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Chapt
er3:
ConceptofI
ncome

CHAPTER3
CONCEPTOFI
NCOME
Pr
oblem 3–1TRUEORFALSE
1. Tr ue
2. Fal se–Someweal tht hatmadet oincreaset hetaxpayer’snetwor t
har egif
tsandi nheri
tanceand
thesear enottaxableincome.
3. Tr ue
4. Fal se–Somet imesasal er esul
tstol oss.
5. Tr ue
6. Tr ue
7. Tr ue
8. Fal se–Fi l
ipi
noci t
izenwhoi snotresidingint hePhili
ppinesist axableonlyforincomeear ned
withi
n.
9. Fal se–Thebasi soft axi sthefairmar ketv al
ueoft heinstrument .
10.Fal se–Noti ncomef ort heempl oyeeandnotsubj ectt
oi ncomet axbecauset hebenef i
ciaryist
he
employ er.
11.Fal se–Accr ual r
eportingr eport
si ncomewhent hereisear ni
ngr egardlessofcollect
ion.
12.Fal se–Mostt axpayeropt sforcalendary earbasis,exceptcor porati
onwhi chmayoptf orf i
scal
year.
13.Tr ue
14.Fal se–Pr epaidexpensesar enotal l
owabl ededuct i
onswhet hercashoraccr ualmet hodof
report
ingincomei sused.
15.Fal se–Ther eisnor uleof25%i ni
tialpaymenti fthesalei smadeonr egul
arbasisofper sonal
goods.

Pr
oblem 3–2TRUEORFALSE
1. Tr ue
2. Tr ue
3. Fal se-Al
li
ncomedi st
ri
butedareconsider
edasf r
om al li
ncomeearnedoutsi
dethePhili
ppines.
4. Fal se–Onlycalendarmethodst ar
tsf
rom JanuaryandendsatDecemberoft hetaxableyear.
5. Tr ue
6. Tr ue
7. Tr ue
8. Fal se–Ther epor
tabl
eincomeoft hedecedent’
sestateisonlytheear
ningsaft
erdeath.
9. Fal se–Ser v
icebusinessisallowedtodeductexpensesusi ngaccr
ualmethodi fsuchbusiness
optedtouseaccrualmethod,butthei
ncomei sstil
lreport
abl
eusingcashbasis.
10.Tr ue
11.Tr ue
12.Tr ue
13.Tr ue
14.Tr ue
15.Tr ue

Pr
oblem 3–3 Probl
em 3–4
1. D 1.D
2. C 2.B
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Chapt
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ConceptofI
ncome

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

Problem 3–5 C
Netassetsending(P300,000–P50,
000) P250,000
Netassetsbeg.(P500,000–P150,
000) (350,000)
Balance (
P100,000)
Add: Owner’
sdrawings 240,000
Repor t
abl
eincome( l
oss) P140,000

Problem 3–6 B
Incr
easeint otalassets P1,
520,
000
Decreaseint otall
iabi
li
ti
es 330,
000
Divi
denddecl ared 100,
000
Total P1,
950,
000
Less:Addit
ional paid-
incapi
tal P800,
000
Unreal
izedgai n 50,
000 850,
000
Repor t
abl
eincome P1,
100,
000

Problem 3–7 B
I
ncreasei ntotalasset
s P250,000
Decreaseint otall
iabi
l
iti
es 160,000
Drawings 20,000
Additi
onal i
nvestments (50,000)
Totalincome P380,000

Problem 3–8 C
Sales P30,
000
Less:Costofsales(P30,000x40%) P12,
000
Rentexpense 2,
000
Kiosk–depr eci
atedvalue(P3,
000–P2,
900) 100
I
nterestexpense(P20,000x1%) 200 14,
300
Netincome–r et
urnoncapi tal P15,
700

Pr
obl
em 3–9 D
Ret
urnofCapi
tal Ret
urnonCapi
tal
Ti
medeposi
tbal
ance P250,
000 P30,
000

Probl
em 3–10 A
Therei
snorepor
tabl
eincomebecauset
her
eisnoact
ual
sal
eyetdur
ing200x.

