PART 8 A pelaictiig JAI Vethow (sand Installment Reporting of Income ACCOUNTING PERIODS Section 43 of the Tax Code provides, that the taxable income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) In accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. 1f the taxpayer's annual accounting period is other than a fiscal year or ifthe taxpayer has no annual accounting period, or does not keep books, or if the taxpayer 's an individual, the taxable income shall be computed on the basis of the calendar year. KINDS 1) Calendar Year : 2) Fiscal Year INSTA HEN USE OF CALENDAR YEAR IS REQU Taxable income shall be computed on the basis of calendar year in the following cases: 1. _ If the taxpayer's annual accounting period is other than a fiscal year; 2. _ If the taxpayer has no annual accounting period; 3. If the taxpayer does not keep books of accounts; 4. If the taxpayer is an individual. (Section 43, NIRC) SHORT PERIOD RETURN ‘Accounting period may be less than twelve (12) months (Short Accounting Period) may arise when: 1. A corporation is newly organized 2. When a corporation is dissolved 3. When the taxpayer dies 4. When a corporation changes accounting period 427Aecnntng Matha latallaet Beto from RETURNS FOR SHORT PERIOD RESULTING FROM CHANGE OF ACCOUNTING PERIOD (Section 47 of the Tax Code) Ifa taxpayer, ther than an individual, with the approve of the corTioainwy, changes the basis of computing net Income from fiscal year to calendar year tte fina) or aaustment etsy shel be made forthe period between the close OF He [st cal year for which retum was made and the following December 31- CANGE 15 FROM CALENDAR YEAR TO FISCAL YEAR, 2 separate fidl or adjustment return shall be made for the period between ‘he close of the last calendar year for which return was made and the date designated as of the close Of the fiscal year. CHANGE IS FROM ONE FISCAL YEAR TO ANOTHER FISCAL YEAR, a Separate fina) or adjustment return shall be made forthe period between the close ofthe former fiscal year and the date designated as the close of the new fiscal year. ACCOUNTING METHODS 1) Cash method 2) Accrual method 3) Crop basis 4) Percentage of completion 5) Installment method PERCENTAGE OF COMPLETION (Section 48 of the Tax Code) Percentage of completion method Is only allowed in case of “long-term contracts”. “Long-term contracts” means building, Installation or construction contracts covering a period in excess of one (1) year. CROP BASIS OF ACCOUNTING (Section 43 and 45 of the Tax Code; Sec. 45, RR 2-98) If a farmer is engaged in producing crops which take more than a year from the time of planting to the time of gathering and disposing, the income therefrom may be computed upon the crop basis; but In any such cases the entire_cost_of duc the crop mu: AS a rin wt income from the crop is realized. (Lancaster Philippines, Inc. v. Commissioner ‘of Internal Revenue, C.T-A. Case No. 6753, [September 12, 2007]) CHANGE OF ACCOUNTING PERIOD If a taxpayer, other than an individual, changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year t9 nother, the net income shall, with the approval of the Commissioner, be computed 0° the basis of such new accounting period, subject to the provisions of Section 47 (Section 46 of the Tax Code). 428Accventing Methed and eatalff tiny Method. and Install INSTALLMENT METHOD (Section 49 of The following sales may be reported on Installment Basis: 4, SALES OF DEALERS IN PERSON, These include sales by persons whee Ye nl Reseing of) Ineane the Tax Code) ERTY [Section 49(A)] nt lan may eet Sel or otherwise dispose of persona proportion return as income therefrom in any taxable year bat prof faaloed e istalent payments actually received in that year, which the ‘contract price. realized when payment Is completed, bears to the total a fe ae S, an AND CASUAL SALES OF PERSONALITY [Section 49(8)] : depoateg are yore ~ These include casual sales or other casual included in the inventory a, ther than property of a kind which are ordinarily FY Of the taxpayer; capit i a. The selling price exceeds haere apital assets), provided: b. The initial payments do not exceed 25% of selling price. * Sales of Real Property - These include sal 9 les or other disposition of real property Provided, the intial payments do not exceed 25% of selling price. INITIAL PAYMENTS means the ‘evidences of indebtedness ofthe ‘or other disposition is made. payments received in cash,or property other than purchaser during the taxable period in which the sale 3, SALES OF REAL PROPERTY CONSIDERE! D AS CAPITAL ASSETS BY INDIVIDUALS [Section 49(C)] 3 ‘An individual taxpayer who sells real property considered as capital assets and the initial payments do not exceed 25% of the selling price may pay the capital gains tax in installments. SUMMARY: INSTALLMENT REPORTING OF INCOME ‘ORDINARY ASSET. Trader of Goods + The sale should be on instalment basis (Cegardless ofthe ration ofiital payments over selling price). Sale of Real Property + The sale should be on instalment basis, and ‘ ‘+ Theiniial payments do not exceed 25% of seling price CAPITAL ASSETS: : i Sale of personal property * ‘The Seling prce exceeds P1000; and + The intial payments do not exceed 25% of selling price. 7 Sale of Real Property = Installment payment of capital gains tax, provided the inital payments do not exceed 25% of seling price. 429lead Jestallneal Accoenting lethed FORMATS OF COMPUTATION 4. Seling Price (SP) ' Prox Cash received de FAV of the property received = Receivables = Unpaid mortgage assumed by the buyer sa Seling Price a 2. Contract Price (CP) , Prox Seling Price Less: Mortgage assumed by the buyer — ee Balance re ‘Add: Excess unpaid mortgage over cost ae Contract Price Prot 3. _ initial Payments (IP) Downpayment Prox Expected instalment colectons inthe year of sale mx Excess of unpaid morigage over cost we Initial Payments Peo 4, Realzed Gross Profit (RGP) (fale is subject fo basic tax) RGP = Collections x Gross Prof Rate Gross Profit Rate = Gross ProfitContract Price , 5. Installment Capital Gains Tax Installment CGT = Total CGT x Collecton/CP CHANGE FROM ACCRUAL TO INSTALLMENT BASIS [Section 49(D)] rfa taxpayer entitled to the benefits of Subsection (A) elects for any taxable year to report his taxable income on the installment basis, then In computing his Income for the year of change or any subsequent year, amounts actualy received during any such year on account Of sales or other dispositions of property made In any prior year shall not be excluded. [ALLOCATION OF INCOME AND DEDUCTIONS (SECTION 50) {In the case of two or more organizations, trades or businesses (whether or not Incorporated ‘and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, ithe determines that such distribution, apportionment or allocation Is necessary In order to prevent asin of taxes or clearly to reflect the Income of any such organizations, trades or businesses. 430Alec np a Cecennting Method and Installent Reporting of home 4. Anaooounting petod of 8. Galena yer ‘va (12) months ending ona at yo Dee Fiscal a mm d. Sum-of-the-year “Answer: A 2, An accountin fe 19 Period of twelve (12) months ending on the last day of any month other than a. Calendar year b. Fiscal year Leap ear $ Meee d. Sumofthe-year et borat oe following cases may the taxable income be computed noton the basis of the |. Taxpayer has no accounting period ll, Taxpayer does nat keep books of accounts IM Taxpayer s an individual taxpayer IV. Taxpayers a corporation V. _Taxpayeris a general partnership a. Vonly ¢. Il, Vand V only b. IVandV only d. None of the above Answer: B : 4, Which of the following statements is correct? a. Acchange in the method of accounting requires prior approval of the Commissioner of Intemal Revenue b. Acchange in accounting period does not require prior approval of the Commissioner of Internal Revenue as long as the necessary income tax retums forthe different accounting periods are filed. ©. Both‘a’ and’b" d._ Neither ‘a” norb” “Answer: A 5, Amethod of accounting which applies to a farmer who is engaged in producing crops which take more than a year from the tim of planting tothe time of gathering and disposing. The entra cost of producing crop must be taken as a deduction inthe year in which the gross income from the crop is realized. . Cash basis ¢. Crop basis b, Aeoval basis 4. Installment method “> Answer: 6. Amethod of accounting where income is reported inthe year its collected, actually or ar. basis «. Crop basis b, Accrual basis d. Installment method Answer: A 43110. 