TAX2 3RD ED Solutions Manual

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SOLUTIONS MANUAL

TRANSFER & BUSINESS TAXATION, 3

rd

_Edition

By: TABAG & GARCIA

CHAPTER 1 – SUCCESSION & TRANSFER TAXES

TRUE OR FALSE 1. T 6. T 11. T 2. T 7. F 12. T 3. T 8. T 13. T 4. T 9. T 14. T 5. F 10. T 15. F MULTIPLE CHOICE 1. D 12. C 23. D 34. D 45. B 2. A 13. C 24. B 35. B 46. C 3. D 14. B 25. D 36. B 47. D 4. C 15. D 26. D 37. D 48. D 5. C 16. C 27. B 38. B 49. A 6. A 17. B 28. D 39. D 50. B 7. B 18. D 29. A 40. D 51. A 8. A 19. C 30. D 41. B 52. D 9. B 20. B 31. B 42. D 53. D 10. A 21. B 32. A 43. B 54. D 11. D 22. B 33. D 44. B 55. B

CHAPTER 2 – GROSS ESTATE

TRUE OR FALSE – SET A

1. T 6. T 11. T 16. F

2. T 7. T 12. F 17. T

3. F 8. T 13. F 18. T

4. T 9. T 14. T 19. T

5. T 10. T 15. T 20. T

TRUE OR FALSE – SET B

1. T 6. F 11. T 16. T 2. F 7. T 12. F 17. T 3. F 8. T 13. F 18. T 4. T 9. T 14. T 19. F 5. T 10. F 15. F 20. T MULTIPLE CHOICE 1. A 16. D 31. C 46. C 61. A 2. B 17. C 32. B 47. D 62. A 3. D 18. B 33. B 48. C 63. A 4. B 19. D 34. A 49. C 64. C 5. C 20. A 35. B 50. C 65. D 6. C 21. D 36. B 51. D 66. B 7. A 22. A 37. D 52. D 67. A 8. B 23. B 38. C 53. C 68. C 9. A 24. A 39. B 54. C 69. C 10. A 25. C 40. D 55. C 70. D 11. C 26. C 41. C 56. B 12. B 27. C 42. C 57. D 13. D 28. D 43. B 58. C 14. A 29. B 44. C 59. C

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15. C 30. D 45. B 60. A Supporting Computations:

23.

Bank deposit in the foreign branch of a domestic bank

P500,000 Bank deposit in Makati branch of a foreign bank 300,000 Shares of stock issued by a domestic corporation

(certificate kept in Canada)

1,000,00 0

Franchise exercised in Manila 800,000

Receivable, debtor from Mindanao 200,000

Total Exclusion from the gross estate P2,800, 000 23.

House and lot, family home in Quezon City P1,500,0 00 Bank deposit in Makati branch of a foreign bank 300,000 Shares of stock issued by a domestic corporation

(certificate kept in Canada)

1,000,00 0

Franchise exercised in Manila 800,000

Receivable, debtor from Mindanao 200,000

Total Inclusion from the gross estate P3,800, 000 25.

Shares of stocks, domestic corp. (certificate kept in UK)

P250,00 0 Shares of stocks, domestic corp.

(certificate kept in Phils.)

100,000 Franchise exercised in the Phils. 200,000 Receivables, debtor is from Phils. 50,000

Intangibles subject to reciprocity

P600,0 00 26.

Land & building, Philippines P2,000,00 0

House and lot, Philippines 3,500,000

Shares of stocks, domestic corp. (certificate kept in UK)

250,000 Shares of stocks, domestic corp. (certificate kept

in Phils.)

100,000 Franchise exercised in the Phils. 200,000 Receivables, debtor is from Phils. 50,000

Gross Estate P6,100,0 00 33. (P12M/100,000) x 1,000 shares = P120,000 34. (P10M/100,000) x 1,000 shares = P100,000 35. P110 x 1,000 shares = P120,000 36. (P140 + P80/2) x 1,000 shares = P110,000 44.

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ion received transfer death Land P1,500,00 0 P1,500,000 P2,000,000 None. Valid sale Shares of stock 100,000 50,000 150,000 None. Valid sale Vintage car 50,000 80,000 100,000 P50,000 Painting 250,000 400,000 500,000 250,000

INCLUSION IN THE GROSS ESTATE P300,000 44. Bequests to charitable institutions are considered exclusions from the gross estate only if the problem clearly states that not more than 30% were used for administrative purposes. PROBLEM SOLVING: PROBLEM 1 (1) P19,300,000 (2) P19,300,000 (3) P11,800,000 (4) P14,300,000 Citizen/ Resident (# 1 & 2) NRA with R (# 3) NRA w/o R (# 4)

Family home in the Philippines P8,000,000 P8,000,000 P8,000,000 Parcel land of with vacation house in Malaysia 5,000,000

Farm land in the Philippines 3,000,000 3,000,000 3,000,000 Shares of stock of a domestic corporation

deposited in a bank safety deposit box in Malaysia

2,000,000 2,000,000

Shares of stock of a foreign corporation the

entire business of which is in the Philippines, deposited in a bank safety

deposit box in Malaysia

500,000 500,000

Receivable from a friend who has no property whatsoever

300,000 300,000 300,000

Receivables under insurance policies:  Life insurance policy, taken by the

decedent on his own life, with his estate as revocable beneficiary

200,000 200,000 200,000

 Life insurance policy, taken by the decedent, with his daughter as revocable beneficiary

300,000 300,000 300,000

 Life insurance policy, taken by the decedent on his own life, with his son as irrevocable beneficiary

- -

- Life insurance (group) taken by the employer of the decedent, with the estate as revocable beneficiary

- -

- Property insurance, for a loss of property 50,000 50,000 50,000  Accident insurance, for injury sustained 50,000 50,000 50,000

TOTAL GROSS ESTATE P19,300,0 00

P11,800,0 00

P14,300,0 00

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PROBLEM 2 To Juan P25,000,0 00 To Pedro 18,000,00 0 To Maria 15,000,00 0 To Sisa 20,000,00 0

Total Gross Estate P78,000, 000 PROBLEM 3 1. P230,0000 2. P1,100,000 3. P0 4. P5,000,000 5. P1,000,000 + [1M x (1M x 10% x 1.5)] = P1,150,000 MODIFIED IDENTIFICATION EXERCISE A 1. Included 11. Included*** 2. Included 12. Excluded** 3. Excluded 13. Excluded** 4. Included 14. Included 5. Excluded 15. Included 6. Excluded 16. Included 7. Included * 17. Excluded 8. Excluded 18. Excluded** 9. Excluded** 19. Excluded 10. Excluded 20. Included

*Included in the gross estate if the beneficiary is the estate, administrator or executor. In case of doubt, the item should be taxable.

**Exclusions from the gross estate. Nonetheless, the tax code requires these items to be included first in the gross estate before deducting the same from the gross estate.

*** Bequests to charitable institutions are considered exclusions from the gross estate only if the problem clearly states that not more than 30% were used for administrative purposes. EXERCISE B EXERCISE C 1. P0; valid sale 2. P0; valid sale 3. P0; valid sale 4. P4,000,000 5. P6,000,000 1. P10M 2. P20M 3. P5M 4. P10M 5. P0

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CHAPTER 3 – DEDUCTIONS FROM THE GROSS ESTATE

TRUE OR FALSE 1. T 7. T 13. F 19. T 25. T 2. T 8. T 14. F 20. T 26. T 3. T 9. T 15. T 21. T 27. F 4. T 10. F 16. F 22. F 28. T 5. T 11. F 17. T 23. T 29. F 6. F 12. F 18. T 24. T 30. T MULTIPLE CHOICE 1. C 12. C 23. A 34. C 45. C 2. D 13. B 24. A 35. A 46. B 3. D 14. A 25. A 36. C 47. A 4. C 15. A 26. B 37. B 48. A 5. C 16. A 27. B 38. B 49. C 6. B 17. D 28. B 39. C 50. C 7. B 18. D 29. C 40. D 51. A 8. D 19. D 30. A 41. A 52. A 9. C 20. D 31. C 42. D 53. A 10. A 21. C 32. D 43. D 54. B 11. B 22. D 33. C 44. D 55. D Supporting Computations: 7.

