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
. !ncome tax paid by a resident citi"en to foreign country
#. $esearch and development costs
%. &nused materials and supplies
'. (onation for coffin and wa)e expenses
*. +anager,s expense account sub-ected to fringe benefit tax
.. Cost of technical boo)s used by a cpa in the practice of his profession
1/. 0ax withheld by corporation from its employee,s salary
11. 1ic)bac) payment to the government official
12. 0uition fees2 board and lodging incurred by a medical doctor while attending a
continuing professional education seminar.
13. Overtime pay paid to ran)3and3file employee.
1. 4ringe benefits paid to an officer of the company.
1#. (istribution of profits to partners.
1%. Cash dividends paid.
1'. (onations made to employee,s birthday party.
1*. 5mounts paid for pensions of retired employees.
1.. 6alary of employee paid for limited period after his death to his widow.
2/. 7ntire amount expensed for meals. 8odging2 and travel in connection with own
business.
Problem 8 2 True or False
9rite true if the statement is correct or false if the statement is incorrect.
1. (eductions from gross income are not presumed.
2. $evenue expenditures are immediately expensed.
3. :usiness expenses are deductible only if they are incurred in relation to business
income taxable in the Philippines.
. No business and personal expenses are allowed as deductions from gross
income.
#. 5s a rule2 deductions means itemi"ed 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.
*. 5ll business expenses are allowable deductions from gross business income.
.. :usiness and professional income derived within and outside the Philippines by a
non resident 4ilipino Citi"en are granted with allowable deductions.
1/. !ndividual tax payers may apply for itemi"ed deductions or optional standard
deduction.
11. !ndividual taxpayers earning a salary compensation income may deduct optional
standard deduction from their gross compensation income.
12. NO8CO is an itemi"ed deduction.
13. 5 bonus paid to secure a lease is deductible on pro ; rata basis over the term of
the lease.
1. 5 representation expense is sub-ect to limit of 1< of net sales of goods.
1#. 5 corporation with interest expense and at the same time earned interest income
will be sub-ect to a tax arbitrage of 3*<.
1%. 6traight ; line method of depreciation provides the best tax savings over other
depreciation methods.
1'. 5dopting private entities of public schools through 076(5 can get 1#/< of the
actual assistance made.
1*. Corporations are allowed to deduct optional standard deduction.
Problem 8 3 Multiple Choice
6elect the letter that contains the best answer.
1. 9hich of the following statement is not correct=
a. personal expenses are not allowed as deductions from compensation 2
profession2 trade or business income.
b. Personal expenses are not allowed as deductions from profession2 trade
or business income except compensation income.
c. Personal exemption and additional exemption are allowed as deduction
from compenasation income.
d. 5ll of the above
2. 0o compute for optional standard deduction2 a taxpayer should multiply 1/< of
the
a. net income
b. gross income before itemi"ed deductions
c. gross income after expenses
d. all of the above.
3. 9hich 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 hospitali"ation insurance
. 9hich of the following is not allowed as deductible in full from gross income=
a. 7ntire amount expended for meals2 lodging2 and travel in connection with
own business.
b. 0uition fees2 board and lodging incurred by amedical doctor while
attending acontinuing professional education seminar.
c. Costs of technical boo)s used by a CP5 in the practice of his profession.
#. 9hich of the following is not allowed as deductible in full from gross income=
a. !nterest expense paid by the ban).
b. !nterest expense paid by the taxpayer in relation to the purchase of
merchandise by installment.
c. !nterest expense paid to the relative of the taxpayer.
d. !nterest expense with reported interest income.
%. 0he following taxes are not allowed as deductions from gross income2 except
a. (ocumentary stamp tax. c. percentage tax.
b. 6pecial assessment tax. d. value added tax.
'. 9hich of the following is classified as deductible loss=
a. 5llowance for bad debts. C. depreciation.
b. 7mbe""lement. (. all of the above.
*. 0he following are re>uisites of depreciation expense to be deducted from the
gross income.
a. !t must be reasonable and charged off during the year.
b. !t must be used in business2 profession or trade.
c. 0he asset sub-ect to depreciation must have a limited life.
d. 5ll of the above.
.. 9hich of the following income is to be reduced by itemi"ed deductions=
a. compensation income
b. business income
c. passive income
d. capital gain
1/. 6tatement 1? the taxpayer has the burden of -ustifying the allowance of any
deduction claimed.
6tatement 2? deductions are strictly construed against the taxpayer.
a. Only statement 1 is correct.
b. Only statement 2 is correct.
c. :oth statements are correct.
d. :oth statements are not correct.
11. 6tatement 1 ? revenue expenditures are period costs that are related to a
particular period of time of business operation.
6tatement 2? capital expenditures are non ; recurring expenditures related to
ac>uisition of depreciable assets to be used in the business.
a. only statement 1 is correct.
b. Only statement 2 is correct.
c. :oth statements are correct
d. :oth statements are incorrect.
12. 9hich 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. (onation made to employees.
c. 8osses incurred on transaction wiyh related party.
d. $egular repairs of business property.
13. 6tatement 1? in preparing financial statements2 @55P should prevail over the 0ax
Code.
6tatement 2? in preparing tax returns2 tax code should prevail over @55P.
a. only statement 1 is correct.
b. Only statement 2 is correct.
c. :oth statements are correct.
d. :oth statements are incorrect
Problem 8 -4 Multiple choice
6elect the letter that contains the best answer.
1. 6tatement 1? compensation income is reduced by personal exemption.
6tatement 2? business income is reduced by business expenses2 and by excess
of personal exemption over compensation income.
a. Only statement is correct.
b. Only statement is correct.
c. :oth statements are correct.
d. :oth statements are incorrect.
