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Chapter 1 General Principles and Concepts
True or False Write True if the statement is correct or False if the statement is incorrect.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.
Eminent domain and police power can effectively be performed even without taxation. Taxes may be imposed to encourage economic growth by granting tax exemptions. Taxation is a way of apportioning the cost of government among those who are privileged to enjoy its benefits. The state can enforce contributions upon its citizens in the form of taxes even without a provision in the Constitution authorizing it. The police power of the government may be exercised through taxation. When the power to tax is delegated to the local government, only the legislative branch of the local government can exercise the power. The power of taxation can be exercised without limitation because its scope is unlimited. The power of taxation is absolute because it is the strongest of all powers of the government. Taxation presupposes an equivalent compensation. There is no imposition of amount in police power. Police power and eminent domain may defeat the constitutional rights of a person. Tax exemption applies only to government entities that exercise proprietary functions. All government entities regardless of their functions are exempted from taxes because it would be impractical for the government to be taxing itself. The state can still exercise its taxing powers over its citizen outside its territory.
True or False Write True if the statement is correct or False if the statement is incorrect.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.
No law granting any tax exemption shall be passed without the concurrence of two thirds of the members of the congress. Churches are exempt from payment of income taxes. A tax may be levied for the support of religious activities as long as all churches benefit from it. A bill not signed by the President can still become law. No person shall be imprisoned for nonpayment of income tax. Taxation is considered as the lifeblood of the government and every government unit must exercise this power. The amount of taxes may be increased to curve spending power and minimize inflation. Benefits from taxation have to be experienced to justify the legitimacy of collection of taxes from the people. Taxes may be used as a tool and weapon in international relations and protect trade relations. The power of legislative review in taxation is limited only to the interpretation and application of tax laws. The rule of “ex post facto law” is applicable for tax purposes. Real estate tax and income tax collected on the same real estate property is double taxation. A tax evader sidesteps the law, while the tax avoider breaks it. Tax exemption is transferable and assignable. Taxation is the government’s legitimate means of interfering with the private properties of its subjects.
True or False Write True if the statement is correct or False if the statement is incorrect.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.
The doctrine of equitable recoupment is applicable to cases where the taxes involved are totally unrelated. Protection is the basic consideration that justifies tax situs. The tax situs for occupation is the place where occupation is pursued even if the criterion for nationality is given. There is no direct double taxation by taxing corporate income and corporate stockholders’ dividends from the same corporation. Tax laws are given retroactive effects. In the imposition of taxes, public purpose is presumed. Taxes are obligations created by law. Taxes collected by the BIR are local taxes. Nonpayment of license fee makes the business illegal. In taxation, it is one’s civil liability to pay taxes which gives rise to criminal liability. Tax laws must be construed strictly against the government, and tax exemptions must be construed strictly against the taxpayer. As a rule doubts must be resolved liberally in favor of the government and strictly against the taxpayer. The Philippine tax laws are not political and penal in nature. When there is ambiguity of tax laws, the rules of statutory construction may be used to search for the legislative intent. However, when the meaning of the law is clear, the statute must be enforced as written. Revenue regulations that are inconsistent with law have the effect and force of law if they are useful and reasonable.
Multiple Choice Encircle the letter that contains the best answer.
Statement No.1: Taxation is an inherent power of the government. Statement No.2: Taxation is a process consisting of levying, assessment and collection. a. Both statements are correct. b. Both statements are incorrect. c. Only statement No.1 is correct. d. Only statement No.2 is correct. Statement 1: The power of taxation is inherent in sovereignty being essential to the existence of every government. Hence, even if not mentioned in the Constitution the state can still exercise the power. Statement 2: It is essentially a legislative function. Even in the absence of any constitutional provision, taxation power falls to Congress as part of the general power of law-making. a. Both statements are false. b. Only statement 1 is false. c. Both statements are true. d. Only statement 1 is true. Which of the following statements is/are correct? i. Taxation is a process. ii. Enactment of tax laws is part of the taxation process. iii. The constitution expressly conferred the power of Taxation to the President of the Philippines. iv. Taxation requires voluntary contribution from the inhabitants to support the government. Choices: a. i, ii, iii and iv b. i, ii and iii only
c. i and ii only d. i only Which of the following is/are natural qualities of a Taxation Power? a. An inherent power. b. Essentially an executive function. c. An absolute power. d. Territorial in operation Choices: a. i, ii, iii and iv b. i, ii and iii only c. i and ii only d. i only Taxation co-exist with the four elements of the state, which include all, except one of the following: a. Government b. Property c. Sovereignty d. Territory Which of the following statements is not correct? a. All the following National Government units exercise the inherent power of taxation. b. Local government units could exercise the power of taxation through legislated delegation. c. National legislation is exercised by Congress. d. Interpretation of Tax Laws is done by the Legislative branch of the government. All of the following statements are correct except one. a. Taxation power is an absolute power. b. Taxation power is the strongest of all the inherent powers of the government. c. Tax laws must not violate Constitutional restrictions. d. Exercise of taxation power is subject to restrictions. Statement 1: Government units performing governmental functions are exempt from tax unless expressly taxable. Statement 2: Government owned or controlled corporations exercising proprietary functions are taxable unless expressly exempt. a. Only statement 1 is correct. b. Only statement 2 is correct. c. Both statements are correct. d. Both statements are not correct. Which of the following is incorrect description of taxation? a. Legislative and inherent for the existence of the government. b. Necessary and for public purposes. c. Supreme and an absolute power of the state. d. Restricted by constitutional and inherent limitations.
10. The power of taxation is supreme, plenary, unlimited and comprehensive. Hence, it may be exercised by the state without any Constitutional provisions granting it. Which of the following is not correct? a. The power of taxation is based on necessity because without money, the state cannot survive. b. The scope of the power of taxation is unlimited. c. The power of taxation can be exercised only if there is just compensation. d. The power of taxation is not absolutely unlimited.
Multiple Choice Encircle the letter that contains the best answer.
Which of the following is not true?
Existence government b. Not legislative in nature c. Superior to the nonimpairment clause d. Restricted by just compensation 2.
Tax affects the area or nation as a community rather than as individuals. This is a specific explanation of a. Public purpose b. Common good c. General welfare d. Reciprocity Which of the following is a correct nature of restriction to exercise taxation power? Constitutional Limitation Inherent Limitation Territorial jurisdiction Yes Yes International comity Yes No Rule of uniformity and equity No No d. Due process of law Yes No Which statement refers to police power as distinguished from taxation? a. It is restricted by constitutional provision. b. It is superior to the impairment clause of the constitution. c. It involves the taking of property by the government. d. The amount imposed has no limit. Police power is distinguished from taxation power because a. It involves taking of property b. The amount collected is limited to the cost of regulation c. It is an inherent power of the state d. The benefit derived is the protection given by the state All of the following are inherent restrictions on the exercise of taxation power except a. Rule of uniformity b. For public purpose c. Territorial jurisdiction d. International comity The US embassy donated vehicle to the Department of Foreign Affairs of the Philippines. Which of the following statement is korek ? a. This transaction is exempted from payment of donor’s tax only. b. This transaction is exempted only from payment of documentary stamp tax. c. This transaction is exempted from payment of both donor’s tax and documentary stamp tax. d. This transaction is subject to both donor’s tax and documentary stamp tax. A fundamental rule in taxation is that property of one country may not be taxed by another country. This is known as: a. International law b. International comity c. Reciprocity d. International inhibition Which of the following statements is not correct? a. The government automatically possesses the power to collect taxes from its inhabitants. a. b. c.
Taxation Power the the
b. c. d. 10.
The government can enforce contribution upon its citizen only when the constitution grants it. Taxation power exists inseparably with the state. The state has the supreme power to command and enforce contribution from the people within its jurisdiction. Which of the following statements is not correct? a. Collections from taxes are public money. b. Appropriation of taxes for the common good of the people is valid. c. Construction of private road from taxes is a valid appropriation. d. Allocation of taxes for the benefit of a greater portion of population is considered for public purpose. A taxpayer gives the following reasons in refusing to pay a tax. Which of these reasons is not acceptable for legally refusing to pay the tax? a. That he has been deprived of the due process. b. That there is lack of territorial jurisdiction. c. That he derives no benefit from the tax. d. That the prescriptive period for the tax has elapsed. The following are the constitutional limitations on the power of taxation, except a. Only Congress can exercise the power of taxation b. Non-impairment of the obligation of contracts c. Taxes are not subject to set-off or compensation d. The rule of taxation must be uniform Due process in taxation means that the a. Taxpayers must be given the opportunity to be heard b. Individual taxpayer must derive direct benefit from taxes c. Tax imposed must not be harsh, oppressive, and arbitrary d. Tax imposed must be subject to the rule on uniformity
Multiple Choice Encircle the letter that contains the best answer.
Which of the following can be an object of taxation? i. Person ii. Property iii. Intangible rights iv. Rights Choices: a. i and ii b. i, ii and iii c. i and iv d. i, ii, iii and iv Which of the following is incorrect? a. Taxation exists inseparably with the state. b. Taxation could be exercised without specific provisions in the constitution granting it. c. Taxation is inherently legislative in nature. d. Any constitutional provisions could not restrict taxation. Which of the following correctly describes the primary purpose of taxation? Fiscal Purpose Regulatory Purpose a. To raise revenue Yes Yes b. To check inflation Yes No c. To discourage consumption of harmful products No No d. To limit influx of foreign No Yes
products Which of the following could not be considered as the purpose of taxation? a. To raise revenue to support the government b. To distribute the wealth of the nation c. To check inflation d. To impose monetary burden to the people 5. Which of the following is/are purposes of taxation? a. To raise revenue for government support b. To distribute wealth of nation c. To check inflation d. All of the above 6. Which of the following statements is not correct? a. A tax bill must only be applicable and operative after becoming a law. b. The effectivity of the tax law commences upon its approval. c. The applicability of the tax law covers the present and future transactions. d. Tax law is ex post facto in application. 7. Which of the following is not correct? a. In the absence of specific tax provision, taxes in general are not cancellable. b. Prescriptive period for assessment and collection is applicable to returnable taxes. c. The law on prescription being a remedial measure should be interpreted liberally in order to protect the taxpayer. d. The prescriptive period should be the shorter between the required filing date and the actual date of filing. 8. Which of the following remedies against double taxation is directly reducing the amount of tax? a. Reciprocity b. Tax exemption c. Tax credit d. Allowance for deduction 9. Which of the following tax escape is permissible under the tax code? a. Tax minimization b. Tax evasion c. Tax dodging d. Overstatement of expenses 10. One of the following is incorrect regarding tax exemption. Expressed Exemption Implied Exemption a. 13th month pay of P30,000 and below Yes No b. Inter-corporate dividend Yes No c. Non-taxability of government units No No d. Separation pay due to sickness Yes No 11. One of the following situs of taxation is not true. Located or Earned Within Outside a. Taxable income of nonresident citizen Yes No b. Taxable estate of resident alien Yes Yes c. Taxable donation of resident citizen Yes Yes d. Taxable sale Yes Yes 12. All of the following statements are true, except a. Double taxation is taxing twice the same taxpayer for the same purpose covering the same period and taxed by the same authority. b. Direct double taxation is prohibited by law. 4.
Indirect double taxation is allowed as long as this does not violate the equal protection and uniformity principles. Indirect double taxation is not enforceable.
Multiple Choice Encircle the letter that contains the best answer.
Statement 1: The City of Baguio claims that it can impose additional taxes on banks under the Local Government Code (in addition to the percentage tax on banks imposed in the NIRC). Statement 2: Such imposition is a direct double taxation. a. Both statements are correct. b. Only statement 1 is correct. c. Only statement 2 is correct. d. Both statements are incorrect. There can be no tax unless there is a law imposing that tax is consistent with the doctrine of a. Uniformity in taxation b. Due process of law c. Taxation is legislative in nature d. The power of taxation is very broad The following are kinds of exemption from tax, except a. Expressed exemption b. Statutory exemption c. Exemption by omission d. Tax evasion Which of the following is not correct? a. Tax avoidance is forbidden in our jurisdiction. b. A group of persons which forms a corporation with the intention to save taxes is not guilty of tax evasion. c. There is a constitutional prohibition against double taxation in the Philippines. d. All of the above. Which of the following are characteristics of taxes? i. Voluntary contribution ii. Imposed by legislative body iii. Proportionate in character iv. Used for public purpose Choices: a. i, ii and iii only b. i, ii and iv only c. i and iii only d. ii, iii and iv only All of the following are national taxes as to collecting authority except a. Income tax b. Real property tax c. Estate tax d. Value-added tax Which of the following tax rates is behaving in the same direction with the taxable value? a. Proportionate b. Progressive c. Regressive d. Digressive Statement 1: All tax escapes are illegal. Statement 2: Tax shifting is a form of tax avoidance. a. Both statements are true.
b. Only statement 1 is true. c. Only statement 2 is true. d. Both statements are incorrect. 9. One of the following is a true classification of tax. As to object As to Who bears the burden a. Income tax Personal Indirect b. Value-added tax Excise Direct c. Donor’s tax Excise Direct d. Estate tax Property Indirect 10. Statement 1: Custom duties are national taxes. Statement 2: Tariff is an import tax. a. Both statements are true. b. Only statement 1 is true. c. Only statement 2 is true. d. Both statements are incorrect. 11. One of the characteristics of a tax is that it is generally a. Based on contract. b. Payable in money. c. Assignable. d. A demand of a taxpayer. Tax of a fixed proportion of the value of the property with respect to which the tax is assessed, and requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined is known as a. Specific tax b. Ad valorem tax c. Specific or regulatory tax d. Proportionate tax 13. It is collected for the use of somebody else’s property. a. Toll b. Debt c. Tax d. Special assessment 14. For this, the state has complete discretion on the amount to be imposed after distinguishing useful from non-useful activity. a. License fee b. Tax c. Toll d. Special assessment
Multiple Choice Encircle the letter that contains the best answer.
The proportional contribution from persons and properties levied by the law-making body of the State by virtue of its sovereignty for the support of the government and all public needs is referred to as a. Taxes b. Special assessment c. License fees d. Surcharges Which of the following statements is not correct? a. Taxes may be imposed to raise revenues or to provide disincentives to certain activities within the state. b. The state can have the power of taxation even if the Constitution does not expressly give it the power to tax.
For the exercise of the power of taxation, the state can tax anything at any time. The provisions of taxation in the Philippine Constitution are grants of power and not limitations on taxing powers. Which of the following forms of escape from taxation does not result to loss of revenue to the government? a. Tax exemption b. Tax avoidance c. Tax evasion d. Shifting Tax as distinguished from license fee: a. Nonpayment does not necessarily render the business illegal. b. A regulatory measure. c. Imposed in the exercise of police power. d. Limited to cover cost of regulation.
Which is not an essential characteristic of tax? a. It is based on contract. b. It is payable in money. c. It is proportionate in character. d. It is a regular payment. 6. Regressive taxation system is a. The same with regressive rate of tax. b. Not observed in the Philippines because it means that the tax rate increases as tax base decreases. c. A situation where indirect taxpayers are more than direct taxpayers. d. Imposed to affect adversely the high-income sector of the population. 7. All except one is an example of direct taxes. a. Transfer taxes b. Other percentage taxes c. Income tax d. Travel tax 8. All of the following are not taxes except a. Surcharge b. Special assessment c. Custom duties d. License fee 9. A financial aid granted by the government to help private commercial enterprises known beneficial to the people a. Margin fee b. Subsidy c. Special assessment d. Toll 10. A schedule or list of rates, duties, or taxes imposed on imported and exported goods is called a. Tariff b. Tax rates c. Custom duties d. Margin rates 11. Special assessment is an enforced proportional contribution from owners of land especially benefited by public improvement. Which of the following is not considered as one of its characteristics? a. It is levied on land. b. It is based on the government’s need of money to support its legitimate objectives. c. It is not a personal liability of the person being assessed. d. It is based solely on the benefit derived by the owners of the land. 12. One of the following is a distinction between tax and license fee. a. Tax can be assigned while license fee cannot be assigned. b. Tax is not subject so set-off whereas license fee is subject to set-off.
Tax is normally paid after the commencement of the business while a license fee is paid before the commencement of the business. d. Tax is based on law while a license fee is based on contract. 13. The specific distinction between tax and penalty is a. Punishment b. Legality c. Imposition by the state d. None of the above 14. The distinction between license and tax is a. Regulatory b. Exercise of inherent power c. Imposition of payment d. Nonpayment will render the business illegal
Multiple Choice Encircle the letter that contains the best answer.
Statement 1: When the primary consideration is the legislative intent, but doubts exist in determining such intent, the doubts must be resolved strictly against the taxing authority. Statement 2: Tax exemptions are strictly construed against the taxpayer. a. Both statements are true. b. Only statement 1 is true. c. Only statement 2 is true. d. Both statements are incorrect. A body of law that codifies all national tax laws is known as a. National law b. Tax law c. Revenue law d. Revenue regulation Which of the following characteristics describes our internal revenue laws? a. Political in nature b. Penal in nature c. Generally prospective in operation although the tax statute may nevertheless operate retrospectively provided it is clearly the legislative intent d. Retroactive in character In cases of deductions and exemptions on income tax returns, doubts shall be resolved a. Liberally in favor of the government b. Liberally in favor of the taxpayer c. Strictly against the government d. Strictly against the taxpayer In case of conflicts between the tax laws and generally accepted accounting principles (GAAP) for preparation of tax returns, a. Both tax laws and GAAP shall be enforced b. GAAP shall prevail over the tax law c. Tax laws shall prevail over the GAAP d. The courts shall resolve the issue Which statement is incorrect? a. A toll is a demand of sovereignty b. A toll is a demand of ownership c. A special assessment is a demand of taxpayer d. A customs duty is a tax
Tax exemptions are strictly construed (1) if the law provides for liberal construction; (2) if the exemptions refer to public utilities; (3) in case of exemptions granted to entities organized for charitable, religious, or educational purposes; (4) in case of special laws applying in cases. a. Exemption 3 is correct. b. Exemptions 2 and 3 are correct. c. No given exemptions are correct. d. All given exemptions are correct. Which of the following statement is not true? a. If a taxpayer is acquired of a criminal violation of the Tax Code, this acquittal does not exonerate him from his civil liability to pay the taxes. b. A conviction for tax evasion is not a bar for collection of unpaid taxes. c. A tax assessment is necessary for criminal prosecution for willful attempt to defeat and evade payment of taxes. d. Criminal proceedings under the Tax Code are now a mode of collection of internal revenue taxes, fees or charges. Which of the following falls under the jurisdiction of the Court of Tax Appeals? a. Criminal action for the violation of the NIRC. b. Question of whether or not to impose a deficiency tax assessment upon a taxpayer. c. Appeal from undisputed tax assessment. d. Action for refund of real property tax. Statement 1: BIR rulings are the correct interpretations of the Tax Code. Statement 2: Supreme Court decision shall prevail over the BIR rulings. a. Only statement 1 is correct. b. Only statement 2 is correct. c. Both statements are correct. d. Both statements are not correct. All of the following statements are incorrect, except a. General provision under the Tax Code prevails over BIR Regulation. b. BIR Rulings prevails over Local Tax Ordinance on matters concerning barangay taxes. c. BIR Rulings are sound law until changed by court resolution. d. Tax Code could violate Constitutional provisions. Which statement is wrong? A revenue bill: a. Must originate from the House of Representatives and on which same bill the Senate may propose amendments. b. May originate from the Senate and on which same bill the House of Representatives may propose amendments. c. May have a House version and a Senate version approved separately and then consolidated with both houses approving the consolidation version. d. May be recommended by the President to Congress. Tax law is derived from a. Constitution b. Judicial decision c. Statutory enactment d. All of the above Which of the following statements is correct? a. Revenue regulations have the force and effect of law and a memorandum and a memorandum order of the Commissioner of Internal Revenue, approved by the Secretary of Finance, has the same force and effect as revenue regulation. b. The revenue regulations in conflict with law are null and void. c. The interpretations of the former Secretary of Finance do not necessarily bind on their successors. d. All of the above.
15. Statement 1: The law on prescription being a remedial measure should be interpreted liberally. Statement 2: Doubts as to whether double taxation has been imposed should be resolved in favor of the taxpayer. a. Only statement 1 is correct. b. Only statement 2 is correct. c. Both statements are correct. d. Both statements are not correct. 16. Statement 1: Tax statutes should be strictly construed against the government. Statement 2: Tax exemptions are strictly construed against the taxpayer. a. Only statement 1 is correct. b. Only statement 2 is correct. c. Both statements are correct. d. Both statements are not correct. 17. Statement 1: Tax laws are applied prospectively. Statement 2: in case of conflict, Tax Laws prevail over Civil Laws. a. Only statement 1 is correct. b. Only statement 2 is correct. c. Both statements are correct. d. Both statements are incorrect.
Chapter 2 Tax Administration
True or False Write true if the statement is correct, or False if the statement is incorrect. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.
Tax administration is the enforcement of tax policy. The BIR is the principal government administrative agency over tax administration. The BIR Commissioner has the final power to interpret the provision of the Tax Code. The Secretary of Justice has the authority to interpret and ascertain the validity of tax laws, subject to the review by the Court of Tax Appeals. Cooperatives are exempted from income tax, but not in payment of annual registration fee. No authority o print is needed if the receipts or invoices are serially numbered. A person who continued the business of a deceased person is required to register the business upon his assumption of the said business. Internal revenue taxes are self-assessing; hence tax assessment is not necessary to demand settlement of a taxpayer’s tax liability. When a taxpayer earned income, he has the responsibility to compute, file and pay his tax liability to the BIR. The BIR has the burden to prove that the taxpayer concerned has received the tax assessment. Tax assessment is a process of taxation which involves the passage of tax laws and ordinances through legislature. The substance of tax laws is a matter of the government’s tax policy. Tax assessment refers to the administration and execution of tax laws by the legislative branch of the government. Theoretical justice means tax laws must be capable of convenient, just and effective administration.
True or False Write true if the statement is correct, or False if the statement is incorrect.
1. 2. 3. 4. 5. 6.
7. 8. 9. 10. 11. 12. 13.
Jeopardy assessment may be made when a taxpayer retires from business. Within 60 days from the filing of the protest, all relevant supporting documents must be submitted to the Court of Tax Appeals; otherwise, the assessment shall become final. The object of distraint may either be personal and/or real properties. When the amount of tax liability is P100, distraint and levy of properties cannot be enforced. All criminal violations may be compromised. Any internal revenue tax, which has been assessed within the prescribed limitation period, may be collected by distraint or levy, or by a proceeding in court within five (5) years following the assessment of tax. Bank deposit or account may be distraint without violating the Law on Secrecy of Bank Deposits. There is no limit on the right of the BIR Commissioner to assess taxes on unreasonable accumulated earnings of the corporation. Only the BIR Commissioner is expressly authorized by the Tax Code to enter into compromise for both civil and criminal liabilities subject to certain conditions. The National Government is allowed to purchase property under distraint if the amount of bid is substantially lesser than the actual cost of the said property. After one year from the date of sale of real property under levy, the delinquent taxpayer may redeem the property sold. The levy may be repeated until the full amount due, including all expenses, is collected. Delinquent accounts may be compromised while holding withholding tax cases, in general, are not subject to compromise.
True or False Write true if the statement is correct, or False if the statement is incorrect.
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The BIR Director should first approve the filing in courts of civil and criminal action for the recovery of taxes and the enforcement of any fine, penalty, or forfeiture. Forfeited property shall not be destroyed at least twenty days after seizure. The required initial bond for manufacturers and importers of articles subject to excise tax is P200,000. The informer’s reward is subject to 10% creditable withholding tax. The BIR Regional Director is authorized to issue a Letter of Authority. Once a taxpayer is served with an LA, he should first verify or check with the BIR’s National Office whether he is listed or not for National Office Audit. Only the real properties of a delinquent taxpayer are subject to tax lien. A fraudulent return with 30% understatement of income reported is subject to a penalty of 25% based on the basic tax unpaid. By forfeiture, the proceeds of the property sold are applied to satisfy the tax liability and the excess thereof shall be returned to the taxpayer. By seizure, no part of the proceeds goes to the taxpayer because the property is confiscated in favor of the government. A compromise tax remedy is available for both the taxpayer and the government. Cases regarding collection of taxes already filed in the court are not subject to compromise. Delinquent accounts with duly approved schedule of installment payments are not subject to compromise.
True or False
Write true if the statement is correct, or False if the statement is incorrect.
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Upon conviction, an alien as an offender for tax violation could immediately be deported even if he has paid all the tax liability discovered as chargeable against him. A letter of authority is not necessary in conducting an examination of books of account of taxpayer. Only criminal actions can be submitted to a court for a judicial proceeding for tax violation cases. Assessment protest made by the taxpayer should be completely complied with by the submission of pertinent documents to support the taxpayer’s claim. Upon issuance of a tax ruling by the BIR Commissioner, the concerned taxpayer can still file a petition to the Court of Appeals. A tax assessment could be done only after a tax return has been filed. If no tax return was filed, no government assessment could still be made if it was not assessed after 10 years from the required filing date. After the tax liability has been assessed, the actual collection should be done within 10 years from date of assignment. Levy of real property could be done only after distraint of personal property of delinquent taxpayer is sold out to partially collect the tax deficiency. The residual value of real properties sold under levy proceedings are payable to the government. When a tax compromise is reached, the ongoing litigation proceeding involving the tax assessed and being collected shall be terminated. Filing of bond in lieu of the actual tax to be paid is applicable only for export transactions. A 10% reward to tax informer is applicable also to discovery of smuggled goods which resulted in the capture and seizure of goods smuggled.
Multiple Choice Encircle the letter that contains the best answer.
Which of the following is/are element/s of impact of taxation? i. Levy ii. Assessment iii. Collection Choices: a. i, ii, and iii b. i and ii only c. ii and iii only d. iii only It is one of the attributes of a sound taxation system one of the attributes of a sound taxation system which states that revenue must be sufficient to support governmental expenditures. a. Fiscal adequacy b. Theoretical justice c. Administrative feasibility d. Equity Which of the following statements is correct? a. Levying and collection of taxes are legislative functions. b. Assessment and collection are administratib functions. c. Enacting tax laws and its interpretation are legislative functions. d. Levying and impositions are judicial functions. Which of the following is correct? Legislative Administrative a. Fixing of tax rates Yes!! Yes b. Valuation of object of tax Yes No c. Collection of taxes Yes Yes
d. Assessment of tax liability No Yes Which of the following is not a measure to enhance administrative feasibility of taxation system? a. Collection of taxes proportionate to ability of the taxpayer to pay. b. Withholding of taxes at source. c. Quarterly filing and payment of income tax on business income. d. Accreditation of banks to collect taxes. A basic principle of taxation which states that “Taxes must be based on the taxpayer’s ability to pay” is called a. Equality in taxation b. Ability to pay theory c. Theoretical justice d. Equity in taxation It has the executive supervision and control over tax administration. a. Bureau of Internal Revenue b. Bureau of Customs c. Department of Finance d. Court of Justice Which of the following is not among the administrative powers of the Bureau of Internal Revenue? a. Compromise tax assessments b. Distraint of personal property of delinquent taxpayer c. Levy of real property of delinquent taxpayer d. Render court decision concerning tax dispute Which of the following is not correct? a. If it is the first employment of the taxpayer, he must be registered with the BIR before employment or within 10 days from the date of employment. b. If the taxpayer is self-employed, he must register his business within 10 days from commencement of his business. c. If the taxpayer is both employed and doing business, he must have only one TIN as employee and as sole proprietor. d. TIN must be indicated in the return, documents or statement filed with the BIR. Statement 1: Self-employed and businesses are registered annually. Statement 2: The annual registration fee is P500 payable on or before the end of January of each year. a. Only statement 1 is correct. b. Both statements are correct. c. Only statement 2 is correct. d. Both statements are not correct. Statement 1: An individual taxpayer earning purely compensation income is exempt from P500 registration fee, but required to renew his registration every year. Statement 2: Cooperatives are exempt from annual registration with the BIR. a. Only statement 1 is correct. b. Both statements are correct. c. Only statement 2 is correct. d. Both statements are not correct. Statement 1: A business with more than P550,000 annual sale or receipts must be registered as VAT business. Statement 2: A business with less than P550,000 annual sale or receipts may be registered as VAT business. a. Only statement 1 is correct. b. Both statements are correct. c. Only statement 2 is correct. d. Both statements are not correct. Statement 1: Businesses registered with the BIR are required to issue commercial invoice for sales of goods and receipts for services rendered.
Statement 2: A VAT Sales invoice is to be issued by a VAT-registered business for its sales to a nonVAT registered buyer. a. Only statement 1 is correct. b. Both statements are correct. c. Only statement 2 is correct. d. Both statements are not correct.
Multiple Choice Encircle the letter that corresponds your answer.
Which of the following is not correct? a. A tax assessment could be done before the filing of tax return nut after the expiration of prescribed period for filing. b. A tax assessment could be done after the filing of tax returns. c. When the business is closed, a tax assessment could be done even before the expiration of the prescribed filing date. d. The BIR Commissioner and the taxpayer may agree in writing on the assessment after the expiration of the prescribed period for assessment. Which of the following is not correct? a. The taxpayer may protest the tax assessment by filing to the BIR Commissioner a written request for reinvestigation within 60 days from receipt of such assessment. b. If the tax assessment protest is not acted upon by the BIR Commissioner within 180 days from submission of documents, the taxpayer may appeal to the Court of Tax Appeals. c. The appeal to the Court of Tax Appeals must be done within 30 days from receipt of the BIR Commissioner’s decision on the formal protest filed. d. If the taxpayer did not make any appeal on the tax assessment, it becomes final, executor and demandable. If the taxpayer failed to pay the tax demanded per final assessment, the government may exercise several administrative remedies. Which of the following is not correct? a. Levy of real property of the taxpayer may be availed of only after distraint of personal property of taxpayer. b. Either distraint or levy may be pursued simultaneously once the assessment becomes final and demandable. c. If the tax is assessed P100 and below, levy or distraint may not be availed of. d. The remedy of distraint of personal property may be repeated if necessary until the full amount due and all expenses are collected. Which of the following is not true with regards to the authority of the Commissioner to enter into a tax compromise? a. The taxpayer must not have an existing tax liability. b. There must be an offer by the taxpayer or commissioner of an amount to be paid by the taxpayer. c. A reasonable doubt as to the validity of the claim against the taxpayer exists. d. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.
Problem 2-8 Late Filing and Payment Income tax return for the calendar year 2009 was due for filing on April 15, 2010 but the taxpayer voluntarily filed his return, without assessment notice from the BIR only on June 30, 2010. The tax due per return amounts to P100,000. How much would be the total amount due inclusive of penalties and interest, excluding compromise penalty? a. P125,000 c. P130,208 b. P129,167 d. P100,000
Problem 2-9 Filing at Wrong RDO The taxpayer’s 2009 income tax return is required to be filed through authorized agent bank under the jurisdiction of RDO East Makati. Without prior authorization from the BIR, the taxpayer filed his tax return, and paid the tax through the authorized agent bank under the jurisdiction of RDO Davao City. The tax due and paid per return is P100,000. How much would be the amount still due and payable to BIR? a. P25,000 c. P100,000 b. P50,000 d. P125,000
Problem 2-10 Late Payment with Assessment Notice The taxpayer did not file his income tax return for the calendar year 2009 which was due on April 15, 2010. He was notified by the BIR about his failure to file the tax return, for which reason he filed his tax return and paid the tax only after the said notice on June 30, 2011. The tax due per return is P100,000. How much would be the total amount due, exclusive of compromise penalty? a. P124,167 c. P154,167 b. P150,000 d. P174,167
Problem 2-11 Deficiency Income Tax The taxpayer filed his income tax on time for the year 2009, and paid P100,000 on April 15, 2010. Upon pre-audit of his return, it was disclosed that he erroneously computed the tax due. The correct amount of tax due is P120,000. The taxpayer is assessed for deficiency income tax in a letter of demand and assessment notice issued on June 30, 2011. How much would be the amount still due? a. P4,833 c. P24,000 b. P20,000 d. P24,833
Problem 2-12 Statutory Fine A taxpayer’s property was placed under a constructive distraint. The fair market value of his personal property is P250,000 with a cost amounting to P100,000. If the taxpayer sold the said property without the consent of the BIR Commissioner, how much statutory fine can the BIR impose against him? a. P500,000 c. P250,000 b. P350,000 d. P100,000
Problem 2-13 Total Fine imposed May Bukol’s personal property has been placed under constructive distraint. Bukol sold the said property without the consent of the BIR Commissioner. The following data are available: Actual cost of the property P6,000 Value of the property sold 2,000 Amount of tax liability 10,000 Surcharges and interest 2,500 Based on the given data, how much is the fine to be imposed against Bukol? a. P6,000 c. P3,000 b. P5,000 d. P2,500
Problem 2-14 Tax Assessment Procedure The RDO of Baguio City issued a tax assessment to Mr. Lang due to fraudulent income tax amounting to P500,000. Mr. Lang filed a protest within 60 days and submitted proofs 10 days thereafter. Can the BIR deny the protest of Mr. Lang? What would be the remedy available to Mr. Lang?
Problem 2-15 Redemption of Property Mr. Bay-an’s real property had been levied due to tax delinquency amounting to P1,000,000 for a period of 2 years since January 1, 2007. On January 1, 2009, the property was sold for public auction with a selling price adequate to cover the amount of public taxes, surcharge and interest.
How much is the total amount to be paid by Mr. Bay-an if he decides to redeem his real property on January 1, 2010?
Problem 2-16 Excess from Sales Proceeds The real property of Mr. Santago, a delinquent taxpayer, was subjected to a levy. His total tax liability per assessment as of April 15,2009 was P300,000 payable on May 31, 2009 with the following expenses incurred by the BIR: Advertisement Transfer of title Capital gains tax
P10,000 15,000 30,000
How much is the amount of excess from the proceeds of sale to be remitted to Mr. Santago as of October 31, 2009?
Problem 2-17 Total Amount Unpaid The income tax return of San Jolly Mac Corporation shows the following data: Total Sales Operating expenses allowed Net taxable income Multiply by corporate income tax rate Income tax payable
P7,000,000 6,500,000 500,000 30% P 150,000
The related income tax referred to the above ITR has been paid. After a year however, the BIR provided assessment that the sales of the corporation is understated by 30%. How much is the total amount of tax unpaid including surcharges and interest?
Problem 2-18 Sales Price of Property under distraint During the auction of a property under distraint, the following information were available: Actual cost of the property Fair market value of the property Amount of bid Amount of tax liability Surcharges and interest Bidding expenses
P200,000 300,000 100,000 190,000 20,000 10,000
How much is the sales price of the property under distraint if the BIR Commissioner decided to purchase the property in behalf of the National Government?
Problem 2-19 Capital Gains Tax and Redemption Price On April 1, 2009, the BIR sold the residential lot (under levy) of Mr. Mario Lucas. Mr. Lucas received P20,000 from the BIR as excess over the tax claim and cost of sale as follows:
Income tax liability Cost of sale
Mr.Lucas redeemed his residential lot on December 1, 2009. How much is the capital gains tax paid upon sale and the required total redemption price?
Problem 2-20 Informer’s Reward Miss Benita Wan provided information to the government, which led to the capture and seizure of smuggled goods with fair market value of P15,000,000. Required:
If the government sold the captured goods for P15,000,000, how much would be the cash reward of Miss Wan as tax informer? b. If the government destroyed the goods seized because these are regarded as harmful to health, how much cash reward would Miss Wan receive? c. In assumption to letter “a”, how much final income tax should be withheld from the reward of Miss Wan?
