Valencia 5th Ed.vol.1

CHAPTER 1 GENERAL PRINCIPLES AND CONCEPTS OF TAXATIONProblem 1 – 1 TRUE OR FALSE

1. False – Without money provided by tax power, the other inherent powers cannot function well.2. True3. True4. True5. True6. True7. False – Taxation power is subject to inherent and Constitutional limitations.8. False – Taxation power is not absolute because it is subject to limitations.9. True10. False – penalty is an example of imposition of amount for police power.11. True12. False – governmental function unless stated otherwise.13. False – government agencies engaged in proprietory functions are subject tax unless stated

otherwise.14. True

Problem 1 – 2 TRUE OR FALSE1. False – Concurrence of the majority of congress.2. False – Churches are required to pay income taxes in cases of sale of real property and business

engagement.3. False – No public funds shall be appropriated for religious purpose.4. False - All bills even if approved by the 2/3 of the congress should still be signed by the President to

become law.5. False – No person shall be imprisoned for nonpayment of poll tax.6. False – Taxation power is essentially legislative function; hence not every government unit exercises

this power.7. True8. False - Benefits from taxation may be or may not be experienced.9. True10. False – Judicial review11. False – “Ex post facto” law is not applicable for tax purposes.12. True13. False – A tax evader breaks the law while the tax avoider sidesteps it.14. False – Neither transferable/assignable 15. True

Problem 1 – 3 TRUE OR FALSE1. True 2. True3. True4. True5. False – prospective effect

6. True7. True8. False – national taxes9. True10. True11. True12. False – Doubts must be resolved liberally in favor of the taxpayer.13. True14. True15. False – null and void

Prob. 1 – 4 Prob. 1 – 5 Prob. 1 – 6 Prob. 1 – 7 Prob. 1 – 8 Prob. 1 – 9 1. A 1. C 1. D 1. B 1. A 1. A2. C 2. A 2. D 2. C 2. D 2. B3. C 3. D 3. D 3. D 3. D 3. C4. A 4. B 4. D 4. D 4. A 4. D5. B 5. B 5. D 5. D 5. A 5. C6. B 6. A 6. D 6. B 6. C 6. C7. A 7. C 7. D 7. B 7. B 7. D8. C 8. B 8. C 8. C 8. C 8. C9. C 9. B 9. A 9. C 9. B 9. C10. C 10. C 10. C 10. B 10. A 10. C

11. C 11. D 11. B 11. B 11. C12. C 12. D 12. B 12. C 12. B13. A 13. A 13. A 13. D

14. A 14. D 14. D15. D 15. C

16. C17. C

CHAPTER 2TAX ADMINISTRATIONProblem 2 – 1 TRUE OR FALSE

1. True2. False - Department of Finance3. False - Exclusive and original power to interpret tax laws. Final power to interpret tax laws belongs

to the Supreme Court.4. False - Review by the Court of Justice/Court of Appeals5. False - Cooperatives are exempted from income tax and annual registration fee.6. False - In all cases, the authority to print is required.7. False - Not required to register again, just file an information update.8. False - Tax assessment is needed to enforce payment of unpaid tax liability.9. True10. True

11. False - Levy or imposition of tax12. True13. False – executive branch of the government14. False – the description refers to administrative feasibility.

Problem 2 – 2 TRUE OR FALSE1. True 2. False – submit to the BIR.3. False - Distraint is for personal property, while levy is for real property.4. True5. False - Exceptions are those already filed in court of those involving fraud.6. True7. True8. True9. True10. False - value of property.11. False – Redemption of property should be made within one year from the date of sale.12. True13. True

Problem 2 – 3 TRUE OR FALSE1. True2. True3. False – P100,0004. False – 10% final withholding tax5. True – If authorized by the BIR Commissioner6. True7. False – All properties of a delinquent taxpayer may be subject to tax lien.8. True9. False – Seizure10. False – Forfeiture11. True12. False – Criminal violations already filed in court are not subject to compromise. Collection of taxes is

not a criminal violation.13. True

Problem 2 – 4 TRUE OR FALSE1. True2. False – Without letter of authority, the taxpayer could refuse access to his books.3. False – Civil action could also be judiciary pursued.4. True5. False – the appeal must first be made to Court of Tax Appeals.6. False – It could also be done if no tax return is filed.7. False – Ten years prescription period starts at date of discovery that tax return was not filed.8. False – It should be 5 years.

9. False – Levy could also be done before or simultaneous with distraint.10. False – Residual value should be returned to taxpayer.11. True12. False – It is also applicable to importation.13. True

Problem 2 – 5 Problem 2 – 61. B 1. D2. A 2. A3. B 3. A4. D 4. A5. A 5. C6. C 6. C7. C 7. D8. D 8. B9. B 9. C10. B 10. C11. D12. C13. B

Problem 2 – 7

Situation 1 – No need to appeal. The prescribed period of filing for the refund is already expired. The filing of refund should have been made within two years after the payment of tax or penalty. It was filed within 2 years, one month, and 5 days after the date of erroneous payment, hence, not appealable anymore.

Situation 2 – May 5, 2010. The filing of refund was appropriately made within the 2 year prescribed period. The denial was received on April 5, 2010. The filing of appeal to CTA should be made within 30 days from the receipt of denial from the BIR.

Situation 3 – August 2, 2014. The date of grant for refund was received on August 1, 2009. The refund check (dated July 15, 2009) should be encashed within 5 years from the date the grant for refund was received (August 1, 2009). The check should be encashed from August 1, 2009 to August 1, 2014. It will be forfeited on August 2, 2014.

Situation 4 – August 22, 2014. The date of grant for refund was received on August 21, 2009. The refund check (dated July 30, 2009) should be utilized within 5 years from the date the grant for refund was received (August 21, 2009). The tax credit certificate should be utilized from August 21, 2009 to August 21, 2014. It will be forfeited on August 22, 2014, unless otherwise revalidated.

Situation 5 – August 20, 2009. If the BIR has no response after the submission of supporting documents to serve as evidence for the protest, the last day to appeal to the CTA should be made within 30 days from the lapse of the 180 day period from the submission of the supporting documents.

Computation of days:After January 22, 2009 Days January 9February 28March 31April 30May 31June 30July 21Total number of days as of July 21 180Plus 30 days after the 180 daysJuly 10August 20Total day on August 20 30

Situation 6 – May 4, 2009. The last day to appeal to the CTA should be made within 30 days from the receipt of the denial of the BIR. The 30 days is determined as follows:

Days First denial of the BIR – March 22, 2009 to 2nd request for reconsideration – March 30, 2009 82nd denial of the BIR – April 12, 2009 to May 4, 2009 to complete the 30 day period 22Total days as of May 4, 2009 30

Situation 7 – June 25, 2009. The appeal to CA should be made within 15 days from date of unfavorable decision from CTA was received (June 10 plus 15 days).

Situation 9 – July 10, 2009. The appeal to SC should be made within 15 days from date of unfavorable decision from CA was received (June 25 plus 15 days).

Situation 10 – March 1, 2010. Within 1 year from the date of sale.

Problem 2 – 8 BTax due per returnLate filing and payment – simple neglect (P100,000 x 25%)Interest (P100,000 x 20% x 2.5/ 12)Total amount due and payable

P100,00025,000 4,167P129,167

Problem 2 – 9 AAmount due – surcharge (P100,000 x 25%) P25,000

Problem 2 – 10 DTax due per returnLate filing and payment – willful neglect (P100,000 x 50%)Interest (P100,000 x 20% x 14.5/12)Total amount due and payable

P100,00050,000 24,167P174,167

Problem 2 – 11 DDeficiency income tax (P120,000 – P100,000)Interest (P20,000 x 20% 435/ 360 days)Amount still due

P20,000 4,833P24,833

Problem 2 – 12 AStatutory fine (P250,000 x 2) P500,000

Problem 2 – 13 BMinimum statutory fine P 5,000

Problem 2 – 14 Yes, because the prescriptive period of filing the written protest is within 30 days from receipt of assessment.

Mr. Lang is obligated to pay the P500,000 assessed against him.

Problem 2 – 15Basic delinquency tax P 1,000,000Surcharges – willful (P1,000,000 x 50%)* 500,000Interest (P1,000,000 x 20% x 2) 400,000Amount collected from the highest bidder P 1,900,000Add: Interest for real property redemption (P1,900,000 x 15%) 285,000Total redemption amount P 2,185,000

*The nonpayment of taxes is already 2 years it becomes habitual; hence, willful neglect.

Problem 2 – 16Proceeds from the highest bidder (P30,000/6%)* P 500,000Less: Basic tax assessed P 300,000 Advertisement 10,000 Transfer of title 15,000 Capital gain tax 30,000 355,000Remittance to Mr. Santiago P 145,000

*The capital gains tax is based on the selling price of the real property sold. The rate of capital gains tax is 6%; hence, the proceeds from the highest bidder is P500,000 or (P30,000/6%).

Problem 2 – 17Corrected sales (P7,000,000/70%) P10,000,000Less: Operating expenses 6,500,000Corrected net taxable income P 3,500,000Multiplied by corporate tax rate 30%Corrected total income tax due P 1,050,000Less: Income tax paid 150,000Tax deficit P 900,000Surcharge (P900,000 x 25%) 225,000Interest (P900,000 x 20%) 180,000Total amount due P 1,305,000

Problem 2 – 18Amount of tax liability P190,000Surcharges and interest 20,000Bidding expenses 10,000Price for the government P220,000

Problem 2 – 19Sales proceeds (P400,000 + P50,000 + P20,000)/94% P500,000Multiplied by capital gains tax rate 6%Capital gains tax P 30,000

Sales proceeds P500,000Add: Interest (P500,000 x 15% x 8/12) 50,000Redemption price P550,000

Problem 2 – 20 a. The cash reward of Miss Wan as tax informer would be P1,000,000, the maximum amount of reward.

b. The informer’s reward remains payable, hence, Miss Wan will received the maximum reward of P1,000,000.

c. The final income tax to be withheld from the reward of Miss Wan would be 10% of P1,000,000 or P100,000.

Problem 2 – 21 a. The tax violations of Miss San Tago are the following:1. Unregistered business (Sec. 236 [A], NIRC.)2. Non-issuance of commercial invoice (Sec. 237, NIRC.)3. Ignoring the summon (Sec. 5, NIRC.)

b. Miss San Tago’s minimum financial penalties if convicted:1. For operating an unregistered business P 5,000

2. For not issuing commercial invoices3. Failure to obey summonTotal minimum

1,000 5,000P11,000

Problem 2 – 22None. There is no surcharge to be imposed to Orville Corporation because the error was corrected before payment and the payment was made on time.

The income tax due is computed as follows:Corrected gross receipts (P2,000,000/75%)Corrected allowable deductions (P1,500,000/1.35)Taxable income per auditMultiply by percent of tax for 2009Income tax due

P 2,666,667 1,111,111P 1,555,556 30%466,667

Problem 2 – 231. Principal factory P 500

Warehouses (P500 x 9) 4,500Branches (P500 x 30) 15,000Total annual registration fee – January 31, 2010 P20,000

2. Total annual registration fee – January 31, 2010 P20,000Surcharges (20,000 x 25%) 5,000Interest (P20,000 x 20% x 6/12) 2,000Total amount due – July 30, 2005 P27,000

Problem 2 – 24 Amount of tax liability P100,000Surcharges 25,000Interest 20,000Advertising cost 5,000Price if purchase by the Government P150,000

Problem 2 – 25 None. Forfeited property belongs to the government, hence, excess amount over tax liability is not refundable to the taxpayer.

Problem 2 – 26Tax violation involving fraud is not allowed with tax comprise. (Sec. 204A, NIRC)

Problem 2 – 271. Compromise (P10,000,000 x 10%) P 1,000,0002. Compromise (P10,000,000 x 40%) P 4,000,000

Problem 2 – 28

Case 1 – Financial incapability due to corporate insolvency.Delinquent accounts P 500,000Pending cases under administrative protest 900,000Criminal violation not filed in courts 1,000,000Total basic tax P2,400,000Multiplied by applicable compromise rate 20%Amount of compromise P 480,000

Case 2 – Financial incapability due to surplus deficit resulting to impairment in original capital by at least 50%.

Delinquent accounts P 500,000Pending cases under administrative protest 900,000Criminal violation not filed in courts 1,000,000Total basic tax P2,400,000Multiplied by applicable compromise rate 40%Amount of compromise P 960,000

Case 3 – Doubtful validity of assessment.Delinquent accounts P 500,000Pending cases under administrative protest 900,000Criminal violation not filed in courts 1,000,000Total basic tax P2,400,000Multiplied by applicable compromise rate 40%Amount of compromise P 960,000

Problem 2 -29a. Yes, because the offered compromise amount of P100,000 exceeds the required minimum amount of

P25,000, (P250,000 x 10%).

b. Since distraint is imposed only on personal property, the personal property with a value of P100,000 shall be subjected to distraint.

c. Yes, levy of real property and distraint of personal property can be done simultaneously (Sec. 207B of the Tax Code). See also Section 205 of NIRC.

d. No, the unpaid portion will remain as tax liability of Lugui because Miss Lugui did not avail of the compromise tax settlement. The remedy by distraint of personal property and levy on realty may be repeated if necessary until the full amount due, including all expenses, is collected (Sec. 217, NIRC).

CHAPTER 3CONCEPT OF INCOME

Problem 3 – 1 TRUE OR FALSE1. False – Some wealth that made to increase the taxpayer’s net worth are gifts and inheritance and

these are not taxable income.

2. True3. True4. False – Filipino citizen who is not residing in the Philippines is taxable only for income earned

within.5. False – The basis of tax is the fair market value of the instrument.6. False – Not income for the employee and not subject to income tax because the beneficiary is the

employer. 7. False – Accrual reporting reports income when there is earning regardless of collection.8. False – Calendar year basis9. True10. False – This rule applies to individual taxpayers.11. False – There is no rule of 25% initial payment if the sale is made on regular basis of personal goods.12. True 13. True14. True

Problem 3 – 2 1. A 11. B2. D 12. A3. B 13. A4. D 14. D5. C 15. A6. B 16. B7. 17. D8. C 18. C9. C 19. C10. C 20. D

21. AProblem 3 – 3 A

Net assets ending (P300,000 – P50,000) P250,000Net assets beg. (P400, 000 – P150,000) ( 250,000)Balance P - 0 -Add: Owner’s drawings 245,000Reportable income (loss) P245,000

Problem 3 – 4 DNet assets, end of year P 100,000Add: Personal drawing 70,000Total P 170,000Less: Net assets, beginning of year 150,000Business income P 20,000

Problem 3 – 5 CNet assets ending (P530,000 – P130,000) P400,000

Net assets beg. ( 250,000)Reportable income (loss) P150,000

Problem 3 – 6 BIncrease in total assets P 250,000Decrease in total liabilities 160,000Drawings 20,000Additional investments ( 50,000)Total income P 380,000

Problem 3 – 7 DReturn of Capital Return on Capital

Time deposit balance P250,000 P30,000

Problem 3 – 8 CYear 1 Year 2 Year 3

Sales 0 0 P1,800,000Cost of sale 0 0 ( 1,000,000)Disposal cost 0 0 ( 50,000)Income for each year 0 0 P 750,000

Problem 3 – 9 ATaxable Income Nontaxable Income

Salary (P260,000/13) x 12 P240,000Raffle winnings 70,00013th month pay (P260,000/13) x 1 P 20,000Lotto winnings . 500,000

P310,000 P520,000Problem 3 – 10 D

Within: Taxable Income Compensation income P180,000 Income from grocery store 50,000Outside: Compensation income 120,000 Lotto winnings 100,000Total income taxable in the Philippines P450,000

Note: Lotto winnings earned outside the Philippines by a resident Filipino citizen are taxable in the Philippines.

Problem 3 – 11 CSubject to ITR Subject to Final Tax

Consultancy fee P 80,000Salary 300,000Prizes in raffle ticket P 20,000Gain on sale of principal residence . 400,000

Totals P380,000 P420,000

Problem 3 – 12 DSalary for the first 4 months (P12,000 x 4) P 48,000Remaining months (P15,000 x 8) 120,000Gross compensation income P168,000

Problem 3 – 13 BReportable income is the market value of the car received P120,000

Problem 3 – 14 AMarket value of the service received P6,000

Problem 3 – 15 CFace value of the non-interest bearing note P30,000Multiplied by the present value factor of 10% annuity 0.909Compensation income – present value of the note P27,270

Note: Upon receipt of the note, no interest income yet is to be reported.

Problem 3 – 16 ACompensation income P50,000Interest income (P50,000 x 12% x 6/12) P3,000

Problem 3 – 17 BCollections during the year P490,000Expenses actually incurred (150,000)Net income before personal exemption – cash basis P340,000

Problem 3 – 18 AGross income (P1,000,000 – P600,000) P400,000Actual operating expenses (P200,000 x 80%) (160,000)Net income before other income P240,000Add: Gain from sale of old furniture 20,000Taxable income P260,000

Problem 3 – 19 1. A Reportable income 2006 - casual sale (P12,000 – P3,000) P9,000

The sale is considered cash sales because the 2006 initial payments (P1,000 + P1,000 + 2,000) exceeds 25% of the selling price; P4,000/P12,000 = 33%

2. B Reportable income 2006 – regular sale (P9,000 x P4,000/P12,000) P3,000

Since the personal property is sold in regular basis, installment reporting of income is allowed.

Problem 3 – 201. P37,500 = Not in the choices Net income (P2,000,000 – P1,400,000 – P100,000) P500,000 Income tax (P500,000 x 5/20) x 30% P 37,500

2. B Income tax (P2,000,000 x 6%) P120,000

Problem 3 – 21 BTotal revenue P1,000,000Cost of sale ( 500,000)Income to be reported P 500,000

Problem 3 – 22 DContract price P 1,000,000Less: Cost (P90,000/20%) 450,000Gross profit P 550,000Multiplied by percent of completion 20%Reportable income under percent of completion P 110,000

Problem 3 – 23 DContract price P1,200,000Less: Total costs (P432,000 + P184,250 + P103,750) 720,000Total profit P 480,000Less: Previous years’ reported income:Accomplished contract price for 2008 and 2009 (P1,200,000 x 85%) P1,020,000Previous years’ actual costs: 2008 ( 432,000) 2009 ( 184,250) 403,750Percent of completion – 2010 Reportable income P 76,250

Problem 3 – 24 AYear 3 sales P 500,000Less: Cost incurred as of year 3: Year 1 P 100,000 Year 2 200,000 Year 3 50,000 350,000Year 3 – reportable income P 150,000

Problem 3 – 25 C

Harvested crops sold P 2,000,000Less: Total direct costs: Year 1 P 300,000 Year 2 100,000 Year 3 100,000 Year 4 100,000 Year 5 400,000 1,000,000Reportable income – year 5 P 1,000,000

Problem 3 – 26 Year 1 Year 2

Total harvest for the year at selling price P50,000 P100,000

Cash Accrual Cash AccrualHarvests sold: (80 cavans x P500) P40,000 P40,000 (190 cavans x P500) P95,000 P95,000Ending inventory: (20 cavans x P500) 10,000 (30 cavans x P500) 15,000Beginning inventory: (20 cavans x P500) . . . ( 10,000)Gross income for the year P40,000 P50,000 P95,000 P100,000

Problem 3 – 27 1. Cash Method Farming Trading Rent Total

Revenue P 50,000 P150,000 P100,000Equipment sold 25,000Costs: Cost of products purchased ( 90,000) Carrying value of farm equipment . ( 25,000) .Gross income P 50,000 P 60,000 P100,000 P210,000

2. Accrual Method Farming Trading Rent Total Revenue P 50,000 P150,000 P100,000Equipment sold 25,000Inventory, ending 9,000Inventory, beginning ( 6,000)Costs: Cost of products purchased ( 90,000) Carrying value of farm equipment . ( 25,000) .Gross income P 53,000 P 60,000 P100,000 P213,000

CHAPTER 4GROSS INCOME

Problem 4 – 1 TRUE OR FALSE1. True 2. True3. False – Religious officer’s income is subject to income tax.4. True5. True6. False – The basis of tax is the amount of debt cancelled.7. False – Excess of advances over actual expenses8. True9. True10. True11. True12. False – Not income but a liability in compliance with the trading business rule.13. False – Under service business, advances from clients are to be reported as income. Hence, include

as income because the advanced rental is without restriction.

