Income taxation by valencia chapter 4 (gross income)

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#######################CHAPTER 4
GROSS INCOMEProblem 4 � 1 TRUE OR FALSETrue
TrueFalse � Religious officer�s income is subject to income tax.
TrueTrueFalse �
The basis of tax is the amount of debt cancelled.
False � Excess of advances over
actual expensesTrueTrueTrueTrueFalse � Not income but a liability in compliance
with the trading business rule.
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 FALSETrueTrueFalse
� because estimated bad debts is not allowed to be deducted from gross business
income.
False � At the year of recoveryFalse � Not an option to report, but
required to report.
False � the return of premium from insurance company is not
taxable.
TrueFalse � To be taxable, income should be realized.

TrueFalse � As a
rule, income obtained illegally is taxable.
False � As a rule, income received by
error is reportable income.
TrueFalse � Not taxable.
TrueTrueFalse � The rule of
P10,000 and below applies to prizes not winnings.
Problem 4 � 3 #Problem 4 � 4
##1.
C#1.
C##2.
C#2.
B##3.
B#3.
C##4.
A#4.
A##5.
B#5.
D##6.
A#6.
D##7.
D#7.
B##8.
D#8.
D##9.
B#9.
C##10.
A#10.
A##11.
B#11.

B##12.
C#12.
C##Problem 4 � 5
AGross salary (P280,000 + P20,000)##P300,000##Pier diem as board of
director##120,000##Taxable 13th month pay##
5,000##Gross taxable
compensation income##P425,000##Problem 4 � 6
BSalary##P150,000##Overtime
pay##30,000##13th month pay and other bonuses##
15,000##Total compensation
income##P195,000##Problem 4 � 7
BSalary ##P120,000##Tips
##360,000##Cost and living allowance##
5,000##Total taxable compensation
income##P485,000##Note: New BIR interpretation provides that the 13th month pay
and other benefits amounting to P30,000 and below is not taxable.
Since the
13th month pay is only P10,000, the P20,000 achievement awards being part of deminimis can be used as other benefits, to complete the P30,000 nontaxable
threshold.
Problem 4 � 8
DFirst employment for 30 years received at the age
of 50##P500,000##Problem 4 � 9
BFirst employment �
resigned##P300,000##Problem 4 � 10 CGross compensation income (1,000 x
P10)##P10,000##Problem 4 � 11
B#Compensation#Capital gain##Compensation
income (P13 � P12) x 10,000#P 10,000###Capital gain (P15 � P13) x 10,000##P
20,000##Problem 4 � 12 C#Compensation#Capital gain##Compensation income (P25 �
P23) x 10,000#P 20,000###Capital gain (P30 � P25) x 10,000##P 50,000##Problem 4
� 13 DRegular compensation per month##P 50,000##Cancellation of indebtedness

(P300,000 � P250,000)##
50,000##Total compensation income � December
2007##P100,000##Problem 4 � 14
BInsurance premium � beneficiary
Sico##P5,000##Problem 4 � 15 BCleaning of business equipment##P 1,000##Repair
service of store##
3,000##Total casual service income##P 4,000##Problem 4 � 16
CTotal purchases##P500,000##Transportation expenses##5,000##Unsold goods##
( 40,000)##Cost of goods sold##P465,000##Problem 4 � 17
CInventory,
beginning##P
20,000##Purchases ##1,200,000##Purchase
discounts##( 10,000)##Purchase returns##( 40,000)##Transportation
in##5,000##Inventory end##
( 50,000)##Cost of sale##P1,125,000##Problem 4 �
18
C#
Year 1#
Year 2##Inventory, beginning##P
50,000##Inventory,
ending#(P50,000)#( 30,000)##Purchases #850,000#900,000##Freight � in
#10,000#15,000##Purchase discount#( 20,000)#( 25,000)##Cost of
sales#P790,000#P910,000##Problem 4 � 19 BSales##P1,275,000 ##Sales returns##(
25,000)##Net sales##P1,250,000##Less: Cost of goods manufactured and sold####
Purchases � raw materials #P
540,000###
Freight-in#20,000###
Raw materials, ending inventory#( 10,000)###
Raw materials used#P
550,000###

Direct labor#400,000###
Factory overhead#200,000###
Total manufacturing cost#P1,150,000###
Work-in-process, ending
inventory#( 100,000)###
Finished goods, ending inventory#
(
50,000)#
1,000,000##Business income##P
250,000##Problem 4 � 20
B
Advance payment##P 2,000##Additional collection##8,000##Office machine##


3,000##Gross service income##P13,000##Problem 4 � 21 AProfessional fee,
accounting services##P 500,000##Salaries of accounting
staff##( 150,000)##Accounting supplies##(
10,000)##Gross service income##P
340,000##Problem 4 � 22
BService charges:####
Originating from the
Philippines##P 150,000##
Collection abroad of collect messages originating
in the Philippines##
60,000##Gross income for Philippine Income Tax
computation##P 210,000##Problem 4 � 23
BRent for year:####200A##P
80,000##200B##480,000##200C##
40,000##200B Reportable income ##P 600,000##
Problem 4 � 24

