INCOME TAXATION, 2015 Edition: Chapter 1 - Principles of Taxation

SOLUTIONS MANUAL
INCOME TAXATION, 2015 Edition

By TABAG & GARCIA
CHAPTER 1 – PRINCIPLES OF TAXATION

TRUE OR FALSE-SET A
1. TRUE 6. TRUE 11. TRUE 16. TRUE
2. FALSE 7. FALSE 12. FALSE 17. TRUE
3. TRUE 8. FALSE 13. TRUE 18. FALSE
4. FALSE 9. FALSE 14. FALSE 19. TRUE
5. FALSE 10. FALSE 15. TRUE 20. TRUE
TRUE OR FALSE-SET B
1. FALSE 6. TRUE 11. FALSE 16. TRUE
2. TRUE 7. TRUE 12. FALSE 17. FALSE
3. FALSE 8. TRUE 13. TRUE 18. TRUE
4. TRUE 9. FALSE 14. FALSE 19. TRUE
5. TRUE 10. TRUE 15. TRUE* 20. FALSE
*Nonpayment of “tax”
MULTIPLE CHOICE
1. C 16. C 31. C 46. A
2. D 17. A 32. C 47. C
3. C 18. C 33. B 48. C
4. B 19. D 34. A 49. D
5. D 20. C 35. C 50. A
6. C 21. A 36. D
7. C 22. C 37. D
8. B 23. D 38. A
9. D 24. C 39. B
10. D 25. D 40. D
11. D 26. A 41. A
12. C 27. D 42. A
13. A 28. A 43. A
14. D 29. A 44. D
15. C 30. B 45. C
CHAPTER 2 - INDIVIDUAL TAXPAYERS
ERRATUM: PAGE#71, ANSWER FOR Q#6: CGT=P400,000 P24,000

PROBLEMS
2-1
1. P50,000 6. P125,000
2. P50,000 7. P150,000**
3. P50,000 8. P0***
4. P50,000 9. P30,000
5. P100,000 10. P0
**Assume that all the requirements to qualify for additional exemption under the “Foster Child Act” were
complied with
***Reciprocity clause applies to a nonresident alien engaged in trade or business. The taxpayer in the
problem is a nonresident alien not engage in trade or business. Dividend income from a domestic
corporation is not considered as income derived from trade or business.
1|Pa ge
Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia
2-2
1. Taxpayer is a resident citizen
1.1 Taxable income = P720,000
1.2 Income tax payable = P20,400
1.3 Final tax on passive income = P9,000
Gross business income, Philippines P1,000,000

Gross business income, USA 500,000
Compensation income, Philippines 400,000
Business expenses, Philippines (700,000)
Business expenses, USA (430,000)
Basic personal exemption (50,000)
Taxable income P720,000
Tax Due P195,400

Withholding tax on compensation income (50,000)
Crdtble withholding tax on bus. income (125,000)
Income Tax Payable P20,400
Dividend income – DC P5,000

Interest income bank deposit 4,000
Final Tax on Passive Income P9,000
2. Taxpayer is a nonresident citizen

2.2 Income tax payable = (P2,000)

Tax Due P173,000

Income Tax Payable (P2,000)

3. Taxpayer is a resident alien

3.2 Income tax payable = (P2,000)
(same with resident citizen)
2|Pa ge
4. Taxpayer is a nonresident alien engaged in trade or business

Tax Due P189,000


5. Taxpayer is a nonresident alien not-engaged in trade or business

5.3 Final tax on passive income = P0
Compensation income, Philippines P400,000

Dividend income – DC 50,000
Interest income bank deposit, Phls. 20,000
Total GROSS Income P470,000
X 25%
Income Tax Due P117,500
Less: Withholding tax on compensation (50,000)
2-3
1. Taxpayer is a resident citizen
a. Taxable income = P1,026,100
b. Income tax payable = P293,352
c. Final tax on passive income = P38,030
d. Capital gains tax = P120,600
Solution:
From Phils. From Abroad
Total
Income from employment P180,000 P280,000 P460,000
Business income 850,000 960,000 1,810,000
Deductible business expenses (610,000) (730,000) (1,340,000)
Interest income on personal loans** 6,000 3,000 9,000
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Dividend income from foreign corp. 6,800 2,000 8,800
Prizes from singing contest 5,600 - 5,600
Interest income on bank deposits 4,200 4,200
Interest income on money market placements 1,600 1,600
Royalty income 50,000 50,000
Winnings/ prizes from lotteries, raffles 16,900 16,900
Lotto winnings --- 50,000 50,000
Basic Personal exemption (50,000)
Additional exemption -
Taxable income P1,026,100
TAX DUE:
First P500,000 P125,000
Excess @ 32% 168,352
**All incomes regardless of source are taxable. However, personal expenses are not P293,352
allowed as deduction from the gross income
Final Tax on Passive income:

Interest income on bank deposits 10,800
Interest income on money market placements 7,500
Royalty income 90,000
Winnings/ prizes from lotteries, raffle draws 45,000
Total P153,300
@ 20% P30,660
Dividend income from domestic corp. 5,700 -
Royalty income from sale of books 68,000 -
Total P73,700
@ 10% 7,370
TOTAL FINAL TAX ON PASSIVE INCOME P38,030
Capital Gains Tax:

Sale of lot (P1,060,000 x 6%) P63,600
Sale of house and lot (P950,000 x 6%) 57,000
Total P120,600
2. Taxpayer is a non-resident citizen

a. Taxable income = P388,400
Solution:
From Phils.
Income from employment P180,000
Business income 850,000
Deductible business expenses (610,000)
Interest income on personal loans 6,000
Dividend income from foreign corp. 6,800
Prizes from singing contest 5,600
Basic Personal exemption (50,000)
Additional exemption -
TAX DUE:
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First P250,000 P50,000
Excess @ 30% 41,520
P91,520
Final Tax on Passive income:
 As long as there is no interest income from foreign currency bank deposit under FCDS/FCDU, the final tax on
passive income of a nonresident citizen is the same with that of a resident citizen.
Capital Gains Tax:

 CGTs for NRCs = RCs
3. Taxpayer is a resident alien (Same treatment with a non-resident citizen taxpayer)

a. Taxable income = P388,400
2-4
a. Special Alien employed by ROHQ = P145,000 computed as follows:
On Compensation income:
P850,000 x 15% P127,500
On other Income (Apply rules on NRA-NETB)

Dividend Income from a dom. corp. P50,000
Int. Inc. Phil. bank deposit 20,000
Int. Inc. fr. Bank dep. under FCDS exempt
Total Other Income P70,000
Tax rate @ 25% 17,500
TOTAL TAXES P145,000
 Being a nonresident alien-not engaged in trade or business for income taxation purposes, a
Special Alien is not entitled to personal exemptions.
b. Filipino Citizen employed by ROHQ = P218,500 computed as follows:

Compensation income (Subject to basic tax):**
Gross Compensation P850,000
Less: Personal exemption (50k + 50k) (100,000)
Net Taxable Income P750,000
First P500,000 P125,000

Excess of P250,000 @ 32% 80,000 P205,000
Passive Income, Phls. (Subject to Final Tax)
Dividend Income from a dom. corp. @ 10% P5,000
Int. Inc. Phil. bank deposit @ 20% 4,000
Int. Inc. fr. Bank dep. under FCDS @ 7.5% 4,500 13,500
 **Filipinos employed by ROHQs/RHQs holding managerial or technical position shall have the
option to be taxed either at 15% on their gross compensation income or based on Section
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24(A) of the tax code. However, Filipinos exercising the option to be taxed at 15% preferential
rate must meet all the three (3) requirements as discussed in page 79. In the problem
provided, the Filipino counterpart failed to meet the “compensation threshold test” of at least
P975,000. Consequently, the taxpayer shall be subject to tax base on Section 24(A) of the tax
code.
c. Filipino Citizen employed by an OBU = P141,000 computed as follows:

Compensation income (Subject to 15% F.Tax)***
P850,000 x 15% P127,500

Dividend Income from a dom. corp. @ 10% P5,000
 ***Filipinos employed by OBUs as well as Petroleum Contractors/Subcontractors shall be
subject to 15% Final Tax on their “compensation income”.
 The 15% tax rate is a final tax on “gross compensation” income. Hence, personal exemptions
shall not be deducted from such income.
d. Filipino Citizen employed by a Petroleum Contractor = P141,000

(refer to computations in assumption “c”)
e. Filipino Citizen employed by ROHQ with gross compensation income of P1,250,000 =

P346,500 OR P201,000 computed as follows:
Compensation income (Subject to basic tax):****
Gross Compensation P1,250,000
Less: Personal exemption (50k + 50k) (100,000)
Net Taxable Income P1,150,000
First P500,000 P125,000

Excess of P650,000 @ 32% 208,000 P333,000
Dividend Income from a dom. corp. @ P5,000
10%
OR
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Compensation income (Subject to final tax):****
Gross Compensation P1,250,000
Tax rate 15% P187,500

