Income taxation by valencia chapter 9 (losses)

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

62
Chapter 9: Losses

CHAPTER 9

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

Problem 9 – 3

5.
6.
7.
8.

D
A
D, P10,000 only
A

9. A
10. C
11. B
12. C

B

Loss from sale of business equipment

P100,000

Problem 9 – 4
A
Loss on sale of capital assets is not deductible from business income.

Problem 9 – 5

C

Deductible loss – Book value (P100,000 x 10% x 4)

Problem 9 – 6

D

Problem 9 – 7

D

Deductible loss – book value lower than replacement cost
Net operating loss per GAAP
Less: Bad debts estimate
NOLCO in the succeeding years

P 40,000
P 50,000
P 50,000
10,000
P 40,000

Problem 9 – 8
D
Zero. An individual who claims the 10% optional standard deduction shall not simultaneously
claim deduction of the NOLCO.

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

63

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

Chapter 9: Losses

Problem 9 – 10
Book value (P1,200,000) x10/20
Less: Insurance recovery
Scrap recovered
Deductible loss

P600,000
P200,000
20,000

220,000
P380,000

Problem 9 – 11
None, because the demolition cost, net of amount realized from scrap should be capitalized
as part of the factory building cost.
Problem 9 – 12
No deductible loss at balance sheet date. On June 30, the reportable gain would be P10,000,
(110,000 – 100,000).
Problem 9 – 13
Net loss reported

Estimated bad debts
Warranty expense
Net loss carry-over

P 50,000
( 20,000)
( 10,000)
P 20,000

Problem 9 – 14
Gross profit – year 1
Less: Other operating expenses
NOLCO for year 2

P500,000
580,000
P 80,000

Problem 9 – 15
Year 1
Sale
Less: Cost – Notes receivable
Gain

Year 2
P1,800,000
1,500,000
P 300,000

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

Problem 9 – 16
None, because the floss should be recognized only upon actual sale of the property
foreclosed.
Problem 9 – 17
None. Gambling losses can only be deducted from the gambling winnings. Gambling
transactions is not an ordinary business transactions, but a capital asset transaction.
Accordingly, gambling losses is not an allowable deduction from ordinary gross income.
Problem 9 – 18
Compensatory liquidated damages
Loss on robbery (construction supplies)
Loss on pilferage of business supplies
Replacement cost of damaged portion of machine
Deductible loss

P 50,000
50,000
10,000
150,000
P260,000

Problem 9 – 19
1.

OSD (P2,000,000 x 40%)

P800,000

2.

OSD (P2,000,000 – P500,000) x 40%

P600,000


64

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

Chapter 9: Losses

Problem 9 – 20
1.

Gross income (P2,000,000 – P1,000,000)
Multiplied by MCIT rate
Income tax due – MCIT

2.

NOLCO for year 200E

P1,000,000
2%
P
20,000
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

200E.

Problem 9 – 21
Pilferage loss
Capital loss on sale of capital asset
Casualty loss
Total deductible loss

Ordinary
P5,000
.
P5,000

Capital
P10,000
15,000
P25,000

Note: It would be more appropriate to classify casualty loss as capital loss because such loss
is not an ordinary or regular loss, unless the problem stated that the loss is an ordinary asset.
Problem 9 – 25
Cost of the building
Less: Accumulated depreciation (P10,000,000/30) x 5
Book value before additions and improvements
Add: Additions and improvements
Total
Less: Accum depn (P8,833,333/25) x 3
Book value
Less: Insurance collected
Salvage value

Deductible loss
Problem 9 – 26
Death of livestock previously purchased
Cost of property expropriated by the government
(P30,000 – P10,000)
Total deductible farm loss

P10,000,000
1,666,667
P 8,333,333
500,000
P 8,833,333
1,060,000
P 7,773,333
P5,800,000
300,000

6,100,000
P 1,673,333
P10,000
20,000
P30,000