Since 1977

TAXATION SIA/TABAG
TAX.2912-Accounting Methods OCTOBER 2020

LECTURE NOTES

A. ACCOUNTING PERIODS FORMATS OF COMPUTATION

KINDS 1. Selling Price (SP)
1) Calendar Year
2) Fiscal Year
Cash received P XXX
INSTANCES WHEN USE OF CALENDAR YEAR IS REQUIRED FMV of the property received XXX
Receivables XXX
Taxable income shall be computed on the basis of Unpaid mortgage assumed by the buyer XXX
calendar year in the following cases: Selling Price P XXX
1. If the taxpayer’s annual accounting period is other
than a fiscal year; 2. Contract Price (CP)
2. If the taxpayer has no annual accounting period;
3. If the taxpayer does not keep books of accounts; Selling Price P XXX
4. If the taxpayer is an individual. (Section 43, RA 8424) Less: Mortgage assumed by the buyer XXX
Balance P XXX
SHORT PERIOD RETURN
Add: Excess unpaid mortgage over cost XXX
Accounting period may be less than twelve (12) months
Contract Price P XXX
(Short Accounting Period) may arise when:
1. A corporation is newly organized
3. Initial Payments (IP)
2. When a corporation is dissolved
3. When the taxpayer dies
4. When a corporation changes accounting period Downpayment P XXX
Expected installment collections in the year XXX
B. ACCOUNTING METHODS of sale
1) Cash method Excess of unpaid mortgage over cost XXX
2) Accrual method Initial Payments P XXX
3) Crop basis
4) Percentage of completion 4. Realized Gross Profit (RGP) (if sale is subject to basic
5) Installment method tax)

PERCENTAGE OF COMPLETION RGP = Collections x Gross Profit Rate

Percentage of completion method is only allowed in case Gross Profit Rate = Gross Profit/Contract Price
of “long-term contracts”.
5. Installment Capital Gains Tax
“Long-term contracts” means building, installation or
construction contracts covering a period in excess of one Installment CGT = Total CGT x Collection/CP
(1) year.
MULTIPLE CHOICE EXERCISES
INSTALLMENT METHOD
The following sales may be reported on installment basis: 1. An accounting period of twelve (12) months ending on the
1) Sales of Dealers in Personal Property - These include last day of December.
sales by persons who regularly sell or otherwise a. Calendar year c. Leap year
dispose of personal property on the installment plan. b. Fiscal year d. Sum-of-the-year

2) Casual Sales of Personal Property - These include 2. An accounting period of twelve (12) months ending on the
casual sales or other casual disposition of personal last day of any month other than December.
property (other than property of a kind which are a. Calendar year c. Leap year
ordinarily included in the inventory of the taxpayer), b. Fiscal year d. Sum-of-the-year
provided:
a. The selling price exceeds P1,000; and 3. Which one of the following cases may the taxable income
b. The initial payments do not exceed 25% of selling be computed not on the basis of the calendar year?
price. I. Taxpayer has no accounting period
II. Taxpayer does not keep books of accounts
3) Sales of Real Property - These include sales of real III. Taxpayer is an individual taxpayer
property on the installment plan, provided: The initial IV. Taxpayer is a corporation
payments do not exceed 25% of the selling price. V. Taxpayer is a general partnership
a. IV only c. III, IV and V only
4) Sales of Real Property Considered as Capital Assets by b. IV and V only d. None of the above
individuals - An individual taxpayer who sells real
property considered as capital assets and the I.P. do 4. Which of the following instances may give rise to short
not exceed 25% of the selling price may pay the accounting period?
capital gains tax in installments. 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

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EXCEL PROFESSIONAL SERVICES, INC.

