Income taxation by valencia chapter 4 (gross income)

15

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

Chapter 4: Gross Income

CHAPTER 4

GROSS INCOME
Problem 4 – 1 TRUE OR FALSE
1. True
2. True
3. False – Religious officer’s income is subject to income tax.
4. True
5. True
6. False – The basis of tax is the amount of debt cancelled.
7. False – Excess of advances over actual expenses
8. True
9. True
10. True
11. True
12. False – Not income but a liability in compliance with the trading business rule.
13. False – Under service business, advances from clients are to be reported as income.
Hence, include as income because the advanced rental is without restriction.
Problem 4 – 2 TRUE OR FALSE
1. True
2. True
3. False – because estimated bad debts is not allowed to be deducted from gross
business income.
4. False – At the year of recovery

5. False – Not an option to report, but required to report.
6. False – the return of premium from insurance company is not taxable.
7. True
8. False – To be taxable, income should be realized.
9. True
10. False – As a rule, income obtained illegally is taxable.
11. False – As a rule, income received by error is reportable income.
12. True
13. False – Not taxable.
14. True
15. True
16. False – The rule of P10,000 and below applies to prizes not winnings.

Problem 4 – 3
1. C

Problem 4 – 4
1. C


16

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

Chapter 4: Gross Income

2. C
3. B
4. A

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

Problem 4 – 5

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

A

Gross salary (P280,000 + P20,000)
Pier diem as board of director
Taxable 13 th month pay
Gross taxable compensation income

Problem 4 – 6

B

Problem 4 – 7

B

P300,000
120,000
5,000
P425,000

Salary
Overtime pay
13 th month pay and other bonuses
Total compensation income

P150,000
30,000
15,000
P195,000

Salary
Tips
Cost and living allowance
Total taxable compensation income

P120,000
360,000

5,000
P485,000

Note: New BIR interpretation provides that the 13 th month pay and other benefits amounting
to P30,000 and below is not taxable. Since the 13 th month pay is only P10,000, the P20,000
achievement awards being part of de-minimis can be used as other benefits, to complete the
P30,000 nontaxable threshold.

Problem 4 – 8

D

Problem 4 – 9

B

First employment for 30 years received at the age of
50

P500,000

First employment – resigned

P300,000

Problem 4 – 10 C
Gross compensation income (1,000 x P10)
Problem 4 – 11

B

Compensation income (P13 – P12) x 10,000
Capital gain (P15 – P13) x 10,000

Problem 4 – 12 C

P10,000
Compensation
P 10,000

Capital gain
P 20,000

Compensation

Capital gain


17

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

Chapter 4: Gross Income

Compensation income (P25 – P23) x 10,000
Capital gain (P30 – P25) x 10,000

P 20,000
P 50,000

Problem 4 – 13 D

Regular compensation per month
Cancellation of indebtedness (P300,000 – P250,000)
Total compensation income – December 2007

P 50,000
50,000
P100,000

Problem 4 – 14 B
Insurance premium – beneficiary Sico

P5,000

Problem 4 – 15
B
Cleaning of business equipment
Repair service of store
Total casual service income

P 1,000
3,000
P 4,000

Problem 4 – 16 C
Total purchases
Transportation expenses
Unsold goods

Cost of goods sold
Problem 4 – 17
Inventory, beginning
Purchases
Purchase discounts
Purchase returns
Transportation in
Inventory end
Cost of sale

C

Problem 4 – 18

C

P500,000
5,000
( 40,000)
P465,000
P 20,000
1,200,000
( 10,000)
( 40,000)
5,000
( 50,000)
P1,125,000
Year 1

Inventory, beginning

Inventory, ending
Purchases
Freight – in
Purchase discount
Cost of sales
Problem 4 – 19
B
Sales
Sales returns
Net sales
Less: Cost of goods manufactured and sold
Purchases – raw materials
Freight-in
Raw materials, ending inventory
Raw materials used
Direct labor
Factory overhead
Total manufacturing cost
Work-in-process, ending inventory
Finished goods, ending inventory
Business income

(P50,000)
850,000
10,000
( 20,000)
P790,000

Year 2
P 50,000

( 30,000)
900,000
15,000
( 25,000)
P910,000
P1,275,000
( 25,000)
P1,250,000

P 540,000
20,000
( 10,000)
P 550,000
400,000
200,000
P1,150,000
( 100,000)
( 50,000)

1,000,000
P 250,000


18

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

Chapter 4: Gross Income

Problem 4 – 20
Advance payment
Additional collection
Office machine
Gross service income

B
P 2,000
8,000
3,000
P13,000

Problem 4 – 21 A

Professional fee, accounting services
Salaries of accounting staf
Accounting supplies
Gross service income

P 500,000
( 150,000)
( 10,000)
P 340,000

Problem 4 – 22
B
Service charges:
Originating from the Philippines
Collection abroad of collect messages originating in the Philippines
Gross income for Philippine Income Tax computation

P 150,000
60,000
P 210,000

Problem 4 – 23 B

Rent for year:
200A
200B
200C
200B Reportable income

P 80,000
480,000
40,000
P 600,000

Problem 4 – 24
B
Rent income
Real property tax assumed by the lessee
Unrestricted advance rent
Taxable gross receipts

P360,000
10,000
60,000
P430,000

Problem 4 – 25 D
Outright
Year 1 Outright method
Year 1 Spread-out method
Value of investment
Less: Accum. depreciation [(P240,500 - P560)/8 yrs] x 4.75 yrs