Mourning clothing of the decedent’s surviving spouse

P1,500 Mourning clothing of the decedent’s dependent

children

3,200 Expenses of the wake preceding the burial 40,000 Publication charges for death notices 5,000 Telecommunication expenses incurred in

informing relatives of the deceased

3,000

Cost of burial plot 20,000

Interment fees and charges 12,000

Expenses for the performance of the rites & ceremonies incident to interment

5,000

Actual Funeral Expenses P89,700

Limit: 5% of Gross Estate (P2M x 5%) P100,000

ALLOWED (Lower Amount) P89,700 15.

Real property tax for the year 2013 P100,000 Notarized interest bearing promissory note 100,000 Accrued interest on the promissory note at the

time of death

20,000

Income tax due for 2013 200,000

Allowable deductions P420,00 0

(Disregard standard deduction)

23.

Income tax from practice of profession - 2013 P300,000 Income tax from practice of profession for Jan.- 100,000

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June ‘13

Real property taxes for 2013 150,000

Deductible taxes P550,00

0 35.

ERRATUM: Pedro died leaving a car acquired by purchase from Pedro JUAN

41.

Value to take/Initial Basis P900,000

Mortgage paid (50,000) Initial basis 850,000 2nd_Deduction: (850/1,000 x P100,000**) (85,000) Final Basis P765,000 X Vanishing rate 40% VANISHING DEDUCTION P306,00 0 ** Mortgage P150,000 – 50,000 54.

Shares, domestic corporation P500,000 Tangible personal property 1,500,000

Gross Estate 2,000,000 ELIT (500,000 x 2,000/2,500) (400,000) Taxable Estate P1,600,00 0 TAX DUE 1st_P500,000 _P15,000 In excess of P500,000 = (1,100,00 x 8%) 88,000

Estate Tax Due P103,00 0 55.

Gross Estate (Tangible property Phils.) P6,000,00 0 ELIT (1,200,000 x 6,000/10,000,000) (720,000) Taxable Estate P5,280,0 00 PROBLEM SOLVING Problem 1 Case A: P150,000 Case B: P200,000 Case C: P150,000 Case D: P150,000 Case E: P0

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Problem 2

ASSUME GROSS ESTATE OF P2,000,000

Embalming charges P15,00

0

Burial apparel of the decedent 3,500

Cost of coffin 125,00

0 Mourning apparel of the surviving spouse during the

burial

5,000 Mourning apparel of the minor child 2,000 Snacks and drinks during the wake 12,500 Honoraria of priest for daily masses before burial 2,000 Telecommunication charges to inform relatives 1,000 Charges for death notice published in a newspaper 8,000 Cost of video footage of the burial and interment 12,000 Funeral car service during interment 4,000 Honorarium of priest who celebrated the mass

during interment

2,000

Cost of tombstone 30,000

ACTUAL FUNERAL EXPENSE P232,0 00

Vs. Limit (P5% of P2M) 100,00 0

ALLOWABLE FUNERAL EXPENSE P100, 000

NOTE: Hospital bills for two months of confinement before decedent’s death should be charged to “medical expenses”

Problem 3

Case A: P100,000

Case B: P333,333 computed as follows:

Receivable P500,000

Collectible portion (400/1,200) x 500,000

(166,667)

Uncollectible portion of the claim P333,33 3

Case C: P0. Debtor is not insolvent

Problem 4

DUE FROM PEDRO P200,00

0 Assets of Pedro P400,00

0 Less: Due to the BIR for unpaid

taxes (200,00 0) Balance 200,000 Collectible by Juan X 200/600 (66,667) UNCOLLECTIBLE PORTION

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Estate) 33 Problem 5

Question 1: P550,000 computed as follows:

Unpaid taxes on the estate before death P150,000

Unpaid mortgage on the estate 200,000

Unpaid loans arising from debt instruments

(notarized) 125,000

Unpaid loans arising from debt instruments (not notarized). The debt instrument was issued by a financial institution not requiring notarizations for debt instruments issued

75,000

Total Deductible Claim Against the Estate P550,00 0 Question 2: P2,097,000 computed as follows

Ordinary Deductions:

Claim against insolvent person P100,000

Unpaid taxes on the estate before death 150,000

Unpaid mortgage on the estate 200,000

Funeral expenses Actual = P182,000 + 37,500 = P219,500 Limit = P5M x 5% = P250,000 Maximum = P200,000 200,000 Judicial expenses 100,000

Unpaid loans arising from debt instruments (notarized)

125,000 Unpaid loans arising from debt instruments (not

notarized). The debt instrument was issued by a financial institution not requiring notarizations for debt instruments issued

75,000

Casualty loss 65,000

Special Deductions:

Standard deduction 1,000,000

Medical expenses 82,000

Total Allowable deduction from the gross

estate P2,097,00₀

Problem 6

Question 1: P217,500 Question 2: P217,500

Same answer with question #1. Whether or not the estate was settled judicially is irrelevant in the determination of allowable deduction for judicial expenses.

Solution:

Expenditures incurred for the collection of assets and payment of debts

P100,000 Attorneys fees (1/2 were incurred after six

months) P40,000 x 1/2 20,000 Accountant’s fees 25,000 Executor’s commission 15,000 Appraiser’s fees 2,500 Court fees 18,000

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Cost of preserving and distributing the estate 15,000 Cost of storing or maintaining the property of the

estate

12,000 Brokerage fees for selling property of the estate 10,000

Total allowable judicial expenses P217,50 0 Problem 7

Loss due to shipwreck, two (2) months after the decedent’s death.

P500,000 Robbery loss, seven (7) months after the decedent’s

death. The decedent’s executor was allowed by

the Bureau of Internal Revenue to extend the filing (within the period allowed by the Tax Code) of

estate tax return due to a meritorious reason

2,000,000

Allowable Deduction P2,500,0

00

Problem 8

Value to take P937,500

1st_{Deduction: Mortgage paid} _(187,500 ) Initial basis P750,000 2nd _{Deduction: Proportionate} deduction (750/4,500) x 562,500 (93,750) Final Basis P656,250 x Vanishing rate 40% Vanishing Deduction P262,50 0 Problem 9 Value to take P1,500,0 00 1st_{Deduction: Mortgage paid}

---Initial basis P1,500,0 00 2nd _{Deduction: Proportionate} deduction (1,500/1,980) x 170,000 (128,788 ) Final Basis P1,371,2 12 x Vanishing rate 80% Vanishing Deduction P1,096, 970 Problem 10 Case A: P1,000,000 Case B: P1,000,000

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Case C: P1,000,000 Case D: P0 Case E: P0 Problem 11 Case A: P500,000 Case B: P500,000 Case C: P150,000 Case D: P500,000 Case E: P0 Problem 12 Case A: P1,000,000 Case B: P500,000 Case C: P0 Case D: P500,000 Case E: P600,000 Case F: P750,000; [ (1M/2) + (500,000/2)] Problem 13 Gross Estate P3,000,0 00 Funeral expenses Actual P300,000 – 120,000 = P180,000 Limit = P3M x 5% = P150,000 (150,000 ) Standard deduction (1,000,0 00) Medical expenses (400,000 ) Taxable Estate P1,450, 000

CHAPTER 4 – PROPERTY RELATIONS

TRUE OR FALSE 1. T 6. F 11. T 16. F 2. T 7. F 12. F 17. T 3. T 8. T 13. T 18. T 4. T 9. F 14. T 19. T 5. T 10. F 15. F 20. T MULTIPLE CHOICE 1. A 7. D 13. B 19. C 25. C 2. B 8. D 14. D** 20. C 26. D 3. B* 9. B 15. A 21. A 27. C 4. C 10. C 16. D 22. A 28. A *** 5. C 11. D 17. D 23. D 29. D 6. D 12. C 18. C 24. B 30. D

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*Change Aug. 3, 1998 TO August 3, 1988

** Under conjugal partnership of gains, fruits earned during marriage, regardless of source, are common properties

Supporting Computations

No. 22 and 23

Gross Estate: Exclusive Conjugal Rest House in Batangas P2,500,00

0

Car 1,000,000

Commercial land 5,000,000

Income from the commercial land 500,000

Income from exclusive property of the spouse

200,000 Jewelry owned before the marriage 300,000

Other properties at the time of her death 1,000,000 Gross Estate P8,800,00 0 P1,700,00 0 No. 24 and 25