Problem 4 – 2 TRUE OR FALSE1. True2. True3. False – because estimated bad debts is not allowed to be deducted from gross business income.4. False – At the year of recovery5. False – Not an option to report, but required to report.6. False – the return of premium from insurance company is not taxable.7. True8. False – To be taxable, income should be realized.9. True10. False – As a rule, income obtained illegally is taxable.11. False – As a rule, income received by error is reportable income.12. True13. False – Not taxable.14. True15. True16. False – The rule of P10,000 and below applies to prizes not winnings.

Problem 4 – 3 Problem 4 – 4 1. C 1. C2. C 2. B3. B 3. C4. A 4. A5. B 5. D

6. A 6. D7. D 7. B8. D 8. D9. B 9. C10. A 10. A11. B 11. B12. C 12. C

Problem 4 – 5 AGross salary (P280,000 + P20,000) P300,000Pier diem as board of director 120,000Taxable 13th month pay 5,000Gross taxable compensation income P425,000

Problem 4 – 6 BSalary P150,000Overtime pay 30,00013th month pay and other bonuses 15,000Total compensation income P195,000

Problem 4 – 7 BSalary P120,000Tips 360,000Cost and living allowance 5,000Total taxable compensation income P485,000

Note: New BIR interpretation provides that the 13th month pay and other benefits amounting to P30,000 and below is not taxable. Since the 13th month pay is only P10,000, the P20,000 achievement awards being part of de-minimis can be used as other benefits, to complete the P30,000 nontaxable threshold.

Problem 4 – 8 DFirst employment for 30 years received at the age of 50 P500,000

Problem 4 – 9 BFirst employment – resigned P300,000

Problem 4 – 10 CGross compensation income (1,000 x P10) P10,000

Problem 4 – 11 BCompensation Capital gain

Compensation income (P13 – P12) x 10,000 P 10,000Capital gain (P15 – P13) x 10,000 P 20,000

Problem 4 – 12 CCompensation Capital gain

Compensation income (P25 – P23) x 10,000 P 20,000Capital gain (P30 – P25) x 10,000 P 50,000

Problem 4 – 13 DRegular compensation per month P 50,000Cancellation of indebtedness (P300,000 – P250,000) 50,000Total compensation income – December 2007 P100,000

Problem 4 – 14 BInsurance premium – beneficiary Sico P5,000

Problem 4 – 15 BCleaning of business equipment P 1,000Repair service of store 3,000Total casual service income P 4,000

Problem 4 – 16 CTotal purchases P500,000Transportation expenses 5,000Unsold goods ( 40,000)Cost of goods sold P465,000

Problem 4 – 17 CInventory, beginning P 20,000Purchases 1,200,000Purchase discounts ( 10,000)Purchase returns ( 40,000)Transportation in 5,000Inventory end ( 50,000)Cost of sale P1,125,000

Problem 4 – 18 C Year 1 Year 2

Inventory, beginning P 50,000Inventory, ending (P50,000) ( 30,000)Purchases 850,000 900,000Freight – in 10,000 15,000Purchase discount ( 20,000) ( 25,000)Cost of sales P790,000 P910,000

Problem 4 – 19 BSales P1,275,000

Sales returns ( 25,000)Net sales P1,250,000Less: Cost of goods manufactured and sold Purchases – raw materials P 540,000 Freight-in 20,000 Raw materials, ending inventory ( 10,000) Raw materials used P 550,000 Direct labor 400,000 Factory overhead 200,000 Total manufacturing cost P1,150,000 Work-in-process, ending inventory ( 100,000) Finished goods, ending inventory ( 50,000) 1,000,000Business income P 250,000

Problem 4 – 20 BAdvance payment P 2,000Additional collection 8,000Office machine 3,000Gross service income P13,000

Problem 4 – 21 AProfessional fee, accounting services P 500,000Salaries of accounting staff ( 150,000)Accounting supplies ( 10,000)Gross service income P 340,000

Problem 4 – 22 BService charges: Originating from the Philippines P 150,000 Collection abroad of collect messages originating in the Philippines 60,000Gross income for Philippine Income Tax computation P 210,000

Problem 4 – 23 BRent for year:200A P 80,000200B 480,000200C 40,000200B Reportable income P 600,000

Problem 4 – 24 BRent income P360,000Real property tax assumed by the lessee 10,000

Unrestricted advance rent 60,000Taxable gross receipts P430,000

Problem 4 – 25 DOutright Spread-out

Year 1 Outright method P240,500Year 1 Spread-out method Value of investment P240,500.00 Less: Accum. depreciation [(P240,500 - P560)/8 yrs] x 4.75 yrs 142,464.37 Book value, end of lease P 98,035.63 Divided by remaining years of contract 4.75 Annual income from improvement P 20,639 Multiplied by months in a year 9/12 Year 1 spread-out – rent income on improvement P 15,479

Problem 4 – 26 COutright Spread-out

Outright P180,000Spread-out P - 0 -

Problem 4 – 27 CCost of improvement P300,000Less: Accumulated depreciation at the end of the lease (P300,000/6) x 4 years and 7 months

229,167

Book value at the end of the lease P 70,833Divided by number of years until the termination of lease contract = 4 years and 7 months 4.58Annual additional income P 15,454Multiplied by number of years expired (from March 31, 2008 to December 31, 2010) 2.75Reported additional income from improvement (P42,500)Book value of improvement at the time of pre-termination Cost P300,000 Less: Accum. depreciation at pre-termination (P300,000/6) x 2.75 years 137,500 162,500Additional income in 2010 from the pre-termination of contract P120,000

Problem 4 – 28 CP50,000 cash dividend received by an individual

Problem 4 – 29 BInterest income from an investment in a 10-year bond P 40,000Interest income from expanded foreign currency deposit 60,000Total taxable interest income P100,000

Problem 4 – 30 DYear 3 interest income of P4,461.20.

Problem 4 – 31 DRoyalty income as author (P100,000 x 10%) P 10,000Royalty income from franchising (P200,000 x 20%) 40,000Royalty income from gold mine (P500,000 x 20%) 100,000Total final tax P150,000

Problem 4 – 32 DCopyright Patent

Gross royalties: P 35,000 Copyright (P31,500/90%) Patent (P20,000/80%) P 25,000Income tax – final Copyright (P35,000 x 10%) ( 3,500) Patent (P25,000 x 20%) . ( 5,000)Income after tax P 31,500 P 20,000

Problem 4 – 33 AP500,000 - Dividends earned outside the Philippines by a domestic corporation from a foreign corporation are taxable in the Philippines.

Problem 4 – 34 AThe dividend received by a domestic corporation from another domestic corporation is nontaxable.

Problem 4 – 35 AP8,000 prize won in a TV program. Prizes amounting to P10,000 and below are subject to normal taxes.

Problem 4 – 36 DFirst prize – raffle draw (P50,000 – P1,000) P 49,000Gambling winnings 300,000Beauty contest winnings 100,000Taxable prizes and winnings P449,000

Problem 4 – 37 D Year 1 Year 2 Year 3

Income (loss) P100,000 (P 20,000) P 50,000Less: Bad debts written off 25,000 10,000 5,000Income loss before bad debts recovery P 75,000 (P 30,000) P 45,000Bad debts recovery of previous year with tax benefit . 25,000 5,000

Taxable income P 75,000 (P 5,000) P 50,000

Note: The tax benefit allowed in year 2 for the bad debts written off is only P5,000; hence, the reportable bad debts recovery in year 3 should also be P5,000.

Problem 4 – 38 DYear 1: No bad debt recovery NoneYear 2: Bad debt recovery P 600

Problem 4 – 39 DP5,000 local tax recovery.

The requirement should be properly stated as: What amount of tax refund should be reported as part of year 3 taxable income?

Problem 4 – 40 CReal property tax P 10,000Local taxes 500Reportable income from tax refund P 10,500

Problem 4 – 41 CAnnuity received P 20,000Present value (P20,000 x 0.9091) 18,182Interest income - Taxable annuity P 1,818

Note: The present value factor of P1 for an effective interest rate of 10% is 0.9091.

Problem 4 – 42 DAnnuity received P 5,880Present value (P5,880 x 0.8928) 5,250Interest income - Taxable annuity P 630

Problem 4 – 43 BExcess of withdrawable amount ($10,000 - $1,000) $ 9,000Multiplied by exchange rate per 1 dollar P 50Reportable income received by error P450,000

Problem 4 – 44 CAverage monthly unreturned change to clients P 4,000Multiplied by number of months in a year 12Illegally obtained income - taxable P48,000

Problem 4 – 45Total receipts, 200BLess: Direct costs- commission (P425,000 x 65%) Rental expense (P3,000 x 12)

P 276,25036,000

P 425,000

Depreciation Supplies usedGross income of A-1 Barbershop

5,000 1,750 319,000

P 106,000

Note: The interest expense could only be deducted to compute gross income if a business is a banking institution. Furthermore, borrowing cost directly attributable to the acquisition, construction or production of assets used in the business may either be capitalized or deducted as operating expense.

Problem 4 – 46SalaryCorporate shares received (1,000 shares x P100)Cancellation of debt in lieu of service renderedProfit sharingGross taxable compensation income

P300,000100,00050,000 40,000P490,000

Problem 4 – 47Salary (P25,000 + P302,000)Income tax paid by the employerNote receivableTotal compensationBusiness gross incomeAllowable expensesPrepaid rent incomeBad debts recovered previously written-off (P38,000 x 60%)Taxable income subject to tabular tax

P 400,000( 250,000)

P327,0005,000 20,000P352,000

150,00050,000 22,800P574,800

CHAPTER 5EXCLUSION FROM GROSS INCOME

Problem 5 – 1 TAXABLE OR NONTAXABLE with income tax1. Nontaxable 11. Taxable 21. Taxable2. Taxable 12. Nontaxable 22. Nontaxable3. Nontaxable 13. Taxable4. Nontaxable with IT 14. Nontaxable5. Taxable 15. Nontaxable6. Taxable 16. Nontaxable7. Nontaxable 17. Taxable8. Nontaxable 18. Taxable9. Taxable 19. Nontaxable10. Nontaxable 20. Taxable

Problem 5 – 2 TAXABLE OR NONTAXABLE with income tax1. Nontaxable 12. Nontaxable, if not exceeding 10 days2. Nontaxable 13. Taxable

3. Nontaxable 14. Taxable (based on proceeds or selling price or zonal value, whichever is higher).

4. Nontaxable 15. Taxable 5. Nontaxable 16. Taxable6. Nontaxable 17. Taxable, except when BIR registered with 50 year old retiree; 10 years

service and first time to avail.7. Nontaxable 18. Taxable8. Taxable 19. Nontaxable if Philippine Sweepstakes and Lotto9. Nontaxable 20. Taxable10. Taxable 21. Taxable11. Taxable 22. Nontaxable

Problem 5 – 3 TRUE OR FALSE 1. False – nontaxable 2. True3. True4. False – Proceeds of life insurance is not taxable regardless of whoever would be the recipient,

except when the insured person outlived his life insurance and received the proceeds. The excess of proceeds over premium paid is taxable.

5. False – include in gross income6. False – Bequest is a personal property.7. True8. True9. True10. False – Nontaxable 11. True12. False – Nontaxable 13. False – Some prizes and awards are not taxable. Eg. Ramon Magsaysay Awards14. True 15. True 16. False – Include in gross income because income from gift is subject to income tax.17. False – Exempt from income tax.18. True

Problem 5 -4 Problem 5 -51. A 9. C 1. B 6. D2. D 10. C 2. D 7. C3. C 11. A 3. A 8. C4. D 12. D 4. D 9. C5. D 13. D 5. C 10. C6. B 14. A7. A 15. B8. A

Problem 5 –6 DAvailed 10-day sick leave pay P1,500

Problem 5 –7 CTake home pay P212,000Nontaxable 13th month pay ( 17,500)Withholding tax 13,500Other income subject to normal tax 20,000Taxable income P228,000

In general, a MWE is not subject to WTW and income tax on his compensation income. But if he has other income that is subject to normal tax, his entire income during the year will be subject to income tax, his compensation income, however, will not be subject to WTW.

Problem 5 –8 C Taxable Nontaxable

Net pay P265,000Withholding tax 50,000Advances 6,0003th month pay (27,000) P27,000Christmas bonus (de minimis) ( 5,000) 5,000SSS contribution . 4,000Totals P289,000 P36,000

Problem 5 –9 C Taxable Tax-exempt

Net take home pay P13,000SSS contributions P300PAG-IBIG contributions 100Union dues contributions 100Office party contributions 75Charitable contribution (deductible only from business income) 25Withholding income tax 400 .Totals P13,500 P500

Problem 5 –10 DMonthly salary P15,000

Problem 5 –11 ARent of apartment P 50,000Reimbursement 20,000Taxable benefits P70,000

Problem 5 –12 D

Reportable taxable income P - 0 -

Problem 5 –13 BProceeds of life insurance received by insured person P500,000Return of premium 40,000Total premium paid (490,000)Taxable income P 50,000

Problem 5 –14 DZero, because, the P270,000 cash surrender value is just a return of contribution of P360,000.

Problem 5 –15 DNontaxable Taxable

Actual damages for unrealized profitInterest on non-taxable damagesActual damages for lost productsExemplary damagesMoral damagesActual liquidated damagesTotal

P200,00050,00050,000 80,000P380,000

P100,000 20,000

.P120,000

Problem 5 –16 ATaxable income P - 0 -

Problem 5 –17 DTaxable Nontaxable

Terminal pay P 60,000Life insurance 500,000SSS death benefit 10,000Donations . 40,000Totals P - 0 - P610,000

Problem 5 –18 AThe termination is due to cause within the control of Jalosjos.

Problem 5 –19 DLast pay ujpon resignation from his first employer P100,000

Problem 5 –20 AZero, all items enumerated are not subject to income tax.

Problem 5 –21 DP50,000 business income for year 4

Problem 5 –22 CInterest income from bank savings deposit P4,000

Problem 5 –23 DZero. All gifts enumerated are not subject to income tax.

Problem 5 –24 DTotal income (P100,000 x 10 months) P1,000,000Total average expenses (P20,000 x 10 months) ( 200,000)Income subject to income tax P 800,000

Problem 5 –25 DZero. All winnings received by Miss Lara are subject to tax because she has entered into a contest as Miss International.

Problem 5 –26 ALotto Philippine winnings P10,000,000

Problem 5 –27 BRamon Magsaysay award P 50,000Athlete of the year award 100,000Prize for winning the silver Olympic medal 500,000Gift from Mr. Lim 250,000Gift from Nissan 1,000,000Winnings – Philippine sweepstakes 100,000Total winnings/ awards not subject to income tax P2,000,000

Problem 5 –28 DZero. Interest and gain on sale of investment in a 5-year government bonds is exempt from income tax.

Problem 5 –29 BInterest received from bond investment P 120,000

Problem 5 –30 BInterest income P120,000Multiplied by final tax rate on interest income 20%Income tax P 24,000

Problem 5 –31 DInterest on expanded foreign currency deposit P100,000

Problem 5 –32 AIncome from sale of invented products P5,000,000

Sale of technology 2,000,000Total revenue P7,000,000Less: Research and development costs 800,000Nontaxable income P6,200,000

Note: The cost of product produced need not to be deducted anymore because of the term “income from sale of invented products.”

Problem 5 –33 C Interest income on bank savings deposit P10,000

Problem 5 –34 CInterest income from foreign currency deposit (P2,000,000 x 7.5%) P150,000Interest income from time deposit (P1,000,000 x 20%) 200,000Income tax paid by BBC P350,000

Problem 5 –351. Compensation income (P5,000 x 10)

2. Retirement benefits Salary earnedGross income

3. Same answer with No. 1

P 50,000

P500,000 50,000P550,000

P 50,000

Problem 5 –36Winnings from charity horse race sweepstakes from PCSOInterest on government debt securitiesDamages for breach of contract (P1,000,000 x 60%)Gains from redemption of shares in mutual fundGain from sale of bonds with maturity of more than five yearsGifts from friendsTotal exclusion from gross income

P 500,000100,000600,000300,00060,000 200,000P1,760,000

Problem 5 –37 Exclude Include

Proceeds of his life insurance (P2,000,000) – (P15,000 x 25)Proceeds of his mother’s life insuranceCash giftInheritanceRent incomeTotal

P 375,0001,000,00050,0003,000,000 .P4,425,000

P1,625,000

100,000P1,725,000

Problem 5 –38No, the P1,500,000 transfer to be received by Miss Tandana is to be included for income taxation because the transfer is in recognition of her services rendered. It is not to be included as a part of estate tax.

Problem 5 –39All enumerated items are not subject to normal (tabular) tax.

CHAPTER 6FRINGE BENEFITS TAX

Problem 6 – 1 TRUE OR FALSE1. True2. False – These are benefits other than salaries.3. False – Wage and salaries are not subject to reduction once given regardless of the financial

condition of the employer.4. True5. False – This a definition of fringe benefits not of fringe benefit tax.6. False – The corporate income tax rate is 35% while the fringe benefit tax is a final tax rate of 32%.7. True, unless these are deminimis8. False – FBT is a final tax of the employee.9. True10. True11. True12. True13. True14. True15. True16. False – Some housing fringe benefit is not subject to income tax. Ex. Temporary housing for three

months or housing benefit under the employer’s benefit rule.

Problem 6 – 2 TRUE OR FALSE1. True2. False – If in the name of an officer employee and reimburse or paid by the employer.3. False - Fringe benefit which are necessary for the business and required for the convenience of

the employer are not subject to fringe benefit tax.4. True5. False – Scholarship grants to employees not related to business is taxable.6. False – These are among those exempted from fringe benefit tax.7. False – Fringe benefits of rank-in-file employee, not mentioned in the exemptions, are subject to

income tax on wages but not subject to fringe benefit tax.8. False – Rank-in-file employees’ fringe benefits are subject to income tax on wages.9. True10. True11. False – medical allowance of P750 per semester

12. False – Daily meal allowance for overtime13. True

Problem 6 – 3 1. A 7. A2. B 8. C3. B 9. C4. D 10. A5. D 11. D6. D 12. D

Problem 6 – 4ACase 1: C

Taxable NontaxableBasic salary P240,00013th month pay P20,000De minimis within ceiling (P1,500 x 12) 18,000Other benefits - excess of de minimis (P24,000 – P18,000) . 6,000Total P240,000 P44,000

Note: The 13th month pay and other benefits amount only to P26,000 (P20,000 + P6,000), hence, nontaxable.

Case 2: DAll of the given items of income for MWE are not subject to income tax and within the prescribed nontaxable ceiling.

Case 3: B Taxable Nontaxable

Total basic salary P108,000Overtime pay 30,000Hazard pay 2,000Holiday pay 1,000De minimis: Nontaxable rice subsidy (P1,500 x 12) P18,000 Nontaxable clothing allowance 4,00013th month pay and other benefits: Nontaxable 13th month pay P 9,000 Other benefits – excess of de minimis Rice subsidy (P36,000 – P18,000) 18,000 Clothing (P20,000 – P4,000) 3,000 13,000 30,000Total P154,000 P52,000

Case 4: Not in the choices Taxable Nontaxable

Total basic salary P96,000

Overtime pay 20,000De minimis: Nontaxable rice subsidy (P1,500 x 12) P18,00013th month pay and other benefits: Nontaxable 13th month pay P 8,000 Other benefits – excess of de minimis Rice subsidy (P24,000 – P18,000) 6,000 14,000Rent income 60,000Interest income (P4,000/80%) 5,000 .Total P181,000 P32,000

Note: A MWE with other income subject to normal tax is disqualified from tax exemption. The interest income is subject to final income tax. It should be included as part of the taxable income as required by the question because such income is taxable. The question did not ask for income subject to normal tax only.

Problem 6 – 4B

Case 1: Housing benefits1. A

GMV (P6,000,000 x 5% x 50%)/68% P220,588Multiplied by FBT rate 32%FBT P 70,588

2. B Down payment P2,000,000Installments (P1,000,000 x 4 x 0.636) 2,544,000Acquisition cost, excluding interest P4,544,000

GMV (P5,037,300 x 5% x 50%)/68%) P185,195Multiplied by FBT rate 32%FBT P 59,262 P2.00 difference is due to rounding off.

