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51

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)


SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

CHAPTER 8

DEDUCTIONS FROM GROSS INCOME


Problem 8 1 DEDUCTIBLE OR NONDEDUCTIBLE FROM GROSS INCOME
1. Deductible
2. Nondeductible
3. Nondeductible
4. Deductible, in lieu of tax credit (Sec. 34C3, NIRC)
5. Deductible
6. Nondeductible
7. Nondeductible
8. Deductible
9. Deductible
10. Nondeductible

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

Problem 8 2
TRUE OR FALSE
1. True
2. True
3. False Business expenses related to business income outside the Philippines is deductible also.
4. False Business expense is deductible from gross income.
5. True
6. True
7. True Once OSD is opted, no capital loss could be deducted from capital gain.
8. False Some business expenses are nondeductible or subject to limit.
9. False Income outside the Philippines by a NRC is not taxable in the Philippines, hence, no
allowable deduction is allowed.
10. True
11. False Compensation income is not subject to OSD.
12. False NOLCO is not an itemized deduction.
13. True Amortized over the term of the lease
14. False of 1%
15. False 33%
16. False Double declining method
17. True
18. True
Problem 8 3
1. B
2. No choice, OSD=40%
3. D
4. D
5. D
6. C
7. B
8. D
9. B
10. C
11. C
12. D
13. C
Problem 8 7

Problem 8 4
1. C
2. A
3. D
4. A
5. B
6. B
7. A
8. A
9. D
10. A

Problem 8 5
1. A
2. A
3. C
4. C
5. A
6. D
7. C
8. A
9. B
10. C

Problem 8 6
1. A
2. C
3. A
4. C
5. C
6. C
7. B
8. C
9. C
10. C
11. D
12. B

C
Expensed

Change of motor of air condition


Repainting of building

P10,000

Capitalized
P60,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)


SUGGESTED ANSWERS

52

Chapter 8: Deductions from Gross Income

Expansion of store
Cleaning of computers
Repair of furniture

50,000
9,000
1,000
P20,000

Problem 8 8
A
Salaries net of tax
Withholding tax
Deductible business expense

.
P110,000
P100,000
5,000
P105,000

Problem 8 9
A
General rule: No personal or business expense is deductible from compensation income.
Problem 8 10
D
Depreciation expense (P1,000,000 x 40%)/25
Loss of business equipment
Deductible expense

P16,000
38,000
P54,000

Problem 8 11
D
1.
A
No personal or business expense is deductible.
2.

B
Depreciation (P20,000 x 10%)
Repair (P100,000 x 10%)
Office supplies
Total deduction

Problem 8 12

P 2,000
10,000
6,000
P18,000

Tax laws
GAAP
Salary expense (P180,000 + P20,000)
P200,000
P200,000
Estimated uncollectible accounts
10,000
Compromise penalty
50,000
Depreciation expense
30,000
30,000
Miscellaneous expense
.
5,000
Deductible from earnings
P230,000
P295,000
Note: For tax purposes, the miscellaneous expense is not deductible because it was not reported last year. For
accounting purposes, the miscellaneous expense can be deducted as prior period adjustment from retained
earnings.
Problem 8 13
C
Gross income (P300,000 + P20,000 + P180,000)
Multiplied by OSD rate
Optional standard deduction

P500,000
40%
P200,000

Problem 8 14
1.
B
Gross income (P870,000 P10,000 P380,000))
Add: Gains from sale of capital asset
Total
Multiplied by OSD rate
Optional standard deduction

P480,000
40,000
P520,000
40%
P208,000

2.

B
OSD
Less: Operating expense
Amount of income enjoying tax savings

P208,000
20,000
P188,000

53

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)


SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

Problem 8 15
D
Gross receipts from profession
Rent income
Total gross income
Multiplied by percent of OSD
Optional standard deduction
Problem 8 16
C
Operating expense before representation expense
(P2,000,000 P300,000)
Representation expense Actual
- Limit (P20,000,000 x 0.005)
- Lower
Allowable itemized deductions
Problem 8 17
B
Salary expense
Rent expense
Advertising expense
Depreciation expense
Interest expense
Tax differential on interest income (P30,000 x 33%)
Total itemized deductions
Problem 8 18
A
Gross salaries of employees
Grossed-up monetary value of fringe benefits
Deductible salaries and fringe benefits expenses
Problem 8 19
D
Allowable deduction fringe benefit expense (P102,000/68%)

P100,000
450,000
P550,000
40%
P220,000

P1,700,000
P300,000
100,000
100,000
P1,800,000
P120,000
24,000
6,000
5,000
60,000
( 9,900)
P205,100
P6,000,000
1,000,000
P7,000,000
P150,000