Gross Estate: Exclusive Common Rest House in Batangas P2,500,00

0

Car 1,000,000

Commercial land 5,000,000

Income from the commercial land 500,000

Jewelry owned before the marriage 300,000 Other properties at the time of her

death 1,000,000 Gross Estate P2,500,00 0 P7,800,00 0 No. 26 Conjugal properties P200,00 0 Conjugal Deductions: Funeral expenses Actual = P45,000 Limit = (P500,000 + 200,000) x 5% = 35,000 (35,000) Judicial expenses (20,000)

Claim against the estate (45,000)

Net Conjugal properties P100,00

0

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Share of the Surviving Spouse P50,00 0 No. 27

Real property, Philippines P4,000,00 0

Real property, USA 5,000,000

Funeral expenses (200,000)

Judicial expenses (200,000 – 50,000) (150,000 Claim against insolvent persons (50,000)

Unpaid taxes (50,000)

Balance P8,550,00

0

Standard Deductions (1,000,00

0) Medical expenses (max.allowed) (500,000) Family Home (P1,500,000/2) (750,000) Share of the surviving spouse

(P8,550,000/2)

(4,275,00 0)

Net Taxable Estate P2,025,0 00

No. 28

Exclusive Common Total

Conjugal real properties P5,000,00

0

Conjugal family home 1,500,000

Exclusive properties P2,500,00 0 Total P2,500,00 0 P6,500,00 0 P9,000,00 0 Ordinary Deductions: Funeral expenses Actual P300,000 x 25% = P75,000 Limit = 5% x P9M = P450,000 (75,000) Casualty losses*** (100,000) Miscellaneous deductions (P1M x 75%) (750,000) (825,000) Net P2,400,00 0 P5,675,00 0 P8,075,00 0 Special Deductions: Standard Deductions (1,000,00

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0) Medical expenses (P500,000 x

50%)

(250,00)

Family Home (1,500,000/2) (750,000)

Share of the surviving spouse (5,675,000/2)

(2,837,50 0)

Net Taxable Estate P3,275,0

00

ERRATUM: DISREGARD ….Exclusive Properties are NET of Casualty Losses***

No. 29 ABSOLUTE COMMUNITY OF PROPERTY

Exclusive Common

Properties-Land P2,400,00

0 Other personal property owned before

marriage

1,600,000 Other personal property acquired during

marriage 500,000 Gross Estate P2,400,00 0 P2,100,00 0 Ordinary Deductions Funeral expenses (200,000) Judicial expenses (100,000)

Net conjugal before special deductions P1,800,00 0

Share of surviving spouse (P1,800,000/2)

P900,000

No. 30 CONJUGAL PARTNERSHIP OF GAINS

Properties-Land P2,400,000

Other personal property owned before marriage

1,600,000 Other personal property acquired during

marriage**** P500,000 Gross Estate P4,000,000 P500,000 P4,500,00 0 Ordinary Deductions Funeral expenses (200,000) Judicial expenses (100,000) Vanishing Deductions***** (1,120,000)

Net Estate Before Special Deductions P2,880,000 200,000 P3,080,00 0

Standard deductions (1,000,00

0)

Medical expenses (500,000)

Share of the surviving spouse (P200,000/2) (100,000)

Share of surviving spouse (P1,800,000/2)

P1,480,0 00

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****If silent and unless the problem clearly illustrate that it is exclusive, assume the property is common.

Value to take P1,500,0 00

1st_{Deduction: Mortgage paid}

-Initial basis P1,500,000 2nd _{Deduction: Proportionate} deduction (1,500/4,500) x 300,000 (100,000) Final Basis P1,400,000 x Vanishing rate 80% Vanishing Deduction P262,500 ***** PROBLEM SOLVING PROBLEM 1: (a)P1,624,773 (b)P4,132,955 (c)P3,691,250 (d)P321,038

Exclusive properties P2,000,00 0 Conjugal properties* P5,000,00 0 P7,000,00 0 ELIT** (867,045) Vanishing Deductions *** (175,227) Transfer for Public Use **** (200,000)

Net Estate P1,624,77 3 P4,132,95 5 P5,757,72 8 Share of the Surviving Spouse

(4,132,955/2)

(2,066,478 )

0

1st_P2,000,000 _P135,000 In excess of P2,000,000 @ 11% 186,038

ESTATE TAX DUE P321,038

*The problem is silent as to reciprocity, hence, the gross estate should include tangible and intangible properties within the Philippines.

**ELIT:

Funeral expenses P200,000 Judicial expenses 800,000 Claim against the

estate 1,725,000 TOTAL ELIT P2,725,00 0 X 7,000/22,0 00 ALLOWABLE ELIT P867,045 **VANISHING DEDUCTIONS: Value to take P500,0 00

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1st_{Deduction: Mortgage paid} -Initial basis P500,000 2nd _{Deduction: Proportionate} deduction (500/7,000) x 867,045 (61,932) Final Basis P438,068 x Vanishing rate 40% Vanishing Deduction P175,227

**** Since the properties were already classified as exclusive and common, it should be assumed that the exclusive properties were already inclusive of transfer for public use.

PROBLEM 2:

(Decedent: Resident Citizen)

a) Vanishing deduction = P1,676,200

b) Net exclusive property of the decedent = P7,923,800 c) Net community property = P17,800,000

d) Net Taxable estate = P15,323,800 e) Estate tax due = P2,279,760

Exclusive Conjugal Total

Exclusive properties P10,000,00 0 Ordinary Deductions: Conjugal properties 20,000,000 P30,000,00 0 Funeral expenses (200,000) (200,000) Judicial expenses (300,000) (300,000)

Claims against conjugal properties (200,000) (200,000) Claims against exclusive properties* (400,000) (400,000)

Legacy against exclusive properties **

- -

-VANISHING DEDUCTION*** (1,676,200) (1,676,200) Amount received under RA4917 (1,500,000) (1,500,000) Net exclusive/conjugal P7,923,800 P17,800,00 0 P25,723,80 0 Special Deductions: Standard deduction (1,000,000) Medical expenses (500,000)

Share of the surviving spouse (8,900,000)

NET TAXABLE ESTATE P15,323,8

00

ESTATE TAX DUE P2,279,76

0

*From the information provided in the problem, the amount of P400,000 as “claim against exclusive property” should pertain to the unpaid mortgage on the land inherited. Therefore, the present decedent paid P100,000 on the original amount of the mortgage (P500,000). This should be taken into consideration in computing the vanishing deduction.

** LEGACY AGAINST EXCLUSIVE PROPERTIES

Legacy means bequest or inheritance of personal properties. The deductible legacy/devised (bequests) under the tax code are:

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 Transfer for “public use” (Rule: Include both in the “Gross Estate” as well as in the “Deductions from the Gross Estate) ; and

 Bequests to charitable institutions wherein not more than 30% of the bequest was used for administrative purposes (Rule: Same as transfer for public use) From the information provided above, the problem was silent as to the type of the legacy. In case of doubt, the two types of transfers enumerated above should not be assumed. Therefore, the item should be treated as a simple “legacy” or “transfer in contemplation of death” which is added only in the gross estate.