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 12. How much is the initial payments?
income from the crop is realized. a. P67,500 c. P45,000
a. Cash basis c. Crop basis b. P112,500 d. P225,000
b. Accrual basis d. Installment method
13. How much is the income subject to income tax in 2018,
6. A method of accounting where income is reported in the 2019, and 2020?
year it is collected, actually or constructively. a. P56,250, P33,750 and P22,500, respectively
a. Cash basis c. Crop basis b. P112,500, P67,500 and P45,000, respectively
b. Accrual basis d. Installment method c. P225,000, P0 and P0, respectively
d. None of the choices
7. Which of the following statements is correct?
a. A change in the method of accounting requires a prior 14. Maripet sold the following capital assets as follows: (RP -
approval of the Commissioner of Internal Revenue. Philippines)
b. A change in accounting period does not require prior Lot 1 Lot 2 Lot 3
approval of the Commissioner of Internal Revenue as Selling Price P225,000 P750,000 P1,200,000
long as the necessary income tax returns for the Cost 95,000 900,000 300,000
different accounting periods are filed. Terms of Sale:
c. Both “a” and “b” Downpayment - 2/18 P 15,000 P 75,000 P 150,000
d. Neither “a” nor “b” 1st Installment payment
- 4/18 15,000 75,000 75,000
8. A farmer under accrual basis has the following data for 2nd Installment
the year: Payment - 9/18 15,000 - 120,000
Beginning inventory: Still due 180,000 P600,000 P 855,000
Livestock and farm products raised in the P 60,000
farm How much is the capital gains tax for the year 2018?
Livestock and farm products purchased 30,000 a. P83,700 c. P130,500
the previous year b. P32,400 d. P11,700
Ending inventory:
Livestock and farm products raised in the 100,000 15. Based on the above problem, assuming that the balance
farm was collected in 2019, how much is the capital gains tax
Livestock and farm products purchased 80,000 on that year?
Sales of livestock and farm products raised 120,000 a. P130,500 c. P46,800
and purchased b. P98,100 d. nil
Cost of livestock and farm products 100,000
purchased during the year 16. In 2018, Leomar sold shares of stocks of a domestic Co.
Miscellaneous income: directly to a buyer for P400,000. The shares were
Gain on sale of work, breeding or dairy 30,000 acquired in 2009 for P150,000.
animals
Gain on sale of farm equipment and 10,000 The term of sale are as follows:
machinery
Hire of tractor 20,000 Downpayment P50,000
Hire of carabaos and horses 6,000 Instalment payments:
Others 4,000 2018 50,000
2019 100,000
How much is his gross income? 2020 100,000
a. P370,000 c. P180,000 2021 100,000
b. P270,000 d. P90,000
How much is the capital gains tax for the year 2011?
9. Based on the preceding data, how much is the gross a. P37,500 c. P9,375
income assuming cash basis is used? b. P20,000 d. P5,000
a. P370,000 c. P180,000
b. P270,000 d. P90,000 17. Karen, a real estate dealer sold a house and lot for
P600,000 on November 20, 2018. The cost of the
Next five (5) questions are based on the following: property is P375,000. Terms are:
Joseph provided the following data on sale of his capital Downpayment: P100,000
personal property sold in 2018 held by him for 15 months: Balance : Payable in monthly installments of
P25,000 beginning Dec. 20, 2018.
Cost P225,000
Mortgage assumed by the buyer 270,000 How much is the income subject to income tax in 2018?
Installment Collection Schedule: a. P125,000 c. P46,875
- 2018 67,500 b. P225,000 d. P23,437.50
- 2019 67,500
- 2020 45,000 18. How much is the income subject to income tax in 2019?
10. How much is the selling price? a. P112,500 c. P56,250
a. P450,000 c. P180,000 b. P300,000 d. nil
b. P270,000 d. P225,000
19. Assuming the asset above is a capital asset, the capital
11. How much is the contract price? gains tax payable in 2018 and in 2019 is –
a. P450,000 c. P180,000 a. P36,000 and P0, respectively
b. P270,000 d. P225,000 b. P7,500 and P18,000, respectively
c. P0 and P36,000, respectively
d. P18,000 and P7,500, respectively

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