Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reo~

Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

CHAPTER 4: SELF-TEST EXERCISES l T 4, Prepayments are deductible but in the future period they expire or are consumed
in the business or trade of the taxpayer.
Discussion Questions T 5. The use of different methods for different businesses of the same taxpayer is
1. What are the three income taxation schemes? Briefly discuss the scope of ea permitted by law.
2. Discuss the nature of final income taxation. T 6. Initial payment Includes downpayment and installments in the year of sale.
3. What are ordinary assets? Compare them with capital assets. F 7. Contract price is synonymous with selling price.
4. What capital gains are subject to capital gains taxation? T 8. The crop year method is an accounting method.
S. What are the special features of regular income taxation? F 9. Under the percentage of completion method, gross income is reported based on
6. Enumerate the instances wherein short accounting period will arise. the cash collections from the contract price.
7. What are the tax accounting methods in reporting income? Briefly explain ea T 10. The depreciated value of the property upon termination of the lease constitutes
8. What are the two types of income tax return? income to the lessee.
F 11. There are three types of income tax return for each income tax scheme.

True or False 1 F 12. All taxpayers, small or large, are encouraged to file their income tax return
F1. An ordinary asset is defined to include all other assets other than capital asset.
1
through the EFPS system of the BIR.
T 13. Large taxpayers are under the supervision of the BIR Large Taxpayer Service.
F 2. Both active income and passive income do not require direct participation of F 14. Non-filing and/or non-payment of tax is subject to penalties such as surcharges,
taxpayer in earning the income.
T 3. There are three types of gross income for taxation purposes. interest, compromise, and imprisonment
T 15. The interest on unpaid taxes is computed on the basic tax only excluding the
F 4. The three tax schemes are mutually inclusive in coverage.
surcharge.
T S. Regular income tax generally covers active income and capital gains. F
16. Only large taxpayers shall file under eFPS.
T 6. Final tax generally covers passive income.
T 17. Both manual filing and filing though e-BIR forms makes use of manual payment.
F 7. Capital gains arise from the sale, exchange, and other disposition of any assets. T 18. eFPS is fully electronic tax compliance.
T 8. There are only two types of assets for purposes of taxation. T 19. e-BIR forms makes use of electronic data entry and filing.
T 9. The technique used to measure income is referred to as an accounting methi1 T 20. eFPS filers may file manually when there is a BIR system downtime.
The length of time over which income is reported is referred to as an accou1·
period. Multiple Choice - Theory: General concepts
T
10. Regular accounting periods are calendar and fiscal. '
T 11. Individuals file their income tax returns on or before April 15 of the follof D 1. Which of the following accounting methods is most consistent with the lifeblood
calendar year. doctrine?
F a. Crop year method c. Installment method
12. All taxpayers can change their accounting period when there is a change in}
b. Cash basis d. Accrual method
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 thall 2. Which is not a scheme in taxing income?
months. A
a. Ordinary gain taxation c. Capital gains taxation
F
14. The accounting period of a deceased taxpayer shall be terminated on Decent# b. Regular income taxation d. Final income taxation
31 in the year of death.
T 3. Which is a correct statement regarding income taxes?
15. Accrual basis and cash basis are the most common accounting methods us! D
practice. f a. An item of income subjected to final tax can still be subject to regular tax.
b. An item of income exempted from final tax is nevertheless taxable to regular

T
True or False2
1. The withheld taxes on the income payments made by the taxpayers are taX
against their income tax due.
f
1 c.
tax.
An item of income subjected to capital gains tax may be subject to regular
income tax.
d. An item of income exempted from tax is likewise exempt from capital gains
2. Advanced income is an item of gross income for accrual basis taxpayers.
T tax and regular income tax.
3. Generally, prepayments are non-deductible in the current accounting period

