Caalim, Isabel D.

DEFERRED TAXES – Theories

1. When is deferred tax liability recognized in a business combination?

a. When there is a temporary difference on goodwill that is not taxable.
b. When there is a temporary difference on acquisition accounting adjustment to the
carrying amount of identifiable assets and liabilities.
c. When there are temporary difference both on goodwill that is not tax deductible and
on acquisition accounting adjustments to the carrying amount identifiable assets and
liabilities.

ANS : B

2. Which of the following disclosures are required by IAS 12?

i. The amount of each type of deferred tax asset and liability.
ii. The amount of unused tax losses for which no deferred tax asset is recognized.
iii. The amount of undistributed profits of subsidiaries, associates, or joint ventures for
which no deferred tax liability is recognized.
a. I and II
b. I and III
c. All of the above

ANS : C

3. If liquidation of carrying amounts will make future tax payments larger or smaller, IAS
12 generally require and undertaking to record a :
a. Provision
b. Deferred Tax Liability (Deferred Tax Asset)
c. Contingent Liability

ANS : B

4. Permanent difference require

a. Provision
b. Deferred Tax Liability (Deferred Tax Asset)
c. None of these
d. Contingent Liability

ANS : C

5. Permanent difference require adjustments in the :

a. The periods relating to the transaction and periods following the transaction
 b. The periods relating to the transaction
c. Periods prior to the transaction
d. Periods following the transaction

ANS : B

6. Deferred tax assets are the taxes recoverable, in future period, in respect of :
1. Deductible temporary difference
2. Unused tax losses
3. Unused tax credits
4. Taxable temporary difference

a. 1 and 2 only
b. 1 only
c. 1 to 4; all
d. 1, 2, and 3 only

ANS :D

7. Deferred taxes relates to :

1. Deductible temporary difference

2. Unused tax losses
3. Unused tax credits
4. Taxable temporary difference
5. Permanent difference

a. 1 and 2 only
b. 1 to 5; all
c. 1, 2, 3, and 4
d. 1, 2 and 3 only

ANS : C

8. If revenue is taxed in the period received, the tax base :

a. Is the amount received
b. Is only nil if the revenue recognised in the following period
c. Is only nil of the revenue is recognised in the same period
d. Is Nil

ANS : D

9. Temporary difference arise :

a. When deferred tax differs from current tax
 b. When deferred tax is applied
c. When the carrying amount of an asset or liability differs from its tax base

ANS : C

10. A taxable temporary difference gives rise to

a. Deferred tax liability
b. Either tax liability or deferred tax asset
c. Deferred tax asset

ANS : A

11. Taxable temporary difference occur when tax is charged in the period
a. Before the accounting period benefits from the income recognised in the financial
accounts
b. After the accounting period benefits from the income recognised in the financial accounts
c. Either before or after the accounting period benefits from the income is recognised in the
financial accounts.

ANS : B

12. Deductible temporary difference occur when tax is charged in the period
a. Before the accounting period benefits from the income recognised in the financial
accounts
b. After the accounting period benefits from the income recognised in the financial accounts
c. Either before or after the accounting period benefits from the income is recognised in the
financial accounts.

ANS : A

13. Differences arising from fair value adjustments are treated

a. The same as any other taxable and deductible difference
b. Differently depending on whether they arise on acquisition of otherwise
c. Seperately for deferred tax

ANS : A

14. Not all temporary differences are recognized as deferred tax balances. The exceptions
are:
1. Goodwill
2. Initial recognition of certain assets and liabilities
3. Certain investment
4. Property revaluation
a. 1 to 4 all
 b. 1 and 2 only
c. 1 only
d. 1, 2 and 3 only

ANS: D

15. The realisation of deferred tax asset depends in

a. No increase in the rate of income tax
b. Taxable profits being available in the future
c. Accounting profits being available in the future

ANS : B

16. When different rules apply to different types and amount of taxable income
a. Each item must be listed
b. An average rate is used
c. No deferred tax is used

ANS : B

17. An undertaking should review unrecorded deferred tax asset to determine whether new
conditions will permit the recovery of the asset.
a. Every 5 years
b. Every 3 years
c. At each statement in of financial position date

ANS : C

18. The carrying amount of deferred tax asset should be reviewed for :
1. Changes in tax rates
2. Changes in the expected manner or recovery of an asset
3. Changes in future profits

a. 1 only
b. 1 and 2 only
c. All of the above

ANS : C

19. The difference between the carrying amount of revalued asset and tax base is a :
a. Temporary difference
b. Permanent difference
c. It can either be a temporary difference of a permanent difference

