True or False 1
1. An ordinary asset is defined to include all other assets other than capital assets.
T 2. Both active income and passive income do not require direct participation of the
taxpayer in earning the income.
F 3. There are three types of gross income for taxation purposes.
T 4. The three tax schemes are mutually inclusive in coverage.
T 5. Regular income tax generally covers active income and capital gains.
'F 6. Final tax generally covers passive income.
T 7. Capital gains arise from the sale, exchange, and other disposition of any assets.
f 8. There are only two types of assets for purposes of taxation.
T 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 to as an accounting
period.
T 10. Regular accounting periods are calendar and fiscal.
T 11. Individuals file their income tax returns on or before April 15 of the following
calendar year.
f 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.
T 13. The first accounting period of a starting business will more likely be less than 12
months.
F 14. The accounting period of a deceased taxpayer shall be terminated on December
31 in the year of death.
T 15. Accrual basis and cash basis are the most common accounting methods used in
practice.
f
T
T
T
True or False 2
1. The withheld taxes on the income payments made by the taxpayers are tax credit
against their income tax due.
2. Advanced income is an item of gross income for accrual basis taxpayers.
3. Generally, prepayments are non-deductible in the current accounting period.
125
u,apter 4
T
-
Income I ax ~cnemes,
A C.lUU I llll l':::j r
C.I I V ' - O /
' . · -
~·. -
--,
-
· ' '--'
'' t'Par,,
, but in
· th e fu ture period they expire or are tttr
4. Prepayments are deductible
in the business or trade of the taxpayer.
T 5. The
use of different methods for different businesses of th e sarne t;i~li;
permitted by law.
.
f 6. Initial payment includ es clownpayment and installments m th e year of sai~
T 7. Ccmt ract price is synonymous with selling price.
·
T= 8. The crop year method ts an accounting method .
.
.
T 9. Under thr percentage of completion m~thod, gross income is reported L
the cash collections from the contract pnce.
·
t \0. The depreciated value of the property upon termination of the lease c
Ori-income to the lessee.
·
11. There are three types of income tax return for each income tax scheme.
f 1.2. AB taxpayers, small or large, are encouraged to file their income tax
through the EFPS system of the BIR.
T 13. Large taxpayers are under the supervision of the BIR Large Taxpayer Sei'rrF 14. Non-filing and/or non-payment of tax is subject to penalties such as su~r:
_
interest, compromise, and imprisonment.
\ 15. The interest on unpaid taxes is computed on the basic tax only exduc
t=
surcharge.
'
_ 16. Only large taxpayers shall file under eFPS.
\ 17. Both ~anual filing a~d filing tho~gh e-BIR forms makes use of manual pa ;
T 18. eFPS 1s fully electronic tax comphance.
'ft.
T 19. e-BIR forms makes use of electronic data entry and filing.
\ 20. eFPS filers may file manually when there is a BIR system downtime.
r
•I
Multiple Choice - Theory: General concepts
Which of the following accounti
h d •
doctrine?
ng met O s Is mo st consistent with the Iii
a. Crop year method
c. Installinent method
b. Cash basis
d. Accrual method
2. Which is not a scheme in tax· .
.
Ing Income?
a. Ordinary gain taxation c C . . .
0
b. Regular income taxati
F~PI~l gams taxation
on . mal mcome taxation
3. Which is a correct statement r
. .
a. An item of income sub. egardmg mcome taxes? .
b An ·t
•
Jected to final tax
·
f
can sti11 be subject to regular ta:
B · 1 em of income exempted
tax..
rom final tax is nevertheless taxable to 1
c. An item of income
.
incom ta
sub1ected to cap·t l .
. e x.
l a gams tax may b
b.
d. An item
f.
e su Je ct to r
o income ex
tax and re l •
empted from tax · 11·k
gu ar income tax.
Is eWise exempt from capi~
1.
d
126
t
Chapter 4 ... Income Tax Schemes, Accoun ing
t-ienou~
'
IVlt'll IVU.J,
\.,Al· ~
' ·-r
4. Which is not a feature of final tax?
a.
