Taxation

INCOME
TAXATIO
N
Mark Jade P. Erazo

Aries Jay O. Llena
Feli Dela Cruz
Alvin Flor
Angelo Rivera
BSA-3B
Chapter 1 General Principles and Concepts of Taxation
Problem 1 – 1 True or False

Write True if the statement is correct, or False if the statement is incorrect.
1. Taxation could be described as a power, as a process, or as a means. As a power, taxation is

a way of apportioning the cost of government among those who are privileged to enjoy its
benefits.
2. The State can enforce contributions upon its citizens in the form of taxes even without a
constitutional provision authorizing it.
3. Appropriation of taxes is considered valid if intended for the common good of the people
without identifying a particular person to be benefited from it.
4. Taxation is inseparable in the existence of a nation.
5. Taxation is considered as the lifeblood of the government and every government unit must
exercise this power.
6. The amount of taxes may be increased to curve spending power and minimize inflation.
7. The Constitution is the source of the State’s taxing power.
8. Taxation is the government’s legitimate means of interfering with the private properties of
its subjects.
9. The benefits from taxation have to be experienced to justify the legitimacy of collection of
taxes from the people.
10. Taxation is the primary source of government revenue. Hence, all government funds come
from taxes.
11. Sovereign equality dictates that a nation cannot impose taxes on the property of another
country.
12. The state can still exercise its taxing powers over its citizen, even if he resides outside the
taxing State’s territory.
13. All government entities regardless of their functions are exempted from taxes because it
would be impractical for the government to be taxing itself.
14. Revenues derived from taxes cannot be used for the exclusive use of private persons.
15. Local tax ordinances must be uniformly and equally applied throughout the country.

1. The primary requisite of equity principle is that each taxpayer should be required to
contribute equal amounts in the form of taxes.
2. Tax assessment refers to the fiscal policy of the government.
3. An aspect of taxes power that could be delegated to the President covers both legislative
and administrative discretion.
4. Eminent domain and police power can effectively be performed even without taxation.
5. When the power to tax is delegated to the local government, only the legislative branch of
the local government can exercise the power.
6. All inherent powers presuppose equivalent compensation.
7. There is no imposition of amount in police power.
8. Police power and eminent domain may defeat the Constitutional rights of a person.
9. Tax exemption applies only to government entities that exercise proprietary functions.
10. Tax assessment is a process of taxation which involves the passage of tax laws and
ordinances through legislature.
11. Taxation, like eminent domain is limited by the Constitutional provision that private
property may not be taken without just compensation.
12. The exercise of police power is superior to the non-impairment clause of the Constitution.
13. Taxation, like police power is restricted by the due process clause of the Constitution.
14. Dumping duty is the additional duty tax imposed on imported goods with lower prices than
their fair market values to protect local industries.
15. The doctrine of tax imprescriptibility states that taxes in general are not cancellable.

1. Taxes may be exercised to encourage economic growth by granting tax exemptions.
2. Taxes may be used as a tool and weapon in international relations and to protect trade
relations.
3. Protection is the basic consideration that justifies tax situs.
4. The tax situs for occupation is the place where occupation is a pursued even if the criterion
for nationality is given.
5. There is direct double taxation by taxing corporate income and corporate stockholders’
dividends from the same corporation.
6. A nonresident alien is liable to pay transfer taxes for properties within and outside the
Philippines.
7. A tax may be levied for the support of religious activities as long as all churches benefit from
it.
8. In general, bills need not to be signed by the President to become a law.
9. No law granting any tax exemption shall be passed without the concurrence of two thirds of
the members of the Congress.
10. The constitution grants autonomous regions certain legislative powers which shall include
legislative power over taxation.
11. Taxes collected by the BIR are local taxes.
12. Real estate and income tax collected on the same real estate property is not a form of
double taxation.
13. A tax evader sidesteps the law, while the tax avoider breaks it.
14. All revenues and assets of non-stock, nonprofit educational institutions used directly or
indirectly for educational purposes shall be exempt from taxes and duties.

1. The power if Judicial Review in taxation is limited only to the interpretation and application
of tax laws.
2. Interpretations made by executive branch for the enforcement of tax laws are generally
respected by the Courts because they are conclusive.
3. Tax laws are given retroactive effect because the rule of “ex post facto law” is applicable for
tax purposes.
4. In taxation, it is one’s civil liability to pay taxes which gives rise to criminal liability.
5. No person shall be imprisoned for nonpayment of income tax.
6. Tax laws must be constructed strictly against the government, and tax exemptions must be
construed strictly against the taxpayer.
7. As a rule, doubts as to imposition must be resolved liberally in favor of the government and
strictly against the taxpayer.
8. The Philippine tax laws are not political and penal in nature.
9. The doctrine of equitable recoupment is applicable to cases where the taxes involved are
totally unrelated.
10. When there is ambiguity of tax laws, the rules of statutory construction may be used to
search for the legislative intent. However, when the meaning of the law is clear, the statute
must be enforced as written.
11. Tax exemption is transferable and assignable.
12. Revenue regulations that are inconsistent with law have the effect and force of law if they
are useful and reasonable.
13. BIR Rulings are the best opinions regarding the interpretations of tax laws and are
considered sound law until changed by the Court.
14. The tax doctrine if Marshall Dictum explains the tax is a power to destroy.
15. Tax rulings of the Secretary of Finance are binding to the Courts because the Department of
Finance is the higher agency regarding tax administration.
Problem 1 – 5 Multiple Choice

Encircle the letter that contains the best answer.
1. Which of the following statements is/are correct?

i. Taxation is a process.
ii. Enactment of Tax laws is part of the taxation process.
iii. The Constitution expressly conferred the power of Taxation to the President of the
Philippines.
iv. Taxation requires voluntary contribution from inhabitants to support the government.
Choices:
a. i, ii, iii and iv.
b. i, ii, and iii only.
c. i, and ii only.
d. i only.
2. Which of the following is/are natural qualities of Taxation Power?

i. An inherent power
ii. Essentially an executive function
iii. An absolute power
iv. Territorial in operation
Choices:
a. i, ii, iii and iv.
b. i, ii, and iii only.
c. i, and ii only.
d. i only.
3. Taxation co-exist with the four elements of the state which includes all, except
a. Government
b. Property
c. Sovereignty
d. Territory
4. Which of the following statements is not correct?

a. The government automatically possesses the power to collect taxes from its inhabitants.
b. The government can enforce contribution upon its citizen only when the Constitution
grants it.
c. Taxation power exists inseparably with the State.
d. The State has the supreme power to command and enforce contribution from people
within its jurisdiction.
a. Only the national government exercises the inherent power of taxation.
b. The power to tax by the local government units is a delegated power granted by the
Constitution and other special laws.
c. National legislation is exercised by Congress.
d. Interpretation of Tax Laws is done by the Legislative branch of the government.
a. Collections from taxes are public money.
b. Appropriation of taxes for the common good of the people is valid.
c. Construction of private road from taxes is a valid appropriation.
d. Allocation of taxes for the benefit of greater portion of population is considered for public
purposes.
7. All of the following statements are correct except one.

a. Taxation power is an absolute power.
b. Taxation power is the strongest of all inherent power of the government.
c. Tax laws must not violate Constitutional restrictions.
d. Exercise of Taxation power is subject to restrictions.
8. One of the following is not among the basic justification for taxation.
a. Taxation is based on necessity.
b. Taxation is the lifeblood of the government.
c. Taxation is the bread and butter of the government.
d. Taxation is a voluntary contribution for the benefits received.
9. Which of the following could be an object of taxation?

i. Person
ii. Tangible property
iii. Intangible property
iv. Rights
Choices:
a. i, and ii.
b. i, ii, and iii.
c. i, and iv.
d. I, ii, iii an iv.
10. These refer to the rules or orders having force of law issued by the executive branch of the
government to ensure uniform application of the tax law.
a. Revenue regulations
b. BIR rulings
c. Memorandum orders
d. Local tax ordinances

1. This refers to the process of taxation to determine the amount of tax based on existing tax law.
a. Levying
b. Imposition
c. Assessment
d. Collection
2. All of the following are legislative aspect of taxation except

a. Selection of the object or subject of tax.
b. Fixing of tax rates.
c. Valuation or property for taxation.
d. Prescribing the general rules of taxation.
3. Which of the following is/are elements of impact of taxation?

i. Levy
ii. Assessment
iii. Collectiom
Choices:
a. i, ii and iii.
b. i, and ii only.
c. ii and iii only.
d. iii only.
4. All of the following are administrative functions of taxation except

a. Selection of object of tax
b. Valuation of property for taxation
c. Equalization of assessment
d. Collection of taxes
5. The statement that “He who received more should give more” is based on this basic tax
principle.
a. Fiscal adequacy
b. Theoretical justice
c. Administrative feasibility
d. Due process of law
6. To spread the burden of taxation, the corresponding estimated tax is collected at once every
payroll period so that at the end of taxable year, the amount of tax withheld will be equal or
approximate to the actual tax for the year. This taxation system of collection at source is based
on what tax principle?
a. Fiscal adequacy
b. Theoretical justice
c. Administrative feasibility
d. Due process of law
7. All of the following are inherent restrictions on the exercise of taxation power, except
a. rule of uniformity.
b. for public purposes.
c. territorial jurisdiction.
d. international comity.
8. Which of the following is not correct?

a. In the absence of the specific tax provision, taxes in general rule are not cancelable.
b. Prescriptive period for assessment and collection is applicable to returnable taxes.
c. The law in prescription being a remedial measure should be interpreted liberally in order to
protect the taxpayer.
d. The prescriptive period should be the shorter between the required filling date and the
actual date of filing.
9. Which of the following statements is correct?

a. Indirect double taxation is legal as long as there is no violation of equal protection and
uniformity clauses of the Constitution.
b. Indirect double taxation violates the Constitutional provision of uniformity and equal
protection.
c. There is direct double taxation in taxing the income of the corporation and again subject
the portion of the income declared as dividend to final tax.
d. Direct double taxation is prohibited by the Constitution.
10. Which of the following remedies against double taxation requires tax treaty?
a. Tax exemption
b. Tax credit
c. Reciprocity
d. Deduction allowance

1. Which of the following tax escape is permissible under Tax Code?

a. Tax avoidance
b. Tax evasion
c. Tax dodging
d. Overstatement of expenses
2. Statement 1: Government units performing governmental functions are exempt from tax
unless expressly taxable.
Statement 2: Government owned or controlled corporations exercising proprietary functions
are taxable unless expressly exempt.
a. Only statement 1 is correct.
b. Only statement 2 is correct.
c. Both statements are correct.
d. Both statements are not correct.
3. Which of the following is an incorrect description of taxation?

a. Legislative and inherent for the existence of the government
b. Necessary and for public purposes
c. Supreme and an absolute power of the State
d. Restricted by Constitutional and inherent limitations
4. Which of the following is not true?

Taxation Police Eminent
Power Power Domain
a. Inherent to the existence of the government Yes Yes Yes
b. Not legislative in nature No No No
c. Superior to the non-impairment clause Yes Yes No
d. Restricted by just compensation No No Yes
5. Which of the following is a correct nature of restriction to exercise taxation power?

Constitutional Inherent
Limitation Limitation
a. Territorial jurisdiction Yes Yes
b. International comity Yes No
c. Rule of uniformity and equity No No
d. Rule process of law Yes No
6. Which statement refers to police power as distinguished from taxation?

a. It is restricted by Constitutional provision.
b. It is superior to the non-impairment clause of the constitution.
c. It involves the taking of property by the government/
d. The amount imposed has no limit.
7. Police power is distinguished from taxation power because

a. It involves taking of property.
b. the amount collected is limited to the cost of regulation
c. it is an inherent power of the state.
d. benefit derived is the protection given by the state.
8. The following restriction are inherent on the exercise of taxation power, except
a. rule of uniformity.
b. for public purposes.
c. territorial jurisdiction.
d. international comity.

a. The national and local government units exercise the inherent power to tax/
b. Local government units could exercise the power of taxation though legislated delegation.
c. National legislation is exercised by Congress.
d. Interpretation if Tax Laws is done by the judicial branch of the government.
10. Tax affects the area or nation as a community rather than as individuals. This is a specific
explanation of
a. International comity.
b. Public purpose.
c. Supreme power.
d. Reciprocity.

Encircle the letter that contains the best answer
1. It is achieved through the passage of tax law that defines the tax system of a nation?
a. Tax legislation
b. Tax administration
c. Tax policy
d. Tax assessment
2. A fundamental rule in taxation is that the property of one country may not be taxed by another
country. This is known as
a. International law
b. International country
c. Reciprocity
d. International inhibition

a. Collections from taxes are public money.
b. Appropriation of taxes for the common good of the people is valid.
c. Construction of private road from taxes is a valid appropriation.
d. Allocation of taxes for the benefit of greater portion of population is considered for public
purposes.
4. A taxpayer gives the following reasons in refusing to pay a tax. Which of his reasons is not
acceptable for legally refusing to pay the tax?
a. That he has been deprived of due process of law.
b. That there is lack of territorial jurisdiction.
c. That he derives no benefit from the tax.
d. That the prescriptive period for the tax has elapsed.
5. The following are the constitutional limitations on the power of taxation, except
a. taxes are not subject to set – off or compensation.
b. only Congress can exercise the power of taxation.
c. non- impairment of the obligation of contracts.
d. the rule of taxation must be uniform.
6. Which of the following is/are taxable only for income earned within the Philippines?
i. Nonresident citizen
ii. Nonresident alien
iii. Resident citizen
iv. Resident alien
Choices:
a. i, ii and iii only.
b. i, ii and iv only.
c. i, and iii only.
d. ii, iii and iv only.
7. Which of the following are characteristics of taxes?

i. Voluntary contribution
ii. Imposed by legislative body
iii. Proportionate in character
iv. Used for public purpose
Choices:
a. i, ii and iii only.
b. i, ii and iv only.
c. i, and iii only.
d. ii, iii and iv only.
8. The following are business taxes except

a. Value-added tax.
b. other percentage tax.
c. excise tax.
d. custom duties.
9. All of the following are National taxes as to collecting authority except

a. income tax.
b. real property tax.
c. estate tax.
d. value – added tax.
10. Which of the following tax rates behaves in the same direction with the taxable value?
a. Proportionate
b. Progressive
c. Regressive
d. Digressive
1. The US embassy donated vehicle to the Department of Foreign Affairs of the Philippines. Which
of the following statements is correct?
a. This transaction is exempted from payment of donor’s tax only.
b. This transaction is exempted only from payment of documentary stamp tax.
c. This transaction is exempted from payment of both donor’s tax and documentary stamp tax
d. This transaction is subject to both donor’s tax and documentary stamp tax
2. All of the following are not taxes except

a. surcharge.
b. special assessment.
c. custom duties.
d. license fee.
3. Which of the following could be an object of taxation?

i. Person
ii. Tangible property
iii. Intangible property
iv. Rights
Choices:
a. i and ii.
b. i, ii and iii.
c. i and iv.
d. i, ii, iii and iv.
4. Which of the following correctly describes the primary purpose of taxation?

Fiscal Regulatory
purpose purpose
a. To raise revenue Yes Yes
b. To check inflation Yes No
c. To discourage consumption of harmful products No No
d. To limit influx of foreign products No Yes
5. All of the following statements are true, except

a. Double taxation is taxing twice the same taxpayer for the same purpose covering the same
period and taxed by the same authority.
b. Double taxation is prohibited by the Philippine Constitution.
c. Indirect double taxation is allowed as long as this does not violate the equal protection and
uniformity principles.
d. Doubts regarding the double taxation must be resolved in favor of the taxpayer.
6. One of the following situs of taxation is not true.

Located or Earned
Within Outside
a. Taxable income of nonresident citizen Yes No
b. Taxable estate of resident alien Yes Yes
c. Taxable donation of resident citizen Yes Yes
d. Taxable sale Yes Yes
7. Statement 1: The City of Baguio claims that it can impose additional taxes on banks under the
Local Government Code (in addition to the percentage tax on banks imposed in the NIRC).
Statement 2: Such imposition is a direct double taxation.
a. Both statements are correct.
c. Only statement 2 is correct.
d. Both statements are incorrect.
8. One of the following is incorrect regarding tax exemption.

Expressed Implied
Exemption Exemption
th
a. 13 month pay of P30,000 and below Yes No
b. Inter-corporate dividend Yes No
c. Nontaxability of government units No No
d. Separation pay due to sickness Yes No

a. A tax bill must only be applicable and operative after becoming a law.
b. The effectivity of the law commences upon its approval.
c. The applicability of the law covers the present and future transactions.
d. Tax law is ex post facto in application.

a. In the absence of specific tax provision, taxes in general rule are not cancelable.
b. Ad volarem taxes are imposed based on the standard of weight or measurement.
c. Prescriptive period for assessment and collection is applicable to returnable taxes.
d. The law in prescription being a remedial measure should be interpreted liberally in order to
protect the taxpayer.

1. Which of the following characteristics describes our internal revenue laws?

a. Political in nature
b. Penal in nature
c. Retroactive in character
d. Generally prospective in operation although the tax statute may nevertheless operate
retrospectively provided it is clearly the legislative intent
2. Statement 1: When the primary consideration is the legislative intent, but doubts exist in
determining such intent, the doubts must be resolved strictly against the taxing authority.
Statement 2: Tax exemptions are strictly construed against the tax payer.
a. Only statement 1 is true.
b. Only statement 2 is true.
c. Both statements are true.
d. Both statements are false.
3. In case of deduction and exemptions on income tax returns, doubts shall be resolved.
a. liberally in favor of the taxpayer.
b. strictly against the government.
c. strictly against the taxpayer.
d. with compromise.
4. In case of conflict between the tax laws and generally accepted accounting principles (GAAP) for
preparation of tax returns,
a. GAAP shall prevail over tax law.
b. Tax laws shall prevail over GAAP.
c. The courts shall resolve the issue.
d. Both tax laws and GAAP shall enforced.
5. Which of the following statement is not true?

a. If a taxpayer is acquitted in a criminal violation of the Tax Code, this acquittal does not
exonerate him from his civil liability to pay the taxes.
b. A conviction for tax evasion is not a bar for collection of unpaid taxes.
c. A tax assessment is necessary to a criminal prosecution for willful attempt to defeat and
evade payment of taxes.
d. Criminal proceedings under the Tax Code are now a mode of collection of internal revenue
taxes, fees or charges.
6. Statement 1: BIR ruling are the final interpretation old the Tax Code.
Statement 2: Supreme Court Decision shall prevail over the BIR Rulings.
7. All of the following statements are incorrect, except

a. General provision under Tax code prevails over BIR Regulations
b. BIR Rulings prevails over Local Tax Ordinance on matters concerning barangay taxes.
c. BIR Rulings are sound law until changed by court resolution.
d. Tax Code could violate Constitutional provisions.
8. Which statement is wrong? A revenue bill:

a. Must originate from the House of Representative and on which same bill the Senate may
propose amendments.
b. May originate from the Senate and on which same bill the House of Representatives may
propose amendments.
c. May have a House version and a Senate version approved separately and then consolidated,
with both houses approving the consolidation version.
d. May be recommended by the President to Congress.

a. Revenue regulations have the force and effect of law and a memorandum order of the
Commissioner of Internal Revenue, approved by the Secretary of Finance, has the same
force and effect as revenue regulations.
b. The revenue regulations in conflict with law are null and void.
c. The interpretations of the former Secretary of Finance do not necessarily bind their
successors.
d. All of the above.
10. Statement 1: The law on prescription being a remedial measure should be interpreted liberally.
Statement 2: Doubts as to whether double taxation has been imposed should be resolved in
favor of the taxpayer.
Chapter 2 Tax Administration

1. The heart of tax administration is the enforcement of tax policy.
2. The BIR is the principally responsible for the fiscal policies and general management of the
government’s financial resources.
3. The BIR is primarily in charge to asses and collect taxes imposed both by the national and
local government units.
4. The Secretary of Justice has the authority to interpret and ascertain the validity of tax laws,
subject to the review by the Courts of Tax Appeals.
5. In general, payors are constituted withholding agents with regard to their income payments
to other taxpayers.
6. Under Title I, Sec. 3 of NIRC, the BIR shall be headed by the Commissioner and to be assisted
by 4 deputy commissioners.
7. The power to interpret the provisions of the Tax Code, to be able to decide on tax cases
under its office is granted by the law to the BIR Commissioner.
8. Internal revenue taxes are self-assessing; hence govt tax assessment is not necessary to
demand settlement of a taxpayer’s tax liability.
9. The BIR can appeal to the CTA.
10. The BIR has the burden to prove that the taxpayer concerned has received the tax
assessment.
11. The final decision made by the CTA can be appealed to the Supreme Court within 30 days.
12. Tax assessment cannot be enforced when there are no available accounting records
maintained by the taxpayer.
13. Jeopardy assessment can be enforced when the taxpayer obstruct the proceedings to collect
taxes.
14. When a taxpayer applies for tax compromise, the CIR can automatically inquire into his bank
deposits.
15. An invalid assessment cannot be used as a basis for a tax compromise.

1. The BIR can access the taxpayer’s record regarding sales or purchases even without a Letter
of Authority.
2. In a written protest to Commissioner, all relevant supporting documents must be submitted

to the Court of Tax Appeals within 60 days from date of assessment; otherwise, the
assessment shall become final.
3. The power to assess the proper tax based on the best evidence obtainable is applicable only
when the relevant reports are not available.
4. For tax violation committed, the BIR has the power to suspend and temporarily close
business establishment within 5 days subject to the taxpayer’s compliance within the
requirement as indicated in the closure order.
5. The object of distraint may either be personal and/or real properties of delinquent taxpayer.
6. Criminal tax violations filed in courts may be compromised.
7. Any internal revenue tax, which has been assessed within the prescribed limitation period,
may be collected by distraint or levy, or by a proceeding in court within five (5) years
following the assessment of tax.
8. The prescriptive period for collection of tax shall be made within three (3) years from the
time the final assessment was released.
9. The National Government is allowed to purchase property under distraint if the amount of
bid is substantially lower than the actual cost of the said property.
10. After one year from the date of sale of real property under levy, the delinquent taxpayer
may redeem the property sold.
11. The levy may be repeated until the full amount due, including all expenses, is collected.
12. Delinquent accounts may be compromised, however withholding tax cases, in general, are
not subject to compromise.

1. The transfer of business place during the year will require registration and additional
registration fee.
2. The estate must secure its own TIN, as a taxpayer separate from its owner.
3. The required initial bond for manufacturers and importers of articles subject to excise tax is
P200,000.
4. The informer’s reward is subject to a 10% creditable withholding tax.
5. Jeopardy assessment requires no tax audit and shortens the taxpayer’s period.
6. Once a taxpayer is served with a NA originating from National Office, he should first verify or
check with the BIR’S National Office whether he is listed or not for National Office audit.
7. A tax assessment must be in writing containing the factual findings and the law violated by
the taxpayer.
8. A fraudulent return with 30% understatement of income reported is subject to a penalty of

25% based on the basic tax unpaid.
9. By forfeiture, the proceeds of the property sold are applied to satisfy the tax liability and the
excess thereof shall be returned to the taxpayer.
10. By seizure, no part of proceeds goes to the taxpayer because the property is confiscated in
favor of the government
11. A second cousin of an internal revenue officer is allowed to receive an informer’s reward.
12. Cases regarding collection of taxes already filed in the court are not subject to compromise.
13. Delinquent tax accounts with duly approved schedule of installment payments are not
subject to compromise.

1. The BIR is under the supervision of the

a. Department of Budget
b. Bureau of Customes
c. Department of Finance
d. Department of Trade and Industry
2. Which of the following is not an activity involving tax administration?

a. Execution of judgment decided by the court in favor of the BIR
b. Passage of tax laws and ordinances through the legislature
c. Computation of tax due and payable
d. Taxpayer’s compliance to pay tax obligation

a. Levying and collection of taxes are legislative functions.
b. Assessment and collection are administrative functions.
c. Enacting of tax laws and its interpretation are legislative functions.
d. Levying and impositions are judicial functions.
4. Which of the following is correct?

Legislative Administrative
a. Fixing of tax rates Yes Yes
b. Valuation of object of tax Yes No
c. Collection of taxes Yes Yes
d. Assessment of tax liability No Yes
5. It has the executive supervision and control over tax administration.

a. Bureau of Internal Revenue
b. Bureau of Customs
c. Department of Finance
d. Court of Justice
6. Which of the following is not among the administrative powers of the Bureau of Internal
Revenue?
a. Compromise tax assessments
b. Distraint of personal property of delinquent taxpayer
c. Render court decision concerning tax dispute
d. Levy of real property of delinquent taxpayer
7. This tax assessment is being asked to be cancelled because there is a question as to its validity or
legality.
a. Jeopardy assessment
b. Disputed assessment
c. Illegal assessment
d. Deficiency assessment

a. If it is the first employment of the taxpayer, he must be registered with the BIR before
employment or within 10 days form date of employment/
b. If the taxpayer is self-employed, he must register his business within 10 days from
commencement of his business.
c. If the taxpayer is both employed and doing business, he must have only one TIN as
employee and as sole proprietor.
d. TIN must be indicated in the return, documents or statement filed with the BIR/
9. The following acts are part of tax assessment except

a. Appraisal and valuation of tax object.
b. Determination of tax prescription.
c. Selection of tax object.
d. Computation of tax surcharges and interest.
10. A fraudulent tax return or failure to file a tax return may be assessed, or proceeding in court for
the collection of such tax may be filed without assessment at any time within
a. Two (2) years after the discovery of the falsity, fraud or omission.
b. Three (3) years after the discovery of the falsity, fraud or omission.
c. Five (5) years after the discovery of the falsity, fraud or omission.
d. Ten (10) years after the discovery of the falsity, fraud or omission.
11. Which of the following requirements is not necessary in order that a tax return could be
amended?
a. The tax return should have been withdrawn first by the taxpayer before amendment shall
be made.
b. A tax return should have been first submitted to the BIR and such should not be withdrawn.
c. The amendment should be made within three (3) years from the date of filling the return.
d. No notice for audit or investigation of such return has been served to the taxpayer.
12. Statement 1: An individual taxpayer earning purely compensation income is exempt from P500
registration fee, but required to renew his registration every year.
Statement 2: Cooperatives are exempt from annual registration which the BIR.
b. Both statements are correct.
d. Both statements are not correct

Encircle the letter the corresponds to the best answer.
1. The passage of tax laws defines the country’s

a. Tax administration.
b. Tax policy.
c. Sound tax system.
d. Fiscal adequacy.
2. Which of the following is not within the scope authority of the BIR Commissioner?
a. To exercise the levying function of taxation
b. To interpret tax laws
c. To assess and collect BIR taxes
d. To decide cases involving National Internal Revenue taxes
3. Which of the following is within the scope authority of the BIR Commissioner?
a. To inquire into bank deposit accounts
b. To terminate taxable period
c. To prescribe real property values
4. The following powers are classified as the primary powers of BIR Commissioner. Which of these
powers is the Commissioner’s secondary power?
a. Power to intercept tax laws
b. Power to assess and collect the amount of tax
c. Power to make arrest and seizures
d. Power to examine books of accounts
5. In which of the following cases could the BIR Commissioner suspend operations of a taxpayer?
a. Understatement of taxable sales or receipts by 30% or more of his taxable sales or receipts
for the taxable quarter.
b. Failure to file a value added tax return and / or failure to issue receipts or invoices.
c. Failure to register with the Revenue District Office
d. All of the Above
6. Which of the following is not a general requirement of a tax return?

a. It must at least be in duplicate and in the form prescribed by the BIR.
b. It must cover a taxable period of one year only except when otherwise specifically
authorized by law.
c. It must contain a declaration under oath and that it was made under the penalties of
perjury.
d. It must be signed and filed by the taxpayer only.
7. The seized property of a delinquent taxpayer becomes the property of the government. This
refers to
a. Distraint.
b. Levy.
c. Forfeiture.
d. Compromise.
8. Which of the following surcharges is not correct?

a. 25% of basic amount of tax due for simple neglect
b. 25% of basic amount of tax due for unintentional failure to file and pay tax return on
prescribed date
c. 50% of the basic amount of tax due for filing of return with wrong RDO
d. 50% of the basic amount of tax due for false or fraudulent tax return
9. If the taxpayer failed to pay the tax demanded per final assessment, the government may
exercise several administrative remedies. Which of the following is not correct?
a. Levy of real property of the taxpayer may be availed of only after distraint of personal
property of taxpayer.
b. Either distraint or levy may be pursued simultaneously once the assessment becomes final
and demandable.
c. If the tax assessed is P100 and below, levy or distraint may not be availed of.
d. The remedy of distraint of personal property may be repeated if necessary until the full
amount due and all expenses are collected.
10. Which of the following is not true with regard to the authority of the Commissioner to enter into
a tax compromise?
a. The taxpayer must not have an existing tax liability.
b. There must be an offer by the taxpayer or commissioner of an amount to be paid by the
taxpayer.
c. A reasonable doubt as to the validity of the claim against the taxpayer exists.
d. The final position of the taxpayer demonstrates a clear inability to pay the assessed tax.

1. A formal letter from the BIR requiring the taxpayer to pay his tax liability within a specific period.
a. Tax remedies
b. Tax assessment
c. Tax collection
d. Letter of Authority
2. An assessment without completing tax audit which is intended to facilitate the collection of
taxes due to taxpayer’s noncooperation.
a. Jeopardy assessment
b. Deficiency assessment
c. Disputed assessment
d. Void assessment
3. The tax return not subjected to tax investigation can be amended within
a. Three (3) years from the date the tax return was filed.
b. Three (3) years from the date the error is discovered.
c. Three (3) years from the date the BIR granted the changing of the tax return.
d. Five (5) years from the date the tax return was filed.
4. A letter is being send by the BIR to the taxpayer with noted tax discrepancy inviting him for
unofficial meeting to determine the endorsement of the tax case to the Assessment Division for
appropriate review.
a. Preliminary assessment notice
b. Notice of informal conference
c. Assessment notice
d. Demand letter
5. A taxpayer’s request to the BIR to consider as evidence the newly discovered or additional
evidence is called motion for
a. reconsideration
b. cancellation
c. withdrawal
d. reinvestigation
6. Which of the following is not a an administrative remedy available to the government?

a. Assessment
b. Distraint
c. Tax avoidance
d. Tax lien
7. Which of the following tax remedies is both beneficial to the government and the taxpayer?
a. Tax lien
b. Compromise
c. Injuction
d. Forfeiture
8. What is the expiration date of a letter of authority?

a. 30 days from its date of issue
b. 120 days from its date of issue
c. 3 days from its date of issue
d. 10 days from its date of issue
9. After the final assessment is made, the government should enforce collection within
a. 2 years.
b. 3 years.
c. 5 years.
d. 10 years.
10. In installment tax payments, the unpaid balance of the tax is subject to a surcharge of
a. 0%
b. 10%
c. 20%
d. 25%
11. Statement 1: It is within the general power of the Commissioner to interpret tax law to be able
to assess the tax liability of the taxpayer.
Statement 2: The interpretation of the Tax Code issued through BIR rulings shall prevail over the
decision of the Court because to interpret tax laws is within the general powers of the
Commissioner.
b. only statement 2 is correct.
12. Statement 1: Each taxpayer is allowed to have only one TIN.

Statement 2: Upon death of the taxpayer, his estate, for estate tax purposes shall use the same
TIN he was using during his lifetime.
b. only statement 2 is correct.
Problem 2 – 7 Tax Assessment/Refund Procedures

Instruction: Determine the last day to exercise the rights of the taxpayer
Case A:
Date of tax return filed April 15, 2011
Date of material non-inclusion of income discovered June 20, 2012
Question: When is the last day to amend the tax return?
Case B:
Date of tax return filed April 15, 2011
Date of tax return amended October 20, 2012
Question: When is the deadline to assess tax return?
Case C:
Date of fraudulent tax return filed April 15, 2011
Date when tax fraud was discovered by BIR April 15, 2015
Question: When is the deadline to file a proceeding in court for tax collection?
Case D:
Date of tax return was not filed April 15, 2011
Date when the omission was discovered by BIR April 15, 2012
Questions: When is the deadline to assess tax return?
Case E:
Date of tax erroneously paid April 15, 2011
Date of claim for refund was filed with BIR May 20, 2013
No decision on the claim of refund was made
Question: When is the last day to appeal to the CTA?
Case F:
Date of tax erroneously paid June 10, 2011
Date of claim for refund was filed with BIR March 3, 2013
Date of BIR decision of denial was received April 5, 2013
Case G:
Date of claim for refund was filed with BIR June 10, 2012
Date of refund check received July 15, 2012
Date when BIR decision to grant refund was delivered August 1, 2012
Question: If the refund check was not encashed, when is the starting date for the government to
forfeit it?
Case H:
Date of claim for refund was filed with BIR June 10, 2012
Date of tax credit certificate July 30, 2012
Date when BIR decision was received August 21, 2012
Question: If the tax credit certificate was not utilized or revalidated, when is the starting date for
the government to revert is to the general fund?
Case I:
Date of assessment was received January 2, 2011
Petition for reconsideration was filed with BIR January 12, 2011
Documents to support petition submitted January 22, 2011
No decision on the protest as of July 12, 2011
Case J:
Assessment received January 5, 2011
Petition for reconsideration filed with BIR February 1, 2011
Documents to support petition submitted February 7, 2011
Decision of BIR denying the petition March 22, 2011
2nd request for reconsideration filed with BIR March 30, 2011
Decision on 2nd request denied April 12, 2011
Case K:
Date to appeal to the CTA April 21, 2011
Date of adverse decision of the CTA June 1, 2011
Date the CTA adverse decision received June 10, 2011
Question: When is the last day to appeal to the Supreme Court?
Case L:
Date to appeal to the CTA June 10, 2011
Date of adverse decision of the CTA June 20, 2011
Date the CTA adverse decision received June 25, 2011
Question: When is the last day to appeal to the Supreme Court?
Case M:
Date the real property was levied January 5, 2011
Date the real property levied was sold March 1, 2011
Question: When is the last day to redeem the real property?
Problem 2 – 8 Business Registration

Which of the following is correct regarding the amount of business registration fee to the BIR?
Original Renewal Transfer
a. P500 P500 P500
b. P500 P500 None
c. P500 None P500
d. None P500 P500
Problem 2 – 9 Minimum Compromise

A criminal case was filed in court against Mr. Garcia for obtaining three different Tax Identification
Numbers (TIN) resulting to an estimated tax fraud of P50 million.
If Mr. Garcia proposed for a compromise to the BIR Commissioner, how much is the minimum
compromise that is allowed to Garcia?
a. P20 million c. P5 million
b. P10 million d. P- 0 -
Problem 2 – 10 Minimum Compromise

F Co. declared bankruptcy with the following financial conditions:
Cash P 100,000
Noncash assets 1,000,000
Bank loans payable 600,000
Trade creditors payable 800,000
Income tax payable 1,000,000
Accumulated losses 1,300,000
The noncash assets were liquidated for P600,000. F Co. was able to negotiate comprise due to financial
incapability. Assuming that income tax payable of F Co. has been due for 6 months, how much is the
minimum amount of compromise?
a. P500,000 c. P270,000
b. P400,00 d. P200,000
Problem 2 – 11 Property Purchased by the Government

The BIR decided to purchase a personal property under distraint in behalf of the National Government.
The information available in deciding the price of the said personal property is as follows:
Market value of the property P300,000

Amount of tax liability 150,000
Bid price of the highest bidder 90,000
Surcharges 25,000
Interest 20,000
Advertising cost 5,000
How much is the price of the personal property if purchased by the BIR in behalf of the National
Government?
a. P350,000 c. P250,000
b. P300,000 d. P200,000
Problem 2 – 12 Importer’s Bonds

X Company is an importer of liquor products that need to pay an importer’s bond on excise taxes. During
the First year of importation, the following was taken form the record of X company:
First 6-months bond P100,000

Actual total excise tax on the:
First 6 months 200,000
Last 6 months 250,000
1. How much is the required bonds on the last 6 months of the first year?
a. P250,000 c. P400,000
b. P300,000 d. P450,000
2. How much is the net actual amount to be paid to the BIR to satisfy the correct amount of
required bonds for the second year assuming that previous bonds paid will be cumulatively
applied as tax credits?
a. P150,000 c. P450,000
b. P300,000 d. P600,000
Problem 2 – 13 Informer’s Reward

X, a first cousin of B (an RDO). Provided an information to the BIR leading to a discovery of a tax fraud
amounting to P9,000,000. How much is the amount of net cash rewards that can be received by X from
government?
a. P1,000,000 c. P810,000
b. P900,000 d. P- 0 -
Problem 2 – 14 Levy of Real Property

After proper proceedings, the real property of X was levied by the government to satisfy his tax liability
which has been delinquent for 5 years. The real property is a boarding house with an average income of
P60,000 per month. X received the total amount of assessment as follows:
Basic income tax unpaid P1,000,000

