Income Taxation - Answer key (6th Edition by Valencia)- Chapter 3

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

Chapter 3: Concept of Income

CHAPTER 3

CONCEPT OF INCOMEProblem 3 – 1 TRUE OR FALSE

1. True2. False – Some wealth that made to increase the taxpayer’s net worth are gifts and

inheritance and these are not taxable income.3. True4. False – Sometimes a sale results to loss.5. True6. True7. True8. 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. True14. 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 FALSE1. True2. True3. 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. True6. True7. True8. 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. True11. True12. True13. True14. True15. True

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Problem 3 – 3 Problem 3 – 41. D 1. D2. C 2. B3. A 3. B4. C 4. A5. B 5. D6. C 6. A7. D 7. B8. C 8. D9. B 9. C10. C 10. C11. C

Problem 3 – 5 CNet assets ending (P300,000 – P50,000) P250,000Net assets beg. (P500,000 – P150,000) ( 350,000)Balance (P100,000)Add: Owner’s drawings 240,000Reportable income (loss) P140,000

Problem 3 – 6 BIncrease in total assets P1,520,000Decrease in total liabilitiesDividend declared

330,000 100,000

Total P1,950,000Less: Additional paid-in capital P800,000 Unrealized gain 50,000 850,000Reportable income P1,100,000

Problem 3 – 7 BIncrease in total assets P 250,000Decrease in total liabilities 160,000Drawings 20,000Additional investments ( 50,000)Total income P 380,000

Problem 3 – 8 CSales P30,000Less: Cost of sales (P30,000 x 40%) P12,000 Rent expense 2,000 Kiosk – depreciated value (P3,000 – P2,900) 100 Interest expense (P20,000 x 1%) 200 14,300Net income – return on capital P15,700

Problem 3 – 9 DReturn of Capital Return on Capital

Time deposit balance P250,000 P30,000

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Problem 3 – 10 AThere is no reportable income because there is no actual sale yet during 200x.

Problem 3 – 11 DInterest credited on peso-savings deposit (40,000/80%) P 50,000Matured interest on coupon bonds, not yet collected 80,000Cancellation of indebtedness from SMC in which Arom has equity investments 120,000Share in joint venture not yet received 200,000Payment of damanges deposited in court by a competitor for unrealized profit 60,000Income realized 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 CYear 1 Year 2 Year 3

Sales 0 0 P1,800,000Cost of sale 0 0 (1,000,000)Disposal cost 0 0 ( 50,000)Income for each year 0 0 P 750,000

Problem 3 – 13 ATaxable Income Nontaxable

Income

Salary (P260,000/13) x 12 P240,000Raffle winnings 70,00013th month pay (P260,000/13) x 1 P 20,000Lotto winnings . 500,000

P310,000 P520,000

Problem 3 – 14 DWithin: Taxable Income Compensation income P180,000 Income from grocery store 50,000Outside: Compensation income 120,000 Lotto winnings 100,000Total income taxable in the Philippines P450,000

Note: Lotto winnings earned outside the Philippines by a resident Filipino citizen are taxable in the Philippines.

Problem 3 – 15 BSalary from the Philippines, net of tax P250,000Add: Withholding tax 50,000Total income reportable in the Philippines P300,000

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

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Problem 3 – 16 BAmount of dividend received P600,000Multiplied by percent of Sungad’s operation within based on gross income 20/30Dividend income – taxable in the Philippines P400,000

Problem 3 – 17 1.

Letter C

Net salary as university professor P240,000Add: Withholding tax on wages 20,000Compensation income P260,000

2.

Letter B

Gross audit service income (P135,000/90%) P150,000Add: Gross rent income (P114,000/95%) 120,000Total income from profession and business P270,000

3.

Letter C

Interest income (P8,000/80%) P10,000Add: Dividend income (P4,500/90%) 5,000Total passive income P15,000

4.

Letter D

Gain from sale of personal car P3,000Add: Gain from sale of shares of stock – outside Stock market (P2,850/95%) 3,000Total capital gains P6,000

Problem 3 – 18 AProfessional fee (P450,000/90%) P500,000Salary (P300,000 + P60,000) 360,000Prizes 8,000Earnings subject to normal tax P868,000

Capital gains - shares of stock: First P100,000 (P95,000/95%) P100,000 Over P100,000 (P54,000/90%) 60,000 P160,000Winnings (P40,000/80%) 50,000Earnings subject to final taxes P210,000

Problem 3 – 19 DFirst 4 months (P12,000 x 4) P 48,000Remaining months (P15,000 x 8) 120,00013th month pay (P168,000/12) 14,000Gross compensation income P182,000

Problem 3 – 20 BReportable income is the market value of the car received P120,000

Problem 3 – 21 AMarket value of the service received P6,000

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Problem 3 – 22 CFace value of the non-interest bearing note P30,000Multiplied by the present value factor of 10% annuity 0.909Compensation income – present value of the note P27,270

Problem 3 – 23 ACompensation income P50,000Interest income (P50,000 x 12% x 6/12) P3,000

Problem 3 – 24 BCollections during the year P490,000Expenses actually incurred (150,000)Net income before personal exemption – cash basis 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 AGross income (P1,000,000 – P600,000) P400,000Actual operating expenses (P200,000 x 80%) (160,000)Net income before other income P240,000Add: Gain from sale of old furniture 20,000Taxable income P260,000

