ACC 311- Income Taxation

Allowable Deductions- Illustrative Problems

JMF, CPA

1. X, Inc has a gross income of 1, 000, 000 with allowable deductions as follows: 140, 000 as business
expenses, 80, 000 as taxes, 20, 000 as bad debts and 40, 000 as contribution to a non-stock, non-profit
religious association. Compute for the allowable deductible contribution.
Suggested Answer:
Cost of Machinery (180,000+2,500+7,500) 190,000.00
Less: Salvage Value 30,000.00
Depreciable Cost 160,000.00
Divided by : 4 years
Annual Depreciation Deductible 40,000.00

2. X, Inc has a gross income of 1, 000,000 with allowable deductions as follows: 140, 000 as business
expenses, 80, 000 as taxes, 20, 000 as bad debts and 40, 000 as contribution to a non-stock, non-profit
religious association. Compute for the taxable income of X Corporation.
Suggested Answer:
Cost of Machinery 190,000.00
Less: Accumulated Depreciation
(40, 000 x 2 years) 80,000.00
Book Value 110,000.00
Divide by: Estimated Life 4 years
Annual Depreciation Deductible 27,500.00

3. X, Inc has a gross income of 1, 000, 000 with allowable deductions as follows: 140, 000 as business
expenses, 80, 000 as taxes, 20, 000 as bad debts and 40, 000 as contribution to a non-stock, non-profit
religious association. The taxpayer also made donations to National Government amounting to 50, 00, and to
an accredited non-government organization (NGO) in the amount of 30, 000. Compute for the taxable income
of X Corporation.
Suggested Answer:
Gross Income 1,000,000.00
Deductions except contribution 240,000.00
Taxable Income 760,000.00
Multiplied by (LIMIT) 5%
Amount of contribution allowable 38,000.00

4. A taxpayer acquired a computer equipment for 180, 000. Shipping charges were 2, 500, installation cost and
programming amounted to 7, 500. The equipment is expected to last for four years. It has a salvage value of
30, 000. If the taxpayer uses the straight line method, how much is the deductible depreciation?
Suggested Answer:
Gross Income 1,000,000.00
Deductions:
Expenses 140,000.00
Taxes 80,000.00
Bad Debts 20,000.00
Contribution 38,000.00 278,000.00
Taxable Income after contribution 722,000.00
5. A taxpayer acquired a computer equipment for 180, 000. Shipping charges were 2, 500, installation cost and
programming amounted to 7, 500. The equipment is expected to last for four years. It has a salvage value of
30, 000. If the taxpayer uses the straight line method, how much is the deductible depreciation if after two
years, it has been estimated that the computer has four more years of useful life?
Suggested Answer:
Gross Income 1,000,000.00
Deductions (except contributions) 240,000.00
Taxable Income before contributions 760,000.00
Less: Allowable Contributions
To religious association
(5% x 760, 000) 38,000.00
To the Government (in full) 50,000.00
to NGO (in full) 30,000.00 118,000.00
Taxable Income before contributions 642,000.00

6. After several years of operation, X Company established a pension trust to provide for the payment of
pensions to its employees when they retire. Under the plan, X corporation has to pay 100, 000 annually
beginning with year the trust was established. The corporation also paid 500, 000 to cover pension of
employees for the past services rendered. How much is the annual deductible pension of X Company?
Suggested Answer:
Amount paid during the taxable year 100,000.00
(1/10 of amount paid to cover prior years
500, 000 / 10 years) 50,000.00
Annual Deduction 150,000.00

End.