Present values of installment paymentsYear:1: (P1,000,000 x 0.8928) P 892,8002: (P1,000,000 x 0.7972) 797,2003: (P1,000,000 x 0.7118) 711,8004: (P1,000,000 x 0.6355) 635,500Total P3,037,300Add: Downpayment 2,000,000Monetary value P5,037,300

Case 2: Motor vehicle benefits

1. AGMV [(P1,000,000/5) x 50%]/68% P147,059Multiplied by FBT rate 32%FBT P 47,059

2. CGMV [(P1,000,000/5)/68%] P294,118Multiplied by FBT rate 32%FBT P 94,118

Correction of Page 270: Motor vehicle formula No. 3:

3. Purchase of car on installment basis, the ownership of which is place in the name of the employee. Not “employer”

MV = AC/5

Where:AC = Acquisition cost, exclusive of interest

Problem 6 – 5 1. C = P170,000 Monetary value of FB (P80,000/32%) x 68% P170,000

2. B = P250,000 Grossed-up monetary value (P80,000/32%) P250,000

3. D = P – 0 - A fringe benefit tax is not an income tax of employer. P - 0 -

Problem 6 – 6 A Deductible from business income (P136,000/68%) P 200,000

Problem 6 – 7 ANone, because fringe benefit tax is a final tax and no deduction is allowed from gross compensation income except personal exemptions and health or hospitalization insurance actually paid if the family income does not exceed P250,000.

Problem 6 – 8 DZero. No Fringe benefit tax is to be imposed on fringe benefit of rank-in-file employee. Mr. Estrada is a company messenger. His fringe benefit is subject to withholding tax on wages.

Problem 6 – 9 CFringe benefit tax (P102,000/68%) x 32% P48,000Income tax:

Net income before tax (P1,750,000/70%) P2,500,000 Add: Fringe benefits charge to miscellaneous expense 102,000 Total P2,602,000 Multiplied by corporate income tax rate 30% Corporate income tax P 780,600 Less: Income tax already paid (P2,500,000 – P1,750,000) 750,000 30,600Tax recovered by the government P78,600

Note: The fringe benefit tax expense is not deductible because the related withholding tax was not withheld and paid until the tax evasion was discovered by the BIR.

Problem 6 – 10 BAcquisition cost = fair market value (higher than zonal value) P2,040,000

Monthly fringe benefit [(P2,040,000 x 5% x 50%)/12]/68% P 6,250Problem 6 – 11 AZero. Jean’s used of the condominium is not for her benefit but for the benefit of B Corporation as the former conducts investigation for inventory fraud.

Problem 6 – 12 AGrossed-up monetary value (P17,000 + P6,800)/68% P30,000Multiplied by FBT rate 32%

P 9,600Problem 6 – 13

FB expense (P476,000 x 75%)/68% P525,000

Problem 6 – 14 DFringe benefit tax (P16,320/68%) x 32% P 7,680

Problem 6 – 15 CFringe benefit tax (P57,800/68%) x 32% P27,200

Problem 6 – 16 B1. D

There is no FBT for rank-in-file employee.2.

Benchmark interest (P88,400 x 12%) P10,608Less: Actual interest charge (P88,400 x 3%) 2,652Difference P 7,956

FBT (P7,956/68%) x 32% P 3,744

Problem 6 – 17 BGoma golf club P 68,000

Baguio Country Club 340,000Total taxable fringe benefits P408,000

FBT (P408,000/68%) x 32% P192,000

Problem 6 – 18 AHotel accommodation [($1,600- ($300 x 4)] x P50/$1 P 20,000Personal expenses ($280 x P50/$1) 14,000Total amount of fringe benefits P 34,000

Fringe benefit expense (P34,000/68%) P 50,000

Problem 6 – 19 CFringe benefit tax [(P54,400 x 30%) / 68%] x 32% P 7,680

Problem 6 – 20 BFringe benefit expense (P408,000/68%) P600,000

Problem 6 – 21 AZero. The scholarship was obtained through competitive examination.

Problem 6 – 22 1. D None. Exempt because the educational benefit is related to work. (Employer’s benefit rule)

2. BP65,280 – Only the monetary value is deductible because the benefit is tax-exempt.

Problem 6 – 23 1. Rice subsidy P12,000

Nontaxable uniform and clothing allowance 3,000Employees achievement award 10,000Nontaxable medical allowance to dependents (P125 x 12) 1,500Laundry allowance 3,600Actual medical benefits 10,000Total nontaxable fringe benefits P40,100

2. Car P214,000Uniform and clothing allowance (P6,800 – P3,000) 3,800Medical allowance to dependents (P8,500 – P1,500) 7,000Total monetary value P224,800Divided by grossed-up rate 68%Grossed-up monetary value P330,588Multiplied by FBT rate 32%

Fringe benefit tax P105,788

Note: The new BIR interpretation is that the excess of the actual fringe benefit given shall be taxable after deducting the maximum de – minimis threshold amount.

Problem 6 – 24 1. Housing benefit (P12,240 x 110%) P13,464

Lions Club membership fee 20,400Total P33,864Divided by grossed-up rate 68%Taxable amount of FB P49,800

2. Fringe benefit tax (P49,800 x 32%) P15,936

3. Violeta Vicente cannot deduct the FBT from her gross income.

San Miguel Corporation, however, can deduct the entire amount of grossed-up monetary value amounting to P49,800 from thegross income of the corporation as fringe benefit expense.

Problem 6 – 25 1. Assuming that Mr. Wong is an alien not engaged in trade or business in the Philippines, the determination of fringe benefit tax due would involve the following computations:

Total value of fringe benefitsDivided by GMV divisor Grossed-up monetary valueMultiplied by FBT rate Fringe benefit tax due

P112,500 75%P150,000 25%P 37,500

2. Assume that Mr. Wong is a Filipino employed as manager of an offshore banking unit of a foreign bank. The determination of the fringe benefit tax due would be as follows:

Total value of fringe benefitsDivided y GMV divisor Grossed-up monetary valueMultiplied by FBT rate Fringe benefit tax due

P112,500 85%P132,353 15%P 19,853

3. Assuming that Mr. Wong is a Filipino employed as manager of Clark Special Economic Zone (CSEZ), the computation of the fringe benefit tax due based on 25% fringe benefit tax would be:

Total value of fringe benefitsDivided by GMV divisor Grossed-up monetary value

P112,500 75%P150,000

Multiplied by FBT rate Fringe benefit tax due

25%P 37,500

Problem 6 – 26 1. Minimum wage earner

Taxable compensation income P - 0 -

The MWE qualifies for tax exemption because his13th month pay and other benefits does not exceedP30,000, computed as follows:13th month pay P 9,100Rice subsidy (P24,000 – P18,000) 6,000Actual hospitalization payments (P15,000 – P10,000) 5,000Clothing allowance (P5,000 – P4,000) 1,00013th month pay and other benefits – nontaxable P21,100

2. Not a minimum wage earnerGross compensation income P109,200Less: SSS premium contribution P2,400 Philhealth premium contribution 3,000 5,400Taxable compensation P103,800

Note: Temporary housing for 3 months is not taxable.

Problem 6 – 27 1. Minimum wage earner

Gross compensation income P128,000Less: SSS premium contribution P2,400 Philhealth premium contribution 3,000 5,400Net taxable compensation P122,600

2. Not a minimum wage earnerGross compensation income P128,000Less: SSS premium contribution P2,400 Philhealth premium contribution 3,000 5,400Net taxable compensation P122,600

Notes: 1. The MWE is disqualified from tax exemption once he has other other income subject to normal tax aside from his compensation income.2. The rent income is not included in the solutin amount because the requirement is only taxable compensation income. 3. Nontaxable 13th month pay and other benefits: 13th month pay P10,600

Add: Excess DM: - actual hospitalization (P20,000 – P10,000) P10,000- food overtime allow (P1,500 – (P10,600/30) x 25% x 10) 617 10,617

Total nontaxable 13th month pay and other benefits P21,217

Problem 6 – 28 A. 1. Monetary value P68,000

2. FBT (P68,000/68%) x 32% P32,000

B. 1. Down payment P200,000Add: Present value of P180,000 installment at 18% per year: Yr. 1: (P180,000 x 0.8475) 152,550 Yr. 2: (P180,000 x 0.7182) 129,276 Yr. 3: (P180,000 x 0.6086) 109,548 Yr. 4: (P180,000 x 0.5158) 92,844 Yr. 5: (P180,000 x 0.4371) 78,678 562,896Acquisition cost P762,896Divided by 5Monetary value P152,579

2. FBT (P152,579/68%) x 32% P 71,802

C. 1. Monetary value (P816,000 x 150%) P1,224,000

2. FBT (P1,224,000/68%) x 32% P 576,000

D. 1. Annual monetary value = annual depreciation (P1,020,000/25) P 40,800

2. FBT (P40,800/68%) x 32% P 19,200

E. 1. Monetary value (P244,000 x 50%) P 122,000

2. FBT (P122,000/68%) x 32% P 57,412

F. 1. Monetary value (P1,360,000 x 5% x 50%) P 34,000

2. FBT (P34,000/68%) x 32% P 16,000

Problem 6 – 29

1. FBT – condominium [(P8,000,000 x 5% x 50%)/68%] x 32% P 94,118FBT – car: Down payment P 300,000

Present value of P240,000 yearly installment at 12% (P240,000 x 3.605) 865,200 Acquisition cost P1,165,200 Divided by 5 Monetary value P 233,040 FBT – car (P233,040/68%) x 32% P 109,666

2. Journal entries:FB expense 94,118 Cash / FBT payable 94,118

FB expense 1,274,866 Car 1,165,200 Cash / FBT payable 109,666

CHAPTER 7DEALINGS IN PROPERTY

Problem 7 – 1 TRUE OR FALSE1. False – Receivable not related to the main conduct of business are capital assets.2. False – Depreciable assets primarily used in business are ordinary assets.3. True4. True5. True6. False – Regardless of gain or loss, a tax should be paid when the shares of stock are sold in the

stock market because the basis of tax is the selling price.7. True8. True9. True10. False – For ordinary loss, the same; but for capital loss not the same because there is not capital

loss carry over and not holding period for corporation.11. True12. False – No, because the 6% final tax is based on the higher of the selling price or zonal value. If

there is loss on sale, the normal tax rate if preferable.13. False – Not subject to creditable withholding tax.14. False – … whichever is lower15. False – subject to income tax (capital gains tax).

Problem 7 – 2 TRUE OR FALSE1. True2. False – equipment used in business operations is an ordinary asset.3. True4. False – The basis is the fair market value at the date of donation.5. False - … the speculator sells securities which he does not own.

6. True7. True – unless sold by dealers of securities8. False – Ordinary assets9. True10. False – There should be no capital gain or loss.11. True12. True13. True14. True

Problem 7 – 3 TRUE OR FALSE1. False – Not subject to capital gains tax because the issuance is original and the shares of stock is

owned by the corporation.2. True3. True4. True5. False – Losses from wash sales are not deductible.6. False – no wash sales if there are two kinds of shares of stocks7. True8. True9. True10. True11. False – The final tax should be 30% is based on the gross income.12. True13. True14. True

Problem 7 – 4 Problem 7 – 5 1. D 1. B2. A 2. D3. None of the choices all are correct. 3. D4. A 4. D5. C 5. D6. A 6. D7. B 7. C8. A 8. D9. C 9. D10. C 10. D

11. AProblem 7 – 6 A

Ordinary assets Capital assetsGoods for sale P100,000Trade receivables 50,000Investment in property P200,000

Land and building for business 500,000Delivery truck 250,000Car for personal use . 400,000Correct amount of assets P900,000 P600,000

Problem 7 – 7 1. A

Selling price per 200 sq. meters P 100,000Multiplied by number of 200 s.m. sold (9,000/200) 45 Total sales P4,500,000Less: Cost of sales (P2,000,000 x 90%) 1,800,000Ordinary gain from sale of land P2,700,000

2. C Remaining capital asset (P2,000,000 x 10%) P200,000

Problem 7 – 8 BFair market value P190,000Less: Book value of car 150,000Gain on exchange P 40,000

Problem 7 – 9 CThere is capital loss if the property given away has fair value higher than P200,000 when it was inherited.Problem 7 – 10 ASec.40C, NIRC. No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation; provided, that stocks issued for services shall not be considered as issued in return for property.Problem 7 – 11 Not in the choices

Acquisition cost P200,000Agent’s commission (P500,000 – P200,000) x 10% 30,000Processing fee (P500,000 x 1%) 5,000Deductible cost and expenses P235,000

Problem 7 – 12 CSales price P150,000Cost or basis to the donee (the lower of donor’s cost or the fair market value when the gift was made ( 50,000)Capital gain P100,000Multiplied by holding period rate – more than 1 year 50%Reportable capital gain P 50,000

Problem 7 – 13 CSales price P200,000

Acquisition cost (P150,000 + P20,000) (170,000)Broker’s commission (P200,000 x 5%) ( 10,000)Capital gain P 30,000

Problem 7 – 14 DThe sale of the entire business is not an ordinary business transaction (Kahn’s Federal Income Tax, p. 364)

Sales price P100,000Less: X , Capital 75,000Capital gain P 25,000

Problem 7 – 15 AHolding period is more than 1 year = 50% of the capital gainProblem 7 – 16 D

Sales price P200,000Less: Cost or market whichever is lower) 100,000Capital gain P100,000

No holding period is allowed for taxpayer other individuals.

Problem 7 – 17 D Year 1 Year 2

Net business income P200,000 P300,000Capital asset transactions: Year 1 Year 2 Capital gain (long-term) = (P50,000 x 50%) ( 40,000 x 50%) 25,000 20,000 Capital loss (short-term) = (P40,000 x 100%) (10,000 x 100%) (40,000) (10,000) Net capital loss carry over (15,000) Capital loss (15,000) (5,000)Taxable income before personal exemption P200,000 P300,000

Correction: The requirement should be taxable income before personal exemption.

Problem 7 – 181. C

Ordinary gain P50,000Capital asset transactions: Short-term capital gain P20,000 Long-term capital gain (P30,000 x 50%) 15,000 Long-term capital loss ( 5,000) 30,000Taxable income before personal exemption P80,000

2. BOrdinary gain P50,000Capital asset transactions: Short-term capital gain P20,000 Long-term capital gain (P30,000) 30,000

Long-term capital loss ( 10,000) 40,000Taxable income before personal exemption P90,000

Problem 7 – 191. C2. C

200A 200BOrdinary net business income P48,900 P85,700Capital asset transactions: Short-term capital gain 15,895 Short-term capital loss (18,960) Long-term capital gain (P45,790 x 50%) . P22,895 Net capital loss carry-over (P3,065) ( 3,065)Taxable net income before personal exemption P 48,900 P 105,530

Problem 7 – 201. Not in the choices = P270,000 Year 1 Year 2

Ordinary taxable income P 60,000 P180,000Short-term capital gain (loss) (P400,000) P200,000Long-term capital gain (loss) (P600,000 x 50%): (P100,000 x 50%) 300,000 (50,000)NOLCO – applicable (P100,000) (60,000)Net capital gain P 90,000Taxable income before personal exemption P 60,000) P270,000

2. BOrdinary taxable income P180,000Short-term capital gain (loss) P200,000Long-term capital gain (loss) (100,000)Net capital gain P100,000Taxable income before personal exemption P280,000

Problem 7 – 21 A

JewelryM. Benz Car – long term (50%)RefrigeratorFord Car

Selling PriceP 80,000400,0006,00012,000

Cost & ExpensesP 11,000370,0005,00020,500

Net Capital GainP 69,00015,0001,000 (8,500)P76,500

Problem 7 – 22 AZero. If BPI is a dealer of debt and equity securities, the transactions related to securities are not capital asset transactions but ordinary transactions, hence there is no net capital gain.Problem 7 – 23 A

Sales of shares of stock P400,000Basis of shares of stock (lower) ( 50,000)

Gain on sale P350,000Problem 7 – 24 A

Capital gains of November sales (P150,000 – P120,000) P30,000Multiplied by capital gains tax rate 5%Capital gains tax P 1,500

Problem 7 – 25 AGain per share (P110 – P100)Number of shares of stock sold outside stock exchangeCapital gain – not traded in local stock exchangeFinal tax rate, 5% for the first P100,000 gainCapital gains tax

P 10 1,000P10,000 5%P 500

Note: The shares of stock sold in the Philippine stock exchange are subject to percentage tax of ½ of 1%.

Problem 7 – 261. A

Tax due and payable (P500,000 x .005) P2,500

2. DGross profit (P500,000 x 30%) P150,000Other expenses (P3,800 + P200) 4,000Net taxable gain P146,000Multiplied by normal corporate income tax rate 30%Tax due and payable P 43,800

Problem 7 – 27 DCapital gain (P150 – P125) x 100) P2,500

Problem 7 – 281. D

Sale – March (P120 x 500 shares)Less: Cost (P120,000/ 1,200 shares) x 500 sharesCapital gain

P 60,000 50,000P10,000

2. B Sales – May (P90 x 500) P45,000Less: Cost of sales (P70,000 x 500/700) 50,000Loss P 5,000

Nondeductible loss (P5,000 x 300/500) P 3,000

3. BProceeds of liquidation (P100 x 300) P30,000Less: Cost (P45,000 + P3,000) 48,000

Capital loss P18,000

Problem 7 – 291. D

No capital gain on original issuance of company’s own stock even if issued above par

P - 0 -

2. C Capital gain on reissued shares (P23 – P21) x 2,000) P4,000

Problem 7 – 30(1) C

Cost of the new family home (P2,500,000/P4,000,000) x P2,000,000 P1,250,000

(2) BSales proceeds P4,000,000Less: Amount used to acquire new family home 2,500,000Unutilized sales proceeds P1,500,000Multiplied by capital gains tax rate 6%Capital gains tax to be paid P 90,000

Problem 7 – 31 DBasis of new residence P9,000,000

Capital gains tax (P5,000,000 x 6%) P300,000

Since there was no tax exemption, the entire amount of acquiring the new house and lot shall be its cost.

Problem 7 – 32 DZonal value (P700 x 500) – higher P350,000Multiplied by capital gains tax rate 6%Capital gains tax P 21,000

Holding period is not applicable because the property is a real property subject to final tax.

Problem 7 – 33 BCost of original residence P6,000,000Add: Excess of new acquisition cost over sales price (P15,000,000 – P12,000,000) 3,000,000Basis of new principal residence P9,000,000

Problem 7 – 341. C

Final tax (P1,200,000 x 6%) P72,000

2. CCreditable withholding tax (P500,000 x 6%) P30,000

Problem 7 – 35 ASales proceedsMultiply by tax rateCapital gains tax

P500,000 6%P 30,000

Note: If the property is not used in trade or business, only the selling price (not zonal value) shall be used in determining the basis of tax when the property is:a. foreclosed by banks orb. sold by a government corporation.

Problem 7 – 36 BCreditable withholding tax: (P500,000 x 1.5%) x 4 houses P 30,000 (P3,000,000 x 5%) x 2 300,000

P330,000Income tax still due and payable: Total revenue (P500,000 x 4) + (P3,000,000 x 2) P8,000,000 Total costs (P200,000 x 4) + (P1,200,000 x 2) (3,200,000) Gross profit P4,800,000 Operating expenses (2,800,000) Net income P2,000,000 Multiplied by normal corporate income tax rate 30% Income tax due P 600,000 Creditable withholding tax ( 330,000) Income tax still due and payable P 270,000

Problem 7 – 371. A

None. No withholding tax because Goldrich Realty Corporation is the buyer not a seller.2 A

None. No income tax is to be collected from sale of land by the government.

Problem 7 – 381. B

Zonal value P10,000,000Multiplied by capital gains tax rate 6%Capital gains tax P 600,000

2. CSelling price P 6,000,000Multiplied by capital gains tax rate 6%Capital gains tax P 360,000

3. BZonal value P10,000,000Multiplied by creditable withholding tax rate 6%Creditable withholding tax P 600,000

4. BZonal value P10,000,000Multiplied by capital gains tax rate 6%Capital gains tax – final tax P 600,000

Note: Real property tax is different from capital gains tax.

5. CSelling price P6,000,000Multiplied by capital gains tax rate 6%Capital gains tax P 360,000

Problem 7 – 39 ASelling price = P1,000,000.

