Valencia 5th Ed. Vol1 - TAX1

Income Taxation by: Valencia and Roxas
CHAPTER 1 GENERAL PRINCIPLES AND CONCEPTS OF TAXATION

Problem 1 1 TRUE OR FALSE
1. False Without money provided by tax power, the other inherent powers cannot function well.
2. True
3. True
4. True
5. True
6. True
7. False Taxation power is subject to inherent and Constitutional limitations.
8. False Taxation power is not absolute because it is subject to limitations.
9. True
10. False penalty is an example of imposition of amount for police power.
11. True
12. False governmental function unless stated otherwise.
13. False government agencies engaged in proprietory functions are subject tax unless stated otherwise.
14. True

1. False Concurrence of the majority of congress.
2. False Churches are required to pay income taxes in cases of sale of real property and business
engagement.
3. False No public funds shall be appropriated for religious purpose.
4. False - All bills even if approved by the 2/3 of the congress should still be signed by the President to
become law.
5. False No person shall be imprisoned for nonpayment of poll tax.
6. False Taxation power is essentially legislative function; hence not every government unit exercises this
power.
7. True
8. False - Benefits from taxation may be or may not be experienced.
9. True
10. False Judicial review
11. False Ex post facto law is not applicable for tax purposes.
12. True
13. False A tax evader breaks the law while the tax avoider sidesteps it.
14. False Neither transferable/assignable
15. True

1. True
2. True
3. True
4. True
5. False prospective effect
6. True
7. True
8. False national taxes
9. True
10. True
11. True
12. False Doubts must be resolved liberally in favor of the taxpayer.
13. True
14. True
15. False null and void
Prob. 1 Prob. 1 Prob. 1 Prob. 1 Prob. 1 Prob. 1

4 5 6 7 8 9
1. A 1. C 1. D 1. B 1. A 1. A
2. C 2. A 2. D 2. C 2. D 2. B
3. C 3. D 3. D 3. D 3. D 3. C
4. A 4. B 4. D 4. D 4. A 4. D
5. B 5. B 5. D 5. D 5. A 5. C
6. B 6. A 6. D 6. B 6. C 6. C
7. A 7. C 7. D 7. B 7. B 7. D
8. C 8. B 8. C 8. C 8. C 8. C
9. C 9. B 9. A 9. C 9. B 9. C
10. C 10. C 10. C 10. B 10. A 10. C
11. C 11. D 11. B 11. B 11. C
12. C 12. D 12. B 12. C 12. B
13. A 13. A 13. A 13. D
14. A 14. D 14. D
15. D 15. C
16. C
17. C
CHAPTER 2
TAX ADMINISTRATION
1. True
2. False - Department of Finance
3. False - Exclusive and original power to interpret tax laws. Final power to interpret tax laws belongs to the
Supreme Court.
4. False - Review by the Court of Justice/Court of Appeals
5. False - Cooperatives are exempted from income tax and annual registration fee.
6. False - In all cases, the authority to print is required.
7. False - Not required to register again, just file an information update.
8. False - Tax assessment is needed to enforce payment of unpaid tax liability.
9. True
10. True
11. False - Levy or imposition of tax
12. True
13. False executive branch of the government
14. False the description refers to administrative feasibility.
1. True
2. False submit to the BIR.
3. False - Distraint is for personal property, while levy is for real property.
4. True
5. False - Exceptions are those already filed in court of those involving fraud.
6. True
7. True
8. True
9. True
10. False - value of property.
11. False Redemption of property should be made within one year from the date of sale.
12. True
13. True

1. True
2. True
3. False P100,000
4. False 10% final withholding tax
5. True If authorized by the BIR Commissioner
6. True
7. False All properties of a delinquent taxpayer may be subject to tax lien.
8. True
9. False Seizure
10. False Forfeiture
11. True
12. False Criminal violations already filed in court are not subject to compromise. Collection of taxes is not a
criminal violation.
13. True

1. True
2. False Without letter of authority, the taxpayer could refuse access to his books.
3. False Civil action could also be judiciary pursued.
4. True
5. False the appeal must first be made to Court of Tax Appeals.
6. False It could also be done if no tax return is filed.
7. False Ten years prescription period starts at date of discovery that tax return was not filed.
8. False It should be 5 years.
9. False Levy could also be done before or simultaneous with distraint.
10. False Residual value should be returned to taxpayer.
11. True
12. False It is also applicable to importation.
13. True
Problem 2 5 Problem 2 6
1. B 1. D
2. A 2. A
3. B 3. A
4. D 4. A
5. A 5. C
6. C 6. C
7. C 7. D
8. D 8. B
9. B 9. C
10. B 10. C
11. D
12. C
13. B
Problem 2 7
Situation 1 No need to appeal. The prescribed period of filing for the refund is already expired. The filing of
refund should have been made within two years after the payment of tax or penalty. It was filed within 2 years,
one month, and 5 days after the date of erroneous payment, hence, not appealable anymore.
Situation 2 May 5, 2010. The filing of refund was appropriately made within the 2 year prescribed period.
The denial was received on April 5, 2010. The filing of appeal to CTA should be made within 30 days from the
receipt of denial from the BIR.
Situation 3 August 2, 2014. The date of grant for refund was received on August 1, 2009. The refund check
(dated July 15, 2009) should be encashed within 5 years from the date the grant for refund was received (August
1, 2009). The check should be encashed from August 1, 2009 to August 1, 2014. It will be forfeited on August 2,
2014.
Situation 4 August 22, 2014. The date of grant for refund was received on August 21, 2009. The refund
check (dated July 30, 2009) should be utilized within 5 years from the date the grant for refund was received
(August 21, 2009). The tax credit certificate should be utilized from August 21, 2009 to August 21, 2014. It will
be forfeited on August 22, 2014, unless otherwise revalidated.
Situation 5 August 20, 2009. If the BIR has no response after the submission of supporting documents to
serve as evidence for the protest, the last day to appeal to the CTA should be made within 30 days from the
lapse of the 180 day period from the submission of the supporting documents.
Computation of days:
After January 22, 2009 Days
January 9
February 28
March 31
April 30
May 31
June 30
July 21
Total number of days as of July 21 180
Plus 30 days after the 180 days
July 10
August 20
Total day on August 20 30
Situation 6 May 4, 2009. The last day to appeal to the CTA should be made within 30 days from the receipt
of the denial of the BIR. The 30 days is determined as follows:
Days
First denial of the BIR March 22, 2009
to 2nd request for reconsideration March 30, 2009 8
nd
2 denial of the BIR April 12, 2009
to May 4, 2009 to complete the 30 day period 22
Total days as of May 4, 2009 30
Situation 7 June 25, 2009. The appeal to CA should be made within 15 days from date of unfavorable
decision from CTA was received (June 10 plus 15 days).
Situation 9 July 10, 2009. The appeal to SC should be made within 15 days from date of unfavorable
decision from CA was received (June 25 plus 15 days).
Situation 10 March 1, 2010. Within 1 year from the date of sale.
Problem 2 8 B
Tax due per return P100,000
Late filing and payment simple neglect (P100,000 x 25,000
25%) 4,167
Interest (P100,000 x 20% x 2.5/ 12) P129,167
Total amount due and payable
Problem 2 9 A
Amount due surcharge (P100,000 x 25%) P25,000
Problem 2 10 D
Tax due per return P100,000
Late filing and payment willful neglect (P100,000 x 50%) 50,000
Interest (P100,000 x 20% x 14.5/12) 24,167
Total amount due and payable P174,167
Problem 2 11 D
Deficiency income tax (P120,000 P100,000) P20,000
Interest (P20,000 x 20% 435/ 360 days) 4,833
Amount still due P24,833
Problem 2 12 A
Statutory fine (P250,000 x 2) P500,000
Problem 2 13 B
Minimum statutory fine P 5,000
Problem 2 14
Yes, because the prescriptive period of filing the written protest is within 30 days from receipt of assessment.
Mr. Lang is obligated to pay the P500,000 assessed against him.
Problem 2 15
Basic delinquency tax P 1,000,000
Surcharges willful (P1,000,000 x 50%)* 500,000
Interest (P1,000,000 x 20% x 2) 400,000
Amount collected from the highest bidder P 1,900,000
Add: Interest for real property redemption (P1,900,000 285,000
x 15%)
Total redemption amount P 2,185,000
*The nonpayment of taxes is already 2 years it becomes habitual; hence, willful neglect.
Problem 2 16
Proceeds from the highest bidder (P30,000/6%)* P 500,000
Less: Basic tax assessed P 300,000
Advertisement 10,000
Transfer of title 15,000
Capital gain tax 30,000 355,000
Remittance to Mr. Santiago P 145,000
*The capital gains tax is based on the selling price of the real property sold. The rate of capital gains tax is 6%;
hence, the proceeds from the highest bidder is P500,000 or (P30,000/6%).
Problem 2 17
Corrected sales (P7,000,000/70%) P10,000,000
Less: Operating expenses 6,500,000
Corrected net taxable income P 3,500,000
Multiplied by corporate tax rate 30%
Corrected total income tax due P 1,050,000
Less: Income tax paid 150,000
Tax deficit P 900,000
Surcharge (P900,000 x 25%) 225,000
Interest (P900,000 x 20%) 180,000
Total amount due P 1,305,000
Problem 2 18
Amount of tax liability P190,000
Surcharges and interest 20,000
Bidding expenses 10,000
Price for the government P220,000
Problem 2 19
Sales proceeds (P400,000 + P50,000 + P500,000
P20,000)/94%
Multiplied by capital gains tax rate 6%
Capital gains tax P 30,000
Sales proceeds P500,000

Add: Interest (P500,000 x 15% x 8/12) 50,000
Redemption price P550,000
Problem 2 20
a. The cash reward of Miss Wan as tax informer would be P1,000,000, the maximum amount of reward.
b. The informers reward remains payable, hence, Miss Wan will received the maximum reward of P1,000,000.
c. The final income tax to be withheld from the reward of Miss Wan would be 10% of P1,000,000 or P100,000.
Problem 2 21
a. The tax violations of Miss San Tago are the following:
1. Unregistered business (Sec. 236 [A], NIRC.)
2. Non-issuance of commercial invoice (Sec. 237, NIRC.)
3. Ignoring the summon (Sec. 5, NIRC.)
b. Miss San Tagos minimum financial penalties if convicted:

1. For operating an unregistered business P 5,000
2. For not issuing commercial invoices 1,000
3. Failure to obey summon 5,000
Total minimum P11,000
Problem 2 22
None. There is no surcharge to be imposed to Orville Corporation because the error was corrected before
payment and the payment was made on time.
The income tax due is computed as follows:

Corrected gross receipts (P2,000,000/75%) P 2,666,667
Corrected allowable deductions (P1,500,000/1.35) 1,111,111
Taxable income per audit P 1,555,556
Multiply by percent of tax for 2009 30%
Income tax due 466,667
Problem 2 23
1. Principal factory P 500
Warehouses (P500 x 9) 4,500
Branches (P500 x 30) 15,000
Total annual registration fee January 31, 2010 P20,000
2. Total annual registration fee January 31, 2010 P20,000

Surcharges (20,000 x 25%) 5,000
Interest (P20,000 x 20% x 6/12) 2,000
Total amount due July 30, 2005 P27,000
Problem 2 24
Amount of tax liability P100,000
Surcharges 25,000
Interest 20,000
Advertising cost 5,000
Price if purchase by the Government P150,000
Problem 2 25
None. Forfeited property belongs to the government, hence, excess amount over tax liability is not refundable to
the taxpayer.
Problem 2 26
Tax violation involving fraud is not allowed with tax comprise. (Sec. 204A, NIRC)
Problem 2 27
1. Compromise (P10,000,000 x 10%) P 1,000,000
2. Compromise (P10,000,000 x 40%) P 4,000,000
Problem 2 28
Case 1 Financial incapability due to corporate insolvency.
Delinquent accounts P 500,000
Pending cases under administrative protest 900,000
Criminal violation not filed in courts 1,000,000
Total basic tax P2,400,000
Multiplied by applicable compromise rate 20%
Amount of compromise P 480,000
Case 2 Financial incapability due to surplus deficit resulting to impairment in original capital by at least 50%.
Case 3 Doubtful validity of assessment.
Problem 2 -29
a. Yes, because the offered compromise amount of P100,000 exceeds the required minimum amount of
P25,000, (P250,000 x 10%).
b. Since distraint is imposed only on personal property, the personal property with a value of P100,000 shall be
subjected to distraint.
c. Yes, levy of real property and distraint of personal property can be done simultaneously (Sec. 207B of the Tax
Code). See also Section 205 of NIRC.
d. No, the unpaid portion will remain as tax liability of Lugui because Miss Lugui did not avail of the compromise
tax settlement. The remedy by distraint of personal property and levy on realty may be repeated if necessary
until the full amount due, including all expenses, is collected (Sec. 217, NIRC).
CHAPTER 3
CONCEPT OF INCOME

1. False Some wealth that made to increase the taxpayers net worth are gifts and inheritance and these
are not taxable income.
2. True
3. True
4. False Filipino citizen who is not residing in the Philippines is taxable only for income earned within.
5. False The basis of tax is the fair market value of the instrument.
6. False Not income for the employee and not subject to income tax because the beneficiary is the
employer.
7. False Accrual reporting reports income when there is earning regardless of collection.
8. False Calendar year basis
9. True
10. False This rule applies to individual taxpayers.
11. False There is no rule of 25% initial payment if the sale is made on regular basis of personal goods.
12. True
13. True
14. True
Problem 3 2
1. A 11. B
2. D 12. A
3. B 13. A
4. D 14. D
5. C 15. A
6. B 16. B
7. 17. D
8. C 18. C
9. C 19. C
10. C 20. D
21. A
Problem 3 3 A
Net assets ending (P300,000 P50,000) P250,000
Net assets beg. (P400, 000 P150,000) ( 250,000)
Balance P - 0 -
Add: Owners drawings 245,000
Reportable income (loss) P245,000
Problem 3 4 D
Net assets, end of year P 100,000
Add: Personal drawing 70,000
Total P 170,000
Less: Net assets, beginning of year 150,000
Business income P 20,000
Problem 3 5 C
Net assets ending (P530,000 P130,000) P400,000
Net assets beg. ( 250,000)
Reportable income (loss) P150,000
Problem 3 6 B
Increase in total assets P 250,000
Decrease in total liabilities 160,000
Drawings 20,000
Additional investments ( 50,000)
Total income P 380,000
Problem 3 7 D
Return of Return on
Capital Capital
Time deposit balance P250,000 P30,000
Problem 3 8 C
Year 1 Year 2 Year 3
Sales 0 0 P1,800,000
Cost of sale 0 0 ( 1,000,000)
Disposal cost 0 0 ( 50,000)
Income for each year 0 0 P 750,000
Problem 3 9 A
Taxable Nontaxable
Income Income
Salary (P260,000/13) x 12 P240,000
Raffle winnings 70,000
13th month pay (P260,000/13) x 1 P 20,000
Lotto winnings . 500,000
P310,000 P520,000
Problem 3 10 D
Within: Taxable Income
Compensation income P180,000
Income from grocery store 50,000
Outside:
Compensation income 120,000
Lotto winnings 100,000
Total income taxable in the Philippines P450,000
Note: Lotto winnings earned outside the Philippines by a resident Filipino citizen are taxable in the Philippines.
Problem 3 11 C
Subject to ITR Subject to Final
Tax
Consultancy fee P 80,000
Salary 300,000
Prizes in raffle ticket P 20,000
Gain on sale of principal residence . 400,000
Totals P380,000 P420,000
Problem 3 12 D
Salary for the first 4 months (P12,000 x 4) P 48,000
Remaining months (P15,000 x 8) 120,000
Gross compensation income P168,000
Problem 3 13 B
Reportable income is the market value of the car P120,000
received
Problem 3 14 A
Market value of the service received P6,000
Problem 3 15 C
Face value of the non-interest bearing note P30,000
Multiplied by the present value factor of 10% annuity 0.909
Compensation income present value of the note P27,270
Note: Upon receipt of the note, no interest income yet is to be reported.
Problem 3 16 A
Interest income (P50,000 x 12% x 6/12) P3,000
Problem 3 17 B
Collections during the year P490,000
Expenses actually incurred (150,000)
Net income before personal exemption cash P340,000
basis
Problem 3 18 A
Gross income (P1,000,000 P600,000) P400,000
Actual operating expenses (P200,000 x 80%) (160,000)
Net income before other income P240,000
Add: Gain from sale of old furniture 20,000
Taxable income P260,000
Problem 3 19
1. A
Reportable income 2006 - casual sale (P12,000 P3,000) P9,000
The sale is considered cash sales because the 2006 initial payments (P1,000 + P1,000 + 2,000) exceeds 25% of
the selling price; P4,000/P12,000 = 33%
2. B
Reportable income 2006 regular sale (P9,000 x P4,000/P12,000) P3,000
Since the personal property is sold in regular basis, installment reporting of income is allowed.
Problem 3 20
1. P37,500 = Not in the choices
Net income (P2,000,000 P1,400,000 P100,000) P500,000
Income tax (P500,000 x 5/20) x 30% P 37,500
2. B
Income tax (P2,000,000 x 6%) P120,000
Problem 3 21 B
Total revenue P1,000,000
Cost of sale ( 500,000)
Income to be reported P 500,000
Problem 3 22 D
Contract price P 1,000,000
Less: Cost (P90,000/20%) 450,000
Gross profit P 550,000
Multiplied by percent of completion 20%
Reportable income under percent of completion P 110,000
Problem 3 23 D
Contract price P1,200,000
Less: Total costs (P432,000 + P184,250 + P103,750) 720,000
Total profit P 480,000
Less: Previous years reported income:
Accomplished contract price for 2008 and 2009 P1,020,00
(P1,200,000 x 85%) 0
Previous years actual costs:
2008 ( 432,00
0)
2009 ( 184,25 403,750
0)
Percent of completion 2010 Reportable income P 76,250
Problem 3 24 A
Year 3 sales P 500,000
Less: Cost incurred as of year 3:
Year 1 P 100,000
Year 2 200,000
Year 3 50,000 350,000
Year 3 reportable income P 150,000
Problem 3 25 C
Harvested crops sold P
2,000,000
Less: Total direct costs:
Year 1 P 300,000
Year 2 100,000
Year 3 100,000
Year 4 100,000
Year 5 400,000
1,000,000
Reportable income year 5 P
1,000,000
Problem 3 26
Year 1 Year 2
Total harvest for the year
at selling price P50,000 P100,000
Cash Accrual Cash Accrual

Harvests sold:
(80 cavans x P500) P40,000 P40,000
(190 cavans x P500) P95,000 P95,000
Ending inventory:
(20 cavans x P500) 10,000
(30 cavans x P500) 15,000
Beginning inventory:
(20 cavans x P500) . . . ( 10,000)
Gross income for the year P40,000 P50,000 P95,000 P100,000
Problem 3 27
1. Cash Method Farming Trading Rent
Total
Revenue P 50,000 P150,000 P100,000
Equipment sold 25,000
Costs:
Cost of products purchased ( 90,000)
Carrying value of farm . ( 25,000) .

equipment
Gross income P 50,000 P 60,000 P100,000 P210,000
2. Accrual Method Farming Trading Rent

Total
Revenue P 50,000 P150,000 P100,000
Equipment sold 25,000
Inventory, ending 9,000
Inventory, beginning ( 6,000

)
Costs:
Cost of products purchased ( 90,000)
Carrying value of farm . ( 25,000) .

equipment
Gross income P 53,000 P 60,000 P100,000 P213,000
CHAPTER 4
GROSS INCOME

1. True
2. True
3. False Religious officers income is subject to income tax.
4. True
5. True
6. False The basis of tax is the amount of debt cancelled.
7. False Excess of advances over actual expenses
8. True
9. True
10. True
11. True
12. False Not income but a liability in compliance with the trading business rule.
13. False Under service business, advances from clients are to be reported as income. Hence, include as
income because the advanced rental is without restriction.

