Revlon Co. has pretax income of P100,000. The following information was gathered: 

a.    Excess of tax depreciation over book depreciation  60,000 

b.    Interest revenue on government bonds  9,000 

c.    Excess of estimated warranty expense over actual expenditures 54,000 

d.    Unearned rent received  12,000 

e.    Fines paid  30,000 

f.     Excess of income reported under percentage-of-completion over completed-contracts accounting used for tax reporting  45,000 

g.    Interest on indebtedness incurred to purchase tax-exempt securities  3,000 

h.    Unrealized losses on held for trading securities recognized for financial reporting  18,000 

 

Additional information: 

a.    Revlon Co had pretax accounting income of P900,000 for the current year, before considering the items listed above. 

b.    Revlon Co does not have any temporary differences at the beginning of the year. 

c.    There were no income tax payments made during the year. 

d.    Income tax rate is 30% 

 

Compute for the following: 

1.    Income tax expense 

2.    Current tax expense 

3.    Deferred tax expense/benefit 

4.    Current tax payable 

5.    Deferred tax liability to be presented in the statement of financial position 

6.    Deferred tax asset to be presented in the statement of financial position 

7.    Prepare year end adjusting entries to record income tax expense and related accounts. 

Answer:

1.    Income tax expense 37,200

2.    Current tax expense 30,900

3.    Deferred tax expense 6,300

4.    Current tax payable 30,900

5.    Deferred tax liability to be presented in the statement of financial position 31,500

6.    Deferred tax asset to be presented in the statement of financial position 25,200

7.    Prepare year end adjusting entries to record income tax expense and related accounts. 

Step-by-step explanation

- From the problem, there is pretax income of P100,000 and pretax accounting income of P900,000. This is confusing since both are the same even if the later only has "accounting" attached in it.  At first, I considered the 100,000 as the income only for the fourth quarter and the 900,000 was for the whole year but, there are no information that will back this assumption up. On the other hand, the additional information stated that the P900,000 is the income before considering the items listed above. Therefore, I assumed that this is the income before the expenses and income from the given letters a to h. Thus, this 900,000 is before we have deducted the depreciation expense, warranty expense, interest expense unrealized losses and fines and before adding the interest income. 

- Nonetheless, If my assumption is not correct and the 900,000 accounting income should be used rather than the 100,000, the process I made in my solution will be the same. Only the amounts will change.

- The pretax financial income is the net income before the income tax in the income statement. From this, we must deduct or add the permanent difference - the non deductible expense and the non taxable income. The  non deductible expense will include the interest expense on indebtedness incurred to purchase tax-exempt securities  of 3,000 and the fines of 30,000. These are amounts that are deducted in the financial income but are not tax deductible. Thus, we will add back the 33,000 since this was deducted when we solved the accounting net income. On the other hand, the non taxable income are income added in the financial income but is not taxable. The example of this is the interest revenue from the government bonds. This is not subject to income tax but a final tax. Therefore, we will deduct this 9,000 interest revenue since we have added this when we computed our accounting income. The financial income before temporary differences will be 124,000. 

- The temporary difference will be due to due timing differences. These are items that are included in both the accounting income and taxable income but have different time periods.

- The Deferred tax Asset are the amounts that are deductible for tax purposes in the future. This are not yet deductible in the current year but will be in the future. Moreover, this are the income that are taxable currently but are added only in the future years in the accounting income. The excess of estimated warranty expense over actual expenditures will be added as Deferred tax Asset since the warranty expense that was deducted in the accounting income is higher than the  actual expenditures that is considered as taxable. Also, the unearned rent received is taxed upon collection but is not yet recognized as income in the financial accounting purposes. Lastly, the unrealized losses on held for trading securities recognized for financial reporting is not deductible in the current period thus we will also add it back. The total Deferred tax Asset will be 84,000.

- The Deferred Tax Liability is the amounts that are taxable for tax purposes in the future. This are not yet taxable in the current period thus we should deduct them. Also, the deductibles are deducted in the current period but not yet deducted in the accounting income. The excess of tax depreciation over book depreciation should be deducted since in tax purposes, the depreciation is higher than the depreciation recorded in the books. Also, the excess of income reported under percentage-of-completion over completed-contracts accounting used for tax reporting is deducted since this portion is taxable in the future. The total Deferred Tax Liability should be 105,000.

- The taxable income will be 103,000.

1.    Income tax expense 37,200

- From the data above, it was already explained how to compute the financial income before temporary differences will be. To compute the total income expense, we will multiply 124,000 to the tax rate of 30%.

2.    Current tax expense 30,900

- The current tax expense is the one that is payable to BIR. This is computed by multiplying the tax rate to the taxable income. We will multiply the 103,000 to the 30% rate to get the answer.

3.    Deferred tax expense 6,300

- This is the net between the  deferred tax expense from the Deferred tax liability  and the deferred tax  benefit from the Deferred tax asset. We will get the difference between both of them the multiply 30%. The net Deferred tax expense will be 6,300

4.    Current tax payable 30,900

- This is equals to the current tax expense that is payable to BIR. The other way to compute this is presented below. 

5.    Deferred tax liability to be presented in the statement of financial position 31,500

-To get the Deferred tax liability, we should multiply the future deductible amounts to the tax rate. The total future deductible amounts will be 105,000 then multiply 30%.

6.    Deferred tax asset to be presented in the statement of financial position 25,200

- The Deferred tax asset is computed by multiplying the  future taxable amounts to the tax rate. The future taxable amounts will be 84,000. We will multiply 30% to 84,000 to get the 25,200 Deferred tax asset 

- This will be the computation if the 900,000 accounting income will be used instead. Honestly, its confusing due to lack of information as to what pretax income to use.

PFA