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PRACTICAL ACCOUNTING 1 – REVIEW

ACCOUNTING FOR TAXES

PROF. U.C. VALLADOLID

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. The following differences between financial and taxable income were reported by Dider Corporation
for the current year:

(a) Excess of tax depreciation over book depreciation .... P60,000

(b) Interest revenue on municipal bonds .................. 9,000
(c) Excess of estimated warranty expense over actual
expenditures ......................................... 54,000
(d) Unearned rent received ............................... 12,000
(e) Fines paid ........................................... 30,000
(f) Excess of income reported under percentage-of-completion
accounting for financial reporting over
completed-contract accounting used for tax reporting . 45,000
(g) Interest on indebtedness incurred to purchase tax-exempt
securities .................................... 3,000
(h) Unrealized losses on marketable securities recognized
for financial reporting .............................. 18,000

Assume that Dider Corporation had pretax accounting income [before considering items (a) through
(h)] of P900,000 for the current year. Compute for the taxable income for the current year.
Assuming current tax rate of 30% and future enacted tax rate of 25%.

2. Anne's Co.'s 2020 income statement reported P90,000 income before provision for income taxes.
To compute the provision for federal income taxes, the following 2020 data are provided:

Rent received in advance P16,000

Income from exempt municipal bonds 20,000
Depreciation deducted for income tax
purposes in excess of depreciation
reported for financial statement purposes 10,000
Estimated tax payments 0
Enacted corporate income tax rate 30%

What amount of current federal income tax liability should be reported in Anne's December 31,
2020 balance sheet?
a. P18,000
b. P22,800
c. P25,800
d. P28,800
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3. Jostine company at the end of 2020, its first year of operation prepared reconciliation between pre
tax financial Income and taxable income as follows:
Pre tax financial income P 900,000
Estimation litigation expense 500,000
Installment sales ( 400,000)
Taxable income P 1,000,000

The estimate of litigation expense of P500,000 will be deductible in 2021 when it is expected to be
paid. The gross profit from the installment sales will be realized in the amount of P200,000 in each
of the next two years. The estimated liability for litigation is classified as non-current and the
installment accounts receivable are classified as P200,000 current and P200,000 non-current. The
income tax rate is 32% in 2020 enacted tax law which will be implemented early next year. Tax rate
will be 33% for all years.

How much shall be the income tax expense?

a) P 287,000 b) P 288,000 c) P 297,000 d) P 353,000

4. The following information was extracted from the records of Dean Company on December 31, 2020:

Carrying amount Tax base

Accounts Receivable 1,500,000 1,750,000
Motor Vehicle 1,650,000 1,250,000
Provisions for warranty 120,000 0
Deposit received in advance 150,000 0

The depreciation rates for accounting and taxation are 15% and 25% respectively. The deposits are
taxable when received and warranty cost are deductible only when written off as uncollectible. The
tax rate is 30%. Dean Company should report a deferred tax liability on December 31, 2020 at
a. 120,000 b. 156,000 c. 81,000 d. 36,000

5. Adik Company prepared the following reconciliation of its pretax financial statement income to
taxable income for the year ended December 31, 2020, its first year of operation:

Pretax financial income 1,600,000

Nontaxable interest received ( 50,000)
Long-term loss accrual in excess of deductible amount 100,000
Depreciation in excess of financial depreciation (250,000)
Taxable income 1,400,000

1. If income tax is 30%, what amount should Adik report as income tax expense- current portion in
its 2020 income statement?
a. 465,000 b. 420,000 c. 480,000 d. 390,000

2. What amount should be reported as total income tax expense for 2020?
a. 480,000 b. 465,000 c. 420,000 d. 435,000

3. On December 31, 2020, what amount should be reported a deferred tax liability?
a. 30,000 b. 45,000 c. 75,0000 d. 0

4. What amount should be reported as deferred tax asset on December 31, 2020?
a. 30,000 b. 75,000 c. 45,000 d. 70,000
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6. Angel Company reported taxable income of P8,000,000 in its income tax return for the year ended
December 31, 2020, its first year of operations. Temporary differences between financial income
and taxable income for the year are as follows:

Tax depreciation in excess of book depreciation 800,000

Accrual for product liability claim in excess of actual claim 1,200,000
Reported installment sales income in excess of taxable
installment sales income 2,600,000
Income tax rate 30%