1. True
2. True
3. False because estimated bad debts is not allowed to be deducted from gross business income.
4. False At the year of recovery
5. False Not an option to report, but required to report.
6. False the return of premium from insurance company is not taxable.
7. True
8. False To be taxable, income should be realized.
9. True
10. False As a rule, income obtained illegally is taxable.
11. False As a rule, income received by error is reportable income.
12. True
13. False Not taxable.
14. True
15. True
16. False The rule of P10,000 and below applies to prizes not winnings.
1. C 1. C
2. C 2. B
3. B 3. C
4. A 4. A
5. B 5. D
6. A 6. D
7. D 7. B
8. D 8. D
9. B 9. C
10. A 10. A
11. B 11. B
12. C 12. C
Problem 4 5 A
Gross salary (P280,000 + P20,000) P300,000
Pier diem as board of director 120,000
Taxable 13th month pay 5,000
Gross taxable compensation income P425,000
Problem 4 6 B
Salary P150,000
Overtime pay 30,000
13th month pay and other bonuses 15,000
Total compensation income P195,000
Problem 4 7 B
Salary P120,000
Tips 360,000
Cost and living allowance 5,000
Total taxable compensation income P485,000
Note: New BIR interpretation provides that the 13th month pay and other benefits amounting to P30,000 and
below is not taxable. Since the 13th month pay is only P10,000, the P20,000 achievement awards being part of
de-minimis can be used as other benefits, to complete the P30,000 nontaxable threshold.
Problem 4 8 D
First employment for 30 years received at the P500,000
age of 50
Problem 4 9 B
First employment resigned P300,000
Problem 4 10 C
Gross compensation income (1,000 x P10) P10,000
Problem 4 11 B
Compensation Capital gain
Compensation income (P13 P12) x 10,000 P 10,000
Capital gain (P15 P13) x 10,000 P 20,000
Problem 4 12 C
Compensation Capital gain
Compensation income (P25 P23) x 10,000 P 20,000
Capital gain (P30 P25) x 10,000 P 50,000
Problem 4 13 D
Regular compensation per month P 50,000
Cancellation of indebtedness (P300,000 50,000
P250,000)
Total compensation income December 2007 P100,000
Problem 4 14 B
Insurance premium beneficiary Sico P5,000
Problem 4 15 B
Cleaning of business equipment P 1,000
Repair service of store 3,000
Total casual service income P 4,000
Problem 4 16 C
Total purchases P500,000
Transportation expenses 5,000
Unsold goods ( 40,000)
Cost of goods sold P465,000
Problem 4 17 C
Inventory, beginning P 20,000
Purchases 1,200,000
Purchase discounts ( 10,000)
Purchase returns ( 40,000)
Transportation in 5,000
Inventory end ( 50,000)
Cost of sale P1,125,000
Problem 4 18 C
Year 1 Year 2
Inventory, beginning P 50,000
Inventory, ending (P50,000) ( 30,000)
Purchases 850,000 900,000
Freight in 10,000 15,000
Purchase discount ( 20,000) ( 25,000)
Cost of sales P790,000 P910,000
Problem 4 19 B
Sales P1,275,000
Sales returns ( 25,000)
Net sales P1,250,000
Less: Cost of goods manufactured and sold
Purchases raw materials P 540,000
Freight-in 20,000
Raw materials, ending inventory ( 10,000)
Raw materials used P 550,000
Direct labor 400,000
Factory overhead 200,000
Total manufacturing cost P1,150,000
Work-in-process, ending inventory ( 100,000)
Finished goods, ending inventory
( 50,000) 1,000,000
Problem 4 20 B
Advance payment P 2,000
Additional collection 8,000
Office machine 3,000
Gross service income P13,000
Problem 4 21 A
Professional fee, accounting services P 500,000
Salaries of accounting staff ( 150,000)
Accounting supplies ( 10,000)
Gross service income P 340,000
Problem 4 22 B
Service charges:
Originating from the Philippines P 150,000
Collection abroad of collect messages originating in the 60,000
Philippines
Gross income for Philippine Income Tax computation P 210,000
Problem 4 23 B
Rent for year:
200A P 80,000
200B 480,000
200C 40,000
200B Reportable income P 600,000
Problem 4 24 B
Rent income P360,000
Real property tax assumed by the lessee 10,000
Unrestricted advance rent 60,000
Taxable gross receipts P430,000
Problem 4 25 D
Outright Spread-
out
Year 1 Outright method P240,500
Year 1 Spread-out method
Value of investment P240,500.0
0
Less: Accum. depreciation [(P240,500 - P560)/8 yrs] x 4.75
yrs 142,464.37
Book value, end of lease P
98,035.63
Divided by remaining years of contract
4.75
Annual income from improvement P
20,639
Multiplied by months in a year
9/12
Year 1 spread-out rent income on improvement P
15,479
Problem 4 26 C
Outright Spread-out
Outright P180,000
Spread-out P - 0 -
Problem 4 27 C
Cost of improvement P300,0
00
Less: Accumulated depreciation at the end of the lease (P300,000/6) x 4
years and 7 months 229,16
7
Book value at the end of the lease P
70,833
Divided by number of years until the termination of lease contract = 4
years and 7 months 4.58
Annual additional income P
15,454
Multiplied by number of years expired (from March 31, 2008 to
December 31, 2010) 2.75
Reported additional income from improvement (P42,50
0)
Book value of improvement at the time of pre-termination
Cost P300,000
Less: Accum. depreciation at pre-termination (P300,000/6) 137,500
x 2.75 years 162,50
0
Additional income in 2010 from the pre-termination of contract P120,0
00
Problem 4 28 C
P50,000 cash dividend received by an individual
Problem 4 29 B
Interest income from an investment in a 10-year bond P 40,000
Interest income from expanded foreign currency deposit 60,000
Total taxable interest income P100,000
Problem 4 30 D
Year 3 interest income of P4,461.20.
Problem 4 31 D
Royalty income as author (P100,000 x 10%) P 10,000
Royalty income from franchising (P200,000 x 20%) 40,000
Royalty income from gold mine (P500,000 x 20%) 100,000
Total final tax P150,000
Problem 4 32 D
Copyright Patent
Gross royalties: P 35,000
Copyright (P31,500/90%)
Patent (P20,000/80%) P 25,000
Income tax final
Copyright (P35,000 x 10%) ( 3,500)
Patent (P25,000 x 20%) . ( 5,000)
Income after tax P 31,500 P 20,000
Problem 4 33 A
P500,000 - Dividends earned outside the Philippines by a domestic corporation from a foreign corporation are
taxable in the Philippines.
Problem 4 34 A
The dividend received by a domestic corporation from another domestic corporation is nontaxable.
Problem 4 35 A
P8,000 prize won in a TV program. Prizes amounting to P10,000 and below are subject to normal taxes.
Problem 4 36 D
First prize raffle draw (P50,000 P1,000) P 49,000
Gambling winnings 300,000
Beauty contest winnings 100,000
Taxable prizes and winnings P449,000
Problem 4 37 D
Year 1 Year 2 Year 3
Income (loss) P100,000 (P P 50,000
20,000)
Less: Bad debts written off 25,000 10,000 5,000
Income loss before bad debts recovery P 75,000 (P P 45,000
30,000)
Bad debts recovery of previous year with tax . 5,000
benefit 25,000
Taxable income P 75,000 (P P
5,000) 50,000
Note: The tax benefit allowed in year 2 for the bad debts written off is only P5,000; hence, the reportable bad
debts recovery in year 3 should also be P5,000.
Problem 4 38 D
Year 1: No bad debt recovery None
Year 2: Bad debt recovery P 600
Problem 4 39 D
P5,000 local tax recovery.
The requirement should be properly stated as: What amount of tax refund should be reported as part of year 3
taxable income?
Problem 4 40 C
Real property tax P 10,000
Local taxes 500
Reportable income from tax refund P 10,500
Problem 4 41 C
Annuity received P 20,000
Present value (P20,000 x 0.9091) 18,182
Interest income - Taxable annuity P 1,818
Note: The present value factor of P1 for an effective interest rate of 10% is 0.9091.
Problem 4 42 D
Annuity received P 5,880
Present value (P5,880 x 0.8928) 5,250
Interest income - Taxable annuity P 630
Problem 4 43 B
Excess of withdrawable amount ($10,000 - $1,000) $ 9,000
Multiplied by exchange rate per 1 dollar P 50
Reportable income received by error P450,000
Problem 4 44 C
Average monthly unreturned change to clients P 4,000
Multiplied by number of months in a year 12
Illegally obtained income taxable P48,000
Problem 4 45
Total receipts, 200B P 425,000
Less: Direct costs- commission (P425,000 x 65%) P
Rental expense (P3,000 x 12) 276,250
Depreciation 36,000
Supplies used 5,000 319,000
Gross income of A-1 Barbershop P 106,000
1,750
Note: The interest expense could only be deducted to compute gross income if a business is a banking
institution. Furthermore, borrowing cost directly attributable to the acquisition, construction or production of
assets used in the business may either be capitalized or deducted as operating expense.
Problem 4 46
Salary P300,000
Corporate shares received (1,000 shares x P100) 100,000
Cancellation of debt in lieu of service rendered 50,000
Profit sharing 40,000
Gross taxable compensation income P490,000
Problem 4 47
Salary (P25,000 + P302,000) P327,000
Income tax paid by the employer 5,000
Note receivable 20,000
Total compensation P352,000
Business gross income P
Allowable expenses 400,000 150,000
Prepaid rent income ( 250,00 50,000
Bad debts recovered previously written-off (P38,000 x 60%) 0) 22,800
Taxable income subject to tabular tax P574,800
CHAPTER 5
EXCLUSION FROM GROSS INCOME
Problem 5 1 TAXABLE OR NONTAXABLE with income tax

1. Nontaxable 11. Taxable 21. Taxable
2. Taxable 12. Nontaxable 22. Nontaxable
3. Nontaxable 13. Taxable
4. Nontaxable with 14. Nontaxable
IT
5. Taxable 15. Nontaxable
Problem 5 2 TAXABLE OR NONTAXABLE with income tax

1. Nontaxable 12. Nontaxable, if not exceeding 10 days
3. Nontaxable 14. Taxable (based on proceeds or selling price or
zonal value,
whichever is higher).
6. Nontaxable 17. Taxable, except when BIR registered with 50 year
old retiree; 10 years service and first time to avail.
8. Taxable 19. Nontaxable if Philippine Sweepstakes and Lotto
10. Taxable 21. Taxable

1. False nontaxable
2. True
3. True
4. False Proceeds of life insurance is not taxable regardless of whoever would be the recipient,
except when the insured person outlived his life insurance and received the proceeds. The
excess of proceeds over premium paid is taxable.
5. False include in gross income
6. False Bequest is a personal property.
7. True
8. True
9. True
10.False Nontaxable
11.True
12.False Nontaxable
13.False Some prizes and awards are not taxable. Eg. Ramon Magsaysay Awards
14.True
15.True
16.False Include in gross income because income from gift is subject to income tax.
17.False Exempt from income tax.
18.True
Problem 5 Problem 5 -5
-4
1. A 9. C 1. B 6. D
2. D 10. C 2. D 7. C
3. C 11. A 3. A 8. C
4. D 12. D 4. D 9. C
5. D 13. D 5. C 10. C
6. B 14. A
7. A 15. B
8. A
Problem 5 6 D
Availed 10-day sick leave pay P1,500
Problem 5 7 C
Take home pay P212,000
Nontaxable 13th month pay ( 17,500)
Withholding tax 13,500
Other income subject to normal tax 20,000
In general, a MWE is not subject to WTW and income tax on his compensation income. But if he has
other income that is subject to normal tax, his entire income during the year will be subject to
income tax, his compensation income, however, will not be subject to WTW.
Problem 5 8 C
Taxable Nontaxable
Net pay P265,000
Advances 6,000
3th month pay (27,000) P27,000
Christmas bonus (de minimis) ( 5,000) 5,000
SSS contribution . 4,000
Totals P289,000 P36,000
Problem 5 9 C
Taxable Tax-exempt
Net take home pay P13,000
SSS contributions P300
PAG-IBIG contributions 100
Union dues contributions 100
Office party contributions 75
Charitable contribution (deductible only from 25
business income)
Withholding income tax 400 .
Totals P13,500 P500
Problem 5 10 D
Monthly salary P15,000
Problem 5 11 A
Rent of apartment P 50,000
Reimbursement 20,000
Taxable benefits P70,000
Problem 5 12 D
Reportable taxable income P - 0 -
Problem 5 13 B
Proceeds of life insurance received by P500,000
insured person
Return of premium 40,000
Total premium paid (490,000)
Taxable income P 50,000
Problem 5 14 D
Zero, because, the P270,000 cash surrender value is just a return of contribution of P360,000.
Problem 5 15 D
Nontaxab
le Taxable
Actual damages for unrealized profit P100,000
Interest on non-taxable damages 20,000
Actual damages for lost products P200,000
Exemplary damages 50,000
Moral damages 50,000
Actual liquidated damages 80,000 .
Total P380,000 P120,000
Problem 5 16 A
Taxable income P -0-
Problem 5 17 D
Taxable Nontaxable
Terminal pay P 60,000
Life insurance 500,000
SSS death benefit 10,000
Donations . 40,000
Totals P - 0 - P610,000
Problem 5 18 A
The termination is due to cause within the control of Jalosjos.
Problem 5 19 D
Last pay ujpon resignation from his first P100,000
employer
Problem 5 20 A
Zero, all items enumerated are not subject to income tax.
Problem 5 21 D
P50,000 business income for year 4
Problem 5 22 C
Interest income from bank savings deposit P4,000
Problem 5 23 D
Zero. All gifts enumerated are not subject to income tax.
Problem 5 24 D
Total income (P100,000 x 10 months) P1,000,000
Total average expenses (P20,000 x 10 ( 200,000)
months)
Income subject to income tax P 800,000
Problem 5 25 D
Zero. All winnings received by Miss Lara are subject to tax because she has entered into a contest
as Miss International.
Problem 5 26 A
Lotto Philippine winnings P10,000,000
Problem 5 27 B
Ramon Magsaysay award P 50,000
Athlete of the year award 100,000
Prize for winning the silver Olympic medal 500,000
Gift from Mr. Lim 250,000
Gift from Nissan 1,000,000
Winnings Philippine sweepstakes 100,000
Total winnings/ awards not subject to income P2,000,000
tax
Problem 5 28 D
Zero. Interest and gain on sale of investment in a 5-year government bonds is exempt from income
tax.
Problem 5 29 B
Interest received from bond investment P 120,000
Problem 5 30 B
Interest income P120,000
Multiplied by final tax rate on interest 20%
income
Income tax P 24,000
Problem 5 31 D
Interest on expanded foreign currency P100,000
deposit
Problem 5 32 A
Income from sale of invented products P5,000,000
Sale of technology 2,000,000
Less: Research and development costs 800,000
Nontaxable income P6,200,000
Note: The cost of product produced need not to be deducted anymore because of the term income
from sale of invented products.
Problem 5 33 C
Interest income on bank savings deposit P10,000
Problem 5 34 C
Interest income from foreign currency deposit P150,000
(P2,000,000 x 7.5%)
Interest income from time deposit (P1,000,000 x 20%) 200,000
Income tax paid by BBC P350,000
Problem 5 35
1. Compensation income (P5,000 x 10) P 50,000
2. Retirement benefits P500,000

Salary earned 50,000
Gross income P550,000
3. Same answer with No. 1 P 50,000
Problem 5 36
Winnings from charity horse race sweepstakes from P 500,000
PCSO 100,000
Interest on government debt securities 600,000
Damages for breach of contract (P1,000,000 x 60%) 300,000
Gains from redemption of shares in mutual fund 60,000
Gain from sale of bonds with maturity of more than five 200,000
years P1,760,000
Gifts from friends
Total exclusion from gross income
Problem 5 37
Exclude Include
Proceeds of his life insurance (P2,000,000) P P1,625,00
(P15,000 x 25) 375,000 0
Proceeds of his mothers life insurance 1,000,000
Cash gift 50,000
Inheritance 3,000,000
Rent income
Total . 100,000
P4,425,00 P1,725,00
0 0
Problem 5 38
No, the P1,500,000 transfer to be received by Miss Tandana is to be included for income taxation
because the transfer is in recognition of her services rendered. It is not to be included as a part of
estate tax.
Problem 5 39
All enumerated items are not subject to normal (tabular) tax.
CHAPTER 6
FRINGE BENEFITS TAX

1. True
2. False These are benefits other than salaries.
3. False Wage and salaries are not subject to reduction once given regardless of the financial
condition of the employer.
4. True
5. False This a definition of fringe benefits not of fringe benefit tax.
6. False The corporate income tax rate is 35% while the fringe benefit tax is a final tax rate of
32%.
7. True, unless these are deminimis
8. False FBT is a final tax of the employee.
9. True
10.True
11.True
12.True
13.True
14.True
15.True
16.False Some housing fringe benefit is not subject to income tax. Ex. Temporary housing for
three months or housing benefit under the employers benefit rule.
1. True
2. False If in the name of an officer employee and reimburse or paid by the employer.
3. False - Fringe benefit which are necessary for the business and required for the convenience
of the employer are not subject to fringe benefit tax.
4. True
5. False Scholarship grants to employees not related to business is taxable.
6. False These are among those exempted from fringe benefit tax.
7. False Fringe benefits of rank-in-file employee, not mentioned in the exemptions, are subject
to income tax on wages but not subject to fringe benefit tax.
8. False Rank-in-file employees fringe benefits are subject to income tax on wages.
9. True
10.True
11.False medical allowance of P750 per semester
12.False Daily meal allowance for overtime
13.True
Problem 6 3
1. A 7. A
2. B 8. C
3. B 9. C
4. D 10. A
5. D 11. D
6. D 12. D
Problem 6 4A
Case 1: C
Taxable Nontaxabl
e
Basic salary P240,000
13th month pay P20,000
De minimis within ceiling (P1,500 x 12) 18,000
Other benefits - excess of de minimis . 6,000
(P24,000 P18,000)
Total P240,000 P44,000
Note: The 13th month pay and other benefits amount only to P26,000 (P20,000 + P6,000), hence,
nontaxable.
Case 2: D
All of the given items of income for MWE are not subject to income tax and within the prescribed
nontaxable ceiling.
Case 3: B
Taxable Nontaxab
le
Total basic salary P108,00
0
Overtime pay 30,000
Hazard pay 2,000
Holiday pay 1,000
De minimis:
Nontaxable rice subsidy (P1,500 x 12) P18,000
Nontaxable clothing allowance 4,000
13th month pay and other benefits: Nontaxab
le
13th month pay P 9,000
Other benefits excess of de minimis
Rice subsidy (P36,000 P18,000) 18,000
Clothing (P20,000 P4,000) 3,000 30,000
13,000
Total P154,00 P52,000
0
Case 4: Not in the choices

Taxable Nontaxab
le
Total basic salary P96,000
Overtime pay 20,000
De minimis:
Nontaxable rice subsidy (P1,500 x 12) P18,000
13th month pay and other benefits: Nontaxab
le
Other benefits excess of de minimis
Rice subsidy (P24,000 P18,000) 6,000 14,000
Rent income 60,000
Interest income (P4,000/80%) .
5,000
Total P181,00 P32,000
0
Note: A MWE with other income subject to normal tax is disqualified from tax exemption. The
interest income is subject to final income tax. It should be included as part of the taxable income as
required by the question because such income is taxable. The question did not ask for income
subject to normal tax only.
Problem 6 4B
Case 1: Housing benefits