Pr
obl em 3–11 D
I
nterestcredi
tedonpeso-
savi
ngsdeposi
t(40,
000/80%) P 50,
000
Matur edi
nter
estoncouponbonds,
notyetcol
lect
ed 80,
000
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Chapt
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ConceptofI
ncome

Cancell
ationofindebtednessfr
om SMCi nwhi
ch
Arom hasequityinvestments 120,
000
Shareinjointvent
urenoty etr
eceiv
ed 200,
000
Paymentofdamangesdeposi tedincour
tbyacompet
it
or
forunreali
zedprofi
t 60,
000
I
ncomer eali
zed P510,
000

I
ncreasesordecr easesinv al
ueofinvest
ment sarenotr eal
i
zedgainorl oss.Paymentofdamagesf or
unreal
ized prof
it
si sat axabl
eincome.Incomemaybeconst ructi
vel
yr ecei
ved eveni fnotphysi
cal
ly
tr
ansferredtoapersonforaslongasi
tiscredi
tedtotheaccountof,
orsegregatedi
nf avorofaper
son.

Pr
obl
em 3–12 C
Year1 Year2 Year3
Sales 0 0 P1,800,000
Costofsale 0 0 (
1,000,000)
Disposal
cost 0 0 ( 50, 000)
I
ncomef oreachy
ear 0 0 P 750, 000

Pr
obl
em 3–13 A
Taxabl
eIncome Nont
axabl
eIncome
Salary(
P260, 000/
13)x12 P240,000
Raffl
ewi nnings 70,000
13thmont hpay(P260,
000/
13)x1 P 20,
000
Lottowinnings . 500,
000
P310,
000 P520,
000

Problem 3–14 D
Withi
n: Taxabl
eIncome
Compensat ioni
ncome P180,000
Incomef r
om grocer
ystor
e 50,000
Outsi
de:
Compensat ioni
ncome 120,
000
Lot t
owinnings 100,
000
Totalincometaxabl
einthePhi
l
ippi
nes P450,
000

Not
e:Lott
owinni
ngsear
nedout
sidet
hePhi
l
ippi
nesbyar
esi
dentFi
l
ipi
noci
ti
zenar
etaxabl
eint
he
Phi
l
ippi
nes.

Probl
em 3–15 B
Salar
yfrom t
hePhi l
ippi
nes,
netoftax P250,
000
Add:Withhol
dingtax 50,
000
Totali
ncomer eport
ableint
hePhil
i
ppines P300,
000

OCW ar
eexemptf
rom i
ncomet
axoni
ncomeear
nedout
sidet
hePhi
l
ippi
nes.[
Sec.23(
C),
NIRC]

Pr
oblem 3–16 B
Amountofdi v
idendr ecei
ved P600,
000
Multi
pli
edbyper centofSungad’
soperat
ion
withi
nbasedongr ossincome 20/30
Di
videndincome–t axabl
einthePhi
l
ippi
nes P400,000

Pr
obl
em 3–17
1. Let
terC
Netsal
aryasuni
versi
typr
ofessor P240,
000
Add:Wit
hhol
dingtaxonwages 20,
000
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Chapt
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ConceptofI
ncome

Compensat
ioni
ncome P260,
000

2. Lett
erB
Grossauditser
vicei
ncome( P135,
000/90%) P150,
000
Add:Grossrenti
ncome( P114,
000/95%) 120,
000
Totali
ncomef r
om prof
essionandbusiness P270,
000

3. Lett
erC
Int
erestincome(P8,
000/
80%) P10,
000
Add:Divi
dendincome(P4,500/
90%) 5,
000
Totalpassivei
ncome P15,
000

4. Let
terD
Gai
nf rom sal
eofpersonal
car P3,
000
Add:Gainfrom sal
eofsharesofst
ock–out
side
Stockmarket(P2,
850/
95%) 3,
000
Totalcapi
talgai
ns P6,
000

Problem 3–18 A
Professional
fee(P450,
000/
90%) P500,
000
Salary(P300,
000+P60,000) 360,
000
Pri
zes 8,
000
Earningssubjectt
onormalt
ax P868,
000

Capit
algains-sharesofst ock:
Fi
rstP100,000(P95,000/95%) P100,
000
OverP100,000(P54,000/90%) 60,
000 P160,
000
Winni
ngs( P40,000/
80%) 50,
000
Earni
ngssubjecttofinalt
axes P210,
000

Problem 3–19 D
Fi
rst4mont hs(
P12,000x4) P 48,
000
Remai ni
ngmonths(P15,
000x8) 120,
000
13thmonthpay(P168,
000/12) 14,
000
Grosscompensationi
ncome P182,
000

Probl
em 3–20 B
Report
abl
eincomei
sthemar
ketv
alueoft
hecarr
ecei
ved P120,
000

