Chapter 4: SELF-TEST EXERCISES

Discussion Questions

1. What are the three income taxation schemes? Briefly discuss the
scope of each.

2. Discuss the nature of final income taxation.

3. What are ordinary assets? Compare them with capital assets.

4. What capital gains are subject to capital gains taxation?

5. What are the special features of regular income taxation?

6. Enumerate the instances wherein short accounting period will arise.

7. What are the tax accounting methods in reporting income? Briefly

explain each.

8. What are the two types of income tax return?

True or False 1

1. Both active income and passive income do not require direct

participation of the taxpayer in earning the income.

2. There are three types of gross income for taxation purposes.

3. The three tax schemes are mutually inclusive in coverage.

4. Regular income tax generally covers active income and capital gains.

5. Final tax generally covers passive income.

6. Capital gains arise from the sale, exchange, and other disposition
of any assets.

7. There are only two types of assets for purpose of taxation.

8. An ordinary asset is defined to include all other assets other than

capital assets.

9. The technique used to measure income is referred to as an accounting

method. The length of time over which income is reported is referred ti
as an accounting period.

10. Regular accounting periods are calendar and fiscal.

11. Individuals file their income tax returns on or before April 15 of

the following calendar year.
12. All taxpayers can change their accounting period when there is a
change in the nature of their business, but the BIR must be notified in
all cases.

13. The first accounting period of a starting business will more likely
be less than 12 months.

14. The accounting period of a deceased taxpayer shall be terminated on

December 31 in the year of death.

15. Accrual basis and cash basis are the most common accounting methods
used in practice.

True or False 2

1. Advanced income is an item of gross income for accrual basis

taxpayers.

2. Generally, prepayments are non-deductible in the current accounting

period.

3. Prepayments are deductible but in the future period they expire or

are consumed in the business or trade of the taxpayer.

4. The use of different methods for different businesses of the same

taxpayer is permitted by law.

5. Initial payment includes down payment and installments in the year

of sale.

6. Contract price is synonymous with selling price.

7. The crop year method is an accounting method.

8. Under the percentage of completion method, gross income is reported

based on the cash collections from the contract price.

9. The depreciated value of the property upon termination of the lease

constitutes income to the lessee.

10. The withheld taxes on the income payments made by the taxpayers are
tax credit against their income tax due.

11. There are three types of income tax return for each income tax
scheme.

12. All taxpayers, small or large, are encouraged to file their income
tax return through the EFPS system of the BIR.

13. Large taxpayers are under the supervision of the BIR Large Taxpayer
Service.
14. Non-filling and / or non-payment of tax is subject to penalties
such as surcharges, interest, compromise, and imprisonment.

15. The interest on unpaid taxes is computed on the basic tax only
excluding the surcharge.

16. Only large taxpayers shall file under eFPS.

17. Both manual filing and filing through e-BIR forms makes use of
manual payment.

18. eFPS is fully electronic tax compliance.

19. e-BIR forms makes use of electronic data entry and filing.

20. eFPS filers may file manually when there is a BIR system downtime.

Multiple Choice- Theory: General Concepts

1. Which is not a scheme in taxing income?

a. Ordinary gain taxation

b. Regular income taxation

c. Capital gains taxation

d. Final income taxation

2. Which is correct statement regarding income taxes?

a. An item of income subjected to final tax can still be subject to

regular tax.

b. An item of income exempted from final tax is nevertheless taxable to

regular tax.

c. An item of income subjected to capital gains tax may be subject to

regular income tax.

d. An item of income exempted from tax is likewise exempt from capital

gains tax and regular income tax.

3. Which is not a feature of final tax?

a. Covers certain passive income

b. Covers all capital gains

c. Withholding at source

d. None of these
4. Which of the following properties when classified as capital asset
is subject to capital gains tax?

a. Domestic stocks sold directly to buyer

b. Real property

c. Both a or b

d. None of these

5. Capital asset means

a. Real properties used in business.

b. Personal properties used in business.

c. Real properties not used in business.

d. Any property, real or personal, not used in business.

6. Which is not an item of passive income?

a. Royalties

b. Prizes

c. Deposit interest income

d. Professional income

7. Which of the following accounting method is most consistent with the

lifeblood doctrine?

a. Crop year method

b. Cash basis

c. Installment method

d. Accrual method

8. These are accounting techniques or conventions used to measure

income

a. Accounting methods

b. Accounting periods

c. Accrual basis

d. Cash basis

09. These are distinct and equal time periods which income is measured

a. Accounting methods c. Crop year basis

 b. Accounting periods d. Cash basis

10. Income is recognized when received rather than when earned

a. Cash basis c. Accrual basis

b. Installment basis d. Deferred payment basis

11. Income is recognized when earned regardless of when received

a. Cash basis c. Installment method

b. Accrual basis d. Percentage of completion

12. Initial payment means

a. Downpayment.

b. Total collection within the year the installment sale was

made.

c. Installment payments, exclusive of downpayment, within the

year installment sale was made.

d. Total collections within one year from the date the

installment sale was made.

