Acctax1 AY 2016-2017 Problems

(1)

DE LA

DE LA SALLSALL E UNIVEE UNIVERSIRSITYTY

RAMON V DEL ROSARIO COLLEGE OF BUSINESS RAMON V DEL ROSARIO COLLEGE OF BUSINESS

ACCOUNTANCY DEPART

ACCOUNTANCY DEPARTMENTMENT INCOME TAXATION (ACCTAX1) INCOME TAXATION (ACCTAX1)

ACADEMIC YEA

ACADEMIC YEA R 2016-2R 2016-2017017 TAX PROBLEMS

TAX PROBLEMS

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Generaneral l InstructionsInstructions :: 1.

1. ReRead ad the the probprob lems lems carefullcarefull y.y. 2.

2. Answer the Answer the requiremerequirements ants and show and show all necell necessary computations.ssary computations. 3.

3. Round the Round the amamounts to the ounts to the neanearest Phrest Philippine peso.ilippine peso. 4.

4. Place Place youyou r r answers in answers in a a colucolu mnar mnar notnot ebook. ebook. MaMake ke sursur e e that you that you have have your assignyour assign ments ments wiwi thth you before coming to class.

you before coming to class.

UNIT 3.

UNIT 3. GROSS GROSS INCOMEINCOME Components of income a

Components of income and gross ind gross i ncomencome Problem 1 – Concept of income and when taxable Problem 1 – Concept of income and when taxable

The following are independent situations or transactions entered into by Mabuhay Corporation, a domestic The following are independent situations or transactions entered into by Mabuhay Corporation, a domestic corporation:

corporation: a.

a. On January 1, On January 1, 20A1, Mab20A1, Mabuhay Corporation receiuhay Corporation received the ved the following properties from following properties from Mr. Segundo Mr. Segundo inin exchange for the original issuance of 10,000 shares with P100 par value:

exchange for the original issuance of 10,000 shares with P100 par value: C

Caasshh PP225500,,000000 L

Laannd d ((ffaaiir r mmaarrkkeet t vvaalluuee) ) 885500,,000000 b.

b. On January 1, On January 1, 20A1, Mab20A1, Mabuhay Corporation entered uhay Corporation entered into a leasinto a lease agreement e agreement for the leasfor the lease of land e of land fromfrom Masaya Corporation. The terms of the lease are

Masaya Corporation. The terms of the lease are as follows:as follows: L

Leeaasse e tteerrm m 2 2 yyeeaarrss M

Moonntthhlly y rreennttaall PP110000,,000000 Advance rentals

Advance rentals 500,000500,000 S

Seeccuurriitty y ddeeppoossiit t 220000,,000000 P

Prere-t-terermmininatatioion n ppenenalalty ty 1010,0,0000 0 pper er momonnth th fofor r ththe e reremamaininining g ununuusesed d momonnththss

The security deposit is refundable at the time of termination of the lease. However, it can be applied as The security deposit is refundable at the time of termination of the lease. However, it can be applied as rental payments.

rental payments.

The advance rentals pertain to the first five months of the lease. Subsequently, Mabuhay paid The advance rentals pertain to the first five months of the lease. Subsequently, Mabuhay paid P100,000 monthly rental at the

P100,000 monthly rental at the beginning of each month.beginning of each month. Mabuhay Corporation pre-terminated the lease eff

Mabuhay Corporation pre-terminated the lease eff ective December 1, 20A1. The security deposit wasective December 1, 20A1. The security deposit was refunded.

refunded. c.

c. On October 1, On October 1, 20A1, Mab20A1, Mabuhay Corporation entered uhay Corporation entered into a leasinto a lease agreement e agreement for the leasfor the lease of office e of office spacespace from Masaya Corporation. The terms of the l

from Masaya Corporation. The terms of the l ease are as follows:ease are as follows: L

Leeaasse e tteerrm m 1 1 yyeeaar r M

Moonntthhlly y rreennttaall PP110000,,000000 Advance rentals

Advance rentals 500,000500,000 S

Seeccuurriitty y ddeeppoossiit t 220000,,000000 P

Prere-t-terermmininatatioion n ppenenalalty ty 1010,0,0000 0 pper er momonnth th fofor r ththe e reremamaininining g ununuusesed d momonnththss

The security deposit is refundable at the time of termination of the lease. However, it can be applied as The security deposit is refundable at the time of termination of the lease. However, it can be applied as rental payments.

rental payments.

The advance rentals pertain to the first five months of the lease. Subsequently, Mabuhay paid The advance rentals pertain to the first five months of the lease. Subsequently, Mabuhay paid P100,000 monthly rental at the

P100,000 monthly rental at the beginning of each month, except for the beginning of each month, except for the last month of the lease where alast month of the lease where a portion of the

portion of the security was applied as rental payment. The balance of tsecurity was applied as rental payment. The balance of t he security deposit washe security deposit was refunded.

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(3)

e.

e. On December 1, On December 1, 20A1, Mab20A1, Mabuhay Corporation sold uhay Corporation sold goods goods for USD100,000 on for USD100,000 on account to account to MasayaMasaya Corporation. The goods cost P3,000,000.

Corporation. The goods cost P3,000,000. Mabuhay collected its receivables from Masaya on JanuaryMabuhay collected its receivables from Masaya on January 31, 20A2. The following are the foreign exchange rates:

31, 20A2. The following are the foreign exchange rates: D

Deecceemmbbeer r 11, , 2200AA11 UUSSDD1 1 = = PP4488 December

December 31, 31, 20A1 20A1 USD1 USD1 = = P50P50 J

Jaannuuaarry y 3311, , 2200AA22 UUSSDD1 1 = = PP5511 Mabuhay Corporation is registered with t

Mabuhay Corporation is registered with t he Board of Investments (BOI) and he Board of Investments (BOI) and enjoying income taxenjoying income tax holiday (ITH) until December 31, 20A2. Masaya Corporation,

holiday (ITH) until December 31, 20A2. Masaya Corporation, on the other hand, ion the other hand, i s an entity registereds an entity registered with the Philippine Economic Zone Authority (PEZA).

with the Philippine Economic Zone Authority (PEZA). f.

f. Mabuhay CorpMabuhay Corporation is oration is a sa security agency. ecurity agency. On DecembOn December 15, er 15, 20A1, i20A1, it collected t collected the the following from following from itsits client, Masaya Corporation:

client, Masaya Corporation: S

Saallaarriiees s oof f sseeccuurriitty y gguuaarrddss P P 220000,,000000 Agency fee

Agency fee 10,00010,000

T

Toottaall PP 221100,,000000

Mabuhay paid P200,000 to the

Mabuhay paid P200,000 to the security guards who are its employees. These security guards security guards who are its employees. These security guards areare minimum wage earners.

minimum wage earners. g.

g. Mabuhay Corporation had a Mabuhay Corporation had a land which wland which was acquired five years as acquired five years ago for P300,000. It sago for P300,000. It sold said land old said land toto Masaya Corporation for P1,000,000, its f

Masaya Corporation for P1,000,000, its f air market value, on December 1, 20A1. However, Masayaair market value, on December 1, 20A1. However, Masaya deposited the payment to t

deposited the payment to t he bank account of Mabuhay for P1,200,000. The he bank account of Mabuhay for P1,200,000. The P200,000 was depositedP200,000 was deposited in error. Masaya collected the

in error. Masaya collected the said overpayment from Mabuhay on December 31, 20A1.said overpayment from Mabuhay on December 31, 20A1. The other party or

The other party or parties in the above transactions are also domestic cparties in the above transactions are also domestic c orporations, unless otherwise stated.orporations, unless otherwise stated. Required:

Required: For each For each of the of the above situation oabove situation or transaction:r transaction: 1.

