Problem 3-1 TRUE OR FALSE

1. All increases in taxpayers wealth are taxable income.

2. An accrued interest income credited to taxpayers is considered constructively received.
3. The theory of income constructively received is designed to prevent taxpayer to delay reporting income.
4. ncome earned by a !ilipino citi"en from all sources is taxable in the #hilippines.
$. f compensation is received in the form of noted or other evidences of indebtedness% the basis of tax is the
face value of the instrument.
&. #remium paid by the employer on life insurance coverage of employee wherein the beneficiary is the
employer% the basis of tax is the premium paid.
'. (nder the accrual basis of reporting income% income is reported in the year of collection.
). *ost taxpayers elect to report income in a fiscal year basis.
+. n general% trading and manufacturing business use accrual method while servicing businesses use cash
method of reporting income.
1,. -orporations whose business consists of the sale of inventories cannot use cash method.
11. A taxpayer engaged in instalment sale of personal goods on a regular basis is allowed to report income by
instalment only if the initial basis exceeds 2$. of the selling price.
12. ncome from farming maybe derived from raising and producing products and sale of ordinary farm assets.
13. The difference between cash and accrual methods of reporting farming income is the inventories.
14. (nder the crop basis% the entire cost of producing the crop is deductible only from gross income in the year
in which the crop is earned.
PROBLEM 3-2
1. /tatement 0 All wealth that flows into the hands of taxpayer other than mere return of capital is income.
/tatement 20 All earnings are taxable with income tax.
A. 1nly statement 1 is correct.
2. 1nly statement 2 is correct.
-. 2oth statements are correct.
3. 4either statement are correct.
2. 5hich of the following is not classified as income6
A. 7ain derived from labour
2. 8eturn on capital
-. 9xcess of selling price over cost of assets sold
3. 7ift received
3. 5hich of the following are not characteristics of income6
A. ncrease in taxpayers wealth
2. 8eturn of taxpayers wealth
-. 8eali"ation of receipt of gain
3. 9arnings constructively reali"ed
4. 5hich of the following is not a criterion of a taxable income6
A. There must be a gain
2. The gain need not actually received.
-. The gain must be included by the law as treaty from taxation.
3. The law as treaty from taxation must exclude the gain.
$. f a property is received in lieu of cash compensation% the basis of tax is the
A. /upposed amount of cash to be receive
2. Agreed value of the property received
-. !air mar:et value of the property received
3. /alvage value of the property received.
&. f services are rendered for the cancellation of debt% the basis of tax is the
A. !air mar:et value of the service rendered
2. Amount of obligation omitted
-. !air mar:et value of the debt cancelled
3. /upposed amount of cash to be receive
'. f the taxpayer is sub;ected to ;eopardy assessment% his taxable accounting period would be
A. -alendar period -. /hort period
2. !iscal period 3. <ariable period
). 5hich of the following businesses is=are normally reporting income on accrual basis6
A. 8eal property lessor -. Trading business
2. #rofessional partnership 3. 2ro:erage business
+. 5hich of the following is=are generally sub;ect to final tax6
i. -ompensation income
ii. 2usiness income
iii. #assive income
iv. -apital gain
A. i% ii% iii and iv -. ii and iv only
2. i and ii only 3. ii only
1,. 5hich of the following is=are reportable >returnable? in the annual income tax return6
v. -ompensation income
vi. 2usiness income
vii. #assive income
viii. -apital gain
-. i% ii% iii and iv -. ii and iv only
3. i and ii only 3. ii only
11. all of the following are passive income except
A. 7ross profit -. interest
2. 8oyalty 3. 3ividend
12. 5hich of the following is not correct6
A. All income received is taxable
2. Taxable income is e@ual to gross income less statutory deductions
-. 4et income is synonymous to taxable income
3. ncome derived from illegal activities is taxable income
13. 1ne of the following is taxable income.
A. ncome from a @ualified pension plan
2. -ompensation from personal in;uries
-. /toc: dividend received
3. <acation leave with pay
14. 5hich of the following is incorrect6
Taxable income
Aear 1 Aear 2
A. 8ent for year 2 collected in year 1 no yes
2. ncome from year 1 sales collected in year 2 yes no
-. /ervices for year 1% collected in year 2 no yes
3. ncome from year2 sales% collected in advance in year 1 no yes
1$. /tatement 10 All foreign corporations are taxable only for income earned within the #hilippines.