1. What is the total income tax expense to be reported in the 2020 income statement?
a. 3,060,000 b. 2,400,000 c. 2,580,000 d. 2,220,000

2. What is the deferred tax asset on December 31, 2020?

a. 240,000 b. 360,000 c. 780,000 d. 0

3. What is the deferred tax expense for the year ended December 31, 2020?
a. 1,380,000 b. 1,020,000 c. 660,000 d. 360,000

7. On December 31, 2020, The accounts of Lol Company have the same basis for accounting and tax
purposes, except the following:
Carrying amount Tax Base Difference
Computer software cost 4,000,000 0 4,000,000
Equipment 15,000,000 12,000,000 3,000,000
Accrued liability-heath care 2,000,000 0 2,000,000
In January 2020, Lol Company incurred cost of P6,000,000 in relation to the development of
a computer software product, this cost was capitalized and amortized over 3 years for accounting
purposes using straight line. However, the total amount was expensed in 2020 for tax purposes.
The equipment was acquired on Jan. 1, 2020 for P 20,000,000. The useful life of the
equipment is 4 years with no residual value. The equipment is depreciated using the straight line for
accounting purposes.
In Jan. 2020, Lol Company entered into an agreement with its employees to provide health
care benefits. The cost of such plan for 2020 was P2,000,000. This amount was accrued as
expense in 2020 for accounting purposes only when actually paid.
The pretax accounting income for 2020 is P13,000,000. the tax rate is 30% and there are no
deferred taxes on Jan. 1, 2020.
1. The December 31, 2020 statement of financial position shall report deferred tax liability at
a. 2,100,000 b. 1,200,000 c. 1,500,000 d. 2,700,000
2. The December 31, 2020 statement of financial position shall report deferred tax asset at
a. 1,200,000 b. 2,100,000 c. 900,000 d. 600,000
3. What is the 2020 current tax expense?
a. 3,900,000 b. 2,400,000 c. 3,300,000 d. 1,500,000
4. The 2020 income statement shall report total income tax expense at
a. 3,900,000 b. 4,500,000 c. 5,100,000 d. 1,500,000
5. What is the deferred tax expense for 2020?
a. 2,100,000 b. 2,700,000 c. 1,500,000 d. 600,000

8. Jostine company lease office premises to Fox, Inc. for a 4-year term beginning January 2,
2020.Under the terms of the operating lease, rent for the first year is P216,00 and rent for years 2
through 4 is P337,500 per annum. However, as an inducement to enter the lease, Fox was allowed
to use the lease asset rent-free for the first three months. Assume tax rate of 32%.

In its December 31, 2020 balance sheet of Jostine company, what amount should be reported as
deferred tax asset?
a) 0 b) 42,120 c) 51, 840 d) 93,969
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9. In 2020, Jostine corporation received interest income of 100,000 on government obligations and
P600,000 in royalties under a licensing agreement. Royalties are reported as taxable income in the
year received, but in the financial statements, royalties are recognized as income in the year earned
and amount to P400,000 for the year ended December 31, 2020 the effective income tax rate of
Jostine corporation is 32%.

By what amount would the deferred income tax asset account balance increase?
a)32,000 b)64,000 c)80,000 d)96,000

10. In Year 2, Ajax, Inc. reported taxable income of 400,000 and pretax financial statement income of
300,000. The difference resulted from 60,000 of nondeductible premiums on Ajax's officers' life
insurance and 40,000 of rental income received in advance. Rental income is taxable when
received. Ajax's effective tax rate is 30%. In its Year 2 income statement, what amount should Ajax
report as income tax expense-current portion?
a. 90,000 b. 102,000 c. 108,000 d. 120,000

11. Lion Co.'s income statement for its first year of operations shows pretax income of 6,000,000. In
addition, the following differences existed between Lion's tax return and records:
Tax Accounting return records
Uncollectible accounts expense 220,000 250,000
Depreciation expense 860,000 570,000
Tax-exempt interest revenue - 50,000
Lion's current year tax rate is 30% and the enacted rate for future years is 40%. What amount
should Lion report as deferred tax expense in its income statement for the year?
a. 148,000 b. 124,000 c. 104,000 d. 78,000

12. At the beginning of 2020, Pitman Co. purchased an asset for 600,000 with an estimated useful life
of 5 years and an estimated residual value of 50,000. For financial reporting purposes the asset is
being depreciated using the straight-line method; for tax purposes the double-declining-balance
method is being used. Pitman Co.’s tax rate is 40% for 2020 and all future years.

