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Income Tax Balinggan Chapter 4, Cheat Sheet of Business Taxation and Tax Management

Central Mindanao University (CMU)Business Taxation and Tax Management

Just an answer key in chapter 4

Typology: Cheat Sheet

2023/2024

Uploaded on 03/14/2024

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CHAPTER 4: INCOME TAX SCHEMES, ACCOUNTING PERIODS AND ACCOUNTING METHODS
True or False 1
1. Both active income and passive income do not require direct
participation of the taxpayer in earning the income. False (only
passive income)
2. There are three types of gross income for taxation purposes. true
3. The three tax schemes are mutually inclusive in coverage. False (They
are mutually exclusive. One excludes the others.)
4. Regular income tax generally covers active income and capital gains.
True (Active income is subject to regular tax. Capital gains are generally subject to regular tax.
There are only two types of capital gains that are exceptionally subject to capital gains tax)
5. Final tax generally covers passive income. True (Most types of passive
income are subject to final tax with the exception of rent.)
6. Capital gains arise from the sale, exchange, and other disposition
of any assets. False (from capital assets, not any assets)
7. There are only two types of assets for purpose of taxation. True
Correct (two types: ordinary asset and capital asset)
8. An ordinary asset is defined to include all other assets other than
capital assets. False (The definition of capital asset is a residual definition.)
9. The technique used to measure income is referred to as an accounting
method. The length of time over which income is reported is referred ti
as an accounting period. true
10. Regular accounting periods are calendar and fiscal. true
11. Individuals file their income tax returns on or before April 15 of
the following calendar year. true
12. All taxpayers can change their accounting period when there is a
change in the nature of their business, but the BIR must be notified in
all cases. False [Only corporations (and partnerships) can change accounting periods.]
13. The first accounting period of a starting business will more likely
be less than 12 months. true
14. The accounting period of a deceased taxpayer shall be terminated on
December 31 in the year of death. False (The accounting period shall be terminated
at the point of death.)
15. Accrual basis and cash basis are the most common accounting methods
used in practice. true
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Partial preview of the text

Download Income Tax Balinggan Chapter 4 and more Cheat Sheet Business Taxation and Tax Management in PDF only on Docsity!

CHAPTER 4: INCOME TAX SCHEMES, ACCOUNTING PERIODS AND ACCOUNTING METHODS

True or False 1

  1. Both active income and passive income do not require direct participation of the taxpayer in earning the income. False (only passive income)
  2. There are three types of gross income for taxation purposes. true

3. The three tax schemes are mutually inclusive in coverage. False (They

are mutually exclusive. One excludes the others.)

  1. Regular income tax generally covers active income and capital gains.

True (Active income is subject to regular tax. Capital gains are generally subject to regular tax.

There are only two types of capital gains that are exceptionally subject to capital gains tax)

5. Final tax generally covers passive income. True (Most types of passive

income are subject to final tax with the exception of rent.)

  1. Capital gains arise from the sale, exchange, and other disposition

of any assets. False (from capital assets, not any assets)

  1. There are only two types of assets for purpose of taxation. True

Correct (two types: ordinary asset and capital asset)

  1. An ordinary asset is defined to include all other assets other than

capital assets. False (The definition of capital asset is a residual definition.)

  1. The technique used to measure income is referred to as an accounting method. The length of time over which income is reported is referred ti as an accounting period. true
  2. Regular accounting periods are calendar and fiscal. true
  3. Individuals file their income tax returns on or before April 15 of the following calendar year. true
  4. All taxpayers can change their accounting period when there is a change in the nature of their business, but the BIR must be notified in

all cases. False [Only corporations (and partnerships) can change accounting periods.]

  1. The first accounting period of a starting business will more likely be less than 12 months. true
  2. The accounting period of a deceased taxpayer shall be terminated on

December 31 in the year of death. False (The accounting period shall be terminated

at the point of death.)

  1. Accrual basis and cash basis are the most common accounting methods used in practice. true

True or False 2

  1. Advanced income is an item of gross income for accrual basis

taxpayers. True (Advanced income is taxable upon receipt)

  1. Generally, prepayments are non-deductible in the current accounting

period. True (Deductible as they are used up or are expired in the business of the taxpayer.)

  1. Prepayments are deductible but in the future period they expire or are consumed in the business or trade of the taxpayer. true
  2. The use of different methods for different businesses of the same

taxpayer is permitted by law. True (The mix of the different methods is referred to as

hybrid method.)

