Chapter 13 - Mixed 2013

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 97 SUGGESTED ANSWERS Chapter 13: MIXED BUSINESS TRANSACTIONS

CHAPTER 13

MIXED BUSINESS TRANSACTIONS Problem 13–1

True or False

1. 2.

True True

3.

False – only those supported with VAT invoice or VAT receipts are allowed to claim input VAT credit. True

4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

False – zero-rated transaction refers to output VAT and not input VAT. Zero-rated VAT transactions have input VAT. False – for the input VAT of zero-rated transaction, the treatment is either VAT credit, refund or TCC issuance. True False – the basis of allocation is sales volume. True True False – costs of sales or operating expense. False – zero-rated VAT transaction. True False – transport of passengers by land is subject to 3% OPT regardless of amount.

Problem 13–2 1. 2. 3. 4. 5. 6.

False True False True False False

7.

False – not anymore subject to OPT tax because such amount is deducted from the gross receipts. True True

8. 9.

– zero-rated transactions. – 12% VAT. – subject to OPT regardless of amount. – life insurance premium is subject to 5% VAT.

10. False – if the monthly rent income is P12,800 and below, not subject to business tax regardless of amount. 11. True 12. False – subject to income tax but not subject to VAT. 13. False – some are subject to OPT. Only those specified by law such as sale of food agricultural products in their original state are exempt both from VAT and OPT. 14. False – only the allocated amount of input VAT related to VAT transactions and zero-rated VAT transactions is allowed as deduction from output VAT.

Problem 13–3 1. 2. 3. 4. 5. 6. 7. 8. 9.

B C A C&D C D B C A

10. B

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 98 SUGGESTED ANSWERS Chapter 13: MIXED BUSINESS TRANSACTIONS

Problem 13 – 4 A Output VAT on taxable transaction Less: Creditable input VAT (P8,640 + P2,880 ) Net VAT payable

Output VAT (P120,000 x 12%) Input VAT – Credited Amount to be remitted (refunded or credited)

P14,400 11,520 P 2,880 Subject to 12% P14,400 8,640 P 5,760

ZeroRated P 0 2,880 (P 2,880)

Allocation of Input VAT Regular sales (P14,400 x 60%) Zero-VAT rate (P14,400 x 20%) VAT-exempt (P14,400 x 20) Input VAT (P134,400/9.333)

VATExempt P 0 None None P 8,640 2,880 2,880 P14,400

Notes: 1.

The amount of Input VAT allocated to regular sales and zero-VAT sales are creditable VAT, while the Input VAT allocated to the VAT-exempt sales are not creditable VAT which should become part of the cost of sales.

2.

Computation of percent of sales: Regular VAT sales Zero-rated sales ($800 x P50) VAT-exempt Total sales

Problem 13 – 5 B Standard input VAT (P15,000 x 7%) Add: Final withholding VAT (P15,000 x 5%) Amount of VAT deductible from sales to government

Percent 60% 20% 20% 100%

Amount P120,000 40,000 40,000 P200,000 P1,050 750 P1,800

Problem 13 – 6 C Total domestic cash sales (P110,000 + P55,000) Sales to government Total sales subject to VAT Multiplied by VAT rate Total Output VAT

P165,000 15,000 P180,000 12% P 21,600

Problem 13 – 7 D Input VAT – export sales (zero-rated) Add: Allocated input VAT – export sales (P250,000 x 8/20) Tax refund or tax credit certificate – applicable to zero-rated VAT only

P 60,000 100,000 P160,000

Problem 13 – 8 A Zero, the business is nonVAT; hence, no input VAT is allowed. Problem 13 – 9 C Output VAT (P2,000,000 x 12%) Less: Input VAT Net VAT payable

P240,000 60,000 P180,000

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 99 SUGGESTED ANSWERS Chapter 13: MIXED BUSINESS TRANSACTIONS

Problem 13 – 10 B Increase in cost of service is the input VAT (P1,120,000/9.333)

P120,000

Problem 13 – 11 C Percentage tax - passengers (P2,000,000 x 3%) VAT taxable transactions - cargoes (P2,000,000 x 12%) Total business tax

P 60,000 240,000 P300,0000

Notes: Additional amount charged in ordinary bus fare tickets issued by common carrier for passengers’ excess baggage is subject to VAT. (BIR Ruling 094-99) Although there is actual Input VAT paid, this could not be claimed as tax credit because the business is non-VAT registered. Problem 13 – 12 B Common carrier’s tax (P1,400,000 x 3%) Output VAT (P1,792,000/9.333) Total business tax Less: Creditable Input VAT (P560,000/9.333) x P1,600,000/P3,000,000 Net business tax payable

