Jasco Company Reported Pretax Accounting

Jasco Company, in its inaugural year of operations, reported a pretax accounting income of P4,000,000. This figure serves as the starting point for determining the company’s taxable income, which is subject to income tax. However, due to various accounting and tax differences, the taxable income differs from the reported pretax accounting income. These differences arise from permanent and temporary items that affect the calculation of taxable income and, consequently, the income tax expense.

Key Differences Affecting Taxable Income

Several items reported by Jasco Company impact the calculation of taxable income. These items are categorized into permanent and temporary differences

Permanent Differences

• Premium on Life Insurance of Key OfficerP100,000
• Interest on Exempt Government BondsP53,000

These items do not affect the timing of tax payments but result in a permanent difference between accounting income and taxable income. The premium on life insurance is not deductible for tax purposes, and the interest income from government bonds is exempt from taxation.

Temporary Differences

• Depreciation on Tax Return in Excess of Book DepreciationP120,000
• Warranty ExpenseP40,000
• Actual Warranty RepairsP32,000
• Bad Debt ExpenseP14,000
• Beginning Balance in Allowance for Uncollectible AccountsP0
• Ending Balance in Allowance for Uncollectible AccountsP8,000
• Rent Received in Advance to be Recognized Over the Next Three YearsP240,000

Temporary differences arise when income or expenses are recognized in different periods for accounting and tax purposes. These differences result in deferred tax assets or liabilities, which will reverse in future periods. For example, the excess depreciation claimed on the tax return over book depreciation creates a deferred tax liability, while the warranty expense recorded for accounting purposes but not yet deductible for tax purposes creates a deferred tax asset.

Calculation of Taxable Income

To determine the taxable income, adjustments are made to the pretax accounting income by adding or subtracting the amounts related to permanent and temporary differences

• Pretax Accounting IncomeP4,000,000
• Additions
  • Premium on Life Insurance P100,000
  • Interest on Exempt Government Bonds P53,000
  • Depreciation on Tax Return in Excess of Book Depreciation P120,000
• Subtractions
  • Warranty Expense P40,000
  • Actual Warranty Repairs P32,000
  • Bad Debt Expense P14,000
  • Ending Balance in Allowance for Uncollectible Accounts P8,000
  • Rent Received in Advance P240,000

After making these adjustments, the taxable income is calculated as P4,183,000. This figure represents the income subject to taxation for the year.

Income Tax Calculation

Using the taxable income, the current tax payable is determined by applying the current tax rate

• Taxable IncomeP4,183,000
• Current Tax Rate30%
• Current Tax PayableP1,254,900

Additionally, deferred tax assets and liabilities are calculated based on the temporary differences

• Deferred Tax LiabilityP63,200
• Deferred Tax AssetP117,600

The net deferred tax position is the difference between the deferred tax asset and liability, which in this case results in a net deferred tax asset of P54,400.

Reporting Income Tax Expense

The total income tax expense reported in the financial statements is the sum of the current tax payable and the net change in deferred tax assets and liabilities

• Current Tax PayableP1,254,900
• Net Deferred Tax AssetP54,400
• Total Income Tax ExpenseP1,309,300

This amount represents the total income tax expense for the year, reflecting both the current tax liability and the changes in deferred tax positions.

Jasco Company’s first-year operations involved various accounting and tax differences that affected the calculation of taxable income and income tax expense. By understanding and properly accounting for permanent and temporary differences, the company ensures compliance with tax regulations and provides accurate financial reporting. The reported pretax accounting income of P4,000,000, adjusted for these differences, resulted in a taxable income of P4,183,000 and a total income tax expense of P1,309,300. These figures highlight the importance of detailed accounting and tax analysis in the preparation of financial statements.