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Income Taxation Solution Manual 2019 ED

Accounting Information System (Tarlac State University)

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INCOME TAX SOLUTION MANUAL

Partner with us in ensuring quality tax University


education in your college. Focus on
assessments. Let us take care of the
contents. Real Excellence commit itself in
ensuring that your students get the most
INCOME
accurate, relevant and updated
information in the field.
TAXATION
OTHER TITLES:

1. Business and Transfer Taxation


SOLUTION
2. Taxation Reviewer
3. Fundamentals of Accountancy,
Business and Management 1 MANUAL
4. Fundamentals of Accountancy,
Business and Management 2 2019 TRAIN Edition
5. Applied Auditing by Assuncion, Ngina
and Escala

AUTHOR’S CONTACT

For any queries, commentaries or anything


for consultation. Please feel free to contact
Mr. Rex B. Banggawan at:

Globe #: 0995-464-7728 This document is restricted only for tax professors of


Facebook: Real Excellence our partner colleges and universities which adopt
E-mail: realexcellence@yahoo.com.ph our book as their textbook. This manual is
specifically encrypted for each college or university.
(Consultation is free. )
Please do not allow student access.
Note:
Subject to his availability, the author can be
invited to provide tax seminar or lecture in your
school for a reasonable fee.

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INCOME TAX SOLUTION MANUAL

Dear Tax Professors,

Greetings in God’s grace!

Our taxation system in the Philippines is besmirched by reported abuses in tax administration and
pervasive corruption. These disheartened many taxpayers not to properly reflect their taxes rationalizing
on corrupt government practices.

Our solemn duty as academician is to lay the foundation for the future correction of this defect in our
society by providing the best tax education our students deserve. Tax malpractices and corruption can be
limited by adequate public tax education.

Most schools fail on their duty in transforming their graduates as agents of change in society because
teaching tends to be too basic or too theoretical to be applied. As our mission, let us give our students more
practical knowledge by giving them the totality of taxation. Even if they are not tax majors, they should be
given the option and the chance to attain high level proficiency in taxation. This could transcend to career
opportunity for them.

Teach well and you will live forever! Your influence will forever stay in the minds and hearts of your
students. That excellence will multiply. Let us give our students a legacy of true competence. Let us give
them the best tax education we can give. Let us give them the type of excellence which is not feigned, not
masked, but real. Always remember that your service to fellow man is a service to God.

Let us join hand to promote a better tax education. Contact me whenever you need assistance. I will assist
in the best way I could. God bless you!

MY HUMBLE REQUEST TO MY BELOVED FELLOW PROFESSORS

Being a teacher myself, I strongly admit that books are excellent partners in classroom teaching. Creating
high quality books requires enormous time investments and efforts. I wrote this book over years of
continuous technical research, tax practice and conceptual refinement through my actual teaching in the
undergrad and in the review.

I am not an entrepreneur. Like you, I am a full-blooded teacher. I teach and write books to empower and
transform people. I hope and pray that you respect the dignity of my work in the same way you value
yours. I am praying that you will NEITHER give the students or reviewees copies of the solution
manual NOR tolerate the photocopying of my book in your classes. As accountants, we must collectively
act under our conscience to be true guardians of integrity. Please help stop book piracy. Please report
suspected counterfeit books to realexcellence@yahoo.com.ph. God bless you!

REX B. BANGGAWAN, CPA, MBA

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INCOME TAX SOLUTION MANUAL

INCOME TAXATION: LAWS, PRINCIPLES AND APPLICATIONS


TAX TEACHER’S MANUAL

Rex B. Banggawan, CPA, MBA

ABOUT TEACHING METHODOLOGY OF THE BOOK

Please be advised that the book is not written to impress tax experts. The book is intended as a guide to
students for them to understand and master the totality of the income taxation. Because of this, the book is
prepared in a sequential organization of topics. To optimize understanding and concept recall, some topics
may be briefly re-opened for discussion in future chapters of the book. This is not repetition. This is
deliberately intended for students to connect and interrelate new concepts with previous ones.

The book devised a vertical presentation of income taxation and diverted from the usual horizontal or NIRC
approach followed by most tax books. Under the horizontal approach, the tax schemes are discussed
separately for individuals and corporations. It is repetitive, time consuming and results to less accurate
understanding because students do not see the comparison of the two tax schemes for each class of
taxpayers. The vertical approach discusses the tax schemes for both individuals and corporations
simultaneously resulting in efficiency and better accuracy.

To maximize the effectiveness of your lecture, please follow the concept organization of the book. Do not
devise other concept arrangements based on other books. Doing otherwise will only confuse your
students. Other authors have their own methods. We have ours. The income tax teaching methodology of
the book is long proven in the undergrad and in the professional review to optimize understanding and
instill mastery.

Here is a list of some of the numerous student testimonials regarding our book:
1. “I am thanking you because without your books, siguradong nahirapan po ako sa taxation… I know you
are God’s blessing to me, to us. I hope na marami pa po kayong matulungan na students especially sa taxation.”
- May Anne Reyes from UST Manila (Top 7 in the October 2015 CPA Board Exam)
2. “Aminado pu ako wala akong natutunan sa undergrad sa tax kaya binasa ko po ng mabuti yung book nyo
during review. Ang galing po ng pagkakaorganize ng topics at yung presentation madaling
maintindihan. Salamat po!” - Ednel Tanhueco Datu, Pampanga
3. “I am a working student, so pagdating ko sa school di na ako masyado nakikinig sa school sa sobrang pagod.
Weekend lang po ang time ko mag-aral. Pero sa tuwing binabasa ko ang book niyo, para na rin may nag-
eexplain na teacher sa akin… Salamat po! Pinadali ninyo buhay ko.” Francis Reyes Remegio – Holy Angel
University, Angeles City
4. “Very helpful po ng book niyo sa tax Sir. I’m not a student of yours Sir nor have met you in person but one
thing is for sure, many students like me owe so much from you for introducing to us your taxation book.
 God bless po.” Angelica Balubal, Tuguegarao City
5. Replying to a social media user inquiry of which tax book is best, Paulo Relucio Dula replied, “Tax – Rex
Banggawan. Bago lang pero sobrang personal teacherna yung book kapag binabasa”
6. “Good day Sir! Just drop by to say thanks for your wonderful masterpiece, Income Taxation. Truly
simplified, principle-based approach.” – Jhoven Mabaquiao from Divine World College of Legaspi
7. “…. We are using your textbooks both Income and Business and Transfer Taxation. I am very happy with the
way the topics are presented and the books help me a lot in understanding our lessons very well….” –
Joshtien Adorable, BSA student FEU Makati
8. “Good evening Sir. I am an accountancy student from Pampanga. Your book for taxation is amazing. I was
able to appreciate tax even more…” – Mark Angelo Mallari
9. “...Dumali ang taxation dahil sa book mo… Yung dating minememorize lang namin, ngayon naisapuso
na namin even without memorizing kasi the way you illustrate the topic eh naiintindihan agad.” -
Kusela Mae Uganiza from University of St. Louis Tuguegarao
10. “We find your book comprehensive, simple and direct to the point.” Alberto Calubaquib, Jr. – University of
Saint Louis – Tuguegarao City

The book is your teaching partner. You can capitalize on its teaching capability to lessen extensive lectures.
By following and reinforcing the concept arrangement as the lecture progresses, it will save you more time
and effort; thus, giving you more time in monitoring and assessing student understanding and skills in
applying the tax concepts and procedures.

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In teaching, focus on the basics and main points. Let students take care of the details. Do not consume your
time discussing the details. The book is designed to be self-teaching. It can teach students even with
minimal teacher supervision. Students also need some extent of self-learning to develop their self-esteem.
This is particularly vital to their future professional development.

CHANGES IN THE 2019 EDITION


This edition packages all changes introduced by the TRAIN law.

CONCEPTS TO FOCUS
A. Fundamental principles of taxation
1. Theories of cost allocation
2. Tax as a lifeblood to the government (Lifeblood doctrine)
3. Limitations of the taxation power
4. The concept of situs
5. The concept of double taxation and the remedies to double taxation

B. The concept of income – discuss what income is taxable under the NIRC
1. The concept of gross income
a. The different concepts of capital (with finite and infinite values)
b. The meaning of realized benefit – connect this to the ability to pay theory
2. The classification of income taxpayers
a. Individuals (RC, NRC, RA, NRA-ETB, NRA-NETB)
b. Corporations (DC, RFC, NRFC)
3. The situs of income – students need to know the place of taxation of each type of income
4. The difference between active and passive income

C. The taxation schemes


 Emphasize how income is taxed under the NIRC.
 Important: Make sure students well comprehend and mastered the tax schemes.

D. Concepts of accounting periods and accounting methods


1. Accounting period
a. Who uses calendar
b. Who uses fiscal year
c. When to file income tax return in either type of accounting period
2. Accounting methods
a. Accrual basis
b. Cash basis
c. Installment method

E. Exceptional taxation scheme


1. Final income taxation –
Important: Emphasize the importance of mastery of final income tax
a. The list of passive income subject to final tax and their final tax rates
b. Taxpayers subject to final taxation and their final tax rates
Please refer the students to Appendix 1 for the comprehensive list of final taxes.

2. Capital gains taxation –


a. The distinction between ordinary assets and capital assets
b. The particular types of capital assets subject to capital gains tax
c. Computational procedures of the capital gains tax on domestic stocks
1. Transactional and annual compliance
2. Installment payment of capital gains tax on domestic stocks

d. Tax bases and computational procedures to the capital gains tax on real properties
1. Exemption rule and alternative taxation rule
2. Pay as you file and installment payment

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Notes for non-accountancy classes
The following specialized and complex and concepts may be dispensed with because they are
time consuming not to mention their circumstantial relevance in practice:
 Wash sales rule
 Tax free exchanges

F. Regular income tax


1. Introduction
Important concepts to emphasize:
a. Regular tax gross income includes all income that qualifies the gross income test in Chapter 3
but is not subject to tax under Chapter 5 and Chapter 6
b. Deductions are deductible from gross income from business only
c. Personal exemptions are deductible from compensation income but a negative compensation
income is deductible to other income
d. Tax reporting of compensation income (highlight the exceptional treatment on fringe benefits –
this serves as a preliminary introduction to Chapter 11)
e. Tax reporting of business or professional income
f. Determination of taxable income

2. Exclusions – discusses income not subject to any income tax schemes

3. Inclusions – discusses income that are subject to regular income tax


a. Compensation income
b. Fringe benefits
c. Dealings in properties

4. Compensation income vs. Fringe benefits


a. Items of non-taxable compensation
b. Components of compensation income
c. Treatment of fringe benefits (those subject to regular tax vs. those subject to final tax)

5. Deductions – discusses expenses of business that are deductible from gross income
a. Itemized deductions
1. Cost of sales or cost of services
2. Regular allowable itemized deductions
3. Special allowable itemized deductions
4. Net operating loss carry-over
b. Optional standard deduction – in lieu of itemized deductions

6. Determination of taxable income


a. Individual income taxpayers
b. Corporate income taxpayers

G. Taxation of individual taxpayers


1. Personal exemption
2. Determination of tax due and tax payable
a. Revisit the computation of individual income tax due in Chapter 7
b. Review the computation of foreign tax credits in Chapter 13-A, foreign tax credit

H. Taxation of corporate taxpayers


1. Special corporations
2. Regular corporations
a. Gross income tax
b. Regular corporate income tax
c. Minimum corporate income tax
3. Improperly accumulated earnings tax
4. Branch profit remittance tax

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INCOME TAX SOLUTION MANUAL

TEACHER’S SOLUTION MANUAL


CHAPTER 1: INTRODUCTION TO TAXATION
Exercise Drill

1. C and I (This is non-delegation) 11. C


2. I 12. I (“properties” excludes it from being a
Constitutional limit)
3. I 13. C
4. N (real property tax not income tax) 14. N (A principle but not a limitation.)
5. C 15. C
6. C and I 16. C
7. C 17. I
8. C 18. C
9. N (Non-payment of tax = imprisonment) 19. N (A principle but not a limitation)
10. C 20. N (Should be non-imprisonment)

TRUE OR FALSE 1
1. False (This is police power.)
2. True
3. True
4. True
5. False (The receipt of benefit is conclusively presumed.)
6. False (Taxation power is inherent to the State.)
7. True
8. False (It is inherent power not requiring Constitutional mandate.)
9. True
10. True

TRUE OR FALSE 2
1. False (Property tax only)
2. False (Different taxpayers warrants different tax treatments.)
3. True
4. True
5. True (It will result to violation of substantive due process)
6. True
7. False (The constitutional guarantee for non-imprisonment applies to debt not tax)
8. False (The Constitution guarantees the sanctity of contract by its non-impairment clause)
9. False (The Constitution requires the majority of all members of congress to pass a tax exemption law
10. False (It will not produce additional benefit if the government taxes itself.)

