The Company Jaehyun Corp. was organized as a family business owned by the Jungs, a highly prominent
Question:
The Company
Jaehyun Corp. was organized as a family business owned by the Jungs, a highly prominent clan in Cebu. It was established in 1989 as a sole proprietorship engaged in the service of graphic arts designing, but due to its outstanding performance in the market, other members of the Hans clan decided to invest their money in the business. Thus, it was incorporated on April 1, 1999 and was registered with the Bureau of Internal Revenue (BIR) on April 10, 1999.
In its Articles of Incorporation, it was provided that the Company is classified as a seller of services as its line of business. The Articles of Incorporation also provides that the Company's registered address is at 381 Sta. Ana Street, South Ridge, Cebu City, Philippines, 6000 and is within the jurisdiction of BIR Revenue District Office (RDO) No. 82 - Cebu City South.
The Problem
Mr. Jung Taeyong, financial controller of Jaehyun Corp. was in a quandary on how he will be able to prepare Jaehyun Corp.'s 2021 annual income tax return (ITR) in time for submission to the BIR. Mr. Xiao Dejun, the Company's chief accountant was tasked to complete the annual ITR and submit the same for Mr. Jung's final review. However, he had a very pressing family emergency in Bohol he had to attend to and was unable to submit his work on time. Furthermore, due to his panic, the chief accountant brought along with him to Bohol the draft ITR he has prepared and the five sheets of supporting documents and schedules to be attached therewith. Upon learning about the situation, Mr. Jung immediately sought the help of Ms. Lee Haechan, the Company's senior accountant.
Taeyong: Haechan, please gather all the necessary information we will need to prepare the annual ITR.
Haechan: I have retrieved all the schedules and information we need from Dejun's computer. It's a good thing he kept all the files we need in one folder.
Taeyong: That's a relief! Will you be able to finish the computation by this afternoon? We don't want to pay any penalties on late filing. After years of continuing losses, this year's different as we will be paying a big amount of income tax due to the record-breaking results of our operations.
Haechan: I'll start preparing them now. I should have them at your desk this afternoon.
Exhibit 1
Income Statement Account Balances
(For the taxable year ending December 31, 2021)
Sales
Sale of Services | 1,661,488,360 |
Less: Sales Discounts | 140,393,451 |
Net Sales | 1,521,094,909 |
Direct Charges - Salaries, Wages and Benefits [including accrual of contributions to retirement fund related to service operations [amounting to 2,500,000 [(1st Q - Php750,000, 2nd Q -Php450,000, 3rd Q - Php 750,000 and 4th Q - Php 550,000)] | 107,457,574 |
Direct Charges - Materials, Supplies, and Facilities | 598,692,879 |
Direct Charges - Depreciation | 70,329,682 |
Direct Charges - Rental | 856,500 |
Direct Charges - Outside Services | 41,826,768 |
Direct Charges - Others | 17,553,168 |
Cost of Services[1]
Other Income/(Expense)
Realized foreign exchange gain | 29,237,440 |
Unrealized foreign exchange loss | (3,762,561) |
Dividend from PLDT | 15,813,765 |
Foreign exchange gain in 2021 resulting from offsetting of accounts | 10,645,434 |
Gain on sale of real properties subjected to capital gains tax (CGT) | 2,500,000 |
Gain on sale of shares of stock subjected to CGT | 150,000 |
Gain on sale of shares of stock subjected to other percentage tax (OPT) | 124,000 |
Reversal of prior year write off of accounts receivable (not claimed as deduction in previous year) | 238,000 |
Interest income (see Exhibit 2 for breakdown) | 10,534,116 |
Share in equity earnings of Blue Ribbon Corp., a local subsidiary | 7,088,479 |
Royalties already subjected to 20% final withholding tax (fully supported by BIR Form No. 2306) | 5,961,586 |
Deductions - Not affecting cost of services
Accrual of contributions to retirement fund | 1,000,000 |
Advertising | 9,831,858 |
Contributions to a BIR-registered retirement plan (PhP 150,900 pertaining to normal cost and the rest pertaining to past service cost) - Debited to a payable account | 300,900 |
Provision for Doubtful accounts | 4,761,784 |
Charitable Contributions [only PhP 150,000 is supported by official receipts (ORs) or certificates of donations from qualified donee institution] | 200,500 |
Communication, Light and Water | 31,832,790 |
Depreciation | 69,686,360 |
Operating Expenses | 63,828,688 |
Fuel and Oil | 3,534,857 |
Insurance | 16,913,870 |
Interest Expense on bank loans | 52,500,000 |
Janitorial and Messengerial Services | 12,140,756 |
Losses (includes casualty losses, net amounting to PhP 3,029,596 and provision for inventory losses amounting to PhP 1,600,261) | 4,629,857 |
Management and Consultancy Fee | 72,599,754 |
Miscellaneous (see Exhibit 3 for breakdown) | 9,358,837 |
Office Supplies | 20,625,815 |
Other Outside Services | 7,404,835 |
Professional Fees | 24,911,959 |
Depreciation - ROU computed in compliance with Philippine Financial Reporting Standards (PFRS) 16 (actual rental payments during the year amounts to PhP 1,500,000) | 1,692,300 |
Repairs and Maintenance - Labor | 16,923,367 |
Repairs and Maintenance - Materials/Supplies | 26,462,027 |
Representation and Entertainment (meal expenses for meetings with clients amounting to PhP 200,000 were not supported by VAT ORs, while expenses for country club membership of clients amounting to PhP 300,000 were supported by VAT ORs in the name of the employees) | 15,721,671 |
Salaries and Allowances | 104,742,877 |
Security Services (includes salary of security guards amounting to PhP 3,632,357 which were not supported by a Notarized Certification and Non-VAT Acknowledgement Receipt) |
8,632,357 |
Taxes and Licenses (see Exhibit 4 for breakdown) | 38,230,000 |
Transportation and Travel | 924,643 |
Depreciation of appraisal increase - fixed assets | 300,000 |
Loss on write-off of obsolete inventories (without certificate of destruction from the BIR) | 8,001,407 |
Moreover, the Company wrote off Accounts Receivable (supported by aging schedule) amounting to PhP 374,985.
