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TAX 1

CASE: PREPARATION OF TAX RETURNS C.V.R. Naranjo, CPA

Mr. Ambrocio Cruz is a resident citizen and married to Lucia Tan-Cruz. The couple has 6 beautiful and
handsome children, namely:

NAME BIRTHDATE
1. Ambricia Elsey T. Cruz August 1, 1987
2. Miriam T. Cruz September 4, 1995
3. Pia T. Cruz October 8, 1997
4. Panfilo T. Cruz November 9, 2000
5. Allan T. Cruz December 31, 2011

Ambrocio, Lucia and their children are residing in 091 Ruby St.,Landmark I Subd., Panacan, Davao City.
Ambrocio 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. Ambrocio Cruz. Mr. Cruz was registered as
an employee in Bureau of Internal Revenue, Revenue District Office No. 101 on January 31, 2015 and was
issued with Taxpayers Identification Number 111-222-333-000. The business was registered on March
31, 2016 with a trade name #AMBROCIO GENERAL MERCHANDISE. Mr. Ambrocio hired 6 employees
including Mr. Carlito Reynes, the General Manager. You were also hired by Mr. Ambrocio Cruz 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. Ambrocios business:
1. A lease contract entered by Mr. Ambrocio 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. Ambrocio 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 Status Basic De Minimis SSS, PHIC, Transporta Net, before Withholding
Compensation Benefit PAG-IBIG tion withholding Taxes
CONTRIBUTI Allowance taxes
ONS
1. Cherry Joyce Lopez S P 9,000 P 750 P 1,200 2,000 P 10,550 P1,200
2. Sheila Mae Castro S2 7,000 750 1,100 2,000 8,650 950
3. Carlito Reyes M1 15,000 750 2,100 5,000 18,650 1,500
4. Ma. Thea Villorente S 8,000 750 1,150 2,000 9,600 1,000
5. Jows Bagot S 7,500 750 1,125 2,000 9,125 980
6. Randy Butch Soria M2 8,500 750 1,175 2,000 10,075 1,180
TOTAL P 55,000 P 4,500 P 7,850 P 15,000 P 66,650

5. The 13th month pay is given every November 30, equivalent to 100% of the Monthly Basic Pay.
6. The 2016 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 2015.
FIRST QUARTER of 2017:

The results of the operations for the first quarter of 2017:

#AMBROCIO GENERAL MERCHANDISE

INCOME STATEMENT
For the quarter ending March 31, 2017

GROSS SALES P 1,200,000


Less: Sales Returns and Allowances 50,000
NET SALES 1,150,000
Less: Cost of Sales
Beginning Inventory P 300,000
Add: Purchases 400,000
Ending Inventory 200,000 500,000
GROSS INCOME 650,000
Add: Interest Income from Bank Deposits, net 80,000 80,000
TOTAL GROSS INCOME 730,000
Less: Administrative and Selling Expenses
Salaries and Wages 149,000
Rent 120,000
Utilities Expense 80,000
Janitorial and Messengerial Expenses 75,000
Professional Fees 45,000
Depreciation Expense 30,000
Representation and Entertainment 12,000
Interest Expense 10,000
Office Supplies 8,000
Miscellaneous Expense 20,000 549,000
NET INCOME 181,000

The customers of #Ambrocio General Merchandise with total purchases of P400,000 subjected its
income payment to 1% creditable withholding tax.

SECOND QUARTER of 2017:

On May 23, 2017, Mr. Co, sold a real property not used in business to Mr. Ilustrado Maamong,
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. Tax Dec. Location Type Area (sq.m) Market Zonal Value
No. Value
384932 GRC14- Bulacao, Commercial 1,200 P 4,800,000 P 4,800 /
2726-11 Cebu City sq.m

Per certification by the City Assessor of Cebu, there is an improvement in the parcel of land above, as
follows:

TCT No. Tax Dec. Location Type Area (sq.m) Market Zonal Value
No. Value
8271 GRC6-1127- Bulacao, Commercial 800 P 5,000,000 No Assigned
99 Cebu City Building Zonal Value

The selling price agreed by the parties is P10,000,000. The parties agreed that the Mr. Ambrocio Co will
pay the taxes pertaining to the sale. Mr. Ambrocio filed the required form and paid the corresponding
taxes on the time prescribed by law and was issued with Certificate Authorizing Registration No.
201782623823 dated June 10, 2017.

On June 15, 2017, Mr. Ambrocio 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.
Ambrocio 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, 2016 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 336-292-382-000 and
residing at Padre Gomez St., Cebu City.

On June 30, 2017, Mr. Ambrocio 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 2017:

#AMBROCIO GENERAL MERCHANDISE


INCOME STATEMENT
For the quarter ending June 30, 2017
GROSS SALES P 1,550,000
Less: Sales Returns and Allowances 80,000
NET SALES 1,470,000
Less: Cost of Sales
Beginning Inventory P 200,000
Add: Purchases 800,000
Ending Inventory 340,000 660,000
GROSS INCOME 810,000
Add: Interest Income from Bank Deposits, net 64,000 64,000
TOTAL GROSS INCOME 874,000

Less: Administrative and Selling Expenses


Salaries and Wages 149,000
Rent 120,000
Utilities Expense 120,000
Janitorial and Messengerial Expenses 90,000
Professional Fees 45,000
Depreciation Expense 51,500
Representation and Entertainment 24,000
Interest Expense 15,000
Office Supplies 29,000
Miscellaneous Expense 45,000 688,500
NET INCOME 185,500

The customers of #Ambrocio General Merchandise with total purchases of P600,000 subjected its
income payment to 1% creditable withholding tax.