2. 6tatement 1? an individual taxpayer could claim both the itemi"ed deduction and
personal exemption in the same taxable year.
6tatement 2? an individual single proprietorship could claim both the itemi"ed
deduction and optional standard deduction in the same taxable year.
a. Only statement 1 is correct.
b. Only statement 2 is correct.
c. :oth statements are correct.
d. :oth statements are incorrect.
3. 9hich of the following is allowed with optional standard deductions=
5. Non resident alien doing business in the Philippines.
:. $esident citi"en whose taxable income is his compensation
earned.
C. Non resident citi"en claiming itemi"ed deductions from his
business income.
(. $esident alien with business income earned within and outside
the Philippines.
. 6tatement 1? unless the taxpayer signified in his return that he is electing the
standard deduction2 he is deemed to have availed of the itemi"ed allowable of
deductions.
6tatement 2? in case of consolidated income tax return of husband and wife2
each is allowed to choose from either optional or itemi"ed deductions.
a. :oth statements are correct.
b. Only statement 1 is correct.
c. Only statement 2 is correct.
d. :oth statements are incorrect.
#. 6tatement 1? self employed taxpayer is re>uired to file his >uarterly income tax
return.
6tatement 2? the option ton avail of optional or itemi"ed deduction could be
opted for each >uarter.
a. :oth statements are correct.
b. Only statement 1 is correct.
c. Only statement 2 is correct.
d. :oth statements are incorrect.
%. 6tatement 1? insurance expense incurred in connection with the conduct of
business is allowable deduction.
6tatement 2? insurance premium incurred to cover the life of )ey employee where
the employer is the beneficiary could be allowed as deduction.
a. both statements are correct
b. Only statement 1 is correct.
c. Only statement 2 is correct.
d. :oth statements are incorrect
'. 9hich of the following the correct allowable entertainment expense=
a. Not more than A < of revenue from services.
b. Not more than 1< net sale of goods.
c. Not more than 1 A< of revenue from services.
d. Not more than 1 A < of net sales of goods.
*. 6tatement 1? as a general rule2 if the taxpayer is in cash basis of accounting2
prepaid interest is allowed as deduction in the year tha principal is fully paid.
6tatement 2? prepaid interest made by service business is deductible in the year
when the interest is paid.
a. both statements are correct.
b. Only statement no. 1 is correct.
c. Only statement no. 2 is correct.
d. :oth statements are incorrect.
.. 9hich of the following statements is not correct=
a. $esident citi"en and (omestic Corporation are allowed to claim foreign
income tax as deduction from their business income.
b. 4oreign income tax paid by resident citi"en could be claimed as deductible
from his income tax.
c. 4oreign income tax paid by (omestic Corporation could be claimed as tax
credit deductible from its income tax.
d. 0he tax payer will benefit more if the foreign income tax is claimed as
deduction rather than as tax credit.
1/. 6tatement 1? the amount of deductible taxes is limited to the basic tax and shall
not include thae amount for any surcharges or penalty.
6tatement 2? interest on delin>uent taxes is deductible from gross income in full
amount.
a. both statements are correct.
b. Only statement 1 is correct.
c. Only statement 2 is correct.
d. :oth statements are incorrect
Problem 8 - Multiple choice
6elect the letter that contains the best answer.
1. 6tatement 1? gains arising from transactions between related taxpayers are
taxable.
6tatement 2? losses incurred from transactions between members of the family
are not deductible from business income.
a. :oth statements are correct.
b. Only statement 1 is correct.
c. Only statement 2 is correct.
d. :oth statements are incorrect.
2. 9hich of the following statement is incorrect=
a. 5ctual bad debts incurred in connection with the conduct of business are
allowed as deduction.
b. 7stimated bad debts based on account receivable balance iss deductible.
c. :ad debts written off are deductible in the year when the allowance based
on estimate was made.
d. :ad debts arising from unpaid salaries that are actually written off are
deductible in the year of write off.
3. 9hich of the following statements is not correct=
a. (epreciation of assets used in business is allowed as deduction from
business income.
b. (epreciation as a recovery of capital invested should not be beyond the
ac>uisition cost.
c. (epreciation should be determined on the basis of re ; appraised value if
revaluation is made.
d. 6traight ; line method2 6B(2 and declining balance methods of
depreciation are all allowed for claiming depreciation expense.
. 9hich of the following statements is correct=
a. 0he employer ma)ing the contribution manages defined contribution plan.
b. 0he actual payment of benefit to employee is the expense of the employer
under thw defined contribution plan.
c. &nder the defined benefit plan2 the employer ma)es the actual payment of
benefits to employees.
d. &nder the defined contriution plan2 the amount of contribution is e>ual to
the actual payment of the benefits due to thr etiring employee.
#. 9hich of the following is not a re>uisite for the deductible contributions=
a. !t must be incurred in connection with the conduct of business.
b. 0he taxpayer ma)ing contribution must be engage in business or
profession.
c. 0here must be actual payment of contribution or
d. 0he recipient of the contribution is an entity speciali"ed by law.
%. 6tatement 1? the optional standard deduction is allowed to all individual
taxpayers earning business income.
6tatement 2? the optional standard deduction is 1/< of gross business income.
a. only statement 1 is correct.
b. Only statement 2 is correct.
c. :oth statements are correct.
d. :oth statements are not correct.
'. 6tatement 1? husband and wife should report their income and expenses in the
same or common tax return.
6tatement 2? husband may choose itemi"ed deduction while the wife may
choose optional standard deduction or vice versa.
a. only statement 1 is correct.
b. Only statement 2 is correct.
c. :oth statements are correct.
d. :oth statements are not correct.
*. 6tatement 1? deductible business expenses must be ordinary and necessary.
