Acctax1 AY 2016-2017 Problems

DE LA SALL E UNIVERSI UNIVERSITY TY RAMON V DEL ROSARIO COLLEGE OF BUSINESS  ACCOUNTANCY DEPARTMENT DEPART MENT INCOME TAXATION (ACCTAX1)  ACADEMIC YEA R 2016-2017 2016-2017 TAX PROBLEMS

Genera Generall Instructions : 1. Read Read the prob lems carefull y. 2. Answer the requirements requirements and and show all all necessary necessary computations. 3. Round the amounts amounts to the nearest nearest Philippine Philippine peso. 4. Place you r answers in a colu mnar not ebook. Make Make sur e that you have your assign ments wi th you before coming to class.

UNIT 3. GROSS INCOME Components of income and and gross i ncome Problem 1 – Concept of income and when taxable The following are independent situations or transactions entered into by Mabuhay Corporation, a domestic corporation: a.

On January 1, 20A1, Mabuhay Mabuhay Corporation received received the following properties from Mr. Segundo in exchange for the original issuance of 10,000 shares with P100 par value: Cash P250,000 Land (f air market value) 850,000

b.

On January 1, 20A1, Mabuhay Mabuhay Corporation entered into a lease lease agreement for the lease lease of land from Masaya Corporation. The terms of the lease are as follows: Lease term 2 years Monthly rental P100,000  Advance rentals 500,000 Security deposit 200,000 Pre-t re-ter erm minat inatio ion n penal enalty ty 10,0 10,00 00 per mon month for for the the rema remain inin ing g unu unused sed mon months ths The security deposit is refundable at the time of termination of the lease. However, it can be applied as rental payments. The advance rentals pertain to the first five months of the lease. Subsequently, Mabuhay paid P100,000 monthly rental at the beginning of each month. Mabuhay Corporation pre-terminated the lease eff ective December 1, 20A1. The security deposit was refunded.

c.

On October 1, 20A1, Mabuhay Mabuhay Corporation entered into a lease lease agreement for the lease lease of office space from Masaya Corporation. The terms of the l ease are as follows: Lease term 1 year   Monthly rental P100,000  Advance rentals 500,000 Security deposit 200,000 Pre-t re-ter erm minat inatio ion n penal enalty ty 10,0 10,00 00 per mon month for for the the rema remain inin ing g unu unused sed mon months ths The security deposit is refundable at the time of termination of the lease. However, it can be applied as rental payments. The advance rentals pertain to the first five months of the lease. Subsequently, Mabuhay paid P100,000 monthly rental at the beginning of each month, except for the last month of the lease where a portion of the security was applied as rental payment. The balance of t he security deposit was refunded.

d.

On January 1, 20A1, Mabuhay Mabuhay Corporation obtained a one-year loan from Masaya Banking Banking Corporation for P5,000,000 bearing an interest of 5% per annum. Mabuhay repaid the loan on December 31, 20A1.

e.

On December 1, 20A1, Mabuhay Mabuhay Corporation sold goods for USD100,000 on account to Masaya Corporation. The goods cost P3,000,000. Mabuhay collected its receivables from Masaya on January 31, 20A2. The following are the foreign exchange rates: December 1, 20A1 USD1 = P48 December 31, 20A1 USD1 = P50 January 31, 20A2 USD1 = P51 Mabuhay Corporation is registered with t he Board of Investments (BOI) and enjoying income tax holiday (ITH) until December 31, 20A2. Masaya Corporation, on the other hand, i s an entity registered with the Philippine Economic Zone Authority (PEZA).

f.

Mabuhay Corporation Corporation is a security security agency. On December December 15, 20A1, itit collected the following from its client, Masaya Corporation: Salaries of security guards  Agency fee Total

P 200,000 10,000 P 210,000

Mabuhay paid P200,000 to the security guards who are its employees. These security guards are minimum wage earners. g.

Mabuhay Corporation had a land which was was acquired five years ago for P300,000. It sold sold said land to Masaya Corporation for P1,000,000, its f air market value, on December 1, 20A1. However, Masaya deposited the payment to t he bank account of Mabuhay for P1,200,000. The P200,000 was deposited in error. Masaya collected the said overpayment from Mabuhay on December 31, 20A1.

The other party or parties in the above transactions are also domestic c orporations, unless otherwise stated. Required: For each of the above situation or or transaction: 1. Identify and determine the amount of income received or or earned by Mabuhay Corporation and the other  party to the transaction for income tax purposes for the year-ended December 31, 20A1 and December  31, 20A2. 2. If the item is an income, determine determine if it is taxable or not and explain; if it is not an income, identify the nature and explain. Problem 2 – Condonation of debt The following are independent situations dealing with condonation of loans of Marikit, Inc.: Situation A  As of December 31, 20A1, Marikit, Inc. had the following net assets assets prior to condonation of its loans:  Assets: Cash Accounts receivables   In Inv entories Property, plant and equipment Liabilities: Accounts payable Loans payable

P 200,000 300,000 400,000 1,000,000 P1,900,000 P 400,000 1,200,000 P1,600,000

The loans were obtained from it s affiliate company. Its affiliate condoned 30% of the loan on December 31, 20A1.

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Situation B  As of December 31, 20A1, Marikit, Inc. had the following net assets assets prior to condonation of its loans:  Assets:   Ca Cash Accounts receivables   In I nv entories Property, plant and equipment Liabilities: Accounts payable Loans payable

P

20,000 30,000 40,000 100,000 P 190,000 P 400,000 1,200,000 P1,600,000

The loans were obtained from it s affiliate company. Its affiliate condoned the entire loan on December 31, 20A1 since Marikit is encountering financial difficulty. Situation C  As of December 31, 20A1, Marikit, Inc. had the following net assets assets prior to condonation of its loans:  Assets:   Ca Cash Accounts receivables   In Inv entories Property, plant and equipment Liabilities: Accounts payable Loans payable

P

20,000 30,000 400,000 100,000 P 550,000 P 400,000 1,200,000 P1,600,000

The loans were obtained from it s affiliate company. Its affiliate condoned the entire loan on December 31, 20A1 since Marikit is encountering financial difficulty. Required: 1. Determine the amount of income that will be declared declared by Marikit for the year ended December 31, 20A1 for each situation. Explain your answer. 2. Determine if the condonation of debt debt will be subject to donor’s tax under each situation. Explain. Problem 3 – Award of damages Mr. Michael Lorenzo filed a labor case against its former employer, Maliwanag Corporation with the National Labor Relations Commission (NLRC). On September 15, 20A1, the case was decided in favor of Mr. Lorenzo where he was awarded the following: Unpaid salaries Unpaid commission Moral and exemplary damages  Attorney’s fees and other costs Total

P 500,000 120,000 300,000 250,000 P1,170,000

The award has already become final and executory and Maliwanag is willing to pay t he above amount less any withholding taxes. Mr. Lorenzo, however, paid only attorney’s and other costs of P200,000. Required: 1. Determine the amount amount of award considered as income subject to income tax. Explain. 2. Determine the amount of award not not considered as income. Explain.

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Problem 4 – Compensation for services; allowances; facilities or privileges Ms. Maganda is an employee of Halo-halo, I nc. She received the following salaries and benefits f or the year  ended December 31, 20A1: Compensation Commissions Tips and gratuities Transportation allowance Representation allowance Bonuses Total

P 200,000 70,000 50,000 40,000 30,000 60,000 P 450,000

These were given in the f orm of cash. The following are the additional information: Situation A ·

The tips and gratuities were paid by Halo-halo’s customers. These were added to the customers’ bills and subsequently paid to the employees in addition to the compensation.

·

The transportation and representation allowances are a fixed allowances given by Halo-halo to Ms. Maganda. These were not subjected to liquidation.

In addition, Ms. Maganda also receiv ed courtesy discounts for purchases of food items equivalent to 10% of the selling price. Total purchases amounted t o P80,000. Situation B ·

The tips and gratuities were paid by Halo-halo’s customers to the employees. Ms. Maganda received P50,000 during the year.

·

The transportation and representation allowances were subjected to liquidation. These were supported by receipts issued in the name of Halo-halo to evidence the actual incurrence of expenditures in connection with its trade or business.

In addition, Ms. Maganda also receiv ed courtesy discounts for purchases of food items equivalent to 50% of the selling price. Total purchases amounted to P80,000. Required: Determine the amount of income that will be declared by Ms. Maganda for the year ended December  31, 20A1. Problem 5 – Compensation for services: cash and i n kind The following are independent situations i nvolving Mr. Matipuno for the year ended December 31, 20A1: a.

Mr. Matipuno rendered repair services to Acacia Corporation. He was paid P50,000 for the services he rendered.

b.

Mr. Matipuno rendered repair services to Acacia Corporation. He received groceries worth P48,000 as compensation for the services he rendered.

c.

Mr. Matipuno rendered repair services to Acacia Corporation. His services was worth P45,000. In consideration for the said services, he received free meals from Acacia for one month.

d.

Mr. Matipuno is a Vice President for Finance of Acacia Corporation. He received an annual salary of  P3,000,000 during the year. In addition, he received a bonus of 1,000 shares of Acacia on January 31, 20A2 for the services he rendered in 20A1. The shares had par value P100 but had fair value of P250 on January 31, 20A2 and average fair value of P175 in 20A1.

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e.

Mr. Matipuno is a Finance Manager of Acacia Hotel Corporation. He received an annual salary of  P1,000,000 during the year. In addition, he also received free meals worth P50,000 and given living quarters with value of P5,000 monthly during the year.

f.

Mr. Matipuno is a chef of Acacia Hotel Corporation. He received an annual salary of P1,000,000 during the year. In addition, he also received free meals worth P50,000 and given living quarters with value of P5,000 monthly during the year. The free meals and liv ing quarters were provided to Mr. Matipuno for and necessary to the proper performance of his duties as chef of Acacia.

g.

Mr. Matipuno is rendered repair services to Ms. Acacia on December 1, 20A1. However, Ms. Malinis issued a promissory note with f ace amount of P50,000 payable on June 1, 20A2. The discounted value of the note on December 31, 20A1 is P45,000.

h.

Mr. Matipuno rendered services to Acacia Corporation for P60,000. However, Mr. Matipuno owes  Acacia the same amount. Acacia cancelled the borrowing of Mr. Matipuno since he rendered the repair  services.

i.

Mr. Matipuno owes Ms. Acacia P30,000. Out of Ms. Acacia’s generosity, she cancelled the debt of Mr. Matipuno.

Required: For each of the above situation, determine the amount that will be included as part of gross income of  Mr. Matipuno. Problem 6 – Income from dealings in property Macapuno, Inc. owned the following assets as of January 1, 20A1:

Building Equipment Land

Remaining life 10 4

Book value P3,000,000 400,000 1,000,000

The building was sold for P3,500,000, i ts fair market value, on June 30, 20A1 to Papaya Corporation. On the other hand, the equipment was sold to Camia Corporation for P400,000 on September 30, 20A1. However, the land was expropriated by the government on October 31, 20A1. The government paid Macapuno P1,800,000, which is its fair market v alue. Macapuno depreciates its properties using t he straight line method of depreciation for i ncome tax purposes. The assets are depreciated monthly. Required: Determine the amount of gross income that will be declared for income tax purposes for the year  ended December 31, 20A1. Problem 7 – Rental income The following are independent situations regardi ng the lease of land owned by Mangosteen Company, Inc. to Gumamela Corporation: Situation A On January 1, 20A1, Mangosteen leased its land to Gumamela for a period of 15 years for P200,000 monthly. Mangosteen also charged Gumamela real property tax ( RPT) on the land for P20,000 mont hly. Gumamela constructed a building on said land. The building was completed on October 1, 20A1 with total construction costs of P5,000,000, which represents its fair market value at the time of completion. The building will be transferred to Mangosteen at the end of the lease term. The building had an estimated useful life of 40 years. The lease continued for 15 years and the building was transferred t o Mangosteen at the end of t he lease term.

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Situation B On January 1, 20A1, Mangosteen leased its land to Gumamela for a period of 15 years for P200,000 monthly. Mangosteen also charged Gumamela real property tax ( RPT) on the land for P20,000 mont hly. Gumamela constructed a building on said land. The building was completed on October 1, 20A1 with total construction costs of P5,000,000, which represents its fair market value at the time of completion. The building will be transferred to Mangosteen at the end of the lease term. The building had an estimated useful life of 40 years. However, Gumamela terminated the lease on September 30, 20A8. It paid penalty of P1,200,000 for the termination of the contract. Situation C On January 1, 20A1, Mangosteen leased its land to Gumamela for a period of 15 years for P200,000 monthly. Mangosteen also charged Gumamela real property tax ( RPT) on the land for P20,000 mont hly. Gumamela constructed a building on said land. The building was completed on October 1, 20A1 with total construction costs of P5,000,000, which represents its fair market value at the time of completion. The building will be transferred to Mangosteen at the end of the lease term. The building had an estimated useful life of 40 years. However, the building was destroyed by f ire on October 1, 20A8. The building was not insured. However, it had a salvage value of P500,000. Situation D On January 1, 20A1, Mangosteen leased its land to Gumamela for a period of 15 years for P200,000 monthly. Mangosteen also charged Gumamela real property tax ( RPT) on the land for P20,000 mont hly. Gumamela constructed a building on said land. The building was completed on October 1, 20A1 with total construction costs of P5,000,000, which represents its fair market value at the time of completion. The building will be transferred to Mangosteen at the end of the lease term. The building had an estimated useful life of 40 years. However, the building was destroyed by f ire on October 1, 20A8. The building was insured and the insurance company indemnified P800,000. In addition, it had a salvage value of P400,000. Required: 1. Determine the annual gross income that will be reported by Mangosteen for the entire term of the lease under the two allowable methods in recognizing income. 2. For Situations C and D, determine the amount of loss that will be recognized by Mangosteen in the year  of destruction if any. Problem 8 – Rental, dividend and i nterest income On January 1, 20A1, Durian Company, Inc., a wholly-owned subsidiary of Rosas Company, leased its building to Pagsibol Corporation. It was agreed t hat instead of paying rentals to Durian, Pagsibol should make payments as follows: Recipient Rosas Company Dahlia Company

Relationship with Durian Stockholder Lender

Amount of payment 10% of par value of shares 6% of loan payable

 As of January 1, 20A1, Durian had common stock of P5,000,000 with no additional paid-in capital. On the other  hand, it had loans payable to Dahlia for P3,500,000, and advances to Rosas for P800,000. There were no changes in the carrying amounts of these accounts at December 31, 20A1 except that Durian forgave the indebtedness of Rosas.

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Pagsibol also shouldered the real property tax (RPT) and insurance on the buildi ng. These charges were paid by Durian but will be reimbursed by Pagsibol. RPT and insurance premiums paid in 20A1 amounted to P100,000 and P150,000, respectively. Required: 1. Determine December 2. Determine December 3. Determine December

the nature and amount of gross income that will be recognized by Durian for the year ended 31, 20A1, if any. the nature and amount of gross income that will be recognized by Rosas for the year ended 31, 20A1, if any. the nature and amount of gross income that will be recognized by Dahlia for the year ended 31, 20A1, if any.

Problem 9 – Dividend The stockholders equity section of Azucena Corporation’s statem ent of financial position shows the following information as of December 31, 20A0: Common stock, 1,000,000 shares issued and outstanding Retained earnings Revaluation surplus Total

P 10,000,000 8,000,000 3,000,000 P 21,000,000

 Azucena had net income of P1,500,000 for the year ended December 31, 20A0. On March 1, 20A1, it declared P4 dividend per share payable on April 15, 20A1. Required: 1. Determine the amount of dividend income to be reported by the stockholders of Azucena for the year  ended December 31, 20A1. 2. Determine the source of dividend declared by Azucena (i.e., year of earning the net income). Exclusions from gro ss income Problem 10 – Proceeds of lif e insurance and return of premiums  As of January 1, 20A1, Ms. Amihan has an insurance policy with face amount of P3,000,000 which she purchased five years ago. Premium on said policy of P15,000 were payable quarterly f or 10 years. She named her husband and her children as the beneficiaries of the insurance policy. The following are independent situations rel ated to the insurance policy: a.

Ms. Amihan died on June 30, 20A1. Her beneficiaries received P3,000,000 from the insurance company.

b.

Ms. Amihan lived after paying the insurance premiums for 10 years. She received P3,000,000 from the insurance company.

c.

Ms. Amihan obtained a policy having dividend participation. She received P30,000 dividend in 20A1.

d.

Ms. Amihan cancelled the insurance policy on June 30, 20A6. She received a cash surrender value of  P150,000.

Required: 1. Determine the amount of gross income of Ms. Amihan for each of the above situation. Identify the year  the income is earned. 2. Determine the amount of exclusion from gross income of Ms. Amihan for each of the above situation. Identify the year of exclusion.

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Problem 11 – Gift, bequest and dev ises Mr. Habagat owns a parcel of l and, cash, jewelry, and shares of stock. The lot was being leased for P 100,000 monthly. These were payable at the end of each month. On July 1, 20A1, Mr. Habagat died. These properties were inherited by his only son, Juan. These properties had the f ollowing fair values at the time of Mr. Habagat’s death: Land Cash Jewelry Shares of stock

P 3,000,000 1,000,000 800,000 1,500,000

The issuer of the shares declared div idend of P300,000 on July 15, 20A1 which were paid on August 1, 20A1. Required: 1. Determine the amount of gross income of Mr. Habagat’s son for the year ended December 31, 20A1. 2. Determine the amount of exclusion from gross income of Mr. Habagat’s son for the year ended December 31, 20A1. Problem 12 – Retirement benefits, pensions and separati on pay The following are independent situations regardi ng the retirement benefits, pensions or separation pay of Mrs. Makulay: a.

Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a BIR-registered retirement plan. Mapula contributed to t he retirement plan in order to fi nance the retirement pay of its employees. Under the retirement plan, the employees are entitled to retirement benefits if they have rendered at least 10 years of service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 50 and rendered 20 years of service. This is the first time t hat she retired from employment. She received the following benefits: Retirement pay Back wages Commutation of vacation leave credits Commutation of sick leave credits

b.

Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a BIR-registered retirement plan. Mapula contributed to t he retirement plan in order to fi nance the retirement pay of its employees. Under the retirement plan, the employees are entitled to retirement benefits if they have rendered at least 5 years of service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 50 and rendered 8 years of service. This is the first time that she retired from employment. She received the following benefits: Retirement pay Back wages Commutation of vacation leave credits Commutation of sick leave credits

c.

P 3,000,000 300,000 200,000 100,000

P 3,000,000 300,000 200,000 100,000

Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a BIR-registered retirement plan. Mapula contributed to t he retirement plan in order to fi nance the retirement pay of its employees. Under the retirement plan, the employees are entitled to retirement benefits if they have rendered at least 10 years of service and they are at least 60 years old. During 20A1, Mapula offered an early retirement to Mrs. Makulay although she has not yet reached 60 years old. On July 31, 20A1, Mrs. Makulay availed the early retirement offer from Mapula at the age of 58 and rendered 20 years of  service. This is the first time that she retired from employment. She received the following benefits: Retirement pay Back wages Commutation of vacation leave credits Commutation of sick leave credits

Income Taxation (ACCTAX1) Tax Problems

P 3,000,000 300,000 200,000 100,000

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d.

Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a BIR-registered retirement plan. Mapula contributed to t he retirement plan in order to fi nance the retirement pay of its employees. Under the retirement plan, the employees are entitled to retirement benefits if they have rendered at least 10 years of service regardless of age. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 35 and rendered 10 years of service. T his is the first time that she reti red from employment. She received the following benefits: Retirement pay Back wages Commutation of vacation leave credits Commutation of sick leave credits

e.

Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a retirement plan. However, it is not registered with the BIR, Mapula contributed to the retirement plan in order to finance the retirement pay of its employees. Under the retirement plan, the employees are entitled to retirement benefits if  they have rendered at least 10 years of service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 50 and rendered 20 y ears of service. This is t he first time that she retired from employment. She received the following benefits: Retirement pay Back wages Commutation of vacation leave credits Commutation of sick leave credits

f.

P 3,000,000 300,000 200,000 100,000

Mrs. Makulay is an employee of Mapula Corporation. Mapula does not maintain a retirement plan. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 60 and she has rendered 20 years of  service. This is the first time that she retired from employment. She received the following benefits: Retirement pay Back wages Commutation of vacation leave credits Commutation of sick leave credits

i.

P 3,000,000 300,000 200,000 100,000

Mrs. Makulay is an employee of Mapula Corporation. Mapula does not maintain a retirement plan. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 50 and r endered 20 years of service. This is the first time that she ret ired from employment. She received the following benefits: Retirement pay Back wages Commutation of vacation leave credits Commutation of sick leave credits

h.

P 3,000,000 300,000 200,000 100,000

Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a retirement plan. However, it is not registered with the BIR. Mapula contributed to the retirement plan in order to finance the retirement pay of its employees. Under the retirement plan, the employees are entitled to retirement benefits if  they have rendered at least 10 years of service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 60 and rendered 20 y ears of service. This is t he first time that she retired from employment. She received the following benefits: Retirement pay Back wages Commutation of vacation leave credits Commutation of sick leave credits

g.

P 3,000,000 300,000 200,000 100,000

P 3,000,000 300,000 200,000 100,000

Mrs. Makulay is an employee of Mapula Corporation. Because the position of Mrs. Makulay became redundant, she was forced to separate from Mapula on July 31, 20A1. Mapula offered her separation benefits. She received the following benefits: Separation pay Back wages Commutation of vacation leave credits Commutation of sick leave credits

Income Taxation (ACCTAX1) Tax Problems

P 3,000,000 300,000 200,000 100,000 Academic Year 2016-2017 Page 9

 j.

Mrs. Makulay is an employee of Mapula Corporation. Because of her sickness, Mrs. Makulay was forced to separate from Mapula on July 31, 20A1. Mapula offered her separation benefits. She received the following benefits: Separation pay Back wages Commutation of vacation leave credits Commutation of sick leave credits

P 3,000,000 300,000 200,000 100,000

Required: 1. Determine the amount that will be included as part of Mrs. Makulay’s gross income for income tax purposes for the year ended December 31, 20A1. 2. Determine the amount that will excluded from Mrs. Makulay’s gross income for income tax purposes for  the year ended December 31, 20A1. Problem 13 – Prizes and awards Mr. Yakal is a private elementary school t eacher. During 20A1, he received the f ollowing prizes and awards (in cash): Most outstanding elementary school teacher SEA Games gold medalist in track and field Loyalty service award for 20 years of service with his employer Prize for winning department store raffle Prize for winning talent competition in a variety show

P 100,000 1,000,000 20,000 100,000 150,000

Required: 1. Determine the amount that will be included as part of Mr. Yakal’s gross income for income tax purposes for the year ended December 31, 20A1. 2. Determine the amount that will excluded from Mr. Yakal’s gross income for income tax purposes for the year ended December 31, 20A1. Problem 14 – 13th month pay and other benefi ts; de minimis benefits; SSS contributions; de minimis benefits Ms. Paraluman is an employee of Adobo, Inc. The following are independent situations regarding t he salaries and benefits granted to her for the year ended December 31, 20A1: a.

Ms. Paraluman received the following salaries and benefits: Gross compensation 13th month pay 14th month pay Bonuses Rice subsidy Clothing allowance Productivity incentive Loyalty award Medical allowance for the employee Medical allowance for dependents Daily meal allowance Total

P 180,000 15,000 15,000 60,000 18,000 4,000 12,000 17,000 9,000 5,000 10,000 P 345,000

The following are the additional information: ·

The rice subsidy was given in cash for P1,500 monthly.

·

The clothing allowance which included T-shirt and jeans worth P4,000 was given on January 31, 20A1.

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b.

·

The productivity incentive was granted in cash on December 1, 20A1.

·

The loyalty award which was a wrist watch was giv en on June 30, 20A1.

·

The medical allowance was subjected to liquidation. Ms. Paraluman submitted invoices and receipts supporting purchases of m edicines and other medical expenses issued in her name.

·

The medical allowance for dependents was giv en quarterly for P1,250. Ms. Paraluman submitted invoices and receipts supporting purchases of medicines and medical expenses issued in the name of her dependents.

·

The daily meal allowance was given on account of overtime equivalent to P100 per day. The basic daily minimum wage was P500 per day.

·

Ms. Paraluman contributed P545 monthly as mandatory contribution to SSS which was deducted from her compensation.

Ms. Paraluman received the following salaries and benefits: Gross compensation 13th month pay 14th month pay Bonuses Rice subsidy Clothing allowance Productivity incentive Loyalty award Medical allowance for the employee Medical allowance for dependents Daily meal allowance Total

P 180,000 15,000 15,000 45,000 18,000 4,000 8,000 10,000 9,000 5,000 11,000 P 320,000

The following are the additional information: ·

The rice subsidy was given in cash for P4,500 quarterly.

