TAX 1

CASE: PREPARATION OF TAX RETURNS

C.V.R.Naranjo, CPA

Mr. Adonahan Co is a resident citizen and married to Maria Coritha Tan-Co. The
couple has 5 beautiful and handsome children, namely:
NAME
BIRTHDATE
1. Alexander T. August 1, 1987
Co
2. Miriam T. Co
September
4,
1994
3. Pia T. Co
October 8, 1997
4. Panfilo T. Co
November
9,
2000
5. Allan T. Co
December
31,
2011
Adonahan, Maria Coritha and their children are residing in 091 Ruby St.,Landmark I
Subd., Panacan, Davao City. Adonahan is a part-time employee of HABANG MAY
BUHAY, Co. as an internal auditor. The spouses own a merchandising business,
registered under the name of Mr. Adonahan Co. Mr. Co was registered as an
employee in Bureau of Internal Revenue, Revenue District Office No. 101 on January
31, 2010 and was issued with Taxpayers Identification Number 111-222-333-000.
The business was registered on March 31, 2013 with a trade name #ADONAHAN
GENERAL MERCHANDISE. Mr. Adonahan hired 6 employees including Mr.
CarlitoReynes, the General Manager. You were also hired by Mr. Adonahan Co to
prepare the BIR Forms and to process any transactions with the Bureau of Internal
Revenue and other government offices. You are paid P5,000 per month for the
services you have rendered.
Upon inspection of documents, you have noted the following recurring expenses Mr.
Adonahans business:
1. A lease contract entered by Mr. Adonahan and Mr. Te, the lessor, states that
the former will pay P40,000 as rent every month.
2. The monthly retainer/professional fee of P5,000 for the monthly services you
have rendered.
3. Adonahan Co withheld 5% and 10% of the rental and professional fee
payments, respectively, and remits its monthly to the BIR.
4. The semi-monthly payroll sheet revealed the following details, the employees
are not allowed to render overtime services:
Employees Name

1. Cherry Joyce Lopez

2. Sheila Mae Castro
3. Carlito Reyes
4. Ma. Thea Villorente
5. Ednel Yee
6. Randy Butch Soria
TOTAL

Stat
us

Basic
Compensat
ion

De
Minimis
Benefit

SSS,
PHIC,
PAGIBIG
CONTRIB
UTIONS

Transpo
rtation
Allowan
ce

Net,
before
withholdin
g taxes

S
S2
M1
S
S
M2

P 9,000
7,000
15,000
8,000
7,500
8,500
P 55,000

P 750
750
750
750
750
750
P 4,500

P 1,200
1,100
2,100
1,150
1,125
1,175
P 7,850

2,000
2,000
5,000
2,000
2,000
2,000
P
15,000

P 10,550
8,650
18,650
9,600
9,125
10,075
P 66,650

5. The 13th month pay is given every November 30, equivalent to 100% of the
Basic Pay.

6. The 2013 Income Tax Return reflected an excess credit of P8,500, which Mr.
Co opted to carry it over as tax credit in the subsequent years. There is also a
net loss of P100,000 in 2013.

FIRST QUARTER of 2014:

The results of the operations for the first quarter of 2014:
#ADONAHAN GENERAL MERCHANDISE
INCOME STATEMENT
For the quarter ending March 31, 2014
GROSS SALES
Less: Sales Returns and Allowances
NET SALES
Less:
Cost
of
Sales
Beginning
Inventory
Add: Purchases
Ending
Inventory
GROSS INCOME
Add: Interest Income from Bank
Deposits, net
TOTAL
GROSS
INCOME
Less:
Administrative
and
Selling
Expenses
Salaries and Wages
Rent
Utilities Expense
Janitorial
and
Messengerial
Expenses
Professional Fees
Depreciation Expense
Representation and Entertainment
Interest Expense
Office Supplies
Miscellaneous Expense
NET INCOME

P
1,200,000
50,000
1,150,000
P 300,000
400,000
200,000

500,000

80,000

650,000
80,000
730,000

149,000
120,000
80,000
75,000
45,000
30,000
12,000
10,000
8,000
20,000

549,000
181,000

The customers of #Adonahan General Merchandise with total purchases of

P400,000 subjected its income payment to 1% creditable withholding tax.