1. A
GMV (P6,000,000 x 5% x 50%)/68% P220,588
Multiplied by FBT rate 32%
FBT P 70,588
2. B
Down payment P2,000,00
0
Installments (P1,000,000 x 4 x
0.636) 2,544,000
Acquisition cost, excluding interest P4,544,00
0
GMV (P5,037,300 x 5% x 50%)/68%) P185,195

FBT P 59,262
P2.00 difference is due to
rounding off.
Present values of installment

payments
Year:
1: (P1,000,000 x 0.8928) P
892,800
2: (P1,000,000 x 0.7972) 797,200
3: (P1,000,000 x 0.7118) 711,800
4: (P1,000,000 x 0.6355)
635,500
Total P3,037,3
00
Add: Downpayment
2,000,00
0
Monetary value P5,037,3
00
Case 2: Motor vehicle benefits
1. A
GMV [(P1,000,000/5) x 50%]/68% P147,059
FBT P 47,059
2. C
GMV [(P1,000,000/5)/68%] P294,118
FBT P 94,118
Correction of Page 270: Motor vehicle formula No. 3:
3. Purchase of car on MV = AC/5

installment basis, the ownership
of which is place in the name of Where:
the employee. AC = Acquisition cost, exclusive of
Not employer interest
Problem 6 5
1. C = P170,000
Monetary value of FB (P80,000/32%) x P170,000
68%
2. B = P250,000
Grossed-up monetary value P250,000
(P80,000/32%)
3. D = P 0 -
A fringe benefit tax is not an income tax P - 0 -
of employer.
Problem 6 6 A
Deductible from business income (P136,000/68%) P 200,000
Problem 6 7 A
None, because fringe benefit tax is a final tax and no deduction is allowed from gross compensation
income except personal exemptions and health or hospitalization insurance actually paid if the
family income does not exceed P250,000.
Problem 6 8 D
Zero. No Fringe benefit tax is to be imposed on fringe benefit of rank-in-file employee. Mr. Estrada
is a company messenger. His fringe benefit is subject to withholding tax on wages.
Problem 6 9 C
Fringe benefit tax (P102,000/68%) x 32% P48,000
Income tax:
Net income before tax (P1,750,000/70%) P2,500,00
0
Add: Fringe benefits charge to miscellaneous
expense 102,000
Total P2,602,00
0
Multiplied by corporate income tax rate
30%
Corporate income tax P
780,600
Less: Income tax already paid (P2,500,000 30,600
P1,750,000) 750,000
Tax recovered by the government P78,600
Note: The fringe benefit tax expense is not deductible because the related withholding tax was not
withheld and paid until the tax evasion was discovered by the BIR.
Problem 6 10 B
Acquisition cost = fair market value (higher than P2,040,000
zonal value)
Monthly fringe benefit [(P2,040,000 x 5% x P 6,250

50%)/12]/68%
Problem 6 11 A
Zero. Jeans used of the condominium is not for her benefit but for the benefit of B Corporation as
the former conducts investigation for inventory fraud.
Problem 6 12 A
Grossed-up monetary value (P17,000 + P30,000
P6,800)/68%
P 9,600
Problem 6 13
FB expense (P476,000 x 75%)/68% P525,000
Problem 6 14 D
Fringe benefit tax (P16,320/68%) x 32% P 7,680
Problem 6 15 C
Fringe benefit tax (P57,800/68%) x 32% P27,200
Problem 6 16 B
1. D
There is no FBT for rank-in-file employee.
2.
Benchmark interest (P88,400 x 12%) P10,608
Less: Actual interest charge (P88,400 x 3%) 2,652
Difference P 7,956
FBT (P7,956/68%) x 32% P 3,744
Problem 6 17 B
Goma golf club P 68,000
Baguio Country Club 340,000
Total taxable fringe benefits P408,000
FBT (P408,000/68%) x 32% P192,000
Problem 6 18 A
Hotel accommodation [($1,600- ($300 x 4)] x P50/$1 P 20,000
Personal expenses ($280 x P50/$1) 14,000
Total amount of fringe benefits P 34,000
Fringe benefit expense (P34,000/68%) P 50,000
Problem 6 19 C
Fringe benefit tax [(P54,400 x 30%) / 68%] x 32% P 7,680
Problem 6 20 B
Fringe benefit expense (P408,000/68%) P600,000
Problem 6 21 A
Zero. The scholarship was obtained through competitive examination.
Problem 6 22
1. D
None. Exempt because the educational benefit is related to work. (Employers benefit rule)
2. B
P65,280 Only the monetary value is deductible because the benefit is tax-exempt.
Problem 6 23
1. Rice subsidy P12,000
Nontaxable uniform and clothing allowance 3,000
Employees achievement award 10,000
Nontaxable medical allowance to dependents (P125 x 12) 1,500
Laundry allowance 3,600
Actual medical benefits 10,000
Total nontaxable fringe benefits P40,100
2. Car P214,000
Uniform and clothing allowance (P6,800 P3,000) 3,800
Medical allowance to dependents (P8,500 P1,500) 7,000
Total monetary value P224,800
Divided by grossed-up rate 68%
Fringe benefit tax P105,788
Note: The new BIR interpretation is that the excess of the actual fringe benefit given shall be
taxable after deducting the maximum de minimis threshold amount.
Problem 6 24
1. Housing benefit (P12,240 x 110%) P13,464
Lions Club membership fee 20,400
Total P33,864
Divided by grossed-up rate 68%
Taxable amount of FB P49,800
2. Fringe benefit tax (P49,800 x 32%) P15,936
3. Violeta Vicente cannot deduct the FBT from her gross

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

amount
of grossed-up monetary value amounting to P49,800
from the
gross income of the corporation as fringe benefit
expense.
Problem 6 25
1. Assuming that Mr. Wong is an alien not engaged in trade or business in the Philippines, the
determination of fringe benefit tax due would involve the following computations:
Total value of fringe benefits P112,500

Divided by GMV divisor 75%
Fringe benefit tax due P 37,500
2. Assume that Mr. Wong is a Filipino employed as manager of an offshore banking unit of a foreign
bank. The determination of the fringe benefit tax due would be as follows:
Divided y GMV divisor 85%
P 19,853
Fringe benefit tax due
3. Assuming that Mr. Wong is a Filipino employed as manager of Clark Special Economic Zone
(CSEZ), the computation of the fringe benefit tax due based on 25% fringe benefit tax would be:

Divided by GMV divisor 75%
P 37,500
Fringe benefit tax due
Problem 6 26
1. Minimum wage earner
Taxable compensation income P - 0 -
The MWE qualifies for tax exemption because his

13th month pay and other benefits does not
exceed
P30,000, computed as follows:
Rice subsidy (P24,000 P18,000) 6,000
Actual hospitalization payments (P15,000 5,000
P10,000)
Clothing allowance (P5,000 P4,000) 1,000
13th month pay and other benefits nontaxable P21,100
2. Not a minimum wage earner

Less: SSS premium contribution P2,400
Philhealth premium contribution 3,000 5,400
Taxable compensation P103,800
Note: Temporary housing for 3 months is not taxable.
Problem 6 27
1. Minimum wage earner
0
Net taxable compensation P122,600
2. Not a minimum wage earner

0
Notes:
1. The MWE is disqualified from tax exemption once he
has other
other income subject to normal tax aside from his
compensation
income.
2. The rent income is not included in the solutin amount
because
the requirement is only taxable compensation
income.
3. Nontaxable 13th month pay and other benefits:
13th month pay P10,600
Add: Excess DM:
- actual hospitalization (P20,000 P10,000) P10,0
00
- food overtime allow (P1,500 (P10,600/30) 10,617
x 25% x 10) 617
Total nontaxable 13th month pay and other P21,217
benefits
Problem 6 28
A 1. Monetary value P68,000
.
2. FBT (P68,000/68%) x 32% P32,000
B 1. Down payment P200,000

.
Add: Present value of P180,000 installment at
18% per year:
Yr. 1: (P180,000 x 0.8475) 152,55
0
Yr. 2: (P180,000 x 0.7182) 129,27
6
Yr. 3: (P180,000 x 0.6086) 109,54
8
Yr. 4: (P180,000 x 0.5158) 92,844
Yr. 5: (P180,000 x 0.4371) 562,896
78,678
Acquisition cost P762,896
Divided by 5
Monetary value P152,579
2. FBT (P152,579/68%) x 32% P 71,802
C 1. Monetary value (P816,000 x 150%) P1,224,0

. 00
2. FBT (P1,224,000/68%) x 32% P

576,000
D 1. Annual monetary value = annual depreciation P

. (P1,020,000/25) 40,800
2. FBT (P40,800/68%) x 32% P

19,200
E 1. Monetary value (P244,000 x 50%) P

. 122,000
2. FBT (P122,000/68%) x 32% P

57,412
F. 1. Monetary value (P1,360,000 x 5% x 50%) P 34,000
2. FBT (P34,000/68%) x 32% P 16,000
Problem 6 29
1. FBT condominium [(P8,000,000 x 5% x P

50%)/68%] x 32% 94,118
FBT car:
Down payment P
300,000
Present value of P240,000 yearly installment
at 12%
(P240,000 x 3.605)
865,200
Acquisition cost P1,165,20
0
Divided by 5
Monetary value P
233,040
FBT car (P233,040/68%) x 32% P
109,666
2. Journal entries:
FB expense 94,118
Cash / FBT payable 94,118
FB expense 1,274,866
Car 1,165,20
0
Cash / FBT payable 109,666
CHAPTER 7
DEALINGS IN PROPERTY
1. False Receivable not related to the main conduct of business are capital assets.
2. False Depreciable assets primarily used in business are ordinary assets.
3. True
4. True
5. True
6. False Regardless of gain or loss, a tax should be paid when the shares of stock are sold in
the stock market because the basis of tax is the selling price.
7. True
8. True
9. True
10.False For ordinary loss, the same; but for capital loss not the same because there is not
capital loss carry over and not holding period for corporation.
11.True
12.False No, because the 6% final tax is based on the higher of the selling price or zonal value.
If there is loss on sale, the normal tax rate if preferable.
13.False Not subject to creditable withholding tax.
14.False whichever is lower
15.False subject to income tax (capital gains tax).

1. True
2. False equipment used in business operations is an ordinary asset.
3. True
4. False The basis is the fair market value at the date of donation.
5. False - the speculator sells securities which he does not own.
6. True
7. True unless sold by dealers of securities
8. False Ordinary assets
9. True
10.False There should be no capital gain or loss.
11.True
12.True
13.True
14.True

1. False Not subject to capital gains tax because the issuance is original and the shares of
stock is owned by the corporation.
2. True
3. True
4. True
5. False Losses from wash sales are not deductible.
6. False no wash sales if there are two kinds of shares of stocks
7. True
8. True
9. True
10.True
11.False The final tax should be 30% is based on the gross income.
12.True
13.True
14.True
1. D 1. B
2. A 2. D
3. None of the choices all are 3. D
correct.
4. A 4. D
5. C 5. D
6. A 6. D
7. B 7. C
8. A 8. D
9. C 9. D
10 C 10 D
. .
11 A
.
Problem 7 6 A
Ordinary Capital
assets assets
Goods for sale P100,000
Trade receivables 50,000
Investment in property P200,000
Land and building for business 500,000
Delivery truck 250,000
Car for personal use . 400,000
Correct amount of assets P900,000 P600,000
Problem 7 7
1. A
Selling price per 200 sq. meters P 100,000
Multiplied by number of 200 s.m. sold 45

(9,000/200)
Total sales P4,500,000
Less: Cost of sales (P2,000,000 x 90%) 1,800,000
Ordinary gain from sale of land P2,700,000
2. C
Remaining capital asset (P2,000,000 x 10%) P200,000
Problem 7 8 B
Fair market value P190,000
Less: Book value of car 150,000
Gain on exchange P 40,000
Problem 7 9 C
There is capital loss if the property given away has fair value higher than P200,000 when it was
inherited.
Problem 7 10 A
Sec.40C, NIRC. No gain or loss shall also be recognized if property is transferred to a corporation
by a person in exchange for stock or unit of participation in such a corporation of which as a result
of such exchange said person, alone or together with others, not exceeding four persons, gains
control of said corporation; provided, that stocks issued for services shall not be considered as
issued in return for property.
Problem 7 11 Not in the choices
Acquisition cost P200,000
Agents commission (P500,000 P200,000) x 30,000
10%
Processing fee (P500,000 x 1%) 5,000
Deductible cost and expenses P235,000
Problem 7 12 C
Sales price P150,000
Cost or basis to the donee (the lower of
donors cost or
the fair market value when the gift was made ( 50,000)
Capital gain P100,000
Multiplied by holding period rate more than 1 50%
year
Reportable capital gain P 50,000
Problem 7 13 C
Acquisition cost (P150,000 + P20,000) (170,000)
Brokers commission (P200,000 x 5%) ( 10,000)
Capital gain P 30,000
Problem 7 14 D
The sale of the entire business is not an ordinary business transaction (Kahns Federal Income Tax,
p. 364)
Sales price P100,00
0
Less: X , Capital
75,000
Capital gain P
25,000
Problem 7 15 A
Holding period is more than 1 year = 50% of the capital gain
Problem 7 16 D
Less: Cost or market whichever is lower) 100,000
Capital gain P100,000
No holding period is allowed for taxpayer other individuals.
Problem 7 17 D
Year Year
1 2
Net business income P200,00 P300,000
0
Capital asset transactions: Year 1 Year
2
Capital gain (long-term) = (P50,000 x 50%) 25,000 20,000
( 40,000 x 50%)
Capital loss (short-term) = (P40,000 x 100%) (40,000 (10,000)
(10,000 x 100%) )
Net capital loss carry over (15,000)
Capital loss (15,000 (5,000)
)
Taxable income before personal exemption P200,00 P300,000
0
Correction: The requirement should be taxable income before personal exemption.
Problem 7 18
1. C
Ordinary gain P50,000
Capital asset transactions:
Short-term capital gain P20,000
Long-term capital gain (P30,000 x 50%) 15,000
Long-term capital loss ( 5,000) 30,000
Taxable income before personal exemption P80,000
2. B
Ordinary gain P50,000
Short-term capital gain P20,000
Long-term capital gain (P30,000) 30,000
Long-term capital loss ( 10,000) 40,000
Problem 7 19
1. C
2. C
200A 200B
Ordinary net business income P48,900 P85,700
Short-term capital gain 15,895
Short-term capital loss (18,960)
Long-term capital gain (P45,790 x 50%) . P22,895
Net capital loss carry-over (P3,065)
( 3,065)
Taxable net income before personal exemption P 48,900 P 105,530
Problem 7 20
1. Not in the choices = P270,000 Year Year
1 2
Ordinary taxable income P P180,00
60,000 0
Short-term capital gain (loss) (P400,00 P200,00
0) 0
Long-term capital gain (loss) (P600,000 x 50%): (50,000)
(P100,000 x 50%) 300,000
NOLCO applicable (P100,00
0) (60,000)
Net capital gain P
90,000
Taxable income before personal exemption P P270,00
60,000) 0
2. B
Ordinary taxable income P180,00
0
Short-term capital gain (loss) P200,00
0
Long-term capital gain (loss) (100,00
0)
Net capital gain P100,00
0
0
Problem 7 21 A
Selling Price Cost & Net Capital
Jewelry P 80,000 Expenses Gain
M. Benz Car long term 400,000 P 11,000 P 69,000
(50%) 6,000 370,000 15,000
Refrigerator 12,000 5,000 1,000
Ford Car 20,500 (8,500)
P76,500
Problem 7 22 A
Zero. If BPI is a dealer of debt and equity securities, the transactions related to securities are not
capital asset transactions but ordinary transactions, hence there is no net capital gain.
Problem 7 23 A
Sales of shares of stock P400,000
Basis of shares of stock (lower) ( 50,000)
Gain on sale P350,000
Problem 7 24 A
Capital gains of November sales (P150,000 P30,000
P120,000)
Problem 7 25 A
Gain per share (P110 P100) P 10
Number of shares of stock sold outside 1,000
stock exchange P10,000
Capital gain not traded in local stock 5%
exchange P 500
Final tax rate, 5% for the first P100,000 gain
Capital gains tax
Note: The shares of stock sold in the Philippine stock exchange are subject to percentage tax of
of 1%.
Problem 7 26
1. A
Tax due and payable (P500,000 x . P2,500
005)
2. D
Gross profit (P500,000 x 30%) P150,000
Other expenses (P3,800 + P200) 4,000
Net taxable gain P146,000
Multiplied by normal corporate 30%
income tax rate
Tax due and payable P 43,800
Problem 7 27 D
Capital gain (P150 P125) x 100) P2,500
Problem 7 28
1. D
Sale March (P120 x 500 shares) P
Less: Cost (P120,000/ 1,200 shares) x 500 shares 60,000
Capital gain
50,000
P10,000
2. B
Sales May (P90 x 500) P45,000
Less: Cost of sales (P70,000 x 500/700) 50,000
Loss P 5,000
Nondeductible loss (P5,000 x 300/500) P 3,000
3. B
Proceeds of liquidation (P100 x 300) P30,000
Less: Cost (P45,000 + P3,000) 48,000
Capital loss P18,000
Problem 7 29
1. D
No capital gain on original issuance of P - 0 -
companys own stock even if issued above par
2. C
Capital gain on reissued shares (P23 P21) x P4,000
2,000)
Problem 7 30
(1 C
)
Cost of the new family home (P2,500,000/P4,000,000) x P1,250,00
P2,000,000 0
(2 B
)
Sales proceeds P4,000,00
0
Less: Amount used to acquire new family home
2,500,000
Unutilized sales proceeds P1,500,00
0
Multiplied by capital gains tax rate
6%
Capital gains tax to be paid P
90,000
Problem 7 31 D
Basis of new residence P9,000,000
Capital gains tax (P5,000,000 x 6%) P300,000
Since there was no tax exemption, the entire amount of acquiring the new house and lot shall be its
cost.
Problem 7 32 D
Zonal value (P700 x 500) higher P350,000
Holding period is not applicable because the property is a real property subject to final tax.
Problem 7 33 B
Cost of original residence P6,000,000
Add: Excess of new acquisition cost over
sales price
(P15,000,000 P12,000,000) 3,000,000
Basis of new principal residence P9,000,000
Problem 7 34
1. C
Final tax (P1,200,000 x 6%) P72,000
2. C
Creditable withholding tax (P500,000 x P30,000
6%)
Problem 7 35 A
Sales proceeds P500,00
Multiply by tax rate 0
Capital gains tax 6%
P
30,000
Note: If the property is not used in trade or business, only the selling price (not zonal value) shall
be used in determining the basis of tax when the property is:
a. foreclosed by banks or
b. sold by a government corporation.
Problem 7 36 B
Creditable withholding tax:
(P500,000 x 1.5%) x 4 houses P 30,000
(P3,000,000 x 5%) x 2 300,000
P330,000
Income tax still due and payable:
Total revenue (P500,000 x 4) + P8,000,000
(P3,000,000 x 2)
Total costs (P200,000 x 4) + (P1,200,000 x (3,200,000)
2)
Gross profit P4,800,000
Operating expenses (2,800,000)
Net income P2,000,000
Multiplied by normal corporate income 30%
tax rate
Income tax due P 600,000
Creditable withholding tax ( 330,000)
Income tax still due and payable P 270,000
Problem 7 37
1. A
None. No withholding tax because Goldrich Realty Corporation is the
buyer not a seller.
2 A
None. No income tax is to be collected from sale of land by the
government.
Problem 7 38
1. B
Zonal value P10,000,000
2. C
Selling price P 6,000,000
3. B
Multiplied by creditable withholding tax rate 6%
Creditable withholding tax P 600,000
4. B
Capital gains tax final tax P 600,000
Note: Real property tax is different from capital

gains tax.
5. C
Selling price P6,000,000
Problem 7 39 A
Selling price = P1,000,000.
Problem 7 40 B
0
Less: Cost of real property lower than unpaid mortgage
assumed 400,000
Contract price P
600,000
Problem 7 41 B
Down payment P 120,000
Excess of unpaid mortgage assumed by the buyer over the
cost of real
property (P500,000 P400,000) 100,000
Initial payments P 220,000
Problem 7 42 B
Less: Unpaid mortgage assumed by the buyer lower than 300,000
cost

