79688098 Chapt 8 Deduct From Gross Income (1)

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

Chapter 8: Deductions from Gross Income

CHAPTER 8

DEDUCTIONS FROM GROSS INCOME Problem 8 – 1 DEDUCTIBLE OR NONDEDUCTIBLE FROM GROSS INCOME 1. Deductible 2. Nondeductible 3. Nondeductible 4. Deductible, in lieu of tax credit (Sec. 34C3, NIRC) 5. Deductible 6. Nondeductible 7. Nondeductible 8. Deductible 9. Deductible 10. Nondeductible

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Nondeductible Deductible Deductible Deductible Nondeductible Nondeductible Nondeductible Deductible Deductible 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 – ½ 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

Problem 8 – 5 1. A 2. A

Problem 8 – 6 1. A 2. C

3. D 4. A 5. B 6. B 7. A 8. A 9. D 10. A

3. C 4. C 5. A 6. D 7. C 8. A 9. B 10. C

3. A 4. C 5. C 6. C 7. B 8. C 9. C 10. C 11. D 12. B

C Expensed

Capitalized

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

Chapter 8: Deductions from Gross Income

Change of motor of air condition Repainting of building Expansion of store Cleaning of computers Repair of furniture Problem 8 – 8 Salaries net of tax Withholding tax Deductible business expense

P60,000 P10,000 50,000 9,000 1,000 P20,000

. P110,000

A 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

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) 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

P208,000 20,000

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

Chapter 8: Deductions from Gross Income

Amount of income enjoying tax savings

P188,000

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

= =

15% (76,000 – T) 30% (76,000 – B)

B B B

= = =

15% [76,000 – 30% (76,000 – B)] 15% (76,000 – 24,320 + 30%B) 11,400 – 3,420 +0.045B

B – 0.045B 0.952B B

= = =

7,980 7,980/0.955 8,356

P 80,000 4,000 P 76,000

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

Chapter 8: Deductions from Gross Income

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 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 – 22

C

Purchases Decreased in inventory Increased in inventory

Inventoriable cost P300,000 20,000 . P320,000

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 D 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

Note: The city services is not a rent expense. Problem 8 – 26 B 1. B Rent for 6 months based on usage (P20,000 x 6) x 80% Rent based on usage and payments (P80,000 x 80%) 2. A Actual cash collection for rent Problem 8 – 27 D Monthly rental expense Monthly depreciation (P600,000/8)/ 12 Monthly deductible expense

Accrual P96,000

Cash P64,000

P150,000

P150,000 P2,000 6,250 P8,250

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

Chapter 8: Deductions from Gross Income

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) Deductible operating expense

P80,000 3,000 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

(9,900) P40,100

B Deductible

Interest Interest Interest Interest Interest Total

Corporation P50,000

paid in advanced paid to a brother paid on deliquency taxes on borrowings to finance his family home paid to finance petroleum exploration

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 Problem 8 – 34 A Documentary stamp taxes Local tax (P6,000 – P800 – P200) Municipal tax Community tax Deductible taxes

Nondeductible P 20,000 12,000

P 8,000 . P 8,000

30,000 100,000 P162,000 P30,000 24,000 P 6,000 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

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

Chapter 8: Deductions from Gross Income

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 Deductible bad debts is the entire amount of collectibles Problem 8 – 37 B Bad debts from business actual written off (P100,000 x 40%) Bad debts from profession actual written off Deductible bad debts expense Problem 8 – 38 D Annual depreciation expense (P50,000 – P5,000)/5 Multiplied by ratio of months used during the year Depreciation expense 200B

P 60,000 (100,000) (P40,000) P100,000

P40,000 50,000 P90,000 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 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 .

A

P5,300,000 5,000,000 P 1.06 800,000 P 848,000

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

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

Chapter 8: Deductions from Gross Income

Depletion cost 2007 (P2 x 1,200,000 units) 3 .