Surcharge (P1,000,000 x 50%) 500,000
Interest (P1,000,000 x 20% x 5 years ) 1,000,000
Total amount due per assessment, October 15 200A P2,500,000
The property was sold for public auction for P4,000,00 on January 15, 200B. Cost of advertisement
amounts to P20,000. It was stipulated in the contract that the related capital gains tax and documentary
stamp tax shall be paid by X.
1. How much is the excess amount of the sale over the claim and cost of sale that should be turned
over to X?
a. P750,000 c. P450,000
b. P490,000 d. P430,000
2. If X decided to redeem the real property on October 15, 200B, how much is the redemption
price?
a. P7,700,000 c. P4,450,000
b. P4,600,000 d. P3,700,000
3. How much is the excess of the real property over the interest expense form the time of auction
sale to the time of redemption?
a. P270,000
b. P120,000
c. P90,000
d. None, because the property has been sold to the highest bidder.
Problem 2 – 15 Constructive Distraint

A taxpayer’s property was placed under a constructive distraint. The property was originally acquired for
P400,00 and at the time of constructive distraint, it has accumulated depreciation of P200,00. If the
taxpayer sold the said property for P250,000 without the consent of the BIR Commissioner, how much is
the minimum statutory fine that the BIR can impose against him?
a. P800,000 c. P500,000
b. P600,000 d. P250,000
Problem 2 – 16 Refund on Distraint of Personal Property

The car of Mr. Poe, a delinquent taxpayer, was subjected to a destraint. His total tax liability per
assessment as of April 15, 200x was P300,000. The car was sold P350,000 through a public auction on
July 15, 200x with the following expenses by the BIR:
Documentary stamp tax 1,500

Advertisement 1,000
How much is the amount to be refunded by the BIR to Mr. Poe as of July 15, 200x?
a. P50,000 c. P32,500
b. P47,500 d. P 2,500
Problem 2 – 17 Amount Still Payable After Distraint

The investment in stock of Mr. Ligot, a delinquent taxpayer, was subjected to a distraint. His total tax
liability per assessment as of April 15, 200x was P275,000. The property was sold through the stcok
market on July 15, 200x with the following expenses incurred by the BIR:
Percentage tax P1,500

Documentary stamp tax 1,125
Advertisement 1,000
How much is the amount still to be paid by Mr. Ligot to the BIR as of July 15, 200x?
a. P22,875 c. P13,750
b. P15,875 d. P 9,125
Problem 2 – 18 Total Surcharge

Miss Ronalyn Galindez reported her income tax return for 200A only on June 30, 200B voluntarily
without ant notice from the BIR. The tax due per return amounts to P10,000. What would be the total
surcharge to be added to the basic tax?
a. P10,000 c. P2,500
b. P 5,000 d. P - 0 -
Problem 2 – 19 Interest on Unpaid Tax

If the basic tax is P10,000 and the surcharge is P2,500, how much is interest charge if the 200A ITR is
only filed on June 30, 200B?
a. P625.00 c. P416.67
b. P520.83 d. P- 0 -
Problem 2 – 20 Wrong RDO

A certain taxpayer has a basic tax due amounting to P10,000 pertaining to his 200A IT but was filed only
on June 30, 200B to wring Revenue District Office. How much would be the total amount due by the
taxpayer inclusive of surcharge and interest?
a. P12,500 c. P15,417
b. P15,000 d. P17,417
Problem 2 – 21 Additions to Tax with BIR Notification

The taxpayer did not file his income tax return for the calendar year 200A which was due for filling on
April 15, 200B. He was notified by the BIR about his failure to file the tax return, for which reason he
filed his tax return and paid the tax only after the said notice on June 30,200C. The tax due per return is
P100,000. How much would be the total amount due, exclusive of compromise penalty?
a. P124,167 c. P154,167
b. P150,00 d. P174,167
Problem 2 – 22 Late Payment of Tax

The taxpayer’s income tax return for the calendar year 200A was due for filing on April 15, 200B but the
taxpayer voluntary filed his return, without assessment notice from the BIR only on June 30, 200B. The
tax due per return amounts to P100,000. How much would be the total amount due inclusive of
penalties and interest, excluding compromise penalty?
a. P125,000 c. P130,208
b. P129,167 d. P100,00
Problem 2 – 23 Redemption of Real Property

Mr. Bay-an’s real property had been levied due to income tax delinquency amounting to P1,000,000 for
a period of 2 years (determined as fraud and habitual nonpayment) since December 31, 200A. On
December 31, 200C, the property was sold for public auction with a selling price adequate to cover the
amount of public taxes, surcharge and interest plus excess amount of P158,333.
How much is the total amount to needed by Mr. Bay-an, if he decides to redeem his real property on
December 31, 200D?
a. P2,300,000 c. P1,900,000
b. P2,000,000 d. P1,185,000
Problem 2 – 24 Deficiency Tax

An assessment notice demanding payment of deficiency tax inclusive of surcharge and interest, due and
payable on May 15, 200A was computed as:
Tax per assessment P120,000

Less: Tax paid per reported return 70,000
Basic deficiency tax P 50,000
Add: Surcharge (P50,000 x 50%) P25,000
Interest (P50,000 x 20% x 6/12) 5,000 30,000
Total amount due per assessment, May 15,200A P 80,000
The total amount due per assessment is required to be paid on May 15, 200A, but the actual payment
was made in June 30,200A. The total payment inclusive of surcharge and interest would be
a. P106,250 c. P94,500
b. P102,000 d. P92,625
Problem 2 – 25 Assessment of Unreported Income

C paid P1,000,000 income tax related to his earnings for the year 200A. On July 15,200B, the BIR
conducted a tax audit and found out that C’s correct income tax liability should be P3,000,000. The tax
discrepancy was due concealment of other earnings subject to normal tax.
C failed to protest on time the preliminary assessment notice. If you were the BIR assessor to issue an
assessment, how much would be the total amount due to be assessed against C as of July 15,200B
excluding compromise penalty?
a. P2,100,000 c. P3,100,000
b. P2,600,00 d. P3,875,000
Problem 2 – 26 Installment Tax Payment

The income of a resident Filipino citizen amounts to P84,000, net of P3,000 creditable withholdings tax
and his income tax due per ITR at year-end amounts to P8,000. If he opted for installment payment, the
minimum tax payable for the first and 2 nd installment would be
First Installment Second Installment

a. P3,000 P3,000
b. P2,500 P2,500
c. P4,000 P1,000
d. P1,000 P4,000
Problem 2 – 27 Installment Tax Payment

Due to financial incapacity, XYZ Corporation requested BIR that it be allowed to pay its income tax
liability per ITR for calendar year 200A, in the amount of P1,000,000, in four (4) equal monthly
installments, starting April 15, 200B, Its request has been duly approved pursuant to Sec. 23 of the Tax
Code. XYZ complied with tits monthly installment payment.
1. The total amount due on April 15,200B and May 15, 200B would be
April 15, 200B May 15, 200B
a. P1,000,000 P762,500
b. P1,000,000 P750,000
c. P 750,000 P508,333
d. P 250,000 P262,500
2. The 3rd installment and 4th installments would be

3rd Installment 4th Installment
a. P300,000 P350,000
b. P262,500 P258,333
c. P258,333 P254,166
d. P250,000 P250,000
Problem 2 – 28 Tax Assessment Procedure

The RDO of Baguio City issued a tax assessment to Mr. Land due to fraudulent income tax amounting to
P500,000. Mr. Lang filed protest with 60 days and submitted proofs 10 days thereafter.
Can be BIR deny the protest of Mr. Lang? What would be the remedy available to Mr, Lang?
Problem 2 – 29 Tax Assessment

As a BIR Examiner, you found the following material findings on the income tax discrepancies of ABC
Company for the taxable year 200A:
Taxable income per 200A ITR P1,000,000

200A income tax paid per return on April 15, 2008 300,000
Discrepancies per investigation during 200C:
Undeclared rental income 450,000
Nondeductible interest expenses 300,000
Nondeductible bad debt expenses 200,000
Undocumented representation expenses 150,000
Required:
a. How much is the total amount due assessed payable as of April 15, 200C?
b. Assume the total amount due assessed and payable as of April 15, 200C was not disputed by ABC
Company, but ABC paid only on June 15, 200C, how much is the total amount due (excluding
compromise penalty for late payment?
Problem 2 – 30 Informer’s Reward

Miss Benita Wan provided information to the government, which led to the capture and seizure of
smuggled goods with fair market value of P15,000,000.
Required:
a. If the government sold the captured goods for P15,000,000, how much would be the cash reward of
Miss Wan as tax informer?
b. If the government destroyed the goods seized because these are regarded as harmful to health,
how much cash reward would Miss Wan receive?
c. In assumption to letter “a,” how much final income tax should be withheld from the reward of Miss
Wan?
Problem 2 – 31 Violations and Penalties

Miss Heide San Tago is operating an unregistered trading business, and she has not been issuing any
official sales invoice. She was not issuing any official sales invoice. When Miss San Tago was summoned
to present her books of accounts to BIR, she ignored the summon.
Required:
a. Enumerate all the Tax Code violations committed by Miss. San Tago.
b. If convicted for all these violations, how much is the total amount of penalties?
Problem 2 – 32 Understatement of Income Tax Return

On April 15, 201B, Orville Corporation filed its income tax return for the taxable year 201A declaring a
total receipts of P2,000,000 and total deduction of P1,500,000. The income tax due declared amounts to
P165,000. Upon filling to BIR, the tax officer discovered that Orville’s receipts are understated by 25%
and the deduction is overstated by 35%, on which basis the correct amount of tax was paid on time.
How much was the amount of surcharge added to Orville’s income tax due on April 15, 201B?
Problem 2 – 33 Registration Fee

Splash Corporation is a manufacturer of beauty products that maintains 9 warehouses and 30 branches
in the Philippines. Its principal factory is located in Quezon City.
Required: Assuming that the taxable year is 200A, compute the following:
a. Total annual registration fee of Splash Corporation for 200A if payment was made on January 31,
200B.
b. Total amount paid to the BIR if payment was made on July 30, 200B.
Problem 2 – 34 Chattel Property Forfeited

The government forfeited the chattel property of Mr. Balana due to criminal violation of tax laws. Mr.
Balana’s total tax liability per assessment as of April 15,200A was P100,000 payable on June 1, 200A. The
property was sold for P200,000 through a public auction on September 1, 200A with the following
expenses incurred by the BIR:
Advertisement P 5,000
Transfer tax 20,000
How much is the amount of excess from proceeds of sale to be remitted to Mr. Balana as of September
1, 200A?
Problem 2 – 35 Compromise
The following cases are available from the records of the BIR resulting from compromise proposals of
corporations:
Basic Tax Surcharge Interest
Delinquent account P500,000 P125,000 P100,000
Pending cases under administrative protest P900,000 P450,000 P180,000
Criminal violation not filed in courts P1,000,000 P250,000 P200,000
Withholding tax cases P2,000,000 P500,000 P400,000
Criminal violation filed in courts P5,000,000 P2,500,000 P1,000,000
Totals P9,400,000 P3,825,000 P1,880,000
Required: How much is the amount of compromise allowed using the following reasons (independent
assumptions):
Case 1: Financial incapability due to corporate insolvency.

Case 2: Financial incapability due to surplus deficit resulting to impairment in original capital by at least
50%.
Case 3: Doubtful validity of assessment.
Problem 2 – 36 Comprehensive Tax Remedy

Miss Malou Lugui was assessed with tax liability of P250,000 exclusive of penalty. The financial status of
Miss Lugui when the demand for payment was made is as follows:
Total properties:
Real property P200,000
Personal property 100,000
Total liabilities, exclusive of tax 150,000
Required:
a. If Miss Lugui offers for a compromise payment of P100,000 for her tax liabilities on the ground of her
financial incapability, and Commissioner accepted the offer, would it be in accordance with the pre-
requisite for a compromise settlement?
b. Assuming that a distraint proceeding was carried out instead, which of the above properties would be
issued with warrant of distraint?
c. If all the properties of Miss Lugui have a realizable value of P200,000 after payment of her P150,000
liabilities and possible cost of the proceedings, would it be possible for the government to carry out
the distraint and levy proceeding simultaneously to effect the conversion of Miss Lugui’s assets into
cash?
d. If, after the properties of Miss Lugui were sold in public auction only P200,000 was realized and used
as payment of her tax liabilities, would this extinguished the unpaid tax liabilities of Miss Lugui?

Write True if the statement is correct or false if the statement is incorrect.
1. An income is a fruit of a wealth.
2. All increases in taxpayer’s net worth are taxable income.
3. Net worth is the same as owner’s capital or shareholder’s equity.
4. A sale always includes return on capital.
5. Non taxable incomes are generally excluded from reportable gross income.
6. An accrued interest income credited to the taxpayer is considered constructively received.
7. The theory of income constructively received is designed to prevent cash basis taxpayer to delay
reporting income.
8. Income earned by a nonresident Filipino Citizen from all sources is taxable in the Philippines.
9. If compensation is received in the form of notes or other evidences of indebtedness, the basis of
tax is the face value of the instrument.
10. Premium paid by the employer on life insurance coverage of employee wherein the beneficiary
is the employer, the basis of tax is the premium paid.
11. Under the accrual basis of reporting income, income is reported in the year of collection.
12. Most taxpayers elect to report income in a fiscal year basis.
13. In general, trading and manufacturing businesses use accrual method while servicing businesses
use cash method of reporting income.
14. Cash method of reporting income can deduct prepaid expenses in the year of payment.
15. A taxpayer engaged in installment sale of personal goods on a regular basis is allowed to report
income by installment only if the initial basis exceeds 25% of the selling price.

Write True if the statement is correct or False if the statement is incorrect.
1. Income from illegal activities is taxable.
2. Foreign corporation which is doing less than 50% of its business within and more than 50% of its
business without is considered as resident foreign corporation.
3. The income distribution of foreign corporation which is doing less than 50% of its business
within is considered as partly earned within and partly earned outside the Philippines by the
recipient of such income distribution.
4. Either calendar or fiscal period consists of twelve (12) months which starts from January to
December of the taxable year.
5. Passive income is to normal tax only if not subjected to final tax.
6. The peso equivalent of a foreign currency as payment for compensation is considered as the
value of reportable income.
7. If the taxpayer is an individual, his taxable income shall be computed on the basis of calendar
year.
8. The income of a decedent person in the year of death, earned from his properties before and
after his death, are reportable income of his estate.
9. Service business which is required to be reporting income using cash basis can claimed
deduction of related expenses determined using accrual basis.
10. In installment method, the excess of mortgage assumed over cost of property sold, is considered
as part of the initial payment.
11. In installment sale, if the initial payment exceeds 25% of the selling price, the transaction is
considered cash sales.
12. The deferred payment method adopts the present value of reporting income.
13. The option for reporting income on cash or accrual basis pertains only those farm products that
were raised or produced in farming activities.
14. The main difference on the amount of income reported under cash and accrual basis of
reporting farming income is the change in peso value of inventories.
15. Under the crop basis, the entire cost of producing the crop is deductible only from gross income
in the year in which the crop was realized.

1. The assets minus total liabilities is equal to

a. Net worth.
b. Owner’s capital.
c. Shareholder’s equity.
2. The principal amount of time deposit in the bank (point of view of depositor) is a/n
a. Income.
b. Revenue.
c. Capital.
d. Receipt.
3. Statement 1: All wealth that flows into the taxpayer’s hand other than mere return of capital is
income.
Statement 2 : All earnings are taxable with income tax.
4. Which of the following is classified as income?

a. Damage recovery due to physical injuries
b. Return of capital
c. Excess of selling price over cost of assets sold
d. Gift received
5. Which of the following is not a characteristics of income?

a. Increase in taxpayers wealth
b. Return of taxpayers wealth
c. Realization or receipt of gain
d. Earnings constrictively received
6. Which of the following items is not concluded in the determination of taxable income?
a. Realized gain
b. Realized loss
c . Gift
d. Income derived from the gift
7. Which of the following is not a criterion of a taxable income?

a. There must be gain.
b. The gain need not be actually received.
c. The gain must be included by the law as treaty from taxation.
d. The law as treaty from taxation must exclude the gain.
8. If a property is received in lieu of cash compensation, the basis of tax is the

a. supposed amount of cash to be received.
b. agreed value of the property received.
c. fair market value of the property received.
d. salvage value of the property received.
9. If services are rendered for the cancellation of debt, the basis of tax (point of view of debtor) is
the
a. fair market value of the service rendered.
b. amount of obligation omitted.
c. fair market value of the debt cancelled.
d. supposed amount of cash to be received.
10. Which of the following businesses is/are reporting income on accrual basis?
a. Real property lessor
b. Professional partnership
c. Trading business
d. Brokerage business
11. Which of the following is/are generally subject to final tax?

i. Compenstation
ii. Business income
iii. Passive income
iv. Capital gain
Choices:
a. i, ii, iii and iv
b. i and ii only
c. ii and iv only
d. iii only

1. A tax period wherein a taxpayer is required to file and pay within differing deadlines depending
on the nature of income earned.
a. Calendar period
b. Fiscal period
c. Short period
d. Variable period
2. A method of reporting income that is used when collection can be made over a relatively long
periods of time with a strong possibility that full collection will not be made.
a. Percentage of completion method
b. Installment method
c. Long-term construction contract method
d. Deferred payment method
3. Which of the following is/are reportable (returnable) in the annual income tax return?
i. Compensation income
ii. Business income
iii. Passive income
iv. Capital gain
Choices:
a. i, ii, iii and iv
b. i, and ii only
c. i, and iii only
d. i only
4. Under which case is an installment method of reporting income on installment sale allowed?
1. Movable property is regularly sold on a installment basis by a dealer.
2. Sale of real property where the initial payments exceeds 25% of the selling price.
Choices:
a. Only No. 1.
b. Only No. 2.
c. Both Nos. 1 and 2.
d. All choices are not allowed to report income by installment.
5. Which of the following sales is allowed to be reported under installment reporting of income?
a. Regular installment sale of personal property
b. Casual sale of personal property with initial payment of 25% and below of selling price
c. Sale of real property with initial payment of 25% of the selling price
6. Which of the following is incorrect?

Taxable income
Year 1 Year 2
a. Rent for year 2 collected in year 1 No Yes
b. Income from year 1 sales collected in year 2 Yes No

c. Services for year 1, collected in year 2 No Yes
d. Income from year 2 sales, collected in advance in year 1 No Yes
7. Statement 1: All foreign corporations are taxable only for income earned within the Philippines.
Statement 2: All Filipino citizens are taxable for their income earned within and outside the
Philippines.
a. Both statements are correct.
8. If an individual renders services for a credit who in consideration thereof cancels his existing
debt, the cancellation of indebtedness may amount to a
a. Gift.
b. Capital Contribution.
c. Donation inter-vivos.
d. Payment of income
9. Which of the following is correct?

Reportable subject to
Final tax Tax return
a. Compensation income No No
b. Business income Yes Yes
c. Passive income earned within Yes No
d. Capital gain on real estate (capital asset) Yes Yes
10. When there are no beginning and ending inventories of farm crops harvested, which of the
following is true?
Cash Method Accrual Method
a. Income is Greater Lesser
b. Expense is Lesser Greater
c. Income is The same The same
d. Expense is Greater Lesser
Problem 3 – 5 Net Assets Approach

The records of Roco Trading for year 200A show the following:
January 1, 200A December 31, 200A
Assets P500,000 P300,000
Liabilities 150,000 50,000
During the year, the owner made a total withdrawal from the business amounted to P240,000. How
much is the next taxable income of Roco for year 200A?
a. P240,000 c. P140,000
b. P190,000 d. P–0–
Problem 3 – 6 Net Assets Approach

The X Corporation reported the following changes during the year:
Increase in total assets P1,520,000

Decrease in total liabilities 330,000
Additional paid-in capital from stockholders 800,000
Dividend declared but not yet paid 100,000
Increase in retained earnings due to unrealized gain 50,000
How much is the net taxable income of X Corporation for the year 200x?
a. P1,850,000 c. P1,000,000
b. P1,100,000 d. P 400,000
Problem 3 – 7 Increase in Net Worth

The single proprietorship reported the following changes during the year:
Increase in total assets P250,000
Decrease in total liabilities 160,000
Additional investment to the business 50,000
Drawings during the year 20,000
The business income for the year is

a. P 60,000 c. P430,000
b. P380,000 d. P450,000
Problem 3 – 8 Return on Capital

Om December 1, 200x, Mario started an ice cream business with a borrowed capital amounting to
P20,000 at a monthly interest of 1%. During the month, he spent P3,000 for the operating expense of
the kiosk, of which, P2,000 for rent and the balance for purchase of ice cream products for resale.
Mario’s total cash sales during the month amounted to P30,000 with and inventory end of P7,500
including a 60% gross profit rate based on sale. At the end of the month, the Kiosk has depreciated value
of P2,900.
How much is the return in capital of Mario during December 200x?

a. P21,600 c. P15,700
b. P15,900 d. P10,000
Problem 3 – 9 Return of Capital and Return on Capital
At the start of the year, Noli’s time deposit has a balance of P250,000. At the end of the year, the
account has a balance of P280,000. There are no additional deposits and there are no drawings during
the year.
How much is the return of capital and return on capital?

Return of Capital Return on Capital
a. P250,000 P280,000
b. P280,000 P250,000
c. P280,000 P 30,000
d. P250,000 P 30,000
Problem 3 – 10 Income Realized

During 200x, Jose bought a parcel of land amounting to P500,000 (for speculation). After several
months, a school was constructed adjacent to his land whereby increasing the land’s market value to
P2,500,000. A prospective buyer offered Jose P2,000,000 plus 6% capital gains tax as the purchase
amount for the property. How much is the reportable gain for 200x?
a. P- 0 - c. P1,500,000
b. P1,380,000 d. P2,000,000
Problem 3 – 11 Income Constructively Received

Arom Corporation showed the following records related to its income:
Interest credited in peso-savings deposit, net of tax P 40,000

Matured interest on coupon bonds, not yet collected 80,000
Decrease in value of investments in bonds 50,000
Cancellation of indebtedness form SMC in which Aron has
equity investments 120,000
Increase in fair market value of SMC equity investments 30,000
Profit share in joint revenue not yet received 200,000
Payment of damages for unrealized profits deposit in
court by a competitor in favor of Arom Co. 60,000
Based on the items given, how much is the amount of realized income of Arom Corporation?
a. P240,000 c. P500,000
b. P450,000 d. P510,000
Problem 3 – 12 Income Realized

In year 1, X invested in real property the amount of P1,000,000. In year 2, the fair value of the real
property is P1,500,000. In year 3, the property was sold for P1,800,000 and incurred disposal cost of
P500,000. The amount of income for each year would be
Year 1 Year 2 Year 3
a. P0 P500,000 P300,000
b. P0 P250,000 P250,000
c. P0 P 0 P750,000
d. P250,000 P250,000 P250,00
Problem 3 -13 Taxable vs. Nontaxable Income

Orange’s income during the year are as follows: Salary – P260,000 (including 13 th month pay); Raffle
winnings – P70,000 and Philippine lotto winnings – P500,000.
How much is the taxable and nontaxable income of Orang?

Taxable Nontaxable
a. P310,000 P520,000
b. P240,000 P500,000
c. P300,000 P560,000
d. P240,000 P590,000
Problem 3 – 14 Sources of Income
Ogie is a resident Filipino Citizen. During the year, his earnings are as follows:
Within Outside
Compensation P180,000 P120,000
Income from grocery store 50,000
Share in lotto winnings 100,000
The total income taxable in the Philippines would be:

a. P230,000 c. P350,000
b. P300,000 d. P450,000

From January to March of 201x, Mr. C’s salary from employment in the Philippines amounted to
P250,000, net of P50,000 withholding tax. From April to December 201x his total income from
employment in Japan where he resided for the rest of the year, amounted to peso equivalent of
P630,000, net of foreign income tax of P70,000. If Mr. C is a Filipino citizen and an overseas contact
worker (OCW), how much is his total reportable income in the Philippines.
a. P250,000 c. P880,000
b. P300,000 d. P1,000,000

Peter Favorito is a resident German citizen. He received P600,000 dividend income from Sungad
Corporation, a resident foreign corporation. Date pertinent to the operation of Sungad Corporation is as
follows:
Philippines German Total
Revenues P20,000,000 P10,000,000 P30,000,000
Operating expenses 14,000,000 4,000,000 18,000,000
Net income P 6,000,000 P 6,000,000 P12,000,000
The amount of Peter’s dividend income taxable within would be

a. P600,000 c. P300,000
b. P400,000 d. P200,000
Problem 3 – 17 Classification of Income

Records reveal the following earnings of Mr. Sabit, a resident Filipino citizen, during a taxable year:
Salary as a university professor, bet of P20,000 WTW P240,000

Income derived from audit services, net of 10% creditable tax 135,000
Rent income, net of 5% CWT 114,000
Interest income, net of 20% final tax (Metrobank) 8,000
Dividend income, net of 10% final tax (Jollibee) 4,500
Gain from sale of personal car 3,000
Gain from sale of shares of stock – outside stock exchange, net of
5% final tax 2,850
1. How much income is classified as compensation income?

a. P410,000 c. P260,000
b. P375,000 d. P240,000
2. How much is the total amount of income classified as income from profession and business?
a. P273,000 c. P260,000
b. P270,000 d. P120,000
3. How much gross income is classified as passive income?

a. P21,000 c. P15,000
b. P15,350 d. P12,500
4. How much income is classified as capital gains?
a. P15,000 c. P10,500
b. P12,500 d. P 6,000
Problem 3 – 18 Normal Tax vs. Final Tax

Kiko reports the following earnings during the year:
Professional fee, net of 10% withholding tax P450,000

Salary, net of P60,000 withholding tax on wages 300,000
Capital gains – shares of stock, net of capital gains tax
of 5% on 1st P100,000 gain, 10% on gain in excess
of P100,000 149,000
Winnings, net of 20% passive income tax 40,000
Prizes 8,000
How much is the amounts of gross earnings subject to normal tax and subject to final taxes?
Subject to
Normal tax Final tax
a. P868,000 P210,000
b. P868,000 P218,000
c. P860,000 P212,000
d. P810,000 P207,000
Problem 3 – 19 Cash Received as Compensation

Cris, a public school teacher, received a monthly cash salary of P12,000 for the first four months of the
taxable year. Subsequently, he was promoted as a department head resulting to an increase in his cash
salary amounted to P15,000 per month. He is entitled to 13 th month pay which is equal to his gross basic
pay during the year/12 months.
The gross compensation income of Cris during the year including 13 th month pay would be
a. P150,000 c. P168,000
b. P156,000 d. P182,000
Problem 3 – 20 Property Received as Compensation

Atty. Pasiclab received a second-hand car from his employer TA Law Office for successfully defending a
criminal case. The car has a cost of P400,000 and its accumulated depreciation amounts to P300,000.
The prevailing market value of the car of the same model is P120,000, but the new model is P500,000.
How much is the reportable income of Pasiclab?

a. P100,000 c. P400,000
b. P120,000 d. P500,000
Problem 3 – 21 Service Received in Lieu of Compensation

Danny Floro works as a caretaker with a monthly salary of P5,000 in the house of Atty. Panfilo Salango.
Atty. Salango successfully defended the former against a vehicular accident case. The prevailing lawyer’s
fee of Atty. Salango is P6,000, which they agreed that such shall become Mr. Floros’s salary for a month.
How much is the compensation income of Mr. Floro in the said month?
a. P6,000 c. P1,000
b. P5,000 d. P–0–
Problem 3 – 22 Service Received in Lieu of Compensation

Mr. Teofilo Alcayde received a note with a face value of P30,000 as a dissertation advising fee from Miss
Nita Rica. The note is non-interest bearing and is payable within one year. The prevailing market rate if
the same nature of not is 10% the present value factor of 10% annuity of P1 is 0.909.
What is the amount of income to be reported by Mr. Alcayde upon receipt of the note?
Compensation Interest
a. P30,000 P–0–
b. P27,270 P2,730
c. P27,270 P–0–
d. P27,000 P3,000
Problem 3 – 23 Notes Received in Lieu of Compensation

On June 30, 200a, Mr. Ely Felix received a two-year 12% interest-bearing note amounting to P50,000 as
a compensation.
As of December 31, 200A, what amount of income Mr. Felix shall report?
Compensation Interest
a. P50,000 P3,000
b. P50,000 P6,000
c. P47,000 P3,000
d. P47,000 P–0–
Problem 3 – 24 Cash vs. Accrual Method

A, a single proprietor engaged in service business, reported the following business income and
expenses:
Service income P500,000
Collections during the year 490,000
Expenses actually incurred during the year 150,000
Expenses paid during the year 200,000
How much is the net income from business before personal exemption?
a. P350,000 c. P300,000
b. P340,000 d. P290,000
Problem 3 – 25 Cash vs. Accrual Method

In March 1, 201A, X Corporation reported the following business income and expenses:
Sales P1,000,000
Cost of Sales 600,000
Operating expenses 200,000
Gain from sale of old furniture 20,000
If 20% of operating expenses of X is prepaid expenses, how much is the taxable income?
a. P260,000 c. P220,000
b. P240,000 d. P200,000
Problem 3 – 26 Sales Price, Contract Price and Initial Payments

The real property classified as capital asset with cost of P400,000 was sold by installment in 4 years
including the year of sale with the following terms:
Down payments:
Cash (down payment) P 50,000
Fair market value of property received as
part of non-cash down payment 100,000
Mortgage assumed by the buyer 450,000
Installments payments:
First year (end of year of sale) 100,000
Second year 200,000
Third year 300,000
Fourth year 400,000
1. How much is the selling price of the installments sales?

a. P2,000,000 c. P1,600,000
b. P1,800,000 d. P1,300,000
2. How much is the contract price?
a. P2,000,000 c. P1,600,000
b. P1,800,000 d. P1,200,000
3. How much is the initial payments

a. P150,000 c. P250,000
b. P200,000 d. P300,000
Problem 3 – 27 Selling Price vs. Contract Price

S purchased P500,000 worth of real property and used the property as a mortgage for a loan of
P600,000, payable in 10 equal annual installments.
After the first annual installments payment, S sold the property to B for P700,000, with 10% cash down
payment, balance payable into 2 equal installments starting January of next year. B assumed the
remaining balance of the mortgage.
How much is the contract price?

a. P700,000 c. P200,000
b. P540,000 d. P160,000
Problem 3 – 28 Installment Sales of Personal Property

After 3 years, Mar sold a painting (capital asset) which he purchased in 200A at a cost of P3,000, on the
following terms:
June 1, 200C down payment P1,000
August 1, 200C installment due 1,000
October 1, 200C installment due 2,000
October 1, 200D installment due 4,000
October 1, 200E installment due 4,000
1. For year 200C, Marifel will report a gross income of

a. P9,000 c. P3,000
b. P4,500 d. P1,500
2. If Marifel is a dealer in paintings, for 200C he will report a gross income of

a. P1,500 c. P4,500
b. P3,000 d. P9,000
Problem 3 – 29 Deferred Payment Method

On October 1, 200A, CF sold a car costing P500,000 payable as follows:
First year: Cash P300,000
Second year: 12% interest bearing note 200,000
Third year: 12% interest bearing note 500,000
How much is the total reportable income in year 200A?

a. P506,000 c. P300,000
b. P500,000 d. P 6,000
Problem 3 – 30 Income from Construction Contracts

Engr. Alcayde presented the following information his road construction project which is 50% completed
at end of this year and was 30% completed at end of last year:
Contract price P50,000,000

Total estimated cost to complete 30,000,000
Cost incurred previous year 10,000,000
Cost incurred this year 9,000,000
How much income is to be reported this year?

a. P1,000,000 c. P6,000,000
b. P5,000,000 d. P10,000,000
The contract price of the project is P1,000,000. Actual costs installed in year 1 amounted to P90,000,
and at that time the project is 20% completed. How much should be reported as income under percent
of completion method for this year?
a. P550,000 c. P200,000
b. P210,000 d. P110,000

The total contract price of the project is P1,200,000. This was constructed as follows:
Year Cost for the year Completion as of year end
200A P432,000 60%
200B P184,250 85%
200C P103,750 100%
The income to be reported in year 200C under percent of completion method would be
a. P480,000 c. P136,000
b. P403,750 d. P 76,250
Problem 3 – 33 Crop Basis

A citrus farm reported the following:
Year Cost Harvest at Selling price
1 P100,000 P–0–
2 P200,000 P–0–
3 P 50,000 P500,000
4 P 50,000 P400,000
How much should be the amount of reportable income in year 3?

a. P150,000 c. P450,000
b. P250,000 d. P500,00
Problem 3 – 34 Crop Basis

A farmer started planting pulp trees in year 1 and harvested the tree 5 years with total value of
P2,000,000. The total direct costs related to harvest are as follows:
Year 1: P300,000 Year 3: P100,000 Year 5: P400,000

Year 2: P100,000 Year 4: P100,000
His income under crop basis of reporting is
a. P 100,000 P300,000 P300,00 P300,000 P –0–

b. P 300,000 P100,000 P100,00 P100,000 P 400,000
c. P –0– P–0– P–0– P–0– P 1,000,000
d. P1,000,000 P–0– P–0– P–0– P–0–
Problem 3 – 35 Accrual Reporting of Income

A, as single proprietor engaged in service business, reported the following business income and
expenses:
Service revenue – accruing for current year P1,000,000

Collections during:
For service income – last year 300,000
For service income – current year 800,000
For service income – next year 100,000
Expenses actually incurred during the year 500,000
Expenses paid during the year 600,000
Required: Compute A’s net income from business before personal exemption?
Problem 3 – 36 Accrual Reporting of Income
X Corporation reported the following business income and expenses for the taxable year 200A:
Cash sales 2,000,000

Sales on account 520,000
Advances from customers 400,000
Cost of sales 1,200,000
Operating expenses (30% prepayments) 600,000
Required: How much is X’s net income for the taxable year 200A?
Problem 3 – 37 Farming Income

Assume the following data of a farmer for two years/
Farm harvest 100 cavans 200 cavans

Harvest sold 80 cavans 190 cavans
Harvest unsold. Year end 20 cavans 30 cavans
Selling price P500/cavans P500/cavan
Required: Compute the gross income using (a) cash and (b) accrual

Ka Polinar, a farmer of Tacurong, reported the following revenues and expenses in his farm for the year
200x:
Revenue from livestock and farm products raised P 50,000

Revenue from livestock and farm products purchased 150,000
Rent income, lease of one hectare farm 100,000
Farm equipment sold 25,000
Cost of livestock and farm products purchased 90,000
Unsold livestock and farm products raised:
Beginning 6,000
Ending 9,000
Carrying value of farm equipment sold (held for 10 months) 25,000
Required: Compute for the gross income under the following situations:
1. Cash Method
2. Accrual Method

Erwin Serna, a farmer reported the following during the taxable year:
Beginning Inventory:
Livestock purchased P 50,000
Livestock produced 180,000
Ending Inventory:
Livestock purchased 100,000
Livestock produced 50,000
Cash purchases – livestock 175,000
Cash received:
Sale of livestock purchased 200,000
Sale of livestock produced 300,000
Rent of livestock for rent 50,000
Sale of livestock for rent (acquired at cost of P15,000
with accum. Depreciation of P8,000 at date of sale 10,000
Sale of machinery (acquired at cost of P50,000 with
accum. Depreciation of (35,000 at date if sale) 20,000
Required: Compute the income from farming using (a) cash basis, and (b) accrual basis.
Problem 4-1 True or False
1. Gross income includes all income from whatever sources whether legal or illegal source.
2. There is compensation income realized by an employee when his employer cancelled the
employee’s indebtedness in lieu of wages payable to him.
3. When a minimum wage earner also derives from self-employment, his minimum wage
earned becomes taxable.
4. Cost of living allowance is not part of taxable compensation income because the amount is
very minimal.
5. Any amount of separation pay received by an employee for any cause beyond his control is
tax-exempt.
6. Baptismal fees paid to religious officers are not subject to income tax because of the
separation of church and state.
7. Under the employee stock option plan, the difference between the fair market value at
grant option and the option price is compensation income of the beneficiary.
8. The cancellation of a taxpayer’s indebtedness is an income unless such cancellation is

intended as a gift.
9. If the debt is cancelled due to services rendered by the debtor, the basis of tax is the value
of service rendered.
10. Transportation allowance pre-computed on a daily basis is not subject to substantiation but
subject to tax.
11. The excess of actual expenses over advances made shall constitute taxable income of the
concerned employee if such amount is not reimbursed to the employee.
12. Remuneration for casual labor not in the course of an employer’s trade or business is not
considered compensation.
13. In the sale of service, gross income under SEC 27 of NIRC, means gross receipts less sales
returns, allowances, discount and cost of service.
14. For MCIT computation, cost of service includes but not limited to cost of facilities directly
utilized in providing the service such as depreciation or rental of equipment used and cost of
supplies.
15. Rental income includes obligations assumed by the lessee in behalf of the lessor.

