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CHAPTER 5

Items and Concept of Income

EXERCISE 5-2. TRUE OR FALSE QUESTIONS


1. True 6. False 11. True 16. True
2. False 7. True 12. False 17. True
3. True 8. True 13. False 18. True
4. True 9. True 14. True 19. True
5. True 10. True 15. False 20. False

EXERCISE 5-3. MULTIPLE CHOICE THEORY


1. C Market Value of Mina's Shares P120
Multiply by: No. of Share Dividend Declared 150
Property Dividend P18,000

2. D Total Number of Shares 1,000


Multiply by: % share of Rosa 20%
Total No. of Rosa Shares 200
Multiply by: 10%Dividend 10%
Share Dividend 20
Multiply by: Market Value of Shares 30
Dividend Income 600

No. of Shares Total


3. A Date Par Value Value of
Shares
10/31/2017 100 P50 P5,000
12/31/2017 100
Multiply by:
25% stock dividend *1.25
125 P40 P5,000
1/20/2018
Purchase Price 25 * P30 = 750
Less: Book Value 25 * P40 = 1,000
Loss on Sale P(250)
No. of Shares Total
4. D Par Value Value of
Shares
200 P55 P11,000
Multiply by:
10% Share Dividend *1.10
220 P50 P11,000

Purchase Price 40 * 60 = P2,400


Less: Book Value 40 * 50 = 2,000
Gain on Sale P400

5. D Sale of Farm Products P400,000


Add: Sale of Farm Equipment 50,000
Other Income 12,500
Gross Income P462,500

6. D 10. A
7. D 11. D
8. C 12. B
9. D

13. D Dividend Income P50,000


Service Income 25,000
Vacation Leave 6,000
Tips from Customer 5,000
Taxable Income P86,000

14. A Date Shares Value Total Value


1/24/2015 200 P100 P20,000
2/5/2015 200 110 22,000
400 105 42,000

Purchase Price 200 * 115 = P23,000


Less: Book Value 200 * 105 = 20,000
Gain on Sale P3,000

15. D Date Shares Value Total Value

1/24/2015 200 P100 P20,000


Multiply by: *1.05
210 P95.24 P20,000
Purchase Price 200 * 115 = P23,000
Less: Book Value 200 * 95.24 = 19,048
Gain on Sale P3,952

16. B
17. D
18. B
19. D
20. C

EXERCISE 5-4. MULTIPLE CHOICE


1. C 4.C
2. C 5. A
3. B

6. C Rent Income P10,000


Income on Leasehold Improvement
Cost 2,000,000
Less: Depreciation for 8 years
(2M/50)*8 320,000
Book value, end of lease 1,680,000
1,680,000/8 210,000
Gross Income P220,000
7. D

EXERCISE 5-5. TAX BENEFIT RULE

1. B
2. D Gross Profit on Sales 800,000
Less: Deductible Expenses 440,000
Provision for Bad Debts 50,000 490,000
Add: Allowed Deduction for Recoveries
of Accounts Receivable 30,000
Net Income Before Income Tax 340,000

3.1. D Income Before Tax P90,000


Less: Value-added Tax 135,000
Amusement Tax 80,000
Local Business Tax 40,000
Stock Transaction Tax 15,000 270,000
Loss P(180,000) None
3.2. B Amusement Tax P80,000
Local Business Tax 8,500
Income on Tax Refund P88,500

EXERCISE 5-6. LEASEHOLD IMPROVEMENT

1.1. D Rent (5,000*12) P60,000


Add: Real Estate Tax 3,000
Rent Income 2016 P63,000

1.2. D Rent (5,000*12) P60,000


Tax 3,000
Leasehold Improvement 1,800,000
Rent Income 2018 P1,863,000

1.3. A Rent (5,000*12) P60,000


Tax 3,000
Leasehold Improvement
Cost 1,800,000
Less: Depreciation for 17.5 years 1,050,000
{(1.8M/30)*17.5}
Book value, end of the lease 750,000
(750,000/17.5)*6/12 21,429
Income using Spread Out Method P84,429

1.4. D

1.5. A Rent P60,000


Tax 3,000
Depreciation- Leasehold Improvement
(1.8M/17.5) 102,857
Deductible Expense P165,857

1.6. D Rent P60,000


Tax 3,000
Income on Leasehold Improvement
(750,000/17.5) 21,429
Income 2019 P84,429
1.7. C Cost P1,800,000
Less: Depreciation for 3.75 years
(1,800,000/30)*3.75 225,000
Book Value upon Termination 1,575,000
Less: Income already reported
(750,000/17.5)*3.5 150,000
1,425,000
Add: Rent (Jan1-Apr1) 5,000*3 15,000
Income using Spread-out Method P1,440,000

2.1. A Rent P24,000


Leasehold Improvent 1,000,000
Income 2016 P1,024,000

2.2. C Rent P24,000


Leasehold Improvement
Cost 1,000,000
Less: Depreciation for 10 years
(1M/20)*10 500,000
Book value, end of the lease 500,000
500000/10 50,000
Income 2017 P74,000

2.3. A

3. B Rent P36,000
Leasehold Improvement
Cost 600,000
Less: Depreciation for 15 years
(600,000/30)*15} 300,000
Book value, end of the lease 300,000
300,000/15 20,000
Yearly Income P56,000

EXERCISE 5-7. SERVICES PAID BY A PROMISSORY NOTE


1.1. D Face Value P120,000
Less: Discount
(50,000*20%) 24,000
Taxable Income 2016 P96,000

1.2. D Face Value P120,000


Less: Income already reported 96,000
Taxable Income 24,000
Multiply by: % of price earned 1
Taxable Income 2017 P12,000
Taxable Income 2018 P12,000

2.1. C Face Value P50,000


Less: Discount
(50,000*25%) 12,500
Taxable Income 2016 P37,500
2.2. B Face Value P50,000
Less: Amount already
declared as income 37,500
Taxable Income 2017 P12,500
CHAPTER 6: FRINGE BENEFIT TAX
Harvy C. Cerda
Richelle C. Cerda
BSA 4-1