6tatement 2? expenses from previous period which were not deducted from
previous period,s income could be deducted from income in the current period.
a. Only statement 1 is correct.
b. Only statement 2 is correct.
c. :oth statements are correct.
d. :oth statements re not correct.
.. 9hich of the following expenses incurred in relation to conduct of business could
be deducted in full2 if the net sales is P12///2///=
i. salaries of employees2 net of withholding tax
ii. P%/2 /// rent expense
iii. P#/2 /// traveling expense
iv. P1/2 /// entertainment expenses
Choices?
a. !2 ii2 iii and iv
b. !2 ii2 and iii only
c. ! and ii only
d. ! only
1/. 0he interest expense allowed as deduction for individual taxpayer must be.
a. 1//< of actual amount even when interest income for the same taxable
year is very minimal
b. 3*< of the actual amount of interest income earned the same taxable
year
c. %2< of the actual amount of interest expense or interest income which are
e>ual to each other
d. 1//< of the actual interest expense if the interest expense is lower than
the interest income for the same year
Problem 8-! Multiple Choice
"elect the letter that contains the best ans#er$
1. 9hich of the following interest expense is deductible in full=
a. !nterest on tax delin>uency
b. !nterest on personal loan
c. !nterest expense which is 2//< of the interest income for the same year.
d. !nterest paid in advance.
2. 9hich of the following taxes incurred in the conduct of business is allowed as
deduction from business income=
a. !ncome 0ax c. 7xcise tax
b. C50 d. (onor,s tax
3. 9hich of the following taxes incurred in the conduct of business is not allowed as
deduction from business income=
a. 4oreign income tax claimed as tax credit c. !mport duties
b. (ocumentary stamp tax d. 8ocal business taxes
. 9hich of the following is deductible as bad debts=
a. :ad depts. 9hich is estimated at1< of net sale=
b. :ad depts based on allowance of 1< of accounts receivable
c. 5ccount receivable written off
d. 5ccount receivable recovered
#. 9hich of the following will be deductible expense for the exhaustion of intangible
asset of wasting asset corporation=
a. (epreciation expense c. (epletion expense
b. 5morti"ation expense d. 7xploration expense
%. 6tatement 1? &nder the defined contribution plan2 the pension expense of the
employer is e>ual to the agreed amount of period contribution.
6tatement 2? &nder the defined benefit plan2 the pension expense of the employer is
e>ual to the pension liability for the current year services plus the amorti"ation of past
year,s services.
a. Only statement 1 is correct.
b. Only statement 2 is correct.
c. :oth statement are correct
d. :oth statement are not correct.
'. 6tatement 1? 0he charitable contribution must be connected in the conduct of
business to be allowed as deduction.
6tatement 2? 0he 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. :oth statements are correct
d. :oth statement are not correct.
*. !f the contribution is sub-ect to limit2 the allowable amount as deduction should be
a. #< of the business income after itemi"ed deduction and contribution of individual
taxpayer.
b. 1/< of the business income after itemi"ed deduction and contribution of
individual taxpayer.
c. #< of the business income after itemi"ed deduction but before contribution of
corporate taxpayer.
d. 1/< of the business income after itemi"ed deduction and contribution
.. 0he amount allowed as deduction for assistance directly and exclusively incurred for
the program coordinated with (7C6 is
a. #/< of the actual value of the assistance.
b. 1//< of the actual value of the assistance.
c. 1#/< of the actual value of the assistance.
d. 2//< of the actual value of the assistance.
1/. 6tatement 1? $esearch 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. :oth statements are correct
d. :oth statement are not correct.
11. 9hich of the following statement is correct=
a. 5ll contribution of person engaged in business are deductible.D
b. 5ll deductible contributions are deductible at their actual amount contributed.
c. Contributions to the government for priority program are deductible only up to
1/< if being claimed by single proprietorship.
d. Contributions by domestic corporation to government for general purposes is
sub-ect to limit of #< of income after itemi"ed deductions before contribution.
12. 6tatement 1? $esearch and development cost is to reported as deferred expense.
6tatement 2? research and development cost could be charged property sub-ect to
depreciation or depletion.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. :oth statements are correct
d. :oth statement are not correct.
Problem 8-% &e'enue 's$ Capital ()penditures
5:C +anufacturing incurred additional expenditures of P13/2/// for its business fixed
assets2 as follows?
Change of motor P%/2///
$epainting of building P1/2///
7xpansion of store #/2///
Cleaning of computers .2///
$epair of furniture 12///
0he amounts to be immediately expensed and capitali"ed are?
7xpensed Capitali"ed
a.
b.
c.
d.
P ; / ;
P1/2///
P2/2///
P%/2///
P13/2///
P12/2///
P11/2///
P'/2///
Problem 8 8 Deductible *usiness ()pense
5 local business firm paid P1//2/// salaries net of P#2/// with withholding tax. Eow
much is the deductible business expense from business income=
a. P1/#2/// c. P .#2///
b. P1//2/// d. P#2///
Problem 8 + Deduction ,rom Compensation
s. a resident citi"en2 earned and paid the following expenses for the taxable year?
Compensation as a supervisor P 2#/2///
$ent expense %/2///
Eouse help 3/2///
$epairs expense #2///
4rom the above expenses2 how much is the allowed deduction from 6 compensation=
a. P ; / ; c. P%#2///
b. P%/2/// d. P./2///
Problem 8-1- Deduction ,rom *usiness .ncome
+r. :ago incurred the following expenses and losses during the year?
