Income taxation by valencia chapter 12 (income tax on corporations)

84

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

Chapter 12: Income Tax of Corporations

CHAPTER 12

INCOME TAX OF CORPORATIONS
Problem 12
1. True
2. True
3. False
4. True
5. False
6. True
7. True
8. True
9. True
10. False
11. False
12. False
13. False

– 1 TRUE OR FALSE
– Only domestic corporations are to be taxed for income within and without.
– 30% normal tax effective 2009.

–
–

–
–

Not taxable because the corporation is a foreign corporation/
30%.
applicable only to resident Offshore Banking Unit on gross receipts of OBU.
final tax of 10%

Problem 12 – 2 TRUE OR FALSE
1. False – If the unrelated income of the proprietory educational institution exceeds the
related income, the income tax rate applicable would be the corporate income tax of
35%.
2. False – Sale of real property outside the Philippines by a resident foreign corporation
is not subject to tax in the Philippines.
3. False – 10% based on gross income within
4. True
5. True
6. False – In general, GOCCs are subject to corporate income tax.
7. True
8. True
9. True
10. True
11. True
12. True
Problem 12 – 3
1. A
2. D
3. D
4. B
5. A

6. D
7. D
8. C
9. A
10.
11.
12.
13.

A
D
B
A

Problem 12 – 4
1. C or D
2. B
3. D
4. A
5. C
6. B & D
7. B
8. Not in the choices = normal tax of
30%
9. Not in the choices = normal tax of
30%
10. B
11. B
12. C

Problem 12 – 5
1.
D
Gross income (P8,000,000 + P4,000,000)
Business expenses (P5,000,000 + P3,000,000)
Net taxable income

Taxable
income
P12,000,000
8,000,000
P4,000,000

Corporate income tax (P4,000,000 x 30%)

P1,200,000

Note: The land sold is a capital asset. Hence, not
subject
to corporate income tax but for final tax of 6% based on
sales price or zonal value, whichever is higher.
2.

C
Gross income

Income tax
due

P8,000,000

85

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

Chapter 12: Income Tax of Corporations

Business expenses
Net taxable income

5,000,000
P3,000,000

Corporate income tax (P3,000,000 x 30%)

P900,000

Note: The land sold is a capital asset. Hence, not
subject
to corporate income tax but for final tax of 6% based on
sales price or zonal value, whichever is higher.
Problem 12 – 6
B
Gross income within
Less: Deductions within
Net taxable income
Multiplied by normal corporate tax rate
Income tax due

P2,800,000
1,300,000
P1,500,000
30%
P 450,000

Problem 12 – 7
D
Gross income within
Multiplied by normal corporate tax rate
Income tax due

P5,000,000
30%
P1,500,000

Problem 12 – 8
1.
Domestic corporation
Gross income – within and without
(P450,000 + P180,000 + P75,000 + P160,000)
Deductions – within and without
(P290,000 + P80,000 + P25,000 + P100,000)
Net income
Multiplied by normal corporate income tax
Income tax due and payable
2.

P865,000

(495,000)
P370,000
30%
P129,500

Resident foreign corporation
Gross income within
Deductions within
Net income
Multiplied by normal corporate income tax
Income tax due and payable

P450,000
290,000
P160,000
30%
P 56,000

Problem 12 – 9
C
Net income from PAGCOR (P30,000,000 x P28,000,000)
Multiplied by normal corporate tax rate
Income tax due

P2,000,000
30%
P 600,000

Problem 12 – 10
B

Net income from National Power Corporation
Net income from National Books Store
Total net income
Multiplied by corporate normal tax

P10,000,000
8,000,000
P18,000,000
30
%
P 5,400,000

Income tax due
Problem 12 – 11
D
Gross profit
Operating expenses before charitable contribution
Net income before charitable contribution
Charitable contributions - limit (P1,050,000 x 5%)
Actual – lower
Net taxable income
Multiplied by corporate normal tax rate
Income tax due and payable
Problem 12 – 12
D
Operating loss
Operating expenses
Gross income
Multiplied by minimum corporate income tax rate
Income tax payable