EXERCISE 6-2: TRUE OR FALSE QUESTIONS

1 1
2 0
3 0
4 0
5 1
6 0
7 1
8 1
9 0
10 0
11 1
12 0
13 1
14 1
15 1
16 1
17 0
18 1
19 1
20 1

EXERCISE 6-3: DISCUSSION QUESTION/ PROBLEMS

1 Interest on corporate bond 1,000


Salary 12,000
Tip 3,000
Lotto Winning 3,000
Jueteng 8,000
Stolen from mother's purse 3,000
Total Taxable Income 30,000

2. No, because in this case, the convenience of employer rule has been applied.

3. No, because the value of the living quarter is part of Kulas' taxable compensation income.

4
a. No, because de minimis benefits are not subject to income tax as well as withholding tax on compensating incom
b. No, because the rice allowance is considered as de minimis benefit which is exempted from the fringe benefit tax

5. P 0.00, none of the items were qualified to be part of gross income of Karen Leon.

6
a. No, because there is a condition that he has to comply
b. No, because there is a condition that he has to comply
c. Yes, if it is part of compensation income to employees

EXERCISE 6-4: IDENTIFICATION

1 Managerial
2 Managerial
3 Supervisory
4 Rank and File
5 Managerial
6 Managerial
7 Supervisory
8 Supervisory
9 Rank and File
10 Rank and File
11 Rank and File
12 Managerial
13 Managerial
14 Supervisory
15 Rank and File

EXERCISE 6-5 THEORY AND COMPUTATION

1. C Fringe Benefit Expense 32500


Add: Fringe Benefit Tax Expense 17500
Total Deductible Expense 50000

2. C Fringe Benefit Tax Expese 17500


Divide: Fringe Benefit Tax Rate 35%
Grossed-Up Monetary Value 50000

3. A the company's general manager

4. B can be recorded by a corporation whether exempt from income tax or not

EXERCISE 6-6: MULTIPLE CHOICE THEORY

1. B Fees in a civic club 9500


Premium on life insurance
where the employee is the
beneficiary 10000
Total Fringe Benefits 19500

Monetary Value 19500


Divided by 65%

Grossed-up monetary value 30000


Rate of Tax 35%
Fringe Benefit Tax 10500

Rice allowance during the


2. B year 96000
Medical cash allowance 16000
Uniform Allowance- rank
and file employees 12000
Fees in a civic club 9500
Premium on life insurance 10000
Uniform Allowance-
company supervisor 4000

Fringe Benefit Tax Expense 10500


Total Deductions 158000
Rice allowance during the
3. B year 96000
Medical cash allowance 16000
Uniform Allowance- rank
and file employees 12000
Total 124000

4. A Fringe Benefit Expense 147500

Fringe Benefit Tax Expense 10500


Cash 147500
Fringe
Benefit Tax
Payable 10500

EXERCISE 6-7: MULTIPLE CHOICE THEORY

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

EXERCISE 6-8: MULTIPLE CHOICE PROBLEMS

1. B Reimbursement by the
employer 11700
Divided by 65%

Grossed-up monetary value 18000


Rate of Tax 35%
Fringe Benefit Tax 6300
2.D Salary 14000
Free meals 10500
Living Quarters 3000
Total Gross Compensation 27500
Income

3. B Salary of 14000

4.B Ticket Cost ($2000xP50) 100000


Divided by 65%

Grossed-up monetary value 153846.15385


Rate of Tax 35%
Fringe Benefit Tax 53846.153846

5.B Motor Vehicles (P800000/5


years) 160000
Multiply 50%
Monetary Value 80000
Divided by 65%

Grossed-up monetary value 123076.92308


Rate of Tax 35%
Fringe Benefit Tax 43076.923077

6.A Car (10000x50%) 5000


Divided by 65%

Grossed-up monetary value 7692.3076923


Rate of Tax 35%
Fringe Benefit Tax 2692.3076923

7.D Loan (P100000x3%x8/12) 2000


Divided by 65%

Grossed-up monetary value 3076.9230769


Rate of Tax 35%
Fringe Benefit Tax 1076.9230769

8.B Vacation Trip 36000


Divided by 65%
Grossed-up monetary value 55384.615385
Rate of Tax 35%
Fringe Benefit Tax 19384.615385

9.C Driver Salary 15000


Housemaid Salary 6000
Annual Membership Fees
(P75000/12) 6250
Total Monetary Value 27250
Divided by 65%

Grossed-up monetary value 41923.076923


Rate of Tax 35%
Fringe Benefit Tax 14673.076923

10.B Condominium Unit 2500000


Divided by 65%

Grossed-up monetary value 3846153.8462


Rate of Tax 35%
Fringe Benefit Tax 1346153.8462

11.A Dormitory (10000x50%) 5000


Divided by 65%

Grossed-up monetary value 7692.3076923


Rate of Tax 35%
Fringe Benefit Tax 2692.3076923
Dormitory 10000
Fringe Benefit - Clerk 3000
Total Deductible Expense 15692.307692

12.C Supervisory Employees 195000


Divided by 65%

Grossed-up monetary value 300000


Rate of Tax 35%
Fringe Benefit Tax 105000

13.B Monthly Salary 500000


Fixed Representation
Allowance 200000
Total 700000

14.D Car 1800000


Divided by 65%

Grossed-up monetary value 2769230.7692


Rate of Tax 35%
Fringe Benefit Tax 969230.76923

15.A Car (P1800000x40%) 720000


Divided by 65%

Grossed-up monetary value 1107692.3077


Rate of Tax 35%
Fringe Benefit Tax 387692.30769
BENEFIT TAX

MS
ding tax on compensating income of rank and file employees.
mpted from the fringe benefit tax.
EXERCISE 7-1. TRUE OR FALSE QUESTIONS
1.TRUE

2. TRUE
3. FALSE
4. FALSE
5. FALSE
6. FALSE
7. TRUE
8. TRUE
9. FALSE

10. TRUE
11. TRUE

12. TRUE

13. FALSE
14. TRUE

15. TRUE

EXERCISE 7-2. COMPREHENSIVE PROBLEM


Interest on loan (50,00 ₱ 4,500.00
From sole proprietor business
Gross business income 650,000.00

