Solutions manual to:

A Study
INCOME TAX
LAW AND ACCOUNTING

UNDER THE TRAIN LAW

A 2019 Revised Edition

By

VIRGILIO D. REYES

Solutions Manual to A Study on Income Tax Law and Accounting, 2019 Edition
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CHAPTER 1. INTRODUCTION

This chapter has no problems

CHAPTER 2. TAX ON DOMESTIC CORPORATIONS

2-1.Gross profit from sales P4,000,000

Less: Expenses of operations 3,000,000
Taxable income P1,000,000
Normal income tax (P1,000,000 x 30%) P 300,000

2-2.Gross profit from sales P2,000,000

Interest income 50,000
Gross income P2,050,000
Less: Expenses of operations 2,020,000
Taxable income P 30,000
Minimum corporate income tax (P2,050,000 x 2%) P 41,000
Normal income tax (P30,000 x 30%) P 9,000
Income tax of the year P 41,000

2-3.Gross revenue P5,000,000

Less: Direct costs of the services 2,000,000
Gross income P3,000,000
Other operating expenses 500,000
Taxable income P2,500,000
Minimum corporate income tax (P3,000,000 x 2%) P 60,000
Normal income tax (P2,500,000 x 30%) P 750,000
Income tax for the year P 750,000

2-4.Seventh year:
Minimum corporate income tax P70,000
Minimum corporate income tax (P4,000,000 x 2%) P 80,000

Eighth year:
Normal income tax P30,000
Less: Excess MCIT carry forward from the seventh year (30,000) P 0
Ninth year:
Minimum corporate income tax P40,000

Tenth year:
Normal income tax P 5,000
Less: Excess MCIT carry forward from the seventh year ( 5,000) P 0
Eleventh year:
Normal income tax P80,000
Less: Excess MCIT carry forward from the ninth year 25,000 P55,000
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2-5. First Second Third Year
Gross profit from sales P500,000 P700,000 P850,000 P990,000
Operating expenses 200,000 280,000 340,000 396,000
Taxable income P300,000 P420,000 P510,000 P594,000
MCIT at 2% P 10,000 P 14,000 P 17,000 P 19,800
NT at 30% P 90,000 P126,000 P153.000 P178,200
Whichever is higher P 90,000 P126,000 P153,000 P178,200
Less: Income tax paid –
First quarter ( 90,000) ( 90,000) ( 90,000)
Second quarter ( 36,000) ( 36,000)
Third quarter ______ _____ ______ ( 27,000)
Due P 90,000 P 36,000 P 27,000 P 25,200
2-6. First Second Third Year
Gross profit from sales P500,000 P850,000 P1,650,000 P2,550,000
Operating expenses 450,000 790,000 1.600,000 2,050,000
Taxable income P 50,000 P 60,000 P 50,000 P 500,000
Minimum corporate income tax P 10,000 P 17,000 P 33,000 P 51,000
Normal income tax P 15,000 P 18,000 P 15,000 P 150,000
Whichever is higher P 15,000 P 18,000 P 33,000 P 150,000
Less: Income tax paid-
First quarter ( 15,000) ( 15,000) ( 15,000)
Second quarter ( 3,000) ( 3,000)
Third quarter _____ ____ _____ ( 15,000)
Income tax due P 15,000 P 3,000 P 15,000 P 117,000

2-7. Net taxable income P1,000,000

Less: Income tax P300,000
Dividend paid 200,000 500,000
Balance P 500,000
Add: Retained earnings, beginning of the year 2,100,000
Total P2,600,000
Less: Paid-in capital, end of the year 2.300,000
Improperly accumulated taxable income P 300,000
Improperly accumulated earnings tax (P300,000 x 10% P 30,000

CHAPTER 3. TAX ON RESIDENT CORPORATIONS

3-1.Gross income, Philippines P30,000,000

Less: Business expenses, Philippines 10,000,000
Net income, Philippines P20,000,000
Income tax at 30% P 6,000,000

Profit remittance (P8,500,000 divided by 85%) P10,000,000

Profit remittance tax paid (P10,000,000 x 15%) P 1,500,000

CHAPTER 4. TAX ON PARTNERSHIPS.

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4-1.
 If the partnership chose the Optional Standard Deductions.

A & Co.
Gross income P1,000,000
Less: Optional Standard Deduction (40% of P1,000,000) 400,000
Net income P 600,000
Taxable income P 0
Income tax P 0
Partners: A B
Share in partnership net income (½ of P600,000) P300,000 P300,000
Own gross income – gross receipts 600,000 700,000
Own expenses (300,000) (450,000)
Taxable income P600,000 P550,000

If partnership availed of the itemized deduction:

Gross income P1,000,000
Less: Expenses of operations 400,000
Net income P 600,000
Taxable income P 0
Income tax P 0
Partners: A B
Share in partnership net income (½ of P600,000) P300,000 P300,000
Own gross income – gross receipts 600,000 700,000
Total P900,000 P1,000,000
Less: Optional Standard Deduction:
40% of P600,000 (240,000)
40% of P700,000 ______ (280,000)
Taxable income P660,000 P720,000