4amily expenses P 2/2///
Cost of family hone2 life 2# years F/< used in businessG 121//2///
8ife insurance expense of his maid2 the beneficiary is +r. :ago 1/2///
8oss from sale of land to his brother 1//2///
Police protection 122///
8oss of business e>uipment reported to the :!$ 3*2///
0he deductible expenses and losses from +r. :ago,s business income is?
a. P 1%2/// c. P%/2///
b. P1#2/// d. P#2///
Problem 8-11 Deduction ,rom /ross .ncome
+r. 5po 8inar2 married2 wor)s as a supervisor of @olden Construction receiving
P2/2/// as hi s annual gross compensation income. Ee maintains a small consulting
firm that earned P12/2/// a year. Ee incurred the following expenses during the year?
Premium payments of his life insurance P 2#2///
(epreciation of his house F1/< is used as office for his firmG 2/2///
$epair of his house 1//2///
!nterest expense paid to his brother 1/2///
Office supplies used %2///
(onation to the burial of his friend #2///
1. 4rom the items above2 how much is the total deduction form gross compensation
income of 8inar=
a. P ; / ; c. P2/2///
b. P 1*2/// d.P2#2///
2. 4rom the items above2 how much is the total deduction from gross income from
professional of 8inar=
a. P ; / ; c. P2/2///
b. P 1*2/// d.P2#2///
Problem 8 12 Ta) 0a#s 's$ /11P
(uring the year2 5 Co. reported the following business expenses?
6alary expense2 net of withholding tax of P2/2/// P1*/2///
7stimated uncollectible accounts 1/2///
Compromise penalty expense #/2///
(epreciation expense 3/2///
+iscellaneous expense #2///
0he miscellaneous expense was incurred but not reported last year.
0he deductible expense from a company,s earnings would be?
0ax 8aws @55P
a
.
b
.
c.
d
.
P2/#2///
P23/2///
P2#/2///
P2*/2///
P2/#2///
P2.#2///
P2./2///
P2.#2///
Problem 8 13 2"D 3&$1$+-44
5 single proprietorship has a gross receipts of P#//2/// from ordinary transactions2
capital gains of P12/2/// from sale of car and interest income of P2///2 net of final
tax of 2/<. 0he optional standard deduction is?
a. P 2#/2// c. P2//2///
b. P 2*2/// d.P1#/2///
Problem 8 14 2"D 3&$1$ +-44
Cost of sales P 3*/2///
Operating expenses 2/2///
@ains from sale of capital asset ; sub-ect to normal tax /2///
1. 0he optional standard deduction of 5 Co. amounts to
a. P ./2// c. P3%/2///
b. P 2/*2/// d.P2//2///
2. 0he net amount of income that would en-oy tax savings would be?
a. P 3%/2// c. P1*/2///
b. P 2/*2/// d.P1'22///
Problem s 8 1 2"D 3&$1$ +-44
+r. 8ito Pusalang provides the following data?
@ross receipts from profession P1//2///
$ent income2 net of withholding tax of #< #/2///
!nterest income from +etro :an) /2///
(ividend income 6an +iguel Corporation 1/2///
Operating expenses without receipts /2///
Compensation income 2/2///
Eow much is the optional standard deduction=
a. P 31%2/// c. P23%2///
b. P 2/2/// d.P22/2///
Problem 8 1! .temi5ed Deductions
6ales P2/2///2///
Cost of sales 1%2///2///
Operating expenses2 inclusive of representation expense
amounting to P3//2/// with proper documentations 22///2///
0he amount of allowable itemi"ed deductions is?
a. P 22///2/// c. P12'//2///
b. P 12*//2/// d.P//2///
Problem 8 1% .temi5ed Deductions
Pasarado Corporation shows the following data during the taxable year
6ales P#//2///
!nterest income2 net of 2/< final tax 22///
Cost of sales 3//2///
6alary expense 12/2///
!nterest expense %/2///
$ent expense 22///
5dvertising expense P %2///
(epreciation expense #2///
NO8CO #/2///
Eow much is the amount of itemi"ed deduction=
a. P 2/22// c. P2#22//
b. P 2/#21// d.P//2///
Problem 8 18 "alar6 ()pense
Phoenix Corporation paid the following salaries and fringe benefits to its officers and
employees for 2//:?
@ross salaries2 employees
8ess? 9ithholding income tax
666 premium
5dvances
Net amount of payment
@rossed3up fringe benefits for officers
8ess? 4inal tax paid on fringe benefit paymentH
FP%*/2///I%*<G x 32<
0otal cash payment for salaries and fringe
benefits
P //2///
2//2///
1//2///
P12///2///
32/2///
P%2///2///
'//2///
P#2.*/2///
*/2///
P#2*./2///
H0he P32/2/// final tax on fringe benefits shall be payable to the :!$ not to the
employee.
0he total amount of allowable salary and fringe benefits expenses that could be claimed
by Phoenix Corporation would be
a. P '2///2/// c. P#2.*/2///
b. P %2///21// d.P#23//2///
Problem 8 1+ Frin7e *ene,its ()pense
Eow much is the allowable deduction from business income of a domestic corporation
which granted and paid P1/22/// cash fringe benefits to its )ey officers in 2//:=
a. P %'232/ c. P1//2///
b. P ..2/// d.P1#/2///
Problem 8 2- Deductible *onus
!n 2//:2 a domestic corporation2 using the calendar period2 had a net income of
P'#2/// after deducting in full charitable contribution of P#2/// which is sub-ect to
limitation but before deducting bonus given to )ey officials and basic income tax. :onus
is 1#< of the income after the basic income tax. 9hat is the amount of deductible
bonus=
a. P '2/// c. P'2'#2
b. P '2/%' d.P*213
Problem 8 21 Compensation ,or .n8uries and Pensions
9hile wor)ing. 52 one of the J Construction Co,s2 wor)ers2 died by falling from the 1/
th

floor of the building. 0he company helped the wor)er,s family with the following?