  1. Initial payment includes down payment and installments in the year of sale. true

6. Contract price is synonymous with selling price. False (Contract price is the

total amount receivable in money or property from the buyer. This amount is usually the selling

price but will differ when there is an encumbrance on the property to be assumed by the buyer.)

7. The crop year method is an accounting method. True (Crop year method is not

an accounting period)

  1. Under the percentage of completion method, gross income is reported

based on the cash collections from the contract price. False (Based on

percentage of progress of the construction project)

  1. The depreciated value of the property upon termination of the lease constitutes income to the lessee. true
  2. The withheld taxes on the income payments made by the taxpayers are

tax credit against their income tax due. False (These are tax credits of the

recipient of the income.)

  1. There are three types of income tax return for each income tax

scheme. False (Only capital gains tax and regular income tax has tax returns. Note that final

income tax are withheld at source.)

  1. All taxpayers, small or large, are encouraged to file their income

tax return through the EFPS system of the BIR. False (Only large taxpayers that

meet certain criteria are required to file through the EFPS. Small taxpayers shall file their returns

in their respective Revenue District Office.)

  1. Large taxpayers are under the supervision of the BIR Large Taxpayer Service. true

b. Covers all capital gains c. Withholding at source d. None of these

  1. Which of the following properties when classified as capital asset is subject to capital gains tax? a. Domestic stocks sold directly to buyer b. Real property c. Both a or b d. None of these
  2. Capital asset means a. Real properties used in business. b. Personal properties used in business. c. Real properties not used in business. d. Any property, real or personal, not used in business.
  3. Which is not an item of passive income? a. Royalties b. Prizes c. Deposit interest income d. Professional income
  4. Which of the following accounting method is most consistent with the lifeblood doctrine? a. Crop year method b. Cash basis c. Installment method d. Accrual method
  5. These are accounting techniques or conventions used to measure income a. Accounting methods b. Accounting periods c. Accrual basis

d. Cash basis

  1. These are distinct and equal time periods which income is measured a. Accounting methods c. Crop year basis b. Accounting periods d. Cash basis
  2. Income is recognized when received rather than when earned a. Cash basis c. Accrual basis b. Installment basis d. Deferred payment basis
  3. Income is recognized when earned regardless of when received a. Cash basis c. Installment method b. Accrual basis d. Percentage of completion
  4. Initial payment means a. Downpayment. b. Total collection within the year the installment sale was made. c. Installment payments, exclusive of downpayment, within the year installment sale was made. d. Total collections within one year from the date the installment sale was made.
  5. Income is reported by reference to the extent of project completion in a. Deferred payment method b. Installment method c. Percentage completion method d. Completed contract method
  6. Which statement is correct? a. Dealers of real properties can use installment method without limitation. b. Dealers of personal properties can use installment method without limitation. c. Non-dealers of properties can use the installment method if initial payment exceeds 25% of the selling price. d. Dealers of properties can use the installment method only if initial payment does not exceed 25% of the selling price.
  7. Leasehold income is recognized over the lease term in

b. Use of accounting period d. Final withholding tax at source Multiple Choice-Problem 4 - 1: Accounting period

