INCOME TAXATION 6" Edition (BY: VALENCIA & ROXAS) 2 SUGGESTED ANSWERS Chapter 4: General Principles ‘and Concepts of Taxation True True True True False - No direct double taxation because the corporation has separate and distinct personality from the stockholders. 6. False - For transfer tax purposes, nonresident alien is liable only for properties located within the Philippines 7. False - No public funds shall be appropriated for religious purpases 4. False -All bills even if approved by the 2/3 of the congress should still be signed by the President ta became law 9, False - To grant tax-exemption, only majority of all the members of the congress is needed, nat two-thirds 10. True IL. False - Taxes collected by the BIR are national taxes 12. True 13. False - the tax evader breaks the law. 14, False - Transfers of real property classified as capital asset is subject to capital gain tax of 6%. The revenue and asset must be used directly far educational purposes. wauhe Problem 1 - 4 TRUE OR FALSE 1. True. False - interpretations made by the executive officers are not conclusive. Itcan be disregarded by the Courts if found erroneous. 3. False — “Ex post facto law” is not applicable for tax purposes. 4. True 5. False - Nonpayment of poll tax. 6. True 7. False - Doubts must be resolved in favor of the taxpayer. 8. True 9. False - Not applicable to totally unrelated taxes. 10. True II. Faise — Not transferrable and not assignable 12. False - Mull and void, not binding and no effect as law. 13. True 14, True 15. False - Tax rulings are not final intemretations of tax laws. The court can change them if found contrary to law. Prob.1-5 = Prob. 1-6 Prob. 1-7 Prob. 1 Prob.1-9 Prob. 1 — 10 Ee Le LA Le Le 1DINCOME TAXATION 6" Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 1: General Principles and Concepts of Taxation wuMumuee elie iad Sd i vooaoau anit igi ot mUuenoom aii sia Gi oi vuvomane ei rie wind A gd Gi va Income tax due per return P100,000 Add: Surcharge for willful neglect to file the and late payment (P100,000 x 50%) P50,000 Interest from April 15, 2008 to June 30, 200C (P100,000 x 20% x 14.5/12) 24,167 74,167 Total amount due, June 30, 200 Piv4.167 Late filing and late payment of tax is a taxpayer's willful neglect if the payment is made only after the notification of the BIR. Such violation is subject to 50% surchame plus 20% interest per annum computed fram the due date of the tax until the date of payment. (Rev. Regs. No 12-99, Sec, 5.3) Problem 2-22 5 Income tax due per return P100,000 Add: Surcharge for late filing and late payment -simple neglect (P100,000 x 25%) P25,000 Interest from April 15, 2008 to June 30, 2008 (P100,000 x 20% x 2.5/12) 4.167 29,167 Total amount due fexclud ing compromise penalty) Pio 367 if the violation is late filing and late payment of tax, only one 25% surcharge shall be imposed for late filing of the return and late payment of the tax plus 20% interest per annum computed from the due date of the tax until the date of payment (RMC Mo. 46-99: Sec. 5, Rev. Regs. No. 12-99) Problem 2-23 A Unpaid tax due PL.opo,c00 Additions to tax: Surcharge (P1,000,000 x 50%) P500,000 Interest from April 15, 2008 to December 31, 200C (1,000,000 x 20% x 1 year & 6.5 mos.) 341,666 541,667 Total amount due as of December 31, 200C PL.Bal.667 Add: Excess amount 158,333 Tatal selling price Pz,000,000 Add: Statutory interest rate to redeem (P2,000,000 x 15%) 300,000 Total amount neaded to redeem the real property E3o0000INCOME TAXATION 6TH Edition (BY: VALENCIA& ROXAS) * SUGGESTED ANSWERS Chapter 2: Tax Administration The redemation of the property sold through public auction shall be made within one year from the