PAS 12:

INCOME TAX

 IAC 13 - Review of Auditing Problem

Date Activity TOPIC/COVERAGE

FEB. 18 COMPRE EXAM I (15%) INCOME TAX & EMPLOYEE BENEFITS

SHAREHOLDERS’ EQUITY ,SHARE-BASED PAYMENTS &

MARCH 18 COMPRE EXAM II (20%)
LIABILITIES

APRIL 22 COMPRE EXAM III (25%) AUDIT OF ASSETS

MAY 16 COMPRE EXAM IV (40%) CORRECTION OF ERRORS & REMAINING TOPICS

Type of Exam - Multiple Choice ( ALL Problem Solving )

AUDITING PROBLEM - 50 items

 POINTERS TO REVIEW

AP07 - Problems 18, 19, 20, 21

AP07 - Exercises 16, 17, 18, 19
Income Tax ( 30 items )
Employee Benefits ( 20 items )
 PAS 12-INCOME TAX
Permanent vs. Temporary Difference

Examples of Permanent Difference ( NTR & NDE )

Examples of Temporary Difference ( FTA & FDA )

Journal Entries

Deferred tax outside Profit or Loss

PERMANENT DIFFERENCE
Items of revenue and expense which are included in
Accounting income but never included in Taxable income
Non-taxable revenues and Non-deductible expenses
Interest Income, Dividend income, Capital Gains ; Fines,
Penalties and Surcharges

TEMPORARY DIFFERENCE
Difference between the carrying amount of an asset or liability and
the tax base of that asset or liability
Taxable temporary difference and Deductible temporary difference
 INCOME STATEMENT APPROACH - INCOME AND EXPENSES

FUTURE
FUTURE

INCOME STATEMENT APPROACH

TAXABLE AMOUNT ( - ) DEDUCTIBLE AMOUNT ( + )
INCOME
ACCOUNTING > TAX 100 > 90 = 10
ACCOUNTING < TAX 90 < 100 = 10
EXPENSE
ACCOUNTING > TAX 100 > 90 = 10
ACCOUNTING < TAX 90 < 100 = 10
TIP:

FTALE (-) = NET INCOME is overstated

FDAAB (+) = NET INCOME is understated
 BALANCE SHEET APPROACH - ASSETS AND LIABILITIES

FUTURE
FUTURE

BALANCE SHEET APPROACH

TAXABLE AMOUNT ( - ) DEDUCTIBLE AMOUNT ( + )
CV of ASSET
ACCOUNTING > TAX 100 > 90 = 10
ACCOUNTING < TAX 90 < 100 = 10
CV of LIABILITY
ACCOUNTING > TAX 100 > 90 = 10
ACCOUNTING < TAX 90 < 100 = 10

TIP:
FTALE (-) = CAPITAL is overstated
FDAAB (+) = CAPITAL is understated
TAXABLE TEMPORARY DIFFERENCE - FTA items & FDA items

1. ADJUSTMENTS ACCOUNTING TAX FTA ( - ) FDA ( + )

DEPRECIATION Straight-line method Accelerated method

Direct write-off
BAD DEBTS Allowance method
method

PREPAID EXPENSE Accrual basis Cash basis

UNEARNED INCOME Accrual basis Cash basis

Excess Accounting depreciation expense over Tax depreciation expense

TAXABLE TEMPORARY DIFFERENCE - FTA items & FDA items

2. PROVISION ACCOUNTING TAX FTA ( - ) FDA ( + )

WARRANTY ESTIMATED REPAIR ACTUAL REPAIR

ESTIMATED ACTUAL
LITIGATION SETTLEMENT SETTLEMENT
AMOUNT AMOUNT
 TAXABLE TEMPORARY DIFFERENCE - FTA items & FDA items

3. UNREALIZED ACCOUNTING TAX FTA ( - ) FDA ( + )

GAIN/LOSS- FVPL

ACTUAL SALE
UNREALIZED GAIN CHANGE IN FAIR VALUE
( REALIZED )

ACTUAL SALE
UNREALIZED LOSS CHANGE IN FAIR VALUE
( REALIZED )

Unrealized gain/loss - FVOCI = Deferred tax recognized outside Profit or Loss

 TAXABLE TEMPORARY DIFFERENCE - FTA items & FDA items

4. IMPAIRMENT & SALE ACCOUNTING TAX FTA ( - ) FDA ( + )

INSTALLMENT SALE UPON SALE UPON COLLECTION

RV < CV
IMPAIRMENT LOSS ( IMPAIRMENT TEST )
SP < CV ( SALE )

Impairment loss on GOODWILL = PERMANENT Difference ( NONDEDUCTIBLE EXPENSE )

 TAXABLE INCOME

Total Income Tax Expense (TITE)

CURRENT Income Tax EXPENSE (CITE) DEFERRED Income Tax EXPENSE (DITE)

Total Income Tax Expense = Financial Income Subject to Tax x % ( Constant tax rate )
 FDA (+)
FDA (+)
FTA (-)
NTR (-)
FTA (-)
FTA (-)
FDA (+)
FDA (+)