Covers certain passive income
b. Covers all capital gains
c. Withholding at source
d. None of th ese
C
.
'f d
pital asset is subject to
5. Which of the following propertie s when class1 te as ca
capital gains tax?
a.
b.
c.
d.
D
6.
Domestic stocks sold directly to buyer
Real property
Both a or b
None of these
Capital asset means
a. real propertie s used in business.
b. personal propertie s used in business.
c. real propertie s not used in business.
d. any property, real or personal, not used in business.
b
7.
0
Which is not an item of passive income?
a. Royalties
c. Deposit interest income
b. Prizes
d. Professional "income
8. These are accounting techniques or conventions used to measure income
a. Accounting methods
c. Accrual basis
A b. Accounting periods
d. Cash basis
9. These are distinct and equal time periods over which income is measure d
a. Accounting methods
c. Crop year basis
B b. Accounting periods
d. Cash basis
10. Income is recognized when received rather than when earned
a. Cash basis
c. Accrual basis
b. Installment basis
d. Deferred payment basis
A
11. Income is recognized when earned regardles s of when received
a. Cash basis
c. Installme nt method
B b. Accrual basis
d. Percentage of completio n
12. Which statement is correct?
a.
r1 b.
U
Dealers of real propertie s can use the installme nt method without limitation .
~e~ler~ of personal propertie s can use the installme nt method
'th
hm1tat1on.
w1 out
c.
Non-dealers of propertie s can use the installme nt method if · ·r I
101
exceeds 25% of the selling price.
•a payment
127
\...napter 4 - Income I ax )Cf l ~l llt::>,
d.
r ..... .... - -
t meth od only if initiaJ
Dealers of properties can use the irn:taJJmen
does not exceed 25% of the selling pnce.
P;iJ_
13. Initial payment mea ns
, ·t IJm en t sa le was mad e.
a. Downpayment.
with in the Ye:,·
b. Total collection within_the year t~e ;/ ~ow npaym ent,
c.
5
Insta llment payments, exclu fve
the date the insta Jlme nt sale wa
f
installment sale was made.
S:.
d. Tota l collections within one year rom
xt t of proj ect com plet jon in
en
thee
to
14. Income is reported by reference
a. Deferred payment method
b. Installment method
c. Percentage of completion method
d. Completed contract method
C,
6
in
15. Leasehold income is recognized over the lease term
Outright method
C b. Cash basis
a.
c. Spread-out met hod
d. Percentage of com plet ion met hod
the buy er ove r the basis t
16. Statement 1: The excess of mortgage assumed by
properties sold is the amount of the gain on the sale.
trac t whe re the mo~
Statement 2: Any collection from an insta llme nt con
coll ectio n ofinco~
exceeds the tax basis of the properties received cons titut es
B
Which statement is true?
a. Statement 1 only
b. Statement 2 only
c. Both state men ts are true .
d. Neither stat eme nt is true .
17. Which is correct regarding the crop year meth od?
a. Crop year method is an accounting period.
.
b. Crop year method recognizes farmin g mco
me whe n the nex t plantings~
commenced.
.
c. Crop year method matches cro in
inco me upon han1
d. Crop year method recognizes PP g_expenses with the
crop pmg expe nses whe n incu rred and ht
income when realized.
18 Wh ' h'is not a special feature of r
ic
.
.
ar mco me taxa tion ?
A ba. Use of accounting method egul
s c. Annual .payme nt of inco me tax
.
· Use of a
d p·
ccountmg periods
. maI with hold ing tax at sour ce
19. Which is an inco
rrect statern
a I
ent rega rdin g the u
.
13 . ndividuals can 1th
se of acco unti ng peri od?
e er choose the I
period.
u'
ye
ar
end
ca
b Th e regular acco .
fiscal year acco ·
or
ar
·
untmg period ~
.
or any taxp a
yer is 12 mon th
s.
