INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS 15 Chapter 4: Gross Income CHAPTER 4 GROSS

INCOME Problem 4 1 TRUE OR FALSE 1. True 2. True 3. False Religious officers income is s ubject 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. Tru e 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 a re to be reported as income. Hence, include as income because the advanced renta l is without restriction. Problem 4 2 TRUE OR FALSE 1. True 2. True 3. False bec ause estimated bad debts is not allowed to be deducted from gross business incom e. 4. False At the year of recovery 5. False Not an option to report, but requir ed to report. 6. False the return of premium from insurance company is not taxab le. 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 re ceived by error is reportable income. 12. True 13. False Not taxable. 14. True 1 5. 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

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS 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 16 Chapter 4: Gross Income Problem 4 5 A Gross salary (P280,000 + P20,000) Pier diem as board of director T axable 13th month pay Gross taxable compensation income Problem 4 6 B Salary Ove rtime pay 13th month pay and other bonuses Total compensation income Problem 4 7 B Salary Tips Cost and living allowance Total taxable compensation income P300,000 120,000 5,000 P425,000 P150,000 30,000 15,000 P195,000 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 Fir st employment for 30 years received at the age of 50 Problem 4 9 First employmen t resigned B P300,000 P10,000 Compensation P 10,000 Capital gain P 20,000 P500,0 00 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 C Compensation Capital gain

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Compensation income (P25 P23) x 10,000 Capital gain (P30 P25) x 10,000 Problem 4 13 D Regular compensation per month Cancellation of indebtedness (P300,000 P250 ,000) Total compensation income December 2007 Problem 4 14 B Insurance premium b eneficiary Sico Problem 4 15 B Cleaning of business equipment Repair service of store Total casual service income Problem 4 16 C Total purchases Transportation expenses Unsold goods Cost of goods sold Problem 4 17 Inventory, beginning Purch ases Purchase discounts Purchase returns Transportation in Inventory end Cost of sale Problem 4 18 Inventory, beginning Inventory, ending Purchases Freight in P urchase 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 mat erials, ending inventory Raw materials used Direct labor Factory overhead Total manufacturing cost Work-in-process, ending inventory Finished goods, ending inve ntory Business income C P 20,000 17 Chapter 4: Gross Income P 50,000 P 50,000 50,000 P100,000 P5,000 P 1,000 3,000 P 4,000 P500,000 5,000 ( 40,000) P465,000 P 20,000 1,200,000 ( 10,000) ( 40,000) 5,000 ( 50,000) P1,125,0 00 C Year 1 (P50,000) 850,000 10,000 ( 20,000) P790,000 Year 2 P 50,000 ( 30,000) 9 00,000 15,000 ( 25,000) P910,000 P1,275,000 ( 25,000) P1,250,000 P 540,000 20,00 0 ( 10,000) P 550,000 400,000 200,000 P1,150,000 ( 100,000) ( 50,000) 1,000,000 P 250,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS 18 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 P 500,000 ( 150,000) ( 10,000) P 340,000 Problem 4 21 A Professional fee, accounting services Salaries of accounting staf f Accounting supplies Gross service income Problem 4 22 B Service charges: Origi nating from the Philippines Collection abroad of collect messages originating in the Philippines Gross income for Philippine Income Tax computation Problem 4 23 B Rent for year: 200A 200B 200C 200B Reportable income Problem 4 24 B Rent inco me Real property tax assumed by the lessee Unrestricted advance rent Taxable gro ss receipts Problem 4 25 D Outright P240,500 P 150,000 60,000 P 210,000 P 80,000 480,000 40,000 P 600,000 P360,000 10,000 60,000 P430,000 Spread-out P24 0,500.00 142,464.3 7 P 98,035.63 4.7 5 P 20,639 9/12 P 15,479 Outright P180,000 Spread-out P - 0 Year 1 Outright method Year 1 Spread-out method Value of investment Less: Accum. depreciation [(P240,500 - P560)/8 yrs] x 4.75 yrs Book value, end of lease Divi ded 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 Outri ght Spread-out Problem 4 27 C 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 num ber of years until the termination of lease contract = 4 years and 7 months P300,000 229,167 P 70,833 4.58

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Annual additional income Multiplied by number of years expired (from March 31, 2 008 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 pr e-termination of contract 19 Chapter 4: Gross Income P 15,454 2.75 (P42,500) P300,000 137,500 162,500 P120,00 0 Problem 4 28 C P50,000 cash dividend received by an individual Problem 4 29 B In terest income from an investment in a 10-year bond Interest income from expanded foreign currency deposit Total taxable interest income Problem 4 30 D Year 3 in terest 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 m ine (P500,000 x 20%) Total final tax Problem 4 32 D Copyright P 35,000 Patent P 25,000 ( 3,500) . P 31,500 ( 5,000) P 20,000 P 10,000 40,000 100,000 P150,000 P 40,000 60,000 P100,000 Gross royalties: Copyright (P31,500/90%) Patent (P20,000/80%) Income tax final C opyright (P35,000 x 10%) Patent (P25,000 x 20%) Income after tax Problem 4 33 A P500,000 - Dividends earned outside the Philippines by a domestic corporation fr om a foreign corporation are taxable in the Philippines. Problem 4 34 A The dividend received by a domestic corporation from another dome stic 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 win nings Taxable prizes and winnings Problem 4 37 Income (loss) D Year 1 P100,000 Y ear 2 (P 20,000) Year 3 P 50,000 P 49,000 300,000 100,000 P449,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Less: Bad debts written off Income loss before bad debts recovery Bad debts reco very 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) 20 Chapter 4: Gross Income 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 Problem 4 39 D P5,000 local tax recovery. The requirement should be properly stated as: Wh at amount of tax refund should be reported as part of year 3 taxable income? Pro blem 4 40 C Real property tax Local taxes Reportable income from tax refund Prob lem 4 41 C Annuity received Present value (P20,000 x 0.9091) Interest income - T axable annuity Note: The present value factor of P1 for an effective interest ra te of 10% is 0.9091. Problem 4 42 D Annuity received Present value (P5,880 x 0.8 928) Interest income - Taxable annuity Problem 4 43 B Excess of withdrawable amo unt ($10,000 - $1,000) Multiplied by exchange rate per 1 dollar Reportable incom e received by error Problem 4 44 C Average monthly unreturned change to clients Multiplied by number of months in a year Illegally obtained income - taxable Pro blem 4 45 Total receipts, 200B Less: Direct costs- commission (P425,000 x 65%) R ental expense (P3,000 x 12) Depreciation Supplies used Gross income of A-1 Barbe rshop $ P 5,880 5,250 P 630 9,000 P 50 P450,000 P 4,000 12 P48,000 P 425,000 P 2 76,250 36,000 5,000 1,750 P 10,000 500 P 10,500 P 20,000 18,182 P 1,818 None P 6 00 319,000 P 106,000 Note: The interest expense could only be deducted to compute gross income if a b usiness is a banking institution. Furthermore, borrowing cost directly attributa ble to the acquisition, construction or production of assets used in the busines s may either be capitalized or deducted as operating expense.

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS 21 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 i ncome Problem 4 47 Salary (P25,000 + P302,000) Income tax paid by the employer N ote receivable Total compensation Business gross income Allowable expenses Prepa id rent income Bad debts recovered previously written- off (P38,000 x 60%) Taxab le 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