Professional Documents
Culture Documents
CHAPTER 8
11. Nondeductible
12. Deductible
13. Deductible
14. Deductible
15. Nondeductible
16. Nondeductible
17. Nondeductible
18. Deductible
19. Deductible
20. Deductible
Problem 8 2
TRUE OR FALSE
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
1. B
2. No choice, OSD=40%
3. D
4. D
5. D
6. C
7. B
8. D
9. B
10. C
11. C
12. D
13. C
Problem 8 7
Problem 8 4
1. C
2. A
3. D
4. A
5. B
6. B
7. A
8. A
9. D
10. A
Problem 8 5
1. A
2. A
3. C
4. C
5. A
6. D
7. C
8. A
9. B
10. C
Problem 8 6
1. A
2. C
3. A
4. C
5. C
6. C
7. B
8. C
9. C
10. C
11. D
12. B
C
Expensed
P10,000
Capitalized
P60,000
52
Expansion of store
Cleaning of computers
Repair of furniture
50,000
9,000
1,000
P20,000
Problem 8 8
A
Salaries net of tax
Withholding tax
Deductible business expense
.
P110,000
P100,000
5,000
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
Loss of business equipment
Deductible expense
P16,000
38,000
P54,000
Problem 8 11
D
1.
A
No personal or business expense is deductible.
2.
B
Depreciation (P20,000 x 10%)
Repair (P100,000 x 10%)
Office supplies
Total deduction
Problem 8 12
P 2,000
10,000
6,000
P18,000
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)
Multiplied by OSD rate
Optional standard deduction
P500,000
40%
P200,000
Problem 8 14
1.
B
Gross income (P870,000 P10,000 P380,000))
Add: Gains from sale of capital asset
Total
Multiplied by OSD rate
Optional standard deduction
P480,000
40,000
P520,000
40%
P208,000
2.
B
OSD
Less: Operating expense
Amount of income enjoying tax savings
P208,000
20,000
P188,000
53
Problem 8 15
D
Gross receipts from profession
Rent income
Total gross income
Multiplied by percent of OSD
Optional standard deduction
Problem 8 16
C
Operating expense before representation expense
(P2,000,000 P300,000)
Representation expense Actual
- Limit (P20,000,000 x 0.005)
- Lower
Allowable itemized deductions
Problem 8 17
B
Salary expense
Rent expense
Advertising expense
Depreciation expense
Interest expense
Tax differential on interest income (P30,000 x 33%)
Total itemized deductions
Problem 8 18
A
Gross salaries of employees
Grossed-up monetary value of fringe benefits
Deductible salaries and fringe benefits expenses
Problem 8 19
D
Allowable deduction fringe benefit expense (P102,000/68%)
P100,000
450,000
P550,000
40%
P220,000
P1,700,000
P300,000
100,000
100,000
P1,800,000
P120,000
24,000
6,000
5,000
60,000
( 9,900)
P205,100
P6,000,000
1,000,000
P7,000,000
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 + P5,000)
Less: Deductible contribution (P80,000 x 5%) lower of actual
Net income before income tax and bonus
B
T
B
B
B
B 0.045B
0.952B
B
=
=
=
=
=
=
=
=
P 80,000
4,000
P 76,000
15% (76,000 T)
30% (76,000 B)
15% [76,000 30% (76,000 B)]
15% (76,000 24,320 + 30%B)
11,400 3,420 +0.045B
7,980
7,980/0.955
8,356
Proof:
Income before bonus and tax
Less: Income tax (P76,000 P8,356) x 30%
Income after tax but before bonus
Multiplied by rate of bonus
Bonus
P76,000
20,293
P55,707
15%
P 8,356
Problem 8 21
Monthly salary
P 5,000
54
Death benefits
Terminal pay
Continuous compensation after the burial for three months
Total deductible expenses
50,000
25,000
15,000
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 cost
P300,000
20,000
.
