Vincent Ortojan

BSA 103

PROBLEMS
1. The following data were provided by Alpha Corporation (domestic corporation) for 2018:
Taxes and licenses 40,000
Documentary stamp taxes 4,000
Other Percentage taxes 120,000
Refund of local business taxes and licenses paid in 2017 10,000
Income tax due for 2018 300,000
Refund of income tax for 2017 25,000
Interest income
From trade notes receivable 100,000
From peso bank deposits 100,000
From bank deposits abroad 20,000
Interest expense on bank loan 150,000
Tax assessment on underpayment of Percentage taxes 75,000
Surcharges on tax assessments 25,000
Interest expense on tax assessments 12,500
DETERMINE THE FOLLOWING
1. Deductible interest expense for the year P129,500.00
2. Deductible taxes for the

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3. Taxable tax refunds P10,000.00

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Solution:

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Interest Tax expense Taxable tax
Expense refunds

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Taxes and Licenses - P40,000.00 -
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Documentary stamp taxes - P4,000.00 -
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Other percentage taxes - P120,000 -
Refund of local taxes and licenses in - P10,000.00
2017
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Interest expense on bank loan P117,000.00

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[150,000-(P100,000x33%)
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Tax assessment for underpayment of - P75,000.00 -

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Interest Expense on tax assessments P12,500.00 - -
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Surcharge on tax assessments - - -

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TOTAL P129,500.00 P239,000.0 P10,000.00

0
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2. On January 1, 2016, Mike leased his vacant lot for a period of 12 years to Leomar at an annual
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rate of P2,400,000. It was also agreed that Leomar will pay the following:
 P4,800,000 representing rental payment for year 2016 and 2017.
 Security deposit of P2,400,000.
 Annual real property tax of P30,000.
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The lease contract provides, among others that the lessee will construct a 5-storey building for parking
purposes at a cost of P9,500,000. Ownership of the building shall belong to the lessor upon the expiration
or termination of the lease contract.
The building was completed on July 1, estimated useful life of 15 years.
DETERMINE THE FOLLOWING
1. Deductible expenses of Leomar in 2016 P2,430,000.00
2. Deductible expenses of Leomar in 2017 P2,430,000.00
3. Deductible expenses of Leomar in 2018 P2,930,000.00

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 Solution:
2016 2017 2018
Annual Rent P2,400,000.00 P2,400,000.00 P2,400,000.00
Annual real property tax P30,000.00 P30,000.00 P30,000.00
Depreciation exp.- leasehold
improvement
(9.5M/9.5 years x 6/12 P500,000.00
Deductible expense P2,430,000.0 P2,430,000.0 P2,930,000.0
0 0 0

3. Clifford borrowed money from the Citibank amounting to P1,000,000 at an annual interest rate of
10%. He invested the money in deposit substitutes earning annual interest income of 12%.
Required:
Determine the deductible interest of Clifford. P60,400.00
Solution:
Interest expense (1M x 10% ) P1,000,000.00
Less: 33% x (P1M x 12% ) (P39,600.00)

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Deductible Interest Expense P60,400.00

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4. Lester received an assessment from the BIR amounting to P250,000 including interest of P50,000
due to non-payment of stock transaction tax. He also received a P125,000 assessment from the

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City of Mandaluyong due to under payment of various local business taxes. The amount is
inclusive of P25,000 interest. During the year, however, he earned P100,000 interest income from
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his various bank deposits.
Required:
Determine the deductible interest of Lester. P25,000.00
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Explanation: interest paid or accrued on taxes related to business of practice of profession, such
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as those paid for deficiency or delinquency (since taxes are considered indebtedness) are
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deductible as interest expense, provided that, the tax is a deductible tax. It is deductible in “full”.
It shall not be reduced by 33% of interest income subject to final tax.