Problem 7 – 40 BSelling price P1,000,000Less: Cost of real property – lower than unpaid mortgage assumed 400,000Contract price P 600,000

Problem 7 – 41 BDown payment P 120,000Excess of unpaid mortgage assumed by the buyer over the cost of real property (P500,000 – P400,000) 100,000Initial payments P 220,000

Problem 7 – 42 BSelling price P1,500,000Less: Unpaid mortgage assumed by the buyer – lower than cost 300,000Contract price P1,200,000

Selling price P1,500,000Less: Cost of sale 500,000

Gross profit P1,000,000

Reportable income = (gross profit/contract price) x collection (P1,000,000/P1,200,000) x P300,000 P 250,000

Note: The unpaid mortgage has no effect on the reportable income because its value is lower than the cost.

Problem 7 – 43 CSelling price P1,000,000Less: Cost of real property – lower than unpaid mortgage assumed 400,000Contract price P 600,000

Selling price P1,000,000Less: Cost of real property 400,000Gross profit P 600,000

Down payment P 120,000Excess of unpaid mortgage assumed by the buyer over the cost (P500,000 – P400,000) 100,000Initial payments P 220,000

Reportable income = (gross profit/contract price) x collection (P600,000/P600,000) x P220,000 P 220,000

Problem 7 – 44

1. Creditable withholding tax: b. (P1,000,000 x 30 x 3%) P 900,000 c. (P2,500,000 x 40 x 5%) 5,000,000Total creditable withholding tax P5,900,000

Note: Sale of socialized housing of a realtor that is a member of HLURB is not subject to CWT if the sales price is P150,000 per house.

2. Gross profit: (20 x P150,000 x 25%) P 750,000 (30 x P1,000,000 x 30%) 9,000,000 (40 x P2,500,000 x 35%) 35,000,000 P44,750,000Less: Optional standard deduction (P44,750,000 x 40%) 17,900,000Net taxable income P26,850,000Multiplied by corporate tax rate 30%Income tax due P 8,055,000Less: Creditable withholding tax 5,900,000

Income tax still due and payable P 2,155,000

Problem 7 – 451. D

Sales in the regular course of businessAdd: Sales of ordinary asset (lot used as warehouse)Total sales of ordinary assetsLess: Cost of sales Cost of lotOrdinary gains / income

P300,000 150,000

P500,000 200,000P700,000 450,000P250,000

2. BSales of residential house and lotProceeds applied for the acquisition of new residential house and lotAmount subject to final withholding taxFinal tax rateFinal tax

P1,000,000

800,000P 200,000 6%P 12,000

Problem 7 – 46Not-traded in Local Stock Exchange:

1. FIFO Method: Sales proceeds (P200 x 350) Less: Cost of shares sold: December 2005 purchased (P86.96 x 100) February 2006 purchased (P104.35 x 250) Gain on sale on investment on stock Multiplied by percentage of tax Tax due and payable

P 8,696.00 26,087.50

P 70,000.00

34,783.50P 35,216.50 5%P 1,760.83

Note: The new cost per share due to 15% stock dividends is computed as follows:

December 200A purchase (P10,000/115)

February 200B purchase (P36,000/345)

P 86.96

P104.35

2. Moving Average Method: Sales proceeds (P200 x 350) Less: Cost of shares sold (350 x P100) Gain on sale of investment in stock Multiplied by percentage of tax Tax due and payable

P 70,000 35,000P 35,000 5%P 1,750

*Computation of the new cost per share would be:

Investment in common stocks:

December 15, 200AFebruary 24, 200BTotalsAdd: 15% stock dividendsBasis of cost per shareDivide by number of shareNew cost per share

No. of Shares100300400 60460

Cost/ shareP100P120

AmountP10,000 36,000P46,000 .P46,000 460P 100

Problem 7 – 47Sales (P150 x 1,000) P150,000Cost (P80 x 1,000) ( 80,000)Gross profit P 70,000Gross profit rate (P70,000/P150,000) 47.667%Percent of initial payment (P30,000/P150,000) 20.00%

200A (P30,000 x 46.667%) x 5% P700.00200B (P40,000 x 46.667%) x 5% P933.34200C (P40,000 x 46.667%) x 5% P933.34200D (P40,000 x 46.667%) x 5% P933.34

Problem 7 – 481. Initial Payments:

DownpaymentInstallment received in 2006TotalAdd: Excess of mortgage assumed by the buyer over the cost to the seller (P650,000-P600,000)Initial payments

P100,000 200,000P300,000

50,000P350,000

2. Selling Price:Down paymentInstallment payments P200,000 + (P300,000 x 4)Mortgage assumed by the buyerSelling Price

P 100,0001,400,000 650,000P 2,150,000

3. Contract Price:Selling priceAdd: Excess of mortgage assumed by the buyer over the cost to the seller (P650,000 – P600,000)TotalLess: Mortgage assumed by the buyerContract Price

P 2,150,000

50,000P 2,200,000 650,000P 1,550,000

Problem 7 – 49

Option money – not exerciseGain on retirement of bonds[(P1,000,000 x 120%)-P1,000,000]Shares becoming worthless

LossP 5,000

20,000P25,000

Gain

P200,000 .P200,000

Net gain (P200,000 – P25,000) P175,000

Note: The gain or loss on transaction letter c is zero. In the absence of cost, the fair market value is assumed as the cost.

Problem 7 – 50Trinidad is correct. There is a tax savings of P100,000 for opting to pay final taxes.

Final tax (P3,000,000 x 6%) P 180,000Normal tax (P3,000,000 – P2,200,000) x 30% ( 240,000)Tax savings ( P60,000)

Problem 7 – 51No, because the Loakan Corporation is not an individual taxpayer.

Problem 7 – 521. Individual taxpayer Year 1 Year 2 Year 3 Year 4

Operating gain (loss) (P100,000) P50,000 P30,000 P80,000 NOLCO (80,000) (20,000)

Capital gain (loss) 20,000 10,000 (40,000) 50,000 NCLCO . (40,000)Taxable income before p.e. ( P80,000) (P20,000) P10,000 P90,000

2. Corporate taxpayerOperating gain (loss) (P100,000) P50,000 P30,000 P80,000 NOLCO (80,000) (20,000)

Capital gain (loss) 20,000 10,000 (40,000) 50,000 .

Taxable income before p.e. ( P80,000) (P20,000) P10,000 P130,000

Problem 7 – 531. M – as an individual taxpayer

200A 200B 200C 200D 200EBusiness income P 200,000 P400,000 P450,000 P520,000 P600,000Business expenses 300,000 350,000 400,000 500,000 500,000

Ordinary income (loss) (P100,000) P 50,000 P 50,000 P 20,000 P100,000NOLCO . ( 30,000) . . .Net ordinary income (loss) (P100,000) P 20,000 P 50,000 P 20,000 P100,000Capital asset transactions:Short-term gain (loss) – 100% P 120,000 (P100,000) P - 0 - P 70,000 P 50,000Long term gain (loss) – 50% ( 50,000) 90,000 10,000 (100,000) - 0 -Net capital gain (loss) P 70,000 (P 10,000) P 10,000 (P 30,000) P 50,000NCLCO . . ( 10,000) . ( 30,000)Reportable net capital gain P 70,000 P 20,000Taxable income before exemption

(P 30,000) P 20,000 P 50,000 P 20,000 P120,000

2. M – as a corporate taxpayer 2005 2006 2007 2008 2009

Business income P 200,000 P400,000 P450,000 P520,000 P600,000Business expenses 300,000 350,000 400,000 500,000 500,000Ordinary income (loss) (P100,000) P 50,000 P 50,000 P 20,000 P100,000NOLCO . ( 50,000) ( 30,000) . .Net ordinary income (loss) (P100,000) P - 0 - P 20,000 P 20,000 P100,000Capital asset transactions:Short-term gain (loss) P 120,000 (P100,000) P - 0 - P 70,000 P 50,000Long term gain (loss) ( 100,000) 180,000 20,000 ( 200,000) - 0 -Net capital gain (loss) P 20,000 P 80,000 P 20,000 (P130,000) P 50,000Reportable net capital gain P 20,000 P 80,000 P 20,000 P 50,000Taxable income (P 80,000) P 80,000 P 40,000 P 20,0000 P150,000

Problem 7 – 541. Sales price P5,000,000

Less: Cost of sale 4,000,000Gross income P1,000,000Multiplied by percent of collection (P2,000,000 + P500,000)/5,000,000 50%Reportable gross income in 2009 P 500,000

2. Collection (P2,500,000/5) P500,000Multiplied by percent of gross income (P1,000,000/P5,000,000) 20%Reportable gross income in 2010 P100,000

3. Sales price P5,000,000Less: Cost of sale 4,000,000Gross income P1,000,000

Note: The 25% initial payment rule does not apply for the regular installment sale of personal property (inventory). The 25% initial payment rule applies only to the casual sale of personal property classified as capital asset and sale of real property.

Problem 7 – 551. Capital gains tax (P3,000,000 – P2,000,000) x 6% P 60,000

2. Basis of the new residential home (P1,200,000 x 2/3) P800,000

3. Capital gains tax (P3,000,000 x 60%) P180,000

4. Basis of the new residential home P2,000,000

Problem 7 – 561. Down payment (P3,000,000 x 20%) P 600,000

Add: Excess of mortgage over cost (P1,200,000 – P700,000) 500,000Initial payment P1,100,000

2. Selling price P3,000,000Add: Excess of mortgage over cost 500,000Total P3,500,000Less: Mortgage assumed by the buyer 1,200,000Contract price P2,300,000

3. Capital gains tax in 2009 (P3,000,000 x 6%) P180,000

Note: The sale is considered cash sales because the initial paymentis 37% of the selling price.

Problem 7 – 571. Deductible loss – Feb. 14, 2009 P - 0 -

2. Sales P320,000Less: Cost of sales (P450,000 x 8/9) 400,000Nondeductible loss – Feb. 14, 2009 P 80,000

3. P294,444

4. P215,556Jan. 20 Feb. 10

Original cost P250,000 P180,000Add: Nondeductible loss 44,444 Jan. 20: (P80,000 x 5/9) 35,556 Feb. 10:: (P80,000 x 4/9) . .New cost P294,444 P215,556

5. Sales (P60 x 4,000) P240,000

Less: Cost of sales: Jan. 10: (P50 x 1,000) P 50,000 Jan. 20: (P294,444 x 3/5) 176,667 226,667Capital gain P 13,333

Problem 7 – 581. FMV of ordinary shares (P25 x 30,000) P 750,000

FMV of preference shares (P50 x 5,000) 250,000Total FMV of shares of stock received P1,000,000Less: Cost of investment in A Co. transferred (P9 x 100,000) 900,000Nontaxable gain P 100,000

2. Basis of new shares – allocated Ordinary PreferenceBasis of ordinary shares (P900,000 x 75/100) P675,000Basis of preference shares (P900,000 x 25/100) P225,000

3. Selling price – ordinary shares (P25 x 25,000) P625,000Less: Cost – ordinary shares - allocated 675,000 (P50,000)Selling price – preference shares (P60 x 5,000) P300,000Less: Cost – preference shares – allocated 225,000 75,000Net gain P 25,000

4. Total sales price (P625,000 + P300,000) P925,000Multiplied by percentage tax 0.005Percentage tax P 4,625

5. Capital gains tax (P25,000 x 5%) P 1,250

6. Tax advantage (P4,625 – P1,250) P 3,375

Problem 7 – 591. B Co. ordinary shares with FMV of P220,000

Land with FMV of 50,000Cash 20,000Total P290,000Less: Cost of A Co.’s shares transferred 200,000Total gain P 90,000

Taxable gain (is limited to the FMV of land and cash) P 70,000

2. Cost of A Co.’s shares transferred P200,000Add: Cash received P20,000 FMV of land received 50,000 70,000Balance P270,000

Gain recognized in the exchange 70,000Basis of B Co. shares received P200,000

3. Basis of land received – FMV of land P 50,000

4. Capital gains tax of land (P300,000 x 6%) P 18,000

5. Sales price P220,000Less: Cost 200,000Taxable gain P 20,000

CHAPTER 8DEDUCTIONS FROM GROSS INCOME

Problem 8 – 1 DEDUCTIBLE OR NONDEDUCTIBLE FROM GROSS INCOME

1. Deductible11. Nondeductible

2. Nondeductible 12. Deductible3. Nondeductible 13. Deductible4. Deductible, in lieu of tax credit (Sec. 34C3, NIRC) 14. Deductible5. Deductible 15. Nondeductible6. Nondeductible 16. Nondeductible7. Nondeductible 17. Nondeductible8. Deductible 18. Deductible9. Deductible 19. Deductible10. Nondeductible 20. Deductible

Problem 8 – 2 TRUE OR FALSE1. True2. True3. False – Business expenses related to business income outside the Philippines is deductible also.4. False – Business expense is deductible from gross income.5. True6. True 7. True – Once OSD is opted, no capital loss could be deducted from capital gain.8. False – Some business expenses are nondeductible or subject to limit.9. False – Income outside the Philippines by a NRC is not taxable in the Philippines, hence, no

allowable deduction is allowed.10. True11. False – Compensation income is not subject to OSD.12. False – NOLCO is not an itemized deduction.13. True – Amortized over the term of the lease14. False – ½ of 1%15. False – 33%

16. False – Double –declining method17. True18. True

Problem 8 – 3 Problem 8 – 4 Problem 8 – 5 Problem 8 – 6 1. B 1. C 1. A 1. A2. No choice, OSD=40% 2. A 2. A 2. C3. D 3. D 3. C 3. A4. D 4. A 4. C 4. C5. D 5. B 5. A 5. C6. C 6. B 6. D 6. C7. B 7. A 7. C 7. B8. D 8. A 8. A 8. C9. B 9. D 9. B 9. C10. C 10. A 10. C 10. C11. C 11. D12. D 12. B13. C

Problem 8 – 7 CExpensed Capitalized

Change of motor of air condition P60,000Repainting of building P10,000Expansion of store 50,000Cleaning of computers 9,000Repair of furniture 1,000 .

P20,000 P110,000Problem 8 – 8 A

Salaries net of tax P100,000Withholding tax 5,000Deductible business expense P105,000

Problem 8 – 9 AGeneral rule: No personal or business expense is deductible from compensation income.

Problem 8 – 10 DDepreciation expense (P1,000,000 x 40%)/25 P16,000Loss of business equipment 38,000Deductible expense P54,000

Problem 8 – 11 D1. A

No personal or business expense is deductible.

2. BDepreciation (P20,000 x 10%) P 2,000

Repair (P100,000 x 10%) 10,000Office supplies 6,000Total deduction P18,000

Problem 8 – 12 B Tax laws GAAP

Salary expense (P180,000 + P20,000) P200,000 P200,000Estimated uncollectible accounts 10,000Compromise penalty 50,000Depreciation expense 30,000 30,000Miscellaneous expense . 5,000Deductible from earnings P230,000 P295,000

Note: For tax purposes, the miscellaneous expense is not deductible because it was not reported last year. For accounting purposes, the miscellaneous expense can be deducted as prior period adjustment from retained earnings.

Problem 8 – 13 CGross income (P300,000 + P20,000 + P180,000) P500,000Multiplied by OSD rate 40%Optional standard deduction P200,000

Problem 8 – 141. B

Gross income (P870,000 – P10,000 – P380,000)) P480,000Add: Gains from sale of capital asset 40,000Total P520,000Multiplied by OSD rate 40%Optional standard deduction P208,000

2. B OSD P208,000Less: Operating expense 20,000Amount of income enjoying tax savings P188,000

Problem 8 – 15 DGross receipts from profession P100,000Rent income 450,000Total gross income P550,000Multiplied by percent of OSD 40%Optional standard deduction P220,000

Problem 8 – 16 COperating expense before representation expense (P2,000,000 – P300,000) P1,700,000

Representation expense – Actual P300,000 - Limit (P20,000,000 x 0.005) 100,000 - Lower 100,000Allowable itemized deductions P1,800,000

Problem 8 – 17 BSalary expense P120,000Rent expense 24,000Advertising expense 6,000Depreciation expense 5,000Interest expense 60,000Tax differential on interest income (P30,000 x 33%) ( 9,900)Total itemized deductions P205,100

Problem 8 – 18 AGross salaries of employees P6,000,000Grossed-up monetary value of fringe benefits 1,000,000Deductible salaries and fringe benefits expenses P7,000,000

Problem 8 – 19 DAllowable deduction – fringe benefit expense (P102,000/68%) P150,000

Problem 8 – 20 DAssume bonus is computed after tax but before bonus. The answer is letter D = P8,143, computed as follows:

Net income before charitable contribution (P75,000 + P5,000) P 80,000Less: Deductible contribution (P80,000 x 5%) – lower of actual 4,000Net income before income tax and bonus P 76,000

B = 15% (76,000 – T)T = 30% (76,000 – B)B = 15% [76,000 – 30% (76,000 – B)]B = 15% (76,000 – 24,320 + 30%B)B = 11,400 – 3,420 +0.045BB – 0.045B = 7,9800.952B = 7,980/0.955B = 8,356

Proof:Income before bonus and tax P76,000Less: Income tax (P76,000 – P8,356) x 30% 20,293Income after tax but before bonus P55,707Multiplied by rate of bonus 15%Bonus P 8,356

Problem 8 – 21 BMonthly salary P 5,000Death benefits 50,000Terminal pay 25,000Continuous compensation after the burial for three months 15,000Total deductible expenses P95,000

Note: Donation for coffin and other wake expenses is not business or compensation related and, hence, not deductible. (Sec. 72, Rev. Regs. 2)

Problem 8 – 22 CInventoriable cost Supplies expense

Purchases P300,000 P40,000Decreased in inventory 20,000Increased in inventory . ( 3,000)

P320,000 P37,000Problem 8 – 23 D

Traveling expenses (P50,000 + P200,000) P250,000Fringe benefit expense (P68,000/68%) 100,000Transportation expense – messenger 40,000Total allowable expense P390,000

Problem 8 – 24 DTotal rent expenses paid P150,000Rent last year (10,000)Prepaid rent (20,000)Deductible rent expense P120,000

Problem 8 – 25 CMonthly rent (P20,000 x 60%) x 2 mos from Oct. 31 to Dec. 31 P24,000Insurance premium (P3,000 x 60%) x 2/12 300Real property tax (P1,500 x 60%) x 2/12 150Deductible rent expense P24,450

Note: The city services is not a rent expense.

Problem 8 – 26 B1. B Accrual Cash Rent for 6 months based on usage (P20,000 x 6) x 80% P96,000 Rent based on usage and payments (P80,000 x 80%) P64,000

2. A Actual cash collection for rent P150,000 P150,000

Problem 8 – 27 DMonthly rental expense P2,000Monthly depreciation (P600,000/8)/ 12 6,250Monthly deductible expense P8,250

Problem 8 – 28 1. B Trading - Limit lower (P5,000,000 x .005) P25,000

2. C Servicing – actual lower P30,000

Problem 8 – 29 BOperating Expense before representation P80,000Representation expense (P300,000 x .01) 3,000Deductible operating expense P83,000

Problem 8 – 30 CInterest expense P40,000Tax differential (P50,000 x 33%) (16,500)Deductible interest expense P23,500

Problem 8 – 31 DSole proprietor Corporation

Interest expense P50,000 P50,000Tax differential (P30,000 x 38%) (11,400) (P30,000 x 33%) . (9,900)Deductible interest expense P38,600 P40,100

Problem 8 – 32 BDeductible Nondeductible

Interest paid in advanced P 20,000Interest paid to a brother 12,000Interest paid on deliquency taxes P 8,000Interest on borrowings to finance his family home 30,000Interest paid to finance petroleum exploration . 100,000Total P 8,000 P162,000

Problem 8 – 33 ATax savings from interest expense (P100,000 x 30%) P30,000Final tax on interest income (P1,000,000 x 12%) x 20% 24,000Actual tax savings P 6,000

Problem 8 – 34 ADocumentary stamp taxes P 1,000Local tax (P6,000 – P800 – P200) 5,000Municipal tax 2,000Community tax 1,500Deductible taxes P9,500

Note: The fringe benefit income taxes to key officers and rank-in-file employees are to be classified as deductible fringe benefit expense and not tax expense.

