INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 3: Concept of Income

CHAPTER 3

CONCEPT OF INCOME
Problem 3 1 TRUE OR FALSE 1. False Some wealth that made to increase the taxpayers net worth are gifts and inheritance and these are not taxable income. 2. True 3. True 4. False Filipino citizen who is not residing in the Philippines is taxable only for income earned within. 5. False The basis of tax is the fair market value of the instrument. 6. False Not income for the employee and not subject to income tax because the beneficiary is the employer. 7. False Accrual reporting reports income when there is earning regardless of collection. 8. False Calendar year basis 9. True 10. False This rule applies to individual taxpayers. 11. False There is no rule of 25% initial payment if the sale is made on regular basis of personal goods. 12. True 13. True 14. True Problem 3 2 1. A 2. D 3. B 4. D 5. C 6. B 7. 8. C 9. C 10. C 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. B A A D A B D C C D A P250,000 ( 250,000) P - 0 245,000 P245,000 P 100,000 70,000 P 170,000 150,000 P 20,000 P400,000 ( 250,000) P150,000 P 250,000 160,000 20,000 ( 50,000) P 380,000 D Return of Capital P250,000 Return on Capital P30,000

Problem 3 3 A Net assets ending (P300,000 P50,000) Net assets beg. (P400, 000 P150,000) Balance Add: Owners drawings Reportable income (loss) Problem 3 4 D Net assets, end of year Add: Personal drawing Total Less: Net assets, beginning of year Business income Problem 3 5 C Net assets ending (P530,000 P130,000) Net assets beg. Reportable income (loss) Problem 3 6 Increase in total assets Decrease in total liabilities Drawings Additional investments Total income Problem 3 7 Time deposit balance B

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Chapter 3: Concept of Income

Problem 3 8 Sales Cost of sale Disposal cost Income for each year Problem 3 9

C Year 1 0 0 0 0 A Taxable Income Nontaxable Inco me P 20,000 500,000 P520,000 Taxable Income P180,000 50,000 120,000 100,000 P450,000 Year 2 0 0 0 0 Year 3 P1,800,000 ( 1,000,000) ( 50,000) P 750,000

Salary (P260,000/13) x 12 Raffle winnings 13th month pay (P260,000/13) x 1 Lotto winnings Problem 3 10 D Within: Compensation income Income from grocery store Outside: Compensation income Lotto winnings Total income taxable in the Philippines

P240,000 70,000 . P310,000

Note: Lotto winnings earned outside the Philippines by a resident Filipino citizen are taxable in the Philippines. Problem 3 11 C Subject to ITR Consultancy fee Salary Prizes in raffle ticket Gain on sale of principal residence Totals Problem 3 12 D Salary for the first 4 months (P12,000 x 4) Remaining months (P15,000 x 8) Gross compensation income Problem 3 13 B Reportable income is the market value of the car received Problem 3 14 A Market value of the service received Problem 3 15 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 Note: Upon receipt of the note, no interest income yet is to be reported. Problem 3 16 A Compensation income Interest income (P50,000 x 12% x 6/12) Problem 3 17 B Collections during the year Expenses actually incurred Net income before personal exemption cash basis Problem 3 18 A Gross income (P1,000,000 P600,000) Actual operating expenses (P200,000 x 80%) P50,000 P3,000 P490,000 (150,000) P340,000 P 80,000 300,000 . P380,000 P 20,000 400,000 P420,000 P 48,000 120,000 P168,000 P120,000 P6,000 P30,000 0.909 P27,270 Subject to Final Tax

P400,000 (160,000)

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Chapter 3: Concept of Income

Net income before other income Add: Gain from sale of old furniture Taxable income Problem 3 19 1. A Reportable income 2006 - casual sale (P12,000 P3,000)

P240,000 20,000 P260,000

P9,000

The sale is considered cash sales because the 2006 initial payments (P1,000 + P1,000 + 2,000) exceeds 25% of the selling price; P4,000/P12,000 = 33% 2. B Reportable income 2006 regular sale (P9,000 x P4,000/P12,000) Since the personal property is sold in regular basis, installment reporting of income is allowed. Problem 3 20 1. P37,500 = Not in the choices Net income (P2,000,000 P1,400,000 P100,000) Income tax (P500,000 x 5/20) x 30% 2. B Income tax (P2,000,000 x 6%) Problem 3 21 B Total revenue Cost of sale Income to be reported Problem 3 22 D Contract price Less: Cost (P90,000/20%) Gross profit Multiplied by percent of completion Reportable income under percent of completion Problem 3 23 D Contract price Less: Total costs (P432,000 + P184,250 + P103,750) Total profit Less: Previous years reported income: Accomplished contract price for 2008 and 2009 (P1,200,000 x 85%) Previous years actual costs: 2008 2009 Percent of completion 2010 Reportable income Problem 3 24 A Year 3 sales Less: Cost incurred as of year 3: Year 1 Year 2 Year 3 Year 3 reportable income P3,000

P500,000 P 37,500 P120,000 P1,000,000 ( 500,000) P 500,000 P 1,000,000 450,000 P 550,000 20% P 110,000 P1,200,000 720,000 P 480,000 P1,020,000 ( 432,000 ) ( 184,250 ) P

403,750 76,250 P 500,000

P 100,000 200,000 50,000

350,000 P 150,000

Problem 3 25

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Chapter 3: Concept of Income

Harvested crops sold Less: Total direct costs: Year 1 Year 2 Year 3 Year 4 Year 5 Reportable income year 5 Problem 3 26 Year 1 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 27 1. Cash Method Revenue Equipment sold Costs: Cost of products purchased Carrying value of farm equipment Gross income 2. Accrual Method Revenue Equipment sold Inventory, ending Inventory, beginning Costs: Cost of products purchased Carrying value of farm equipment Gross income P50,000 Cash P40,000 Accrual P40,000

P 2,000,000 P 300,000 100,000 100,000 100,000 400,000

1,000,000 P 1,000,000

Year 2 P100,000 Cash P95,000 10,000 15,000 Accrual P95,000

. P40,000 Farming P 50,000

. P50,000 Trading P150,000 25,000 ( 90,000) ( 25,000) P 60,000 Trading P150,000 25,000

. P95,000 Rent P100,000

( 10,000) P100,000 Total

. P 50,000 Farming P 50,000 ( 9,000 6,000) . P 53,000

. P100,000 Rent P100,000 P210,000 Total

( 90,000) ( 25,000) P 60,000

. P100,000 P213,000