1. Identify and determine Identify and determine the amount of the amount of income received oincome received or earned r earned by Mabuhay by Mabuhay Corporation and the Corporation and the other other party to the transaction for income tax purposes for the year-ended December 31, 20A1 and December party to the transaction for income tax purposes for the year-ended December 31, 20A1 and December 31, 20A2.

31, 20A2. 2.

2. If the item If the item is an income, deis an income, determine if it is termine if it is taxable or not taxable or not and explain; if it and explain; if it is not is not an income, identify thean income, identify the nature and explain.

nature and explain.

Problem 2 – Condonation of debt Problem 2 – Condonation of debt

The following are independent situations dealing with

The following are independent situations dealing with condonation of loans of Marikit, Inc.:condonation of loans of Marikit, Inc.: Situation A

Situation A

As of December 31, 20A1, Marikit, Inc. had the following net ass

As of December 31, 20A1, Marikit, Inc. had the following net assets prior to condonation of its loans:ets prior to condonation of its loans: Assets:

Assets: C

Caasshh PP 220000,,000000

A

Accccoouunntts s rreecceeiivvaabbllees s 330000,,000000 I

Innvveennttoorriieess 440000,,000000 P

Prrooppeerrttyy, , ppllaannt t aannd d eeqquuiippmmeenntt 11,,000000,,000000 P1,900,000 P1,900,000 Liabilities: Liabilities: A Accccoouunntts s ppaayyaabbllee P P 440000,,000000 L Looaanns s ppaayyaabbllee 11,,220000,,000000 P1,600,000 P1,600,000 The loans were obtained from it

The loans were obtained from it s affiliate company. Its affiliate condoned 30% of the loan s affiliate company. Its affiliate condoned 30% of the loan on December 31,on December 31, 20A1.

(4)

Situation B Situation B

Assets: C

Caasshh PP 2200,,000000

A

Prrooppeerrttyy, , ppllaannt t aannd d eeqquuiippmmeenntt 110000,,000000 P 190,000 P 190,000 Liabilities: Liabilities: A Accccoouunntts s ppaayyaabbllee P P 440000,,000000 L Looaanns s ppaayyaabbllee 11,,220000,,000000 P1,600,000 P1,600,000 The loans were obtained from it

The loans were obtained from it s affiliate company. Its affiliate condoned the entire loan s affiliate company. Its affiliate condoned the entire loan on December 31, 20A1on December 31, 20A1 since Marikit is encountering financial difficulty.

since Marikit is encountering financial difficulty. Situation C

Situation C

Assets: C

Caasshh PP 2200,,000000

A

Prrooppeerrttyy, , ppllaannt t aannd d eeqquuiippmmeenntt 110000,,000000 P 550,000 P 550,000 Liabilities: Liabilities: A Accccoouunntts s ppaayyaabbllee P P 440000,,000000 L Looaanns s ppaayyaabbllee 11,,220000,,000000 P1,600,000 P1,600,000 The loans were obtained from it

The loans were obtained from it s affiliate company. Its affiliate condoned the entire loan s affiliate company. Its affiliate condoned the entire loan on December 31, 20A1on December 31, 20A1 since Marikit is encountering financial difficulty.

since Marikit is encountering financial difficulty. Required:

Required: 1.

1. Determine the amount of Determine the amount of income that income that will be dwill be declared by Marikit eclared by Marikit for the for the year ended year ended December 31, 20A1December 31, 20A1 for each situation. Explain your answer.

for each situation. Explain your answer. 2.

2. Determine if the Determine if the condonation of decondonation of debt will be bt will be subject to subject to donor’s tax under donor’s tax under each situation. Explain.each situation. Explain. Problem 3 – Award of damages

Problem 3 – Award of damages Mr. Michael Lorenzo filed a labor

Mr. Michael Lorenzo filed a labor case against its former employer, Maliwanag Corporation with the Nationalcase against its former employer, Maliwanag Corporation with the National Labor Relations Commission (NLRC). On September 15, 20A1, the case was decided

Labor Relations Commission (NLRC). On September 15, 20A1, the case was decided in favor of Mr. Lorenzoin favor of Mr. Lorenzo where he was awarded the following:

where he was awarded the following: U

Unnppaaiid d ssaallaarriieess P P 550000,,000000 U

Unnppaaiid d ccoommmmiissssiioonn 112200,,000000 M

Moorraal l aannd d eexxeemmppllaarry y ddaammaaggeess 330000,,000000 Attorney’s fees and other costs

Attorney’s fees and other costs 250,000250,000 T

Toottaall PP11,,117700,,000000 The award has already become final and

The award has already become final and executory and Maliwanag is willing to pay texecutory and Maliwanag is willing to pay t he above amount less anyhe above amount less any withholding taxes. Mr. Lorenzo, however, paid only attorney’s and other costs of P200,000.

withholding taxes. Mr. Lorenzo, however, paid only attorney’s and other costs of P200,000. Required:

Required: 1.

1. Determine the amDetermine the amount of ount of award considered award considered as income as income subject to income subject to income tax. Explain.tax. Explain. 2.

(5)

Problem 4 – Compensation for services; allowances; facilities or privileges

Ms. Maganda is an employee of Halo-halo, I nc. She received the following salaries and benefits f or the year ended December 31, 20A1:

Compensation P 200,000

Commissions 70,000

Tips and gratuities 50,000

Transportation allowance 40,000

Representation allowance 30,000

Bonuses 60,000

Total P 450,000

These were given in the f orm of cash. The following are the additional information: Situation A

· The tips and gratuities were paid by Halo-halo’s customers. These were added to the customers’ bills and subsequently paid to the employees in addition to the compensation.

· The transportation and representation allowances are a fixed allowances given by Halo-halo to Ms. Maganda. These were not subjected to liquidation.

In addition, Ms. Maganda also receiv ed courtesy discounts for purchases of food items equivalent to 10% of the selling price. Total purchases amounted t o P80,000.

Situation B

· The tips and gratuities were paid by Halo-halo’s customers to the employees. Ms. Maganda received P50,000 during the year.

· The transportation and representation allowances were subjected to liquidation. These were supported by receipts issued in the name of Halo-halo to evidence the actual incurrence of expenditures in

connection with its trade or business.

In addition, Ms. Maganda also receiv ed courtesy discounts for purchases of food items equivalent to 50% of the selling price. Total purchases amounted to P80,000.

Required: Determine the amount of income that will be declared by Ms. Maganda for the year ended December 31, 20A1.

Problem 5 – Compensation for services: cash and i n kind

The following are independent situations i nvolving Mr. Matipuno for the year ended December 31, 20A1:

a. Mr. Matipuno rendered repair services to Acacia Corporation. He was paid P50,000 for the services he rendered.

b. Mr. Matipuno rendered repair services to Acacia Corporation. He received groceries worth P48,000 as compensation for the services he rendered.

c. Mr. Matipuno rendered repair services to Acacia Corporation. His services was worth P45,000. In consideration for the said services, he received free meals from Acacia for one month.

d. Mr. Matipuno is a Vice President for Finance of Acacia Corporation. He received an annual salary of P3,000,000 during the year. In addition, he received a bonus of 1,000 shares of Acacia on January 31, 20A2 for the services he rendered in 20A1. The shares had par value P100 but had fair value of P250 on January 31, 20A2 and average fair value of P175 in 20A1.

