FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA.

FAR 22: ACCOUNTING FOR INCOME TAXES

MULTIPLE CHOICE THEORIES:

1. Under PAS 12, which enterprises are required to report deferred tax asset or liability?

i. Public enterprises
ii. Non-public enterprises

a. I only c. Both I and II

b. II only d. Neither I nor II

2. Which of the following statements related to income taxes is incorrect?

a. Accounting profit is profit or loss for a period before deducting tax expense.
b. Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance with the rules established by
taxation authorities, upon which income taxes are payable (recoverable).
c. Tax expense (tax income) is the aggregate amount included in the determination of profit or loss for period in
respect of current tax and deferred tax.
d. Deferred tax liabilities are the amounts of income taxes recoverable in future periods in respect of deductible
temporary difference; the carryforward of unused tax credits.

3. The term future taxable amounts include

a. Gains that are included in the tax return after they are recognized for accounting purposes.
b. Revenues that are included in the tax return before they are recognized for accounting purposes
c. Losses that are included in the tax return after they are recognized for accounting purposes
d. Warranty deductions for accounting purposes

4. A deferred tax liability is computed using

a. The current tax law, regardless of the enacted future tax law.
b. Expected future tax law, regardless of whether this expected law has been enacted.
c. Current tax law, unless enacted future tax law is different.
d. Either current or expected future law, regardless of whether the expected law has been enacted.

5. Which of the following differences would result in future taxable amount?

I. Expenses or losses that are deductible before they are recognized in accounting income.
II. Expenses or losses that are deductible after they are recognized in accounting home.
III. Revenues or gains that are taxable before they are recognized in accounting home.
IV. Revenues or gains that are taxable after they are recognized in accounting home.

a. I and III c. II and III

b. I and IV d. II and IV

6. Which of the following differences would result in future deductible amount?

I. Expenses or losses that are deductible before they are recognized in accounting home.
II. Expenses or losses that are deductible after they are recognized in accounting home.
III. Revenues or gains that are taxable before they are recognized in accounting home.
IV. Revenues or gains that are taxable after they are recognized in accounting income

a. I and III c. II and III

b. I and IV d. II and IV

7. In accordance with IAS 12, it is the total amount included in the determination of profit or loss for the period.
a. Current tax expense c. Income tax expense
b. Deferred tax expense d. Deferred tax benefit

8. Which statement is/are correct tax assets and liabilities?

a. Deferred tax assets and liabilities shall not be counted.

FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA. 1

 b. Tax assets and liabilities shall present separately from other assets and liabilities in the statement of financial
position.
c. When an entity makes a distinction between current and non-current assets and liabilities, it shall classify
deferred tax assets and liabilities as non-current.
d. All of these statements are correct.

9. In 2024, EXO Inc. decides to incorporate a 2-year warranty on its new product sales. Warranty costs are tax deductible
when claims are settled. In its financial statements for 2024, EXO Inc, incurs which of the following?
a. An increase in a deferred tax asset. c. An increase in a deferred tax liability.
b. A decrease in a deferred tax asset. d. A decrease in a deferred tax liability.

10. Recognition of tax benefits in the loss year due to a loss carryforward require the establishment of:
a. Deferred tax asset equal to the loss carryforward times the tax rate.
b. Deferred tax asset to the extent realizable.
c. Deferred tax liability equal to the loss carryforward times the tax rate.
d. Current income tax asset to the extent realizable.
e. Only a note to the financial statements.

MULTIPLE CHOICE PROBLEMS

1. On December 31, 2024, the accounts of PENTAGON Co. have the same basis for accounting and tax purposes,
except for the following:

Carrying amount Tax base

Computer software cost 4,000,000
Equipment 15,000,000 12,000,000
Accrued liability-health care 2,000,000

In January 2024, the entity incurred costs of P6,000,000 in relation to the development of a computer software
product. The software cost was appropriately capitalized and amortized over 3 years for accounting purposes using
straight line. However, the total amount was expensed in 2022 for tax purposes.

The equipment was acquired on January 1, 2024, for P20,000,000. The useful life is 4 years with no residual value.
The equipment is depreciated using the straight line for accounting purposes and sum-of-the-years’ digits (SYD)
for tax purposes.

In January 2024, the entity into an agreement with the employees to provide health care benefits. The cost of such
plan for 2024 was P2,000,000 was accrued as expense in 2024 for accounting purposes. However, health care
benefits are deductible for tax purposes only when actually paid.

The pretax accounting income for 2022 is P13,000,000. The tax rate is 30% and there are no deferred taxes on
January 1, 2024.