P1,600,000
(550,000)
P1,050,000
P52,500
50,000
P1,000,000
30%
P 300,000
(P 200,000)
1,000,000
P 800,000
2%
P 16,000


86

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

Chapter 12: Income Tax of Corporations

Problem 12 – 13
YEAR 2005 use 35% normal tax rate
1. D
Net income per GAAP
Add: Allowance for bad debts
Contribution
Income before allowable contribution

Less: Deductible contribution (P5,450,000 x 5%)
Net taxable income
Multiply by normal corporate income tax rate
Income tax due and payable

P5,000,000
150,000
300,000
P5,450,000
272,500
P5,177,500
35%
P1,812,125

2. D
Net income per GAAP
Add: Operating expenses
Gross income
Multiply by minimum corporate income tax rate
Minimum corporate income tax

P 5,000,000
80,000,000
P85,000,000
2%
P 1,700,000

Normal tax (P5,000,000 x 35%)

P1,812,125

Problem 12 – 14
1
A
.
Tax payable – current year (P8,000,000 x 2%)
2
.

P 160,000

C
Operating income (P8,000,000 – P7,000,000)
Multiplied by normal tax rate
Normal tax
Less: Excess of MCIT
Tax payable

P1,000,000
30%
P 300,000
100,000
P 200,000

Problem 12 – 15
A
None. There is no excess corporate MCIT over NCIT in 2005 to be applied on 2006 because
the MCIT is not yet applicable for the company as it only has 3 years of operation in 2005.
Problem 12 – 16
C

Rental income (P1,900,000/95%)
Capital gains
Total gross income
Operating expenses
Net taxable income
Multiplied by corporate normal tax
Income tax payable

P2,000,000
500,000
P2,500,000
(2,350,000)
P 150,000
30%
P
45,000

Excess of MCIT over NCIT
Expanded withholding tax (P2,000,000 – P1,900,000)
Total creditable income tax
Income tax due
Tax refund

P 40,000
100,000
P140,000
45,000
P 95,000

Problem 12 – 17

C
Capital gains tax (P1,500,000 x 6%)
Problem 12 – 18
1. D
Domestic Corporation:
a. Not traded in local exchange:
Selling price
Cost (P110 x 12,000 shares)
Capital gain
Tax on P100,000 x 5%
Tax on excess (P280,000 – P100,000) x 10%
b. Traded in local exchange (P1,800,000 x .005)

P 90,000

P1,600,000
1,320,000
P 280,000
P

5,000
18,000

P 23,000
9,000


87

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

SUGGESTED ANSWERS

Chapter 12: Income Tax of Corporations

c.
d.
2.

Sale of land abroad (P3,000,000 – P2,500,000) x 30%
Sale of land – Philippines (P1,200,000 x 6%)

A
Resident Foreign Corporation
a.
b.
c.
d. (P1,200,000 x 6%)
Total

Problem 12 – 19
C
Interest from savings deposits (P3,000,000 x 20%)
Royalty income (P1,000,000 x 20%)
Interest from a depository bank (P1,500,000 x 7.5%)
Total passive final tax

150,000
72,000
P254,000
P 23,000

9,000
72,000
P104,000
P 600,000
200,000
112,500
P 912,500

Dividend from a domestic corporation received by a domestic corporation is tax exempt.
Dividend from a nonresident foreign corporation is subject to normal tax.
Problem 12 – 20
1. B
Domestic Corporation
a. ($20,000 @ 7.5% x P50)
b. P300,000 @ 20%
c. P100,000 @ 20%
d. P 80,000 @ 20%
Total
2.

B = Resident foreign corporation (same as letter 1)

3.

C
Nonresident foreign corporation
a. Exempted
b. (P300,000 @ 30%)
c. (P100,000 @ 30%)
d. (P 80,000 @ 30%)

Total

Problem 12 – 21
1.
A
Dividend income - (PCB and Magnolia are both domestic corporations)
Interest income on US dollar loans ($3,000 x 10% x P50)
2.

