Income Taxation Solution Manual 2019 Ed Income Taxation Solution Manual 2019 Ed

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Income Taxation Solution Manual 2019 ED Accounting Information System (Tarlac State University)

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INCOME TAX SOLUTION MANUAL

Partner with us in ensuring quality tax education in your college. Focus on assessments. Let us take care of the contents. Real Excellence commit itself in ensuring that your students get the most accurate, relevant and updated information in the field.

OTHER TITLES: 1. Business and Transfer Taxation 2. Taxation Reviewer 3. Fundamentals of Accountancy, Business and Management 1 4. Fundamentals of Accountancy, Business and Management 2 5. Applied Auditing by Assuncion, Ngina and Escala

University

INCOME TAXATION SOLUTION MANUAL 2019 TRAIN Edition

AUTHOR’S CONTACT For any queries, commentaries or anything for consultation. Please feel free to contact Mr. Rex B. Banggawan at: Globe #: 0995-464-7728 Facebook: Real Excellence E-mail: [email protected] (Consultation is free. )

This document is restricted only for tax professors of our partner colleges and universities which adopt our book as their textbook. This manual is specifically encrypted for each college or university. Please do not allow student access.

Note: Subject to his availability, the author can be invited to provide tax seminar or lecture in your school for a reasonable fee.

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INCOME TAX SOLUTION MANUAL

Dear Tax Professors, Greetings in God’s grace!

Our taxation system in the Philippines is besmirched by reported abuses in tax administration and pervasive corruption. These disheartened many taxpayers not to properly reflect their taxes rationalizing on corrupt government practices. Our solemn duty as academician is to lay the foundation for the future correction of this defect in our society by providing the best tax education our students deserve. Tax malpractices and corruption can be limited by adequate public tax education. Most schools fail on their duty in transforming their graduates as agents of change in society because teaching tends to be too basic or too theoretical to be applied. As our mission, let us give our students more practical knowledge by giving them the totality of taxation. Even if they are not tax majors, they should be given the option and the chance to attain high level proficiency in taxation. This could transcend to career opportunity for them. Teach well and you will live forever! Your influence will forever stay in the minds and hearts of your students. That excellence will multiply. Let us give our students a legacy of true competence. Let us give them the best tax education we can give. Let us give them the type of excellence which is not feigned, not masked, but real. Always remember that your service to fellow man is a service to God. Let us join hand to promote a better tax education. Contact me whenever you need assistance. I will assist in the best way I could. God bless you!

MY HUMBLE REQUEST TO MY BELOVED FELLOW PROFESSORS Being a teacher myself, I strongly admit that books are excellent partners in classroom teaching. Creating high quality books requires enormous time investments and efforts. I wrote this book over years of continuous technical research, tax practice and conceptual refinement through my actual teaching in the undergrad and in the review. I am not an entrepreneur. Like you, I am a full-blooded teacher. I teach and write books to empower and transform people. I hope and pray that you respect the dignity of my work in the same way you value yours. I am praying that you will NEITHER give the students or reviewees copies of the solution manual NOR tolerate the photocopying of my book in your classes. As accountants, we must collectively act under our conscience to be true guardians of integrity. Please help stop book piracy. Please report suspected counterfeit books to [email protected]. God bless you!

REX B. BANGGAWAN, CPA, MBA

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INCOME TAX SOLUTION MANUAL

INCOME TAXATION: LAWS, PRINCIPLES AND APPLICATIONS TAX TEACHER’S MANUAL Rex B. Banggawan, CPA, MBA ABOUT TEACHING METHODOLOGY OF THE BOOK Please be advised that the book is not written to impress tax experts. The book is intended as a guide to students for them to understand and master the totality of the income taxation. Because of this, the book is prepared in a sequential organization of topics. To optimize understanding and concept recall, some topics may be briefly re-opened for discussion in future chapters of the book. This is not repetition. This is deliberately intended for students to connect and interrelate new concepts with previous ones. The book devised a vertical presentation of income taxation and diverted from the usual horizontal or NIRC approach followed by most tax books. Under the horizontal approach, the tax schemes are discussed separately for individuals and corporations. It is repetitive, time consuming and results to less accurate understanding because students do not see the comparison of the two tax schemes for each class of taxpayers. The vertical approach discusses the tax schemes for both individuals and corporations simultaneously resulting in efficiency and better accuracy. To maximize the effectiveness of your lecture, please follow the concept organization of the book. Do not devise other concept arrangements based on other books. Doing otherwise will only confuse your students. Other authors have their own methods. We have ours. The income tax teaching methodology of the book is long proven in the undergrad and in the professional review to optimize understanding and instill mastery. Here is a list of some of the numerous student testimonials regarding our book: 1. “I am thanking you because without your books, siguradong nahirapan po ako sa taxation… I know you are God’s blessing to me, to us. I hope na marami pa po kayong matulungan na students especially sa taxation.” - May Anne Reyes from UST Manila (Top 7 in the October 2015 CPA Board Exam) 2. “Aminado pu ako wala akong natutunan sa undergrad sa tax kaya binasa ko po ng mabuti yung book nyo during review. Ang galing po ng pagkakaorganize ng topics at yung presentation madaling maintindihan. Salamat po!” - Ednel Tanhueco Datu, Pampanga 3. “I am a working student, so pagdating ko sa school di na ako masyado nakikinig sa school sa sobrang pagod. Weekend lang po ang time ko mag-aral. Pero sa tuwing binabasa ko ang book niyo, para na rin may nageexplain na teacher sa akin… Salamat po! Pinadali ninyo buhay ko.” Francis Reyes Remegio – Holy Angel University, Angeles City 4. “Very helpful po ng book niyo sa tax Sir. I’m not a student of yours Sir nor have met you in person but one thing is for sure, many students like me owe so much from you for introducing to us your taxation book.  God bless po.” Angelica Balubal, Tuguegarao City 5. Replying to a social media user inquiry of which tax book is best, Paulo Relucio Dula replied, “Tax – Rex Banggawan. Bago lang pero sobrang personal teacherna yung book kapag binabasa” 6. “Good day Sir! Just drop by to say thanks for your wonderful masterpiece, Income Taxation. Truly simplified, principle-based approach.” – Jhoven Mabaquiao from Divine World College of Legaspi 7. “…. We are using your textbooks both Income and Business and Transfer Taxation. I am very happy with the way the topics are presented and the books help me a lot in understanding our lessons very well….” – Joshtien Adorable, BSA student FEU Makati 8. “Good evening Sir. I am an accountancy student from Pampanga. Your book for taxation is amazing. I was able to appreciate tax even more…” – Mark Angelo Mallari 9. “...Dumali ang taxation dahil sa book mo… Yung dating minememorize lang namin, ngayon naisapuso na namin even without memorizing kasi the way you illustrate the topic eh naiintindihan agad.” Kusela Mae Uganiza from University of St. Louis Tuguegarao 10. “We find your book comprehensive, simple and direct to the point.” Alberto Calubaquib, Jr. – University of Saint Louis – Tuguegarao City

The book is your teaching partner. You can capitalize on its teaching capability to lessen extensive lectures. By following and reinforcing the concept arrangement as the lecture progresses, it will save you more time and effort; thus, giving you more time in monitoring and assessing student understanding and skills in applying the tax concepts and procedures.

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INCOME TAX SOLUTION MANUAL In teaching, focus on the basics and main points. Let students take care of the details. Do not consume your time discussing the details. The book is designed to be self-teaching. It can teach students even with minimal teacher supervision. Students also need some extent of self-learning to develop their self-esteem. This is particularly vital to their future professional development.

CHANGES IN THE 2019 EDITION This edition packages all changes introduced by the TRAIN law. CONCEPTS TO FOCUS A. Fundamental principles of taxation 1. Theories of cost allocation 2. Tax as a lifeblood to the government (Lifeblood doctrine) 3. Limitations of the taxation power 4. The concept of situs 5. The concept of double taxation and the remedies to double taxation B. The concept of income – discuss what income is taxable under the NIRC 1. The concept of gross income a. The different concepts of capital (with finite and infinite values) b. The meaning of realized benefit – connect this to the ability to pay theory 2. The classification of income taxpayers a. Individuals (RC, NRC, RA, NRA-ETB, NRA-NETB) b. Corporations (DC, RFC, NRFC) 3. The situs of income – students need to know the place of taxation of each type of income 4. The difference between active and passive income C. The taxation schemes  Emphasize how income is taxed under the NIRC.  Important: Make sure students well comprehend and mastered the tax schemes. D. Concepts of accounting periods and accounting methods 1. Accounting period a. Who uses calendar b. Who uses fiscal year c. When to file income tax return in either type of accounting period 2. Accounting methods a. Accrual basis b. Cash basis c. Installment method E. Exceptional taxation scheme 1. Final income taxation – Important: Emphasize the importance of mastery of final income tax a. The list of passive income subject to final tax and their final tax rates b. Taxpayers subject to final taxation and their final tax rates Please refer the students to Appendix 1 for the comprehensive list of final taxes. 2. Capital gains taxation – a. The distinction between ordinary assets and capital assets b. The particular types of capital assets subject to capital gains tax c. Computational procedures of the capital gains tax on domestic stocks 1. Transactional and annual compliance 2. Installment payment of capital gains tax on domestic stocks d. Tax bases and computational procedures to the capital gains tax on real properties 1. Exemption rule and alternative taxation rule 2. Pay as you file and installment payment 4

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INCOME TAX SOLUTION MANUAL Notes for non-accountancy classes The following specialized and complex and concepts may be dispensed with because they are time consuming not to mention their circumstantial relevance in practice:  Wash sales rule  Tax free exchanges F. Regular income tax 1. Introduction Important concepts to emphasize: a. Regular tax gross income includes all income that qualifies the gross income test in Chapter 3 but is not subject to tax under Chapter 5 and Chapter 6 b. Deductions are deductible from gross income from business only c. Personal exemptions are deductible from compensation income but a negative compensation income is deductible to other income d. Tax reporting of compensation income (highlight the exceptional treatment on fringe benefits – this serves as a preliminary introduction to Chapter 11) e. Tax reporting of business or professional income f. Determination of taxable income 2. Exclusions – discusses income not subject to any income tax schemes 3. Inclusions – discusses income that are subject to regular income tax a. Compensation income b. Fringe benefits c. Dealings in properties

4. Compensation income vs. Fringe benefits a. Items of non-taxable compensation b. Components of compensation income c. Treatment of fringe benefits (those subject to regular tax vs. those subject to final tax) 5. Deductions – discusses expenses of business that are deductible from gross income a. Itemized deductions 1. Cost of sales or cost of services 2. Regular allowable itemized deductions 3. Special allowable itemized deductions 4. Net operating loss carry-over b. Optional standard deduction – in lieu of itemized deductions 6. Determination of taxable income a. Individual income taxpayers b. Corporate income taxpayers G. Taxation of individual taxpayers 1. Personal exemption 2. Determination of tax due and tax payable a. Revisit the computation of individual income tax due in Chapter 7 b. Review the computation of foreign tax credits in Chapter 13-A, foreign tax credit H. Taxation of corporate taxpayers 1. Special corporations 2. Regular corporations a. Gross income tax b. Regular corporate income tax c. Minimum corporate income tax 3. Improperly accumulated earnings tax 4. Branch profit remittance tax

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INCOME TAX SOLUTION MANUAL

TEACHER’S SOLUTION MANUAL CHAPTER 1: INTRODUCTION TO TAXATION Exercise Drill 1. 2.

C and I (This is non-delegation) I

11. 12.

3. 4. 5. 6. 7. 8. 9. 10.

I N (real property tax not income tax) C C and I C C N (Non-payment of tax = imprisonment) C

13. 14. 15. 16. 17. 18. 19. 20.

