INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 9: Losses

CHAPTER 9

LOSSES
Problem 9 1 TRUE OR FALSE 1. True 2. True 3. True 4. True 5. True 6. True 7. True 8. False deductible only to either income or estate. 9. False NOLCO is not applicable when OSD is used. 10. False NOLCO is not applicable under MCIT. 11. True 12. False not deductible 13. False lower amount of the replacement cost or book value 14. True 15. True 16. False Deductible from gambling gains only. Problem 9 2 1. A 2. C 3. D 4. C 5. 6. 7. 8. D A D A 9. A 10. C 11. B 12. C P10,000

Problem 9 3 Not in the choices = P10,000. Account worthless and written-off

Note: The depreciation amounting to P16,000 is deductible from business income as an expense but not a loss. Problem 9 4 B B. Loss from sale of business equipment Problem 9 5 A Loss on sale of capital assets is not deductible from business income. Problem 9 6 C Deductible loss Book value (P100,000 x 10% x 4) Problem 9 7 D Deductible loss book value lower than replacement cost Problem 9 8 C Acquisition cost Less: Accum. Dpn. [(P600,000 x 90%)/10] x 2 Book value Multiplied by percent of damaged portion Damaged portion Deductible loss replacement cost (lower) P 40,000 P 50,000 P600,000 108,000 P492,000 30% P147,600 P127,600 P100,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 9: Losses

Problem 9 9

No deductible loss at balance sheet date. On June 30, the reportable gain would be P20,000, or (P120,000 P100,000).
Problem 9 10 D

Net operating loss per GAAP Less: Bad debts estimate NOLCO in the succeeding years

P50,000 10,000 P40,000

Problem 9 11 D Zero. An individual who claims the 10% optional standard deduction shall not simultaneously claim deduction of the NOLCO. Problem 9 12 P25,000. The lower between the carrying value and replacement cost. Problem 9 13 Book value (P1,200,000) x10/20 Less: Insurance recovery Scrap recovered Deductible loss P600,000 P200,000 20,000 220,000 P380,000

Problem 9 14 None, because the demolition cost, net of amount realized from scrap should be capitalized as part of the factory building cost. Problem 9 15 Net loss reported Estimated bad debts Warranty expense Net loss carry-over Problem 9 16 Gross profit year 1 Less: Other operating expenses NOLCO for year 2 Problem 9 17 Year 1 Sale Less: Cost Notes receivable Gain No gain or loss on year 1 because there was no actual sale of foreclosed property. Problem 9 18 None, because the loss should be recognized only upon actual sale of the property foreclosed. Problem 9 19 None. There is no deductible loss from gross income. Gambling losses can only be deducted from the gambling winnings. Gambling transactions are not ordinary business transactions, but capital asset transaction. Accordingly, gambling losses are not an allowable deduction from ordinary gross income. Year 2 P1,800,000 1,500,000 P 300,000 P 50,000 ( 20,000) ( 10,000) P 20,000 P500,000 580,000 P 80,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 9: Losses

Problem 9 20 Loss on robbery (construction supplies) Loss on pilferage of business supplies Replacement cost of damaged portion of machine Deductible loss

P50,000 10,000 150,000 P210,000

The compensatory and actual damages can be claimed under the classification of deductible damages. Problem 9 21 1. OSD (P2,000,000 x 40%) 2. OSD (P2,000,000 P500,000) x 40% P800,000 P600,000 P1,000,000 2% P 20,000 P - 0 -

Problem 9 22 1. Gross income (P2,000,000 P1,000,000) Multiplied by MCIT rate Income tax due MCIT 2. NOLCO for year 200E Note: The 3-year reglamentary period for NOLCO shall not be suspended even if MCIT has been used. NOLCO has expired effectively on 200D. Problem 9 23 Pilferage loss Capital loss on sale of capital asset Casualty loss Total deductible loss Problem 9 24 Death of livestock previously purchased Cost of property expropriated by the government (P30,000 P10,000) Total deductible farm loss Problem 9 25 Cost of the building Less: Accumulated depreciation (P10,000,000/30) x 5 Book value before additions and improvements Add: Additions and improvements Total Less: Accum depn (P8,833,333/25) x 3 Book value Less: Insurance collected Salvage value Deductible loss Problem 9 26 Ordinary P5,000 15,000 P20,000

Capital P10,000 . P10,000 P10,000 20,000 P30,000 P10,000,000 1,666,667 P 8,333,333 500,000 P 8,833,333 1,060,000 P 7,773,333

P5,800,000 300,000

6,100,000 P 1,673,333

Compensatory liquidated damages Replacement cost of damaged portion of machine Book value of abandoned equipment (P150,000 P120,000)

P100,000 40,000 30,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Amount of deductible losses

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Chapter 9: Losses

P170,000

Loss on unrealized earnings is not deductible because it is not an actual loss (Sec. 96, Rev. Regs. No. 2). The casualty losses are fully compensated by insurance, hence, not deductible. The excess of insurance compensation is a taxable gain and should not be treated as a deduction of other losses (Sec. 5, Rev. Regs. No. 12-77). Loss caused by embezzlement of funds by a known person can only be deducted when the right of recovery becomes worthless (Talisay-Silay Milling Co. Inc., vs. Commissioner, CTA Cases No. 1399 and 1406, December 29, 1965). Capital losses are not deductible from business gross income. (Sec. 39(C), NIRC)