Chapter 9

Losses

Problem 9-1 True or False
Write True if the statement is correct or False if the statement is incorrect.
1. Loss incurred from sale of personal property is ordinary loss.
2. Loss from sale of capital asset is deductible from business income
3. If there is a partial loss, the allowable deduction will be the book value of the damaged asset at the time of
loss.
4. Expenses not reported when incurred cannot be claimed as NOLCO.
5. A loss claimed as deduction from estate tax purposes should not be claimed as deduction for income tax
purposes.
6. Gambling losses can be deducted from gambling gains and capital gains.
7. Losses from business operation are ordinary losses.
8. Loss incurred from the sale of business furniture is deductible from business income.
9. Loss from embezzlement of business fund is a loss deductible from business income.
10. Fire damage on the sold proprietorships equipment is deductible from business income.
11. Typhoon damage on the residence of the owner of the business is not allowed as deduction from business
income.
12. Net operating loss of prior year could be claimed as deduction from business income of the current year.
13. Partial loss on business property, plant and equipment is deductible loss from business income.
14. A loss claimed as deduction for estate tax may be claimed as deduction for income tax purposes.
15. NOLCO could be deducted from next years business income of a sole proprietorship which is opting for
optional standard deduction.
16. The NOLCO should be deducted from gross income to arrive at base amount for the computation of MCIT.

Problem 9-2 Multiple choice
Select the letter that contains the best answer.
1. Which of the following is deductible from gross income?
a. Personal Expenses c. Bad Debts
b. Net Capital Loss d. Estimated loss
2. Which of the following is not deductible from business income?
a. Casual losses on properties connected in the conduct of trade or business
b. Loss of business property due to embezzlement
c. Loss on exchange of capital asset
d. Net operating loss carry over
3. If the casual loss on business property is partial, the deductible loss is the
a. replacement cost to put back the business property to its operating condition
b. actual cost of damaged on business property
c. higher amount between a and b
d. lower amount between a and b
4. Which of the following is not correct regarding NOLCO
a. NOLCO is allowed as deduction from business income for the next 3 succeeding years
b. Domestic and resident foreign corporation subject to normal income tax is allowed with
NOLCO.
c. Offshore banking unit of a foreign corporation is allowed with NOLCO
d. Private education institution enjoying preferential tax rate is allowed with NOLCO
5. Which of the following is entitled to claim NOLCO?
a. Employee with respect to his compensation income
b. Foreign international carrier
c. Offshore banking Unit
d. Self employed individual
6. Which of the following statement is correct?
` a. NOLCO is an item of deduction from business income
b. Compensation earner could claim NOLCO
c. NOLCO could be claimed together with the optional deduction
d. NOLCO is equal to operating loss reported in the income statement for prior year
7. Which of the following is allowed as deduction from business income?
a. Loss on the sale of property not directly used in the business
b Losses on inventory which is fully covered with insurance
c. Fire damage on fully depreciated business equipment
8. Statement 1: Losses claimed as deduction from gross estate will reduce the net taxable estate.
Statement 2: Losses claimed as deduction from gross estate would also reduce the taxable income of the
estate
a. Only statements 1 is correct
b. Only statements 2 is correct
c. Both statements are correct
d. Both statements are incorrect
9. Statement 1: A loss in one line of business is not permitted as allowable deduction from gain in another
line of business, if one of the two lines is exempt from tax
Statement 2: Losses from transactions between related party taxpayers may be allowed as deduction as
long as supported by documentation
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect
10. Statement 1: When the loss is cause by embezzlement of funds by a known person, the loss sustained is
not deductible on the year of commission or discovery, but in the year when the right of recovery
becomes worthless
Statement 2: The loss on mortgage is determined upon sale of the property by the mortgagee
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect
11. Statement 1: Casualty losses of propective crops are deductible loss.
Statement 2: Loss on purchased livestock is a deductible loss.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect
12. Statement 1: Domestic and resident foreign corporation taxed during the year with MCIT cannot claim
NOLCO.
Statement 2: Decline in the value through market fluctuation of investments in stock of a corporation is
not a deductible loss.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect


Problem 9-3 Deduction from Business income
During the year, the following losses were incurred:
A. Loss incurred on sale of investment in stocks P 200,000
B. Loss from sale of business equipment 100,000
C. Loss of personal equipment 50,000
Which of the above losses could be claimed as deduction from business income?
a. A c. C
b. B d. All of the above
Problem 9-4 Deduction from Business income
The following transactions transpired during the year:
Cost Sales Price
Inventory P1,400,000 P2,500,000
Temporary investments 500,000 450,000
Land(capital asset) 1,000,000 800,000

How much could be claimed as deduction from business income?
a. P0 c. P250,000
b. P50,000 d. P450,000


Problem 9-5 Deductible loss on fire
What would be the amount of loss that could be deducted from business income for the property that was damaged
by fire in 200x and has a remaining useful life of 4 years at date of fire? The property was acquired at 100,000 and
depreciated at 10% per year without scrap value.
a. P10,00 c. P40,000
b. P20,000 d. P60,000


Problem 9-6 Deductible loss on Rehabilitate
X trading incurred losses from fire on its equipment with a net book value of P50,000 when the fire happened. It will
need P60,000 to rehabilitate the extent of damages on the equipment which was not covered by any insurance policy

The equipment has an accumulated depreciation of P150,000 at date of fire. To acquire new equipment of the same
type will cost P110,000. The allowable deductible loss is
a. P200,000 c. P60,000
b. P110,000 d. P50,000


Problem 9-7 NOLCO
The net operating loss reported in the GAAP income statement is P50,000 after P200,000 operating expenses. Part
of the operating expenses is a P10,000 bad debts based on estimate. How much NOLCO would be deductible from
the succeeding years income?
a. P260,000 c. P50,000
b. P60,000 d. P40,000


Problem 9-8 NOLCO
The previous years operating loss amounted to P50,000. How much would be the NOLCO that could be deducted
from current years income of business opting for optional standard deduction?
a. P55,000 c. P5,000
b. P50,000 d. P0


Problem 9-9 Partial fire loss
The business equipment which has a carrying value of P25,000 was partially damaged by fire. The actual cost of
P30,000 was incurred to put back the business equipment to its operating condition.

Required: Compute for the deductible loss from business income.


Problem 9-10 Total Fire Loss
The business building with an acquisition cost of P1,200,00 and estimated useful life of 20 years was totally
damaged by fire at the end of its 10
th
year P200,000 worth of damages was recovered from insurance scrap
recovered were realized at 20,000.

Required: Compute for the deductible loss from business income.


Problem 9-11 Destruction of old building
The business incurred P120,000 to raze down an old existing building to give way to the construction of its factory
building. Scrap from the demolished building were realized for P20,000.

Required: Compute for the deductible loss from business income related to above construction.


Problem 9-12 Deductible loss and reportable gain
Kool corporation is holding common stocks of Lang Corp. acquired at cost of P100,000. At balance sheet date,
investments in Langs stocks has a fair market value of P90,000. On June 30 after balance sheet date the investment
in stocks of lang were sold for P110,000

Required: Compute for the deductible loss at balance sheet date and reportable gain on June 30

Problem 9-13 NOLCO
The trading business reported a net loss of P50,000, net of P300,000 operating expense. The operating expense
included P20,000 estimated bad debts and estimated warranty expense of P10,000

Required: Compute for the net operating loss that could be carried over for the next 3 succeeding years.

Problem 9-14 NOLCO
The following are the comparative income statements of Venus:
Year 1 Year 2
Gross Profit P500,000 P600,000
Estimated Bad debts 20,000 10,000
Other operating expenses 580,000 490,000

Required: Compute for the NOLCO that could be deducted from year 2 income.


Problem 9-15 Mortgage Property
In year 1, the business foreclosed the property of delinquent debtor with fair value of P1,000,000 to recover the
notes receivable of P1,500,000. In year 2, the foreclosed property was sold for P1,800,000.

Required: Determine the gain or loss in year 1 and year 2.

Problem 9-16 Mortgage Property
The mortgage property with fair value of P1,000,000 at date of grant of loan was foreclosed by the bank when the
business over due loan of P500,000 was not paid. The foreclosed property was offered for public auction and no
bidder offered any price. The fair value at the date of auction us estimated at P400,000.