(6)

e. Mr. Matipuno is a Finance Manager of Acacia Hotel Corporation. He received an annual salary of P1,000,000 during the year. In addition, he also received free meals worth P50,000 and given living quarters with value of P5,000 monthly during the year.

f. Mr. Matipuno is a chef of Acacia Hotel Corporation. He received an annual salary of P1,000,000 during the year. In addition, he also received free meals worth P50,000 and given living quarters with value of P5,000 monthly during the year. The free meals and liv ing quarters were provided to Mr. Matipuno for and necessary to the proper performance of his duties as chef of Acacia.

g. Mr. Matipuno is rendered repair services to Ms. Acacia on December 1, 20A1. However, Ms. Malinis issued a promissory note with f ace amount of P50,000 payable on June 1, 20A2. The discounted value of the note on December 31, 20A1 is P45,000.

h. Mr. Matipuno rendered services to Acacia Corporation for P60,000. However, Mr. Matipuno owes

Acacia the same amount. Acacia cancelled the borrowing of Mr. Matipuno since he rendered the repair services.

i. Mr. Matipuno owes Ms. Acacia P30,000. Out of Ms. Acacia’s generosity, she cancelled the debt of Mr. Matipuno.

Required: For each of the above situation, determine the amount that will be included as part of gross income of Mr. Matipuno.

Problem 6 – Income from dealings in property

Macapuno, Inc. owned the following assets as of January 1, 20A1:

Remaining life Book value

Building 10 P3,000,000

Equipment 4 400,000

Land 1,000,000

The building was sold for P3,500,000, i ts fair market value, on June 30, 20A1 to Papaya Corporation. On the other hand, the equipment was sold to Camia Corporation for P400,000 on September 30, 20A1.

However, the land was expropriated by the government on October 31, 20A1. The government paid Macapuno P1,800,000, which is its fair market v alue.

Macapuno depreciates its properties using t he straight line method of depreciation for i ncome tax purposes. The assets are depreciated monthly.

Required: Determine the amount of gross income that will be declared for income tax purposes for the year ended December 31, 20A1.

Problem 7 – Rental income

The following are independent situations regardi ng the lease of land owned by Mangosteen Company, Inc. to Gumamela Corporation:

Situation A

On January 1, 20A1, Mangosteen leased its land to Gumamela for a period of 15 years for P200,000 monthly. Mangosteen also charged Gumamela real property tax ( RPT) on the land for P20,000 mont hly.

Gumamela constructed a building on said land. The building was completed on October 1, 20A1 with total construction costs of P5,000,000, which represents its fair market value at the time of completion. The building will be transferred to Mangosteen at the end of the lease term. The building had an estimated useful life of 40 years.

(7)

Situation B

However, Gumamela terminated the lease on September 30, 20A8. It paid penalty of P1,200,000 for the termination of the contract.

Situation C

However, the building was destroyed by f ire on October 1, 20A8. The building was not insured. However, it had a salvage value of P500,000.

Situation D

However, the building was destroyed by f ire on October 1, 20A8. The building was insured and the insurance company indemnified P800,000. In addition, it had a salvage value of P400,000.

Required:

1. Determine the annual gross income that will be reported by Mangosteen for the entire term of the lease under the two allowable methods in recognizing income.

2. For Situations C and D, determine the amount of loss that will be recognized by Mangosteen in the year of destruction if any.

Problem 8 – Rental, dividend and i nterest income

On January 1, 20A1, Durian Company, Inc., a wholly-owned subsidiary of Rosas Company, leased its building to Pagsibol Corporation. It was agreed t hat instead of paying rentals to Durian, Pagsibol should make payments as follows:

Recipient Relationship with Durian Amount of payment

Rosas Company Stockholder 10% of par value of shares

Dahlia Company Lender 6% of loan payable

As of January 1, 20A1, Durian had common stock of P5,000,000 with no additional paid-in capital. On the other hand, it had loans payable to Dahlia for P3,500,000, and advances to Rosas for P800,000. There were no changes in the carrying amounts of these accounts at December 31, 20A1 except that Durian forgave the indebtedness of Rosas.

(8)

Pagsibol also shouldered the real property tax (RPT) and insurance on the buildi ng. These charges were paid by Durian but will be reimbursed by Pagsibol. RPT and insurance premiums paid in 20A1 amounted to

P100,000 and P150,000, respectively. Required:

1. Determine the nature and amount of gross income that will be recognized by Durian for the year ended December 31, 20A1, if any.

2. Determine the nature and amount of gross income that will be recognized by Rosas for the year ended December 31, 20A1, if any.

3. Determine the nature and amount of gross income that will be recognized by Dahlia for the year ended December 31, 20A1, if any.

Problem 9 – Dividend

The stockholders equity section of Azucena Corporation’s statem ent of financial position shows the following information as of December 31, 20A0:

Common stock, 1,000,000 shares issued and outstanding P 10,000,000

Retained earnings 8,000,000

Revaluation surplus 3,000,000

Total P 21,000,000

Azucena had net income of P1,500,000 for the year ended December 31, 20A0. On March 1, 20A1, it declared P4 dividend per share payable on April 15, 20A1.

Required:

1. Determine the amount of dividend income to be reported by the stockholders of Azucena for the year ended December 31, 20A1.

2. Determine the source of dividend declared by Azucena (i.e., year of earning the net income). Exclusions from gro ss income

Problem 10 – Proceeds of life insurance and return of premiums

As of January 1, 20A1, Ms. Amihan has an insurance policy with face amount of P3,000,000 which she

purchased five years ago. Premium on said policy of P15,000 were payable quarterly f or 10 years. She named her husband and her children as the beneficiaries of the insurance policy.

The following are independent situations rel ated to the insurance policy:

a. Ms. Amihan died on June 30, 20A1. Her beneficiaries received P3,000,000 from the insurance company.

b. Ms. Amihan lived after paying the insurance premiums for 10 years. She received P3,000,000 from the insurance company.

c. Ms. Amihan obtained a policy having dividend participation. She received P30,000 dividend in 20A1. d. Ms. Amihan cancelled the insurance policy on June 30, 20A6. She received a cash surrender value of

P150,000. Required:

1. Determine the amount of gross income of Ms. Amihan for each of the above situation. Identify the year the income is earned.

2. Determine the amount of exclusion from gross income of Ms. Amihan for each of the above situation. Identify the year of exclusion.

(9)

Problem 11 – Gift, bequest and dev ises

Mr. Habagat owns a parcel of l and, cash, jewelry, and shares of stock. The lot was being leased for P 100,000 monthly. These were payable at the end of each month. On July 1, 20A1, Mr. Habagat died. These properties were inherited by his only son, Juan. These properties had the f ollowing fair values at the time of Mr. Habagat’s death:

Land P 3,000,000

Cash 1,000,000

Jewelry 800,000

Shares of stock 1,500,000

The issuer of the shares declared div idend of P300,000 on July 15, 20A1 which were paid on August 1, 20A1. Required:

1. Determine the amount of gross income of Mr. Habagat’s son for the year ended December 31, 20A1. 2. Determine the amount of exclusion from gross income of Mr. Habagat’s son for the year ended

December 31, 20A1.

