ACT1106 – Intermediate Accounting 2
Practice problems, Acctg for income tax and DEPS
Problem 1
The following differences enter into the reconciliation of accounting profit and taxable profit of Navarro Company for
the year ended December 31, 2023, its first year of operations.
Life insurance expense (Nondeductible expenses) 100,000
Excess tax depreciation 2,000,000
Warranty expense 200,000
Litigation accrual 500,000
Unamortized computer software 3,000,000
Unearned rent income deferred on the books but appropriately
recognized in taxable profit 400,000
Interest income from long-term certificate of deposit)Nontaxable income) 200,000
Additional information:
a. On July 1, 2023, Navarro Company paid insurance premium of Php200,000 on the life of an officer with Mari
Company as beneficiary.
b. Excess tax depreciation will reverse equally over a four-year period, 2024-2027.
c. The warranty liability is the estimated warranty cost that was recognized as expense in 2023 but deductible
for tax purposes when actually paid.
d. It is estimated that the litigation liability will be paid in 2027.
e. In January 2023, Navarro Company incurred Php4,000,000 of computer software cost. Considering the
technical feasibility of the project, this cost was capitalized and amortized over 4 years for accounting
purposes. However, the total amount was expensed in 2023 for tax purposes.
f. Rent income will be recognized during the last year of the lease, 2027.
g. Interest income from the long-term certificate of deposit (LTCD) is expected to be Php200,000 each year
until their maturity at the end of 2027. Interest income from LTCD is tax exempt.
h. Accounting profit for 2023 is Php10,000,000. Tax rate is 35%.
Based on the given information and the result of your audit, Compute for the following:
1. Deferred tax liability
2. Deferred tax asset
3. Current tax expense
4. Total tax expense
Problem 2
Almedilla Company reported pretax income of Php1,000,000 in the income statement for the current year.
Tax return Accounting record
Rent income 70,000 120,000
Depreciation 280,000 220,000
Premiums on officer’s life insurance 90,000
Income tax rate 25%
5. What is the current provision for income tax for the current year?
6. What is the total tax expense?
Problem 3
During 2022, Caceres Company reported accounting income of 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 (Caceres 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 collections from customers 200,000
Income tax rate 30%
7. How much is the income subject to tax?
8. How much is the taxable income?
9. How much is the current tax expense?
10. How much is the deferred tax liability?
11. How much is the deferred tax asset?
12. How much is the total income tax expense?
13. How much is the net income?
Accounting Income 9,000,000
Permanent differences
Non taxable revenues
Interest income on government bonds ( 700,000)
Non deductible expenses
Life insurance premium 100,000
Tax penalties and surcharges 40,000 140,000
Income subject to tax 8,440,000
Temporary differences
Future taxable amounts
Additional depreciation (1,300,000)
Prepaid rentals ( 400,000) (1,700,000)
Future deductible amounts
Provision for probable losses 100,000
Accrued warranty 400,000
Advance collections from customers 200,000 700,000
Taxable Income 7,440,000
Accounting Income 8,440,000
Current tax expense 2,232,000
Deferred tax liability 510,000
Deferred tax asset ( 210,000) 2,532,000
Net income 5,908,000
Problem 4
Marcos Company had the following transactions during the year:
January 1 Ordinary shares outstanding 300,000
February 1 Issued a 10% share dividend 30,000
March 1 Issued ordinary shares in a business
Combination 90,000
July 1 Issued ordinary shares for cash 80,000
Dec. 31 Ordinary shares outstanding 500,000
14. What is the weighted average number of shares outstanding?
January 1 300,000 x 1.10 x 12/12 330,000
March 1 90,000 x 10/12 75,000
July 1 80,000 x 6/12 40,000
Average number of shares 445,000
The share dividend is treated as a change from the date the original shares are issued
Problem 5
Tuazon Company had 200,000 ordinary shares of P20 par value and 20,000 shares of P100 par. 6% cumulative,
convertible preference share capital outstanding for the entire current year. Each preference share is convertible into
5 ordinary shares. The net income for the current year was P840,000.
15. What amount should be reported as basic earnings per share? 3.60
16. What amount should be reported as diluted earnings per share? 2.80
Under diluted EPS, the annual dividend on the convertible preference share is no longer deducted from net income
because it is assumed that the preference share is already converted into ordinary shares
Problem 6
Parido Company reported the following capital structure at year-end:
Ordinary share capital 110,000 shares
Convertible noncumulative preference share capital 20,000 shares
9% convertible bonds payable 2,000,000
Share options to purchase 20,000 shares at P15 were outstanding. Market price of Parido share was P25 at year-
end and averaged P20 during the current year.
No value was assigned to the share options. The entity paid the annual dividend of P5 on the preference share.
The preference shares are convertible into 40,000 ordinary shares and the 0% bonds are convertible into 30,000
ordinary shares.
The net income for the current year is P650,000 and the income tax rate is 25%
17. What amount should be reported as basic earnings per share?
18. What is the total number of potentially dilutive ordinary shares?
19. What amount should be reported as diluted earnings per share?
Net Income 650,000
Preference dividend (20,000 x 5) (100,000)
Net income to ordinary shares 550,000
Basic EPS (550,000 / 110,000) 5.00
Effect on net income:
Preference dividend 100,000
Interest on bonds (2M x 9% x 75%) 135,000
Incremental EPS:
Convertible PS (100,000 / 40,000) 2.50
Convertible bonds (135,000 / 30,000) 4.50
Share options 20,000
Assumed treasury shares (20k x 15 / 20) 15,000
Potential ordinary shares from share options 5,000
Potential ordinary shares – share options 5,000
Potential ordinary shares – preference 40,000
Potential ordinary shares – bonds payable 30,000
Total potential ordinary shares 75,000
Net Income Shares EPS
Basic EPS 550,000 110,000 5.00
5,000
Diluted EPS 550,000 115,000 4.78
Convertible PS 100,000 40,000
Diluted EPS 650,000 155,000 4.19
Convertible bonds 135,000 30,000
Diluted EPS 785,000 185,000 4.24
The diluted EPS should be reported is P4.19. The convertible bonds are ignored because the effect is antidilutive.
BONUS PROBLEM
On January 1, 2017, Surigao Company issued bonds with face amount of P4,000,000 and stated interest rate of
12%. The interest is payable semiannually on June 30 and December 31. The bonds mature every December 31 at
the rate of P2,000,000 per year for 2 years. The prevailing market rate for the bonds is 8%.
On December 31, 2017, Surigao Company paid all principal and interests due on that date. In addition, on the same
date, the company retired the outstanding serial bonds maturing on December 31, 2018. The bonds were trading at
102 at the time of retirement.
1. What is the market price of the bonds on January 1, 2017? 4,220,720
2. What is the interest expense for 2017? 334,811
3. What is the carrying amount of the bonds as of December 31, 2017 prior to retirement? 2,075,531
4. How much is the gain on retirement of the bonds retired? 35,531
