Valencia 5th Ed Vol 1

CHAPTER 1 GENERAL PRINCIPLES AND CONCEPTS OF TAXATION
Problem 1 1 TRUE OR FALSE

1. False Without money provided by tax power, the other inherent powers cannot
function well.
2. True
3. True
4. True
5. True
6. True
7. False Taxation power is subject to inherent and Constitutional limitations.
8. False Taxation power is not absolute because it is subject to limitations.
9. True
10. False penalty is an example of imposition of amount for police power.
11. True
12. False governmental function unless stated otherwise.
13. False government agencies engaged in proprietory functions are subject tax
unless stated otherwise.
14. True
9. True
10. True
11. True
12. False Doubts must be resolved liberally in favor of the taxpayer.
13. True
14. True
15. False null and void
Prob. 1
4
1. A
2. C
3. C
4. A
5. B
6. B
7. A
8. C
9. C
10. C
Prob. 1
5
1. C
2. A
3. D
4. B
5. B
6. A
7. C
8. B
9. B
10. C
11. C
12. C
13. A
Prob. 1
6
1. D
2. D
3. D
4. D
5. D
6. D
7. D
8. C
9. A
10. C
11. D
12. D
Prob. 1
7
1. B
2. C
3. D
4. D
5. D
6. B
7. B
8. C
9. C
10. B
11. B
12. B
13. A
14. A
15. D
Prob. 1
8
1. A
2. D
3. D
4. A
5. A
6. C
7. B
8. C
9. B
10. A
11. B
12. C
13. A
14. D
Prob. 1
9
1. A
2. B
3. C
4. D
5. C
6. C
7. D
8. C
9. C
10. C
11. C
12. B
13. D
14. D
15. C
16. C
17. C

1. False Concurrence of the majority of congress.
2. False Churches are required to pay income taxes in cases of sale of real
property and business engagement.
3. False No public funds shall be appropriated for religious purpose.
4. False - All bills even if approved by the 2/3 of the congress should still be signed
by the President to become law.
5. False No person shall be imprisoned for nonpayment of poll tax.
6. False Taxation power is essentially legislative function; hence not every
government unit exercises this power.
CHAPTER 2
7. True
TAX ADMINISTRATION
8. False - Benefits from taxation may be or may not be experienced.
9. True
1. True
10. False Judicial review
2. False - Department of Finance
11. False Ex post facto law is not applicable for tax purposes.
3. False - Exclusive and original power to interpret tax laws. Final power to interpret
12. True
tax laws belongs to the Supreme Court.
13. False A tax evader breaks the law while the tax avoider sidesteps it.
4. False - Review by the Court of Justice/Court of Appeals
14. False Neither transferable/assignable
5. False - Cooperatives are exempted from income tax and annual registration fee.
15. True
6. False - In all cases, the authority to print is required.
7. False - Not required to register again, just file an information update.
8. False - Tax assessment is needed to enforce payment of unpaid tax liability.
1. True
9. True
2. True
10. True
3. True
11. False - Levy or imposition of tax
4. True
12. True
5. False prospective effect
13. False executive branch of the government
6. True
14. False the description refers to administrative feasibility.
7. True
8. False national taxes
1. True
2. False
3. False
4. True
5. False
6. True
7. True
8. True
9. True
10. False
11. False
sale.
12. True
13. True
submit to the BIR.

- Distraint is for personal property, while levy is for real property.
2. A
3. B
4. D
- Exceptions are those already filed in court of those involving fraud.
5. A
6. C
7. C
8. D
9. B
- value of property.
10. B
Redemption of property should be made within one year from the date of 11. D
12. C
13. B

1. True
2. True
3. False P100,000
4. False 10% final withholding tax
5. True If authorized by the BIR Commissioner
6. True
7. False All properties of a delinquent taxpayer may be subject to tax lien.
8. True
9. False Seizure
10. False Forfeiture
11. True
12. False Criminal violations already filed in court are not subject to compromise.
Collection of taxes is not a criminal violation.
13. True
1. True
2. False Without letter of authority, the taxpayer could refuse access to his books.
3. False Civil action could also be judiciary pursued.
4. True
5. False the appeal must first be made to Court of Tax Appeals.
6. False It could also be done if no tax return is filed.
7. False Ten years prescription period starts at date of discovery that tax return was
not filed.
8. False It should be 5 years.
9. False Levy could also be done before or simultaneous with distraint.
10.
False Residual value should be returned to taxpayer.
11.
True
12.
False It is also applicable to importation.
13.
True
Problem 2 5
1. B
Problem 2 6
1. D
2. A
3. A
4. A
5. C
6. C
7. D
8. B
9. C
10. C
Problem 2 7
Situation 1 No need to appeal. The prescribed period of filing for the refund is
already expired. The filing of refund should have been made within two years after the
payment of tax or penalty. It was filed within 2 years, one month, and 5 days after the
date of erroneous payment, hence, not appealable anymore.
Situation 2 May 5, 2010. The filing of refund was appropriately made within the 2
year prescribed period. The denial was received on April 5, 2010. The filing of appeal to
CTA should be made within 30 days from the receipt of denial from the BIR.
Situation 3 August 2, 2014. The date of grant for refund was received on August 1,
2009. The refund check (dated July 15, 2009) should be encashed within 5 years from
the date the grant for refund was received (August 1, 2009). The check should be
encashed from August 1, 2009 to August 1, 2014. It will be forfeited on August 2, 2014.
Situation 4 August 22, 2014. The date of grant for refund was received on August
21, 2009. The refund check (dated July 30, 2009) should be utilized within 5 years from
the date the grant for refund was received (August 21, 2009). The tax credit certificate
should be utilized from August 21, 2009 to August 21, 2014. It will be forfeited on
August 22, 2014, unless otherwise revalidated.
Situation 5 August 20, 2009. If the BIR has no response after the submission of
supporting documents to serve as evidence for the protest, the last day to appeal to
the CTA should be made within 30 days from the lapse of the 180 day period from the
submission of the supporting documents.
Computation of days:
After January 22, 2009
January
February
March
April
May
June
Days
9
28
31
30
31
30
July
Total number of days as of July 21
Plus 30 days after the 180 days
July
August
Total day on August 20
21
180
Problem 2 13
B
Minimum statutory fine
10
20
30
Problem 2 14
Yes, because the prescriptive period of filing the written protest is within 30 days from
receipt of assessment.
Situation 6 May 4, 2009. The last day to appeal to the CTA should be made within
30 days from the receipt of the denial of the BIR. The 30 days is determined as follows:
Days
First denial of the BIR March 22, 2009
to 2nd request for reconsideration March 30, 2009
nd
2 denial of the BIR April 12, 2009
to May 4, 2009 to complete the 30 day period
Total days as of May 4, 2009
8
22
30
Situation 7 June 25, 2009. The appeal to CA should be made within 15 days from
date of unfavorable decision from CTA was received (June 10 plus 15 days).
Situation 9 July 10, 2009. The appeal to SC should be made within 15 days from
date of unfavorable decision from CA was received (June 25 plus 15 days).
Situation 10 March 1, 2010. Within 1 year from the date of sale.
Problem 2 8
B
Tax due per return
Late filing and payment simple neglect (P100,000 x
25%)
Interest (P100,000 x 20% x 2.5/ 12)
Total amount due and payable
Problem 2 9
A
Amount due surcharge (P100,000 x 25%)
Problem 2 10
D
Tax due per return
Late filing and payment willful neglect (P100,000 x 50%)
Interest (P100,000 x 20% x 14.5/12)
Total amount due and payable
Problem 2 11
D
Deficiency income tax (P120,000 P100,000)
Interest (P20,000 x 20% 435/ 360 days)
Amount still due
Problem 2 12
A
Statutory fine (P250,000 x 2)
P 5,000
P100,000
25,000
4,167
P129,167
Mr. Lang is obligated to pay the P500,000 assessed against him.

Problem 2 15
Basic delinquency tax
Surcharges willful (P1,000,000 x 50%)*
Interest (P1,000,000 x 20% x 2)
Amount collected from the highest bidder
Add: Interest for real property redemption (P1,900,000
x 15%)
Total redemption amount
P 1,000,000
500,000
400,000
P 1,900,000
285,000
P 2,185,000
*The nonpayment of taxes is already 2 years it becomes habitual; hence, willful

neglect.
Problem 2 16
Proceeds from the highest bidder (P30,000/6%)*
Less: Basic tax assessed
Advertisement
Transfer of title
Capital gain tax
Remittance to Mr. Santiago
P 300,000
10,000
15,000
30,000
P 500,000
355,000
P 145,000
*The capital gains tax is based on the selling price of the real property sold. The rate of
capital gains tax is 6%; hence, the proceeds from the highest bidder is P500,000 or
(P30,000/6%).
P25,000
P100,000
50,000
24,167
P174,167
P20,000
4,833
P24,833
P500,000
Problem 2 17
Corrected sales (P7,000,000/70%)
Less: Operating expenses
Corrected net taxable income
Multiplied by corporate tax rate
Corrected total income tax due
Less: Income tax paid
Tax deficit
Surcharge (P900,000 x 25%)
Interest (P900,000 x 20%)
Total amount due
Problem 2 18
P10,000,000
6,500,000
P 3,500,000
30%
P 1,050,000
150,000
P
900,000
225,000
180,000
P 1,305,000
Amount of tax liability

Surcharges and interest
Bidding expenses
Price for the government
P190,000
20,000
10,000
P220,000
Problem 2 19
Sales proceeds (P400,000 + P50,000 +
P20,000)/94%
Multiplied by capital gains tax rate
Capital gains tax
Sales proceeds
Add: Interest (P500,000 x 15% x 8/12)
Redemption price
P500,000
6%
P 30,000
P500,000
50,000
P550,000
Problem 2 20
a. The cash reward of Miss Wan as tax informer would be P1,000,000, the maximum
amount of reward.
b. The informers reward remains payable, hence, Miss Wan will received the
maximum reward of P1,000,000.
c. The final income tax to be withheld from the reward of Miss Wan would be 10% of
P1,000,000 or P100,000.
Problem 2 21
a. The tax violations of Miss San Tago are the following:
1. Unregistered business (Sec. 236 [A], NIRC.)
2. Non-issuance of commercial invoice (Sec. 237, NIRC.)
3. Ignoring the summon (Sec. 5, NIRC.)
b. Miss San Tagos minimum financial penalties if convicted:
1. For operating an unregistered business
2. For not issuing commercial invoices
3. Failure to obey summon
Total minimum
P 5,000
1,000
5,000
P11,000
1.
Principal factory
Warehouses (P500 x 9)
Branches (P500 x 30)
Total annual registration fee January 31, 2010
P 500
4,500
15,000
P20,000
2.
Total annual registration fee January 31, 2010

Surcharges (20,000 x 25%)
Interest (P20,000 x 20% x 6/12)
Total amount due July 30, 2005
P20,000
5,000
2,000
P27,000
Problem 2 24
Amount of tax liability
Surcharges
Interest
Advertising cost
Price if purchase by the Government
P100,000
25,000
20,000
5,000
P150,000
Problem 2 25
None. Forfeited property belongs to the government, hence, excess amount over tax
liability is not refundable to the taxpayer.
Problem 2 26
Tax violation involving fraud is not allowed with tax comprise. (Sec. 204A, NIRC)
Problem 2 27
1. Compromise (P10,000,000 x 10%)
2. Compromise (P10,000,000 x 40%)
Problem 2 28
Case 1 Financial incapability due to corporate insolvency.
Delinquent accounts
Pending cases under administrative protest
Criminal violation not filed in courts
Total basic tax
Multiplied by applicable compromise rate
Amount of compromise
P 1,000,000
P 4,000,000
P 500,000
900,000
1,000,000
P2,400,000
20%
P 480,000
Problem 2 22
Case 2 Financial incapability due to surplus deficit resulting to impairment in original
None. There is no surcharge to be imposed to Orville Corporation because the error was capital by at least 50%.
corrected before payment and the payment was made on time.
Delinquent accounts
P 500,000
900,000
The income tax due is computed as follows:
1,000,000
Corrected gross receipts (P2,000,000/75%)
P 2,666,667
Total basic tax
P2,400,000
Corrected allowable deductions (P1,500,000/1.35)
1,111,111
40%
Taxable income per audit
P 1,555,556
P 960,000
Multiply by percent of tax for 2009
30%
Case 3 Doubtful validity of assessment.
Income tax due
466,667
Delinquent accounts
P 500,000
Problem 2 23
900,000

Total basic tax
1,000,000
P2,400,000
40%
P 960,000
Problem 2 -29
a. Yes, because the offered compromise amount of P100,000 exceeds the required
minimum amount of P25,000, (P250,000 x 10%).
b. Since distraint is imposed only on personal property, the personal property with a
value of P100,000 shall be subjected to distraint.
c. Yes, levy of real property and distraint of personal property can be done
simultaneously (Sec. 207B of the Tax Code). See also Section 205 of NIRC.
d. No, the unpaid portion will remain as tax liability of Lugui because Miss Lugui did
not avail of the compromise tax settlement. The remedy by distraint of personal
property and levy on realty may be repeated if necessary until the full amount due,
including all expenses, is collected (Sec. 217, NIRC).
CHAPTER 3
CONCEPT OF INCOME
1. False Some wealth that made to increase the taxpayers net worth are gifts
and inheritance and these are not taxable income.
2. True
3. True
4. False Filipino citizen who is not residing in the Philippines is taxable only for
income earned within.
5. False The basis of tax is the fair market value of the instrument.
6. False Not income for the employee and not subject to income tax because the
beneficiary is the employer.
7. False Accrual reporting reports income when there is earning regardless of
collection.
8. False Calendar year basis
9. True
10. False This rule applies to individual taxpayers.
11. False There is no rule of 25% initial payment if the sale is made on regular
basis of personal goods.
12. True
13. True
14. True
Problem 3 2
1. A
2. D
3. B
11. B
12. A
13. A
4. D
5. C
6. B
7.
8. C
9. C
10. C
14.
15.
16.
17.
18.
19.
20.
21.
D
A
B
D
C
C
D
A
Problem 3 3
A
Net assets ending (P300,000 P50,000)
Net assets beg. (P400, 000 P150,000)
Balance
Add: Owners drawings
Reportable income (loss)
P250,000
( 250,000)
P - 0 245,000
P245,000
Problem 3 4
D
Net assets, end of year
Add: Personal drawing
Total
Less: Net assets, beginning of year
Business income
P 100,000
70,000
P 170,000
150,000
P 20,000
Problem 3 5
C
Net assets ending (P530,000 P130,000)
Net assets beg.
Reportable income (loss)
Problem 3 6
Increase in total assets
Decrease in total liabilities
Drawings
Additional investments
Total income
Problem 3 7
P400,000
( 250,000)
P150,000
P 250,000
160,000
20,000
( 50,000)
P 380,000
Return of
Capital
P250,000
Time deposit balance

Problem 3 8
Sales
Cost of sale
Disposal cost
Income for each year
Problem 3 9
Year 1
0
0
0
0
Taxable
Income
Year 2
0
0
0
0
Return on
Capital
P30,000
Year 3
P1,800,000
( 1,000,000)
(
50,000)
P 750,000
Nontaxable
Income
Salary (P260,000/13) x 12
Raffle winnings
13th month pay (P260,000/13) x 1
Lotto winnings
P240,000
70,000
.
P310,000
P 20,000
500,000
P520,000
Problem 3 10
D
Within:
Taxable Income
Compensation income
P180,000
Income from grocery store
50,000
Outside:
Compensation income
120,000
Lotto winnings
100,000
Total income taxable in the Philippines
P450,000
Note: Lotto winnings earned outside the Philippines by a resident Filipino citizen are
taxable in the Philippines.
Problem 3 11
Subject to ITR
Subject to Final
Tax
P 80,000
300,000
.
P380,000
Problem 3 12
D
Salary for the first 4 months (P12,000 x 4)
Remaining months (P15,000 x 8)
Gross compensation income
Problem 3 13
B
Reportable income is the market value of the car
received
Problem 3 14
A
Market value of the service received
Problem 3 18
A
Gross income (P1,000,000 P600,000)
Actual operating expenses (P200,000 x 80%)
Net income before other income
Add: Gain from sale of old furniture
Taxable income
P400,000
(160,000)
P240,000
20,000
P260,000
Problem 3 19
1. A
Reportable income 2006 - casual sale (P12,000 P3,000)
P9,000
2. B
Reportable income 2006 regular sale (P9,000 x P4,000/P12,000)
P3,000
P 20,000
400,000
P420,000
Since the personal property is sold in regular basis, installment reporting of income is
allowed.
P 48,000
120,000
P168,000
Problem 3 20
1. P37,500 = Not in the choices
Net income (P2,000,000 P1,400,000 P100,000)
Income tax (P500,000 x 5/20) x 30%
P500,000
P 37,500
P120,000
2. B
Income tax (P2,000,000 x 6%)
P120,000
P6,000
Problem 3 15
C
Face value of the non-interest bearing note
P30,000
Multiplied by the present value factor of 10% annuity
0.909
Compensation income present value of the note
P27,270
Note: Upon receipt of the note, no interest income yet is to be reported.
Problem 3 16
A
Compensation income
Interest income (P50,000 x 12% x 6/12)
Problem 3 17
B
Collections during the year
(150,000)
P340,000
The sale is considered cash sales because the 2006 initial payments (P1,000 + P1,000
+ 2,000) exceeds 25% of the selling price; P4,000/P12,000 = 33%
Consultancy fee
Salary
Prizes in raffle ticket
Gain on sale of principal residence
Totals
Expenses actually incurred

Net income before personal exemption cash
basis
P50,000
Problem 3 21
B
Total revenue
Cost of sale
Income to be reported
Problem 3 22
D
Contract price
Less: Cost (P90,000/20%)
Gross profit
Multiplied by percent of completion
Reportable income under percent of completion
P1,000,000
( 500,000)
P 500,000
P 1,000,000
450,000
P 550,000
20%
P 110,000
P3,000
P490,000
Problem 3 23
Contract price
P1,200,000
Less: Total costs (P432,000 + P184,250 + P103,750)

Total profit
Less: Previous years reported income:
Accomplished contract price for 2008 and 2009
(P1,200,000 x 85%)
Previous years actual costs:
2008
720,000
P 480,000
P1,020,00
0
( 432,00
0)
( 184,25
0)
2009
Percent of completion 2010 Reportable income
Problem 3 24
A
Year 3 sales
Less: Cost incurred as of year 3:
Year 1
Year 2
Year 3
Year 3 reportable income
Problem 3 25
Harvested crops sold
P 100,000
200,000
50,000
350,000
P 150,000
P
2,000,000
P 300,000
100,000
100,000
100,000
400,000
Year 1
Year 2
P50,000
P40,000
P100,000
Accrual
Cash
10,000
.
Accrual
P40,000
P95,000
P95,000
15,000
Problem 3 27
1. Cash Method
Revenue
Equipment sold
Costs:
Cost of products purchased
Carrying value of farm
equipment
Gross income
2. Accrual Method
Revenue
Equipment sold
Inventory, ending
Inventory, beginning
Costs:
Cost of products purchased
Carrying value of farm
equipment
Gross income
P40,000
P50,000
Farming
Trading
P 50,000 P150,000
25,000
P95,000
Rent
P100,000
( 90,000)
( 25,000)
P 50,000
P 60,000
P100,000
Farming
Trading
P 50,000 P150,000
25,000
9,000
( 6,000
)
Rent
P100,000
( 90,000)
( 25,000)
P 53,000
P 60,000
P100,000
P100,000
Total
P210,000
Total
P213,000
CHAPTER 4
GROSS INCOME
1,000,000
P
1,000,000
Cash
Harvests sold:
(80 cavans x P500)
(190 cavans x P500)
Ending inventory:
(20 cavans x P500)
(30 cavans x P500)
Beginning inventory:
(20 cavans x P500)
76,250
Reportable income year 5
Total harvest for the year

at selling price
P 500,000
Less: Total direct costs:

Year 1
Year 2
Year 3
Year 4
Year 5
Problem 3 26
403,750
Gross income for the year
( 10,000)

1. True
2. True
3. False Religious officers income is subject to income tax.
4. True
5. True
6. False The basis of tax is the amount of debt cancelled.
7. False Excess of advances over actual expenses
8. True
9. True
10. True
11. True
12. False Not income but a liability in compliance with the trading business rule.
13. False Under service business, advances from clients are to be reported as
income. Hence, include as income because the advanced rental is without
restriction.
1. True
2. True
3. False because estimated bad debts is not allowed to be deducted from gross
business income.
4. False At the year of recovery
5. False Not an option to report, but required to report.
6. False the return of premium from insurance company is not taxable.
7. True
8. False To be taxable, income should be realized.
9. True
10. False As a rule, income obtained illegally is taxable.
11. False As a rule, income received by error is reportable income.
12. True
13. False Not taxable.
14. True
15. True
16. False The rule of P10,000 and below applies to prizes not winnings.
Problem 4 3
1. C
2. C
3. B
4. A
5. B
6. A
7. D
8. D
9. B
10. A
11. B
12. C
Problem 4 8
D
First employment for 30 years received at the
age of 50
P300,000
Problem 4 10
C
Gross compensation income (1,000 x P10)
P10,000
Compensation income (P13 P12) x 10,000

Capital gain (P15 P13) x 10,000
Problem 4 12
Problem 4 13
D
Regular compensation per month
Cancellation of indebtedness (P300,000
P250,000)
Total compensation income December 2007
Problem 4 6
B
Salary
Overtime pay
13th month pay and other bonuses
Total compensation income
P150,000
30,000
15,000
P195,000
Problem 4 7
B
Salary
Tips
Cost and living allowance
Total taxable compensation income
P120,000
360,000
5,000
P485,000
Compensation
P 10,000
Capital gain
Compensation
P 20,000
Capital gain
P 20,000
Compensation income (P25 P23) x 10,000

Capital gain (P30 P25) x 10,000
P300,000
120,000
5,000
P425,000
P500,000
Problem 4 9
B
First employment resigned
Problem 4 11
Problem 4 4
1. C
2. B
3. C
4. A
5. D
6. D
7. B
8. D
9. C
10. A
11. B
12. C
Problem 4 5
A
Gross salary (P280,000 + P20,000)
Pier diem as board of director
Taxable 13th month pay
Gross taxable compensation income
Note: New BIR interpretation provides that the 13th month pay and other benefits
amounting to P30,000 and below is not taxable. Since the 13 th month pay is only
P10,000, the P20,000 achievement awards being part of de-minimis can be used as
other benefits, to complete the P30,000 nontaxable threshold.
P 50,000
P 50,000
50,000
P100,000
Problem 4 14
B
Insurance premium beneficiary Sico
P5,000
Problem 4 15
B
Cleaning of business equipment
Repair service of store
Total casual service income
P 1,000
3,000
P 4,000
Problem 4 16
C
Total purchases
Transportation expenses
Unsold goods
Cost of goods sold
Problem 4 17
C
Purchases
P500,000
5,000
( 40,000)
P465,000
P 20,000
1,200,000
Purchase discounts
Purchase returns
Transportation in
Inventory end
Cost of sale
Problem 4 18
( 10,000)
( 40,000)
5,000
( 50,000)
P1,125,000
C
Inventory, ending
Purchases
Freight in
Purchase discount
Cost of sales
Problem 4 19
B
Sales
Sales returns
Net sales
Less: Cost of goods manufactured and sold
Purchases raw materials
Freight-in
Raw materials, ending inventory
Raw materials used
Direct labor
Factory overhead
Total manufacturing cost
Work-in-process, ending inventory
Finished goods, ending inventory
Year 1
(P50,000)
850,000
10,000
( 20,000)
P790,000
P1,275,000
( 25,000)
P1,250,000
50,000)
Problem 4 23
B
Rent for year:
200A
200B
200C
200B Reportable income
P 80,000
480,000
40,000
P 600,000
Problem 4 24
B
Rent income
Real property tax assumed by the lessee
Unrestricted advance rent
Taxable gross receipts
P360,000
10,000
60,000
P430,000
Problem 4 25
Year 1 Outright method

Year 1 Spread-out method
Value of investment
1,000,000
P 250,000
P240,500.0
0
142,464.37
P
98,035.63
Divided by remaining years of contract
4.75
P
20,639
Annual income from improvement

P 2,000
8,000
3,000
P13,000
Problem 4 21
A
Professional fee, accounting services
Salaries of accounting staff
Accounting supplies
Gross service income
P 500,000
( 150,000)
( 10,000)
P 340,000
Multiplied by months in a year

9/12
P
15,479
Year 1 spread-out rent income on improvement

Problem 4 26
Outright
Spread-out
Outright
P180,000
Problem 4 27
C
Cost of improvement
P 150,000
60,000
Spreadout
P240,500
Less: Accum. depreciation [(P240,500 - P560)/8 yrs] x 4.75

yrs
Book value, end of lease
Problem 4 20
B
Advance payment
Additional collection
Office machine
Gross service income
Problem 4 22
B
Service charges:
Originating from the Philippines
Collection abroad of collect messages originating in the
P 210,000
Outright
P 540,000
20,000
( 10,000)
P 550,000
400,000
200,000
P1,150,000
( 100,000)
(
Business income
Year 2
P 50,000
( 30,000)
900,000
15,000
( 25,000)
P910,000
Philippines
Gross income for Philippine Income Tax computation
Less: Accumulated depreciation at the end of the lease (P300,000/6) x 4

years and 7 months
Spread-out
P - 0 P300,0
00
229,16
Book value at the end of the lease

Divided by number of years until the termination of lease contract = 4
years and 7 months
Annual additional income
Multiplied by number of years expired (from March 31, 2008 to
December 31, 2010)
Reported additional income from improvement
Book value of improvement at the time of pre-termination
Cost
Less: Accum. depreciation at pre-termination (P300,000/6) x
2.75 years
7
P
70,833
Problem 4 33
A
P500,000 - Dividends earned outside the Philippines by a domestic corporation from a
foreign corporation are taxable in the Philippines.
4.58
P
15,454
Problem 4 34
A
The dividend received by a domestic corporation from another domestic corporation is
nontaxable.
2.75
(P42,50
0)
Problem 4 35
A
P8,000 prize won in a TV program. Prizes amounting to P10,000 and below are subject
to normal taxes.
P300,000
137,500
Additional income in 2010 from the pre-termination of contract
162,50
0
P120,0
00
Problem 4 37
Problem 4 28
C
P50,000 cash dividend received by an individual
Problem 4 29
B
Interest income from an investment in a 10-year bond
Interest income from expanded foreign currency deposit
Total taxable interest income
P 40,000
60,000
P100,000
Problem 4 30
D
Year 3 interest income of P4,461.20.
Problem 4 31
D
Royalty income as author (P100,000 x 10%)
Royalty income from franchising (P200,000 x 20%)
Royalty income from gold mine (P500,000 x 20%)
Total final tax
Problem 4 32
Gross royalties:
Copyright (P31,500/90%)
Patent (P20,000/80%)
Income tax final
Copyright (P35,000 x 10%)
Patent (P25,000 x 20%)
Income after tax
Problem 4 36
D
First prize raffle draw (P50,000 P1,000)
Gambling winnings
Beauty contest winnings
Taxable prizes and winnings
P 10,000
40,000
100,000
P150,000
Copyright
P 35,000
Patent
P 25,000
( 3,500)
.
P 31,500
( 5,000)
P 20,000
P 49,000
300,000
100,000
P449,000
Income (loss)
Year 1
P100,000
Less: Bad debts written off

Income loss before bad debts recovery
25,000
P 75,000
Bad debts recovery of previous year with tax

benefit
Taxable income
.
P 75,000
Year 2
(P
20,000)
10,000
(P
30,000)
25,000
(P
5,000)
Year 3
P 50,000
5,000
P 45,000
5,000
P
50,000
Note: The tax benefit allowed in year 2 for the bad debts written off is only P5,000;
hence, the reportable bad debts recovery in year 3 should also be P5,000.
Problem 4 38
D
Year 1: No bad debt recovery
Year 2: Bad debt recovery
None
P 600
Problem 4 39
D
P5,000 local tax recovery.
The requirement should be properly stated as: What amount of tax refund should be
reported as part of year 3 taxable income?
Problem 4 40
Real property tax
P 10,000
Local taxes
Reportable income from tax refund
500
P 10,500
Problem 4 41
C
Annuity received
P 20,000
Present value (P20,000 x 0.9091)
18,182
Interest income - Taxable annuity
P 1,818
Note: The present value factor of P1 for an effective interest rate of 10% is 0.9091.
Problem 4 42
D
Annuity received
Present value (P5,880 x 0.8928)
Interest income - Taxable annuity
P 5,880
5,250
P 630
Problem 4 43
B
Excess of withdrawable amount ($10,000 - $1,000)
Multiplied by exchange rate per 1 dollar
Reportable income received by error
Problem 4 44
C
Average monthly unreturned change to clients
Multiplied by number of months in a year
Illegally obtained income - taxable
Problem 4 45
Total receipts, 200B
Less: Direct costs- commission (P425,000 x 65%)
Rental expense (P3,000 x 12)
Depreciation
Supplies used
Gross income of A-1 Barbershop
9,000
P 50
P450,000
P 4,000
12
P48,000
P 425,000
P
276,250
36,000
5,000
319,000
P 106,000
1,750
Note: The interest expense could only be deducted to compute gross income if a
business is a banking institution. Furthermore, borrowing cost directly attributable to
the acquisition, construction or production of assets used in the business may either be
capitalized or deducted as operating expense.
Problem 4 46
Salary
Corporate shares received (1,000 shares x P100)
Cancellation of debt in lieu of service rendered
Profit sharing
Gross taxable compensation income
Problem 4 47
Salary (P25,000 + P302,000)
Income tax paid by the employer
Note receivable
P300,000
100,000
50,000
40,000
P490,000
P327,000
5,000
20,000
Total compensation
Business gross income
Allowable expenses
Prepaid rent income
Bad debts recovered previously written-off (P38,000 x 60%)
Taxable income subject to tabular tax
P352,000
P
400,000
( 250,00
0)
150,000
50,000
22,800
P574,800
CHAPTER 5
EXCLUSION FROM GROSS INCOME
Problem 5 1 TAXABLE OR NONTAXABLE with income tax
1. Nontaxable
11. Taxable
21. Taxable
2. Taxable
12. Nontaxable
22. Nontaxable
3. Nontaxable
13. Taxable
4. Nontaxable with
14. Nontaxable
IT
5. Taxable
15. Nontaxable
6. Taxable
16. Nontaxable
7. Nontaxable
17. Taxable
8. Nontaxable
18. Taxable
9. Taxable
19. Nontaxable
10. Nontaxable
20. Taxable
Problem 5 2 TAXABLE OR NONTAXABLE with income tax
1. Nontaxable
12. Nontaxable, if not exceeding 10 days
2. Nontaxable
13. Taxable
3. Nontaxable
14. Taxable (based on proceeds or selling price or
zonal value,
whichever is higher).
4. Nontaxable
15. Taxable
5. Nontaxable
16. Taxable
6. Nontaxable
17. Taxable, except when BIR registered with 50 year
old retiree; 10 years service and first time to avail.
7. Nontaxable
18. Taxable
8. Taxable
19. Nontaxable if Philippine Sweepstakes and Lotto
9. Nontaxable
20. Taxable
10. Taxable
21. Taxable
11. Taxable
22. Nontaxable
Problem 5 3
TRUE OR FALSE
1. False nontaxable
2. True
3. True
4. False Proceeds of life insurance is not taxable regardless of whoever
would be the recipient, except when the insured person outlived his
life insurance and received the proceeds. The excess of proceeds over
premium paid is taxable.
5. False include in gross income
6. False Bequest is a personal property.

7. True
8. True
9. True
10.False Nontaxable
11.True
12.False Nontaxable
13.False Some prizes and awards are not taxable. Eg. Ramon Magsaysay
Awards
14.True
15.True
16.False Include in gross income because income from gift is subject to
income tax.
17.False Exempt from income tax.
18.True
Problem 5
-4
1. A
2. D
3. C
4. D
5. D
6. B
7. A
8. A
Problem 5 -5
9. C
10. C
11. A
12. D
13. D
14. A
15. B
1.
2.
3.
4.
5.
B
D
A
D
C
6. D
7. C
8. C
9. C
10. C
P1,500
Problem 5 7
C
Take home pay
Nontaxable 13th month pay
Withholding tax
Other income subject to normal tax
Taxable income
P212,000
( 17,500)
13,500
20,000
P228,000
In general, a MWE is not subject to WTW and income tax on his compensation
income. But if he has other income that is subject to normal tax, his entire
income during the year will be subject to income tax, his compensation
income, however, will not be subject to WTW.
Net pay
Withholding tax
Advances
3th month pay
Problem 5 9
( 5,000)
.
P289,000
C
Taxable
P265,000
50,000
6,000
(27,000)
Nontaxable
P27,000
5,000
4,000
P36,000
Taxable
Net take home pay
P13,000
SSS contributions
PAG-IBIG contributions
Union dues contributions
Office party contributions
75
Charitable contribution (deductible only from
25
business income)
Withholding income tax
400
Totals
P13,500
Problem 5 10
Monthly salary
Problem 5 11
Rent of apartment
Reimbursement
Taxable benefits
Tax-exempt
P300
100
100
.
P500
P15,000
P 50,000
20,000
P70,000
Problem 5 12
D
Reportable taxable income
Problem 5 6
D
Availed 10-day sick leave pay
Problem 5 8
Christmas bonus (de minimis)

SSS contribution
Totals
P - 0 -
Problem 5 13
B
Proceeds of life insurance received by
insured person
Return of premium
Total premium paid
Taxable income
P500,000
40,000
(490,000)
P 50,000
Problem 5 14
D
Zero, because, the P270,000 cash surrender value is just a return of
contribution of P360,000.
Problem 5 15
D
Nontaxab
Taxable
le
Actual damages for unrealized profit
Interest on non-taxable damages
Actual damages for lost products
Exemplary damages
Moral damages
Actual liquidated damages
Total
P100,000
20,000
P200,000
50,000
50,000
80,000
P380,000
.
P120,000
Problem 5 16
Taxable income
Problem 5 17
P -0-
Terminal pay
Life insurance
SSS death benefit
Donations
Totals
Taxable
.
P - 0 -
Nontaxable
P 60,000
500,000
10,000
40,000
P610,000
Problem 5 18
A
The termination is due to cause within the control of Jalosjos.
Problem 5 19
D
Last pay ujpon resignation from his first
employer
P100,000
Problem 5 20
A
Zero, all items enumerated are not subject to income tax.
P4,000
Problem 5 23
D
Zero. All gifts enumerated are not subject to income tax.
Problem 5 24
D
Total income (P100,000 x 10 months)
Total average expenses (P20,000 x 10
months)
Income subject to income tax
500,000
250,000
1,000,000
100,000
P2,000,000
Problem 5 28
D
Zero. Interest and gain on sale of investment in a 5-year government bonds is
exempt from income tax.
Problem 5 29
B
Interest received from bond investment
P 120,000
Problem 5 30
B
Interest income
Multiplied by final tax rate on interest
income
Income tax
Problem 5 31
D
Interest on expanded foreign currency
deposit
Problem 5 21
D
P50,000 business income for year 4
Problem 5 22
C
Interest income from bank savings deposit
Prize for winning the silver Olympic medal

Gift from Mr. Lim
Gift from Nissan
Winnings Philippine sweepstakes
Total winnings/ awards not subject to income
tax
Problem 5 32
A
Income from sale of invented products
Sale of technology
Total revenue
Less: Research and development costs
Nontaxable income
P120,000
20%
P 24,000
P100,000
P5,000,000
2,000,000
P7,000,000
800,000
P6,200,000
Note: The cost of product produced need not to be deducted anymore

because of the term income from sale of invented products.
P1,000,000
( 200,000)
P
800,000
Problem 5 25
D
Zero. All winnings received by Miss Lara are subject to tax because she has
entered into a contest as Miss International.
Problem 5 33
C
Interest income on bank savings deposit
Problem 5 34
C
Interest income from foreign currency deposit
(P2,000,000 x 7.5%)
Interest income from time deposit (P1,000,000 x 20%)
Income tax paid by BBC
P10,000
P150,000
200,000
P350,000
Problem 5 26
A
Lotto Philippine winnings
P10,000,000
Problem 5 35
1. Compensation income (P5,000 x 10)
P 50,000
Problem 5 27
B
Ramon Magsaysay award
Athlete of the year award
P 50,000
100,000
2. Retirement benefits
Salary earned
P500,000
50,000
Gross income
P550,000
3. Same answer with No. 1
P 50,000
Problem 5 36
Winnings from charity horse race sweepstakes from
PCSO
Interest on government debt securities
Damages for breach of contract (P1,000,000 x 60%)
Gains from redemption of shares in mutual fund
Gain from sale of bonds with maturity of more than five
years
Gifts from friends
Total exclusion from gross income
P 500,000
100,000
600,000
300,000
60,000
200,000
P1,760,000
Problem 5 37
Include
Exclude
Proceeds of his life insurance (P2,000,000)
(P15,000 x 25)
Proceeds of his mothers life insurance
Cash gift
Inheritance
Rent income
Total
P
375,000
1,000,000
50,000
3,000,000
P1,625,00
0
.
P4,425,00
0
100,000
P1,725,00
0
Problem 5 38
No, the P1,500,000 transfer to be received by Miss Tandana is to be included
for income taxation because the transfer is in recognition of her services
rendered. It is not to be included as a part of estate tax.
Problem 5 39
All enumerated items are not subject to normal (tabular) tax.
CHAPTER 6
FRINGE BENEFITS TAX
1. True
2. False These are benefits other than salaries.
3. False Wage and salaries are not subject to reduction once given
regardless of the financial condition of the employer.
4. True
5. False This a definition of fringe benefits not of fringe benefit tax.
6. False The corporate income tax rate is 35% while the fringe benefit
tax is a final tax rate of 32%.
7. True, unless these are deminimis
8. False FBT is a final tax of the employee.
9. True
10.True
11.True
12.True
13.True
14.True
15.True
16.False Some housing fringe benefit is not subject to income tax. Ex.
Temporary housing for three months or housing benefit under the
employers benefit rule.
1. True
2. False If in the name of an officer employee and reimburse or paid by
the employer.
3. False - Fringe benefit which are necessary for the business and
required for the convenience of the employer are not subject to fringe
benefit tax.
4. True
5. False Scholarship grants to employees not related to business is
taxable.
6. False These are among those exempted from fringe benefit tax.
7. False Fringe benefits of rank-in-file employee, not mentioned in the
exemptions, are subject to income tax on wages but not subject to
fringe benefit tax.
8. False Rank-in-file employees fringe benefits are subject to income
tax on wages.
9. True
10.True
11.False medical allowance of P750 per semester
12.False Daily meal allowance for overtime
13.True
Problem 6 3
1. A
7. A
2. B
8. C
3. B
9. C
4. D
10. A
5. D
11. D
6. D
12. D
Problem 6 4A
Case 1: C
Taxable
Nontaxabl
e
Basic salary
P240,000
13th month pay