SECOND QUARTER of 2014:

On May 23, 2014, Mr. Co, sold a real property not used in business to Mr.
IlustradoMaamong, with TIN 333-222-111-000 and registered address at
Ligaya St., Brgy. Liloan, Calbayog City. The details of the sold property are as
follows:

TCT No.
384932

Tax Dec.
No.
GRC142726-11

Location

Type

Bulacao,
Cebu City

Commerc
ial

Area
(sq.m)
1,200

Market
Value
P
4,800,00
0

Zonal
Value
P 4,800 /
sq.m

Per certification by the City Assessor of Cebu, there is an improvement in the parcel
of land above, as follows:
TCT No.
8271

Tax Dec.
No.
GRC61127-99

Location

Type

Bulacao,
Cebu City

Commerc
ial
Building

Area
(sq.m)
800

Market
Value
P
5,000,00
0

Zonal
Value
No
Assigned
Zonal
Value

The selling price agreed by the parties is P10,000,000. The parties agreed that the
Mr. Adonahan Co will pay the taxes pertaining to the sale. Mr. Adonahan filed the
required form and paid the corresponding taxes on the time prescribed by law and
was issued with Certificate Authorizing Registration No. 201482623823 dated June
10, 2014.

On June 15, 2014, Mr. Adonahan Co sold for P800,000, 4,000 shares of stocks
of ALOLOY Co.,, not listed in the stock exchange. The investment was not
recorded in the business books of Mr. Adonahan Co, since it was purchased
before the start of the business at 30% above its par value.ALOLOY has
20,000 outstanding shares with a par value of P150 and the balance of
Retained Earnings as of December 31, 2013 is P8,000,000. On the date of
sale, the fair value of the following real properties were noted to be higher
than the book values, at the following amounts:
Land
P 200,000
Building
200,000
The buyer of the shares of stocks is Ms. Maganda P. Moreno, with TIN 336292-382-000 and residing at Padre Gomez St., Cebu City.
On June 30, 2014, Mr. Adonahan Co purchased a Mitsubishi Montero with a
cost of P2,600,000 and was used by in business. He charges P21,500 per
month as a depreciation of the Montero.
The results of the operations for the second quarter of 2014:
#ADONAHAN GENERAL MERCHANDISE
INCOME STATEMENT
For the quarter ending June 30, 2014
GROSS SALES
Less: Sales Returns and Allowances
NET SALES
Less:
Cost
of
Sales
Beginning
Inventory
Add: Purchases
Ending
Inventory
GROSS INCOME
Add: Interest Income from Bank

P
1,550,000
80,000
1,470,000
P 200,000
800,000
340,000

660,000

64,000

810,000
64,000

Deposits, net
TOTAL
GROSS
INCOME
Less:
Administrative
and
Selling
Expenses
Salaries and Wages
Rent
Utilities Expense
Janitorial
and
Messengerial
Expenses
Professional Fees
Depreciation Expense
Representation and Entertainment
Interest Expense
Office Supplies
Miscellaneous Expense
NET INCOME

874,000

149,000
120,000
120,000
90,000
45,000
51,500
24,000
15,000
29,000
45,000

688,500
185,500

The customers of #Adonahan General Merchandise with total purchases of

P600,000 subjected its income payment to 1% creditable withholding tax.

THIRD QUARTER of 2014

On August 18, 2014, Mr. Adonahan Co sold to Mr. Agapito Cruz properties that
are used in business for P5,000,000. The properties are 300 square-meter
commercial lot and the building on the said lot. The fair market value,
assessed value and zonal values of the lot are P2,800,000, P3,800,000,
P3,400,000, respectively, while the fair market value of the building is
P2,300,000. The book value of the building is P2,500,000 and the cost of the
land is P1,500,000. The buyer properly withheld the taxes for the sale of this
ordinary asset.
Mr. Adonahan purchased a Toyota Vios worth P600,000 and was registered
under the name of Mr. Carlito Reyes, as a reward for his valuable service to
the company.
Mr. Adonahan also hired the services of Mr. Chocho, a non-resident Chinese
citizen to be a Chief Operating Officer. For taxation purposes he is classified
as a Non-Resident Alient Not Engaged in Trade or Busines. He receives a
compensation of P50,000 per month. A week after he was hired, he was given
a new Toyota Camry with a cost of P1,200,000.
The results of the operations for the 3rd quarter of 2014 are as follows:
#ADONAHAN GENERAL MERCHANDISE
INCOME STATEMENT
For the quarter ending September 30, 2014
GROSS SALES
Less: Sales Returns and Allowances
NET SALES
Less:
Cost
of
Sales
Beginning
Inventory
Add: Purchases
Ending
Inventory
GROSS INCOME
Add: Dividends Received from AAA
Corp., net
Gain from sale of properties
Add: Interest Income from Bank

P
4,880,000
70,000
4,810,000

P 340,000
2,200,000
550,000

1,990,000
2,820,000

90,000
1,000,000
92,000

1,182,000

Deposits, net
TOTAL
GROSS
INCOME

4,002,000

Less:
Administrative
and
Selling
Expenses
Salaries and Wages
Fringe Benefits
Rent
Utilities Expense
Janitorial
and
Messengerial
Expenses
Professional Fees
Depreciation Expense
Representation and Entertainment
Interest Expense
Office Supplies
Miscellaneous Expense
NET INCOME

199,000
2,482,353
120,000
160,000
100,000
45,000
51,500
30,000
16,000
28,000
42,000

3,273,853
728,147

The customers of #Adonahan General Merchandise with total purchases of

P600,000 subjected its income payment to 1% creditable withholding tax.

