Chapter 9 Losses Problem 9-1 True or False Write True if the statement is correct or False if th e statement is incorrect.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.
Loss incurred from sale of personal property is ordinary loss. Loss from sale of capital asset is deductible from business income If there is a partial loss, the allowable deduction will be the book value of the damaged asset at the time of loss. Expenses not reported when incurred cannot be claimed as NOLCO. A loss claimed as deduction from estate tax purposes should not be claimed as deduction for income tax purposes. Gambling losses can be deducted from gambling gains and capital gains. Losses from business operation are or dinary losses. Loss incurred from the sale of business furniture is deductible from business income. Loss from embezzlement of business fund is a loss deductible from business income. Fire damage on the sold proprietorship’s equipment is deductible from business income. Typhoon damage on the residence of the owner of the business is not allowed as deduction from business income. Net operating loss of prior year could be claimed as deduction from business income of the current year. Partial loss on business property, plant and equipment is deductible loss from business income. A loss claimed as deduction for estate tax may be claimed as deduction for income tax purposes. NOLCO could be deducted from next year’s business income of a sole propr ietorship which is opting for optional standard deduction. The NOLCO should be deducted from gross income to arrive at base amount for the computation of MCIT.
Problem 9-2
Multiple choice Select the letter that contains the best answer.
1.
Which of the following is deductible from gross income? a. Personal Expenses c. Bad Debts b. Net Capital Loss d. Estimated loss
2.
Which of the following is not deductible from business income? a. Casual losses on properties connected in the conduct of trade or business b. Loss of business property due to embezzlement c. Loss on exchange of capital asset d. Net operating loss carry over
3.
If the casual loss on business property is partial, the deductible loss is the a. replacement cost to put back the business property to its operating condition b. actual cost of damaged on business property c. higher amount between a and b d. lower amount between a and b
4.
Which of the following is not correct regarding NOLCO a. NOLCO is allowed as deduction from business income for the next 3 succeeding years b. Domestic and resident foreign corporation subject to normal income tax is allowed with NOLCO.
c. Offshore banking unit of a foreign corporation is allowed with NOLCO d. Private education institution enjoying preferential tax rate is allowed with NOLCO 5.
Which of the following is entitled to claim NOLCO? a. Employee with respect to his compensation income b. Foreign international carrier c. Offshore banking Unit d. Self employed individual
6.
Which of the following statement is correct? a. NOLCO is an item of deduction from business income b. Compensation earner could claim NOLCO c. NOLCO could be claimed together with the optional deduction d. NOLCO is equal to operating loss reported in the income statement for prior year
`
7.
Which of the following is allowed as deduction from business income? a. Loss on the sale of property not directly used in the business b Losses on inventory which is fully covered with insurance c. Fire damage on full y depreciated business equipment 8. Statement 1: Losses claimed as deduction from gross estate will reduce the net taxable estate. Statement 2: Losses claimed as deduction from gross estate would also reduce the taxable income of the estate a. Only statements 1 is correct b. Only statements 2 is correct c. Both statements are correct d. Both statements are incorrect 9.