De minimis within ceiling (P1,500 x 12)
Other benefits - excess of de minimis
(P24,000 P18,000)
Total
.
P240,000
P20,000
18,000
6,000
Total
P44,000
Case 2: D
All of the given items of income for MWE are not subject to income tax and
within the prescribed nontaxable ceiling.
Taxable
Total basic salary

Overtime pay
Hazard pay
Holiday pay
De minimis:
Nontaxable rice subsidy (P1,500 x 12)
Nontaxable clothing allowance
13th month pay and other benefits:
13th month pay
Other benefits excess of de minimis
Rice subsidy (P36,000 P18,000)
Clothing (P20,000 P4,000)
P108,00
0
30,000
2,000
1,000
18,000
3,000
Case 4: Not in the choices

Total basic salary
Overtime pay
De minimis:
Nontaxable rice subsidy (P1,500 x 12)
13th month pay and other benefits:
13th month pay
Other benefits excess of de minimis
Rent income
Interest income (P4,000/80%)
Taxable
P96,000
20,000
Problem 6 4B
Case 1: Housing benefits
1. A
GMV (P6,000,000 x 5% x 50%)/68%
Multiplied by FBT rate
FBT
2.
30,000
13,000
P154,00
0
Total
Nontaxabl
e
P18,000
4,000
Nontaxab
le
P 9,000
P52,000
Nontaxabl
e
P220,588
32%
P 70,588
B
Down payment
P2,000,00
0
Installments (P1,000,000 x 4 x
0.636)
Acquisition cost, excluding interest
2,544,000
P4,544,00
0
GMV (P5,037,300 x 5% x 50%)/68%)

FBT
P2.00 difference is due to
rounding off.
Present values of installment
payments
Year:
1: (P1,000,000 x 0.8928)
2: (P1,000,000 x 0.7972)
3: (P1,000,000 x 0.7118)
4: (P1,000,000 x 0.6355)
P18,000
Nontaxab
le
P 8,000
Total
P185,195
32%
P 59,262
P
892,800
797,200
711,800
635,500
P3,037,3
00
Add: Downpayment
6,000
14,000
60,000
P32,000
Note: A MWE with other income subject to normal tax is disqualified from tax
exemption. The interest income is subject to final income tax. It should be
included as part of the taxable income as required by the question because
such income is taxable. The question did not ask for income subject to normal
tax only.
Note: The 13th month pay and other benefits amount only to P26,000
(P20,000 + P6,000), hence, nontaxable.
Case 3: B
5,000
P181,00
0
Monetary value
2,000,00
0
P5,037,3
00
Case 2: Motor vehicle benefits

1.
2.
A
GMV [(P1,000,000/5) x 50%]/68%
FBT
P147,059
32%
P 47,059
C
GMV [(P1,000,000/5)/68%]
FBT
P294,118
32%
P 94,118
Correction of Page 270: Motor vehicle formula No. 3:

3. Purchase of car on
MV = AC/5
installment basis, the ownership
of which is place in the name of
Where:
the employee.
AC = Acquisition cost, exclusive of
Not employer
interest
Problem 6 5
1. C = P170,000
Monetary value of FB (P80,000/32%) x
P170,000
68%
2. B = P250,000
Grossed-up monetary value
(P80,000/32%)
P250,000
3. D = P 0 A fringe benefit tax is not an income tax

of employer.
P - 0
Problem 6 6
A
Deductible from business income (P136,000/68%)
P 200,000
Problem 6 7
A
None, because fringe benefit tax is a final tax and no deduction is allowed
from gross compensation income except personal exemptions and health or
hospitalization insurance actually paid if the family income does not exceed
P250,000.
Problem 6 8
D
Zero. No Fringe benefit tax is to be imposed on fringe benefit of rank-in-file
employee. Mr. Estrada is a company messenger. His fringe benefit is subject
to withholding tax on wages.
Problem 6 9
C
Fringe benefit tax (P102,000/68%) x 32%
Income tax:
Net income before tax (P1,750,000/70%)
Add: Fringe benefits charge to miscellaneous
expense
Total
Multiplied by corporate income tax rate
Corporate income tax
Less: Income tax already paid (P2,500,000
P1,750,000)
Tax recovered by the government
P48,000
P2,500,00
0
102,000
P2,602,00
0
30%
P
780,600
30,600
750,000
P78,600
Note: The fringe benefit tax expense is not deductible because the related
withholding tax was not withheld and paid until the tax evasion was
discovered by the BIR.
Problem 6 10
B
Acquisition cost = fair market value (higher than
zonal value)
P2,040,000
Monthly fringe benefit [(P2,040,000 x 5% x

P 6,250
50%)/12]/68%
Problem 6 11
A
Zero. Jeans used of the condominium is not for her benefit but for the benefit
of B Corporation as the former conducts investigation for inventory fraud.
Problem 6 12
A
Grossed-up monetary value (P17,000 +
P6,800)/68%
Problem 6 13
FB expense (P476,000 x 75%)/68%
P30,000
32%
P 9,600
P525,000
Problem 6 14
D
P 7,680
Problem 6 15
C
P27,200
Problem 6 16
B
1. D
There is no FBT for rank-in-file employee.
2.
2.
Benchmark interest (P88,400 x 12%)
Less: Actual interest charge (P88,400 x 3%)
Difference
P10,608
2,652
P 7,956
FBT (P7,956/68%) x 32%
P 3,744
Problem 6 17
B
Goma golf club
Baguio Country Club
Total taxable fringe benefits
P 68,000
340,000
P408,000
FBT (P408,000/68%) x 32%
P192,000
Problem 6 18
A
Hotel accommodation [($1,600- ($300 x 4)] x P50/$1
Personal expenses ($280 x P50/$1)
Total amount of fringe benefits
P 20,000
14,000
P 34,000
Fringe benefit expense (P34,000/68%)
P 50,000
Problem 6 19
C
Fringe benefit tax [(P54,400 x 30%) / 68%] x 32%
P 7,680
Problem 6 20
B
P600,000
Car
Uniform and clothing allowance (P6,800 P3,000)
Medical allowance to dependents (P8,500 P1,500)
Total monetary value
Divided by grossed-up rate
Fringe benefit tax
P214,000
3,800
7,000
P224,800
68%
P330,588
32%
P105,788
Note: The new BIR interpretation is that the excess of the actual fringe
benefit given shall be taxable after deducting the maximum de minimis
threshold amount.
Problem 6 24
1. Housing benefit (P12,240 x 110%)
Lions Club membership fee
Total
Divided by grossed-up rate
Taxable amount of FB
P13,464
20,400
P33,864
68%
P49,800
2.
Fringe benefit tax (P49,800 x 32%)
P15,936
3.
Violeta Vicente cannot deduct the FBT from her gross

income.
San Miguel Corporation, however, can deduct the entire

amount
Problem 6 21
A
of grossed-up monetary value amounting to P49,800
Zero. The scholarship was obtained through competitive examination.
from the
gross income of the corporation as fringe benefit
Problem 6 22
expense.
1. D
Problem 6 25
None. Exempt because the educational benefit is related to work. (Employers 1. Assuming that Mr. Wong is an alien not engaged in trade or business in
benefit rule)
the Philippines, the determination of fringe benefit tax due would involve the
following computations:
2. B
P65,280 Only the monetary value is deductible because the benefit is taxTotal value of fringe benefits
P112,500
exempt.
Divided by GMV divisor
75%
P150,000
Problem 6 23
25%
1. Rice subsidy
P12,000
Fringe benefit tax due
P 37,500
Nontaxable uniform and clothing allowance
3,000
Employees achievement award
10,000
2. Assume that Mr. Wong is a Filipino employed as manager of an offshore
Nontaxable medical allowance to dependents (P125 x 12)
1,500
banking unit of a foreign bank. The determination of the fringe benefit tax
Laundry allowance
3,600
due would be as follows:
Actual medical benefits
10,000
Total nontaxable fringe benefits
P40,100
Total value of fringe benefits
P112,500
Divided y GMV divisor
85%

P132,353
15%
P 19,853
2.
Not a minimum wage earner

Less: SSS premium contribution
Philhealth premium contribution
3. Assuming that Mr. Wong is a Filipino employed as manager of Clark

Special Economic Zone (CSEZ), the computation of the fringe benefit tax due
based on 25% fringe benefit tax would be:
Total value of fringe benefits
Divided by GMV divisor
Net taxable compensation
Not a minimum wage earner

Taxable compensation
Note: Temporary housing for 3 months is not taxable.
P - 0 -
P 9,100
6,000
5,000
1,000
P21,100
2.
Problem 6 27
1. Minimum wage earner
5,400
P103,800
P128,000
P2,40
0

Problem 6 28
A 1 Monetary value
.
.
P109,200
P2,400
3,000
3,000
5,400
P122,600
Notes:
1. The MWE is disqualified from tax exemption once he
has other
other income subject to normal tax aside from his
compensation
income.
2. The rent income is not included in the solutin amount
because
the requirement is only taxable compensation
income.
3. Nontaxable 13th month pay and other benefits:
13th month pay
Add: Excess DM:
P10,0
- actual hospitalization (P20,000 P10,000)
00
- food overtime allow (P1,500 (P10,600/30)
617
x 25% x 10)
Total nontaxable 13th month pay and other
benefits
The MWE qualifies for tax exemption because his

13th month pay and other benefits does not
exceed
P30,000, computed as follows:
13th month pay
Actual hospitalization payments (P15,000
P10,000)
Clothing allowance (P5,000 P4,000)
13th month pay and other benefits nontaxable
P128,000
3,000
P112,500
75%
P150,000
25%
P 37,500
Problem 6 26
1. Minimum wage earner
Taxable compensation income
P2,40
0
B
.
P10,600
10,617
P21,217
P68,000
2
.
FBT (P68,000/68%) x 32%
P32,000
1
.
Down payment
P200,000
Add: Present value of P180,000 installment at

18% per year:
Yr. 1: (P180,000 x 0.8475)
Yr. 2: (P180,000 x 0.7182)
5,400
Yr. 3: (P180,000 x 0.6086)
P122,600
Yr. 4: (P180,000 x 0.5158)

Yr. 5: (P180,000 x 0.4371)
152,55
0
129,27
6
109,54
8
92,844
78,678
562,896
C
.
D
.
E
.
F.
Acquisition cost
Divided by
Monetary value
P762,896
5
P152,579
2
.
FBT (P152,579/68%) x 32%
P 71,802
1
.
Monetary value (P816,000 x 150%)
P1,224,0
00
2
.
FBT (P1,224,000/68%) x 32%
P
576,000
1
.
Annual monetary value = annual depreciation

(P1,020,000/25)
P
40,800
2
.
FBT (P40,800/68%) x 32%
P
19,200
1
.
Monetary value (P244,000 x 50%)
P
122,000
2
.
FBT (P122,000/68%) x 32%
P
57,412
1
.
Monetary value (P1,360,000 x 5% x 50%)
P 34,000
2
.
FBT (P34,000/68%) x 32%
P 16,000
Problem 6 29
1.
FBT condominium [(P8,000,000 x 5% x

50%)/68%] x 32%
FBT car:
Down payment
Present value of P240,000 yearly installment
at 12%
(P240,000 x 3.605)
Acquisition cost
Divided by
Monetary value
P
94,118
P
300,000
865,200
P1,165,20
0
5
P
233,040
FBT car (P233,040/68%) x 32%

2.
Journal entries:
FB expense
Cash / FBT payable
FB expense
Car
Cash / FBT payable
P
109,666
94,118
94,118
1,274,866
1,165,20
0
109,666
CHAPTER 7
DEALINGS IN PROPERTY
1. False Receivable not related to the main conduct of business are
capital assets.
2. False Depreciable assets primarily used in business are ordinary
assets.
3. True
4. True
5. True
6. False Regardless of gain or loss, a tax should be paid when the shares
of stock are sold in the stock market because the basis of tax is the
selling price.
7. True
8. True
9. True
10.False For ordinary loss, the same; but for capital loss not the same
because there is not capital loss carry over and not holding period for
corporation.
11.True
12.False No, because the 6% final tax is based on the higher of the
selling price or zonal value. If there is loss on sale, the normal tax rate
if preferable.
13.False Not subject to creditable withholding tax.
14.False whichever is lower
15.False subject to income tax (capital gains tax).
1. True
2. False equipment used in business operations is an ordinary asset.
3. True
4. False The basis is the fair market value at the date of donation.
5. False - the speculator sells securities which he does not own.
6. True
7. True unless sold by dealers of securities
8. False Ordinary assets

9. True
10.False There should be no capital gain or loss.
11.True
12.True
13.True
14.True
Delivery truck
Car for personal use
Correct amount of assets

1. False Not subject to capital gains tax because the issuance is original
and the shares of stock is owned by the corporation.
2. True
3. True
4. True
5. False Losses from wash sales are not deductible.
6. False no wash sales if there are two kinds of shares of stocks
7. True
8. True
9. True
10.True
11.False The final tax should be 30% is based on the gross income.
12.True
13.True
14.True
Problem 7 4
1.
D
2.
A
3.
None of the choices all are
correct.
4.
A
5.
C
6.
A
7.
B
8.
A
9.
C
10 C
.
Problem 7 6
Goods for sale

Trade receivables
Investment in property
Land and building for business
Problem 7 5
1.
B
2.
D
3.
D
4.
5.
6.
7.
8.
9.
10
.
11
.
D
D
D
C
D
D
D
A
Ordinary
assets
P100,000
50,000
500,000
Capital
assets
P200,000
250,000
.
P900,000
Problem 7 7
1. A
Selling price per 200 sq. meters
Multiplied by number of 200 s.m. sold
(9,000/200)
Total sales
Less: Cost of sales (P2,000,000 x 90%)
Ordinary gain from sale of land
2. C
Remaining capital asset (P2,000,000 x 10%)
400,000
P600,000
100,000
45
P4,500,000
1,800,000
P2,700,000
P200,000
Problem 7 8
B
Fair market value
P190,000
Less: Book value of car
150,000
Gain on exchange
P 40,000
Problem 7 9
C
There is capital loss if the property given away has fair value higher than
P200,000 when it was inherited.
Problem 7 10
A
Sec.40C, NIRC. No gain or loss shall also be recognized if property is
transferred to a corporation by a person in exchange for stock or unit of
participation in such a corporation of which as a result of such exchange said
person, alone or together with others, not exceeding four persons, gains
control of said corporation; provided, that stocks issued for services shall not
be considered as issued in return for property.
Problem 7 11
Not in the choices
Acquisition cost
P200,000
Agents commission (P500,000 P200,000) x
30,000
10%
Processing fee (P500,000 x 1%)
5,000
Deductible cost and expenses
P235,000
Problem 7 12
C
Sales price
Cost or basis to the donee (the lower of
donors cost or
the fair market value when the gift was made
Capital gain
Multiplied by holding period rate more than 1
year
Reportable capital gain
Problem 7 13
P150,000
( 50,000)
P100,000
50%
P 50,000
Sales price
Acquisition cost (P150,000 + P20,000)
Brokers commission (P200,000 x 5%)
Capital gain
P200,000
(170,000)
( 10,000)
P 30,000
Problem 7 14
D
The sale of the entire business is not an ordinary business transaction
(Kahns Federal Income Tax, p. 364)
Sales price
P100,00
0
Less: X , Capital
75,000
Capital gain
P
25,000
Problem 7 15
A
Holding period is more than 1 year = 50% of the capital gain
Problem 7 16
D
Sales price
Less: Cost or market whichever is lower)
Capital gain
No holding period is allowed for taxpayer other individuals.
Problem 7 17
P200,000
100,000
P100,000
Short-term capital gain

Long-term capital gain (P30,000 x 50%)
Long-term capital loss
Taxable income before personal exemption
2.
B
Ordinary gain
Capital asset transactions:
Long-term capital gain (P30,000)
Long-term capital loss
Problem 7 19
1. C
2. C
Ordinary net business income
Short-term capital loss
Long-term capital gain (P45,790 x 50%)
Net capital loss carry-over
P20,000
15,000
( 5,000)
P50,000
P20,000
30,000
( 10,000)
200A
P48,900
15,895
(18,960)
.
(P3,065)
D
Year
1
P200,00
0
Net business income

Year 1
2
Capital gain (long-term) = (P50,000 x 50%)
( 40,000 x 50%)
Capital loss (short-term) = (P40,000 x 100%)
(10,000 x 100%)
Net capital loss carry over
Capital loss
Year
2
P300,000
Year
25,000
20,000
(40,000
)
(10,000)
(15,000
)
P200,00
0
(15,000)
(5,000)
P300,000
Correction: The requirement should be taxable income before personal

exemption.
Problem 7 18
1. C
Ordinary gain
P50,000
Taxable net income before personal exemption

Problem 7 20
1. Not in the choices = P270,000
Ordinary taxable income
Short-term capital gain (loss)
Long-term capital gain (loss) (P600,000 x 50%):
(P100,000 x 50%)
NOLCO applicable
Net capital gain
2. B
Ordinary taxable income
Short-term capital gain (loss)
Long-term capital gain (loss)
Net capital gain
30,000
P80,000
P 48,900
Year
P
60,000
(P400,00
0)
40,000
P90,000
200B
P85,700
P22,895
( 3,065)
P 105,530
Year
2
P180,000
P200,000
(50,000)
300,000
(P100,00
0)
P
60,000)
(60,000)
P 90,000
P270,000
P180,000
P200,000
(100,000)
P100,000
P280,000
Problem 7 21
Capital gain (P150 P125) x 100)

Selling Price
P 80,000
400,000
6,000
12,000
Jewelry
M. Benz Car long term
(50%)
Refrigerator
Ford Car
Cost &
Expenses
P 11,000
370,000
5,000
20,500
Net Capital
Gain
P
69,000
15,000
1,000
(8,500)
P76,500
Problem 7 22
A
Zero. If BPI is a dealer of debt and equity securities, the transactions related
to securities are not capital asset transactions but ordinary transactions,
hence there is no net capital gain.
Problem 7 23
A
Sales of shares of stock
P400,000
Basis of shares of stock (lower)
( 50,000)
Gain on sale
P350,000
Problem 7 24
A
Capital gains of November sales (P150,000
P30,000
P120,000)
5%
Capital gains tax
P 1,500
Problem 7 25
A
Gain per share (P110 P100)
P
10
Number of shares of stock sold outside
1,000
stock exchange
P10,000
Capital gain not traded in local stock
5%
exchange
P 500
Final tax rate, 5% for the first P100,000 gain
Capital gains tax
Problem 7 28
1. D
Sale March (P120 x 500 shares)
Less: Cost (P120,000/ 1,200 shares) x 500 shares
Capital gain
2.
D
Gross profit (P500,000 x 30%)
Other expenses (P3,800 + P200)
Net taxable gain
Multiplied by normal corporate
income tax rate
Tax due and payable
Problem 7 27
P2,500
P150,000
4,000
P146,000
30%
P 43,800
P
60,000
50,000
P10,000
2. B
Sales May (P90 x 500)
Less: Cost of sales (P70,000 x 500/700)
Loss
P45,000
50,000
P 5,000
Nondeductible loss (P5,000 x 300/500)
P 3,000
3. B
Proceeds of liquidation (P100 x 300)
Less: Cost (P45,000 + P3,000)
Capital loss
Problem 7 29
1. D
No capital gain on original issuance of
companys own stock even if issued above par
2.
Note: The shares of stock sold in the Philippine stock exchange are subject to
percentage tax of of 1%.
Problem 7 26
1. A
Tax due and payable (P500,000 x .
005)
P2,500
C
Capital gain on reissued shares (P23 P21) x
2,000)
P30,000
48,000
P18,000
P - 0
P4,000
Problem 7 30
(1 C
)
Cost of the new family home (P2,500,000/P4,000,000) x
P2,000,000
(2
)
P1,250,00
0
B
Sales proceeds
P4,000,00
0
Less: Amount used to acquire new family home

