This document provides the suggested answers to problems in Chapter 3 of the textbook "Income Taxation 6th Edition" by Valencia & Roxas. The chapter problems relate to determining taxable income and applying the concepts of cash basis versus accrual basis accounting. Some key points covered: - Problems distinguish between taxable vs. non-taxable income such as gifts/inheritances. - Questions test understanding of residency status and whether income is taxable in the Philippines. - Multiple choice and true/false questions assess knowledge of income concepts like capital gains, business income, compensation. - Problems work through calculations and accounting methods for contractors, farmers, traders to determine reportable taxable income

1. INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS
10
Chapter 3: Concept of Income
CHAPTER 3
CONCEPT OF INCOME
Problem 3 – 1 TRUE OR FALSE
1. True
2. False – Some wealth that made to increase the taxpayer’s net worth are gifts and
inheritance and these are not taxable income.
3. True
4. False – Sometimes a sale results to loss.
5. True
6. True
7. True
8. False – Filipino citizen who is not residing in the Philippines is taxable only for income
earned within.
9. False – The basis of tax is the fair market value of the instrument.
10. False – Not income for the employee and not subject to income tax because the
beneficiary is the employer.
11. False – Accrual reporting reports income when there is earning regardless of
collection.
12. False – Most taxpayer opts for calendar year basis, except corporation which may opt
for fiscal year.
13. True
14. False – Prepaid expenses are not allowable deductions whether cash or accrual
method of reporting income is used.
15. False – There is no rule of 25% initial payment if the sale is made on regular basis of
personal goods.
Problem 3 – 2 TRUE OR FALSE
1. True
2. True
3. False- All income distributed are considered as from all income earned outside the
Philippines.
4. False – Only calendar method starts from January and ends at December of the
taxable year.
5. True
6. True
7. True
8. False – The reportable income of the decedent’s estate is only the earnings after
death.
9. False – Service business is allowed to deduct expenses using accrual method if such
business opted to use accrual method, but the income is still reportable using cash
basis.
10. True
11. True
12. True
13. True
14. True
15. True

2. 11
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS
Chapter 3: Concept of Income
Problem 3 – 3
1. D
2. C
3. A
4. C
5. B
6. C
7. D
8. C
9. B
10. C
11. C
Problem 3 – 4
1. D
2. B
3. B
4. A
5. D
6. A
7. B
8. D
9. C
10. C
Problem 3 – 5
C
Net assets ending (P300,000 – P50,000)
Net assets beg. (P500,000 – P150,000)
Balance
Add: Owner’s drawings
Reportable income (loss)
Problem 3 – 6
B
Increase in total assets
Decrease in total liabilities
Dividend declared
Total
Less: Additional paid-in capital
Unrealized gain
Reportable income
Problem 3 – 7
Increase in total assets
Decrease in total liabilities
Drawings
Additional investments
Total income
Time deposit balance
P1,520,000
330,000
100,000
P1,950,000
P800,000
50,000
850,000
P1,100,000
B
P 250,000
160,000
20,000
( 50,000)
P 380,000
Problem 3 – 8
C
Sales
Less: Cost of sales (P30,000 x 40%)
Rent expense
Kiosk – depreciated value (P3,000 – P2,900)
Interest expense (P20,000 x 1%)
Net income – return on capital
Problem 3 – 9
P250,000
( 350,000)
(P100,000)
240,000
P140,000
P30,000
P12,000
2,000
100
200
14,300
P15,700
D
Return of Capital
P250,000
Return on Capital
P30,000

3. 12
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS
Chapter 3: Concept of Income
Problem 3 – 10
A
There is no reportable income because there is no actual sale yet during 200x.
Problem 3 – 11
D
Interest credited on peso-savings deposit (40,000/80%)
Matured interest on coupon bonds, not yet collected
Cancellation of indebtedness from SMC in which
Arom has equity investments
Share in joint venture not yet received
Payment of damanges deposited in court by a competitor
for unrealized profit
Income realized
P 50,000
80,000
120,000
200,000
60,000
P510,000
Increases or decreases in value of investments are not realized gain or loss. Payment of
damages for unrealized profits is a taxable income. Income may be constructively received
even if not physically transferred to a person for as long as it is credited to the account of, or
segregated in favor of a person.
Problem 3 – 12
C
Year 1
0
0
0
0
Sales
Cost of sale
Disposal cost
Income for each year
Problem 3 – 13
Year 2
0
0
0
0
Year 3
P1,800,000
(1,000,000)
(
50,000)
P 750,000
A
Taxable Income
Salary (P260,000/13) x 12
Raffle winnings
13th month pay (P260,000/13) x 1
Lotto winnings
Problem 3 – 14
D
Within:
Compensation income
Income from grocery store
Outside:
Compensation income
Lotto winnings
Total income taxable in the Philippines
Nontaxable
Inco
me
P240,000
70,000
.
P310,000
P 20,000
500,000
P520,000
Taxable Income
P180,000
50,000
120,000
100,000
P450,000
Note: Lotto winnings earned outside the Philippines by a resident Filipino citizen are taxable
in the Philippines.
Problem 3 – 15
B
Salary from the Philippines, net of tax
Add: Withholding tax
Total income reportable in the Philippines
P250,000
50,000
P300,000
OCW are exempt from income tax on income earned outside the Philippines. [Sec. 23 (C),
NIRC]

