Income taxation by valencia chapter 8 (deductions from gross income)

51

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

CHAPTER 8

DEDUCTIONS FROM GROSS INCOME
Problem 8 – 1 DEDUCTIBLE OR NONDEDUCTIBLE FROM GROSS INCOME
1. Deductible
2. Nondeductible
3. Nondeductible
4. Deductible, in lieu of tax credit (Sec. 34C3, NIRC)
5. Deductible
6. Nondeductible
7. Nondeductible
8. Deductible
9. Deductible
10. Nondeductible

11.
12.
13.
14.
15.
16.
17.
18.
19.

20.

Nondeductible
Deductible
Deductible
Deductible
Nondeductible
Nondeductible
Nondeductible
Deductible
Deductible
Deductible

Problem 8 – 2
TRUE OR FALSE
1. True
2. True
3. False – Business expenses related to business income outside the Philippines is
deductible also.
4. False – Business expense is deductible from gross income.
5. True
6. True
7. True – Once OSD is opted, no capital loss could be deducted from capital gain.
8. False – Some business expenses are nondeductible or subject to limit.
9. False – Income outside the Philippines by a NRC is not taxable in the Philippines,
hence, no allowable deduction is allowed.
10. True
11. False – Compensation income is not subject to OSD.
12. False – NOLCO is not an itemized deduction.
13. True – Amortized over the term of the lease

14. False – ½ of 1%
15. False – 33%
16. False – Double –declining method
17. True
18. True
Problem 8 – 3
1. B
2. No choice,
OSD=40%
3. D
4. D
5. D
6. C
7. B
8. D
9. B
10. C
11. C
12. D
13. C
Problem 8 – 7

Problem 8 – 4
1. C
2. A

Problem 8 – 5
1. A
2. A

Problem 8 – 6
1. A
2. C

3. D
4. A
5. B
6. B
7. A
8. A
9. D
10. A

3. C
4. C
5. A
6. D
7. C
8. A
9. B
10. C

3. A
4. C
5. C
6. C
7. B
8. C
9. C
10. C

11. D
12. B

C
Expensed

Capitalized


52

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

Change of motor of air condition
Repainting of building
Expansion of store
Cleaning of computers
Repair of furniture
Problem 8 – 8
Salaries net of tax
Withholding tax
Deductible business expense

P60,000
P10,000
50,000
9,000

1,000
P20,000

.
P110,000

A
P100,000
5,000
P105,000

Problem 8 – 9
A
General rule: No personal or business expense is deductible from compensation income.
Problem 8 – 10
D
Depreciation expense (P1,000,000 x 40%)/25
Loss of business equipment
Deductible expense

P16,000
38,000
P54,000

Problem 8 – 11
D
1.
A
No personal or business expense is deductible.
2.

B
Depreciation (P20,000 x 10%)
Repair (P100,000 x 10%)
Office supplies
Total deduction

Problem 8 – 12

P 2,000
10,000
6,000
P18,000

B

Tax laws
GAAP
Salary expense (P180,000 + P20,000)
P200,000
P200,000
Estimated uncollectible accounts
10,000
Compromise penalty
50,000
Depreciation expense
30,000
30,000
Miscellaneous expense
.

5,000
Deductible from earnings
P230,000
P295,000
Note: For tax purposes, the miscellaneous expense is not deductible because it was not
reported last year. For accounting purposes, the miscellaneous expense can be deducted as
prior period adjustment from retained earnings.
Problem 8 – 13
C
Gross income (P300,000 + P20,000 + P180,000)
Multiplied by OSD rate
Optional standard deduction

P500,000
40%
P200,000

Problem 8 – 14
1.
B
Gross income (P870,000 – P10,000 – P380,000))
Add: Gains from sale of capital asset
Total
Multiplied by OSD rate
Optional standard deduction

P480,000
40,000
P520,000
40%

P208,000

2.