4-2.E& Co.
Gross income P2,000,000
Less: Expenses 1,000,000
Taxable income P1,000,000
Income tax at 30% 300,000
Distributable net income P 700,000

Partners: E G
Share in the distributable net income after tax P350,000 P350,000
Final tax at 10% P 35,000 P 35,000

Own gross income – gross receipts P700,000 P800,000

Own expenses (320,000)
Optional Standard Deduction (40% of P800,000) ______ (320,000)
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 Net income P380,000 P480,000

4-3.(a) If the partnership is a general partnership in trade:

1st Q 2nd Q 3rd Q Year
Grossincome P200,000 P600,000 P900,000 P1,150,000
Less: Operating expenses 90,000 280,000 440,000 540,000
Taxable income P110,000 P320,000 P460,000 P 610,000
Income tax at 30% P 33,000 P 96,000 P138,000 P 183,000
Less: Income tax paid
First quarter (33,000) (33,000) (33,000)
Second quarter (63,000) (63,000)
Third quarter _____ _____ _____ (42,000)
Income tax due P33,000 P63,000 P 42,000 P 45,000

Net income of the partnership P 610,000

Less: Income tax thereon 183,000
Distributable net income P427,000
Dividend income of each partner (P427,000 divided by 2) P213,500
Income tax of Partner H (P213,000 x 10%) P 21,350
Income tax of Partner I (P213,000 x P10%) P 21,350

CHAPTER 5.

5-1. A minimum wage earner is exempt from income tax.

5-2. Salaries P500,000

Less: Mandatory deductions 10,000
Taxable income 490,000
Graduated income tax 52,500
Less: Income tax withheld 20,000
Income tax due P32,500

CHAPTER 6.

6-1.
(a) Gross sales P2,000,000
Less: Fixed deduction 250,000
Taxable income 1,750,000
8% income tax P 140,000
(b) Gross sales P2,000,000
Less Costs and expenses 1,200,000
Taxable income 800,000
Graduated income tax P 130,000

(c) The better choice is (b), graduated income tax.

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6-2.
(a) Gross receipts P2,500,000
Less: Fixed deduction 250,000
Taxable income 1,250,000
8% income tax P 100,000
(b) Gross receipts P2,500,000
Less: Costs and expenses 1,500,000
Taxable income 1,000,000
Graduated income tax P 190,000
(c) The better choice is (a), the 8% income tax.
6-3.
(a) The 8% income tax will not apply because the taxpayer is subject to “Other Percentage
Taxes” under Title V of the Tax Code.

(b) Gross receipts P2,500,000

Less: Costs and expenses 1,700,000
Taxable income 800,000
Graduated income tax P 130,000
6-4.
(a) Gross income P1,500,000
Less: Costs and expenses 1,000,000
Taxable income 500,000
Income tax at graduated rates P 55,000
(b) Gross receipts P2,000,000
Less: Optional Standard Deduction (40% of P2,000,000) 800,000
Taxable income 1,200,000
Income tax at graduated rates P 250,000
(c) The better choice is (a).

6-5.
(a) Gross income P2,500,000
Less: Costs and expenses 2,100,000
Taxable income 400,000
Income tax at graduated rates P 30,000

(b) Gross receipts P3,000,000

Less: Optional Standard Deduction (40% of P3,000,000) 1,200,000
Taxable income P1,800,000
Income tax at graduated rates P 430,000

(c) Itemized deduction is a better choice.

6-6. Problem was inadvertently omitted in the book.

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6-7.
(a) Itemized deductions. 1st Q 2nd Q 3rd Q Year
Gross receipts P4,000,000 P6,000,000 P9,000,000 P14,000,000
Less: Costs and expenses 2,000,000 3,000,000 4,500,000 7,000,000
Taxable income P2,000,000 P3,000,000 P4,500,000 P 7,000,000
Income tax P 490,000 P 810,000 P1,290,000 P1,450,000
Less: Income tax paid:
First quarter (490,000 (490,000) (490,000)
Second quarter (390,000) (390,000)
Third quarter ______ ______ ______ (410,000)
Due P 490,000 P 320,000 P 410,000 P 160,000
(b) Gross receipts P4,000,000 P6,000,000 P9,000,000 P14,000,000
Less: Optional Standard
Deduction 1,600,000 2,400,000 3,600,000 5,600,000
Taxable income P2,400,000 P3,600,000 P5,400,000 P8,400,000
Income tax P 618,000 P1,002,000 P1,578,000 P2,550,000
Less: Income tax paid:
First quarter (618,000 (618,000) (618,000)
Second quarter (384,000) (384,000)
Third quarter ______ ______ ______ (576,000)
Due P 618,000 P 384,000 P 576,000 P 972,000

CHAPTER 7.

