taxable income to be HIGHER than accounting income. This
will also result in the CA of an asset to be lower than the tax base and the CA of a liability to be higher
than the tax base. The taxable temporary difference will result to an income tax benefit and deferred tax
asset.
2|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
j) If the deductible temporary difference reverses, this will cause accounting income to be higher than
taxable income. This will result in a decrease in the deferred tax asset and deferred tax expense.
V. Recognition of Tax Expense or Income
Current and deferred tax should be recognized as income or expense and included in profit or loss
for the period, except to the extent that the tax arises from:
• A transaction or event that is recognized directly in equity; or
• A business combination accounted for as an acquisition.
If the tax relates to items that are credited or charged directly to equity, the tax should also be charged
or credited directly to equity.
If the tax arises from a business combination that is an acquisition, it should be recognized as an
identifiable asset or liability at the date of acquisition in accordance with IFRS 3 Business Combinations
(thus affecting goodwill or negative goodwill).
VI. Assets Carried at Fair Value
• PFRSs permit or require certain assets to be carried at fair value or to be revalued (IAS 16
Property, Plant and Equipment, IAS 38 Intangible Assets and IAS 40 Investment Property). In
some jurisdictions, the revaluation or other restatement of an asset to fair value affects taxable
profit (tax loss) for the current period.
• As a result, the tax base of the asset is adjusted and no temporary difference arises. In other
jurisdictions, the revaluation or restatement of an asset does not affect taxable profit in the period
of the revaluation or restatement and, consequently, the tax base of the asset is not adjusted.
• Nevertheless, the future recovery of the carrying amount will result in a taxable flow of economic
benefits to the entity and the amount that will be deductible for tax purposes will differ from the
amount of those economic benefits.
• The difference between the carrying amount of a revalued asset and its tax base is a temporary
difference and gives rise to a deferred tax liability or asset. This is true even if:
(a) The entity does not intend to dispose of the asset. In such cases, the revalued carrying
amount of the asset will be recovered through use and this will generate taxable income
which exceeds the depreciation that will be allowable for tax purposes in future periods; or
(b) Tax on capital gains is deferred if the proceeds of the disposal of the asset are invested in
similar assets. In such cases, the tax will ultimately become payable on sale or use of the
similar assets.
3|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
MULTIPLE CHOICE PROBLEMS
1. Lala Company reported income before taxes P5,000,000 in its 2022 income statement. Lala provided the
following information for its first year of operations ended December 31, 2022, in connection with the
preparation of its income statement and income tax return.
Interest on bank deposits net of final tax 800,000
Premiums paid on life insurance 400,000
Financial depreciation 300,000
Accelerated depreciation for income tax purposes 600,000
Rent received in advance 500,000
Lala’s tax rate is 20% and Lala did not pay any taxes in previous quarters for 2022.
1. What was Lala’s pretax financial income?
a. 6,400,000
b. 5,000,000
c. 3,800,000
d. 4,600,000
2. What was Lala’s income subject to tax?
a. 5,000,000
b. 4,600,000
c. 5,500,000
d. 4,700,000
3. What was Lala’s taxable income?
a. 4,800,000
b. 5,500,000
c. 4,200,000
d. 3,900,000
4. How much taxes are due for 2021?
a. 960,000
b. 840,000
c. 1,100,000
d. 780,000
5. What was Lala’s total tax expense reported in the income statement?
a. 850,000
b. 960,000
c. 920,000
d. 1,000,000
2. For the year ended December 31, 2022, Libby Company reported pretax financial income of P5,500,000. Its
taxable income was P5,000,000. The difference is due installment sale recorded as income in 2022 but will
be taxable in 2023 when full collection is made. The income tax rate is 20% and Libby made estimated tax
payments during 2022 of P600,000. What should Libby report as current tax expense for 2022?
a. 1,200,000
b. 1,000,000
c. 1,100,000
d. 1,350,000
4|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
3. For the year ended December 31, 2022, Carmona Company reported pretax financial income of P6,000,000.
Its taxable income was P7,000,000. The difference is due to warranty expense recorded in the income
statement that exceeded the amount recorded in the tax return by P1,000,000. Warranty expense is
deductible for tax purposes when paid. The income tax rate is 20% and Carmona made estimated tax
payments of P800,000 in 2022. There were no permanent differences in 2022. What amount should
Carmona report as 2022 total income tax expense?
a. 1,200,000
b. 1,350,000
c. 1,400,000
d. 1,100,000
4. On December 31, 2022, Colby Corporation’s accounting profit is P7,000,000. The following items are the
temporary differences that caused Colby’ income tax in the tax return to differ from the amount reported in
the income statement, future deductible amounts expected to reverse in 2023 of P1,000,000 and future
taxable amounts expected to reverse in 2023 and later years of P1,700,000 and P1,800,000, respectively.
Colby’ income tax rate is 20%. What amount should be reported as income tax payable on December 31,
2022, assuming no taxes have been paid by Colby?
a. 900,000
b. 800,000
c. 750,000
d. 550,000
5. David Company, organized on January 1, 2022, had pretax accounting income of P5,500,000 and taxable
income of P7,000,000 for the current year. The only temporary difference is rental income received in
advance and shall be amortized for financial accounting purposes in 2023. The enacted tax rates are 25%
for 2022 and 20% for 2023 and the years thereafter. What amount should be reported as total income tax
expense in the income statement for 2022?
a. 1,750,000
b. 1,100,000
c. 1,450,000
d. 1,375,000
6. On January 1, 2022, Rudy Company reported a deferred tax liability of P300,000 and a deferred tax asset of
P950,000. On December 31, 2022, Rudy Company reported a deferred tax liability of P100,000, and a
deferred tax asset of P200,000. What is the deferred tax expense for 2022?
a. 650,000
b. 450,000
c. 850,000
d. 550,000
7. Kayla Company reported income tax expense of P3,000,000 in its 2022 statement of comprehensive income.
The following changes in Kayla’s tax assets and liabilities are :
December 31, 2022 December 31, 2021
Deferred tax asset 100,000 250,000
Income tax payable 300,000 600,000
Deferred tax liability 350,000 700,000
The deferred tax liability was caused by accelerated depreciation and the deferred tax asset is for rentals
received in advance. How much is Kayla’s 2022 current tax expense?
a. 2,800,000
b. 2,500,000
c. 3,100,000
d. 3,200,000
5|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
8. On January 1, 2018, Derrick Company acquired a building for P10,000,000. The building is depreciated using
straight-line method based on a useful life of 10 years with no residual value. On January 1, 2022, the building
is revalued at a replacement cost of P15,000,000 with no change in useful life. The 2022 pretax accounting
income before depreciation is P6,000,000. The income tax rate is 20% and there are no other temporary
differences at the beginning of 2022.
1. What is the deferred tax liability arising from the revaluation on January 1, 2022?
a. 800,000
b. 600,000
c. 500,000
d. 0
2. What is the 2022 current tax expense?
a. 1,250,000
b. 1,200,000
c. 1,100,000
d. 1,000,000
3. What is the deferred tax liability on December 31, 2022?
a. 500,000
b. 450,000
c. 350,000
d. 0
4. What is the 2022 total income tax expense?
a. 650,000
b. 750,000
c. 800,000
d. 900,000
5. What is the revaluation surplus on December 31, 2022?
a. 2,400,000
b. 2,000,000
c. 1,500,000
d. 1,800,000
end
6|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