B
OSD
Less: Operating expense

P208,000
20,000


53

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

Amount of income enjoying tax savings

P188,000

Problem 8 – 15
D
Gross receipts from profession
Rent income
Total gross income
Multiplied by percent of OSD
Optional standard deduction

Problem 8 – 16
C
Operating expense before representation expense
(P2,000,000 – P300,000)
Representation expense – Actual
- Limit (P20,000,000 x 0.005)
- Lower
Allowable itemized deductions
Problem 8 – 17
B
Salary expense
Rent expense
Advertising expense
Depreciation expense
Interest expense
Tax differential on interest income (P30,000 x 33%)
Total itemized deductions
Problem 8 – 18
A
Gross salaries of employees
Grossed-up monetary value of fringe benefits
Deductible salaries and fringe benefits expenses
Problem 8 – 19
D
Allowable deduction – fringe benefit expense (P102,000/68%)

P100,000
450,000
P550,000
40%

P220,000

P1,700,000
P300,000
100,000
100,000
P1,800,000
P120,000
24,000
6,000
5,000
60,000
( 9,900)
P205,100
P6,000,000
1,000,000
P7,000,000
P150,000

Problem 8 – 20
D
Assume bonus is computed after tax but before bonus. The answer is letter D = P8,143,
computed as follows:
Net income before charitable contribution (P75,000 +
P5,000)
Less: Deductible contribution (P80,000 x 5%) – lower of
actual
Net income before income tax and bonus
B
T

=
=

15% (76,000 – T)
30% (76,000 – B)

B
B
B

=
=
=

15% [76,000 – 30% (76,000 – B)]
15% (76,000 – 24,320 + 30%B)
11,400 – 3,420 +0.045B

B – 0.045B
0.952B
B

=
=
=

7,980
7,980/0.955
8,356

P 80,000
4,000
P 76,000


54

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

Proof:
Income before bonus and tax
Less: Income tax (P76,000 – P8,356) x 30%
Income after tax but before bonus
Multiplied by rate of bonus
Bonus

P76,000
20,293
P55,707
15%
P 8,356

Problem 8 – 21
B
Monthly salary
Death benefits

Terminal pay
Continuous compensation after the burial for three months
Total deductible expenses

P 5,000
50,000
25,000
15,000
P95,000

Note: Donation for coffin and other wake expenses is not business or compensation related
and, hence, not deductible. (Sec. 72, Rev. Regs. 2)
Problem 8 – 22

C

Purchases
Decreased in inventory
Increased in inventory

Inventoriable
cost
P300,000
20,000
.
P320,000

Supplies expense
P40,000
( 3,000)

P37,000

Problem 8 – 23
D
Traveling expenses (P50,000 + P200,000)
Fringe benefit expense (P68,000/68%)
Transportation expense – messenger
Total allowable expense

P250,000
100,000
40,000
P390,000

Problem 8 – 24
D
Total rent expenses paid
Rent last year
Prepaid rent
Deductible rent expense

P150,000
(10,000)
(20,000)
P120,000

Problem 8 – 25
C
Monthly rent (P20,000 x 60%) x 2 mos from Oct. 31 to Dec. 31
Insurance premium (P3,000 x 60%) x 2/12

Real property tax (P1,500 x 60%) x 2/12
Deductible rent expense

P24,000
300
150
P24,450

Note: The city services is not a rent expense.
Problem 8 – 26
B
1. B
Rent for 6 months based on usage (P20,000 x 6) x 80%
Rent based on usage and payments (P80,000 x 80%)
2. A
Actual cash collection for rent
Problem 8 – 27
D
Monthly rental expense
Monthly depreciation (P600,000/8)/ 12
Monthly deductible expense

Accrual
P96,000

Cash
P64,000

P150,000

P150,000
P2,000
6,250
P8,250


55

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

Problem 8 – 28
1. B
Trading - Limit lower (P5,000,000 x .005)

P25,000

2. C
Servicing – actual lower

P30,000

Problem 8 – 29
B
Operating Expense before representation
Representation expense (P300,000 x .01)
Deductible operating expense