C
Interest on Philippine peso loans
Operating expenses
Taxable income
Multiplied by normal corporate tax
Income tax due

Problem 12 – 22
Related income
Unrelated income
Total revenue
Operating expenses
Net loss

P75,000
60,000
20,000
16,000
P171,000

P90,000

30,000
24,000
P144,000

Exempt
P15,000
P2,000,000
( 900,000)
P1,100,000
30%
P 330,000

D

Minimum corporate income tax (P2,500,000 x 2%)

P1,000,000
1,500,000
P2,500,000
(3,000,000)
(P 500,000)
P50,000

Problem 12 – 23
A
Nonprofit educational institutions are tax-exempt.
Problem 12 – 24
D
Government educational institutions are tax-exempt.
Problem 12 – 25

B
Income tax payable (P700,000 x 0.025)

P17,500


88

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

Chapter 12: Income Tax of Corporations

Problem 12 – 26
A
Manila to Beijing (P5,000 x 2,000)
Manila – Hong Kong – Beijing (P6,000 x 4,000) x P3,000/P6,000
Manila to Hong Kong (P3,000 x 2,000)
Total reportable gross income within
Multiplied by applicable rate
Income tax

P10,000,000
12,000,000
6,000,000
P28,000,000
2.5%
P
700,000

Problem 12 – 27
Not in the Choices = P2,500,000 & P1,500,000
Within
Dragon Films
American Aircraft
Gross receipts
P10,000,000
P20,000,000
Multiplied by special tax rate
25%
7 ½%
Philippine income taxes
P 2,500,000
P 1,500,000
Note: Gross income means gross receipts. The aforementioned resident foreign corporation
are subject special tax rates (final taxes). They are not allowed to deduct costs or expenses
from their gross receipts. The cost of service is only applicable for MCIT purposes. (Sec. 27(E)
(4), NIRC)
Problem 12 – 28
B
Income tax (P80,000/80%) x 20%

P20,000

Note: Although cooperatives are tax-exempt, they still subject to final income taxes on
interest income.
Problem 12 – 29
A
All of the transactions of Unlad Cooperative are exempted from income taxes.
Problem 12 – 30

Not in the choices = P6,000
Income tax due – 2nd quarter [(P792,000/99%) – P700,000) x 30%
Income tax due – 1st quarter [(P495,000/99%) – P480,000) x 30%
Withholding tax – 2nd quarter [(P792,000/99%) x 1%
Excess tax credit – 2009
Income tax still due and payable – 2 nd quarter

P 30,000
( 6,000)
( 8,000)
( 10,000)
P 6,000

Note: The withholding tax for the 1 st quarter is already included in the income tax due in the
first quarter.
Problem 12 – 31
C
Income tax from ordinary net income (P1,000,000 – P900,000) x 30%
Final income taxes:
Interest income on peso savings (P100,000 x 20%)
Expanded foreign currency deposit (P100,000 x 7.5%)
Total income taxes
Problem 12 – 32
B
Income tax on interest income from peso savings bank (P100,000 x 30%)

P30,000
20,000
7,500
P57,500

P 30,000

Interest income earned by nonresident foreign corporation from EFCD is tax-exempt.
Problem 12 – 33
C
Tax on cash dividend from a resident foreign corporation (P100,000 x
P 30,000
30%)
Dividend received by a resident foreign corporation from a domestic corporation is taxexempt.
Problem 12 – 34
C
Cash dividend from a domestic corporation (P100,000 x 30%)

P 30,000

Cash dividend received by a domestic corporation from another domestic corporation is taxexempt because it is considered earned outside the Philippines since only 40% of its business
is done within.
Problem 12 – 35
D
Zero because the earnings of the said resident foreign corporation have no tax situs in the
Philippines.
Problem 12 – 36
Interest from saving deposit – Metrobank (P3,000,000 x 20%)
Royalty income – Philippine Mining Company (P1,000,000 x 20%)
Interest from a depository bank under expanded foreign currency