Problem 2-21 Violations and Penalties Miss Heide San Tago is operating an unregistered trading business, and she has not been issuing any official sales invoice. When Miss San Tago was summoned to present her books of accounts to BIR, she ignored the summon. Required:
Enumerate all the Tax Code violations committed by Miss San Tago. If convicted for all these violations, how much is the total amount of penalties?
Problem 2-22 Understatement of Income Tax Return On April 15, 2010, Orville Corporation filed its income tax return for the taxable year 2009 declaring a total receipts of P2,000,000 and total deduction of P1,500,000. The income tax due declared amounts to P165,000. Upon filing to BIR, the tax officer discovered that Orville’s receipts are understated by 25% and the deduction is overstated by 35%. How much is the amount of surcharge to be added to Orville’s income tax due on April 15, 2010?
Problem 2-23 Registration Fee Splash Corporation is a manufacturer of beauty products that maintains 9 warehouses and 30 branches in the Philippines. Its principal factory is located in Quezon City. Required: Assuming that the taxable year is 2009, compute the following:
Total annual registration fee of Splash Corporation for 2009 if payment was made on January 31, 2010. Total amount paid to the BIR if payment was made on July 30, 2010.
Problem 2-24 Distraint Property Purchased by Government The BIR has decided to purchase a personal property under distraint in behalf of the National Government. The information available in deciding the price of the said personal property is as follows: Market value of the property Bid price of the highest bidder
Amount of tax liability Surcharges Interest Advertising cost
100,000 25,000 20,000 5,000
How much is the price of the personal property if purchased by the BIR in behalf of the National Government?
Problem 2-25 Chattel Property Forfeited The government forfeited the chattel property of Mr.Balana due to criminal violation of tax laws. Mr.Balana’s total tax liability per assessment as of April 15, 2009 was P100,000 payable on June 1, 2009. The property was sold for P200,000 through a public auction on September 1, 2009 with the following expenses incurred by the BIR: Advertisement Transfer tax
P 5,000 20,000
How much is the amount of excess from proceeds of sale to be remitted to Mr.Balana as of September 1, 2009?
Problem 2-26 Compromise Allowed A criminal case was filed against Atang Ang for obtaining three different Tax Identification Number (TIN) resulting to an estimated tax fraud of P20 million. If Atang Ang proposed for a compromise to the BIR Commissioner, how much is the maximum compromise that is allowed to Ang?
Problem 2-27 Compromise In 2009, Mr.Lubrado Tinidor, a local manufacturer of furniture, settled a compromise agreement with the Commissioner of BIR concerning P10,000,000 unpaid taxes since 2007. You are called to compute the tax to be collected per compromise agreement under the following independent assumptions: 1. Mr.Tinidor is financially incapable and has P10,000 income per month. 2. The compromise is due to doubtful validity of assessment.
Problem 2-28 Compromise The following cases are available from the records of the BIR resulting from the compromise proposals of corporations: Basic Tax Surcharge Interest Delinquent accounts P 500,000 P 125,000 P 100,000 Pending cases under administrative protest 900,000 450,000 180,000 Criminal violation not filed in courts 1,000,000 250,000 200,000 Withholding tax cases 2,000,000 500,000 400,000 Criminal violations filed in courts 5,000,000 2,500,000 1,000,000 Totals P9,400,000 P3,825,000 P1,880,000
Required: How much is the amount of compromise allowed using the following reasons (independent assumptions):
Case 1: Financial incapability due to corporate insolvency. Case 2: Financial incapability due to surplus deficit resulting to impairment in original capital by at least 50%. Case 3: Doubtful validity of assessment.
Problem 2-29 Comprehensive Tax Remedy Miss Malou Lugui was assessed with tax liability of P250,000 exclusive of penalty. The financial status of Miss Lagui when the demand for payment was made is as follows: Total properties: Real property Personal property Total liabilities, exclusive of tax
P200,000 100,000 150,000
Required: a. If Miss Lugui offers for a compromise payment of P100,000 for her tax liabilities on the ground of her
financial incapability, and Commissioner accepted the offer, would it be in accordance with the prerequisite for a compromise settlement? Assuming that a distraint proceeding was carried out instead, which of the above properties would be issued with warrant of distraint? If all the properties of Miss Lugui have a realizable value of P200,000 after payment of her P150,000 liabilities and possible cost of the proceedings, would it be possible for the government to carry out the distraint and levy proceeding simultaneously to effect the conversion of Miss Lugui’s assets into cash? If, after the properties of Miss Lugui were sold in public auction only P200,000 was realized and used as payment of her liabilities, would this extinguish the unpaid tax liabilities of Miss Lugui?
Problem 3-1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.
TRUE OR FALSE
All increases in taxpayer’s wealth are taxable income. An accrued interest income credited to taxpayers is considered constructively received. The theory of income constructively received is designed to prevent taxpayer to delay reporting income. Income earned by a Filipino citizen from all sources is taxable in the Philippines. If compensation is received in the form of noted or other evidences of indebtedness, the basis of tax is the face value of the instrument. Premium paid by the employer on life insurance coverage of employee wherein the beneficiary is the employer, the basis of tax is the premium paid. Under the accrual basis of reporting income, income is reported in the year of collection. Most taxpayers elect to report income in a fiscal year basis. In general, trading and manufacturing business use accrual method while servicing businesses use cash method of reporting income. Corporations whose business consists of the sale of inventories cannot use cash method. A taxpayer engaged in instalment sale of personal goods on a regular basis is allowed to report income by instalment only if the initial basis exceeds 25% of the selling price. Income from farming maybe derived from raising and producing products and sale of ordinary farm assets. The difference between cash and accrual methods of reporting farming income is the inventories. Under the crop basis, the entire cost of producing the crop is deductible only from gross income in the year in which the crop is earned. PROBLEM 3-2 Statement I: All wealth that flows into the hands of taxpayer other than mere return of capital is income.
Statement 2: All earnings are taxable with income tax. A. Only statement 1 is correct. B. Only statement 2 is correct. C. Both statements are correct. D. Neither statement are correct. 2. Which of the following is not classified as income? A. Gain derived from labour B. Return on capital C. Excess of selling price over cost of assets sold D. Gift received 3. Which of the following are not characteristics of income? A. Increase in taxpayers wealth B. Return of taxpayers wealth C. Realization of receipt of gain D. Earnings constructively realized 4. Which of the following is not a criterion of a taxable income? A. There must be a gain B. The gain need not actually received. C. The gain must be included by the law as treaty from taxation. D. The law as treaty from taxation must exclude the gain. 5. If a property is received in lieu of cash compensation, the basis of tax is the A. Supposed amount of cash to be receive B. Agreed value of the property received C. Fair market value of the property received D. Salvage value of the property received. 6. If services are rendered for the cancellation of debt, the basis of tax is the A. Fair market value of the service rendered B. Amount of obligation omitted C. Fair market value of the debt cancelled D. Supposed amount of cash to be receive 7. If the taxpayer is subjected to jeopardy assessment, his taxable accounting period would be A. Calendar period C. Short period B. Fiscal period D. Variable period 8. Which of the following businesses is/are normally reporting income on accrual basis? A. Real property lessor C. Trading business B. Professional partnership D. Brokerage business 9. Which of the following is/are generally subject to final tax? i. Compensation income ii. Business income iii. Passive income iv. Capital gain A. i, ii, iii and iv C. Iii and iv only B. i and ii only D. Iii only 10. Which of the following is/are reportable (returnable) in the annual income tax return? v. Compensation income vi. Business income vii. Passive income viii. Capital gain C. i, ii, iii and iv C. Iii and iv only D. i and ii only D. Iii only 11. all of the following are passive income except A. Gross profit C. interest B. Royalty D. Dividend 12. Which of the following is not correct? A. All income received is taxable B. Taxable income is equal to gross income less statutory deductions
C. Net income is synonymous to taxable income D. Income derived from illegal activities is taxable income 13. One of the following is taxable income. A. Income from a qualified pension plan B. Compensation from personal injuries C. Stock dividend received D. Vacation leave with pay 14. Which of the following is incorrect? Taxable income Year 1 Year 2 A. Rent for year 2 collected in year 1 no yes B. Income from year 1 sales collected in year 2 yes no C. Services for year 1, collected in year 2 no yes D. Income from year2 sales, collected in advance in year 1 no yes 15. Statement 1: All foreign corporations are taxable only for income earned within the Philippines. Statement 2: All Filipino citizens are taxable for their income earned within and outside the Philippines. A. Both statements are correct. B. Only statement 1 is correct. C. Only statement 2 is correct. D. Both statements are incorrect 16. If an individual renders services for a creditor who in consideration thereof cancels the debt, the cancellation of indebtedness may amount to a A. Gift C. Donation inter-vivos B. Capital contribution D. Payment of income 17. Which of the following is correct? Reportable subject to Final taxTax return A. Compensation income no yes B. Business income yes yes C. Passive income earned within yes no D. Capital gain on real estate (capital asset) yes yes 18. Where there are no beginning and ending inventories of farm crops harvested, which of the following is true? Cash method Accrual method A. Income is greater lesser B. Expense is lesser greater C. Income is the same the same D. Expense is greater lesser 19. Which of the following sales is allowed to be reported under instalment reporting of income? A. Regular instalment sale of personal property B. Casual sale of personal property with initial payment of 25% of the selling price C. sale of real property with initial payment of 25% of the selling price D. all of the above 20. Under which case an instalment method of reporting income on instalment sale is allowed? A. Movable property is regularly sold on an instalment on instalment by a dealer B. Sale of real property where the initial payments exceeds 25% of the selling price Choices: A. Only no. 1 B. Only no. 2 PROBLEM 3-3 NET ASSETS APPROACH
C. Both nos. 1and 2 D. None.
The records of Roco trading for year 2009 show the following: January 1, 2009
December 31, 2009
During the year, the owner made a total withdrawal from the business amounted to 245000. How much is the reportable income for year 2009? A. 245000 B. 100000
c. -0D. (100000)
Problem 3-4 Increase in net worth The beginning net assets of a single proprietorship was 150,000. At the end of the year, the single proprietorship has net assets of 100,000. During the year, the owner made personal drawing of 70,000 from the business. The business income for the year is a. P50,000 loss c. P20,000 loss b. P50,000 income d. P20,000 income
Problem 3-5 Increase in net worth The net assets of a single proprietorship at the start of the year is 250,000. At the end of the year, it has total assets of P530,000 and total liabilities of P130,000. There are neither additional investments nor drawings during the year. Its income for the year using net worth method of computation is a. P400,000 c. P150,000 b. P280,000 d. P120,000
Problem 3-6 Increase in net worth The single proprietorship reported the following changes during the year: Increase in total assets Decrease in total liabilities Additional investments to the business Drawings during the year The business income during the year is a. P60,000 c. P430,000 b. P380,000 d. P450,000
P250,000 160,000 50,000 20,000
Problem 3-7 Return of capital and return on capital At the start of the year, Noli’s time deposit has a balance of P250,000. At the end of the year, the account has a balance of P280,000. There are no additional deposits and there are no drawings during the year. How much is the return of capital and return on capital? Return of capital Return on capital
a. b. c. d.
P250,000 P280,000 P280,000 P250,000
P280,000 P250,000 P 30,000 P 30,000
Problem 3-8 Income Realized In year 1, X invested in real property in the amount of P1,000,000. In year 2, the fair value of the real property is P1,500,000. In year 3, the property was sold for P1,800,000 and incurred disposal cost of P50,000. The amount of income for each year would be Year 1 Year 2 Year 3 a. P 0 500,000 300,000 b. P 0 250,000 250,000 c. P 0 0 750,000 d. P250,000 250,000 250,000
Problem 3-9 Taxable vs. Non-taxable income Orang’s income during the year are as follows; salary- P260,000 (including 13 th month pay); raffle winningsP70,000 and Philippine lotto winnings- P500,000. How much is the taxable and non-taxable income of Orang? Taxable Nontaxable a. P310,000 P520,000 b. P240,000 P500,000 c. P300,000 P560,000 d. P240,000 P590,000
Problem 3-10 Sources of income Ogie is a resident Filipino citizen. During the year, his earnings are as follows; Within Outside Compensation P180,000 P120,000 Income from grocery store 50,000 Share in lotto winnings 100,000 The total income taxable in the Philippines would be: a. P230,000 c. P350,000 b. P300,000 d.P450,000
Problem 3-11 Normal tax vs. Final tax Kikay reports the following earnings: Consultancy fee Salary Prizes in raffle ticket Gain on sale of principal residence How much is the income reportable in ITR and subject to final taxes? Subject to ITR Subject to final tax a. P300,000 P500,000
P80,000 300,000 20,000 400,000
b. c. d.
P320,000 P380,000 P480,000
P480,000 P420,000 P320,000
Problem 3-12 Cash received as Compensation Cris, a public school teacher, received a monthly salary of P12,000 for the first 4 months off the taxable year. Subsequently, he was promoted as department head resulting to an increase in his cash salary P15,000 per month. The gross compensation income of Mr. Sacayanan would be; a. P120,000 c. P156,000 b. P150,000 d. P168,000
Problem 3-13 Property received as compensation Atty. Pasiclab, received a second hand car from his employer TA Law Office for successfully defending a criminal case. The car has a cost of P400,000 and its accumulated depreciation amounts to P300,000. The prevailing market value of the car of the same model is P120,000, but the new model is p500,000. How much is the reportable income of Pasiclab? a. P100,000 c. P400,000 b. P120,000 d. P500,000
Problem 3-14 Service received in lieu of compensation Danny Floro works as a care taker with a monthly salary of P5,000 in the house of Atty. Panfilo Salango. Atty. Salango successfully defended the former against a vehicular accident case. The prevailing lawyers fee of Atty. Salango is P6,000, which they agreed that such shall become Mr. Floro’s salary for a month. How much is the compensation income of Mr. Floro in the said month? a. P6,000 c. P1,000 b. P5,000 d. P0
Problem 3-15 Notes received in lieu of compensation Mr. Teofilo Alcayde received a note with a face value of P30,000 as a dissertation advising fee from Miss Nita Rica. The note is non-interest bearing and is payable within one year. The prevailing market rate of the same nature of note is 10%. The present value factor of 10% annuity of P1 is 0.909. What is the amount of income to be reported by Mr. Alcayde upon receipt of the note? Compensation Interest a. P30,000 P0 b. P27,270 P2,730 c. P27,270 P0 d. P27,000 P3,000
Problem 3-16 Notes received in lieu of compensation
On June 30, 2009, Mr. Ely Felix received a two-year 12% interest bearing note amounting to P50,000 as a compensation. As of December 31, 2009, what amount of income Mr. Felix shall report? Compensation Interest a. P50,000 P3,000 b. P50,000 P6,000 c. P47,000 P3,000 d. P47,000 P0
Problem 3-17 Cash vs. Accrual method A, a single proprietor engaged in service business reported the following business income and expenses: Service income P500,000 Collections during the year P490,000 Expenses actually incurred during the year P150,000 Expenses paid during the year P200,000 How much is the net income from business before personal exemption? a. P350,000 c. P300,000 b. P340,000 d. P290,000
Problem 3-18 Cash vs. Accrual method In March 1, 2009, X Corporation reported the following business income and expenses: Sales P1,000,000 Cost of sales P600,000 Operating expenses P200,000 Gain from sale of old furniture P 20,000 If 20% of operating expenses of X is prepaid expenses, how much is the taxable income? a. P260,000 c. P220,000 b. P240,000 d. P200,000
Problem 3-19 Installment sales of personal property Mar sold a painting (capital asset) which he purchased in 2007 at a cost of P3,000, on the following terms: June 1, 2009 downpayment P1,000 August 1, 2009 installment due P1,000 October 1, 2009 installment due P2,000 October 1, 2010 installment due P4,000 October 1, 2011 installment due P4,000 1. For year 2009, Marifel will report a gross income of a. P9,000 c. P3,000 b. P4,500 d. P1,500 2. If Marifel is a dealer in paintings, for 2009 he will report a gross income of a. P1,500 c. P4,500 b. P3,000 d. P9,000
Problem 3-20 Installment sales of real property
In 2009, Cali Corporation sold by instalment a land for P2,000,000 which was previously purchased for P1,400,000. Other expenses related to the sale amounted to P100,000. 1. If Cali is a realty corporation and collected P500,000 as initial payment, how much is the income tax for the said sale in 2009? a. P37,500 c. P120,000 b. P52,500 d. P175,000 2. If Cali classifies the land as a capital asset, how much is the 2009 income tax for the sale if the initial payment received is P600,000? a. P175,000 c. P52,500 b. P120,000 d. P43,750
Problem 3-21 Deferred payment method On October 1, 2009, Uno sold a car costing P500,000 payable as follows: 1st year: cash P300,000 nd 2 year: 12% interest bearing note P200,000 3rd year: 12% interest bearing note P500,000 How much is the total reportable income in the year 2009? a. P506,000 c. P300,000 b. P500,000 d. P 6,000 Problem 3-22 Income from construction contracts The contract price of the project is P1,000,000. Actual cost installed in year 1 amounted to P90,000, which is 20% of the total estimated cost. How much should be reported as income under percentage of completion method? a. P200,000 c. P200,000 b. P110,000 d. P110,000
Problem 3-23 Income from construction contracts The total contract price of the project is P1,200,000. This was constructed as follows: Year Cost for the year Completion as of year end 2008 P432,000 60% 2009 P184,250 85% 2010 P103,750 100% The income to be reported in year 2010 under percentage of completion method would be a. P480,000 c. P136,250 b. P403,750 d. P76,250 Problem 3-24 Crop basis The citrus farm reported the following: Year Cost Harvest at selling price 1 P100,000 P0 2 P200,000 P0 3 P 50,000 P500,000 4 P50,000 P400,000 How much should be the amount of reportable income in year 3? a. P150,000 c. P450,000 b. P250,000 d. P500,000
Problem 3-25 Crop basis A farmer started planting pulp trees in year 1 and harvested the trees 5 years later with total value of P2,000,000. The total direct cost related to the harvest are as follows: Year 1: P300,000 Year 3: P100,000 Year 5: P400,000 Year 2: P100,000 Year 4: P100,000 His income under crop basis of reporting is Year 1 Year 2 Year 3 Year 4 Year 5 a. P100,000 P300,000 P300,000 P300,000 P0 b. P300,000 P100,00 P100,000 P100,000 P400,000 c. P 0 P0 P0 P0 P1,000,000 d. P1,000,000 P0 P0 P0 P0
Problem 3-26 Income from farming Assume the following data of a farmer for two years: Year 1 Farm harvest 100 cavans Harvest sold 80 cavans Harvest unsold, year end 20 cavans Selling price P500/cavan Required: Compute the gross income using (a) cash and (b) accrual methods.
Year 2 200 cavans 190 cavans 30 cavans P500/cavan
Problem 3-27 Farming business income Ka Polinar, a farmer of Tacurong, reported the following revenues and expenses in his farm for the year 200X: Revenue from livestock and farm products raised P 50,000 Revenue from livestock and farm products purchased P150,000 Rent income, lease of one hectare farm P100,000 Farm equipment sold P 25,000 Cost of livestock and farm products purchased P 90,000 Unsold livestock of farm products raised: Beginning P 6,000 Ending P 9,000 Carrying value of farm equipment sold (held for 10 months) P 25,000 Required: Compute for the gross income under the following situations: 1. Cash method 2. Accrual method Continuation of chapter 2 Problem 2-7 Tax assessment/refund procedures Instruction: Determine the last day to exercise the right of the taxpayer. Situation 1: Date of tax erroneously paid Date of claim for refund No decision on the claim of refund was made Question 1: When is the last day to appeal to the CTA?
April 15, 2008 May 20, 2010
Situation 2: Date of tax erroneously paid June 10, 2008 Date of claim for refund was filed with BIR March 3, 2010 Date of BIR decision of denial was received April 5, 2010 Question: When is the last day to appeal to the CTA? Situation 3: Date of tax erroneously paid June 10, 2008 Date of claim for refund was fled with BIR June 10, 2009 Date of BIR decision of grant was received August 1, 2009 Date of refund check received July 15, 2009 Question: If the refund check was not encashed, when is the starting date for the government to forfeit? Situation 4: Date of tax erroneously paid June 10 , 2008 Date of claim for refund was filed with BIR June 10, 2009 Date of BIR decision of grant was received August 21, 2009 Date of tax credit certificate received July 30, 2009 Question: If the tax credit certificate was not utilized or revalidated, when is the starting dste for the government to revert it to the general fund? Situation 5: Date of assessment was received Petition for reconsideration was filed with BIR Documents to support petition submitted No decision on the protest as of Question: When is the last day to appeal to the CTA?
January 2, 2009 January 12, 2009 January 22, 2009 July 12, 2009
Situation 6: Assessment received Petition for reconsideration filed with BIR Documents to support petition submitted Decision of BIR denying the petition 2nd request for reconsideration filed with BIR Decision on 2nd request denied Question: When is the last day to appeal to the CTA?
January 5, 2009 February 1, 2009 February 7, 2009 March 22, 2009 March 30, 2009 April 12, 2009
Situation 7: Date of appeal to the CTA April 21, 2009 Date adverse decision of the CTA June 1, 2009 Date the CTA adverse decision received June 10, 2009 Question: When is the last day to appeal to the Court of Appeals? Situation 8: Date of appeal to the CA June 10, 2009 Date of adverse decision of the CA August 20, 2009 Date of the CA adverse decision received June 25, 2009 Question: When is the last day to appeal to the Supreme Court?
Situation 9: Date the real property was levied Date the real property levied was sold Question: When is the last day to redeem the real property?
January 5, 2009 March 1, 2009
CHAPTER 4 GROSS INCOME
Problem 4 – 1 True or False Write True if the statement is correct or False if the statement is incorrect.
1. 2. 3.
Only the salary received by a statutory MWE is nontaxable but his income from business is taxable. Any amount received by an employee for any cause beyond the control of the employee is tax exempt. Baptismal fees given to religious officers are not subject to income tax because of the separation of church and state. 4. Under the employee stock option, the difference between the fair market value and the option price is compensation. 5. The cancellation of a taxpayer’s indebtedness is an income unless such cancellation of indebtedness is a gift. 6. If debt is cancelled due to services rendered, the basis of tax is the value of service rendered. 7. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. 8. Remuneration for casual labor not in the course of an employer’s trade or business is not considered compensation. 9. In the sale of service, gross income means gross receipts less sales returns, allowances, discounts and cost of services. 10. Cost of services includes but not limited to cost of facilities directly utilized in providing the services such as depreciation or rental of equipment used and cost of supplies. 11. Rental income includes obligations assumed by the lessee in behalf of the lesssor. 12. If the advanced payment is received from a customer to deliver a commodity, such receipts should be reported as income when received. 13. If the advanced rental is a security deposit, without restriction, then such amount is excluded in the determination of rental income. Problem 4 – 2 Write True if the statement is correct or False if the statement is incorrect.
1. 2. 3. 4. 5. 6. 7.
The principle of tax benefit considers reduction of taxable income. In general, illegally obtained income is taxable. Recovery of estimated bad debts is to comprise other source of income. Bad debts written off constitute income when recovered in the year of write off. The tax benefit rule provides reporting option to the taxpayer for the recovery of bad debts previously written off. All amounts received from a life insurance annuity are taxable. Income obtained through illegal means is included in the wrongdoer’s gross income even though he is obliged to return it when discovered.
8. 9. 10. 11. 12. 13.
Income that is not realized is taxable. Actual repayment of embezzled fund by the wrongdoer will give rise to reduction of his gross income. As a rule, income obtained illegally is not taxable if the wrongdoer is obliged to return it when discovered. Income received by error is not to be reported as part of the gross income. Dividends received by a cooperative from a domestic corporation are tax exempt. When stocks dividends received are of a different class from shares previously acquired, the stocks dividends are taxable income. 14. As a rule, excess amount of liquidating dividends over cost of shares surrendered is taxable. 15. Dividend is tax exempt if received by a resident foreign corporation from a domestic corporation. 16. Winnings are subject to a final tax of 20%, except when the amount is P10,000 or below. Problem 4 – 3 Multiple Choice Select the letter that contains the best answer.
Which of the following income is/ are earned through employee – employer relationship? i. Professional fee ii. Wages iii. Pension Pay iv. Capital gain Choices:
i, ii, iii only c. ii and iii only i and ii only d. ii only 2. Which of the following is taxable compensation income? Retirement pay under BIR approved retirement plan Separation pay due to disability Separation pay due to resignation Terminal pay by fact of death 3. Statement 1: All vacation leave and sick leave taken with pay are taxable compensation income. Statement 2: All unused vacation leave converted into cash are taxable a. b. c. d. 4. a. b. c. d. 5.
Both statements are correct. Only statement 1 is correct. Only statement 2 is correct. Both statements are incorrect. Which of the following is considered as taxable compensation income? Transportation allowance paid to rank and file employee Social security System Benefits Retirement pay under a duly BIR approved benefit plan Retrenchment pay Which of the following is not taxable? a. P2,500 for 10 days sick leaves actually taken b. P1,250 for 5 days unused vacation leave converted into cash c. P1,000 for unused vacation leave received as part of separation pay due to voluntary resignation d. P500 vacation leave included as part of as salary not withstanding his absence from work Which of the following is a taxable compensation income? a. Cost of living allowance b. De minimis benefits
c. Retirement benefit under BIR approved retirement plan d. Retirement pay 7. Compensation income is earned when an employee _ employer relationship exists. Which of the following represents compensation income? a. Honorarium of the company lawyer as guest speaker in company sponsored seminar b. Emergency pay c. Sick leave with pay d. All of the above 8. Which of the following is not a compensation income? a. Retirement pay c. Wages b. Allowances d. Professional fees 9. Which of the following will result to earning of income by the debtor? a. Cancellation of existing payables without any consideration b. Cancellation of existing payables for services rendered to creditor c. Cancellation of existing payable to offset the equivalent amount of collectible d. Cancellation of existing payable due bankruptcy of the debtor 10. Which of the following is income to the recipient? a. Stock option c. Pre-emptive stock right b. Stock dividend d. Stock warrant 11. Which of the following is / are not taxable benefits of employee? i. Lodging served within the employer’s premises and accepted by the employee as a condition of employment ii. Living quarter furnished to the employee for the convenience of the employer iii. Living quarter furnished outside the premises of the employee Choices: a. i. only c. ii and iii only b. i and ii only d. ii only 12. Statement 1: Remuneration for casual labor not in the normal course of business is not compensation. Statement 2: Remuneration for casual labor performed for a corporation is considered compensation a. Only the statement 1 is correct. b. Only the statement 2 is correct c. Both statements are correct d. Both statements are incorrect e. Problem 4 – 4 Multiple Choice Select the letter that contains the best answer.
Cost of services may be defined as a. Cost of services to provide services. b. Cost of facilities directly utilized to provide services. c. All direct costs and expenses necessary to provide services. d. No cost involved in providing services. All of the following are income within, except a. Dividends declared by domestic corporation. b. Salaries earned by Filipino overseas contract workers. c. Interest on bonds issued by domestic corporation. d. Income from business located in the Philippines. What is the final tax rate or interest income earned from a regular savings deposit? a. 5% c. 20%
b. 10% d. 25% Mrs. Gemmarie Parong is a mining operator. Her mineral lands are not covered by any lease contract. The tax Mrs. Parong to pay based on the actual market value of the gross output or mineral products extracted is a. Excise tax c. rental b. Royalties d. ad - valorem tax Insurance premium paid by employer in favor of the insured employee and designate the business of the employer as the beneficiary. Statement 1: The payment of insurance premium is taxable income of the employee. Statement 2: The payment of insurance is deductible expense of the employer. a. Only Statement 1 is correct. b. Only statement 2 is correct. c. Both statements are correct. d. Both statements are incorrect. The following are related items to the operation of the single proprietorship business: i. Purchases of goods for sale ii. Freight in of goods purchased iii. Sale of goods iv. Freight out of goods sold v. Unsold goods at the end of the period Which of the above items are elements of cost of sales?
a. i, ii, iii, iv and v c. i, ii and iv only b. i, ii, iv and v only d. i, ii, and v only 7. Statement 1: Property dividends received by individual from domestic corporation are subject to final withholding tax. Statement 2: Cash dividend received by a resident corporation from another corporation not during business in the Philippines is subject to final withholding tax of 35% without reciprocity. a. Both statements are correct. b. Only statement 1 is correct. c. Only statement 2 is correct. d. Both statements are incorrect. 8. Which of the following is subject to 10% final tax? a. Interest income from savings account b. Royalty income from franchise c. Royalty income from patent d. Royalty income from literary works 9. Which of the following dividends are subject to income tax? a. Received by domestic corporation from another domestic corporation b. Received by a resident corporation from a domestic corporation c. Received by domestic from resident foreign corporation d. Received by non-resident foreign corporation from another non-resident foreign corporation 10. Statement 1: Generally, Prizes and winnings are taxable income. Statement 2: Prizes less than P10,000 are taxable the same manner as business income a. Both statements are correct. b. Only statement1 is correct. c. Only statement 2 is correct. d. Both statements are incorrect. 11. Which of the following is not a taxable income? a. Bad debts previously deducted as item of expense and partially recovered subsequently b. Tax expense previously disallowed as deduction from taxable income, fully refunded subsequently c. Income from gambling d. Income from usurious financing
12. Statement 1: Income that is not realized is not taxable, but illegal income is taxable Statement 2: Income received under a mistake of fact or law is to be included as part of the gross taxable income. a. Only statement 1 is correct. b. Only statement 2 is correct. c. Both statements are correct. d. Both statements are incorrect. Problem 4 – 5
Gross Taxable Compensation
Pamela Lantes has earned the following income in 200x: Salary as a professor, net of withholding tax of P20,000
Income from practice of profession as CPA
Per diem as a board of director
Thirteenth month pay
First prize in essay writing contest
What is the amount of gross taxable compensation income? a. b.
Problem 4 – 6
The following incomes are reported by Cute, a CPA: Salary as an accountant
13th month pay and other bonuses
Audit retainer’s fee
Capital gains from sale of car
The total compensation income from employment is a. b.
Problem 4 - 7
The following are reported by Sexy: Salary as guest relation officer
Monetized 10-day unused vacation leaves
13th month pay
Cost and living allowance
How much is the taxable compensation income? a. b.
Problem 4 – 8
Sue reported the following retirement: First employment for 30 years received at the age of 50
Second employment for 10 tears received at the age of 60
Third employment for 10 years at the age of 70
How much is the nontaxable retirement pay of Sue? a. b.
Problem 4 – 9
c. P400,000 d. P500,000 Separation Pay
Gorgeous reported the following separation pay: First employment for 20 years at the age of 40 – resigned
Second employment for 10 years at the age of 50 - Retrenchment Third employment for 10 years at the age of 60 – retirement How much is the taxable separation pay?
Problem 4 – 10
Which of the following is the gross compensation income for 1,000 staock certificates received as payment of services rendered to employer? The share of stock is selling at P10 per share in the stock exchange. This has par value of P5 per share. The shares were acquired by the employer at cost of P8 per share. a. b. c. d.
P8,000 P5,000 P10,000 Whichever is the lowest of a, b or c
Problem 4 – 11
Compensation from Stock Option
An employee received stock option right for 10,000 shares of P10 per common stock at option price of P12 per share for one –year service. At date of grant, the market price was P13 per share and at date of exercise and sell of stock option, the market price was P15. The compensation income and capital gain of the employee are Compensation income
Problem 4 – 12
Taxable Compensation from Stock Option
X, an officer of Y Corporation was given stock portion for 10,000 shares with P20 par at option price of P23. The market price of the share in year 200B, date of grant was P25. The option was exercised in year 200C when the market value price was P30. How much would be the taxable compensation income of X in year 200B and capital gain in year 200C? 200B
Problem 4 – 13
Cancellation of Debt
Bingcol works as the CEO of Co. His compensation income is P50,000 per month. In January 31, 200B, he borrowed P300,000 from B Co. As a result, his monthly compensation income is reduced by P25,000 a payment to his borrowing. If on December 31, 200B, B Co. cancelled Bingcol’s indebtedness, how much is the latter’s compensation income in December 200B a. b.
Problem 4 – 14
Other Forms of Compensation
During the year, Sico has the following benefits received from his employer: Rice subsidy of P1,000 per month
Free housing as a requirement to perform his duty
Transportation allowance subject to liquidation
Insurance premium paid – the beneficiary is Sico
SSS employer’s contribution
How much is taxable benefits of Sico? a. b.
P- 0 P5,000
c. P21,000 d. P45,000
Problem 4 – 15
Remuneration for Casual Labor
Ana, a single proprietor, employs the following persons for a short period of time and pays their relative remuneration Workers
Status 1 day work
Cleaning of business equipment
Repair service of store
10 day work
Repair of home refrigerator
3 day work
Casual (1 month)
How much is the remuneration considered as compensation from casual service received? a. b.
Problem 4 – 16
Cost of Goods Sold
During the taxable year, the total purchase of goods for sale amounted to P500,000. Transportation expenses are P5,000 for goods purchased and P10,000 for goods sold. During the year, total sales amounted to P550,000. At the end of the year unsold goods amounted to P40,000. The cost of goods sold for the year is a. b.
Problem 4 – 17
c. P465,000 d. P460,000 Cost of Sales
The following information is available to determine the cost of sale of X Purchases
How much is the cost of sale? a. P 95,000
Problem 4 – 18
Cost of Sales
The following information pertains to the 2-year operations of a trading business: Year 1
The cost of sales for year 1 and year 2 are Year 2
Problem 4 – 19
Income from Manufacturing Business
A manufacturing business reported the following for its first operation: Purchases of raw materials
Raw materials, ending inventory
Work- in –process, ending inventory
Finished goods, ending inventory
Its business income is a. b.
Problem 4 – 20
Before starting to render his service, X collected an advance payment of P2,000 for the acceptance of the job contract. When the required service from X was completed, X received P8,000 cash service fee after deducting the P2,000 advanced payment, plus an office machine with cash price value of P3,000 and P2,500 cost to the seller.
The gross service income of X is a. b.
Problem 4 – 21
c. P11,000 d. P10,500 Gross Service Income
From the following data compute the gross business of a servicing business: Professional fee, accounting services
Salaries of accounting staff
Salaries of office assistant
General supplies a. b.
Problem 4 – 22
Telegraph and Cable Service Income
How much is the following receipts of a foreign corporation would be reported as gross income for Philippine Income Tax computation? Service charges for messages: Originating from outside of the Philippines sent to the Philippines Originating from the Philippines
Collection abroad of collect messages originating from the Philippines Collection in the Philippines of collect messages originating outside the Philippines a. b.
Problem 4 – 23
How much of the following amount received in 200B will be included in the tax return for the year 200B? Rent for year 200A
Rent for year 200B
Rent for year 200C
Refundable deposit a. b.
Problem 4 – 24
For the year, the following amounts were received from the lessee: Rent income
For the year’s real property tax assumed by the lessee
For the year’s insurance, reimburse to lessee
Unrestricted advanced rent
How much is the taxable gross receipts? a. b.