5. On July 1, 2017, a taxpayer obtained a P6,000,000 loan from a bank with annual interest rate of 12%.
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The proceeds of the loan amounted to P5,280,000 net of interest. Answer the questions under the
following independent cases:
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1. Assume the taxpayer is a resident citizen (under cash basis) and the loan including the interest is
payable on June 30, 2018. How much is the deductible interest expense for 2017 and 2018?
P0; P720,000.00
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2. How much is the correct interest expense for 2017 and 2018 assuming the taxpayer is a resident citizen
(under cash basis) and the loan is payable on installment as follows; P1,500,000 on September 30, 2017,
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December 31, 2017, March 31, 2018 and June 30, 2018
P360,000.00; P360,000.00
3. Assume the taxpayer is a domestic corporation (under cash basis) and the loan including the interest is
payable on June 30, 2018. How much is the deductible interest expense for 2017 and 2018?
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P720,000.00; P0

6. On January 2, 2018 Erwin contracted a 1-year P200,000 loan from BPI for the purchase of computers.
The computers were acquired three (3) months after securing the loan with depreciable life of eight (8)
years. Erwin paid P20,000 interest to BPI on December 31, 2018 in relation to the loan. On the other
hand, his bank deposit with BDO earned P4,000 interest during the year.
DETERMINE THE FOLLOWING:
1. Deductible interest expense for the year P18,680.00
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Interest Expense (bank loan)

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 Less: 33% x P4,000.00 (1,320.00)
Allowable interest expense on bank loan P18,680.00

2. Allowable deduction of Erwin from his gross income assuming that the interest on loan was
capitalized.
Answer:
Acquisition cost of computers P200,000.00
Add: Interest expense P20,000.00
Capitalizable cost of computers P220,000.00

Depreciation expense P20,625.00

(P220,000.00 /8 x 9/12 )

7. Omega Corporation paid the following during 2018:

Interest paid for late payment of 2016 income tax 50,000
Surcharge and compromise penalty for late payment of 2016 income tax 72,500
Interest on bonds issued by Omega 250,000
Interest on money borrowed by Omega from Alpha Corporation (Alpha owns 60% of Omega's
outstanding shares) 80,000
Interest on preference shares 125,000

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REQUIRED:

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Determine the deductible interest of Omega for 2018 P300,000.00

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Solution:

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Interest paid for late payment for 2016 income tax P50,000.00
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Surcharge and compromise penalty for late payment of 2016 income -
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tax
Interest on bonds issued by omega P250,000.00
Deductible interest P300,000.00
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8. In 2018, a self-employed resident citizen, paid the following taxes:

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Philippine income tax P400,000

Professional tax 750 Gravel and sand tax 20,000 Income tax paid in Singapore 180,000 Real property tax
on his house 8,000
Road user's tax on his delivery trucks 50,000
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Local annual fixed tax for his delivery trucks 10,000

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Other local business taxes 12,000

Special assessment on land used in business 5,000

Required:
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If the taxpayer had signified in his return to avail of tax credit of foreign income tax paid, how much
deduction for taxes may he claim on his 2018 income? P92,750.00
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Solution:
Professional tax P750.00
Gravel and sand tax 20,000 P20,000.00
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Road user's tax on his delivery trucks P50,000.00

Local annual fixed tax for his delivery trucks P10,000.00
Other local business taxes P12,000.00
Total deductible taxes P92,750.00

9. In 2018, Omega Corporation incurred the following expenses in connection with the conduct of its
business:
■ P100,000 worth of plane tickets and hotel bills of its employees who were sent to business seminars.
• P136,000 transportation allowances of its officers from home to office and vice versa as part of their
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employment contract, net of P64,000 withholding tax
▪ P80,000 transportation expenses of messengers from office to several clients
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 ■ P20,000 special assessment

Required:
Determine the allowable expenses that could be deducted by Omega Corporation from its gross income
P380,000.00

Solution:
Plane tickets P100,000.00
Transportation expenses- officers (136,000 + 64,000) P200,000.00
Transportation expense- messengers P80,000.00
Deductible expenses P380,000.00

10. Delta Corporation took two key men insurance on the life of its President, Mr. Masigasig. In one
policy, the beneficiary is Delta Corporation to compensate it for its expected loss in case of death of its
president. The company paid a total premiums of P50,000 on that policy. The other policy designates Mr.
Masigasig's wife as its irrevocable beneficiary. Delta paid P75,000 premiums on that policy.