128
t 1·ncome using fiscal accoun ting
repor
to
d
allowe
not
are
ers
taxpay
ividual
Ind
c.
eriod
f
l
period.
·
P
mg
accoun
fisca
or
ar
calend
either
d. Corporati ons may opt to use
. ?
d
anse.
not
perio
ting
accoun
short
will
ng
followi
20. Under which of th e
a. Change of accounting period by a corpor ate taxpayer
b. Change of accoun ting period by an individual taxpay er
C c. Death of a taxpay er
d. Dissolu tion and liquidation of a busine ss
Multiple Choice - Proble m 4-1: Accounting period
1.
B
corporation reporting on a fiscal year ending every March 31 shall file its
2021income tax return not later than
c. July 15, 2021.
a. April 15, 2021.
d. April 15, 2022.
b. June 15, 2021.
A
2. An individual income taxpayer shall file his or her income tax return on or before
the
a. 15 th day of the fourth month of the same calend ar year.
C b. 15 th day of the fourth month of the folio.wing calendar year.
c. 15 th day of the fourth month of the same fiscal year.
d. 15 th day of the fourth month of the following fiscal year.
3. Anderson died on March 31, 2021. Which is a correc t statem ent?
a. Anderson's 2021 income tax return shall cover Januar y 1, 2020 to Decem ber
31, 2021.
b. Anderson's 2021 income tax return shall cover Januar y 1, 2021 to Decem ber
B 31, 2021.
c. Anderson's 2021 income tax return shall cover Januar y 1, 2021 to March 31,
2021.
d.
Anderson's 2021 income tax return shall cover April 1, 2021 to Decem ber 31,
2021.
4.
C
5.
0
Mrs. Julian started busine ss on July 15, 2021. What should be the covera ge of her
2021 income tax return ?
a. January 1 to July 15, 2021
b. July 15, 2021 to December 31, 2021
c. July 16, 2021 to July 15, 2021
d. January 1 to December 31, 2021
~eters bonwe Corpo ration started busine ss on April 5, 2021 and opted to repor t
income tax on a fiscal year ending every Octob er 31. Meter sbonw e's first incom e
tax return shall cover
a. April 6, 2021 to October 31, 2021
b. April 5, 2021 to October 31, 2021
1Jq
T
Chapter 4 - Income ax
c.
d.
Schemes, Accou
nttng
31, 2021
Apn·' I 5 ' 2021 to December
·15 2022
April 5, 2021 to Apn '
t"t'.'' ,vu., , .. . -
On August 15, 2021 , it
st, .
reports on a calendar year. ation's Jast income lal'. ·,
J
Maitum Corpor
6 Maltum Corpora ti on
. tr:,
. business
.
d ue to persistent osses.
shall cover
B
7.
.
ber 31, 2021
a.
t 15 2021
b. January 1 to Augus Au , st 15, 2021
c-. August 15, 2020 to gu31 2021
A ust 15 to December '
.
d. . ug
d ·ts fiscal year ending every Apr;,~
Effective May 15, 2022, Tabuk, Inc. chang~a/1 be fi)ed covering the period ~
the calendar year. An adjustment return s
May 1 to December 31, 202 2 ,
January 15 to December2321, 2022.
c January 1 to April 30, 20 ·
April 30 to December 31, 202 2 .
January 1 to
Decem .
~~
.f3
d.
nc chan ed its calendar year to a fiscal 'f.
Effective March 1, 2021, C~raga, 1 t · t rn ~hall be filed covering the period
ending every June 30. An adJustmen re u
a. March 1 to June 30, 2021.
b. January 1 to June 30, 2021.
c. January 1 to March 1, 2021.
d. January 1 to December 31, 2021.
8.
C.
9.
During 2021, Ozamis Corporation changed its accounting period to the cale::
year. The adjustment return shall be filed on or before.
a. April 15, 2021.
c. April 15, 2022.
b. July 15, 2021.
d. July 15, 2022.
C...