Less: Cost of sale 500,000
Reportable income = (gross profit/contract price) x

collection
(P1,000,000/P1,200,000) x P300,000 P 250,000
Note: The unpaid mortgage has no effect on the reportable income because its value is lower than
the cost.
Problem 7 43 C
Less: Cost of real property lower than unpaid mortgage 400,000
assumed
Contract price P 600,000

Less: Cost of real property 400,000
Down payment P 120,000

Excess of unpaid mortgage assumed by the buyer over the
cost 100,000
(P500,000 P400,000)
Initial payments P 220,000
Reportable income = (gross profit/contract price) x

collection
(P600,000/P600,000) x P220,000 P 220,000
Problem 7 44
1. Creditable withholding tax:

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

a member of
HLURB is not subject to CWT if the sales price is
P150,000 per house.
2. Gross profit:
(20 x P150,000 x 25%) P
750,000
(30 x P1,000,000 x 30%) 9,000,000
(40 x P2,500,000 x 35%) P44,750,00
35,000,00 0
0
Less: Optional standard deduction
(P44,750,000 x 40%) 17,900,000
Net taxable income P26,850,00
0
Multiplied by corporate tax rate 30%
Income tax due P
8,055,000
Less: Creditable withholding tax
5,900,000
Income tax still due and payable P
2,155,000
Problem 7 45
1. D
Sales in the regular course of business P500,0
Add: Sales of ordinary asset (lot used as 00
warehouse)
Total sales of ordinary assets P300,00 200,00
Less: Cost of sales 0 0
Cost of lot P700,0
Ordinary gains / income 150,000 00
450,00
0
P250,0
00
2. B
Sales of residential house and lot P1,000,00
Proceeds applied for the acquisition of new residential 0
house and lot
Amount subject to final withholding tax
Final tax rate 800,000
Final tax P
200,000
6%
P
12,000
Problem 7 46
Not-traded in Local Stock Exchange:
1. FIFO Method:
Sales proceeds (P200 x 350) P 70,000.00
Less: Cost of shares sold:
December 2005 purchased (P86.96 x P 8,696.00
100) 26,087.50 34,783.50
February 2006 purchased (P104.35 x P 35,216.50
250) 5%
Gain on sale on investment on stock P 1,760.83
Multiplied by percentage of tax
Tax due and payable
Note: The new cost per share due to 15% stock dividends is computed as follows:
December 200A purchase (P10,000/115) P 86.96
February 200B purchase (P36,000/345) P104.35
2. Moving Average Method:

Sales proceeds (P200 x 350) P 70,000
Less: Cost of shares sold (350 x P100) 35,000
Gain on sale of investment in stock P 35,000
Multiplied by percentage of tax 5%
Tax due and payable P 1,750
*Computation of the new cost per share would be:

Investment in common stocks:
No. of Cost/ Amou
December 15, 200A Shares share nt
February 24, 200B 100 P100 P10,0
Totals 300 P120 00
Add: 15% stock dividends 400
Basis of cost per share 60 36,000
Divide by number of share 460 P46,0
New cost per share 00
.
P46,0
00
460
P
100
Problem 7 47
Sales (P150 x 1,000) P150,000
Cost (P80 x 1,000) ( 80,000)
Gross profit rate (P70,000/P150,000) 47.667%
Percent of initial payment 20.00%
(P30,000/P150,000)
200A (P30,000 x 46.667%) x 5% P700.00

200B (P40,000 x 46.667%) x 5% P933.34
200C (P40,000 x 46.667%) x 5% P933.34
200D (P40,000 x 46.667%) x 5% P933.34
Problem 7 48
1. Initial Payments:
Downpayment P100,000
Installment received in 2006 200,000
Total P300,000
Add: Excess of mortgage assumed by the buyer over the
cost to the seller 50,000
(P650,000-P600,000) P350,000
Initial payments
2. Selling Price:
Down payment P
Installment payments P200,000 + (P300,000 x 4) 100,000
Mortgage assumed by the buyer 1,400,000
Selling Price
650,000
P
2,150,000
3. Contract Price:
Selling price P
Add: Excess of mortgage assumed by the buyer over the 2,150,000
cost to the seller
(P650,000 P600,000)
Total 50,000
Less: Mortgage assumed by the buyer P
Contract Price 2,200,000
650,000
P
1,550,000
Problem 7 49
Loss
Option money not exercise P 5,000 Gain
Gain on retirement of bonds[(P1,000,000 x 120%)-
P1,000,000] 20,000 P200,00
Shares becoming worthless P25,000 0
.
P200,00
0
Net gain (P200,000 P25,000) P175,00
0
Note: The gain or loss on transaction letter c is zero. In the absence of cost, the fair market value is
assumed as the cost.
Problem 7 50
Trinidad is correct. There is a tax savings of P100,000 for opting to pay final taxes.
Final tax (P3,000,000 x 6%) P 180,000
Normal tax (P3,000,000 P2,200,000) x ( 240,000)
30%
Tax savings ( P60,000)
Problem 7 51
No, because the Loakan Corporation is not an individual taxpayer.
Problem 7 52
1. Individual taxpayer Year 1 Year 2 Year 3 Year 4
Operating gain (loss) (P100,000 P50,000 P30,000 P80,000
)
NOLCO (80,000) (20,000)
Capital gain (loss) 20,000 10,000 (40,000) 50,000
NCLCO . (40,000)
Taxable income before ( P80,000) (P20,000) P10,000 P90,000

p.e.
2. Corporate taxpayer
Operating gain (loss) (P100,000 P50,000 P30,000 P80,000
)
NOLCO (80,000) (20,000)
Capital gain (loss) 20,000 10,000 (40,000) 50,000
Taxable income before ( P80,000) (P20,000) P10,000 P130,000

p.e.
Problem 7 53
1. M as an individual taxpayer
200A 200B 200C 200D 200E

Business income P P400,00 P450,0 P520,0 P600,0
200,000 0 00 00 00
Business expenses
300,000 350,000 400,00 500,00 500,00
0 0 0
Ordinary income (P100,0 P P P P100,0
(loss) 00) 50,000 50,000 20,000 00
NOLCO ( 30,00
. 0) . . .
Net ordinary income (P100,0 P P P P100,0
(loss) 00) 20,000 50,000 20,000 00
Capital asset
transactions:
Short-term gain P (P100,0 P - 0 P P
(loss) 100% 120,000 00) - 70,000 50,000
Long term gain (loss) ( 50,0 - 0
50% 00) 90,000 10,000 (100,00 -
0)
Net capital gain P (P P (P P
(loss) 70,000 10,000) 10,000 30,000) 50,000
NCLCO ( 10,00 ( 30,00
. . 0) . 0)
Reportable net P P
capital gain 70,000 20,000
Taxable income (P P P P P120,0
before exemption 30,000) 20,000 50,000 20,000 00
2. M as a corporate taxpayer
2005 2008
2006 2007 2009
Business income P P400,00 P450, P520,00 P600,0
200,000 0 000 0 00
Business expenses
300,000 350,000 400,00 500,000 500,00
0 0
Ordinary income (P100,00 P P P P100,0
(loss) 0) 50,000 50,000 20,000 00
NOLCO ( 50,00 ( 30,0
. 0) 00) . .
Net ordinary income (P100,00 P - 0 P P P100,0
(loss) 0) - 20,000 20,000 00
Capital asset
transactions:
Short-term gain P (P100,0 P - P P
(loss) 120,000 00) 0 - 70,000 50,000
Long term gain ( 100,00 ( 200,00 - 0
(loss) 0) 180,000 20,000 0) -
Net capital gain P P P (P130,0 P
(loss) 20,000 80,000 20,000 00) 50,000
Reportable net P P P P
capital gain 20,000 80,000 20,000 50,000
Taxable income (P P P P P150,0
80,000) 80,000 40,000 20,0000 00
Problem 7 54
1. Sales price P5,000,00
0
Less: Cost of sale
4,000,000
Gross income P1,000,00
0
Multiplied by percent of collection (P2,000,000 +
P500,000)/5,000,000 50%
Reportable gross income in 2009 P
500,000
2. Collection (P2,500,000/5) P500,000

Multiplied by percent of gross income 20%
(P1,000,000/P5,000,000)
Reportable gross income in 2010 P100,000
3. Sales price P5,000,00
0
Less: Cost of sale
4,000,000
0
Note: The 25% initial payment rule does not apply for the regular installment sale of personal
property (inventory). The 25% initial payment rule applies only to the casual sale of personal
property classified as capital asset and sale of real property.
Problem 7 55
1. Capital gains tax (P3,000,000 P 60,000
P2,000,000) x 6%
2. Basis of the new residential home (P1,200,000 P800,000

x 2/3)
3. Capital gains tax (P3,000,000 x 60%) P180,000
4. Basis of the new residential home P2,000,00

0
Problem 7 56
1. Down payment (P3,000,000 x 20%) P 600,000
Add: Excess of mortgage over cost (P1,200,000
P700,000) 500,000
Initial payment P1,100,00
0
2. Selling price P3,000,00

0
Add: Excess of mortgage over cost
500,000
Total P3,500,00
0
Less: Mortgage assumed by the buyer
1,200,000
0
3. Capital gains tax in 2009 (P3,000,000 x 6%) P180,000
Note: The sale is considered cash sales because the

initial payment
is 37% of the selling price.
Problem 7 57
1. Deductible loss Feb. 14, 2009 P- 0-
2. Sales P320,00
0
Less: Cost of sales (P450,000 x 8/9)
400,000
Nondeductible loss Feb. 14, 2009 P
80,000
3. P294,444
4. P215,556
Jan. 20 Feb. 10
Original cost P250,000 P180,00
0
Add: Nondeductible loss 44,444
Jan. 20: (P80,000 x 5/9)
35,556
Feb. 10:: (P80,000 x 4/9) .
.
New cost P294,444 P215,55
6
5. Sales (P60 x 4,000) P240,00

0
Less: Cost of sales:
Jan. 10: (P50 x 1,000) P 50,000
Jan. 20: (P294,444 x 3/5) 176,667
226,667
Capital gain P
13,333
Problem 7 58
1. FMV of ordinary shares (P25 x 30,000) P
750,000
FMV of preference shares (P50 x 5,000)
250,000
Total FMV of shares of stock received P1,000,00
0
Less: Cost of investment in A Co. transferred (P9 x 100,000)
900,000
Nontaxable gain P
100,000
2. Basis of new shares allocated Preferenc

Ordinar e
y
Basis of ordinary shares (P900,000 x 75/100) P675,00
0
Basis of preference shares (P900,000 x 25/100) P225,000
3. Selling price ordinary shares (P25 x 25,000) P625,00

0
Less: Cost ordinary shares - allocated (P50,000)
675,000
Selling price preference shares (P60 x 5,000) P300,00
0
Less: Cost preference shares allocated 75,000
225,000
Net gain P 25,000
4. Total sales price (P625,000 + P300,000) P925,000

Multiplied by percentage tax 0.005
Percentage tax P 4,625
5. Capital gains tax (P25,000 x 5%) P 1,250
6. Tax advantage (P4,625 P1,250) P 3,375
Problem 7 59
1 B Co. ordinary shares with FMV of P220,00
. 0
Land with FMV of 50,000
Cash
20,000
Total P290,00
0
Less: Cost of A Co.s shares transferred
200,000
Total gain P
90,000
Taxable gain (is limited to the FMV of land and P

cash) 70,000
2 Cost of A Co.s shares transferred P200,00

. 0
Add: Cash received P20,00
0
FMV of land received
50,000 70,000
Balance P270,00
0
Gain recognized in the exchange
70,000
Basis of B Co. shares received P200,00
0
3 Basis of land received FMV of land P

. 50,000
4 Capital gains tax of land (P300,000 x 6%) P

. 18,000
5 Sales price P220,00
. 0
Less: Cost
200,000
Taxable gain P
20,000
CHAPTER 8
DEDUCTIONS FROM GROSS INCOME
Problem 8 1 DEDUCTIBLE OR NONDEDUCTIBLE FROM GROSS INCOME

11. Nondeductible
1. Deductible
2. Nondeductible 12. Deductible
4. Deductible, in lieu of tax credit (Sec. 34C3, 14. Deductible
NIRC)
5. Deductible 15. Nondeductible
6. Nondeductible 16. Nondeductible
7. Nondeductible 17. Nondeductible
8. Deductible 18. Deductible
9. Deductible 19. Deductible

1. True
2. True
3. False Business expenses related to business income outside the Philippines is deductible also.
4. False Business expense is deductible from gross income.
5. True
6. True
7. True Once OSD is opted, no capital loss could be deducted from capital gain.
8. False Some business expenses are nondeductible or subject to limit.
9. False Income outside the Philippines by a NRC is not taxable in the Philippines, hence, no allowable
deduction is allowed.
10. True
11. False Compensation income is not subject to OSD.
12. False NOLCO is not an itemized deduction.
13. True Amortized over the term of the lease
14. False of 1%
15. False 33%
16. False Double declining method
17. True
18. True
Problem 8 3 Problem 8 4 Problem 8 5 Problem 8 6
1. B 1. C 1. A 1. A
2. No choice, 2. A 2. A 2. C
OSD=40%
3. D 3. D 3. C 3. A
4. D 4. A 4. C 4. C
5. D 5. B 5. A 5. C
6. C 6. B 6. D 6. C
7. B 7. A 7. C 7. B
8. D 8. A 8. A 8. C
9. B 9. D 9. B 9. C
10. C 10. A 10. C 10. C
11. C 11. D
12. D 12. B
13. C
Problem 8 7 C
Expensed Capitalized
Change of motor of air condition P60,000
Repainting of building P10,000
Expansion of store 50,000
Cleaning of computers 9,000
Repair of furniture 1,000 .
P20,000 P110,000
Problem 8 8 A
Salaries net of tax P100,000
Deductible business expense P105,000
Problem 8 9 A
General rule: No personal or business expense is deductible from compensation income.
Problem 8 10 D
Depreciation expense (P1,000,000 x 40%)/25 P16,000
Loss of business equipment 38,000
Deductible expense P54,000
Problem 8 11 D
1. A
No personal or business expense is deductible.
2. B
Depreciation (P20,000 x 10%) P 2,000
Repair (P100,000 x 10%) 10,000
Office supplies 6,000
Total deduction P18,000
Problem 8 12 B
Tax laws GAAP
Salary expense (P180,000 + P20,000) P200,000 P200,000
Estimated uncollectible accounts 10,000
Compromise penalty 50,000
Depreciation expense 30,000 30,000
Miscellaneous expense . 5,000
Deductible from earnings P230,000 P295,000
Note: For tax purposes, the miscellaneous expense is not deductible because it was not reported last year. For
accounting purposes, the miscellaneous expense can be deducted as prior period adjustment from retained
earnings.
Problem 8 13 C
Gross income (P300,000 + P20,000 + P180,000) P500,000
Multiplied by OSD rate 40%
Optional standard deduction P200,000
Problem 8 14
1. B
Gross income (P870,000 P10,000 P480,000
P380,000))
Add: Gains from sale of capital asset 40,000
Total P520,000
2. B
OSD P208,000
Less: Operating expense 20,000
Amount of income enjoying tax savings P188,000
Problem 8 15 D
Gross receipts from profession P100,000
Rent income 450,000
Total gross income P550,000
Multiplied by percent of OSD 40%
Problem 8 16 C
Operating expense before representation expense
(P2,000,000 P300,000) P1,700,000
Representation expense Actual P300,000
- Limit (P20,000,000 x 0.005) 100,000
- Lower 100,000
Allowable itemized deductions P1,800,000
Problem 8 17 B
Salary expense P120,000
Rent expense 24,000
Advertising expense 6,000
Depreciation expense 5,000
Interest expense 60,000
Tax differential on interest income (P30,000 x 33%) ( 9,900
)
Total itemized deductions P205,100
Problem 8 18 A
Gross salaries of employees P6,000,000
Grossed-up monetary value of fringe benefits 1,000,000
Deductible salaries and fringe benefits expenses P7,000,000
Problem 8 19 D
Allowable deduction fringe benefit expense (P102,000/68%) P150,000
Problem 8 20 D
Assume bonus is computed after tax but before bonus. The answer is letter D = P8,143, computed as follows:
Net income before charitable contribution (P75,000 + P 80,000

P5,000)
Less: Deductible contribution (P80,000 x 5%) lower of 4,000
actual
Net income before income tax and bonus P 76,000
B = 15% (76,000 T)
T = 30% (76,000 B)
B = 15% [76,000 30% (76,000 B)]