Current tax expense for 2024

a. P2,400,000 c. P3,600,000
b. P3,300,000 d. P3,900,000

Deferred tax liability on December 31, 2024

a. Zero c. P1,200,000
b. P900,000 d. P2,100,000

Deferred tax asset on December 31, 2024

a. Zero c. P800,000
b. P600,000 d. P900,000

Deferred tax expense for 2024

a. Zero c. P1,500,000
b. P1,200,000 d. P2,100,000

FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA. 2

 Total tax expense for 2024
a. Zero c. P3,600,000
b. P2,400,000 d. P3,900,000

2. SEVENTEEN Corporation has a pre-tax income of P200,000. The following information was gathered:

Fines, surcharges and penalties during the period 70,000

Non-deductible premium on life insurance of key employees 12,000
Interest income received on government securities subject to final tax 10,000
Excess of accelerated depreciation used in taxation over straight-line 20,000
depreciation used in financial reporting
Warranty expense accrued for financial reporting purposes but is tax 30,000
deductible only when actually paid
Rent received in advance 16,000
Income tax payments made in the first three quarters 40,000
Tax rate 30%
Beginning balance of taxable temporary differences 24,000
Beginning balance of deductible temporary differences 18,000

The amount of income tax expense is

a. P89,400 c. P81,600
b. P86,100 d. P81,510

The amount of current income tax expense

a. P89,400 c. P81,600
b. P86,100 d. P81,510

3. On January 1, 2021, ENHYPHEN Company acquired an equipment for P8,000,000. The equipment is depreciated
using straight-line method based on a useful life of 8 years with no residual value.

On January 1, 2024, after 3 years, the equipment was revalued at a replacement cost of P12,000,000 with no change
in the useful life.

The pretax accounting income before depreciation for 2024 is P10,000,000. The income tax rate is 35% and there
are no other temporary differences at the beginning of the year.

What is the deferred tax liability on December 31, 2024 arising from revaluation?
a. P875,000 c. P525,000
b. P700,000 d. P -0-

The 2024 income statement shall report total income tax expense at
a. P4,375,000 c. P3,150,000
b. P3,500,000 d. 2,975,000

4. SHINEE Company reported its 2024 current income tax expense at P4,424,000. The following changes in SHINEE
Company’s asset and liabilities are as follows:

December 31, 2024 December 31, 2023

Income tax payable 680,000 160,000
Deferred tax liability 336,000 480,000
Deferred tax asset 160,000 400,000

The deferred tax liability was caused by accelerated depreciation and the deferred tax asset is for rentals received
in advance.
How much is SHINEE Company’s total income tax expense?
a. P4,184,000 c. P5,040,000
b. P4,520,000 d. P5,280,000

5. SUPER JUNIOR Company reported pretax financial income of P5,850,000 and P7,380,000 for the years 2023 and
2024, respectively. The tax bases for its assets and liabilities on December 31, 2023 and December 31, 2024, were
equal to their carrying amounts except for property, plant and equipment and provision for warranty. Equipment,

FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA. 3

 costing P3,600,000 with estimated residual value of P360,000 and estimated useful life of 8 years, was acquired on
January 1, 2023. This asset depreciated using straight-line method for financial reporting purposes and sum-of-the-
years’ digits method for tax purposes.

For years 2023 and 2024, the company recorded warranty expense in its books amounting to P292,500 and P387,
000, respectively. However, actual warranty expenditures were posted in the accounts amounting to P261,000 and
P297,000 for years 2023 and 2024, respectively.

There are no other temporary differences during the two-year period. Income tax rate for all years is 30%.

What are the taxable amounts for the years 2023 and 2024, respectively?
a. P5,566,500 and P7,245,000 c. P6,133,500 and P7,515,000
b. P5,850,000 and P7,380,000 d. P6,196,500 and P7,695,000

How much was the current tax liability on December 31, 2023 and December 31, 2024, respectively?
a. P1,669,950 and P2,173,500 c. P1,840,050 and P2,254,500
b. P1,755,000 and P2,214,000 d. P1,858,950 and P2,308,500

How much was the deferred tax liability on December 31, 2023 and December 31, 2024, respectively?
a. P9,450 and P94,500 c. P94,500 and P162,000
b. P40,500 and P162,000 d. P162,000 and P94,500

How much was the deferred tax asset on December 31, 2023 and December 31, 2024, respectively?
a. P36,450 and P9,450 c. P9,450 and P94,500
b. P9,450 and P36,450 d. P36,450 and P162,000

What are the after-tax profits for the years 2023 and 2024, respectively?
a. P4,265,100 and P5,247,000 c. P4,095,000 and P5,166,000
b. P4,180,050 and P5,206,500 d. P5,850,000 and P7,380,000

-END OF HANDOUTS-

FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA. 4