Problem 4 - 25
Income from Leasehold Improvements
The lease dated January 1, 2007 provided for construction of improvements at the cost of the lessee, and the ownership will belong the lessor at the end of 5 year contract. The construction of improvements which was completed at the end of the 3rd month of the contract amounted to P240,500. the improvement has an economic life of 8 years and estimated scrap value of P560. The rent income on improvements for year 1 under each method is Outright
Spread – Out
Problem 4 - 26
Income from Leasehold Improvement
The following information are available related to a 10-year lease contract which commenced on June 30, 200B: Cost of improvement put up by the lessee
Estimated useful life of the improvement
December 31, 200B
The reportable income from leasehold improvement for year 200B is Outright Method
Problem 4 – 27
Pre-Terminated Lease Contract
The following data are pertaining to a 5-year lease contract which started October 31, 2009: Cost of improvement put up by the lessee
Estimated useful life of the improvement
March 31, 2010
The income from leasehold improvement was reported by the lessor using the spread – out method. Assuming that the lease contract was pre-terminated on December 31, 2012, how much would be the additional income in 2012 from the pre-termination of contract? a. b.
Problem 4 – 28
P120,000 P 42,500
Which of the following is subject to 10% final tax? a. b. c. d.
P10,000 winnings P20,000 prizes P50,000 cash dividend received by an individual P100,000 property dividend received by a domestic corporation from another domestic corporation
Problem 4 – 29
The following are the income of a resident citizen for the period: Interest income from an investment in a 10-year bond
Interest income from 5-year time deposit in Philippine bank
Interest income from expanded foreign currency deposit
His taxable income is
Problem 4 – 30
X is a beneficiary for P100,000 payable in 3 equal payments at 12% interest per year. The P100,000 is payable in the following annuity table: Year
The income earned by the beneficiary in year 3 is a. b.
Problem 4 – 31
P24,905.00 P 4,461.20
The following are the gross royalty income of a resident for the period: Royalty income as author
Royalty income from franchising
Royalty income from gold mine
The total final tax on royalty income is a. P 80,000 b. P100,000 c. Problem 4 – 32
c. P130,000 d. P150,000 Royalty Income
X, a resident citizen received P51,500 from his royalties, net of final taxes of P3,500 for book copyrights and P5,00 for exclusive patent. There transactions are correctly summarized as Copyright a.
Gross income of
Income after tax of
Gross income of
Income after tax of
Problem 4 – 33
P31,500 P35,000 P31,500
P45,000 P20,000 P20,000
A domestic corporation received P500,000 cash dividend from a foreign corporation the earnings of which are 70% earned in the Philippines. The taxable dividend income of the domestic corporation is a.
Problem 4 – 34
P 150,000 d.
A, a domestic corporation, invested P1,000,000 in 10,000 common shares of stock of B, another domestic corporation. The investment represents 20% of the outstanding shares of B. During the year, B declared property dividend of 20,000 common shares of investment in common stock of C Corporation.
The par value of C’s share is P10 per share. At time of declaration, the fair market value of the share was P15 per share but when A received the property dividend, the fair market value was P16. How much is the taxable dividend income of A? a. P -0 – b. P40,000 Problem 4 – 35
c. P60,000 d. P64,000 Prizes and Winnings
Which of the following winnings and prizes received by a citizen is not subject to 20% final tax? a. P8,000 prize won in a TV program b. P20,000 winnings in a local boxing exhibition c. P5,000 winnings in a bicycle race paying P500 entry fee d. P50,000 prize won in a raffle draw Problem 4 – 36 Prizes and Winnings X received the following prizes and winnings: First prize – raffle draw (cost of ticket, P1,000 )
Philippine lotto winnings
Gambling winnings Beauty contest winnings
How much is the taxable prizes and winnings? a. P 50,000 b. P300,000 Problem 4 - 37
Bad Debts Recovery Year 1
(loss) before bad debts written off excluding bad debts recovery Bad debts written off
Previous year’s write off, recover this year
For year 3, the total taxable income would be a. b.
Problem 4 – 38
Bad Debt Recovery
The following ledger postings are available: Allowance for Bad Debts
Year 1 write off
January 1, balance P 800 December 31, balance
Accounts Receivable P1,500 January 1, Year 1 Year 2 sales 1,300 on account
P100,000 Year 1 write P800 100,800
For year 1, net operating income of P500 was reported. In year 2, P600 of year 1 bad debts written off was collected. The income from bad debt recovery to be reported would be Year 1
Problem 4 – 39
In tear 1, A Company’s net operating income reported was P20,000. The amount is net of P100,000 operating expenses. Part of the operating expenses is P25,000 local taxes. In year 3, P5,000 of year 1 local tax and P2,000 income tax were refunded. What amount of tax refund should be reported as part of year 3 taxable income? a. b.
Problem 4 – 40
During the year, the following tax refunds were received by the taxpayer : Real property tax deducted as expense in the previous year
Income tax paid in the previous year
Percentage on shares sold last year
Local taxes paid for the previous year
The income tax from tax refund to be reported should be a. b.
Problem 4 – 41
Mr. Normal received P20,000 as annuity of life insurance from Malayan Life. The annuity received includes a 10% interest. How much is the amount of taxable annuity? a. b.
P20,000 P 2,000
Problem 4 – 42
X received an annuity of P5,880, includes of 12% interest as part of the insurance plan entered into by X. What amount of this annuity is taxable against X? a.
Problem 4 – 43
Illegally Obtained Income
Mr. X received a letter from Mr. Y, his brother, to withdraw $1,000 from the PNB. The teller of PNB, however, issued $10,000 to Mr. X in which the latter took the entire money and spent the $9,000 immediately. Assuming that the exchange rate is P50 per $1, how much is the reportable income received by error of Mr. X? a. b.
P 50,000 P450,000
Problem 4 – 44
c. P500,000 d. P - 0 –
Illegally Obtained Income
Golang received a salary of P5,000 per month as a conductor of Philippine Lapid. Aside from his salary, he also obtain some money from the changes of bus clients which he intentionally neglect to return with a monthly average of P4,000 per month. If the BIR assessed Golang using the net worth method, and net increase in net asset is determined at P150,000, how much of the illegally obtained income would be taxable? a. b.
P108,000 P 60,000
Problem 4 – 45
P 48,000 P 42,000
Gross Income (Servicing)
A-1 Barber Shop Shows a total receipts of P425,000 from its hair cut and massage services in 200B. The following expenses were incurred by the barbershop in providing services: (a) Commission given to the barbers was 65% of the total receipts. (b) Rental expense of barbershop apace, P3,000 per month. (c) Depreciation of furniture and tools used in rendering service, P5,000 (d) Interest expense for buying furniture, P2,000; and ointment used P1,750 Required: For income tax computation, what is the correct amount of gross income of A-1 Barber Shop
Problem 4 – 46
Atty. Orville Thomas is employed as a corporate-lawyer of FLP, International. In 200B, he received the following from his employment: Salary
One thousand corporate shares of stock for special service rendered in October 200A : Fair market value per share – 200A
Fair market value per share – 200B
Cancellation of debt in lieu of service rendered
Insurance (the company is the beneficiary)
Required: Compute for the gross taxable compensation income of Mr. Thomas for year 200B
Problem 4 – 47
Mrs. Rowena Gorospe reports the following items of income and expenses as of December 31, 200B: Cash salary, net of withholding tax, P25,000 and SSS, P3,000 Dividend from San Magnolia Corporation Cancellation of her debt from San Magnolia Corporation Living quarters and meals allowances, within the employer’s premises Income tax paid by the employer
P302,000 30,000 50,000 40,000 5,000
One year note receivable from the employer, net of discount P1,000 (maturity June 30,200B) Gross income from business
Prepaid rent income
Interest from insurance proceeds, net of withholding tax Bad debt recovery (60% previously written off)
Income tax refund
Donation from relatives
Stock dividends from Asia Brewery at fair market value
Required: Compute the taxable income subject to normal tabular tax before personal exemptions.
Determining the Taxability of an Item Indicate whether the item is taxable or nontaxable with income tax.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.
Overtime pay of a minimum wage earner Statutory minimum wage of MWE plus his business income Amount receive in payment of moral damages Money acquired through donation Money acquired through illegal means Winnings Separation pay due to merger Income derived by Baguio City Government Availed vacation leave with pay Exemplary damages Damages for real unrealized profits Income earned by Philippine government Prizes and awards in sports competition not sanctioned by Philippine Olympic Sport Committee Interest income by Philippine National Red Cross from trust funds PERAA retirement plan Tuition fees collected by nonprofit educational institution Interest income from savings deposit earned by senior citizen Interest income from time deposit earned by cooperative Shelter of the maid working within the employer’s home Thirteen month pay in excess of P30,0000 Separation pay due to voluntary resignation Terminal leave benefit
Determining the Taxability of an Item Indicate whether the item is taxable or nontaxable with income tax.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.
Emergency and hazard pay o MWE Gains from redemption of share in mutual fund Prizes and awards-Magsaysay awards GSIS retirement benefits Premium received from insurance Proceeds from life insurance of employee received by the employer Dividend income derived from in the Philippines by the Taiwan Government Gains from sale of bond with a maturity of four years Gains from the sale of certificate of indebtedness with a maturity of six years Cancellation of debt due to service rendered Stock receive due to professional service rendered Accumulated vacation leave for private employees converted into cash at the end of employment contract Pensions, in general
14. 15. 16. 17. 18. 19. 20. 21. 22.
Proceed from the sale of land (capital asset), P100,000: costs, P120,000 Interest income Board of director’s fee Retirement program approved by the BIR Professional athletes salary Winning from sweepstakes or loto Income derived from smuggling Interest received from life insurance De minimis clothing, P4,000
True or False Write True if the statement is correct, or False if the statement is incorrect.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.
If the MWE earns other income subject to final tax, his SMW becomes taxable. If the MWE earns other income subject to normal tax, his SWE becomes taxable. Amount received by virtue of settlement of will litigation is not taxable income. The proceeds of life insurance taken by a corporation who insured the life of its employee who subsequently died constitute taxable income Amount received as a consideration for a service rendered shall be excluded from gross income Bequest refers to real property transferred from one person to another by will Income subject to treaty obligation binding upon the government of the Philippines is exempted from taxable Termination pay for any cause beyond the control of an employee is not subject to tax, except if the dismissal is with a cause. Damages for loss of earning capacity are nontaxable. Actual liquidated damages are taxable Physical, exemplary, and moral damages except damages for loss of profit in property are not taxable. Income divided by foreign government in the Philippines is taxable All prizes and awards are subject to income tax. Inventor’s awards are subject to income tax. Income derived by the political subdivision of the government is not taxable. Income derived from the property acquired by the gift, devised, or descent is excluded from gross income. Capital gains from sale of certificate of indebtedness with maturity of more than five years are subject to taxable. Maternity benefits advanced by the employer to the employee are excluded from gross income, hence exempt from withholding tax.
Problem 5-4 1.
Statement 1: For taxation purpose, 13th month pay is a compensation income. Statement 2: 13th month of less than P30,000 is taxable compensation income. a) Only statement 1 is correct. b) Only statement 2 is correct. c) Both statements are correct. d) Both statements are incorrect. Statement 1: Insurance premium paid by the employer for the life insurance of the employee, where the beneficiary is the employer is a taxable compensation income of the employee. Statement 2: Upon death of the insured employee, the proceeds of the life insurance is taxable against the beneficiary. a) Only Statement 1 is correct. b) Only statement 2 is correct. c) Both statements are correct. d) Both statements are incorrect.
Both Ara and Rica covered by a BIR approved employer’s pension plan. Ara retired from employment at the age of 52 after serving the same employer for 12 years. Rica retired at the age of 51 after serving the same employer for 10 intermittent services. a) Only the retirement pay of Ara is tax exempt. b) Only the retirement pay if Rica is tax exempt. c) Both the retirement pay of Ara and Rica are tax exempt. d) Both the retirement pay of Ara and Rica are taxable. William Galam was retired by his employer corporation in 200A and paid P1,000,000 as a retirement gratuity without any deduction for withholding tax. The corporation became bankrupt in 200B. Can the BIR subject the P1,000,000 retirement gratuity to income tax? First answer: Yes, if the retirement gratuity was paid based on the reasonable pension plan where William Galam was 50 years old and has served the corporation for 10 years.
Second answer: No, if William Galam was forced by the corporation to retire. a) Both answers are wrong. b) Both answers are correct. c) First answer is correct, the second answer is wrong. d) First answer is wrong, the second answer is correct. XYZ Co. took two insurance on the life of its President, Mr. A. In one policy, the beneficiary is the corporation to compensate it for its expected loss in case of death of its president. The other policy designates Mr. A’s wife as its irrevocable beneficiary. Question 1-Are the insurance premium paid by XYZ Co. in both policies deductible? Question 2-Will the insurance proceeds be treated as income subject to tax by corporation and by the wife?
a) Yes to 1st and no to 2nd questions. b) Yes to both questions. c) No to 1st question and yes to 2nd question. d) No to both questions. The widow of your best friend had been paid P1,000,000 account of the life insurance policy of the deceased husband. She asks you whether she should declare the amount for income tax purpose or for estate tax purpose. First advice: The proceeds of life insurance paid to beneficiary upon the death of insured are exempt from income tax and need not be declared for income tax purposes.
Second advice: The proceeds of life insurance would have to be declared for estate tax purpose if the designation of the beneficiary was irrevocable; otherwise it needs not to be declared. a) Both advices are correct. b) 1st advice is correct and 2nd advice is wrong. c) Both advices are wrong. d) 1st advice is wrong and 2nd is correct. 7. The following are the requirements to exempt retirement pay due to old age from taxation exempt. a) SSS or GSIS retirement pay. b) Equitable retirement program approved by the BIR Commissioner. c) The retiree should have been employed for at least 10 years and retiring at the age of at least 50 years old. d) Retirement pay should have been availed of for the first time. 8. Which of the following is classifiable as a taxable separation pay? a) Separation pay due to optional retirement b) Separation pay due to reorganization of the company c) Separation pay due to company’s brink of bankruptcy d) Separation pay due to death, sickness or disability 9. Which of the following is a common for non-taxable pension benefits i. The retiring employees have been in service of the same employer for at least 10 uninterrupted years. ii. The retiring employee is not less than 50 years of age at the time of retirement.
Choices a) I and ii c) ii only b) I only d) None 10. Which of the following income earned in the Philippines by a citizen is subject to income tax? a) Winnings in Philippine Charity Sweepstake Lottery b) Interest on government bonds as stipulated on the bond issue c) Gains sale of 3-year bond d) Value of property received as gift 11. A CDA registered cooperative is not subject to which of the following tax? a) Output VAT b) Final tax on interest income c) Final tax on foreign currency income d) Input VAT 12. The law excludes some items of income from taxation because a) The transformation of these income into economic gain are not essentially the result of labor or efforts of taxpayer. b) The law or treaty provides that they are not taxable. c) Some of these items are just return of capital. d) All of the above. 13. The following are the exclusions from gross income, except, a) Proceeds of life c) gifts, bequest and devises. insurance policies. b) Retirement benefits d) prizes and winnings. 14. Which of the following is excluded from the gross taxable income? a) Retirement benefits c) Raffle prizes b) Various winnings d) Rent income 15. Which of the following is taxable income? i. Insurance premium paid by employer on the life insurance policy of the employee where the designated beneficiary is the relative of the employee ii. Insurance policy paid by employer on the life insurance policy of the employee where the designated beneficiary is the employer. iii. The income tax of the employee paid by the employer as part of employee’s benefit. iv. The income tax of the employee advanced by the employer deduction against future income of employee. Choices: a) i only c) ii and iii only b) I and iv only d) iii only Problem 5-5
Multiple Choice Select the letter that contains the best answer.
Eddie resigned from his employment and received P25,000 separation pay. Glory received P30,000 as her terminal pay due to retrenchment legally enforced by her employer. Joseph received P35,000 termination pay when he was dismissed due to gross negligence. a) Only the separation pay of Eddie is taxable. b) Only the terminal pay of Glory is not taxable. c) Only the termination pay of Joseph and Glory are not taxable. d) Only the separation pay of Eddie and Joseph are not taxable. 2. Which of the following is taxable? a) SSS and GSIS benefit b) Social security benefits received by a balikbayan from employer abroad. c) Separation pay received by a 50-year old employee due to the retrenchment program of the employer. d) Interest income on time deposit. 3. Which of the following exclusion from gross income is not provided by special laws?
a) b) c) d)
Prizes and awards on religious and educational achievement. Winnings from lotto. Winnings from Philippine Charity Sweepstakes. Interest and capital gains on land covered by Land Reform under the purchaser tenant program.
4. The proceeds of insurance taken by a corporation on the life of the President to identify it against Loss in case of his death is a) Part of taxable income of the corporation. b) Taxable income of the corporation. c) Partly exempt, partly taxable. d) Exempt from income tax. 5. Mr. Tso’s building with a book value of P2,000,000 was razed by fire. The insurance company paid P1,400,000. The P1,400,000 proceeds is a) Taxable in full. c) tax exempt. b) Subject to final tax. d) any of the above. 6. Which of the following maybe excluded from the gross income of a taxpayer? a) Income derived from bequest and devices. b) Interest on proceeds of life insurance policies. c) Interest received from a domestic corporation. d) None of the above. 7. Which of the following is considered as taxable income? a) Separation pays due to sickness. b) Separation pays due to death. c) Separation pays due to voluntary resignation. d) Retirement pay of P3,000 per month. 8. Which of the following is a taxable income? a) SSS contribution deducted from salary. b) SSS sickness benefits. c) 13th month pay in excess of P30,000. d) Passive income earned by a citizen from sources outside the Philippines. 9. The following are taxable compensation for injuries except a) Interest from nontaxable damages. b) Compensatory liquidated damages. c) Damages for loss of goods and other belongings. d) Damages for unrealized profit. 10. which of the following cases is retirement benefit excluded from taxable income? a) The retiree is 45 years of age and has been in the service for more than 20 years. b) The retiree is 50 years of age and has been in the service for lesser than 10 years. c) The retiree is more than 50 years of age and has been in the service of the same employer for 15 years. d) The retiree is less than 50 years and has been in the service of the same employer for 10 years. Problem 5-6 Taxable Compensation An employee received the following for the period: Reimbursements of his medical expenses received from SSS 5 days sick leave paid by SSS Availed 10-day sick leave pay included in by the employer In the semi-monthly pay of the employee How much is the amount of taxable compensation? a) P3,500 c) P2,000 b) P2,250 d) P1,500 Problem 5-7
P 1 ,250 750 1,500
A MWE employee received a take home pay amounting to P212,000 inclusive of 13 th month pay of P17,500. The P212,000 is net of P13,500 withholding tax and P2,000 SSS contribution. In addition, he earned a P20,000 as other income subject to normal tax. How much is the total amount of his taxable income? a) P 20,000 c) P228,000 b) P212,000 d) P245,500 Problem 5-8 Taxable and Nontaxable Compensation Jennifer, a taxpayer who is single, received a net pay of P265,000 for the year. The amount is net of P50,000 withholding tax, P6,000 payment for advances, and P4,000 SSS contribution. This is inclusive of P27,000 13 th month pay and P5,000 Christmas bonus (de minimis). How much is the taxable and nontaxable compensation income? Taxable Nontaxable a) P265,000 P33,000 b) P285,000 P36,000 c) P289,000 P36,000 d) P295,000 P30,000 Problem 5-9 Tax-Exempt Contributions Thomas pay slip reported the following: Net take home pay Deductions made: SSS contributions Pag-ibig contributions Union dues contributions Office party contributions Charitable contributions Withholding income tax
P 13,000 300 100 100 75 25 400
Thomas taxable compensation income and tax exempt contributions would be Compensation Tax-exempt Contributions a) P13,000 P1,000 b) P13,100 P 900 c) P13,500 P 500 d) P13,600 P 400 Problem 5-10 Employer’s Benefits X was hired with a condition (due to the nature of his work) that he will be a stay-in. At monthly salary of P15,000 per month, he was also provided with free lodging valued at P2,000 per month and free meals, valued at P3,000 per month. The taxable monthly compensation income of the employee is a) P20,000 c) P17,000 b) P18,000 d) P15,000 Problem 5-11 Taxable Benefits A managerial employee enjoys the following monthly benefits: Rent apartment Insurance premium (employer is beneficiary)
Reimbursement of personal expenses Which of the following are subject to income tax? a) P100,000 c) P20,000 b) P 70,000 d) P -0-
Problem 5-12 Proceeds of life Insurance Twinkle Co. Insured Mr. Rodrigo Pajama, its President for P500,000. Mr. Pajama died and twinkle Co. received the proceeds of the insurance after paying insurance premium of P50,000. The reportable taxable income would be a) P500,000 c) P 10,000 b) P 50,000 d) P - 0 Problem 5-13 Income from life Insurance Mrs. Vina Luchina was insured under an endowment policy with value of P500,000. Total premiums paid by her during the term of premium payments on the on the policy was P490,000 from which there was a return of premiums of P 40,000. At the maturity of the policy, Mrs. Luchina received P500,000. The income of Mrs. Luchina under the policy is a) P500,000 c) P 10,000 b) P 50,000 d) P - 0 Problem 5-14 Cash Surrender Value X paid a monthly insurance premium of P10,000 for 3 full years. The average is for P2,000,000. At the end of 3 rd year, a cash surrender value of P270,000 was received by the insured. How much is the amount of income to be reported? a) P360,000 c) P10,000 b) P270,000 d) P - 0 Problem 5-15 Nontaxable and taxable damages Ernie Barron, an entrepreneur, met an accident and was able to claim the following damages: Actual damages for unrealized profit P 100,000 Actual damages for lost products 200,000 Exemplary damages 50,000 Moral damages 50,000 Interest on nontaxable damages 20,000 Actual liquidated damages 80,000 How much damages are taxable and not taxable? Taxable Nontaxable a) P380,000 P120,000 b) P300,000 P200,000 c) P200,000 P300,000 d) P120,000 P380,000 Problem 5-16 Compensation from Injuries Mr. Arango was injured in a vehicular accident in 200b. he incurred and paid medical expenses of P20,000 and legal fees of P10,000 during the year. In 200c, he received P70,000 as settlement from the insurance company which insured the car owned by the other party involved in the accident. From the above payment and transaction, what is the amount of taxable income accruing to Mr. Arango in 200C?
a) P -0b) P40,000
c) P 70,000 d) P 50,000
Problem 5-17 Taxable and Nontaxable Terminal pay The heir, upon the death of an employee, received the following amounts: Terminal pay P 60,000 Life Insurance 500,000 SSS death benefit 10,000 Donation of relatives 40,000 What amount of these receipts is taxable and not taxable with income tax? Taxable Nontaxable a) P610,000 P - 0 b) P500,000 P110,000 c) P110,000 P500,000 d) P - 0 P610,000 Problem 5-18 Taxability of Termination Pay Jalosjos was dismissed from his employment due to major infraction committed and received P100,000 termination pay. Under the Tax Code final pay received due to involuntary separation is not taxable. Which of the following is true? a) Jalosjos’ P100,000 termination pay is taxable because he was terminated due to cause within his control. b) Jalosjos’ P100,000 termination pay is not taxablr because his termination is not voluntary. c) Jalosjos’ P100,000 termination pay is not taxable because it is against his will. d) Jalosjos’ P100,000 termination pay is taxable because it is due to cause which is beyond his control. Problem 5-19 During the year, a resident citizen received the following among others: Last pay upon resignation from 1st employment P 100,000 Separation pay due to closure of his 2nd employer 70,000 Retirement pay received from SSS as member 150,000 Which is the reportable income from data above? a)P20,000 c)P150,000 b)P170,000 d)P100,000
Problem 5-20 Nontaxable Receipts Eddie Gil received the following cash during a taxable year: Actual damages for injuries suffered P30,000 Separation pay due to sickness 100,000 SSS retirement benefits 500,000 Inheritance from his grandparents 100,000 How much amount of cash receipts is subject to income taxation? a)P-0c)P130,000 b)P100,000 d)230,000 Problem 5-21 Senior Citizen’s Income Which of the following income earned each year year by a senior citizen is not taxable income? a) P100,000 salary for year 1 b) P5,000 interest income for year 2
c) P10,000 interest income for year 3 d) P50,000 business income for year 4 Problem 5-22 Senior Citizen’s Income Lolo Rado is a 60-year old retired employee. For the year, he received the following income: Income from his various consultation fees Interest income from 5-year time deposit Interest in credit cooperative where he is a member Interest income from bank savings deposit His income subject to income tax is a) P69,000 b) P14,000
P50,000 10,000 5,000 4,000
c)P 4,000 d) P-0-
Problem 5-23 Gifts, Bequests and Devises Pandoy received the following gifts during the year Christmas gifts from his employer Gifts from relatives on account of his birthday Inheritance from his grandfather Donations from his friends
P 5,000 100,000 500,000 30,000
How much is the total gifts subject to income tax? a) P635,000 b) P35,000 c) P5,000 d) P-0Problem 5-24 Gifts, Bequests and Devises On march 1 200B, Mayumi received a building property from his parents in heritance with fair market value of P1,000,000. This property was acquired for P8,000,000 five years ago by his parents. The monthly rental income of the property is P100,000 with an average monthly expense of P20,000. Mayumi’s income subject to income tax for the year 200B is a) P11,200,000 c) P 960,000 b) P10,960,000 d) P 800,000 Problem 5-25 Nontaxable Prizes and Awards Precious Lara received cash amounting to P1,000,000 plus a house and lot amounting to P3,000,000 for winning as Ms. International. How much tax exempt from award of Ms.Lara? a) P 4,000,000 c) P 1,000,000 b) P 3,000,000 d) P -0Problem 5-26 Nontaxable Winnings and Awards Manny Pacman, a boxing champion received the following winnings during the taxable year: Lotto-Philippines Boxing price
P 10,000,000 25,000,000
Gambling winnings Raffle-refrigerator The nontaxable winning/ prizes would be a) P10,000,000 b) P10,020,000
100,000 20,000 c) P 10,120,000 d) P 35,120,000
Problem 5-27 Nontaxable Winnings Prizes and Awards Onyok Velasco, a national athlete received the following during the year: Ramon Magsaysay award Athlete of the year award Prize-Jollibee raffle Prize for winning the silver Olympic medal Gift from Mr. Alfred Lim Car from Nissan as a gift Winnings-Philippine sweepstake Gambling winnings
P 50,000 100,000 5,000 500,000 250,000 1,000,000 100,000 500,000
The total winnings/ awards and prizes are not subject to income tax is a) P2,505,000 b) P2,000,000 c) P1,905,000 d) P1,900,000 Problem 5-28 Investment in Government bonds The following earnings were realized from the investment in 5-year government bonds: Interest income Gain from the sale of bonds classified as capital asset securities How much is the total income tax? a) P 21,000 b) P 12,000
P 60,000 140,000
c) P 9,000 d) P -0-
Problem 5-29 Gain from Sale of Bonds The following transaction of an individual taxpayer transpired during the taxable year: Investment in a 7-year, P1,000,000 face value bonds Interest received from bond investment Gain from the sale of bonds on maturity date How much is the taxable income? a) P -0b) P 24,000
c) P 36,000 d) P 60,000
Problem 5-31 Nontaxable Interest Income A nonresident alien earned the following interest income:
P990,000 120,000 110,000
Interest income from peso savings deposit Interest from expanded foreign currency deposit (converted to peso) Interest from yield deposit
P50,000 100,000 30,000
How much of the above income is nontaxable? a) P 30,000 c) P 80,000 b) P 50,000 d) P 100,000 Problem 5-32 Investor’s income Alberto invented a device that helps paralyzed people walk. The government approved its patent. During its first year of commercial activities, the following items wre reported in relation to yhe invention: Income from the sale invented products Cost of produced products Sale of technology Research and development costs Inventor’s Achievement Award
P5,000,000 1,000,000 2,000,000 800,000 300,000
How much is the nontaxable income of Alberto as inventor? a) P6,200,000 c) P4,000,000 b) P5,000,000 d) P 300,000 Problem 5-33 Cooperative Income A CDA registered cooperative reported a total income of P500,000 inclusive of P10,000 interest in bank savings deposit. The taxable income of this cooperative would be a) P 510,000 c) P 10,000 b) P 500,000 d) P -0Problem 5-34 Cooperative Income Baguio-Benguet Cooperative has the following income during the taxable year: Interest income from members P5,000,000 Income from coop groceries 3,000,000 Interest income from foreign currency deposit 2,000,000 Interest income from time deposit 1,000,000 How much is the income tax paid by Baguio-Benguet Cooperative? a) P 150,000 c) P 350,000 b) P 200,000 d) P 1,200,000 Problem 5-35 Retirement Benefit [Comprehensive] Mr. Mario Matiyaga, 50 years old, rendered service as a security guard of Anscor Corporation. He had a monthly salary of P5,000 before retirement in October 31, 200x. He received P500,000 retirement benefits in accordance with reasonable private benefit plan maintained by Anscor Co. Required: Compute for the amount to be included in the gross income of Mr. Matiyaga for 200x based on the following independent assumptions: 1) He received the retirement benefit for the first time after serving for 10 years. 2) He received the retirement benefit for the second time. 3) He has served the company for 10 noncontinuous years. Problem 5-36 Exclusion from Gross Income (Comprehensive) Mr. Jose Velarde received the following items for the taxable year 2007: Winnings from charity horse race sweepstake from PCSO
Winnings from gambling, net of P700,000 loss from gambling Interest on government debt securities Damages awarded by the court for breach of contact [of which 40% is damages for unrealized profits] Gain from redemption of shares in mutual fund Gain from sale of bonds with maturity of more than five years Gain from friends
800,000 100,000 1,000,000 300,000 60,000 200,000
Required: Compute the total amount of exclusion from gross income. Problem 5-37 Exclusion from Gross Income (Comprehensive) Mr. Erasto Fuentes received the following: Return of his life insurance premium pais within 25 years with annual premium of P15,000 Proceeds of his mother’s life insurance paid within 30 years with annual premium of P5,000 Cash gift from his missionary friends House and lot inherited from his mother Rent income from house and lot inherited Required: Compute for the following: 1) Amount to be excluded from gross income 2) Amount to be included as gross income
P2,000,000 1,000,000 50,000 3,000,000 100,000
Problem 5-38 Taxability of Transferred Received Miss Aurma Tandana served as a nurse for Judge Maximo Laxa for thirty years. Since she has been serving for long period of time, the judge included in his last will and testament an amount of P1,500,000 as a payment for her service. Question: Is the transfer excluded from income taxation if received by Miss Tandana upon the death of Judge Laxa? Problem 5-39 Income Subject to Normal Tax Cristiflor Buduhan received the following items for the taxable year 200x: Proceeds of life insurance of his decedent husband with premiums paid amounting to P200,000. Mrs. Buduhan is an irrevocable beneficiary Donation from friends and relatives Compensation for actual damages for injuries suffered by her husband Dividend income Interest on bank deposits Prizes for winning as Mrs. Beautiful of Tawi-Tawi SSS death benefits of his husband
P 1,500,000 10,000 200,000 50,000 2,000 25,000 20,000
Required: Compute for the gross income to be included in the income tax return of Mrs. Buduhan subject to noramal or tabular tax.
True or False
Write True if the statement is correct or False if the statement is incorrect.
1. Fringe benefits are forms of incentives to employees. 2. Fringe benefits include salaries, services, or other benefit given by employer to an individual employee. 3. Wage and/or salary given to the employees may be reduced during financial difficulties. 4. Additional remuneration for overtime and separation pay does not include fringe benefits. 5. Fringe benefit tax includes additional help granted by the employer to the employees in addition to the basic salary. 6. The tax rate of fringe benefits tax shall be the same with corporate tax rate for income taxes. 7. The fringe benefits received by the rank-and-file employees are to be reported in the annual income tax return. 8. The fringe benefit tax is a final tax to the employer. 9. The grossed up monetary value is the benefit expense of the employer. 10. Fringe benefit tax shall be treated as a final income tax on the employee that shall be withheld and paid by the employer’s gross income. 11. If the employer did not withhold the FBT and subsequently discovered and assessed by the BIR, the related fringe benefit tax is not allowed as deduction from the employer’s gross income. 12. The fringe benefit tax is the income tax income earned by the employee. 13. The liability of the employer is to withhold the corresponding income tax from the fringe benefit earned by the employee. 14. If the fringe benefit is granted in money, or directly paid for by the employer the actual amount received by the employee is the monetary value. 15. If the fair value of the assigned residential house is greater than its cost, the excess amount shall be amortized and charged to fringe benefit expense. 16. All housing fringe benefits are subject to fringe benefit tax. Problem 6-2 True or False Write True if the statement is correct or False if the statement is incorrect. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Salaries of household maid granted by the employer to a managerial employee are taxable fringe benefits All household expenses are taxable fringe benefits. A travel as fringe benefit required by the company to its officer is subject to fringe benefit tax Holiday and vacation expenses of the managerial employee borne by his employer are taxable fringe benefits. All scholarship grants to the employees are non-taxable fringe benefits. Contributions of the employer for the benefit of the employee for retirement, insurance and hospitalization benefit plans are subject to fringe benefit tax. All fringe benefits are subject to fringe benefit tax, except those covered by employer benefit rule and de minimis. A fringe benefit no t subject to FBT is also not subject to compensation income tax. Fringe benefit tax is not applicable when the fringe benefit given is required by the nature of or is necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience of the employer. The monetized value of leave credits paid to government officials and employees is not subject to FBT and withholding tax on compensation. A medical allowance of P750 per employee per month to the employee’s dependent is a nontaxable fringe benefit.
Daily meal allowance not exceeding twenty-five percent of the basic minimum wage is a “de minimis.” Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year and the monetized value of leave credits paid to government officials and employees part of de minimis.
Select the letter that contains the best answer.
1. Which of the following statements is true? a. Existing fringe benefit being provided to a managerial employee could be reduced without violating the labor law b. The fringe benefit increases in direct proportion to overtime rendered. c. The fringe benefit is strictly payable in cash d. The fringe benefit of managerial employee is exempted from income tax. 2. Which of the following statements is not correct? a. Fringe benefit of a managerial employee is subject to final income tax. b. Fringe benefit tax is a creditable withholding tax. c. Fringe benefit tax is an income tax. d. Fringe benefit tax rate is 32%. 3. Which of the following statement is correct? a. The grossed up monetary value of fringe benefit is equal to 68% of cash value of the benefit. b. The taxable compensation of the employee with respect to the benefit is equal to the grossed up monetary value of the benefit. c. The fringe benefit tax is the income tax expense of the employer. d. The 32% final tax is applied to the monetary value of the benefit. 4. Which of the following is not correct? Relatively small meal allowances paid to rank and file employee intended to promote health and goodwill are a. b. c. d.
considered as de minimis fringe benefits not subject to fringe benefit tax not subject to income tax as compensation. subject to income tax as compensation.
5. Which of the following is subject to fringe benefit tax?
a. Fringe benefit required by the nature of or necessary to trade business or profession of the employer. b. Those granted for the convenience of employer. c. De minimis benefits. d. Medical cash allowance to dependents of employees amounting to P150 per month. 6. Which of the following concepts denotes exemption from fringe benefit tax? a. Convenience of the employer rule b. Necessity to the business or trade of employer rule. c. De minimis benefits d. All of the above 7. Which of the following is not a taxable fringe benefit? a. P10,000 actual medical benefits received during the taxable year b. Daily meal allowance of P50. The basic minimum wage is P200 c. Cost of the educational assistance to the employee’s children. d. Cost of employees’ group insurance paid by the employer.
8. Which of the following fringe benefit is subject to compensation income? De minimis Received by rank-and-file Received by supervisor a.
9. Which of the statements is correct? Statement 1: The fringe benefit tax is part of the compensation of the managerial employee Statement 2: The fringe benefit tax is to be withheld and remitted by the employer to the BIR a. b. c. d.