MULTIPLE CHOICE – Theory: Part 1


1. A 13. C 25. B
2. D 14. C 26. C
3. D 15. B 27. C
4. A 16. A (Absolutely) 28. D
5. D 17. D 29. C
6. D 18. A 30. A
7. A 19. D 31. B
8. A 20. D 32. D
9. B 21. C 33. A
10. C 22. C 34. B
11. D 23. C
12. D 24. C

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MULTIPLE CHOICE – Theory: Part 2
1. A 10. C 17. B
2. B 11. D 18. D
3. B 12. C 19. C (Violation of
4. A 13. C territoriality)
5. C 14. D 20. D
6. D (B is non-delegation) 15. C 21. A
7. C (There is taxpayer class) 16. A (different taxpayer 22. B
8. C warrants different
9. B treatment.)

MULTIPLE CHOICE – Theory: Part 3


1. B (i.e. category) 10. C 19. B
2. A 11. B 20. D
3. C 12. C 21. C
4. A 13. B 22. D
5. C 14. C 23. D (Best being also
6. A 15. C inherent.)
7. D 16. A 24. B
8. B 17. B
9. A 18. D

CHAPTER 2: TAXES, TAX LAWS AND TAX ADMINISTRATION


EXERCISE DRILL NO. 1
1. Percentage tax
2. Donor’s tax
3. Regressive tax
4. Indirect tax
5. Ad valorem tax
6. Fiscal/General/Revenue tax
7. National tax
8. Excise tax* or sin tax
9. Estate tax
10. Community tax or residency tax
11. Proportional tax
12. Specific tax
13. Direct tax
14. Regulatory tax
15. Excise tax or privilege tax
*This is different with excise tax as a privilege tax

EXERCISE DRILL NO. 2


1. Revenue 6. Tax
2. Tax 7. Debt
3. Special assessment or Special levy 8. Toll
4. Customs duties 9. Penalty
5. License 10. Debt

EXERCISE DRILL NO. 3


As to payment
1. Value Added Tax ≥ P200,000/quarter
2. Excise Tax ≥ P1,000,000/year
3. Income Tax ≥ P1,000,000/year
4. Withholding Tax ≥ P1,000,000/year
5. Percentage Tax ≥ P200,000/quarter
6. Documentary Stamp Tax ≥ P1,000,000/year
As to conditions and operations
1. Gross receipts or sales ≥ P1,000,000,000 in a year
2. Net worth ≥ P300,000,000 at year end
3. Gross purchases ≥ P800,000,000 in the preceding year

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MULTIPLE CHOICE – Theory: Part 1

1. B 16. D 32. D
2. A 17. D 33. C
3. C 18. D 34. A
4. C 19. C 35. C
5. B (best answer, RPT is 20. D 36. D
local tax as to collection) 21. D 37. B
6. A 22. B 38. D
7. A 23. A 39. D
8. B 24. B 40. A
9. C 25. B 41. B
10. D 26. A 42. A
11. A 27. D 43. D
12. B 28. B 44. A
13. B 29. B 45. A
14. C 30. C
15. C 31. D

MULTIPLE CHOICE – Theory: Part 2


1. C 6. C 11. C
2. C 7. C 12. D
3. A 8. A 13. D
4. D 9. D 14. A
5. D 10. B

MULTIPLE CHOICE – Theory: Part 3

1. B 8. D 16. D
2. C (LGU for assessed 9. C 17. C
value.) 10. A 18. A
3. A 11. A 19. C
4. A 12. D 20. D
5. D 13. B 21. D
6. B 14. D 22. B
7. B 15. C

CHAPTER 3: INTRODUCTION TO INCOME TAXATION


EXERCISE DRILL NO. 1: Return of capital and Return on capital
Consideration For the loss of Return OF Capital Return ON Capital
1. P 1,000,000 Health P 1,000,000 P0
2. P 500,000 P400,000 car P 400,000 P 100,000
3. P 300,000 P350,000 building P 300,000 P0
4. P 600,000 Income P0 P 600,000
5. P 1,200,000 Health P 1,200,000 P0

EXERCISE DRILL NO. 2: Income tax and transfer tax


Transaction Income Tax Transfer Tax
1. Barter of properties 
2. Sale of goods 
3. Rendering of services 
4. Donation of properties 
5. Transfer of properties from a 
decedent to his heirs upon death
6. Transfer for less than full and  
adequate consideration

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EXERCISE DRILL NO. 3: The tax concept of income

Item Taxable Exempt


1. Winnings from gambling 
2. Income from swindling 
3. Indemnity for moral damages 
4. Harvest of fruits from an orchard  *
5. Compensation income 
6. Interest income 
7. Amount received by the insured in excess of insurance premiums paid 
8. Proceeds of life insurance received by the heirs of the insured 
9. Gain on sale of goods by the home office to its branch 
10. Gain on sale of goods and services between relatives 
11. Gain on sale of goods by a parent corporation to a subsidiary 
corporation
12. Appreciation in the value of land 
13. Birth of animal offspring  *
14. Income of a registered Barangay Micro-Business Enterprise 
15. Cancellation of debt out of gratuity of the creditor 
16. Cancellation of debt by the creditor in exchange of services rendered 
by the debtor
17. Matured interest from coupon bonds 
18. Receipt of bank loan 
19. Salaries of a minimum wage earner 
20. PCSO or lotto winnings 
21. Benefits from GSIS, SSS, Pag-Ibig or PhilHealth 
22. Discovery of hidden treasure (taxable only when sold) 
*This are unrealized income taxable upon realization by sale or disposition

EXERCISE DRILL NO. 4: Income taxpayer classification

Person or Entity Classification


1. A fat Mexican tourist NRA-NETB
2. An overseas Filipino worker NRC
3. An expatriate employee NRC
4. A Filipino who is privately employed in the Philippines RC
5. An unemployed Filipino residing in the Philippines RC
6. A Chinese businessman who have his domicile in the Philippines for 6 NRA-ETB
months
7. A Japanese who married a Filipina and residing in the Philippines for 2 RA
years
8. A 2nd year Korean college student studying in the Philippines RA
9. A corporation incorporated under Philippine law DC
10. A foreign corporation doing business in the Philippines RFC
11. Donation of a property in trust designated by the donor as irrevocable RC*
12. Donation of a property in trust designated by the donor as revocable NT
13. A business partnership (Partnership are classified as corporations DC
under the NIRC, presumption if silent = domestic)
14. A joint venture organized under a foreign law and is not operating in NRFC
the Philippines
15. An estate of a Filipino citizen judicially administered in the Japan NRC*
16. An estate of a Filipino citizen extra-judicially administered in the NT
Philippines
17. A taxable joint venture organized in the Philippines DC
18. A non-profit corporation organized in the Philippines DC
*Treated as individual income taxpayers by the law

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EXERCISE DRILL NO. 5: General Income Tax Rule

Taxpayer World Philippine


income income
1. Non-resident citizen 
2. Resident alien 
3. Non-resident alien engaged in trade or 
business
4. Resident foreign corporation 
5. Resident citizen 
6. Non-resident alien not engaged in business 
7. Non-resident foreign corporation 
8. Domestic corporation 
9. Taxable trusts established by a Filipino 
citizen in the Philippines (treated as RC)
10. Taxable estate of a non-resident citizen 
judicially administered abroad

EXERCISE DRILL NO. 6: Location and situs of income


Income description Within Without
1. Rey earned P100,000 interest income. 40% of these were
from non-resident debtors. P 60,000 P 40,000
2. A finance company earned P1,000,000 royalties from a
franchise; 40% of these were derived abroad. P 600,000 P 400,000
3. Raymond earned P100,000 rent from OFWs in his
apartment in the US. He also earned P40,000 rent from his P 40,000 P 100,000
Philippine condominium unit.
4. Chester, a resident citizen, works home online and submits P 120,000
his output to clients. He collected P100,000 service fee from (situs is where P0
foreign clients and P20,000 from resident clients. rendered)
5. Mark rendered audit services to client in Afghanistan for P0 P 500,000
P500,000. The services were paid in Afghanistan.
6. Jun has a store in a tourist park in Baguio City, Philippines. P 40,000 (stitus
He earned a total of P40,000 gain from selling souvenir is place of sale) P0
items. 40% were from foreign tourists.
7. Don Mariano sold to his friend abroad a commercial building P2M P0
located in Quezon City, Philippines at a gain of P2,000,000. (situs is location)
8. John sold his stocks in a domestic corporation to a foreign P 50,000 P0
investor at a gain of P50,000.
9. Manso received P20,000 dividends from a domestic P 20,000 P 30,000
corporation and P30,000 dividend income from a non-
resident foreign corporation.
10. Andrew received P40,00 dividend from a resident foreign P 24,000 P 16,000
corporation 60% of its historical income is from the (60% x P40,000) (40% x P40,000)
Philippines.
11. CDO, Inc. manufactures in the Philippines and sells to P 100,000 P0
unaffiliated export clients. A total of P100,000 gross income Income is
were earned during a period. presumed within*
12. ABC manufactures abroad and sells to its Philippines branch at P 150,000 P 100,000
market prices. Production cost abroad were P200,000. Billings to
branch totaled P300,000 while branch sales totaled P450,000.
13. James received P100,000 dividend from a resident foreign P 100,000
corporation which realized 40% of its income from the P 0 (fails dominance
Philippines. test)
14. Ellis received P20,000 dividend from a non-resident foreign P 0 P 20,000
corporation.
15. Davao plant manufactures tables and sells to resident
clients. A total of P400,000 gross income were realized P 400,000 P0
during a period.
*Since manufacturing activity is within, the sale is presumed agreed within. Hence, the entire gain is earned
within.