Expenses -410,000.00
Net Income 240,000.00
Passenger jeepney inherited
Gross receipts 90,000.00
Expenses -65,000.00
Inccome 25,000.00
Proceeds of matured life insurance
Face value 200,000.00
Premiums paid -120,000.00
Income 80,000.00
Income subject to tax ₱ 349,500.00

EXERCISE 7-3. DISCUSSION QUESTIONS


1. Proceeds of life insurance
a. None. It is not an income.
b. (12,000*10) ₱ 120,000.00
face value 100,000.00
income ₱ 20,000.00
None. There are no difference whether
c. who is the benificiary.
2. Return of premiums
None. Angel must not include the
100,000 in its gross income.
3. Property acquired by inheritance
Income earned ₱ 75,000.00
4. Payments for personal injury
a. medical expenses ₱ 20,000.00
pain and suffering 20,000.00
excluded ₱ 40,000.00
b. moral damages ₱ 150,000.00

c. None. It is include in gross income


d. None. It is include in gross income
e. damages ₱ 100,000.00
5. Retirement Benefits
Yes. It is taxable because of the years
in service of Anda.
6. Separation pay
Yes. It is taxable because he is
dismissed due to inefficiency of
service.
7. Prizes and awards
a. not taxable
b. not taxable
c. not taxable
8. Prizes to athletes
Taxable income
9. 13th month pay and other benefits
salary(33,000*12) ₱ 396,000.00
non-taxable(4,000*12) -48000.00
₱ 348,000.00
christmas bonus 20,000.00
productivity bonus 5,000.00
loyalty award 20,000.00
cash gift 6,000.00
anniversary bonus 8,000.00
13th month pay 29,000.00
clothing allowance 8,000.00
monthly rice allowan 2,200.00
98,200.00
exemption -90,000.00
8,200.00
income subject to tax ₱ 356,200.00
10. Minimum wage earner
None. It is not taxable because she is a
minimum wage earner and the benefits
does'nt exceed 90,000.
EXERCISE 7-4. IDENTIFICATION
1. TAXABLE

2. NOT TAXABLE
3. NOT TAXABLE
4. NOT TAXABLE
5. TAXABLE
6. NOT TAXABLE
7. NOT TAXABLE
8. NOT TAXABLE
9. TAXABLE

10. NOT TAXABLE

EXERCISE 7-5. MULTIPLE CHOICE

1. D
2. B face value ₱ 500,000.00

premiums paid (1,000*12*20)


240,000.00
income subject to tax ₱ 260,000.00
3. C face value ₱ 500,000.00
premiums paid (50,000*12) 600,000.00
income subject to tax ₱ 100,000.00
4. C premiums paid (50,000*12) ₱ 600,000.00
(1,000*12*20)
240,000.00
income subject to tax ₱ 360,000.00
5. C face value ₱ 500,000.00
premiums paid (10,000*20) 200,000.00
income ₱ 300,000.00
6. D
7. D annual income from land ₱ 50,000.00
income from bus 30,000.00
income subject to tax ₱ 80,000.00
8. B face value ₱ 500,000.00
premiums paid 400,000.00
₱ 100,000.00
9. C Proceeds ₱ 200,000.00
premiums paid (80,000+60,000) 140,000.00
₱ 60,000.00
10. C
11. A
12. C

13. D
14. A

15. D
16. C loss of income ₱ 300,000.00
17. A salary ₱ 40,000.00
loss of car (800,000-750,000) 50,000.00
income ₱ 90,000.00
18. C salary (10,000*6) ₱ 60,000.00
19. D
20. B Anthony (400,000+1,000,000) ₱ 1,400,000.00
(30,000,000+12,000,
Pacman 000) ₱ 42,000,000.00

EXERCISE 7-6. MULTIPLE CHOICE QUESTIONS


1. D Salary (25,000*12) ₱ 300,000.00
13th month pay 25,000.00
cash gift 2,500.00

rice allowance per month 24,000.00

clothing allowance 8,000.00


loyalty award 20,000.00
79,500.00
exemption (90,000.00)
-
proceeds from life insurance 100,000.00
income subject to tax ₱ 400,000.00
2. B
3. B basic monthly salary ₱ 180,000.00
monthly contributions:
GSIS premium ₱ 1,800.00
Philhealth 412.50
Pag-ibig 300.00 ₱ 2,512.50
taxable income ₱ 177,487.50
4. D
5. A
6. C
7. A
8. A
9. B
10. A
11. A
12. A

13. C
14. C
15. D
16. D
17. D
18. A face value ₱ 1,000,000.00
premiums paid (100,000*12) 1,200,000.00
₱ 200,000.00
19. C
20. A salary (3,500*5.5) ₱ 19,250.00
allowance (1,000*5.5) 5,500.00
income 24,000.00
income subject to tax ₱ 48,750.00
21. C
22. B
23. D
EXERCISE 7-7. PROBLEMS ON MINIMUM WAGE
1. Mr. CSO
None. He is a minimum wage earner and his
a. benefits does'nt exceeds 90,000.
b. overtime pay ₱ 80,000.00
night shift differential 30,000.00
hazard pay 15,000.00
holiday pay 15,000.00
total 140,000.00
exemption (90,000.00)
income subject to tax ₱ 50,000.00
The income from his grocery store are
2. Mr. Aching should be included in his taxable income.
3. Ms. De los Santos No. She is a minimum wage earner.
No. because at that time she is a minimum
4. MWE wage earner.
Yes. Because their rate is different in NCR.
5. PO2 Iska Lawag No. Her entire salary is not subject to tax.
EXERCISE 7-8. PROBLEM
It is taxable because it is a prize wherein he
a. take action to win it by buying 100 tickets.
30% is the rate.
taxable (1,350,000-20,000) 1,330,000
₱ 130,000.00
(30%*530,000) 159,000.00
₱ 289,000.00
b. Taxable because it is a prize from a raffle.
Exempted because it is a prize wherein he
c.
did'nt take any action to win.