Value to take P3,000,000

Mortgage Paid (refer to explanation above) (100,000)

Initial basis P2,900,000 2nd Deduction: 2,900/30,000 x P1.1M (106,333) Final Basis P2,793,667 x rate 60% Vanishing Deduction*** P1,676,20 0 PROBLEM 3:

(Decedent: Resident Alien) (a) Net Taxable estate = P3,570,000; (b)Estate tax due = P307,700

House and lot, USA * P2,000,00

0

Investment in stock, Philippines 800,000

Investment in stock, USA 1,000

000

Investment in bonds, USA 700,000

Cash in bank, Philippines 300,000

Cash on hand, Philippines 50,000

Accounts receivable 200.000

Car, Philippines 800,000

Legacy in favor of Philippine National Red Cross**

50,000 Devise to Quezon City for children’s

playground**

70,000

Total Gross Estate P5,970,00

0

Ordinary Deductions:

Funeral expenses P150,000

Judicial expenses 300,000

Unpaid Philippine income tax for income in 2011 120,000 Loss on December 31, 2012 due to theft 10,000 Legacy in favor of Philippine National Red Cross 50,000 Devise to Quezon City for children’s playground 70,000

Accounts receivable (fully uncollectible) *** 200,000 (900,000)

Special Deductions:

Standard deduction (1,000,00

0)

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Estate Tax Due P307,70 0

NOTE (Problem 3)

*Family home is not allowed as a deduction for single decedent **To be deductible, the legacy/devise should be included first in the decedent’s gross estate

***Assume the debtor is an insolvent person.

PROBLEM 4 (Decedent: Resident Alien)

a) Vanishing deduction = P441,463 b) Net Taxable estate = P3,200,000 c) Estate tax due = P386,739

Exclusive Conjugal Total

Land P3,000,000

House and Lot, furniture and appliances

P5,000,000 Other tangible personal properties 1,200,000

Amount received under RA4917 1,000,000

Claims against insolvent persons 50,000 P10,250,00

0 Ordinary deductions:

Funeral expenses (200,000)

Judicial expenses (100,000)

Other claims against conjugal properties

(500,000)

Claims against insolvent persons (50,000)

Unpaid mortgage** (350,000) VANISHING DEDUCTION* (441,463) Net exclusive/conjugal P2,208,537 P6,400,000 P8,608,537 Special deductions: Standard deduction (1,000,000) Medical expenses (120,000)

Share of the surviving spouse (3,200,000)

TAXABLE ESTATE P4,288,53

7

Estate Tax Due P386,739

Value to take/Initial Basis*** P2,500,000 2nd Deduction: 2,500/10,250 x 1,200,000 (292,683)

Final Basis P2,207,317

x rate 20%

Vanishing Deduction* P441,463

** P700,000 – 350,000 = P350,000

***The amount paid on the mortgage should not be considered in computing the vanishing deduction because the amount pertains to a mortgage entered into by Pedro during his lifetime. To be deductible, the mortgage should have been assumed on the property at the time of inheritance.

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PROBLEM 5 Conjugal Partnersh ip Absolute Communi ty

1. Real Property inherited by the decedent during the marriage.

E E

2. Income earned during marriage from the property in the preceding number.

C E

3. Property acquired by the decedent with cash owned before the marriage

E C

4. Personal belongings used exclusively by the decedent

E E

5. Jewelry for the exclusive use of one of the spouses

C C

6. Property unidentified when and by whom acquired

C C

7. Lot acquired before the marriage by the surviving spouse (surviving spouse had a previous marriage and legitimate children in that previous marriage)

E E

8. Income from the lot above E E

9. Cash – income during marriage C C

10. Exclusive property was sold, and was repurchased using conjugal property

C C

CHAPTER 5 – ESTATE TAX CREDIT AND ESTATE TAX DISTRIBUTABLE

MULTIPLE CHOICE 1. B 8. A 15. A 22. C 29. C 2. C 9. D 16. C 23. A 30. D 3. D 10. A 17. C 24. C 31. A 4. C 11. D 18. A 25. D 32. B 5. C 12. D 19. D 26. C 6. C 13. A 20. A 27. A 7. C 14. D 21. C 28. B Supporting Computations: No.5

Estate tax due (for P4M) P355,000

Estate tax credit (3/4 x P355,000) vs P80,000

(80,000)

Estate tax payable P275,000 No. 6

Estate tax due (for P500,000) P55,000

Less: Estate tax credit (20,500)

(19)

Limit 1: Limit Actual Allowed Singapore: 300/1,000 x P55,000 P16,500 P30,000 P16,500 USA: 100/1,000 x P55,000 5,500 4,000 4,000 P20,500 Limit 2: 400/1,000 x P55,000 P22,000 34,000 22,000

ALLOWED TAX CREDIT (LOWER AMOUNT) P20,500 No. 7 Gross Estate P10,000,00 0 Deductions (5,000,000)

Share of the surviving spouse (5,000,000 x 60% x 50%)

(1,500,000)

Net taxable estate P3,500,000

Tax Due P300,000

Estate tax credit (2.8/3.5 x P300,000) vs P124,500

(124,500)

Estate tax payable P175,500

Net estate France = [(6M -2M) x 0.6 x 1/2] + (6M-2M) x 0.4 = P2,800,000 Net estate R.P. = [(4M-3M) x 0.6 x 1/2] + (4M-3M) x 0.4 = P700,000

No. 8

Estate tax due (for P500,000) P71,000

Less: Estate tax credit (41,417)

Estate tax payable P29,583

Limit 1: Limit Actual Allowed

Japan: 300/1,200 x P71,000 P17,750 P20,000 P17,750

USA: Exclude for purposes of computing Limit 1

- -

-HK: 450/1,200 x P71,000 26,625 45,000 26,625

P44,375

Limit 2: (Include USA)

700/1,200 x P71,000 P41,417 65,000 41,417

ALLOWED TAX CREDIT (LOWER AMOUNT)

P41,417

No. 9 and 10

Net Taxable Net Distributable

Property inherited P1,400,000 P1,400,000

Property acquired through own labor

3,600,000 3,600,000

Funeral expenses (200,000) (240,000)

Judicial expenses (200,000) (200,000)

(20)

Notarized Not notarized (40,000) -(40,000) (20,000) Standard deduction (1,000,000) -Net Taxable/Distributable estate P3,560,000 P4,500,000 No. 28

Letter “a” ……….The Bureau of Internal Revenue can ask payment from the heirs to whom the estate has been disturbed …….. change to Distributed

PROBLEM SOLVING

Problem I:

(1)P200,000 (2)P0; not allowed

Net Taxable Estate P10,000,0

00 Estate Tax Due [P465,000 + (5M x 15%)] P1,215,00 0

Estate tax credit (4/10 x P1,215,000) vs P200,000

(200,000 )

Estate tax payable P1,015,00

0

Problem II:

0

Estate Tax Due P135,000

Estate tax credit (67,500)

Estate tax payable after tax credit P67,500

0

Limit 1: Limit Actual Allowed

Canada: 500/2,000 x P135,000 P33,750 P150,000 P33,750

USA: 500/2,000 x P135,000 33,750 110,000 33,750

P67,500

Limit 2:

1,000/2,000 x P135,000 P67,500 260,000 67,500

ALLOWED TAX CREDIT P67,500

Problem III:

(a) Net Taxable estate = P3,570,000; (b)Estate tax due after tax credit = P142,770 (c ) Net Distributable Estate = P4,427,230

House and lot, USA * P2,000,00

0

Investment in stock, Philippines 800,000

Investment in stock, USA 1,000

000

Investment in bonds, USA*** 700,000

(21)

Cash on hand, Philippines 50,000

Accounts receivable 200.000

Car, Philippines 800,000

Legacy in favor of Philippine National Red Cross**

50,000 Devise to Quezon City for children’s

playground**

70,000

Total Gross Estate P5,970,00

0

Accounts receivable (fully uncollectible) 200,000 (900,000)

Standard deduction (1,000,00

0)

NET TAXABLE ESTATE P3,570,0

00

Estate Tax Due P307,70

0

Estate Tax Credit

Limit: [(3,200/5,970) x 307,700 = P164,930 Actual: P250,000

(164,930)

ESTATE TAX DUE AFTER ESTATE TAX CREDIT P142,77 0

NOTE:

*Family home is not allowed as a deduction for single decedent **To be deductible, the legacy/devise should be included first in the decedent’s gross estate

*** Considered as Estate “within”

TOTAL GROSS ESTATE (Refer above) P5,970,00 0

Accounts receivable (fully uncollectible) 200,000 (900,000)

Standard deduction

-Medical expenses (500,000)

(22)

) NET DISTRIBUTABLE ESTATE P4,427,2 30

Problem IV:

Real property, Philippines P4,000,00

0

Claim Against Insolvent Persons 50,000

Real property, USA 3,000,000

Real property, Japan 2,000,000

Net estate, Malaysia (1,000,00

0) Total Gross Estate (common) P8,050,00 0

Funeral expenses (maximum) (200,000)

Judicial expenses (P200,000-100,000) (100,000)

Claim against insolvent persons (50,000)

Unpaid taxes (50,000)

Net estate before special deductions P7,650,00 0 X (Share of the surviving spouse) 1/2 Net estate of the decedent in the conjugal

properties P3,825,00 0 Standard Deduction (1,000,00 0) Family Home (1,000,00 0) Medical Expenses (500,000)

NET TAXABLE ESTATE P1,325,0 00

TAX DUE:

1ST_P500,000 _P15,000

In excess of P500,000 @ 8% 66,000

ESTATE TAX DUE P81,000

Estate Tax Credit (None; No Estate Tax Payments abroad)

----ESTATE TAX PAYABLE P81,000

Total Gross Estate (common; as computed above)

P8,050,00 0

Funeral expenses (actual) (300,000)

Judicial expenses (actual) (200,000)

(23)

Unpaid taxes (50,000) Net estate before special deductions P7,450,00 0

X (Share of the surviving spouse) 1/2

Net estate of the decedent in the conjugal properties

P3,725,00 0

Standard Deduction

---Family Home

---Medical Expenses (actual) (650,000)

Estate Tax (81,000)

NET DISTRIBUTABLE ESTATE P2,994,0 00

CHAPTER 6 – DONOR’S TAX

TRUE OR FALSE 1. T 7. F 13. F 19. F 25. T 2. T 8. T 14. F 20. F 26. T 3. F 9. F 15. F 21. F 27. F 4. T 10. F 16. F 22. F 28. T 5. T 11. T 17. F 23. F 29. F 6. T 12. F 18. F 24. T 30. F MULTIPLE CHOICE 1. A 11. D 21. D 31. B 41. A 2. A 12. B 22. C 32. C 42. B 3. C 13. C 23. A 33. D 43. A 4. C 14. D 24. D 34. A 44. A 5. B 15. D 25. C 35. B 45. C 6. D 16. B 26. C 36. D 46. B 7. D 17. D* 27. D 37. C 47. B 8. D 18. A 28. C 38. B 48. D 9. D 19. B 29. D 39. D** 49. D 10. C 20. C 30. B 40. D 50. A Supporting computation: No. 17.

ERRATUM: Letter “C”: A gift to the International Rice Research Institute…… is exempt from gift *

No. 19. If the sale is considered fictitious, the entire value at the date of sale is subject to donor’s tax.

No. 22.

Letter “a” – onerous transfer

Letter “b” - To be considered valid donation, the renunciation should be specifically and

categorically done in favor of identified heir(s) to the exclusion or disadvantage of the

other co-heir(s) in the hereditary estate.

(24)

No. 25.

Donation to Pedro Clara

Gross Gifts (2M/2) /2 P500,000 P500,000

Less Dowry (10,000)

-Net taxable gift P490,000 P500,000

No. 28. DONEE Son D. in Law Gross Gifts (5M/2) P2,500,0 00 -Less Dowry (10,000)

-Net taxable gift P2,490,0 00 -No. 32-34. Husband Wife NG (3/1) 125,000 125,000 Tax Due (P25,000 x 2%) P500 P500 GG (5/1) P100,000 P100,000 Dowry (10,000) (10,000) PNG 3/1 125,000 125,000 TNG P215,00 0 P215,00 0 Tax Due P2,600 P2,600 Tax Paid 3/1 (500) (500) D.T. Payable P2,100 P2,100 GG (7/1) 100,000 100,000 PNG 3/1 and 5/1 215,000 215,000 TNG P315,00 0 P315,00 0 Tax Due 6,600 6,600

Total Taxes Paid 7/1 P13,200 No. 39. Taxable gift P300,00 0 Tax Due P6,000 Tax Credit P4,500 vs. (200/300 x P6,000=P4,000) (4,000) D.T.Pyable P2,000 ** PROBLEM SOLVING Problem I: ITEM Q#1 Q#2 Q#3 Q#4 Q#5 A P800,000 P800,000 P800,000 P800,000 P800,000

**Change Choice “d” from P2,200

(25)

B 3,000,000 3,000,000 3,000,000 C 250,000 250,000 250,000 250,000 D 100,000 100,000 100,000 - 100,000 E* 5,000,000 5,000,000 5,000,000 F 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 G 100,000 100,000 100,000 - 100,000 H 100,000 100,000 100,000 - -I 500,000 500,000 500,000 500,000 500,000 Land 1** - - - - -Land 2*** - - - - -Land 3**** 5,000,000 5,000,000 5,000,000 - -Car 200,000 200,000 200,000 200,000 200,000 GROSS GIFT P16,550,0 00 P16,550,0 00 P16,550,0 00 P3,000,00 0 P3,450,00 0

*The question is “gross gifts”, hence, disregard the mortgage. **Sale of Land #1 is a transfer with insufficient consideration. However, unlike in Estate Taxation, Transfer with insufficient

consideration for donor’s tax purposes is not taxable if the property donated is a real property classified as capital asset subject to capital gains tax.

*** Sale of Land # 2 is considered bonafide or valid sale.

****Sale of Land #3 is a transfer with insufficient consideration. Nonetheless, the sale is subject to donor’s tax because the property was not subjected to capital gains tax. Capital gains tax on real properties are applicable only on sale of real properties classified as capital assets located in the Philippines.

Problem II: ITEM Q#1 Q#2 A P4,500,00 P4,500,00 B 1,000,000 -C 1,500,000 -D 2,000,000 -E 3,000,000 3,000,000 F 500,000 -Car, Alabang 200,000 200,000 Car, Malaysia 200,000 -Land Cebu - -GROSS GIFT P12,900,0 00 P7,700,00 0 Problem III: 1.P0 2.P5,000 3.P10,000 43,000 Problem IV:

Donation-Red Cross (exempt under a special law)*

(26)

Donation to Manila City Hall * 300,000 Mortgage on the land (400,000 x ¼) 100,000

Total deductions from the gross gifts P500,00 0

*Exempt donations which partake the nature of deductions and are, therefore , deductible from the gross gifts to arrive at taxable net gifts.

Problem V (Donations to Relatives and Strangers)

Relative Stranger

Cash to his son on account of marriage P50,000

Cash to PPCRV for 2013 election -

-Jewelry to his auntie 46,000

Shoes and bags to his girlfriend 30,000

Books to the City of Makati 20,000

Second hand car to his first cousin 500,000 Brand new SUV to his second cousin (subject to

revocation) -

-Shares of stocks of a domestic corp. to his best

friend 150,000

Car to his daughter (a donation mortis causa) - -Forgiven a loan due from his

brother(50,000-25,000)

25,000

Sports equipment to his brother in law 75,000

Parcel of land to the Philippine government for

public use 1,000,000 Gross Gifts P621,00 0 P1,275,0 00 NOTE:

 Cash to PPCRV. Not considered as donation under the tax code. It is subject to the rules and regulations of the COMELEC under the election code of the Philippines.

 City of Makati AND Land for Public Use. Although the donation is exempt, it shall be considered in the determination of “gross gifts”

 Gift subject to revocation is not a gift.

 Donation mortis causa is a donation subject to estate tax, not donor’s tax.

Problem VI

Tax payable on:

1) March 1 = P2,000 2) May 30 = P18,000 3) June 30 = P90,000 4) July 31 = P0 5) September 30 = P447,200 Solution Gross Gifts P200,000

Dowry - _ 1 year after

celebration

Net taxable gift P200,000

(27)

Gross gift P500,000 Less: Mortgage assumed by the donee (100,000)

Add: Prior net gift 200,000

Taxable gift – May 30 P600,000

Donor’s Tax Due P20,000

Less: Tax paid (2,000)

Donor’s tax payable-May 30 P18,000 Donor’s tax payable-June 30

(P300,000 x 30%)

P90,000 Donor’s tax payable-July 31 (Bantay

Bata)

P0

September 30

Relative Stranger Total

Gross Gift P1,500,000 P1,500,000

Dowry (10,000)

-Mortgage assumed (300,000) (300,000)

Prior net gift 600,000

Taxable gift P1,790,000 P1,200,000

@30%

Tax Due P107,200 P360,000

Less: Tax Payments (20,000)

Tax Payable P87,200 360,000 P447,200 Problem VII 1) January 15, 2012 = P32,000 2) April 1, 2012 = P6,000 3) December 25, 2012 = P0 4) March 30, 2013 = P30,000 5) May 25, 2013 = P0 Solution Gross Gifts-Jan. 1, 2012 P1,000,000 Less: Encumbrance (200,000) Taxable gift P800,000

Donor’s tax due/payable-Jan. 1, 2012

P32,000

Gross gift – April 1, 2012 P100,000

Add: Prior net gift 800,000

Taxable gift P900,000

Donor’s Tax Due P38,000

Less: Tax paid (32,000)

