Tax1 (T31920)

DE LA SALLE UNIVERSITY
RAMON V DEL ROSARIO COLLEGE OF BUSINESS

ACCOUNTANCY DEPARTMENT
INCOME TAXATION (ACCTAX1)
ACADEMIC YEAR 2019-2020
TAX PROBLEMS
General Instructions:
1. Read the problems carefully. Read the problem in its entirety. Answer the
requirements stated by showing all necessary computations in good accounting
format. Parenthetical notations showing the supporting computations are not
allowed. Round-off the figures to the nearest peso and the percentages to the
nearest two decimal places.
2. Place your answers in a columnar notebook. Make sure that you have your
assignments with you before coming to class.
A. Gross income: Inclusions and exclusions
Problem 1 – Concept of income and when taxable
The following are independent situations or transactions entered into by Mabuhay Corporation, a domestic
corporation:
a. On January 1, 20A1, Mabuhay Corporation received the following properties from Mr. Segundo in
exchange for the original issuance of 100,000 shares with P100 par value:
Cash P2,500,000
Land (fair market value) 8,000,000
b. On January 1, 20A1, Mabuhay Corporation entered into a lease agreement for the lease of land from
Masaya Corporation. The terms of the lease are as follows:
Lease term 2 years
Monthly rental P2,000,000
Advance rentals 10,000,000
Security deposit 4,000,000
Pre-termination penalty 200,000 per month for the remaining unused months
The security deposit is refundable at the time of termination of the lease. However, it can be applied as
rental payments.
The advance rentals pertain to the first five months of the lease. Subsequently, Mabuhay paid
P2,000,000 monthly rental at the beginning of each month.
Mabuhay Corporation pre-terminated the lease effective December 1, 20A1. The security deposit was
refunded.
c. On October 1, 20A1, Mabuhay Corporation entered into a lease agreement for the lease of office space
from Masaya Corporation. The terms of the lease are as follows:
Lease term 1 year
rental payments.
The advance rentals pertain to the first five months of the lease. Subsequently, Mabuhay paid
P2,000,000 monthly rental at the beginning of each month, except for the last month of the lease where
a portion of the security deposit was applied as rental payment. The balance of the security deposit was
refunded.
d. On January 1, 20A1, Mabuhay Corporation obtained a one-year loan from Masaya Banking Corporation
for P10,000,000 bearing an interest of 6% per annum. Mabuhay repaid the loan on December 31,
20A1.
e. On December 1, 20A1, Mabuhay Corporation sold goods for USD100,000 on account to Masaya
Corporation. The goods cost P3,000,000. Mabuhay collected its receivables from Masaya on January
31, 20A2. The following are the foreign exchange rates:
December 1, 20A1 USD1 = P50
January 31, 20A2 USD1 = P52
Mabuhay Corporation is registered with the Board of Investments (BOI) and enjoying income tax
holiday (ITH) until December 31, 20A2. Masaya Corporation, on the other hand, is an entity registered
with the Philippine Economic Zone Authority (PEZA).
f. Mabuhay Corporation is a security agency. On December 15, 20A1, it collected the following from its
client, Masaya Corporation:
Salaries of security guards P 300,000

Agency fee 30,000
Total P 330,000
Mabuhay paid P200,000 to the security guards who are its employees. These security guards are
minimum wage earners.
g. Mabuhay Corporation had a land which was acquired five years ago for P500,000. It sold said land to
Masaya Corporation for P2,000,000, its fair market value, on December 1, 20A1. However, Masaya
deposited the payment to the bank account of Mabuhay for P2,300,000. The P300,000 was deposited
in error. Masaya collected the said overpayment from Mabuhay on December 31, 20A1.
The other party or parties in the above transactions are also domestic corporations, unless otherwise stated.
Required: For each of the above situation or transaction:

1. Identify and determine the amount of income received or earned by Mabuhay Corporation and the other
party to the transaction for income tax purposes for the year-ended December 31, 20A1 and December
31, 20A2.
2. If the item is an income, determine if it is taxable or not and explain; if it is not an income, identify the
nature and explain.
Problem 2 – Condonation of debt
The following are independent situations dealing with condonation of loans of Marikit, Inc.:
Situation A
As of December 31, 20A1, Marikit, Inc. had the following net assets prior to condonation of its loans:
Assets:
Cash P 200,000
Accounts receivables 300,000
Inventories 400,000
Property, plant and equipment 1,000,000
P1,900,000
Liabilities:
Accounts payable P 400,000
Loans payable 1,200,000
P1,600,000
The loans were obtained from its affiliate company. Its affiliate condoned 30% of the loan on December 31,
20A1.
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Situation B
As of December 31, 20A1, Marikit, Inc. had the following net assets prior to condonation of its loans:
Assets:
Cash P 20,000
Accounts receivables 30,000
Inventories 40,000
Property, plant and equipment 100,000
P 190,000
Liabilities:
Accounts payable P 400,000
Loans payable 1,200,000
P1,600,000
The loans were obtained from its affiliate company. Its affiliate condoned the entire loan on December 31, 20A1
since Marikit is encountering financial difficulty.
Required:
1. Determine the amount of income that will be declared by Marikit for the year ended December 31, 20A1
for each situation. Explain your answer.
2. Determine if the condonation of debt will be subject to donor’s tax under each situation. Explain.
Problem 3 – Compensation for services; allowances; facilities or privileges; award of damages
Ms. Maganda is an employee of Halo-halo, Inc. She received the following salaries and benefits for the year
ended December 31, 20A1:
Compensation P 200,000
Commissions 70,000
Tips and gratuities 50,000
Transportation allowance 40,000
Representation allowance 30,000
Bonuses 60,000
Total P 450,000
These were given in the form of cash. The following are the additional information:
Situation A
• The tips and gratuities were paid by Halo-halo’s customers. These were added to the customers’ bills
as part of service charge, and subsequently paid to the employees in addition to the compensation.
• The transportation and representation allowances are fixed allowances given by Halo-halo to Ms.
Maganda. These were not subjected to liquidation.
In addition, Ms. Maganda also received courtesy discounts for purchases of food items equivalent to 10% of the
selling price. Total purchases amounted to P80,000.
Situation B
• The tips and gratuities were paid by Halo-halo’s customers to the employees. Ms. Maganda received
P50,000 during the year.
• The transportation and representation allowances were subjected to liquidation. These were supported
by receipts issued in the name of Halo-halo to evidence the actual incurrence of expenditures in
connection with its trade or business.
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In addition, Ms. Maganda also received courtesy discounts for purchases of food items equivalent to 50% of the
selling price. Total purchases amounted to P80,000.
Situation C
• The tips and gratuities were paid by Halo-halo’s customers where P30,000 were added to the
customers’ bills as part of service charge and subsequently paid to the employees in addition to the
compensation while P20,000 were directly received from customers.
• The transportation allowance is a fixed allowance given by Halo-halo to Ms. Maganda, which was not
subjected to liquidation. On the other hand, the representation allowance was subjected to liquidation.
This is supported by receipts issued in the name of Halo-halo to evidence the actual incurrence of
expenditures in connection with its trade or business.
In addition, Ms. Maganda filed a labor case against its former employer, Maliwanag Corporation with the
National Labor Relations Commission (NLRC). On September 15, 20A1, the case was decided in favor of Ms.
Maganda where she was awarded the following:
Unpaid salaries P 500,000

Unpaid commission 120,000
Moral and exemplary damages 300,000
Attorney’s fees and other costs 250,000
Total P1,170,000
The award has already become final and executory and Maliwanag is willing to pay the above amount less any
withholding taxes. Ms. Maganda, however, paid only attorney’s and other costs of P200,000.
Required: Determine the amount of income that will be declared by Ms. Maganda for the year ended December
31, 20A1 (indicate the declarable income for each employer, if applicable). Consider the impact of
exclusion from gross income relating to 13th month pay and other benefits.
Problem 4 – Compensation for services: cash and in kind
The following are independent situations involving Mr. Matipuno for the year ended December 31, 20A1:
a. Mr. Matipuno rendered repair services to Acacia Corporation. He was paid P50,000 for the services he
rendered.
b. Mr. Matipuno rendered repair services to Acacia Corporation. He received groceries worth P48,000 as
compensation for the services he rendered.
c. Mr. Matipuno rendered repair services to Acacia Corporation. His services were worth P45,000. In
consideration for the said services, he received free meals from Acacia for one month.
d. Mr. Matipuno is a Vice President for Finance of Acacia Corporation. He received an annual salary of
P3,000,000 during the year. In addition, he received a bonus of 1,000 shares of Acacia on January 31,
20A2 for the services he rendered in 20A1. The shares had par value P100 but had fair value of P250
on January 31, 20A2 and average fair value of P175 in 20A1.
e. Mr. Matipuno is a Finance Manager of Acacia Hotel Corporation. He received an annual salary of
P1,000,000 during the year. In addition, he also received free meals worth P50,000 and given living
quarters with value of P5,000 monthly during the year.
f. Mr. Matipuno is a chef of Acacia Hotel Corporation. He received an annual salary of P1,000,000 during
the year. In addition, he also received free meals worth P50,000 and given living quarters with value of
P5,000 monthly during the year. The free meals and living quarters were provided to Mr. Matipuno for
and necessary to the proper performance of his duties as chef of Acacia.
g. Mr. Matipuno rendered repair services to Ms. Acacia on December 1, 20A1. However, Ms. Acacia
issued a promissory note with face amount of P50,000 payable on June 1, 20A2. The discounted value
of the note on December 31, 20A1 is P45,000.
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h. Mr. Matipuno rendered services to Acacia Corporation for P60,000. However, Mr. Matipuno owes
Acacia the same amount. Acacia cancelled the borrowing of Mr. Matipuno since he rendered the repair
services.
i. Mr. Matipuno owes Ms. Acacia P30,000. Out of Ms. Acacia’s generosity, she cancelled the debt of Mr.
Matipuno.
Required: For each of the above situation, determine the amount that will be included as part of gross income of
Mr. Matipuno.
Problem 5 – Rental income
The following are independent situations regarding the lease of land owned by Mangosteen Company, Inc. to
Gumamela Corporation:
Situation A
On January 1, 20A1, Mangosteen leased its land to Gumamela for a period of 15 years for P200,000 monthly.
Mangosteen also charged Gumamela real property tax (RPT) on the land for P20,000 monthly.
Gumamela constructed a building on said land. The building was completed on October 1, 20A1 with total
construction costs of P5,000,000, which represents its fair market value at the time of completion. The building
will be transferred to Mangosteen at the end of the lease term. The building had an estimated useful life of 40
years.
The lease continued for 15 years and the building was transferred to Mangosteen at the end of the lease term.
Situation B
On January 1, 20A1, Mangosteen leased its land to Gumamela for a period of 15 years for P200,000 monthly.
Mangosteen also charged Gumamela real property tax (RPT) on the land for P20,000 monthly.
Gumamela constructed a building on said land. The building was completed on October 1, 20A1 with total
construction costs of P5,000,000, which represents its fair market value at the time of completion. The building
will be transferred to Mangosteen at the end of the lease term. The building had an estimated useful life of 40
years.
However, Gumamela terminated the lease on September 30, 20A8. It paid penalty of P1,200,000 for the
termination of the contract.
Required: Determine the annual gross income that will be reported by Mangosteen for the entire term of the
lease under the two allowable methods in recognizing income.
Problem 6 – Rental, dividend and interest income; income from dealings in property
On January 1, 20A1, Durian Company, Inc., a wholly-owned subsidiary of Rosas Company, leased its building
to Pagsibol Corporation. It was agreed that instead of paying rentals to Durian, Pagsibol should make payments
as follows:
Recipient Relationship with Durian Amount of payment

Rosas Company Stockholder 10% of par value of shares
Dahlia Company Lender 6% of loan payable
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As of January 1, 20A1, Durian had common stock of P5,000,000 with no additional paid-in capital. On the other
hand, it had loans payable to Dahlia for P3,500,000, and advances to Rosas for P800,000. There were no
changes in the carrying amounts of these accounts at December 31, 20A1 except that Durian forgave the
indebtedness of Rosas.
Pagsibol also shouldered the real property tax (RPT) and insurance on the building. These charges were paid
by Durian but will be reimbursed by Pagsibol. RPT and insurance premiums paid in 20A1 amounted to
P100,000 and P150,000, respectively.
In addition, Durian, Rosas and Dahlia had the following assets as of January 1, 20A1:
Owner Property Remaining life Book value

Durian Building 10 P3,000,000
Rosas Equipment 4 400,000
Dahlia Land 1,000,000
Durian sold the building for P4,200,000 on July 1, 20A1, while Rosas sold the equipment for P480,000 on
September 30, 20A1. However, the land owned by Dahlia was expropriated by the government on October 31,
20A1. The government paid Dahlia P1,800,000, which is its fair market value. These companies depreciate
their properties using the straight-line method of depreciation for income tax purposes. The assets are
depreciated monthly.
Required:
1. Determine the nature and amount of gross income that will be recognized by Durian for the year ended
December 31, 20A1, if any.
2. Determine the nature and amount of gross income that will be recognized by Rosas for the year ended
3. Determine the nature and amount of gross income that will be recognized by Dahlia for the year ended
Problem 7 – Dividend, stock options, stock awards, share appreciation rights
The following are independent situations relating to equity investments:
Situation A
The stockholders equity section of Azucena Corporation’s statement of financial position shows the following
information as of December 31, 20A0:
Common stock, 1,000,000 shares issued and outstanding P 10,000,000

Retained earnings 8,000,000
Revaluation surplus 3,000,000
Total P 21,000,000
Azucena had net income of P1,500,000 for the year ended December 31, 20A0. On March 1, 20A1, it declared
P4 dividend per share payable on April 15, 20A1.
Situation B
The board of directors of Kapamilya Corporation adopted a fixed stock option plan to supplement the salaries of
certain executives. The options to buy common stock were granted as follows:
Date Employee Number of Exercise Price Price of Shares Option Value at

Shares at Date of Grant Date of Grant
Jan. 1, 20A1 D. R. Tawa 80,000 P30 P32 P9
Jan. 1, 20A2 J. K. Ngiti 45,000 38 41 10
Jan. 1, 20A3 B. D. Halakhak 25,000 43 47 11
The options are nontransferable and can be exercised beginning three years after the date of grant, provided
the executive is still employed by the company. The stock options were exercised as follows:
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Date Employee Number of Price of Shares
Shares at Date of
Exercise
December 31, 20A4 D. R. Tawa 80,000 P48
December 31, 20A5 J. K. Ngiti 45,000 43
December 31, 20A6 B. D. Halakhak 25,000 49
The stock of the company has a P1 par value. The accounting period for the company is the calendar year.
Situation C
Kapuso Corporation established a stock awards plan for its employees. The plan was established on January
1, 20A1. Under the plan, each employee will be granted 200 Kapuso shares on January 1, 20A4 provided they
remain with the company for three years. The fair value of the stock awards was P12 per share on January 1,
20A1 and the average fair value during 20A1 was P14. The fair market value of Kapuso shares on January 1,
20A4 was P18 per share. The par value of the shares was P5 per share.
The no. of employees on selected dates was as follows:
December 31, 20A1 150

Assume that employee hiring and resignations or terminations occurred on January 1 of each year. The stock
awards were awarded to 130 employees on January 1, 20A4 for services rendered in 20A1. These were
properly subjected to withholding tax at the time of the grant of the stock awards.
Situation D
San Juan Corporation established a stock option plan that provides for cash payments to employees based on
the appreciation of stock prices from an established option price. The plan was instituted on January 1, 20A1
and provides for benefits to employees who work for the succeeding three years. Cash payments to employees
will be made on January 1, 20A4, and will equal the excess of the stock price over the option price on that date.
In total, 10,000 of these cash stock appreciation rights (SARs) were granted to employees.
The option price established for the stock is P10 per share. The market price of San Juan stock on selected
dates in 20A1 to 20A3 were as follows:
January 1, 20A1 P15

The SARs were properly subjected to withholding tax at the time of payment.
Required: Determine the amount of gross income that will be declared by the income earner, and the taxable
year of declaration. For dividend, determine the source of dividend declared (i.e., taxable year when
income is earned).
Problem 8 – Gift, bequest and devises; proceeds of life insurance and return of premiums
Mr. Habagat owns a parcel of land, cash, jewelry, and shares of stock. The lot was being leased for P100,000
monthly. These were payable at the end of each month. On July 1, 20A1, Mr. Habagat died. These properties
were inherited by his daughter, Ms. Amihan. These properties had the following fair values at the time of Mr.
Habagat’s death:
Land P 3,000,000
Cash 1,000,000
Jewelry 800,000
Shares of stock 1,500,000
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The issuer of the shares declared dividend of P300,000 on July 15, 20A1 which were paid on August 1, 20A1.
Moreover, Mr. Habagat had an insurance policy with face amount of P10,000,000 which was purchased on
January 1, 20A0. The premiums on said policy of P50,000 were payable quarterly for 10 years (payable every
January 1, April 1, July 1 and October 1). He named his daughter, Ms. Amihan, as the beneficiary of the
insurance policy, who received the face amount.
Required:
1. Determine the amount of gross income of Ms. Amihan for the year ended December 31, 20A1.
2. Determine the amount of exclusion from gross income of Ms. Amihan for the year ended December 31,
20A1.
3. Determine the amount of gross income and exclusion from gross income of Mr. Habagat under the
following situations and the year of declaration of income:
a. Mr. Habagat lived after paying the insurance premiums for 10 years. He received P10,000,000
from the insurance company.
b. Mr. Habagat obtained a policy having dividend participation. He received P50,000 dividend in
20A1.
c. Mr. Habagat cancelled the insurance policy on June 30, 20A3. He received a cash surrender
value of P500,000.
Problem 9 – Retirement benefits, pensions and separation pay
The following are independent situations regarding the retirement benefits, pensions or separation pay of Mrs.
Makulay:
a. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a BIR-registered retirement plan.
Mapula contributed to the retirement plan in order to finance the retirement pay of its employees. Under the
retirement plan, the employees are entitled to retirement benefits if they have rendered at least 10 years of
service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age
of 50 and rendered 20 years of service. This is the first time that she retired from employment. She received
the following benefits:
Retirement pay P 3,000,000

Back wages 300,000
Commutation of vacation leave credits 200,000
Commutation of sick leave credits 100,000
b. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a BIR-registered retirement plan.
Mapula contributed to the retirement plan in order to finance the retirement pay of its employees. Under the
retirement plan, the employees are entitled to retirement benefits if they have rendered at least 10 years of
service regardless of age. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 35 and
rendered 10 years of service. This is the first time that she retired from employment. She received the
following benefits:

Back wages 300,000
c. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a retirement plan. However, it is not
registered with the BIR, Mapula contributed to the retirement plan in order to finance the retirement pay of
its employees. Under the retirement plan, the employees are entitled to retirement benefits if they have
rendered at least 10 years of service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay
retired from Mapula at the age of 50 and rendered 20 years of service. This is the first time that she retired
from employment. She received the following benefits:

Back wages 300,000
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d. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a retirement plan. However, it is not
registered with the BIR. Mapula contributed to the retirement plan in order to finance the retirement pay of
its employees. Under the retirement plan, the employees are entitled to retirement benefits if they have
rendered at least 10 years of service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay
retired from Mapula at the age of 60 and rendered 20 years of service. This is the first time that she retired
from employment. She received the following benefits:

Back wages 300,000
e. Mrs. Makulay is an employee of Mapula Corporation. Because the position of Mrs. Makulay became
redundant, she was forced to separate from Mapula on July 31, 20A1. Mapula offered her separation
benefits. She received the following benefits:
Separation pay P 3,000,000

Back wages 300,000
f. Mrs. Makulay is an employee of Mapula Corporation. Because of her sickness, Mrs. Makulay was forced to
separate from Mapula on July 31, 20A1. Mapula offered her separation benefits. She received the following
benefits:
Separation pay P 3,000,000

Back wages 300,000
Required:
1. Determine the amount that will be included as part of Mrs. Makulay’s gross income for income tax
purposes for the year ended December 31, 20A1.
2. Determine the amount that will excluded from Mrs. Makulay’s gross income for income tax purposes for
the year ended December 31, 20A1.
Problem 10 – 13th month pay and other benefits; de minimis benefits; prizes and awards; SSS contributions
The following are independent situations regarding the salaries and benefits granted to Ms. Paraluman for the
year ended December 31, 20A1:
a. Ms. Paraluman received the following salaries and benefits from Adobo, Inc.:
Gross compensation P 360,000

13th month pay 30,000
Bonuses 60,000
Rice subsidy 24,000
Productivity incentive 12,000
Loyalty award 15,000
Medical allowance for the employee 8,000
Daily meal allowance 12,000
Total P 591,000
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The following are the additional information:
• The rice subsidy was given in cash for P2,000 monthly.

• The productivity incentive was granted in cash on December 1, 20A1.
• The loyalty award which was a wrist watch was given on June 30, 20A1.
• The medical allowance was subjected to liquidation. Ms. Paraluman submitted invoices and
receipts supporting purchases of medicines and other medical expenses issued in her name.
• The daily meal allowance was given on account of overtime equivalent to P100 per day. The basic
daily minimum wage was P500 per day.
• The commutation of vacation leave credits pertains to 12 days leave credits which were converted
into cash.
• The commutation of sick leave credits pertains to 8 days leave credits which were converted into
cash.
• Ms. Paraluman contributed P545 monthly as mandatory contribution to SSS which was deducted
from her compensation.
b. Ms. Paraluman, a private elementary school teacher, received the following salaries and benefits the
Department of Education (DepEd):
Gross compensation P 240,000

Bonuses 40,000
Rice subsidy 24,000
Productivity incentive 10,000
Loyalty award 15,000
Medical allowance for the employee 10,000
Daily meal allowance 15,000
Total P 414,000
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• The rice subsidy was given in cash for P6,000 quarterly.

• The productivity incentive was granted in cash on December 1, 20A1.
• The loyalty award was given in cash on June 30, 20A1.
• The medical allowance was given in cash and only P7,000 was subjected to liquidation. Ms.
Paraluman submitted invoices and receipts supporting purchases of medicines and other medical
expenses issued in her name for P7,000.
• The daily meal allowance was given regardless of whether Ms. Paraluman rendered overtime. The
basic daily minimum wage was P500 per day. Ms. Paraluman did not render any overtime.
• The commutation of vacation leave credits pertains to 12 days leave credits which were converted
into cash.
• The commutation of sick leave credits pertains to 8 days leave credits which were converted into
cash.
• Ms. Paraluman contributed P700 monthly to SSS which was deducted from her compensation.
However, only P545 is the mandatory monthly contribution.
In addition, he received the following prizes and awards (in cash):
Most outstanding elementary school teacher P 100,000

SEA Games gold medalist in track and field 1,000,000
Loyalty service award for 20 years of service with his employer 20,000
Prize for winning department store raffle 100,000
Prize for winning talent competition in a variety show 150,000
Required:
1. Determine the amount that will be included as part of Ms. Paraluman’s gross income for income tax
purposes for the year ended December 31, 20A1.
2. Determine the amount that will excluded from Ms. Paraluman’s gross income for income tax purposes
for the year ended December 31, 20A1.
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B. Ordinary and necessary expenses
Problem 1 – Employee benefits; timing of deduction; lesser deduction, withholding tax requirements; illegal
expenses
The following are some of the expenses reflected in the profit and loss statement of Agila Corporation for the
Salaries and wages P 5,000,000

Special bonuses 2,000,000
Regular bonuses 3,000,000
Other employee benefits 3,500,000
• The salaries and wages were accrued and paid to the employees during 20A1. These were properly
subjected to withholding taxes.
• The special bonuses pertain to bonuses to be given to the employees based on their performance.
These were accrued at year-end in compliance with Philippine Accounting Standards (PAS) 19. These
were actually paid in March 20A2. However, only P1,800,000 was paid. As a matter of policy, Agila
grants bonuses to its employees annually depending on their performance and the company’s
performance. The final amount is normally determined in February of the subsequent year based on the
performance evaluation which are usually completed every January for prior year’s performance.
However, it is required that the employees remain with the employ of the company at the time the
bonus is paid. Otherwise, the bonus will not be paid. These bonuses were only subjected to withholding
taxes in March 20A2 at the time of payment.
• There were special bonuses accrued in 20A0 of P2,500,000. However, P2,600,000 was actually paid to
the employees in April 20A1. These were subjected to withholding taxes at the time of payment.
• The regular bonuses pertain to the 14th month pay which were paid in January 20A2. These were
accrued at year-end in compliance with PAS 19 since these pertain to services rendered in 20A1. The
amount accrued pertains to the actual bonus that was paid in January 20A2. These were properly
subjected to withholding taxes at the time of accrual.
• There were regular bonuses paid in 20A0 of P1,200,000. These were properly subjected to withholding
taxes at the time of accrual. These were actually paid in January. However, Agila only claimed
P1,000,000 as income tax deduction in 20A0. It wanted to claim the P200,000 as deduction in 20A1.
• The other employee benefits include “de minimis” benefits of P2,000,000, and other benefits of
P1,200,000 granted and paid to the employees during 20A1. The balance of P300,000 pertain to
facilitation fees. The “de minimis” benefits were not subjected to withholding taxes. However, other
benefits were properly subjected to withholding taxes. With respect to “de minimis” benefits, P1,500,000
of which pertain to the threshold provided under the regulations. However, the balance pertains to the
amount in excess of the threshold. With respect to facilitation fees, these were paid to government
personnel to expedite the processing of Agila’s application for tax incentives. These were not properly
supported by documents and pocketed by government personnel.
Required: Determine the amount of deductible business expense for the year ended December 31, 20A1.
Problem 2 – Stock options, stock awards, stock appreciation rights
The following are independent situations relating to equity incentives granted to employees:
Situation A
The board of directors of Kapamilya Corporation adopted a fixed stock option plan to supplement the salaries of
certain executives. The options to buy common stock were granted as follows:
Date Employee Number of Exercise Price Price of Shares Option Value at

Shares at Date of Grant Date of Grant
Jan. 1, 20A1 D. R. Tawa 80,000 P30 P32 P9
Jan. 1, 20A2 J. K. Ngiti 45,000 38 41 10
Jan. 1, 20A3 B. D. Halakhak 25,000 43 47 11
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The options are nontransferable and can be exercised beginning three years after the date of grant, provided
the executive is still employed by the company. The stock options were exercised as follows:
Date Employee Number of Price of Shares