  1. An individual income taxpayer shall file his or her income tax return on or before the 15 th^ day of the fourth month of the same calendar year. 15 th^ day of the fourth month of the following calendar year. 15 th^ day of the fourth month of the same fiscal year. 15 th^ day of the fourth month of the following fiscal year.
  2. Anderson died on March 31, 2017. Which is a correct statement? a. Anderson’s 2017 income tax return shall cover January 1, 2016 to December 31, 2017. b. Anderson’s 2017 income tax return shall cover January 1, 2017 to December 31, 2017. c. Anderson’s 2017 income tax return shall cover January 1, 2017 to March 31, 2017. d. Anderson’s 2017 income tax return shall cover April 1, 2017 to December 31, 2017.
  3. Mrs. Julian started business on July 15, 2016. What should be the coverage of her 2016 income tax return? a. January 1 to July 15, 2016 b. July 15, 2016 to December 31, 2016 c. July 16, 2016 to July 15, 2017 d. January 1 to December 31, 2016
  4. A corporation reporting on a fiscal year ending every March 31 shall file its 2017 income tax return not later than a. April 15, 2017 c. July 15, 2017 b. June 15, 2017 d. April 15, 2018
  5. Metersbonwe Corporation started business on April 5, 2016 and opted to report income tax on a fiscal year ending every October 31. Metersbonwe’s first income tax return shall cover a. April 6, 2016 to October 31, 2016 b. April 5, 2016 to October 31, 2016 c. April 5, 2016 to December 31, 2016 d. April 5, 2016 to April 5, 2017
  1. Beneco Corporation reports on calendar year. On August 15, 2016, it stopped business due to persistent losses. Beneco Corporation’s last income tax return shall cover a. January 1 to December 31, 2016 b. Janaury 1 to August 15, 2016 c. August 15, 2013 to August 15, 2016 d. August 15 to December 31, 2016
  2. Effective March 1, 2017, Jonah, Inc. changed its calendar year to a fiscal year ending every June 30. An adjustment return shall be filed covering the period a. March 1 to June 30, 2017 b. Janaury 1 to June 30, 2017 c. January 1 to March 1, 2017 d. January 1 to December 31, 2017
  3. During 2017, Klein Corporation changed its accounting period to the calendar year. The adjustment return shall be filed on or before a. April 15, 2017 c. April 15, 2018 b. July 15, 2017 d. July 15, 2018
  4. Effective July 2, 2016, Rofelson Company changed its fiscal year ending every March 31 to another fiscal year ending every August 31. An adjustment return shall be filed covering the period a. April 1 to July 2, 2016 c. April 1 to August 31, 2016 b. April to July 1, 2016 d. July 3 to August 31, 2016
  5. Effective May 15, 2017, Tabuk, Inc. changed its fiscal year ending every April 30 to the calendar year. An adjustment return shall be filed covering the period a. May 1 to December 31, 2017 b. January 15 to December 31, 2017 c. January 1 to April 30, 2017 d. April 30 to December 31, 2017 Multiple Choice-Problems 4 - 2: tax schemes and accounting methods
  6. Astercor, Inc. reported the following during the year: P400,000 proceeds of life insurance of an officer where Antercor is the beneficiary (P600,000 still uncollected.)

P400,000 c. P500, P450,000 d. P550,

  1. Compute the gross income using accrual basis. P400,000 c. P500,

P450,000 d. P550,000 [(P400K+P150KP100K)+P100K]

  1. In 2019, Bright Inc. sold its parking lot for P2,400,000 payable on installment. The lot was previously acquired for P1,500,000. The buyer has an outstanding unpaid balance of P1,800,000 as of December 31, 2019, Bright’s year-end. Compute Exquisite’s gross income in 2019 using the installment method.

P900,000 c. P225,000 [P900K GP x (P600K/P2.4M)]

P675,000 d. P112,

  1. Exquisite Corporation sold its old warehouse with carrying amount (tax basis) of P600,000 for P1,000,000. A downpayment of 15% was collected on July 1,2019. Additional P150,000 installment payments were received as of December 31, 2019. Compute the gross profit to be reported for the year 2019.

P60,000 c. P400,000 (P 1M-P600K)

P120,000 d. P450,

  1. Lancelot is a dealer of household appliances. He reported the following in 2019 and 2020: 2019 2020 Installment sales P500,000 P800, Cost of installment sales 250,000 440, Collections 300,000 600, Lance’s 2020 collection is inclusive of P100,000 accounts from 2019. Using the installment method, compute Lancelot’s gross income subject to income tax 2020. P360,000 c. P250,

P320,000 d. P275,000 [(P250K 2015GP x20%) + (P360K 2016GP

x62.5%)]

  1. Using the accrual basis of accounting compute Lancelot’s gross income subject to income tax in 2020. P360,000 c. P275, P320,000 d. P250,
  1. Merville is a dealer in real properties. Merville requires 20% downpayment, and the balance is payable over 36 monthly instalments starting on the last day of the month following the month of sale. Merville sold properties in 2019 and 2020 with terms as follows: House and Lot No. 1 was sold for P1,350,000 on November 11, 2019. House and Lot No. 2 was sold for P1,800,000 on July 5, 2020. Both properties were sold at a gross profit rate of 40% based on the selling price. Compute Merville’s gross income subject to income tax in 2019 and 2020, respectively. P120,000;P720,000 c. P540,000;P720,

P120,000;P846,000 [P540K 2015GP x (P300K/P1.35M)];[(P540 K 2015GP x

P360K/P1.35M)+P720K 2016GP] d. P540,000;P846,

  1. In 2020, Mr. Marangley, a dealer of car, disposed a brand new sports utility vehicle (SUV) which costs P800,000 for P1,200,000, inclusive or under the following terms: July 1, 2020 - as down payment P100, Monthly installment thereafter 50, Mr. Marangley will choose whichever favourable permissible income reporting method for him. How much gross income is to be reported in 2020?

