Northern CPAR: Taxation – Fundamentals of Income Taxation
NORTHERN CPA REVIEW 4 Floor Pelizloy Centrum, Lower Session Road, Baguio City, Philippines Mobile Numbers: SMART 09294891758 & GLOBE 09272128204 E-mail Address:
[email protected] th
REX B. BANGGAWAN, CPA, MBA TAXATION FUNDAMENTALS OF INCOME TAXATION INCOME All wealth which flows into the taxpayer other than a mere return of capital and includes gains Why is income taxed? Income is the best measure of a taxpayer’s ability to pay. Basic Definitions: Gross Income – refers to what is income for taxation purposes Taxable Income – as the pertinent items of gross income that are subject to tax after allowable deductions Tax Base – the value of a certain goods, or property for taxation purposes Characteristics of Gross Income: 1. Return on capital and resulted increased networth at the moment of its generation 2. Realized benefit by the taxpayer (realization means actual or constructive receipt of in cash) Example of constructive receipts of income: 1. credit to an account own by the taxpayer 2. declaration of a share of the profits of a general professional partnership 3. offsetting debt with right to received dividends 4. cancellation of debt in payment of service Which do not constitute gross income? 1. Receipts representing returns of capital Examples: a. Proceeds of life insurance policy (upon death of the insured) b. Proceeds received by the insured (still living) representing return of premium 2. Unrealized income Examples: a. Appreciation of value of properties b. Unrealized gains on investments 3. Those exempted by the Constitution, statues or treaty or contract with taxpayers Examples: a. Receipt of non-profit institutions from their main activities b. Contributions to GSIS, SSS, PhilHealth, Pag-Ibig and c. Retirement and separation benefits under certain circumstances d. Tax holiday for entities registered pursuant to the Omnibus Investment Code e. Income of foreign government or corporations owned or controlled by them Taxation of Gross Income under the NIRC: A. Passive Income Tax 1. Capital gains tax – few final tax is imposed on certain gains on dealings on properties Examples include final tax on: a. Final tax on net gain on sale of domestic stocks directly to buyer (withheld at source) b. Final tax on gains on sale of real property located in the Philippines classified as capital asset
That in all things God will be glorified!
Rex B. Banggawan, CPA, MBA
1 TAX – 6th Batch – HQ03
Northern CPAR: Taxation – Fundamentals of Income Taxation
2. Other withheld final tax – these are groups of passive income that are subject to withholding by the income payor. Examples include final tax on: a. Interest on deposits with banks d. Winnings b. Prizes e. Royalties c. Dividends received from domestic corporation B. Regular (Active) Income Tax – applies to all items of gross income that are generated by the taxpayer in the ordinary course of business or to those items of passive income that are not covered by final taxes. Regular income tax is either: 1. Progressive tax (0-32% schedular rates) – applicable to individual and taxable trusts and estates 2. Final tax (35%) – applicable to corporations Examples active income: 1. Compensation income 2. Professional income 3. Business income 4. Those items of income that are excluded from capital gains tax a. Gain on sale of properties located abroad b. Gain on sale of properties located in the Philippines by non-residents c. Gain on sale of other non-domestic stocks and non-real property capital assets 5. Those items of income that are excluded from other final taxes a. Interest income on notes receivable (not deposit) b. Prizes where the taxpayer has no intention or active effort to compete (Nobel Prize, cash awards to “Most Outstanding Citizens of Baguio”) c. Dividends from foreign corporations 6. Others a. Certain tax benefits (example: items of deductions claimed in the past that are subsequently recovered) b. Obligations waived by the creditors in consideration of service SITUS OF INCOME A. Interest – debtor’s residence B. Dividends 1. By a domestic corporation – within the Philippines 2. By a foreign corporation – apply the income dominance test Basis: World gross income for the three-year period ending the current taxable year preceding the declaration of such dividends a. If Philippine gross income is more than 85%, the whole dividends are considered within. b. If Philippine gross income is less than 50% of the basis, the whole dividend is considered earned outside the Philippines c. If Philippine gross income is at least 50% of this, the ratio of Philippine gross income over the basis multiplied by the dividend received is considered earned within the Philippines. C. Service – place of performance of the service D. Rent – location of the property E. Royalties – place where the intangible is used F. Gain on sale a. Real property – location of the property b. Domestic shares of stock – always within the Philippines c. Personal property – place of sale G. Mining – location of mine H. Farming - location of farm
That in all things God will be glorified!
