INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 15

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 Problem 4 – 4
1. C 1. C
INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 16
SUGGESTED ANSWERS
Chapter 4: Gross Income

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

Problem 4 – 5 A
Gross salary (P280,000 + P20,000) P300,000
Pier diem as board of director 120,000
Taxable 13th month pay 5,000
Gross taxable compensation income P425,000

Problem 4 – 6 B
Salary P150,000
Overtime pay 30,000
13th month pay and other bonuses 15,000
Total compensation income P195,000

Problem 4 – 7 B
Salary P120,000
Tips 360,000
Cost and living allowance 5,000
Total taxable compensation income 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 P500,000
50

Problem 4 – 9 B
First employment – resigned P300,000

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

Problem 4 – 11 B
Compensation Capital gain
Compensation income (P13 – P12) x 10,000 P 10,000
Capital gain (P15 – P13) x 10,000 P 20,000

Problem 4 – 12 C
Compensation Capital gain
INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 17
SUGGESTED ANSWERS
Chapter 4: Gross Income

Compensation income (P25 – P23) x 10,000 P 20,000

Capital gain (P30 – P25) x 10,000 P 50,000

Problem 4 – 13 D
Regular compensation per month P 50,000
Cancellation of indebtedness (P300,000 – P250,000) 50,000
Total compensation income – December 2007 P100,000

Problem 4 – 14 B
Insurance premium – beneficiary Sico P5,000

Problem 4 – 15 B
Cleaning of business equipment P 1,000
Repair service of store 3,000
Total casual service income P 4,000

Problem 4 – 16 C
Total purchases P500,000
Transportation expenses 5,000
Unsold goods ( 40,000)
Cost of goods sold P465,000

Problem 4 – 17 C
Inventory, beginning P 20,000
Purchases 1,200,000
Purchase discounts ( 10,000)
Purchase returns ( 40,000)
Transportation in 5,000
Inventory end ( 50,000)
Cost of sale P1,125,000

Problem 4 – 18 C
Year 1 Year 2
Inventory, beginning P 50,000
Inventory, ending (P50,000) ( 30,000)
Purchases 850,000 900,000
Freight – in 10,000 15,000
Purchase discount ( 20,000) ( 25,000)
Cost of sales P790,000 P910,000

Problem 4 – 19 B
Sales P1,275,000
Sales returns ( 25,000)
Net sales P1,250,000
Less: Cost of goods manufactured and sold
Purchases – raw materials P 540,000
Freight-in 20,000
Raw materials, ending inventory ( 10,000)
Raw materials used P 550,000
Direct labor 400,000
Factory overhead 200,000
Total manufacturing cost P1,150,000
Work-in-process, ending inventory ( 100,000)
Finished goods, ending inventory ( 50,000) 1,000,000
Business income P 250,000
INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 18
SUGGESTED ANSWERS
Chapter 4: Gross Income

Problem 4 – 20 B
Advance payment P 2,000
Additional collection 8,000
Office machine 3,000
Gross service income P13,000

Problem 4 – 21 A
Professional fee, accounting services P 500,000
Salaries of accounting staff ( 150,000)
Accounting supplies ( 10,000)
Gross service income P 340,000

Problem 4 – 22 B
Service charges:
Originating from the Philippines P 150,000
Collection abroad of collect messages originating in the Philippines 60,000
Gross income for Philippine Income Tax computation P 210,000

Problem 4 – 23 B
Rent for year:
200A P 80,000
200B 480,000
200C 40,000
200B Reportable income P 600,000

Problem 4 – 24 B
Rent income P360,000
Real property tax assumed by the lessee 10,000
Unrestricted advance rent 60,000
Taxable gross receipts P430,000

Problem 4 – 25 D
Outright Spread-out
Year 1 Outright method P240,500
Year 1 Spread-out method
Value of investment P240,500.00
Less: Accum. depreciation [(P240,500 - P560)/8 yrs] x 4.75 yrs 142,464.3
7
Book value, end of lease P 98,035.63
Divided by remaining years of contract 4.7
5
Annual income from improvement P 20,639
Multiplied by months in a year 9/12
Year 1 spread-out – rent income on improvement P 15,479