P 600,000
200,000

89

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

Chapter 12: Income Tax of Corporations

deposit - PCI Bank ($30,000 x P50 x 7.5%)
Dividends from Zerxes, a resident foreign corporation (P500,000 x 30%)
Total final passive income taxes
Problem 12 – 37

112,500
150,000
P1,062,500

C
3 rd Quarter
P880,000
(704,000)
P176,000
30%
P 52,800

Gross income - cumulative
Itemized deductions - cumulative
Net taxable income
Multiplied by normal corporate income tax
Income tax due
Total income tax paid in previous quarters - tax credit

Income tax still due and payable
Problem 12 – 38
A
Income subject to normal tax rate (P300,000/ 30%)
Passive income (P60,000/20%)
Capital gains (P35,000: 5,000 @5%, 30,000@10%)
Total income
Less: Income taxes paid:
Income tax per annual tax return
Final tax on passive income
Capital gains tax
Amount subject to 10% surtax

4th Quarter
P1,120,000
(896,000)
P 224,000
30%
P
67,200
( 52,800)
P
14,400
P1,000,000
300,000
400,000
P1,700,000

P300,000
60,000

35,000

395,000
P1,305,000

Problem 12 – 39
Year 2009
Within
Gross income:
Philippine
USA
Japan
Deductions:
Philippine
USA
Japan
Net income
Multiply by tax rate
Income tax payable
Tax credit allowed – see supporting computation
Income tax still due

Without

Total

P 400,000
300,000

P1,000,000

400,000
300,000

P1,000,000

(800,000)
.
P 200,000

(200,000)
(200,000)
P300,000

(800,000)
(200,000)
(200,000)
P 500,000
30%
P 150,000
( 90,000)
P
60,000

Supporting computation:
US
Japan
Total

Tax credits:
(P200,000/P500,000) x P150,000 = P60,000 vs. P80,000

Allowed, lower
(P100,000/P500,000) x P150,000 = P30,000 vs. P30,000
Allowed, lower

P60,000
30,000
P90,000

(P300,000/P500,000) x P150,000 = P90,000 vs. P100,000
Allowed, lower

P90,000

Problem 12 – 40

Reported income before tax
Add: Loss from sale of shares of stock outside stock market
Total
Less: Gains subject to final income tax:
(1) Gain from sale of stock in the stock market
(2) Gain from sale of short-term debt securities
(3) Gain from sale of real property
(P9,400,000 – P4,400,000)
Adjusted income subject to corporate income tax
Multiply by normal corporate income tax
Correct amount of income tax

90,000

P10,000,000

5,000
P10,005,000
P

25,000
10,000

5,000,000

5,035,000
P 5,630,000
30%
P 1,689,000

Total reported income before tax
Less: Normal corporate income tax
Net income after tax

P10,000,000
1,689,000
P 8,311,000

Problem 12 – 41
Total revenue
Operating expenses

P1,000,000
( 10,000)

90

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

Chapter 12: Income Tax of Corporations

Service charge – credit card (P1,000,000/5%) x 3%
Net income
Multiplied by normal corporate tax
Income tax due
Less: Creditable expanded withholding tax (P1,000,000/5%) x ½
%
Income tax still due and payable
Problem 12 – 42
Taxable income (normal tax)
Add: Income subject to final tax
Income exempt from tax
Income, excluded from gross income
Amount of NOLCO deducted
Total
Less: Dividends
Income tax paid for the year
Improperly accumulated income
Multiply by tax rate
Tax on improperly accumulated income

( 600,000)
P 380,000
30%

P 114,000
100,000
P

14,000

P 900,000
P 60,000
50,000
10,000
50,000
P150,000
200,000

Problem 12 – 43
Income tax per ITR (P450,000/30%)
Income subject to final tax (P37,500/7.5%)
Capital gains:
P5,000/5%
P35,000/10%
Total
Less: Income tax paid (P450,000 + P37,500 + P40,000)
Basis of IAET
Multiplied by IAET rate
IAET

170,000
P1,070,000
350,000
P 720,000

10%
P
72,000

P1,500,000
500,000
P100,000
350,000

450,000
P2,450,000
527,500
P1,922,500
10%
P 192,250

Problem 12 – 44
Government educational institutions are exempted from tax. (Sec. 30(I), NIRC.)
Problem 12 – 45

