Professional Documents
Culture Documents
SUGGESTED ANSWERS
70
CHAPTER 8
71
Problem 8 3
1. C
2. C
3. A
4. D
5. A
6. B
7. A
8. C
9. C
10. D
Problem 8 7
Problem 8 4
1. D
2. B
3. B
4. C
5. A
6. D
7. C
8. C
9. A
10. A
Problem 8 5
1. A
2. C
3. C
4. A
5. D
6. C
7. A
8. B
9. A
10. C
C
Expensed
Problem 8 6
1. C
2. C
3. B
4. C
5. C
6. D
7. D
8. A
9. C
10. C
P20,000
10,000
9,000
1,000
P40,000
Capitalized
P60,000
50,000
.
P110,000
P400,000
40,000
P440,000
P20,000
10,000
5,000
4,000
P39,000
P16,000
38,000
P54,000
72
Letter 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
P200,000
30,000
.
P230,000
GAAP
P200,000
10,000
50,000
30,000
5,000
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
Sales
Multiplied by OSD rate
Optional standard deduction
P300,000
40%
P120,000
The compensation income is not included in determining OSD. The OSD (40% of gross
sales or gross receipts) is only allowed as deduction from income derived from
business. If an individual opted to use OSD, he is no longer allowed to deduct cost of
sales. [Sec. 34(L), NIRC; Sec. 3, Rev. Regs. No. 16-2008]
Problem 8 14
B
Gross receipts from profession
Rent income (P475,000/95%)
Total gross income
Multiplied by percent of OSD
Optional standard deduction
Problem 8 15
P100,000
500,000
P600,000
40%
P240,000
Since there are no official receipts and documents to support the operating expenses,
the reported operating expenses are not deductible (Sec. 34(A)(b), NIRC). The OSD is
not allowed for nonresident aliens (Sec. 34(L), NIRC). No personal exemption will be
granted to a nonresident alien with business in the Philippines if his country does not
have an exemption reciprocity law favoring a Filipino citizen. (Sec. 9, Rev. Regs. No. 2)
73
Problem 8 16
Sole Proprietor
Sales
P1,000,00
0
.
P1,000,00
0
40%
P
400,000
Corporatio
n
P1,000,000
300,000
P 700,000
40%
P 280,000
RA 9504 is specific as to the basis of OSD. For individuals, the basis of the 40% OSD
shall be the gross sales or gross receipts. In the case of corporate taxpayers subject
to tax under Sections 27(A) and 28(A)(1) of the Tax Code, as amended, the basis of the
40% OSD shall be the gross income.
Problem 8 17
B
Operating expense before representation expense
(P2,000,000 P300,000)
Representation expense Actual
- Limit (P20,000,000 x 0.005)
- Lower
Allowable itemized deductions
P1,700,000
P300,000
100,000
100,000
P1,800,000
Problem 8 18
B
Salary expense
Rent expense
Advertising expense
Depreciation expense
Interest expense
Tax differential on interest income (P30,000 x 33%)
Total itemized deductions
P120,000
24,000
6,000
5,000
60,000
( 9,900)
P205,100
Sales
Cost of sales
Gross income
Less: OSD or Itemized deductions
Using OSD
P1,200,000
- 0 P1,200,000
Using Itemized
P1,200,000
700,000
P 500,000
74
(P1,200,000 x 40%)
Net income before personal exemption
480,000
P 720,000
- 0 P 500,000
P 480,000
700,000
(P220,000)
P6,000,000
1,000,000
P7,000,000
Problem 8 21
C
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
0.955B
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 P8,382) x 30%
P76,000
20,285
75
P55,715
15%
P 8,356
Problem 8 22
B
Monthly salary
Death benefits
Terminal pay
Continuous compensation after the burial for three months
Total deductible expenses
P 5,000
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 23
Purchases
Decreased in inventory
Increased in inventory
Inventoriable cost
P300,000
20,000
.
P320,000
Problem 8 24
D
Traveling expenses (P50,000 + P200,000)
Fringe benefit expense (P68,000/68%)
Transportation expense messenger
Total allowable expense
Problem 8 25
B
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
Supplies expense
P40,000
( 3,000)
P37,000
P250,000
100,000
40,000
P390,000
P24,000
300
150
P24,450
P96,000
P150,000
P2,000
6,250
P8,250
76
Problem 8 28
C
Rent expense (P5,000 x 12)
Add: Depreciation expense [(P950,000/9.5) x 11/12]
Deductible expense in 200y
P 60,000
91,667
P151,667
At the start of the used of the building, the remaining period for the contract of lease is
9.5 years. The salvage value is ignored in the computation of the depreciation because
T Foods could no longer benefit on it since the improvement on the land will be owned
by the lessor at the end of the 10-year contract of lease.
Problem 8 29
1. Letter B
Trading - Limit lower (P5,000,000 x .005)
P25,000
2. Letter C
Servicing actual lower
P30,000
Problem 8 30
P10,000
P10,000
Problem 8 31
A
Interest expense
Tax differential (P50,000 x 33%)
Deductible interest expense
Problem 8 32
70%
P 7,000
P3,500
30%
P 3,000
3,000
P6,500
P40,000
(16,500)
P23,500
P200,000
15,000
60,000
P275,000
77
Problem 8 33
B
Deductible
Interest
Interest
Interest
Interest
Interest
Total
paid in advanced
paid to a brother
paid on delinquency taxes
on borrowings to finance his family home
paid to finance petroleum exploration
Problem 8 34
Nondeductible
P 20,000
12,000
P 8,000
.