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MULTIPLE CHOICE – Theory: Part 1

1. C 7. B 13. C
2. D 8. B 14. D
3. A 9. B 15. D
4. A 10. B 16. A
5. A 11. B
6. D 12. B

MULTIPLE CHOICE – Theory: Part 2

1. A 9. A 15. C
2. B 10. A 16. A
3. B 11. C 17. D
4. C 12. B 18. C
5. D 13. A (The partnership is
6. B presumed organized
7. C herein if silent.)
8. A 14. D

MULTIPLE CHOICE – Theory: Part 3

1. B 4. B 7. D
2. A 5. D
3. A 6. D

MULTIPLE CHOICES – Problems


Problem 3-1: B Problem 3-9: C (P30K is Problem 3-18: D
Problem 3-2: C (22 + 15-12) expense) Problem 3-19: D
Problem 3-3: C (120 – P80) Problem 3-10: D Problem 3-20: A
Problem 3-4: A Problem 3-11: C Problem 3-21: B
Problem 3-5: C [1M – 120K – Problem 3-12: D Problem 3-22: C
(20Kx4)] Problem 3-13: D Problem 3-23:
Problem 3-6: C (200 – 20x7) Problem 3-14: C 1. D
Problem 3-7: A Problem 3-15: A 2. C
Problem 3-8: C Problem 3-16: D 3. B
Problem 3-17: C 4. D

MULTIPLE CHOICES – Case Problems

Case Problem 1
Within Without
 P10,000 interest income from a non-resident Japanese friend P 10,000
 P40,000 interest income from Philippine residents P 40,000
 P500,000 rent income from a commercial complex located in the USA
leased to resident Filipinos 500,000
 P200,000 rent income from a boarding house in Baguio City,
Philippines 200,000
 P200,000 professional fees rendered to Chinese clients in Hong Kong 200,000
 P300,000 salary from a resident employer 300,000
 P100,000 gain from sale of merchandise imported and sold to
Filipino residents 100,000
 P50,000 gain on sale of merchandise purchased locally and sold
during his business travel in Hong Kong 50,000
 P400,000 gain on sale of the boarding house located in Baguio City to
a non-resident buyer 400,000 -
Total P1,040,000 P 760,000

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Case Problem 2

Within Without
 P500,000 royalty fees from local Hot Burger outlets P 500,000
 P200,000 royalty fees from foreign Hot Burger outlets P 200,000
 P100,000 gain from sales of equipment to foreign franchisees 100,000
 P200,000 gain from sales of equipment to local franchisees 200,000
 P50,000 gains from sale of investment in domestic stocks to foreign
investors 50,000
 P40,000 gains from sale of investments in foreign stocks to Filipino
investors (The stock is presumed stocks of a non-resident foreign
corporation.) - 40,000
Total P 950,000 P 340,000

Case Problem 3
In this problem, billing is based on free market conditions. TC bills its foreign outlet (branch) at the same
rate as it bills foreign clients. The transfer pricing is considered arms’ length.

Gross income without = P2,720,000 x 100/200% = P1,360,000


Profit from foreign operation
Billings on foreign operation = P2,720,000 – P1,360,000 = P 1,360,000
Gross income within
From sales to unrelated clients (P3,400,000 x 70%/170%) = P1,400,000
Add: Profit on sales to foreign operation
P1,360,000 x 70/170 = 560,000
Total P 1,960,000
The answer is A.

CHAPTER 4: INCOME TAX SCHEMES, ACCOUNTING PERIODS AND


ACCOUNTING METHODS
TRUE OR FALSE 1
1. False (Only passive income)
2. True
3. False (They are mutually exclusive. One excludes the others.)
4. True (Active income is subject to regular tax. Capital gains are generally subject to regular tax. There
are only two types of capital gains that are exceptionally subject to capital gains tax)
5. True (Most types of passive income are subject to final tax with the exception of rent.)
6. False (from capital assets, not any assets)
7. Correct (two types: ordinary asset and capital asset)
8. False (The definition of capital asset is a residual definition.)
9. True
10. True
11. True
12. False [Only corporations (and partnerships) can change accounting periods.]
13. True
14. False (The accounting period shall be terminated at the point of death.)
15. True

TRUE OR FALSE 2
1. True (Advanced income is taxable upon receipt)
2. True (Deductible as they are used up or are expired in the business of the taxpayer.)
3. True
4. True (The mix of the different methods is referred to as hybrid method.)
5. True
6. False (Contract price is the total amount receivable in money or property from the buyer. This amount
is usually the selling price but will differ when there is an encumbrance on the property to be assumed
by the buyer.)
7. True (Crop year method is not an accounting period)
8. False (Based on percentage of progress of the construction project)

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9. True
10. False (These are tax credits of the recipient of the income.)
11. False (Only capital gains tax and regular income tax has tax returns. Note that final income tax are
withheld at source.)
12. False (Only large taxpayers that meet certain criteria are required to file through the EFPS. Small
taxpayers shall file their returns in their respective Revenue District Office.)
13. True
14. False (The compromise is in lieu of criminal prosecution over a tax violation. It does not apply hand in
hand with imprisonment.)
15. True (The imposition of a penalty upon another penalty is illegal. Hence, the BIR cannot impose the
interest to the amount of the surcharge.)
16. False
17. True
18. True
19. True
20. True

Multiple Choices – Theory: General Concepts


1. A 8. A 15. C
2. D 9. B 16. B
3. B 10. A 17. C
4. C 11. B 18. A
5. D 12. B 19. B
6. D 13. C 20. D
7. D 14. B

Multiple Choices – Problem 4-1: Accounting period


1. B 5. B 9. C
2. C 6. B 10. A
3. B 7. B
4. C 8. C

Multiple Choices – Problems 4-2: Tax schemes and accounting methods


Please pattern your solution to the book illustration. If you encounter any problem, feel free to contact me.
Thank you!
1. A 9. D [(P250K 2015GP x20%) 15. B
2. B + (P360K 2016GP 16. A [(P40M x 10/50)/40]
3. B (P2M – P1.1M COGS + x62.5%)] 17. B (Lease will not
P30K + P30K). * 10. A commence until building
4. D (P2M – P1.1M COGS + 11. B [P540K 2015GP x completed).
P30K + P40K) (P300K/P1.35M)];[(P540 18. A [(P1.2M x4/12)/8]
5. C K 2015GP x 19. B
6. D [(P400K+P150K- P360K/P1.35M)+P720K 20. D (P900K SALES-P400K
P100K)+P100K] 2016GP] EXP +P50K)
7. C [P900K GP x 12. C (350K/1.2M x 400K)
(P600K/P2.4M)] 13. A
8. C (P 1M-P600K) 14. B (80% x P1M – P600K)
*Note that the deductible amount for inventory (a form of prepayment) shall be the expired (sold) portion for both cash basis
and accrual basis. Advanced income is taxable upon receipt for both methods. For cash basis collected income excluding accrued
income is included. For both accrual and cash basis, unrealized income is not subject to tax.

Multiple Choices – Problems 4-3: Tax Compliance


1. A, computed as (196/365) x 12% x P40,000 = P2,278
2. C (P40,000 x 25%)
3. D (50% surcharge apply. There is a BIR prior notice.)
4. C
Since this is an assessment after Dec. 31, 2017, TRAIN law counting rule applies:
April 16, 2017 to December 31, 2017 is 260 days.
P100,000 x 20% x 260/365 P 14,246.57
P100,000 x 12% x 15/365 493.15
Total P 14,740
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Note teachers that the “exact day method” will be used for all assessment starting January 1,
2018 even if the assessment covers NIRC era tax deficiency or delinquency.

5. B, please check the Appendix (For unpaid tax amounting P50,000 but not exceeding P100,000, the
compromise penalty is P15,000).

6. The problem has no answer. April 16, 2020 to July 18, 2020 is 94 days. P1M x 12% x 94/365) =
P30,904. You may consider rewarding students who objectively answered P30,904. Good student
should have identified the lack of answer and objectively indicated their correct answer.

7. C (50% apply since he received a notice from the BIR before filing)
8. A (The return deadline is December 15, 2019. December 16, 2019 to June 6, 2020 is 174 days. Note that
February 2020 is 29 days since 2020 is a leap year. Hence, P500,00 x 12% x 174/365 = P28,603.
9. A (interest penalty + 500K + 25%xP500K)

CHAPTER 5: FINAL INCOME TAXATION

Note: Please share these rules of presumptions to your students


If the problem is silent regarding the identity or characteristics of the taxpayer in a particular case, the
following presumption rules are followed in answering:
a. Between whether the taxpayer is an individual or a corporation, an individual taxpayer is
presumed
(This is because there are more individuals than corporations.)
b. Between whether the individual is resident or non-resident, residency is presumed
(This is because we are very likely to be of concern with resident entities than non-resident entities.
c. Between whether the corporation is domestic or foreign, domestic is presumed
(This is because there are more domestic corporations than foreign corporations.)
d. Between whether the foreign corporation is resident or non-resident, resident corporation is
presumed
(This is because we are very likely to be of concern with resident entities than non-resident entities.

TRUE OR FALSE 1
1. True (Final tax on interest covers only interest income from banks and trust funds)
2. False
3. False (Final tax applies only on identified passive income from sources WITHIN.)
4. True (They are considered deposits substitutes.)
5. False (Passive income are generally subject to final tax, but not ALL)
6. True
7. False (Only inter-corporate dividend from DOMESTIC corporation)
8. False (Only individual taxpayers are exempt)
9. True
10. False (REIT dividends are generally subject to 10% final tax.)
11. False (Stock dividend is generally exempt, except when it confers upon the recipient an interest
different from what he previously owned or when the declaration of stock dividends amounts to a
declaration of cash dividends.)
12. False (The NIRC did not contemplate final taxation of prizes on corporations, hence, corporate prizes is
deemed subject to regular income tax.)
13. False (subject to final tax of 10%)
14. False (They are exempt from any income tax.)
15. True (Only resident aliens are subject to 7.5% final tax.)
16. False (Active royalties are subject to regular tax. Passive royalties are subject to final tax.)
17. False (It applies only to non-resident foreign corporations)

TRUE OR FALSE 2
1. False
2. False
3. False (Passive income abroad, including winnings are subject to regular tax.)
4. False (This rule applies to taxable price.)
5. False (PCSO / lotto winnings are now generally subject to 20% final tax)
6. True
7. False
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8. False (Active or passive income are subject to final tax)
9. True
10. True
11. True
12. False (It is exempt)
13. True
14. False (On the 10th day, not on the 15th day)
15. True (They are exempt from income tax: final tax, capital gains tax or regular income tax.)

Multiple Choices – Theory 1


1. A 6. C 11. A
2. B 7. A 12. C
3. D 8. D 13. C
4. D 9. C 14. C
5. B 10. C 15. A

Multiple Choices – Theory 2


1. B would result in multiple 12. D
2. B answers hence inconsistent with 13. A
the problem. Student should use
3. D the law which gives the rational 14. A
4. B answer. That is, they should use 15. D
5. D the NIRC. 16. D
6. D 8. C 17. D
7. A 9. C 18. C
This problem is a transition 10. D
problem. Applying TRAIN law 11. A

Multiple Choices – Problems 1


1. D [(P2M X 180/360) X 6. C (P80K/80% X 20%) 12. A
8%X20%] 7. C [(P1M X 10%) X 80%] 13. B [($1M X 8% X 15%)/2]
2. C (P80K X 25%) 8. D (P100K X 30%) 14. A
3. A (P42,000/80%) X 20% 9. B [(P1M X 10% X 6/12) X 15. D [($1M X 10% X 15%) X
4. A 20%] P45]
5. C [(P2M X 10% X 4.5) X 10. B [(P1M/4 X 10%) X 20%]
5%] 11. A

Multiple Choices – Problems 2


1. C If we assume the $46,250 as 4. D (A resident corporation is a 12. D
net of tax, there would be no foreign corporation) 13. C (P1M X 40% X 10%) The
answer [i.e. $46,250/85%) x 5. A (P120K X 24%) problem is asking for final tax to
15%]. The next correct 6. B (P100K/90%) X 10% be withheld to all not from the
assumption is that $46,250 dividend income of Sison.)
gross is credited then the 7. B (P200K X 40% X 10%)
8. D 14. A (P800K/80% X 20%)
account must be debited for
15. B (P8M X 10% X 80%)
$46,250 x 15%. 9. C (P200K X 10%)
2. B 10. D
3. C (P1M X 60% X 10%) 11. D

Multiple Choices – Problems 3


1. B (P22,100 X 20%) 11. D (Surcharge = P90,000 x 25%, tax rate = P240,000). The
2. A (The P10K final tax threshold interest is P90,000 x 20% x surcharges shall be P240,000 x
10/360, compromise is P15,000 25% = P60,000. The interest
on prizes is on a per event and
per table.) Total amount due is shall be P240,000 x 20% x
per organizer basis).
P90K+22.5K+500 + P 15K = 30/360 or P4,000. Total
3. D penalties before compromise =
P128,000
4. D P64,000.
5. B (P500K X 20%) Note: This is an NIRC case not a
6. D TRAIN law case since This is also an NIRC assessment
compliance date is March 20, era assessment case.
7. D (P1M maximum x 90%)
2017.
8. A
9. C (P1M X 8.75%/70% X 30%)
12. C (The interest payment was
10. C actually P1,200,000 x 20% final

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CHAPTER 6: CAPITAL GAINS TAXATION

Note to Professors:
You may assign the special tax rules in capital gains or loss measurement (wash sales and tax-free
exchanges) to student for their detailed study at home. These are time consuming topics which may eat too
much classroom time. You may focus on the basic rules of the 5% and 10% CGT and the 6% CGT. These
specialized topics may be skipped for non-accountancy students.

