Income taxation by valencia chapter 3 (concepts of income)

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 taxpayer’s 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

Problem 3 – 3
A
Net assets ending (P300,000 – P50,000)
Net assets beg. (P400, 000 – P150,000)
Balance
Add: Owner’s drawings
Reportable income (loss)

P250,000
( 250,000)
P - 0 245,000
P245,000

Problem 3 – 4
D
Net assets, end of year
Add: Personal drawing
Total
Less: Net assets, beginning of year
Business income

P 100,000
70,000
P 170,000
150,000
P 20,000

Problem 3 – 5
C
Net assets ending (P530,000 – P130,000)
Net assets beg.
Reportable income (loss)

P400,000
( 250,000)
P150,000

Problem 3 – 6
Increase in total assets
Decrease in total liabilities
Drawings
Additional investments
Total income

B
P 250,000
160,000
20,000
( 50,000)
P 380,000

Problem 3 – 7

D

Time deposit balance

Return of Capital
P250,000

Return on Capital
P30,000


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

Problem 3 – 8

C
Year 1
0
0
0
0

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

Year 2
0
0
0

0

Year 3
P1,800,000
( 1,000,000)
(
50,000)
P 750,000

A
Taxable Income

Salary (P260,000/13) x 12
Raffle winnings
13 th month pay (P260,000/13) x 1
Lotto winnings

Nontaxable
Inco
me

P240,000
70,000
.
P310,000

Problem 3 – 10
D
Within:
Compensation income

Income from grocery store
Outside:
Compensation income
Lotto winnings
Total income taxable in the Philippines

P 20,000
500,000
P520,000
Taxable Income
P180,000
50,000
120,000
100,000
P450,000

Note: Lotto winnings earned outside the Philippines by a resident Filipino citizen are taxable
in the Philippines.
Problem 3 – 11

C

Consultancy fee
Salary
Prizes in raffle ticket
Gain on sale of principal residence
Totals

Subject to ITR
P 80,000

300,000
.
P380,000

Subject to Final Tax
P 20,000
400,000
P420,000

Problem 3 – 12
D
Salary for the first 4 months (P12,000 x 4)
Remaining months (P15,000 x 8)
Gross compensation income

P 48,000
120,000
P168,000

Problem 3 – 13
B
Reportable income is the market value of the car received

P120,000

Problem 3 – 14
A
Market value of the service received

P6,000

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

P30,000
0.909
P27,270

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)

P50,000
P3,000

Problem 3 – 17
B
Collections during the year
Expenses actually incurred
Net income before personal exemption – cash basis

P490,000
(150,000)
P340,000

Problem 3 – 18
A
Gross income (P1,000,000 – P600,000)
Actual operating expenses (P200,000 x 80%)
Net income before other income

P400,000
(160,000)
P240,000


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

Add: Gain from sale of old furniture
Taxable income

20,000
P260,000

Problem 3 – 19
1. A
Reportable income 2006 - casual sale (P12,000 – P3,000)

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)

P3,000

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%

P500,000
P 37,500

2. B
Income tax (P2,000,000 x 6%)

P120,000

Problem 3 – 21
B
Total revenue
Cost of sale
Income to be reported

P1,000,000
( 500,000)
P 500,000

Problem 3 – 22

D
Contract price
Less: Cost (P90,000/20%)
Gross profit
Multiplied by percent of completion
Reportable income under percent of completion

P 1,000,000
450,000
P 550,000
20%
P 110,000

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

P1,200,000
720,000
P 480,000
P1,020,000
( 432,000

)
( 184,250
)

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

Problem 3 – 25
Harvested crops sold

C

403,750
P

76,250
P 500,000

P 100,000
200,000
50,000

350,000

P 150,000

P 2,000,000


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

Less: Total direct costs:
Year 1
Year 2
Year 3
Year 4
Year 5
Reportable income – year 5

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

1,000,000
P 1,000,000

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

Year 2

P50,000

P100,000

Cash

Accrual

P40,000

P40,000

Cash

Accrual

P95,000

P95,000

10,000
15,000
.
P40,000

.
P50,000

Farming

P 50,000

Trading
P150,000
25,000

.
P95,000

( 10,000)
P100,000

Rent
P100,000

.

( 90,000)
( 25,000)

.

P 50,000

P 60,000

P100,000

Farming
P 50,000

Trading
P150,000
25,000

Rent
P100,000

(

Total

P210,000
Total

9,000
6,000)
.

( 90,000)
( 25,000)

.

P 53,000

P 60,000

P100,000

P213,000