INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

SUGGESTED ANSWERS

82
Chapter 9: Losses

CHAPTER 9

LOSSES
Problem 9 1 TRUE OR FALSE
1. True
2. True
3. True
4. True
5. True
6. True
7. True
8. False deductible only to either income or estate.
9. False NOLCO is not applicable when OSD is used.
10. False NOLCO is not applicable under MCIT.
11. True
12. False not deductible
13. False lower amount of the replacement cost or book value
14. True
15. True
16. False Deductible from gambling gains only.
Problem 9 2
1. A
2. C
3. D
4. C

5.
6.
7.
8.

D
A
D
A

9. A
10. C
11. B
12. C

Problem 9 3
Not in the choices = P10,000.
Account worthless and written-of

P10,000

Note: The depreciation amounting to P16,000 is deductible from business income as an expense
but not a loss.
Problem 9 4
B
B. Loss from sale of business equipment

P100,000

Problem 9 5
A
Loss on sale of capital assets is not deductible from business income.
Problem 9 6
C
Deductible loss Book value (P100,000 x 10% x 4)
Problem 9 7
D
Deductible loss book value lower than replacement cost

P 40,000

P 50,000

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INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

SUGGESTED ANSWERS

Chapter 9: Losses

Problem 9 8
C
Acquisition cost
Less: Accum. Dpn. [(P600,000 x 90%)/10] x 2
Book value
Multiplied by percent of damaged portion
Damaged portion

P600,000
108,000
P492,000
30%
P147,600

Deductible loss replacement cost (lower)

P127,600

Problem 9 9

No deductible loss at balance sheet date. On June 30, the reportable gain would be
P20,000, or (P120,000 P100,000).
Problem 9 10

Net operating loss per GAAP

Less: Bad debts estimate
NOLCO in the succeeding years

P50,000
10,000
P40,000

Problem 9 11
D
Zero. An individual who claims the 10% optional standard deduction shall not simultaneously
claim deduction of the NOLCO.
Problem 9 12
P25,000. The lower between the carrying value and replacement cost.
Problem 9 13
Book value (P1,200,000) x10/20
Less: Insurance recovery
Scrap recovered
Deductible loss

P600,000
P200,000
20,000

220,000
P380,000

Problem 9 14
None, because the demolition cost, net of amount realized from scrap should be capitalized as
part of the factory building cost.
Problem 9 15
Net loss reported
Estimated bad debts
Warranty expense
Net loss carry-over
Problem 9 16
Gross profit year 1
Less: Other operating expenses
NOLCO for year 2

P 50,000
( 20,000)
( 10,000)
P 20,000

P500,000
580,000
P 80,000

84

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

SUGGESTED ANSWERS

Chapter 9: Losses

Problem 9 17
Year 1
Sale
Less: Cost Notes receivable
Gain

Year 2
P1,800,000
1,500,000
P 300,000

No gain or loss on year 1 because there was no actual sale of foreclosed property.
Problem 9 18
None, because the loss should be recognized only upon actual sale of the property foreclosed.
Problem 9 19
None. There is no deductible loss from gross income. Gambling losses can only be deducted from
the gambling winnings. Gambling transactions are not ordinary business transactions, but
capital asset transaction. Accordingly, gambling losses are not an allowable deduction from
ordinary gross income.
Problem 9 20
Loss on robbery (construction supplies)
Loss on pilferage of business supplies
Replacement cost of damaged portion of machine
Deductible loss

P50,000
10,000
150,000
P210,000

The compensatory and actual damages can be claimed under the classification of deductible
damages.
Problem 9 21
1.
OSD (P2,000,000 x 40%)

P800,000

2.

P600,000

OSD (P2,000,000 P500,000) x 40%

Problem 9 22
1.
Gross income (P2,000,000 P1,000,000)
Multiplied by MCIT rate
Income tax due MCIT
2.

P1,000,000
2%
P
20,000

NOLCO for year 200E

P - 0 -

Note: The 3-year reglamentary period for NOLCO shall not be suspended
even if MCIT has been used. NOLCO has expired efectively on 200D.
Problem 9 23
Pilferage loss
Capital loss on sale of capital asset
Casualty loss

Ordinary
P5,000
15,000

Capital
P10,000
.

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INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

SUGGESTED ANSWERS

Chapter 9: Losses

Total deductible loss

P20,000

Problem 9 24
Death of livestock previously purchased
Cost of property expropriated by the government
(P30,000 P10,000)
Total deductible farm loss
Problem 9 25
Cost of the building
Less: Accumulated depreciation (P10,000,000/30) x 5
Book value before additions and improvements
Add: Additions and improvements
Total
Less: Accum depn (P8,833,333/25) x 3
Book value
Less: Insurance collected
Salvage value
Deductible loss

P10,000

P10,000
20,000
P30,000

P10,000,000
1,666,667
P 8,333,333
500,000
P 8,833,333
1,060,000
P 7,773,333
P5,800,000
300,000

6,100,000
P 1,673,333

Problem 9 26

Compensatory liquidated damages

Replacement cost of damaged portion of machine
Book value of abandoned equipment (P150,000 P120,000)
Amount of deductible losses

P100,000
40,000
30,000
P170,000

Loss on unrealized earnings is not deductible because it is not an actual loss (Sec. 96,
Rev. Regs. No. 2). The casualty losses are fully compensated by insurance, hence, not
deductible. The excess of insurance compensation is a taxable gain and should not be
treated as a deduction of other losses (Sec. 5, Rev. Regs. No. 12-77). Loss caused by
embezzlement of funds by a known person can only be deducted when the right of
recovery becomes worthless (Talisay-Silay Milling Co. Inc., vs. Commissioner, CTA
Cases No. 1399 and 1406, December 29, 1965). Capital losses are not deductible from
business gross income. (Sec. 39(C), NIRC)