Statement 1: A loss in one line of business is not permitted as allowable deduction from gain in another line of business, if one of the two lines is exempt from tax Statement 2: Losses from transactions between related party taxpayers may be allowed as deduction as long as supported by documentation a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are incorrect
10. Statement 1: When the loss is cause by embezzlement of funds by a known person, the loss sustained is not deductible on the year of commission or discovery, but in the year when the right of recovery becomes worthless Statement 2: The loss on mortgage is determined upon sale of the property by the mortgagee a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are incorrect 11. Statement 1: Casualty losses of propective crops are deductible loss. Statement 2: Loss on purchased livestock is a deductible loss. a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are incorrect
12. Statement 1: Domestic and resident foreign corporation taxed during the year with MCIT cannot claim NOLCO. Statement 2: Decline in the value through market fluctuation of investments in stock of a corporation is not a deductible loss. a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are incorrect
Deduction from Business income Problem 9-3 During the year, the following losses were incurred: A. Loss incurred on sale of investment in stocks P 200,000 B. Loss from sale of business equipment 100,000 C. Loss of personal equipment 50,000 Which of the above losses could be claimed as deduction from business income? a. A c. C b. B d. All of the above Problem 9-4 Deduction from Business income The following transactions transpired during the year: Cost Sales Price Inventory P1,400,000 P2,500,000 Temporary investments 500,000 450,000 Land(capital asset) 1,000,000 800,000
How much could be claimed as deduction from business income? a. P0 c. P250,000 b. P50,000 d. P450,000
Problem 9-5 Deductible loss on fire What would be the amount of loss that could be deducted from business income for the property that was damaged by fire in 200x and has a remaining useful life of 4 years at date of fire? The property was acquired at 100,000 and depreciated at 10% per year without scrap value. a. P10,00 c. P40,000 b. P20,000 d. P60,000
Problem 9-6 Deductible loss on Rehabilitate X trading incurred losses from fire on its equipment with a net book value of P50,000 when the fire happened. It will need P60,000 to rehabilitate the extent of damages on the equipment which was not covered by any insurance policy
The equipment has an accumulated depreciation of P150,000 at date of fire. To acquire new equipment of the same type will cost P110,000. The allowable deductible loss is a. P200,000 c. P60,000 b. P110,000 d. P50,000
NOLCO Problem 9-7 The net operating loss reported in the GAAP income statement is P50,000 after P200,000 operating expenses. Part of the operating expenses is a P10,000 bad debts based on estimate. How much NOLCO would be deductible from the succeeding year’s income?
a. b.
P260,000 P60,000
c. P50,000 d. P40,000
Problem 9-8 NOLCO The previous year’s operating loss amounted to P50,000. How much would be the NOLCO that could be deducted from current year’s income of business opting for optional standard deduction? a. P55,000 c. P5,000 b. P50,000 d. P0
Partial fire loss Problem 9-9 The business equipment which has a carrying value of P25,000 was partially damaged by fire. The actual cost of P30,000 was incurred to put back the business equipment to its operating condition.
Required: Compute for the deductible loss from business income.
Problem 9-10 Total Fire Loss The business building with an acquisition cost of P1,200,00 and estimated useful life of 20 years was totally th damaged by fire at the end of its 10 year P200,000 worth of damages was was recovered from insurance scrap recovered were realized at 20,000.
Required: Compute for the deductible deductible loss from business income.
Problem 9-11 Destruction of old building The business incurred P120,000 to raze down an old existing building to give way to the construction of its factory building. Scrap from the demolished building were realized f or P20,000.
Required: Compute for the deductible loss from business income related to above construction.
Problem 9-12 Deductible loss and reportable gain Kool corporation is holding common stocks of Lang Corp. acquired at cost of P100,000. At balance sheet date, investments in Lang’s stocks has a fair market value of P90,000. On June 30 after balance sheet date the investment in stocks of lang were sold for P110,000
Required: Compute for the deductible loss at balance sheet date and reportable gain on June 30 NOLCO Problem 9-13 The trading business reported a net loss of P50,000, net of P300,000 operating expense. The operating expense included P20,000 estimated bad debts and estimated warranty expense of P10,000
Required: Compute for the net operating loss that could be carried over for the next 3 succeeding years. NOLCO Problem 9-14 The following are the comparative income statements of Venus: Year 1 Gross Profit P500,000 Estimated Bad debts 20,000
Year 2 P600,000 10,000
Other operating expenses
580,000
490,000
Required: Compute for the NOLCO that could be deducted from year 2 income.
Problem 9-15 Mortgage Property In year 1, the business foreclosed the property of delinquent debtor with fair value of P1,000,000 to recover the notes receivable of P1,500,000. In year 2, the foreclosed property was sold for P1,800,000.
Required: Determine the gain or loss in year 1 and year 2. Mortgage Property Problem 9-16 The mortgage property with fair value of P1,000,000 at date of grant of loan was foreclosed by the bank when the business over due loan of P500,000 was not paid. The foreclosed property was offered for public auction and no bidder offered any price. The fair value at the date of auction us estimated at P400,000.