Statement 1 is correct. Statement 2 is correct Both statements are correct Both statements are incorrect
10. What is the value of fringe benefit if a property is furnished by the employer to be used by the employee without transfer of ownership? BookValue Fair market value Depreciated value
11. The following business travel is subject to fringe benefit tax, except a. Hotel accommodation for $300 per day b. Cost of economy airplane ticket c. Inland travel expense d. All of the above 12. Educational grant to the employee or his dependent by the employer is not subject to fringe benefit tax, except when a. the study grant is connected to trade b. there is a written contract that the employee will remain to work for a period of time c. the assistance was through competitive scholarship program d. the study grant is not connected to trade Problem 6-4A De Minimis Case 1- De minimis’ and other benefits’ Mr. A received the following compensation and benefits during the year: Total basic salary
13th month pay
Rice subsidy (P2000 per month)-de minimis
How much is the taxable and the nontaxable compensation of Mr. A? Taxable
Case 2- MWE with other benefits within P30,000 ceiling Mr. B a minimum wage earner, received the following compensation and benefits during the year:
Total basic salary
13th month pay Hazard pay
How much is the taxable compensation of Mr. B? a. P132,000 b. P116,000 c. P112,000 d. P -0Case 3- MWE with other benefits exceeding P30,000 ceiling Mr. C, a minimum wage earner , received the following compensation and benefits during the year: Total basic salary
13th month pay
Rice subsidy (P3,000 per month)-de minimis
How much is the taxable and the nontaxable compensation of Mr. C? Taxable
Case 4- MWE with business income Mr. D, a minimum wage earner, received the following compensation and benefits during the year: Total basic salary
13th month pay
Rice subsidy(P2,000 per month)-de minimis
In addition, Mr. D earned the following other income: Rent income
Interest income, net of final tax
How much is the taxable and nontaxable income of Mr. D? Taxable
Problem 6-4B Housing and Motor Vehicle Benefits Case 1-Housing Benefits X corporation purchased a residential property with a zonal value of P5,000,000. The property has a fair market value of P6,000,000. 1. If the property was assigned for the use of X Co.’s president, how much is the fringe benefit tax? a. P70,588
2. If the property was acquired for the use of X Co.’s manager for P2,000,000 down payment and P1,000,000 on installment basis per year in 4 years (with an effective interest rate of 12% per year), how much is the fringe benefit tax? a. P70,588
Case 2- Motor Vehicle Benefits A Co. purchased a car for a cash price of P1,000,000. Of the A Co. purchased the car on installment, the monthly payment would be P20,000 for 5 years.
1. If the company decided to maintain the car for the use of its president and other employees as needed. How much is the fringe benefit tax? a. P47,059 b. P56,471 c. P94,118 d. P112,941 2. If the company decided to transfer the ownership of the car in the name of its president, how much is the fringe benefit tax? a. P47,059 b. P56,471 c. P94,118 d. P112,941 Problem 6-5
Values of Fringe Benefits and FBT
An employer remitted to BIR P80,000 pertaining to amount withheld from cash benefit granted to its managerial employee. 1. How much is the monetary value of fringe benefit paid to managerial employee? a. P330,000 b. P250,000 c. P170,000 d. P80,000 2. How much is the grossed-up monetary value of fringe benefit? a. P330,000 b. P250,000 c. P170,000 d. P80,000
3. The income tax expense deductible from the business income of the employer for this particular payment is? a. P80,000 b. P54,000 c. P25,600 d. P-0Problem 6-6
Deductible Fringe Benefit Expense
X Corporation paid P136,000 cash fringe benefit for year 200A representing 80% of the car incentive for its area manager. X remitted the related final tax of the said cash fringe benefit. The amount to be claimed as business deduction from business income is a. P200,000 b. P170,000 c. P136,000 d. P108,800 Problem 6-7
Deductible Tax Expenseb
EGV partnership withheld P19,200 from the fringe benefit granted to its office manager. Pertaining to the amount tax withheld, how much would be the tax expense that the office manager could deduct from his gross compensation income? a. P-0b. P 1,644 c. P 19,200 d. P60,000
Fringe Benefit Tax
Joseph Estrada, a company messenger, received the following fringe benefits during the taxable period: Motor Vehicle purchased to deliver messages Actual medical help for hernia operation
Food allowance per month Uniform allowance
The fringe benefit tax of Joseph would be a. b. c. d.
P31,520 P30,400 P24,000 P-0-
Tax Recovered by the Government
In 200B, the BIR found that X Corporation’s payments of fringe benefits to its managerial employees in 200A were charged to miscellaneous expense amounting to P102,000 . If the company’s 200A net income after tax was P1,750,000 how much is the tax recovered by the government for the said discovery if the requirement of expense deductibility is considered? a. P83,700 b. P48,000 c. P78,600 d. P17,400 Problem 6-10 Housing Privilege A Corporation assigned its residential building to be used by its CEO. The building was purchased for P 2,040,00 and has a zonal value of P 1,972,000. How much is the monthly fringe benefit by the CEO a. P125,000 b. P 6,250 c. P 6,042 d. P 2,000 Problem 6-11 Housing Privilage B Corporation rents a condominium in Baguio City to be used by its key officers that supervise the Region I business operation. The monthly rental expense on the condominium is P34,000. Jean, the corporate comptroller, is assigned in Baguio City for two months to investigate inventory fraud. She was assigned to stay in the said condominium during the period of investigation.
How much is the amount of fringe benefit tax on the condominium? a. b. c. d.
P-0P8,000 P10,880 P16,000
Problem 6-12 Expense Account Gerry, the chairman of the board, presented the following expense accounts paid by U Corporation: Monthly Representation Allowance
Pants and T-shirt
Gasoline of company car
The fringe benefit tax would be a. P27,200
Problem 6-13 Motor Vehicle Fringe Benefit Miss Clarene Sito, the production supervisor of the Universal Corporation was given a fringe benefit in the form of a car whereby the company has shouldered 75% of the price. The price of the car is P476,000 How much is the fringe benefit expense? a. P700,000
d. P 357,000
Problem 6-14 Household Expense In 200B, Miss Rowena Gorospe, a managerial employee, was reimbursed by her employer for the total salary she paid to her house helper amounting to P16,320 for the year and P34,000 traveling expenses incurred in connection with her duty as sales manager How much would be the fringe benefit tax for the year, to be withheld by her employer? a. P24,000
Problem 6-15 Household Expense A managerial employee received P57,800 cash from his employer. The amount is to repay the manager of the amount paid as salary of the household helper of the manager’s family. How much is the fringe benefit tax? a. P85,000
Problem 6-16 Interest benefits on Loan Andoy, an employee of P Finance Co. borrowed money from the company amounting to P88,400. The company’s policy is to charge 3% per annum to its employees instead of its regular interest rate of 1.5% per month. 1. If Andoy is a rank-and-file employee, how much is the fringe benefit tax on the interest benefits? a. P6,240
2. If Andoy is a managerial employee, how much is the fringe benefit tax on the interest benefits? a. P6,240
Problem 6-17 Membership Fees A Corporation paid the following membership fees of its comptroller: Professional Tax Receipts (PTR)
PICPA Lifetime membership Goma Golf Club
Baguio Country Club
How much is the fringe benefit tax? a. P160,000
Problem 6-18 Expenses for Foreign Travel
Art, the VP for Marketing of U Co. was given a privilege to attend a business meeting in Europe. He incurred the following expenses with supporting documentary evidences: Plane Ticket-ordinary (round trip)
Hotel, room charge for four days
Assume that $1=P50 and all expenses are in the name of the employee reimbursed by the company.
How much is the amount of fringe benefit expense? a. P50,000 b. P137,500
c. P150,000 d. P237,500
Problem 6-19 Expenses for Foreign Travel An employer sent a managerial employee to an international convention. From Philippines to country of venue, business class plane ticket of P40,800 was paid by the employer. From country of venue back to the Philippines, P54,400 first class ticket was by the employer. How much is the fringe benefit tax for the plane tickets paid? a. P19,200
Problem 6-20 Holiday and Vacation Expenses A managerial employee was given by his employer all paid up vacation expenses amounting to P408,000 plus salary of P34,000. How much is the fringe benefit expense of the employer? a. P650,000 b. P600,000
c. P208,000 d. P192,000
Problem 6-21 Educational Assistance After passing the scholarship examination, J received P92,500 as educational from EGV foundation wherein his father works as the VP for Operations.
How much is the fringe benefit tax? a. P-0b. P30,464
c. P44,800 d. P95,200
Problem 6-22 Educational Assistance 1. For the year 200A, Michelle Gallego, a dean of college, received from her employer an educational benefit with cash value of P65,280. The fringe benefit tax is a. P65,280 c. P15,360 b. P30,720
2. Pertaining to the same data in number 1, the operating expense allowed as deduction from business income of the employer is a. P96,000 c. P30,720 b. P65,280
Problem 6-23 Nontaxable and Taxable Fringe Benefits Miss Mabukol, as the head of office, received the following fringe benefits during the taxable year: Car
Employees Achievement Award
Medical allowance to dependents
Actual Medical benefits
Required: Compute the following: 1. Nontaxable fringe benefits. 2. Fringe benefit tax Problem 6-24 Comprehensive Problem Violeta, a branch manager of San Miguel Corporation since 200A, received a total annual salary of P360,000. She also received a free housing benefit with monthly rent of P12,240 and fixed monthly meal of P2,000 considered as part of her compensation income.
In 200B, her salary and, fringe benefits has been increased by 10%. During the year, in addition to her previous fringe benefits the following cash benefit was extended to her by the corporation: a. Educational assistance for her dependents amounting to P13,600. b. Employee achievement awards, P10,000 c. Lions Club membership fee, P20,400 Required: Compute the following: 1. 200B taxable amount of fringe benefits subject to FBT 2. 200B fringe benefit tax 3. 200B deductible amount of fringe benefits Problem 6-25 Comprehensive Problem The following items of fringe benefits are given to Mr. Wong, a manager of Leslie Company:
Required: How much is the fringe benefit tax due assuming that Mr. Wong is a (an): 1. Alien not engaged in trade or business in the Philippines 2. Filipino employed as manager of an offshore banking unit of a foreign bank 3. Filipino employed as manager of Clark Special Economic Zone (CSEZ) Problem 6-26 Compensation and De minimis Mr. C, a resident Filipino citizen, shows his income and expenses during a calendar year:
Gross compensation income
13th month pay
SSS premium contribution
Philhealth premium contribution
De minimis: Rice Subsidy
Actual Hospitilization payments
Clothing allowance Temporary Housing for 3 months
Required: Compute the taxable compensation during the year assuming that Mr. C is a:
1. Minimum wage earner 2. Not a minimum wage earner Problem 6-27 Compensation and De minimis Mr. B, a resident Filipino citizen, shows his income and expenses during a calendar year:
Gross compensation income 13th month pay SSS premium contribution
P128,000 10,600 2,400
Philhealth premium contribution
De minimis: Rice subsidy
Actual hospitalization payments
Food allowance for overtime in 10 days
Temporary housing for 3 months Rent income
Required: Compute the taxable compensation during the year assuming that Mr. C is a 1. Minimum wage earner 2. Not a minimum wage earner Problem 6-28 Valuation and FBT The following fringe benefits were received by a managerial employee from his employer:
a. Cash amounting to P68,000 to purchase a motor vehicle. b. Car acquired on installment. Terms: P200,000 down payment and P180,000 installment for 5 years. The effective interest rate is 18% per year. c. House and lot costing P816,000 transferred in the name of the employee. The property has a fair market value of 150% based on its cost. The estimated life is 20 years d. House and lot costing P1,020,000 with a fair market value of P1,600,000. The property was not transferred in the name of the employee. The estimated useful life of the property is 25 years e. Apartment rented by the company for P244,000 for a year and granted the same to be used by the employee for free f. Assignment of residential property for the use of employee. The property has a fair market value if P1,360,000 but its zonal value is P1,224,000 Required: Compute the following (independent situation): 1. Monetary value 2. Fringe benefit tax Problem 6-29 Valuation of Fringe Benefits In 200x, May Tamboc is a branch manager of PCI Bank. The bank assigned to her a condominium. If the condominium is leased to others it has a monthly rent income of P25,000. The condominium has the following values: Acquisition Cost
Fair Market Value
In addition, the bank purchased a car in the name of May. The car was acquired on installment with the following terms: P300,000 down payment and P240,000 per year for 5 installment. The effective interest rate is 12% per year. Required:
1. Compute the fringe benefit tax of each fringe benefit received 2. Make the appropriate journal entries of each fringe benefit. Problem 7-1
True or False
Write True if the statement is correct, or False if the statement is incorrect. 1. Receivables are ordinary assets 2. Assets subject to depreciation are capital assets 3. The taxpayer’s purpose at the time of sale is the determining factor whether the asset is to be classified as ordinary or capital 4. If a taxpayer abandons property for an ordinary loss and sells it in a foreclosure sale, the loss incurred is a capital loss. 5. There is no holding period for sale of shares of stock held for more than 1 year 6. No tax is to be paid if the sale of shares of stock is traded in the local stock exchange and resulted to a capital loss. 7. Net capital loss carry over is not applicable for corporations 8. If the property was acquired as a gift, the cost of such property when sold is its fair market value at the date of donation or acquisition cost of donor, whichever is lower 9. The net capital loss carry over of an individual taxpayer is limited to the amount of taxable income in the year when the loss was sustained 10. The rules of ordinary loss and net capital loss for both individual taxpayer and corporations are the same 11. If a government owned corporation sells a real property, only the selling price is the basis of tax. 12. It is always advantageous to the taxpayer to choose the 6% final tax than the normal tax if the real property is sold to the government. 13. Sake of real and personal properties for profit of SSS and GSIS are subject to creditable withholding tax 14. A contract price is determined by deducting from the selling price the amount of cost or assumed mortgage whichever is higher 15. Land owned by religious order, if sold is not subject to tax Problem 7-2
True or False
Write True if the statement is correct, or False if the statement is incorrect 1. A sale or exchange of interest in partnership is a capital asset transaction 2. Ordinary assets are held primarily for sale to customers in the ordinary course of the business except equipment used in business operations. 3. Capital losses are deductible only to the extent of the extent of the capital gain 4. If the property is acquired through inheritance, the basis of cost is the acquisition cost of the donor. 5. A short sale is effected when a speculator sell securities which he owns 6. The gains from sale of securities held by dealers in securities are ordinary income subject to normal tax
7. Share of stocks sold through local stock exchange are no longer to be reported in the annual income tax return 8. Stocks and securities held by dealers in securities are capital assets 9. Stocks that are traded in the local stock exchange are subject to a percentage tax based on the sales price irrespective of gain or loss sustained by the taxpayer 10. When a taxpayer provided a consideration for an option period to buy a capital property and such privilege was exercised, the option money shall be considered as capital gain or capital loss 11. If the real property used in business were sold to the government, the tax would be 6% final tax or normal tax rate at the option of the taxpayer 12. The total payments received during the year of sale in cash or property including evidences of indebtedness comprises the initial payment for the sale of real property 13. A deductible loss may be incurred if the treasury stock is subsequently reissued for a consideration less than its cost 14. The NOLCO applicable for three years from the year of operating loss can be deducted from ordinary income and net capital gain Problem 7-3
True or False
Write True if the statement is correct, or False if the statement is incorrect
1. The original issue by a corporation of its shares of stock above par value is subject to capital gains tax 2. A disguised sale is a sale or exchange transaction between two related parties with intent of partly sale and partly gift 3. The gain or loss on sale of partner’s interest (capital) in the partnership is a capital asset transaction 4. If the property sold is not subject to mortgage, the contract price is usually the selling price 5. Gains from wash sales are taxable and losses from wash sales are deductible 6. There is a wash sale if within a 61-day period , a taxpayer sold its 1,000 common stocks and subsequently purchased 1,000 preferred stocks 7. Banks and trust companies are dealers in debt securities 8. If stock dividends are included in the number of shares sold, an allocated cost of the original cost shall be assigned to the said stock dividends 9. Realty business registered with HLURB engaged in socialized housing project with selling price per house of P18,000 in Metro Manila is exempt from creditable withholding tax 10. The capital gains tax of 6% based on the higher amount of selling price or zonal value simplifies the complex computation of donor’s tax and capital gains tax 11. Real property sold in the Philippines by a nonresident foreign corporation is subject to a final tax based on the selling price 12. If a domestic corporation sold a real property located outside the Philippines the net income thereof shall be subject to a normal tax of 35% 13. Liquidating dividends in general is not taxable if only a return of investment 14. Issuance of a corporation of its bonds at a premium gives rise to capital gain
1. Which of the following is a capital asset? a. Inventory for sale b. Real property for rent c. Equipment used in business d. Investment property 2. Which of the following is not an ordinary assets? a. Accounts receivable-trade b. Investment in Equity security c. Real property used d. Factory equipment of manufacturing business 3. Which of the following statements is not correct? a. Ordinary loss is deductible from net capital gain b. Capital loss is deductible from capital gain c. Net capital gain is added to ordinary gain d. Net capital loss is deductible from the succeeding year’s capital gain of an individual taxpayer 4. Which of the following is correct with regard to the dealing in capital asset? a. Net capital loss is allowed to carry-over by individual taxpayer next year b. Corporate taxpayer is allowed to have short and long term holding periods c. If the capital asset sold is under possession of the individual seller for 12 months, the holding period is considered long-term d. If the holding period is considered long-term, only 75% of capital gain is reportable 5. Which of the following capital asset transactions is subject to final tax? a. Sale of shares of stock sold inside stock market b. Sale of movable property considered as capital asset c. Sale of real property classified as capital asset d. Sale of receivable 6. Which of the following may result to capital gain or loss? i. Sale of investment bonds ii. Receipt of liquidating dividends iii. Sale of interest in partnership iv. Re-issuance of treasury stock Choices: a. i, ii and iv c. i and ii only b. i, ii and iii only d. iv only 7. Statement 1: Loss from wash sale of securities is deductible from capital gain Statement 2: Gains from wash sales are taxable gains a. b. c. d.
Only statement 1 is correct Only statement 2 is correct Both statements are correct Both statements are not correct
8. If an individual taxpayer disposes of his principal residence for P1,000,000 and acquired as a replacement a smaller residential house and lot for P750,000, the sale is subject to 6% capital gain tax on a. 25% of the selling price b. 75% of the selling price c. 100% of the selling price d. 100% of the purchase price 9. The sale of real property that is considered as capital asset shall be taxed at 6% of a. selling price, where the zonal value is 110% of selling price b. zonal value, where the selling price is 110% of zonal value c. selling price, where the zonal value is 80% of the selling price d. zonal value, where the zonal value is 80% of the selling price 10. If the real property sold is classified as inventory with a selling price of P3,000,000 and zonal value of P4,000,000 the creditable withholding tax is a. 6% of the selling price
c. 5% of the selling price
b. 6% of the zonal value
d. 5% of the zonal value
11. A net capital loss means the excess of the a. losses over the gains on sales or exchanges of capital assets b. losses over the losses on sales or exchange of capital assets c. determined cost over the value received from the sale or exchange of a capital asset d. gains over the losses on sales or exchanges of capital assets 12. A dividend received by stockholders upon the corporate dissolution is called a. Liquidating dividends
c. Stockholder’s dividends
b. Terminating dividends
d. Retirement dividends
13. When a taxpayer provided a consideration for an option period to buy a capital property but such privilege was not exercised, the option money shall be considered a. Taxable
c. Capital loss
Select the letter that contains the best answer
1. For income taxation purposes, which of the following is classified as capital asset of a manufacturing business? a. Work-in-process ending inventory b. Investment in equity securities c. Factory building d. Office equipment 2. The following rules shall be observed when a capital gain or loss is sustained by a corporation, except, a. Capital gains and losses are recognized to the extent of its full amount b. Capital losses are deductible only to the extent of capital gains c. Net capital losses are not deductible from ordinary gain or income but ordinary losses are deductible from capital gains d. There is a holding period 3. To compute for the gain or loss in the disposition of the capital assets, the selling price should be reduced by a. Cost of the capital assets b. Cost and expenses of the capital assets acquired c. Disposition expenses of the capital assets d. Acquisition cost and disposition expenses of the capital assets 4. Which of the following rules shall be observed on securities becoming worthless for purposes of income taxation? a. The securities are ascertained worthless and written off b. The taxpayer owning the securities written off should not be bank or trust company c. The written off amount is a capital loss d. All of the above 5. Sales of stocks of a domestic corporation traded through a local stock exchange are subject to a a. Percentage tax of one half of one percent b. Final tax of five percent if the net capital gain is not over P100,000 c. Final tax of ten percent on any amount in excess of P100,000 d. Percentage tax of one fourth of one percent
6. If the stock cannot be properly identified, the following rules are applicable in the determination of the cost of the shares of stocks, except a. The cost to be assigned shall be on the basis of the first-in first-out method b. The cost to be assigned shall be on the basis of the average method if the seller maintains a record for every particular stock c. An allocated cost shall be assigned to stock dividends to get the cost of each stock d. No cost shall be assigned to the stocks since the stocks cannot be properly identified 7. a. b. c. d.
Which of the following sale of land is tax-exempt Land sold by the church Land foreclosed by the bank Land sold by Government Corporation Land sold by non-stock and non-profit corporation
8. Sales of stocks of a domestic corporation not traded through local stock market are subject to a final tax of a. 5% b. 10% c. 10% on the net gain not over P100,000 d. 5% on the net gain not over P100,000 and 10% on the excess of the first P100,000 9. If the proceeds are from the disposition of principal residence and fully utilized in acquiring or constructing a new principal residence, the capital gain is not subject to tax if the a. acquisition or construction of the new residence us within 18 months b. Commissioner is notified within 30 days from the date if disposition of the taxpayer’s intention to avail of the tax exemption c. Historical cost or adjusted basis of property sold is carried over to the new principal residence d. All of the above 10. a. b. c.
The cost of the new principal residence may be the Cost of the residence sold Percentage of the cost of the old residence sold Cost of the old residence sold plus additional cost in acquiring the new principal residence d. All of the above 11. Which of the following is/are to be included as part of the selling price of installment sale? i. Cash payment by the buyer
ii. Non-cash item given by the buyer iii. Existing obligation assumed by the buyer iv. Promise to pay originated by the buyer a. i, ii, and iv only c. i and ii only b. I, ii and iii only
d. i only
Classification of Assets
Lito presented the following assets: Ordinary assets: Goods for sale
Investment in property
Capital assets: Land and building for business
Car for personal use
The correct amount of ordinary and capital assets would be: Ordinary Assets
Change of Purpose
B purchased one-hectare land intended for investment purposes for P2,000,000. After 10 years, He decided to subdivide 90% of the land for business purposes and the 10% is to be used to construct his principle residence.
1. If per subdivided lot is sold for P100,000 per 200 square meters, how much is the ordinary gain from the sale of land? a. P 4,500,000 c. P 2,700,000 b. P 4,000,000 d. P 2,500,000 2. How much is the remaining capital asset of B? a. P 2,000,000 b. P 500,000 Problem 7-8
c. P 200,000 d. P 100,000
Gain (Loss) on Exchange
Mr. Basa exchanged his car with a cost of 250,000 and a book value of 150,000 to a lot with a fair market value of 190,000 and a zonal value of 150,000 The gain (loss) from the exchange of property is a. (60000) b. 40000
c. 50000 D. 90000
Exchange of dissimilar property
A taxpayer exchanges his personal property for dissimilar property with a market value of 200000. Which of the following is correct? a. There is a capital gain if the property given away has fair value lesser than 200000 at date of exchange b. There is capital gain if the property given away has acquisition cost that is higher than 200000. c. There is capital loss if the property given away has fair value more thabn 200000 when it was inherited. d. There is capita loss if the property given away has fair value at the date it was received as donation that is lower than 200000.
Problem 7-10 Transfer of property
Miss Bambao owns a parcel of land worth 500000 which she inherited from her father in 200A when it was worth 300000. Her father prrchased it in 1996 for 100000. If miss Bambao transfers this parcel of land to her wholly owned corporation in exchanged for share of stocks of said corporation worth 450000, miss bambao’s taxable gain is a. -0b. 50000
c. 150000 d.350000
Problem 7-11 Determination of cost and expenses
Mr. Alejandro Ciencia sold his capital asset for a sales price 500000.the sale was subject to 10% agent commission based on the gross capital gain and a processing fee of 1% based on the sales price. The capital asset was acquired by Mr. Ciencia for a purchase price of 200000 including installation and insurance cost of 20000. The cost and expenses deductible from sale is a. 200000 b. 225000
c. 235000 d. 275000
Problem 7-12 Special Rules
A acquired a capital asset for 50000. He donated it to X corporation when the market value was 80000. After 2 years from date of donation, X sold the capital asset for 150000. How much is the amount of the reportable gain? a. 100000 b. 70000
c. 50000 d. 35000
Problem 7-13 Capital Gain
A taxpayer sold his capital asset previously acquired at a cost of 150000. He spent another 20000 to put it to its intended use. Subsequently, the same capital asset was sold for 200000 before broker’s commission and 5% based on sales price. The capital gain is a. 50000 b. 40000
c. 30000 d. 20000
Problem 7-14 Ordinary gain vs. capital gain
The following is the balance sheet of a single proprietorship: Cash Accounts receivable Inventory Accounts payable
30000 150000 20000 125000
X sold the business for P100,000, the buyer assuming the outstanding liabilities. Which of the following is true, pertaining to the sale? a. Ordinary gain of P25,000; no capital gain nor loss b. Ordinary gain of P175,000; capital loss of P150,000 c. Ordinary gain of P205,000; capital loss of P180,000 d. No ordinary gain nor loss; capital gain of P25,000
Problem 7-15 Holding Period Under the Tax Code, how much shall be taken into account in computing the net income, if a gain is realized by an individual taxpayer from the sale or exchange of capital asset (other than real properties and shares of stocks) held for more than twelve months? a. 50% of the capital gain
c. 100% of the capital gain
b. 5% of the capital gain
d. 10% of the capital gain
Problem 7-16 Holding Period A capital asset of an individual was acquired at cost of P100,000. Subsequently, this owner died and the capital asset is transferred to a religious organization when the fair market value was P120,000. They later sold the capital asset for P200,000 after holding it for 2 years.
The amount of reportable capital gain would be? a. P 40,000
c. P 80,000
b. P 50,000
d. P 100,000
Problem 7-17 Taxable Income The individual taxpayer reported the following:
Net income from business Capital gain for asset held for more than a year
Capital loss for asset held for less than a year
The taxpayer should report taxable income of a. P 210,000 in year 1: P330,000 in year 2 b. P 185,000 in year 1: P330,000 in year 2 c. P 185,000 in year 1: P310,000 in year 2 d. P 200,000 in year 1: P300,000 in year 2 Problem 7-18 Taxable income ( Individual vs. Corporation) The following are the transactions of the X business for the year: Ordinary gain
Short term capital gain
Long term capital gain
Long term capital loss
1. If X is an individual, how much is the taxable income before personal exemption? a. P 95,000
c. P 80,000
b. P 90,000
d. P 75,000
2. If X is a corporation, how much is the taxable income? a. P 95,000
c. P 80,000
b. P 90,000
d. P 75,000
Problem 7-19 Net Capital Loss Carry-Over Dolinta, married, had the following data on income and losses:
Ordinary business income Short term capital gain Short term capital losses
P85,7000 15,895 18,960
Mrs. Dolinta gave birth to their first child on December 31, 200A.
1. The taxable income before personal exemption of Mr. Dolinta for 200A is a. P 30,900
c. P 48,900
b. P 45,835
d. P 64,795
2. The taxable income before personal exemption of Mr. Dolinta for 200B is a. P 131,400
c. P 105,530
b. P 108,595
d. P 82,530
Problem 7-20 NCLCO (Individual vs. Corporation) C reported the following income and losses for the years 1 and 2:
Ordinary taxable income
Short-term capital loss
Long term capital gain
Long term capital loss
Short term capital gain
1. If C is an individual taxpayer, the year 2 taxable income before personal exemption is a. P 330,000
c. P 270,000
b. P 280,000
d. P 170,000
2. If C is a corporation, the year 2 taxable income is
a. P 330,000
c. P 270,000
b. P 280,000
d. P 170,000
Problem 7-21 Net Capital Gain In addition to his business as construction materials dealer, Mr. Espiritu had the following transactions in 200x:
M. Benz car
The net taxable capital gain of Mr. Espiritu in 200X is a. P 76,500
c. P 27,000
b. P 42,000
d. P 26,500
Problem 7-22 Bank and Trust Companies BPI Family bank and Trust Co. reports the following results of operations: Interest Revenue Operating Expense
P 10,000,000 6,000,000
Gain on sale of long-term bonds
Loss on sale of Trading debt securities
Loss on sale of long term equity investment
If BPI is a dealer of debt and equity securities, how much is the net capital gain of BPI Family Bank? a. P -0-
c. P 800,000
b. P 1,000,000
d. P 750,000
Problem 7-23 Stock Transaction Marizza bought shares of stock not through the local stock exchange in 1999 for P 50,000. These shares were donated to Roel Evangelista in 200A when the fair market value was P 300,000. Mr. Evangelista sold the shares directly to the buyer in 200B for P 400,000
The gain on the sale of shares is a. P 350,000
c. P 400,000
b. P 100,000
d. P 300,000
Problem 7-24 Stock Transaction The following capital stock transactions on shares of stock were reported by an individual taxpayer: Cost
If tax returns were filed and paid on prescribed dates, how much capital gain tax should be reported within 30 days from November sales?
a. P 1,500
c. P 6,500
b. P 3,000
d. P 8,000
Problem 7-25 Percentage Tax and Capital Gains Tax The following are the transactions of Maricris for the year 200A: Sale of shares of stock of X corporation which she acquired previously at P100 per share: (1) 1,000 shares sold in the stock exchange at P 105 per share (2) 1,000 shares sold outside the stock exchange at P 110 per share
What would be the final tax for these stock transactions? a. P 500
c. P 1000
b. P 750
d. P 1,500
Dealer in Securities
Corporation sold its 5,000 investment in stock of SMC Co. for P 500,000 with a realized 30% gross profit on sale. Other expenses incurred were agent commission of P 3,800 and documentary tax of P200. If Garoy is a dealer in securities, how much is the tax exposure assuming the shares were: 1. Traded in stock exchange? a. P 2,500
c. P 29,600
b. P 46,300
d. P 43,800
2. Not traded in stock exchange? a. P 2,500
c. P 17,500
b. P 9,600
d. P 43,800
Net Capital Gain
During the year, the following are the recorded stock transaction of X Corporation: (1) Total share issued 1,000 shares of P100 par value per share, sold at P120 per share. (2) Total shares retrieved 250 shares at cost of P125 per share. (3) From the total shares retrieved, 100 shares were sold outside stock market at P150 per share. What would be the net capital gain before tax for the year? a. P 22,500
c. P 21,250
b. P 20,000
d. P 2,500
Marjorie Corpuz is an investor in X Corporation. In 200A she has 1,000 share holdings acquired at P120 per share or a total investment cost of P 120,000 classified as capital asset. 200B
Received stock dividends 2 shares for every shareholdings.
Sold 500 shares of X Corporation for P120 per share.
Purchased 300 shares of X Corporation for P150 per shares.
Sold 500 shares of X Corporation for P90 per share.
1. What would be the net capital gain on March? a. Gain of P 9,000
c. Gain of P 20,000
b. Gain of P 8,000
d. Gain of P 10,000
2. How much is the nondeductible loss in May? a. P 8,000
c. P 3,000
b. P 5,000
d. P 2,000
3. Supposing that all of the remaining 300 shares were liquidated in December 200B at P100 per share because of bankruptcy of X Corporation. What would be the capital loss in December 200B? a. Capital loss, P 15,000
c. Capital loss, P 8,000
b. Capital loss, P 18,000
d. Capital loss, P 10,000
Corporation’s Own Share of Stock
X Corporation issued 5, 000 of its P20 per share common stock at P25 per share. Of the 5, 000 common share issued, 2, 000 shares were reacquired for P21 per and eventually reissued for P23 per share. 1. How much is the capital gain on the original issuance? a. P 25,000
c. P 4,000
b. P 12,500
2. How much is the capital gain on reissued shares? a. P25, 000
c. P4, 000
b. P12, 500
Basis of New Residence and Capital Gain Tax
Manwong is a resident of Mankayan, Benguet. He sold his family home for P4, 000, 0000 which was previously acquired for P2, 000, 000. Manwong complied all BIR requirements to avail of tax exemption and spent P2, 500, 000in acquiring new family home. 1. How much is the basis of the new family home? a. P2, 500, 000
c. P1, 250, 000
b. P2, 000, 000
d. P500, 0000
2. How much is the capital gain tax to be paid by Mr. Manwong? a. P-0-
c. P150, 000
b. P90, 000
d. P240, 000
Basis of New Residence and Capital Gains Tax
Hunk sold his old residential house and lot for P5,000,000 and acquired a new residential house and lot for P9,000,000. How much is the cost of the new residence and capital gains tax on the said sale if the old house and a lot was previously acquired for P2,000,000 and no tax exemption was allowed by the BIR? Basis of New Residence
Capital Gains Tax
P6, 000, 000
P6, 000, 000
P9, 000, 000
P9, 000, 000
Capital Gains Tax (Real Property)
On August 15, 2007, Mr. Tandingan, sold 500 square meter residential land for P300, 000. The land was acquired in 1999 for P200, 000 and classified as capital asset. On the date of sale the fair market value as shown in the real property declaration is P250,000 and the assessed value amounts to P75,000. The zonal value is P700 per square meter. The capital gain tax is a. P3, 750
c. P17, 500.
b. P12, 000
d. P21, 000.
Basis of New residence
In 200A, Mr. Del Rosario acquired his principal residence for P6, 000, 000. He sold it to Mr. De la Cruz for P12, 000, 000 in 200D. Within 30 days, he wrote the BIR for tax exemption because he intends to use the entire sales proceeds to purchase a new principal residence. How much is the basis of the new residence for the taxation purposes if he actually acquired it for P15, 000, 000? a. P6, 000, 000
c. P12, 000, 000
b. P9, 000, 000
d. P15, 000, 000
Tax on Real Estate Transactions
The following are the transactions of Ruby pertaining to sale of real properties for the year 200x: (a)Sale of vacant lot used as open warehouse of her trading business, P500, 000. This was acquired 2 years ago at P200, 000. (b)Sale of her residential lot for P1, 000, 000, the zonal value at date of sale is P1, 200, 000. This was purchased 3 years ago at P400, 000. 1. What would be her final tax for these real estate transactions? a. P60, 000
c. P72, 000
b. P90, 000
d. P102, 000
2. What would be the creditable withholding tax for the real estate used in business? a. P60, 000
c. P30, 000
b. P 37,000
d. P15, 000
Capital Gains of Foreclosed Property
RCBC, a domestic bank, foreclosed a real property with a zonal value of P550, 000 in payment for a P400, 000 client’s unpaid loan. Subsequently, the property was sold for P500, 000. The capital gain tax is a. P30, 000.
c. P35, 000.
b. P33, 000.
d. P52, 000.