Dividend Income from a dom. corp. @ P5,000
10%
 ****Filipinos employed by ROHQs/RHQs holding managerial or technical position shall have
the option to be taxed either at 15% on their gross compensation income or based on Section
24(A) of the tax code, provided, however, that Filipinos exercising the option to be taxed at
15% preferential rate must meet all the three (3) requirements as discussed in page 79.
2-5
a. Taxable income of the husband = P1,260,000
b. Taxable income of the wife = P1,075,000
c. Consolidated tax due of the husband and the wife = P677,200
Solution:
Husband Wife
INCOME:
Compensation income [P.6M + (.5M/2)] P 850,000 -
Compensation income [P.4M + (.5M/2)] - P650,000
Income-Profession(H): [200,000+(400,000/2)] 400,000 -
Income-Profession(W): [100,000+(400,000/2)] - 300,000
Income from business (P800,000/2) 400,000 400,000
LESS:
Expenses-profession(H):[P80,000 +(120,000/2)] (140,000) -
Expenses-profession(W): [P40,000 +(120,000/2)] (100,000)
Business expenses (P250,000/2) (125,00) (125,000)
Basic Personal exemption (50,000) (50,000)
Additional exemption (75,000) -
TAXABLE INCOME P1,260,000 P1,075,000
Tax due:
7|Pa ge
First P500,000 P125,000 P125,000
In excess of P500,000 @ 32% 243,200 184,000
Total P368,200 P309,000
Consolidated Tax Due P677,200
Note: Personal expenses are not deductible. The Premium payments for health insurance are likewise
nondeductible because the total gross income of the family exceeded the threshold of P250,000.
2-6
a. Total capital gains taxes
Sale of shares of domestic corp. directly to a buyer (P100,000 x 5%) + P50,000 x 10% P10,000
Capital gain on sale of land in the Philippines classified as capital asset (P5M x 6%) 300,000
Total capital gains tax P310,000
Note: Sale of shares in the local stock exchange is subject to transaction tax of ½ of 1% of gross selling
price
b.
Dividend income from domestic corp. @ 10% P4,000
Interest income on Philippine bank deposit (3,200 + 2,400 + 8,000)/80% x 20% 3,400
Interest income on Phl. bank deposit under FCDU (4,000 + 4,000 + 2,000) x 7.5% 750
Interest income on government bonds 2,000
Royalty – literary 1,000
Royalty other than literary 2,400
Total Final tax on passive income of Daniel and Kat P13,550
Note: Interest income on long-term deposit is tax exempt
c.
Business income P600,000
Rental income net of tax (P200,000/95%)/2 100,000
Dividend income from nonresident corp. (P10,000/2) 5,000
Interest income on notes receivable [P6,000 + (P2,000/2)] 7,000
Interest income on bank deposit abroad [P5,000 + (P5,000/2)] 7,500
Capital gain on sale of land abroad (P500,000/2) 250,000
Gain on sale of shares – New York Stock Exchange P30,000/2 15,000
Expenses [P350,000 +(75,000/2)] (387,500)
Personal exemption (50,000)
Taxable income of Daniel P547,000
d.
Gross income from practice of profession (P360,000/90%) P400,000
Rental income net of tax (P190,000/95%)/2 100,000
Dividend income from resident corp. 20,000
Dividend income from nonresident corp. (P10,000/2) 5,000
Interest income on notes receivable [P4,000 + (P2,000/2)] 5,000
Interest income on bank deposit abroad [P5,000 + (P5,000/2)] 7,500
Capital gain on sale of land abroad (P500,000/2) 250,000
Gain on sale of shares – New York Stock Exchange P30,000/2 15,000
Expenses [P200,000 +(75,000/2)] (237,500)
Taxable income of Kat P515,000
8|Pa ge
2-7
2-8
a. Income tax payable, first quarter = P32,500
b. Income tax payable, second quarter = P14,500
c. Income tax payable, third quarter = P19,233
d. Income tax payable, fourth quarter = P59,823
e. Final tax on passive income = P15,800
f. Capital gains tax = P600,000 x 6% = P36,000
Solution:
1 st Q 2 nd Q 3 rd Q Q4/Year
Gross Profit from Sales P300,000 P500,000 P710,000 P980,000
Business expenses (120,000) (262,000) (405,890) (426,700)
Taxable income P180,000 P238,000 P304,110 P503,300
Tax Due (Tax Table) P32,500 P47,000 P66,233 P126,056

Less: Tax Paid
Q1 - (32,500) (32,500) (32,500)
Q2 - (14,500) (14,500)
Q3 - (19,233)
Income Tax Payable P32,500 P14,500 P19,233 P59,823
Note: The amounts shown above are cumulative amounts
(Amounts are cumulative) Amount % Tax

Dividend received from domestic corp. 30,000 10 P3,000
Interest income from
BPI 16,000 20 3,200
UCPB 18,000 20 3,600
Metro Bank 30,000 20 6,000
Total final tax on passive income P15,800
2-9
Gross compensation income P180,000
SSS premium contributions (3,600)
Philhealth contributions (2,400) Note: SSS loan is nondeductible
Pag-ibig contributions (1,800)
Union dues (2,200)
Basic exemption (50,000)
HHIP (P200 x 6 mos.) (1,200)
2-10
Gross compensation income P250,000
SSS premium contributions (3,600)
Philhealth contributions (2,400)
Pag-ibig contributions (2,000)
Union dues (1,000)
Additional exemption (100,000)
HHIP (max.) (2,400)
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2-11
P6M x 6% = P360,000
2-12
a. P15M x 6% = P900,000
b. P25M x 6% = P1,500,000
c. P0
2-13
CGT = P0; the sale resulted to a capital loss
2-14
MV using the Adjusted Net Asset P350,000
Method (RR 6-2013)
Less:
Purchase price P200,000
Expenses on the acquisition 20,000
Expenses on sale 10,000 (P230,000)
Net capital gain P120,000
Capital Gains Tax: P7,000

(P100,000 x 5%) + (P20,000 x10%)
2-15
Selling Price P550,000
Less:
Purchase price P320,000
Expenses on the acquisition 30,000
Expenses on sale 20,000 (P370,000)
Net capital gain P180,000
Capital Gains Tax: P13,000

(P100,000 x 5%) + (P80,000 x10%)
2-16
Final tax? Tax % Final tax? Tax %
1 Y 20% 16 Y 7.5%
2 Y 7.5% 17 N Exempt * Prizes received from
3 N Graduated 18 Y 10% Philippine sources
4 N Graduated 19 Y 10% exceeding P10,000 are
5 Y 20% 20 Y 10%
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6 N Graduated 21 N Graduated subject to 20% final tax
7 Y 20% 22 N Graduated rate. On the other hand,
8 Y 10% 23 N Exempt Other WINNINGS
9 Y 20% 24 N Exempt (regardless of amount)
are subject to 20% final
10 N Graduated 25 Y 25% tax rate. Refer to Table
11 N Graduated 26 Y 20% 2-3
27 Y 5%;10%
12 Y 20% CGT
13 2
Y* 20% 8 Y 20%
14 2
N Graduated 9 N Graduated
15 3
N Exempt 0 N Graduated
TRUE OR FALSE-SET A
1. TRUE 6. FALSE 11. FALSE
2. FALSE 7. FALSE 12. FALSE*
3. TRUE 8. TRUE 13. TRUE
4. TRUE 9. TRUE 14. FALSE
5. TRUE 10. FALSE
*Filipino counterparts of Special Aliens are subject to either 15% Final Tax or Basic Tax on their Gross
“compensation” income, at their option.
TRUE OR FALSE-SET B
3. TRUE 8. FALSE** 13. TRUE
4. TRUE 9. FALSE 14. TRUE
5. FALSE 10. TRUE 15. FALSE
**NRA-NETB are subject to 25% “final tax”, not CWT
MULTIPLE CHOICE
1. A 16. A 31. D 46. D
2. D 17. C 32. C 47. B
3. B 18. D 33. B 48. D
4. D 19. B 34. A 49. D
5. D 20. D 35. A 50. D
6. D 21. B 36. B
7. D 22. C 37. D
8. D 23. D 38. D
9. A 24. D 39. B
10. C 25. B 40. A
11. D 26. D 41. B
12. D 27. B 42. D
13. B 28. A 43. A
14. B 29. D 44. C
15. B 30. D 45. B
Supporting Computations (Multiple Choice):
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(12)
Gross income, Philippines P800,000
Gross income, USA 600,000
Expenses, Philippines (400,000)
Expenses, USA (300,000)
(13 and 14)

(15)
(36)
Copyright (11,250/90%)x10% P1,250
Royalty (12,000/80%) x 20% 3,000
Share from Trade Partnership 30,000
(treated as dividend income)
(270,000/90%) x10%
(38)
CHAPTER 3 – FRINGE BENEFITS
PROBLEM SOLVING
P3.1
Subject to FBT Subject to Basic Tax Exempt
1. P120,000 - -
2. - - P80,000
3. 50,000 - -
4. - - 5,000/ yr. (RR 8-2012)
5. - - 360,000
6. 250,000 - -
7. - - 45,000
8. - - 15,000
9. 60,000 - -
10. - - 1,500
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P3.2
(a)P65,176
Payment for the groceries of the manager P90,000
Manager’s tuition fee* 48,500
Total monetary value of the F. Benefits P138,500
Divide by GUMVF 68%
GUMV P203, 676
x FBT Rate 32%
Total Fringe Benefit Tax P65,176
* cost of educational assistance, as a general rule, is subject to FBT except in instances as provided for in
page 127.
(b)January 10, 2016 or within 10th day of the month following the end of the calendar quarter in which the fringe
benefits were granted to the recipient.
(c)P2,900,000 computes as follows:

Salary per quarter (net of CWT) P510,000
Add: CWT per quarter 240,000
Total gross compensation income per quarter P750,000
X 4 quarters
Total gross compensation income in 2015 P3,000,000
Less:
Additional personal exemption (2 x P25,000) (50,000)
Taxable Income for 2015 P2,900,00
0
P3.3
a) Yes
b) GUMV = P330,000/68%=P485,294
c) No. FBT is a final tax, hence, nonreturnable
d) FBT = P485,294 x 32% = P155,294
e) Within 10th day of the month following the end of the calendar quarter in which the fringe benefits were granted to
the recipient.
f) No. It is subject to basic tax instead of FBT.
P3.4 P466,000 computed as follows:

Compensation income P480,000
Monthly transportation allowance** 36,000
De Minimis Taxable
Benefits Benefits
13th month pay - P40,000
Christmas bonus (P5,000 is de minimis) P5,000 -
Christmas bonus (in excess of P5,000) 20,000
Productivity incentive pay (de minimis under RR 1-2015) 10,000 -
Uniform allowance (15,000-5,000) 5,000 10,000
Medical allowance (entire amount is de minimis) 10,000 -
Rice subsidy [24,000-(1,500 x 12)] 18,000 6,000
Total (known as 13 th Month Pay & Other Benefits) 76,000
Tax Exempt 13 th Month Pay & Other Benefits (82,000) -
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**Fixed Allowances received regularly shall be treated as part of basic compensation income

De Minimis Taxable
Benefits Benefits
13th month pay and mid-year bonus P30,000
Christmas bonus 5,000 2,500
Uniform allowance (7,500-5,000) 5,000 2,500
Actual Medical allowance (P12,000-10,000) 10,000 2,000
Medical allowance to dependents (P2,000-1,500) 1,500 500
Rice subsidy [entire amount is de minimis] 18,000 -
Monetized vacation leave [7,500-(500x 10)] 5,000 2,500
Total (known as 13 th Month Pay & Other Benefits) 40,000
Tax Exempt 13 th Month Pay & Other Benefits (40,000) -

3-month piano lesson P45,000
Personal car insurance 20,000
Salaries of Bobby’s driver and maids 30,000
Tuition fee Bobby’s 18-yearold child 75,000
Bobby’s Taxable benefit P152,000
P3.7
1. 4.
a) P165,000 x 50% = P82,500 a. P1,200,000
b) P82,500/68% x 32% = P38,824 b. P1,200,000/68% x 32% = P564,705
5.
2. a. P800,000
a. P4.5M x 5% /4 x 50% = P28,125 b. P800,000/68% x 32% = P376,470
b. P28,125/68% x 32% = P13,235 6.
3. a. P1,200,000/5 = P240,000
a. P4.5M b. P240,000/68% x 32% = P112,941
b. P4.5M/68% x 32% = P2,117,647
TRUE OR FALSE
1. TRUE 6. FALSE 11. FALSE
2. FALSE 7. TRUE 12. TRUE
MODIFIED IDENTIFICATION
1. B 6. B 11. B 16. B
2. B 7. B 12. B 17. B
14 | P a g e
3. B 8. B 13. B 18. B
4. B 9. B 14. B 19. B
5. B 10. B 15. B 20. B
MULTIPLE CHOICE
1. C 11. C 21. D 31. A 41. D
2. A 12. A 22. A 32. D 42. D
3. D 13. A* 23. D 33. A 43. C
4. D 14. B 24. C 34. C 44. D
5. D 15. B 25. D 35. D 45. D
6. D 16. D 26. A 36. A 46. C
7. B 17. C 27. D 37. C 47. A
8. A 18. B 28. A 38. C 48. B
9. D 19. C 29. B 39. D 49. B
10. C 20. D 30. P787,500 40. B 50. D
Explanations (Modified Identification)

4. Vacation leave exceeding “10” days for “private” employees are subject to basic and creditable withholding tax,
NOT fringe benefit tax.
5. Vacation and sick leave credits of government employees regardless of the # of days are treated as de minimis
benefits.
6 and 7. Sick leave credits of private employees, regardless of the # of days, are subject to basic and creditable
withholding tax.
Sick leave credit, regardless of the number of days shall be subject to basic and creditable withholding tax unless the
sick leave credits were provided to government employees. If the problem is silent, assume the sick leave credits were
provided to private employees.