·

The clothing allowance was given in cash on January 31, 20A1.

·

The productivity incentive was granted in cash on December 1, 20A1.

·

The loyalty award was given in cash on June 30, 20A1.

·

The medical allowance was given in cash and onl y P5,000 was subjected to liquidation. Ms. Paraluman submitted invoices and receipts supporting purchases of m edicines and other medical expenses issued in her name for P5,000.

·

The medical allowance for dependents was giv en quarterly for P1,250. Ms. Paraluman submitted invoices and receipts supporting purchases of medicines and medical expenses issued in the name of her dependents.

·

The daily meal allowance was given regardless of whether Ms. Paraluman rendered overtime. However, P7,500 was given on account of overtime equivalent to P150 per day. The basic daily minimum wage was P500 per day.

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·

Ms. Paraluman contributed P700 monthly to SSS which was deducted f rom her compensation. However, only P545 is the mandatory m onthly contribution.

Required: 1. Determine the amount that will be included as part of Ms. Paraluman’s gross income for income tax purposes for the year ended December 31, 20A1. Determine the amount that will excluded from Ms. Paraluman’s gross income for income tax purposes for the year ended December 31, 20A1. Special treatment of fringe benefits – include journal entries on the part of the employer  Problem 15 – FBT on housing privileges On January 1, 20A1, Libertad Inc. hired Mr. Aruga as its Vice P resident for Finance. As part of his compensation package, Libertad granted him housing privilege. Temporarily, Mr. Aruga stayed in a nearby hotel from January 1, 20A1 to February 28, 20A1. Libertad paid monthly hotel charges of P300,000 for January and February. Subsequently, he transferred t o a residential condominium unit in Bonifacio Global City (BGC). The following are independent cases relative to the residential condominium unit occupied by Mr. Aruga for the year ended December 31, 20A1: a. b.

c.

d.

e.

f.

Libertad leased a residential condominium unit at Bonifacio Global City (BGC) on March 1, 20A1. Monthly rental amounts to P120,000 payable on a monthly basis at the begi nning of each month. Mr. Aruga leased a residential condominium unit at BGC on March 1, 20A1. Monthly rental amounts to P120,000 payable on a monthly basis at the beginning of each month. Libertad reimbursed Mr. Aruga for the rentals related to the residential condominium unit. Libertad owned a residential condominium unit at BGC. It was assigned to Mr. Aruga starting March 1, 20A1. The unit had a fair market value of P10 million as indicated in the real property tax (RPT) declaration while its zonal val ue is P8.5 million as determined by the BIR. Libertad purchased a condominium unit at BGC on March 1, 20A1 for P10 million payable on installment. Libertad paid a downpayment of P2 million on March 1, 20A1, and t he remaining balance was payable in four (4) yearly installments payable every March 1 with 5% i nterest. The unit had a fair  market value of P9 million as indicat ed in the RPT declaration while its zonal value is P8 million as determined by the BIR. It was assigned t o Mr. Aruga. Libertad purchased a condominium unit at BGC on March 1, 20A1 for P10 million. The unit had a fair  market value of P12 million as i ndicated in the RPT declaration while its zonal value i s P12.5 million as determined by the BIR. The titl e to the unit was transferred to Mr. Aruga. Libertad purchased a condominium unit at BGC on March 1, 20A1 for P10 million. The unit had a fair  market value of P12.5 million as indicated i n the RPT declaration while its zonal value is P12 million as determined by the BIR. The unit was transferred to Mr. Aruga for P6 million.

Required: 1. Determine the monetary value of the quarterly fringe benefits granted to Mr. Aruga. 2. Determine the amount of quarterly fringe benefits tax (FBT). 3. Prepare the related journal entries for the year ended December 31, 20A1. Problem 16 – FBT on motor vehicles Trinidad Manufacturing Company hired Ms. Halaran, as its Finance Manager, on January 1, 20A1. As part of  her compensation package, she was granted car benefit. The following are independent situation relating to the car benefit: a. b. c.

Trinidad purchased a car for P1,200,000 on January 1, 20A1 in the name of Ms. Halaran. Trinidad granted Ms. Halaran cash for P1,200,000 on January 1, 20A1 for the acquisition of car. Trinidad purchased a car on installment for P1,200,000 on January 1, 20A1 in the name of Ms. Halaran. Trinidad paid downpayment of P300,000, and the balance was payable in three equal annual installment every January 1 with 10% interest.

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d. e.

f.

Trinidad purchased a car for P1,200,000 on January 1, 20A1 in the name of Ms. Halaran. However, Ms. Halaran shouldered P200,000 which was also paid on January 1, 20A1. Trinidad purchased a car for P1,200,000 on January 1, 20A1 and this was part of a fleet of motor  vehicles assigned to its employees. Said car was assigned to Ms. Halaran. Trinidad depreciates its motor vehicles for four years using the straight-line method of depreciation. Trinidad leased a car for P35,000 monthly commencing on January 1, 20A1. The said leased car  formed part of its fleet of motor vehicles assigned to its employees. Said car was assigned to Ms. Halaran.

Required: 1. Determine the monetary value of the quarterly fringe benefits granted to Ms. Halaran. 2. Determine the amount of quarterly fringe benefits tax (FBT). 3. Prepare the related journal entries for the year ended December 31, 20A1. Problem 17 – Expense accounts; household personnel; life insurance; membership fees, dues and other  expenses Plazoleta Company, Inc. reimbursed the following expenses to Mr. Sebaste, its Sales and Marketing Manager, for the quarter ended March 31, 20A1: Car repairs and maintenance Representation expenses Transportation expenses Supplies expenses Groceries Driver’s salaries Maid’s salaries Laundry expenses Membership fees in PICPA Membership fees in Rotary Club Membership fees in Tennis Club PRC license fee Personal life insurance premium

Income Taxation (ACCTAX1) Tax Problems

P20,000 12,000 7,500 5,000 5,250 5,500 2,500 1,500 3,000 1,500 6,000 1,000 3,000

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 Although Mr. Sebaste heads the company’s sales and marketing department, he is a CPA by profession. As such, he is an active member of PICPA. He is also a member of various organizations. The following are the additional information: · · ·

· · · ·

·

The car repairs and maintenance are supported by official receipts i ssued in the name of Plazoleta. These are for the car owned by Plazoleta which is assigned to Mr. Sebaste. The representation expenses are supported by official receipts. However, only P8,000 were issued in the name of Plazoleta while the balance were issued in the name of Mr. Sebaste. The transportation expenses are supported by official receipts issued by the transportation contractor in the name of Mr. Sebaste for the account of Plazoleta. These are actual business transportation expenses. The supplies expenses are supported by invoices issued in the name of Plazoleta. The groceries are supported by invoices issued in the name of Plazoleta. However, these are for the family of Mr. Sebaste. The driver and maid are personnel of Mr. Sebaste where the salaries are shouldered by Plazoleta. The laundry expenses pertain to personal expenses of Mr. Sebaste which are supported by official receipts in the name of Plazoleta. Plazoleta granted laundry allowance of P1,500 quarterly to Mr. Sebaste. The personal life insurance premium represents annual premium on the life insurance policy obtained by Mr. Sebaste. This is in addi tion to the annual group lif e insurance premium paid by Plazoleta of  P1,000. Moreover, Plazoleta also granted Mr. Sebaste annual medical cash allowance of P10,000 which were properly supported by official receipts and invoices evidencing medical expenses issued in his name.

Mr. Sebaste received monthly salary of P120,000. Required: 1. Determine the monetary value of the fringe benefits granted to Mr. Sebaste for the quarter ended March 31, 20A1. 2. Determine the amount of fringe benefits tax (FBT). 3. Prepare the related journal entries for the year ended December 31, 20A1. Problem 18 – Foregone interest on loans Del Pilar Company, Inc. provided the f ollowing loans and cash advances to Ms. Bonifacio for the year ended December 1, 20A1: Date January 1, 20A1

Loan Car loan

February 1, 20A1  April 1, 20A1

Emergency loan Salary loan

50,000 120,000

July 1, 20A1

Special loan

100,000

Income Taxation (ACCTAX1) Tax Problems

Amount P600,000

Terms 60 months; P10,000 monthly amortization (salary deduction); no interest Payable on July 31, 20A1; no interest 6 months; P20,000 monthly amortization (salary deduction); 5% annual interest payable monthly Payable on July 1, 20A2; 15% annual interest

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If the loans were payable monthl y through salary deduction, the first monthly amortization commenced on the last day of the month t he loan was granted. If interest was charged, the interest was also paid t hrough salary deduction. Moreover, loans and loan amortizations were paid promptly by Ms. Bonifacio through salary deductions. Required: 1. Determine the quarterly monetary value of the fringe benefits granted to Ms. Bonifacio for the year  ended December 31, 20A1. 2. Determine the amount of quarterly fringe benefits tax (FBT). 3. Prepare the related journal entries for the year ended December 31, 20A1. Problem 19 – Car plan, car lease and foregone interest Rizal Services, Inc. provided the following car benefits to its two employees, Mr. Hidalgo, Operations Manager, and Ms. Karisma, Accounting Manager: ·

Mr. Hidalgo Rizal purchased a car for P1,000,000 on January 1, 20A1. This formed part of the fleet of assigned cars of the employees. This was assigned to Mr. Hidalgo on said date. The purchase price was paid by Rizal in cash. However, Mr. Hidalgo shouldered 30% of the acquisition cost of the car. The said amount was paid through salary deduction for P5,000 monthly starting January 31, 20A1 for 60 months.

·

Ms. Karisma Rizal leased a car for P25,000 monthly starting January 1, 20A1. This formed part of the fleet of  assigned cars of the employees. This was assigned to Ms. Karisma. As agreed, Ms. Karisma will shoulder P5,000 of the rental payment since the maximum rental which can be shouldered by the company is only P20,000. The said amount will be paid through salary deduction. The initial P5,000 payment, however, was made on January 1, 20A1.

Required: 1. Determine the quarterly monetary value of the fringe benefits granted to Mr. Hidalgo and Ms. Karisma for the year ended December 31, 20A1. 2. Determine the amount of quarterly fringe benefits tax (FBT). 3. Prepare the related journal entries for the year ended December 31, 20A1. Problem 20 – Foreign travel, holiday ex penses and educational assistance Francisco Cars and Motors Corporation pai d the following expenses and benefits of i ts employees for the year  ended December 31, 20A1: ·

Mr. Fresco He travelled to Los Angeles, US on March 1, 20A1 to attend a convention f or ten (10) days. The trav el was supported by an invitation letter coming from the host organization. He incurred the following expenses which were paid by Francisco:  Airfare, business class (Manila to Los Angeles)  Airfare, first class (Los Angeles to Manila) Hotel charges Food expenses

P 50,000 120,000 100,000 25,000

In addition, Mr. Fresco spent additi onal three (3) vacation. He incurred t he following expenses which were paid by Francisco: Hotel charges Food expenses Other incidentals

Income Taxation (ACCTAX1) Tax Problems

P 30,000 6,000 10,000

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This was an additional benefit that was granted to Mr. Fresco. Mr. Fresco also availed of educational assistance for his three dependents f rom Francisco. Two dependents availed of the scholarship program granted by the company. Francisco paid P250,000 tuition fee for each child during 20A1 (50% was paid in January and 50% in July). However, his third was not able to pass the scholarship exam administered by the company. Hence, t he child was not entitled to the scholarship. Nonetheless, Francisco still shouldered 50% of the tuition fee of the third dependent. The tuition fee amounted to P150,000 (50% was paid in January and 50% in July). ·

Ms. Kamagong Ms. Kamagong started taking her MBA degree on January 1, 20A1. Her tuition fee and other  educational expenses incurred during 20A1 amounting to P100,000 (50% was paid in January and 50% was paid in July) was shouldered by the company. She is required to remain with the employ of the company for at least two years after obtaining her degree.

·

Ms. Halaman Ms. Halaman started studying culinary arts on January 1, 20A1. This is not related to her work. However, Francisco shouldered her tuition fee for the year amounting to P70,000 out of generosity. This was paid in February 20A1.

Required: 1. Determine the quarterly monetary value of the fringe benefits granted to Mr. Fresco, Ms. Kamagong and Ms. Halaman for the year ended December 31, 20A1. 2. Determine the amount of quarterly fringe benefits tax (FBT). 3. Prepare the related journal entries for the year ended December 31, 20A1. Problem 21 – Fringe benefits received by certain individuals; applicable tax rate Benedicto, a regional operating headquarters (ROHQ) granted the following benefits to its employees during the 20A1:

Rental of housing facilities Rental of assigned cars (fleet of cars) Rice subsidy Membership fees in professional organization Membership fees in sports club Clothing allowance

Subject to regular rates P3,000,000 2,200,000 300,000 200,000 100,000 120,000

Entitled to 15% tax P3,600,000 2,160,000 225,000 150,000 75,000 90,000

The following are the additional information: · · ·

There were 20 employees who are subject to regular rates and 15 employees who are entitled to the 15% tax. No employees were hired and left the company during the year. Rice subsidy was granted monthly for P1,250. Clothing allowance granted amounted to P6,000 annually.

The P82,000 13th month pay and other benefits were already exhausted. Required: 1. Determine the monetary value of the fringe benefits granted to Benedicto’s employees. 2. Determine the amount of fringe benefits tax (FBT).

Income Taxation (ACCTAX1) Tax Problems

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UNIT 4. DEDUCTIONS FROM GROSS INCOME Ordinary and necessary business expenses Problem 22 – Employee benefits; timing of deduction; lesser deduction, withholding tax requirements; illegal expenses The following are some of the expenses ref lected in the profit and loss statement of Agila Corporation for the year ended December 31, 20A1: Salaries and wages Special bonuses Regular bonuses Other employee benefits

P 5,000,000 2,000,000 3,000,000 3,500,000

The following are the additional information: · ·

· ·

·

·

The salaries and wages were accrued and paid to the employees during 20A1. These were properly subjected to withholding taxes. The special bonuses pertain to bonuses to be given to the employees based on thei r performance. These were accrued at year-end in compliance with Philippine Accounting Standards (PAS) 19. These were actually paid in March 20A2. However, only P1,800,000 was paid. As a matter of policy, Agila grants bonuses to its employees annually depending on their performance and the company’s performance. The final amount is normally determined in F ebruary of the subsequent year based on the performance evaluation which are usually completed every January for prior year’s performance. However, it is required that the employees remain with the employ of the c ompany at the time the bonus is paid. Otherwise, the bonus will not be paid. These bonuses were only subjected to withholding taxes in March 20A2 at the time of payment. There were special bonuses accrued in 20A0 of P2,500,000. However, P2,600,000 was actually pai d to the employees in April 20A1. These were subjected t o withholding taxes at the time of payment. The regular bonuses pertain to the 14th month pay which was paid in January 20A2. These were accrued at year-end in compliance with PAS 19 since these pertain to services rendered i n 20A1. The amount accrued pertains to the actual of bonus that was paid in January 20A2. These were properly subjected to withholding taxes at the time of accrual. There were regular bonuses paid in 20A0 of P1,200,000. These were properly subjected to withholding taxes at the time of accrual. These were actually paid in January. However, Agila only claimed P1,000,000 as income tax deduction i n 20A0. It wanted to claim the P200,000 as deduction in 20A1. The other employee benefits include “de mi nimis” benefits of P2,000,000, and other benefits of  P1,200,000 granted and paid to the employees during 20A1. The balance of P300,000 pertain to facilitation fees. The “de minimis” benefits were not subjected to withholding taxes. However, other  benefits were properly subjected t o withholding taxes. With respect to “de minimis” benefits, P1,500,000 of which pertain to the threshold provided under the regulations. However, the balance pertain to the amount in excess of the threshold. With respect to facilitation fees, t hese were paid to government personnel to expedite the process of Agila’s application for tax incentives. These were not properly supported by documents and pocket by government personnel.

Required: Determine the amount of deductible business expense for the year ended December 31, 20A1. Problem 23 – Stock options, equity settled transaction The board of directors of Kapamilya Corporation adopted a fixed stock option plan to supplement the salaries of  certain executives. The options to buy common stock were granted as follows: Date

Employee

Jan. 1, 20A1 Jan. 1, 20A2 Jan. 1, 20A3

D. R. Tawa J. K. Ngiti B. D. Halakhak

Number of   Shares 80,000 45,000 25,000

Exercise Price P30 38 43

Price of Shares at Date of Grant P32 41 47

Option Value at Date of Grant P9 10 11

The options are nontransferable and can be exercised beginning three years after the date of grant, provided the executive is still employed by the company. The stock options were exercised as follows:

Income Taxation (ACCTAX1) Tax Problems

Academic Year 2016-2017 Page 17

Date

Employee

December 31, 20A4 December 31, 20A5 December 31, 20A6

D. R. Tawa J. K. Ngiti B. D. Halakhak

Number of   Shares 80,000 45,000 25,000

Price of Shares at Date of  Exercise P48 43 49

The benefits were subjected to fringe benefits tax (FBT). The stock of the company has a P1 par value. The accounting period for the company is the calendar year. Required: Determine the deductible expense for the year ended December 31, 20A1 to 20A6. Problem 24 – Stock awards, equity-settled transaction Kapuso Corporation established a stock awards plan for its employees. The plan was established on January 1, 20A1. Under the plan, each employee will be granted 200 Kapuso shares on January 1, 20A4 provided they remain with the company for three years. The fair value of the stock awards was P12 per share on January 1, 20A1 and the average fair value during 20A1 was P14. The fair market value of Kapuso shares on January 1, 20A4 was P18 per share. The par value of the shares was P5 per share. The no. of employees on selected dates was as follows: December 31, 20A1 December 31, 20A2 December 31, 20A3

150 185 170

 Assume that employee hiring and resignations or terminations occurred on January 1 of each year. The stock awards were awarded to 130 employees on January 1, 20A4 for services rendered in 20A1. These were properly subjected to withholding tax at the time of the grant of the stock awards. Required: Determine the deductible expense for the year ended December 31, 20A1 to 20A4. Problem 25 – Share appreciation rights, cash-settled transactions San Juan Corporation established a stock option plan that provides for cash payments to employees based on the appreciation of stock prices from an established option price. The plan was instituted on January 1, 20A1 and provides for benefits to employees who work for the succeeding three years. Cash payments to employees will be made on January 1, 20A4, and will equal the excess of t he stock price over the option price on that date. In total, 10,000 of these cash stock appreciation rights (SARs) were granted to employees. The option price established for the stock is P10 per share. The market price of San Juan stock on selected dates in 20A1 to 20A3 were as follows: January 1, 20A1 December 31, 20A2 December 31, 20A3 December 31, 20A4

P15 16 20 18

The SARs were properly subjected to withholding tax at the time of payment. Required: Determine the deductible expense for the year ended December 31, 20A1 to 20A4. Problem 26 – Compensation for personal services The following are independent situations relative to compensation for personal services paid or incurred by Kapatid Corporation for the y ear ended December 31, 20A1: a.

Kapatid paid Mr. El Nido salaries of P8,000,000 during the year. He is a major stockholder of Kapatid and he is also its president. Presidents of corporations with similar business, similar size and v olume of  business as Kapatid receives an average salaries of P6,500,000. The entire salaries were subjected to withholding tax on compensation.

Income Taxation (ACCTAX1) Tax Problems

Academic Year 2016-2017 Page 18

b.

c.

d.

e.

f. g.

Kapatid paid monthly salary of P8,000 to the son of Mr. El Nido for 12 months. His son was still studying and he did not render any service to Kapatid. The salaries were not subjected to withholding tax since the amount pai d was equivalent to the minimum wage. On January 1, 20A1, Kapatid hired Mr. El Nido as its Vice President for Marketing. As agreed, his monthly salary was P300,000. He received 13 months salaries during the year. In addition, he was also entitled to a bonus equiv alent to 5% of the company’s profit. However, only 3% of the net profit was paid during 20A1. No addit ional bonus will be paid. Kapatid’s net profit during the year amounted to P10,000,000. The salaries and bonuses were properly subjected to withholding t ax. Kapatid granted its employees free goods with fair market value of P4,000 per employee during the year as Christmas gifts. The t otal fair market value of goods granted amounted to P2,000,000. These were not subjected to withholding tax. Kapatid granted its employees who were affected by typhoon free clothes with fair market value of  P5,000 per employee. The total f air market value of clothes granted amount to P5, 000,000. These were subjected to withholding tax. Kapatid paid separation pay of P2,500,000 to certain redundant employees during the year. These were not subjected to withholding tax. Kapatid paid back wages to certain employees who were terminated in 20A0 amounting to P3,000,000.  Although these pertain to services rendered by the employees in 20A0, the amount of back wages was only determined and fixed in 20A1. These were properly subjected to withholding tax.

Required: Determine the deductible expense for the year ended December 31, 20A1. Problem 27 – Travel expenses; entertainment, amusement and recreation expenses; documentation requirements Ms. Maharlika, CPA, is a private practitioner, with offi ce at Makati City. She renders tax and accounting services to her clients. During 20A1, she derived gross revenues amounting to P10,000,000 for sale of services with discounts of P240,000. She and her staff incurred the following expenses: · · · ·

·

· · ·

· · · ·

Taxi fare from office to t he client within Metro Manila and vice versa of P50,000. These are supported by taxi official receipts issued in the name of Ms. Maharlika. Bus fare from office to the client within Metro Manila and vice versa of P12,000. These are supported bus receipts. However, Ms. Maharlika’s name was not indicated on the face of the bus receipts.  Airplane fare for domestic travels which are client related of P250,000. These are supported by plane tickets and official receipts issued in t he name of Ms. Maharlika.  Airplane fare for international travels in connection with business conventions of P125,000. These are supported by plane tickets and official receipts in the name of Ms. Maharlika. These are al so supported by official invitation from the hosts. Hotel and food charges for domestic travels of P100,000. However, only P60,000 were business related while the balance pertains to personal expenses. The entire amount was supported by official receipts issued in the name of Ms. Maharli ka. Hotel and food charges for overseas travels of P80,000. Out of this amount, P25,000 were personal in nature. The entire amount was supported by official receipts issued in t he name of Ms. Maharlika. Fixed representation expenses paid to her employees of P100,000. However, these were not subjected to withholding tax. Restaurant charges of P45,000 supported by official receipts issued in the name of Ms. Maharlika. Out of this amount, P30,000 pertains to expenses incurred in entertaining her clients while the balance pertains to expenses related to internal meetings with staff. These were supported by official receipts issued in the name of Ms. Maharli ka. Membership fees of P12,000 for membership in various professional organi zations. These were supported by official receipts i ssued in the name of Ms. Maharlika. Restaurant and hotel charges of P8,000 for attendance in business meetings of v arious professional organizations. These were supported by official receipts issued in the name of Ms. Maharlika. Tickets for various movies, concerts and plays of P52,000 incurred in entertaining clients. These were supported by official receipts i ssued in the name of Ms. Maharlika. Charges of sports club for P25,000 incurred in entertaining clients. These were supported by official receipts issued in the name of Ms. Maharlika.

Required: 1. Determine the deductible travel expenses for the year ended December 31, 20A1. 2. Determine the deductible transportation expenses for the year ended December 31, 20A1. Income Taxation (ACCTAX1) Tax Problems

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3. 4. 5. 6.

Determine the deductible entertainment, amusement and recreation (EAR) expenses for the year  ended December 31, 20A1. Determine the deductible expenses other than travel and EAR expenses for the year ended December  31, 20A1. Assume that Maharlika is engaged in sale of goods, determine the deductible EAR expenses for the year ended December 31, 20A1. Assume that Maharlika had sale of goods of P2,000,000 with P180,000 discount, and sale of services of P10,000,000 with P300,000 discount, determine the deductible EAR expense for the year ended December 31, 20A1.