1. Tips are not taxable.
2. A fee received by a religious worker for service rendered is a taxable compensation.
3. I f the advanced payment is received from a customer to deliver a commodity, such receipts
should be reported as income when received by the vendor.
4. If the advanced rental is received as a security deposit, without restriction, then such
amount should be excluded in the determination of rental income.
5. The amount of bad debts which resulted to reduction of taxable income will become a
taxable income in the subsequent year when such is eventually recovered.
6. In general, illegally obtained income is taxable.
7. Estimated bad debts expense, which eventually adjusted to zero, becomes income in the
year of adjustment.
8. The journal entry under GAAP rule, debiting allowance and crediting accounts receivable, is
the item of bad debts expense that is allowed as deduction under Tax Rule.
9. The tax benefit rule provides reporting option to the taxpayer for the recovery of bad debts
preciously written off.
10. All amounts received from life insurance annuity are taxable.
11. Income obtained through illegal means is included in the wrongdoer’s gross income even
though he is obligated to return it when discovered.
12. Income that is not realized is taxable.
13. Actual repayment of embezzled fund by the wrongdoer will give rise to reduction of his
gross income.
14. As a rule, income obtained illegally is not taxable if the wrongdoer is obligated to return it
when discovered.
15. Income received due to error on the part of the payor is not to be reported as part of the
gross income of the payee.

1. Monetized value vacation and sick leave credits of private employees are not subject to tax.
2. The entire amount of P30,000 fourteen month pay is non-taxable .
3. De minimis benefits are non-taxable.
4. The proceeds of life insurance due to death of an insured person shall be part of the gross
income of the recipient.
5. Subsidized board and lodging furnished by an employer is not taxable.
6. Dividends received by a cooperative from a domestic corporation are tax-exempt.
7. When stock dividends received are of a different class from shares previously acquired, the
stock dividends are taxable income.
8. As a rule, excess amount of liquidating dividends over cost of shares surrendered is taxable.
9. The distribution of liquidating dividends is considered as sale of stock.
10. Dividend is tax exempt of received by a resident foreign corporation from a domestic
corporation.
11. Winning are subject to a final tax of 20%, except when the amount is P10,000 or below.
12. All damages recoveries are not taxable.
13. Tax refunds are subject to final tax if the related tax were allowed as deduction from
previous year’s gross income.
14. Prizes are subject to a final tax of 20% regardless of amount.

15. The amount stolen by the cashier is subject a taxable income of the cashier.

16. Gross income includes all income from whatever sources whether legal or illegal source.
17. There is compensation income realized by an employee when his employer cancelled the
employee’s indebtedness in lieu of wages payable to him.
18. When a minimum wage earner also derives from self-employment, his minimum wage
earned becomes taxable.
19. Cost of living allowance is not part of taxable compensation income because the amount is
very minimal.
20. Any amount of separation pay received by an employee for any cause beyond his control is
tax-exempt.
21. Baptismal fees paid to religious officers are not subject to income tax because of the
separation of church and state.
22. Under the employee stock option plan, the difference between the fair market value at
grant option and the option price is compensation income of the beneficiary.
23. The cancellation of a taxpayer’s indebtedness is an income unless such cancellation is

intended as a gift.
24. If the debt is cancelled due to services rendered by the debtor, the basis of tax is the value
of service rendered.
25. Transportation allowance pre-computed on a daily basis is not subject to substantiation but
subject to tax.
26. The excess of actual expenses over advances made shall constitute taxable income of the
concerned employee if such amount is not reimbursed to the employee.
27. Remuneration for casual labor not in the course of an employer’s trade or business is not
28. In the sale of service, gross income under SEC 27 of NIRC, means gross receipts less sales
returns, allowances, discount and cost of service.
29. For MCIT computation, cost of service includes but not limited to cost of facilities directly
utilized in providing the service such as depreciation or rental of equipment used and cost of
supplies.
30. Rental income includes obligations assumed by the lessee in behalf of the lessor.

16. Tips are not taxable.
17. A fee received by a religious worker for service rendered is a taxable compensation.
18. I f the advanced payment is received from a customer to deliver a commodity, such receipts
should be reported as income when received by the vendor.
19. If the advanced rental is received as a security deposit, without restriction, then such
amount should be excluded in the determination of rental income.
20. The amount of bad debts which resulted to reduction of taxable income will become a
taxable income in the subsequent year when such is eventually recovered.
21. In general, illegally obtained income is taxable.
22. Estimated bad debts expense, which eventually adjusted to zero, becomes income in the
year of adjustment.
23. The journal entry under GAAP rule, debiting allowance and crediting accounts receivable, is
the item of bad debts expense that is allowed as deduction under Tax Rule.
24. The tax benefit rule provides reporting option to the taxpayer for the recovery of bad debts
preciously written off.
25. All amounts received from life insurance annuity are taxable.
26. Income obtained through illegal means is included in the wrongdoer’s gross income even
though he is obligated to return it when discovered.
27. Income that is not realized is taxable.
28. Actual repayment of embezzled fund by the wrongdoer will give rise to reduction of his
gross income.
29. As a rule, income obtained illegally is not taxable if the wrongdoer is obligated to return it
when discovered.
30. Income received due to error on the part of the payor is not to be reported as part of the
gross income of the payee.

16. Monetized value vacation and sick leave credits of private employees are not subject to tax.
17. The entire amount of P30,000 fourteen month pay is non-taxable .
18. De minimis benefits are non-taxable.
19. The proceeds of life insurance due to death of an insured person shall be part of the gross
income of the recipient.
20. Subsidized board and lodging furnished by an employer is not taxable.
21. Dividends received by a cooperative from a domestic corporation are tax-exempt.
22. When stock dividends received are of a different class from shares previously acquired, the
stock dividends are taxable income.
23. As a rule, excess amount of liquidating dividends over cost of shares surrendered is taxable.
24. The distribution of liquidating dividends is considered as sale of stock.
25. Dividend is tax exempt of received by a resident foreign corporation from a domestic
corporation.
26. Winning are subject to a final tax of 20%, except when the amount is P10,000 or below.
27. All damages recoveries are not taxable.
28. Tax refunds are subject to final tax if the related tax were allowed as deduction from
previous year’s gross income.
29. Prizes are subject to a final tax of 20% regardless of amount.
30. The amount stolen by the cashier is subject a taxable income of the cashier.
1. A liquidating dividend is given by a corporation as a result of complete liquidation or

dissolution.
2. Regular allowances are generally taxable.
3. The income from practice of profession should be classified as compensation income.
4. The monetary value of availed vacation and sick leaves is taxable.
5. Gain from redemption of shares in mutual fund is exempt from income tax.
6. All BIR-approved retirement pays are exempt from income tax.
7. Tips are taxable.
8. Pre-computed daily transportation allowance is taxable.
9. The MWE’s basic salary is exempt from tax but his overtime pay in excess of his basic daily
wage is taxable.
10. If a corporation forgives the debt of its stockholder, the transaction is considered payment
of income.
11. Gross income includes other income from other resources.
12. To compute for the gross income of banks, the interest expense is treated as operating
expense.
13. The advanced rent income received by a lessor is not reportable because there is no actual
realization of income.
14. Passive income earned outside the Philippines by a resident Filipino citizen that has been
subjected to foreign final tax shall not anymore be taxed in the Philippines.
15. Interest income earned by the banks from its borrowers is subject to final tax of 20%.
Problem 4-5 Multiple Choice

Select the letter that contains the best answer.
1. Which of the following is taxable with income tax at its gross amount when earned within the
Philippines?
a. Professional fee
b. Compensation income
c. Business income
d. Royalty income
2. Which of the following income is/are earned through employee-employer relationship?
i. Professional fee
ii. Wages
iii. Pension pay
iv. Capital gain
Choices:
a. I, ii, iii only
b. I and ii only
c. Ii and iii only
d. Ii only
3. Statement 1: Remuneration for casual labor not in the course of an employer’s trade or business
is not considered as taxable compensation income.
Statement 2: Additional benefits received by the employee for the convenience of the employer
are not taxable income of the employee.

c. Both statements are correct
4. Which of the following is a taxable compensation income?
a. Separation pay due to resignation.

b. Retirement pay under BIR approved retirement plan.
c. Separation pay due to disability.
d. Terminal pay by fact of death.
a. Professional fee, net of creditable withholding tax.

b. Separation pay due to closure of the employer’s business.
c. Terminal pay inclusive of P15,000 13 th month pay.
d. Separation pay due to early retirement.
6. Statement 1: All vacation and sick leave with pay are taxable compensation income.
Statement 2: All unused vacation leave converted into cash are taxable.

c. Both statements are correct
d. Both statements are incorrect
7. Which of the following is considered a taxable compensation income?
a. Free housing given to employee.

b. Social Security System Benefits.
c. Retirement pay under a duly BIR approved benefit plan.
d. Retrenchment pay.
8. Which of the following is not taxable?
a. P2,500 for 10 days sick leaves actually taken.

b. P1,250 for 5 days unused vacation leave converted into cash.
c. P1,000 for unused vacation leave received as part of separation pay due to voluntary
resignation.
d. P500 availed vacation leave.
a. Cost of living allowances.

b. De minimis benefits.
c. Retirement benefit under BIR approved retirement plan.
d. Retrenchment pay.
10. Compensation income is earned when an employer-employee relationship exists. Which of the
following does not represent compensation income?
a. Honorarium of the company lawyer as a speaker in company sponsored seminar.

b. Retainer’s fee of a bookkeeper.
c. Emergency pay.
d. Sick leave with pay.

1. Transportation allowance is non-taxable if

i. Pre-computed on a daily basis.
ii. Paid to employee while on duty.
iii. Received by employee under employer’s benefit rule.
a. i only
b. i and ii
c. ii and iii
d. I, ii, and iii
2. Which of the following is not a compensation income?
a. Retirement pay.
b. Professional fees.
c. Allowances.
d. Wages.
3. A stock dividend received in 200x from a domestic corporation by a non-resident individual not
doing business in the Philippines is
a. Subject to 10% final tax.

b. Subject to 25% tax.
c. Subject to 20% tax.
d. Not subject to tax.
4. Which of the following will result to earning of income by the debtor?
a. Cancellation of existing payables without any financial consideration.

b. Cancellation of existing payables for services rendered to creditor.
c. Cancellation of existing payables to offset the equivalent amount of collectible.
d. Cancellation of existing payable due to bankruptcy of the debtor.
5. Which of the following is income recipient?
a. Stock option.
b. Stock dividend.
c. Pre-emptive stock right.
d. Stock warrant.
6. Which of the following is/are not taxable benefits of employee?
i. Lodging served within the employer’s premises and accepted by the employee as a
condition of employment.
ii. Living quarter furnished to the employee for the convenience of the employer.
iii. Living quarter furnished outside the employer’s premises.
Choices:
a. i only
b. i and ii only
c. ii and iii only
d. ii only
7. Statement 1: Remuneration for casual labor not in the normal course of business is not
Statement 2: Remuneration for casual labor performed for corporation is considered
compensation.

8. Property dividend received by resident citizens from domestic corporation is taxable at
a. Fair value of the property at the date of declaration.

b. Fair value of the property at the date of settlement.
c. Cost of the property at the date of declaration.
d. Cost of the property at the date of settlement.
9. Cost of services may be defined as
a. Cost of services to provide services.

b. Cost of facilities directly utilized to provide services.
c. All direct costs and direct expenses necessary to provide services.
d. All cost involved in providing services.
10. The following are related items to the operation of a single proprietorship business:
i. Purchase of goods for sale.
ii. Freight in of goods purchased.
iii. Sale of goods.
iv. Freight out of goods sold.
v. Unsold goods at the end of the period.
Which of the above items are elements of cost of sales?

a. i, ii, iii, iv and v
b. i, ii, iv and v only
c. i, ii, and iv only
d. i, ii, and v only

1. Which of the following tax refunds, which were incurred in the conduct of business is taxable
income of recipient?
a. Donor’s tax
b. Philippine income tax
c. Vat
d. Documentary stamp tax
2. Statement 1: Income that is not realized is not taxable, but illegal income is taxable.
Statement 2: Income received under a mistake of fact or law is to be included as part of the
gross taxable income.

3. All of the following are income within, except.
a. Dividends declared by the domestic corporation.

b. Salaries earned by Filipino overseas contract workers.
c. Interest on bonds issued by domestic corporation.
d. Income from business located in the Philippines.
4. What is the final tax rate applicable to interest income earned from a regular savings deposit?
a. 5%
b. 10%
c. 20%
d. 25%
5. Mrs.GemmarieParong is a mining operator. Her mineral lands are not covered by any lease
contract. The tax Mrs.Parong has to pay based on the actual market value of the gross output or
mineral products extracted is?
a. Excise tax
b. Royalties
c. Rental
d. Ad-valorem tax
6. Which of the following is not taxable income?
a. Bad debts previously deducted as item of expense and partially recovered subsequently.
b. Tax expense previously disallowed as deduction from taxable income, fully refunded
subsequently.
c. Income from gambling.
d. Income from usurious financing.
7. Insurance premium paid by employer in favour of the insured employee and designate the
business of the employer as the beneficiary. Which of the following statements is/are correct?
Statement 1: The payment of insurance premium is taxable income of the employer.

Statement 2: The payment of insurance premium is deductible expense of the employer.

8. Statement 1: Property dividends received by individual from domestic corporation are subject to
final withholding tax.
Statement 2: The payment of insurance premium is deductible expense of the employer.

9. Which of the following is subject to 10% final tax?
a. Interest income from savings account.

b. Royalty income from franchise.
c. Royalty income from patent.
d. Royalty income from literary works.
10. Which of the following dividends are subject to income tax?
a. Received by domestic corporation from another domestic corporation.

b. Received by a resident corporation from a domestic corporation.
c. Received by domestic from non-resident foreign corporation.
d. Received by non-resident foreign corporation from another non-resident foreign
corporation.
Problem 4-8 Gross Reportable Compensation

The employee reported a net take home pay of P180,000. The amount is net of P30,000 withholding
income tax and P1,000 SSS. The amount is inclusive of P5,000, covering a 10-day vacation leave actually
availed and P10,000 13th month pay. His gross reportable compensation income is?
a. P200,000 c. P190,000
b. P195,000 d.P165,000
Problem 4-9 Gross Taxable Compensation

MarilouBadol has earned the following income in 200A
Salary as a professor, net of withholding tax of P50,000 P370,000
Professional fee as CPA, net of 10% CWT 270,000
Per diem as a board director 200,000
13th month pay 35,000
First prize in essay writing contest 50,000
Sale of house and lot (capital asset) 500,000
What is the amount of gross taxable compensation income subject to normal tax?
a. P420,000 c. P620,000
b. P425,000 d. P625,000
Problem 4-10 Compensation Income

The following items of income are reported by Cute, a CPA:
Salary as accountant P150,000
Overtime pay 30,000
Audit retainer’s fee 60,000
Capital gains from sale of car 25,000
The total compensation income from employment is

a. P180,000 c. P205,000
b. P195,000 d. P255,000

The following items of income are reported by Sexy:
Salary as a guest relation officer P120,000
Tips,(from various customers) 360,000
Monetized 10-day unused vacation leave 4,000
Cost and living allowance 5,000
Achievement awards 20,000
How much is the gross taxable compensation income?

a. P480,000 c. P500,000
b.P485,000 d. P505,000

Jeffrey Miguel received the following during the taxable year 200A:
Salary from employment, net of P240,000 withholding tax P120,000
Overtime pay from employment 36,000
Remuneration from his contractual job:
One year none-interest bearing notes
(dated December 30,200B) 30,000
Payment of services rendered, net of P30,000 cancelled
indebtedness, 4,000
Interest income from bank, net of tax 330
The prevailing effective rate of non-interest bearing notes of the same kinds is 10% per year.
What is the reportable amount of taxable income before personal exemption for annual ITR purposes?
a. P244,000 c. P241,270
b. P242,330 d. P190,270
Problem 4-13 Retirement Pay

Sue reported the following retirement:
First employment for 30 years received at the age of 50 P500,000
Second employment for 10 years received at the age of 60 400,000
Third employment for 10 years received at the age of 70 300,000
How much is non-taxable retirement pay of Sue?

a. P-0- c. P400,000
b. P300,000 d. P500,000
Problem 4-14 Separation Pay

Gorgeous reported the following separation pay:
First employment for 20 years at the age of 40 –resigned P300,000
Second employment for 10 years at the age of 50-retrenchment 200,000
Third employment for 10 years at the age of 60-retirement 100,000
How much is the taxable separation pay?

a. P-0- c.P500,000
b. P300,000 d.P600,000
Problem 4-15 Stock Compensation

Which of the following is the gross compensation income for 1,000 stock certificates received as
payment of services rendered to employer? The certificate is selling P10 per share in the stock exchange.
This has par value of P5 per share. The share were acquired by the employer at cost of P8 per share.
a. P8,000
b. P5,000
c. P10,000
d. Whichever is the lowest of a, b or c.
Problem 4-16 Compensation from Stock Option

An employee received stock option right for 10,000 shares of P10 par common stock at option price of
P12 per share for one-year service. At date of grant, the market price was P13 per share and at date of
exercise and sell of stock option, the market price was P15.
Compensation Income Capital gain

a. P30,000 P20,000
b. P10,000 P20,000
c. P20,000 P30,000
d. P10,000 P50,000
Problem 4-17 Taxable Compensation from Stock Option

X an officer of Y Corporation was given stock option for 10,000 shares with P20 par at option price of
P23. The market price for the share in year 200B, date of grant was P25. The option was exercised and
sold in year 200C when the market price was P30.
How much would be the taxable compensation income of X in year 200B and capital gain in year 200C?
200B 200C
a. P35,000 P35,000
b. P30,000 P70,000
c. P20,000 P50,000
d. P-0- P20,000
Problem 4-18 Cancellation of Debt

Bingcol works as the CEO of B Co. His compensation income is P50,000 per month. In January 31,200B,
he borrowed P300,000 from B Co. As a result, his monthly compensation income is reduced by P25,000
starting February, as payment to his borrowing.
If on December 31, 200B, after payment of P25,000 salary net of loan amortization, B Co. cancelled
Bingcol’s indebtedness, how much is the latter’s compensation income in December 200B?
a. P25,000 c. P75,000
b. P50,000 d. P100,000
Problem 4-19 Other forms of Compensation

During the year, Sico has the following benefits received from his employer:
Rice subsidiary of P1,000 per month P12,000
Free housing as a requirement to perform his duty 24,000
Clothing allowance 1,000
Transportation allowance subject to liquidation 6,000
Insurance premium paid-the beneficiary is Sico’s wife 5,000
SSS employer’s share contribution 3,000
How much is the taxable benefits of Sico?

a. P-0- c. P21,000
b. P5,000 d. P45,000
Problem 4-20 Other Forms of Compensation

The following transactions were reported by Mr. Guardia related to his income during the taxable year
from January to December 200A:
(1) He received a notice of cancellation of his indebtedness amounting to P10,000 from his
employer. Contained in the notice is to offset such amount from basic monthly compensation of
P30,000.
(2) 100 shares of stock as compensation for service rendered on October 31, 200A. the market
value of the shares of stock at the time when service was rendered was P100 per share, but
P120 per share when the shares were received on November 30, 200A.
(3) A stock option of 100 shares was granted to Mr. Guardia. The market price per share was P120
but the option price was P80 per share at the time of stock option exercise. He subsequently
sold the 50% of the shares at P130 per share.
(4) His employer granted P4,000 annual insurance premium to Mr. Guardia for an insurance policy
of P1,000,000. It is stipulated that 50% of the proceeds of life insurance will be received by Mr.
Guardia’s heirs.
What is the amount of the gross taxable compensation income of Mr. Guardia during the taxable year?
a. P376,000 c. P378,000
b. P376,500 d. P386,000
Problem 4-21 Remuneration for Casual Labor

Ana, a single proprietor, employs the following persons for a short period of and pays their related
remuneration.
Workers Service rendered Status Amount

W Cleaning of business equipment 1 day work P1,000
X Repair service of store 10 day work 3,000
Y Repair of home refrigerator 3 day work 1,500
Z Baby sitter Causal (1 month) 2,500
How much is the total remuneration considered as reportable compensation from casual service
rendered?
a. P3,000 c. P5,500
b. P4,000 d. P8,000
Problem 4-22 Cost of Goods sold

During the taxable year, the total purchases of goods for sale amounted to P50,000. Transportation
expense are P5,000 for goods purchased and P10,000 for goods sold. During the year, total sales
amounted to P550,000. At the end of the year unsold goods amounted to P40,000. The cost of goods
sold for the period is.
a. P505,000 c. P465,000
b. P475,000 d. P460,000
Problem 4-23 Cost of Sales

The following information is available to determine the cost of sale of X:
Purchases P1,200,000
Purchase discounts 10,000
Purchase returns 40,000
Transportation in 5,000
Freight out 4,000
Inventory, end 50,000
Inventory, beginning 20,000
How much is the cost of sale?

a. P95,000 c. P1,125,000
b. P1,185,000 d. P1,135,000
Problem 4-24 Cost of Sales

The following pertain to the year 2-year operations of a trading business:
Year 1 Year 2
Inventory, end P50,000 P30,000
Purchases 850,000 900,000
Freight in 10,000 15,000
Purchase discount 20,000 25,000
The cost of sales for year 1 and year 2 are:

Year 1 Year 2
a. P920,000 P890,000
b. 910,000 790,000
c. 790,000 910,000
d. 860,000 790,000
Problem 4-25 Income from Manufacturing Business

A manufacturing business reported the following for its first year of operation:
Purchases of raw materials P540,000
Freight in 20,000
Raw materials, ending inventory 10,000
Direct labor 400,000
Factory overhead 200,000
Work in-process, ending inventory 100,000
Finished goods, ending inventory 50,000
Sales 1,275,000
Freight out 12,000
Sales return 25,000
Its gross business income is

a. P238,000 c. P228,000
b. P250,000 d. P188,000
Problem 4-26 Gross Service Income

Before starting to render his service, X collected an advance payment of P2,000 for the acceptance of
the job contract. When the required service from X was completed, X received P8,000 cash service fee
after deducting the P2,000 advance payment, plus an office machine with cash price value of P3,000 and
P2,500 cost to the seller.
The gross service income of X is.

a. P15,000 c. P11,000
b. P13,000 d. P10,500
Problem 4-27 Gross Service Income

From the following data compute for the reportable gross business income of a servicing business for
MCIT purposes.
Professional fee, accounting services P500,000
Salaries of accounting staff 150,000
Salaries of office assistant 60,000
Accounting supplies 10,000
General supplies 5,000
a. P500,000 c. P280,000
b. P340,000 d. P275,000
Problem 4-28 Gross Income of Banks

BPI Inc. reported the following income during the year:
Interest income from clients P50,000,000
Yields from money placements with other banks 20,000,000
Realized gain on trading securities thru stock market 10,000,000
Administrative and sales salaries expense 8,000,000
Lending and investments funds salaries 3,000,000
Interest expense paid to depositors 2,000,000
Miscellaneous expense 1,000,000
How much is the gross income of BPI subject for regular tax purposes?
a. P65,000,000 c. P48,000,000
b. P55,000,000 d. P45,000,000
Problem 4-29 Gross Income of Banks

Metrobank, Inc. reported the following during the taxable year:
Interest income from clients P10,000,000

Gain on sales of capital assets 5,000,000
Rent income 2,000,000
Salaries of bank employees assigned on lending and investments of funds 3,700,000
Salaries of janitors and security guards 1,000,000
Depreciation of building 800,000
Depreciation of computers and teller machines used 600,000
Direct supplies used 200,000
Interest expense paid to depositors 1,500,000
How much is the gross income of Metrobank, Inc. for purposes of MCIT?
a. P17,000,000 c. P12,500,000
b. P12,700,000 d. P11,000,000
Problem 4-30 Telegraph and Cable Service Income

How much of the following receipts of a foreign corporation would be reported as gross income for
Philippine income tax computation?
Service charges for messages:
Originating from outside the Philippines sent to the Philippines P500,000
Originating from the Philippines 150,000
Collection abroad of collect messages originating from the Philippines 60,000
Collection in the Philippines of collect messages originating
outside the Philippines 10,000
a. P160,000 c. P560,000
b. P210,000 d. P520,000
Problem 4-31 Rental Income

How much of the following amounts received in 200B will be included in the tax return for the year
200B?
Rent for year 200A P 80,000
Rent for year 200B 480,000
Rent for year 200C 40,000
Refundable deposit 120,000
a. P720,000 c. P560,000
b. P600,000 d. P520,000
Problem 4-32 Rental Income

On March 1, 200A, Claudette leases a portion of its commercial building to Mark with the following
items:
Advanced deposit P40,000
Monthly rental 20,000
Annual insurance premium to be paid by the lessee 6,000
Portion (10 mos.) of real estate to be paid by lessee 3,000/yr
The lease contract also stipulates that a 5% of mark’s net revenue will be credited to Claudette as
commission. Mark’s net revenue during the year is P2,000,000.
1. Claudette’s 200A rent income would be
a. P 69,000 c. P247,500
b. P240,000 d. P347,500
Problem 4-33 Income From Leasehold Improvements

The lease dated January 1, 200B provided for construction of improvements at the cost of the lessee,
and the ownership will belong to the lessor at the end of the 5-year lease contract. The construction of
improvements which was completed at the end of the 3 rd month of the contract amounted to P240,500.
The improvement has an economic life of 8 years and estimated scrap value of P560 the rent income on
improvements for 1 year under each method is
Outright Spread-Out
a. P240,500 P19,672
b. P147,620 P22,143
c. P239,940 P14,754
d. P240,500 P15,479
Problem 4-34 Income From Leasehold Improvements

The following information are available related to a 10-year lease contract which commenced on June
30, 200B:
Cost of improvement put up by the lessee P180,000
Estimated useful life of the improvement 12 years
Date completed December 31, 200B
The reportable income from leasehold improvement for year 200B is

Outright Spread-Out
a. P180,000 P1,974
b. P180,000 P3.750
c. P180,000 P-0-
d. P180,000 P3,947
Problem 4-35 Pre-terminated Lease Contract

The following data are pertaining to a 5-year lease contract which started October 31, 200A:
Cost of improvement put up by the lessee P300,000
Estimated useful life of the improvement 6 years
Date completed March 31, 200B
The income from leasehold improvement was reported by the lessor using the spread-out method.
Assuming that the lease contract was pre-terminated on December 31, 200D from the pre-termination
of contract?
a. P137,500 c. P 120,000
b. P135,455 d. P 42,500
Problem 4-36 Interest Income

The following are the income of a resident citizen for the period:
Interest income from an investment in a 10-year bond P 40,000
Interest income from a 5-year time deposit in Philippines bank 50,000
Interest income from expanded foreign currency deposit 60,000
His taxable interest income is
a. P150,000 c. P 40,000
b. P100,000 d. P -0-
Problem 4-37 Interest Income

X is a beneficiary of P100,000 payable in 3 equal payments at 12%interest per year. The P100,000 is
payable in the following annuity table:
Year Annual Pay Interest Principal Balance

P100,000.00
1 P41,635 P12,000.00 P29,635.00 70,635.00
2 41,635 8,433.80 33,191.20 37,173.80
3 41,635 4,461.20 37,173.80 -0-
Total P24,905.00
The interest income earned by the beneficiary in year 3 is

a. P41,635.00 c. P24,905.00
b. P37,173.80 d. P 4,461.20
Problem 4-38 Royalty Income

The following are the gross royalty income of a resident citizen for the period:
Royalty income as author P100,000
Royalty income from franchiser 200,000
Royalty income from gold mine 500,000
The total final tax on royal income is

a. P80,000 c. P130,000
b. P100,000 d. P150,000

X, a resident citizen received P51,500 from his royalties, net of final taxes of P3,500 for book copyrights
and P5,000 for exclusive patent. These transactions are correctly summarized as
Copyright Patent
a. Gross income of P17,500 P50,000
b. Income after tax of P31,500 P45,000
c. Gross income of P35,000 P20,000
d. Income after tax of P31,500 P20,000

Pacman is a resident Filipino, an inventor, a song writer and international singer. He receives royalties
within and outside the Philippines as follows:
Philippines Outside
Royalties from pain reliever invention P100,000 P200,000
Royalties from musical compositions 200,000 300,000
Royalties from books 500,000 100,000
1. What is the amount final tax on royalty income ?

a. P80,000 c. P140,000
b. P90,000 d. P280,000
2. What is the amount of royalty income subject to normal tax

a. P-0- c. P500,000
b. P300,000 d. P500,000
Problem 4-41 Dividend Income

A domestic corporation received P500,000 cash dividend from a foreign corporation the earnings of
which are 70% earned in the Philippines. The taxable dividend income of the domestic corporation is
a. P500,000 c. P150,000
b. P350,000 d. P100,000
Problem 4-42 Property Dividend

A, a domestic corporation, invested P1,000,000 in 10,000 common shares of stock of B, another
domestic corporation. The investment represents 20% of the outstanding shares of B. During the year, B
declared property dividends of P20,000 common shares of investment in common stock of C
corporation.
The par value of C’s share is P10 per share. At time of declaration, the fe share fair market value of the
share was P15 per share but when A received the property divided, the fair market value was P16.
How much is the taxable dividend income of A?

a. P-0- c. P60,000
b. P40,000 d. P64,000
Problem 4-43 Prizes and Winnings
Mario received the following prizes and winnings during the taxable year:
First Prize in TalentadongPinoy P10,000

2nd place in bicycle race 6,000
3rd place in chess tournament 15,000
4th place in a raffle draw 5,000
What is the total amount subject to normal tax?

a. P10,000 c. P31,000
b. P16,000 d. P36,000
Problem 4-44 Prizes and Winnings

X received te following prizes and winnings: P 50,000
First prize – raffle draw (cost of ticket, P 1,000) 1,000,000
Philippine lotto winnings 300,000
Gambling winnings
Beauty contest winnings 100,000
How much is the taxable prizes and winnings?

a. P50,000 c. P349,000
b. P300,000 d. P449,000
Problem 4-45 Bad Debts Recovery

The following information is available from the records of X:
Year 1 Year 2 Year 3
Income (loss) before bad debts written of
Excluding bad debts recovery P100,000 (P20,000) P50,000
Bad debts written off 25,000 10,000 5,000
Previous year’s write off, recover this year 30,000 8,000
For year 3, the total taxable income would be

a. P42,000 c. P48,000
b. P45,000 d. P50,000
Problem 4-46 Bad Debts Recovery

The following ledger posting are available:
Allowance for Bad Debts
January 1, balance P 1,500
Year 1 write off P 800
December 31, balance 1,300
Accounts Receivable
January 1, Year 1 P100,000
Year 1 write off P 800
Year 2 sales on account 100,800
For year 1, Net operation income of P500 was reported. In year 2, P600 of year 1 bad debts written off
was collected. The income from bad debt recovery to be reported would be
Year 1 Year 2
a. P800 P600
b. P600 P600
c. None P500
d. None P600
Problem 4-47 Tax Refund
In year 1, A Company’s net operating income reported was P20,000. The amount is net of P100,000
operating expenses. Part of the operating expenses is P25,000 local taxes.
In year 2, A company paid an income tax of amounting to P12,000 and a VAT of P1,000. In year 3, P5,000
of year 1 local tax and P2,000 income tax were refunded. What amount of tax refund should be reported
as part of year 3 taxable income?
a. P8,000 c. P6,000
b. P7,000 d. P5,000
Problem 4-48 Tax Refund

During the year, the following tax refunds were received by the taxpayer:
Real property tax deducted as expense in the previous year P10,000
Income tax paid in the previous year P 5,000
Percentage on shares sold last year P 2,000
Local taxes paid for the previous year P 500
The income from tax refund to be reported should be

a. P17,500 c. P10,500
b. P12,500 d. P10,000
Problem 4-49 Damage Recovery
Abner received the following amount in relation to damage recoveries:
Loss of property P500,000
Unfair competition 400,000
Physical Injuries 300,000
Loss earnings 100,000
Moral damages for breach of contract 150,000
Exemplary damages for breach of contract 50,000
Hospital expenses 50,000
Interest on damages 10,000
The gross income subject to tax from damage recoveries would be

a. P760,000 c. P660,000
b. P710,000 d. P510,000
Problem 4-50 Annuity

Mr. Normal received P20,000 as annuity of life insurance from Malayan Life. The annuity received
includes 10% interest for one year. How much is the amount of taxable annuity?
a. P20,000 c. P1,818
b. P2,000 d. P-0-
Problem 4-51 Annuity

X received an annuity of P5,880, inclusive of 12% interest as part of the insurance plan entered into by X.
What amount of this annuity is taxable against X?
a. P5,880 c. P706
b. P5,250 d. P630
Problem 4-52 Illegally Obtained Income

Mr. X received a letter from Mr. Y, his brother, to withdraw $1,000 from the PNB. The teller of PNB,
however, issued $10,000 to Mr. X in which the latter took the entire money and spent the $9,000
immediately. Assuming that the exchange rate is P50 per $1, how much is the reportable income
received by error of Mr. X?
a. P50,000 c. P500,000
b. P450,000 d. P-0-
Problem, 4-53 Illegally Obtained Income

Goland received a salary of P5,000 per month as a conductor of Philippine Lapid. Aside from his salary,
he also obtain money from the changes of bus clients which he intentionally neglect to return with a
monthly average of P4,000 per month. If the BIR assessed Golang using the networth method, and net
increase in net asset is determined at P150,000, how much is the illegally obtained income would be
taxable?
a. P108,000 c. P 48,000
b. P 60,000 d. P 42,000
Problem 4-54 Gross Income (Servicing)
A-1 Barber Shop shows a total receipt of P425,000 from its hair cut and massage services in 200B. The
following expenses were incurred by the barbershop in providing services:
(a) Commission given to the barbers was 65% of the total receipts.
(b) Rental expense of barbershop space, P3,000 a month.
(c) Depreciation of Furniture and tools used in rendering services, P5,000.
(d) Interest expense for buying furniture, P2,000, and a ointment used, P1,750.
Required: For income tax computation, what is the correct amount of the gross income of A-1 Barber
shop?