C I (“properties” excludes it from being a Constitutional limit) C N (A principle but not a limitation.) C C I C N (A principle but not a limitation) N (Should be non-imprisonment)

TRUE OR FALSE 1 1. False (This is police power.) 2. True 3. True 4. True 5. False (The receipt of benefit is conclusively presumed.) 6. False (Taxation power is inherent to the State.) 7. True 8. False (It is inherent power not requiring Constitutional mandate.) 9. True 10. True TRUE OR FALSE 2 1. False (Property tax only) 2. False (Different taxpayers warrants different tax treatments.) 3. True 4. True 5. True (It will result to violation of substantive due process) 6. True 7. False (The constitutional guarantee for non-imprisonment applies to debt not tax) 8. False (The Constitution guarantees the sanctity of contract by its non-impairment clause) 9. False (The Constitution requires the majority of all members of congress to pass a tax exemption law 10. False (It will not produce additional benefit if the government taxes itself.) MULTIPLE CHOICE – Theory: Part 1 1. A 2. D 3. D 4. A 5. D 6. D 7. A 8. A 9. B 10. C 11. D 12. D

13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.

C C B A (Absolutely) D A D D C C C C

25. 26. 27. 28. 29. 30. 31. 32. 33. 34.

B C C D C A B D A B

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INCOME TAX SOLUTION MANUAL MULTIPLE CHOICE – Theory: Part 2 1. A 2. B 3. B 4. A 5. C 6. D (B is non-delegation) 7. C (There is taxpayer class) 8. C 9. B MULTIPLE CHOICE – Theory: Part 3 1. B (i.e. category) 2. A 3. C 4. A 5. C 6. A 7. D 8. B 9. A

10. 11. 12. 13. 14. 15. 16.

C D C C D C A (different taxpayer warrants different treatment.)

17. B 18. D 19. C (Violation of territoriality) 20. D 21. A 22. B

10. 11. 12. 13. 14. 15. 16. 17. 18.

C B C B C C A B D

19. 20. 21. 22. 23.

B D C D D (Best being also inherent.) 24. B

CHAPTER 2: TAXES, TAX LAWS AND TAX ADMINISTRATION EXERCISE DRILL NO. 1 1. Percentage tax 2. Donor’s tax 3. Regressive tax 4. Indirect tax 5. Ad valorem tax 6. Fiscal/General/Revenue tax 7. National tax 8. Excise tax* or sin tax 9. Estate tax 10. Community tax or residency tax 11. Proportional tax 12. Specific tax 13. Direct tax 14. Regulatory tax 15. Excise tax or privilege tax *This is different with excise tax as a privilege tax

EXERCISE DRILL NO. 2 1. Revenue 2. Tax 3. Special assessment or Special levy 4. Customs duties 5. License EXERCISE DRILL NO. 3 As to payment 1. Value Added Tax 2. Excise Tax 3. Income Tax 4. Withholding Tax 5. Percentage Tax 6. Documentary Stamp Tax As to conditions and operations 1. Gross receipts or sales 2. Net worth 3. Gross purchases

6. Tax 7. Debt 8. Toll 9. Penalty 10. Debt

≥ P200,000/quarter ≥ P1,000,000/year ≥ P1,000,000/year ≥ P1,000,000/year ≥ P200,000/quarter ≥ P1,000,000/year

≥ P1,000,000,000 in a year ≥ P300,000,000 at year end ≥ P800,000,000 in the preceding year

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--- 2019 INCOME TAXATION SOLUTION MANUAL --MULTIPLE CHOICE – Theory: Part 1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

B A C C B (best answer, RPT is local tax as to collection) A A B C D A B B C C

MULTIPLE CHOICE – Theory: Part 2 1. C 2. C 3. A 4. D 5. D

16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31.

D D D C D D B A B B A D B B C D

32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45.

D C A C D B D D A B A D A A

6. 7. 8. 9. 10.

C C A D B

11. 12. 13. 14.

C D D A

8. 9. 10. 11. 12. 13. 14. 15.

D C A A D B D C

16. 17. 18. 19. 20. 21. 22.

D C A C D D B

MULTIPLE CHOICE – Theory: Part 3 1. B 2. C (LGU for assessed value.) 3. A 4. A 5. D 6. B 7. B

CHAPTER 3: INTRODUCTION TO INCOME TAXATION EXERCISE DRILL NO. 1: Return of capital and Return on capital Consideration For the loss of Return OF Capital Return ON Capital 1. P 1,000,000 Health P 1,000,000 P0 2. P 500,000 P400,000 car P 400,000 P 100,000 3. P 300,000 P350,000 building P 300,000 P0 4. P 600,000 Income P0 P 600,000 5. P 1,200,000 Health P 1,200,000 P0

EXERCISE DRILL NO. 2: Income tax and transfer tax Transaction Income Tax 1. Barter of properties  2. Sale of goods  3. Rendering of services  4. Donation of properties 5. Transfer of properties from a decedent to his heirs upon death 6. Transfer for less than full and  adequate consideration

Transfer Tax

  

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--- 2019 INCOME TAXATION SOLUTION MANUAL --EXERCISE DRILL NO. 3: The tax concept of income Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

Winnings from gambling Income from swindling Indemnity for moral damages Harvest of fruits from an orchard Compensation income Interest income Amount received by the insured in excess of insurance premiums paid Proceeds of life insurance received by the heirs of the insured Gain on sale of goods by the home office to its branch Gain on sale of goods and services between relatives Gain on sale of goods by a parent corporation to a subsidiary corporation Appreciation in the value of land Birth of animal offspring Income of a registered Barangay Micro-Business Enterprise Cancellation of debt out of gratuity of the creditor Cancellation of debt by the creditor in exchange of services rendered by the debtor Matured interest from coupon bonds Receipt of bank loan Salaries of a minimum wage earner PCSO or lotto winnings Benefits from GSIS, SSS, Pag-Ibig or PhilHealth Discovery of hidden treasure (taxable only when sold)

Taxable  

Exempt

  *          *         

*This are unrealized income taxable upon realization by sale or disposition

EXERCISE DRILL NO. 4: Income taxpayer classification

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

Person or Entity A fat Mexican tourist An overseas Filipino worker An expatriate employee A Filipino who is privately employed in the Philippines An unemployed Filipino residing in the Philippines A Chinese businessman who have his domicile in the Philippines for 6 months A Japanese who married a Filipina and residing in the Philippines for 2 years A 2nd year Korean college student studying in the Philippines A corporation incorporated under Philippine law A foreign corporation doing business in the Philippines Donation of a property in trust designated by the donor as irrevocable Donation of a property in trust designated by the donor as revocable A business partnership (Partnership are classified as corporations under the NIRC, presumption if silent = domestic) A joint venture organized under a foreign law and is not operating in the Philippines An estate of a Filipino citizen judicially administered in the Japan An estate of a Filipino citizen extra-judicially administered in the Philippines A taxable joint venture organized in the Philippines A non-profit corporation organized in the Philippines

Classification NRA-NETB NRC NRC RC RC NRA-ETB RA RA DC RFC RC* NT DC NRFC NRC* NT DC DC

*Treated as individual income taxpayers by the law

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--- 2019 INCOME TAXATION SOLUTION MANUAL --EXERCISE DRILL NO. 5: General Income Tax Rule Taxpayer

World income

1. Non-resident citizen 2. Resident alien 3. Non-resident alien engaged in trade or business 4. Resident foreign corporation 5. Resident citizen 6. Non-resident alien not engaged in business 7. Non-resident foreign corporation 8. Domestic corporation 9. Taxable trusts established by a Filipino citizen in the Philippines (treated as RC) 10. Taxable estate of a non-resident citizen judicially administered abroad

Philippine income    

    

EXERCISE DRILL NO. 6: Location and situs of income Income description 1. Rey earned P100,000 interest income. 40% of these were from non-resident debtors. 2. A finance company earned P1,000,000 royalties from a franchise; 40% of these were derived abroad. 3. Raymond earned P100,000 rent from OFWs in his apartment in the US. He also earned P40,000 rent from his Philippine condominium unit. 4. Chester, a resident citizen, works home online and submits his output to clients. He collected P100,000 service fee from foreign clients and P20,000 from resident clients. 5. Mark rendered audit services to client in Afghanistan for P500,000. The services were paid in Afghanistan. 6. Jun has a store in a tourist park in Baguio City, Philippines. He earned a total of P40,000 gain from selling souvenir items. 40% were from foreign tourists. 7. Don Mariano sold to his friend abroad a commercial building located in Quezon City, Philippines at a gain of P2,000,000. 8. John sold his stocks in a domestic corporation to a foreign investor at a gain of P50,000. 9. Manso received P20,000 dividends from a domestic corporation and P30,000 dividend income from a nonresident foreign corporation. 10. Andrew received P40,00 dividend from a resident foreign corporation 60% of its historical income is from the Philippines. 11. CDO, Inc. manufactures in the Philippines and sells to unaffiliated export clients. A total of P100,000 gross income were earned during a period. 12. ABC manufactures abroad and sells to its Philippines branch at



Within

Without

P 60,000

P 40,000

P 600,000

P 400,000

P 40,000

P 100,000

P 120,000 (situs is where rendered)

P0

P0

P 500,000

P 40,000 (stitus is place of sale)

P0

P2M

P0

(situs is location)

P 50,000

P0

P 20,000

P 30,000

P 24,000

P 16,000

(60% x P40,000)

(40% x P40,000)

P 100,000

P0 Income is presumed within*

P 150,000

P 100,000

P 0

(fails dominance test)

P 0

P 20,000

P 400,000

P0

market prices. Production cost abroad were P200,000. Billings to branch totaled P300,000 while branch sales totaled P450,000.

13. James received P100,000 dividend from a resident foreign corporation which realized 40% of its income from the Philippines. 14. Ellis received P20,000 dividend from a non-resident foreign corporation. 15. Davao plant manufactures tables and sells to resident clients. A total of P400,000 gross income were realized during a period.

P 100,000

*Since manufacturing activity is within, the sale is presumed agreed within. Hence, the entire gain is earned within.

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--- 2019 INCOME TAXATION SOLUTION MANUAL --MULTIPLE CHOICE – Theory: Part 1 1. 2. 3. 4. 5. 6.

C D A A A D

7. 8. 9. 10. 11. 12.

B B B B B B

13. 14. 15. 16.

C D D A

9. 10. 11. 12. 13.

A A C B A (The partnership is presumed organized herein if silent.) 14. D

15. 16. 17. 18.

C A D C

4. B 5. D 6. D

7. D

Problem 3-9: C (P30K is expense) Problem 3-10: D Problem 3-11: C Problem 3-12: D Problem 3-13: D Problem 3-14: C Problem 3-15: A Problem 3-16: D Problem 3-17: C

Problem 3-18: D Problem 3-19: D Problem 3-20: A Problem 3-21: B Problem 3-22: C Problem 3-23: 1. D 2. C 3. B 4. D

MULTIPLE CHOICE – Theory: Part 2 1. 2. 3. 4. 5. 6. 7. 8.