P80,000
3,000
P83,000

Problem 8 – 30
C
Interest expense
Tax differential (P50,000 x 33%)
Deductible interest expense

P40,000
(16,500)
P23,500

Problem 8 – 31

D

Interest expense
Tax differential (P30,000 x 38%)
(P30,000 x 33%)
Deductible interest expense
Problem 8 – 32

Sole proprietor
P50,000
(11,400)
.
P38,600

(9,900)
P40,100

B
Deductible

Interest
Interest
Interest
Interest
Interest
Total

Corporation
P50,000

paid in advanced
paid to a brother
paid on deliquency taxes
on borrowings to finance his family home
paid to finance petroleum exploration

Problem 8 – 33
A
Tax savings from interest expense (P100,000 x 30%)
Final tax on interest income (P1,000,000 x 12%) x
20%
Actual tax savings
Problem 8 – 34
A

Documentary stamp taxes
Local tax (P6,000 – P800 – P200)
Municipal tax
Community tax
Deductible taxes

Nondeductible
P 20,000
12,000

P 8,000
.
P 8,000

30,000
100,000
P162,000
P30,000
24,000
P 6,000
P 1,000
5,000
2,000
1,500
P9,500

Note: The fringe benefit income taxes to key officers and rank-in-file employees are to be
classified as deductible fringe benefit expense and not tax expense.
Problem 8 – 35
D

Unadjusted net income (P520,000 – P200,000)
Add back: Income tax foreign country
Adjusted net income
Personal exemption
Net taxable income

P320,000
10,000
P330,000
(50,000)
P280,000


56

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

Note: The P10,000 income tax paid to foreign country is better to be treated as tax credit
rather than as operating expense.
Problem 8 – 36
A
Asset of Oliva
Payment to government (P200,000 x 50%)
Balance
Deductible bad debts is the entire amount of
collectibles
Problem 8 – 37

B
Bad debts from business actual written off (P100,000 x
40%)
Bad debts from profession actual written off
Deductible bad debts expense
Problem 8 – 38
D
Annual depreciation expense (P50,000 – P5,000)/5
Multiplied by ratio of months used during the year
Depreciation expense 200B

P 60,000
(100,000)
(P40,000)
P100,000

P40,000
50,000
P90,000
P9,000
1/2
P4,500

Problem 8 – 39
A
Annual depreciation (P2,300,000/11.5 years)
Multiplied by ratio of months used in 2007 (July 1 to Dec.)
Depreciation expense

P200,000

6/12
P100,000

Problem 8 – 40
D
Oil drilling machine (P800,000 x 90%) / 8 years
Oil extracting machine (P900,000 x 90% / 10 years – limit
Computers (P100,000 x 90%)/4 years
Delivery truck (P200,000 x 90%)/ 5 years – limit
Annual depreciation expense

P 90,000
81,000
22,500
36,000
P229,500

Problem 8 – 41
C
Depletion base (P6,000,000 – P1,000,000 + P300,000)
Divided by number of extractible estimated tons
Depletion per ton
Multiplied by number of tons extracted during the year
Depletion expense
Problem 8 – 42
1
D
.
Depletable costs, January 1, 200x
Exploration costs

Intangible development costs
Total
Less: Depletion expense (P15,000,000/7,500,000) x 1,200,000
Adjusted basis
Divided by remaining reserves
(5,000,000 + 2,500,000 – 1,200,000)
New depletion rate/ unit
2
.

A

P5,300,000
5,000,000
P
1.06
800,000
P 848,000

P12,500,000
1,000,000
1,500,000
P15,000,000
2,400,000
P 1,260,000
6,300,000
P 2.00


57

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

Depletion cost 2007 (P2 x 1,200,000 units)
3
.

P2,400,000

B
Value of production (P12 x 1,200,000 units)
Less: Production and selling costs:
Mining costs
Milling costs
Marketing expenses
Depreciation expense

P14,400,000
P2,000,000
3,000,000
1,500,000
1,000,00
0

7,500,000

Net income from operation

Multiplied by limit percentage
Deductible amount fro exploration and development cost
4
.

