INCOME TAXATION 6TH Edition (BY: VALENCIA ROXAS) 0 ‘SUGGESTED ANSWERS Chapter: Concept af income CHAPTER 3 CONCEPT OF INCOME Problem 3-1 TRUE OR FALSE True False - Some wealth that made to increase the taxpayer's net worth are gifts and inheritance and these are not taxable income. True False - Sometimes a sale resuts to loss. True True True False - Filipino citizen who is not residing in the Philippines is taxable only for income ‘earned within Falge - The basis of tax is the fair market value ofthe instrum ent False — Nat income for the emplayee and not subject to income tax because the beneficiary is the employer. False - Accrual reporting reports Income when there is esmning regardless of collection False - Most taxpayer opts for calendar year basis, except corporation which may opt for fecal year, True False - Prepaid expenses are not allowable deductions whether cash or accrual method of reparting income is used, False - There is no nale of 25% intial payment f the sale is made on regular basis of personal goods. Problem 3-2 TRUE OR FALSE lo. nL, 12. 23, 14, 15, True True Falge- All income distributed are considered as fram all income earned outside the Philipines. False ~ Only calendar method starts from January and ends at December of the taxable year, True True True False - The reportable income of the decedent's estate is only the earnings after death False ~ Service business is allowed to deduct expenses using accrual method # such business opted to use accrual method, but the income: is stil reportable using cash basis. True True True True True TrueINCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) u ‘SUGGESTED ANSWERS Chapter: Concept oncom Problem 3-3 Problem 3-4 1D LD ac 28 3A sa ane aA 58 5D 6c rary a ne Bc 8D a8 9c 10.¢ 10.€ ic Problem 3-5 c Net assets ending (300,000 — 50,000) 250,000, Net assets beg. (P500,000 -P2150,000) 350.000) Balance (200,000), ‘Add: Owner's drawings 240.000, Reportable income (loss) Bao.oo0 Problem 3-6 5 Increase in total assets 2,520,000 Decrease in total labilties 330,000 Dividend decared 00-000, Total P¥9s0,000 Less: Additional paid-in capital 800,000 Unrealized gain ‘sa.gon © __aso.00. Reportable income PLiooooo Problem 3-7 e Increase in total assets 250,000, Decrease in total lablities 460,000 Drawings 20,000 ‘Additional investments s0.d00 Total income aso.o00 Problem 3-8 c Sales 30,000 Less: Cost of sales (P30,000 x 40%) 12,000 Rent expense 2.000 Kiork'~ depreciated value (P3,000 - P2,900) 200 Interast expense (P20,000 « 1%) 200 14,300 Not incame ~ return on capital Esaoo Problem 3-9 > Return of Capital Return on Capital Time deposit balance ‘2250.00 eavoooINCOME TAXATION 6TH Euition (BY: VALENCIA& ROXAS) 2 SUGGESTED ANSWERS Chapter: Conseptot cone Problem 3-10 x There is na reportable income decsuse there sno actual sale yet using 200x. Problem 2-12 > Interest credited on peso-savings deposit (40,000/80%6 0,000 Matured interest an coupon bonds, nt yet calected av'oo0 Carcelation of indettedness fromSMC In wich ‘arom Fas equity investments 220,000 Siare in int venture net yst eceved 200,000 Payment ef damanges depesited i ccurt by a competitor forunreaized profit 50.000. Incame realized Paco Increases or decreases in value of investments are not realized gain of loss. Payment of damages ‘or unrealized profits © 3 taxable Income. hncame may be constructively "ecsived fen ifnot physically transferred 1 a parson for as long as itis credited tothe account of, or Segregated in favor ef apersor. Problem 3-12 © vexed © Yes2 __Yoara. Sales 0 0 Pra00,000 Cost ofsat o © @,000.000) Disposal cast o 0 so000, Incame foreach year a ab téeac0 Problem 3-13 a Jauable income Montarabie. inca, Salary (®250,000123) x 22 24,000 Rafe winnings 70'000, 13" manth pay (F260,000/23) x2 20,000 {ona winnings 00.000, nom Pszooco Problem 2-14 > wwii Table Income, ‘Compensation income 80,000 Income fram