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

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CHA+TER %
DEDUCTIONS ,ROM GROSS INCOME
Problem 8 1 DEDUCTIBLE OR NONDEDUCTIBLE FROM GROSS INCOME
1. Deductible 11. Nondeductible
2. Nondeductible 12. Deductible
3. Nondeductible 13. Deductible
4. Deductible, in lieu of tax credit (Sec. 34C3, NIRC) 14. Deductible
5. Deductible 15. Nondeductible
6. Nondeductible 16. Nondeductible
7. Nondeductible 17. Nondeductible
8. Deductible 18. Deductible
9. Deductible 19. Deductible
10. Nondeductible 20. Deductible
Problem 8 2 TRUE OR FALSE
1. True
2. True
3. False Business expenses related to business income outside the Philippines is
deductible also.
4. False Business expense is deductible from gross income.
5. True
6. True
7. True Once OSD is opted, no capital loss could be deducted from capital gain.
8. False Some business expenses are nondeductible or subject to limit.
9. False Income outside the Philippines by a NRC is not taxable in the Philippines, hence,
no allowable deduction is allowed.
10.True
11.False Compensation income is not subject to OSD.
12.False NOLCO is not an itemized deduction.
13.True Amortized over the term of the lease
14.False of 1%
15.False 33%
16.False Double declining method
17.True
18.True
Problem 8 3 Problem 8 4 Problem 8 5 Problem 8 6
1. B 1. C 1. A 1. A
2. No choice, OSD=40% 2. A 2. A 2. C
3. D 3. D 3. C 3. A
4. D 4. A 4. C 4. C
5. D 5. B 5. A 5. C
6. C 6. B 6. D 6. C
7. B 7. A 7. C 7. B
8. D 8. A 8. A 8. C
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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
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9. B 9. D 9. B 9. C
10. C 10. A 10. C 10. C
11. C 11. D
12. D 12. B
13. C
Problem 8 7 C
Expensed Capitalized
Change of motor of air condition P60,000
Repainting of building P10,000
Expansion of store 50,000
Cleaning of computers 9,000
Repair of furniture 1,000 .
P20,000 P110,000
Problem 8 8 A
Salaries net of tax P100,000
Withholding tax 5,000
Deductible business expense P105,000
Problem 8 9 A
General rule: No personal or business expense is deductible from compensation income.
Problem 8 10 D
Depreciation expense (P1,000,000 x 40%)/25 P16,000
Loss of business equipment 38,000
Deductible expense P54,000
Problem 8 11 D
1. A
No personal or business expense is deductible.
2. B
Depreciation (P20,000 x 10%) P 2,000
Repair (P100,000 x 10%) 10,000
Ofce supplies 6,000
Total deduction P18,000
Problem 8 12 B
Tax laws GAAP
Salary expense (P180,000 + P20,000) P200,000 P200,000
Estimated uncollectible accounts 10,000
Compromise penalty 50,000
Depreciation expense 30,000 30,000
Miscellaneous expense . 5,000
Deductible from earnings P230,000 P295,000
Note: For tax purposes, the miscellaneous expense is not deductible because it was not reported
last year. For accounting purposes, the miscellaneous expense can be deducted as prior period
adjustment from retained earnings.
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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
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Problem 8 13 C
Gross income (P300,000 + P20,000 + P180,000) P500,000
Multiplied by OSD rate 40%
Optional standard deduction P200,000
Problem 8 14
1. B
Gross income (P870,000 P10,000 P380,000)) P480,000
Add: Gains from sale of capital asset 40,000
Total P520,000
Multiplied by OSD rate 40%
Optional standard deduction P208,000
2. B
OSD P208,000
Less: Operating expense 20,000
Amount of income enjoying tax savings P188,000
Problem 8 15 D
Gross receipts from profession P100,000
Rent income 450,000
Total gross income P550,000
Multiplied by percent of OSD 40%
Optional standard deduction P220,000
Problem 8 16 C
Operating expense before representation expense
(P2,000,000 P300,000) P1,700,000
Representation expense Actual P300,000
- Limit (P20,000,000 x 0.005) 100,000
- Lower 100,000
Allowable itemized deductions P1,800,000
Problem 8 17 B
Salary expense P120,000
Rent expense 24,000
Advertising expense 6,000
Depreciation expense 5,000
Interest expense 60,000
Tax diferential on interest income (P30,000 x 33%) ( 9,900)
Total itemized deductions P205,100
Problem 8 18 A
Gross salaries of employees P6,000,000
Grossed-up monetary value of fringe benefts 1,000,000