ANS : A
 20. Which of the following is/are required to be disclosed in the statement of profit or loss
and other comprehensive income (or in the separate income statement if presented)?
a. Total income tax expense related to profit or loss from ordinary activities
b. Income tax expense related to discontinued operations
c. Major components of income tax expense

ANS : A

21. When should an entity assess the carrying amount of deferred tax asset?
a. Only on initial recognition
b. At the end of each reporting period
c. If the net deferred tax position is a liability

ANS : B

22. Which of the following items does not normally give rise to temporary difference
a. Depreciation
b. General Bad Debt Provision
c. Revalued Asset
d. Entertainment

ANS: D

23. The method of providing for deferred tax that places an emphasis on the income
statement charge is known as the :
a. Historic method
b. Current rate method
c. Liability method
d. Deferral method

ANS : D

24. IAS 12 requires which approach for the measurement of deferred taxes
a. Full provision using the liability method
b. Full provision using the deferral method
c. Partial provisioning using the liability method
d. Partial provisioning using the deferral method

ANS : A

25. The taxation expense for a company will be shown :

a. As an administrative expense
b. As a finance cost
c. As a line item within the income statement
 d. In the statement of cash flows

ANS :

1. B 6. D 11. B 16. B 21. B

2. C 7. C 12. A 17. C 22. D
3. B 8. D 13. A 18. C 23. D
4. C 9. C 14. D 19. A 24. A
5. B 10. A 15. B 20. A 25. C

SOURCES :

Highered.mheducation.com
www.iCPAK.com
www.mondaq.com
CAALIM, Isabel D.

DEFERRED TAXES – Problems

1. Tower company began operations on January 1 for financial reporting, the entity
recognized revenuew from all sales under accrual method. However, in the income tax
return, the entity reported qualifying sales under instalment method. The gross proft of
these instalment sales under each method was

Accrual Method Installment Method

2013 3,200,000 1,200,000

2014 5,200,000 2,800,000

The income tax rate is 30%. There are no other temporary or permanent differences on
Dec. 31, 2014. What amount should be reported as deferred tax asset or liability?

a. 1,320,000 asset
b. 1,320,000 liability
c. 720,000 asset
d. 720,000 liability

SOLUTION : ANS : B

Accrual method (3,200,000 + 5,200,000) 8,400,000

Installment method (1,200,000 + 2,800,000) 4,000,000

4,400,000
x 30%

Deferred Tax Liability 1,320,000

2. In the December 31, 2013 statement of financial position, Shin company had income tax
payable of 130,000 and deferred tax asset of 200,000. The entity had reported a deferred
tax asset of 150,000 on Jan. 1, 2013. No estimated tax payments were made during 2013.
What amount should be reported as total income tax expense for 2013?
a. 80,000
b. 180,000
 c. 100,000
d. 130,000

SOLUTION : ANS : A

Current Tax Expense 130,000

Income Tax Benefit (200,000 -150,000) (50,000)

Income Tax Expense 80,000

3. Zambal Company reported depreciation of 2,500,000 in the 2013 tax return. However, in
the 2013 income statement, the entity reported depreciation of 1,000,000. The difference
that will reverse over time. The tax rate is 30% what amount should be added to the
deferred tax liability on Dec. 31,2013?
a. 300,000
b. 750,000
c. 450,000
d. 0

SOLUTION : ANS : C

Tax depreciation 2,500,000

Book depreciation 1,000,000
Future Taxable Amount 1,500,000
x 30%
450,000

4. West company leased a building and received 4,000,000 annual rental payment on June
15, 2013. The beginning of the lease was July 1, 201. Rental income is taxable when
received. The income tax rate is 30%. The entity had no other permanent or temporary
differences. What amount of deferred tax asset should be reported on Dec. 31,2013?
a. 1,200,000
b. 300,000
c. 600,000
d. 0

SOLUTION : ANS : C

Book 4,000,000
Tax 2,000,000
2,000,000
x 30%
600,000
 5. Caleb company has three financial statement elements for which the Dec. 31,2013
carrying amount is different from the Dec. 31, 2013 tax basis :

Carrying Tax
Amount Basis Difference
Equipment 200,000 120,000 80,000
Prepaid Officers' insurance
policy 75,000 0 75,000
Warranty liability 50,000 0 50,000

What is the total amount of

future taxable differences?
a. 205,000
b. 155,000
c. 80,000
d. 50,000

SOLUTION : ANS : C

80,000 Taxable

6. Jillian Company has a noncurrent asset which had a carrying amount of 1,800,00 on Dec.
31, 2013. The tax written down value or tax base of the asset at the date was 900,000.
The tax rate is 30%. What is the deferred tax balance in respect of the asset on dec. 31,
2013?
a. 900,000 asset
b. 270,000 liability
c. 270,000 asset
d. 900,000 liability