Rex B. Banggawan, CPA, MBA
2 TAX – 6th Batch – HQ03
Northern CPAR: Taxation – Fundamentals of Income Taxation
I. Merchandising – place of sale Place of Puchase Place of Sale Income is earned a. Within within within b. within abroad abroad c. abroad within within d. abroad abroad abroad J. Manufacturing – place of production and place of sale (Sec. 42(E), NIRC): Whether full or partial processing, for example: Place of Production Place of Sale Income is earned a. Within within within b. within abroad within and abroad c. abroad within within and abroad d. abroad abroad abroad Allocation methods: 1. With factory or production price – the value as transfer price of the factory to the selling segment is deemed the selling price of the commodity transferred.* 2. Without factory or production price – the portion deemed earned within the Philippines is: (Property value, Philippines/ Property value, world) * 50% of P xxx income (Gross sales, Philippines/ Gross sales, world) * 50% of income xxx Manufacturing income earned from the Philippines P xxx TAX ACCOUNTING PERIODS Gross income accumulates over a period of time. Income taxation would require adoption of an accounting period wherein to measure the income. The NIRC provides that “taxable income shall be computed upon the basis of the taxpayer’s annual accounting period in accordance with the methods of accounting regularly employed in keeping the books of such taxpayer.” There are two types of tax accounting periods: 1. Calendar year – the 12-month period ending December 31 and is applicable to: a. Individuals b. taxpayers who do not keep books d. taxpayers with accounting periods other than the fiscal year c. taxpayers with no annual accounting period 2. Fiscal period – any 12 months period ending the last day of any month other than December 31st. This is Not available to non-corporate taxpayers. Normally, accounting period are uniformly 12 months, however, short accounting period may arise in the following cases: 1. death of a taxpayer 3. dissolution of a business 2. newly organized business 4. changes in accounting period TAX PAYMENTS Tax shall be paid on the 15th day of the fourth month following the close of the taxpayer’s taxable year. TAX ACCOUNTING METHODS So as the reporting of items of gross income would be consistent, tax accounting methods should be applied such as the following: A. Principal Methods 1. Cash Basis Method – income is recorded in the year it is actually or constructively received; expenses are generally reported in the year it is paid 2. Accrual Method – income is reported in the year it is earned and expenses are deducted in the year incurred 3. Hybrid method – combination of both cash basis and accrual basis method B. Deferred Payment Sales 1. Installment method – applicable in the following three cases only:
That in all things God will be glorified!
Rex B. Banggawan, CPA, MBA
3 TAX – 6th Batch – HQ03
Northern CPAR: Taxation – Fundamentals of Income Taxation a. Sale of personal property by a dealer b. Casual sale of personal property where: a. selling price is over P1,000.00 b. initial payment do not exceed 25% of the selling price c. property is of a kind which would be included in the taxpayer’s inventory if on hand at the close of the taxable year c. Sale of real property where the initial payment do not exceed 25% of the selling price Initial Payment – refers to payments which the seller receives upon the execution of the instruments of sale and those scheduled to be received in the year of sale or disposition. It simply means “total first year payments” but do not include receipts of evidence of indebtedness of the buyer such as notes. 2. Deferred payment basis – applicable when the buyer has issued evidence of obligation (notes). The notes shall be valued at its market value at the date of receipt. The difference between the fair value and the face value is reported as interest income in future taxable period. This is an alternative to delaying tax payments when the installment method is not available. C. Long-term Construction Contracts 1. Percentage of completion – this is applicable only to long-term construction contracts covering a period in excess of one year (Architect or engineer’s certification is required) 2. Completed contract basis – gross income is recognized upon completion of construction contract D. Farming income Crop year basis – applicable only to farmers engaged in the production of crops which takes more than a year from the time of planting to the process of gathering and disposal. Expenses paid or incurred are deductible in the year the gross income from the sale of the crops is realized. E. Leasehold improvement 1. Outright method – the value of the leasehold improvement attributable to the lessor is reported in taxable income at the time of completion of the leasehold 2. Spread-out method – the value of the leasehold improvement attributable to the lessor is recognized in taxable income over the lease term Reminders on Tax Accounting Methods: a. Absence of accounting method or use of one that do not clearly reflects the income If the taxpayer has no accounting method or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. b. Consolidation of gross income from two or more methods If a taxpayer adopted the cash basis and accrual basis in accounting for income earned on separate trade or business, he may opt to combine the two income determined from the respective methods as a consolidated income for tax purposes. c. Change of Tax Method - Prior BIR approval is required - If the taxpayer changes its accounting methods from accrual to installment method, he should include in future periods the collection of receivables in future gross income.* d. Expenditures benefiting future periods Expenditures benefiting more than one taxable period is deferred and allocated to those periods expected to be benefited by the expenditure. e. Advanced receipt of items of gross income Receipt of income in advance is taxable in the year of receipt. GENERAL RULE IN INCOME TAXATION Type of Taxpayers I. Individuals
Income Taxable in the Philippines Earned Philippines Earned Abroad
That in all things God will be glorified!