date of sale subject to a statutory redemption interest rate of 15% per annum. (Sec 214, NIRC) Problem 2-24 5 Basic amount due per assessment P 80.000 Add: Surcharge for simple neglect to pay on time (P80,000 x 25%) P 20,000 Interest (P80,000 x 20% x 45/360 days) 2.000 22.000 Total required payment on june 30, 2004 Plo2.o00 [Sec. 248(A)(3) and Sec. 249(8)(3), Rev. Regs. No. 12-99, Sept. 6, 1999] Problem 2-25 c Unpaid income tax due (P3,000,000 - P1,000,000) P2.000,000 Additions to tax: Surchame (P2,000,000 x 50%) P1,000,000 Interest (P2,000,000 x 20% x 3/12) lino Lon ono Total amount due as of August 15, 200B. Belonooo Concealment of income is a form of fraud. A false or fraudulent return is subject to a surcharge of 50% based on the unpaid tax or the deficiency tax. [Sec. 248 (B), NIRC] Problem 2-26 D Income tax due per ITA Pa.000 Divided by installments allowed = Tax due on 1" installment P4000 Less: Tax credit no Tax payable Ist installment Laon When the tax due is in excess of P2,000, the taxpayer other than a corporation may elect to pay the tax in two equal installments (Sec, 56(A)(2). NIRC), Problem 2-27 1. Letter A Income tax due per return, April 15, 2008, P1,000,000 Less: 1“ installment, April 15, 2008 250,000 Balance as of April 15, 2008 P 750,000 Add: Interest from April 15, 2008 to May 15, 2008 {P750,000 x 20% x 1/12) —esi Total amount due, May 15, 2008 P76? 500 2. Letter c Balance as of May 15. 2008. P 500,000 Add: Interest from May 15, 2008 to June 15, 2008 (P500,000 x 20% x 1/12) 8.333 Total amount due, june 15, 2008 P 508,333INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 10 SUGGESTED ANSWERS ‘Chapter 2: Tax Administ ation Less: 3¢installment, June 15, 2008 (P250,000 + P8,333) 256333 Balance as of June 15, 2008 P 250,000 Add; Interest from June 15, 2008 to July 15, 2008 (P250,000 x 20% x 1/12) ——alez 4® and final installment Bo 254167 Problem 2-28 Yes, because the prescriptive period of filing the written protest is within 30 days from receipt of assessment. Pay the related tax. Compromise is not @ remedy because tax fraud is not subject to campramise Problem 2-29 1 Taxable income P1,000,00 a Add: Discrepancies per investigation: Undeclared rental income 450,000 Nondeductible interest expenses 300,000 Nondeductible bad debt expense 200,000 Undocumented representation expenses —ismona _1100 900. Taxable income per investigation P2,100,000 Multiplied by income tax rate 30% Income tax due P 630,000 Less: Income tax paid per retum 300.000 Balance P 330,000 Add: 50% Surcharge for filing 2 fraudulent return [P330,000 x 50%) P165,000 20% interest per annum from April 15, 2010 to April 15, 2011 (P330,000 x 20%) —Ss.000 231.000 Total amount due Bo soh.oo0 2 Total amount due P561,000 Add: 25% Surcharge for late payment (P562,000 x 25%) P140,250 20% Interest per annum from April 15, 2011 to june 15, 2011 (P561,000 x 20% x 2/12) _Ia700 = _15B.950. Total amount due (excluding suggested compromise penalty for late payment) bus.9so Problem 2-30 a. The cash reward of Miss Wan as tax informer would be P1,000,000, the maximum amount ‘of reward. b. The informer's reward remains payable, hence, Miss Wan will receh reward of P1,000,000. d the maximum <, The final income tax to be withheld from the reward of Miss Wan would be 10% of P1,000,000 or P100,000. Problem 2-31 a. The tax violations of Miss San Tago are the following: 1 Unregistered business (Sec. 236 [A], NIRC.)INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) uN SUGGESTED ANSWERS ‘Chapter 2: Tax Administ ation 2. Non-issuance of commercial invoice (Sec. 237, NIRC.) 3 Ignoring the summon (Sec. 5, NIRC} b. Miss San Tago's minimum financial penalties if convicted: 