INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) Is ‘SUGGESTED ANSWERS Chapter A Gross Income CHAPTER 4 GROSS INCOME Problem 4-1 TRUE OR FALSE 2. True 2. True 3) Tue 4. False ~ cost of tving allow ance is part of a taxable compensation income. 5) True 4G) False ~ Religious officer's income is subject to income tax, 1. True 8) True 9) False , income of debtor = amount of debt settled Xu 1 L 1 (0, False “ transportation allowance pre-computed on a dally basis isnot subject to tax. 1. False - there is na income because the actual expenses is greater than the advances, 2. True 4] False, the nile on MCI is being described, La. True 15. True Problem 4-2 TRUE OR FALSE I False ~ tes are taxable because there is no law exempting i from income tax 2) Tue 31. False — Not incame but a liability in compliance with the trading business rule, 4) False — Under service business, advances fram clients are ta be reported as income, Include as income because the advanced rental s without restriction, 5. True 6 Tue 7) False ~ because estimated bad debts is not allowed to be deducted from grass business income. &. Tue ‘9. False - Not an option to report, but required to report 10. False the return of prem lum from insurance company is not taxable i True 12! False ~ income should be realized to be taxable, 13. True 14! False — Asa rule, income abtained illegally is taxable. 15. False AS a rule, income received by error is reportable income. Problem 4-3 TRUE OR FALSEINCOME TAXATION 6TH Edition (BY: VALENCIA& ROXAS) 6 ‘SUGGESTED ANSWERS ‘Chapter ds Gross Income a 8 10 1. 2 a 14 1s, Fase Thi tar-exempron = granted only to pubic emphyses and appreable to accumulated monetized vacation and sick leave credits False - Only 13” month pay is nontaxable within P30,000 celing. True False - proceeds of life insurance due to death is nontaxable regardless of wha is the beneficiary False ~ a2 2 rule board and loading furnished by an employer is taxable, except when it applies to employer's benefit rula, True False -not taxable income because the dividend received is stil stack though different in class, True True True False ~The rule of 10,000 and below applies to prizes not winnings False - Gnly damages resuiting from injuries is nantaxable True False - this rule applies to winnings. Prizes amounting to 10,000 and below is subject 9 normal tax True Problem 4-4 TRUE OR FALSE True True False - Income from profession True True False - Only those employees who can meetthe requisites are exempt from income taxeven ifthe retirement plan is BIR approved True False ~ Not taxable, False ~ Qvertime pay of MWE is nontaxable. True True False - interest expense of a bankis treated as part of cost of service, False - Advance callection of rent income f taxable False - All earnings of a resident Filipino citzen from all sources are taxable in the Philippines. False - Subject to @ normal tax of 30% because such interest income is a normal ‘operating income of the bankINCOME TAXATION 6TH Edltion (B" ‘SUGGESTED ANSWERS Problem 4-5 Problem 4-6 Problem 4-7 a0 2b 3B 63 68 68 oA ae 9.0 0.8 too fac Problem 4-8 a Nee take home pay P2g0,000 ‘Adel Watnholding income tax “30000, ‘otal Pax0.000 ess: 23° month pay pastor Gross reportable compensation Hooooa Unused 20-day vacation leave is nontaxable it Is converted into cash (Rev. Regs. No. 10- 2008; B18 Rutmy No. 93-34). Ih the above problem, the 10-day vacation leave was actualy valled; hence, taxable Problem 4-9 > Sstary (376,000 + P50,000) 420,000 ‘axanle thirteenth month pay {P 35.000 ~ PS.000), Sonn Gross