Problem 12 – Retirement benefits, pensions and separati on pay

The following are independent situations regardi ng the retirement benefits, pensions or separation pay of Mrs. Makulay:

a. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a BIR-registered retirement plan. Mapula contributed to t he retirement plan in order to fi nance the retirement pay of its employees. Under the retirement plan, the employees are entitled to retirement benefits if they have rendered at least 10 years of service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 50 and rendered 20 years of service. This is the first time t hat she retired from employment. She received the following benefits:

Retirement pay P 3,000,000

Backwages 300,000

Commutation of vacation leave credits 200,000 Commutation of sick leave credits 100,000

b. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a BIR-registered retirement plan. Mapula contributed to t he retirement plan in order to fi nance the retirement pay of its employees. Under the retirement plan, the employees are entitled to retirement benefits if they have rendered at least 5 years of service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 50 and rendered 8 years of service. This is the first time that she retired from employment. She received the following benefits:

Backwages 300,000

c. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a BIR-registered retirement plan. Mapula contributed to t he retirement plan in order to fi nance the retirement pay of its employees. Under the retirement plan, the employees are entitled to retirement benefits if they have rendered at least 10 years of service and they are at least 60 years old. During 20A1, Mapula offered an early retirement to Mrs. Makulay although she has not yet reached 60 years old. On July 31, 20A1, Mrs. Makulay availed the early retirement offer from Mapula at the age of 58 and rendered 20 years of service. This is the first time that she retired from employment. She received the following benefits:

Backwages 300,000

(10)

d. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a BIR-registered retirement plan. Mapula contributed to t he retirement plan in order to fi nance the retirement pay of its employees. Under the retirement plan, the employees are entitled to retirement benefits if they have rendered at least 10 years of service regardless of age. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 35 and rendered 10 years of service. T his is the first time that she reti red from employment. She received the following benefits:

Backwages 300,000

e. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a retirement plan. However, it is not registered with the BIR, Mapula contributed to the retirement plan in order to finance the retirement pay of its employees. Under the retirement plan, the employees are entitled to retirement benefits if they have rendered at least 10 years of service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 50 and rendered 20 y ears of service. This is the first time that she retired from employment. She received the following benefits:

Backwages 300,000

f. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a retirement plan. However, it is not registered with the BIR. Mapula contributed to the retirement plan in order to finance the retirement pay of its employees. Under the retirement plan, the employees are entitled to retirement benefits if they have rendered at least 10 years of service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 60 and rendered 20 y ears of service. This is the first time that she retired from employment. She received the following benefits:

Backwages 300,000

g. Mrs. Makulay is an employee of Mapula Corporation. Mapula does not maintain a retirement plan. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 50 and r endered 20 years of service. This is the first time that she ret ired from employment. She received the following benefits:

Backwages 300,000

h. Mrs. Makulay is an employee of Mapula Corporation. Mapula does not maintain a retirement plan. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 60 and she has rendered 20 years of service. This is the first time that she retired from employment. She received the following benefits:

Backwages 300,000

i. Mrs. Makulay is an employee of Mapula Corporation. Because the position of Mrs. Makulay became redundant, she was forced to separate from Mapula on July 31, 20A1. Mapula offered her separation benefits. She received the following benefits:

Separation pay P 3,000,000

Backwages 300,000

(11)

j. Mrs. Makulay is an employee of Mapula Corporation. Because of her sickness, Mrs. Makulay was forced to separate from Mapula on July 31, 20A1. Mapula offered her separation benefits. She received the following benefits:

Separation pay P 3,000,000

Backwages 300,000

Commutation of vacation leave credits 200,000 Commutation of sick leave credits 100,000 Required:

1. Determine the amount that will be included as part of Mrs. Makulay’s gross income for income tax purposes for the year ended December 31, 20A1.

2. Determine the amount that will excluded from Mrs. Makulay’s gross income for income tax purposes for the year ended December 31, 20A1.

Problem 13 – Prizes and awards

Mr. Yakal is a private elementary school t eacher. During 20A1, he received the f ollowing prizes and awards (in cash):

Most outstanding elementary school teacher P 100,000 SEA Games gold medalist in track and field 1,000,000 Loyalty service award for 20 years of service with his employer 20,000 Prize for winning department store raffle 100,000 Prize for winning talent competition in a variety show 150,000 Required:

1. Determine the amount that will be included as part of Mr. Yakal’s gross income for income tax purposes for the year ended December 31, 20A1.

2. Determine the amount that will excluded from Mr. Yakal’s gross income for income tax purposes for the year ended December 31, 20A1.

Problem 14 – 13th_{month pay and other benefi ts; de minimis benefits; SSS contributions; de minimis benefits}

Ms. Paraluman is an employee of Adobo, Inc. The following are independent situations regarding t he salaries and benefits granted to her for the year ended December 31, 20A1:

a. Ms. Paraluman received the following salaries and benefits:

Gross compensation P 180,000 13th_month _pay _15,000 14th_month _pay _15,000 Bonuses 60,000 Rice subsidy 18,000 Clothing allowance 4,000 Productivity incentive 12,000 Loyaltyaward 17,000

Medical allowance for the employee 9,000 Medical allowance for dependents 5,000

Daily meal allowance 10,000

Total P 345,000

The following are the additional information:

· The rice subsidy was given in cash for P1,500 monthly.

· The clothing allowance which included T-shirt and jeans worth P4,000 was given on January 31, 20A1.

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· The productivity incentive was granted in cash on December 1, 20A1. · The loyalty award which was a wrist watch was giv en on June 30, 20A1.

· The medical allowance was subjected to liquidation. Ms. Paraluman submitted invoices and receipts supporting purchases of m edicines and other medical expenses issued in her name. · The medical allowance for dependents was giv en quarterly for P1,250. Ms. Paraluman submitted

invoices and receipts supporting purchases of medicines and medical expenses issued in the name of her dependents.

· The daily meal allowance was given on account of overtime equivalent to P100 per day. The basic daily minimum wage was P500 per day.

· Ms. Paraluman contributed P545 monthly as mandatory contribution to SSS which was deducted from her compensation.

b. Ms. Paraluman received the following salaries and benefits:

Gross compensation P 180,000 13th_month _pay _15,000 14th_month _pay _15,000 Bonuses 45,000 Rice subsidy 18,000 Clothing allowance 4,000 Productivity incentive 8,000 Loyaltyaward 10,000

Medical allowance for the employee 9,000 Medical allowance for dependents 5,000

Daily meal allowance 11,000

Total P 320,000

· The rice subsidy was given in cash for P4,500 quarterly.

· The clothing allowance was given in cash on January 31, 20A1. · The productivity incentive was granted in cash on December 1, 20A1. · The loyalty award was given in cash on June 30, 20A1.

· The medical allowance was given in cash and onl y P5,000 was subjected to liquidation. Ms. Paraluman submitted invoices and receipts supporting purchases of m edicines and other medical expenses issued in her name for P5,000.

· The medical allowance for dependents was giv en quarterly for P1,250. Ms. Paraluman submitted invoices and receipts supporting purchases of medicines and medical expenses issued in the name of her dependents.

· The daily meal allowance was given regardless of whether Ms. Paraluman rendered overtime. However, P7,500 was given on account of overtime equivalent to P150 per day. The basic daily minimum wage was P500 per day.

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· Ms. Paraluman contributed P700 monthly to SSS which was deducted f rom her compensation. However, only P545 is the mandatory m onthly contribution.

Required:

1. Determine the amount that will be included as part of Ms. Paraluman’s gross income for income tax purposes for the year ended December 31, 20A1.

Determine the amount that will excluded from Ms. Paraluman’s gross income for income tax purposes for the year ended December 31, 20A1.

Special treatment of fringe benefits – include journal entries on the part of the employer Problem 15 – FBT on housing privileges

On January 1, 20A1, Libertad Inc. hired Mr. Aruga as its Vice P resident for Finance. As part of his

compensation package, Libertad granted him housing privilege. Temporarily, Mr. Aruga stayed in a nearby hotel from January 1, 20A1 to February 28, 20A1. Libertad paid monthly hotel charges of P300,000 for January and February. Subsequently, he transferred t o a residential condominium unit in Bonifacio Global City (BGC).