13. Income is reported by reference to the extent of project completion

in

a. Deferred payment method

b. Installment method

c. Percentage completion method

d. Completed contract method

14. Which statement is correct?

a. Dealers of real properties can use installment method without

limitation.

b. Dealers of personal properties can use installment method

without limitation.

c. Non-dealers of properties can use the installment method if

initial payment exceeds 25% of the selling price.

d. Dealers of properties can use the installment method only if

initial payment does not exceed 25% of the selling price.

15. Leasehold income is recognized over the lease term in

a. Outright method c. Spread-out method

b. Cash basis d. Percentage of completion

method
16. Statement 1: The excess of mortgage assumed by the buyer over the
basis of the properties sold is the amount of gain on the sale.

Statement 2: Any collection from an installment contract where the

mortgage exceeds the tax basis of the properties received
constitutes collection of income.

Which statement is true?

Statement 1 only c. Both statements are true.

Statement 2 only d. Neither statement is true.

17. Which is correct regarding the crop year method?

a. Crop year method is an accounting period.

b. Crop year method recognizes farming income when the next

planting season commenced.

c. Crop year method matches cropping expenses with the income

upon harvest.

d. Crop year method recognizes cropping expenses when incurred

and harvest income when realized.

18. Which is an incorrect statement reagarding the use of accounting

period?

a. Individuals can either choose the calendar year or fiscal year

accounting period.

b. The regular accounting period for any taxpayer is 12 months.

c. Individual taxpayers are not allowed to report income using

fiscal accounting period.

d. Corporations may opt to use either calendar or fiscal

accounting period.

19. Under which of the following will short accounting period not
arise?

a. Change of accounting period by a corporate taxpayer

b. Change of accounting period by an individual taxpayer

c. Death of taxpayer

d. Dissolution and liquidation of a business

20. Which is not a special feature of regular income taxation?

a. Use of accounting methods c. Annual payment of income tax

b. Use of accounting period d. Final withholding tax at source

Multiple Choice-Problem 4-1: Accounting period

1. An individual income taxpayer shall file his or her income tax
return on or before the

15th day of the fourth month of the same calendar year.

15th day of the fourth month of the following calendar year.

15th day of the fourth month of the same fiscal year.

15th day of the fourth month of the following fiscal year.

2. Anderson died on March 31, 2017. Which is a correct statement?

a. Anderson’s 2017 income tax return shall cover January 1, 2016

to December 31, 2017.

b. Anderson’s 2017 income tax return shall cover January 1, 2017

to December 31, 2017.

c. Anderson’s 2017 income tax return shall cover January 1, 2017

to March 31, 2017.

d. Anderson’s 2017 income tax return shall cover April 1, 2017 to

December 31, 2017.

3. Mrs. Julian started business on July 15, 2016. What should be the
coverage of her 2016 income tax return?

a. January 1 to July 15, 2016

b. July 15, 2016 to December 31, 2016

c. July 16, 2016 to July 15, 2017

d. January 1 to December 31, 2016

4. A corporation reporting on a fiscal year ending every March 31 shall

file its 2017 income tax return not later than

a. April 15, 2017 c. July 15, 2017

b. June 15, 2017 d. April 15, 2018

5. Metersbonwe Corporation started business on April 5, 2016 and opted

to report income tax on a fiscal year ending every October 31.
Metersbonwe’s first income tax return shall cover

a. April 6, 2016 to October 31, 2016

b. April 5, 2016 to October 31, 2016

c. April 5, 2016 to December 31, 2016

d. April 5, 2016 to April 5, 2017

6. Beneco Corporation reports on calendar year. On August 15, 2016, it

stopped business due to persistent losses. Beneco Corporation’s last
income tax return shall cover

a. January 1 to December 31, 2016

 b. Janaury 1 to August 15, 2016

c. August 15, 2013 to August 15, 2016

d. August 15 to December 31, 2016

7. Effective March 1, 2017, Jonah, Inc. changed its calendar year to a

fiscal year ending every June 30. An adjustment return shall be filed
covering the period

a. March 1 to June 30, 2017

b. Janaury 1 to June 30, 2017

c. January 1 to March 1, 2017

d. January 1 to December 31, 2017

8. During 2017, Klein Corporation changed its accounting period to the

calendar year. The adjustment return shall be filed on or before

a. April 15, 2017 c. April 15, 2018

b. July 15, 2017 d. July 15, 2018

9. Effective July 2, 2016, Rofelson Company changed its fiscal year

ending every March 31 to another fiscal year ending every August 31. An
adjustment return shall be filed covering the period