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 Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Rep~
Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting
B 4. Which is not a feature of final tax?
a. Covers certain passive income d. Dealers of properties can use the installment method only If Initial payment
b. Covers all capital gains does not exceed 25% of the selling price.
c. Withholding at source B
13. Initial payment means
d. None of these a. Downpayment.
C b. Total collection within the year the installment sale was made.
5. Which of the following properties when classified as capital asset is subj c. Installment payments, exclusive of downpayment, within the year the
capital gains tax? installment sale was made.
a. Domestic stocks sold directly to buyer d. Total collections within one year from the date the Installment sale was made.
b. Real property
c. Both a orb C 14. Income is reported by reference to the extent of project completion in
d. None of these a. Deferred payment method
b. Installment method
D 6. Capital asset means c. Percentage of completion method
a. real properties used in business. d. Completed contract method
b. personal properties used in business.
C 15. Leasehold Income is recognized over the lease term in
c. real properties not used in business.
d. any property, real or personal, not used in business. a. Outright method c. Spread-out method
b. Cash basis d. Percentage of completion method
D
7. Which is not an item of passive income? B 16. Statement 1: The excess of mortgage assumed by the buyer over the basis of the
a. Royalties c. Deposit interest income properties sold is the amount of the gain on the sale.
b. Prizes d. Professional income
Statement 2: Any collection from an installment contract where the mortgage
A exceeds the tax basis of the properties received constitutes collection of income.
8. These are accounting techniques or conventions used to measure income
a. Accounting methods c. Accrual basis Which statement is true?
b. Accounting periods d. Cash basis a. Statement 1 only c. Both statements are true.
b. Statement 2 only d. Neither statement is true.
B
9. These are distinct and equal time periods over which income is measured
a. Accounting methods c. Crop year basis C 17. Which is correct regarding the crop year method?
b. Accounting periods d. Cash basis a. Crop year method is an accounting period.
b. Crop year method recognizes farming income when the next planting season
A 10. Income is recognized when received rather than when earned commenced.
a. Cash basis c. Accrual basis c. Crop year method matches cropping expenses with the !~come udon :~rvest
b. Installment basis d. Deferred payment basis d. Crop year method recognizes cropping expenses when incurrer an arvest
B 11. Income is recognized when earned regardless of when received income when realized.
a. Cash basis c.Installment method D 18. Which is not a special feature of regular income taxation?
b. Accrual basis d. Percentage of completion a. Use of accounting methods c. Annual payment of income tax
B
b. Use ofaccounting periods d. Final withholding tax at source
12. Which statement is correct? j
a. Dealers of real properties can use the installment method without limitat? A 19. Which is an incorrect statement regarding the use of accounting period? .
b. Dealers of personal properties can use the installment method wit a. Individuals can either choose the calendar year or fiscal year accounting
limitation. +
c. Non-dealers of properties can use the installment method if initial pay , .,aaraccounting period for any taxpayer is 12 months.
exceeds 25% of the selling price. -~

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 Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Rel Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