taxable compensation income scsi Problem 4-200 8 Oven MSofnoa 23% manth pay and other bonuses 15,000 Total compensation income nea Problem 4-22 8 Salany 320,000 Cost and ving allowance soon ‘otal taxable compensation income aso Note: New BIR interpretation provides that the 13° month pay and other benefits amountina {2'P30,000 and below @ not taxable. Since the 13” manth pay fs only P20,000, the P20,000 Schievement awards being part of demuninis can be used as ather Denetts, to complere the 30.000 nontaxable threshold Salary (P120,000 + P24,000) 144,000 Overtime pay 36,000,INCOME TAXATION 6TH Edition (BY: VALENCIA& ROXAS) 6 SUGGESTED ANSWERS, Payment of services (P4,000 + P30,000) 34,000 Present value of non-interest bearing notes (P30,000 x 0.909) 21270 Reportable taxable Income per TR. Pao In general, interest income is subject to final tax; hence not to be reported in the TTR. "Nominterest bearing note & to be reported at ils discounted value when received. (Sec. 2.78.1, Rey. Reg. No. 2-98) Problem 4-13 > (First employment for 30 years fecelved at tne age of 500,000 50) Problem 4-14 e Fist empoyment resigned eaon.000 Grose compensation income (1.000 x P10) pooon Problem 4-16 8 ‘compensation income (P13 ~ #22) x 10,000 Somopygieas — Sastalanin Capital gain (P25 P23} x 20,000 p2oooo Compensation Capital gain. ‘compensation income (P25 #23) x 10,000 E2aoo0 Capital gain (P30 25} «20,000 eso.ooo Corraction: The option was exercised and sold in year 200C whan the market price was P30. Problem 4-18 ¢ Reguisr Com pensation per month P $0,000 Concellotion of inde btesinens (P300,000 - 275,000) 25.000 Total compensation income - December 2008 7s300 Insurance premium - beneficiary Sico ps.000 Basie comnensation (P30.000 x 12) 360.000 Shares of stock (P100 x 100) 10,000 Stock optan (PL20 ~ Pad) x 200 ‘000 Annual ineuranea pramium (PA,000 x 50%) 2.000 Gross compensation Boao Cleaning of business equipment P 1,000 Repair service ot store 3.000INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) ‘SUGGESTED ANSWERS, Totalcasual service income Problem 4-22 ¢ Tal purchases . Unsold goods (Cost of goods sold Problem 4-23 ¢ Inventory, begianing Purchase discounts Purchase returns Inventory end Cost of le Problem 4-24 ¢ Inventory. ending Purchases Freight in Purchase discount Cost of sales Problem 4-25 8 Sales Less: Cast of goods manufactured and sold Raw materials, ending inventory Factory overhead ‘Total m anufacturing cost Finished goods, ending Inventary Gross business income. Problem 4-26 8 Advance payment Office machine Gross service income Problem 4-27. 8 Protessiaral Fee, accounting services, Salaries of accounting staff Accounting supplies Gross busmess income for MCIT purposes* 9 Ea 40,000) aes.a00 P 20,000 (0,000), (40,000), 59,000 Buazs000 ‘veara ‘year? (50.000) 30.000) 50,000 | 900,000, (20000 125.000) Pagano = ‘aiooog 2,275,000 “srdediane 10,000 200,000, Prasoo00 (160,000), 30.000) _2,000,000 Easoo00 P 2,000 3.000 Boao 500,000 P150.000 20,000 _x60,000 perincigINCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) ‘SUGGESTED ANSWERS 20 correction: The requirement should qualify mat the grass business Income 6 for MCIT Trading gan Interest expenses paid to depositors Grass income for MCIT purposes Problem 4-29 « Interest income from clients Gain on sale of capital assets Rent income Total Less: Cost of services: Salaries of bank employees assigned in lending and investments of funds Depreciation of computers and teller machines used Direct cupplies used Interest expense paid to depositors Gross income