Required: Compute for the deductible loss from business income of the bank

Problem 9-17 Various Losses
Mr. Guiller Dunong, a farmer, reports the following:
Income from farming P300,000
Cockpit winnings 50,000
Shrinkage of farm products produced 20,000
Loss of potential farm products due to calamities 150,000
Cockpit losses 100,000

Required: How much is the deductible loss?

Problem 9-18 Various Losses
Mr. Scotty Saboy incurred the following losses in connection to his construction business:
Compensatory liquidated damages P 50,000
Loss on actual damages 30,000
Loss on robbery(construction Supplies) 50,000
Loss on pilferage of business supplies 10,000
Book value of partially damaged machine due to fire 200,000
Replacement cost of damaged portion of machine 150,000
Loss on sale of capital asset 25,000

Required: Compute the amount of deductible loss from gross income


Problem 9-19 NOLCO and OSD
X, reported the following gross receipts, cash disbursements and NOLCO.
Gross receipts P2,000,000
Cost of service 500,000
Cash Disbursement 400,000
NOLCO last year 300,000

X opted to deduct OSD because the cash disbursement that represent business expense are not properly supported
with documentation.

Required: Compute the following:
1. If x is an individual taxpayer, how much is the amount of allowable deductions?
2. If x is a corporation, how much is the amount of allowable deductions?


Problem 9-20 NOLCO,OSD and MCIT
In the fourth year of Y Co., the company reported the following:
Sales,200r 2,000,000
Cost of sale 1,000,000
Operating expenses 990,000
NOLCO 200a 200,000

Due to losses and since the company has been in existence for more than 3 years, the BIR required Y co. to pay a
minimum corporate tax of 2% based on gross income.

Required: Compute the following:
1. Income tax due and payable in year 200r
2. Total NOLCO in year 200a


Problem 9-21 Various Losses
A CO. reported the following losses during the year:
Burglary loss-cash 50,000
Embezzlement loss-cash 25,000
Pilferage loss-office supplies 5,000
Capital loss on salo of capital asset(long term) 10,000
Decline in the value of investment in stocks 30,000
Casualty losses 15,000

The Burglary loss was reported to the police station within 90 days but such loss was not reported to the BIR. The
cashier was traced capable for the embezzlement.
Required: Compute the following:
1. Deductible loss from gross income
2. Deductible loss from capital gain


Problem 9-22 Losses from farming
The following losses were incurred by Dizon Farms during the calendar year:
Shrinkage loss if farm products produce P140,000
Casualty losses of propective products 40,000
Casualty losses of animals raised in the farm 20,000
Death of livestock previously purchased 10,000
Cost of property expropriated by the government:
The government paid only 10,000 as compensation 30,000

Required: Compute for the deductible farm loss





Problem 9-23 Adjustment of Losses
X Co. constructed a building at a cost of 10,000,000 with an estimated useful life of 30 years. After 5 years,
subsequent additions and improvements which were properly capitalized amounted to 500,000. The building was
insured for 6,000,000 against fire at the time it was totally destroyed by fire at year 8.




Chapter 10



Problem 10 1 True or False
Write true if the statement is correct or False if the statement is incorrect.

1. A self-employed taxpayers is required to file his quarterly income tax return.
2. A general professional partnership is taxed in the same manner as corporation.
3. A passive income outside the Philippines by a nonresident alien is subject to annual income tax in the Philippines.
4. Both creditable and final withholding taxes are withholding at source.
5. The excess of personal exemption over compensation income cannot reduce the net operating income from
business.
6. In general, passive income within is subject to final tax.
7. The annual income taxes are usually increased by creditable taxes.
8. The optional standard deduction can be deducted from the quarterly income tax.
9. Passive income within by a resident citizen is allowed to be reduced by personal exemption.
10. Reporting compensation and business income in one tax return using the same tax rate is an example of global
tax system.
11. Allowing personal exemption as reduction to taxable compensation income is an example of global income tax
system.
12. Resident aliens are taxable for their income earned within and outside the Philippines.
13. There is net capital gain if the ordinary gain exceeds ordinary loss.
14. Only resident citizen could opt for 40% standard deduction for business income.
15. A single individual, fully supporting his minor sister could claim P75, 000 personal exemption.
16. A married individual with 5 dependent children could claim only P100, 000 total personal exemption.


Problem 10 2 Multiple Choice
Select the letter that contains the best answer.

