Chap 3 Concepts of Income2013

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

10 Chapter 3: Concept of Income

CHAPTER 3

CONCEPT OF INCOME Problem 3 – 1 TRUE OR FALSE 1. True 2. False – Some wealth that made to increase the taxpayer’s net worth are gifts and inheritance and these are not taxable income. 3. True 4. False – Sometimes a sale results to loss. 5. True 6. True 7. True 8. False – Filipino citizen who is not residing in the Philippines is taxable only for income earned within. 9. False – The basis of tax is the fair market value of the instrument. 10. False – Not income for the employee and not subject to income tax because the beneficiary is the employer. 11. False – Accrual reporting reports income when there is earning regardless of collection. 12. False – Most taxpayer opts for calendar year basis, except corporation which may opt for fiscal year. 13. True 14. False – Prepaid expenses are not allowable deductions whether cash or accrual method of reporting income is used. 15. False – There is no rule of 25% initial payment if the sale is made on regular basis of personal goods. Problem 3 – 2 TRUE OR FALSE 1. True 2. True 3. False- All income distributed are considered as from all income earned outside the Philippines. 4. False – Only calendar method starts from January and ends at December of the taxable year. 5. True 6. True 7. True 8. False – The reportable income of the decedent’s estate is only the earnings after death. 9. False – Service business is allowed to deduct expenses using accrual method if such business opted to use accrual method, but the income is still reportable using cash basis. 10. True 11. True 12. True 13. True 14. True 15. True

11

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 3: Concept of Income

Problem 3 – 3 1. D 2. C 3. A 4. C 5. B 6. C 7. D 8. C 9. B 10. C 11. C

Problem 3 – 4 1. D 2. B 3. B 4. A 5. D 6. A 7. B 8. D 9. C 10. C

Problem 3 – 5 C Net assets ending (P300,000 – P50,000) Net assets beg. (P500,000 – P150,000) Balance Add: Owner’s drawings Reportable income (loss) Problem 3 – 6 B Increase in total assets Decrease in total liabilities Dividend declared Total Less: Additional paid-in capital Unrealized gain Reportable income Problem 3 – 7 Increase in total assets Decrease in total liabilities Drawings Additional investments Total income

Time deposit balance

P1,520,000 330,000 100,000 P1,950,000 P800,000 50,000

850,000 P1,100,000

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

Problem 3 – 8 C Sales Less: Cost of sales (P30,000 x 40%) Rent expense Kiosk – depreciated value (P3,000 – P2,900) Interest expense (P20,000 x 1%) Net income – return on capital Problem 3 – 9

P250,000 ( 350,000) (P100,000) 240,000 P140,000

P30,000 P12,000 2,000 100 200

14,300 P15,700

D Return of Capital P250,000

Return on Capital P30,000

12

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 3: Concept of Income

Problem 3 – 10 A There is no reportable income because there is no actual sale yet during 200x. Problem 3 – 11 D Interest credited on peso-savings deposit (40,000/80%) Matured interest on coupon bonds, not yet collected Cancellation of indebtedness from SMC in which Arom has equity investments Share in joint venture not yet received Payment of damanges deposited in court by a competitor for unrealized profit Income realized

P 50,000 80,000 120,000 200,000 60,000 P510,000

Increases or decreases in value of investments are not realized gain or loss. Payment of damages for unrealized profits is a taxable income. Income may be constructively received even if not physically transferred to a person for as long as it is credited to the account of, or segregated in favor of a person. Problem 3 – 12

C Year 1 0 0 0 0

Sales Cost of sale Disposal cost Income for each year Problem 3 – 13

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 13th month pay (P260,000/13) x 1 Lotto winnings Problem 3 – 14 D Within: Compensation income Income from grocery store Outside: Compensation income Lotto winnings Total income taxable in the Philippines

Nontaxable Inco me

P240,000 70,000 . P310,000

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 – 15 B Salary from the Philippines, net of tax Add: Withholding tax Total income reportable in the Philippines

P250,000 50,000 P300,000

OCW are exempt from income tax on income earned outside the Philippines. [Sec. 23 (C), NIRC]

13

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 3: Concept of Income

Problem 3 – 16 B Amount of dividend received Multiplied by percent of Sungad’s operation within based on gross income Dividend income – taxable in the Philippines

P600,000 20/30 P400,000

Problem 3 – 17 1 Letter C . Net salary as university professor Add: Withholding tax on wages Compensation income 2 .

