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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

84

Chapter 12: Income Tax of Corporations

CHAPTER 12

INCOME TAX OF CORPORATIONS

Problem 12 – 1 TRUE OR FALSE

1. True

2. True

3. False – Only domestic corporations are to be taxed for income within and without.

4. True

5. False – 30% normal tax effective 2009.

6. True

7. True

8. True

9. True

10. False – Not taxable because the corporation is a foreign corporation/

11. False – 30%.

12. False – applicable only to resident Offshore Banking Unit on gross receipts of OBU.

13. False – final tax of 10%

Problem 12 – 2 TRUE OR FALSE

1. False – If the unrelated income of the proprietory educational institution exceeds the related income, the income tax rate applicable would be the corporate income tax of

35%.

2. False – Sale of real property outside the Philippines by a resident foreign corporation

is not subject to tax in the Philippines.

3. False – 10% based on gross income within

4. True

5. True

6. False – In general, GOCCs are subject to corporate income tax.

7. True

8. True

9. True

10. True

11. True

12. True

Problem 12 – 3

Problem 12 – 4

1. A

1. C or D

2. D

2. B

3. D

3. D

4. B

4. A

5. A

5. C

6. D

6. B & D

7. D

7. B

8. C

8.

Not

in the choices

= normal

tax of

30%

 

9. A

9.

Not

in the choices

= normal

tax of

30%

 

10. A

10. B

11. D

11. B

12. B

12. C

13. A

Problem 12 – 5

1. D

Taxable

Income tax

income

due

Gross income (P8,000,000 + P4,000,000) Business expenses (P5,000,000 + P3,000,000) Net taxable income

P12,000,000

8,000,000

P4,000,000

Corporate income tax (P4,000,000 x 30%)

P1,200,000

Note: The land sold is a capital asset. Hence, not subject to corporate income tax but for final tax of 6% based on sales price or zonal value, whichever is higher.

2. C Gross income Business expenses

P8,000,000

5,000,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

85

Chapter 12: Income Tax of Corporations

Net taxable income

P3,000,000

Corporate income tax (P3,000,000 x 30%)

P900,000

Note: The land sold is a capital asset. Hence, not subject to corporate income tax but for final tax of 6% based on sales price or zonal value, whichever is higher.

Problem 12 – 6

B

Gross income within Less: Deductions within Net taxable income Multiplied by normal corporate tax rate

P2,800,000

1,300,000

P1,500,000

30%

Income tax due

P

450,000

Problem 12 – 7

D

Gross income within Multiplied by normal corporate tax rate Income tax due

P5,000,000

 

30%

P1,500,000

Problem 12 – 8

1. Domestic corporation Gross income – within and without (P450,000 + P180,000 + P75,000 + P160,000) Deductions – within and without (P290,000 + P80,000 + P25,000 + P100,000) Net income Multiplied by normal corporate income tax Income tax due and payable

 

P865,000

(495,000)

P370,000

30%

P129,500

2. Resident foreign corporation Gross income within Deductions within Net income Multiplied by normal corporate income tax Income tax due and payable

P450,000

290,000

P160,000

30%

P 56,000

Problem 12 – 9

C

Net income from PAGCOR (P30,000,000 x P28,000,000) Multiplied by normal corporate tax rate Income tax due

P2,000,000

 

30%

P

600,000

Problem 12 – 10

B

Net income from National Power Corporation

P10,000,000

Net income from National Books Store

 

8,000,00

 

0

Total net income Multiplied by corporate normal tax

P18,000,000

 

30

 

%

Income tax due

P 5,400,000

Problem 12 – 11

D

Gross profit Operating expenses before charitable contribution Net income before charitable contribution Charitable contributions - limit (P1,050,000 x 5%) Actual – lower Net taxable income Multiplied by corporate normal tax rate Income tax due and payable

 

P1,600,000

 

(550,000)

 

P1,050,000

P52,500

 

50,000

 

P1,000,000

 

30%

 