BRent income##P360,000##Real property tax assumed by the
lessee##10,000##Unrestricted advance rent##
60,000##Taxable gross
receipts##P430,000##Problem 4 � 25 D#Outright #Spread-out##Year 1 Outright
method#P240,500###Year 1 Spread-out method####
Value of
investment##P240,500.
00##
Less: Accum.
depreciation [(P240,500 - P560)/8 yrs]
x 4.
75 yrs## 142,464.
37##
Book value, end of lease##P 98,035.
63##
Divided by remaining years of contract##
4.
75##
Annual income
from improvement##P
20,639##
Multiplied by months in a year##
9/12##
Year 1 spread-out � rent income on improvement##P
15,479##
Problem 4 � 26
C#Outright #Spread-out##Outright #P180,000###Spread-out ##P 0 -##Problem 4 � 27
CCost of improvement##P300,000##Less: Accumulated
depreciation at the end of the lease (P300,000/6) x 4 years and 7 months##
229,167##Book value at the end of the lease##P 70,833##Divided by number of

years until the termination of lease contract = 4 years and 7 months##
4.
58##Annual additional income##P 15,454##Multiplied by number of years expired
(from March 31, 2008 to December 31, 2010)##
2.
75##Reported additional
income from improvement##(P42,500)##Book value of improvement at the time of
pre-termination####
Cost#P300,000###
Less: Accum.
depreciation at pretermination (P300,000/6) x 2.
75 years# 137,500# 162,500##Additional income in
2010 from the pre-termination of contract##P120,000##Problem 4 � 28
CP50,000
cash dividend received by an individualProblem 4 � 29
BInterest income from
an investment in a 10-year bond##P 40,000##Interest income from expanded
foreign currency deposit##
60,000##Total taxable interest income##P100,000##
Problem 4 � 30
DYear 3 interest income of P4,461.
20.
Problem 4 � 31 DRoyalty
income as author (P100,000 x 10%)##P 10,000##Royalty income from franchising
(P200,000 x 20%)##40,000##Royalty income from gold mine (P500,000 x 20%)##
100,000##Total final tax##P150,000##Problem 4 � 32
D#Copyright#Patent ##Gross
royalties:#P 35,000###
Copyright (P31,500/90%)####
Patent (P20,000/80%)##P

25,000##Income tax � final ####
Copyright (P35,000 x 10%)#(
3,500)###
Patent (P25,000 x 20%)#
.
# ( 5,000)##Income after tax#P 31,500#P
20,000##Problem 4 � 33 AP500,000 - Dividends earned outside the Philippines by
a domestic corporation from a foreign corporation are taxable in the
Philippines.
Problem 4 � 34
AThe dividend received by a domestic corporation
from another domestic corporation is nontaxable.
Problem 4 � 35
AP8,000
prize won in a TV program.
Prizes amounting to P10,000 and below are subject to
normal taxes.
Problem 4 � 36 DFirst prize � raffle draw (P50,000 � P1,000)##P
49,000##Gambling winnings ##300,000##Beauty contest winnings## 100,000##Taxable
prizes and winnings##P449,000##Problem 4 � 37 D#
Year 1#
Year 2#
Year 3##Income (loss)#P100,000#(P 20,000)#P 50,000##Less: Bad debts written
off#
25,000#
10,000#
5,000##Income loss before bad debts recovery#P
75,000#(P 30,000)#P 45,000##Bad debts recovery of previous year with tax
benefit#
.

#
25,000#
5,000##Taxable income#P 75,000#(P
5,000)#P 50,000##Note: The tax benefit allowed in year 2 for the bad debts
written off is only P5,000; hence, the reportable bad debts recovery in year 3
should also be P5,000.
Problem 4 � 38
DYear 1: No bad debt
recovery###None##Year 2: Bad debt recovery###P 600##Problem 4 � 39
DP5,000
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
CReal property tax##P 10,000##Local taxes ##
500##Reportable income
from tax refund##P 10,500##Problem 4 � 41
CAnnuity received##P
20,000##Present value (P20,000 x 0.
9091)##
18,182##Interest income - Taxable
annuity ##P
1,818##Note: The present value factor of P1 for an effective
interest rate of 10% is 0.
9091.
Problem 4 � 42 DAnnuity received##P
5,880##Present value (P5,880 x 0.
8928)##
5,250##Interest income - Taxable

annuity ##P
630##Problem 4 � 43 BExcess of withdrawable amount ($10,000 $1,000)##$
9,000##Multiplied by exchange rate per 1 dollar##
P
50##Reportable income received by error##P450,000##Problem 4 � 44
C
Average monthly unreturned change to clients ##P 4,000##Multiplied by number of
months in a year##
12##Illegally obtained income - taxable##P48,000##
Problem 4 � 45Total receipts, 200BLess: Direct costs- commission (P425,000 x
65%)
Rental expense (P3,000 x 12)
Depreciation
Supplies usedGross income of A-1 Barbershop#P 276,25036,0005,000
1,750#P 425,000
319,000P 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 � 46SalaryCorporate
shares received (1,000 shares x P100)Cancellation of debt in lieu of service
renderedProfit sharingGross taxable compensation income#P300,000100,00050,000
40,000P490,000##Problem 4 � 47Salary (P25,000 + P302,000)Income tax paid by the
employerNote receivableTotal compensationBusiness gross incomeAllowable expenses
Prepaid rent incomeBad debts recovered previously written-off (P38,000 x 60%)
Taxable income subject to tabular tax#P 400,000( 250,000)#P327,0005,000
20,000P352,000150,00050,000

22,800P574,800## #####PAGE ##PAGE #21#INCOME
TAXATION 5TH Edition (BY: VALENCIA & ROXAS)SUGGESTED ANSWERSChapter 4: Gross
Income#
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