+onthly 6alary P #2///
(eath benefits #/2///
0erminal pay 2#2///
4uneral expense 1/2///
Continuous compensation after the burial three months 1#2///
Eow much is the total deductible expenses
a. P 1/#2/// c. P./2///
b. P .#2/// d.P*/2///
Problem 8 22 Materials and "upplies
C Co. reported the following data regarding its materials and supplies?
:eginning inventory
Purchases
!ncreased FdecreaseG in inventory
+aterials
P1//2///
3//2///
F 2/2/// G
6upplies
P2/2///
/2///
32///
Eow much is the amount of inventoriable cost and supplies expense=
a.
b.
c.
d.
6upplies expnse
P//2///
P3*/2///
P32/2///
P3//2///
!nventoriable cost
P%32///
P%/2///
P3'2///
P/2///
Problem 8 23 Tra'elin7 ()penses
5 Corporation incurs the following travel expenses?
1. Plane tic)ets and hotel bills of its officers who were sent to business seminars?
!n (avao P #/2///
!n 0aiwan 2//2///
2. 0ransportation expenses of its officers from home to office and vice versa as part of
their employment contract2 P%*2/// from which final tax P322/// was remitted.
0ransportation expenses of messengers from office to several clients, place at P/2///2
inclusive of meals amounting to P2#2///.
Eow much is the total allowable expense that could be claimed by 5 Corporation=
a. P2#/2/// c. P3#/2///
b. P31*2/// d. P3./2///
Problem 8 24 &ent ()pense
0he business reports its income on accrual basis. 5t the end of the year2 total rent
expenses paid P1#/2///2 inclusive of P1/2/// rent last year and P2/2/// for the next
year,s first two months.
0he deductible rent expense is?
a. P1#/2/// c. P13/2///
b. P1/2/// d. P12/2///
Problem 8 2 &ent ()pense
On October 212 2//:2 5 ac>uired a contract of least with 0abora :uilders regarding a
space with the stipulations that 7 should be responsible in paying the following?
+onthly rent
6hare in annual insurance premium
6hare in annual real property tax
6hare in annual city services
P2/2///
32///
12#//
22///
!f a uses %/< of the space for business and the remaining /< for residence2 how
much is the deductible rent expense to be reported by 5 for the year ending (ecember
312 2//:=
a. P*2#// c. P22#/
b.P2'#/ d. P2%2'//
Problem 8 2! Prepaid &ent
On Kune 3/2 2//:2 @ rents an apartment for P2/2/// a month with an advanced
payment for 3 months and subse>uently sublease */< of the apartment to CP5
reviewees for P2#2/// a month beginning Kuly 312 2//:.
@,s records show the following rental collections and payments during the year?
0otal payments P */2///
0otal collections 1#/2///
1. Eow much is the deductible rent expense for the year=
a.
b.
c.
d.
5ccrual basis
P12/2///
P.%2///
P*/2///
P1/2///
Cash basis
P*/2///
P%2///
P1//2///
P12/2///
2. Eow much is the reportable rent income for the year=
a.
b.
c.
d.
5ccrual basis
P1#/2///
P12#2///
P12/2///
P1//2///
Cash basis
P1#32///
P1#/2///
P1//2///
P12/2///
Problem 8 2% 0easehold .mpro'ement
$ signed a *3year lease contract to occupy a vacant lot for P22/// a month. 5s a part
of the lease agreement. $ constructed a restaurant building costing P%//2///. 0he
building has an estimated life of 1/ years. 5t the end of the lease contract2 the landlord
will own the building.
0he monthly deductible expense from the above contract would be?
a. P22/// c. P'2///
b. P%22#/ d. P*22#/
Problem 8 28 &epresentation ()pense
5 business reported a total net sales of P#2///2///. 0he actual entertainment and
representation expenses incurred in connection with the conduct of business amounted
to P3/2///.
1. !f the business is a trading business2 the deductible amount of representation and
entertainment expenses is?
a. P#2/// c. P3/2///
b. d.
2. !f the business is a service business2 the deductible amount of representation and
entertainment expenses is?
a. P#2/// c. P3/2///
b. P2#2/// d. P#/2///
Problem 8 2+ &epresentation ()pense
0he following data are available from the boo)s of Carwash Company?
@ross receipts
Cost of service
Operating expense2 excluding representation
expense
$epresentation expense
P3//2///
12/2///
*/2///
2/2///
Eow much is the total operating expense deductible from gross income=
a. P1//2/// c.P*12*//
b. P*32/// d. P*/2.//
Problem 8 3- .nterest ()pense
5 corporation earned income2 inclusive of P#/2/// interest income and net of interest
expense of P/2///2 amounting to P12#//2///.
0he deductible interest expense would be?
a. P1.2/// c. P232///
b. P1%2*// d. P ; / ;
Problem 8 31 .nterest ()pense
9hat would be the amount allowed as a deduction for P#/2/// interest expense
incurred for short3term loan ac>uired from a ban)2 which proceed was used for
business= 0he business has P3/2/// interest income earned during that year.
a.
b.
c.
d.
6ole Proprietor
P#/2///
P3*2%//
P3'2//
P3*2%//
Corporation
P#/2///
P3'2//
P312//
P/21//
Problem 8 32 Deductible 's$ Nondeductible .nterest ()pense
+r. 0ee2 a reporting in cash basis2 showed the following interest expense related to his
business during the year.