Shares at Date of
Exercise
December 31, 20A4 D. R. Tawa 80,000 P48
December 31, 20A5 J. K. Ngiti 45,000 43
December 31, 20A6 B. D. Halakhak 25,000 49
The stock of the company has a P1 par value. The accounting period for the company is the calendar year.
Situation B
Kapuso Corporation established a stock awards plan for its employees. The plan was established on January
1, 20A1. Under the plan, each employee will be granted 200 Kapuso shares on January 1, 20A4 provided they
remain with the company for three years. The fair value of the stock awards was P12 per share on January 1,
20A1 and the average fair value during 20A1 was P14. The fair market value of Kapuso shares on January 1,
20A4 was P18 per share. The par value of the shares was P5 per share.
The no. of employees on selected dates was as follows:

Assume that employee hiring and resignations or terminations occurred on January 1 of each year. The stock
awards were awarded to 130 employees on January 1, 20A4 for services rendered in 20A1. These were
properly subjected to withholding tax at the time of the grant of the stock awards.
Situation C
San Juan Corporation established a stock option plan that provides for cash payments to employees based on
the appreciation of stock prices from an established option price. The plan was instituted on January 1, 20A1
and provides for benefits to employees who work for the succeeding three years. Cash payments to employees
will be made on January 1, 20A4, and will equal the excess of the stock price over the option price on that date.
In total, 10,000 of these cash stock appreciation rights (SARs) were granted to employees.
The option price established for the stock is P10 per share. The market price of San Juan stock on selected
dates in 20A1 to 20A3 were as follows:
January 1, 20A1 P15

The SARs were properly subjected to withholding tax at the time of payment.
Required: Determine the deductible expense related to the above equity incentives to employees and the year
the expense is tax deductible.
Problem 3 – Compensation for personal services, withholding tax requirement
The following are independent situations relative to compensation for personal services paid or incurred by
Kapatid Corporation for the year ended December 31, 20A1:
a. Kapatid paid Mr. El Nido salaries of P8,000,000 during the year. He is a major stockholder of Kapatid
and he is also its president. Presidents of corporations with similar business, similar size and volume of
business as Kapatid receives an average salaries of P6,500,000. The entire salaries were subjected to
withholding tax on compensation.
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b. Kapatid paid monthly salary of P8,000 to the son of Mr. El Nido for 12 months. His son was still studying
and he did not render any service to Kapatid. The salaries were not subjected to withholding tax since
the amount paid was equivalent to the minimum wage.
c. On January 1, 20A1, Kapatid hired Mr. El Nido as its Vice President for Marketing. As agreed, his
monthly salary was P300,000. He received 13 months salaries during the year. In addition, he was also
entitled to a bonus equivalent to 5% of the company’s profit. However, only 3% of the net profit was
paid during 20A1. No additional bonus will be paid. Kapatid’s net profit during the year amounted to
P10,000,000. The salaries and bonuses were properly subjected to withholding tax.
d. Kapatid granted its employees free goods with fair market value of P4,000 per employee during the
year as Christmas gifts. The total fair market value of goods granted amounted to P2,000,000. These
were not subjected to withholding tax.
e. Kapatid granted its employees who were affected by typhoon free clothes with fair market value of
P5,000 per employee. The total fair market value of clothes granted amount to P5,000,000. These were
subjected to withholding tax.
f. Kapatid paid separation pay of P2,500,000 to certain redundant employees during the year. These were
not subjected to withholding tax.
g. Kapatid paid back wages to certain employees who were terminated in 20A0 amounting to P3,000,000.
Although these pertain to services rendered by the employees in 20A0, the amount of back wages was
only determined and fixed in 20A1. These were properly subjected to withholding tax.
Required: Determine the deductible expense for the year ended December 31, 20A1.
Problem 4 – Travel expenses; entertainment, amusement and recreation expenses; documentation

requirements
Ms. Maharlika, CPA, is a private practitioner, with office at Makati City. She renders tax and accounting services
to her clients. During 20A1, she derived gross revenues amounting to P10,000,000 for sale of services with
discounts of P240,000. She and her staff incurred the following expenses:
• Taxi fare from office to the client within Metro Manila and vice versa of P50,000. These are supported
by taxi official receipts issued in the name of Ms. Maharlika.
• Bus fare from office to the client within Metro Manila and vice versa of P12,000. These are supported
bus receipts. However, Ms. Maharlika’s name was not indicated on the face of the bus receipts.
• Airplane fare for domestic travels which are client related of P250,000. These are supported by plane
tickets and official receipts issued in the name of Ms. Maharlika.
• Airplane fare for international travels in connection with business conventions of P125,000. These are
supported by plane tickets and official receipts in the name of Ms. Maharlika. These are also supported
by official invitation from the hosts.
• Hotel and food charges for domestic travels of P100,000. However, only P60,000 were business related
while the balance pertains to personal expenses. The entire amount was supported by official receipts
issued in the name of Ms. Maharlika.
• Hotel and food charges for overseas travels of P80,000. Out of this amount, P25,000 were personal in
nature. The entire amount was supported by official receipts issued in the name of Ms. Maharlika.
• Fixed representation expenses paid to her employees of P100,000. However, these were not subjected
to withholding tax.
• Restaurant charges of P45,000 supported by official receipts issued in the name of Ms. Maharlika. Out
of this amount, P30,000 pertains to expenses incurred in entertaining her clients while the balance
pertains to expenses related to internal meetings with staff. These were supported by official receipts
issued in the name of Ms. Maharlika.
• Membership fees of P12,000 for membership in various professional organizations. These were
supported by official receipts issued in the name of Ms. Maharlika.
• Restaurant and hotel charges of P8,000 for attendance in business meetings of various professional
organizations. These were supported by official receipts issued in the name of Ms. Maharlika.
• Tickets for various movies, concerts and plays of P52,000 incurred in entertaining clients. These were
supported by official receipts issued in the name of Ms. Maharlika.
• Charges of sports club for P25,000 incurred in entertaining clients. These were supported by official
receipts issued in the name of Ms. Maharlika.
Required:
1. Determine the deductible travel expenses for the year ended December 31, 20A1.
2. Determine the deductible transportation expenses for the year ended December 31, 20A1.
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3. Determine the deductible entertainment, amusement and recreation (EAR) expenses for the year ended
December 31, 20A1.
4. Determine the deductible expenses other than travel and EAR expenses for the year ended December
31, 20A1.
5. Assume that Maharlika is engaged in sale of goods, determine the deductible EAR expenses for the
year ended December 31, 20A1.
6. Assume that Maharlika had sale of goods of P2,000,000 with P180,000 discount, and sale of services
of P10,000,000 with P300,000 discount, determine the deductible EAR expense for the year ended
December 31, 20A1.
Problem 5 – Rental and related expenses, repairs and maintenance
Matino Corporation needs a warehouse. On January 1, 20A1, it entered into a lease contract with Matibay
Corporation with the following terms:
Term 5 years
Total rentals for 5 years P1,000,000
Annual real property tax (RPT) shouldered by Matino 30,000
The rentals were payable every January 1, in five annual equal installments. During 20A1, Matino incurred the
following expenditures in connection with the leased warehouse:
Ordinary repairs of wall and posts P100,000

Replacement of windows and roofs 200,000
Ordinary repairs neither materially add to the value of the property nor prolonged its life. However, the
replacement of the windows and roofs, which were incurred on July 1, 20A1, arrested the deterioration of the
property but it maintained its life. The remaining life of the warehouse is 8 years.
In 20A2, Matino constructed leasehold improvements on said leased warehouse for P300,000. The construction
was completed on March 31, 20A2. Said improvements were utilized starting April 1, 20A2 with useful life of 7
years.
Required:
1. Determine the deductible expense for the years ended December 31, 20A1 and 20A2. Identify the
nature of the expense.
2. Determine the capital expenditures for the years ended December 31, 20A1 and 20A2. Explain why
these are non-deductible.
Problem 6 – Security, janitorial, manpower and advertising expenses
Mabini Corporation availed the following services for the year ended December 31, 20A1:
• Security services of Magdiwang Corporation

Salaries of security guards P300,000
Agency fees 30,000
• Janitorial services of Maaliwalas Corporation

Salaries of janitors P250,000
Agency fees 25,000
• Manpower services of Maligalig Corporation

Salaries of personnel P500,000
Agency fees 50,000
• Services of Mayaman Corporation, advertising agency, and Maligaya Broadcasting Company, media
supplier
Advertising charges (payable to Maligaya) – 85% P850,000
Agency commission (payable to Mayaman) – 15% 150,000
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Required: Determine the deductible expense on the part of Mabini and the other party or parties for the year
ended December 31, 20A1. Indicate the nature of the expense.
Problem 7 – Expenses of farmers
Magsasaka, Inc. is engaged in agriculture business. Its profit and loss statement prepared in accordance with
PFRS for the year ended December 31, 20A1 provides in part as follows:
Cost of sales
Inventories sold P20,000,000
Depreciation and amortization 5,350,000
Freight, trucking and handling 5,000,000
Communication, light and water 4,500,000
Personnel expenses 3,500,000
Repairs and maintenance 3,000,000
Rentals 2,500,000
Others 1,750,000
Total
Selling and administrative expenses

Personnel expenses P3,700,000
Contracted services 2,850,000
Advertising and promotions 2,500,000
Repairs and maintenance 1,650,000
Rentals 1,500,000
Management fees 1,400,000
Taxes and licenses 1,200,000
Professional fees 1,000,000
Pensions 800,000
Insurance 750,000
Supplies 520,000
Others 1,150,000
• Cost of inventories sold pertains to cost of finished goods of agricultural produce, and cost of raw
materials, feeds and feed ingredients. Out of the total cost, P4,150,000 pertains to fair value of
agricultural produce less costs to sell.
• Depreciation and amortization under cost of sales pertain to building, improvements, furniture and
fixtures, and farm machines and equipment of P3,800,000, and breeding animals of P1,550,000 directly
used in connection with the production of agricultural produce sold.
• Repairs and maintenance pertain to building, improvements, furniture and fixtures, farm machines and
equipment, and land used in production of agricultural produce sold.
• Others include hand tools like rakes, shovels and the like of P780,000.
• Allowance for inventory write-down to P3,150,000 as of January 1, 20A1 and P4,625,000 as of
December 31, 20A1. The write-downs for the current period were charged to inventories sold.
• Purchased breeding stock for P3,250,000. Moreover, it sold breeding stocks with acquisition cost of
P2,750,000 which were subjected to amortization.
• Magsasaka treats its biological assets as capital investment for tax purposes.
Required:
1. Determine the deductible expenses (as farmer) for the year ended December 31, 20A1.
2. Assuming Magsasaka treats its biological assets as inventory for tax purposes, determine the
deductible expenses (as farmer) for the year ended December 31, 20A1.
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Problem 8 – Expenses of private educational institutions
Magaling University, a proprietary educational institution, incurred the following expenditures for the year ended
December 31, 20A1:
Rentals 800,000
Electricity and other utilities 600,000
Communication expenses 120,000
Training 100,000
Supplies 150,000
Salaries expense 3,500,000
Other employee benefits 1,250,000
Other expenses 3,200,000
Construction of building to be used as classrooms 3,000,000
Equipment for classrooms and other educational activities 900,000
Construction of building to be leased to various businesses 3,500,000
Equipment related to building for lease 720,000
• Taxes were properly withheld on expenses subject to withholding taxes.

• Salaries expense includes P350,000 salaries of minimum wage earners which were not subjected to
withholding taxes.
• The construction of the buildings were completed on June 30, 20A1. It had estimated useful life of 30
years.
• The equipment were acquired on June 30, 20A1 and were immediately used by Magaling. It had
estimated useful of 5 years.
• Magaling opted to claim as outright expense its capital expenditures for the expansion of school
facilities.
• Magaling adopts the straight-line method of depreciation.
Required:
1. Determine the deductible ordinary and necessary expenses for the year ended December 31, 20A1.
2. Determine the deductible ordinary and necessary expenses for the year ended December 31, 20A1 if
Magaling opted to capitalize and depreciate all its capital expenditures.
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C. Other deductions and non-deductible items
Problem 1 – Interest: Stipulated in writing, tax arbitrage, related parties
Tikling Company, Inc. had the following borrowings, advances and equity instruments during 20A1:
• Loan obtained from Itik Bank, a local bank, on July 1, 20A0 amounting to P1,000,000 with 5% interest
payable on July 1, 20A2.
• Non-interest bearing advances obtained from its affiliate, Maya Corporation, amounting to P500,000 on
January 1, 20A1, payable on December 31, 20A3. For financial reporting purposes, the loan was
initially recognized in the books at P408,150 using market interest rate of 7%. Maya is wholly-owned by
Kaya Corporation. Kaya is 60% owned by Mr. Polka. Mr. Polka also owns 30% of Tikling.
• Preferred shares of P1,500,000 with 10% dividend rate classified as liabilities for financial reporting
purposes.
• Loan obtained from its affiliate, Surtido Corporation amounting to P2,000,000 bearing 8% interest on
January 1, 20A0 payable on January 20A5. Surtido is a wholly-owned subsidiary of Pantomina, Inc.
Pantomina is 80% owned by Mrs. Carinosa. Mrs. Carinosa also owns 80% of Malong Corporation.
Malong owns 90% of Latik and Latik owns 75% of Tikling.
During the year, Tikling derived the following interest income:
• Interest income of P60,000 on bank deposits with Itik Bank, which were subjected to 20% final
withholding tax.
• Interest income of P15,000 on bank deposits under the Expanded Foreign Currency Deposit System of
Itik Bank, which were subjected to 15% final withholding tax.
• Interest income of P20,000 on loans granted to Pantomina, its affiliate.
• Interest income of P25,000 on bank deposits in Rasa Sayang Bank, a non-resident foreign bank located
in Malaysia, which were subjected to 10% final withholding tax.
Required: Determine the deductible interest expense for the year ended December 31, 20A1.
Problem 2 – Interest: Optional treatment, tax arbitrage, interest on unpaid taxes
On January 1, 20A1, Binasuan issued five-year, 12% bonds at face value of P8,000,000 to various investors.
The proceeds of the bonds were used for the acquisition of a land, where the company constructed its factory
building. The land was acquired on the same date.
On April 1, 20A1, Binasuan Corporation borrowed P5,000,000 bearing 10% interest specifically for the
construction of its new building payable at the end of 5 years. The interest on the loan was payable every April
1. It temporarily invested P3,500,000 proceeds on April 1, 20A1 which matured on July 1, 20A1. Said
investment earned interest of 8% per annum, which was subjected to 15% final withholding tax.
The construction of the building began on April 1, 20A1 and the building was completed on December 31, 20A2.
Expenditures on the building were made as follows:
January 1, 20A1 P 4,000,000

September 1, 20A1 3,500,000
December 1, 20A1 3,200,000
April 1, 20A2 2,500,000
July 31, 20A2 1,000,000
Binasuan had also the following other loans which were outstanding for the years ended December 31, 20A1
and 20A2 for general purposes:
Principal
14% Short-term Note P4,000,000
11% Long-term Loan 7,000,000
The interest on these loans was payable every January 1.
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Principal
14% Short-term Note P4,000,000
11% Long-term Loan 7,000,000
The interest on these loans was payable every January 1.
Binasuan also paid the following deficiency taxes and interest in 20A1 and 20A2:
20A1 20A2
Deficiency taxes P3,500,000 P3,800,000
Interest 1,400,000 1,520,000
It also derived interest income of P300,000 in 20A1 and P450,000 in 20A2 on bank deposits, which were
subjected to 20% final withholding tax.
Required:
1. Determine the deductible interest for the years ended December 31, 20A1 and 20A2 if Binasuan opted
to treat interest incurred to acquire properties used in trade or business as outright expense.
2. Determine the deductible interest for the years ended December 31, 20A1 and 20A2 if Binasuan opted
to treat interest incurred to acquire properties used in trade or business as capital expenditure.
Problem 3 – Interest: Advance payment; periodic amortization of debt
Mr. Botolena is a cash basis taxpayer, engaged in trade or business. On January 1, 20A1, he obtained an 8%,
P2,000,000 loan which was used in its business. The loan was payable annually at P400,000 plus interest for
five years every January 1.
On December 1, 20A1, it also obtained a one-year loan with face amount of P500,000 loan which was used in
its business. Since the loan was discounted, it only received P400,000 proceeds. The loan was repaid on
December 1, 20A2.
Required:
1. Prepare an amortization table for the P2,000,000 loan which present the deductible interest for the
entire term of the loan.
2. Determine the deductible interest for the years ended December 31, 20A1 and 20A2.
3. Determine the deductible interest for the years ended December 31, 20A1 and 20A2 if Mr. Botolena is
an accrual basis taxpayer.
Problem 4 – Taxes: Deductible and non-deductible items
Kilig Company, Inc., a VAT-registered taxpayer, had the following tax payments, and tax and related liabilities
for the year ended December 31, 20A1:
19
Basic Interest Surcharge
Current tax liabilities:
Income tax P3,000,000
Value added tax (VAT) 2,700,000
Withholding taxes 2,500,000
Fringe benefits tax 800,000
Documentary stamp tax 1,000,000
Excise tax 1,200,000
Local business tax 750,000
Real property tax 1,400,000
Deficiency taxes
Income tax 1,100,000 P550,000
VAT 900,000 450,000
Withholding taxes 850,000 425,000 P100,000
Documentary stamp tax 500,000 250,000 125,000
Local business tax 450,000 225,000
Real property tax 650,000 325,000
Provision for possible tax exposure
Income tax P2,000,000 P1,000,000
VAT 1,500,000 750,000
Withholding taxes 1,200,000 600,000
Documentary stamp tax 1,000,000 500,000 P 250,000
Local business tax 900,000 450,000
Real property tax 800,000 400,000
The deficiency taxes plus surcharge and interest pertain to tax liabilities two years ago which were only settled
in 20A1. However, the provision for possible tax exposures pertain to potential tax liabilities of Kilig which are
disputable but these were recognized in accordance with PAS 37/IFRIC 23 for financial reporting purposes.
Required:
1. Determine the deductible tax expense for the year ended December 31, 20A1.
2. Determine the other deductible items for the year ended December 31, 20A1.
Problem 5 – Taxes: Deductible taxes, VAT, capital expenditures
Yakap Corporation, a VAT-registered entity had the following transactions during 20A1:
• On January 1, 20A1, Yakap purchased equipment for P1,120,000, VAT inclusive, from VAT-registered
supplier. The equipment had estimated useful life of 5 years.
• From January 1, 20A1 to December 31, 20A1, Yakap purchased goods and services from VAT-
registered suppliers amounting to P5,600,000, VAT inclusive. The related goods and services were
claimed as income tax deduction.
• Yakap paid local business tax (LBT) of P300,000 to the local government unit (LGU) on January 20,
20A1 representing the first installment payment based on 20A0 revenues. It opted to pay LBT in four
equal installments. The remaining three installments were paid on-time. It also paid license fees of
P25,000 to the same LGU on January 20, 20A1.
• Yakap paid real property tax (RPT) of P900,000 on March 31, 20A1 for its 20A1 tax liability.
• On July 1, 20A1, Yakap imported equipment for P800,000, paid customs duties of P160,000 and VAT
on importation of P115,200. The equipment had estimated useful life of 4 years.
• On October 1, 20A1, Yakap rented a building for P95,000 monthly for one-year. The said rental is
exclusive of 5% withholding taxes and 12% VAT. It paid advance rentals for six-months on the same
date. Yakap also paid documentary stamp tax (DST) of P1,201 on the lease agreement.
• On December 1, 20A1, Yakap also received the following tax refund from the BIR based on the
Supreme Court decision:
Income tax refund P200,000
VAT refund 120,000
DST refund 50,000
Excise tax refund 180,000
Yakap claimed the deductible taxes in previous years. These deductions resulted in reducing its income
tax liability, except for excise tax since it was claimed as deduction in the period when Yakap was in a
tax loss position.
20
• Yakap paid income tax of P380,000 to Singaporean tax authorities for the income derived by its Branch
in Singapore during 20A1.
• Yakap paid income tax of P720,000 to the BIR in 20A1.
It is Yakap’s policy to claim foreign income taxes as income tax deduction.
Required:
1. Determine the deductible tax expense for the year ended December 31, 20A1.
2. Determine the other tax deductible items for the year ended December 31, 20A1.
3. Determine the amount of taxes which may qualify as capital expenditures for the year ended December
31, 20A1.
4. Determine the amount of tax refund which are subject to tax for the year ended December 31, 20A1.
5. Assume that Yakap is a VAT-exempt taxpayer, determine the deductible tax expense for the year
ended December 31, 20A1.
6. Assume that Yakap is a VAT-exempt taxpayer, determine the other tax deductible items for the year
7. Assume that Yakap is a VAT-exempt taxpayer, determine the amount of taxes which may qualify as
capital expenditures for the year ended December 31, 20A1.
Problem 6 – Losses: Various deductible losses
The following are independent situations related to losses incurred by Abaca Company, Inc.:
a. Abaca had an equipment acquired for P1,000,000 with estimated useful life of 5 years. It was sold for
P280,000 on January 1, 20A1 after using it for 3 years.
b. Abaca imported inventories for USD80,000 on December 1, 20A0. It was paid on January 31, 20A1.
The foreign exchange rates are as follows:
January 31, 20A1 USD1 = P49
c. Abaca owned a building which was totally destroyed by fire on December 1, 20A0. It had a book value
of P2,500,000 on the said date. Abaca submitted its declaration of loss with the BIR on January 5,
20A1.
d. Abaca owned a building which was totally destroyed by fire on December 1, 20A0. It had a book value
of P2,500,000 on the said date. The building was covered by insurance. Abaca claimed the loss from
the insurance company. However, the amount of compensation was not yet determined on December
31, 20A0. The insurance company paid Abaca P2,200,000 on January 31, 20A1. Abaca also submitted
its declaration of loss with the BIR on January 5, 20A1.
e. Abaca owned a building which was totally destroyed by fire on December 1, 20A0. It had a book value
its declaration of loss with the BIR on January 5, 20A1.
f. Abaca owned a building which was totally destroyed by fire on December 1, 20A0. It had a book value
its declaration of loss with the BIR on January 5, 20A1. Abaca used the insurance proceeds in order to
construct a new building as replacement.
g. On October 1, 20A0, Abaca discovered that its inventories with book value of P1,000,000 were stolen.
Abaca submitted its declaration of loss with the BIR on November 29, 20A0.
h. Abaca owned an equipment with book value of P750,000 on December 31, 20A1. On the same date, a
new law was enacted rendering said equipment useless. It was permanently retired on the same date.
i. Abaca had inventories with carrying amount of P1,000,000 and P1,200,000 on December 31, 20A0 and
20A1, respectively. These were carried at net realizable value in accordance with PAS 2. These
inventories had cost of P1,150,000 and P1,300,000 on December 31, 20A0 and 20A1, respectively.
However, Abaca wrote-off inventories of P300,000 and P350,000 during 20A0 and 20A1, respectively.
These were actually destroyed as witnessed by BIR personnel and supported by Certificate of
Destruction issued by the BIR.
j. Abaca has investment in available for sale securities which was acquired for P500,000 on July 1, 20A0.
On December 31, 20A0, it had fair value of P400,000. It was sold on June 30, 20A1 for P450,000.
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Required: Determine the amount of deductible losses for the year ended December 31, 20A0 and 20A1.
Problem 7 – Losses: Deductible casualty losses
The following are independent situations relative to casualty losses incurred by Mariposa Corporation:
a. Mariposa had a building with book value of P2,000,000 as of December 31, 20A0 with remaining life of
5 years. On June 30, 20A1, the building was partially destroyed by fire. Mariposa incurred P1,200,000
in order to restore the building.
b. Mariposa had a building with book value of P2,000,000 as of December 31, 20A0 with remaining life of
5 years. On June 30, 20A1, the building was partially destroyed by fire. The building was covered by
insurance and Mariposa received P1,000,000 on September 30, 20A1 as compensation for the loss.
Mariposa incurred P1,200,000 in order to restore the building.
c. Mariposa had an equipment with book value of P600,000 as of December 31, 20A0 with remaining life
of 3 years. On June 30, 20A1, the building was partially destroyed by fire. Mariposa incurred P800,000
in order to restore the equipment.
d. Mariposa had an equipment with book value of P600,000 as of December 31, 20A0 with remaining life
of 3 years. On June 30, 20A1, the building was partially destroyed by fire. The equipment was covered
by insurance and Mariposa received P1,000,000 on January 31, 20A2 as compensation for the loss.
Mariposa incurred P800,000 in order to restore the equipment.
e. Mariposa had a machinery with book value of P450,000 as of December 31, 20A0 with remaining useful
life of 3 years. On December 31, 20A1, it incurred capital expenditures related to the said machinery
amounting to P120,000 which were capitalized. However, the machinery started to breakdown in 20A2.
It was scrapped and sold on September 30, 20A2 for P150,000.
f. Mariposa bought a land with an old building for P3,500,000 on January 1, 20A1. The purchase price
allocable to the building was P750,000. Mariposa immediately demolished the building to give way for
the construction of a manufacturing plant. It incurred demolition cost of P200,000, and the proceeds
from the sale of scraps amounted to P120,000.
Required:
1. Determine the amount of tax deductible loss for the year ended December 31, 20A1 and 20A2.
2. Determine the amount of other tax deductible expense for the year ended December 31, 20A1 and
20A2.
3. Determine the book value of the related asset as of December 31, 20A1 and 20A2.
Problem 8 – Losses: Net operating loss carryover (NOLCO)
Magiting Corporation had the following gross income and deductions before net operating loss carryovers
(NOLCO):
Gross income Deductions