1. When different type of income are subjected to common tax rate, the tax system is described as:
a. Global tax system c. scheduler tax system
b. Gross income tax system d. final tax system
2. Scheduler tax system of income taxation means:
a. All types of income are added together to arrive at gross income
b. Separate graduated rates are imposed on different type of income.
c. Capital gains are excluded in determining gross income.
d. Compensation income and business professional income shall be added together in arriving at gross
income.
3. Which of the following taxpayers are taxed for income earned within and outside the Philippines.
i. Resident citizen
ii. Resident alien
iii. Domestic corporation
iv. Resident foreign corporation
Choices
a. i,ii,iii,and vi c. i and iv only
b. i,ii and iv only d. i and iii only
4. a self employed taxpayer is required to file his quarterly income tax return in
a. BIR Form 1700 c. BIR Form 1701Q
b. BIR Form 1701 d. BIR Form 2316
5. A domestic corporation is required to file its annual income tax return in
a. BIR Form 1700 c. BIR Form 1701Q
b. BIR Form 1701 d. BIR Form 2316
6. The quarterly tax return of a commercial partnership is required to be reported in BIR Form
a. 1700Q c. 1702Q
b. 1701Q d. 2316Q
7. Which of the following is required to file quarterly income tax return?
a. Compensation income c. Annual income tax
b. Passive income d. Capital gain
8. An income tax that is used to reduced the income tax due at the end of the year.
a. Creditable withholding income tax c. Annual income tax
b. Final withholding income tax d. Capital gains tax
9. Statement 1: NOLCO can only be deducted from the operating income of the last quarter.
Statement 2: The individual taxpayers personal exemption can only be deducted from the operating income of
the last quarter.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are not correct


Problem 10 3 Resident Citizens Compensation
A resident citizen reported compensation income amounting to P167.500, net of P22.500 withholding tax. The tax
rates for individual are as follows:

P8, 500 for P70, 000 + 20% in excess of P70, 000
P22, 500 for P140, 000 + 25% in excess of P140, 000
His net tax payable would be
a. P22, 500 c. P5,000
b. P15,000 d. None


Problem 10 4 Compensation and Business Income
Mr. A, a MWE, reported a gross compensation income of P90, 000 and business gross receipts of P200, 000. How
much is the net taxable income if the taxpayer opted to elect the optional standard deduction?
a. P 0 - c. P160, 000
b. P70, 000 d. P240, 000


Problem 10 5 Quarterly Income and OSD
For the months of January, February, March and April, ahead of family reported a business gross of P50, 000, P60,
000, P70, 000 and P80, 000, respectively. Opting for standard deduction, his net taxable income for the first quarter
is
a. P209, 000 c. P106, 000
b. P108, 000 d. P58, 000


Problem 10 6 Corporations Net Taxable Income
A domestic corporation reported a gross profit of P1, 000, 000. Its sales amounted to P2, 500, 000. Its ending
inventory is P500, 000 more than the beginning inventory. Its operating expenses amounted tom P400, 0000. Its net
taxable income would be
a. P1, 000, 000 c. P2, 600, 000
b. P3, 000, 000 d. P600, 000


Problem 10 7 Income Tax on Final Adjusted Return
For the previous 3 quarters, the total income tax paid by a domestic corporation amounted to P900, 000. Its total
business income for the year amounted to P5, 500, 000 and expenses of P2, 220, 000. How much would be its net
tax payable per final adjusted return?
a. P1, 120, 000 c. P220, 000
b. P900, 000 d. P150, 000


Problem 10 8 Net Tax Payable (Refund)
A resident foreign corporation paid P500, 000 income tax for the first 3 quarters. Its net taxable income after
operating expense of P23, 500, 000 is equal to P1, 500, 000. What would be its net tax payable (refund) at the end of
the year?
a. P480, 000 c. P 0
b. P20, 000 d. (20.00)


Problem 10 9 Net Taxable Income of Resident Citizen
The following are the reported income and expenses of a resident citizen:

___Within ____Outside
Compensation income P250, 000 P 0 -
Business income 500, 000 600, 000
Business expenses 200, 000 300, 000
Dividend income 50, 000 100, 000

Required: Compute for the net taxable income before personal exemption that should be reported in the annual
income tax return.