Problem 8 – 35 DUnadjusted net income (P520,000 – P200,000) P320,000Add back: Income tax foreign country 10,000Adjusted net income P330,000Personal exemption (50,000)Net taxable income P280,000

Note: The P10,000 income tax paid to foreign country is better to be treated as tax credit rather than as operating expense.Problem 8 – 36 A

Asset of Oliva P 60,000Payment to government (P200,000 x 50%) (100,000)Balance (P40,000)

Deductible bad debts is the entire amount of collectibles P100,000

Problem 8 – 37 BBad debts from business actual written off (P100,000 x 40%) P40,000Bad debts from profession actual written off 50,000Deductible bad debts expense P90,000

Problem 8 – 38 D

Annual depreciation expense (P50,000 – P5,000)/5 P9,000Multiplied by ratio of months used during the year 1/2Depreciation expense 200B P4,500

Problem 8 – 39 AAnnual depreciation (P2,300,000/11.5 years) P200,000Multiplied by ratio of months used in 2007 (July 1 to Dec.) 6/12Depreciation expense P100,000

Problem 8 – 40 DOil drilling machine (P800,000 x 90%) / 8 years P 90,000Oil extracting machine (P900,000 x 90% / 10 years – limit 81,000Computers (P100,000 x 90%)/4 years 22,500

Delivery truck (P200,000 x 90%)/ 5 years – limit 36,000Annual depreciation expense P229,500

Problem 8 – 41 CDepletion base (P6,000,000 – P1,000,000 + P300,000) P5,300,000Divided by number of extractible estimated tons 5,000,000Depletion per ton P 1.06Multiplied by number of tons extracted during the year 800,000Depletion expense P 848,000

Problem 8 – 42 1. D

Depletable costs, January 1, 200x P12,500,000Exploration costs 1,000,000Intangible development costs 1,500,000Total P15,000,000Less: Depletion expense (P15,000,000/7,500,000) x 1,200,000 2,400,000Adjusted basis P 1,260,000Divided by remaining reserves (5,000,000 + 2,500,000 – 1,200,000) 6,300,000New depletion rate/ unit P 2.00

2. ADepletion cost 2007 (P2 x 1,200,000 units) P2,400,000

3. BValue of production (P12 x 1,200,000 units) P14,400,000Less: Production and selling costs: Mining costs P2,000,000 Milling costs 3,000,000 Marketing expenses 1,500,000 Depreciation expense 1,000,000 7,500,000Net income from operation P 6,900,000Multiplied by limit percentage 25%Deductible amount fro exploration and development cost P 1,725,000

4. BCurrent exploration and development cost (P1,500,000 + P1,000,000) P2,500,000Less: Deductible amount of exploration and development cost (see 3) 1,725,000Exploration and development cost chargeable to succeeding years P 775,000

Problem 8 – 43 BDeductible expense: Capitalized Outright expenseDepreciation expense (P10,000,000 x 90%)/50 P180,000Capital outlay P10,000,000

Problem 8 – 44 1 B 200A 200B 200C

Lower of actual contribution or normal valuation 800,000 800,000 500,000Add: Amortization of excess 200A (P200,000/10) 20,000 20,000 20,000 200B (P100,000/10) . 10,000 10,000Deductible retirement expense 820,000 830,000 530,000

2. A 200A 200B 200CActual retirement payments 0 400,000 300,000

Problem 8 – 45 P610,000 = Not in the choices Year X Year Y

Actual contribution or normal valuation, lower 700,000 600,000Add: Amortization (P100,000/10) 10,000 10,000Deductible retirement expense 710,000 610,000

Note: Only the excess of the actual contribution over the normal valuation is to be amortized over 10 years.

Problem 8 – 46 BAllowed deductible contribution (P200,000 x 5%) P10,000

Problem 8 – 47 CAllowed deductible contribution – actual P5,000

Problem 8 – 48 BIncome before charitable contribution (P500,000 – P130,000) P370,000Multiplied by percent of limit 5%Allowed deductible contribution - lower P 18,500

Problem 8 – 49 CActual value of donation – priority program P1,000,000Adopt a school program – incentive (P1,000,000 x 50%) 500,000Deductible donation P1,500,000

Problem 8 – 50Net sales P5,000,000Less: Cost of goods manufactured and sold: Raw materials used: Raw materials, beginning P 200,000 Net purchases of raw materials 2,000,000 Raw materials, ending ( 400,000) P1,800,000 Direct labor 600,000 Factory overhead: Indirect labor – factory supervisor P 120,000

Depreciation (P100,000 x 90%) 90,000 Light and water (P150,000 x 80%) 120,000 Miscellaneous factory expenses 20,000 350,000 Cost of goods manufactured P2,750,000 Finished goods, ending ( 750,000) 2,000,000Gross income P3,000,000Less: Optional standard deduction (P3,000,000 x 40%) 1,200,000Income from operations P1,800,000

Problem 8 – 51 1. Salaries of barbers P200,000

Depreciation of barbershop equipment 50,000Cost of service P250,000

2. Rent expense P 20,000Utility expense 30,000Janitorial expense 15,000Bookkeeping expense 10,000Itemized deductions P 75,000

Problem 8 – 52 Salaries of assistants P 96,000Traveling expenses 11,000Light and water – office 7,890Stationeries and supplies 1,960Office rent 60,000Total operating expenses before contribution P176,850Add: Contribution subject to limit (P500,000 – P176,850) x 10%) 32,315Allowable itemized deductions P209,165

Problem 8 – 53 Sole Proprietorship Corporation Partnership

Bad debts written-off (P35,000 – P30,000)Depreciation expense (P140,000 – P100,000)Donation to the government – priority programDonations subject to limit: Lower of actual, P170,000 or (P2,500,000 x 10%) (P2,500,000 x 5%)Total allowable deductions

P 5,00040,00050,000

170,000 . P 265,000

P 5,00040,00050,000

125,000P 220,000

P 5,00040,00050,000

125,000P 220,000

The research and development cost is to be treated as a deferred expense, hence, its amortization shall be made in the succeeding five years when the taxpayer realizes benefits from such expenditures (Sec. 341, NIRC).

Problem 8 – 54 1. Operating expenses (1,000,000 x 30%) – P50,000 P250,000

Interest expense (P50,000 – (P40,000/80%) x 33%] 33,500Total itemized deductions P283,500Add: NOLCO 500,000Total deductible expenses P783,500

Note: NOLCO is not an itemized deduction but part of deductible expenses.

2. Gross income (P5,000,000 – P2,000,000) P3,000,000Multiplied by OSD rate 40%OSD P1,200,000

Note: NOLCO is not allowed to be deducted if the taxpayer uses OSD.

3. Gross income P3,000,000Less: OSD 1,200,000Net taxable income P1,800,000

Problem 8 – 55 1. 200A 200B

Actual contribution or normal valuation, lower 1,000,000 900,000Add: Amortization - 200A (P250,000/10) 25,000 25,000Deductible retirement expense 1,025,000 925,000

2. Financial net income 50,000,000 60,000,000Add: Retirement benefit expense – accounting 1,100,000 1,200,000Total 51,100,000 61,200,000Less: Deductible retirement expense – taxation 1,025,000 925,000Net income for tax purposes 50,075,000 60,275,000

Problem 8 – 56 Corporation Individual

Salary expenses 500,000 500,000Retirement (P250,000 + P50,000/10) 255,000 255,000Representation expense (P10,000,000 x .005) 50,000 50,000Interest expense paid to the BIR - full 20,000 20,000Interest expense – limit: Corporation (P100,000 – (P96,000/80%) x 33%) 60,400 Individuals (P100,000 – (P96,000/80%) x 38% 54,400

Depreciation expense 40,000 40,000Rent expense 250,000 250,000Group insurance expense 50,000 50,000Bad debts expense (P100,000 x 20%) 20,000 20,000Contribution expenses: TESDA priority project (500,000 x 1.5) 750,000 750,000 Local government – limit (lower is actual) 100,000 100,000Total itemized deductions 2,095,400 2,089,400

Note: NOLCO is an allowable special deduction but not an itemized deduction.

Problem 8 – 57 1. Individual Corporation

Salaries expense (P680,000 – P100,000) 580,000 580,000Bad debts expense (P370,000 – P270,000) 100,000 100,000Retirement expense (P1,000,000 – P380,000) 620,000 620,000Representation expense (P39,000,000 x 0.005) 195,000 195,000Rent expenses (P200,000 – P20,000) 180,000 180,000Taxes expense (P300,000 – P270,000) 30,000 30,000Life insurance expense (P150,000 – P100,000) 50,000 50,000Total itemized deduction before contributions 1,755,000 1,755,000Contribution expenses: Donation to TESDA priority project (P500,000 x 150%) 750,000 750,000 Donations to CHED not priority project (P200,000 actual is lower + 50% of actual) 300,000 300,000 Donations to government (P100,000 actual is lower) 100,000 100,000 Ind: (P39,000,000 – P30,000,000 – P1,752,500) x 10%=724,500 Corp: (P39,000,000 – P30,000,000 – P1,752,500) x 5%=362,250 . .Total allowable deductions 2,905,000 2,905,000

Computation of sales:Financial income P 5,000,000Cost of sales 30,000,000Operating expenses deducted (P680,000 + P370,000 + P1,000,000 + P800,000 + P500,000 + P200,000 + P300,000 + P150,000) 4,000,000Total sales P39,000,000

2. Individual Corporation Gross income (P39,000,000 – P30,000,000) P9,000,000 P9,000,000Less: Total allowable deductions 2,905,000 2,905,000Net taxable income P6,095,000 P6,095,000

CHAPTER 9LOSSES

Problem 9 – 1 TRUE OR FALSE1. False – Capital loss2. False – not deductible3. False – lower amount of the replacement cost or book value4. True5. True6. False – Deductible from gambling gains only.7. True8. True9. True10. False – Not deductible because the property has been sold.11. True12. True13. True14. False – deductible only to either income or estate15. False – NOLCO is not applicable when OSD is used.16. False – NOLCO is not applicable under MCIT.

Problem 9 – 2 1. C 5. D 9. A2. C 6. A 10. C3. D 7. D, P10,000 only 11. B4. C 8. A 12. C

Problem 9 – 3 BLoss from sale of business equipment P100,000

Problem 9 – 4 ALoss on sale of capital assets is not deductible from business income.

Problem 9 – 5 CDeductible loss – Book value (P100,000 x 10% x 4) P 40,000

Problem 9 – 6 DDeductible loss – book value lower than replacement cost P 50,000

Problem 9 – 7 DNet operating loss per GAAP P 50,000Less: Bad debts estimate 10,000NOLCO in the succeeding years P 40,000

Problem 9 – 8 D

Zero. An individual who claims the 10% optional standard deduction shall not simultaneously claim deduction of the NOLCO.

Problem 9 – 9 P25,000. The lower between the carrying value and replacement cost.

Problem 9 – 10 Book value (P1,200,000) x10/20 P600,000Less: Insurance recovery P200,000 Scrap recovered 20,000 220,000Deductible loss P380,000

Problem 9 – 11 None, because the demolition cost, net of amount realized from scrap should be capitalized as part of the factory building cost.

Problem 9 – 12 No deductible loss at balance sheet date. On June 30, the reportable gain would be P10,000, (110,000 – 100,000).

Problem 9 – 13 Net loss reported P 50,000Estimated bad debts ( 20,000)Warranty expense ( 10,000)Net loss carry-over P 20,000

Problem 9 – 14 Gross profit – year 1 P500,000Less: Other operating expenses 580,000NOLCO for year 2 P 80,000

Problem 9 – 15 Year 1 Year 2

Sale P1,800,000Less: Cost – Notes receivable 1,500,000Gain P 300,000

No gain or loss on year 1 because there was no actual sale of foreclosed property.Problem 9 – 16 None, because the floss should be recognized only upon actual sale of the property foreclosed.

Problem 9 – 17 None. Gambling losses can only be deducted from the gambling winnings. Gambling transactions is not an ordinary business transactions, but a capital asset transaction. Accordingly, gambling losses is not an allowable deduction from ordinary gross income.

Problem 9 – 18 Compensatory liquidated damages P 50,000Loss on robbery (construction supplies) 50,000Loss on pilferage of business supplies 10,000Replacement cost of damaged portion of machine 150,000Deductible loss P260,000

Problem 9 – 19 1. OSD (P2,000,000 x 40%) P800,000

2. OSD (P2,000,000 – P500,000) x 40% P600,000

Problem 9 – 20 1. Gross income (P2,000,000 – P1,000,000) P1,000,000

Multiplied by MCIT rate 2%Income tax due – MCIT P 20,000

2. NOLCO for year 200E P - 0 -

Note: The 3 year reglamentary period for NOLCO shall not be suspendedeven if MCIT has been used. NOLCO has expired effectively on 200E.

Problem 9 – 21Ordinary Capital

Pilferage loss P5,000Capital loss on sale of capital asset P10,000Casualty loss . 15,000Total deductible loss P5,000 P25,000

Note: It would be more appropriate to classify casualty loss as capital loss because such loss is not an ordinary or regular loss, unless the problem stated that the loss is an ordinary asset.

Problem 9 – 25 Cost of the building P10,000,000Less: Accumulated depreciation (P10,000,000/30) x 5 1,666,667Book value before additions and improvements P 8,333,333Add: Additions and improvements 500,000Total P 8,833,333Less: Accum depn (P8,833,333/25) x 3 1,060,000Book value P 7,773,333Less: Insurance collected P5,800,000 Salvage value 300,000 6,100,000Deductible loss P 1,673,333

Problem 9 – 26 Death of livestock previously purchased P10,000Cost of property expropriated by the government (P30,000 – P10,000) 20,000Total deductible farm loss P30,000

CHAPTER 10BASIC INCOME TAX PATTERNS

Problem 10 – 1 TRUE OR FALSE1. True2. False - General professional partnerships are tax-exempt.3. False – Not taxable income the Philippines because the passive income is earned outside the

Philippines.4. True5. False – The excess of personal exemption over compensation income is to be deducted from net

income from business.6. True7. False – Decrease by creditable taxes.8. True9. False – passive income is not subject for deductions.10. True11. False – There should be a combination of various income subject to the same tax rate irrespective

of personal exemption.12. False – Taxable only for income earned within.13. False – net income or income from operation.14. False – resident alien could also opt for OSD for business income earned within.15. False – Only P50,000. Siblings are not allowed for additional exemptions.16. False – could claim P150,000.

Problem 10 – 2 1. A 6. C2. B 7. C3. D 8. A4. C 9. C5. C

Problem 10 – 3 DGross compensation income (P137,500 +P22,500) P190,000Less: Personal exemption – single 50,000Net taxable compensation income P140,000

Tax on P140,000 P22,500Less: Withholding tax 22,500

Net tax payable P - 0 -

Problem 10 – 4 CGross compensation income P 90,000Net business income (P200,000 x 60%) 120,000Total net income before personal exemption P210,000Less: Personal exemption – married 50,000Net taxable income P160,000

Problem 10 – 5 BNet income for the first quarter (P50,000 + P60,000 + P70,000) P180,000Less: Optional standard deduction (P180,000 x 40%) 72,000Net business income – first quarter P108,000

Note: No personal exemption yet is allowed to be deducted in the quarterly income tax. The Personal exemption is to be deducted in the 4th quarter in the adjusted ITR.

Problem 10 – 6 DGross profit P1,000,000Less: Operating expenses 400,000Net taxable income P 600,000

Problem 10 – 7 Not in the choicesNet taxable income (P5,500,000 – P2,000,000) P3,500,000Multiplied by corporate income tax rate 30%Income tax due and payable P1,050,000Less: Income tax paid 900,000Net tax payable P 150,000

Problem 10 – 8 CMinimum corporate income tax (P23,500,000 + P1,500,000) x 2%* P 500,000Less: Income tax paid 500,000Net tax refund P - 0 -

“The minimum corporate income tax is greater than the normal tax.

Problem 10 – 9 Compensation P 250,000Business income (P500,000 + P600,000) P1,100,000Less: Business expenses (P200,000 + P300,000) 500,000 600,000Dividend income earned outside the Philippines 100,000Net taxable income before personal exemption P 950,000

Note: the dividend income within is subject to final withholding tax of 10%, and as such, is no longer required to be reported in the annual tax return.Problem 10 – 10

Compensation P 250,000Business income P 500,000Less: Business expenses 200,000 300,000Net taxable income before personal exemption P 550,000

Note: the dividend income is subject to final withholding tax of 10%, and as such, is no longer required to be reported in the annual tax return.

Problem 10 – 11 None. Nonresident alien is taxable only for income earned within. The dividend income within is taxable with final tax of 25%.

Problem 10 – 12 Business income (P500,000 + P600,000) P1,100,000Business expenses (P200,000 + P300,000) ( 500,000)Dividend income – outside 150,000Net taxable income P 700,000

Problem 10 – 13 Business income P 500,000Business expenses ( 200,000)Net taxable income P 300,000

Note: Foreign corporation is taxable only for income within. Dividend income earned within is taxable in the Philippines but shall not be included as part of the annual ITR because such dividend is subject of final tax.

Problem 10 – 14 QUARTERS

First Second Third Fourth Gross income 40% of sale 400,000 320,000 240,000 480,000Operating exp. (40% of gross income) (160,000) (128,000) ( 96,000) (192,000)Net taxable income 240,000 192,000 144,000 288,000Multiplied by normal corporate tax rate 30% 30% 30% 30%Income tax still due 72,000 56,600 43,200 86,400

Note: Even if the previous quarters net taxable income is not carried to the next quarters the income tax still due is the same because the corporate income tax rate is constant at 30%.

Problem 10 – 15 Answers for 1 and 2 requirements: QUARTERS

First Second Third Fourth Gross profit 40% of sales 200,000 240,000 160,000 360,000Rent income 30,000 30,000 30,000 30,000Total gross profit 230,000 270,000 180,000 390,000Operating expenses before int. & cont. (120,000) (150,000) (100,000) (160,000)Deductible interest expense* (5,050) (6,700) (10,050) (8,400)Contribution deductible in full . (20,000) . (40,000)

Net taxable income 104,950 93,300 69,950 181,600Multiplied by corp. income tax rate 30% 30% 30% 30%Quarterly income tax due and payable 31,485 27,990 20,985 54,480

Interest expense 10,000 10,000 15,000 15,000Less: Tax differential (int. income x 33%) 4,950 3,300 4,950 6,600*Deductible interest expense 5,050 6,700 10,050 8,400

Problem 10 – 16Business income P 7,500,000Itemized allowable deductions ( 4,000,000)Capital gains 200,000Passive income earned outside the Philippines 100,000Net taxable income P 3,800,000Multiplied by corporate income tax rate 32%Income tax due P 1,216,000Less: Total income taxes paid in the previous quarters P 800,000 Income tax withheld per BIR form 2307 40,000 840,000Income tax still due and payable P 376,000

3. Royalty income (P60,000 x 20%) P12,000 Interest income (P15,000 + P10,000 + P15,000 + P20,000) x 20% 12,000 Total passive income tax P24,000

Problem 10 – 17 Total salary income (P16,000 + P4,000) x 12 P240,000First three quarters taxable business income (P300,000 + P90,000) 390,000Last quarter’s net taxable business income 110,000Total net income before personal exemption P740,000Less: Personal exemption – single 50,000Net taxable income P690,000

Income tax on P500,000 P125,000Income tax on excess (P190,000 x 32%) 60,800Total income tax per ITR P185,800Add: Final withholding tax on interest income 2,000Annual income tax P187,800

CHAPTER 11INCOME TAX OF INDIVIDUALS

Problem 11 – 1 TRUE OR FALSE1. False – Qualified dependent parents and siblings are not entitled for additional exemption.

2. False – must be more than 180 days.3. False – NRA NBT are not allowed for personal exemptions.4. True5. True6. True7. True8. True9. True10. True11. False – No personal exemption is allowed to NRANEBT.12. True

Problem 11 – 2 TRUE OR FALSE1. False – additional exemptions are allowed only for qualified dependent children.2. False – not payment for hospitalization but payment of premium for health and hospitalization

insurance provided that the family income does not exceed P250,000 per year.3. True4. False – 15% of gross income5. False – creditable withholding income tax.6. False – qualified dependent parent and siblings are not entitled for additional exemption.7. False – Tax credit of income taxes paid outside the Philippines is allowed only for resident Filipino

citizen.8. False – The creditable withholding tax is 15%.9. False – Gross income includes other income but not compensation income.10. False – Tax-exempt11. True12. True

Problem 11 – 3 Problem 11 – 4 Problem 11 – 51. D 1. D 1. Not in the choices. P25,000 per child (R.A. 9504)2. D 2. B 2. Not in the choices. P50,000 basic (R.A. 9504)3. A 3. C 3. B4. A 4. A 4. C5. A 5. B 5. B6. B 6. D 5. B7. D 7. B 6. A, B & C8. C 8. B 7. D9. C 9. B 8. D10. B 10. A 9. D

10. C

Problem 11 – 6 AIncome from the Philippines (P10,000 x 12) P120,000Less: Personal exemption – single 50,000

Income subject to tax in the Philippines P 70,000

Note: It is assumed that Juan works as OFW for more than 183 days. Income earned by OFW outside the Philippines is not subject to tax in the Philippines. The income from the sari-sari store in the Philippines is earned from January to December of the taxable year.Problem 11 – 7 C

Gross compensation income – Philippines (P250,000 x 12) P3,000,000Multiplied by special income tax rate 15%Income tax payable P 450,000

Problem 11 – 8 ABasic personal exemption of couple: Husband P50,000 Wife 50,000Additional exemptions: 4 qualified dependent children (P25,000 x 4) 100,000Maximum amount of personal exemption P200,000

Problem 11 – 9 COnly P50,000 basic personal exemption because the taxpayer’s category is single.

