I. Gross income: Inclusions and exclusions
Problem 1 – Concept of income and when taxable
The following are independent situations or transactions entered into by Mabuhay Corporation,
a domestic corporation:
a.
On January 1, 20A1, Mabuhay Corporation received the following properties from Mr.
Segundo in exchange for the original issuance of 100,000 shares with P100 par value:
Cash
Land (fair market value)
b.
P2,500,000
8,000,000
On January 1, 20A1, Mabuhay Corporation entered into a lease agreement for the lease
of land from Masaya Corporation. The terms of the lease are as follows:
Lease term
Monthly rental
Advance rentals
Security deposit
Pre-termination penalty
2 years
P2,000,000
10,000,000
4,000,000
200,000 per month for the remaining
unused months
The security deposit is refundable at the time of termination of the lease. However, it can
be applied as rental payments.
The advance rentals pertain to the first five months of the lease. Subsequently, Mabuhay
paid P2,000,000 monthly rental at the beginning of each month.
Mabuhay Corporation pre-terminated the lease effective December 1, 20A1. The
security deposit was refunded.
c.
On October 1, 20A1, Mabuhay Corporation entered into a lease agreement for the lease
of office space from Masaya Corporation. The terms of the lease are as follows:
Lease term
Monthly rental
Advance rentals
Security deposit
Pre-termination penalty
1 year
P2,000,000
10,000,000
4,000,000
200,000 per month for the remaining
unused months
The security deposit is refundable at the time of termination of the lease. However, it can
be applied as rental payments.
The advance rentals pertain to the first five months of the lease. Subsequently, Mabuhay
paid P2,000,000 monthly rental at the beginning of each month, except for the last
month of the lease where
a portion of the security deposit was applied as rental payment. The balance of the security deposit was
refunded.
d. On January 1, 20A1, Mabuhay Corporation obtained a one-year loan from Masaya Banking Corporation
for P10,000,000 bearing an interest of 6% per annum. Mabuhay repaid the loan on December 31,
20A1.
e. On December 1, 20A1, Mabuhay Corporation sold goods for USD100,000 on account to Masaya
Corporation. The goods cost P3,000,000. Mabuhay collected its receivables from Masaya on January
31, 20A2. The following are the foreign exchange rates:
December 1, 20A1
USD1 = P50
December 31, 20A1
USD1 = P53
January 31, 20A2
USD1 = P52
Mabuhay Corporation is registered with the Board of Investments (BOI) and enjoying income tax
holiday (ITH) until December 31, 20A2. Masaya Corporation, on the other hand, is an entity registered
with the Philippine Economic Zone Authority (PEZA).
f.
Mabuhay Corporation is a security agency. On December 15, 20A1, it collected the following from its
client, Masaya Corporation:
Salaries of security guards
Agency fee
Total
P 300,000
30,000
P 330,000
Mabuhay paid P200,000 to the security guards who are its employees. These security guards are
minimum wage earners.
g. Mabuhay Corporation had a land which was acquired five years ago for P500,000. It sold said land to
Masaya Corporation for P2,000,000, its fair market value, on December 1, 20A1. However, Masaya
deposited the payment to the bank account of Mabuhay for P2,300,000. The P300,000 was deposited
in error. Masaya collected the said overpayment from Mabuhay on December 31, 20A1.
The other party or parties in the above transactions are also domestic corporations, unless otherwise stated.
Required: For each of the above situation or transaction:
1. Identify and determine the amount of income received or earned by Mabuhay Corporation and the other
party to the transaction for income tax purposes for the year-ended December 31, 20A1 and December
31, 20A2.
2. If the item is an income, determine if it is taxable or not and explain; if it is not an income, identify the
nature and explain.