20A0 P2,000,000 P2,700,000
20A1 3,500,000 3,200,000
20A2 3,800,000 4,000,000
20A3 4,000,000 3,980,000
20A4 3,800,000 5,000,000
20A5 4,500,000 4,300,000
It adopts the calendar year accounting period. The following are independent cases relative to the tax status
and changes in ownership of Magiting:
Situation A
Magiting is subject to the regular corporate income tax (RCIT) or minimum corporate income tax (MCIT),
whichever is higher. There were no changes in Magiting’s ownership from 20A0 to 20A5.
Situation B
Magiting is registered with the Board of Investments and enjoying income tax holiday (ITH) until December 31,
20A0. There were no changes in Magiting’s ownership from 20A0 to 20A5.
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Situation C
Magiting is 80% owned by Katipunan Corporation. On January 1, 20A2, Katipunan sold its 80% interest in
Magiting to Gabriela Corporation.
Situation D
Magiting is 100% owned by Katipunan Corporation. Katipunan Corporation is 80% owned by Gabriela
Corporation. Magiting was merged with Katipunan on January 1, 20A5. Katipunan became the surviving entity.
Katipunan had gross income of P5,500,000 and deductions of P5,250,000 in 20A5, in addition to the above
items pertaining to Magiting.
Situation E
Magiting is 100% owned by Katipunan Corporation. On the other hand, Gabriela Corporation is 80% owned by
Alonzo Corporation. Magiting was merged with Gabriela on January 1, 20A5. Gabriela became the surviving
entity and it continued to be 80% owned by Alonzo. Gabriela had gross income of P5,500,000 and deductions
of P5,250,000 in 20A5, in addition to the above items pertaining to Magiting.
Situation F
Magiting is 100% owned by Katipunan Corporation. On the other hand, Gabriela Corporation is 80% owned by
Alonzo Corporation. Magiting was merged with Gabriela on January 1, 20A4. Magiting became the surviving
entity and it continued to be 100% owned by Katipunan. Gabriela had gross income of P5,500,000 and
deductions of P5,250,000 in 20A5, in addition to the above items pertaining to Magiting.
Required: For each of the above cases, determine the taxable income/tax loss for the years ended December
31, 20A0 to 20A5.
Problem 9 – Bad debts: Deductible items
The following are independent situations involving Harana Company’s receivables:
Situation A
Harana Company is a trading company with the following receivables:
a. Receivable from Bughaw Company amounting to P1,200,000. Harana sent collection and demand
letters to Bughaw. However, Bughaw did not pay said receivables. Harana wrote-off said receivables in
20A1. Bughaw was still operating.
b. Receivable from Dilaw Company amounting to P920,000. Harana sent collection and demand letters to
Dilaw. This was also referred to a collection lawyer. It was found out that Dilaw was bankrupt and it was
only able to pay P100,000 on October 1, 20A1. Harana wrote-off the remaining receivables.
c. Receivable from Luntian Company amounting to P750,000. This arose from sale of goods in 20A0
where Luntian issued promissory note for P900,000 but with discounted value of P750,000. Luntian
recorded revenues from said transaction amounting to P750,000. Harana sent collection and demand
letters to Luntian. However, Harana was able to gather information that Luntian became insolvent.
Hence, the receivable was written-off in 20A1.
Harana was able to collect its receivable from Dilaw in 20A3 amounting to P500,000.
Situation B
Harana Company is a bank with the following receivables:
a. Loan receivable from Mr. Bughaw amounting to P1,200,000 which was covered by real estate
mortgage. Mr. Bughaw defaulted on the payment of the loan. Harana foreclosed the property and it was
sold at a public auction for P850,000 in 20A1. Harana wrote-off the uncollectible receivable in 20A1
which was supported by written approval from BSP.
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b. Loan receivable from Mrs. Dilaw amounting to P920,000. Harana sent collection and demand letters to
Mrs. Dilaw. This was also referred to a collection lawyer and it was found out that Mrs. Dilaw was
insolvent. The receivable was written-off in 20A1 but the BSP approval was only secured in 20A2.
c. Loan receivable from Mr. Luntian amounting to P750,000. Harana sent collection and demand letters to
Mr. Luntian. It was found out that Mr. Luntian was insolvent. The receivable was written-off in 20A1
which was supported by written approval from BSP.
Harana was able to collect its receivable from Mrs. Dilaw in 20A3 amounting to P500,000.
Required:
1. Determine the amount of tax deductible bad debts for the year ended December 31, 20A1 and 20A2
sunder both Situations.
2. Determine the amount of recovery of bad debts subject to income tax for the year ended December 31,
20A3 under both Situations assuming Harana had the following taxable income before bad debts
deduction in 20A1 and 20A2:
a. 20A1: P5,000,000; 20A2: P3,000,000
b. 20A1: P1,000,000; 20A2: P300,000
c. 20A1: P-0-; 20A2: P-0-
Problem 10 – Depreciation: Deductible item, change in depreciation method, depreciable lives
Agrikultura Company, Inc., an agricultural company, had the fixed and intangible assets, and their remaining
useful lives as of January 1, 20A1
Assets Book value Remaining useful life

Land P2,000,000
Administration building 3,000,000 15
Farm building 5,000,000 20
Equipment 2,200,000 5
Trademark 1,000,000 4
During 20A1, Agrikultura had the following transactions:
• On January 1, 20A1, it purchased motor vehicle of P2,000,000 for the use of its Vice President, with
useful life of 5 years and salvage value of P200,000.
• On January 31, 20A1, it incurred expenses of P250,000 for the ordinary repair of its factory building.
• On October 1, 20A1, it purchased motor vehicle of P3,000,000 for the use of its President, with useful
life of 5 years.
• On December 31, 20A1, it incurred capital expenditures of P300,000 related to its equipment. This
extended the life of the asset by 1 years.
Agrikultura used straight-line method of depreciation. However, on January 1, 20A2, it changed its depreciation
method to sum-of-the-years digits as approved by the BIR. During 20A2, Agrikultura had the following
transactions:
• On January 1, 20A2, it incurred capital expenditures of P500,000 for its administration building.
• On January 1, 20A2, it purchased equipment of P1,150,000, with useful life of 5 years and salvage
value of P150,000.
On January 1, 20A2, it was determined that the factory building had remaining life of 10 years.
In addition, it had the following biological assets as of December 31, 20A1 and 20A2:
Assets December 31, 20A1 December 31, 20A2

Current
Growing stocks P1,800,000 P2,200,000
Goods in process 400,000 525,000
Non-current
Breeding stock (net) 3,900,000 4,975,000
Total carrying amount P6,100,000 P7,700,000
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The movements in the biological assets are as follows:
Details December 31, 20A1 December 31, 20A2

Cost
Beginning P7,200,000 P8,575,000
Increase (decrease) due to:
Production P35,000,000 P40,725,000
Purchases 1,200,000 2,250,000
Mortality (525,000) (650,000)
Harvest (32,500,000) (37,500,000)
Retirement (1,800,000) 1,375,000 (1,975,000) 2,850,000
Ending P8,575,000 P11,425,000
Accumulated amortization
Beginning P1,750,000 P2,475,000
Additions 2,350,000 2,600,000
Retirement (1,625,000) (1,350,000)
Ending 2,475,000 3,725,000
Carrying amount P6,100,000 P5,700,000 P7,700,000
• The current biological assets pertain to growing hogs, cattle and poultry livestock which are valued at
cost.
• The breeding stocks are carried at accumulated costs net of amortization and any impairment in value.
However, no impairment losses were recognized to date. The costs and expenses incurred up to the
start of the productive stage are accumulated and these are amortized over the estimated productive
lives of the biological assets.
• The purchases of biological assets include breeding stocks of P1,000,000 and P2,000,000 as of
December 31, 20A1 and 20A2, respectively.
Agrikultura treats its breeding stocks as capital investment for tax purposes.
Required:
1. Determine the deductible depreciation expense for the year ended December 31, 20A1 and 20A2.
2. Determine the book value of depreciable assets as of December 31, 20A1 and 20A2.
3. Assuming Agrikultura treats its breeding stocks as inventory for tax purposes, determine the deductible
depreciation expense for the year ended December 31, 20A1 and 20A2.
4. Assuming Agrikultura treats its breeding stocks as inventory for tax purposes, determine the book value
of depreciable assets as of December 31, 20A1 and 20A2.
Problem 11 – Depletion: Exploration and development expenses, improvements, depletion expense
Brilyante Mining Company was organized on January 1, 20A0 after acquiring mining rights from another mining
company for P30,000,000 (Mine A). In addition, it also acquired another mining right for P20,000,000 (Mine B)
on July 1, 20A0. The following are the additional information:
Mine A
It incurred P1,200,000 for preliminary planning for a potential exploration activity to be undertaken from January
1, 20A0 to March 31, 20A0. In addition, it also spent P8,000,000 from April 1, 20A0 to September 30, 20A0, in
ascertaining the existence, location, extent and quality of any deposit before commencing the development of
the mine. This amount includes P2,000,000 improvements which are depreciable having 8 years depreciable
life, which were used starting April 1, 20A0. These improvements were used during exploration and
development stages and during the actual mining operations.
The development of the mine commenced on October 1, 20A0 where it incurred P7,500,000 until December 31,
20A0 and P12,500,000 from January 1, 20A1 to December 31, 20A1. Out of this amount, P5,000,000 pertains
to improvements which are depreciable having 10 years depreciable life which were incurred and used starting
January 1, 20A1 during the development stage and during the actual mining operations.
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The actual mining operations commenced on January 1, 20A3. The following are the estimated remaining
production of output of the mine area, and the actual annual production:
Estimated remaining Actual annual production

production (tons) (tons)
20A3 2,000,000 120,000
20A4 1,800,000 130,000
20A5 1,700,000 160,000
Mine B
It incurred P1,000,000 for preliminary planning for a potential exploration activity to be undertaken from July 1,
20A0 to September 30, 20A0. In addition, it also spent P6,000,000 from October 1, 20A0 to December 31, 20A0
and P4,000,000 from January 1, 20A1 to March 31, 20A1, in ascertaining the existence, location, extent and
quality of any deposit before commencing the development of the mine. This amount includes P3,000,000
improvements which are depreciable having 10 years depreciable life, which were incurred and used starting
January 1, 20A1. These improvements were used during exploration and development stages of the mine.
The development of the mine commenced on April 1, 20A1 where it incurred P3,500,000 until December 31,
20A1 and P6,500,000 from January 1, 20A2 to December 31, 20A2. Out of this amount, P2,500,000 pertains to
improvements which are depreciable having 8 years depreciable life which were incurred and used starting
June 1, 20A1 during the development stage.
However, the mine was abandoned on January 1, 20A3 since the commercial operation was not warranted as
confirmed by the Mines and Geosciences Bureau.
Required:
1. Determine the adjusted cost basis of the of the mines as of December 31, 20A0, 20A1, 20A2, 20A3,
20A4 and 20A5.
2. Determine the depletion expense for the years ended December 31, 20A3, 20A4 and 20A5.
Problem 12 – Depletion: Exploration and development expenses, accelerated deduction
Mineral Mining Corporation had net income from mining operations before deduction relating to tax incentives,
as of December 31, 20A0, 20A1 and 20A2, and the related exploration and development costs for the years
then ended, as follows:
20A0 20A1 20A2

Net income from mining operations
before tax incentives P12,000,000 P15,000,000 P20,000,000
Exploration costs 2,500,000 2,300,000 2,000,000
Development costs 1,800,000 3,500,000 2,250,000
In addition, Mineral also had the following other income and expenses for the years ended December 31, 20A0,
20A1 and 20A2:
20A0 20A1 20A2

Interest income on bank deposit P300,000 P450,000 P600,000
Dividend income from domestic
corporation 225,000 375,000 380,000
Dividend income from foreign
corporation 100,000 125,000 150,000
Rental income 1,200,000 1,500,000 1,750,000
Depreciation on leased property 600,000 700,000 800,000
Mineral elected to deduct exploration and development costs as outright expense for income tax purposes. As
of December 31, 20A2, it has not yet commenced the operations of its mine.
Required: Determine the taxable income of Mineral for the years eneded December 31, 20A0, 20A1 and 20A2.
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Problem 13 – Charitable and other contributions: Deductible items
Humaling Company, Inc. had the following information for the year ended December 31, 20A1:
Gross income from business P10,000,000

Deductible expenses excluding charitable contributions 7,000,000
Contributions:
Government for rehabilitation of earthquake
devastated areas 500,000
Government for priority activity in education 1,200,000
Families of victims of calamity 400,000
Kulay Foundation (PCNC-accredited) for health
purposes 350,000
Beterano Foundation (PCNC-accredited) for
rehabilitation of veterans 200,000
Kapwa Foundation (pending PCNC-accreditation) for
scientific purposes 280,000
Required:
1. Determine the tax deductible charitable contributions for the year ended December 31, 20A1.
2. Determine the taxable income for the year ended December 31, 20A1.
3. Assume that Humaling Company is a sole proprietorship, determine the tax deductible charitable
contributions for the year ended December 31, 20A1.
4. Assume that Humaling Company is a sole proprietorship, determine the taxable income for the year
Problem 14 – Research and development: Capital expenditures vs outright deduction
Balintataw Company, a pharmaceutical company, is continuously conducting research and development in

connection the development and manufacture of new drugs. On January 1, 20A0, it started constructing a
building for its research and development activities. It incurred construction costs of P12,000,000. The building
was completed on June 30, 20A0. It had a useful life of 20 years.
In addition, it incurred the following costs from July 1, 20A0 to June 30, 20A1:
July 1 – January 1 –
December 20A0 June 30, 20A1
Liaison with medical association groups and practitioners P400,000 P600,000
Preparation for clinical investigations 700,000 650,000
Feedback information on efficacy and safety of medical products 320,000 280,000
Professional fees of medical practitioners 450,000 300,000
Exploratory and research studies including surveys and
interviews 850,000 500,000
Testing of new drugs 1,000,000 1,200,000
Production cost of new drug for sale (commercial production) 3,000,000
The above costs were incurred in connection with the research and development of a new drug. It started to
realize benefit from research and development costs on July 1, 20A1.
Required:
1. Determine the tax-deductible research and development expenditures for the years ended December
31, 20A0 and 20A1 assuming Balintataw opted to claim said expenses as outright expense.
2. Determine the tax-deductible research and development expenditures for the years ended December
31, 20A0 and 20A1 assuming Balintataw opted to capitalize said expenditures.
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Problem 15 – Pension trusts: Deductible items
Kundiman Company, Inc. had a BIR-registered retirement plan. The following information relates to said
retirement plan for the year ended December 31, 20A1 and 20A2:
20A1 20A2
Contribution P3,000,000 P1,200,000
Benefits paid 1,200,000 500,000
Normal cost per actuarial valuation for funding 800,000 700,000
Service cost per actuarial valuation under PAS 19 900,000 750,000
Earnings of retirement plan 300,000 350,000
Required:
1. Determine the tax deductible pension expense for the years ended December 31, 20A1 and 20A2.
2. Assuming the retirement plan is not BIR-registered, determine the tax deductible expense for the years
ended December 31, 20A1 and 20A2.
Problem 16 – Other deductions: Optional standard deduction (OSD); senior citizen and PWD discounts
Karunungan Company is engaged in merchandising business with the following information for the year ended
December 31, 20A1:
Gross sales P6,000,000

Sales returns and allowances 300,000
Sales discounts 350,000
Purchases 2,000,000
Purchase returns and allowances 100,000
Purchase discounts 150,000
Freight-in 200,000
Inventory, January 1 300,000
Inventory, December 31 250,000
Operating expenses, supported by invoices and receipts 1,000,000
Operating expenses, not supported by invoices and receipts 500,000
The sales discounts include P150,000 discounts granted to senior citizen and PWDs.
The following are additional independent situations:
Situation A
Karunungan filed its first quarter income tax return on May 30, 20A1, and it used the OSD. However, it used the
itemized deduction in its second and third quarter income tax returns.
Situation B
Karunungan filed its first quarter income tax return on May 30, 20A1 and it used the itemized deduction.
However, it amended its first quarter income tax return on June 30, 20A1 and adopted the OSD. OSD was used
in its second and third quarter income tax returns.
Required:
1. Assume that Karunungan is a corporation, determine the OSD for the year ended December 31, 20A1.
2. Assume that Karunungan is a corporation, determine the taxable income for the year ended December
31, 20A1.
3. Assume that Karunungan is a sole proprietorship, determine the OSD for the year ended December 31,
20A1.
4. Assume that Karunungan is a sole proprietorship, determine the taxable income for the year ended
December 31, 20A1.
Problem 17 – Special deductions: Insurance companies
Likha Life Insurance Company had the following liability reserves on policies in force:
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December 31, 20A0 P300,000,000
December 31, 20A1 320,000,000
December 31, 20A2 380,000,000
December 31, 20A3 335,000,000
December 31, 20A4 400,000,000
December 31, 20A5 375,000,000
In addition, it paid the following actual claims from the insured:
20A1 P80,000,000
20A2 75,000,000
20A3 90,000,000
20A4 100,000,000
20A5 105,000,000
Required:
1. Determine the tax deductible expenses for the years ended December 31, 20A1 to 20A5.
2. Determine the amount that will be reported as income for the years ended December 31, 20A1 to 20A5,
if any.
3. Prepare the related journal entries from tax perspective for the years ended December 31, 20A1 to
20A5.
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D. Real properties, shares of stock and securities, and sources of income
Problem 1 – Computation of gain or loss
On January 1, 20A1, Mr. Andres purchased Land A for P1,500,000 which is equivalent to its fair market value.
Moreover, on March 1, 20A1, he inherited Land B from his father. At that time, said property had fair market
value of P1,200,000.
On June 1, 20A1, Mr. Andres received Land C as donation from Mrs. Andrea. Said property had fair market
value of P1,000,000 at the time of donation. Mrs. Andrea acquired said property two years ago for P800,000.
On August 1, 20A1, Mr. Andres purchased Land D for P1,000,000 although its fair market value was
P1,300,000.
On October 1, 20A1, Mr. Andres sold Land A, B and C as follows:
Selling price Fair market value

Land A P2,000,000 P2,500,000
Land B 1,800,000 1,800,000
Land C 1,600,000 1,500,000
On December 1, 20A1, Mr. Andres transferred Land D to Mrs. Ankara in exchange for Land E and building.
Land D had fair market value of P1,600,000 at the time of transfer while Land E and building had combined fair
market value of P1,750,000.
Required:
1. Determine the gain or loss from sale of Land A, Land B and Land C on October 1, 20A1.
2. Determine the gain or loss from exchange on December 1, 20A1.
3. Assuming the combined fair market value of Land E and building on December 1, 20A1 was
P1,400,000, determine the gain or loss from exchange on said date.
Problem 2 – Capital gains and losses: Individuals; corporations
Ms. Karunungan, citizen of the Philippines, single, had the following income and losses for the years ended
December 31, 20A1, 20A2 and 20A3:
20A1 20A2 20A3 20A4

Operating income from business P300,000 P375,000 P80,000 P450,000
Interest income on notes
receivables 20,000 35,000 40,000 42,000
Dividend income 33,000 28,000 30,000 35,000
Gain on sale of scraps from
business 50,000 60,000 75,000 125,000
Loss on sale of equipment used
in business 75,000 80,000 50,000 100,000
Gain on sale of jewelry, held for 2
years 50,000 90,000 60,000 150,000
Gain on sale of painting, held of 8
months 28,000 100,000 30,000 155,000
Loss on sale of investment in
foreign common shares, held
for 3 years 75,000 50,000 300,000 50,000
Loss on sale of bonds, held for 6
months 60,000 40,000 100,000 20,000
Required:
1. Determine the taxable income for the years ended December 31, 20A1, 20A2, 20A3 and 20A4.
2. Assume that the taxpayer is a corporation and assume further that instead of the gains on sale of
jewelry and painting, these pertain to gains on sale of investment in foreign preferred shares and
investment in debt securities with the same holding periods, determine the taxable income for the years
ended December 31, 20A1, 20A2 and 20A3.
Problem 3 – Sale of real property: Real estate business; idle assets
30
Kultura Corporation, an entity engaged in real estate business, purchased a parcel of land in Calamba for
P15,000,000 on March 1, 20A0 when its fair market value was P14,800,000. The said land will be further
developed where housing units will be constructed. Kultura incurred land development costs for P5,000,000,
construction costs for roads and other structures on the land for P4,000,000 and construction costs related to
the housing units for P10,000,000 during 20A0.
During 20A1, Kultura started selling houses and lots in Calamba. There were 30 units of houses and lots which
were developed and constructed. As of December 31, 20A1, Kultura sold 15 units of houses and lots for
P3,500,000 each which were paid in cash. These houses and lots have the same area and specifications. The
cost of these houses and lots were assumed to be the same.
On December 1, 20A1, Kultura sold a parcel of land in Alabang for P12,500,000 with fair market value of
P12,800,000. Said land was purchased three years ago for P8,200,000 when its fair market value was
P8,500,000. It planned to construct condominium building which should have been held for sale. However,
because of certain problems, the project construction did not push through.
Required:
1. Determine the gain or loss from the sale of real properties for the year ended December 31, 20A1.
2. Determine the whether the gain or loss is a capital gain/loss or ordinary gain/loss.
3. Determine the capital gains tax (CGT), if any, on the sale of real properties.
Problem 4 – Sale of real property: Capital and ordinary assets; idle assets; installment payment of tax
Tinatangi Company, Inc., engaged in the manufacture of toys, had the following real properties as of January 1,
20A1 with their carrying amounts for financial reporting purposes:
Land A P3,000,000
Land B 3,200,000
Building A, net 2,800,000
Building B, net 500,000
These properties were sold in 20A1. The following are the additional information:
• Land A was acquired in 20A0 when its fair market value was P3,250,000. It was not used until it was
sold for P3,500,000 on March 1, 20A1 when its fair market value was P3,350,000.
• Land B was acquired five years ago at fair market value. Building A was constructed on said land. As of
January 1, 20A1, Building A had remaining useful life of 14 years. Its carrying amount was net of
accumulated depreciation of P1,800,000 and impairment loss of P1,400,000 which was recognized on
December 31, 20A0. On July 1, 20A1, Land B was sold for P4,000,000 while Building A for P3,000,000.
The building was used as production plant of the entity.
• Building B was constructed on a leased land for P6,000,000. It was initially used for three years and
subsequently became idle for five years and it was sold for P2,000,000 on October 1, 20A1 when its fair
market value was P2,300,000. Its carrying amount was net of accumulated depreciation of P4,000,000
and impairment loss of P1,500,000 which was recognized on December 31, 20A0. Building B had
remaining useful life of 4 years.
Required:
1. Determine the capital gain or loss from sale of real properties for the year ended December 31, 20A1.
2. Determine whether the gain or loss is a capital gain/loss or ordinary gain/loss.
4. Assuming that the selling price of Building B was paid as follows:
October 1, 20A1 P200,000
February 1, 20A2 300,000
June 1, 20A2 400,000
October 1, 20A2 500,000
February 1, 20A3 600,000
Determine the capital gains tax (CGT), if any, on the sale of the building that was declared and paid in
20A1, 20A2 and 20A3. Determine the deadline for the payment of the CGT.
5. Assuming that the selling price of Building B was paid as follows:
31
October 1, 20A1 P600,000
February 1, 20A2 500,000
June 1, 20A2 400,000
October 1, 20A2 300,000
February 1, 20A3 200,000
Determine the capital gains tax (CGT), if any, on the sale of the building that was declared and paid in
20A1, 20A2 and 20A3. Determine the deadline for the payment of the CGT.
Problem 5 – Sale of real property: Principal residence; individual
The following are independent situations involving sale of real properties:
Situation A
Mrs. Gunita, widower, sold her residential house and lot on July 1, 20A1 for P6,000,000. The land was acquired
fifteen years ago for P300,000 while the residential house was constructed 10 years ago for P1,000,000. The
fair market values of the property were as follows:
Land, at acquisition date P320,000