Problem 8 20
D
Assume bonus is computed after tax but before bonus. The answer is letter D = P8,143, computed as follows:
Net income before charitable contribution (P75,000 + P5,000)
Less: Deductible contribution (P80,000 x 5%) lower of actual
Net income before income tax and bonus
B
T
B
B
B
B 0.045B
0.952B
B

=
=
=
=
=
=
=
=

P 80,000
4,000
P 76,000

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

Proof:
Income before bonus and tax
Less: Income tax (P76,000 P8,356) x 30%
Income after tax but before bonus
Multiplied by rate of bonus
Bonus

P76,000
20,293
P55,707
15%
P 8,356

Problem 8 21
Monthly salary

P 5,000

54

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)


SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

Death benefits
Terminal pay
Continuous compensation after the burial for three months
Total deductible expenses

50,000
25,000
15,000
P95,000

Note: Donation for coffin and other wake expenses is not business or compensation related and, hence, not
deductible. (Sec. 72, Rev. Regs. 2)
Problem 8 22

C
Inventoriable cost
P300,000
20,000
.
P320,000

Purchases
Decreased in inventory
Increased in inventory

Supplies expense
P40,000
( 3,000)
P37,000

Problem 8 23
D
Traveling expenses (P50,000 + P200,000)
Fringe benefit expense (P68,000/68%)
Transportation expense messenger
Total allowable expense

P250,000
100,000
40,000
P390,000

Problem 8 24
Total rent expenses paid
Rent last year
Prepaid rent
Deductible rent expense

P150,000
(10,000)
(20,000)
P120,000

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

P24,000
300
150
P24,450

Note: The city services is not a rent expense.


Problem 8 26
B
1. B
Rent for 6 months based on usage (P20,000 x 6) x 80%
Rent based on usage and payments (P80,000 x 80%)
2. A
Actual cash collection for rent
Problem 8 27
D
Monthly rental expense
Monthly depreciation (P600,000/8)/ 12
Monthly deductible expense

Accrual
P96,000

Cash
P64,000

P150,000

P150,000
P2,000
6,250
P8,250

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

P25,000

2. C
Servicing actual lower

P30,000

Problem 8 29
B
Operating Expense before representation
Representation expense (P300,000 x .01)

P80,000
3,000

55

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)


SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

Deductible operating expense

P83,000

Problem 8 30
C
Interest expense
Tax differential (P50,000 x 33%)
Deductible interest expense

P40,000
(16,500)
P23,500

Problem 8 31 D
Interest expense
Tax differential (P30,000 x 38%)
(P30,000 x 33%)
Deductible interest expense
Problem 8 32

Sole proprietor
P50,000
(11,400)
.
P38,600

Corporation
P50,000
(9,900)
P40,100

B
Deductible

Interest paid in advanced


Interest paid to a brother
Interest paid on deliquency taxes
Interest on borrowings to finance his family home
Interest paid to finance petroleum exploration
Total

Nondeductible
P 20,000
12,000

P 8,000
.
P 8,000

30,000
100,000
P162,000

Problem 8 33
A
Tax savings from interest expense (P100,000 x 30%)
Final tax on interest income (P1,000,000 x 12%) x 20%
Actual tax savings

P30,000
24,000
P 6,000

Problem 8 34
A
Documentary stamp taxes
Local tax (P6,000 P800 P200)
Municipal tax
Community tax
Deductible taxes

P 1,000
5,000
2,000
1,500
P9,500

Note: The fringe benefit income taxes to key officers and rank-in-file employees are to be classified as
deductible fringe benefit expense and not tax expense.
Problem 8 35
D
Unadjusted net income (P520,000 P200,000)
Add back: Income tax foreign country
Adjusted net income
Personal exemption
Net taxable income

P320,000
10,000
P330,000
(50,000)
P280,000

Note: The P10,000 income tax paid to foreign country is better to be treated as tax credit rather than as
operating expense.
Problem 8 36
A
Asset of Oliva
Payment to government (P200,000 x 50%)
Balance

P 60,000
(100,000)
(P40,000)

Deductible bad debts is the entire amount of collectibles

P100,000

Problem 8 37
B
Bad debts from business actual written off (P100,000 x 40%)

P40,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)


SUGGESTED ANSWERS

56

Chapter 8: Deductions from Gross Income

Bad debts from profession actual written off


Deductible bad debts expense

50,000
P90,000

Problem 8 38
D
Annual depreciation expense (P50,000 P5,000)/5
Multiplied by ratio of months used during the year
Depreciation expense 200B