P 42,000 192,000 P234,000 32,000 P202,000

Notes: Additional amount charged in ordinary bus fare tickets issued by common carrier for passengers’ excess baggage is subject to VAT. (BIR Ruling 094-99) The creditable Input VAT is prorated between the Vatable and VAT-exempt gross receipts. Problem 13 – 13 D Output VAT [(P30,000/3%) + P3,000,000] x 12% Less: OPT paid Output VAT balance Less: Input VAT Transitional input VAT (P500,000 x 2%) Actual input VAT (P2,240,000/9.333) Net VAT payable

P480,000 30,000 P450,000 P 10,000 240,000

Problem 13–14 1. Letter A Input tax on regular VAT taxable sales Input tax on zero-rated sales Input tax allocated to regular and zero-rated VAT sales (P60,000 x 3/5) Creditable input tax against regular sales output VAT 2.

Letter D Input tax on sales to government Input tax allocated to sales to government (P60,000 x 1/5) Actual input VAT of sales to government

3.

Letter C Input VAT on VAT-exempt sales Excess of actual input VAT over standard input VAT of sales to gov’t. Actual input VAT Less: Std. input VAT (P100,000 x 7%) Input VAT to cost of sales or operating expense

250,000 P200,000

P10,000 4,000 36,000 P50,000 P 3,000 12,000 P15,000 P 4,000 P15,000 7,000

8,000 P12,000

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 100 SUGGESTED ANSWERS Chapter 13: MIXED BUSINESS TRANSACTIONS

4.

Letter B Gross income (P500,000 x 40%) Less: OSD (P200,000 x 40%) Net taxable income Multiplied by corporate tax rate Income tax due – operating expense approached Total sales Less: Cost of sales (P500,000 x 60%) Input VAT of VAT-exempt sales Gross income Less: OSD (P188,000 x 40%) Net taxable income Multiplied by corporate tax rate Income tax due – cost of sale approach Tax advantage

P500,000

P300,000 12,000

Problem 13–15 1. Letter B Output VAT from: Regular VAT sales (P1,120,000/9.333) Sale of defective products (P168,000/9.333) Less: Allocation of input VAT from: Packaging materials (P60,000 x 85%) Presumptive input VAT [(P800,000 – P100,000) x 4%] x 85% Net VAT payable

P200,000 80,000 P120,000 30% P 36,000

312,000 P188,000 75,200 P112,800 30%

33,840 P 2,160

P120,000 18,000

P138,000

P 51,000 23,800

74,800 P 63,200

Note: The presumptive input VAT is based on the primary raw materials used in the production. 2.

Letter A Total sales, net of VAT (P1,000,000 + P1,400,000 + P450,000 + P150,000) Less: Cost of sales P1,786,800 Input VAT traced to VAT–exempt sales (P60,000 x 15%) 9,000 Presumptive input VAT to VAT-exempt (P700k x 4%) x 15% 4,200 Gross income Less: Itemized deductions Net taxable income Multiplied by corporate tax rate Income tax due

Problem 13–16 1. Letter D Other percentage tax – land passengers, within (P20,000,000 x 3%) Add: Net VAT payable Output VAT - transport within from: Air (P40,000,000 x 12%) Sea (P20,000,000 x 12%) Land – cargoes (P10,000,000 x 12%) Total output VAT Less: Actual input VAT air and sea - within Input VAT [(P6,000,000 x 75%)/60 months] x 3 Total business taxes due

P3,000,000 1,800,000 P1,200,000 700,000 P 500,000 30% P 150,000

P

P775,000 225,000

600,000

P4,800,000 2,400,000 1,200,000 P8,400,000 1,000,000

7,400,000 P8,000,000

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 101 SUGGESTED ANSWERS Chapter 13: MIXED BUSINESS TRANSACTIONS

Computation of percent of allocation: Allowed with input VAT VAT-exempt – land passengers Total gross receipts

P 90M 30M P120M

Input VAT on Jet purchased (P50,000,000 x 12%) 2. Letter A Total gross receipts Less: Cost of service (P120,000,000 x 40%) Applicable input VAT for VAT-exempt [(P6M x 25%)/60 months] x 3 Gross income Less: OSD (P72,000,000 x 40%) Net taxable income – OSD Less: Net taxable income – itemized Gross income Less: Itemized deductions (P5M + P3.8M) Difference Multiplied by corporate income tax rate Tax advantage using OSD