The following are independent cases relative to the residential condominium unit occupied by Mr. Aruga for the year ended December 31, 20A1:

a. Libertad leased a residential condominium unit at Bonifacio Global City (BGC) on March 1, 20A1. Monthly rental amounts to P120,000 payable on a monthly basis at the begi nning of each month. b. Mr. Aruga leased a residential condominium unit at BGC on March 1, 20A1. Monthly rental amounts to

P120,000 payable on a monthly basis at the beginning of each month. Libertad reimbursed Mr. Aruga for the rentals related to the residential condominium unit.

c. Libertad owned a residential condominium unit at BGC. It was assigned to Mr. Aruga starting March 1, 20A1. The unit had a fair market value of P10 million as indicated in the real property tax (RPT)

declaration while its zonal val ue is P8.5 million as determined by the BIR.

d. Libertad purchased a condominium unit at BGC on March 1, 20A1 for P10 million payable on

installment. Libertad paid a downpayment of P2 million on March 1, 20A1, and t he remaining balance was payable in four (4) yearly installments payable every March 1 with 5% i nterest. The unit had a fair market value of P9 million as indicat ed in the RPT declaration while its zonal value is P8 million as determined by the BIR. It was assigned t o Mr. Aruga.

e. Libertad purchased a condominium unit at BGC on March 1, 20A1 for P10 million. The unit had a fair market value of P12 million as i ndicated in the RPT declaration while its zonal value i s P12.5 million as determined by the BIR. The titl e to the unit was transferred to Mr. Aruga.

f. Libertad purchased a condominium unit at BGC on March 1, 20A1 for P10 million. The unit had a fair market value of P12.5 million as indicated i n the RPT declaration while its zonal value is P12 million as determined by the BIR. The unit was transferred to Mr. Aruga for P6 million.

Required:

1. Determine the monetary value of the quarterly fringe benefits granted to Mr. Aruga. 2. Determine the amount of quarterly fringe benefits tax (FBT).

3. Prepare the related journal entries for the year ended December 31, 20A1. Problem 16 – FBT on motor vehicles

Trinidad Manufacturing Company hired Ms. Halaran, as its Finance Manager, on January 1, 20A1. As part of her compensation package, she was granted car benefit.

The following are independent situation relating to the car benefit:

a. Trinidad purchased a car for P1,200,000 on January 1, 20A1 in the name of Ms. Halaran.

b. Trinidad granted Ms. Halaran cash for P1,200,000 on January 1, 20A1 for the acquisition of car.

c. Trinidad purchased a car on installment for P1,200,000 on January 1, 20A1 in the name of Ms. Halaran. Trinidad paid downpayment of P300,000, and the balance was payable in three equal annual

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d. Trinidad purchased a car for P1,200,000 on January 1, 20A1 in the name of Ms. Halaran. However, Ms. Halaran shouldered P200,000 which was also paid on January 1, 20A1.

e. Trinidad purchased a car for P1,200,000 on January 1, 20A1 and this was part of a fleet of motor vehicles assigned to its employees. Said car was assigned to Ms. Halaran. Trinidad depreciates its motor vehicles for four years using the straight-line method of depreciation.

f. Trinidad leased a car for P35,000 monthly commencing on January 1, 20A1. The said leased car formed part of its fleet of motor vehicles assigned to its employees. Said car was assigned to Ms. Halaran.

Required:

1. Determine the monetary value of the quarterly fringe benefits granted to Ms. Halaran. 2. Determine the amount of quarterly fringe benefits tax (FBT).

3. Prepare the related journal entries for the year ended December 31, 20A1.

Problem 17 – Expense accounts; household personnel; life insurance; membership fees, dues and other expenses

Plazoleta Company, Inc. reimbursed the following expenses to Mr. Sebaste, its Sales and Marketing Manager, for the quarter ended March 31, 20A1:

Car repairs and maintenance P20,000

Representation expenses 12,000 Transportation expenses 7,500 Supplies expenses 5,000 Groceries 5,250 Driver’s salaries 5,500 Maid’ssalaries 2,500 Laundry expenses 1,500

Membership fees in PICPA 3,000

Membership fees in Rotary Club 1,500 Membership fees in Tennis Club 6,000

PRClicensefee 1,000

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Although Mr. Sebaste heads the company’s sales and marketing department, he is a CPA by profession. As such, he is an active member of PICPA. He is also a member of various organizations.

· The car repairs and maintenance are supported by official receipts i ssued in the name of Plazoleta. These are for the car owned by Plazoleta which is assigned to Mr. Sebaste.

· The representation expenses are supported by official receipts. However, only P8,000 were issued in the name of Plazoleta while the balance were issued in the name of Mr. Sebaste.

· The transportation expenses are supported by official receipts issued by the transportation contractor in the name of Mr. Sebaste for the account of Plazoleta. These are actual business transportation

expenses.

· The supplies expenses are supported by invoices issued in the name of Plazoleta.

· The groceries are supported by invoices issued in the name of Plazoleta. However, these are for the family of Mr. Sebaste.

· The driver and maid are personnel of Mr. Sebaste where the salaries are shouldered by Plazoleta. · The laundry expenses pertain to personal expenses of Mr. Sebaste which are supported by official

receipts in the name of Plazoleta. Plazoleta granted laundry allowance of P1,500 quarterly to Mr. Sebaste.

· The personal life insurance premium represents annual premium on the life insurance policy obtained by Mr. Sebaste. This is in addi tion to the annual group lif e insurance premium paid by Plazoleta of P1,000. Moreover, Plazoleta also granted Mr. Sebaste annual medical cash allowance of P10,000 which were properly supported by official receipts and invoices evidencing medical expenses issued in his name.

Mr. Sebaste received monthly salary of P120,000. Required:

1. Determine the monetary value of the fringe benefits granted to Mr. Sebaste for the quarter ended March 31, 20A1.

2. Determine the amount of fringe benefits tax (FBT).

3. Prepare the related journal entries for the year ended December 31, 20A1. Problem 18 – Foregone interest on loans

Del Pilar Company, Inc. provided the f ollowing loans and cash advances to Ms. Bonifacio for the year ended December 1, 20A1:

Date Loan Amount Terms

January 1, 20A1 Car loan P600,000 60 months; P10,000 monthly amortization (salary deduction); no interest

February 1, 20A1 Emergency loan 50,000 Payable on July 31, 20A1; no interest April 1, 20A1 Salary loan 120,000 6 months; P20,000 monthly amortization

(salary deduction); 5% annual interest payable monthly

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If the loans were payable monthl y through salary deduction, the first monthly amortization commenced on the last day of the month the loan was granted. If interest was charged, the interest was also paid through salary deduction. Moreover, loans and loan amortizations were paid promptly by Ms. Bonifacio through salary

deductions. Required:

1. Determine the quarterly monetary value of the fringe benefits granted to Ms. Bonifacio for the year ended December 31, 20A1.

2. Determine the amount of quarterly fringe benefits tax (FBT).

3. Prepare the related journal entries for the year ended December 31, 20A1. Problem 19 – Car plan, car lease and foregone interest

Rizal Services, Inc. provided the following car benefits to its two employees, Mr. Hidalgo, Operations Manager, and Ms. Karisma, Accounting Manager:

· Mr. Hidalgo

Rizal purchased a car for P1,000,000 on January 1, 20A1. This formed part of the fleet of assigned cars of the employees. This was assigned to Mr. Hidalgo on said date. The purchase price was paid by Rizal in cash. However, Mr. Hidalgo shouldered 30% of the acquisition cost of the car. The said amount was paid through salary deduction for P5,000 monthly starting January 31, 20A1 for 60 months.