A B B C D B C A

MULTIPLE CHOICE – Theory: Part 3 1. B 2. A 3. A MULTIPLE CHOICES – Problems Problem 3-1: B Problem 3-2: C (22 + 15-12) Problem 3-3: C (120 – P80) Problem 3-4: A Problem 3-5: C [1M – 120K – (20Kx4)] Problem 3-6: C (200 – 20x7) Problem 3-7: A Problem 3-8: C

MULTIPLE CHOICES – Case Problems Case Problem 1 Within   

P10,000 interest income from a non-resident Japanese friend P40,000 interest income from Philippine residents P500,000 rent income from a commercial complex located in the USA leased to resident Filipinos  P200,000 rent income from a boarding house in Baguio City, Philippines  P200,000 professional fees rendered to Chinese clients in Hong Kong  P300,000 salary from a resident employer  P100,000 gain from sale of merchandise imported and sold to Filipino residents  P50,000 gain on sale of merchandise purchased locally and sold during his business travel in Hong Kong  P400,000 gain on sale of the boarding house located in Baguio City to a non-resident buyer Total

P P

Without 10,000

40,000 500,000 200,000 200,000 300,000 100,000 50,000

400,000 P1,040,000

P

760,000

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Case Problem 2      

P500,000 royalty fees from local Hot Burger outlets P200,000 royalty fees from foreign Hot Burger outlets P100,000 gain from sales of equipment to foreign franchisees P200,000 gain from sales of equipment to local franchisees P50,000 gains from sale of investment in domestic stocks to foreign investors P40,000 gains from sale of investments in foreign stocks to Filipino investors (The stock is presumed stocks of a non-resident foreign corporation.)

Total

Within P 500,000

Without P 200,000 100,000

200,000 50,000

P 950,000

40,000 P 340,000

Case Problem 3 In this problem, billing is based on free market conditions. TC bills its foreign outlet (branch) at the same rate as it bills foreign clients. The transfer pricing is considered arms’ length. Gross income without = P2,720,000 x 100/200% Profit from foreign operation Billings on foreign operation = P2,720,000 – P1,360,000

Gross income within From sales to unrelated clients (P3,400,000 x 70%/170%) Add: Profit on sales to foreign operation P1,360,000 x 70/170 Total

= P1,360,000

= P 1,360,000 = P1,400,000 =

560,000 P 1,960,000

The answer is A.

CHAPTER 4: INCOME TAX SCHEMES, ACCOUNTING PERIODS AND ACCOUNTING METHODS TRUE OR FALSE 1 1. False (Only passive income) 2. True 3. False (They are mutually exclusive. One excludes the others.) 4. True (Active income is subject to regular tax. Capital gains are generally subject to regular tax. There are only two types of capital gains that are exceptionally subject to capital gains tax) 5. True (Most types of passive income are subject to final tax with the exception of rent.) 6. False (from capital assets, not any assets) 7. Correct (two types: ordinary asset and capital asset) 8. False (The definition of capital asset is a residual definition.) 9. True 10. True 11. True 12. False [Only corporations (and partnerships) can change accounting periods.] 13. True 14. False (The accounting period shall be terminated at the point of death.) 15. True TRUE OR FALSE 2 1. True (Advanced income is taxable upon receipt) 2. True (Deductible as they are used up or are expired in the business of the taxpayer.) 3. True 4. True (The mix of the different methods is referred to as hybrid method.) 5. True 6. False (Contract price is the total amount receivable in money or property from the buyer. This amount is usually the selling price but will differ when there is an encumbrance on the property to be assumed by the buyer.) 7. True (Crop year method is not an accounting period) 8. False (Based on percentage of progress of the construction project) 12 Unauthorized distribution of book manual (current or prior editions) is an infringement of copyright punishable by law. Downloaded by Cah Cords ([email protected])

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--- 2019 INCOME TAXATION SOLUTION MANUAL --9. True 10. False (These are tax credits of the recipient of the income.) 11. False (Only capital gains tax and regular income tax has tax returns. Note that final income tax are withheld at source.) 12. False (Only large taxpayers that meet certain criteria are required to file through the EFPS. Small taxpayers shall file their returns in their respective Revenue District Office.) 13. True 14. False (The compromise is in lieu of criminal prosecution over a tax violation. It does not apply hand in hand with imprisonment.) 15. True (The imposition of a penalty upon another penalty is illegal. Hence, the BIR cannot impose the interest to the amount of the surcharge.) 16. False 17. True 18. True 19. True 20. True Multiple Choices – Theory: General Concepts 8. A 1. A 9. B 2. D 10. A 3. B 11. B 4. C 12. B 5. D 13. C 6. D 14. B 7. D

15. 16. 17. 18. 19. 20.

Multiple Choices – Problem 4-1: Accounting period 1. B 5. B 2. C 6. B 3. B 7. B 4. C 8. C

9. C 10. A

C B C A B D

Multiple Choices – Problems 4-2: Tax schemes and accounting methods Please pattern your solution to the book illustration. If you encounter any problem, feel free to contact me. Thank you! 1. A 2. B 3. B (P2M – P1.1M COGS + P30K + P30K). * 4. D (P2M – P1.1M COGS + P30K + P40K) 5. C 6. D [(P400K+P150KP100K)+P100K] 7. C [P900K GP x (P600K/P2.4M)] 8. C (P 1M-P600K)

9. D [(P250K 2015GP x20%) + (P360K 2016GP x62.5%)] 10. A 11. B [P540K 2015GP x (P300K/P1.35M)];[(P540 K 2015GP x P360K/P1.35M)+P720K 2016GP] 12. C (350K/1.2M x 400K) 13. A 14. B (80% x P1M – P600K)

15. B 16. A [(P40M x 10/50)/40] 17. B (Lease will not commence until building completed). 18. A [(P1.2M x4/12)/8] 19. B 20. D (P900K SALES-P400K EXP +P50K)

*Note that the deductible amount for inventory (a form of prepayment) shall be the expired (sold) portion for both cash basis and accrual basis. Advanced income is taxable upon receipt for both methods. For cash basis collected income excluding accrued income is included. For both accrual and cash basis, unrealized income is not subject to tax.

Multiple Choices – Problems 4-3: Tax Compliance 1. A, computed as (196/365) x 12% x P40,000 = P2,278 2. C (P40,000 x 25%) 3. D (50% surcharge apply. There is a BIR prior notice.) 4. C Since this is an assessment after Dec. 31, 2017, TRAIN law counting rule applies: April 16, 2017 to December 31, 2017 is 260 days. P100,000 x 20% x 260/365 P100,000 x 12% x 15/365 Total

P 14,246.57 493.15 P 14,740 13

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Note teachers that the “exact day method” will be used for all assessment starting January 1, 2018 even if the assessment covers NIRC era tax deficiency or delinquency. 5. B, please check the Appendix (For unpaid tax amounting P50,000 but not exceeding P100,000, the compromise penalty is P15,000). 6. The problem has no answer. April 16, 2020 to July 18, 2020 is 94 days. P1M x 12% x 94/365) = P30,904. You may consider rewarding students who objectively answered P30,904. Good student should have identified the lack of answer and objectively indicated their correct answer. 7. C (50% apply since he received a notice from the BIR before filing) 8. A (The return deadline is December 15, 2019. December 16, 2019 to June 6, 2020 is 174 days. Note that February 2020 is 29 days since 2020 is a leap year. Hence, P500,00 x 12% x 174/365 = P28,603. 9. A (interest penalty + 500K + 25%xP500K)

CHAPTER 5: FINAL INCOME TAXATION Note: Please share these rules of presumptions to your students If the problem is silent regarding the identity or characteristics of the taxpayer in a particular case, the following presumption rules are followed in answering: a. Between whether the taxpayer is an individual or a corporation, an individual taxpayer is presumed (This is because there are more individuals than corporations.) b. Between whether the individual is resident or non-resident, residency is presumed (This is because we are very likely to be of concern with resident entities than non-resident entities. c. Between whether the corporation is domestic or foreign, domestic is presumed (This is because there are more domestic corporations than foreign corporations.) d. Between whether the foreign corporation is resident or non-resident, resident corporation is presumed (This is because we are very likely to be of concern with resident entities than non-resident entities. TRUE OR FALSE 1 1. True (Final tax on interest covers only interest income from banks and trust funds) 2. False 3. False (Final tax applies only on identified passive income from sources WITHIN.) 4. True (They are considered deposits substitutes.) 5. False (Passive income are generally subject to final tax, but not ALL) 6. True 7. False (Only inter-corporate dividend from DOMESTIC corporation) 8. False (Only individual taxpayers are exempt) 9. True 10. False (REIT dividends are generally subject to 10% final tax.) 11. False (Stock dividend is generally exempt, except when it confers upon the recipient an interest different from what he previously owned or when the declaration of stock dividends amounts to a declaration of cash dividends.) 12. False (The NIRC did not contemplate final taxation of prizes on corporations, hence, corporate prizes is deemed subject to regular income tax.) 13. False (subject to final tax of 10%) 14. False (They are exempt from any income tax.) 15. True (Only resident aliens are subject to 7.5% final tax.) 16. False (Active royalties are subject to regular tax. Passive royalties are subject to final tax.) 17. False (It applies only to non-resident foreign corporations) TRUE OR FALSE 2 1. False 2. False 3. False (Passive income abroad, including winnings are subject to regular tax.) 4. False (This rule applies to taxable price.) 5. False (PCSO / lotto winnings are now generally subject to 20% final tax) 6. True 7. False 14 Unauthorized distribution of book manual (current or prior editions) is an infringement of copyright punishable by law. Downloaded by Cah Cords ([email protected])

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--- 2019 INCOME TAXATION SOLUTION MANUAL --8. 9. 10. 11. 12. 13. 14. 15.

False (Active or passive income are subject to final tax) True True True False (It is exempt) True False (On the 10th day, not on the 15th day) True (They are exempt from income tax: final tax, capital gains tax or regular income tax.)

Multiple Choices – Theory 1 1. A 2. B 3. D 4. D 5. B Multiple Choices – Theory 2 1. B 2. B 3. D 4. B 5. D 6. D 7. A This problem is a transition problem. Applying TRAIN law

Multiple Choices – Problems 1 1. D [(P2M X 180/360) X 8%X20%] 2. C (P80K X 25%) 3. A (P42,000/80%) X 20% 4. A 5. C [(P2M X 10% X 4.5) X 5%] Multiple Choices – Problems 2 1. C If we assume the $46,250 as net of tax, there would be no answer [i.e. $46,250/85%) x 15%]. The next correct assumption is that $46,250 gross is credited then the account must be debited for $46,250 x 15%.

2. B 3. C (P1M X 60% X 10%) Multiple Choices – Problems 3 1. B (P22,100 X 20%) 2. A (The P10K final tax threshold on prizes is on a per event and per organizer basis).

3. 4. 5. 6. 7. 8. 9. 10.

D D B (P500K X 20%) D D (P1M maximum x 90%) A C (P1M X 8.75%/70% X 30%) C

C A D C C

11. 12. 13. 14. 15.

A C C C A

would result in multiple answers hence inconsistent with the problem. Student should use the law which gives the rational answer. That is, they should use the NIRC.

12. 13. 14. 15. 16. 17. 18.

D A A D D D C

C (P80K/80% X 20%) C [(P1M X 10%) X 80%] D (P100K X 30%) B [(P1M X 10% X 6/12) X 20%] 10. B [(P1M/4 X 10%) X 20%] 11. A

12. 13. 14. 15.

A B [($1M X 8% X 15%)/2] A D [($1M X 10% X 15%) X P45]

4. D (A resident corporation is a

12. D 13. C (P1M X 40% X 10%) The

6. 7. 8. 9. 10.

8. 9. 10. 11.

C C D A

6. 7. 8. 9.

5. 6. 7. 8. 9. 10. 11.

foreign corporation) A (P120K X 24%) B (P100K/90%) X 10% B (P200K X 40% X 10%)

D C (P200K X 10%) D D

problem is asking for final tax to be withheld to all not from the dividend income of Sison.) 14. A (P800K/80% X 20%) 15. B (P8M X 10% X 80%)

interest is P90,000 x 20% x 10/360, compromise is P15,000 per table.) Total amount due is P90K+22.5K+500 + P 15K = P128,000

tax rate = P240,000). The surcharges shall be P240,000 x 25% = P60,000. The interest shall be P240,000 x 20% x 30/360 or P4,000. Total penalties before compromise = P64,000.