THIRD QUARTER of 2017


On August 18, 2017, Mr. Ambrocio 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. Ambrocio 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. Ambrocio 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 2017 are as follows:

#AMBROCIO GENERAL MERCHANDISE


INCOME STATEMENT
For the quarter ending September 30, 2017
GROSS SALES P 4,880,000
Less: Sales Returns and Allowances 70,000
NET SALES 4,810,000
Less: Cost of Sales
Beginning Inventory P 340,000
Add: Purchases 2,200,000
Ending Inventory 550,000 1,990,000
GROSS INCOME 2,820,000
Add: Dividends Received from AAA Corp., net 90,000
Gain from sale of properties 1,000,000
Add: Interest Income from Bank Deposits, net 92,000 1,182,000
TOTAL GROSS INCOME 4,002,000
Less: Administrative and Selling Expenses
Salaries and Wages 199,000
Fringe Benefits 2,482,353
Rent 120,000
Utilities Expense 160,000
Janitorial and Messengerial Expenses 100,000
Professional Fees 45,000
Depreciation Expense 94,500
Representation and Entertainment 30,000
Interest Expense 16,000
Office Supplies 28,000
Miscellaneous Expense 42,000 3,316,853
NET INCOME 685,147

The customers of #Ambrocio General Merchandise with total purchases of P600,000 subjected its
income payment to 1% creditable withholding tax.

FOURTH QUARTER of 2017:

Mr. Ambrocio Co gave the 13th month pay to each employee, equivalent to a month salary, except
for the newly hired, Mr. Chocho.
On November 15, 2017, Ambrocio sold another 2,000 shares of stocks of ALOLOY CO. for P400,000
to Antonio Luna, a resident citizen with TIN 000-293-332-000 and a residence of Private Drive,
Basak, Mandaue City.
Ambrocio 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, 2017 and will expire on December 31, 2016. Ako and Co.,
CPAs issued the following financial statements of #Ambrocio General Merchandise (before
effecting the effect of taxes).

#AMBROCIO GENERAL MERCHANDISE

STATEMENT OF FINANCIAL POSITION


December 31, 2017

ASSETS
CURRENT ASSETS
Cash and Cash Equivalents P 5,000,000
Accounts Receivable 2,500,000
Inventories 500,000
Other Assets 1,200,000
Total Current Assets P 9,200,000
NONCURRENT ASSETS
Properties and Equipment, net P 8,400,000
Other Non-Current Assets 2,000,000
Total Non Current Assets P10,400,000
TOTAL ASSETS P 19,600,000

LIABILITIES AND OWNERS EQUITY


LIABILITIES

CURRENT LIABILITIES
Accounts Payable P 6,000,000
Accrued Expenses 2,600,000
Total Current Liabilities P 8,600,000
NON CURRENT LIABILITIES
Long Term Loan P 7,000,000

TOTAL LIABILITIES P15,600,000

OWNERS EQUITY
Co, Beginning Capital P 1,457,853
Add: Net Income for the year 2,542,147 P 4,000,000

TOTAL LIABILITIES AND OWNERS EQUITY P 19,600,000

INCOME STATEMENT
For the year ended December 31, 2017

GROSS SALES P 15,500,000


Less: Sales Returns and Allowances 350,000
NET SALES 15,150,000
Less: Cost of Sales
Beginning Inventory P 300,000
Add: Purchases 8,500,000
Ending Inventory 500,000 8,300,000
GROSS INCOME 6,850,000
Add: Dividend from Domestic Corporation, net 90,000
Gain on sale of asset 1,000,000
Interest Income from Bank Deposits, net 350,000 1,440,000
TOTAL GROSS INCOME 8,290,000
Less: Administrative and Selling Expenses
Salaries and Wages 895,000
Fringe Benefits 2,482,353
Rent 540,000
Utilities Expense 500,000
Janitorial and Messengerial Expenses 300,000
Professional Fees 280,000
Depreciation Expense 330,500
Representation and Entertainment 100,000
Interest Expense 120,000
Office Supplies 80,000
Miscellaneous Expense 120,000 5,747,853
NET INCOME 2,542,147

The customers of #Ambrocio 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 2017.
2. Prepare BIR FORM 1601 C for the remittance of the Withholding Tax on Compensation for the
month of June 2017.
3. Prepare the ALPHALIST OF EMPLOYEES to be attached to 1604CF at year end, assuming that the
employees received the same salary every semi-monthly. You may use EXCEL for this
requirement.
4. Prepare the BIR FORM for the sale of real property on May 23, 2017.
5. Prepare the BIR FORM for the sale of real property on August 18, 2017.
6. Prepare the BIR FORM 1603 for the remittance of the fringe benefit tax withheld for the 3rd
quarter of 2017.
7. Prepare the BIR FORM for the sale of shares of stocks on November 15, 2017.
8. Prepare the BIR FORM 1701Q for the THIRD QUARTER of 2017.
9. Prepare the BIR FORM 1701.

NOTE: Prepare the MANUAL BIR FORMS.


BIR FORMS
A Final Project in
TAX 1 - INCOME TAXATION
Prepared by: SCORE:
NAMES Req. # 1: _____
CLASS SCHEDULE Req. # 2: _____
Req. # 3: _____
Req. # 4: _____
Req. # 5: _____
Submitted to: Req. # 6: _____
Req. # 7: _____
MR. CEDRIC VAL R. NARANJO, CPA Req. # 8: _____
Req. # 9: _____

TOTAL: ______