P9,000
1/2
P4,500

Problem 8 39
A
Annual depreciation (P2,300,000/11.5 years)
Multiplied by ratio of months used in 2007 (July 1 to Dec.)
Depreciation expense

P200,000
6/12
P100,000

Problem 8 40
D
Oil drilling machine (P800,000 x 90%) / 8 years
Oil extracting machine (P900,000 x 90% / 10 years limit
Computers (P100,000 x 90%)/4 years
Delivery truck (P200,000 x 90%)/ 5 years limit
Annual depreciation expense

P 90,000
81,000
22,500
36,000
P229,500

Problem 8 41
C
Depletion base (P6,000,000 P1,000,000 + P300,000)
Divided by number of extractible estimated tons
Depletion per ton
Multiplied by number of tons extracted during the year
Depletion expense

P5,300,000
5,000,000
P
1.06
800,000
P 848,000

Problem 8 42
1. D
Depletable costs, January 1, 200x
Exploration costs
Intangible development costs
Total
Less: Depletion expense (P15,000,000/7,500,000) x 1,200,000
Adjusted basis
Divided by remaining reserves
(5,000,000 + 2,500,000 1,200,000)
New depletion rate/ unit
2.
3.

4.

P12,500,000
1,000,000
1,500,000
P15,000,000
2,400,000
P 1,260,000
6,300,000
P 2.00

A
Depletion cost 2007 (P2 x 1,200,000 units)
B
Value of production (P12 x 1,200,000 units)
Less: Production and selling costs:
Mining costs
Milling costs
Marketing expenses
Depreciation expense
Net income from operation
Multiplied by limit percentage
Deductible amount fro exploration and development cost
B
Current exploration and development cost (P1,500,000 + P1,000,000)
Less: Deductible amount of exploration and development cost (see 3)
Exploration and development cost chargeable to succeeding years

P2,400,000
P14,400,000
P2,000,000
3,000,000
1,500,000
1,000,000

7,500,000
P 6,900,000
25%
P 1,725,000
P2,500,000
1,725,000
P 775,000

57

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)


SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

Problem 8 43
B
Deductible expense:
Depreciation expense (P10,000,000 x 90%)/50
Capital outlay

Capitalized
P180,000

P10,000,000

Problem 8 44
1
B
Lower of actual contribution or normal valuation
Add: Amortization of excess
200A (P200,000/10)
200B (P100,000/10)
Deductible retirement expense
2.

A
Actual retirement payments

Problem 8 45

Outright expense

200A
800,000

200B
800,000

200C
500,000

20,000
.
820,000

20,000
10,000
830,000

20,000
10,000
530,000

200A
0

200B
400,000

200C
300,000

Year X
700,000
10,000
710,000

Year Y
600,000
10,000
610,000

P610,000 = Not in the choices

Actual contribution or normal valuation, lower


Add: Amortization (P100,000/10)
Deductible retirement expense

Note: Only the excess of the actual contribution over the normal valuation is to be amortized over 10 years.
Problem 8 46
B
Allowed deductible contribution (P200,000 x 5%)

P10,000

Problem 8 47
C
Allowed deductible contribution actual

P5,000

Problem 8 48
B
Income before charitable contribution (P500,000 P130,000)
Multiplied by percent of limit
Allowed deductible contribution - lower

P370,000
5%
P 18,500

Problem 8 49
C
Actual value of donation priority program
Adopt a school program incentive (P1,000,000 x 50%)
Deductible donation
Problem 8 50
Net sales
Less: Cost of goods manufactured and sold:
Raw materials used:
Raw materials, beginning
Net purchases of raw materials
Raw materials, ending
Direct labor
Factory overhead:
Indirect labor factory supervisor
Depreciation (P100,000 x 90%)
Light and water (P150,000 x 80%)
Miscellaneous factory expenses
Cost of goods manufactured
Finished goods, ending
Gross income

P1,000,000
500,000
P1,500,000

P5,000,000
P 200,000
2,000,000
( 400,000)
P 120,000
90,000
120,000
20,000

P1,800,000
600,000

350,000
P2,750,000
( 750,000)

2,000,000
P3,000,000

58

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)


SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

Less: Optional standard deduction (P3,000,000 x 40%)


Income from operations

1,200,000
P1,800,000

Problem 8 51
1.
Salaries of barbers
Depreciation of barbershop equipment
Cost of service
2.