Problem 2
Condonation of debt
The following are independent situations dealing with condonation of loans of Marikit, Inc.:
Situation A
As of December 31, 20A1, Marikit, Inc. had the following net assets prior to condonation of its loans:
Assets:
Cash
Accounts receivables
Inventories
Property, plant and equipment
Liabilities:
Accounts payable
Loans payable
P 200,000
300,000
400,000
1,000,000
P1,900,000
P 400,000
1,200,000
P1,600,000
2
The loans were obtained from its affiliate company. Its affiliate condoned 30% of the loan on December 31,
20A1.
Situation B
As of December 31, 20A1, Marikit, Inc. had the following net assets prior to condonation of its loans:
Assets:
Cash
Accounts receivables
Inventories
Property, plant and equipment
Liabilities:
Accounts payable
Loans payable
P
20,000
30,000
40,000
100,000
P 190,000
P 400,000
1,200,000
P1,600,000
The loans were obtained from its affiliate company. Its affiliate condoned the entire loan on December 31, 20A1
since Marikit is encountering financial difficulty.
Required:
1. Determine the amount of income that will be declared by Marikit for the year ended December 31, 20A1
for each situation. Explain your answer.
2.
Problem 3
Compensation for services; allowances; facilities or privileges; award of damages
Ms. Maganda is an employee of Halo-halo, Inc. She received the following salaries and benefits for the year
ended December 31, 20A1:
Compensation
Commissions
Tips and gratuities
Transportation allowance
Representation allowance
Bonuses
Total
P 200,000
70,000
50,000
40,000
30,000
60,000
P 450,000
These were given in the form of cash. The following are the additional information:
Situation A
The tips and gratuities were paid by Haloas part of service charge, and subsequently paid to the employees in addition to the compensation.
The transportation and representation allowances are fixed allowances given by Halo-halo to Ms.
Maganda. These were not subjected to liquidation.
In addition, Ms. Maganda also received courtesy discounts for purchases of food items equivalent to 10% of the
selling price. Total purchases amounted to P80,000.
Situation B
The tips and gratuities were paid by HaloP50,000 during the year.
The transportation and representation allowances were subjected to liquidation. These were supported
by receipts issued in the name of Halo-halo to evidence the actual incurrence of expenditures in
connection with its trade or business.
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In addition, Ms. Maganda also received courtesy discounts for purchases of food items equivalent to 50% of the
selling price. Total purchases amounted to P80,000.
Situation C
The tips and gratuities were paid by Halowhere P30,000 were added to the
cust
compensation while P20,000 were directly received from customers.
The transportation allowance is a fixed allowance given by Halo-halo to Ms. Maganda, which was not
subjected to liquidation. On the other hand, the representation allowance was subjected to liquidation.
This is supported by receipts issued in the name of Halo-halo to evidence the actual incurrence of
expenditures in connection with its trade or business.
In addition, Ms. Maganda filed a labor case against its former employer, Maliwanag Corporation with the
National Labor Relations Commission (NLRC). On September 15, 20A1, the case was decided in favor of Ms.
Maganda where she was awarded the following:
Unpaid salaries
Unpaid commission
Moral and exemplary damages
Total
P 500,000
120,000
300,000
250,000
P1,170,000
The award has already become final and executory and Maliwanag is willing to pay the above amount less any
withholding taxes. Ms. Maganda
P200,000.
Required: Determine the amount of income that will be declared by Ms. Maganda for the year ended December
31, 20A1 (indicate the declarable income for each employer, if applicable). Consider the impact of
exclusion from gross income relating to 13th month pay and other benefits.
Problem 4
Compensation for services: cash and in kind
The following are independent situations involving Mr. Matipuno for the year ended December 31, 20A1:
a. Mr. Matipuno rendered repair services to Acacia Corporation. He was paid P50,000 for the services he
rendered.
b. Mr. Matipuno rendered repair services to Acacia Corporation. He received groceries worth P48,000 as
compensation for the services he rendered.
c.