Land, July 1, 20A1 3,200,000
Building, July 1, 20A1 3,500,000
Situation B
Mr. Kalinaw constructed a house, ten years ago for P650,000. On May 1, 20A1, he sold said house for
P4,000,000 when its fair market value was P4,200,000. After six-months, he bought a new house for
P3,800,000. He submitted a notification to the BIR of his intention to avail of the tax exemption on June 15,
20A1.
Required:
1. Determine the capital gain or loss from sale of real properties for the year ended December 31, 20A1.
3. For Situation B, determine the new cost basis of the residential property.
4. For Situation B, assuming the notification to avail of the tax exemption was submitted on May 15, 20A1,
determine the capital gains tax (CGT), if any on the sale of real property.
5. For Situation B, assuming the notification to avail of the tax exemption was submitted on May 30, 20A1,
determine the new cost basis of the residential property.
Problem 6 – Shares of stock: Sale, specific identification, FIFO, moving average
The following are independent situations on the acquisition and disposal of investment in Kanlaon Company
shares of Mayon Corporation:
a. On January 1, 20A0, Mayon purchased 10,000 shares P10 par of Kanlaon Company for P15 per share.
At that time, the shares have fair market value of P17 per share. On June 15, 20A0, Mayon purchased
additional 15,000 Kanlaon shares for P20 per share with fair market value of P21 per share. Mayon sold
12,000 shares at fair market value for P25 per share coming from June 15 purchases on November 30,
20A0. On January 31, 20A1, Mayon purchased 5,000 shares for P23 per share with fair market value of
P25. On July 1, 20A1, Mayon purchased 7,000 shares at fair market value for P28 per share. On
October 1, 20A1, Mayon sold 10,000 shares for P30 per share with fair market value of P32 per share.
Of the 10,000 shares, 7,000 shares were taken from July 1, 20A1 purchases and the balance came
from January 1, 20A0 purchases.
b. On January 1, 20A0, Mayon purchased 10,000 shares P10 par of Kanlaon Company for P15 per share.
12,000 shares at fair market value for P25 per share. On January 31, 20A1, Mayon purchased 5,000
shares for P23 per share with fair market value of P25. On July 1, 20A1, Mayon purchased 7,000
shares at fair market value for P28 per share. On October 1, 20A1, Mayon sold 10,000 shares for P30
per share with fair market value of P32 per share. Mayon was not able to identify the shares which were
sold in 20A0 and 20A1.
32
c. On January 1, 20A0, Mayon purchased 10,000 shares P10 par of Kanlaon Company for P15 per share.
12,000 shares at fair market value for P25 per share. On January 31, 20A1, Mayon purchased 5,000
shares for P23 per share with fair market value of P25. On July 1, 20A1, Mayon purchased 7,000
shares at fair market value for P28 per share. On October 1, 20A1, Mayon sold 10,000 shares for P30
per share with fair market value of P32 per share. Mayon maintains books of accounts where every
transaction relating to purchases and disposals of shares are recorded.
Both Mayon and Kanlaon are listed in the Philippine stock exchange. However, the above transactions were
made over the counter.
Required: Determine the gain or loss from sale and capital gains tax (CGT) for the years ended December 31,
20A0 and 20A1.
Problem 7 – Shares of stock: Stock dividend; shares swap; property for shares
As of December 31, 20A0, Tanglaw Corporation had 25,000 Agila shares with carrying amount of P1,200,000
for financial reporting purposes. These were acquired for P35 per share one year ago. On the same date,
Tanglaw transferred all its Agila shares to Maya Corporation in exchange for 50,000 Talaba shares. Maya
acquired Talaba shares two years ago for P17 per share. Agila and Talaba shares are listed in the Philippine
Stock Exchange. Agila shares had fair market value of P48 per share while Talaba shares had fair market value
of P27 per share.
On April 1, 20A1, Maya transferred 20,000 Agila shares to Loro Corporation in exchange for land with book
value of P1,000,000 and fair market value of P1,450,000. Loro adopted the cost model in accounting for
property, plant and equipment. Agila shares had fair market value of P55 at the time of transfer.
On July 1, 20A1, Loro Corporation acquired 50,000 shares of Kabibe Company, Inc. from Kapis Corporation for
P25 per share. Kapis acquired said shares two years ago for P20 per share.
On October 1, 20A1, Kabibe declared and issued 25% stock dividend. On December 31, 20A1, Loro sold
35,000 Kabibe shares to Sigay Corporation for P28 per share.
Required: Determine the gain or loss, the capital gains tax (CGT), the deadline for payment of CGT, and the
party liable to CGT on the transfer of shares on the following dates:
1. December 31, 20A0.
2. April 1, 20A1.
3. July 1, 20A1.
4. October 1, 20A1.
5. December 31, 20A1.
Problem 8 – Shares of stock: Treasury shares; transfer of property for own shares
On June 1, 20A1, Indak Corporation reacquired its own 10,000 shares from Salamin Corporation for P300 per
share. Salamin purchased said shares on January 1, 20A1 for P200 per share. On October 1, 20A1, Indak sold
said shares for P420 per share.
Moreover, on December 1, 20A1, Indak sold its land which was idle for one (1) year to Bintana Corporation
which was acquired for P5,000,000 in exchange for 15,000 Indak shares. Said shares had fair market value of
P350 at that time. The land had fair market value of P5,750,000 while the shares were acquired by Bintana for
P225 per share.
Required:
1. Determine the gain or loss from sale or transfer of shares/properties for the year ended December 31,
20A1. Indicate the party that derived the gain or incurred the loss.
2. Determine the capital gains tax from the transactions.
Problem 9 – Shares of stock: Wash sales
The following are independent situations regarding Marahuyo Company’s acquisition and disposal of Habagat
Corporation shares:
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a. On November 15, 20A1, Marahuyo purchased 10,000 common shares of Habagat for P100 per share.
On December 1, 20A1, it purchased again additional 10,000 common shares of Habagat for P90 per
share. On December 15, 20A1, it sold 10,000 shares of Habagat for P90 per share.
b. On September 21, 20A1, Marahuyo purchased 10,000 common shares of Habagat for P100 per share.
On December 21, 20A1, it purchased again additional 5,000 common shares of Habagat for P90 per
share. Subsequently, on December 26, 20A1, it purchased additional 3,000 common shares of Habagat
for P80 per share. Marahuyo sold 10,000 common shares of Habagat for P70 on December 31, 20A1.
c. On September 15, 20A1, Marahuyo purchased 10,000 common shares of Habagat for P100 per share.
On November 30, 20A1, it sold 4,000 common shares of Habagat for P90 per share. On December 15,
20A1, it again purchased 5,000 common shares of Habagat for P80 per share. On December 17, 20A1,
it purchased again 5,000 common shares of Habagat for P80 per share.
d. On September 15, 20A1, Marahuyo purchased 10,000 common shares of Habagat for P90 per share.
On December 15, 20A1, it purchased again 4,000 common shares of Habagat for P100 per share. On
December 20, 20A1, it purchased another 7,500 common shares of Habagat for P80 per share. On
December 31, 20A1, it sold 10,000 common shares of Habagat for P70 per share.
Marahuyo adopted the calendar year accounting period.
Required: Determine the deductible and non-deductible loss for the year ended December 31, 20A1 under each
situation.
Source: De Leon (2016), modified.
Problem 10 – Other capital assets: Disposal of bonds
The following are independent situations regarding Humaling, Inc.’s disposal of its investment in bonds:
a. On January 1, 20A1, Humaling issued a 5-year, 6% coupon bonds at face value of P5,000,000. On
December 31, 20A3, the said bonds were redeemed for P4,800,000.
b. On January 1, 20A1, Humaling issued a 5-year, 6% coupon bonds with face value of P5,000,000, for
P4,800,000. On December 31, 20A3, the said bonds were redeemed for P5,000,000.
c. On January 1, 20A1, Humaling issued a 5-year, 6% coupon bonds with face value of P5,000,000 for
P5,300,000. On December 31, 20A3, the said bonds were redeemed for P5,000,000.
The Company adopted the effective interest method in accounting for bonds for tax purposes.
Required: Determine the gain or loss from redemption of the bonds under each situation.
Problem 11 – Corporate readjustments: Exchanges of properties in merger; subsequent transfers
Makisig Corporation is engaged in the manufacture of semiconductor products. On January 1, 20A1, it merged
its operations with Tadhana Company, Inc., another entity which is also engaged in the manufacture of the
same products. Tadhana transferred the following assets and liabilities to Makisig in exchange for shares:
Accounts receivables P1,000,000

Intangible assets 800,000
Notes payable 750,000
The property, plant and equipment, and intangible assets had fair market value of P1,800,000 and P1,000,000,
respectively, at the time of merger.
Makisig issued 2,000,000 shares with P1 par in exchange for said assets. The shares had fair market value of
P1.75 per share. Makisig became the surviving entity.
Tadhana transferred Makisig shares to its sole stockholder, Matibay Corporation on the same date, in exchange
for Tadhana shares. Matibay acquired Tadhana shares for P2,000,000 five years ago. Tadhana was
subsequently dissolved by operation of law.
On July 1, 20A1, Makisig sold the property, plant and equipment it acquired from Tadhana for P2,000,000. Said
property had fair market value at that time of P2,200,000.
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On September 1, 20A1, Matibay sold all its investment in Makisig shares for P2.10 per share. Said shares had
fair market value of P2.20 on that date.
Required:
1. Determine the taxable gain or deductible loss from exchange on the part of Makisig, Tadhana and
Matibay on January 1, 20A1.
2. Determine the cost basis of the properties transferred by Tadhana in the hands of Makisig at the time of
transfer.
3. Determine the taxable gain or deductible loss on sales transactions made on July 1, 20A1 and
September 1, 20A1.
Problem 12 – Corporate readjustments: Transfer of properties; gain control
Batibot Corporation is engaged in the trading business with 1,000,000 P10 authorized common shares, where
only 400,000 were issued and outstanding. Currently, it is 40% owned by Ningning Corporation and 60% owned
by Matsing Corporation. On January 1, 20A1, Tarsi Corporation and Sesame Corporation transferred the
following assets and liabilities to Batibot in exchange for shares:
Tarsi
Intangible assets 1,000,000
Notes payable 1,300,000
Sesame
Loans payable 500,000
Tarsi’s property, plant and equipment, and intangible assets had fair market value of P3,800,000 and
P1,300,000, respectively, at the time of transfer. On other hand, Sesame’s property, plant and equipment had
fair market value of P2,500,000 on the same date.
Batibot issued 375,000 common shares to Tarsi and 225,000 common shares to Sesame in exchange for these
assets. The shares had fair market value of P15 per share.
On July 1, 20A1, Batibot sold the property, plant and equipment it acquired from Sesame for P2,700,000. Said
property had fair market value at that time of P2,600,000.
Required:
1. Determine the taxable gain or deductible loss from exchange on the part of Batibot, Tarsi and Sesame
on January 1, 20A1.
2. Determine the cost basis of the properties transferred by Tarsi and Sesame in the hands of Batibot at
the time of transfer.
3. Determine the taxable gain or deductible loss on sales transactions made on July 1, 20A1.
Problem 13 – Income from sources within and without the Philippines
The following are independent situations regarding the income earned by Hamili Corporation, a domestic
corporation, from sources within and outside the Philippines:
a. On January 1, 20A3, Hamili borrowed P10,000,000 from Madjapahit Corporation, a resident of

Thailand, bearing interest of 8%. Hamili utilized the proceeds from the loan to acquire various property,
plant and equipment which were used in its business in the Philippines.
b. Hamili had investment in shares of stock of Madjapahit Corporation, another domestic corporation.
Madjapahit declared and paid cash dividend of P1,000,000 on October 1, 20A3.
c. Hamili had investment in shares of stock of Madjapahit Corporation, a resident of Thailand. Madjapahit
declared and paid cash dividend of P1,000,000 on October 1, 20A3. Madjapahit had no Philippine
operations.
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d. Hamili had investment in shares of stock of Madjapahit Corporation, a resident of Thailand. Madjapahit
declared and paid cash dividend of P1,000,000 on October 1, 20A3. Madjapahit had a Philippine
branch. Its worldwide gross income and its Philippine branch’s gross income in the last three years
were as follows:
Year Philippine Worldwide
branch
20A0 3,000,000 5,000,000
20A1 4,000,000 8,000,000
20A2 5,000,000 9,000,000
e. Hamili declared and paid dividend of P1,000,000 to its sole stockholder, Madjapahit Corporation, a
resident of Thailand, on October 1, 20A3.
f. Hamili availed of the management services of Madjapahit Corporation, a resident of Thailand.
Madjapahit rendered management services in Thailand and Hamili paid P500,000 for said services on
October 1, 20A3 for services rendered for nine months from January 1 to September 30, 20A3.
g. Hamili availed of the management services of Madjapahit Corporation, a resident of Thailand.
Madjapahit rendered management services in the Philippines through its employees and Hamili paid
P400,000 on October 1, 20A3 for services rendered for six months. Madjapahit’s employees were in the
Philippines from April 1 to September 30, 20A3.
h. Hamili availed of the management services of Madjapahit Corporation, a resident of Thailand.
Madjapahit rendered management services partly in the Philippines and partly in Thailand. Hamili paid
P1,000,000 for management services rendered from January 1 to September 30, 20A3. Madjapahit
sent employees to the Philippines from January 1, 20A3 to June 30, 20A3 to render said services in the
Philippines. The remaining services were rendered in Thailand from July 1 to September 30, 20A3.
i. Hamili owned an equipment which it leased to Madjapahit Corporation, a resident of Thailand. The
equipment was sent to Thailand in Madjapahit’s premises. Madjapahit paid rentals of P600,000 on
January 1, 20A3 for the lease of said equipment from January 1 to June 30, 20A3.
j. Hamili leased an equipment from Madjapahit Corporation, a resident of Thailand. The equipment was
sent to the Philippines in Hamili’s premises. Hamili paid rentals of P600,000 on January 1, 20A3 for the
lease of said equipment from January 1 to June 30, 20A3.
k. Hamili entered into a licensing agreement with Madjapahit Corporation, a resident of Thailand, for the
use of know-how and technology in manufacturing certain food products in the Philippines. Madjapahit
did not send any employees to render the related services. All services were rendered in Thailand.
Hamili paid royalties of P1,000,000 on December 31, 20A3 for using said know-how and technology
from January 1 to December 31, 20A3.
l. Hamili sold a condominium unit located in the Philippines to Madjapahit Corporation, a resident of
Thailand, for P5,000,000 on December 31, 20A3. Said unit had book value of P3,500,000 as of
December 31, 20A3.
m. Hamili purchased electronic goods in Thailand for P5,000,000. Said goods were sold to Madjapahit
Corporation, a resident of Thailand, for P8,000,000. The goods were directly delivered from Hamili’s
supplier in Thailand to Madjapahit. The goods did not enter the Philippine territory.
n. Hamili is engaged in the manufacture of electronic products. It imported its raw materials from
Madjaphit Corporation, a resident of Thailand, and it exported its finished goods to Kongo Company,
Inc., a resident of Japan. During 20A3, Hamili had export sales to Kongo of P8,000,000 with cost of
P5,000,000 which already included cost of raw materials paid to Madjapahit for P3,000,000.
o. Hamili availed the advertising services of Madjapahit Corporation, a broadcasting company located in
Thailand. The advertisements were aired in the Philippines, however, the broadcasting facilities are
maintained in Thailand. On December 31, 20A3, Hamili paid P1,000,000 for advertising services
rendered from January 1 to December 31, 20A3.
p. Madjapahit Corporation, a resident of Thailand, had investment in Hamili shares. On July 1, 20A3,
Madjapahit sold 10,000 shares of Hamili for P500 per share to Kongo Corporation, a resident of
Singapore with fair market value of P525. The shares were acquired two years ago for P325 per share.
Required: Identify the income earned, the amount of gross income earned within and outside the Philippines
and the party that derived the income for the year ended December 31, 20A3 for each of the above
situations.
Problem 14 – Head office allocated expenses
Molave Corporation, an entity incorporated in France, maintains various operations worldwide including the
Philippines through its Philippine branch. The following information relates to Molave’s worldwide and Philippine
operations for the year ended December 31, 20A1:
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Description Philippine branch Total worldwide
Net sales P15,000,000 P65,000,000
Cost of sales 8,000,000 30,000,000
Direct expenses:
Ordinary and necessary 2,200,000 6,500,000
Fire losses 1,000,000 1,600,000
Other deductible expenses 750,000 8,000,000
Income tax expense 120,000 3,500,000
Common expenses:
Ordinary and necessary 4,000,000
Other expenses 2,800,000
Direct capital expenditures 5,000,000 12,000,000
Worldwide income tax 2,750,000
The head office expenses were allocated using gross income as certified by Molave’s external auditor.
Required:
1. Determine the taxable income from sources within the Philippines for the year ended December 31,
20A1.
2. Determine the taxable income from sources outside the Philippines for the year ended December 31,
20A1.
3. Assuming the head office allocated expenses were allocated using net sales, determine the taxable
income from sources within the Philippines for the year ended December 31, 20A1.
4. Assuming the head office allocated expenses were allocated using net sales, determine the taxable
income from sources outside the Philippines for the year ended December 31, 20A1.
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E. Individual taxpayers, withholding taxes and fringe benefits
Problem 1 – Classification of individual taxpayers
The following are independent situations on the classification of taxpayers:
a. Mr. Acacia, a citizen of the Philippines, stayed in United States for three years. He returned on June 15,
20A1 to reside permanently in the Philippines. He had income of P350,000 from January 1 to June 14,
20A1 from Philippine sources and P450,000 from United States. He had income of P500,000 from
Philippine sources and P300,000 from United States from June 15, 20A1 to December 31, 20A1.
b. Mrs. Bravo, a citizen of the Philippines, left the country on March 15, 20A1 and returned only on
January 1, 20A2. She derived consultancy fee income of P120,000 from January 1 to March 14, 20A1
from Philippine sources and P100,000 from foreign sources. She derived consultancy fee income of
P300,000 from March 15, 20A1 to December 31, 20A1 from foreign sources and P150,000 from
Philippine sources.
c. Mr. Camilo, a citizen of the Philippines, is employed by Kahel Company, Inc., a domestic corporation
since 20A0. On April 1, 20A1, Mr. Camilo was assigned to Singapore Branch of Kahel for two years. He
continued to receive his compensation from Kahel Head Office in the Philippines and allowances from
Kahel Singapore. During 20A1, he received P1,200,000 as compensation (P250,000 from January to
March 31, 20A1) from Kahel Head Office and P500,000 allowances from Kahel Singapore.
d. Mrs. Delta, a citizen of Canada, came to the Philippines on May 31, 20A1 to render professional
services for four months until September 30, 20A1. She derived service fees of P350,000 for rendering
said services.
e. Mr. Edukado, a citizen of Spain, came to the Philippines on June 1, 20A1 to render professional
services until May 31, 20A2. He received professional fees of P100,000 monthly.
f. Mrs. Ginto, a citizen of Portugal, came to the Philippines on November 1, 20A1 to render professional
services until August 31, 20A2. She received professional fees of P150,000 monthly.
g. Mr. Kabesa, a citizen of Brazil, came to the Philippines on October 1, 20A1 to render consultancy
services for three years as provided in the consultancy agreement. He received professional fees of
P120,000 monthly.
h. Mrs. Lila, a citizen of Mexico, came to the Philippines two years ago to render consultancy services for
three years until December 31, 20A1 as provided in the consultancy agreement. She received
professional fees of P90,000 monthly.
Required:
1. Determine the classification of the taxpayer for the year ended December 31, 20A1.
2. Determine the income derived from sources within and outside the Philippines for the year ended
December 31, 20A1.
3. Determine the income that will be subject to Philippine income tax for the year ended December 31,
20A1.
Problem 2 – Income subject to final withholding taxes
Mrs. Sampaguita derived the following income for the year ended December 31, 20A1:
a. Car received with fair market value of P1,000,000 as a raffle prize in a department store.
b. Lotto winnings of P2,000,000.
c. Cash received of P5,000 as a raffle prize in a car show.
d. Interest income of P40,000 on investment in bonds with remaining maturity of two years.
e. Interest income of P90,000 on investment in bonds with remaining maturity of four years.
f. Interest income of P100,000 on investment in bonds with remaining maturity of six years.
g. Dividend income of P10,000 from investment in shares of a domestic corporation.
h. Dividend income of P8,000 from investment in shares of a foreign corporation.
i. Gain of P125,000 from over the counter sale of shares in a domestic corporation.
j. Gain of P500,000 from sale of condominium unit for personal purposes with selling price of P5,000,000
and fair market value of P6,000,000.
k. Royalty income of P15,000 from musical composition.
l. Franchise fee (considered passive income) of P100,000 for the use of tradename.
Required:
1. Determine the final income tax for the year ended December 31, 20A1 if Mrs. Sampaguita is a resident
citizen.
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2. Determine the final income tax for the year ended December 31, 20A1 if Mrs. Sampaguita is a non-
resident citizen.
3. Determine the final income tax for the year ended December 31, 20A1 if Mrs. Sampaguita is a resident
alien.
resident alien engaged in trade or business.
resident alien not engaged in trade or business.
Problem 3 – Interest on bank deposits; income from deposit substitutes and trust funds
Mr. Limon had various bank deposits, and investments in securities and trust funds. He had the following
earnings for the year ended December 31, 20A1:
a. Interest income of P6,000 on bank deposit in a regular banking unit of a bank.

b. Interest income of P3,000 on bank deposit in a foreign currency deposit unit of a bank.
c. Income from trust fund of P20,000 maintained with a bank. This was composed of P5,000 rental income
derived by the fund, P8,500 dividend income from a domestic corporation, and P6,500 gain from sale of
shares traded in the Philippine Stock Exchange.
d. Interest income of P50,000 on investment in bonds in Marimar Corporation. Marimar issued these
bonds to the public. There were around 100 investors which invested in said bonds.
e. Interest income of P20,000 on promissory notes issued by Mrs. Karpa. Mr. Limon is the sole creditor.
f. Interest income of P25,000 on promissory notes issued by Buko Corporation. Buko issued promissory
notes to 25 investors including Mr. Limon at one time.
Required:
1. Determine the final income tax for the year ended December 31, 20A1 if Mr. Limon is a resident citizen.
2. Determine the final income tax for the year ended December 31, 20A1 if Mr. Limon is a non-resident
citizen.
3. Determine the final income tax for the year ended December 31, 20A1 if Mr. Limon is a resident alien.
alien engaged in trade or business.
alien not engaged in trade or business.
Problem 4 – FBT on housing privileges
On January 1, 20A1, Libertad Inc. hired Mr. Aruga as its Vice President for Finance. As part of his
compensation package, Libertad granted him housing privilege. Temporarily, Mr. Aruga stayed in a nearby hotel
from January 1, 20A1 to February 28, 20A1. Libertad paid monthly hotel charges of P300,000 for January and
February. Subsequently, he transferred to a residential condominium unit in Bonifacio Global City (BGC).
The following are independent cases relative to the residential condominium unit occupied by Mr. Aruga for the
a. Libertad leased a residential condominium unit at Bonifacio Global City (BGC) on March 1, 20A1.
Monthly rental amounts to P120,000 payable on a monthly basis at the beginning of each month.
b. Mr. Aruga leased a residential condominium unit at BGC on March 1, 20A1. Monthly rental amounts to
P120,000 payable on a monthly basis at the beginning of each month. Libertad reimbursed Mr. Aruga
for the rentals related to the residential condominium unit.
c. Libertad owned a residential condominium unit at BGC. It was assigned to Mr. Aruga starting March 1,
20A1. The unit had a fair market value of P10 million as indicated in the real property tax (RPT)
declaration while its zonal value is P8.5 million as determined by the BIR.
d. Libertad purchased a condominium unit at BGC on March 1, 20A1 for P10 million payable on
installment. Libertad paid a downpayment of P2 million on March 1, 20A1, and the remaining balance
was payable in four (4) yearly installments payable every March 1 with 5% interest. The unit had a fair
market value of P9 million as indicated in the RPT declaration while its zonal value is P8 million as
determined by the BIR. It was assigned to Mr. Aruga.
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e. Libertad purchased a condominium unit at BGC on March 1, 20A1 for P10 million. The unit had a fair
market value of P12 million as indicated in the RPT declaration while its zonal value is P12.5 million as
determined by the BIR. The title to the unit was transferred to Mr. Aruga.
f. Libertad purchased a condominium unit at BGC on March 1, 20A1 for P10 million. The unit had a fair
market value of P12.5 million as indicated in the RPT declaration while its zonal value is P12 million as
determined by the BIR. The unit was transferred to Mr. Aruga for P6 million.
Required:
1. Determine the monetary value of the quarterly fringe benefits granted to Mr. Aruga.
2. Determine the amount of quarterly fringe benefits tax (FBT).
3. Prepare the related journal entries for the year ended December 31, 20A1.
Problem 5 – FBT on motor vehicles
Trinidad Manufacturing Company hired Ms. Halaran, as its Finance Manager, on January 1, 20A1. As part of
her compensation package, she was granted car benefit.
The following are independent situation relating to the car benefit:
a. Trinidad purchased a car for P1,200,000 on January 1, 20A1 in the name of Ms. Halaran.
b. Trinidad granted Ms. Halaran cash for P1,200,000 on January 1, 20A1 for the acquisition of car.
c. Trinidad purchased a car on installment for P1,200,000 on January 1, 20A1 in the name of Ms. Halaran.
Trinidad paid downpayment of P300,000, and the balance was payable in three equal annual
installment every January 1.
d. Trinidad purchased a car for P1,200,000 on January 1, 20A1 in the name of Ms. Halaran. However, Ms.
Halaran shouldered P200,000 which was also paid on January 1, 20A1.
e. Trinidad purchased a car for P1,200,000 on January 1, 20A1 and this was part of a fleet of motor
vehicles assigned to its employees. Said car was assigned to Ms. Halaran. Trinidad depreciates its
motor vehicles for four years using the straight-line method of depreciation.
f. Trinidad leased a car for P35,000 monthly commencing on January 1, 20A1. The said leased car
formed part of its fleet of motor vehicles assigned to its employees. Said car was assigned to Ms.
Halaran.
Required:
1. Determine the monetary value of the quarterly fringe benefits granted to Ms. Halaran.
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Problem 6 – Car plan, car lease
Rizal Services, Inc. provided the following car benefits to its two employees, Mr. Hidalgo, Operations Manager,
and Ms. Karisma, Accounting Manager:
• Mr. Hidalgo
Rizal purchased a car for P1,000,000 on January 1, 20A1. This formed part of the fleet of assigned cars
of the employees. This was assigned to Mr. Hidalgo on said date. The purchase price was paid by Rizal
in cash. However, Mr. Hidalgo shouldered 30% of the acquisition cost of the car. The said amount was
paid outright by Mr. Hidalgo.
• Ms. Karisma
Rizal leased a car for P25,000 monthly starting January 1, 20A1. This formed part of the fleet of
assigned cars of the employees. This was assigned to Ms. Karisma. As agreed, Ms. Karisma will
shoulder P5,000 of the rental payment since the maximum rental which can be shouldered by the
company is only P20,000. The said amount will be paid through salary deduction. The initial P5,000
payment, however, was made on January 1, 20A1.
Required:
1. Determine the quarterly monetary value of the fringe benefits granted to Mr. Hidalgo and Ms. Karisma
Problem 7 – Expense accounts; household personnel; life insurance; membership fees, dues and other
expenses
Plazoleta Company, Inc. reimbursed the following expenses to Mr. Sebaste, its Sales and Marketing Manager,
for the quarter ended March 31, 20A1:
Car repairs and maintenance P20,000

Representation expenses 12,000
Transportation expenses 7,500
Supplies expenses 5,000
Groceries 5,250
Driver’s salaries 5,500
Maid’s salaries 2,500
Laundry expenses 1,500
Membership fees in PICPA 3,000
Membership fees in Rotary Club 1,500
Membership fees in Tennis Club 6,000
PRC license fee 1,000
Personal life insurance premium 3,000
41
Although Mr. Sebaste heads the company’s sales and marketing department, he is a CPA by profession. As
such, he is an active member of PICPA. He is also a member of various organizations.
• The car repairs and maintenance are supported by official receipts issued in the name of Plazoleta.
These are for the car owned by Plazoleta which is assigned to Mr. Sebaste.
• The representation expenses are supported by official receipts. However, only P8,000 were issued in
the name of Plazoleta while the balance were issued in the name of Mr. Sebaste.
• The transportation expenses are supported by official receipts issued by the transportation contractor in
the name of Mr. Sebaste for the account of Plazoleta. These are actual business transportation
expenses.
• The supplies expenses are supported by invoices issued in the name of Plazoleta.
• The groceries are supported by invoices issued in the name of Plazoleta. However, these are for the
family of Mr. Sebaste.
• The driver and maid are personnel of Mr. Sebaste where the salaries are shouldered by Plazoleta.
• The laundry expenses pertain to personal expenses of Mr. Sebaste which are supported by official
receipts in the name of Plazoleta. Plazoleta granted laundry allowance of P1,500 quarterly to Mr.
Sebaste. These are only provided to certain non-rank and file employees.
• The personal life insurance premium represents annual premium on the life insurance policy obtained
by Mr. Sebaste. This is in addition to the annual group life insurance premium paid by Plazoleta of
P1,000 covering all employees. Moreover, Plazoleta also granted Mr. Sebaste annual medical cash
allowance of P10,000 which were properly supported by official receipts and invoices evidencing
medical expenses issued in his name.
Mr. Sebaste received monthly salary of P120,000.
Required:
1. Determine the monetary value of the fringe benefits granted to Mr. Sebaste for the quarter ended March
31, 20A1.
2. Determine the amount of fringe benefits tax (FBT).
Problem 8 – Foreign travel, holiday expenses, educational assistance, foregone interest
Francisco Cars and Motors Corporation paid the following expenses and benefits of its non-rank and file
employees for the year ended December 31, 20A1:
• Mr. Fresco
He travelled to Los Angeles, US on March 1, 20A1 to attend a convention for ten (10) days. The travel
was supported by an invitation letter coming from the host organization. He incurred the following
expenses which were paid by Francisco:
Airfare, business class (Manila to Los Angeles) P 50,000

