08 Accounting Methods Installment Reporting of Income PDF

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PART 8Accounting Methods; andInstallment Reporting of IncomeACCOUNTING PERIODSKINDS Calendar Year Fiscal Year INSTANCES WHEN USE OF CALENDAR YEAR IS REQUIREDTaxable income shall be computed on the basis of calendar year in the following cases: If the taxpayer's annual accounting period is other than...

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PART 8

Accounting Methods; and Installment Reporting of Income

ACCOUNTING PERIODS KINDS 1) Calendar Year 2) Fiscal Year INSTANCES WHEN USE OF CALENDAR YEAR IS REQUIRED 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, RA 8424) 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 ACCOUNTING METHODS 1) 2) 3) 4) 5)

Cash method Accrual method Crop basis Percentage of completion Installment method

PERCENTAGE OF COMPLETION 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. INSTALLMENT METHOD THE FOLLOWING SALES MAY BE REPORTED ON INSTALLMENT BASIS: 1)

Sales of Dealers in Personal Property - These include sales by persons who regularly sell or otherwise dispose of personal property on the installment plan.

2)

Casual Sales of Personal Property - These include casual sales or other casual disposition of personal property (other than property of a kind which are ordinarily included in the inventory of the taxpayer), provided: a. The selling price exceeds P1,000; and b. The initial payments do not exceed 25% of selling price.

3)

Sales of Real Property - These include sales of real property on the installment plan, provided: The initial payments do not exceed 25% of the selling price.

4)

Sales of Real Property Considered as Capital Assets by individuals - An individual taxpayer who sells real property considered as capital assets and the I.P. do not exceed 25% of the selling price may pay the capital gains tax in installments.

FORMATS OF COMPUTATION 1.

Selling Price (SP) Cash received FMV of the property received Receivables Unpaid mortgage assumed by the buyer Selling Price

2.

P XXX XXX XXX XXX P XXX

Contract Price (CP) Selling Price Less: Mortgage assumed by the buyer Balance Add: Excess unpaid mortgage over cost Contract Price

P XXX XXX P XXX XXX P XXX

3.

Contract Price (CP) Downpayment Expected installment collections in the year of sale Excess of unpaid mortgage over cost Initial Payments

P XXX XXX XXX P XXX

4. Realized Gross Profit (RGP) (if sale is subject to basic tax) RGP = Collections x Gross Profit Rate Gross Profit Rate = Gross Profit/Contract Price 5.

Installment Capital Gains Tax Installment CGT = Total CGT x Collection/CP

Accounting Method and Installment Reporting of Income

--------------------------------QUIZZER-------------------------------Choose the letter of the correct answer 1. An accounting period of twelve (12) months ending on the last day of December. a. Calendar year c. Leap year b. Fiscal year d. Sum-of-the-year  Answer: A 2. An accounting period of twelve (12) months ending on the last day of any month other than December. a. Calendar year c. Leap year b. Fiscal year d. Sum-of-the-year  Answer: B . Which one of the following cases may the taxable income be computed not on the basis of the calendar year? I. Taxpayer has no accounting period II. Taxpayer does not keep books of accounts III. Taxpayer is an individual taxpayer IV. Taxpayer is a corporation V. Taxpayer is a general partnership a. IV only c. III, IV and V only b. IV and V only d. None of the above  Answer: B 4. Which of the following statements is correct? a. A change in the method of accounting requires a prior approval of the Commissioner of Internal Revenue. b. A change in accounting period does not require prior approval of the Commissioner of Internal Revenue as long as the necessary income ta x returns for the different accounting periods are filed. c. Both "a" and "b" d. Neither “a” nor "b"  Answer: A 5. A method of accounting which applies to a farmer who is engaged in producing crops which take more than a year from the time of planting to the time of gathering and disposing. The entire cost of producing crop must be taken as a deduction in the year in which the gross income from the crop is realized.

a. Cash basis b. Accrual basis

c. Crop basis d. Installment method

 Answer: C 6.

