INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
10
Chapter 3: Concept of Income
CHAPTER 3
CONCEPT OF INCOME Problem 3 – 1 TRUE OR FALSE
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 13. 14. 15.
True False – Some Some wealth wealth that made made to increase increase the the taxpayer’s taxpayer’s net net worth are are gifts gifts and inheritance and these are not taxable income. True False False – Some Sometim times es a sale sale resul results ts to loss loss.. True True True False – Filipin Filipino o citizen who who is not residing residing in the the Philippines Philippines is taxabl taxable e only for for income income earned within. False – The basis basis of tax is the the fair fair market market value value of the the instrument instrument.. False – Not income for for the employee and and not subject to income income tax because the the beneficiary is the employer. False – Accrual reporting reports reports income when there is earning earning regardless of collection. False – Most taxpayer taxpayer opts for calendar calendar year basis, except corporation corporation which may opt opt for fiscal year. True True False – Prepaid expenses expenses are not allowable allowable deductions whether cash or accrual method of reporting income is used. False – There is no rule of 25% initial payment if the sale is made on regular regular basis of personal goods.
Problem 3 – 2 TRUE OR FALSE
1. 2. 3. 4. 5. 6. 7. 8. 9.
10. 10. 11. 11. 12. 12. 13. 13. 14. 14. 15. 15.
True True FalseFalse- All income distrib distributed uted are consid considered ered as from from all income income earned earned outside outside the Philippines. False – Only Only calenda calendarr method starts starts from Janua January ry and ends ends at Decembe Decemberr of the taxable year. True True True False – The The reportabl reportable e income of the deceden decedent’s t’s estate estate is only the the earnings earnings after after death. False – Service Service business business is allowed allowed to deduct deduct expenses expenses using using accrual accrual method if such such business opted to use accrual method, but the income is still reportable using cash basis. True True True True True True True True True True True True
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
11
Chapter 3: Concept of Income
Problem 3 – 3
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 10. 11.
Problem 3 – 4
D C A C B C D C B C C
Problem 3 – 5
1. D 2. B 3. B 4. A 5. D 6. A 7. B 8. D 9. C 10. 10. C
C
Net assets ending (P300,000 – P50,000) Net assets beg. (P500,000 – P150,000) Balance Add: Owner’s drawings Reportable income (loss)
Problem 3 – 6
B
Increase in total assets Decrease in total liabilities Dividend declared Total Less: Additional paid-in capital Unrealized gain Reportable income Problem 3 – 7
P250,000 ( 350,000) (P100,000) 240,000 P140,000
P1,520,000 330,000 100,000 P1,950,000 P800,000 50,000
B
Increase in total assets Decrease in total liabilities Drawings Additional investments Total income Problem 3 – 8
P 250,000 160,000 20,000 ( 50,000) P 380,000 C
Sales Less: Cost of sales (P30,000 x 40%) Rent expense Kiosk – depreciated value (P3,000 – P2,900) Interest expense (P20, 000 x 1%) Net income – return on capital Problem 3 – 9
Time deposit balance
850,000 P1,100,000
P30,000 P12,000 2,000 100 200
14,300 P15,700
D
Retu Return rn of of Capi Capita tall P250,000
Retu Return rn on on Capi Capital tal P30,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
12
Chapter 3: Concept of Income Problem 3 – 10
A
There is no reportable income because there there is no actual sale yet during 200x. Problem 3 – 11
D
Interest credited on peso- savings deposit (40,000/80%) Matured interest on coupon bonds, not yet collected Cancellation of indebtedness from SMC in which Arom has equity investments Share in joint venture not yet received Payment of damanges deposited in court by a competitor for unrealized profit Income realized
P 50 50,000 80,000 120,000 200,000 60,000 P510,000
Increases Increases or decreases decreases in value value of investments investments are not realized realized gain or loss. Payment Payment of damages damages for unrealized unrealized profits profits is a taxable taxable income. income. Income Income may be constructi constructively vely received even if not physically transferred to a person for as long as it is credited to the account of, or segregated in favor of a person. Problem 3 – 12
C
Year 1 0 0 0 0
Sales Cost of sale Disposal cost Income for each year Problem 3 – 13
Year 2 0 0 0 0
A
Taxable Income
Salary (P260,000/13) x 12 Raffle winnings 13th month pay (P260,000/13) x 1 Lotto winnings
Problem 3 – 14
Year 3 P1,800,000 (1,000,000) ( 50,000) P 750,000
Nontaxable Inco me
P240,000 70,000 . P310,000
P 20,000 500,000 P520,000
D
Within: Compensation income Income from grocery store Outside: Compensation income Lotto winnings Total income taxable in the Philippines
Taxable Income P180,000 50,000 120,000 100,000 P450,000
Lotto winnings earned outside the Philippines by a resident Filipino citizen are taxable in the Philippines. Note:
Problem 3 – 15
B
Salary from the Philippines, net of tax Add: Withholding tax Total income reportable in the Philippines
P250,000 50,000 P300,000
OCW are exempt from income tax on income earned outside the Philippines. [Sec. 23 (C), NIRC]
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
13
Chapter 3: Concept of Income Problem 3 – 16
B
Amount of dividend received Multiplied by percent of Sungad’s operation within based on gross income Dividend income – taxable in the Philippines
P600,000 20/30 P400,000
Problem 3 – 17 1 Letter C .
