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

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Chapter 3: Concept of Income

CHAPTER 3

CONCEPT OF INCOME
Problem 3 1 TRUE OR FALSE 1. True 2. False Some wealth that made to increase the taxpayers net worth are gifts and inheritance and these are not taxable income. 3. True 4. False Sometimes a sale results to loss. 5. True 6. True 7. True 8. False Filipino citizen who is not residing in the Philippines is taxable only for income earned within. 9. False The basis of tax is the fair market value of the instrument. 10. False Not income for the employee and not subject to income tax because the beneficiary is the employer. 11. False Accrual reporting reports income when there is earning regardless of collection. 12. False Most taxpayer opts for calendar year basis, except corporation which may opt for fiscal year. 13. True 14. False Prepaid expenses are not allowable deductions whether cash or accrual method of reporting income is used. 15. False There is no rule of 25% initial payment if the sale is made on regular basis of personal goods. Problem 3 2 TRUE OR FALSE 1. True 2. True 3. False- All income distributed are considered as from all income earned outside the Philippines. 4. False Only calendar method starts from January and ends at December of the taxable year. 5. True 6. True 7. True 8. False The reportable income of the decedents estate is only the earnings after death. 9. False Service business is allowed to deduct expenses using accrual method if such business opted to use accrual method, but the income is still reportable using cash basis. 10. True 11. True 12. True 13. True 14. True 15. True

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

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Chapter 3: Concept of Income

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

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

Problem 3 5 C Net assets ending (P300,000 P50,000) Net assets beg. (P500,000 P150,000) Balance Add: Owners 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 Increase in total assets Decrease in total liabilities Drawings Additional investments Total income B

P250,000 ( 350,000) (P100,000) 240,000 P140,000

P1,520,000 330,000 100,000 P1,950,000 P800,000 50,000 850,000 P1,100,000 P 250,000 160,000 20,000 ( 50,000) P 380,000 P30,000 P12,000 2,000 100 200

Problem 3 8 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 D

14,300 P15,700

Return of Capital P250,000

Return on Capital P30,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Problem 3 10 A There is no reportable income because 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

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Chapter 3: Concept of Income

P 50,000 80,000 120,000 200,000 60,000 P510,000

Increases or decreases in value of investments are not realized gain or loss. Payment of damages for unrealized profits is a taxable income. Income may be constructively 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 Sales Cost of sale Disposal cost Income for each year Problem 3 13 A Taxable Income Salary (P260,000/13) x 12 Raffle winnings 13th month pay (P260,000/13) x 1 Lotto winnings Problem 3 14 D Within: Compensation income Income from grocery store Outside: Compensation income Lotto winnings Total income taxable in the Philippines P240,000 70,000 . P310,000 P 20,000 500,000 P520,000 Taxable Income P180,000 50,000 120,000 100,000 P450,000 Nontaxable Inco me C Year 1 0 0 0 0 Year 2 0 0 0 0 Year 3 P1,800,000 (1,000,000) ( 50,000) P 750,000

Note: Lotto winnings earned outside the Philippines by a resident Filipino citizen are taxable in the Philippines. 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
Problem 3 16 B Amount of dividend received Multiplied by percent of Sungads operation within based on gross income Dividend income taxable in the Philippines Problem 3 17 1 Letter C . Net salary as university professor Add: Withholding tax on wages Compensation income 2 . Letter B Gross audit service income (P135,000/90%) Add: Gross rent income (P114,000/95%) Total income from profession and business 3 . Letter C Interest income (P8,000/80%) Add: Dividend income (P4,500/90%) Total passive income 4 . 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 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 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 B Reportable income is the market value of the car received Problem 3 21 A Market value of the service received P100,000 60,000

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Chapter 3: Concept of Income