Note: This is an NIRC case not a TRAIN law case since compliance date is March 20, 2017.

This is also an NIRC assessment era assessment case.

11. D (Surcharge = P90,000 x 25%,

12. C (The interest payment was actually P1,200,000 x 20% final

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--- 2019 INCOME TAXATION SOLUTION MANUAL --CHAPTER 6: CAPITAL GAINS TAXATION Note to Professors: You may assign the special tax rules in capital gains or loss measurement (wash sales and tax-free exchanges) to student for their detailed study at home. These are time consuming topics which may eat too much classroom time. You may focus on the basic rules of the 5% and 10% CGT and the 6% CGT. These specialized topics may be skipped for non-accountancy students. Need emphasis: In law, documentary stamp tax (DST) is payable by either the seller or buyer. If paid by the seller, the same is deducted in the measurement of the gain. If assumed by the buyer, it should not be deducted against the gain. TRUE OR FALSE 1 1. True 2. True 3. True 4. False 5. False 6. False (See sales of RFC and the RIT option on individual sale to government) 7. False 8. True 9. True 10. True

TRUE OR FALSE 2 1. True 2. False (or the fair value whichever is lower) 3. False (by moving average method) 4. False (adjusted basis of the shares received) 5. True 6. True 7. False (not downpayment but initial payment) 8. True 9. False (not selling price but contract price) 10. True 11. True

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

True True True False False False (only domestic stocks) True False (tax is based on selling price) False (tax is based on SP or FMV) False (only real property capital assets within)

12. 13. 14. 15.

False True True False (Assessed Value and Zonal value are independent valuations) True False (foreign corporations are exempt) True False (Only on domestic stocks.) True

16. 17. 18. 19. 20.

Multiple Choices – Theory: Part 1 1. C 2. A 3. C 4. D 5. D 6. C

7. 8. 9. 10. 11. 12.

A (NIRC question) C D A C D

13. A 14. D (MOST CORRECT TECHNICAL ANSWER! ) 15. C

Multiple Choices – Theory: Part 2 1. D 2. C 3. D 4. D 5. C 6. A

7. 8. 9. 10. 11. 12.

C D C B D D

13. 14. 15. 16. 17.

A D B A B

Multiple Choices – Theory: Part 3 1. A 2. C 3. A 4. B 5. C

6. 7. 8. 9. 10.

D A D C D

11. 12. 13. 14. 15.

A B D D A 16

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Note to professors: 1. If the problem is dated 2017 and prior years, apply NIRC. If the problem is dated 2018 onwards, use TRAIN law. If the problem is silent, use TRAIN law. If the problem is inconsistent with TRAIN law by having no answers or having multiple answers, apply NIRC. 2. If the problem did not provide documentary stamp tax on the sale of stocks, ignore it in the computation of the net gain. The understanding is that the buyer paid for the DST. If the problem provided the documentary stamp or data (i.e. par value) which enables us to compute the same, we deduct the documentary stamp tax expense in measuring the net capital gain. The question is implying that DST is relevant to the case otherwise it would not have provided it. Multiple Choices – Problems: Part 1 1. A [The net gain is (P200K 8. – P5K – P8K) x 15%] 2. A 9. 3. D 4. D 5. D 6. A (DST=P300K x 1.5/200=P2,250). 10. [(P500k-P350k-P2, 250 dst-P100k) x 15%] 7. B [(P350K-300K) X 15%] 11.

A (Stocks is an ordinary asset to a dealer in stocks) A This is NIRC. [P92K(P20K X 2 per share of the 1st purchase) -(P20K X 2.1 per share of the 2nd purchase)] X 5% B This is NIRC. [P92K(P40K X 2.06 WA per share)]x 5% D

Multiple Choices – Problems: Part 2 1. A. The cost per share as of 2. C [(P50k Dp. + P50K 5/1/2020 is 11.2 per share computed as (P112K-P100K) X 8/10] +P80k) = P89,600/8,000 shares as of 5/1/2020. The CGT on 6/7/2020 is computed as [P60K-(5K x 11.2)]

inst.)/P500K] x P45K Total CGT

3. B [(P300K - P1.5K dst) x 15%] 4. A (P1.5/200 x P200K)

12. B [ P320K-(2K x 30)- (8K x 25)] 13. C [(120K-10K+250K) x 15% 14. B [(P120K-P100K) + P240K] 15. A (through PSE) 16. A (through PSE)

5. C (P40K x 5K/20K). Note 5K shares were not covered-up. 6. D [(P40K x 15K/20K) + P160K] 7. C [(1,500 x (P120-P90)] – 1,500 x 85 x 1.5/200) x 15%

8. A The documentary stamp tax is P1.5/P200 of par value. It is 0.0075 of the par. Hence, the par value must have been P7,500.00/.0075 = P1,000,000, the cost would have been P1,500,000 (P1M x 150%). At the date of sale, the value of the stocks doubled to P3,000,000 (P1.5M value at purchase x 2). 9. D The net gain is P3M-P1.5M = (P1.5M – P7,500 – P10,000) x 15%. 10. A (nearest answer)

Basic tax due (140K x 15%) Surcharge (21K x 25%) Interest (21K x 90/365 x 12%) The exact answer

P

P

21,000 5,250 621 26,871

Deadline is March 22 since February 2019 is a 28-day period. March 22 to July 20, 2019 is 90 days. 360 days was inadvertently used in the interest computation resulting into 630 interest. This would yield P26,880, the question answer. Consider rewarding students who indicated the exact answer. Note to professors: In the CPA Exam, examinees must be able to identify defective assumptions of the examiner in the problems when the exact technical solution is not with the choices. They are not supposed to shade letter E. When the most correct solution does not yield an answer, examinees must test every possible assumption the examiner used. The rule of the game is getting the “intended answer” when the technical answer is not with the choices.

Multiple Choices – Problems: Part 3 1. A 5. 2. D 6. 3. C (P3.2M x 6%) 7. 4. A (Parking lot is an 8. 9. ordinary asset.)

D (P2.5M x 6%) C (P1M x P1.8M/P2M) B (P150K x P1.5M/P2M) D (P5K x 500 +1.5M) x 6% D (13M x 6%)

10. A (P12M x 6%) 11. A 12. B (P12M/1K x 15)

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Multiple Choices – Problems: Part 4 1. A (Initial acquisition of 4. control is a tax-exempt 5. transaction.) 6. 2. B 7. 3. C [(P 200K-P100K) x 10%] 8. + P5K 9.

B C D [(P250K-P100K) x 15% B C D

10. E* (No answer) 11. C** 12. B (P4M x 7.5%)

*No. 10: No answer Basic tax due (P2.5M x 6%) Surcharge (P150,000 x 25%) Interest (P150,000 x 12% x 366/365) Exact answer

P

P

**No. 11: Higher of selling price or fair value (P9,000 /1.5%) Multiply by: Tax rate Capital gains tax

P P

150,000 37,500 18,049 205,549

600,000 6% 36,000

CHAPTER 7: INTRODUCTION TO REGULAR INCOME TAX TRUE OR FALSE 1 1. True 2. False (NRA-NETB and NRFC are subject to FIT) 3. False 4. False 5. True TRUE OR FALSE 2 1. True 2. False 3. False (only against business gross income) 4. True 5. False (deductions apply to individuals and corporations)

6. 7. 8. 9. 10.

True (As a rule) False True False (only in lieu of personal expense) True

6. 7. 8. 9. 10.

True True True True True (effectively, yes)

Multiple Choices – Theory: Part 1 1. C 2. A 3. D 4. C 5. A 6. D 7. A 8. D

9. 10. 11. 12. 13. 14. 15. 16.

B B D B B A C D

17. 18. 19. 20. 21. 22.

C D A A D A

Multiple Choices – Theory: Part 2 1. D 2. D 3. C 4. D 5. A 6. A 7. B 8. A 9. D

10. 11. 12. 13. 14. 15. 16. 17. 18.

A B A B B D C D A

19. 20. 21. 22. 23. 24. 25.

C D D (best answer) D A B A

Multiple Choices – Problems 1 1. A (P400K-P100K+P3K) 2. C (P300K+P5K-P50K) 3. A (P800K-P300K-P100K)

4. D (P200K-P150K) 5. A (P500K-P200K+P8K) 6. C (P50K+308K)

7. B [(P120K CI-P150K PE)+ P300K BI + P8K OI] 8. A (P450K- P100K) 18

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--- 2019 INCOME TAXATION SOLUTION MANUAL --9. C [(P350K-P250K) X 30%]+ P50K

10. A [(P4M-P2M)+(P6MP3.6M+P80K)-P75K] 11. C (P4M-P2M-P75K)

Multiple Choices – Problems 2 1. B [(P10M-P8.7M)+(P12M-P9.8M+P200K)] 2. C (P3.7M X 30%) 3. D (P10M-P8.7M) 4. A (P1.3M X 30%) 5. B (P10M+50K+80K) x 30%

12. A [(P1925K-P500K) X 32%]+P125K 13. D (P1M+40K) x 25%

6. A (P20K Deposit+P100K Royalty+P50K Dividend) 7. B (P200K BI+ P300K CI+ P100K Lending+P20K Car+ P10K Furniture) 8. B ( The P40K sale directly to buyer)

CHAPTER 8: REGULAR INCOME TAX: EXCLUSION FROM GROSS INCOME TRUE OR FALSE 1 1. True 2. True 3. False 4. False 5. False (Other requisites exist.)

6. 7. 8. 9. 10. 11.

TRUE OR FALSE 2 1. False 2. True 3. False (It depends on source and amount) 4. True 5. True 6. False Multiple Choices – Theory 1 1. C 2. B 3. C 4. D 5. B Multiple Choices – Theory 2 1. D 2. D 3. A 4. B 5. A 6. C

12. 13. 14. 15.

True False False False

7. True 8. True (As a rule) 9. False (They are still taxable on income from unrelated operations.) 10. True 11. False (More than 5 years)

12. 13. 14. 15.

True False True False (The rule is total asset, not net asset)

6. 7. 8. 9. 10.

B A D B C

11. 12. 13. 14. 15.

A D C A C

7. 8. 9. 10. 11.

D C A C B (Old question, C is also acceptable.)

12. 13. 14. 15.

C A C A

True True False True True True

Multiple Choices – Problem: Part 1 1. D 7. D (The excess is payment 2. D for health) 3. C 8. A (P2M – P.8M + P.5M). The P800K is exempt but is 4. C not specifically mentioned by 5. B (the P100K premium is the law as exclusion. an expense) 9. C (P1.8M+P.4M) 6. B Multiple Choices – Problems: Part 2 1. B (This is voluntary 8. resignation.) 2. A 3. A (She is 48-year old.) 4. C 9. 5. D 10. 6. D 7. A (125 + max 100 PERA)

C (The interest income is included in gross income while the gain on sale is excluded.) D B (P9K and P6.8K are inclusion to gross income subject to final tax)

10. C (Income from related operations only) 11. B (P25+P12+P9+P10+P5) 12. C 13. C 14. D

11. 12. 13. 14.

B (9K + 6.8K) C (P400K+20K+18K) A C (Income from property and commercial activity is taxable.) 15. D 19

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--- 2019 INCOME TAXATION SOLUTION MANUAL --CHAPTER 9: REGULAR INCOME TAX: INCLUSION IN GROSS INCOME TRUE OR FALSE 1 1. True 2. True 3. False 4. True 5. False 6. True 7. True 8. True

9. 10. 11. 12. 13. 14. 15.

