INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 82

SUGGESTED ANSWERS
Chapter 9: Losses

CHAPTER 9
LOSSES
Problem 9 – 1 TRUE OR FALSE
1. True
2. True
3. True
4. True
5. True
6. True
7. True
8. False – deductible only to either income or estate.
9. False – NOLCO is not applicable when OSD is used.
10. False – NOLCO is not applicable under MCIT.
11. True
12. False – not deductible
13. False – lower amount of the replacement cost or book value
14. True
15. True
16. False – Deductible from gambling gains only.

Problem 9 – 2
1. A 5. D 9. A
2. C 6. A 10. C
3. D 7. D 11. B
4. C 8. A 12. C

Problem 9 – 3 Not in the choices = P10,000.

Account worthless and written-off P10,000

Note: The depreciation amounting to P16,000 is deductible from business income as an

expense but not a loss.

Problem 9 – 4 B
B. Loss from sale of business equipment P100,000

Problem 9 – 5 A
Loss on sale of capital assets is not deductible from business income.

Problem 9 – 6 C
Deductible loss – Book value (P100,000 x 10% x 4) P 40,000

Problem 9 – 7 D
Deductible loss – book value lower than replacement cost P 50,000

Problem 9 – 8 C
Acquisition cost P600,000
Less: Accum. Dpn. [(P600,000 x 90%)/10] x 2 108,000
Book value P492,000
Multiplied by percent of damaged portion 30%
Damaged portion P147,600

Deductible loss – replacement cost (lower) P127,600

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 83
SUGGESTED ANSWERS
Chapter 9: Losses

Problem 9 – 9 C
No deductible loss at balance sheet date. On June 30, the reportable gain would be
P20,000, or (P120,000 – P100,000).

Problem 9 – 10 D
Net operating loss per GAAP P50,000
Less: Bad debts estimate 10,000
NOLCO in the succeeding years P40,000

Problem 9 – 11 D
Zero. An individual who claims the 10% optional standard deduction shall not simultaneously
claim deduction of the NOLCO.

Problem 9 – 12
P25,000. The lower between the carrying value and replacement cost.

Problem 9 – 13
Book value (P1,200,000) x10/20 P600,000
Less: Insurance recovery P200,000
Scrap recovered 20,000 220,000
Deductible loss P380,000

Problem 9 – 14
None, because the demolition cost, net of amount realized from scrap should be capitalized
as part of the factory building cost.

Problem 9 – 15
Net loss reported P 50,000
Estimated bad debts ( 20,000)
Warranty expense ( 10,000)
Net loss carry-over P 20,000

Problem 9 – 16
Gross profit – year 1 P500,000
Less: Other operating expenses 580,000
NOLCO for year 2 P 80,000

Problem 9 – 17
Year 1 Year 2
Sale P1,800,000
Less: Cost – Notes receivable 1,500,000
Gain P 300,000

No gain or loss on year 1 because there was no actual sale of foreclosed property.

Problem 9 – 18
None, because the loss should be recognized only upon actual sale of the property foreclosed.

Problem 9 – 19
None. There is no deductible loss from gross income. Gambling losses can only be deducted
from the gambling winnings. Gambling transactions are not ordinary business transactions,
but capital asset transaction. Accordingly, gambling losses are not an allowable deduction
from ordinary gross income.
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 84
SUGGESTED ANSWERS
Chapter 9: Losses

Problem 9 – 20
Loss on robbery (construction supplies) P50,000
Loss on pilferage of business supplies 10,000
Replacement cost of damaged portion of machine 150,000
Deductible loss P210,000

The compensatory and actual damages can be claimed under the classification of deductible
“damages.”

Problem 9 – 21
1. OSD (P2,000,000 x 40%) P800,000

2. OSD (P2,000,000 – P500,000) x 40% P600,000

Problem 9 – 22
1. Gross income (P2,000,000 – P1,000,000) P1,000,000
Multiplied by MCIT rate 2%
Income tax due – MCIT P 20,000

2. NOLCO for year 200E P - 0 -

Note: The 3-year reglamentary period for NOLCO shall not be suspended
even if MCIT has been used. NOLCO has expired effectively on
200D.

Problem 9 – 23
Ordinary Capital
Pilferage loss P5,000
Capital loss on sale of capital asset P10,000
Casualty loss 15,000 .
Total deductible loss P20,000 P10,000

Problem 9 – 24
Death of livestock previously purchased P10,000
Cost of property expropriated by the government
(P30,000 – P10,000) 20,000
Total deductible farm loss P30,000

Problem 9 – 25
Cost of the building P10,000,000
Less: Accumulated depreciation (P10,000,000/30) x 5 1,666,667
Book value before additions and improvements P 8,333,333
Add: Additions and improvements 500,000
Total P 8,833,333
Less: Accum depn (P8,833,333/25) x 3 1,060,000
Book value P 7,773,333
Less: Insurance collected P5,800,000
Salvage value 300,000 6,100,000
Deductible loss P 1,673,333

Problem 9 – 26
Compensatory liquidated damages P100,000
Replacement cost of damaged portion of machine 40,000
Book value of abandoned equipment (P150,000 – P120,000) 30,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 85
SUGGESTED ANSWERS
Chapter 9: Losses

Amount of deductible losses P170,000

Loss on unrealized earnings is not deductible because it is not an actual loss (Sec.
96, Rev. Regs. No. 2). The casualty losses are fully compensated by insurance,
hence, not deductible. The excess of insurance compensation is a taxable gain and
should not be treated as a deduction of other losses (Sec. 5, Rev. Regs. No. 12-77).
Loss caused by embezzlement of funds by a known person can only be deducted
when the right of recovery becomes worthless (Talisay-Silay Milling Co. Inc., vs.
Commissioner, CTA Cases No. 1399 and 1406, December 29, 1965). Capital losses
are not deductible from business gross income. (Sec. 39(C), NIRC)