11. Aeceenting Methodard installa Byertig of Icong , i ing period? Which of the following instances may give rise to short account 2 When ho Soot naw organized using calondar yoar b. Wher a corporation is dissolved i c. When a corporation changes acoounting por d. Allofthe above Answer: D Which of the following instances may give rise to short accounting prod? | When the corporation is newly organized using fiscal year When a taxpayer dies Ill When a corporation changes accounting method a. lonly «. Illonly b Monly d. land Il > Answer: B ‘Which of the following statements in incorrect? 1. No.uniform method of accounting can be prescribed forall taxpayers. b. Each taxpayer is required by law to make a retum on his true income. ©. The taxpayer has to adopt accrual method of accounting because it is in ‘accordance with generally accepted accounting principles 4. Where purchase or sale of merchandise is an income-producing factor, inventories on hand shall be taken atthe beginning and at the end of year Answer: C Statement 4:- If @ taxpayer, other than an individual, with the approval of the Commissioner, changes the basis of.computing net income from fiscal year to calendar year, a separate final ‘or adjustment retum shall be made for the period between the close of the last fiscal year for which return was made and the following December 31 Statement 2: Ifthe change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which retum was made and the date designated as the close ofthe fiscal year, a. Statements 1 and 2 are falso b. Statement 1 is true but statement 2s false c. Statement 1 is false but statement 2 is true d. Statements 1 end 2 are true “> Answer: D Statement 1; The method of accounting regularly employed by the taxpayer in keeping bis books, if such method clearty reflects his income, is to be followed with respect to the time as ‘of which items of gross income and deductions are to be accounted for. ‘Statement 2: The computation shall be made in accordance with such method of accounting as in the opinion of the Commissioner clearly reflects the income if there is a method of accounting being employed by the taxpayer and such method of accounting clearly reflect he income. ‘a. Statements 1 and 2 are false 432Avcventing Methed ard install, b. - Statement 1 is true but stato c. Statement 1is false but ime d, Statements 4 and 2 are true 7 en Ryertiy of Income Answer: B of the following is an essenti 42, Wish one sential ofan acceptable Thee shoud be dsinion een roe and al spears a © Property or prolong its useful life should not be added to the property account or charged agains deprecation ©. Cases in which production, purchase or sale of merchandise is an income producing factor, inventories Heatran es soul be considered either at the beginning or at Th 5 q The seth Method should adhere td generally accepted accounting % Answer: A 13. Statement 1: Income which js oredited to the account of or set apart for a taxpayer and which mmay be withdrawn upon by him at any times subjecto tax or the year dung whch o credied or set apart, although not then actually reduced to possession ‘Statement 2: The doctrine of constructive receipt ofincome is designed to prevent the exclusion from taxable income of items, the actual receipt of which could, atthe option ofa taxpayer on the cash basis, be deferred or indefinitely postponed. ‘a. Statements 4 and 2 are false b. Statement 1 is true but statement 2s false ©. Statement 1 is false but statement 2s true d. Statements 1 and 2 are true “& Answer: D 14, The following statements pertain to registration requirements of every person required to register for tax purposes. Choose the incorrect statement. |. Every person subject to any internal revenue tax