INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 84

SUGGESTED ANSWERS
Chapter 12: Income Tax of Corporations

CHAPTER 12
INCOME TAX OF CORPORATIONS
Problem 12 1 TRUE OR FALSE
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%

Problem 12 2 TRUE OR FALSE

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

Problem 12 3 Problem 12 4
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
Net taxable income P4,000,000

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
Gross income P8,000,000
Business expenses 5,000,000
INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 85
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Chapter 12: Income Tax of Corporations

Net taxable income P3,000,000

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
Net taxable income P1,500,000
Multiplied by normal corporate tax rate 30%
Income tax due P 450,000

Problem 12 7 D
Gross income within P5,000,000
Multiplied by normal corporate tax rate 30%
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%
Income tax due and payable P 56,000

Problem 12 9 C
Net income from PAGCOR (P30,000,000 x P28,000,000) P2,000,000
Multiplied by normal corporate tax rate 30%
Income tax due P 600,000

Problem 12 10 B
Net income from National Power Corporation P10,000,000
Net income from National Books Store 8,000,00
0
Total net income P18,000,000
Multiplied by corporate normal tax 30
%
Income tax due P 5,400,000

Problem 12 11 D
Gross profit P1,600,000
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
Net taxable income P1,000,000
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%
Income tax payable P 16,000

Problem 12 13 YEAR 2005 use 35% normal tax rate

1. D
INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 86
SUGGESTED ANSWERS
Chapter 12: Income Tax of Corporations

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
Net taxable income P5,177,500
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
Gross income P85,000,000
Multiply by minimum corporate income tax rate 2%
Minimum corporate income tax P 1,700,000

Normal tax (P5,000,000 x 35%) P1,812,125

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)
Net taxable income P 150,000
Multiplied by corporate normal tax 30%
Income tax payable P 45,000

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:
Selling price P1,600,000
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

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 87
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Chapter 12: Income Tax of Corporations

d. Sale of land Philippines (P1,200,000 x 6%) 72,00

0
P254,000
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 corporations) Exempt
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%
Income tax due P 330,000

Problem 12 22 D
Related income P1,000,000
Unrelated income 1,500,000
Total revenue P2,500,000
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
INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 88
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Chapter 12: Income Tax of Corporations

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 30% P 30,000
Income tax due 1st quarter [(P495,000/99%) P480,000) x 30% ( 6,000)
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 30% P30,000
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 x 30%) P 30,000

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 (P100,000 x P 30,000
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
INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 89
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Chapter 12: Income Tax of Corporations

deposit - PCI Bank ($30,000 x P50 x 7.5%) 112,500

Dividends from Zerxes, a resident foreign corporation (P500,000 x 30%) 150,000
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%
Income tax due P 52,800 P 67,200
Total income tax paid in previous quarters - tax credit ( 52,800)
Income tax still due and payable P 14,400

Problem 12 38 A
Income subject to normal tax rate (P300,000/ 30%) P1,000,000
Passive income (P60,000/20%) 300,000
Capital gains (P35,000: 5,000 @5%, 30,000@10%) 400,000
Total income P1,700,000
Less: Income taxes paid:
Income tax per annual tax return P300,000
Final tax on passive income 60,000
Capital gains tax 35,000 395,000
Amount subject to 10% surtax P1,305,000

Problem 12 39
Year 2009
Within Without Total
Gross income:
Philippine P1,000,000 P1,000,000
USA P 400,000 400,000
Japan 300,000 300,000
Deductions:
Philippine (800,000) (800,000)
USA (200,000) (200,000)
Japan . (200,000) (200,000)
Net income P 200,000 P300,000 P 500,000
Multiply by tax rate 30%
Income tax payable P 150,000
Tax credit allowed see supporting computation ( 90,000)
Income tax still due P 60,000

Supporting computation:
Tax credits:
US (P200,000/P500,000) x P150,000 = P60,000 vs. P80,000
Allowed, lower P60,000
Japan (P100,000/P500,000) x P150,000 = P30,000 vs. P30,000
Allowed, lower 30,000
P90,000 90,000
Total (P300,000/P500,000) x P150,000 = P90,000 vs. P100,000
Allowed, lower P90,000

Problem 12 40
Reported income before tax P10,000,000
Add: Loss from sale of shares of stock outside stock market 5,000
Total P10,005,000
Less: Gains subject to final income tax:
(1) Gain from sale of stock in the stock market P 25,000
(2) Gain from sale of short-term debt securities 10,000
(3) Gain from sale of real property
(P9,400,000 P4,400,000) 5,000,000 5,035,000
Adjusted income subject to corporate income tax P 5,630,000
Multiply by normal corporate income tax 30%
Correct amount of income tax P 1,689,000

Total reported income before tax P10,000,000

Less: Normal corporate income tax 1,689,000
Net income after tax P 8,311,000

Problem 12 41
Total revenue P1,000,000
Operating expenses ( 10,000)
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Chapter 12: Income Tax of Corporations

Service charge credit card (P1,000,000/5%) x 3% ( 600,000)

Net income P 380,000
Multiplied by normal corporate tax 30%
Income tax due P 114,000
Less: Creditable expanded withholding tax (P1,000,000/5%) x 100,000
%
Income tax still due and payable P 14,000

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 P2,843,100
Miscellaneous fees 362,600
Income from rents 60,000
Net income, school canteen 36,200
Net income, book store 24,800
Gross income P3,326,700
Less: Allowable deductions:
Payroll and administrative salary P1,425,420
Other operating expenses 762,330
Interest expense 82,100
Depreciation, net six room building 37,500 2,307,350
Taxable income P1,019,350
Multiply by the applicable tax rate 10%
Income tax 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 year 4th year 5th year 6th year

Sales P1,000,000 P2,500,000 P4,000,000 P5,000,000
Cost of sales ( 600,000) (1,200,000 (2,400,000 (2,700,000
) ) )
Rent income 200,000 300,000 100,000 50,000
Gross income P 600,000 P1,600,000 P1,700,000 P2,350,000
Operating expenses allowed ( 300,000 (1,300,000 (1,400,000 (1,500,000
) ) ) )
Net taxable income P 300,000 P 300,000 P 300,000 P 850,000
Multiplied by NCIT rate 30% 30% 30% 30%
Income tax due P 90,000 P 90,000 P 90,000 P 255,000
Quarterly tax paid ( 10,000 ( 20,000 ( 30,000 ( 40,000
INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 91
SUGGESTED ANSWERS
Chapter 12: Income Tax of Corporations

) ) ) )
Income tax still due and payable P 80,000 P 70,000 P 60,000 P 215,000

2. 3rd year 4th year 5th year 6th 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 tax P100,000 P192,000 P136,000 P 64,000
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 + P250,000) 400,000 500,000
Total P2,000,000
Less: Income tax paid 500,000
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
Net income P1,461,040