Required:
Determine the amount of allowable premium payment that could be deducted by Delta Corporation from

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its gross income. Deductible Premium = P75,000.00

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11. A taxpayer had the following data for 2018:

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Gross income from business P1,000,000
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Capital gain Capital loss Operating expenses Donation to an accredited NGO Donation to CBCP
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P1,000,000 50,000 20,000 400,000 30,000 20,000
DETERMINE THE FOLLOWING:
1. Taxable income assuming the taxpayer is an individual taxpayer, single, and with a compensation
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income during the year amounting to P600,000. P1,180,000.00

Solution:
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Gross business income P1,000,000.00

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Business expenses (P400,000.00)

Net Income before capital gains and contribution P600,000.00
Contributions deductible in full (accredited NGO) (P30,000.00)
Contributions with limit (CBCP):
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Actual=P20,000.00; limit(P600,000 x 10%= P60,000.00) (P20,000.00)

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Add (Deduct):
Net capital gain P30,000.00
Compensation income P600,000.00
Taxable Net Income P1,180,000.00
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2. Taxable income assuming the taxpayer is a domestic corporation. P580,000.00

Solution:

Gross business income P1,000,000.00

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Business expenses (P400,000.00)

Net Income before capital gains and contribution P600,000.00
Contributions deductible in full (accredited NGO) (P30,000.00)
Contributions with limit (CBCP):
Actual=P20,000.00; limit(P600,000 x 10%= P60,000.00) (P20,000.00)
Add (Deduct):
Net capital gain P30,000.00

Taxable Net Income P580,000.00

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 12. The following contributions and donations were made by a taxpayer.
To Christ the King Catholic Church P250,000
To Bukas Palad, non-profit domestic corporation 300,000
To the fire victims of Recto 200,000
To the Gospel church of Taiwan 350,000
Required: Determine following:
1. Total deductible charitable and other contributions subject to limit. = P550,000.00
( P250,000.00 + P300,000.00)

2. Total nondeductible contributions = P550,000.00

(P200,000.00 + P350,000.00 )

13. A domestic corporation has the following data on income and expenses:
Gross business income P6,200,000
Operating expenses ( including SSS and Philhealth contributions of P150,000 ) 2,500,000
Contributions to Government for priority project in education 100,000

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Contribution to a foreign private foundation 100,000

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Contribution to a domestic charitable organization 190,000

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REQUIRED:

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Determine total amount of deductible charitable and other contributions
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Actual (w/limit) P190,000.00
Limit [(6,200,000.00 – 2,500,000.00) x 5% ] P185,000.00
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Allowed P185,000.00
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Add: deductible in full (priority project) P100,000.00

TOTAL P285,000.00
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14. Juan, reported the following for the year 2018:

Gross Income P5,000,000
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Cost of Sales 3,000,000

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Salaries of employees,( net of P100,000 withholding tax and P50,000 SSS, Medicare and Pag-
Ibig premiums contributions) 800,000
Fringe benefits given to rank and file employees 300,000
Fringe benefits given to managerial employees 136,000
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Business related representation and entertainment expenses 100,000

Rent expense 120,000
Donation to religious and charitable institutions 500,000

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 REQUIRED:
Determine the taxable income of Juan.
Answer:
Gross Income P5,000,000.00
Cost of Sales P3,000,000.00
Sales P8,000,000.00

Sales P8,000,000.00
COS P3,000,000.00
Gross Income P5,000,000.00
Salaries(gross of withholding tax, SSS, Medicare/Pag-ibig) of (P950,000.00
employees, gross of P100,000.00 withholding tax and P50,000.00 SSS,
Medicare and Pag-ibig premiums contribution
Fringe benefits given to rank and file employees (P300,000.00)
Fringe benefits given to managerial and supervisory employees (P136,000.00)
(@grossed-up monetary value)
Rent Expenses (P120,000.00)
Represenation and entertainment expenses (1/2 % of N. sales) (40,000.00)
Net income before contributions P3,454,000.00
Donation to religious and charitable institutions (limit) (345,400.00)
Limit: P3,454,000.00 x 10%

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Net Income P3,108,600.00

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15. On July 1, 2015, a taxpayer purchased for P1,000,000 a vehicle which he used as delivery truck for
his trading business. He deducted annual depreciation on the basis of an estimated useful life of five (5)
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years. On July 1, 2018, the automobile was partially damaged in an accidental collision with another
vehicle. The cost of repairs amounted to P200,000. The taxpayer received insurance proceeds of P100,000
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to cover the loss.