TRUE OR FALSE 2 1. True (Not final tax) 2. False (Not taxable) 3. True 4. True 5. False (FIT do not apply abroad) 6. True 7. True (generally, exception is when no tax benefit is derived) 8. False (This is a normal realization of income) 9. False (No tax benefits). Multiple Choices – Theory: Part 1 1. D 2. A 3. C 4. C 5. B 6. C 7. D Multiple Choices – Theory: Part 2 1. A 2. D (The best answer*) 3. D 4. B (Note: “progressive” tax) 5. C (Those taxable on world income)

True True True False True True False (Subject to RIT, as a rule)

10. False (GPPs are also exempt from FIT and CGT.) 11. False 12. False (It depends. There is tax benefit to the excess of the recovery over the loss.) 13. True (No tax benefit) 14. False (This is carried over as NOLCO in the future measurement of the income of the GPP.) 15. False (Accounting method)

16. False (Taxable if there is an alternation in interest after declaration.) 17. True 18. False 19. True 20. True

16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27.

False True True False False (applicable to all taxpayers) True False (not required) True False (including domestic) True False True

8. 9. 10. 11. 12. 13. 14.

B B C B D (This is withholding tax) D A

15. 16. 17. 18. 19.

A A C D B (No CGT on real property for FCs.) 20. A

6. 7. 8. 9. 10.

B (This is an old question.) D (subject to final tax) B C C

11. D (The situs on interest on domestic bonds is within.) 12. B 13. D 14. C 15. A

*D is the best answer. Passive royalties are generally subject to final tax; hence, non-reportable. However, passive royalties earned from sources abroad are subject to regular tax, hence reportable. The capital gain on sale of stocks through PSE is not subject to tax; hence, non-reportable.

Multiple Choices – Problems: Part 1 1. D (P800K-P124K+P150K) 8. 2. C (P400K-P20K). 13th 9. month pay is below P90K. 10. 3. B (P480K+P80K+P1M) 11. 4. A (P1.5M GP +P200K 12. Commission income + P20K Interest income 13. from customers) 14. 5. C 15. [(P400K+P300K)+P70K+P 16. 30K] 17. 6. C 7. A [(P1.9M/95%)+P50K]

C (P30K+P70K+P10K) A (P3M-P2.4M) A B (P600K+P200K) D [P400K+P200K+(P35KP30K)] B C B A C (Not D. There is tax benefit by carry-over.)

18. C (The NOLCO has no tax benefit.) 19. D 20. B (Only interest is deductible and hence have tax benefits.) 21. A (P40K + P4K), Note that basic local tax and interest are deductible.) 22. B (As is method.) 23. C (As is method.)

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Multiple Choice – Problems: Part 2 1. D (P500K x 20% (Exempt JV similar to GPPs are not subject to FIT, their passive income is part of the distributable income taxable to their venturers.) 2. A (P490K – P200K – P120K) 3. C (P120K – P30K) 4. D (P90K + P170K) 5. D (P1,140K)/2 6. A (Subject to final tax since this is a business partnership.) 7. A (This is an old question. This is subject to final tax) 8. D* 9. D (Gains on long term bonds with more than 5 years is exempt. No holding period rule for corporation. Holding period will be discussed in Chapter 12.) 10. A (DCs are taxable on world income but the capital gains on real property is subject to CGT. Hence, P300K+P800K+P200K) 11. C (RFCs are taxable only on Philippine income but are not subject to CGT on real properties; hence, P300K+P400K)

12. C (RAs are taxable only on Philippine income but are subject to CGT on real properties; hence, P300K only) 13. C (P800K+P100K+P400K+P200K) 14. D 15. B (P10K +P400K prizes abroad+P100K winning abroad). Note prizes not exceeding P10K are subject to RIT. 16. C (Corporate prizes and winnings are subject to RIT. DC is taxable on world income while RFC is taxable only on Philippine taxable income.) 17. A (Income from related operations are exempt. The unrelated income is subject to final tax) 18. A (This is subject to 5% GIT.) 19. D (P400K-100K cost of services + P8K) 20. A [None to report since all the income are subject to final withholding tax (i.e. no ITR)]

*The employee will not be subject to final tax notwithstanding satisfaction of the compensation threshold test because he is not a managerial or technical employee

Multiple Choice – Problems: Part 3 1. D (P80K+P100K) 2. B (P150K+P120K) 3. D (P45K + P5K) 4. D (P66,600 + P600 – P7,200) 5. C (P79,200/99%). There is no VAT because the taxpayer is non-VAT. 6. A (P45,900 is inclusive of 12% VAT but net of 10% CWT. It is 102% (100%+12%-10%) of the gross income). Hence, P45,900/102% = P45,000. 7. A. ZERO. Interest income is subjected to final tax. The same is not subject to regular income tax. 8. A. ZERO. (Income is subject to final tax.) 9. B (P12M x 80% = P9.6M goods transferred x 50% markup = P4,800,000. This should be the gross profit of the resident foreign corporation subject to Philippine income tax. 10. C (P500,000 sales x 40% = P200,000)

CHAPTER 10: COMPENSATION INCOME TRUE OR FALSE 1 1. True (This is an NIRC concept.) 2. False 3. True 4. True 5. True 6. False (Generally taxable) 7. False (Considered resident citizens and taxable) TRUE OR FALSE 2 1. False 2. True 3. False 4. False (There are directors who are part of management.) 5. True

8. 9. 10. 11. 12. 13. 14.

True (As a rule) True False False True True (As a rule) False (No limit for government employees)

6. False (still MWE, but taxable on business income) 7. True 8. False (whichever is higher)

15. False (Under current rule, only those listed by the regulations) 16. False (rank and file only) 17. False (Vacation leave credits not sick leave credits) 18. True

9. False (For a foreign bank, FCDU or EFCDU for a local bank) 10. False (Note position and function test) 11. True 12. False 21

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--- 2019 INCOME TAXATION SOLUTION MANUAL --13. True 14. True 15. True (Non-resident citizen with income abroad) 16. False (Considered resident citizen in taxation)

17. False (100% exempt) 18. False (regular compensation) 19. False (taxable to final tax) 20. True 21. False

22. True 23. False (Exemption is prospective) 24. True 25. True 26. True

Exercise Drill No. 1

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.

Rank and file employee DM SC DM DM OB RC DM OB OB DM DM EB OB RC SC OB SC SC EB RC* OB DM & OB for excess EB EB SC**

Manager or supervisor DM SC DM DM OB RC DM OB OB DM DM EB FB RC SC FB SC SC EB RC* FB DM & FB for excess EB EB SC**

*Note, this is integrated to the basic pay of the employee and is not separately paid for **The 13th month pay and other benefits exceeding P82,000 is also considered a supplemental compensation

Exercise Drill No. 2

1.

Limit P62.50/day

2.

P4,000 year,

Annual Excess P5,925 (P37.50/day x 158 days)

P2,000

(P6,000 x 10/15)

3.

P250/mo.

P9,000 (P750/mo. x 12)

4. 5. 6.

P0 P10,000/year P6,000/year

7.

P300/mo.

P6,000 P2,000 P2,000

(P2k x 4 – P6k)

P2,400

(P200/mo. x 12)

8. 9. 10.

P 0* P5,000/year** P2,000/mo.

P 10,000 P3,000 P12,000 (P 1,000/mo. x 12)

*This should be in non-cash to be exempt. **This limit pertains to both anniversary gift and Christmas gift Note: Medical allowance to dependents is P1,500/semester translated to P250/month.

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Exercise Drill No. 3 Basic salary Less: Employee share in SSS, PHIC, HDMF and union dues Regular compensation income Supplemental compensation – OT 13th month pay and other benefits (P21,000 – P82,000) Gross taxable compensation income

P 250,000 24,000 P 226,000 16,000 0 P 242,000

Note: The SSS benefits and retirement pay are exempt

Exercise Drill No. 4

13th month pay Profit sharing (this is supplemental) De minimis benefits De minimis within their limits Excess de minimis benefits Other de minimis benefits Other fringe benefits Total 13th month pay and other benefits Less: Exclusion limit Taxable 13th month pay and other benefits**

Rank & File Employee P 60,000 0 30,000 10,000 25,000 P 125,000 90,000 P 35,000

Managerial/ Supervisory P 60,000 0

P P

***60,000 90,000 0

*Taxable under fringe benefits tax **This will be included in compensation income as supplemental/additional compensation

Exercise Drill No. 5

1. 2.

Progressive tax P 1,420,000* P 1,408,000**

Fringe benefits tax P0 P 13,000

*P1,068,000 + P340,000 + (P89,000 + P13,000 – P90,000) **P1,068,000 + P340,000; Note 13th month is below P90,000 threshold

Exercise Drill No. 6 1. 2.

P 48,000 P 97,000*

*13th month pay do not exceed the P90,000 threshold; hence, not taxable

Multiple Choice –Theory: Part 1 1. D 2. C 3. C 4. A

5. 6. 7. 8.

Multiple Choices – Theory: Part 2 1. A 2. D 3. A 4. B 5. A 6. D 7. C 8. D 9. C 10. C

11. D (NIRC limit is P1,500. Now P2,000/mo.) 12. D 13. C and D 14. B 15. C (Statement 2 depends on type of employee.) 16. B 17. C 18. C

C C A (i.e. employee) B

9. D

19. 20. 21. 22.

C D A D (Embassies have tax immunity and cannot be obligated to withhold by virtue of international comity.) 23. B

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Multiple Choices – Problems: Part 1 1. B (P300,000 + P30,000) 2. C (P1,068 – 44 + P45) 3. A (P20,000 x 12 – P18,000) 4. B (P11,000 x 12 + P12,000 OT– P5.2K exclusions) 5. A Note that Johnny is a minimum wage earner for being a recipient of annual salary of P60,000. Note that overtime is an exempt benefit to a minimum wage earner. Note also that his 13 th month pay and other benefits do not exceed P90,000.) 6. C {P128K regular + P8K supplemental + {(P120K x140/150 + P12K) – P90K}] Note that the retirement benefit is exempt. 7. C (P1,090 + 240 + 5) 8. C (P258K regular – P24K + P20K supplemental + P0 excess) 9. A (P780K regular + P43K supplemental + P19K excess computed as [P65K + (P22K –P10K) + P32K) – P90K] 10. B (P780K regular + P43K supplemental + P0K excess computed as [P65K – P90K]

Multiple Choice – Problems: Part 2 1. C (P12K + P12K + P8K + P24K) Note that the 13th month pay and other benefits in excess of P90,000 is part of additional or supplemental compensation. However, in this case, the 13th month pay and other benefits did not exceed the P90,000 exclusion threshold. 2. D (P8K + P24K). 3. C (P 45,000 – P30,000)

4. Please disregard choices. There was a computational slippage. Consider giving extra points for students who provided the correct amount of answer. Exempt de minimis: P 24,000 rice allowance + P5,000 Christmas gift = P29,000 5. Non-taxable compensation income: 13th month pay and other benefits Exempt de minimis Contribution to SSS, PhilHealth and HDMF Total non-taxable compensation

P

P

90,000 29,000 21,000 140,000

6. Supplemental compensation: Commission income P Excess 13th and other benefits (P45,000 + P45,000 + P2,000 + 3,000 – P90,000) Total supplemental compensation P

12,000 5,000 17,000

7. Taxable compensation income: Regular compensation (P540,000 – P21,000) Supplemental compensation Taxable compensation income Alternatively: Gross compensation (540+45+45+26+12+8) Less: Non-taxable compensation Taxable compensation income

P P P

519,000 17,000 536,000

P

676,000 140,000 536,000

P

982,000

8. A [P1,080 + 5 x 12 + (95-90)] 9. D Regular compensation (P1,044K – P62K) Supplemental compensation (P87+5K+24K addcom + 100x 12 – 90K) Taxable compensation income

27,200 P 1,009,200 24

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--- 2019 INCOME TAXATION SOLUTION MANUAL --10. D (P314K + 12K + 24K); Note 13th month and other benefits is below P90K exclusion 11. No answer. P300 x 12 + 5,000 = P8,600 12. B 13th month Excess de-minimis (P8,000 – P3,600*) 13th and other benefits (i.e. below P90K) De minimis ( P5,000 + 3,600) Total non-taxable income

P P P

28,000 4,400 32,400 8,600 41,000

*P3,600. Note that the P500/month rate given does not match with the P8,000 annual total indicating that additional allowances were given. Hence the P8,000 shall be used in the computation. 13. B (33K + 33K + 3K + 6K – 1.2K – 1.2K) 14. B (24,750 + 6,000 – 1,100) CHAPTER 11: FRINGE BENEFITS TAX TRUE OR FALSE 11-1 1. False 2. False 3. True 4. True

5. 6. 7. 8.