Deductible salaries and fringe benefts expenses P7,000,000
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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
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Problem 8 19 D
Allowable deduction fringe beneft expense (P102,000/68%) P150,000
Problem 8 20 D
Assume bonus is computed after tax but before bonus. The answer is letter D = P8,143,
computed as follows:
Net income before charitable contribution (P75,000 + P5,000) P 80,000
Less: Deductible contribution (P80,000 x 5%) lower of actual 4,000
Net income before income tax and bonus P 76,000
B = 15% (76,000 T)
T = 30% (76,000 B)
B = 15% [76,000 30% (76,000 B)]
B = 15% (76,000 24,320 + 30%B)
B = 11,400 3,420 +0.045B
B 0.045B = 7,980
0.952B = 7,980/0.955
B = 8,356
Proof:
Income before bonus and tax P76,000
Less: Income tax (P76,000 P8,356) x 30% 20,293
Income after tax but before bonus P55,707
Multiplied by rate of bonus 15%
Bonus P 8,356
Problem 8 21 B
Monthly salary P 5,000
Death benefts 50,000
Terminal pay 25,000
Continuous compensation after the burial for three months 15,000
Total deductible expenses P95,000
Note: Donation for cofn and other wake expenses is not business or compensation related and,
hence, not deductible. (Sec. 72, Rev. Regs. 2)
Problem 8 22 C
Inventoriable cost Supplies expense
Purchases P300,000 P40,000
Decreased in inventory 20,000
Increased in inventory . ( 3,000)
P320,000 P37,000
Problem 8 23 D
Traveling expenses (P50,000 + P200,000) P250,000
Fringe beneft expense (P68,000/68%) 100,000
Transportation expense messenger 40,000
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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
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Total allowable expense P390,000
Problem 8 24 D
Total rent expenses paid P150,000
Rent last year (10,000)
Prepaid rent (20,000)
Deductible rent expense P120,000
Problem 8 25 C
Monthly rent (P20,000 x 60%) x 2 mos from Oct. 31 to Dec. 31 P24,000
Insurance premium (P3,000 x 60%) x 2/12 300
Real property tax (P1,500 x 60%) x 2/12 150
Deductible rent expense P24,450
Note: The city services is not a rent expense.
Problem 8 26 B
1. B Accrual Cash
Rent for 6 months based on usage (P20,000 x 6) x 80% P96,000
Rent based on usage and payments (P80,000 x 80%) P64,000
2. A
Actual cash collection for rent P150,000 P150,000
Problem 8 27 D
Monthly rental expense P2,000
Monthly depreciation (P600,000/8)/ 12 6,250
Monthly deductible expense P8,250
Problem 8 28
1. B
Trading - Limit lower (P5,000,000 x .005) P25,000
2. C
Servicing actual lower P30,000
Problem 8 29 B
Operating Expense before representation P80,000
Representation expense (P300,000 x .01) 3,000
Deductible operating expense P83,000
Problem 8 30 C
Interest expense P40,000
Tax diferential (P50,000 x 33%) (16,500)
Deductible interest expense P23,500
Problem 8 31 D
Sole proprietor Corporation
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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
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Interest expense P50,000 P50,000
Tax diferential (P30,000 x 38%) (11,400)
(P30,000 x 33%) . (9,900)
Deductible interest expense P38,600 P40,100
Problem 8 32 B
Deductible Nondeductible
Interest paid in advanced P 20,000
Interest paid to a brother 12,000
Interest paid on deliquency taxes P 8,000
Interest on borrowings to fnance his family home 30,000
Interest paid to fnance petroleum exploration . 100,000
Total P 8,000 P162,000
Problem 8 33 A
Tax savings from interest expense (P100,000 x 30%) P30,000
Final tax on interest income (P1,000,000 x 12%) x 20% 24,000
Actual tax savings P 6,000
Problem 8 34 A
Documentary stamp taxes P 1,000
Local tax (P6,000 P800 P200) 5,000
Municipal tax 2,000
Community tax 1,500
Deductible taxes P9,500
Note: The fringe beneft income taxes to key ofcers and rank-in-fle employees are to be
classifed as deductible fringe beneft expense and not tax expense.
Problem 8 35 D
Unadjusted net income (P520,000 P200,000) P320,000
Add back: Income tax foreign country 10,000
Adjusted net income P330,000
Personal exemption (50,000)
Net taxable income P280,000

Note: The P10,000 income tax paid to foreign country is better to be treated as tax credit rather
than as operating expense.
