Accounting for Income Taxes Pt.
2
Files
Unit/Module
Accounting for Income Tax
Week
Temporary Differences
Future Taxable Amount
Future Deductible Amount
Installment receivable
Advances from customers
Accrued income (rent receivable)
Unearned revenue
Revaluation surplus
Warranty payable
Unrealized gain of investments
Provision for bad debt
Investment income from assoc.
Provision for lawsuit
Prepaid expense (prepaid rent)
Unrealized losses
Excess depreciation in taxation
Impairment of inventory
Capitalized research and
development
Impairment of PPE
Income Statement
Income Tax Return
Revenue
xx
Expenses
(xx)
Allow. deduction
(xx)
Accounting income
xx
Taxable income
xx
Tax rate
x%
Tax rate
x%
Accounting for Income Taxes Pt. 2
Gross income
xx
1
Total tax expense
xx
Current tax expense
xx
Total Tax Expense
Alternative 1
Accounting income
xx
Non taxable income
(xx)
Non deductible income
xx
Accounting income subject to tax
expense)
xx
* x% Tax rate) = xx (total tax
Alternative 2
Current tax expense
xx
Net deferred tax expense
xx
Total tax expense
xx
Current Tax Expense
base sa taxable income
Alternative 1
Accounting for Income Taxes Pt. 2
2
Accounting income convert into taxable income
Conversion of AI to TI
Accounting income
xx
Non taxable income
(xx)
Non deductible expense
xx
Acctg. income subj. to tax
xx
Future taxable amount
(xx)
Future deductible amount
xx
Taxable income
xx
*
x% = xx (current tax expense)
Alternative 2
Current tax expense
xx Squeeze)
Net deferred tax expense
xx
Total tax expense
xx
Alternative 3
Squeeze the current tax expense
Net Deferred Tax Expense (Benefit)
Accounting for Income Taxes Pt. 2
3
Alternative 1
Accounting income
xx
Non taxable income
(xx)
Non deductible expense
xx
Acctg. income subj. to tax
xx
Future taxable amount
(xx)
Future deductible amount
xx
Taxable income
xx
*
x%
* x%
= xx Total tax expense)
= xx Deferred tax expense)
* x%
*
= xx Deferred tax benefit)
x% = xx (current tax expense)
Deferred tax expense FTA x TR
xx
Deferred tax benefit FDA x TR
(xx)
Net deferred tax expense (benefit)
xx
Alternative 2
Current tax expense
xx
Net deferred tax expense
xx Squeeze)
Total tax expense
xx
Alternative 3
Squeeze Deferred tax expense
Accounting for Income Taxes Pt. 2
4
Squeeze Deferred tax benefit
Squeeze Deferred tax benefit or
Squeze Deferred tax expense
Squeeze from DTL
xx
Squeeze from DTA
(xx)
Net deferred tax expense (benefit)
xx
Income Tax Payable
Deferred Tax Liability
Accounting for Income Taxes Pt. 2
5
Future taxable amount
xx
Tax rate
x%
Deferred tax expense
xx
Deferred Tax Asset
Future deductible amount
xx
Tax rate
x%
Deferred tax benefit
xx
Illustration
Total Tax Expense versus Current Tax Expense
Hopeful Company is preparing its 2021 year-end income tax returns and the
following differences were noted between financial reporting and tax reporting:
Financial reporting
Tax
reporting
Warranty expense
200,000
360,000
Revenue from installment sales
1,800,000
1,200,000
Premium on officer's life insurance for which the
0
120,000
company as the beneficiary
Accounting for Income Taxes Pt. 2
6
Hopeful Company reported a pretax income of P4,500,000 in its financial
reporting. Income tax rate is 32% for all years.
 What is the total tax expense
Solution:
Accounting income
4,500,000
Non taxable income
0
Non deductible expense
120,000
Acctg. income subj. to tax
expense)
4,620,000
x 32% = 1,478,400 Total tax
Future taxable amount
expense)
600,000
x 32% = 192,000 Def. Tax
Future deductible amount
benefit)
160,000
x 32% = 51,200 Def. Tax
Taxable income
expense)
4,180,000
x 32% = 1,337,600 (current tax
Revenue from installment 1.8M - 1.2M = 600,000 mas mataas si acctng.
income kaya future taxable amount siya
Warranty expense 360,000 - 200,000 = 160,000
Ans: 1,478,400
 What is the current portion of Hopeful's income tax expense?