Unutilized sales proceeds
2,500,000
P1,500,00
0
6%
Capital gains tax to be paid

Problem 7 31
Basis of new residence
Capital gains tax (P5,000,000 x 6%)
P
90,000
P9,000,000
P300,000
Since there was no tax exemption, the entire amount of acquiring the new
house and lot shall be its cost.
Problem 7 32
D
Zonal value (P700 x 500) higher
Capital gains tax
P350,000
6%
P 21,000
Holding period is not applicable because the property is a real property

subject to final tax.
Problem 7 33
B
Cost of original residence
Add: Excess of new acquisition cost over
sales price
(P15,000,000 P12,000,000)
Basis of new principal residence
Problem 7 34
1. C
Final tax (P1,200,000 x 6%)
2.
C
Creditable withholding tax (P500,000 x
6%)
Problem 7 35
Sales proceeds
Multiply by tax rate
Capital gains tax
P6,000,000
3,000,000
P9,000,000
P72,000
P30,000
A
P500,00
0
6%
P
30,000
Note: If the property is not used in trade or business, only the selling price
(not zonal value) shall be used in determining the basis of tax when the
property is:
a. foreclosed by banks or
b. sold by a government corporation.
Problem 7 36
Creditable withholding tax:

(P500,000 x 1.5%) x 4 houses
(P3,000,000 x 5%) x 2
Income tax still due and payable:
Total revenue (P500,000 x 4) +
(P3,000,000 x 2)
Total costs (P200,000 x 4) + (P1,200,000 x
2)
Gross profit
Operating expenses
Net income
Multiplied by normal corporate income
tax rate
Income tax due
Creditable withholding tax
Income tax still due and payable
P 30,000
300,000
P330,000
P8,000,000
(3,200,000)
P4,800,000
(2,800,000)
P2,000,000
30%
P 600,000
( 330,000)
P 270,000
Problem 7 37
1. A
None. No withholding tax because Goldrich Realty Corporation is the
buyer not a seller.
2
A
None. No income tax is to be collected from sale of land by the
government.
Problem 7 38
1. B
Zonal value
Capital gains tax
P10,000,000
6%
P 600,000
2.
C
Selling price
Capital gains tax
P 6,000,000
6%
P 360,000
3.
B
Zonal value
Multiplied by creditable withholding tax rate
Creditable withholding tax
P10,000,000
6%
P 600,000
B
Zonal value
Capital gains tax final tax
P10,000,000
6%
P 600,000
4.
Note: Real property tax is different from capital

gains tax.
5.
C
Selling price
Capital gains tax
P6,000,000
6%
P 360,000
Problem 7 39
A
Selling price = P1,000,000.
Problem 7 40
Selling price
P1,000,00
0
Less: Cost of real property lower than unpaid mortgage

assumed
Contract price
Problem 7 41
B
Down payment
Excess of unpaid mortgage assumed by the buyer over the
cost of real
property (P500,000 P400,000)
Initial payments
Problem 7 42
B
Selling price
Less: Unpaid mortgage assumed by the buyer lower than
cost
Contract price
Selling price
Less: Cost of sale
Gross profit
Reportable income = (gross profit/contract price) x
collection
(P1,000,000/P1,200,000) x P300,000
400,000
P
600,000
Selling price
Less: Cost of real property
Gross profit
P1,000,000
400,000
P 600,000
Down payment
Excess of unpaid mortgage assumed by the buyer over the
cost
(P500,000 P400,000)
Initial payments
Reportable income = (gross profit/contract price) x

collection
(P600,000/P600,000) x P220,000
1.
P1,200,000
P1,500,000
500,000
P1,000,000
250,000
P1,000,000
400,000
120,000
100,000
220,000
220,000
Creditable withholding tax:

b. (P1,000,000 x 30 x 3%)
c. (P2,500,000 x 40 x 5%)
Total creditable withholding tax
P 900,000
5,000,000
P5,900,000
Note: Sale of socialized housing of a realtor that is

a member of
HLURB is not subject to CWT if the sales price is
P150,000 per house.
100,000
P 220,000
P1,500,000
300,000
600,000
Problem 7 44
P 120,000
Note: The unpaid mortgage has no effect on the reportable income because
its value is lower than the cost.
Problem 7 43
C
Selling price
Less: Cost of real property lower than unpaid mortgage
assumed
Contract price
2.
Gross profit:
(20 x P150,000 x 25%)
(30 x P1,000,000 x 30%)
(40 x P2,500,000 x 35%)
Less: Optional standard deduction
(P44,750,000 x 40%)
Net taxable income
Multiplied by corporate tax rate
Income tax due
Less: Creditable withholding tax
Problem 7 45
P
750,000
9,000,000
35,000,00
0
P44,750,00
0
17,900,000
P26,850,00
0
30%
P
8,055,000
5,900,000
P
2,155,000
1.
D
Sales in the regular course of business
Add: Sales of ordinary asset (lot used as
warehouse)
Total sales of ordinary assets
Less: Cost of sales
Cost of lot
Ordinary gains / income
P500,0
00
P300,00
0
150,000
200,00
0
P700,0
00
450,00
0
P250,0
00
2.
B
Sales of residential house and lot
Proceeds applied for the acquisition of new residential
house and lot
Amount subject to final withholding tax
Final tax rate
Final tax
P1,000,00
0
P 70,000.00
P 8,696.00
26,087.50
34,783.50
P 35,216.50
5%
P 1,760.83
Note: The new cost per share due to 15% stock dividends is computed as
follows:
December 200A purchase (P10,000/115)
P 86.96
February 200B purchase (P36,000/345)
P104.35
2. Moving Average Method:
*Computation of the new cost per share would be:

Investment in common stocks:
No. of
December 15, 200A
Shares
February 24, 200B
100
Totals
300
Add: 15% stock dividends
400
Basis of cost per share
60
Divide by number of share
460
New cost per share
P 70,000
35,000
P 35,000
5%
P 1,750
Cost/
share
P100
P120
Amou
nt
P10,0
00
36,000
P46,0
00
.
P46,0
00
800,000
P
200,000
6%
P
12,000
Problem 7 46
Not-traded in Local Stock Exchange:
1. FIFO Method:
Sales proceeds (P200 x 350)
Less: Cost of shares sold:
December 2005 purchased (P86.96 x
100)
February 2006 purchased (P104.35 x
250)
Gain on sale on investment on stock
Multiplied by percentage of tax
Tax due and payable
Sales proceeds (P200 x 350)

Less: Cost of shares sold (350 x P100)
Gain on sale of investment in stock
Multiplied by percentage of tax
Tax due and payable
460
P
100
Problem 7 47
Sales (P150 x 1,000)
Cost (P80 x 1,000)
Gross profit
Gross profit rate (P70,000/P150,000)
Percent of initial payment
(P30,000/P150,000)
P150,000
( 80,000)
P 70,000
47.667%
20.00%
200A (P30,000 x 46.667%) x 5%

200B (P40,000 x 46.667%) x 5%
200C (P40,000 x 46.667%) x 5%
200D (P40,000 x 46.667%) x 5%
P700.00
P933.34
P933.34
P933.34
Problem 7 48
1. Initial Payments:
Downpayment
Installment received in 2006
Total
Add: Excess of mortgage assumed by the buyer over the
cost to the seller
(P650,000-P600,000)
Initial payments
P100,000
200,000
P300,000
50,000
P350,000
2. Selling Price:
Down payment
Installment payments P200,000 + (P300,000 x 4)
Mortgage assumed by the buyer
Selling Price
No, because the Loakan Corporation is not an individual taxpayer.

P
100,000
1,400,000
650,000
P
2,150,000
3. Contract Price:
Selling price
Add: Excess of mortgage assumed by the buyer over the
cost to the seller
(P650,000 P600,000)
Total
Less: Mortgage assumed by the buyer
Contract Price
P
2,150,000
50,000
P
2,200,000
650,000
P
1,550,000
Net gain (P200,000 P25,000)
Loss
P 5,000
20,000
P25,000
Capital gain (loss)

NCLCO
Taxable income before
p.e.
(P20,000)
(40,000)
.
P10,000
50,000
(40,000)
P90,000
(P100,000
)
P50,000
P30,000
P80,000
(80,000)
(20,000)
Capital gain (loss)
20,000
10,000
Taxable income before

p.e.
( P80,000)
(P20,000)
(40,000)
.
P10,000
2. Corporate taxpayer
Operating gain (loss)
NOLCO
Gain
P200,00
0
.
P200,00
0
P175,00
0
Note: The gain or loss on transaction letter c is zero. In the absence of cost,
the fair market value is assumed as the cost.
Problem 7 50
Trinidad is correct. There is a tax savings of P100,000 for opting to pay final
taxes.
Final tax (P3,000,000 x 6%)
P 180,000
Normal tax (P3,000,000 P2,200,000) x
( 240,000)
30%
Tax savings
( P60,000)
Problem 7 51
NOLCO
Year 1
Year 2
Year 3
Year 4
(P100,000 P50,000
P30,000
P80,000
)
(80,000)
(20,000)
20,000
10,000
( P80,000)
50,000
P130,000
Problem 7 53
1. M as an individual taxpayer
Problem 7 49
Option money not exercise
Gain on retirement of bonds[(P1,000,000 x 120%)P1,000,000]
Shares becoming worthless
Problem 7 52
1. Individual taxpayer
Operating gain (loss)
Business income
Business expenses
Ordinary income
(loss)
NOLCO
Net ordinary income
(loss)
Capital asset
transactions:
Short-term gain
(loss) 100%
Long term gain (loss)
50%
Net capital gain
(loss)
NCLCO
200A
P
200,000
200B
P400,00
0
200C
P450,0
00
200D
P520,0
00
200E
P600,0
00
300,000
350,000
(P100,0
00)
P
50,000
( 30,00
0)
P
20,000
400,00
0
P
50,000
500,00
0
P
20,000
500,00
0
P100,0
00
.
P
50,000
.
P
20,000
.
P100,0
00
P
70,000
P
50,000
- 0
-
.
(P100,0
00)
P
120,000
( 50,0
00)
(P100,0
00)
P -
90,000
10,000
P
70,000
(P
10,000)
P
10,000
( 10,0
(100,00
0)
(P
30,000)
P
50,000
( 30,00
Reportable net
capital gain
Taxable income
before exemption
.
P
70,000
(P
30,000)
00)
P
20,000
P
50,000
P
20,000
0)
P
20,000
P120,0
00
3.
Business income
Business expenses
Ordinary income
(loss)
NOLCO
Net ordinary income
(loss)
Capital asset
transactions:
Short-term gain
(loss)
Long term gain
(loss)
Net capital gain
(loss)
Reportable net
capital gain
Taxable income
P
200,000
2007
P450,
000
300,000
350,000
500,000
(P100,00
0)
P
50,000
( 50,00
0)
P - 0
-
400,00
0
P
50,000
( 30,0
00)
P
20,000
(P100,0
00)
P
0
180,000
P
80,000
P
80,000
P
80,000
20,000
P
20,000
P
20,000
P
40,000
.
(P100,00
0)
P
120,000
( 100,00
0)
P
20,000
P
20,000
(P
80,000)
Problem 7 54
1. Sales price
Less: Cost of sale
Gross income
Multiplied by percent of collection (P2,000,000 +
P500,000)/5,000,000
Reportable gross income in 2009
2.
Collection (P2,500,000/5)
Multiplied by percent of gross income
(P1,000,000/P5,000,000)
P520,00
0
2009
P600,0
00
P
20,000
500,00
0
P100,0
00
.
P
20,000
.
P100,0
00
P
70,000
( 200,00
0)
(P130,0
00)
P
50,000
- 0
P
50,000
P
50,000
P150,0
00
P
20,0000
Sales price
P5,000,00
0
Gross income
2008
2006
P400,00
0
P100,000
Less: Cost of sale
2. M as a corporate taxpayer
2005
Reportable gross income in 2010
4,000,000
P1,000,00
0
Note: The 25% initial payment rule does not apply for the regular installment
sale of personal property (inventory). The 25% initial payment rule applies
only to the casual sale of personal property classified as capital asset and
sale of real property.
Problem 7 55
1.
Capital gains tax (P3,000,000
P2,000,000) x 6%
P 60,000
2.
Basis of the new residential home (P1,200,000

x 2/3)
P800,000
3.
P180,000
4.
Basis of the new residential home
P2,000,00
0
Problem 7 56
1.
Down payment (P3,000,000 x 20%)
Add: Excess of mortgage over cost (P1,200,000
P700,000)
Initial payment
2.
P5,000,00
0
Selling price
P 600,000
500,000
P1,100,00
0
P3,000,00
0
Add: Excess of mortgage over cost

500,000
P3,500,00
0
4,000,000
P1,000,00
0
Total
50%
P
500,000
Contract price
1,200,000
P2,300,00
0
Capital gains tax in 2009 (P3,000,000 x 6%)
P180,000
P500,000
20%
Less: Mortgage assumed by the buyer
3.
Note: The sale is considered cash sales because the

initial payment
is 37% of the selling price.

Problem 7 57
1.
Deductible loss Feb. 14, 2009
2.
Basis of ordinary shares (P900,000 x 75/100)

P- 0-
Sales
P320,00
0
Basis of preference shares (P900,000 x 25/100)

3.
Less: Cost of sales (P450,000 x 8/9)
Less: Cost ordinary shares - allocated
400,000
P
80,000
Nondeductible loss Feb. 14, 2009
Selling price ordinary shares (P25 x 25,000)
Selling price preference shares (P60 x 5,000)
3.
P294,444
Less: Cost preference shares allocated
4.
P215,556
Net gain
Original cost
Add: Nondeductible loss
Jan. 20: (P80,000 x 5/9)
Feb. 10:: (P80,000 x 4/9)
New cost
5.
Jan. 20
P250,000
Less: Cost of sales:

Jan. 10: (P50 x 1,000)
Jan. 20: (P294,444 x 3/5)
FMV of preference shares (P50 x 5,000)

Total FMV of shares of stock received
2.
Basis of new shares allocated
225,000
P 25,000
35,556
5.
Capital gains tax (P25,000 x 5%)
1,250
.
P215,55
6
6.
Tax advantage (P4,625 P1,250)
3,375
Problem 7 59
1 B Co. ordinary shares with FMV of
.
Land with FMV of
Cash
P220,00
0
50,000
20,000
P290,00
0
Total
226,667
P
13,333
Less: Cost of A Co.s shares transferred
P
750,000
250,000
P1,000,00
0
Less: Cost of investment in A Co. transferred (P9 x 100,000)

Nontaxable gain
75,000
P925,000
0.005
P 4,625
P 50,000
176,667
Problem 7 58
1. FMV of ordinary shares (P25 x 30,000)
(P50,000)
675,000
P300,00
0
Total sales price (P625,000 + P300,000)

Multiplied by percentage tax
Percentage tax
P240,00
0
Capital gain
P225,000
4.
Sales (P60 x 4,000)
P625,00
0
Feb. 10
P180,00
0
44,444
P294,444
Ordinar
y
P675,00
0
900,000
P
100,000
Preferenc
2
.
Total gain
200,000
P
90,000
Taxable gain (is limited to the FMV of land and

cash)
P
70,000
Cost of A Co.s shares transferred
P200,00
0
Add: Cash received

FMV of land received
P20,00
0
50,000
Balance
70,000
P270,00
0
Gain recognized in the exchange

Basis of B Co. shares received
70,000
P200,00
0
3
.
Basis of land received FMV of land
P
50,000
4
.
Capital gains tax of land (P300,000 x 6%)
P
18,000
5
.
Sales price
P220,00
0
Less: Cost
Taxable gain
200,000
P
20,000
CHAPTER 8
DEDUCTIONS FROM GROSS INCOME
Problem 8 1 DEDUCTIBLE OR NONDEDUCTIBLE FROM GROSS INCOME
11. Nondeductible
1. Deductible
2. Nondeductible
12. Deductible
3. Nondeductible
13. Deductible
4. Deductible, in lieu of tax credit (Sec. 34C3,
14. Deductible
NIRC)
5. Deductible
15. Nondeductible
6. Nondeductible
16. Nondeductible
7. Nondeductible
17. Nondeductible
8. Deductible
18. Deductible
9. Deductible
19. Deductible
10. Nondeductible
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
Problem 8 4
Problem 8 5
1. B
1. C
1. A
2. No choice,
2. A
2. A
OSD=40%
3. D
3. D
3. C
4. D
4. A
4. C
5. D
5. B
5. A
6. C
6. B
6. D
7. B
7. A
7. C
8. D
8. A
8. A
9. B
9. D
9. B
10. C
10. A
10. C
11. C
12. D
13. C
Problem 8 7
C
Expensed
Change of motor of air condition
Repainting of building
P10,000
Expansion of store
Cleaning of computers
9,000
Repair of furniture
1,000
P20,000
Problem 8 8
A
Salaries net of tax
Withholding tax
Deductible business expense
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
Capitalized
P60,000
50,000
.
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
Problem 8 11
D
1. A
No personal or business expense is deductible.
P16,000
38,000
P54,000
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
Problem 8 14
1. B
Gross income (P870,000 P10,000
P380,000))
Add: Gains from sale of capital asset
Total
2.
B
OSD
Less: Operating expense
Amount of income enjoying tax savings
Problem 8 15
D
Gross receipts from profession
Rent income
Total gross income
Multiplied by percent of OSD
Problem 8 16
C
Operating expense before representation expense
(P2,000,000 P300,000)
P500,000
40%
P200,000
P480,000
40,000
P520,000
40%
P208,000
P208,000
20,000
P188,000
P100,000
450,000
P550,000
40%
P220,000
P1,700,000
Representation expense Actual

- Limit (P20,000,000 x 0.005)
- Lower
Allowable itemized deductions
P300,000
100,000
Problem 8 17
B
Salary expense
Rent expense
Advertising expense
Interest expense
Tax differential on interest income (P30,000 x 33%)
Total itemized deductions
100,000
P1,800,000
P120,000
24,000
6,000
5,000
60,000
( 9,900
)
P205,100
Problem 8 18
A
Gross salaries of employees
Grossed-up monetary value of fringe benefits
Deductible salaries and fringe benefits expenses
P6,000,000
1,000,000
P7,000,000
Problem 8 19
D
Allowable deduction fringe benefit expense (P102,000/68%)
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
= 15% (76,000 T)
= 30% (76,000 B)
B
B
B
= 15% [76,000 30% (76,000 B)]

= 15% (76,000 24,320 + 30%B)
= 11,400 3,420 +0.045B
B
0.045B
0.952B
B
= 7,980
P 80,000
4,000
P 76,000
= 7,980/0.955
= 8,356
Proof:
Income before bonus and tax
Less: Income tax (P76,000 P8,356) x 30%
P76,000
20,293
Income after tax but before bonus