Required: Compute for the deductible loss from business income of the bank Problem 9-17 Various Losses Mr. Guiller Dunong, a farmer, reports the following: Income from farming Cockpit winnings Shrinkage of farm products produced Loss of potential farm products due to calamities Cockpit losses
P300,000 50,000 20,000 150,000 100,000
Required: How much is the deductible loss? Problem 9-18 Various Losses Mr. Scotty Saboy incurred the following losses in connection to his construction business: Compensatory liquidated damages P 50,000 Loss on actual damages 30,000 Loss on robbery(construction Supplies) 50,000 Loss on pilferage of business supplies 10,000 Book value of partially damaged machine due to fire 200,000 Replacement cost of damaged portion of machine 150,000 Loss on sale of capital asset 25,000
Required: Compute the amount of deductible loss from gross income
Problem 9-19 NOLCO and OSD X, reported the following gross receipts, cash disbursements and NOLCO. Gross receipts P2,000,000 Cost of service 500,000 Cash Disbursement 400,000 NOLCO last year 300,000
X opted to deduct OSD because the cash disbursement that represent business expense are not properly supported with documentation.
Required: Compute the following: 1. If x is an individual taxpayer, how much is the amount of allowable deductions? 2. If x is a corporation, how much is the amount of allowable deductions?
Problem 9-20 NOLCO,OSD and MCIT In the fourth year of Y Co., the company reported the following: Sales,200r 2,000,000 Cost of sale 1,000,000 Operating expenses 990,000 NOLCO 200a 200,000
Due to losses and since the company has been in existence for more than 3 years, the BIR required Y co. to pay a minimum corporate tax of 2% based on gross income. Required: Compute the following: 1. Income tax due and payable in year 200r 2. Total NOLCO in year 200a
Problem 9-21 Various Losses A CO. reported the following losses during the year: Burglary loss-cash Embezzlement loss-cash Pilferage loss-office supplies Capital loss on salo of capital asset(long term) Decline in the value of investment in stocks Casualty losses
50,000 25,000 5,000 10,000 30,000 15,000
The Burglary loss was reported to the police station within 90 days but such loss was not reported to the BIR. The cashier was traced capable for the embezzlement. Required: Compute the following: 1. Deductible loss from gross income 2. Deductible loss from capital gain
Losses from farming Problem 9-22 The following losses were incurred by Dizon Farms during the calendar year: Shrinkage loss if farm products produce P140,000 Casualty losses of propective products 40,000 Casualty losses of animals raised in the farm 20,000 Death of livestock previously purchased 10,000 Cost of property expropriated by the government: The government paid only 10,000 as compensation 30,000
Required: Compute for the deductible farm loss
Problem 9-23 Adjustment of Losses X Co. constructed a building at a cost of 10,000,000 with an estimated useful life of 30 years. After 5 years, subsequent additions and improvements which were properly capitalized amounted to 500,000. The building was insured for 6,000,000 against fire at the time it was totally destroyed by fire at year 8.
Chapter 10
Problem 10 – 10 – 1 1 True or False Write true if the statement is correct or False if the statement is incorrect.
1. A self-employed taxpayers is required to file his quarterly income tax return. 2. A general professional partnership is taxed in the same manner as corporation. 3. A passive income outside the Philippines by a nonresident alien is subject to annual income tax in the Philippines. 4. Both creditable and final withholding taxes are withholding at source. 5. The excess of personal exemption over compensation income cannot reduce the net operating income from business. 6. In general, passive income within is subject to final tax. 7. The annual income taxes are usually increased by creditable taxes. 8. The optional standard deduction can be deducted from the quarterly income tax. 9. Passive income within by a resident citizen is allowed to be reduced by personal exemption. 10. Reporting compensation and business income in one tax return using the same tax rate is an example of global tax system. 11. Allowing personal exemption as reduction to taxable compensation income is an example of global income tax system. 12. Resident aliens are taxable for their income earned within and outside the Philippines. 13. There is net capital gain if the ordinary gain exceeds ordinary loss. 14. Only resident citizen could opt for 40% standard deduction for business income. 15. A single individual, fully supporting his minor sister could claim P75, 000 personal exemption. 16. A married individual with 5 dependent children could claim only P100, 000 total personal exemption.
Problem 10 – 10 – 2 2 Multiple Choice Select the letter that contains the best answer.