Ans: 1,337, 600
Accounting for Income Taxes Pt. 2
7
Net deferred tax expense
Alternative 1
Deferred tax expense FTA x TR
192,000
Deferred tax benefit FDA x TR
51,200
Net deferred tax expense (benefit)
140,800
Alternative 2
Current tax expense
1,337,600
Net deferred tax expense
140,800
Total tax expense
1,478,400
Journal Entry:
Dr. DTA
51,200
Dr. Income tax expense
1,478,300
Cr. Income tax payable
Cr. DTL
1,337,600
192,000
Total Tax Expense versus Current Tax Expenses versus Deferred Tax Expense
Acierto Company reported net income for the current year 2019 at P10,000,000
before taxes. Included in the determination of the said net income were:
Permanent differences
Non deductible expenses
Non taxable income
P100,000
500,000
Temporary differences
Accrued warranty expenses
Accounting for Income Taxes Pt. 2
250,000
8
Rental payments made in advance
400,000
Advance collections from customers
500,000
Provision for probable losses
900,000
Income tax rate is 40% and is not expected to change in the future.
 How much is the total tax expense?
Solution:
Accounting income
10,000,000
Non taxable income
500,000
Non deductible expense
100,000
Acctg. income subj. to tax
9,600,000
x 40% = 3,840,000 Total tax
400,000
x 40%
expense)
Future taxable amount
= 160,000 Def. tax
expense)
Future deductible amount
250,000
Future deductible amount
500,000
Future deductible amount
Def. tax benefit)
900,000
Taxable income
tax expense)
1,085,000 x
1,650,000 x 40% = 660,000
40% = 4,340,000 (current
Ans: 4,340,000
Accounting for Income Taxes Pt. 2
9
💡
💡
if acctng. income is higher = future taxable amount
If taxable income is higher = future deductible amount
 How much is the current portion and deferred portion of the total tax
expense?
Solution:
Taxable income
expense)
1,085,000 x
40% = 4,340,000 (current tax
Deferred tax expense FTA x TR
160,000
Deferred tax benefit FDA x TR
660,000
Net deferred tax benefit
500,000
Ans: 4,340,000 (current tax); 500,000 B (deferred tax)
Journal entry:
Dr. DTA DTB
660,000
Dr. Income tax expense TTE
3,840,000
Cr. Income tax payable CTE
4,340,000
Cr. DTL DTE
160,000
 What is the net deferred tax expense?
Ans: 660,000 DTA; 160,000 DTE
Accounting for Income Taxes Pt. 2
10
Income Tax Payable
Toro Company reported P6,750,000 income before provision for income tax. To
compute provision for income tax, the following date are provided for 2018
Rent received in advance
1,200,000
Income from exempt municipal bonds
1,500,000
Depreciation deduction for income tax purposes
in excess of depreciation reported for financial acctng. purposes
750,000
Estimated tax payment for 2018
375,000
Enacted corporate income tax rate
30%
What amount of current tax liability should be reported on December 31, 2018?
Solution:
Accounting income
6,750,000
Non taxable income
1,500,000
Non deductible expense
0
Acctg. income subj. to tax
expense)
5,250,000
x 30% = 1,575,000 Total tax
Future taxable amount
expense)
750,000
x
Accounting for Income Taxes Pt. 2
30% = 225,000 Def. tax
11
Future deductible amount
1,200,000
x
30% = 360,000 Def. tax
5,700,000
x
30% = 1,710,000 (current tax
benefit)
Taxable income
expense)
Ans: 1,335,000 1,710,000 - 375,000
Journal entry:
Dr. DTA DTB
360,000
Dr. Income tax expense TTE
1,575,000
Cr. Income tax payable CTE
1,710,000
Cr. DTL DTE
225,000
Change in Tax rates - One Time Change
EX Company reported in the first year of operations pretax financial income of
P6,000,000. The year tax rate is 30% and the enacted rate for future years is 25%.
CTR = 30%
|
FTR = 25%
Tax return
Accounting
record
Uncollectible accounts expense
200,000
300,000
Depreciation expense
500,000
Tax exempt interest revenue
150,000
800,000
—
 What is the current tax expense?