Creditable Withholding Tax and Income Tax Due
Camella Homes, a realty corporation, sold the following real property during a taxable year: INCOME TAXATION Sales price/unit 4 houses at a cost of P200, 000 each 2 houses at a cost of P1, 200, 000 each
P500, 000 3, 000, 000
The operating expense incurred during the year is P2, 800, 000. How much is the creditable withholding tax and income tax still due and payable of Camella Homes? Creditable withholding tax
Income tax still due and payable
Creditable Withholding Tax and Income Tax Due
The San Fernando City Government sold 10 hectares of land to Goldrich Realty Corporation (a member of HLURB) at a price of P10, 0000, 000. 1. How much is the creditable withholding tax to be withheld by Goldrich? a. P-0-
c. P500, 000
b. P600, 000
d. P300, 000
2. How much is the income tax still due and payable by San Fernando Government? a. P-0-
c. P2, 900, 000
b. P600, 000
d. P3, 500, 000
Sale of Real Property (Comprehensive)
1. A sold his real property with a cost of P1, 000, 000 to B. At the date of sale, the land has a zonal value of P10, 000, 000 but the selling price stipulated in the absolute contract of sale is P6, 000, 000. How much is the capital gains tax on the sale of land? a. P60, 000
c. P360, 000
b. P600, 000
d. P540, 000
2. Based on number 1, what is the capital gain tax if A is a bank and the land sold were acquired by foreclosure from clients? a. P750, 000
c. P360, 000
b. P600, 000
d. P540, 000
3. Based on number 1, if A sold his land to B who is a government owned and controlled corporation, what is the amount of creditable withholding tax on sale if A opted to apply the normal tax rate? a. P750, 000
c. P450, 000
b. P600, 000
d. P500, 000
4. Based on number 1, assuming that A is a religious group, how much is its capital gain tax it should pay if the said religious group is exempted from real property tax? a. Tax exempt
c. P360, 000
b. P600, 0000
d. P300, 000
5. Based on number 1, assuming that A is a government owned and controlled corporation, how much is the capital gain tax on the sale of land? a. P750, 000
c. P360, 000
b. P600, 000
d. P540, 000
The real property with a cost of P400, 000 was sold for P1, 000, 000. P120, 000 down payment, P500, 000 unpaid mortgage assumed by the buyer. The selling price is? a. P1, 000, 000
c. P1, 500, 000
b. P1, 120, 000
d. P1, 620, 000
The real property with a cost of P400, 000 was sold for P1, 000, 000. P120, 000 down, P500, 000 unpaid mortgage assumed by the buyer. The contract price is? a. P500000
The real property with a cost of P400, 000 was sold for P1, 000, 000. P120, 000 down payment, P500, 000 unpaid mortgage assumed by the buyer. The balance is payable P950, 000 every December 31 for the next 4 years. The initial payment is? a. P120, 000
c. P620, 000
b. P220, 000
d. P720, 000
Income from Installment Sales
The real property costing P500, 000 was sold P1, 500, 000, P20% down, unpaid mortgage of P300, 000 assumed by the buyer, balance payable in 3 equal annual installments. Under installment method of reporting income, the income to be reported in the year of sale is? a. P200, 000
c. P300, 000
b. P250, 000
d. P400, 000
Reporting Income by Installment
The real property with a cost of P400, 000 was sold for P1, 000, 000. P120, 000 down payment, P500, 000 unpaid mortgage assumed by the buyer. The balance is payable P950, 000 every December 31 for the next 4 years. The reportable income under installment method in year of sale is? a. P120, 000
c. P220, 000
b. P183, 333
d. P372, 000
Creditable Withholding tax
Villa Corporation, a real estate developer and member of HLURB, sells socialized housing. In 200B, records show the following sales of houses as follows: a. 20 houses: selling price of P150, 000 each, gross profit of 25% b. 30 houses: selling price of P1, 000, 000 each, gross profit of 30% c. 40 houses: selling price of, 500, 000 each, gross profit of 35% Required: Compute for the creditable withholding tax and income tax still due and payable on the sales.
Ordinary Income, Capital Gains and Final Tax
The following data pertains to the transactions of Miss Lacy De Guzman for the 200B: Total net sale from his trading business
Cost of sale
Sale of vacant lot used as open warehouse for her trading business. This was acquired 2 years ago at accost of P150, 000 Sale of residential house and lot-acquired 12 years ago, P800, 000
Of the proceeds was to acquire her new residential house And lot. All pertinent BIR requirements were complied with.
1, 000, 000
Sale of her personal computer. He bought this for her personal use, 2 years ago at cost of P20, 000
Sale of personal car, acquired 3 years ago at P50, 000
Questions: 1. What is the ordinary income/gain of Miss De Guzman for 200B? 2. How much is the supposedly final tax taken from the proceeds of Miss De Guzman transactions for the year 200B?
FIFO vs Moving Average
Galam’s common stock investments in Philex mines are as follows: December 15, 200A:
Purchased 100 shares at P100 per share.
February 24, 200B:
Purchased 300 shares at P120 per share.
August 20, 200B:
Received a 15% stock dividend.
December 15, 200B:
Sold 350 shares at P200 per share.
Required: Compute the tax due and payable for the 350 shares sold assuming that the shares are not traded in stock exchange using (a) FIFO Method (b) Moving Average.
Installment Sale of Shares of Stock
In 200A, Miss Virginia Reyes sold outside stock exchange 1, 000 shares of stock with a cost of P80 per share for P150 per share under the following terms:P300, 000 down payment and the balance shall be payable in three equal annual installments. Required: Compute the annual tax due of Miss Reyes for 200A, 200B, 200C and 200D.
Selling Price, Contract Price and Initial Payments
Miss Limas sold a real property(capital asset) under the following terms: Terms
Date of Payments
Additional information: a. The real property was purchased five years ago at a cost of P600, 000. b. The property was mortgaged for P650, 000 which was assumed by the buyer. Required: Compute for the following; 1. Initial payments 2. Selling price 3. Contract price
Various Capital Asset Transactions
Mrs. Dolinta’s capital asset transactions for 200B were as follows: a) Gave P5, 000 option money to buy a capital asset of Mr. Yew of which she did not exercise. b) Invested P1, 000, 000 in San Pedro Corporation’s bonds with an interest of 30%which was retired after 9 months for 120. c) Received P50, 000 from Mr. Chu for 20, 000 common shares with market value of P3.00 per share delivered immediately d) Invested P20, 000 for 100 common shares in Philippine Airlines which was ascertained insolvent. Required: Compute the net capital gain or net loss incurred by Mrs. Dolinta.
Capital Gains Tax vs. Normal Tax
On December 31, 200B, Trinidad Wood Corporation sold its land with erected warehouse to the Benguet Provincial Government at sales price of P3, 000, 000. The land was previously acquired by Trinidad for P2, 000, 000 and the warehouse has a remaining book value of P200, 000 at the date of sale. Trinidad books of accounts shows the following data related to its 200B operations:
Sales Cost of sale
2, 000, 000
Allowable deductible expanse
1, 000, 000
Questions: Trinidad intends to pay the sale to the land at its capital gains tax of 6% instead of opting to pay the normal tax with a creditable withholding tax of 6%. Is Trinidad correct? Show your supporting computation.
Loakan Corporation sold the residential building used as housing privilege of its employees for P10, 00sales p, 000. The building was previously constructed at P8, 000, 000 with recorded accumulated depreciation of P7, 500, 000. The corporation wrote the BIR to avail of the tax exemption privilege because its plan to use the entire sales proceeds to construct a new residential building amounting to P10, 000, 000. Question: Can Loakan avail of the tax exemption? Justify your answer.
NOLCO vs. NCLCO
The following ordinary and capital gains(losses) are taken from T: Years
Required: 1. What is the amount of taxable income for years 3 and 4 before personal exemption if T is an individual taxpayer? 2. What is the amount of taxable income for years 3 and 4 if T is a corporate taxpayer?
Capital Asset Transaction
The following data are available from the records of M: 200A200B Business income
Short-term gain (loss)
Long-term gain (loss)
Business expenses Capital
Required: Compute the taxable income if M is a/an: 1. Individual taxpayer (taxable income before personal exemption) 2. Corporation
Ordinary Asset vs. Capital Asset
In 2009, Toyota Philippines sold a land Cruiser (inventory) costing P4, 000, 000 for P5, 000, 000 by installment. The terms of payment were: Downpayment
Additional during the year of sale
equally in 5 years
Required: Compute for the following: 1. Reportable gross income in 2009. 2. Reportable gross income in 2010. 3. Assuming that the Land Cruiser is classified as a capital asset, how much is the reportable gross income 2009?
Sale Family Home
Mr. S sold his family home costing P1, 200, 000 for P3, 000, 000. He applied for tax exemption. He spent P2, 000, 000 for the construction of his new residential home. Required: Compute for the following: 1. If the tax exemption was granted how much is the capital gains tax?
2. Based on No. 1, how is the basis of the new residential home? 3. If the tax exemption was not granted, how much is the capital gains tax? 4. Based No. 3, how is the basis of the new residential home?
Installment sale of Real Property
In 200x, X sold a real property lot (capital asset) by installment by P3, 000, 000. Information related to the sale: Downpayment
Mortgage assumed by the buyer
P1, 200, 000
equally in 5 years
Cost to the seller
Required: Compute for the following: 1. Initial payment 2. Contract price 3. Capital gains tax in 200x
Mr. I had the following transactions in ABC Corporation’s ordinary shares classified as capital asset: Date
Jan. 10, 200x
Purchased 9, 000 shares at P50 per share
Jan. 20, 200x
Purchased 5, 000 shares at P50 per share
Feb. 10, 200x
Purchased 4, 000 shares at P45 per share
Feb. 14, 200x
Sold 8, 000 shares at P40 per share (FIFO)
Required: Compute for the following: 1. Deductible loss on Feb. 14, 200x sales. 2. Nondeductible loss on Feb. 14, 200x sales. 3. New cost of January 20 purchases
4. New cost of February 10 purchases 5. If on Feb. 25, Mr. I sold 4, 000 shares P60 per share, how much is the capital gain (loss)?
Y, a shareholder, owns 100, 000 A Co. shares which cost him P9 per share. As a result of merger of A Co. and B Co., he received from b Co. the following shares: No. of shares
Required: 1. Determine the gain or loss to be recognized on the exchange. 2. Determine the basis of the ordinary and preference shares respectively. 3. Assume that the ordinary shares were sold for P25 and preference share for P60 per share, determine the net gain or loss. 4. If the shares were sold in the stock exchange, compute the percentage tax. 5. If the shares were sold not in the stock exchange, determine the capital gains tax. 6. Choosing the lower tax between 4 and 5, determine the tax advantage.
As a result of merger, Mr. X transferred his A Co. shares with a basis of P180, 000 in exchange for the following: B Co. ordinary shares with FMV of
Land with a FMV of
Required: 1. Determine the taxable gain on the exchange 2. Determine the basis of the B Co. shares received on the exchange 3. What is the basis of the land received?
4. If the land were sold for P300, 000, how much is the capital gain tax? 5. If the investment in B Co. shares were sold for P250, 000, compute the gain or loss on sale.
Problem 8 – 1
Deductible or Nondeductible
Classify the item whether deductible or non deductible from business gross income.
1. Net operating loss carry over 2. Operating expenses incurred outside the Philippines by a non resident alien engaged in business in the Philippines 3. Philippine income tax 4. Income tax paid by a resident citizen to foreign country 5. Research and development costs 6. Unused materials and supplies 7. Donation for coffin and wake expenses 8. Manager’s expense account subjected to fringe benefit tax 9. Cost of technical books used by a cpa in the practice of his profession 10. Tax withheld by corporation from its employee’s salary 11. Kickback payment to the government official 12. Tuition fees, board and lodging incurred by a medical doctor while attending a continuing professional education seminar. 13. Overtime pay paid to rank-and-file employee. 14. Fringe benefits paid to an officer of the company. 15. Distribution of profits to partners. 16. Cash dividends paid. 17. Donations made to employee’s birthday party. 18. Amounts paid for pensions of retired employees. 19. Salary of employee paid for limited period after his death to his widow. 20. Entire amount expensed for meals. Lodging, and travel in connection with own business. Problem 8 – 2 True or False Write true if the statement is correct or false if the statement is incorrect. 1. Deductions from gross income are not presumed. 2. Revenue expenditures are immediately expensed. 3. Business expenses are deductible only if they are incurred in relation to business income taxable in the Philippines. 4. No business and personal expenses are allowed as deductions from gross income.
5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.
As a rule, deductions means itemized deduction. Optional standard deduction may be deducted from the gross income of partnerships. Optional standard deductions include losses from sales or exchanges of capital assets. All business expenses are allowable deductions from gross business income. Business and professional income derived within and outside the Philippines by a non resident Filipino Citizen are granted with allowable deductions. Individual tax payers may apply for itemized deductions or optional standard deduction. Individual taxpayers earning a salary compensation income may deduct optional standard deduction from their gross compensation income. NOLCO is an itemized deduction. A bonus paid to secure a lease is deductible on pro – rata basis over the term of the lease. A representation expense is subject to limit of 1% of net sales of goods. A corporation with interest expense and at the same time earned interest income will be subject to a tax arbitrage of 38%. Straight – line method of depreciation provides the best tax savings over other depreciation methods. Adopting private entities of public schools through TESDA can get 150% of the actual assistance made. Corporations are allowed to deduct optional standard deduction.
Problem 8 – 3
Select the letter that contains the best answer.
1. Which of the following statement is not correct? a. personal expenses are not allowed as deductions from compensation , profession, trade or business income. b. Personal expenses are not allowed as deductions from profession, trade or business income except compensation income. c. Personal exemption and additional exemption are allowed as deduction from compenasation income. d. All of the above 2. To compute for optional standard deduction, a taxpayer should multiply 10% of the a. b. c. d.
net income gross income before itemized deductions gross income after expenses all of the above.
3. Which of the following can be deducted from gross compensation income? a. losses due to theft or robbery
b. interest expense incurred in business c. depreciation expense of car partly used for business d. pemium payments on health or hospitalization insurance 4. Which of the following is not allowed as deductible in full from gross income? a. Entire amount expended for meals, lodging, and travel in connection with own business. b. Tuition fees, board and lodging incurred by amedical doctor while attending acontinuing professional education seminar. c. Costs of technical books used by a CPA in the practice of his profession. 5. Which of the following is not allowed as deductible in full from gross income? a. Interest expense paid by the bank. b. Interest expense paid by the taxpayer in relation to the purchase of merchandise by installment. c. Interest expense paid to the relative of the taxpayer. d. Interest expense with reported interest income. 6. The following taxes are not allowed as deductions from gross income, except a. Documentary stamp tax. c. percentage tax. b. Special assessment tax. d. value added tax. 7. Which of the following is classified as deductible loss? a. Allowance for bad debts. C. depreciation. b. Embezzlement. D. all of the above. 8. The following are requisites of depreciation expense to be deducted from the gross income. a. It must be reasonable and charged off during the year. b. It must be used in business, profession or trade. c. The asset subject to depreciation must have a limited life. d. All of the above. 9. Which of the following income is to be reduced by itemized deductions? a. compensation income b. business income c. passive income d. capital gain 10. Statement 1: the taxpayer has the burden of justifying the allowance of any deduction claimed. Statement 2: deductions are strictly construed against the taxpayer. a. Only statement 1 is correct. b. Only statement 2 is correct.
c. Both statements are correct. d. Both statements are not correct. 11. Statement 1 : revenue expenditures are period costs that are related to a particular period of time of business operation. Statement 2: capital expenditures are non – recurring expenditures related to acquisition of depreciable assets to be used in the business. a. only statement 1 is correct. b. Only statement 2 is correct. c. Both statements are correct d. Both statements are incorrect. 12. Which of the following expenses of the business would be allowed as deduction from its business income? a. insurance premium on life insurance of employee where the employer is the beneficiary. b. Donation made to employees. c. Losses incurred on transaction wiyh related party. d. Regular repairs of business property. 13. Statement 1: in preparing financial statements, GAAP should prevail over the Tax Code. Statement 2: in preparing tax returns, tax code should prevail over GAAP. a. b. c. d. Problem 8 -4
only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Both statements are incorrect Multiple choice
Select the letter that contains the best answer.
1. Statement 1: compensation income is reduced by personal exemption. Statement 2: business income is reduced by business expenses, and by excess of personal exemption over compensation income. a. b. c. d.
Only statement is correct. Only statement is correct. Both statements are correct. Both statements are incorrect.
2. Statement 1: an individual taxpayer could claim both the itemized deduction and personal exemption in the same taxable year. Statement 2: an individual single proprietorship could claim both the itemized deduction and optional standard deduction in the same taxable year. a. b. c. d.
Only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Both statements are incorrect.
3. Which of the following is allowed with optional standard deductions? A. Non resident alien doing business in the Philippines. B. Resident citizen whose taxable income is his compensation earned. C. Non resident citizen claiming itemized deductions from his business income. D. Resident alien with business income earned within and outside the Philippines. 4. Statement 1: unless the taxpayer signified in his return that he is electing the standard deduction, he is deemed to have availed of the itemized allowable of deductions. Statement 2: in case of consolidated income tax return of husband and wife, each is allowed to choose from either optional or itemized deductions. a. b. c. d.
Both statements are correct. Only statement 1 is correct. Only statement 2 is correct. Both statements are incorrect.
5. Statement 1: self employed taxpayer is required to file his quarterly income tax return. Statement 2: the option ton avail of optional or itemized deduction could be opted for each quarter. a. Both statements are correct. b. Only statement 1 is correct. c. Only statement 2 is correct. d. Both statements are incorrect. 6. Statement 1: insurance expense incurred in connection with the conduct of business is allowable deduction. Statement 2: insurance premium incurred to cover the life of key employee where the employer is the beneficiary could be allowed as deduction. a. b. c. d.
both statements are correct Only statement 1 is correct. Only statement 2 is correct. Both statements are incorrect
7. Which of the following the correct allowable entertainment expense? a. Not more than ½ % of revenue from services. b. Not more than 1% net sale of goods. c. Not more than 1 ½% of revenue from services. d. Not more than 1 ½ % of net sales of goods. 8. Statement 1: as a general rule, if the taxpayer is in cash basis of accounting, prepaid interest is allowed as deduction in the year tha principal is fully paid. Statement 2: prepaid interest made by service business is deductible in the year when the interest is paid. a. b. c. d.
both statements are correct. Only statement no. 1 is correct. Only statement no. 2 is correct. Both statements are incorrect.
9. Which of the following statements is not correct? a. Resident citizen and Domestic Corporation are allowed to claim foreign income tax as deduction from their business income. b. Foreign income tax paid by resident citizen could be claimed as deductible from his income tax. c. Foreign income tax paid by Domestic Corporation could be claimed as tax credit deductible from its income tax. d. The tax payer will benefit more if the foreign income tax is claimed as deduction rather than as tax credit. 10. Statement 1: the amount of deductible taxes is limited to the basic tax and shall not include thae amount for any surcharges or penalty. Statement 2: interest on delinquent taxes is deductible from gross income in full amount. a. b. c. d. Problem 8 -5
both statements are correct. Only statement 1 is correct. Only statement 2 is correct. Both statements are incorrect Multiple choice
Select the letter that contains the best answer.
1. Statement 1: gains arising from transactions between related taxpayers are taxable. Statement 2: losses incurred from transactions between members of the family are not deductible from business income.
a. b. c. d.
Both statements are correct. Only statement 1 is correct. Only statement 2 is correct. Both statements are incorrect.
2. Which of the following statement is incorrect? a. Actual bad debts incurred in connection with the conduct of business are allowed as deduction. b. Estimated bad debts based on account receivable balance iss deductible. c. Bad debts written off are deductible in the year when the allowance based on estimate was made. d. Bad debts arising from unpaid salaries that are actually written off are deductible in the year of write off. 3. Which of the following statements is not correct? a. Depreciation of assets used in business is allowed as deduction from business income. b. Depreciation as a recovery of capital invested should not be beyond the acquisition cost. c. Depreciation should be determined on the basis of re – appraised value if revaluation is made. d. Straight – line method, SYD, and declining balance methods of depreciation are all allowed for claiming depreciation expense. 4. Which of the following statements is correct? a. The employer making the contribution manages defined contribution plan. b. The actual payment of benefit to employee is the expense of the employer under thw defined contribution plan. c. Under the defined benefit plan, the employer makes the actual payment of benefits to employees. d. Under the defined contriution plan, the amount of contribution is equal to the actual payment of the benefits due to thr etiring employee.
5. Which of the following is not a requisite for the deductible contributions? a. It must be incurred in connection with the conduct of business. b. The taxpayer making contribution must be engage in business or profession. c. There must be actual payment of contribution or d. The recipient of the contribution is an entity specialized by law. 6. Statement 1: the optional standard deduction is allowed to all individual taxpayers earning business income. Statement 2: the optional standard deduction is 10% of gross business income.
a. b. c. d.
only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Both statements are not correct.
7. Statement 1: husband and wife should report their income and expenses in the same or common tax return. Statement 2: husband may choose itemized deduction while the wife may choose optional standard deduction or vice versa. a. b. c. d.
only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Both statements are not correct.
8. Statement 1: deductible business expenses must be ordinary and necessary. Statement 2: expenses from previous period which were not deducted from previous period’s income could be deducted from income in the current period. a. b. c. d.
Only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Both statements re not correct.
9. Which of the following expenses incurred in relation to conduct of business could be deducted in full, if the net sales is P1,000,000? i. salaries of employees, net of withholding tax ii. P60, 000 rent expense iii. P50, 000 traveling expense iv. P10, 000 entertainment expenses
Choices: a. I, ii, iii and iv b. I, ii, and iii only c. I and ii only d. I only
10. The interest expense allowed as deduction for individual taxpayer must be. a. 100% of actual amount even when interest income for the same taxable year is very minimal b. 38% of the actual amount of interest income earned the same taxable year c. 62% of the actual amount of interest expense or interest income which are equal to each other d. 100% of the actual interest expense if the interest expense is lower than the interest income for the same year
Problem 8-6 Multiple Choice Select the letter that contains the best answer. 1. Which of the following interest expense is deductible in full? a. Interest on tax delinquency b. Interest on personal loan c. Interest expense which is 200% of the interest income for the same year. d. Interest paid in advance. 2. Which of the following taxes incurred in the conduct of business is allowed as deduction from business income? a. Income Tax c. Excise tax b. VAT d. Donor’s tax 3. Which of the following taxes incurred in the conduct of business is not allowed as deduction from business income? a. Foreign income tax claimed as tax credit c. Import duties b. Documentary stamp tax d. Local business taxes 4. Which of the following is deductible as bad debts? a. Bad depts. Which is estimated at1% of net sale? b. Bad depts based on allowance of 1% of accounts receivable c. Account receivable written off d. Account receivable recovered 5. Which of the following will be deductible expense for the exhaustion of intangible asset of wasting asset corporation? a. Depreciation expense c. Depletion expense b. Amortization expense d. Exploration expense 6. Statement 1: Under the defined contribution plan, the pension expense of the employer is equal to the agreed amount of period contribution. Statement 2: Under the defined benefit plan, the pension expense of the employer is equal to the pension liability for the current year services plus the amortization of past year’s services. a. Only statement 1 is correct. b. Only statement 2 is correct. c. Both statement are correct d. Both statement are not correct.
7. Statement 1: The charitable contribution must be connected in the conduct of business to be allowed as deduction. Statement 2: The charitable contribution is allowed as deduction from business income but not allowed as deduction from compensation income. a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statement are not correct. 8. If the contribution is subject to limit, the allowable amount as deduction should be a. 5% of the business income after itemized deduction and contribution of individual taxpayer. b. 10% of the business income after itemized deduction and contribution of individual taxpayer. c. 5% of the business income after itemized deduction but before contribution of corporate taxpayer. d. 10% of the business income after itemized deduction and contribution 9. The amount allowed as deduction for assistance directly and exclusively incurred for the program coordinated with DECS is a. 50% of the actual value of the assistance. b. 100% of the actual value of the assistance. c. 150% of the actual value of the assistance. d. 200% of the actual value of the assistance. 10. Statement 1: Research and development cost is chargeable as outright expense in the year incurred. a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statement are not correct. 11. Which of the following statement is correct? a. All contribution of person engaged in business are deductible.] b. All deductible contributions are deductible at their actual amount contributed. c. Contributions to the government for priority program are deductible only up to 10% if being claimed by single proprietorship. d. Contributions by domestic corporation to government for general purposes is subject to limit of 5% of income after itemized deductions before contribution. 12. Statement 1: Research and development cost is to reported as deferred expense. Statement 2: research and development cost could be charged property subject to depreciation or depletion. a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statement are not correct. Problem 8-7 Revenue vs. Capital Expenditures ABC Manufacturing incurred additional expenditures of P130,000 for its business fixed assets, as follows: Change of motor
Repainting of building P10,000 Expansion of store 50,000 Cleaning of computers 9,000 Repair of furniture 1,000 The amounts to be immediately expensed and capitalized are: a. b. c. d.
Expensed P–0– P10,000 P20,000 P60,000
Capitalized P130,000 P120,000 P110,000 P70,000
Problem 8 – 8 Deductible Business Expense A local business firm paid P100,000 salaries net of P5,000 with withholding tax. How much is the deductible business expense from business income? a. P105,000 c. P 95,000 b. P100,000 d. P5,000 Problem 8 – 9 Deduction from Compensation s. a resident citizen, earned and paid the following expenses for the taxable year: Compensation as a supervisor Rent expense House help Repairs expense
60,000 30,000 5,000
From the above expenses, how much is the allowed deduction from S compensation? a. P – 0 – c. P65,000 b. P60,000 d. P90,000 Problem 8-10 Deduction from Business Income Mr. Bago incurred the following expenses and losses during the year: Family expenses Cost of family hone, life 25 years (40% used in business) Life insurance expense of his maid, the beneficiary is Mr. Bago Loss from sale of land to his brother Police protection Loss of business equipment reported to the BIR
P 240,000 1,100,000 10,000 100,000 12,000 38,000
The deductible expenses and losses from Mr. Bago’s business income is: a. P 164,000 c. P60,000 b. P154,000 d. P54,000 Problem 8-11 Deduction from Gross Income Mr. Apo Linar, married, works as a supervisor of Golden Construction receiving P240,000 as hi s annual gross compensation income. He maintains a small consulting firm that earned P120,000 a year. He incurred the following expenses during the year:
Premium payments of his life insurance Depreciation of his house (10% is used as office for his firm) Repair of his house Interest expense paid to his brother Office supplies used Donation to the burial of his friend
P 25,000 20,000 100,000 10,000 6,000 5,000
1. From the items above, how much is the total deduction form gross compensation income of Linar? a. P – 0 – c. P20,000 b. P 18,000 d.P25,000 2. From the items above, how much is the total deduction from gross income from professional of Linar? a. P – 0 – c. P20,000 b. P 18,000 d.P25,000 Problem 8 – 12 Tax Laws vs. GAAP During the year, A Co. reported the following business expenses: Salary expense, net of withholding tax of P20,000 Estimated uncollectible accounts Compromise penalty expense Depreciation expense Miscellaneous expense
P180,000 10,000 50,000 30,000 5,000
The miscellaneous expense was incurred but not reported last year. The deductible expense from a company’s earnings would be: a. b . c. d .
Tax Laws P205,000 P230,000 P250,000 P280,000
GAAP P205,000 P295,000 P290,000 P295,000
Problem 8 – 13 OSD (R.A.9504) A single proprietorship has a gross receipts of P500,000 from ordinary transactions, capital gains of P120,000 from sale of car and interest income of P4,000, net of final tax of 20%. The optional standard deduction is: a. P 250,00 b. P 248,000
Problem 8 – 14 OSD (R.A. 9504) Cost of sales
c. P200,000 d.P150,000
Operating expenses Gains from sale of capital asset – subject to normal tax 1. The optional standard deduction of A Co. amounts to a. P 90,00 b. P 208,000
20,000 40,000 c. P360,000 d.P200,000
2. The net amount of income that would enjoy tax savings would be: a. P 360,00 c. P180,000 b. P 208,000 d.P172,000 Problem s 8 – 15 OSD (R.A. 9504) Mr. Lito Pusalang provides the following data: Gross receipts from profession Rent income, net of withholding tax of 5% Interest income from Metro Bank Dividend income San Miguel Corporation Operating expenses without receipts Compensation income How much is the optional standard deduction? a. P 316,000 b. P 240,000
450,000 40,000 10,000 40,000 240,000
c. P236,000 d.P220,000
Problem 8 – 16 Itemized Deductions Sales Cost of sales Operating expenses, inclusive of representation expense amounting to P300,000 with proper documentations The amount of allowable itemized deductions is: a. P 2,000,000 b. P 1,800,000
c. P1,700,000 d.P400,000
Problem 8 – 17 Itemized Deductions Pasarado Corporation shows the following data during the taxable year Sales Interest income, net of 20% final tax Cost of sales Salary expense Interest expense Rent expense Advertising expense Depreciation expense NOLCO How much is the amount of itemized deduction? a. P 202,400
P500,000 24,000 300,000 120,000 60,000 24,000 P 6,000 5,000 50,000
b. P 205,100
Problem 8 – 18 Salary Expense Phoenix Corporation paid the following salaries and fringe benefits to its officers and employees for 200B: Gross salaries, employees Less: Withholding income tax SSS premium Advances Net amount of payment Grossed-up fringe benefits for officers Less: Final tax paid on fringe benefit payment* (P680,000/68%) x 32% Total cash payment for salaries and fringe benefits
P 400,000 200,000 100,000 P1,000,000 320,000
P6,000,000 700,000 P5,980,000 80,000 P5,890,000
*The P320,000 final tax on fringe benefits shall be payable to the BIR not to the employee. The total amount of allowable salary and fringe benefits expenses that could be claimed by Phoenix Corporation would be a. P 7,000,000 c. P5,980,000 b. P 6,000,100 d.P5,300,000 Problem 8 – 19 Fringe Benefits Expense How much is the allowable deduction from business income of a domestic corporation which granted and paid P102,000 cash fringe benefits to its key officers in 200B? a. P 67,320 c. P100,000 b. P 99,000 d.P150,000 Problem 8 – 20 Deductible Bonus In 200B, a domestic corporation, using the calendar period, had a net income of P75,000 after deducting in full charitable contribution of P5,000 which is subject to limitation but before deducting bonus given to key officials and basic income tax. Bonus is 15% of the income after the basic income tax. What is the amount of deductible bonus? a. P 7,000 c. P7,752 b. P 7,067 d.P8,143 Problem 8 – 21 Compensation for Injuries and Pensions While working. A, one of the X Construction Co’s, workers, died by falling from the 10 th floor of the building. The company helped the worker’s family with the following: Monthly Salary P 5,000 Death benefits 50,000 Terminal pay 25,000 Funeral expense 10,000 Continuous compensation after the burial three months 15,000
How much is the total deductible expenses a. P 105,000 b. P 95,000
c. P90,000 d.P80,000
Problem 8 – 22 Materials and Supplies C Co. reported the following data regarding its materials and supplies: Materials Beginning inventory P100,000 Purchases 300,000 Increased (decrease) in inventory ( 20,000 )
Supplies P20,000 40,000 3,000
How much is the amount of inventoriable cost and supplies expense? Supplies expnse Inventoriable cost a. P400,000 P63,000 b. P380,000 P60,000 c. P320,000 P37,000 d. P300,000 P40,000 Problem 8 – 23 Traveling Expenses A Corporation incurs the following travel expenses: 1. Plane tickets and hotel bills of its officers who were sent to business seminars: In Davao P 50,000 In Taiwan 200,000 2. Transportation expenses of its officers from home to office and vice versa as part of their employment contract, P68,000 from which final tax P32,000 was remitted. Transportation expenses of messengers from office to several clients’ place at P40,000, inclusive of meals amounting to P25,000. How much is the total allowable expense that could be claimed by A Corporation? a. P250,000 c. P350,000 b. P318,000 d. P390,000 Problem 8 – 24 Rent Expense The business reports its income on accrual basis. At the end of the year, total rent expenses paid P150,000, inclusive of P10,000 rent last year and P20,000 for the next year’s first two months. The deductible rent expense is: a. P150,000 b. P140,000
c. P130,000 d. P120,000
Problem 8 – 25 Rent Expense On October 21, 200B, A acquired a contract of least with Tabora Builders regarding a space with the stipulations that E should be responsible in paying the following: Monthly rent Share in annual insurance premium Share in annual real property tax
P20,000 3,000 1,500
Share in annual city services
If a uses 60% of the space for business and the remaining 40% for residence, how much is the deductible rent expense to be reported by A for the year ending December 31, 200B? a. P48,500 c. P24,450 b.P44,750 d. P26,700 Problem 8 – 26 Prepaid Rent On June 30, 200B, G rents an apartment for P20,000 a month with an advanced payment for 3 months and subsequently sublease 80% of the apartment to CPA reviewees for P25,000 a month beginning July 31, 200B. G’s records show the following rental collections and payments during the year: Total payments P 80,000 Total collections 150,000 1. How much is the deductible rent expense for the year? a. b. c. d.
Accrual basis P120,000 P96,000 P80,000 P140,000
Cash basis P80,000 P64,000 P100,000 P120,000
2. How much is the reportable rent income for the year? Accrual basis Cash basis a. P150,000 P153,000 b. P125,000 P150,000 c. P120,000 P100,000 d. P100,000 P120,000 Problem 8 – 27 Leasehold Improvement R signed a 8-year lease contract to occupy a vacant lot for P2,000 a month. As a part of the lease agreement. R constructed a restaurant building costing P600,000. The building has an estimated life of 10 years. At the end of the lease contract, the landlord will own the building. The monthly deductible expense from the above contract would be: a. P2,000 c. P7,000 b. P6,250 d. P8,250 Problem 8 – 28 Representation Expense A business reported a total net sales of P5,000,000. The actual entertainment and representation expenses incurred in connection with the conduct of business amounted to P30,000.
1. If the business is a trading business, the deductible amount of representation and entertainment expenses is: a. P5,000 c. P30,000 b. d. 2. If the business is a service business, the deductible amount of representation and entertainment expenses is: a. P5,000 c. P30,000 b. P25,000 d. P50,000 Problem 8 – 29 Representation Expense The following data are available from the books of Carwash Company: Gross receipts Cost of service Operating expense, excluding representation expense Representation expense
P300,000 120,000 80,000 20,000
How much is the total operating expense deductible from gross income? a. P100,000 c.P81,800 b. P83,000 d. P80,900
Problem 8 – 30 Interest Expense A corporation earned income, inclusive of P50,000 interest income and net of interest expense of P40,000, amounting to P1,500,000. The deductible interest expense would be: a. P19,000 b. P16,800
c. P23,000 d. P – 0 –
Problem 8 – 31 Interest Expense What would be the amount allowed as a deduction for P50,000 interest expense incurred for short-term loan acquired from a bank, which proceed was used for business? The business has P30,000 interest income earned during that year. a. b. c. d.