1. For operating an unregistered business P 5.000 2. For not issuing commercial invoices 1,000 3. Failure ta obey summan 5000 Total minimum BiLooo Problem 2-32 None. There is no surcharge to be impased ta Orville Corporation because the error was corrected before payment and the payment was made on time. The income tax due is computed as follows: Corrected gross receipts (P2,000.000/75%) P 2.666.667 Corrected allowable deductions (P1,500,000/1.35) —LULi1 Taxable incame per audit PLS55.556 Multiply by percent of tax for 2018 30% income tax due Bb 466.667 Problem 2-33 2. Principal factory P 509 Warehouses (P500 x 4) 4,500 Branches (P500 x 30) 15.000 Total annual registration fee — January 31, 2008 E2po00 2. Total annual registration fee — January 31, 2008 20,000 Surcharges (20.000 « 25%) 5.000 Interest (P20,000 x 20% x 6/12) 2.000 Total amount due - july 30, 200B E2zo00 Problem 2-34 Amount of tax lisbility 100,000 Surcharges 25,000 Interest 20,090 Advertising cost 5.000 Price if purchase by the Government Bisooo0 Problem 2-35 Case 1- Financial incapability due to corporate insolvency. Delinquent accounts P 500,000 Pending cases under administrative protest 900,000 Criminal violation not filed in courts —L.ooo.000 Total basic tax P2.400,000 Multiplied by applicable compromise rate 20% Amount of compromise 2 ae0.n00 Case 2 - Financia! incapability due to surplus deficit resulting to impairment jin original capital by at least 50% Delinquent accounts P S00.000INCOME TAXATION 6TH Edition (BY: VALENCIA& ROXAS) 12 SUGGESTED ANSWERS Chapter 2: Tax Aekminis ration Pending cases under administrative protest 900,000 Criminal violation not filed in courts —Looo.o00 Total basic tax P2,400,000 Multiplied ty applicable compromise rate 40% Amount of compromise 2 960.000 Case 3- Doubtful validity of assessment. Delinquent accounts P 500,000 Pending cases under administrative protest 900,000 Criminal violation nat filed in courts 1,000,000 Total basic tax P2,400,000 Multiplied by applicable compromise rate 40% Amount of compromise E360 000 Problem 2-36 a. Yes, because the offered compromise amount of P100,000 exceeds the required minimum amount of P25,000, (P250,000 x 10%). b, Since distraint is imposed only on personal property, the personal praperty with a value of P100,000 shall be subjected to distraint c. Yes, levy of real property and distraint of personal property can be done simultaneously (Sec. 2078 of the Tax Code). See also Section 205 of NIAC. d. No, the unpaid portion will remain as tax liability of Lugui because Miss Lugui did not avail of the compromise tax settlement. The remedy by distraint of personal property and levy on realty may be repeated if necessary until the full amount due, including all expenses, Seca tt gia i iets asINCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 10 SUGGESTED ANSWERS Chapter 3: Concept of income CHAPTER 3 CONCEPT OF INCOME Problem 3-1 TRUE OR FALSE 1 2 eae 13. ld 15. True False - Some wealth that made to increase the taxpayer's net worth are gifts and inheritance and these are not taxable income True False - Sometimes a sale results to loss. True True True Faise - Filipino citizen wha is not residing in the Philippines is taxable only for income earned within False ~ The basis of tax is the fair market value of the instrument False — Not income for the employee and not subject to income tax because the beneficiary is the employer. False - Accrual reporting reports incame when there is earning regardless of collection False - Most taxpayer opts for calendar year basis, except corporation which may opt for fiscal year. True False - Prepaid expenses are not allowable deductions whether cash or accrual method of reparting income is used False - There is no rule of 25% initial payment if the sale is made on regular basis af personal goods Problem 3-2 TRUE OR FALSE mann & WN © 10, 1. 