Donor’s tax payable-Apr. 1, 2012

(28)

December 25, 2012 P0 March 30, 2013

P100,000 x 30% P30,000

The rule that gift of not more than P100,000 is exempt is applicable only to donations made to relatives. May 25, 2013 Gross gift P200,000 Deductions (200,000 ) Taxable gift P0 Tax Due P0 Problem VIII 1) October 8, 2014 = P9,800 2) November 4, 2014 = P1,200 June 6, 2014

Husband Wife Total

Gross Gift P240,000 P240,000

Dowry (10,000) (10,000)

Mortgage assumed (2,000) (2,000)

Taxable gift P228,000 P228,000

Donor’s Tax Payable P3,120 P3,120 P6,240 October 8, 2014

Gross Gift P30,000 P30,000

Dowry --- (10,000)

Prior Net Gift 228,000

@30

Donor’s Tax (Tax Table) P3,920

Tax Paid-June 6 (3,120)

Donor’s Tax Payable P9,0000 P800 P9,800 November 4, 2014

Gross Gifts (strangers) P7,000 P7,000

Exempt (5,000) (5,000)

Prior Net Gift -

-Taxable gift P2,000 P2,000

@30 @30

Donor’s Tax Payable P600 P600 P1,200

Problem IX

1) October 10, 2013 = P3,140 2) April 4, 2014 = P13,500

(29)

June 6, 2013

Mr.Ramos Mrs.Ramos Total

Gross Gifts (strangers) P115,000 P115,000

Exempt (90,000) (90,000)

@30 @30

Donor’s Tax Payable P7,500 P7,500 P15,000 October 10, 2013

Gross Gifts P191,000 P191,000

Dowry (10,000) (10,000)

Mortgage assumed (2,500) (2,500)

Prior net gifts -

Donor’s Tax P1,570 P1,570

Tax paid -

-Donor’s Tax Payable P1,570 P1,570 P3,140 April 4, 2014

Gross Gifts P45,000 P45,000

Dowry - (10,000)

Prior net gifts

(none; different year)

-

@30

Donor’s Tax Payable P13,500 Exempt P13,500

Problem X (1)P7,000 (2)P2,600 (3)P69,800 (4)P30,000 Feb. 15, 2014 Mr.Macariol a Mrs.Macari ola Total Gross Gifts P200,000 P200,000

Dowry (beyond 1 year) -

Donor’s Tax Payable P1,000 P1,000 P2,000 March 30, 2014 Mr.Macariol a Mrs.Macari ola Total Gross Gifts P200,000 P-Dowry -

-Prior net gift 150,000

Taxable gift P350,000

Donor’s Tax 8,000

Donor’s tax paid (1,000)

(30)

June 1, 2014 Mr.Macariol a Mrs.Macari ola Total Gross Gifts P- P100,000 Dowry - (10,000)

Prior net gift 150,000

Taxable gift 240,000

Donor’s Tax P3,600

Donor’s tax paid (1,000)

Donor’s Tax Payable 2,600 P2,600

October 12, 2014

Mr.Macariola Mrs.Macariola Total

Donation to Stranger Donation to a Relative Donation to a Relative Gross Gifts P200,000 P200,000 P400,000

Dowry (claimed June 1)

- -

Prior net gift 350,000 240,000

Taxable gift 150,000 550,000 590,000

@30%

Donor’s Tax P17,000 P19,400

Donor’s tax paid (8,000) (3,600)

Donor’s Tax Payable P45,000 P9,000

Total P54,000 P15,800 P69,80 0 Donation by Clifford: Gross Gifts P100,00 0 @30% Donor’s Tax P30,00 0

ERRATUM: Ronald Change to Clifford

CHAPTER 7 – BUSINESS TAXES

MULTIPLE CHOICE 1. A 7. B 13. D 19. C 25. A* 2. D 8. C 14. C 20. D 26. D 3. D 9. D 15. B 21. D 27. C** 4. D 10. C 16. C 22. A 28. A 5. D 11. A 17. A 23. D 29. A 6. C 12. C 18. D 24. C 30. C

(31)

* The end-use (person using the communication facility is the one liable for OCT, not the communication company.

**3% CCT is applicable only to domestic carriers transporting passengers by land, not by air or sea.

CHAPTER 8 – VALUE ADDED TAX

TRUE OR FALSE-PART A 1. T 6. F 11. F 16. T 21. F 2. F 7. F 12. F 17. F 22. F 3. F 8. F 13. F 18. F 23. T 4. T 9. T 14. F 19. T 24. F 5. T 10. T 15. F 20. T 25 F TRUE OR FALSE-PART B 1. T 6. F 11. F 16. T 2. T 7. F 12. F 17. T 3. T 8. F 13. T 18. T 4. F 9. T 14. F 19. F 5. F 10. F 15. T 20. F MULTIPLE CHOICE 1. D 21. A 41. B 61. B 81. D 2. C 22. B 42. C 62. C 82. C 3. A 23. D 43. A 63. A 83. D 4. D 24. C 44. B 64. C 84. C 5. D 25. A 45. C 65. A 85. B 6. D 26. C 46. D 66. B 86. D 7. D 27. C 47. D 67. B 87. A 8. D 28. D 48. B 68. C 88. B 9. D 29. C 49. D 69. D 89. D 10. B 30. D 50. D 70. A 90. D 11. A 31. B 51. C 71. C 91. B 12. C 32. C 52. C 72. B 92. C 13. C 33. B 53. D 73. D 93. D 14. A 34. A 54. B 74. A 94. C 15. A 35. D 55. C 75. D 95. D 16. D 36. A 56. B 76. D 17. C 37. B 57. D 77. A 18. C 38. B 58. D 78. D 19. A 39. B 59. C 79. B 20. D 40. B 60. A 80. C ERRATUM:

Illustration #6 …. Medical fees (

included

in the hospital bills)

Supporting Computations:

No. 14 To be exempt, the contributions from each member in item “III” should not exceed P15,000.

(32)

No. 23 Output Vat (P280,550 +P152,400) x 12% P51,954 Input vat (P110,220+P101,250) x 12% (25,374.6 ) Vat Payable P26,578 No. 24

Output Vat, 3rd_{quarter (P150,000} x 12%)

P18,000 Input vat, 3rd_{quarter (P120,000 x}

12%)

(14,400) Deferred input vat – previous

quarter

(6,000)

Vat Payable (Carry-over) (P2,400) No. 40 AR, July 1 P180,00 0 Billings, July-Sept. 850,000 AR, Sept. 30 (120,00 0) Collections P910,00 0 Output vat @ 12% 109,200

Input vat on purchases @ 12% (57,600) Vat Payable P51,600 No. 42 Output vat (P10M x 12%) P1,200,0 00 Input vat on materials (480,000 ) Input vat on capital goods

(P3Mx12%) /60 mos.

(36,000) Vat Payable June 30,

2014

P684,000

No. 44

Sales, shares held as inventory

P5,000,0 00 Cos of shares, held as

inventory (2,000,00 0) Gross income 3,000,00 0 Vat rate 12% Output vat P360,000

Les: Input vat

Supplies expense 12,000

Rent expense 24,000 (36,000)

(33)

0 No. 52

Domestic sales (P600,000 x 12%) P72,000 Add: Transaction deemed sales

Jan. 4 consignment (P200,000 x 12%) 24,000 Goods consumed on Fe. 27 (P50,000 x

12%)

6,000 Property dividends (P150,000 x 12%) 18,000

Total Output Vat P120,00

0

No. 63

Output tax (1,500,00 x 12%) P180,000

Less: Input taxes

Purchases (800,000 x 12%) 96,000 Machinery (240,000/60 x

3mos.)

12,000

Carry-over 97,000 205,000

Excess input vat (P25,000)

No. 64

Output tax on sale (2,000,000x 12%) P240,000

Output tax on sale of machinery (2,000,000x 12%)

240,000 Less: Input taxes

Purchases 1,000,000x 12%) 120,000 Unamortized input tax on machinery

(240,000- 12,000) 25,000 Carry-over 228,000 (373,000 ) VAT Payable P107,00 0 No. 71 & 72 Output vat (P592,480 x 3/28) P63,480

Less: Input Vat

Purchases of goods (P100,000 x 12%) P12,00 0 Purchases of services (P20,000 x 12%) 2,400

Transitional input vat 4,800 (19,200

)

VAT Payable P44,28

0 No. 77

Change the year from 2010 to 2012

Output Vat for October 2012 = P3M x 12 = P360,000

(34)

 If initial payment is more than 25% of Selling Price, the sale is classified as Deferred Sale which is treated as Cash Sale. Therefore, the entire output vat is due on the month of sale.