(2) Statement 2: False. Fringe benefits are other benefits in addition to basic compensation (salaries)
(* #13)
The journal entry in letter “a” is the journal entry provided in related revenue regulations. Nonetheless, the authors believe that
the journal entry should have been:
Compensation expense (@ GUMV) Pxx
Cash Pxx
Consequently, from the journal entry shown above, the account debited as “fringe benefit tax expense” in revenue regulations
should not form part of the employer’s “Taxes Expense” but as a component of the employer’s “Compensation expense”.
(23)
To managerial – fringe benefit expense P1,360,000
Fringe benefit tax expense 640,000
Rank and File 5,000,000
Total P7,000,000
(24)
Expenditure attributable to Managerial employees
(P1M x 20%) P200,000
Divide by GUMVF 68%
Grossed-up monetary value P294,118
x FBT rate 32%
Fringe Benefit Tax P94,118
15 | P a g e
(25) Total deductible expense = GUMV of P294,188
(26)
Salaries and wages gross of CWT P380,000
Fixed monthly allowance** 60,000
Total compensation income subject to graduated rate P440,000
*Fixed Allowances received regularly per payroll are considered part of regular compensation subject to
graduated rate (RR 10-2008)
(27)
Allowance not subject to liquidation P48,000
Divide by GUMVF 68%
GUMV P70,588
x FB rate 32%
FBT P22,588
(28)
Groceries P10,000
Plumbing materials 5,000
Clothes and shoes 15,000
Total monetary value of fringe benefits P30,000
Divide by GUMVF 68%
GUMV P44,118
X FBT rate 32%
FBT P14,118
(30)
Annual rental P637,500
x 50%
Monetary value of housing benefit P318,750
Divide by GUMVF 68%
GUMVF P468,750
X FBT rate 32%
FBT P150,000
Add: Annual Rental 637,500
Total Deductible Expense P787,500
(31) (34)
 P2,000,000 x 5% x 50% / 12 = P4,1667.67  (P5,000,000-2,000,000) / 12 = P250,000
 P4,1667.67 / 68% x 32% = P1,960.78  P250,000/ 68% x 32% = P117,647.05
(32) (36)
 P3,000,000 x 5% x 50% / 12 = P6,250  P1,000,000 / 68% = P1,470,588
 P6,250/ 68% x 32% = P2,941.18  P1,470,588 x 32% = P470,588
(33) (37)
 P5,000,000 / 12* = P416,667  P800,000 / 68% = P1,176,471
 P416,667/ 68% x 32% = P196,078.42  P1,176,471 x 32% = P376,471
Monthly monetary value (38)
 (P1,000,000/5) / 68% = P294,118
 P294,118 x 32% = P94,118
CHAPTER 4 – INCOME TAX FOR CORPORATIONS
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PROBLEM SOLVING:
(P4.1)
CASE A (Domestic Corporation):
1. P1,636,500
2. P81,250
3. P550,000
Solution
Philippines Abroad Total
Gross sales P10,000,000 P5,000,000 P15,000,000
Sales returns 200,000 (200,000)
Cost of goods sold 3,500,000 2,250,000 (5,750,000)
Operating expenses 2,800,000 1,100,000 (3,900,000)
Interest income from trade receivable 100,000 50,000 150,000
Interest income from BPI deposits-USA - 80,000 80,000
Dividend income-resident foreign corp. 45,000 - 45,000
Dividend income-nonresident foreign corp. - 30,000 30,000
Tax rate 30%
Normal Corporate Income Tax Due P1,636,500
Philippines Final Tax

Interest income from BPI deposits-Phils. @ 20% 100,000 P20,000
Interest income from FCDS @ 7.5% 150,000 11,250
Income from money market placement @ 20% 200,000 40,000
Royalty income @ 20% 50,000 10,000
Final tax on passive income P81,250
Capital Gains Tax
Gain on sale of shares sold directly to a buyer P10,000

[(100,000x 5%) + (50,000 x 10%)]
Sale of real property in the Philippines 540,000
(SP of P9M** x 6%)
Total Capital Gains Tax P550,000
**SP = Cost + Gain = P4M + 5M = P9M; SP is higher than FMV
CASE B (Resident Foreign Corporation):

4. P1,093,500
5. P81,250 (Same with Case A)
6. P550,000 (Same with Case A)
Solution:
Gross sales P10,000,000
Sales returns (200,000)
Cost of goods sold (3,500,000)
Operating expenses (2,800,000)
Interest income from trade receivable 100,000
Dividend income-resident foreign corp. 45,000
Tax rate 30%
Normal Corporate Income Tax Due P1,093,500
17 | P a g e
CASE C (Non-Resident Foreign Corporation):
7. P2,038,500 computed as follows:
Sales returns (200,000)
Cost of goods sold (3,500,000)
GROSS INCOME P6,300,000
ADD:
Interest income from trade receivable 100,000
Dividend income-resident foreign corp. 45,000
Interest income from BPI deposits-Phils. 100,000
Income from money market placement 200,000
Royalty income 50,000
Total “Gross” Income P6,795,000
Tax rate 30%
Final Tax Due (Basis: Gross income) P2,038,500
(P4.2) P0. A foreign corporation is taxable only on its income derived from sources within the Philippines. The incomes
provided in the problem were all derived in U.S.
(P4.3)
Current account, BDO @ 20% P120,000

Savings deposit, BPI @ 20% 100,000
Interest income from government bonds @ 20% 40,000
Royalty income from various domestic corporations @ 20% 20,000
US dollar deposit, FCDU @ 7.5% 60,000
Total final taxes on passive income P340,000
(P4.4)
Q1 Q2 Q3 Q4
Gross profit from sales P1,600,000 P3,200,000 P4,800,000 P6,200,000
Business expenses (1,200,000) (2,400,000) (3,400,000) (4,200,000)
Taxable income 400,000 800,000 1,400,000 P2,000,000
NCIT 120,000 240,000 420,000 600,000
MCIT (Gross Profit x 2%) 32,000 64,000 96,000 124,000
TAX DUE (Higher) P120,000 P240,000 P420,000 P600,000

Less: Income tax withheld (30,000) (70,000) (130,000) (230,000)
Tax Paid Q1 - (90,000) (90,000) (90,000)
Tax Paid Q2 (80,000) (80,000)
Tax Paid Q3 - (120,000)
Income Tax Payable P90,000 P80,000 P120,000 P80,000
(P4.5)
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Year 4 Year 5 Year 6 Year 7 Year 8
MCIT 100,000 60,000 50,000 40,000 20,000
NCIT 30,000 70,000 60,000 30,000 90,000
TAX DUE (Higher) P100,000 P70,000 P60,000 P40,000 P90,000
Excess MCIT
Year 4 - (70,000) - - -
Year 7 (10,000)
Income Tax Payable P100,000 P0 P60,000 P40,000 P80,000
(P4.6)
1. P120,000
2. P690,000
3. P210,000
4. P495,000
Q1 Q2 Q3 Q4
Tax Due NCIT P300,000 MCIT P990,000 NCIT P1,410,000 NCIT P2,010,000
Excess MCIT Prior Yr (90,000) - (90,000) (90,000)
W/holding tax-Prior Yr (30,000) (30,000) (30,000) (30,00)
W/holding -During the Yr (60,000) (150,00) (270,000) (375,000)
Tax Paid Previous Qtr(s) (120,000) (810,000) (1,020,000)
Tax Payable P120,000 P690,000 P210,000 P495,000
(P4.7)
Case A (Taxable Joint Venture)
1. Taxable income of the joint venture = P20M
2. Tax due of the joint venture = P6M
3. Taxable income of ABC Company = P10M
4. Tax due of ABC Company = P3M
5. Taxable income DEF Company = P5M
6. Tax due of DEF Company = P1.5M
Joint Venture ABC Co. DEF Co.
Gross income P50,000,000 P30,000,000 P20,000,000
Business expenses (30,000,000) (20,000,000) (15,000,000)
Taxable income P20,000,000 P10,000,000 P5,000,000
Tax Rate (NCIT) 30% 30% 30%
Tax Due P6,000,000 P3,000,000 P1,500,000
Note: The co-venturer’s share in the income of the joint venture is treated as inter-corporate dividends, hence,
nontaxable.
Case B (Tax Exempt Joint Venture)

7. Taxable income of the joint venture = P0 (tax exempt)
8. Tax due of the joint venture = P0
9. Taxable income of ABC Company = P24M
10. Tax due of ABC Company = P7.2M
11. Taxable income DEF Company = P11M
12. Tax due of DEF Company = P3.3M
Joint Venture ABC Co. DEF Co.
Gross income P50,000,000 P30,000,000 P20,000,000
Share in the income of the - 14,000,000 6,000,000
19 | P a g e
joint venture
Net/ Taxable income P20,000,000 P24,000,000 P11,000,000
Tax Rate (NCIT) 30% 30%
Tax Due P0 P7,200,000 P3,300,000
(P4.8)
Case A:
1. Taxable income of the joint venture = P20M
2. Tax due of the joint venture = P6,000,000
3. Taxable income of Rico = P10M
4. Taxable income Earl = P5M
5. Final tax due of Rico (10%) = P980,000
6. Final tax due of Earl (10%) = P420,000
Joint Venture Rico Earl
Gross income P50,000,000 30,000,000 20,000,000
Taxable income P20,000,000 P10,000,000 P5,000,000
Less: Tax Due @ 30% (6,000,000)
Distributable income P14,000,000
Share in income
Rico @ 70% P9,800,000
Earl @ 30% 4,200,000
Case B:
7. Taxable income of the joint venture = P0 (tax exempt)
8. Tax due of the joint venture = P0
9. Taxable income of Rico = P24,000,000
10. Taxable income Earl = P11,000,000
11. Final tax due of Rico = P0 ; subject to basic and creditable withholding tax
12. Final tax due of Earl = P0 ; subject to basic and creditable withholding tax
Joint Venture Rico Earl
Gross income P50,000,000 30,000,000 20,000,000
Net income P20,000,000 P10,000,000 P5,000,000
Distributable income P20,000,000