4. 13
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS
Chapter 3: Concept of Income
Problem 3 – 16
B
Amount of dividend received
Multiplied by percent of Sungad’s operation
within based on gross income
Dividend income – taxable in the Philippines
P600,000
20/30
P400,000
Problem 3 – 17
1
Letter C
.
Net salary as university professor
Add: Withholding tax on wages
Compensation income
2
.
P240,000
20,000
P260,000
Letter B
Gross audit service income (P135,000/90%)
Add: Gross rent income (P114,000/95%)
Total income from profession and business
3
.
P150,000
120,000
P270,000
Letter C
Interest income (P8,000/80%)
Add: Dividend income (P4,500/90%)
Total passive income
4
.
P10,000
5,000
P15,000
Letter D
Gain from sale of personal car
Add: Gain from sale of shares of stock – outside
Stock market (P2,850/95%)
Total capital gains
P3,000
3,000
P6,000
Problem 3 – 18
A
Professional fee (P450,000/90%)
Salary (P300,000 + P60,000)
Prizes
Earnings subject to normal tax
Capital gains - shares of stock:
First P100,000 (P95,000/95%)
Over P100,000 (P54,000/90%)
Winnings (P40,000/80%)
Earnings subject to final taxes
P500,000
360,000
8,000
P868,000
P100,000
60,000
P160,000
50,000
P210,000
Problem 3 – 19
D
First 4 months (P12,000 x 4)
Remaining months (P15,000 x 8)
13th month pay (P168,000/12)
Gross compensation income
P 48,000
120,000
14,000
P182,000
Problem 3 – 20
B
Reportable income is the market value of the car received
P120,000
Problem 3 – 21
A
Market value of the service received
P6,000

5. 14
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS
Chapter 3: Concept of Income
Problem 3 – 22
C
Face value of the non-interest bearing note
Multiplied by the present value factor of 10% annuity
Compensation income – present value of the note
Problem 3 – 23
A
Compensation income
Interest income (P50,000 x 12% x 6/12)
Problem 3 – 24
B
Collections during the year
Expenses actually incurred
Net income before personal exemption – cash basis
P30,000
0.909
P27,270
P50,000
P3,000
P490,000
(150,000)
P340,000
If the service business opted to report on accrual basis, such method can only be applied
when it comes to reporting of expense.
Problem 3 – 25
A
Gross income (P1,000,000 – P600,000)
Actual operating expenses (P200,000 x 80%)
Net income before other income
Add: Gain from sale of old furniture
Taxable income
Problem 3 – 26
1.
Letter C
Cash
Fair market value of property received
Mortgage assumed by the buyer
Installment payments:
First year
Second year
Third year
Fourth year
Selling price
2.
3.
Letter D
Selling price
Less: Mortgage assumed by the buyer
Balance
Add: Excess of mortgage over cost (P450,000 – P400,000)
Contract price
Letter D
Down payments:
Cash (down payment)
Fair market value of property received
Installment received in the year of sale
Excess of mortgage over cost (P450,000 – P400,000)
Initial payments
Problem 3 – 27
C
Selling price
Add: Excess of mortgage over cost (P600,000 – P500,000)
P400,000
(160,000)
P240,000
20,000
P260,000
P 50,000
100,000
450,000
100,000
200,000
300,000
400,000
P1,600,000
P1,600,000
450,000
P1,150,000
50,000
P1,200,000
P 50,000
100,000
100,000
50,000
P300,000
P700,000
100,000