Problem 11 – 10 BBasic personal exemption – Married P50,000Additional exemption 25,000Total personal exemptions P75,000

Problem 11 – 11 CBasic personal exemption P50,000Additional exemption (a & b only) (P25,000 x 2) 50,000Total personal and additional exemptions P100,000

Problem 11 – 12 ABasic personal exemption – married P 50,000

Nonresident alien engaged in business in the Philippines is allowed of basic personal exemption subject to limit, but additional exemption is not allowed. Personal exemptions for foreigners are subject to the rule of reciprocity with limit of whichever is lower.

Problem 11 – 13 AP200 per month. For the month of December only.

Problem 11 – 14 DNo special deduction is allowed. The family income exceeding P250,000 is not allowed for a special deduction for health insurance.

Problem 11 – 15 DZero. Maria has no income.

Problem 11 – 16 ANo net tax payable at the end of the taxable year because the senior citizen’s income does not exceed P60,000 during the year. The tax withheld from interest income is final tax.

Problem 11 – 17Subject to

1. Not in the choices = P790,000 & P160,000 Tabular tax Final taxCompensation income P240,000Business and other income: Professional income (P300,000 + P200,000) 500,000 Interest income – without 60,000 Dividend income – without 40,000Total net income before personal exemption P840,000Less: Basic personal exemption – single ( 50,000)Net income to ITR – tabular tax P790,000

Interest income within P100,000Dividend income within 60,000Income subject to final tax P160,000

2. ACompensation income P240,000Business income: Professional income 300,000Total net income before personal exemption P540,000Less: Basic personal exemption – single 50,000Net income to ITR – tabular tax P490,000

Interest income within P100,000Dividend income within 60,000Income subject to final tax P160,000

Note: The problem is silent as to whether the taxpayer opted for OSD, hence, OSD should not be deducted from the business gross income. In order to qualify for OSD, the taxpayer should indicate in his return that he is opting OSD instead of itemized deductions. (Sec. 34 (L), NIRC)

Alternative Solution of Prob. 11-17: If X opted to use OSDSubject to

1. A Tabular tax Final taxCompensation income P240,000Business and other income:

Professional income (P300,000 + P200,000) 500,000 Interest income – without 60,000 Dividend income – without 40,000 Total business and other income P600,000 Less: OSD (P600,000 x 40%) ( 240,000) Net business income P360,000Total net income before personal exemption P600,000Less: Basic personal exemption – single ( 50,000)Net income to ITR – tabular tax P550,000

Interest income within P100,000Dividend income within 60,000Income subject to final tax P160,000

2. Not in the choices = P370,000 & P160,000Compensation income P240,000Business income: Professional income, net of OSD (P300,000 x 60%) 180,000Total net income before personal exemption P420,000Less: Basic personal exemption 50,000Net income to ITR – tabular tax P370,000

Interest income within P100,000Dividend income within 60,000Income subject to final tax P160,000

Problem 11 – 18 DHusband Wife

Net taxable income P140,000 P250,000Income tax P 22,500 P 50,000Less: Withholding tax 20,000 45,000Net tax payable P 2,500 P 5,000

Problem 11 – 19 DCompensation as researcher P 600,000Less: Personal exemption – married 50,000Net taxable compensation income P 550,000

Tax on P500,000 P125,000Tax on excess (P50,000 x 32%) 16,000Total income tax from compensation P141,000Dividend income tax (P120,000 x 10%) 12,000Interest income tax (P500,000 x 7.5%) 37,500Total income tax due P190,500

Problem 11 – 20 DCapital gains tax on shares of stock (P80,000 x 5%) P 4,000Capital gains tax on sale of land (P2,000,000 x 6%) 120,000Total capital gains tax paid P124,000

Problem 11 – 21 B1. B

Final tax on copyright royalty (P11,250/90%) x 10% P 1,250Final tax on mineral claim royalty (P12,000/80%) x 20% 3,000Final tax on share from trading partnership as dividend (P270,000/90%) x 10% 30,000Total final tax P34,250

2. Not in the choices None. All reported earnings are subject to final tax.

Problem 11 – 22 BPercent of service 100%Add: Output VAT 12%Total 112%Less: Withholding tax 20%Percent of net proceeds 92%

Net proceeds P 92,000Divided by percent of net proceeds 92%Service fee P100,000

Withholding tax (P100,000 x 20%) P 20,000

VAT (P100,000 x 12%) P 12,000

Problem 11 – 231. A

Salaries of assistantsTraveling expensesLight and water, OfficeStationeries and suppliesOffice rentTotal expenses before contributionAdd: Contribution subject to limit (P500,000 – P176,850) x 10%Total allowable deductions

P 96,00011,0007,8901,960 60,000P176,850 32,315P209,165

2. CProfessional feesLess: Allowable deductionsNet income from businessAdd: Income from compensation:

P500,000 209,165P290,835

Allowance as director of Corporation A CommissionsNet income before personal and additional exemptions

P25,000 5,000 30,000

P320,8353. D

Net income before personal and additional exemptionsLess: Personal and additional exemptions: Basic – widower Additional exemptions (P25,000 x 3 qualified children)Net taxable income

P 50,000 75,000

P320,835

125,000P195,835

Tax on P140,000Tax on excess (P55,835) x 30%Income tax due

P 22,500 13,959P 36,459

Problem 11 – 241. P164,200

Net worth, December 31, 2009Less: Net worth, December 31, 2008Unadjusted Net income for year 2009Add back: Non-deductible expenses Contributions (P20,000 + P50,000)Total Less: Non-taxable incomeIncome before contributionLess: Contributions: Deductible in full With limit Actual, P50,000 Limit, P268,000 x 10% = P26,800 AllowedNet income before personal exemptionsLess: Personal exemptions (P50,000 +p100,000)Net taxable income

P 20,000

26,800

P375,000 325,000P 50,000150,000 70,000P270,000 2,000P268,000

46,800P221,200 150,000P 71,200

2. P140,000Corrected net taxable incomeLess: Reported net income subject to taxUnreported taxable income

P 71,200 24,200P 47,000

Problem 11 – 251. Itemized deduction

Compensation incomeGross income from businessLess: Itemized deductionTotal income before personal exemptions

P 400,000 150,000

P 20,000

250,000P270,000

Less: Personal exemptions Basic personal exemptions Additional exemptions (P25,000 x 4)Taxable income

P 50,000 100,000 150,000

P120,000

Computation of income tax:Tax on P70,000Tax on excess (P50,000) x 20%Income tax before withholding taxLess: Withholding taxIncome tax due and payable

P 8,500 10,000P 18,500 1,000P 17,500

2. Optional standard deductionCompensation incomeGross income from businessLess: Optional standard deduction (40%)Total income before personal exemptionsLess: Personal exemptions Basic personal exemptions Additional exemptions (P8,000 x 4)Taxable income

P 400,000 160,000

P 50,000 100,000

P 20,000

240,000P260,000

150,000P110,000

Computation of income tax:Tax on P70,000Tax on excess (P40,000 x 20%)Income tax before withholding taxLess: Withholding TaxIncome tax due and payable

P 8,500 8,000P 16,500 1,000P 15,500

Problem 11 – 262010 net income from businessCapital gains transactions Short term capital gains (P40,000 x 100%) Long term capital gains (P30,000 x 50%) Short term capital loss (P10,000 x 100%) Capital gains Less: 2009 Capital loss carry over – limit Income before personal exemptions Basic personal exemption- married Additional exemption (P25,000 x 3)Taxable income, 2010

P 40,00015,000 (10,000)P45,000 35,000

P 50,000 75,000

P 600,000

10,000P 610,000

125,000P 485,000

Note: The applicable capital loss carry-over should only be limited to P35,000, because it should not exceed the net income from operation of such year (Sec. 39D, NIRC).

Problem 11 – 271. Compensation income (P240,000 + P30,000) P270,000

Less: Personal exemption (P50,000 + P25,000) 75,000Net taxable compensation P195,000Business income P100,000Less: Business expenses 120,000Net loss from business (P20,000) 0 -Net taxable income P195,000

2. Tax on P140,000 P22,500Tax on excess (P55,000 x 25%) 13,750Income tax due P36,250Less: Tax credit 30,000Income tax still due and payable P 6,250

Problem 11 – 281. Salary (P30,000 x 12) P360,000

Add: Taxable 13th month pay (P35,000 – P30,000) 5,000Total P365,000Less: SSS contribution P3,000 Medicare/Philhealth contribution 2,000 5,000Taxable compensation income before personal exemption P360,000Less: Personal exemption 50,000Net taxable compensation income P310,000

Estimated income tax due:Tax on P250,000 P50,000Tax on excess (P60,000 x 30%) 18,000Total income tax due per year P68,000Divided by number of months in a year 12Monthly withholding tax P 5,667

2. Quarterly business income taxBusiness income per quarterLess: Business expense per quarterNet income per quarter

Tax on P70,000Tax on excess (P10,000 x 20%)Quarterly business income tax first quarter to third quarter

P200,000 120,000P 80,000

P 8,500 2,000P 10,500

Problem 11 – 29

1. Entertainment fee (P1,700,000/85%) P2,000,000Business income Philippines 500,000 Japan 1,000,000Net income before personal exemption P3,500,000Less: Personal exemption - basic P50,000 Additional (P25,000 x 4) 100,000 150,000Net taxable income P3,350,000

Note: The OSD is not used because the problem is silent that the taxpayer opted to utilize it. OSD is allowed only if the taxpayer indicated in his return that he is using it otherwise he is using itemized deduction. If the taxpayer did not indicate that he is using OSD and at the same time he has no itemized deduction, he cannot deduct expenses from his gross business income. (Sec. 34 (L), NIRC)

2. Tax on P500,000 P 125,000Tax on excess (P2,850,000 x 32%) 912,000Income tax due P1,037,000

3. Tax creditCreditable withholding tax on fees (P2,000,000 x 15%) P300,000Business income tax paid - Philippines 40,000Japan (P1,037,000 x 1,000,000/3,500,000)) P296,286 vs. actual P300,000, lower 296,286 P 636,286

4. Income tax still due (P1,037,000 – P636,286)) P 400,714

Alternative Solution of Problem 11-29: If Rosanna Roces opted to use OSD

1. Entertainment fee (P1,700,000/85%) P2,000,000Business income Philippines 500,000 Japan 1,000,000Total gross income P3,500,000Less: OSD (P3,500,000 x 40%) 1,400,000Net income before personal exemption P2,100,000Less: Personal exemption - basic P50,000 Additional (P25,000 x 4) 100,000 150,000Net taxable income P1,950,000

2. Tax on P500,000 P 125,000Tax on excess (P1,450,000 x 32%) 464,000Income tax due P 589,000

3. Tax creditCreditable withholding tax on fees (P2,000,000 x 15%) P300,000Business income tax paid - Philippines 40,000Japan (P589,000 x 594,000*/2,100,000)) P166,603 vs. actual P300,000, lower 166,603 P 506,603

4. Income tax still due (P589,000 – P506,603) P 82,397

Supporting computation of net taxable income before personal exemptions:

Within Outside Total Gross receipts 2,500,000 1,000,000 3,500,000Percent 71% 29% 100%

Allocated OSD x percent 994,000 406,000 1,400,000Net income before personal exemption 1,506,000 594,000 2,100,000

Problem 11 – 30Mr. Bravo Mrs. Bravo

Gross professional income (P100,000/90%) P111,111Rent income (P300,000/2) 150,000 P150,000Gross compensation income 225,000 300,000Total P486,111 P450,000Less: Personal exemptions 150,000 50,000Net taxable income P336,111 P400,000

Tax on P250,000 P 50,000 P 50,000Tax on excess: Mr. Bravo (P86,111 x 30%) 25,833 Mrs. Bravo (P150,000 x 30%) . 45,000Income tax due P 75,833 P 95,000Withholding tax on compensation ( 25,000) ( 50,000)Withholding tax on professional income (P111,111 – P100,000) ( 11,111) .Income tax still due and payable P 39,722 P 45,000

Note: No OSD is allowed because the taxpayer did not opt to use it in lieu of itemized deduction. (Sec. 34 (L), NIRC)

Alternative Solution of Prob. 11-30: If taxpayers opted to use OSD

Mr. Bravo Mrs. BravoGross professional income (P100,000/90%) P111,111Rent income (P300,000/2) 150,000 P150,000Total gross income P261,111 P150,000Less: OSD (40%) 104,444 60,000Net income from business P156,667 P 90,000Add: Gross compensation income 225,000 300,000Total P381,667 P390,000Less: Personal exemptions 150,000 50,000Net taxable income P231,667 P340,000

Tax on P140,000/ P250,000 P 22,500 P 50,000Tax on excess: Mr. Bravo (P91,667 x 25%) 22,917 Mrs. Bravo (P90,000 x 30%) . 27,000Income tax due P 45,417 P 77,000Withholding tax on compensation ( 25,000) ( 50,000)Withholding tax on professional income (P111,111 – P100,000) ( 11,111) .Income tax still due and payable P 9,306 P 27,000

Problem 11 – 311. P290,000

Compensation income P300,000Taxable 13th month pay and bonuses (P40,000 – P30,000) 10,000Net business income (P400,000 – P300,000) 100,000Capital gains – long-term (P60,000 x 50%) 30,000Total P440,000Less: Personal exemptions (P50,000 + P100,000) 150,000Net taxable income P290,000

2. (P8,000)Tax on P250,000 P 50,000Tax on excess (P40,000 x 30%) 12,000Total income tax due P 62,000Less: Income tax paid on: Compensation P 50,000 Quarterly business income 20,000 70,000Income tax refund (P 8,000)

Problem 11 – 32Gross income from business (P1,000,000 – P700,000) P 300,000

Operating expenses (P250,000 – P60,000 – P30,000) ( 160,000) Deductible interest expense (P30,000) – (P20,000 x 12/32) ( 22,500)Deductible contribution (P300,000 – P160,000 – P22,500) x 10% ( 11,750)Net business income P 105,750Capital asset transactions: Capital gains – short-term (P300,000 x 100%) P 300,000 Capital losses – long-term (P400,000 x 50%) 200,000 100,000 Lotto winning, USA 300,000 Gambling winnings P 200,000 Gambling losses (excess cannot be deducted from other income) 250,000Gross compensation income (P180,000 + P20,000) 200,000Taxable 13th month pay (P35,000 – P30,000) 5,000Net taxable income before exemption P 710,750Less: Personal exemptions (P50,000 + P100,000) 150,000Net taxable income P 560,750

Tax on P500,000 P 125,000Tax on excess (P60,750 x 32%) 19,440Total income tax due P 144,440Less: Withholding tax on compensation 20,000Income tax still due and payable P 124,440

Problem 11 – 331. 13th month pay P25,000

Other benefits: Excess of clothing allowance (P4,500 – P4,000) P 500 Excess of rice subsidy (P1,600 – P1,500) x 12 1,200 1,700 Total (not exceeding P30,000) – nontaxable P26,700 Allowable de minimis: Clothing allowance P4,000 Rice subsidy (P1,500 x 12) 18,000 22,000Total 13th month pay and other benefits P48,700

2. Basic salary (P25,000 x 12) P300,000Less: Personal exemptions 150,000Net taxable compensation income P150,000

Tax on P140,000 P22,500Tax on excess (P10,000 x 25%) 2,500Total income tax due P25,000

Withholding tax from January to November 2009 (P25,000/12) x 11 P22,917

3. Net taxable compensation income P150,000Add: Net business income: Professional fees (P224,000/1.12) P 200,000 Gross income from sales (P5,000,000 – P3,200,000) 1,800,000 Less: Itemized deductions: P2,000,000 Operating expenses, net of interest expense (P900,000 – P50,000) P850,000 Interest expense (P50,000 – (P75,000 x 38%) 21,500 871,500 Net income before contribution P1,128,500 Less: Contribution, actual = P100,000, lower Contribution, limit (P1,128,500 x 10%)= P112,850 100,000 1,028,500Net taxable income P1,178,500

Tax on P500,000 P125,000Tax on excess (P678,500 x 32%) 217,120Total income tax due P342,120Less: Tax credits: WTW from Jan to Nov., 2009 P22,917 WT on Professional income (P224,000 – P200,000) 24,000 46,917Income tax still due and payable on December 31, 2009 P295,203

Problem 11 – 34

Note: OSD is not applicable unless the taxpayer signified in his ITR that he opted to use OSD in lieu of itemized deductions. (Sec. 34 (L), NIRC)

Taxpayer is a resident citizen

a. Normal (tabular) tax:Salaries: Philippines U. S. A. Total Within (P180,000/90%) P200,000 Without ($2,250/90%) x P50 P125,000 P325,000Commissions: Within (P57,000/ 95%) 60,000 Without ($950/ 95%) x P50 50,000 110,000Interest income-without 75,000 75,000 ($1,200/80%) x P50Dividend-without ($1,800/90%) x P50 . 100,000 100,000

Totals P260,000 P350,000 P610,000Less: Personal exemption – basic 50,000Taxable income P560,000

Tax on P500,000Tax on excess (P60,000) x 32% TotalLess: Tax credits: Compensation (P200,000 x 10%) Commission (P60,000 x 5%) Allowable tax credit - foreign*Income tax due and payable, after tax credits

P20,0003,000 40,000

P125,000 19,200P144,200

63,000P 81,200

*Allowable tax credit paid outside the Philippines is lower than tax limit or actual tax paid. The tax credit is computed as follows:

Limit (P350,000/P610,000) x P144,200Actual foreign taxes paid: Interest (P75,000 x 20%) Compensation (P125,000 x 10%) Dividend (P100,000 x 10%) Commissions (P50,000 x 5%) Total

Allowable foreign tax credit - lower

P82,738

P15,00012,50010,000 2,500P40,000

P40,000

Note: The actual tax paid outside the Philippines is lower than the computed tax limit; hence, the actual tax paid without is the allowable tax credit.

b. Passive income tax:

Interest income within (P50,000/ 80%) x 20%Dividend income within (P9,000/ 90%) x 10%Total passive income tax for the year

P12,500 1,000P13,500

Note: Philippine Lotto winnings are tax-exempt.

Taxpayer is a nonresident citizen

a. Normal (tabular) tax:

Salaries - within (P180,000/90%)Commissions- within (P57,000/ 95%)Net income

P200,000 60,000P260,000

Less: Personal exemption - basic Taxable income

50,000P210,000

Tax on P140,000Tax on excess (P70,000) x 25% Total tax dueLess: Withholding taxes within (P20,000 + P3,000)Income tax due and payable

P22,500 17,500P40,000 23,000P17,000

b. Passive income tax:

Interest income within (P50,000/80%) x 20%Dividend income within (P9,000/90%) x 10%Total passive income tax for the year

P12,500 1,000P13,500

Note: Nonresident citizens are taxable only on income derived within the Philippines.

Taxpayer is a resident alien. Solution is the same as nonresident citizen.

Taxpayer is a nonresident alien engaged in trade or business in the Philippines.

The taxpayer cannot be regarded as doing business in the Philippines because he has no business income in the Philippines.

If the taxpayer has stayed more than 180 days in the Philippines, he is regarded as doing business. The computation of his net income tax payable in the Philippines will be the same as in number 2 under the assumption that his country is granting the same privilege of reciprocity to nonresident Filipino doing business in that foreign country.

Taxpayer is a nonresident alien not engaged in trade or business in the Philippines.

