15 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 4: Gross Income CHAPTER GROSS INCOME Problem – TRUE OR FALSE True True False – Religious officer’s income is subject to income tax True True False – The basis of tax is the amount of debt cancelled False – Excess of advances over actual expenses True 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 – TRUE OR FALSE True True False – because estimated bad debts is not allowed to be deducted from gross business income False – At the year of recovery False – Not an option to report, but required to report False – the return of premium from insurance company is not taxable True False – To be taxable, income should be realized 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 – C Problem – C 16 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 4: Gross Income C B A B A D D B 10 A 11 B 12 C Problem – B C A D D B D 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 – B Problem – 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 – D Problem – B First employment for 30 years received at the age of 50 P500,000 First employment – resigned P300,000 Problem – 10 C Gross compensation income (1,000 x P10) Problem – 11 B Compensation income (P13 – P12) x 10,000 Capital gain (P15 – P13) x 10,000 Problem – 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 – 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 – 14 B Insurance premium – beneficiary Sico P5,000 Problem – 15 B Cleaning of business equipment Repair service of store Total casual service income P 1,000 3,000 P 4,000 Problem – 16 C Total purchases Transportation expenses Unsold goods Cost of goods sold Problem – 17 Inventory, beginning Purchases Purchase discounts Purchase returns Transportation in Inventory end Cost of sale C Problem – 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 Inventory, beginning Inventory, ending Purchases Freight – in Purchase discount Cost of sales Problem – 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 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 – 20 Advance payment Additional collection Office machine Gross service income B P 2,000 8,000 3,000 P13,000 Problem – 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 – 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 – 23 B Rent for year: 200A 200B 200C 200B Reportable income P 80,000 480,000 40,000 P 600,000 Problem – 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 – 25 D Outright Year Outright method Year 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 P 98,035.63 4.7 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 spread-out – rent income on improvement Problem – 26 C Outright P180,000 Outright Spread-out Problem – 27 Cost of improvement Spread-out P - - 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 years and months Book value at the end of the lease Divided by number of years until the termination of lease contract = years and 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 – 28 C P50,000 cash dividend received by an individual Problem – 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 – 30 D Year interest income of P4,461.20 Problem – 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 – 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 – 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 – 34 A The dividend received by a domestic corporation from another domestic corporation is nontaxable Problem – 35 A P8,000 prize won in a TV program Prizes amounting to P10,000 and below are subject to normal taxes Problem – 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 – 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 P100,000 25,000 P 75,000 P 75,000 Year (P 20,000) 10,000 (P 30,000) 25,000 (P 5,000) Year P 50,000 5,000 P 45,000 5,000 P 50,000 Note: The tax benefit allowed in year for the bad debts written of is only P5,000; hence, the reportable bad debts recovery in year should also be P5,000 Problem – 38 D Year 1: No bad debt recovery Year 2: Bad debt recovery None P 600 Problem – 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 taxable income? Problem – 40 C Real property tax Local taxes Reportable income from tax refund P 10,000 500 P 10,500 Problem – 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 – 42 D Annuity received Present value (P5,880 x 0.8928) Interest income - Taxable annuity P 5,880 5,250 P 630 Problem – 43 B Excess of withdrawable amount ($10,000 - $1,000) Multiplied by exchange rate per dollar Reportable income received by error $ 9,000 P 50 P450,000 Problem – 44 C Average monthly unreturned change to clients Multiplied by number of months in a year Illegally obtained income - taxable Problem – 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 – 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 – 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 ... winnings P 49 ,000 300,000 100,000 P 449 ,000 20 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 4: Gross Income Problem – 37 D Income (loss) Less: Bad debts written of Income. .. [(P 240 ,500 - P560)/8 yrs] x 4. 75 yrs Spreadout P 240 ,500 P 240 ,500.00 142 ,46 4.3 P 98,035.63 4. 7 P 20,639 9/12 P 15 ,47 9 Book value, end of lease Divided by remaining years of contract Annual income. .. 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