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. 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

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

SUGGESTED ANSWERS

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

Time deposit balance

P1,520,000
330,000
100,000
P1,950,000
P800,000
50,000

850,000
P1,100,000

B
P 250,000
160,000
20,000
( 50,000)
P 380,000

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

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

P30,000
P12,000
2,000
100
200

14,300
P15,700

D
Return of Capital
P250,000

Return on Capital
P30,000

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

SUGGESTED ANSWERS

Chapter 3: Concept of Income

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

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

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

Year 3
P1,800,000
(1,000,000)
(
50,000)
P 750,000

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

Nontaxable
Inco
me

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

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]

13

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

SUGGESTED ANSWERS

Chapter 3: Concept of Income

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

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

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

P3,000
3,000
P6,000

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

P500,000
360,000
8,000
P868,000
P100,000
60,000

P160,000
50,000
P210,000

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

P 48,000
120,000
14,000
P182,000

Problem 3 20
B
Reportable income is the market value of the car received

P120,000

Problem 3 21
A
Market value of the service received

P6,000

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

SUGGESTED ANSWERS

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

P30,000
0.909
P27,270
P50,000
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.

3.

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

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

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

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

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

SUGGESTED ANSWERS

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 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

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

P50,000,000
P25,000,000
19,000,000
P 6,000,000
5,000,000
P 1,000,000

Problem 3 31
D
Contract price
Less: Cost (P90,000/20%)
Gross profit
Multiplied by percent of completion
Reportable income under percent of completion

P 1,000,000
450,000
P 550,000
20%
P 110,000

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

P1,200,000
720,000
P 480,000
P1,020,000
( 432,000
)
( 184,250
)

403,750
P

76,250

16

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

SUGGESTED ANSWERS

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

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

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

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

Problem 3 35
Cash basis income (300K +800K +100K)
Accrual expenses
Net income before personal exemption

P1,200,000
500,000
P 700,000

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
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
Problem 3 38
1. Cash Method
Revenue
Equipment sold
Costs:
Cost of products purchased
Carrying value of farm
equipment

Year 1
P50,000

Year 2
P100,000

Cas
h

Accrual

P40,000

P40,000

Cash

Accrual

P95,000

P95,000

10,000
15,000
.
P40,000

.
P50,000

Farming
P 50,000

Trading
P150,000
25,000

( 90,000)
( 25,000)

.
P95,000

( 10,000)
P100,000

Rent
P100,000

Total

17

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

SUGGESTED ANSWERS

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

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

P213,000

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

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