1) For the year ended December 31, 2020, Theodore Corporation reported pretax financial income of P6,000,000. Its taxable income was P8,000,000. The difference is due to rental received in advance. Rental income is taxable when received. The income tax rate is 30% for all years and Theodore made estimated tax payment of P1,000,000. What should Theodore report as 2020 total income tax expense? 

2) Tosh Company reports pretax financial income of P700,000 for 2020. The following caused taxable income to be different than accounting income: -Depreciation on the tax return is greater than depreciation on the income statement by P160,000. -Rent collected on the tax return is greater than rent earned on the income statement by P220,000. -Fines for pollution appears as an expense of P110,000 on the income statement. Tosh's tax rate is 30% for all years and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2020. What is the amount of income tax liability for 2020? 

 

1. Answer: P2,400,000
2. Answer: P261,000

Step-by-step explanation

Answer 1: Theodore should report total income tax expense of P2,400,000. Broken down as follows:

Current income tax expense: P1,800,000

Deferred tax expense: P600,000

Explanation: Under International Accounting Standards (IAS)12, deferred taxes arise when there's a difference between financial income and taxable income due to temporary differences which can either be future deductible amount or taxable temporary difference. Future deductible amount happens when the taxable income is greater than financial income which results to deferred tax assets. On the other hand, taxable temporary differences arise when taxable income is lower than financial income.

In question number 1, taxable income is higher than financial income due to rental received in advance, which is already taxable under the tax law upon receipt, hence Theodore should already paid the equivalent income tax.

Answer 2: Income tax liability for 2020 is P261,000. The income tax liability is equal to the total income tax expense. Also, the Company should record net deferred tax asset of P18,000 which arise from the temporary difference brought about by the higher depreciation for tax purpose which resulted to deferred tax liability of P48,000 and rental payments received in advance which resulted to deferred tax asset of P66,000.

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