P240,000 20,000 P260,000

Letter B Gross audit service income (P135,000/90%) Add: Gross rent income (P114,000/95%) Total income from profession and business

3 .

P150,000 120,000 P270,000

Letter C Interest income (P8,000/80%) Add: Dividend income (P4,500/90%) Total passive income

4 .

P10,000 5,000 P15,000

Letter D Gain from sale of personal car Add: Gain from sale of shares of stock – outside Stock market (P2,850/95%) Total capital gains

P3,000 3,000 P6,000

Problem 3 – 18 A Professional fee (P450,000/90%) Salary (P300,000 + P60,000) Prizes Earnings subject to normal tax Capital gains - shares of stock: First P100,000 (P95,000/95%) Over P100,000 (P54,000/90%) Winnings (P40,000/80%) Earnings subject to final taxes

P500,000 360,000 8,000 P868,000 P100,000 60,000

P160,000 50,000 P210,000

Problem 3 – 19 D First 4 months (P12,000 x 4) Remaining months (P15,000 x 8) 13th month pay (P168,000/12) Gross compensation income

P 48,000 120,000 14,000 P182,000

Problem 3 – 20 B Reportable income is the market value of the car received

P120,000

Problem 3 – 21 A Market value of the service received

P6,000

14

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 3: Concept of Income

Problem 3 – 22 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 Problem 3 – 23 A Compensation income Interest income (P50,000 x 12% x 6/12) Problem 3 – 24 B Collections during the year Expenses actually incurred Net income before personal exemption – cash basis

P30,000 0.909 P27,270 P50,000 P3,000 P490,000 (150,000) P340,000

If the service business opted to report on accrual basis, such method can only be applied when it comes to reporting of expense. Problem 3 – 25 A Gross income (P1,000,000 – P600,000) Actual operating expenses (P200,000 x 80%) Net income before other income Add: Gain from sale of old furniture Taxable income Problem 3 – 26 1. Letter C Cash Fair market value of property received Mortgage assumed by the buyer Installment payments: First year Second year Third year Fourth year Selling price 2.

3.

Letter D Selling price Less: Mortgage assumed by the buyer Balance Add: Excess of mortgage over cost (P450,000 – P400,000) Contract price Letter D Down payments: Cash (down payment) Fair market value of property received Installment received in the year of sale Excess of mortgage over cost (P450,000 – P400,000) Initial payments

Problem 3 – 27 C Selling price Add: Excess of mortgage over cost (P600,000 – P500,000)

P400,000 (160,000) P240,000 20,000 P260,000

P 50,000 100,000 450,000 100,000 200,000 300,000 400,000 P1,600,000 P1,600,000 450,000 P1,150,000 50,000 P1,200,000

P 50,000 100,000 100,000 50,000 P300,000 P700,000 100,000

15

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 3: Concept of Income

Total Less: Mortgage assumed by the buyer Contract price

P800,000 600,000 P200,000

Problem 3-28 1. A Income 200C - casual sale (P12,000 – P3,000) Multiplied by holding period – more than 1 year Reportable income

P9,000 50% P4,500

The sale is considered cash sales because the 200C initial payments (P1,000 + P1,000 + 2,000) exceeds 25% of the selling price; P4,000/P12,000 = 33% 2. B Reportable income 200C – regular sale (P9,000 x P4,000/P12,000)

