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CHAPTER 7

EXERCISES 7 1
1 a. By contributing P100,000 each with the intention of dividing
.
whatever profit is obtained, Atienza, Bauzon and Carmona have
formed a business partnership which is taxable as a corporation.
The registration with the Securities and Exchange Commission is
not an indispensable requisite in its formation.
In this case, the business organization formed will fall under the
phrase partnership no matter how created or organized, which is
included in the definition of a corporation.
b. The business organization formed is a corporation. The five
entrepreneurs served as the incorporators.
c.

The two corporations have formed a joint venture because it is clear


that their intention is to accomplish a single project which upon
completion, the joint undertaking will be automatically dissolved.
The joint venture is not taxable as a corporation (BIR Ruling 83-03).

d. Gigi and Jayjay have formed a general professional partnership. By


organizing an accounting and auditing firm, they shall exercise a
common profession for certified public accountants. A general
professional partnership is not subject to income tax.
e. The business organization formed possesses the feature applicable
to a joint stock company. It is taxable as a corporation.
2
.

Classification
a
.
b
.
c
.

Domestic corporation
Resident foreign
corporation *
Nonresident foreign
corporation

Situs of
Income
Within and
without
Within only

Tax Base
Taxable income

Within only

Gross income

Taxable income

*It is an international carrier (See Comm vs. BOAC, et al, GR Nos.


65773-74, April 30, 1987). In which case, the tax base can be Gross
Philippine Billings.
3 a
. .

Domestic corporation
Sales domestic

2008

2009

3,000,0 3,000,00
00
0

Sales abroad
Gross sales
Less: Cost of goods
sold
Gross income
Less: Expenses
Domestic
Foreign
Total expenses
Taxable income
Rate
Income tax
b
.

1,000,0
00
2,000,0
00
3,000,0
00
2,000,0
00
35
%
700,00
0

1,000,00
0
2,000,00
0
3,000,00
0
2,000,00
0
30%

3,000,0
00
1,500,0
00
1,500,0
00
1,000,0
00
500,000
35
%
175,00
0

3,000,00
0
1,500,00
0
1,500,00
0
1,000,00
0
500,000
30%

3,000,0
00
400,00
0
3,400,0

3,000,0
00
400,00
0
3,400,0

600,00
0

Resident foreign
corporation
Sales domestic
Less: Cost of goods sold (3/10 x
5,000,000)
Gross income
Less: Expenses on domestic
sales
Taxable income
Rate of tax
Income tax

c
.

7,000,
7,000,0
000
00
10,000, 10,000,0
000
00
5,000,
5,000,0
000
00
5,000,0 5,000,00
00
0

150,000

Nonresident foreign
corporation
Sales domestic
Yield from deposit
substitute
Gross income

00
35
%
1,190,0
00

Rate
Income tax

00
30
%
1,020,0
00

4 a. Bago Corporation shall be covered by the application of the MCIT


. effective 2010.
b. Yes, the corporation shall be subject to a minimum income tax in 2010
because the normal income tax is P90,000 while the 2% of the gross
income which represents the minimum corporate income tax is
P100,000, computed as follows:
Gross income 2010
Less: Expenses
Taxable income
Rate
Normal income tax
Less: Minimum income tax (5,000,000
x 2%)
Excess MCIT

5,000,000
4,700,000
300,000
30%
90,000
100,000
( 10,000)

The counting of the four (4) year period shall commence in 2006 a
year following the year in which the corporation was registered with the
BIR.
The corporation is not covered by the MCIT from 2005 to 2009. It
shall be covered only in 2010 or on the 4th year following the year in
which it was registered with the Bureau of Internal Revenue.
5
.
Gross sales
Sales returns and discounts
Cost of goods sold
Total
Net
Add: Capital gain
Gross income

2007

2008

2009

4,580,0
00
200,00
0
860,0
00
1,060,0
00
3,520,0
00
30,0
00
3,550,
000

5,250,0
00
175,00
0
620,0
00
795,0
00
4,455,0
00

2,850,0
00
295,00
0
1,200,0
00
1,495,0
00
1,355,0
00
35,0
00
1,390,
000

.
4,455,0
00

Less: Deductions
Taxable income
Rate of tax
Normal Income tax
MCIT:
2007 (3,550,000 x 2%)
2008 (4,455,000 x 2%)
2009 (1,390,000 x 2%)
Income tax
Excess MCIT 2007 (71,000
24,360)
Less: Carry forward of excess
MCIT
Income tax payable
6 a
. .