c. Individual taxpayers are not allowed to report income using fiscal acog B 6. Maitum Corporation reports on a calendar year. On August 15, 2021, it stopped
period... ] business due to persistent losses. Maitum Corporation's last income tax return
d. Corporations may opt to use either calendar or fiscal accounting period shall cover
B a. January l to December 31, 2021
20. Under which of the following will short accounting period not arise? b. January 1 to August 15, 2021
a. Change of accounting period by a corporate taxpayer c. August 15, 2020 to August 15, 2021
b. Change of accounting period by an individual taxpayer d. August 15 to December 31, 2021
c. Death of a taxpayer A
d. Dissolution and liquidation of a business 7. Effective May 15, 2022, Tabuk, Inc. changed its fiscal year ending every April 30 to
the calendar year. An adjustment return shall be filed covering the period
Multiple Choice - Problem 4-1: Accounting period a. May 1 to December 31, 2022.
C 1. A corporation reporting on a fiscal year ending every March 31 shall ft b. January 15 to December 31, 2022.
2021income tax return not later than c. January 1 to April 30, 2022.
a. April 15,2021. c. July 15, 2021. d. April 30 to December 31, 2022.
b. June 15, 2021. d. April 15, 2022. B 8. Effective March 1, 2021, Caraga, Inc. changed its calendar year to a fiscal year
B Z. An individual taxpayer shall file his or her income tax return on or before the ending every June 30. An adjustment return shall be filed covering the period
a. 15day of the fourth month of the same calendar year. a. March 1 to June 30, 2021.
b. 15day of the fourth month of the following calendar year. b. January 1 to June 30, 2021.
c. 15day of the fourth month of the same fiscal year. c. January 1 to March 1, 2021.
d. 15day of the fourth month of the following fiscal year. d. January 1 to December 31, 2021.
C
9. During 2021, Ozamis Corporation changed its accounting period to the calendar
C 3. Anderson died on March 31, 2021. Which is a correct statement?
year. The adjustment return shall be filed on or before.
a. Anderson's 2021 income tax return shall cover January 1, 2020 to Dece
a. April 15, 2021. c. April 15, 2022.
31,2021. '
b. July 15, 2021. d. July 15, 2022.
b. Anderson's 2021 income tax return shall cover January 1, 2021 to Decel
31, 2021. C 10. Effective July 2, 2022, Parang Company changed its fiscal year ending every March
c. Anderson's 2021 income tax return shall cover January 1, 2021 to March) 31 to another fiscal year ending every August 31. An adjustment return shall be
2021. ' filed covering the period
d. Anderson's 2021 income tax return shall cover April 1, 2021 to Decemb@l a. April 1 to July 2,2022. c. April 1 to August 31, 2022.
2021. 3 b. April 1 to July 1, 2022. d. July 3 to August 31, 2022.
B
!
4. Mrs. Julian started business on July 15, 2021. What should be the coverage d Multiple Choice - Problems 4-2: Tax schemes and accounting methods
2021 income tax return? 1. Berlin Corp. reported the following data for 2023:
a. January 1 to July 15, 2021 • Total net sales made to customers were P2,000,000 in cash.
b. July 15, 2021 to December 31, 2021 • Goods purchased for sale totaled P1,200,000 in cash. Beginning and ending
c. July 16, 2021 to July 15, 2021 inventory of goods for sale, respectively, were P200,000 and P300,000.
d. January 1 to December 31, 2021 • 1-year advanced rent of P30,000 to apply for 2024 was received from a
B sublease contract
5. Metersbonwe Corporation started business on April 5, 2021 and opted tor • P40,000 total interest Income from customers promissory note earned.
income tax on a fiscal year ending every October 31. Metersbonwe's first in®
tax return shall cover P30 000 of this was collected.
• Unrealized foreign exchange gains from foreign currency receivables totaled
a. April 6, 2021 to October 31, 2021
b. April 5, 2021 to October 31, 2021 P60,000.
c. April 5, 2021 to December 31, 2021
d. April 5, 2021 to April 5, 2022 129
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 2,400,000
(1,500,000)
=900,000
Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Re~ X600,000/2,400,000
2M Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting
(1.1M)
Using cash basis, compute the total income subject to income tax. 30K
B
a. P990,000 cC. P750,000 30K Compute Malita's gross income in 2023 using the installment method.
b. P960,000 d. P690,000 C a. P900,000 c. P225,000
2M
b. P675,000 d. P112,500
D 2. Using accrual basis, compute the total income subject to income tax. (1.1M)
a. Pl,060,000 c. P960,000 30K 8. Exquisite Corporation sold its old warehouse with carrying amount (tax basis) of
b. P1,000,000 d. P970,000 40K C P600,000 for Pl,000,000. A downpayment of 15% was collected on July 1, 2023.
Additional PlS0,000 installment payments were received as of December 31,
3. Pagadian, Inc. reported the following during the year: 2023. 30% Cannot Installment method
• P400,000 proceeds of life insurance of an officer where Pagadlan Is Compute the gross profit to be reported for the year 2023.
beneficiary (P600,000 still uncollected.) a. P60,000 c. P400,000
• PB00,000 interest income, exclusive of P200,000 uncollected and ac b. P120,000 d. P450,000
interest
• P300,000 increase in value of investment in stocks 9. Carl Gabriel is a dealer of household appliances. He reported the following in
D 2023and 2024: 50% 45%
A Compute the gross income under cash basis. 2023 2024 500,000*45%
a. P 800,000 c. P1,200,000 Installment sales P 500,000 P 800,000 100,000*50%
b. P1,000,000 d. Pl,400,000 Cost of installment sales 250,000 440,000
B Collections 300,000 600,000
4. Compute the gross income under accrual basis.
a. P800,000 c. Pl,200,000 Carl Gabriel's 2024 collection is inclusive of Pl00,000 accounts from 2023.
b. P1,000,000 d. Pl,400,000
Using the installment method, compute Carl Gabriel's gross income subject to
5. Dapitan, Inc. has the following receipts during 2023: income tax in 2024.
a. P360,000 c. P250,000
From service billings to clients P 400,000 b. P320,000 d. P275,000
C Advances from clients 100,000 A 10. Using the accrual basis of accounting. compute Lancelot's gross income subject to
Total cash collection P 500,000
income tax in 2024. 800,000-440,000
; c. P275,000
The P100,000 advances refer to services which will be rendered next year. a. P360,000
b. P320,000 d. P250,000
uncollected billing increased from P100,000 on December 31, 2022 to P150#
on December 31, 2023. ~ 11. Merville is a dealer in real properties. Merville requires 20% downpayment, and
the balance is payable over 36 monthly installments starting on the last day of the
Compute the gross income using cash basis. , month following the month of sale. Merville sold properties in 2023 and 2024
a. P400,000 c. PS00,000 with terms as follows:
b. P450,000 d. PSS0,000 • House and Lot No. 1 was sold for P1,350,000 on November 11, 2023.
400K
• House and Lot No. 2 was sold for P1,800,000 on July 5, 2024.
D 6. Compute the gross income using accrual basis.
150K
a. P400,000 c. PS00,000 Both properties were sold at a gross profit rate of 40% based on the selling price.
(100K)
b. P450,000 d. PSS0,000 100k
·) Compute Merville's gross income subject to income tax in 2023 and 2024,
2023 2024
respectively. 270,000 DP 360,000 DP
7. In 2023, Malita Inc. sold its parking lot for P2,400,000 payable on installment] A c. P540,000; P720,000 30,000 IP
a. P120,000; P368,000 360,000 IP (2023)
lot was previously acquired for P1,500,000. The buyer has an outstanding UP, d. PS40,000; P864,000
b. P120,000; P864,000
balance of P1,800,000 as of December 31, 2023, Malita's year-end. ~ 200,000 IP (2024)