10. Effective July 2, 2022, Parang Company changed its fiscal year ending every Mr
31 to another fiscal year ending every August 31. An adjustmen t return sbi:•
A filed covering the period
a. April 1 to July 2, 2022. c. April 1 to August 31, 2022.
b. April 1 to July 1, 2022. d. July 3 to August 31, 2022.
Multiple Choice - Problems 4-2: Tax schemes and accountin g methods
1.
A
Berlin Corp. reported the following data for 2021:
• Total net sales made to customers were P2 000 000 .
h
• G d
h
,
,
1n cas .
in::n~:uri f a!ed for sale totaled Pl,200,000 in cash. Beginning and en£
•
ry g ods for sale, respectivel y, were P200 000 and P300 000.
1_
year advanced rent of P30 000
,
,
~
sublease contract
'
to apply for 2022 was received fro •
•
P40,000 total interest income from
P30,000 of this was collected.
r
customers promissor y note ear •'
130
•
Unrealized foreign excha nge gain s from foreign currency receivables totaled
P60,000.
Using cash bas is, co mpu te the to tal inco me s ubject to income tax.
a. P99 0,000
c. P7 50,000
b. P960,000
d. P690,000
:,
2. Using accrua l bas is, cornpute th e total income subject to income tax.
n. a. P l,060,000
c. P960,000
t-J b.
Pl ,000,000
d. P970,000
3.
0
4.
D
5.
Pagadian, Inc. reported the following during the year:
• P400,000 proceeds of life insurance of an officer where Pagadian is the
beneficiary (P600,000 still uncollected.)
• PB00,000 interest income, exclusive of P200,000 uncollected and accrued
interest
• P300,000 increase in value of investment in stocks
Compute the gross income under cash basis.
a. P 800,000
c. Pl,200,000
b. Pl,000,000
d. Pl,400,000
Compute the gross income under accrual basis.
a. PB00,000
c. Pl,200,000
b. Pl,000,000
d. Pl,400,000
Dapitan, Inc. has the foUowing receipts during 2021:
From service billings to clients
Advances from clients
Total cash collection
P 400,000
100,000
P 500,000
The Pl00,000 advances refer to services which will be rendered next year. Total
uncollected billing increased from Pl00,000 on December 31, 2020 to PlS0,000
on December 31, 2021.
C
6.
0
Compute the gross income using cash basis.
a. P400,000
c. PS00,000
b. P450,000
d. PSS0,000
Compute the gross income using accrual basis.
a. P400,000
c. PS00,000
b. P450,000
d. PSS0,000
~napter 4 - Income Tax Schemes Accoun ting
t-' e r iuu::i, ,v, ,;:; ~, ''-''"' -'' u , ''-'
f\~Po .
I
7·
C
8.
~~
In 2021, Malita In c. sold its parking lot for PZ.400,000 payable on installn-i~
lot was previously acquired for Pl ,500,000. The buyer, has an outstandit1 ~,
g~i.
balance of Pl ,800,000 as of December 31, 2021, MaJita s year-end.
Compute Malita's gross income in 2021 using the installment method.
c. P225,000
a. P900,000
d. Pl 12,500
b. P6 75,000
Exquisite Corporation sold its old warehouse with carrying amount (tax b·
P600,000 for Pl,000,000. A downpayment of 15% was _collected on July
Additional PlS0,000 installment payments were received as of Decen/
~
2021.
t
Compute the gross profit to be reported for the year 2021.
c. P400,000
C a. P60,000
d. P450,000
b. P120,000
9.
Carl Gabriel is a dealer of household appliances. He reported the followt
2021and 2022:
Installment sales
Cost of installment sales
Collections
2021
P 500,000
250,000
300,000
2022
P 800,000
440,000
600,000
Carl Gabriel's 2022 collection is inclusive of Pl00,000 accounts from 20Zl.
D
.
.
Using the installment method, compute Carl G b . I'
a ne s gross income sub1~
income tax in 2022.
a. P360,000
C. P250,000
b. P320,000
d. P275,000
.