EXERCISE 7-9. PROBLEM


Miss Monique Salonga should include in her taxable income the $75,000 that she
received from her contract in a broadway musical. Also the witholding income tax of
10,000 that was deducted from her proffesional fee.
E

,000 that she


g income tax of
Chapter 9:
Taxation of Corporations

Exercise 9-1. TRUE OR FALSE QUESTIONS


1. True 9. True
2. True 10. True
3. False 11. True
4. False 12. True
5.False 13. True
6. False 14. False
7.True 15. True
8. False

EXERCISE 9-2. COMPREHENSIVE PROBLEM


QUESTIONS:

1.) Income tax if the cost is capitalize:


Income from tuition fees 8,300,000.00
Miscellaneous fees 720,000.00
Canteen 200,000.00
Bookstore 140,000.00
Rent income (45,600/95%) 48,000.00
Income of school clinic 36,000.00
Gross income 9,444,000.00
Less: Expenses
Salaries 3,600,000.00
Share in SSS, Philhealth & Pag-ibig 104,000.00
Depreciation- rental properties 18,000.00
Rent expense 120,000.00
Depreciation- other facilities 66,000.00
Construction of school building (15M 625,000.00 4,533,000.00
Taxable income 4,911,000.00
Rate of tax 10%
Income tax 491,100.00

2.) Income tax if the entire cost is expensed:


Income from tuition fees 8,300,000.00
Miscellaneous fees 720,000.00
Canteen 200,000.00
Bookstore 140,000.00
Rent income (45,600/95%) 48,000.00
Income of school clinic 36,000.00
Gross income 9,444,000.00
Less: Expenses
Salaries 3,600,000.00
Share in SSS, Philhealth & Pag-ibig 104,000.00
Depreciation- rental properties 18,000.00
Rent expense 120,000.00
Depreciation- other facilities 66,000.00
Construction of school building 15,000,000.00 18,908,000.00
Taxable income - 9,464,000.00
Rate of tax 10%
Income tax - 946,400.00

3.) No, St. James Academy Inc. cannot avail the optional standard deduction in computing the income tax.
4.) No, St. James Academy Inc. is not subject to minimum corporate income tax.
5.) Yes, St. James Academy Inc. is not subject to improperly accumulated earnings tax.

Exercise 9-3. DISCUSSION QUESTIONS/COMPUTATIONS

1. Definition of Corporation:
a.) The business organization formed by Atienza, Bauzon and Carmona qualifies as
partnerships, no matter how created or organized which is considered as corporation in
income taxation.
b.) The group of five entrepreneurs served as incorporators, therefore what they formed is a corporation.
c.) The two corporations have formed a joint venture because it is clearly stated that after
two-and-a-half years of construction, the organization will be automatically terminated. It
is not taxable as a corporation.

d.) By organizing a new accounting and auditing firms which they named as Gigi, Jayjay
and Associates CPAs, Gigi and Jayjay shall exercise a common profession for certified
public accountants. They have formed a general professional partnership which is not
subject to income tax.
e.) Based on the agreed features in the business organization formed by Almasco, Brioso,
Carullo and Damasco, it is considered as joint stock company and taxable as a
corporation.

2. Classification of a corporation:
Classification Situs of Income Tax Base
a. Domestic corporation Within and without Taxable income
b. Resident foreign Within only Taxable income
corporation
c. Nonresident foreign Within only Gross income
corporation

3. Computation of income tax:


a.) Domestic Corporation
Sales (domestic) 3,000,000.00
Sales (abroad) 7,000,000.00
Gross Sales 10,000,000.00
Less: Cost of goods sold 5,000,000.00
Gross Income 5,000,000.00
Less: Expenses
Domestic sales ###
Sales abroad ###
Toral Expenses 3,000,000.00
Taxable income 2,000,000.00
Rate 30%
Income tax 600,000.00

b. Resident Corporation
Sales (domestic) 3,000,000.00
Less: Cost of goods sold (5,000,000 x 3/10) 1,500,000.00
Gross Income 1,500,000.00
Less: Expenses on domestic sales 1,000,000.00
Taxable income 500,000.00
Rate 30%
Income tax 150,000.00

c. Non-resident foreign corporation


Sales- domestic 3,000,000.00
Yield from deposit substitute 400,000.00
Gross income 3,400,000.00
Rate 30%
Income tax 1,020,000.00

4. Minimum corporate income tax:


a. Bago Corporation shall be covered by the application of the MCIT effective 2018.
b. Yes, the corporation is subject to minimum corporate income tax in 2018, computed below:

Gross Income - 2010 5,000,000.00


Less- Expenses 4,700,000.00
Taxable income 300,000.00
Rate 30%
Normal income tax 90,000.00
Less: Minimum income tax (5,000,000 x 2%) 100,000.00
Excess MCIT - 10,000.00

5. Minimum corporate income 2017 2018


Gross sales ### 2,850,000.00
Less- Sales Returns and Discounts ### ###
Cost of Goods Sold ### ### 1,495,000.00
Total ### 1,355,000.00
Capital Gain 35,000.00
Gross Income ### 1,390,000.00
Less: Deductions ### 850,000.00
Taxable Income ### 540,000.00
Rate of tax 30% 30%
Normal Income Tax ### 162,000.00
MCIT:
2017 (4,455,000 * 2%) ###
2018 (1,390,000 * 2%) 27,800.00
Income tax ### 162,000.00
Excess MCIT- 2017 (89,100-76500) ###
Less: Carry forward of excess MCIT 12,600.00
Income Tax Payable 89,100.00* 149400.00**

The income tax payable in 2017 is whichever the higher between the MCIT and the
Normal Income Tax, therefore it is 89,100.*

The excess of MCIT in 2017 is deducted in 2018 Normal income tax because it is higher
than the 2018 MCIT (162,000-12,600 = 149,400).**