1. When different type of income are subjected to common tax rate, the tax system is described as: a. Global tax system c. scheduler tax system b. Gross income tax system d. final tax system 2. Scheduler tax system of income taxation means: a. All types of income are added together to arrive at gross income b. Separate graduated rates are imposed on different type of income. c. Capital gains are excluded in determining gross income. d. Compensation income and business professional income shall be added together in arriving at gross income. 3. Which of the following taxpayers are taxed for income earned within and outside the Philippines. i. Resident citizen
4.
5.
6.
7.
8.
9.
ii. Resident alien iii. Domestic corporation iv. Resident foreign corporation Choices a. i,ii,iii,and vi c. i and iv only b. i,ii and iv only d. i and iii only a self employed taxpayer is required to file his quarterly income tax return in a. BIR Form 1700 c. BIR Form 1701Q b. BIR Form 1701 d. BIR Form 2316 A domestic corporation is required to file its annual income tax return in a. BIR Form 1700 c. BIR Form 1701Q b. BIR Form 1701 d. BIR Form 2316 The quarterly tax return of a commercial partnership is required to be reported in BIR Form a. 1700Q c. 1702Q b. 1701Q d. 2316Q Which of the following is required to file quarterly income tax return? a. Compensation income c. Annual income tax b. Passive income d. Capital gain An income tax that is used to reduced the income tax due at the end of the year. a. Creditable withholding income tax c. Annual income tax b. Final withholding income tax d. Capital gains tax Statement 1: NOLCO can only be deducted from the operating income of the last quarter. Statement 2: The individual taxpayer’s personal exemption can only be deducted from the operating income of the last quarter. a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are not correct
Problem 10 – 10 – 3 3 Resident Citizen’s Compensation A resident citizen reported compensation income amounting to P167.500, net of P22.500 withholding tax. The tax rates for individual are as follows:
P8, 500 for P70, 000 + 20% in excess of P70, 000 P22, 500 for P140, 000 + 25% in excess of P140, 000 His net tax payable would be a. P22, 500 c. P5,000 b. P15,000 d. None
Problem 10 – 10 – 4 4 Compensation and Business Income Mr. A, a MWE, reported a gross compensation income of P90, 000 and business gross receipts of P200, 000. How much is the net taxable income if the taxpayer opted to elect the optional standard deduction? a. P – 0 – 0 c. P160, 000 b. P70, 000 d. P240, 000
Problem 10 – 10 – 5 5 Quarterly Income and OSD For the months of January, February, March and April, ahead of family reported a business gross of P50, 000, P60, 000, P70, 000 and P80, 000, respectively. Opting for standard deduction, his net taxable income for the first quarter is a. P209, 000 c. P106, 000 b. P108, 000 d. P58, 000
Problem 10 – 10 – 6 6 Corporation’s Net Taxable Income A domestic corporation reported a gross profit of P1, 000, 000. Its sales amounted to P2, 500, 000. Its ending inventory is P500, 000 more than the beginning inventory. Its operating expenses amounted tom P400, 0000. Its net taxable income would be a. P1, 000, 000 c. P2, 600, 000 b. P3, 000, 000 d. P600, 000
Problem 10 – 10 – 7 7 Income Tax on Final Adjusted Return For the previous 3 quarters, the total income tax paid by a domestic corporation amounted to P900, 000. Its total business income for the t he year amounted to P5, 500, 000 and expenses of P2, 220, 000. How much would be its net tax payable per final adjusted return? a. P1, 120, 000 c. P220, 000 b. P900, 000 d. P150, 000
Problem 10 – 10 – 8 8 Net Tax Payable (Refund) A resident foreign corporation paid P500, 000 income tax for the first 3 quarters. Its net taxable income after operating expense of P23, 500, 000 is equal to P1, 500, 000. What would be its net tax payable (refund) at the end of the year? a. P480, 000 c. P – 0 – 0 – b. P20, 000 d. (20.00)
Problem 10 – 10 – 9 9 Net Taxable Income of Resident Citizen The following are the reported income and expenses of a resident citizen:
Compensation income Business income Business expenses Dividend income
___Within P250, 000 500, 000 200, 000 50, 000
____Outside P – 0 0 600, 000 300, 000 100, 000
Required: Compute for the net taxable income before personal exemption that should be reported in the annual income tax return.