B = 15% (76,000 24,320 + 30%B)
B = 11,400 3,420 +0.045B
B = 7,980
0.045B
0.952B = 7,980/0.955
B = 8,356
Proof:
Income before bonus and tax P76,000
Less: Income tax (P76,000 P8,356) x 30% 20,293
Income after tax but before bonus P55,707
Multiplied by rate of bonus 15%
Bonus P 8,356
Problem 8 21 B
Monthly salary P 5,000
Death benefits 50,000
Terminal pay 25,000
Continuous compensation after the burial for three 15,000
months
Total deductible expenses P95,000
Note: Donation for coffin and other wake expenses is not business or compensation related and, hence, not
deductible. (Sec. 72, Rev. Regs. 2)
Problem 8 22 C
Inventoriable Supplies
cost expense
Purchases P300,000 P40,000
Decreased in inventory 20,000
Increased in inventory . ( 3,000)
P320,000 P37,000
Problem 8 23 D
Traveling expenses (P50,000 + P200,000) P250,000
Fringe benefit expense (P68,000/68%) 100,000
Transportation expense messenger 40,000
Total allowable expense P390,000
Problem 8 24 D
Total rent expenses paid P150,000
Rent last year (10,000)
Prepaid rent (20,000)
Deductible rent expense P120,000
Problem 8 25 C
Monthly rent (P20,000 x 60%) x 2 mos from Oct. 31 to Dec. 31 P24,000
Insurance premium (P3,000 x 60%) x 2/12 300
Real property tax (P1,500 x 60%) x 2/12 150
Deductible rent expense P24,450
Note: The city services is not a rent expense.
Problem 8 26 B
1. B Accrual Cash
Rent for 6 months based on usage (P20,000 x 6) x P96,000
80%
Rent based on usage and payments (P80,000 x 80%) P64,000
2. A
Actual cash collection for rent P150,000 P150,000
Problem 8 27 D
Monthly rental expense P2,000
Monthly depreciation (P600,000/8)/ 12 6,250
Monthly deductible expense P8,250
Problem 8 28
1. B
Trading - Limit lower (P5,000,000 x .005) P25,000
2. C
Servicing actual lower P30,000
Problem 8 29 B
Operating Expense before representation P80,000
Representation expense (P300,000 x .01) 3,000
Deductible operating expense P83,000
Problem 8 30 C
Interest expense P40,000
Tax differential (P50,000 x 33%) (16,500)
Deductible interest expense P23,500
Problem 8 31 D
Sole proprietor Corporation
Interest expense P50,000 P50,000
Tax differential (P30,000 x 38%) (11,400)
(P30,000 x 33%) . (9,900)
Deductible interest expense P38,600 P40,100
Problem 8 32 B
Deductible Nondeductible
Interest paid in advanced P 20,000
Interest paid to a brother 12,000
Interest paid on deliquency taxes P 8,000
Interest on borrowings to finance his family home 30,000
Interest paid to finance petroleum exploration . 100,000
Total P 8,000 P162,000
Problem 8 33 A
Tax savings from interest expense (P100,000 x P30,000
30%)
Final tax on interest income (P1,000,000 x 12%) 24,000
x 20%
Actual tax savings P 6,000
Problem 8 34 A
Documentary stamp taxes P 1,000
Local tax (P6,000 P800 P200) 5,000
Municipal tax 2,000
Community tax 1,500
Deductible taxes P9,500
Note: The fringe benefit income taxes to key officers and rank-in-file employees are to be classified as
deductible fringe benefit expense and not tax expense.
Problem 8 35 D
Unadjusted net income (P520,000 P200,000) P320,000
Add back: Income tax foreign country 10,000
Adjusted net income P330,000
Personal exemption (50,000)
Net taxable income P280,000
Note: The P10,000 income tax paid to foreign country is better to be treated as tax credit rather than as
operating expense.
Problem 8 36 A
Asset of Oliva P 60,000
Payment to government (P200,000 x 50%) (100,000)
Balance (P40,000)
Deductible bad debts is the entire amount of P100,000

collectibles
Problem 8 37 B
Bad debts from business actual written off (P100,000 P40,000
x 40%)
Bad debts from profession actual written off 50,000
Deductible bad debts expense P90,000
Problem 8 38 D
Annual depreciation expense (P50,000 P5,000)/5 P9,000
Multiplied by ratio of months used during the year 1/2
Depreciation expense 200B P4,500
Problem 8 39 A
Annual depreciation (P2,300,000/11.5 years) P200,000
Multiplied by ratio of months used in 2007 (July 1 to 6/12
Dec.)
Depreciation expense P100,000
Problem 8 40 D
Oil drilling machine (P800,000 x 90%) / 8 years P 90,000
Oil extracting machine (P900,000 x 90% / 10 years 81,000
limit
Computers (P100,000 x 90%)/4 years 22,500
Delivery truck (P200,000 x 90%)/ 5 years limit 36,000
Annual depreciation expense P229,500
Problem 8 41 C
Depletion base (P6,000,000 P1,000,000 + P5,300,000
P300,000)
Divided by number of extractible estimated tons 5,000,000
Depletion per ton P 1.06
Multiplied by number of tons extracted during the 800,000
year
Depletion expense P 848,000
Problem 8 42
1 D
.
Depletable costs, January 1, 200x P12,500,000
Exploration costs 1,000,000
Intangible development costs 1,500,000
Total P15,000,000
Less: Depletion expense (P15,000,000/7,500,000) x 1,200,000 2,400,000
Adjusted basis P 1,260,000
Divided by remaining reserves
(5,000,000 + 2,500,000 1,200,000) 6,300,000
New depletion rate/ unit P 2.00
2 A
.
Depletion cost 2007 (P2 x 1,200,000 units) P2,400,000
3 B
.
Value of production (P12 x 1,200,000 units) P14,400,000
Less: Production and selling costs:
Mining costs P2,000,00
0
Milling costs 3,000,000
Marketing expenses 1,500,000
Depreciation expense 7,500,000
1,000,000
Net income from operation P 6,900,000
Multiplied by limit percentage 25%
Deductible amount fro exploration and development P 1,725,000
cost
4 B
.
Current exploration and development cost (P1,500,000 + P2,500,000
P1,000,000)
Less: Deductible amount of exploration and development cost 1,725,000
(see 3)
Exploration and development cost chargeable to succeeding P 775,000
years
Problem 8 43 B
Deductible expense: Capitalized Outright
expense
Depreciation expense (P10,000,000 x 90%)/50 P180,000
Capital outlay P10,000,000
Problem 8 44
1 B 200A 200B 200C
Lower of actual contribution or normal 800,000 800,000 500,000
valuation
Add: Amortization of excess
200A (P200,000/10) 20,000 20,000 20,000
200B (P100,000/10) . 10,000 10,000
Deductible retirement expense 820,000 830,000 530,000
2. A 200A 200B 200C

Actual retirement payments 0 400,000 300,000
Problem 8 45 P610,000 = Not in the choices

Year X Year Y
Actual contribution or normal valuation, 700,000 600,000
lower
Add: Amortization (P100,000/10) 10,000 10,000
Deductible retirement expense 710,000 610,000
Note: Only the excess of the actual contribution over the normal valuation is to be amortized over 10 years.
Problem 8 46 B
Allowed deductible contribution (P200,000 x 5%) P10,000
Problem 8 47 C
Allowed deductible contribution actual P5,000
Problem 8 48 B
Income before charitable contribution (P500,000 P370,000
P130,000)
Multiplied by percent of limit 5%
Allowed deductible contribution - lower P 18,500
Problem 8 49 C
Actual value of donation priority program P1,000,000
Adopt a school program incentive (P1,000,000 x 50%) 500,000
Deductible donation P1,500,000
Problem 8 50
Net sales P5,000,000
Less: Cost of goods manufactured and
sold:
Raw materials used:
Raw materials, beginning P 200,000
Net purchases of raw materials 2,000,000
Raw materials, ending ( 400,000) P1,800,000
Direct labor 600,000
Factory overhead:
Indirect labor factory supervisor P 120,000
Depreciation (P100,000 x 90%) 90,000
Light and water (P150,000 x 80%) 120,000
Miscellaneous factory expenses 20,000 350,000
Cost of goods manufactured P2,750,000
Finished goods, ending ( 750,000 2,000,000
)
Less: Optional standard deduction (P3,000,000 x 1,200,000
40%)
Income from operations P1,800,000
Problem 8 51
1. Salaries of barbers P200,000
Depreciation of barbershop equipment 50,000
Cost of service P250,000
2. Rent expense P 20,000

Utility expense 30,000
Janitorial expense 15,000
Bookkeeping expense 10,000
Itemized deductions P 75,000
Problem 8 52
Salaries of assistants P 96,000
Traveling expenses 11,000
Light and water office 7,890
Stationeries and supplies 1,960
Office rent 60,000
Total operating expenses before contribution P176,850
Add: Contribution subject to limit (P500,000 P176,850) x 10%) 32,315
Allowable itemized deductions P209,165
Problem 8 53
Sole
Proprietorship Corporatio Partnershi
n p
Bad debts written-off (P35,000 P 5,000 P 5,000 P 5,000
P30,000) 40,000 40,000 40,000
Depreciation expense (P140,000 50,000 50,000 50,000
P100,000)
Donation to the government priority
program 170,000
Donations subject to limit: . 125,000 125,000
Lower of actual, P170,000 or P 265,000 P 220,000 P 220,000
(P2,500,000 x 10%)
(P2,500,000 x 5%)
Total allowable deductions
The research and development cost is to be treated as a deferred expense, hence, its amortization shall be
made in the succeeding five years when the taxpayer realizes benefits from such expenditures (Sec. 341, NIRC).
Problem 8 54
1. Operating expenses (1,000,000 x 30%) P50,000 P250,000
Interest expense (P50,000 (P40,000/80%) x 33%] 33,500
Total itemized deductions P283,500
Add: NOLCO 500,000
Total deductible expenses P783,500
Note: NOLCO is not an itemized deduction but part of deductible

expenses.
2. Gross income (P5,000,000 P2,000,000) P3,000,000

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

OSD.
3. Gross income P3,000,000

Less: OSD 1,200,000
Problem 8 55
1. 200A 200B
Actual contribution or normal valuation, lower 1,000,000 900,000
Add: Amortization - 200A (P250,000/10) 25,000 25,000
Deductible retirement expense 1,025,000 925,000
2. Financial net income 50,000,00 60,000,000

0
Add: Retirement benefit expense accounting 1,200,000
1,100,000
Total 51,100,00 61,200,000
0
Less: Deductible retirement expense 925,000
taxation 1,025,000
Net income for tax purposes 50,075,00 60,275,000
0
Problem 8 56
Corporatio Individual
n
Salary expenses 500,000 500,000
Retirement (P250,000 + P50,000/10) 255,000 255,000
Representation expense (P10,000,000 x .005) 50,000 50,000
Interest expense paid to the BIR - full 20,000 20,000
Interest expense limit:
Corporation (P100,000 (P96,000/80%) x 33%) 60,400
Individuals (P100,000 (P96,000/80%) x 38% 54,400
Depreciation expense 40,000 40,000
Rent expense 250,000 250,000
Group insurance expense 50,000 50,000
Bad debts expense (P100,000 x 20%) 20,000 20,000
Contribution expenses:
TESDA priority project (500,000 x 1.5) 750,000 750,000
Local government limit (lower is actual) 100,000 100,000
Total itemized deductions 2,095,400 2,089,400
Note: NOLCO is an allowable special deduction but not an itemized deduction.
Problem 8 57
1. Individual Corporation
Salaries expense (P680,000 P100,000) 580,000 580,000
Bad debts expense (P370,000 P270,000) 100,000 100,000
Retirement expense (P1,000,000 P380,000) 620,000 620,000
Representation expense (P39,000,000 x 0.005) 195,000 195,000
Rent expenses (P200,000 P20,000) 180,000 180,000
Taxes expense (P300,000 P270,000) 30,000 30,000
Life insurance expense (P150,000 P100,000) 50,000 50,000
Total itemized deduction before contributions 1,755,000 1,755,000
Contribution expenses:
Donation to TESDA priority project (P500,000 x 750,000 750,000
150%)
Donations to CHED not priority project
(P200,000 actual is lower + 50% of actual) 300,000 300,000
Donations to government (P100,000 actual is 100,000 100,000
lower)
Ind: (P39,000,000 P30,000,000 P1,752,500) x
10%=724,500
Corp: (P39,000,000 P30,000,000 P1,752,500) x . .
5%=362,250
Total allowable deductions 2,905,000 2,905,000
Computation of sales:
Financial income P
5,000,000
Cost of sales 30,000,000
Operating expenses deducted
(P680,000 + P370,000 + P1,000,000 + P800,000 + P500,000
+ P200,000 + P300,000 + P150,000)
4,000,000
Total sales P39,000,00
0
2. Individual Corporation
Gross income (P39,000,000 P30,000,000) P9,000,00 P9,000,000
0
Less: Total allowable deductions 2,905,000
2,905,000
Net taxable income P6,095,00 P6,095,000
0
CHAPTER 9
LOSSES

1. False Capital loss
2. False not deductible
3. False lower amount of the replacement cost or book value
4. True
5. True
6. False Deductible from gambling gains only.
7. True
8. True
9. True
10. False Not deductible because the property has been sold.
11. True
12. True
13. True
14. False deductible only to either income or estate
15. False NOLCO is not applicable when OSD is used.
16. False NOLCO is not applicable under MCIT.
Problem 9 2
1. C 5. D 9. A
2. C 6. A 10. C
3. D 7. D, P10,000 11. B
only
4. C 8. A 12. C
Problem 9 3 B
Loss from sale of business equipment P100,000
Problem 9 4 A
Loss on sale of capital assets is not deductible from business income.
Problem 9 5 C
Deductible loss Book value (P100,000 x 10% x 4) P 40,000
Problem 9 6 D
Deductible loss book value lower than replacement cost P 50,000
Problem 9 7 D
Net operating loss per GAAP P 50,000
Less: Bad debts estimate 10,000
NOLCO in the succeeding years P 40,000
Problem 9 8 D
Zero. An individual who claims the 10% optional standard deduction shall not simultaneously claim deduction of
the NOLCO.
Problem 9 9
P25,000. The lower between the carrying value and replacement cost.
Problem 9 10
Book value (P1,200,000) x10/20 P600,000
Less: Insurance recovery P200,000
Scrap recovered 20,000 220,000
Deductible loss P380,000
Problem 9 11
None, because the demolition cost, net of amount realized from scrap should be capitalized as part of the
factory building cost.
Problem 9 12
No deductible loss at balance sheet date. On June 30, the reportable gain would be P10,000, (110,000
100,000).
Problem 9 13
Net loss reported P 50,000
Estimated bad debts ( 20,000)
Warranty expense ( 10,000)
Net loss carry-over P 20,000
Problem 9 14
Gross profit year 1 P500,000
Less: Other operating expenses 580,000
NOLCO for year 2 P 80,000
Problem 9 15
Year 1 Year 2
Sale P1,800,000
Less: Cost Notes receivable 1,500,000
Gain P 300,000
No gain or loss on year 1 because there was no actual sale of foreclosed property.
Problem 9 16
None, because the floss should be recognized only upon actual sale of the property foreclosed.
Problem 9 17
None. Gambling losses can only be deducted from the gambling winnings. Gambling transactions is not an
ordinary business transactions, but a capital asset transaction. Accordingly, gambling losses is not an allowable
deduction from ordinary gross income.
Problem 9 18
Compensatory liquidated damages P 50,000
Loss on robbery (construction supplies) 50,000
Loss on pilferage of business supplies 10,000
Replacement cost of damaged portion of machine 150,000
Deductible loss P260,000
Problem 9 19
1. OSD (P2,000,000 x 40%) P800,000
2. OSD (P2,000,000 P500,000) x 40% P600,000
Problem 9 20
1. Gross income (P2,000,000 P1,000,000) P1,000,000
Multiplied by MCIT rate 2%
Income tax due MCIT P 20,000
2. NOLCO for year 200E P - 0 -
Note: The 3 year reglamentary period for NOLCO shall not be suspended
even if MCIT has been used. NOLCO has expired effectively on
200E.
Problem 9 21
Ordinary Capital
Pilferage loss P5,000
Capital loss on sale of capital asset P10,000
Casualty loss . 15,000
Total deductible loss P5,000 P25,000
Note: It would be more appropriate to classify casualty loss as capital loss because such loss is not an ordinary
or regular loss, unless the problem stated that the loss is an ordinary asset.
Problem 9 25
Cost of the building P10,000,000
Less: Accumulated depreciation (P10,000,000/30) x 1,666,667
5
Book value before additions and improvements P 8,333,333
Add: Additions and improvements 500,000
Total P 8,833,333
Less: Accum depn (P8,833,333/25) x 3 1,060,000
Book value P 7,773,333
Less: Insurance collected P5,800,000
Salvage value 300,000 6,100,000
Deductible loss P 1,673,333
Problem 9 26
Death of livestock previously purchased P10,000
Cost of property expropriated by the government
(P30,000 P10,000) 20,000
Total deductible farm loss P30,000
CHAPTER 10
BASIC INCOME TAX PATTERNS

1. True
2. False - General professional partnerships are tax-exempt.
3. False Not taxable income the Philippines because the passive income is earned outside the Philippines.
4. True
5. False The excess of personal exemption over compensation income is to be deducted from net income
from business.
6. True
7. False Decrease by creditable taxes.
8. True
9. False passive income is not subject for deductions.
10. True
11. False There should be a combination of various income subject to the same tax rate irrespective of
personal exemption.
12. False Taxable only for income earned within.
13. False net income or income from operation.
14. False resident alien could also opt for OSD for business income earned within.
15. False Only P50,000. Siblings are not allowed for additional exemptions.
16. False could claim P150,000.
Problem 10 2
1. A 6. C
2. B 7. C
3. D 8. A
4. C 9. C
5. C
Problem 10 3 D
Gross compensation income (P137,500 +P22,500) P190,000
Less: Personal exemption single 50,000
Net taxable compensation income P140,000
Tax on P140,000 P22,500

Less: Withholding tax 22,500
Net tax payable P - 0 -
Problem 10 4 C
Gross compensation income P 90,000
Net business income (P200,000 x 60%) 120,000
Total net income before personal exemption P210,000
Less: Personal exemption married 50,000
Problem 10 5 B
Net income for the first quarter (P50,000 + P60,000 + P180,000
P70,000)
Less: Optional standard deduction (P180,000 x 40%) 72,000
Net business income first quarter P108,000
Note: No personal exemption yet is allowed to be deducted in the quarterly income tax. The Personal exemption
is to be deducted in the 4th quarter in the adjusted ITR.
Problem 10 6 D
Less: Operating expenses 400,000
Net taxable income P 600,000
Problem 10 7 Not in the choices

Net taxable income (P5,500,000 P2,000,000) P3,500,000
Multiplied by corporate income tax rate 30%
Income tax due and payable P1,050,000
Net tax payable P 150,000
Problem 10 8 C
Minimum corporate income tax (P23,500,000 + P1,500,000) P 500,000
x 2%*
Net tax refund P - 0 -
The minimum corporate income tax is greater than the normal tax.
Problem 10 9
Compensation P 250,000
Business income (P500,000 + P600,000) P1,100,000
Less: Business expenses (P200,000 + P300,000) 500,000 600,000
Dividend income earned outside the Philippines 100,000
Net taxable income before personal exemption P 950,000
Note: the dividend income within is subject to final withholding tax of 10%, and as such, is no longer required to
be reported in the annual tax return.
Problem 10 10
Less: Business expenses 200,000 300,000
Net taxable income before personal exemption P 550,000
Note: the dividend income is subject to final withholding tax of 10%, and as such, is no longer required to be
reported in the annual tax return.
Problem 10 11
None. Nonresident alien is taxable only for income earned within. The dividend income within is taxable with
final tax of 25%.
Problem 10 12
Business income (P500,000 + P600,000) P1,100,000
Business expenses (P200,000 + P300,000) ( 500,000)
Dividend income outside 150,000
Problem 10 13
Business expenses ( 200,000)
Note: Foreign corporation is taxable only for income within. Dividend income earned within is taxable in the
Philippines but shall not be included as part of the annual ITR because such dividend is subject of final tax.
Problem 10 14
QUARTERS
Third
First Second Fourth
Gross income 40% of sale 400,000 320,000 240,000 480,000
Operating exp. (40% of gross (160,000 (128,000) ( 96,000) (192,000
income) ) )
Net taxable income 240,000 192,000 144,000 288,000
Multiplied by normal corporate tax 30% 30% 30% 30%
rate
Income tax still due 72,000 56,600 43,200 86,400
Note: Even if the previous quarters net taxable income is not carried to the next quarters the income tax still
due is the same because the corporate income tax rate is constant at 30%.
Problem 10 15
Answers for 1 and 2 QUARTERS
requirements:
Third
First Second Fourth
Gross profit 40% of sales 200,000 240,000 160,000 360,000
Rent income 30,000 30,000 30,000
30,000
Total gross profit 230,000 270,000 180,000 390,000
Operating expenses before int. & (120,00 (150,000) (100,000) (160,000
cont. 0) )
Deductible interest expense* (5,050) (6,700) (10,050) (8,400)
Contribution deductible in full (20,000) . (40,000)
.
Multiplied by corp. income tax rate 30% 30% 30% 30%
Quarterly income tax due and 31,485 27,990 20,985 54,480
payable
Interest expense 10,000 10,000 15,000 15,000

