15

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

SUGGESTED ANSWERS

Chapter 4: Gross Income

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.

16

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

SUGGESTED ANSWERS

Chapter 4: Gross 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 13 th 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
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.

17

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

SUGGESTED ANSWERS

Chapter 4: Gross Income

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: 13 th 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

Unused 10-day vacation leave is nontaxable if it is converted into cash (Rev. Regs. No. 10-2008;
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

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

SUGGESTED ANSWERS

18
Chapter 4: Gross Income

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

P144,000
36,000
34,000
27,270
P241,270

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
B
First employment resigned

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

P300,000

P10,000

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

SUGGESTED ANSWERS

Chapter 4: Gross Income

Problem 4 16

Compensation income (P13 P12) x 10,000

Capital gain (P15 P13) x 10,000

Problem 4 17

Compensation
P 10,000

Capital gain
P 20,000

Compensation income (P25 P23) x 10,000

Capital gain (P30 P25) x 10,000

Compensation
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
Inventory, beginning
Purchases
Purchase discounts
Purchase returns

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

C
P 20,000
1,200,000
( 10,000)
( 40,000)

20

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

SUGGESTED ANSWERS

Chapter 4: Gross Income

Transportation in
Inventory end
Cost of sale
Problem 4 24

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

Inventory, beginning
Inventory, ending
Purchases
Freight in
Purchase discount
Cost of sales

(P50,000)
850,000
10,000
( 20,000)
P790,000

Problem 4 25
B
Sales
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
Advance payment
Additional collection
Office machine
Gross service income

Year 2
P 50,000
( 30,000)
900,000
15,000
( 25,000)
P910,000

P1,275,000
(
25,000)
P1,250,000
P 540,000
20,000
(
10,000)
P 550,000
400,000
200,000
P1,150,000
( 100,000)
( 50,000)

1,000,000
P 250,000

Problem 4 27
B
Professional fee, accounting services
Less: Direct costs of services:
Salaries of accounting staff
Accounting supplies
Gross business income for MCIT purposes*

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

P500,000
P150,000
10,000

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

P50,000,000

21

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

SUGGESTED ANSWERS

Chapter 4: Gross Income

Trading gain
Less: Cost of services:
Lending and investments funds salaries
Interest expenses paid to depositors
Gross income for MCIT purposes

Problem 4 29

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

5,000,000
P55,000,000

Interest income from clients

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

P10,000,000
5,000,000
2,000,000
P17,000,000

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

6,000,000
P11,000,000

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

P 150,000
60,000
P 210,000

Problem 4 31
B
Rent for year:
200A
200B
200C
200B Reportable income

P 80,000
480,000
40,000
P 600,000

Problem 4 32

1
.

Letter C

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

SUGGESTED ANSWERS

Chapter 4: Gross Income

Advanced deposit
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

P 40,000
200,000
5,000
2,500
P247,500

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

Problem 4 33

P200,000
5,000
2,500
P207,500
100,000
P307,500

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
Divided by remaining years of contract

Outright
P240,500

P240,500.00
142,464.37
P 98,035.63
4.7
5
P
20,639
9/12
P
15,479

Annual income from improvement

Multiplied by months in a year
Year 1 spread-out rent income on improvement
Problem 4 34
Outright
Spread-out

Spread-out

C
Outright
P180,000

Spread-out
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.

23

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

SUGGESTED ANSWERS

Chapter 4: Gross Income

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
P300,000
Less: Accum. depreciation at pre-termination (P300,000/6) x 2.75 years
137,500
Additional income in 200D from the pre-termination of contract

Problem 4 36
Interest income from
Interest income from
Interest income from
Total taxable interest

A
an investment in a 10-year bond
5-year time deposit in Philippine bank
expanded foreign currency deposit
income

P300,000
229,167
P 70,833
4.58
P 15,454
2.75
(P42,500)

162,500
P120,000

P 40,000
50,000
60,000
P150,000

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%)
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
Problem 4 40

1
.

P 10,000
40,000
100,000
P150,000

Letter B
Royalties within derived from:

Copyright
P 35,000

Patent

P 25,000
( 3,500)
.
P 31,500

( 5,000)
P 20,000

24

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

SUGGESTED ANSWERS

Chapter 4: Gross Income

Pain reliever invention (P100,000 x 20%)

Musical compositions (P200,000 x 10%)
Books (P500,000 x 10%)
Final tax on royalty income
2
.

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

Letter D
Royalties outside derived from:
Pain reliever invention
Musical compositions
Books
Royalty income subject to normal tax

P200,000
100,000
300,000
P600,000

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.
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
Income (loss)

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

C
Year 1
P100,000

Year 2
(P 20,000)

Year 3
P 50,000

25

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

SUGGESTED ANSWERS

Chapter 4: Gross Income

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

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

10,000
(P 30,000)
25,000
(P 5,000)

5,000
5,000
P 40,000
8,000
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
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

P 10,000
500
P 10,500

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

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-489-2005
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
Annuity received

D
P 5,880

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

SUGGESTED ANSWERS

Chapter 4: Gross Income

Present value (P5,880 x 0.8928)

Interest income - Taxable annuity

5,250
630

Problem 4 52
B
Excess of withdrawable amount ($10,000 - $1,000)
Multiplied by exchange rate per 1 dollar
Reportable income received by error

$ 9,000
P 50
P450,000

Problem 4 53
C
Net increase in net asset
Less: Salary in a year (P5,000 x 12)
Illegally obtained income - taxable

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

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
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%
Car more than 1 year (P100,000 P50,000) x 50%
Gross income subject to regular tax
2.

Unutilized portion of sale of residential house

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

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

P300,000
50,000

(P5,000)
25,000

20,000
P370,000

P12,000

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

SUGGESTED ANSWERS

Chapter 4: Gross Income

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

P327,000
5,000
20,000
P352,000
P 400,000
( 250,000)

150,000
50,000
22,800
P574,800