Need emphasis:
In law, documentary stamp tax (DST) is payable by either the seller or buyer. If paid by the seller, the same
is deducted in the measurement of the gain. If assumed by the buyer, it should not be deducted against the
gain.

TRUE OR FALSE 1
1. True 11. True
2. True 12. True
3. True 13. True
4. False 14. False
5. False 15. False
6. False (See sales of RFC and the RIT option on 16. False (only domestic stocks)
individual sale to government) 17. True
7. False 18. False (tax is based on selling price)
8. True 19. False (tax is based on SP or FMV)
9. True 20. False (only real property capital assets
10. True within)

TRUE OR FALSE 2
1. True 12. False
2. False (or the fair value whichever is lower) 13. True
3. False (by moving average method) 14. True
4. False (adjusted basis of the shares received) 15. False (Assessed Value and Zonal value are
5. True independent valuations)
6. True 16. True
7. False (not downpayment but initial payment) 17. False (foreign corporations are exempt)
8. True 18. True
9. False (not selling price but contract price) 19. False (Only on domestic stocks.)
10. True 20. True
11. True

Multiple Choices – Theory: Part 1


1. C 7. A (NIRC question) 13. A
2. A 8. C 14. D (MOST CORRECT
3. C 9. D TECHNICAL ANSWER! )
4. D 10. A 15. C
5. D 11. C
6. C 12. D

Multiple Choices – Theory: Part 2


1. D 7. C 13. A
2. C 8. D 14. D
3. D 9. C 15. B
4. D 10. B 16. A
5. C 11. D 17. B
6. A 12. D

Multiple Choices – Theory: Part 3


1. A 6. D 11. A
2. C 7. A 12. B
3. A 8. D 13. D
4. B 9. C 14. D
5. C 10. D 15. A

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Note to professors:
1. If the problem is dated 2017 and prior years, apply NIRC. If the problem is dated 2018 onwards, use
TRAIN law. If the problem is silent, use TRAIN law. If the problem is inconsistent with TRAIN law by
having no answers or having multiple answers, apply NIRC.
2. If the problem did not provide documentary stamp tax on the sale of stocks, ignore it in the computation
of the net gain. The understanding is that the buyer paid for the DST. If the problem provided the
documentary stamp or data (i.e. par value) which enables us to compute the same, we deduct the
documentary stamp tax expense in measuring the net capital gain. The question is implying that DST is
relevant to the case otherwise it would not have provided it.

Multiple Choices – Problems: Part 1


1. A [The net gain is (P200K 8. A (Stocks is an ordinary 12. B [ P320K-(2K x 30)- (8K x
– P5K – P8K) x 15%] asset to a dealer in stocks) 25)]
2. A 9. A This is NIRC. [P92K- 13. C [(120K-10K+250K) x
3. D (P20K X 2 per share of the 15%
4. D 1st purchase) -(P20K X 2.1 14. B [(P120K-P100K) +
5. D per share of the 2nd P240K]
6. A (DST=P300K x purchase)] X 5% 15. A (through PSE)
1.5/200=P2,250). 10. B This is NIRC. [P92K- 16. A (through PSE)
[(P500k-P350k-P2, 250 (P40K X 2.06 WA per
dst-P100k) x 15%] share)]x 5%
7. B [(P350K-300K) X 15%] 11. D

Multiple Choices – Problems: Part 2


1. A. The cost per share as of 2. C [(P50k Dp. + P50K 5. C (P40K x 5K/20K). Note
5/1/2020 is 11.2 per share inst.)/P500K] x P45K Total 5K shares were not
computed as (P112K-P100K) CGT covered-up.
X 8/10] +P80k) = 3. B [(P300K - P1.5K dst) x 6. D [(P40K x 15K/20K) +
P89,600/8,000 shares as of 15%] P160K]
5/1/2020. The CGT on 4. A (P1.5/200 x P200K) 7. C [(1,500 x (P120-P90)] –
6/7/2020 is computed as
[P60K-(5K x 11.2)] 1,500 x 85 x 1.5/200) x
15%
8. A
The documentary stamp tax is P1.5/P200 of par value. It is 0.0075 of the par. Hence, the par value must
have been P7,500.00/.0075 = P1,000,000, the cost would have been P1,500,000 (P1M x 150%). At the
date of sale, the value of the stocks doubled to P3,000,000 (P1.5M value at purchase x 2).
9. D
The net gain is P3M-P1.5M = (P1.5M – P7,500 – P10,000) x 15%.

10. A (nearest answer)

Basic tax due (140K x 15%) P 21,000


Surcharge (21K x 25%) 5,250
Interest (21K x 90/365 x 12%) 621
The exact answer P 26,871

Deadline is March 22 since February 2019 is a 28-day period. March 22 to July 20, 2019 is 90 days. 360
days was inadvertently used in the interest computation resulting into 630 interest. This would yield
P26,880, the question answer. Consider rewarding students who indicated the exact answer.

Note to professors:
In the CPA Exam, examinees must be able to identify defective assumptions of the examiner in the problems when
the exact technical solution is not with the choices. They are not supposed to shade letter E. When the most correct
solution does not yield an answer, examinees must test every possible assumption the examiner used. The rule of
the game is getting the “intended answer” when the technical answer is not with the choices.

Multiple Choices – Problems: Part 3


1. A 5. D (P2.5M x 6%) 10. A (P12M x 6%)
2. D 6. C (P1M x P1.8M/P2M) 11. A
3. C (P3.2M x 6%) 7. B (P150K x P1.5M/P2M) 12. B (P12M/1K x 15)
4. A (Parking lot is an 8. D (P5K x 500 +1.5M) x 6%
ordinary asset.) 9. D (13M x 6%)

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Multiple Choices – Problems: Part 4
1. A (Initial acquisition of 4. B 10. E* (No answer)
control is a tax-exempt 5. C 11. C**
transaction.) 6. D [(P250K-P100K) x 15% 12. B (P4M x 7.5%)
2. B 7. B
3. C [(P 200K-P100K) x 10%] 8. C
+ P5K 9. D

*No. 10: No answer

Basic tax due (P2.5M x 6%) P 150,000


Surcharge (P150,000 x 25%) 37,500
Interest (P150,000 x 12% x 366/365) 18,049
Exact answer P 205,549

**No. 11:
Higher of selling price or fair value (P9,000 /1.5%) P 600,000
Multiply by: Tax rate 6%
Capital gains tax P 36,000

CHAPTER 7: INTRODUCTION TO REGULAR INCOME TAX

TRUE OR FALSE 1
1. True 6. True (As a rule)
2. False (NRA-NETB and NRFC are subject to FIT) 7. False
3. False 8. True
4. False 9. False (only in lieu of personal expense)
5. True 10. True

TRUE OR FALSE 2
1. True 6. True
2. False 7. True
3. False (only against business gross income) 8. True
4. True 9. True
5. False (deductions apply to individuals and 10. True (effectively, yes)
corporations)

Multiple Choices – Theory: Part 1


1. C 9. B 17. C
2. A 10. B 18. D
3. D 11. D 19. A
4. C 12. B 20. A
5. A 13. B 21. D
6. D 14. A 22. A
7. A 15. C
8. D 16. D

Multiple Choices – Theory: Part 2


1. D 10. A 19. C
2. D 11. B 20. D
3. C 12. A 21. D (best answer)
4. D 13. B 22. D
5. A 14. B 23. A
6. A 15. D 24. B
7. B 16. C 25. A
8. A 17. D
9. D 18. A

Multiple Choices – Problems 1


1. A (P400K-P100K+P3K) 4. D (P200K-P150K) 7. B [(P120K CI-P150K PE)+
2. C (P300K+P5K-P50K) 5. A (P500K-P200K+P8K) P300K BI + P8K OI]
3. A (P800K-P300K-P100K) 6. C (P50K+308K) 8. A (P450K- P100K)
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9. C [(P350K-P250K) X 10. A [(P4M-P2M)+(P6M- 12. A [(P1925K-P500K) X
30%]+ P50K P3.6M+P80K)-P75K] 32%]+P125K
11. C (P4M-P2M-P75K) 13. D (P1M+40K) x 25%

Multiple Choices – Problems 2


1. B [(P10M-P8.7M)+(P12M-P9.8M+P200K)] 6. A (P20K Deposit+P100K Royalty+P50K
2. C (P3.7M X 30%) Dividend)
3. D (P10M-P8.7M) 7. B (P200K BI+ P300K CI+ P100K
4. A (P1.3M X 30%) Lending+P20K Car+ P10K Furniture)
5. B (P10M+50K+80K) x 30% 8. B ( The P40K sale directly to buyer)

CHAPTER 8: REGULAR INCOME TAX: EXCLUSION FROM GROSS INCOME

TRUE OR FALSE 1
1. True 6. True 12. True
2. True 7. True 13. False
3. False 8. False 14. False
4. False 9. True 15. False
5. False (Other requisites 10. True
exist.) 11. True

TRUE OR FALSE 2
1. False 7. True 12. True
2. True 8. True (As a rule) 13. False
3. False (It depends on 9. False (They are still 14. True
source and amount) taxable on income from 15. False (The rule is total
4. True unrelated operations.) asset, not net asset)
5. True 10. True
6. False 11. False (More than 5 years)

Multiple Choices – Theory 1


1. C 6. B 11. A
2. B 7. A 12. D
3. C 8. D 13. C
4. D 9. B 14. A
5. B 10. C 15. C

Multiple Choices – Theory 2


1. D 7. D 12. C
2. D 8. C 13. A
3. A 9. A 14. C
4. B 10. C 15. A
5. A 11. B (Old question, C is also
6. C acceptable.)

Multiple Choices – Problem: Part 1


1. D 7. D (The excess is payment 10. C (Income from related
2. D for health) operations only)
3. C 8. A (P2M – P.8M + P.5M). 11. B (P25+P12+P9+P10+P5)
4. C The P800K is exempt but is 12. C
5. B (the P100K premium is not specifically mentioned by 13. C
the law as exclusion.
an expense) 14. D
6. B 9. C (P1.8M+P.4M)

Multiple Choices – Problems: Part 2


1. B (This is voluntary 8. C (The interest income is 11. B (9K + 6.8K)
resignation.) included in gross income 12. C (P400K+20K+18K)
2. A while the gain on sale is 13. A
3. A (She is 48-year old.) excluded.) 14. C (Income from property
4. C 9. D and commercial activity is
5. D 10. B (P9K and P6.8K are taxable.)
6. D inclusion to gross income 15. D
7. A (125 + max 100 PERA) subject to final tax)
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CHAPTER 9: REGULAR INCOME TAX: INCLUSION IN GROSS INCOME

TRUE OR FALSE 1
1. True 9. True 16. False (Taxable if there is
2. True 10. True an alternation in interest
3. False 11. True after declaration.)
4. True 12. False 17. True
5. False 13. True 18. False
6. True 14. True 19. True
7. True 15. False (Subject to RIT, as a 20. True
8. True rule)

TRUE OR FALSE 2
1. True (Not final tax) 10. False (GPPs are also 16. False
2. False (Not taxable) exempt from FIT and 17. True
3. True CGT.) 18. True
4. True 11. False 19. False
5. False (FIT do not apply 12. False (It depends. There is 20. False (applicable to all
abroad) tax benefit to the excess of taxpayers)
6. True the recovery over the 21. True
7. True (generally, exception loss.) 22. False (not required)
is when no tax benefit is 13. True (No tax benefit) 23. True
derived) 14. False (This is carried over 24. False (including domestic)
8. False (This is a normal as NOLCO in the future 25. True
realization of income) measurement of the 26. False
9. False (No tax benefits). income of the GPP.) 27. True
15. False (Accounting
method)
Multiple Choices – Theory: Part 1
1. D 8. B 15. A
2. A 9. B 16. A
3. C 10. C 17. C
4. C 11. B 18. D
5. B 12. D (This is withholding tax) 19. B (No CGT on real
6. C 13. D property for FCs.)
7. D 14. A 20. A

Multiple Choices – Theory: Part 2


1. A 6. B (This is an old question.) 11. D (The situs on interest on
2. D (The best answer*) 7. D (subject to final tax) domestic bonds is within.)
3. D 8. B 12. B
4. B (Note: “progressive” tax) 9. C 13. D
5. C (Those taxable on world 10. C 14. C
income) 15. A

*D is the best answer. Passive royalties are generally subject to final tax; hence, non-reportable. However, passive
royalties earned from sources abroad are subject to regular tax, hence reportable. The capital gain on sale of stocks
through PSE is not subject to tax; hence, non-reportable.