Solution:
Accounting for Income Taxes Pt. 2
12
Accounting income
6,000,000
Non taxable income
150,000
Acctg. income subj. to tax
5,850,000 Total tax expense) → Not
applicable
Future taxable amount
300,000 x 25% = 75,000 Def. tax
expense)
Future deductible amount
benefit)
100,000
Taxable income
tax expense)
5,650,000
x 25% = 25,000 Def. tax
x
30% = 1,695,000 (current
Ans: 1,695,000
 What is the net deferred tax expense or benefit?
Solution:
Deferred tax expense FTA x TR
75,000 E
Deferred tax benefit FDA x TR
25,000 B
Net deferred tax expense (benefit)
50,000 E
Ans: 50,000 E
 What is the total tax expense?
Solution:
Current tax expense
Net deferred tax expense
Total tax expense
Accounting for Income Taxes Pt. 2
1,695,000 E
50,000
E
1,745,000
E
13
Ans: 1,745,000
Change in Tax Rates - Multiple Changes
Demonic Shield Company prepared the following reconciliation for the first year of
operations:
Pretax financial income for 2019
Tax exempt interest revenue
9,000,000
750,000
Temporary difference
2,250,000
Taxable income
6,000,000
The temporary difference will reverse evenly in 2020 and 2021 at an enacted
tax rate of 35% in 2020, and 32% in 2021. The tax rate for 2019 is 30%.
What amount should be reported as deferred tax asset or liability on
December 31, 2019?
Solution:
Accounting income
9,000,000
Non taxable income
750,000
Acctg. income subj. to tax
applicable
8,250,000 Total tax expense) → Not
Future taxable amount
expense)
Future deductible amount
expense)
Accounting for Income Taxes Pt. 2
1,125,000 x 35% = 393,750 Def. tax
1,125,000 x 32% = 360,000 Def. tax
14
Taxable income
expense)
6,000,000
x
30% = 1,800,000 (current tax
393,750
360,000
753,750
Ans: 753,750 deferred tax liability
Squeeze Technique
Free Willing Co. paid of P5,000,000 for 2020 estimated income taxes. The
changes in assets and liabilities are as follows:
12/31/20
Deferred tax asset
12/31/19
P1,000,000
P800,000
Deferred tax liability
450,000
600,000
Income tax payable
500,000
200,000
The deferred tax liability was caused by accelerated depreciation and the
deferred tax asset is for rentals received in advance.
What amount of total tax expense should be recognized in 2020?
Solution:
Accounting income
xx
Non taxable income
(xx)
Non deductible expense
xx
Acctg. income subj. to tax
xx
TR
x
x%
Total Tax Exp.
=
Alternative 2
Accounting for Income Taxes Pt. 2
15
Current tax expense
P5,300,000 E
Net deferred tax expense
Total tax expense
350,000 B
4,950,000 E
Squeeze from DTL
150,000 B
Squeeze from DTA
200,000 B
Net deferred tax expense (benefit)
350,000 B
Ans: 4,950,000
Income Tax Payment
For the year 2021, Meowski Company reported income tax expense of P110,000.
Income tax payable at the end of 2020 was P90,000 and at the end of 2021 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 2021 to P130,000 at the
end of 2021.
Accounting for Income Taxes Pt. 2
16
How much cash was paid for income taxes during the year?
Alternative 2
Current tax expense
85,000 E
Net deferred tax expense
25,000 E
Total tax expense
110,000 E
Squeeze from DTL
Squeeze from DTA
Net deferred tax expense
P25,000 E
0
P25,000 E
Ans: 75,000
Income Statement Method
Computing the deferred taxes by comparing the income statement versus the
income tax return.
Balance Sheet Method
Accounting for Income Taxes Pt. 2
17
Balance sheet method - computing the deferred taxes by comparing the balance
sheet under accrual basis (financial reporting) versus the balance sheet under
cash basis (tax reporting).
Carrying Amount: amount of asset and liabilities reflected in the balance sheet
prepared under GAAP.
Tax Base: amount of asset and liabilities reflected in the balance sheet prepared
under tax laws.
Carrying amount
Deferred Tax
-
xx
Tax Base
xx
=
Difference
x
Tax Rate
xx
=
x%
xx
Asset:
Liability
Carrying amount > Tax base = DTL
Carrying amount > Tax base = DTA
Carrying amount < Tax base = DTA
Carrying amount < Tax base = DTL
Illustration
The following information was provided to you by Shackles Company:
Book Value
Tax Base
Receivable
150,000
200,000
Building - net
300,000
100,000
Machinery and equipment - net
500,000
550,000
Unearned revenue
100,000
—
Estimated warranty obligation
80,000
Current and future tax 30%. Taxable income for the year P300,000.