A method of accounting where income is reported in the year it is collected, actually or constructively. a. Cash basis c. Crop basis b. Accrual basis d. Installment method  Answer: A

7. Which of the following instances may give rise to short accounting period? a. When the corporation is newly organized using calendar year b. When a corporation is dissolved c. When a corporation changes accounting period d. All of the above  Answer: D 8. Which of the following instances may give rise to short accounting period? I. When the corporation is newly organized using fiscal year II. When a taxpayer dies III. When a corporation changes accounting method a. I only c. Ill only b. ll only d. I, II and III  Answer: B 9. Which of the following statements in incorrect? a. No uniform method of accounting can be prescribed for all taxpayers. b. Each taxpayer is required by law to make a return on his true income. c. The taxpayer has to adopt accrual method of accounting because it is in accordance with generally accepted accounting principles d. Where purchase or sale of merchandise is an income-producing factor; inventories on hand shall be taken at the beginning and at the end of year.  Answer: C 10. Statement 1: If a taxpayer, other than an individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year, separate final or adjustment return 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: If the 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 return was made and the date designated as the close of the fiscal year. a. Statements 1 & 2 are false b. Statement 1 is true but statement 2 is false c. Statement 1 is false but statement 2 is true d. Statements 1 and 2 are true  Answer: D 11. Statement 1: The method of accounting regularly employed by the taxpayer in keeping his books, if such method clearly 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 the income. a. Statements 1 & 2 are false b. Statement 1 is true but statement 2 is false c. Statement 1 is false but statement 2 is true d. Statements 1 and 2 are true  Answer: B 12. Which one of the following is an essential of an acceptable accounting method? a. There should be distinction between revenue and capital expenditures b. Expenses to restore property or prolong its useful life should not be added to the property account or charged against depreciation c. In all cases in which production, purchase or sale of merchandise is an income producing factor, inventories should be considered either at the beginning or at the end of the accounting period d. The accounting method should adhere to generally accepted accounting principles.  Answer: A 13.

Statement 1: Income which is credited to the account of or set apart for a taxpayer and which may be withdrawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. Statement 2: The doctrine of constructive receipt of income is designed to prevent the exclusion from taxable income of items, the actual receipt of which could, at the option of a taxpayer on the cash basis, be deferred or indefinitely postponed. a. Statements 1 & 2 are false b. Statement 1 is true but statement 2 is false

c. Statement 1 is false but statement 2 is true d. Statements 1 and 2 are true  Answer: D 14. The following statements pertain to registration requirements of every person required 3 to register for tax purposes. Choose the incorrect statement. I. Every person subject to any internal revenue tax shall register once with the appropriate revenue district officer. II. A person maintaining a head office, branch or facility shall register with the revenue district officer having jurisdiction over the head office, branch of facility. III. In case a registered person decides to transfer his place of business or his head office or branches, it shall be his duty to update his registration status by filing 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 b e cancelled upon filing with the Revenue District Office where he is registered by filing an application for registration information update in a prescribed form. a. III only c. All of the above b. IV only d. None of the above  Answer: D 15. Statement 1: Any person required under the authority of the Tax Code to make, render, or file a return, statement or other documents shall be supplied with of assigned a single Taxpayer Identification Number (TIN). Statement 2: The assigned TIN shall be indicated every time a return, statement of document is filed with the BIR for the taxpayer's proper identification. a. Statements 1 & 2 are false b. Statement 1 is true but statement 2 is false c. Statement 1 is false but statement 2 is true d. Statements 1 and 2 are true  Answer: D 16. What is/are the penalty for non-issuance of receipts or invoices? a. Fine of not less than P1,000 but not more than P50,000; b. Imprisonment for not less than two (2) years but not more than four (4) years. c. Both “a” and “b” d. Neither “a” nor “b”  Answer: D

17.

Prior to the effectivity of the TRAIN Law, what books of account shall be kept for those whose quarterly sales /earnings/receipts or output do not exceed P50,000 prior to 2018? I. Simplified set of bookkeeping records II. Journal and a ledger or their equivalents. III. Either simplified set or bookkeeping records or journal and a ledger or their equivalents IV. No books of account required. a. I only c. III only b. ll only d. IV only  Answer: A

