ACCOUNTING FOR INCOME TAXES

Question 1

This is the income that appears in the income statement.

Answer 1

Accounting Income

Question 2

What is the basis of Accounting Income?

Answer 2

GAAP

Question 3

It is the income appearing on the ITR?

ITR = Income Tax Returns

Answer 3

Taxable Income

Question 4

What is the basis of Taxable Income?

Answer 4

Tax Laws
Cash Basis

Question 5

TRUE OR FALSE?

Income tax expense reported in the statement of comprehensive income may be different from the amount of income tax required to be paid to the BIR.

Answer 5

True

Question 6

This type of difference arises when income and expenses enter in the computation of either accounting income or taxable income but not both.

Answer 6

Permanent Differences

They are the items excluded from the income tax return.

Question 7

These differences include timing differences, wherein income and expenses are recognized for financial reporting purposes in one period but are recognized for taxation purposes in another period.

Answer 7

Temporary Differences

Question 8

What are the two types of permanent differences?

Answer 8

1. Non-taxable Revenues
2. Non-deductible Expenses

Question 9

What are the two types of temporary differences?

Answer 9

1. Taxable Temporary Differences
2. Deductible temporary differences

Question 10

These are recognized as revenue in Accounting, but not recognized as revenue in the BIR.

Answer 10

Non-taxable revenues

Question 11

These are expenses deducted under accounting purposes, but cannot be deducted under the BIR.

Answer 11

Non-deductible expenses

Question 12

These are future taxable amounts.

Answer 12

Taxable Temporary Differences

Question 13

These are future deductible amounts.

Answer 13

Deductible Temporary Differences

Question 14

What temporary difference brings deferred tax liability?

Answer 14

Taxable Temporary Differences

Note: This is a bigat in the future

Question 15

What temporary difference brings deferred tax asset?

Answer 15

Deductible Temporary Differences

Note: This is a benefit in the future.

Question 16

What is the solution to convert the accounting income into taxable income?

Answer 16

Accounting Income
Permanent Differences
Less: Non-Taxable Revenues
Add: Non-Deductible Expenses
—————————–
Equal: Income Subject to Tax
Temporary Differences
Less: Future Taxable Amounts
Add: Future Deductible Amounts
—————————–
Equal: Taxable Income

Question 17

What is not DTL?

Answer 17

1. Goodwill
2. Asset/Liability that does not affect accounting or taxable income
3. Undistributed profit of subsidiary, associate, or joint venture

Why: There are no cash transactions

Question 18

This is measured using the tax rate that has been enacted and effective at the end of the reporting period.

Answer 18

Current Taxes

Question 19

TRUE OR FALSE:
You can reclassify the deferred tax liability and deferred tax asset to current.

Answer 19

FALSE.

Question 20

TRUE OR FALSE:
Operating losses carry forward when it comes to deferred tax asset.

Answer 20

TRUE.

Question 21

What are the two conditions that a DTA can be offset against a DTL?

DTA: Deferred Tax Asset, DTL: Deferred Tax Liability

Answer 21

WHEN:
1. The DTL and DTA are levied by the same tax authority
2. The entity has the right to offset

Question 22

WHAT IS THE CLASSIFICATION TO FORMULA OF TAXABLE INCOME?

Interest Income

What is the treatment?

Answer 22

PERMANENT DIFFERENCE:
Non-taxable Income

TREATMENT: Deduct

Question 23

WHAT IS THE CLASSIFICATION TO FORMULA OF TAXABLE INCOME?

Life insurance premium
(Entity is the beneficiary)

Answer 23

PERMANENT DIFFERENCE:
Non-deductible Expenses

Treatment: Add

Question 24

WHAT IS THE CLASSIFICATION TO FORMULA OF TAXABLE INCOME?

Tax penalties and surcharges

Answer 24

PERMANENT DIFFERENCE:
Non-deductible Expenses

Treatment: Add

Question 25

How do you find Income Subject to Tax?

Answer 25

Accounting Income
Add(Less): Permanent Differences

Question 26

How do you find Taxable Income?

Answer 26

Income Subject to Tax
Add: Taxable Income

Question 27

How do you find Income Tax Expense?

Answer 27

Taxable Income
Multiply: Tax Rate

Question 28

How do you find the Total Income Tax Expense?

Answer 28

Income Subject to Tax
Multiple: Tax Rate

Question 29

What is the difference between Income Tax Expense and Total Income Tax Expense?

Answer 29

Income Tax Expense considers both permanent and temporary differences, while the Total Income Tax Expense only considers the permanent difference.

Question 30

When the amount presented as deferred tax liability is being asked,
how do you solve for this?

Answer 30

DTL x Tax Rate

Question 31

When the amount presented as deferred tax asset is being asked,
how do you solve for this?

Answer 31

DTA x Tax Rate

Question 32

What is the journal entry for the current tax liability?

Answer 32

DrIncome Tax Expense
CrIncome Tax Liability

Question 33

What is the journal entry for the deferred tax liability?

Answer 33

DrIncome Tax Expense
CrDeferred Tax Liability

Question 34

What is the journal entry for the deferred tax asset?

Answer 34

DrDeferred Tax Asset
CrIncome Tax Expense