Mr. Matipuno rendered repair services to Acacia Corporation. His services were worth P45,000. In
consideration for the said services, he received free meals from Acacia for one month.
d. Mr. Matipuno is a Vice President for Finance of Acacia Corporation. He received an annual salary of
P3,000,000 during the year. In addition, he received a bonus of 1,000 shares of Acacia on January 31,
20A2 for the services he rendered in 20A1. The shares had par value P100 but had fair value of P250
on January 31, 20A2 and average fair value of P175 in 20A1.
e. Mr. Matipuno is a Finance Manager of Acacia Hotel Corporation. He received an annual salary of
P1,000,000 during the year. In addition, he also received free meals worth P50,000 and given living
quarters with value of P5,000 monthly during the year.
f.
Mr. Matipuno is a chef of Acacia Hotel Corporation. He received an annual salary of P1,000,000 during
the year. In addition, he also received free meals worth P50,000 and given living quarters with value of
P5,000 monthly during the year. The free meals and living quarters were provided to Mr. Matipuno for
and necessary to the proper performance of his duties as chef of Acacia.
g. Mr. Matipuno rendered repair services to Ms. Acacia on December 1, 20A1. However, Ms. Acacia
issued a promissory note with face amount of P50,000 payable on June 1, 20A2. The discounted value
of the note on December 31, 20A1 is P45,000.
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h. Mr. Matipuno rendered services to Acacia Corporation for P60,000. However, Mr. Matipuno owes
Acacia the same amount. Acacia cancelled the borrowing of Mr. Matipuno since he rendered the repair
services.
i.
Mr. Matipuno
Matipuno.
Required: For each of the above situation, determine the amount that will be included as part of gross income of
Mr. Matipuno.
Problem 5
Rental income
The following are independent situations regarding the lease of land owned by Mangosteen Company, Inc. to
Gumamela Corporation:
Situation A
On January 1, 20A1, Mangosteen leased its land to Gumamela for a period of 15 years for P200,000 monthly.
Mangosteen also charged Gumamela real property tax (RPT) on the land for P20,000 monthly.
Gumamela constructed a building on said land. The building was completed on October 1, 20A1 with total
construction costs of P5,000,000, which represents its fair market value at the time of completion. The building
will be transferred to Mangosteen at the end of the lease term. The building had an estimated useful life of 40
years.
The lease continued for 15 years and the building was transferred to Mangosteen at the end of the lease term.
Situation B
On January 1, 20A1, Mangosteen leased its land to Gumamela for a period of 15 years for P200,000 monthly.
Mangosteen also charged Gumamela real property tax (RPT) on the land for P20,000 monthly.
Gumamela constructed a building on said land. The building was completed on October 1, 20A1 with total
construction costs of P5,000,000, which represents its fair market value at the time of completion. The building
will be transferred to Mangosteen at the end of the lease term. The building had an estimated useful life of 40
years.
However, Gumamela terminated the lease on September 30, 20A8. It paid penalty of P1,200,000 for the
termination of the contract.
Required: Determine the annual gross income that will be reported by Mangosteen for the entire term of the
lease under the two allowable methods in recognizing income.
Problem 6
Rental, dividend and interest income; income from dealings in property
On January 1, 20A1, Durian Company, Inc., a wholly-owned subsidiary of Rosas Company, leased its building
to Pagsibol Corporation. It was agreed that instead of paying rentals to Durian, Pagsibol should make payments
as follows:
Recipient
Rosas Company
Dahlia Company
Relationship with Durian
Stockholder
Lender
Amount of payment
10% of par value of shares
6% of loan payable
5
As of January 1, 20A1, Durian had common stock of P5,000,000 with no additional paid-in capital. On the other
hand, it had loans payable to Dahlia for P3,500,000, and advances to Rosas for P800,000. There were no
changes in the carrying amounts of these accounts at December 31, 20A1 except that Durian forgave the
indebtedness of Rosas.
Pagsibol also shouldered the real property tax (RPT) and insurance on the building. These charges were paid
by Durian but will be reimbursed by Pagsibol. RPT and insurance premiums paid in 20A1 amounted to
P100,000 and P150,000, respectively.