Rex B. Banggawan, CPA, MBA
4 TAX – 6th Batch – HQ03
Northern CPAR: Taxation – Fundamentals of Income Taxation A. Citizens 1. Resident 2. Non-resident B. Aliens 1. Resident 2. Non-resident a. In business b. Not in business C. Estate and Trusts II. Corporations A. Domestic B. Foreign 1. Resident 2. Non-resident
same rule with individuals
TAX COMPLIANCE The Philippines follows the “self-assessment method” wherein taxpayers determine their gross income, prepare their income tax returns and pay the tax accordingly. The return filed is presumed correct unless proven otherwise by the government. However, in cases of failure to file a return, the Commissioner of Internal Revenue shall file a return from best available information and such return thus filed is presumed correct. The taxpayer has the burden of proof in this case. The same rule applies when tax authorities has reasons to believed that the tax return of the taxpayer is grossly misstated. Income tax return is required for items of gross income that are subject to: 1. Regular Income Tax (quarterly and annual consolidated return) 2. Capital Gains Tax (per transaction and an annual consolidated return) Who shall file income tax returns? 1. Every resident Filipino citizen 2. Every non-resident Filipino citizen on his income from sources within the Philippines 3. Every resident alien on income from sources within the Philippines; and 4. Every non-resident alien engaged in trade or business or in the exercise of profession in the Philippines, on income from sources within the Philippines Who are not required to file individual returns for income tax? 1. An individual whose gross income does not exceed his total personal and additional exemptions, except those engaged in business or profession 2. An individual with respect to pure compensation income, derived from sources in the Philippines, the income tax on which has been correctly withheld, except those with concurrent employment 3. An individual whose income has been subjected to final income tax 4. An individuals who is exempt from filing income tax returns in pursuant to other provisions of the Tax Code and other laws. Where to file income tax returns? 1. Authorized agent bank 2. Revenue District Officer 3. Collection Agent 4. Duly authorized Treasurer of the city or municipality in which the taxpayer has his legal residence or principal place of business in the Philippines or 5. Office of the Commissioner if the taxpayer has no legal residence or place of business in the Philippines Payment of Income Tax 1. Outright
That in all things God will be glorified!
Rex B. Banggawan, CPA, MBA
5 TAX – 6th Batch – HQ03
Northern CPAR: Taxation – Fundamentals of Income Taxation 2. Installments (for individual taxpayers) The Networth Method The Networth Method serves as a test of the existence of income when not specifically disclosed.
Possible Gross Income = Personal Expenditures + Change in Networth* *The change in Networth is computed as: Asset, end Less: Assets, beginning
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Liabilities, end = Net Worth, end Liabilities, beginning = Networth, beginning Change in networth The possible gross income is generally taxable, except when it: 1. is excluded by law, contract, treaty, public policy from taxation 2. result from additional investment 3. is not income for income tax purposes (i.e. does not meet the three characteristics of gross income) EXAM DRILL PROBLEMS: 1. In particular, income is taxed because a. When a person receive an income, it received a benefit from the government b. Other sources of government revenues may not be sufficient to shoulder government expenditures c. It represents the primary source of government revenue aside from business tax d. It represents the best indicator of one’s ability to pay 2. Gross income means a. The pertinent item of income that is subject to progressive rates. b. The pertinent item of income that is subject to final tax rates. c. Income that can be subject to income taxation. d. Income that are actually realized in cash or property. 3. ABC Company received a P1,000,000 cash remittance from its sister company, DEF Company, to be remitted to its home office HIJ Company. Which statement is correct concerning the taxation of this item? a. Not taxable since the item represents a return of capital. b. Taxable since it is realized by ABC Company by means of an actual receipt. c. Not taxable since the item, although a received in cash, did not redound to the benefit of ABC Company. d. Taxable since taxation is the rule, exemption is the exception. 4. THE Corporation declared dividends to its 100,000 outstanding P10-par ordinary share at P2 per share. ABC bought its 10,000 ordinary share investment in THE Corporation for P15 per share. ABC have already received cumulative dividends of P140,000. Which statement is correct? a. Only P10,000 of the dividends will be subject to income tax since it represents excess over cost (i.e. return on capital) b. The P20,000 dividends will be subject to tax since both return of or on capital is subject to tax c. The P20,000 dividends will be subject to tax because it represents a return on capital. d. Only P10,000 of the dividends will be subject to income tax since it is the benefit actually realized. 5. Which is not subject to income taxation? a. Income from properties received from donations and inheritance b. Proceeds of crop insurance c. Damage recovered from patent infringement suit
That in all things God will be glorified!
