DE LA SALLE UNIVERSITY

FINANCIAL ACCOUNTING AND REPORTING

ACCOUNTING FOR DEFERRED AND INCOME TAXES

Multiple Choices – Theories

1. The deferred tax consequence attributable to a deductible temporary difference and operating loss carry
forward is known as
a. current tax
b. total tax expense
c. deferred tax asset
d. deferred tax liability

2. According to PAS 12, deferred tax assets and liabilities should be reported in the financial statement:
a. as noncurrent asset and noncurrent liability.
b. always net in current asset or net current liability.
c. as current and noncurrent depending on the order of liquidity or maturity.
d. as current and noncurrent assets and liabilities depending on the balance sheet classification of the
related tax basis of the temporary difference.

3. Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:
a. deductible temporary differences; the carryforward of unused tax losses; and the carryforward of unused
tax credits.
b. deductible permanent differences; the carryforward of unused tax losses; and the carryforward of unused
tax credits.
c. deductible temporary differences; the carryforward of used tax losses; and the carryforward of unused
tax credits.
d. deductible temporary differences; the carryforward of unused tax losses; and the carryforward of used
tax credits.

4. Mahal Ka Pa Ba? Company’s financial reporting basis of its plant assets exceeded the tax basis because it
uses a different method of reporting depreciation for financial reporting purposes and tax purposes. If there
is no other temporary differences, Mahal Ka Pa Ba? should report a:
a. current tax asset.
b. deferred tax asset.
c. current tax payable.
d. deferred tax liability

5. Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is
recognized in financial income?
a. Subscriptions received in advance.
b. Prepaid royalty received in advance.
c. Sales accounted for on the accrual basis for financial reporting purposes and on the installment (cash)
basis for tax purposes.
d. Interest received on government obligations.

6. Which of the following differences would result in future taxable amounts?

a. Expenses or losses that are tax deductible after they are recognized in financial income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Revenues or gains that are recognized in financial income but are never included in taxable income.
d. Expenses or losses that are tax deductible before they are recognized in financial income.

7. In determining whether to adjust a deferred tax asset, a company should

a. consider all positive and negative information in determining the need for an adjustment.
b. consider only the positive information in determining the need for an adjustment.
c. take an aggressive approach in its tax planning.
d. pass a recognition threshold, after assuming that it will be audited by taxing authorities.

8. The total income tax expense (TITE) is the:

a. the sum of current income tax expense and deferred tax liability
b. the difference of current income tax expense and deferred tax expense.
c. the difference of deferred tax liability and deferred tax asset
d. the current income tax expense plus increase in deferred tax liability less increase in deferred tax asset

9. When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should
be
a. handled retroactively in accordance with the guidance related to changes in accounting standards.
b. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases
a deferred tax asset.
c. reported as an adjustment to tax expense in the period of change.
d. applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax
rate change, but not subsequent to the date of the change.
10. Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the
statement of financial position if
a. it is probable that a future tax rate change will occur.
b. it appears likely that a future tax rate will be greater than the current tax rate.
c. the future tax rates have been enacted or substantially enacted.
d. it appears likely that a future tax rate will be less than the current tax rate.

11. Which of the following statements is correct regarding deferred taxes under IFRS?
a. Income tax payable plus or minus the change in deferred income taxes equals income tax expense.
b. The current portion of income tax expense is the amount of change in deferred taxes related to the
current period.
c. In computing income tax expense, a company deducts an increase in a deferred tax liability to income
tax payable.
d. All of the choices are correct.

12. Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise
to reporting a deferred tax liability on the balance sheet?
I. A revenue is deferred for financial reporting purposes but not for tax purposes.
II. A revenue is deferred for tax purposes but not for financial reporting purposes.
III. An expense is deferred for financial reporting purposes but not for tax purposes.
IV. An expense is deferred for tax purposes but not for financial reporting purposes.
a. item II only
b. items I and II only
c. items II and III only
d. items I and IV only

Multiple Choices: Problems

1. Universe Company reported pretax income of P7,000,000 for the year ended December 31, 2023. The
company record shows the following differences:
Tax depreciation in excess of book depreciation (expected reversal in 2026 and onwards) P350,000
Installment sales recognized in the book to be collected 40% in 2024 and 60% in 2025 500,000
Proceeds from life insurance policy upon death of an officer* 550,000
Interest revenue on bank deposits 150,000
Impairment loss on goodwill 50,000
Fines and penalties 120,000
Provision for litigation expected to settle in 2024 and 2025 in equal amounts 320,000
Warranty expense in 2023 expected to be settled in 2024 (70%) and 2025 (30%) 240,000
*The beneficiary of the insurance policy is Universe Corporation.