P 8,000
30,000
100,000
P162,000
P 60,000
16,500
P 76,500
Salary expense
Rent expense
Deductible interest expense bank loan (P40,000 P16,500)
Total itemized deductions
P600,000
200,000
23,500
P823,500
The salaries of direct workers should be classified as deductible cost of service and not
to be classified as part of itemized deductions (Rev. Regs. No.16-2008). Interest expense
on unpaid salaries is not deductible. (Kuenzel & Streiff, Inc. vs. Collector of Internal
Revenue, 106 Phil. 355)
Problem 8 35
D
Tax savings from interest expense (P100,000 x 30%)
Final tax on interest income (P1,000,000 x 12%) x 20%
Actual net tax savings
P30,000
(24,000)
P 6,000
Problem 8 36
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 37
Business taxes
Documentary stamp taxes
Automobile registration fees
Postage stamp taxes
P 20,000
1,000
3,000
500
78
50,000
P 74,500
Problem 8 38
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 39
A
Asset of Oliva
Payment to government (P200,000 x 50%)
Balance
P 60,000
(100,000)
(P40,000)
P100,000
Problem 8 40
B
Bad debts from business actual written off (P100,000 x
40%)
Bad debts from profession actual written off
Deductible bad debts expense
P40,000
50,000
P90,000
Problem 8 41
D
Annual depreciation expense (P50,000 P5,000)/5
Multiplied by ratio of months used during the year (from June 30 to Dec. 31)
Depreciation expense 200B
Problem 8 42
A
Annual depreciation (P2,300,000/11.5 years)
Multiplied by ratio of months used in 200B (July 1 to Dec.)
Depreciation expense
Problem 8 43
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
P9,000
6/12
P4,500
P200,000
6/12
P100,000
P 90,000
81,000
22,500
36,000
P229,500
The useful life of properties used in or related to production of petroleum shall be ten
(10) years or such shorter life as may be permitted by the BIR Commissioner. Properties
not used directly in the production of petroleum shall be depreciated under the
79
straight-line method on the basis of an estimated useful life of five (5) years. (Sec. 34(F)
(4), NIRC)
Problem 8 44
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 45
1
Letter 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
.
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
Letter A
Depletion cost 2007 (P2 x 1,200,000 units)
3
.
P2,400,000
Letter B
Value of production (P12 x 1,200,000 units)
Less: Production and selling costs:
Mining costs
Milling costs
Marketing expenses
Depreciation expense
P14,400,000
P2,000,00
0
3,000,000
1,500,000
1,000,00
0
7,500,000
P 6,900,000
25%
P 1,725,000
Letter 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
P2,500,000
1,725,000
P 775,000
80
Problem 8 46
B
Deductible expense:
Depreciation expense (P10,000,000 x 90%)/50
Capital outlay
Problem 8 47
1
Letter B
Lower of actual contribution or normal valuation
Add: Amortization of excess
200A (P200,000/10)
200B (P100,000/10)
Deductible retirement expense
2.
Capitalized
P180,000
P10,000,000
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
Letter A
Actual retirement payments
Problem 8 48
Outright expense
Note: Only the excess of the actual contribution over the normal valuation is to be amortized
over 10 years.
Problem 8 48
B
Allowed deductible contribution (P200,000 x 5%)
P10,000
Problem 8 49
B
Allowed deductible contribution (P200,000 x 5%)
P10,000
Problem 8 50
D
Allowed deductible contribution [(P60,000 + P5,000) x 10%]
Problem 8 51
B
Income before charitable contribution (P500,000 P130,000)
Multiplied by percent of limit
Allowed deductible contribution - lower
Problem 8 52
PPHHI per month
P6,500
P370,000
5%
P 18,500
Problem 8 53
D
Not allowed to deduct PPHHI because family income exceeded P250,000 per year.
P200
81
Problem 8 54
C
Actual value of donation priority program
Adopt a school program incentive (P1,000,000 x 50%)
Deductible donation
P1,000,000
500,000
P1,500,000
Problem 8 55
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
Gross income
Less: OSD
Net taxable income
P3,000,000
1,200,000
P1,800,000
Problem 8 56
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 57
Sole
Proprietorship
P 5,000
40,000
Corporation
P 5,000
40,000
Partnership
P 5,000
40,000
82
50,000
50,000
50,000
170,000
.
P 265,000
125,000
P 220,000
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 58
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 59
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:
(P100,000 (P96,000/80%) x 33%)
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
60,400
40,000
250,000
50,000
20,000
750,000
100,000
2,095,400
750,000
100,000
2,095,400
Problem 8 60
1.
Salaries expense (P680,000 P100,000)
Bad debts expense (P370,000 P270,000)
Retirement expense (P1,000,000 P380,000)
Individual
580,000
100,000
620,000
Corporation
580,000
100,000
620,000
83
195,000
180,000
30,000
50,000
203,500
1,958,500
195,000
180,000
30,000
50,000
203,500
1,958,500
750,000
400,000
100,000
750,000
400,000
100,000
.
3,208,500
.
3,208,500
Computation of sales:
Financial income
Cost of sales
Operating expenses deducted
(P680,000 + P370,000 + P1,000,000 + P800,000 + P200,000
+ P300,000 + P150,000 + P160,000 + P800,000)
Total sales
2.
Gross income (P39,460,000 P30,000,000)
Less: Total allowable deductions
Net taxable income
P 5,000,000
30,000,000
4,460,000
P39,460,000
Individual
P9,460,000
3,208,500
P6,251,500
Corporation
P9,460,000
3,208,500
P6,251,500