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 Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Rep~
Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

12. In 2024, Mr. Francis, a dealer of car, disposed a brand new sports utility g,
C A Compute Bernas income from the leasehold improvement to be reported in 2024
(SUV) which costs P800,000 for P1,200,000, under the following terms: F
using the spread-out method.
(40,000,000*10/50)/40
July 1,2024-as down payment P 100y a. P 200,000 c. P8,000,000
Monthly installment thereafter S0,y b. P4,000,000 d. P32,000,000
Mr. Francis will choose whichever favorable permissible income reporting
17. In the immediately preceding problem, assume that the building was completed
method for him. 100,000 -DP on July 1, 2024, what is the income using outright method.
B
250,000 -IP
How much gross income is to be reported in 2024? a. P 4,000,000 c. P32,000,000
b. P 8,000,000 d. P40,000,000
(40,000,000*10/50)
a. P 400,000 c. Pl 16,667 GP 33.33%
b. P 250,000 d. PlOB,219
18. Len leases an office space from Rafi, Inc. in a non-renewable 10-year lease
1
13. In the immediately preceding problem, assuming Mr. Francis is not a dealer orj A
contract Just after the second year of the lease, Tomas renovated the premises
and made improvements at a cost of P1,200,000. These improvements are
A how much gross income is to be reported in 2024?
a. P400,000 c. P116,667 · expected to last for 12 years. Compute Rafi's annual income from the leasehold
b. P 250,000 d. P108,219 improvement using the spread-out method.
(1,200,000*4/12)/8
a. P50,000 c. P30,000 =50,000
C b. P37,500 d. P20,000
14. Luccio Karl accepted a Pl,000,000 construction contract in early 2023. A;
1,000,000 December 31, Luccio Karl incurred total construction costs of P600,000 1 19. Jamie started raising swine for sale by purchasing 5 gilts and a boar at a total
(800,000) estimates additional P200,000 to bring the project to completion. Per independ purchase price of P50,000 on January 2022. As of December 31, 2024, Hassan'
= 200,000 appraisal, the building is at its 80% stage of completion. Compute Luccio Kai B herd grew to 15 guilts, 2 boars and 20 piglets. The total herd has a fair value of
x80%
2023 construction income using the percentage of completion method. ' P196,000 when sold as is. During the year, Hassan earned P180,000 from selling
a. P40,000 c.P160,000 { piglets. How much should Hassan report as farming income in 2024?
b. P200,000 d. P400,000 ~ a. P326,000 c. P 146,000
B b. P180,000 d. P 130,000
15. Talomo, Inc. constructs residential properties for clients and reports income!
the percentage of completion method. In 2023, Talomo, Inc. started a P2,000 20. Peter, a farmer, uses the crop-year method in reporting his income from long-
construction contract. Details of his 2023 and 2024 construction follow: term crops. The following data are relevant to his farming operations in 2023:
750,000
D
1,000,000 • Sales of crops harvested, P900,000 900,000
2023 2024 • Expenses on harvested crops, P400,000 (400,000)
Annual construction costs P 200,000 P 800,000 50,000
Estimated cost to finish 800,000 • Expenses on maturing crops, P200,000
250,000
Extent of completion 20% • Expenses on newly planted crops, P100,000
80%
• Sales of tree branches for firewood, P50,000
Compute the construction income in 2023 and 2024. 600,000
a. P200,000;P560,000 c. P400,000; P400,000 (200,000) Peter uses the crop year method in reporting crop income. Compute Peter's total
400,000 income subject to tax.
b. P200,000;P400,000 d. P400,000; PS60,000
a. P240,000 c. P540,000
16. Oliver entered into a 40-year lease contract with Be b. P340,000 d. P550,000
·u tr b ernas. , er agreemer±,t.» 0l!
wit construct a uilding on Bernas lot and operate the same for 40 y
Ownership of the building will transfer to Bernas upon the termination ol® Multiple Choice - Problem 4-3: Tax compliance
lease. The lease will not commence until the buildi: +. 5feted. Oli! A 1. A taxpayer filed his income tax return in October 28, 2024. The de6adline for the
completed he building at a total cost of P40,000,5,"®® """,,u.# return was April 15, 2024. If he has P40,000 net tax due, compute the penalties in
bunt·1d·ting is
· d
expecte to be used over 50years.
, , on anuary ,
"[
.
the fonn of interest 196 DAYS/365 DAYS
a. P 2,578 P 2,867
12% x 40,000
C.