Multiplied by rate of bonus
Bonus
P55,707
15%
P 8,356
2. A
Actual cash collection for rent
P150,000
P150,000
Problem 8 27
D
Monthly rental expense
Monthly depreciation (P600,000/8)/ 12
Monthly deductible expense
P2,000
6,250
P8,250
Problem 8 28
1. B
Trading - Limit lower (P5,000,000 x .005)
P25,000
Note: Donation for coffin and other wake expenses is not business or compensation
related and, hence, not deductible. (Sec. 72, Rev. Regs. 2)
2. C
Servicing actual lower
P30,000
Problem 8 22
Problem 8 29
B
Operating Expense before representation
Representation expense (P300,000 x .01)
Deductible operating expense
P80,000
3,000
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 21
B
Monthly salary
Death benefits
Terminal pay
Continuous compensation after the burial for three
months
Total deductible expenses
Purchases
Decreased in inventory
Increased in inventory
Problem 8 23
D
Traveling expenses (P50,000 + P200,000)
Transportation expense messenger
Total allowable expense
P 5,000
50,000
25,000
15,000
P95,000
Inventoriable
cost
P300,000
20,000
.
P320,000
Supplies
expense
P40,000
( 3,000)
P37,000
P250,000
100,000
40,000
P390,000
Problem 8 24
D
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
Accrual
P96,000
Cash
P64,000
Interest expense
Tax differential (P30,000 x 38%)
(P30,000 x 33%)
Deductible interest expense
Problem 8 32
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%)
Problem 8 31
Interest
Interest
Interest
Interest
Interest
Total
Sole proprietor
P50,000
(11,400)
.
P38,600
Corporation
P50,000
(9,900)
P40,100
paid in advanced
paid to a brother
paid on deliquency taxes
on borrowings to finance his family home
paid to finance petroleum exploration
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%
Deductible
P 8,000
.
P 8,000
Nondeductible
P 20,000
12,000
30,000
100,000
P162,000
P30,000
24,000
Actual tax savings
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
P 60,000
Payment to government (P200,000 x 50%)
(100,000)
Balance
(P40,000)
Deductible bad debts is the entire amount of
collectibles
Problem 8 37
B
Bad debts from business actual written off (P100,000
x 40%)
Bad debts from profession actual written off
Deductible bad debts expense
Problem 8 38
D
Annual depreciation expense (P50,000 P5,000)/5
Multiplied by ratio of months used during the year
Depreciation expense 200B
Problem 8 39
A
Annual depreciation (P2,300,000/11.5 years)
Multiplied by ratio of months used in 2007 (July 1 to
Dec.)
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
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
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
.
P100,000
P40,000
50,000
P90,000
P 90,000
81,000
Value of production (P12 x 1,200,000 units)

Less: Production and selling costs:
Mining costs
5,000,000
1.06
800,000
P 848,000
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
P2,400,000
P14,400,000
P2,000,00
0
3,000,000
1,500,000
7,500,000
1,000,000
Net income from operation
Multiplied by limit percentage
Deductible amount fro exploration and development
cost
P200,000
6/12
P100,000
P5,300,000
Depletion cost 2007 (P2 x 1,200,000 units)
Milling costs
Marketing expenses
P9,000
1/2
P4,500
22,500
36,000
P229,500
4
.
P 6,900,000
25%
P 1,725,000
B
Current exploration and development cost (P1,500,000 +
P1,000,000)
Less: Deductible amount of exploration and development cost
P2,500,000
1,725,000
(see 3)
Exploration and development cost chargeable to succeeding
years
Problem 8 43
B
Deductible expense:
Capitalized
Depreciation expense (P10,000,000 x 90%)/50

Capital outlay
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.
P180,000
200A
800,000
Outright
expense
P10,000,000
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
Year Y
600,000
10,000
710,000
10,000
610,000
A
Actual retirement payments
Problem 8 45
P 775,000
P610,000 = Not in the choices
Actual contribution or normal valuation,

lower
Add: Amortization (P100,000/10)
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%)
Problem 8 47
C
Allowed deductible contribution actual
Problem 8 48
B
Income before charitable contribution (P500,000
P130,000)
Multiplied by percent of limit
Allowed deductible contribution - lower
Problem 8 49
C
Actual value of donation priority program
Adopt a school program incentive (P1,000,000 x 50%)
Deductible donation
P10,000
P5,000
P370,000
5%
P 18,500
P1,000,000
500,000
P1,500,000
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
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
)
Gross income
Less: Optional standard deduction (P3,000,000 x
40%)
Income from operations
P3,000,000
1,200,000
P1,800,000
Problem 8 51
1. Salaries of barbers
Depreciation of barbershop equipment
Cost of service
2.
2,000,000
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
Sole
Proprietorship
Bad debts written-off (P35,000
5,000
Corporatio Partnershi
n
p
P 5,000
P 5,000
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
40,000
50,000
40,000
50,000
40,000
50,000
170,000
P 265,000
125,000
P 220,000
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%]
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)

OSD
P3,000,000
40%
P1,200,000
Note: NOLCO is not allowed to be deducted if the taxpayer uses

OSD.
3.
Gross income
Less: OSD
Net taxable income
Problem 8 55
1.
Actual contribution or normal valuation, lower
Add: Amortization - 200A (P250,000/10)
2.
Financial net income

Add: Retirement benefit expense accounting
Total
Less: Deductible retirement expense

taxation
Net income for tax purposes
P3,000,000
1,200,000
P1,800,000
200A
1,000,000
25,000
1,025,000
200B
900,000
25,000
925,000
50,000,00
0
60,000,000
1,100,000
51,100,00
0
1,200,000
61,200,000
925,000
1,025,000
50,075,00
0
60,275,000
Problem 8 56
Corporatio
n
500,000
255,000
50,000
20,000
Individual
Salary expenses
500,000
Retirement (P250,000 + P50,000/10)
255,000
Representation expense (P10,000,000 x .005)
50,000
Interest expense paid to the BIR - full
20,000
Interest expense limit:
Corporation (P100,000 (P96,000/80%) x 33%)
60,400
Individuals (P100,000 (P96,000/80%) x 38%
54,400
40,000
40,000
Rent expense
250,000
250,000
Group insurance expense
50,000
50,000
Bad debts expense (P100,000 x 20%)
20,000
20,000
Contribution expenses:
TESDA priority project (500,000 x 1.5)
750,000
750,000
Local government limit (lower is actual)
100,000
100,000
2,095,400
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
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
Computation of sales:
Financial income
Loss from sale of business equipment
Cost of sales
Operating expenses deducted
(P680,000 + P370,000 + P1,000,000 + P800,000 + P500,000
+ P200,000 + P300,000 + P150,000)
4,000,000
P39,000,00
0
Total sales
2.
Gross income (P39,000,000 P30,000,000)
Individual
P9,000,00
0
Less: Total allowable deductions

2,905,000
P6,095,00
0
CHAPTER 9
LOSSES
Problem 9 3
P6,095,000
P100,000
Problem 9 4
A
Loss on sale of capital assets is not deductible from business income.
Problem 9 5
C
Deductible loss Book value (P100,000 x 10% x 4)
P 40,000
Problem 9 6
D
Deductible loss book value lower than replacement cost
P 50,000
Problem 9 7
D
Net operating loss per GAAP
Less: Bad debts estimate
NOLCO in the succeeding years
P 50,000
10,000
P 40,000
Problem 9 8
D
Zero. An individual who claims the 10% optional standard deduction shall not
simultaneously claim deduction of the NOLCO.
Problem 9 9
P25,000. The lower between the carrying value and replacement cost.

1. False Capital loss
2. False not deductible
3. False lower amount of the replacement cost or book value
4. True
5. True
6. False Deductible from gambling gains only.
7. True
8. True
9. True
10. False Not deductible because the property has been sold.
11. True
12. True
13. True
14. False deductible only to either income or estate
15. False NOLCO is not applicable when OSD is used.
16. False NOLCO is not applicable under MCIT.
4. C
Corporation
P9,000,000
2,905,000
Net taxable income
Problem 9 2
1. C
2. C
3. D
P
5,000,000
30,000,000
5. D
6. A
7. D, P10,000
only
8. A
B
9. A
10. C
11. B
12. C
Problem 9 10
Book value (P1,200,000) x10/20
Less: Insurance recovery
Scrap recovered
Deductible loss
P600,000
P200,000
20,000
220,000
P380,000
Problem 9 11
None, because the demolition cost, net of amount realized from scrap should be
capitalized as part of the factory building cost.
Problem 9 12
No deductible loss at balance sheet date. On June 30, the reportable gain would be
P10,000, (110,000 100,000).
Problem 9 13
Net loss reported
Estimated bad debts
Warranty expense
Net loss carry-over
P 50,000
( 20,000)
( 10,000)
P 20,000
Problem 9 14
Gross profit year 1
Less: Other operating expenses
NOLCO for year 2
P500,000
580,000
P 80,000
Problem 9 15
Year 1
Year 2
Sale
P1,800,000
Less: Cost Notes receivable
1,500,000
Gain
P 300,000
No gain or loss on year 1 because there was no actual sale of foreclosed property.
Problem 9 16
None, because the floss should be recognized only upon actual sale of the property
foreclosed.
Problem 9 17
None. Gambling losses can only be deducted from the gambling winnings. Gambling
transactions is not an ordinary business transactions, but a capital asset transaction.
Accordingly, gambling losses is not an allowable deduction from ordinary gross income.
Problem 9 18
Compensatory liquidated damages
Loss on robbery (construction supplies)
Loss on pilferage of business supplies
Replacement cost of damaged portion of machine
Deductible loss
Problem 9 19
1. OSD (P2,000,000 x 40%)
P 50,000
50,000
10,000
150,000
P260,000
P800,000
Problem 9 25
Cost of the building
Less: Accumulated depreciation (P10,000,000/30) x
5
Book value before additions and improvements
Add: Additions and improvements
Total
Less: Accum depn (P8,833,333/25) x 3
Book value
Less: Insurance collected
Salvage value
Deductible loss
Problem 9 26
Death of livestock previously purchased
Cost of property expropriated by the government
(P30,000 P10,000)
Total deductible farm loss
P10,000,000
1,666,667
P5,800,000
300,000
P 8,333,333
500,000
P 8,833,333
1,060,000
P 7,773,333
6,100,000
P 1,673,333
P10,000
20,000
P30,000
CHAPTER 10
BASIC INCOME TAX PATTERNS

1. True
2. OSD (P2,000,000 P500,000) x 40%
P600,000
2. False - General professional partnerships are tax-exempt.
3. False Not taxable income the Philippines because the passive income is earned
Problem 9 20
outside the Philippines.
1. Gross income (P2,000,000 P1,000,000)
P1,000,000
4. True
Multiplied by MCIT rate
2%
5. False The excess of personal exemption over compensation income is to be
Income tax due MCIT
P
20,000
deducted from net income from business.
6. True
2. NOLCO for year 200E
P - 0 7. False Decrease by creditable taxes.
8. True
Note: The 3 year reglamentary period for NOLCO shall not be suspended
9. False passive income is not subject for deductions.
even if MCIT has been used. NOLCO has expired effectively on
10. True
200E.
11. False There should be a combination of various income subject to the same tax
rate irrespective of personal exemption.
Problem 9 21
12. False Taxable only for income earned within.
Ordinary
Capital
13. False net income or income from operation.
Pilferage loss
P5,000
14. False resident alien could also opt for OSD for business income earned within.
Capital loss on sale of capital asset
P10,000
15. False Only P50,000. Siblings are not allowed for additional exemptions.
Casualty loss
.
15,000
16. False could claim P150,000.
Total deductible loss
P5,000
P25,000
Problem 10 2
1. A
6. C
Note: It would be more appropriate to classify casualty loss as capital loss because such 2. B
7. C
loss is not an ordinary or regular loss, unless the problem stated that the loss is an
3. D
8. A
ordinary asset.
4. C
9. C
5. C
Less: Business expenses (P200,000 + P300,000)

Dividend income earned outside the Philippines
Net taxable income before personal exemption
Problem 10 3
D
Gross compensation income (P137,500 +P22,500)
Less: Personal exemption single
Net taxable compensation income
P190,000
50,000
P140,000
Tax on P140,000
Less: Withholding tax
Net tax payable
P22,500
22,500
P - 0 -
Problem 10 4
C
Net business income (P200,000 x 60%)
Total net income before personal exemption
Less: Personal exemption married
Net taxable income
P 90,000
120,000
P210,000
50,000
P160,000
Problem 10 5
B
Net income for the first quarter (P50,000 + P60,000 +
P180,000
P70,000)
Less: Optional standard deduction (P180,000 x 40%)
72,000
Net business income first quarter
P108,000
Note: No personal exemption yet is allowed to be deducted in the quarterly income tax.
The Personal exemption is to be deducted in the 4th quarter in the adjusted ITR.
Problem 10 6
D
Gross profit
Net taxable income
P1,000,000
400,000
P 600,000
Problem 10 7
Not in the choices
Net taxable income (P5,500,000 P2,000,000)
Income tax due and payable
Net tax payable
P3,500,000
30%
P1,050,000
900,000
P 150,000
Problem 10 8
C
Minimum corporate income tax (P23,500,000 + P1,500,000)
x 2%*
Net tax refund
The minimum corporate income tax is greater than the normal tax.
Problem 10 9
Compensation
Business income (P500,000 + P600,000)
P 500,000
500,000
P - 0 -
P 250,000
P1,100,000
500,000
600,000
100,000
P 950,000
Note: the dividend income within is subject to final withholding tax of 10%, and as
such, is no longer required to be reported in the annual tax return.
Problem 10 10
Compensation
P 250,000
Business income
P 500,000
Less: Business expenses
200,000
300,000
P 550,000
Note: the dividend income is subject to final withholding tax of 10%, and as such, is no
longer required to be reported in the annual tax return.
Problem 10 11
None. Nonresident alien is taxable only for income earned within. The dividend income
within is taxable with final tax of 25%.
Problem 10 12
Business income (P500,000 + P600,000)
Business expenses (P200,000 + P300,000)
Dividend income outside
Net taxable income
P1,100,000
( 500,000)
150,000
P 700,000
Problem 10 13
Business income
P 500,000
Business expenses
( 200,000)
Net taxable income
P 300,000
Note: Foreign corporation is taxable only for income within. Dividend income earned
within is taxable in the Philippines but shall not be included as part of the annual ITR
because such dividend is subject of final tax.
Problem 10 14
QUARTERS
First
400,000
(160,000
)
240,000
30%
Third
Fourth
Gross income 40% of sale
240,000
480,000
Operating exp. (40% of gross
( 96,000)
(192,000
income)
)
Net taxable income
192,000
144,000
288,000
Multiplied by normal corporate tax
30%
30%
30%
rate
Income tax still due
72,000
56,600
43,200
86,400
Note: Even if the previous quarters net taxable income is not carried to the next
quarters the income tax still due is the same because the corporate income tax rate is
constant at 30%.
Problem 10 15
Second
320,000
(128,000)
Answers for 1 and 2

requirements:
Gross profit 40% of sales
Rent income
Total gross profit
Operating expenses before int. &
cont.
Deductible interest expense*
Contribution deductible in full
Net taxable income
Multiplied by corp. income tax rate
Quarterly income tax due and
payable
Interest expense
Less: Tax differential (int. income x
33%)
*Deductible interest expense
QUARTERS
Third
First
200,000
Second
240,000
30,000
160,000
30,000
270,000
(150,000)
180,000
(100,000)
(6,700)
(20,000)
(10,050)
.
390,000
(160,000
)
(8,400)
(40,000)
.
104,950
30%
31,485
93,300
30%
27,990
69,950
30%
20,985
181,600
30%
54,480
10,000
4,950
10,000
3,300
15,000
4,950
15,000
6,600
5,050
6,700
10,050
8,400
30,000
230,000
(120,00
0)
(5,050)
Problem 10 16
Business income
Itemized allowable deductions
P 7,500,000
( 4,000,000)
200,000
Capital gains
Passive income earned outside the Philippines
Net taxable income
Income tax due
Less: Total income taxes paid in the previous quarters
Fourth
360,000
30,000
100,000
P 3,800,000
32%
P 1,216,000
P
800,000
Income tax withheld per BIR form 2307

40,000
3. Royalty income (P60,000 x 20%)

Interest income (P15,000 + P10,000 + P15,000 + P20,000) x
20%
Total passive income tax
Problem 10 17
Total salary income (P16,000 + P4,000) x 12
First three quarters taxable business income (P300,000 +
840,000
P
376,000
P12,000
12,000
P24,000
P240,000
390,000
P90,000)
Last quarters net taxable business income
Net taxable income
110,000
P740,000
50,000
P690,000
Income tax on P500,000

Income tax on excess (P190,000 x 32%)
Total income tax per ITR
Add: Final withholding tax on interest income
Annual income tax
P125,000
60,800
P185,800
2,000
P187,800
CHAPTER 11
INCOME TAX OF INDIVIDUALS
1. False Qualified dependent parents and siblings are not entitled for additional
exemption.
2. False must be more than 180 days.
3. False NRA NBT are not allowed for personal exemptions.
4. True
5. True
6. True
7. True
8. True
9. True
10. True
11. False No personal exemption is allowed to NRANEBT.
12. True
1. False additional exemptions are allowed only for qualified dependent children.
2. False not payment for hospitalization but payment of premium for health and
hospitalization insurance provided that the family income does not exceed
P250,000 per year.
3. True
4. False 15% of gross income
5. False creditable withholding income tax.
6. False qualified dependent parent and siblings are not entitled for additional
exemption.
7. False Tax credit of income taxes paid outside the Philippines is allowed only for
resident Filipino citizen.
8. False The creditable withholding tax is 15%.
9. False Gross income includes other income but not compensation income.
10. False Tax-exempt
11. True
12. True
Problem 11 3
1. D
Problem 11
4
1. D
2. D
3. A
4. A
5. A
6. B
7. D
8. C
9. C
10. B
2. B
3. C
4. A
5. B
6. D
7. B
8. B
9. B
10. A
Problem 11 5
Total personal and additional exemptions
1. Not in the choices. P25,000 per child (R.A.