Airfare, first class (Los Angeles to Manila) 120,000
Hotel charges 100,000
Food expenses 25,000
In addition, Mr. Fresco spent additional three (3) days vacation. He incurred the following expenses
which were paid by Francisco:
Hotel charges P 30,000

Food expenses 6,000
Other incidentals 10,000
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This was an additional benefit that was granted to Mr. Fresco.
Mr. Fresco also availed of educational assistance for his three dependents from Francisco. Two
dependents availed of the scholarship program granted by the company. Francisco paid P250,000
tuition fee for each child during 20A1 (50% was paid in January and 50% in July). However, his third
child was not able to pass the scholarship exam administered by the company. Hence, the child was
not entitled to the scholarship. Nonetheless, Francisco still shouldered 50% of the tuition fee of the third
dependent. The tuition fee amounted to P150,000 (50% was paid in January and 50% in July).
• Ms. Kamagong
Ms. Kamagong started taking her MBA degree on January 1, 20A1. Her tuition fee and other
educational expenses incurred during 20A1 amounting to P100,000 (50% was paid in January and 50%
was paid in July) was shouldered by the company. She is required to remain with the employ of the
company for at least two years after obtaining her degree.
• Ms. Halaman
Ms. Halaman started studying culinary arts on January 1, 20A1. This is not related to her work.
However, Francisco shouldered her tuition fee for the year amounting to P70,000 out of generosity. This
was paid in February 20A1.
• Mr. Mangga
Mr. Mangga borrowed P120,000 on January 1, 20A1 for his personal use, without interest. This is
payable over 12-months for P10,000 monthly starting January 31, 20A1.
Required:
1. Determine the quarterly monetary value of the fringe benefits granted to the employees for the year
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F. Compensation, business and other income
Problem 1 – Individual compensation income earners; withholding tax; substituted filing
The following are independent situations regarding the compensation and benefits received by Mr. Lanzones, a
citizen, for the year ended December 31, 20A1:
a. Mr. Lanzones, single, with PWD dependent who is his brother, was employed by Camachile
Corporation, a Large Taxpayer, as notified by the BIR. He received monthly compensation of P30,000
which was paid P15,000 every 15th and P15,000 every 30th of the month. In addition, he also received a
rice subsidy of P1,500 every 30th of the month. Moreover, he also received 13th month pay of P30,000
on November 15, 20A1, 14th month pay of P30,000 on December 15, 20A1, and performance bonus of
P60,000 on October 30, 20A1. Camachile correctly withheld the taxes on his compensation.
b. Mr. Lanzones, single, with PWD dependent who is his brother, was employed by Camachile
Corporation until May 31, 20A1. Camachile is a Large Taxpayer, as notified by the BIR. He received
monthly compensation of P30,000 which was paid P15,000 every 15th and P15,000 every 30th of the
month. In addition, he received a rice subsidy of P1,500 every 30th of the month. Moreover, he also
received pro-rated 13th month pay as part of his final pay with Camachile which was paid May 31, 20A1
together with his last half-month pay. He joined Duhat Corporation starting June 1, 20A1. Duhat is not a
Large Taxpayer or a Top 20,000 corporation. It also uses the manual books of accounts. Mr. Lanzones
received monthly compensation of P40,000 which was paid P20,000 every 15th and P20,000 every 30th
of the month. In addition, he received pro-rated 13th month pay on November 15, 20A1 and
performance bonus of P50,000 on December 31, 20A1. Camachile correctly withheld taxes on his
compensation. Moreover, Duhat correctly consolidated the calculation of his income tax liability together
with his compensation from Camachile.
Required:
1. Determine the monthly withholding taxes withheld by Camachile and Duhat under each scenario for the
year ended December 31, 20A1. Use the prescribed withholding tax table.
2. Determine the due date for filing the monthly withholding tax return and remittance of the related tax of
Camachile and Duhat for the year ended December 31, 20A1.
3. Determine the income tax liability of Mr. Lanzones under each scenario for the year ended December
31, 20A1.
4. Determine the income tax that will be paid by Mr. Lanzones when he filed his income tax return under
each scenario, if required. Determine the due date for filing of the tax return and payment of the tax.
5. Prepare the annual income tax return of Mr. Lanzones under each scenario, if required, for the year
ended December 31, 20A1. Please fill-up all the required boxes. Please put “XXX” for those boxes
where no information are provided.
Problem 2 – Multiple employer, married
Mr. Pilak, married, was employed by Palayan, Inc. until August 31, 20A1. He earned gross compensation
income of P300,000 from Palayan. Out of this amount, P25,000 pertains to pro-rated thirteenth month pay.
On September 1, 20A1, he joined Maisan Company and earned gross compensation income of P170,000. Out
of this amount, P30,000 pertains to pro-rated thirteenth month pay. In addition, he also received monthly
transportation allowance of P1,500 starting September 1, 20A1, and performance bonus of P40,000.
Mr. Pilak was also a part-time employee of Manihan, Inc. during 20A1 and he earned compensation income of
P161,000. Out of this amount, P11,500 pertains to thirteenth month pay.
Mr. Pilak, had three legimate dependents below 21 years old. However, his eldest child died on January 1,
20A1. He also paid hospitalization premium of P5,000 during the year.
Required:
1. Determine the taxable compensation income for the year ended December 31, 20A1.
2. Determine the income taxes withheld by each employer of Mr. Pilak for the year ended December 31,
20A1 assuming that the subsequent employer consolidated the income tax from full-time employment.
Assume further that taxes withheld by Manihan were not consolidated by the current employer.
3. Determine the total income tax and tax still due of Mr. Pilak for the year ended December 31, 20A1.
44
Problem 3 – Tax on business income; resident citizens; 8% income tax
Mrs. Katakataka, married, had four dependent children below 21 years old. Her business had the following
quarterly information (non-cumulative) for the year ended December 31, 20A1:
First Quarter Second Quarter Third Quarter Fourth Quarter

Sales P280,000 P210,000 P250,000 P280,000
Cost of sales 72,000 75,000 76,000 80,000
Business expenses 30,000 32,000 38,000 45,000
Mrs. Katakataka used the itemized deduction in filing her first quarter income tax return did not signify to adopt
the 8% income tax.
Required:
1. Determine the taxable income of Mrs. Katakataka for the year ended December 31, 20A1.
2. Determine the quarterly (cumulative) and annual income tax of Mrs. Katakataka for the year ended
December 31, 20A1
3. Assuming Mrs. Katakataka used the optional standard deduction (OSD) in filing her first quarter income
tax return, determine her taxable income for the year ended December 31, 20A1.
4. Assuming Mrs. Katakataka used the optional standard deduction (OSD) in filing her first quarter income
tax return, determine her quarterly (cumulative) and annual income tax for the year ended December
31, 20A1.
5. Assuming Mrs. Katakataka signified her intention to avail the 8% income tax when she filed her first
quarter income tax return, determine here quarterly (cumulative) and annual tax for the year ended
December 31, 20A1.
Problem 4 – Tax on business income; gross sales/receipts; 8% income tax option: VAT threshold breached
Mr. Pansin, married, had two dependent children below 21 years old. His business had the following quarterly
information (non-cumulative) for the year ended December 31, 20A1:

Gross sales P700,000 P800,000 P1,250,000 P1,500,000
Cost of sales 300,000 350,000 500,000 650,000
Business expenses 200,000 250,000 300,000 350,000
The gross sales are net of the following prompt payment discounts:
First quarter P80,000

Second quarter 100,000
Third quarter 120,000
Fourth quarter 130,000
Mr. Pansin signified his intention to adopt 8% income tax when he filed his first quarter income tax return since
he does not expect to breach the VAT threshold.
Required:
1. Determine the quarterly (cumulative) and annual income tax of Mr. Pansin for the year ended
December 31, 20A1.
2. Assuming Mr. Pansin opted to use the graduated income tax rates, determine his quarterly (cumulative)
and annual income tax for the year ended December 31, 20A1.
Problem 5 – Individual business income earners, mixed income; quarterly and annual; installment payment
Mr. and Mrs. Dalandan, Filipino resident citizens, have six qualified dependents. Mr. Dalandan was an
employee Pomelo Corporation for the year ended December 31, 20A1. Mrs. Dalandan, on the other hand, was
also an employee of Rambutan Company and at the same time had a trading business for the year ended
December 31, 20A1.
The following information pertain Mr. Dalandan’s compensation and benefits from Pomelo:
Salaries and allowances P300,000
45
13th month pay and other benefits 40,000
Payroll deductions
SSS contributions P5,000
Philhealth contributions 2,000
Pag-ibig contributions 1,800
Labor union dues 1,000
Pomelo properly and correctly withheld taxes on Mr. Dalandan’s compensation during the year.
Mrs. Dalandan, on the other hand, had the following information regarding her compensation and benefits from
Rambutan:
Salaries and allowances P360,000

13th month pay and other benefits 50,000
Payroll deductions
SSS contributions P6,000
Philhealth contributions 3,000
Pag-ibig contributions 2,200
Rambutan properly and correctly withheld taxes on Mrs. Dalandan’s compensation during the year.
Moreover, the following information relate to the trading business of Mrs. Dalandan for each of the quarters:

Sales P250,000 P290,000 P270,000 P280,000
Cost of sales 100,000 120,000 140,000 142,000
Expenses 20,000 25,000 24,000 28,000
Mr. and Mrs. Dalandan opted to pay their income tax liabilities, if any, on installment.
Required:
1. Determine the income tax withheld on compensation of Mr. Dalandan for the year ended December 31,
20A1.
2. Determine the income tax withheld on compensation of Mrs. Dalandan for the year ended December
31, 20A1.
3. Determine the quarterly income tax liability of Mrs. Dalandan on her business income for the year
ended December 31, 20A1. Determine the deadline for filing of her tax returns and payment of taxes.
4. Determine the annual income tax liability of Mrs. Dalandan for the year ended December 31, 20A1.
5. Determine the amount of tax that will be paid by Mr. and Mrs. Dalandan in filing their annual income tax
return for the year ended December 31, 20A1. Determine the deadline for filing of their tax return and
payment of tax.
6. Prepare the quarterly and annual income tax returns of Mr. and Mrs. Dalandan for the year ended
December 31, 20A1. Please fill-up all the required boxes. Please put “XXX” for those boxes where no
information are provided.
7. Determine the attachments to the quarterly and annual income tax returns of Mr. and Mrs. Dalandan for
8. Determine the annual income tax liability of Mrs. Dalandan for the year ended December 31, 20A1 if
she opted for the 8% income tax on her business income.
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Problem 6 – Tax on mixed income; resident and non-resident citizen; resident alien and non-resident alien
Mr. Liwayway, single, had the following gross compensation income from employment and income from
business for the year ended December 31, 20A1:
Gross compensation income P520,000

Gross income from business 700,000
Cost of services 300,000
Business expenses 100,000
The gross compensation income included thirteenth month pay of P40,000 and SSS, Philhealth and Pag-ibig
contributions of P12,000.
Required:
1. Assuming Mr. Liwayway is a resident citizen and his business income was derived from sources within
the Philippines, determine his taxable income and income tax liability for the year ended December 31,
20A1.
2. Assuming that Mr. Liwayway is a non-resident citizen and his compensation income was derived from
sources outside the Philippines, determine his taxable income and income tax liability for the year
ended December 31, 20A1. Assume further that the gross compensation does not include thirteenth
month pay and other statutory contributions.
3. Assuming that Mr. Liwayway is a resident alien and his business income was derived from sources
outside the Philippines, determine his taxable income and income tax liability for the year ended
December 31, 20A1.
4. Assuming that Mr. Liwayway is a non-resident alien engaged in trade or business and his business
income was derived from sources outside the Philippines, determine his taxable income and income tax
liability for the year ended December 31, 20A1.
5. Assuming that Mr. Liwayway is a non-resident alien not engaged in trade or business and his business
income was derived from sources outside the Philippines, determine his taxable gross income and
income tax liability for the year ended December 31, 20A1.
Problem 7 – Tax on resident citizens; foreign tax credits
Mrs. Namukadkad is a resident citizen, without dependent. She was locally employed by Bulaklak Corporation.
However, she had a business in Australia. She received gross compensation income of P351,000 (net of SSS,
Philhealth and Pag-ibig contributions) for the year ended December 31, 20A1. This amount still included
thirthteenth month pay of P27,000.
Moreover, she generated sales of P450,000 with cost of sales of P120,000 and incurred business expenses of
P100,000 in Australia. She opted to pay the graduated income tax rates. She paid income tax of P30,000 in
Australia. Mrs. Namukadkad opted to claim the foreign income tax paid as tax credit.
Required:
1. Determine the taxable income of Mrs. Namukadkad for the year ended December 31, 20A1.
2. Determine the income tax due after tax credit of Mrs. Namukadkad for the year ended December 31,
20A1.
3. Determine the income tax due after tax credit, if any, of Mrs. Namukadkad for the year ended
December 31, 20A1 assuming that she opted to claim the foreign income tax as deduction.
4. Assuming that 60% of sales, cost of sales and business expenses pertain to business operations in
Australia and the remaining 40% pertains to her business in New Zealand, and she paid foreign income
tax of P20,000 in Australia, and P10,000 in New Zealand, determine the income tax due after tax credit
of Mrs. Namukadkad for the year ended December 31, 20A1.
Problem 8 – Minimum wage earners
Mrs. Waling, married, with one qualified dependent child, is employed by Ylang Company, Inc., located in Metro
Manila, since 20A0. Starting January 1, 20A1, she received a monthly compensation of P15,208 for 13 months.
The daily statutory minimum wage rate in Metro Manila was P500. Based on Ylang’s wage policy, employees
are considered paid on rest days, special days and regular holidays. As such, it uses 365 days for purposes of
determining its daily wage rate.
47
The following are independent situations regarding the additional compensation and benefits received by Mrs.
Waling from Ylang during 20A1:
a. Mrs. Waling also received monthly hazard pay of P500 and monthly rice subsidy of P1,500.
b. Mrs. Waling also received monthly hazard pay of P500, monthly rice subsidy of P2,500, 14 th, 15th and
16th month of P15,208 each, P25,000 performance bonus and P12,000 commission.
c. Mrs. Waling was promoted to the next level effective July 1, 20A1 and she received a monthly salary
increase of 10%. She also received 13-month pay based on her pro-rated pay.
d. Mrs. Waling resigned from Ylang and transferred to Camia Corporation, located in Cavite, on July 1,
20A1. She received a monthly salary of P16,000 for 13 months. The daily statutory minimum wage in
Cavite was P450. Based on Camia’s wage policy, employees are not considered paid on Sundays and
rest days. Hence, it uses 313 days for purposes of determining its daily wage rate.
Required:
1. Determine the monthly statutory minimum wage of Ylang and Camia, as applicable, for the year ended
December 31, 20A1.
2. Determine the taxable income of Mrs. Waling for the year ended December 31, 20A1.
3. Determine the income tax liability of Mrs. Waling for the year ended December 31, 20A1.
48
G. Regular and special corporations
Problem 1 – Income subject to final taxes; domestic corporations; resident foreign corporations
Kalusugan Company derived the following income for the year ended December 31, 20A1:
a. Interest income of P60,000 on bank deposit in the regular banking unit of a bank.
b. Interest income of P30,000 on bank deposit in the foreign currency deposit unit of a bank.
c. Interest income of P400,000 on investment in bonds with remaining maturity of two years.
d. Interest income of P900,000 on investment in bonds with remaining maturity of four years.
e. Interest income of P1,000,000 on investment in bonds with remaining maturity of six years.
f. Income from trust fund of P200,000 maintained with a bank. This was composed of P50,000 rental
income derived by the fund, P85,000 dividend income from a domestic corporation, and P65,000 gain
from sale of shares traded in the Philippine Stock Exchange.
g. Dividend income of P100,000 from investment in shares of a domestic corporation.
h. Dividend income of P80,000 from investment in shares of a foreign corporation.
i. Gain of P1,250,000 from over the counter sale of shares in a domestic corporation.
j. Gain of P3,500,000 from sale of condominium unit classified as capital asset with selling price of
P5,000,000 and fair market value of P6,000,000.
k. Royalty income (considered as passive income) of P1,500,000 from patents and trademarks.
l. Franchise fee of P1,000,000 from its franchising business.
Required:
1. Determine the final income tax for the year ended December 31, 20A1 if Kalusugan is a domestic
corporation.
2. Determine the final income tax for the year ended December 31, 20A1 if Kalusugan is a resident foreign
corporation.
Problem 2 – Taxation of non-resident foreign corporations
The following are independent situations relative to the transactions of Moderno Corporation, a non-resident
foreign corporation based in South Africa with Makaluma Corporation, a domestic corporation for the year
a. Moderno rendered consultancy services to Makaluma. Makaluma paid Moderno consultancy fees of
P500,000. Out of said amount, P300,000 was attributable to services rendered by Moderno’s
employees in the Philippines while the balance pertains to services rendered in South Africa.
b. Moderno provided technical services to Makaluma, which qualify as royalties. Makaluma paid Moderno
technical service fees of P500,000. Out of said amount, P300,000 was attributable to services rendered
by Moderno’s employees in the Philippines while the balance pertains to services rendered in South
Africa.
c. Moderno charged Makaluma service fees of P500,000 for the use of cinematographic films in the
Philippines.
d. Moderno leased a shipping vessel to Makaluma in the Philippines, as approved by MARINA, for
P500,000.
e. Moderno leased specialized equipment to Makaluma for P500,000. Said equipment was transported
from South Africa to the Philippines.
f. Moderno lent P10,000,000 to Makaluma bearing 5% interest. The loan was outstanding for the entire
20A1.
g. Moderno had investment in Makaluma shares. During 20A1, Makaluma paid dividend of P500,000.
Dividend received by Moderno was not subject to tax in South Africa.
h. Moderno had investment in Makaluma shares. During 20A1, Makaluma paid dividend of P500,000.
Dividend received by Moderno was subject to tax in South Africa. South African law does not allow tax
credits for taxes deemed to have been paid in the Philippines.
i. Moderno had investment in Makaluma shares. During 20A1, Makaluma paid dividend of P500,000.
Dividend received by Moderno was subject to tax in South Africa. South African law allows tax credits
for taxes deemed to have been paid in the Philippines equivalent to 15 %.
j. Moderno sold its investment in Makaluma shares for P1,200,000. Said shares were acquired for
P700,000.
Required: Determine the final tax on income derived by Moderno from sources within the Philippines for the
year ended December 31, 20A1.
49
Problem 3 – Regular corporate income tax (RCIT) and minimum corporate income tax (MCIT)
Begonia Corporation, a domestic trading company, was incorporated and registered with the BIR five years
ago. It had the following information for the year ended December 31, 20A1:
Gross sales P10,000,000

Sales returns 500,000
Cost of goods sold 4,000,000
Interest income on bank deposit 50,000
Interest income on loans 100,000
Dividend income on investment in domestic shares 400,000
Dividend income on investment in foreign shares 300,000
Gain on sale of transportation equipment 350,000
Gain on sale of domestic shares 280,000
Salaries and bonuses 2,500,000
Interest expense 325,000
Depreciation expense 900,000
Impairment loss on fixed assets 250,000
Provision for doubtful accounts 180,000
Loss on sale of equipment 175,000
Fire loss 650,000
Utilities expense 380,000
Charitable contributions 420,000
Pension expense 370,000

a. Begonia wrote-off accounts receivables of P200,000. These were properly supported by documents to
support worthlessness.
b. Fire loss was supported by declaration of loss filed with the BIR within 30 days from the date of loss.
c. Charitable contributions include P270,000 donations to government for priority projects in education and
the balance pertains to donations to Aral Foundation, which is accredited by PCNC, for religious
purposes.
d. Pension expense was recognized in accordance with PAS 19. During 20A1, Begonia contributed
P300,000 to its BIR-registered pension plan. Normal cost amounted to P200,000 based on actuarial
valuation for funding.
e. During 20A0, Begonia contributed P350,000 to its pension plan. Normal cost during the same year
amounted to P220,000.
Begonia opted to use the itemized deduction in calculating its taxable income.
Required: Determine the income tax liability (excluding those subject to final taxes) for the year ended
December 31, 20A1.
Problem 4 – Excess MCIT carryover; commencement of MCIT
Aster Manufacturing Company was registered with the BIR on January 31, 20A0. However, it was incorporated
and registered with the SEC in prior year. The following information relates to its operations for the years ended
December 31, 20A4 to 20A9:
20A3 20A4 20A5 20A6 20A7 20A8 20A9

Net sales P5,000,000 P6,000,000 P7,000,000 P8,000,000 P9,000,000 P10,000,000 P12,000,000
Cost of sales 1,800,000 2,500,000 3,200,000 3,800,000 8,000,000 7,000,000 8,000,000
Deductions 3,000,000 3,400,000 3,750,000 4,230,000 900,000 2,750,000 3,800,000
Aster incurred tax losses in 20A1 and 20A2 of P150,000 and P40,000, respectively. Deductions exclude net
operating losses, if any. Aster opted to use the itemized deduction in calculating its taxable income.
Required:
1. Determine Aster’s income tax liability for the years ended December 31, 20A3 to 20A9.
2. Prepare journal entries in the books of Aster for the years ended December 31, 20A3 to 20A9.
50
3. Assume that Aster opted to use the optional standard deduction (OSD), determine its income tax
liability for the years ended December 31, 20A3 to 20A9.
Problem 5 – RCIT, MCIT, cost of services
Sinanglay Foods Corporation is engaged in food business. It operates various restaurants in Metro Manila. It
was registered with the BIR and SEC five years ago. The following information relates to its operations for the
Sales/Revenues P10,000,000
Interest income on foreign currency bank deposit, net of tax 13,875
Other income (not subject to final tax) 750,000
Cost of sales – food 1,200,000
Cost of sales – packaging 500,000
Salaries and bonuses – servers/waiters 1,500,000
Salaries and bonuses – store supervisors and managers 700,000
Rental expense – stores 850,000
Utilities expense – stores 325,000
Repairs and maintenance – stores and store facilities 300,000
Depreciation – stores and store facilities 600,000
Stores and store facilities impairment loss 525,000
Pension expense – servers/waiters 380,000
Pension expense – store supervisors and managers 250,000
Salaries and bonuses – sales and administration 560,000
Rental expense – administration 450,000
Utilities expense – administration 225,000
Repairs and maintenance – administration 150,000
Depreciation expense – administration 280,000
Building impairment loss – administration 475,000
Taxes and licenses 480,000
Provision for various losses including tax exposures 550,000
Pension expense – administration 180,000
Other administration expenses 425,000

a. Sales discounts include senior citizen and PWD discount of P50,000.
b. Pension expense pertains to accrual of expenses under PAS 19. There were no contributions to the
pension fund.
c. Taxes and licenses include documentary stamp tax of P100,000, donor’s tax of P50,000 and local
business tax of P280,000.
d. Sinanglay opted to use the itemized deduction.
Required:
1. Determine Sinanglay’s income tax liability (other than income subject to final taxes) for the year ended
December 31, 20A1.
2. Assume that Sinanglay opted to use the optional standard deduction (OSD), determine its income tax
51
Problem 6 – Income tax reconciling items, RCIT, MCIT
Sinangag Corporation had sales of P3,000,000, cost of sales of P1,200,000 and financial income before income
tax of P1,350,000 for the year ended December 31, 20A1. Dividend income from investment in a domestic
corporation of P20,000 was reported as part of other income and non-deductible entertainment, amusement
and representation expense of P10,000 was reported as part of selling expenses.
The partial balance sheet of Sinangag with corresponding tax bases is as follows:
Assets/Liabilities
Machinery and equipment

Cost P400,000
Accumulated depreciation (194,000)
Accumulated impairment loss (50,000)
Net P156,000
Construction in progress P500,000
Inventories P450,000
Allowance for inventory write-down (50,000)
Net P400,000
Accounts receivable P350,000

Allowance for doubtful accounts (40,000)
Net P310,000
Accounts payable P290,000
Warranties payable P135,000
a. Machinery and equipment

Cost P400,000
Accumulated depreciation, 12/31/20A0 (150,000)
Carrying amount before impairment testing, 12/31/20A0 P 250,000
Impairment loss recognized in 20A0 (30,000)
Carrying amount, 12/31/A0 P 220,000
Depreciation expense, 20A1 (44,000)
Impairment loss recognized during 20A1 (20,000)
Carrying amount, 12/31/20A1 P 156,000
The machinery and equipment have been depreciated for four years with remaining useful life of
another four years both for income tax and accounting purposes.
b. Construction in progress
Balance, 1/1/20A1 P -0-
Add: Capital Expenditures 420,000
Interest Capitalized under PAS 23 80,000
Balance, 12/31/20A1 P500,000
For tax purposes, the interest was claimed as outright expense in 20A1. It is expected that the asset
will be used and depreciated starting 20A2 for 10 years. Sinangag uses the straight line method of
depreciation.
52
c. Allowance for doubtful accounts
Balance, 1/1/20A1 P 35,000
Add: Provision for doubtful accounts 23,000
Total P 58,000
Less: Accounts written-off 18,000
Balance, 12/31/20A1 P 40,000
The accounts receivable has carrying amount of P300,000 as of January 1, 20A1. The accounts
written-off were claimed as deduction for income tax purposes in 20A1 since these were properly
substantiated.
d. Allowance for inventory obsolescence

Balance, 1/1/20A1 P 35,000
Add: Adjustment 15,000
Balance, 12/31/20A1 P 50,000
The provision for inventory write-down was charged to expense. All the beginning inventory balance
were sold during the year.
e. Accounts payable
Balance, 1/1,20A1 P530,000
Add: Purchases on account 420,000
Total P950,000
Less: Settlement 635,000
Balance P315,000
Less: Foreign exchange adjustment 25,000
Balance, 12/31/20A1 P290,000
The accounts payable have average turnover of 60 days. The foreign exchange adjustment arose from
accounts payable incurred during 20A1. There was no foreign currency denominated accounts payable
in prior years.
f. Warranties payable
Balance, 1/1,20A1 P120,000
Add: Accruals 50,000
Total P170,000
Less: Actual payments 35,000
Balance, 12/31/20A1 P135,000
Sinangag was registered with the BIR and SEC five years ago and it opted to use the itemized deduction.
Required:
1. Determine Sinangag’s income tax liability for the year ended December 31, 20A1.
2. Assume that Sinangag’s opted to use the optional standard deduction (OSD), determine its income tax
Problem 7 – Corporate income tax returns; excess MCIT, NOLCO; creditable withholding taxes
Palosebo Co. is a domestic trading corporation. It had the following data at the end of each of the first three
quarters (cumulative), and for the year ended December 31, 20A1 (sixth year of operations):
First Quarter Second Quarter Third Quarter Annual