· Ms. Karisma

Rizal leased a car for P25,000 monthly starting January 1, 20A1. This formed part of the fleet of assigned cars of the employees. This was assigned to Ms. Karisma. As agreed, Ms. Karisma will shoulder P5,000 of the rental payment since the maximum rental which can be shouldered by the company is only P20,000. The said amount will be paid through salary deduction. The initial P5,000 payment, however, was made on January 1, 20A1.

Required:

1. Determine the quarterly monetary value of the fringe benefits granted to Mr. Hidalgo and Ms. Karisma for the year ended December 31, 20A1.

3. Prepare the related journal entries for the year ended December 31, 20A1. Problem 20 – Foreign travel, holiday ex penses and educational assistance

Francisco Cars and Motors Corporation pai d the following expenses and benefits of i ts employees for the year ended December 31, 20A1:

· Mr. Fresco

He travelled to Los Angeles, US on March 1, 20A1 to attend a convention f or ten (10) days. The travel was supported by an invitation letter coming from the host organization. He incurred the following expenses which were paid by Francisco:

Airfare, business class (Manila to Los Angeles) P 50,000 Airfare, first class (Los Angeles to Manila) 120,000

Hotel charges 100,000

Food expenses 25,000

In addition, Mr. Fresco spent additi onal three (3) vacation. He incurred t he following expenses which were paid by Francisco:

Hotel charges P 30,000

Food expenses 6,000

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This was an additional benefit that was granted to Mr. Fresco.

Mr. Fresco also availed of educational assistance for his three dependents f rom Francisco. Two dependents availed of the scholarship program granted by the company. Francisco paid P250,000 tuition fee for each child during 20A1 (50% was paid in January and 50% in July). However, his third was not able to pass the scholarship exam administered by the company. Hence, t he child was not entitled to the scholarship. Nonetheless, Francisco still shouldered 50% of the tuition fee of the third dependent. The tuition fee amounted to P150,000 (50% was paid in January and 50% in July). · Ms. Kamagong

Ms. Kamagong started taking her MBA degree on January 1, 20A1. Her tuition fee and other

educational expenses incurred during 20A1 amounting to P100,000 (50% was paid in January and 50% was paid in July) was shouldered by the company. She is required to remain with the employ of the company for at least two years after obtaining her degree.

· Ms. Halaman

Ms. Halaman started studying culinary arts on January 1, 20A1. This is not related to her work. However, Francisco shouldered her tuition fee for the year amounting to P70,000 out of generosity. This was paid in February 20A1.

Required:

1. Determine the quarterly monetary value of the fringe benefits granted to Mr. Fresco, Ms. Kamagong and Ms. Halaman for the year ended December 31, 20A1.

3. Prepare the related journal entries for the year ended December 31, 20A1. Problem 21 – Fringe benefits received by certain individuals; applicable tax rate

Benedicto, a regional operating headquarters (ROHQ) granted the following benefits to its employees during the 20A1:

Subject to regular rates

Entitled to 15% tax Rental of housing facilities P3,000,000 P3,600,000 Rental of assigned cars (fleet of cars) 2,200,000 2,160,000

Rice subsidy 300,000 225,000

Membership fees in professional organization 200,000 150,000 Membership fees in sports club 100,000 75,000

Clothing allowance 120,000 90,000

· There were 20 employees who are subject to regular rates and 15 employees who are entitled to the 15% tax. No employees were hired and left the company during the year.

· Rice subsidy was granted monthly for P1,250.

· Clothing allowance granted amounted to P6,000 annually.

The P82,000 13th_{month pay and other benefits were already exhausted.}

Required:

1. Determine the monetary value of the fringe benefits granted to Benedicto’s employees. 2. Determine the amount of fringe benefits tax (FBT).

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UNIT 4. DEDUCTIONS FROM GROSS INCOME Ordinary and necessary business expenses

Problem 22 – Employee benefits; timing of deduction; lesser deduction, withholding tax requirements; illegal expenses

The following are some of the expenses ref lected in the profit and loss statement of Agila Corporation for the year ended December 31, 20A1:

Salaries and wages P 5,000,000

Specialbonuses 2,000,000

Regularbonuses 3,000,000

Other employee benefits 3,500,000

· The salaries and wages were accrued and paid to the employees during 20A1. These were properly subjected to withholding taxes.

· The special bonuses pertain to bonuses to be given to the employees based on thei r performance. These were accrued at year-end in compliance with Philippine Accounting Standards (PAS) 19. These were actually paid in March 20A2. However, only P1,800,000 was paid. As a matter of policy, Agila grants bonuses to its employees annually depending on their performance and the company’s

performance. The final amount is normally determined in F ebruary of the subsequent year based on the performance evaluation which are usually completed every January for prior year’s performance.

However, it is required that the employees remain with the employ of the c ompany at the time the

bonus is paid. Otherwise, the bonus will not be paid. These bonuses were only subjected to withholding taxes in March 20A2 at the time of payment.

· There were special bonuses accrued in 20A0 of P2,500,000. However, P2,600,000 was actually pai d to the employees in April 20A1. These were subjected t o withholding taxes at the time of payment.

· The regular bonuses pertain to the 14th_{month pay which was paid in January 20A2. These were}

accrued at year-end in compliance with PAS 19 since these pertain to services rendered i n 20A1. The amount accrued pertains to the actual of bonus that was paid in January 20A2. These were properly subjected to withholding taxes at the time of accrual.

· There were regular bonuses paid in 20A0 of P1,200,000. These were properly subjected to withholding taxes at the time of accrual. These were actually paid in January. However, Agila only claimed

P1,000,000 as income tax deduction i n 20A0. It wanted to claim the P200,000 as deduction in 20A1. · The other employee benefits include “de mi nimis” benefits of P2,000,000, and other benefits of

P1,200,000 granted and paid to the employees during 20A1. The balance of P300,000 pertain to facilitation fees. The “de minimis” benefits were not subjected to withholding taxes. However, other benefits were properly subjected t o withholding taxes. With respect to “de minimis” benefits, P1,500,000 of which pertain to the threshold provided under the regulations. However, the balance pertain to the amount in excess of the threshold. With respect to facilitation fees, t hese were paid to government personnel to expedite the process of Agila’s application for tax incentives. These were not properly supported by documents and pocket by government personnel.

Required: Determine the amount of deductible business expense for the year ended December 31, 20A1. Problem 23 – Stock options, equity settled transaction

The board of directors of Kapamilya Corporation adopted a fixed stock option plan to supplement the salaries of certain executives. The options to buy common stock were granted as follows:

Date Employee Number of

Shares

Exercise Price Price of Shares at Date of Grant

Option Value at Date of Grant

Jan. 1, 20A1 D. R. Tawa 80,000 P30 P32 P 9

Jan. 1, 20A2 J. K. Ngiti 45,000 38 41 10

Jan. 1, 20A3 B. D. Halakhak 25,000 43 47 11

The options are nontransferable and can be exercised beginning three years after the date of grant, provided the executive is still employed by the company. The stock options were exercised as follows:

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Date Employee Number of Shares

Price of Shares at Date of

Exercise

December 31, 20A4 D. R. Tawa 80,000 P48

December 31, 20A5 J. K. Ngiti 45,000 43 December 31, 20A6 B. D. Halakhak 25,000 49

The benefits were subjected to fringe benefits tax (FBT). The stock of the company has a P1 par value. The accounting period for the company is the calendar year.