/tatement 20 All !ilipino citi"ens are taxable for their income earned within and outside the #hilippines.
A. 2oth statements are correct.
2. 1nly statement 1 is correct.
-. 1nly statement 2 is correct.
3. 2oth statements are incorrect
1&. f an individual renders services for a creditor who in consideration thereof cancels the debt% the
cancellation of indebtedness may amount to a
A. 7ift -. 3onation interBvivos
2. -apital contribution 3. #ayment of income
1'. 5hich of the following is correct6
8eportable sub;ect to
!inal taxTax return
A. -ompensation income no yes
2. 2usiness income yes yes
-. #assive income earned within yes no
3. -apital gain on real estate >capital asset? yes yes
1). 5here there are no beginning and ending inventories of farm crops harvested% which of the following is
true6
-ash method Accrual method
A. ncome is greater lesser
2. 9xpense is lesser greater
-. ncome is the same the same
3. 9xpense is greater lesser
1+. 5hich of the following sales is allowed to be reported under instalment reporting of income6
A. 8egular instalment sale of personal property
2. -asual sale of personal property with initial payment of 2$. of the selling price
-. sale of real property with initial payment of 2$. of the selling price
3. all of the above
2,. (nder which case an instalment method of reporting income on instalment sale is allowed6
A. *ovable property is regularly sold on an instalment on instalment by a dealer
2. /ale of real property where the initial payments exceeds 2$. of the selling price
-hoices0
A. 1nly no. 1 -. 2oth nos. 1and 2
2. 1nly no. 2 3. 4one.
PROBLEM 3-3 NET ASSETS APPROACH
The records of 8oco trading for year 2,,+ show the following0
Canuary 1% 2,,+ 3ecember 31% 2,,+
Assets #4,,,,, #3,,,,,
Diabilities 1$,,,, $,,,,
3uring the year% the owner made a total withdrawal from the business amounted to 24$,,,. Eow much is the
reportable income for year 2,,+6
A. 24$,,, c. B,B
2. 1,,,,, 3. >1,,,,,?
Problem 3-4 Increae !n ne" #or"$
The beginning net assets of a single proprietorship was 1$,%,,,. At the end of the year% the single proprietorship has
net assets of 1,,%,,,. 3uring the year% the owner made personal drawing of ',%,,, from the business. The
business income for the year is
a. #$,%,,, loss c. #2,%,,, loss
b. #$,%,,, income d. #2,%,,, income
Problem 3-% Increae !n ne" #or"$
The net assets of a single proprietorship at the start of the year is 2$,%,,,. At the end of the year% it has total assets
of #$3,%,,, and total liabilities of #13,%,,,. There are neither additional investments nor drawings during the year.
ts income for the year using net worth method of computation is
a. #4,,%,,, c. #1$,%,,,
b. #2),%,,, d. #12,%,,,
Problem 3-& Increae !n ne" #or"$
The single proprietorship reported the following changes during the year0
ncrease in total assets #2$,%,,,
3ecrease in total liabilities 1&,%,,,
Additional investments to the business $,%,,,
3rawings during the year 2,%,,,
The business income during the year is
a. #&,%,,, c. #43,%,,,
b. #3),%,,, d. #4$,%,,,
Problem 3-' Re"(rn o) ca*!"al an+ re"(rn on ca*!"al
At the start of the year% 4olis time deposit has a balance of #2$,%,,,. At the end of the year% the account has a
balance of #2),%,,,. There are no additional deposits and there are no drawings during the year.
Eow much is the return of capital and return on capital6
8eturn of capital 8eturn on capital
a. #2$,%,,, #2),%,,,
b. #2),%,,, #2$,%,,,
c. #2),%,,, # 3,%,,,
d. #2$,%,,, # 3,%,,,
Problem 3-, Income Real!-e+
n year 1% F invested in real property in the amount of #1%,,,%,,,. n year 2% the fair value of the real property
is #1%$,,%,,,. n year 3% the property was sold for #1%),,%,,, and incurred disposal cost of #$,%,,,. The
amount of income for each year would be
Aear 1 Aear 2 Aear 3
a. # , $,,%,,, 3,,%,,,
b. # , 2$,%,,, 2$,%,,,
c. # , , '$,%,,,
d. #2$,%,,, 2$,%,,, 2$,%,,,
Problem 3-. Ta/able 01 Non-"a/able !ncome
1rangs income during the year are as followsG salaryB #2&,%,,, >including 13
th
month pay?G raffle winningsB
#',%,,, and #hilippine lotto winningsB #$,,%,,,.