6. Minimum corporate income tax:

Sales ###
Less- Sales returns and allowances ###
Sales Discounts ### ###
Net sales ###
Less: Cost of Sales* ###
Gross income ###
Less: Operating expenses ###
Taxable income ###
Rate of tax 30%
a.) Normal income tax ###

b.) Minimum corporate income tax: ###


2%
###

c.) Income tax due: ###


(higher between NIT and MCIT)

*Cost of Sales
Inventory, Jan.1 2,400,000.00
Purchses ###
Freight in ###
Less: Purchase return and allowan ###
Purchase discounts 7,000.00 ###
Net purchases 1,498,000.00
Total Goods Available for Sale 3,898,000.00
Less: Inventory, Dec.31 1,900,000.00
Cost of Sales 1,998,000.00

7. Predominance test:
a.) The rate of tax that shall be applied to ARTS University is 10% because the revenue
from activities not related to education was 40%, it does not exceed 50% of its gross
income.

b.) If the income from unrelated activities is more than the income from related activities,
the applicable rate is the usual tax rates imposed on corporations which is 30%.

9. Minimum corporate income tax:


2015
Deferred charges-MCIT ###
Income tax payable ###
2016
Deferred charges-MCIT ###
Income tax payable ###
2017
Deferred charges-MCIT ###
Income tax payable ###
2018
Deferred charges-MCIT ###
Income tax payable ###

10. Educational Institutions - proprietary; non-stock; non-profit; government:

1. Proprietary Educational Institution


Income from tuition fees ###
School canteen ###
Dormitories ###
Bookstores ###
Car stickers 8,300.00
Taxable Income ###

2. Non-stock, non-profit and educational institution


No taxable income shall be reported for income tax purposes because non-stock, non-
profit educational instituion is not subject to income tax.
No taxable income shall be reported for income tax purposes because non-stock, non-
profit educational instituion is not subject to income tax.

3. Government educational institution


If Fatima University is a government educational institution, it will not report any income
because it is exempt from income tax.

11. Improperly accumulated earnings tax:


a.) Gross recepits 4,500,000.00
Less: Cost of sales 1,200,000.00
Gross income 3,300,000.00
Less: Deductions 680,000.00
Taxable income 2,620,000.00
Rate 30%
Income tax 786,000.00

b.) Taxable income 2,620,000.00


Yield from deposit substitutes 75,000.00
Interest on income dollar deposit 42,000.00
Total 2,737,000.00
Less: Dividend Paid ###
Income tax paid ###
Tax on deposit substitute (75,000 x 20% ###
Tax on interest (42,000 x 20%) 8,400.00
Reserved for building construction ### 2,315,400.00
Improperly accumulated tax 421,600.00

12. Sale of shares of stock:


a-c The tax due on the sale, whether domestic, resident foreign or
nonresident foreign, is uniformly computed as follows:
Gross selling price (110 x 1,000) ###
Less: Cost (100 x 1,000) ###
Net capital gain ###
Rate of tax 5%
Final tax 500.00

EXERCISE 9-4. MULTIPLE CHOICE


1. B
2. A
3. D
4. B
5. D
6. D
7. A Sales 2,650,000.00
Less: Cost of sales 1,725,000.00
Gross income 925,000.00
Less: Expenses
Inclusive (386,400/112%) ###
Exclusive ### 795,000.00
Taxable Income 130,000.00
Rate of tax 30%
Income tax 39,000.00

8. A
9. D
10. D
11. C
12. A
13. C
14. D
15. D Gross income ###
Less: Deductions ###
Taxable income ###
Rate of tax 30%
Normal income tax ###

MCIT (852,000 x 2%) ###


Income tax payable (MCIT- higher ###

16. C. Gross income ###


Less: Deductions ###
Taxable income ###
Rate of tax 30%
Normal income tax 6,600.00

MCIT (632,000 x 2%) ###


Income tax payable ( MCIT- highe ###

17. B Gross income 2,950,000.00


Less: Deductions
Expenses ###
Net operating loss carry ov ### 2,050,000.00
Taxable income 900,000.00
Rate of tax 30%
Income tax due 270,000.00
18. D Taxable income 900,000.00
Add: Interest on bank deposit (1 ###
Proceeds of insurance ###
Net operating loss carry ov ###
Dividends from ABB ### 1,595,000.00
Total 2,495,000.00
Less: Dividend paid ###
Income tax paid ###
Interest on bank deposit
(20,000 - 16,000)
4,000.00 774,000.00
Improperly accumulated taxable income 1,721,000.00
Rate 10%
Improperly accumulated earnings tax 172,100.00

19. D
20. D

EXERCISE 9-5. MULTIPLE CHOICE


1. C.
2. C Gross income 11,230,000.00
Less: Expenses
Salary, allowances & bonu ###
Other operating expenses ###
Depreciation of additional
school facilities:
Classrooms (1,300,000/20 ###
Furniture & Equipment
(400,000/20 x 6/12 ### 9,058,750.00
Taxable income 2,171,250.00
Rate of tax 10%
Income tax 217,125.00

3. D Tuition fees 9,500,000.00


Miscellaneous fees 1,200,000.00
Income of bookstore 350,000.00
Income of school canteen 180,000.00
Gross income 11,230,000.00
Less: Salary, allowances & bonus ###
Other operating expenses ###
Construction of additiona ###
Furniture and equipment ### 10,700,000.00
Taxable income 530,000.00
Rate of tax 10%
Income tax 53,000.00

4. B
5. D
6. C Minimum corporate income tax 50,000.00
Less: Normal income tax 20,000.00
Excess MCIT 30,000.00

7. A
8. B 2014 ###
2015 5,000.00
2016 ###
Total excess of MCIT over NIT ###

9. B Income tax, 1st Qtr, higher NIT 100,000.00


Less: Taxes withheld - prior year ###
Taxes withheld- 1st Qtr ###
Excess MCIT prior year ###
Total 60,000.00
Net income tax due, NIT, 1st Qtr 40,000.00

10. B Income tax, 2nd Qtr, higher MCIT 330,000.00


Less: Taxes withheld - prior year ###
Taxes withheld- 1st Qtr ###
Taxes withheld- 2nd Qtr ###
Net income tax payment- ###
Total 100,000.00
Net income tax due, MCIT, 2nd Qtr 230,000.00