for MCIT purposes. Problem 4-30 8 Service charges Sriginacing rem tne Puippines 200.000 3,700,000 600.000 2001000 1,500,000 Collection abraad af calleet messages originating in the Philippines Grass income for Philippine incame Tax computation Problem 4-31 8 Rene roryear: 2oa8 2oue 1 Letter C Aavances deposit Monthly rental (P20,000 x 10 months) ‘adaoo.n00 -$.000.000. Psooo.oo0 10,000,000 51000,000 2/000,000 Fi7'000-000 6,000,000 7i1.000'00 “enn Ezio.ooo 480,000 a0 000 aoonoe 40,000 200,000INCOME TAXATION 6TH Edition (BY: VALENCIA ROXAS) 2 SUGGESTED ANSWERS "Annual Insurance premium to be pald by the lessee (P6,000 x 10/12) 5,000 Portion of real estate tax to be paid by the lessee (P3,000 x 10/12) 2.500 Rent income paar soo As a general rule, pre-collection of rental is taxable in full to the lessor when received regardless of accounting method used. 2 Letters Monthly rental (P20.000 x 10 months) 200.000 ‘Annual insurance premium to be paid by the lessee (P6,000 x 10/12) 5,000 Portion of real estate tax to be pald by the lessee (P3,000 « 10/12) 2.500 Rent income P207;500 ‘Commission income (P2,000,000 x 5%) Reportable taxa ble income Ba07,500 Outright Spread.out Year 1 Outright method 7240,500 ‘Year 2 spreau-out method less: Accurn, depreciation ((P240,500 - PS60)/8 yrs] x 4.75 yrs 342.464.3 Divided by remaining years of contract rel 5 Multiplied by months mayear a2 Year I spread-out= fent Income on improvement 8 Problem 4-34 ¢ Outright Spread-out Spread-out peo. 2008 because the said improvement was completed at the end of the year Problem 4-35 ¢ Book vac at the end ofthe lease 70833 Beiaddy tumber of years ni tne termination oftease contact =4 years and7 montns 7 Ugg Nidtipted by aumber of years expired trom March 31, 2008 19 December 31,2000) 2INCOME TAXATION 6TH Edition (BY: VALENCIA ROXAS) 2 ‘SUGGESTED ANSWERS, Reparasaauonalncome tom mpavenant Trarsos) ASS: Accum. deprecation at preter mina ton (F300,000/6)x2.75 years Fipst ezsoo sai oal incre n 2000 tom the gresterinatan ot contact mao Iterest income from an investment in a 10-year bond P 40.000 50,000 Ifferest ncome trom expanded foreign currency deposit pyiviaan ote: Tecnicaly speaking, te interest rom S-year ume depost in Prulppine bank taxable form: ‘Year 3 interest income of P4,461.20. Royalty income as author (PL00,000 x 10%) P 10,000 Rayalty incame from franchising (200,000 x 20°) 40,000 Royalty income from gold mine 500,000 % 20%) 300,000 ‘Total nal tae Hiso‘o00 Copyriant Patent ‘Gross royatties: P5000 ‘Copyright (P32,500/90%) Patent (P20,000/80%), P 25.000 Income tax final ‘Copyngnt (P35,000 x 20%) (3.500) Patent (P25.000 20%) 5.000 Income after tax 226.000 Problem 4-40 1” Letter B Royalties within derived from. Pain rellover invention (P100,000 x 2034) 20,000 Musical compositions (P200,000 x 10%) 20,000 Books (P500,000 x 10%) 30.000 Final tax on reyaity income Fac 2 Letter D Royalties outside derived trom: Pain rellover invention 200,000 Musical compositions 100,000 Books 300-000 Royalty Income subject to normal tax ‘Feoo.000 In general, royalties derived from sources within the Philippines are subject te a final tax of 20%, except royalties on books, other literary works and musical compositionsINCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 2 ‘SUGGESTED ANSWERS Which shall be subject to a Tinal tax of 10%, Royallles recelved by resident ciiizens from sources outside the Philippines shall be subject to normal tax under Section 24 (A) of the NIRC and by the domestic corporation under Section 27 (A) of the NIRC Problem 4-42 A Problem 