Eow much is the taxable and nonBtaxable income of 1rang6
Taxable 4ontaxable
a. #31,%,,, #$2,%,,,
b. #24,%,,, #$,,%,,,
c. #3,,%,,, #$&,%,,,
d. #24,%,,, #$+,%,,,
Problem 3-12 So(rce o) !ncome
1gie is a resident !ilipino citi"en. 3uring the year% his earnings are as followsG
5ithin 1utside
-ompensation #1),%,,, #12,%,,,
ncome from grocery store $,%,,,
/hare in lotto winnings 1,,%,,,
The total income taxable in the #hilippines would be0
a. #23,%,,, c. #3$,%,,,
b. #3,,%,,, d.#4$,%,,,
Problem 3-11 Normal "a/ 01 F!nal "a/
Hi:ay reports the following earnings0
-onsultancy fee #),%,,,
/alary 3,,%,,,
#ri"es in raffle tic:et 2,%,,,
7ain on sale of principal residence 4,,%,,,
Eow much is the income reportable in T8 and sub;ect to final taxes6
/ub;ect to T8 /ub;ect to final tax
a. #3,,%,,, #$,,%,,,
b. #32,%,,, #4),%,,,
c. #3),%,,, #42,%,,,
d. #4),%,,, #32,%,,,
Problem 3-12 Ca$ rece!0e+ a Com*ena"!on
-ris% a public school teacher% received a monthly salary of #12%,,, for the first 4 months off the taxable year.
/ubse@uently% he was promoted as department head resulting to an increase in his cash salary #1$%,,, per month.
The gross compensation income of *r. /acayanan would beG
a. #12,%,,, c. #1$&%,,,
b. #1$,%,,, d. #1&)%,,,
Problem 3-13 Pro*er"3 rece!0e+ a com*ena"!on
Atty. #asiclab% received a second hand car from his employer TA Daw 1ffice for successfully defending a criminal
case. The car has a cost of #4,,%,,, and its accumulated depreciation amounts to #3,,%,,,. The prevailing mar:et
value of the car of the same model is #12,%,,,% but the new model is p$,,%,,,.
Eow much is the reportable income of #asiclab6
a. #1,,%,,, c. #4,,%,,,
b. #12,%,,, d. #$,,%,,,
Problem 3-14 Ser0!ce rece!0e+ !n l!e( o) com*ena"!on
3anny !loro wor:s as a care ta:er with a monthly salary of #$%,,, in the house of Atty. #anfilo /alango. Atty.
/alango successfully defended the former against a vehicular accident case. The prevailing lawyers fee of Atty.
/alango is #&%,,,% which they agreed that such shall become *r. !loros salary for a month. Eow much is the
compensation income of *r. !loro in the said month6
a. #&%,,, c. #1%,,,
b. #$%,,, d. #,
Problem 3-1% No"e rece!0e+ !n l!e( o) com*ena"!on
*r. Teofilo Alcayde received a note with a face value of #3,%,,, as a dissertation advising fee from *iss 4ita 8ica.
The note is nonBinterest bearing and is payable within one year. The prevailing mar:et rate of the same nature of
note is 1,.. The present value factor of 1,. annuity of #1 is ,.+,+.