3,480,4
00
69,600
35
%
24,360

Sales discounts

89,100
.
71,00
0
46,64
0
71,00
0

Purchases
Freight-in
Purchase returns and
allowances
Purchase discounts
Goods available for sale
Inventory, December 31
Gross income

.
89,250

46,64
0
42,61
0
6,000,0
00

200,00
0
15,00
0

Net sales
Less: Cost of goods sold
Inventory, January 1

850,0
00
540,00
0
30
%
162,00
0

71,000

Sales
Sales returns and allowances

4,200,0
00
255,00
0
35
%
89,250

2,400,0
00
1,500,0
00
35,000
( 30,00
0)
(
7,00
0)
3,898,0
00
1,900,0
00

215,00
0
5,785,0
00

1,998,0
00
3,787,0
00

27,80
0
162,00
0
______
162,00
0

Less: Operating expenses

1,600,0
00
2,187,0
00
35
%
765,45
0

Taxable income
Rate of tax
Normal Income tax
b MCIT (3,787,000 x 2%)
.
c
.

75,74
0

Income tax due

765,45
0

7 Gross sales
.
Less: Cost of sales

2,000,0
00
1,600,0
00
400,00
0

Gross income
Less:
Optional
deduction
Gross income
Rate

standard

Taxable net income


8
.

400,000
40%

160,00
0
240,00
0

a
.

The rate of tax applicable to the educational institution is 10% because the
income from unrelated activity does not exceed 50% of the entire gross
income.

b
.

If the income from unrelated activity is more than the income from related
the Arts University would be subject to a tax rate of 35% until 2008 and
30% effective 2009.

9
.

2006
a
.

Provision for income tax

50,000

Income tax payable


To record income tax liability using normal
income tax.
b
.

Deferred charges MCIT

15,000

50,000

Income tax payable


To record excess MCIT (65,000
50,000)

15,000

c. Income tax payable


Cash in bank
To record payment of income tax due
for 2006.

65,000
65,000

a
.

2007
The corporation is not allowed to carry forward and credit the 2006 excess
MCIT against the income tax liability for 2007, since the 2007 MCIT is
greater than the normal income tax for said year.

b
.

To record income tax liability using the normal


income tax rate.
Provision for income tax
Income tax payable

85,000
85,000

c. To record application of excess MCIT.


Deferred charges MCIT
Income tax payable
d
.

To record payment of income tax due for


2007.
Income tax payable

15,000
15,000

100,00
0

Cash in bank

100,000

2008
The corporation is not allowed to carry forward and credit the
2006 and 2007 excess MCIT against the normal income tax liability
for 2008 and 2009 since the 2008 and 2009 MCIT are greater than
the Normal Income Tax for said year.
The accounting entries in 2008 and 2009 shall be similar to
2006 and 2007 above.
For taxable year 2010 when the expired portion of excess MCIT
(65,000 50,000) for taxable year 2006 is closed to Retained
Earnings account due to its non-application the entry is:
Retained earnings
Deferred charges MCIT

15,000
15,000

10
.

1
.

Tuition fees
School canteen
Dormitories
Bookstores
Car stickers
Total

2
.

If Fatima University is a non-stock, non-profit educational institution


no income shall be reported for income tax purposes because nonstock non-profit schools are not subject to income tax.

3
.

If Fatima University is a government educational institution it will


not report any income for income tax purposes because government
educational institutions are exempt from income tax.

11
.

a
.

b
.

Gross receipts

4,500,000

Less: Cost of sales


Gross income
Less: Deductions
Taxable income
Rate
Income tax

1,200,000
3,300,000
680,000
2,620,000
35%
917,000

Taxable income

2,620,000

Yield from deposit substitutes


Interest income
Total
Less: Dividends paid
Income tax paid
Tax on deposit substitutes (75,000 x
20%)
Tax on interest (42,000 x 20%)
Reserved for building construction

75,000
42,000
2,737,000

Improperly accumulated earnings


12
.

1,560,0
00
250,000
95,000
48,000
8,30
0
1,961,3
00

375,000
917,000
15,000
8,400
1,500,0
00

2,815,400
( 78,400)

The final withholding tax to be paid by the corporation (whether


domestic, resident foreign or nonresident foreign) is uniformly
computed as follows
Gross selling price (P110 x 1,000)

P 110,000

Less: Cost (P100 x 1,000)


Net capital gain
Rate of tax
Capital gains tax (final tax)

100,000
10,000
5%
500

EXERCISES 72
72.1

1.

