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

CHAPTER 4

GROSS INCOME
Problem 4 1 TRUE OR FALSE
1. True
2. True
3. True
4. False cost of living allowance is part of a taxable compensation income.
5. True
6. False Religious officers income is subject to income tax.
7. True
8. True
9. False , income of debtor = amount of debt settled
10.False transportation allowance pre-computed on a daily basis is not subject to tax.
11.False there is no income because the actual expenses is greater than the advances.
12.True
13.False, the rule on MCIT is being described.
14.True
15.True
Problem 4 2 TRUE OR FALSE
1. False tips are taxable because there is no law exempting it from income tax.
2. True
3. False Not income but a liability in compliance with the trading business rule.
4. False Under service business, advances from clients are to be reported as income.
Include as income because the advanced rental is without restriction.
5. True
6. True
7. False because estimated bad debts is not allowed to be deducted from gross business
income.
8. True
9. False Not an option to report, but required to report.
10.False the return of premium from insurance company is not taxable.
11.True
12.False income should be realized to be taxable.
13.True
14.False As a rule, income obtained illegally is taxable.
15.False As a rule, income received by error is reportable income.
Problem 4 3 TRUE OR FALSE
1. False This tax-exemption is granted only to public employees and applicable to
accumulated monetized vacation and sick leave credits.
2. False Only 13th month pay is nontaxable within P30,000 ceiling.
3. True
4. False proceeds of life insurance due to death is nontaxable regardless of who is the
beneficiary.
5. False as a rule board and loading furnished by an employer is taxable, except when it
applies to employers benefit rule.
6. True

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

7. False not taxable income because the dividend received is still stock though different in
class.
8. True
9. True
10.True
11.False The rule of P10,000 and below applies to prizes not winnings.
12.False Only damages resulting from injuries is nontaxable.
13.True
14.False this rule applies to winnings. Prizes amounting to P10,000 and below is subject to
normal tax.
15.True
Problem 4 4 TRUE OR FALSE
1. True
2. True
3. False Income from profession
4. True
5. True
6. False Only those employees who can meet the requisites are exempt from income tax
even if the retirement plan is BIR approved.
7. True
8. False Not taxable.
9. False Overtime pay of MWE is nontaxable.
10.True
11.True
12.False Interest expense of a bank is treated as part of cost of service.
13.False Advance collection of rent income is taxable.
14.False All earnings of a resident Filipino citizen from all sources are taxable in the
Philippines.
15.False Subject to a normal tax of 30% because such interest income is a normal
operating income of the bank.
Problem 4 5
1. D
2. C
3. C
4. A
5. D
6. D
7. A
8. B
9. A
10.B

Problem 4 6
1. D
2. B
3. D
4. B
5. A
6. B
7. C
8. A
9. C
10. D

Problem 4 8
A
Net take home pay
Add: Withholding income tax
Total
Less: 13th month pay
Gross reportable compensation

Problem 4 7
1. D
2. C
3. B
4. C
5. A
6. B
7. D
8. B
9. D
10. C
P180,000
30,000
P210,000
10,000
P200,000

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

Unused 10-day vacation leave is nontaxable if it is converted into cash (Rev. Regs. No. 102008; BIR Ruling No. 93-34). In the above problem, the 10-day vacation leave was actually
availed; hence, taxable.
Problem 4 9
D
Salary (P370,000 + P50,000)
Per diem as a board of director
Taxable thirteenth month pay (P35,000 P5,000)
Gross taxable compensation income

P420,000
200,000
5,000
P625,000

Problem 4 10 B
Salary
Overtime pay
13th month pay and other bonuses
Total compensation income

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

Problem 4 11
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 13 th month pay and other benefits amounting to
P30,000 and below is not taxable. Since the 13 th 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 12

Salary (P120,000 + P24,000)

Overtime pay
Payment of services (P4,000 + P30,000)
Present value of non-interest bearing notes (P30,000 x
0.909)
Reportable taxable income per ITR