Rex B. Banggawan, CPA, MBA
6 TAX – 6th Batch – HQ03
Northern CPAR: Taxation – Fundamentals of Income Taxation d. Revenues of non-profit educational institutions 6. Which is subject to income tax? a. Compensation for personal injuries b. Investment income of foreign government in the Philippines c. Income of resident aliens abroad d. Business income from jueteng and sale of coccaine 7. Which is an item of gross income? a. Tariff collected by the Bureau of Customs b. License fees collected by the Professional Regulation Commission c. Income of a government-owned and controlled corporations d. Tithes received by religious organizations 8. Alexander is a foreign currency speculator. He currently held $100,000 dollar purchased by him at P40/$1. At the close of his business on December 31, 2008, a dollar was selling P50. Which statement is correct? a. The appreciation will be subject to tax since transaction in currencies is presumed to be a realized benefit. b. The appreciation will not be subject to tax since it is not a realized benefit. c. The appreciation will not be subject to tax since it is merely a return of capital. d. The appreciation will be subject to tax since it will be reported in accounting income. The NIRC provides that the methods of accounting of the taxpayer shall be followed in determining the taxable income. 9. Which of the following represents an item of gross income? a. Revaluation surplus on building c. Appreciation in the value of land b. Local tax refund d. Return of premium in a life insurance policy
10. Which is not an item of gross income? a. Interest on a bank deposit c. Winnings b. Interest on a notes receivable d. PhilHealth benefits 11. Which cannot be subjected to income tax? a. Exemplary damages c. Damages awarded from a patent infringement suit b. Proceeds of crop insurance d. Lotto winnings 12. All a. b. c. d.
of the following cannot be subject to income tax, except? Proceeds of life insurance of a director received by the corporation as beneficiary Excess of the proceeds of the life insurance over premium paid by the taxpayer Moral damages Tuition fee earned by Benguet State University
13. Toma Sengla Tumba is an organized non-stock, non-profit fraternal organization. In order to fund its summer activity, Bassagulero, its members purchased and sold souvenir merchandise to local tourists. The total profit generated by the fund raising activity was P200,000. The members further contributed P100,000 as additional funding for the activity. Which statement is correct? a. All receipts of Toma Sengla Tumba are subject to income tax. b. Only the P100,000 membership contribution is subject to income tax. c. All receipts of Toma Sengla Tumba are exempt from income tax. d. Only the P200,000 fund raising profit is subject to income tax. 14. Under the NIRC, income is received not only when it is actually or physically transferred to a person but even when it is merely constructively received by him. An example of income constructively received is a. Rental payments refused by the lessosr, when the lessee tendered payment and the latter made a judicial deposit of the rental due.
That in all things God will be glorified!
Rex B. Banggawan, CPA, MBA
7 TAX – 6th Batch – HQ03
Northern CPAR: Taxation – Fundamentals of Income Taxation b. Interest coupons not yet due and payable. c. Interest on savings deposit not yet credited to the account of the depositor. d. Advanced deposit made by the lessee. 15. Which of the following is considered or construed as an example of constructive receipt? a. Retirement benefits, pension, gratuities. b. Fees paid to a public officials. c. Interest coupons that have matured and are payable but have not been cashed. d. Deposits for rentals to answer for damages, restricted as to use. 16. Which is not subject to final tax? a. Winnings not exceeding P10,000 b. Royalties
c. Dividends from a resident corporation d. Interest from deposit substitute
17. Which is a correct statement? a. An item of income by an individual that is subject to final tax can still be subject to progressive rates. b. Final tax rules do not apply with corporations since they are taxed under a globalized scheme. c. In case of individuals, an item of income that is subject to final tax cannot be subjected to progressive tax. d. An item of income of an individual that is exempted by final tax is always taxable under progressive tax. 18. Under individual income taxation, which is subject to progressive rates? a. Cash reward for tax informers c. Book royalties b. P10,000 prizes d. Share in the net profit of a general professional partnership 19. All a. b. c. d.
