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Chapter 9
Income Taxes

NAME: Date:
Professor: Section: Score:

QUIZ 1:
1. All of the following can result in a temporary difference between pretax financial income and
taxable income except for
a. payment of premiums for life insurance.
b. depreciation expense.
c. provision for pending lawsuits.
d. product warranty costs.
(Adapted)

2. Which of the following items results in a temporary difference deductible amount for a given
year?
a. Premiums on officer's life insurance (company is beneficiary)
b. Recognition of unrealized gains on financial liabilities that are measured at fair value
through profit or loss.
c. Vacation pay accrual
d. Accelerated depreciation for tax purposes; straight-line for financial reporting purposes
(Adapted)

3. Which of the following temporary differences may result to a deferred tax liability?
a. Accrued warranty costs
b. Subscription revenue received in advance
c. Unrealized losses on held for trading securities
d. Depreciation
(Adapted)

4. When enacted tax rates change, the asset and liability method of interperiod tax allocation
recognizes the rate change as
a. a cumulative effect adjustment.
b. an adjustment to be netted against the current income tax expense.
c. a separate charge to the current year's net income.
d. a separate charge or benefit to income tax expense.
(Adapted)

5. Current financial reporting standards currently are moving toward the

a. no-deferral approach.
b. partial recognition approach.
c. comprehensive recognition approach.
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d. discounted comprehensive recognition approach.

(Adapted)

6. If all temporary differences entering into the determination of pretax accounting income are
considered in the computation of deferred taxes and income tax expense, then
a. the no-deferral approach is being applied.
b. the comprehensive recognition approach is being applied.
c. the partial recognition approach is being applied.
d. the net-of-tax method is being applied.
(Adapted)

7. If there is a change in the tax rate applicable in future periods, which of the following statements
is incorrect?
a. Current tax expense may be equal to taxable profit multiplied by the enacted tax rate(s)
applicable to the period(s) where the profit was earned.
b. Deferred tax asset or liability is computed based on the substantially enacted tax rate that is
applicable in the period where the deferred tax is expected to reverse.
c. Income tax expense is equal to accounting profit multiplied by the substantially enacted
future tax rate.
d. Deferred tax expense (benefit) is equal to the net change in deferred tax asset and deferred
tax liability during the year.

8. Which of the following situations would require interperiod income tax allocation procedures?
a. A temporary difference exists because the tax basis of capital equipment is less than its
reported amount in the financial statements.
b. Proceeds from an insurance policy on capital equipment lost in a fire exceed the book value
of the equipment.
c. Last period's ending inventory was understated causing both net income and income tax
expense to be understated.
d. Nontaxable interest payments are received on municipal bonds.
(Adapted)

9. The result of interperiod income tax allocation is that

a. wide fluctuations in a company's tax liability payments are eliminated.
b. tax expense shown in the income statement is equal to the deferred taxes shown on the
balance sheet.
c. tax liability shown in the balance sheet is equal to the deferred taxes shown on the previous
year's balance sheet plus the income tax expense shown on the income statement.
d. tax expense shown on the income statement is equal to income taxes payable for the current
year plus or minus the change in the deferred tax asset or liability balances for the year.
(Adapted)

10. Assuming no prior period adjustments, would the following allocations affect net income?
Interperiod Tax Allocation Intraperiod Income Tax Allocation
a. Yes Yes
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b. Yes No
c. No Yes
d. No No
(Adapted)

“The roots of education are bitter, but the fruit is sweet.” – Aristotle
- END -

ANSWERS TO QUIZ 1:
1. A 6. B
2. C 7. C
3. D 8. A
4. D 9. D
5. C 10. B

NAME: Date:
Professor: Section: Score:

QUIZ 2:

The next two items are based on the following:

Bee Corp. prepared the following reconciliation between book income and taxable income for the
year ended December 31, 20x0:
Pretax accounting income 500,000
Taxable income 300,000
Difference 200,000

