1. During the current year, Wilkins Company reported accounting income P9,000,000 before income tax.
The Company revealed the following information for the current year:
Interest Income on government bonds 700,000
Life Insurance annual premium (Wilkins company is the beneficiary of this insurance policy) 100,000
tax penalties and surcharges 40,000
Depreciation claimed on income tax return 2,700,000
Depreciation per accounting records 1,400,000
Rental payments made in advance 400,000
Provisions for probable losses 100,000
Warranty expense on the accrual basis 600,000
Actual Warranty payment 200,000
advance collectors from customers 200,000
income tax rate (not expected to change in the future) 30%
Note: bold letters are permanent items
1. How much is the income subject to tax?
Accounting Income
Permanent Differences
Non-taxbale Revenue
Interest Income on government bonds
Non-deductible expenses
Life Insurance annual premium 100,000
Tax penalties and surcharges 40,000
Income subject to tax
2. How much is the taxable income?
Accounting Income
Permanent Differences
Non-taxbale Revenue
Interest Income on government bonds
Non-deductible expenses
Life Insurance annual premium 100,000
Tax penalties and surcharges 40,000
Income subject to tax
Temporary Differences
Future taxable amount
Excess tax depreciation -1,300,000
Prepaid Rent -400,000
Future decutible amounts
Loss Provision 100,000
Excess Warranty 400,000
Advance Collections 200,000
Taxable Income
3. How much is the current income tax expense?
Current ITE = Taxable Income x Current Tax Rate 2,232,000
7,440,000 x 30%
4. How much is the total income tax expense?
Total ITE Income subject to tax x Tax Rate 2,532,000
8,440,000 x 30%
5. What amount shall be presented as deferred tax liability on Decmber 31? 510,000
Deferred tax Liability = Future taxable amount x Enacted Tax Rate
DTL = 1,700,000 x 30%
6. What amount shall be presented as deferred tax asset on December 31? 210,000
DTA = 700,000 x 30%
INDENDENT CASE: Expected Income Tax Rate for future years is 35%
1. How much is the total income tax expense? 2,582,000
2. What amount shall be presented as deferred tax liability on December 31? 595,000
3. What amount shall be presented as deferred tax asset on December 31? -245,000
Solution:
Current ITE (7,440,000 x 30%) 2,232,000
Add Creation of DTL (1,700,000 x 35%) 595,000
Deduct Creation of DTA (700,000 x 35%) -245,000
Total ITE 2,582,000
Journal Entries
Current Tax Liability
Income Tax Expense 2,232,000
Income Tax Payable 2,232,000
Deferred Tax Liability
Income Tax Expense 510,000
Deferred Tax Liability 510,000
Deferred Tax Asset
Deferred Tax Asset 210,000
Income Tax Expense 210,000
9,000,000
-700,000
140,000
8,440,000
9,000,000
-700,000
140,000
8,440,000
-1,700,000
700,000
7,440,000