P

300,000

Problem 12 – 12

D

Operating loss Operating expenses Gross income Multiplied by minimum corporate income tax rate Income tax payable

(P 200,000)

1,000,000

P 800,000

 

2%

P

16,000

Problem 12 – 13 1. D

YEAR 2005 use 35% normal tax rate

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

86

Chapter 12: Income Tax of Corporations

 

Net income per GAAP Add: Allowance for bad debts Contribution Income before allowable contribution Less: Deductible contribution (P5,450,000 x 5%) Net taxable income Multiply by normal corporate income tax rate Income tax due and payable

 

P5,000,000

150,000

300,000

P5,450,000

272,500

P5,177,500

35%

P1,812,125

2.

D Net income per GAAP Add: Operating expenses Gross income Multiply by minimum corporate income tax rate Minimum corporate income tax

 

P

5,000,000

80,000,000

P85,000,000

2%

P

1,700,000

Normal tax (P5,000,000 x 35%)

P1,812,125

Problem 12 – 14

1

A

.

 

Tax payable – current year (P8,000,000 x 2%)

P

160,000

2

C

.

 

Operating income (P8,000,000 – P7,000,000) Multiplied by normal tax rate Normal tax Less: Excess of MCIT Tax payable

 

P1,000,000

30%

P

300,000

100,000

P

200,000

Problem 12 – 15

None. There is no excess corporate MCIT over NCIT in 2005 to be applied on 2006 because the MCIT is not yet applicable for the company as it only has 3 years of operation in 2005.

A

Problem 12 – 16

C

Rental income (P1,900,000/95%) Capital gains Total gross income Operating expenses Net taxable income Multiplied by corporate normal tax Income tax payable

P2,000,000

 

500,000

P2,500,000

(2,350,000)

P

150,000

30%

P

45,000

Excess of MCIT over NCIT Expanded withholding tax (P2,000,000 – P1,900,000) Total creditable income tax Income tax due Tax refund

 

P 40,000

100,000

P140,000

45,000

P 95,000

Problem 12 – 17

C

Capital gains tax (P1,500,000 x 6%)

 

P 90,000

Problem 12 – 18

1.

D Domestic Corporation:

a. Not traded in local exchange:

 

Selling price Cost (P110 x 12,000 shares) Capital gain

P1,600,000

 
 

1,320,000

P

280,000

Tax on P100,000 x 5% Tax on excess (P280,000 – P100,000) x 10%

P

5,000

18,000

P 23,000

b. Traded in local exchange (P1,800,000 x .005)

 

9,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

87

Chapter 12: Income Tax of Corporations

 

d.

Sale of land – Philippines (P1,200,000 x 6%)

72,00

 

0

P254,000

2.

A Resident Foreign Corporation

a.

P 23,000

b.

9,000

c.

d. (P1,200,000 x 6%)

72,000

 

Total

P104,000

Problem 12 – 19

C

Interest from savings deposits (P3,000,000 x 20%) Royalty income (P1,000,000 x 20%) Interest from a depository bank (P1,500,000 x 7.5%) Total passive final tax

P 600,000

200,000

112,500

P 912,500

Dividend from a domestic corporation received by a domestic corporation is tax exempt. Dividend from a nonresident foreign corporation is subject to normal tax.

Problem 12 – 20

1. B Domestic Corporation

 

a. ($20,000 @ 7.5% x P50)

 

P75,000

b. P300,000 @ 20%

60,000

c. P100,000 @ 20%

20,000

d. P 80,000 @ 20%

16,000

Total

P171,000

2.

B = Resident foreign corporation (same as letter 1)

3.

C Nonresident foreign corporation

a.

