Chapter 13 - Principles of Deductions

Multiple Choice - Problems: Part 1

(1) Deductible interest expense 0.00

*Not a business-related expense

(2) Office Supplies on Hand, 1/1/2020 40,000.00

Add: Total Supplies Purchased 250,000.00
Total 290,000.00
Less: Office Supplies on Hand, 3/31/2020 80,000.00
Office Supplies Expense 210,000.00

(3) Deductible Expenses 0.00

*NRA-NETB

(4) Salaries of Administrative Employees 80,000.00

Salaries of Sales Marketing Employees 70,000.00
Deductible Salaries Expense 150,000.00
*Salaries of administrative employees and sales marketing
employees are Operating Expenses.

*Salaries of factory production workers are part of Total

Manufacturing Costs and used also to compute COGS

*COGS is deducted against sales in determining the repor-

table GI from operations

(5) Cost of Equipment Purchased 500,000

Less: Residual Value 100,000
Depreciable Value 400,000
Divided by: Useful Life (yrs) 5
Annual Depreciation Expense 80,000
x 6/12
Depreciation Expense - 2018 40,000

(6) Cost of Property Insurance 45,000

Divided by: 12
Monthly Insurance Expense 3,750
x 10
Deductible Insurance Expense - 2018 37,500

(7) Purchase Price - 2 Heifers 30,000

Purchase Price - Bull 18,000
Deductible Loss 48,000

(8) Salaries of Office Staff 30,000

 Office Utilities 12,000
Office Supplies 8,000
Depreciation - Office Equipment 20,000
Total Deductible Expenses 70,000

(9) Carrying Amount 4,500,000

Divided by: Remaining useful life 9
Depreciation Expense 500,000

(10) Deductible Depreciation Expense 0

(11) Inventory of tools, 1/1/2019 120,000

Add: Purchases of tools 300,000
Total 420,000
Less: Inventory of tools, 12/31/19 140,000
Deductible tools expense 280,000

(12) Depreciation - Equipment (100,000/5) 20,000

Rent Expense (90,000/3) 30,000
Office Supplies Used (20,000/2) 10,000
Total Deductible Expense 60,000

(13) Total Deductible Expense

Mr. Genero's policy 34,000

(14) Compensation Expense

Salaries paid to Philippine employees 300,000

(15) Salaries paid to Philippine employees 300,000

Salaries paid to Chinese employees 1,200,000
Deductible compensation expense 1,500,000

(16) Deductible Compensation Expense 0

*NRFC is subject to final tax. No deduction is allowed.

SOLUTION MANUAL - CHAPTER 13-B

(1) Total Gross Revenue 345,000.00

x 20%
Deductible Amount - Senior Citizen's Discount 69,000.00

(2) Compensation paid to SC employees (w/in proverty level) 182,000.00

x 15%
Deductible additional compensation expense 27,300.00

(3) Compensation given to Mang Pandoy 144,000.00

x 15%
 Total deductible additional compensation expense 21,600.00

(4) Total Deduction allowable to the trust for the income

distribution 0.00

(5) Rent Income 810,000.00

Divided by: 90%
Rent Income - gross 900,000.00
Less: Expenses 350,000.00
Total 550,000.00
Less: Management Fee (5% x 900,000) 45,000.00
Net Distributable Income 505,000.00
x 20%
Deductible amount of income distribution 101,000.00

(6) Required reserve - 2014 3,500,000.00

Less: Required reserve - 2013 3,200,000.00
Deductible amount of transfer to the reserve fund 300,000.00

(7) Earnings from rentals 4,100,000.00

Less: Total business expenses 2,100,000.00
Distributable Income 2,000,000.00
x 90%
Deductible dividend 1,800,000.00

(8) Total operating income 3,000,000.00

Less: Income from related activities 2,400,000.00
Total 600,000.00
x 50%
Tota deductible amount of transfers to reserve 300,000.00

(9) Gross sales 800,000.00

x 20%
Deductible SC's discount 160,000.00

(10) Receipts from SCs 93,750.00

Divided by: 75%
Gross Receipts 125,000.00
x 20%
Deduction for Senior Citizens' Discount 25,000.00

(11) Compensation expense 2,100,000.00

x 25%
Additional deductible compensation expense 525,000.00

(12) Amount incurred in workplace improvements - for PWDs 300,000.00

x 50%
 Additional expense for the improvements 150,000.00

(13) Contribution-acquisition of computer equipment 500,000.00

x 50%
Additional Conttribution Expense 250,000.00

Operating Income 900,000.00

Actual amount of contribution (500,000.00)
Additional Contibution expense (250,000.00)
Net Income 150,000.00

(14) Operating Income 900,000.00

Less: (900,000 x 10%)
Additional Contribution Expense 340,000.00
Net Income 560,000.00

