INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 87

SUGGESTED ANSWERS
Chapter 9: Losses

CHAPTER 9
LOSSES
Problem 9 – 1 TRUE OR FALSE
1. True
2. False – Deductible from gambling gains only.
3. True
4. True
5. True
6. True
7. True
8. True
9. True
10. False – NOLCO is not applicable when OSD is used.
11. False – NOLCO is not applicable under MCIT.
12. True
13. False – not deductible
14. False – lower amount of the replacement cost or book value
15. True

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

Problem 9 – 3 D
Book value damaged portion (P80,000 x 60%) P48,000

Deductible loss = cost to rehabilitate, lower P40,000

If the loss is partial, the deductible loss is the lower amount of the damaged portion of the
asset’s book value or the replacement cost of the damaged portion at the time of loss. (Sec. 36(2),
NIRC)

Problem 9 – 4 D
Cost of stolen item P200,000
Less: Insurance recovery 120,000
Deductible loss in 200B P 80,000

No loss is to be reported in year 200A because the litigation for recovery was still in effect. The
decline in value of property is not deductible. Furthermore, a loss property with claim for
reimbursement shall not be deductible until it is ascertained with reasonable certainty of the
reimbursement. (Sec. 7, Rev. Regs. No. 12-77 as amended Rev. Regs. No. 10-79 dated December
12, 1979)

Problem 9 – 5 D
Account worthless and written-off P10,000

Note: The depreciation amounting to P16,000 is deductible from business income as an expense
but not a loss.

Problem 9 – 6 A
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 88
SUGGESTED ANSWERS
Chapter 9: Losses

Loss on sale of capital assets is not deductible from business income.

Problem 9 – 7 C
Deductible loss – Book value (P100,000 x 10% x 4) P 40,000

Problem 9 – 8 D
Deductible loss – book value lower than replacement cost P 50,000

Problem 9 – 9 C
Acquisition cost P600,000
Less: Accum. Dpn. [(P600,000 x 90%)/10] x 2 108,000
Book value P492,000
Multiplied by percent of damaged portion 30%
Damaged portion P147,600

Deductible loss – replacement cost (lower) P127,600

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

Problem 9 – 11 D
Net operating loss per GAAP P50,000
Less: Bad debts estimate 10,000
NOLCO in the succeeding years P40,000

Problem 9 – 12 D
Zero. An individual who claims the 10% optional standard deduction shall not simultaneously
claim deduction of the NOLCO.

Problem 9 – 13 D
The operating loss sustained in China is not deductible from gross income within because a loss
on a nontaxable entity or business transaction is not deductible from the gross income of a
taxable entity or business transaction. The income or losses outside the Philippines of Mr. Chin
is not covered by Philippine taxation.

The capital loss on the sale of his personal car is likewise nondeductible from gross income
within because capital losses are deductible only from capital gains.

Problem 9 – 14 B
Recorded losses P700,000
Less: Book value of the car:
Cost of car P500,000
Less: Accum. dpn (P500,000/5) x 4 400,000 100,000
Deductible loss P600,000

Related party losses are not deductible from gross income. [Sec. 36 (B)(1), NIRC]

Problem 9 – 15
1 Letter B
.
Abandoned machines P2,000,000
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 89
SUGGESTED ANSWERS
Chapter 9: Losses

Less: Accumulated depreciation:

200A beginning P800,000
200A ending (P2M/10M) x 100k 20,000 820,000
Deductible loss P1,180,000

2 Letter C
.
Net operating income P 8,820,000
Add: Book value of the abandoned machines 1,180,000
Total P10,000,000
Less: Depreciation (P0.20 x 500,000) 100,000
Net taxable income P 9,900,000

If a producing well is subsequently abandoned, the following rules shall be applied:

 The unamortized cost thereof, including the undepreciated costs of equipment directly
used therein, shall be allowed as a deduction in the year such well, equipment or facility
is abandoned.

 If such abandoned well is reentered and production is resumed, or if such equipment or

facility is restored into service, the said costs shall be included as part of gross income
in the year of resumption or restoration and shall be amortized or depreciated, as the
case may be. (Sec. 34(D)(7), NIRC)

Problem 9 – 16
P25,000. The lower between the carrying value and replacement cost.

Problem 9 – 17
Book value (P1,200,000) x10/20 P600,000
Less: Insurance recovery P200,000
Scrap recovered 20,000 220,000
Deductible loss P380,000

Problem 9 – 18
None, because the demolition cost, net of amount realized from scrap should be capitalized as
part of the factory building cost.

Problem 9 – 19
Net loss reported P 50,000
Estimated bad debts ( 20,000)
Warranty expense ( 10,000)
Net loss carry-over P 20,000

Problem 9 – 20
Gross profit – year 1 P500,000
Less: Other operating expenses 580,000
NOLCO for year 2 P 80,000

Problem 9 – 21
Year 1 Year 2
Sale P1,800,000
Less: Cost – Notes receivable 1,500,000
Gain P 300,000

No gain or loss on year 1 because there was no actual sale of foreclosed property.
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Chapter 9: Losses

Problem 9 – 22
None, because the loss should be recognized only upon actual sale of the property foreclosed.

Problem 9 – 23
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.

Problem 9 – 24
Loss on robbery (construction supplies) P50,000
Loss on pilferage of business supplies 10,000
Replacement cost of damaged portion of machine 150,000
Deductible loss P210,000

The compensatory and actual damages can be claimed under the classification of deductible
“damages.”

Problem 9 – 25
1. OSD (P2,000,000 x 40%) P800,000

2. OSD (P2,000,000 – P500,000) x 40% P600,000

Problem 9 – 26
1. Gross income (P2,000,000 – P1,000,000) P1,000,000
Multiplied by MCIT rate 2%
Income tax due – MCIT P 20,000

2. NOLCO for year 200E P - 0 -

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 – 27
Ordinary Capital
Pilferage loss P5,000
Capital loss on sale of capital asset P10,000
Casualty loss 15,000 .
Total deductible loss P20,000 P10,000

Problem 9 – 28
Death of livestock previously purchased P10,000
Cost of property expropriated by the government
(P30,000 – P10,000) 20,000
Total deductible farm loss P30,000

Problem 9 – 29
Cost of the building P10,000,000
Less: Accumulated depreciation (P10,000,000/30) x 5 1,666,667
Book value before additions and improvements P 8,333,333
Add: Additions and improvements 500,000
Total P 8,833,333
Less: Accum depn (P8,833,333/25) x 3 1,060,000
Book value P 7,773,333
Less: Insurance collected P5,800,000
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 91
SUGGESTED ANSWERS
Chapter 9: Losses

Salvage value 300,000 6,100,000

Deductible loss P 1,673,333

Problem 9 – 30
Compensatory liquidated damages P100,000
Replacement cost of damaged portion of machine 40,000
Book value of abandoned equipment (P150,000 – P120,000) 30,000
Amount of deductible 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)