P400,000 c. P116,667 (350K/1.2M x 400K)

P250,000 d. P108,

  1. In the immediately preceding problem, assuming Mr. Marangley is not a dealer of car, how much gross income is to be reported in 2020? How much gross income is to be reported in 2020? P400,000 c. P116, P250,000 d. P108,
  2. Luccio accepted a P1,000,000 construction contract in early 2020. As of December 31, Luccio incurred total construction costs of P600, and estimates additional P200,000 to bring the project to completion. Per independent appraisal, the building is at its 80% stage of completion. Compute Luccio’s 2020 construction income using the percentage completion method. P40,000 c. P160,

P200,000 (80% x P1M – P600K) d. P400,

During the year, Hassan earned P180,000 from selling piglets. How much should Hassan report as farming income in 2020? P326,000 c. P146, P180,000 d. P130,

  1. Pedro, a farmer, uses the crop-year method in reporting his income from long-term crops. The following data are relevant to his farming operations in 2020: Sales of crops harvested, P900, Expenses on harvested crops, P400, Expenses on maturing crops, P200, Expenses on newly planted crops, P100, Sales of tree branches for firewood, P50, Pedro uses the crop year method in reporting crop income. Compute Pedro’s total income subject to tax. P240,000 c. P540,

P340,000 d. P550,000 (P900K SALES-P400K EXP +P50K)

Multiple Choice-Problem 4 - 3:Tax compliance

  1. A tax payer filed his income tax return in October 28, 2018. The deadline for the return was April 15, 2018. If he has P40,000 net tax due, compute the penalties in the form of interest.

P2,578 (196/365) x 12% x P40,000 = P2,278 c. P2,

P2,611 d. P4,

  1. What is the total surcharge penalty?

P0 c. P10,000 (P40,000 x 25%)

P8,000 d. P20,

  1. A taxpayer received a notice from the BIR to file his 2016 income tax return not later than January 15, 2018. The tax due per his return is P100,000. What is the total surcharge penalty? P0 c. P25,

P20,000 d. P50,000 (50% surcharge apply. There is a BIR prior notice.)

  1. What is his total interest penalty? P6,500 c. P14, P7,900 d. P15,
  2. Compute the compromise penalty

P10,000 c. P20,

P15,000 (For unpaid tax amounting P50,000 but not exceeding P100,000, the compromise

penalty is P15,000). d. P30,

  1. Mani Pakyaw failed to pay file his income tax return for the year 2019 which should have been filed on or before July 18, 2020. Mani Pakyaw filed a return showing a basic tax due of P1,000,000. Compute the total interest penalty. P35,836 c. P38, P37,6 44 d. P39,

The problem has no answer. April 16, 2020 to July 18, 2020 is 94 days. P1M x 12% x 94/365) =

P30,904. You may consider rewarding students who objectively answered P30,904. Good

student should have identified the lack of answer and objectively indicated their correct answer.

  1. Mr. Pakyaw must pay a surcharge of

P0 c. P500,000 (50% apply since he received a notice

from the BIR before filing)

P250,000 d. P1,000,

  1. Rich Goma Corporation failed to file its income tax return for the fiscal year ending August 31, 2019. On June 6, 2020, it filed an income tax return with a basic tax still due and payable for the fiscal year amounting to P500,000. Compute the interest penalty to be imposed by the BIR.

P28,603 (The return deadline is December 15, 2019. December 16, 2019 to June 6, 2020 is 174

days. Note that February 2020 is 29 days since 2020 is a leap year. Hence, P500,00 x 12% x

174/365 = P28,603. c. P45,

P28,438 d. P46,

  1. Compute the total tax assessment to be paid, excluding compromise penalty.

P653,603 (interest penalty + 500K + 25%xP500K) c. P689,

P653,438 d. P660,

17. The tax sparing rule is applicable to resident and non-resident foreign corporations. False (It

applies only to non-resident foreign corporations)

True or False 2

1 A government employee mar, claim the tax informer's reward. False

2 The final tar on winnings applies to corporations. False

3. individuais except corporations are subject to final tax on winnings abroad. False (Passive

income abroad, including winnings are subject to regular tax.)