ANSWER: A

2.

ANSWER: C

3.

Answer: D
For purposes of MCIT, the taxable year in which business
operations commenced shall be the year in which the domestic
corporation is registered with the Bureau of Internal Revenue.
Firms registered with BIR in any year shall be covered by MCIT
after the lapse of three calendar years.
The corporation is registered with BIR in 2004. Therefore, it
shall be subject to MCIT effective 2008.

4.

5.

ANSWER: D
Gross income
Less: Deductions
Taxable income
Rate of tax
Normal income tax
MCIT (P852,000 x 2%)
Income tax payable (higher)

852,000
800,000
52,000
30%
15,600
17,040
17,040

Answer: C
Gross income
Less: Deductions
Taxable income
Rate of tax
Normal income tax
MCIT (P632,000 x 2%)
Income tax payable (higher)

632,000
610,000
22,000
35%
7,700
12,640
12,640

PROBLEM 7-2.2

1.

2.

3.

ANSWER: C
Minimum Corporate Income Tax
Less: Normal income tax
Excess of MCIT over NIT

50,000
20,000
30,000

Entry:
Deferred charges - MCIT
Income tax payable

30,000

ANSWER: A
Retained earnings
Deferred charges - MCIT

30,000

ANSWER: B
2005
2006
2007
Total excess of MCIT over NIT
Journal entry:
Income tax payable
Deferred charges MCIT

30,000

30,000
27,000
5,000
10,000
42,000
42,000
42,000

PROBLEM 72.3:
1. ANSWER: B
Income tax, 1st Qtr (NIT higher)
Less: Taxes withheld Prior year
Taxes withheld 1st qtr
Excess MCIT prior year
Income tax due, 1st Qtr (normal
income tax)
2.

10,000
20,000
30,000

ANSWER: B
Income tax, 2nd Qtr (MCIT higher)
Less: Taxes withheld Prior year
Taxes withheld 1st qtr
Taxes withheld 2nd qtr
Net income tax payment 1st
Qtr
Income tax due, 2nd Qtr MCIT

3.

100,00
0

ANSWER: C
Income tax, 3rd Qtr (NIT higher)

60,000
40,000

330,00
0
10,000
20,000
30,000
40,000

100,00
0
230,00
0
470,00

0
Less: Taxes withheld Prior year
Taxes withheld 1st qtr
Taxes withheld 2nd qtr
Taxes withheld 3rd qtr
Net income tax payment 1st
Qtr
MCIT paid in the 2nd Qtr
Excess MCIT in prior year

10,000
20,000
30,000
40,000
40,000
230,000
30,000

Income tax due, 3rd Qtr - NIT


4.

ANSWER: C
Annual income tax (NIT higher)
Less: Taxes withheld Prior year
Taxes withheld 1st qtr
Taxes withheld 2nd qtr
Taxes withheld 3rd qtr
Taxes withheld 4th qtr
Net income tax payment 1st
Qtr
Net income tax payment 3rd
Qtr
MCIT paid in the 2nd Qtr
Excess MCIT in prior year

670,00
0
10,000
20,000
30,000
40,000
35,000
40,000
70,000
230,000
30,000

Income tax due, Final Qtr - NIT


5.

ANSWER: A
Annual income tax (MCIT higher)
Less: Taxes withheld Prior year
Taxes withheld 1st qtr
Taxes withheld 2nd qtr
Taxes withheld 3rd qtr
Taxes withheld 4th qtr
Net income tax payment 1st
Qtr
Net income tax payment 3rd
Qtr
MCIT paid in the 2nd Qtr
Income tax due, Final Qtr - NIT

400,00
0
70,00
0

505,00
0
165,0
00
550,00
0

10,000
20,000
30,000
40,000
35,000
40,000
70,000
230,000

475,00
0
75,0

00
EXERCISE 73
1. ANSWER: A
Gross income
Less: Deductions
Expenses
NOLCO

2,950,0
00
1,750,0
00
300,00
0

Taxable income
Rate of tax
Income tax due
2.

ANSWER: D
Taxable income
Add: Interest on bank deposit
(16,000/80%)
Proceeds of insurance
NOLCO
Dividends from ABB

900,000
20,000
1,200,0
00
300,00
0
75,00
0

Total
Less: Dividends paid
Income tax paid
Interest on bank deposit
(20,000 16,000)
Improperly accumulated taxable
income
Rate
Improperly accumulated earnings
tax
3.
4.
5.