P6,000,000

P47,925,000 75,000

P72,000,000 8,800,000

Problem 13–17 1. NOT IN THE CHOICES Other percentage tax – life insurance premium (P76,000,000 x 5%) Add: Net VAT payable Output VAT – nonlife insurance premium (P24,000,000 x 12%) P2,880,000 Less: Input VAT (P300,000 x 24%) 72,000 Total business taxes due Percent of gross receipts: Nonlife (P26,000,000 – P2,000,000) Life (P82,000,000 – P6,000,000) 2.

Letter B Total gross receipts (P24M + P76M) Less: Cost of service Life (P76,000,000 x 40%) Nonlife (P24,000,000 x 30%) Amount of input VAT – life (P300,000 x 76%) Gross income Add: Rent income Total gross income Less: OSD (P63,000,000 x 40%) Net taxable income Multiplied by corporate tax rate Income tax due

Problem 13–18 1. Letter B Output VAT (P2,000,000 + P1,500,000) x 12% Less: Amortization of input VAT [(P33,600,000/9.333)/60] x 10 months x 3.5/6 Total business tax payable

75% 25% 100%

24% 76% 100%

P120,000,000 48,000,000 P 72,000,000 28,800,000 P43,200,000 63,200,000 P20,000,000 30% P 6,000,000

P3,800,000

2,808,000 P6,608,000 P 24,000,000 76,000,000 P100,000,000 P100,000,000

30,400,000 7,200,000 228,000

37,828,000 P 62,172,000 828,000 P 63,000,000 25,200,000 P 37,800,000 30% P 11,340,000

P420,000 350,000 P 70,000

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 102 SUGGESTED ANSWERS Chapter 13: MIXED BUSINESS TRANSACTIONS

2. NOT IN THE CHOICES Total gross receipts Less: Costs of service: Depreciation – direct cost [(P33,600,000/1.12)/30] Input VAT traced to VAT-exempt transactions Class C (P3,600,000/60) x 10 mos. x 2.5/6 Gross income Less: OSD (P4,750,000 x 40%) Net taxable income Multiplied by corporate tax rate Income tax due

P6,000,000 P1,000,000 250,000

Problem 13–19 1. Output VAT – vacation house (P9M x 12%) Less: Input VAT (P360,000) + (P240,000 x 75%) Net VAT payable

1,250,000 P4,750,000 1,900,000 P2,850,000 30% P 855,000 P1,080,000 540,000 P 540,000

The installment sale of real property is subject to 25% rule of initial payment. If the initial payment exceeds 25% of the selling price, the sale is considered as cash sales. The sale of house and lot with a selling price of P3,199,200 and below is exempt from VAT. 2.

Cash sales – vacation house Installment sales Total sales Less: Cost of sales of: Cash sales – vacation house Installment sales – bungalow (P2,100,000 x 6/30) Input VAT traced to VAT-exempt sales related to: Cost of sale (P120,000 x 6/30%) Operating expense (P240,000 x 3/12) Gross income Less: Operating expenses Net income Multiplied by corporate normal income tax rate Income tax due

Problem 13 – 20 Output VAT from: Cash sales to VAT persons (P300,000 x 12%) Cash sales to Non-VAT persons (P100,000 x 12%) Cash sales to government units (P200,000 x 12%) Credit sales to VAT persons (P400,000 x 12%) Sales return (P10,000 x 12%) Less: Input VAT from: Purchases from VAT person per invoice (P324,800/9.333) Payment of services for business purposes, gross of VAT (P72,800/9.333) Standard input VAT – government (P200,000 x 7%) VAT payable Less: Final withholding VAT – government (P200,000 x 5%) Net VAT payable

P9,000,000 600,000 P9,600,000 P6,000,000 420,000 24,000 60,000

P 36,000 12,000 24,000 48,000 ( 1,200)

6,504,000 P3,096,000 2,000,000 P1,096,000 30% P 328,800

P118,800

P 34,800 7,800 14,000

56,600 P 62,200 10,000 P 52,200

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 103 SUGGESTED ANSWERS Chapter 13: MIXED BUSINESS TRANSACTIONS

Notes: 1. 2.