!nterest paid in advance
!nterest paid to a brother
!nterest paid on delin>uency taxes
!nterest on borrowings to finance his family
home
!nterest paid to finance petroleum exploration
P2/2///
122///
*2///
3/2///
1//2///
!f +r. 0ee has an interest income of P1/2/// earned from the ban)2 how much is the
deductible and nondeductible interest expense during the year=
a. P2*2/// c. P122///
b. P*2/// d. P1%22///
Problem 8 33 Ta) 1rbitra7e
5-oy Co.2 a domestic corporation2 has average annual business income of P12///2///
and the annual average allowed operating expenses of P#//2///. !t has ac>uired a loan
of P12///2/// with interest expense of 1/< per year2 and invest the same in time
deposit that earns 12< interest income per year.
!f there is no limitation on the deductibility of interest expense2 how much is the tax
savings of 5-oy=
a. P%2/// c. P122///
b. P3/2/// d. P112///
Problem 8 34 Ta) ()penses
Care Corporation incurred the following taxes during the taxable year.
(ocumentary stamp taxes
!ncome taxes paid in favor of )ey officers Fas fringe benefitG
!ncome taxes paid in favor of ran) in file employees Fas fringe
benefitG
8ocal taxes2 including surcharge of P*// and interest of P2//
Philippine income tax
+unicipal tax
Calue3added tax
Compromise penalty on taxes
P 12///
132%//
222//
%2///
1//2///
22///
12#//
./2///
0he amount of taxes deductible from gross income of Care Corporation would be?
a. P.2#// c. P%2#//
b. P2*2#// d. P#12.//
Problem 8-3 Ta) Credit Paid to Forei7n Countr6
:along is a resident citi"en with earnings within and outside the Philippines. Eis
financial records show the following during the taxable year.
:usiness income within and without P#2/2///
:usiness expenses within and without 2//2///
0he business expense includes P1/2/// representing income tax payment made in
foreign country. !f his personal exemption is P#/2///2 how much is the correct taxable
income to avail better tax savings=
a. P32/2/// c. P3//2///
b. P31/2/// d. P2*/2///
Problem 8 3! *ad debt ()pense
4ran Corporation has P1//2/// collectibles from Oliva who became insolvent with the
P%/2/// assets and P2//2/// liabilities of which #/< is an income tax liability.
Eow much is the deductible bad debts of 4ran Corporation=
a. P1//2/// c. P3/2///
b. P1/2/// d. P1#2///
Problem 8 3% *ad debt ()pense
+r. 6o reports the following bad debts as deductions from his gross income for the year
2//:?
:ad debts expense from business
:ad debts expense from practice of profession
&ncollectible salary
&ncollectible money lend to brother for operation
0otal bad debts claimed
P2//2///
#/2///
2/2///
1/2///
P2*/2///
&pon investigation2 the following are gathered from the records of +r. 6o?
1. :ad debts from business?
4rom insolvent customer with solvent guarantor P1//2///
4rom other customers without guarantor F%/< are estimated
and /< are actually written off during the yearG 1//2///
Total P2--9---

2. 1//< of bad debts from profession are actually written off during the year
3. &ncollectible salary was due to employer,s ban)ruptcy.
. :rother died from operation and could not pay anymore.
Eow much is the deductible bad debts deduction of +r. 6o=
a. P#/2/// c. P2//2///
b. P./2/// d.P2#/2///
Problem 8 38 Depreciation ()pense
On Kune 3/2 2//:2 the business ac>uired an e>uipment for P#/2///. 0his is
depreciated over # years serviceable life with a salvage value of P#2///.
0he depreciation expense for 2//: is
a. P1/2/// c. P#2///
b. P.2/// d. P2#//
Problem 8 3+ Depreciation e)pense
!n Kanuary 12 2//:2 0op @un !nc.2 leased a portion of commercial lot owned by Nevada
Co. for 12 year for a monthly rent of P1/2///. 0he lessee constructed a building
improvement amounting to P223//2/// which was completed on Kuly 12 2//:. 0he
building has an estimated life of 2/ years. 0he building improvement was eventually
used in the business on October 12 2//:.
0he 2//: depreciation expense of 0op @un is
a. P1//2/// c. P2//2///
b. P1.1.''% d. P2/2
Problem 8 4- Properties :sed in Petroleum 2perations
Lamba Oils fixed assets are as follows?
Oil extracting machine
Computers FofficeG
(elivery truc)
7stimated useful
life
2/ years
years
1/ years
5c>uisition cost
.//2///
1//2///
2//2///
!f all depreciation assets can have a salvage value of 1/<2 how much is the annual
depreciation=
a. P2'/2/// c. P23#2///
b. P2#/2/// d. P22.2#//
Problem 8 41 Depletion ()pense
@old Ore ac>uired a mining property for P%2///2/// believed to have an estimated gold
ore deposit of #2///2ooo tons. !t is estimated that the property has a salvage value of
P12///2/// after P3//2/// restoration cost.
!f @old Ore was able to produce *//2/// tons of gold ore2 how much is the deductible
depletion expense=
a. P'#22/// c. P**2///
b. P*//2/// d. P.%/2///
Problem 8 42 ()ploration and De'elopment ()penditures
:enguet +ining Co. reported the following data for 2//x?
Kanuary 12 2//x depletable cost
Kanuary 12 2//x probable reserves
Cost and 7xpenses?