Multiple Choices – Problems: Part 1


1. D (P800K-P124K+P150K) 8. C (P30K+P70K+P10K) 18. C (The NOLCO has no tax
2. C (P400K-P20K). 13th 9. A (P3M-P2.4M) benefit.)
month pay is below P90K. 10. A 19. D
3. B (P480K+P80K+P1M) 11. B (P600K+P200K) 20. B (Only interest is
4. A (P1.5M GP +P200K 12. D [P400K+P200K+(P35K- deductible and hence have
Commission income + P30K)] tax benefits.)
P20K Interest income 13. B 21. A (P40K + P4K), Note that
from customers) 14. C basic local tax and interest
5. C 15. B are deductible.)
[(P400K+P300K)+P70K+P 16. A 22. B (As is method.)
30K] 17. C (Not D. There is tax 23. C (As is method.)
6. C benefit by carry-over.)
7. A [(P1.9M/95%)+P50K]

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Multiple Choice – Problems: Part 2
1. D (P500K x 20% (Exempt JV similar to GPPs 12. C (RAs are taxable only on Philippine income
are not subject to FIT, their passive income is but are subject to CGT on real properties;
part of the distributable income taxable to hence, P300K only)
their venturers.) 13. C (P800K+P100K+P400K+P200K)
2. A (P490K – P200K – P120K) 14. D
3. C (P120K – P30K) 15. B (P10K +P400K prizes abroad+P100K
4. D (P90K + P170K) winning abroad). Note prizes not exceeding
5. D (P1,140K)/2 P10K are subject to RIT.
6. A (Subject to final tax since this is a business 16. C (Corporate prizes and winnings are subject
partnership.) to RIT. DC is taxable on world income while
7. A (This is an old question. This is subject to RFC is taxable only on Philippine taxable
final tax) income.)
8. D* 17. A (Income from related operations are
9. D (Gains on long term bonds with more than exempt. The unrelated income is subject to
5 years is exempt. No holding period rule for final tax)
corporation. Holding period will be discussed 18. A (This is subject to 5% GIT.)
in Chapter 12.) 19. D (P400K-100K cost of services + P8K)
10. A (DCs are taxable on world income but the 20. A [None to report since all the income are
capital gains on real property is subject to subject to final withholding tax (i.e. no ITR)]
CGT. Hence, P300K+P800K+P200K)
11. C (RFCs are taxable only on Philippine income
but are not subject to CGT on real properties;
hence, P300K+P400K)

*The employee will not be subject to final tax notwithstanding satisfaction of the compensation threshold test because he is not a
managerial or technical employee

Multiple Choice – Problems: Part 3


1. D (P80K+P100K)
2. B (P150K+P120K)
3. D (P45K + P5K)
4. D (P66,600 + P600 – P7,200)
5. C (P79,200/99%). There is no VAT because the taxpayer is non-VAT.
6. A (P45,900 is inclusive of 12% VAT but net of 10% CWT. It is 102% (100%+12%-10%) of the gross
income). Hence, P45,900/102% = P45,000.
7. A. ZERO. Interest income is subjected to final tax. The same is not subject to regular income tax.
8. A. ZERO. (Income is subject to final tax.)
9. B (P12M x 80% = P9.6M goods transferred x 50% markup = P4,800,000. This should be the gross profit
of the resident foreign corporation subject to Philippine income tax.
10. C (P500,000 sales x 40% = P200,000)

CHAPTER 10: COMPENSATION INCOME

TRUE OR FALSE 1
1. True (This is an NIRC 8. True (As a rule) 15. False (Under current rule,
concept.) 9. True only those listed by the
2. False 10. False regulations)
3. True 11. False 16. False (rank and file only)
4. True 12. True 17. False (Vacation leave
5. True 13. True (As a rule) credits not sick leave
6. False (Generally taxable) 14. False (No limit for credits)
7. False (Considered resident government employees) 18. True
citizens and taxable)

TRUE OR FALSE 2
1. False 6. False (still MWE, but 9. False (For a foreign bank,
2. True taxable on business FCDU or EFCDU for a local
3. False income) bank)
4. False (There are directors 7. True 10. False (Note position and
who are part of 8. False (whichever is function test)
management.) higher) 11. True
5. True 12. False
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13. True 17. False (100% exempt) 22. True
14. True 18. False (regular 23. False (Exemption is
15. True (Non-resident citizen compensation) prospective)
with income abroad) 19. False (taxable to final tax) 24. True
16. False (Considered resident 20. True 25. True
citizen in taxation) 21. False 26. True

Exercise Drill No. 1

Rank and file Manager or


employee supervisor
1. DM DM
2. SC SC
3. DM DM
4. DM DM
5. OB OB
6. RC RC
7. DM DM
8. OB OB
9. OB OB
10. DM DM
11. DM DM
12. EB EB
13. OB FB
14. RC RC
15. SC SC
16. OB FB
17. SC SC
18. SC SC
19. EB EB
20. RC* RC*
21. OB FB
22. DM & OB for excess DM & FB for excess
23. EB EB
24. EB EB
25. SC** SC**
*Note, this is integrated to the basic pay of the employee and is not separately paid for
**The 13th month pay and other benefits exceeding P82,000 is also considered a supplemental compensation

Exercise Drill No. 2

Limit Annual Excess


1. P62.50/day P5,925
(P37.50/day x 158 days)
2. P4,000 year, P2,000
(P6,000 x 10/15)
3. P250/mo. P9,000
(P750/mo. x 12)
4. P0 P6,000
5. P10,000/year P2,000
6. P6,000/year P2,000
(P2k x 4 – P6k)
7. P300/mo. P2,400
(P200/mo. x 12)
8. P 0* P 10,000
9. P5,000/year** P3,000
10. P2,000/mo. P12,000
(P 1,000/mo. x 12)
*This should be in non-cash to be exempt.
**This limit pertains to both anniversary gift and Christmas gift

Note: Medical allowance to dependents is P1,500/semester translated to P250/month.

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Exercise Drill No. 3
Basic salary P 250,000
Less: Employee share in SSS, PHIC, HDMF and union dues 24,000
Regular compensation income P 226,000
Supplemental compensation – OT 16,000
13th month pay and other benefits (P21,000 – P82,000) 0
Gross taxable compensation income P 242,000
Note: The SSS benefits and retirement pay are exempt

Exercise Drill No. 4


Rank & File Managerial/
Employee Supervisory
13th month pay P 60,000 P 60,000
Profit sharing (this is supplemental) 0 0
De minimis benefits
De minimis within their limits - -
Excess de minimis benefits 30,000 *-
Other de minimis benefits 10,000 *-
Other fringe benefits 25,000 *-
Total 13th month pay and other benefits P 125,000 P 60,000
Less: Exclusion limit 90,000 90,000
Taxable 13th month pay and other benefits** P 35,000 P 0
*Taxable under fringe benefits tax
**This will be included in compensation income as supplemental/additional compensation

Exercise Drill No. 5

Progressive tax Fringe benefits tax


1. P 1,420,000* P0
2. P 1,408,000** P 13,000
*P1,068,000 + P340,000 + (P89,000 + P13,000 – P90,000)
**P1,068,000 + P340,000; Note 13th month is below P90,000 threshold

Exercise Drill No. 6

1. P 48,000
2. P 97,000*
*13th month pay do not exceed the P90,000 threshold; hence, not taxable

Multiple Choice –Theory: Part 1


1. D 5. C 9. D
2. C 6. C
3. C 7. A (i.e. employee)
4. A 8. B

Multiple Choices – Theory: Part 2


1. A 11. D (NIRC limit is P1,500. 19. C
2. D Now P2,000/mo.) 20. D
3. A 12. D 21. A
4. B 13. C and D 22. D (Embassies have tax
5. A 14. B immunity and cannot be
6. D 15. C (Statement 2 depends obligated to withhold by
7. C on type of employee.) virtue of international
8. D 16. B comity.)
9. C 17. C 23. B
10. C 18. C

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Multiple Choices – Problems: Part 1
1. B (P300,000 + P30,000)
2. C (P1,068 – 44 + P45)
3. A (P20,000 x 12 – P18,000)
4. B (P11,000 x 12 + P12,000 OT– P5.2K exclusions)
5. A
Note that Johnny is a minimum wage earner for being a recipient of annual salary of P60,000. Note that
overtime is an exempt benefit to a minimum wage earner. Note also that his 13 th month pay and other
benefits do not exceed P90,000.)

6. C {P128K regular + P8K supplemental + {(P120K x140/150 + P12K) – P90K}]


Note that the retirement benefit is exempt.

7. C (P1,090 + 240 + 5)
8. C (P258K regular – P24K + P20K supplemental + P0 excess)
9. A (P780K regular + P43K supplemental + P19K excess computed as [P65K + (P22K –P10K) + P32K) –
P90K]

10. B (P780K regular + P43K supplemental + P0K excess computed as [P65K – P90K]

Multiple Choice – Problems: Part 2


1. C (P12K + P12K + P8K + P24K)
Note that the 13th month pay and other benefits in excess of P90,000 is part of additional or
supplemental compensation. However, in this case, the 13th month pay and other benefits did not
exceed the P90,000 exclusion threshold.
2. D (P8K + P24K).
3. C (P 45,000 – P30,000)

4. Please disregard choices. There was a computational slippage. Consider giving extra points for
students who provided the correct amount of answer.
Exempt de minimis: P 24,000 rice allowance + P5,000 Christmas gift = P29,000

5. Non-taxable compensation income:


13th month pay and other benefits P 90,000
Exempt de minimis 29,000
Contribution to SSS, PhilHealth and HDMF 21,000
Total non-taxable compensation P 140,000

6. Supplemental compensation:
Commission income P 12,000
Excess 13th and other benefits
(P45,000 + P45,000 + P2,000 + 3,000 – P90,000) 5,000
Total supplemental compensation P 17,000

7. Taxable compensation income:


Regular compensation (P540,000 – P21,000) P 519,000
Supplemental compensation 17,000
Taxable compensation income P 536,000
Alternatively:
Gross compensation (540+45+45+26+12+8) P 676,000
Less: Non-taxable compensation 140,000
Taxable compensation income P 536,000

8. A [P1,080 + 5 x 12 + (95-90)]
9. D
Regular compensation (P1,044K – P62K) P 982,000
Supplemental compensation
(P87+5K+24K addcom + 100x 12 – 90K) 27,200
Taxable compensation income P 1,009,200

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10. D (P314K + 12K + 24K); Note 13th month and other benefits is below P90K exclusion

11. No answer. P300 x 12 + 5,000 = P8,600

12. B
13th month P 28,000
Excess de-minimis (P8,000 – P3,600*) 4,400
13th and other benefits (i.e. below P90K) P 32,400
De minimis ( P5,000 + 3,600) 8,600
Total non-taxable income P 41,000

*P3,600. Note that the P500/month rate given does not match with the P8,000 annual total indicating
that additional allowances were given. Hence the P8,000 shall be used in the computation.