Tax rate is 25% in 2023 and in the future. Payments in previous quarters totaled P400,000.

Question 1: How much is the taxable income?

a. P1,630,000 b. P1,650,000 c. P1,680,000 d. P1,710,000

Question 2: How much is the income tax payable?

a. P1,145,000 b. P1,155,000 c. P1,165,000 d. P1,175,000

Question 3: How much is the total income tax expense for the year 2023?
a. P1,630,000 b. P1,622,500 c. P1,620,000 d. P1,617,500

Question 3: Assume that tax rate for years 2024 is 23% and 2025 and onwards is 24% as enacted by the
congress. How much is the deferred tax asset and deferred tax liability as of December 31, 2023,
respectively?
a. P202,000 and P131,120 c. P132,080 and P197,500
b. P131,120 and P202,000 d. P197,500 and P132,080

2. ReSAlicious Corporation’s income statement for the year ended December 31, 2023, shows pretax income
of P4,500,000. The following are treated differently on the tax return and in the accounting records:
Tax Return Book records
Rent income P 200,000 P 120,000
Depreciation expense (reversal in 2026) 300,000 150,000
Unrealized loss – PL -- 85,000
Royalties received -- 140,000
Entertainment and recreational expense 460,000 560,000
Tax expense (payment of taxes in previous quarters) ? 340,000
Premiums on officer’s life insurance* -- 110,000
*ReSAlicious Corporation is the beneficiary of the insurance policy of the officer.

Question 1: Assume that ReSAlicious tax rate for 2023 is 25%, what is the total income tax expense for
2023?
a. P1,137,500 b. P1,139,750 c. P1,142,500 d. P1,151,250
 Question 2: Assume that ReSAlicious tax rate for 2024 is 25%, and 23% years 2025 and onwards. What is
the income after tax in its Statement of comprehensive income for the year ending December 31, 2023?
a. P3,318,000 b. P3,427,000 c. P3,512,500 d. P3,360,500

3. Balik Ka Na Please Incorporated’s partial income statement after its first year of operation is as follows:
Income tax expense:
Current P1,050,000
Deferred 90,000
Total income tax expense P1,140,000

Balik Ka Na Please uses straight-line method of depreciation for financial reporting purposes and accelerated
depreciation method for tax purposes. The amount charged to depreciation expenses on its book this year
was P1,500,000. There were penalties paid by Balik Ka Na Please amounting to P240,000 because of late
filing in BIR in previous quarters. No other temporary differences existed between book income and taxable
income except for the amount of depreciation.

Question 1: Assuming a 25% tax rate, what amount was deducted for depreciation on the company’s tax
return for the current year?
a. P1,140,000 b. P1,460,000 c. P1,560,000 d. P1,860,000

Question 2: Assuming a 25% tax rate, how much is the net income after tax?
a. P3,420,000 b. P3,180,000 c. P3,060,000 d. P3,000,000

4. Brunei Co. at the end of 2023, its first year of operation, prepared reconciliation between pretax financial
income and taxable income as follows:
Pretax financial income P1,400,000
Estimated litigation expense 1,000,000
Installment sales (800,000)
Taxable income P1,600,000

The estimated litigation expenses of P1,000,000 will be deductible in 2024 when it is expected to be paid.
The gross profit from installment sales will be realized in the amount of P500,000 and P300,000 each of the
next two years. The income tax rate is 25% in current year and 30% in future years.

Question 1: How much is the deferred tax asset at year end?

a. P300,000 b. P320,000 c. P340,000 d. P360,000

Question 2: How much is the deferred tax liability at year end?

a. P240,000 b. P248,000 c. P256,000 d. P260,000

Question 3: How much is the total income tax expense?

a. P340,000 b. P210,000 c. P150,000 d. P90,000

5. Toner Company has revalued its property and has recognized the increase in the revaluation reserve in its
financial statements. The carrying value of the property was P5,000,000, and the revalued amount was
P12,000,000. The tax base of the property was P8,000,000. The tax rate 25%. What amount of deferred tax
that should go directly to equity?
a. None b. P750,000 c. P1,000,000 d. P1,750,000

6. On January 2, 2023, Alison Company acquired from the stock exchange 20,000 shares of Emilia Company
at the prevailing market price of P60 per share. Alison Company has designated the shares as Investment
at Fair Value to Other Income. On December 31, 2023, the shares of Alison are selling at P68 per share. On
July 1, 2023, Alison Company paid P300,000 for one year insurance that will expire on June 30, 2024. The
current year income tax rate is 32% while the future tax rate is 30%. What amount of deferred tax
expense(savings) should the Alison Company disclose in its 2023 profit or loss?
a. P45,000 b. P51,200 c. P48,000 d. P93,000