ACCOUNTING FOR INCOME TAX
PROBLEM 1. Hilton Company reported pretax financial income of P6,200,000 for the current
year.
Included in other income was P200,000 of interest revenue from government bonds held by the
entity.
The income statement also included depreciation expense of P500,000 for a machine costing
P3,000,000. The income tax return reported P600,000 as depreciation on the machine.
The enacted tax rate is 30% for the current year and future years.
What is the current tax expense for the current year?
Solution:
Financial income
Interest revenue from government bonds
Tax depreciation in excess of financial depreciation (600,000 - 500,000)
Taxable income
Current tax expense (5,900,000 x 30%)
6,200,000
(200,000)
(100,000)
5,900,000
1,770,000
PROBLEM 2. Tantrum Company began operations at the beginning of current year. At the end
of the first year of operations, the entity reported P6,000,000 income before income tax in the
income statement but only P5,100,000 taxable income in the tax return.
Analysis of the P900,000 difference revealed that P500,000 was a permanent difference and
P400,000 was a temporary difference tax liability difference related to a current asset.
The enacted tax rate of the current year and future years is 30%.
What is the total income tax expense to be reported in the income statement for the current year?
Solution:
Financial income
Permanent difference
Financial income subject to tax
Total income tax expense (5,500,000 x 30%)
6,000,000
(500,000)
5,500,000
1,650,000
PROBLEM 3. Huskie Company reported in the income statement for the current year pretax
income of P400,000.
The following items are treated differently on the tax return and on the book.
Tax return
Per book
Royalty income
20,000
40,000
Depreciation expense
125,000
100,000
Payment of a penalty
None
15,000
The enacted tax rate for current year is 30% and 25% for all future years.
What amount should be reported as current portion of income tax expense in the income
statement for the current year?
Solution:
Pretax income
Payment of a penalty - non-deductible
Accounting income subject to tax
Royalty income in excess of taxable amount
Excess tax depreciation
Taxable income
Current tax expense (370,000 x 30%)
400,000
15,000
415,000
(20,000)
(25,000)
370,000
111,000