Exhibit 2
Interest Income Breakdown
Interest income - Peso deposits - net of 20% final tax | 5,000,000 |
Interest income - foreign currency deposits - net of 15% final tax | 3,500,000 |
Interest income from deposits abroad | 1,450,000 |
Interest income on loans to affiliates | 584,116 |
Exhibit 3
Miscellaneous Expense Breakdown
Bank charges | 3,258,760 |
Postage and stamps | 175,650 |
Courier services | 2,765,880 |
Outside printing and scanning services | 1,365,244 |
Outsource trainings | 1,793,303 |
Exhibit 4
Taxes and Licenses Breakdown
Payment of deficiency income tax | 15,000,000 |
Capital Gains Tax (CGT) on sale of real properties | 180,000 |
CGT on sale of shares of stock | 20,000 |
Other percentage tax on sale of shares of stock | 30,000 |
Payment of surcharge | 3,750,000 |
Payment of interest on deficiency income tax | 1,250,000 |
Payment of compromise penalties | 200,000 |
Business taxes and licenses | 17,800,000 |
Exhibit 5
NOLCO and MCIT Information
NOLCO Information
Year Incurred | Amount | Applied Subsequent Years |
2017 | 5,000,000 | - |
2018 | 3,000,000 | - |
2019 | 4,000,000 | - |
2020 | 2,000,000 | - |
MCIT
Year | Normal Income Tax as adjusted | MCIT | Excess MCIT over Normal Income Tax as adjusted | Excess MCIT applied in subsequent year/s |
2017 | 16,000,000 | 25,000,000 | 9,000,000 | - |
2018 | 17,000,000 | 24,000,000 | 7,000,000 | - |
2019 | 15,000,000 | 20,000,000 | 5,000,000 | - |
2020 | 13,000,000 | 19,000,000 | 6,000,000 | - |
Exhibit 6
Tax Credits/ Payments
Evaluation of prior quarterly ITRs and other documents disclosed the following:
Payments | CWTs | |
1st Quarter | 2,750,000 | 1,239,773 |
2nd Quarter | 1,988,263 | 2,101,000 |
3rd Quarter | 2,250,000 | 900,000 |
4th Quarter | - | 727,533 |
Total | 6,988,263 | 4,968,306 |
Out of the total CWTs claimed by the Company, CWTs for the 1st quarter 2021 amounting to PhP 582,500 is not supported by CWT Certificates (BIR Form No. 2307), CWTs for the 4th quarter 2021 amounting to PhP 439,773 were issued not in the name of the Company and CWTs for the 2nd quarter 2021 amounting to PhP 1,477,727 are dated outside CY 2021 (i.e., 2020 and prior years). No information is available regarding prior year excess credits and foreign tax credits for the year.
Exhibit 7
Additional Information
Jaehyun Corp. is a domestic corporation not enjoying any tax relief/ exemption under any special law or international tax treaty with alphanumeric tax code (ATC) No. IC010.
Forwarded to Ms. Haechan is the Company's community tax certificate with CTC No. 200800025273 issued in the City of Cebu on January 10, 2022 amounting to PhP 10,500.
Also forwarded to Ms. Haechan is the photocopy of the TIN Card of Mr. Taeyong containing the following information:
Name: Jung, Taeyong Lee
Address: 345 C A.P. Cruz Compound, Edang St. Cebu City
Birth Date: November 16, 1975
Issue Date: November 11, 2006
TIN: 789-654-321-000
The TIN of Jaehyun Corp. is 347-938-692-000.
Upon the determination of the exact amount of tax payable for the Company, Mr. Jung instructed the Company's Finance Department to prepare a Company check from its RCBC checking account. The check number is 240477 dated April 14, 2022 amounting exactly to the tax due Ms. Haechan has computed.
Exhibit 8
Balance Sheet
Assets | |
Current Assets | 92,093,142.00 |
Property, Plant and Equipment - Net | 10,000,000.00 |
Long-Term Receivables | 15,010,322.00 |
Other Assets | 5,500,000.00 |
Total Assets | 122,603,464.00 |
Liabilities and Equity | |
Current Liabilities | 232,819,426.00 |
Long-Term Liabilities | 341,445,583.00 |
Other Liabilities | 2,500,000.00 |
Total Liabilities | 576,765,009.00 |
Capital Stock | 31,250,000.00 |
Additional Paid-in Capital | 5,000,000.00 |
Retained Earnings | (490,411,545.00) |
Total Equity | (454,161,545.00) |
Exhibit 9
Stockholders' Information
Name | TIN | # of Stocks |
Jung, Irene | 125 586 456 000 | 1,500,000 |
Jung, Wendy | 108 193 587 000 | 5,800,000 |
Jung, Joy | 187 784 409 000 | 50,000 |
Required:
What is the Net Taxable Income/Loss and Tax Payable/Overpayment for the year ended, December 31, 2021 by reconciling per books and per tax balances.
[1] These expenses were subjected to the applicable withholding taxes (e.g., EWT, WTW, FWT and FBT) unless otherwise stated.
Auditing A Practical Approach with Data Analytics
ISBN: 978-1119401742
1st edition
Authors: Raymond N. Johnson, Laura Davis Wiley, Robyn Moroney, Fiona Campbell, Jane Hamilton