12. LB. 14. 15. True True False- All income distributed are considered as from all income earned outside the Philippines. False - Only calendar method starts from January and ends at December of the taxable year. True True True False - The reportable income of the decedent's estate is only the earnings after death False — Service business is allowed to deduct expenses using accrual method if such business opted to use accrual method, but the income is still reportable using cash basis. True True True True True TrueINCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Ghaptar 3: Concept of Income Problem 3-3 Problem 3-4 lob Lo Be 28 3A 3.8 4c aa 5. B 5. DB 6c 6A 70 7.8 ac 8. D 9B gc 10. 10. 11.c Problem 3-5 c Net assets ending (P300,000 ~ P50,000) Net assets bag. (P500,000 -P150,000) Balance Add: Owner's drawings Reportable income floss} Problem 3-6 B increase in total assets Decrease in total liabilities Dividend deciared Total Less: Additional paid-in capital Unrealized gain Reportable income Problem 3-7 8 Increase in total assets Decrease in total liabilities Drawings Additional investments. Total income Problem 3-8 c Sales Less: Cost of sales (P30,000 x 40%) Rent expense Kiosk - depreciated value (P3,000 - P2,900) Interest expense (P20,000 x 1%) Net income - return on capital Problem 3-9 o Time deposit balance PEOO, P250,000 1.350.000), iPio0,a00) 240.000 bi40.000 P1,520,000 330,000 100.000 50,000 000 don no Ehoo.000 P 250,000 160,000 20,000 150.000) Bagoo00 p30,000 P12,000 24 aoa 100 200 14,300 Return of Capital 2250.000 Eo zo0 Return on Capital Baao00INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 12 SUGGESTED ANSWERS ‘Chapter 3: Concept of income Problem 3-10 a There is no reportable income because there is no actual sale yet during 200% Problem 3-11 D Interest credited on peso-savings deposit (40,000/80%) P 50.000 Matured interest on coupon bonds, not yet collected 80,000 Cancellation of indebtedness fram SMC in which Aram has equity investments 120.000 Share in joint venture not yet received 200,000 Payment of damanges deposited in caurt by a comipetitar for unrealized profit —s0.000 Income realized BSLono0 Increases or decreases in value of investments are not realized gain or lass. Payment of damages for unrealized profits is a taxable income. Income may be constructively received even if not physically transferred to a person far as long as it is credited to the account of, or segregated in favor of a person Problem 3-12 « Yeard Vear2 9 -___Year3 Sales 0 0 = -P2,800,000 ‘Cost of sale 0 0 (2,000,000) Disposal cost 0 a 50.000 Income for each year 2 Q B 70.000 Problem 3-13 A Taxable Income Montaxable inca. me Salary (P260,000/13) x 12 240,000 Raffle winnings 70,000 13" month pay (P260,000/13) x 1 P 20,000 Lotte winnings 800.000, Lauo.000 Ba20.000 Problem 3-14 D ‘Within: Taxable Income Compensation income P180,000 Income from grocery store 50.000 ‘Outside: Compensation income 129,000 Latte winnings 100.000, Total income taxable in the Philippines ba5g.000 Note: Lotto winnings earned outside the Philippines by a resident Filipino citizen are taxable in the Philippines. Problem 3-15 5 Salary from the Philippines, net of tax P250,000 Add: Withholding tax 50,000 Total income reportable in the Philippines Eaeno00 ‘OCW are exempt from income tax on income earned outside the Philippines. (Sec. 23 (C), MIRC]INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS 1a Chapter 3: Conoapt of income Problem 3-16 B Amount of dividend