Share in income
Rico @ 70% P14,000,000 14,000,000
Earl @ 30% 6,000,000 6,000,000
Taxable income P24,000,000 P11,000,000
(P4.9)
1. [(P6M-4M) + (($50,000-$20,000)x45)] = P3,350,000 x 30% = P1,005,000
2. (P6M-4M) x 30% = P600,000
3. P6M x 30% = P1,800,000
4. P6M x 2.5% = P150,000
5. P6M x 1.5% = P90,000
20 | P a g e
6. P6M x 25% = P1,500,000
7. P6M x 4.5% = P270,000
8. P6M x 7.5% = P450,000
9. *P3,350,000 x 10% = P335,000; * from #1
10. P1,005,000; same computation with #1
11. P0; exempt
(P4.10)
1. [5M + 3M] x 2.5% = P200,000
2. [5M x 2.5%) + (3M x 1%)] = P155,000
3. [5M + 3M] x 2.5% = P200,000; No GPB on Gross receipts from USA to Russia
(P4.11)
1.Related 4.Related
2.Related 5.Related
3.Related 6.Unrelated
(P4.12)
Gross income, related activities P5,000,000
Gross income, unrelated activities (excluding rental income) 5,000,000
Rental income from commercial spaces (gross of 5% WT) 2,000,000
Expenses, related activities (2,000,000)
Expenses, unrelated activities (3,000,000)
Tax Rate (NCIT); Unrelated income  Related income 30%
Tax Due 2,100,000
Less: Quarterly tax payments for the first 3 quarters (500,000)
Income Tax Payable P1,600,000
(P4.13)
Question 1:
Tuition fees P9,500,000
Miscellaneous fees 1,200,000
Income from bookstore 350,000
Income of school canteen 180,000
Salary, allowances and bonus (6,400,000)
Other operating expenses (2,600,000)
Depreciation expense-classrooms (75,000)
Depreciation expense-furniture and equipment (50,000)
x Tax Rate 10%
Tax Due P210,500
Question 2:
Tuition fees P9,500,000
Miscellaneous fees 1,200,000
Income from bookstore 350,000
Income of school canteen 180,000
Salary, allowances and bonus (6,400,000)
Other operating expenses (2,600,000)
Construction of additional classrooms (1,300,000)
21 | P a g e
Acquisition of furniture and equipment (400,000)
x Tax Rate 10%
Tax Due P53,000
(P4.14)
1. Income Tax Due (Payable) = P249,000 – CWT 15,000 = P234,000
2. Improperly accumulated earnings tax = P46,425
Solution:
Gross income (gross of 1% WT) P1,500,000
Business expenses (600,000)
Gain on sale of business asset 60,000
NOLCO in 2011 (130,000)
ADD:
2011 NOLCO 130,000
Interest on peso bank deposit (P5,000/80%) 6,250
Dividends from a domestic corporation 35,000
Gain on sales of shares, not listed and traded subjected to
capital gains tax (P150,000-115,000) 35,000 206,250
DEDUCT:
NCIT (P830,000 x 30%; higher than MCIT) 249,000
Final Tax on Passive income (6,250 x 20%) 1,250
Capital gains tax on shares (35,000 x 5%) 1,750
Dividends paid during the year 120,000 (372,000)
BALANCE P664,250
RE Jan. 1 200,000
RE Dec. 31, 2015 P864,250
LESS: Amount that may be retained (Par of Outs. (400,000)
Sh.)
IMPROPERLY ACCUMULATED EARNINGS P464,250
x IAET RATE 10%
IMPROPERLY ACCUMULATED EARNINGS TAX P46,425
(P4.15) P1.5M x 6% = P90,000

(P4.16) (Sale 3 = P14,000) + (Sale 4 = P2,500) = P16,500
TRUE OR FALSE - SET A

1. TRUE 6. FALSE 11. FALSE 16. TRUE
2. TRUE 7. FALSE 12. TRUE 17. TRUE
3. FALSE* 8. TRUE 13. FALSE 18. FALSE
4. TRUE 9. TRUE 14. TRUE 19. FALSE
5. TRUE 10. FALSE 15. TRUE 20. FALSE
*Imposed only if MCIT > NCIT
TRUE OR FALSE – SET B
1. FALSE 6. FALSE** 11. TRUE
22 | P a g e
**If the labor dispute will result to a temporary closure of a business, it may be a valid ground for the
suspension of MCIT.
MULTIPLE CHOICE
1. D 14. C 27. C 40. D
2. B 15. B 28. - 41. D
3. C 16. A 29. B 42. D
4. B 17. C 30. B 43. B
5. D 18. D 31. C 44. B
6. C 19. B 32. A 45. D
7. D 20. D 33. D 46. C
8. B 21. D 34. D 47. B
9. B 22. A 35. B 48. C
10. B 23. C 36. B 49. B
11. A 24. D 37. C 50. D
12. C 25. C 38. C
13. B 26. D 39. A
(4).
Domestic RFC NRFC
Gross Income, Philippines P975,000 P975,000 P975,000
Expenses, Philippines (750,000) (750,000)
Gross Income, Malaysia 770,000
Expenses, Malaysia (630,000)
Interest on bank deposit - - 25,000
Taxable income 365,000 225,000 P1,000,000
Tax Rate 30% 30% 30%
Tax Due P109,500 67,500 300,000
(5) .
Gross profit from sales P3,000,000
Business expenses (1,800,000)
Dividend income from a resident corporation 50,000
Dividend income from a nonresident corporation 40,000
Capital gain on sale of land in China 200,000
Interest income from notes receivable 20,000
Tax Due @ 30% P453,000
(6) .
Sale of land-Phils. P2M x 6% P120,000
Sale of shares of domestic corp.
[(P100,000 x 5%)+(P20,000 x 10%)] 7,000
Capital gains tax P127,000
(7).
Interest income on peso bank deposit @ 20% P6,000
Interest income on foreign currency bank deposit 1,875
Interest income on treasury bills @ 20% 2,000
Total final taxes on passive income P9,875
(8) .
To Louie @ 10% P10,000
To Floyd @ 10% 10,000
To Zeus @ 10% 10,000
To JJ @ 20% 20,000
23 | P a g e
To Francis @ 25% 25,000
To Chen, a domestic corporation Exempt
To a resident foreign corporation Exempt
To a nonresident foreign corporation @ 15% 15,000
Total withholding taxes P90,000
(10).
Final W. Tax = $3,000 x P45 x 10% = 13,500
(11).
Interest income from loans P10,000,000
OPEX (P12M x 10/15) (8,000,000)
Income Tax Rate 30%
Income Tax Due P600,000
(20).
Gross income, related activities P5,000,000
Gross income, unrelated activities (except rental income) 5,000,000
Rental income from commercial spaces (gross of 5% WT) 2,000,000 P12,000,000
Expenses, related activities 2,000,000

Expenses, unrelated activities 3,000,000 (5,000,000)
Tax rate (unrelated income>related income) 30%
Tax due P2,100,000
Less: Quarterly tax payments P500,000
Withholding tax on rental income 100,000 (600,000)
Tax payable P1,500,000
(21).
Income from tuition fees P3,500,000
Miscellaneous school fees 1,500,000
Dividend income from foreign corp. 2,000,000
Rental income (gross of 5% WT) 2,000,000 P9,000,000
OPEX (4,000,000)
Taxable income P,000,000
Tax rate (related income>unrelated income) 10%
Tax due P500,000
Less: Withholding tax on rental income (100,000)
Tax payable P400,000
(22).
Tuition and other fees P5,000,000
Rental income (gross of 5% WT) 50,000
OPEX (1,500,000)
CAPEX (2,000,000)
24 | P a g e
Tax rate (related income>unrelated income) 10%
Tax due P155,000
Less: Withholding tax on rental income (2,500)
(#s 28 TO 36).
‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15
NCIT P25,000 P130,000 P200,000 P0 P100,000 P150,000 P8,000 P1,000

MCIT 100,000 150,000 190,000 300,000 50,000 60,000 40,000 50,000
DUE (Higher) 100,000 150,000 200,000 300,000 100,000 150,000 40,000 50,000
EXCESS MCIT 75,000 20,000 - 300,000 - - 32,000 49,000
TAX DUE P100,000 P150,000 P200,000 P300,000 P100,000 P150,000 P40,000 P50,000
MCITCO -
‘06 (75,000)
‘07 (20,000)
‘09 (100,000) (150,000) -
TAX PAYABLE P100,000 P150,000 P105,000 P300,000 P0 P0 P40,000 P50,000
CHAPTER 5 – PARTNERSHIPS, ESTATES AND TRUSTS
PROBLEM SOLVING
P5.1
1. Income tax due of the partnership = P0 (tax exempt)
2. Income tax due of LJ = P397,000
LJ
LJ’s gross income from his trading business P1,000,000
LJ’s expenses from his trading business (600,000)
Share from the net income of a GPP 400,000
Royalty, books published in USA 150,000
Salaries, gross of withholding tax 450,000
Tax Due (Tax Table) P397,000
P5.2
Case A (Ordinary Partnership):
25 | P a g e
1. Tax due of the partnership = P240,000
2. Tax due of Rivera = P0
3. Tax due of Reyes = P50,000
RR Partnership Rivera Reyes
Gross Income P2,000,000 P800,000 P1,000,000
Allowed Deductions (1,200,000) (900,000) (700,000)
Basic exemption - (50,000) (50,000)
Taxable income P800,000 (P150,000) P250,000
Tax Rate 30% Tax Table Tax Table
Tax Due P240,000 P0 P50,000
Note: The partners’ share in the net income of the partnership is treated as dividend income subject to a
final tax rate of 10%.
Case B (General Professional Partnership):

3. Tax due of the partnership
4. Tax due of Rivera
5. Tax due of Reyes
RR Partnership Rivera Reyes
Gross Income P2,000,000 P800,000 P1,000,000
Allowed Deductions (1,200,000) (900,000) (700,000)
Basic exemption - (50,000) (50,000)
Share in partnership income - 320,000 480,000
Taxable income P800,000 P170,000 P730,000
Tax Rate EXEMPT Tax Table Tax Table
Tax Due P0 P14,500 P198,600
P5.3
1. Income tax payable/(refundable) of the partnership = P352,500
2. Income tax payable/(refundable) of Villamin = P40,150
3. Income tax payable/(refundable) of Francis = P0
4. Final tax on passive income of the partnership = P7,750
5. Final tax on passive income of Villamin = P40,908
6. Final tax on passive income of Francis = P97,317
7. Capital gains tax of the partnership = P150,000
8. Capital gains tax of Villamin = P0
9. Capital gains tax of Francis = P7,000
Partnership:
Gross profit from sale of services P3,500,000
Direct cost of services (1,500,000)
Business Expenses (700,000)
Rental Income in business assets (gross) 150,000
(P142,500/95%)
X tax rate 30%
Tax due P435,000
Quarterly tax payments (75,000)
Withholding tax on rent (7,500)
Income tax payable P352,500
Interest Income on peso bank deposits @ 20% P4,000