Problem 28 – Rental and rel ated expenses, repairs and maintenance Matino Corporation needs a warehouse. O n January 1, 20A1, it entered into a lease contract with Matibay Corporation with the following terms: Term Total rentals for 5 years  Annual real property tax (RPT) shouldered by Matino

5 years P1,000,000 30,000

The rentals were payable ev ery January 1, in five annual equal i nstallments. During 20A1, Matino incurred the following expenditures in connection with the l eased warehouse: Ordinary repairs of wall and posts Replacement of windows and roofs

P100,000 200,000

Ordinary repairs neither materially add to the value of the property nor prolonged its life. However, the replacement of the windows and roofs, which were incurred on July 1, 20A1, arrested the deterioration of the property but it maintained it s life. The remaining life of the warehouse is 8 years. In 20A2, Matino constructed leasehold improvements on said leased warehouse for P300,000. The construction was completed on March 31, 20A2. Said im provements were utilized starting April 1, 20A2 with useful life of 7 years. Required: 1. Determine the deductible expense for the years ended December 31, 20A1 and 20A2. Identify the nature of the expense. 2. Determine the capital expenditures for the years ended December 31, 20A1 and 20A2. Explain why these are non-deductible. Problem 29 – Security, janitorial, manpower and adv ertising expenses Mabini Corporation availed the following services for the year ended December 31, 20A1: ·

Security services of Magdiwang Corporation Salaries of security guards  Agency fees

·

Janitorial services of Maaliwalas Corporation Salaries of janitors  Agency fees

·

P300,000 30,000

P250,000 25,000

Manpower services of Maligalig Corporation Salaries of personnel  Agency fees

Income Taxation (ACCTAX1) Tax Problems

P500,000 50,000

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·

Services of Mayaman Corporation, advertising agency, and Maligaya Broadcasting Company, media supplier   Advertising charges (payable to Maligaya) – 85%  Agency commission (payable to Mayaman) – 15%

P850,000 150,000

Required: Determine the deductible expense on the part of Mabini and the other party or parties for the year  ended December 31, 20A1. Indicate the nature of the expense. Problem 30 – Expenses of farmers Magsasaka, Inc. incurred the following expenditures on January 1, 20A1 in connecti on with its coconut plantation with farm: Coconut seedlings and seednuts Heifer Feeds Farm machines and equipment Hand tools including shovels and rakes

P 700,000 2,000,000 350,000 1,200,000 250,000

On July 1, 20A1, Magsasaka incurred t he following expenditures: Gasoline and fuel for machines Feeds Heifer Land maintenance Utilities Other labor expenses

P 450,000 600,000 300,000 800,000 750,000 1,500,000

Required: 1. Determine the deductible ordinary and necessary expenses for the year ended December 31, 20A1. 2. Determine the capital expenditures for the year ended December 31, 20A1 Problem 31 – Expenses of priv ate educational institutions Magaling University, a proprietary educational institution, incurred the following expenditures for the year ended December 31, 20A1: Rentals Electricity and other utilities Repairs and maintenance expenses Transportation and travel expenses Professional fees Communication expenses Training Supplies Security and janitorial Insurance Salaries expense Other employee benefits Construction of building to be used as classrooms Equipment for classrooms and other educational activities Construction of building to be leased to various businesses Equipment related to building for lease

800,000 600,000 500,000 250,000 350,000 120,000 100,000 150,000 225,000 275,000 3,500,000 1,250,000 3,000,000 900,000 3,500,000 720,000

The following are the additional information: ·

Taxes were properly withheld on expenses subject to withholding taxes.

Income Taxation (ACCTAX1) Tax Problems

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· · · · ·

· · · ·

Repairs and maintenance expenses pertain to ordinary expenses which did not improve or prolong the life of the property.  A portion of transportation and travel expenses amounting to P25,000 were not properly supported by documents issued in the name of Magaling. Security guard salaries amount to P100,000. Taxes were properly withheld by the securities on said salaries. Salaries expense includes P350,000 salaries of mi nimum wage earners which were not subjected to withholding taxes. Other employee benefits include P800,000 “de minimis” benefits within the threshold. However, the balance pertains to “de minimis” benefits in excess of the threshold which were absorbed by the P82,000 other benefits. The entire amount of other employee benefits were not subjected to withholding taxes. The construction of the buildings were completed on June 30, 20A1. It had estimated useful life of 30 years. The equipment were acquired on June 30, 20A1 and were immediately used by Magaling. It had estimated useful of 5 years. Magaling opted to claim as outright expense its capital expenditures for the expansion of school facilities. Magaling adopts the straight-line method of depreciation.

Required: 1. Determine the deductible ordinary and necessary expenses for the year ended December 31, 20A1. 2. Determine the deductible ordinary and necessary expenses for the year ended December 31, 20A1 if  Magaling opted to capitalize and depreciate all its capital expenditures. Interest expense Problem 32 – Interest expense, stipulated in writing, tax arbitrage, related parties Tikling Company, Inc. had the following borrowings, adv ances and equity instruments during 20A1: · ·

· ·

Loan obtained from Itik Bank, a l ocal bank, on July 1, 20A0 amounting to P1,000,000 with 5% interest payable on July 1, 20A2. Non-interest bearing advances obtained f rom its affiliate, Maya Corporation, amounting to P500,000 on January 1, 20A1, payable on December 31, 20A3. For financial reporting purposes, the loan was initially recognized in the books at P408,150 using market interest rate of 7%. Maya is wholly-owned by Kaya Corporation. Kaya is 60% owned by Mr. Polka. Mr. Polka also owns 30% of Tikling. Preferred shares of P1,500,000 with 10% dividend rate classified as liabilities for financial reporting purposes. Loan obtained from its affiliate, Surtido Corporation amounting to P2,000,000 bearing 8% interest on January 1, 20A0 payable on January 20A5. Surtido is a wholly-owned subsidiary of Pantomina, Inc. Pantomina is 80% owned by Mrs. Carinosa. Mrs. Cari nosa also owns 80% of Malong Corporation. Malong owns 90% of Latik and Latik owns 75% of Tikling.

During the year, Tikling derived t he following interest income: · · · ·

Interest income of P60,000 on bank deposits with Itik Bank, which were subjected to 20% final withholding tax. Interest income of P15,000 on bank deposits under the Expanded Forei gn Currency Deposit System of  Itik Bank, which were subjected to 7.5% final withholding tax. Interest income of P20,000 on loans granted to Pantomina, its affiliate. Interest income of P25,000 on bank deposits Rasa Sayang Bank, a non-resident foreign bank located in Malaysia, which were subjected to 10% final withholding tax.

Required: Determine the deductible interest expense for the year ended December 31, 20A1.

Income Taxation (ACCTAX1) Tax Problems

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Problem 33 – Optional treatment of interest, tax arbitrage, interest on unpaid taxes On January 1, 20A1, Binasuan issued five-year, zero-coupon bonds with total face value of P7,800,000 to various investors for P6,000,000. The proceeds of the bonds were used for the acquisition of a land, where the company constructed its factory building. The l and was acquired on the same date. On April 1, 20A1, Binasuan Corporation borr owed P5,000,000 bearing 10% interest specifically for the construction of its new building payable at the end of 5 years. The interest on the loan was payable every April 1. Binasuan incurred the f ollowing costs in connection with the loan (assume incurred on April 1, 20A1): Commissions paid to its agent Guarantee fees paid to its parent company, Habanera, Inc. for the loan guarantee Bank charges

P100,000 1.5% of the loan amount 1.0% of the loan amount

It temporarily invested P3,500,000 proceeds on April 1, 20A1 which matured on July 1, 20A1. Said investment earned interest of 8% per annum, which was subjected to 7.5% final withholdi ng tax. The construction of the building began on April 1, 20A1 and the building was completed on December 31, 20A2. Expenditures on the building were made as follows: January 1, 20A1 September 1, 20A1 December 1, 20A1  April 1, 20A2 July 31, 20A2

P 4,000,000 3,500,000 3,200,000 2,500,000 1,000,000

Binasuan had also the following other loans which were outstanding for the years ended December 31, 20A1 and 20A2 for general purposes:

14% Short-term Note 11% Long-term Loan

Principal P4,000,000 7,000,000

The interest on these loans was payable every January 1. Principal 14% Short-term Note P4,000,000 11% Long-term Loan 7,000,000 The interest on these loans was payable every January 1. Binasuan also paid the following deficiency taxes and interest in 20A1 and 20A2:

Deficiency taxes Interest

20A1 P3,500,000 1,400,000

20A2 P3,800,000 1,520,000

It also derived interest income of P300,000 in 20A1 and P450,000 in 20A2 on bank deposits, which were subjected to 20% final withholding t ax. Required: 1. Determine the deductible interest for the years ended December 31, 20A1 and 20A2 if Binasuan opted to treat interest incurred to acquire properties used in trade or business as outright expense. 2. Determine the deductible interest for the years ended December 31, 20A1 and 20A2 if Binasuan opted to treat interest incurred to acquire properties used in trade or business as capital expenditure.

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Problem 34 – Interest paid in advance; periodic amortization of debt Mr. Botolena is a cash basis taxpayer, engaged in trade or business. On January 1, 20A1, it obtained an 8%, P2,000,000 loan which was used in i ts business. The loan was payable annually at P400, 000 plus interest for  five years every January 1. On December 1, 20A1, it also obtained a one-year loan with face amount of P500,000 loan which was used in its business. Since the loan was discounted, i t only received P400,000 proceeds. The loan was repaid on December 1, 20A2. Required: 1. Prepare an amortization table for the P2,000,000 loan which present the deductible interest for the entire term of the loan. 2. Determine the deductible interest for the years ended December 31, 20A1 and 20A2. 3. Determine the deductible interest for the years ended December 31, 20A1 and 20A2 if Mr. Botolena is an accrual basis taxpayer. Taxes Problem 35 – Deductible and non-deducti ble taxes Kilig Company, Inc., a VAT-registered taxpayer, had the foll owing tax payments, and tax and related liabilities for the year ended December 31, 20A1: Basic Current tax liabilities: Income tax Value added tax (VAT) Withholding taxes Fringe benefits tax Documentary stamp tax Excise tax Local business tax Real property tax Deficiency taxes Income tax VAT Withholding taxes Documentary stamp tax Local business tax Real property tax Provision for possible tax exposure Income tax VAT Withholding taxes Documentary stamp tax Local business tax Real property tax

Interest

Surcharge

P3,000,000 2,700,000 2,500,000 800,000 1,000,000 1,200,000 750,000 1,400,000 1,100,000 900,000 850,000 500,000 450,000 650,000

P550,000 450,000 425,000 250,000 225,000 325,000

P2,000,000 1,500,000 1,200,000 1,000,000 900,000 800,000

P1,000,000 750,000 600,000 500,000 450,000 400,000

P100,000 125,000

P 250,000

The deficiency taxes plus surcharge and interest pertain to tax liabilities two years ago which were only settled in 20A1. However, the provision f or possible tax exposures pertain to pot ential tax liabilities of Kilig which are disputable but these were recognized i n accordance with PAS 37 for financial reporting purposes. Required: 1. Determine the deductible tax expense for the year ended December 31, 20A1. 2. Determine the other deductible items for the year ended December 31, 20A1. Problem 36 – Deductible taxes, VAT on purchases, VAT and duties on importation, capital expenditures Yakap Corporation, a VAT-registered entity had the following transactions during 20A1:

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· ·

·

· · ·

·

· ·

On January 1, 20A1, Yakap purchased equipment for P1,120,000, VAT inclusive, from VAT-registered supplier. The equipment had estimated usef ul life of 5 years. From January 1, 20A1 to December 31, 20A1, Yakap purchased goods and servi ces from VATregistered suppliers amounting to P5,600,000, VAT inclusive. The related goods and services were claimed as income tax deduction. Yakap paid local business tax (LBT) of P300,000 to the local government unit (LGU) on January 20, 20A1 representing the first installment payment based on 20A0 revenues. It opted to pay LBT in four  equal installments. The remaining three installments were paid on-time . It also paid license f ees of  P25,000 to the same LGU on January 20, 20A1. Yakap paid real property tax (RPT) of P900,000 on March 31, 20A1 for its 20A1 tax liability. On July 1, 20A1, Yakap imported equipment for P800,000, paid customs duties of P160,000 and VAT on importation of P115,200. The equi pment had estimated useful life of 4 years. On October 1, 20A1, Yakap rented a building for P95,000 monthly for one-year. The said rental is exclusive of 5% withholding taxes and 12% VAT. It paid advance rentals for six-months on the same date. Yakap also paid documentary stamp tax (DST) of P1,201 on the lease agreement. On December 1, 20A1, Yakap al so received the following tax refund from t he BIR based on the Supreme Court decision: Income tax refund P200,000 VAT refund 120,000 DST refund 50,000 Excise tax refund 180,000 Yakap claimed the deductible taxes in previous years. These deductions resulted in reduci ng its income tax liability, except for excise t ax since it was claimed as deduction in the period when Yakap was in a tax loss position. Yakap paid income tax of P380,000 to Singaporean tax authorities for the i ncome derived by its Branch in Singapore during 20A1. Yakap paid income tax of P720,000 to the BIR in 20A1.

It is Yakap’s policy to claim foreign i ncome taxes as income tax deduction. Required: 1. Determine the deductible tax expense for the year ended December 31, 20A1. 2. Determine the other tax deductible items for the year ended December 31, 20A1. 3. Determine the amount of taxes which may qualify as capital expenditures for the year ended December  31, 20A1. 4. Determine the amount of tax refund which are subject to tax for the year ended December 31, 20A1. 5. Assume that Yakap is a VAT-exempt taxpayer, determine the deductible tax expense for the year  ended December 31, 20A1. 6. Assume that Yakap is a VAT-exempt taxpayer, determine the other tax deductible items for the year  ended December 31, 20A1. 7. Assume that Yakap is a VAT-exempt taxpayer, determine the amount of taxes which may qualify as capital expenditures for the year ended December 31, 20A1. Losses Problem 37 – Various deductible losses The following are independent situations rel ated to losses incurred by Abaca Company, Inc.: a. b.

c.

d.

Abaca had an equipment acquired for P1,000,000 with estimated useful life of 5 years. It was sold for  P280,000 on January 1, 20A1 after using it for 3 years. Abaca imported inventories for USD80,000 on December 1, 20A0. It was paid on January 31, 20A1. The foreign exchange rates are as follows: December 1, 20A0 USD1 = P47 December 31, 20A0 USD1 = P50 January 31, 20A0 USD1 = P49 Abaca owned a building which was totally destroyed by fire on December 1, 20A0. It had a book value of P2,500,000 on the said date. Abaca submitted its declaration of l oss with the BIR on January 5, 20A1. Abaca owned a building which was totally destroyed by fire on December 1, 20A0. It had a book value of P2,500,000 on the said date. The building was covered by i nsurance. Abaca claimed the loss from

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the insurance company. However, the amount of compensation was not yet determined on December  31, 20A0. The insurance company paid Abaca P2,200,000 on January 31, 20A1. Abaca also submitted its declaration of loss with the BIR on January 5, 20A1. e. Abaca owned a building which was totally destroyed by fire on December 1, 20A0. It had a book value of P2,500,000 on the said date. The building was covered by i nsurance. Abaca claimed the loss from the insurance company. However, the amount of compensation was not yet determined on December  31, 20A0. The insurance company paid Abaca P2,600,000 on January 31, 20A1. Abaca also submitted its declaration of loss with the BIR on January 5, 20A1. f. Abaca owned a building which was totally destroyed by fire on December 1, 20A0. It had a book value of P2,500,000 on the said date. The building was covered by i nsurance. Abaca claimed the loss from the insurance company. However, the amount of compensation was not yet determined on December  31, 20A0. The insurance company paid Abaca P2,600,000 on January 31, 20A1. Abaca also submitted its declaration of loss with the BIR on January 5, 20A1. Abaca used the insurance proceeds in order to construct a new building as replacement. g. On October 1, 20A0, Abaca discovered that its inventories with book value of P1,000,000 were stolen.  Abaca submitted its declaration of loss with the BIR on November 29, 20A0. h. Abaca owned an equipment with book value of P750,000 on December 31, 20A1. On the same date, a new law was enacted rendering said equi pment useless. It was permanently retired on the same date. i. Abaca had inventories with carrying amount of P1,000,000 and P1,200,000 on December 31, 20A0 and 20A1, respectively. These were carried at net realizable value in accordance wit h PAS 2. These inventories had cost of P1,150,000 and P1,300,000 on December 31, 20A0 and 20A1, respectively. However, Abaca wrote-off inventories of P 300,000 and P350,000 during 20A0 and 20A1, respectively. These were actually destroyed as witnessed by BIR personnel and supported by Certificate of  Destruction issued by the BI R.  j. Abaca has investment in available for sale securities which was acquired for P500,000 on July 1, 20A0. On December 31, 20A0, it had fair value of P400,000. It was sold on June 30, 20A1 for P450,000. Required: Determine the amount of deductible losses for the year ended December 31, 20A0 and 20A1. Problem 38 – Amount of deductible casualty losses The following are independent situations rel ative to casualty losses incurred by Mariposa Corporation: a.

b.

c.

d.

e.

f.

Mariposa had a building with book value of P2,000,000 as of December 31, 20A0 with remaining life of  5 years. On June 30, 20A1, the building was partially destroyed by fire. Mariposa incurred P1,200,000 in order to restore the building. Mariposa had a building with book value of P2,000,000 as of December 31, 20A0 with remaining life of  5 years. On June 30, 20A1, the building was partially destroyed by fire. The building was covered by insurance and Mariposa receiv ed P1,000,000 on September 30, 20A1 as compensation for the loss. Mariposa incurred P1,200,000 in order to restore the building. Mariposa had an equipment with book value of P600,000 as of December 31, 20A0 with remaining life of 3 years. On June 30, 20A1, the building was partially destroyed by fire. Mariposa incurred P800,000 in order to restore the equipment. Mariposa had an equipment with book value of P600,000 as of December 31, 20A0 with remaining life of 3 years. On June 30, 20A1, the building was partially destroyed by fire. The equipment was covered by insurance and Mariposa receiv ed P1,000,000 on January 31, 20A2 as compensation f or the loss. Mariposa incurred P800,000 in order to restore the equipment. Mariposa had a machinery with book value of P450,000 as of December 31, 20A0 with remaining useful life of 3 years. On December 31, 20A1, it incurred capital expenditures related to the said machinery amounting to P120,000 which were capitalized. However, the machinery started to breakdown in 20A2. It was scrapped and sold on September 30, 20A2 for P150,000. Mariposa bought a land with an old building for P3,500,000 on January 1, 20A1. The purchase price allocable to the building was P750,000. Mari posa immediately demolished the building to give way for  the construction of a manufacturing plant. It incurred demolition cost of P200,000, and the proceeds from the sale of scraps amounted to P120,000.

Required: 1. Determine the amount of tax deductible loss for the year ended December 31, 20A1 and 20A2. 2. Determine the amount of other tax deductible expense for the year ended December 31, 20A1 and 20A2. 3. Determine the book value of the related asset as of December 31, 20A1 and 20A2.

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Problem 39 – Net operating loss carryover (NOLCO) Magiting Corporation had the following gross income and deductions before net operating loss carryovers (NOLCO):

20A0 20A1 20A2 20A3 20A4 20A5

Gross income P2,000,000 3,500,000 3,800,000 4,000,000 3,800,000 4,500,000

Deductions P2,700,000 3,200,000 4,000,000 3,900,000 5,000,000 4,300,000

It adopts the calendar year accounting period. The following are independent cases relative to the tax status and changes in ownership of Magiting: Situation A Magiting is subject to the regul ar corporate income tax (RCIT) or minimum corporate income tax (MCIT), whichever is higher. There were no changes i n Magiting’s ownership from 20A0 to 20A5. Situation B Magiting is registered with the Board of Investments and enjoying income tax holiday (ITH) until December 31, 20A0. There were no changes in Magiting’s ownership from 20A0 to 20A5. Situation C Magiting is 80% owned by Katipunan Corporation. O n January 1, 20A2, Katipunan sold i ts 80% interest in Magiting to Gabriela Corporation. Situation D Magiting is 100% owned by Katipunan Corporation. Katipunan Corporation is 80% owned by Gabriela Corporation. Magiting was merged with Katipunan on January 1, 20A5. Katipunan became the surviving entity. Katipunan had gross income of P5,500,000 and deductions of P5,300,000 in 20A5, in addition to the above items pertaining to Magiting. Situation E Magiting is 100% owned by Katipunan Corporation. On the other hand, Gabriela Corporati on is 80% owned by  Alonzo Corporation. Magiting was merged with Gabriela on January 1, 20A5. Gabriela became the surviving entity and it continued to be 80% owned by Alonzo. Gabriela had gross incom e of P5,500,000 and deductions of P5,300,000 in 20A5, in addi tion to the above items pertaining to Magiting. Situation F Magiting is 100% owned by Katipunan Corporation. On the other hand, Gabriela Corporati on is 80% owned by  Alonzo Corporation. Magiting was merged with Gabriela on January 1, 20A4. Magiting became the surviving entity and it continued to be 100% owned by Katipunan. G abriela had gross income of P5,500,000 and deductions of P5,300,000 in 20A5, i n addition to the above it ems pertaining to Magiting. Required: For each of the above cases, determine the taxable income/tax loss for the years ended December  31, 20A0 to 20A5.

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Bad debts Problem 40 – Bad debts deduction The following are independent situations i nvolving Harana Company’s receivables: Situation A Harana Company is a trading company with the f ollowing receivables: a.

b.

c.

Receivable from Bughaw Company amounting to P1,200,000. Harana sent collection and demand letters to Bughaw. However, Bughaw did not pay said receivables. Harana wrote-off said receivables in 20A1. Bughaw was still operating. Receivable from Dilaw Company amounting to P920,000. Harana sent collection and demand letters to Dilaw. This was also referred to a collection lawyer. It was found out that Dilaw was bankrupt and it was only able to pay P100,000 on October 1, 20A1. Harana wrote-off the remaining receivables. Receivable from Luntian Company amounting to P750,000. This arose from sale of goods in 20A0 where Luntian issued promissory note for P900,000 but with discounted value of P750,000. Luntian recorded revenues from said transaction amounting to P750,000. Harana sent collection and demand letters to Luntian. However, Harana was able to gather information that Luntian became insolvent. Hence, the receivable was written-off in 20A1.

Harana was able to collect its receivable from Dilaw in 20A3 amounting to P500,000. Situation B Harana Company is a bank with t he following receivables: a.

b.

c.

Loan receivable from Mr. Bughaw amounting to P1,200,000 which was covered by real estate mortgage. Mr. Bughaw defaulted on the payment of the loan. Harana foreclosed the property and it was sold at a public auction for P850,000 in 20A1. Harana wrote-off the uncollectible receivable in 20A1 which was supported by written approval from BSP. Loan receivable from Mrs. Dilaw amounting to P920,000. Harana sent collection and demand letters to Mrs. Dilaw. This was also referred t o a collection lawyer and it was f ound out that Mrs. Dilaw was insolvent. The receivable was written-off i n 20A1 but the BSP approval was only secured i n 20A2. Loan receivable from Mr. Luntian amounting to P750,000. Harana sent collection and demand letters to Mr. Luntian. It was found out that Mr. Luntian was insolvent. The receiv able was written-off in 20A1 which was supported by written approval from BSP.

Harana was able to collect its receivable from Dilaw in 20A3 amounting to P500,000. Required: 1. Determine the amount of tax deductible bad debts for the year ended December 31, 20A1 and 20A2 sunder both Situations. 2. Determine the amount of recovery of bad debts subject to income tax for the year ended December 31, 20A3 under both Situations assuming Harana had the following taxable income before bad debts deduction in 20A1 and 20A2: a. 20A1: P5,000,000; 20A2: P3,000,000 b. 20A1: P1,000,000; 20A2: P500,000 c. 20A1: P-0-; 20A2: P-0-

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Depreciation Problem 41 – Depreciation deduction, change i n depreciation method, depreciable lives Silakbo Company, Inc., a manufacturing company, had the f ollowing assets and their remaining useful lives as of January 1, 20A1  Assets Land  Administration building Factory building Equipment Patent Trademark

Book value P2,000,000 3,000,000 5,000,000 2,200,000 1,500,000 1,000,000

Remaining useful life 15 20 5 5 4

During 20A1, Silakbo had the foll owing transactions: · · · ·

On January 1, 20A1, Silakbo purchased motor vehicle of P2,000,000 for t he use of its Vice President, with useful life of 5 years and salvage value of P200,000. On January 31, 20A1, Silakbo incurred expenses of P250,000 for the ordinary repair of its factory building. On October 1, 20A1, Silakbo purchased motor vehicle of P3,000,000 for t he use of its President, with useful life of 5 years. On December 31, 20A1, Silakbo incurred capital expenditures of P300,000 related to its equipment. This extended the life of the asset by 1 years.

Silakbo used straight-line method of depreci ation. However, on January 1, 20A2, it changed it s depreciation method to sum-of-the-years digits as approved by the BIR. During 20A2, Silakbo had the foll owing transactions: · ·

On January 1, 20A2, Silakbo i ncurred capital expenditures of P500,000 for its administration building. On January 1, 20A2, Silakbo purchased equipment of P1,150,000, with useful life of 5 years and salvage value of P150,000.