ANSWER: D
ANSWER: D
ANSWER: C

PROBLEM
4.1

7-

2,050,0
00
900,000
35
%
315,00
0

500,000
315,000
4,000

1,595,0
00
2,495,0
00
819,00
0
1,676,0
00
10
%
167,60
0

1. ANSWER: C
Gross income
Less: Expenses
Salary, allowances and bonus
6,400,000
Other operating expenses
2,600,000
Depreciation of additional
school facilities:
Classrooms (1,300,000/20 x 48,750
9/12)
Furniture & equipment
10,0
(400,000/20 x 6/12)
00
Taxable income
Rate of tax
Income tax
2.

3.

ANSWER: D
Tuition fees
Miscellaneous fees
Income of bookstore
Income of school canteen
Gross income
Less: Expenses
Salary, allowances and
bonus
Other operating expenses
Construction of additional
classrooms
Furniture and equipment
Taxable income
Rate of tax
Income tax

11,230,000

9,058,750
2,171,250
10%
217,125
9,500,000
1,200,000
350,000
180,000
11,230,000

6,400,000
2,600,000
1,300,000
400,000

10,700,000
530,000
10%
53,000

ANSWER: B
A public elementary school is also a government educational
institution. They are exempt from income tax under Sec. 30 of the
National Internal Revenue Code.
A non-stock, non-profit educational institution is exempt from
tax under Article XIV, Sec. 4[3], [4] of the Constitution.
A non-profit educational institution is subject to an income tax
rate of 10%.

4.

ANSWER:

PROBLEM 74.2

1.

ANSWER: A
Gross income
Less: Deductions
Operating expenses
Cost of building

10,000,000
6,400,0
00
2,500,0
00

8,900,000

Taxable income
Rate of tax
Income tax due
2.

ANSWER: C
Gross income
Less: Deductions
Operating expenses
Depreciation(2,500,000/50x6/
12)
Taxable income
Rate of tax
Income tax due

3.

1,100,000
10%
110,000
10,000,000
6,400,0
00
25,00
0

6,425,000
3,575,000
10%
357,500

ANSWER: B
The importation of laboratory equipments are exempt from customs
duties if the school is a private educational institutions.
The school building, even if rented only by the school, if being used
actually, directly and exclusively for educational purpose is exempt from
real property tax.
The portion of the school building is subject to real estate tax
because it is not being used actually, directly and exclusively for
educational purpose.
The income from operation is taxable. Only income received by
non-stock non-profit educational institutions and government
educational institutions are exempt.

4.

ANSWER:

EXERCISES 7 5
PROBLEM 75.1.
1. ANSWER: A
Gross income, Philippines
Less: Expenses, Philippines

P
740,00
0
425,00

0
Gross income, U.S.A.
Less: Expenses, USA

690,00
0
450,00
0

Royalties, USA
Taxable income
Rate of tax (2008)
Income tax
2.

740,00
0
425,00
0
315,00
0
35%
110,25
0

Less: Expenses
Taxable income
Rate of tax (2008)
Income tax
ANSWER: A
Gross income, Philippines

740,00
0
10,00
0
750,00
0
35%
262,50
0

Interest on bank deposit, PNB


Total
Rate of tax (2008)
Final tax
4.

240,00
0
50,00
0
605,00
0
35%
211,75
0

ANSWER: C
Gross income, Phils.

3.

315,00
0

ANSWER: A

PROBLEM 7
5.2
ANSWER: D
Gross income, Phils.
Less: Deductions

200,00
0
80,000

120,00
0

Gross income, USA

60,00
0
30,000

Less: Deductions
Taxable income
Rate (2009)
Income tax
PROBLEM 7
5.3
ANSWER:

30,00
0
150,00
0
30%
45,000

Gross income, Philippines

2,800,0
00
1,300,0
00
1,500,0
00
35
%
525,0
00

Less: Deductions
Taxable income
Rate of tax (2008)
Income tax
PROBLEM 7
5.4
1. ANSWER: B
Gross income, Philippines
Less: Expenses, Phils.

1,200,000
800,000

Gross income, U.S. ($125,000 x P40)


P5,000,000
Less: Expenses, U.S. ($62,000 x P40)
2,480,000
Gross income, HK ($345,000/5x40)
2,760,000
Less: Expenses, HK ($230,000/5 x 40)
1,840,000
Taxable income
Rate of tax
Income tax
2.