11. C Income tax, 3rd Qtr, higher NIT 470,000.00


Less: Taxes withheld - prior year ###
Taxes withheld- 1st Qtr ###
Taxes withheld- 2nd Qtr ###
Taxes withheld- 3rd Qtr ###
Net income tax payment- ###
MCIT paid in 2nd Qtr ###
Excess MCIT in prior years ###
Total 400,000.00
Net income tax due, NIT, 3rd Qtr 70,000.00
12. A Income tax, 4th Qtr, higher NIT 670,000.00
Less: Taxes withheld - prior year ###
Taxes withheld- 1st Qtr ###
Taxes withheld- 2nd Qtr ###
Taxes withheld- 3rd Qtr ###
Taxes withheld- 4th Qtr ###
Net income tax payment- ###
Net income tax payment- ###
MCIT paid in 2nd Qtr ###
Excess MCIT in prior years ###
Total 505,000.00
Net income tax due, NIT, 4th Qtr 165,000.00

13. A Income tax, 4th Qtr, higher NIT 550,000.00


Less: Taxes withheld - prior year ###
Taxes withheld- 1st Qtr ###
Taxes withheld- 2nd Qtr ###
Taxes withheld- 3rd Qtr ###
Taxes withheld- 4th Qtr ###
Net income tax payment- ###
Net income tax payment- ###
MCIT paid in 2nd Qtr ###
Total 475,000.00
Net income tax due, NIT, 4th Qtr 75,000.00

14. A Gross income 10,000,000.00


Less: Deductions
Operating expenses ###
Cost of additional building ### 8,900,000.00
Taxable income 1,100,000.00
Rate of tax 10%
Income tax due 110,000.00

15. C Gross income 10,000,000.00


Less: Deductions
Operating expenses ###
Depreciation (2,500,000/5 ### 6,425,000.00
Taxable income 3,575,000.00
Rate of tax 10%
Income tax due 357,500.00

16. B
17. C
18. B Gross income, Philippines 740,000.00
Gross income, U.S.A. 690,000.00
Royalties, U.S.A. 50,000.00
Total 1,480,000.00
Less: Deductions
Expenses, Philippines ###
Expenses, U.S.A. ### 875,000.00
Taxable income 605,000.00
Rate of tax 30%
Income tax due 181,500.00

19. A Gross income, Philippines 740,000.00


Less: Expenses, Philippines 425,000.00
Taxable income 315,000.00
Rate of tax 30%
Income tax due 94,500.00

20. B Gross income. Philippines 740,000.00


Interest on bank deposit, PNB 10,000.00
Total gross income 750,000.00
Rate of tax 30%
Final withholding tax 225,000.00

EXERCISE 9-6. MULTIPLE CHOICE


1. A

2. D Gross income, Philippines ###


Gross income, U.S.A ### 260,000.00
Less: Deductions
From the Philippines ###
From the U.S.A ### 110,000.00
Taxable Income 150,000.00
Rate of tax 30%
Income Tax Payable 45,000.00

3. B Gross income from Philipines 2,800,000.00


Less: Deductions- Philippines 1,300,000.00
Taxable income 1,500,000.00
Rate of tax 30%
Income tax Due 450,000.00
4. A Gross income ,Philippines ###
Gross income, U.S.
( U.S. $ 125,000 x P 40 ) ###
Gross income, Hongkong
( H.K. $ 345,000/ 5 x P 40 ) ### 8,960,000.00
Less: Deductions
Expenses, Phil. ###
Expenses, U.S
( U.S. $ 62,000 x P 40) ###
Expenses, H.K.
( H.K. $ 230,000/ 5 x P 40 ### 5,120,000.00
Taxable income 3,840,000.00
Rate of tax 30%
Income tax 1,152,000.00

5. C Gross income, Philippines 1,200,000.00


Less: Deductions
Expenses, Philippines 800,000.00
Taxable income 400,000.00
Rate of tax 30%
Income tax 120,000.00

6. D Gross income, Philippines 1,200,000.00


Rate of tax 30%
Income tax 360,000.00

7. A Gross income, Philippines 1,200,000.00


Rate of tax 2.50%
Income tax 30,000.00

8. B Gross income, Philippines 1,200,000.00


Less: Deductions
Expenses, Philippines 800,000.00
Taxable income 400,000.00
Rate of tax 30%
Income tax 120,000.00

Taxable income ###


Less: Income tax ###
Amount remitted 280,000.00
Rate of tax 15%
Final Tax 42,000.00
9. A Exempt from tax

10. B Gross income, Philippines 1,200,000.00


Rate of tax 25%
Income tax 300,000.00

11. B Gross income, Philippines 1,200,000.00


Rate of tax 4.50%
Income tax 54,000.00

12. A
13. C

14. B Net income after tax 40,000,000.00


Rate 15%
Branch profits remittance tax 6,000,000.00

15. C Net income after tax ###


Royalty ###
Dividend ### 47,500,000.00
Less- Remittance tax 6,000,000.00
Remitted to head office 41,500,000.00
16. D
17. D
18. C
19. C
20. C

Submitted by:

Leslie G. Aragones
Roda May A. Diño

BSA 4-1

Submitted to:

Prof. Susan D. Cadiente, CPA


Deductions form Gross Income
Chapter 14- A Expenses, interest and taxes

Chapter 14 - A1
1. True
2. False
3. True
4. True
5. True
6. True
7. True
8. False
9. True
10. True
11. True
12. True
13. False
14 False
15. False

Chapter 14 - A2
1. Two full-time and two part-time employees.

2. Property Taxes ₱ 2,000


Insurance 1,500
Utilities 8,000
Deductible expense ₱ 11,500

3. Expenses for the taxation books, journals and renewal of license are deductible.

4. (c) malpractice insurance


(e) amount spent to entertain a BIR employee who is assigned to examine the books of his clients
All other items are not deductible because those are not related to Erra's profession.