Net salary as university professor Add: Withholding tax on wages Compensation income 2 .
P240,000 20,000 P260,000
Letter B
Gross audit service income (P135,000/90%) Add: Gross rent income (P114,000/95%) Total income from profession and business business 3 .
P150,000 120,000 P270,000
Letter C
Interest income (P8,000/80%) Add: Dividend income (P4, 500/90%) Total passive income 4 .
P10,000 5,000 P15,000
Letter D
Gain from sale of personal car Add: Gain from sale of shares of stock – outside Stock market (P2,850/95%) Total capital gains Problem 3 – 18
P3,000 3,000 P6,000
A
Professional fee (P450,000/90%) Salary (P300,000 + P60,000) Prizes Earnings subject to normal tax Capital gains - shares of stock: First P100,000 (P95,000/95%) Over P100,000 (P54,000/90%) Winnings (P40,000/80%) Earnings subject to final taxes Problem 3 – 19
P160,000 50,000 P210,000
P 48,000 120,000 14,000 P182,000
B
Reportable income is the market value of the car received Problem 3 – 21
P100,000 60,000
D
First 4 months (P12,000 x 4) Remaining months (P15,000 x 8) 13th month pay (P168,000/12) Gross compensation income Problem 3 – 20
P500,000 360,000 8,000 P868,000
P120,000
A
Market value of the service received
P6,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
14
Chapter 3: Concept of Income
Problem 3 – 22
C
Face value of the non-interest bearing note Multiplied by the present value factor of 10% annuity Compensation income – present value of the note Problem 3 – 23
A
Compensation income Interest income (P50,000 x 12% x 6/12) Problem 3 – 24
P30,000 0.909 P27,270
P50,000 P3,000
B
Collections during the year Expenses actually incurred Net income before personal exemption – cash basis
P490,000 (150,000) P340,000
If the service business opted to report on accrual basis, basis , such method can only be applied when it comes to reporting of expense. expense . Problem 3 – 25
A
Gross income (P1,000,000 – P600, 000) Actual operating expenses (P200,000 x 80%) Net income before other income Add: Gain from sale of old furniture Taxable income
P400,000 (160,000) P240,000 20,000 P260,000
Problem 3 – 26 Letter C
1.
Cash Fair market value of property received Mortgage assumed by the buyer Installment payments: First year Second year Third year Fourth year Selling price 2.
100,000 200,000 300,000 400,000 P1,600,000
Letter D
Selling price Less: Mortgage assumed by the buyer Balance Add: Excess of mortgage over cost (P450,000 – P400,000) Contract price 3.