7-1. Gross compensation income P 300,000

Income tax at graduated rates P10,000
Gross sales P2,900,000
Non-operating income 50,000
Taxable income P2,950,000
Income tax at 8% 236,000
Total income tax P246,000

7-2
(a) Gross compensation income P 500,000
Income tax at graduated rates P 55,000
Gross sales P2,900,000
Non-operating income 50,000
Costs and expenses (1,450,000)
Taxable income P1,500,000
Income tax at graduated rates 340,000
Total income tax P395,000
(b) Gross compensation income P500,000
Income tax at graduated rates P 55,000
Gross sales P2,900,000
Non-operating income 50,000
Total 2,950,000
Less: Optional Standard Deduction (40% of P2,950,000) 1,180,000
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Taxable income P1,770,000
Income tax at graduated rates 421,000
Total income tax P476,000

7-3.
(a) Gross compensation income P 500,000
Income tax at graduated rates P55,000
Gross sales P4,000,000
Less: Costs and expenses 2,000,000
Taxable income P2,000,000
Income tax 490,000
Total income tax P545,000
(b) Gross compensation income P 500,000
Income tax at graduated rates P 55,000
Gross sales P4,000,000
Less: Optional Standard Deduction (40% of P4,000,000) 1,600,000
Taxable income P2,400,000
Income tax 618,000
Total income tax P673,000
7-4,
(a) Mrs. A
Itemized deductions.
Gross compensation income of Mrs. A P 400,000
Income tax at graduated rates P 30,000

Mr. A
Gross sales P4,800,000
Non-operating income 200,000
Costs and expenses (2,000,000)
Taxable income at graduated rates P3,000,000
Income tax P810,000

(b) Mrs. A
Itemized deductions.
Gross compensation income of Mrs. A P 400,000
Income tax at graduated rates P 30,000

Mr. A
Gross sales P4,800,000
Non-operating income 200,000
Total P5,000,000
Less: Optional Standard Deduction (40% of P5,000,000) 2,000,000
Taxable income P3,000,000
Income tax at graduated rates P810,000

7-5. Mrs. A:
Gross compensation income P600,000
Income tax at graduated rates P 80,000
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Net rent income (1/2 of P500,000) P250,000
Income tax ____0
Total income tax P 80,000

Mr. A
Gross sales P4,800,000
Non-operating income 200,000
Total P5,000,000
Less: Costs and expenses 2,000,000
Net income from business P3,000,000
Add: ½ of net rent income 250,000
Taxable income P3,250,000
Income tax P890,000

CHAPTER 8.

8-1. (a) 1ST Q 2nd Q 3rd Q Year

Gross sales P800,000 P1,200,000 P1,800,000 P2,500,000
Less: Fixed deduction 250,000 250,000 250,000 250,000
Taxable income 550,000 950,000 1.550,000 250,000
Income tax at 8% 44,000 76,000 124,000 180,000
Less: Income tax paid:
First quarter (44,000) (44,000) (44,000)
Second quarter (32,000) (32,000)
Third quarter _____ _____ _____ (48,000)
Due P 44,000 P 32,000 P 48.000 P56,000

(b) 1ST Q 2nd Q 3rd Q Year

Gross sales P800,000 P1,200,000 P1,800,000 P2,500,000
Less: Costs and expenses 300,000 700,000 900,000 1,200,000
Taxable income 500,000 500,000 900,000 1,300,000
Graduated income tax 55,000 55,000 160,000 280,000
Less: Income tax paid:
First quarter (55,000) (55,000) (55,0000
Second quarter 0 0 0
Third quarter ______ ______ ______ (105,000)
Due P 55,000 P0 P 105,000 P 120,000

8.2 1ST Q 2nd Q 3rd Q Year

Gross sales P3,500,000 P5,500,000 P8,100,000 P9,900,000
Less: Costs and expenses 1,320,000 2,700,000 3,400,000 4,160,000
Taxable income 2,180,000 2,800,000 4,700,000 5,740,000
Graduated income tax 547,600 746,000 1,354,000 1,686,800
Less: Income tax paid:
First quarter (547,600) (547,600) (547,600)
Second quarter (198,400) (198,400)
Third quarter ______ ______ ______ (608,000)
Due P 547,600 P 198,400 P 608,000 P 332,800

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8-3. 1ST Q 2nd Q 3rd Q Year

Gross sales P400,000 P700,000 P2,000,000 P3,500,000
Less:
Fixed deduction 250,000 250,000 250,000
Cost of sales (1,600,000)
Operating expenses ______ ______ ________ ( 700,000)
Taxable income 150,000 450,000 1,750,000 1,200,000
8% income tax 12,000 36,000 140,000
Graduated income tax 250,000
Less: Income tax paid:
First quarter (12,000) (12,000) ( 12,000)
Second quarter (24,000) ( 24,000)
Third quarter _____ _____ ______ (104,000)
Due P 12,000 P 24,000 P 104,000 P 110,000

CHAPTER 9.

This chapter has no problems.