+ining costs
+illing costs
+ar)eting expenses
(epreciation expense
7xploration costs
!ntangible development costs
P 122#//2///
32///2///
P22///2///
32///2///
12#//2///
12///2///
12///2///
12#//2///
Other information during 2//x?
a. 5dditional probable reserves were determined to be 22#//2/// units
b. 5ctual production was 122//2/// units
c. 6elling price per unit is P12
1. 0he new depletion rate if the additional exploration and development costs will be
part of the ad-ustment on depletion rate would be
a. P3.// c. P2.3*
b. P2.#/ d.P2.//
2. 0he depletion cost for year 2//x using assumption 1 is
a. P22//2/// c. P32///2///
b. P22*#%2/// d. P32%//2///
3. !f the additional exploration and development cost are to be treated as direct
deduction from the taxable income2 how much would be the allowable amount for
2//x=
a. P22#//2/// c. P12///2///
b. P12'2#2/// c. P%/#2///
. 0a)ing option 22 direct deduction from gross income2 what amount of exploration
and development costs would be charged to succeeding years=
a. P%2#2/// c. P12///2///
b. P''#2/// d. P22#//2///
Problem 8 43 Capital ()penses o, (ducational .nstitution
!n 2//x. :enguet &niversity2 a private educational institution2 has constructed a building
with a contract price of P1/2///2///. 0he building has an estimated useful life of #/
years with a salvage value of 1/<. Eow much is the deductible expense allowed to
:enguet &niversity for year 2//x under the two options=
a.
b.
c.
d.
Capitali"ed
P 2//2///
P 1*/2///
P1/2///2///
P .2///2///
Outright expense
P .2///2...
P1/2///2///
P 2//2///
P 1*/2///
Problem 8 44 &etirement ()pense
Cordillera &niversity,s boo)s of accounts reveal the following contribution for its
retirement plan for the years 2//52 2//: and 2//C.
5ctual contribution
Normal valuation
2//5
P12///2///
*//2///
2//:
P .//2///
*//2///
2//C
P #//2///
*//2///
5ctual retirement payments made were as follows?
5ctual retirement payments
2//5
P 3 / 3

2//:
P //2///

2//C
P 3//2///

1. !f the retirement plan is :!$3registered2 how much is the deductible retirement
expense for year 2//C=
a. P3//2/// c. P*//2///
b. P#3/2/// d. P*3/2///
2. !f the retirement plan is NO0 :!$3registered2 how much is the deductible retirement
expense for year 2//C=
a. P3//2/// c. P*//2///
b. P#3/2/// d. P ; / ;
Problem 8 4 &etirement ()pense
J Co. maintains a :!$3registered defined benefit retirement plan. 0he company,s
normal cost for funding is P'//2 /// and P%'/2 /// for year J and year B2 respectively.
0he following are expenses related to the retirement plan.
Bear J Bear
B
:enefit expense for accounting purposes P'#/2 ///
P.//2 ///
5ctual contribution *//2 /// %//2
///
Eow much retirement expense is deductible for year B=
Problem 8 4! Deductible Contribution ()pense
9hat would be the allowable deduction for P1#2 /// contribution made by a domestic
corporation to a religious organi"ation2 from his P%/2 /// net income after contribution=
a. P%2 /// c. P1/2 '#/
b. P1/2 /// d. P1#2 ///
Problem 8 4% Deductible Contribution ()pense
9hat would be the allowable deduction for P1#2 /// contribution made by a resident
citi"en to an accredited social welfare organi"ation2 from his P%/2 /// net income after
contribution=
a. P%2 /// c. P#2 ///
b. P#2 #// d. P%2 #//
Problem 8 48 Deductible Charitable Contribution
5 domestic corporation made a P2/2 /// contribution to an accredited social welfare
institution. !ts business income for 2//# is P#//2 ///. 0he related business expenses
inclusive of the P2/2 /// contribution is P1#/2 ///. 0he allowable deduction for
charitable contribution would be
a. P1'2 #// c. P2/2 ///
b. P1*2 #// d. P22 ///
Problem 8 4+ Ta) .ncenti'es to 1doptin7 Pri'ate (ntities
J signed a +O5 with (epartment of 7ducation for the supply of boo)s to !risan National
Eigh 6chool value at P12 ///2 /// for free.
(uring the same year2 J reported a business income of P312 #//2 /// and business
expenses of P222 #//2 /// before the amount of donation per +O5.
0he deductible donation of J is
a. P%'#2 ///2 if J is a corporation and the donation is for the priority program of the
@overnment.
b. P12 3#/2 ///2 if J is a single proprietor and the donation is for the priority program of
the @overnment.
c. P12 #//2 ///2 if J is a general co3partnership and the donation is for the priority
program of the @overnment.
d. P%'#2 ///2 if J is a sole proprietorship and the donation is not part of the priority
program of the @overnment.
Problem 8 - Manu,acturin7 *usiness usin7 2"D
0he following business data of 8aban2 a manufacturing corporation2 are available?
Net 6ales P#2 ///2 ///
$aw materials2 beginning 2//2 ///
Net purchase of raw materials 22 ///2 ///
$aw materials2 ending //2 ///
4inished goods2 ending '#/2 ///
(irect labor %//2 ///
!ndirect labor ; factory supervisor 12/2 ///
MMMMMMMMMM 1//2 ///
8ight and water F*/< factoryG 1#/2 ///
+iscellaneous factory expenses 2/2 ///
6alary of administration and mar)eting %//2 ///
(elivery expense /2 ///
5dvertising expense %/2 ///
&e;uired< !f 8aban cannot substantiate with receipts the operating expense2 how much
is its income from operations using optional standard deductions=
Problem 8 1 "er'ice *usiness
Kovito2 a resident individual2 engaged in barbershop business2 provides the following
data from his barbershop business?
@ross revenue from?
Eair trimming P3//2 ///
+assaging 2//2 ///
News paper and comics rental 2/2 ///
Operating expenses incurred?
6alaries of barbers 2//2 ///
(epreciation of barbershop e>uipments #/2 ///
$ental of barbershop space 2/2 ///
&tility ; light2 water2 and telephone 3/2 ///
Kanitorial service 1#2 ///
:oo))eeping service 1/2 ///
&e;uired< Compute for the following?