,
10. ~sing the accrual basis of accountin co
g, mpute Lancelot s gross income suojl
income tax in 2022.
c. P275,000
a. P36 0,000
d. P250,000
b. P320,000
A
.
11. Merville is a dealer in real ro er .
the balance is payable over ~6: ties. ~erv11Ie requires 20% downpaymeni
m~nth following the month of onthly installments starting on the last dayr
sale. Merville sold properties in 2021 ana:1th terms as follows:
House and Lot No 1
. was sold fo Pl 3
• H
ouse and Lot No. 2 was s Id i r , 50,000 on November 11 2021.
o or Pl,800,000 on July 5 2022 ,
Both properties
.
,
were sold
. "(
at a gross profit
rate of 40% based on the selh 0 0 1
1
lnctf)le l 4t ·- 111 cUlll t' ldX .)U l !:= l lle~, MU... UUIIIII I~
I
\:. l l V U J t
. . . ....... . . ..., .... ..,,
~ .. -
· ·- , - · -
..J
Comp ute Merville's gross income subJect to income tax in 2021 and 2022,
respectively.
B a.
b.
P120, 000; P368, 000
Pl 20,000 ; P864, 000
P540,000; P720,000
d. P540,000; P864,000
C.
12. In 2022, Mr. Franci s, a dealer of car, disposed a brand new sports utility
vehicle
(SUV) whi ch costs PB00,000 for Pl,200 ,000, under the fol1owing terms :
p
July 1, 2022 - as down paym ent
Monthly instal lment therea fter
100,0 00
50,00 0
Mr. Francis will choose which ever favorable permi ssible income repor ting
method for him.
How much gross income is to be repor ted in 2022?
C a. P 400,000
c. P116,667
b. P 250,000
d. P108,219
13. In the imme diatel y preced ing problem, assuming Mr. Francis is not a deale r of
car,
how much gross incom e is to be repor ted in 2022?
A
How much gross incom e is to be report ed in 2022?
a. P 400,0 00
c. Pl 16,667
b. P 250,0 00
d. P108,219
14. Luccio Karl accep ted a Pl,000 ,000 constr uction contra ct in early 2021.
As of
December 31, Luccio Karl incurr ed total constr uction costs of P600, 000 and
estima tes additi onal P200,000 to bring the projec t to comp letion . Per indep enden t
appraisal, the buildi ng is at its 80% stage of completion. Comp ute Luccio Karl's
2021 constr uction incom e using the percen tage of comp letion metho d.
() a. P40,000
c. P160,000
b. P200,000
d. P400,000
15. Talamo, Inc. constr ucts reside ntial prope rties for client s and repor ts incom e by
the perce ntage of comp letion metho d. In 2021, Talam o, Inc. starte d a P2,00 0,000
construction contra ct. Details of his 2021 and 2022 constr uction follow:
Annual constr uction costs
Estimated cost to finish
Extent of comp letion
G
2021
P 200,0 00
800,0 00
20%
Compute the constr uction income in 2021 and 2022.
a. P200,000; P560, 000
c. P400,000; P400, 000
b. P200,000; P400, 000
d. P400,000; P560, 000
2022
P 800,0 00
250,0 00
80%
16. Oli:Ver entered into a 40-year lease contract with Bernas.
th Per agreefJ\e;
will construct a building on Sem as Jot and operate
~ same for
Ownership of
up~n t 1s
_e terrn
, the bujldfng will transfer to,,B-e.rnas
th building
co .tF1at1 f;.·
lease. The lease will not comme nce u nti
e
mp!e4:.i
completed the building at a total co~t of p4o,OOO,OOO on January 1, Ir
~
building ls ex~ctrd to be u,ed over 50 years.
'<
Compute Bernas income from the leasehold improvement to be repol"\erj
usmg the spread-out method.
o a
P 200.000
- b. P4,00o.ooo
'
c. ps,000,000
d. p32,ooo,ooo
17. In the immediately preceding problem, assume that the bu ilding was er,
on luly 1, 202 2, what is the income using outright method.