18. Prior to the effectivity of TRAIN Law, what books of account shall be kept for those whose quarterly sales, earnings, receipts or output exceed P50,000 I. Simplified set of bookkeeping records II. Journal and a ledger or their equivalents. lll. Either Simplified set or bookkeeping records or journal and a ledger or their equivalents IV. No books of account required. a. I only c. III only b. ll only d. I only  Answer: B 19. Prior to the effectivity of TRAIN Law, the books of account are required to be audited and examined yearly by an independent CPA if the gross quarterly sales, earnings, receipts or output exceed a. P10,000 c. P50,000 b. P30,000 d. P150,000  Answer: D 20. The books of account may be kept in the following languages, except a. Native language b. Spanish c. English d. Chinese or Japanese  Answer: D 21. How long must the books of account be kept? a. For a period beginning the preceding taxable year until the last day of the same taxable year;

b. For a period beginning the current taxable until the last day of the same taxable year; c. For a period beginning from the last entry in each book until the last day prescribed within which the Commissioner is authorized to make an assessment; d. Keeping of books of account is not required.  Answer: C 22. Statement 1: The books of account and other records shall be subject to examination and inspection only once in a taxable year by the BIR officers. Statement 2: The examination and inspection of books of account and other accounting records shall be done in the taxpayer's office or place of business or office of the BIR. a. Statements 1 & 2 are false b. Statement 1 is true but statement 2 is false c. Statement 1 is false but statement 2 is true d. Statements 1 and 2 are true  Answer: D 23.

For income tax purposes, the examination and inspection of the books of account and records shall be made only once in a taxable year, except in the following cases. I. Fraud, irregularity or mistakes, as determined by the Commissioner; II. The taxpayer requests for reinvestigation; III. Verification of compliance with withholding tax laws and regulations; IV. Verification of capital gains tax liabilities; a. I and II only c. All of the above b. III and IV only d. None of the above  Answer: C

24. A farmer under accrual basis has the following data for the year: Beginning inventory: Livestock and farm products raised in the farm Livestock and farm products purchased the previous year Ending inventory: Livestock and farm products raised in the farm Livestock and farm products purchased Sales of livestock and farm products raised and purchased Cost of livestock and farm products purchased during the year Miscellaneous income: Gain on sale of work, breeding or dairy animals Gain on sale of farm equipment and machinery Hire of tractor

P 60,000 30,000 100,000 80,000 120,000 100,000 30,000 10,000 20,000

Hire of carabaos and horses Others

6,000 4,000

How much is his gross income? a. P370,000 c. P180,000 b. P270,000 d. P90,000  Answer: C Solution: Sale of livestock and farm products Cost of Sales Beginning inventory (60k + 30k) Purchases of livestock Ending inventory Gross income from operations Add: Other income (30k + 10k + 20k + 6k+ 4k) Total Gross income

P120,000 P90,000 100,000 (180,000)

(10,000) 110,000 70,000 180,000

25. Based on the preceding data, how much is the gross income assuming cash basis is used? a. P370,000 c. P180,000 b. P270,000 d P90,000  Answer: D Solution: Sale of livestock and farm products Cost of Sales: Purchases of livestock Gross income from operations Add: Other income (30k + 10k + 20% + 6k+ 4k) Total Gross income

P120,00 0 (100,000 ) 20,000 70,000 90,000

Next five (5) questions are based on the following: Joseph provided the following data on sale of his personal property sold in 2016 held by him for 15 months: Cost P225,000 Mortgage assumed by the buyer 270,000 Installment Collection Schedule: - 2016 67,500 - 2017 67,500 - 2018 45,000 26. How much is the selling price? a. P450,000

c. P180,000

b. P270,000

d. P225,000

 Answer: A Solution: Cash received Receivables FMV of property received Mortgage assumed by the buyer Selling Price 27. How much is the contract price? a. P450,000 b. P270,000

c. P180,000 d. P225,000

 Answer: D Selling price Less: Mortgaged assumed by the buyer Excess of mortgage over cost = P270,000 - P225,000 Contract Price 28. How much is the initial payments? a. P67,500 b. P112,500  Answer: B Cash received Excess of mortgage over cost Initial Payment

P67,500 112,500 270,000 P450,000

P450,000 (270,000) 45,000 P225,000

c. P45,000 d. P225,000

P67,500 45,000 P112,50 0

29. How much is the income subject to income tax in 2016, 2017, and 2018? a. P56,250, P33,750 and P22,500, respectively b. P112,500, P67,500 and P45,000, respectively c. P225,000, PO and PO, respectively d. None of the choices  Answer: A Solution: Selling price Cost

P450,00 0 (225,000 )