Interest income-FCDS @ 7.5% 3,750
Final Tax on passive income of the partnership P7,750
26 | P a g e
Capital gains tax on real property (2.5M x 6%) 150,000
DISTRIBUTABLE INCOME:
Total income subject to final tax 70,000
Capital gain 300,000
Less:
Basic tax due (435,000)
Final tax due (7,750)
Capital gains tax (150,000)
DISTRIBUTABLE INCOME P1,227,250
Villamin:
Gross income from sole-proprietorship business 925,000
Allowable business expenses (670,000)
Dividend Income-resident foreign corp. 120,500
Tax due (tax table) P72,650
Quarterly tax payments (32,500)
Final Tax – (P1,227,250/3 X 10%) P40,908
Capital gains tax - Villamin P0
Francis:
Income Tax payable P0
(No income subject to basic tax)
Dividend Income @ 10% P8,500

Royalty Income @ 20% 7,000
Share in the distributive share of the partnership income
(P1,227,250/3 X 2 x 10%) 81,817
Capital gains tax on shares of stock 7,000

[(P100,000 x 5%) + (20,000 x 10%)]
P5.4
1. Income tax payable of the business partnership = P114,000
2. Income tax payable of the GPP = P0
3. Income tax payable of Louie = P26,875
4. Income tax payable of Floyd = P44,563
Business
Partnership GPP
Gross income P800,000 P500,000
Deductible expenses (420,000) (375,000)
Net or Taxable income P380,000 P125,000
Tax rate 30%
Income tax due/payable P114,000 EXEMPT
27 | P a g e
Louie and Floyd Louie Floyd
Gross Income P 325,000 P 380,000
Dividend from foreign corporation 12,000 8,250
Prize, supermarket raffle - 7,500
Share in income of GPP 37,500 87,500
Basic exemption (50,000) (50,000)
Additional exemption (50,000) -
Taxable income P157,500 P228,250
Income tax payable (tax table) P26,875 P44,563
NOTE:
 The share in the net income of the business partnership, the dividend income from a domestic corporation and
royalty from books are subject to a final tax rate of 10%.
 The prize in a supermarket raffle by Louie (more than P10,000) is subject to 20% final tax
P5.5
1. Income tax payable of the estate = P43,000
Louie Floyd Estate
Gross income (gross of 5% tax) P 325,000 P 380,000 P800,000
Deductible expenses (117,000) (205,000) (420,000)
Prize, supermarket raffle 7,500
Basic exemption (50,000) (50,000) (20,000)
Additional exemption (50,000) - -
Taxable income P120,000 P140,750 P360,000
Tax Due (Tax Table) P18,500 P22,688 P83,000

Less CWTax (5%) (16,250) (19,000) (40,000)
Income Tax Payable P2,250 P3,688 P43,000
P5.6
1. Income tax payable of the estate = P49,000
Estate
Rental income of the estate (gross 5% tax) P1,000,000
Deductible operating expenses (estate) (500,000
Income distributed to Louie (50,000)
Income distributed to Floyd (50,000)
28 | P a g e
Tax due (tax table) P89,000
Less: CWtx (50,000)
Louie Floyd
Gross Income P 325,000 P 380,000
Prize, supermarket raffle 7,500
Amount received from the Income of the estate 50,000 50,000
Taxable income P220,000 P190,750
Tax Due P42,500 P35,188
P5.7
1. Income tax payable of the trust = P310,600
2. Income tax payable of Pedro = P131,640
Gross income of the trust P3,000,000
Deductible business expenses of the trust (1,800,000)
Income distributed to EDT during the year (200,000)
Dividend income from resident foreign corporation 100,000
Income Tax payable (tax table) P310,600

Rental income (gross) 500,000
Rental expenses (80,000)
Dividend from foreign corporation 8,250
Tax Due P351,640
Tax payments (Quarter 1-3) (120,000)
CWTx on rent (100,000)
Income Tax Payable-Pedro P131,640
P5.8
1. Taxable income of Trust 1 = P780,000
2. Taxable income of Trust 2 = P1,280,000
3. Consolidated taxable income of the Trust 1 and 2 = P2,080,000
4. Income tax payable of Trust 1 = P14,860
5. Income tax payable of Trust 2 = P26,540
6. Taxable income of Juan = P1,950,000
7. Taxable income of Pedro = P1,350,000
Trust 1 Trust 2 Consolidated
Gross income of the trust P3,000,000 P3,000,000 P6,000,000
29 | P a g e
Deductible business expenses of the trust (1,800,000) (1,800,000) (3,600,000)
Income distributed to Rico during the year (500,000) (500,000)
Dividend income-resident corporation 100,000 100,000 200,000
Basic exemption (20,000) (20,000) (20,000)
Taxable income P780,000 P1,280,000
TAX DUE (PAID) P214,600 P374,600
Total consolidated income P2,080,000

TAX DUE (Allocated Income Tax Due) P229,460 P401,140 P630,600
Trust #1=214,600/589,200 x P630,600
Trust #1=374,600/589,200 x P630,600
Less: Tax Paid P214,600 P374,600
INCOME TAX PAYABLE P14,860 P26,540
Juan Pedro
Compensation income P1,000,000 1,200,000
Gross business income 1,000,000 600,000
Business expenses (550,000) (400,000)
Dividend from foreign corporation 50,000
Amount received from the income of the trust 500,000
Taxable income P1,950,000 P1,350,000
MULTIPLE CHOICE
1. A 21. D 41. B 61. C
2. C 22. A 42. B 62. B
3. B 23. D 43. D 63. C
4. B 24. D 44. C 64. D
5. B 25. D 45. D 65. D
6. A 26. A 46. C
7. A 27. D 47. D
8. D 28. C 48. D
9. B 29. A 49. D
10. C 30. A 50. D
11. B 31. D 51. B
12. A 32. B 52. D
13. B 33. A 53. D
14. C 34. D 54. C
15. B 35. A 55. C
16. A 36. D 56. D
17. D 37. C 57. B
18. B 38. C 58. D
19. C 39. D 59. D
20. B 40. D 60. C

15. (P2M-1M) x 30% = P300,000
16. Subject to 10% final tax
17.
Partnership net profit (net of 30% tax) P560,000
30 | P a g e
(P800,000 x 70%)
Other Income:
Interest income, net 8,000
Dividend income (tax exempt) 20,000
Total distributive income P588,000
Share of T (50%) P294,000

Applicable tax (10% final tax) P29,400
18. P600,000 – P350,000 x 50% = P125,000
19.
Share in GPP’s income P125,000
Own income (P150,000-70,000) 80,000
Taxable income of Ramos P155,000
20.
Gross income P750,000
Expenses (200,000)
x 70%
Net income after corporate tax 385,000
Add:
Dividend received from a domestic corp. (tax exempt) 20,000
Bank interest income, Metrobank (net of final tax) 80,000
Distributable net income P485,000
Tita: P485,000 x 55% x 10% P26,675

Ghore: P485,000 x 45% x 10% P21,285
32. Statement IV – subject to creditable withholding tax, not final tax

40.
Income of the estate P600,000
Expenses (150,000)
Distribution of income to Francis (120,000)
41.
Francis’ own income P500,000
Income of the estate received by Francis 120,000
60.
Compensation income P1,500,000
Business income 1,000,000
Taxable income of Ramos P2,450,00
0
61.
Trust’s income P40,000,000
Income distributed to Atty. Lo Yer (Gross) (P8.5M / 85%) (10,000,000)
31 | P a g e
62.
Compensation income (Gross amount) P3,000,000
Income of the trust received by Niah (Gross) 10,000,000
63 – 65.
# 64 TRUST 1 # 65 TRUST 2
Net income P4,000,000 Net income P6,000,000
Personal exemption (20,000) Personal exemption (20,000)
Taxable income P3,980,000 Taxable income P5,980,000
Tax due: Tax due:
1st P500,000 P125,000 1st P500,000 P125,000
Excess @ 32% 1,113,600 Excess @ 32% 1,753,600
Tax due/paid 1,238,600 Tax due/paid 1,878,600
Versus Share 1,262,171* Versus Share 1,896,429**
Tax Payable P23,571*** Tax Payable P17,829****
# 63
Consolidated:
Net income P10,000,000
Tax Due (Consolidated):
1st P500,000 P125,000
Excess @ 32% 3,033,600
Total P3,158,600
Less Paid:
Trust 1 (1,238,600)
Trust 2 (1,878,600)
Income Tax Payable 41,400
Share in the Tax due:

Trust 1 41,400 x 3,980/9,960*****
(3,980/9,960***) x P1,238,600 1,262,171* =23,571***
Trust 2
(5,980/9,960) 1,896,429** 41,400 x 5,980/9,960
=17,829****
3,980+5,980 = 9,960*****
32 | P a g e
CHAPTER 6 – CONCEPT OF INCOME
MULTIPLE CHOICE
1. B 11. C 21. D 31. D
2. D 12. D 22. B 32. B
3. D 13. D 23. B 33. B
4. D 14. A 24. B 34. C
5. A 15. B 25. D 35. D
6. D 16. D 26. A
7. B 17. A 27. D
8. D 18. D 28. D
9. C 19. D 29. B
10. A 20. D 30. E
Supporting Computations:
28. P300,000 4/12 = P100,000
29.
Gain on sale of personal property purchased in the Philippines P-
and sold in Hongkong
Compensation received for personal services in the Philippines 200,000
Rent income from real property in Malaysia -
Gain from sale in the Philippines of shares of a foreign corporation 100,000
Deductions identified with:
Philippine income (80,000)
Foreign income -
Deductions unidentified with any particular income (P30,000 x 300,000/1,000,000) (9,000)
Philippine Net Income P211,000
32. (Resident Alien)

Gross Income P2,000,000
Dividend income from foreign corp. (50,000 x 60%) 30,000
33. Final Tax Withheld on dividend income from domestic corp. = (P90,000 + 72,000)/ 90% x 10% = P18,000
34. (Domestic Corp = Taxable on income within and without
Allowable deductions (4,000,000)
Dividend income from domestic corp. exempt
Dividend income foreign corp. (95% from R.P.) 1,000,000
Dividend income foreign corp. (60% from R.P.) 800,000
33 | P a g e
35. (Resident Foreign Corp = Taxable on income from Philippine sources only
Allowable deductions (4,000,000)
Dividend income from domestic corp. exempt
(P1M X 80%=considered from Phil. sources)
(P800,000 x 60%)
Dividend income foreign corp. (25% from R.P.) -
(entire amount is considered income from sources
outside of the Phils.)
CHAPTER 7 – INCLUSIONS AND EXCLUSIONS FROM GROSS INCOME

