Comprehensive Problems

Problem 1. Marie Corporation, a domestic corporation, presented to us its data for 2018 as follows:
Sales P 1,200,000
Less: Cost of Sales 450,000
Gross Income 750,000
Less: Operating Expenses
Salaries and wages P 170,000
Travelling expenses 12,000
Light, heat and water 24,000
Entertainment 20,000
Depreciation 5,000
Interest expense 2,500
Charitable contributions 5,000
Fire Loss 85,000 323,500
Net Income before tax P 426,500

Additional information:
After review of the cost and expense items, the following data were revealed:
a. Salaries and wages was overstated by P 15,000
b. Entertainment expenses amounting to P 6,500 are not supported by receipts.
c. The charitable contributions were distributed through the Kiwanis Club as aid to war victims of
Mindanao.
d. Out of the fire loss of P 85,000, an amount of P 15,000 was compensated by insurance.

Required: Compute the income tax due and payable by Marie Corporation.

Problem 2. Genuine Corporation has a soft spot for senior citizens and persons with disability (PWDs).
As such, it hires senior citizens and PWDs to work in the company. The following data taken from the
books of accounts are provided by the corporation for the calendar year 2018:

Gross Sales P15,000,000

Cost of Sales 5,000,000
Salaries of Senior Citizens 500,000
Salaries of PWDs 300,000
Actual amount of assistance under Adopt-A-School Program (fully deductible) 200,000
Other operating expenses 3,000,000

During the same period, the corporation allows 20% discount to senior citizens and PWDs who buy
goods from the company. The sales are as follows (not part of the gross sales above):
Sales to senior citizens P800,000
Sales to PWDs 500,000
Total P1,300,000

Required: (1) How much is the total discount to be given?

(2) How much is the taxable net income?
(3) How much is the taxable net income using optional standard deduction?
Other Problems

A. INTEREST EXPENSE

Problem 1. Ricky incurred a deductible interest expense of P180,000 in 2018. In the same year, his bank
deposit realized interest income of P50,000, on which the 20% final tax was withheld by the bank.

Determine the amount of interest expense which can be deducted from gross income.

Problem 2. Lynleen Company, on an accrual basis, purchased factory equipment as follows:

Cost of equipment P 1,000,000
Estimated useful life 5 years
Date acquired March 1, 2018

The equipment was financed through a 1-year loan with Antony and Douglas Bank with interest at the
rate of 18% per annum beginning on January 16, 2018 which was discounted in full.

In 2018, Lynleen Company realized interest income on its bank deposit in the amount of P 100,000,
which was subjected to a 20% final tax.

Question 1: How much is the deduction in 2018 if the interest is treated as an expense?
Question 2: How much is the deduction in 2018 if the interest is treated as capital expenditure?

Problem 3. Carlo obtained a 1-year loan from Maricar Bank in the amount of P 1,000,000, with interest
at the rate of 19% per annum. The loan was released on December 26, 2018 with the interest for 1 year
of P 190,000 already discounted.

On January 10, 2019, Carlo paid the loan in full, getting a rebate of the excess discounted interest.

Question 1: How much is the interest deduction of Carlo for 2018 and 2019 if he is on the accrual basis?
Question 2: How much is the interest deduction of Carlo for 2018 and 2019 if he is on the cash basis and
the “when indebtedness is paid rule” as provided in Section 34 (B)(2)(a) of the NIRC is applied?

Problem 4. Alvin Company paid the following interest during the year:
Interest for late payment of income tax for 2017 P 2,100
Surcharge and compromise for late payment of income tax for 2017 4,250
Interest on bonds issued by Alvin Company 50,000
Interest on money borrowed by the company from a stockholder who owns 60%
of the outstanding stock of the company 80,000
Interest on an indebtedness which has prescribed 5,000

How much is the interest deduction of Alvin Company?

Problem 5. The books of Lovelyn Company, a foreign corporation, show the following data during the
year:
Gross income from the Philippines P 400,000
Gross income from the US 1,000,000
Gross income from Australia 600,000
 Interest expense in the Philippines 40,000
Interest expense in the US 120,000
How much is the interest deductible from the Philippine gross income if the taxpayer is
a. Engaged in trade or business within the Philippines.
b. Not engaged in trade or business within the Philippines.

B. TAXES

Problem 1. State whether the following tax payments are deductible (Y) or not (N):
Tax payments Y/N
Real property tax on apartment house for rent owned by Robert.
Real property tax on residential house and lot of Richard.
Foreign income tax paid by Iesa which was claimed as a tax credit
Value added tax paid by Sarah Restaurant, Inc. on its sales
Value added tax added to restaurant bill paid by a customer engaged in
trade or business
Income tax paid by Rodman engaged in business
Special assessment on land, used for business purposes by Pretie
Company
Value added ta paid on importation of machinery used in business.

Problem 2. Bert Co., a domestic corporation, has the following data on its taxable income and income
taxes for the current year:
Taxable Income Income Tax
paid/payable
Philippines P 55,000 P 30,000
USA 25,000 10,000
Switzerland 20,000 2,000
Taxable income before deducting foreign income taxes P 100,000 P 42,000

Question 1: Compute the income tax payable of Bert Co. if the foreign taxes are claimed as a tax credit.
Question 2: Compute the income tax payable of Bert Co. if the foreign taxes are claimed as deductions
from gross income.

C. LOSSES

Problem 1. A building was destroyed by fire in 2017. May the owner of the building deduct such loss in
2018?

Problem 2. A fire occurred in the City of Dumaguete and by reason of which the stock of plywood of a
lumber company was looted. The lumber company, however, failed to record such loss in its books of
accounts. May the company deduct such losses?

Problem 3. An abaca plantation in Davao was destroyed by Mosaic infestation starting in 2012. By the
end of the year, more than 2/3 of the plantation was worthless. Towards the middle of 2013, the
plantation was totally destroyed. When should the loss be deducted?
Problem 4. During an earthquake in 2012, a building was destroyed. The owner (corporation) filed a
claim of P 1,000,000, the book value of the building, against the insurance company. The insurance
company was willing to pay P 600,000. Finally, the claim was settled in 2013 for P 750,000, the insurance
company paying that amount in the same year. When was the loss of P 250,000 deductible?

Problem 5: Miss Beauty, whose taxable year is the calendar year, had the following stock transactions:

 On September 20, 2018 purchased 100 shares of the common stock of Ugly Company for P5,000
or at P50 per share.
 On December 11, 2018, she purchased 50 shares of substantially identical stock for P2,750 or at
P55 per share.
 On December 26, 2018, she purchased 25 additional shares of such stock for P1,125 or at P45
per share.
 On January 2, 2019, she sold for P4,000 the shares purchased on September 20 at P40 per share.

How much is the deductible loss and non-deductible loss on January 2, 2019?