Dainty included the following items in pretax accounting income for 2014: Litigation loss estimated at P75,000 which will become tax deductible when settled in the Future. Goodwill impairment of P87,500 which will never be deductible for income tax purposes Revenue from an installment sale of P112,500, which will be recognized as part of taxable income as received over the next three years Pretax financial income is P437,500.

1. How much should be the pretax financial income subject to income tax?

2. What is the net deferred tax expense?

Answer:

1. Calculation of pretax financial income subject to income tax

Here

Litigation loss estimated = P75,000

Goodwill Impairment        = P 87,500

Revenue from installment sale = P 112,500

Pretax financial Income = P437,500

Calculations

for pretax financial Income subject to income tax = pretax financial income + goodwill impairment never deductible to taxes + future deductible litigation loss - future revenue from installment sale

here

Pre Tax Financial Income                = P437,500

Add: Goodwill Impairement never deductible to taxes    = P 87,500

Add:Future Deductible litigation loss = P 75000

Less : Future taxable revenue from installement sale    = ( P112,500)

Pretax Income subject to income tax                              = P 487,500

2.

Net Deferred Tax Expense:

Deferred Tax are two types they are

1.Deferred Tax Asset

2.Deferred liability

Deferred Tax Asset:

when they arise differences between income statement and corresponding tax statement that would result in payment of tax related to another period either in advance or able reduce tax liability

Deferred tax Liability

when they arise differences between income statement and corresponding tax statement that would result in payment of tax in subsequent fiscal year then it is called as deferred tax liability

net deferred tax is after adjustment of deferred tax asset and liabilities

Examples of deferred tax situations

1.Gross loss

2.Changes in Depreciation calculation