Atty. Orville Thomas is employed as a corporate-lawyer of FLP, International. In 200B, he received the
following from his employment:
Salary P300,000
On thousand corporate shares of stock for special service
Rendered October 200A:
Fair Market Value per share – 200A 100
Fair Market Value per share – 200B 125
Cancellation of debt in lieu of service rendered 50,000
Insurance (the company is the beneficiary) 20,000
Profit Sharing 40,000
Required: Compute for the gross taxable compensation income of Mr. Thomas for year 200B.
Problem 4-56 Tax Benefit

X Corporation received the following refunds during the taxable year:
Licensing fee P 30,000

Registration fees of delivery trucks 4,000
Donor’s Tax 50,000
Real Estate Tax 5,000
Community Tax 3,000
Special assessment 10,000
Corporate Income Tax 150,000
Foreign Income Tax previously claimed as tax credit 60,000
Foreign Income Tax previously claimed as deduction 80,000
Value-Added Tax 120,000
How much is the tax benefits on the tax refunds?
Problem 4-57 Various Sales

The following data pertains to the transaction of Miss Liza Betty for year 200x:
Total net sales from his trading business P500,000

Cost of Sales 300,000
Sale of vacant lot used as open warehouse for his
trading business. This was acquired two years ago
at cost of P150,000 200,000
Sale of family home – acquired 12 years ago, P800,000 of
the proceeds was used to acquire his new residential
house and lot. She was granted tax exemption by the BIR 1,000,000
Sale of his personal computer. He brought this for his personal
use, 2 years ago with book value of P20,000 10,000
Sale of personal car, acquired 3 years ago with book value
of P50,000 100,000
Required:
1. What is the 200x gross income of Bety subject to regular tax?
2. How much is the supposedly final tax taken from the proceeds of Miss Bety’s transaction for the
year?
Problem 4-58 Comprehensive Problem

Mrs. Rowena Gorospe reports the following items of income and expense as of December 31, 200B:
Cash salary, net of withholding tax, P25,000 and SSS, P3,000 P302,000
Dividend from San Magnolia Corporation 30,000
Cancellation of her debt from San Magnolia Corporation 50,000
Living quarters and meals allowance, within the employer’s premises 40,000
Income tax paid by the employer 5,000
One year note receivable form the employer, net of discount
P1,000 (maturity June 30,200B) 19,000
Gross income from business 400,000
Allowable Expenses 250,000
Prepaid rent income 50,000
Interest from insurance proceeds , net of withholding tax 18,000
Bad debt recovery (60% previously written-off) 38,000
Gambling winnings 20,000
Gambling losses 30,000
Income Tax Refund 8,000
Household expenses 200,000
Donation from relatives 150,000
Winnings 10,000
Stock dividends from Asia Brewery at fair market value 4,000
Required: Compute the taxable income subject to normal tabular tax before personal exemptions.
Problem 5-1 Determining the Taxability of an Item

Indicate whether the item is taxable or non-taxable with income tax.
1. Monetized sick leave credits of private employees
2. Overtime pay of a minimum wage earner
3. Statutory minimum wage of MWE who has other reportable income
4. Amount received in payment of moral damages due to physical injuries
5. Interest income in bank deposit earned by the duly registered cooperative
6. Maternity benefits
7. Tuition fees collected by non-profit educational institutions
8. Interest income from savings deposit earned by non-taxable senior citizen
9. Interest income derived by Philippine National Red Cross
10. Shelter within the employer’s home provided by the employer t the maid
11. Thirteenth month pay in excess of P30,000
12. Separation pay due to voluntary resignation
13. Money received as donation
14. Money acquired through illegal means
15. Philippine lotto winnings

16. Separation pay received resulting from business merger
17. Income derived by Baguio City Government in leasing Burnham Park
18. Availed vacation leave with pay
19. Exemplary damages due to breach of contract
20. Damages from unrealized profits
21. Novel prize received due to civic achievement contributions
22. Prizes and awards in sports competition not sanctioned by Philippine

Olympic Sport Committee
23. Income earned within the Philippines by the World Bank
24. Cost of living allowance
25. Employee’s Union due contribution
Problem 5-2 Determining the Taxability of an Item

Indicate whether the item is taxable or non-taxable with income tax.
1. Novel prize received for achievements civic achievements.
2. Prizes and awards in sports competition, not sanctioned by their respective national association
accredited by POSC
3. World Bank’s income earned in the Philippines
4. Cost of living allowance
5. Union due contribution
6. Proceeds of from life insurance policy, revocable designation of beneficiary
7. Pensions, in general
8. Income of PAGCOR
9. Proceeds from the sale of land (capital asset), P100,000: costs, P120,000
10. Income of government from holder of public utility franchise
11. Interest income
12. Board of director’s fee

13. Mandatory retirement pay
14. Professional athlete’s salary
15. Winnings from Philippine Sweepstakes or Lotto
16. Income derived from smuggling
17. Interest received from life insurance’s annuity
18. Annual clothing allowance of P4,000
19. Hazard pay received by MWE
20. Gains from redemption of shares in mutual fund
21. Magsaysay awards
22. GSIS Retirement benefits
23. Cash surrender value received from insurance in excess of premium paid
24. Proceeds from life insurance of a deceased employee received by the employer
25. Dividend income derived in the Philippines by the Taiwan Government
26. Gains from the sale of bond with a maturity of four years
27. Gains from the sale of certificate of indebtedness with a maturity of six years
28. Cancellation of debt in lieu to services rendered
29. Shares of Stock received due to professional service rendered
30. Accumulated vacation and sick leave credits for government employees converted into cash at
the end of employment contract
1. The excess of de minimis benefits received may be added as part of non-taxable 13 th month pay
and other benefits if the latter does not exceed P30,000.
2. Charity sweepstake winning outside the Philippines won by resident citizen is exempt from
Philippine income tax.
3. Dividend received by a domestic corporation from non-resident foreign corporation is exempt

from income tax.
4. If the MWE earns other income subject to final tax, his SMX is also becomes taxable.
5. If the MWE earns other income subject to normal income tax, his SMW becomes taxable.
6. Amount received by virtue of settlement of will litigation is not taxable income.
7. The proceeds of life insurance received by employer from insurance policy coverage taken and
paid by such employer constitute taxable income.
8. Amount received as a consideration for a service rendered shall be excluded from gross income.
9. Bequest refers to real property transferred from one person to another by will.
10. Income subject to treaty obligation binding upon the Government of the Philippines is exempted
from income taxation.
11. Termination pay for any cause beyond the control of an employee is not subject to tax, except if
the dismissal is with a cause.
12. Damages for loss of earning capacity are non-taxable.
13. Actual liquidated damages are taxable.
14. Physical, exemplary, and moral damages except damages for loss of profit in property are not
taxable.
15. Income derived by foreign government in the Philippines is taxable.
1. Income of Philippine Chamber of Commerce is exempt from tax.
2. Professional income earned outside the Philippines by resident alien is taxable in the
Philippines.
3. A business with capitalization of P3,000,000 excluding an asset in the form of land worth
P1,000,000 is not allowed to register as BMBE.
4. The income of a senior citizen is to be taxed like as MWE.
5. The income of OFWs outside the Philippines is exempt from income tax.
6. Income of general professional partnership is taxable.
7. Income of co-ownership is taxable.
8. Income of commercial partnership is taxable.
9. Tax refund allowed as deduction from prior year’s gross income is taxable.
10. All prizes and awards are subject to income tax.
11. Inventor’s awards are subject to income tax.
12. Income derived by the political subdivision of the government is not taxable.
13. Income derived from the property acquired by gift, devise, or descent is excluded from gross
income.
14. Capital gains from ale of certificates of indebtedness with maturity of more than five years are
subject to tax.
15. Maternity benefits advanced by the employer to the employee are excluded from gross income,
hence exempt from withholding tax.

1. Which of the following is taxable?
a. SSS and GSIS benefit
b. Social security benefit received by a balikbayan from employer abroad.
c. Separation pay received by a 50-year old employee due to the retrenchment program of
the employer.
d. Personnel Economic Relief Allowance
2. The following are exclusions from gross income, except

a. proceeds of life insurance policies.
b. SSS retirement benefits.
c. gifts, bequest and devises.
d. stock option granted by employer.
3. For the life insurance premium paid by the employer to be included as gross income of
employee, the designated beneficiary should be
a. a family member of the insured.
b. employer.
c. the insured person.
d. a religious organization.
4. The following are taxable recoveries from damages except

a. Interest from non-taxable damages.
b. Moral damages awarded due to libel.
c. Damages for loss of goods and other belongings.
d. Damages for unrealized profit.
5. Statement 1: For taxation purposes, 13th month pay is a compensation income. Statement 2: 13th
month of less than P30,000 is taxable compensation income.
6. Statement 1: Insurance premium paid by the employer for the life insurance of the employee,
where the beneficiary is the employer is taxable compensation income of the employee.
Statement 2: Upon death of the insured employee, the proceeds of the life insurance are
taxable against the beneficiary.
7. Both Ara and Rica are covered by a BIR approved employer’s pension plan. Ara retired from her
employment at age 52 serving the same employer for 12 years. Rica retired at age 51 serving the
same employer for 10 intermittent years of services.
a. Only the retirement pay of Ara is tax-exempt.
b. Only the retirement pay of Rica is tax-exempt.
c. Both the retirement pay of Ara and Rica are tax-exempt.
d. Both the retirement pay of Ara and Rica are taxable.
8. William Galam was retired by his employer corporation in 200A and paid P1,000,000 as a
retirement gratuity without any deduction for withholding tax. The corporation became
bankrupt in 200B.
Can BIR subject the P1,000,000 retirement gratuity to income tax?
First answer: Yes, if the retirement gratuity was paid based on a reasonable pension plan where
William Galam was 50 years old has served the corporation for 10 years.
Second answer: No, if William Galam was forced by the corporation to retire.
a. Both answers are wrong.
b. Both answers are correct.
c. First answer is correct, the second is wrong.
d. First answer is wrong, second answer is correct.
9. A CDA-registered cooperative is not subject to which of the following tax?

a. Output VAT
b. Final tax on interest income
c. Final tax on foreign currency income
d. Input VAT
10. Which of the following income earned/received in the Philippines by a citizen is subject to
income tax?
a. Winnings in Philippines Charity Sweepstake lottery
b. SSS and GSIS benefits
c. Gains from sale 3-year bond
d. Value property received as gift
1. The following shall be excluded from gross income, except

a. Income derived from a gift.
b. Allowance based from marriage separation agreement.
c. Amount paid under marriage settlement.
d. Advance for travelling expenses computed on a daily basis and are paid to an employee
to perform his duty.
2. Which of the following is not exempt from income tax?

a. Interest paid from PERAA
b. Interest from PAG-IBIG Mortgage Certificate
c. Magsaysay award
d. Interest on debt instrument with maturity of 10 years
3. XYZ Co. took two insurance policies on the life of its President, Mr. A. In one policy, the
beneficiary is the corporation to compensate it for its expected loss in case of death of its
president. The other policy designates Mr. A’s wife as its irrevocable beneficiary.
Question 1- Are the insurance premiums paid by XYZ Co. in both policies taxable income of the
employee (president)?
Question 2- Will the insurance proceeds be treated as income subject to tax by the corporation
and by the wife?
a. Yes to 1st and No to 2nd question.
b. Yes to both questions.
c. No to 1st question and Yes to 2nd question.
d. No to both questions.
4. The widow of your best friend had been paid P1,000,000 on account of the life insurance policy
of the deceased husband. She ask you whether she would declare the amount for income tax
purposes of for state tax purposes.
First advice: The proceeds of life insurance paid to the beneficiary upon the death of the insured
are exempt from income tax and need not be declared for income tax purposes.
Second advice: The proceeds of life insurance would have to be declared for state tax purposes if
the designation of the beneficiary was irrevocable, otherwise it need not be declared.
a. Both advices are correct.
b. 1st advice is correct and 2nd advice is wrong.
c. Both advices sre wrong.
d. 1st advice is wrong and 2nd advice I correct.
5. The following are the requirements to exempt retirement pay due to old age taxation, except
a. Must SSS and GSIS retirement plan only
b. Equitable retirement program approved by the BIR Commissioner
c. The retirement should have been employed for at least 10 years and retiring at the age
of at least 50 years old.
d. Retirement pay should have been availed of for the first time.
6. Which of the following is/are requisites for non-taxable pension benefit?

i. The retiring employee has been in the service of the same employer for at least 5
uninterrupted years.
ii. The retiring employee is not less than 50 years of age at the time of retirement.
iii. The retiring employee must retire from employment for the second time.
Choices:
a. i only
b. ii only
c. iii only
d. none
7. Which of the following income earned in the Philippines by a citizen is subject to income tax?
a. Winnings in the Philippines Charity Sweepstake lottery
b. Interest on government bonds stipulated as tax exempted on the bond issue
c. Gains from sale of 3-year bond
d. Value of property received as gift
8. A BMBE is exempt from income tax if its capitalization is

a. More than P3,000,000 including land.
b. Not exceeding P3,000,000 excluding land.
c. Not more than P5,000,000 including land.
d. More than P5,000,000 excluding land.
9. The law excludes some items of income from taxation because

a. The transformation of these incomes into economic gain are not essentially the result of
labor or efforts of tax payer.
b. The law or treaty provides that they are not taxable
c. Some of these items are just return of capital
10. The following are exclusions from gross income , except

a. Proceeds of life insurance policies.
b. Retirement benefits from plan approved by BIR
c. Gifts, bequest and devises
d. Prizes and winnings
1. Which of the following is considered as taxable income?

a. Separation pay due to sickness.
b. Separation pay due to voluntary resignation
c. Separation pay due to death.
d. Separation pay of P3,000 per month.
2. Which of the following is a taxable income?

a. Excess of the de minimis benefits + 13 th month pay, aggregated amount is P30,000.
b. Member’ SSS contribution
c. SSS sickness benefit
d. Passive income earned by a resident citizen from sources outside the Philippines
3. The following are recoveries for injuries except

a. Interest earned non-taxable damages.
b. Compensatory liquidated damages.
c. Damages for loss of goods and other belongings.
d. Damages for unrealized profit.
4. Which of the following cases of retirement benefit is excluded from taxable income?
a. The retiree is 45 years of age and has been in the service for more than 20 years.
b. The retiree is 50 years of age and has been in the service for more than 10 year in the
employ of several employees.
c. The retiree is 60 years of age in his 2nd retirement after working for same employer for
another 10 years.
d. The retiree is more than 50 years of age and has been in the service for the same
employer for 15 years.
5. Eddie resigned from his employment and received P25,000 separation pay. Glory received
P30,000 as her terminal pay due to retrenchment legally enforced by her employer. Joseph
received P35,000 termination pay when he was dismissed due to gross negligence.
a. Only the separation pay of Eddie is taxable.
b. Only the terminal pay of Glory is not taxable.
c. Only the termination pay of Joseph and Glory are not taxable.
d. Only the separation pay of Eddie and Joseph are not taxable.
6. Which of the following is taxable?

a. SSS and GSIS benefit
b. Social security benefit received by a balikbayan from employer abroad.
c. Separation pay received by a 50-year old employee due to the retrenchment program of
the employer.
d. Interest income on peso time deposit.
7. Which of the following exclusion from gross income is not provided by special laws?
a. Prizes and awards on religious and educational achievement.
b. Winnings from Philippine Lotto
c. Winnings from Philippine Charity Sweepstakes.
d. Interest and capital gains on land covered by Land Reform under the purchaser tenant
program.
8. The proceeds of insurance taken by a corporation on the life of the President to indemnify it
against loss in case of his death is
a. Part of taxable income of the corporation.
b. Taxable income of the corporation.
c. Partly exempt, partly taxable.
d. Exempt from income tax.
9. Mr. Tso’s building with a book value of P2,000,000 was razed by fire. The insurance company
paid Tso P1,400,000 for damages. The P1,400,000 proceeds is
a. Taxable in full.
b. Subject to final tax.
c. Tax exempt.
d. Partly reportable income and partly income subject to final tax.
10. Which of the following may be excluded from the gross income of taxpayer?
a. Income derived from bequest and devices.
b. Income from illegal gambling.
c. Laundry service income of a minimum wage earner.
d. Hazard pay of MWE senior citizen.
Problem 5-8 Minimum Wage Earner
The basic gross compensation income of a minimum wage earner employee for the entire year
amounted to P90,000, not including the following compensation.
13th month pay P 7,500

15-day monetized unavailed vacation leave 3,750
Holiday pay 24,000
Christmas bonus (de minimis) 5,000
How much is the total non-taxable income if he received P400 interest income, net of final tax,
from his savings bank deposit?
a. P132,500
b. P131,250
c. P125,000
d. P 15,000
Mr. Q, a minimum wage earner, reveals the following income and expenses during the taxable
year:
Gross compensation income P 78,000

Overtime pay 10,000
SSS contribution 3,000
Philhealth contribution 2,500
Cellphone repair revenue 200,000
How much is the amount excluded from gross income of Mr. Q?
a. All gross compensation income because Mr.Q is minimum wage earner.

b. P12,000
c. P82,500
d. P94,500
Problem 5-10 Non-Resident Taxpayer
Meriam is a Filipino Citizen residing in Australia. She earned the following during the taxable
year: (In Philippine Pesos)
Philippines Australia
Compensation income P900,000

Interest income under EFCDS P40,000
Dividend income 60,000
How much total amount is subject to tax in the Philippines?
a. P1,000,000 c. P 60,000
b. P 100,000 d. P 40,000
Problem 5-11 Overseas Contract Worker
Jean, single, is an OFW with a monthly income as domestic helper in Hong Kong amounting to
P30,000. She sends second hand clothed to the Philippines for her Wag-Wag business from
which she earns a monthly income of P5,000. She has a Sari-sari store in the Philippines with an
average monthly income of P20,000.
Assuming that she stayed in Hong Kong for a period of 1 months during the taxable year, how
much is her gross taxable income in the Philippines?
a. P240,000 c. P360,000
b. P300,000 d. P660,000
Problem 5-12 De Minimis

Rex received the following compensation income for the year:
Total compensation including 13th month pay P390,000

De Minimis:
Rice subsidy (P1,800) 21,600
How much is the amount of non-taxable compensation?

a. P18,000 c. P26,000
b. P22,000 d. P52,000
Problem 5-13 De minimis’ and ‘other benefit’

Mr. A received the following compensation and benefits during the year:
Total basic salary P240,000
Rice subsidy (P2,000 per month) – de minimis 24,000
How much is the taxable and the non-taxable compensation of Mr. A?

Taxable Nontaxable
a. P240,000 P30,000
b. P240,000 P38,000
c. P240,000 P44,000
d. P246,000 P38,000
Problem 5-14 MWE with other benefits within P30,000 ceiling

Mr. B, a minimum wage earner, received the following compensation and benefits during the
year:

Overtime pay 20,000
Hazard pay 2,000
Holiday pay 1,000
How much is the taxable compensation of Mr. B?

a. P132,000 c. P112,000
b. P116,000 d. P - 0 -
Problem 5-15 MWE with other benefits exceeding P30,000 ceiling
Mr. C, a minimum wage earner, received the following compensation and benefits during the
year:

Overtime pay 30,000
Hazard pay 2,000
Holiday pay 1,000
How much is the taxable and the non-taxable compensation of Mr. C?

Taxable Nontaxable
a. P150,000 P30,000
b. P154,000 P52,000
c. P176,000 P30,000
d. P - 0 - P206,000
Problem 5-16 MWE with business income

Mr. D, a minimum wage earner, received the following compensation and benefits during the
year:
Overtime pay 20,000
In addition, Mr. D earned the following other income:

Rent income P60,000
Interest income, net of final tax 4,000
How much is the taxable and the non-taxable compensation of Mr. D?

Taxable Nontaxable
a. P176,000 P32,000
b. P194,000 P14,000
c. P182,000 P30,000
d. P 181,000 P32,000
Problem 5-17 Taxable Compensation

An employee received the following for the period:
Reimbursements of his medical expenses received from SSS P1,250
5 days sick leave paid by SSS 750
Availed 10-day leave pay included in by the employer
in the semi-monthly pay of the employee 1,500
How much is the amount of taxable compensation?

a. P3,500
b. P2,250
c. P2,000
d. P1,500
Problem 5-18 Nontaxable Compensation
A MWE employee received a take home pay amounting to P212,000 inclusive of 13 th month pay
of P17,500. The P212,000 is net of P13,500 withholding tax and P2,000 SSS contribution. In
addition, he earned a P20,000 as other income subject to normal tax.
How much is the total amount of his taxable income?

a. P 20,000 c. P228,000
b. P212,000 d. P245,000
Problem 5-19 Taxable and Nontaxable Compensation

Jennifer, a tax payer who is single, received a net pay of P265,000 for the year. The amount is
net of P50,000 withholding tax, P6,000 payment for advances, and P4,000 SSS contribution. This
is inclusive of P27,000 13th month pay and P5,000 Christmas bonus (de minimis).
How much is the taxable and non-taxable compensation income?
Taxable Nontaxable
a. P265,000 P33,000
b. P285,000 P36,000
c. P289,000 P36,000
d. P 295,000 P30,000
Problem 5-20 Tax-exempt Contributions

Thomas pay slip reported the following:
P13,000
Net take home pay
Deductions made:
SSS contributions 300
PAG-IBIG contributions 100
Union dues contributions 100
Office party contributions 75
Charitable contribution 25
Withholding income tax 400
The taxable compensation income and tax-exempt contributions are

Compensation Tax-exempt Contributions
a. P13,000 P1,000
b. P13,100 P 900
c. P13,500 P 500
d. P13,600 P 400
Problem 5-21 Employer’s Benefits

X was hired with a condition (due to the nature of his work) that he will be a stay in. At a
monthly salary of P15,000 per month, he was also provide with free lodging valued at P2,000
per month and free meals, valued at P3,000 per month.
The taxable monthly compensation income of the employee is

a. P20,000
b. P18,000
c. P17,000
d. P15,000
Problem 5-23 Proceeds of Life Insurance

After two years from the death of her husband, NatyPaltos received the proceeds of life insurance of her
husband amounting to P1,254,400 including 12% compounded interest per year. How much is the
taxable amount?
a. P500,000
b. P120,000
c. P154,400
d. P - 0 -
Problem 5-24 Proceeds of Life Insurance
Twinkle Co. insured Mr. Rodrigo Pajama, its President for P500,000. Mr. Pajama died and Twinkle Co.
received the proceeds of the insurance after paying insurance premium of P50,000. The reportable
taxable income would be
a.P500,000
b.P450,000
c. P300,000
d. P - 0 -
Problem 5-25 income of Life Insurance
Mrs. VinaLuchina was insured under an endowment policy with value of P500,000. Total premiums paid
by her for life insurance policy was P490,000 from which there was a return of premiums of P40,000. At
the maturity of the policy, Mrs. Luchina received P500,000. The income of Mrs. Luchina under the policy
is
a. P500,000
b. P 50,000
c. P 10,000
d. P-0-
Problem 5-26 Cash Surrender Value
X paid a monthly insurance premium of P10,000 for 3 full years. The coverage is for P2,000,000. At the
end of 3rd year, a cash surrender value of P270,000 was received by the insured. How much is the
amount of income to be reported?
a. P360,000
b. P270,000
c. P 10,000
d. P-0–
Problem 5-27 Return of Capital Darling received the following proceeds of insurance:
Car insurance P300,000 Accident insurance 100,000 Life insurance as Beneficiary 500,000 Cash
surrender value of life insurance 30,000 Participating dividend 10,000
The total amount to be excluded from gross income is
a. P900,000
b. P930,000
c. P910,000
d. P940,000
Problem 5-28 Return of Capital
Danny took out a Jardin life insurance policy amounting to P2,000,000 with his wife as irrevocable
beneficiary. Under the policy, Jardin will pay the amount of P2,000,000 when Danny reaches the age of
50 years, or his beneficiary wife in case he dies before the maturity of the policy. The total premiums
that would be paid upon maturity of the policy is P500,000.
1. Assume Danny reached 50 years old and Jardin paid P2,000,000 upon the maturity of the life
insurance. How much is the amount excluded from the gross taxable income? P2,000,000 c. P 500,000
P1,500,000 d. P - 0 -
2. Assume Danny died at the age of 45, and the total premium paid upon his death was P350,000.
How much is the amount excluded from the gross taxable income?
a. P2,000,000
b. P1,500,000
c. P1,650,000
d. P 350,000
Problem 5-29 Nontaxable and Taxable Damages

Ernie Baron, /an entrepreneur, met an accident and was able to claim th =e following damages: Actual
damages for unrealized profit P100,000 Actual damages for lost products 200,000 Exemplary damages
due to injuries 50,000 Moral damages due to injuries 50,000 Interest on non-taxable damages 20,000
Attorney’s fee 80,000
How much damages are taxable and not taxable?
Taxable Nontaxable
a. P380,000 P120,000
b. P300,000 P200,000
c. P200,000 P300,000
d. P120,000 P380,000
Problem 5-30 Compensation for Injuries

Mr. Arango was injured in a vehicular accident in 200B. he incurred and paid medical expenses of
P20,000 and legal fees of P10,000 during the year. In 200C, he received P70,000 as settlement from the
insurance company which insured the car owned by the other party involved in the accident.
From the above payments and transactions, what is the amount of taxable income accruing to Mr.
Arango in 200C?
a. P-0–
b. P40,000
c. P70,000
d. P50,000
Problem 5-31 Retirement Benefits Max, 50 years old, rendered service as a security guard of Anscor
Corporation. His final salary upon retirement amounted to P12,000. He opted to avail optional early
retirement under the reasonable private benefit plan maintained by Anscor, equivalent to 150% of his
monthly salary in evry year of service.
If he worked for Anscor for 8 years, how much of the above receipts will be excluded from taxable
income at date of his retirement?
a. P-0–
b. P 96,000
c. P 12,000
d. P144,000
Problem 5-32 Pension Mr. Wais, a 50 year old retired army, entered into a life annuity contract with
Malayan Insurance Co., with Mr. Wais investing P1,350,000. For his investment, Mr. Wais will receive
annula pension of P360,000 for 15 years. In case of death of Mr. Wais during term of contract, his heir
will continue receiving his pension for remaining term of agreement.
How much of the Mr. Wais annual pension is excluded from taxable income?
a. P360,000
b. P 96,000
c. P 90,000
d. P 24,000
Problem 5-33 Terminal Pay The following amounts were received by the heir of deceased employee
from his employer: Terminal fee P 60,000 Proceeds of life insurance 500,000 SSS death benefit 10,000
Donations/aids from relatives 40,000
How much of these receipts is taxable and non-taxable with income tax?
Taxable Nontaxable
a. P610,000 P-0–
b. P500,000 P110,000
c. P110,000 P500,000
d. P-0- P610,000
Problem 5-34 Taxability of termination pay

Jalosjalos was dismissed from his employment due to major infractions committed and received
P100,000 termination pay. Under the tax code the final payreceived due to involuntary separation is not
taxable. Which of the following is true?
a. Jalosjalos P100,000 termination pay is taxable because he was terminated due to cause within
his control.
b. Jalosjalos P100,000 termination pay is not taxable because the termination is not voluntarily.
c. Jalosjalos P100,000 termination pay is not taxable because it is against his will.
d. Jalosjalos P100,000 termination pay is taxable because it is due to cause which is beyond his
control.
Problem 5-35 Income from Separation

During the year a resident citizen received the following among other.
Last pay upon resignation from his employment P100,000
Separation pay due to closure of his 2nd employer 70,000
Retirement pay received from SSS as member 150,000
How much is the reportable income from the data above?
a. P220,000 c. P150,000
b. P170,000 d. P100,000
Problem 5-36 SSS benefits

Satur, who after paying 30 months of SSS premium amounting to P300 per month, died due to vehicular
accident. Upon his death, his wife received P36,000 SSSdeath benefits.
How much of the amount received is excluded from taxable income?

a. P9,000 c. P36,000
b. P27,000 d. P90,000
Problem 5-37 SSS benefits

Sarah, after working for 3 months and after regularly remitting her SSS premium contribution, was
hospitalized during the year as follows:
 6 days due to threaten miscarriage.

 10 days for giving caesarian birth.
If her average salary credit as basis for her SSS contribution was P300 per day, how much is the total
exclusion from taxable income of the total SSS benefits of Sarah for the year?
a. P25,020 c. P19,620
b. P24,750 d. P4,620
Problem 5-38 Non-taxable receipts

Eddie Gil received the following cash during a taxable year.
Actual damages for injuries suffered P30,000
Separation pay due to sickness 100,000
SSS retirement benefits 500,000
Inheritance from his grandparents 100,000
How much amount of cash receipts is subject to income tax?

a. P-0- c. P130,000
b. P100,000 d. P230,000
Problem 5-39 Senior citizen’s Income

Lolo Rado is a 60-year old retired employee. For the year, he received the following income:
Income from the various consultation fees P50,000
Interest income from 5-year time deposit 10,000
Interest in credit cooperative where he is a member 5,000
Interest income from bank deposits 4,000
His income subject to income tax is?
a. P69,000 c. P4,000
b. P14,000 d. P-0-
Problem 5-40 Gifts, Requests and Devises

Pandoy received the following gifts during the year:
Christmas gifts from his employer P 5,000
Gifts from relatives on account of his birthday 100,000
Inheritance from his grandfather 500,000
Donations from his friends 30,000
How much is the total gifts subject to income tax?

a. P635,000 c. P5,000
b. P35,000 d. P-0-
Problem 5-41 Gifts, Bequests and Devises

On March 1, 200B, Mayumi received a building property from his parents as inheritance with fair market
value of P10,000,000. This property was acquired for P8,000,000 five years ago by his parents. The
monthly rental income of the property is P100,000 with an average monthly expense of P20,000.
Mayumi’s income after expenses, subject to income tax for the year 200B is?
a. P11,200,000 c. P960,000
b. P10,960,000 d.P800,000
Problem 5-42 Non-taxable Prizes and Awards

Precious Lara received cash amounting to P1,000,000 plus a house and lot amounting to P3,000,000 for
winning as Miss International.
How much is tax-exempt from the awards of Miss Lara?

a. P4,000,000 c. P1,000,000
b. P3,000,000 d. P-0-
Problem 5-43 Non-taxable Winnings and Prizes

Manny Pacman, a boxing champion received the following winnings during the year:
Lotto- Philippines P10,000,000
Boxing prize 25,000,000
Raffle-refrigerator 20,000
The non-taxable winnings/prizes would be.

a. P10,000,000 c. P10,120,000
b. P10,020,000 d. P35,120,000
Problem 5-44 Non-taxable Winnings, Prize and Awards

Onyok Velasco, a national athlete, receiving the following during the year
Ramon Magsaysay award P50,000

Athlete of the year award 100,000
Prize – Jolibee raffle 5,000
Prize for winning the silver Olympic medal 500,000
Cash award from Mr Alfred Lim 250,000
Car from Nissan as a gift 1,000,000
Winnings> Philippine sweepstake 100,000
The total winnings/awards and prize not subject to income tax is

a. P2, 505,000 c. P1,905,000
b. P2, 000,000 d. P1,900,000
Problem 5 – 45 Investments in Government Bonds

The following earnings were realized from investment in 5 year government bonds
Interest income P60, 000
Gain from sale of bonds classified as capital asset 140, 000
How much is the total taxable income?

a. P200,000 c. P60,000
b. P140,000 d. P - 0 -
Problem 5 – 46 Gain from Sale of bonds

The following transactions of an individual taxpayer transpire during the taxable year.
Investment in a 7 –year, P1,000,000 face value bonds P990,000
Interest received from bond investment 120,000
Gain from sale of bonds on maturity date 110,000
How much is the taxable income?

a. P110,000 c. P220,000
b. P120,000 d. P230,000
Problem 5-47 Gain from Bond Redemption

A 6-year investment in bonds earned the following
Interest income P120,000
Gain from redemption of bonds 180,000
Total 300,000
The taxable income on the above earnings would be?

a. P-0- c. P180,000
b. P120,000 d. P300,000
Problem 5-48 Non-taxable Interest Income

A non-resident alien earned the following interest income:
Interest income from peso savings deposit P50,000
Interest from expanded foreign currency deposit
(converted to peso) 100,000
Interest from yield deposit 30,000
How much of the above income is non-taxable?

a. P30,000 c. P80,000
b. P50,000 d. P100,000
Problem 5-49 Inventor’s Income

Alberto invented a device that helps paralyzed people walk. The government approved its patent.
During its first year of commercial activities, the following items were reported in relation to the
invention.
Income from sale for invented products P5,000,000

Cost of produced products 1,000,000
Sale of technology 2,000,000
Research and development costs 800,000
Inventor’s achievement award 300,000
How much is the non-taxable income of Alberto as inventor?

a. P6,200,000 c. P4,000,000
b. P5,000,000 d. P300,000
Problem 5-50 Cooperative Income

A CDA registered cooperative reported a total income of P500,000 inclusive of P10,000 interest in bank
savings deposit. The taxable income of this cooperative would be?
a. P510,000 c. P10,000
b. P500,000 d. P-0-
Problem 5-51 Cooperative Income

Baguio-Benguet Cooperative has the following income during the taxable year:
Interest income from members P5,000,000
Income from coop groceries 3,000,000
Interest income from foreign currency deposit 2,000,000
Interest income from time deposit 1,000,000
How much is the income taxable income of Baguio-Benguet Cooperative?
a. P1,000,000 c. P3,000,000
b. P2,000,000 d. P6,000,000
Problem 5-52 Retirement Benefits (Comprehensive)

Mr. Mario Matiyaga, 50 years old, rendered service as a security guard in Anscor Corporation. He had a
monthly salary of P5,000 before retirement in October 31,200x. during the same taxable year he
received P500,000 retirement benefits in accordance with reasonable private benefit plan maintained
by Anchor Co.
Required: Compute for the amount to be included in the gross income of Mr.Matiyaga for 200x based
on the following independent assumptions.
1. He received the retirement benefit for the first time after serving for 10 years.
2. He received the retirement benefit for the second time.
3. He has served the company for 10 non-continuous years.
Problem 5-53 Exclusion from Gross Income (Comprehensive)

Mr.JoneVelarde received the following item from the taxable year 200x:
Winnings from charity horse race sweepstakes from PCSO P500,000
Winnings from gaining, net of P700,000 loss from gambling 800,000
Interest on government debt securities 100,000
Damages awarded by the court for breach of contract
(of which 40% is damages for unrealized profits) 1,000,000
Gains from redemption of shares in mutual fund 300,000
Gain from sale of bonds with maturity of more than five years 60,000
Gift from friends 200,000
Required: Compute the total amount of exclusion from gross income.
Problem 5-54 Exclusion from Gross Income (Comprehensive)

Mr.Erasto Fuentes received the following:
Return of his life insurance premium paid for 25 years
With annual premium of P15,000 P2,000,000
Proceeds of his mother’s life insurance, paid from premium for
30 years with annual premium of P5,000
1,000,000
Cash gift from his missionary friend 50,000
House and lot inherited from his mother 3,000,000
Rent income from house and lot inherited 100,000
Required: Compute the following

1. Amount to be excluded from gross income.
2. Amount to be included as gross income.
Problem 5-55 Taxability of Transfer Received

Miss Aurmatandana served as a nurse for Judge MaximoLaxa for thirty years. Since she has been serving
for a long period of time, the judge
Question: Is the transfer excluded from income taxation if received by Miss Tandana upon the death of
Judge Laxa?
Problem 5-56 Income Subject to Normal Tax

CristiflorBuduhan received the following items for the taxable year 200x:
Proceeds of life insurance of his decedent husband with premiums
Paid amounting to P200,000. Mrs Buduhan is an irrevocable
beneficiary P1,500,000
Donation from friends and relatives 10,000
Compensation for actual damages for injuries suffered
by her husband 200,000
Interest on bank deposits 2,000
Prizes winning as Mrs. Beautiful of Tawi-tawi 25,000
SSS death benefits of his husband 20,000
Required: Compute of his income subject to tax.
Problem 5-57 Compensation and De Minimis

Mr. C, a resident Filipino citizen, shows his income and expenses during a calendar year.
Gross compensation income P109,200

SSS premium contribution 2,400
De minimis
Rice subsidy 24,000
Actual hospitalization payments 15,000
Temporary housing for 3 months 6,000
Required: Compute the taxable compensation during the year assuming that Mr. C is a
1. Minimum wage earner.
2. Not minimum wage earner.
Problem 5-58 Compensation and De Minimis

Mr. D, a resident Filipino citizen , shows his income and expenses during a calendar year.
Gross compensation income P128,000

SSS premium contributions 2,400
Philhealth premium contribution 3,000
De minimis
Rice subsidy 18,000
Actual compensation payments 20,000
Food allowance for overtime in 10 days 1,500
Temporary housing for 3 months 6,000
Rent income 60,000
Required: Compute for the gross taxable compensation during the year, assuming that Mr. D is a
1. Minimum wage earner.
2. Not minimum wage earner.
Problem 5-59 Cooperative

The following are the transaction of Baguio-Benguet Cooperative during the year.
Total purchases VAT-registered business

Inclusing VAT P1,120,000
Sales to members 1,500,000
Interest income-time deposit 60,000
Interest income-loan deposit 40,000
Interest income-foreign currency deposit
(converted to peso) 10,000
The cooperative’s statement of surplus reported the following:
Sales 1,500,000
Less: Purchases P1,000,000
Input VAT _120,000 1,120,000
Gross income 380,000
Add: Interest income
Time deposit P60,000
Loan to members 40,000
Foreign currency deposit 10,000_ _110,000_
Total surplus P490,000
Required: Compute the cooperative income subject to
1. Final tax.
2. Normal tax.

1. The fringe benefit tax is a final tax of the employer.
2. The grossed-up monetary value is the benefit expense of the employer.
3. Fringe benefit tax shall be treated as a final income tax on the employee that shall be withheld
and paid by the employer on a quarterly basis.
4. If the employer did not withhold the FBT and was subsequently discovered and assessed by the
BIR, the related fringe benefit tax is not allowed as deduction from the employer’s gross income.
5. The fringe benefit tax is the income tax on income earned by the employee.
6. The liability of the employer is to withhold the corresponding income tax from the fringe benefit
earned by the employee.
7. If fringe benefit is granted in money, or directly paid for by the employer in cash the actual
amount received by the employee is the monetary value.
8. If the fair market value of the residential house assigned for the use of managerial employee is
greater than its cost the excess amount shall be amortized over the remaining life of the asset.
9. All housing benefits provided by the employer to managerial employee are subject to fringe
benefit tax.
10. Fringe benefits are forms of incentives to managerial employees.
11. Fringe benefits include only salaries and services, or similar benefits given by employer to a
managerial employee.
12. Wage and/or salary already given to the employees may be eventually reduced during financial
difficulties.
13. Additional remuneration for overtime and separation pay does not include fringe benefits.
14. Fringe benefit includes additional help granted by the employer to the managerial employees in
addition to the basic salary.
15. The fringe benefit tax rate shall be the same with the normal corporate tax rate for income
taxes.
16. The additional benefits received by the rank-and-file employees are not subject to final fringe
benefit tax rate, but are to be reported in the annual income tax return.

1. All fringe benefits given to managerial employees are subject to final fringe benefit tax, except
those which are granted for the convenience of the employer.
2. A fringe benefit not subject to FBT is also not subject to compensation income tax.
3. Fringe benefit tax is not applicable when the fringe benefit given is required by the nature of or
is necessary to the trade, business or profession of the employer, or when the fringe benefit is
for the convenience of the employer.
4. The 10 days monetized value of leave credits paid to government official and employees is not
subject to FBT and withholding tax on compensation.
5. A medical allowance of P750 per employee per month granted by employer to the employee’s
dependent is a nontaxable fringe benefit.
6. Daily meal allowance not exceeding twenty-five percent of the basic minimum wage is a “de
minimis” benefit.
7. Monetized unused vacation leave credits of private employees not exceeding ten (10) days
during the year and the monetized value of leave credits paid to government official and
employees are part of de minimis.
8. Salaries of household maid of managerial employee that is reimbursed to the manager by his
employer constitute a fringe benefit that is subject to final tax.
9. Household expenses which are reimbursed to the manager by his employer are taxable fringe
benefit.
10. A travel as fringe benefit required by the company to its officer is subject to fringe benefit tax.
11. Holiday and vacation expenses of the managerial employee borne by his employer are taxable
fringe benefits.
12. All scholarship grants to the employees are nontaxable fringe benefits.
13. Contributions of the employer for the benefit of the employee for retirement, insurance and
hospitalization benefit plans are subject to fringe benefit tax.