received Multiplied by percent of Sungad’s operation within based an grass incame Dividend income — taxable in the Philippines Problem 3-17 1 Letterc Net salary as university professor Add: Withholding tax on wages Campensation income 2 Letter B Gross audit service income (P135,000/90%) Add: Gross rent income (P114,000/95%) Tatal income from profession and business 3 Letter Interest income (P8,000/80%) Add: Dividend income (P4,500/90%) Total passive income 4 Letter D Gain from sale of personal car Add: Gain from sale of shares of stock - outside Stock market (P2,850/95%) Total capital gains Problem 3-18 a Professional fee (P450,000/90%5) Salary (P300,000 + P60,000) Prizes Earnings subject to normal tax Capital gains - shares of stock: First PLOO,0G0 (P95,000/95%) P109,000 ‘Over P100,000 (P54,000/90%) 60,000 Winnings (P40.000/80% ) Earnings subject to final taxes Problem 3-19 D First 4 months (P12,000 x 4) Remaining months (P15,000 x8) 13" month pay (P168,000/12) Gross compensation income Problem 3-20 B Reportable income is the market value of the car received Problem 3-21 A Market value of the service received P6oo,000 — 20st Bano.000 P240,000 — 20.000 20.000 P150,000 —120,000 b2ro.000 P10,000 P509,000 360,000 —A000 Basa.000 P160,000 —S0.000 bouo00 P 48,000 120,000 —14.000 Bagzoo0 BeppoINCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) la SUGGESTED ANSWERS Chaptar 3: Concapt of Income Problem 3-22 © Face value of the nan-interest bearing note P30,000 Multiplied by the present value factor of 10% annuity ona ‘Compensation income - present value of the nate Paz Problem 3-23 a ‘Compensation income 250.000 Interest income (P50,000 x 12% x 6/12) pa.g00 Problem 3-24 B Collections during the yaar P490,000 Expenses actually incurred 250.000) Net income before personal exemption — cash basis Pa40,000, ifthe service business opted to report on accrual basis, such method can only ba applied when it comes to reparting of axpansa Problem 3-25 a Grass income (P1,000,000 — P600,000) P400,000 Actual operating expenses (P200,000 x 80%) O6o.000% Net incame before ather income P240,000 Add: Gain from sale of old fumiture 20.000 Taxable income E2eoo00 Problem 3-26 1. Letter ¢ Cash P 50,000 Fair market value of property received 100,000 Mortgage assumed by the buyer 450,000 Installment payments: First year 200.000 Second year 200,000 Third year 300,000 Fourth year 400.000 Selling price ELeonooa 2. Letter D Selling price P1,600,000 Less: Mortgage assumed by the buyer 450.000 Balance P1,150,000 Add: Excess of mortgage over cast (P450,000 - 400,000) 50.000 Contract price BL200.000 3. Letter O Down payments: ‘Cash idown payment) P 50,000 Fair market value of property received 100,000 Installment received in the year of sale 100,000 Excess of mortgage over cost (P450,000 — P400,000) —so.0n0 Initial payments Eaoo.o00 Problem 3-27 c Selling price 700,000 Add: Excess af mortgage aver cost (P600,000 —P500,000) LoanINCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 15 SUGGESTED ANSWERS Chapter 3: Goncapt of income Total Pgo0,000 Less: Mortgage assumed by the buyer —fo0.n00 Contract price B200.090 Problem 3-28 La Income 200C - casual sale (P12,000 - P3,000) 9,000 Multiplied by holding period —more than 1 year 50% Reportable income Ea5o0 The sale is considered cash sales because the 2000 initial payments (P1,000 + P1,000 + 2,000) exceeds 25% of the selling price; Pa, 000/P12,000 = 33% 2.8 Reportable income 200€ - regular sale (P9,000 x Pa.000/P12,000) p2o00, Since the property is sold in regular basis, installment reporting of incame is allowed. Problem 3-29 B Total revenue P:1,000,000 Cost of sale 500,000 Income ta be reported EB s0n000 Problem 