13. B (33K + 33K + 3K + 6K – 1.2K – 1.2K)


14. B (24,750 + 6,000 – 1,100)

CHAPTER 11: FRINGE BENEFITS TAX

TRUE OR FALSE 11-1


1. False 5. True 9. True
2. False 6. False (Final tax) 10. True
3. True 7. False
4. True 8. False (100% exempt)

TRUE OR FALSE 11-2


1. False (5%) 7. True 13. True (only business class
2. True 8. True ticket is exempt)
3. True 9. True 14. True
4. True 10. True 15. False (Still a taxable fringe
5. False (fringe benefits) 11. True benefit)
6. True 12. False

Multiple Choice –Theory 1


1. D (13th month pay) 6. B 11. A*
2. A 7. D 12. C **
3. A 8. A 13. A
4. B 9. D 14. C
5. C 10. C 15. A

*(A is the intended answer but the most appropriate answer to this question is (50% x 5%) or 2.5% since the problem
talks about percentage of the fair value)
** (The problem speaks bout percentage of the depreciation value)

Multiple Choice –Theory 2


1. D (gross-up)
2. D
3. A
4. B
5. C
6. C
7. A (Yatch is considered real property in fringe benefit taxation)
8. D
9. A
10. A

Multiple Choice –Problem: Part 1


1. B (The amount actually 3. D (The basis is [P2M+1.5M 6. D (P4M/20 X 50% /4)
subject to fringe benefits or P3.5M + P1.5M] w/e is 7. A
tax is the grossed-up higher). Hence, P5M x 5% 8. C
monetary value. Hence, x 50%/4 = P31,250. 9. A (P500,000 X 50%)
P50,000/68%) 4. B 10. C (P2M + P4M) x 60%
2. A (P10,000 X 50% X 3) 5. C
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Multiple Choice –Problem: Part 2
1. C 6. D (P1.2M X 20% X 50% /4)
2. D (P19,000 X 35/65) 7. C [(P1,200,000 X 20%)/4] X 50%) X 35/65
3. B 8. D (Convenience of the employer.)
4. B (P800,000 X 25/75) 9. C
5. B (P2M + 1.5M)

Multiple Choice –Problem: Part 3


1. C (P16,000+P24,750) X 35%/65% 9. C
2. D (P16.4M/20 X ½) 10. C (P500K/5 X 50%)/4 + P30K
3. B (P10K+P15K+P15K) x 3 months + P4K + 11. A
P100 x 4 weeks x 3 months
Cash 500,000
4. D (P10K + P200K x 12% x 3/12 + P12K)
FB expense 300,000
5. A (P12,000+P300,000) x 35%/65%
Lot 800,000
6. D (P27,200 x 3 x 50%) x 35%/65% and
(P27,200 x 2 x 50%) x 35%/65%*
12. D (P700K X 35%/65%)
7. D**
8. A

*Nearest answer. The actual answer is (P21,969; P14,646).


** Basis is P2M zonal value of land+ P2M assessed value of improvement or P4.5M w/e is higher. Hence, P4.5M x 5% x
50%/4 x 35%/65%.

CHAPTER 12: DEALINGS IN PROPERTIES

TRUE OR FALSE 1
1. True 9. False (bonds & debentures only)
2. True 10. False (within one year, not less than)
3. True 11. False (more than one year)
4. True 12. False
5. False 13. False
6. True 14. False
7. True 15. True (ordinary loss is deductible in full)
8. False

TRUE OR FALSE 2
1. True 9. True
2. True 10. False
3. True 11. False (one to five persons)
4. False (fair value or cost to original donor- 12. False (this is an ordinary exchange
purchaser w/e is lower) transaction)
5. False 13. True
6. True 14. True (the wash sales rule)
7. True 15. False (SP – cost)
8. False (as a rule both is not recognized, but
gain may be recognized when there is cash or
other assets received as consideration)

Multiple Choice –Theory: Part 1


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

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Multiple Choice –Theory: Part 2
1. A 7. B 13. A
2. B 8. C 14. A
3. C 9. C 15. C
4. A 10. A 16. B
5. A 11. B 17. D
6. B 12. D

Multiple Choice –Problems: Part 1


1. D CL X 50%); The total items of deduction is
2. C (P200K OG – P150K OL) computed as P200K ST OL+P120K LT OL.]
3. B (P200K-P100K)+[(P100K-P150K) X 50%] 11. D [The total items of GI is computed as P200K
4. D (P200K+P100K-P100K-P150K) ST CG+P100K LT CG+P50K ST OG+P150K LT
5. A [(P150K-P120K)+P200K] OG –P100K ST CL-P150K LT CL; The total
6. C [P300K+(P80K-P90K)] items of deduction is computed as P200K ST
7. B OL+ P120K LT OL.]
8. D (P60K-P70K);0 12. D
9. C [(P1.5M-P1.2M) X 50%] 13. A (P1M – P800K)
10. D [The total items of GI is computed as P200K 14. A (4.5M-P3M)
ST CG+(P100K LT CG X50%)+P50K ST 15. A (P50K-P20K)
OG+P150K LT OG –P100K ST CL-(P150K LT 16. D [(P60K-P25K)-P20K 2015NCL]

Multiple Choice –Problem: Part 2


1. D (There is a P45k Net Capital Loss in 2015 to 10. D (The tax basis is P120K ; the gain to be
be carried over in 2016 with a Net Capital recognized is P120K-P80K)
Gain of P12, 500.) 11. C
2. D [(P60K+P25K)-(P50K+P20K)] 12. A (The basis of the new shares is P400K
3. C +P50K-P90K; the gain to be recognized
4. A [(P30K X 50%)-P8K] isP360K+P90K-P400K)
5. B [The OG is P400k; the net capital gain is 13. B
P80k-(P40K X 50%)] 14. D
6. C 15. B
7. D [(P50K X 50%)+(P100K X 50%)] 16. A
8. D [P10K X(P13-P10)] 17. D
9. D

CHAPTER 13: PRINCIPLES OF DEDUCTIONS

Exercise Drill No. 1


Business Expense Personal expense
1. 
2. 
3. 
4. 
5. 
6. 
7. 
8. 
9. 
10. 
11. 
12. 
13. 
14.  *
15. 
*if silent personal, if business seminar, it is an expense

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Exercise Drill No. 2

2011 2012 2013


1. P 200,000
2. P 25,000 P 50,000 P 50,000
3. P 200,000
4. P 200,000
5. P 100,000 P 100,000

Exercise Drill No. 3

Beginning inventory P 520,000


Purchases (P800,000 + P1,200,000) 2,000,000
Total cost of goods available for sale P 2,520,000
Less: Ending inventory
Zircon (400/1000 x P800,000) P 320,000
Ruby (800/4,000 x P1,200,000) 240,000 560,000
Cost of goods sold P 1,960,000

Exercise Drill No. 4 (You can skip this for classroom drills. It is complicated and time consuming. It
may be given as an assignment. )

SLM SYD 150%DB 200% DB


Expense Tax basis Expense Tax basis Expense Tax basis Expense Tax basis
2010 P 225,000 P 1,775,000 P 360,000 1,640,000 P 375,000 P 1,625,000 P 500,000 P1,500,000
2011 450,000 1,325,000 630,000 1,010,000 609,375 1,015,625 750,000 750,000
2012 450,000 875,000 450,000 560,000 380,859.38 634,765.63 375,000 375,000
2013 450,000 425,000 270,000 290,000 238,037.11 396,728.52 150,000 225,000
2014 225,000 200,000 90,000 200,000 196,728.52 200,000 25,000 200,000
2015 0 200,000 0 200,000 0 200,000 - 200,000

Sum of the years digit method


Annual dep’n Semi-annual Actual dep’n Book value
2010 4 720,000.00 360,000.00 360,000.00 1,640,000.00
360,000.00
2011 3 540,000.00 270,000.00 630,000.00 1,010,000.00
270,000.00
2012 2 360,000.00 180,000.00 450,000.00 560,000.00
180,000.00
2013 1 180,000.00 90,000.00 270,000.00 290,000.00
2014 90,000.00 90,000.00 200,000.00
SYD 10

150% Declining balance


Declining rate* 0.375 Annual Semi-annual Actual dep'n Tax Basis
2010 4 750,000.00 375,000.00 375,000.00 1,625,000.00
375,000.00
2011 3 468,750.00 234,375.00 609,375.00 1,015,625.00
234,375.00
2012 2 292,968.75 146,484.38 380,859.38 634,765.63
146,484.38
2013 1 183,105.47 91,552.73 238,037.11 396,728.52
91,552.73
2014 105,175.78 105,175.78 196,728.52 200,000.00
Declining rate = 1/4x150% = 37.50%

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Double declining balance

Declining rate* 0.5 Annual Semi-annual Actual dep'n Tax Basis


2010 4 1,000,000.00 500,000.00 500,000.00 1,500,000.00
500,000.00
2011 3 500,000.00 250,000.00 750,000.00 750,000.00
250,000.00
2012 2 250,000.00 125,000.00 375,000.00 375,000.00
125,000.00
2013 1 175,000.00 25,000.00 150,000.00 225,000.00
25,000.00
2014 - - 25,000 200,000.00
2015 - - - 200,000
*1/4 x 200% = 50%

Exercise Drill No. 5

1. NDE
2. DE
3. CE
4. NDE
5. CE
6. NDE
7. CE
8. NDE
9. DE
10. CE
11. NDE
12. NDE
13. NDE
14. NDE
15. NDE
16. DE
17. CE
18. CE
19. CE
20. DE
21. DE
22. DE
23. NDE
24. NDE
25. NDE
26. NDE
27. DE
28. NDE
29. NDE
30. NDE(best answer but this is not an expense)

TRUE OR FALSE 1
1. True 6. True
2. False** 7. True
3. False 8. False *
4. True 9. False
5. False 10. True

*In taxation, this is a capital expenditure


** Tax basis or book value not cost

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TRUE OR FALSE 2
1. False* 6. True
2. True 7. True
3. True 8. False
4. False 9. False (records of gross income)
5. True 10. False (because allowed by law)
*As a rule, expense of regular income only.