P 6,900,000
25%
P 1,725,000

B
Current exploration and development cost (P1,500,000 +
P1,000,000)
Less: Deductible amount of exploration and development cost (see
3)
Exploration and development cost chargeable to succeeding years

Problem 8 – 43
B
Deductible expense:
Depreciation expense (P10,000,000 x 90%)/50
Capital outlay
Problem 8 – 44
1
B
Lower of actual contribution or normal
valuation
Add: Amortization of excess
200A (P200,000/10)
200B (P100,000/10)
Deductible retirement expense

2.

A
Actual retirement payments

Problem 8 – 45

Capitalized
P180,000

P2,500,000
1,725,000
P 775,000
Outright expense
P10,000,000

200A
800,000

200B
800,000

200C
500,000

20,000
.
820,000

20,000

10,000
830,000

20,000
10,000
530,000

200A
0

200B
400,000

200C
300,000

Year X
700,000
10,000
710,000

Year Y
600,000
10,000
610,000

P610,000 = Not in the choices

Actual contribution or normal valuation, lower
Add: Amortization (P100,000/10)

Deductible retirement expense

Note: Only the excess of the actual contribution over the normal valuation is to be
amortized over 10 years.
Problem 8 – 46
B
Allowed deductible contribution (P200,000 x 5%)
Problem 8 – 47
C
Allowed deductible contribution – actual

P10,000
P5,000


INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS

58

Chapter 8: Deductions from Gross Income

Problem 8 – 48
B
Income before charitable contribution (P500,000 – P130,000)
Multiplied by percent of limit
Allowed deductible contribution - lower

P370,000
5%

P 18,500

Problem 8 – 49
C
Actual value of donation – priority program
Adopt a school program – incentive (P1,000,000 x 50%)
Deductible donation
Problem 8 – 50
Net sales
Less: Cost of goods manufactured and sold:
Raw materials used:
Raw materials, beginning
P 200,000
Net purchases of raw materials
2,000,000
Raw materials, ending
( 400,000)
Direct labor
Factory overhead:
Indirect labor – factory supervisor
P 120,000
Depreciation (P100,000 x 90%)
90,000
Light and water (P150,000 x 80%)
120,000
Miscellaneous factory expenses
20,000
Cost of goods manufactured
Finished goods, ending
Gross income

Less: Optional standard deduction (P3,000,000 x 40%)
Income from operations

P1,000,000
500,000
P1,500,000

P5,000,000

P1,800,000
600,000

350,000
P2,750,000
( 750,000)

Problem 8 – 51
1.
Salaries of barbers
Depreciation of barbershop equipment
Cost of service
2.

2,000,000
P3,000,000
1,200,000
P1,800,000

P200,000
50,000

P250,000

Rent expense
Utility expense
Janitorial expense
Bookkeeping expense
Itemized deductions

P 20,000
30,000
15,000
10,000
P 75,000

Problem 8 – 52
Salaries of assistants
Traveling expenses
Light and water – office
Stationeries and supplies
Office rent
Total operating expenses before contribution
Add: Contribution subject to limit (P500,000 – P176,850) x 10%)
Allowable itemized deductions

P 96,000
11,000
7,890
1,960
60,000
P176,850

32,315
P209,165

Problem 8 – 53
Sole
Proprietorship

Corporation

Partnership


59

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

Bad debts written-off (P35,000 – P30,000)
Depreciation expense (P140,000 – P100,000)
Donation to the government – priority
program
Donations subject to limit:
Lower of actual, P170,000 or
(P2,500,000 x 10%)
(P2,500,000 x 5%)
Total allowable deductions

P

5,000
40,000
50,000

170,000
.
P 265,000

P

5,000
40,000
50,000

125,000
P 220,000

P

5,000
40,000
50,000

125,000
P 220,000

The research and development cost is to be treated as a deferred expense, hence, its
amortization shall be made in the succeeding five years when the taxpayer realizes
benefits from such expenditures (Sec. 341, NIRC).