4-42 A nontaxable, First prize in Talentadong Pinoy, 10,000 2 pce in bicyels race 6.000 Amount subject to normal tax Boo In general, prizes (reward fore content) arc subject to final tax of 20% except the amount af the prize is PLO,000 or less which wil be subject to normal tax. Winnings (reward that depends on chance) are subject to 20%% final tax regardless af amauni. [See. 24 (B)(0), NIRC] Problem 4-44 > First prize ~ raffle draw (P50,000 -P2,000), P 49,000 Gambiing winnings 300,000, Beauty contact winnings anon Taxable prizes and winnings Pasa.oo0 Fre FRU FBoeO Income (loss) Pio0.000 (PZ0.000) 7 -S0.000 Use: NOLCO (P26,000 -P20,000 - 920,000) 5.000 Bad debts written off zsooo _io.0n0 e000. Income (loss) before bad debts recovery F73.000 (F30,000) 7-40.00 Bad dabts recovery of provious year wth tax bancfit 2eo0n | “eno, ‘Taxable income Eso Boom Fapooo Feportable bad debts recovery in year 3 should also be P5,000, Year 1! No bad debt recovery one. Year 2: Bad debt recovery zea Problem 4-47 5,000 local tax recavery, Problem 4-48 0 ¢ eat property tax P 30,000 Ibeal tase son Reportable income fram tax refund Eitan Unfair com patition 400,000 Loss earnings 300,000INCOME TAXATION 6TH Edition (BY: VALENCIA ROXAS) m4 SUGGESTED ANSWERS ‘oral damages for breach of contract Tsao Ingerast on damages onan Gross income from damage recoveries subject to tax aoa ‘Actual damages are considered taxable income to the extent that such damages constitute @ lose af anticpated profits, and are non-taxable tothe extent they represent a return of capital Eonttact are subject to income tax, and, consequently, withholding tax (BIR Ruling No. DA- ‘¥45-200s dated December 6, 2005) Take note that the moral damages and exemplary damages awarded were net on accoun tof Injuries or sickness. Problem 4-50 ¢ ‘anulty reecived P 20,000 Prevent value (20,000 x 0.9092) iaaea Interest income - Taxable annuity Dine Problem 4-51 > Present value (P5,880 x 0.8928) 5250 Interest income - Taxa le annuky ee Problem 4-52 8 Excess of withdrawable amount ($20,000 - $2,000) $9,000 Multiplied by exchange rate per Y dollar so, Reportable income received by enor mma Net increase in net asset P208,000 Less salary in a year (P5,000 x 12) 50,000 Mlegally attained income taxable ‘Eason Correction: The increase in nat worth should be P108,000. Problem 4-54 Gressincome b425.000 Incase of taxnayers engaged in the sale of service, “gross income” means gross receipts less Problem 455 Salary 300,000 Caiperate shares received (2,000 shares x F200) ioo.009, Cancellation of debt in lieu of service rendered ‘30,000, rote sharing 0.000 Gross taxable compensation income Tiso.o00 Problem 4-56 Registration fees of delivery trucks “#000, Real estate tax 5.000INCOME TAXATION 6TH Edltion (B" /ALENCIA& ROXAS) a ‘SUGGESTED ANSWERS Communty tax Tao Foreign income tax previously clalmed as deduction soon) Raportahle grass incamean ta refunds Biazona 1! °'Gross income - trading business (500,000 -P200.000), 300.000 Gross income — warehouse (P200,000 ~P150,000) 50,000 Net capital goin (ss) on personal properties (10,000 ~ P20.000) 50% (5,000) (car mare than 2 year (P100,000 - P50,000) x 80% 25.000 20,000 Grose incame mubjoct to regular tnx Eo 2. Unutlized portion of sale of residential house (Pi,000/000” P800,000) x 6%. paz.oo0 Salary (P25,000 + P302,000) 327,000 Income tax paid by the employer “S000 Total compensation Fasz.000 Business grass Income 400,000 Allowable expenses 250,000} 50,000 Prepaid rent income 50/000, Bad debts recovered previously written-o 38,000 x60%) 22/800