Sales P500,000 P765,000 P920,000 P1,180,000
Interest income 3,000 5,600 8,000 10,500
Dividend income 35,000 45,000 80,000 90,000
Rent income 30,000 60,000
Gain on sale of fixed assets 45,000 45,000 180,000 500,000
Cost of sales 100,000 175,000 240,000 325,000

Taxes 63,435 72,379 210,886 211,126
Interest expense 500 700 1,400 2,000
Salaries and bonuses 50,000 120,000 180,000 300,000
53
Depreciation 40,000 80,000 120,000 200,000
Bad debts 150,000
Casualty loss 40,000 40,000 40,000
Contributions 3,000 5,000 80,000 150,000
Other business expenses 30,456 65,700 110,893 156,649
Loss on sale of fixed assets 30,000 80,000 105,000 200,000
Additional information on selected account balances:

• The interest income pertains to interest on bank deposits subjected to 20% final tax.
• The dividend income pertains to dividend received from domestic corporations.
• Rent income pertains to income earned during the year. Rentals of P120,000 were collected in advance
on July 1, 20A1 covering one-year agreement.
• Taxes pertain to quarterly local business tax (LBT) of P14,675, deficiency income tax including
penalties pertaining to prior years of P70,000, and the balance pertains to quarterly income taxes paid.
• The provision for bad debts of P150,000 was made at the end of the year. Write-off was made in
September for P200,000.
• Casualty loss was for a partial loss in May of property with a book value of P100,000. The cost to
restore the property to its normal operating condition was P120,000.
• The contributions during the year pertain to contributions to the Society for the Blind, Inc., a PCNC-
accredited charitable institution. Said contributions were for charitable purposes which qualify for full
deduction.
• Income taxes were withheld on sales for P5,000 during the first quarter, P2,650 for the second quarter,
P1,550 for the third quarter and P2,600 for the fourth quarter.
• Income tax withheld on the rent received on July 1 was P6,000.
Palosebo incurred net operating loss of P500,000 for the year ended December 31, 20A0. Moreover, it paid
MCIT of P80,000 and excess creditable taxes withheld of P50,000 during the same year. It opted to carryover
the excess creditable taxes withheld in 20A0 as credit against its future income tax liabilities.
However, for the year ended December 31, 20A1, Palosebo opted to claim for refund the excess creditable
taxes withheld.
Required:
1. Determine the quarterly and annual taxable income of Palosebo for the year ended December 31,
20A1.
2. Determine the quarterly and annual income tax due of Palosebo for the year ended December 31,
20A1.
3. Determine the amount of excess creditable taxes withheld that can be claimed as refund for the year
ended December 31, 20A1. Determine the deadline for filing the claim for refund.
4. Determine the amount of excess tax credits that can be carried over in the subsequent year(s).
Determine the prescription for the carryover.
5. Prepare the quarterly and annual income tax returns of Palosebo for the year ended December 31,
20A1. Please fill-up all the required boxes. Please put “XXX” for those boxes where no information are
provided.
6. Determine the attachments to the quarterly and annual income tax returns of Palosebo for the year
54
Problem 8 – Taxation of educational institutions and hospitals
Matalino University, a proprietary educational institution accredited by the Commission on Higher Education
(CHED), had the following financial performance for the year ended December 31, 20A1:
Revenues:
Tuition fees P20,000,000
Other education fees 3,800,000
Interest income subject to final tax 100,000
Rental income 3,500,000
Total P22,400,000
Costs:
Salaries and wages P6,000,000
Employee benefits 2,200,000
Laboratory and maintenance 800,000
Faculty retirement expense 1,200,000
School supplies 350,000
Honorariums 250,000
Rent expense 180,000
Faculty development 150,000
Total P13,580,000
Gross profit P 8,820,000
Expenses:
Salaries and wages P 3,000,000
Employee benefits 1,100,000
Depreciation and amortization 700,000
Retirement expense 650,000
Office supplies 170,000
Charitable contributions 350,000
Professional fees 110,000
Staff training and development 80,000
Other expenses 150,000
Total P 7,080,000
Income before tax P 1,740,000

• Salaries and wages under costs include “de minimis” benefits of P800,000 and P420,000 under
expenses.
• Faculty retirement expense and retirement expense under expenses pertain to accrual of pension
expense under PAS 19. Matalino contributed P1,000,000 to its BIR-registered retirement plan with
normal cost of P800,000. Unamortized excess contribution over normal cost pertaining to prior years
amounted to P700,000 with 7 years remaining amortization period. It is estimated that 70% of these
pertain to direct costs and the balance relate to administrative purposes.
• Charitable contributions pertain to donations to foundations accredited by PCNC for educational
purposes amounting to P250,000 while the balance pertain to donation to government for sports
development.
• Rental income pertains to income from leasing of building space for commercial purposes with the
following direct costs which were part of costs above:
Depreciation and amortization P700,000
• Matalino opted to capitalize its capital expenditures for the expansion of school facilities. The related
depreciation amounted to P300,000 which was included as part of depreciation and amortization under
cost of services. Total expenditures amounted to P3,000,000 which was incurred on January 1, 20A1.
55
• Matalino adopts the straight-line method of depreciation.
Required:
1. Determine the income tax liability of Matalino for the year ended December 31, 20A1.
2. Assuming Matalino treat as outright expense its capital expenditures for the expansion of school
facilities, determine its income tax liability for the year ended December 31, 20A1.
3. Assuming 52% of Matalino’s gross income pertains to leasing activities, determine its income tax
4. Assuming Matalino is a non-stock, non-profit educational institution, determine its income tax liability for
5. Assuming Matalino is a proprietary educational institution without accreditation from CHED, Department
of Education or the Technical Education and Skills Development Authority (TESDA), determine its
6. Assuming Matalino is a proprietary hospital, and the revenues and expenses pertain to hospital
operations, determine its income tax liability for the year ended December 31, 20A1.
7. Assuming Matalino is a charitable institution engaged in hospital operations, and the revenues and
expenses pertain to hospital operations, determine its income tax liability for the year ended December
31, 20A1.
8. Assuming Matalino is a for profit hospital, and the revenues and expenses pertain to hospital
operations, determine its income tax liability for the year ended December 31, 20A1.
Problem 9 – Taxation of local banks; foreign currency deposit unit
Matipid Banking Corporation, a domestic universal bank, had the following financial performance for the year
Interest income:
Loans and receivables P15,000,000
Trading and investments 1,000,000
Due from other banks (deposits) 800,000
Total P16,800,000
Interest expense:
Deposit liabilities P2,200,000
Other borrowings 420,000
Total 2,620,000
Net interest income P14,180,000
Other income
Service charges, fees and commissions P3,200,000
Gain on sale of investments and trading gains 740,000
Foreign exchange gain 180,000
Trust income 120,000
Total other income P4,240,000
Total income P18,420,000
Costs:
Salaries and employee benefits P2,150,000
Retirement expense 1,200,000
Supplies 350,000
Total P6,330,000
Gross profit P12,090,000
Expenses:
Provision for impairment and credit losses P3,700,000
Salaries and employee benefits 1,800,000
Taxes and licenses 1,100,000
Depreciation and amortization 700,000
Retirement expense 650,000
56
Other expense 250,000
Total P8,200,000
Income before tax P3,890,000

• FCDU income and expenses were converted to Philippine peso using the peso historical rates.
• Interest income on loans and receivables include interest on loans granted by Matipid’s foreign currency
deposit unit (FCDU) to non-residents of P520,000 and residents of P1,350,000. The balance pertains to
income under the regular banking unit (RBU).
• Interest income on bank deposits pertains to interest income under the regular banking units of other
banks amounting to P500,000 and FCDUs of P300,000. Two-thirds of these pertain to Matalino’s RBU
and the balance to its FCDU.
• Interest expense comprised of 85% incurred under its RBU and 15% under its FCDU.
• Other income pertains only to RBU. There were no other income derived under FCDU.
• Gain on sale of investments and trading gains pertain to gains on sale of bonds with maturity of more
than 5 years and investment in shares.
• Foreign exchange gains comprised of P100,000 realized gains. There were unrealized gains pertaining
to prior year which were realized in 20A1 of P150,000.
• Costs and expenses comprised of 78% incurred under its RBU and 22% under its FCDU.
• Accounts written-off amounted to P2,800,000 under its RBU and P500,000 under its FCDU which were
approved by BSP in 20A1.
• Retirement expense pertains to accruals under PAS 19. There were no contributions to retirement plan.
Required:
1. Determine the RCIT liability of Matipid’s RBU for the year ended December 31, 20A1.
2. Determine the MCIT liability of Matipid’s RBU for the year ended December 31, 20A1.
3. Determine the income tax liability (other than final tax) of Matalino’s RBU for the year ended December
31, 20A1.
4. Determine the final tax liability of Matipid’s RBU for the year ended December 31, 20A1.
5. Determine the final tax liability of Matipid’s FCDU for the year ended December 31, 20A1.
6. Determine the final tax liability of Matipid’s depositors for the year ended December 31, 20A1.
Problem 10 – Taxation of resident foreign corporations; ROHQ; branch profit remittance
Banyaga Pte. Ltd. – Philippine Branch, is a branch of Spanish company engaged in manufacturing business. It
had financial income before tax of P2,880,000 for the year ended December 31, 20A1. The following were the
additional information related to its financial performance:
Net sales P7,000,000

Interest on bank deposit 100,000
Dividend from domestic corporation 80,000
Gain on sale of domestic bonds held as investment 120,000
Gain on sale of domestic shares (over the counter) 150,000
Cost of sales 2,400,000
Loss on sale of domestic bonds held as investment 150,000
Business expenses excluding head office allocated expenses 1,900,000
Head office allocated expenses 120,000

• Business expenses include interest expense of P120,000.
• Head office allocated expenses were properly supported by documents required under BIR rules.
• Banyaga remitted profits of P2,000,000 and paid P120,000 for allocated expenses to its head office in
20A1.
Required:
1. Determine the RCIT liability of Banyaga for the year ended December 31, 20A1.
2. Determine the MCIT liability of Banyaga for the year ended December 31, 20A1.
3. Determine the income tax liability of Banyaga for the year ended December 31, 20A1.
4. Assume that Banyaga is an ROHQ, determine its income tax liability for the year ended December 31,
20A1.
57
5. Determine the final tax on branch profit remittance and the net amount of remittance for the year ended
December 31, 20A1.
Source: Reyes (2006) modified.
Problem 11 – Taxation of international carriers
Himpapawid Airlines, Inc. is an international airline based in United Kingdom (UK). It operated flights from UK to
the Philippines and vice versa. Himpapawid derived the following revenues for the year ended December 31,
20A1:
a. Passenger revenues of P5,000,000 where tickets were sold in the Philippines. These pertain to direct
flights via Himpapawid from Manila to London and vice versa. Out of the said amount, P2,000,000
pertains to London-Manila flights.
b. Passenger revenues of P2,000,000 where tickets were sold abroad. These pertain to direct flights from
Manila to London and vice versa. Out of the said amount, P1,200,000 pertains to Manila-London flights.
c. Passenger revenues of P3,000,000 where 60% of the tickets were sold in the Philippines while 40%
were sold abroad. These pertain to flights from Manila to Paris with stopover in Taipei. Revenues
pertaining to Manila-Taipei leg amounted to P800,000.
d. Passenger revenues of P2,500,000 where 75% of the tickets were sold in the Philippines while 25%
were sold abroad. These pertain to flights from Paris to Manila with stopover in Taipei. Revenues
pertaining to Paris-Taipei leg amounted to P1,200,000 of which 60% were sold abroad.
e. Passenger revenues of P4,000,000 where 70% of the tickets were sold in the Philippines while 30%
were sold abroad. These pertain to flights from Manila to Athens via London. However, London-Athens
flights were via Lipad Airways. Revenues pertaining to said leg amounted to P850,000 in which 70%
were sold in the Philippines.
f. Passenger revenues of P3,200,000 where 65% of the tickets were sold in the Philippines while 35%
were sold abroad. These pertain to flights from Athens to Manila via London. However, Athens-London
flights were via Lipad Airways. Revenues pertaining to said leg amounted to P1,000,000 in which 65%
were sold in the Philippines.
g. Excess baggage revenues of P1,000,000 and cargo revenues of P1,550,000 for direct flights from
Manila to London.
h. Excess baggage revenues of P1,200,000 and cargo revenues of P1,650,000 for direct flights from
London to Manila.
i. Excess baggage revenues of P1,300,000 and cargo revenues of P1,750,000 for flights from Manila to
Paris via Taipei. Excess baggage revenues of P400,000 and cargo revenues of P350,000 pertain to
Manila-Taipei leg.
j. Excess baggage revenues of P1,400,000 and cargo revenues of P1,800,000 for flights from Paris to
Manila via Taipei. Excess baggage revenues of P350,000 and cargo revenues of P450,000 pertain to
Taipei-Manila leg.
k. Excess baggage revenues of P1,500,000 for flights from Manila to Athens via London. London-Athens
flights were via Lipad Airways. Revenues of P500,000 pertain to London-Athens leg.
l. Excess baggage revenues of P1,700,000 for flights from Athens to Manila via London. Athens-London
flights were via Lipad Airways. Revenues pertaining to said leg amounted to P650,000.
Required:
1. Determine the Gross Philippine Billings Tax of Himpapawid for the year ended December 31, 20A1,
assuming there is no reciprocity between the Philippines and United Kingdom with respect to taxation of
international carriers.
2. Determine the Gross Philippine Billings Tax of Himpapawid for the year ended December 31, 20A1,
assuming there is reciprocity between the Philippines and United Kingdom with respect to taxation of
international carriers.
Problem 12 – Improperly accumulated earnings tax
Magiliw Corporation is a domestic corporation and a wholly-owned subsidiary of Malambing Corporation,

another domestic corporation. Malambing is a family corporation which is owned Mr. and Mrs. Malambing and
kids.
Magiliw had the following financial information for the years ended December 31, 20A0 to 20A2:
20A0 20A1 20A2

Net sales P4,200,000 P8,000,000 P12,000,000
Cost of sales 1,200,000 3,200,000 4,500,000
58
Business expenses 800,000 1,000,000 1,500,000
Dividend from domestic corporation 200,000 420,000 500,000
Income subjected to 20% final tax, gross 150,000 250,000 300,000

• Magiliw paid dividend of P600,000 on April 1, 20A2 which came from 20A0 and 20A1 earnings for
P100,000 and P500,000 respectively.
• Magiliw also paid dividend of P1,500,000 on June 1, 20A3 coming from 20A2 earnings.
• Magiliw was incorporated on January 1, 20A0 with capital stock of P1,500,000 and additional paid in
capital of P1,200,000. There were no changes in these amounts from 20A0 to 20A2.
• Magiliw started its operations on January 1, 20A0.
Required:
1. Determine the improperly accumulated taxable earnings for the years ended December 31, 20A0, 20A1
and 20A2.
2. Determine the improperly accumulated earnings tax (IAET) for the years ended December 31, 20A0,
20A1 and 20A2.
3. Assume that Magiliw paid dividend of P1,200,000 on April 1, 20A2 (instead of P600,000) which came
from 20A0 and 20A1 earnings for P700,000 and P500,000 respectively, determine the improperly
accumulated taxable earnings and IAET for the years ended December 31, 20A0, 20A1 and 20A2.
4. Assume that Magiliw appropriated its retained earnings of P3,000,000 as of December 31, 20A1,
determine the improperly accumulated taxable earnings and IAET for the years ended December 31,
20A1 and 20A2.
59
H. Partnerships, estates and trusts, and joint ventures
Problem 1 – Taxation of partnership and individual partners; itemized deduction and OSD
Sumakwel and Makatunaw Partnership is a general professional partnership, with Mr. Sumakwel and Mr.
Makatunaw as partners. They share equally in the partnership net income and loss. The partnership had gross
revenues of P6,000,000, cost of services of P1,200,000 and business expenses of P800,000 for the year ended
December 31, 20A1. Mr. Sumakwel, who is single, had personal gross revenues of P800,000, cost of services
of P200,000 and business expenses of P100,000 during the same taxable year. Mr. Makatunaw, who is
married, with two qualified dependents, had personal gross revenues of P900,000, cost of services of P120,000
and business expenses of P80,000. Mr. Sumakwel and Mr. Makatunaw withdrew only 60% of their respective
share in the partnership income.
The Partnership and the partners adopted the itemized deduction in calculating their income tax liabilities.
Required:
1. Determine the income tax liability of the Partnership for the year ended December 31, 20A1.
2. Determine the income tax liability of Mr. Sumarkwel for the year ended December 31, 20A1.
3. Determine the income tax liability of Mr. Makatunaw for the year ended December 31, 20A1.
4. Assuming the Partnership and Mr. Sumakwel adopted the optional standard deduction (OSD),
determine the income tax liability of Mr. Sumakwel for the year ended December 31, 20A1.
5. Assuming the Partnership adopted the optional standard deduction (OSD) while Mr. Makatunaw
adopted the itemized deduction, determine the income tax liability of Mr. Makatunaw for the year ended
December 31, 20A1.
6. Assuming the Partnership is a business partnership, determine the income tax liability of the
Partnership for the year ended December 31, 20A1.
7. Assuming the Partnership is a business partnership, determine the income tax liability of Mr. Sumakwel
8. Assuming the Partnership is a business partnership, determine the income tax liability of Mr.
Makatunaw for the year ended December 31, 20A1.
Problem 2 – Taxation of partnership and individual partners; passive income
Sulayman and Indarafatra are partners in Sulayman and Indarafatra Partnership. The share in the profit and
loss using 60:40 ratio. The following information relates to the income and expenses of the partnership for each
of the quarters for the year ended December 31, 20A1:
First Quarter Second Quarter Third Quarter Fourth

Revenues P750,000 P800,000 P700,000 P900,000
Interest income 5,000 4,500 5,200 4,800
Dividend income 100,000 75,000
Rent income 50,000 50,000 50,000 50,000
Gain on sale of equipment 80,000 180,000
Cost of services 300,000 350,000 275,000 325,000

Various expenses 280,000 320,000 275,000 360,000

• Interest income were derived from bank deposits which were subjected to 20% final withholding tax.
• Dividend income received during the second quarter pertains to investment in domestic shares while
dividend income received during the fourth quarter pertains to investment in a non-resident foreign
corporation not doing business in the Philippines.
• Various expenses include the following:
• Fire loss P80,000 which was incurred during the fourth quarter. The partnership submitted the
required documentation requirements to the BIR within 30 days from the incurrence of the loss.
• Interest expense of P30,000 quarterly arising from bank loan.
• FWT on certain income items were recorded as part of various expenses.
The partnership adopted the itemized deduction for income tax purposes.
Required:
60
1. Assuming Sulayman and Indarafatra Partnership is a business partnership, determine its quarterly and
income tax liability (including FWT) for the year ended December 31, 20A1.
2. Assuming Sulayman and Indarafatra Partnership is a business partnership, determine the income tax
liability of the partners for the year ended December 31, 20A1.
3. Assuming Sulayman and Indarafatra Partnership is a general professional partnership, determine its
quarterly and annual income tax liability (including FWT) for the year ended December 31, 20A1.
4. Assuming Sulayman and Indarafatra Partnership is a general professional partnership, determine the
quarterly and annual income tax liability (including FWT) of the partners for the year ended December
31, 20A1.
Problem 3 – Taxation of estate and beneficiary
On February 1, 20A0, Mr. Bangkaya died living a net estate of P30,000,000. The estate was in the hands of
Mrs. Libay, the executor. Mrs. Dumangsil, married, was one of the heirs to the estate. The estate derived gross
revenues of P2,800,000, and incurred cost of services of P300,000 and expenses of P200,000 for the lease of
properties in the estate for the year ended December 31, 20A1. Mrs. Dumangsil had personal business where
she derived gross sales of P1,200,000, and incurred cost of sales of P700,000 and expenses of P250,000. Mrs.
Libay, distributed to Mrs. Dumangsil, properties amounting to P1,000,000 and income of P600,000.
All the taxpayers adopted the graduated income tax rates and the itemized deduction for income tax purposes.
Required:
1. Determine the income tax liability of the estate for the year ended December 31, 20A1.
2. Determine the income tax liability of Mrs. Dumangsil for the year ended December 31, 20A1.
3. Assuming the estate adopted the itemized deduction while Mrs. Dumangsil adopted the optional
standard deduction, determine the income tax liability of Mrs. Dumangsil for the year ended December
31, 20A1.
4. Assuming the estate adopted the optional standard deduction while Mrs. Dumangsil adopted the
itemized deduction, determine the income tax liability of the estate for the year ended December 31,
20A1.
5. Assuming the estate and Mrs. Dumangsil opted to avail the 8% income tax, determine the income tax
liability of the estate for the year ended December 31, 20A1.
6. Assuming the estate and Mrs. Dumangsil opted to avail the 8% income tax, determine the income tax
liability of Mrs. Dumangsil for the year ended December 31, 20A1.
Problem 4 – Taxation of trusts and beneficiary, same grantor and same beneficiary
Mr. Paiburong created two Trusts, Trust A and Trust B for his daughter, Kapinangan. He appointed Atty.
Katurong as trustee for Trust A, and Atty. Domalogdog, as trustee for Trust B. Trust A had gross revenues of
P780,000, and incurred cost of services of P150,000 and expenses of P100,000. Trust B, on the other hand,
had gross revenues of P890,000, and incurred cost of services of P225,000 and expenses P125,000 for the
year ended December 31, 20A1. There were distributions to Kapinangan coming from the two Trusts amounting
to P250,000 from Trust A and P200,000 from Trust B.
Both trusts adopted the graduated income tax rates and itemized deduction for purposes of calculating taxable
income.
Required:
1. Determine the individual income tax liability and allocated income tax liability after consolidation of Trust
A and Trust B for the year ended December 31, 20A1.
2. Determine the income tax liability of the beneficiary for the year ended December 31, 20A1. Will the
beneficiary be allowed to claim OSD? Explain.
3. Assuming the trusts adopted the optional standard deduction, determine the individual income tax
liability and allocated income tax liability after consolidation of Trust A and Trust B for the year ended
December 31, 20A1.
4. Assuming the trusts adopted the 8% income tax, determine the individual income tax liability and
allocated income tax liability after consolidation of Trust A and Trust B for the year ended December 31,
20A1.
5. Is the beneficiary allowed to adopt the 8% income tax? Explain.
61
Problem 5 – Taxation of trusts and beneficiary, income subject to final tax
Mrs. Aninipay created a trust for her daughter, Matimtiman, who is a minor. Mrs. Aninipay and her daughter are
resident citizens. Mrs. Aninipay appointed Atty. Humabon as the trustee. She transferred land and other
investments to the trust, which derived revenues and income, and incurred costs and expenses for the year
ended December 31, 20A1, as follows:
Rent revenues P1,750,000

Cost of services (rent) 300,000
Interest income on foreign currency bank deposit 25,000
Dividend income from investment in local shares 150,000
Dividend income from investment in foreign shares 400,000
Expenses 250,000
There was distribution of income to Matimtiman for the year ended December 31, 20A1 amounting to P620,000,
where P20,000 came from interest income, P100,000 from dividend income from investment in local shares,
P300,000 from dividend income from investment in foreign shares, and P200,000 from rentals. It was also
provided in the trust agreement that P100,000 of income from the lease of the land will be used for the payment
of the life insurance of Mrs. Aninipay.
Moreover, Mrs. Aninipay derived income and incurred expenses for the year ended December 31, 20A1 as
follows:
Compensation income P1,200,000