In addition, Durian, Rosas and Dahlia had the following assets as of January 1, 20A1:
Owner
Durian
Rosas
Dahlia
Property
Building
Equipment
Land
Remaining life
10
4
Book value
P3,000,000
400,000
1,000,000
Durian sold the building for P4,200,000 on July 1, 20A1, while Rosas sold the equipment for P480,000 on
September 30, 20A1. However, the land owned by Dahlia was expropriated by the government on October 31,
20A1. The government paid Dahlia P1,800,000, which is its fair market value. These companies depreciate
their properties using the straight-line method of depreciation for income tax purposes. The assets are
depreciated monthly.
Required:
1. Determine the nature and amount of gross income that will be recognized by Durian for the year ended
December 31, 20A1, if any.
2. Determine the nature and amount of gross income that will be recognized by Rosas for the year ended
December 31, 20A1, if any.
3. Determine the nature and amount of gross income that will be recognized by Dahlia for the year ended
December 31, 20A1, if any.
Problem 7
Dividend, stock options, stock awards, share appreciation rights
The following are independent situations relating to equity investments:
Situation A
information as of December 31, 20A0:
Common stock, 1,000,000 shares issued and outstanding
Retained earnings
Revaluation surplus
Total
P 10,000,000
8,000,000
3,000,000
P 21,000,000
Azucena had net income of P1,500,000 for the year ended December 31, 20A0. On March 1, 20A1, it declared
P4 dividend per share payable on April 15, 20A1.
Situation B
The board of directors of Kapamilya Corporation adopted a fixed stock option plan to supplement the salaries of
certain executives. The options to buy common stock were granted as follows:
Date
Employee
Jan. 1, 20A1
Jan. 1, 20A2
Jan. 1, 20A3
D. R. Tawa
J. K. Ngiti
B. D. Halakhak
Number of
Shares
80,000
45,000
25,000
Exercise Price
P30
38
43
Price of Shares
at Date of Grant
P32
41
47
Option Value at
Date of Grant
P9
10
11
The options are nontransferable and can be exercised beginning three years after the date of grant, provided
the executive is still employed by the company. The stock options were exercised as follows:
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Date
Employee
December 31, 20A4
December 31, 20A5
December 31, 20A6
D. R. Tawa
J. K. Ngiti
B. D. Halakhak
Number of
Shares
80,000
45,000
25,000
Price of Shares
at Date of
Exercise
P48
43
49
The stock of the company has a P1 par value. The accounting period for the company is the calendar year.
Situation C
Kapuso Corporation established a stock awards plan for its employees. The plan was established on January
1, 20A1. Under the plan, each employee will be granted 200 Kapuso shares on January 1, 20A4 provided they
remain with the company for three years. The fair value of the stock awards was P12 per share on January 1,
20A1 and the average fair value during 20A1 was P14. The fair market value of Kapuso shares on January 1,
20A4 was P18 per share. The par value of the shares was P5 per share.
The no. of employees on selected dates was as follows:
December 31, 20A1
December 31, 20A2
December 31, 20A3
150
185
170
Assume that employee hiring and resignations or terminations occurred on January 1 of each year. The stock
awards were awarded to 130 employees on January 1, 20A4 for services rendered in 20A1. These were
properly subjected to withholding tax at the time of the grant of the stock awards.
Situation D
San Juan Corporation established a stock option plan that provides for cash payments to employees based on
the appreciation of stock prices from an established option price. The plan was instituted on January 1, 20A1
and provides for benefits to employees who work for the succeeding three years. Cash payments to employees
will be made on January 1, 20A4, and will equal the excess of the stock price over the option price on that date.
In total, 10,000 of these cash stock appreciation rights (SARs) were granted to employees.
The option price established for the stock is P10 per share. The market price of San Juan stock on selected
dates in 20A1 to 20A3 were as follows:
January 1, 20A1
December 31, 20A2
December 31, 20A3
December 31, 20A4
P15
16
21
18
The SARs were properly subjected to withholding tax at the time of payment.
Required: Determine the amount of gross income that will be declared by the income earner, and the taxable
year of declaration. For dividend, determine the source of dividend declared (i.e., taxable year when
income is earned).