No. 78

Output Vat for 2013 = P0; The entire output vat was paid in 2012

No. 80

Downpayment P112,00

0

1st_{installment payment} _112,000

Total (vat inclusive) 224,000

Less: VAT (P224,000 x 3/28) (24,000) Initial Payment (exclusive of vat) P200,00 0

Divide by contract Price (P1,120,000 x

3/28)

1,000,00 0

Ratio of Initial Payment over SP 20% Output vat for 2012 (P200,000 x

12%)

P24,00 0

No. 80

VAT ON CASH SALE: P72,000

(FMV is higher than SP) (P600,000 x 12%)

VAT ON DEFERRED SALE: 36,000 (Ratio of Initial payment over SP 

25%

(Not qualifying under installment method)

(Treated as cash sale; SP is higher

than FMV)

[(P336,000/1.12) x 12%]

TOTAL OUTPUT VAT P108,0 00 No. 83 and 84 Output vat (P336,000 x 3/28) P36,000 Input vat (56,000 + 11,200) x 3/28 x 300/500 (4,320) Vat Payable P31,68 0 No. 85 OUTPUT VAT (P896,000 x 3/28) P96,000 INPUT VAT

Purchases of goods, vat business, vat included (P224,000 x 3/28)

(24,000)

MIXED Transactions:

Purchases of supplies, for vat & non vat business

(35)

Purchase of depreciable asset, for use in vat and non vat business [(P2,240 x 3/28) x (800,000/1,000,000)] VAT PAYABLE P62,208 No. 86 and 87 OUTPUT VAT Domestic sales (P330,000 + P274,996) x 3/28 P64,821

Export sales (zero rated) 0

INPUT VAT

Purchases of goods, supplies and services for domestic sales

and for export (374,000 + 69,848 + 154,000 + 55,000) x 3/28 (69,948 ) Vat Payable (P5,127 ) No. 88 Raw Materials (P560,000 x 3/28) x 400,000/1M P24,000 Supplies (P448,000 x 3/28) x 400,000/1M 19,200 Equipment (P300,000 x 12% x 400,000/1M) 14,400

INPUT VAT ATTRIBUTED TO EXPORT SALES P57,600 PROBLEM SOLVING Problem 1: a) P0 b) P134,400 x 3/28 = P14,400

c) PP201,600 x 3/28 = P201,600 (regardless of whether or not Abi is a vat registered exporter)

Not zero rated. To be zero rated, the problem should provide that Abi exported more than 70% of its annual production

d) Vat exempt

Problem 2:

Cash sales (P660,800 x 3/28) P70,800 Sales on account (P246,400 x 3/28) 26,400 Transaction deemed sales:

(P22,400 + 16,800 + 19,040 + 8,960) x 3/28

7,200

Total output vat P104,40

0 Input vat (P291,200 x 3/28) (31,200)

Vat Payable P73,20

0 Problem 3:

(36)

OUTPUT:

Sales (P8M – 400,000) x 12% P912,000

Sales from consignment (March and Feb.) (20+10) x P10,000 x 12%

36,000 Transactions deemed sales

January 8 consignment (20 x P10,000) x 12%

24,000

Goods withdrawn 6,000

Goods taken as payment to creditors 3,600 P981,600 INPUT VAT

Purchase of goods, supplies, freight/insurance)

82,080 Capital goods (ASSUME USEFUL LIFE OF

4 YEARS) (P1,100,000 x 12%) / 48 mos. 2,750 (84,830) VAT PAYABLE P896,77 0 Problem 4:

Business tax VAT OPT

Gross receipts (collections) from:

Hotel rooms P1,800,0 00 Dining hall 3,150,00 0 Other revenues 700,000 Total P5,650,0 00 VAT 12% P678,00 0 Gross receipts (collections) from disco

operations @18%

P504,00 0

TOTAL Business Taxes P1,182,000

Problem 5:

Output vat on gross receipts

(collections) from construction contracts with:

Bobads, City Condo & Urban Dev’t.

(P30M x 12%)

P3,600,00 0 Less: Input vat on payments/advances

made to:

Alpha (P12M x 90% x 12%) (1,296,00 0) Charlie (P4M-P1M) x 12% (360,000)

Delta (P2M x 12%) (240,000)

VAT PAYABLE, 1st_{Quarter 2014} _P1,704,0 00

(37)

Problem 6:

Ratio of Initial Payment over Selling Price:

Lot A = 50/250 = 20% ; Installment Sale

Lot B = 70/200 = 35%; Deferred Sale; Treated as Cash Sale Lot C = 60/300 = 20%; Installment Sale

No. 2013 Dec. 2013 Lot A: P25,000 x 12%; P25,000 x 12% P3,000 P3,000 Lot B: P200,000 x 12% 24,000 -Lot C: P40,000 x 12%; P20,000 x 12% 4,800 2,400 Vat Payable P31,800 P5,400 Problem 7:

Output vat: school supplies and gift items (P560,000 + 336,000) x 3/28

P96,000 Input vat:

 Directly attributable to vatable sales (P406,000 x 3/28) (43,500)  Not directly attributable to vatable sales (P21,112 x 3/28 x

800*/1,000**) (1,809.6 0) VAT PAYABLE P50,690 .40 *(560,000/1.12) + (P336,000/1.12) = P800,000 vatable sales **vatable sales + vat exempt sales (sale of books) = P1,000,000

CHAPTER 9 – OTHER PERCENTAGE TAXES

TRUE OR FALSE-SET A 1. F 6. F 11. T 16. T 2. T 7. F 12. F 17. F (False, should be 20 days) 3. T 8. T 13. F 18. F 4. F 9. T 14. T 19. T 5. F 10. F 15. T 20. F TRUE OR FALSE-SET B

(38)

1. T 6. F 11. T 16. T 2. T 7. F 12. F 17. T 3. F 8. T 13. F 18. T 4. T 9. F 14. T 19. T 5. T 10. F 15. T 20. T MODIFIED IDENTIFICATION 1. A 6. C 11. C 16. A 21. C 2. A 7. A 12. A 17. C 22. A 3. E 8. A 13. A 18. C 23. A 4. C 9. C 14. A 19. C 24. A 5. C 10. C 15. A 20. C 25. B MULTIPLE CHOICE 1. C 21. --- 41. D 61. A 81. C 2. D 22. A 42. C 62. D 82. B 3. D 23. B 43. A 63. D 83. D 4. C 24. D 44. D 64. B 84. D 5. A 25. B 45. D 65. C 85. B 6. A 26. C 46. C 66. D 86. B 7. D 27. B 47. B 67. A 87. A 8. A 28. C 48. C 68. A 88. D 9. A 29. C 49. B 69. B 89. D 10. C 30. A 50. B 70. C** 90. D 11. D 31. B 51. A 71. A 12. A 32. D 52. C 72. C 13. B 33. D 53. C 73. C 14. C 34. D 54. C 74. C 15. D 35. D 55. A 75. C 16. B 36. A 56. A 76. D 17. B 37. A 57. --- 77. D 18. D 38. A 58. C 78. D 19. A 39. D 59. C 79. C 20. B 40. A 60. A 80. A Supporting Computations: No. 5 (P280,000 + P220,000) x 3% = P15,000 No. 6 (P50,000 + 100,000 – 75,000) x 3% = P2,250 No. 7

Gross receipts (refer to

#6) P75,000 x vat rate 12% Output vat P9,000 Input vat (P11,200 x 3/28) (1,200) Vat Payable P7,800 No. 16 P6.5M x 12% = P780,000 No. 17 P660,00 x 3% = P19,800 No. 18 (P400,000 + P100,000) x 12% = P60,000 No. 22 P10M x 2.5% = P250,000 No. 22 P10M x 1.5% = P150,000

(39)

No. 26 (P10M x 40%) 3% = P120,000 No. 27 (P10M – P6M) X 30% = P1,800,000 No. 30 Subject to vat, not franchise tax

No. 34 AR, beg. P600,00 0 Revenues (P4M + P1M) 5,000,00 0 AR, end (960,000 ) Gross receipts P4,640,0 00 Vat rate 12%

Business tax due P556,8 00 No. 35

Covered by the Franchise

NOT Covered by the Franchise

AR, beg. P600,000 AR, beg.