CHAPTER 10. GAINS AND LOSSES FROM SALES OR

OR EXCHANGES OF ASSETS

10-1.Gross income from business P5,000,000

Less: Business expenses 3,000,000
Ordinary net income P2,000,000
Capital gain (100%) P60,000
Less: Capital loss (100%) 30,000
Net capital gain 30,000
Taxable income P2,030,000

10-2.Gross income from business P1,000,000

Less: Business expenses 400,000
Ordinary net income P 600,000
Capital gain (100%) P50,000
Less: Capital loss (50%) 15,000
Net capital gain 35,000
Taxable income P 635,000

10-3.Gross income from the practice of profession P1,200,000

Less: Expenses on the practice of profession 800,000
Ordinary net income P 400,000
Capital gain (50%) P50,000
Less: Capital loss (100%) 60,000
 Net capital loss P10,000 ______
Taxable income P 400,000

10-4.200A:
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Gross income from business P4,000,000

Less: Expenses of the business 2,000,000
Ordinary net income P2,000,000
Capital gains P100,000
Capital losses 200,000
Net capital loss P100,000 ________
Taxable income P2,000,000
200B:
Gross income from business P3,000,000
Less: Expenses of the business 1,600,000
Ordinary net income P1,400,000
Capital gains P400,000
Less: Capital losses 250,000
Net capital gain 150,000
Taxable income P1,550,000

10-5. 200A:
Gross income from business P2,000,000
Less: Expenses of the business 1,000,000
Ordinary net income P1,000,000
Capital gain (100%) P100,000
Less: Capital loss (50%) 150,000
Net capital loss P 50,000 ______
Taxable income P 950,000
200B:
Gross income from business P3,000,000
Less: Expenses of the business 1,600,000
Ordinary net income P1,400,000
Capital gain (100%) P400,000
Less:
Capital loss (50%) P50,000
Net capital loss carry over from 200A 50,000 100,000
Net capital gain 300,000
Taxable income P1,050,000

10-6.200A:
Gross income from business P2,000,000
Less: Expenses of the business 1,800,000
Ordinary net income P 200,000
Capital gain (50%) P200,000
Less: Capital loss (100%) 450,000
Net capital loss P250,000 ______
Taxable income P 200,000
 200B:
Gross income from business P3,000,000

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Less: Expenses of the business 1,600,000

Ordinary net income P1,400,000
Capital gain (100%) P400,000
Less:
Capital loss (50%) P50,000
Net capital loss carry over from 200A 200,000 250,000
Net capital gain 150,000
Taxable income P1,350,000

CHAPTER 11, GAINS AND LOSSES FROM SALES OR EXCHANGES OF ASSETS-2

11-1. Capital gain tax (P60,000 x 15%) P9,000

11-2.Capital gain tax (there is a loss on the sale) P 0

11-3. Capital gain tax (P350,000 x 15%) P52,500

l1-4. Capital gain tax P 0

(The shares are not shares of stock of a domestic corporation.)

11-5. Capital gain tax (P5,000,000 x 6%) P300,000

11-6. Capital gain tax (P5,200,000 x 6%) P312,000

11-7.Capital gain tax (P5,000,000 x 6%) P300,000

11-8.Capital gain tax (P3,200,000 x 6%) P192,000

11-9. (a) Capital gain tax P 0

Basis of new principal residence (the basis of the old residence) P5,000,000

(b) “Should have been capital gain tax (P6,000,000 x 6%) P360,000
Capital gain tax to pay because of investment.
(P2,000,000/P6,000,000 x P360,000) P120,000
Basis of new principal residence:
(P4,000,000/P6,000,000 x P5,000,000) P3,333,333

CHAPTER 12. GAINS AND LOSSES FROM SALES OR EXCHANGES OF ASSETS-3

12-1. Selling price P1,000,000

Less: Cost 800,000
Gross profit P 200,000
Payment, July 1, 2018 P 150,000
 Payment, December 1, 2018 50,000
Initial payments (not exceeding 25% of the selling price) P 200,000
Income in 2018: P200,000/P1,000,000 x P200,000) P 40,000
Income in 2019: P200,000/P1,000,000m x P800,000) P 160,000
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12-2.Selling price P1,000,000

Less: Cost 800,000
Gross profit P 200,000
Payment, July 1, 2018 P 150,000
Payment, December 1, 2018 50,000
Initial payments (not exceeding 25% of the selling price) P 200,000
Selling price P1,000,000
Less: Mortgage assumed by buyer 600,000
Contract price P 400,000
Income in 2018: P200,000/P400,000 x P200,000 P 100,000
Income in 2019: P200,000/P400,000 x P200,000 P 100,000

12-3. Selling price P1,000,000

Less: Cost 800,000
Gross profit P 200,000
Payments in 2018 P 60,000
Add: Excess of mortgage over cost to the seller (P850,000 less P800,000) 50,000
Initial payments (not exceeding 25% of the selling price P 110,000
Selling price P1,000,000
Less: Mortgage assumed by buyer 850,000
Balance P150,000
Add: Excess of mortgage over cost to seller 50,000
Contract price P200,000
Income in 2018 (P200,000/P200,000 x P110,000) P 110,000
Income in 2019 (P200,000/P200,000 x P90,000) P 90,000