Problem 8
Gift, bequest and devises; proceeds of life insurance and return of premiums
Mr. Habagat owns a parcel of land, cash, jewelry, and shares of stock. The lot was being leased for P100,000
monthly. These were payable at the end of each month. On July 1, 20A1, Mr. Habagat died. These properties
were inherited by his daughter, Ms. Amihan. These properties had the following fair values at the time of Mr.
Land
Cash
Jewelry
Shares of stock
P 3,000,000
1,000,000
800,000
1,500,000
7
The issuer of the shares declared dividend of P300,000 on July 15, 20A1 which were paid on August 1, 20A1.
Moreover, Mr. Habagat had an insurance policy with face amount of P10,000,000 which was purchased on
January 1, 20A0. The premiums on said policy of P50,000 were payable quarterly for 10 years (payable every
January 1, April 1, July 1 and October 1). He named his daughter, Ms. Amihan, as the beneficiary of the
insurance policy, who received the face amount.
Required:
1. Determine the amount of gross income of Ms. Amihan for the year ended December 31, 20A1.
2. Determine the amount of exclusion from gross income of Ms. Amihan for the year ended December 31,
20A1.
3. Determine the amount of gross income and exclusion from gross income of Mr. Habagat under the
following situations and the year of declaration of income:
a. Mr. Habagat lived after paying the insurance premiums for 10 years. He received P10,000,000
from the insurance company.
b. Mr. Habagat obtained a policy having dividend participation. He received P50,000 dividend in
20A1.
c. Mr. Habagat cancelled the insurance policy on June 30, 20A3. He received a cash surrender
value of P500,000.
Problem 9
Retirement benefits, pensions and separation pay
The following are independent situations regarding the retirement benefits, pensions or separation pay of Mrs.
Makulay:
a. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a BIR-registered retirement plan.
Mapula contributed to the retirement plan in order to finance the retirement pay of its employees. Under the
retirement plan, the employees are entitled to retirement benefits if they have rendered at least 10 years of
service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age
of 50 and rendered 20 years of service. This is the first time that she retired from employment. She received
the following benefits:
8
Retirement pay
Back wages
Commutation of vacation leave credits
Commutation of sick leave credits
P 3,000,000
300,000
200,000
100,000
b. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a BIR-registered retirement plan.
Mapula contributed to the retirement plan in order to finance the retirement pay of its employees. Under the
retirement plan, the employees are entitled to retirement benefits if they have rendered at least 10 years of
service regardless of age. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 35 and
rendered 10 years of service. This is the first time that she retired from employment. She received the
following benefits:
Retirement pay
Back wages
Commutation of vacation leave credits
Commutation of sick leave credits
c.
P 3,000,000
300,000
200,000
100,000
Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a retirement plan. However, it is not
registered with the BIR, Mapula contributed to the retirement plan in order to finance the retirement pay of
its employees. Under the retirement plan, the employees are entitled to retirement benefits if they have
rendered at least 10 years of service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay
retired from Mapula at the age of 50 and rendered 20 years of service. This is the first time that she retired
from employment. She received the following benefits:
Retirement pay
Back wages
Commutation of vacation leave credits
Commutation of sick leave credits
P 3,000,000
300,000
200,000
100,000
d. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a retirement plan. However, it is not
registered with the BIR. Mapula contributed to the retirement plan in order to finance the retirement pay of
its employees. Under the retirement plan, the employees are entitled to retirement benefits if they have
rendered at least 10 years of service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay
retired from Mapula at the age of 60 and rendered 20 years of service. This is the first time that she retired
from employment. She received the following benefits:
Retirement pay
Back wages
Commutation of vacation leave credits
Commutation of sick leave credits
P 3,000,000
300,000
200,000
100,000
e. Mrs. Makulay is an employee of Mapula Corporation. Because the position of Mrs. Makulay became
redundant, she was forced to separate from Mapula on July 31, 20A1. Mapula offered her separation
benefits. She received the following benefits:
Separation pay
Back wages
Commutation of vacation leave credits
Commutation of sick leave credits
f.