Required: Determine the deductible expense for the year ended December 31, 20A1 to 20A6. Problem 24 – Stock awards, equity-settled transaction

Kapuso Corporation established a stock awards plan for its employees. The plan was established on January 1, 20A1. Under the plan, each employee will be granted 200 Kapuso shares on January 1, 20A4 provided they remain with the company for three years. The fair value of the stock awards was P12 per share on January 1, 20A1 and the average fair value during 20A1 was P14. The fair market value of Kapuso shares on January 1, 20A4 was P18 per share. The par value of the shares was P5 per share.

The no. of employees on selected dates was as follows: December 31, 20A1 150

December 31, 20A2 185 December 31, 20A3 170

Assume that employee hiring and resignations or terminations occurred on January 1 of each year. The stock awards were awarded to 130 employees on January 1, 20A4 for services rendered in 20A1. These were properly subjected to withholding tax at the time of the grant of the stock awards.

Required: Determine the deductible expense for the year ended December 31, 20A1 to 20A4. Problem 25 – Share appreciation rights, cash-settled transactions

San Juan Corporation established a stock option plan that provides for cash payments to employees based on the appreciation of stock prices from an established option price. The plan was instituted on January 1, 20A1 and provides for benefits to employees who work for the succeeding three years. Cash payments to employees will be made on January 1, 20A4, and will equal the excess of t he stock price over the option price on that date. In total, 10,000 of these cash stock appreciation rights (SARs) were granted to employees.

The option price established for the stock is P10 per share. The market price of San Juan stock on selected dates in 20A1 to 20A3 were as follows:

January 1, 20A1 P15

December 31, 20A2 16 December 31, 20A3 20 December 31, 20A4 18

The SARs were properly subjected to withholding tax at the time of payment.

Required: Determine the deductible expense for the year ended December 31, 20A1 to 20A4. Problem 26 – Compensation for personal services

The following are independent situations relative to compensation for personal services paid or incurred by Kapatid Corporation for the y ear ended December 31, 20A1:

a. Kapatid paid Mr. El Nido salaries of P8,000,000 during the year. He is a major stockholder of Kapatid and he is also its president. Presidents of corporations with similar business, similar size and v olume of business as Kapatid receives an average salaries of P6,500,000. The entire salaries were subjected to withholding tax on compensation.

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b. Kapatid paid monthly salary of P8,000 to the son of Mr. El Nido for 12 months. His son was still

studying and he did not render any service to Kapatid. The salaries were not subjected to withholding tax since the amount paid was equivalent to the minimum wage.

c. On January 1, 20A1, Kapatid hired Mr. El Nido as its Vice President for Marketing. As agreed, his monthly salary was P300,000. He received 13 months salaries during the year. In addition, he was also entitled to a bonus equiv alent to 5% of the company’s profit. However, only 3% of the net profit was paid during 20A1. No additional bonus will be paid. Kapatid’s net profit during the year amounted to P10,000,000. The salaries and bonuses were properly subjected to withholding t ax.

d. Kapatid granted its employees free goods with fair market value of P4,000 per employee during the year as Christmas gifts. The t otal fair market value of goods granted amounted to P2,000,000. These were not subjected to withholding tax.

e. Kapatid granted its employees who were affected by typhoon free clothes with fair market value of P5,000 per employee. The total f air market value of clothes granted amount to P5, 000,000. These were subjected to withholding tax.

f. Kapatid paid separation pay of P2,500,000 to certain redundant employees during the year. These were not subjected to withholding tax.

g. Kapatid paid back wages to certain employees who were terminated in 20A0 amounting to P3,000,000. Although these pertain to services rendered by the employees in 20A0, the amount of back wages was

only determined and fixed in 20A1. These were properly subjected to withholding tax. Required: Determine the deductible expense for the year ended December 31, 20A1.

Problem 27 – Travel expenses; entertainment, amusement and recreation expenses; documentation requirements

Ms. Maharlika, CPA, is a private practitioner, with offi ce at Makati City. She renders tax and accounting services to her clients. During 20A1, she derived gross revenues amounting to P10,000,000 for sale of services with discounts of P240,000. She and her staff incurred the following expenses:

· Taxi fare from office to the client within Metro Manila and vice versa of P50,000. These are supported by taxi official receipts issued in the name of Ms. Maharlika.

· Bus fare from office to the client within Metro Manila and vice versa of P12,000. These are supported bus receipts. However, Ms. Maharlika’s name was not indicated on the face of the bus receipts. · Airplane fare for domestic travels which are client related of P250,000. These are supported by plane

tickets and official receipts issued in t he name of Ms. Maharlika.

· Airplane fare for international travels in connection with business conventions of P125,000. These are supported by plane tickets and official receipts in the name of Ms. Maharlika. These are al so supported by official invitation from the hosts.

· Hotel and food charges for domestic travels of P100,000. However, only P60,000 were business related while the balance pertains to personal expenses. The entire amount was supported by official receipts issued in the name of Ms. Maharli ka.

· Hotel and food charges for overseas travels of P80,000. Out of this amount, P25,000 were personal in nature. The entire amount was supported by official receipts issued in t he name of Ms. Maharlika. · Fixed representation expenses paid to her employees of P100,000. However, these were not subjected

to withholding tax.

· Restaurant charges of P45,000 supported by official receipts issued in the name of Ms. Maharlika. Out of this amount, P30,000 pertains to expenses incurred in entertaining her clients while the balance pertains to expenses related to internal meetings with staff. These were supported by official receipts issued in the name of Ms. Maharli ka.

· Membership fees of P12,000 for membership in various professional organi zations. These were supported by official receipts i ssued in the name of Ms. Maharlika.

· Restaurant and hotel charges of P8,000 for attendance in business meetings of v arious professional organizations. These were supported by official receipts issued in the name of Ms. Maharlika.

· Tickets for various movies, concerts and plays of P52,000 incurred in entertaining clients. These were supported by official receipts i ssued in the name of Ms. Maharlika.

· Charges of sports club for P25,000 incurred in entertaining clients. These were supported by official receipts issued in the name of Ms. Maharlika.

Required:

1. Determine the deductible travel expenses for the year ended December 31, 20A1.

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3. Determine the deductible entertainment, amusement and recreation (EAR) expenses for the year ended December 31, 20A1.

4. Determine the deductible expenses other than travel and EAR expenses for the year ended December 31, 20A1.

5. Assume that Maharlika is engaged in sale of goods, determine the deductible EAR expenses for the year ended December 31, 20A1.

6. Assume that Maharlika had sale of goods of P2,000,000 with P180,000 discount, and sale of services of P10,000,000 with P300,000 discount, determine the deductible EAR expense for the year ended December 31, 20A1.

Problem 28 – Rental and related expenses, repairs and maintenance

Matino Corporation needs a warehouse. O n January 1, 20A1, it entered into a lease contract with Matibay Corporation with the following terms:

Term 5years

Total rentals for 5 years P1,000,000

Annual real property tax (RPT) shouldered by Matino 30,000

The rentals were payable every January 1, in five annual equal i nstallments. During 20A1, Matino incurred the following expenditures in connection with the l eased warehouse:

Ordinary repairs of wall and posts P100,000

Replacement of windows and roofs 200,000

Ordinary repairs neither materially add to the value of the property nor prolonged its life. However, the

replacement of the windows and roofs, which were incurred on July 1, 20A1, arrested the deterioration of the property but it maintained it s life. The remaining life of the warehouse is 8 years.

In 20A2, Matino constructed leasehold improvements on said leased warehouse for P300,000. The construction was completed on March 31, 20A2. Said im provements were utilized starting April 1, 20A2 with useful life of 7 years.

Required:

1. Determine the deductible expense for the years ended December 31, 20A1 and 20A2. Identify the nature of the expense.

2. Determine the capital expenditures for the years ended December 31, 20A1 and 20A2. Explain why these are non-deductible.