On January 1, 20A2, it was determined that the factory building had remaining life of 10 years. Required: 1. Determine the deductible depreciation expense for the year ended December 31, 20A1 and 20A2. 2. Determine the book value of the assets as of December 31, 20A1 and 20A2. Depletion Problem 42 – Depletion Tingga Mining Company was organized on January 1, 20A0 af ter acquiring mining rights from another mining company for P3,000,000. After months of expl oration for which it spent P800,000, it was estimated t hat the mine area could produce 1,000,000 tons of ore. Development expenditures of P15,000,000 was incurred from July 1, 20A0 to December 31, 20A1. O ut of this amount, P3,000,000 pertains to light ing ventilation and water  systems which are considered depreciable expenditures with 10 years depreciable life. These depreciable it ems were used starting January 1, 20A1. Tingga started mining operations on January 1, 20A3. It had the following production: · · ·

20A3 – 12,000 tons 20A4 – 18,000 tons 20A5 – 25,000 tons

Required: 1. Determine the total cost of the mine as of January 1, 20A3. 2. Determine the depletion expense for the year ended December 31, 20A3, 20A4 and 20A5. Source: De Leon (2016), modified.

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Charitable and oth er contribution s Problem 43 – Charitable and other contributions Humaling Company, Inc. had the following information for the year ended December 31, 20A1: Gross income from business Deductible expenses excluding charitable contributions Contributions: Government for rehabilitation of earthquake devastated areas Government for priority activity in education Families of victims of calamity Kulay Foundation (PCNC-accredited) for health purposes Beterano Foundation (PCNC-accredited) for  rehabilitation of veterans Kapwa Foundation (pending PCNC-accreditation) for  scientific purposes

P10,000,000 7,000,000

500,000 1,200,000 400,000 350,000 200,000 280,000

Required: 1. Determine the tax deductible charitable contributions for the year ended December 31, 20A1. 2. Determine the taxable income for the year ended December 31, 20A1. 3. Assume that Humaling Company is a sole proprietorship, determine the tax deductible charitable contributions for the year ended December 31, 20A1. 4. Assume that Humaling Company is a sole proprietorship, determine the taxable income for the year  ended December 31, 20A1. Problem 44 – Research and devel opment expenditures Balintataw Company, a manufacturer of food product s, is continuously conducting research and dev elopment on its various product lines. O n January 1, 20A1, it started constructi ng a building for its research and development activities. It incurred construction costs of P2,000,000. The building was completed on June 30, 20A1. It had a useful life of 20 years. On July 1, 20A1, it incurred research costs of P1,500,000. Additional research and development costs were incurred on October 1, 20A1 for P800,000. Required: 1. Determine the tax deductible research and development expenditures for the year ended December 31, 20A1 assuming Balintataw opted to claim said expenses as outright expense. 2. Determine the tax deductible research and development expenditures for the year ended December 31, 20A1 assuming Balintataw opted to capitalize said expenditures. Problem 45 – Pension trusts Kundiman Company, Inc. had a BIR-registered retirement pl an. The following information relates to said retirement plan for the year ended December 31, 20A1 and 20A2:

Contribution Benefits paid Normal cost per actuarial valuation for funding Service cost per actuarial valuation under PAS 19 Earnings of retirement plan

20A1 P3,000,000 1,200,000 800,000 900,000 300,000

20A2 P1,200,000 500,000 600,000 750,000 350,000

Required: 1. Determine the tax deductible pension expense for the years ended December 31, 20A1 and 20A2. 2. Assuming the retirement plan is not BIR-registered, determine the tax deductible pension expense for  the years ended December 31, 20A1 and 20A2.

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Problem 46 – Optional standard deduction (OSD); senior citizen and PWD discounts Karunungan Company is engaged in m erchandising business with the following information for the year ended December 31, 20A1: Gross sales Sales returns and allowances Sales discounts Purchases Purchase returns and allowances Purchase discounts Freight-in Inventory, January 1 Inventory, December 31 Operating expenses, supported by invoices and receipts Operating expenses, not supported by invoices and receipts

P6,000,000 300,000 350,000 2,000,000 100,000 150,000 200,000 300,000 250,000 1,000,000 500,000

The sales discounts include P150,000 discounts granted to senior citizen and PWDs. The following are additional independent situati ons: Situation A Karunungan filed its first quarter income tax return on May 30, 20A1, and it used the OSD. However, it used the itemized deduction in its second and third quarter income tax returns. Situation B Karunungan filed its first quarter income tax return on May 30, 20A1 and it used the itemized deduction. However, it amended its first quarter income tax return on June 30, 20A1 and adopted the OSD. OSD was used in its second and third quarter income tax returns. Required: 1. Assume that Karunungan is a corporation, determine the OSD for the year ended December 31, 20A1. 2. Assume that Karunungan is a corporation, determine the taxable income for the year ended December  31, 20A1. 3. Assume that Karunungan is a sole proprietorship, determine the OSD for the year ended December 31, 20A1. 4. Assume that Karunungan is a sole proprietorship, determine the taxable income before personal exemptions for the year ended December 31, 20A1. Problem 47 – Special deductions: Insurance companies Likha Life Insurance Company had t he following liability reserves on policies in forc e: December December December December December December

31, 31, 31, 31, 31, 31,

20A0 20A1 20A2 20A3 20A4 20A5

P300,000,000 320,000,000 380,000,000 335,000,000 400,000,000 375,000,000

In addition, it paid t he following actual claims from insured: 20A1 20A2 20A3 20A4 20A5

Income Taxation (ACCTAX1) Tax Problems

P80,000,000 75,000,000 90,000,000 100,000,000 105,000,000

Academic Year 2016-2017 Page 31

Required: 1. Determine the tax deductible expenses for the years ended December 31, 20A1 to 20A5. 2. Determine the amount that will be reported as income for the years ended December 31, 20A1 to 20A5, if any.

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UNIT 5. GAINS AND L OSSES FROM DISPOSITION OF PROPERTY Tax basis of property Problem 48 – Computation of gain or loss On January 1, 20A1, Mr. Andres purchased Land A for P1,500,000 which is equivalent to its fair market value. Moreover, on March 1, 20A1, he i nherited Land B from his father. At that time, said property had f air market value of P1,200,000. On June 1, 20A1, Mr. Andres received Land C as donation from Mrs. Andrea. Sai d property had fair market value of P1,000,000 at the time of donation. Mrs. Andrea acquired said propert y two years ago for P800,000. On August 1, 20A1, Mr. Andres purchased Land D for P1,000,000 al though its fair market value was P1,300,000. On October 1, 20A1, Mr. Andres sold Land A, B and C as follows:

Land A Land B Land C

Selling price P2,000,000 1,800,000 1,600,000

Fair market value P2,500,000 1,800,000 1,500,000

On December 1, 20A1, Mr. Andres transferr ed Land D to Mrs. Ankara in exchange f or Land E and building. Land D had fair market value of P1,600,000 at the time of transf er while Land E and building had combined fair  market value of P1,750,000. Required: 1. Determine the gain or loss from sale of all Land on October 1, 20A1. 2. Determine the gain or loss from exchange on December 1, 20A1. 3. Assuming the combined fair market value of Land E and building on December 1, 20A1 was P1,400,000, determine the gain or loss from exchange on said date. Exchanges of properties in corporate readjustments Problem 49 – Exchanges of properti es in merger; subsequent transfers Makisig Corporation is engaged in the m anufacture of semiconductor products. On January 1, 20A1, it merged its operations with Tadhana Company, Inc., another entity which is also engaged in t he manufacture of the same products. Tadhana transferred the f ollowing assets and liabilities to Makisig in exchange for shares:  Accounts receivables Property, plant and equipment Intangible assets Notes payable

P1,000,000 1,500,000 800,000 750,000

The property, plant and equi pment, and intangible assets had fair market value of P1,800,000 and P1,000,000, respectively, at the time of merger. Makisig issued 2,000,000 shares with P1 par i n exchange for said assets. The shares had f air market value of  P1.75 per share. Makisig became the surviving entity. Tadhana transferred Makisig shares to it s sole stockholder, Matibay Corporation on the same date, in exchange for Tadhana shares. Matibay acquired Tadhana shares f or P2,000,000 five years ago. Tadhana was subsequently dissolved by operation of l aw. On July 1, 20A1, Makisig sold the property, plant and equipment it acquired fr om Tadhana for P2,000,000. Said property had fair market v alue at that time of P2,200,000. On September 1, 20A1, Matibay sold all it s investment in Makisig shares for P2.10 per share. Said shares had fair market value of P2.20 on that date.

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Required: 1. Determine the taxable gain or deductible loss from exchange on the part of Makisig, Tadhana and Matibay on January 1, 20A1. 2. Determine the taxable gain or deductible loss on sales transactions made on July 1, 20A1 and September 1, 20A1. Problem 50 – Transfer of properti es; gain control Batibot Corporation is engaged in t he trading business with 1,000,000 P10 authorized common shares, where only 400,000 were issued and outstanding. Currently, it is 40% owned by Ningni ng Corporation and 60% owned by Matsing Corporation. On January 1, 20A1, Tarsi Corporation and Sesame Corporation transf erred the following assets and liabilities to Batibot i n exchange for shares: Tarsi  Accounts receivables Property, plant and equipment Intangible assets Notes payable

P1,200,000 3,500,000 1,000,000 1,300,000

Sesame  Accounts receivables Property, plant and equipment Loans payable

P1,000,000 2,200,000 500,000

Tarsi’s property, plant and equipment, and i ntangible assets had fair market value of P3,800,000 and P1,300,000, respectively, at the time of transf er. On other hand, Sesame’s property, plant and equipment had fair market value of P2,500,000 on t he same date. Batibot issued 375,000 common shares to Tarsi and 225,000 common shares to Sesame in exchange for these assets. The shares had fair m arket value of P15 per share. On July 1, 20A1, Batibot sold the property, plant and equipment it acquired from Sesame for P2,700,000. Said property had fair market v alue at that time of P2,600,000. Required: 1. Determine the taxable gain or deductible loss from exchange on the part of Batibot, Tarsi and Sesame on January 1, 20A1. 2. Determine the taxable gain or deductible loss on sales transactions made on July 1, 20A1.

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Capital gains and l osses Problem 51 – Capital gains and losses, indiv iduals Mrs. Karunungan, citizen of the Philippines, single, had the following income and losses for the y ears ended December 31, 20A1, 20A2 and 20A3:

Operating income from business Interest income on notes receivables Dividend income Gain on sale of scraps from business Loss on sale of equipment used in business Gain on sale of jewelry, held for 2 years Gain on sale of painting, held of 8 months Loss on sale of investment in foreign common shares, held for 3 years Loss on sale of bonds, held for 6 months

20A1 P300,000

P375,000

20A3 P80,000

20A4 P450,000

20,000 25,000

35,000 28,000

40,000 30,000

42,000 35,000

50,000

60,000

75,000

125,000

75,000

80,000

50,000

100,000

50,000

90,000

60,000

150,000

25,000

100,000

30,000

155,000

75,000

50,000

300,000

50,000

60,000

40,000

100,000

20,000

Required: 1. Determine the taxable income for the years ended December 31, 20A1, 20A2, 20A3 and 2004. The personal exemption for single is P50,000. 2. Assume that the taxpayer is a corporation and assume further that instead of the gains on sale of   jewelry and painting, these pertain to gains on sale of investment in foreign preferred shares and investment in debt securities with the same holding periods, determine the taxable income for the years ended December 31, 20A1, 20A2 and 20A3. Sale of real property Problem 52 – Sale of real property; real estate business; idle assets Kultura Corporation, an entity engaged in real estate business, purchased a parcel of land in Calamba for  P15,000,000 on March 1, 20A0 when it s fair market value was P14,800,000. The said l and will be further  developed where housing units will be constructed. Kultura incurred land development costs for P5,000,000, construction costs for roads and other structures on the land for P4,000,000 and construction costs related to the housing units for P10,000,000 during 20A0. During 20A1, Kultura started selling houses and lot s in Calamba. There were 30 units of house and lots which were developed and constructed. As of December 31, 20A1, Kultura sold 15 units of houses and lots for  P3,500,000 each which were paid in cash. These houses and lots have the same area and specifications. The cost of these house and lots were assumed to be the same. On December 1, 20A1, Kultura sold a parcel of land in Alabang for P12,500,000 with fair market value of  P12,800,000. Said land was purchased three y ears ago for P8,200,000 when it s fair market value was P8,500,000. It planned to construct condominium building which should have been held f or sale. However, because of certain problems, the project construction did not push through. Required: 1. Determine the gain or loss from the sale of real properties for the year ended December 31, 20A1. 2. Determine the whether the gain or loss is a capital gain/loss or ordinary gain/loss. 3. Determine the capital gains tax (CGT), if any, on the sale of real properties.

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Problem 53 – Sale of real property; capital and ordinary assets; idle assets; installment method Tinatangi Company, Inc., engaged in the m anufacture of toys, had the following real properties as of January 1, 20A1 with their carrying amounts for financi al reporting purposes: Land A Land B Building A, net Building B, net

P3,000,000 3,200,000 2,800,000 500,000

These properties were sold in 20A1. T he following are the additional information: · ·

·

Land A was acquired in 20A0 when its fair market value was P3,250,000. It was not used until it was sold for P3,500,000 on March 1, 20A1 when its fair market v alue was P3,350,000. Land B was acquired five years ago at fair market val ue. Building A was constructed on said land. As of  January 1, 20A1, Building A had remaining useful life of 14 years. Its carrying amount was net of  accumulated depreciation of P1,800,000 and impairment loss of P1,400,000 which was recognized on December 31, 20A0. On July 1, 20A1, Land B was sold for P4,000,000 while the Building A for  P3,000,000. The building was used as production plant of the entity. Building B was constructed on a leased land for P6,000,000. It was initially used f or three years and subsequently became idle for five years and it was sold for P2,000,000 on October 1, 20A1 when its fair  market value was P2,300,000. Its carrying amount was net of accumulated depreciation of P4,000,000 and impairment loss of P1,500,000 which was recognized on December 31, 20A0. Building B had remaining useful life of 4 years.

Required: 1. Determine the capital gain or loss from sale of real properties for the year ended December 31, 20A1. 2. Determine whether the gain or loss is a capital gain/loss or ordinary gain/loss. 3. Determine the capital gains tax (CGT), if any, on the sale of real properties. 4. Assuming that the selling price of Building B was paid as follows: October 1, 20A1 P200,000 February 1, 20A2 300,000 June 1, 20A2 400,000 October 1, 20A2 500,000 February 1, 20A3 600,000 Determine the capital gains tax (CGT), if any, on the sale of the building that was declared and paid in 20A1, 20A2 and 20A3. Determine the deadline for the payment of the CGT. 5. Assuming that the selling price of Building B was paid as follows: October 1, 20A1 P600,000 February 1, 20A2 500,000 June 1, 20A2 400,000 October 1, 20A2 300,000 February 1, 20A3 200,000 Determine the capital gains tax (CGT), if any, on the sale of the building that was declared and paid in 20A1, 20A2 and 20A3. Determine the deadline for the payment of the CGT. Problem 54 – Sale of real property; principal residence; individual The following are independent situations i nvolving sale of real properties: Situation A Mrs. Gunita, widower, sold her residential house and lot on July 1, 20A1 for P6,000,000. The land was acquired fifteen years ago for P300,000 while the residential house was constructed 10 years ago for P1,000,000. The fair market values of the propert y were as follows: Land, at acquisition date Land, July 1, 20A1 Building, July 1, 20A1

Income Taxation (ACCTAX1) Tax Problems

P320,000 3,200,000 3,500,000

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Situation B Mr. Kalinaw constructed a house, ten years ago for P650,000. On May 1, 20A1, he sold said house f or  P4,000,000 when its fair market val ue was P4,200,000. After six-months, he bought a new house for  P3,800,000. He submitted a notification to the BIR of his intention to avail of the tax exemption on June 15, 20A1. Required: 1. Determine the capital gain or loss from sale of real properties for the year ended December 31, 20A1. 2. Determine the capital gains tax (CGT), if any, on the sale of real properties. 3. For Situation B, determine the new cost basis of the residential property. 4. For Situation B, assuming the notification to avail of the tax exemption was submitted on May 15, 20A1, determine the capital gains tax (CGT), if any on the sale of real property. 5. For Situation B, assuming the notification to avail of the tax exemption was submitted on May 30, 20A1, determine the new cost basis of the residential property. Dealings in stocks and securiti es Problem 55 – Treasury shares; transfer of property for own shares On June 1, 20A1, Indak Corporation reacquired its own 10,000 shares from Salamin Corporation for P300 per  share. Salamin purchased said shares on January 1, 20A1 for P200 per share. On October 1, 20A1, Indak sold said shares for P420 per share. Moreover, on December 1, 20A1, Indak sold its land which was acquired f or P5,000,000 in exchange for its own 15,000 shares. Said shares had fair market value of P350 at that time. Required: Determine the gain or loss from sale or transfer of shares/properties for the year ended December  31, 20A1. Indicate the party that derived the gain or incurred the loss. Problem 56 – Disposal of bonds The following are independent situations regardi ng Humaling, Inc.’s disposal of its investment in bonds: a. b. c.

On January 1, 20A1, Humaling issued a 5-year, 6% coupon bonds at face value of P5,000,000. On December 31, 20A3, the said bonds were redeemed for P4,800,000. On January 1, 20A1, Humaling issued a 5-year, 6% coupon bonds with face value of P5,000,000, for  P4,800,000. On December 31, 20A3, the said bonds were redeemed for P5,000,000. On January 1, 20A1, Humaling issued a 5-year, 6% coupon bonds with face value of P5,000,000 for  P5,300,000. On December 31, 20A3, the said bonds were redeemed for P5,000,000.

The Company adopted the effective int erest method in accounting for bonds for tax purposes. Required: Determine the gain or loss from redemption of the bonds under each situation. Problem 57 – Wash sales The following are independent situations regarding Marahuyo Company’s acquisition and disposal of Habagat Corporation shares: a.

b.

c.

On November 15, 20A1, Marahuyo purchased 10,000 common shares of Habagat for P100 per share. On December 1, 20A1, it purchased again additional 10,000 common shares of Habagat for P90 per  share. On December 15, 20A1, it sold 10,000 shares of Habagat f or P90 per share. On September 21, 20A1, Marahuyo purchased 10,000 common shares of Habagat for P100 per share. On December 21, 20A1, it purchased again additional 5,000 common shares of Habagat for P90 per  share. Subsequently, on December 26, 20A1, it purchased additional 2,500 common shares of Habagat for P80 per share. Habagat sold 10,000 common shares of Habagat for P70 on December 31, 20A1. On September 15, 20A1, Marahuyo purchased 10,000 common shares of Habagat for P100 per share. On November 30, 20A1, it sold 4,000 common shares of Habagat for P90 per share. On December 15, 20A1, it again purchased 5,000 comm on shares of Habagat for P 80 per share. On December 17, 20A1, it purchased again 5,000 common shares of Habagat for P80 per share.

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d.

On September 15, 20A1, Marahuyo purchased 10,000 common shares of Habagat for P90 per share. On December 15, 20A1, it purchased again 5,000 common shares of Habagat for P100 per share. On December 20, 20A1, it purchased another 2,500 common shares of Habagat for P80 per share. On December 31, 20A1, it sold 10,000 common shares of Habagat for P70 per share.

Marahuyo adopted the calendar year accounting period. Required: Determine the deductible and non-deductible loss for the year ended December 31, 20A1 under each situation. Source: De Leon (2016), modified.

Capit al Gains Tax (CGT) on st ock t ransactio ns Problem 58 – Sale of shares: Specific identification, FIFO, moving average The following are independent situations on the acquisition and disposal of investment in Kanlaon Company shares of Mayon Corporation: a.

On January 1, 20A0, Mayon purchased 10,000 shares P10 par of Kanlaon Company for P15 per share.  At that time, the shares have fair market value of P17 per share. On June 15, 20A0, Mayon purchased additional 15,000 Kanlaon shares for P20 per share with fair market value of P21 per share. Mayon sold 12,000 shares at f air market value for P25 per share coming from June 15 purchases on November 30, 20A0. On January 31, 20A1, Mayon purchased 5,000 shares for P23 per share with fair  market value of P25. On July 1, 20A1, Mayon purchased 7,000 shares at f air market value for P28 per  share. On October 1, 20A1, Mayon sold 10,000 shares for P30 per share with fair market value of P32 per share. Of 10,000 shares, 7,000 shares were taken from July 1, 20A1 purchases and the balance came from January 1, 20A0 purchases. b. On January 1, 20A0, Mayon purchased 10,000 shares P10 par of Kanlaon Company for P15 per share.  At that time, the shares have fair market value of P17 per share. On June 15, 20A0, Mayon purchased additional 15,000 Kanlaon shares for P20 per share with fair market value of P21 per share. Mayon sold 12,000 shares at f air market value for P25 per share. On January 31, 20A1, Mayon purchased 5,000 shares for P23 per share with fair market value of P25. On July 1, 20A1, Mayon purchased 7,000 shares at fair market value for P28 per share. On October 1, 20A1, Mayon sold 10,000 shares for P30 per share with fair market value of P32 per share. Mayon was not able to identify the shares which were sold in 20A0 and 2A01. c. On January 1, 20A0, Mayon purchased 10,000 shares P10 par of Kanlaon Company for P15 per share.  At that time, the shares have fair market value of P17 per share. On June 15, 20A0, Mayon purchased additional 15,000 Kanlaon shares for P20 per share with fair market value of P21 per share. Mayon sold 12,000 shares at f air market value for P25 per share. On January 31, 20A1, Mayon purchased 5,000 shares for P23 per share with fair market value of P25. On July 1, 20A1, Mayon purchased 7,000 shares at fair market value for P28 per share. On October 1, 20A1, Mayon sold 10,000 shares for P30 per share with fair market value of P32 per share. Mayon maintains books of accounts where every transaction relating to purchases and disposals of shares are recorded. Both Mayon and Kanloan are listed in the Philippine stock exchange. However, the abov e transactions were made over the counter. Required: Determine the gain or loss from sale and capital gains tax (CGT) for the years ended December 31, 20A0 and 20A1. Problem 59 – Stock dividend, fair market v alue; net asset value; donation; installment method Luneta Corporation acquired 50, 000 shares of Kabibe Company, Inc. on December 31, 20A0 from Kapis Corporation for P25 per share. Luneta paid P100,000 on the same date while the balance was paid on January 31, 20A1. Kapis acquired said shares two y ears ago for P20 per share. Kabibe’s balance sheet showed the f ollowing on December 31, 20A0:

Income Taxation (ACCTAX1) Tax Problems

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Cash  Accounts receivables Equipment Building Land  Accounts payable Notes payable Common stock  Additional paid in capital Retained earnings

P 500,000 900,000 800,000 1,200,000 1,000,000 420,000 300,000 1,800,000 650,000 1,230,000

The equipment, building and land had fair market values of P1,000,000, P1,500,000 and P1,600,000, respectively. Kabibe had 180,000 issued and outstanding shares with P10 par value. On July 1, 20A1, Kabibe declared and issued 25% stock dividend. On D ecember 31, 20A1, Luneta sold 35,000 Kabibe shares to Sigay Corporation for P28 per share. Kabibe paid P350,000 on the same date and the balance was paid on July 1, 20A2. Kabibe’s balance sheet showed the f ollowing on December 31, 20A1: Cash  Accounts receivables Equipment Building Land  Accounts payable Loan payable Common stock  Additional paid in capital Retained earnings

P 900,000 1,500,000 1,020,000 1,160,000 1,000,000 450,000 500,000 1,800,000 650,000 2,180,000

The equipment, building and land had fair market values of P1,200,000, P1,600,000 and P1,700,000, respectively. Required: 1. Determine the gain or loss and capital gains tax (CGT) on the sale of shares on December 31, 20A0 and December 31, 20A1, and the CGT paid in 20A0 and 20A1. Determine the deadline for the payment of CGT. 2. Determine the amount of donation on December 31, 20A0 and December 31, 20A1. Problem 60 – Share swap, property f or shares Tanglaw Corporation had 25,000 Agila shares which were classified as available for sale securities. As of  December 31, 20A0, said investment had car rying amount of P1,200,000. These were acquired for P35 per  share one year ago. On the same date, Tanglaw transferred all its Agila shares to Maya Corporation in exchange for 50,000 Talaba shares. Maya acquired Talaba shares two years ago for P17 per share. Agila and Talaba shares are listed in t he Philippine Stock Exchange. Agila shares had fair m arket value of P48 per share while Talaba shares had fair market v alue of P27 per share. On July 1, 20A0, Maya transferred 20,000 Agila shares to Loro Corporation in exchange for land with book value of P1,000,000 and fair market value of P1,450,000. Loro adopted the cost model in accounting for  property, plant and equipment. Agila shares had fair market value of P55 at the time of transfer. Required: 1. Determine the gain or loss and capital gains tax on the transfer of shares on December 31, 20A0. 2. Determine the gain or loss and capital gains tax on the transfer of shares and property on July 1, 20A1.

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UNIT 6. SOURCES OF INCOME Problem 61 – Income from sources within and without the Philippines The following are independent situations regardi ng the income earned by Hamili Corporation, a domestic corporation, from sources within and outside the Philippines: a.