1. The determination of the fringe benefit tax would entail the following except
a. Valuation of the fringe benefit.
b. Determination of the percentage of the benefit subject to the fringe benefit tax.
c. Determination of the manner by which the fringe benefit has been utilized by the employee.
d. Determination of the grossed-up monetary value of the fringe benefit.
2. The monetary value of fringe benefit if given in money is

a. Fair market value (BIR) or zonal value whichever is higher.
b. Amount granted.
c. Depreciated value.
d. Acquisition cost plus other incidental cost.
3. Which value should be used as tax base to compute the fringe benefit on the property assigned
for the use of employees?
a. Fair market value of the property.
b. Cost of the property.
c. Equivalent rental value of the property.
d. Fringe benefit value.
4. For property assigned for use of employee, the excess of fair market value over cost of the
property assigned should be
a. Amortized over the original life of the property.
b. Depreciated over the original life of the property.
c. Amortized over the remaining useful life of the property.
d. Depreciated over the remaining useful life of the property.
5. The following are nontaxable housing fringe benefit, except

a. Housing for military official of the armed forces of the Philippines.
b. Housing within 50 meters of business premises.
c. Temporary housing within three month.
d. Free housing privilege to a corporate officer.
6. If residential property is purchased and title of ownership is transferred in the name of the
employees, the monetary value of
a. Higher of fair market value.
b. Acquisition cost exclusive of interest.
c. Five percent of fair market value.
d. Fifty percent of the acquisition cost.
7. The following items are treated as taxable fringe benefit, except

a. Expenses incurred by the employee paid by the employer.
b. Expenses incurred attributable to business of employer paid by the employer.
c. Personal expenses without receipt of the employees reimbursed by the employer.
d. Representation and transportation allowances which are variable in amount and not part of
compensation income.
8. Interest on loans granted by employer to employee are taxable fringe benefit when the interest
rate is
a. 12%
b. Above 12%
c. 18% and above.
d. Lower than 12%
9. Statement 1: Nonpayment of FBT will result to disallowance of deductible fringe benefit

expense. Statement 2: All compensation income of a managerial employee is subject to FBT.
10. Which of the following fringe benefits received by a managerial employee is taxable with final
income tax?
a. De minimis
b. Free housing
c. Educational scholarship
d. Foreign travel on account of business convention
11. Which of the following is not true?

a. Use of company owned aircraft by a managerial employee is not subject to fringe benefit
tax.
b. Use of company owned yacht by a managerial employee is not subject to fringe benefit tax.
c. Accumulated vacation and sick leave credits to government employees are nontaxable.
d. Educational assistance to the employee and his dependents are generally taxable benefits.
12. Which of the following is a taxable fringe benefit?

a. Life insurance premium on the life of employee, borne by the employer.
b. Employer tax payment on behalf of the employee
c. 13th month pay and similar benefits in excess of P30,000

1. Which of the following fringe benefit in excess of threshold amount is subject to withholding tax
on wages?
De minimis Received by rank-and-file Received by supervisor
a. Yes Yes Yes
b. No Yes Yes
c. Yes No Yes
d. No Yes Yes
2. Statement 1: The fringe benefit tax is part of the compensation of the managerial employee.
Statement 2: The fringe benefit tax is to be withheld and remitted by the employer to the BIR.
a. Statement 1 is correct.
b. Statement 2 is incorrect.
3. What is the value of fringe benefit if a property is furnished by the employer to be used by the
employee without transfer of ownership?
Book Value Fair market value Depreciated value
a. No No Yes
b. Yes Yes No
c. Yes No Yes
d. No Yes Yes
4. Which of the following business travel expenses is not subject to fringe benefit tax?
a. Hotel and accommodation for $300 per day.
b. Cost of economy airplane ticket.
c. Inland travel expense.
5. Educational grant to the employee or his dependent by the employer is not subject to fringe
benefit tax, except when
a. The study grant involved is connected with the trade.
b. There is a written contract that the employee will remain to work for a period of time.
c. The assistance was through competitive scholarship program.
d. The study grant is not connected with the trade.
6. Which of the following statements is true?

a. Existing fringe benefit being provided to a managerial employee could be reduced without
violating the labor law.
b. The fringe benefit increases in direct proportion to overtime rendered.
c. The fringe benefit is strictly payable in cash.
d. The fringe benefit of managerial employee is exempted from income tax.

a. Fringe benefit of a managerial employee is subject to final income tax.
b. Fringe benefit tax is a creditable withholding tax.
c. Fringe benefit tax is an income tax.
d. Fringe benefit tax rate is 32%.
a. The grossed-up monetary value of fringe benefit is equal to 68% of cash value of the benefit.
b. The taxable compensation of the employee with respect to the benefit is equal to the
grossed-up monetary value of the benefit.
c. The fringe benefit tax is the income tax expense of the employer.
d. The 32% final tax is applied to the monetary value of the benefit.
9. Which of the following items is a taxable fringe benefit?

a. P15,000 actual medical benefits received during the taxable years.
b. Overtime meal allowance of P50. The basic minimum wage is P400.
c. Cost of the educational assistance to the employee’s children on account of competitive
scholarship.
d. Cost of employees’ group insurance premium paid by the employer.

a. Considered as de minimis fringe benefits.
b. Not subject to fringe benefit tax.
c. Not subject to income tax as compensation.
d. Subject to income tax as compensation.
11. Which of the following is subject to income tax?

a. Fringe benefit required by the nature of or necessary to trade business or profession of the
employer.
b. Those granted for the convenience of employer.
c. De minimis benefits.
d. Income tax paid by the employer in behalf of the employee.
12. Which of the following concepts denotes exemption from fringe benefit tax?
a. Convenience of the employer rule
b. Necessity to the busiess or trade of employer rule
c. De minimis benefits
d. All of the above
Problem 6 – 5 Effect of FBT

In 200A, the accountant of Y Company charged the P170,000 fringe benefits of its rank-and-file
employee as miscellaneous expense to avoid related withholding tax. As a result, the company paid an
income tax amounting to P300,000. How much is the additional tax to be paid if the BIR found the said
concealment?
a. P – 0 – c. P 80,000
b. P 54,400 d. P131,000
Problem 6 – 6 Tax Recovered by the Government

In 200B, the BIR found that X Corporation’s payments of fringe benefits to its managerial employees in
200A were charged to miscellaneous expense amounting to P102,000. If the company’s 200A net
income after tax was P1,750,000, how much is the tax recovered by the government for the said
discovery if the requirement of expense deductibility is considered?
a. P83,700 c. P78,600
b. P48,000 d. P17,400
Problem 6 – 7 Values of Fringe Benefits

Mr. Alegre, a manager of Jollimac, received the following fringe benefits during the taxable year:
Cash travel allowance P 34,000

House and lot – ownership of real property is transferred
To Mr. Alegre, (FMV, P544,000) cost 476,000
Car – ownership was transferred to Mr. Alegre.
The car has a 10year estimated useful life, but
already 1 year in use at date of transfer 630,000
1. The monetary value of fringe benefits received during the year would be
a. P1,258,000 c. P646,000
b. P1,190,000 d. P578,000
2. The grossed-up monetary value of the fringe benefits would be

a. P850,000 c. P1,750,000
b. P950,000 d. P1,850,000
3. The income tax expense deductible from the business income of the employer for this particular
payment is
a. P80,000 c. P25,000
b. P54,000 d. P – 0 –
Problem 6 – 9 Net Monetary Value Subject to FBT

Mr. Rojas, a professor of Luzon University, was promoted to school canteen manager starting June 30,
200A with the following compensation and fringe benefit.
As a Professor As a manager
Monthly salary P30,000 P50,000
Monthly meal benefits 3,000 10,200
Educational assistance of children 10, 000 13,600
How much is the 200A net monetary value of fringe benefits subject to FBT?
a. P81,600 c. P142,800
b. P141,600 d. P220,800
Problem 6 – 10 Deductible Fringe Benefit Expense

X Corporation paid P136,000 cash fringe benefit for year 200A representing 80% of the car incentive for
its area manager. X remitted the related final tax of the said cash fringe benefit. The amount to be
claimed as business deduction from business income is
a. P170,000 c. P136,200
b. P200,000 d. P180,000
Problem 6 – 11 Deductible Tax Expense

EGV partnership withheld P19,200 from the fringe benefit granted to its office manager. Pertaining to
the amount of tax withheld, how much would be the tax expense that the office manager could deduct
from his gross compensation income?
a. P32,520 c. P24,000
b. P30,400 d. P – 0 –
Problem 6 – 12 Fringe Benefit Tax

Joseph Estrada, a company messenger, received the following fringe benefits during the taxable period:
Motor vehicle purchased to deliver messages P51,000
Actual medical help for hernia operation 13,600
Food allowance per month 1,700
Uniform allowance 680
The fringe benefit tax of Joseph would be

a. P31,520 c. P24,000
b. P30,400 d. P–0–
Problem 6 – 13 Housing Benefits

X Corporation purchased a residential property with a zonal value of P5,000,000. The property has a fair
market value of P6,000,000.
1. If the property was assigned for the use of X Co.’s president, how much is the fringe benefit tax?
a. P70,588 c. P48,000
b. P59,824 d. P40,000
2. If the property was acquired for the use of X Co.’s manager for P2,000,000 down payment and
P1,000,000 an installment basis per year in 4 years (with an effective interest rate of 12% per
year), how much is the fringe benefit tax.?
a. P70,588 c. P58,824
b. P59,258 d. P35,294
Problem 6 – 14 Housing Benefits

In Problem 6 – 13 No. 2, if the company policy is to treat the fringe benefit based on the actual payment
yearly, how much is the total fringe benefit expense in year 200A?
a. P36,764.71 c. P23,862.50
b. P35,091.91 d. P73,529.41
Problem 6 – 15 Housing privilege

A Corporation assigned its residential building to be used by its CEO. The building was purchased for
P2,040,000 and has a zonal value of P1,972,000, how much is the monthly fringe benefit by the CEO?
a. P125,000 c. P6,042
b. P 6,250 d. P2000
Problem 6-16 Housing Privilege

B Corporation rents a condominium in Baguio city to be used by its key officers that supervise the Region
1 business operation. The monthly rental expense for said condominium is P34,000. Jean, the corporate
comptroller, is assigned in Baguio City for two months to investigate an inventory fraud. She was
assigned to stay in the said condominium during the period of investigation.
How much is the amount of fringe benefit tax on the stay of Jean in the condominium?
a. P-0- c. P10,800
b. P8,000 d. P16,000
Problem 6-17 FB Monetary Value of Each Officer

Abbott Laboratories Co, owns a fleet of 50 cars which 8-% are used in the sales department. The
remaining cars are assigned to its 10 office. Each car has a sales price of P1,000,000. Abbott purchased
50 with 5%discount plus transportation, insurance and testing cost of P500,000.
How much is the monetary value of the fringe benefit of each officer?
a. P96,000 c. P950,000
b. P192,000 d. P960,000
Problem 6-18 Motor Vehicle Benefits

A Co. purchased a car for a cash price of P1,000,000. If the A Co. purchased the car on installment, the
monthly payment would be P20,000 for 5 years.
1. If the company decided to maintain the car for the personal use of the president as needed.
How much is the fringe benefit tax?
a. P47,059 c. P94,118
b. P56,471 d. P112,941
2. If the company decided to transfer the ownership of the car in the name of its president, how
much is the fringe benefit tax?
a. P47059 c. P94,118
b. P56,471 d. P112,941
Problem 6-19 Lease of Fleet of Vehicles

EF Distribution, Inc. leases a fleet of vehicles from Transpo Co. it leases 20 trucks for its delivery
operations, 14 cars for its sales force and 6 cars for its executive officers for a lump sum fee of
P6,000,000 per year. How much is the annual monetary value of fringe benefit of each officer?
a. P450,000 c. P150,000
b. P300,000 d. P75,000
Problem 6-20 Yacht, Helicopter and Airplane Benefits

Java Group of Corporations owns and maintains a yacht, a helicopter and an airplane which are used by
its five members of the board of directors for pleasure and business purpose. Some data available are as
follows:
Acquisition cost Estimated life
Yacht P170,000,000 30 years
Helicopter 5,440,000 25 years
Airplane 8,840,000 30 years
How much is the amount of annual fringe benefis tax for each director?
a. P147,200 c. P80,000
b. P100,000 d. P-0-
Problem 6-21 Expense Account

M Corporation allows its Chief Operation Officer, Mr. Colon, to incur expense subject to
reimbursement. Mr. Colon presented the following itemized receipts:
Light and power of his residential house P5,440
Grocery items 6,800
Transportation-business trip 2,040
Meals as representation expense in the name of employer 3,400
The reimbursable expense of Mr. Colon subject to fringe benefit tax would amount to
a. P15,640 c. P10,200
b. P12,240 d. P8,840
Problem 6-22 Expense Account

Gerry, the chairman of the board, presented the following expense accounts which were reimbursed to
him by his employer , U Corporation:
Monthly representation allowance P30,600
Grocery items 17,000
Pants and T-shirt 3,400
Gasoline of company car 6,800
The fringe benefit tax would be

a. P27,200 c. P20,400
b. P24,000 d. P9,600
Problem 6-23 Motor Vehicle Fringe Benefit
Miss Clarence Sito, the production supervisor of the universal Corporation was given a fringe benefit in
the form of a car whereby the company has shouldered 75% of the price. The price of the car is
P746,000.

a. P700,000 c. P476,000
b. P525,000 d. P337,000
Problem 6-24 Household Expense
In 200B Miss Rowena Gorospe, a managerial employee, was reimbursed by her employer for the total
salary she paid to her house helper amounting to P16,320 for the year and P34,000 traveling expenses
incurred in connection with her duty as sales manager.
How much would be the fringe benefit tax for the year, to be withheld by her employer?
a. P24,000 c. P16,000
b. P23,680 d. P7,680
Problem 6-25 Household Expense

A managerial employee received P57,800 cash from his employer. The amount is to repay the manager
of the amount paid as salary of the household helper of the manager’s family.

a. P85,000 c. P27,200
b. P57,800 d. P18,496
Problem 6-26 Interest Benefits on Loan

Andoy, an employer of P Finance Co, borrowed money from the company amounting to P88,400. The
company’s policy is to charge 3% per month to its employees instead of its regular interest rat of 1.5%
per month.
1. If Andoy is a rank-in-file employee, how much is the fringe benefit tax on the interest benefits?
a. P6,240 c. P1,248
b. P3,744 d. P-0-
2. If Andoy is a managerial employee, how much is the fringe benefit tax on the interest benefits?
a. P6,240 c. P1,248
b. P3,744 d. P-0-
Problem 6-27 Membership Fees

A Corporation paid the following membership fees of its comptroller.
Professional Tax Receipts (PTR) P 5,440
PICPA Lifetime membership 13,600
Goma Gulf Club 68,000
Baguio Country Club 340,000
How much is the fringe benefit tax ?

a. P160,000 c. P198,400
b. P192,000 d. P200,960
Problem 6-28 Expense of Foreign Travel

Art the VP for Marketing of U Co. was assigned to attend a business meeting in Europe in behalf of corp.
He incurred the following expenses with supporting documentary evidences:
Plane ticket-ordinary (round trip) $2,040
Hotel, room charge for four days 1,500
Inland travel 1,190
Personal expenses 280
Assume that $1=P50 and all expenses are in the name of the employee reimbursed by the company.
How much is the amount of fringe benefit expense of U Corp?

a. P50,000 c. P150,000
b. P137,500 d. P237,500
Problem 6-29 Expenses of Foreign Travel

An employer sent a managerial employee to an international convention. From Philippines to country of
venue, business class plane ticket of P40,800 was paid by the employer. From country of venue back to
the Philippine, P54,400 first class ticket was paid by the employer.
How much is the fringe benefit tax for the plane tickets paid?
a. P19,200 c. P7,680
b. P25,600 d. P6,400
Problem 6-30 Holiday and Vacation Expenses

A managerial employee was given by his employer all paid up vacation expenses amounting to P408,000
plus salary of P34,000 for the period of duration of vacation. How much is the fringe benefit expense of
the employer?
a. P650,000 c. P208,000
b. P600,000 d. P192,000
Problem 6-31 Educational Assistance

After passing the scholarship examination, J received P92,500 as educational assistance from EGV
Foundation wherein his father works as the VP for Operations.

a. P-0- c. P44,800
b. P30,464 d. P95,200
Problem 6-32 Educational Assistance

1. For year 200A, Michelle Gallego, a dean of college, received from her employer an educational
benefit with cash value of P65,280. The fringe benefit tax is
a. P65,280 c. P15,360
b. P30,720 d. P-0-
2. Pertaining to same data in number 1, the operating expense allowed as deduction from business
income of the employer is
a. P96,000 c. P30,720
b. P65,280 d. P30,000
Problem 6-33 Special Taxpayers

Leah Salonga, a resident Filipino, is employed as a manager of a regional operating headquarters of
Walmart Multinational Corporation here in the Philippines. Her position is normally occupied only by
expatriate. She received P170,000 cash as fringe benefits. The fringe benefit tax would be
a. P80,000 c. P27,000
b. P62,500 d. P30,000
Problem 6-34 Special and Regular Taxpayers

Chan and Lapid are both working with Okinawa Corporation, located inside the Clark Special Economic
Zone. Chan is a Chinese national who stayed in the Philippines for one month to complete his special
process design with Okinawa. He received a fringe benefit of P30,000. Lapid is a Filipino citizen and he is
the plant supervisor of the company. He received P51,000 fringe benefit.
How much is the total fringe benefit tax to be withheld by Okinawa Corporation?
a. P38,118 c. P27,000
b. P34,000 d. P19,000
Problem 6-35
During her first year as X-Factor, Philippines president, Melanie Amaro received the following benefits:
5 year non-interest bearing loan to construct her house P1,000,000

Use of company’s airplane (share in annual depreciation) 200,000
Annual premium on life insurance 100,000
The monetary value of Amaro’s fringe Benefit subject to FBT amounts to.
a. P-0- c. P207,000
b. P107,000 d. P407,000
Problem 6-36 Non-taxable Fringe Benefits

Mr. Sison, the president of S Corporation, gave the following benefits during the taxable year to his
employees:
SSS contributions P 680

Philhealth contributions 612
Regular meal allowances to the company driver 3,400
Free housing to the company janitors 5,780
Insurance premium of the Vice President for Operation
(S Corporation is the beneficiary of 50% proceeds) 4,080
How much is the total fringe benefit tax?

a. P-0- c. P960
b. P444 d. P5,280
Problem 6-37 Non-taxable and Fringe Benefits

Miss Mabukol, as the head office, received the following fringe benefits during the taxable year:
Car P214,000
Uniform and clothing allowance 6,800
Rice subsidy (P1,000 per month) 12,000
Employees achievement award (in kind) 10,000
Laundry allowance (P300 per month) 3,600
Medical allowance to dependents (P4,250 per semester) 8,500
Actual medical benefits 10,000

1. Non-taxable fringe benefits.
2. Fringe benefit tax.

Violeta, a branch manager of San Miguel Corporation since year 200A, received a total annual salary of
P360,000. She also received a free housing benefit with monthly rent of P12,240 and fixed monthly
mwal allowance of P2,000 considered as part of her compensation income.
In 200B, her salary and fringe benefits have been increased by 10%. During the year, in addition to her
previous fringe benefits the following cash benefits were extended to her by the corporation.
a. Educational assistance for her dependents amounting to P13,600. This was availed through a
rigorous competitive scheme.
b. Employee achievement awards, P10,000.
c. Lions Club membership fee, P20,400.
Required: Compute the following:

1. 200B taxable amount of fringe benefits subject to FBT.
2. 200B fringe benefit tax.
3. 200B deductible amount of fringe benefits.
Problem 6-39 Valuation and FBT

The following fringe benefits were received by a managerial employee from his employer.
a. Cash amounting to P68,000 to purchase a motor vehicle.

b. Car acquired on installment, Terms: P200,000 down payment and P180,000 installment for 5
years. The effective interest rate is 18% per year.
c. House and lot costing P816,000 transferred in the name of the employee. The property has a
fair market value of 150% based on his cost. The estimated useful life of the property is 20 years.
d. House and lot costing P1,020,000 with a fair market value of P1,600,000. The property was not
transferred in the name of the employee. The estimated useful life of the property is 25 years.
e. Apartment rented by the company for P244,000 for a year and granted at the same to be used
by the employee for free.
f. Assignment of residential property for the use of employee. The property has a fair market value
of P1,360,000 but its zonal value is P1,244,000.
Required: Compute for the following (independent situation):

1. Monetary value.
2. Fringe benefit tax.
Problem 6-40 Valuation of Fringe Benefits

In 200x, May Tamboc is a branch manager of PCI Bank. The bank assigned to her a condominium. If the
condominium is leased to others it has a monthly rent income of P25,000.
The condominium has the following values:
Acquisition cost P4,000,000
Fair market value 5,000,000
Zonal value 6,000,000
In addition, the bank purchased a car in the name of May. The car was acquired on installment with the
following terms: P300,000 down payment and P240,000 per year for 5 installment payments. The
effective interest is 12% per year.
Required:
1. Compute the fringe benefit tax of each fringe benefit received.
2. Make the appropriate journal entries of each fringe benefit.

In 200A, Miss Chita De Vera, a branch manager of PCI Bank, was given fringe benefits as follows:
 Assignment of condominium owned by the bank. The prevailing rent of the same class of
condominium is P40,000 per month. The fair market value of the condominium is P4,000,000
per BIR valuation and the zonal valuation is P5,000,000.
 A brand new car purchased by the company is in the name of Miss de Vera. The company
purchased the car by annual installment of P200,000 in four consecutive years after giving a
down payment of P50,000. The cash price is P500,000.
 A P10,000 cash representing transportation and representation expenses as fixed amount and
considered part of Miss de Vera’s compensation income.
1. Monetary value of fringe benefit on condominium.

2. Grossed-up monetary value of the condominium
3. Fringe benefit tax on use of condominium per year
4. Grossed-up monetary value of the car as fringe benefit.
5. Fringe benefit tax of the car.
6. Grossed up monetary value of cash fringe benefit.
7. Fringe benefit tax of the cash benefit.
Write True if the statement is correct, or False if the statement incorrect.
1. Real properties acquired by a real estate developer, intended to be developed and sold are
ordinary assets.
2. Real properties held and used in the conduct of business, but are not intended for sale are
capital assets.
3. The depreciable assets of realtor shall be treated as capital assets.
4. A taxpayer who is not engaged in a real estate business can classify its real properties previously
used in business as capital asset upon showing proof that the same have not been used in
business for more than two years.
5. If the property was acquired as gift, the cost basis to compute gain or loss is the fair market
value at the time of donation.
6. There is no holding period for sale of shares of stock held by dealers in securities for more than
one year.
7. No NIRC tax is to be paid if the sale of shares of stock is traded in the local stock exchange and
its resulted to a capital loss.
8. All sales pertaining to real properties are subject to a capital gains tax of 6%.
9. Net capital loss carry over is not applicable for corporations.
10. The loss on sale of debt securities sustained by a bank is a capital loss.
11. The net capital loss carry over of an individual taxpayer is limited to the amount of taxable
income in the year when the loss was sustained.
12. The tax rules of ordinary loss and net capital loss for both individual taxpayer and corporations
are the same.
1. The purchased goodwill that is subsequently sold is taxable.
2. It is always advantageous to the taxpayer to choose the 6% final tax than the normal tax if the
real property is sold to the government.
3. Sales of real properties to SSS or GSIS are subject to creditable withholding tax.
4. In installment reporting of income, the contract price is determined by deducting from the
selling price the amount of cost or assumed mortgage whichever is higher.
5. Ordinary assets include those which are held primarily for sale to customers in the ordinary
course of the business except equipment used in business operations.
6. Capital losses are deductible only to the extent of the capital gain.
7. If the property is acquired through inheritance, the cost basis to the recipient is the acquisition
cost of the previous owner.
8. The gains from sale of securities held by dealers in securities are ordinary income subject to
normal tax.
9. Stocks that are traded in the local stock market are subject to a stock transaction tax based on
the sales price irrespective of gain or loss sustained by the taxpayer.
10. When a taxpayer provided a consideration for an option period to buy a capital property and
such privilege was exercised, the option money shall be considered as a capital gain or capital
loss.
11. If the real property used in business were sold to the government, the tax would be 6% final tax
or normal tax rate at the option of the taxpayer.
12. The total payments received during the year of sale in cash or property including evidences of
indebtedness comprises the initial payment for sale of real property.
1. A disguised sale is a sale or exchange transaction between two related parties with intent of
partly sale and partly gift.
2. The gain or loss on sale of partner’s interest (capital) in the partnership is a capital asset
transaction.
3. If the property sold is not subject to mortgage, the contract price is usually the selling price.
4. Gains from wash sales are taxable and losses from wash sales are deductible.
5. There is wash sale if within a 61-day period, a taxpayer sold its 1,000 X company’s common
stocks and subsequently purchased 1,000 X company’s preferred stocks.
6. If a government owned corporation sells a real property, only the selling price is the basis of the
tax.
7. The NOLCO is applicable for three years from the year of operating loss and can be deducted
from ordinary income and net capital gain.
8. The original issue by a corporation of its shares of stock above par value is subject to capital
gains tax.
9. Dealers in securities are not liable to the stock transaction tax.
10. All sales of shares of stock of a non-dealer in securities are subject to stock transaction tax of ½
of 1%.
11. The payment of stock transaction tax exempts the sale from final income tax of 5% and 10%.
12. Additional assessments obtained by a corporation from its shareholders are taxable income.
Problem 7-4True or False
1. Land owned by a religious order, if sold is not subject to tax.
2. A sale or exchange of interest to partnership is a capital asset transaction.
3. A short sale is effected when a speculator sell securities which he owns.
4. A deductible loss may be incurred if the treasury stock is subsequently reissued for a
consideration less than it’s cost.
5. Copyright is an exclusive right granted by the government to an inventor.
6. Liquidating dividends in general are not taxable if they only represent return of investment.
7. Issuance of a corporation of its bonds at a premium gives rise to capital gain.
8. All sales of land are subject to a final tax of 6% based on the selling price or fair market value,
whichever is higher.
9. Sale of real property of national government is exempt from creditable withholding tax.
10. Banks and trust companies are generally dealers of securities.
11. Sales of real properties foreclosed by bank from nonpaying loan clients are subject to normal
taxes.
12. Dealers in securities are not liable to the stock transaction tax.
1. When a buyer provided a consideration for an option period to buy a capital property but such
privilege was not exercised, the option money received by a seller shall be considered
a. Nontaxable because the option privilege was not exercised.
b. Capital loss of the seller
c. Taxable gain of the seller
d. Refundable
2. For income taxation purposes, which of the following is classified as capital asset of a
manufacturing business?
a. Work in process ending inventory
b. Investment in equity securities
c. Factory building
d. Office Equipment
3. Which of the following is a capital asset?

a. Inventory for sale
b. Real property held for rent
c. Equipment used in business
d. Investment property

a. Ordinary loss is deductible from capital gain.
b. Capital loss is deductible from capital gain.
c. Dealers in securities are subject to stock transaction tax.
d. Net capital loss is deductible from the succeeding year’s capital gain of an individual
taxpayer.
5. It refers to an exclusive right granted to authors and composers.

a. Patent
b. Franchise
c. Copyright
d. Goodwill
6. Which of the following may result to capital gain or loss?

i. Sale of investment in bonds
ii. Receipt of liquidating dividend
iii. Sale of interest in partnership
iv. Re-issuance of treasury stock
Choices:
a. I, ii, and iv
b. I, ii, and iii only
c. I, and ii only
d. Iv, only
7. Statement 1: Loss from wash sale of securities is deductible from capital gain.
Statement 2: gains from wash sales are taxable gains.
8. If an individual taxpayer disposed of his principal residence for P1,000,000 and acquired as a
replacement a smaller residential house and lot for P750,000, the sale is subject to 6% capital
gain tax on.
a. 25% of the selling price.
b. 75% of the selling price.
c. 100% of the selling price.
d. 100% of the purchase price of the new residential house and lot.
9. The sale of real property classified as capital asset shall be taxed at 6% of

a. Selling price, where the zonal value is 110% of selling price.
b. Zonal value, where the selling price is 110% of zonal value.
c. Selling price, where the zonal value is 80% of the selling price.
d. Zonal value, where the zonal value is 80% of the selling price.
10. If the real property sold is classified as inventory with a selling price of P3,000,000 and zonal
value of P4,000,000, the creditable withholding tax is
a. 6% of the selling price.
b. 6% of the zonal price.
c. 5% of the selling price.
d. 5% of the zonal price.
11. A dividend received by stockholders upon corporate dissolution is called

a. Liquidating dividends.
b. Terminating dividends.
c. Stockholder’s dividends.
d. Retirement dividends.
12. To compute for the gain or loss in the disposition of the capital assets, the selling price should
the reduced by
a. Cost of the capital assets.
b. Cost and expenses of the capital assets acquired.
c. Disposition expenses of the capital assets.
d. Acquisition costs and disposition expenses of the capital assets.
1. A real estate business that shifts to a servicing business shall classify its real estate properties as
a. Ordinary asset.
b. Capital asset.
c. Abandoned asset.
d. Service asset.
2. The following rules shall be observed when a capital gain or loss is sustained by a corporation,
except,
a. Capital gains and losses are recognized to the extent of its full amount.
b. Capital losses are deductible only to the extent of capital gains.
c. Net capital losses are not deductible from ordinary gain or income but ordinary losses are
deductible from capital gains.
d. Only 50% of gain or loss is reportable if the asset sold was held for more than 12 months
3. Which of the following rules shall be observed on securities becoming worthless for purposes of
income taxation?
a. The securities are ascertained worthless and written off.
b. The taxpayer owning the securities written off should not be bank or trust company.
c. The written off amount is a capital loss.
4. Sale of stocks of a domestic corporation traded through a local stock exchange are subject to a
a. Percentage tax of one half of one percent.
b. Final tax of five percent if the net capital gain is not over P100,000.
c. Final tax of ten percent on any amount in excess of P100,000.
d. Percentage tax of one fourth of one percent.
5. If the stock cannot be properly identified, the following rules are applicable in the determination
of the cost of the shares of stocks, except
a. The cost to be assigned shall be on the basis of the first-in, first-out method.
b. The cost to be assigned shall be on the basis of the average method if the seller maintains a
record for every particular stock.
c. No cost shall be assigned to the stocks since the stocks cannot be properly identified.
d. An allocated cost shall be assigned to stock dividends to get the cost of each stock.
6. Which of the following sale results to a capital gain or loss reportable in ITR?
a. Sale of land foreclosed by the bank.
b. Sale of interest in a professional partnership.
c. Sale of shares of stock not traded in the stock market.
d. Sale of debt securities traded in the stock market.
7. Sale of investment in stocks of a domestic corporation not traded through local stock market are
subject to a final tax of
a. 5%.
b. 10%.
c. 10% on the net gain not over P100,000.
d. 5% on the net gain not over P100,000, and 10% on the excess of the first P100,000.
8. If the proceeds from the disposition of principal residence are fully utilized in acquiring or
constructing a new principal residence, the capital gain is not subject to tax if the
a. Acquisition or construction of the new residence is within 18months.
b. Commissioner is notified within 30 days from the date of disposition of the taxpayer’s
intention to avail of the tax exemption.
c. Historical coast or adjusted basis of property sold is carried over to the new principal
residence.
9. The cost of the new principal residence may be the

a. Cost of the old residence sold.
b. Percentage of the cost of the old residence sold.
c. Cost of the old residence sold plus additional cost in acquiring the principal residence.
10. Which of the following is/are to be included as part of the selling price of installment of sale?
i. Cash payment by the buyer.
ii. Noncash item given by the buyer.
iii. Existing obligation assumed by the buyer.
iv. Promise to pay originated by the buyer.
Choices:
a. I, ii, iii, and iv

c. I, and ii only
d. I only
Problem 7-7 Classification of Assets
The following real estate assets are taken from the records of Buenas Realty Corporation, a real
estate dealer and developer.
Real property inventories P10,000,000

Land and building used in business 3,000,000
Vacation house of the executives 1,500,000
Acquired undeveloped properties 500,000
Abandoned properties 600,000
The amount of ordinary asset would be

a. P13,000,000
b. P14,500,000
c. P15,100,000
d. P15,600,000
Problem 7- 8 Classification of Assets

Care Enterprises presented the following assets.
Interest in partnership P1,000,000

Idle raw lands 100,000
Proceeds of expropriated real property 2,000,000
Supplies Inventory 200,000
Land and building used in business 5,000,000
The amount of capital assets would be

a. P1,100,000
b. P1,300,000
c. P.3,100,000
d. P4,900,000
Problem 7- 9 Change of purpose

B, a trader, purchased one- hectare land intended for investment purposes for P2,000,000. After 10
years, he decided to subdivide 90% of the land for business purposes and the 10% is used to
construct his warehouse. One thousand square meters of the subdivision are used as a subdivision
road.
1. If per subdivided lot is sold for P100,000 per 200 square meters, how much is the ordinary gain
from sale of land?
a. P4,500,000
b. P4,000,000
c. P2,700,000
d. P2,200,000
2. Based on the above transaction, how much is the remaining capital asset of B?
a. P - 0 –
b. P100,000
c. P200,000
d. P300,000
Problem 7- 10 Gain (Loss) on Exchange

Mr. Basa exchanged his car with a cost of P250,000 and a book value of P150,000 to a portion of
land with a fair market value of P190,000 and a zonal value of P150,000. The gain (loss) from the
exchange of property is
a. (P60,000)
b. P40,000
c. P 50,000
d.P90,000
Problem 7- 11 Exchange of Dissimilar Property

A taxpayer exchange his personal property for dissimilar property with a market value of P200,000.
Which of the following is correct?
a. There is capital gain if the property given away has fair value equal to P200,000 at date of
exchange.
b. There is capital gain if the property given away has acquisition cost that is higher than P200,000.
c. There is capital loss if the property given away has fair value higher than P200,000 when it was
inherited.
d. There is capital loss if the property given away has fair value of at date it was received as donation
that is lower than P200,000.
Problem 7- 12 Exchange solely in Kind

Veniz Corporation has an authorized capital stock of P10,000,000 with a par value of P100 per share.
The subscriptions of the incorporators are as follows:
Incorporators No. of shares subscribedAmount paidUnpaid Subscriptions

A 15,000 P150,000 P1,350,000
B 5,000 125,000 375,000
C 2,000 125,000 75,000
D 2,000 125,000 75,000
E 1,000100,000 -0
Total 25,000 P625,000P1,875,000
By way of a deed of assignment, Mr. A transferred to the corporation a parcel of his land with a fair
market value of P600,000 in order to fully pay his unpaid subscriptions. How much is the taxable
amount if the land was acquired by A for only P50,000?
a. P - 0 –
b. P400,000
c. P450,000
d. P600,000
Problem 7- 13 Determination of Cost and expenses

Mr. Alejandro Ciencia sold his capital asset for a sales price of P500,000. The sale was subject to 10%
agent commission. The capital asset was acquired by Mr. Ciencia for P200,000 excluding installation
and insurance cost of P20,000.
The cost and expenses deductible from the sale is
a. P200,000.
b. P220,000.
c. P235,000.
d. P270,000.
Problem 7- 14 Special Rules

When the father of Manuel died, the latter inherited a farm land which after five years he sold for
P2,000,000. The values related to the farm land are given as follows:
Acquisition cost of his father P500,000

Fair market value at the time of his father’s death 1,200,000
Fair market value when sold by manuel 1,800,000
what is the amount of the gain on sale of farm land ?
a. P1,500,000
b. P800,000
c. P700,000
d. P600,000
Problem 7- 15 Special Rules

A acquired a capital asset (personal property) for P50,000. He donated if to X corporation when the
market value was P80,000. After 2 years from date of donation, X corporation sold the said capital
asset for 150,000.
How much is the amount of reportable capital gain>

a. P100,000
b. P70,000
c. P50,000
d. P35,000
Problem 7- 16 Ordinary Vs. Capital Gain/Loss

Mr. Flo sold his personal car for P700,000. Which he previously acquired two years ago for
P1,000,000 with an estimated useful life of 5 years. How much is the reportable gain (loss) on the
sake of the car?
a. (P300,000).
b. P 50,000.
c. P100,000.
d. P200,000.
Problem 7- 17 Holding Period