12-4.2018:
Cash collected P1,500,000
Fair market value of mortgage note (P2,500,000 x 80%) 2,000,000
Total consideration received P3,500,000
Less: Cost 3,000,000
Income P 500,000
2019:
Cash collected P2,500,000
Less: Income already reported (P2,500,000 x 80%) 2,000,000
Income P 500,000
12-5.
2017 Cash received P5,000,000
Fair market value of mortgage note (P5,000,000 x 90%) 4,500,000
 Total consideration received P9,500,000
Less: Cost 6,000,000
Income P3,500,000

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2018 Cash received P3,000,000

Less: Income already reported (P3,000,000 x 90%) 2,700,000
Income P 300,000

2019 Cash received P2,000,000

Less: Income already reported (P2,000,000 x 90%) 1,800,000
Income P 200,000

CHAPTER 13. INCOME FROM BUSINESS, DIVIDEND AND INTEREST

13-1. Gross sales P1.030,000

Less: Sales returns and allowances P 20,000
Sales discounts 10,000 30,000
Net sales P1,000,000
Less: Cost of sales:
Purchases P412,000
Less: Purchase returns and allowances P7,000
Purchase discounts 5.000 12,000 400,000
Gross profit from sales P 600,000
Dividend from resident corporations 5.000
Interest income on trade receivables 15,000
Gross income in the year-end return P 620,000

13-2. Cash dividend P 20,000

Property dividend 30,000
Dividend in treasury stock 25,000
Optional stock dividend 60,000
Total P135,000

13-3. Cost of 100 shares P120,000

Cost of 50 shares received as stock dividend 0
Cost of 150 shares, original purchase and stock dividend P120,000
New cost per share (P120,000/150 shares) P 800
Selling price (P1,100 x 40) P 44,000
Less: Cost (P800 x 40) 32,000
Gain on the sale P 12,000

13-4. Acquisition cost (P1,000 x 1,000 shares) (P1,000 X 1,000) P1,000,000

Fair market values at the time of the dividend:
Common (P1,200 x 1,000 shares) P1,200,000
 Preferred (P600 x 500 shares) 300,000
Total P1,500,000
Allocation of original cost: To class Per share
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To common (P1,200,000/P1,500,000 x P1,000,000) P800,000
(P800,000/1,000) P 800
To preferred (P300,000/P1,500,000 x P1,000,000) P200,000
(P200,000/500) P 400
Gain (Loss) on the sale:
Selling price
(P1,300 x 10 shares) P13,000
(P600 x 10 shares) P6,000
Less: Cost
(P800 x 10 shares) 8,000
(P400 X 10 shares) ____ 4,000
Gain on the sale P5,000 P2,000

13-5.Dividend income P 0
Liquidating dividend received P100,000
Cost of the shares on which paid 60,000
Gain on the sale P 40,000

13-6. Interest on Philippine currency bank deposit P20,000

Interest on trade notes receivable 10,000
Total P30,000

Chapter 14. INCOME FROM RENT AND FARMING.

14-1.Income on the advance rental P120,000

Real estate tax for the third and fourth quarters 5,000
Premium on the fire insurance 10,000
Gross income in 2019 P135,000

14-2.Cost of leasehold improvements P5,000,000

Less: Depreciation over the remaining term of the lease:
(P5,000,000/50 years x 40 years) 4,000,000
Estimated book value when lease expires P1,000,000

Gross income under the annual method of reporting income

(P1,000,000/40 years) P 25,000
Gross income under the lump sum method of reporting income P1,000,000

14-3. There is nothing to report. There is nothing that will go to the lessor.
14-4.Sales of livestock and farm products raised P800,000
Sales of livestock and farm products purchased P200,000
Less: Cost 120,000 80,000
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Sale of old farm tractor P 50,000

Less: Book value 20,000 30,000
Gross income, cash method P910,000

Inventory, end P 10,000

Sales of livestock and farm products raised P800,000
Sales of livestock and farm products purchased 200,000 1,000,000
Cost of livestock and farm products purchased P120,000
Inventory, beginning 6.000 (126,000)
Sales of old farm tractor P 50,000
Less: Book value 20,000 30,000
Gross income, accrual method P914,000
or
Gross income, cash method P910,000
Add: Increase in inventory 4,000
Gross income, accrual method P914,000
14-5.Sales of livestock and farm products raised P 900,000
Sales of livestock and farm products purchased P300,000
Less: Cost 350,000
Loss (P50,000)
Rent income from farm equipment 5,000
Gross income, cash method P 855,000

Inventory, end P 2,000

Sales of livestock and farm products raised P900,000
Sales of livestock and farm products purchased 300,000 1,200,000
Cost of livestock and farm products purchased P350,000
Inventory, beginning 5.000 (355,000)
Rent income from farm equipment 5,000
Gross income, accrual method P 852,000
or

Gross income, cash method P905,000

Less: Inventory decrease P 3,000
Loss on sale of livestock and farm products purchased 50,000 53,000
Gross income, accrual method P852,000

Chapter 15. INCOME FROM SERVICES AND OTHER SOURCES.