On January 1, 20A3, Hamili borrowed P10,000,000 from Madjapahit Corporation, a resident of  Thailand, bearing interest of 8%. Hamili utilized the proceeds from the loan to acquire various property, plant and equipment which were used in its business in the Philippines. b. Hamili had investment in shares of stock of Madjapahit Corporation, another domestic corporation. Madjapahit declared and paid cash dividend of P1,000,000 on October 1, 20A3. c. Hamili had investment in shares of stock of Madjapahit Corporation, a resident of Thailand. Madjapahit declared and paid cash dividend of P1,000,000 on October 1, 20A3. Madjapahit had no Philippine operations. d. Hamili had investment in shares of stock of Madjapahit Corporation, a resident of Thailand. Madjapahit declared and paid cash dividend of P1,000,000 on October 1, 20A3. Madjapahit had a Philippine branch. Its worldwide gross income and its Philippine branch’s gross income in the last three years were as follows: Year Philippine Worldwide branch 20A0 3,000,000 5,000,000 20A1 4,000,000 8,000,000 20A2 5,000,000 9,000,000 e. Hamili declared and paid dividend of P1,000,000 to its sole stockholder, Madjapahit Corporation, a resident of Thailand, on October 1, 20A3. f. Hamili availed of the management services of Madjapahit Corporation, a resident of Thailand. Madjapahit rendered management services in Thailand and Hamili paid P500,000 for said services on October 1, 20A3 for services rendered for nine months from January 1 to September 30, 20A3. g. Hamili availed of the management services of Madjapahit Corporation, a resident of Thailand. Madjapahit rendered management services in the Philippines through its employees and Hamili paid P400,000 on October 1, 20A3 for services rendered for six m onths. Madjapahit’s employees were in the Philippines from April 1 to September 30, 20A3. h. Hamili availed of the management services of Madjapahit Corporation, a resident of Thailand. Madjapahit rendered management services partly in the Philippines and partly in Thailand. Hamili paid P1,000,000 for management services rendered f rom January 1 to September 30, 20A3. Madjapahit sent employees to the Philippines from January 1, 20A3 to June 30, 20A3 to render said services in the Philippines. The remaining services were rendered in Thailand from July 1 to September 30, 20A3. i. Hamili owned an equipment which it leased to Madjapahit Corporation, a resident of Thailand. The equipment was sent to Thailand in Madjapahit’s premises. Madjapahit paid rentals of P600,000 on January 1, 20A3 for the lease of said equipment from January 1 to June 30, 20A3.  j. Hamili leased an equipment from Madjapahit Corporation, a resident of Thailand. The equipment was sent to the Philippines in Hamili’s premises. Hamili paid rentals of P600,000 on January 1, 20A3 for the lease of said equipment from January 1 to June 30, 20A3. k. Hamili entered into a licensing agreement with Madjapahit Corporation, a resident of Thailand, for the use of know-how and technology in manufacturing certain food products in t he Philippines. Madjapahit did not send any employees to render the related services. All services were rendered in Thailand. Hamili paid royalties of P1,000,000 on December 31, 20A3 for using said know-how and technology from January 1 to December 31, 20A3. l. Hamili sold a condominium unit located in the Philippines to Madjapahit Corporation, a resident of  Thailand, for P5,000,000 on December 31, 20A3. Said unit had book v alue of P3,500,000 as of  December 31, 20A3. m. Hamili purchased electronic goods in Thailand for P5,000,000. Said goods were sold to Madjapahit Corporation, a resident of Thailand, for P8,000,000. The goods were directl y delivered from Hamili’s supplier in Thailand to Madjapahit. The goods did not enter the Philippine t erritory. n. Hamili is engaged in the manufacture of electronic products. It imported its raw materials from Madjaphit Corporation, a resident of Thailand, and it exported its finished goods to Kongo Company, Inc., a resident of Japan. During 20A3, Hamili had export sales to Kongo of P8,000,000 with cost of  P5,000,000 which already included cost of raw materials paid to Madjapahit for P3,000,000.

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o.

p.

Hamili availed the advertising services services of Madjapahit Madjapahit Corporation, a broadcasting company located in Thailand. The advertisements were aired in t he Philippines, however, the broadcasting facilities are maintained in Thailand. On December 31, 20A3, Hamili paid P1,000,000 for advertising services rendered from January 1 to December 31, 20A3. Madjapahit Corporation, a resident of Thailand, had investment in Hamili Hamili shares. shares. On July July 1, 20A3, 20A3, Madjapahit sold 10,000 shares of Hamili for P500 per share to Kongo Corporat ion, a resident of  Singapore with fair market v alue of P525. The shares were acquired two years ago for P325 per share.

Required: Identify the income earned, the amount of gross income earned within and outside the Philippines and the party that derived the income for the year ended December 31, 20A3 for each of the above situations. Problem 62 – Head office allocated expenses Molave Corporation, an entity incorporated in F rance, maintains various operations worldwide including the Philippines through its Philippine branch. The following information r elates to its operations for the year ended December 31, 20A1: Description Sales Cost of sales Directly attributable expenses Common expenses

Philippine Branch P5,000,000 1,500,000 2,000,000

Worldwide P25,000,000 10,000,000 8,000,000 4,000,000

Required: 1. Determine the taxable income from sources within the Philippines for the year ended December 31, 20A1. 2. Determine the taxable income from sources outside the Philippines for the year ended December 31, 20A1.

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UNIT 7. TAXATION OF INDIVIDUALS Problem 63 – Classification of individual taxpayers The following are independent situations on the classification of taxpayers: a.

b.

c.

d.

e. f. g.

h.

Mr. Acacia, a citizen of the Philippines, Philippines, stayed in United States for three years. He returned returned on June 15, 20A1 to reside permanently in the Philippines. He had income of P350,000 from January 1 to June 14, 20A1 from Philippine sources and P450,000 f rom United States. He had income of P500,000 f rom Philippine sources and P300,000 from United States from June 15, 20A1 to December 31, 20A1. Mrs. Bravo, a citizen of the Philippines, Philippines, left the country on March 15, 20A1 and returned only on January 1, 20A2. She deriv ed consultancy fee income of P120,000 from January 1 to March 14, 20A1 from Philippine sources and P100,000 from f oreign sources. She derived consultancy fee i ncome of  P300,000 from March 15, 20A1 to December 31, 20A1 from foreign sources and P150,000 f rom Philippine sources. Mr. Camilo, a citizen of the Philippines, Philippines, is employed employed by Kahel Company, Inc., a domestic domestic corporation since 20A0. On April 1, 20A1, Mr. Camilo was assigned to Singapore Branch of Kahel for two years. He continued to receive his compensation from Kahel Head Office in the Philippines and allowances f rom Kahel Singapore. During 20A1, he received P1,200,000 as compensation (P250,000 f rom January to March 31, 20A1) from Kahel Head Office and P500,000 allowances from Kahel Singapore. Mrs. Delta, a citizen citizen of Canada, came came to the Philippines on on May 31, 20A1 to render professional professional services for four months until September 30, 20A1. She derived service fees of P350,000 for rendering said services. Mr. Edukado, a citizen citizen of Spain, came came to the Philippines on June 1, 20A1 to render professional services until May 31, 20A2. He received professional fees of P100,000 monthly. Mrs. Ginto, a citizen of Portugal, Portugal, came to the Philippines on November November 1, 20A1 20A1 to render professional professional services until August 31, 20A2. He received professional fees of P150,000 monthly. Mr. Kabesa, a citizen of Brazil, came came to the Philippines on October 1, 20A1 20A1 to render render consultancy services for three years as provided in the consultancy agreement. He received professional fees of  P120,000 monthly. Mrs. Lila, a citizen citizen of Mexico, came to the Philippines two two years ago to render render consultancy services for  three years until December 31, 20A1 as provided in the consultancy agreement. She received professional fees of P90,000 monthly.

Required: 1. Determine 2. Determine December 3. Determine 20A1.

the classification of the taxpayer for the year ended December 31, 20A1. the income derived from sources within and outside the Philippines for the year ended 31, 20A1. the income that will be subject to Philippine income tax for the year ended December 31,

Problem 64 – Personal and additional personal exemptions The following are independent situations on personal and additional personal exemptions for the year ended December 31, 20A1: a. b. c. d. e.

Mr. Moreno, single, with a dependent parent. Ms. Kayumanggi, single, with with a dependent brother, 24 years old, who who is crippled. crippled. Mr. and Mrs. Kubo, married, both deriving deriving income have two qualified dependents. Mr. and Mrs. Mrs. Rosa, married, both deriving income have have five qualified qualified dependents. Mr. and Mrs. Mrs. Sampalok, married, both deriving deriving income have six qualified dependents. Mr. Sampalok waived the claiming of additional personal ex emptions in favor of Mrs. Sampalok. f. Mr. and Mrs. Patawanin were were married on January 30, 20A1 20A1 and they had a legitimate legitimate son born on December 25, 20A1. g. Mr. and Mrs. Buko, married, have have three children who who are below 21 years old. The first child was born out of wedlock while the two are l egitimate children. h. Mr. and Mrs. Mrs. Kapalaran, married, have four legitimate children who who are below 21 years old. Mr. Kapalaran died on September 1, 20A1. i. Mr. and Mrs. Bola, married, have three legitimate children children who who are below 21 years old. The first first child turned 22 on January 30, 20A1.  j. Mr. and Mrs. Indayog, married, have three legitimate children who are below 21 years old. The first child became gainfully employed on June 30, 20A1. Inc ome Taxation (ACCTAX1) Tax Pr oblems

Ac ademic Year 2016-2017 Page 42

k.

l.

Mrs. Bituin, a married resident alien, alien, has three legitimate children who are below 21 years old. Her  country of residence allows personal exemption of P40,000 to married individuals and additional personal exemption of P20,000 f or each dependent for a maximum of two dependents f or Filipino residents. His husband is based in Vietnam. Mr. Leron, a married non-resident alien engaged in trade or business, has has three legitimate children children who are below 21 years old. His country of residence allows personal exemption of P40,000 to married individuals and additional personal exemption of P22,500 for each dependent for a maximum of two dependents for Filipino residents.

Required: Determine the personal exemption and additional personal exemption of the taxpayer(s) for the year  ended December 31, 20A1. If the taxpayers are married, determine the exemption for each spouse. Problem 65 – Tax on compensation income; resident citi zen; premium payments deduction Ms. Alibangbang, married, resident citizen, is an employee of Paru-paro, Inc. She paid monthly hospitalization insurance premium of P350 for herself and her family. Her husband is unemployed. The following are independent situations regardi ng the salaries and benefits granted t o Ms. Alibangbang for the year ended December 31, 20A1: a.

Ms. Alibangbang received the following salaries and benefits for the year ended December 31, 20A1: 20A1: Gross compensation 13th mo  month pay th 14  mo  month pay Bonuses Rice subsidy Clothing allowance Productivity incentive Loyalty award Medical allowance f or the employee Medical allowance f or dependents Daily meal allowance Total

P 180,000 15,000 15,000 60,000 18,000 4,000 12,000 17,000 9,000 5,000 10,000 P 345,000

The following are the additional information: ·

The rice subsidy was given in cash for P1,500 monthly.

·

The clothing allowance which included T-shirt and j eans worth P4,000 was given on January 31, 20A1.

·

The productivity incentive was granted in cash on December 1, 20A1.

·

The loyalty award which was a wrist watch was giv en on June 30, 20A1.

·

The medical allowance was subjected to liquidation. Ms. Paraluman submitted invoices and receipts supporting purchases of m edicines and other medical expenses issued in her name.

·

The medical allowance for dependents was giv en quarterly for P1,250. Ms. Paraluman submitted invoices and receipts supporting purchases of m edicines and medical expenses issued in the name of her dependents.

·

The daily meal allowance was given on account of overtime equivalent to P100 per day. The basic daily minimum wage was P500 per day.

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·

b.

Ms. Alibangbang contributed P545 monthly as mandatory contribution to SSS which was deducted from her compensation.

Ms. Alibangbang received the following salaries and benefits: Gross compensation 13th month pay 14th month pay Bonuses Rice subsidy Clothing allowance Productivity incentive Loyalty award Medical allowance for the employee Medical allowance for dependents Daily meal allowance Total

P 180,000 15,000 15,000 45,000 18,000 4,000 8,000 10,000 9,000 5,000 11,000 P 320,000

The following are the additional information: ·

The rice subsidy was given in cash for P4,500 quarterly.

·

The clothing allowance was given in cash on January 31, 20A1.

·

The productivity incentive was granted in cash on December 1, 20A1.

·

The loyalty award was given in cash on June 30, 20A1.

·

The medical allowance was given in cash and onl y P5,000 was subjected to liquidation. Ms. Paraluman submitted invoices and receipts supporting purchases of m edicines and other medical expenses issued in her name for P5,000.

·

The medical allowance for dependents was giv en quarterly for P1,250. Ms. Paraluman submitted invoices and receipts supporting purchases of medicines and medical expenses issued in the name of her dependents.

·

The daily meal allowance was given regardless of whether Ms. Paraluman rendered overtime. However, P7,500 was given on account of overtime equivalent to P150 per day. The basic daily minimum wage was P500 per day.

·

Ms. Paraluman contributed P700 monthly to SSS which was deducted f rom her compensation. However, only P545 is the mandatory m onthly contribution.

Required: 1. Determine the taxable compensation income of Ms. Alibangbang for the year ended December 31, 20A1. 2. Determine the income tax on compensation income of Ms. Alibangbang which was withheld by Paruparo, Inc. for the year ended December 31, 20A1. (Note: Problem 65 is similar to Problem 14)

Problem 66 – Multiple employer, married, dependents Mr. Pilak, married, was employed by Palayan, Inc. until August 31, 20A1. He earned gross compensation income of P260,000 from Palayan. Out of thi s amount, P20,000 pertains to pro-rated thirteenth month pay. On September 1, 20A1, he joined Maisan Company and earned gross compensation income of P170,000. Out of this amount, P30,000 pertains to pro-rated thirteenth month pay. In addition, he also received transportation allowance of P1,500 starting September 1, 20A1, and performance bonus of P40,000.

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Mr. Pilak was also a part-time employee of Manihan, Inc. during 20A1 and he earned compensation income of  P161,000. Out of this amount, P11,500 pertains to thirteenth month pay. Mr. Pilak, had three legimate dependents below 21 years old. However, his eldest child died on January 1, 20A1. He also paid hospitalization premium of P5, 000 during the year. Required: 1. Determine the taxable compensation income for the year ended December 31, 20A1. 2. Determine the income taxes withheld by each employer of Mr. Pilak for the year ended December 31, 20A1 assuming that the subsequent employer consolidated the income tax from full-time employment.  Assume further that taxes withheld by Manihan were not consolidated by the current employer. 3. Determine the total income tax and tax still due of Mr. Pilak for the year ended December 31, 20A1. Problem 67 – Tax on business income; resident citizens Mrs. Katakataka, married, had four dependent children below 21 years old. Her business had the following quarterly information (non-cumulative) for the year ended December 31, 20A1:

Sales Cost of sales Business expenses

First Quarter P180,000 72,000 30,000

Second Quarter P210,000 75,000 32,000

Third Quarter P250,000 76,000 38,000

Fourth Quarter  P280,000 80,000 45,000

Mrs. Katakataka used the itemized deduction in filing her fi rst quarter income tax return. Mr. Katakataka, employed, executed a waiver for claiming of additional personal exemptions in favor of his wife. Required: 1. 2. 3. 4.

Determine the taxable income of Mrs. Katakataka for the year ended December 31, 20A1. Determine the quarterly (cumulative) and annual income tax of Mrs. Katakataka for the year ended December 31, 20A1 Assuming Mrs. Katakataka used the optional standard deduction (OSD) in filing her first quarter income tax return, determine her taxable income for the year ended December 31, 20A1. Assuming Mrs. Katakataka used the optional standard deduction (OSD) in filing her first quarter income tax return, determine her quarterly (cumulative) and annual income tax for the year ended December  31, 20A1.

Problem 68 – Tax on mixed income; resident and non-resident citizen; resident alien and non-resident alien Mr. Liwayway, single, had the following gross compensation income from l ocal employment and income from business within the Philippines for the y ear ended December 31, 20A1: Gross compensation income Gross income from business Business expenses

P200,000 300,000 100,000

The gross compensation income included thirteenth month pay of P15,000 and SSS, Philhealth and Pag-ibig contributions of P5,000. Required: 1. Determine the taxable income of Mr. Liwayway for the year ended December 31, 20A1. 2. Determine the income tax of Mr. Liwayway for the year ended December 31, 20A1. 3. Assuming that Mr. Liwayway is a non-resident citizen and his compensation income was derived from sources outside the Philippines, determine his taxable income for the year ended December 31, 20A1. 4. Assuming that Mr. Liwayway is a non-resident citizen and his compensation income was derived from sources outside the Philippines, determine his income tax for the year ended December 31, 20A1. 5. Assuming that Mr. Liwayway is a resident alien and his business income was derived from sources outside the Philippines, determine his taxable income for the year ended December 31, 20A1.

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6.

Assuming that Mr. Liwayway is a resident alien and his business income was derived from sources outside the Philippines, determine his income tax for the year ended December 31, 20A1. 7. Assuming that Mr. Liwayway is a non-resident alien engaged in trade or business and his business income was derived from sources outside the Philippines, determine his taxable income for the year  ended December 31, 20A1. Assume further that his country of residence allows basic personal exemption of P60,000 to Filipino single individuals. 8. Assuming that Mr. Liwayway is a non-resident alien engaged in trade or business and his business income was derived from sources outside the Philippines, determine his income tax for the year ended December 31, 20A1. Assume further that his country of residence allows basic personal exemption to of P60,000 to Filipino single individuals. 9. Assuming that Mr. Liwayway is a non-resident alien not engaged in trade or business and his business income was derived from sources outside the Philippines, determine his taxable gross income for the year ended December 31, 20A1. Assume further that his country of residence allows basic personal exemption of P60,000 to Filipino single individuals. 10. Assuming that Mr. Liwayway is a non-resident not alien engaged in trade or business and his business income was derived from sources outside the Philippines, determine his income tax for the year ended December 31, 20A1. Assume further that his country of residence allows basic personal exemption to of P60,000 to Filipino single individuals. Problem 69 – Tax on resident citizens; foreign tax credits Mrs. Namukadkad is a resident citizen, without dependent. She was locally employed by Bulaklak Corporation. However, she had a business in Australia. She received gross compensation income of P351,000 (net of SSS, Philhealth and Pag-ibig contributions) for the y ear ended December 31, 20A1. T his amount still included thirthteenth month pay of P27,000. Moreover, she generated sales of P450,000 with cost of sales of P120,000 and incurred business expenses of P 100,000 in Australia. She paid income tax of P92,000 in Australia. Mrs. Namukadkad opted to claim the foreign i ncome tax paid as tax credit. Required: 1. Determine the taxable income of Mrs. Namukadkad for the year ended December 31, 20A1. 2. Determine the income tax due after tax credit of Mrs. Namukadkad for the year ended December 31, 20A1. 3. Assuming that 60% of sales, cost of sales and business expenses pertain to business operations in  Australia and the remaining 40% pertains to her business in New Zealand, and she paid foreign income tax of P55,200 in Australia, and P18,400 in New Zealand, determine the income tax due after tax credit of Mrs. Namukadkad for the year ended December 31, 20A1. Problem 70 – Minimum wage earners Mrs. Waling, married, with one qualified dependent child, is employed by Ylang Company, Inc., located in Metro Manila, since 20A0. Her husband waived the claiming of additional personal exemption. Starting January 1, 20A1, she received a monthly compensation of P15,208 f or 13 months. The daily statutory minimum wage rate in Metro Manila was P500. Based on Ylang’s wage policy, employees are considered paid on rest days, special days and regular holidays. A s such, it uses 365 days for pur poses of determining its daily wage rate. The following are independent situations regardi ng the additional compensation and benefits received by Mrs. Waling from Ylang during 20A1: a. b. c. d.

Mrs. Waling also received monthly hazard pay of P500 and monthly rice subsidy of P1,500. Mrs. Waling also received monthly hazard pay of P500, monthly rice subsidy of P2,500, 14th, 15th and 16th month of P15,208 each, P25,000 performance bonus and P12,000 commission. Mrs. Waling was promoted to the next level effective July 1, 20A1 and she received a monthly salary increase of 10%. She also received 13-month pay based on her pro-rated pay. Mrs. Waling resigned from Ylang and transferred to Camia Corporation, located in Cavite, on July 1, 20A1. She received a monthly salary of P16,000 for 13 months. The daily statutory mi nimum wage in Cavite was P450. Based on Camia’s wage policy, employees are not considered paid on Sundays and rest days. Hence, it uses 313 days for purposes of determining its daily wage rate.

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Required: 1. Determine December 2. Determine 3. Determine

the 31, the the

monthly statutory minimum wage of Ylang and Camia, as applicable, for the year ended 20A1. taxable income of Mrs. Waling for the year ended December 31, 20A1. income tax liability of Mrs. Waling for the year ended December 31, 20A1.

Problem 71 – Aliens and Filipinos employed by RHQs and ROHQs The following are independent situations regardi ng the employment of Mr. Lirio with Santan Pte. Ltd. –  Philippine Regional Operating Head Quarters (ROHQ): a.

b.

c.

d.

e.

f.

g.

h.

i.

 j.

Mr. Lirio, a resident alien, single, was employed by Santan starting 20A0 as Vice President of  Operations. He received monthly salary of P150,000 from January to December 20A1. In addition, he also received 13th and 14th month pay equivalent to one-m onth salary each. His monthly salary is gross of SSS, Philheath and Pag-ibig contri butions of P1,500. Mr. Lirio, a resident citizen, married, with two qualified dependents, was employed by Santan starting January 1, 20A1 as Marketing Manager. He received monthly salary P60,000 and transportation allowance of P15,000, both for 13 months. Mr. Lirio, a resident citizen, married, with three qualified dependents, was employed by Santan starting January 1, 20A1 as senior technical specialist. He received monthly salary of P72,000 f or 13 months. In addition, he also received monthly rice subsidy of P1,500 and monthly laundry allowance of P200 both for 12 months, clothing allowance of P5,000, productivity incentive of P10,000, and Christmas gift of  P5,000. Mr. Lirio, a resident citizen, married, with four qualified dependents, was employed by Santan starting January 1, 20A1 as senior technical specialist. He received monthly salary of P60,000 f or 13 months. However, on December 1, 20A1, Mr. Lirio received P200,000 performance bonus. Mr. Lirio, a resident citizen, single, with a PWD parent, was employed by Santan on July 1, 20A1 as Operations Manager. His employment contract stipulates a monthly sal ary of P80,000 for 13 months. During 20A1, he received monthly salary and pro-rated 13-month pay. In addition, he also received P1,000 monthly rice subsidy. He had a taxable compensation income of P455,000 before personal and additional personal exemption from his previous em ployer from January 1 to June 30, 20A1. This amount includes pro-rated thirteenth month pay. Mr. Lirio, a resident citizen, single, was employed by Santan two years ago, as Technical Specialist. His current salary was P80,000 for 13 months. However, he left the Santan on May 31, 20A1. He received monthly salary and pro-rated 13-month pay from Santan. On June 1, 20A1, Mr. Lirio was employed by  Araw Pte. Ltd. – Regional Operating Headquarters as Operations Manager. His employment contract provides a monthly salary of P100,000 for 13 months. He received monthly salary and pro-rated 13month pay from Araw. Mr. Lirio, a resident citizen, single, was employed by Santan two years ago, as Technical Specialist. His current salary was P80,000 for 13 months. However, he left the Santan on May 31, 20A1. He received monthly salary and pro-rated 13-month pay from Santan. On June 1, 20A1, Mr. Lirio was employed by  Araw, Inc., a domestic corporation, as Operations Manager. His employment contract provides a monthly salary of P100,000 for 13 months. He received monthly salary and pro-rated 13-month pay from Araw. Mr. Lirio, a resident citizen, single, was employed by Araw, Inc., a domestic corporation, two years ago, as Technical Specialist. His current salary was P80,000 for 13 months. However, he left the Araw on May 31, 20A1. He received mont hly salary and pro-rated 13-month pay f rom Araw. On June 1, 20A1, Mr. Lirio was employed by Santan, as Operations Manager. His employment contract provides a monthly salary of P100,000 for 13 months. He received monthly salary and pro-rated 13-month pay from Santan. Mr. Lirio, a resident citizen, married with one qualified dependent, was employed by Santan two years ago, as Technical Specialist. His current salary was P70,000 for 13 months. However, eff ective July 1, 20A1, he received a salary increase of 10%. Mr. Lirio, a resident citizen, married with one qualified dependent, was employed by Santan two years ago, as Executive Assistant. His current salary was P70,000 for 13 months. However, effective July 1, 20A1, he received a salary increase of 10%.