PROBLEM SOLVING:
P7.1
INCOME SUBJECT TO BASIC TAX:
Basic salary (P900,000+P300,000) P1,200,000
Director’s fee 200,000
Business income:
Retail business 250,000
Apartment rental (P190,000/95%) 200,000
Dividend income from a resident corporation 50,000
13th, Xmas and MidYear Bonus (net of P30,000 150,000
exclusions)
Gross Income subject to basic tax (Q#1) P2,050,000
LESS:
Net Taxable income (Q#4) P1,875,000
Income tax due (Q#5) P565,000
INCOME SUBJECT TO FINAL TAX:

Cash dividend from a domestic corporation P50,000
Interest from savings deposit 20,000
Royalties from book publications 50,000
Prizes from contest won 50,000
Winnings town lottery 50,000
Total Income subject to final tax (Q2) P220,000
INCOME EXEMPT FROM TAX:

Stock dividend from a domestic corporation P25,000
Damages received from injuries and sickness 85,000
Proceeds-life insurance coverage of his father 300,000
Total income exempt from tax (Q3) P410,000
P7.2
1) P10,000
34 | P a g e
2) P15,000
3) P715,000 computed as follows:
Gross profit from sales P1,000,000

Taxable recovery-receivables 10,000
Taxable tax refunds 15,000
Rent income excluding security deposit 250,000
Operating expenses (500,000)
Write-off during the year (60,000)
P7.3
1) P240,000 + 24,000 = P264,000
2) P240,000 + 24,000 = P264,000
3) P1,000,000
Income from improvement (Remaining BV after lease term) P1,000,000
(P3M x 5/15)
Remaining Lease Term after completion = 10 years
Remaining life after lease term = 5 years
4) P100,000
Income from improvement (Remaining BV after lease term) P1,000,000
(P3M x 5/15) /10 years
Remaining Term after completion = 10 years =P100,000
Remaining life after lease term = 5 years
P7.4
Ramon Magsaysay award P50,000
Athlete of the year award 100,000
Prize for winning an Olympic Medal 500,000
Winnings – Philippine lotto 100,000
Total Winnings and Awards exempt from income tax P750,000
If the Question was total amount exempt from income tax, the answer would have been:
Total Winnings and Awards exempt from income tax P750,000
Gift from Mayor Alfredo Lim 250,000
Car from Honda as a gift 1,000,000
Total Amount exempt from income tax P2,000,000
P7.5
P0; The P800,000 should be exempt from income tax
P7.6
P1,000,000; The interest income from expanded foreign currency deposit
P7.7
Taxable Proceeds = P1,000,000 – P600,000 = P400,000
P7.8
35 | P a g e
Income within = None. The ratio of income without over total income for the past 3 years < 50%.
P7.9
Salary for the first quarter P180,000
Honorarium as speaker in one of ABC’s team building activities 10,000
Retirement pay Exempt
Commissions 30,000
Fee as a member of ABC’s board of directors 50,000
10 days monetized vacation leave Exempt
Interest income from time deposit F. Tax
Productivity incentive pay and 13th month pay Exempt
(Productivity pay=P10,000 de minimis under RR 1-2015)
(Total of excess of productivity of P10,000 + 60,000 bonus is not
more than P82,000, hence tax exempt)
Total compensation income subject to tax P270,000
P7.10
INCOME Q#1 Q#2 Q#3 Q#4
Income Income Taxable income Taxable income
within without (Resident Citizen) (Nonresident Citizen)
A. Rental income (gross)
 From an apartment unit in USA, - P240,000 P240,000
36 | P a g e
 From a parcel of land in Makati P180,000 180,000 P180,000
B. Royalties from book

 Published in the Philippines 30,000 - -
 Published in USA 20,000 20,000
C. Interest income earned on notes receivable

 From a debtor who resides in USA 15,000 15,000
 From a debtor who resides in Manila 25,000 25,000 25,000
D. Net profit from sales, merchandising business

 From Philippine outlet 300,000 300,000 -
 From USA outlet 200,000 200,000 200,000
E. Dividend income from two domestic corporations.

Gross income from the Phils. for the past 3 years
 60% of its world income 60,000 - - -
 85% of its world income 80,000 - - -
F. Dividend income from two resident foreign

corporations. Gross income from the Philippines for
the past 3 years was equivalent to:
 40% of its world income - 40,000 40,000 -
 60% of its world income 12,000 8,000 20,000 12,000
G. Prizes received from Supermarket raffle:
From the Philippines:
 ABC Supermarket 8,000 - 8,000 8,000
 DEF Superstore 12,000 - - -
From USA:
 UVW Supermarket - 6,000 6,000 -
 XYZ Supersavers - 14,000 14,000 -
H. Prizes and winnings from lotto
 Philippine lotto 200,000 - - -
 USA lotto 100,000 - -
BASIC EXEMPTION (50,000) (50,000)

TOTAL P907,00 P643,00 P1,018,000 P375,000
0 0
MODIFIED IDENTIFICATION:
Exercise 1:
1) D
2) B
3) A
4) D
5) B
6) C (as dividend income)
37 | P a g e
7) A
8) A (year of service was not provided. Retirement benefits, in general, are taxable)
9) C
10) D
Exercise 2:
DIVIDEND INJURIES/DAMAGES PRIZES/AWARDS
1. 10% F.Tax 8. Exempt 15. Basic
2. 10% F.Tax 9. Exempt 16. Exempt
3. Basic Tax 10. Basic Tax 17. Exempt
4. Exempt 11. Exempt 18. Exempt
5. Basic Tax 12. Basic Tax 19. Exempt
6. Exempt 13. Exempt 20. Basic Tax
7. N.taxable 14. Basic 21. Basic Tax
22. Exempt
23. Basic Tax
24. 20% final tax (individual taxpayer)
25. Basic Tax
VARIOUS PROCEEDS/INCOME
26. Final Tax
27. Exempt
28. Exempt
29. Exempt
30. Exempt
TRUE OR FALSE
1. T 6. T 11. F 16. F
2. F 7. F 12. T 17. T
3. T 8. T 13. F 18. F
4. F 9. F 14. F 19. T
5. F 10. F 15. F 20. F
MULTIPLE CHOICE
1. C 16. C 31. C 46. D
2. B 17. B 32. D 47. D
3. B 18. D 33. D 48. D
4. B 19. D 34. C 49. B
5. B 20. B 35. A 50. C
6. B 21. A 36. C 51. B
7. C 22. C 37. D 52. C
8. A 23. C 38. D 53. D
9. C 24. A 39. D 54. D
10. C 25. C 40. D 55. D
11. B 26. D 41. B 56. C
12. D 27. C 42. D 57. A
13. B 28. D 43. D 58. B
14. A 29. D 44. D 59. B
15. D 30. C 45. A 60. C
38 | P a g e
No. 2. TIPS are not compensation income, but subject to basic tax only if not accounted for by the employees to the
employer. TIPS accounted for by the employee to the employer are not taxable income of the former.
No. 11.
Write-off 2013 Income (Loss) 2014 2014 TAXABLE
2013 before write off Recovery RECOVERY
P50,000 P350,000 P20,000 P20,000
10,000 (50,000) 10,000 -
30,000 20,000 30,000 20,000
P40,000
No. 12.
Case A Case B Case C
2013 Income(loss) before write-off P120,000 P60,000 (P40,000)
Write-off 40,000 40,000 50,000
2014 Recovery P40,000 P10,000 P50,000
TAXABLE RECOVERY P40,000 P10,000 P0
No. 15.
Interest from Philippine Currency Certificate = subject to 20% final tax
Refund of income tax = not an income
No. 23.
Rent for 2015 and 2016 (prepaid rent is taxable P3,600,000
yr. of receipt regardless of accounting method)
Annual real property tax 30,000
Total annual income P3,630,000
No. 24.
Rent for 2016 (already reported in 2015) P0
Annual real property tax 30,000
Income from improvement 600,000
[(P36M x **3/15) / 12]
Total annual income P630,000
Lease Term: 12.5 years

Remaining Lease term after completion of the improvement: 12 years
Useful life of the improvement: 15 years
Remaining useful life of the improvement after termination of the lease: 3 years**
No. 26.
Royalty – as an author @ 10% P10,000
Other royalties P800,000
x 20% 160,000
Total final tax on royalty income P170,000
No. 46.
Proceeds from the taxpayers life insurance P2,000,000
39 | P a g e
Less premiums paid (P15,000 x 25) (375,000) P1,625,000
Rent income from inherited properties 200,000
CHAPTER 8 – DEALINGS IN PROPERTIES

PROBLEM SOLVING
P8.1 Question #1
Add: Net capital gains
Short term capital loss (@100%) (60,000)
Long term capital gain (@100%) 40,000
Net Capital Gain (Loss) (20,000) -
Net Taxable Income in 2014 P80,000
 holding period and capital loss carry-over are not applicable to corporate taxpayers.
 capital losses are deductible only from capital gains.
P8.2 Question #2
2015
Net Capital Gain
Short term capital gain (@ 100%) 80,000
Capital loss (@ 100%) (20,000) 60,000
P8.1 Question #3
Short term capital loss (@100%) P(60,000)
Long term capital gain (@50% ) 20,000
Net capital loss (P40,000) -
Basic Exemption (50,000)
P8.1 Question #4
Short term capital gain (@100%) 80,000
Long term capital loss (@50%) (10,000)
Net capital loss carry over from 2014 (30,000) 40,000
P8.2
Taxable income exclusive of capital gains and losses P400,000
Add(Deduct): Ordinary gains(loss)
40 | P a g e
Gain on sale of land used in business, for 3 years P50,000
Loss on sale of machinery used in business, for 8 months (26,000)