Exempted

b. (P300,000 @ 30%)

 

P90,000

c. (P100,000 @ 30%)

30,000

d. (P 80,000 @ 30%)

24,000

Total

P144,000

Problem 12 – 21

1. A Dividend income - (PCB and Magnolia are both domestic corporations) Interest income on US dollar loans ($3,000 x 10% x P50)

 

Exempt

P15,000

2. C Interest on Philippine peso loans Operating expenses Taxable income Multiplied by normal corporate tax Income tax due

P2,000,000

( 900,000)

P1,100,000

 

30%

P

330,000

Problem 12 – 22 Related income Unrelated income Total revenue Operating expenses Net loss

D

 

P1,000,000

1,500,000

P2,500,000

(3,000,000)

(P 500,000)

Minimum corporate income tax (P2,500,000 x 2%)

P50,000

Problem 12 – 23

Nonprofit educational institutions are tax-exempt.

A

Problem 12 – 24

Government educational institutions are tax-exempt.

D

Problem 12 – 25

B

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

88

Chapter 12: Income Tax of Corporations

Problem 12 – 26

A

Manila to Beijing (P5,000 x 2,000) Manila – Hong Kong – Beijing (P6,000 x 4,000) x P3,000/P6,000

 

P10,000,000

12,000,000

Manila to Hong Kong (P3,000 x 2,000) Total reportable gross income within Multiplied by applicable rate Income tax

6,000,000

P28,000,000

2.5%

P

700,000

Problem 12 – 27

Not in the Choices = P2,500,000 & P1,500,000 Dragon Films

 

American Aircraft

Within Gross receipts

P10,000,000

P20,000,000

Multiplied by special tax rate Philippine income taxes

25%

7 ½%

P 2,500,000

P 1,500,000

Note: Gross income means gross receipts. The aforementioned resident foreign corporation are subject special tax rates (final taxes). They are not allowed to deduct costs or expenses from their gross receipts. The cost of service is only applicable for MCIT purposes. (Sec. 27(E) (4), NIRC)

Problem 12 – 28

Income tax (P80,000/80%) x 20%

B

P20,000

Note: Although cooperatives are tax-exempt, they still subject to final income taxes on interest income.

Problem 12 – 29

All of the transactions of Unlad Cooperative are exempted from income taxes.

A

Problem 12 – 30

Income tax due – 2 nd quarter [(P792,000/99%) – P700,000) x 30% Income tax due – 1st quarter [(P495,000/99%) – P480,000) x 30% Withholding tax – 2 nd quarter [(P792,000/99%) x 1% Excess tax credit – 2009 Income tax still due and payable – 2 nd quarter

Not in the choices = P6,000

P 30,000

(

(

( 10,000)

8,000)

6,000)

P

6,000

Note: The withholding tax for the 1 st quarter is already included in the income tax due in the first quarter.

Problem 12 – 31

C

Income tax from ordinary net income (P1,000,000 – P900,000) x 30% Final income taxes:

P30,000

Interest income on peso savings (P100,000 x 20%) Expanded foreign currency deposit (P100,000 x 7.5%) Total income taxes

20,000

7,500

P57,500

Problem 12 – 32

B

Income tax on interest income from peso savings bank (P100,000 x 30%)

P 30,000

Interest income earned by nonresident foreign corporation from EFCD is tax-exempt. Problem 12 – 33 C Tax on cash dividend from a resident foreign corporation (P100,000 x

P 30,000

30%)

Dividend received by a resident foreign corporation from a domestic corporation is tax- exempt.

Problem 12 – 34

Cash dividend from a domestic corporation (P100,000 x 30%)

C

P 30,000

Cash dividend received by a domestic corporation from another domestic corporation is tax- exempt because it is considered earned outside the Philippines since only 40% of its business is done within.

Problem 12 – 35

Zero because the earnings of the said resident foreign corporation have no tax situs in the

Philippines.