Spreadout

P240,500
P240,500.00
142,464.3
7
P
98,035.63
4.7
5
P
20,639
9/12
P
15,479

Book value, end of lease
Divided by remaining years of contract
Annual income from improvement
Multiplied by months in a year
Year 1 spread-out – rent income on improvement

Problem 4 – 26 C

Outright
P180,000

Outright
Spread-out
Problem 4 – 27
Cost of improvement

Spread-out
P - 0 -

C
P300,000


19

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

Chapter 4: Gross Income
Less: Accumulated depreciation at the end of the lease (P300,000/6) x 4 years and 7
months
Book value at the end of the lease
Divided by number of years until the termination of lease contract = 4 years and 7 months
Annual additional income
Multiplied by number of years expired (from March 31, 2008 to December 31, 2010)
Reported additional income from improvement
Book value of improvement at the time of pre-termination
Cost

P300,000
Less: Accum. depreciation at pre-termination (P300,000/6) x 2.75 years
137,500
Additional income in 2010 from the pre-termination of contract

229,167
P 70,833
4.58
P 15,454
2.75
(P42,500)
162,500
P120,000

Problem 4 – 28
C
P50,000 cash dividend received by an individual
Problem 4 – 29
B
Interest income from an investment in a 10-year bond
Interest income from expanded foreign currency deposit
Total taxable interest income

P 40,000
60,000
P100,000

Problem 4 – 30
D
Year 3 interest income of P4,461.20.

Problem 4 – 31 D

Royalty income as author (P100,000 x 10%)
Royalty income from franchising (P200,000 x 20%)
Royalty income from gold mine (P500,000 x 20%)
Total final tax

Problem 4 – 32 D
Gross royalties:
Copyright (P31,500/90%)
Patent (P20,000/80%)
Income tax – final
Copyright (P35,000 x 10%)
Patent (P25,000 x 20%)
Income after tax
Problem 4 – 33

P 10,000
40,000
100,000
P150,000
Copyright
P 35,000

Patent
P 25,000

( 3,500)
.

P 31,500

( 5,000)
P 20,000

A

P500,000 - Dividends earned outside the Philippines by a domestic corporation from a foreign corporation
are taxable in the Philippines.

Problem 4 – 34
A
The dividend received by a domestic corporation from another domestic corporation is
nontaxable.
Problem 4 – 35
A
P8,000 prize won in a TV program. Prizes amounting to P10,000 and below are subject to
normal taxes.
Problem 4 – 36
D
First prize – raffle draw (P50,000 – P1,000)
Gambling winnings
Beauty contest winnings
Taxable prizes and winnings

P 49,000
300,000
100,000
P449,000

20

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

Chapter 4: Gross Income

Problem 4 – 37

D

Income (loss)
Less: Bad debts written of
Income loss before bad debts recovery
Bad debts recovery of previous year with tax benefit
Taxable income

Year 1
P100,000
25,000
P 75,000
.
P 75,000

Year 2
(P 20,000)
10,000
(P 30,000)
25,000

(P 5,000)

Year 3
P 50,000
5,000
P 45,000
5,000
P 50,000

Note: The tax benefit allowed in year 2 for the bad debts written of is only P5,000; hence, the
reportable bad debts recovery in year 3 should also be P5,000.
Problem 4 – 38
D
Year 1: No bad debt recovery
Year 2: Bad debt recovery

None
P 600

Problem 4 – 39
D
P5,000 local tax recovery.
The requirement should be properly stated as: What amount of tax refund should be reported
as part of year 3 taxable income?
Problem 4 – 40
C
Real property tax
Local taxes
Reportable income from tax refund

P 10,000
500
P 10,500

Problem 4 – 41
C
Annuity received
Present value (P20,000 x 0.9091)
Interest income - Taxable annuity

P 20,000
18,182
P 1,818

Note: The present value factor of P1 for an efective interest rate of 10% is 0.9091.
Problem 4 – 42
D
Annuity received
Present value (P5,880 x 0.8928)
Interest income - Taxable annuity

P 5,880
5,250
P 630

Problem 4 – 43
B
Excess of withdrawable amount ($10,000 - $1,000)
Multiplied by exchange rate per 1 dollar
Reportable income received by error

$

9,000
P 50
P450,000

Problem 4 – 44
C
Average monthly unreturned change to clients
Multiplied by number of months in a year
Illegally obtained income - taxable
Problem 4 – 45
Total receipts, 200B
Less: Direct costs- commission (P425,000 x 65%)
Rental expense (P3,000 x 12)
Depreciation
Supplies used

P 4,000
12
P48,000
P 425,000
P 276,250
36,000
5,000
1,750

319,000

21

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

Chapter 4: Gross Income

Gross income of A-1 Barbershop

P 106,000

Note: The interest expense could only be deducted to compute gross income if a business is a banking
institution. Furthermore, borrowing cost directly attributable to the acquisition, construction or production of
assets used in the business may either be capitalized or deducted as operating expense.

Problem 4 – 46
Salary
Corporate shares received (1,000 shares x P100)
Cancellation of debt in lieu of service rendered
Profit sharing
Gross taxable compensation income
Problem 4 – 47
Salary (P25,000 + P302,000)
Income tax paid by the employer
Note receivable
Total compensation
Business gross income
Allowable expenses
Prepaid rent income

Bad debts recovered previously written- of (P38,000 x 60%)
Taxable income subject to tabular tax

P300,000
100,000
50,000
40,000
P490,000
P327,000
5,000
20,000
P352,000
P 400,000
( 250,000)

150,000
50,000
22,800
P574,800