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OBJECTIVES:
The objective of this Standard is to prescribe the accounting treatment for income taxes. The principal issue in accounting
for income taxes is how to account for the current and future tax consequences of:
(a) the future recovery (settlement) of the carrying amount of assets (liabilities) that are recognised in an entity’s
statement of financial position; and
(b) transactions and other events of the current period that are recognised in an entity’s financial statements.
(g) Temporary differences are differences between the carrying amount of an asset or liability in the statement of
financial position and its tax base. Temporary differences may be either:
a. taxable temporary differences, which are temporary differences that will result in taxable amounts
in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or
liability is recovered or settled (future taxable amount); or
b. deductible temporary differences, which are temporary differences that will result in amounts that
are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of
the asset or liability is recovered or settled (future deductible amount).
(h) The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
2) When the carrying amount of an asset is higher than the tax base.
3) When the carrying amount of a liability is lower than the tax base.
Par. 15 provides that deferred tax liability shall NOT be recognised for all taxable temporary differences arising from the
following:
(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction which is not a business combination and at the time
of the transaction, affects neither accounting profit nor taxable profit (tax loss).
(c) Temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint
ventures, a deferred tax liability shall not be recognized when the parent, investor or venturer is able to control
the timing of the reversal of the temporary difference and it is probable that the temporary difference will not
reverse in the foreseeable future (see par. 39 - 40)
PAS 12, par. 24, provides that a deferred tax asset is recognized for all deductible temporary differences and the
carryforward of unused tax losses (operating loss carryforward) and unused tax credits to the extent that it is probable that
future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized under
paragraph 34.
Paragraph 46 Current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected to
be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or
substantively enacted by the end of the reporting period.
Paragraph 47 Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period
when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted by the end of the reporting period.
Paragraph 70 provides that when an entity makes a distinction between current and noncurrent assets and liabilities, it
shall not classify deferred tax assets as current assets and deferred tax liabilities as current liabilities. Furthermore, a
deferred tax asset or deferred tax liability shall not be discounted in accordance to paragraph 53.
Paragraph 74 provides that an entity shall offset a deferred tax asset against a deferred tax liability when the:
(a) deferred tax asset and deferred tax liability relate to income taxes levied by the same tax authority.
(b) The entity has a legal enforceable right to set off a current tax asset against a current tax liability.
STRAIGHT PROBLEMS
1. Accounting profit is
a. The profit or loss for a period before deducting tax expense.
b. The profit or loss for a period determined in accordance with tax law.
c. The profit or loss for a period after deducting tax expense
d. The profit or loss after current tax expense determined in accordance with tax law
2. It is the income tax payable in future periods in respect of taxable temporary differences.
a. Deferred tax liability
b. Deferred tax asset
c. Current tax liability
d. Current tax asset
4. Deferred tax asset is the amount of income taxes recoverable in future periods in respect of
a. Deductible temporary differences
b. Permanent differences
c. Carryforward of unused tax losses
d. Deductible temporary differences and carryforward of unused tax losses
7. An entity shall offset a deferred tax asset and deferred tax liability
a. When the deferred tax asset and income taxes are levied by different taxing authority.
b. When the entity has no legal enforceable right to offset.
c. When the income taxes are levied by the same taxing authority and the entity has a legal enforceable right to
offset a current tax asset against a current tax liability.
d. Under all circumstances.
9. Entities use the intaperiod tax allocation for all of the following items, except
a. Discontinued operations
b. Prior period adjustments
c. Changes in accounting estimate
d. Income from continuing operations
10. An entity reported pretax financial income of P8,000,000 for the current year. The taxable income was
P7,000,000 for the current year. The difference is due to accelerated depreciation for income tax purposes. The
income tax rate is 30% and the entity made estimated tax payment of P500,000 during the current year.
A. What amount should be reported as current tax expense for the current year?
a. 2,100,000 c. 1,600,000
b. 2,400,000 d. 1,900,000
11. An entity reported pretax accounting income f P5,000,000 for the current year. The taxable income was
P5,500,000. The difference is due to rental received in advance. Rental income is taxable when received. The
income tax rate is 30% and the entity made no estimated tax payment in the current year. What amount should be
reported as total income tax expense for the current year?
a. 1,650,000 c. 1,800,000
b. 1,500,000 d. 3,150,000
12. At the end of the first year of operations, an entity had taxable temporary differences totaling P3,000,000. Of this
total, P500,000 relates to current items. The entity also had deductible temporary differences totaling P1,000,000,
P250,000 of which relates to current items. Pretax financial income for the current year was P20,000,000. The tax
rate is 30%.
A. What amount should be reported as current tax expense for current year?
a. 5,925,000 c. 6,600,000
b. 6,000,000 d. 5,400,000
B. What is the net deferred tax expense or benefit for the current year?
a. 900,000 expense c. 600,000 expense
b. 300,000 benefit d. 600,000 benefit
13. an entity was organized on January 1, 2018. The entity had pretax accounting income of P5,000,000 and taxable
income of P7,000,000 for the current year. The only temporary difference is accrued product warranty cost that is
expected to be paid in 2019. The enacted tax rates are 30% for 2018 and 25% for 2019 and thereafter. What
amount should be reported as total income tax expense in the income statement for 2018?
a. 1,500,000 c. 1,250,000
b. 2,100,000 d. 1,600,000
14. On December 31, 2018, an entity reported a deferred tax liability of P600,000 and a deferred tax asset of
P150,000. On December 31, 2019, the deferred tax liability is P900,000 and the deferred tax asset is zero. What is
the deferred tax expense for 2019?
a. 300,000
b. 450,000
c. 150,000
d. 900,000
15. An entity reported the following information during the first year of operations:
Pretax financial income 9,000,000
- Nontaxable interest received 1,000,000
- Long-term loss accrual in excess of deductible amount 1,500,000
- Tax depreciation in excess of financial depreciation 2,000,000
Income tax rate 30%
-end of handouts-
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