GROSS INCOME (PART II)

Problem 6 – Rental, dividend and interest income; income from dealings in property

On January 1, 20A1, Durian Company, Inc., a wholly-owned subsidiary of Rosas Company, leased its building to
Pagsibol Corporation. It was agreed that instead of paying rentals to Durian, Pagsibol should make payments as
follows:

Recipient Relationship with Durian Amount of payment

Rosas Company Stockholder 10% of par value of shares
Dahlia Company Lender 6% of loan payable

As of January 1, 20A1, Durian had common stock of P50,000,000 with no additional paid-in capital. On the other
hand, it had loans payable to Dahlia for P35,000,000, and advances to Rosas for P8,000,000. There were no changes
in the carrying amounts of these accounts at December 31, 20A1 except that Durian forgave the indebtedness of Rosas.

Pagsibol also shouldered the real property tax (RPT) and insurance on the building. These charges were paid by Durian
but will be reimbursed by Pagsibol. RPT and insurance premiums paid in 20A1 amounted to P1,000,000 and
P1,500,000, respectively.

In addition, Durian, Rosas and Dahlia had the following assets as of January 1, 20A1:

Owner Property Remaining life Book value

Durian Building 10 P30,000,000
Rosas Equipment 4 4,000,000
Dahlia Land 10,000,000

Durian sold the building for P42,000,000 on July 1, 20A1, while Rosas sold the equipment for P4,800,000 on
September 30, 20A1. However, the land owned by Dahlia was expropriated by the government on October 31, 20A1.
The government paid Dahlia P18,000,000, which is its fair market value. These companies depreciate their properties
using the straight-line method of depreciation for income tax purposes. The assets are depreciated monthly.

Required:
1. Determine the nature and amount of gross income that will be recognized by Durian for the year ended December
31, 20A1, if any.
2. Determine the nature and amount of gross income that will be recognized by Rosas for the year ended December
31, 20A1, if any.
3. Determine the nature and amount of gross income that will be recognized by Dahlia for the year ended December
31, 20A1, if any.

Problem 7 – Dividend, stock options, stock awards, share appreciation rights

The following are independent situations relating to equity investments:

Situation A
The stockholders’ equity section of Azucena Corporation’s statement of financial position shows the following
information as of December 31, 20A0:

Common stock, 1,000,000 shares issued and outstanding P 10,000,000

Retained earnings 8,000,000
Revaluation surplus 3,000,000
Total P 21,000,000
Azucena had net income of P1,500,000 for the year ended December 31, 20A0. On March 1, 20A1, it declared P5
dividend per share payable on April 15, 20A1.

Situation B
The board of directors of Kapamilya Corporation adopted a fixed stock option plan to supplement the salaries of
certain executives. The options to buy common stock were granted as follows:

The options are nontransferable and can be exercised beginning three years after the date of grant, provided the
executive is still employed by the company. The stock options were exercised as follows:

The stock of the company has a P1 par value. The accounting period of the company is the calendar year.

Situation C
Kapuso Corporation established a stock awards plan for its employees. The plan was established on January 1, 20A1.
Under the plan, each employee will be granted 200 Kapuso shares on January 1, 20A4 provided they remain with the
company for three years. The fair value of the stock awards was P12 per share on January 1, 20A1 and the average
fair value during 20A1 was P14. The fair market value of Kapuso shares on January 1, 20A4 was P18 per share. The
par value of the shares was P5 per share.

The no. of employees on selected dates was as follows:

December 31, 20A1 150

December 31, 20A2 185
December 31, 20A3 170

Assume that employee hiring and resignations or terminations occurred on January 1 of each year. The stock awards
were awarded to 135 employees on January 1, 20A4 for services rendered in 20A1. These were properly subjected to
withholding tax at the time of the grant of the stock awards.

Situation D
San Juan Corporation established a stock option plan that provides for cash payments to employees based on the
appreciation of stock prices from an established option price. The plan was instituted on January 1, 20A1 and provides
for benefits to employees who work for the succeeding three years. Cash payments to employees will be made on
January 1, 20A4, and will equal the excess of the stock price over the option price on that date. In total, 10,000 of
these cash stock appreciation rights (SARs) were granted to the employees.