P----Revenues 4,000,00

0

Revenues 1,000,00

0

AR, end (800,000) AR, end (160,000

) Gross receipts P3,800,00

0

Gross receipts P840,000

Franchise tax rate 2% Franchise tax rate 12%

Business tax due P76,000 Business tax due P100,800

Total Business Taxes P176,80 0 No. 42 P3M x 10% = P300,000 No. 34 Output vat (P5M x 12%) P600,00 0 Input Vat  P300,000 x 12% (36,000)  P800,000 x 12% x 5/8 (60,000) Vat Payable P504,0 00 No. 48 OPT% GRT

Interest income from lending activities from inst1uments with remaining terms of:

Five years and less 5,000,00 0

5% P250,000 More than five years 3,000,00

0

(40)

Dividends & equity shares from subsidiaries 1,000,00 0 0% 0 Rental income 500,000 7% 35,000

Net trading gains 300,000 7% 21,000

Total Gross Receipts Tax P336,000 No. 49

OPT% GRT

Rentals from safety deposit boxes P880,000 7% P61,600 Net foreign exchange gains 220,000 7% 15,400 Net trading gains from trading of

securities 660,00₀ 7% 46,200

Trust fees 110,000 7% 7,700

Dividends from domestic corporations

30,000 0% 0

Other service fees 220,000 7% 15,400

Interest income from lending activities from inst1uments with remaining terms of:

Five years and less 700,000 5% 35,000

More than five years 800,000 1% 8,000

Total Gross Receipts Tax P189,300 No. 50

Interest income with maturity of less than 5 years (P500,000 x 5%)

P25,0 00

Rentals (P500,000 x 7%) 35,00

0 Net trading loss = none; if net trading gain, tax is

7%

Gross receipt tax (GRT) P60,0 00 No. 51

Interest income with maturity of less than 5 years (P1M x 5%)

P50,000

Rentals (P500,000 x 7%) 35,000

Net trading gain

[200,000 – (100,000 net trading loss previous month) x 7%]

7,000

Gross receipt tax (GRT) P92,00 0 No. 52

Interest withheld and paid (P100,000 x 5 years x 1%) P5,000 Adjusted amount of tax due to pretermination (P100,000 x

5 years x 5%)

25,000

Tax Payable P20,0

(41)

No. 55 P2M x 10% = P200,000

No. 56 [(P500,000 x 12%)-(300,000x12%)] = P24,000

No. 58 P2M x 2% = P40,000

No. 64 P7.5M x 18% = P1,350,000

No. 65 P5M x 18% = P900,000

No. 66 Not subject to OPT. Gross Receipts > 1,919,500, therefore, JC is subject to vat, not OPT

No. 70**

ERRATUM: CHANGE THE QUESTION TO : WHICH OF THE FOLLOWING IS SUBJECT TO

PERCENTAGE TAX?

“a” - not subject to percentage tax or any business tax…… Overseas communication

into the Philippines.

“b” and “d” - subject to vat

“c” – not world or oriental championship. Subject to 10% OPT

No. 75 P350,000 x .005 = P1,750

No. 77 [(P1,500,000 - P1,000,000) x 12] = P60,000

No. 79 (120,000 – 30,000) x ½ x P30 x 1% = P13,500; Ratio = 45/75 = 60%; IPO

rate = 1%

No. 80 (2,000 x P25 x 4% = P2,000; Ratio = 2/75 = 2.67%; IPO rate = 4%

No. 81 (6,000 x P40 x .005% = P1,200 PROBLEM SOLVING Problem I: Gross receipts-passenger operations (P8,000,000 x 3% CCT) P240,000

Gross receipts cargo operations (P5M x 75% x 12%vat)

450,000 Rentals (P2M x 12%vat) 240,000

Total business taxes P930,00 0 Problem II:

1) 3% OPT on vat exempt sales (GR<1,919,500 & non-vat registered) =P1.4M x 3%

= P42,000

2) VAT = P1,400,000 x 12% = P168,000 Problem III:

1) Income tax due = P625,000

Subject to 2.5% GPB:  GR Passenger operations-Phils. P10,000,0 00  GR cargo operations-Phils. 6,000,000 Total 16,000,00 0 GPB rate 2.5% P400,000 Subject o NCIT (RR 15-2013):

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 Demurrage, detention and Other fees

1,000,000  Expenses on demurrage fees (250,000) Income subject to NCIT 750,000

NCIT rate 30% 225,000

Total income tax due P625,000

EXCLUDED FROM GPB: RR15-2003 provides that demurrage fees, detention fees, and other charges relating to inbound and outbound cargoes are

considered as income derived from sources “within” the Philippines subject to regular tax rates.

2) Income tax due = P545,000

Subject to 2% GPB (Under a tax treaty):  GR Passenger operations-Phils. P10,000,0 00  GR cargo operations-Phils. 6,000,000 Total 16,000,00 0 GPB rate 2% P320,000 Subject o NCIT (RR 15-2013):  Demurrage, detention and

Other fees

1,000,000  Expenses on demurrage fees (250,000) Income subject to NCIT 750,000

NCIT rate 30% 225,000

Total income tax due P545,000

3) Business tax due = 3% CCT on cargo operations originating in the Philippines

= 3% x P6M = P180,000

4) Income tax due = P3,225,000

 An offline carrier is not an international carrier. Assume therefore that the income provided were in the nature of commission income from international carriers.

 ***An offline carrier may be a domestic or resident foreign corporation.

Since the original problem pertains to an international carrier (resident foreign corporation), the offline carrier provided in the problem should be treated as a resident foreign corporation taxable only on its income from sources within the Philippines.

Solution:

Net income subject to NCIT:

 GR Passenger operations-Phils. P10,000,0 00  GR cargo operations-Phils. 6,000,00 0  Demurrage, detention and

Other fees

1,000,00 0  Expenses-passenger operations- (4,000,00

(43)

Phils. 0)  Expenses-cargo

operations-Phils.

(2,000,00 0)

 Expenses on demurrage fees (250,000) P10,750,000

***

NCIT rate 30%

Income tax due P3,225,000

5) Business tax due (offline carrier) = P2,040,000

 GR from Passenger operations-Phils.

P10,000,0 00  GR from cargo operations-Phils. 6,000,000  Demurrage, detention and

Other fees

1,000,000 P17,000,00 0

Vat rate 12%

Business tax due P2,040,00

0 Problem IV:

1. P0. Not subject to business tax but subject to a capital gains tax of P2,500.

[(5,000 sh. X P50) – P200,000 = P50,000 capital gain x 5%CGT = P2,500 CGT

2. P0. Not subject to business tax as well as income tax (CGT). The

transaction resulted to a loss amounting to P75,000, hence, not subject to CGT.

Purchase Price = P50/share; S.P.=P35/share; Loss = P15/share

3. Subject to P6,000 value added tax

[(5,000 sh. X P50) – P200,000 = P50,000 capital gain x 12% = P6,000

4. Subject to OPT (stock transaction tax) of P600 computed as follows:

P120,000 x .005 = P600

5. OPT = 5,000 shares x P18 x .005 = P450 Problem V:

1. P3,000 OPT. ratio=10/35=28.5%; IPO rate= 2%; Tax due on=P150,000 x 2% = P3,000

2. P100 OPT. P20,000 x .005

Problem VI:

1. P1,053,000 OPT (amusement tax). P5,850,000 x 18%

2. P1,053,000 OPT. Subject only to a business tax due of 18% OPT. 3. P720,000 OPT P4,000,000 x 18%

4. P55,500 OPT. P1,850,000 x 3%

5. P108,000 Vat. (P1850,000 x 12%) – [P750,000 x 12% + (P224,000 x 3/28)]

(44)

1. P651,250 (P4M + 3.5M + 775,000) x 7% = P579,250 (P6M + 1.2M) x 1% = P72,000 2. P578,500 [(P2.8M + 3.3M + 825,000) + (325,000 – 150,000)] x 7% = P497,000 (P7.2M + 950,000) x 1% = P81,500