Problem 4 – 26 C
Outright Spread-out
Outright P180,000
Spread-out P - 0 -

Problem 4 – 27 C
Cost of improvement P300,000
Less: Accumulated depreciation at the end of the lease (P300,000/6) x 4 years and 7 months 229,167
Book value at the end of the lease P 70,833
Divided by number of years until the termination of lease contract = 4 years and 7 months 4.58
INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 19
SUGGESTED ANSWERS
Chapter 4: Gross Income

Annual additional income P 15,454

Multiplied by number of years expired (from March 31, 2008 to December 31, 2010) 2.75
Reported additional income from improvement (P42,500)
Book value of improvement at the time of pre-termination
Cost P300,000
Less: Accum. depreciation at pre-termination (P300,000/6) x 2.75 years 137,500 162,500
Additional income in 2010 from the pre-termination of contract 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 P 40,000
Interest income from expanded foreign currency deposit 60,000
Total taxable interest income 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%) P 10,000
Royalty income from franchising (P200,000 x 20%) 40,000
Royalty income from gold mine (P500,000 x 20%) 100,000
Total final tax P150,000

Problem 4 – 32 D
Copyright Patent
Gross royalties: P 35,000
Copyright (P31,500/90%)
Patent (P20,000/80%) P 25,000
Income tax – final
Copyright (P35,000 x 10%) ( 3,500)
Patent (P25,000 x 20%) . ( 5,000)
Income after tax P 31,500 P 20,000

Problem 4 – 33 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) P 49,000
Gambling winnings 300,000
Beauty contest winnings 100,000
Taxable prizes and winnings P449,000

Problem 4 – 37 D
Year 1 Year 2 Year 3
Income (loss) P100,000 (P 20,000) P 50,000
INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 20
SUGGESTED ANSWERS
Chapter 4: Gross Income

Less: Bad debts written off 25,000 10,000 5,000

Income loss before bad debts recovery P 75,000 (P 30,000) P 45,000
Bad debts recovery of previous year with tax benefit . 25,000 5,000
Taxable income P 75,000 (P 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 None
Year 2: Bad debt recovery 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 P 10,000
Local taxes 500
Reportable income from tax refund P 10,500

Problem 4 – 41 C
Annuity received P 20,000
Present value (P20,000 x 0.9091) 18,182
Interest income - Taxable annuity 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 P 5,880
Present value (P5,880 x 0.8928) 5,250
Interest income - Taxable annuity P 630

Problem 4 – 43 B
Excess of withdrawable amount ($10,000 - $1,000) $ 9,000
Multiplied by exchange rate per 1 dollar P 50
Reportable income received by error P450,000

Problem 4 – 44 C
Average monthly unreturned change to clients P 4,000
Multiplied by number of months in a year 12
Illegally obtained income - taxable P48,000

Problem 4 – 45
Total receipts, 200B P 425,000
Less: Direct costs- commission (P425,000 x 65%) P 276,250
Rental expense (P3,000 x 12) 36,000
Depreciation 5,000
Supplies used 1,750 319,000
Gross income of A-1 Barbershop 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.
INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 21
SUGGESTED ANSWERS
Chapter 4: Gross Income

Problem 4 – 46
Salary P300,000
Corporate shares received (1,000 shares x P100) 100,000
Cancellation of debt in lieu of service rendered 50,000
Profit sharing 40,000
Gross taxable compensation income P490,000

Problem 4 – 47
Salary (P25,000 + P302,000) P327,000
Income tax paid by the employer 5,000
Note receivable 20,000
Total compensation P352,000
Business gross income P 400,000
Allowable expenses ( 250,000) 150,000
Prepaid rent income 50,000
Bad debts recovered previously written- off (P38,000 x 60%) 22,800
Taxable income subject to tabular tax P574,800