5. Remittances from curiadores and cabos ₱ 720,000,000


Salaries to employees (12,000,000)
Depreciation of equipments (500,000)
Payments to wining bettors (350,000,000)
Taxable income ₱ 357,500,000
6. Plane ticket ₱ 4,500
Taxi fare 1,200
Meals 3,500
Hotel bills 4,900
Laundry and other incidental expenses 600
Deductible expenses ₱ 14,700

7. Meals ₱ 2,000
Wines & liquors 2,000
Hotel accomodation 4,000
Deductible expense ₱ 8,000

8. No, because it is not ordinary expenses of the business.

9. The 20% kickback to the government officials is nondeductible as well as the amount of money given to inspectors becau

10. No, because the said cost was used in construction of an additional building which will be a long-term asset of the Unive
However, they can validly claim the depreciation of the property as deduction but not the total cost of the building.

11. They are expenses not deductible from the gross income but rather capitalized to the apartment building.

12. No, the proceeds from the loan was used in personal purposes.

13. Interest expense ₱ 185,000


Interest income (5,000 x 33%) (1,650)
Deductible interest ₱ 183,350

14. a. Senior citizen ₱ 358,400


b. Both senior citizen & PWD; he can only claim ₱ 358,400
one 20% discount on a particular transactions.

15. a. Interest treated as expense


Interest expense on loan (500,000 x 18% x 6/12) ₱ 45,000.00
Less: Interest income [4,500 / (100% - 20% ) x 33%] (1,856.25)
Deductible interest ₱ 43,143.75

b. Interest is treated as capital expenditure


Cost of equipment ₱ 500,000
Add: Interest on loan 90,000
Total cost 590,000

Depreciation expense (590, 000 / 5 x 6/12) ₱ 59,000


16. a. Cash basis: She can claim the interest as a deduction from her income on the year she paid the principal, in full or in p
b. Accrual Basis: She can deduct a part of the interest for the month of December.

17. No, because Andres has a significant control over Kaibigan Corporation (55%), which makes them “related taxpayers.”

18. Donor's tax ₱ 40,000

19. a. Real property tax on apartment houses


b. Real property tax on residential house.
c. Business taxes imposed by Naga City

20. a. Foreign income tax claimed as deductions


Gross income, Philipines ₱ 420,000
Gross income, Spain 200,000 ₱ 620,000
Less : Deductions
Expenses, Philippines 50,000
Expenses, Spain 60,000
Foreign income tax paid 20,000 130,000
Taxable income ₱ 490,000
Tax rate 30%
Income tax due ₱ 147,000

b. Foreign income tax claimed as tax credits


Gross income, Philippines ₱ 420,000
Less: Expense, Philippines (50,000) ₱ 370,000
Gross income, Spain 200,000
Less: Expense, Spain (60,000) 140,000
Taxable income ₱ 510,000
Tax rate 30%
Income tax due ₱ 153,000
Less: Tax credit
Tax paid, Spain ₱ 20,000
Limit (140/510 x 153) 42,000 ₱ (20,000)
Income tax payable ₱ 133,000

21. Taxable income, Philipines ₱ 650,000


Taxable income, United States 700,000
Taxable income, Hong Kong 800,000
Total taxable income 2,150,000
Tax rate 30%
Income tax due ₱ 645,000
Less: Tax credit
Tax paid, United States ₱ 40,000
Limit (700/2150 x 645) 210,000 (40,000)
Tax paid, Hong Kong 50,000
Limit (800/2150 x 645) 240,000 (50,000)
Income tax payable ₱ 555,000
y given to inspectors because both of them are illegal expenses.

ng-term asset of the University.


al cost of the building.

ent building.
the principal, in full or in part.

em “related taxpayers.”
Chapter 14B

Losses, Bad Debts, Depreciation & Depletion

Exercise 14-B.1 TRUE OR FALSE QUESTIONS

1 0
2 0
3 0
4 1
5 0
6 0
7 0
8 0
9 1
10 1
11 0
12 1
13 0
14 0
15 0

Exercise 14-B.2 DISCUSSION QUESTIONS/PROBLEMS

1 No, because the loss is not due to trade/business.

2 Asset A= 25,000-10,000 ₱ 15,000


Asset B= 2,000-5,000 -3,000
Asset C= 1,000-3,000 -2,000
Total 10,000
Replacement Cost 21,000
Deductible Loss(Lower) ₱ 10,000

3 No, because the loss is not due to trade/business.

4 Asset A ₱ 1,500,000
Asset B (1,500,000-500,000) 1,000,000
Asset C (1,000,000/12x6/12) 41,667

5 Kelly must deduct the loss within 45 days after the occurrence of
such event and immediately deduct it from gross income.
Kelly must deduct the loss within 45 days after the occurrence of
such event and immediately deduct it from gross income.

Cash from safe ₱ 5,000


Equipment & Fixtures 45,000
Deductible Loss ₱ 50,000

6 a. Gross Income (60,000+2,000+1,500) ₱ 63,500


NOLCO (25,000)
Long-term Capital Loss (5,000)
Taxable Income ₱ 33,500

b. NOLCO ₱ 25,000
Long-term Capital Loss 5,000
Net Operating Loss ₱ 30,000

7 Taxable income (from business) ₱ 250,000

8 a. Cost of Building
Jose ₱ 4,000,000
Allan ₱ 3,500,000

b. Cost of Land to Jose


Land (allocated price) ₱ 1,000,000
add:
Building(allocated price) 500,000
Demolition Cost 80,000
Sale of Scrap (15,000)
₱ 1,565,000

c. Deductible Loss
Jose None

Allan
Undepreciated cost ₱ 1,500,000
Demolition cost 18,000
Sale of scrap (5,000)
Deductible Loss ₱ 1,513,000

9 Book Value (4000x6) ₱ 24,000


Selling Price (1000x6) 6,000
Deductible Loss ₱ 18,000
10 No, because mere loss on shrinkage in value of stocks through
fluctuation of the market is not deductible

Yes, because the 6000 is the amount actually suffered when the
stocks were disposed of.