5hat is the amount of income to be reported by *r. Alcayde upon receipt of the note6
-ompensation nterest
a. #3,%,,, #,
b. #2'%2', #2%'3,
c. #2'%2', #,
d. #2'%,,, #3%,,,
Problem 3-1& No"e rece!0e+ !n l!e( o) com*ena"!on
1n Cune 3,% 2,,+% *r. 9ly !elix received a twoByear 12. interest bearing note amounting to #$,%,,, as a
compensation. As of 3ecember 31% 2,,+% what amount of income *r. !elix shall report6
-ompensation nterest
a. #$,%,,, #3%,,,
b. #$,%,,, #&%,,,
c. #4'%,,, #3%,,,
d. #4'%,,, #,
Problem 3-1' Ca$ 01 Accr(al me"$o+
A% a single proprietor engaged in service business reported the following business income and expenses0
/ervice income #$,,%,,,
-ollections during the year #4+,%,,,
9xpenses actually incurred during the year #1$,%,,,
9xpenses paid during the year #2,,%,,,
Eow much is the net income from business before personal exemption6
a. #3$,%,,, c. #3,,%,,,
b. #34,%,,, d. #2+,%,,,
Problem 3-1, Ca$ 01 Accr(al me"$o+
n *arch 1% 2,,+% F -orporation reported the following business income and expenses0
/ales #1%,,,%,,,
-ost of sales #&,,%,,,
1perating expenses #2,,%,,,
7ain from sale of old furniture # 2,%,,,
f 2,. of operating expenses of F is prepaid expenses% how much is the taxable income6
a. #2&,%,,, c. #22,%,,,
b. #24,%,,, d. #2,,%,,,
Problem 3-1. In"allmen" ale o) *eronal *ro*er"3
*ar sold a painting >capital asset? which he purchased in 2,,' at a cost of #3%,,,% on the following terms0
Cune 1% 2,,+ downpayment #1%,,,
August 1% 2,,+ installment due #1%,,,
1ctober 1% 2,,+ installment due #2%,,,
1ctober 1% 2,1, installment due #4%,,,
1ctober 1% 2,11 installment due #4%,,,
1. !or year 2,,+% *arifel will report a gross income of
a. #+%,,, c. #3%,,,
b. #4%$,, d. #1%$,,
2. f *arifel is a dealer in paintings% for 2,,+ he will report a gross income of
a. #1%$,, c. #4%$,,
b. #3%,,, d. #+%,,,
Problem 3-22 In"allmen" ale o) real *ro*er"3
n 2,,+% -ali -orporation sold by instalment a land for #2%,,,%,,, which was previously purchased for
#1%4,,%,,,. 1ther expenses related to the sale amounted to #1,,%,,,.
1. f -ali is a realty corporation and collected #$,,%,,, as initial payment% how much is the income tax for the
said sale in 2,,+6
a. #3'%$,, c. #12,%,,,
b. #$2%$,, d. #1'$%,,,
2. f -ali classifies the land as a capital asset% how much is the 2,,+ income tax for the sale if the initial
payment received is #&,,%,,,6
a. #1'$%,,, c. #$2%$,,
b. #12,%,,, d. #43%'$,
Problem 3-21 4e)erre+ *a3men" me"$o+
1n 1ctober 1% 2,,+% (no sold a car costing #$,,%,,, payable as follows0
1
st
year0 cash #3,,%,,,
2
nd
year0 12. interest bearing note #2,,%,,,
3
rd
year0 12. interest bearing note #$,,%,,,
Eow much is the total reportable income in the year 2,,+6
a. #$,&%,,, c. #3,,%,,,
b. #$,,%,,, d. # &%,,,
Problem 3-22 Income )rom con"r(c"!on con"rac"
The contract price of the pro;ect is #1%,,,%,,,. Actual cost installed in year 1 amounted to #+,%,,,% which is 2,.
of the total estimated cost. Eow much should be reported as income under percentage of completion method6
a. #2,,%,,, c. #2,,%,,,
b. #11,%,,, d. #11,%,,,
Problem 3-23 Income )rom con"r(c"!on con"rac"
The total contract price of the pro;ect is #1%2,,%,,,. This was constructed as follows0
Aear -ost for the year -ompletion as of year end
2,,) #432%,,, &,.
2,,+ #1)4%2$, )$.
2,1, #1,3%'$, 1,,.
The income to be reported in year 2,1, under percentage of completion method would be
a. #4),%,,, c. #13&%2$,
b. #4,3%'$, d. #'&%2$,
Problem 3-24 Cro* ba!
The citrus farm reported the following0
Aear -ost Earvest at selling price
1 #1,,%,,, # ,
2 #2,,%,,, # ,
3 # $,%,,, #$,,%,,,
4 #$,%,,, #4,,%,,,
Eow much should be the amount of reportable income in year 36
a. #1$,%,,, c. #4$,%,,,
b. #2$,%,,, d. #$,,%,,,
Problem 3-2% Cro* ba!
A farmer started planting pulp trees in year 1 and harvested the trees $ years later with total value of #2%,,,%,,,.