P144,00
0
36,000
34,000
27,27
0
P241,27
0

In general, interest income is subject to final tax; hence not to be reported in the ITR.
Non-interest bearing note is to be reported at its discounted value when received.
(Sec. 2.78.1, Rev. Reg. No. 2-98)
Problem 4 13
D
(First employment for 30 years received at
the age of 50)

P500,000

Aside from the requirement that the plan should be reasonable, the Tax Code requires that the retiring
employee should have been in the service of the same employer for at least ten years and is not less
than fifty years of age at the time of his retirement. The taxpayer should not also have previously
availed of the privilege under a retirement benefit plan for the same or another employer.)

Problem 4 14

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

First employment resigned

P300,000

Problem 4 15 C
Gross compensation income (1,000 x P10)
Problem 4 16

Compensation income (P13 P12) x 10,000

Capital gain (P15 P13) x 10,000
Problem 4 17

P10,000

Compensatio
n
P 10,000

Capital gain
P 20,000

Compensation income (P25 P23) x 10,000

Capital gain (P30 P25) x 10,000

Compensatio
n
P 20,000

Capital gain
P 50,000

Correction: The option was exercised and sold in year 200C when the market price was P30.
Problem 4 18 C
Regular compensation per month
Cancellation of indebtedness (P300,000
P275,000)
Total compensation income December
200B
Problem 4 19 B
Insurance premium beneficiary Sico
Problem 4 20 A
Basic compensation (P30,000 x 12)
Shares of stock (P100 x 100)
Stock option (P120 P80) x 100
Annual insurance premium (P4,000 x 50%)
Gross compensation
Problem 4 21 B
Cleaning of business equipment
Repair service of store
Total casual service income
Problem 4 22 C
Total purchases
Transportation cost on purchases
Unsold goods
Cost of goods sold
Problem 4 23 C
Inventory, beginning
Purchases

P 50,000
25,000
P75,000

P5,000
P360,000
10,000
4,000
2,000
P376,000
P 1,000
3,000
P 4,000

P500,000
5,000
( 40,000)
P465,000
P 20,000
1,200,000

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

Purchase discounts
Purchase returns
Transportation in
Inventory end
Cost of sale
Problem 4 24

( 10,000)
( 40,000)
5,000
( 50,000)
P1,125,000
C
Year 1

Inventory, beginning
Inventory, ending
Purchases
Freight in
Purchase discount
Cost of sales
Problem 4 25
Sales

(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

B
P1,275,00
0
(
25,00
0)
P1,250,00
0

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
Gross business income

Problem 4 26 B
Advance payment
Additional collection
Office machine
Gross service income

P
540,000
20,000
(
10,000
)
P
550,000
400,000
200,00
0
P1,150,00
0
( 100,000)
( 50,00
0)

1,000,0
00
P

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

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

Problem 4 27 B
Professional fee, accounting services
Less: Direct costs of services:
Salaries of accounting staff
Accounting supplies

P500,000
P150,000
10,00
0

Gross business income for MCIT purposes*

160,000
P340,000

Correction: The requirement should qualify that the gross business income is for MCIT
purposes.
Problem 4 28
B
Interest income from clients
Trading gain
Less: Cost of services:
Lending and investments funds salaries
Interest expenses paid to depositors
Gross income for MCIT purposes
Problem 4 29

P50,000,000
10,000,000
P3,000,000
2,000,000

Interest income from clients

P10,000,00
0
5,000,000
2,000,00
0
P17,000,00
0

Gain on sale of capital assets

Rent income
Total
Less: Cost of services:
Salaries of bank employees assigned in
lending and investments of funds
Depreciation of computers and
teller machines used
Direct supplies used
Interest expense paid to depositors
Gross income for MCIT purposes

P3,700,00
0
600,000
200,000
1,500,00
0

Problem 4 30 B
Service charges:
Originating from the Philippines
Collection abroad of collect messages originating in the
Philippines
Gross income for Philippine Income Tax computation
Problem 4 31
Rent for year:
200A
200B