9504)
2. Not in the choices. P50,000 basic (R.A. 9504)
3. B
4. C
5. B
5. B
6. A, B & C
7. D
8. D
9. D
10. C
Problem 11 12 A
Basic personal exemption married
P 50,000
Nonresident alien engaged in business in the Philippines is allowed of basic personal
exemption subject to limit, but additional exemption is not allowed. Personal
exemptions for foreigners are subject to the rule of reciprocity with limit of whichever is
lower.
Problem 11 6
A
Income from the Philippines (P10,000 x 12)
Income subject to tax in the Philippines
P120,000
50,000
P 70,000
Note: It is assumed that Juan works as OFW for more than 183 days. Income earned by
OFW outside the Philippines is not subject to tax in the Philippines. The income from the
sari-sari store in the Philippines is earned from January to December of the taxable
year.
Problem 11 7
C
Gross compensation income Philippines (P250,000 x 12)
P3,000,000
Multiplied by special income tax rate
15%
Income tax payable
P 450,000
Problem 11 8
A
Basic personal exemption of couple:
Husband
Wife
Additional exemptions:
4 qualified dependent children (P25,000 x 4)
Maximum amount of personal exemption
Problem 11 13 A
P200 per month. For the month of December only.
Problem 11 14 D
No special deduction is allowed. The family income exceeding P250,000 is not allowed
for a special deduction for health insurance.
Problem 11 15 D
Zero. Maria has no income.
Problem 11 16 A
No net tax payable at the end of the taxable year because the senior citizens income
does not exceed P60,000 during the year. The tax withheld from interest income is final
tax.
Problem 11 17
1.
P50,000
50,000
100,000
P200,000
Problem 11 9
C
Only P50,000 basic personal exemption because the taxpayers category is single.
Problem 11 10 B
Basic personal exemption Married
Additional exemption
Total personal exemptions
Problem 11 11 C
Basic personal exemption
Additional exemption (a & b only) (P25,000 x 2)
P50,000
25,000
P75,000
P50,000
50,000
P100,000
Not in the choices = P790,000 & P160,000

Compensation income
Business and other income:
Professional income (P300,000 + P200,000)
Interest income without
Dividend income without
Less: Basic personal exemption single
Net income to ITR tabular tax
Subject to
Tabular tax
P240,000
500,000
60,000
40,000
P840,000
( 50,000)
P790,000
Interest income within

Dividend income within
Income subject to final tax
2.
A
Compensation income
Business income:
Professional income
Final tax
P100,000
60,000
P160,000
P240,000
300,000
P540,000
50,000
P490,000
Problem 11 19 D
P100,000
Compensation as researcher
60,000
P160,000
Less: Personal exemption married
Note: The problem is silent as to whether the taxpayer opted for OSD, hence, OSD
should not be deducted from the business gross income. In order to qualify for OSD, the Net taxable compensation income
taxpayer should indicate in his return that he is opting OSD instead of itemized
deductions. (Sec. 34 (L), NIRC)
Tax on P500,000
Alternative Solution of Prob. 11-17: If X opted to use OSD
Tax on excess (P50,000 x 32%)
Subject to
Total income tax from compensation
1. A
Tabular tax
Final tax
Dividend income tax (P120,000 x 10%)
Compensation income
P240,000
Interest income tax (P500,000 x 7.5%)
Business and other income:
Total income tax due
Professional income (P300,000 + P200,000)
500,000
Interest income without
60,000
Problem 11 20 D
Dividend income without
40,000
Capital gains tax on shares of stock (P80,000 x
Total business and other income
P600,000
5%)
Less: OSD (P600,000 x 40%)
( 240,000)
Capital gains tax on sale of land (P2,000,000 x
Net business income
P360,000
6%)
P600,000
Total capital gains tax paid
( 50,000)
Problem 11 21 B
P550,000
1. B
Final tax on copyright royalty (P11,250/90%) x 10%
P100,000
Final tax on mineral claim royalty (P12,000/80%) x 20%
60,000
Final tax on share from trading partnership as dividend
P160,000
(P270,000/90%) x 10%
Total final tax
2. Not in the choices = P370,000 & P160,000
2. Not in the choices
Compensation income
P240,000
None. All reported earnings are subject to final tax.
Business income:
Professional income, net of OSD (P300,000 x
180,000
Problem 11 22 B
60%)
Percent of service
P420,000
Add: Output VAT
Less: Basic personal exemption
50,000
Total
P370,000
Percent of net proceeds
P100,000
60,000
Net proceeds
P160,000
Divided by percent of net proceeds
Service fee
Problem 11 18 D
Husband
Wife
Withholding tax (P100,000 x 20%)
Net taxable income
P140,000
P250,000
Income tax
P 22,500
P 50,000
VAT (P100,000 x 12%)
20,000
45,000
Net tax payable
P 2,500
P 5,000
Problem 11 23
1. A
P
600,000
50,000
P
550,000
P125,000
16,000
P141,000
12,000
37,500
P190,500
P
4,000
120,000
P124,000
P 1,250
3,000
30,000
P34,250
100%
12%
112%
20%
92%
P 92,000
92%
P100,000
P 20,000
P 12,000
Salaries of assistants
Traveling expenses
Light and water, Office
Stationeries and supplies
Office rent
Total expenses before contribution
Add: Contribution subject to limit (P500,000 P176,850) x 10%
2. C
Professional fees
Less: Allowable deductions
Net income from business
Add: Income from compensation:
Allowance as director of Corporation A
P25,000
Commissions
5,000
Net income before personal and additional exemptions
3. D
Net income before personal and additional exemptions
Less: Personal and additional exemptions:
Basic widower
P
Additional exemptions (P25,000 x 3 qualified
50,000
children)
Net taxable income
75,000
Tax on P140,000
Tax on excess (P55,835) x 30%
Income tax due
Problem 11 24
1. P164,200
Net worth, December 31, 2009
Less: Net worth, December 31, 2008
Unadjusted Net income for year 2009
Add back: Non-deductible expenses
Contributions (P20,000 + P50,000)
Total
Less: Non-taxable income
Income before contribution
Less: Contributions:
Deductible in full
With limit
Actual, P50,000
Limit, P268,000 x 10% = P26,800
Allowed
Net income before personal exemptions
Less: Personal exemptions (P50,000 +p100,000)
Net taxable income
2. P140,000
P 96,000
11,000
7,890
1,960
60,000
P176,850
32,315
P209,165
P500,000
209,165
P290,835
30,000
P320,835
P320,835
125,000
P195,835
P 22,500
13,959
P 36,459
P375,000
325,000
P 50,000
150,000
70,000
P270,000
2,000
P268,000
P 20,000
26,800
46,800
P221,200
150,000
P 71,200
Corrected net taxable income

Less: Reported net income subject to tax
Unreported taxable income
Problem 11 25
1. Itemized deduction
Compensation income
Gross income from business
Less: Itemized deduction
Total income before personal exemptions
Less: Personal exemptions
Basic personal exemptions
Additional exemptions (P25,000 x 4)
Taxable income
P 71,200
24,200
P 47,000
P 20,000
P 400,000
150,000
P 50,000
100,000
Computation of income tax:

Tax on P70,000
Income tax before withholding tax
2. Optional standard deduction
Compensation income
Gross income from business
Less: Optional standard deduction (40%)
Total income before personal exemptions
Basic personal exemptions
Additional exemptions (P8,000 x 4)
Taxable income
150,000
P120,000
P 8,500
10,000
P 18,500
1,000
P 17,500
P 400,000
160,000
P 50,000
100,000
Computation of income tax:

Tax on P70,000
Income tax before withholding tax
Less: Withholding Tax
Problem 11 26
2010 net income from business
Capital gains transactions
Short term capital gains (P40,000 x 100%)
Long term capital gains (P30,000 x 50%)
Short term capital loss (P10,000 x 100%)
Capital gains
Less: 2009 Capital loss carry over limit
Income before personal exemptions
250,000
P270,000
P 20,000
240,000
P260,000
150,000
P110,000
P 8,500
8,000
P 16,500
1,000
P 15,500
P 600,000
P 40,000
15,000
(10,000)
P45,000
35,000
10,000
P 610,000
Basic personal exemption- married

Additional exemption (P25,000 x 3)
Taxable income, 2010
P 50,000
75,000
Note: The applicable capital loss carry-over should only be limited to P35,000, because
it should not exceed the net income from operation of such year (Sec. 39D, NIRC).
Problem 11 27
1. Compensation income (P240,000 + P30,000)
Less: Personal exemption (P50,000 + P25,000)
Business income
Less: Business expenses
Net loss from business
Net taxable income
2.
P270,000
75,000
P195,000
P100,000
120,000
(P20,000)
Tax on P140,000
Income tax due
Less: Tax credit
Problem 11 28
1. Salary (P30,000 x 12)
Add: Taxable 13th month pay (P35,000 P30,000)
Total
Less: SSS contribution
Medicare/Philhealth contribution
Taxable compensation income before personal
exemption
Less: Personal exemption
Estimated income tax due:
Tax on P250,000
Total income tax due per year
Divided by number of months in a year
Monthly withholding tax
2. Quarterly business income tax
Business income per quarter
Less: Business expense per quarter
Net income per quarter
Tax on P70,000
Problem 11 29
1.
Entertainment fee (P1,700,000/85%)
Business income
Philippines
Japan
Net income before personal exemption
Less: Personal exemption - basic
Additional (P25,000 x 4)
P 10,500
P2,000,000
500,000
1,000,000
P3,500,000
P50,000
150,000
100,000
0 P195,000
P22,500
13,750
P36,250
30,000
P 6,250
P360,000
5,000
P365,000
P3,000
2,000
Quarterly business income tax first quarter to third

quarter
125,000
P 485,000
Net taxable income
Note: The OSD is not used because the problem is silent that the taxpayer opted to
utilize it. OSD is allowed only if the taxpayer indicated in his return that he is using it
otherwise he is using itemized deduction. If the taxpayer did not indicate that he is
using OSD and at the same time he has no itemized deduction, he cannot deduct
expenses from his gross business income. (Sec. 34 (L), NIRC)
2.
Tax on P500,000
Tax on excess (P2,850,000 x 32%)
Income tax due
3.
Tax credit
Creditable withholding tax on fees
(P2,000,000 x 15%)
5,000
P360,000
Business income tax paid - Philippines

Japan (P1,037,000 x 1,000,000/3,500,000))
P296,286 vs. actual P300,000, lower
50,000
P310,000
P50,000
18,000
P68,000
12
P 5,667
P200,000
120,000
P 80,000
P
8,500
2,000
P3,350,000
P 125,000
912,000
P1,037,000
P300,00
0
40,000
P 636,286
296,286
4.
Income tax still due (P1,037,000 P636,286))
P 400,714
Alternative Solution of Problem 11-29: If Rosanna Roces opted to use OSD

1.
Entertainment fee (P1,700,000/85%)

Business income
Philippines
Japan
Total gross income
Less: OSD (P3,500,000 x 40%)
P2,000,000
500,000
1,000,000
P3,500,000
1,400,000
P2,100,000
P50,000
100,000
150,000
2.
3.
Net taxable income
P1,950,000
Tax on P500,000
Tax on excess (P1,450,000 x 32%)
Income tax due
P 125,000
464,000
P 589,000
Tax credit
Creditable withholding tax on fees
(P2,000,000 x 15%)
Business income tax paid - Philippines
Japan (P589,000 x 594,000*/2,100,000))
P166,603 vs. actual P300,000, lower
P300,00
0
40,000
P 506,603
166,603
4.
Income tax still due (P589,000 P506,603)
P 82,397
Supporting computation of net taxable income before personal exemptions:

Gross receipts
Percent
Within
2,500,000
71%
Outside
1,000,000
29%
Total
3,500,000
100%
Allocated OSD x percent

994,000
1,506,000
406,000
594,000
1,400,000
2,100,000
Problem 11 30
Gross professional income (P100,000/90%)
Rent income (P300,000/2)
Total
Net taxable income
Tax on P250,000
Tax on excess:
Mr. Bravo (P86,111 x 30%)
Mrs. Bravo (P150,000 x 30%)
Income tax due
Withholding tax on compensation
Withholding tax on professional income (P111,111
P100,000)
Mr.
Bravo
P111,111
150,000
225,000
P486,111
150,000
P336,111
Mrs. Bravo
P 50,000
P 50,000
25,833
P150,000
300,000
P450,000
50,000
P400,000
.
P 75,833
( 25,000)
( 11,111)
45,000
P 95,000
( 50,000)
.
P 39,722
P 45,000
Note: No OSD is allowed because the taxpayer did not opt to use it in lieu of itemized
deduction. (Sec. 34 (L), NIRC)
Alternative Solution of Prob. 11-30: If taxpayers opted to use OSD
Mr.
Bravo
Gross professional income (P100,000/90%)
P111,111
Rent income (P300,000/2)
150,000
Total gross income
P261,111
Less: OSD (40%)
104,444
Net income from business
P156,667
Add: Gross compensation income
225,000
Total
P381,667
150,000
Net taxable income
P231,667
Tax on P140,000/ P250,000
Tax on excess:
Mr. Bravo (P91,667 x 25%)
Mrs. Bravo (P90,000 x 30%)
Income tax due
Withholding tax on compensation
Withholding tax on professional income (P111,111
P100,000)
P 22,500
22,917
P150,000
P150,000
60,000
P 90,000
300,000
P390,000
50,000
P340,000
P 50,000
.
P 45,417
( 25,000)
( 11,111)
27,000
P 77,000
( 50,000)
.
P 27,000
9,306
Problem 11 31
1. P290,000
Compensation income
Taxable 13th month pay and bonuses (P40,000 P30,000)
Net business income (P400,000 P300,000)
Capital gains long-term (P60,000 x 50%)
Total
Less: Personal exemptions (P50,000 + P100,000)
Net taxable income
2. (P8,000)
Tax on P250,000
Less: Income tax paid on:
Compensation
Quarterly business income
Income tax refund
Mrs. Bravo
P300,000
10,000
100,000
30,000
P440,000
150,000
P290,000
P
P
50,000
12,000
62,000
(P
70,000
8,000)
P 50,000
20,000
Problem 11 32
Gross income from business (P1,000,000 P700,000)
Operating expenses (P250,000 P60,000 P30,000)
Deductible interest expense (P30,000) (P20,000 x 12/32)
Deductible contribution (P300,000 P160,000 P22,500) x
10%
Net business income
Capital gains short-term (P300,000 x 100%)
P 300,000
( 160,000)
( 22,500)
( 11,750)
P 105,750
P
300,000
Capital losses long-term (P400,000 x 50%)

Lotto winning, USA
Gambling winnings
Gambling losses (excess cannot be deducted from other
income)
Gross compensation income (P180,000 + P20,000)
Taxable 13th month pay (P35,000 P30,000)
Net taxable income before exemption
Net taxable income
100,000
200,000
250,000
Tax on P500,000
Less: Withholding tax on compensation
Problem 11 33
1. 13th month pay
Other benefits:
Excess of clothing allowance (P4,500
P4,000)
Excess of rice subsidy (P1,600 P1,500) x
12
Total (not exceeding P30,000)
nontaxable
Allowable de minimis:
Clothing allowance
Rice subsidy (P1,500 x 12)
Total 13th month pay and other benefits
2.
Basic salary (P25,000 x 12)
300,000
P
200,000
200,000
5,000
P 710,750
150,000
P 560,750
P 125,000
19,440
P 144,440
20,000
P 124,440
P25,000
P 500
1,200
1,700
3.

150,000
P150,000
Tax on P140,000
P22,500
2,500
P25,000
Withholding tax from January to November

2009
(P25,000/12) x 11
P22,917

Add: Net business income:
Professional fees (P224,000/1.12)
Gross income from sales (P5,000,000
P3,200,000)
Less: Itemized deductions:
Operating expenses, net of interest
expense
(P900,000 P50,000)
Interest expense (P50,000 (P75,000 x
38%)
Net income before contribution
Less: Contribution, actual = P100,000,
lower
Contribution, limit (P1,128,500 x 10%)=
P112,850
Net taxable income
P150,000
P 200,000
1,800,000
P2,000,00
0
P850,000
21,500
Tax on P500,000
Less: Tax credits:
WTW from Jan to Nov., 2009
WT on Professional income (P224,000
P200,000)
Income tax still due and payable on December 31,
2009
871,500
P1,128,500
100,000
1,028,50
0
P1,178,500
P125,000
217,120
P342,120
P22,917
24,000
46,917
P295,203
P26,700
P4,000
18,000
Problem 11 34
22,000
P48,700
P300,000
Note: OSD is not applicable unless the taxpayer signified in his ITR that he opted to
use OSD in lieu of itemized deductions. (Sec. 34 (L), NIRC)
Taxpayer is a resident citizen

a. Normal (tabular) tax:
Salaries:
Within (P180,000/90%)
Without ($2,250/90%) x P50
Commissions:
Within (P57,000/ 95%)
Without ($950/ 95%) x P50
Interest income-without
($1,200/80%) x P50
Dividend-without ($1,800/90%) x P50
Totals
Less: Personal exemption basic
Taxable income
Tax on P500,000
Total
Less: Tax credits:
Compensation (P200,000 x 10%)
Commission (P60,000 x 5%)
Allowable tax credit - foreign*
Income tax due and payable, after tax
credits
Philippine
s
P200,000
U. S. A.
P125,000
Total
P325,000
.
P260,000
50,000
75,000
110,000
75,000
100,000
P350,000
100,000
P610,000
50,000
P560,000
P125,00
0
19,200
P144,20
0
Note: Philippine Lotto winnings are tax-exempt.
a. Normal (tabular) tax:

Salaries - within (P180,000/90%)
Commissions- within (P57,000/ 95%)
Net income
Taxable income
Tax on P140,000
Total tax due
Less: Withholding taxes within (P20,000 +
P3,000)
P200,000
60,000
P260,000
50,000
P210,000
P22,500
17,500
P40,000
23,000
P17,000
b. Passive income tax:
40,000
63,000
P
81,200
*Allowable tax credit paid outside the Philippines is lower than tax limit or actual tax
paid. The tax credit is computed as follows:
Limit (P350,000/P610,000) x P144,200
Actual foreign taxes paid:
Interest (P75,000 x 20%)
Compensation (P125,000 x 10%)
Dividend (P100,000 x 10%)
Commissions (P50,000 x 5%)
Total
P82,738
Allowable foreign tax credit - lower
P40,000
P15,000
12,500
10,000
2,500
P40,000
Note: The actual tax paid outside the Philippines is lower than the computed tax limit;
hence, the actual tax paid without is the allowable tax credit.
b. Passive income tax:
P12,500
1,000
P13,500
Taxpayer is a nonresident citizen
60,000
P20,00
0
3,000
Interest income within (P50,000/ 80%) x 20%

Dividend income within (P9,000/ 90%) x 10%
Total passive income tax for the year
Interest income within (P50,000/80%) x 20%

Dividend income within (P9,000/90%) x 10%
Total passive income tax for the year
P12,500
1,000
P13,500
Note: Nonresident citizens are taxable only on income derived within the Philippines.
Taxpayer is a resident alien. Solution is the same as nonresident citizen.
Taxpayer is a nonresident alien engaged in trade or business in the
Philippines.
The taxpayer cannot be regarded as doing business in the Philippines because he has
no business income in the Philippines.
If the taxpayer has stayed more than 180 days in the Philippines, he is regarded as
doing business. The computation of his net income tax payable in the Philippines will be
the same as in number 2 under the assumption that his country is granting the same
privilege of reciprocity to nonresident Filipino doing business in that foreign country.
Taxpayer is a nonresident alien not engaged in trade or business in the
Philippines.
Nonresident aliens are subject to tax of 25% based on their gross income derived within
the Philippines. In our illustration, let us assume that the source of income has been
deducted with 25% tax on the income given to the taxpayer - that is, the amount
shown in the problem is net of 25% final tax.
3. False 10% based on gross income within

4. True
5. True
6. False In general, GOCCs are subject to corporate income tax.
7. True
8. True
9. True
10. True
11. True
12. True
The income tax of Mr. Ramsay Colorado would be:

Salaries- within (P180,000/75%)
Commissions- within (P57,000/ 75%)
Interest income within (P50,000/
75%)
Dividend income within (P9,000/
75%)
Gross income within
Multiplied by tax rate
Income tax for the taxable year
within
P240,000
76,000
66,667
12,000
P394,667
25%
P 98,667
Note: In computing the income tax, a fractional part of a peso less than P0.50 shall be
disregarded. If the fractional part is P0.50 or more, its shall be rounded up to P1.00
(R.A. 590).
Problem 12 3
1. A
2. D
3. D
4. B
5. A
6. D
7. D
8. C
9. A
CHAPTER 12
INCOME TAX OF CORPORATIONS
1. True
2. True
3. False Only domestic corporations are to be taxed for income within and
without.
4. True
5. False 30% normal tax effective 2009.
6. True
7. True
8. True
9. True
10. False Not taxable because the corporation is a foreign corporation/
11. False 30%.
12. False applicable only to resident Offshore Banking Unit on gross receipts of
OBU.
13. False final tax of 10%
10.
11.
12.
13.
A
D
B
A
Problem 12 4
1. C or D
2. B
3. D
4. A
5. C
6. B & D
7. B
8. Not in the choices = normal tax of
30%
9. Not in the choices = normal tax of
30%
10. B
11. B
12. C
Problem 12 5
1. D

1. False If the unrelated income of the proprietory educational institution exceeds 2.
the related income, the income tax rate applicable would be the corporate
income tax of 35%.
2. False Sale of real property outside the Philippines by a resident foreign
corporation is not subject to tax in the Philippines.
Gross income (P8,000,000 + P4,000,000)