shall register once with the ‘appropriate revenue district officer. Il. A person maintaining a head office, branch or facility shall register with the revenue district officer having jurisdiction over the head office, branch or facility. Ill, Incase a registered person decides to transfer hs place of business or his head office or branches, it shall be his duty to update his registration status by fling ‘an application for registration information update in a prescribed form, IV. The registration of any person who ceases to be liable to a tax type shall be canceled upon fling with the Revenue District Office where he is registered by fling an application for registration information update ina prescribed form. a. tlonly ©. Allof the above b Wonly d. None of the above © Answer: D 18. Siatement 4: Any person required under the authority of the Tax Code to make, render, or file @ tetum, statement or other documents shall be supplied with or assigned a single ‘Taxpayer Identification Number (TIN). 433fecrentuag 1 Metarn a2 * rdiedieret Rebertied 14 being rat bo ebcrsed coy Wd & ET, Sara Sateret 2 Tre eget TN erro fet wth he BR te ORES Pr =a Exgiss Creo > AseeD 17. Seemed t: Thetocts d sxautand ohe moots Sal be subject ® Saran ag Teoecien cniyance ra teat yes by De SR ACES Samet? Tre caaieten end repocion of books of excout and ces ecsaning Saerr cal be dare bite eameya’s cace or pace of buses cr afice of be BR. 18. For noome tax purposes. te exorinaton end inspection of fe boots of exmort and reooeds cal be made ony once a taxable yesr, ercent n fe following cases: | Fraud, creguarty oF mistakes, os determined by fee Commissoner, IL The taxpayer requests for emvestgaton: [1 Verdceton of compliance wit withoidng tax lews end reguistons, IV. Verficaton of capital gens tax Febibes, a landilony ¢ Allof the ebove b. lilend V only &. None of he above © Answer 49. A fermer under eccrual basis hes the folowing data for he yest: Beginning inventory. [Livestock and farm products raised in the farm P.60,000 Livestock and farm products purchased the previous year 3000 Ending inventory: ‘Livestock and farm products raised in the farm 100,000 Livestock and farm products purchased 60,000 ‘Sates of livestock and farm products raised and purchased 120,000 Cost of ivestonk and farm products purchased durng the year 400,000 Miscellaneous income: ‘Gain on sale of work, breeding or dairy animals. 30.000 Gain on sae of farm equipment and machinery 10000 434CMecoenting Meth and. Installnent Reporting of Ione Hiro of tractor Hiro of carabaos and horses Others How much is his gross inoome? a, P370,000 b. P270,000 > Answer: Salo of ivestock and fam products Cost of Sales: Blgining inventory (60 304) PPurchasos of vestock Ending inventory Gross income from operations ‘Add: Other income (30k + 10k + 20k + 6k 4k) Total Gross income c. P180,000 d. P90,000 20.000 6,000 100 120,000 10,000) 110,000 70,000 180,000 20. Based on the preceding data, how,much is the gross income assuming cash basis is used? a. P370,000 Answer: D Sale of livestock and farm products Cost of Sates: Purchases of fvestock Gross income from operations ‘Add: Other income (30k+ 10k + 20k+ 6k+ 4K) Total Gross income Next five (5) questions are based on the following: . P180,000 b: P270,000 4. P90,000 120,000 (100,000) 20,000 70,000 90,000 Joseph provided the following data on sale of his personal property sold in 2021 held by him for 15 months: Cost Mortgage assumed by the buyer Installment Collection Schedule: = 2021 - 2022 - 2023 225,000 270,000 67,500 67,500 45,000 21. How much is the seling price? a. P450,000 b. 270,000 . P180,000 d. P225,000 >. Answer: A Cash received 67,500 Receivables 112,500 FUV of propery rocoived - ‘Mortgage assumed by the buyer —270.000_ Seling Price 22.. How much is the contract price? a. P450,000 . P180,000 b. P270,000 d, P225,000 435caenting A tedhal and lntallcat Byertg en > Answer: D P40 On sear Monige asunedy he ye ss Morhjagod assunnod by I Excoss of morgage ovr cost» P770.990- 7228,000 Contract Pico 23. How much is tho initial paymonts? a. P67,500 c, P45,000 b, P112,500 