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Required: 1. Determine the taxable income (gross or net) of Mr. Lirio for the year ended December 31, 20A1. 2. Determine the income tax liability of Mr. Lirio for the year ended December 31, 20A1. Problem 72 – Income subject to final t axes Mrs. Sampaguita derived the following income for the year ended December 31, 20A1: a. b. c. d. e. f. g. h.

Car received with fair market value of P1,000,000 as a raffle prize in a department store. Cash received of P5,000 as a raffle prize in a car show. Interest income of P6,000 on bank deposit in the regular banking unit of a bank. Interest income of P3,000 on bank deposit in the foreign currency deposit unit of a bank. Interest income of P40,000 on investment in bonds with remaining maturity of two years. Interest income of P90,000 on investment in bonds with remaining maturity of four years. Interest income of P100,000 on investment in bonds with remaining maturity of six years. Income from trust fund of P20,000 maintained with a bank. This was composed of P5,000 rental income derived by the fund, P8,500 dividend income from a domestic corporation, and P6,500 gain from sale of  shares traded in the Philippine Stock Exchange. i. Dividend income of P10,000 from investment in shares of a domestic corporation.  j. Dividend income of P8,000 from investment in shares of a foreign corporation. k. Gain of P125,000 from over the counter sale of shares in a domestic corporation. l. Gain of P500,000 from sale of condominium unit for personal purposes with selling price of P5,000,000 and fair market value of P6,000,000. m. Royalty income of P15,000 from musical composition. n. Franchise fee (considered passive income) of P100,000 for the use of tradename. Required: 1. Determine the final income tax for the year ended citizen. 2. Determine the final income tax for the year ended resident citizen. 3. Determine the final income tax for the year ended alien. 4. Determine the final income tax for the year ended resident alien engaged in trade or business. 5. Determine the final income tax for the year ended resident alien not engaged in trade or business.

December 31, 20A1 if Mrs. Sampaguita is a resident December 31, 20A1 if Mrs. Sampaguita is a nonDecember 31, 20A1 if Mrs. Sampaguita is a resident December 31, 20A1 if Mrs. Sampaguita is a nonDecember 31, 20A1 if Mrs. Sampaguita is a non-

Problem 73 – Deposit substitutes Mr. Limon had various investments. He derived t he following investment income for the year ended December  31, 20A1: a. Interest income of P50,000 on investment in bonds in Marimar Corporation. Marimar issued these bonds to the public. There were around 100 investors which invested in said bonds. b. Interest income of P20,000 on promissory notes issued by Mrs. Karpa. Mr. Limon is the sole creditor. c. Interest income of P25,000 on promissory notes issued by Buko Corporation. Buko issued promissory notes to 25 investors including Mr. Limon at one time. Required: 1. Determine if the instrument issued will qualify as deposit substitute. 2. Determine the final income tax liability, if any, on the investment income for the year ended December  31, 20A1.

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UNIT 8 – TAXATION OF CORPORATIONS Problem 74 – Regular corporat e income tax (RCIT) and minimum corporate income tax (MCIT) Begonia Corporation, a domestic trading company, was incorporated and registered with the BIR five years ago. It had the following information for the year ended December 31, 20A1: Gross sales Sales discounts Sales returns Cost of goods sold Interest income on bank deposit Interest income on loans Dividend income on investment in domestic shares Dividend income on investment in foreign shares Gain on sale of transportation equipment Gain on sale of domestic shares Salaries and bonuses Interest expense Depreciation expense Impairment loss on fixed assets Provision for doubtful accounts Loss on sale of equipment Fire loss Utilities expense Charitable contributions Pension expense

P10,000,000 300,000 500,000 4,000,000 50,000 100,000 400,000 300,000 350,000 280,000 2,500,000 325,000 900,000 250,000 180,000 175,000 650,000 380,000 420,000 370,000

The following are the additional information: a. Begonia wrote-off accounts receivables of P200,000. These were properly supported by documents to support worthlessness. b. Fire loss was supported by declaration of loss filed with the BIR within 30 days from the date of loss. c. Charitable contributions include P270,000 donations to government for priority projects in education and the balance pertains to donations to Aral Foundation, which is accredited by PCNC, for religious purposes. d. Pension expense was recognized in accordance with PAS 19. During 20A1, Begonia contributed P300,000 to its BIR-registered pension plan. Normal cost amounted to P200,000 based on actuarial valuation for funding. e. During 20A0, Begonia contributed P350,000 to its pension plan. Normal cost during the same year  amounted to P220,000. Begonia opted to use the itemized deduction in calculating its taxable income. Required: 1. Determine 2. Determine 3. Determine 4. Determine 5. Determine

the gross income subject to MCIT for the year ended December 31, 20A1. the MCIT for the year ended December 31, 20A1. the taxable income subject to RCIT for the year ended December 31, 20A1. the RCIT for the year ended December 31, 20A1. the income tax liability for the year ended December 31, 20A1.

Problem 75 – Excess MCIT carryover; commencement of MCIT  Aster Manufacturing Company was registered with the BIR on January 31, 20A0. However, it was incorporated and registered with the SE C in prior year. The following information relates to it s operations for the years ended December 31, 20A4 to 20A9:

Net sales Cost of sales Deductions

20A3 P5,000,000 1,800,000 3,000,000

Income Taxation (ACCTAX1) Tax Problems

20A4 P6,000,000 2,500,000 3,400,000

20A5 P7,000,000 3,200,000 3,750,000

20A6 P8,000,000 3,800,000 4,230,000

20A7 P9,000,000 8,000,000 900,000

20A8 P10,000,000 7,000,000 2,750,000

20A9 P12,000,000 8,000,000 3,800,000

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 Aster incurred tax losses in 20A1 and 20A2 of P150,000 and P40,000, respectively. Deductions exclude net operating losses, if any. Aster opted to use the itemized deduction in calcul ating its taxable income. Required: 1. Determine Aster’s MCIT for the years ended December 31, 20A3 to 20A9. 2. Determine Aster’s RCIT for the years ended December 31, 20A3 to 20A9. 3. Determine Aster’s income tax liability for the years ended December 31, 20A3 to 20A9. 4. Prepare journal entries in the books of Aster for the years ended December 31, 20A3 to 20A9. 5. Assume that Aster opted to use the optional standard deduction (OSD), determine its income tax liability for the years ended December 31, 20A3 to 20A9. Problem 76 – RCIT, MCIT, cost of services Sinanglay Foods Corporation is engaged in f ood business. It operates vari ous restaurants in Metro Manila. It was registered with the BIR and SEC five years ago. The following information relates to it s operations for the year ended December 31, 20A1: Sales/Revenues Sales discounts Interest income on foreign currency bank deposit, net of tax Other income (not subject to final tax) Cost of sales – food Cost of sales – packaging Salaries and bonuses – servers/waiters Salaries and bonuses – store supervisors and managers Rental expense – stores Utilities expense – stores Repairs and maintenance – stores and store facilities Depreciation – stores and store facilities Stores and store facilities impairment loss Pension expense – servers/waiters Pension expense – store supervisors and managers Salaries and bonuses – sales and administration Rental expense – administration Utilities expense – administration Repairs and maintenance – administration Depreciation expense – administration Building impairment loss – administration Interest expense Taxes and licenses Provision for various losses including tax exposures Pension expense – administration Other administration expenses

P10,000,000 300,000 13,875 750,000 1,200,000 500,000 1,500,000 700,000 850,000 325,000 300,000 600,000 525,000 380,000 250,000 560,000 450,000 225,000 150,000 280,000 475,000 375,000 480,000 550,000 180,000 425,000

The following are the additional information: a. Sales discounts include senior citizen and PWD discount of P50,000. b. Pension expense pertains to accrual of expenses under PAS 19. There were no contributions to the pension fund. c. Taxes and licenses include documentary stamp tax of P100,000, donor’s tax of P50,000 and local business tax of P280,000. d. Sinanglay opted to use the itemized deduction. Required: 1. Determine Sinanglay’s gross income for MCIT purposes for the year ended December 31, 20A1. 2. Determine Sinanglay’s MCIT for the year ended December 31, 20A1. 3. Determine Sinanglay’s taxable income for the year ended December 31, 20A1. 4. Determine Sinanglay’s RCIT for the year ended December 31, 20A1. 5. Determine Sinanglay’s income tax liability for the year ended December 31, 20A1. 6. Assume that Sinanglay opted to use the optional standard deduction (OSD), determine its income tax liability for the year ended December 31, 20A1.

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Problem 77 – Income tax reconciling items, RCIT, MCIT Sinangag Corporation had sales of P3,000,000, cost of sales of P1,200,000 and financial income before income tax of P1,350,000 for the year ended December 31, 20A1. Dividend income from investment in a domestic corporation of P20,000 was reported as part of other income and non-deductible entertainment, amusement and representation expense of P10,000 was reported as part of selling expenses. The partial balance sheet of Sinangag with corresponding tax bases is as follows:  Assets/Liabilities Machinery and equipment Cost  Accumulated depreciation  Accumulated impairment loss Net

P400,000 (194,000) (50,000) P156,000

Construction in progress

P500,000

Inventories  Allowance for inventory write-down Net

P450,000 (50,000) P400,000

 Accounts receivable  Allowance for doubtful accounts Net

P350,000 (40,000) P310,000

 Accounts payable

P300,000

Warranties payable

P135,000

The following are the additional information: a.

Machinery and equipment Cost P400,000  Accumulated depreciation, 12/31/20A0 (150,000) Carrying amount before impairment testing, 12/31/20A0 P 250,000 Impairment loss recognized in 20A0 (30,000) Carrying amount, 12/31/A0 P 220,000 Depreciation expense, 20A1 (44,000) Impairment loss recognized during 20A1 (20,000) Carrying amount, 12/31/20A1 P 156,000 The machinery and equipment have been depreci ated for four years with remaining useful life of  another four years both for income tax and accounting purposes.

b.

Construction in progress Balance, 1/1/20A1  Add: Capital Expenditures Interest Capitalized under PAS 23 Balance, 12/31/20A1

P

-0420,000 80,000 P500,000

For tax purposes, the interest was claimed as outright expense in 20A1. It is expected that the asset will be used and depreciated starting 20A2 for 10 years. Sinangag uses the straight line method of  depreciation.

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c.

Allowance for doubtful accounts Balance, 1/1/20A1  Add: Provision for doubtful accounts Total Less: Accounts written-off Balance, 12/31/20A1

P 35,000 23,000 P 58,000 18,000 P 40,000

The accounts receivable has carrying amount of P300,000 as of January 1, 20A1. The accounts written-off were claimed as deduction f or income tax purposes in 20A1 since t hese were properly substantiated. d.

Allowance for inventory obsolescence Balance, 1/1/20A1  Add: Adjustment Balance, 12/31/20A1

P 35,000 15,000 P 50,000

The provision for inventory write-down was charged to cost of sales. e.

Accounts payable Balance, 1/1,20A1  Add: Purchases on account Total Less: Settlement Balance Less: Foreign exchange adjustment Balance, 12/31/20A1

P530,000 420,000 P950,000 635,000 P315,000 15,000 P300,000

The accounts payable have average turnover of 60 days. The foreign exchange adjustment arose from accounts payable incurred during 20A1. There was no foreign currency denominated accounts payable in prior years. f.

Warranties payable Balance, 1/1,20A1  Add: Accruals Total Less: Actual payments Balance, 12/31/20A1

P120,000 50,000 P170,000 35,000 P135,000

Sinangag was registered with the BI R and SEC five years ago and it opted to use the itemized deduction. Required: 1. Determine Sinangag’s gross income for MCIT purposes for the year ended December 31, 20A1. 2. Determine Sinangag’s MCIT for the year ended December 31, 20A1. 3. Determine Sinangag’s taxable income for the year ended December 31, 20A1. 4. Determine Sinangag’s RCIT for the year ended December 31, 20A1. 5. Determine Sinangag’s income tax liability for the year ended December 31, 20A1. 6. Assume that Sinangag’s opted to use the optional standard deduction (OSD), determine its income tax liability for the year ended December 31, 20A1.

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Problem 78 – Taxation of propri etary educational institutions Matalino University, a proprietary educational institution, had t he following financial performance for the year  ended December 31, 20A1: Revenues: Tuition fees Other education fees Interest income subject to final tax Rental income Total

P15,000,000 3,800,000 100,000 3,500,000 P22,400,000

Costs: Salaries and wages Employee benefits Laboratory and maintenance Depreciation and amortization Faculty retirement expense Utilities expense School supplies Honorariums Rent expense Faculty development Total Gross profit

P6,000,000 2,200,000 800,000 1,500,000 1,200,000 950,000 350,000 250,000 180,000 150,000 P13,580,000 P 8,820,000

Expenses: Salaries and wages Employee benefits Depreciation and amortization Retirement expense Utilities expense Office supplies Rent expense Charitable contributions Professional fees Staff training and development Interest expense Other expenses Total

P 3,000,000 1,100,000 700,000 650,000 450,000 170,000 100,000 350,000 110,000 80,000 220,000 150,000 P 7,080,000

Income before tax

P 1,740,000

The following are the additional information: · Salaries and wages under costs i nclude “de minimis” benefits of P800,000 and P420,000 under  expenses. · Faculty retirement expense and retirement expense under expenses pertain to accrual of pension expense under PAS 19. Matalino contributed P1,000,000 to its BIR-registered retirement plan with normal cost of P800,000. Unamortized excess contribution over normal cost pertaining to prior years amounted to P700,000 with 7 years remaining amortization period. It is estimated that 70% of these pertain to direct costs and the balance relate to administrative purposes. · Charitable contributions pertain to donations to foundations accredited by PCNC for educational purposes amounting to P250,000 while the balance pertain to donation to government for sports development. · Rental income pertains to income from leasing of building space for commercial purposes with the following direct costs which were part of costs above: Depreciation and amortization P700,000 Utilities expense 200,000 ·

Matalino opted to capitalize its capit al expenditures for the expansion of school f acilities.

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·

Matalino adopts the straight-line method of depreciation.

Required: 1. Determine the income tax liability of Matalino for the year ended December 31, 20A1. 2. Determine the income tax liability of Matalino for the year ended December 31, 20A1, assuming that 52% of its gross profit pertains to leasing activities. Problem 79 – Taxation of local banks; f oreign currency deposit unit Matipid Banking Corporation, a domestic universal bank, had the following financial performance for the year  ended December 31, 20A1: Interest income: Loans and receivables Trading and investments Due from other banks (deposits) Total

P15,000,000 1,000,000 800,000 P16,800,000

Interest expense: Deposit liabilities Other borrowings Total Net interest income

P2,200,000 420,000 2,620,000 P14,180,000

Other income Service charges, fees and commissions Gain on sale of investments and trading gains Foreign exchange gain Trust income Total other income Total income

P3,200,000 740,000 180,000 120,000 P4,240,000 P18,420,000

Costs: Salaries and employee benefits Depreciation and amortization Retirement expense Utilities expense Supplies Rent expense Total Gross profit

P2,150,000 1,500,000 1,200,000 950,000 350,000 180,000 P6,330,000 P12,090,000

Expenses: Provision for impairment and credit losses Salaries and employee benefits Taxes and licenses Depreciation and amortization Retirement expense Other expense Total

P3,700,000 1,800,000 1,100,000 700,000 650,000 250,000 P8,200,000

Income before tax

P3,890,000

The following are the additional information: · FCDU income and expenses were converted to Philippine peso using the peso historical rates. · Interest income on loans and receivables include interest on loans granted by Matipid’s foreign currency deposit unit (FCDU) to non-residents of P520,000 and residents of P1,350,000. The balance pertains to income under the regular banking unit (RBU). · Interest income on bank deposits pertains to interest income under the regular banking units of other  banks amounting to P500,000 and F CDUs of P300,000. One-half of these pertain t o Matalino’s RBU and the balance to its FCDU. Income Taxation (ACCTAX1) Tax Problems

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· · · · · · ·

Interest expense comprised of 85% incurred under its RBU and 15% under i ts FCDU. Other income pertains only to RBU. There were no other income derived under FCDU. Gain on sale of investments and trading gains pertain to gains on sale of bonds with maturity of more than 5 years and investment in shares. Foreign exchange gains comprised of P100,000 realized gains. There were unrealized gains pertaining to prior year which were realized in 20A1 of P120,000. Costs and expenses comprised of 78% incurred under its RBU and 22% under i ts FCDU.  Accounts written-off amounted to P2,800,000 under its RBU and P500,000 under its FCDU which were approved by BSP in 20A1. Retirement expense pertains to accruals under PAS 19. There were no contributions to retirement plan.

Required: 1. Determine 2. Determine 3. Determine 31, 20A1. 4. Determine 5. Determine 6. Determine

the RCIT liability of Matipid’s RBU for the year ended December 31, 20A1. the MCIT liability of Matipid’s RBU for the year ended December 31, 20A1. the income tax liability (other than final tax) of Matalino’s RBU for the year ended December  the final tax liability of Matipid’s RBU for the year ended December 31, 20A1. the final tax liability of Matipid’s FCDU for the year ended December 31, 20A1. the final tax liability of Matipid’s depositors for the year ended December 31, 20A1.

Problem 80 – Taxation of resident f oreign corporations; ROHQ; branch profit remittance Banyaga Pte. Ltd. – Philippine Branch, is a branch of Spanish company engaged in m anufacturing business. It had financial income before tax of P2, 880,000 for the year ended December 31, 20A1. The following were the additional information related to its financi al performance: Net sales Interest on bank deposit Dividend from domestic corporation Gain on sale of domestic bonds held as investment Gain on sale of domestic shares (over the counter) Cost of sales Loss on sale of domestic bonds held as investment Business expenses excluding head office allocated expenses Head office allocated expenses

P7,000,000 100,000 80,000 120,000 150,000 2,400,000 150,000 1,900,000 120,000

The following are the additional information: · Business expenses include interest expense of P120,000. · Head office allocated expenses were properly supported by documents required under BIR rules. · Banyaga remitted profits of P2,000,000 and paid P120,000 for allocated expenses to its head office in 20A1. Required: 1. Determine the RCIT liability of Banyaga for the year ended December 31, 20A1. 2. Determine the MCIT liability of Banyaga for the year ended December 31, 20A1. 3. Determine the income tax liability of Banyaga for the year ended December 31, 20A1. 4. Assume that Banyaga is an ROHQ, determine its income tax liability for the year ended December 31, 20A1. 5. Determine the final tax on branch profit remittance and the net amount of remittance for the year ended December 31, 20A1. Source: Reyes (2006) modified.

Problem 81 – Taxation of international carriers Himpapawid Airlines, Inc. is an international airline based in United Kingdom (UK). It operated flights from UK to the Philippines and vice versa. Himpapawid deriv ed the following revenues for the year ended December 31, 20A1: · Passenger revenues of P5,000,000 where tickets were sold in the Philippines. These pertain to direct flights via Himpapawid from Manila to London and v ice versa. Out of the said amount, P2,000,000 pertains to London-Manila flights.

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· ·

·

·

·

· · ·

·

· ·

Passenger revenues of P2,000,000 where tickets were sold abroad. These pertain to direct flights from Manila to London and vice v ersa. Out of the said amount, P1,200,000 pert ains to Manila-London flights. Passenger revenues of P3,000,000 where 60% of the tickets were sold i n the Philippines while 40% were sold abroad. These pertai n to flights from Manila to Paris with stopover in Taipei. Revenues pertaining to Manila-Taipei leg amounted to P800,000. Passenger revenues of P2,500,000 where 75% of the tickets were sold i n the Philippines while 25% were sold abroad. These pertai n to flights from Paris to Manila with stopover in Taipei. Revenues pertaining to Paris-Taipei leg amounted to P1,200,000 of which 60% were sold abroad. Passenger revenues of P4,000,000 where 70% of the tickets were sold i n the Philippines while 30% were sold abroad. These pertain to flights from Manila to Athens via London. However, London-Athens flights were via Lipad Airways. Revenues pertaining to said leg amounted t o P850,000 in which 70% were sold in the Philippines. Passenger revenues of P3,200,000 where 65% of the tickets were sold i n the Philippines while 35% were sold abroad. These pertai n to flights from Athens to Manila via London. However, Athens-London flights were via Lipad Airways. Rev enues pertaining to said leg amounted t o P1,000,000 in which 65% were sold in the Philippines. Excess baggage revenues of P1,000,000 and cargo revenues of P1,550,000 f or direct flights from Manila to London. Excess baggage revenues of P1,200,000 and cargo revenues of P1,650,000 f or direct flights from London to Manila. Excess baggage revenues of P1,300,000 and cargo revenues of P1,750,000 for flights from Manila to Paris via Taipei. Excess baggage revenues of P400,000 and cargo revenues of P350,000 pertain to Manila-Taipei leg. Excess baggage revenues of P1,400,000 and cargo revenues of P1,800,000 for flights from Paris to Manila via Taipei. Excess baggage revenues of P350,000 and cargo revenues of P450,000 pertain to Taipei-Manila leg. Excess baggage revenues of P1,500,000 for flights from Manila to Athens via London. London-Athens flights were via Lipad Airways. Rev enues of P500,000 pertain to London-Athens leg. Excess baggage revenues of P1,700,000 for flights from Athens to Manila via London. Athens-London flights were via Lipad Airways. Revenues pert aining to said leg amounted t o P650,000.

Required: 1. Determine the Gross Philippine Billings Tax of Himpapawid for the year ended December 31, 20A1, assuming there is no reciprocity between the Philippines and United Kingdom with respect to taxation of  international carriers. 2. Determine the Gross Philippine Billings Tax of Himpapawid for the year ended December 31, 20A1, assuming there is reciprocity between the Philippines and United Kingdom with respect to taxation of  international carriers. Problem 82 – Income subject to final t axes; domestic corporations; resident foreign corporations Kalusugan Company derived the following income for the year ended December 31, 20A1: a. b. c. d. e. f.

g. h. i.  j. k. l.

Interest income of P60,000 on bank deposit in the regular banking unit of a bank. Interest income of P30,000 on bank deposit in the foreign currency deposit unit of a bank. Interest income of P400,000 on investment in bonds with remaining maturity of two years. Interest income of P900,000 on investment in bonds with remaining maturity of four years. Interest income of P1,000,000 on investment in bonds with remaining maturity of six years. Income from trust fund of P200,000 maintained with a bank. This was composed of P50,000 rental income derived by the fund, P85,000 dividend income from a domestic corporation, and P65, 000 gain from sale of shares traded i n the Philippine Stock Exchange. Dividend income of P100,000 from investment in shares of a domestic corporation. Dividend income of P80,000 from investment in shares of a foreign corporation. Gain of P1,250,000 from over the counter sale of shares in a domestic corporation. Gain of P5,000,000 from sale of condominium unit classified as capital asset with selling price of  P5,000,000 and fair market value of P6,000,000. Royalty income (considered as passive income) of P1,500,000 from patents and trademarks. Franchise fee of P1,000,000 from its franchising business.

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Required: 1. Determine the final income tax for the year ended December 31, 20A1 if Kalusugan is a domestic corporation. 2. Determine the final income tax for the year ended December 31, 20A1 if Kalusugan is a resident foreign corporation. Problem 83 – Taxation of non-resident f oreign corporations The following are independent situations rel ative to the transactions of Moderno Corporation, a non-resident foreign corporation based in South Africa with Makaluma Corporation, a domestic corporation for the y ear  ended December 31, 20A1: a. Moderno rendered consultancy services to Makaluma. Makaluma paid Moderno consultancy fees of  P500,000. Out of said amount, P300,000 was attributable to services rendered by Moderno’s employees in the Philippines while the balance pertains to services rendered in South Africa. b. Moderno provided technical services to Makaluma, which qualify as royalties. Makaluma paid Moderno technical service fees of P500,000. Out of said amount, P300,000 was attri butable to services rendered by Moderno’s employees in the Philippines while the balance pertains to services rendered in South  Africa. c. Moderno charged Makaluma service fees of P500,000 for the use of cinematographic films in the Philippines. d. Moderno leased a shipping vessel to Makaluma in the Philippines, as approved by MARINA, for  P500,000. e. Moderno leased specialized equipment to Makaluma for P500,000. Said equipment was transported from South Africa to the Philippines. f. Moderno lent P10,000,000 to Makaluma bearing 5% interest. The loan was outstanding for the entire 20A1. g. Moderno had investment in Makaluma shares. During 20A1, Makaluma paid dividend of P500,000. Dividend received by Moderno was not subject to tax in South Africa. h. Moderno had investment in Makaluma shares. During 20A1, Makaluma paid dividend of P500,000. Dividend received by Moderno was subject to tax in South Africa. South African law does not allow tax credits for taxes deemed to have been paid in the Philippines. i. Moderno had investment in Makaluma shares. During 20A1, Makaluma paid dividend of P500,000. Dividend received by Moderno was subject to tax in South Africa. South African law al lows tax credits for taxes deemed to have been paid in the Philippines equivalent to 15 %.  j. Moderno sold its investment in Makaluma shares for P1,200,000. Said shares were acquired for  P700,000. Required: Determine the final tax on income derived by Moderno from sources within the Philippines for the year ended December 31, 20A1. Problem 84 – Improperly accumulated earnings tax Magiliw Corporation is a domestic corporation and a wholly-owned subsidiary of Malambing Corporation, another domestic corporation. Malambing is a family corporation which is owned Mr. and Mrs. Malambing and kids. Magiliw had the following financial information for t he years ended December 31, 20A0 to 20A2:

Net sales Cost of sales Business expenses Dividend from domestic corporation Income subjected to 20% final tax, gross  Appropriated retained earnings

20A0 P4,200,000 1,200,000 800,000 200,000 150,000 -0-

20A1 P8,000,000 3,200,000 1,000,000 420,000 250,000 -0-

20A2 P12,000,000 4,500,000 1,500,000 500,000 300,000 -0-

The following are the additional information: · Magiliw paid dividend of P600,000 on April 1, 20A2 which came from 20A0 and 20A1 earnings for  P100,000 and P500,000 respectively. · Magiliw also paid dividend of P1,500,000 on June 1, 20A3 coming from 20A2 earnings. · Magiliw appropriated retained earnings of P3,000,000 in 20A1 for future expansion.