l b. P 2,611 d. P 4,296
133 =2,578
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t
!:
Chapter 4 _ Income Tax Schemes, Accounting Periods, Methods, and Report!~!'. Chapter 5- Final Income Taxation

C 2. What is the total surcharge penalty? 25%

a. po c. P 10,000 :
CHAPTERS
b. P8,000 d. P 20,000 FINAL INCOME TAXATION
3. A taxpayer received a notice from the BIR to file his 2022 income tax return~
D later than January 15, 2024. The tax due per his return is Pl00,000. What is~ Chapter Overview and Objectives
total surcharge penalty? ,
------------------- _
a. PO c. P25000 50% ] This Chapter discusses the features of final income taxation, the items of gross
b. P20,000 d. P 50,000 ] Income, and the class of taxpayers subject to final income tax.

4. What is his total interest penalty? :1 Final tax is one of the exceptions to the scope of the regular income tax. An
C a. P 6,500 C. p 9,041 , excellent understanding of the items of passive income and those taxpayers
275/365 x 12% * 100,000 = 9,041
b. P 7,900 d. P15,068 subject to final tax including their final tax rates is extremely crucial to your
~ mastery of income taxation.
B 5. Compute the compromise penalty
a. P10,000 c. p 20,000 After finishing this Chapter, readers are expected to demonstrate:
b. P 15,000 d. P 30,000 a. Understanding and appreciation of the features and scope of final tax
b. Mastery of those certain passive income subject to final tax and their
6. Mani Pokyaw failed to pay file his income tax return for the year 2023 wtii' corresponding final tax rates
A should have been filed on or before April 15, 2024. The BIR sent him a notice c. Mastery of the general final tax rates on certain non-residents and their
file his return and pay his tax on or before July 18, 2024. Mani Pakyaw filel exceptions
return showing a basic tax due of P1,000,000.
d. Knowledge of the other applications of the final income tax scheme
j
Compute the total interest penalty. 94/365
a. P30,904 c. P 38,555 1 FEATURES OF FINAL INCOME TAXATION

C 7.
b. P37,644 d. P 39,863

Mr. Pokyaw must pay a surcharge of

50% 4
i 1.
2.
Final tax
Tax withholding at source
a. P O c. P 500,000 .. I 3. Territorial imposition
4. Imposed on certain passive income and persons not engaged in business in
b. P 250,000 d. P 1,000,000
I the Philippines
8. Maco Corporation failed to file its income tax return for the fiscal year endf
A August 31, 2023. On June 5, 2024, it filed an income tax return with a basic taxsd The Final Withholding System
due and payable for the fiscal year amounting to P500,000. Compute the interd The final withholding system imposes upon the person making income payments
penalty to be imposed by the BIR. · the responsibility to withhold the tax. The tax which will be deducted at source is
a. P 28,603 c. P 45,873 174/365 * 12% *500,000 = 28,603 :I final. The taxpayer receives the income net of tax and there would be no need for
b. P28,438 d.P46,207 ] him to file an income tax return to report the same.
I
A 9. Compute the total tax assessment to be paid, excluding compromise penalty,
a. P653,603
b. P 653,438
c.P 689,275
d. P 660,873 28,603
; The final withholding system is inherently territorial. It applies only to certain
passive income earned from sources within the Philippines. Note that taxation is
500,000 * 25% .I territorial and we cannot impose tax obligation (filing or withholding) against
500,000
=653,603
non-resident subjects of foreign sovereignty. Hence, all items of income earned
A
from sources abroad, passive or active, are subject to tax under the general scope
,I of the regular income tax.

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