P600,000 20/30 P400,000

P240,000 20,000 P260,000

P150,000 120,000 P270,000

P10,000 5,000 P15,000

P3,000 3,000 P6,000 P500,000 360,000 8,000 P868,000

P160,000 50,000 P210,000 P 48,000 120,000 14,000 P182,000 P120,000 P6,000

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

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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 B Collections during the year Expenses actually incurred Net income before personal exemption cash basis P50,000

P30,000 0.909 P27,270

P3,000 P490,000 (150,000) P340,000

If the service business opted to report on accrual basis, such method can only be applied when it comes to reporting of 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 Problem 3 26 1. Letter C 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. Letter D Selling price Less: Mortgage assumed by the buyer Balance Add: Excess of mortgage over cost (P450,000 P400,000) Contract price 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 P400,000 (160,000) P240,000 20,000 P260,000

P 50,000 100,000 450,000 100,000 200,000 300,000 400,000 P1,600,000 P1,600,000 450,000 P1,150,000 50,000 P1,200,000

3.

P 50,000 100,000 100,000 50,000 P300,000 P700,000 100,000

Problem 3 27 C Selling price Add: Excess of mortgage over cost (P600,000 P500,000)

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Total Less: Mortgage assumed by the buyer Contract price Problem 3-28 1. A Income 200C - casual sale (P12,000 P3,000) Multiplied by holding period more than 1 year Reportable income

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Chapter 3: Concept of Income

P800,000 600,000 P200,000

P9,000 50% P4,500

The sale is considered cash sales because the 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 basis, installment reporting of income is allowed. Problem 3 29 B Total revenue Cost of sale Income to be reported 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 D Contract price Less: Cost (P90,000/20%) Gross profit Multiplied by percent of completion Reportable income under percent of completion Problem 3 32 D Contract price Less: Total costs (P432,000 + P184,250 + P103,750) Total profit Less: Previous years reported income: Accomplished contract price for 200A and 200B (P1,200,000 x 85%) Previous years actual costs: 200A 200B Percent of completion 200C Reportable income P1,000,000 ( 500,000) P 500,000 P50,000,000 P25,000,000 19,000,000 P 6,000,000 5,000,000 P 1,000,000

P 1,000,000 450,000 P 550,000 20% P 110,000 P1,200,000 720,000 P 480,000 P1,020,000 ( 432,000 ) ( 184,250 ) P

403,750 76,250

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
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 C Harvested crops sold Less: Total direct costs: Year 1 Year 2 Year 3 Year 4 Year 5 Reportable income year 5 Problem 3 35 Cash basis income (300K +800K +100K) Accrual expenses Net income before personal exemption 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 Problem 3 37 Total harvest for the year at selling price Year 1 P50,000 Cas h 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 Problem 3 38 1. Cash Method Revenue Equipment sold Costs: Cost of products purchased Carrying value of farm equipment P40,000 Accrual P40,000 P95,000 10,000 Year 2 P100,000 Cash

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Chapter 3: Concept of Income

P 500,000 P 100,000 200,000 50,000

350,000 P 150,000 P 2,000,000

P 300,000 100,000 100,000 100,000 400,000

1,000,000 P 1,000,000 P1,200,000 500,000 P 700,000 P2,520,000 1,200,000 P1,320,000 420,000 P 900,000

Accrual

P95,000 15,000

. P40,000 Farming P 50,000

. P50,000 Trading P150,000 25,000 ( 90,000) ( 25,000)

. P95,000 Rent P100,000

( 10,000) P100,000 Total

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
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 Farming P 50,000 ( 9,000 6,000) . P 53,000 ( 90,000) ( 25,000) P 60,000 . P100,000 P 60,000 Trading P150,000 25,000 P100,000 Rent P100,000

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Chapter 3: Concept of Income

P210,000 Total

P213,000

Problem 3 39 1. 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 2. 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 is prepared as follows: Ending inventory livestock produced Less: Beginning inventory livestock produced Decrease in inventory Cash basis gross income Less: Accrual basis gross income Difference P 50,000 180,000 P 130,000 P 433,000 303,000 P 130,000