True False (Final tax) False False (100% exempt)

9. True 10. True

TRUE OR FALSE 11-2 1. False (5%) 2. True 3. True 4. True 5. False (fringe benefits) 6. True

7. 8. 9. 10. 11. 12.

True True True True True False

13. True (only business class ticket is exempt) 14. True 15. False (Still a taxable fringe benefit)

Multiple Choice –Theory 1 1. D (13th month pay) 2. A 3. A 4. B 5. C

6. 7. 8. 9. 10.

B D A D C

11. 12. 13. 14. 15.

A* C ** A C A

*(A is the intended answer but the most appropriate answer to this question is (50% x 5%) or 2.5% since the problem talks about percentage of the fair value) ** (The problem speaks bout percentage of the depreciation value)

Multiple Choice –Theory 2 1. D (gross-up) 2. D 3. A 4. B 5. C 6. C 7. A (Yatch is considered real property in fringe benefit taxation) 8. D 9. A 10. A Multiple Choice –Problem: Part 1 1. B (The amount actually subject to fringe benefits tax is the grossed-up monetary value. Hence, P50,000/68%) 2. A (P10,000 X 50% X 3)

3. D (The basis is [P2M+1.5M or P3.5M + P1.5M] w/e is higher). Hence, P5M x 5% x 50%/4 = P31,250. 4. B 5. C

6. 7. 8. 9. 10.

D (P4M/20 X 50% /4) A C A (P500,000 X 50%) C (P2M + P4M) x 60% 25

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Multiple Choice –Problem: Part 2 1. C 2. D (P19,000 X 35/65) 3. B 4. B (P800,000 X 25/75) 5. B (P2M + 1.5M)

6. 7. 8. 9.

Multiple Choice –Problem: Part 3 1. C (P16,000+P24,750) X 35%/65% 2. D (P16.4M/20 X ½) 3. B (P10K+P15K+P15K) x 3 months + P4K + P100 x 4 weeks x 3 months 4. D (P10K + P200K x 12% x 3/12 + P12K) 5. A (P12,000+P300,000) x 35%/65% 6. D (P27,200 x 3 x 50%) x 35%/65% and (P27,200 x 2 x 50%) x 35%/65%* 7. D** 8. A

D (P1.2M X 20% X 50% /4) C [(P1,200,000 X 20%)/4] X 50%) X 35/65 D (Convenience of the employer.) C

9. C 10. C (P500K/5 X 50%)/4 + P30K 11. A Cash FB expense Lot

500,000 300,000 800,000

12. D (P700K X 35%/65%)

*Nearest answer. The actual answer is (P21,969; P14,646). ** Basis is P2M zonal value of land+ P2M assessed value of improvement or P4.5M w/e is higher. Hence, P4.5M x 5% x 50%/4 x 35%/65%.

CHAPTER 12: DEALINGS IN PROPERTIES TRUE OR FALSE 1 1. True 2. True 3. True 4. True 5. False 6. True 7. True 8. False

9. 10. 11. 12. 13. 14. 15.

TRUE OR FALSE 2 1. True 2. True 3. True 4. False (fair value or cost to original donorpurchaser w/e is lower) 5. False 6. True 7. True 8. False (as a rule both is not recognized, but gain may be recognized when there is cash or other assets received as consideration) Multiple Choice –Theory: Part 1 1. D 2. A 3. D 4. C 5. A 6. D 7. A 8. B 9. D 10. A

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

False (bonds & debentures only) False (within one year, not less than) False (more than one year) False False False True (ordinary loss is deductible in full)

9. 10. 11. 12.

True False False (one to five persons) False (this is an ordinary exchange transaction) 13. True 14. True (the wash sales rule) 15. False (SP – cost)

C B C A A C B C C A

21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

A B B C D C A D C B

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Multiple Choice –Theory: Part 2 1. A 2. B 3. C 4. A 5. A 6. B

7. 8. 9. 10. 11. 12.

B C C A B D

Multiple Choice –Problems: Part 1 1. D 2. C (P200K OG – P150K OL) 3. B (P200K-P100K)+[(P100K-P150K) X 50%] 4. D (P200K+P100K-P100K-P150K) 5. A [(P150K-P120K)+P200K] 6. C [P300K+(P80K-P90K)] 7. B 8. D (P60K-P70K);0 9. C [(P1.5M-P1.2M) X 50%] 10. D [The total items of GI is computed as P200K ST CG+(P100K LT CG X50%)+P50K ST OG+P150K LT OG –P100K ST CL-(P150K LT

Multiple Choice –Problem: Part 2 1. D (There is a P45k Net Capital Loss in 2015 to be carried over in 2016 with a Net Capital Gain of P12, 500.) 2. D [(P60K+P25K)-(P50K+P20K)] 3. C 4. A [(P30K X 50%)-P8K] 5. B [The OG is P400k; the net capital gain is P80k-(P40K X 50%)] 6. C 7. D [(P50K X 50%)+(P100K X 50%)] 8. D [P10K X(P13-P10)] 9. D

13. 14. 15. 16. 17.

11.

12. 13. 14. 15. 16.

A A C B D

CL X 50%); The total items of deduction is computed as P200K ST OL+P120K LT OL.] D [The total items of GI is computed as P200K ST CG+P100K LT CG+P50K ST OG+P150K LT OG –P100K ST CL-P150K LT CL; The total items of deduction is computed as P200K ST OL+ P120K LT OL.] D A (P1M – P800K) A (4.5M-P3M) A (P50K-P20K) D [(P60K-P25K)-P20K 2015NCL]

10. D (The tax basis is P120K ; the gain to be recognized is P120K-P80K) 11. C 12. A (The basis of the new shares is P400K +P50K-P90K; the gain to be recognized isP360K+P90K-P400K) 13. B 14. D 15. B 16. A 17. D

CHAPTER 13: PRINCIPLES OF DEDUCTIONS Exercise Drill No. 1 Business Expense

Personal expense 

1. 2.  3.  4.  5.  6.  7.  8.  9.  10.  11.  12.  13.  14.  * 15.  *if silent personal, if business seminar, it is an expense

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Exercise Drill No. 2

1. 2. 3. 4. 5.

2011

2012

P 25,000

P 50,000 P 200,000 P 200,000 P 100,000

P 100,000

2013 P 200,000 P 50,000

Exercise Drill No. 3 Beginning inventory Purchases (P800,000 + P1,200,000) Total cost of goods available for sale Less: Ending inventory Zircon (400/1000 x P800,000) Ruby (800/4,000 x P1,200,000) Cost of goods sold

P

520,000 2,000,000 P 2,520,000

P

320,000 240,000

560,000 P 1,960,000

Exercise Drill No. 4 (You can skip this for classroom drills. It is complicated and time consuming. It may be given as an assignment. ) SLM 2010 2011 2012 2013 2014 2015

Expense P 225,000 450,000 450,000 450,000 225,000 0

SYD

Tax basis P 1,775,000 1,325,000 875,000 425,000 200,000 200,000

Expense P 360,000 630,000 450,000 270,000 90,000 0

Sum of the years digit method Annual dep’n 2010 4 720,000.00 2011

3

540,000.00

2012

2

360,000.00

2013 2014 SYD

1

180,000.00

Tax basis 1,640,000 1,010,000 560,000 290,000 200,000 200,000

Semi-annual 360,000.00 360,000.00 270,000.00 270,000.00 180,000.00 180,000.00 90,000.00 90,000.00

150%DB Expense P 375,000 609,375 380,859.38 238,037.11 196,728.52 0

200% DB

Tax basis P 1,625,000 1,015,625 634,765.63 396,728.52 200,000 200,000

Expense P 500,000 750,000 375,000 150,000 25,000 -

Actual dep’n 360,000.00

Book value 1,640,000.00

630,000.00

1,010,000.00

450,000.00

560,000.00

270,000.00 90,000.00

290,000.00 200,000.00

Tax basis P1,500,000 750,000 375,000 225,000 200,000 200,000

10

150% Declining balance Declining rate* 2010

0.375 Annual 4 750,000.00

2011

3

468,750.00

2012

2

292,968.75

2013

1

183,105.47

2014

105,175.78

Semi-annual 375,000.00 375,000.00 234,375.00 234,375.00 146,484.38 146,484.38 91,552.73 91,552.73 105,175.78

Actual dep'n 375,000.00

Tax Basis 1,625,000.00

609,375.00

1,015,625.00

380,859.38

634,765.63

238,037.11

396,728.52

196,728.52

200,000.00

Declining rate = 1/4x150% = 37.50%

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Double declining balance Declining rate* 2010

0.5 4

Annual 1,000,000.00

2011

3

500,000.00

2012

2

250,000.00

2013

1

175,000.00

2014 2015

Semi-annual 500,000.00 500,000.00 250,000.00 250,000.00 125,000.00 125,000.00 25,000.00 25,000.00 -

-

Actual dep'n 500,000.00

Tax Basis 1,500,000.00

750,000.00

750,000.00

375,000.00

375,000.00

150,000.00

-

25,000 -

225,000.00 200,000.00 200,000

*1/4 x 200% = 50%

Exercise Drill No. 5 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

NDE DE CE NDE CE NDE CE NDE DE CE NDE NDE NDE NDE NDE DE CE CE CE DE DE DE NDE NDE NDE NDE DE NDE NDE NDE(best answer but this is not an expense)

TRUE OR FALSE 1 1. True 2. False** 3. False 4. True 5. False

6. 7. 8. 9. 10.

True True False * False True

*In taxation, this is a capital expenditure ** Tax basis or book value not cost

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--- 2019 INCOME TAXATION SOLUTION MANUAL --TRUE OR FALSE 2 1. False* 2. True 3. True 4. False 5. True

6. 7. 8. 9. 10.

True True False False (records of gross income) False (because allowed by law)

*As a rule, expense of regular income only.

Multiple Choice – Theory – Part 1 1. C 2. A 3. A 4. A 5. C 6. B 7. B 8. B 9. B

10. 11. 12. 13. 14. 15. 16. 17. 18.

C D D B D B D A A

19. 20. 21. 22. 23. 24. 25.

B D D C C D C

Multiple Choice – Theory – Part 2 1. D 2. D 3. A 4. B 5. B 6. A 7. D 8. D 9. D

10. 11. 12. 13. 14. 15. 16. 17. 18.

A D D C C D D A D

19. 20. 21. 22. 23. 24. 25.

A D B C A D D (no outflow)

13. 14. 15. 16.

A B D A (NRFC is subject to final tax. No deduction is allowed.)