Problem 10-9 Net Taxable Income of Resident Alien
The following are the reported income and expenses of a resident alien:

___Within ____Outside
Compensation income P250, 000 P 0 -
Business income 500, 000 600, 000
Business expenses 200, 000 300, 000
Dividend income 50, 000 100, 000

Required: Comute for the net taxable income before personal exemption that should be reported in the annual tax
return.



Problem 10 11 Net Taxable Income of Nonresident Alien
The following are the reported income and expenses of a nonresident alien:

___Within ____Outside
Compensation income P 500, 000
Business income 600, 000
Business expenses 300, 000
Dividend income P 50, 000 100, 000

Required: Compute for the net taxable income before personal exemption that should be reported in the annual;
income tax return.


Problem 10 12 Net Taxable Income of Domestic Corporation
The following are the reported income and expenses of a domestic corporation:

___Within ____Outside
Business income P 500, 000 P600, 000
Business expenses 200, 000 300, 000
Dividend income from foreign corporation 50, 000 100, 000

Required: Compute for the net taxable income that should be reported in the annual income tax return.


Problem 10 13 Net taxable Income of Foreign Corporation
The following are the reported income and expenses of a foreign corporation.

___Within ____Outside
Business income P 500, 000 P600, 000
Business expenses 200, 000 300, 000
Dividend income from foreign corporation 50, 000 100, 000
Required: Compute for the next taxable income that should be reported in the annual income tax return.


Problem 10 14 Quarterly Income Tax
Handsome Corporations quarterly operating records show the following:

Q U A R T E R S_________
______First ____Second ____Third _____Fourth
Sales P1, 000, 000 P800, 000 P600, 000 P1, 200, 000

The cost of sale is 60% of sale and the business expenses allowed is 40% of gross income. Assume that the amounts
are noncumulative.

Required: Compute the income tax still due for the first, second, third and fourth quarters.


Problem 10 15 Quarterly Income Tax
Data of Highland Corporation, a domestic corporation, for the year 200x are as follows: (Data are all
noncumulative)

Q U A R T E R
S_________
______First ____Second ____Third _____Fourth
Sales (noncumulative) P500, 000 P600, 000 P400, 000 P900, 000
Operating expenses before interest and
contribution
120, 000 10, 000 15, 000 160, 000
Interest expenses 10, 000 10, 000 15, 000 15, 000
Contribution (deductible in full) 20, 000 40, 000
Other revenue:
Dividend income (domestic) 40, 000
Royalty income 60, 000
Rent income 30, 000 30, 000 30, 000 30, 000
Interest income 15, 000 10, 000 15, 000 20,000

The gross profit is 40% based on sales.

Required: Compute the following:
1. Quarterly income tax due and payable
2. Income tax still due and payable in the fourth quarter
3. Total passive income tax




Problem 10 16 Income Tax Still Due
Mariposa Co., a domestic corporation, reported the following tax payments for the first to the third quarters of the
taxable year (cumulative amount):

Quarters
First Second Third
Business income P2, 5000, 000 P4, 000, 000 P5, 500, 000
Itemized allowance deductions 1, 500, 000 2, 500, 000 3, 000, 000
Taxable income P1, 000, 000 P1, 500, 000 P2, 500, 000

Income tax P 320, 000 P 480, 000 P 800, 000
Les: Payment previous quarters - 0 - 320, 000 480, 000
Income tax payments P320, 000 P160, 000 P 320, 000


For the fourth quarter, the company reported the following:


Business income P7, 500, 000
Itemized allowable deductions 4, 000, 000
Capital gains 200, 000
Passive income earned outside the Philippines 100, 000
Income tax withheld per BIR Form 2307 furnished by credit card company 40, 000

Required: Determine the income tax still due and payable


Problem 10 17 Annual Income Tax
Saddam, a single individual taxpayer, received the following income during the year.

Taxable monthly salary after allowable deductions, net of P4, 000 creditable withholding
tax
P16, 000
Interest income, net of final withholding tax of P2, 000 8, 000
First three (3) quarters taxable business income after allowable deductions, net of P90, 000
income tax for three (3) quarters income tax
300, 000



The net taxable business income for the quarter is P110, 000.

Required: How much is Saddams annual income tax?