15-1.Cash received P100,000
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Fair market value of property received 50,000

Gross income from personal services P150,000
15-2.If fair market value of property received can be established P2,300,000
If fair market value of property received cannot be established P2,000,000

15-3.Gross income P ____ 0

15-4.Gross income in 2018 P50,000

Gross income in 2019 (P60,000 x 12%) P 6,000

15-5.Gross income in 2018 (P40,000 x 85%) P34,000

Gross income in 2019 (P40,000 less P34,000) P
6,000
15-6.Gross income from the note P100,000

15-7.Gross income P 0

15-8.Gross income on the bad debt recovery P20,000

15-9.Net income before write-off P20,000

Less: “Should-be write-off (only) P25,000 less P12,000 13,000
“Should be” income P 7,000

Taxable income reported (net loss was reported) P ___0

Taxable income on the recovery P7,000

15-10.Refund of community tax P 2,000

Refund of real estate tax 12,000
Refund of registration fee of delivery equipment 10,000
Refund of foreign income tax, previously take as deduction 60,000
Gross income on the tax refunds P84,000

15-11.If Mr. A rendered services (income from personal services) P100,000

If Mr. A rendered services worth P80,000
(income from personal services) P 80,000
If Mr. A did not do anything (gift) P 0

15-12.Indirect dividend P200,000

15-13.Damages for patent infringement P500,000

Damages for unfair competition 400,000
 Total P900,000

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CHAPTER 16. OPTIONAL STANDARD DEDUCTION.

16-1.Gross sales P935,000

Less: Sales returns and allowances P25,000
Sales discounts 10,000 35,000
Net sales P900,000
Less: Cost of sales 400,000
Gross profit from sales P500,000
Interest on trade notes receivable 15,000
Capital gain 50,000
Total gross income P565,000
Less: Optional Standard Deduction (40% of P565,000) 226,000
Taxable income, if choosing Optional Standard Deduction P339,000

16-2.Net sales P2,000,000

Less: Cost of sales 800,000
Gross profit from sales P1,200,000
Capital gain 100,000
Gross income P1,300,000
Less: Optional Standard Deduction (40% of P1,300,000) 520,000
Taxable income P 780,000

16.3. Gross income from business, Philippine P3,000,000

Gross income from business, foreign 5,000,000
Total P8,000,000
Less: Optional Standard Deduction (40% of P8,000,000) 3,200,000
Taxable income P4.800,000

16-4.Year-end deduction should be Optional Standard Deduction.

1st Q 2nd Q 3rd Q Year
Gross income P300,000 P550,000 P700,000 P1,000,000
Less: Optional Standard Deduction 120,000 220,000 280,000 400,000
Taxable income P180,000 P330,000 P420,000 P600,000

16-5. Gross sales P610,000

Less: Optional Standard Deduction (40% of P610,000) 244,000
Taxable income P376,000

16-6.Gross sales P720,000

Less: Optional Standard Deduction (40% of P720,000) 280,000
Taxable income P440,000

16-7.Gross revenues P800,000

 Less: Optional Standard Deduction (40% of P800,000) 320,000
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Taxable income P480,000

16.8 Gross sales P810,000

Less:
Optional Standard Deduction (40% of P810,000) 324,000
Taxable income P486,000

16-9. DE Partnership:
Gross income P500,000
Less: Optional Standard Deduction (40% of P500,000) 200,000
Net distributable income P300,000

Partner:

Share in the partnership net distributable income (fifty percent) P150,000

Own income 200,000
Less: Cost of operation 80,000 120,000
Taxable income P270,000

16-10.Gross revenues P1,000,000

Less: Direct costs 300,000
Gross income P 700,000
Less: Optional Standard Deduction (40% of P700,000) 280,000
Net income P 420,000
Share in the partnership net income P210,000
Gross income P500,000
Less: Operating expenses 200,000 300,000
Net income P510,000

CHAPTER 17. ITEMIZED DEDUCTIONS, IN GENERAL

17-1.Family expenses P 500,000

Bad debt on a sale to a sister 50,000
Major repair 100,000
Interest expense on money borrowed from brother 10,000
Capital loss on sale of land in the Philippines 700,000
Capital loss on sale of bonds to the father 20,000
Total P1.380,000

CHAPTER 18. TAXES AND FRINGE BENEFITS

18-1. Real estate tax P10,000

 Basic and additional community tax 1,700
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Percentage tax 6,000

City food and beverage tax 200
Total P17,900
18-2.Gross monetary value of fringe benefit P10,000.00
Grossed-up monetary value of fringe benefit (P10,000/65%) P15,384.62
Fringe benefit tax (P15,384.62 x 35%) P2,309.00

CHAPTER 19. INTEREST AND LOSSES.