6. 15
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS
Chapter 3: Concept of Income
Total
Less: Mortgage assumed by the buyer
Contract price
P800,000
600,000
P200,000
Problem 3-28
1. A
Income 200C - casual sale (P12,000 – P3,000)
Multiplied by holding period – more than 1 year
Reportable income
P9,000
50%
P4,500
The sale is considered cash sales because the 200C initial payments (P1,000 + P1,000 +
2,000) exceeds 25% of the selling price; P4,000/P12,000 = 33%
2. B
Reportable income 200C – regular sale (P9,000 x P4,000/P12,000)
P3,000
Since the property is sold in regular basis, installment reporting of income is allowed.
Problem 3 – 29
B
Total revenue
Cost of sale
Income to be reported
P1,000,000
( 500,000)
P 500,000
Problem 3 – 30
A
Contract price
Completed as of this year, 50%
Cumulative cost, P10 M + 9M
Cumulative income
Less: Reported prior year (P50M x 30%) – P10M
Reportable income this year
P50,000,000
P25,000,000
19,000,000
P 6,000,000
5,000,000
P 1,000,000
Problem 3 – 31
D
Contract price
Less: Cost (P90,000/20%)
Gross profit
Multiplied by percent of completion
Reportable income under percent of completion
P 1,000,000
450,000
P 550,000
20%
P 110,000
Problem 3 – 32
D
Contract price
Less: Total costs (P432,000 + P184,250 + P103,750)
Total profit
Less: Previous years’ reported income:
Accomplished contract price for 200A and 200B (P1,200,000 x
85%)
Previous years’ actual costs:
200A
200B
Percent of completion – 200C Reportable income
P1,200,000
720,000
P 480,000
P1,020,000
( 432,000
)
( 184,250
)
403,750
P
76,250

7. 16
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS
Chapter 3: Concept of Income
Problem 3 – 33
A
Year 3 sales
Less: Cost incurred as of year 3:
Year 1
Year 2
Year 3
Year 3 – reportable income
P 500,000
P 100,000
200,000
50,000
Problem 3 – 34
C
Harvested crops sold
Less: Total direct costs:
Year 1
Year 2
Year 3
Year 4
Year 5
Reportable income – year 5
350,000
P 150,000
P 2,000,000
P 300,000
100,000
100,000
100,000
400,000
1,000,000
P 1,000,000
Problem 3 – 35
Cash basis income (300K +800K +100K)
Accrual expenses
Net income before personal exemption
P1,200,000
500,000
P 700,000
Problem 3 – 36
Accrued sales (P2,000,000 + P520,000)
Less: Cost of sales
Gross income
Less: Operating expenses (P600,000 x 70%)
Net income
P2,520,000
1,200,000
P1,320,000
420,000
P 900,000
Problem 3 – 37
Total harvest for the year at selling
price
Year 1
P50,000
Year 2
P100,000
Cas
h
Harvests sold:
(80 cavans x P500)
(190 cavans x P500)
Ending inventory:
(20 cavans x P500)
(30 cavans x P500)
Beginning inventory:
(20 cavans x P500)
Gross income for the year
Problem 3 – 38
1. Cash Method
Revenue
Equipment sold
Costs:
Cost of products purchased
Carrying value of farm
equipment
Accrual
P40,000
Cash
Accrual
P40,000
P95,000
P95,000
10,000
15,000
.
P40,000
.
P50,000
Farming
P 50,000
Trading
P150,000
25,000
.
( 90,000)
( 25,000)
.
P95,000
( 10,000)
P100,000
Rent
P100,000
.
Total

8. 17
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS
Chapter 3: Concept of Income
Gross income
2. Accrual Method
Revenue
Equipment sold
Inventory, ending
Inventory, beginning
Costs:
Cost of products purchased
Carrying value of farm
equipment
Gross income
P 50,000
P 60,000
P100,000
P210,000
Farming
P 50,000
Trading
P150,000
25,000
Rent
P100,000
Total
(
9,000
6,000)
.
( 90,000)
( 25,000)
.
P 53,000
P 60,000
P100,000
Problem 3 – 39
1. Letter C
Cash receipts:
Sale of livestock (P200,000 + P300,000)
Sale of livestock for rent
Sale of machinery
Rent of livestock for rent
Total cash receipts
Less: Cost of livestock purchased
(P50,000 + P175,000 – P100,000)
Cost of livestock for rent sold
Cost of machinery sold
Gross income
2.
Letter A
Sale of livestock (P200,000 + P300,000)
Less: Cost of livestock purchased
Balance
Add: Inventory, end – livestock produced
Total
Less: Inventory, beg. – livestock produced
Balance
Add: Gain from sale of livestock for rent
[P10,000 – (P15,000 – P8,000)]
Gain from sale of machinery
[P20,000 – (P50,000 – P35,000)]
Rent of livestock
Gross income
P213,000
P500,000
10,000
20,000
50,000
P580,000
P125,000
7,000
15,000
147,000
P433,000
P500,000
125,000
P375,000
50,000
P425,000
180,000
P245,000
P 3,000
5,000
50,000
58,000
P303,000
The difference between the cash basis and the accrual basis is the decrease in inventory
of livestock produced by P130,000. A comparison is prepared as follows:
Ending inventory – livestock produced
Less: Beginning inventory – livestock produced
Decrease in inventory
P 50,000
180,000
P 130,000
Cash basis – gross income
Less: Accrual basis – gross income
Difference
P 433,000
303,000
P 130,000