of the following income is considered earned within, except one. Choose the exception. Interest income from notes issued by a non-resident alien Dividends paid by a non-resident foreign corporation Management advisory fee earned from a foreign client abroad Dividends declared by a domestic corporation received a non-resident alien investor
SITUS APPLICATIONS 20. THY, a resident foreign corporation, declared P500,000 dividends on July 1, 2008, to its 100,000 outstanding ordinary shares. Becky holds 20,000 of THY’s ordinary shares. The corporation has just started operation 3 years ago and has significant Philippine operation since its start-up. Details of the gross income of THY is shown below: Gross Income: 2005 2007 2008 Philippines P 1,200,000 P 4,000,000 P 6,000,000 Abroad 2,800,000 2,000,000 4,000,000 How much of the dividends received by Becky is considered earned within the Philippines and the pertinent tax scheme that would apply? a. P56,000; final tax c. P52,000; final tax b. PP56,000; progressive tax d. P52,000; progressive tax 21. A resident alien rendered professional advisory services to foreign businesses earning him P2,000,000 professional fees. The professional fee is a. exempt from the Philippines. c. taxable both in the Philippines and abroad. b. taxable from the Philippines. d. neither taxable in the Philippines nor abroad. 22. Which income is considered purely earned in abroad? a. A merchandise purchased abroad and sold in the Philippines b. A merchandise purchased in the Philippines and sold abroad c. A merchandise manufactured in the Philippines and sold abroad d. A merchandise manufactured abroad and sold in the Philippines
That in all things God will be glorified!
Rex B. Banggawan, CPA, MBA
8 TAX – 6th Batch – HQ03
Northern CPAR: Taxation – Fundamentals of Income Taxation 23. When real property is sold at a gain, the situs of taxation is a. the residence of the owner. c. the place where the deed of sale is executed. b. the residence of the buyer. d. the place where the property is located. 24. Darrel Asuncion, a resident citizen, owned a commercial building in Las Vegas. The building was currently leased to a resident Pilipino who pays P50,000,000 rental annually. The rent is considered a. earned abroad. c. earned within the Philippines. b. earned in the Philippines. d. partly within and partly outside the Philippines. 25. An Indian citizen who married a beautiful Filipina wife owns a building in the United States and leases the same to businesses owned by Filipino residents. The Indian national has his residence in the Philippines and all his children are studying in elite Philippine universities. Which is true? a. The rental income of the Indian national is taxable in the Philippines because he had his residence in the Philippines. b. The rental income of the Indian national is taxable in the Philippines because he married a beautiful Filipina wife and his family is resident in the Philippines. c. The rental income of the Indian national is taxable in the Philippines because he derives his income from Filipino resident lessees. d. The rental income of the Indian national is exempt in the Philippines because the property is located abroad. 26. Benzon, a non-resident alien, invests in the capital stock of a domestic corporation. Benzon subsequently sold this to another non-resident alien at a gain of P20,000. Which is true? a. The income is taxable in the Philippines because domestic securities are by situs rules situated herein. b. The income is exempt in the Philippines because the place of sale applies with sale of personal property. c. The income is exempt in the Philippines because the resident of the seller applies with sale of personal property. d. The income is exempt in the Philippines because both non-residents are involved in the transaction. INCOME TAXPAYERS 27. Which is not an income taxpayer? a. Business partnership c. Non-resident alien b. Non-resident foreign corporation d. General professional partnership 28. Which of the following individual taxpayers is not covered by progressive tax? a. Resident citizen c. Non-resident alien engaged in trade or business b. Resident alien d. Non-resident alien not engaged in trade or business 29. The following are not separate income taxpayer, except? a. Revocable trusts b. Non-resident alien, not engaged in business c. Estates under extrajudicial settlements d. Joint ventures engaged in construction projects or energy operations in pursuant to an operating consortium agreement under service contract with the government e. Co-ownership 30. A business partnership that is organized in the Philippines but dominantly operates abroad is classified under the NIRC as a a. domestic corporation c. non-resident corporation b. resident corporation d. absentee corporation
That in all things God will be glorified!