Problem 8 – 54
1. Operating expenses (1,000,000 x 30%) – P50,000
Interest expense (P50,000 – (P40,000/80%) x 33%]
Total itemized deductions
Add: NOLCO
Total deductible expenses

P250,000
33,500
P283,500
500,000
P783,500

Note: NOLCO is not an itemized deduction but part of deductible
expenses.
2.

Gross income (P5,000,000 – P2,000,000)
Multiplied by OSD rate
OSD

P3,000,000
40%
P1,200,000

Note: NOLCO is not allowed to be deducted if the taxpayer uses OSD.
3.

Gross income
Less: OSD

Net taxable income

Problem 8 – 55
1.
Actual contribution or normal valuation, lower
Add: Amortization - 200A (P250,000/10)
Deductible retirement expense
2.

Financial net income
Add: Retirement benefit expense – accounting
Total
Less: Deductible retirement expense – taxation
Net income for tax purposes

P3,000,000
1,200,000
P1,800,000
200A
1,000,000
25,000
1,025,000

200B
900,000
25,000
925,000

50,000,000
1,100,000

51,100,000
1,025,000
50,075,000

60,000,000
1,200,000
61,200,000
925,000
60,275,000

Problem 8 – 56
Salary expenses
Retirement (P250,000 + P50,000/10)
Representation expense (P10,000,000 x .005)
Interest expense paid to the BIR - full
Interest expense – limit:
Corporation (P100,000 – (P96,000/80%) x 33%)
Individuals (P100,000 – (P96,000/80%) x 38%
Depreciation expense
Rent expense

Corporation
500,000
255,000
50,000
20,000

Individual
500,000
255,000

50,000
20,000

60,400
40,000
250,000

54,400
40,000
250,000


60

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income

Group insurance expense
Bad debts expense (P100,000 x 20%)
Contribution expenses:
TESDA priority project (500,000 x 1.5)
Local government – limit (lower is actual)
Total itemized deductions

50,000
20,000

50,000

20,000

750,000
100,000
2,095,400

750,000
100,000
2,089,400

Note: NOLCO is an allowable special deduction but not an itemized deduction.
Problem 8 – 57
1.
Salaries expense (P680,000 – P100,000)
Bad debts expense (P370,000 – P270,000)
Retirement expense (P1,000,000 – P380,000)
Representation expense (P39,000,000 x 0.005)
Rent expenses (P200,000 – P20,000)
Taxes expense (P300,000 – P270,000)
Life insurance expense (P150,000 – P100,000)
Total itemized deduction before contributions
Contribution expenses:
Donation to TESDA priority project (P500,000 x 150%)
Donations to CHED not priority project
(P200,000 actual is lower + 50% of actual)
Donations to government (P100,000 actual is lower)
Ind: (P39,000,000 – P30,000,000 – P1,752,500) x 10%=724,500
Corp: (P39,000,000 – P30,000,000 – P1,752,500) x 5%=362,250
Total allowable deductions

Individual
580,000
100,000
620,000
195,000
180,000
30,000
50,000
1,755,000

Corporation
580,000
100,000
620,000
195,000
180,000
30,000
50,000
1,755,000

750,000

750,000

300,000
100,000

300,000
100,000

.
2,905,000

.
2,905,000

Computation of sales:
Financial income
Cost of sales
Operating expenses deducted
(P680,000 + P370,000 + P1,000,000 + P800,000 + P500,000
+ P200,000 + P300,000 + P150,000)
Total sales
2.
Gross income (P39,000,000 – P30,000,000)
Less: Total allowable deductions
Net taxable income

Individual
P9,000,000
2,905,000
P6,095,000

P 5,000,000
30,000,000
4,000,000
P39,000,000
Corporation
P9,000,000
2,905,000

P6,095,000