1. TITE = 3,000,000 - 80,000 = 2,920,000 x 30% = 876,000 601,500 - 196,500 + 471,000 = 876,000
2. DTA = 50,000 + 350,000 + 75,000 + 180,000 = 655,000 x 30% = 196,500
3. DTL = 250,000 + 420,000 + 900,000 = 1,570,000 x 30% = 471,000
CURRENT TAX EXPENSE = 2,920,000 +655,000 - 1,570,000 = 2,005,000 x 30% = 601,500
 Temporary Difference FTALE ( - ) FDAAB ( + )
PRETAX Financial Income 6,000,000
PROVISION for warranty = 300,000
NON-TAXABLE Revenue (600,000)
Excess TAX depreciation EXPENSE = 250,000
NON-DEDUCTIBLE Expense 200,000
Excess FINANCIAL REVENUE = 200,000
Financial Income Subject to Tax 5,600,000

Future TAXABLE Amounts

(450,000)
( 250,000 + 200,000 )

Future DEDUCTIBLE Amount 300,000

TAXABLE INCOME 5,450,000

 PRETAX Financial Income 6,000,000

NON-TAXABLE Revenues (600,000)

NON-DEDUCTIBLE Expenses 200,000

Financial Income Subject to Tax 5,600,000

Future TAXABLE Amounts

(450,000) x 30% = 135,000 Deferred Income tax expense 135,000

( 250,000 + 200,000 )
Deferred tax liability 135,000

Deferred tax asset 90,000

Future DEDUCTIBLE Amounts 300,000 x 30% = 90,000
Deferred Income tax expense 90,000

TAXABLE INCOME 5,450,000 x 32% = 1,744,000 Current Income tax expense 1,744,000
Income tax payable 1,744,000
 CITE

1,744,000

135,000

( 90,000 )

1,789,000

Total Income Tax Expense ( TITE )

1,789,000

CURRENT Income Tax EXPENSE (CITE) NET DEFERRED Income Tax EXPENSE (NDITE)
1,744,000 135,000 - 90,000 = 45,000
 Rent income (2020) = 600,000 x 6/12
= 300,000
Income Statement - Rent Income ( I ) FTALE (-) or FDAAB (+)
Unearned Rent, 12/31/20 = 600,000 x 6/12
TAX - Cash Received 600,000 = 300,000

ACCOUNTING - Earned (300,000)

DIFFERENCE FDAAB ( + ) 300,000 x 32% = 96,000

Balance Sheet - Unearned Rent ( L ) FTALE (-) or FDAAB (+)

TAX -0-

ACCOUNTING - Unearned (300,000)

DIFFERENCE FDAAB ( + ) 300,000 x 32% = 96,000

 Insurance Expense = 380,000 x 3/12
= 95,000
2021

Prepaid Insurance = 380,000 x 9/12

= 285,000
DTL

Balance Sheet - Prepaid Insurance ( A ) FTALE (-) or FDAAB (+)

TAX -0-

ACCOUNTING - Unexpired (285,000)

DIFFERENCE FTALE ( - ) (285,000) x 32% = 91,200

Income Statement - Insurance Expense ( E ) FTALE (-) or FDAAB (+)

TAX - Cash Paid 380,000

ACCOUNTING - Incurred/Expired (95,000)

DIFFERENCE FTALE ( - ) (285,000) x 32% = 91,200

4.

NOTE: Deferred tax = 90,000

Income tax expense

Deferred Income tax expense 90,000

Deferred tax liability 90,000

Income Statement - Depreciation Expense ( E ) FTALE (-) or FDAAB (+)

TAX - Accelerated method ?

1,800,000
ACCOUNTING - SL method 1,500,000

DIFFERENCE FTALE ( - ) (300,000)

? x 30% = 90,000
 Assuming the Pretax Financial
Income for the year 2023 is
P1,000,000, How much is the
Taxable Income for the year
FTALE ( - ) 2023? 1,240,000

400,000 240,000 160,000 Pretax Financial Income 1,000,000

Collection ( Reversal ) 240,000

5. TAXABLE INCOME 1,240,000

CITE = 1,240,000 x 33% = 409,200

2022 = 400,000 x 34% 136,000 Income tax expense 409,200

Income tax payable 409,200
2023 = 240,000 x 33% 79,200
2024 = 160,000 x 32% 51,200 Deferred tax liability 79,200 240,000 x 33%

Deferred tax LIABILITY 266,400 Income tax expense 79,200

TOTAL INCOME TAX EXPENSE (2023) = 409,200 - 79,200 = 330,000

TOTAL INCOME TAX EXPENSE (2023) = 1,000,000 x 33% = 330,000
Deferred Tax Outside
Profit or Loss
( i.e. Deferred tax related to OCI/EQUITY )
 6.

P/L DTL

Balance Sheet - CV of PPE ( A ) FTALE (-) or FDAAB (+)

TAX 7,000,000

ACCOUNTING - Revalued amount (10,000,000) P/L = 320,000

DIFFERENCE FTALE ( - ) (3,000,000) x 32% = 960,000
EQUITY = 640,000
Revaluation surplus = 2,000,000

CV before revaluation 8,000,000

Revaluation surplus 640,000 2,000,000 x 32%
320,000 1,000,000 x 32% Revalued amount
Deferred Income tax expense 960,000 (10,000,000)
Deferred tax liability 960,000 Revaluation Surplus 2,000,000
 7.

Equity

Balance Sheet - CV of Bonds Payable ( L ) FTALE (-) or FDAAB (+)

TAX - Cash received 4,000,000

ACCOUNTING - Liability component 3,000,000

DIFFERENCE FTALE ( - ) (1,000,000) x 32% = 320,000

Share premium - BCP = 1,000,000

Deferred Income
Share premiumtax expense 320,000
- BCP
Deferred tax liability 320,000
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do OCCASIONALLY. It comes from what
you do CONSISTENTLY”

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