A capital asset of an individual was acquired at a cost of P100,000. Subsequently, this owner died
and the capital asset is transferred to a religious organization when the fair market value was
P120,000. The latter sold the capital asset for P200,000 after holding it for 2 years.
The amount of reportable capital gain would be

a. P40,000.
b. P50,000.
c. P80,000.
d. P100,000.
Problem 7- 18 Taxable Income

The individual taxpayer reported the following:
Year 1 Year 2
Net Income from the business P200,000 P300,000
Capital gain for asset held more than one year 50,000 40,000
Capital loss for asset held less than one year 40,000 10,000
The taxpayer should report combined taxable income before personal exemption of
Year 1 Year 2
a. P210,000 P350,000
b. P200,000 P300,000
c. P200,000 P295,000
d. P185,000 P310,000
Problem 7- 19 Taxable Income (Individual vs. Corporation)

The following are the transactions of X business for the year.
Ordinary gain P 50,000
Short-term capital gain 20,000
Long-term capital gain 30,000
1. If X is an individual, how much is the combined taxable income before personal exemption?
a. P95,000
b. P90,000
c. P80,000
d. P75,000
2. If X is corporation, how much is the combined capital income?

a. P95,000
b. P90,000
c. P80,000
d. P75,000
Problem 7- 20 Net Capital Loss Carry-Over

C reported the following incomes and losses for the years 1 and 2 :
Year 1 Year 2
Ordinary taxable income P60,000 P180,000
Short-term capital loss 400,000
Long-term capital loss 100,000
Short-term capital gain 200,000
1. If C is an individual taxpayer, the year 2 combined taxable income before personal exemption is
a. P330,000
b. P280,000
c. P270,000
d. P170,000
2. If C is a corporation, the year 2 combined taxable income is

a. P330,000
b. P280,000
c. P270,000
d. P170,000
Problem 7- 21 Net Taxable Capital Gain

In addition to his business as construction materials dealer, Mr. Espiritu had the following capital
asset transactions in 200x:
Sold Acquired
Capital Asset Date Selling Price Date Cost Selling Expense
Jewelry 8/15/0x P80,000 5/10/0x P10,000 P1,000
M. Benz Car 5/16/0x 400,000 5/15/0Y 350,000 20,000
Refrigerator 9/5/0x 6,000 2/9/0x 5,000
Ford car 12/5/0x 12,000 1/10/0x 20,500
The net taxable capital gain of Mr. Espiritu is 200x is
a. P76,500
b. P42,000
c. P27,000
d. P26,000
Problem 7- 22 Bank and Trust Companies

BPI Family bank and Trust Co. reports the following results of operation:
Interest revenue P10,000,000

Operating expenses 6,000,000
Gain on sale of long-term bonds 1,000,000
Loss on sale of trading debt securities 200,000
Loss on sale of long-term equity investment 50,000
If BPI is a dealer of debt and equity securities, how much is the net capital gain of BPI Family Bank?
a. P – 0 -
b. P750,000
c. P800,000
d. P1,000,000
Problem 7- 23 Stock Transactions

The capital gains from sale of investment in debt securities outside the stock exchange is P207,500,
net of final tax. How much is the final tax?
a. P12,500
b. P17,432
c. P17,500
d. P22,500
Problem 7- 24 Stock Transactions

The following capital stock transactions on shares of stock were reported by an individual taxpayer:
Cost Selling Price

March P100,000 P150,000
June 150,000 160,000
September 200,000 240,000
November 120,000 150,000
If tax returns were filed and paid on prescribed dates, how much capital gain tax should be reported
within 30 days from November sales?
a. P1,500
b. P3,000
c. P6,500
d. 8,000
Problem 7- 25 Dealer in Securities
A company sold 100,000 SMC equity shares for P1,000,000. The related costs of the said securities
are as follows:
Acquisition cost P900,000

Brokerage fee 40,000
1. If A company is a dealer in securities and sold the securities through the stock market, the income
tax due would be
a. P18,000
b. P5,000
c. P3,000
d. P500
2. If A company is not a dealer in securities and sold the securities through the stock market, the
stock transaction tax would be
a. P18,000
b. P5,000
c. P5,000
d. P500
3. If A company is not a dealer in securities and sold the securities directly to the buyer, the capital
gains tax would be
a. P18,000
b. P5,000
c. P3,000
d. P500
Problem 7- 26 Dealer in Securities

In October 200A, Marisa acquired 1,000 shares, par P100 per share of Baguio Oil Corporation for
P90,000 with the following market values in the last quarter of the year:
OctoberNovemberDecember
Market values 90% 105% 140%
Marisa would like to sell the shares of stock in December. A broker’s fee of 1% based on sales price
will be paid in addition to the percentage tax if the stock is sold in the stock exchange. To avoid the
broker’s fee, Marisa decided to sell the shares of stocks directly to the buyer at the same sales price.
Would Marisa’s decision result to a better profit? At what amount?

a. Yes, P500 increase in profit
b. Yes, P400 increase in profit
c. No, P400 decrease in profit
d. No, P200 decrease In profit
Problem 7- 27 Net Capital Gain

During the year, the following are the recorded stock transactions of X corporation of its own shares
of stock:
(1) Total shares originally issued, 1,000 shares of P100 par value per share, sold at P120 per share.
(2) Total shares retrieved 250 shares at cost of 125 per share.
(3) From the total shares retrieved, 100 shares were sold outside stock market at P150 per share.
what would be the net capital gain before tax for the year?
a. P22,500
b. P21,250
c. P20,000
d. P2,500
Problem 7- 28 wash Sales

Marjorie Corpuz is an investor in X corporation. In 200A she has 1,000 share holdings acquired at
P120 per share or a total investment cost of P120,000 classified as capital asset.
200B Transactions:
January Received stock dividends 2 shares for every 10 share holdings.
March Sold 500 shares of X Corporation for P120 per share.
April Purchased 300 shares of X Corporation for P150 per share.
May Sold 500 shares of X Corporation for P90 per share.
1. What would be the net capital gain in March?

a. P9,000
b. P8,000
c. P20,000
d. P10,000
2. How much is the nondeductible loss in May?

a. P8,000
b. P5,000
c. P 3,000
d. P2,000
3. Supposing that all of the remaining shares were liquidated in December 200B at P130 per
share.what would be the capital gain (loss) in December 200B?
a. (P3,000)
b. (P18,000)
c. P17,000
d. P18,000
Problem 7- 29 Cost of the Remaining Shares

Mona’s investments in equity shares of Sting Corporation show the following transactions:
200AParticulars Amount
Mar. 10 Purchased 800 ordinary shares P80,960
Apr. 20 Purchased 1,500 ordinary shares 161,700
May 30 Received 10% stock dividend
(the fair market value of stock is P95 per share)
June 1 Sold 2,000 ordinary shares 240,000
Mona specifically identified that the April 20 batch of shares was first sold because it has higher cost
compared to March 10.
1. How much is the gain on sale of the investment in equity shares?

a. P27,700
b. P29,680
c. P46,100
d. P48,760
2. How much is the cost of the remaining shares?

a. P30,360
b. P32,340
c. P48,760
d. P51,940
Problem 7- 30 Corporation’s Own Share of Stock
X corporation issued 5,000 of its common shares with P20 par value per share at P25 per share. Of
the 5,000 common shares issued, 2,000 shares were reacquired for P21 per share and eventually
reissued for P23 per share.
1. How much is the capital gains on the original issuance?

a. P25,000
b. P12,500
c. P4,000
d. P – 0 -
2. How much is the capital gains on reissued shares?

a. P25,000
b. P12,500
c. P4,000
d. P – 0 -
Problem 7- 31 Original Issuance and Retirement of Shares

The following accounts are shown in the records of V Corporation:
Share capital, issued and outstanding , at par P100 P2,000,000
Share premium – par value 500,000
Revaluation surplus 400,000
Accumulated profits 1,000,000
1,000 Treasury shares at cost 120,000
Five hundred (500) capital shares were originally issued at P130 per share. Nine hundred (900)
treasury shares were reissued at 140 per share, and the remaining one hundred (100) shares were
retired.
How much is the net taxable gain of the above data and transactions?
a. P33,000
b. P22,000
c. P18,000
d. P16,000
Problem 7- 32 Installment Sales of Shares of Stock

In 200A, Mr. Rey, an owner of shares of stock in a family-closed Corporation, sold outside stock
exchange 1,000 shares of stock with a cost of P120 per share for P180 per share under the following
terms: P36,000 down payment and the balance is collectible in three equal annual installments.
The capital gain tax due for year 200D would be

a. P960
b. P800
c. P720
d. P360
Problem 7- 33 Liquidating Dividend

On October 31, 200C, X received P120,000 liquidating dividends from Philex Mining Corporation for
his 10,000 shares invested at P10 per share which was acquired on January 31, 200A
1. How much is the reportable capital gains if X is a corporation?

a. P-0-
b. P10,000
c. P20,000
d. P30,000
2. How much is the reportable capital gains if X is an individual?
a. P-0-
b. P10,000
c. P20,000
d. P30,000
Problem 7- 34 Basis of New Residence and Capital Gains Tax

Manwong is a resident of mankayan, Benguet. He sold his family home for P4,000,000 which was
previously acquired for P2,000,000. Manwong complied with all the BIR requirements to avail of tax
exemption and spent P2,500,000 in acquiring new family home.
1. How much is the basis of the new family home?

a. P2,500,000
b. P2,000,000
c. P1,250,000
d. P500,000
2. How much is the capital gains tax to be paid by Mr. Manwong?

a. P-0-
b. P90,000
c. P150,000
d. P240,000
Problem 7- 35 Basis of New Residence and Capital Gains Tax

Hunk sold his old residential house and lot for P5,000,000 and acquired a new residential house and
lot for P9,000,000. How much is the cost of the new residence and capital gains tax on the said sale
if the old house and lot was previously acquired for P2,000,000 and no tax exemption was allowed
by the BIR?
Basis of New ResidenceCapital Gains Tax

a. P6,000,000 Tax exempt
b. P6,000,000 P300,000
c. P9,000,000 Tax exempt
d. P9,000,000 P300,000
Problem 7- 36 Capital Gains Tax (Real Property)

On August 15, 201A, Mr. Tandingan sold a 500 square meters residential land for P300,000. The land
was acquired in 199A for P200,000 and classified as capital asset. On the date of sale, the fair market
value as shown in the real property declaration is P250,000 and the assessed value amounts to
P75,000. The zonal value is P700 per square meter.
The capital gain tax is
a. P3,750
b. P12,500
c. P17,500
d. P21,000
Problem 7- 37 Basis of New Residence

In 200A, Mr. Del Rosario acquired his principal residence for P6,000,000. He sold it to Mr. De la Cruz
for P12,000,000 in 200D. Within 30 days, he wrote the BIR for tax exemption because he intends to
use the entire sales proceeds to purchase a new principal residence.
How much is the basis of the new residence for taxation purposes if he actually acquired it for
P15,000,000?
a. P6,000,000
b. P 9,000,000
c. P12,000,000
d. P15,000,000
Problem 7- 38 Real Estate Transactions

The following are the transactions of Ruby pertaining to sale of real properties for the year 200x:
(a) Sale of vacant lot used as open warehouse for her trading business, P500,000. This was acquired
2 years ago at P200,000.
(b) Sale of her residential lot for P1,000,000, the zonal value at date of sale is P1,200,000. This was
purchased 3 years ago at P400,000.
1. What would be her final tax for these real estate transactions?
a. P60,000
b. P90,000
c. P72,000
d. P102,000
2. What would be the creditable withholding tax for the real estate used In business?
a. P60,000
b. P30,000
c. P15,000
d. P7,500
Problem 7- 39 Disposition of Real Property

In 200x, E Corporation sold a residential house and lot for sales price of P2,500,000, excluding VAT.
The said property has a cost of P1,500,000 and with fair market value of P2,000,000. The
documentary stamp tax (DST) is paid by E Corporation.
1. If the property is a capital asset, how much is the total tax that should be paid to the BIR?
a. P137,500
b. P150,000
c. P162,500
d. P187,500
2. If the property is an ordinary asset, how much is the total tax that should be paid to the BIR with
the application of tax minimization principle?
a. P492,500
b. P367,500
c. P217,500
d. P192,500
Problem 7- 40 Creditable Withholding Tax and Income Tax Due

Camella Homes, a realty corporation, sold the following real property during a taxable year:
Sales price/unit
4 houses at a cost of P200,000 each P500,000
2 houses at a cost of P1,200,00 each 3,000,000
The operating expenses incurred during the year is P2,800,00. How much is the creditable
withholding tax and income tax still due and payable of Camella Homes?
Creditable withholding taxIncome tax still due and payable

a. P240,000 P460,000
b. P330,000 P370,000
c. P400,000 P300,000
d. P330,000 P270,000
Problem 7- 41 Creditable Withholding Tax and Income Tax Due
The San Fernando City Government sold 10 hectares of land to Goldrich Realty Corporation (a
member of HLURB) at a price of P10,000,000
1. How much is the creditable withholding tax to be withheld by Goldrich>

a.P-0-
b. P600,000
c. P500,000
d. P300,000
2. How much is the income tax still due and payable by San Fernando Government?
a. P-0-
b. P600,000
c. P2,900,000
d. P3,500,000
Problem 7- 42 Corporate Reorganization

E Co. was merged into V Co. with the following data:
E Co. V Co.
Total assets P15,000,000 P18,000,000
Total liabilities 6,000,000 2,000,000
Total shareholders’ equity 9,000,000 16,000,000
Number of outstanding shares 300,000 500,000

Par value per share P10 P25
Fair market value per share P12 P30
The net assets of E Co. with fair value of P8,000,000 are transferred to V Co. for a corresponding
250,000 V Co.’s shares.
1. The nondeductible loss of E Co amounts to

a. P2,500,000
b. P1,500,000
c. P500,000
d. P-0-
2. The cost or basis of E Co.’s share to V Co. would be

a. P15,000,000
b. P9,000,000
c. P8,000,000
d. P3,000,000
3.The taxable gain of V Co. would be

a. P1,750,000
b. P1,120,000
c. P630,000
d. P-0-
4. Assume that Mr. Cruz, a shareholder of E Co. was asked to surrender his 20,000 shares which he
purchased for P700,000, how much is his gain (loss) not recognized?
a. P400,000
b. P300,000
c. (P200,000)
d. P-0-
5. Assume the Mr. Cruz subsequently sold 20% of his, E Co.’s investment, how much is the gain (loss)
on sale?
a. (P20,000)
b. P-0-
c. P20,000
d. P40,000
Problem 7- 43 Creditable Withholding Tax

Villar Corporation, real estate developer and a member of HLURB, sells socialized housing. In 200B,
records show the following sales of houses:
a. 20 houses: selling price of P150,000 each, gross profit of 25%.
b. 30 houses: selling price of P1,000,000 each, gross profit of 30%.
c. 40 houses: selling price of P2,500,00 each, gross profit of 35%.
Required: Compute for the creditable withholding tax and income tax still due and payable on the
sales using OSD.
Problem 7- 44 Ordinary Income, Capital Gains and Final Tax

The following date pertains to the transactions of Miss Larcy De Guzman for year 200B:
Total net sales from his trading business P500,000

Cost of sales 300,000
Sale of Vacant lot used as open warehouse for her trading business.
This was acquired two years ago at cost of P150,000. 200,000
Sale of residential house and lot – acquired 12 years ago, P800,000
of the proceeds was used to acquire her new residential house
and lot. All pertinent BIR requirements were complied with.1,000,000
Sale of her personal computer. He bought this for her personal use,
2 years ago at cost of P20,000 10,000
Sale of personal car, acquired 3 years ago at P50,000 100,000
Questions:
1. What is the ordinary income/gain of Miss De Guzman for 200B?
2. How much is the supposedly final tax taken from the proceeds of Miss De Guzman transactions
for the year 200B?
Problem 7- 45 FIFO vs. Moving Average

Galam’s common stock investments in Philex Mines are as follows:
December 15, 200A. Purchased 100 shares at P100 per share.

February 25, 200B.Purchased 300 shares at P120 per share.
August 20, 200B.Received a 15% stock dividend.
December 15, 200B.Sold 350 shares at P200 per share.
Required: Compute the tax due and payable for the 350 shares sold assuming that the shares are
not traded in stock exchange using (a) FIFO Method and (b) Moving Average.
Problem 7- 46 Installment Sale of Shares of Stock

In 200A, Miss Virginia Reyes sold outside stock exchange 1,000 shares of stock with a cost of P80 per
share for P150 per share under the following terms: P30,000 down payment and the balance shall
be payable in three equal annual installments.
Required: Compute the annual tax due of Miss Reyes for 200A, 200B, 200C, and 200D.
Problem 7- 47 Various Capital Asset Transactions

Mrs. Dolinta’s capital asset transactions for 200B were as follows:
(a) Gave P5,000 option money to buy a capital asset of Mr. Yew, of which she did not exercise.
(b) Invested P1,000,000 in San Pedro Corporation’s bonds with an interest of 30% which was retired
after 9 months for 120.
(c) Received P50,000 from Mr. Chu for 20,000 common shares with a market value of P3.00 per
share which she delivered immediately.
(d) Invested P20,000 for 100 common shares in Philippine Airlines which was ascertained insolvent.
Required: Compute the net capital gain or net loss incurred by Mrs. Dolinta.
Problem 7- 48 Capital Gains Tax vs. Normal Tax

On December 31, 200B, Trinidad Wood Corporation sold its land with erected warehouse to the
Benguet Provincial Government at sales price of P3,000,000. The land was previously acquired by
Trinidad for P2,000,000 and the warehouse has a remaining book value of P200,000 at the date of
sale. Trinidad’s books of accounts shows the following date related to its 200B operations:
Sales P6,000,000
Alllowable deductible expenses 1,000,000
Question: Trinidad intends to pay the sale of the land at its final capital gains tax of 6% instead of
opting to pay normal tax with a creditable withholding tax of 6%. Is Trinidad correct? Show you
supporting computation.
Problem 7- 49 Tax Exemption

Loakan Corporation sold the residential building used as housing privilege of its employees for
P10,000,000. The building was previously constructed at P8,000,000 with recorded accumulated
depreciation of P7,500,000. The corporation wrote the BIR to avail of the tax exemption privilege
because it plans to use the entire sales proceeds to construct a new residential building amounting
to P10,000,000.
Question: Can Loakan Corporation avail of tax exemption? Justify your answer.
Problem 7- 50 NOLCO vs. NCLCO

The following ordinary and capital gains (losses) are taken from T:
Years:Operating gain (loss)Capital gain (loss)
1 (P100,000) P20,000
2 P50,000 P10,000
3 P30,000 (P40,000)
4 P80,000 P50,000
Required:
1. What is the amount of taxable income for years 3 and 4 before personal exemption if T is an
individual taxpayer
2. What is the amount of taxable income for years 3 and 4 if T is a corporate taxpayer?
Problem 7- 51 Comprehensive Problem

Mr. AvelinoCayat reported the following incomes and losses for the calendar year 200B:
Income:
Professional fees P180,000
Interest on notes receivable (profession) 12,000
Winning in a raffle 10,000
Capital gain (loss) on sale of capital assets:
Residential land 50,000
Personal car 10,000
Jewelry 30,000
Refrigerator (4,000)
Loss on sale of personal furniture to his brother (6,000)
The following tabulations are the particulars on the capital assets sold in 200B:
Capital Assets:Date SoldDate PurchasedSelling Price Cost

Residential land 2-15-200B 12-20-200A P130,000 P80,000
Personal car 1-15-200B 11-25-200B 105,000 95,000
Jewelry 7-10-200B 5-12-199Y 80,000 50,000
Refrigerator 9-20-200B 7-15-199X 4,000 8,000
Furniture 9-30-200B 10-30-200B 10,000 16,000
Required: Compute the amount of net capital gains of Mr. Cayat that shall be reported in his 200B
income tax return.
Problem 7- 52 Capital Asset Transactions

The following data are available from the records of S:
Year 4 Year 5 Year 6 Year 7 Year 8

Business income P300,000 P400,000 P500,000 P600,000 P700,000
Business expenses 340,000 380,000 450,000 570,000 650,000
Capital gain (loss)
Short-term 50,000 (40,000) 30,000 30,000 (40,000)
Long-term (40,000) 10,000 (100,000) 10,000 70,000
Required: Compute the taxable income if S is a/an

1. Individual (taxable income before personal exemption)
2. Corporation
Problem 7- 53 Ordinary Asset vs. Capital Asset

In 200A, Toyota Philippines sold a Land Cruiser (inventory) costing P4,000,000 for P5,000,000 by
installment. The terms of payment were:
Down payment 40%

Additional during the year of sale 500,000
Unpaid balance Equally in 5 years

1. Reportable gross income in 200A.
2. Reportable gross income in 200B.
3. Assuming that the Land Cruiser is classified as a capital asset, how much is the reportable gross
income in 200A?
Problem 7- 54 Various Transactions

Mrs. Dolinta’s capital asset transactions for 200B were as follows:
* Gave P10,000 option money to buy a capital asset of Mr. Yew which she exercised.
* Invested P500,000 in San Pedro Corporation’s bonds with an interest of 30% which was retired
after 9 months for 120.
* Received P50,000 from Mr. Chu for 20,000 common shares with a market value of P3.00 per share
which she delivered immediately. The cost per share was P2.25
* Invested P50,000 for 100 common shares in Philippine Airlines which was ascertained insolvent.
Required: Compute the amount of net capital gain.
Problem 7- 55Sale of Family Home

Mr. S sold his family home costing P1,200,000 for P3,000,000. He applied for tax exemption. He
spent P2,000,000 for the construction of his new residential home.

1. If the tax exemption was granted how much is the capital gains tax?
2. Based on No. 1, how much is the basis of the new residential home?
3. If the tax exemption was not granted, how much is the capital gains tax?
4. Based on No. 3, how much is the basis of the new residential home?
Problem 7- 56 Wash Sales

Mr. I had the following transactions in ABC Corporation’s ordinary shares classified as capital asset:
DateParticularsAmount
Jan. 10, 200x Purchased 9,000 shares at P50 per share P450,000
Jan. 20, 200x Purchased 5,000 share at P50 per share 250,000
Feb. 10, 200x Purchased 4,000 shares at P45 per share 180,000
Feb. 14, 200x Sold 8,000 shares at P40 per share (FIFO) 320,000

1. Deductible loss on Feb 14. 200x sales.
2. Nondeductible loss on Feb. 14 200 sales.
3. New cost of January 20 purchases
4. New cost of Feb. 10 Purchases
5. If on Feb. 25, Mr. I sold 4,000 shares at P60 per share, how much is the capital gain (loss)?
Problem 7- 57Corporate Reorganization

Y, a shareholder, owns 100,000 A Co. shares which cost him P9 per share. As a result of a merger of
A Co. to B Co. , he received from B Co. the following shares:
Number of SharesPar value/shareFair market value/share

Ordinary shares 25,000 P20 P30
Preference Shares 5,000 30 50
Required:
1. Determine the gain or loss not to be recognized on the exchange.
2. Determine the basis of the ordinary and preference shares, respectively.
3. Assume that the ordinary shares were sold for P25 per share and the preference share for P60 per
share, determine the net gain or loss.
4. If the shares were sold in the stock exchange, compute the percentage tax.
5. If the shares were sold not in the stock exchange, determine the capital gains tax.
6. Choosing the lower tax between 4 and 5, determine the tax advantage.
Problem 7- 58 Corporate Reorganization

As a result of a merger, Mr. X transferred his A Co. shares with a basis of P180,000 in exchange for
the following:
B Co. ordinary shares with FMV of P200,000

Land with FMV of 100,000
Cash 50,000
Required:
1. Determine the taxable gain on the exchange
2. Determine the basis of the B Co. Shares received on the exchange.
3. What is the basis of the land received?
4. If the land were sold for P300,000, how much is the capital gains tax?
5. If the investment in B Co. Shares were sold for P250,000, compute the gain or loss on sale.
Problem 8 – 1 Deductible or Nondeductible
Classify the item whether deductible or nondeductible for business gross income.
1. Kickback payment to the government official.
2. Tuition fees, board and lodging incurred by a medical doctor while attending a continuing
professional education seminar
3. Overtime pay paid to rank-and-file employee
4. Fringe benefits paid to an officer of the company
5. Distribution of profits to partners
6. Cash dividends paid
7. Donations made to employee’s birthday party
8. Amounts paid for pensions of retired employees
9. Salary of employee paid to his widow for a limited period after his death
10. Entire amount expended for meals, lodging, and travel in connection with own business
11. Net capital loss carry-over
12. Philippine income tax
13. Income tax paid by a resident citizen to foreign country
14. Research and development costs of unsuccessful developed products
15. Net operating loss carry-over
16. Operating expenses incurred outside the Philippine by a nonresidential alien engaged in
business in the Philippine
17. Donation for coffin and wake expenses
18. Manager’s expense account subjected to fringe benefit tax
19. Cost of technical books used by a CPA in the practice of his profession
20. Withholding income tax on employees’ salaries

Write True if the statement is correct of False if the statement is
1. All business expenses are allowable deductions from gross business income.
2. Individual taxpayers may opt for itemized deductions or OSD from his business income.
3. Individual taxpayers earning salary compensation income may deduct optional standard
deduction from their gross compensation income.
4. NOLCO is among those that could be claimed as itemized deduction.
5. A bonus paid to secure a lease is deductible on a pro-rate basis over the term of the lease.
6. A representation expense is subject to limit 1% of net sales of goods.
7. A corporation with interest expense and at the same time earned interest income during the
same taxable period will be subject to a tax arbitrage of 38%.
8. Straight-line method of depreciation provides the best tax savings over other allowable
depreciation methods.
9. Adopting private entities of public schools through TESDA can get 150% of the actual assistance
made.
10. Corporations are allowed to deduct optional standard deduction.
11. Business and professional income derived within and outside the Philippine by a nonresident
Filipino Citizen are granted with allowable deductions.
12. As a rule, deduction means itemized deduction.
13. Deductions from gross income are not presumed.
14. Revenue expenditures are immediately expensed.
15. Business expenses are deductible only if these are incurred in relation to business income
taxable in the Philippines.
16. No business and personal expenses are allowed as deductions from reportable gross income.
17. Optional standard deduction may be allowed as deduction from the gross income of
partnerships
18. The optional standard deduction allowed to individual taxpayer is 40% based on his gross
income.
1. Statement 1: The taxpayer has the burden of justifying the allowance of any deduction claimed.
Statement 2: Deductions are strictly construed against the taxpayer.
2. Statement 1: Revenue expenditures are period costs that are related to a particular period of
time of business operation.
Statement 2: Capital expenditures are non-recurring expenditures related to acquisition of
depreciable assets to be used in the business.
3. Which of the following item is correct as to the deductibility of expense from gross income?
ItemDeductibleNondeductible
a. Compromise penalty No Yes
b. Advance payment of rent
expenses Yes Yes
c. Interest on unclaimed salary No No
d. Accrued salary expense No Yes
4. Which of the following items is not included as entertainment, amusement and recreation
expenses of a business?
a. Depreciation or rental of entertainment facilities
b. Amusement and recreation expenses
c. Expenses incurred in accommodating company guests
d. Fixed representation allowances of key officers subjected to WTW
5. Which of the following taxes incurred in the conduct of business is not allowed as deduction
from business income?
a. Foreign income tax claimed as tax credit
b. Documentary stamp tax
c. Import duties
d. Local business taxes
6. Which of the following statement is not correct?

a. Personal expenses are not allowed as deductions from compensation, profession, traded or
business income.
b. Personal expenses are not allowed as deductions from profession, trade or business income
except compensation income.
c. Personal exemption and additional exemption are allowed as deduction from compensation
income.
7. Which of the following cannot be deducted as business expenses?

a. Donations made of employees.
b. Entire amount of expended for meals, lodging, and travel in connection with own business.
c. Tuition fees, board and lodging incurred by a medical doctor while attending a continuing
professional education seminar.
d. Cost of technical books used by a CPA in the practice of his profession.
8. Which of the following is not allowed as deductible in full from gross income?
a. Interest expense paid by the bank.
b. Interest expense paid by the taxpayer in relation to the purchase of merchandise on
installment.
c. Interest expense paid to the relative of the taxpayer.
d. Interest expense with reported interest income.
9. Which of the following taxes incurred in the conduct of business is allowed as deduction from
business income?
a. Income tax
b. VAT
c. Community tax
d. Withholding on wages of employees
10. Which of the following expenses of the business would be allowed as deduction from its
business income?
a. Insurance premium on life insurance of employee where the employer is the beneficiary
b. Donation made to employees
c. Losses incurred on transaction with related party
d. Regular repairs of business property

1. The following taxes are not allowed as deductions from reportable gross income, except
a. Value-added tax.
b. Stock transaction tax.
c. Capital gain tax.
d. Documentary stamp tax.
2. Which of the following is classified as deductible loss?

a. Allowance for bad debts
b. Embezzlement
c. Depreciation
d. All of the above
3. Which of the following income is allowed to be reduced with itemized deductions>

a. Compensation income
b. Business income
c. Passive income
d. Capital gain
4. Statement 1: Compensation income is allowed to be reduced with personal exemption

Statement 2: All business income is allowed to be reduced with business expenses, and with
excess of personal exemption over compensation income.
5. Statement 1: An individual taxpayer could claim both the itemized deduction and personal
exemption in the same taxable year.
Statement 2: An individual single proprietor could claim both the itemized deduction and
optional standard deduction in the same taxable year.
6. Which of the following is allowed with optional standard deductions?

a. Nonresident alien doing business in the Philippines
b. Resident citizen whose taxable income is his compensation earned
c. Nonresidential citizen claiming itemized deductions from his business income outside the
Philippines.
d. Resident alien with business income earned within and outside the Philippines.
7. Statement 1: In preparing financial statements, GAAP should prevail over the Tax Code.
Statement 2: In preparing Tax Returns, Tax Code should prevail over GAAP.
8. Statement 1: Unless the taxpayer signified in his return that he is electing the standard
deduction, he is deemed to have availed of the itemized allowable of deductions.
statement 2: In case of consolidated income tax return of husband and wife, each is allowed to
choose from either optional or itemized deductions.
9. Statement 1: Self-employed taxpayer is required to file his quarterly income tax return.
Statement 2: The option to avail of optional standard or itemized deduction could be opted for
each quarter.
10. Statement 1: Insurance expense incurred in connection with the conduct of business is
allowable deduction.
Statement 2: Insurance premium incurred to cover the life of key employee where the employer
is the beneficiary could be allowed as deduction.
1. Which of the following statement is correct?

a. Actual receivable written off in connection with the conduct of business are allowed as
deduction.
b. Estimated bad debts based on account receivable balance is deductible.
c. Bad debts written off are deductible in the year when the allowance based on estimate was
made.
d. Bad debts arising from unpaid salaries that are actually written-off are deductible in the year
of write off.

a. Depreciation of assets used in business is allowed as deduction from business income.
b. Depreciation as a recovery of capital invested should not be beyond the acquisition cost.
c. Depreciation should be determined on the basis of re-appraised value if revaluation is made.
d. Straight-line method, SYD and declining balance methods of depreciation are all allowed for
claiming depreciation expense.

a. The employer making the contribution manages defined contribution plan.
b. The actual payment of benefit to employee is the expense of the employer under the defined
contribution plan.
c. Under the defined benefit plan, the employer normally makes the actual payment of benefit
to employees.
d. Under the defined contribution plan, the amount of contribution is equal to the actual
payment of the benefits due to the retiring employee.
4. Which of the following is not a requisite for the deductible contributions?

a. It must be incurred in connection with the conduct of business.
b. The taxpayer making contribution must be engaged in business of profession.
c. There must be actual payment of contribution or gift.
d. There recipient of the contribution is an entity specified by law.
5. Statement 1: The optional standard deduction is allowed to all individual taxpayers earning
business income.
Statement 2: The optional standard deduction is 10% of gross business income.
6. Statement 1: Husband and wife may report their income and expenses in the same or common
tax return.
Statement 2: Husband may choose itemized deduction while the wife may choose optional
standard deduction or vice versa.
7. Statement 1: Deductible business expenses must be ordinary and necessary.

Statement 2: Expenses from previous period which were not income in the current period.
8. Which of the following expenses incurred in relation to the conduct of business could be
deducted in full, if the net sale is P1,000,000?
i. Salaries of employees, net of withholding tax
ii. P60,000 rent expense
iii. P50,000 traveling expense
iv. P10,000 entertainment expenses
Choices:
a. I, ii, iii and iv
c. I, and ii only
d. I only
9. Which of the following interest expense is deductible in full?

a. Interest on tax delinquency
b. Interest on personal loan
c. Interest expense which is 200% of the interest for the same year
d. Interest pain in advance
10. Which of the following is deductible as bad debts?

a. Bad debts which is estimated at 1% of net sale
b. Bad debts based on allowance of 1% of accounts receivable
c. Accounts receivable written off
d. Accounts receivable recovered

1. Which of the following will be an appropriate deductible expense for the exhaustion of
intangible asset of wasting asset corporation?
a. Depreciation expense
b. Amortization expense
c. Depletion expense
d. Exploration expense
2. Statement 1: Under the defined contribution plan, the pension expense of the employer is equal
to the agreed amount of periodic contribution.
Statement 2: Under the defined benefit plan, the pension expenses of the employer is equal to
the pension liability for the current year services plus the amortization of past years’ services.
3. Statement 1: The charitable contribution must be connected in the conduct of business to be

allowed as deduction.
Statement 2: The charitable contribution is allowed as deduction from business income but not
allowed as deduction from compensation income.
4. If the contribution is subject to limit, the allowable amount as deduction should be limited to
a. 5% of the business income after itemized deduction but before contribution of individual
taxpayer.
b. 10% of the business income after itemized deduction and contribution of individual taxpayer.
c. 5% of the business income after itemized deduction but before contribution of corporate
taxpayer.
d. 10% if the business income after itemized deduction and contribution of corporate taxpayer.
5. The amount allowed as deduction for assistance directly and exclusively incurred for the
program coordinated with DECS is
a. 50% of the actual value of the assistance.
b. 100% of the actual value of the assistance.
c. 150% of the actual value of the assistance.
d. 200% of the actual value of the assistance.
6. Statement 1: Premium payment on health and hospitalization insurance is a special itemized

deduction.
Statement 2: All charitable contributions to educational project of the government can be
deducted in full amount plus a special itemized deduction of 50%

a. All contributions of person engaged in business are deductible.
b. All deductible contributions are deductible at their actual amount contributed.
c. Contributions to the government for priority program are deductible only up to 10% if being
claimed by single proprietorship.
d. Contribution by a domestic corporation to the government for general purposes is subject to
limit of 5% of income after itemized deductions before contribution.
8. Statement 1: Research and development cost may be reported as deferred expense.