Tuition fees
Miscellaneous fees
Income from rents
Net income, school canteen
Net income, book store
Gross income
Less: Allowable deductions:
Payroll and administrative salary
Other operating expenses
Interest expense

Depreciation, net six room building
Taxable income
Multiply by the applicable tax rate
Income tax

P1,425,420
762,330
82,100
37,500

P2,843,10
0
362,600
60,000
36,200
24,800
P3,326,70
0

2,307,350
P1,019,350
10%
P 101,935

Note: The tax differential on interest income shall not be used because the tax applicable is
10% not 30% normal tax.
Problem 12 – 46
1.
Sales
Cost of sales

Rent income
Gross income
Operating expenses allowed
Net taxable income
Multiplied by NCIT rate

3rd year
P1,000,000
( 600,000)
200,000
P 600,000
( 300,000
)
P 300,000
30%

4th year
P2,500,000
(1,200,000
)
300,000
P1,600,000
(1,300,000
)
P 300,000
30%

5th year
P4,000,000
(2,400,000

)
100,000
P1,700,000
(1,400,000
)
P 300,000
30%

6th year
P5,000,000
(2,700,000
)
50,000
P2,350,000
(1,500,000
)
P 850,000
30%


91

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

Chapter 12: Income Tax of Corporations

Income tax due
Quarterly tax paid

P
(

Income tax still due and payable

P

2.
Royalty income, net of tax
Interest income, net of tax
Total passive income, net of tax
Divide by
Total gross passive income
Multiplied by final tax rate
Final taxes

90,000
10,000
)
80,000

P
(
P

3rd year
P 80,000
20,000
P100,000
80%

P125,000
20%
P 25,000

90,000
20,000
)
70,000
4th year
P160,000
32,000
P192,000
80%
P240,000
20%
P 48,000

P
(
P

90,000
30,000
)
60,000

P 255,000
(
40,000
)

P 215,000

5th year
P120,000
16,000
P136,000
80%
P170,000
20%
P 34,000

6th year
P 40,000
24,000
P 64,000
80%
P 80,000
20%
P 16,000

Problem 12 – 47
(1)
Taxable income from operation (P1050,000/70%)
Add: NOLCO deducted
Interest income (P120,000/80%)
Capital gain (P230,000 – P5,000)/90%
Total income for GAAP reporting, before tax

P1,500,000
100,000

150,000
250,000
P2,000,000

(2)
Tax on income from operation (P1,500,000 x 30%)
Tax on interest income (P150,000 x 20%)
Tax on capital gain (P250,000 – P230,000)
Total income tax paid

P450,000
30,000
20,000
P500,000

(3)
GAAP income
Less: Income tax
Net income after tax – GAAP
(4)
Taxable income from operation
Add: NOLCO
Income subjected to final tax (P150,000 + P250,000)
Total
Less: Income tax paid
Net income after income tax
Multiplied by surtax rate
IAET = Surtax

P2,000,000

500,000
P1,500,000
P1,500,000
P100,000
400,000

Problem 12 – 48
1.
Sales
Less: Cost of sales
Reportable income per ITR
2.

Gross profit
Less: Operating expenses:
Salaries
Depreciation
Supplies
Interest expense [P50,000 – (40,000 x 33%)
Net taxable income per ITR

500,000
P2,000,000
500,000
P1,500,000
10%
P 150,000
P10,000,000
6,000,000
P 4,000,000

P4,000,000

P1,000,000
300,000
200,000
36,800

1,536,800
P2,463,200

Note:
•
Interest income is subject to final tax of 20%
•
Inter-corporate dividend is tax-exempt.
•
Losses on investment in securities is not deductible – capital loss
3.

Final withholding tax paid (P32,000/80%) x 20%

4.

Net income before tax per GAAP
Less: Income tax (P2,463,200 x 30%)
Net income

P 8,000
P2,200,000
738,960

P1,461,040