D

Problem 12 – 36 Interest from saving deposit – Metrobank (P3,000,000 x 20%) Royalty income – Philippine Mining Company (P1,000,000 x 20%) Interest from a depository bank under expanded foreign currency

P

600,000

200,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

89

Chapter 12: Income Tax of Corporations

deposit - PCI Bank ($30,000 x P50 x 7.5%) Dividends from Zerxes, a resident foreign corporation (P500,000 x 30%) Total final passive income taxes

 

112,500

150,000

 

P1,062,500

Problem 12 – 37

C

 

3 rd Quarter

 

4 th Quarter

Gross income - cumulative Itemized deductions - cumulative Net taxable income Multiplied by normal corporate income tax Income tax due Total income tax paid in previous quarters - tax credit Income tax still due and payable

 

P880,000

P1,120,000

(704,000)

 

(896,000)

 

P176,000

P

224,000

30%

30%

P 52,800

P

67,200

 

(

52,800)

P

14,400

Problem 12 – 38

A

Income subject to normal tax rate (P300,000/ 30%) Passive income (P60,000/20%)

 

P1,000,000

 
 

300,000

Capital gains (P35,000: 5,000 @5%, 30,000@10%) Total income Less: Income taxes paid:

Income tax per annual tax return Final tax on passive income

400,000

 

P1,700,000

 

P300,000

60,000

Capital gains tax Amount subject to 10% surtax

35,000

395,000

 
 

P1,305,000

Problem 12 – 39 Year 2009

 
 

Within

Without

Total

Gross income:

 

Philippine

 

P1,000,000

 

P1,000,000

 

USA

P 400,000

400,000

Japan

300,000

300,000

Deductions:

 

Philippine USA Japan Net income Multiply by tax rate Income tax payable Tax credit allowed – see supporting computation Income tax still due

 

(800,000)

(800,000)

 
 

(200,000)

(200,000)

 

.

(200,000)

(200,000)

P

200,000

P300,000

P

500,000

 

30%

 

P

150,000

 

( 90,000)

P

60,000

Supporting computation:

 
 

Tax credits:

US

(P200,000/P500,000) x P150,000 = P60,000 vs. P80,000

 
 

Allowed, lower

P60,000

 

Japan

(P100,000/P500,000) x P150,000 = P30,000 vs. P30,000 Allowed, lower

30,000

 

P90,000

 

90,000

Total

(P300,000/P500,000) x P150,000 = P90,000 vs. P100,000 Allowed, lower

 

P90,000

Problem 12 – 40

Reported income before tax

 

P10,000,000

Add: Loss from sale of shares of stock outside stock market Total Less: Gains subject to final income tax:

 

5,000

 

P10,005,000

(1)

Gain from sale of stock in the stock market Gain from sale of short-term debt securities Gain from sale of real property

P

25,000

(2)

10,000

(3)

 

(P9,400,000 – P4,400,000) Adjusted income subject to corporate income tax Multiply by normal corporate income tax Correct amount of income tax

5,000,000

 

5,035,000

P

5,630,000

 

30%

 

P

1,689,000

Total reported income before tax Less: Normal corporate income tax Net income after tax

P10,000,000

 

1,689,000

 

P

8,311,000

Problem 12 – 41 Total revenue Operating expenses

P1,000,000

 

(

10,000)

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

90

Chapter 12: Income Tax of Corporations

Service charge – credit card (P1,000,000/5%) x 3% Net income Multiplied by normal corporate tax

( 600,000)

P

380,000

30%

Income tax due Less: Creditable expanded withholding tax (P1,000,000/5%) x ½

P

114,000

100,000

%

Income tax still due and payable

P

14,000

Problem 12 – 42 Taxable income (normal tax) Add: Income subject to final tax Income exempt from tax Income, excluded from gross income Amount of NOLCO deducted

 

P

900,000

P 60,000

50,000

10,000

50,000

170,000

Total Less: Dividends Income tax paid for the year Improperly accumulated income Multiply by tax rate Tax on improperly accumulated income

 

P1,070,000

P150,000

200,000

350,000

 

P

720,000

 

10%

 

P

72,000

Problem 12 – 43 Income tax per ITR (P450,000/30%) Income subject to final tax (P37,500/7.5%) Capital gains:

P1,500,000

 

500,000

P5,000/5%

P100,000

P35,000/10%

350,000

450,000

Total Less: Income tax paid (P450,000 + P37,500 + P40,000) Basis of IAET Multiplied by IAET rate IAET

 

P2,450,000

 

527,500

 

P1,922,500

 

10%

 

P

192,250

Problem 12 – 44

Government educational institutions are exempted from tax. (Sec. 30(I), NIRC.)