Problem 29 – Security, janitorial, manpower and adv ertising expenses

Mabini Corporation availed the following services for the year ended December 31, 20A1: · Security services of Magdiwang Corporation

Salaries of security guards P300,000

Agency fees 30,000

· Janitorial services of Maaliwalas Corporation

Salaries of janitors P250,000

Agency fees 25,000

· Manpower services of Maligalig Corporation

Salaries of personnel P500,000

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· Services of Mayaman Corporation, advertising agency, and Maligaya Broadcasting Company, media supplier

Advertising charges (payable to Maligaya) – 85% P850,000 Agency commission (payable to Mayaman) – 15% 150,000

Required: Determine the deductible expense on the part of Mabini and the other party or parties for the year ended December 31, 20A1. Indicate the nature of the expense.

Problem 30 – Expenses of farmers

Magsasaka, Inc. incurred the following expenditures on January 1, 20A1 in connection with its coconut plantation with farm:

Coconut seedlings and seednuts P 700,000

Heifer 2,000,000

Feeds 350,000

Farm machines and equipment 1,200,000

Hand tools including shovels and rakes 250,000 On July 1, 20A1, Magsasaka incurred t he following expenditures:

Gasoline and fuel for machines P 450,000

Feeds 600,000

Heifer 300,000

Landmaintenance 800,000

Utilities 750,000

Other labor expenses 1,500,000

Required:

1. Determine the deductible ordinary and necessary expenses for the year ended December 31, 20A1. 2. Determine the capital expenditures for the year ended December 31, 20A1

Problem 31 – Expenses of private educational institutions

Magaling University, a proprietary educational institution, incurred the following expenditures for the year ended December 31, 20A1:

Rentals 800,000

Electricity and other utilities 600,000

Repairs and maintenance expenses 500,000

Transportation and travel expenses 250,000

Professionalfees 350,000

Communication expenses 120,000

Training 100,000

Supplies 150,000

Security and janitorial 225,000

Insurance 275,000

Salariesexpense 3,500,000

Other employee benefits 1,250,000

Construction of building to be used as classrooms 3,000,000 Equipment for classrooms and other educational activities 900,000 Construction of building to be leased to various businesses 3,500,000 Equipment related to building for lease 720,000 The following are the additional information:

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· Repairs and maintenance expenses pertain to ordinary expenses which did not improve or prolong the life of the property.

· A portion of transportation and travel expenses amounting to P25,000 were not properly supported by documents issued in the name of Magaling.

· Security guard salaries amount to P100,000. Taxes were properly withheld by the securities on said salaries.

· Salaries expense includes P350,000 salaries of mi nimum wage earners which were not subjected to withholding taxes.

· Other employee benefits include P800,000 “de minimis” benefits within the threshold. However, the balance pertains to “de minimis” benefits in excess of the threshold which were absorbed by the

P82,000 other benefits. The entire amount of other employee benefits were not subjected to withholding taxes.

· The construction of the buildings were completed on June 30, 20A1. It had estimated useful life of 30 years.

· The equipment were acquired on June 30, 20A1 and were immediately used by Magaling. It had estimated useful of 5 years.

· Magaling opted to claim as outright expense its capital expenditures for the expansion of school facilities.

· Magaling adopts the straight-line method of depreciation. Required:

1. Determine the deductible ordinary and necessary expenses for the year ended December 31, 20A1. 2. Determine the deductible ordinary and necessary expenses for the year ended December 31, 20A1 if

Magaling opted to capitalize and depreciate all its capital expenditures. Interest expense

Problem 32 – Interest expense, stipulated in writing, tax arbitrage, related parties

Tikling Company, Inc. had the following borrowings, adv ances and equity instruments during 20A1:

· Loan obtained from Itik Bank, a l ocal bank, on July 1, 20A0 amounting to P1,000,000 with 5% interest payable on July 1, 20A2.

· Non-interest bearing advances obtained f rom its affiliate, Maya Corporation, amounting to P500,000 on January 1, 20A1, payable on December 31, 20A3. For financial reporting purposes, the loan was

initially recognized in the books at P408,150 using market interest rate of 7%. Maya is wholly-owned by Kaya Corporation. Kaya is 60% owned by Mr. Polka. Mr. Polka also owns 30% of Tikling.

· Preferred shares of P1,500,000 with 10% dividend rate classified as liabilities for financial reporting purposes.

· Loan obtained from its affiliate, Surtido Corporation amounting to P2,000,000 bearing 8% interest on January 1, 20A0 payable on January 20A5. Surtido is a wholly-owned subsidiary of Pantomina, Inc. Pantomina is 80% owned by Mrs. Carinosa. Mrs. Cari nosa also owns 80% of Malong Corporation. Malong owns 90% of Latik and Latik owns 75% of Tikling.

During the year, Tikling derived t he following interest income:

· Interest income of P60,000 on bank deposits with Itik Bank, which were subjected to 20% final withholding tax.

· Interest income of P15,000 on bank deposits under the Expanded Forei gn Currency Deposit System of Itik Bank, which were subjected to 7.5% final withholding tax.

· Interest income of P20,000 on loans granted to Pantomina, its affiliate.

· Interest income of P25,000 on bank deposits Rasa Sayang Bank, a non-resident foreign bank located in Malaysia, which were subjected to 10% final withholding tax.

(24)

Problem 33 – Optional treatment of interest, tax arbitrage, interest on unpaid taxes

On January 1, 20A1, Binasuan issued five-year, zero-coupon bonds with total face value of P7,800,000 to various investors for P6,000,000. The proceeds of the bonds were used for the acquisition of a land, where the company constructed its factory building. The l and was acquired on the same date.

On April 1, 20A1, Binasuan Corporation borr owed P5,000,000 bearing 10% interest specifically for the

construction of its new building payable at the end of 5 years. The interest on the loan was payable every April 1. Binasuan incurred the following costs in connection with the loan (assume incurred on April 1, 20A1):

Commissions paid to its agent P100,000

Guarantee fees paid to its parent company, Habanera, Inc.

for the loan guarantee 1.5% of the loan amount

Bank charges 1.0% of the loan amount

It temporarily invested P3,500,000 proceeds on April 1, 20A1 which matured on July 1, 20A1. Said investment earned interest of 8% per annum, which was subjected to 7.5% final withholdi ng tax.

The construction of the building began on April 1, 20A1 and the building was completed on December 31, 20A2. Expenditures on the building were made as follows:

January 1, 20A1 P 4,000,000

September 1, 20A1 3,500,000

December 1, 20A1 3,200,000

April 1, 20A2 2,500,000

July 31, 20A2 1,000,000

Binasuan had also the following other loans which were outstanding for the years ended December 31, 20A1 and 20A2 for general purposes:

Principal 14% Short-term Note P4,000,000 11% Long-term Loan 7,000,000 The interest on these loans was payable every January 1.

Binasuan also paid the following deficiency taxes and interest in 20A1 and 20A2:

20A1 20A2

Deficiency taxes P3,500,000 P3,800,000

Interest 1,400,000 1,520,000

It also derived interest income of P300,000 in 20A1 and P450,000 in 20A2 on bank deposits, which were subjected to 20% final withholding t ax.

Required:

1. Determine the deductible interest for the years ended December 31, 20A1 and 20A2 if Binasuan opted to treat interest incurred to acquire properties used in trade or business as outright expense.

2. Determine the deductible interest for the years ended December 31, 20A1 and 20A2 if Binasuan opted to treat interest incurred to acquire properties used in trade or business as capital expenditure.