Interest on municipal bonds 50,000

Lower depreciation per financial statements 150,000
Total differences 200,000

Bee's effective income tax rate for 20x0 is 30%. The depreciation difference will reverse equally over
the next three years at enacted tax rates as follows:
Years Tax rates
20x1 30%
20x2 25%
20x3 25%

1. In Bee's 20x0 income statement, the current portion of its provision for income taxes should be
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a. 150,000 b. 125,000 c. 90,000 d. 75,000

2. In Bee's 20x0 financial statements, the deferred portion of its provision for income taxes should
be
a. 60,000 b. 50,000 c. 45,000 d. 40,000

3. In its December 31, 20x0 balance sheet, Quinn Co. reported a deferred tax asset of ₱9,000 and no
deferred tax liability. For 20x1, Quinn reported pretax financial statement income of ₱300,000.
Temporary differences of ₱100,000 resulted in taxable income of ₱200,000 for 20x1. At December
31, 20x1, Quinn had cumulative taxable differences of ₱70,000. Quinn's effective income tax rate
is 30%. In its December 31, 20x1, income statement, what should Quinn report as deferred
income tax expense?
a. 12,000 b. 21,000 c. 30,000 d. 60,000

4. On its December 31, 20x1, balance sheet, Shin Co. had income taxes payable of ₱13,000 and a
deferred tax asset of ₱20,000 before determining the need for a valuation account. Shin had
reported a deferred tax asset of ₱15,000 at December 31, 20x0. No estimated tax payments were
made during 20x1. At December 31, 20x1, Shin determined that it was more likely than not that
10% of the deferred tax asset would not be realized. In its 20x1 income statement, what amount
should Shin report as total income tax expense?
a. 8,000 b. 8,500 c. 10,000 d. 13,000

5. Taft Corp. uses the equity method to account for its 25% investment in Flame, Inc. During 20x1,
Taft received dividends of ₱30,000 from Flame and recorded ₱180,000 as its equity in the
earnings of Flame. Additional information follows:
 All the undistributed earnings of Flame will be distributed as dividends in future periods.
 The dividends received from Flame are eligible for the 80% dividends received deduction.
 There are no other temporary differences.
 Enacted income tax rates are 30% for 20x1 and thereafter.

In its December 31, 20x1, balance sheet, what amount should Taft report for deferred income tax
liability?
a. 9,000 b. 10,800 c. 45,000 d. 54,000

6. Bishop Corporation began operations in 20x7 and had operating losses of ₱200,000 in 20x7 and
₱150,000 in 20x8. For the year ended December 31, 20x9, Bishop had pretax book income of
₱300,000. For the three-year period 20x7 to 20x9, assume an income tax rate of 40% and no
permanent or temporary differences between book and taxable income. In Bishop’s 20x9 income
statement, how much should be reported as total income tax expense?
a. 0 b. 40,000 c. 60,000 d. 120,000

The next two items are based on the following:

Venus Corp.’s worksheet for calculating current and deferred income taxes for 20x2 follows:
20x2 20x3 20x4
Pretax income 1,400
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Temporary differences:
Depreciation (800) (1,200) 2,000
Warranty costs 400 (100) (300)
Taxable income 1,000 (1,300) 1,700

Enacted rate 30% 30% 25%

Venus had no prior deferred tax balances. In its 20x2 income statement, what amount should Venus
report as:

7. Current income tax expense?

a. 420 b. 350 c. 300 d. 0

8. Deferred income tax expense?

a. 350 b. 300 c. 120 d. 95

9. Black Co., organized on January 2, 20x0, had pretax financial statement income of ₱500,000 and
taxable income of ₱800,000 for the year ended December 31, 20x0. The only temporary
differences are accrued product warranty costs, which Black expects to pay as follows:
20x1 ₱100,000
20x2 50,000
20x3 50,000
20x4 100,000

The enacted income tax rates are 25% for 20x0, 30% for 20x1 through 20x3, and 35% for 20x4. Black
believes that future years' operations will produce profits. In its December 31, 20x0, balance sheet,
what amount should Black report as deferred tax asset?
a. 50,000 b. 75,000 c. 90,000 d. 95,000