P320,000
Purchases
Decreased in inventory
Increased in inventory
Supplies expense
P40,000
( 3,000)
P37,000
Problem 8 23
D
Traveling expenses (P50,000 + P200,000)
Fringe benefit expense (P68,000/68%)
Transportation expense messenger
Total allowable expense
P250,000
100,000
40,000
P390,000
Problem 8 24
Total rent expenses paid
Rent last year
Prepaid rent
Deductible rent expense
P150,000
(10,000)
(20,000)
P120,000
Problem 8 25
C
Monthly rent (P20,000 x 60%) x 2 mos from Oct. 31 to Dec. 31
Insurance premium (P3,000 x 60%) x 2/12
Real property tax (P1,500 x 60%) x 2/12
Deductible rent expense
P24,000
300
150
P24,450
Accrual
P96,000
Cash
P64,000
P150,000
P150,000
P2,000
6,250
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
Representation expense (P300,000 x .01)
P80,000
3,000
55
P83,000
Problem 8 30
C
Interest expense
Tax differential (P50,000 x 33%)
Deductible interest expense
P40,000
(16,500)
P23,500
Problem 8 31 D
Interest expense
Tax differential (P30,000 x 38%)
(P30,000 x 33%)
Deductible interest expense
Problem 8 32
Sole proprietor
P50,000
(11,400)
.
P38,600
Corporation
P50,000
(9,900)
P40,100
B
Deductible
Nondeductible
P 20,000
12,000
P 8,000
.
P 8,000
30,000
100,000
P162,000
Problem 8 33
A
Tax savings from interest expense (P100,000 x 30%)
Final tax on interest income (P1,000,000 x 12%) x 20%
Actual tax savings
P30,000
24,000
P 6,000
Problem 8 34
A
Documentary stamp taxes
Local tax (P6,000 P800 P200)
Municipal tax
Community tax
Deductible taxes
P 1,000
5,000
2,000
1,500
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)
Add back: Income tax foreign country
Adjusted net income
Personal exemption
Net taxable income
P320,000
10,000
P330,000
(50,000)
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
Payment to government (P200,000 x 50%)
Balance
P 60,000
(100,000)
(P40,000)
P100,000
Problem 8 37
B
Bad debts from business actual written off (P100,000 x 40%)
P40,000
56
50,000
P90,000
Problem 8 38
D
Annual depreciation expense (P50,000 P5,000)/5
Multiplied by ratio of months used during the year
Depreciation expense 200B
P9,000
1/2
P4,500
Problem 8 39
A
Annual depreciation (P2,300,000/11.5 years)
Multiplied by ratio of months used in 2007 (July 1 to Dec.)
Depreciation expense
P200,000
6/12
P100,000
Problem 8 40
D
Oil drilling machine (P800,000 x 90%) / 8 years
Oil extracting machine (P900,000 x 90% / 10 years limit
Computers (P100,000 x 90%)/4 years
Delivery truck (P200,000 x 90%)/ 5 years limit
Annual depreciation expense
P 90,000
81,000
22,500
36,000
P229,500
Problem 8 41
C
Depletion base (P6,000,000 P1,000,000 + P300,000)
Divided by number of extractible estimated tons
Depletion per ton
Multiplied by number of tons extracted during the year
Depletion expense
P5,300,000
5,000,000
P
1.06
800,000
P 848,000
Problem 8 42
1. D
Depletable costs, January 1, 200x
Exploration costs
Intangible development costs
Total
Less: Depletion expense (P15,000,000/7,500,000) x 1,200,000
Adjusted basis
Divided by remaining reserves
(5,000,000 + 2,500,000 1,200,000)
New depletion rate/ unit
2.
3.
4.
P12,500,000
1,000,000
1,500,000
P15,000,000
2,400,000
P 1,260,000
6,300,000
P 2.00
A
Depletion cost 2007 (P2 x 1,200,000 units)
B
Value of production (P12 x 1,200,000 units)
Less: Production and selling costs:
Mining costs
Milling costs
Marketing expenses
Depreciation expense
Net income from operation
Multiplied by limit percentage
Deductible amount fro exploration and development cost
B
Current exploration and development cost (P1,500,000 + P1,000,000)
Less: Deductible amount of exploration and development cost (see 3)
Exploration and development cost chargeable to succeeding years
P2,400,000
P14,400,000
P2,000,000
3,000,000
1,500,000
1,000,000
7,500,000
P 6,900,000
25%
P 1,725,000
P2,500,000
1,725,000
P 775,000
57
Problem 8 43
B
Deductible expense:
Depreciation expense (P10,000,000 x 90%)/50
Capital outlay
Capitalized
P180,000
P10,000,000
Problem 8 44
1
B
Lower of actual contribution or normal valuation
Add: Amortization of excess
200A (P200,000/10)
200B (P100,000/10)
Deductible retirement expense
2.
A
Actual retirement payments
Problem 8 45
Outright expense
200A
800,000
200B
800,000
200C
500,000
20,000
.