FOURTH QUARTER of 2014:

Mr. Adonahan Co gave the 13 th month pay to each employee, equivalent to a

month salary, except for the newly hired, Mr. Chocho.
On November 15, 2014, Adonahan sold another 2,000 shares of stocks of
ALOLOY CO. for P400,000.
Adonahan hired the services of Ako and Co., CPAs with TIN 111-222-321-000,
naming Ms. Charity Lopez as the signing partner with TIN 444-555-222-000
and BIR Accreditation Number 22-332122-888-1121 issued on January 1,
2014 and will expire on December 31, 2016. Ako and Co., CPAs issued the
following financial statements of #Adonahan General Merchandise (before
effecting the effect of taxes).

#ADONAHAN GENERAL MERCHANDISE

STATEMENT OF FINANCIAL POSITION
December 31, 2014
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents
Accounts Receivable
Inventories
Other Assets
Total Current Assets
NONCURRENT ASSETS
Properties and Equipment, net
Other Non-Current Assets
Total Non Current Assets
TOTAL ASSETS
19,600,000

P 5,000,000
2,500,000
500,000
1,200,000
P 9,200,000
P 8,400,000
2,000,000
P10,400,000
P

LIABILITIES AND OWNERS EQUITY

LIABILITIES
CURRENT LIABILITIES
Accounts Payable
Accrued Expenses
Total Current Liabilities
NON CURRENT LIABILITIES
Long Term Loan

P 6,000,000
2,600,000
P 8,600,000
P 7,000,000

TOTAL LIABILITIES

P15,600,000

OWNERS EQUITY
Co, Beginning Capital
Add: Net Income for the year

P 3,111,853
888,147 P 4,000,000

TOTAL LIABILITIES AND OWNERS EQUITY

19,600,000

#ADONAHAN GENERAL MERCHANDISE

INCOME STATEMENT
For the year ended December 31, 2014
GROSS SALES

P
13,500,00
0
150,000
13,350,00
0

Less: Sales Returns and Allowances

NET SALES
Less:
Sales

Cost

of

Beginning
Inventory
Add: Purchases
Ending
Inventory
GROSS INCOME
Add:
Dividend
from
Domestic
Corporation, net
Gain on sale of asset
Interest Income from Bank Deposits,
net
TOTAL
GROSS
INCOME
Less:
Administrative
and
Selling
Expenses
Salaries and Wages
Fringe Benefits
Rent
Utilities Expense
Janitorial
and
Messengerial
Expenses
Professional Fees
Depreciation Expense
Representation and Entertainment

P 300,000
8,500,000
500,000

8,300,000
5,050,000

90,000
1,000,000
350,000

1,440,000
6,490,000

895,000
2,482,353
540,000
500,000
300,000
280,000
184,500
100,000

Interest Expense
Office Supplies
Miscellaneous Expense
NET INCOME

120,000
80,000
120,000

5,601,853
888,147

The customers of #Adonahan General Merchandise with total purchases of

P1,000,000 in the fourth quarter subjected its income payment to 1%
creditable withholding tax.

REQUIRED:
1. Prepare BIR FORM 1601 E for the remittance of the Creditable
Withholding Tax for Rental and Professional Fee Payment for the
month of January 2014.
2. Prepare BIR FORM 1601 C for the remittance of the Withholding Tax
on Compensation for the month of June 2014.
3. Prepare the BIR FORM 2316 to be given by Mr. Adohan Co to Mr.
Carlito Reyes.
4. Prepare the BIR FORM for the sale of real property on May 23, 2014.
5. Prepare the BIR FORM for the sale of real property on August 18,
2014.
6. Prepare the BIR FORM 1603 for the remittance of the fringe benefit
tax withheld for the 3rd quarter of 2014.
7. Prepare the BIR FORM for the sale of shares of stocks on November
15, 2014.
8. Prepare the BIR FORM 1701Q for the FIRST, SECOND and THIRD
QUARTERS of 2014.
9. Prepare the BIR FORM 1701.