Chapt-3 Concepts of Income

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 3: Concept of Income

CHAPTER 3

CONCEPT OF INCOME Problem 3 – 1 TRUE OR FALSE 1. False – Some wealth that made to increase the taxpayer’s net worth are gifts and inheritance and these are not taxable income. 2. True 3. True 4. False – Filipino citizen who is not residing in the Philippines is taxable only for income earned within. 5. False – The basis of tax is the fair market value of the instrument. 6. False – Not income for the employee and not subject to income tax because the beneficiary is the employer. 7. False – Accrual reporting reports income when there is earning regardless of collection. 8. False – Calendar year basis 9. 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 3 – 2 1. A 2. D 3. B 4. D 5. C 6. B 7. 8. C 9. 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 3 – 3 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 - 0 245,000 P245,000

Problem 3 – 4 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 3 – 5 C Net assets ending (P530,000 – P130,000) Net assets beg. Reportable income (loss)

P400,000 ( 250,000) P150,000

Problem 3 – 6 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 3 – 7

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 3 – 8

C Year 1 0 0 0 0

Sales Cost of sale Disposal cost Income for each year Problem 3 – 9

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

Nontaxable Inco me

P240,000 70,000 . P310,000

Problem 3 – 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 3 – 11

C Subject to ITR

Consultancy fee Salary Prizes in raffle ticket Gain on sale of principal residence Totals

Subject to Final Tax

P 80,000 300,000 . P380,000

P 20,000 400,000 P420,000

Problem 3 – 12 D Salary for the first 4 months (P12,000 x 4) Remaining months (P15,000 x 8) Gross compensation income

P 48,000 120,000 P168,000

Problem 3 – 13 B Reportable income is the market value of the car received

P120,000

Problem 3 – 14 A Market value of the service received

P6,000

Problem 3 – 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 3 – 16 A Compensation income Interest income (P50,000 x 12% x 6/12)

P50,000 P3,000

Problem 3 – 17 B Collections during the year Expenses actually incurred Net income before personal exemption – cash basis

P490,000 (150,000) P340,000

Problem 3 – 18 A Gross income (P1,000,000 – P600,000) Actual operating expenses (P200,000 x 80%)

P400,000 (160,000)

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 3: Concept of Income

Net income before other income Add: Gain from sale of old furniture Taxable income

P240,000 20,000 P260,000

Problem 3 – 19 1. 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% 2. 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 3 – 20 1. 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

2. B Income tax (P2,000,000 x 6%)

P120,000

Problem 3 – 21 B Total revenue Cost of sale Income to be reported

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

Problem 3 – 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 3 – 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 3 – 24 A Year 3 sales Less: Cost incurred as of year 3: Year 1 Year 2 Year 3 Year 3 – reportable income

Problem 3 – 25

C

403,750 P

76,250 P 500,000

P 100,000 200,000 50,000

350,000 P 150,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 3: Concept of Income

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

P 2,000,000 P 300,000 100,000 100,000 100,000 400,000

1,000,000 P 1,000,000

Problem 3 – 26 Year 1 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 – 27 1. Cash Method Revenue Equipment sold Costs: Cost of products purchased Carrying value of farm equipment Gross income 2. Accrual Method Revenue Equipment sold Inventory, ending Inventory, beginning Costs: Cost of products purchased Carrying value of farm equipment Gross income

Year 2

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

Total

.

( 90,000) ( 25,000)

.

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

P213,000