5,000,000
P55,000,000

6,000,00
0
P11,000,00
0

P 150,000
60,000
P 210,000

B
P 80,000
480,000

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

200C
200B Reportable income

40,000
P 600,000

Problem 4 32

1 Letter C
.
Advanced deposit

P
40,000
200,000

Monthly rental (P20,000 x 10 months)

Annual insurance premium to be paid by the
lessee
(P6,000 x 10/12)
Portion of real estate tax to be paid by the
lessee
(P3,000 x 10/12)
Rent income

5,000
2,50
0
P247,50
0

As a general rule, pre-collection of rental is taxable in full to the lessor when

received regardless of accounting method used.
2 Letter B
.
Monthly rental (P20,000 x 10 months)

P200,00
0

Annual insurance premium to be paid by the

lessee
(P6,000 x 10/12)
Portion of real estate tax to be paid by the
lessee
(P3,000 x 10/12)
Rent income

5,000
2,50
0
P207,50
0
100,00
0
P307,50
0

Commission income (P2,000,000 x 5%)

Reportable taxable income

Problem 4 33

Year 1 Outright method

Year 1 Spread-out method
Value of investment

Outrigh
t
P240,500

Less: Accum. depreciation [(P240,500 - P560)/8 yrs] x

4.75 yrs
Book value, end of lease

Spreadout
P240,500.
00
142,464.
37
P
98,035.63

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

Divided by remaining years of contract

4.
75
P
20,639
9/
12
P

Annual income from improvement

Multiplied by months in a year
Year 1 spread-out rent income on improvement

Problem 4 34

C
Outright

Outright
Spread-out

Spreadout

P180,000
P - 0 -

For spread out method, there is no reportable income from leasehold improvement for year
200B because the said improvement was completed at the end of the year.
Problem 4 35

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
Annual additional income
Multiplied by number of years expired (from March 31, 200B to
December 31, 200D)
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 200D from the pre-termination of
contract

Problem 4 36 A
Interest income from an investment in a 10-year bond
Interest income from 5-year time deposit in Philippine
bank
Interest income from expanded foreign currency
deposit
Total taxable interest income

P300,000
137,500

P300,0
00
229,1
67
P
70,833
4.
58
P
15,454
2.
75
(P42,50
0)
162,5
00
P120,0

P
40,000
50,000
60,00
0
P150,00

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

Note: Technically speaking, the interest from 5-year time deposit in Philippine bank is taxable
because the period involved is not more than 5 years and the deposit is not BSP prescribed
form.
Problem 4 37 D
Year 3 interest income of P4,461.20.
Problem 4 38
D
Royalty income as author (P100,000 x 10%)

P
10,000
40,000
100,00
0
P150,00

Royalty income from franchising (P200,000 x 20%)

Royalty income from gold mine (P500,000 x 20%)
Total final tax
Problem 4 39

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

Copyright
P 35,000

Patent
P 25,000

( 3,500)
.
P 31,500

( 5,000)
P 20,000

Problem 4 40

1 Letter B
.
Royalties within derived from:
Pain reliever invention (P100,000 x 20%)
Musical compositions (P200,000 x 10%)
Books (P500,000 x 10%)
Final tax on royalty income
2 Letter D
.
Royalties outside derived from:
Pain reliever invention
Musical compositions
Books
Royalty income subject to normal tax

P20,000
20,000
50,000
P90,000

P200,00
0
100,000
300,00
0
P600,00
0

In general, royalties derived from sources within the Philippines are subject to a final
tax of 20%, except royalties on books, other literary works and musical compositions
which shall be subject to a final tax of 10%. Royalties received by resident citizens
from sources outside the Philippines shall be subject to normal tax under Section 24
(A) of the NIRC and by the domestic corporation under Section 27 (A) of the NIRC.

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

Problem 4 41

P500,000 - Dividends earned by a domestic corporation from a foreign corporation are taxable.