·
<) a. P 4,000,000
c. P32,000,000
b. P 8,000,000
d. P40,000,000
18. Len leases an office space from Rafi, Inc. in a non-renewable 10.Y~:
contract. Just after the second year of the lease, Tomas renovated the : ·
and made improvements at a cost of Pl,200,000. These improve:
expected to last for 12 years. Compute Rafi's annual income from the 1.
improvement using the spread-out method.
ll:
A. a PS0,000
c. P30,000
' b. P37,500
d. P20,000
19. Jamie started raising swine for sale by purchasing 5 gilts a d b
purchase price of PS0,000 on January 2020 As f D
b n a oar ati
herd grew to 15 guilts 2 boars and 2
. .
o
ecem er 31, 2022,i
Pl 96,000 when sold~ is. During th O piglets. The total herd has a fair ~
Q piglets. How much should Hassan re;:~ar, pass~n ~arned P180,000 from
!
rJ a.
P326,000
b. P180 000
'
cp
as armmg mcome in 2022?
146
.
,000
d. P 130,000
20. term
Peter, a farmer, uses the crop-year method .
.
.
crops. The following data are rel
in reporting his income fro[
· operations in 201,.
•• Sales of erops h arvested, P900 evant to his fa rm1ng
000
Expenses on h
'
Expenses on maa:t~ted crops, P400,000
Expenses on n I nng crops, P200,000
Sales of tree b ew y planted crops, Pl00 000
ranches for fl
'
Peter uses th
rewood, PS0 000
•
e crop y
,
income sub·Ject to tax ear method m
, reportin
·
: · P 40,ooo
·
g
crop
income.
Compute
Pete
r
2
•
•
•
D
. P340,ooo
C.
PS40,000
d. Psso,ooo
28 2022. The deadline for the
Multiple Choice - Problem 4-3: Tax comp!ianc e
pute the penalties in
1 A taxpayer filed his income tax return .m October
J~
~.; · return was April 15, 2022. If he has P40,000 net tax ue, com
d
. the form of interest.
~<·
\
·it
\
z.
p 2,578
b.
P 2,611
c. P 2,867
d. P 4,296
A
What is the total surcharge penalty?
c. P 10,000
a. p O
d. P 20,000
b. p 8,000
c..
from the BIR to file his 20~0 income tax retur~ not
3 A taxpayer received a notice
th e
· later than January 15, 2022. The tax due per his return 1s Pl00,000. What ts
total surcharge penalty?
,. 4.
'
It
t
'
a.
5.
p 25,QQQ
a.
PO
C.
b.
P 20,000
d. P·S0,000
What is his total interest penalty? .
C. p 9,041
a. P 6,500
d. PlS,068
b. P 7,900
Compute the compromise penalty
c. P 20,000
a. P 10,000
d. P 30,000
b. P 15,000
D
C
\3
6. Mani Pokyaw failed · to pay file his income tax return for the year 20 21 which
should have been filed on or before April 15, 2022. The BIR sent him a notice to
file his return and pay his tax on or before July 18, 20 22. Mani Pakyaw filed a
return showing a basic tax due of Pl,000,000. Compute the total interest penalty.
c. P 38,555
a. P 30,904
d. P 39,863
b. P 37,644
7.
Mr. Pokyaw must pay a surcharge of
c. P 500,000
a. PO
d. P 1,000,000
b. P 250,000
C
8. Maco Corporation failed to file its income tax return for the fiscal year ending
August 31, 2021. On June 6, 2022, it filed an income tax return with a basic tax still
due and payable for the fiscal year amounting to PS00,000. Compute the interest
penalty to be imposed by the BIR.
A,
c. P 45,873
a. P 28,603
d. P 46,207
b. P 28,438
9
· Compute the total tax assessmen t to be paid, excluding compromi se penal ty.
A
· c. P 689,275
a. P 653,603
d. P 660,873
b. P 653,438