The sales discount is generally a cash discount that depends on the happening of future events which is the prompt payment of customers. This sales discount is not allowed to be deducted for VAT purposes. (Sec. 4.106-9, R.R. 14-2005) The 5% final withholding VAT is deductible from output VAT on sales to the government.

Problem 13 – 21 1. Input tax on taxable goods Input tax on zero-rated sales Standard input tax – government sales (P100,000 x 7%) Input tax on depreciable capital goods not attributable to any specific activity (monthly amortization for 60 months) = (P20,000 x P200,000/P400,000) Creditable input tax for the month 2. Input tax on sale to the government Input tax on depreciable goods allocated to sales to the government (P20,000 x 100,000/400,000) Input tax attributable to sales to government for the month

P 5,000 3,000 7,000 10,000 P25,000 P4,000 5,000 P9,000

Note: This actual input tax is deductible only to the extent of standard input VAT amounting to P7,000. The excess of actual input VAT over standard input VAT is to be treated as additional cost of sales or operating expense. 3. Input tax on sale of exempt goods Input tax attributable to VAT-exempt goods (P20,000 x 1/4) Input tax attributable to VAT-exempt goods

P2,000 5,000 P7,000

Note: This input VAT is not deductible from output VAT. Its entire amount is to be treated as additional cost of sales or operating expense. Problem 13 – 22 Gross sales/receipts for the month (VAT taxable) Multiplied by VAT rate Output VAT Less: Input taxes: Goods (P392,000/9.333) x 675/750 Service (P84,000/9.333) x 675/750 Std input VAT on sales to government (P75,000 x 7%) VAT Payable before final VAT Less: Final withholding VAT (P75,000 x 5%) Net VAT payable Notes: 1. Composition of sales: Cash sales to VAT persons Cash sales to Non-VAT persons Credit sales to VAT persons Gross sales Less: Sales returns Sales discounts VAT taxable sales – subject to VAT Add: Sales to the government-subject to final VAT Total sales

P750,000 12% P 90,000 P37,800 8,100 5,250

P20,000 5,000

51,150 P 38,850 3,750 P 35,100

P450,000 50,000 200,000 P700,000 25,000 P675,000 75,000 P750,000

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 104 SUGGESTED ANSWERS Chapter 13: MIXED BUSINESS TRANSACTIONS

2.

All sales, whether sold to VAT or non-VAT person, cash and on credit are included.

3.

Sales return and discounts were deducted to arrive at the amount of net sales. In this particular case, the sales discounts is deductible to determine the taxable based because the it does not depend on the happening of future event and its related total sales are recorded.

4.

VAT on expenses that are not related in the conduct of business is not allowed as creditable Input VAT.

5.

Sale to government unit is subject to final VAT withholding tax. (Sec. 4.114-2, R.R. 14-2005)

Problem 13 – 23 Output VAT from: Regular sales (P216,000 + P576,000) x 12% Deemed sales (P90,000 + P180,000) x 12% Government sales (P160,000 x 12%) Less: Input VAT allocation to: Regular VAT transactions Zero-VAT transactions Standard VAT from sales to government (P160,000 x 7%) VAT payable before final VAT Less: Creditable withholding final VAT from sales to government (P160,000 x 5%) Net VAT payable

P95,040 32,400 19,200

P146,640

P88,888 27,123 11,200

127,211 P 19,429 8,000 11,429

Supporting computations: Sales: To VAT To non-VAT To government (P169,600/106%) Export Personal use, at cost Consignment (P241,920/9.333) x 83.33%* Totals Percentage Input VAT from: Creditable input VAT balance VAT business (P571,760/9.333) Office supplies (P28,000/9.333) Payments VAT persons (P110,000 x 12%) Importation (P298,144/9.333) Input VAT allocations

Notes: 1. 2.

Regular VAT Taxable P576,000 216,000 90,000 180,000 P1,062,000 68.69%

Zero-VAT

. P324,000

. P160,000

Total P576,000 216,000 160,000 324,000 90,000 180,000 P1,546,000

20.96%

10.35%

100%

P324,000

With Gov’t. P160,000

P 20,000 61,260 3,000

P88,888

P27,123

P13,394

13,200 31,945 P129,405

The goods consumed for personal use can be price at cost being transaction deemed sale. The deemed sale consigned goods is also price at cost, computed as follows: Consignment price excluding VAT (P241,920/1.12) P216,000 Multiplied by percent of cost based on the goods consumed for personal use (P90,000/P108,000) 83.33% *Cost of consigned goods P180,000