Multiple Choice – Theory – Part 1


1. C 10. C 19. B
2. A 11. D 20. D
3. A 12. D 21. D
4. A 13. B 22. C
5. C 14. D 23. C
6. B 15. B 24. D
7. B 16. D 25. C
8. B 17. A
9. B 18. A

Multiple Choice – Theory – Part 2


1. D 10. A 19. A
2. D 11. D 20. D
3. A 12. D 21. B
4. B 13. C 22. C
5. B 14. C 23. A
6. A 15. D 24. D
7. D 16. D 25. D (no outflow)
8. D 17. A
9. D 18. D

Multiple Choice – Problem – Part 1


1. A 8. B 13. A
2. A (P40K+P250K-P80K) (P30K+P12K+P8K+P20K) 14. B
3. A 9. C (P4.5M/9) 15. D
4. C (P80K+P70K) 10. A 16. A (NRFC is subject to final
5. B 11. C (P120K+P300K-P140K) tax. No deduction is
6. C (P45K/12 X 10) 12. D allowed.)
7. B [(P15K X 2)+ P18K] [(P100K/5)+(P90K/3)+(P
20K X ½)]

Multiple Choice – Problem – Part 2


1. A (P600K+P200K) 8. B 11. C [P400K+(P150K X
2. A 9. A 1/3)+P80K +P25K]
3. C (P42M-P41.7M) 10. D [(P400K X 7/8)+(P150K 12. A
4. B X 1/3)+P80K 13. B
5. C +P25K];NOTE: Supplies is 14. B
6. B a from prepayment. 15. D
7. A (P800K-P500K)

Multiple Choice – Problem – Part 3


1. B (The input VAT must be excluded.)
2. D (The VAT is part of supplies expense.)
3. D (The cost of the equipment for a non-VAT taxpayer shall be (P150,000 + P18,000) or P168,000/5
years = P33,600.)
4. D (P5,600 / 5%, note that the 5% is based on the rent expense, exclusive of VAT.)
5. A (Zero.
6. D (P10,000 x 25% surcharge)
7. C
8. B (P27,440 x 2% = P548.8; P27,440 – P548.80 = P26,891.20)
9. C (The supplier is non-VAT, so there is no difference as there is no Input VAT to account for.)
10. B

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CHAPTER 13-A: REGULAR ALLOWABLE ITEMIZED DEDUCTIONS

TRUE OR FALSE 1
1. False (non-deductible)
2. True
3. False (no qualification)
4. True
5. False
6. True
7. False
8. True
9. False (as tax expense, basic only)
10. True
11. False
12. False
13. True
14. False
15. True

TRUE OR FALSE 2
1. True 7. True 12. True (This is recovery
2. False 8. True of lost profits)
3. False 9. False 13. True
4. True 10. True 14. False
5. True 11. False 15. True
6. True

TRUE OR FALSE 3
1. True 9. True 16. False
2. True 10. True 17. True
3. True 11. True 18. True* (not less than)
4. False (tax basis of value 12. False (expensed or 19. False
given) capitalized) 20. True
5. True 13. False (5%) 21. False
6. True 14. False (fixed by law as 10
7. True years)
8. True 15. False

Multiple Choice – Theory 1


1. C 5. C 11. C
2. A 6. C 12. A
3. A 7. C 13. B
4. D (D is fringe benefit 8. D 14. C
expense. Mandatory payroll 9. C 15. C
deduction is deduction 10. D
against compensation.)

Multiple Choice – Theory 2


1. C 6. C
2. D 7. A
3. A (securities becoming worthless is generally 8. A
a capital loss) 9. D
4. A 10. D
5. D

Multiple Choice – Problems 1


1. A 8. D 13. C
2. C (P200K+P50K) 9. B 14. C [(P500K-P400K)-P70K
3. D 10. A 2012 NOLCO]
4. A 11. C 15. C [(P150K/P500K) X
5. D 12. C [(P400K GI-P300K Bus. P125K]
6. B [P400K-(P100K X 33%)] Exp.) +P70K-P60K
7. C (P50K+P70K) 2014NOLCO]

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Multiple Choice – Problems 2
1. B 7. C [(P300K/10)+ P400K 10. B (P50K+P30K Limit); The
2. A CSC] limit is computed as
3. D (P32,000/32%)* 8. C [P400K+(P300K (P500K-P200K) x 10% for
4. C (P270K Limit for 2015PSC/10)+(P200K individuals.
Malaysia+P175K Income 2016PSC/10)] 11. B (P400K-P75K)
tax paid for Singapore); 9. C (P50K Limit for 12. C [(P500K-P200K)-P80K]
Note: The foreign tax to be contribution to the 13. C (P325K+P220K)
credited is whichever is Government in NPA 14. C (P2M X 0.5% Limit)
lower b/n the Limit and +P30K+P100K); The limit 15. B (The limit is P2M x 1%
the Income tax paid. is computed as 5% of the or 20K, since the limit is
5. B [(P500K-P200K)/10+ P P1M NI before greater than the actual
200K CSC] contribution expense for EAR, the actual is used)
6. B (P1M – 20%XP1M) corporations. 16. C (P15K S + P14K R)
*This is an NIRC question. The grossed-up value inclusive of the monetary value and fringe benefits tax is an expense to
the employer.

CHAPTER 13-B: SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS AND NOLCO

TRUE OR FALSE
1. False (25%) 11. True (deductible amount in total is twice the
2. False (additional 50%) amount of expense)
3. True 12. True
4. False (only distribution of income) 13. True
5. True 14. True
6. True 15. True
7. False 16. False
8. True 17. True
9. False (20%) 18. False
10. False (15%) 19. True*
20. True (Note: acquirer’s own NOLCO)
*(Both of them however can be carried over so long as both of them did not arise from the same year. In other words the
NOLCO occurred earlier than the NCLCO)
Exercise Drills
Deduction incentive Incentive limit
1. 15% of salaries to senior citizen None
2. 25% of salaries paid to disabled persons None
3. 50% of training expense None
4. 50% of the cost of improvement None
5. 50% of the contribution None
6. 100% of the compliance expense None
7. Value of pro-bono services 10% of gross income
8. 50% of productivity incentive bonus None

Multiple Choice – Problem 1


1. D(P345K X 20%) 10. D [(P93,750/75%) X 20%] 16. C (P350K X 100%)
2. B (P182K X 15%) 11. D (P2.1M X 25%) 17. A
3. B (P144K X 15%) 12. D (P300K X 50%) 18. C (P1M X 100%)
4. A 13. A [P900K-P500K-(P500K 19. B ( P1.4M X 10% Limit
5. B [(P900K-P350K-P45K) X X 50% Contribution )+[(180-60) x 1k Pro
20%] expense)] bono]
6. B (P3.5M-P3.2M) 14. D [P900K-(P900K X 10%)- 20. B [P8M +P6M) X 10%
7. B (P4.1M-P2.1M) (P500K X 50% Limit]
8. D [(P3M-P2.4M) X 50%] Contribution expense)] 21. D (P800K X 50%)
9. B (P800K X 20%) 15. D (P300K X 50%) 22. C (P200K X 50%)

Multiple Choice – Problem 2


1. B (P2.5M GI-P1M ID-P300K DI) 6. A
2. A 7. B
3. B (P1.8M GI-P1.2M RID-P800K SID) 8. C (P400K +P200K-P800K)
4. A 9. D
5. B (P400K+P200K+P100K) 10. A
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CHAPTER 13-C: OPTIONAL STANDARD DEDUCTIONS

TRUE OR FALSE
1. True 12. True
2. False 13. True
3. False (Note: or gross income) 14. False
4. True 15. True
5. False 16. False
6. False 17. False
7. False (when OSD is used, 60% of sales or 18. True
gross receipts) 19. False (Note that NCLCO is used in the
8. True measurement of an item of gross income (i.e.
9. True net capital gain) and is not an expense.
10. True 20. False
11. False

Exercise Drill No. 1


1. RC 
2. RA 
3. NRC 
4. NRA
5. Regular DC 
6. Regular RFC 
7. Special corporations
8. Corporations under special regimes
9. Business partnership 
10. GPP 

Exercise Drill No. 2


1. P2,008,000 (P5,020,000 x 2%)
2. P1,008,000 (P2,520,000 x 2%)

Exercise Drill No. 3


Taxpayer Cash basis Accrual basis
1. Individual P 3,120,000 P 3,600,000
2. Corporation 1,380,000 1,740,000

Exercise Drill No. 4


1. P2,000,000, computed as (P5,000,000 x 40%)
2. P840,000, computed as (P2,000,000 + P100,000) x 40%

Multiple Choice – Theory 1


1. A 5. A 9. D
2. D 6. D 10. A
3. A 7. A 11. D
4. B 8. B

Multiple Choice – Theory 2


1. C 6. B 11. D
2. A 7. D 12. C
3. D 8. D 13. C
4. D 9. A 14. A
5. C 10. C

Multiple Choice – Problem 1


1. D [(P800K+P600K+P300K+P400K) X 40%] 6. C [(P3.4M+P120K) X 40%]
2. A(P2.1M-840K) 7. B [(P3.4M-P1.2M)+P120K+P80K]X40%
3. A 8. A (P800K X 40%)
4. D (P600K+P400K+P300K+P150K) 9. B [(P800K+P100K+P20K)X40%]
5. B (P400K+P300K+P150K) 10. A [(P800K+P200K+P20K)X40%]

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Multiple Choice – Problem 2
1. C [(P7.2M+P100K) X 40%] 5. A
2. B [(P7.2M-P4.7M COGS)+P100K+P20K]X 40% 6. A
3. B (P200K+P2.5M-P400K) 7. B (P1M-400K)+P60K
4. C (P2M X 40%) 8. C [(P1M-P600K)+60K] X 40%

CHAPTER 14: INDIVIDUAL INCOME TAXATION

True or False
1. True 6. True 12. True
2. True 7. True 13. True
3. False (some are not 8. False 14. True
subject to FIT) 9. True 15. False
4. True 10. True
5. True 11. False
Multiple Choice Theory – Part 1
1. A 5. A 9. A
2. C 6. B 10. D
3. D 7. A 11. B
4. A 8. D 12. D

Multiple Choice Theory – Part 2


1. C 6. C 11. C
2. A 7. A
3. A 8. D
4. A 9. C
5. D 10. D

Multiple Choice Theory – Part 3


1. A 8. A 15. C
2. C 9. B 16. C
3. C 10. B 17. C
4. C 11. D (Errata: B is employers) 18. C
5. B 12. A 19. D
6. A 13. D 20. A
7. C 14. A 21. D

Multiple Choice – Problems: Part 1


1. A 7. B 13. B
2. A 8. C 14. D
3. C 9. C 15. B
4. B 10. B 16. C
5. B 11. C 17. C
6. A 12. D

Multiple Choice – Problems: Part 1


1. C (P180K + P200K + P210K + P250K) Contribution subject to limit); Limit on NANPI
2. C (P280K + P50K + P100K + P25K + P40K) contribution = (P600K GP - P100K ODE) x
3. A (P280K + P50K) 10% = P50K; lower than P55K actual.
4. C (P4M + P800K + P200K; Note: Car usage 8. B (Taxable income = P455K + P15K. Please
and the house and lot are subject to fringe use tax table.)
benefit tax.) 9. C (Taxable income = P700,000; Taxable
5. C [(P2.5M/5 X 50%)/65% X 35%] + income per tax table is P105,000. Foreign tax
(P5M/65% X 35%) credit limit is P300K/P700K x P105,000 =
6. B P45,000. Tax credit is P45,000 since lower
(P600K + P20K O. gain – P200K expense – than P55,000.
P40K O. loss +10K Net Capital gain); Net 10. A (Only taxpayers subject to tax on global
capital gain = 80K x 50% + 45K - 90K x 50% - income such as resident citizen is qualified
30K.) for tax credit for foreign taxes paid.)
7. A (P600K Gross profit - P100K Other
deduction - P50K Fully deductible – P50K

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Multiple Choice – Problems: Part 2
1. C (P400K - P15K tardiness 4. D (P617.5K/95% service 6. D (P617,500/95%) x 8%
- P10K SSS - P8K PH - P7K fees - P230K deductible 7. B
Pag-ibig - P2K Union dues) expense) (P100K+P15K+P50K+[P3
2. C (P321K + P59K WH tax) 5. D (Tax due per tax table is 0K-(P16K/80% X 33%)]
3. B (P30K utilities + P120K P35,000 – P32,500 8. A (500K-188400-150KPE)
salaries + P80K rent & withholding tax, computed
miscellaneous) as (P617,500/95%) x 5%)

