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) Cash method
2) Accrual method
3) Crop basis 
4) Percentage of completion
5) 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 P XXX

FMV of the property received XXX
Receivables XXX
Unpaid mortgage assumed by the buyer XXX
Selling Price P XXX

2. Contract Price (CP) 

Selling Price P XXX

Less: Mortgage assumed by the buyer XXX
Balance P XXX
Add: Excess unpaid mortgage over cost XXX
Contract Price  P XXX
 3. Contract Price (CP) 

Downpayment P XXX
Expected installment collections in the year of sale XXX
Excess of unpaid mortgage over cost XXX
Initial Payments  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  c. Crop basis
b. Accrual 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 fis cal 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 be
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  P 60,000 
Livestock and farm products purchased the previous year 30,000
Ending inventory: 
Livestock and farm products raised in the farm  100,000
Livestock and farm products purchased 80,000
Sales of livestock and farm products raised and purchased 120,000
Cost of livestock and farm products purchased during the year 100,000
Miscellaneous income: 
Gain on sale of work, breeding or dairy animals 30,000
Gain on sale of farm equipment and machinery 10,000
Hire of tractor 20,000
 Hire of carabaos and horses 6,000
Others  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 P120,000
Cost of Sales
Beginning inventory (60k + 30k)  P90,000
Purchases of livestock 100,000
Ending inventory (180,000) (10,000)
Gross income from operations 110,000
Add: Other income (30k + 10k + 20k + 6k+ 4k) 70,000
Total Gross income  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 P120,00
Cost of Sales:  0
Purchases of livestock
Gross income from operations  (100,000
Add: Other income (30k + 10k + 20% + 6k+ 4k) )
Total Gross income  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 P67,500
Receivables 112,500
FMV of property received -
Mortgage assumed by the buyer 270,000
Selling Price  P450,000

27. How much is the contract price? 

a. P450,000  c. P180,000
b. P270,000  d. P225,000 

 Answer: D 
Selling price P450,000
Less: Mortgaged assumed by the buyer (270,000)
Excess of mortgage over cost 45,000
= P270,000 - P225,000
Contract Price  P225,000

28. How much is the initial payments? 

a. P67,500  c. P45,000
b. P112,500 d. P225,000

 Answer: B
Cash received P67,500
Excess of mortgage over cost 45,000
Initial Payment  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 P450,00
0
Cost (225,000
)
 Gross Profit  P225,000

Gross Profit % = GP/CP 100%

P225,000/P225,000 

REALIZED GROSS PROFIT 2016 (Year 1)

Initial payment P112,50
0
x  100%
Gross Profit P112,50
0
x Holding Period 50%
REALIZED GROSS PROFIT - 2016  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 30%
2016 = 40/100 40%
2017 =75/150  50%
Realized Gross Profit 2018 
2015 = 15/50 = P10,000 x 30% P3,000
 2016 = 40/100 = 20,000 x 40% 8,000
2017 = 75./150 = 40,000 x 50% 20,000
Dina's Gross Profit for 2018  P31,000

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

Lot 1 Lot 2 Lot 3

Selling Price  P225,000 P750,000 P1,200,000
Cost  95,000 900,000 300,000
Terms of Sale:
P Downpayment - 2/16  P 15,000 P 75,000 P 150,000
1st Installment payment - 4/16 15,000 75,000 75,000
2nd Installment Payment - 9/16  15,000 - 120,000
Still due  180,000 P600,000 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 P195,000
Lot 3 1,200,000
Total  P1,139,000
x 6%
Gross income from operations  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 P780,000
Lot 3 -
Total  780,000
x 6%
 Gross income from operations  P46,000

33. 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 P50,000
Instalment payments: 
2017 50,000
2018 100,000
2019 100,000
2020 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 a capital asset, the capital gains tax payable is 2017 and 
in 2018 is –
a. P36,000 and PO, respectively
b. 27,500 and P18,000, respectively
c. PO and P36,000, respectively
d. R18,000 and P7,500, respectively 

 Answer: B
 Capital gains tax (CGT) 2017 = P125,000 x 6% = 7,500
 Capital gains tax (CGT) 2017 = P25,000 x 12 x 6% = 18,000