Pr
oblem 3–21 A
Marketv
alueoft
heser
vicer
ecei
ved P6,
000

Probl
em 3–22 C
Facevalueofthenon-inter
estbearingnote P30,
000
Multi
pli
edbythepr esentvaluefact
orof10%annuit
y 0.
909
Compensationincome–pr esentvalueoft
henot
e P27,
270

Problem 3–23 A
Compensationi
ncome P50,
000
I
nteresti
ncome(P50,
000x12%x6/
12) P3,
000

Problem 3–24 B
Coll
ecti
onsduri
ngthey ear P490,000
Expensesact
uall
yincurred (
150,000)
Netincomebeforepersonalexempt
ion–cashbasi
s P340,000
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Chapt
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ConceptofI
ncome

I
ftheserv
icebusinessopt
edt
or tonaccr
epor ualbasi
s,suchmet
hodcanonl
ybeappl
i
edwheni
tcomest
o
r
eport
ingofexpense.

Problem 3–25 A
Grossincome( P1,000,
000–P600, 000) P400,000
Actualoperati
ngexpenses(P200,000x80%) (
160,000)
Netincomebef oreotheri
ncome P240,000
Add:Gainf r
om saleofoldfur
nit
ure 20,000
Taxableincome P260,000

Pr
obl
em 3–26
1. LetterC
Cash P 50,
000
Fairmar ketv al
ueofpr
oper
tyr
ecei
ved 100,
000
Mor tgageassumedbyt hebuy
er 450,
000
Install
mentpay ments:
Fir
sty ear 100,
000
Secondy ear 200,
000
Thirdy ear 300,
000
Fourthy ear 400,
000
Selli
ngpr ice P1,
600,
000

2. LetterD
Sell
ingprice P1,
600,
000
Less: Mortgageassumedbythebuyer 450,
000
Balance P1,
150,
000
Add: Excessofmor t
gageovercost(
P450,
000–P400,
000) 50,
000
Cont r
actprice P1,
200,
000

3. LetterD
Downpay ments:
Cash(downpay ment) P 50,
000
Fairmarketval
ueofpropert
yrecei
ved 100,
000
Instal
lmentreceiv
edintheyearofsal
e 100,
000
Excessofmor t
gageovercost(P450,
000–P400,
000) 50,
000
Ini
tialpay
ment s P300,
000

Problem 3–27 C
Sell
ingprice P700,
000
Add: Excessofmor tgageovercost(P600,
000–P500,
000) 100,
000
Total P800,
000
Less: Mortgageassumedbyt hebuyer 600,
000
Contractprice P200,
000

Pr
obl
em 3-
28

1.A
I
ncome200C-casual sal
e(P12,
000–P3,
000) P9,
000
Mult
ipl
iedbyhol
dingperi
od–mor et
han1year 50%
Report
ablei
ncome P4,
500

Thesaleisconsi
der
edcashsal
esbecausethe200Ci
nit
ial
pay
ment
s(P1,
000+P1,
000+2,
000)
exceeds25%ofthesel
l
ingpri
ce;P4,
000/P12,
000=33%
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ConceptofI
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2.B
Repor
tabl
eincome200C–r
egul
arsal
e(P9,
000xP4,
000/
P12,
000) P3,
000

Si
ncet
hepr
oper
tyi
ssol
dinr
egul
arbasi
s,i
nst
all
mentr
epor
ti
ngofi
ncomei
sal
l
owed.

Probl
em 3–29 B
Total
revenue P1,
000,000
Costofsale (500,000)
I
ncomet oberepor
ted P 500,000

Probl
em 3–30 A
Contr
actpr i
ce P50,
000,
000
Completedasoft hisy ear,50% P25,
000,
000
Cumulativ
ecost ,P10M +9M 19,
000,
000
Cumulativ
ei ncome P 6,
000,
000
Less:Reportedprioryear(P50M x30%)–P10M 5,
000,
000
Reportabl
eincomet hi
sy ear P 1,
000,
000

Probl
em 3–31 D
Contr
actpr ice P1,
000,
000
Less:Cost( P90,
000/20%) 450,
000
Grosspr ofi
t P 550,
000
Multi
pliedbypercentofcompl
eti
on 20%
Reportableincomeunderper
centofcompl
eti
on P 110,
000

Problem 3–32 D
Contractprice P1,
200,
000
Less:Total costs(P432,000+P184, 250+P103,750) 720,
000
Totalprof
it P 480,
000
Less:Previousy ears’repor
tedincome:
Accompl i
shedcont ractpri
cefor200Aand200B( P1,
200,
000x85%) P1,
020,
000
Previ
ousy ear s’
actual cost
s:
200A (432,
000)
200B (184,
250) 403,
750
Percentofcompl et
ion–200CRepor tabl
eincome P 76,
250