Gain from sale of residential land 3,000,000
Business activities:
Gross sales 300,000
Cost of sales 180,000
Expenses 70,000
• Her compensation income is already net of 13th month pay of P120,000 but gross of SSS, PhilHealth
and HDMF contribution of P65,000.
• The residential land was sold for P8,000,000 with fair market value of P10,000,000.
The taxpayers adopted the graduated income tax rates and optional standard deduction for income tax
purposes.
Required:
1. Determine the income tax liability (including FWT) of the trust for the year ended December 31, 20A1.
2. Determine the income tax liability of Matimtiman (including FWT) for the year ended December 31,
20A1.
3. Determine the income tax liability of Mrs. Aninipay (including FWT) for the year ended December 31,
20A1.
Problem 6 – Taxation of trusts and beneficiaries, same grantor, different beneficiaries
Mr. Dumalugdog created two trusts, Trust A and Trust B, for the benefit of her daughters, Salalila and Sarikula,
respectively. The following were the revenues, costs and expenses of the trusts for the year ended December
31, 20A1:
Trust A Trust B
Revenues P1,500,000 P1,800,000
Cost of services 250,000 400,000
Expenses 150,000 300,000
Trust A distributed income of P350,000 to Salalila while Trust B distributed income of P500,000 to Sarikula.
Trust A adopted the itemized deduction while Trust B adopted the optional standard deduction. Both trusts used
the graduated income tax rates.
62
Required:
1. Determine the income tax liability of Trust A and Trust B for the year ended December 31, 20A1.
2. Determine the income tax liability of the beneficiaries for the year ended December 31, 20A1.
3. Assuming Trust A was created by Mr. Dumalugdog and Trust B was created by Mrs. Dumalugdog for
their daughter Salalila, determine the income tax liability of Trust A and Trust B for the year ended
December 31, 20A1.
4. Assuming Trust A was created by Mr. Dumalugdog and Trust B was created by Mrs. Dumalugdog for
their daughter Salalila, determine the income tax liability of Salalila for the year ended December 31,
20A1.
Problem 7 – Tax-exempt co-ownership
Limahong and Balensucla, both single, inherited from their father a land and building. The building was being
held for lease which derived monthly rental income of P250,000. Their father’s estate is not under
administration. They wanted to keep the property in-tact and continuing the leasing business. Balensucla
managed the property and she was in-charge of collecting the related income.
All costs and expenses related to the preservation of the property and for continuing the leasing business were
taken from the rental generated from the property. Costs amounted to P400,000 while expenses amounted to
P200,000, for the year ended December 31, 20A1. Moreover, Limahong and Balensucla derived compensation
income as follows:
Limahong P1,500,000
Balensucla 1,250,000
The above compensation income were net of statutory contributions (SSS, PhilHealth and HDMF) and 13th
month pay of P132,000 for Limahong and P110,000 for Balensucla.
Required:
1. Determine the income tax liability of the co-ownership, if any, for the year ended December 31, 20A1.
2. Determine the income tax liability of Limahong and Balensucla for the year ended December 31, 20A1.
3. Assume the optional standard deduction is adopted, determine the income tax liability of Limahong and
Balensucla for the year ended December 31, 20A1.
Problem 8 – Taxable co-ownership
Colambu and Sikatuna, both single, inherited a large parcel of land from their mother. They invested
P5,000,000 each to further develop the land into a banana plantation. They generated sales, and incurred costs
and expenses for the year ended December 31, 20A1, as follows:
Sales P20,000,000
Expenses 1,500,000
Moreover, Colambu and Sikatuna derived compensation income as follows:
Colambu P750,000
Sikatuna 800,000
The above compensation income were net of statutory contributions (SSS, PhilHealth and HDMF) and 13 th
month pay of P65,000 for Colambu and P70,000 for Sikatuna. Sikatuna has a convenience store which derived
the sales, and incurred costs and expenses as follows:
Sales P2,000,000
Expenses 350,000
The co-ownership adopted the optional standard deduction. On the other hand, Sikatuna availed the 8% income
tax on business income.
63
Required:
1. Determine the income tax liability of the co-ownership, if any, for the year ended December 31, 20A1.
2. Determine the income tax liability of Colambu and Sikatuna for the year ended December 31, 20A1.
Problem 9 – Taxable joint venture
Kalantiaw Realty Development Corporation, is a real estate developer, entered into a joint venture agreement
with Mrs. Urduja, a resident citizen landowner. Under the agreement, Kalantiaw will construct house and lots
on the land owned by Mrs. Urduja. The house and lots will be sold where Kalantiaw will share 70% of the net
income of the joint venture while Mrs. Urduja will share 30% of the net income. However, the joint venture was
not incorporated but it was registered with the BIR for tax purposes.
The joint venture generated sales, and incurred costs and expenses for the year ended December 31, 20A1, as
follows:
Sales P120,000,000
Expenses 25,000,000
The above sales and cost of sales were recognized in accordance with the tax rules. Its expenses, however,
include impairment of receivables of P3,000,000 and pension expense of P2,000,000 which were recognized in
accordance with the accounting rules. It was ascertained that P1,200,000 of accounts receivables were
worthless and can no longer be collected. These were properly supported by documents to support their
worthlessness. Moreover, pension expense only pertains to accruals since the joint venture did not maintain
any retirement plan.
Required:
1. Determine the income tax liability of the joint venture, if any, for the year ended December 31, 20A1.
2. Determine the income tax liability of Kalantiaw and Mrs. Urduja from the joint venture transaction, if any,
Problem 10 – Tax-exempt joint venture
Lakandula Construction Corporation, a construction company, entered into a joint venture agreement with
another construction company, Lakambini Construction Company for the construction of condominium unit for
sale. Both companies and the joint venture organized were accredited by the Philippine Contractor’s
Accreditation Board (PCAB). Under the agreement, Lakandula and Lakambini will share equally in the
constructed condominium units, which they will sell independently. Moreover, they also share equally in the
expenses of the joint venture.
For the year ended December 31, 20A1, Lakandula and Lakambini sold condominium units as follows:
Lakandula P70,000,000
Lakambini 50,000,000
The above sales were determined using the tax rules with gross profit rate was 40%. Moreover, the joint
venture incurred P30,000,000 expenses.
Moreover, Lakandula and Lakambini generated revenues, and incurred costs and expenses for their respective
construction businesses as follows:
Lakandula Lakambini
Revenues P120,000,000 P100,000,000
Cost of services 70,000,000 65,000,000
Expenses 35,000,000 17,000,000
The above were determined using the tax rules.
Required:
1. Determine the income tax liability of the joint venture, if any, for the year ended December 31, 20A1.
2. Determine the income tax liability of Lakandula and Lakambini for the year ended December 31, 20A1.
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I. Accounting methods and periods
Problem 1 – Cash basis
Mr. Masagana, married, with three qualified dependents, is engaged in trading business. The following
information relates to his business for the year ended December 31, 20A1:
Sales on account P300,000

Cash sales during the year 400,000
Collections of 20A1 sales on account 175,000
Collections of 20A0 sales on account 250,000
Purchases on account 120,000
Cash purchases 100,000
Payments for 20A1 purchases on account 70,000
Payments for 20A0 purchases on account 50,000
Expenses on account 180,000
Cash expenses 130,000
Payments for 20A1 expenses on account 80,000
Payments for 20A0 expenses on account 60,000
Mr. Masagana adopted the cash basis of accounting for income tax purposes. In addition, he opted to use the
itemized deduction.
Required:
1. Determine Mr. Masagana’s taxable income for the year ended December 31, 20A1.
2. Determine Mr. Masagana’s income tax liability for the year ended December 31, 20A1.
3. Determine Mr. Masagana’s taxable income for the year ended December 31, 20A1 assuming he
adopted the optional standard deduction.
4. Determine Mr. Masagana’s income tax liability for the year ended December 31, 20A1 assuming he
Problem 2 – Hybrid method
Mrs. Masigasig with one qualified dependent, is engaged in trading and manufacturing businesses. The
following information relates to her businesses for the year ended December 31, 20A1:
Trading Manufacturing
Sales on account P350,000 P370,000
Cash sales during the year 400,000 350,000
Collections of 20A1 sales on account 180,000 150,000
Collections of 20A0 sales on account 220,000 120,000
Purchases on account 100,000 120,000
Cash purchases 90,000 100,000
Payments for 20A1 purchases on account 80,000 75,000
Payments for 20A0 purchases on account 75,000 80,000
Expenses on account 280,000 220,000
Cash expenses 170,000 175,000
Payments for 20A1 expenses on account 150,000 120,000
Payments for 20A0 expenses on account 120,000 100,000
Mrs. Masagana adopted the cash basis of accounting for her trading business and accrual basis of accounting
for her manufacturing business. In addition, she opted to use the itemized deductions. There were no beginning
and ending inventories.
Required:
1. Determine Mrs. Masigasig’s taxable income for the year ended December 31, 20A1.
2. Determine Mrs. Masigasig’s income tax liability for the year ended December 31, 20A1.
3. Determine Mrs. Masigasig’s taxable income for the year ended December 31, 20A1 assuming he
4. Determine Mrs. Masigasig’s income tax liability for the year ended December 31, 20A1 assuming he
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Problem 3 – Farming: cash or accrual method
Sakahan Corporation, an accrual method taxpayer, is engaged in agricultural business. Its profit and loss
statement prepared in accordance with PFRS as of December 31, 20A1 showed the following:
Revenues
Sale of livestock and farm products raised P26,000,000
Sale of livestock and farm products purchased 12,900,000
Fair value adjustment on agricultural produce 7,500,000
Service revenues 5,200,000
Other income
Gain on sale of breeding stocks 3,250,000
Gain on sale of equipment 650,000
Selling and administrative expenses 12,200,000
• The cost of sales consists of the following:
Cost of livestock and farm products raised P12,800,000

Cost of livestock and farm products purchased 5,350,000
Repairs and maintenance 800,000
Rentals 700,000
Others 250,000
• The cost of livestock and farm products raised includes cost of raw materials, feeds and feed
ingredients, and direct labor costs. It also includes fair value of agricultural produce of P2,150,000.
• The depreciation and amortization includes amortization of breeding stocks of P2,250,000.
• The accounts receivable balances and unearned revenues as of December 31, 20A0 and 20A1 are as
follows:
December 31, 20A0 December 31, 20A1

Accounts receivables
Sale of livestock and farm products raised P2,700,000 P2,900,000
Sale of livestock and farm products purchased 1,250,000 1,520,000
Service revenues 480,000 575,000
Unearned service revenues 350,000 460,000
• The accounts payable as of December 31, 20A0 and 20A1 are as follows:
December 31, 20A0 December 31, 20A1

Raw materials, feeds and feed ingredients P1,200,000 P1,500,000
Labor 250,000 320,000
Livestock and farm products purchased 350,000 530,000
Other cost of sales 2,100,000 2,250,000
Selling and administrative expenses 1,500,000 1,750,000
• The acquisition costs of breeding stocks were amortized over their estimated productive lives. The
breeding stocks sold have book value of P3,500,000. These were acquired for P5,000,000.
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• The breeding stocks and equipment were sold for cash.
Required:
1. Determine Sakahan’s taxable income for the year ended December 31, 20A1.
2. Determine Sakahan’s income tax liability for the year ended December 31, 20A1.
3. Assuming Sakahan treats the breeding stock as inventory for tax purposes, determine Sakahan’s
taxable income for the year ended December 31, 20A1.
4. Assuming Sakahan treats the breeding stock as inventory for tax purposes, determine Sakahan’s
5. Assuming Sakahan adopts the cash basis of accounting for tax purposes, determine Sakahan’s taxable
income for the year ended December 31, 20A1.
6. Assuming Sakahan adopts the cash basis of accounting for tax purposes, determine Sakahan’s income
tax liability for the year ended December 31, 20A1.
7. Assuming Sakahan adopts the cash basis of accounting and treats breeding stock as inventory for tax
purposes, determine Sakahan’s taxable income for the year ended December 31, 20A1.
8. Assuming Sakahan adopts the cash basis of accounting and treats breeding stock as inventory for tax
purposes, determine Sakahan’s income tax liability for the year ended December 31, 20A1.
Problem 4 – Real property: Deferred payment basis, installment method
Dalaga Corporation, a real estate dealer, sold the following condominium units for the year ended December
31, 20A1:d
a. March 1, 20A1 – Unit A for P2,500,000 with cost of P1,000,000, downpayment of P100,000 and the
balance was payable monthly for P100,000 beginning April 1, 20A1 for 24 months.
b. July 1, 20A1 – Unit B for P3,200,000 with cost of P1,200,000, downpayment of P200,000 and the
balance was payable monthly for P125,000 beginning August 1, 20A1 for 24 months.
c. September 1, 20A1 – Unit C for P4,000,000 with cost of P1,800,000, downpayment of P250,000 and
the balance was payable monthly for P150,000 beginning October 1, 20A1 for 25 months.
d. November 1, 20A1 – Land D for P1,250,000 to be paid by an assumption by the buyer of P600,000
mortgage, downpayment of P130,000 and monthly installment payments of P20,000 every month
starting December 1, 20A1 for 26 months. Land had acquisition cost of P500,000.
e. December 1, 20A1 – Land E for P1,000,000 to be paid by an assumption of the buyer of P400,000
mortgage, downpayment of P250,000 and monthly installment payments of P10,000 every month
starting December 31, 20A1 for 35 months. Land had acquisition cost of P480,000.
Dalaga had deductible expenses of P1,200,000 during the taxable year. It opted to use the installment method
of accounting for qualifying sales transactions and itemized deduction. It was incorporated and registered with
the BIR five years ago.
Required:
1. Determine Dalaga’s taxable income for the year ended December 31, 20A1.
2. Determine Dalaga’s income tax liability for the year ended December 31, 20A1.
3. Determine Dalaga’s taxable income for the year ended December 31, 20A1 assuming it adopted the
deferred payment basis on all sales transactions.
4. Determine Dalaga’s income tax liability for the year ended December 31, 20A1 assuming it adopted the
deferred payment basis on all sales transactions.
Problem 5 – Dealer of personal property: Deferred payment; installment method
Binata Corporation, a car dealer, made the following sales transactions for the year ended December 31, 20A1:
Car A Car B Car C Car D Car E

Date of sale February 1 April 1 June 1 September 1 December 1
Selling price P1,200,000 P1,500,000 P1,700,000 P1,800,000 P2,000,000
Cost 400,000 600,000 750,000 800,000 1,100,000
Downpayment 200,000 300,000 500,000 300,000 500,000
Monthly
installment 20,000 20,000 20,000 30,000 30,000
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The monthly installments were paid starting from the subsequent month of sale until fully paid. Binata had
deductible expense of P500,000 during the taxable year. It adopted the installment method in computing its
taxable income. Moreover, Binata was registered with the BIR on December 1, 20A0.
Required:
1. Determine Binata’s taxable income for the year ended December 31, 20A1.
2. Determine Binata’s income tax liability for the year ended December 31, 20A1.
3. Determine Binata’s taxable income for the year ended December 31, 20A1 assuming it adopted the
deferred payment method.
4. Determine Binata’s income tax liability for the year ended December 31, 20A1 assuming it adopted the
deferred payment method.
Problem 6 – Construction, percentage of completion
Kanluran Construction Company entered into a fixed-price contract with Silangan Company on July 1, 20A1 to
construct a four-story office building. At this time, Kanluran estimated that it would take between two to three
years to complete the project. The total contract price for the construction of the building was P6,000,000. The
building was completed on December 31, 20A3. The following information relates to the project as of December
31, 20A1 to 20A3:
20A1 20A2 20A3

Percentage of completion 10% 60% 100%
Costs incurred to date P350,000 P2,500,000 P4,250,000
Estimated costs to complete 3,150,000 1,700,000 -0-
Billings to Silangan, to date 720,000 2,170,000 3,600,000
The percentage of completion was determined by Kanluran’s engineers. Kanluran incurred operating expenses
of P350,000 in 20A1, P400,000 in 20A2 and P450,000 in 20A3. These operating expenses were tax
deductible.
Kanluran was incorporated and registered with the BIR seven years ago.
Required:
1. Determine Kanluran’s taxable income for the years ended December 31, 20A1, 20A2 and 20A3.
2. Determine Kanluran’s income tax liability for the years ended December 31, 20A1, 20A2 and 20A3.
Problem 7 – Inventory method, change in accounting method
Hilaga Company’s inventory records contained the following information regarding its inventories for the years
ended December 31, 20A1 and 20A2:
January 1, 20A1 600 units at P80 each

Purchases
March 15, 20A1 1,000 units at P95 each
June 1, 20A1 800 units at P100 each
December 31, 20A1 200 units at P105 each
Sales
February 1, 20A1 400 units at P120 each
July 1, 20A1 800 units at P130 each
Purchases
March 31, 20A2 900 units at P110 each
May 31, 20A2 800 units at P115 each
October 31, 20A2 700 units at P120 each
Sales
March 1, 20A2 700 units at P140 each
June 30, 20A2 1,000 units at P145 each
Hilaga adopted the FIFO method in accounting for its inventories for income tax purposes. However, starting
January 1, 20A2, it adopted the moving average method in accounting for its inventories. Moreover, it adopted
the optional standard deduction for purposes of calculating its taxable income for both taxable years.
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Hilaga was registered with the BIR on January 1, 20A0.
Required:
1. Determine Hilaga’s taxable income for the year ended December 31, 20A1.
2. Determine Hilaga’s income tax liability for the year ended December 31, 20A1.
3. Determine Hilaga’s taxable income for the year ended December 31, 20A2.
4. Determine Hilaga’s income tax liability for the year ended December 31, 20A2.
Problem 8 – Accounting periods: Calendar or fiscal year, excess MCIT over RCIT, NOLCO
Tatak Corporation had the following information for the year ended December 31, 20A3:
Net sales P5,000,000

Deductions 3,000,000
It had excess MCIT over RCIT and NOLCO as follows:
Excess MCIT NOLCO

December 31, 20A0 P30,000 P250,000
December 31, 20A1 20,000 350,000
December 31, 20A2 10,000 -0-
Starting 20A4, it changed its accounting period to March 31. It had the following information for the periods
ended March 31, 20A4 and 20A5:
20A4 20A5
Net sales P1,000,000 P7,000,000
Cost of sales 300,000 2,500,000
Deductions 400,000 1,000,000
Required:
1. Determine the Tatak’s RCIT for the periods ended December 31, 20A3, March 31, 20A4 and 20A5.
2. Determine the Tatak’s MCIT for the periods ended December 31, 20A3, March 31, 20A4 and 20A5.
3. Determine the Tatak’s income tax liability for the periods ended December 31, 20A3, March 31, 20A4
and 20A5.
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J. Expanded withholding tax
Problem 1 – Timing of withholding, top withholding agent, expanded withholding tax
Takip-silim, Inc., a top withholding agent, had the following income payments for the year ended December 31,
20A1:
a. Purchased of goods for P500,000 on January 15, 20A1 payable within 30 days but with 5% discount is
paid within 15 days. Takip-silim paid the purchase price on March 15, 20A1.
b. Availed repair services for P400,000 on March 1, 20A1 payable within 60 days. Takip-silim paid the
contractor on April 15, 20A1.
c. Leased office space starting April 1, 20A1 for one-year for P100,000 monthly. Paid advance rentals of
P500,000 on said date to be applied against rentals for the last five months. Monthly rental payments
were due within 30 days from the beginning of the month. Monthly rentals were paid as follows:
Month Date paid

April April 15
May June 15
June July 15
July July 30
August August 30
September September 30
October October 15
d. Availed the services of security agency for P55,000 monthly, inclusive of P5,000 agency fee and
P50,000 salaries of the guards. These were due and paid at the end of the month.
e. Availed the services of janitorial agency for P22,000 monthly, inclusive of P2,000 agency fee and
P20,000 salaries of the janitors. These were due at the end of the month. Payments were made at the
end of the month except for December 20A1 which was paid January 5, 20A2.
Takip-silim adopts the calendar year accounting period.
Required:
1. Determine the timing of withholding of EWT on income payments of Takip-silim for the year ended
December 31, 20A1.
2. Determine the amount of monthly and quarterly EWT liability of Takip-silim for the year ended
December 31, 20A1.
3. Determine the deadline for filing of the monthly payment forms and quarterly EWT returns, and
remittance of the related tax for the year ended December 31, 20A1.
4. Determine the amount of amount of EWT liability of Takip-silim for the year ended December 31, 20A1,
assuming it files its tax returns and pays its taxes manually.
Problem 2 – Rental payments: real property, personal property and billboard
Napagtanto Corporation had the following lease transactions:
a. On January 1, 20A1, Napagtanto entered into a lease agreement for the lease of land from Sapantaha
Corporation. The terms of the lease are as follows:
Lease term 2 years
rental payments. The advance rentals pertain to the first five months of the lease. Subsequently,
Napagtanto paid P2,000,000 monthly rental at the beginning of each month. In addition, Sapantaha
charged Napagtanto real property tax (RPT) for the land of P500,000. The RPT for the initial year was
paid on January 1, 20A1, which is its due date for payment to Sapantaha, while it is payable January 1,
20A2 for the second year.
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On November 1, 20A1, Napagtanto advised Sapantaha that the lease will be pre-terminated effective
December 1, 20A1. A portion of the security deposit was applied as rental payment for the month of
November while the balance was refunded.
b. On May 1, 20A1, Napagtanto leased a billboard for P3,000 monthly for three months. However, the
lease agreement was extended for another three months when it expired on July 31, 20A1. The rentals
were paid in advance at the commencement of the lease and its renewal.
c. On September 1, 20A1, Napagtanto leased an office equipment for P3,500 monthly for two months.
However, the lease agreement was extended for six months after its expiration on October 31, 20A1.
The rentals were due at the beginning of each month, which were actually paid on time.
Required: Determine the amount of monthly and quarterly EWT liability of Napagtanto for the year ended
December 31, 20A1.
Problem 3 – EWT on reimbursements
On March 1, 20A1, Kagandahan Company availed the brokerage services of Liwanag Brokerage Corporation.
Liwanag billed Kagandahan the following (exclusive of VAT):
Brokerage fees P5,000

Customs processing fee 2,000
Trucking and delivery charges 4,000
Warehouse rentals 3,500
Duties and taxes 25,000

• The trucking and delivery charges were paid in advance by Liwanag to Kargador Trucking Company on
March 15, 20A1. Kargador issued VAT official receipt (OR) in the name of Kagandahan.
• The warehouse rentals were paid in advance by Liwanag to Kapaligiran Company on March 20, 20A1.
Kapagiliran issued VAT OR in the name of Liwanag.
• The customs processing fees, and duties and taxes were paid in advance by Liwanag to the Bureau of
Customs (BOC) on March 25, 20A1. BOC issued official receipts in the name of Kagandahan.
• Liwanag issued non-VAT acknowledgement receipt for trucking and delivery charges, customs
processing fee, and customs duties and taxes in the name of Kagandahan.
• Liwanag issued VAT OR in the name of Kagandahan for the brokerage fees and warehouse rentals.
• Kagandahan paid Liwanag on April 5, 20A1.
It is expected that the gross income of Liwanag for 20A1 will exceed P720,000.
Required:
1. Determine the EWT liability of Kagandahan for the above transaction.
2. Determine the EWT liability of Liwanag for the above transaction.
3. Assuming the gross income of Liwanag is expected not to exceed P720,000 for 20A1 and it was able to
provide Kagandahan the required sworn declaration, determine the EWT liability of Kagandahan for the
above transaction.
Problem 4 – Income payments to security and advertising agencies, and media supplier
Pahimakas Corporation availed the following services for the year ended December 31, 20A1:
a. Security services of Abaniko Security Services Corporation from January 1, 20A1 to June 30, 20A1,
where it was required to pay the following every end of the month:

Agency fee 30,000
Total P 330,000
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The above were paid on-time except for the month of March which was paid on April 5, 20A1.
Moreover, Abaniko issued VAT ORs for the entire amount collected (both the salaries of the security
guards and agency fees) from Pahimakas.
b. Security services of Awanggan Security Services Corporation from July 1, 20A1 to June 30, 20A2,
where it was required to pay the following every end of the month:

Agency fee 27,500
Total P 302,500
The above were paid on-time. Moreover, Awanggan issued VAT ORs for the agency fees and non-VAT
acknowledgment receipt for the salaries of the security guards. Awanggan also provided Pahimakas a
notarized certification that the salaries of the security guards were subjected to withholding tax on
wages, if applicable.
c. Services of Anakula Advertising Services, Inc. for broadcast media. This was availed on June 25, 20A1
for P1,000,000 where the advertisement will be aired through Bandahali Broadcasting Company. The
income payment was due on June 30, 20A1 but Pahimakas paid the entire amount to Anakula on July
15, 20A1 after the advertisement was initially aired. Anakula issued VAT ORs for the 15% of the income
payment and non-VAT acknowledgment receipt for the remaining 85%. The 85% portion was also
supported by VAT OR issued by Bandahali in the name of Pahimakas.
Required: Determine the amount of monthly and quarterly EWT liability of Pahimakas for the year ended
December 31, 20A1.
Problem 5 – EWT on real estate sales
Patintero Corporation, a real estate developer, sold the following condominium units for the year ended
December 31, 20A1:
a. March 1, 20A1 – Sold Unit A to Katuwa Corporation for P2,500,000 with cost of P1,000,000,
downpayment of P100,000 and the balance was payable monthly for P100,000 beginning April 1, 20A1
for 24 months.
b. July 1, 20A1 – Sold Unit B to Mr. Karpintero for P3,200,000 with cost of P1,200,000, downpayment of
P200,000 and the balance was payable monthly for P125,000 beginning August 1, 20A1 for 24 months.
c. September 1, 20A1 – Sold Unit C to Kapitan Corporation for P4,000,000 with cost of P1,800,000,
downpayment of P250,000 and the balance was payable monthly for P150,000 beginning October 1,
20A1 for 25 months.
d. November 1, 20A1 – Sold land to Mrs. Dyesebel for P1,250,000 with cost of P500,000, dowpayment of
P250,000 and monthly installment payments of P20,000 every month starting December 1, 20A1 for 50
months.
Required: Determine the monthly and quarterly EWT on the above sales transaction for the year ended
December 31, 20A1.
Problem 6 – Professionals, individuals, corporations, lone payor
Sambunot Corporation made the following income payments for the last six-months of the year ended
December 31, 20A1:
a. Availed the legal services of Atty. Calahoyo for the month of July, 20A1. On July 31, 20A1, Atty.
Calahoyo billed Sambunot P100,000 for said services. Sambunot paid the legal fees on August 31,
20A1. Atty. Calahoyo provided a sworn declaration that his gross receipts will not exceed P3,000,000
for the year ended December 31, 20A1 and Certificate of Registration.
b. Retained the medical services of Dr. Pityaw for its employees for P50,000 monthly. Dr. Pityaw billed her
services for the quarter ended September 30, 20A1 on September 15, 20A1. Sambunot paid the fees
on October 15, 20A1. She also billed her services for the quarter ended December 31, 20A1 on
December 1, 20A1 and these were paid on December 28, 20A1.
c. Availed the management consultancy services of Lusalos Corporation, its parent company, for
P250,000 monthly. Sambunot received billings from Lusalos for the quarter ended September 30, 20A1
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on October 15, 20A1. It paid said fees on November 25, 20A1. Lusalos billed consultancy services for
the quarter ended December 31, 20A1 on December 30, 20A1 and these were paid on January 25,
20A2.
d. Hired Mr. Syato and Mr. Hwego as janitors for six months from July to December 20A1. Monthly service
fee amounted to P8,000 each which were paid every end of the month. Mr. Syato solely received his
income for the year 20A1 from Sambunot. Mr. Syato submitted the required sworn declaration that his
annual gross receipts will not exceed P250,000 and Certificate of Registration to Sambunot. However,
Mr. Hwego also received income from other firms during 20A1. He submitted, though, a sworn
declaration that his annual gross receipts will not exceed P3,000,000 and Certificate of Registration.
e. Availed the bookkeeping and related services of Declan Ruki Corporation for P50,000 monthly. Out of
the P50,000 monthly fee, P10,000 pertains to handling services (receiving and keeping of documents).
Declan Ruki billed Sambunot monthly every end of the month and these were paid after 15 days.
Sambunot was not notified by the BIR as top withholding agent. Moreover, it accrued its expenses monthly
even if these are not yet billed by its suppliers.
Required: Determine the monthly and quarterly EWT of Sambunot on the above transactions for the last six
months of the year ended December 31, 20A1.
Problem 7 – Income payments to doctors and hospitals
Kaulayaw Corporation availed the hospital and medical services of Pagamutan Medical Center, a non-stock,
non-profit charitable institution, for its employees. The proceeds collected by Pagamutan from paying patients
were used solely for servicing its indigent patients.
Kaulayaw made the following income payments to Pagamutan for the year ended December 31, 20A1:
First quarter Second quarter Third quarter Fourth quarter