3-30 a Contract price P50,000,000 Completed as of this year, 50% P25,000,000 Cumulative cast, PLO M + 9M 19,000,000 ‘Cumulative income P 6,000,000 Less: Reported prior year (PS0M x 30%) — P10M 5,000,000 Reportable income this year E-Loopooo Problem 3-31 D Contract price P 1,000,000 Less: Cast (P90,000/20%) 450,000 Gross profit P 550,000 Multiplied by percent of completion 20% Reportable income under percent of completion Enon Problem 3-32 > Contract price P1,.200,000 Less; Total costs (P432,000 + P1B4,250 + PLO3, 750) 720,000 Total profit P 480,000 Less! Previous years’ reported income: Accomplished contract price for 200A and 2008 (P1,200,000 x P1,020,000 5%) Previous years’ actual costs: 2004 (432,000 ) 2008 184,250 403,750 L Percent of completion - 200C Reportable income BP 7e20INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 16 SUGGESTED ANSWERS Chapter 3: Goncept of income roblem 3 — 33 Year 3 sales P 500,000 Less: Cost incurred as of year 3: Year 1 P 100.000 Year 2 200.000 Year 3 5.000 350.000 ‘Year 3 - reportable income Baso.o00 Problem 3-34 Es Harvested crops sold P 2,000,000 Less: Total direct costs: Year 1 P 300,000 Year 2 100,000 Year 3 100.000 Year 4 100,000 Year 5 400000 _i1000.000 Reportable income —year 5 ELoog.o09 Problem 3-35 Cash basis income (300K +800K +100K} P1,200,000 Accrual expenses 500.000 Net income before personal exemption E_Zog.000 Problem 3 - 36 Accrued sales [2,000,000 + 520,000) P2,520,000 Less: Cost of sales 1.200.000 Gross income P1.320,000 Less: Operating expenses (P600,000 x 70%) 420,000 Net income E-sooo00 Problem 3 - 37 Total harvest far the year at seling price b Harvasts sold: (80 cavans x P500) Pd0.000 Pa0.000 (190 cavans x P500) P95,000 Pg5,000 Ending inventory: (20 cavans x P500) 10,000 (30 cavans x PSO) 15,000 Beginning inventory: (20 cavans x P500) 10.000) Gross income for the year Eaoo0 Hoon) Babooo ooo Problem 3-38 1. Cash Method fanning —Inadiog Revenue P 50,000 P150,000 Equipment sold 25,000 Costs: ‘Cost of products purchased { 90,000) Carrying value of farm 25.000) equipmentINCOME TAXATION 6TH Edition (BY: VALENCIA& ROXAS) SUGGESTED ANSWERS Chapter 3: Concept of Income Gross income Bso000 Epon PLooooo pene 2. Accrual Method Farming Trading Rent Tota Revenue P 50,000 pis0,000 P100,000 Equipment sold 25,000 Inventory, ending g,000 Inventory, beginning { 6,000) Costs: ‘Cost of products purchased { 90,000) Carrying value of farm { 25.000) equipment Gross income 253.000 Problem 3-39 1. Letter C Cash receipts: Sale of livestock (P200,000 + P300,000) Sale of livestock for rent Sale of machinery Rent of livestock for rent Total cash receipts Less: Cast of livestock purchased (P50,000 + P175,000 -P100,000) Cost of livestock for rent sold Cost of machinery sold Gross income 2. Letter A Sale of livestock (P200,000 + 300,000) Less: Cost of livestock purchased Balance Add: Inventory, end - livestock produced Total Less: Inventory, beg. - livestock produced Balance Add: Gain fram sale of livestock for rent (P10,000 - (15,000 - PB,000)) Gain from sale of machinery (P20,000 - (F50,000 - P35,000)] Rentof livestack ‘Gross income fppooo Piooooo peoor 125,000 7.000 —15.000 P 3,000 5.000 30.000, p500,000 10,000 20,000 Lon P5e0,000 142.000 Ba33.000 p500,000 125.000 pa75,000 — 50.000) pa25,000 Lao p245,000 58.000, Sanoo0 The difference between the cash basis and the accrual basis is the decrease in inventory of livestock prduced by P130,000. A comparison is prepared as follows: Ending inventory - livestock produced Less: Beginning inventory — livestock produced Decrease in inventory fash basis — gross income Less: Accrual basis - gross income Difference P 50,000 —180.000 ono Pa33,000 oo PL30.000