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·

Magiliw was incorporated on January 1, 20A0 with capital stock of P1,500,000 and additional paid in capital of P1,200,000. There were no changes in these amounts from 20A0 t o 20A2.

Required: 1. Determine the improperly accumulated taxable earnings for the years ended December 31, 20A0, 20A1 and 20A2. 2. Determine the improperly accumulated earnings tax (IAET) for the years ended December 31, 20A0, 20A1 and 20A2. 3. Assume that Magiliw appropriated its retained earnings of P3,000,000 as of December 31, 20A1, determine the improperly accumulated taxable earnings and IAET for the years ended December 31, 20A1 and 20A2.

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UNIT 9 – TAX ON PART NERSHIPS, ESTATES AND TRUSTS Problem 85 – Taxation of partnership and individual partners; itemized deduction and OSD Sumakwel and Makatunaw Partnership is a general professional partnership, with Mr. Sumakwel and Mr. Makatunaw as partners. They share equally in the partnership net income and loss. The partnership had gross revenues of P6,000,000, cost of services of P1,200,000 and business expenses of P800,000 for the year ended December 31, 20A1. Mr. Sumakwel, who is single, had personal gross revenues of P800,000, cost of services of P200,000 and business expenses of P100,000 during the same taxable year. Mr. Makatunaw, who is married, with two qualified dependents, had personal gross revenues of P900,000, cost of services of P120,000 and business expenses of P80,000. Mr. Sumakwel and Mr. Makatunaw withdrew only 60% of their r espective share in the partnership income. The Partnership and the partners adopted the itemized deduction in calculating their income tax liabilities. Required: 1. Determine the income tax liability of the Partnership for the year ended December 31, 20A1. 2. Determine the income tax liability of Mr. Sumarkwel for the year ended December 31, 20A1. 3. Determine the income tax liability of Mr. Makatunaw for the year ended December 31, 20A1. 4. Assuming that the Partnership and Mr. Sumakwel adopted the optional standard deduction (OSD), determine the income tax liability of Mr. Sumakwel for the year ended December 31, 20A1. 5. Assuming that the Partnership adopted the optional standard deduction (OSD) while Mr. Makatunaw adopted the itemized deduction, determine the income tax liability of Mr. Makatunaw for the year ended December 31, 20A1. 6. Assuming that the Partnership is a business partnership, determine the income tax liability of the Partnership for the year ended December 31, 20A1. 7. Assuming that the Partnership is a business partnership, determine the income tax liability of Mr. Sumakwel for the year ended December 31, 20A1. 8. Assuming that the Partnership is a business partnership, determine the income tax liability of Mr. Makatunaw for the year ended December 31, 20A1. Source: Reyes (2006) modified.

Problem 86 – Taxation of estate and beneficiaries On February 1, 20A0, Mr. Bangkaya died living a net estate of P3, 000,000. The estate was in the hands of Mrs. Libay, the executor. Mrs. Dumangsil, married, was one of the heirs to the estate. The estate had gross income of P300,000 and expenses of P50,000 on the properties in the estate for the year ended December 31, 20A1. Mrs. Dumangsil had personal income and expenses of P50, 000 and P10,000 respectively. Mrs. Libay, distributed to Mrs. Dumangsil, properties amounting to P100,000 and i ncome of P60,000. Required: 1. Determine the income tax liability of the estate for the year ended December 31, 20A1. 2. Determine the income tax liability of Mrs. Dumangsil for the year ended December 31, 20A1. Source: Reyes (2006) modified.

Problem 87 – Taxation of trusts Mr. Paiburong created two Trusts, Trust A and Trust B for his daughter, Kapinangan. He appointed Atty. Katurong and Atty. Domalogdog, as trustees. Trust A had gross income of P780,000 and ex penses of P250,000 while Trust B had gross income of P890,000 and expenses P350,000 for the year ended December 31, 20A1. There were distributions to Kapinangan coming f rom the two Trusts amounting to P100,000 from Trust A and P80,000 from Trust B. Required: 1. Determine the individual income tax liability of Trust A and Trust B for the year ended December 31, 20A1. 2. Determine the allocated income tax liability of Trust A and Trust B after consolidation for the year ended December 31, 20A1. 3. Determine the income tax liability of the beneficiary for the year ended December 31, 20A1. Assume the taxpayer adopted the OSD. Source: Reyes (2006) modified.

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UNIT 10 – ACCOUNTING METHODS Problem 88 – Cash basis Mr. Masagana, married, with three qualified dependents, is engaged in trading business. The f ollowing information relates to his business for the year ended December 31, 20A1: Sales on account Cash sales during the year Collections of 20A1 sales on account Collections of 20A0 sales on account Purchases on account Cash purchases Payments for 20A1 purchases on account Payments for 20A0 purchases on account Expenses on account Cash expenses Payments for 20A1 expenses on account Payments for 20A0 expenses on account

P300,000 400,000 175,000 250,000 120,000 100,000 70,000 50,000 180,000 130,000 80,000 60,000

Mr. Masagana adopted the cash basis of accounting for income tax purposes. In addi tion, he opted to use the itemized deduction. Required: 1. Determine Mr. Masagana’s taxable income for the year ended December 31, 20A1. 2. Determine Mr. Masagana’s income tax liability for the year ended December 31, 20A1. 3. Determine Mr. Masagana’s taxable income for the year ended December 31, 20A1 assuming he adopted the optional standard deduction. 4. Determine Mr. Masagana’s income tax liability for the year ended December 31, 20A1 assuming he adopted the optional standard deduction. Problem 89 – Hybrid method Mrs. Masigasig with one qualified dependent, i s engaged in trading and manufacturing businesses. The following information relates to her businesses for the year ended December 31, 20A1:

Sales on account Cash sales during the year Collections of 20A1 sales on account Collections of 20A0 sales on account Purchases on account Cash purchases Payments for 20A1 purchases on account Payments for 20A0 purchases on account Expenses on account Cash expenses Payments for 20A1 expenses on account Payments for 20A0 expenses on account

Trading P350,000 400,000 180,000 220,000 100,000 90,000 80,000 75,000 280,000 170,000 150,000 120,000

Manufacturing P370,000 350,000 150,000 120,000 120,000 100,000 75,000 80,000 220,000 175,000 120,000 100,000

Mrs. Masagana adopted the cash basis of accounting for her trading business and accrual basis of accounting for her manufacturing business. In addi tion, she opted to use the itemized deductions. There were no beginning and ending inventories. Required: 1. Determine Mrs. Masigasig’s taxable income for the year ended December 31, 20A1. 2. Determine Mrs. Masigasig’s income tax liability for the year ended December 31, 20A1. 3. Determine Mrs. Masigasig’s taxable income for the year ended December 31, 20A1 assuming he adopted the optional standard deduction. 4. Determine Mrs. Masigasig’s income tax liability for the year ended December 31, 20A1 assuming he adopted the optional standard deduction.

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Problem 90 – Farming: cash or accrual method Mr. Magsasaka, a farmer, single, had t he following information for the year ended December 31, 20A1: Sales of livestock and farm products raised Sales of livestock and farm products purchased Cost of raising livestock and farm products paid in 20A1 Cost of livestock and f arm products purchased and sold paid in 20A1 Gain on sale of farm equipment Proceeds from crop insurance Inventory of livestock and farm products, January 1 Inventory of livestock and farm products, December 31

P170,000 60,000 90,000 40,000 5,000 10,000 10,000 13,000

In addition, the following information relates to Mr. Magsasaka’s other deductions: Cash expenses paid in 20A1 for current year’s expenses Cash expenses paid in 20A1 for prior year’s expenses Expenses incurred in 20A1 but not yet paid

P30,000 25,000 20,000

Mr. Magsasaka adopted the cash basis of accounting for purposes of calculating his taxable income. Required: 1. Determine Mr. Magsasaka’s taxable income for the year ended December 31, 20A1. 2. Determine Mr. Magsasaka’s income tax liability for the year ended December 31, 20A1. 3. Determine Mr. Magsasaka’s taxable income for the year ended December 31, 20A1 assuming he adopted the accrual basis of accounting. 4. Determine Mr. Magsasaka’s income tax liability for the year ended December 31, 20A1 assuming he adopted the accrual basis of accounting. Source: Reyes (2006) modified.

Problem 91 – Real property: Deferred payment basis, installment method Dalaga Corporation, a real estate dealer, sold the following condominium units for the year ended December  31, 20A1: · · · ·

·

March 1, 20A1 – Unit A for P2,500,000 with cost of P1,000,000, downpayment of P100,000 and the balance was payable monthly for P100,000 beginning April 1, 20A1 for 24 months. July 1, 20A1 – Unit B for P3,200,000 with cost of P1,200,000, downpayment of P200,000 and the balance was payable monthly for P125,000 beginning August 1, 20A1 for 24 months. September 1, 20A1 – Unit C for P4,000,000 with cost of P1,800,000, downpayment of P250,000 and the balance was payable monthly for P150,000 beginning October 1, 20A1 for 25 months. November 1, 20A1 – Land for P1,250,000 to be paid by an assumption by the buyer of P600,000 mortgage, downpayment of P130,000 and monthly i nstallment payments of P20,000 every month starting December 1, 20A1 for 26 months. Land had acquisition cost of P500,000. December 1, 20A1 – Land for P1,000,000 to be paid by an assumption of the buyer of P400,000 mortgage, downpayment of P250,000 and monthly i nstallment payments of P10,000 every month starting December 31, 20A1 for 25 months. Land had acquisition cost of P480,000.

Dalaga had deductible expenses of P1, 200,000 during the taxable year. It opt ed to use the installment method of accounting for qualifying sales transactions and itemized deduction. It was incorporated and regi stered with the BIR five years ago. Required: 1. Determine Dalaga’s taxable income for the year ended December 31, 20A1. 2. Determine Dalaga’s income tax liability for the year ended December 31, 20A1. 3. Determine Dalaga’s taxable income for the year ended December 31, 20A1 assuming it adopted the deferred payment basis on all sales transactions. 4. Determine Dalaga’s income tax liability for the year ended December 31, 20A1 assuming it adopted the deferred payment basis on all sales transactions.

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Problem 92 – Dealer of personal property: Deferred payment; installment method Binata Corporation, a car dealer, made the following sales transactions for the year ended December 31, 20A1:

Date of sale Selling price Cost Downpayment Monthly installment

Car A February 1 P1,200,000 400,000 200,000

Car B April 1 P1,500,000 600,000 300,000

Car C June 1 P1,700,000 750,000 500,000

Car D September 1 P1,800,000 800,000 300,000

Car E December 1 P2,000,000 1,100,000 500,000

20,000

20,000

20,000

30,000

30,000

The monthly installments were paid starting from the subsequent m onth of sale until fully paid. Binata had deductible expense of P500,000 during the taxable year. It adopted the installment method in computing its taxable income. Moreover, Binata was registered with the BIR on December 1, 20A0. Required: 1. Determine Binata’s taxable income for the year ended December 31, 20A1. 2. Determine Binata’s income tax liability for the year ended December 31, 20A1. 3. Determine Binata’s taxable income for the year ended December 31, 20A1 assuming it adopted the deferred payment method. 4. Determine Binata’s income tax liability for the year ended December 31, 20A1 assuming it adopted the deferred payment method. Problem 93 – Construction, percentage of completion Kanluran Construction Company entered into a fix ed-price contract with Silangan Company on July 1, 20A1 to construct a four-story office buil ding. At this time, Kanluran estimated that it would take bet ween two to three years to complete the project. T he total contract price for the construction of the building was P6,000,000. The building was completed on December 31, 20A3. The following information relates to the project as of December  31, 20A1 to 20A3:

Percentage of completion Costs incurred to date Estimated costs to complete Billings to Silangan, to date

20A1 10% P350,000 3,150,000 720,000

20A2 60% P2,500,000 1,700,000 2,170,000

20A3 100% P4,250,000 -03,600,000

The percentage of completion was determined by Kanluran’s engineers. Kanluran incurred operating expenses of P350,000 in 20A1, P400,000 in 20A2 and P450,000 in 20A3. These operating expenses were tax deductible. Kanluran was incorporated and registered with the BIR seven years ago. Required: 1. Determine Kanluran’s taxable income for the years ended December 31, 20A1, 20A2 and 20A3. 2. Determine Kanluran’s income tax liability for the years ended December 31, 20A1, 20A2 and 20A3. Problem 94 – Inventory method, change i n accounting method Hilaga Company’s inventory records contained t he following information regarding its inventories for the years ended December 31, 20A1 and 20A2: January 1, 20A1 Purchases March 15, 20A1 June 1, 20A1 December 31, 20A1 Sales February 1, 20A1 July 1, 20A1 December 1, 20A1 Income Taxation (ACCTAX1) Tax Problems

600 units at P80 each 1,000 units at P95 each 800 units at P100 each 200 units at P105 each 400 units at P120 each 800 units at P130 each 500 units at P135 each Academic Year 2016-2017 Page 62

Purchases March 31, 20A2 May 31, 20A2 October 31, 20A2 Sales March 1, 20A2 June 30, 20A2 December 31, 20A2

900 units at P110 each 800 units at P115 each 700 units at P120 each 700 units at P140 each 1,000 units at P145 each 500 units at P150 each

Hilaga adopted the FIFO method in accounting for its inventories for income tax purposes. Howev er, starting January 1, 20A2, it adopted the moving average method in accounting f or its inventories. Moreover, it adopted the optional standard deduction f or purposes of calculating its taxable income for bot h taxable years. Hilaga was registered with the BI R on January 1, 20A0. Required: 1. Determine 2. Determine 3. Determine 4. Determine

Hilaga’s Hilaga’s Hilaga’s Hilaga’s

taxable income for income tax liability taxable income for income tax liability

the year ended December 31, 20A1. for the year ended December 31, 20A1. the year ended December 31, 20A2. for the year ended December 31, 20A2.

Problem 95 – Accounting periods: Calendar or f iscal year, excess MCIT over RCIT, NOLCO Tatak Corporation had the following information for the year ended December 31, 20A3: Net sales Cost of sales Deductions

P5,000,000 1,800,000 3,000,000

It had excess MCIT over RCIT and NOLCO as follows:

December 31, 20A0 December 31, 20A1 December 31, 20A2

Excess MCIT P30,000 20,000 10,000

NOLCO P350,000 100,000 -0-

Starting 20A4, it changed its accounting period to March 31. It had the following information for the periods ended March 31, 20A4 and 20A5:

Net sales Cost of sales Deductions

20A4 P1,000,000 300,000 400,000

20A5 P7,000,000 2,500,000 1,000,000

Required: 1. Determine the Tatak’s RCIT for the periods ended December 31, 20A3, March 31, 20A4 and 20A5. 2. Determine the Tatak’s MCIT for the periods ended December 31, 20A3, March 31, 20A4 and 20A5. 3. Determine the Tatak’s income tax liability for the periods ended December 31, 20A3, March 31, 20A4 and 20A5.

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UNIT 11 – FILING OF RETURNS, PAYMENT OF TAX AND A DMINISTRATIVE REQUIREMENTS Problem 96 – Individual compensation income earners; withholdi ng tax; substituted filing The following are independent situations regardi ng the compensation and benefits received by Mr. Lanzones, a citizen, for the year ended December 31, 20A1: a.

Mr. Lanzones, single, with PWD dependent who is his brother, was employed by Camachile Corporation, a Large Taxpayer, as notified by the BIR. He received m onthly compensation of P30,000 which was paid P15,000 every 15th and P15,000 every 30th of the month. In addition, he also received a rice subsidy of P1,200 every 30th of the month. Moreover, he also received 13th month pay of P30,000 on November 15, 20A1, 14th month pay of P30,000 on December 15, 20A1, and performance bonus of  P60,000 on October 30, 20A1. Camachile correct withheld the taxes on his compensation.

b.

Mr. Lanzones, single, with PWD dependent who is his brother, was employed by Camachile Corporation until May 31, 20A1. Camachile is a Large Taxpayer, as notified by the B IR. He received monthly compensation of P30,000 which was paid P15,000 ev ery 15th and P15,000 every 30th of the month. In addition, he received a rice subsidy of P1,200 every 30th of the month. Moreover, he also received pro-rated 13th month pay as part of his final pay with Camachile which was paid May 31, 20A1 together with his last half-month pay. He joined Duhat Corporation starting June 1, 20A1. Duhat is not a Large Taxpayer or a Top 20,000 corporation. It also uses the m anual books of accounts. Mr. Lanzones received monthly compensation of P40,000 which was paid P20,000 every 15th and P20,000 every 30th of the month. In addition, he received pro-rated 13th month pay on November 15, 20A1 and performance bonus of P50,000 on December 31, 20A1. Camachile correctly withheld taxes on his compensation. Moreover, Duhat correctly consolidated the c alculation of his income tax liability together  with his compensation from Camachile.

Required: 1. Determine the monthly withholding taxes withheld by Camachile and Duhat under each scenario for the year ended December 31, 20A1. Use the withholding tax table prescribed under RR No. 2-98, as amended. 2. Determine the due date for filing the monthly withholding tax return and remittance of the related tax of  Camachile and Duhat for the year ended December 31, 20A1. 3. Determine the income tax liability of Mr. Lanzones under each scenario for the year ended December  31, 20A1. 4. Determine the income tax that will be paid by Mr. Lanzones when he filed his income tax return under  each scenario, if required. Determine the due date for filing of the tax return and payment of the tax. 5. Prepare the annual income tax return of Mr. Lanzones under each scenario, if required, for the year  ended December 31, 20A1. Please fill-up all the required boxes. Please put “XXX” for those boxes where no information are provided. Problem 97 – Individual business income earners, mixed income; quart erly and annual; installment payment Mr. and Mrs. Dalandan, Filipino resident citizens, hav e six qualified dependents. Mr. Dalandan was an employee Pomelo Corporation for the year ended December 31, 20A1. Mrs. Dalandan, on the other hand, was also an employee of Rambutan Company and at the same time had a trading business for the year ended December 31, 20A1. The following information pertain Mr. Dalandan’s compensation and benefits f rom Pomelo: Salaries and allowances 13th month pay and other benefits Payroll deductions SSS contributions Philhealth contributions Pag-ibig contributions Labor union dues

P240,000 40,000 P5,000 2,000 1,800 1,000

Pomelo properly and correctly withheld taxes on Mr. Dalandan’s compensation during the year. Mrs. Dalandan, on the other hand, had the following information regarding her compensation and benefits from Rambutan: Income Taxation (ACCTAX1) Tax Problems

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Salaries and allowances 13th month pay and other benefits Payroll deductions SSS contributions Philhealth contributions Pag-ibig contributions

P216,000 25,000 P4,000 3,000 1,200

Rambutan properly and correctly withheld t axes on Mrs. Dalandan’s compensation during the year. Moreover, the following information relate to t he trading business of Mrs. Dalandan for each of the quarters:

Sales Cost of sales Expenses

First Quarter P50,000 25,000 10,000

Second Quarter P90,000 50,000 15,000

Third Quarter P70,000 40,000 14,000

Fourth Quarter  P80,000 42,000 18,000

Mr. and Mrs. Dalandan opted t o pay their income tax liabilities, if any, on installment. Required: 1. Determine the income tax withheld on compensation of Mr. Dalandan for the year ended December 31, 20A1. 2. Determine the income tax withheld on compensation of Mrs. Dalandan for the year ended December  31, 20A1. 3. Determine the quarterly income tax liability of Mrs. Dalandan on her business income for the year  ended December 31, 20A1. Determine the deadline for filing of her tax returns and payment of taxes. 4. Determine the annual income tax liability of Mrs. Dalandan for the year ended December 31, 20A1. 5. Determine the amount of tax that will be paid by Mr. and Mrs. Dalandan in filing their annual income tax return for the year ended December 31, 20A1. Determine the deadline for filing of their tax return and payment of tax. 6. Prepare the quarterly and annual income tax returns of Mr. and Mrs. Dalandan for the year ended December 31, 20A1. Please fill-up all the required boxes. Please put “XXX” for those boxes where no information are provided. 7. Determine the attachments to the quarterly and annual income tax returns of Mr. and Mrs. Dalandan for  the year ended December 31, 20A1. Problem 98 – Individuals: capital gains tax on sale of real property, shares Mr. Malaya, widower, had the following transactions duri ng the year: · · · · ·

March 1, 20A1 – sold 10,000 shares of Kadiwa Company for P15 per share. At that time, the shares have fair market value of P17 per share. These shares were acquired for P10 per share. May 20, 20A1 – sold l and for P3,500,000 with fair market value of P3,800,000. These were acquired for  P1,800,000. June 25, 20A1 – sold 15,000 Malumay shares for P20 per share with fair market value of P19 per  share. These shares were acquired for P12 per share. September 8, 20A1 – sold 12, 000 Kapatid shares at fair market val ue for P25 per share. These shares were acquired for P17 per share. November 18, 20A1 – sold residential house which was constructed 10 years ago for P1,000,000 with fair market value of P900,000. These were acquired for P300,000.

Required: 1. Determine Mr. Malaya’s income tax liability for the years ended December 31, 20A1. 2. Determine the deadline for filing the tax returns and payment of the related tax liabilities of Mr. Malaya for the year’s ended December 31 20A1. 3. Prepare Mr. Malaya’s income tax returns for the years ended December 31, 20A1. Please fill-up all the required boxes. Please put “XXX” for those boxes where no information are provided.

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Problem 99 – Corporate income tax r eturns; excess MCIT, NOLCO; creditable withholding taxes Palosebo Co. is a domestic trading corporation. I t had the following data at t he end of each of the first three quarters (cumulative), and for the year ended December 31, 20A1 (sixth year of operations):

Sales Interest income Dividend income Rent income Gain on sale of fixed assets Cost of sales Taxes Interest expense Salaries and bonuses Depreciation Bad debts Casualty loss Contributions Other business expenses Loss on sale of fixed assets

First Quarter P500,000 3,000 35,000

Second Quarter P765,000 5,600 45,000 45,000

Third Quarter P920,000 8,000 80,000 30,000 180,000

Annual P1,180,000 10,500 90,000 60,000 500,000

45,000 100,000 63,435 500 50,000 40,000

175,000 72,379 700 120,000 80,000

240,000 210,886 1,400 180,000 120,000

3,000 30,456 30,000

40,000 5,000 65,700 80,000

40,000 80,000 110,893 105,000

325,000 211,126 2,000 300,000 200,000 150,000 40,000 150,000 156,649 200,000

 Additional information on selected account balances: · The interest income pertains to i nterest on bank deposits subjected to 20% final tax. · The dividend income pertains to dividend received from domestic corporations. · Rent income pertains to income earned duri ng the year. Rentals of P120,000 were collected in advance on July 1, 20A1 covering one-year agreement. · Taxes pertain to quarterly local business tax (LBT) of P14,675, deficiency income tax including penalties pertaining to prior years of P70,000, and the balance pertains to quarterly income taxes paid. · The provision for bad debts of P150,000 was made at the end of the year. Write-off was made in September for P200,000. · Casualty loss was for a partial loss in May of property with a book value of P100,000. The cost to restore the property to its normal operating condition was P120,000. · The contributions during the year pertain to contributions to the Society for the Blind, Inc., a PCNCaccredited charitable institution. Said contributions were f or charitable purposes which qualify for f ull deduction. · Income taxes were withheld on sales for P5,000 during the first quarter, P2,650 for the second quarter, P1,550 for the third quarter and P2,600 for the fourth quarter. · Income tax withheld on the rent received on July 1 was P6,000. Palosebo incurred net operating loss of P500,000 for the year ended December 31, 20A0. Moreover, it paid MCIT of P80,000 and excess creditable t axes withheld of P10,000 during the same year. It opted to carryover  the excess creditable taxes withheld in 20A0 as credit against its future income tax liabilities. However, for the year ended December 31, 20A1, Palosebo opted to claim for r efund the excess creditable taxes withheld. Required: 1. Determine the quarterly and annual taxable income of Palosebo for the year ended December 31, 20A1. 2. Determine the quarterly and annual income tax due of Palosebo for the year ended December 31, 20A1. 3. Determine the amount of excess creditable taxes withheld that can be claimed as refund for the year  ended December 31, 20A1. Determine the deadline for filing the claim for refund. 4. Determine the amount of excess tax credits that can be carried over in the subsequent year(s). Determine the prescription for the carryover. 5. Prepare the quarterly and annual income tax returns of Palosebo for the year ended December 31, 20A1. Please fill-up all the required boxes. Please put “XXX” for those boxes where no information are provided.