Rex B. Banggawan, CPA, MBA
9 TAX – 6th Batch – HQ03
Northern CPAR: Taxation – Fundamentals of Income Taxation 31. A corporation doing business in the Philippines but is not organized according to Philippine laws is classified as a. domestic corporation c. non-resident corporation engaged in business b. resident corporation d. non-resident foreign corporation 32. All of the following taxpayers are taxable even on income earned outside the Philippines, except a. Domestic corporation c. Resident alien b. Resident citizen d. None of these 33. All of the following are taxable only on income earned within the Philippines, except a. Resident alien c. Non-resident alien b. Resident citizen d. Non-resident citizen 34. An alien who arrived in the Philippines during the year and showed proof to the satisfaction of the CIR regarding his employment in the Philippines for an extended period of time. a. Resident alien c. Non-resident citizen engaged in trade or business b. Resident citizen d. Non-resident citizen not engaged in trade or business 35. In default of intention, an alien who is resident in the Philippines for 6 months is considered a a. Resident alien c. Non-resident citizen engaged in trade or business b. Resident citizen d. Non-resident citizen not engaged in trade or business 36. A resident alien naturalized in accordance with law a. Resident alien c. Non-resident citizen b. Resident citizen d. Non-resident alien engaged in trade or business TAX ACCOUNTING PERIODS AND METHODS 37. Which is incorrect? The calendar year accounting period is applicable to a. individual income taxpayers only b. taxpayers who do not keep book or with no annual accounting period c. taxpayers with other than fiscal accounting period d. individuals and corporations 38. Which is correct? The fiscal accounting period is applicable only to a. domestic corporations. c. corporations and individuals by election. b. resident corporations. d. Any taxpayers who are not individuals. 39. A short accounting period may arise under the following scenarios, except one. Select the exception? a. When a taxpayer dies. b. When a business is dissolved. c. When the Commissioner of Internal Revenue terminates the taxpayer’s accounting period. d. When an individual taxpayer changes his accounting period to a fiscal year. 40. DEF Corporation changed its accounting period from a calendar year to a fiscal year ending every March 31. DEF Corporation should file its annual income tax return not late than a. April 15 c. June 15 b. August 15 d. July 15 41. Bee Jay, a resident citizen, changed its accounting period for internal reporting purposes from a calendar year to a fiscal year ending every June 30 after a significant change in the nature of his business. Bee Jay should file its annual income tax not later than a. June 30 c. October 15 b. September 15 d. April 15 42. Gross income is reported partially in each taxable year in proportion to collections made in such period as it bears to the total contract price refer to
That in all things God will be glorified!
Rex B. Banggawan, CPA, MBA
10 TAX – 6th Batch – HQ03
Northern CPAR: Taxation – Fundamentals of Income Taxation a. Crop year basis method b. Accrual method
c. Percentage of completion basis method d. Installment sales method
43. Which is incorrect regarding a change in accounting period by non-individual taxpayers? a. IF the change is from fiscal year to calendar year, a separate final or adjustment return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31 b. If the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year c. If the change is from one fiscal year to another fiscal year, a separate final or adjustment return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year d. If the change is from fiscal year to a calendar year, a separate final or adjustment return shall be made for the period between the close of the last calendar year and the last fiscal year 44. Starting August, 2008, ABC Corporation changed its accounting period from a fiscal year ending every June 30 to the calendar year. Which statement is correct? a. ABC Corporation should file an adjustment return on April 15, 2009 covering the period of July 1, 2008 to December 31, 2008. b. ABC Corporation should file an adjusted return on April 15, 2009 covering the period of August 1, 2008 to December 31, 2008. c. ABC Corporation should file an adjustment return on October 15 covering the period of January 1, 2008 to June 30, 2008 d. ABC Corporation need not file an income tax return until April 15, 2009 45. Effective February 2008, DEF Corporation changed its accounting period from a fiscal year ending every January 31 to another fiscal year ending every August 31. Which is correct? a. DEF Corporation should file an adjustment return covering the period covering August 31, 2007 to August 31, 2008. b. DEF Corporation should file an adjustment return covering the period January 1, 2008 to August 31, 2008 c. DEF Corporation should file an adjustment return covering the period of February 1, 2008 to August 31, 2008. d. DEF Corporation should file an adjustment return covering the period of August 31, 2008 to December 31, 2008. 46. Which is correct? a. The installment method of reporting income is applicable only to dealers in property. b. The installment method can be availed only by any taxpayer when the initial payment do not exceed 25% of the selling price of the property sold. c. The casual sale of personal property cannot avail of the installment method if the selling price is below P1,000 d. Dealers in real properties can always avail of the installment method. 47. On July 1, 2008, Eliazar sold a real property for P600,000. 10% down-payment is due upon signing of the contract of sale. The balance is payable as follows: 15% December 31, 2008; 50% March 31, 2009; 35% July 31, 2009 Since the property is classified as ordinary asset only the gain of P300,000 is subject to progressive tax. How much of the gain is taxable in 2008? a. P0 c. P300,000 b. P6,000 d. P70,500 48. The following accounts relates to book of Zeus, a dealer of household appliances: 12/31/2006 12/31/2007 Installment sales P 1,000,000 P 2,000,000
That in all things God will be glorified!