Problem 4 42 A
The dividend received by a domestic corporation from another domestic corporation is
nontaxable.
Problem 4 43
C
First prize in Talentadong Pinoy
2nd place in bicycle race
3rd place in chess tournament
Amount subject to normal tax

P10,000
6,000
15,000
P31,000

In general, prizes (reward for a contest) are subject to final tax of 20% except if the amount of
the prize is P10,000 or less which will be subject to normal tax. Winnings (reward that depends
on chance) are subject to 20% final tax regardless of amount. [Sec. 24 (B)(1), NIRC]
Problem 4 44 D
First prize raffle draw (P50,000 P1,000)
Gambling winnings
Beauty contest winnings
Taxable prizes and winnings
Problem 4 45

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

C
Year 1

Income (loss)
Less: NOLCO (P25,000 P20,000 P10,000)
Bad debts written off
Income (loss) before bad debts recovery
Bad debts recovery of previous year with
tax benefit
Taxable income

P100,000
25,000
P 75,000
.
P 75,000

Year
2
(P
20,000)
10,00
0
(P
30,000)
25,0
00
(P
5,000)

Year
3
P
50,000
5,000
5,00
0
P
40,000
8,00
0
P
48,000

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 46 D
Year 1: No bad debt recovery
Year 2: Bad debt recovery

None
P 600

Problem 4 47 D
P5,000 local tax recovery.
Problem 4 48 C
Real property tax
Local taxes
Reportable income from tax refund

P 10,000
500
P 10,500

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

Problem 4 49 B
Unfair competition
Loss earnings
Moral damages for breach of contract
Exemplary damages for breach of contract
Interest on damages
Gross income from damage recoveries subject to
tax

P400,00
0
100,000
150,000
50,000
10,00
0
P710,00
0

Actual damages are considered taxable income to the extent that such damages constitute a
loss of anticipated profits, and are non-taxable to the extent they represent a return of capital
or investment. However, moral and exemplary damages awarded as a result of a breach of
contract are subject to income tax, and, consequently, withholding tax. (BIR Ruling No. DA-4892005 dated December 6, 2005)
Take note that the moral damages and exemplary damages awarded were not on account of
injuries or sickness.
Problem 4 50 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 51 D
Annuity received
Present value (P5,880 x 0.8928)
Interest income - Taxable annuity
Problem 4 52 B
Excess of withdrawable amount ($10,000 - $1,000)
Multiplied by exchange rate per 1 dollar
Reportable income received by error
Problem 4 53
C
Net increase in net asset
Less: Salary in a year (P5,000 x 12)
Illegally obtained income - taxable

P 5,880
5,250
P 630
$
9,000
P
P450,00
0
P108,000
60,000
P 48,000

Correction: The increase in net worth should be P108,000.

Note: Income derived from illegal source is taxable even if the taxpayer is a MWE.
Problem 4 54
Gross income

P 425,000

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

In case of taxpayers engaged in the sale of service, gross income means gross receipts less
sales returns, allowances and discounts. [Sec. 27 (A) NIRC]
Problem 4 55
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 56
Licensing fee
Registration fees of delivery trucks
Real estate tax
Community tax
Foreign income tax previously claimed as deduction
Reportable gross income on tax refunds

P 30,000
4,000
5,000
3,000
80,000
P122,000

Problem 4 57
1 Gross income trading business (P500,000 P200,000)
.
Gross income warehouse (P200,000 P150,000)
Net capital gains (loss) on personal properties
Computer more than 1 year
(P10,000 P20,000) x 50%
(P5,000)
Car more than 1 year (P100,000 P50,000) x
25,00
50%
0
Gross income subject to regular tax
2
.

Unutilized portion of sale of residential house

(P1,000,000 P800,000) x 6%

Problem 4 58
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
50,000

20,000
P370,000
P12,000

P327,000
5,000
20,00
0
P P352,000
400,000
( 250,00
150,000
0)
50,000
22,80
0
P574,800