SOLUTION : ANS B

Financial 1,800,000
Tax 900,000
900,000
x 30%
270,000 Deferred Tax Liability

7. On December 30, 2013, South Company has revalued a property and has recognised the
increase in the revaluation in the financial statements. The carrying amount of the
property was 8,000,000 and the revalued amount was 10,000,000. However, the tax base
 of the property was only 6,000,000. The income tax rate is 30%. What is the deferred tax
asset or liability on Dec. 31, 2013?
a. 1,200,000 asset
b. 1,200,000 liability
c. 600,000 asset
d. 600,000 liability

SOLUTION: ANS : B

10,000,000
(6,000,000)
4,000,000
x 30%
1,200,000 Deferred Tax Liabiity

8. Boom Company prepared the following reconciliation of the financial statement and
taxable income for 2014 :

Pretax financial income 6,000,000

Permanent difference (500,000)

Temporary difference – capitalized interest fo book & expensed for tax (200,000)

Taxable income 5,300,000

Cumulative temporary difference amounted to 300,000 and 500,000 respectively on Dec. 31,
2013 and Dec. 31, 2014. What amount should be reported as deferred tax liability on Dec. 31,
2014?

a. 150,000
b. 90,000
c. 60,000
d. 0

SOLUTION : ANS : A

500,000 x 30% = 150,000

9. Canterbury Company has one temporary difference at the end of 2013 that will reverse
and cause taxable amount of 1,100,000 in 2014, 1,200,000 in 2015, and 1,200,000 in
2016. The entity has also a deductible temporary difference of 1,500,000. The pretax
accounting accounting income for 2013 is 6,000,000 and the tax rate is 30%. There are no
deferred taxes at the beginning of 2013
 a. 1,800,000
b. 1,920,000
c. 1,200,000
d. 2,400,000

10. What is the net deferred tax expense for 2013?

a. 1,050,000
b. 1,200,000
c. 600,000
d. 450,000

SOLUTION : ANS : 9 : C ; 10 : C

Pretax Income 6,000,000

Future Taxable Amount (3,500,000)
Future Deductible Amount 1,500,000
Taxable Income 4,000,000
x 30%
Current tax expense 1,200,000

Increase in deferred tax (3,500,000 x 30%) 1,050,000

Increase in deferred tax asset (1,500,000 x 30%) (450,000)
Net deferred tax expense 600,000

11. On December 31, 2013, Ramona Company reported a deferred tax liability of 90,000
which was attributed to a taxable temporary difference of 300,000. The temporary is
scheduled to reverse in 2015. During 2014, a new tax law increased the corporate tax rate
30% to 40%. What account and amount should be debited to record the change in tax
rate?
a. Retained earnings 30,000
b. Retained earnings 9,000
c. Income tax expense 9,000
d. Income tax expense 30,000

SOLUTION : ANS : D

300,000 x 10% = 30,000

Income tax expense 30,000

Deferred tax liability 30,000
 12. Aries Company reported a deferred tax asset of 9,000 on Jan. 1, 2013. The entity reported
pretax financial income of 300,000 for 2013. Temporary difference of 100,000 resulted in
taxable income of 200,000 for 2013. On Dec. 31, 2013, the entity had cumulative taxable
difference of 70,000 and no cumulative deductible differences. The income tax rate is
30%. What amount should be reported as deferred tax expense for 2013?
a. 12,000
b. 21,000
c. 30,000
d. 60,000

SOLUTION : ANS : C

Decrease in deferred tax asset 9,000

Increase in deferred tax liability (70,000 x 30%) 21,000
30,000

13. Stabilizer Company reported taxable income of 8,000,000 in the income tax return for the
year ended December 31, 2013, the 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 instalment sales income in excess of taxable instalment sales income 2,600,000
Income tax rate 30%

What is the deferred tax asset on Dec. 31, 2013?