4. Winnings which are not more than P10,000 in amount are subject to the regular income tax.

False (This rule applies to taxable price.)

5. PCSO or lotto winnings are exempt from all types of income tax. False (PCSO / lotto winnings

are now generally subject to 20% final tax)

6. Special aliens do not file a regular income tax return on their compensation income. True

7. The final tax on interest on tax-free corporate covenant bonds applies only to resident

individual or corporate taxpayers. False

8. NRA-NETB and NRFC are subject to final tax only to passive income from sources in the

Philippines. False (Active or passive income are subject to final tax)

9. NRA-NETB and NRFCs are not required to file the regular income tax return. True

10. Residents shall withhold 10% final tax upon interest on foreign currency loans of FCDU banks

and OBUS under the expanded foreign currency deposit system. True

11. A qualified employee trust fund is not subject to final tax. True

12. The income of FCDU banks from fellow depositary banks under the expanded foreign

currency deposit system is subject to 10% final tax. False (It is exempt)

13. Petroleum service subcontractors are subject to 8% final tax on their income from petroleum

service contractors. True

14. The final withholding tax return shall be filed by the withholding agent once

before the 159 day of the month the final taxes were withheld. False (On the 10th day, not on

the 15th day)

15. Foreign governments and foreign government-owned and controlled corporation are

exempt from final tax. True (They are exempt from income tax: final tax, capital gains tax or

regular income tax.)

Multiple Choices - Theory 1

1. Which is correct with regard to the final income taxation?

a. Taxpayers need not file an income tax return

b. It covers all items of passive income from whatever sources.

C. It applies to all items of gross income of any non-resident earned from

sources within the Philippines.

d. It applies to passive income earned abroad.

2. Which statement is correct regarding final income tax?

a. Items of income subjected to final tax can still be subjected to regular tax

b. Final tax applies only on certain passive income earned within the Philippines

C.Items of income exempt under final tax are subject to regular tax.

D. Final income tax applies to all passive income from Philippines sources.

3. Interest income from which of the following sources is subject to final income tax

a Lending

b. Mortgage loans

c. Bond investment

d. Money market placements

4. The final tax does not apply to interest on (select the best answer)

a. Long-term deposit

b. Trust funds

c. Deposit substitute

d. Promissory notes

5. The exemption on final tax on interest from long-term deposit is not applicable to

c. Non-resident alien engaged in trade or business

d. None of these

10. The interest income from long-term peso deposits made with foreign banks is

a. subject to 20% final tax.

b. exempt from any tax.

C. subject to regular tax.

d. None of these.

11. What is the final tax on interest income on 6-year deposit pre-terminated less

than 2 years before maturity?

a. 20%

b. 12%

c. 5%

d. 0%

12. Which of the following recipients is exempt from final tax on dividends?

a. Resident citizen

b. Non-resident alien

c. Resident corporation

d. Resident alien

13. A dividend declaration in 2019 is subject to a final tax of

a 6%

b. 8%.

ç 10%.

d. 20%

14. Dividends declared by a resident corporation is

a. exempt from any tax.

b. subject to 10% final tax.

C. subject to regular income tax

d. subject to 20% final tax.

15. Between the date of declaration and the date of record. BCD, Inc. sold investment

representing stock of ABC, Inc. a domestic corporation. Which statement is correct?

a. ABC Inc. shall withhold 10% dividend tax if the buyer of the sale is an individual.

b. ABC, Inc. shall withhold 10% dividend tax if the buyer of the sale is a corporation

C. ABC, Inc. shall withhold 10% dividend tax if the seller of the sale is individual.

d. ABC, Inc. shall withhold 10% dividend tax if the seller of the sale is, corporation

Multiple Choices - Theory 2

1. Which is covered by final tax?

a. Interest income from foreign banks

b. Share in the net income of a joint venture

C. P10,000 taxable prizes from the Philippines

d. Share in the net income of a general professional partnership

2. Which is not subject to 20% final tax?

a. Interest income from trust funds

b. Royalties from musical compositions

с. P11,000 worth of prizes

d. Winnings

3. Which is not subject to 10% final tax?