Loss on sale of securities held for 3 years (8,000)
Loss on sale of securities held for 3 months (6,000) -
Taxable income for Royale, Inc. P424,000
 capital losses are deductible only from capital gains
 holding period and capital loss carry-over are not applicable to corporate taxpayers.
P8.3
Ordinary income P140,000
Add: Net capital gain:
Long term capital gain @ 50% P20,000
Long term capital loss @ 50% (5,000) 15,0000
Taxable Income P105,00
0
P8.4
(1)P25,000: (2)P(P80,000); (3)(P55,000)
Capital gain on sale of bonds (@50%) P25,000
Capital loss on sale of car @ 100% (80,000)
Net capital loss (P55,000)
 net capital loss from the taxable period of a prior year is deductible only from net capital gains in the current year.
 sale of shares of domestic corporations held as capital assets are subject to CGT
 sale of real properties held as capital assets located in the Philippines are subject to CGT
P8.5
(1)P5,000: (2)(P5,000);
Capital gain on sale of bonds (@100%) P45,000
Capital loss on sale of car @ 50% (40,000)
Net capital gain 2015 P5,000
Capital loss carry-over in 2015 P5,000
net capital loss from the taxable period of a prior year is deductible only from net capital gains in the
current year.
P8.6
2014 2015
Ordinary income P48,900 P85,700
Add: Net capital gain
41 | P a g e
2014: P15,895-P18,960 = (P3,065)
2015: =P45,700 x 50% = P22,850 P22,850
Net capital loss carry-over from 2014 --- ---
Additional exemption (25,000) (25,000)
Taxable Income (P26,100) P33,550
 net capital loss from the taxable period of a prior year is deductible only from net capital gains in the current year.
MULTIPLE CHOICE
1. C 11. A 21. D
2. D 12. A 22. D
3. D 13. D 23. C
4. A 14. B 24. C
5. D 15. D 25. C
6. D 16. D 26. D
7. D 17. D 27. D
8. D 18. C 28. C
9. B/A 19. A 29. A
10. C 20. B 30. A

18. P1,200,000 x 6% = P72,000
Sale of vacant lot used as warehouse is an ordinary asset
19. CGT = 1,000 shares x P10 x 5% = P500
20. Statement 2 is False. The capital loss should be recognized as of the last day of the taxable year.
22.
Total net sales from his trading business P 500,000
Cost of sales (300,000)
Gain on sale of vacant lot used in business 50,000
Ordinary income/gain P250,000
23. Capital Gain (On Sale of personal Car) = (P100,000-P50,000) x 50% = P25,000
24. Capital Loss (On Sale of personal computer) = (P10,000-P20,000) x 50% = (P5,000)
25. Net capital gain = P25,000 – P5000 = P20,000
CHAPTER 9 – DEDUCTIONS FROM GROSS INCOME

PROBLEM SOLVING:
P9.1
1. P142,000
2. P104,000
3. P10,000
Solution:
Interest Tax Expense Taxable tax
Expense refunds
Taxes and licenses 100,000
Documentary stamp taxes 4,000
42 | P a g e
Fringe benefit taxes paid* - - -
Refund of taxes and licenses for the preceding year 10,000
Income tax due for the year - - -
Income tax payments for the year (first 3 quarters) - - -
Refund of income tax payments for the preceding year - - -
Interest income
From trade notes receivable - - -
From peso bank deposits - - -
From U.S.$ deposit - - -
From bank deposits abroad - - -
Interest expense on indebtedness 150,000 - -
Surcharges on tax assessments - - -
Interest expense on tax assessments 25,000 - -
Reduction of interest expense (P100,000 x 33%)** (33,000)
P142,000 P104,000 P10,000
* Should be part of compensation of expense
**The limitation on the deductibility of interest expense was legislated specifically to address the tax arbitrage arising from the
difference between the 20% final tax on interest income and the regular corporate income tax rate (RCIT) under which
interest expense can be claimed as a deduction.
P9.2
ERRATUM : DETERMINE THE FOLLOWING
1. Deductible expenses of Mike Leomar in 2014
2. Deductible expenses of Mike Leomar in 2016
Answers::
2014 2016
Annual Rent P2,400,000 P2,400,000
Annual real property tax 30,000 30,000
Depreciation expe. – Leasehold Improvement**
(P9.5M/9.5 years x 6/12) - 4,750,000
Deductible Expense P2,430,000 P7,210,000
 **Remaining lease term upon completion of the improvement = 9.5 years
 Useful life of the improvement = 15 years
 Depreciation expense for 2016 = 6 months from July to December 2016
P9.3
Gross income, Philippines P1,600,000
Unallocated business expenses (P150,000 x 1.6/2) (120,000)
Interest expense, Philippines (100,000)
Unallocated interest expense (P80,000 x 1.6/2) (64,000)
Taxable Net Income P816,000
P9.4
Interest expense (P1M x 10%) P100,000
Less: 33% x (P1M x 12%) (39,600)
Deductible Interest Expense P60,400
43 | P a g e
P9.5 Deductible Interest = P25,000.
*Interest paid or accrued on taxes related to business of practice of profession, such as those paid
for deficiency or delinquency (since taxes are considered indebtedness) are deductible as interest expense,
provided that, the tax is a deductible tax. It is deductible in “full”. It shall not be reduced by 33% of
interest income subject to final tax. Stock Transaction Tax is a nondeductible tax, hence, the related interest
expense on such assessment shall not be deductible from the gross income.
P9.6
1. P0; P0; P1,600,000
2. P533,333; P533,333; P533,333
3. P533,333; P533,333; P533,333
4. P533,333; P533,333; P533,333
Total interest = P6M loan – proceeds of P4.4M = P1.6M
P9.7
1. P533,333; P533,333; P533,333
2. P533,333 ; P533,333; P533,333
P9.8 Question#1
Interest expense (bank loan) P20,000
Less: 33% x P4,000 (1,320)
Allowable interest expense on bank P18,680
loan
P9.8 Question#2
Acquisition cost of computers P200,000
ADD: Interest expense 20,000
Capitalizable cost of the computers P220,000
Depreciation expense
(P220,000/8 x 9/12) P20,625
P9.9
Interest paid for late payment of 2014 income tax P50,000
Surcharge and compromise penalty for late payment of 2014 -
income tax
Interest on bonds issued by CTDI 250,000
Deductible interest P300,000
9.10
Professional tax P750
Gravel and sand tax 20,000
Road user’s tax on his delivery vans 50,000
Local annual fixed tax for his delivery vans 10,000
Other local business taxes 12,000
Total deductible taxes P92,750
Real property tax on his house is not deductible, it is considered as personal expense not related to trade, business, or
practice of profession. However, Real property taxes on real properties used in business are deductible taxes.
44 | P a g e
9.11
Plane tickets P100,000
Transportation expenses-officers (136,000 + 64,000) **200,000
Transportation expenses-messengers 80,000
Deductible expenses P380,000
**Not subject to FBT. Regularly received allowances as part of compensation package.
P9.12. Deductible Premium = P75,000
9.13 None. There shares purchased and sold within the prohibited period are not identical.
9.14
(1)
SP (50 shares of Elsa) P75,000
Cost (50 shares of Elsa = P200,000 x 50/100) (100,000)
Loss on Wash Sale (P25,000
)
(2) P0.
(3) Cost of shares acquired on June 30 = P50,000 + loss on wash sale of P25,000 = P75,000
(4 )
SP (75 shares of Elsa) P250,000
Adjusted cost (Q#3) (75,000)
Capital Gain P175,00
0
9.15
(1)
Gross business income P1,000,000
Net income before capital gains and contributions P600,000
Contributions deductible in full (accredited NGO) (30,000)
Contributions with limit (CBCP):
Actual=P20,000; Limit (P600,000x10%= P60,000) (20,00)
Add (Deduct):
Net capital gain 30,000
Compensation income 600,000
Taxable Net Income P1,130,00
0
(2 )
Gross business income P1,000,000
Net income before capital gains and contributions P600,000
Contributions deductible in full (accredited NGO) (30,000)
Contributions with limit (CBCP):
Actual=P20,000; Limit (P600,000 x 5% = P30,000) (20,00)
45 | P a g e
Add:
Net capital gain 30,000
Taxable Net Income P580,000
P9.16. Charitable and other contributions with limit = P250,000 + 300,000 = P550,000
P9.17.
Actual (w/ limit) P190,000
Limit [(6,200,000 – 2,500,000) x 5%] 185,000
Allowed P185,000
Add: deductible in full (priority project) 100,000
Total P285,000
P9.18.
Cost of Sales 3,000,000
Sales P8,000,000
Sales P8,000,000
COS (3,000,000)
Gross Income 5,000,000
Salaries (gross of withholding tax, SSS, Medicare/Medicare/Pag-ibig) of (950,000)
employees, net of P100,000 withholding tax and P50,000 SSS, Medicare
and Pag-Ibig premiums contributions
Fringe benefits given to rank and file employees (300,000)
Fringe benefits given to managerial employees (200,000)
(@Grossed-up monetary value)
Rent expense (120,000)
Representation and entertainment expenses ( ½ % of N.Sales) (40,000)
Net income before contributions P3,390,000
Donation to religious and charitable institutions (Limit) (339,000)
Limit: P3,390,000 x 10%
Net income before personal exemption P3,051,000
 Representation expenses = limit is ½% of net sales (if merchandising) or actual whichever is lower. If service concern,
limit is 1% of net revenues or actual whichever is lower.
9.19
BV = P1M x 2/5 P400,000
Vs. Cost to restore 200,000
Allowed (lower amount) P200,000
Less: insurance coverage (100,000)
Deductible Loss P100,000
46 | P a g e
P9.20.
CASE A:
(a)
Sales P6,200,000
Cost of sales (2,500,000)
OPEX:
Bad debts written-off 20,000
Salaries and wages excluding fringe benefits/de minimis 350,000
Fringe benefits provided to rank and file employees 50,000
Fringe benefits provided to managerial employees 220,588
(GUMV = P150,000/68%)
Interest expense (exclude P25,000 surcharge) 125,000
Utilities expense 100,000
Casualty losses 60,000
Depreciation expense 40,000 (1,015,588)
Net capital Gain(Loss)
Capital gain on sale of a 10-year bonds 30,000
Capital loss on sale of bonds of a domestic corporation (20,000) 10,000
Dividend income:
From domestic corporation -
From resident corporation 30,000
From nonresident corporation 20,000 50,000
Interest income:
From trade notes receivable 75,000
From bank deposits abroad 30,000 105,000
Other Income:
Recovery of bad debts written off preceding year 10,000
Refund of taxes and licenses for the preceding year 10,000 20,000
TAXABLE INCOME P2,869,412
NCIT@ 30% P860,824

Less: Payments for the first 3 quarters (75,000)
INCOME TAX PAYABLE P785,824
(b) cannot be determined using the new/revised formula
47 | P a g e
(c)
Interest income from peso bank deposit @ 20% 10,000
Interest income from U.S.$ deposit (Philippines) @ 7.5% 3,000
Royalty income @ 20% 8,000
Income from trust indenture with Security Bank @ 20% 5,000
(d )
Capital gain on sale at P6M of land in the Philippines held P360,000
for 10 years = P6M x 6% = P360,000
Capital gain on sale of shares of stock of a domestic 750
corporation held for six (6) months, sold directly to a buyer
P15,000 x 5% = P750
CASE B:
(a)
Sales P6,200,000
Cost of sales (2,500,000)
OPEX:
Bad debts written-off 20,000
Salaries and wages excluding fringe benefits/de minimis 350,000
Fringe benefits provided to rank and file employees 50,000
Fringe benefits provided to managerial employees 220,588
(GUMV = P150,000/68%)
Interest expense (exclude P25,000 surcharge) 125,000
Utilities expense 100,000
Casualty losses 60,000
Depreciation expense 40,000 (1,015,588)
Net capital Gain(Loss)
Capital gain on sale of a 10-year bonds 30,000
Capital loss on sale of bonds of a domestic corporation (20,000) 10,000
Dividend income:
From domestic corporation -
From resident corporation 30,000
From nonresident corporation 20,000 50,000
Interest income:
From trade notes receivable 75,000
From bank deposits abroad 30,000 105,000
Other Income:
Recovery of bad debts written off preceding year 10,000
Refund of taxes and licenses for the preceding year 10,000 20,000
Basic Personal Exemption (50,000)
Additional Personal Exemption (25,000 x 2) (50,000)
INCOME TAX DUE (TAX TABLE) P851,212