grocery store 50,000, outside ‘Compensation income 220,000 {ota winnings as.aco, Total icame taxable inthe Philippines Besoooo Notes Lotto winnings eared outside the Phitppines bya resent Filpino ctizen are taxable inthe Phiippines Problem 3-15 8 Salary from the Philippines, net oftax 20,000 Adc: Wthholcing tax 50,000, Total income reportable in the Phiippines Bncon (OCW are exempt fram incame tax on income eames ovtsive the Phiippines [Sec. 23 (C), NRC}INCOME TAXATION 6TH Edition (BY: VALENCIA& ROXAS) ‘SUGGESTED ANSWERS CChapter3: Concept of Income Problem 3-16 8 ‘Amount of dividend received Multiplied by pereent af Sungad’s operation within based on gross income Dividend income - taxable in the Philippines Problem 3-17 a Letter ~ Net salary as university professor ‘Ada: Withnolding tax on wages ‘Compensation income 2 Letter@ Gross audit service income (P135,000/00%) ‘Add: Gross rent income (P114,000/95%) ‘Total income from profession and business 3 Letterc 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 stack ~ outside Stock market (P2,850/95%) ‘Total capital gains Problem 3-18 A. Professional fee (P450,000/90%) Salary (P300,000 + F60,000) Prizes Earnings subject ta normal tax Capital gains -shares of stock: First 100,000 (P95,000/95%) P2a0.000 ‘Over P200,000 (P54,000/00%) 60.000 Winnings (P40,000/80%6) Earnings subject to final taxes Problem 3-19 > First 4 months (P22,000 x4) Remaining months (P25,000 x8) 13" month pay (P168,000/12) Gross compensation income Problem 3-20 8 Reportable income is the market value of the car received Problem 3-21 A, Market value of the service received 600,000, 2030 00.000 240,000 20.000 Pooog 150,000 20-000 bazoogo 10,000 500,000 360,000 2.000 Freng 160,000 50-000 baoooo P_ 48,000, 120/000 14.000 Eiazowo az0.000INCOME TAXATION 6TH Edition (BY: VALENCIA& ROXAS) W ‘SUGGESTED ANSWERS ‘Chapter: Concept of neome Problem 3-22 c Face value of the non-interest bearing note 30,000, Multiplied ty the present value factor af 10% annuity erry ‘Compensation income - present value of the note ez Problem 3-23 A Compensation income 250.000 Interest income {P50,000 x 12% x 6/12) eao0g Problem 3-24 B Collections during the year 490,000 Expenses actually incurred sooo) Net incame before personal exemption ~cash basis eaooo If the service business opted to report an accrual basis, such method can only be applied tuhen it comes t9 reparing of expense Problem 3-25 Aw Grass income (P,a00,000 ~ P600,000) 400,000, ‘Actual operating expenses (P200,000 x 80%) 60.000) Net Income before ather income 240,000, ‘ald: Gain from sale of old fum‘ture 20-000 Taxable income Peeo.o00 Problem 3-26 1 Letter cash 50,000, Fair market value of property received 100,000 Mortgage assumed by the buyer 450;000 Installment payments: Fiest year 100,000 Second year 200,000 Third year 300,000 Fourth year 400'000 Seling price PLaao-ooo 2. Letter Selling price 2.600.000 Less: Mortgage assumed by the buyer 40°00, Balance P¥,350,000 ‘Add: Excess of mortgage over cost (P450,000 - P400,000) 50.000 Contract price PL2ao-oo0 3. Letter D Down payments: ‘Cash (down payment) 50,000, Fair market value of property received 100,000 Installment received in the year of sale 00,000 Excess of mortgage ever cost (P450,000 ~ P400,000) 50.000 Initial payments Pow ooo Problem 3-27 « Selling price 700,000, ald: Excess of mortgage over cast (P600,000 ~ 500,000) toa .o90INCOME TAXATION 6TH Edition (BY: VALENCIA& ROXAS) Is ‘SUGGESTED ANSWERS. Chapter: Concept of tacoma Tora 800,000 Less: Mortg age assumed by the buyer 600.000 Contract price Powooo Problem 3-28 La Income 200 - casual sale (P32,000 — P3,000) 9.000 Multiplied by holding period - more than'l year 034, Reportable income easo0 The sale is considered cash sales because the 200C initial payments (P1,000 + P2,000 + 2,000} exceeds 25% of the selling price, P4,000/022,000 = 339% ze Reportable income 200C ~ regular sale (P9,000 x Pa4,000/P12,000) 3.000 Since the property i sold in regular basis, installment reporting of income is allowed. Problem 3-29 8 Total revenue 1,000,000 Cost of sake $500,000 Income ta be reported Esado0e Problem 3-30 a Contract price 0,000,000 Completed a af this year, 50% 25,000,000 Cumulative cost, P10 M 4 9M 19,008,000, (Cumulative income F 6,000,000 Less: Reported prior year (P50M x 30%) ~ P20M 5,000,000 Reportable income this year Eaaoeooe Problem 3-31 o Contract price P 1,000,000 Less: Cost (90,000/20%) 450,000 Gross profit 7350.00 Multiplied ty percent ef completion 20% Reportable income under percent of completion ooo Problem 3-32 Contract price 1,200,000 Less: Total costs (P432,000 + P184,250 + 103,750) 720,009 Total profit Fa0,000 Less: Previous years’ reparted income: ‘Accomplished contract price for 200A and 2008 (P2,200,000 x 2,020,000 ro) Previous years’ actual casts: 2008 (432,000 » 2o0e 384250 __403,750 1 Percent of completion - 200C Reportable income b26250INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 6 SUGGESTED ANSWERS ‘Sapte: Gonapt of ncome Probiem 3-33. A Year 3 sales 500,000 Less: Cost incurred as of year 3 Year P 200,000 Year? 200.000 Year 3 sao00 _as0.000 Year 3~ reportable income ELsoooo Problem 3-34 ¢ Harvested crops sold 2,000,000 Less: Total drect costs: Year P 300,000 Year? 400,000 Year 3 100,000 Year 4 300,000 Years —so0.000 _3,000.000 Reportable income -year 5 EXoono0o Problem 3-35 ‘Cash basis income (300K +800K +100K) 1,200,000 Accrual expenses soa.a00 Net income before personal exemption Eon000 Problem 3-36 ‘cenied sales (P2,000,000 + P520,000) 2,520,000 Less! Cost of sales 2oa.aoa Gross income 1320.00 Less: Operating expenses (600,000 x 70%) ‘20.000. Net income Esco Problem 3 ~ 37 tert Weare ‘Total harvest for the year at selina Tata Haase price fxg Actual Cash ecru Harvests sod {80 cavans x P00) 40.000 ——_P40,000 (196 cavans x PSO0) 95.000 98,000, Ending inventory: (20 eavans x F500) 20,000 (G0 cavans x P500) 15,000 Beginning inventory (20 cavans x P00) Lao.o00) {Grass income for the year mo ae Problem 3-38 1 cash Method faming _uading ent Tota Revenue P 50,000 "150,000 “PI00,000 Equipment sald 25.000 Costs: ‘Cost of products purchased (90,000) ‘Sarrying value of farm 25.000) ‘equipmentINCOME TAXATION 6TH Edition (BY: VALENGIA& ROXAS) ‘SUGGESTED ANSWERS Gross neame 2. Acenial Method Revenue Equipment sold Inventory, ending Inventory, beginning Costs ‘Cast of products purchased Carrying value of Farm equipment Gross Income Problem 3-39 Ln Letter ¢| Cath recent: Sale of livestock (P200,000 + P 300,00 Sale of livestock for rent Sale of machinery Rent of livestock or rent Total cash receipts Less: Cost of livestock purchased fain 50,000 9,000 (6,000) 0) (P50,000 + 175,000 -P100,000) Cost of livestock for rent sold Cast af machinery sold Gross income 2. Letter a, ‘Sale of lvestock (P200,000 + P300,004 Less: Cost of livastack purchased Balance Add: Inventory, end — ivestock produc Total Less: Inventory, beg. ~ livestock prod Balance 0) ad Iced ‘Add: Gain fram sale of ivestack for rent {10,000 ~ (P15,000 - P8,000)), Gain from sale of machinery {P20,000 ~ (P50,000 ~ P35,000)) Rent of livestock Gross income Chapter: Concept afncome sooo Pegoon puogen9 pano.oo isaooa Pi00,000 25,000 (90,0009 (25000) ___. Pood —prov.odo 500,000 20,000 20,000 50.000 780,000 225,000 7.000 Abo _2a7.000 Bi32.000, 00,000 125.000 7375.00 —s0.000 725,000 tea 000 7245,000 P 3,000 5,000 -s0.o00 © __sa.000 FETENTIIG tara 213.000, ‘The difference between the cash basis and the accrual bass is the decrease in inventory of livestock produced by P130,000, comparison is prepared as follows Ending inventory livestock produced Less: Beginning inventory livestock praduced Decrease in inventory cash basis -gross income Less: Accrual basis ~ grass income Difference P 50,000 280.000 Ehsoo0o 433,000 303.000 SEUNG