Problem 8 36 A
Asset of Oliva P 60,000
Payment to government (P200,000 x 50%) (100,000)
Balance (P40,000)
Deductible bad debts is the entire amount of collectibles P100,000
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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
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Problem 8 37 B
Bad debts from business actual written of (P100,000 x
40%)
P40,000
Bad debts from profession actual written of 50,000
Deductible bad debts expense P90,000

Problem 8 38 D
Annual depreciation expense (P50,000 P5,000)/5 P9,000
Multiplied by ratio of months used during the year 1/2
Depreciation expense 200B P4,500
Problem 8 39 A
Annual depreciation (P2,300,000/11.5 years) P200,000
Multiplied by ratio of months used in 2007 (July 1 to Dec.) 6/12
Depreciation expense P100,000
Problem 8 40 D
Oil drilling machine (P800,000 x 90%) / 8 years P 90,000
Oil extracting machine (P900,000 x 90% / 10 years limit 81,000
Computers (P100,000 x 90%)/4 years 22,500
Delivery truck (P200,000 x 90%)/ 5 years limit 36,000
Annual depreciation expense P229,500
Problem 8 41 C
Depletion base (P6,000,000 P1,000,000 + P300,000) P5,300,000
Divided by number of extractible estimated tons 5,000,000
Depletion per ton P 1.06
Multiplied by number of tons extracted during the year 800,000
Depletion expense P 848,000
Problem 8 42
1
.
D
Depletable costs, January 1, 200x P12,500,000
Exploration costs 1,000,000
Intangible development costs 1,500,000
Total P15,000,000
Less: Depletion expense (P15,000,000/7,500,000) x 1,200,000 2,400,000
Adjusted basis P 1,260,000
Divided by remaining reserves
(5,000,000 + 2,500,000 1,200,000) 6,300,000
New depletion rate/ unit P 2.00
2
.
A
Depletion cost 2007 (P2 x 1,200,000 units) P2,400,000
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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
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3
.
B
Value of production (P12 x 1,200,000 units) P14,400,000
Less: Production and selling costs:
Mining costs P2,000,00
0
Milling costs 3,000,000
Marketing expenses 1,500,000
Depreciation expense 1,000,00
0
7,500,000
Net income from operation P 6,900,000
Multiplied by limit percentage 25%
Deductible amount fro exploration and development cost P 1,725,000
4
.
B
Current exploration and development cost (P1,500,000 + P1,000,000) P2,500,000
Less: Deductible amount of exploration and development cost (see 3) 1,725,000
Exploration and development cost chargeable to succeeding years P 775,000
Problem 8 43 B
Deductible expense: Capitalized Outright expense
Depreciation expense (P10,000,000 x 90%)/50 P180,000
Capital outlay P10,000,000
Problem 8 44
1 B 200A 200B 200C
Lower of actual contribution or normal valuation 800,000 800,000 500,000
Add: Amortization of excess
200A (P200,000/10) 20,000 20,000 20,000
200B (P100,000/10) . 10,000 10,000
Deductible retirement expense 820,000 830,000 530,000
2. A 200A 200B 200C
Actual retirement payments 0 400,000 300,000
Problem 8 45 P610,000 = Not in the choices
Year X Year Y
Actual contribution or normal valuation, lower 700,000 600,000
Add: Amortization (P100,000/10) 10,000 10,000
Deductible retirement expense 710,000 610,000
Note: Only the excess of the actual contribution over the normal valuation is to be amortized
over 10 years.
Problem 8 46 B
Allowed deductible contribution (P200,000 x 5%) P10,000
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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
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Problem 8 47 C
Allowed deductible contribution actual P5,000
Problem 8 48 B
Income before charitable contribution (P500,000 P130,000) P370,000
Multiplied by percent of limit 5%
Allowed deductible contribution - lower P 18,500
Problem 8 49 C
Actual value of donation priority program P1,000,000
Adopt a school program incentive (P1,000,000 x 50%) 500,000
Deductible donation P1,500,000
Problem 8 50
Net sales P5,000,000
Less: Cost of goods manufactured and sold:
Raw materials used:
Raw materials, beginning P 200,000
Net purchases of raw materials 2,000,000
Raw materials, ending ( 400,000) P1,800,000
Direct labor 600,000
Factory overhead:
Indirect labor factory supervisor P 120,000
Depreciation (P100,000 x 90%) 90,000
Light and water (P150,000 x 80%) 120,000
Miscellaneous factory expenses 20,000 350,000
Cost of goods manufactured P2,750,000
Finished goods, ending ( 750,000) 2,000,000
Gross income P3,000,000
Less: Optional standard deduction (P3,000,000 x 40%) 1,200,000
Income from operations P1,800,000
Problem 8 51
1. Salaries of barbers P200,000
Depreciation of barbershop equipment 50,000
Cost of service P250,000
2. Rent expense P 20,000
Utility expense 30,000
Janitorial expense 15,000
Bookkeeping expense 10,000
Itemized deductions P 75,000
Problem 8 52
Salaries of assistants P 96,000
Traveling expenses 11,000
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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
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Light and water ofce 7,890
Stationeries and supplies 1,960
Ofce rent 60,000
Total operating expenses before contribution P176,850
Add: Contribution subject to limit (P500,000 P176,850) x 10%) 32,315
Allowable itemized deductions P209,165
Problem 8 53
Sole
Proprietorship Corporation Partnership
Bad debts written-of (P35,000 P30,000)
Depreciation expense (P140,000 P100,000)
Donation to the government priority program
Donations subject to limit:
Lower of actual, P170,000 or
(P2,500,000 x 10%)
(P2,500,000 x 5%)
Total allowable deductions
P 5,000
40,000
50,000
170,000
.