1. Cost of service
2. !temi"ed deductions
Problem 8 2 1llo#able Deductions
+r. Ko)er 5rroyo2 widower with three F3G >ualified depended children and a practicing
accountant has the following receipts and expenditures for the calendar years ended
(ecember 312 2//x?
$eceipts?
Professional fees P #//2 ///
5llowance as director of Corporation 5 2#2 ///
!nterest on time and savings deposits2 net of 2/< final tax 1%2 ///
Commissions #2 ///
7xpenditures?
6alaries of 5ssistants P .%2 ///
Partial Payment of 8oan 2/2 ///
!nterest on the loan F0he loan was used for the repair
Of the residential house of +r. 5rroyoG 32 *#/
0raveling 7xpenses 112 ///
8ight and water2 Office '2 *./
8ight and water2 $esidence %2 #//
6tationeries and supplies 12 .%/
Office rent %/2 ///
Contributions exclusively for religious purposes 3*2 #//
&e;uired< Compute for the allowable deductions from the business gross income
Problem 8 3 Total 1llo#able Deductions
8ove 7nterprises incurred the following business expenses in the taxable year 2//x?
aG 5llowance per aging of accounts receivable at the beginning and ending of the
year are P2/2 /// and P3/2 /// respectively. 0he firm,s provision for bad debts
during the year is P1#2 ///.
bG 5ccumulated depreciation on machine at the beginning is P1//2 /// but at the
end of the year is P11/2 ///. (uring the year2 the firm sold a machine with a cost
of P3//2 /// and an accumulated depreciation of P3/2 /// and purchase at the
end of the year a new machine worth P//2 /// with a better capability.
cG $esearch and development cost of P#//2 /// treated as deferred expense.
dG Contribution during the year are as follows?
0o the government for priority program in sports P #/2
///
0o the government for public purposes 1/2 ///
0o the accredited N@O,s total administrative expenses is 3#< 1//2
///
0o the church of :aguio %/2 ///
Net income before contribution 22 #//2///
&e;uired< Compute the total allowable deductions of 8ove 7nterprises assuming that
the firm is a
1. 6ole proprietorship
2. Corporation
3. Partnership
Problem 8 4 2"D and N20C2
J Co. reported the following income and expenses for a calendar year?
6ales P#2 ///2 ///
Cost of 6ales 22 ///2 ///
Operating expenses during the year 12 ///2 ///
NO8CO #//2 ///
(ividend income from domestic corporation
!nterest income2 net of final tax 2/2 ///
Only 3/< of the operating expenses can be substantiated with official receipts. !ncluded
in the operating expenses is P#/2 /// interest expense.
&e;uired<
1. 0otal deductible expenses using itemi"ed deduction
2. 0otal deductible expenses using O6(
3. Net taxable income using the amount that provides tax advantage
Problem 8 &etirement ()pense
J Corporation maintains a :!$ registered benefit retirement plan. 0he company,s
normal cost per actuarial valuation for funding is P12 ///2 /// and P12 2//2 /// for
years 2//5 and 2//:2 respectively?
&e;uired< Compute for the following?
1. (eductible retirement expense for years 2//5 and 2//:
2. Net income before income tax for years 2//5 and 2//:
Problem 8 ! Financial to Ta) &eportin7
J2 reported the following income and expenses during the calendar year?
6ales P1/2 ///2 ///
!nterest income2 net of final tax .%2 ///
Cost of sales 2 ///2 ///
6alary expenses #//2 ///
$etirement expenses Factual contributionG 3//2 ///
Fnormal valuation is P2#/2 ///G
$epresentation expense 2//2 ///
!nterest expense paid to the :!$ 2/2 ///
!nterest expense paid to +etro :an) 1//2 ///
(epreciation expense /2 ///
$ent expense 2#/2 ///
@roup insurance expense #/2 ///
:ad debt expense Fof which only 2/< actual write3offG 1//2 ///
!ncome tax expense 12/2 ///
Contribution to 076(5 priority pro-ect #//2 ///
Contribution to local @overnment 1//2 ///
NO8CO 2//2 ///
&e;uired< Compute the allowable itemi"ed deduction if J is a
1. Corporate taxpayer
2. !ndividual 0axpayer
Problem 8 % ================ to Ta) &eportin7
a. 6alaries expense?
6alaries wor)ed and paid P #//2 ///
5dvances to employees 1//2 ///
5ccrued salaries */2 ///
0otal salaries expense P#*/2 ///
b. :ad debt expense?
5ccounts written off determined to be worthless P1//2 ///
7stimated uncollectible accounts 2//2 ///
$elated party bad debts 2/2 ///
9orthless accounts not yet written off #/2 ///
0otal bad debts expense P 3'/2 ///
c. $etirement expenses deducted amounted to P12 ///2 ///. 0he retirement plan is not
:!$3registered. 5ctual retirement payments amounted to P%2/2 ///.
d. Contribution expense2 P#//2 ///
f. $ent expenseN
5dvanced payment of which only ./< was used P2//2 ///
g. 0axes expense?
+unicipalities and 8icenses P 3/2 ///
6urcharges and penalties /2 ///
Ouarterly income tax P23/2 ///
0otal taxes P3//2 ///
h. 8ife insurance expense?
Premium on the employees group insurance P #/2 ///
Premium on officer,s insurance Fbeneficiary3J Co.G P1//2 ///
0otal life insurance expense P1#/2 ///
$e>uired? Compute for the following?
1. 0otal allowable deductions if J is anIa
a. !ndividual taxpayer
b. Corporate taxpayer
2. Net !ncome for income tax purposes if J is anIa
a. individual tax payer