Multiple Choice – Problem – Part 1 1. A 2. A (P40K+P250K-P80K) 3. A 4. C (P80K+P70K) 5. B 6. C (P45K/12 X 10) 7. B [(P15K X 2)+ P18K]

8. B (P30K+P12K+P8K+P20K) 9. C (P4.5M/9) 10. A 11. C (P120K+P300K-P140K) 12. D [(P100K/5)+(P90K/3)+(P 20K X ½)]

Multiple Choice – Problem – Part 2 1. A (P600K+P200K) 8. B 2. A 9. A 3. C (P42M-P41.7M) 10. D [(P400K X 7/8)+(P150K 4. B X 1/3)+P80K 5. C +P25K];NOTE: Supplies is 6. B a from prepayment. 7. A (P800K-P500K)

11. C [P400K+(P150K X 1/3)+P80K +P25K] 12. A 13. B 14. B 15. D

Multiple Choice – Problem – Part 3 1. B (The input VAT must be excluded.) 2. D (The VAT is part of supplies expense.) 3. D (The cost of the equipment for a non-VAT taxpayer shall be (P150,000 + P18,000) or P168,000/5 years = P33,600.) 4. D (P5,600 / 5%, note that the 5% is based on the rent expense, exclusive of VAT.) 5. A (Zero. 6. D (P10,000 x 25% surcharge) 7. C 8. B (P27,440 x 2% = P548.8; P27,440 – P548.80 = P26,891.20) 9. C (The supplier is non-VAT, so there is no difference as there is no Input VAT to account for.) 10. B

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--- 2019 INCOME TAXATION SOLUTION MANUAL --CHAPTER 13-A: REGULAR ALLOWABLE ITEMIZED DEDUCTIONS TRUE OR FALSE 1 1. False (non-deductible) 2. True 3. False (no qualification) 4. True 5. False 6. True 7. False 8. True 9. False (as tax expense, basic only) 10. True 11. False 12. False 13. True 14. False 15. True TRUE OR FALSE 2 1. True 2. False 3. False 4. True 5. True 6. True TRUE OR FALSE 3 1. True 2. True 3. True 4. False (tax basis of value given) 5. True 6. True 7. True 8. True Multiple Choice – Theory 1 1. C 2. A 3. A 4. D (D is fringe benefit expense. Mandatory payroll deduction is deduction against compensation.)

7. 8. 9. 10. 11.

True True False True False

9. 10. 11. 12.

True True True False (expensed or capitalized) 13. False (5%) 14. False (fixed by law as 10 years) 15. False

16. 17. 18. 19. 20. 21.

False True True* (not less than) False True False

5. 6. 7. 8. 9. 10.

11. 12. 13. 14. 15.

C A B C C

C C C D C D

Multiple Choice – Theory 2 1. C 2. D 3. A (securities becoming worthless is generally a capital loss) 4. A 5. D Multiple Choice – Problems 1 1. A 2. C (P200K+P50K) 3. D 4. A 5. D 6. B [P400K-(P100K X 33%)] 7. C (P50K+P70K)

12. True (This is recovery of lost profits) 13. True 14. False 15. True

8. 9. 10. 11. 12.

6. 7. 8. 9. 10.

C A A D D

D B A C C [(P400K GI-P300K Bus. Exp.) +P70K-P60K 2014NOLCO]

13. C 14. C [(P500K-P400K)-P70K 2012 NOLCO] 15. C [(P150K/P500K) X P125K]

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Multiple Choice – Problems 2 1. B 2. A 3. D (P32,000/32%)* 4. C (P270K Limit for Malaysia+P175K Income tax paid for Singapore); Note: The foreign tax to be credited is whichever is lower b/n the Limit and the Income tax paid. 5. B [(P500K-P200K)/10+ P 200K CSC] 6. B (P1M – 20%XP1M)

7. C [(P300K/10)+ P400K CSC] 8. C [P400K+(P300K 2015PSC/10)+(P200K 2016PSC/10)] 9. C (P50K Limit for contribution to the Government in NPA +P30K+P100K); The limit is computed as 5% of the P1M NI before contribution expense for corporations.

10. B (P50K+P30K Limit); The limit is computed as (P500K-P200K) x 10% for individuals. 11. B (P400K-P75K) 12. C [(P500K-P200K)-P80K] 13. C (P325K+P220K) 14. C (P2M X 0.5% Limit) 15. B (The limit is P2M x 1% or 20K, since the limit is greater than the actual EAR, the actual is used) 16. C (P15K S + P14K R)

*This is an NIRC question. The grossed-up value inclusive of the monetary value and fringe benefits tax is an expense to the employer.

CHAPTER 13-B: SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS AND NOLCO TRUE OR FALSE 1. False (25%) 2. False (additional 50%) 3. True 4. False (only distribution of income) 5. True 6. True 7. False 8. True 9. False (20%) 10. False (15%)

11. True (deductible amount in total is twice the amount of expense) 12. True 13. True 14. True 15. True 16. False 17. True 18. False 19. True* 20. True (Note: acquirer’s own NOLCO)

*(Both of them however can be carried over so long as both of them did not arise from the same year. In other words the NOLCO occurred earlier than the NCLCO)

Exercise Drills 1. 2. 3. 4. 5. 6. 7. 8.

Deduction incentive 15% of salaries to senior citizen 25% of salaries paid to disabled persons 50% of training expense 50% of the cost of improvement 50% of the contribution 100% of the compliance expense Value of pro-bono services 50% of productivity incentive bonus

Multiple Choice – Problem 1 1. D(P345K X 20%) 2. B (P182K X 15%) 3. B (P144K X 15%) 4. A 5. B [(P900K-P350K-P45K) X 20%] 6. B (P3.5M-P3.2M) 7. B (P4.1M-P2.1M) 8. D [(P3M-P2.4M) X 50%] 9. B (P800K X 20%)

Incentive limit None None None None None None 10% of gross income None

10. 11. 12. 13.

D [(P93,750/75%) X 20%] D (P2.1M X 25%) D (P300K X 50%) A [P900K-P500K-(P500K X 50% Contribution expense)] 14. D [P900K-(P900K X 10%)(P500K X 50% Contribution expense)] 15. D (P300K X 50%)

Multiple Choice – Problem 2 1. B (P2.5M GI-P1M ID-P300K DI) 2. A 3. B (P1.8M GI-P1.2M RID-P800K SID) 4. A 5. B (P400K+P200K+P100K)

6. 7. 8. 9. 10.

16. 17. 18. 19.

C (P350K X 100%) A C (P1M X 100%) B ( P1.4M X 10% Limit )+[(180-60) x 1k Pro bono] 20. B [P8M +P6M) X 10% Limit] 21. D (P800K X 50%) 22. C (P200K X 50%)

A B C (P400K +P200K-P800K) D A 32

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--- 2019 INCOME TAXATION SOLUTION MANUAL --CHAPTER 13-C: OPTIONAL STANDARD DEDUCTIONS TRUE OR FALSE 1. True 2. False 3. False (Note: or gross income) 4. True 5. False 6. False 7. False (when OSD is used, 60% of sales or gross receipts) 8. True 9. True 10. True 11. False

12. 13. 14. 15. 16. 17. 18. 19.

True True False True False False True False (Note that NCLCO is used in the measurement of an item of gross income (i.e. net capital gain) and is not an expense. 20. False

Exercise Drill No. 1 1. RC 2. RA 3. NRC 4. NRA 5. Regular DC 6. Regular RFC 7. Special corporations 8. Corporations under special regimes 9. Business partnership 10. GPP

    

 

Exercise Drill No. 2 1. P2,008,000 (P5,020,000 x 2%) 2. P1,008,000 (P2,520,000 x 2%) Exercise Drill No. 3 Taxpayer 1. Individual 2. Corporation

Cash basis P 3,120,000 1,380,000

Accrual basis P 3,600,000 1,740,000

Exercise Drill No. 4 1. P2,000,000, computed as (P5,000,000 x 40%) 2. P840,000, computed as (P2,000,000 + P100,000) x 40% Multiple Choice – Theory 1 1. A 2. D 3. A 4. B

5. 6. 7. 8.

A D A B

9. D 10. A 11. D

Multiple Choice – Theory 2 1. C 2. A 3. D 4. D 5. C

6. 7. 8. 9. 10.

B D D A C

11. 12. 13. 14.

Multiple Choice – Problem 1 1. D [(P800K+P600K+P300K+P400K) X 40%] 2. A(P2.1M-840K) 3. A 4. D (P600K+P400K+P300K+P150K) 5. B (P400K+P300K+P150K)

6. 7. 8. 9. 10.

D C C A

C [(P3.4M+P120K) X 40%] B [(P3.4M-P1.2M)+P120K+P80K]X40% A (P800K X 40%) B [(P800K+P100K+P20K)X40%] A [(P800K+P200K+P20K)X40%]

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Multiple Choice – Problem 2 1. C [(P7.2M+P100K) X 40%] 2. B [(P7.2M-P4.7M COGS)+P100K+P20K]X 40% 3. B (P200K+P2.5M-P400K) 4. C (P2M X 40%)

5. 6. 7. 8.

A A B (P1M-400K)+P60K C [(P1M-P600K)+60K] X 40%

CHAPTER 14: INDIVIDUAL INCOME TAXATION True or False 1. True 2. True 3. False (some are not subject to FIT) 4. True 5. True Multiple Choice Theory – Part 1 1. A 2. C 3. D 4. A

6. 7. 8. 9. 10. 11.

True True False True True False

12. 13. 14. 15.

True True True False

5. 6. 7. 8.

A B A D

9. 10. 11. 12.

A D B D

Multiple Choice Theory – Part 2 1. C 2. A 3. A 4. A 5. D

6. 7. 8. 9. 10.

C A D C D

11. C

Multiple Choice Theory – Part 3 1. A 2. C 3. C 4. C 5. B 6. A 7. C

8. 9. 10. 11. 12. 13. 14.

A B B D (Errata: B is employers) A D A

15. 16. 17. 18. 19. 20. 21.

C C C C D A D

Multiple Choice – Problems: Part 1 1. A 2. A 3. C 4. B 5. B 6. A

7. 8. 9. 10. 11. 12.

B C C B C D

13. 14. 15. 16. 17.

B D B C C

Multiple Choice – Problems: Part 1 1. C (P180K + P200K + P210K + P250K) 2. C (P280K + P50K + P100K + P25K + P40K) 3. A (P280K + P50K) 4. C (P4M + P800K + P200K; Note: Car usage and the house and lot are subject to fringe benefit tax.) 5. C [(P2.5M/5 X 50%)/65% X 35%] + (P5M/65% X 35%) 6. B (P600K + P20K O. gain – P200K expense – P40K O. loss +10K Net Capital gain); Net capital gain = 80K x 50% + 45K - 90K x 50% 30K.) 7. A (P600K Gross profit - P100K Other deduction - P50K Fully deductible – P50K

Contribution subject to limit); Limit on NANPI contribution = (P600K GP - P100K ODE) x 10% = P50K; lower than P55K actual. 8. B (Taxable income = P455K + P15K. Please use tax table.) 9. C (Taxable income = P700,000; Taxable income per tax table is P105,000. Foreign tax credit limit is P300K/P700K x P105,000 = P45,000. Tax credit is P45,000 since lower than P55,000. 10. A (Only taxpayers subject to tax on global income such as resident citizen is qualified for tax credit for foreign taxes paid.)