9. B
Salaries expense P 100,000
Depreciation expense 15,000
Rent and other expense 50,000
Interest expense (P30K – 33% x P16K/80%) 23,400
Total deduction P 188,400

10. B
Gross profit from operation P 500,000
Interest income from notes 12,000
Total gross income subject to regular tax P 512,000
Less: Total deductions 188,400
Net income P 323,600

11. C

Compensation income P 820,000


Less: Non-taxable compensation 20,000
Taxable compensation income P 800,000

Gross receipts P 1,800,000


Less: Cost of services 500,000
Gross profit from operations P 1,300,000
Other income subject to RIT 100,000
Total gross income subject to RIT P 1,400,000
Less: Deductions 300,000
Net income 1,100,000
Taxable income P 1,900,000

Tax due of P1.9M per tax table P 460,000


Less: Tax credits
WH tax on compensation P 130,000
CWT on gross income 14,000
Estimated quarterly tax payments 94,000 238,000
Tax still due P 222,000

12. B (Errata: The problem seeks tax STILL Due)

Compensation income P 820,000


Less: Non-taxable compensation 20,000
Taxable compensation income P 800,000

Gross receipts P 1,800,000


Less: Cost of services -
Gross profit from operations P 1,800,000
Other income subject to RIT 100,000
Total gross income subject to RIT P 1,900,000
Less: OSD (P1.8M x 40%) 720,000
Net income 1,180,000
Taxable income P 1,980,000

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Tax due of P1.98M per tax table P 484,000
Less: Tax credits
WH tax on compensation P 130,000
CWT on gross income 14,000
Estimated quarterly tax payments 94,000 238,000
Tax still due P 246,000

13. A
Tax due
Compensation income P 820,000
Less: Non-taxable compensation 20,000
Taxable compensation income P 800,000 P 130,000
Gross receipts P 1,800,000
Less: Cost of services -
Gross profit from operations P 1,800,000
Other income subject to RIT 100,000
Total receipts and other income P 1,900,000
Multiply by: 8% 152,000
Total tax due P 282,000

14. C
Sales P 2,500,000
Less: Cost of sales 1,000,000
Gross income from operations P 1,500,000
Add: Other income
Share in GPP net income 200,000
Total gross income subject to RIT P 1,700,000
Less: Deductions 700,000
Net income P 1,000,000
Tax due of P1M per tax table P 190,000

15. C
Sales P 2,500,000
Add: Other income
Share in GPP net income 200,000
Total sales and other income P 2,700,000
Less: Annual income exemption 250,000
Total P 2,450,000
Multiply by: 8%
Tax due P 196,000

CHAPTER 15-A: CORPORATE INCOME TAX – SPECIAL CORPORATIONS

True or False – Part 1


1. True 9. True 15. False (world taxable
2. True 10. False income)
3. False (exempt) 11. False 16. False
4. True 12. False (Except FCDU) 17. False
5. True 13. True 18. True
6. False 14. False (gross Philippine 19. False (They are subject to
7. False billings) compromise penalty.)
8. True 20. True

True or False – Part 2


1. False (dominance test) 6. False (Philippine income) 11. True
2. False 7. False (gross income) 12. True
3. True 8. False (7.5% of gross 13. True
4. False (4.5% of gross income) 14. True
income) 9. True 15. False (three years)
5. True 10. True
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True or False – Part 3
1. False 6. True 12. True
2. True 7. True 13. True
3. False (wherever billed so 8. False 14. True
long as outgoing) 9. True (the dominance test) 15. False (30% on world
4. True 10. False taxable income)
5. True 11. True

Multiple Choice – Theory 1


1. D 6. A 11. C
2. A 7. C 12. D
3. A 8. D 13. D
4. D 9. B 14. C
5. A 10. A 15. D

Multiple Choice – Theory 2


1. C 7. D 13. C
2. C 8. B 14. B
3. D 9. D 15. A
4. B 10. C 16. A
5. C 11. B 17. B
6. B 12. D 18. C

Multiple Choices – Case Problems

Problem 1:
1. D (P350K Total TI x 30%) 6. A (P350K Total TI x 30%) 11. C (P400K PH GI x 7.5%)
2. A (P200K PH TI x 30%) 7. B (P400K PH GI x 2.5%) 12. B (P350K Total TI x 60%)x
3. B (P400K PH GI x 30%) 8. C (P200K PH TI x 10%) 30%
4. B (P350K Total TI x 10%) 9. C (P400K PH GI x 25%)
5. D 10. A (P400K PH GI x 4.5%)

Problem 2:
1. A (P300K Total TI x 30%)
2. C (P300K Related GI x 10%)
3. B (P100K Unrelated TI x 30%)

Problem 3:
1. B (P3M FCDU II to other residents x 10%)
2. B (P1.2M RBU NI x 30%)

Problem 4:
1. A [(P500K GI-P200K DD- 3. D 7. C
P62.5K Allocated 4. C 8. B (P500K PH GI X30% FT)
CE)x30%] 5. D
2. D 6. C

Problem 5:
1. D (P1.5M Total NI x 30%)
2. B (P3M Outgoing GR x 2.5%)

Problem 6:
1. D [(P1M AUS)+(1K X P750 RUS)+P1.5M JAP]X2.5%; The P750 is computed as P1.5M/2K which is from
PH-JAP
2. B [(P1M+P1.25M+P2M+P1.5M)-P3M GE] X 30%

Problem 7:
1. C (P4M X 2.5%)
2. C (P4M X 4.5%)

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Problem 8:
1. D [P4M x 60% - P3M x 50%) x 30% tax]
Note that the rule on non-profit school is classification not the dominance test. But the same is subject
to the Constitutional exemption. If the Constitutional exemption does not apply, the income from
unrelated activities would be taxed.
2. A (Everything will be exempt by virtue of Constitutional exemption.)
3. A (P4M x 60% - P3M x 50%) x 30% tax. Only the income from unrelated activities is taxable.
4. C (P4M – P3M) x 30%. Note that the dominance test is failed.
5. D (P4M – P3M) x 30%. Private hospitals are subject to the 30% regular income tax.
6. B (P4M – P3M) x 30%. The dominance test is failed.
7. B. Only the income from unrelated activities is taxable.

Problem 9:
1. D (P2M X 10%) Dominant test is passed.
2. D (Same answer. The Constitutional exemption for income actually, directly and exclusively for
educational purposes relates to non-profit, non-stock educational institutions.)

Integrative Illustration… (You can handle this. Contact me via facebook if you need support.)

CHAPTER 15-B: CORPORATE INCOME TAX – REGULAR CORPORATIONS

TRUE OR FALSE: Part 1


1. True 7. False (Domestic only.) 13. True
2. False (It apply to resident 8. False 14. False (on total gross
foreign corporations.) 9. True income)
3. True 10. False 15. False (start by 1/1/ 2015)
4. False 11. False (also when RCIT <
5. True MCIT)
6. True 12. True

TRUE OR FALSE: Part 2


1. False 6. True 12. False (Third year)
2. True 7. False 13. False (comparison is made
3. True 8. True with cumulative balances.)
4. False (MCIT gross income 9. True 14. True
= OSD gross income) 10. True (See. Chapter 13-C) 15. True
5. False (cost of goods sold) 11. False

TRUE OR FALSE: Part 3


1. False 5. False (Sec. of Finance) 12. True
2. False (not holding 6. False (domestic only) 13. True
companies) 7. True 14. True
3. False (if held by more than 8. True 15. False (excluding domestic
20 people, it is closed 9. False corporation branches)
corporation) 10. True
4. True 11. True

MULTIPLE CHOICE – Theory: Part 1


1. C 6. D 11. A
2. C 7. C 12. C
3. A 8. C 13. D
4. D 9. A 14. C
5. D 10. B 15. D

Multiple Choice – Theory: Part 2


1. B 6. D 11. A
2. B 7. A 12. D
3. C 8. A 13. A
4. A 9. D 14. B
5. D 10. C 15. A

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Multiple Choice – Theory: Part 3
1. A 6. D 11. D
2. A 7. C 12. B
3. A 8. A 13. C
4. B 9. D 14. B
5. A 10. D 15. A

Multiple Choice – Problem: Part 1


1. C [(P1.6M GI + P150K on deposit abroad- P2.1M 14. C [MCIT=(P500K
GOS) X 2%] Bus Exp= P45k) GI+P200K
2. B [(P1.6M+ P150K GOS- 9. C (MCIT=P800K PH GI x RI)x2%=P14K;RCIT=(P50
P1.7M AD) X 30%] 2%= P16K; RCIT=(P800K 0K GI+P200K RI-P820K
3. C (for 2013 the P120K PH GI-P800K Bus Ecp) x BE) x30%=0]
MCIT; for 2014 the P220K 30%=0) 15. D [MCIT=(P1M GI+P200K
RCIT-P10K 2013Excess 10. C (MCIT=P7MTotal GI x RI)x2%=P24K;
MCIT) 2%= P140K; RCIT=100K RCIT=(P1M GI +P200K RI-
4. A (for 2015,the P190K Within GI x 30%=P30K) P850K BE-P120K
MCIT; for 2016,theP180K 11. D (MCIT=P4M Within GI x NOLCO)x30%=P69K; Tax
RCIT-P180K 2015 Excess 2%=P80K;RCIT=P500Kx3 Due=P69K-P14K
MCIT) 0%=P150K) 2013MCIT=P55K]
5. D 12. A 16. B (P8M x 2% MCIT) is
6. D 13. C [MCIT= P7M GI x greater than the RCIT.
7. B (P100K NI x 30%) 2%=P140K; RCIT=(P600K 17. D (Net income is P8M x
8. C (MCIT=P2M Total GI x NI-P300K 2013NOLCO)x 60% x 30% tax rate.)
2% o=P40K; RCIT=P2M 30%=P90K)
Total GI+P250K Interest

Multiple Choice – Problem: Part 2

1. C (P970K RCIT-P70K 8. D (P230K RCIT-P40K 12. B


2014MCIT-P130K 2013MCIT-P50K [(4M-3.8M)+600K
2015MCIT-P120K CWT of 2014MCIT-P10K NOLCO+240K+120K-600K
Current Quarter-P150 2015MCIT) Dividend-80K MCIT] x
CWT of Previous Quarter- 9. A (P1.6M RCIT-P180K 10%
P350K Income Tax MCIT of PY-P120K Excess 13. A [(P1.2M – P380K higher
payment of Previous CWT of PY-P220K CWT of MCIT +400K+100K -700K
Quarter) Current Quarter-P250K dividends – P400K
2. D (P2150K RCIT- P160K CWT of Previous Quarter- Approp. – P50K excess
CWT of Current Quarter- P430K Income tax paid-up) x 10%
P410 CWT of Previous payment of Previous 14. C
Quarter-P880K Income Quarter) 15. C
Tax payment of Previous 10. B (P3M RCIT-P180K MCIT 16. B (Tax due = MCIT
Quarter) of PY-P120K Excess CWT (P6M+100K) x 2% - P5K
3. A of PY-P260K CWT of CWT – P45K est. tax
4. D (P105K RCIT-P80K Current Quarter-P810K payments)
2012 MCIT- P25K CWT of Previous Quarter- 17. C (P6M – P5M+100K –
2013MCIT) P1.47M Income tax 122K + 160K + 800K -
5. B (P140K-P45K 2013 payment of previous 700K) + P1.8M – P2.0M =
MCIT-P20K 2014MCIT) Quarter) P103,800.
6. B (P100K-P35K 2013 11. B
MCIT) [(P4M-3.2M)x70% 18. D (P6M – P4M – P1.5M
7. C (P60K RCIT-P150K +40K+60K-400K+500K- approp.) x 10%
CWT-P5K-P10K) 400K] x 10%

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