Nonresident aliens are subject to tax of 25% based on their gross income derived within the Philippines. In our illustration, let us assume that the source of income has been deducted with 25% tax on the income given to the taxpayer - that is, the amount shown in the problem is net of 25% final tax.

The income tax of Mr. Ramsay Colorado would be:

Salaries- within (P180,000/75%) P240,000Commissions- within (P57,000/ 75%) 76,000Interest income within (P50,000/ 75%) 66,667Dividend income within (P9,000/ 75%) 12,000Gross income within P394,667Multiplied by tax rate 25%Income tax for the taxable year within P 98,667

Note: In computing the income tax, a fractional part of a peso less than P0.50 shall be disregarded. If the fractional part is P0.50 or more, its shall be rounded up to P1.00 (R.A. 590).

CHAPTER 12INCOME TAX OF CORPORATIONS

Problem 12 – 1 TRUE OR FALSE1. True2. True3. False – Only domestic corporations are to be taxed for income within and without.4. True5. False – 30% normal tax effective 2009.6. True7. True8. True9. True10. False – Not taxable because the corporation is a foreign corporation/11. False – 30%.12. False – applicable only to resident Offshore Banking Unit on gross receipts of OBU.13. False – final tax of 10%

Problem 12 – 2 TRUE OR FALSE1. False – If the unrelated income of the proprietory educational institution exceeds the related

income, the income tax rate applicable would be the corporate income tax of 35%.2. False – Sale of real property outside the Philippines by a resident foreign corporation is not subject

to tax in the Philippines.3. False – 10% based on gross income within4. True5. True6. False – In general, GOCCs are subject to corporate income tax.7. True8. True9. True10. True11. True12. True

Problem 12 – 3 Problem 12 – 4 1. A 1. C or D2. D 2. B3. D 3. D4. B 4. A5. A 5. C

6. D 6. B & D7. D 7. B8. C 8. Not in the choices = normal tax of 30%9. A 9. Not in the choices = normal tax of 30%10. A 10. B11. D 11. B12. B 12. C13. A

Problem 12 – 51. D Taxable income Income tax

dueGross income (P8,000,000 + P4,000,000) P12,000,000Business expenses (P5,000,000 + P3,000,000) 8,000,000Net taxable income P4,000,000

Corporate income tax (P4,000,000 x 30%) P1,200,000

Note: The land sold is a capital asset. Hence, not subjectto corporate income tax but for final tax of 6% based on sales price or zonal value, whichever is higher.

2. CGross income P8,000,000Business expenses 5,000,000Net taxable income P3,000,000

Corporate income tax (P3,000,000 x 30%) P900,000

Note: The land sold is a capital asset. Hence, not subjectto corporate income tax but for final tax of 6% based on sales price or zonal value, whichever is higher.

Problem 12 – 6 BGross income within P2,800,000Less: Deductions within 1,300,000Net taxable income P1,500,000Multiplied by normal corporate tax rate 30%Income tax due P 450,000

Problem 12 – 7 DGross income within P5,000,000Multiplied by normal corporate tax rate 30%

Income tax due P1,500,000Problem 12 – 8

1. Domestic corporationGross income – within and without (P450,000 + P180,000 + P75,000 + P160,000) P865,000Deductions – within and without (P290,000 + P80,000 + P25,000 + P100,000) (495,000)Net income P370,000Multiplied by normal corporate income tax 30%Income tax due and payable P129,500

2. Resident foreign corporationGross income within P450,000Deductions within 290,000Net income P160,000Multiplied by normal corporate income tax 30%Income tax due and payable P 56,000

Problem 12 – 9 CNet income from PAGCOR (P30,000,000 x P28,000,000) P2,000,000Multiplied by normal corporate tax rate 30%Income tax due P 600,000

Problem 12 – 10 BNet income from National Power Corporation P10,000,000Net income from National Books Store 8,000,000Total net income P18,000,000Multiplied by corporate normal tax 30%Income tax due P 5,400,000

Problem 12 – 11 DGross profit P1,600,000Operating expenses before charitable contribution (550,000)Net income before charitable contribution P1,050,000Charitable contributions - limit (P1,050,000 x 5%) P52,500 Actual – lower 50,000Net taxable income P1,000,000Multiplied by corporate normal tax rate 30%Income tax due and payable P 300,000

Problem 12 – 12 DOperating loss (P 200,000)Operating expenses 1,000,000Gross income P 800,000Multiplied by minimum corporate income tax rate 2%Income tax payable P 16,000

Problem 12 – 13 YEAR 2005 use 35% normal tax rate

1. DNet income per GAAPAdd: Allowance for bad debts ContributionIncome before allowable contributionLess: Deductible contribution (P5,450,000 x 5%)Net taxable incomeMultiply by normal corporate income tax rateIncome tax due and payable

P5,000,000150,000 300,000P5,450,000 272,500P5,177,500 35%P1,812,125

2. DNet income per GAAPAdd: Operating expensesGross incomeMultiply by minimum corporate income tax rateMinimum corporate income tax

P 5,000,000 80,000,000P85,000,000 2%P 1,700,000

Normal tax (P5,000,000 x 35%)P1,812,125

Problem 12 – 141. A

Tax payable – current year (P8,000,000 x 2%) P 160,000

2. C Operating income (P8,000,000 – P7,000,000) P1,000,000Multiplied by normal tax rate 30%Normal tax P 300,000Less: Excess of MCIT 100,000Tax payable P 200,000

Problem 12 – 15 ANone. There is no excess corporate MCIT over NCIT in 2005 to be applied on 2006 because the MCIT is not yet applicable for the company as it only has 3 years of operation in 2005.

Problem 12 – 16 CRental income (P1,900,000/95%) P2,000,000Capital gains 500,000Total gross income P2,500,000Operating expenses (2,350,000)Net taxable income P 150,000Multiplied by corporate normal tax 30%Income tax payable P 45,000

Excess of MCIT over NCIT P 40,000Expanded withholding tax (P2,000,000 – P1,900,000) 100,000Total creditable income tax P140,000Income tax due 45,000

Tax refund P 95,000

Problem 12 – 17 CCapital gains tax (P1,500,000 x 6%) P 90,000

Problem 12 – 181. D Domestic Corporation:

a. Not traded in local exchange: Selling price Cost (P110 x 12,000 shares) Capital gain

Tax on P100,000 x 5% Tax on excess (P280,000 – P100,000) x 10%

b. Traded in local exchange (P1,800,000 x .005)

c. Sale of land abroad (P3,000,000 – P2,500,000) x 30%d. Sale of land – Philippines (P1,200,000 x 6%)

P1,600,000 1,320,000P 280,000

P 5,000 18,000 P 23,000

9,000

150,000 72,000P254,000

2. A Resident Foreign Corporation

a. b.c.d. (P1,200,000 x 6%)Total

P 23,0009,000

72,000P104,000

Problem 12 – 19 CInterest from savings deposits (P3,000,000 x 20%) P 600,000Royalty income (P1,000,000 x 20%) 200,000Interest from a depository bank (P1,500,000 x 7.5%) 112,500Total passive final tax P 912,500

Dividend from a domestic corporation received by a domestic corporation is tax exempt.Dividend from a nonresident foreign corporation is subject to normal tax.

Problem 12 – 20

1. B Domestic Corporation

a. ($20,000 @ 7.5% x P50)b. P300,000 @ 20%

P75,00060,000

c. P100,000 @ 20%d. P 80,000 @ 20%Total

20,000 16,000P171,000

2. B = Resident foreign corporation (same as letter 1)

3. C Nonresident foreign corporation

a. Exemptedb. (P300,000 @ 30%)c. (P100,000 @ 30%)d. (P 80,000 @ 30%)Total

P90,00030,000 24,000P144,000

Problem 12 – 211. A

Dividend income - (PCB and Magnolia are both domestic corporations) ExemptInterest income on US dollar loans ($3,000 x 10% x P50) P15,000

2. CInterest on Philippine peso loans P2,000,000Operating expenses ( 900,000)Taxable income P1,100,000Multiplied by normal corporate tax 30%Income tax due P 330,000

Problem 12 – 22 DRelated income P1,000,000Unrelated income 1,500,000Total revenue P2,500,000Operating expenses (3,000,000)Net loss (P 500,000)

Minimum corporate income tax (P2,500,000 x 2%) P50,000

Problem 12 – 23 ANonprofit educational institutions are tax-exempt.

Problem 12 – 24 DGovernment educational institutions are tax-exempt.

Problem 12 – 25 BIncome tax payable (P700,000 x 0.025) P17,500

Problem 12 – 26 AManila to Beijing (P5,000 x 2,000)Manila – Hong Kong – Beijing (P6,000 x 4,000) x P3,000/P6,000Manila to Hong Kong (P3,000 x 2,000)Total reportable gross income withinMultiplied by applicable rateIncome tax

P10,000,00012,000,000 6,000,000P28,000,000 2.5%P 700,000

Problem 12 – 27 Not in the Choices = P2,500,000 & P1,500,000Within Dragon Films American AircraftGross receipts P10,000,000 P20,000,000Multiplied by special tax rate 25% 7 ½%Philippine income taxes P 2,500,000 P 1,500,000

Note: Gross income means gross receipts. The aforementioned resident foreign corporation are subject special tax rates (final taxes). They are not allowed to deduct costs or expenses from their gross receipts. The cost of service is only applicable for MCIT purposes. (Sec. 27(E)(4), NIRC)

Problem 12 – 28 BIncome tax (P80,000/80%) x 20% P20,000

Note: Although cooperatives are tax-exempt, they still subject to final income taxes on interest income.

Problem 12 – 29 AAll of the transactions of Unlad Cooperative are exempted from income taxes.

Problem 12 – 30 Not in the choices = P6,000Income tax due – 2nd quarter [(P792,000/99%) – P700,000) x 30% P 30,000Income tax due – 1st quarter [(P495,000/99%) – P480,000) x 30% ( 6,000)Withholding tax – 2nd quarter [(P792,000/99%) x 1% ( 8,000)Excess tax credit – 2009 ( 10,000)Income tax still due and payable – 2nd quarter P 6,000

Note: The withholding tax for the 1st quarter is already included in the income tax due in the first quarter.

Problem 12 – 31 CIncome tax from ordinary net income (P1,000,000 – P900,000) x 30% P30,000Final income taxes: Interest income on peso savings (P100,000 x 20%) 20,000 Expanded foreign currency deposit (P100,000 x 7.5%) 7,500Total income taxes P57,500

Problem 12 – 32 BIncome tax on interest income from peso savings bank (P100,000 x 30%) P 30,000

Interest income earned by nonresident foreign corporation from EFCD is tax-exempt.Problem 12 – 33 C

Tax on cash dividend from a resident foreign corporation (P100,000 x 30%) P 30,000

Dividend received by a resident foreign corporation from a domestic corporation is tax-exempt.

Problem 12 – 34 CCash dividend from a domestic corporation (P100,000 x 30%) P 30,000

Cash dividend received by a domestic corporation from another domestic corporation is tax- exempt because it is considered earned outside the Philippines since only 40% of its business is done within.

Problem 12 – 35 DZero because the earnings of the said resident foreign corporation have no tax situs in the Philippines.

Problem 12 – 36Interest from saving deposit – Metrobank (P3,000,000 x 20%) P 600,000Royalty income – Philippine Mining Company (P1,000,000 x 20%) 200,000Interest from a depository bank under expanded foreign currency deposit - PCI Bank ($30,000 x P50 x 7.5%) 112,500Dividends from Zerxes, a resident foreign corporation (P500,000 x 30%) 150,000Total final passive income taxes P1,062,500

Problem 12 – 37 C3 rd Quarter 4 th Quarter

Gross income - cumulative P880,000 P1,120,000Itemized deductions - cumulative (704,000) (896,000)Net taxable income P176,000 P 224,000Multiplied by normal corporate income tax 30% 30%Income tax due P 52,800 P 67,200Total income tax paid in previous quarters - tax credit ( 52,800)Income tax still due and payable P 14,400

Problem 12 – 38 AIncome subject to normal tax rate (P300,000/ 30%)Passive income (P60,000/20%)Capital gains (P35,000: 5,000 @5%, 30,000@10%)Total incomeLess: Income taxes paid: Income tax per annual tax return Final tax on passive income Capital gains taxAmount subject to 10% surtax

P300,00060,000 35,000

P1,000,000300,000 400,000P1,700,000

395,000P1,305,000

Problem 12 – 39Year 2009

Within Without TotalGross income: Philippine USA JapanDeductions: Philippine USA JapanNet incomeMultiply by tax rateIncome tax payableTax credit allowed – see supporting computationIncome tax still due

P1,000,000

(800,000)

.P 200,000

P 400,000300,000

(200,000) (200,000) P300,000

P1,000,000400,000300,000

(800,000)(200,000) (200,000)P 500,000 30%P 150,000 ( 90,000)P 60,000

Supporting computation:

US

Japan

Total

Tax credits:(P200,000/P500,000) x P150,000 = P60,000 vs. P80,000Allowed, lower(P100,000/P500,000) x P150,000 = P30,000 vs. P30,000Allowed, lower

(P300,000/P500,000) x P150,000 = P90,000 vs. P100,000Allowed, lower

P60,000

30,000 P90,000 90,000

P90,000

Problem 12 – 40Reported income before taxAdd: Loss from sale of shares of stock outside stock marketTotal Less: Gains subject to final income tax:

(1) Gain from sale of stock in the stock market(2) Gain from sale of short-term debt securities(3) Gain from sale of real property

(P9,400,000 – P4,400,000)Adjusted income subject to corporate income taxMultiply by normal corporate income taxCorrect amount of income tax

Total reported income before tax

P 25,00010,000

5,000,000

P10,000,000 5,000P10,005,000

5,035,000P 5,630,000 30%P 1,689,000

P10,000,000

Less: Normal corporate income taxNet income after tax

1,689,000P 8,311,000

Problem 12 – 41Total revenue P1,000,000Operating expenses ( 10,000)Service charge – credit card (P1,000,000/5%) x 3% ( 600,000)Net income P 380,000Multiplied by normal corporate tax 30%Income tax due P 114,000Less: Creditable expanded withholding tax (P1,000,000/5%) x ½% 100,000Income tax still due and payable P 14,000

Problem 12 – 42Taxable income (normal tax)Add: Income subject to final tax Income exempt from tax Income, excluded from gross income Amount of NOLCO deductedTotalLess: Dividends Income tax paid for the yearImproperly accumulated incomeMultiply by tax rateTax on improperly accumulated income

P 60,00050,00010,000 50,000

P150,000 200,000

P 900,000

170,000P1,070,000

350,000P 720,000 10%P 72,000

Problem 12 – 43Income tax per ITR (P450,000/30%) P1,500,000Income subject to final tax (P37,500/7.5%) 500,000Capital gains: P5,000/5% P100,000 P35,000/10% 350,000 450,000Total P2,450,000Less: Income tax paid (P450,000 + P37,500 + P40,000) 527,500Basis of IAET P1,922,500Multiplied by IAET rate 10%IAET P 192,250

Problem 12 – 44Government educational institutions are exempted from tax. (Sec. 30(I), NIRC.)

Problem 12 – 45Tuition feesMiscellaneous fees

P2,843,100362,600

Income from rentsNet income, school canteenNet income, book storeGross incomeLess: Allowable deductions: Payroll and administrative salary Other operating expenses Interest expense Depreciation, net six room buildingTaxable incomeMultiply by the applicable tax rateIncome tax

P1,425,420762,33082,100 37,500

60,00036,200 24,800P3,326,700

2,307,350P1,019,350 10%P 101,935

Note: The tax differential on interest income shall not be used because the tax applicable is 10% not 30% normal tax.

Problem 12 – 461. 3 rd year 4 th year 5 th year 6 th year

Sales P1,000,000 P2,500,000 P4,000,000 P5,000,000Cost of sales ( 600,000) (1,200,000) (2,400,000) (2,700,000)Rent income 200,000 300,000 100,000 50,000Gross income P 600,000 P1,600,000 P1,700,000 P2,350,000Operating expenses allowed ( 300,000) (1,300,000) (1,400,000) (1,500,000)Net taxable income P 300,000 P 300,000 P 300,000 P 850,000Multiplied by NCIT rate 30% 30% 30% 30%Income tax due P 90,000 P 90,000 P 90,000 P 255,000Quarterly tax paid ( 10,000) ( 20,000) ( 30,000) ( 40,000)Income tax still due and payable P 80,000 P 70,000 P 60,000 P 215,000

2. 3 rd year 4 th year 5 th year 6 th year Royalty income, net of tax P 80,000 P160,000 P120,000 P 40,000Interest income, net of tax 20,000 32,000 16,000 24,000Total passive income, net of tax P100,000 P192,000 P136,000 P 64,000Divide by 80% 80% 80% 80%Total gross passive income P125,000 P240,000 P170,000 P 80,000Multiplied by final tax rate 20% 20% 20% 20%Final taxes P 25,000 P 48,000 P 34,000 P 16,000

Problem 12 – 47(1)

Taxable income from operation (P1050,000/70%) P1,500,000Add: NOLCO deducted 100,000 Interest income (P120,000/80%) 150,000 Capital gain (P230,000 – P5,000)/90% 250,000

Total income for GAAP reporting, before tax P2,000,000

(2)Tax on income from operation (P1,500,000 x 30%) P450,000Tax on interest income (P150,000 x 20%) 30,000Tax on capital gain (P250,000 – P230,000) 20,000 Total income tax paid P500,000

(3)GAAP income P2,000,000Less: Income tax 500,000Net income after tax – GAAP P1,500,000

(4)Taxable income from operation P1,500,000Add: NOLCO P100,000 Income subjected to final tax (P150,000 + P250,000) 400,000 500,000Total P2,000,000Less: Income tax paid 500,000Net income after income tax P1,500,000Multiplied by surtax rate 10%IAET = Surtax P 150,000

Problem 12 – 481. Sales P10,000,000

Less: Cost of sales 6,000,000Reportable income per ITR P 4,000,000

2. Gross profit P4,000,000Less: Operating expenses: Salaries P1,000,000 Depreciation 300,000 Supplies 200,000 Interest expense [P50,000 – (40,000 x 33%) 36,800 1,536,800Net taxable income per ITR P2,463,200

Note: Interest income is subject to final tax of 20% Inter-corporate dividend is tax-exempt. Losses on investment in securities is not deductible – capital loss

3. Final withholding tax paid (P32,000/80%) x 20% P 8,000

4. Net income before tax per GAAP P2,200,000

Less: Income tax (P2,463,200 x 30%) 738,960Net income P1,461,040

CHAPTER 13INCOME TAXES OF PARTNERSHIPS, ESTATES & TRUSTS

Problem 13 – 1 TRUE OR FALSE1. False – not all partnership, only commercial partnership.2. False – tax exempt, but required to file.3. False – the tax withheld in creditable.4. True – starting on the 4th year of operation.5. True6. True7. True – because it is withheld with final tax.8. True9. False – trading business income will make the partnership a commercial partnership.10. False – still subject to final tax of 10%.11. True – if created through gratuitous transfer, not more than 10 years and no contribution is made

by the co-owners.12. True13. True

Problem 13 – 2 TRUE OR FALSE1. True2. False – It shall be in writing either as trust inter-vivos or through a will.3. False – A trustor is the person who establishes the trust, not the trustee.4. True5. True6. True7. True8. False – P50,000.9. True10. True11. False – the personal exemption is P50,000.12. True

Problem 13 – 3 Problem 13 – 4 1. A 1. A2. B 2. A3. C 3. B4. C 4. A5. B 5. C6. C 6. A7. B 7. B

8. B 8. D9. B 9. B10. A 10. A

11. C

Problem 13 – 5 ANet profit from trading business of the partnershipLess: Income tax (P400,000 x 30%)Income after taxInterest income, net of final withholding taxDividend incomeTotal income for distribution to partnersDivide by profit and loss ratioShare of each partnerMultiply by dividend tax rateIncome tax on the distributive share of Mitzi Baguingan

P400,000 120,000P280,0004,000 10,000P294,000 2P147,000 10%P 14,700

Problem 13 – 6(1) C

Net income (P400,000 – P160,000) P240,000Multiplied by applicable income tax rate 30%Income tax of the partnership P 72,000

(2) A Partnership’s income after tax (P240,000 – P72,000) P168,000Divided by profit and loss ratio 1/2Share of A P 84,000Less: Final tax (P84,000) x 10% 8,400A’s share, net of final tax P 75,600

Problem 13 – 7 1. AJ, Opting itemized deduction:

Share of J in the Partnership (325,000-175,000) x 70%Other business incomeTotal business incomeLess: Itemized deductions (excluding contribution)Net income before contributionLess: Contribution Actual, P1,750 + (15,000 x 70%) =P12,250 Limit, P155,000 x 10% or P15,500 Allowed

P105,000 85,000P190,000 35,000P155,000

12,250

Net taxable before personal exemptionLess: Personal exemption (P50,000 + 25,000)Net taxable income of J

P142,750 75,000P 67,750

2. DR, opting for standard optional deduction:

Share in the partnership, gross (P325,000 x 30%)Other business incomeTotal business incomeLess: Optional standard deduction (P162,500 x 40%)Net income before personal exemptionLess: Personal exemption - singleNet taxable income

P 97,500 65,000P162,500 65,000P 97,500 50,000P 47,500

Problem 13 – 8 Net income from trading business of the partnership P400,000Divided by profit and loss ratio 2Share of each partner P200,000Add: Compensation income 240,000Total income before personal exemption P440,000Less: Personal exemption 50,000Net taxable income P390,000

Note: Interest income and dividend income have been subjected to final tax, hence, not to be included anymore in an annual taxable income.