The option price established for the stock is P12 per share. The market price of San Juan stock on selected dates in
20A1 to 20A4 were as follows:
 January 1, 20A1 P15
December 31, 20A2 16
December 31, 20A3 21
December 31, 20A4 18

The SARs were properly subjected to withholding tax at the time of payment.

Required: Determine the amount of gross income that will be declared by the income earner, and the taxable year of
declaration. For dividend, determine the source of dividend declared (i.e., taxable year when income is earned).

Problem 8 – Gift, bequest and devises; proceeds of life insurance and return of premiums

Mr. Habagat owns a parcel of land, cash, jewelry, and shares of stock. The lot was being leased for P200,000 monthly.
These were payable at the end of each month. On July 1, 20A1, Mr. Habagat died. These properties were inherited by
his daughter, Ms. Amihan. These properties had the following fair values at the time of Mr. Habagat’s death:

Land P 10,000,000
Cash 2,000,000
Jewelry 800,000
Shares of stock 1,500,000

The issuer of the shares declared dividend of P500,000 on July 15, 20A1 which were paid on August 1, 20A1.
Moreover, Mr. Habagat had an insurance policy with face amount of P10,000,000 which was purchased on January
1, 20A0. The premiums on said policy of P50,000 were payable quarterly for 10 years (payable every January 1, April
1, July 1 and October 1). He named his daughter, Ms. Amihan, as the beneficiary of the insurance policy, who received
the face amount.

Required:
1. Determine the amount of gross income of Ms. Amihan for the year ended December 31, 20A1.
2. Determine the amount of exclusion from gross income of Ms. Amihan for the year ended December 31, 20A1.
3. Determine the amount of gross income and exclusion from gross income of Mr. Habagat under the following
situations and the year of declaration of income:
a. Mr. Habagat lived after paying the insurance premiums for 10 years. He received P10,000,000 from the insurance
company.
b. Mr. Habagat obtained a policy having dividend participation. He received P50,000 dividend in 20A1.
c. Mr. Habagat cancelled the insurance policy on June 30, 20A3. He received a cash surrender value of P500,000.

Problem 9 – Retirement benefits, pensions and separation pay

The following are independent situations regarding the retirement benefits, pensions or separation pay of Mrs.
Makulay:

a. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a BIR-registered retirement plan. Mapula
contributed to the retirement plan in order to finance the retirement pay of its employees. Under the retirement plan,
the employees are entitled to retirement benefits if they have rendered at least 10 years of service and they are at least
50 years old. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 50 and rendered 20 years of service.
This is the first time that she retired from employment. She received the following benefits:

Retirement pay P 10,000,000

Back wages 500,000
Commutation of vacation leave credits 200,000
 Commutation of sick leave credits 100,000

b. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a BIR-registered retirement plan. Mapula
contributed to the retirement plan in order to finance the retirement pay of its employees. Under the retirement plan,
the employees are entitled to retirement benefits if they have rendered at least 10 years of service regardless of age.
On July 31, 20A1, Mrs. Makulay retired from Mapula at the age of 35 and rendered 10 years of service. This is the
first time that she retired from employment. She received the following benefits:

Retirement pay P 10,000,000

Back wages 500,000
Commutation of vacation leave credits 200,000
Commutation of sick leave credits 100,000

c. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a retirement plan. However, it is not
registered with the BIR, Mapula contributed to the retirement plan in order to finance the retirement pay of its
employees. Under the retirement plan, the employees are entitled to retirement benefits if they have rendered at least
10 years of service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age
of 50 and rendered 20 years of service. This is the first time that she retired from employment. She received the
following benefits:

Retirement pay P 10,000,000

Back wages 500,000
Commutation of vacation leave credits 200,000
Commutation of sick leave credits 100,000

d. Mrs. Makulay is an employee of Mapula Corporation. Mapula maintains a retirement plan. However, it is not
registered with the BIR. Mapula contributed to the retirement plan in order to finance the retirement pay of its
employees. Under the retirement plan, the employees are entitled to retirement benefits if they have rendered at least
10 years of service and they are at least 50 years old. On July 31, 20A1, Mrs. Makulay retired from Mapula at the age
of 60 and rendered 20 years of service. This is the first time that she retired from employment. She received the
following benefits:

Retirement pay P 10,000,000

Back wages 500,000
Commutation of vacation leave credits 200,000
Commutation of sick leave credits 100,000

e. Mrs. Makulay is an employee of Mapula Corporation. Because the position of Mrs. Makulay became redundant,
she was forced to separate from Mapula on July 31, 20A1. Mapula offered her separation benefits. She received the
following benefits:

Separation pay P 10,000,000

Back wages 500,000
Commutation of vacation leave credits 200,000
Commutation of sick leave credits 100,000

f. Mrs. Makulay is an employee of Mapula Corporation. Because of her sickness, Mrs. Makulay was forced to separate
from Mapula on July 31, 20A1. Mapula offered her separation benefits. She received the following benefits:

Separation pay P 10,000,000

Back wages 500,000
Commutation of vacation leave credits 200,000
 Commutation of sick leave credits 100,000

Required:
1. Determine the amount that will be included as part of Mrs. Makulay’s gross income for income tax purposes for
the year ended December 31, 20A1.
2. Determine the amount that will excluded from Mrs. Makulay’s gross income for income tax purposes for the year
ended December 31, 20A1.

Problem 10 – 13th month pay and other benefits; de minimis benefits; prizes and awards; SSS contributions

The following are independent situations regarding the salaries and benefits granted to Ms. Paraluman for the year
ended December 31, 20A1:

a. Ms. Paraluman received the following salaries and benefits from Adobo, Inc.:

Gross compensation P 360,000

13th month pay 30,000
14th month pay 30,000
Bonuses 75,000
Rice subsidy 24,000
Productivity incentive 12,000
Loyalty award 15,000
Medical allowance for the employee 8,000
Daily meal allowance 12,000
Commutation of vacation leave credits 24,000
Commutation of sick leave credits 16,000
Total P 591,000

The following are the additional information:

 The rice subsidy was given in cash for P2,000 monthly.
 The productivity incentive was granted in cash on December 1, 20A1.
 The loyalty award which was a wrist watch was given on June 30, 20A1.
 The medical allowance was subjected to liquidation. Ms. Paraluman submitted invoices and receipts
supporting purchases of medicines and other medical expenses issued in her name.
 The daily meal allowance was given on account of overtime equivalent to P100 per day. The basic daily
minimum wage was P500 per day.
 The commutation of vacation leave credits pertains to 12 days leave credits which were converted into cash.
 The commutation of sick leave credits pertains to 8 days leave credits which were converted into cash.
 Ms. Paraluman contributed P545 monthly as mandatory contribution to SSS which was deducted from her
compensation.

b. Ms. Paraluman, a private elementary school teacher, received the following salaries and benefits the Department of
Education (DepEd):

Gross compensation P 240,000

13th month pay 20,000
14th month pay 20,000
Bonuses 50,000
Rice subsidy 24,000
Productivity incentive 10,000
Loyalty award 15,000
Medical allowance for the employee 10,000
 Daily meal allowance 15,000
Commutation of vacation leave credits 12,000
Commutation of sick leave credits 8,000
Total P 414,000

The following are the additional information:

 The rice subsidy was given in cash for P6,000 quarterly.
 The productivity incentive was granted in cash on December 1, 20A1.
 The loyalty award was given in cash on June 30, 20A1.
 The medical allowance was given in cash and only P7,000 was subjected to liquidation. Ms. Paraluman
submitted invoices and receipts supporting purchases of medicines and other medical expenses issued in her
name for P7,000.
 The daily meal allowance was given regardless of whether Ms. Paraluman rendered overtime. The basic daily
minimum wage was P500 per day. Ms. Paraluman did not render any overtime.
 The commutation of vacation leave credits pertains to 12 days leave credits which were converted into cash.
 The commutation of sick leave credits pertains to 8 days leave credits which were converted into cash.
 Ms. Paraluman contributed P700 monthly to SSS which was deducted from her compensation. However,
only P545 is the mandatory monthly contribution.

In addition, he received the following prizes and awards (in cash):

Most outstanding elementary school teacher P 100,000

SEA Games gold medalist in track and field 1,000,000
Loyalty service award for 20 years of service with his employer 20,000
Prize for winning department store raffle 100,000
Prize for winning talent competition in a variety show 150,000

Required:
1. Determine the amount that will be included as part of Ms. Paraluman’s gross income for income tax purposes for
the year ended December 31, 20A1.
2. Determine the amount that will be excluded from Ms. Paraluman’s gross income for income tax purposes for the
year ended December 31, 20A1.