820,000
20,000
10,000
830,000
20,000
10,000
530,000
200A
0
200B
400,000
200C
300,000
Year X
700,000
10,000
710,000
Year Y
600,000
10,000
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 P130,000)
Multiplied by percent of limit
Allowed deductible contribution - lower
P370,000
5%
P 18,500
Problem 8 49
C
Actual value of donation priority program
Adopt a school program incentive (P1,000,000 x 50%)
Deductible donation
Problem 8 50
Net sales
Less: Cost of goods manufactured and sold:
Raw materials used:
Raw materials, beginning
Net purchases of raw materials
Raw materials, ending
Direct labor
Factory overhead:
Indirect labor factory supervisor
Depreciation (P100,000 x 90%)
Light and water (P150,000 x 80%)
Miscellaneous factory expenses
Cost of goods manufactured
Finished goods, ending
Gross income
P1,000,000
500,000
P1,500,000
P5,000,000
P 200,000
2,000,000
( 400,000)
P 120,000
90,000
120,000
20,000
P1,800,000
600,000
350,000
P2,750,000
( 750,000)
2,000,000
P3,000,000
58
1,200,000
P1,800,000
Problem 8 51
1.
Salaries of barbers
Depreciation of barbershop equipment
Cost of service
2.
P200,000
50,000
P250,000
Rent expense
Utility expense
Janitorial expense
Bookkeeping expense
Itemized deductions
P 20,000
30,000
15,000
10,000
P 75,000
Problem 8 52
Salaries of assistants
Traveling expenses
Light and water office
Stationeries and supplies
Office rent
Total operating expenses before contribution
Add: Contribution subject to limit (P500,000 P176,850) x 10%)
Allowable itemized deductions
P 96,000
11,000
7,890
1,960
60,000
P176,850
32,315
P209,165
Problem 8 53
Bad debts written-off (P35,000 P30,000)
Depreciation expense (P140,000 P100,000)
Donation to the government priority program
Donations subject to limit:
Lower of actual, P170,000 or
(P2,500,000 x 10%)
(P2,500,000 x 5%)
Total allowable deductions
Sole
Proprietorship
P 5,000
40,000
50,000
170,000
.
P 265,000
Corporation
P 5,000
40,000
50,000
125,000
P 220,000
Partnership
P 5,000
40,000
50,000
125,000
P 220,000
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
Interest expense (P50,000 (P40,000/80%) x 33%]
Total itemized deductions
Add: NOLCO
Total deductible expenses
P250,000
33,500
P283,500
500,000
P783,500
P3,000,000
40%
P1,200,000
59
3.
Gross income
Less: OSD
Net taxable income
P3,000,000
1,200,000
P1,800,000
Problem 8 55
1.
Actual contribution or normal valuation, lower
Add: Amortization - 200A (P250,000/10)
Deductible retirement expense
2.
200A
1,000,000
25,000
1,025,000
200B
900,000
25,000
925,000
50,000,000
1,100,000
51,100,000
1,025,000
50,075,000
60,000,000
1,200,000
61,200,000
925,000
60,275,000
Problem 8 56
Salary expenses
Retirement (P250,000 + P50,000/10)
Representation expense (P10,000,000 x .005)
Interest expense paid to the BIR - full
Interest expense limit:
Corporation (P100,000 (P96,000/80%) x 33%)
Individuals (P100,000 (P96,000/80%) x 38%
Depreciation expense
Rent expense
Group insurance expense
Bad debts expense (P100,000 x 20%)
Contribution expenses:
TESDA priority project (500,000 x 1.5)
Local government limit (lower is actual)
Total itemized deductions
Corporation
500,000
255,000
50,000
20,000
Individual
500,000
255,000
50,000
20,000
60,400
40,000
250,000
50,000
20,000
54,400
40,000
250,000
50,000
20,000
750,000
100,000
2,095,400
750,000
100,000
2,089,400
Individual
580,000
100,000
620,000
195,000
180,000
30,000
50,000
1,755,000
Corporation
580,000
100,000
620,000
195,000
180,000
30,000
50,000
1,755,000
750,000
750,000
300,000
100,000
300,000
100,000
.
2,905,000
.
2,905,000
P 5,000,000
30,000,000
60
4,000,000
P39,000,000
Individual
P9,000,000
2,905,000
P6,095,000
Corporation
P9,000,000
2,905,000
P6,095,000