P 3,000,000
300,000
200,000
100,000
Mrs. Makulay is an employee of Mapula Corporation. Because of her sickness, Mrs. Makulay was forced to
separate from Mapula on July 31, 20A1. Mapula offered her separation benefits. She received the following
benefits:
Separation pay
Back wages
Commutation of vacation leave credits
Commutation of sick leave credits
P 3,000,000
300,000
200,000
100,000
Required:
1.
purposes for the year ended December 31, 20A1.
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2.
income tax purposes for
the year ended December 31, 20A1.
Problem 10
13th month pay and other benefits; de minimis benefits; prizes and awards; SSS contributions
The following are independent situations regarding the salaries and benefits granted to Ms. Paraluman for the
year ended December 31, 20A1:
a. Ms. Paraluman received the following salaries and benefits from Adobo, Inc.:
Gross compensation
13th month pay
14th month pay
Bonuses
Rice subsidy
Productivity incentive
Loyalty award
Medical allowance for the employee
Daily meal allowance
Commutation of vacation leave credits
Commutation of sick leave credits
Total
P 360,000
30,000
30,000
60,000
24,000
12,000
15,000
8,000
12,000
24,000
16,000
P 591,000
The following are the additional information:
The rice subsidy was given in cash for P2,000 monthly.
The productivity incentive was granted in cash on December 1, 20A1.
The loyalty award which was a wrist watch was given on June 30, 20A1.
The medical allowance was subjected to liquidation. Ms. Paraluman submitted invoices and
receipts supporting purchases of medicines and other medical expenses issued in her name.
The daily meal allowance was given on account of overtime equivalent to P100 per day. The basic
daily minimum wage was P500 per day.
The commutation of vacation leave credits pertains to 12 days leave credits which were converted
into cash.
The commutation of sick leave credits pertains to 8 days leave credits which were converted into
cash.
Ms. Paraluman contributed P545 monthly as mandatory contribution to SSS which was deducted
from her compensation.
b. Ms. Paraluman, a private elementary school teacher, received the following salaries and benefits the
Department of Education (DepEd):
Gross compensation
13th month pay
14th month pay
Bonuses
Rice subsidy
Productivity incentive
Loyalty award
Medical allowance for the employee
Daily meal allowance
Commutation of vacation leave credits
Commutation of sick leave credits
Total
P 240,000
20,000
20,000
40,000
24,000
10,000
15,000
10,000
15,000
12,000
8,000
P 414,000
10
The following are the additional information:
The rice subsidy was given in cash for P6,000 quarterly.
The productivity incentive was granted in cash on December 1, 20A1.
The loyalty award was given in cash on June 30, 20A1.
The medical allowance was given in cash and only P7,000 was subjected to liquidation. Ms.
Paraluman submitted invoices and receipts supporting purchases of medicines and other medical
expenses issued in her name for P7,000.
The daily meal allowance was given regardless of whether Ms. Paraluman rendered overtime. The
basic daily minimum wage was P500 per day. Ms. Paraluman did not render any overtime.
The commutation of vacation leave credits pertains to 12 days leave credits which were converted
into cash.
The commutation of sick leave credits pertains to 8 days leave credits which were converted into
cash.
Ms. Paraluman contributed P700 monthly to SSS which was deducted from her compensation.
However, only P545 is the mandatory monthly contribution.
In addition, he received the following prizes and awards (in cash):
Most outstanding elementary school teacher
SEA Games gold medalist in track and field
Loyalty service award for 20 years of service with his employer
Prize for winning department store raffle
Prize for winning talent competition in a variety show
P 100,000
1,000,000
20,000
100,000
150,000
Required:
1. Determine the amount that will be included as part of Ms. Paraluman
purposes for the year ended December 31, 20A1.
2. Determine the amount that will excluded from Ms. Paraluman
for the year ended December 31, 20A1.
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