P 50,000 100,000 450,000
Letter D Down payments: Cash (down payment) Fair market value of property received Installment received in the year of sale Excess of mortgage over cost (P450,000 – P400,000) Initial payments
Problem 3 – 27
P1,600,000 450,000 P1,150,000 50,000 P1,200,000
P 50,000 100,000 100,000 50,000 P300,000
C
Selling price Add: Excess of mo m ortgage over cost (P600,000 – P500,000)
P700,000 100,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
15
Chapter 3: Concept of Income
Total Less: Mortgage assumed by the buyer Contract price
P800,000 600,000 P200,000
Problem 3-28
1. A Income 200C - casual sale (P12,000 – P3,000) Multiplied by holding period – more than 1 year Reportable income
P9,000 50% P4,500
The sale is considered cash sales because the 200C 200C initial payments (P1,000 + P1,000 + 2,000) exceeds 25% of the selling price; P4,000/P12,000 = 33% 2. B Reportable income 200C – regular sale (P9,000 x P4,000/P12,000)
P3,000
Since the property is sold in regular regular basis, installment reporting of income is allowed. Problem 3 – 29
B
Total revenue Cost of sale Income to be reported
P1,000,000 ( 500,000) P 500,000
Problem 3 – 30
A
Contract price Completed as of this year, 50% Cumulative cost, P10 M + 9M Cumulative income Less: Reported prior year (P50M x 30%) – P10M Reportable income this year
Problem 3 – 31
P50,000,000 P25,000,000 19,000,000 P 6,000,000 5,000,000 P 1,000,000
D
Contract price Less: Cost (P90,000/20%) Gross profit Multiplied by percent of completion Reportable income under percent of completion Problem 3 – 32
P 1,000,000 450,000 P 550,000 20% P 110,000
D
Contract price Less: Total costs (P432,000 + P184,250 + P103,750) Total profit Less: Previous years’ reported income: Accomplishe Accomplished d contract contract price for 200A and 200B (P1,200,0 (P1,200,000 00 x 85%) Previous years’ actual costs: 200A 200B Percent of completion – 200C Reportable income
P1,200,000 720,000 P 480,000 P1,020,000
( 432,000 ) ( 184,250 )
403,750 P
76,250
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
16
Chapter 3: Concept of Income Problem 3 – 33
A
Year 3 sales Less: Cost incurred as of year 3: Year 1 Year 2 Year 3 Year 3 – reportable income Problem 3 – 34
P 500,000 P 100,000 200,000 50,000
350,000 P 150,000
C
Harvested crops sold Less: Total direct costs: Year 1 Year 2 Year 3 Year 4 Year 5 Reportable income – year 5
P 2,000,000 P 300,000 100,000 100,000 100,000 400,000
1,000,000 P 1,000,000
Problem 3 – 35
Cash basis income (300K +800K +100K) Accrual expenses Net income before personal exemption
P1,200,000 500,000 P 7 70 00,000
Problem 3 – 36
Accrued sales (P2,000,000 + P520,000) Less: Cost of sales Gross income Less: Operating expenses (P600,000 x 70%) Net income
P2,520,000 1,200,000 P1,320,000 420,000 P 900,000
Problem 3 – 37 Year 1
Total harvest for the year at selling price
Harvests sold: (80 cavans x P500) (190 cavans x P500) Ending inventory: (20 cavans x P500) (30 cavans x P500) Beginning inventory: (20 cavans x P500) Gross income for the year
Year 2
P50,000
P100,000
Cas h
Accrual
P40,000
P40,000
Cash Cas h
Accrual Accr ual
P95,000
P95,000
10,000 15,000 . P40,000
. P50,000
Farming P 50,000
Trading P150,000 25,000
. P95,000
( 10,000) P100, 000
Problem 3 – 38
1. Cash Method Revenue Equipment sold Costs: Cost of products purchased Carrying value of farm equipment
.
( 90,000) ( 25,000)
Rent P100,000
.
Total
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
17
Chapter 3: Concept of Income
Gross income 2. Accrual Method Revenue Equipment sold Inventory, ending Inventory, beginning Costs: Cost of products purchased Carrying value of farm equipment Gross income
P 50,000
P 60,000
P100,000
P210,000
Farming P 50,000
Trading P150,000 25,000
Rent P100,000
Total
(
9,000 6,000)
.
( 90,000) ( 25,000)
.
P 53,000
P 60,000
P100,000
P213,000
Problem 3 – 39
1.
2.
Letter C Cash receipts: Sale of livestock (P200,000 + P300,000) Sale of livestock for rent Sale of machinery Rent of livestock for rent Total cash receipts Less: Cost of livestock purchased (P50,000 + P175,000 – P100,000) Cost of livestock for rent sold Cost of machinery sold Gross income Letter A Sale of livestock (P200,000 + P300,000) Less: Cost of livestock purchased Balance Add: Inventory, end – livestock produced Total Less: Inventory, beg. – livestock produced Balance Add: Gain from sale of livestock for rent [P10,000 – (P15,000 – P8,000)] Gain from sale of machinery [P20,000 – (P50,000 – P35,000)] Rent of livestock Gross income
P500,000 10,000 20,000 50,000 P580,000 P125,000 7,000 15,000
147,000 P433,000
P500,000 125,000 P375,000 50,000 P425,000 180,000 P245,000 P 3,000 5,000 50,000
58,000 P303,000
The difference between the cash basis and the accrual basis is the decrease in inventory of livestock produced by P130,000. A comparison i s prepared as follows: Ending inventory – livestock produced Less: Beginning inventory – livestock produced Decrease in inventory
P 50,000 180,000 P 130,000
Cash basis – gross income Less: Accrual basis – gross income Difference
P 433,000 303,000 P 130,000
