BA 118.

3
November 18, 2019

Income Tax
 Accounting profit or income vs. Taxable profit or income
o Accounting profit = Sales – CGS – OPEX + Other income – Other expenses
 Sales = IFRS 15 (when to record sales?)
 CGS = Cost of items that you were able to sell plus difference net
realizable value of inventory (LCNRV)
Dr. Loss on inventory writedown or Cost of goods sold
 Cr. Allowance for inventory valuation
 Other income – includes SIANI/SIJVNI/SISNI, interest income
 Other expenses – interest expense
o Taxable profit = Taxable income – deductible expense
 Followed the law (specific law in specific jurisdiction)
 Accounting and taxable profit are reconciled
o Dr. Income tax expense – current
o Cr. Cash – taxable profit * tax rate (or Income tax payable)
 Accounting profit/income +/- permanent differences = income subject to tax
o Permanent differences
 Revenue – NEVER taxable [therefore, deduct]
 Dividend income from investment in stocks
o Dr. Cash or dividend receivable
o Cr. Dividend income
 Gain on sale of stocks
 Interest income subject to final tax
 Expense – NEVER deductible [therefore, add back]
 Surcharges and penalties
 Non-deductible interest expense
o Result: income subject to tax
 Question: when will it be subjected to tax?
 Income subject to tax +/- temporary differences (tomorrow, yesterday) = taxable
income
o Income subject to tax (tomorrow, today or yesterday)
o Taxable income (today)
o Computation
 Revenue = MINUS revenue taxable in the future, PLUS revenue
taxable today
  Example: Unearned revenue (PLUS cash received for unearned
revenue, MINUS earned revenue from unearned revenue)
 Expense
 Example: Depreciation expense
o Total depreciation is the same
o Cash today more important than cash tomorrow
o Lower tax payment today
o SL will not be used for tax purposes
 Add back straight-line depreciation
 Deduct double declining balance depreciation
 Other examples: Accumulated impairment, allowance for
inventory valuation, allowance for doubtful accounts

Taxable income * tax rate = income tax expense – current

Income subject to tax * tax rate = income tax expense
Temporary differences * tax rate = income tax expense – deferred
 Dr. DTA, Cr. ITE-D
 Dr. ITE-D, Cr. DTL

Deferred tax asset

 Asset should have future benefit
 What is the future benefit from the deferred tax item? Decreases future tax
liabilities
o Future deductions
o Revenue items that were already taxed in prior periods

Deferred tax liabilities

 Liabilities should result in future outflows of economic resources
 What is the future outflow of economic resources from the deferred tax item?
Increases future tax liabilities
o Current revenue items that will be taxed in future periods
o Current tax deductions that will be expenses in financial accounting in the
future

Assets  Future expenses

 Inventory  Cost of goods sold
 Accounts receivable  Bad debts expense
 Prepaid expenses  Operating expenses
 Property, plant and equipment  Depreciation expense
Balance sheet approach
 Inventory  Cost of goods sold
o CV: 800K, TB: 1M
o Dr. Cost of goods sold 200K, Cr. Allowance for inventory valuation 200K
 Imagine a separate accounting for tax. Follow the TRAIN law.
 Resulted in lower tax liability, therefore, an economic benefit
o CV < TB = DTA
 Assume time of reversal, and use applicable tax rate
 Dr. DTA 64K, Cr. ITE-D 64K
o Next year – CV: 700K, TB: 750K
 50K x 32% = 16K DTA
 Dr. ITE-D 48K, Cr. DTA 48K
 Accounts receivable  Bad debts expense
o CV 2826250, TB 2975000
 DTA 148750 x 32% = 47600
 Dr. DTA 47600, Cr. ITE-D 47600
o Next year: CV 6297550, TB 6629000
 DTA balance should be 331450 x 32% = 106064
 Dr. DTA 58464, Cr. ITE-D 58464
 PPE  Depreciation expense
o CV 1248K, TB 1040K
 CV > TB = DTL
 Dr. ITE-D 66560, Cr. DTL 66560
o Year 2: Dr. ITE-D 33280, Cr. DTL 33280
o What if there is a change in tax rate?
 PPE at revalued amounts
o CV 50M, TB 20M
 Revaluation surplus is not recorded until the equipment is sold
 50M – 20M = 30M x 32% = 9.6M DTL
 What to debit? Dr. RS 9.6M, Cr. DTL 9.6M
o Piecemeal realization (Dr. RS, Cr. RE)
 Net income – income, net of tax.
 Dr. RS 3M, Cr. RE 3M
 Depreciation is still based on the original amount.
 Dr. DTL 960K, Cr. ITE-D 960K
 Reversal, use depreciation based on original cost. IFRS is
based on revalued amount.
 Example: Revenue 10M
 Depreciation of 5M, Tax 1.6M, NI 3.4M
 o Piecemeal 3M
 Depreciation of 2M, Tax 2.56M, NI 5.44M
 30M x 68% = 20.4M / 10 = 2.04M
 When will DTL be reversed?
 Liabilities
o Unearned revenues  revenues
 Year 1
 CV 800K, TB 0
 CV > TB = DTA
 800K x 32% = 256K
 Dr. DTA 256K, Cr. ITE-D 256K
 Year 2
 CV 0, TB 0
 Dr. ITE-D 256K, Cr. DTA 256K
 Reverse income tax expense vs. income tax payable
o Prove by doing balance sheet approach.

Effect on conso/WPEE
 Parent & sub are 2 taxable entities  ITP
o ITP is payable to the BIR
o Just add ITP
 Parent & sub are 1 economic entity
 Excess of FMV over BV of NIA are unrecorded (in the acctg books) gains and
losses.
 WPEE 2 (Dr. PPE, Cr. IIS, Cr. NCI)
 WPEE 2.1 for first year (Dr. Dep Exp, Cr. Acc Dep)
o Increase depreciation expense on the income statement
o Income before tax decreases.
o Taxable income * tax rate = Dr. ITE-C, Cr. ITP
o Deduct depreciation expense to obtain taxable income
 ITE-C = parent + subsidiary
 ITE, ending = parent + subsidiary – 32% additional depreciation
 Example: P 1M, S 750K, Total 1.75M x 32% = 560K ITP
o Depreciation of excess of fmv over bv = 20K
o 1750K – 20K = 1730K x 20% = 553.6K
o BIR will not consider gain from excess of fmv over bv
 WPEE 2 (Dr. PPE 200K, Cr. DTL 64K, Cr. IIS + NCI 136K)
 If 75%-25% IIS 102K, NCI 34K
 WPEE 2.1 (Dr. DTL 6400, Cr. ITE-D 6400)
 Example: Inventory CV 500K, TB 550K
o CV has no intercompany gain, TB is adding two inventories
o Dr. Sales, Cr. CGS, Cr. Inventory – lower income before tax
o Dr. DTA, Cr. ITE-D – lower income tax
o Sale
 Dr. Inventory, Cr. CGS – higher income before tax
 Dr. ITE-D, Cr. DTA – higher income tax