Probl
em 3–33 A
Year3sales P500,
000
Less:Costincurr
edasofyear3:
Year1 P100,
000
Year2 200,
000
Year3 50,
000 350,
000
Year3–r eportabl
eincome P150,
000

Problem 3–34 C
Harvestedcropssold P2,
000,
000
Less:Totaldi
rectcost
s:
Year1 P300,
000
Year2 100,
000
Year3 100,
000
Year4 100,
000
Year5 400,
000 1,
000,
000
Repor t
abl
eincome–y ear5 P1,
000,
000
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Problem 3–35
Cashbasisincome(300K+800K+100K) P1,
200,
000
Accrualexpenses 500,
000
Netincomebef or
epersonal
exempt
ion P 700,
000

Problem 3–36
Accruedsales(P2,
000,000+P520,000) P2,
520,
000
Less:Costofsales 1,
200,
000
Grossincome P1,
320,
000
Less:Operati
ngexpenses(P600,
000x70%) 420,
000
Netincome P 900,
000

Pr
obl
em 3–37
Year1 Year2
Tot
alhar
vestf
ort
hey
earatsel
l
ingpr
ice P50,
000 P100,
000

Cash Accr
ual Cash Accr
ual
Harvestssold:
(80cav ansxP500) P40,
000 P40,
000
(190cav ansxP500) P95,
000 P95,
000
Endinginventory:
(20cav ansxP500) 10,
000
(30cav ansxP500) 15,
000
Beginni
ngi nventor
y:
(20cav ansxP500) . . . (10,000)
Grossincomef ort
heyear P40,
000 P50,
000 P95,
000 P100,000

Problem 3–38
1.CashMet hod Farming Tradi
ng Rent Tot
al
Revenue P 50,000 P150,
000 P100,
000
Equipmentsold 25,
000
Costs:
Costofproductspurchased (90,000)
Car r
yingv
alueoffar
m equipment . (25,000) .
Grossincome P 50,
000 P 60,000 P100,
000 P210,
000

2.Accrual Method Farming Tradi

ng Rent Tot
al
Revenue P 50,000 P150,
000 P100,
000
Equipmentsold 25,
000
I
nventory,endi
ng 9,000
I
nventory,begi
nning ( 6,000)
Costs:
Costofpr oductspurchased (90,000)
Carryi
ngv al
ueoff ar
m equipment . (25,000) .
Grossincome P 53,
000 P 60,000 P100,
000 P213,
000

Pr
oblem 3–39
1. Lett
erC
Cashr eceipts:
Saleoflivestock( P200,000+P300,000) P500,
000
Saleoflivestockf orrent 10,
000
Saleofmachi nery 20,
000
Rentofl i
vestockf orrent 50,
000
Totalcashr eceipts P580,
000
Less:Costofl i
vestockpurchased
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Chapt
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ConceptofI
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(P50,
000+P175,000–P100,000) P125,
000
Costofl
iv
estockforr
entsol
d 7,
000
Costofmachiner
ysold 15,
000 147,
000
Gr
ossincome P433,
000

2. Let
terA
Saleofl i
v estock(P200,000+P300, 000) P500,
000
Less: Costofl iv
estockpur chased 125,
000
Balance P375,
000
Add: I
nv entory,end–l i
vestockpr oduced 50,
000
Total P425,
000
Less: I
nv entory,beg.–livestockproduced 180,
000
Balance P245,
000
Add: Gainf rom saleofliv
estockf orrent
[
P10, 000–( P15,000–P8, 000)] P 3,
000
Gai nf r
om saleofmachi nery
[
P20, 000–( P50,000–P35, 000)] 5,
000
Rentofl i
vestock 50,
000 58,
000
Grossi ncome P303,
000

Thediffer
encebet
weenthecashbasi
sandt heaccr
ualbasi
sist
hedecr
easei
ninv
ent
oryofl
i
vest
ock
producedbyP130,
000.Acompar
isoni
spreparedasf
oll
ows:

Endinginv
entor
y–livest
ockpr
oduced P 50,
000
Less:Begi
nni
nginventor
y–li
vest
ockproduced 180,
000
Decreaseini
nvent
ory P130,
000

Cashbasi
s–gr ossi
ncome P433,
000
Less:
Accrual
basis–grossi
ncome 303,
000
Dif
fer
ence P130,
000