Problem 13 – 9 1. DNone. The objective of co-ownership is to preserve the co-ownership property, therefore, not subject to tax.

2. BThe co-owners in an exempt co-ownership are liable for the tax in the income they received from the co-ownership. They should file the return and pay the corresponding tax based on their separate and individual capacity.

The net taxable income of Robert is computed as follows:Share from the income of co-ownershipLess: Personal exemption – singleNet taxable income

P1,000,000 50,000P 950,000

Income received by the co-owners is already net of itemized deductions of the co-ownership, therefore, the co-owners in their individual capacity is not anymore entitled to optional standard deduction. Inasmuch as the related expenses have been deducted before the distribution of income to the co-owners, (Sec. 34 L).

Supreme Court Ruling - Deductions and exemptions are highly disfavored in law. They must be construed strictly against the taxpayer, (Commissioner of Internal Revenue vs. P. J. Kiener Company, LTD., 65 SCRA 143).

Problem 13 – 10 DIncome after expenses but before distribution to heir P400,000Less: Gross amount distributed to heir (P85,000/85%) P100,000 Exemption 50,000 150,000Net taxable income P250,000

Problem 13 – 111. B

Income of the grantorIncome of trust A - revocableTotal income of the grantorLess: Total expenses Grantor – business expense Trust A – business expenseGrantor’s income before personal exemptions

P400,000 200,000

P1,000,000 500,000P1,500,000

600,000P 900,000

2. DIncome of trust B – irrevocable trustLess: Expenses of irrevocable trust – BNet income before exemptionLess: Personal exemption Net taxable income of all the trust

P200,000 100,000P100,000 50,000P 50,000

3. Not in the choicesIncome of beneficiary (P100,000 – P40,000)Add: Share from trustNet taxable income before personal exemption

P 60,000 50,000P110,000

Less: Personal exemption 50,000Net income P 60,000

Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD, he shall be considered as having availed himself of the itemized deductions. (Sec. 34(L), NIRC)

Alternative solution of 3: If beneficiary opted to use OSD

4. Not in the choicesIncome of beneficiary Add: Share from trustTotal gross income

P100,000 50,000P150,000

Less: OSD (P150,000 x 40%) 60,000Net income before personal exemption P 90,000Less: Personal exemption 50,000Net income P 40,000

Problem 13 – 121. The partnership is a general professional partnership, therefore, tax exempt.

2. and 3. Computation of tax liabilities of partners A and B.

Net income of the partnership (P1,200,000 – P100,0000) P1,100,000

Partner A = 60% Partner B = 40% TotalPartner’s salaryDistribution of balanceTotalLess Personal exemptionNet taxable income

P240,000 300,000P540,000 50,000P490,000

P360,000 200,000P560,000 100,000P460,000

P 600,000 500,000P1,100,000

Tax on P250,000 P 50,000 P 50,000Tax on excess (P240,000 x 30%) 72,000Tax on excess (P210,000 x 30%) . 63,000Income tax due and payable P122,000 P113,000

Problem 13 – 13Gross income – merchandisingDividend received from nonresident foreign corporationOrdinary and necessary expenses – merchandisingNet income before income taxLess: Provision for income tax (P380,000 x 30%)Net income

P575,00060,000 (255,000)P380,000 114,000P266,000

Note: Dividends received from domestic corporation by a general co-partnership is tax exempt.

Computation of partnership share considered as dividends: M - 40% W – 60%

Net income (P266,000)Dividends from domestic corporation (P40,000)Interest income, net of final tax of 20%, (P8,000)Distributive partner’s share on general co-partneshipMultiply by final tax rateFinal tax on share on partnership income

P 106,40016,000 3,200P 125,600 10%P 12,560

P 159,60024,000 4,800P 188,400 10%P 18,840

Note: In a general co-partnership, the share of individual partner is considered as dividend income.

Problem 13 – 141. BIR Ruling (August 18, 1959) provides that the co-ownership shall be taxed as a corporation if the

property was not divided for more than ten (10) years. Therefore, the tax on the income of the co-ownership would be:

Income of co-ownership Multiply by corporate normal tax rateIncome tax as corporation

P5,000,000 30%P1,500,000

2. Final tax on dividend of Marjorie Sison:Amount received from co-ownershipMultiply by final tax rate on dividendFinal tax on dividend – income tax withheld

P1,000,000 10%P 100,000

3. The amount received by Grace Ann Subala shall no longer be subjected to normal tabular tax because it has been subjected to final tax on dividend.

Problem 13 – 151. Answer

Conjugal gross income from estateLess: Business expense (P5,000,000 x 40%) Income distributed to beneficiariesConjugal net income

P2,000,000 600,000

P5,000,000

2,600,000P2,400,000

200x income tax due from the estate of Mr. Baguingan:Share of Mr. Baguingan from the net income of the conjugal estate (P2,400,000 x 50%)Less: Personal exemptions (P50,000 + P25,000)Taxable income

Tax on P500,000 Tax on excess (P625,000) x 32%)Income tax due

P1,200,000 75,000P1,125,000

P 125,000 200,000P 325,000

Mr. Baguingan’s income from estate shall claim the total amount of P75,000 personal exemptions (RA 9504) because Sec. 35C of the NIRC provides that if the taxpayer dies during the taxable year, his estate may claim the corresponding additional exemptions for himself and his dependent(s) as if he died at the close of such year. Hence, the applicability of the exemption of the income from estate amounting to P50,000 shall take effect only in the succeeding years after the decedent’s death.

2. Answer Compensation income P250,000Add: Income received from trust 200,000Total income before personal exemption P450,000

Less: Personal exemptions (P50,000 + P100,000) 150,000Net taxable income P300,000

Tax on P250,000 P50,000Tax on excess (P50,000 x 30%) 15,000Income tax due P65,000

Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD, he shall be considered as having availed himself of the itemized deductions. (Sec. 34(L), NIRC)

Alternative solution: If beneficiary opted to use OSD

Compensation incomeAdd: Income received from trust, net of OSD (P200,000 x 60%)Total income before exemptionLess: Personal exemptions: Basic Additional (P25,000 x 4)Taxable income of Mrs. Diana Nievera

Tax on P140,000Tax on excess (P80,000 x 30%)Income tax due

P 50,000 100,000

P250,000 120,000P370,000

150,000P220,000

P 22,500 24,000P 46,500

3. Answer Total amount received by the childrenMultiply by withholding tax rateTotal withholding taxes

P600,000 15%P 90,000

Problem 13 – 16Correction: Second paragraph should be…”A year following the death of Naty Poc….”

Tax savings:Income tax when no income of estate was distributed (Case 1 + Case 3) (P122,000 + P8,500) P130,500Less: Income tax when P150,000 of estate’s income was distributed (Case 2 + Case 4) = (P77,000 + P42,500) 119,500Tax savings P 11,000

Supporting computations: Case 1 Case 2 Case 3 Case 4

Gross income 800,000 800,000 300,000 300,000Business deductions: Itemized deductions (260,000) (260,000) (180,000) (180,000) Distributed income of the estate . (150,000) . 150,000

Net income before personal exemption 540,000 390,000 120,000 270,000Personal exemption (50,000) (50,000) (50,000) (50,000)Net taxable income 490,000 340,000 70,000 220,000Income tax for first bracket 50,000 50,000 8,500 22,500Income tax on excess Case 1: (490,000 – 250,000) x 30% 72,000 Case 2: (340,000 – 250,000) x 30% 27,000 Case 4: (220,000 – 140,000) x 25% . . . 20,000 Total income taxes 122,000 77,000 8,500 42,500

Problem 13 – 171. Income tax payable by the trust in 200x:

Income from house and lotIncome from hollow block business (P10,000 x 12)Income from farmTotal gross income from trust Less: Related expenses (P250,000 x 30%) Amount distributed to the beneficiaryNet income before exemptionLess: ExemptionNet taxable income

Tax on P70,000Tax on excess (P5,000 x 20%)Total income tax payable

P 75,000 50,000

P 80,000120,000 50,000P 250,000

125,000P 125,000 50,000P 75,000

P 8,500 1,000P 9,500

2. Income tax payable from the beneficiary in 200x:Gross income received from income of trustLess: Personal exemptionNet taxable income

Total income tax payable

P 50,000 50,000P 0 . P 0 .

Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD, he shall be considered as having availed himself of the itemized deductions. (Sec. 34(L), NIRC)

Alternative solution – if Trust and beneficiary opted to use OSD

1. Total gross income – trust P250,000Less: OSD (P250,000 x 40%) P100,000 Amount distributed to the beneficiary 50,000 150,000Net income before personal exemption P100,000Less: Personal exemption 50,000Net taxable income P 50,000

Tax on P30,000 P2,500Tax on excess (P20,000 x 15%) 3,000Total income tax payable P5,500

2. Gross income received from income of trust P50,000Less: Optional standard deduction (P50,000 x 40%) 20,000Net income before exemption P30,000Less: Personal exemption 50,000Net taxable income (P30,000)

Total income tax payable P 0 .

Problem 13 – 18A

Correction: The requirement should be stated as: How much is the income tax due and payable of the two trusts?

Total income of trusts (P50,000 + P1,000,000)Less: Distribution to beneficiary (P10,000 + P20,000) ExemptionNet taxable income

Tax on P500,000Tax on excess (P470,000 x 32%)Income tax due and payable

P 30,000 50,000

P1,050,000

80,000P 970,000

P125,000 150,400P275,400

Problem 13 – 18BNote: Since the topic is tax planning and the requirement is tax savings, OSD can automatically assumed to be used to determine the lower tax.

1. Gross receipts 2009 P300,000Less: OSD (P300,000 x 40%) 120,000Net income before personal exemption P180,000Less: Personal exemption – basic 50,000Net income subject to income tax P130,000

2. Income tax when no income of estate was distributed (Case 1 + Case 3) (P50,000 + P8,500) P 58,500Less: Income tax when P150,000 of estate’s income was distributed (Case 2 + Case 4) = (P27,500 + P27,500) 55,000Tax savings P 3,500

Supporting computations:

Case 1 Case 2 Case 3 Case 4Gross business receipts 500,000 500,000 200,000 200,000Distribution to the beneficiary . (150,000) . 150,000Balance 500,000 350,000 200,000 350,000OSD – 40% (200,000) (140,000) (80,000) (140,000)Net income before personal exemption 300,000 210,000 120,000 210,000Personal exemption (50,000) (50,000) (50,000) (50,000)Net taxable income 250,000 160,000 70,000 160,000

Income tax for first bracket 50,000 22,500 8,500 22,500Income tax on excess Case 2 & 3: (160,000 – 140,000) x 25% . 5,000 . 5,000Total income taxes 50,000 27,500 8,500 27,500

Problem 13 – 191. To minimize income tax, Dokling can do the following:

a. Put his business under irrevocable trust b. Use OSD instead of itemized deduction because the OSD is greater than the

itemized deduction, andc. Claim his child’s allowance as share from the income of the trust.

2. Tax exposure before the creation of trust:Gross income P400,000Less: OSD (P400,000 x 40%) 160,000Net income before personal exemption P240,000Less: Personal exemption 50,000Net taxable income P190,000

Tax on P140,000 P22,500Tax on excess (P50,000 x 25%) 12,500Income tax due P35,000

Note: The allowance is not deductible because the child is not established as beneficiary of the trust. Furthermore, the business is not in trust.

50% of the business is created as trust:Grantor:Income tax if 50% is held in trust (irrevocable)Gross income (50%) P200,000Less: OSD (P200,000 x 40%) 80,000Net income before personal exemption P120,000Less: Personal exemption 50,000Net taxable income P 70,000

Tax on P70,000 ( 8,500)

Trust:Income tax if 50% is held in trust (irrevocable)Gross income (50%) P200,000Less: OSD (P200,000 x 40%) P 80,000 Distribution to beneficiary 100,000 P180,000Net income before personal exemption P 20,000Less: Personal exemption 50,000Net taxable income (P 30,000)

Beneficiary:Share from the income of trust P100,000Less: OSD (P100,000 x 40%) 40,000Net income before personal exemption P 60,000Less: Personal exemption 50,000Net taxable income P 10,000

Tax on P10,000 ( 500)

Tax savings P26,000

Problem 13 – 20

Note: Since the topic is tax planning, the taxpayer should use OSD instead of itemized deduction because using OSD can give a greater tax savings based on the given data of this case.

1. Rent income P 800,000Less: OSD (P800,000 x 40%) 320,000Net income before personal exemption P 480,000Less: Personal exemption 50,000Net income P 430,000

Tax on P250,000 P 50,000Add: Tax on excess (P180,000 x 30%) 54,000Income tax due P104,000

2. Rent income – Property 2 P 300,000Less: OSD (P300,000 x 40%) 120,000Net income before personal exemption P 180,000Less: Personal exemption 50,000Net income P 130,000

Tax on P70,000 P 8,500

Add: Tax on excess (P60,000 x 20%) 12,000Income tax due ( 20,500)Less: Income tax in No. 1

2. Rent income – Property 1 P 500,000Less: OSD (P500,000 x 40%) 200,000Net income before personal exemption P 300,000Less: Personal exemption 50,000Net income P 250,000

Tax on P250,000 ( 50,000)

Tax savings P 33,500

Problem 13 – 211. Not a government project

a. Contract price, excluding VAT (P112,000,000/1.12) P100,000,000Less: Cost of construction, net of VAT (P72,800,000/1.12) 65,000,000Gross income P 35,000,000Less: Operating expenses 15,000,000Net income P 20,000,000Multiplied by corporate income tax rate 30%Income tax due P 6,000,000

b. The share of joint venture partners X Co and Y Co is notsubject to income tax under inter-corporate dividend rule.

2. Government project (consortium)a. Tax-exempt

X Co. Y Co.b. Share of co-venturers in the net income (P20M x 50%) P10,000,000 P10,000,000

Multiplied by corporate income tax rate 30% 30%Income tax due P 3,000,000 P 3,000,000

Note: OSD is not applicable to co-ventures because their respective shares are already net of expense.

Problem 13 – 221. Not a government project

a. Contract price, excluding VAT (P89,600,000/1.12) P80,000,000Less: Cost of construction, net of VAT (P56,000,000/1.12) 50,000,000Gross income P30,000,000Less: Operating expenses 10,000,000Net income P 20,000,000Multiplied by corporate income tax rate 30%Income tax due P 6,000,000

b. The share of joint venture partners X Co and Y Co is notsubject to income tax under inter-corporate dividend rule.

2. Government project (consortium)a. Tax-exempt

X Co. Y Co.b. Share of co-venturers in the net income (P20M x 50%) P10,000,000 P10,000,000

Multiplied by corporate income tax rate 30% 30%Income tax due P 3,000,000 P 3,000,000

Alternative solution using OSD:Note: If the joint venture opted to use OSD, it will have a lower income tax obligation, computed as follows:

1. Not a government projecta. Contract price, excluding VAT (P89,600,000/1.12) P80,000,000

Less: Cost of construction, net of VAT (P56,000,000/1.12) 50,000,000Gross income P30,000,000Less: OSD (P30,000,000 x 40%) 12,000,000Net income P18,000,000Multiplied by corporate income tax rate 30%Income tax due P 5,400,000

b. The share of joint venture partners X Co and Y Co is notsubject to income tax under inter-corporate dividend rule.

2. Government project (consortium)a. Tax-exempt

X Co. Y Co.b. Share of co-venturers in the net income (P20M x 50%) P9,000,000 P9,000,000

Multiplied by corporate income tax rate 30% 30%Income tax due P 2,700,000 P 2,700,000

CHAPTER 14WITHHOLDING TAXESProblem 14 – 1 TRUE OR FALSE1. True2. True3. True4. True5. False – final withholding taxes are not creditable.6. False – the tax is final tax, hence not required to file an income tax return.7. False – Business income is an income earned but not all subject to expanded withholding tax.8. True

9. True10. True 11. True12. False – all payments made by the government are net of withholding taxes.13. True14. True15. TrueProblem 14 – 2 C

Share from the professional partnership (P500,000 x 50%) P250,000Less: Creditable withholding tax (P250,000 x 10%) 25,000Amount received, net of withholding tax P225,000

Problem 14 – 3 DDividend income (P10 x 10,000) P 100,000Less: Withholding tax on dividends income of NRFC (30%) 30,000Dividend income, net of withholding tax P 70,000

Problem 14 – 4 CLease income P 500,000Less: Withholding tax (P500,000 x 4.5%) 22,500Lease income, net of withholding tax P 477,500

Problem 14 – 5 BTax informer’s fee P1,000,000Less: Withholding tax (P1,000,000 x 10%) 100,000Tax informer’s fee, net of withholding tax P 900,000

Problem 14 – 6 SOLUTIONS

a. Resident Citizen or Resident Alien1. Interest on bank deposits a. Peso deposits b. Dollar account (FCDS)2. Prize3. Royalties on books4. Capital gains on sale of real property5. Property dividends6. Compensation from OBU

(P 50,000 x 20%)($ 10,000 x 7.5%)(P100,000 x 20%)(P300,000 x 10%)(P1,000,000 x 6%)(P120,000 x 10%)(P400,000 x 15%)

P10,000$ 750P20,000P30,000P60,000P12,000P60,000

b. Nonresident Alien engaged in business1. Interest on bank deposits a. Peso deposits b. Dollar account (FCDS)2. Prize3. Royalties on books4. Capital gains on sale of real property

(P 50,000 x 20%)

(P100,000 x 20%)(P300,000 x 10%)(P1,000,000 x 6%)

P10,000ExemptP20,000P30,000P60,000

5. Property dividends6. Compensation from OBU

(P120,000 x 20%)(P400,000 x 15%)

P24,000P60,000

c. Nonresident Alien not engaged in business1. Interest on bank deposits a. Peso deposits b. Dollar account 2. Prize3. Royalties on books4. Capital gains on sale of real property5. Property dividends6. Compensation from OBU

(P 50,000 x 25%)

(P100,000 x 25%)(P300,000 x 25%)(P1,000,000 x 6%)(P120,000 x 25%)(P400,000 x 15%)

P12,500ExemptP25,000P75,000P60,000P30,000P60,000

d. Domestic Corporation1. Interest on bank deposits a. Peso deposits b. Dollar account 2. Prize3. Royalties on books4. Capital gains on sale of property5. Property dividends6. Compensation from OBU

(P 50,000 x 20%)($ 10,000 x 7.5%)

(P300,000 x 20%)(P200,000 x 6%)

P10,000$ 750N/AP60,000P12,000ExemptN/A

e. Resident Foreign Corporation1. Interest on bank deposits a. Peso deposits b. Dollar account 2. Prize3. Royalties on books4. Capital gains on sale of property5. Property dividends6. Compensation from OBU

(P 50,000 x 20%)($ 10,000 x 7.5%)

(P300,000 x 20%)

P10,000$ 750N/AP60,000N/AExemptN/A

f. Nonresident Foreign Corporation 1. Interest on bank deposits a. Peso deposits b. Dollar account 2. Prize 3. Royalties on books 4. Capital gains on sale of property 5. Property dividends 6. Compensation from OBU

(P 50,000 x 30%)

(P100,000 x 30%)(P300,000 x 30%)

(P120,000 x 30%)

P15,000ExemptP30,000P90,000N/AP36,000N/A