1. At the end of 2020, what is the book basis and the tax basis of the asset?
Book basis Tax basis
a. 440,000 310,000
b. 490,000 310,000
c. 490,000 360,000
d. 440,000 360,000

2. At the end of 2020, which of the following deferred tax accounts and balances is reported on
Pitman’s statement of financial position?
Account _ Balance
a. Deferred tax asset 52,000
b. Deferred tax liability 52,000
c. Deferred tax asset 78,000
d. Deferred tax liability 78,000
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13. Mathis Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax
financial income and taxable income as follows:
Pretax financial income 500,000
Estimated litigation expense 1,250,000
Installment sales (1,000,000)
Taxable income 750,000

The estimated litigation expense of 1,250,000 will be deductible in 2022 when it is expected to be
paid. The gross profit from the installment sales will be realized in the amount of 500,000 in each of
the next two years. The estimated liability for litigation is classified as non-current and the
installment accounts receivable are classified as 500,000 current and 500,000 noncurrent. The
income tax rate is 30% for all years.

1. The income tax expense is

a. 150,000. b. 225,000. c. 250,000. d. 500,000.

2. The net deferred tax asset to be recognized is

a. 0. b. 150,000. c. 375,000. d. 225,000.

14. In 2020, Krause Company accrued, for financial statement reporting, estimated losses on disposal
of unused plant facilities of 1,500,000. The facilities were sold in March 2021 and a 1,500,000 loss
was recognized for tax purposes. Also in 2020, Krause paid 100,000 in fines for violation of
environmental regulations. Assuming that the enacted tax rate is 30% in both 2020 and 2021, and
that Krause paid 780,000 in income taxes in 2020, the amount reported as net deferred income
taxes on Krause's statement of financial position at December 31, 2020, should be a
a. 420,000 asset.
b. 360,000 asset.
c. 360,000 liability.
d. 450,000 asset.

15. Munoz Corp.'s books showed pretax financial income of 1,500,000 for the year ended December
31, 2020. In the computation of income taxes, the following data were considered:
Gain on an involuntary conversion 650,000
(Munoz has elected to replace the property within the statutory
period using total proceeds.)
Depreciation deducted for tax purposes in excess of depreciation
deducted for book purposes 100,000
Estimated tax payments, 2020 125,000
Enacted tax rate, 2020 30%
What amount should Munoz report as its current income tax liability on its December 31, 2020
statement of financial position?
a. 100,000 b. 130,000 c. 225,000 d. 255,000

16. Haag Corp.'s 2020 income statement showed pretax accounting income of 750,000. To compute
the income tax liability, the following 2020 data are provided:
Income from government bonds 30,000
Depreciation deducted for tax purposes in excess of depreciation
deducted for financial statement purposes 60,000
Estimated income tax payments made 150,000
Enacted corporate income tax rate 30%
What amount of current income tax liability should be included in Hagg's December 31, 2020
statement of financial position?
a. 48,000 b. 66,000 c. 75,000 d. 198,000

17. On January 1, 2020, Piper Corp. purchased 40% of the voting common stock of Betz, Inc. and
appropriately accounts for its investment by the equity method. During 2020, Betz reported earnings
of 360,000 and paid dividends of 120,000. Piper assumes that all of Betz's undistributed earnings
will be distributed as dividends in future periods when the enacted tax rate will be 30%. Ignore the
dividend-received deduction. Piper's current enacted income tax rate is 25%. The increase in
Piper's deferred income tax liability for this temporary difference is
a. 72,000. b. 60,000. c. 43,200. d. 28,800.
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18. Didde Corp. prepared the following reconciliation of income per books with income per tax return for
the year ended December 31, 2020:
Book income before income taxes 1,200,000
Add temporary difference
Construction contract revenue which will reverse in 2021 160,000
Deduct temporary difference
Depreciation expense which will reverse in equal amounts in
each of the next four years (640,000)
Taxable income 720,000
Didde's effective income tax rate is 34% for 2020. What amount should Didde report in its 2020
income statement as the current provision for income taxes?
a. 54,400 b. 244,800 c. 408,000 d. 462,400