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Multiple Choice – Problems: Part 2 1. C (P400K - P15K tardiness 4. D (P617.5K/95% service - P10K SSS - P8K PH - P7K fees - P230K deductible Pag-ibig - P2K Union dues) expense) 2. C (P321K + P59K WH tax) 5. D (Tax due per tax table is 3. B (P30K utilities + P120K P35,000 – P32,500 salaries + P80K rent & withholding tax, computed miscellaneous) as (P617,500/95%) x 5%)

6. D (P617,500/95%) x 8% 7. B (P100K+P15K+P50K+[P3 0K-(P16K/80% X 33%)] 8. A (500K-188400-150KPE)

9. B Salaries expense Depreciation expense Rent and other expense Interest expense (P30K – 33% x P16K/80%) Total deduction

P

P

100,000 15,000 50,000 23,400 188,400

10. B Gross profit from operation Interest income from notes Total gross income subject to regular tax Less: Total deductions Net income

P

P

500,000 12,000 512,000 188,400 323,600

P

800,000

P

11. C Compensation income Less: Non-taxable compensation Taxable compensation income

P

Gross receipts Less: Cost of services Gross profit from operations Other income subject to RIT Total gross income subject to RIT Less: Deductions Net income Taxable income

P 1,800,000 500,000 P 1,300,000 100,000 P 1,400,000 300,000

Tax due of P1.9M per tax table Less: Tax credits WH tax on compensation CWT on gross income Estimated quarterly tax payments Tax still due

820,000 20,000

1,100,000 P 1,900,000

P

P

460,000

P

238,000 222,000

P

800,000

130,000 14,000 94,000

12. B (Errata: The problem seeks tax STILL Due) Compensation income Less: Non-taxable compensation Taxable compensation income

P

820,000 20,000

Gross receipts Less: Cost of services Gross profit from operations Other income subject to RIT Total gross income subject to RIT Less: OSD (P1.8M x 40%) Net income Taxable income

P 1,800,000 P 1,800,000 100,000 P 1,900,000 720,000 1,180,000 P 1,980,000

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Tax due of P1.98M per tax table Less: Tax credits WH tax on compensation CWT on gross income Estimated quarterly tax payments Tax still due

P

P

484,000

P

238,000 246,000

130,000 14,000 94,000

13. A Tax due Compensation income Less: Non-taxable compensation Taxable compensation income

P

Gross receipts Less: Cost of services Gross profit from operations Other income subject to RIT Total receipts and other income Multiply by: Total tax due

P 1,800,000 P 1,800,000 100,000 P 1,900,000 8%

P

820,000 20,000 800,000

P

130,000

P

152,000 282,000

14. C Sales Less: Cost of sales Gross income from operations Add: Other income Share in GPP net income Total gross income subject to RIT Less: Deductions Net income

P 2,500,000 1,000,000 P 1,500,000 200,000 P 1,700,000 700,000 P 1,000,000

Tax due of P1M per tax table

P

190,000

15. C Sales Add: Other income Share in GPP net income Total sales and other income Less: Annual income exemption Total Multiply by: Tax due

P 2,500,000 200,000 P 2,700,000 250,000 P 2,450,000 8% P 196,000

CHAPTER 15-A: CORPORATE INCOME TAX – SPECIAL CORPORATIONS True or False – Part 1 1. True 2. True 3. False (exempt) 4. True 5. True 6. False 7. False 8. True True or False – Part 2 1. False (dominance test) 2. False 3. True 4. False (4.5% of gross income) 5. True

9. 10. 11. 12. 13. 14.

True False False False (Except FCDU) True False (gross Philippine billings)

6. False (Philippine income) 7. False (gross income) 8. False (7.5% of gross income) 9. True 10. True

15. False (world taxable income) 16. False 17. False 18. True 19. False (They are subject to compromise penalty.) 20. True

11. 12. 13. 14. 15.

True True True True False (three years) 36

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--- 2019 INCOME TAXATION SOLUTION MANUAL --True or False – Part 3 1. False 2. True 3. False (wherever billed so long as outgoing) 4. True 5. True

6. 7. 8. 9. 10. 11.

True True False True (the dominance test) False True

12. 13. 14. 15.

True True True False (30% on world taxable income)

Multiple Choice – Theory 1 1. D 2. A 3. A 4. D 5. A

6. 7. 8. 9. 10.

A C D B A

11. 12. 13. 14. 15.

C D D C D

Multiple Choice – Theory 2 1. C 2. C 3. D 4. B 5. C 6. B

7. 8. 9. 10. 11. 12.

D B D C B D

13. 14. 15. 16. 17. 18.

C B A A B C

6. 7. 8. 9. 10.

A (P350K Total TI x 30%) B (P400K PH GI x 2.5%) C (P200K PH TI x 10%) C (P400K PH GI x 25%) A (P400K PH GI x 4.5%)

11. C (P400K PH GI x 7.5%) 12. B (P350K Total TI x 60%)x 30%

Multiple Choices – Case Problems Problem 1: 1. D (P350K Total TI x 30%) 2. A (P200K PH TI x 30%) 3. B (P400K PH GI x 30%) 4. B (P350K Total TI x 10%) 5. D Problem 2: 1. A (P300K Total TI x 30%) 2. C (P300K Related GI x 10%) 3. B (P100K Unrelated TI x 30%) Problem 3: 1. B (P3M FCDU II to other residents x 10%) 2. B (P1.2M RBU NI x 30%) Problem 4: 1. A [(P500K GI-P200K DDP62.5K Allocated CE)x30%] 2. D

3. 4. 5. 6.

D C D C

7. C 8. B (P500K PH GI X30% FT)

Problem 5: 1. D (P1.5M Total NI x 30%) 2. B (P3M Outgoing GR x 2.5%) Problem 6: 1. D [(P1M AUS)+(1K X P750 RUS)+P1.5M JAP]X2.5%; The P750 is computed as P1.5M/2K which is from PH-JAP 2. B [(P1M+P1.25M+P2M+P1.5M)-P3M GE] X 30% Problem 7: 1. C (P4M X 2.5%) 2. C (P4M X 4.5%)

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Problem 8: 1. D [P4M x 60% - P3M x 50%) x 30% tax] Note that the rule on non-profit school is classification not the dominance test. But the same is subject to the Constitutional exemption. If the Constitutional exemption does not apply, the income from unrelated activities would be taxed. 2. A (Everything will be exempt by virtue of Constitutional exemption.) 3. A (P4M x 60% - P3M x 50%) x 30% tax. Only the income from unrelated activities is taxable. 4. C (P4M – P3M) x 30%. Note that the dominance test is failed. 5. D (P4M – P3M) x 30%. Private hospitals are subject to the 30% regular income tax. 6. B (P4M – P3M) x 30%. The dominance test is failed. 7. B. Only the income from unrelated activities is taxable. Problem 9: 1. D (P2M X 10%) Dominant test is passed. 2. D (Same answer. The Constitutional exemption for income actually, directly and exclusively for educational purposes relates to non-profit, non-stock educational institutions.) Integrative Illustration… (You can handle this. Contact me via facebook if you need support.) CHAPTER 15-B: CORPORATE INCOME TAX – REGULAR CORPORATIONS TRUE OR FALSE: Part 1 1. True 2. False (It apply to resident foreign corporations.) 3. True 4. False 5. True 6. True

7. 8. 9. 10. 11.

False (Domestic only.) False True False False (also when RCIT < MCIT) 12. True

13. True 14. False (on total gross income) 15. False (start by 1/1/ 2015)

TRUE OR FALSE: Part 2 1. False 2. True 3. True 4. False (MCIT gross income = OSD gross income) 5. False (cost of goods sold)

6. 7. 8. 9. 10. 11.

True False True True True (See. Chapter 13-C) False

12. False (Third year) 13. False (comparison is made with cumulative balances.) 14. True 15. True

TRUE OR FALSE: Part 3 1. False 2. False (not holding companies) 3. False (if held by more than 20 people, it is closed corporation) 4. True

5. 6. 7. 8. 9. 10. 11.

False (Sec. of Finance) False (domestic only) True True False True True

12. 13. 14. 15.

True True True False (excluding domestic corporation branches)

MULTIPLE CHOICE – Theory: Part 1 1. C 2. C 3. A 4. D 5. D

6. 7. 8. 9. 10.

D C C A B

11. 12. 13. 14. 15.

A C D C D

Multiple Choice – Theory: Part 2 1. B 2. B 3. C 4. A 5. D

6. 7. 8. 9. 10.

D A A D C

11. 12. 13. 14. 15.

A D A B A

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--- 2019 INCOME TAXATION SOLUTION MANUAL --Multiple Choice – Theory: Part 3 1. A 2. A 3. A 4. B 5. A Multiple Choice – Problem: Part 1 1. C [(P1.6M GI + P150K GOS) X 2%] 2. B [(P1.6M+ P150K GOSP1.7M AD) X 30%] 3. C (for 2013 the P120K MCIT; for 2014 the P220K RCIT-P10K 2013Excess MCIT) 4. A (for 2015,the P190K MCIT; for 2016,theP180K RCIT-P180K 2015 Excess MCIT) 5. D 6. D 7. B (P100K NI x 30%) 8. C (MCIT=P2M Total GI x 2% o=P40K; RCIT=P2M Total GI+P250K Interest

6. 7. 8. 9. 10.

D C A D D

11. 12. 13. 14. 15.

on deposit abroad- P2.1M Bus Exp= P45k) C (MCIT=P800K PH GI x 2%= P16K; RCIT=(P800K PH GI-P800K Bus Ecp) x 30%=0) C (MCIT=P7MTotal GI x 2%= P140K; RCIT=100K Within GI x 30%=P30K) D (MCIT=P4M Within GI x 2%=P80K;RCIT=P500Kx3 0%=P150K) A C [MCIT= P7M GI x 2%=P140K; RCIT=(P600K NI-P300K 2013NOLCO)x 30%=P90K)

14. C [MCIT=(P500K GI+P200K RI)x2%=P14K;RCIT=(P50 0K GI+P200K RI-P820K BE) x30%=0] 15. D [MCIT=(P1M GI+P200K RI)x2%=P24K; RCIT=(P1M GI +P200K RIP850K BE-P120K NOLCO)x30%=P69K; Tax Due=P69K-P14K 2013MCIT=P55K] 16. B (P8M x 2% MCIT) is greater than the RCIT. 17. D (Net income is P8M x 60% x 30% tax rate.)

8. D (P230K RCIT-P40K 2013MCIT-P50K 2014MCIT-P10K 2015MCIT) 9. A (P1.6M RCIT-P180K MCIT of PY-P120K Excess CWT of PY-P220K CWT of Current Quarter-P250K CWT of Previous QuarterP430K Income tax payment of Previous Quarter) 10. B (P3M RCIT-P180K MCIT of PY-P120K Excess CWT of PY-P260K CWT of Current Quarter-P810K CWT of Previous QuarterP1.47M Income tax payment of previous Quarter) 11. B [(P4M-3.2M)x70% +40K+60K-400K+500K400K] x 10%

12. B [(4M-3.8M)+600K NOLCO+240K+120K-600K Dividend-80K MCIT] x 10% 13. A [(P1.2M – P380K higher MCIT +400K+100K -700K dividends – P400K Approp. – P50K excess paid-up) x 10% 14. C 15. C 16. B (Tax due = MCIT (P6M+100K) x 2% - P5K CWT – P45K est. tax payments) 17. C (P6M – P5M+100K – 122K + 160K + 800K 700K) + P1.8M – P2.0M = P103,800.

9.

10.

11.

12. 13.

D B C B A

Multiple Choice – Problem: Part 2 1. C (P970K RCIT-P70K 2014MCIT-P130K 2015MCIT-P120K CWT of Current Quarter-P150 CWT of Previous QuarterP350K Income Tax payment of Previous Quarter) 2. D (P2150K RCIT- P160K CWT of Current QuarterP410 CWT of Previous Quarter-P880K Income Tax payment of Previous Quarter) 3. A 4. D (P105K RCIT-P80K 2012 MCIT- P25K 2013MCIT) 5. B (P140K-P45K 2013 MCIT-P20K 2014MCIT) 6. B (P100K-P35K 2013 MCIT) 7. C (P60K RCIT-P150K CWT-P5K-P10K)

18. D (P6M – P4M – P1.5M approp.) x 10%

Integrative Illustration (You can handle this. Contact me via facebook if you need support.)

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