Business expenses (P5,000,000 + P3,000,000)
Net taxable income
Taxable
income
P12,000,000
8,000,000
P4,000,000
Corporate income tax (P4,000,000 x 30%)
P1,200,000
Note: The land sold is a capital asset. Hence, not

subject
to corporate income tax but for final tax of 6%
based on
sales price or zonal value, whichever is higher.
C
Gross income
Business expenses
Net taxable income
Income tax
due
P8,000,000
5,000,000
P3,000,000
Corporate income tax (P3,000,000 x 30%)
P900,000
Note: The land sold is a capital asset. Hence, not

subject
to corporate income tax but for final tax of 6%
based on
sales price or zonal value, whichever is higher.
Problem 12 6
B
Gross income within
Less: Deductions within
Net taxable income
Multiplied by normal corporate tax rate
Income tax due
Problem 12 7
D
Gross income within
Income tax due
Problem 12 8
1. Domestic corporation
Gross income within and without
(P450,000 + P180,000 + P75,000 + P160,000)
Deductions within and without
(P290,000 + P80,000 + P25,000 + P100,000)
Net income
Multiplied by normal corporate income tax
2. Resident foreign corporation
Gross income within
Deductions within
Net income
Problem 12 9
C
Net income from PAGCOR (P30,000,000 x P28,000,000)
Income tax due
Problem 12 10
B
Net income from National Power Corporation
P2,800,000
1,300,000
P1,500,000
30%
P 450,000
P5,000,000
30%
P1,500,000
P865,000
(495,000)
P370,000
30%
P129,500
P450,000
290,000
P160,000
30%
P 56,000
P2,000,000
30%
P 600,000
P10,000,00
0
Net income from National Books Store

Total net income
Multiplied by corporate normal tax
8,000,000
P18,000,00
0
Income tax due
30%
P
5,400,000
Problem 12 11
D
Gross profit
Operating expenses before charitable contribution
P1,600,000
Net income before charitable contribution

Charitable contributions - limit (P1,050,000 x 5%)
Actual lower
Net taxable income
Multiplied by corporate normal tax rate
Problem 12 12
Operating loss
(550,000)
P1,050,000
P52,500
Operating expenses
Gross income
Multiplied by minimum corporate income tax rate
Income tax payable
Problem 12 13
YEAR 2005 use 35% normal tax rate
1. D
Net income per GAAP
Add: Allowance for bad debts
Contribution
Income before allowable contribution
Less: Deductible contribution (P5,450,000 x 5%)
Net taxable income
Multiply by normal corporate income tax rate
2. D
Net income per GAAP
Add: Operating expenses
Gross income
Multiply by minimum corporate income tax rate
Minimum corporate income tax
Normal tax (P5,000,000 x 35%)
Problem 12 14
1 A
.
Tax payable current year (P8,000,000 x 2%)
2
.
50,000
P1,000,000
30%
P
300,000
(P
200,000)
1,000,000
P 800,000
2%
P 16,000
P5,000,000
150,000
300,000
P5,450,000
272,500
P5,177,500
35%
P1,812,125
P 5,000,000
80,000,000
P85,000,000
2%
P 1,700,000
P1,812,125
P 160,000
C
Operating income (P8,000,000 P7,000,000)
P1,000,000
Multiplied by normal tax rate

30%
Normal tax
P 300,000
Less: Excess of MCIT
100,000
Tax payable
P 200,000
Problem 12 15
A
None. There is no excess corporate MCIT over NCIT in 2005 to be applied on 2006
because the MCIT is not yet applicable for the company as it only has 3 years of
operation in 2005.
Problem 12 16
C
Rental income (P1,900,000/95%)
Capital gains
Total gross income
Operating expenses
Net taxable income
Multiplied by corporate normal tax
Income tax payable
P2,000,000
500,000
P2,500,000
(2,350,000
)
P 150,000
30%
P
45,000
Excess of MCIT over NCIT

Expanded withholding tax (P2,000,000 P1,900,000)
Total creditable income tax
Income tax due
Tax refund
P 40,000
100,000
P140,000
45,000
P 95,000
Problem 12 17
C
P 90,000
Problem 12 18
1. D
Domestic Corporation:
a. Not traded in local exchange:
Selling price
Cost (P110 x 12,000 shares)
Capital gain
Tax on P100,000 x 5%
Tax on excess (P280,000 P100,000) x 10%
b. Traded in local exchange (P1,800,000 x .005)
c. Sale of land abroad (P3,000,000 P2,500,000) x
30%
d. Sale of land Philippines (P1,200,000 x 6%)
2. A
Resident Foreign Corporation

a.
b.
c.
d. (P1,200,000 x 6%)
Total
Problem 12 19
C
Interest from savings deposits (P3,000,000 x 20%)
Royalty income (P1,000,000 x 20%)
Interest from a depository bank (P1,500,000 x 7.5%)
Total passive final tax
P 23,000
9,000
72,000
P104,000
P 600,000
200,000
112,500
P 912,500
Dividend from a domestic corporation received by a domestic corporation is tax

exempt.
Dividend from a nonresident foreign corporation is subject to normal tax.
Problem 12 20
1. B
Domestic Corporation
a. ($20,000 @ 7.5% x P50)
b. P300,000 @ 20%
c. P100,000 @ 20%
d. P 80,000 @ 20%
Total
P75,000
60,000
20,000
16,000
P171,000
2. B = Resident foreign corporation (same as letter 1)

3. C
Nonresident foreign corporation
a. Exempted
b. (P300,000 @ 30%)
c. (P100,000 @ 30%)
d. (P 80,000 @ 30%)
Total
P1,600,000
1,320,000
P 280,000
P
5,000
18,000
P
23,000
9,000
150,000
72,000
P254,00
0
Problem 12 21
1. A
Dividend income - (PCB and Magnolia are both domestic
corporations)
Interest income on US dollar loans ($3,000 x 10% x P50)
2.
C
Interest on Philippine peso loans
Operating expenses
Taxable income
P90,000
30,000
24,000
P144,000
Exempt
P15,000
P2,000,000
( 900,000)
P1,100,000

Income tax due
Problem 12 22
D
Related income
Unrelated income
Total revenue
Operating expenses
Net loss
Minimum corporate income tax (P2,500,000 x 2%)
30%
P 330,000
P1,000,000
1,500,000
P2,500,000
(3,000,000
)
(P
500,000)
P50,000
Problem 12 23
A
Nonprofit educational institutions are tax-exempt.
Problem 12 26
A
Manila to Beijing (P5,000 x 2,000)
Manila Hong Kong Beijing (P6,000 x 4,000) x P3,000/P6,000
Manila to Hong Kong (P3,000 x 2,000)
Total reportable gross income within
Multiplied by applicable rate
Income tax
Problem 12 30
Not in the choices = P6,000
Income tax due 2nd quarter [(P792,000/99%) P700,000) x
P 30,000
30%
Income tax due 1st quarter [(P495,000/99%) P480,000) x
( 6,000)
30%
Withholding tax 2nd quarter [(P792,000/99%) x 1%
( 8,000)
Excess tax credit 2009
( 10,000)
Income tax still due and payable 2nd quarter
P 6,000
Note: The withholding tax for the 1st quarter is already included in the income tax due
in the first quarter.
Problem 12 31
C
Income tax from ordinary net income (P1,000,000 P900,000) x
30%
Final income taxes:
Interest income on peso savings (P100,000 x 20%)
Expanded foreign currency deposit (P100,000 x 7.5%)
Total income taxes
Problem 12 24
D
Government educational institutions are tax-exempt.
Problem 12 25
B
Income tax payable (P700,000 x 0.025)
Problem 12 29
A
All of the transactions of Unlad Cooperative are exempted from income taxes.
P17,500
P10,000,000
12,000,000
6,000,000
P28,000,000
2.5%
P
700,000
Problem 12 27
Within
Not in the Choices = P2,500,000 & P1,500,000

Dragon Films
American
Aircraft
Gross receipts
P10,000,000
P20,000,000
Multiplied by special tax rate
25%
7 %
Philippine income taxes
P 2,500,000
P 1,500,000
Note: Gross income means gross receipts. The aforementioned resident foreign
corporation are subject special tax rates (final taxes). They are not allowed to deduct
costs or expenses from their gross receipts. The cost of service is only applicable for
MCIT purposes. (Sec. 27(E)(4), NIRC)
Problem 12 28
B
Income tax (P80,000/80%) x 20%
P20,000
Note: Although cooperatives are tax-exempt, they still subject to final income taxes on
interest income.
Problem 12 32
B
Income tax on interest income from peso savings bank (P100,000
x 30%)
P30,000
20,000
7,500
P57,500
P 30,000
Interest income earned by nonresident foreign corporation from EFCD is tax-exempt.

Problem 12 33
C
Tax on cash dividend from a resident foreign corporation
P 30,000
(P100,000 x 30%)
Dividend received by a resident foreign corporation from a domestic corporation is taxexempt.
Problem 12 34
C
Cash dividend from a domestic corporation (P100,000 x 30%)
P 30,000
Cash dividend received by a domestic corporation from another domestic corporation is

tax- exempt because it is considered earned outside the Philippines since only 40% of
its business is done within.
Problem 12 35
D
Zero because the earnings of the said resident foreign corporation have no tax situs in
the Philippines.
Problem 12 36
Interest from saving deposit Metrobank (P3,000,000 x 20%)
Royalty income Philippine Mining Company (P1,000,000 x 20%)
P 600,000
200,000
Interest from a depository bank under expanded foreign currency

deposit - PCI Bank ($30,000 x P50 x 7.5%)
Dividends from Zerxes, a resident foreign corporation (P500,000 x
30%)
Total final passive income taxes
Problem 12 37
112,500
150,000
P1,062,500

Income tax payable
Tax credit allowed see supporting
computation
Income tax still due
.
P
200,000
(200,000
)
P300,000
Gross income - cumulative

Itemized deductions - cumulative
Net taxable income
Income tax due
Total income tax paid in previous quarters - tax credit
3rd Quarter
P880,000
(704,000)
P176,000
30%
P 52,800
Problem 12 38
A
Income subject to normal tax rate (P300,000/ 30%)
Passive income (P60,000/20%)
Capital gains (P35,000: 5,000 @5%, 30,000@10%)
Total income
Less: Income taxes paid:
Income tax per annual tax return
Final tax on passive income
Capital gains tax
Amount subject to 10% surtax
4th Quarter
P1,120,000
(896,000)
P 224,000
30%
P
67,200
( 52,800)
P
14,400
P1,000,00
0
300,000
P300,000
60,000
35,000
400,000
P1,700,00
0
395,000
P1,305,00
0
Problem 12 39
Year 2009
Within
Without
Gross income:
Philippine
USA
Japan
Deductions:
Philippine
USA
Japan
Net income
Total
P1,000,00
0
P
400,000
300,000
P1,000,00
0
400,000
300,000
(200,000
)
(800,000)
(200,000)
(200,000)
(800,000)
P
500,000
30%
P
150,000
( 90,000)
P
60,000
Supporting computation:
Tax credits:
US
(P200,000/P500,000) x P150,000 = P60,000 vs.
P80,000
Japan Allowed, lower
(P100,000/P500,000) x P150,000 = P30,000 vs.
P30,000
Total
Allowed, lower
P60,000
30,000
P90,000
90,000
(P300,000/P500,000) x P150,000 = P90,000 vs.

P100,000
Allowed, lower
Problem 12 40
Reported income before tax
Add: Loss from sale of shares of stock outside stock
market
Total
Less: Gains subject to final income tax:
(1) Gain from sale of stock in the stock market
(2) Gain from sale of short-term debt securities
(3) Gain from sale of real property
(P9,400,000 P4,400,000)
Adjusted income subject to corporate income tax
Multiply by normal corporate income tax
Correct amount of income tax
Total reported income before tax
Less: Normal corporate income tax
Net income after tax
Problem 12 41
Total revenue
Operating expenses
Service charge credit card (P1,000,000/5%) x 3%
Net income
P90,000
P10,000,000
5,000
P10,005,000
P
25,000
10,000
5,000,000
5,035,000
P 5,630,000
30%
P 1,689,000
P10,000,000
1,689,000
P 8,311,000
P1,000,000
( 10,000)
( 600,000)
P 380,000
30%
Income tax due

Less: Creditable expanded withholding tax
(P1,000,000/5%) x %
Problem 12 42
Taxable income (normal tax)
Add: Income subject to final tax
Income exempt from tax
Income, excluded from gross income
Amount of NOLCO deducted
Total
Less: Dividends
Income tax paid for the year
Improperly accumulated income
Tax on improperly accumulated income
P 114,000
100,000
P
14,000
10%
P
101,935
P 900,000
P 60,000
50,000
10,000
50,000
P150,000
200,000
Problem 12 43
Income tax per ITR (P450,000/30%)
Income subject to final tax (P37,500/7.5%)
Capital gains:
P5,000/5%
P35,000/10%
Total
Less: Income tax paid (P450,000 + P37,500 + P40,000)
Basis of IAET
Multiplied by IAET rate
IAET
170,000
P1,070,000
350,000
P 720,000
10%
P
72,000
Note: The tax differential on interest income shall not be used because the tax
applicable is 10% not 30% normal tax.
Problem 12 46
1.
Sales
Cost of sales
P1,500,000
500,000
P100,000
350,000
450,000
P2,450,000
527,500
P1,922,500
10%
P 192,250
P2,843,1
00
362,600
60,000
36,200
P1,425,42
0
762,330
82,100
37,500
Rent income
Gross income
Problem 12 44
Government educational institutions are exempted from tax. (Sec. 30(I), NIRC.)
Problem 12 45
Tuition fees
Miscellaneous fees
Income from rents
Net income, school canteen
Net income, book store
Gross income
Less: Allowable deductions:
Payroll and administrative salary
Other operating expenses
Interest expense
Depreciation, net six room building
Taxable income
Multiply by the applicable tax rate
Income tax
2,307,35
0
P1,019,3
50
24,800
P3,326,7
00
Operating expenses allowed

Net taxable income
3rd
year
P1,000,00
0
( 600,000
)
4th
year
P2,500,00
0
(1,200,00
0)
5th
year
P4,000,00
0
(2,400,00
0)
200,000
P
600,000
( 300,00
0)
P
300,000
300,000
P1,600,00
0
(1,300,00
0)
P
300,000
100,000
P1,700,00
0
(1,400,00
0)
P
300,000
6th
year
P5,000,000
(2,700,000)
50,000
P2,350,000
(1,500,000)
P 850,000
Multiplied by NCIT rate

Income tax due
Quarterly tax paid
Income tax still due and
payable
2.
Royalty income, net of tax
Interest income, net of tax
Total passive income, net of
tax
Divide by
Total gross passive income
Multiplied by final tax rate
Final taxes
Problem 12 47
30%
30%
P
90,000
(
10,00
0)
P
80,000
30%
P
90,000
(
20,00
0)
P
70,000
30%
P
90,000
(
30,00
0)
P
60,000
3rd
year
P 80,000
20,000
P100,000
4th
year
P160,000
32,000
P192,000
5th
year
P120,000
16,000
P136,000
6th
year
P 40,000
24,000
P 64,000
80%
P125,000
20%
P 25,000
80%
P240,000
20%
P 48,000
80%
P170,000
20%
P 34,000
80%
P 80,000
20%
P 16,000
P 255,000
(
40,000)
P 215,000
(1)
Taxable income from operation (P1050,000/70%)
Add: NOLCO deducted
Interest income (P120,000/80%)
Capital gain (P230,000 P5,000)/90%
Total income for GAAP reporting, before tax
P1,500,000
100,000
150,000
250,000
P2,000,000
(2)
Tax on income from operation (P1,500,000 x 30%)
Tax on interest income (P150,000 x 20%)
Tax on capital gain (P250,000 P230,000)
Total income tax paid
P450,000
30,000
20,000
P500,000
(3)
GAAP income
Less: Income tax
Net income after tax GAAP
P2,000,000
500,000
P1,500,000
(4)
Taxable income from operation
Add: NOLCO
Income subjected to final tax (P150,000 +
P250,000)
Total
Net income after income tax
Multiplied by surtax rate
IAET = Surtax
P100,000
400,000
P1,500,000
500,000
P2,000,000
500,000
P1,500,000
10%
P 150,000
Problem 12 48
1. Sales
Less: Cost of sales
Reportable income per ITR
P10,000,000
6,000,000
P 4,000,000
2.
P4,000,000
Gross profit
Less: Operating expenses:
Salaries
Depreciation
Supplies
Interest expense [P50,000 (40,000 x 33%)
Net taxable income per ITR
P1,000,000
300,000
200,000
36,800
Note:
Interest income is subject to final tax of
20%
Inter-corporate dividend is tax-exempt.
Losses on investment in securities is not deductible capital
loss
1,536,800
P2,463,200
3.
Final withholding tax paid (P32,000/80%) x 20%
P 8,000
4.
Net income before tax per GAAP

Less: Income tax (P2,463,200 x 30%)
Net income
P2,200,000
738,960
P1,461,040
CHAPTER 13
INCOME TAXES OF PARTNERSHIPS, ESTATES & TRUSTS
1. False not all partnership, only commercial partnership.
2. False tax exempt, but required to file.
3. False the tax withheld in creditable.
4. True starting on the 4th year of operation.
5. True
6. True
7. True because it is withheld with final tax.
8. True
9. False trading business income will make the partnership a commercial
partnership.
10. False still subject to final tax of 10%.
11. True if created through gratuitous transfer, not more than 10 years and no
contribution is made by the co-owners.
12. True
13. True
1. True
2. False It shall be in writing either as trust inter-vivos or through a will.
3. False A trustor is the person who establishes the trust, not the trustee.
4. True
5. True
6. True
7. True
8. False P50,000.
9. True
10. True
11. False the personal exemption is P50,000.
12. True
Problem 13 3
1. A
2. B
3. C
4. C
5. B
6. C
Problem 13 4
1. A
2. A
3. B
4. A
5. C
6. A
7. B
8. B
9. B
10. A
7. B
8. D
9. B
10. A
11. C
Less: Personal exemption (P50,000 + 25,000)