P3,000

Since the property is sold in regular basis, installment reporting of income is allowed. Problem 3 – 29 B Total revenue Cost of sale Income to be reported

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

Problem 3 – 30 A Contract price Completed as of this year, 50% Cumulative cost, P10 M + 9M Cumulative income Less: Reported prior year (P50M x 30%) – P10M Reportable income this year

P50,000,000 P25,000,000 19,000,000 P 6,000,000 5,000,000 P 1,000,000

Problem 3 – 31 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 – 32 D Contract price Less: Total costs (P432,000 + P184,250 + P103,750) Total profit Less: Previous years’ reported income: Accomplished contract price for 200A and 200B (P1,200,000 x 85%) Previous years’ actual costs: 200A 200B Percent of completion – 200C Reportable income

P1,200,000 720,000 P 480,000 P1,020,000 ( 432,000 ) ( 184,250 )

403,750 P

76,250

16

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 3: Concept of Income

Problem 3 – 33 A Year 3 sales Less: Cost incurred as of year 3: Year 1 Year 2 Year 3 Year 3 – reportable income

P 500,000 P 100,000 200,000 50,000

Problem 3 – 34 C Harvested crops sold Less: Total direct costs: Year 1 Year 2 Year 3 Year 4 Year 5 Reportable income – year 5

350,000 P 150,000 P 2,000,000

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

1,000,000 P 1,000,000

Problem 3 – 35 Cash basis income (300K +800K +100K) Accrual expenses Net income before personal exemption

P1,200,000 500,000 P 700,000

Problem 3 – 36 Accrued sales (P2,000,000 + P520,000) Less: Cost of sales Gross income Less: Operating expenses (P600,000 x 70%) Net income

P2,520,000 1,200,000 P1,320,000 420,000 P 900,000

Problem 3 – 37 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 – 38 1. Cash Method Revenue Equipment sold Costs: Cost of products purchased Carrying value of farm equipment

Year 1 P50,000

Year 2 P100,000

Cas h

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

.

( 90,000) ( 25,000)

. P95,000

( 10,000) P100,000

Rent P100,000

.

Total

17

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 3: Concept of Income

Gross income 2. Accrual Method Revenue Equipment sold Inventory, ending Inventory, beginning Costs: Cost of products purchased Carrying value of farm equipment Gross income

P 50,000

P 60,000

P100,000

P210,000

Farming P 50,000

Trading P150,000 25,000

Rent P100,000

Total

(

9,000 6,000) .

( 90,000) ( 25,000)

.

P 53,000

P 60,000

P100,000

Problem 3 – 39 1. Letter C Cash receipts: Sale of livestock (P200,000 + P300,000) Sale of livestock for rent Sale of machinery Rent of livestock for rent Total cash receipts Less: Cost of livestock purchased (P50,000 + P175,000 – P100,000) Cost of livestock for rent sold Cost of machinery sold Gross income 2.

Letter A Sale of livestock (P200,000 + P300,000) Less: Cost of livestock purchased Balance Add: Inventory, end – livestock produced Total Less: Inventory, beg. – livestock produced Balance Add: Gain from sale of livestock for rent [P10,000 – (P15,000 – P8,000)] Gain from sale of machinery [P20,000 – (P50,000 – P35,000)] Rent of livestock Gross income

P213,000

P500,000 10,000 20,000 50,000 P580,000 P125,000 7,000 15,000

147,000 P433,000 P500,000 125,000 P375,000 50,000 P425,000 180,000 P245,000

P 3,000 5,000 50,000

58,000 P303,000

The difference between the cash basis and the accrual basis is the decrease in inventory of livestock produced by P130,000. A comparison is prepared as follows: Ending inventory – livestock produced Less: Beginning inventory – livestock produced Decrease in inventory

P 50,000 180,000 P 130,000

Cash basis – gross income Less: Accrual basis – gross income Difference

P 433,000 303,000 P 130,000