Accounting for Income Taxes Pt. 2
18
 Deferred tax asset
Carrying amount
Deferred Tax
-
Tax Base
=
Difference
x
Tax Rate
=
150,000
15,000
DTA
200,000
=
50,000
x
30%
=
300,000 60,000
DTL
100,000
=
200,000
x
30%
=
500,000 15,000
DTA
550,000
=
50,000
x
30%
=
100,000
30,000 DTA
0
=
100,000
x
30%
=
80,000
24,000 DTA
0
=
80,000
x
30%
=
Ans: 84,000
 Deferred tax liability
Ans: 60,000
Guide in Determining Tax Base
 If the asset is depreciable
Cost
xx
Accumulated dep. per tax
(xx)
Tax base
xx
 If an asset or liability is taxable when received. Such as:
Installment receivable
Accounting for Income Taxes Pt. 2
19
Unearned rent
TAX BASE = ZERO
 If an asset or liability is deductible when paid. Such as:
Research and development
Warranty liability
TAX BASE = ZERO
 If an asset arises from non taxable income or non deductible expenses
Permanent differences)
Interest receivables from government bonds
Royalties receivable
Prepaid life insurance
TAX BASE = Carrying amount
 If a liability arises from non taxable income or non deductible expenses
Permanent differences)
Unearned royalties income
Fines and penalties payable
TAX BASE = Carrying amount
 If an asset or liability arises from income or expenses that were already
reported in both reports
Sales of goods on account
TAX BASE = Carrying amount
Accounting for Income Taxes Pt. 2
20
Tax Base - Depreciable Asset
 An equipment cost P4,000. For tax purposes, depreciation of P2,400 has
already been deducted in the current and prior periods and the remaining cost
will be deductible in future periods, either as depreciation or through a
deduction on disposal. Revenue generated by using the equipment is taxable,
any gain on disposal of the equipment will be taxable and any loss on disposal
will be deducted for tax purposes.
How much is the tax base of the equipment?
Solution:
Cost
4,000
Acc. depreciation
2,400
Tax base
1,600
Ans: 1,600
 An entity has spent P600,000 in developing a new product. These costs meet
the definition of an intangible asset under PAS 38 and have been recognized
in the statement of financial position. These costs have been recognized an as
expense for tax purposes. At the year-end the intangible asset is deemed to
be impaired by P50,000.
The tax base of the intangible asset at the year end is
Research and development
Ans: 0
 Gem Company has interest receivable which has a carrying amount of
P1,000,000 on December 31, 2022. The related interest revenue will be taxed
on a cash basis in 2023.
Accounting for Income Taxes Pt. 2
21
The entity has trade receivables that have a carrying amount of P5,000,000 on
December 31, 2022. The related revenue has been recognized for tax
purposes for the year ended December 31, 2022.
What is the total tax base of interest receivable and trade receivable on
December 31, 2022?
First paragraph: tax base = 0
Ans: 5,000,000 CA
 The current liabilities of an entity include fines and penalties for environmental
damage. The fines and penalties are stated at P10 million. The fines and
penalties are not deductible for tax purposes.
What is the tax base of the fines and penalties?
Ans: 10,000,000
Offsetting
offsetting of deferred tax expense and deferred tax benefit is allowed
offsetting of deferred tax liability and deferred tax asset is NOT allowed
Exception to the rule (where the offsetting of DTL and DTA is allowed)
"The DTA and DTL relate to income taxes levied by the same tax authority"
Same jurisdiction
Same agency
Accounting for Income Taxes Pt. 2
22
"Entity has legal enforceable right to set off current tax asset and current tax
liability"
Offsetting
Sosa Company located its business in two jurisdictions, France and Germany. In
both countries, Sosa has the legal right to offset the taxes receivable and payable.
The following information related to deferred tax assets and liabilities:
Classification
Amount
Taxing Jurisdiction
Deferred tax asset
800,000
France
Deferred tax liability
300,000
Germany
Deferred tax liability
600,000
France
How should Sosa represent as deferred taxes at year-end?
Solution:
Deferred tax asset - France
800,000
Deferred tax liability - France
600,000
Net DTA - France
P200,000
DTL - Germany
300,000
Ans: 200,000 DTA; 300,000 DTL
Accounting for Income Taxes Pt. 2
23