The total direct cost related to the harvest are as follows0
Aear 10 #3,,%,,, Aear 30 #1,,%,,, Aear $0 #4,,%,,,
Aear 20 #1,,%,,, Aear 40 #1,,%,,,
Eis income under crop basis of reporting is
Aear 1 Aear 2 Aear 3 Aear 4 Aear $
a. #1,,%,,, #3,,%,,, #3,,%,,, #3,,%,,, # ,
b. #3,,%,,, #1,,%,, #1,,%,,, #1,,%,,, #4,,%,,,
c. # , # , # , # , #1%,,,%,,,
d. #1%,,,%,,, # , # , # , # ,
Problem 3-2& Income )rom )arm!n5
Assume the following data of a farmer for two years0
Aear 1 Aear 2
!arm harvest 1,, cavans 2,, cavans
Earvest sold ), cavans 1+, cavans
Earvest unsold% year end 2, cavans 3, cavans
/elling price #$,,=cavan #$,,=cavan
8e@uired0 -ompute the gross income using >a? cash and >b? accrual methods.
Problem 3-2' Farm!n5 b(!ne !ncome
Ha #olinar% a farmer of Tacurong% reported the following revenues and expenses in his farm for the year 2,,F0
8evenue from livestoc: and farm products raised # $,%,,,
8evenue from livestoc: and farm products purchased #1$,%,,,
8ent income% lease of one hectare farm #1,,%,,,
!arm e@uipment sold # 2$%,,,
-ost of livestoc: and farm products purchased # +,%,,,
(nsold livestoc: of farm products raised0
2eginning # &%,,,
9nding # +%,,,
-arrying value of farm e@uipment sold >held for 1, months? # 2$%,,,
8e@uired0 -ompute for the gross income under the following situations0
1. -ash method
2. Accrual method
Con"!n(a"!on o) c$a*"er 2
Problem 2-' Ta/ aemen"6re)(n+ *roce+(re
In"r(c"!on7 3etermine the last day to exercise the right of the taxpayer.
S!"(a"!on 17
3ate of tax erroneously paid April 1$% 2,,)
3ate of claim for refund *ay 2,% 2,1,
4o decision on the claim of refund was made
Iuestion 10 5hen is the last day to appeal to the -TA6
S!"(a"!on 27
3ate of tax erroneously paid Cune 1,% 2,,)
3ate of claim for refund was filed with 28 *arch 3% 2,1,
3ate of 28 decision of denial was received April $% 2,1,
Iuestion0 5hen is the last day to appeal to the -TA6
S!"(a"!on 37
3ate of tax erroneously paid Cune 1,% 2,,)
3ate of claim for refund was fled with 28 Cune 1,% 2,,+
3ate of 28 decision of grant was received August 1% 2,,+
3ate of refund chec: received Culy 1$% 2,,+
Iuestion0 f the refund chec: was not encashed% when is the starting date for the government to forfeit6
S!"(a"!on 47
3ate of tax erroneously paid Cune 1, % 2,,)
3ate of claim for refund was filed with 28 Cune 1,% 2,,+
3ate of 28 decision of grant was received August 21% 2,,+
3ate of tax credit certificate received Culy 3,% 2,,+
Iuestion0 f the tax credit certificate was not utili"ed or revalidated% when is the starting dste for the
government to revert it to the general fund6
S!"(a"!on %7
3ate of assessment was received Canuary 2% 2,,+
#etition for reconsideration was filed with 28 Canuary 12% 2,,+
3ocuments to support petition submitted Canuary 22% 2,,+
4o decision on the protest as of Culy 12% 2,,+
Iuestion0 5hen is the last day to appeal to the -TA6
S!"(a"!on &7
Assessment received Canuary $% 2,,+
#etition for reconsideration filed with 28 !ebruary 1% 2,,+
3ocuments to support petition submitted !ebruary '% 2,,+
3ecision of 28 denying the petition *arch 22% 2,,+
2
nd
re@uest for reconsideration filed with 28 *arch 3,% 2,,+
3ecision on 2nd re@uest denied April 12% 2,,+
Iuestion0 5hen is the last day to appeal to the -TA6
S!"(a"!on '7
3ate of appeal to the -TA April 21% 2,,+
3ate adverse decision of the -TA Cune 1% 2,,+
3ate the -TA adverse decision received Cune 1,% 2,,+
Iuestion0 5hen is the last day to appeal to the -ourt of Appeals6
S!"(a"!on ,7
3ate of appeal to the -A Cune 1,% 2,,+
3ate of adverse decision of the -A August 2,% 2,,+
3ate of the -A adverse decision received Cune 2$% 2,,+
Iuestion0 5hen is the last day to appeal to the /upreme -ourt6
S!"(a"!on .7
3ate the real property was levied Canuary $% 2,,+
3ate the real property levied was sold *arch 1% 2,,+
Iuestion0 5hen is the last day to redeem the real property6