ANSWER: C

400,00
0

2,520,0
00
920,00
0

3,440,0
00
3,840,0
00
30
%
1,152,0
00

Gross income, Philippines


Less: Expenses, Philippines
Taxable income
Rate of tax
Income tax
3.

ANSWER: D
Gross income, Philippines
Rate of tax
Final tax

Rate of tax
Income tax

1,200,0
00
2.5
%
30,00
0

ANSWER: B
Gross income, Philippines
Less: Expenses, Philippines
Taxable income
Rate of tax
Income tax
Amount remitted to mother company
(400,000 - 120,000)
Rate of tax
Branch profit remittance tax

6.

1,200,0
00
30
%
360,00
0

ANSWER: A
Gross income

5.

1,200,0
00
800,00
0
400,000
30%
120,000

ANSWER: A
Exempt from branch profit remittance
tax.

1,200,0
00
800,00
0
400,000
30
%
120,00
0
280,000
15%
42,000

7.

ANSWER: B
Gross income
Rate of tax
Final tax

8.

1,200,0
00
25
%
300,00
0

ANSWER: B
Gross income
Rate of tax
Final tax

1,200,0
00
4.5
%
54,00
0

EXERCISE 7 6
1. ANSWER: A
2.

ANSWER:

3.

ANSWER: B
Net income after tax
Rate of tax
Branch profit remittance tax

40,000,000
15%
6,000,000

ANSWER: C
Net income after tax
Royalty
Dividend
Total
Less: Branch profit remittance tax
Amount to be remitted to head office

40,000,000
3,500,000
4,000,000
47,500,000
6,000,000
41,500,000

4.

5.

ANSWER: B

6.

ANSWER: D
GSIS, SSS, and PHIC are exempt from income tax.
PAGCOR is now subject to income tax per RA 9727.

7.

ANSWER:

8.

ANSWER: C
All assets of a non-stock non-profit educational institution are
exempt from customs duties on importation.

EXERCISE 77. MULTIPLE CHOICE THEORY


1.

ANSWER: B
Cuentas en participacion is considered as a corporation subject to
corporate tax.
General professional partnerships and co-ownerships are not
subject to income tax.
A joint venture which is formed for the purpose of undertaking
energy operations with the government are exempt from tax.

2.

ANSWER: A
An individual permanently residing in the Philippines is classified
as resident regardless of whether he is a citizen or not.

3.

ANSWER: D
Domestic corporations and resident foreign corporations are taxed
based on taxable income.
Non-profit cemeteries are exempt from income tax.
Nonresident foreign corporations are not allowed to claim
deductions for purposes of income taxation. They are taxed based
entirely on gross income derived from sources within the Philippines.

4.

ANSWER:

5.

ANSWER: D

6.

ANSWER: D
Dividends received by individuals from a domestic company are
subject to final tax of 10%.

The rule on tax sparing credit applies only when the dividends are
received by nonresident foreign from a domestic corporations.
7.

ANSWER: B
Sales (2,968,000 /112%)
Less: Cost of sales
Gross income
Less: Expenses
Inclusive (386,400 / 112%)

P2,650,000
1,725,000
925,000
345,000

Exclusive
Taxable income
Rate of tax (2008)
Income tax

450,000

795,000
130,000
35%
45,500

EXERCISE 78. CASE PROBLEM

Excess income taxes paid in a year that could not be applied as tax credit to
taxes due the following year may be refunded the next year.
Thus, if the excess income taxes paid in 2005 have not been entirely used by
a taxable corporation against its quarterly income tax liabilities for 2006,
the unused amount of the excess may still be refunded, provided that the
claim for such a refund is made within two years after payment of the tax.
If a taxpayer suffered a net loss in 2006, incurring no tax liability to
which a previous years tax credit could be applied, there is no reason for
the BIR to withhold a tax refund which rightfully belongs to the taxpayer.
Technicalities and legalisms, however exalted, should not be misused
by the government to keep money not belonging to it, thereby enriching
itself at the expense of its law-abiding citizens (solutio indebiti).
Thus:
Excess tax (TY 04, filed 4/15/05)
TY 2005 (filed 2006):
Income tax due
Less: Tax credit (excess tax 05)
Balance (may be refunded)

13,929,793.5
1
4,187,523.00
13,929,793.5
1
9,742,270.5
1*

* Claim for refund should be made not later that April 15, 2007.