Sole Proprietor P50,000 P38,600 P37,400 P38,600
Corporation P50,000 P37,400 P31,400 P40,100
Problem 8 – 32 Deductible vs. Nondeductible Interest Expense Mr. Tee, a reporting in cash basis, showed the following interest expense related to his business during the year. Interest paid in advance Interest paid to a brother
Interest paid on delinquency taxes Interest on borrowings to finance his family home Interest paid to finance petroleum exploration
8,000 30,000 100,000
If Mr. Tee has an interest income of P10,000 earned from the bank, how much is the deductible and nondeductible interest expense during the year? a. P28,000 c. P142,000 b. P8,000 d. P162,000 Problem 8 – 33 Tax Arbitrage Ajoy Co., a domestic corporation, has average annual business income of P1,000,000 and the annual average allowed operating expenses of P500,000. It has acquired a loan of P1,000,000 with interest expense of 10% per year, and invest the same in time deposit that earns 12% interest income per year. If there is no limitation on the deductibility of interest expense, how much is the tax savings of Ajoy? a. P6,000 c. P12,000 b. P30,000 d. P11,000 Problem 8 – 34 Tax Expenses Care Corporation incurred the following taxes during the taxable year. Documentary stamp taxes Income taxes paid in favor of key officers (as fringe benefit) Income taxes paid in favor of rank in file employees (as fringe benefit) Local taxes, including surcharge of P800 and interest of P200 Philippine income tax Municipal tax Value-added tax Compromise penalty on taxes
1,000 13,600 22,400 6,000 100,000 2,000 1,500 90,000
The amount of taxes deductible from gross income of Care Corporation would be: a. P9,500 c. P46,500 b. P28,500 d. P51,900 Problem 8-35 Tax Credit Paid to Foreign Country Balong is a resident citizen with earnings within and outside the Philippines. His financial records show the following during the taxable year. Business income within and without Business expenses within and without
The business expense includes P10,000 representing income tax payment made in foreign country. If his personal exemption is P50,000, how much is the correct taxable income to avail better tax savings? a. P320,000 c. P300,000 b. P310,000 d. P280,000 Problem 8 – 36 Bad debt Expense Fran Corporation has P100,000 collectibles from Oliva who became insolvent with the P60,000 assets and P200,000 liabilities of which 50% is an income tax liability.
How much is the deductible bad debts of Fran Corporation? a. P100,000 c. P30,000 b. P10,000 d. P15,000 Problem 8 – 37 Bad debt Expense Mr. So reports the following bad debts as deductions from his gross income for the year 200B: Bad debts expense from business P200,000 Bad debts expense from practice of profession 50,000 Uncollectible salary 20,000 Uncollectible money lend to brother for operation 10,000 Total bad debts claimed P280,000 Upon investigation, the following are gathered from the records of Mr. So: 1. Bad debts from business: From insolvent customer with solvent guarantor P100,000 From other customers without guarantor (60% are estimated and 40% are actually written off during the year) 100,000 Total P200,000 2. 100% of bad debts from profession are actually written off during the year 3. Uncollectible salary was due to employer’s bankruptcy. 4. Brother died from operation and could not pay anymore. How much is the deductible bad debts deduction of Mr. So? a. P50,000 c. P200,000 b. P90,000 d.P250,000 Problem 8 – 38 Depreciation Expense On June 30, 200B, the business acquired an equipment for P50,000. This is depreciated over 5 years serviceable life with a salvage value of P5,000. The depreciation expense for 200B is a. P10,000 b. P9,000
c. P5,000 d. P4,500
Problem 8 – 39 Depreciation expense In January 1, 200B, Top Gun Inc., leased a portion of commercial lot owned by Nevada Co. for 12 year for a monthly rent of P10,000. The lessee constructed a building improvement amounting to P2,300,000 which was completed on July 1, 200B. The building has an estimated life of 20 years. The building improvement was eventually used in the business on October 1, 200B. The 200B depreciation expense of Top Gun is a. P100,000 b. P191.776
c. P200,000 d. P204, 444
Problem 8 – 40 Properties Used in Petroleum Operations Zamba Oils fixed assets are as follows:
Oil extracting machine Computers (office) Delivery truck
Estimated useful life 20 years 4 years 10 years
Acquisition cost 900,000 100,000 200,000
If all depreciation assets can have a salvage value of 10%, how much is the annual depreciation? a. P270,000 c. P235,000 b. P250,000 d. P229,500 Problem 8 – 41 Depletion Expense Gold Ore acquired a mining property for P6,000,000 believed to have an estimated gold ore deposit of 5,000,ooo tons. It is estimated that the property has a salvage value of P1,000,000 after P300,000 restoration cost. If Gold Ore was able to produce 800,000 tons of gold ore, how much is the deductible depletion expense? a. P752,000 c. P848,000 b. P800,000 d. P960,000 Problem 8 – 42 Exploration and Development Expenditures Benguet Mining Co. reported the following data for 200x: January 1, 200x depletable cost January 1, 200x probable reserves Cost and Expenses: Mining costs Milling costs Marketing expenses Depreciation expense Exploration costs Intangible development costs
P 12,500,000 3,000,000 P2,000,000 3,000,000 1,500,000 1,000,000 1,000,000 1,500,000
Other information during 200x: a. Additional probable reserves were determined to be 2,500,000 units b. Actual production was 1,200,000 units c. Selling price per unit is P12 1. The new depletion rate if the additional exploration and development costs will be part of the adjustment on depletion rate would be a. P3.00 c. P2.38 b. P2.50 d.P2.00 2. The depletion cost for year 200x using assumption 1 is a. P2,400,000 c. P3,000,000 b. P2,856,000 d. P3,600,000 3. If the additional exploration and development cost are to be treated as direct deduction from the taxable income, how much would be the allowable amount for 200x? a. P2,500,000 c. P1,000,000 b. P1,725,000 c. P605,000 4. Taking option 2, direct deduction from gross income, what amount of exploration and development costs would be charged to succeeding years?
a. P625,000 b. P775,000
c. P1,000,000 d. P2,500,000
Problem 8 – 43 Capital Expenses of Educational Institution In 200x. Benguet University, a private educational institution, has constructed a building with a contract price of P10,000,000. The building has an estimated useful life of 50 years with a salvage value of 10%. How much is the deductible expense allowed to Benguet University for year 200x under the two options? a. b. c. d.
Capitalized P 200,000 P 180,000 P10,000,000 P 9,000,000
Outright expense P 9,000,999 P10,000,000 P 200,000 P 180,000
Problem 8 – 44 Retirement Expense Cordillera University’s books of accounts reveal the following contribution for its retirement plan for the years 200A, 200B and 200C. Actual contribution Normal valuation Actual retirement payments made were as follows: Actual retirement payments
200A P1,000,000 800,000
200B P 900,000 800,000
200C P 500,000 800,000
200A P - 0 -
200B P 400,000
200C P 300,000
1. If the retirement plan is BIR-registered, how much is the deductible retirement expense for year 200C? a. P300,000 c. P800,000 b. P530,000 d. P830,000 2. If the retirement plan is NOT BIR-registered, how much is the deductible retirement expense for year 200C? a. P300,000 c. P800,000 b. P530,000 d. P – 0 –
Problem 8 – 45 Retirement Expense X Co. maintains a BIR-registered defined benefit retirement plan. The company’s normal cost for funding is P700, 000 and P670, 000 for year X and year Y, respectively. The following are expenses related to the retirement plan. Benefit expense for accounting purposes Actual contribution
Year X P750, 000 800, 000
Year Y P900, 000 600, 000
How much retirement expense is deductible for year Y? Problem 8 – 46 Deductible Contribution Expense What would be the allowable deduction for P15, 000 contribution made by a domestic corporation to a religious organization, from his P60, 000 net income after contribution? a. P6, 000 c. P10, 750 b. P10, 000 d. P15, 000 Problem 8 – 47 Deductible Contribution Expense What would be the allowable deduction for P15, 000 contribution made by a resident citizen to an accredited social welfare organization, from his P60, 000 net income after contribution? a. P6, 000 c. P5, 000 b. P5, 500 d. P6, 500 Problem 8 – 48 Deductible Charitable Contribution A domestic corporation made a P20, 000 contribution to an accredited social welfare institution. Its business income for 2005 is P500, 000. The related business expenses inclusive of the P20, 000 contribution is P150, 000. The allowable deduction for charitable contribution would be a. P17, 500 c. P20, 000 b. P18, 500 d. P24, 000 Problem 8 – 49 Tax Incentives to Adopting Private Entities X signed a MOA with Department of Education for the supply of books to Irisan National High School value at P1, 000, 000 for free. During the same year, X reported a business income of P31, 500, 000 and business expenses of P22, 500, 000 before the amount of donation per MOA. The deductible donation of X is a. P675, 000, if X is a corporation and the donation is for the priority program of the Government. b. P1, 350, 000, if X is a single proprietor and the donation is for the priority program of the Government. c. P1, 500, 000, if X is a general co-partnership and the donation is for the priority program of the Government. d. P675, 000, if X is a sole proprietorship and the donation is not part of the priority program of the Government. Problem 8 – 50 Manufacturing Business using OSD The following business data of Laban, a manufacturing corporation, are available: Net Sales P5, 000, 000 Raw materials, beginning 200, 000 Net purchase of raw materials 2, 000, 000 Raw materials, ending 400, 000 Finished goods, ending 750, 000 Direct labor 600, 000 Indirect labor – factory supervisor 120, 000 __________ 100, 000
Light and water (80% factory) Miscellaneous factory expenses Salary of administration and marketing Delivery expense Advertising expense
150, 000 20, 000 600, 000 40, 000 60, 000
Required: If Laban cannot substantiate with receipts the operating expense, how much is its income from operations using optional standard deductions? Problem 8 – 51 Service Business Jovito, a resident individual, engaged in barbershop business, provides the following data from his barbershop business: Gross revenue from: Hair trimming Massaging News paper and comics rental Operating expenses incurred: Salaries of barbers Depreciation of barbershop equipments Rental of barbershop space Utility – light, water, and telephone Janitorial service Bookkeeping service
P300, 000 200, 000 20, 000 200, 000 50, 000 20, 000 30, 000 15, 000 10, 000
Required: Compute for the following: 1. Cost of service 2. Itemized deductions Problem 8 – 52 Allowable Deductions Mr. Joker Arroyo, widower with three (3) qualified depended children and a practicing accountant has the following receipts and expenditures for the calendar years ended December 31, 200x: Receipts: Professional fees Allowance as director of Corporation A Interest on time and savings deposits, net of 20% final tax Commissions
P 500, 000 25, 000 16, 000 5, 000
Expenditures: Salaries of Assistants Partial Payment of Loan Interest on the loan (The loan was used for the repair
P 96, 000 20, 000
Of the residential house of Mr. Arroyo)
Traveling Expenses Light and water, Office
11, 000 7, 890
Light and water, Residence
Stationeries and supplies
Office rent Contributions exclusively for religious purposes
60, 000 38, 500
Required: Compute for the allowable deductions from the business gross income
Problem 8 – 53 Total Allowable Deductions Love Enterprises incurred the following business expenses in the taxable year 200x:
a) Allowance per aging of accounts receivable at the beginning and ending of the year are P20, 000 and P30, 000 respectively. The firm’s provision for bad debts during the year is P15, 000. b) Accumulated depreciation on machine at the beginning is P100, 000 but at the end of the year is P110, 000. During the year, the firm sold a machine with a cost of P300, 000 and an accumulated depreciation of P30, 000 and purchase at the end of the year a new machine worth P400, 000 with a better capability. c) Research and development cost of P500, 000 treated as deferred expense. d) Contribution during the year are as follows: To the government for priority program in sports To the government for public purposes To the accredited NGO’s total administrative expenses is 35% To the church of Baguio Net income before contribution
P 50, 000 10, 000 100, 000 60, 000 2, 500,000
Required: Compute the total allowable deductions of Love Enterprises assuming that the firm is 1. Sole proprietorship 2. Corporation 3. Partnership
Problem 8 – 54 OSD and NOLCO X Co. reported the following income and expenses for a calendar year:
P5, 000, 000
Cost of Sales
2, 000, 000
Operating expenses during the year
1, 000, 000
Dividend income from domestic corporation Interest income, net of final tax
Only 30% of the operating expenses can be substantiated with official receipts. Included in the operating expenses is P50, 000 interest expense.
Required: 1. Total deductible expenses using itemized deduction 2. Total deductible expenses using OSD 3. Net taxable income using the amount that provides tax advantage
Problem 8 – 55 Retirement Expense X Corporation maintains a BIR registered benefit retirement plan. The company’s normal cost per actuarial valuation for funding is P1, 000, 000 and P1, 200, 000 for years 200A and 200B, respectively:
Required: Compute for the following: 1. Deductible retirement expense for years 200A and 200B 2. Net income before income tax for years 200A and 200B
Problem 8 – 56 Financial to Tax Reporting X, reported the following income and expenses during the calendar year:
Sales Interest income, net of final tax Cost of sales Salary expenses
P10, 000, 000 96, 000 4, 000, 000 500, 000
Retirement expenses (actual contribution)
(normal valuation is P250, 000) Representation expense Interest expense paid to the BIR Interest expense paid to Metro Bank
200, 000 20, 000 100, 000
Group insurance expense Bad debt expense (of which only 20% actual write-off) Income tax expense Contribution to TESDA priority project
50, 000 100, 000 120, 000 500, 000
Contribution to local Government
Required: Compute the allowable itemized deduction if X is a 1. Corporate taxpayer 2. Individual Taxpayer
Problem 8 – 57 ________________ to Tax Reporting
a. Salaries expense: Salaries worked and paid Advances to employees
P 500, 000 100, 000
Accrued salaries Total salaries expense
80, 000 P580, 000
b. Bad debt expense: Accounts written off determined to be worthless
Estimated uncollectible accounts
Related party bad debts
Worthless accounts not yet written off
Total bad debts expense
P 370, 000
c. Retirement expenses deducted amounted to P1, 000, 000. The retirement plan is not BIR-registered. Actual retirement payments amounted to P620, 000.
d. Contribution expense, P500, 000
f. Rent expense” Advanced payment of which only 90% was used
g. Taxes expense: Municipalities and Licenses
P 30, 000
Surcharges and penalties
Quarterly income tax
h. Life insurance expense: Premium on the employees group insurance
P 50, 000
Premium on officer’s insurance (beneficiary-X Co.)
Total life insurance expense
Required: Compute for the following: 1. Total allowable deductions if X is an/a a. Individual taxpayer b. Corporate taxpayer
2. Net Income for income tax purposes if X is an/a a. individual tax payer
Chapter 9 Losses
True or False Write True if the statement is correct or False if the statement is incorrect.
Loss incurred from sale of personal property is ordinary loss.
Loss from sale of capital asset is deductible from business income
If there is a partial loss, the allowable deduction will be the book value of the damaged asset at the time of loss.
Expenses not reported when incurred cannot be claimed as NOLCO.
A loss claimed as deduction from estate tax purposes should not be claimed as deduction for income tax purposes.
Gambling losses can be deducted from gambling gains and capital gains.
Losses from business operation are ordinary losses.
Loss incurred from the sale of business furniture is deductible from business income.
Loss from embezzlement of business fund is a loss deductible from business income.
10. Fire damage on the sold proprietorship’s equipment is deductible from business income. 11. Typhoon damage on the residence of the owner of the business is not allowed as deduction from business income. 12. Net operating loss of prior year could be claimed as deduction from business income of the current year. 13. Partial loss on business property, plant and equipment is deductible loss from business income. 14. A loss claimed as deduction for estate tax may be claimed as deduction for income tax purposes. 15. NOLCO could be deducted from next year’s business income of a sole proprietorship which is opting for optional standard deduction. 16. The NOLCO should be deducted from gross income to arrive at base amount for the computation of MCIT.
Multiple choice Select the letter that contains the best answer.
Which of the following is deductible from gross income? a. Personal Expenses c. Bad Debts b. Net Capital Loss d. Estimated loss
Which of the following is not deductible from business income? a. Casual losses on properties connected in the conduct of trade or business
b. Loss of business property due to embezzlement c. Loss on exchange of capital asset d. Net operating loss carry over 3.
If the casual loss on business property is partial, the deductible loss is the a. replacement cost to put back the business property to its operating condition b. actual cost of damaged on business property c. higher amount between a and b d. lower amount between a and b
Which of the following is not correct regarding NOLCO a. NOLCO is allowed as deduction from business income for the next 3 succeeding years b. Domestic and resident foreign corporation subject to normal income tax is allowed with NOLCO. c. Offshore banking unit of a foreign corporation is allowed with NOLCO d. Private education institution enjoying preferential tax rate is allowed with NOLCO
Which of the following is entitled to claim NOLCO? a. Employee with respect to his compensation income b. Foreign international carrier c. Offshore banking Unit d. Self employed individual
Which of the following statement is correct? a. NOLCO is an item of deduction from business income b. Compensation earner could claim NOLCO c. NOLCO could be claimed together with the optional deduction d. NOLCO is equal to operating loss reported in the income statement for prior year
Which of the following is allowed as deduction from business income? a. Loss on the sale of property not directly used in the business b Losses on inventory which is fully covered with insurance c. Fire damage on fully depreciated business equipment 8. Statement 1: Losses claimed as deduction from gross estate will reduce the net taxable estate. Statement 2: Losses claimed as deduction from gross estate would also reduce the taxable income of the estate a. Only statements 1 is correct b. Only statements 2 is correct c. Both statements are correct d. Both statements are incorrect 9.
Statement 1: A loss in one line of business is not permitted as allowable deduction from gain in another line of business, if one of the two lines is exempt from tax Statement 2: Losses from transactions between related party taxpayers may be allowed as deduction as long as supported by documentation a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are incorrect
10. Statement 1: When the loss is cause by embezzlement of funds by a known person, the loss sustained is not deductible on the year of commission or discovery, but in the year when the right of recovery becomes worthless Statement 2: The loss on mortgage is determined upon sale of the property by the mortgagee a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are incorrect 11. Statement 1: Casualty losses of propective crops are deductible loss. Statement 2: Loss on purchased livestock is a deductible loss. a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are incorrect 12. Statement 1: Domestic and resident foreign corporation taxed during the year with MCIT cannot claim NOLCO. Statement 2: Decline in the value through market fluctuation of investments in stock of a corporation is not a deductible loss. a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are incorrect
Problem 9-3 Deduction from Business income During the year, the following losses were incurred: A. Loss incurred on sale of investment in stocks P 200,000 B. Loss from sale of business equipment 100,000 C. Loss of personal equipment 50,000 Which of the above losses could be claimed as deduction from business income? a. A c. C b. B d. All of the above Problem 9-4 Deduction from Business income The following transactions transpired during the year: Cost Sales Price Inventory P1,400,000 P2,500,000 Temporary investments 500,000 450,000 Land(capital asset) 1,000,000 800,000 How much could be claimed as deduction from business income? a. P0 c. P250,000 b. P50,000 d. P450,000
Problem 9-5 Deductible loss on fire What would be the amount of loss that could be deducted from business income for the property that was damaged by fire in 200x and has a remaining useful life of 4 years at date of fire? The property was acquired at 100,000 and depreciated at 10% per year without scrap value. a. P10,00 c. P40,000
Problem 9-6 Deductible loss on Rehabilitate X trading incurred losses from fire on its equipment with a net book value of P50,000 when the fire happened. It will need P60,000 to rehabilitate the extent of damages on the equipment which was not covered by any insurance policy The equipment has an accumulated depreciation of P150,000 at date of fire. To acquire new equipment of the same type will cost P110,000. The allowable deductible loss is a. P200,000 c. P60,000 b. P110,000 d. P50,000
Problem 9-7 NOLCO The net operating loss reported in the GAAP income statement is P50,000 after P200,000 operating expenses. Part of the operating expenses is a P10,000 bad debts based on estimate. How much NOLCO would be deductible from the succeeding year’s income? a. P260,000 c. P50,000 b. P60,000 d. P40,000
Problem 9-8 NOLCO The previous year’s operating loss amounted to P50,000. How much would be the NOLCO that could be deducted from current year’s income of business opting for optional standard deduction? a. P55,000 c. P5,000 b. P50,000 d. P0
Problem 9-9 Partial fire loss The business equipment which has a carrying value of P25,000 was partially damaged by fire. The actual cost of P30,000 was incurred to put back the business equipment to its operating condition. Required: Compute for the deductible loss from business income.
Problem 9-10 Total Fire Loss The business building with an acquisition cost of P1,200,00 and estimated useful life of 20 years was totally damaged by fire at the end of its 10 th year P200,000 worth of damages was recovered from insurance scrap recovered were realized at 20,000. Required: Compute for the deductible loss from business income.
Problem 9-11 Destruction of old building The business incurred P120,000 to raze down an old existing building to give way to the construction of its factory building. Scrap from the demolished building were realized for P20,000. Required: Compute for the deductible loss from business income related to above construction.
Deductible loss and reportable gain
Kool corporation is holding common stocks of Lang Corp. acquired at cost of P100,000. At balance sheet date, investments in Lang’s stocks has a fair market value of P90,000. On June 30 after balance sheet date the investment in stocks of lang were sold for P110,000 Required: Compute for the deductible loss at balance sheet date and reportable gain on June 30 Problem 9-13 NOLCO The trading business reported a net loss of P50,000, net of P300,000 operating expense. The operating expense included P20,000 estimated bad debts and estimated warranty expense of P10,000 Required: Compute for the net operating loss that could be carried over for the next 3 succeeding years. Problem 9-14 NOLCO The following are the comparative income statements of Venus: Year 1 Gross Profit P500,000 Estimated Bad debts 20,000 Other operating expenses 580,000
Year 2 P600,000 10,000 490,000
Required: Compute for the NOLCO that could be deducted from year 2 income.
Problem 9-15 Mortgage Property In year 1, the business foreclosed the property of delinquent debtor with fair value of P1,000,000 to recover the notes receivable of P1,500,000. In year 2, the foreclosed property was sold for P1,800,000. Required: Determine the gain or loss in year 1 and year 2. Problem 9-16 Mortgage Property The mortgage property with fair value of P1,000,000 at date of grant of loan was foreclosed by the bank when the business over due loan of P500,000 was not paid. The foreclosed property was offered for public auction and no bidder offered any price. The fair value at the date of auction us estimated at P400,000. Required: Compute for the deductible loss from business income of the bank Problem 9-17 Various Losses Mr. Guiller Dunong, a farmer, reports the following: Income from farming Cockpit winnings Shrinkage of farm products produced Loss of potential farm products due to calamities Cockpit losses
P300,000 50,000 20,000 150,000 100,000
Required: How much is the deductible loss? Problem 9-18 Various Losses Mr. Scotty Saboy incurred the following losses in connection to his construction business: Compensatory liquidated damages P 50,000 Loss on actual damages 30,000 Loss on robbery(construction Supplies) 50,000 Loss on pilferage of business supplies 10,000 Book value of partially damaged machine due to fire 200,000
Replacement cost of damaged portion of machine Loss on sale of capital asset
Required: Compute the amount of deductible loss from gross income
Problem 9-19 NOLCO and OSD X, reported the following gross receipts, cash disbursements and NOLCO. Gross receipts P2,000,000 Cost of service 500,000 Cash Disbursement 400,000 NOLCO last year 300,000 X opted to deduct OSD because the cash disbursement that represent business expense are not properly supported with documentation. Required: Compute the following: 1. If x is an individual taxpayer, how much is the amount of allowable deductions? 2. If x is a corporation, how much is the amount of allowable deductions?
Problem 9-20 NOLCO,OSD and MCIT In the fourth year of Y Co., the company reported the following: Sales,200r 2,000,000 Cost of sale 1,000,000 Operating expenses 990,000 NOLCO 200a 200,000 Due to losses and since the company has been in existence for more than 3 years, the BIR required Y co. to pay a minimum corporate tax of 2% based on gross income. Required: Compute the following: 1. Income tax due and payable in year 200r 2. Total NOLCO in year 200a
Problem 9-21 Various Losses A CO. reported the following losses during the year: Burglary loss-cash Embezzlement loss-cash Pilferage loss-office supplies Capital loss on salo of capital asset(long term) Decline in the value of investment in stocks Casualty losses
50,000 25,000 5,000 10,000 30,000 15,000
The Burglary loss was reported to the police station within 90 days but such loss was not reported to the BIR. The cashier was traced capable for the embezzlement. Required: Compute the following: 1. Deductible loss from gross income 2. Deductible loss from capital gain
Problem 9-22 Losses from farming The following losses were incurred by Dizon Farms during the calendar year: Shrinkage loss if farm products produce P140,000 Casualty losses of propective products 40,000 Casualty losses of animals raised in the farm 20,000 Death of livestock previously purchased 10,000 Cost of property expropriated by the government: The government paid only 10,000 as compensation 30,000 Required: Compute for the deductible farm loss
Problem 9-23 Adjustment of Losses X Co. constructed a building at a cost of 10,000,000 with an estimated useful life of 30 years. After 5 years, subsequent additions and improvements which were properly capitalized amounted to 500,000. The building was insured for 6,000,000 against fire at the time it was totally destroyed by fire at year 8.
Problem 10 – 1 True or False Write true if the statement is correct or False if the statement is incorrect.
1. A self-employed taxpayers is required to file his quarterly income tax return. 2. A general professional partnership is taxed in the same manner as corporation. 3. A passive income outside the Philippines by a nonresident alien is subject to annual income tax in the Philippines. 4. Both creditable and final withholding taxes are withholding at source. 5. The excess of personal exemption over compensation income cannot reduce the net operating income from business. 6. In general, passive income within is subject to final tax. 7. The annual income taxes are usually increased by creditable taxes. 8. The optional standard deduction can be deducted from the quarterly income tax. 9. Passive income within by a resident citizen is allowed to be reduced by personal exemption. 10.Reporting compensation and business income in one tax return using the same tax rate is an example of global tax system. 11. Allowing personal exemption as reduction to taxable compensation income is an example of global income tax system. 12.Resident aliens are taxable for their income earned within and outside the Philippines. 13.There is net capital gain if the ordinary gain exceeds ordinary loss. 14.Only resident citizen could opt for 40% standard deduction for business income.
15.A single individual, fully supporting his minor sister could claim P75, 000 personal exemption. 16.A married individual with 5 dependent children could claim only P100, 000 total personal exemption. Problem 10 – 2 Multiple Choice Select the letter that contains the best answer.
1. When different type of income are subjected to common tax rate, the tax system is described as: a. Global tax system c. scheduler tax system b. Gross income tax system d. final tax system 2. Scheduler tax system of income taxation means: a. All types of income are added together to arrive at gross income b. Separate graduated rates are imposed on different type of income. c. Capital gains are excluded in determining gross income. d. Compensation income and business professional income shall be added together in arriving at gross income. 3. Which of the following taxpayers are taxed for income earned within and outside the Philippines. i. Resident citizen ii. Resident alien iii. Domestic corporation iv. Resident foreign corporation Choices a. i,ii,iii,and vi c. i and iv only b. i,ii and iv only d. i and iii only 4. a self employed taxpayer is required to file his quarterly income tax return in a. BIR Form 1700 c. BIR Form 1701Q b. BIR Form 1701 d. BIR Form 2316 5. A domestic corporation is required to file its annual income tax return in a. BIR Form 1700 c. BIR Form 1701Q b. BIR Form 1701 d. BIR Form 2316 6. The quarterly tax return of a commercial partnership is required to be reported in BIR Form a. 1700Q c. 1702Q b. 1701Q d. 2316Q 7. Which of the following is required to file quarterly income tax return? a. Compensation income c. Annual income tax b. Passive income d. Capital gain 8. An income tax that is used to reduced the income tax due at the end of the year. a. Creditable withholding income tax c. Annual income tax b. Final withholding income tax d. Capital gains tax 9. Statement 1: NOLCO can only be deducted from the operating income of the last quarter. Statement 2: The individual taxpayer’s personal exemption can only be deducted from the operating income of the last quarter. a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are not correct Problem 10 – 3 Resident Citizen’s Compensation A resident citizen reported compensation income amounting to P167.500, net of P22.500 withholding tax. The tax rates for individual are as follows: P8, 500 for P70, 000 + 20% in excess of P70, 000 P22, 500 for P140, 000 + 25% in excess of P140, 000 His net tax payable would be a. P22, 500 c. P5,000
Problem 10 – 4 Compensation and Business Income Mr. A, a MWE, reported a gross compensation income of P90, 000 and business gross receipts of P200, 000. How much is the net taxable income if the taxpayer opted to elect the optional standard deduction? a. P – 0 c. P160, 000 b. P70, 000 d. P240, 000 Problem 10 – 5 Quarterly Income and OSD For the months of January, February, March and April, ahead of family reported a business gross of P50, 000, P60, 000, P70, 000 and P80, 000, respectively. Opting for standard deduction, his net taxable income for the first quarter is a. P209, 000 c. P106, 000 b. P108, 000 d. P58, 000 Problem 10 – 6 Corporation’s Net Taxable Income A domestic corporation reported a gross profit of P1, 000, 000. Its sales amounted to P2, 500, 000. Its ending inventory is P500, 000 more than the beginning inventory. Its operating expenses amounted tom P400, 0000. Its net taxable income would be a. P1, 000, 000 c. P2, 600, 000 b. P3, 000, 000 d. P600, 000 Problem 10 – 7 Income Tax on Final Adjusted Return For the previous 3 quarters, the total income tax paid by a domestic corporation amounted to P900, 000. Its total business income for the year amounted to P5, 500, 000 and expenses of P2, 220, 000. How much would be its net tax payable per final adjusted return? a. P1, 120, 000 c. P220, 000 b. P900, 000 d. P150, 000 Problem 10 – 8 Net Tax Payable (Refund) A resident foreign corporation paid P500, 000 income tax for the first 3 quarters. Its net taxable income after operating expense of P23, 500, 000 is equal to P1, 500, 000. What would be its net tax payable (refund) at the end of the year? a. P480, 000 c. P – 0 – b. P20, 000 d. (20.00) Problem 10 – 9 Net Taxable Income of Resident Citizen The following are the reported income and expenses of a resident citizen: Compensation income Business income Business expenses Dividend income
___Within P250, 000 500, 000 200, 000 50, 000
____Outside P–0600, 000 300, 000 100, 000
Required: Compute for the net taxable income before personal exemption that should be reported in the annual income tax return. Problem 10-9
Net Taxable Income of Resident Alien
The following are the reported income and expenses of a resident alien: ___Within P250, 000 500, 000 200, 000 50, 000
Compensation income Business income Business expenses Dividend income
____Outside P–0600, 000 300, 000 100, 000
Required: Comute for the net taxable income before personal exemption that should be reported in the annual tax return.
Problem 10 – 11 Net Taxable Income of Nonresident Alien The following are the reported income and expenses of a nonresident alien: ___Within Compensation income Business income Business expenses Dividend income
P 50, 000
____Outside P 500, 000 600, 000 300, 000 100, 000
Required: Compute for the net taxable income before personal exemption that should be reported in the annual; income tax return. Problem 10 – 12 Net Taxable Income of Domestic Corporation The following are the reported income and expenses of a domestic corporation: ___Within P 500, 000 200, 000 50, 000
Business income Business expenses Dividend income from foreign corporation
____Outside P600, 000 300, 000 100, 000
Required: Compute for the net taxable income that should be reported in the annual income tax return. Problem 10 – 13 Net taxable Income of Foreign Corporation The following are the reported income and expenses of a foreign corporation. ___Within ____Outside Business income P 500, 000 P600, 000 Business expenses 200, 000 300, 000 Dividend income from foreign corporation 50, 000 100, 000 Required: Compute for the next taxable income that should be reported in the annual income tax return. Problem 10 – 14 Quarterly Income Tax Handsome Corporation’s quarterly operating records show the following: Q Sales
U A R T ______First ____Second P1, 000, 000 P800, 000
E R S_________ ____Third _____Fourth P600, 000 P1, 200, 000
The cost of sale is 60% of sale and the business expenses allowed is 40% of gross income. Assume that the amounts are noncumulative.
Required: Compute the income tax still due for the first, second, third and fourth quarters. Problem 10 – 15 Quarterly Income Tax Data of Highland Corporation, a domestic corporation, for the year 200x are as follows: (Data are all noncumulative) Q
S_________ Sales (noncumulative) Operating expenses before interest and contribution Interest expenses Contribution (deductible in full) Other revenue: Dividend income (domestic) Royalty income Rent income Interest income
______First P500, 000 120, 000
____Second P600, 000 10, 000
____Third P400, 000 15, 000
_____Fourth P900, 000 160, 000
10, 000 20, 000
15, 000 40, 000
30, 000 15, 000
30, 000 20,000
40, 000 60, 000 30, 000 10, 000
30, 000 15, 000
The gross profit is 40% based on sales. 1. 2. 3.
Required: Compute the following: Quarterly income tax due and payable Income tax still due and payable in the fourth quarter Total passive income tax Problem 10 – 16 Income Tax Still Due Mariposa Co., a domestic corporation, reported the following tax payments for the first to the third quarters of the taxable year (cumulative amount): Quarters Business income Itemized allowance deductions Taxable income
First P2, 5000, 000 1, 500, 000 P1, 000, 000
Second P4, 000, 000 2, 500, 000 P1, 500, 000
Third P5, 500, 000 3, 000, 000 P2, 500, 000
Income tax Les: Payment previous quarters Income tax payments
P 320, 000 - 0 P320, 000
P 480, 000 320, 000 P160, 000
P 800, 000 480, 000 P 320, 000
For the fourth quarter, the company reported the following: Business income Itemized allowable deductions Capital gains Passive income earned outside the Philippines Income tax withheld per BIR Form 2307 furnished by credit card company Required: Determine the income tax still due and payable Problem 10 – 17 Annual Income Tax Saddam, a single individual taxpayer, received the following income during the year.
P7, 500, 000 4, 000, 000 200, 000 100, 000 40, 000
Taxable monthly salary after allowable deductions, net of P4, 000 creditable withholding tax Interest income, net of final withholding tax of P2, 000 First three (3) quarters’ taxable business income after allowable deductions, net of P90, 000 income tax for three (3) quarter’s income tax
P16, 000 8, 000 300, 000
The net taxable business income for the quarter is P110, 000. Required: How much is Saddam’s annual income tax?
True or False Write true if the statement is correct or false if the statement is incorrect .
1. All qualified dependents are granted an additional personal exemption of P50,000 as long as the maximum number of dependents is four.
2. A foreigner who stays in the Philippines for 180 days during the taxable year is deemed as doing business in the Philippines.
3. Nonresident aliens not engaged in business in the Philippines are allowed for personal exemptions and additional exemptions subject to reciprocity.
4. The basic personal and additional exemptions of a single mother with an unrecognized dependent child are P50,000 and P25,000.
5. Individual taxpayers are allowed of installment payment for their income taxes when the tax due is in excess of P2,000.
6. At the option of the taxpayer, income taxes paid in the foreign countries can be claimed as deduction from gross income or tax credit subject to limit.
7. A senior citizen’s passive income is subject to final income tax. 8. An individual taxpayer is exempted from filing income tax return if his sole income has been subjected to final withholding tax.
9. For self-employed taxpayers, his quarterly income tax return is not to be reduced by personal exemption. 10. Income earned outside the Philippines by domestic helpers is tax-exempt because they are considered nonresident citizens.
11. The personal exemption of a nonresident alien not engaged in business in the Philippines is subject to reciprocity.
12. A citizen who works abroad most of the time during the taxable year is a nonresident citizen.
True or False Write True if the statement is correct or False if the statement is incorrect.
A man os woman who provides chief support to a brother who is 20 years old and incapable of self support is entitled to claim basic exemption of P50,000 and additional exemption of P25,000.
Payments for hospitalization not exceeding P2,400 per year is allowed as a deduction for individual taxpayers.
If the taxpayer dies during the taxable year, his estate may claim the personal exemption as if he died at the close of such year.
Tax on special aliens is 15% of their net income derived within the Philippines.
Professional or talent fees for services rendered by an individual shall be subjected to a credible value added tax.
An individual taxpayer can claim additional exemption of P25,000 for supporting a senior citizen who can show a certification from OSCA.
An alien residing and doing business in the Philippines is allowed to have a tax credit for income taxes paid in other country.
If the professional fee of an entertainer exceeds P720,000, the credible withholding tax should be 20%.
Gross income for computation of standard deduction includes business income plus other taxable income not subjected to final tax.