Yes, the gain of 5000 on the sale is subject to income tax.

11 30,000 is validly deducted from gross income because of the


disappeance of the debtor which became the debt worthless.

12 None, because the loss is not due to trade/business

13 The school used accrual method of reporting income so it can


claim the amount as bad debt because it had already recorded as
income.

14 Yes, the amount collected was taxable because it is


part of gross income in the year of recovery

15 a. Deductible
b. Non-deductible
c. Non-deductible
d. Deductible
EXERCISE 14-3: Multiple Choice Problems (Answers)

1) B
2) B
Solution:
Total Expenses 150,000.00
Multiply by: 70%
Deductible Expense 105,000.00

3) A
4) C
5) C
Solution:
Interest Expense 20,000.00
Less: 33% of interest income 660.00
Deductible Expense 19,340.00

6) D
7) A
Solution:
Gross Income, Philippines 1,000,000.00
Expenses, Philippines 800,000.00 200,000.00
Gross Income, "A" foreign country 400,000.00
Expenses, "A" foreign country 200,000.00 200,000.00
Gross Income, "B" foreign country 300,000.00
Expenses, "B" foreign country 200,000.00 100,000.00 300,000.00
Taxable Income 500,000.00
Rate of Tax 30%
Income Tax Due 150,000.00
Less: Tax Credit
Tax paid "A" foreign Country 80,000.00
Limit (200/500 * 150,000) 60,000.00 60,000.00
Tax paid "B" foreign country 20,000.00 20,000.00
Limit (100/500 * 150,000) 30,000.00
Total credits, 1st limitations 80,000.00
2nd limitation (300/500 * 150,000) 90,000.00
Credit allowed (lower) 80,000
Income Tax Payable 70,000.00
8) B
Solution:
Net Income, Philippines 200,000.00
Net Income, United States 300,000.00
Taxable Income 500,000.00
Rate of Tax 30%
Income Tax Due 150,000.00
Less: Tax Credit
Tax paid, United States 110,000.00
Limit (300/500 * 150,000) 90,000.00
Credit allowed (lower) 90,000.00
Income Tax Payable 60,000.00

9) C
Solution:
Cost 100,000.00
Multiply by:
Depreciation Rate 10%
Remaining Years 4
Book Value 40,000.00

10) A
11) D
Solution:
Book Value 4,000,000.00
Less: Recovery from insurance (2017) 3,500,000.00
Deductible Loss (2017) 500,000.00

12) A
13) A
Solution:
Acquisition cost of land 1,100,000.00
Cost of old building 200,000.00
Demolition Cost 40,000.00
Less: Proceeds from the sale of scrap 15,000.00
Cost of the land 1,325,000.00

14) C
Solution:
Cost 500,000.00
Less: Accumulated Depreciation 300,000.00
Book Value 200,000.00
Replacement cost 300,000.00
Deductible loss (lower) 200,000.00

15) D
Solution:
Gross profit on sales 800,000.00
Add: Recovery on Accounts Receivable 30,000.00
Less: Deductible Expenses 440,000.00
Provisions for Bad 50,000.00 490,000.00
Net Income before income tax 340,000.00
ers)
EXERCISE 14-4: Multiple Choice Problems (Answers)

1) A
2) A
3) D
Solution:
Cost 570,000.00
Less: Scrap Value 70,000.00
Depreciable Amount 500,000.00
Divided by: Useful life 16
Allowable Deduction of Depreciation 31,250.00

4) C
5) C
Solution:
Payment of current pensions 250,000.00
Payment of past pensions
(1,200,000/10 years) 120,000.00
(1,500,000/10 years) 150,000.00
Deductible pension expense 520,000.00

6) D
7) B
8) B
9) B
10) A
Solution:
Sales 1,500,000.00
Cost of Sales (1,500,000 * 40%) 600,000.00
Gross Income 900,000.00
Less: Operating Expense (1,500,000 * 20%) 300,000.00
Net income before other income 600,000.00
Add: Other Income (600,000 * 5%) 30,000.00
Net income before income tax 630,000.00
Rate of Tax 30%
Income tax payable 189,000.00

11) B
Allowances 200,000.00
Business Income 400,000.00
Total 600,000.00
Less: Deductions 150,000.00
Taxable Income 450,000.00
Divided by: 2
Taxable Income (Miravite) 225,000.00
Rate of tax (Tax table) 20%
Income tax payable 45,000.00

12) A
Solution:
2016
Gross Income 420,000.00
Less: Deductions 400,000.00
Income from operations 20,000.00
Less: NOLCO -
Taxable Income 20,000.00

*Rescue Corporation cannot avail of NOLCO in 2016 because it is subject to


MCIT during this year
Taxable Income 20,000.00
Rate of tax 30%
Normal Income Tax 6,000.00
MCIT:
2016 (420000*2%) 8,400.00
Income tax payable (Higher) 8,400.00

13) B
Solution:
2017
Gross Income 380,000.00
Less: Deductions 300,000.00
Income from operations 80,000.00
Less: NOLCO 20,000.00
Taxable Income 60,000.00

*Rescue Corporation can avail of NOLCO in 2017 because it isn't subject to


MCIT during this year
Taxable Income 80,000.00
Rate of tax 30%
Normal Income Tax 24,000.00
MCIT:
2017 (380,000*2%) 7,600.00
Income tax payable (Higher) 24,000.00

14) D
15) D
wers)
EXERCISE 14-5: Problem (Answer)

Sales 1,200,000.00
Less: Cost of Sales 450,000.00
Gross Income 750,000.00
Less: Operating Expense
Salaries and wages 155,000.00
Travelling expenses 12,000.00
Light, heat and power 24,000.00
Entertainment 13,500.00
Depreciation 5,000.00
Interest Expense 2,500.00
Fire Loss 70,000.00 282,000.00
Income before contributions 468,000.00
Less: Contributions
Deductible subject to limit:
Actual 5,000.00
Limit (468,000 * 5%) 23,400.00 5,000.00
Taxable Income 463,000.00
Rate of tax 30%
Income tax due 138,900.00

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