P 265,000
P 5,000
40,000
50,000
125,000
P 220,000
P 5,000
40,000
50,000
125,000
P 220,000
The research and development cost is to be treated as a deferred expense, hence, its
amortization shall be made in the succeeding fve years when the taxpayer realizes
benefts from such expenditures (Sec. 341, NIRC).
Problem 8 54
1. Operating expenses (1,000,000 x 30%) P50,000 P250,000
Interest expense (P50,000 (P40,000/80%) x 33%] 33,500
Total itemized deductions P283,500
Add: NOLCO 500,000
Total deductible expenses P783,500
Note: NOLCO is not an itemized deduction but part of deductible expenses.
2. Gross income (P5,000,000 P2,000,000) P3,000,000
Multiplied by OSD rate 40%
OSD P1,200,000
Note: NOLCO is not allowed to be deducted if the taxpayer uses OSD.
3. Gross income P3,000,000
Less: OSD 1,200,000
Net taxable income P1,800,000
Problem 8 55
1. 200A 200B
Actual contribution or normal valuation, lower 1,000,000 900,000
Add: Amortization - 200A (P250,000/10) 25,000 25,000
Deductible retirement expense 1,025,000 925,000
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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
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2. Financial net income 50,000,000 60,000,000
Add: Retirement beneft expense accounting 1,100,000 1,200,000
Total 51,100,000 61,200,000
Less: Deductible retirement expense taxation 1,025,000 925,000
Net income for tax purposes 50,075,000 60,275,000
Problem 8 56
Corporation Individual
Salary expenses 500,000 500,000
Retirement (P250,000 + P50,000/10) 255,000 255,000
Representation expense (P10,000,000 x .005) 50,000 50,000
Interest expense paid to the BIR - full 20,000 20,000
Interest expense limit:
Corporation (P100,000 (P96,000/80%) x 33%) 60,400
Individuals (P100,000 (P96,000/80%) x 38% 54,400
Depreciation expense 40,000 40,000
Rent expense 250,000 250,000
Group insurance expense 50,000 50,000
Bad debts expense (P100,000 x 20%) 20,000 20,000
Contribution expenses:
TESDA priority project (500,000 x 1.5) 750,000 750,000
Local government limit (lower is actual) 100,000 100,000
Total itemized deductions 2,095,400 2,089,400
Note: NOLCO is an allowable special deduction but not an itemized deduction.
Problem 8 57
1. Individual Corporation
Salaries expense (P680,000 P100,000) 580,000 580,000
Bad debts expense (P370,000 P270,000) 100,000 100,000
Retirement expense (P1,000,000 P380,000) 620,000 620,000
Representation expense (P39,000,000 x 0.005) 195,000 195,000
Rent expenses (P200,000 P20,000) 180,000 180,000
Taxes expense (P300,000 P270,000) 30,000 30,000
Life insurance expense (P150,000 P100,000) 50,000 50,000
Total itemized deduction before contributions 1,755,000 1,755,000
Contribution expenses:
Donation to TESDA priority project (P500,000 x 150%) 750,000 750,000
Donations to CHED not priority project
(P200,000 actual is lower + 50% of actual) 300,000 300,000
Donations to government (P100,000 actual is lower) 100,000 100,000
Ind: (P39,000,000 P30,000,000 P1,752,500) x 10%=724,500
Corp: (P39,000,000 P30,000,000 P1,752,500) x 5%=362,250 . .
Total allowable deductions 2,905,000 2,905,000
Computation of sales:
Financial income P 5,000,000
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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
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Cost of sales 30,000,000
Operating expenses deducted
(P680,000 + P370,000 + P1,000,000 + P800,000 + P500,000
+ P200,000 + P300,000 + P150,000) 4,000,000
Total sales P39,000,000
2. Individual Corporation
Gross income (P39,000,000 P30,000,000) P9,000,000 P9,000,000
Less: Total allowable deductions 2,905,000 2,905,000
Net taxable income P6,095,000 P6,095,000
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