d, P225,000 Answer: B e icas cane 01800 Excoss of mortgago ovor cos! 45,000_ in Payment Tie 0 24. How much is the income subject fo income tax in 2021, 2022, and 20237 8. P56,260, P33,750 and 22,500, espoctivly b. P112,500, P67,500 and P45,000, respectively ¢, 225,000, RO and RO, respectively 4. None of the choices Answer: A Soling price 480,000 Cost (225,000)_ Gross Pott ras ‘Gross Prot % = GPICP 100% +P225,0009°225,000 REALIZED GROSS PROFIT 2021 (Year 70a 7a 7a 1) ‘nil payment (1) /Cofectons (Y28Y3) 112,500 P6T.500 Pa 000 x 100% Gross Profit 192.500 Holding Pond 50% 50% 50% [REALIZED GROSS PROFIT 56,280 P33, 750 Pa 00 © Tho asst sold was a captalaset and the slr is nduadul, ence, apply res on hoidng petiod © Foryoarf, the basis should bo tie ball payment, rather than coectons 0 For 2 year onwards, uso collections 25. The following data pertain to instalment sales of personal property made by Dina Bale, who regularly sells in installment, in her retail fumiture store, Year ofsala —_{nstallment alo Profit Equal collection 2021 P 50,000 15,000 10,000 2022 400,000 40,000 20,000 2023 P 150,000 75,000 40,000 These sales were regularly made in installment by Dina Bale to’ her customers. Under installment method, how much should Dina should report as gross profi for 20237 a. P31,000 °. P8600 * b. P75,000, 4. P130,000 436loveating (| lethos wad Iestalleint Ryertig of lecene Answor: A © Tho seller can avai of instalment reporting of wcoma reqariess ofthe rato oft payment over seling rice because sho is regularly engaged en tadng perscnal property Gross Profi % 2021 = 1850 2022 = 40/100 on 2023 75/180 50% Calectons §—GP% Realized Gros n2023 Profitin 2023, From 2021 sate 10.000 20% 3.000 From 2022 salo 70000 40% 8,000 From 2023 sale 40000 = «50% 20,000 TOTAL 7 — 1,000 Fito 26. Maripet sold the following capital assets as follows: (RP - Philippines) : Lott Lot2 Lot3 Selling Price ‘ 225,000 750,000 1,200,000 Cost 95,000 900,000 300,000 Teims of Sale: Downpayment, Feb. 2024 P 15.000 P7500 —-P._ 150,000 * Installment payment, April 2021 15,000 75,000 75,000 2+ Installment payment, Sept. 2024 15,000 . 120,000 Stil due (2022) 180,000 600,000 P 855,000 How much isthe capital gains tax forthe year 2021? a. P83,700 . 130,600 b. 32,400 d. P11,700 Answer: A RATIO of INITIAL PAYMENT over SELLING PRICE fmol moe than 25% = apply instalment method * more than 25% = installment sale method s gt applicable, considered as defered sale © LOT 1=45/225 = 20%, Installment method is applicable © — LOT2= 150/750 = 20%, mstaliment method is applicable © LOT 3=345/1,200 = 28 75%, Deferted basis; shall be treated as cash sale Lot tand2 195,000 1 1.200.000 Ted. 395000 t —_ cor R70" 27. Based on the above problem, assuming that the balance was collected in 2022, how much is the capital gains tax on that year? a. P130,500 c. P46,600 b. P98,100 d. nil Answer: C 437senting Malte and Jaestallocert Re Salton Lot tand2 PT780,000 ta _ Total 760,000 x O% cer eer 28. Karen areal estate dealr, sold a house and ot for PGQO,000 on November 20, 2021. The cost of the property was P375,000. Terms are: Downpayment: 100,000 Balance = Payable in monthly installments of 25,000 beginning Dec. 20, 2021. How much is the income subject to income taxin 2021? a. 125,000 , P46,875 b. 225,000 d, P23,437.50 © Answer: © Raliool bal Payment over Selig Price = 1251600 = 20 63%, since he ratios not mare tan 25%, the instalment method of recording income is appicable. © Gross Profit = P600,000-375,000 = P225,000 © GP%=2251600= 37.5% © Taxable income in 2021= P125,000 x37.5% = P4875 29. How much is the income subject to income tax in 20227 a, P112,500 ¢, P56,250 b. 300,000 d. nil Answer: A Pe esate came 2072» F25,000« monte x37 5% = 112500, 30, Assuming the asset above is a capital asset, te capital gains tax payable is 2024 and in 2022 should be: a. P96,000 and RO, respectively b. 7,500 and 18,000, respectively c. PO and P36,000, respectively dd. 18,000 and P7,500, respectively > Answer: B “Capital gains tax (CGT) 2021 = P125,000 x 6% = 7500 Capital gams tax (CGT) 2022 = P25,000 x 12 x 6% = 18,000 438