Less: Tax differential (int. income x 4,950 3,300 4,950 6,600
33%)
*Deductible interest expense 5,050 6,700 10,050 8,400
Problem 10 16
Business income P 7,500,000
Itemized allowable deductions
( 4,000,000)
Capital gains 200,000
Passive income earned outside the Philippines
100,000
Net taxable income P 3,800,000
Multiplied by corporate income tax rate
32%
Income tax due P 1,216,000
Less: Total income taxes paid in the previous quarters P
800,000
Income tax withheld per BIR form 2307
40,000 840,000
3. Royalty income (P60,000 x 20%) P12,000

Interest income (P15,000 + P10,000 + P15,000 + P20,000) x 12,000
20%
Total passive income tax P24,000
Problem 10 17
Total salary income (P16,000 + P4,000) x 12 P240,000
First three quarters taxable business income (P300,000 + 390,000
P90,000)
Last quarters net taxable business income 110,000
Income tax on P500,000 P125,000

Income tax on excess (P190,000 x 32%) 60,800
Total income tax per ITR P185,800
Add: Final withholding tax on interest income 2,000
Annual income tax P187,800
CHAPTER 11
INCOME TAX OF INDIVIDUALS

1. False Qualified dependent parents and siblings are not entitled for additional exemption.
2. False must be more than 180 days.
3. False NRA NBT are not allowed for personal exemptions.
4. True
5. True
6. True
7. True
8. True
9. True
10. True
11. False No personal exemption is allowed to NRANEBT.
12. True

1. False additional exemptions are allowed only for qualified dependent children.
2. False not payment for hospitalization but payment of premium for health and hospitalization insurance
provided that the family income does not exceed P250,000 per year.
3. True
4. False 15% of gross income
5. False creditable withholding income tax.
6. False qualified dependent parent and siblings are not entitled for additional exemption.
7. False Tax credit of income taxes paid outside the Philippines is allowed only for resident Filipino citizen.
8. False The creditable withholding tax is 15%.
9. False Gross income includes other income but not compensation income.
10. False Tax-exempt
11. True
12. True
Problem 11 3 Problem 11 Problem 11 5

4
1. D 1. D 1. Not in the choices. P25,000 per child (R.A.
9504)
2. D 2. B 2. Not in the choices. P50,000 basic (R.A. 9504)
3. A 3. C 3. B
4. A 4. A 4. C
5. A 5. B 5. B
6. B 6. D 5. B
7. D 7. B 6. A, B & C
8. C 8. B 7. D
9. C 9. B 8. D
10. B 10. A 9. D
10. C
Problem 11 6 A
Income from the Philippines (P10,000 x 12) P120,000
Income subject to tax in the Philippines P 70,000
Note: It is assumed that Juan works as OFW for more than 183 days. Income earned by OFW outside the
Philippines is not subject to tax in the Philippines. The income from the sari-sari store in the Philippines is earned
from January to December of the taxable year.
Problem 11 7 C
Gross compensation income Philippines (P250,000 x 12) P3,000,000
Multiplied by special income tax rate 15%
Income tax payable P 450,000
Problem 11 8 A
Basic personal exemption of couple:
Husband P50,000
Wife 50,000
Additional exemptions:
4 qualified dependent children (P25,000 x 4) 100,000
Maximum amount of personal exemption P200,000
Problem 11 9 C
Only P50,000 basic personal exemption because the taxpayers category is single.
Problem 11 10 B
Basic personal exemption Married P50,000
Additional exemption 25,000
Total personal exemptions P75,000
Problem 11 11 C
Basic personal exemption P50,000
Additional exemption (a & b only) (P25,000 x 2) 50,000
Total personal and additional exemptions P100,000
Problem 11 12 A
Basic personal exemption married P 50,000
Nonresident alien engaged in business in the Philippines is allowed of basic personal exemption subject to limit,
but additional exemption is not allowed. Personal exemptions for foreigners are subject to the rule of reciprocity
with limit of whichever is lower.
Problem 11 13 A
P200 per month. For the month of December only.
Problem 11 14 D
No special deduction is allowed. The family income exceeding P250,000 is not allowed for a special deduction
for health insurance.
Problem 11 15 D
Zero. Maria has no income.
Problem 11 16 A
No net tax payable at the end of the taxable year because the senior citizens income does not exceed P60,000
during the year. The tax withheld from interest income is final tax.
Problem 11 17
Subject to
1. Not in the choices = P790,000 & P160,000 Tabular tax Final tax
Business and other income:
Professional income (P300,000 + P200,000) 500,000
Interest income without 60,000
Dividend income without 40,000
Less: Basic personal exemption single ( 50,000)
Net income to ITR tabular tax P790,000
Interest income within P100,000

Dividend income within 60,000
Income subject to final tax P160,000
2. A
Business income:
Professional income 300,000
Less: Basic personal exemption single 50,000

Note: The problem is silent as to whether the taxpayer opted for OSD, hence, OSD should not be deducted from
the business gross income. In order to qualify for OSD, the taxpayer should indicate in his return that he is
opting OSD instead of itemized deductions. (Sec. 34 (L), NIRC)
Alternative Solution of Prob. 11-17: If X opted to use OSD

Subject to
1. A Tabular tax Final tax
Business and other income:
Professional income (P300,000 + P200,000) 500,000
Interest income without 60,000
Dividend income without 40,000
Total business and other income P600,000
Less: OSD (P600,000 x 40%) ( 240,000)
Net business income P360,000
Less: Basic personal exemption single ( 50,000)

2. Not in the choices = P370,000 & P160,000

Business income:
Professional income, net of OSD (P300,000 x 180,000
60%)
Less: Basic personal exemption 50,000

Problem 11 18 D
Husband Wife
Net taxable income P140,000 P250,000
Income tax P 22,500 P 50,000
Less: Withholding tax 20,000 45,000
Net tax payable P 2,500 P 5,000
Problem 11 19 D
Compensation as researcher P
600,000
Less: Personal exemption married
50,000
Net taxable compensation income P
550,000
Tax on P500,000 P125,000

Tax on excess (P50,000 x 32%) 16,000
Total income tax from compensation P141,000
Dividend income tax (P120,000 x 10%) 12,000
Interest income tax (P500,000 x 7.5%) 37,500
Total income tax due P190,500
Problem 11 20 D
Capital gains tax on shares of stock (P80,000 x P 4,000
5%)
Capital gains tax on sale of land (P2,000,000 x 120,000
6%)
Total capital gains tax paid P124,000
Problem 11 21 B
1. B
Final tax on copyright royalty (P11,250/90%) x 10% P 1,250
Final tax on mineral claim royalty (P12,000/80%) x 20% 3,000
Final tax on share from trading partnership as dividend 30,000
(P270,000/90%) x 10%
Total final tax P34,250
2. Not in the choices
None. All reported earnings are subject to final tax.
Problem 11 22 B
Percent of service 100%
Add: Output VAT 12%
Total 112%
Less: Withholding tax 20%
Percent of net proceeds 92%
Net proceeds P 92,000

Divided by percent of net proceeds 92%
Service fee P100,000
Withholding tax (P100,000 x 20%) P 20,000
VAT (P100,000 x 12%) P 12,000
Problem 11 23
1. A
Salaries of assistants P 96,000
Traveling expenses 11,000
Light and water, Office 7,890
Stationeries and supplies 1,960
Office rent 60,000
Total expenses before contribution P176,850
Add: Contribution subject to limit (P500,000 P176,850) x 10% 32,315
Total allowable deductions P209,165
2. C
Professional fees P500,000
Less: Allowable deductions 209,165
Net income from business P290,835
Add: Income from compensation:
Allowance as director of Corporation A P25,000
Commissions 5,000 30,000
Net income before personal and additional exemptions P320,835
3. D
Net income before personal and additional exemptions P320,835
Less: Personal and additional exemptions:
Basic widower P
Additional exemptions (P25,000 x 3 qualified 50,000
children) 125,000
Net taxable income 75,000 P195,835
Tax on P140,000 P 22,500

Tax on excess (P55,835) x 30% 13,959
Problem 11 24
1. P164,200
Net worth, December 31, 2009 P375,000
Less: Net worth, December 31, 2008 325,000
Unadjusted Net income for year 2009 P 50,000
Add back: Non-deductible expenses 150,000
Contributions (P20,000 + P50,000) 70,000
Total P270,000
Less: Non-taxable income 2,000
Income before contribution P268,000
Less: Contributions:
Deductible in full P 20,000
With limit
Actual, P50,000
Limit, P268,000 x 10% = P26,800
Allowed 26,800 46,800
Net income before personal exemptions P221,200
Less: Personal exemptions (P50,000 +p100,000) 150,000
2. P140,000
Corrected net taxable income P 71,200
Less: Reported net income subject to tax 24,200
Unreported taxable income P 47,000
Problem 11 25
1. Itemized deduction
Compensation income P 20,000
Gross income from business P 400,000
Less: Itemized deduction 150,000 250,000
Total income before personal exemptions P270,000
Less: Personal exemptions
Basic personal exemptions P 50,000
Additional exemptions (P25,000 x 4) 100,000 150,000
Computation of income tax:

Tax on P70,000 P 8,500
Tax on excess (P50,000) x 20% 10,000
Income tax before withholding tax P 18,500
Less: Withholding tax 1,000
Income tax due and payable P 17,500
2. Optional standard deduction

Compensation income P 20,000
Gross income from business P 400,000
Less: Optional standard deduction (40%) 160,000 240,000
Total income before personal exemptions P260,000
Less: Personal exemptions
Basic personal exemptions P 50,000
Additional exemptions (P8,000 x 4) 100,000 150,000
Computation of income tax:

Tax on P70,000 P 8,500
Tax on excess (P40,000 x 20%) 8,000
Income tax before withholding tax P 16,500
Less: Withholding Tax 1,000
Problem 11 26
2010 net income from business P 600,000
Capital gains transactions
Short term capital gains (P40,000 x 100%) P 40,000
Long term capital gains (P30,000 x 50%) 15,000
Short term capital loss (P10,000 x 100%) (10,000)
Capital gains P45,000
Less: 2009 Capital loss carry over limit 35,000 10,000
Income before personal exemptions P 610,000
Basic personal exemption- married P 50,000
Additional exemption (P25,000 x 3) 75,000 125,000
Taxable income, 2010 P 485,000
Note: The applicable capital loss carry-over should only be limited to P35,000, because it should not exceed the
net income from operation of such year (Sec. 39D, NIRC).
Problem 11 27
1. Compensation income (P240,000 + P30,000) P270,000
Less: Personal exemption (P50,000 + P25,000) 75,000
Business income P100,000
Less: Business expenses 120,000
Net loss from business (P20,000) 0 -
2. Tax on P140,000 P22,500

Tax on excess (P55,000 x 25%) 13,750
Income tax due P36,250
Less: Tax credit 30,000
Problem 11 28
1. Salary (P30,000 x 12) P360,000
Add: Taxable 13th month pay (P35,000 P30,000) 5,000
Total P365,000
Less: SSS contribution P3,000
Medicare/Philhealth contribution 2,000 5,000
Taxable compensation income before personal P360,000
exemption
Less: Personal exemption 50,000
Estimated income tax due:

Tax on P250,000 P50,000
Tax on excess (P60,000 x 30%) 18,000
Total income tax due per year P68,000
Divided by number of months in a year 12
Monthly withholding tax P 5,667
2. Quarterly business income tax

Business income per quarter P200,000
Less: Business expense per quarter 120,000
Net income per quarter P 80,000
Tax on P70,000 P 8,500

Tax on excess (P10,000 x 20%) 2,000
Quarterly business income tax first quarter to third P 10,500
quarter
Problem 11 29
1. Entertainment fee (P1,700,000/85%) P2,000,000
Business income
Philippines 500,000
Japan 1,000,000
Net income before personal exemption P3,500,000
Less: Personal exemption - basic P50,000
Additional (P25,000 x 4) 150,000
100,000
Note: The OSD is not used because the problem is silent that the taxpayer opted to utilize it. OSD is allowed
only if the taxpayer indicated in his return that he is using it otherwise he is using itemized deduction. If the
taxpayer did not indicate that he is using OSD and at the same time he has no itemized deduction, he cannot
deduct expenses from his gross business income. (Sec. 34 (L), NIRC)
2. Tax on P500,000 P 125,000

Tax on excess (P2,850,000 x 32%) 912,000
Income tax due P1,037,000
3. Tax credit
Creditable withholding tax on fees
(P2,000,000 x 15%) P300,00
0
Business income tax paid - Philippines 40,000
Japan (P1,037,000 x 1,000,000/3,500,000))
P296,286 vs. actual P300,000, lower P 636,286
296,286
4. Income tax still due (P1,037,000 P636,286)) P 400,714
Alternative Solution of Problem 11-29: If Rosanna Roces opted to use OSD
1. Entertainment fee (P1,700,000/85%) P2,000,000

Business income
Philippines 500,000
Japan 1,000,000
Total gross income P3,500,000
Less: OSD (P3,500,000 x 40%) 1,400,000
Net income before personal exemption P2,100,000
Less: Personal exemption - basic P50,000
Additional (P25,000 x 4) 150,000
100,000
2. Tax on P500,000 P 125,000

Tax on excess (P1,450,000 x 32%) 464,000
3. Tax credit
Creditable withholding tax on fees
(P2,000,000 x 15%) P300,00
0
Business income tax paid - Philippines 40,000
Japan (P589,000 x 594,000*/2,100,000))
P166,603 vs. actual P300,000, lower P 506,603
166,603
4. Income tax still due (P589,000 P506,603) P 82,397
Supporting computation of net taxable income before personal exemptions:
Within Outside Total

Gross receipts 2,500,000 1,000,000 3,500,000
Percent 71% 29% 100%
Allocated OSD x percent 994,000 406,000 1,400,000

Net income before personal exemption 1,506,000 594,000 2,100,000
Problem 11 30
Mr. Mrs. Bravo
Bravo
Gross professional income (P100,000/90%) P111,111
Rent income (P300,000/2) 150,000 P150,000
Gross compensation income 225,000 300,000
Total P486,111 P450,000
Less: Personal exemptions 150,000 50,000
Tax on P250,000 P 50,000 P 50,000

Tax on excess:
Mr. Bravo (P86,111 x 30%) 25,833
Mrs. Bravo (P150,000 x 30%) . 45,000
Income tax due P 75,833 P 95,000
Withholding tax on compensation ( 25,000) ( 50,000)
Withholding tax on professional income (P111,111 ( 11,111) .
P100,000)
Income tax still due and payable P 39,722 P 45,000
Note: No OSD is allowed because the taxpayer did not opt to use it in lieu of itemized deduction. (Sec. 34 (L),
NIRC)
Alternative Solution of Prob. 11-30: If taxpayers opted to use OSD
Mr. Mrs. Bravo
Bravo
Gross professional income (P100,000/90%) P111,111
Rent income (P300,000/2) 150,000 P150,000
Total gross income P261,111 P150,000
Less: OSD (40%) 104,444 60,000
Net income from business P156,667 P 90,000
Add: Gross compensation income 225,000 300,000
Total P381,667 P390,000
Less: Personal exemptions 150,000 50,000
Tax on P140,000/ P250,000 P 22,500 P 50,000

Tax on excess:
Mr. Bravo (P91,667 x 25%) 22,917
Mrs. Bravo (P90,000 x 30%) . 27,000
Withholding tax on compensation ( 25,000) ( 50,000)
Withholding tax on professional income (P111,111 ( 11,111) .
P100,000)
Income tax still due and payable P 9,306 P 27,000
Problem 11 31
1. P290,000
Taxable 13th month pay and bonuses (P40,000 P30,000) 10,000
Net business income (P400,000 P300,000) 100,000
Capital gains long-term (P60,000 x 50%) 30,000
Total P440,000
Less: Personal exemptions (P50,000 + P100,000) 150,000
2. (P8,000)
Tax on P250,000 P 50,000
Tax on excess (P40,000 x 30%) 12,000
Total income tax due P 62,000
Less: Income tax paid on:
Quarterly business income 20,000 70,000
Income tax refund (P 8,000)
Problem 11 32
Gross income from business (P1,000,000 P700,000) P 300,000
Operating expenses (P250,000 P60,000 P30,000) ( 160,000)
Deductible interest expense (P30,000) (P20,000 x 12/32) ( 22,500)
Deductible contribution (P300,000 P160,000 P22,500) x ( 11,750)
10%
Net business income P 105,750
Capital gains short-term (P300,000 x 100%) P
300,000
Capital losses long-term (P400,000 x 50%) 100,000
200,000
Lotto winning, USA 300,000
Gambling winnings P
200,000
Gambling losses (excess cannot be deducted from other
income) 250,000
Gross compensation income (P180,000 + P20,000) 200,000
Taxable 13th month pay (P35,000 P30,000) 5,000
Net taxable income before exemption P 710,750
Tax on P500,000 P 125,000

Tax on excess (P60,750 x 32%) 19,440
Total income tax due P 144,440
Less: Withholding tax on compensation 20,000
Problem 11 33
1. 13th month pay P25,000
Other benefits:
Excess of clothing allowance (P4,500 P 500
P4,000)
Excess of rice subsidy (P1,600 P1,500) x 1,200 1,700
12
Total (not exceeding P30,000) P26,700
nontaxable
Allowable de minimis:
Clothing allowance P4,000
Rice subsidy (P1,500 x 12) 18,000 22,000
Total 13th month pay and other benefits P48,700
2. Basic salary (P25,000 x 12) P300,000

Less: Personal exemptions 150,000
Tax on P140,000 P22,500

Tax on excess (P10,000 x 25%) 2,500
Withholding tax from January to November

2009
(P25,000/12) x 11 P22,917
3. Net taxable compensation income P150,000

Add: Net business income:
Professional fees (P224,000/1.12) P 200,000
Gross income from sales (P5,000,000 1,800,000
P3,200,000)
Less: Itemized deductions: P2,000,00
0
Operating expenses, net of interest
expense
(P900,000 P50,000) P850,000
Interest expense (P50,000 (P75,000 x 21,500
38%) 871,500
Net income before contribution P1,128,500
Less: Contribution, actual = P100,000,
lower
Contribution, limit (P1,128,500 x 10%)= 100,000 1,028,50
P112,850 0
Tax on P500,000 P125,000

Tax on excess (P678,500 x 32%) 217,120
Less: Tax credits:
WTW from Jan to Nov., 2009 P22,917
WT on Professional income (P224,000 24,000 46,917
P200,000)
Income tax still due and payable on December 31, P295,203
2009
Problem 11 34
Note: OSD is not applicable unless the taxpayer signified in his ITR that he opted to use OSD in lieu of itemized
deductions. (Sec. 34 (L), NIRC)
Taxpayer is a resident citizen
a. Normal (tabular) tax:

Salaries: Philippine U. S. A. Total
s
Within (P180,000/90%) P200,000
Without ($2,250/90%) x P50 P125,000 P325,000
Commissions:
Within (P57,000/ 95%) 60,000
Without ($950/ 95%) x P50 50,000 110,000
Interest income-without 75,000 75,000
($1,200/80%) x P50
Dividend-without ($1,800/90%) x P50 . 100,000 100,000
Totals P260,000 P350,000 P610,000
Less: Personal exemption basic 50,000
Tax on P500,000 P125,00

Tax on excess (P60,000) x 32% 0
Total
Less: Tax credits: 19,200
Compensation (P200,000 x 10%) P20,00 P144,20
Commission (P60,000 x 5%) 0 0
Allowable tax credit - foreign* 3,000
Income tax due and payable, after tax
credits 40,000
63,000
P
81,200
*Allowable tax credit paid outside the Philippines is lower than tax limit or actual tax paid. The tax credit is
computed as follows:
Limit (P350,000/P610,000) x P144,200 P82,738