Gross Profit Gross Profit % = GP/CP P225,000/P225,000 REALIZED GROSS PROFIT 2016 (Year 1) Initial payment x Gross Profit x Holding Period REALIZED GROSS PROFIT - 2016

P225,000 100%

P112,50 0 100% P112,50 0 50% P56,250

 The asset sold was a capital asset and the seller is individual, hence, apply rules on holding period.  For year 1, the multiplier should be the initial payment, rather than collections.  For 2nd year onwards, use collections. 30. The following data pertain to installment sales of personal property made by Dina Bale, who regularly sells in installment, in his retail furniture store. Year of sale Installment sale Profit Equal collection in 2018 2015 P 50,000 P 15,000 P 10,000 2016 P100,000 P 40,000 P 20,000 2017 P150,000 P 75,000 P 40,000 These sales were regularly made in installment by Dina Bale to her customers. Under installment method, Dina should report gross profit for 2018 of a. P31,000 c. P86,000 b. P75,000 d. P130,000  Answer: A  The seller can avail of instalment reporting of income regardless of the ratio of initial payment over selling price because she is regularly engaged in trading personal property. Gross Profit 2015 = 15/50 2016 = 40/100 2017 =75/150 Realized Gross Profit 2018 2015 = 15/50 = P10,000 x 30%

30% 40% 50% P3,000

2016 = 40/100 = 20,000 x 40% 2017 = 75./150 = 40,000 x 50% Dina's Gross Profit for 2018

8,000 20,000 P31,000

31. Maripet sold the following capital assets as follows: (RP – Philippines)

Selling Price Cost Terms of Sale: P Downpayment - 2/16 1st Installment payment - 4/16 2nd Installment Payment - 9/16 Still due

Lot 1 P225,000 95,000

Lot 2 P750,000 900,000

Lot 3 P1,200,000 300,000

P 15,000 15,000 15,000 180,000

P 75,000 75,000 P600,000

P 150,000 75,000 120,000 P855,000

How much is the capital gains tax for the year 2016? a. P83,700 c. P130.500 b. P32,400 d. P11,700  Answer: A RATIO of INITIAL PAYMENT Over SELLING PRICE  LOT 1 = 45/225 = 20%; Installment  LOT 2 = 150/750 = 20%; installment  LOT 3 = 345/1,200 = 28.75%; Deferred basis; Treat as cash sale Solution: Lot 1 and 2 Lot 3 Total x Gross income from operations

P195,000 1,200,000 P1,139,000 6% P83,700

32. Based on the above problem, assuming that the balance was collected in 2017, how much is the capital gains tax on that year? a. P130,500 c. P46,800 b. P98,100 d. nil  Answer: C Solution: Lot 1 and 2 Lot 3 Total x

P780,000 780,000 6%

Gross income from operations 33.

P46,000

In 2017, Leomar sold shares of stocks of a domestic company directly to a buyer for P400,000. The shares were acquired in 2015 for P150,000. The term of sale are as follows: Downpayment Instalment payments: 2017 2018 2019 2020

P50,000 50,000 100,000 100,000 100,000

How much is the capital gains tax for the year 2017? a. P20,000 c. P15,000 b. P10,000 d. P5,000  Answer: D  Ratio of Initial Payment over Selling Price = 100/400 = 25%  Capital gain = P400,000 – 150,000 = P250,000  TOTAL Capital Gains Tax = P100,000 x5% + (P150,000 x 10%)  CGT for 2017 = P20,000 x 100/400 = P5,000 34. Karen, a real estate dealer sold a house and lot for P600,000 on November 20, 2017. The cost of the property is P375,000. Terms are: Downpayment: P100,000 Balance : Payable in monthly installments of P25,000 beginning Dec. 20, 2017. How much is the income subject to income tax in 2017? a. P125,000 c. P46,875 b. P225,000 d. P23,437.50  Answer: C  Ratio of Initial Payment over Selling Price = 125/600 = 20.83%  Gross Profit = P600,000-375,000 = P225,000  GP % = 225/600 = 37.5%  Taxable income 2017 = P125,000 x 37.5% = P46,875 35. How much is the income subject to income tax in 2018? a. P112,500 c. P56,250 b. P300,000 d. nil  Answer: A

 Taxable income 2018 = P25,000 x 12months x 37.5% = P112,500 36. Assuming the asset above is ...