P2,400,000

B Value of production (P12 x 1,200,000 units) Less: Production and selling costs: Mining costs

P14,400,000 P2,000,00 0 3,000,000 1,500,000 1,000,00 0

Milling costs Marketing expenses Depreciation expense

7,500,000

Net income from operation Multiplied by limit percentage Deductible amount fro exploration and development cost 4 .

P 6,900,000 25% P 1,725,000

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

Problem 8 – 43 B Deductible expense: Depreciation expense (P10,000,000 x 90%)/50 Capital outlay 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

Capitalized P180,000

P2,500,000 1,725,000 P 775,000 Outright expense 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

P610,000 = Not in the choices

Actual contribution or normal valuation, lower Add: Amortization (P100,000/10) Deductible retirement expense

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%) Problem 8 – 47 C Allowed deductible contribution – actual

P10,000 P5,000

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

58

Chapter 8: Deductions from Gross Income

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 P 200,000 Net purchases of raw materials 2,000,000 Raw materials, ending ( 400,000) Direct labor 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 Cost of goods manufactured Finished goods, ending Gross income Less: Optional standard deduction (P3,000,000 x 40%) Income from operations

P1,000,000 500,000 P1,500,000

P5,000,000

P1,800,000 600,000

350,000 P2,750,000 ( 750,000)

Problem 8 – 51 1. Salaries of barbers Depreciation of barbershop equipment Cost of service 2.

2,000,000 P3,000,000 1,200,000 P1,800,000

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 Sole Proprietorship

Corporation

Partnership

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

Chapter 8: Deductions from Gross Income

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

P

5,000 40,000 50,000

170,000 . P 265,000

P

5,000 40,000 50,000

125,000 P 220,000

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

Note: NOLCO is not an itemized deduction but part of deductible expenses. 2.

Gross income (P5,000,000 – P2,000,000) Multiplied by OSD rate OSD

P3,000,000 40% P1,200,000

Note: NOLCO is not allowed to be deducted if the taxpayer uses OSD. 3.

Gross income Less: OSD Net taxable income

Problem 8 – 55 1. Actual contribution or normal valuation, lower Add: Amortization - 200A (P250,000/10) Deductible retirement expense 2.

Financial net income Add: Retirement benefit expense – accounting Total Less: Deductible retirement expense – taxation Net income for tax purposes

P3,000,000 1,200,000 P1,800,000 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

Corporation 500,000 255,000 50,000 20,000

Individual 500,000 255,000 50,000 20,000

60,400 40,000 250,000

54,400 40,000 250,000

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

Chapter 8: Deductions from Gross Income

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

50,000 20,000

50,000 20,000

750,000 100,000 2,095,400

750,000 100,000 2,089,400

Note: NOLCO is an allowable special deduction but not an itemized deduction. Problem 8 – 57 1. Salaries expense (P680,000 – P100,000) Bad debts expense (P370,000 – P270,000) Retirement expense (P1,000,000 – P380,000) Representation expense (P39,000,000 x 0.005) Rent expenses (P200,000 – P20,000) Taxes expense (P300,000 – P270,000) Life insurance expense (P150,000 – P100,000) Total itemized deduction before contributions Contribution expenses: Donation to TESDA priority project (P500,000 x 150%) Donations to CHED not priority project (P200,000 actual is lower + 50% of actual) Donations to government (P100,000 actual is 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

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

Computation of sales: Financial income Cost of sales Operating expenses deducted (P680,000 + P370,000 + P1,000,000 + P800,000 + P500,000 + P200,000 + P300,000 + P150,000) Total sales 2. Gross income (P39,000,000 – P30,000,000) Less: Total allowable deductions Net taxable income

Individual P9,000,000 2,905,000 P6,095,000

P 5,000,000 30,000,000 4,000,000 P39,000,000 Corporation P9,000,000 2,905,000 P6,095,000