Actual foreign taxes paid:
Interest (P75,000 x 20%) P15,000
Compensation (P125,000 x 10%) 12,500
Dividend (P100,000 x 10%) 10,000
Commissions (P50,000 x 5%) 2,500
Total P40,000
Allowable foreign tax credit - lower P40,000
Note: The actual tax paid outside the Philippines is lower than the computed tax limit; hence, the actual tax
paid without is the allowable tax credit.
b. Passive income tax:
Interest income within (P50,000/ 80%) x 20% P12,500

Dividend income within (P9,000/ 90%) x 10% 1,000
Total passive income tax for the year P13,500
Note: Philippine Lotto winnings are tax-exempt.
Taxpayer is a nonresident citizen
a. Normal (tabular) tax:
Salaries - within (P180,000/90%) P200,000

Commissions- within (P57,000/ 95%) 60,000
Net income P260,000
Less: Personal exemption - basic 50,000
Tax on P140,000 P22,500

Tax on excess (P70,000) x 25% 17,500
Total tax due P40,000
Less: Withholding taxes within (P20,000 + 23,000
P3,000) P17,000
Income tax due and payable
b. Passive income tax:
Interest income within (P50,000/80%) x 20% P12,500

Dividend income within (P9,000/90%) x 10% 1,000
Total passive income tax for the year P13,500
Note: Nonresident citizens are taxable only on income derived within the Philippines.
Taxpayer is a resident alien. Solution is the same as nonresident citizen.
Taxpayer is a nonresident alien engaged in trade or business in the Philippines.
The taxpayer cannot be regarded as doing business in the Philippines because he has no business income in the
Philippines.
If the taxpayer has stayed more than 180 days in the Philippines, he is regarded as doing business. The
computation of his net income tax payable in the Philippines will be the same as in number 2 under the
assumption that his country is granting the same privilege of reciprocity to nonresident Filipino doing business in
that foreign country.
Taxpayer is a nonresident alien not engaged in trade or business in the Philippines.
Nonresident aliens are subject to tax of 25% based on their gross income derived within the Philippines. In our
illustration, let us assume that the source of income has been deducted with 25% tax on the income given to the
taxpayer - that is, the amount shown in the problem is net of 25% final tax.
The income tax of Mr. Ramsay Colorado would be:
Salaries- within (P180,000/75%) P240,000

Commissions- within (P57,000/ 75%) 76,000
Interest income within (P50,000/ 66,667
75%)
Dividend income within (P9,000/ 12,000
75%)
Gross income within P394,667
Multiplied by tax rate 25%
Income tax for the taxable year P 98,667
within
Note: In computing the income tax, a fractional part of a peso less than P0.50 shall be disregarded. If the
fractional part is P0.50 or more, its shall be rounded up to P1.00 (R.A. 590).
CHAPTER 12
INCOME TAX OF CORPORATIONS

1. True
2. True
3. False Only domestic corporations are to be taxed for income within and without.
4. True
5. False 30% normal tax effective 2009.
6. True
7. True
8. True
9. True
10. False Not taxable because the corporation is a foreign corporation/
11. False 30%.
12. False applicable only to resident Offshore Banking Unit on gross receipts of OBU.
13. False final tax of 10%

1. False If the unrelated income of the proprietory educational institution exceeds the related income, the
income tax rate applicable would be the corporate income tax of 35%.
2. False Sale of real property outside the Philippines by a resident foreign corporation is not subject to tax
in the Philippines.
3. False 10% based on gross income within
4. True
5. True
6. False In general, GOCCs are subject to corporate income tax.
7. True
8. True
9. True
10. True
11. True
12. True
1. A 1. C or D
2. D 2. B
3. D 3. D
4. B 4. A
5. A 5. C
6. D 6. B & D
7. D 7. B
8. C 8. Not in the choices = normal tax of
30%
9. A 9. Not in the choices = normal tax of
30%
10. A 10. B
11. D 11. B
12. B 12. C
13. A
Problem 12 5
1. D Taxable Income tax
income due
Gross income (P8,000,000 + P4,000,000) P12,000,000
Business expenses (P5,000,000 + P3,000,000) 8,000,000
Corporate income tax (P4,000,000 x 30%) P1,200,000
Note: The land sold is a capital asset. Hence, not

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

subject
to corporate income tax but for final tax of 6%
based on
sales price or zonal value, whichever is higher.
Problem 12 6 B
Gross income within P2,800,000
Less: Deductions within 1,300,000
Multiplied by normal corporate tax rate 30%
Problem 12 7 D
Gross income within P5,000,000
Income tax due P1,500,000
Problem 12 8
1. Domestic corporation
Gross income within and without
(P450,000 + P180,000 + P75,000 + P160,000) P865,000
Deductions within and without
(P290,000 + P80,000 + P25,000 + P100,000) (495,000)
Net income P370,000
Multiplied by normal corporate income tax 30%
Income tax due and payable P129,500
2. Resident foreign corporation
Gross income within P450,000
Deductions within 290,000
Net income P160,000
Multiplied by normal corporate income tax 30%
Problem 12 9 C
Net income from PAGCOR (P30,000,000 x P28,000,000) P2,000,000
Problem 12 10 B
Net income from National Power Corporation P10,000,00
0
Net income from National Books Store
8,000,000
Total net income P18,000,00
0
Multiplied by corporate normal tax
30%
Income tax due P
5,400,000
Problem 12 11 D
Operating expenses before charitable contribution
(550,000)
Net income before charitable contribution P1,050,000
Charitable contributions - limit (P1,050,000 x 5%) P52,500
Actual lower 50,000
Multiplied by corporate normal tax rate 30%
Income tax due and payable P
300,000
Problem 12 12 D
Operating loss (P
200,000)
Operating expenses 1,000,000
Gross income P 800,000
Multiplied by minimum corporate income tax rate 2%
Problem 12 13 YEAR 2005 use 35% normal tax rate
1. D
Net income per GAAP P5,000,000
Add: Allowance for bad debts 150,000
Contribution 300,000
Income before allowable contribution P5,450,000
Less: Deductible contribution (P5,450,000 x 5%) 272,500
Multiply by normal corporate income tax rate 35%
Income tax due and payable P1,812,125
2. D
Net income per GAAP P 5,000,000
Add: Operating expenses 80,000,000
Multiply by minimum corporate income tax rate 2%
Minimum corporate income tax P 1,700,000
P1,812,125
Normal tax (P5,000,000 x 35%)
Problem 12 14
1 A
.
Tax payable current year (P8,000,000 x 2%) P 160,000
2 C
.
Operating income (P8,000,000 P7,000,000) P1,000,000
Multiplied by normal tax rate 30%
Normal tax P 300,000
Less: Excess of MCIT 100,000
Tax payable P 200,000
Problem 12 15 A
None. There is no excess corporate MCIT over NCIT in 2005 to be applied on 2006 because the MCIT is not yet
applicable for the company as it only has 3 years of operation in 2005.
Problem 12 16 C
Rental income (P1,900,000/95%) P2,000,000
Capital gains 500,000
Total gross income P2,500,000
Operating expenses (2,350,000
)
Multiplied by corporate normal tax 30%
Excess of MCIT over NCIT P 40,000

Expanded withholding tax (P2,000,000 P1,900,000) 100,000
Total creditable income tax P140,000
Income tax due 45,000
Tax refund P 95,000
Problem 12 17 C
Capital gains tax (P1,500,000 x 6%) P 90,000
Problem 12 18
1. D
Domestic Corporation:
a. Not traded in local exchange:
Cost (P110 x 12,000 shares) 1,320,000
Capital gain P 280,000
Tax on P100,000 x 5% P 5,000
Tax on excess (P280,000 P100,000) x 10% 18,000 P
23,000
b. Traded in local exchange (P1,800,000 x .005)
9,000
c. Sale of land abroad (P3,000,000 P2,500,000) x
30% 150,000
d. Sale of land Philippines (P1,200,000 x 6%)
72,000
P254,00
0
2. A
Resident Foreign Corporation
a. P 23,000
b. 9,000
c.
d. (P1,200,000 x 6%) 72,000
Total P104,000
Problem 12 19 C
Interest from savings deposits (P3,000,000 x 20%) P 600,000
Royalty income (P1,000,000 x 20%) 200,000
Interest from a depository bank (P1,500,000 x 7.5%) 112,500
Total passive final tax P 912,500
Dividend from a domestic corporation received by a domestic corporation is tax exempt.

Dividend from a nonresident foreign corporation is subject to normal tax.
Problem 12 20
1. B
Domestic Corporation
a. ($20,000 @ 7.5% x P50) P75,000
b. P300,000 @ 20% 60,000
c. P100,000 @ 20% 20,000
d. P 80,000 @ 20% 16,000
Total P171,000
2. B = Resident foreign corporation (same as letter 1)
3. C
Nonresident foreign corporation
a. Exempted
b. (P300,000 @ 30%) P90,000
c. (P100,000 @ 30%) 30,000
d. (P 80,000 @ 30%) 24,000
Total P144,000
Problem 12 21
1. A
Dividend income - (PCB and Magnolia are both domestic Exempt
corporations)
Interest income on US dollar loans ($3,000 x 10% x P50) P15,000
2. C
Interest on Philippine peso loans P2,000,000
Operating expenses ( 900,000)
Taxable income P1,100,000
Multiplied by normal corporate tax 30%
Problem 12 22 D
Related income P1,000,000
Unrelated income 1,500,000
Operating expenses (3,000,000
)
Net loss (P
500,000)
Minimum corporate income tax (P2,500,000 x 2%) P50,000
Problem 12 23 A
Nonprofit educational institutions are tax-exempt.
Problem 12 24 D
Government educational institutions are tax-exempt.
Problem 12 25 B
Income tax payable (P700,000 x 0.025) P17,500
Problem 12 26 A
Manila to Beijing (P5,000 x 2,000) P10,000,000
Manila Hong Kong Beijing (P6,000 x 4,000) x P3,000/P6,000 12,000,000
Manila to Hong Kong (P3,000 x 2,000) 6,000,000
Total reportable gross income within P28,000,000
Multiplied by applicable rate 2.5%
Income tax P 700,000
Problem 12 27 Not in the Choices = P2,500,000 & P1,500,000

Within Dragon Films American
Aircraft
Gross receipts P10,000,000 P20,000,000
Multiplied by special tax rate 25% 7 %
Philippine income taxes P 2,500,000 P 1,500,000
Note: Gross income means gross receipts. The aforementioned resident foreign corporation are subject special
tax rates (final taxes). They are not allowed to deduct costs or expenses from their gross receipts. The cost of
service is only applicable for MCIT purposes. (Sec. 27(E)(4), NIRC)
Problem 12 28 B
Income tax (P80,000/80%) x 20% P20,000
Note: Although cooperatives are tax-exempt, they still subject to final income taxes on interest income.
Problem 12 29 A
All of the transactions of Unlad Cooperative are exempted from income taxes.
Problem 12 30 Not in the choices = P6,000

Income tax due 2nd quarter [(P792,000/99%) P700,000) x P 30,000
30%
Income tax due 1st quarter [(P495,000/99%) P480,000) x ( 6,000)
30%
Withholding tax 2nd quarter [(P792,000/99%) x 1% ( 8,000)
Excess tax credit 2009 ( 10,000)
Income tax still due and payable 2nd quarter P 6,000
Note: The withholding tax for the 1st quarter is already included in the income tax due in the first quarter.
Problem 12 31 C
Income tax from ordinary net income (P1,000,000 P900,000) x P30,000
30%
Final income taxes:
Interest income on peso savings (P100,000 x 20%) 20,000
Expanded foreign currency deposit (P100,000 x 7.5%) 7,500
Total income taxes P57,500
Problem 12 32 B
Income tax on interest income from peso savings bank (P100,000 P 30,000
x 30%)
Interest income earned by nonresident foreign corporation from EFCD is tax-exempt.

Problem 12 33 C
Tax on cash dividend from a resident foreign corporation P 30,000
(P100,000 x 30%)
Dividend received by a resident foreign corporation from a domestic corporation is tax-exempt.
Problem 12 34 C
Cash dividend from a domestic corporation (P100,000 x 30%) P 30,000
Cash dividend received by a domestic corporation from another domestic corporation is tax- exempt because it
is considered earned outside the Philippines since only 40% of its business is done within.
Problem 12 35 D
Zero because the earnings of the said resident foreign corporation have no tax situs in the Philippines.
Problem 12 36
Interest from saving deposit Metrobank (P3,000,000 x 20%) P 600,000
Royalty income Philippine Mining Company (P1,000,000 x 20%) 200,000
Interest from a depository bank under expanded foreign currency
deposit - PCI Bank ($30,000 x P50 x 7.5%) 112,500
Dividends from Zerxes, a resident foreign corporation (P500,000 x 150,000
30%)
Total final passive income taxes P1,062,500
Problem 12 37 C
3rd Quarter 4th Quarter
Gross income - cumulative P880,000 P1,120,000
Itemized deductions - cumulative (704,000) (896,000)
Net taxable income P176,000 P 224,000
Multiplied by normal corporate income tax 30% 30%
Total income tax paid in previous quarters - tax credit ( 52,800)
Problem 12 38 A
Income subject to normal tax rate (P300,000/ 30%) P1,000,00
Passive income (P60,000/20%) 0
Capital gains (P35,000: 5,000 @5%, 30,000@10%) 300,000
Total income
Less: Income taxes paid: 400,000
Income tax per annual tax return P300,000 P1,700,00
Final tax on passive income 60,000 0
Capital gains tax 35,000
Amount subject to 10% surtax
395,000
P1,305,00
0
Problem 12 39
Year 2009
Within Total
Without
Gross income:
Philippine P1,000,00 P1,000,00
USA 0 P 0
Japan 400,000 400,000
Deductions: 300,000 300,000
Philippine
USA (800,000) (800,000)
Japan (200,000 (200,000)
Net income ) (200,000)
Multiply by tax rate . P
Income tax payable P (200,000 500,000
Tax credit allowed see supporting 200,000 )
computation 30%
Income tax still due P300,000 P
150,000
( 90,000)
P
60,000
Supporting computation:
Tax credits:
US (P200,000/P500,000) x P150,000 = P60,000 vs.
P80,000 P60,000
Japan Allowed, lower
(P100,000/P500,000) x P150,000 = P30,000 vs. 30,000
P30,000 P90,000
Total Allowed, lower 90,000
(P300,000/P500,000) x P150,000 = P90,000 vs. P90,000

P100,000
Allowed, lower
Problem 12 40
Reported income before tax P10,000,000
Add: Loss from sale of shares of stock outside stock 5,000
market P10,005,000
Total
Less: Gains subject to final income tax: P
(1) Gain from sale of stock in the stock market 25,000
(2) Gain from sale of short-term debt securities 10,000
(3) Gain from sale of real property 5,035,000
(P9,400,000 P4,400,000) P 5,630,000
Adjusted income subject to corporate income tax 5,000,000 30%
Multiply by normal corporate income tax P 1,689,000
Correct amount of income tax
P10,000,000
Total reported income before tax 1,689,000
Less: Normal corporate income tax P 8,311,000
Net income after tax
Problem 12 41
Operating expenses ( 10,000)
Service charge credit card (P1,000,000/5%) x 3% ( 600,000)
Net income P 380,000
Multiplied by normal corporate tax 30%
Less: Creditable expanded withholding tax 100,000
(P1,000,000/5%) x %
Problem 12 42
Taxable income (normal tax) P 900,000
Add: Income subject to final tax P 60,000
Income exempt from tax 50,000
Income, excluded from gross income 10,000
Amount of NOLCO deducted 50,000 170,000
Total P1,070,000
Less: Dividends P150,000
Income tax paid for the year 200,000 350,000
Improperly accumulated income P 720,000
Multiply by tax rate 10%
Tax on improperly accumulated income P 72,000
Problem 12 43
Income tax per ITR (P450,000/30%) P1,500,000
Income subject to final tax (P37,500/7.5%) 500,000
Capital gains:
P5,000/5% P100,000
P35,000/10% 350,000 450,000
Total P2,450,000
Less: Income tax paid (P450,000 + P37,500 + P40,000) 527,500
Basis of IAET P1,922,500
Multiplied by IAET rate 10%
IAET P 192,250
Problem 12 44
Government educational institutions are exempted from tax. (Sec. 30(I), NIRC.)
Problem 12 45
Tuition fees P2,843,1
Miscellaneous fees 00
Income from rents 362,600
Net income, school canteen 60,000
Net income, book store 36,200
Gross income
Less: Allowable deductions: 24,800
Payroll and administrative salary P1,425,42 P3,326,7
Other operating expenses 0 00
Interest expense 762,330
Depreciation, net six room building 82,100
Taxable income
Multiply by the applicable tax rate 37,500
Income tax
2,307,35
0
P1,019,3
50
10%
P
101,935
Note: The tax differential on interest income shall not be used because the tax applicable is 10% not 30%
normal tax.
Problem 12 46
1. 3rd 4th 5th 6th
year year year year
Sales P1,000,00 P2,500,00 P4,000,00 P5,000,00
0 0 0 0
Cost of sales ( 600,000 (1,200,00 (2,400,00 (2,700,00
) 0) 0) 0)
Rent income
200,000 300,000 100,000 50,000
Gross income P P1,600,00 P1,700,00 P2,350,00
600,000 0 0 0
Operating expenses allowed ( 300,00 (1,300,00 (1,400,00 (1,500,00
0) 0) 0) 0)
Net taxable income P P P P
300,000 300,000 300,000 850,000
Multiplied by NCIT rate
30% 30% 30% 30%
Income tax due P P P P
90,000 90,000 90,000 255,000
Quarterly tax paid ( 10,00 ( 20,00 ( 30,00 ( 40,00
0) 0) 0) 0)
Income tax still due and P P P P
payable 80,000 70,000 60,000 215,000
2. 3rd 4th 5th 6th

year year year year
Royalty income, net of tax P 80,000 P160,000 P120,000 P 40,000
Interest income, net of tax 20,000 32,000 16,000 24,000
Total passive income, net of P100,000 P192,000 P136,000 P 64,000

tax
Divide by 80% 80% 80% 80%
Total gross passive income P125,000 P240,000 P170,000 P 80,000
Multiplied by final tax rate 20% 20% 20% 20%
Final taxes P 25,000 P 48,000 P 34,000 P 16,000
Problem 12 47
(1)
Taxable income from operation (P1050,000/70%) P1,500,000
Add: NOLCO deducted 100,000
Interest income (P120,000/80%) 150,000
Capital gain (P230,000 P5,000)/90% 250,000
Total income for GAAP reporting, before tax P2,000,000
(2)
Tax on income from operation (P1,500,000 x 30%) P450,000
Tax on interest income (P150,000 x 20%) 30,000
Tax on capital gain (P250,000 P230,000) 20,000
Total income tax paid P500,000
(3)
GAAP income P2,000,000
Less: Income tax 500,000
Net income after tax GAAP P1,500,000
(4)
Taxable income from operation P1,500,000
Add: NOLCO P100,000
Income subjected to final tax (P150,000 + 400,000 500,000
P250,000)
Total P2,000,000
Net income after income tax P1,500,000
Multiplied by surtax rate 10%
IAET = Surtax P 150,000
Problem 12 48
1. Sales P10,000,000
Less: Cost of sales 6,000,000
Reportable income per ITR P 4,000,000
2. Gross profit P4,000,000

Less: Operating expenses:
Salaries P1,000,000
Depreciation 300,000
Supplies 200,000
Interest expense [P50,000 (40,000 x 33%) 36,800 1,536,800
Net taxable income per ITR P2,463,200
Note:
Interest income is subject to final tax of
20%
Inter-corporate dividend is tax-exempt.
Losses on investment in securities is not deductible capital
loss
3. Final withholding tax paid (P32,000/80%) x 20% P 8,000
4. Net income before tax per GAAP P2,200,000