10. Interest income of a foreign currency deposit of a nonresident Filipino is subject to final withholding tax of 7.5%. 11. The financial position and profit and loss statements are to be attached in the annual income tax return if the business gross sales in any quarter exceed P50,000 but do not exceed P150,000. 12. The income of a professional entertainer can be reduced by optional standard deduction.
Multiple Choice Select the letter that contains the best answer.
The following individual taxpayers are granted basic and additional personal exemption except. a. Resident citizen d. Nonresident alien subject to reciprocity b. Nonresident citizen c. Resident citizen
For Philippine income tax computation, which of the following individual is taxable also for income earned outside the Philippines? a. Nonresident alien c. Resident alien b. Nonresident citizen d. Resident citizen
A foreign individual who have stayed in the Philippines during the taxable year for more than 180 days but less than one year is considered a a. Nonresident alien doing business in the Philippines b. Nonresident alien not doing business in the Philippines c. Resident alien d. Resident alien doing business in the Philippines
Which of the following is taxable only on income earned within? i. Resident alien ii. Nonresident alien doing business in the Philippines iii.Nonresident alien not doing business in the Philippines Choices: a. I,ii, and iii c. ii only b. Ii and iii only d. iii only
Which of the following individual is taxable at 15% on compensation income derived within the Philippines? i. Compensation income of citizen earned from employment with regional or area headquarters of multi- National Corporation. ii. Compensation of alien earned from employment with the petroleum service contractor. iii. Compensation income of alien earned from employment with an offshore banking unit. Choices: a. i,ii, and iii c. ii only b. Ii and iii only d. iii only
Which of the following is not required to file an income tax return? a. Resident citizen with respect to his business income earned outside the Philippines b. An employee with only one employer and whose compensation income is fully collected with creditable withholding tax. c. Nonresident citizen with respect to his compensation income earned within the Philippines. d. Nonresident alien with respect to his business income earned within the Philippines.
Which of the following is not correct? a. A self-employed individual is required to file a quarterly income tax return. b. The income reported in quarterly tax return is cumulative during the year. c. Business expenses reduce the income reported in the quarterly income tax return. d. The income reported in the quarterly tax return is reduced by personal exemption.
Statement 1: An alien who shall reside in the Philippines with no definite intention as to his tax is a resident of the Philippines. Statement 2: A foreigner who has acquired residency in the Philippines shall only become a nonresident alien when he actually departs with the intention of abandoning his residency in the Philippines. a. Only statement 1 is correct b. Both statements are correct c. Only statement 2 is correct d. Both statements are incorrect
Statement 1: Compensation income is reduced by personal expenses to arrive at the taxable amount.
Statement 2: Business income is reduced by business expenses to arrive at taxable amount. a. Only statement 1 is correct b. Both statements are correct c. Only statement 2 is correct d. Both statements are incorrect 10. The following persons benefit from personal exemptions, except a. Resident alien, not doing business in the Philippines b. Nonresident alien, with only compensation income earned in the Philippines c. Foreigner who stayed in the Philippines for more than 183 days and earned business income within. d. An alien with only business income earned within after a year of stay in the Philippines. Problem 11-4
Multiple Choice Select the letter of the best answer.
An individual taxpayer, whose personal exemption allowed in the lower amount provided between Philippine Tax Code and his country’s Tax Code. Citizenship Residency Business income a. Filipino Within No b. Filipino Outside Yes c. Alien Within No d. Alien Outside Yes
Statement 1: If both husband and wife are earning income, only one of them could claim for the additional personal exemption. Statement 2: The husband is the rightful claimant of additional personal exemption, unless he waives his rights in favor of his wife. a. Only statement 1 is correct b. Both statements are correct c. Only statement 2 is correct d. Both statements are incorrect
Statement 1: A tax credit will reduce the taxable income. Statement 2: A tax credit will be available only when there is foreign income tax paid by resident Filipino for income earned without. a. Only statement 1 is correct b. Both statements are correct c. Only statement 2 is correct d. Both statements are incorrect
One of the following is not creditable against the total computed tax per ITR. a. Final withholding tax b. Foreign income tax paid by resident citizen c. Creditable withholding tax on compensation d. Income tax paid for the first three quarters for the business income earned
For taxation purposes, A Filipino citizen who stayed outside the Philippines and worked abroad for 182 days during the taxable year is classified as a. Nonresident citizen c. overseas contract worker b. Resident citizen d. special taxpayer
Which of the following statements is true? a. Resident citizen with income from foreign sources only is allowed a basic personal exemption only. b. Nonresident alien not engaged in business in the Philippines is allowed basic personal exemption only. c. Nonresident citizen engaged in business in the Philippines is allowed for basic and additional personal exemptions. d. Nonresident citizen with income from the Philippines only is allowed both basic and personal exemptions.
The personal exemption of the nonresident alien engaged in trade or business in the Philippines is equal to that allowed by the a. Income tax law of his country to a citizen of the Philippines not residing there. b. Income tax law of his country to a citizen of the Philippines not residing there or the amount provided by the NIRC to a citizen or resident, whichever is lower. c. NIRC to a citizen or resident. d. Income tax law of his country allows to a citizen of the Philippines not residing there or the amount provided by the NIRC to a citizen or a resident alien, whichever is higher.
Which of the following taxpayers whose personal exemptions is subject to the law on reciprocity under the Tax Code? a. Nonresident alien with respect to his income derived outside the Philippines. b. Nonresident alien who shall come to the Philippines and stay therein for an aggregate period of more than 180 days. c. Resident alien deriving income from a foreign country. d. Nonresident alien not engaged in trade or business in the Philippines whose country allows personal exemption to Filipinos who are not residing but deriving income from said country.
Statement 1: The maximum amount of hospitalization and health insurance allowed as deduction is P2,500 per year. Statement 2: The allowable hospitalization and health insurance is deductible from compensation income or business income whichever is applicable. a. Only statement 1 is correct. b. Only statement 2 is correct. c. Both statements are correct. d. Both statements are not correct.
10. A net taxable income of a resident citizen sole proprietor of a proprietary educational institution is subject to a a. Normal tax of individuals b. 10% special tax c. 25% special tax d. 32% normal corporate tax
Multiple Choice Select the letter that contains the best answer.
Which of the following is the correct amoumt of personal additional exemption?
a. b. c. d.
P50,000 for married individual P32,000 for head of the family P25,000 for senior citizen P25,000 for each qualified child (maximum of 4)
Which of the following is the correct basic personal exemption? a. P50,000 for single individual with his parent as dependent b. P50,000 for legally separated individual, with no dependent c. P50,000 for married individual with no dependent d. All of the above
Which of the following amount of winnings is subject to final tax of 20%? a. P10,000 winnings outside the Philippines b. P10,000 winnings earned within the Philippines c. P1,000,000 Philippines sweepstakes winnings d. P9,000 first prize singing contest
All of the following taxes are classified as income taxes, except a. 20% royalty tax b. 10% dividend tax c. ½% of 1% tax on the selling price of shares of stock traded in the local stock exchange d. 6% capital gain tax on sale of land
Which of the following is the correct income tax rate? a. 20% dividend income earned within by nonresident alien doing business income wit b. 25% on gross income earned within by nonresident alien not doing business in the Philippines c. 25% 0n more than P1,000,000 business income earned within by nonresident alien d. 20% on P50,000 compensation income earned by senior citizen
The normal tax rate on individual taxpayer is from a. 2% to 32% b. 5% to 32% c. 5% to 35% d. 2% to 32%
One of the following individual taxpayer could claim personal exemption as head of the family a. Single, supporting a 30 year old paralytic brother b. Widow, with a 25 year old son under his custody c. Legally separated with 21 year old sibling as qualified dependent d. Married but legally separated without dependent
All of the following dependents will entitle the taxpayer for additional personal exemption except a. 25 year old, but mwentally retarded son b. 20 year old, unmarried daughter c. 18 year old, unemployed son d. 19 year old sister
Which of the following is the correct creditable withholding tax on professional income? a. 15% on professional income of practicing lawyer earning P500,000 a year b. 20% on professional incomeof entertainer eartning P500,000 and below per year c. 10% o professional income of entertainer earning more than P720,000 per year d. 15% on professional income of entertainer earning more than P720,000 per year
11. In the year2009, P500,000 dividends from a domestic corporation and/or P500,000 share in the net income of a taxable partnership received by a citizen is subject to a final tax of a. 15% c. 20% b. 6% d. 10% 12. If an individual person is allowed to pay his tax on installment payment, the date would be a. May 15 for the first installment and July 25 for the second installment b. April 25 for the first nstallment and August 15 for the second installment c. April 15 for the frst installment and July 15 for the second installment d. May 15 for the first installment and August 15 for the second installment Problem 11-6 Income subject to Philippine Income Tax Juan, single, is an OFW with a monthly income abroad amounting to P20,000. He has a sari-sari store in the Philippines with an average monthly income of P10,000. If Juan returned in the Philippines from March 1 of the taxable year and stayed to mange his sari-sari store,how much of his income is subject to tax in the Philippines after personal exemption? a. P70,000 c. P110,000 b. P100,000 d. P120,000
Problem 11-7 Special Taxpayer Mr. Roman Dinero (single), a Spaniard who is a resident general manger of Sbbot Laboratories- a multi-national company’s regional operating headquarters established in the Philippines- received a monthly salary of P250,000. What is the amount of Mr. Roman Dinero’s income tax payable? a. P12,500 c. P450,000 b. P80,000 d. P918,600 Problem 11-8 Personal Exemption (Married Individual) What would be the maximum amount of personal exemption allowed to Filipino citizen couple that have five qualified dependent children during the taxable year? a. P200,000 c. P100,000 b. P150,000 d. P 75,000 Problem 11-9 Personal Exemption (Legally Separated) What would be the amount of Personal Exemptiion allowed to a citizen who is legally separated whose wife and minor son are living together in USA? a. P100,000 c. P50,000 b. P125,000 d. P75,000 Problem 11-10 Personal Exemption (Change of Status) What would be the personal exmption allowed to a citizen whose wife died in December of the taxable year after giving birth to their son? a. P100,000 c. P125,000 b. P 75,000 d. P 50,000 Problem 11-11 Personal and Additional Exemptions The taxpayer is a widow who supports the following: (a) Legitimate child by a former marriage, 12 years old; (b) Recognized natural child with present common law husband, 6 years old;
(c) Common law husband who is single; and (d) Widowed mother (senior citizen) of her common law husband. The amount of her personal and additional exemptions is a. P50,000 c. P100,000 b. P75,000 d. P125,000 Problem 11-12 Personal Exemption (Reciprocity) Mr. Ronal Baden, an American citizen and a resident of California, U.S.A., has business income derived in the Philippines amounting to P500,000 for the year. He is married and has 2 minor children. How much will be allowed as his personal exemption for the computation of his income tax in the Philippines, if his country’s tax law is granting the same exemption to Filipino citizens, except for additional exemption where his country’s tax law is allowing P10,000 per dependent child, a. P 50,000 c. P75,000 b. P100,000 d. P -0Problem 11-13 Special Deduction How much is the special deduction allowed for the payment of a premium on health insurance during the taxable year by a resident alien if the total amount paid is P3,000, total family income is P200,000 and payment was made in the month of December of the current year, covering one year period starting December of the current year of the taxable year. a. P 200 c. P3,000 b. P2,400 d. P2,000 Problem 11-14 Special Deduction Mr. Tyrone Velasquez has total salary of P180,000 , and Mrs. Girlie Velasquez has P120,000 income for the year, both earned from employment in the Philippines. They paid P150 per month health insurance policy for the months of June to December 200x. Mr. Velasquez as head of the family could claim special deductions for these payments equal to a. P 900 c. P2,400 b. P1,800 d. P-0Problem 11-15 Dependent Other than Children Maria, Married and without income, receives her allowance amounting to P50,000 per month from her husband who is working in Brunei as Accountant. She supports her two siblings and parents who are qualified as dependent relatives. How much is the total personal and additional exemptions to Maria? a. P125,000 c. P50,000 b. P100,000 d. P-0Problem 11-16 Income of Senior Citizen A senior citizen reported compensation income of P40,000 net of withholding tax. His net tax payable at the end of the taxable year would be a. P-0c. P2,500 b. P2,000 d. P4,000 Problem 11-17 Taxpayers Income X, single, reported the following income and expenses during the taxable year:
Compensation Income Professional Income Interest Income Dividend Income 1.
Within P240,000 300,000 100,000 60,000
Without P200,000 60,000 40,000
What is the amount of net income subject to tabular tax and final tax in the Philippines if X is a resident Filipino citizen? Subject to Tabular tax Final tax a. P550,000 P154,000 b. P760,000 P260,000 c. P770,000 P180,000 d. P790,000 P160,000
2. What is the amount of net income subject to tabular tax and final tax in the Philippines if X is a resident alien? Subject to Tabular tax Final Tax a. P490,000 P160,000 b. P520,000 P220,000 c. P410,000 P160,000 d. P640,000 P260,000 Problem 11-18 Income of Husband and Wife The net taxable income of husband and wife are P140,000 and P250,000 respectively. These incomes are net of withholding tax amounting to P20,000 and P45,000 respectively.Their income tax still due and payable would be Husband Wife a. P22,500 P50,000 b. P20,000 P45,000 c. P20,000 P22,500 d. P 2,500 P 5,000 Problem 11-19 Total Income Tax Due (Resident alien) Mr. Erection, a married Indian national, stays in the Phikippines with no definite intention. He received P600,000 Compensation income as researcher of Blue Good Ocean, a domestic corporation. In addition, he invested in thePhilippines some of his savings earning dividend income and interest income of P120,000 and P10,000 respectively. If the interest income is a dollar deposit under the expanded currency deposit system, how much is the total income tax due of Mr. Erection in the Philippines?(One dollar is P50) a. P 37,500 c. P146,760 b. P190,500 d. P196,260 Problem 11-20 Capital Gains Tax Mr. Jose Matbagan, a citizen and a resident of the Philippines had the stock transactions during 200x: (a) Capital gain tax on sales directly to a buyer at P280,000 of shares of a domestic corporation,P80,000 (b) Capital gain on sale directly to a buyer at P2,000,000 of land in Makati, Philippines,P300,000 The total capital gains tax paid during the year should be a. P 19,400 b. P 22,000
c. P108,000 d. P124,000
Problem 11-21 Final tax and Normal Tax In 200x, Mr. Marvin Ebojo, a native of Pangasinan, received during the year the following: Proceeds from copyright royalty, net of tax P 11,250 Proceeds from mineral claim 12,000 Share from trading partnership, net of withholding tax 270,000 Assume that Mr. Ebojo is single, compute the following: 1.
The final tax on Mr. Ebojo’s income a. P50,000 c. P31,250 b. P34,250 d. P 4,250
Income tax still due and payable per ITR a. P50,000 c. P31,250 b. P34,250 d. P-0-
Problem 11-22 Professional Income Professional income of a VAT-registered person is subject to Output VAT and required to be withheld with income tax. If the net proceeds for the services rendered is P92,000, net of 20% withholding tax based on the service fee, the amounts of service fee, withholding tax and VAT would be Service fee Withholding tax VAT a. P112,000 P20,000 P12,000 b. P100,000 P20,000 P12,000 c. P 97,391 P19,478 P11,687 d. P 32,000 P18,400 P22,080 Problem 11-23 Various Income Mr. Crisanto Estrada, widower with three qualified dependent children and a practicing accountant has the following receipts and expenditures for the calendar year ended December 31, 2009. Receipts: Professional fees P 500,000 Allowance as director of Corporation A 25,000 Interest on time savings deposits, net of 20% final tax 16,000 Commissions 5,000 Expenditures: Salaries of Assistants Partial payment of loan Interest on the loan (The loan was used for the repair of the Residential house of Mr. Estrada) Travelling Expenses-business related Light and water-office Light and water-residence Stationeries and supplies used in the office Office rent Contributions exclusively for religious purposes
P 96,000 20,000 3,850 11,000 7,890 6,500 1,960 60,000 38,500
1. The allowable deductions from the business gross income is a. P209,165 c. P212,165 b. P210,725 d. P176,850 2. The net income for income tax purposes after itemized deduction but before personal and additional exemptions is
3. The income tax due in ITR is a. P56,550 b. P50,000
Problem 11-24 Determination of Correct Income (CPA Examination) Data from the records of Mr. Alex Valdez are: Net worth, December 31, 2008 Nontaxable income for 2009 Nondeductible expenses for 2009 (excluding donations and contributions) Fully deductible donations Contributions subject to limitations Net Worth, December 31, 2009 Reported/Declared net income subject to tax, 2009
P325,000 2,000 150,000 20,000 50,000 375,000 24,200
Required: Compute for the following: 1. The correct income subject to normal graduated tax if Mr. Valdez is a widower, with four dependent children. 2. The unreported taxable income for the year 2009 of Mr. Valdez.
Problem 11-25 Itemized vs. OSD (CPA Exam) Mr. George Estrada, Filipino resident, whose wife died during the taxable year, has six qualified dependents. He is a director of a business firm from which he received per diem and allowances amounting to P20,000 during the taxable year. The income tax withheld on his is P1,000. He also operates a hardware store which generated a gross income of P400,000. The total itemized expense of his business is P150,000 but he encounters difficulty in determining how much of these expenses can be classified as direct costs and deductible expenses. He asks you to prepare his income tax return. Required: Compute the taxable income and tax still due payable by Mr. Estrada using: 1. Itemized deduction. 2. Optional Standard Deduction Problem 11-26 Taxable Income (With Capital Asset Transactions) The following data are the operating results and capital assets (not real estate, not corporate shares of stock) transactions of Mr. Jovito Galam, a contractor for the years 2009 and 2010. 2009 Gross receipts from contracts P1,600,000 Less:Materials and supplies used P700,000 Labor 865,000 1,565,000 Net Income P35,000 Net Capital Loss Carryover to 2010 P45,000 2010
Gross receipts from Contracts Less: Materials and supplies used Labor Net Income Short term Capital gains Long term Capital Gains Short term capital loss
P2,550,000 P1,200,000 750,00 1,950,000 P600,000 40,000 30,000 10,000
Required: If Mr. Galam is married and has three qualified dependent children,how much is the taxable income for the taxable income for the year ended December 31, 2010?
Problem 11-27 Compensation and Business income A resident citizen, single with qualified dependent chikd has the following income and expenses during the year: Compensation Income, net of WTW P 13th month pay Personal Expenses Business Income Business Expense allowed Premium on health/hospitalization insurance paid
P240,000 20,000 60,000 100,000 120,000 3,000
Required: Compute the following: 1. Taxable income 2. Income tax still due and payable per ITR
Problem 11-28 Monthly and Quarterly withholding taxes Ms. Jennifer Bay-on, single has thefollowing data from January to December 2009: Monthly salary 13th month pay and bonus SSS contribution (one whole year) Medicare/Philhealth contribution Business income per quarter Business Expense per quarter Capital asset transactions: Proceeds from the sale of Personal car Cost of the car sold: The car’s estimated useful life is 8 years but used by Ms. Bay-on for 6 years
P 30,000 35,000 3,000 2,000 200,000 120,000 300,000 400,000
Required: Compute the following: 1. Monthly withholding taxes paid 2. Quartely business income tax paid Problem 11-29 Income tax of Professional Income Rosanna Roses, a resident Filipina actress, earned P1,700.000 as an entertainment fee during the taxable year, net of related 15% creditable withholding tax. In addition, she earned the following from business: Gross Receipts Income tax paid Philippines P500,000 P40,000 Japan 1,000,000 300,000 Required: Assume that Roses is single with four qualified dependent children, compute the following: 1.Net taxable income 2.Income tax due 3.Tax credit 4.Income tax still due and payable
Problem 11-30 Income Tax of Husband and Wife Mr. and Mrs. Bravo living with 8 qualified dependent children have the following income and expenses during the taxable year: Mr. Bravo Mrs. Bravo
Compensation net of WTW P200,000 Withholding tax on wages (WTW) 25,000 Personal expenses in going to work 80,000 Professional income net of withholding tax 100,000 Premium on health/hospitalization insurance paid The couple had communal property with a rent income of P300,000 during the year.
P250,000 50,000 100,000 2,400
Required: Compute for tax still due and payable (ITR) of Mr. and Mrs. Bravo. Problem 11-31 Income Tax of Various Earnings An individual taxpayer, married with 4 qualified dependent children: Compensation income 13th month pay and bonuses Business income Business expense allowed Dividend income Royalty income – literature Capital gain- long term Income taxes paid on: Compensation Quarterly business income Dividend Royalty
P300,000 40,000 400,000 300,000 50,000 80,000 60,000 50,000 20,000 5,000 8,000
Required: Compute the following: 1. Taxable income subject to normal tax. 2. Income tax still due and payable reportable in ITR Problem 11-32 Compensation Problem The following data are taken from the books of the taxpayer: Sales Cost of sales Gain from sale of capital assets-short term Loss from sale of capital assets-long term Gambling winnings Gambling losses Compensation income net of tax withheld P20,000 13th month pay, and other bonuses Proceeds from life insurance of his mother Business expenses, including robbery loss of P50,000, Contribution to church, P60,000, And interest expenses, P30,000 Bad debts recovery, not deducted previously Lotto winnings, USA Personal expenses Tuition fees of children Interest income
P1,000,000 700,000 300,000 400,000 200,000 250,000 180,000 35,000 100,000 250,000 20,000 300,000 100,000 150,000 20,000
Required: Compute the income tax still due and payable, if the taxpayer is an individual Filipino resident, married and has 4 qualified dependent children. Problem 11-33 Comprehensive Problem Atty. Abo Gado, a CPA-Lawyer, has the following income and related expenses during the year 2009:
Basic salary per month as a professor Clothing allowance – de minimis per year 13th month pay Rice subsidy de – minimis per month Professional fees, inclusive of VAT Sales Cost of sales Operating expenses before contribution Contribution to Interest expense (included in the operating expenses) Interest income Total quarterly tax paid Health hospitalization insurance paid
P25,000 4,500 13,000 1,600 224,000 5,000,000 3,200,000 900,000 100,000 50,000 75,000 20,000 5,000
The taxpayer married with six qualified dependent children. Required: Compute for the following: 1. Total nontaxable 13th month pay and other benefits. 2. Estimated withholding tax from January to November. 3. Total income tax still due and payable on December 31,2009. Problem 11-34 Comprehensive Problem A taxpayer named Ramsay Colorado, single, has the following income and expenses during the taxable year 2009: Philippines USA Compensation income net of WT 10% P360,000 $2,250 Interest income, net of WT 20% 50,000 1,200 Commission income net of WT 5% 57,000 950 Lotto winnings 100,000 Dividend income net of WT 10% 9,000 1800 One US dollar is equivalent to P50. All income derived without come from USA assume that withholding tax were applied to income derive within the Philippines. Required: Determine the income taxes due and payable of the taxpayer assuming that he is a; 1. Resident citizen 2. Nonresident citizen 3. Nonresident alien engage in business in the Philippines; and 4. Nonresident alien not engage in business in the Philippines.
Problem 12 – 1 True or False Write True if the statement is correct or False if the statement is incorrect. 1. 2. 3. 4.
A corporation does not include general professional partnership. Domestic corporation includes government owned and controlled corporations. Domestic and foreign resident corporations are taxed on income within and without. Resident foreign corporation in the Philippines are organized through the laws of foreign country irrespective of the nationality of the stockholders.
5. 6. 7. 8. 9. 10. 11. 12. 13.
The gross income derived within by the nonresident foreign corporation is taxed in the Philippines with 35% normal tax. Nonstock and nonprofit educational institutions are exempt from the income tax. After three years of operation, the MCIT is applicable only to domestic and resident foreign corporation that incurred a ner loss or zero taxable income or a normal income tax is lesser than the minimum income tax. The excess of MCIT can be carried forward as tax credit against the normal tax for the three immediately succeeding years. An expanded withholding tax can be deducted from MCIT. The capital gain earned outside the Philippines by resident foreign corporation is taxable based on the normal corporate income tax. A sale of real property by nonresident foreign corporation is subject to a final tax of 35% based on gain. A domestic or resident corporation’s interest income under the expanded foreign currency deposit system is subject to a final tax of 10%. The interest income from foreign currency loans granted to residents is subject to a passive income tax of 20%.
Problem 12 – 2 True or False Write True if the statement is correct or False if the statement is incorrect. 1. 2.
All proprietory educational institutions are subject to a special income tax rate of 10%. The capital gains on sale of land located outside the Philippines of a resident foreign corporation is subject to a capital gains tax of 6% based on the selling price or fair market value, whichever is higher. 3. The offshore banking units are subject to 15% tax rate based on gross income. 4. Regional operating head quarters are subject to a 10% tax rate based on their taxable income. 5. The cooperative is subject to a 20% final tax on its interest income earned from the bank. 6. Government owned and controlled corporations are exempt from income tax. 7. The applicable tax on foreign international carrier is 2 ½% of the Gross Philippine Billings. 8. A corporation should file a quarterly income tax return within 60 days after the end of each first three quarters of the taxable year. 9. The objective of imposing tax on the improperly accumulated income is to force the corporation to distribute dividends to stockholders and to force corporations to expand their businesses. 10. Investment of substantial amount in long-term debt securities is an improper accumulation of retained earnings. 11. In computing the surtax, NOLCO is to be added in the income per income tax return. 12. If the corporate income has been subject to IAET, it shall no longer be subjected to IAET in later years, even if not declared as dividend.
Problem 12 – 3 Multiple Choice Select the letter that contains the best answer. 1.
A corporation whose income within and without the Philippines is taxable. a. Domestic Corporation b. Foreign Corporation c. Resident Foreign Corporation d. Nonresident Foreign Corporation A corporation is taxable on business income after business expenses, except a. Domestic Corporation b. Foreign Corporation c. Resident Foreign Corporation d. Nonresident Foreign Corporation Which of the following corporation is taxed based on gross income?
a. Cooperative b. Domestic Corporation c. Resident Foreign Corporation d. Nonresident foreign Corporation What kind of income tax is subject to 2% of corporate gross income? a. Normal Corporate Income Tax b. Minimum Corporate Income Tax c. Gross Income Tax d. Capital Gains Tax In paying corporate income tax, the excess of minimum corporate income tax could be used as a deduction within three immediate succeeding taxable years and such excess could only be deducted from a. Normal corporate tax b. Minimum corporate tax c. Gross income tax d. Capital gains tax The minimum corporate income tax shall be used in computing and paying the corporate income tax if the corporation has been a. In its fourth year b. Incurred net loss or zero taxable income c. The normal income tax is lesser that minimum income tax d. All of the above The gross income tax shall be applicable to a. Servicing and manufacturing firms b. Manufacturing firms and merchandising firms c. Merchandising and service firms d. All of the above Royalty income derived within the Philippines by a nonresident foreign corporation shall be subject to a. 20% final tax b. 7.5% final tax c. normal corporate tax d. minimum corporate tax Capital gains of resident foreign corporation on sale or exchange or disposition of lands and or buildings located in the Philippines. a. 6% of selling price or FMV whichever is higher b. 6% of selling price or FMV whichever is lower c. ½ of 1% of the selling price d. Subject to normal corporate income tax The following corporate income are subject to income tax, except, a. Cash dividends received from a domestic corporation by other domestic corporation b. Royalty income received from a domestic corporation c. Interest income on foreign loans d. Inter-corporate dividends received by a non-resident foreign corporation form a domestic corporation. The offshore banking units of resident foreign corporations are subject to 10% tax on income derived from: a. Foreign currency transactions with local commercial banks b. Foreign currency transactions with branches of foreign banks authorized by Bangko Sentral c. Interest income derived from foreign currency loans granted to residents d. All of the above The net taxable income of regional operating headquarters by multi-national companies engaged in administrative service is a. Tax exempt b. Subject to 10% income tax c. Subject to 15% final tax d. Subject to 35% corporate tax The tax imposed on intercorporate dividends received by a domestic corporation from a resident foreign corporation is
a. b. c. d.
Tax exempt Subject to 10% income tax Subject to 15% final tax Subject to 35% corporate tax
Problem 12 – 4 Multiple Choice Select the letter that contains the best answer. 1.
For taxation purposes, the following are nontaxable corporation, except a. SSS b. General professional partnership c. General commercial partnership d. PAGCOR The following are corporations exempt from income tax, except a. Non-stock and non-profit educational institutions b. Government owned and controlled corporations c. CDA registered cooperatives d. Government educational institution The business income of a domestic corporation is subject to any of the following except a. Minimum corporate income tax b. Normal corporate tax c. Optional gross income tax d. Final withholding tax All of the following are subject to minimum corporate income tax except a. Nonresident foreign corporation b. General commercial partnership c. Resident foreign corporation d. Domestic corporation The excess of minimum corporate income tax over the normal income tax is deductible from normal income tax for the succeeding a. 1st year b. 2 years c. 3 years d. 5 years Which of the following is not correct income tax? a. Minimum corporate income tax on domestic corporation incurring operating loss for the year. b. 35% income tax on the net taxable business income of resident foreign corporation c. 10% income tax on proprietary educational institution d. Zero income tax on business income of government owned and controlled corporation The following is correct income tax, except a. 25% on gross income within earned by nonresident foreign cinematographic film owner b. 25% on gross receipts within received by foreign international carrier c. 4.4% on gross income within earned by nonresident lessor of vessel chartered by Philippine nationals d. 7.5 on gross income earned within by nonresident foreign lessor of aircraft The tax imposed on intercorporate dividends received by a nonresident foreign corporation from a domestic corporation is a. Tax exempt b. Subject to 10% income tax c. Subject to 15% final tax d. Subject to 35% corporate tax Royalty income earned within the Philippines by a nonresident foreign corporation is a. Tax exempt b. Subject to 10% income tax
c. Subject to 15% final tax d. Subject to 35% corporate tax 10. CDA registered cooperatives are income tax exempt, except on a. Income form business transacted with non-members b. Interest income from depository bank c. Income from business transacted with members d. Interest income earned from member’s loan 11. Statement 1: A domestic corporation subjected to normal corporate income tax is exempt from Improperly Accumulated Earning Tax Statement 2: Both domestic and resident foreign corporations are subject to improperly accumulated earning tax. a. only statement 1 is correct b. only statement 2 is correct c. both statements are correct d. both statements are not correct 12. Statement 1: Once a profit has been subjected to IAET, the same shall no longer be subjected to IAET in the later years. Statement 2: Nonresident corporation’s interest income on foreign loans contracted on or after August 1, 1986 is subject to 20% final withholding tax. a. only statement 1 is correct b. only statement 2 is correct c. both statements are correct d. both statements are not correct
Problem 12 – 5 Income Tax Situs The following income and expenses are shown by X corporation: Within Gross income P8,000,000 Business expenses 3,500,000 Sale of Land (capital asset, cost P2,000,000) 3,000,000
Outside P4,000,000 3,000,000
If X is a domestic corporation, how much is the taxable income and income tax due in the Philippines per annual ITR? Taxable Income Income Tax Due a. P3,000,000 P1,050,000 b. P4,000,000 P1,400,000 c. P5,000,000 P1,750,000 d. P4,000,000 P1,200,000
If X is a resident foreing corporation, how much is the taxable income and income tax due in the Philippines per annual ITR? Taxable Income Income Tax Due a. P3,000,000 P1,050,000 b. P4,000,000 P1,200,000 c. P3,000,000 P 900,000 d. P7,000,000 P2,450,000
Problem 12 – 6 Income Tax Situs The ABC corporation has the following income and deductions for the calendar year 2009:
Sources of income Philippines USA Saudi Arabia
gross income P2,800,000 1,100,000 400,000
deductions P1,300,000 600,000 500,000
If ABC Corporation is a resident foreign corporation, the Philippine income tax due for 2009 is a. P175,000 c. P525,000 b. P450,000 d. P700,000
Problem 12 – 7 Income Tax Situs Unicor is a nonresident foreign corporation. For the fiscal year ending March 31, 2010, it had the following income deductions: Gross income Expenses From the Philippines P 5,000,000 From the USA 60,000,000 P30,000,000 The Philippine income tax payable Unicor for the fiscal year April 1, 2009 to March 31, 2010 is a. P12,250,000 c. P1,750,000 b. P10,500,000 d. P1,500,000
Problem 12 – 8 Domestic vs. Foreign Corporation The Tacurong Corporation has the following business income and deductions in year 2009: From Philippines sources: Gross income Deductions From business P450,000 P290,000 Dividends from domestic corporations 80,000 From other countries: Saudi Arabia Australia Japan
P180,000 75,000 160,000
P 80,000 25,000 100,000
Total foreign income tax is P100,000 Required: Compute the income still tax due and payable if Tacurong Corporation is a a. Domestic corporation b. Resident Foreign Corporation
Problem 12 – 9 Tax-Exempt Corporations The Philippine Government maintains the following corporations with the following gross income and expenses: Gross income Expenses University of the Philippines P50,000,000 P47,000,000 GSIS 60,000,000 55,000,000 PAGCOR 30,000,000 28,000,000 How much is the income tax due that can be collected by the Philippine Government?
c. P600,000 d. P3,500,000
Problem 12 – 10 Tax-Exempt Corporations The following domestic corporations reported the following net income for operations: Philippine Charity Sweepstakes P10,000,000 National Power Corporation 8,000,000 UNLAD Cooperative 6,000,000 National Bookstore 5,000,000 Baguio Colleges Foundation 4,000,000 How much income tax due that can be collected by the Philippine Government? a. P6,300,000 c. P2,800,000 b. P5,400,000 d. P – 0 –
Problem 12 – 11 Normal Corporate Income Tax A Corporation, a domestic corporation, shows the following data for the taxable year 2009: Gross sales P3,000,000 Gain on sale of real property, net of capital gains tax 940,000 Gross Profit 1,600,000 Dividend income (domestic) 200,000 Operating expenses including charitable contribution 600,000 Charitable contribution 50,000 The income tax due and payable would be: a. P493,500 c. P350,000 b. P420,000 d. P300,000
Problem 12 – 12 MCIT vs. NCIT th On its 5 year of operation, a domestic corporation reported an operating loss of P200,000 after operating expenses of P1,000,000. Its income tax payable for the period is a. P70,000 c. P20,000 b. P24,000 d. P16,000
Problem 12 – 13 MCIT vs. NCIT A ten-year domestic corporation reported in year 2005 a net income before tax, under GAAP amounting to P5,000,000. This amount is net of operating expenses which includes allowance for bad debts of P150,000 and actual contribution to government for public purposes of P300,000. 1. 2.
What is the amount of income tax due and payable? a. P1,553,000 c. P1,700,000 b. P1,656,000 d. 1,812,125 How much would be the income tax due if the total amount of the total operating expenses per GAAP is P80,000,000?
c. P1,700,000 d. P1,812,125
Problem 12 – 14 Excess of MCIT The outstanding balance of excess of MCIT over normal tax in prior period is P100,000. During the current taxable year, the corporation has gross income of P8,000,000 and operating expenses of P7,850,000. 1.
