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University of San Carlos

Accountancy Department
Cebu City

AC 525
Assignment

P-1. Ratolon Company reported a pretax financial income of P3,000,000 for the year ended December 31,
2016. The taxable income was P4,000,000. The difference is due to rental received in advance. Rental
income is taxable when received. The income tax rate is 30% and Ratolon Company made estimated tax
payment of P500,000 during the current year.

1. Prepare journal entries relating to income tax for 2016.

2. Compute the total income tax expense for 2016.

P-2. Practice Company included in 2015 a deferred income on installment sale of P500,000 in accounting
income. This deferred income is expected to reverse for tax purposes in 2016. the income statement and
tax return showed the following:

1. Prepare journal entries to record the income tax and deferred tax for 2015 and 2016.
2. Present the income tax expense in the income statement for 2015 and 2016.

P-3. Prayer Company provided the following information for its first year of operations ended December
31, 2017:
Accounting income 4,000,000
Nondeductible expenses 200,000
Nontaxable revenue 300,000
Deferred income on installment sale 450,000
In financial income but taxable in 2018
Doubtful accounts recorded 100,000
Financial depreciation 300,000
Tax depreciation 350,000
Est. warranty cost accrued in 2016 100,000
Income Tax Rate 30%

Prepare the journal entry to record the current tax expense.

1. Journal entry to record the deferred tax liability

2. Present the income tax expense in the income statement.
3. Determine the net deferred tax expense or benefit.

P-4. On January 1, 2015, Panagdait Company entered into a 3-year construction contract that had an
estimated gross revenue of P3,000,000. The entity used the percentage of completion method in
recognizing income on its books and reported construction income as follows:
2015 600,000
2016 1,500,000
2017 900,000

The cost recovery method is used for income tax purposes and the entity reported construction income on
the tax return as follows:
2015 -
2016 -
2017 3,000,000

This is the only timing difference between pretax accounting income and taxable income.
The entity reported income before construction income and tax as follows:
2015 2,400,000
2016 3,600,000
2017 3,200,000
Prepare journal entries to record income tax and deferred tax for 2013, 2014, and 2015. the income tax
rate is 30%.

P-5. Family Corporation reported a pretax accounting income of P7,900,000 for the year ended December
31, 2015. Temporary differences have been identified as follows:

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The warranty liability is classified as a current liability in the entitys statement of financial position. The
income tax rate is 30%.

Tax depreciation in excess of accounting depreciation 1,000,000

Probable Litigation loss 400,000
Estimated warranty cost 300,000

There are no temporary differences at the beginning of the current year.

1. Journal entries to record the income tax and deferred tax for 2013.
2. Partial income statement and financial position showing income tax expense and deferred tax
account.

P-6. On December 31, 2015, the statement of financial position accounts of PRAYER 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-healthcare 2,000,000 0 2,000,000

In January 2015, PRAYER company incurred cost of P6,000,000 in relation to the development of
a computer software product. Considering the technical feasibility of the product, this cost was capitalized
and amortized over 3 years for accounting purposes using straight line. However, the total amount was
expensed in 2015 for tax purposes.

The equipment was acquired on January 1, 2015 for P20,000,000. The useful life of the equipment
is 4 years with no residual value. The equipment is depreciated using the straight line for accounting
purposes and sum of year digits method for tax purposes.

In January 2015, PRAYER Company entered into an agreement with its employees to provide health
care benefits. The cost of such plan for 2015 was P2,000,000. This amount was accrued as expense in
2015 for accounting purposes. However, health care benefits are deductible for tax purposes when actually
paid.

The pretax accounting income for 2015 is P13,000,000. The tax rate is 30% and assume there
are no deferred taxes on January 1, 2015.

Required: Journal entries to record the deferred tax liability, deferred tax asset and current tax expense.
Present the income tax expense in the income statement.

P-7. Health Company provided the following statement of financial position on January 1, 2017:

Property, plant, and equipment 7,000,000

Goodwill 3,000,000

Intangible assets 2,000,000

Financial assets 6,000,000

Trade receivables 7,000,000

Other receivables 1,600,000

Cash and cash equivalents 700,000

Total Assets 27,300,000

Share capital 7,500,000

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Retained Earnings 6,130,000

Loans Payable 8,000,000

Trade Payables 4,000,000

Employee benefits payable 1,000,000

Current tax liability 70,000

Deferred Tax Liability 600,000

Total equity & liabilities 27,300,000

Tax bases of the assets and liabilities are the same as their carrying amount, except for the following:

Property, plant and equipment 1,400,000

Trade Receivables 7,500,000
Loans Payable 8,500,000
Financial Assets 7,000,000

The financial assets are all classified as at fair value through profit or loss and the fair value is P6,500,000.
The intangible assets are development costs that are allowed as deduction for tax purposes when the costs
are incurred. Intangible assets of P400,000 do not qualify for recognition.

Included in trade payables is an accrual for compensation to be paid to employees. The compensation is
allowed as deduction for taxation when the payment is made and totals P200,000.

A pension liability of P50,000 is to be recognized. The tax base of such liability is zero.

Required:
1. Adjustments on January 1, 2019 to correct the carrying amount of certain assets and liabilities.
2. Adjusting entry for the deferred tax liability on January 1, 2017.
3. Adjusting entry for the deferred tax asset on January 1, 2017.

Nothing follows--

AC525/2016/Atty. KMA