Less: Income tax (P2,463,200 x 30%) 738,960
CHAPTER 13
INCOME TAXES OF PARTNERSHIPS, ESTATES & TRUSTS

1. False not all partnership, only commercial partnership.
2. False tax exempt, but required to file.
3. False the tax withheld in creditable.
4. True starting on the 4th year of operation.
5. True
6. True
7. True because it is withheld with final tax.
8. True
9. False trading business income will make the partnership a commercial partnership.
10. False still subject to final tax of 10%.
11. True if created through gratuitous transfer, not more than 10 years and no contribution is made by the
co-owners.
12. True
13. True

1. True
2. False It shall be in writing either as trust inter-vivos or through a will.
3. False A trustor is the person who establishes the trust, not the trustee.
4. True
5. True
6. True
7. True
8. False P50,000.
9. True
10. True
11. False the personal exemption is P50,000.
12. True
1. A 1. A
2. B 2. A
3. C 3. B
4. C 4. A
5. B 5. C
6. C 6. A
7. B 7. B
8. B 8. D
9. B 9. B
10. A 10. A
11. C
Problem 13 5 A
Net profit from trading business of the partnership P400,000
Less: Income tax (P400,000 x 30%) 120,000
Income after tax P280,000
Interest income, net of final withholding tax 4,000
Dividend income 10,000
Total income for distribution to partners P294,000
Divide by profit and loss ratio 2
Share of each partner P147,000
Multiply by dividend tax rate 10%
Income tax on the distributive share of Mitzi Baguingan P 14,700
Problem 13 6
(1 C
)
Net income (P400,000 P160,000) P240,000
Multiplied by applicable income tax rate 30%
Income tax of the partnership P 72,000
(2 A
)
Partnerships income after tax (P240,000 P72,000) P168,000
Divided by profit and loss ratio 1/2
Share of A P 84,000
Less: Final tax (P84,000) x 10% 8,400
As share, net of final tax P 75,600
Problem 13 7
1. A
J, Opting itemized deduction:
Share of J in the Partnership (325,000-175,000) x 70% P105,000
Other business income 85,000
Total business income P190,000
Less: Itemized deductions (excluding contribution) 35,000
Net income before contribution P155,000
Less: Contribution
Actual, P1,750 + (15,000 x 70%) =P12,250
Limit, P155,000 x 10% or P15,500
Allowed 12,250
Net taxable before personal exemption P142,750
Less: Personal exemption (P50,000 + 25,000) 75,000
Net taxable income of J P 67,750
2. D
R, opting for standard optional deduction:
Share in the partnership, gross (P325,000 x 30%) P 97,500
Other business income 65,000
Total business income P162,500
Net income before personal exemption P 97,500
Less: Personal exemption - single 50,000
Problem 13 8
Net income from trading business of the partnership P400,000
Divided by profit and loss ratio 2
Share of each partner P200,000
Add: Compensation income 240,000
Total income before personal exemption P440,000
Note: Interest income and dividend income have been subjected to final tax, hence, not to be included anymore
in an annual taxable income.
Problem 13 9
1. D
None. The objective of co-ownership is to preserve the co-ownership property, therefore, not subject to tax.
2. B
The co-owners in an exempt co-ownership are liable for the tax in the income they received from the co-
ownership. They should file the return and pay the corresponding tax based on their separate and individual
capacity.
The net taxable income of Robert is computed as follows:

Share from the income of co-ownership P1,000,000
Income received by the co-owners is already net of itemized deductions of the co-ownership, therefore, the co-
owners in their individual capacity is not anymore entitled to optional standard deduction. Inasmuch as the
related expenses have been deducted before the distribution of income to the co-owners, (Sec. 34 L).
Supreme Court Ruling - Deductions and exemptions are highly disfavored in law. They must be construed strictly
against the taxpayer, (Commissioner of Internal Revenue vs. P. J. Kiener Company, LTD., 65 SCRA 143).
Problem 13 10 D
Income after expenses but before distribution to heir P400,000
Less: Gross amount distributed to heir (P85,000/85%) P100,000
Exemption 50,000 150,000
Problem 13 11
1. B
Income of the grantor P1,000,00
Income of trust A - revocable 0
Total income of the grantor
Less: Total expenses 500,000
Grantor business expense P400,000 P1,500,00
Trust A business expense 200,000 0
Grantors income before personal exemptions
600,000
P 900,000
2. D
Income of trust B irrevocable trust P200,000
Less: Expenses of irrevocable trust B 100,000
Net income before exemption P100,000
Net taxable income of all the trust P 50,000

Income of beneficiary (P100,000 P40,000) P 60,000
Add: Share from trust 50,000
Net taxable income before personal exemption P110,000
Net income P 60,000
Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD, he shall be considered as having
availed himself of the itemized deductions. (Sec. 34(L), NIRC)
Alternative solution of 3: If beneficiary opted to use OSD

Income of beneficiary P100,000
Add: Share from trust 50,000
Total gross income P150,000
Less: OSD (P150,000 x 40%) 60,000
Net income P 40,000
Problem 13 12
1. The partnership is a general professional partnership, therefore, tax exempt.
2. and 3. Computation of tax liabilities of partners A and B.
Net income of the partnership (P1,200,000 P100,0000) P1,100,000

Partner A = Partner B =
60% 40% Total
Partners salary P240,000 P360,000 P 600,000
Distribution of balance 300,000 200,000 500,000
Total P540,000 P560,000 P1,100,000
Less Personal exemption 50,000 100,000
Tax on P250,000 P 50,000 P 50,000

Tax on excess (P240,000 x 30%) 72,000
Tax on excess (P210,000 x 30%) . 63,000
Income tax due and payable P122,000 P113,000
Problem 13 13
Gross income merchandising P575,000
Dividend received from nonresident foreign corporation 60,000
Ordinary and necessary expenses merchandising
Net income before income tax (255,000
Less: Provision for income tax (P380,000 x 30%) )
Net income P380,000
114,000
P266,000
Note: Dividends received from domestic corporation by a general co-partnership is tax exempt.
Computation of partnership share considered as dividends:

M - 40% W 60%
Net income (P266,000) P 106,400 P

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

Multiply by corporate normal tax rate 30%
Income tax as corporation P1,500,000
2. Final tax on dividend of Marjorie Sison:

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

Share of Mr. Baguingan from the net income of the conjugal estate
(P2,400,000 x 50%) P1,200,00
Less: Personal exemptions (P50,000 + P25,000) 0
Taxable income
75,000
Tax on P500,000 P1,125,00
Tax on excess (P625,000) x 32%) 0
Income tax due
P
125,000
200,000
P
325,000
Mr. Baguingans income from estate shall claim the total amount of P75,000 personal exemptions (RA 9504)
because Sec. 35C of the NIRC provides that if the taxpayer dies during the taxable year, his estate may claim
the corresponding additional exemptions for himself and his dependent(s) as if he died at the close of such year.
Hence, the applicability of the exemption of the income from estate amounting to P50,000 shall take effect only
in the succeeding years after the decedents death.
2. Answer
Add: Income received from trust 200,000
Total income before personal exemption P450,000
Tax on P250,000 P50,000

Tax on excess (P50,000 x 30%) 15,000
Alternative solution: If beneficiary opted to use OSD

Add: Income received from trust, net of OSD (P200,000 x 0
60%)
Total income before exemption 120,000
Less: Personal exemptions: P P370,00
Basic 50,000 0
Additional (P25,000 x 4)
Taxable income of Mrs. Diana Nievera 100,000
Tax on P140,000 150,000

Tax on excess (P80,000 x 30%) P220,00
Income tax due 0
P
22,500
24,000
P
46,500
3. Answer
Total amount received by the children P600,000
Multiply by withholding tax rate 15%
Total withholding taxes P 90,000
Problem 13 16
Correction: Second paragraph should beA year following the death of Naty Poc.
Tax savings:
Income tax when no income of estate was distributed (Case 1 +
Case 3)
(P122,000 + P8,500) P130,500
Less: Income tax when P150,000 of estates income was distributed
(Case 2 + Case 4) = (P77,000 + P42,500) 119,500
Tax savings P 11,000
Supporting computations:
Case 1 Case 2 Case 3 Case 4
Gross income 800,000 800,000 300,000 300,000
Business deductions:
Itemized deductions (260,000) (260,000) (180,000) (180,000)
Distributed income of the . (150,000) . 150,000
estate
Net income before personal 540,000 390,000 120,000 270,000
exemption
Personal exemption (50,000) (50,000) (50,000) (50,000)
Income tax for first bracket 50,000 50,000 8,500 22,500
Income tax on excess
Case 1: (490,000 250,000) 72,000
x 30%
Case 2: (340,000 250,000) 27,000
x 30%
Case 4: (220,000 140,000) . . . 20,000
x 25%
Total income taxes 122,000 77,000 8,500 42,500
Problem 13 17
1. Income tax payable by the trust in 200x:
Income from house and lot P 80,000
Income from hollow block business (P10,000 x 12) 120,000
Income from farm
Total gross income from trust 50,000
Less: Related expenses (P250,000 x 30%) P 75,000 P 250,000
Amount distributed to the beneficiary 50,000
Net income before exemption
Less: Exemption 125,000
Tax on P70,000 50,000

Tax on excess (P5,000 x 20%) P 75,000
Total income tax payable
P 8,500
1,000
P 9,500
2. Income tax payable from the beneficiary in 200x:

Gross income received from income of trust P 50,000
Net taxable income P 0 .
Total income tax payable P 0 .
Alternative solution if Trust and beneficiary opted to use OSD
1. Total gross income trust P250,000

Less: OSD (P250,000 x 40%) P100,000
Amount distributed to the beneficiary 50,000 150,000
Net income before personal exemption P100,000
Tax on P30,000 P2,500

Tax on excess (P20,000 x 15%) 3,000
Total income tax payable P5,500
2. Gross income received from income of trust P50,000

Net income before exemption P30,000
Net taxable income (P30,000)
Total income tax payable P 0 .
Problem 13 18A
Correction: The requirement should be stated as: How much is the income tax due and payable of the two
trusts?
Total income of trusts (P50,000 + P1,000,000) P1,050,00

Less: Distribution to beneficiary (P10,000 + P20,000) P 30,000 0
Exemption 50,000
Net taxable income
80,000
Tax on P500,000 P
Tax on excess (P470,000 x 32%) 970,000
Income tax due and payable
P125,000
150,400
P275,400
Problem 13 18B
Note: Since the topic is tax planning and the requirement is tax savings, OSD can automatically assumed to be
used to determine the lower tax.
1. Gross receipts 2009 P300,000

Less: OSD (P300,000 x 40%) 120,000
Less: Personal exemption basic 50,000
Net income subject to income tax P130,000
2. Income tax when no income of estate was distributed (Case 1 +
Case 3)
(P50,000 + P8,500) P 58,500
Less: Income tax when P150,000 of estates income was
distributed
(Case 2 + Case 4) = (P27,500 + 55,000
P27,500)
Tax savings P 3,500
Supporting computations:
Case 1 Case 2 Case 3 Case 4
Gross business receipts 500,000 500,000 200,000 200,000
Distribution to the beneficiary (150,000) . 150,000
.
Balance 500,000 350,000 200,000 350,000
OSD 40% (200,00 (140,000) (80,000) (140,000)
0)
Net income before personal 300,000 210,000 120,000 210,000
exemption
Personal exemption (50,000) (50,000) (50,000) (50,000)
Income tax for first bracket 50,000 22,500 8,500 22,500

Income tax on excess
Case 2 & 3: (160,000 140,000) . 5,000 . 5,000
x 25%
Total income taxes 50,000 27,500 8,500 27,500
Problem 13 19
1. To minimize income tax, Dokling can do the following:
a. Put his business under irrevocable trust
b. Use OSD instead of itemized deduction because the OSD is greater
than the itemized deduction, and
c. Claim his childs allowance as share from the income of the trust.
2. Tax exposure before the creation of trust:

Gross income P400,000
Less: OSD (P400,000 x 40%) 160,000
Tax on P140,000 P22,500

Tax on excess (P50,000 x 25%) 12,500
Note: The allowance is not deductible because the child is not established as beneficiary of the trust.
Furthermore, the business is not in trust.
50% of the business is created as trust:

Grantor:
Income tax if 50% is held in trust
(irrevocable)
Gross income (50%) P200,000
Less: OSD (P200,000 x 40%) 80,000
Tax on P70,000 ( 8,500)
Trust:
Income tax if 50% is held in trust
(irrevocable)
Gross income (50%) P200,000
Less: OSD (P200,000 x 40%) P 80,000
Distribution to beneficiary 100,000 P180,000
Net taxable income (P 30,000)
Beneficiary:
Share from the income of trust P100,000
Less: OSD (P100,000 x 40%) 40,000
Tax on P10,000 ( 500)
Tax savings P26,000
Problem 13 20
Note: Since the topic is tax planning, the taxpayer should use OSD instead of itemized deduction because using
OSD can give a greater tax savings based on the given data of this case.
1 Rent income P 800,000

.
Less: OSD (P800,000 x 40%) 320,000
Tax on P250,000 P 50,000

Add: Tax on excess (P180,000 x 30%) 54,000
2 Rent income Property 2 P 300,000

.
Less: OSD (P300,000 x 40%) 120,000
Tax on P70,000 P 8,500

Add: Tax on excess (P60,000 x 20%) 12,000
Income tax due ( 20,500)
Less: Income tax in No. 1
2 Rent income Property 1 P 500,000

.
Less: OSD (P500,000 x 40%) 200,000
Tax on P250,000 ( 50,000)
Tax savings P 33,500
Problem 13 21
1 Not a government project
.
a. Contract price, excluding VAT (P112,000,000/1.12) P100,000,000
Less: Cost of construction, net of VAT 65,000,000
(P72,800,000/1.12)
Gross income P 35,000,000
Net income P 20,000,000
b. The share of joint venture partners X Co and Y Co is

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

.
a. Tax-exempt
X Co. Y Co.
b. Share of co-venturers in the net income (P20M x P10,000,00 P10,000,00
50%) 0 0
Multiplied by corporate income tax rate 30% 30%
Income tax due P P
3,000,000 3,000,000
Note: OSD is not applicable to co-ventures because their respective shares are already net of expense.
Problem 13 22
1 Not a government project
.
a. Contract price, excluding VAT (P89,600,000/1.12) P80,000,000
(P56,000,000/1.12)
Net income P 20,000,000
b. The share of joint venture partners X Co and Y Co is

not
dividend rule.
2 Government project (consortium)

.
a. Tax-exempt
X Co. Y Co.
b. Share of co-venturers in the net income (P20M x P10,000,00 P10,000,00
50%) 0 0
Income tax due P P
3,000,000 3,000,000
Alternative solution using OSD:

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

a Contract price, excluding VAT (P89,600,000/1.12) P80,000,000
.
(P56,000,000/1.12)
Less: OSD (P30,000,000 x 40%) 12,000,000
b The share of joint venture partners X Co and Y Co is

. not
dividend rule.
2. Government project (consortium)

a Tax-exempt
.
X Co. Y Co.
b Share of co-venturers in the net income (P20M x P9,000,000 P9,000,000
. 50%)
Income tax due P P
2,700,000 2,700,000
CHAPTER 14
WITHHOLDING TAXES
1. True
2. True
3. True
4. True
5. False final withholding taxes are not creditable.
6. False the tax is final tax, hence not required to file an income tax return.
7. False Business income is an income earned but not all subject to expanded withholding tax.
8. True
9. True
10. True
11. True
12. False all payments made by the government are net of withholding taxes.
13. True
14. True
15. True
Problem 14 2 C
Share from the professional partnership (P500,000 x P250,000
50%)
Less: Creditable withholding tax (P250,000 x 10%) 25,000
Amount received, net of withholding tax P225,000
Problem 14 3 D
Dividend income (P10 x 10,000) P 100,000
Less: Withholding tax on dividends income of NRFC (30%)
30,000
Dividend income, net of withholding tax P 70,000
Problem 14 4 C
Lease income P 500,000
Less: Withholding tax (P500,000 x 4.5%) 22,500
Lease income, net of withholding tax P 477,500
Problem 14 5 B
Tax informers fee P1,000,000
Less: Withholding tax (P1,000,000 x 10%) 100,000
Tax informers fee, net of withholding tax P 900,000
Problem 14 6 SOLUTIONS
a. Resident Citizen or Resident Alien

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

Valencia 5th Ed. Vol1 - TAX1

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Valencia 5th Ed. Vol1 - TAX1

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Income Taxation by: Valencia and Roxas

CHAPTER 1 GENERAL PRINCIPLES AND CONCEPTS OF TAXATION

Problem 1 2 TRUE OR FALSE

Problem 1 3 TRUE OR FALSE

Prob. 1 Prob. 1 Prob. 1 Prob. 1 Prob. 1 Prob. 1

Problem 2 3 TRUE OR FALSE

Problem 2 4 TRUE OR FALSE

Situation 10 March 1, 2010. Within 1 year from the date of sale.

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

Sales proceeds P500,000

b. Miss San Tagos minimum financial penalties if convicted:

The income tax due is computed as follows:

2. Total annual registration fee January 31, 2010 P20,000

Problem 3 1 TRUE OR FALSE

Cash Accrual Cash Accrual

Equipment sold 25,000

Cost of products purchased ( 90,000)

Carrying value of farm . ( 25,000) .

2. Accrual Method Farming Trading Rent

Equipment sold 25,000

Inventory, ending 9,000

Inventory, beginning ( 6,000

Cost of products purchased ( 90,000)

Carrying value of farm . ( 25,000) .

Problem 4 1 TRUE OR FALSE

Problem 4 2 TRUE OR FALSE

Problem 5 1 TAXABLE OR NONTAXABLE with income tax

Problem 5 2 TAXABLE OR NONTAXABLE with income tax

Problem 5 3 TRUE OR FALSE

2. Retirement benefits P500,000

3. Same answer with No. 1 P 50,000

Problem 6 1 TRUE OR FALSE

Case 4: Not in the choices

Case 1: Housing benefits

GMV (P5,037,300 x 5% x 50%)/68%) P185,195

Present values of installment

Case 2: Motor vehicle benefits

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

3. Purchase of car on MV = AC/5

Monthly fringe benefit [(P2,040,000 x 5% x P 6,250

FBT (P7,956/68%) x 32% P 3,744

Fringe benefit expense (P34,000/68%) P 50,000

2. Fringe benefit tax (P49,800 x 32%) P15,936

3. Violeta Vicente cannot deduct the FBT from her gross

San Miguel Corporation, however, can deduct the entire

Total value of fringe benefits P112,500

Total value of fringe benefits P112,500

The MWE qualifies for tax exemption because his

2. Not a minimum wage earner

2. Not a minimum wage earner

2. FBT (P68,000/68%) x 32% P32,000

B 1. Down payment P200,000

2. FBT (P152,579/68%) x 32% P 71,802

C 1. Monetary value (P816,000 x 150%) P1,224,0

2. FBT (P1,224,000/68%) x 32% P

D 1. Annual monetary value = annual depreciation P

2. FBT (P40,800/68%) x 32% P

E 1. Monetary value (P244,000 x 50%) P

2. FBT (P122,000/68%) x 32% P

F. 1. Monetary value (P1,360,000 x 5% x 50%) P 34,000

2. FBT (P34,000/68%) x 32% P 16,000

1. FBT condominium [(P8,000,000 x 5% x P

Problem 7 2 TRUE OR FALSE