Problem 3 – 26 1. Letter C

Cash P 50,000Fair market value of property received 100,000Mortgage assumed by the buyer 450,000Installment payments: First year 100,000 Second year 200,000 Third year 300,000 Fourth year 400,000Selling price P1,600,000

2. Letter DSelling price P1,600,000Less: Mortgage assumed by the buyer 450,000Balance P1,150,000Add: Excess of mortgage over cost (P450,000 – P400,000) 50,000Contract price P1,200,000

3. Letter DDown payments: Cash (down payment) P 50,000 Fair market value of property received 100,000Installment received in the year of sale 100,000Excess of mortgage over cost (P450,000 – P400,000) 50,000Initial payments P300,000

Problem 3 – 27 CSelling price P700,000Add: Excess of mortgage over cost (P600,000 – P500,000) 100,000

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Total P800,000Less: Mortgage assumed by the buyer 600,000Contract price P200,000

Problem 3-28

1. A Income 200C - casual sale (P12,000 – P3,000) P9,000 Multiplied by holding period – more than 1 year 50% Reportable income 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 BTotal revenue P1,000,000Cost of sale ( 500,000)Income to be reported P 500,000

Problem 3 – 30 AContract price P50,000,000Completed as of this year, 50% P25,000,000Cumulative cost, P10 M + 9M 19,000,000 Cumulative income P 6,000,000Less: Reported prior year (P50M x 30%) – P10M 5,000,000Reportable income this year P 1,000,000

Problem 3 – 31 DContract price P 1,000,000Less: Cost (P90,000/20%) 450,000Gross profit P 550,000Multiplied by percent of completion 20%Reportable income under percent of completion P 110,000

Problem 3 – 32 DContract price P1,200,000Less: Total costs (P432,000 + P184,250 + P103,750) 720,000Total profit P 480,000Less: Previous years’ reported income:Accomplished contract price for 200A and 200B (P1,200,000 x 85%)

P1,020,000

Previous years’ actual costs: 200A ( 432,000

) 200B ( 184,250

) 403,750

Percent of completion – 200C Reportable income P 76,250

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Problem 3 – 33 AYear 3 sales P 500,000Less: Cost incurred as of year 3: Year 1 P 100,000 Year 2 200,000 Year 3 50,000 350,000Year 3 – reportable income P 150,000

Problem 3 – 34 C Harvested crops sold P 2,000,000Less: Total direct costs: Year 1 P 300,000 Year 2 100,000 Year 3 100,000 Year 4 100,000 Year 5 400,000 1,000,000Reportable income – year 5 P 1,000,000

Problem 3 – 35 Cash basis income (300K +800K +100K) P1,200,000Accrual expenses 500,000Net income before personal exemption P 700,000

Problem 3 – 36 Accrued sales (P2,000,000 + P520,000) P2,520,000Less: Cost of sales 1,200,000Gross income P1,320,000Less: Operating expenses (P600,000 x 70%) 420,000Net income P 900,000

Problem 3 – 37 Year 1 Year 2

Total harvest for the year at selling price

P50,000 P100,000

Cash

Accrual Cash Accrual

Harvests sold: (80 cavans x P500) P40,000 P40,000 (190 cavans x P500) P95,000 P95,000Ending inventory: (20 cavans x P500) 10,000 (30 cavans x P500) 15,000Beginning inventory: (20 cavans x P500) . . . ( 10,000)Gross income for the year P40,000 P50,000 P95,000 P100,000

Problem 3 – 38 1. Cash Method Farming Trading Rent Total

Revenue P 50,000 P150,000 P100,000Equipment sold 25,000Costs: Cost of products purchased ( 90,000) Carrying value of farm equipment

. ( 25,000) .

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Gross income P 50,000 P 60,000 P100,000 P210,000

2. Accrual Method Farming Trading Rent Total Revenue P 50,000 P150,000 P100,000Equipment sold 25,000Inventory, ending 9,000Inventory, beginning ( 6,000)Costs: Cost of products purchased ( 90,000) Carrying value of farm equipment

. ( 25,000) .

Gross income P 53,000 P 60,000 P100,000 P213,000

Problem 3 – 391. Letter C

Cash receipts:Sale of livestock (P200,000 + P300,000)Sale of livestock for rentSale of machineryRent of livestock for rentTotal cash receiptsLess: Cost of livestock purchased (P50,000 + P175,000 – P100,000) Cost of livestock for rent sold Cost of machinery soldGross income

P125,0007,000

15,000

P500,00010,00020,000

50,000P580,000

147,000P433,000

2. Letter ASale of livestock (P200,000 + P300,000)Less: Cost of livestock purchasedBalanceAdd: Inventory, end – livestock producedTotalLess: Inventory, beg. – livestock producedBalanceAdd: 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 livestockGross income

P 3,000

5,000 50,000

P500,000 125,000P375,000

50,000P425,000

180,000P245,000

58,000P303,000

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 producedLess: Beginning inventory – livestock producedDecrease in inventory

Cash basis – gross incomeLess: Accrual basis – gross incomeDifference

P 50,000 180,000P 130,000

P 433,000 303,000P 130,000

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Income Taxation - Answer key (6th Edition by Valencia)- Chapter 3

Economy & Finance

Transcript of Income Taxation - Answer key (6th Edition by Valencia)- Chapter 3