Income tax paid first 3 quarters (75,000)
48 | P a g e
INCOME TAX PAYABLE P776,212
(b)
Dividend income from domestic corporations @ 10% P6,000
Interest income from peso bank deposit @ 20% 10,000
Interest income from U.S.$ deposit (Philippines) @ 7.5% 3,000
Royalty income @ 20% 8,000
Income from trust indenture with Security Bank @ 20% 5,000
(c )
Capital gain on sale at P6M of land in the Philippines held P360,000
for 10 years = P6M x 6% = P360,000
Capital gain on sale of shares of stock of a domestic 750
corporation held for six (6) months, sold directly to a buyer
P15,000 x 5% = P750
TRUE OR FALSE
2. FALSE 12. FALSE 22. TRUE
3. FALSE 13. FALSE 23. TRUE
6. TRUE 16. TRUE
7. TRUE 17. TRUE
8. TRUE 18. TRUE
9. TRUE 19. TRUE
10. TRUE 20. TRUE
MULTIPLE CHOICE
1. B 16. B 31. C
2. C 17. A 32. C
3. B 18. A 33. D
4. D 19. C 34. D
5. C 20. A 35. D
6. A 21. C 36. C
7. D 22. B 37. D
8. D 23. C 38. C
9. D 24. B 39. D
10. A 25. D 40. C
11. D 26. D 41. C
12. D 27. D 42. B
13. D 28. D 43. B
14. C 29. A 44. D
15. B** 30. C 45. B
**Change the Question to “not entitled to claim NOLCO”
49 | P a g e
No. 6.
 Sales less cost of sales of Merchandise inventory is part of the gross income, not deduction.
 Loss on sale of investment is a capital loss which is deductible only from capital gains.
 The sale of land classified as capital asset is subject to 6% capital gains tax
No. 16-18:
2012 2013 2014
Gross sales P3,300,000 2,340,000 P825,000
Cost of sales (2,400,000) (1,070,000) (380,000)
Deductions (1,475,000) (1,025,000) (459,000)
GP(Loss) (P575,000) P245,000 (P14,000)
Dividend – resident foreign corporation 140,000 - 32,000
Interest income on notes receivable 28,000 16,400 -
Capital gain 13,000 18,500
Capital loss - ***(18,500)
Income (Loss) before NOLCO 274,400 18,000
NOLCO (274,400) (18,000)
Taxable income (P407,000) P0 P0
*** To the extent only of capital gain
No. 36.
Actual (w/ limit) P190,000
Limit [(6,200,000 – 2,500,000) x 5%] 185,000
Allowed P185,000
Add: deductible in full (priority project) 100,000
Total P285,000
No. 37 .
Cost of Sales 3,000,000
Sales P8,000,000
Sales P8,000,000
COS (3,000,000)
Gross Income 5,000,000
Salaries (gross of withholding tax, SSS, Medicare/Medicare/Pag-ibig) of (950,000)
employees, net of P100,000 withholding tax and P50,000 SSS, Medicare
and Pag-Ibig premiums contributions
Fringe benefits given to rank and file employees (300,000)
Fringe benefits given to managerial employees (200,000)
(@Grossed-up monetary value) = 136,000/68%
Rent expense (120,000)
Representation and entertainment expenses ( ½ % of Net Sales) (40,000)
Net income before contributions P3,390,000
Donation to religious and charitable institutions (Limit) (339,000)
Limit: P3,390,000 x 10%; Actual= P500,000
NET INCOME BEFORE PERSONAL EXEMPTION P3,051,000
 Representation expenses
= Limit of ½% of net sales (if merchandising) or actual whichever is lower
= Limit of 1% of net revenues (if service concern) or actual whichever is lower
50 | P a g e
No. 39.
2012 2013 2014
Current service costs P2,000,000 P2,000,000 P2,000,000
Past service costs
2012 (P1,600,000/10) 160,000 160,000 160,000
2013 (P1,200,000/10) - 120,000 120,000
Deductible Contributions P2,160,000 P2,280,000 P2,280,000
CHAPTER 10 – INSTALLMENT REPORTING OF INCOME

1. A 6. C
2. D 7. D
3. B 8. C
4. A 9. A
5. A 10. B
CHAPTER 11 – FOREIGN INCOME TAX CREDIT AND OPTIONAL STANDARD DEDUCTION

1. D 11. A 21. D
2. D 12. A 22. C
3. B 13. C 23. B
4. D 14. D 24. A
5. C 15. A 25. B
6. D 16. D 26. D
7. D 17. C 27. B
8. D 18. B 28. A
9. A 19. D 29. D
10. C 20. B
No. 11.
Net income, Philippines P1,500,000
Net income, Canada 1,250,000
Taxable Income 2,700,000
Tax Due:
First P500,000 P125,000
Excess: 704,000 P829,000
(P2.7M-.5M)32%
Less Tax Credit:
Limit: (1,250/2750 x P829,000) P373,050
Actual 150,000 (150,000)
No. 12.
Net income, Philippines P1,500,000
Net income, Canada 1,250,000
Taxable Income 2,750,000
Tax Due: P825,000

Less Tax Credit:
Limit: (1,250/2,750 x P825,000) P375,000
Actual 150,000 (150,000)
51 | P a g e
No. 13.
Taxable income, world P2,000,00
Tax Due @ 30% P600,000

Less Tax Credit:
L1:
Country X (600/200 x P600,000) P180,000
Paid 250,000
Allowed P180,000
Country Y(400/200 x P600,000) P120,000

Paid 120,000
Allowed 120,000
Total L1 P300,000
L2 (1/2 x 600,000) 300,000

Paid (Total) 370,000 300,000
TAX CREDIT ALLOWED (300,000)

Tax paid, three quarters (110,000)
No. 14.
Taxable income before tax credit, world P2,000,000
Taxes paid foreign countries (370,000)
X 30%
Tax Due 489,000
Less: Payments, 3 quarters (110,000)
No. 29.
Less: Sales returns 1,000,000
Sales discounts 500,000 (1,500,000)
Net sales P10,500,000
Less: Cost of sales
Inventory, beginning 300,000
Purchases 5,000,000
Purchase returns (200,000)
Purchase discounts (100,000)
Freight in 150,000
Goods available for sale 515,000
Inventory, end (100,000) 5,050,000
Gross profit from sales 5,450,000
52 | P a g e
Add: other income
Interest on notes receivable 100,000
Dividend income from resident corporation 100,000 200,000
GROSS INCOME 5,650,000
Less:
OSD (P10,500,000 x 40%) (4,200,000)
CHAPTER 12 – ACCOUNTING PERIODS AND METHODS

1. A 11. B 21. D
2. B 12. A 22. C
3. B 13. D 23. D
4. A 14. D 24. D
5. C 15. D 25. C
6. A 16. A
7. D 17. C
8. B 18. A
9. C 19. B
10. D 20. D
53 | P a g e

INCOME TAXATION, 2015 Edition: Chapter 1 - Principles of Taxation

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INCOME TAXATION, 2015 Edition: Chapter 1 - Principles of Taxation

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SOLUTIONS MANUAL

INCOME TAXATION, 2015 Edition

CHAPTER 1 – PRINCIPLES OF TAXATION

CHAPTER 2 - INDIVIDUAL TAXPAYERS

ERRATUM: PAGE#71, ANSWER FOR Q#6: CGT=P400,000 P24,000

Gross business income, Philippines P1,000,000

Tax Due P195,400

Dividend income – DC P5,000

2. Taxpayer is a nonresident citizen

Gross business income, Philippines P1,000,000

Tax Due P173,000

Dividend income – DC P5,000

3. Taxpayer is a resident alien

Gross business income, Philippines P1,000,000

Tax Due P189,000

Dividend income – DC P10,000

5. Taxpayer is a nonresident alien not-engaged in trade or business

Compensation income, Philippines P400,000

Final Tax on Passive income:

Capital Gains Tax:

2. Taxpayer is a non-resident citizen

Capital Gains Tax:

3. Taxpayer is a resident alien (Same treatment with a non-resident citizen taxpayer)

On other Income (Apply rules on NRA-NETB)

b. Filipino Citizen employed by ROHQ = P218,500 computed as follows:

First P500,000 P125,000

c. Filipino Citizen employed by an OBU = P141,000 computed as follows:

Passive Income, Phls. (Subject to Final Tax)

d. Filipino Citizen employed by a Petroleum Contractor = P141,000

e. Filipino Citizen employed by ROHQ with gross compensation income of P1,250,000 =

First P500,000 P125,000

Passive Income, Phls. (Subject to Final Tax)

Tax Due (Tax Table) P32,500 P47,000 P66,233 P126,056

(Amounts are cumulative) Amount % Tax

Capital Gains Tax: P7,000

Capital Gains Tax: P13,000

Supporting Computations (Multiple Choice):

(13 and 14)

CHAPTER 3 – FRINGE BENEFITS

(c)P2,900,000 computes as follows:

P3.4 P466,000 computed as follows:

P3.5 P130,000 computed as follows:

P3.6 P152,000 computed as follows:

Explanations (Modified Identification)

Supporting Computations (Multiple Choice):

CHAPTER 4 – INCOME TAX FOR CORPORATIONS

Philippines Final Tax

Gain on sale of shares sold directly to a buyer P10,000

**SP = Cost + Gain = P4M + 5M = P9M; SP is higher than FMV

CASE B (Resident Foreign Corporation):

Current account, BDO @ 20% P120,000

TAX DUE (Higher) P120,000 P240,000 P420,000 P600,000

Case B (Tax Exempt Joint Venture)

Distributable income P20,000,000

(P4.15) P1.5M x 6% = P90,000

TRUE OR FALSE - SET A

Expenses, related activities 2,000,000

NCIT P25,000 P130,000 P200,000 P0 P100,000 P150,000 P8,000 P1,000

CHAPTER 5 – PARTNERSHIPS, ESTATES AND TRUSTS

Case B (General Professional Partnership):

Interest Income on peso bank deposits @ 20% P4,000

Dividend Income @ 10% P8,500

Capital gains tax on shares of stock 7,000