Statement 2: Research and development cost could be charged to property subject to
depreciation or depletion.
9. Statement 1: Gains arising from transactions between related taxpayers are taxable.
Statement 2: Losses incurred from transactions between member of the family are not
deductible from business income.
10. Statement 1: The amount of deductible taxes is limited to the basic tax and shall not include the
amount for any surcharges or penalty.
Statement 2: Interest on delinquent taxes is deductible from gross business income in full
amount.
Problem 8 – 7 Revenue vs. Capital Expenditures
ABC store incurred additional expenditures of P130,000 for its business fixed assets as follows:
Installation of new air condition P60,000

Expansion of store 50,000
Damages paid due to workers’ injury 20,000
Repainting of store building 10,000
Cleaning of computers 9,000
Repair of furniture 1,000
The amounts to be immediately expensed and capitalized would be

ExpensedCapitalized
a. P-0-. P150,000.
b. P30,000. P120,000.
c. P40,000. P110,000.
d. P80,000. P70,000.
Problem 8 – 8 Situs of Expenses

Mr. Smith a nonresident alien, who is engaged in business in the Philippines, presented the following
incomes and expenses during the taxable year:
PhilippinesAustralia
Gross income P1,000,000 P4,000,000
Operating expenses 400,000 2,200,000
In addition, Mr. Smith presented P200,000 operating expenses which cannot properly be identified
whether or not incurred in the Philippines.
How much is the amount of allowable operating expenses for Philippine income tax purposes?
a. P600,000
b. P450,000
c. P440,000
d. P400,000
Problem 8 – 9 Items Not Deductible

Mr. Wallang, a business man, submitted the following business expenses and losses during the taxable
year:
Salary of employees P120,000

Police protection 20,000
Interest expense paid to his father 10,000
Gifts made to employees during birthday 5,000
Capital loss 4,000
How much is the amount of nondeductible expenses and losses from gross income?
a. P14,000
b. P29,000
c. P35,000
d. P39,000
Problem 8 – 10 Deduction from Business Income

Mr. Bago incurred the following expenses and losses during the year:
Family expenses P240,000

Cost of family home, life 25 years (40% used in business) 1,000,000
Life insurance expense of his, maid the beneficiary is Mr. Bago 10,000
Loss from sale of land to his brother 100,000
Loss of business equipment reported to the BIR 38,000
The deductible expenses and losses from Mr. Bago’s business income is
a. P164,000
b. P154,000
c. P 60,000
d. P 54,000
Problem 8 – 11 Deductible from Gross Income

Mr. Apo Linar, married, works as a supervisor of Golden Construction receiving P240,000 as his annual
gross compensation income. He maintains a small consulting firm that earns P120,000 a year. He
incurred the following expenses during the year:
Premium payments of his life insurance P25,000

Depreciation of his house (10% is used as office for his firm) 20,000
Repair for his house (10% used as office for his firm) 100,000
Interest expense paid to his brother 10,000
Office supplies used 6,000
Donation to the burial of his friend 5,000
1. From the items above, how much is the total deduction from gross compensation income of Linar?
a. P-0-
b. P18,000
c. P20,000
d. P25,000
2. From the items above, how much is the total deduction from gross income from profession of Linar?
a. P-0-
b. P18,000
c. P20,000
d. P25,000
Problem 8 – 12 Tax Laws vs. GAAP

During the year, A Co. reported the following business expenses:
Salaries expense, net of withholding tax of P20,000 P180,000
Estimated uncollectible accounts 10,000
Compromise penalty expense 50,000
Depreciation expense 30,000
Miscellaneous expense 5,000
The miscellaneous expense was incurred but not reported last year. The deductible business expense
from a company’s earnings would be
Tax Laws GAAP
a. P205,000 P205,000
b. P230,000 P295,000
c. P250,000 P290,000
d. P280,000 P295,000
Problem 8 – 13 OSD of Sales (Individuals)

Miss Dianne Torres showed the following income and expenses during the year:
Compensation income as a teacher P250,000

Sales of wagwag business 300,000
Operating expenses (without documentation) 50,000
How much is the deductible cost of sale and operating expense if Dianne opted to deduct OSD?
Cost of saleOperating expenses
a. P-0- P120,000
b. P80,000 P120,000
c. P80,000 P88,000
d. P130,000 P50,000
Problem 8 – 14 OSD of Gross Receipts (Individuals)

Mr. LitoPusalang provides the following data:
Gross receipts from profession P100,000

Rent income, net of withholding tax of 5% 475,000
Interest income from metro bank 40,000
Dividend income from San Miguel Corporation 10,000
Operating expenses without receipts 40,000
Compensation income 300,000
How much is the optional standard deduction?

a. P316,000
b. P240,000
c. P230,000
d. P220,000
Problem 8 – 15 OSD (Nonresident Alien)

Teno Lang, a nonresident Chinese national engaged in business in the Philippines, reported the following
Philippine income and expenses during the year:
Sales P1,000,000
Gross income P700,000
Less: Operating expenses 500,000
Net income P200,000
There are no official receipts and documents to support his operating expenses. There is no reciprocity
law in his country to provide tax exemption to Filipino citizen. How much is the amount of allowable
deduction from the gross income of Teno Lang if he opted to deduct OSD because he cannot
substantiate with receipts his operating expenses?
a. P550,000
b. P450,000
c. P330,000
d. P-0-
Problem 8 – 16 OSD (Individual vs. Corporation)

T reported the following for the period:
Sales P1,000,000
Determine the OSD assuming that T is a (a) sole proprietor or (b) corporation.
Sole ProprietorCorporation
a. P400,000 P280,000
b. P400,000 P580,000
c. P360,000 P200,000
d. P280,000 P280,000
Problem 8 – 17 Itemized Deductions

Maharlika Corporation reported the following information:
Sales P20,000,000
Operating expenses, inclusive of representation expense
amounting to P300,000 with proper documentations 2,000,000
The amount of allowable regular itemized deductions is

a. P2,000,000
b. P1,800,000
c. P1,700,000
d. P400,000
Problem 8 – 18 Itemized Deductions

Parasado Corporation showed the following data during the taxable year:
Sales P500,000
Interest income, net of 20% final tax 24,0000
Salary expense 120,000
Interest expense 60,000
Rent expense 24,000
Advertising expense 6,000
NOLCO 50,000
How much is the amount of regular itemized deduction?

a. P202,400
b. P205,100
c. P252,400
d. P265,000
Problem 8 – 19 Itemized Deductions vs. OSD

NalyLito, a resident Filipino sole proprietor, reported the following sales and expenses during the
taxable year:
Sales P1,200,000
Cost of sales with documentations 700,000
Itemized deductions with no official receipts 200,000
Naly contemplates to avail of OSD because the itemized deductions cannot be supported by official
receipts.
How much is the net amount of deductible advantage (disadvantage) if she avails of OSD>
a. P480,000 advantage
b. P280,000 disadvantage
c. P220,000 advantage
d. P220,000disadvantage
Problem 8 – 20 Salary Expenses

Phoenix Corporation paid the following salaries and fringe benefits it its officers and employees for
200B.
Gross salaries, employees P6,000,000
Less: Withholding income tax P400,000
SSS premium 200,000
Advances 100,000 700,000
Net amount of payment P5,300,000
Grossed-up fringe benefits for officers 1,000,000
Less: Final tax paid on fringe benefit payment*
(680,000/68%) x 32% 320,000 680,000
Total cash payment for salaries and fringe benefits P5,980,000
*The P320,000 final tax on fringe benefits has been pain to the BIR.
The total amount of allowable salary and fringe benefits expenses that could be claimed by Phoenix
Corporation would be
a. P7,000,000
b. P6,000,000
c. P5,980,000
d. P5,300,000
Problem 8 – 21 Deductible Bonus

In 200B, a domestic corporation, using the calendar period, had a net income of P75,000 after deducting
in full charitable contribution of P5,000 which is subject to limitation but before deducting bonus given
to key officials and before 30% basis income tax. Bonus is 15% of the income before the bonus and after
the basic income tax. What is the amount of deductible bonus?
a. P7,067
b. P7,752
c. P8,356
d. P8,400
Problem 8 – 22 Compensation for Injuries and Pensions

While working, A, one of X Construction Co.’s worker, died by falling from the 10 th floor of the building.
The company helped the worker’s family with the following.
Monthly salary P5,000

Death benefits 50,000
Terminal pay 25,000
Funeral expense 10,000
Continuous Compensation after the burial for three months. 15,000
How much is the total deductible expense?

a. P105,000
b. P95,000
c. P90,000
d. P80,000
Problem 8 – 23 Materials and Supplies

C Co. reported the following date regarding its materials and supplies.
MaterialsSupplies
Beginning inventory P100,000 P20,000
Purchases 300,000 40,000
Increased (decreased) in inventory (20,000) 3,000
How much is the amount of inventoriable cost and supplies expense?

Inventoriable CostSupplies expense
a. P400,000 P63,000
b. P380,000 P60,000
c. P320,000 P37,000
d. P300,000 P40,000
Problem 8 – 24 Traveling Expenses

A corporation incurs the following travel expenses:
(1) Plane tickets and hotel bills of its officers who were sent to business seminars:
In Davao P50,000
In Taiwan 200,000
(2) Transportation expenses of its officers from home to office and vice versa as part of their
employment contract, P68,000 on which final tax of P32,000 was remitted. Transportation expenses of
messengers from office to several clients’ places at P40,000, inclusive of meals amounting to P25,000.
How much is the total allowable expense that could be claimed by A corporation?
a. P250,000
b. P318,000
c. P350,000
d. P390,000
Problem 8 – 25 Rent Expense

On October 31, 200B, A acquired a contract of lease with Tabora Builders regarding a space with the
stipulations that A should be responsible in paying the following:
Monthly rent P20,000

Share in annual nonlife insurance premium 3,000
Share in annual real property tax 1,500
Share in annual city services 24,000
If A uses 60% of the space for business and the remaining 40% for residence, how much is the deductible
rent expense to be reported by A for the year ending December 31, 200B?
a. P24,450
b. P26,700
c. P26,850
d. P44,750
Problem 8 – 26 Prepaid Rent

On June 30, 200B, G rents an apartment for P20,000 and subsequently sublease 80% of the apartment
to CPA reviewees for P25,000 a month beginning July 31, 200B.
G’s records show the following rental collections and payments during the year:
Total payments P80,000

Total collections 150,000
1. How much is the deductible rent expense for the year?

a. P140,000
b. P120,000
c. P96,000
d. P80,000
2. How much is the reportable rent income for the year?

a. P80,000
b. P100,000
c. P120,000
d. P150,000
Problem 8 – 27 Leasehold Improvement
R signed an 8-year lease contract to occupy a vacant lot for P2,000 a month. As a part of the lease
agreement. R constructed a restaurant building costing P600,000 completed at the start of the lease
contract. The building has an estimated life of 10 years. At the end of the lease contract, the landlord
will own building.
The monthly deductible expense from the above contract would be

a. P2,000
b. P6,250
c. P7,000
d. P8,250
Problem 8 – 28 Leasehold Improvement

On August 1, 200A, T Foods signed a 10-year lease contract to occupy a vacant lot for P5,000 a month.
As a part of the lease agreement. T foods constructed a restaurant building costing P950,000. The
building was completed and immediately used on January 31, 200B. The building has an estimated life of
15 years with a salvage value of P50,000. At the end of the lease contract, the landlord will own the
building.
The related deductible expense of T in 200B form the above contract would be
a. P142,500
b. P150,000
c. P151,667
d. P154,737
Problem 8 – 29 Representation Expense

A business reported a total net revenue of P5,000,000. The actual entertainment and representation
expenses incurred in connection will the conduct of business amounted to P30,000.
1. If the business is a trading business, the deductible amount of representation and entertainment
expenses is:
a. P5,000
b. P25,000
c. P30,000
d. P50,000
2. If the business is a service business, the deductible amount of representation and entertainment
expenses is:
a. P5,000
b. P25,000
c. P30,000
d. P50,000
Problem 8 – 30 Representation Expense

Compairs, a sole proprietor, is engaged in computer sales and computer repairs, reported the following
income and expenses during year:
Net sales P700,000

Net repairs revenue 300,000
Cost of service 80,000
Salaries expense 90,000
Rent expense 60,000
Representation expense 10,000
How much is the deductible representation expenses?
a. P5,000
b. P6,500
c. P7,500
d. P10,000
Problem 8 – 31 Interest Expense

A corporation earned income, inclusive of P50,000 interest income and net of interest expense of
P40,000, amounting to P1,500,000.
The deductible interest expense would be

a. P23,500
b. P19,000
c. P16,800
d. P-0-
Problem 8 – 32 Special Itemized Deductions

Care Medical Center Reported the following expenses during the year:
Breast-feeding assistance to the needy P200,000

Salary of workers (20% senior citizens) 500,000
If the medical center reported health services revenue amounting P300,000 from senior citizen, how
much is the total special itemized deduction?
a. P275,000
b. P300,000
c. P315,000
d. P560,000
Problem 8 – 33 Deductible vs. Nondeductible Interest Expense

Mr. Tee, a taxpayer reporting in cash basis, showed the following interest expense related to his
business during the year:
Interest paid in advance P20,000

Interest paid to a brother 12,000
Interest paid on delinquency taxes 8,000
Interest on borrowings to finance his family home 30,000
Interest paid to finance petroleum exploration 100,000
If Mr. Tee has an interest income of P10,000 earned from the bank, and P20,000 interest income from
trade notes receivable, how much is the deductible and nondeductible interest expense during the
year?
Deductible Nondeductible
a. P28,000 P142,000
b. P8,000 P162,000
c. P4,200 P165,800
d. P-0- P170,000
Problem 8 – 34 Nondeductible Interest and Itemized Deductions

Gibo Manpower Services, a domestic corporation, reports the following incomes and expenses during a
taxable year:
Gross receipts P1,000,000

Interest income, net of 20% final tax 40,000
Salaries 600,000
Rent expense 200,000
Interest expense on unpaid salaries 60,000
Payment of bank load balance, including interest
expense of 40,000 400,000
If Gibo opted to use itemized deductions, how much is the amount of nondeductible interest expense
and total amount of itemized deductions allowed to reduce business gross receipts?
Nondeductible interest expenseItemized deductions
a. P79,000 P821,000
b. P76,500 P823,000
c. P60,000 P840,000
d. P19,000 P281,000
Problem 8 – 35 Tax Arbitrage

Ajoy Co., a domestic corporation, has average annual business income of P1,000,000 and an annual
average allowed operating expenses of P500,000. It has acquired a loan of P1,000,000 with interest
expense of 10% per year, and invested the same in a time deposit the earns 12% per year.
If there is no limitation on the deductibility of interest expense, how much is the actual net tax saving of
Ajoy?
a. P12,000
b. P11,880
c. P11,000
d. P6,000
Problem 8 – 36 Tax Expenses

Care Corporation incurred the following taxes during the taxable year:
Documentary stamp taxes P1,000

Income taxes paid in favor of key officers (as fringe benefit) 13,600
Income taxes paid in favor or rank-in-file employees (as fringe benefit) 22,400
Local taxes, including surcharge of P800 and interest of P200 6,000
Philippine income tax 100,000
Municipal tax 2,000
Community tax 1,500
Value-added tax 90,000
Compromise penalty on taxes 50,000
The amount of taxes deductible from gross income of Care Corporation would be:
a. P9,500
b. P45,500
c. P46,500
d. P51,900
Problem 8 – 37 Tax Expenses

The following tax expenses related to business were paid by X Trading during the taxable year:
Business taxes other than VAT P20,000

Documentary stamp taxes 1,000
Automobile registration fees (business use) 3,000
Import duty taxes 50,000
Postage stamp taxes 500
Stock transaction tax 2,500
Income tax 600,000
Value-added tax 240,000
Donor’s tax 5,000
How much is the amount of taxes deductible from gross income?

a. P73,000
b. P73,500
c. P74,500
d. P76,000
Problem 8 – 38 Tax Credit Paid to Foreign Country

Balong is a resident citizen with earnings with and outside the Philippines. His financial records during
the taxable year show the following:
Business income within and without P520,000

Business expenses within and without 200,000
The business expense includes P10,000 representing income tax payment made in foreign country.
If his personal exemption is P50,000, how much is the correct net taxable income to avail better tax
savings?
a. P320,000
b. P310,000
c. P300,000
d. P280,000
Problem 8 – 39 Bad debt Expense

Fran Corporation has P100,000 collectibles from Oliva who became insolvent with P60,000 assets and
P200,000 liabilities of which 50% is an income tax liability.
How much is the deductible bad debts of Fran Corporation?

a. P100,000
b. P40,000
c. P30,000
d. P15,000
Problem 8 – 40 Bad debt Expense

Mr. So reports the following bad debts as deductions from his gross income for the year 200B:
Bad debts expense from business P200,000
Bad dents expense from practice of profession 50,000
Uncollectible salary 20,000
Uncollectible money lend to brother for operation 10,000
Total bad debts claimed P280,000
Upon investigation, the following are gathered from the records of Mr. So:
1) Bad debts from business:
From insolvent customer with solvent guarantor P100,000
From other customers without guarantor (60% are estimated
collectible and 40% are actually written off during the year) 100,000
Total P200,000
2) 100% of bad debts from profession are actually written off during the year.
3) Uncollectible salary was due to employer’s bankruptcy.
4) Brother died from operation and could not pay anymore.
How much is the deductible bad debts expense of Mr. So?

a. P50,000
b. P90,000
c. P200,000
d. P250,000
Problem 8 – 41 Depreciation Expense
On June 30, 200B, the business acquired an equipment for P50,000. This is depreciated over 5 years
serviceable life with a salvage value of P5,000.
The depreciation expense for 200B is

a. P10,000
b. P9,000
c. P5,000
d. P4,500

In January 1, 200B, Top Gun Inc., leased a portion of commercial lot owned by Nevada Co. for 12 years
for a monthly rent of 10,000. The lessee constructed a building improvement amounting to P2,300,000
which was completed on July 1, 200B. The building has an estimated life of 20 years. The building
improvement was eventually used in the business on October 1, 200B.
The 200B depreciation expense of Top Gun is

a. P100,000
b. P191,667
c. P200,000
d. P204,444

Zamba Oil’s fixed assets that are used in petroleum operations are as follows:
Estimated useful lifeAcquisition cost
Land Infinite P500,000
Oil drilling machine 8 years 800,000
Oil extracting machine 20 years 900,000
Computers (office) 4 years 100,000
Delivery truck 10 years 200,000
If all depreciable assets have a salvage value of 10%, how much is the annual depreciation?
a. P270,000
b. P250,000
c. P235,000
d. P229,500
Problem 8 – 44 Depletion Expense

Gold Ore acquired a mining property for P6,000,000 believed to have an estimated gold ore deposit of
5,000,000 tons. It is estimated that the property has a salvage value of P1,000,000 after P300,000
restoration cost>
If Gold Ore was able to produce 800,000 tons of gold ore, how much is the deductible depletion
expense?
a. P752,000
b. P800,000
c. P848,000
d. P960,000
Problem 8 – 45 Exploration and Development Expenditures

Benguet Mining Co. reported the following date for 200x:
January 1, 200x depletable cost P12,500,000

January 1, 200x probable reserves 5,000,000 units
Cost and Expenses:
Mining costs P2,000,000
Milling cost 3,000,000
Marketing expenses 1,500,000
Depreciation expense 1,000,000
Exploration costs 1,000,000
Intangible development costs 1,500,000
Other information during 200x:

(a) Additional probable reserves were determined to be 2,500,000 units.
(b) Actual production was 1,200,000 units.
(c) Selling price per unit is P12.
1. The new depletion rate if the additional exploration and development costs will be part of the
adjustment on depletion rate would be
a. P3.00
b. P2.50
c. P2.38
d. P2.00
2. The depletion cost for year 200x using assumption 1 is

a. P2,400,000
b. P2,856,000
c. P3,000,000
d. P3,600,000
3. If the additional exploration and development cost are to be treated as direct deduction from the
taxable income, how much would be the allowable amount for 200x?
a. P2,500,000
b. P1,725,000
c. P1,000,000
d. P625,000
4. Taking option 2, direct deduction from gross income, what amount of exploration and development
costs would be charged to succeeding years?
a. P625,000
b. P775,000
c. P1,000,000
d. P2,500,000
Problem 8 – 46 Capital Expenses of Educational Institution

In 200x, Benguet University , a private educational institution, constructed a building with a contract
price of P10,000,000. The building has an estimated useful life of 50 years with a salvage value of 10%.
How much is the deductible expense allowed to Benguet University for year 200x under the two
options?
CapitalizedOutright expense
a. P200,000 P9,000,000
b. P180,000 P10,000,000
c. P10,000,000 P200,000
d. P9,000,000 P180,000
Problem 8 – 47 Retirement Expense

Cordiilera University’s books of accounts reveal the following contribution for its retirement plan for the
years 200A, 200B and 200C.
200A 200B 200C
Actual contribution P1,000,000 P900,000 P500,000
Normal (actuarian) valuation 800,000 800,000 800,000
Actual retirement payments made were as follows:
1. If the retirement plan is BIR-registered, how much is the deductible retirement expense for year
200C?
a. P300,000
b. P530,000
c. P800,000
d. P830,000
2. If the retirement plan is NOT BIR-registered, how is the deductible retirement expense for year 200C?
a. P300,000
b. P530,000
c. P800,000
d. P-0-

X Co. maintains a BIR-registered defined benefit retirement plan. The company’s normal cost for funding
is P700,000 and P670,000 for year X and year Y, respectively. The following are expenses related to the
retirement plant:
Year X Year Y
Benefit expense for accounting purposes P750,000 P900,000
Actual contribution 800,000 600,000
How much retirement expense is deductible for year Y?

a. P610,000
b. P670,000
c. P680,000
d. P900,000
Problem 8 – 49 Deductible Contribution Expense

What would be the allowable deduction for P15,000 contribution made by a domestic corporation to a
religious organization from its P200,000 net income before contribution?
a. P9,250
b. P10,000
c. P10,750
d. P15,000
Problem 8 – 50 Deductible Contribution Expense

What would be the allowable deduction for P5,000 contribution made by a resident citizen to an
accredited social welfare organization, from his P60,000 net income after contribution?
a. P6,000
b. P5,500
c. P5,000
d. P6,500
Problem 8 – 51 Deductible Charitable Expense

A domestic corporation made a P20,000 contribution to an accredited social welfare institution. Its
business income for 200A is P500,000. The related business expenses inclusive of the P20,000
contribution is P150,000. The allowable deduction for charitable contribution would be
a. P17,500
b. P18,500
c. P20,000
d. P24,000
Problem 8 – 52 PPHHI
How much is the deductible amount of PPHHI if the amount paid is P3,000 during the taxable year by a
resident alien and his total family income is P200,000. The payment of PPHHI was made in the month of
December of current year, covering one year period starting December of current year of the taxable
yea.
a. P200
b. P2,400
c. P3,000
d. P2,000
Problem 8 – 53 PPHHI
Mr. Tyrone Velasquez has a total salary of P180,000, and Mrs. Girlie Velasquez has P120,000 income for
the year, both earned from employment in the Philippines.
They paid P150 per month health insurance policy for the months of June to December 200x. Mr.
Velasquez as head of the family could claim special allowable itemized deduction for these payments
equal to
a. P900
b. P1,800
c. P2,400
c. P-0-
Problem 8 – 54 Tax Incentives to Adopting Private Entities

X signed a MOA with Department of Education for the supply of books to Irisan National High School
valued at P1,00,000 for free. During the same year, X reported a business income of P31,500,000 and
business expenses of P22,500,000 before the amount of donation per MOA.
The deductible donation of X is

a. P675,000 if X is a corporation and the donation is for the priority program of the Government.
b. P1,350,000 if X is a single proprietor and the donation is for the priority program of the Government.
c. P1,500,000 if X is a general co-partnership and the donation is for the priority program of the
Government.
d. P675,000 if X is a sole proprietorship and the donation is not part of the priority program of the
Government.
Problem 8 – 55 OSD and NOLCO

X Co. reported the following income and expenses for a calendar year:
Sale P5,000,000
Operating expenses during the year 1,000,000
NOLCO 500,000
Dividend income from domestic corporation 60,000
Interest income, net of final tax 40,000
Only 30% of the operating expenses can be substantiated with official receipts. Included in the operating
expenses is P50,000 interest expense.
Required:
1. Total deductible expenses using itemized deduction
2. Total deductible expenses using OSD
3. Net taxable income using the amount that provides tax advantage.
Problem 8 – 56 Allowable Deductions

Mr. Joker Aroyo, widower with three(3) qualified dependent children and a practicing accountant has
the following receipts and expenditures for the calendar year ended December 31, 200x:
Receipts:
Allowance as director of Corporation A 25,000
Interest on time and savings deposits, net of 20% final tax 16,000
Commissions 5,000
Expenditures:
Salaries of Assistants P96,000
Partial payment of load 20,000
Interest on the load (The loan was used for the repair
of the residential house of Mr. Aroyo) 3,850
Traveling expenses 11,000
Light and water, Office 7,890
Light and water, Residence 6,500
Stationeries and supplies 1,960
Office rent 60,000
Contributions exclusively for religious purposes 38,500
Required: Compute for the allowable business expenses in the taxable year 200x:
Problem 8 – 57 Total Allowable Deductions

Love Enterprises incurred the following business expenses in the taxable year 200x:
a. Allowance per aging of accounts receivable at the beginning and ending of the year are P20,000 and
P30,000 respectively. The firm’s provision for bad debts during the year is P15,000
b. Accumulated depreciation on machine at the beginning is P100,000 but at the end of the year is
P110,000. During the year, the firm sold a machine with a cost of P300,000 and an accumulated
depreciation of P30,000 and purchase at the end of the year a new machine worth P400,000 with a
better capability.
c. Research and development cost of P500,000 treated as deferred expense.
d. Contribution during the year are as follows:

To the government for priority program in sports P50,000
To the government for public purposes 10,000
To the accredited NGO’s total administrative expense is 35% 100,000
To the church of Baguio 60,000
Net income before contribution 2,500,000
Required: Compute the total allowable deductions of Love Enterprises assuming that the firm is a
1. Sole proprietorship
2. Corporation
3. Partnership

X Corporation maintains a BIR-registered benefit retirement plan. The company’s normal cost per
actuarial valuation for funding is P1,000,000 and P1,200,000 for years 200A and 200B, respectively.
The following are expenses related to the retirement plan:

200A 200B
Retirement benefit expense
(Recognized for accounting purposes) P1,100,000 P1,200,000
Actual contribution P1,250,000 P900,000
X Co.’s financial net income for year 200A and 200B are P50,000,000 and P60,000,000 respectively
Required: Compute for the following

a. Deductible retirement expense for years 200A and 200B
b. Net income before income tax for years 200A and 200B|
Problem 8 – 59 Financial to Tax Reporting

X, reported the following income and expenses during the calendar year:
Sales P10,000,000
Interest income; net of final tax 96,000
Salary expenses 500,000
Retirement expenses (actual contribution) 300,000
(normal valuation is P250,000) – BIR Registered
Representation expense 200,000
Interest expense paid to the BIR 20,000
Interest expense paid to the Metro Bank 100,000
Rent expense 250,000
Group insurance expense 50,000
Bad debts expense (of which 20% actual write-off) 100,000
Income tax expense 120,000
Contribution to TESDA priority project 500,000
Contribution to local government 100,000
NOLCO 200,000
Required: Compute the allowable itemized deduction if X is a

1. Corporate taxpayer
2. Individual taxpayer
Problem 8 – 60 Financial to tax reporting

X, reported a financial accounting income amounting P5,000,000 during a calendar year. The cost of sale
was P30,000,000. The operating expenses that were deducted reveal the following:
a. Salaries expense:
Salaries worked and paid P500,000
Advances to employees 100,000
Accrued salaries (Senior citizen workers) 80,000
Total Salaries P680,000
b. Bad debts expense:

Accounts written off determined to be worthless P100,000
Estimated uncollectible accounts 200,000
Related party bad debts 20,000
Worthless accounts not yet written off 50,000
Total bad debts expense P370,000
c. Actual retirement expenses deducted P1,000,000. The retirement plan is BIR-approved. Normal
retirement per actuarial computation is P800,000. Actual retirement payments amounted to P620,000.
d. Representation expense, P500,000
e. Rent expense:
Advance payment of which only 80% was used P200,000
f. Taxes expense:
Municipal and licenses P30,000
Surcharges and penalties 40,000
Quarterly income tax 230,000
Total taxes P300,000
g. Life insurance expense

Premium on employees group insurance P50,000
Premium on officer’s insurance (beneficiary-X Co.) 100,000
Total life insurance expense P150,000
h. Interest expense:
Interest expense (bank borrowings) P200,000
Interest expense (late payment of tax) 20,000
Interest income (bank deposits) (50,000)
Interest income (trade notes receivable) (10,000)
Net interest expense, deducted P160,000
i. Contribution expense:
Donations to TESDA priority project P500,000
Donations for Rooming-in and Breast-feeding 200,000
Donations to accredited NGO’s (35% for admin.) 100,000
Total contribution expense P800,000
Required: Compute for the following:

1. Total allowable deductions if X is an/a
a. Individual taxpayer
b. Corporate taxpayer
2. Net income for income tax purposes if X is an/a

b. Corporate taxpayer
1. Losses from business operation are ordinary losses.
2. Loss incurred from the sale of business furniture is deductible from business income.
3. Loss from embezzlement of business fund is a loss deductible from business income.
4. Fire damage on the equipment is deductible from business income unless covered by an
insurance policy.
5. Typhoon damage on the residence of the owner of the business is not allowed as deductible
from business income.
6. Net operating loss of prior year could be claimed as deductible from business income of current
year.
7. Partial loss on business property, plant and equipment is deductible loss from business income.
8. A loss claimed as deductible for estate tax may be claimed again as deduction in the estate’s ITR
for income tax purposes.
9. NOLCO could be deducted from next year’s business income of a sole proprietorship which is
opting for optional standard deduction.
10. The NOLCO should be deducted from gross income to arrive at base amount for the
computation of MCIT.
11. Loss incurred from sale of partner’s interest in a partnership is a capital loss.
12. Loss from sale of capital asset is deductible from business income.
13. If there is a partial loss, the allowable deduction will be the book value of the damaged asset at
the time of loss.
14. Expenses not reported when incurred cannot be claimed as NOLCO.
15. A loss claimed as deduction for estate tax purposes should not be claimed as a deduction in the
ITR of the estate for income tax purposes.
16. Gambling losses can be deducted from gambling gains and capital gains.
1. Which of the following is deductible from related gross income?

a. Worthless and written-off trade receivables
b. Personal expenses
c. Net capital loss
d. Estimated loss
2. Which of the following is not deductible from business income?

a. Casualty losses on properties connected in the conduct of trade or business
b. Loss of business property due to theft
c. Loss on exchange of capital assets
d. Net operating loss carry-over
3. If the casual loss on business property is partial, the deductible loss is the
a. Replacement cost of the damaged property.
b. Actual cost of damaged on business property.
c. Book value of the damage property.
d. Lower amount between a and c.
4. Which of the following is not correct regarding NOLCO?

a. NOLCO is allowed as deduction from business income for the next 3 succeeding years.
b. Domestic and resident foreign corporation subject to normal income tax is allowed with
NOLCO
c. Offshore banking unit of a foreign corporation is allowed with NOLCO
d. Private education institution enjoying preferential tax rate is allowed with NOLCO
5. Which of the following is entitled to claim NOLCO?

a. Employee with respect to his compensation income
b. Foreign international carrier
c. Offshore banking unit
d. Self-employed individual

a. NOLCO is an item deduction from business income.
b. Compensation earner could claim NOLCO.
c. NOLCO could be claimed together with the optional deduction.
d. NOLCO is equal to operating loss reported in the GAAP statement of earnings in prior year.
7. Which of the following is allowed as deduction from business income?

a. Loss on the sale of property not directly used in the business
b. Loss on inventory which is fully covered with insurance
c. Fire damage on fully depreciated business equipment
d. P50,000 fire loss on business building without insurance
8. Statement 1: Losses claimed as deduction from gross estate will reduce the net taxable estate.
Statement 2: Losses already claimed as deduction from gross estate would also reduce the
taxable income of the estate.
9. Statement 1: A loss in one line of business is not permitted as allowable deduction from gain in
another line of business, if one of the two lines is exempt from tax.
Statement 2: Losses from transactions between related party taxpayers may be allowed as
deduction as long as supported by documentation.
10. Statement 1: when the loss is caused by embezzlement of funds by a known person, the loss
sustained is not deductible on the year of commission or discovery, but in the year when the
right of recovery becomes worthless.
Statement 2: The loss on mortgage is determined upon sale of the property by the mortgagee.
11. Statement 1: Casualty losses of prospective crops are deductible loss.

Statement 2: Loss on purchased livestock is a deductible loss.
12. Statement 1: Domestic and resident foreign corporation taxed during the taxable year with
MCIT cannot claim NOLCO.
Statement 2: Decline in value through market fluctuation investments in stock of a corporation
is no deductible loss.
Problem 9 – 3 Expenses and Losses
Mr. Bago incurred the following expenses and losses during the year:
Cost of family home, life 25 years (40% used in business) P1,000,000

Family expenses 240,000
Loss from sale of land to his brother 100,000
Loss of business equipment reported to the BIR after 90 days 38,000
Life insurance expenses of his maid (beneficiary is Mr. Bago) 10,000
Accounts receivable of a customer determined to be worthless
and written-off during the year 10,000
The deductible losses from Mr. Bago’s business income is

a. P54,000
b. P26,000
c. P16,000
d. P10,000
Problem 9 – 4Deduction from Business Income

During the year, the following losses were incurred:
A. Loss incurred on sale of investment in stocks P200,000
B. Loss from sale of business equipment 100,000
C. Loss of personal equipment 50,000
Which of the above losses could be claimed as deduction from business income?
a. A
b. B
c. C
d. All of the above
Problem 9 – 5 Deduction from Business Income

The following transactions transpired during the year:
Cost Sales Price
Inventory P1,400,000 P2,500,000
Temporary investment 500,000 450,000
Land (capital asset) 1,000,000 800,000
How much could be claimed as deduction from business income?

a. P-0-
b. P50,000
c. P250,000
d. P450,000
Problem 9 – 6Deductible Loss on Fire

What would be the amount of loss that could be deducted from business income for the property that
was damaged by fire in 200x and has a remaining useful life of 4 years at date of fire? The property was
acquired at P100,000 and depreciated at 10% per year without scrap value.
a. P10,000
b. P20,000
c. P40,000
d. P60,000
Problem 9 – 7Deductible Loss to Rehabilitate

X Trading incurred losses from fire on its equipment with a net book value of P50,000 when the fire
happened. It will need P60,000 to rehabilitate the extent of damages on the equipment which was not
covered by any insurance policy.
The equipment has an accumulated depreciation of P150,000 at date of fire. To acquire new equipment
of the same type will cost P110,000. The allowable deductible loss is
a. P200,000
b. P110,000
c. P60,000
d. P50,000
Problem 9 – 8 Partial Loss

X Enterprises reported a partial loss on its property. The property was acquired 2 years ago for P600,000
and has an estimated useful life of 10 years with an estimated 10% salvage value.
Thirty percent (30%) of the property was partially damaged. The replacement cost of the damaged
portion was P127,000. The replacement of the damaged portion extended the life of the property by
four years.
How much is the deductible loss?

a. P180,000
b. P147,600
c. P127,600
d. P133,400
Problem 9 – 9 Shrinkage in Value of Stocks

Kool Corporation is holding common stocks of Lang Corporation acquired at cost of P100,000. At
December 31, 201A, investment in Lang’s stocks has a fair market value of P90,000. On January 30, 201B
after the balance sheet date, the investment in stocks of Lang were sold outside the stock market for
P120,000
The deductible loss at balance sheet date and reportable gain on June 30 would be
Dec. 31 201A Deductible lossJune 30, 201B Non-reportable gain
a. P-0- P-0-
b. P10,000 P30,000
c. P-0- P20,000
d. P10,000 P20,000
Problem 9 – 10 NOLCO
The net operating loss reported in the GAAP income statement is P50,000 after P200,000 operating
expenses. Part of the operating expenses is a P10,000 bad debts based on estimate. How much NOLCO
would be deductible from the succeeding year’s income?
a. P260,000
b. P60,000
c. P50,000
d. P40,000
The previous year’s operating loss amounted to P50,000. How much would be the NOLCO that could be
deducted from current year’s income of business opting for optional standard deduction?
a. P55,000
b. P50,000
c. P5,000
d. P-0-
Problem 9 – 12 Partial Fire Loss

The business equipment which has a carrying value of P25,000 was partially damaged by fire. The actual
cost of P30,000 was incurred to put back the business equipment to its operating condition.
Required: Compute for the deductible loss from business income.

Problem 9 – 13 Total Fire Loss
The business building with an acquisition cost of P1,200,000 and estimated useful life of 20 years was
totally damaged by fire at the end of its 10 th year. P200,000 worth of damages was recovered from
insurance. Scrap recovered were realized at P20,000
Required: Compute for the deductible loss from business income.
Problem 9 – 14 Destruction of Old Building

The business incurred P120,000 to raze down an old existing building to give way to the construction of
its factory building. Scrap from the demolished building were realized for P20,000
Required: Compute for the deductible loss from business income related to above construction.
The trading business reported a net loss of P50,000, net of P300,000 operating expense. The operating
expenses included P20,000 estimated bad debts and estimated warranty expense of P10,000
Required: Compute for the Net operating loss that could be carried over for the next 3 succeeding years.
The following are the comparative income statements of Venus:
Year 1 Year 2
Gross profit P500,000 P600,000
Estimated bad debts 20,000 10,000
Other operating expenses 580,000490,000
Income (loss) (P100,000)P100,000
Required: Compute the NOLCO that could be deducted form year 2 income.
Problem 9 – 17 Mortgage Property

In year 1, the business foreclosed the property of delinquent debtor with fair value of P1,000,000 to
recover the notes receivable of P1,500,000. In 2 year, the foreclosed property was sold for P1,800,000.
Required: Determine the gain or loss in year 1 and year 2
Problem 9 – 18 Mortgage property

The mortgage property with fair value of P1,000,000 at date of grant of loan was foreclosed by the bank
when the business over due loan of P500,000 was not paid. The foreclosed property was offered for
public auction and no bidder offered any price. The fair value at date of auction is estimated at
P400,000.
Required: Compute for the deductible loss from business income of the bank.
Problem 9 – 19 Various Losses

Mr. GuillerDunong, a farmer, reports the following:
Income from farming P300,000
Cockfighting winnings 50,000
Shrinkage of farm products produced 20,000
Loss of potential farm products due to calamities 150,000
Cockfighting losses 100,000
Required: How much is the deductible loss from gross income?

