Answers - Chapter 5 Vol 2

CHAPTER 5 INCOME TAXES PROBLEMS 5-1

a. b. c. d. e. f. g.

Nontaxable Nondeductible Nondeductible Temporary difference Temporary difference Temporary difference Temporary difference

– – – –

Future Future Future Future

taxable amount taxable amount deductible amount deductible amount

5-2 Pretax financial income

P11,000,00 0 640,000

Add Nondeductible expenses (b + c) 600,000 + 40,000 Less Nontaxable income (a) Financial income subject to tax

(3,000,000) P 8,640,000 1,150,000

Add Future deductible amounts (f + g) 750,000 + 400,000 Less Future taxable amounts (d + e) 1,500,000 + 1,000,000 Taxable income Income Tax Expense – Current Income Tax Payable 35% x 7,290,000

(2,500,000) P7,290,000

2,551,500 2,551,500

Income Tax Expense – Deferred Deferred Tax Liability 35% x 2,500,000

875,000

Deferred Tax Asset Income Tax Expense – Deferred 35% x 1,150,000

402,500

875,000

402,500

or one compound entry may be made as follows: Income Tax Expense – Current Income Tax Expense – Deferred Deferred Tax Asset Income Tax Payable Deferred Tax Liability 5-3

(Luzon Corporation) (a) Pretax financial income Future taxable amount Taxable income Income tax payable: 35% x 1,200,000 P420,000 (b)

Income Tax Expense – Current

2,551,500 472,500 402,500

2,551,500 875,000 P3,000,000 (1,800,000) P1,200,000

420,000

Chapter 5 - Income Taxes Income Tax Expense – Deferred Income Tax Payable Deferred Tax Liability 35% x 1,200,000 = 420,000 35% x 1,800,000 = 630,000

630,000 420,000 630,000

5-4

(Visayas Corporation) (a) Pre tax financial income Future deductible amount 1,550,000 Taxable income Income tax payable: 35% x 3,550,000 (b)

Income Tax Expense-Current Deferred Tax Asset Income Tax Payable Income Tax Benefit-Deferred

P2,000,000 P3,550,000 P1,242,500 1,242,500 542,500 1,242,500

542,500 5-5

(Mindanao Corporation) Income Tax Expense – Current 1,820,000 Deferred Tax Asset 700,000 Deferred Tax Liability 209,000 Income Tax Expense – Deferred (Benefit) 491,000 Income Tax Payable 1,820,000 35% x 5,200,000 = 1,820,000 35% x 2,000,000 = 700,000 (35% x 500,000) + (34% x 100,000) = 209,000

5-6

(Samar, Inc.) Income Tax Expense – Current (35% x 2,000,000) Income Tax Expense – Deferred (185,500 – 210,000) (24,500) Income Tax Expense – Total 675,500 Income Tax Payable (see above) 700,000 Deferred Tax Asset: 35% x (360,000 + 240,000) 210,000 Deferred Tax Liability: 35% x 530,000 185,500 5-7

P 700,000 P P P P

(Bohol Company) Taxable income P11,998,000 Future deductible amount: Book depreciation in excess of tax depreciation (430,000) Nontaxable income: Proceeds from life insurance policy upon death of officer 1,250,000 Pretax financial income P12,818,000 5-8

(Wall Services)

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Chapter 5 - Income Taxes (a)

Schedule of reversal of the temporary differences 2008 140,000 x 34% P 47,600 2009 320,000 x 33% 105,600 2010 240,000 x 32% 76,800 Total P230,000 Pretax financial income Add nondeductible expenses

400,000 ( 140,000)

616,000 230,000 (b)

P2,200,000

Less nontaxable revenues Financial income subject to tax Future taxable amounts Taxable income Tax rate Income tax payable

P2,460,000 ( 700,000) P1,760,000 x 35 % P

Deferred tax liability (see above)

P

Income Tax Expense – Current Income Tax Payable

616,000

Income Tax Expense – Deferred Deferred Tax Liability

230,000

616,000 230,000

(c) Income from continuing operations before income tax P2,200,000 Income tax expense: Current P616,000 Deferred 230,000 846,000 Net income P1,354,000 5-9

(Daniel Company) (a) 2007 2008 2009 2010

Straight Line 500,000 500,000 500,000 500,000

12/31/2007 12/31/2008 12/31/2009 12/31/2010 Taxable income Future taxable amount Additional taxable amount (reversal) Pretax accounting income

(b)

SYD 800,000 600,000 400,000 200,000

Carrying Amount 1,500,000 1,000,000 500,000 0 2007 800,000 300,000

2008 890,000 100,000

1,100,000

990,000

Difference (300,000) (100,000) 100,000 300,000 Tax Base 1,200,000 600,000 200,000 0

Difference 300,000 400,000 (300,000) 0

2009 1,200,000

2010 1,500,000

( 100,000) 1,100,000

(300,000) 1,200,000

Deferred Tax Liability (Asset) at the end of each year is as follows: 2007 300,000 x 35% P

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Chapter 5 - Income Taxes

(c)

2008 2009

400,000 x 35% 300,000 x 35%

2010

0

105,000 140,000 ( 105,00 0) 0

Journal entries to record current income tax: 2007 2008 Income Tax Expense-Current 280,000 311,500 Income Tax Payable 280,000 311,500 (35% x 800,000) (35% x 890,000) 2009 2010 Income Tax Expense-Current 420,000 525,000 Income Tax Payable 420,000 525,000 (35% x 1,200,000) (35% x 1,500,000)

Journal entries to record deferred income tax: December 31, 2007: Income Tax Expense-Deferred Deferred Tax Liability 105,000

105,000

December 31, 2008: Income Tax Expense – Deferred Deferred Tax Liability 35,000

35,000

December 31, 2009: Deferred Tax Liability Income Tax Expense-Deferred (Benefit) 35,000 December 31, 2010: Deferred Tax Liability Income Tax Expense-Deferred (Benefit) 105,000 (d) Income tax expense: Current Deferred (Benefit) Total income tax expense (e) Income before

35,000

105,000

2007

2008

2009

2010

P 280,000 105,00 0 P 385,000

P 311,500 35,00 0 P 346,500

P 420,000 ( 35,00 0) P 385,000

P 525,000 (105,00 0) P 420,000

2007 P1,100,00

2008 P 990,000

2009 P1,100,00

2010 P1,200,00

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Chapter 5 - Income Taxes income tax Less income tax expense (see above) Net income

0 385,00 0 P 715,000

346,50 0 P 643,500

0

0

385,00 0 P 715,000

420,00 0 P 780,000

5-10

(Jude Company) (a) Future taxable amount Carrying amount of inventories > Tax Base 100,000 Carrying amount of building & equipment > Tax Base 1,800,000 P 1,900,000 Future Deductible Amount Carrying amount of accounts receivable < Tax Base P200,000 Carrying amount of warranty > Tax Base 800,000 Carrying amount of unearned rent > Tax Base 500,000 P 1,500,000 (b) Income Tax Payable P1,750,000 Deferred Tax Assets (1,500,000 x 35%) 525,000 Deferred Tax Liability (1,900,000 x 35%) 665,000 (c)

735,000

Income Tax Expense-Current Income Tax Payable Deferred Tax Liability Income Tax Benefit-Deferred

P

P P

1,750,000 1,750,000 735,000

1,400,000 – 665,000 No entry is necessary to adjust deferred tax asset, as deferred tax asset beginning is P525,000 which is equal to the required balance of deferred tax asset.

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