CHAPT- 4 GROSS INCOME

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 4: Gross Income

CHAPTER 4

GROSS INCOME Problem 4 – 1 TRUE OR FALSE 1. True 2. True 3. False – Religious officer’s income is subject to income tax. 4. True 5. True 6. False – The basis of tax is the amount of debt cancelled. 7. False – Excess of advances over actual expenses 8. True 9. 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 4 – 2 TRUE OR FALSE 1. True 2. True 3. False – because estimated bad debts is not allowed to be deducted from gross business income. 4. False – At the year of recovery 5. False – Not an option to report, but required to report. 6. False – the return of premium from insurance company is not taxable. 7. True 8. False – To be taxable, income should be realized. 9. 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 4 – 3 1. C

Problem 4 – 4 1. C

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 4: Gross Income

2. C 3. B 4. A 5. B 6. A 7. D 8. D 9. B 10. A 11. B 12. C

2. B 3. C 4. A 5. D 6. D 7. B 8. D 9. C 10. A 11. B 12. C

Problem 4 – 5 A Gross salary (P280,000 + P20,000) Pier diem as board of director Taxable 13th month pay Gross taxable compensation income

P300,000 120,000 5,000 P425,000

Problem 4 – 6 B Salary Overtime pay 13th month pay and other bonuses Total compensation income

P150,000 30,000 15,000 P195,000

Problem 4 – 7 B 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 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 de-minimis can be used as other benefits, to complete the P30,000 nontaxable threshold. Problem 4 – 8 D First employment for 30 years received at the age of 50 Problem 4 – 9 First employment – resigned

P500,000

B P300,000

Problem 4 – 10 C Gross compensation income (1,000 x P10) Problem 4 – 11

B

Compensation income (P13 – P12) x 10,000 Capital gain (P15 – P13) x 10,000 Problem 4 – 12

P10,000 Compensation P 10,000

Capital gain P 20,000

C Compensation

Capital gain

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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 4 – 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 4 – 14 B Insurance premium – beneficiary Sico

P5,000

Problem 4 – 15 B Cleaning of business equipment Repair service of store Total casual service income

P 1,000 3,000 P 4,000

Problem 4 – 16 C Total purchases Transportation expenses Unsold goods Cost of goods sold Problem 4 – 17 Inventory, beginning Purchases Purchase discounts Purchase returns Transportation in Inventory end Cost of sale

C

Problem 4 – 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 1

Inventory, beginning Inventory, ending Purchases Freight – in Purchase discount Cost of sales Problem 4 – 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 2 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

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 4: Gross Income

Problem 4 – 20 Advance payment Additional collection Office machine Gross service income

B P 2,000 8,000 3,000 P13,000

Problem 4 – 21 A Professional fee, accounting services Salaries of accounting staff Accounting supplies Gross service income

P 500,000 ( 150,000) ( 10,000) P 340,000

Problem 4 – 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 4 – 23 B Rent for year: 200A 200B 200C 200B Reportable income

P 80,000 480,000 40,000 P 600,000

Problem 4 – 24 B Rent income Real property tax assumed by the lessee Unrestricted advance rent Taxable gross receipts Problem 4 – 25

P360,000 10,000 60,000 P430,000

D

Year 1 Outright method Year 1 Spread-out method Value of investment Less: Accum. depreciation [(P240,500 - P560)/8 yrs] x 4.75 yrs

Outright P240,500

P240,500.00 142,464.3 7 P 98,035.63 4.7 5 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 1 spread-out – rent income on improvement Problem 4 – 26

C Outright P180,000

Outright Spread-out Problem 4 – 27

Spread-out

Spread-out P - 0 -

C

Cost of improvement Less: Accumulated depreciation at the end of the lease (P300,000/6) x 4 years and 7 months Book value at the end of the lease Divided by number of years until the termination of lease contract = 4 years and 7 months

P300,000 229,167 P 70,833 4.58

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 4: Gross Income 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 Less: Accum. depreciation at pre-termination (P300,000/6) x 2.75 years Additional income in 2010 from the pre-termination of contract

P 15,454 2.75 (P42,500) P300,000 137,500

162,500 P120,000

Problem 4 – 28 C P50,000 cash dividend received by an individual Problem 4 – 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 4 – 30 D Year 3 interest income of P4,461.20. Problem 4 – 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 4 – 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 4 – 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 4 – 34 A The dividend received by a domestic corporation from another domestic corporation is nontaxable. Problem 4 – 35 A P8,000 prize won in a TV program. Prizes amounting to P10,000 and below are subject to normal taxes. Problem 4 – 36 D First prize – raffle draw (P50,000 – P1,000) Gambling winnings Beauty contest winnings Taxable prizes and winnings Problem 4 – 37 Income (loss)

P 49,000 300,000 100,000 P449,000

D Year 1 P100,000

Year 2 (P 20,000)

Year 3 P 50,000

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 4: Gross Income

Less: Bad debts written off Income loss before bad debts recovery Bad debts recovery of previous year with tax benefit Taxable income

25,000 P 75,000 . P 75,000

10,000 (P 30,000) 25,000 (P 5,000)

5,000 P 45,000 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 D Year 1: No bad debt recovery Year 2: Bad debt recovery

None P 600

Problem 4 – 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 3 taxable income? Problem 4 – 40 C Real property tax Local taxes Reportable income from tax refund

P 10,000 500 P 10,500

Problem 4 – 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 effective interest rate of 10% is 0.9091. Problem 4 – 42 D Annuity received Present value (P5,880 x 0.8928) Interest income - Taxable annuity

P 5,880 5,250 P 630

Problem 4 – 43 B Excess of withdrawable amount ($10,000 - $1,000) Multiplied by exchange rate per 1 dollar Reportable income received by error

$

9,000 P 50 P450,000

Problem 4 – 44 C Average monthly unreturned change to clients Multiplied by number of months in a year Illegally obtained income - taxable Problem 4 – 45 Total receipts, 200B Less: Direct costs- commission (P425,000 x 65%) Rental expense (P3,000 x 12) Depreciation Supplies used Gross income of A-1 Barbershop

P 4,000 12 P48,000 P 425,000 P 276,250 36,000 5,000 1,750

319,000 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.

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 4: Gross Income

Problem 4 – 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 4 – 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- off (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