The income tax payable for the current year is a. P160,000 c. P60,000 b. P100,000 d. P52,000 Assuming that the operating expenses is P7,000,000 instead of P7,850,000, the income tax payable for the current year is a. P350,000 c, P200,000 b. 250,000 d. P160,000
Problem 12 – 15
Deferred Charges MCIT
In year 5, Arabohok Corporation provided the following data: (in thousand of pesos) Year 3
Gross profit – business
Assume that the corporation has been existing for five years, what is the amount of deferred charges MCIT applicable for year 4? a. P – 0 – c. P 20,000 b. P15,000 d. P(20,000)
Problem 12 – 16 Expanded Withholding Tax R Corporation, a real estate lessor, collected rental income amounting to P1,900,000, net of 5% expanded withholding tax. Total operating expenses of the business amounted P2,350,000. The corporation has a capital gain amounting to P500,000, not subjected to capital gains tax. How much is the amount of income tax payable and tax refund if the excess of MCIT over NCIT in the previous year amounted to P40,000? Income Tax Payable Tax refund a. P52,500 P 87,500 b. P50,000 P100,000 c. P45,000 P 95,000 d. P–0– P 87,500
Problem 12 – 17 Investment in Real Property A domestic corporation sold its investment in real property carried at cost of P1,000,000 for P1,500,000. The related income tax on sale of real property would be a. P – 0 – c. P90,000 b. P30,000 d. P175,000
Problem 12 – 18 Tax on Capital Assets Star Corporation has the following sales of capital assets transactions for 200x: a. Sold 12,000 investment in common shares of stock not traded in the local stock exchange for P1,600,000. The cost per stock is P110. b. Sold 5,000 investment in preferred stock traded in the local stock exchange for P1,800,000. The cost per stock is P300. c. Sold land located in Japan for P3,000,000. The cost of the land is P2,500,000. d. Sold land located in the Philippines for P1,000,000. The cost of land is P900,000 with a fair market value of P1,200,000. Star Diamond Corporation’s taxes payable (income tax and percentage tax) on sales of capital assets assuming the taxpayer is: 1. 2. 3.
Domestic corporation (DC). a. P254,000 b. P264,000 Resident Foreign Corporation (RFC). a. P104,000 b. P94,000 Nonresident foreign corporation (NRFC). a. P104,000 b. P94,000
c. P269,000 d. P279,000 c. P89,000 d. P79,000 c. P89,000 d. P – 0 –
Problem 12 – 19 Final Passive Income Assets San Miguel Corporation, a domestic corporation, has earned the following passive income within the Philippines for the taxable year 2009: Interest income from savings P3,000,000 Royalty income 1,000,000 Interest from depository bank under expanded foreign currency deposit ($30,000 at P50 per $) 1,500,000 Dividends from Jollibee, a domestic corporation 200,000 Dividends from Microsoft, a nonresident foreign corporation 800,000 What is the total amount of final taxes on passive income subject to final tax? a. P800,000 c. P912,500 b. P880,000 d. P992,500
Problem 12 – 20 Passive Income Taxes Silver Corporation has the following passive income within for the year 2009: Interest from depository bank under expanded FCDS Royalty income from mining
$ 20,000 P300,000
Royalty income from franchising Interest income peso savings deposit
One dollar is P50. Compute the passive income taxes of Silver Corporation assuming that the corporation is a: 1. Domestic corporation. a. P296,000 c. P96,000 b. P171,000 d. P86,000 2. Resident Foreign Corporation. a. P296,000 c. P96,000 b. P171,000 d. P86,000 3. Nonresident foreign corporation. a. P296,000 c. P168,000 b. P171,000 d. P144,000
Problem 12 – 21 Final and Normal Income Taxes A Philippine Commercial Bank has been authorized to operate a Foreign Currency Deposit Unit by the BSP had the following revenue and expenses: a. Dividend income from Magnolia, a domestic corporation at P1,000,000. b. Interest income on US dollar loans from resident borrowers at $3,000. ($1 = P50) c. Interest on Philippine peso loans from borrowers at P2,000,000. d. Operating expenses of P900,000. 1. 2.
What is the total amount of normal corporate income tax of Philippine Commercial Bank? a. P15,000 c. P115,000 b. P30,000 d. P215,000 What is the total amount of normal corporate income tax of Philippine Commercial Bank? a. P40,000 c. P385,000 b. P330,000 d. P437,500
Problem 12 – 22 Educational Institution A proprietary educational institution reported an educational related income of P1,000,000 and other business income of P1,500,000. Its total operating expenses amount to P3,000,000. Its income tax payable for the period is a. P50,000 c. (P175,000) b. (P40,000) d. P – 0 –
Problem 12 – 23 Nonprofit Educational Institution SLU is a nonstock, nonprofit educational institution. For the taxable year, it reported the following revenue: Tuition fee P5,000,000 Unrelated business income 2,000,000 Operating expenses 4,000,000 The amount of income tax for the period would be a. P – 0 – b. P100,000
c. P300,000 d. P1,050,000
Problem 12 – 24 Government Educational Institution A government owned and controlled institution reported an educational related income of P1,000,000 and other business income of P1,500,000. Its operating expenses amounted to P3,000,000. Its income tax payable for the period is a. P50,000 c. (P160,000) b. (P50,000) d. P – 0 –
Problem 12 – 25 Foreign International Carrier A resident foreign international carrier has the following data for the current year: Gross income of P700,00 and expenses of P200,000 from the Philippines; Gross income of P500,000 and expenses of P100,000 from Hongkong. What is the amount of income tax payable in the Philippines? a. P210,000 c. P160,000 b. P17,500 d. P30,000
Problem 12 – 26 Foreign International Carrier Fly Horse is a resident foreign international carrier. Its records of income and expenses are as follows: a. Continuous flight from Manila to Beijing = 2,000 tickets at P5,000 per ticket. b. Ticket sold for flight from Manila to Hongkong: transfer flight from Hongkong to Beijing = 4,000 tickets at P6,000 per ticket. c. Direct flight from Manila to Hongkong = 2,000 tickets at P,3000 per ticket. d. Total operating expenses is P10,000,000. What is the amount of Fly Horse’s income tax payable in the Philippines? a. P700,000 c. P6,300,000 b. P750,000 d. 7,350,000
Problem 12 – 27 Special Nonresident Foreign Corporation The following nonresident foreign corporations operate in the Philippines with their respective income and expenses: A. Dragon Film, cinematographic film distributor: Within Outside Gross Receipts P10,000,000 P200,000,000 Cost of Film distributed 6,000,000 120,000,000 Operating expenses 3,000,000 50,000,000 B. American Aircraft, a lessor of airplanes to the Philippine Airlines Within Gross income Operating expenses
Outside P100,000,000 80,000,000
What is the amount of Philippine income taxes to be paid by Dragon Film and American Aircraft? Dragon Film American Aircraft a. P2,500,000 P375,000 b. P1,000,000 P225,000 c. P1,000,000 P1,500,000 d. P250,000 P1,250,000
Problem 12 – 28 Cooperative A multi-purpose cooperative, registered with CDA reported a business income of P500,000, operating expenses of P300,000 and interest income of P80,000, net of 20% final tax. Its income tax would be a. P70,000 c. P16,000 b. P20,000 d. P – 0 –
Problem 12 – 29 Cooperative Unlad Cooperative is registered with CDA reported the following business income and expenses: Sale of land (classified as ordinary asset) to its members P800,000 Sale of groceries to its members 900,000 Interest income from its members 600,000 Dividend income from Jollibee 60,000 Cost of land sold 700,000 Cost of groceries 500,000 Operating expenses 400,000 Interest expenses on loan for expansion 100,000 What is the amount of income tax of Unlad Cooperative? a. P – 0 – c. P60,000 b. P48,000 d. P175,000
Problem 12 – 30 Quarterly Income Tax A domestic corporation has the following data: Excess tax credits from 2009
P 10,000 1st Quarter P495,000 480,000
For year 2010 (cumulative amount): Income, net of 1% withholding tax Deductions
How much is the income tax still due and payable in the second quarter? a. P18,000 c. P10,000 b. P15,000 d. P6,000
Problem 12 – 31 Tax on Interest Income A domestic corporation reported the following income within before tax: Business income P1,000,000 Business Expenses 900,000 Interest income from peso savings bank 100,000 Interest income from expanded foreign currency deposit 100,000 Its total income tax is a. P105,000
2nd Quarter P792,000 700,000
Problem 12 – 32 Tax on Interest Income A nonresident foreign corporation reported the following income within before tax: Interest income from peso savings bank P 100,000 Interest income from expanded foreign currency deposit 100,000 Its total income tax is a. P70,000 b. P35,000
c. P30,000 d. P – 0 –
Problem 12 – 33 Dividend Income Tax A resident foreign corporation reported the following income before income tax: Cash dividend from domestic corporation Cash dividend from a resident foreign corporation with 100% earnings in the Philippines Its total income tax is a. P70,000 b. P40,000
c. P30,000 d. Tax-exempt
Problem 12 – 34 Dividend Income Tax A nonresident foreign corporation earned the following income before income tax: Cash dividend from domestic corporation Cash dividend from a resident foreign corporation, 40% earned within Its total income tax is a. P64,000 b. P40,000
c. P30,000 d. P20,000
Problem 12 – 35 Passive Income Tax A resident foreign corporation reported an interest income of P100,000; royalty income of P200,000 and cash dividend of P500,000 all earned outside the Philippines. Based on the earnings presented, how much is the total income tax payable in the Philippines? a. P160,000 c. P60,000 b. P100,000 d. P – 0 –
Problem 12 – 36 Passive Income Tax Abbott Corporation, a resident foreign corporation, has earned the following passive income for the taxable year 200x: Interest from savings deposits – Metrobank Royalty income – Philippine Mining Company Interest from a depository bank under expanded foreign currency deposit ($30,000 at P50 per US dollar – PCI Bank)
P3,000,000 1,000,000 1,500,000
Dividends from Jollibee, a domestic corporation Dividends from Xerxes, a resident foreign corporation (income within) Dividends from Microsoft, a nonresident foreign corporation
200,000 500,000 800,000
Required: How much is the total final passive income tax for the year 200x?
Problem 12 – 37 Quarterly Income Tax Masikap Corporation, a domestic corporation, has the following information regarding its income and expenses for the taxable year 2009: Q U A R T E R S First Second Third Fourth Sales P1,000,000 P1,500,000 P2,200,000 P2,800,000 Cost of Sales 600,000 900,000 1,320,000 1,680,000 Itemized deductions 320,000 480,000 704,000 896,000 Assume that the amounts are cumulative for first quarter to fourth quarter, the income tax credit and income tax still due and payable in the fourth quarter would be
a. b. c. d.
Income tax credit P56,320 P61,600 P52,800 P61,600
Income tax still due P15,360 P16,800 P14,400 (P39,200)
Problem 12 – 38 Amount subject to Surtax (IAET) The following data are taken from the records of Pandak Corporation: Income tax per annual income tax return P300,000 Income tax for the first three quarters 240,000 Final tax on passive income at 20% 60,000 Capital gain tax at 5%, 10% 35,000 What is the amount subject to surtax if the above taxes were paid during the taxable year? a. P1,255,000 c. P1,305,000 b. P1,285,000 d. P1,000,000
Problem 12 – 39 Tax Credit Intern Corporation, a domestic corporation, has the following data for calendar year 2009. The corporation signified its intention to claim tax credits on income taxes paid to foreign countries. Country Philippines United States Japan Required:
Gross income P1,000,000 400,000 300,000
Allowed Deduction P800,000 200,000 200,000
Compute the income tax still due in the Philippines.
Income tax paid P80,000 30,000
Problem 12 – 40 Income after Tax A domestic corporation reported a net income before normal tax of P10,000,000. This amount includes the following: 1. Gain from sale of shares of stocks in the local stocks in the local stock exchange, net of P5,000 percentage tax – P25,000. 2. Loss from sale of shares of stocks outside stock market – P5,000. 3. Gain from sale of short-term debt securities – P10,000. 4. Sale of real property not related in business, net of final withholding tax (cost, P4,400,000) – P9,400,000. Required:
Compute the total income after normal tax.
Problem 12 – 41 Income Tax Refundable/Payable A travel agency is earning its income at 5% of total collections from plane tickets sold. Its collections are made through credit card which imposes 3% services charges. The credit card company withholds ½% of total collectibles as expanded withholding tax on income of travel agency. During the year, the total revenue is P1,000,000, and the total operating expenses reported by the travel agency amounted to P10,000. Required:
Compute for the net income tax refundable/payable by the travel agency.
Problem 12 – 42 Improperly Accumulated Income ABC Corporation, a domestic corporation was determined to have improperly accumulated earnings for the taxable year 200x based on its records as follows: Taxable income at normal tax rate Dividends actually or constructively paid Income tax paid for the year Income subject to final tax Income exempt from tax Income excluded from gross income Amount of NOLCO deducted Required:
P900,000 150,000 200,000 60,000 50,000 10,000 50,000
Compute the tax on improperly accumulated income.
Problem 12 – 43 Computation of Surtax P Corporation showed the following income tax paid for a taxable year: Income tax per annual income tax return Income tax for the first three quarters Final tax on passive income at 7.5% Capital gain tax on shares sold outside the stock exchange
P450,000 420,000 37,500 40,000
If it is determined that P Corporation has an unreasonable accumulated income, what is the corresponding surtax if the said taxes were paid during the taxable year?
Problem 12 – 44 Income Tax of Educational Institution University of the Philippines, Baguio reported the following: Tuition and miscellaneous fees P5,000,000 Rental income (not related to educational activities) 6,000,000 Gain from capital assets (long term) 100,000 Loss on capital assets (short term) 20,000 Business expenses, inclusive of P50,000 allowance for uncollectible accounts 10,050,000 Miscellaneous income 20,000 Required: Compute for the income tax, assuming that the school has been in existence for more than five years.
Problem 12 – 45 Income Tax of Educational Institution The following information came from the records of the Cordillera University, Inc., a private educational institution for the fiscal year ended May 31, 200x: Income:
Miscellaneous fees Tuition fees Income from rents Net income, school canteen Net income, book store Dividends Interest on time deposits
Payroll and administrative salary Other operating expense Interest on P750,000 bank loan Depreciation, new six room building
P 362,600 2,843,100 60,000 36,200 24,800 15,000 45,000 1,425,420 762,330 82,100 37,500
In the first month of the fiscal year, the school secured a loan from a bank in the amount of P750,000. The proceeds of the loan were spent in the construction of a new six-room building. Required:
Compute the income tax payable for 200x.
Problem 12 – 46 Surtax (IAET) The retained earnings of the Panday Corporation at the start of the year has a credit balance of P2,500,000 which is equal to its paid-in capital. During the year, the corporation reported the following data but no dividend income was distributed: Net income after tax of 30% P1,050,000 Interest income, net of 20% final tax 120,000 Capital gain on shares of stock net of income tax 230,000 Income tax paid for the first 3 quarters 350,000 NOLCO deducted from taxable operating income 100,000 Required: 1. 2.
Compute for the following: Total Income for GAAP reporting. Total income tax paid for the year, before IAET.
GAAP income after tax. Total IAET.
Problem 12 – 47 Reconciliation from GAAP to Tax Code Reporting The income statement of X Corporation prepared under GAAP rules is as follows: Sales Less: Cost of Sales Gross profit Less: Operating expenses: Salaries Deprecation Supplies Bad debts (percent of accounts receivable) Interest expense Operating Income Add: Other Revenues: Interest Income, net of tax Cash dividend (domestic) Income before other expenses Less: Losses in investment in securities Net income before tax Required:
P10,000,000 6,000,000 P 4,000.000 P1,000,000 300,000 200,000 100,000 50,000
100,000 P2,450,000 250,000 P2,200,000
Determine the correct amount of the following: 1. 2. 3.
Reportable income per ITR Net taxable income per ITR Final withholding tax paid
CHAPTER 14 Problem 14-1 True or False 1. 2. 3. 4. 5.
A penalty shall be imposed on withholding tax agent for failure to withhold the tax. Taxes are withheld at source to facilitate tax collection. Under the final withholding tax system, the income tax withheld is the full and final income tax due from the payee. Under the withholding tax system, the income tax payee is not required to file an income tax return for the particular income on which the final tax has been withheld. Taxes withheld on income payments covering the expanded withholding taxes and final withholding taxes are creditable in nature.
6. 7. 8. 9. 10. 11. 12. 13. 14. 15.
The taxes withheld from compensation of employees of offshore banking units should file income tax returns to the BIR. All income earned by persons are subject to holding tax. Remuneration for casual labor not in the course of employer’s trade or business is not subject to holding tax. No withholding tax shall be required where the total compensation income of an individual in a year does not exceed sixty thousand pesos. The employee who opts to file the income tax return shll file the same not later than April 15 of the year immediately following the taxable year. In general, any juridical person, whether or not engaged in business or trade is required to withhold tax on income payments. Government offices are not constituted as withholding tax agents. The obligation of the pay or to withhold tax arises at the time an income is paid or payable. The withholding of creditable withholding taxes shall not apply to income payments made to national government and its instrumentalities. Business establishments whose withholding taxes amount to one million pesos are considered large taxpayers.
Problem 14-2 Amount to Receive, Net of Withholding Tax Y is an unmarried person and a partner in a general professional partnership for a 50% interest. The partnership earned P500, 000 income and distributed to partners. How much should partner X receive, net of withholding tax? a. b.
c. P225,000 d. P212,000
Problem 14-3 Amount to be Paid, Net of Withholding Tax A nonresident foreign corporation is a holder of 10,000 shares of X, a stockholder of record. How much should be paid to the nonresident foreign corporation, net of withholding tax? a. b.
c. P80,000 d. P70,000
Problem 14-4 Amount to be Paid, Net of Withholding Tax A Philippines National chartered a foreign vessel of nonresident less or for P500, 000. How much should be paid to nonresident less or, net of withholding tax? a. b.
P450, 000 P462, 000
c. P477, 500 d. P500, 000
Problem 14-5 Net Payment, Net of Withholding Tax A tax informer earned P1, 000, 000 rewards. How much should be paid to the tax informer, net of withholding tax? a. b.
P950, 000 P900, 000
c. P850, 000 d. P800, 000
Problem 14-6 Comprehensive Problem The following income are earned during the taxable year 200x: 1.
Interest on the bank deposits:
a. b. 2. 3. 4. 5. 6.
Prize Royalties on books Capital gains – sale of real property (acquisition cost, P800,000) Property dividends Compensation from offshore banking units
Required: a. b. c. d. e. f.
Peso deposits Dollar account (FCDS)
P 50,000 $ 10,000 P100,000 P300,000 P200, 000 P120, 000 P400,000
Computer the final withholding tax at source if the income payee is a:
Resident Citizen or Resident Alien. Nonresident Alien engaged in business. Nonresident Alien not engaged business. Domestic Corporation (except Nos. 2 and 6). Resident Foreign Corporation (except Nos. 2, 4 and 6). Nonresident Foreign Corporation (except Nos. 2, 4 and 6).
CHAPTER 13 Problem 13-1 True or False (Partnerships) Write True if the statement is correct or False if the statement is incorrect. 1. 2. 3. 4. 5. 6.
All partnerships are taxed in the same manner as corporation. A general professional partnership is not required to file its annual income tax return. The share of a partner in the general professional partnership is subject to final withholding tax of 10% if the amount is below P720, 000. The income of general commercial partnership is also subject to MCIT or Normal Corporate Tax whichever applicable. If the amount to be distributed to partner of a general professional partnership is more than P720, 000, it is to be withheld with 15% creditable tax. The distributed share of a partner in a commercial partnership is subject to final tax 10%.
7. 8. 9. 10. 11. 12. 13.
If the only source of income of the partner is his share in a general commercial partnership, he is no longer required to file the annual income tax return. The share of partnership in the general professional partnership is taxable in the conventional manner of computing the normal income tax of individual. A partnership that derives income primarily from professional fee and also engages in trading business as secondary source of income is to be classified as general professional partnership. Dividend income earned by general commercial partnership is no longer taxable against the partner upon its distribution as share of the partner. Generally, co-ownership income is not taxable. The income of co-ownership that is distributed to the beneficiary is subject to 10% withholding tax if less than P720, 000 per year. Co-ownership, which exists for more than 10 years, is subject to income tax in the same manner as general commercial partnerships.
Income Taxes of Partnerships, Estates and Trusts
Problem 13-2 True or False (Income of estate/Trusts) Write True if the statement is correct or False is the statement is incorrect. 1. 2. 3. 4. 5.
A trust a right of property, real or personal, held by one party for the benefit of another. The creation of trusts may be either expressed or implied. A trustee is the person who establishes a trust. Each beneficiary must include in his return his distributive share of the net income of the trust. The tabular rates of tax prescribed under Section 24 (A) for individuals shall be used in computing the income tax of trusts or estates. 6. The amount of trust’s income for distribution to beneficiary, allowed as a deduction from trust’s taxable income shall be included in computing the taxable income of the beneficiaries whether distributed to them or not. 7. Estate and trusts are treated as separate taxable entities. 8. The exemption allowed to estate or trust is P25, 000. 9. In the case of two or more trusts created by the same person for the same beneficiary, the taxable income of all trusts shall be consolidated and the tax shall be computed based on the consolidated income. 10. A beneficiary of an estate engaged in business has the status of self-employed individual taxpayer. 11. The computation of the net taxable income of the estate is the same manner as individual taxpayer, except that the personal exemption is limited to P20, 000. 12. The income tax of irrevocable trust is taxable in the same manner as of the income of the estate.
Problem 13-3 Multiple Choice Select the letter that contains the best answer. 1.
Statement 1: Professional fee is the primary source of general professional partnership’s income Statement 2: Trading activities are also sources of general professional partnership. a. b. c. d.
Only statement 1 is correct. Only statement no. 2 is correct. Both statements are correct. Both statements are not correct.
Statement 1: A general professional partnership is exempt from income tax and as such is not required to file its income tax return. Statement 2: The share of partners in the general professional partnership is subject to income tax rate for individual. a.
Only statement 1 is correct.
b. c. d. 3.
Statement 1: A general commercial partnership is taxed the same manner as a domestic corporation. Statement 2: A general commercial partnership that is reporting an operating loss on its 5 th year of operation is still liable to pay its annual income tax for such year. a. b. c. d.
Exceeds P720, 000. Is P720, 000 and below. Is P1, 000, 000 and above. None of the above.
The general professional partnership is not subject to income tax, but is required to file a return in order to a. b. c. d.
10% tax based on gross income. 25% tax based on net taxable income. 30% tax based on net taxable income. Tax-exempt.
The gross receipts of a professional entertainers is subject to a 10% creditable withholding tax if his/her income during the year a. b. c. d.
Final tax of 10%. Creditable withholding tax of 10%. Creditable withholding tax 15%. Tax-exempt.
A professional partnership engaged in the practice of profession and trading of goods is subject to a. b. c. d.
Only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Both statements are not correct.
The share of partners form the net income of a professional partnership is subject to a. b. c. d.
Only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Both statements are not correct.
Statement 1: The distributive share of general commercial partnership is subject to final withholding tax of 10%. Statement 2: The distributive share of a general professional partnership is subject to creditable withholding tax of 10%. a. b. c. d.
Only statement 2 is correct. Both statements are correct. Both statements are not correct.
Provide information regarding the business activities of the partnership. Provide information regarding the share of the partners in the net income of the partnership to be included in their tax return. Comply with the requirements of the Securities and Exchange Commission. Comply with the requirements of the taxing agency.
The net income received by a partner of a general co-partnership is subject to
a. b. c. d.
A corporate tax. A final tax on dividends. An individual normal tax. A capital gains tax.
10. Statement 1: The creditable withholding tax on the partner’s share from the income of a professional partnership is 15% if the partner’s share exceeded P720, 000 per year. Statement 2: The amount received by the partner as his share in the general commercial partnership is subject to a creditable withholding tax of 10%. a. b. c. d.
Only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Both statements are not correct.
Select the letter that contains the best answer. 1.
Statement 1: The income of co-owned inheritance is tax exempt. Statement 2: The share of the co-owner in the income of co-ownership is also exempt from income tax. a. b. c. d.
Which of the following co-ownership is subject to income tax? a. b. c. d.
Only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Both statements are not correct.
Statement 1: Income of co-ownership per agreement is taxable. Statement 2: The share of the co-owner of co=ownership is also exempt from income tax. a. b. c. d.
Income of voluntarily established co-ownership. Income of co-owned property acquired as inheritance. Income of co-owned property acquired as donation. Income of general professional partnership.
Statement 1: A co-ownership that exists for more than 10 years is exempt from income tax. Statement 2: The share of co-owners from tax-exempt co-ownership is taxable against the co-owners. a. b. c. d.
Only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Bothe statements are not correct.
Only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Both statements are not correct.
The portion of income from irrevocable trust that would be distributed during the year is taxable against the. a.
Only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Both statements are not correct.
Which of the following statements is not correct? a. b. c. d.
Only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Both statements are not correct.
Statement 1: The income of the estate distributed to the beneficiary during the year is subject to final tax of 15%. Statement 2: The withholding tax on the income distributed to beneficiary is creditable against the total tax liability of the beneficiary. a. b. c. d.
Statement 1: The income of the undistributed estate is subject to income tax. Statement 2: The income of the estate is computed the same manner as a general commercial partnership. a. b. c. d.
An irrevocable trust is subject to income tax. The taxable trust is taxed the same manner as individual taxpayer. The taxable trust is allowed to claim P50, 000 personal exemptions. The taxable trust is taxed at 30% of net taxable income.
Statement 1: Both revocable and irrevocable trusts are taxable for their income earned. Statement 2: The income of revocable trust is taxable against the grantor. a. b. c. d.
Only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Both statements are not correct
10. Statement 1: The grantor is liable for the income of a revocable trust. Statement 2: A revocable trusts exist when the grantor of the trust. power to change at any time any part of the terms of the trust. a. b. c. d.
Only statement 1 is correct. Only statement 2 is correct. Both statements are correct. Both statements are not correct.
11. Statement 1: The income of the estate distributed to the beneficiary During the year is subject to final tax of 15% Statement 2: The withholding tax on the income distributed to beneficiary is creditable against the total tax liability of the beneficiary. a. b. c. d.
Only statement 1 is correct Only statement 2 is correct Both statements are correct Both statement are not correct
Problem 13-5 Co- Partnership In 200x, Mitzi and Edgar reported a partnership net profit from trading amounting to P400, 000. Other items of income not included in the net profit are interest income of P400, 000, net of final withholding tax, and dividend income from Domestic Corporation of P10, 000. The income tax on the distributive share of Mitzi who shares profit and loss equally with Edgar in the earning of the partnerships. a. b.
P14, 700. P14, 300.
c. P14, 076. d. P 13, 600.
Problem 13-6 Co- Partnership A and B formed a trading partnership as partners sharing profit and loss at 1:1. During the taxable year, the gross profit of the partnership amounted to P400, 000 and business expenses incurred amounted to P160, 000; cost odf sale of P200, 000. 1.
The income tax of the partnership is
a. P135, 000. c. P72, 000. b. P105, 000. d. P15, 000. How much is the distributable share of partner A, net of final tax? a. b.
P75, 600. P183, 000.
c. P102, 000 d. P87, 750
Problem 13-7 General Professional Partnership J, married, with an unemployed wife and one qualified dependent child, and R, single, are partners in J, R,, Co., a general professional partnership. They are sharing profits and losses as follows: J – 70% and R – 30%. For the calendar year ended 200x, the income and expenses of the partnership and the income and expenses of the personal accounts of the partner are as follows: Gross income Expenses: Allowable deductions Charitable contributions Drawing by J and R from the Partnership during the year 1.
Personal J P85, 000
Accounts R P65, 000
175, 000 15, 000
The taxable net income of J, if he opted for itemized deduction is a. b.
J, R, & Co. P325, 000
P 67, 750. P108, 250.
c. P142, 750. d. P155, 000.
The taxable net income of R, if he opted for optional standard deduction is a. b.
P112, 500. P 97, 500.
c. P77, 500. d. P47, 500.
Problem 13- 8 General Professional Partnerships Black and White partnership reported for year 200x a net professional income amounting to P400, 000. Mr. Black is single and has compensation income of P240, 000 his other income, net of final withholding taxes are interest of P4, 000 and dividend income of P10, 000. The net taxable income per annual ITR of Black who shares profit and loss equally with White in the earnings of the partnership is
P420, 000 P404, 000
c. P390, 000 d. P360, 000
Problem 13-9 Co-ownership In 200x, Robert and Annie inherited a plantation form their Aunt, Cherry. During the year, the property has net earnings after itemized expenses was P3, 000, 000 of which P1, 000, 000 each was received by Robert and Annie. 1.
How much is the income tax of the earnings from the plantation? a. b.
P320, 000 P960, 000
c. P285, 000 d. P – 0 –
Assuming that Robert is single, how much is his taxable income in his share from the co-ownership? a. b.
P1, 000, 000 P 950, 000
c. P 880, 000 d. P - 0 –
Problem 13- 10 Irrevocable Trust During the year, the amount of income of irrevocable trust that was distributed to heir amounted to P85, 000, net of creditable withholding tax. The trust income after expenses but before deducting the income distributed to heir was p400, 000. The net taxable income of trust is a. P400, 000. c. P295, 000 b. P380, 000. d. P250, 000 Problem 13- 11 Comprehensive (Trust) The following date is available for the income and expenses of the grantor, the trusts and the beneficiary for the year 200x: Earner Grantor Trust A Trust B Beneficiary 1.
600, 000. 900, 000.
c. P1, 000, 000. d. P1, 100, 000.
Based on the given data income of all the trust after exemption is a. b.
Expenses P400, 000 200, 000 100, 000 40, 00
Under the assumption that income earned from trust A is revocable and B is Irrevocable, the net income of the grantor before personal exemption is a. b.
Income P1, 000, 000 500, 000 200, 000 100, 000
P400, 000. P380, 000.
c. P100, 000. d. P 50, 000.
Assume further that P50, 000 of the income of trust B was distributed to the beneficiary, the net taxable income of beneficiary, after personal exemption is a. b.
P150, 000. P110, 000.
c. P 60, 000. d. P 40, 000.
Problem 13- 12 General professional partnership has following data for 200x:
Gross income P1, 200, 000 Deductions: Salary of A 240, 000 Salary of B 360, 000 Other business expenses 100, 000 Profit and loss distribution: Partner A, 60%, single, providing full support to his mother. Partner B, legally separated with 2 qualified dependent children. Required: Compute for the tax liability of: 1. 2. 3.
The partnership Partner A Partner B
Problem 13- 13 Co – Partnership MW, a registered general co - partnership, had the following data for 200x: Gross income from merchandising P575, 000 Dividends received from domestic corporation 40, 000 Dividends received from nonresident foreign corporation 60, 000 Interest income, net of 20% final tax 10, 000 Ordinary and necessary business expenses 255, 000 Data for the partners: M W Participation 40% Single Required: Compute the income tax due of M and W.
Problem 13- 14 Co-ownership In 1989, Grace Ann Subala and Marjorie Sison received a plantation from their aunt Evelyn Paragas. Thus cousin continued to maintain the plantation. In 200x, the net income of the plantation is P5,000, 000 of which P1,000, 000 each was received by Grace and Marjorie before deducting the applicable withholding tax. Required: 1. 2. 3.
Compute the income tax due and payable of the co-ownership. Compute the withheld from the share of Marjorie Sison. Compute the income tax and payable of Grace Ann Subala using the normal tabular tax.
Problem 13-15 Income of Estate Mr. Gerald Baguingan, died on January 4, 200x, leaving a conjugal estate of P20, 000, 000 to his wife, Mitzi. The heirs are still in judicial testamentary proceedings for the settlement of estate. In 200x, the estate realized a gross income from business amounting to P5, 000, 000 and related business expenses is 40% of gross income. The administrator distributed the following amount to the children beneficiaries of Mr. Baguingan. a. b. c.
Mrs. Diana Nievera, married with 4 qualified dependent children, with compensation income of P250, 000 Alona, single , 18 years old Mrs. Grace Micu, married and unemployed Total income distributed to the beneficiaries
P200, 000 200, 000 200, 000 P500, 000
The related withholding taxes were made on the amount received the children beneficiaries. Required: Compute for the following: 1. Income tax due of Mr. Baguingan’s estate for 200x. 2. Income tax still due and payable of Mrs. Diana Nievera for 200x. 3. Total withholding taxes on the amount received by the children beneficiaries. Problem 13 – 16 Tax Savings Naty Poc died in November 1, 200x. Kalag, her husband, survived her. Upon her death, her exclusive estate includes a business income of P500, 000 earned during year 200x. The business expenses for year 200x amounted to P200,000. Naty’s estate was managed by an administrator. A year following the death of Naty Poc, the estate’s income and expenses amounted to P800, 000 and 260, 000, respectively. The estate has not been transferred to Kalag when the income was earned. Kalag also earned business income of P300, 000 and incurred business expenses of P180, 000 during the same year. Required: How much would be the tax saving if the administrator of the estate would distribute p150, 000 income of the estate to kalag? Problem 13-17 Taxable Income of Trust and Beneficiary In January 2, 200x, Mr. James Boting established a trust for the benefit of his daughter Juniper Boting, aged 12 years old. The properties established as trust are as follow: House and lot with an annual income of Hollow block business with a monthly income of Farm with an annual income of
P 80, 000 10, 000 50, 000
Required: If the trust is irrevocable trust, compute for the following: 1. 2.
Income tax payable by the trust in 200x. Income tax due from the beneficiary in 200x.
Problem 13-18 Irrevocable Two Trusts Mark Llaguno, a trust or, created two irrevocable trusts for his son. The reported earnings of each trust for year 200x are as follows: a. b.
Trust 1: Net income before exemption, after P10, 000 distributions to beneficiary during the year, P40, 000. Trust 2: 1, 000, 000 incomes before exemption, and distribution to beneficiary amounting to P20, 000.
Required: If the related withholding taxes were made during the year, how much is the income tax still due and payable for the two trusts? Problem 13-18B Tax Planning Mr. Nabiag, single, with a dependent a further, died in November 1, 2009. His estate has a gross business receipt of P300, 000 during the year 2009. Required:
How much would be the net income of the estate subject to income tax? If a year following the death of Mr. Nabiag, his estate’s gross business receipts amounted to P500, 000, and his estate has not ,been transferred to his father. Assume further that his father has a gross business receipts of his own amounting to P200, 000, How much would be the tax saving if the administrator of the estate would distribute P150, 000 income of the estate to Nabiag’s father?
Problem 13-19 Tax Planning Dokling earns an annual gross income of P400, 000 from his business before deducting the operating expense averaging to P100, 000 per year. Out of his earnings, he is giving P100, 000 as yearly allowance to his son. Required: 1. 2.
Using a better way to minimize income tax, what device could Dokling use to lower his income tax. If 50% of his business will be put in an irrevocable trust in favor of his son who is married, how much would be his annual tax savings?
Problem 13-20 Tax Planning Mr. A, married, receives an annual income from his two properties as follows: Rent income
Total P800, 000
Property 1 P500, 000
Property 2 P300, 000
P 90, 00
Applying the tax minimization principle, how much is the income tax due of Mr. A.
If Property No. 1 would be held in irrevocable trust for any of his beneficiaries, hoe much is the amount of tax savings?
X Co. and Y Co., both domestic corporations, form a joint venture to construct a building with a constract price including 12% VAT amounting to P112, 000, 000. The total cost of construction amounted to P72, 000, 000 including 12% VAT. Operating expenses related to the joint venture amounted to P15, 000, 000. The corporation agreed to share any income losses equally. Required: Compute the related taxes of the joint venture and joint venture partners assuming that the construction is 1.
Not a government project.
A government project.
Required 13-22 Joint Venture A Co. and B Co., both domestic corporations, form a joint venture to construct a building with a contract price including 12% VAT amounting to P89, 600, 000.
The total cost of construction amounted to P56, 000, 000 including 12% VAT. Operating expenses related to the joint venture amounted to P10, 000, 000. The corporations agreed to share any income or losses equally. Required: Compute the related taxes of the joint venture and the joint venture partners assuming that the construction is 1.
Not a government project.