Hospital services P 250,000 P 200,000 P 300,000 P 350,000
Doctors’ fees 100,000 75,000 80,000 175,000
Total P 350,000 P 275,000 P 380,000 P 525,000
Pagamutan paid the professional fees of the doctors in the subsequent month after the payments were received
from Kaulayaw. These doctors’ fees were not recorded and accrued as expense in the books of Pagamutan.
These were recorded as expense by Kaulayaw.
Sixty percent (60%) of the doctors who received professional fees from Pagamutan for medical services
rendered to Kaulayaw have annual gross receipts of less than P3,000,000 as evidenced by sworn declaration
which were submitted on-time. The remaining doctors have annual gross receipts of more than P3,000,000.
Required:
1. Determine the monthly and quarterly EWT of Kaulayaw on the above transactions for the year ended
December 31, 20A1.
2. Determine the monthly and quarterly EWT of Pagamutan on the above transactions for the year ended
December 31, 20A1.
3. Assuming Pagamutan is not a non-stock, non-profit charitable institution but a hospital paying the
regular corporate income tax, and Kaulayaw is a top withholding agent, determine the monthly and
quarterly EWT of Kaulayaw on the above transactions for the year ended December 31, 20A1.
Problem 8 – Interest on debt instruments and credit card purchases
Salipapaw Corporation, a top withholding agent, had the following transactions for the year ended December
31, 20A1:
a. On January 1, 20A1, it obtained a two-year P10,000,000 loan from its affiliate bearing 6% interest. The
interest was payable on the 5th day following the end of each quarter. Salipapaw did not pay any
interest during the year.
b. On July 1, 20A1, it obtained a five-year loan P50,000,000 loan from Basisig Commercial Bank bearing
9% interest. The interest was payable at the end of each month, which was actually paid on-time since
it was debited from Salipapaw’s bank account.
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c. Purchases of office supplies from Bilnuran Supplies, Inc. for P200,000 for the first quarter, P250,000 for
the second quarter, P300,000 for the third quarter and P180,000 for the fourth quarter. These were paid
two days before the end of each quarter using Salipapaw’s corporate credit card issued by Basisig.
d. Car rentals with driver from Kapnayan Car Rental Corporation for P100,000 monthly which were paid
two days before the end of each month using the personal credit card of its President issued by Basisig.
With respect to credit card purchases, Basisig made income payments to the merchants the next day from the
date of the transaction.
Required:
1. Determine the monthly and quarterly EWT of Salipapaw on the above transactions for the year ended
December 31, 20A1.
2. Assuming Salipapaw is not a top withholding agent, determine its monthly and quarterly EWT on the
above transactions for the year ended December 31, 20A1.
3. Determine the monthly and quarterly EWT of Basisig on the above transactions for the year ended
December 31, 20A1. Assume that Basisig paid the merchants the subsequent month when the charges
were made through the credit cards.
Problem 9 – Income payments to beneficiaries of trusts and partners of GPP
The following are independent situations:
a. Mrs. Aninipay created a trust for her daughter, Matimtiman, who is a minor. Mrs. Aninipay and her daughter
are resident citizens. Mrs. Aninipay appointed Atty. Humabon as the trustee. She transferred land and
other investments to the trust, which derived revenues and income, and incurred costs and expenses for
the year ended December 31, 20A1, as follows:
Rent revenues P1,750,000

Cost of services (rent) 300,000
Interest income on foreign currency bank deposit 25,000
Dividend income from investment in local shares 150,000
Dividend income from investment in foreign shares 400,000
Expenses 250,000
There was distribution of income to Matimtiman for the year ended December 31, 20A1 amounting to
P620,000, where P20,000 came from interest income, P100,000 from dividend income from investment in
local shares, P300,000 from dividend income from investment in foreign shares, and P200,000 from rentals.
b. Sumakwel and Makatunaw Partnership is a general professional partnership, with Mr. Sumakwel and Mr.
Makatunaw as partners. They share equally in the partnership net income and loss. The partnership had
gross revenues of P6,000,000, cost of services of P1,200,000 and business expenses of P800,000 for the
year ended December 31, 20A1. The partnership also earned interest on local bank deposit of P100,000.
Each partner made monthly drawings of P80,000. At the end of the year, they made final drawings so that
their annual withdrawals amount to 60% of their respective share in the partnership income. The
Partnership and the partners adopted the itemized deduction in calculating their income tax liabilities.
The gross income of Sumakwel and Makatunaw were expected to exceed P720,000 during the year.
Required: Determine the monthly and quarterly EWT on the above transactions for the year ended December
31, 20A1. Determine the withholding agent.
Problem 10 – Various income payments: Taxable and exempt from EWT
Dagisikan Supermarket Corporation had the following transactions for the year ended December 31, 20A1:
a. Director’s fees paid to Mr. Dagsin for P200,000 plus allowance of P20,000. Mr. Dagsin is not an employee
of Dagisikan. His annual gross receipts were expected to exceed P3,000,000.
b. Director’s fees paid to Mrs. Damikay for P150,000 plus P15,000 allowance. Mrs. Damikay is an employee of
Dagisikan. Her annual gross receipts were not expected to exceed P3,000,000.
c. Purchases of electronic supplies for P1,000,000, from Gitisig Electronics Corporation, an entity registered
with the Board of Investments (BOI), currently enjoys income tax holiday (ITH).
74
d. Purchases of agricultural products for P350,000, from Agrikultura Cooperative, a cooperative registered
with the Cooperative Development Authority (CDA).
e. Purchases of agricultural products for P250,000 from Mr. Sakahan.
f. Purchases of agricultural products for P520,000 from Mrs. Kabukiran.
g. Tuition fees paid to Hayhayan University, a non-stock, non-profit educational institution, for P800,000
representing the tuition fees of its employees taking master’s degree courses.
Dagisikan was not notified by the BIR as top withholding agent.
Required:
1. Determine the EWT liability of Dagisikan on the above transactions for the year ended December 31,
20A1.
2. Assuming Dagisikan was notified as a top withholding agent by the BIR, determine its EWT liability on
the above transactions for the year ended December 31, 20A1.
75
K. Taxation of entities enjoying special tax incentives
Problem 1 – Income tax holiday; commencement
Laruan Manufacturing Company is engaged in the manufacture of toys for export. It was incorporated and
registered with the BIR in December 20A0. It registered with the Board of Investments (BOI) and enjoyed
income tax holiday (ITH) incentive. Its ITH incentive commenced on May 1, 20A1, which is the start of its
commercial operations.
The following information relates to its operations for the year ended December 31, 20A1:
January 1 to May 1 to
April 30 December 31
Sales P100,000 P8,000,000
Interest income 20,000 100,000
Scrap sales 300,000
Gain on sale of fixed assets 1,250,000
Foreign exchange gain 60,000 420,000
Cost of sales 20,000 3,200,000

Interest expense 400,000 600,000
Salaries and bonuses 300,000 2,500,000
Depreciation 400,000 1,600,000
Pension expense 300,000 600,000
Other business expenses 30,000 65,000
Foreign exchange loss 50,000 330,000

• Interest income pertains to interest subjected to 20% FWT. The amount recorded was gross of tax.
• Scrap sales pertain to sale of scraps which have undergone production of P200,000 while the balance
pertains to scrap raw materials sold.
• Gain on sale of fixed assets pertains to gain from sale of equipment.
• Foreign exchange gain pertains to realized and unrealized gains. Out of the total amount, 30% of the
gain from May to December 31, 20A1 was not realized yet. The balance was already realized during the
year. These pertain to trade transactions.
• Interest expense pertains to interest on loans used in connection with Laruan’s trade or business.
• Pension expense pertains to accrual of pension obligation based on PAS 19.
• Foreign exchange loss pertains to realized and unrealized losses. Out of the total amount, 20% of the
loss from May to December 31, 20A1 was not realized yet. The balance was already realized during the
year. These pertain to trade transactions.
Required:
1. Determine the taxable income subject to income tax for the year ended December 31, 20A1.
2. Determine the taxable income covered by ITH for the year ended December 31, 20A1.
3. Determine the income tax liability for the year ended December 31, 20A1.
4. Determine the income tax savings related to its ITH for the year ended December 31, 20A1.
Problem 2 – Expiration of income tax holiday
Kapistahan Company is engaged in the manufacture of electronic items for export. It registered with the BOI
and enjoyed income tax holiday (ITH) incentive for 6 years. Its ITH incentive expired on September 30, 20A1.
January 1 to October 1 to
September 30 December 31
Sales P12,000,000 P5,000,000
Interest income 100,000 70,000
Dividend income 1,000,000
Scrap sales 400,000 200,000
Gain on sale of fixed assets 350,000 250,000
76
Foreign exchange gain 450,000 320,000
Cost of sales 4,000,000 1,500,000

Interest expense 700,000 300,000
Salaries and bonuses 3,900,000 1,800,000
Depreciation 1,800,000 600,000
Impairment loss 1,000,000
Provision for doubtful accounts 800,000
Pension expense 750,000 250,000
Other business expenses 230,000 85,000

• Interest income pertains to interest subjected to 20% FWT. The amount recorded was net of tax.
• Scrap sales pertain to sale of scraps which have undergone production of P300,000 for those sold until
September 30 and P120,000 for those sold after said date. The balance pertains to scrap raw materials
sold.
• Gain on sale of fixed assets pertains to gain from sale of equipment.
• Foreign exchange gain pertains to realized and unrealized gains from trade transactions. Out of the
total amount, 35% of the gain from January to December 31, 20A1 was not realized yet.
• Interest expense pertains to interest on loans used in connection with Kapistahan’s trade or business.
• Pension expense pertains to accrual of pension obligation based on PAS 19. Contributions during the
year pertaining to normal cost amounted to P1,200,000. Proportionate amount based on number of
months pertains to ITH.
• Accounts written-off during the year amounted to P500,000. These pertain to receivables during ITH
period.
Required:
Problem 3 – Multiple registrations; expansion
Balsa Company, Inc., a manufacturer of motor vehicle, is an entity registered with the BOI. It had two registered
activities. One activity pertains to a new product line while the other activity pertains to expansion of its old
product line. These activities enjoyed ITH for the year ended December 31, 20A1. Balsa was registered with the
BIR eight years ago.
The following information relates to these activities:
New product Old product

Sales P12,000,000 P20,000,000
Cost of sales 4,000,000 3,000,000
Deductions 2,000,000 16,000,000
Balsa produced 1,200 units of its new products and 20,000 units of old products. Its base figure for its
expansion project was 15,000 units with sales value of P14,000,000. The registered products were
homogeneous products.
Required:
Problem 4 – 5% gross income tax
Kasibulan Company, Inc. is engaged in the manufacture of automotive wiring harness for export. It registered
with the Philippine Economic Zone Authority (PEZA) a few years ago and its ITH expired on September 30,
20A0. Hence, it was subject to 5% gross income tax (GIT) starting October 1, 20A0.
77
Sales P15,000,000
Interest income on loans 100,000
Interest income on bank deposit 50,000
Dividend income 250,000
Scrap sales 750,000
Gain on sale of fixed assets 1,000,000
Foreign exchange gain 600,000
Cost of sales
Raw materials 1,200,000
Indirect materials 500,000
Salaries and wages 1,500,000
Depreciation 1,000,000
Royalty fees 450,000
Subcontractor’s fees 800,000
Rentals 650,000
Training 225,000
Operating expenses
Supplies 300,000
Salaries and wages 420,000
Depreciation 375,000
Utilities 220,000
Rentals 180,000
Janitorial 160,000
Security 210,000
Interest 580,000
Doubtful accounts 300,000
Impairment loss 250,000

• Scrap sales pertain to 25% raw materials and 75% work-in-process.
• Dividend income pertains to dividend from a domestic corporation.
• Gain on sale of fixed assets pertain to obsolete equipment no longer used in production.
• Foreign exchange gain pertains to unrealized gains relating to loans (60%) and trade receivables
(40%). Kasibulan realized gains of P500,000 during the year where 65% pertains to loans and 35%
pertains to trade receivables.
• Cost of sales pertain to expenses incurred by Kasibulan’s production department.
• Pension expense recorded pertains to accruals under PAS 19. Contributions equivalent to normal cost
amounted to P500,000 where 80% pertains to production and 20% to administration.
• Interest expense pertains to interest on loans obtained to finance the construction of its factory.
Kasibulan claimed 50% of the training expenses as credit against its GIT liability.
Required:
1. Determine Kasibulan’s gross income subject to 5% GIT for the year ended December 31, 20A1.
2. Determine Kasibulan’s 5% GIT for the year ended December 31, 20A1.
3. Determine Kasibulan’s taxable income subject to 30% RCIT for the year ended December 31, 20A1.
4. Determine Kasibulan’s RCIT and MCIT for the year ended December 31, 20A1.
5. Determine Kasibulan’s tax liability payable to the BIR for the year ended December 31, 20A1.
6. Determine Kasibulan’s tax liability payable to the LGU for the year ended December 31, 20A1.
7. Determine Kasibulan’s tax savings for the year ended December 31, 20A1.
Problem 5 – Multiple registrations: 5% GIT, ITH and regular tax
78
Kalinisan Manufacturing Company, Inc. is engaged in the manufacture of various optical products with two
product lines and warehousing business. These activities were separately registered with PEZA. The following
are the details of its registrations:
Product Line A Product Line B Warehousing

Expiration of ITH January 1, 20A0 June 30, 20A3 None
Type of registration New, Non-pioneer New, Non-pioneer Not applicable
Tax regime ITH, 5% GIT ITH, 5% GIT 30% RCIT/2% MCIT
Kalinisan was registered with the BIR five years ago.
The following information relates to Kalinisan’s operations for the year ended December 31, 20A1:
Product Line A Product Line B Warehousing

Sales/Revenues P10,000,000 P12,000,000 P3,000,000
Direct costs/Cost of services 6,000,000 6,800,000 800,000
Operating expenses 2,000,000 3,000,000 280,000

• Direct costs include provision for inventory obsolescence of P200,000 for Product Line A and P280,000
for Product Line B.
• Direct costs include depreciation of P800,000 for Product Line A and P1,000,000 for Product Line B
related to impaired assets. Tax depreciation amounted to P900,000 for Product Line A and P1,200,000
for Product Line B.
• Operating expenses include provision for doubtful accounts of P225,000 for Product Line A and
P250,000 for Product Line B, and provision for potential litigation losses of P350,000 relating to Product
Line B.
• Revenues from warehousing activities include revenues collected in advance and subjected to income
tax in 20A0 of P300,000. There were advance collections during 20A1 amounting to P400,000 which
were not yet subjected to income tax.
Required:
1. Determine Kalinisan’s gross income subject to 5% GIT for the year ended December 31, 20A1.
2. Determine Kalinisan’s 5% GIT for the year ended December 31, 20A1.
3. Determine Kalinisan’s taxable income subject to 30% RCIT for the year ended December 31, 20A1.
4. Determine Kalinisan’s RCIT and MCIT for the year ended December 31, 20A1.
5. Determine Kalinisan’s tax liability payable to the BIR for the year ended December 31, 20A1.
6. Determine Kalinisan’s tax liability payable to the LGU for the year ended December 31, 20A1.
7. Determine Kasibulan’s tax savings for the year ended December 31, 20A1.
79
L. Double taxation agreements
Problem 1 – Permanent establishment, subcontractor, business profits
Bandila Company, Inc., a domestic corporation, entered into the following transactions with its affiliate, Inglatera
Corporation, a company domiciled in United Kingdom for the year ended December 31, 20A1:
• Inglatera rendered administration and accounting services to Bandila which commenced on January 31,
20A1. Inglatera sent three employees to render the services in the Philippines. The two employees
were in the Philippines from January 31, 20A1 to March 31, 20A1 while the third employee was in the
Philippines from April 15, 20A1 to June 15, 20A1. Bandila paid Inglatera P500,000.
• Inglatera rendered management services to Bandila which commenced on March 1, 20A1. Inglatera
sent one employee to render the services in the Philippines from May 1, 20A1 to December 15, 20A1.
Bandila paid Inglatera P700,000.
• Bandila availed engineering services from Inglatera which commenced on May 1, 20A1. However,
Inglatera, subcontracted said services to Watawat Philippines Corporation, a domestic corporation.
Watawat also provided engineering services to other clients. The services were rendered from May 1,
20A1 for 12 months. Bandila paid Inglatera P400,000.
Required:
1. Determine the final withholding tax (FWT) liability of Bandila for the year ended December 31, 20A1.
2. Determine the net payments made by Bandila to Inglatera for the year ended December 31, 20A1.
Problem 2 – Permanent establishment; royalties and service fees; grossing-up
Kanyugan Corporation, a domestic corporation, entered into the following agreements with certain non-resident
foreign corporations, for the year ended December 31, 20A1:
• Licensing agreement with Singapura Company, a resident of Singapore, for the use of know-how in the
production process. License fees paid during the year amounted to P350,000, exclusive of Philippine
income tax, if any. Singapura did not send any employees to the Philippines in connection with this
agreement.
• Technical service agreement with Hapon Company, a resident of Japan, for technical services
rendered. Technical service fees paid during the year amounted to P250,000. Hapon sent employees to
the Philippines to render the related services for 200 days.
• Royalty agreement with Franciscano Corporation, a resident of the United States. Royalty fees paid
during the year amounted to P420,000. Franciscano did not send any employees to the Philippines.
• Franchise agreement with Britana Corporation, a resident of British Virgin Islands. Franchise fees paid
during the year amounted to P380,000, net of all taxes. Britana send employees to the Philippines for
one-month in connection with this agreement.
Required:
1. Determine the final withholding tax (FWT) liability of Kanyugan for the year ended December 31, 20A1.
2. Determine the net payments made by Kanyugan to the non-residents for the year ended December 31,
20A1.
Problem 3 – Permanent establishment; interest and penalties; trade transactions
Kapalaran Corporation had the following loans and trade payables with non-residents for the year ended
December 31, 20A1:
• Loan of USD500,000 with 5% interest from Amerikano Corporation, a resident of the United States. The
loan was outstanding for the entire year. Interest was paid on December 31, 20A1.
• Loan of EUR350,000 with 3% interest from Europa Corporation, a resident of France. The loan was
outstanding for the entire year. Interest was paid on December 31, 20A1. Europa maintains a Philippine
branch engaged in construction activities. The said Branch did not participate in the loan transaction.
• Loan of HKD5,000,000 with 4% interest from Hong Corporation, a resident of Hong Kong. The loan was
outstanding for the entire year. Interest was paid on December 31, 20A1.
• Accounts payable of AUD300,000 to Australyano Corporation, a resident of Australia. This was
outstanding for two years and penalty of 1% per year was charged. No penalty was paid as of year-end.
80
• Accounts payable of EUR250,000 to Praha Corporation, a resident of Czech Republic. This was
outstanding for more than one year and penalty of 1.5% was charged. No penalty was paid as of year-
end.
• Installment payable of SGD200,000 to Singapura Corporation, a resident of Singapore, bearing 1%
interest per annum. The liability was outstanding for the entire year. Interest was paid on December 31,
20A1.
The foreign exchange rates on December 31, 20A1 were as follows:
USD1 = P50
EUR1 = P53
HKD1 = P6
AUD1 = P40
SGD1 = P33
Required:
1. Determine the final withholding tax (FWT) liability of Kapalaran for the year ended December 31, 20A1.
2. Determine the net payments made/payable by Kapalaran to non-residents for the year ended
December 31, 20A1.
Problem 4 – Permanent establishment; dividend and branch profit remittance
The following are independent situations relative to dividend payments to a non-resident foreign corporation for
the year ended December 31, 20A1:
a. Busilak Philippines Corporation, a domestic corporation, is a wholly-owned by Noruega Corporation, a

Norwegian entity. Busilak declared and paid dividend of P1,000,000 during 20A1.
b. Busilak Philippines Corporation, a domestic corporation paid P1,000,000 during 20A1 to Noruega
Corporation, a Norwegian entity. Noruega owns 5% of Busilak.
c. Noruega Philippine Branch remitted branch profits of P1,000,000 to its head office, Noruega
Corporation, a Norwegian entity.
d. Busilak Philippines Corporation, a domestic corporation, is a wholly-owned by Nederland Corporation, a
Dutch entity. Busilak declared and paid dividend of P1,000,000 during 20A1. Nederland maintains a
Philippine Branch. Said Branch did not participate in the investment transaction of Nederland with
Busilak.
e. Nederland Philippine Branch remitted branch profits of P1,000,000 to its head office, Nederland
Corporation, a Dutch entity.
f. Busilak Corporation, a domestic corporation, is a subsidiary of Britannica Corporation, a resident of
British Virgin Islands. Busilak declared dividend of P1,000,000 during 20A1. Dividends were not taxable
in British Virgin Islands.
Required:
1. Determine the final withholding tax (FWT) liability of Busilak, Noruega Philippine Branch and Nederland
Philippine Branch for the year ended December 31, 20A1.
2. Determine the net payments made/payable by Busilak, Noruega Philippine Branch and Nederland
Philippine Branch to non-residents for the year ended December 31, 20A1.
Problem 5 – Sale of shares, real property interest
On September 1, 20A1, Energo Corporation, a non-resident foreign corporation, sold 10,000 shares of Molino
Philippines Corporation, a domestic corporation for P1,000 per share. Said shares were acquired for P800 per
share on May 1, 20A0. The following are the independent situations relative to the residency and real property
interests of Energo in Molino:
a. Energo Corporation is a resident of Hong Kong. Molino’s total assets amounted to P30,000,000 in
which P17,000,000 pertains to real properties.
b. Energo Corporation is a resident of the United States. Molino’s total assets amounted to P30,000,000 in
c. Energo Corporation is a resident of Japan. Molino’s total assets amounted to P30,000,000 in which
P10,000,000 pertains to real properties.
d. Energo Corporation is a resident of United Kingdom. Molino’s total assets amounted to P30,000,000 in
81
Required: Determine the capital gains tax (CGT) from the sale of Molino shares on September 1, 20A1.
Problem 6 – Dependent personal services
Mr. Oslo was employed by Kon-Tiki Corporation. During 20A1, he was assigned to render consultancy services
to Kon-Tiki Philippines Corporation (KPC), a Philippine subsidiary of Kon-Tiki.
The following are additional independent information about Mr. Oslo’s assignment in the Philippines:
a. Mr. Oslo and Kon-Tiki Corporation are residents of Hong Kong. Mr. Oslo was in the Philippines for three
months. Mr. Oslo received compensation of P500,000 directly from Kon-Tiki.
b. Mr. Oslo and Kon-Tiki Corporation are residents of Hong Kong. Mr. Oslo was in the Philippines for
seven months. Mr. Oslo received compensation of P500,000 directly from Kon-Tiki.
c. Mr. Oslo and Kon-Tiki Corporation are residents of Norway. Mr. Oslo was in the Philippines for three
d. Mr. Oslo and Kon-Tiki Corporation are residents of Norway. Mr. Oslo was in the Philippines for seven
e. Mr. Oslo and Kon-Tiki Corporation are residents of Norway. Mr. Oslo was in the Philippines for three
months. Mr. Oslo received compensation of P500,000 directly from KPC.
f. Mr. Oslo and Kon-Tiki Corporation are residents of Norway. Mr. Oslo was in the Philippines for seven
months. Mr. Oslo received compensation of P500,000 directly from KPC.
Assume that there is reciprocity with the Philippines and the foreign country and the personal exemption
granted under the Philippines is lower than in foreign country.
Required: Determine the income tax liability of Mr. Oslo for the year ended December 31, 20A1.
Problem 7 – Independent personal services
Mrs. Ingles is a professional consultant. During the 20A1, she rendered management consultancy services to
Mapera Philippines, Inc. a Philippine resident.
The following are additional independent information about Mrs. Ingles’ management consultancy services in
the Philippines:
a. Mrs. Ingles is a resident of Hong Kong. She was in the Philippines for two months. Mrs. Ingles received
compensation of P300,000 directly from Mapera.
b. Mrs. Ingles is a resident of Hong Kong. She was in the Philippines for five months. Mrs. Ingles received
compensation of P300,000 directly from Mapera.
c. Mrs. Ingles is a resident of Hong Kong. She was in the Philippines for eight months. Mrs. Ingles
received compensation of P300,000 directly from Mapera.
d. Mrs. Ingles is a resident of United Kingdom. She was in the Philippines for two months. Mrs. Ingles
e. Mrs. Ingles is a resident of United Kingdom. She was in the Philippines for five months. Mrs. Ingles
f. Mrs. Ingles is a resident of United Kingdom. She was in the Philippines for eight months. Mrs. Ingles
Assume that there is reciprocity with the Philippines and the foreign country and the personal exemption
granted under the Philippines is lower than in foreign country.
Required: Determine the income tax liability of Mrs. Ingles for the year ended December 31, 20A1.
82

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DE LA SALLE UNIVERSITY

RAMON V DEL ROSARIO COLLEGE OF BUSINESS

A. Gross income: Inclusions and exclusions

Problem 1 – Concept of income and when taxable

Salaries of security guards P 300,000

Required: For each of the above situation or transaction:

Problem 2 – Condonation of debt

Problem 3 – Compensation for services; allowances; facilities or privileges; award of damages

Unpaid salaries P 500,000

Problem 4 – Compensation for services: cash and in kind

Problem 5 – Rental income

Recipient Relationship with Durian Amount of payment

Owner Property Remaining life Book value

Problem 7 – Dividend, stock options, stock awards, share appreciation rights

The following are independent situations relating to equity investments:

Common stock, 1,000,000 shares issued and outstanding P 10,000,000

Date Employee Number of Exercise Price Price of Shares Option Value at

The no. of employees on selected dates was as follows:

December 31, 20A1 150

January 1, 20A1 P15

Problem 9 – Retirement benefits, pensions and separation pay

Retirement pay P 3,000,000

Retirement pay P 3,000,000

Retirement pay P 3,000,000

Retirement pay P 3,000,000

Separation pay P 3,000,000

Separation pay P 3,000,000

Gross compensation P 360,000

• The rice subsidy was given in cash for P2,000 monthly.

Gross compensation P 240,000

• The rice subsidy was given in cash for P6,000 quarterly.

In addition, he received the following prizes and awards (in cash):

Most outstanding elementary school teacher P 100,000

Salaries and wages P 5,000,000

The following are the additional information:

Problem 2 – Stock options, stock awards, stock appreciation rights

Date Employee Number of Exercise Price Price of Shares Option Value at

Date Employee Number of Price of Shares

The no. of employees on selected dates was as follows:

December 31, 20A1 150

January 1, 20A1 P15

Problem 3 – Compensation for personal services, withholding tax requirement

Problem 4 – Travel expenses; entertainment, amusement and recreation expenses; documentation

Problem 5 – Rental and related expenses, repairs and maintenance

Ordinary repairs of wall and posts P100,000

Problem 6 – Security, janitorial, manpower and advertising expenses

• Security services of Magdiwang Corporation

• Janitorial services of Maaliwalas Corporation

• Manpower services of Maligalig Corporation

Problem 7 – Expenses of farmers

Selling and administrative expenses

The following are the additional information:

The following are the additional information:

• Taxes were properly withheld on expenses subject to withholding taxes.

During the year, Tikling derived the following interest income:

Problem 2 – Interest: Optional treatment, tax arbitrage, interest on unpaid taxes

January 1, 20A1 P 4,000,000

The interest on these loans was payable every January 1.