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

14. What is the deferred tax liability on Dec. 31, 2013?

a. 1,020,000
b. 780,000
c. 240,000
d. 0

15. What is the deferred tax expense for 2013?

 a. 1,380,000
b. 1,020,000
c. 660,000
d. 360,000
16. What is the total tax expense?
a. 3,060,000
b. 2,400,000
c. 2,580,00
d. 2,220,000

SOLUTION : ANS 13. B ; 14. A; 15. C; 16 : A

13. Deferred Tax Asset (12/31/13) 1,200,000 x 30% = 360,000

14. Excess tax depreciation 800,000

Installment sales income 2,600,000
3,400,000 x 30% = 1,020,000 Deferred tax liability

15. Increase in deferred tax liability 1,020,000

Increase in deferred tax asset (360,000)
660,000

16. Taxable Income 8,000,000

Excess tax depreciation 800,000
Est. Product claim liability (1,200,000)
Installment sales income not included in taxable income 2,600,000
10,200,000 x 30% = 3,060,000 Total Tax Expense

Another approach :
Current tax expense (8,000,000 x 30%) 2,400,000
Deferred tax expense 660,000
3,060,000

17. Venus Company had no prior deferred tax balances. The worksheet for calculating
current and deferred taxes for 2013 is as follows :

2013 2014 2015

Pretax financial
income 1400
TemporaryDifference
Depreciation (800) (1200) 2000
Warranty Cost 400 100 300
Taxable Income 1000
Income Tax Rate 30% 30% 25%

Deferred tax asset 105

Deferred tax liability 140

What is the current tax expense?

a. 420
b. 350
c. 300
d. 0
18. What is the deferred tax expense?
a. 350
b. 300
c. 120
d. 35

SOLUTION : 17. C 18. D

1000 x 30% = 300 Current Tax Expense

Deferred tax liability 140

Deferred tax asset (105)
Deferred tax expense 35

19. On January 1, 2013, Bolton Company reported a deferred tax liability of 1,000,000 and
deferred tax asset 400,000. At the end of 2013, the entity reported a deferred tax liability
of 1,500,000 and deferred tax asset of zero. What is the deferred tax expense for 2013?
a. 500,000
b. 900,000
c. 400,000
d. 100,000

SOLUTION : ANS : B

Increase in deferred tax liability (1,500,000-1,000,000) 500,000

Decrease in deferred tax asset (400,000-0) 400,000
Deferred tax expense 900,000

20. Zeff Company prepared the following reconciliation of pretax financial statement income
to taxable income for the year ended Dec. 31, 2013, the first year of operations
Pretax financial income 1,600,000
Nontaxable interest received (50,000)
Long term accrual in excess of deductible amount 100,000
Depreciation in excess of financial depreciation (250,000)
1,400,000

If the income tax is 30%. What amount should be reported as income tax expense – current
portion in the 2013 income statement?

a. 465,000
b. 420,000
c. 480,000
d. 390,000
21. What amount should be reported as deferred tax liability on Dec. 31, 2013?
a. 30,000
b. 45,000
c. 75,000
d. 0.
22. What amount should be reported as deferred tax asset on Dec. 31, 2013?
a. 30,000
b. 75,000
c. 45,000
d. 70,000
23. What amount should be reported as total tax expense for 2013?
a. 480,000
b. 465,000
c. 420,000
d. 435,000

SOLUTION : 20. B 21.C 22.A 23.B

Current tax expense 1,400,000 x 30% = 420,000

Deferred tax liability 250,000 x 30% = 75,000

Deferred tax asset 100,000 x 30% = 30,000

Pretax financial income 1,600,000

Nontaxable interest received (50,000)

Financial income subject to tax 1,550,000 x 30% = 465,000

Another approach :
Increase in DTL 75,000
Increase in DTA (30,000)
45,000

Current tax expense 420,000

Deferred tax expense 45,000
465,000

24. On Jan. 1, 2010, Easy company acquired an equipment for 8,000,000. The equipment is
depreciated using straight line method based on a useful life of 8 years with no residual
value. On Jan. 1, 2013, after 3 years, the equipment was revalued at replacement cost of
12,000,000 with no change in the useful life. The pretax income before depreciation for
2013 is 10,000,000. The income tax rate is 30% and there are no other temporary
difference at the beginning of the year.

What is the current tax expense?

a. 2,700,000
b. 3,000,000
c. 3,450,000
d. 3,300,000
25. What is the deferred tax liability on January 1, 2013 arising from the revaluation?
a. 1,200,000
b. 450,000
c. 750,000
d. 0

SOLUTION 24.A 25.C

Cost Replacement Cost Appreciation

Equipment 8,000,000 12,000,000 4,000,000
Accumulated depreciation
(8,000,000 x 3/8) 3,000,000
(12,000,000 x 3/8) 4,500,000 1,500,000
5,000,000 7,500,000 2,500,000

Equipment 4,000,000
Accumulated depreciation 1,500,000
Revaluation surplus 2,500,000

2,500,000 x 30% = 750,000

Pretax income before depreciation 10,000,000
Depreciation on cost (5,000,000/5) (1,000,000)
Taxable income 9,000,000 x 30% = 2,700,000