19-1 . Interest expense in 2019 and each of the next four years
(P1,000,000/5 years) P200,000
Depreciation per year (P5,000,000/20 years) 250,000
Total deductions in 2019and each of the next four years P450,000
Deduction beginning the sixth year (depreciation) P250,000

If interest expense is treated as cost of the asset

Deduction each year beginning with 2016:
(P6,000,000/20 years) – depreciation P300,000

19-2.Cost of the asset P2,000,000

Less: Accumulated depreciation 1,100,000
Book value P 900,000
Less: Insurance recovery 400,000
Deductible loss P500,000
19.3 Asset 1 Asset 2
Cost to restore the property to normal
operating condition P200,000 P100,000
Book value of the asset P120,000 P180,000
Whichever is lower P120,000 P100,000
Less: Insurance recovery 80,000 30,000
Deductible loss P 40,000 P 70,000

19-4.Net operating loss, X Co. P 20,000

Net operating loss, Y Co. P 25,000
Net operating loss, Z Co. P170,000

19-5. 2015 2016 2017 2018 2019

Gross income P500,000 P700,000 P200,000 P700,000 P800,000
Deductions 900,000 500,000 300,000 600,000 500,000
NOLCO
From 2015 200,000 100,000
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From 2018 ______ ______ ______ ______ 100,000

Taxable income P 0 P 0 P 0 P 0 P200,000

Deduction for contributions P200,000

CHAPTER 20. BAD DEBTS, PENSION TRUST AND RESEARCH COSTS

20-1.Deduction for bad debts P50,000

20-2Deduction for bad debts

Deduction for bad debts P40,000

20-3.Deduction for bad debt None

20-4.Deduction in 2018 None

Basis of the receivable uncollected P500,000
Less: Selling price of the property 450,000
Deduction in 2019 P50,000

20-5.Deduction in 2007:
1/10 of P1,000,000, on past service cost P100,000
Present service cost 50,000
Total P150,000
Deduction in 2018 (present service cost) P50,000
Deduction in 2019 (present service cost) P50,000

20-6. Research and development costs (others),

deduction in one lump sum P2,000,000

20-7. Amortization of deferred charge (P3,000,000/60 months), per month P 50,000

Deduction in 2017 P 0
Deduction in 2018 (P50,000 per mo. x 6.5 mos.) P 325,000
Deduction in 2019 (P50,000 per mo. x 12 mos.) P 600,000

CHAPTER 21. DEPRECIATION, DEPLETION AND OTHERS

21-1.Deduction for depreciation (based on cost) P50,000

21-2. P20,000,000/10,000,000 tons x 50,000 tons P100,000

21-3. Cost to the lessee of leasehold improvements P5,000,000

Annual deduction for the lessee:
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If life of improvements is 40 years (P5,000,000/40 years) P 125,000

If life of improvements is 60 years (P5,000,000/50 years) P 100,000

21-4.Deduction for repairs P200

21-5. If merchandiser or manufacturer (1/2 of 1% of P60,000) P300

If service provider (1% P60,000) P600

CHAPTER 22. CONTRIBUTIONS

22-1. Cost of property given as contribution P20,000

Fair market value of the property given as contribution P30,000
Measure of actual contribution (cost) P20,000

22-2. Gross income P900,000

Less: All deductions, except contributions 500,000
Taxable income before contributions P400,000
Actual contributions P 30,000
Limit (P400,000 x 10%) P 40,000
Deduction for contribution P 30,000

22-3.Gross income from business P500,000

Expenses of the business 300,000
Taxable income from business before contributions P200,000
Actual contributions to churches P 35,000
Limit (P200,000 x 10%) P 20,000
Deduction for contributions P 20,000

22-4.Gross income P5,000,000

Less: All deductions, except contributions 3,000,000
Taxable income before contributions P2,000,000
Actual contributions P 120,000
Limit (P2,000,000 x 5%) P 100,000
Deduction for contribution P 100,000

22-5. Gross income P4,000,000

Less: All deductions, except contributions 3,000,000
Taxable income before contributions P1,000,000
Contributions deductible in full P 40,000
Contributions deductible, subject to limitation
Actual P60,000
Limit ((P1,000,000 x 5%) P50,000 50,000
Deduction for contributions P 90,000
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22-6. Gross income from business P6,000,000
All deductions, except contributions 4,000,000
Taxable income before contributions P2,000,000
Contributions deductible in full – To the Government
for priorityactivity in education P100,000
Contributions deductible subject to limitation –
To charitable institutions5% of P2,000,000 (Limit) 100,000
Total P200,000

CHAPTER 23. TAXABLE INCOME AND INCOME TAX

3-1. Mr. Miguel Mendoza:

Merchandising:
Sales P900,000
Less: Cost of sales –
Inventory, beginning P 70,000
Add: Purchases 500,000
Goods available for sale P570,000
Less: Inventory, end 60,000 510,000
Gross profit from sales P390,000
Less: Salaries, wages and bonuses P190,000
Repairs and maintenance 10,000
Write off for bad debts 10,000
Rent 120,000
Taxes and licenses 15,000
Light, water and telephone 63,000
Interest on delinquent taxes 2,000
Sundries 14,000 424,000 (P34,000)

Dividend from resident corporation 18,000

Professional fees P650,360
Less: Salaries and bonuses P230,000
Rent 95,000
Professional tax 300
Light, water and telephone 45,000
Interest expense on bank loan 5,000 375,300
Balance 275,060
Interest income on notes of clients 10,000 285.060
Rent income P120,000
Less: Depreciation P 25,000
Casualty loss 55,000
Taxes and licenses 5,000 85,000 35,000
Net income before contributions P304,060
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Less: Contributions (10% of P304,060 is P30,406) Actual 10,000