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6.

Determine the attachments to the quarterly and annual income tax returns of Palosebo for the year  ended December 31, 20A1.

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UNIT 12 – WITHHOLDING TAXES Problem 100 – Timing of withholding, Top 20,000 cor porations, expanded withholding tax Takip-silim, Inc., a Top 20,000 corporation, had the following income payments for the year ended December  31, 20A1: · · ·

· ·

Purchased of goods for P500,000 on January 15, 20A1 payable within 30 days but with 5% discount is paid within 15 days. Takip-silim paid the purchase price on March 15, 20A1.  Availed repair services for P400,000 on March 1, 20A1 payable within 60 days. Takip-silim paid the contractor on April 15, 20A1. Leased office space starting April 1, 20A1 for one-year for P100,000 monthly. Paid advance rentals of  P500,000 on said date to be applied against rentals f or the last five months. Monthly rental payments were due within 30 days from the beginning of the month. Monthly rentals were paid as follows: Month Date paid  April April 15 May June 15 June July 15 July July 30  August August 30 September September 30 October October 15  Availed the services of security agency for P55,000 monthly, inclusive of P5,000 agency fee and P50,000 salaries of the guards. These were due and paid at the end of the month.  Availed the services of janitorial agency for P22,000 monthly, inclusive of P2,000 agency fee and P20,000 salaries of the j anitors. These were due at the end of the month. Payments were made at the end of the month except for December 20A1 which was paid January 5, 20A2.

Takip-silim adopts the calendar year accounting period. Required: 1. Determine the timing of withholding of EWT on income payments of Takip-silim for the year ended December 31, 20A1. 2. Determine the amount of monthly EWT liability of Takip-silim for the year ended December 31, 20A1. 3. Determine the deadline for filing of the monthly EWT returns and remittance of the related tax for the year ended December 31, 20A1. 4. Determine the amount of amount of EWT liability of Takip-silim for the year ended December 31, 20A1, assuming it files its tax returns and pays its taxes manually. Problem 101 – EWT on reimbursements On March 1, 20A1, Kagandahan Company av ailed the brokerage services of Liwanag Brokerage Corporation. Liwanag billed Kagandahan the f ollowing (exclusive of VAT): Brokerage fees Customs processing fee Trucking and delivery charges Warehouse rentals Duties and taxes

P5,000 2,000 4,000 3,500 25,000

The following are the additional information: · The trucking and delivery charges were paid in advance by Liwanag to Kargador Trucking Company on March 15, 20A1. Kargador issued VAT official receipt (OR) in the name of Kagandahan. · The warehouse rentals were paid in advance by Liwanag to Kapaligiran Company on March 20, 20A1. Kapagiliran issued VAT OR in the name of Li wanag. · The customs processing fees, and duties and taxes were paid in advance by Liwanag to the Bureau of  Customs (BOC) on March 25, 20A1. BOC i ssued official receipts in the name of Kagandahan. · Liwanag issued non-VAT acknowledgement receipt for trucki ng and delivery charges, customs processing fee, and customs duties and taxes in the name of Kagandahan. · Liwanag issued VAT OR in the name of Kagandahan for the brokerage f ees and warehouse rentals. · Kagandahan paid Liwanag on April 5, 20A1. Income Taxation (ACCTAX1) Tax Problems

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Required: 1. Determine the EWT liability of Kagandahan for the month ended March 31, 20A1. 2. Determine the EWT liability of Liwanag for the month ended March 31, 20A1. Problem 102 – EWT on real estate sales Patintero Corporation, a real estate developer, sold the following condominium units for the year ended December 31, 20A1: ·

· ·

·

March 1, 20A1 – Sold Unit A to Katuwa Corporation for P2,500,000 with cost of P1,000,000, downpayment of P100,000 and t he balance was payable monthly for P100,000 beginning April 1, 20A1 for 24 months. July 1, 20A1 – Sold Unit B to Mr. Karpintero for P3,200,000 with cost of P1,200,000, downpayment of  P200,000 and the balance was payable monthly for P125,000 beginning August 1, 20A1 for 24 months. September 1, 20A1 – Sold Unit C to Kapitan Corporation for P4,000,000 with cost of P1,800,000, downpayment of P250,000 and t he balance was payable monthly for P150,000 beginning Oct ober 1, 20A1 for 25 months. November 1, 20A1 – Sold land to Mrs. Dyesebel for P1,250,000 with cost of P500,000, dowpayment of  P250,000 and monthly installment payments of P20,000 ev ery month starting December 1, 20A1 for 50 months.

Required: Determine the EWT on the above sales transaction for the year ended December 31, 20A1.

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UNIT 13 – ASSESSMENT AND COLL ECTION OF TAXES Problem 103 – Late filing and l ate payment of income tax, income tax assessments The following are independent situations regardi ng the income tax liability of Piko Corporation: a.

Piko Corporation filed its income tax return for the year ended December 31, 20A1 with taxable income of P1,000,000 and gross incom e of P20,000,000 on April 15, 20A2. It used the 30% RCIT since its accountant thought that it was not liable to MCIT. However, upon consultation with it s tax consultant, it was determined that Piko was already li able to MCIT in 20A1. As such, it filed an amended income tax return and paid the additional tax and penalties on October 15, 20A2.

b.

Piko Corporation filed its income tax return for the year ended December 31, 20A1 and declared taxable income of P1,000,000 and gross income of P14,000,000 on April 15, 20A2. Pi ko was registered with the BIR five years ago. Piko intentionally used the 30% RCIT instead of MCIT. It under-declared gross income to justify that it was liable to RCIT. Its correct gross income was P20,000,000. O n October 1, 20A1, Piko received a notice from the BIR to pay its additional i ncome tax liability including penalties. The assessed amount including penalties were paid on October 15, 20A1.

c.

Piko Corporation filed its income tax return for the year ended December 31, 20A1 with taxable income of P1,000,000 and gross income of P14,000,000 on April 15, 20A2. Piko was registered with the BIR five years ago. Piko received a Letter of Authority from the BIR on January 1, 20A4 and it examined its books. The BIR assessed Piko additional income tax liability since it was determined that its correct gross income was P20,000,000. The BIR issued Preliminary Assessment Notice (PAN) and Final  Assessment Notice (FAN). Piko did not protest the assessment since it believed that it was correct. The BIR required the payment of t he tax and penalties on October 15, 20A4. Piko paid assessed amount including penalties on October 15, 20A4.

d.

Piko Corporation filed its income tax return for the year ended December 31, 20A1 with taxable income of P1,000,000 and gross income of P14,000,000 on April 15, 20A2. Piko was registered with the BIR five years ago. Piko received a Letter of Authority from the BIR on January 1, 20A4 and it examined its books. The BIR assessed Piko additional income tax liability since it was determined that its correct gross income was P20,000,000. The BIR issued Preliminary Assessment Notice (PAN) and Final  Assessment Notice (FAN). Piko did not protest the assessment since it believed that it was correct. The BIR required the payment of t he tax and penalties on October 15, 20A4. However, Piko paid the assessed amount including penalties on October 31, 20A4.

Required: Determine income tax, deficiency income tax and penalties paid by Piko Corporation on the given dates in all situations.

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UNIT 14 – OMNIBUS INVESTMENTS CODE Problem 104 – Income tax holiday; commencement Laruan Manufacturing Company is engaged in the manufacture of toys for export. It was incorporated and registered with the BIR in December 20A0. It registered with the Board of Inv estments (BOI) and enjoyed income tax holiday (ITH) incentive. Its ITH incentive commenced on May 1, 20A1, which is the start of its commercial operations. The following information relates to its operations f or the year ended December 31, 20A1:

Sales Interest income Scrap sales Gain on sale of fixed assets Foreign exchange gain Cost of sales Interest expense Salaries and bonuses Depreciation Pension expense Other business expenses Foreign exchange loss

January 1 to  April 30 P100,000 20,000

60,000

May 1 to December 31 P8,000,000 100,000 300,000 1,250,000 420,000

20,000 400,000 300,000 400,000 300,000 30,000 50,000

3,200,000 600,000 2,500,000 1,600,000 600,000 65,000 330,000

The following are the additional information: · Interest income pertains to i nterest subjected to 20% FWT. The amount recorded was gross of tax. · Scrap sales pertain to sale of scraps which have undergone production of P200,000 while the balance pertains to scrap raw materials sold. · Gain on sale of fixed assets pertains to gain from sale of equipment. · Foreign exchange gain pertains to realized and unrealized gains. Out of the total amount, 30% of the gain from May to December 31, 20A1 was not realized yet. The bal ance was already realized during the year. These pertain to trade transactions. · Interest expense pertains to interest on loans used in connection with Laruan’s trade or business. · Pension expense pertains to accrual of pension obligation based on PAS 19. · Foreign exchange loss pertains to realized and unrealized losses. Out of the total amount, 20% of the loss from May to December 31, 20A1 was not r ealized yet. The balance was already realized during the year. These pertain to trade transactions. Required: 1. Determine 2. Determine 3. Determine 4. Determine

the the the the

taxable income subject to income tax for the year ended December 31, 20A1. taxable income covered by ITH for the year ended December 31, 20A1. income tax liability for the year ended December 31, 20A1. income tax savings related to its ITH for the year ended December 31, 20A1.

Problem 105 – Expiration of income tax holiday Kapistahan Company is engaged in the m anufacture of electronic items for export. It registered with the BOI and enjoyed income tax holiday (ITH) i ncentive for 6 years. Its ITH i ncentive expired on September 30, 20A1. The following information relates to its operations f or the year ended December 31, 20A1:

Sales Interest income Dividend income Scrap sales Gain on sale of fixed assets

Income Taxation (ACCTAX1) Tax Problems

January 1 to September 30 P12,000,000 100,000 400,000 350,000

October 1 to December 31 P5,000,000 70,000 1,000,000 200,000 250,000

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Foreign exchange gain Cost of sales Interest expense Salaries and bonuses Depreciation Impairment loss Provision for doubtful accounts Pension expense Other business expenses

450,000

320,000

4,000,000 700,000 3,900,000 1,800,000

1,500,000 300,000 1,800,000 600,000 1,000,000 800,000 250,000 85,000

750,000 230,000

The following are the additional information: · Interest income pertains to i nterest subjected to 20% FWT. The amount recorded was net of tax. · Scrap sales pertain to sale of scraps which have undergone production of P300,000 for those sold until September 30 and P120,000 for those sold after said date. The balance pertains to scrap raw materials sold. · Gain on sale of fixed assets pertains to gain from sale of equipment. · Foreign exchange gain pertains to realized and unrealized gains from trade transactions. Out of the total amount, 35% of the gain from January to December 31, 20A1 was not realized yet. · Interest expense pertains to interest on loans used in connection with Kapistahan’s trade or business. · Pension expense pertains to accrual of pension obligation based on PAS 19. Contributions during the year pertaining to normal cost amounted to P1,200,000. Proportionate amount based on number of  months pertains to ITH. ·  Accounts written-off during the year amounted to P500,000. These pertain to receivables during ITH period. Required: 1. Determine 2. Determine 3. Determine 4. Determine

the the the the

taxable income subject to income tax for the year ended December 31, 20A1. taxable income covered by ITH for the year ended December 31, 20A1. income tax liability for the year ended December 31, 20A1. income tax savings related to its ITH for the year ended December 31, 20A1.

Problem 106 – Multiple registrations; expansion Balsa Company, Inc., a manufacturer of motor v ehicle, is an entity registered with the BOI. I t had two registered activities. One activity pertains to a new product line while the other activit y pertains to expansion of its old product line. These activities enjoyed ITH for the year ended December 31, 20A1. Balsa was registered with the BIR eight years ago. The following information relates to these activities:

Sales Cost of sales Deductions

New product P12,000,000 4,000,000 2,000,000

Old product P20,000,000 3,000,000 16,000,000

Balsa produced 1,200 units of its new products and 20,000 units of old products. Its base figure for its expansion project was 15,000 units with sales v alue of P14,000,000. The registered products were homogeneous products. Required: 1. Determine 2. Determine 3. Determine 4. Determine

the the the the

taxable income subject to income tax for the year ended December 31, 20A1. taxable income covered by ITH for the year ended December 31, 20A1. income tax liability for the year ended December 31, 20A1. income tax savings related to its ITH for the year ended December 31, 20A1.

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UNIT 15 – SPECIAL ECONOMIC ZONE ACT Problem 107 – 5% gross income tax Kasibulan Company, Inc. is engaged in t he manufacture of automotive wiring harness for ex port. It registered with the Philippine Economic Zone Authority (PEZA) a few years ago and its ITH expired on September 30, 20A0. Hence, it was subject to 5% gross income tax (GIT) starting October 1, 20A0. The following information relates to its operations f or the year ended December 31, 20A1: Sales Interest income on loans Interest income on bank deposit Dividend income Scrap sales Gain on sale of fixed assets Foreign exchange gain

P15,000,000 100,000 50,000 250,000 750,000 1,000,000 600,000

Cost of sales Raw materials Indirect materials Salaries and wages Pension expense Depreciation Repairs and maintenance Royalty fees Subcontractor’s fees Rentals Training

1,200,000 500,000 1,500,000 350,000 1,000,000 300,000 450,000 800,000 650,000 225,000

Operating expenses Supplies Salaries and wages Pension expense Depreciation Repairs and maintenance Utilities Rentals Janitorial Security Interest Doubtful accounts Impairment loss

300,000 420,000 100,000 375,000 125,000 220,000 180,000 160,000 210,000 580,000 300,000 250,000

The following are the additional information: · Scrap sales pertain to 25% raw materials and 75% work-in-process. · Dividend income pertains to dividend from a domestic corporation. · Gain on sale of fixed assets pertain to obsolete equipment no longer used in production. · Foreign exchange gain pertains to unrealized gains relating to loans (60%) and trade receivables (40%). Kasibulan realized gains of P500,000 during the year where 65% pertains to loans and 35% pertains to trade receivables. · Cost of sales pertain to expenses incurred by Kasibulan’s production department. · Pension expense recorded pertains to accruals under PAS 19. Contributions equivalent t o normal cost amounted to P500,000 where 80% pertai ns to production and 20% to administration. · Interest expense pertains to interest on loans obtained to finance the construction of its factory. Kasibulan claimed 50% of the training expenses as credit against its GIT liability. Required: 1. Determine Kasibulan’s gross income subject to 5% GIT for the year ended December 31, 20A1. 2. Determine Kasibulan’s 5% GIT for the year ended December 31, 20A1.

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3. 4. 5. 6. 7.

Determine Determine Determine Determine Determine

Kasibulan’s Kasibulan’s Kasibulan’s Kasibulan’s Kasibulan’s

taxable income subject to 30% RCIT for the year ended December 31, 20A1. RCIT and MCIT for the year ended December 31, 20A1. tax liability payable to the BIR for the year ended December 31, 20A1. tax liability payable to the LGU for the year ended December 31, 20A1. tax savings for the year ended December 31, 20A1.

Problem 108 – Multiple registrations Kalinisan Manufacturing Company, Inc. is engaged in the m anufacture of various optical products with two product lines and warehousing business. These activ ities were separately registered with PEZA. The following are the details of its registrations:

Expiration of ITH Type of registration Tax regime

Product Line A January 1, 20A0 New, Non-pioneer ITH, 5% GIT

Product Line B June 30, 20A3 New, Non-pioneer ITH, 5% GIT

Warehousing None Not applicable 30% RCIT/2% MCIT

Kalinisan was registered with the BIR five years ago. The following information relates to Kalinisan’s operations for the year ended December 31, 20A1:

Sales/Revenues Direct costs/Cost of services Operating expenses

Product Line A P10,000,000 6,000,000 2,000,000

Product Line B P12,000,000 6,800,000 3,000,000

Warehousing P3,000,000 800,000 280,000

The following are the additional information: · Direct costs include provi sion for inventory obsolescence of P200,000 for Product Line A and P280,000 for Product Line B. · Direct costs include depreciation of P800,000 for Product Line A and P1,000,000 for Product Line B related to impaired assets. Tax depreciation amounted to P900,000 for Product Line A and P1,200,000 for Product Line B. · Operating expenses include provision for doubtful accounts of P225,000 for Product Line A and P250,000 for Product Line B, and provision for potential litigation losses of P350,000 relating to Product Line B. · Revenues from warehousing activities include rev enues collected in advance and subjected to income tax in 20A0 of P300,000. There were advance collections during 20A1 am ounting to P400,000 which were not yet subjected to income tax. Required: 1. Determine 2. Determine 3. Determine 4. Determine 5. Determine 6. Determine 7. Determine

Kalinisan’s gross income subject to 5% GIT for the year ended December 31, 20A1. Kalinisan’s 5% GIT for the year ended December 31, 20A1. Kalinisan’s taxable income subject to 30% RCIT for the year ended December 31, 20A1. Kalinisan’s RCIT and MCIT for the year ended December 31, 20A1. Kalinisan’s tax liability payable to the BIR for the year ended December 31, 20A1. Kalinisan’s tax liability payable to the LGU for the year ended December 31, 20A1. Kasibulan’s tax savings for the year ended December 31, 20A1.

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UNIT 17 – DOUBLE TAXATION AGREEMENTS Problem 109 – Permanent establishment, subcontractor, business profits Bandila Company, Inc., a domestic corporation, entered i nto the following transactions with its affiliate, Inglatera Corporation, a company domiciled in United Kingdom for the year ended December 31, 20A1: ·

·

·

Inglatera rendered administration and accounting services to Bandila which commenced on January 31, 20A1. Inglatera sent three employees to render the serv ices in the Philippines. The two employees were in the Philippines from January 31, 20A1 to March 31, 20A1 while the t hird employee was in the Philippines from April 15, 20A1 to June 15, 20A1. Bandila paid Inglatera P500,000. Inglatera rendered management services t o Bandila which commenced on March 1, 20A1. Inglatera sent one employee to render the services in the Philippines from May 1, 20A1 to December 15, 20A1. Bandila paid Inglatera P700,000. Bandila availed engineering services from Bandila which commenced on May 1, 20A1. However, Inglatera, subcontracted said services to Watawat Philippines Corporation, a domestic corporation. Watawat also provided engineering services to other clients. The services were rendered f rom May 1, 20A1 for 12 months. Bandila paid Inglatera P400,000.

Required: 1. Determine the final withholding tax (FWT) liability of Bandila for the year ended December 31, 20A1. 2. Determine the net payments made by Bandila to Inglatera for the year ended December 31, 20A1. Problem 110 – Permanent establishment; royalties and service f ees; grossing-up Kanyugan Corporation, a domestic corporation, entered into the following agreements with certai n non-resident foreign corporations, for the year ended December 31, 20A1: ·

·

· ·

Licensing agreement with Singapura Company, a resident of Singapore, for the use of know-how in the production process. License fees paid during the year amounted to P350,000, exclusive of Philippine income tax, if any. Singapura did not send any employees to the Philippines in connection with this agreement. Technical service agreement with Hapon Company, a resident of Japan, for technical services rendered. Technical service fees paid during the year amounted to P250,000. Hapon sent employees to the Philippines to render the related services for 200 days. Royalty agreement with Franciscano Corporation, a resident of the United States. Royalty fees paid during the year amounted to P420,000. Franciscano did not send any em ployees to the Philippines. Franchise agreement with Britana Corporation, a resident of British Virgin Islands. Franchise fees paid during the year amounted to P380,000, net of all taxes. Britana send employees to the Philippines for  one-month in connection with this agreement.

Required: 1. Determine the final withholding tax (FWT) liability of Kanyugan for the year ended December 31, 20A1. 2. Determine the net payments made by Kanyugan to the non-residents for the year ended December 31, 20A1. Problem 111 – Permanent establishment; interest and penalties; trade transactions Kapalaran Corporation had the following loans and trade payables with non-residents for the year ended December 31, 20A1: Loan of USD500,000 with 5% interest f rom Amerikano Corporation, a resident of the United States. The loan was outstanding for the entire year. Interest was paid on December 31, 20A1. · Loan of EUR350,000 with 3% interest f rom Europa Corporation, a resident of France. The l oan was outstanding for the entire year. Interest was paid on December 31, 20A1. Europa maintains a Philippine branch engage in construction activities. The said Branch did not participate in the loan transaction. · Loan of HKD5,000,000 with 4% int erest from Hong Corporation, a resident of Hong Kong. The loan was outstanding for the entire year. Interest was paid on December 31, 20A1. ·  Accounts payable of AUD300,000 to Australyano Corporation, a resident of Australia. This was outstanding for two years and penalty of 1% per year was charged. No penalty was paid as of year-end. ·

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·  Accounts payable of EUR250,000 to Praha Corporation, a resident of Czech Republic. This was outstanding for more than one year and penalty of 1.5% was charged. No penalty was paid as of yearend. · Installment payable of SGD200,000 to Singapura Corporation, a resident of Singapore, bearing 1% interest per annum. The liability was outstanding f or the entire year. Interest was paid on December 31, 20A1.

The foreign exchange rates on December 31, 20A1 were as follows: USD1 = EUR1 = HKD1 =  AUD1 = SGD1 =

P50 P53 P6 P40 P33

Required: 1. Determine the final withholding tax (FWT) liability of Kapalaran for the year ended December 31, 20A1. 2. Determine the net payments made/payable by Kapalaran to non-residents for the year ended December 31, 20A1. Problem 112 – Permanent establishment; dividend and branch prof it remittance The following are independent situations rel ative to dividend payments to a non-resident forei gn corporation for  the year ended December 31, 20A1: a. b. c. d.

e. f.

Busilak Philippines Corporation, a domestic corporation, is a wholly-owned by Noruega Corporation, a Norwegian entity. Busilak declared and paid dividend of P1,000,000 during 20A1. Busilak Philippines Corporation, a domestic corporation paid P1,000,000 during 20A1 to Noruega Corporation, a Norwegian entity. Noruega owns 5% of Busilak. Noruega Philippine Branch remitted branch profits of P1,000,000 to its head office, Noruega Corporation, a Norwegian entity. Busilak Philippines Corporation, a domestic corporation, is a wholly-owned by Nederland Corporation, a Dutch entity. Busilak declared and pai d dividend of P1,000,000 during 20A1. Nederland maintains a Philippine Branch. Said Branch did not participate in the investment transaction of Nederland with Busilak. Nederland Philippine Branch remitted branch profits of P1,000,000 to its head office, Nederland Corporation, a Dutch entity. Busilak Corporation, a domestic corporation, is a subsidiary of Britannica Corporation, a resident of  British Virgin Islands. Busilak declared dividend of P1,000,000 during 20A1. Dividend were not taxable in British Virgin Islands.

Required: 1. Determine the final withholding tax (FWT) liability of Busilak, Noruega Philippine Branch and Nederland Philippine Branch for the year ended December 31, 20A1. 2. Determine the net payments made/payable by Busilak, Noruega Philippine Branch and Nederland Philippine Branch to non-residents for the year ended December 31, 20A1. Problem 113 – Sale of shares, real property interest On September 1, 20A1, Energo Corporati on, a non-resident foreign corporation, sold 10,000 shares of Molino Philippines Corporation, a domestic corporation for P1,000 per share. Said shares were acquired for P800 per  share on May 1, 20A0. The f ollowing are the independent situations relative to the residency and real property interests of Energo in Molino: a. b. c. d.

Energo Corporation is a resident of Hong Kong. Molino’s total assets amounted to P30,000,000 in which P17,000,000 pertains to real properties. Energo Corporation is a resident of the United States. Molino’s total assets amounted to P30,000,000 in which P17,000,000 pertains to real properties. Energo Corporation is a resident of Japan. Molino’s total assets amounted to P30,000,000 in which P10,000,000 pertains to real properties. Energo Corporation is a resident of United Kingdom. Molino’s total assets amounted to P30,000,000 in which P17,000,000 pertains to real properties.

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