Principles of Taxation

1. First Statement – Taxation power is considered inherent in a sovereign State because it is a

necessary attribute of sovereignty. Without this power no sovereign State can exist or endure
Second Statement - The power to tax proceeds upon the theory that the existence of a
government is a necessity and this power is an essential and inherent attribute of sovereignty,
belonging as a matter of right to every independent state or government.
a. True, False
b. True, True
c. False, True
d. False, False
2. The following are stages/aspects of taxation, except
a. Levying and imposition
b. Administration and collection
c. Payment
d. Appeal to the Court of Tax Appeals
3. By its nature taxation is a legislative power, i.e., such power being exclusively vested in the
legislature, except
a. In case of local governments, to raise their own revenue, within their own territorial
jurisdiction, subject to limitations as may be provided by Congress.
b. The Congress may, by law, authorize the President to fix within specified limits, and subject
to such limitations and restrictions as it may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within the framework of the
national development program of the Government.
c. Both A and B
d. Neither A nor B
4. The equal protection clause guarantees that persons and things similarly situated are treated
under the law similarly. However, constitutional guarantee allows reasonable classification,
provided the conditions are met, except
a. rest on substantial distinctions
b. be germane to the purpose of the law
c. not be limited to existing conditions only
d. apply equally to some members of the same class.
5. An Executive Order (EO) was issued pursuant to law, granting tax and duty incentives only to
businesses and residents within the "secured area" of the Subic Economic Special Zone, and
denying said incentives to those who live within the Zone but outside such "secured area". Is the
constitutional right to equal protection of the law violated.
a. Yes, the EO gave preferential rights to those located within the SEZA as against other
business located within the Philippines.
b. Yes, the EO being an issuance made by the executive branch of the Government
encroached on the power of the Legislature to exercise the power of taxation.
c. No. Equal protection of the law clause allows reasonable classification. There are
substantial differences between big investors being enticed to the "secured area" and the
business operators outside that are in accord with the equal protection clause that does
not require territorial uniformity of laws.
d. No. Equal protection is not the issue on this matter rather the territoriality limitation has
been breached.
6. The following are the usual methods of avoiding the occurrence of double taxation, except
a. Allowing reciprocal exemption either by law or by treaty;
b. Allowance of tax credit for foreign taxes paid;
c. Allowance of deduction for foreign taxes paid; and
d. Granting of reduced taxation rates by the Department of Finance
7. Our national internal revenue laws are
a. Political in nature
b. Penal and nature
c. Criminal in nature
d. Civil in nature
8. Generally, tax laws are prospective in character. It will be given retroactive effect under the
following circumstances, except:
a. It is necessarily implied from the language used
 b. It involves income tax
c. It is expressly provided, or the retroactive application is clearly the intent of Congress
d. It imposes a criminal liability
9. Which of the following statements is not correct?
a. Taxes maybe imposed to raise revenue or to provide disincentives to certain activities
within the State.
b. The State can have the power of taxation even if the Constitution does not expressly give it
the power to tax.
c. In the exercise of the power of taxation, the State can tax anything at any time.
d. The power of taxation in the Philippine Constitution are grants of power and not
limitations on taxing power.
10. All of the following, except one, are basic principles of a sound taxation system:
a. Fiscal adequacy
b. Administrative feasibility
c. Social equality
d. Theoretical justice
 PARTNERHIP FORMATION AND OPERATION

FORMATION
Problem 1: On November 1, 20x1, Gene, Exo, and Levi decided to combine their business to form a
partnership. The partnership is to take over the business assets and assume the business liabilities. They
agreed to share profits and losses on a 50:30:20 ratio for Gene, Exo and Levi, respectively. The statement
of financial position of Gene and Levi separate businesses on November 1, 20x1 are presented below:

Gene Exo Levi

Cash 250,000 500,000 380,000
Accounts receivable 100,000 220,000 80,000
Allowance for doubtful accounts (10,000) (25,000) (12,000)
Notes receivable 200,000 300,000
Inventory 150,000 260,000 90,000
Office supplies 5,000 10,000 8,000
Equipment 300,000 400,000 200,000
Accumulated depreciation -
equipment (30,000) (50,000) (40,000)
Machine 450,000 150,000 300,000
Accumulated depreciation - machine (90,000) (15,000) (30,000)
Total 1,325,000 1,450,000 1,276,000

Accounts payable 100,000 230,000 150,000

Notes payable 60,000 100,000 120,000
Capital 1,165,000 1,120,000 1,006,000
Total 1,325,000 1,450,000 1,276,000

Gene, Exo and Levi contributed their business to the partnership with the following adjustments:
a. An 8% allowance is to be recognized in the books of Gene. Uncollectible account of P10,000 for Exo is
to be provided. The receivable of Levi is 90% collectible.
b. Interest of 15% on the notes receivable dated April 1, 20x1 of Gene is to be accrued. Interest of 12%
on the notes receivable dated June 1, 20x1 of Levi is to be accrued.
c. Exo agree to value its inventory to P270,000 and Levi’s inventory amounting to P5,000 is
considered worthless.
d. The equipment of Gene has agreed value of P280,000. Levi’s equipment is under-depreciated by
P2,000.
e. Gene’s machine is over-depreciated by P12,000 and Levi’s machine has a market value of P250,000.
f. Interest of 12% on the notes payable dated September 1, 20x1 of Exo should be accrued.
g. The machine of Gene has unpaid mortgage amounting to P50,000 but it is not assumed by the
partnership.
h. Levi has unrecorded patent of P100,000 to be recognized in Levi’s books.

Required: Compute the following independent scenarios:

A. What is the total capital Exo after formation of partnership?

B. What is the total cash to be withdrawn by Levi to have 20% interest in the partnership?

Problem 2: C, P, A are new CPA’s and are to form an accounting partnership. C is to contribute cash of
150,000 and his used computer originally bought at P160,000 but has a second hand value of P100,000. P
is to contribute cash of P200,000, and tables and chairs with an appraised value of P40,000 but acquired by
P for only P36,000. A, whose family is selling computers plus printer is to contribute cash of P80,000 and a
brand new computer plus printer with regular price at P160,000 but which cost their family’s computer
dealership P140,000. Partners agree to share profits 3:2:3.
What are the capital balances of C, P and A, respectively upon formation?
a. 310,000, 236,000 and 220,000
b. 250,000, 240,000 and 240,000
c. 250,000, 236,000 and 240,000
d. 250,000, 240,000 and 220,000
Problem 3: On December 1, 2012, AB invited MZ to join him in his business. MZ agreed provided that AB will
adjust the accumulated depreciation of his Equipment account to a certain amount, and will recognize
additional accrued expenses of P50,000. After that, MZ is to invest additional pieces of equipment to make
her interest equal to 45%. If the capital balances of AB before and after adjustment were P695,000 and
P605,000 respectively, what is the effect in the carrying value of the equipment as a result of the
admission of MZ?

Problem 4: On December 1, 2022, Paul and Marie agreed to invest equal amounts and share profits equally
to form a partnership. Paul invested P3,120,000 cash and a piece of equipment. Marie invested some assets
which are shown below:

Book Value
Accounts Receivable P 400,000
Inventory 1,120,000
Machineries, net 2,240,000
Intangibles, net 920,000

The assets invested by Marie are not properly valued. P32,000 of the accounts receivable are proven
uncollectible. Inventories are to be written down to P1,040,000. Included in the machineries is an obsolete
apparatus acquired for P384,000 with an accumulated depreciation balance of P336,000. Part of the
intangibles is a patent with a carrying value of P56,000 which was sued upon by a competitor. Marie
unsuccessfully defended the case and the final decision of the court was released on November 29, 2022.