Problem 10-9 Net Taxable Income of Resident Alien The following are the reported income and expenses of a resident alien:
Compensation income Business income Business expenses Dividend income
___Within P250, 000 500, 000 200, 000 50, 000
____Outside P – 0 0 600, 000 300, 000 100, 000
Required: Comute for the net taxable income before personal exemption that should be reported in the annual tax return.
Problem 10 – 10 – 11 11 Net Taxable Income of Nonresident Alien The following are the reported income and expenses of a nonresident alien:
___Within Compensation income
____Outside P 500, 000
Business income Business expenses Dividend income
600, 000 300, 000 100, 000
P 50, 000
Required: Compute for the net taxable income before personal exemption that should be reported in the annual; income tax return.
Problem 10 – 10 – 12 12 Net Taxable Income of Domestic Corporation The following are the reported income and expenses of a domestic corporation:
___Within P 500, 000 200, 000 50, 000
Business income Business expenses Dividend income from foreign corporation
____Outside P600, 000 300, 000 100, 000
Required: Compute for the net taxable income that should be reported in the annual income tax return.
Problem 10 – 10 – 13 13 Net taxable Income of Foreign Corporation The following are the reported income and expenses of a foreign corporation.
___Within ____Outside Business income P 500, 000 P600, 000 Business expenses 200, 000 300, 000 Dividend income from foreign corporation 50, 000 100, 000 Required: Compute for the next taxable income that should be reported in the annual income tax return.
Problem 10 – 10 – 14 14 Quarterly Income Tax Handsome Corporation’s quarterly operating records show the following:
Q Sales
U A R T ______First ____Second P1, 000, 000 P800, 000
E R S_________ ____Third _____Fourth P600, 000 P1, 200, 000
The cost of sale is 60% of sale and the business expenses allowed is 40% of gross income. Assume that the amounts are noncumulative. Required: Compute the income tax still due for the first, second, third and fourth quarters.
Problem 10 – 10 – 15 15 Quarterly Income Tax Data of Highland Corporation, a domestic corporation, for the year 200x are as follows: (Data are all noncumulative)
Q
U
A
R
T
E
R
S_________ Sales (noncumulative) Operating expenses before interest contribution Interest expenses Contribution (deductible in full) Other revenue: Dividend income (domestic)
and
______First P500, 000 120, 000
____Second P600, 000 10, 000
____Third P400, 000 15, 000
_____Fourth P900, 000 160, 000
10, 000
10, 000 20, 000
15, 000
15, 000 40, 000
40, 000
Royalty income Rent income Interest income
60, 000 30, 000 10, 000
30, 000 15, 000
30, 000 15, 000
30, 000 20,000
The gross profit is 40% based on sales. Required: Compute the following: 1. Quarterly income tax due and payable 2. Income tax still due and payable in the fourth quarter 3. Total passive income tax
Problem 10 – 10 – 16 16 Income Tax Still Due Mariposa Co., a domestic corporation, reported the following tax payments for the first to the third quarters of the taxable year (cumulative amount):
Quarters Business income Itemized allowance deductions Taxable income
First P2, 5000, 000 1, 500, 000 P1, 000, 000
Second P4, 000, 000 2, 500, 000 P1, 500, 000
Third P5, 500, 000 3, 000, 000 P2, 500, 000
Income tax Les: Payment previous quarters Income tax payments
P 320, 000 0 P320, 000
P 480, 000 320, 000 P160, 000
P 800, 000 480, 000 P 320, 000
For the fourth quarter, the company reported the following:
Business income Itemized allowable deductions Capital gains Passive income earned outside the Philippines Income tax withheld per BIR Form 2307 furnished by credit card company
P7, 500, 000 4, 000, 000 200, 000 100, 000 40, 000
Required: Determine the income tax still due and payable
Problem 10 – 10 – 17 17 Annual Income Tax Saddam, a single individual taxpayer, received the following income during the year.
Taxable monthly salary after allowable deductions, net of P4, 000 creditable withholding tax Interest income, net of final withholding tax of P2, 000 First three (3) quarters’ quarters’ taxable business income after allowable deductions, net of P90, 000 income tax for three (3) quarter’s income tax
The net taxable business income for the quarter is P110, 000. Required: How much is Saddam’s annual income tax?
P16, 000 8, 000 300, 000