P200,000
50,000
P250,000

Rent expense
Utility expense
Janitorial expense
Bookkeeping expense
Itemized deductions

P 20,000
30,000
15,000
10,000
P 75,000

Problem 8 52
Salaries of assistants
Traveling expenses
Light and water office
Stationeries and supplies
Office rent
Total operating expenses before contribution
Add: Contribution subject to limit (P500,000 P176,850) x 10%)
Allowable itemized deductions

P 96,000
11,000
7,890
1,960
60,000
P176,850
32,315
P209,165

Problem 8 53
Bad debts written-off (P35,000 P30,000)
Depreciation expense (P140,000 P100,000)
Donation to the government priority program
Donations subject to limit:
Lower of actual, P170,000 or
(P2,500,000 x 10%)
(P2,500,000 x 5%)
Total allowable deductions

Sole
Proprietorship
P 5,000
40,000
50,000
170,000
.
P 265,000

Corporation
P 5,000
40,000
50,000

125,000
P 220,000

Partnership
P 5,000
40,000
50,000

125,000
P 220,000

The research and development cost is to be treated as a deferred expense, hence, its amortization shall be
made in the succeeding five years when the taxpayer realizes benefits from such expenditures (Sec. 341,
NIRC).
Problem 8 54
1.
Operating expenses (1,000,000 x 30%) P50,000
Interest expense (P50,000 (P40,000/80%) x 33%]
Total itemized deductions
Add: NOLCO
Total deductible expenses

P250,000
33,500
P283,500
500,000
P783,500

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


2.

Gross income (P5,000,000 P2,000,000)


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

P3,000,000
40%
P1,200,000

59

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)


SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

3.

Gross income
Less: OSD
Net taxable income

P3,000,000
1,200,000
P1,800,000

Problem 8 55
1.
Actual contribution or normal valuation, lower
Add: Amortization - 200A (P250,000/10)
Deductible retirement expense
2.

Financial net income


Add: Retirement benefit expense accounting
Total
Less: Deductible retirement expense taxation
Net income for tax purposes

200A
1,000,000
25,000
1,025,000

200B
900,000
25,000
925,000

50,000,000
1,100,000
51,100,000
1,025,000
50,075,000

60,000,000
1,200,000
61,200,000
925,000
60,275,000

Problem 8 56
Salary expenses
Retirement (P250,000 + P50,000/10)
Representation expense (P10,000,000 x .005)
Interest expense paid to the BIR - full
Interest expense limit:
Corporation (P100,000 (P96,000/80%) x 33%)
Individuals (P100,000 (P96,000/80%) x 38%
Depreciation expense
Rent expense
Group insurance expense
Bad debts expense (P100,000 x 20%)
Contribution expenses:
TESDA priority project (500,000 x 1.5)
Local government limit (lower is actual)
Total itemized deductions

Corporation
500,000
255,000
50,000
20,000

Individual
500,000
255,000
50,000
20,000

60,400
40,000
250,000
50,000
20,000

54,400
40,000
250,000
50,000
20,000

750,000
100,000
2,095,400

750,000
100,000
2,089,400

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


Problem 8 57
1.
Salaries expense (P680,000 P100,000)
Bad debts expense (P370,000 P270,000)
Retirement expense (P1,000,000 P380,000)
Representation expense (P39,000,000 x 0.005)
Rent expenses (P200,000 P20,000)
Taxes expense (P300,000 P270,000)
Life insurance expense (P150,000 P100,000)
Total itemized deduction before contributions
Contribution expenses:
Donation to TESDA priority project (P500,000 x 150%)
Donations to CHED not priority project
(P200,000 actual is lower + 50% of actual)
Donations to government (P100,000 actual is lower)
Ind: (P39,000,000 P30,000,000 P1,752,500) x 10%=724,500
Corp: (P39,000,000 P30,000,000 P1,752,500) x 5%=362,250
Total allowable deductions
Computation of sales:
Financial income
Cost of sales

Individual
580,000
100,000
620,000
195,000
180,000
30,000
50,000
1,755,000

Corporation
580,000
100,000
620,000
195,000
180,000
30,000
50,000
1,755,000

750,000

750,000

300,000
100,000

300,000
100,000

.
2,905,000

.
2,905,000
P 5,000,000
30,000,000

60

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)


SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

Operating expenses deducted


(P680,000 + P370,000 + P1,000,000 + P800,000 + P500,000
+ P200,000 + P300,000 + P150,000)
Total sales
2.
Gross income (P39,000,000 P30,000,000)
Less: Total allowable deductions
Net taxable income

4,000,000
P39,000,000
Individual
P9,000,000
2,905,000
P6,095,000

Corporation
P9,000,000
2,905,000
P6,095,000