Problem 12 – 45

Tuition fees Miscellaneous fees Income from rents Net income, school canteen Net income, book store Gross income Less: Allowable deductions:

Payroll and administrative salary Other operating expenses Interest expense Depreciation, net six room building Taxable income Multiply by the applicable tax rate Income tax

 

P2,843,100

362,600

60,000

36,200

24,800

P3,326,700

P1,425,420

762,330

82,100

37,500

2,307,350

P1,019,350

10%

P 101,935

Note: The tax differential on interest income shall not be used because the tax applicable is 10% not 30% normal tax.

Problem 12 – 46

1.

3 rd year

4 th year

5 th year

6 th year

 

Sales Cost of sales

P1,000,000

P2,500,000

P4,000,000

P5,000,000

( 600,000)

(1,200,000

(2,400,000

(2,700,000

 

)

)

)

 

Rent income Gross income Operating expenses allowed

 

200,000

300,000

100,000

50,000

P 600,000

P1,600,000

P1,700,000

P2,350,000

(

300,000

(1,300,000

(1,400,000

(1,500,000

 

)

)

)

)

 

Net taxable income Multiplied by NCIT rate Income tax due Quarterly tax paid

P

300,000

P

300,000

P

300,000

P

850,000

30%

30%

30%

30%

P

90,000

P

90,000

P

90,000

P

255,000

(

10,000

(

20,000

(

30,000

(

40,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

91

Chapter 12: Income Tax of Corporations

 

)

)

)

)

Income tax still due and payable

P

80,000

P

70,000

P

60,000

P

215,000

2.

3 rd year

4 th year

5 th year

6 th year

Royalty income, net of tax Interest income, net of tax Total passive income, net of tax Divide by Total gross passive income Multiplied by final tax rate Final taxes

 

P 80,000

P160,000

P120,000

P 40,000

20,000

32,000

16,000

24,000

P100,000

P192,000

P136,000

P 64,000

80%

80%

80%

80%

P125,000

P240,000

P170,000

P 80,000

20%

20%

20%

20%

P 25,000

P 48,000

P 34,000

P 16,000

Problem 12 – 47

(1)

Taxable income from operation (P1050,000/70%) Add: NOLCO deducted Interest income (P120,000/80%) Capital gain (P230,000 – P5,000)/90% Total income for GAAP reporting, before tax

 

P1,500,000

 

100,000

150,000

250,000

 

P2,000,000

(2)

Tax on income from operation (P1,500,000 x 30%) Tax on interest income (P150,000 x 20%) Tax on capital gain (P250,000 – P230,000) Total income tax paid

 

P450,000

30,000

20,000

P500,000

(3)

GAAP income Less: Income tax Net income after tax – GAAP

 

P2,000,000

 

500,000

 

P1,500,000

(4)

Taxable income from operation Add: NOLCO Income subjected to final tax (P150,000 + P250,000)

 

P1,500,000

P100,000

 

400,000

500,000

Total Less: Income tax paid Net income after income tax Multiplied by surtax rate IAET = Surtax

 

P2,000,000

 

500,000

 

P1,500,000

 

10%

 

P

150,000

Problem 12 – 48

1. Sales Less: Cost of sales Reportable income per ITR

 

P10,000,000

6,000,000

P 4,000,000

2. Gross profit Less: Operating expenses:

P4,000,000

Salaries Depreciation Supplies Interest expense [P50,000 – (40,000 x 33%) Net taxable income per ITR

P1,000,000

300,000

200,000

36,800

1,536,800

P2,463,200

Note:

Interest income is subject to final tax of 20%

Inter-corporate dividend is tax-exempt.

Losses on investment in securities is not deductible – capital loss

 

3. Final withholding tax paid (P32,000/80%) x 20%

P 8,000

4. Net income before tax per GAAP Less: Income tax (P2,463,200 x 30%) Net income

 

P2,200,000

738,960

P1,461,040