19. In its 2020 income statement, Cohen Corp. reported depreciation of 1,110,000 and interest revenue
on government obligations of 210,000. Cohen reported depreciation of 1,650,000 on its 2020
income tax return. The difference in depreciation is the only temporary difference, and it will reverse
equally over the next three years. Cohen's enacted income tax rates are 35% for 2020, 30% for
2021, and 25% for 2022 and 2023. What amount should be included in the deferred income tax
liability in Hertz's December 31, 2020 statement of financial position?
a. 144,000 b. 186,000 c. 225,000 d. 262,500

20. For calendar year 2020, Kane Corp. reported depreciation of 1,200,000 in its income statement. On
its 2020 income tax return, Kane reported depreciation of 1,800,000. Kane's income statement also
included 225,000 accrued warranty expense that will be deducted for tax purposes when paid.
Kane's enacted tax rates are 30% for 2020 and 2021, and 24% for 2022 and 2023. The
depreciation difference and warranty expense will reverse over the next three years as follows:
Depreciation Difference Warranty Expense
2021 240,000 45,000
2022 210,000 75,000
2023 150,000 105,000
600,000 225,000
These were Kane's only temporary differences. In Kane's 2020 income statement, the deferred
portion of its provision for income taxes should be
a. 200,700. b. 112,500. c. 101,700. d. 109,800.

21. On its December 31, year 2 balance sheet, Shin Co. had income taxes payable of 13,000 and a
current deferred tax asset of 20,000 before determining the need for a valuation account. Shin had
reported a current deferred tax asset of 15,000 at December 31, year 1. No estimated tax payments
were made during year 2. At December 31, year 2, Shin determined that it was more likely than not
that 10% of the deferred tax asset would not be realized. In its year 2 income statement, what
amount should Shin report as total income tax expense?
a. 8,000 b. 8,500 c. 10,000 d. 13,000

22. Eckert Corporation's partial income statement after its first year of operations is as follows:
Income before income taxes 3,750,000
Income tax expense
Current 1,035,000
Deferred 90,000 1,125,000
Net income 2,625,000
Eckert uses the straight-line method of depreciation for financial reporting purposes and accelerated
depreciation for tax purposes. The amount charged to depreciation expense on its books this year
was 1,500,000. No other differences existed between book income and taxable income except for
the amount of depreciation. Assuming a 30% tax rate, what amount was deducted for depreciation
on the corporation's tax return for the current year?
a. 1,200,000 b. 1,425,000 c. 1,500,000 d. 1,800,000
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23. Kraft Company made the following journal entry in late 2020 for rent on property it leases to Danford
Corporation.
Cash 60,000
Unearned Rent 60,000
The payment represents rent for the years 2021 and 2020, the period covered by the lease. Kraft
Company is a cash basis taxpayer. Kraft has income tax payable of 92,000 at the end of 2020, and
its tax rate is 35%.

1. What amount of income tax expense should Kraft Company report at the end of 2020?
a. 53,000 b. 71,000 c. 81,500 d. 113,000

2. Assuming the taxes payable at the end of 2021 is 102,000, what amount of income tax
expense would Kraft Company record for 2021?
a. 81,000 b. 91,500 c. 112,500 d. 123,000

24. MARGA Company reports pretax financial income of P750,000 for 2020. The following caused
taxable income to be different than financial income:

 Depreciation on the tax return is greater that depreciation on the income statement by
P150,000.
 Rent collected on the tax return is greater than rent earned on the income statement by
200,000.
 Fines for pollution appears as expense of P100,000 on the income statement.

Marga’s tax rate is 32% for all years and the company expects to report taxable income in all future
years. There are no deferred taxes at the beginning of 2020

What is the amount of income tax liability for 2020?

a. 240,000 c. 288,000
b. 272,000 d. 256,000

25. Shear, Inc. began operations in year 1. Included in Shear’s year 1 financial statements were bad
debt expenses of 1,400 and profit from an installment sale of 2,600. For tax purposes, the bad
debts will be deducted when written off and the profit from the installment sale will be recognized in
year 2. The enacted tax rates are 30% in year 1 and 25% in year 2. In its year 1 income statement,
what amount should Shear report as deferred income tax expense?
a. 300 b. 360 c. 650 d. 780