Rex B. Banggawan, CPA, MBA
11 TAX – 6th Batch – HQ03
Northern CPAR: Taxation – Fundamentals of Income Taxation Cost of installment sales 2007 Installment receivables 2006 Installment receivables
500,000 300,000
1,100,000 500,000 50,000
How much taxable gain is to be reported in 2007? a. P1,750,000 b. P800,000 c. P675,000
d. P900,000
49. Which is incorrect regarding change in accounting methods? a. If the taxpayer changes from accrual to installment basis, he should include the amounts received from sales or other dispositions of property made in any prior year in the computation of his income for the year of change or any subsequent year. b. Any change in accounting method or accounting period require the BIR’s approval c. If a taxpayer adopted the cash basis and the accrual basis in computing income earned on separate trade or business, he may opt to combine the two income determined from the respective methods as a consolidated income for tax purposes d. If the taxpayer changes from accrual to installment basis, he should include only receipts that relates to current sales or dispositions 50. On October 1, 2008, Vicky sold one of her business establishment (ordinary asset). The land and building cost Vicky P10,000,000 and was sold for P14,000,000. P500,000 was paid upon the signing of the contract. The establishment is subject to P11,000,000 real mortgage and is to be assumed by the buyer. Compute the amount taxable gain to be reported in 2008. a. P500,000 b. P5,000,000 c. P4,000,000 d. P625,000 51. On December 31, 2008, Carlo received P100,000 notes due April 1, 2009 as payment for his business advisory services from his client. The notes can be discounted at various bank at P96,000. Under deferred payment method, how much is taxable in 2008 and in 2009? a. P100,000; P0 c. P4,000; P96,000 b. P96,000; P4,000 d. P0; P100,000 52. The following computations were shown by the taxpayer as support of his GAAP income under the accrual basis: Gross profit from cash and credit sales P 500,000 Rental Income: Cash rentals received P 300,000 Unearned rent, beginning 100,000 Unearned rent, end ( 50,000) 350,000 Other Income: P 850,000 Unrealized gain on trading securities 50,000 Total Income P 900,000 Determine the income for taxation purposes. a. P800,000 b. P500,000 c. P900,000
d. P950,000
53. Mr. Mario was alleged to have under-declared his income during the previous year. An examiner conducted an evaluation of Mr. Mario based on his statement of assets and liabilities. The following information were available: Declared asset, beginning of the year Discovered undeclared assets existing at the beginning of the year Declared liabilities, beginning* Ending assets as evaluated, inclusive of discovered undeclared assets Ending liabilities as evaluated *40% was discovered unsupported and apparently fictitious
That in all things God will be glorified!
Rex B. Banggawan, CPA, MBA
P 400,000 500,000 200,000 1,000,000 150,000
12 TAX – 6th Batch – HQ03
Northern CPAR: Taxation – Fundamentals of Income Taxation In the same period, Mr. Mario donated a parcel of land out of its declared asset with a declared value of P200,000. Mr. Mario also presented a lists of his personal and family expenditures aggregating P150,000 during that year. Using the net worth method, what is Mr. Mario’s possible income? a. P70,000 b. P270,000 c. P420,000 d. P220,000 54. Income tax return may be filed on the following, except a. Authorized agent bank c. Authorized City or Municipal Treasurer b. Collection agent of the BIR d. Barangay treasurer of the taxpayer’s residence
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That in all things God will be glorified!
Rex B. Banggawan, CPA, MBA
13 TAX – 6th Batch – HQ03