10. Rom Corp. began business in 20x1 and reported taxable income of ₱50,000 on its 20x1 tax return.
Rom's enacted tax rate is 30% for 20x1 and future years. The following is a schedule of Rom's
December 31, 20x1, temporary differences in thousands of dollars:

12/31/x1 Future taxable (deductible) amounts

Carrying
amount
over (under)
Tax base 20x2 20x3 20x4 20x5
Equipment 10 (5) 5 5 5
Warranty liability (20) (10) (10)
Deferred compensation
liability (15) (5) (10)
Installment receivables 30 10 20
Totals 5 (5) (10) 25 (5)
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What amount should Rom report as total deferred tax asset in its December 31, 20x1, balance sheet?
a. 0 b. 1,500 c. 4,500 d. 6,000

"For God has not given us a spirit of fear and timidity, but of power, love, and self-discipline." - (2 Timothy 1:7)

- END -
SOLUTIONS TO QUIZ 2:

1. C (300,000 taxable income x 30%) = 90,000

2. D
Solution:
Year Reversals* Tax rate Deferred tax
20x1 50,000 30% 15,000
20x2 50,000 25% 12,500
20x3 50,000 25% 12,500
40,000

*Lower depreciation per financial statements 150,000

Divide by: 3
Equal amounts of reversals 50,000

3. C
Solution:
Decrease in DTA (the beginning balance) 9,000
Increase in DTL (70K TTD x 30%) 21,000
Deferred tax expense 30,000

4. C
Solution:
DTA, Dec. 31, 20x1 before adjustment 20,000
Allowance (20,000 x 10%) (2,000)
DTA, Dec. 31, 20x1 after adjustment 18,000
DTA, Dec. 31, 20x0 15,000
Increase in DTA during 20x1 3,000

Income tax expense 10,000 (squeeze)

Add: Increase in DTA during 20x1 3,000
Current tax expense (equal to income tax payable) 13,000 (start)

5. A
Solution:
Share in associate’s profit 180,000
Dividends received (30,000)
Share in undistributed earnings 150,000
Multiply by: Percentage subject to taxation (100% - 80%) 20%
Taxable temporary difference 30,000
Multiply by: Substantially enacted tax rate for future periods 30%
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Deferred tax liability – year-end 9,000

6. D (300,000 pretax income x 40%) = 120,000. The reversal of deferred tax asset affects only the
current tax expense but not income tax expense.

7. C (1,000 taxable income x 30%) = 300

8. D
Solution:
Depreciation (FI>TI); TTD; DTL
(800 x 25% rate in 20x4, the yr. of reversal*) (200)
Warranty costs (FI<TI); DTD; DTA
(100 x 30% rate in 20x3) + (300 x 25% rate in 20x4) 105
Deferred tax expense (95)
* Depreciation reverses in 20x4 because it is on this year that the ‘minus’ function becomes an ‘addition’.

9. D
Solution:
Year of reversal Amounts Tax rate Deferred tax asset
20x1 100,000 30% 30,000
20x2 50,000 30% 15,000
20x3 50,000 30% 15,000
20x4 100,000 35% 35,000
95,000

10. A
Solution:
Concept: If the carrying amount (CA) of an asset exceeds its tax base (TB), the difference is a taxable
temporary difference which, if multiplied by the tax rate, results to a deferred tax liability.
“For an asset: CA > TB = difference is TTD; TTD x Tax rate = DTL”
Consequently:
“For a liability: CA < TB = = difference is TTD; TTD x Tax rate = DTL”

In all of the items in the problem, the carrying amounts of the assets (i.e., equipment and installment
receivables) as of December 31, 20x1 exceed their tax bases (CA>TB). Therefore, the differences are
taxable temporary differences which give rise to deferred tax liability and not deferred tax asset.

Also, the carrying amounts of the liabilities (i.e., warranty and deferred compensation) as of December 31,
20x1 are less than their tax bases. Therefore, the differences are taxable temporary differences which
give rise to deferred tax liability and not deferred tax asset.
Conclusion: No deferred tax asset is recognized on December 31, 20x1.