Net taxable income of J
Problem 13 5
A
Net profit from trading business of the partnership
Less: Income tax (P400,000 x 30%)
Income after tax
Interest income, net of final withholding tax
Dividend income
Total income for distribution to partners
Divide by profit and loss ratio
Share of each partner
Multiply by dividend tax rate
Income tax on the distributive share of Mitzi Baguingan
P400,000
120,000
P280,000
4,000
10,000
P294,000
2
P147,000
10%
P 14,700
Problem 13 6
(1 C
)
Net income (P400,000 P160,000)
Multiplied by applicable income tax rate
Income tax of the partnership
(2
)
P240,000
30%
P 72,000
A
Partnerships income after tax (P240,000 P72,000)
Divided by profit and loss ratio
Share of A
Less: Final tax (P84,000) x 10%
As share, net of final tax
Problem 13 7
1. A
J, Opting itemized deduction:
Share of J in the Partnership (325,000-175,000) x 70%
Other business income
Total business income
Less: Itemized deductions (excluding contribution)
Net income before contribution
Less: Contribution
Actual, P1,750 + (15,000 x 70%) =P12,250
Limit, P155,000 x 10% or P15,500
Allowed
Net taxable before personal exemption
P168,000
1/2
P 84,000
8,400
P 75,600
P105,000
85,000
P190,000
35,000
P155,000
12,250
P142,750
75,000
P 67,750
2. D
R, opting for standard optional deduction:
Share in the partnership, gross (P325,000 x 30%)
Other business income
Total business income
Less: Personal exemption - single
Net taxable income
P 97,500
65,000
P162,500
65,000
P 97,500
50,000
P 47,500
Problem 13 8
Net income from trading business of the partnership
Divided by profit and loss ratio
Share of each partner
Add: Compensation income
Total income before personal exemption
Net taxable income
P400,000
2
P200,000
240,000
P440,000
50,000
P390,000
Note: Interest income and dividend income have been subjected to final tax, hence, not
to be included anymore in an annual taxable income.
Problem 13 9
1. D
None. The objective of co-ownership is to preserve the co-ownership property,
therefore, not subject to tax.
2. B
The co-owners in an exempt co-ownership are liable for the tax in the income they
received from the co-ownership. They should file the return and pay the corresponding
tax based on their separate and individual capacity.
The net taxable income of Robert is computed as follows:
Share from the income of co-ownership
Net taxable income
P1,000,000
50,000
P 950,000
Income received by the co-owners is already net of itemized deductions of the coownership, therefore, the co-owners in their individual capacity is not anymore entitled
to optional standard deduction. Inasmuch as the related expenses have been deducted
before the distribution of income to the co-owners, (Sec. 34 L).
Supreme Court Ruling - Deductions and exemptions are highly disfavored in law. They
must be construed strictly against the taxpayer, (Commissioner of Internal Revenue vs.
P. J. Kiener Company, LTD., 65 SCRA 143).
Problem 13 10
D
Income after expenses but before distribution to heir
Less: Gross amount distributed to heir (P85,000/85%)
Exemption
Net taxable income
P100,000
50,000
Problem 13 11
1. B
Income of the grantor
Income of trust A - revocable
Total income of the grantor
Less: Total expenses
Grantor business expense
Trust A business expense
Grantors income before personal exemptions
P400,000
150,000
P250,000
P1,000,00
0
P400,000
200,000
500,000
P1,500,00
0
600,000
P 900,000
2. D
Income of trust B irrevocable trust
Less: Expenses of irrevocable trust B
Net income before exemption
Net taxable income of all the trust
P 60,000
50,000
P110,000
50,000
P 60,000
Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD, he shall be
considered as having availed himself of the itemized deductions. (Sec. 34(L), NIRC)
Alternative solution of 3: If beneficiary opted to use OSD
Income of beneficiary
Add: Share from trust
Total gross income
Less: OSD (P150,000 x 40%)
P 90,000
50,000
P 40,000
Problem 13 12
1. The partnership is a general professional partnership, therefore, tax exempt.
2. and 3. Computation of tax liabilities of partners A and B.
Net income of the partnership (P1,200,000 P100,0000)
P1,100,000
Partner A =
Partner B =
Total
60%
40%
Partners salary
P240,000
P360,000
Distribution of balance
300,000
200,000
Total
P540,000
P560,000
Less Personal exemption
50,000
100,000
Net taxable income
P490,000
P460,000
Tax on P250,000
P 50,000
72,000
.
P122,000
P100,000
50,000
P150,000
60,000
P 600,000
500,000
P1,100,000
P 50,000
63,000
P113,000
Problem 13 13
Gross income merchandising
Dividend received from nonresident foreign corporation
Ordinary and necessary expenses merchandising
Net income before income tax
Less: Provision for income tax (P380,000 x 30%)
Net income
P200,000
100,000
P100,000
50,000
P 50,000

Income of beneficiary (P100,000 P40,000)
Add: Share from trust
Net income

Net income
P575,000
60,000
(255,000
)
P380,000
114,000
P266,000
Note: Dividends received from domestic corporation by a general co-partnership is tax

exempt.
Computation of partnership share considered as dividends:
M - 40%
W 60%
Net income (P266,000)
P 106,400
Dividends from domestic corporation (P40,000)
16,000
Interest income, net of final tax of 20%, (P8,000)
3,200
Distributive partners share on general co-partneship
P 125,600
Multiply by final tax rate
10%
Final tax on share on partnership income
P
12,560
P
159,600
24,000
4,800
P
188,400
10%
P
18,840
Note: In a general co-partnership, the share of individual partner is considered as
dividend income.
Problem 13 14
1. BIR Ruling (August 18, 1959) provides that the co-ownership shall be taxed as a
corporation if the property was not divided for more than ten (10) years. Therefore,
the tax on the income of the co-ownership would be:
Income of co-ownership
Multiply by corporate normal tax rate
Income tax as corporation
P5,000,000
30%
P1,500,000
2. Final tax on dividend of Marjorie Sison:

Amount received from co-ownership
Multiply by final tax rate on dividend
Final tax on dividend income tax withheld
P1,000,00
0
10%
P
100,000
3. The amount received by Grace Ann Subala shall no longer be subjected to normal
tabular tax because it has been subjected to final tax on dividend.
Problem 13 15
1. Answer
Conjugal gross income from estate
Less: Business expense (P5,000,000 x 40%)
Income distributed to beneficiaries
Conjugal net income
P2,000,000
600,000
P5,000,00
0
2,600,000
P2,400,00
0
200x income tax due from the estate of Mr. Baguingan:

Share of Mr. Baguingan from the net income of the conjugal estate
(P2,400,000 x 50%)
Taxable income
Tax on P500,000
Tax on excess (P625,000) x 32%)
Income tax due
200,000
P
325,000
Mr. Baguingans income from estate shall claim the total amount of P75,000 personal
exemptions (RA 9504) because Sec. 35C of the NIRC provides that if the taxpayer dies
during the taxable year, his estate may claim the corresponding additional exemptions
for himself and his dependent(s) as if he died at the close of such year. Hence, the
applicability of the exemption of the income from estate amounting to P50,000 shall
take effect only in the succeeding years after the decedents death.
2. Answer
Compensation income
Add: Income received from trust
Total income before personal exemption
Net taxable income
P250,000
200,000
P450,000
150,000
P300,000
Tax on P250,000
P50,000
15,000
Income tax due
P65,000
Alternative solution: If beneficiary opted to use OSD
Compensation income
Add: Income received from trust, net of OSD (P200,000 x
60%)
Total income before exemption
Less: Personal exemptions:
Basic
Taxable income of Mrs. Diana Nievera
Tax on P140,000
Income tax due
P250,00
0
120,000
P370,00
0
P
50,000
100,000
150,000
P220,00
0
P1,200,00
0
P
22,500
75,000
P1,125,00
0
24,000
P
46,500
P
125,000
3. Answer
Total amount received by the children
P600,000
Multiply by withholding tax rate

Total withholding taxes
15%
P 90,000
Tax on P70,000
Total income tax payable
50,000
P 75,000
Problem 13 16
Correction: Second paragraph should beA year following the death of Naty
Poc.
Tax savings:
Income tax when no income of estate was distributed (Case 1 +
Case 3)
(P122,000 + P8,500)
Less: Income tax when P150,000 of estates income was distributed
(Case 2 + Case 4) = (P77,000 + P42,500)
Tax savings
Supporting computations:
Gross income
Business deductions:
Itemized deductions
Distributed income of the
estate
Net income before personal
exemption
Personal exemption
Net taxable income
Income tax for first bracket
Income tax on excess
Case 1: (490,000 250,000)
x 30%
Case 2: (340,000 250,000)
x 30%
Case 4: (220,000 140,000)
x 25%
Total income taxes
P130,500
P
P
2. Income tax payable from the beneficiary in 200x:
Gross income received from income of trust
Net taxable income
119,500
P 11,000
Case 1
800,000
Case 2
800,000
Case 3
300,000
Case 4
300,000
(260,000)
.
(260,000)
(150,000)
(180,000)
.
(180,000)
150,000
540,000
390,000
120,000
270,000
(50,000)
490,000
50,000
(50,000)
340,000
50,000
(50,000)
70,000
8,500
(50,000)
220,000
22,500
.
122,000
77,000
Problem 13 17
1. Income tax payable by the trust in 200x:
Income from house and lot
Income from hollow block business (P10,000 x 12)
Income from farm
Total gross income from trust
Less: Related expenses (P250,000 x 30%)
Amount distributed to the beneficiary
Less: Exemption
Net taxable income
.
8,500
20,000
42,500
P 80,000
120,000
P 75,000
50,000
50,000
P 250,000
125,000
P 125,000
Alternative solution if Trust and beneficiary opted to use OSD
1.
2.
P 50,000
50,000
P 0 .
72,000
27,000
8,500
1,000
9,500
Total gross income trust

Less: OSD (P250,000 x 40%)
Amount distributed to the beneficiary
Net taxable income
P250,000
P100,000
50,000
150,000
P100,000
50,000
P 50,000
Tax on P30,000
P2,500
3,000
P5,500
Gross income received from income of trust

Net taxable income
P50,000
20,000
P30,000
50,000
(P30,000)
Problem 13 18A
Correction: The requirement should be stated as: How much is the income tax due
and payable of the two trusts?
Total income of trusts (P50,000 + P1,000,000)
Less: Distribution to beneficiary (P10,000 + P20,000)
Exemption
Net taxable income
P 30,000
50,000
P1,050,00
0
80,000
Tax on P500,000
P
970,000
P125,000
150,400
P275,400
Problem 13 18B
Note: Since the topic is tax planning and the requirement is tax savings, OSD can
automatically assumed to be used to determine the lower tax.
1.
2.
Gross receipts 2009

Less: OSD (P300,000 x 40%)
Less: Personal exemption basic
Net income subject to income tax
P300,000
120,000
P180,000
50,000
P130,000
Income tax when no income of estate was distributed (Case 1 +

Case 3)
(P50,000 + P8,500)
Less: Income tax when P150,000 of estates income was
distributed
(Case 2 + Case 4) = (P27,500 +
P27,500)
Tax savings
P 58,500
55,000
P 3,500
Supporting computations:
Gross business receipts
Distribution to the beneficiary
Balance
OSD 40%
Net income before personal
exemption
Personal exemption
Net taxable income
Income tax for first bracket
Income tax on excess
Case 2 & 3: (160,000 140,000)
x 25%
Total income taxes
Case 1
500,000
.
500,000
(200,00
0)
300,000
Case 2
500,000
(150,000)
Case 3
200,000
350,000
(140,000)
200,000
(80,000)
Case 4
200,000
150,000
350,000
(140,000)
210,000
120,000
210,000
(50,000)
250,000
(50,000)
160,000
(50,000)
70,000
(50,000)
160,000
50,000
22,500
8,500
22,500
.
50,000
5,000
27,500
Problem 13 19
1. To minimize income tax, Dokling can do the following:
a. Put his business under irrevocable trust
.
8,500
5,000
27,500
b. Use OSD instead of itemized deduction because the OSD is greater

than the itemized deduction, and
c. Claim his childs allowance as share from the income of the trust.
2.
Tax exposure before the creation of trust:

Gross income
Less: OSD (P400,000 x 40%)
Net taxable income
P400,000
160,000
P240,000
50,000
P190,000
Tax on P140,000
Income tax due
P22,500
12,500
P35,000
Note: The allowance is not deductible because the child is not established as
beneficiary of the trust. Furthermore, the business is not in trust.
50% of the business is created as trust:
Grantor:
Income tax if 50% is held in trust
(irrevocable)
Gross income (50%)
Less: OSD (P200,000 x 40%)
Net taxable income
P200,000
80,000
P120,000
50,000
P 70,000
Tax on P70,000
Trust:
Income tax if 50% is held in trust
(irrevocable)
Gross income (50%)
Less: OSD (P200,000 x 40%)
Distribution to beneficiary
Net taxable income
Beneficiary:
Share from the income of trust
Less: OSD (P100,000 x 40%)
Net taxable income
Tax on P10,000
( 8,500)
P 80,000
100,000
P200,000
P180,000
P 20,000
50,000
(P 30,000)
P100,000
40,000
P 60,000
50,000
P 10,000
(
500)
Tax savings
(P72,800,000/1.12)
Gross income
Net income
Income tax due
P26,000
Problem 13 20
Note: Since the topic is tax planning, the taxpayer should use OSD instead of itemized
deduction because using OSD can give a greater tax savings based on the given data
of this case.
1
.
2
.
2
.
Rent income
P 800,000
Less: OSD (P800,000 x 40%)

Net income
320,000
P 480,000
50,000
P 430,000
Tax on P250,000
Add: Tax on excess (P180,000 x 30%)
Income tax due
P 50,000
54,000
P104,000
Rent income Property 2
P 300,000
Less: OSD (P300,000 x 40%)

Net income
120,000
P 180,000
50,000
P 130,000
Tax on P70,000
Add: Tax on excess (P60,000 x 20%)
Income tax due
Less: Income tax in No. 1
Rent income Property 1
P 500,000
Less: OSD (P500,000 x 40%)

Net income
200,000
P 300,000
50,000
P 250,000
8,500
12,000
( 20,500)
2
.
( 50,000)
Tax savings
P 33,500
P100,000,000
65,000,000
The share of joint venture partners X Co and Y Co is

not
subject to income tax under inter-corporate
dividend rule.
Government project (consortium)

a.
Tax-exempt
X Co.
Y Co.
P10,000,00
P10,000,00
0
0
30%
30%
P
P
3,000,000
3,000,000
Note: OSD is not applicable to co-ventures because their respective shares are already
net of expense.
b.
Share of co-venturers in the net income (P20M x

50%)
Income tax due
Problem 13 22
1 Not a government project
.
a. Contract price, excluding VAT (P89,600,000/1.12)
Less: Cost of construction, net of VAT
(P56,000,000/1.12)
Gross income
Net income
Income tax due
b.
Tax on P250,000
Problem 13 21
1 Not a government project
.
a. Contract price, excluding VAT (P112,000,000/1.12)
b.
P 35,000,000
15,000,000
P 20,000,000
30%
P 6,000,000
2
.
P80,000,000
50,000,000
P30,000,000
10,000,000
P 20,000,000
30%
P 6,000,000

not
dividend rule.

a.
Tax-exempt
b.

50%)
X Co.
P10,000,00
0
30%
Y Co.
P10,000,00
0
30%
Income tax due
P
3,000,000
P
3,000,000
Alternative solution using OSD:

Note: If the joint venture opted to use OSD, it will have a lower income tax obligation,
computed as follows:
1.
Not a government project

a Contract price, excluding VAT (P89,600,000/1.12)
.
(P56,000,000/1.12)
Gross income
Less: OSD (P30,000,000 x 40%)
Net income
Income tax due
b
.
2.
50,000,000
P30,000,000
12,000,000
P18,000,000
30%
P 5,400,000

not
dividend rule.

a Tax-exempt
.
b
.
P80,000,000

50%)
Income tax due
X Co.
P9,000,000
Y Co.
P9,000,000
30%
P
2,700,000
30%
P
2,700,000
CHAPTER 14
WITHHOLDING TAXES
1. True
2. True
3. True
4. True
5. False final withholding taxes are not creditable.
6. False the tax is final tax, hence not required to file an income tax return.
7. False Business income is an income earned but not all subject to expanded
withholding tax.
8. True
9. True
10. True
11. True
12. False all payments made by the government are net of withholding taxes.
13. True
14. True
15. True
Problem 14 2
C
Share from the professional partnership (P500,000 x
P250,000
50%)
Less: Creditable withholding tax (P250,000 x 10%)
25,000
Amount received, net of withholding tax
P225,000
Problem 14 3
D
Dividend income (P10 x 10,000)
P 100,000
Less: Withholding tax on dividends income of NRFC (30%)
30,000
Dividend income, net of withholding tax
P 70,000
Problem 14 4
C
Lease income
Less: Withholding tax (P500,000 x 4.5%)
Lease income, net of withholding tax
P 500,000
22,500
P 477,500
Problem 14 5
B
Tax informers fee
Less: Withholding tax (P1,000,000 x 10%)
Tax informers fee, net of withholding tax
P1,000,000
100,000
P 900,000
Problem 14 6
SOLUTIONS
a. Resident Citizen or Resident Alien

1. Interest on bank deposits
a. Peso deposits
(P 50,000 x 20%)
b. Dollar account (FCDS)
($ 10,000 x 7.5%)
2. Prize
(P100,000 x 20%)
3. Royalties on books
(P300,000 x 10%)
4. Capital gains on sale of real property
(P1,000,000 x 6%)
5. Property dividends
(P120,000 x 10%)
6. Compensation from OBU
(P400,000 x 15%)
b. Nonresident Alien engaged in business
a. Peso deposits
(P 50,000 x 20%)
b. Dollar account (FCDS)
2. Prize
(P100,000 x 20%)
(P300,000 x 10%)
(P1,000,000 x 6%)
(P120,000 x 20%)
(P400,000 x 15%)
c. Nonresident Alien not engaged in business
a. Peso deposits
(P 50,000 x 25%)
P10,000
$
750
P20,000
P30,000
P60,000
P12,000
P60,000
P10,000
Exempt
P20,000
P30,000
P60,000
P24,000
P60,000
P12,500
b. Dollar account
2. Prize
d. Domestic Corporation
a. Peso deposits
b. Dollar account
2. Prize
4. Capital gains on sale of property
e. Resident Foreign Corporation
a. Peso deposits
(P100,000 x 25%)
(P300,000 x 25%)
(P1,000,000 x 6%)
(P120,000 x 25%)
(P400,000 x 15%)
(P 50,000 x 20%)
($ 10,000 x 7.5%)
(P300,000 x 20%)
(P200,000 x 6%)
(P 50,000 x 20%)
Exempt
P25,000
P75,000
P60,000
P30,000
P60,000
P10,000
$ 750
N/A
P60,000
P12,000
Exempt
N/A
P10,000
f.
b. Dollar account
2. Prize
Nonresident Foreign Corporation
a. Peso deposits
b. Dollar account
2. Prize
($ 10,000 x 7.5%)
(P300,000 x 20%)
(P 50,000 x 30%)
(P100,000 x 30%)
(P300,000 x 30%)
(P120,000 x 30%)
$ 750
N/A
P60,000
N/A
Exempt
N/A
P15,000
Exempt
P30,000
P90,000
N/A
P36,000
N/A

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Valencia 5th Ed Vol 1

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CHAPTER 1 GENERAL PRINCIPLES AND CONCEPTS OF TAXATION

Problem 1 1 TRUE OR FALSE

Problem 1 2 TRUE OR FALSE

submit to the BIR.

Problem 2 3 TRUE OR FALSE

Mr. Lang is obligated to pay the P500,000 assessed against him.

*The nonpayment of taxes is already 2 years it becomes habitual; hence, willful

Amount of tax liability

Total annual registration fee January 31, 2010

Criminal violation not filed in courts

Time deposit balance

Expenses actually incurred

Less: Total costs (P432,000 + P184,250 + P103,750)

Reportable income year 5

Total harvest for the year

Less: Total direct costs:

Gross income for the year

Problem 4 1 TRUE OR FALSE

Compensation income (P13 P12) x 10,000

Compensation income (P25 P23) x 10,000

Year 1 Outright method

Divided by remaining years of contract

Annual income from improvement

Multiplied by months in a year

Year 1 spread-out rent income on improvement

Less: Accum. depreciation [(P240,500 - P560)/8 yrs] x 4.75

Less: Accumulated depreciation at the end of the lease (P300,000/6) x 4

Book value at the end of the lease

Additional income in 2010 from the pre-termination of contract

Less: Bad debts written off

Bad debts recovery of previous year with tax

6. False Bequest is a personal property.

Christmas bonus (de minimis)

Prize for winning the silver Olympic medal

Note: The cost of product produced need not to be deducted anymore

3. Same answer with No. 1

13th month pay

Total basic salary

Case 4: Not in the choices

GMV (P5,037,300 x 5% x 50%)/68%)

Case 2: Motor vehicle benefits

Correction of Page 270: Motor vehicle formula No. 3:

3. D = P 0 A fringe benefit tax is not an income tax

Monthly fringe benefit [(P2,040,000 x 5% x

FBT (P7,956/68%) x 32%

FBT (P408,000/68%) x 32%

Fringe benefit expense (P34,000/68%)

Fringe benefit tax (P49,800 x 32%)

Violeta Vicente cannot deduct the FBT from her gross

San Miguel Corporation, however, can deduct the entire

Grossed-up monetary value

Not a minimum wage earner

Fringe benefit tax due

Philhealth premium contribution

3. Assuming that Mr. Wong is a Filipino employed as manager of Clark

Net taxable compensation

Not a minimum wage earner

Philhealth premium contribution

Fringe benefit tax due

The MWE qualifies for tax exemption because his

FBT (P68,000/68%) x 32%

Add: Present value of P180,000 installment at

Yr. 3: (P180,000 x 0.6086)