Net taxable income after contributions P294,060
Capital gain on bonds, maturity of 4 years (100%) P200,000
Less: Capital loss on shares of resident corporation (100%) 20,000 180,000
Total P474,060
Income tax(at graduated rates) P 48,515
Less: Income tax withheld on professional fees P 60,000
Income tax withheld on rent 6,000 (66,000)
Income tax refundable (P17,485)

23.2 O Co.
1st Q 2nd Q 3rd Q Year
Sales P250,000 P500,000 P800,000 P1,250,000
Less: Cost of sales 100,000 170,000 235,000 350,000
Gross profit from sales P150,000 P330,000 P565,000 P 900,000
Dividend from resident corporation 2,000 4,000 6,000 8,000
Rent income 8,000 16,000 24,000 32,000
Refund of municipal taxes ______ ______ ______ 12,000
Totals P160,000 P350,000 P595,000 P 952,000
Less:
Interest expense on deficiency tax P 4,800 P 4,800
Interest expense P 9,910 19,820 29,550 39,460
Municipal taxes 5,000 10,000 15,000 20,000
Ordinary and necessary business
expenses 120,000 260,000 410,000 720,000
Totals P134,910 P289,820 P459,350 P 784,260
Taxable income P 25,090 P 60,180 P135,650 P 167,740

Minimum corporate
income tax (2%) P 3,200 P 7,000 P 11,900 P 19,040
Normal income tax (30%) P 7,527 P 18,054 P 40,695 P 50,322
Whichever is higher P 7.527 P 18,054 P 40,695 P 50,322
Less:
Income tax withheld on rent ( 400) ( 800) ( 1,200) ( 1,600)
Quarterly income taxes paid –
First quarter (7,527) ( 7,527) ( 7,527)
Second quarter (9,727) (9,727)
Third quarter _____ _____ ______ (22,241)
Income tax due P 7,199 P 9,727 P 22,241 P 9,227

Schedule of capital gains and losses.

 Net capital loss (P12,000) (P12,000)
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CHAPTER 24. TAX CREDIT FOR FOREIGN INCOME TAX PAID.

24-1.
(a) Net income, Philippines P2,000,000
Net income, foreign country 1,000,000
Net income before deduction for foreign income tax P3,000,000
Less: Income tax paid, foreign country 400,000
Taxable income P2,600,000
Income tax at 30% P 780,000

(b) Net income, Philippines P2,000,000

Net income, foreign country 1,000,000
Taxable income P3,000,000
Income tax at 30% P 900,000
Less: Tax credit for foreign income tax paid:
Actually paid P400,000
Limit (P1,000,000/P3,000,000 x P900,000) P300,000
Allowed 300,000
Philippine income tax still due P 600,000

(c) Tax credit is more advantageous.

24-2.
(a) Net income, Philippines P3,000,000
Net income, Foreign Country A 2,000,000
Net income, Foreign Country B 1,000,000
Net income before deduction for foreign income taxes P6,000,000
Less: Income tax paid, Foreign Country A P700,000
Income tax paid, Foreign Country B 200,000900,000 Taxable
income P5,100,000
Income tax at 30% P1,530,000

(b) Net income, Philippines P3,000,000

Net income, Foreign Country A 2,000,000
Net income, Foreign Country B 1,000,000
Taxable income, world P6,000,000
Income tax at 30% P1,800,000
Less: Tax credit (Schedule) 800,000
Income tax still due P1,000,000

Schedule on tax credit.

 Limitation A:

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On tax paid, Country A:
Formula: P2,000,000/P6,000,000 x P1,800,000 P600,000
Actually paid P700,000
Allowed tax credit P600,000
On tax paid to Country B:
Formula: P1,000,000/P6,000,000 x P1,800,000 P300,000
Actually paid P200,000
Allowed 200,000
Total, Limitation A P800,000
Limitation B:
Formula: P3,000,000/P6,000,000 x P1,800,000 P900,000
Total of foreign income taxes paid (P700,000 + P200,000) P900,000
Allowed P900,000
Tax credit to apply (Limitation A) P800,000

(c) It is more advantageous to claim a tax credit than a deduction for the foreign
income taxes paid.

24-3.

(a)
Net income, Philippines P 700,000
Net income, foreign country 300,000
Total P1,000,000
Less: Foreign income tax paid 80,000
Taxable income P 920,000
Income tax at graduated rates P 166,000

(b)
Net income, Philippines P 700,000
Net income, foreign country 300,000
Taxable income, world P1,000,000
Income tax at graduated rates P 190,000
Less: Tax credit:
Formula: P300,000/P1,000,000 x P190,000 P57,000
Actually paid P80,000
Allowed 57,000
Income tax still due P 133,000
(c) It is more advantageous to claim a tax credit than a deduction for the foreign income
tax paid.