What is the fair value of the equipment invested by Paul?

OPERATION
Problem 5: CD partnership begins its first year of operations with the following capital balances: C, Capital,
P224,000; D, Capital, P112,000. According to the partnership agreement, all profits will be distributed as
follows: C will be allowed an salary of P268,800 and P134,400 to D. The partners will be allowed with
interest equal to 10% of the beginning capital balance of the year. C will be allowed a bonus of 10% of the
net income after bonus. The remainder will be divided on the basis of the beginning capital for the first
year and equally for the second year. Each partner is allowed to withdraw up to P11,200 per year. Assume
that the income summary has a debit balance of P16,800 on the first year and a credit balance of P61,600
on the second year. Assume further that each partner withdraws the maximum amount from the business
each period.

What is the balance of D’s capital account at the end of the second year?

Problem 6: CC Partnership began operations on June 1, 20x1. On that date, Caloy and Chris have capital
credits of P35,000 and P48,000, respectively. The partnership has the following profit-sharing plan:

a. 10% interest on partners’ capital balances at the end of the year

b. P12,000 and P15,000 annual salaries for Caloy and Chris, respectively
c. Remaining profit will be divided to Caloy and Chris on a 3:2 ratio, respectively

During the year, Caloy invested P30,000 worth of merchandise and withdrew P8,000 cash, while Chris
invested P24,000 cash. The partnership earned a profit of P53,275 during the year.

How much is Caloy’s capital balance at the end of 20x1?

Problem 7: Aubrey and Ann are partners who have the agreement to share profit and loss in the following
manner:

Aubrey Ann
Annual Salaries P 52,200 P 51,800
Interest on average balances 5% 10%
Bonus (based on net income after 10%
salaries and interest)
Remainder 50% 50%

During the year ended December 31, 20x1, the partnership generated a profit of P115,000 before any
deductions. Aubrey’s and Ann’s average capital balances for the year are P120,000 and P60,000,
respectively. Income is distributed to the partners only as far as it is available.

How much is the total share of Ann in the net income for the year ended 20x1?

Problem 8: The partnership agreement of X, Y and Z provides for the division of net income as follows:

a. Y, who manages the partnership is to receive an annual salary of P120,000.

b. Each partner is to be allowed interest at 10% on ending capital.
c. Balance is to be divided 40:25:35.

During 2006, X invested an additional P90,000 in the partnership. Y made an additional investment of
P75,000 and withdrew P110,000, and Z withdrew P60,000. No other investments or withdrawals were
made during 2006. On January 1, 2006, the capital balances were X, P300,000; Y, P410,000; and Z,
P220,000. Total capital at year-end was P600,000.

Compute the capital balance of partner Y at year-end:

Problem 9: On January 1, 20x1, Alger, Paul and Rodiel formed a partnership. The initial investment were
as follows: Alger, P1,000,000; Paul, P600,000; and Rodiel, P900,000. The profit and loss ratio of the
partners are 50:25;25. The following are the agreement of the partners:

1. Monthly salary of P10,000, P15,000 and P12,000, to Alger, Paul and Rodiel, respectively. The salary
allowance is treated as expense.
2. Bonus to Rodiel of 10% of net income after salary, interest and bonus.
3. Interest of 5% on average capital
4. The balance of net income (loss) will be divided based on the profit and loss ratio
Additional information:
The capital accounts of the partners shows the following information for 20x1:

Alger Paul Rodiel

January 1 1,000,000 600,000 800,000
April.14 50,000
May 1 (120,000) 30,000
June 20 120,000
September 1 30,000
October 10 (40,000)
November 18 (12,000)

The net income of the partnership for the year ended December 31, 20x1 was P860,000. The partners
made regular drawings against their shares of net income during 20x1 of P25,000 each.

A. What is the capital balance of Alger on December 31, 20x1?

B. What is the total income of Paul received from the partnership?