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Required:
Determine the amount of loss that could be deducted from the taxpayer's gross income.
Answer:
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BV = P1M x 2/5 P400,000.00

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Vs. Cost to restore P200,000.00

Allowed (lower amount) P200,000.00
Less: Insurance coverage (P100,000.00)
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Deductible Loss P100,000.00

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16. A domestic corporation provided the following results of operations for 2018 taxable year:
Sales P6,200,000
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Cost of sales 2,500,000

Dividend income
From domestic corporation 60,000
From resident corporation 30,000
From nonresident corporation 20,000
Interest income
From trade notes receivable 75,000
From peso bank deposits in Manila 50,000
From peso $ deposits in Taguig 40,000
From bank deposits abroad 30,000
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Royalty income 40,000
Capital gain on sale at P6M of land in the Philippines ( held for 10 years) 500,000
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 Capital gain on sale of a 10-year bonds of a domestic corporation held for eight (8) years 30,000
Capital loss on sale of bonds of a domestic corporation held for one (1) year 20,000
Capital gain on sale of shares of stock of a domestic corporation held for six (6) months, sold directly to a
buyer 15,000
Capital gain on sale of shares of stock of a domestic corporation held for six (6) months, sold thru PSE
12,500
Income from trust indenture with Security Bank 25,000
Provision for bad debts 15,0' Bad debts written-off 15,000
Recovery of bad debts written off preceding year 10,000
Salaries and wages excluding fringe benefits/de minimis 350,000
De minimis benefits provided to rank and file employees 70,000
De minimis benefits provided to managerial employees 30,000
Fringe benefits provided to rank and file employees 50,000
Fringe benefits provided to managerial employees 156,000
Taxes and licenses 50,000
Refund of local business taxes and licenses for the 201510,000
Tax assessment on unpaid local business taxes 100,000
Interest expense on the tax assessment 15,000
Surcharge and penalties on the tax assessment 25,000
Utilities expense 100,000 Casualty losses 60,000
Shrinkage in the value of short-term debt securities 5,000
Depreciation expense 40,000
Dividend declared and paid 200,000

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Income tax paid for first 3 quarters 75,000

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Determine the following:

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a. income tax payable at the end of the year
Solution:
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Sales P6,200,000.00
Cost of Sales (P2,500,000.00)
OPEX:
Bad debt written-off P20,000.00
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Salaries and wages excluding fringe benefit/de minimis P350,000.00

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De minimis (70k +30k) P100,000.00

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Fringe Benefits provided to rank and file employees P50,000.00

Fringe benefits provided to managerial employees P240,000.00
(GUMV = P156,000/65%)
Taxes and licenses P50,000.00
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Tax assessment including interest P115,000.00

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Utilities expense P100,000.00

Casualty losses P60,000.00
Depreciation expense P40,000.00
Net Capital Gain (loss) (P1,125,000.00)
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Capital gain on sale of a 10-year bonds held for 8 years

Capital loss on sale of bonds of a domestic corporation Tax exempt
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Dividend income: (P20,000.00) -

From Domestic Corporation
From resident corporation -
From nonresident corporation P30,000.00
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Interest Income P20,000.00 P50,000.00

From trade notes receivable
From bank deposits abroad P75,000.00
Other income: P30,000.00 P105,000.00
Recovery of bad debts written off preceding year
Refund of taxes and licenses for the preceding year P10,000.00
TAXABLE INCOME P10,000.00
P20,000.00

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NCIT @305 (Higher than MCIT)

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 Less: Payment for the first 3 quarters
INCOME TAX PAYABLE P825,000.00
(P75,000

b. Total Final tax on passive income

c. Total capital gains tax

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