INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 3: Concept of Income CHAPTER CONCEPT OF INCOME Problem – TRUE OR FALSE False – Some wealth that made to increase the taxpayer’s net worth are gifts and inheritance and these are not taxable income True True False – Filipino citizen who is not residing in the Philippines is taxable only for income earned within False – The basis of tax is the fair market value of the instrument False – Not income for the employee and not subject to income tax because the beneficiary is the employer False – Accrual reporting reports income when there is earning regardless of collection False – Calendar year basis 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 – A D B D C B C 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 – 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 - 245,000 P245,000 Problem – 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 – C Net assets ending (P530,000 – P130,000) Net assets beg Reportable income (loss) P400,000 ( 250,000) P150,000 Problem – 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 – 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 – C Year 0 0 Sales Cost of sale Disposal cost Income for each year Problem – Year 0 0 Year 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 Lotto winnings Nontaxable Inco me P240,000 70,000 P310,000 Problem – 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 – 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 – 12 D Salary for the first months (P12,000 x 4) Remaining months (P15,000 x 8) Gross compensation income P 48,000 120,000 P168,000 Problem – 13 B Reportable income is the market value of the car received P120,000 Problem – 14 A Market value of the service received P6,000 Problem – 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 – 16 A Compensation income Interest income (P50,000 x 12% x 6/12) P50,000 P3,000 Problem – 17 B Collections during the year Expenses actually incurred Net income before personal exemption – cash basis P490,000 (150,000) P340,000 Problem – 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 – 19 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% 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 – 20 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 B Income tax (P2,000,000 x 6%) P120,000 Problem – 21 B Total revenue Cost of sale Income to be reported P1,000,000 ( 500,000) P 500,000 Problem – 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 – 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 – 24 A Year sales Less: Cost incurred as of year 3: Year Year Year Year – reportable income Problem – 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 Year Year Year Year Reportable income – year P 300,000 100,000 100,000 100,000 400,000 1,000,000 P 1,000,000 Problem – 26 Year 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 – 27 Cash Method Revenue Equipment sold Costs: Cost of products purchased Carrying value of farm equipment Gross income Accrual Method Revenue Equipment sold Inventory, ending Inventory, beginning Costs: Cost of products purchased Carrying value of farm equipment Gross income Year 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 .. .INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 3: Concept of Income Problem – C Year 0 0 Sales Cost of sale Disposal cost Income for each year... crops sold C 4 03, 750 P 76,250 P 500,000 P 100,000 200,000 50,000 35 0,000 P 150,000 P 2,000,000 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 3: Concept of Income Less:... 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 – 19 A Reportable income 2006 -