a. April 1 to July 2, 2016 c. April 1 to August 31, 2016

b. April to July 1, 2016 d. July 3 to August 31, 2016

10. Effective May 15, 2017, Tabuk, Inc. changed its fiscal year ending
every April 30 to the calendar year. An adjustment return shall be
filed covering the period

a. May 1 to December 31, 2017

b. January 15 to December 31, 2017

c. January 1 to April 30, 2017

d. April 30 to December 31, 2017

Multiple Choice-Problems 4-2: tax schemes and accounting methods

1. Astercor, Inc. reported the following during the year:

P400,000 proceeds of life insurance of an officer where Antercor is the

beneficiary (P600,000 still uncollected.)

P800,000 interest income, exclusive of P200,000 uncollected and accrued

interest

P300,000 increase in value of investment stocks

Compute the gross income under basis.

P800,000 c. P1,200,000

P1,000,000 d. P1,400,000

2. Compute the gross income under accrual basis.

a. P800,000 c. P1,200,000

b. P1,000,000 d. P1,400,000

3. Berlin Corp. reported the following data for 2019:

Total net sales made to customers were P2,000,000 in cash.

Goods purchased for sale totalled P1,200,000 in cash. Beginning and

ending inventory of goods for sale, respectively, were P200,000 and
P300,000.

1-year advanced rent of P30,000 to apply for 2020 was received from a
sublease contract.

P40,000 total interest income from customers promissory note earned

P30,000 of this was collected.

Unrealized foreign exchange gains from foreign currency receivable

totaled P60,000.

Using cash basis, compute the total income subject to income tax.

P990,000 c. P750,000

P960,000 d. P690,000

4. Using accrual basis, compute the total income subject to income tax.

a. P1,060,000 c. P960,000

b. P1,000,000 d. P970,000

5. Santiago, Inc. has the following receipts during 2018:

From service billings to client P400,000

Advances from clients 100,000

Total cash collection P500,000

The P100,000 advances refer to services which will be rendered next

year. Total uncollected billing increased from P100,000 on December 31,
2017 to P150,000 on December 31, 2018.

Compute the gross income using cash basis.

P400,000 c. P500,000

P450,000 d. P550,000

6. Compute the gross income using accrual basis.

P400,000 c. P500,000

P450,000 d. P550,000

7. In 2019, Bright Inc. sold its parking lot for P2,400,000 payable on
installment. The lot was previously acquired for P1,500,000. The buyer
has an outstanding unpaid balance of P1,800,000 as of December 31,
2019, Bright’s year-end.

Compute Exquisite’s gross income in 2019 using the installment method.

P900,000 c. P225,000

P675,000 d. P112,500

8. Exquisite Corporation sold its old warehouse with carrying amount

(tax basis) of P600,000 for P1,000,000. A downpayment of 15% was
collected on July 1,2019. Additional P150,000 installment payments
were received as of December 31, 2019.

Compute the gross profit to be reported for the year 2019.

P60,000 c. P400,000

P120,000 d. P450,000

9. Lancelot is a dealer of household appliances. He reported the

following in 2019 and 2020:

2019 2020

Installment sales P500,000 P800,000

Cost of installment sales 250,000 440,000

Collections 300,000 600,000

Lance’s 2020 collection is inclusive of P100,000 accounts from 2019.

Using the installment method, compute Lancelot’s gross income subject

to income tax 2020.

P360,000 c. P250,000

P320,000 d. P275,000

10. Using the accrual basis of accounting compute Lancelot’s gross

income subject to income tax in 2020.

P360,000 c. P275,000

P320,000 d. P250,000

11. Merville is a dealer in real properties. Merville requires 20%

downpayment, and the balance is payable over 36 monthly instalments
starting on the last day of the month following the month of sale.
Merville sold properties in 2019 and 2020 with terms as follows:

House and Lot No. 1 was sold for P1,350,000 on November 11, 2019.
House and Lot No. 2 was sold for P1,800,000 on July 5, 2020.

Both properties were sold at a gross profit rate of 40% based on the
selling price.

Compute Merville’s gross income subject to income tax in 2019 and

2020, respectively.

P120,000;P720,000 c. P540,000;P720,000

P120,000;P846,000 d. P540,000;P846,000

12. In 2020, Mr. Marangley, a dealer of car, disposed a brand new

sports utility vehicle (SUV) which costs P800,000 for P1,200,000,
inclusive or under the following terms:

July 1, 2020-as down payment P100,000

Monthly installment thereafter 50,000

Mr. Marangley will choose whichever favourable permissible income

reporting method for him.

How much gross income is to be reported in 2020?