(15) Program Cost 300,000.00

x 50%
Additional Training Expense 150,000.00

(16) Total Cost incurred 350,000.00

x 100%
Additional deduction 350,000.00

(17) Additional Deduction 0.00

(18) Cost 1,000,000.00

x 100%
Additional Deduction 1,000,000.00

CHAPTER 13-C MC PROBLEM 2 ANSWER KEY

(1) Gross Sales Revenue 7,200,000.00

Add: Non-Operating Income 100,000.00
Gross Income 7,300,000.00
x 40%
OSD 2,920,000.00

(2) Gross Sales Revenue 7,200,000.00

Less: Cost of Goods Sold
Beginning Inventory 300,000.00
Add: Purchases 5,800,000.00
Total Goods Available for Sale 6,100,000.00
Less: Ending Inventory 1,400,000.00 4,700,000.00
Total 2,500,000.00
Add: Other Operating Revenues 100,000.00
 Non-Operating Income 20,000.00 120,000.00
Gross Income 2,620,000.00
x 40%
OSD 1,048,000.00

(3) Uncollected billings, 2019 200,000.00

Add: Additional billings, 2020 2,500,000.00
Total 2,700,000.00
Less: Uncollected billings, 2020 400,000.00
Gross receipts 2,300,000.00

(4) Gross Income 2,000,000.00

x 40%
OSD 800,000.00

(5) Allowable OSD 0.00

*Subject to Preferential Tax Rate - not allowed to claim OSD

(6) Sales 1,000,000.00

x 40%
OSD 400,000.00

(7) Sales 1,000,000.00

Less: OSD (1,000,000 x 40%) 400,000.00
Total 600,000.00
Add: Gain on Sale of Equipment 60,000.00
Taxable Income 660,000.00

(8) Sales 1,000,000.00

Less: Cost of Sales 600,000.00
Total 400,000.00
Add: Gain on Sale of Equipment 60,000.00
Total 460,000.00
x 40%
OSD 184,000.00

CHAPTER 14 - MC PROBLEM 2

1. Gross Salaries 400,000

Less: Deductions for
Tardiness and absences 15,000
SSS 10,000
Philhealth 8,000
Pag-ibig 7,000
Union dues 2,000 42,000
 Taxable Compensation Income 358,000

2. Salaries, net of withholding tax 321,000

Add: Tax withheld 59,000
Taxable Compensation Income 380,000

3. Utilities Expense 30,000

Salaries Expense 120,000
Reni and miscellaneous expenses 80,000
Total deductible expense 230,000

4. Service fees (617,500/95%) 650,000

Less: Total deductible expense 230,000
Taxable Net Income 420,000

5. First 400,000 30,000

Excess (20,000x25%) 5,000
Tax Due 35,000
Less: CWT (650,000 x 5%) 32,500
Income Tax still due 2,500

6. Service Fees 650,000

x 0
Tax still due 52,000

7. Salaries Expense 100,000

Depreciation Expense 15,000
Rent and other expenses 50,000
Interest Expense
Interest Expense 30,000
Less: Limit [(16,000/80%) x 33%] 6,600 23,400
Deductible Business Expense 188,400

8. Gross Profit 500,000

Less: Deductible Business Expense 188,400
Total 311,600
Add: Interest income from client notes 12,000
Taxable Income 323,600

9. Gross Profit 500,000

x 0
OSD 200,000

Gross Profit 500,000

Add: Interest Income from Client notes 12,000
Total 512,000
Less: OSD 200,000
 Taxable Income 312,000

10. Sales 900,000

Add: Interest Income from Client notes 12,000
Total 912,000
Less: Individual income exemption on income tax 250,000
Total 662,000
x 0
Income tax due 52,960

11. Compensation income 820,000

Less: Non-taxable compensation 20,000
Taxable Compensation 800,000

Gross Receipts 1,800,000

Less: Cost of services 500,000
Gross profit from operations 1,300,000
Other income subject to RIT 100,000
Total GI subject to RIT 1,400,000
Less: Deductions (Expenses) 300,000
Net Income 1,100,000
Taxable Income 1,900,000

Tax due of 1,900,000 per tax table 460,000

Less: Tax Credits
WH Tax in compensation 130,000
CWT on compensation income 14,000
Est. tax payments made 94,000 238,000
Income tax still due 222,000

12-13 Practice Problems (Try to answer)

Answer for item # 12 is 246,000 and for item # 13 is 282,000

14. Sales 2,500,000

Less: Cost of Sales 1,000,000
Gross income from operations 1,500,000
Add: Other income
Share in GPP net income 200,000
Total GI subject to RIT 1,700,000
Less: Deductions 700,000
Net income 1,000,000

Tax due of 1,000,000 per tax table 190,000

15. Sales 2,500,000

Add: Other income
Share in GPP net income 200,000
Total sales and other income 2,700,000
Less: Annual income exemption 250,000
Total 2,450,000
x 0
Tax due 196,000