P400,000 c. P116,667

P250,000 d. P108,219

13. In the immediately preceding problem, assuming Mr. Marangley is not

a dealer of car, how much gross income is to be reported in 2020?

How much gross income is to be reported in 2020?

P400,000 c. P116,667

P250,000 d. P108,219

14. Luccio accepted a P1,000,000 construction contract in early 2020.

As of December 31, Luccio incurred total construction costs of P600,000
and estimates additional P200,000 to bring the project to completion.
Per independent appraisal, the building is at its 80% stage of
completion. Compute Luccio’s 2020 construction income using the
percentage completion method.

P40,000 c. P160,000

P200,000 d. P400,000

15. Crevar constructs residential properties for clients and reports

income by the percentage of completion method. In 2019, Crevar started
a P2,000,000 construction contract. Details of his 2019 and 2020
construction follow:

2019 2020

Annual construction costs P200,000 P800,000

Estimated cost to finish 800,000 250,000

 Extent of completion 20% 80%

Compute the construction income in 2019 amd 2020.

P200,000;P560,000 c. P400,000;P400,000

P200,000;P400,000 d. P400,000;P560,000

16. Oliver entered into a 40-year lease contract with Berna. Per
agreement, Oliver will construct a building on Berna’s lot and operate
the same for 40 years. Ownership of the building will transfer to Berna
upon the termination of the lease. The lease will not commence until
the building is completed. Oliver completed the building at a total
cost of P40,000,000 on January 1, 2020. The building is expected to be
used over 50 years.

Compute Berna’s income from the leasehold improvement to be reported

in 2020 using the spread-out method.

P200,000 c. P8,000,000

P4,000,000 d. P32,000,000

17. In the immediately preceding problem, assume that the building was
completed on July 1, 2020, what is the income using the outright
method?

P400,000,000 c. P32,000,000

P8,000,000 d. P40,000,000

18. Tomas leases an office space from Rafi, Inc. in a non-renewable 10

year lease contract. Just after the second year of the lease. Tomas
renovated the premises and made improvements at a cost of P1,200,000.
These improvements are expected to last for 12 years. Compute Rafi’s
annual income from the leasehold improvement using the spread-out
method.

P50,000 c. P30,000

P37,500 d. P20,000

19. Hassan started raising swine for sale by purchasing 5 gilts and a
boar at a total purchase price of P50,000 on January 2020. As of
December 31, 2020, Hassan’s herd grew to 15 gilts, 2 boars and 20
piglets. The total herd has a fair value of P196,000 when sold as is.
During the year, Hassan earned P180,000 from selling piglets. How much
should Hassan report as farming income in 2020?

P326,000 c. P146,000

P180,000 d. P130,000

20. Pedro, a farmer, uses the crop-year method in reporting his income
from long-term crops. The following data are relevant to his farming
operations in 2020:

Sales of crops harvested, P900,000

Expenses on harvested crops, P400,000

Expenses on maturing crops, P200,000

Expenses on newly planted crops, P100,000

Sales of tree branches for firewood, P50,000

Pedro uses the crop year method in reporting crop income. Compute
Pedro’s total income subject to tax.

P240,000 c. P540,000

P340,000 d. P550,000

Multiple Choice-Problem 4-3:Tax compliance

1. A taxpayer filed his income tax return in October 28, 2018. The
deadline for the return was April 15, 2018. If he has P40,000 net tax
due, compute the penalties in the form of interest.

P2,578 c. P2,867

P2,611 d. P4,296

2. What is the total surcharge penalty?

P0 c. P10,000

P8,000 d. P20,000

3. A taxpayer received a notice from the BIR to file his 2016 income
tax return not later than January 15, 2018. The tax due per his return
is P100,000. What is the total surcharge penalty?

P0 c. P25,000

P20,000 d. P50,000

4. What is his total interest penalty?

P6,500 c. P14,740

P7,900 d. P15,068

5. Compute the compromise penalty

P10,000 c. P20,000

P15,000 d. P30,000

6. Mani Pakyaw failed to pay file his income tax return for the year
2019 which should have been filed on or before July 18, 2020. Mani
Pakyaw filed a return showing a basic tax due of P1,000,000. Compute
the total interest penalty.

P35,836 c. P38,555

P37,644 d. P39,863
7. Mr. Pakyaw must pay a surcharge of

P0 c. P500,000

P250,000 d. P1,000,000

8. Rich Goma Corporation failed to file its income tax return for the
fiscal year ending August 31, 2019. On June 6, 2020, it filed an income
tax return with a basic tax still due and payable for the fiscal year
amounting to P500,000.

Compute the interest penalty to be imposed by the BIR.

P28,603 c. P45,873

P28,438 d. P46,207

9. Compute the total tax assessment to be paid, excluding compromise

penalty.

P653,603 c. P689,275

P653,438 d. P660,873