Mr. Scott Saboy incurred the following losses in connection to his construction business:
Compensatory liquidated damages P50,000
Loss on actual damages 30,000
Loss on robbery (construction supplies) 50,000
Loss on pilferage of business supplies 10,000
Book value of partially damaged machine due to fire 200,000
Replacement cost of damaged portion of machine 150,000
Loss on sale of capital assets 25,000
Required: Compute the amount of deductible loss from gross income.
Problem 9 – 21 NOLCO and OSD (R.A. 9504)

X, reported the following gross receipts, cash disbursement and NOLCO.
Gross receipts P2,000,000

Cost of service 500,000
Cash disbursement 400,000
NOLCO – last year 300,000
X opted to deduct OSD because the cash disbursements that represent business expenses are not
properly supported with documentation.
1. If X is an individual taxpayer, how much is the amount of allowable deductions?
2. If X is a corporation, how much is the amount of allowable deduction?
Problem 9 – 22 NOLCO, OSD and MCIT (R.A. 9504)

In the fourth year of Y Co., the company reported the following:
Sales, 200D P2,000,000

NOLCO – 200A 200,000
Due to losses and since the company has been in existence for more than 3 years, the BIR required Y Co.
to pay a minimum corporate tax of 2% based on gross income.
1. Income tax due and payable in year 200D.

2. Total NOLCO in year 200E.
A Co. reported the following losses during the year:
Burglary loss – cash P50,000

Embezzlement loss – cash 25,000
Pilferage loss – office supplies 5,000
Capital loss on sale of capital asset (long-term) 10,000
Decline in the market value of investments in stocks 30,000
Casualty losses 15,000
The burglary loss was reported to the police station within 90 days, but such loss was not reported to
the BIR. The cashier was traced culpable for the embezzlement.

1. Deductible loss from gross income
2. Deductible loss from capital gains
Problem 9 – 24 Losses from Farming

The following losses were incurred by D Farms during the calendar year:
Shrinkage loss of farm products produce P140,000

Casualty losses of prospective products 40,000
Casualty losses of animals raised in the farm
( not part of inventory) 20,000
Death of livestock previously purchased 10,000
Cost of property expropriated by the government
The government paid only P10,000 as compensation 30,000
Required: Compute for the deductible farm loss.
Problem 9 – 25 Adjustment of Losses

X Co. constructed a building at a cost of P10,000,000 with an estimated useful life of 30 years. After five
years, subsequent additions and improvements which were properly capitalized amounted to P500,000.
The building was insured for P6,000,000 against fire at the time it was totally destroyed by fire at year 8.
The claim for fire loss was settled with the insurance company paying P5,800,000 with an agreement
that any materials that may be salvaged from the fire shall be taken by the owner of the building.
Proceeds from sale of salvaged materials amounted to P300,000.
Required: Compute the loss deductible by X Co.

Mr. Saboy incurred the following losses related to his construction business:
Loss on unrealized earnings P500,000

Casualty losses 250,000
Abandoned equipment due to technological problem 150,000
Accumulated depreciation of abandoned equipment 120,000
Compensatory liquidated damages 100,000
Embezzled funds by the cashier 70,000
Book value of partially damaged machine 50,000
Replacement cost of damaged portion of machine 40,000
Loss on sale of capital assets 30,000
The casualty losses was reported to the BIR within 45 days and compensated by insurance amounting to
P300,000.
Required: Compute the total amount of deductible losses.

Chapter 10 Basic Income Tax Patterns
1. A self- employed taxpayer is required to file his quarterly income tax return.
2. A general professional partnership is taxed in the same manner as corporation.
3. A passive income earned outside the Philippines by a nonresident alien is subject to annual
income tax in the Philippines.
4. Both creditable and final withholding taxes are withheld at source.
5. The excess of personal exemption over compensation income cannot reduce the net operating
income from business,
6. In general, passive income within is subject to final tax.
7. The annual income taxes are usually increased by creditable withholding taxes.
8. The optional standard deduction can be deducted from quarterly income tax.
9. Passive income within by a resident citizen is allowed to be reduces by personal exemption.
10. Reporting compensation and business income in one tax return using the same tax rate is an
example of global tax system.
11. Allowing personal exemption as reduction to taxable compensation income is an example of
global income tax system.
12. Resident alien are taxable for their income earned within and outside the Philippines.
13. There is net capital gain if the ordinary gain exceeds ordinary loss.
14. Only resident citizen could opt for 40% OSD.
15. A single individuals, fully supporting his minor sister could claim P75,000 total personal
exemption
16. A married individual with 5dependent children could claim only P100,000 total personal
exemption.
1. When different typed of income are subjected to common tax rate.

a. Global tax system
b. Gross income tax system
c. Scheduler tax system
d. Final tax system
2. Scheduler tax system of income taxation means
a. All types of income are added together to arrive at gross income.
b. Separate graduated rates are imposed on different types of income.
c. Capital gains are excluded in determining gross income.
d. Compensation income and business professional income shall be added together in arriving
at gross income.
3. Which of the following tax payers are taxed for income earned within and outside the
Philippines.
i. Resident citizen
ii. Resident alien
iii. Domestic corporation
iv. Resident foreign corporation
Choices:
a. I, ii, iii and iv

b. I, ii and iv only
c. I and iv only
d. I and iii only
4. In general, which of the following income is allowed to be reduced with personal exemption?
b. Passive income
c. Professional income
d. Business income
5. The following incomes are not allowed to deduct business expenses except.
b. Capital gains
c. Passive income
d. Professional income
6. Which of the following income is not subject to withholding tax at source?
a. Tax informer’s reward
b. Sale of real property classified as inventory
c. Interest income of bank time-deposit
d. Gain on sale of personal property
7. Which of the following required to be filled with quarterly income tax return/
b. Passive income
c. Business income
d. Capital gain
8. An income tax is used to reduce the income tax due at the end of the year.
a. Creditable withholding income tax
b. Final withholding income tax
c. Annual income tax
d. Capital gains tax
9. Statement 1: NOLCO can only be deducted from the operating income in the annual ITR.
Statement 2 : The individual taxpayer’s personal exemption can only be deducted from the
operating income in the annual ITR.
10. Which of the following is a subject to a creditable withholding tax at source?
a. Holiday pay
b. Royalties
c. Gain on sale of shares of stock
d. Sale of family home
11. Statement 1: an individual self employed taxpayer is allowed to deduct personal exemptions
every quarter he files his quarterly tax return.
Statement 2: the income of estates or trusts is subject to an absolute exemption of P20,000.
12. Which of the following income is subject to monthly creditable withholding tax?
a. Salaries
b. 13th month pay
c. Income from trading
d. Winnings
Problem 10-3 Resident Citizen’s Compensation
A resident citizen reported compensation income amounting to P167, 500,net of P22,500 withholding
tax. The tax rates for individual are as follows:
 P8,500 for P70,000 + 20% in excess of P70,000.
 P22,500 for P140,000+ 25% excess of P140,000
His net tax payable would be
a. P22,500
b. P15,000
c. P 5,000
d. P- 0-
Mr. A, a MWE reported a gross compensation income of P90,000 and business gross receipts of
P200,000. How much is the net taxable income if the taxpayer opted to elect the optional standard
deduction?
a. P-0-
b. P70,000
c. P160,000
d. P240,000
Problem 10-5 Quarterly income and OSD
For the months of January, February, march and April, a head of family reported a business gross
receipts of P50,000,P60,000, P70,000 and P 80,000, respectively. Opting for standard deduction, his net
taxable income for the first quarter is
a. P209,000
b. P108,000
c. P106,000
d. P58,000
Problem 10-6 Corporation’s Net Taxable Income
A domestic corporation reported a gross profit of P1, 000,000.its sales amounted to P2, 500,000. Its
ending inventory is P500,000 more than the beginning inventory. Its operating expenses amounted to
P400, 000.its net taxable income would be
a. P1,000,000
b. P3,000,000
c. P2,600,000
d. P600,000
Problem 10-7 Income Tax on Final Adjusted Return
For the previous 3 quarters, the total income tax paid by domestic corporation amounted to P900,000
.Its total business income for the year amounted to P 5,500, 000 and expenses of P2,000,000.How much
would be its net tax payable per final adjusted return?
a. P1,120,000
b. P900,000
c. P220,000
d. P150,000
Problem 10-8 Net Tax Payable (Refund)
A resident foreign corporation in its 5 th year paid P500, 000 income taxes for the first 3 quarters. Its net
taxable income for the year after operating expense of P23, 500,000 is equal to P 1,500,000. What
would be the net tax payable (refund) at the end of the year?
a. P480,000
b. P20,000
c. P-0-
d. P(20,000)
Problem 10-9 Net TaxableIncome of Resident Citizen
The following are the reported income and expense of a resident citizen:
Within Outside
Compensation income P250,000 P-0-
Business income 500,000

600,000
Business Expenses 200,000

300,000

100,000
Required: Compute for the net taxable income before personal exemption that should be reported in
the annual tax return.
Problem 10-10 Net TaxableIncome of Resident Alien
The following are the reported income and expenses of a resident alien:
Within Outside
Compensation income P250,000 P-0-

600,000

300,000

100,000
Required:Compute for the next taxable income before personal exemption that should be reported in
the annual income tax return.
Problem 10-11 Net TaxableIncome of Foreign Corporation
The following are the reported income and expenses of a foreign corporation:
Within Outside
600,000

300,000
Dividend income from foreign corporation 50,000

100,000
Required:Compute for the next taxable income that should be reported in the annual income tax return.
Problem 10-12 Annual Income Tax
Saddam, a single individual taxpayer, received the following income during the year:
Taxable monthly salary, net of

P4,000 creditable withholding tax P16,000
Interest income, net of final withholding tax of P2,000
First three (3) quarter’s taxable business income after
allowable deductions, net of P90,000 income tax
for three (3) quarter’s income tax P300,000
The net taxable business income for the last quarter is P110,000.
Required: How much is Saddam’s total income tax (normal tax plus final taxes) during the year?
Problem 10-13 Quarterly Income Tax
Data of Highland Corporation, a domestic corporation, for the year 200x are as follows: (Data are all
noncumulative)
Quarters
First Second Third Fourth
Sales (noncumulative) P500,000 P600,000 P400,000 P900,000
Operating expense before

Interesting and contribution P120,000 P150,000 P100,000
P160,000
Interest expenses 10,000 10,000 15,000 15,000
Contribution (deductible in full) 20,000
Other Revenue:
Dividend income (domestic) 40,000
Royalty income 60,000
Rent income 30,000 30,000 30,000 30,000
Interest Income 15,000 10,000 15,000 20,000
The gross profit is 40% based on sales.

1. Quarterly income tax due and payable
2. Income tax still due and payable in the fourth quarter.
3. Total passive income tax
Problem 10-14 Income Tax Still Due

Mariposa Co., a domestic corporation, reported the following tax payments for the first to the third
quarters of taxable year (cumulative amount):
Quarters
First Second Third
Business income P2,500,000 P4,000,000 P5,500,000
Itemized allowable deductions 1,500,000 2,500,000 3,000,000
Taxable income P1,000,000 P1,500,000 P2,500,000
Income Tax P 320,000 P480,000 P800,000

Less: Payment previous quarters -0- 320,000 480,000
Income tax payments P 320,000 P160,000 P320,000
For the fourth quarter, the company reports the following:

Business Income P7,500,000
Itemized allowable deductions 4,000,000
Capital gains (no final withholding tax) 200,000
Passive income earned outside in the Philippines
100,000
Income tax withheld per BIR Form 2307
Furnished by Credit Card Company 40,000
Required: Determine the income tax still due and payable at year-end ITR.
Chapter 11 Income Tax of Individuals

1. A nonresident citizen is taxable only for income within. Therefore, his interest income from
expanded foreign currency deposit system transacted with an OBU is taxable in the Philippines.
2. A foreigner who stays in the Philippines for more than 180 days during the taxable year is
deemed as doing business within and his income within and outside the Philippines is taxable in
the Philippine.
3. Nonresident aliens engaged in business in the Philippines are allowed with personal exemptions
and additional exemptions subject to reciprocity.
4. The allowances for personal exemptions of a single mother with a dependent child out of
wedlock are P50, 000 and P25,000, respectively.
5. Individual taxpayers are allowed to elect installment payment of their income taxes when the
tax due is P2,000.
6. At the option of a resident taxpayer, income taxes paid in foreign countries can be claimed as
deduction from gross income or tax credit subject to limit.
7. A senior citizen’s income is exempt from all income taxes.
8. An individual taxpayer is exempted from filling income tax return if his sole income has been
subjected to final withholding tax.
9. For self-employed taxpayers, their quarterly income tax returns are to be reduced with
corresponding personal exemption.
10. Income earned outside the Philippines by domestic helpers is tax-exempt because they are
considered nonresident citizen.
11. The personal exemption of a nonresident alien not engaged in business in the Philippines is
subject to reciprocity agreement.
12. A citizen who works abroad most of the time during the taxable year is a nonresident citizen.
Income Tax of Individuals

1. A dependent senior citizen is not entitled for additional exemption of P25,000
2. A Filipino citizen classified as special taxpayer is required to be taxed based on his gross
compensation income subject to a final tax of 15%.
3. If the taxpayer dies during the taxable year, his estate may claim the personal exemption as if he
died at the close of such year.
4. The tax rate on special aliens is 15% of their gross compensation income derived within the
Philippines from special employment by Multinational Corporation.
5. Professional or talent fees for services rendered by an individual shall be subjected to a

creditable withholding value-added tax.
6. When there is a tax treaty agreement, both the basic and additional exemptions can be availed
by a nonresident alien engaged in trade or business in the Philippines but subject to limit.
7. An alien residing and doing business in the Philippines is allowed to have a tax credit for income
taxes paid in other country.
8. If the professional fee of an entertainer exceeds P720,000 per year, the creditable withholding
tax should be 20%.
9. Gross income for computation of optional standard deduction includes compensation and
business income plus other taxable income not subjected to final tax.
10. Interest income from foreign currency deposit of a nonresident Filipino is subject to a final
withholding tax 7.5%
11. The income of a professional entertainer can be reduced by optional standard deduction.
12. All lotto and sweepstake winnings derived by a resident Filipino citizen within and outside the
Philippines are exempt from Philippine income tax.

1. A taxpayer that allowed with both personal exemption and additional exemption is a / an
b. Estate and trusts
c. Partnership
d. Corporation
2. The following individual taxpayers are granted basic and additional personal exemption except.
a. Resident citizen
b. Nonresident citizen
c. Partnership fully owned by a resident Filipino citizen.
d. Nonresident alien engaged in trade or business in the Philippines with tax treaty reciprocity.
3. For Philippine income tax computation, which of the following individual is taxable also for
income outside the Philippines?
a. Nonresident alien
b. Nonresident citizen
c. Resident alien
d. Resident citizen
4. A foreign individual who have stayed in the Philippines during the taxable year for more than
180 days but less than one year is considered a
a. Nonresident alien doing business in the Philippines.
b. Nonresident alien not doing business in the Philippines.
c. Resident alien
d. Resident alien doing business in the Philippines.
5. Which of the following is taxable only for income earned within?

i. Resident citizen
ii. Nonresident alien doing business in the Philippines
iii. Nonresident alien not doing business in the Philippines
Choices:
a. ii only c. i, ii, and iii
b. iii only d. ii and iii
6. Which of the following is individual is required to be taxable at 15% on compensation income

derived within the Philippines?
i. Compensation income amounting to more than P975,000 per year of a citizen earned
from employment with regional or area headquarters of multi-national corporation
ii. Managerial and technical compensation income of alien earned from employment with
the petroleum service contractor
iii. Compensation income of alien as a rank-in-file earned from employment with an
offshore banking unit
Choices:
a. i, ii and iii c. ii only
b. ii and iii only d. iii only
7. for taxation purposes, a Filipino citizen who stayed outside the Philippines and worked abroad
for 182 days during the taxable year is classified as
a. Nonresident citizen c. overseas contract worker
b. Resident citizen d. special taxpayer
8. Which of the following is not required to file an income tax return?
a. Resident citizen with respect to his business income earned outside the Philippines
b. An employee with only one employer and whose compensation income is fully collected
with creditable withholding tax
c. Nonresident citizen with respect to his compensation income earned within the Philippines
d. Nonresident alien with respect to his business income earned within the Philippines

a. A self-employed individual is required to file a quarterly income tax return.
b. The income reported in quarterly tax return is cumulative during the year.
c. Business expenses reduce the income reported in the quarterly tax return.
d. The income reported in the quarterly tax return is reduces by personal exemption.
10. A CPA certificate is required if the quarterly gross sales, gross receipts or earnings of an
individual taxpayer.
a. Exceeds P100,000
b. Exceeds P150,000
c. Less than P200,000
d. Less than P500,000

1. An individual taxpayer, whose personal exemption allowed is the lower amount provided
between Philippine Tax Code and his country’s Tax Code.
Citizenship Residency Business Income
a. Filipino Within No
b. Filipino Outside Yes
c. Alien Within No
d. Alien Outside Yes
2. Statement 1: if both husband and wife are earning income, only one of them could claim for the
additional personal exemption.
Statement 2: the husband is the rightful claimant of additional personal exemption, unless he
waives his rights in favor of his wife.
a. Only statement 1 is correct
b. Both statement are correct
c. Only statement 2 is correct
3. Statement 1: a tax credit will reduce the taxable income.
Statement 2: a tax credit will be available when there is foreign income tax paid by resident
Filipino for income earned without.
a. Only statement 1 is correct
b. Both statement are correct
c. Only statement 2 is correct
4. One of the following is not creditable against the total computed tax per ITR.
a. Final withholding tax
b. Foreign income tax paid by resident citizen
c. Creditable withholding tax on compensation
d. Income tax paid for the first three quarters for the business income earned.
5. Statement 1: An alien who shall reside in the Philippines with no definite intention as to his stay
is a resident of the Philippines.
Statement 2: A foreigner who has acquired residency in the Philippines shall only become a
nonresident alien when he actually departs with the intention of abandoning his residency in
the Philippines.
6. Statement 1: compensation income is reduced by personal expenses to arrive at the taxable
amount.
Statement 2: business income is reduced by business expenses to arrive at taxable amount.

7. The following persons benefit from personal exemptions, except

a. Resident alien, not doing business in the Philippines
b. Foreigner who stayed in the Philippines for more than 183 days and earned business
income within.
c. An alien with only business income earned within after a year of stay in the Philippines.
d. Nonresident alien, with only compensation income earned in the Philippines.
8. Which of the following statements is true?

a. Resident citizen with income from foreign sources only is allowed a basic personal
exemption only.
b. Nonresident alien not engaged in business in the Philippines is allowed basic personal
exemption only.
c. Nonresident alien engaged in business in the Philippines is allowed both basic and
additional personal exemptions.
d. Nonresident citizen with income from the Philippines only is allowed both basic and
additional personal exemptions.
9. The personal exemption of a nonresident alien engage in trader or business in the Philippines is
equal to that allowed by the
a. Income tax law of his country to a citizen of the Philippines not residing there.
b. Income tax law of his country to a citizen of the Philippines not residing there ot the
amount provided by the NIRC to a citizen or resident, whichever is lower.
c. NIRC to a citizen or resident.
d. Income tax law of his country allows to a citizen of the Philippines not residing there or
the amount provided by the NIRC to a citizen or resident alien, whichever is higher.
10. A net taxable income of a nonresident alien sole proprietor of a cinematographic film is subject
to a
a. Normal tax of individuals.
b. 10% special tax
c. 25% final tax
d. 32% normal corporate income tax.

1. All of the following taxes are classified as income taxes, except

a. 20% royalty tax
b. 10% dividend tax
c. ½ of 1% on the selling price of shares of stock traded-in the local stock exchange.
d. 6% capital gains tax on sale of land.
2. Which of the following amount of winnings / prizes is subject to final tax 20%?
a. P10,000 winnings outside the Philippines
b. P10,000 winnings earned within the Philippines
c. P1,000,000 Philippines Sweepstakes winnings
d. P9,000 first prize singing contest
3. Which of the following is not correct income tax rate?

a. 20% on P50,000 compensation income earned by a senior citizen
b. 20% on dividend income earned within by nonresident alien doing business within
c. 25% on gross income earned within by nonresident alien not doing business in the
Philippines
d. 7.5% on interest income earned within by a resident Filipino citizen under the expanded
foreign currency deposit system.
4. One of the following individual taxpayer could claim additional personal exemption.
a. Single, supporting a 30-year old paralytic brother
b. Widow, with a 25 year old son under his custody
c. Legally separated with 21 year old siblings as qualified dependent.
d. Legally separated with one qualified dependent child within his custody.
5. All of the following dependents will entitle the taxpayer for additional personal exemption
except
a. 25 year old, but mentally retarded son.
b. 20-year old, unmarried daughter.
c. 18- year old, unemployed son.
d. 19-year old sister.
6. Which of the following is the correct creditable withholding tax on professional income/
a. 15% on professional income of a practicing lawyer earning P500,000 a year.
b. 15% on professional income of entertainer earning more than P720,000
c. 20% on professional income of entertainer earning P500,000 and below per year
d. 20% on professional income of entertainer earning more than P720,000 per year.
7. A Filipino special taxpayer is taxable on his gross compensation income if his total earnings
during the taxable year from multinational enterprise amounted to more than P975,000.
a. Yes, provided that the amount is to be reduced by personal exemption.
b. Yes, provided that the amount is said taxpayer has the option to be taxed at special tax rate
of 15% or normal tax.
c. Yes, for as long as the tax rate is applicable is 15%.
d. No, because the special tax rate is applicable only to aliens classified as special taxpayer.
8. Which of the following is the correct amount of additional personal exemption?

a. P8,000 for each qualified dependent child
b. P20,000 for each dependent sibling
c. P25,000 for senior citizen
d. P25,000 for each qualified dependent child.
9. Which of the following is an amount of allowed personal exemption for a nonresident alien not
engage in trade or business in the Philippines?
a. P50,000 basic without additional exemption
b. P50,000 basic plus additional exemption of P25,000 for each qualified dependent child.
c. Amount subject to tax treaty reciprocity and limit.
d. No personal exemption is allowed NRANETB.
10. If an individual person is allowed to pay his tax on installment payment, the due date would be
a. April 15 for the 1stinstallment and July 15 for the 2ndinstallment payment.
b. May 15 for the 1stinstallment and July 15 for the 2ndinstallment payment
c. April 15 for the 1stinstallment and August 15 for 2ndinstallment payment
d. May 15 for the 1stinstallment and August 15 for the 2 ndinstallment.
Problem 11-6 Personal Exemption

A Filipino taxpayer supports the following dependents for their chief financial needs:
 Mentally retarded legitimate son(40 years old);

 Legitimate son (25 years old);
 Legitimate daughter (20 years old) and her husband (21 years old)
 Illegitimate daughter (10 years old);
 Adopted child (6 years old);
 Wife without income;
 Senior citizen mother; and
 A brother (20 years old)
How much is the amount of his total personal exemptions allowed from his P300,000 gross
compensation income?
a. P175,000 c. P125,000
b. P150,000 d. P100,000
Problem 11-7 Personal and Additional Exemptions

The tax payer is a widow who supports the following:
(a.) Legitimate child by a former marriage, 12 years old;

(b.) Recognized natural child with present common law husband, 6 years old;
(c.) Common law husband who is single; and
(d.) Widowed mother (senior citizen) of her common law husband.
The amount of her personal and additional exemptions is

a. P50,000 c. P100,000
b. P75,000 d. P125,000
Problem 11-8 Personal Exemptions (reciprocity)

Mr. Ronald Baden, an American citizen and a resident of California, U.S.A., has business income
derived in the Philippines amounting to P500,000 for the year. He is married and has 2 minor
children.
How much will be allowed as his personal exemption for the computation of his income tax in the
Philippines, if his country’s tax law is granting the same amount of personal exemptions to Filipino
citizens, except for additional exemptions where his country’s tax law is allowing P10,000 per
dependent child?
a. P100,000 c. P500,000
b. P70,000 d. P-0-
Problem 11-9 Dependent Other than Children

Maria, married and without income, receives her allowance amounting to P50,000 per month from
her husband who is working in Brunei as Accountant. She supports her two siblings and parents who
are qualify as dependent relatives.
How much is the total personal and additional exemptions of Maria?

a. P125,000 c. P50,000
b. P100,000 d. P-0-
Problem 11-10 Income Subject to Philippine Income Tax

Juan, single, is an OFW with a monthly income abroad amounting to P20,000. He has a sari-sari store
in the Philippines with an average monthly income of P10,000. If Juan returned in the Philippines
from March 1 of the taxable year and stayed to manage his sari-sari store, how much of his income
is subject to tax in the Philippines after personal exemption?
a. P 70,000 c. P110,000
b. P100,000 d. P120,000
Problem 11-11 Special Taxpayer

Mr. Roman Dinero (single), a Spaniard who is a resident general manager of Texas Instrument,
Philippines- a multi-national company’s regional operating headquarters established in the
Philippines- received a monthly salary of P250,000. What is the amount of Mr.Dinero’s income tax
payable during the year assuming he received 12 months’ salary?
a. P12,500 c. P450,000
b. P80,000 d. P487,500

On July 1, 201x, Mr. Bout, an Indian national came to work in the Philippines as a resident general
manager of Abbot Laboratories- a multinational company’s regional operating headquarters. He
received a monthly salary of P150,000 plus 13 th month pay. In addition, he received a bonus of
P50,000 and a car fringe benefit amounting to P850,000, net of fringe benefit tax. What is the
amount of Mr. Bout’s preferential income tax on compensation for the year 201x?
a. P297,000
b. P165,000
c. P153,750
d. 149,250

Mr. E, a Filipino holding a technical position in a Regional Operating Headquarters of Multinational
Company receives a monthly salary and cost of living allowance in the amount of P65,000 and
P5,000, respectively, for the entire year. How much is the income tax due to Mr. E?
a. P131,250
b. P229,000
c. P238,600
d. P245,000
Problem 11-14 Net Taxable Income

Eddie Paylaeng, a Filipino Citizen who supports his senior citizen father, reported the following
earnings and expenses during the year.
Gross compensation income

P200,000
Gross receipts derived from rent income 50,000
Personal living expenses 180,000
Premium payments on hospitalizations insurance 5,000
How much is the net taxable income of Mr.Paylaeng by taking the best option to minimize tax?
a. P52,400 c. P177,600
b. P175,000 d. P180,400
Problem 11-15 Taxpayer’s Income

X, single, reported the following income and expenses during the taxable year:
Within Without
Professional income 300,000
P200,000
Interest income 100,000 60,000
Dividend income 60,000 40,000
X opted to deduct OSD.
1. What is the amount of net income subject to tabular tax and final tax in the Philippines if X is a
resident Filipino Citizen?
Subject to
Tabular Tax Final Tax
a. P450,000 P154,000
b. P550,000 P160,000
c. P770,000 P180,000
d. P790,000 P160,000
2. What is the amount of net income subject to tabular tax and final tax in the Philippines if X is a
resident alien?
Subject to
Tabular Tax Final Tax
a. P370,000 P160,000
b. P410,000 P220,000
c. P520,000 P160,000
d. P640,000 P260,000
Problem 11-16 Taxpayer’s Income

The net taxable income of husband wife are P140,000 and P250,000 respectively. These income are
net of withholding taxes amounting to P20,000 and P45,000, respectively. Their respective income
tax still due and payable would be
Husband Wife
a. P22,500 P50,000
b. P20,000 P45,000
c. P20,000 P22,500
d. P 2,500P 5,000
Problem 11-17 Total Income Tax Due (Resident Alien)

Mr. Erection, a married Indian national, stays in the Philippines with no definite intention. He
received P600,000 compensation income as researcher of Blue Good Ocean, a domestic corporation.
In addition, he invested in the Philippines some of hi savings earning dividend income and interest
income of P120,000 and $10,000 respectively.
If the interest income is a dollar deposit under the expanded foreign currency system, how much is
the total income tax due of Mr. Erection in the Philippines? (one dollar is P50)
a. P37,500
b. P190,500
c. P146,760
d. P196,260
Problem 11-18 Capital Gains Tax

Mr. Jose Matbagan, a citizen and resident of the Philippines had the stock transactions during 200x:
(a.) Capital gain on sales directly to buyer at P280,000 of shares of a domestic corporation, P80,000
(b.) Capital gain on sale directly to a buyer at P2,000,000 of land in Makati, Philippines, P300,000
The total capital gains tax paid during the year should be
a. P19,400
b. P22,000
c. P108,000
d. P124,000
Problem 11-19 Final Tax and Normal Tax

In 200A, Mr. Marvin Ebojo, a native of Pangasinan, received the following during the year:
Proceeds from copyright royalty, net of tax P 11,250

Proceeds from mineral claim royalty, net of tax 12,000
Share from trading partnership, net of withholding 270,000
Assume that Mr.Ebojo is single, compute for the following:
1. Total final tax on Mr.Ebojo’s income

a. P50,000
b. P34,250
c. P31,250
d. P 4,250
2. Income tax still due and payable per ITR.

a. P50,000
b. P34,250
c. P31,250
d. P -0-
Problem 11-20 Professional income

Professional income of a VAT- registered person is subject to output VAT and required to be
withheld with income tax. If the net proceeds for services rendered is P92,000, net of 20%
withholding tax based on the service fee, the amounts of service fee, withholding tax and output Vat
would be
Service fee Withholding tax VAT

a. P112,000 P20,000 P12,000
b. P100,000 P20,000 P12,000
c. P97,391 P19,478 P11,687
d. P92,000 P18,400 P22,080
Problem 11-21 Various Income

Mr.Crisanto Estrada, widower with three (3) qualified dependent children and a practicing
accountant has the following receipts and expenditures for the calendar year ended December 31,
200A:
Receipts:
Allowance as director of Corporation A 25,000
Interests on time and savings deposits, net of 20% final tax 16,000
Commissions 5,000
Expenditures:
Salaries of assistants 96,000
Partial payment of loan 20,000
Interest on the loan (the loan was used for the repair of the
` residential house of Mr. Estrada) 3,850
Traveling expenses-business related 11,000
Light and water- office 7,890
Light and water- residence 6,500
Stationeries and supplies used in the office 1,960
Office rent 60,000
Contributions exclusively for religious purposes 38,500
1. The allowable deduction from the business gross income is

a. P209,165
b. P210,725
c. P212,165
d. P176,850
2. The net income ( for the income tax purposes) after itemized deduction but before personal and
additional exemption is
a. P317,8325
b. P319,275
c. P212,165
d. P176,850
3. The income tax due in ITR is

a. P56,550
b. P50,000
c. P38,350
d. P36,459
Problem 11-22 Itemized vs OSD (CPA EXAM)

Mr. George Estrada, a Filipino resident, whose wife died during the taxable year, has six qualified
dependent children. He is a director of a business firm which he received per diem and allowances
amounting to P20,000 during the taxable year. The income tax withheld on this is P1,000.
He also operates a barbershop which generated a gross receipts of P400,000. The total itemized
expenses of his business is P150,000, but he encounters difficulty in determining how much of these
expenses a can be classified as direct cost and deductible expenses. He asks you to prepare his
income tax return.
Required: compute the taxable income and income tax still due and payable by Mr. Estrada using
1. Itemized deduction
2. Optional standard deduction.
Problem 11-23 Determination of Correct Income (CPA EXAM)

Data from the records of Mr. Alex Valdez are:
Net worth, December 31,200A P325,000

Nontaxable income for 200 2,000
Nondeductible expenses for 200B (excluding donations and contributions) 150,000
Fully deductible donations 20,000
Contributions subject to limitations ` 50,000
Net worth, December 31, 200B 375,000
Reported/ declared net income subject to tax, 200B 24,200
Required: compute for the following

1. The correct income subject to normal graduated tax if Mr. Valdez is a widower, with four
qualified dependent children
2. The unreported taxable income for the year 200B foMr. Valdez.
Problem 11-24 Taxable Income (With Capital Asset Transactions)

The following data are the operating results and capital assets (not real estate, not corporate shares
of stock) transactions of Mr.JovitoGalam, a contractor, for the year 200a and 200B:
200A Gross receipts from contracts P1,600,000

Less: Materials and supplies used P700,000
Labor 865,000 1,565,000
Net income P 35,000
Net capital loss carry over to 200B P 45,000
200B Gross receipts from contracts P2,550,000
Less: Materials and supplies used P1,200,000

Labor 750,000 P1,950,000
Net income P 600,000
Short-term capital gains 40,000
Long-term capital gains 30,000
Short-term capital loss 10,000
Required: If Mr.Galam is married and has three qualified dependent children, how much is the
taxable income for the year ended December 31,200B?
Problem 11-25 Compensation and Business Income

A resident citizen, single with qualified dependent child, has the following income and expenses
during the year:
Compensation income, net of WTW P30,000 P240,000

Personal expenses 60,000
Business expenses allowed 120,000
Premium on health/ hospitalization insurance paid 3,000

1. Taxable income
2. Income tax still due and payable per ITR.
Problem 11-26 Monthly and Quarterly Withholding Taxes

Miss Jennifer Bay-on, single, has the following data from January to
December 200A
Monthly salary P30,000
13th month pay and bonus 35,000
SSS contribution (one whole year) 3,000
Medicare/ Philhealth contribution 2,000
Business income per quarter
200,000
Capital asset transactions: 120,000
Capital asset transactions
Proceeds from sale of personal car 300,000
Cost of the car sold 400,000
The car’s estimated useful life is 8 years, but used by Miss bay-on fro 6 years
Required: compute fro the following:

1. Monthly withholding taxes paid.
2. Quarterly business income tax paid.
Problem 11-27 Income Tax of Professional Income

Rosanna Roses, a resident Filipina actress, earned P1,700,000 as an entertainment fee during the
taxable year, net of related 15% creditable withholding tax. In addition, she earned the following
form business:
Gross receipts Income tax paid
Philippines P500,000 P40,000
Japan 1,000,000 300,000
Rosanna opted to use OSD.
Required: assume that roses is single with four qualified dependent children, compute for the
following:
1. Net taxable income
2. Income tax due
3. Tax credit
4. Income tax still due and payable
Problem 11-28 Income Tax of Husband and Wife

Mr. and Mrs. Bravo living with 8 qualified dependent children have the following income and
expenses during the taxable year:
Mr. Bravo Mrs. Bravo

Compensation, net of WTW P200,000 P250,000
Withholding tax on wages (WTW) 25,000 50,000
Personal expenses in going to work 80,000 100,000
Professional income, net of withholding tax 100,000
Premium on health/ hospitalization insurance paid 2,400
The couple has a communal property with a rent income of P300,000 during the year. The couple
use OSD.
Required: compute for income tax still due and payable (ITR) of Mr. and Mrs. Bravo.
Problem 11-29 Income Tax of Various Earnings

An individual taxpayer, married with 4 qualified dependent children, reported the following:

13th month pay and bonuses 40,000
Business expenses allowed 300,000

Royalty income- literature 80,000
Capital gains- long term 60,000
Withholding income taxes paid on:
Compensation 50,000
Quarterly business income 20,000
Dividend 5,000
Royalty 8,000
Required: compute the following:

1. Taxable income subject to normal tax.
2. Income tax still due and payable or tax refund reportable in ITR.
Problem 11-30 Comprehensive Problems

Atty. Abo Gado, a CPA- Lawyer, has the following income and related expenses during the year
200A:
Basic salary per month as a professor P25,000
Clothing allowance- de minimis per year 4,500
th
13 month pay 25,000
Rice subsidy- de minimis per month 1,600
Professional fees, inclusive of 12% VAT 224,000
Sales 5,000,000
Operating expenses before contribution 900,000
Contribution to the government 100,000
Interest expense (included in the operating expenses) 50,000
Interest income 75,000

Total quarterly tax paid 20,000
Health hospitalization insurance paid 5,000
The taxpayer is married with six qualified dependent children.

1. Total nontaxable 13th moth pay and other benefits.
2. Estimated withholding tax from January to November.
3. Total income tax still due and payable on December 31, 200A.

The following data are taken from the books of the taxpayer:
Sales
P1,000,000
Cost of sales
700,000
Gain from sale of capital assets- short term
300,000
Loss from sale of capital assets- long term
400,000
Gambling winnings
200,000
Gambling loses
250,000
Compensation income, net of tax withheld P20,000
180,000
th
13 month pay, and other bonuses 35,000
Proceeds from life insurance of his mother
100,000
Business expenses, including robbery loss ofP50,000;
Contribution to church, P60,000,
And interest expenses, P30,000
250,000
Bad debts recovery, not deducted previously
20,000
Lotto winnings, USA 300,000
Personal expense
100,000
Tuition fess of children
150,000
Interest income 20,000
Required: Compute the income tax still due and payable, if the taxpayer is an individual Filipino
resident, married and has 4 qualified dependent children.

A taxpayer named Ramsay Colorado, single, has the following income and expenses during the
taxable year 200A:
Philippines U.S.A
Compensation income, net of WT 10% P360,000 $2,250
Interest income, net of WT 20% 50,000 1,200
Commission income, net of WT 5% 57,000 950
Lotto winnings 100,000
Dividend income, net of WT 10 % 9,000 1,8000
One US dollar is equivalent to P50. All income derived without come from U.S.A. assume that
withholding taxes applied to income derived within the Philippines.
Required: Determine the income taxes due and payable of the taxpayer assuming that he is a :
1. Resident citizen;
2. Nonresident citizen;
3. Resident alien;
4. Nonresident alien engaged in business in the Philippines; and
5. Nonresident alien not engaged in business in the Philippines.

The following data are taken from the books of the taxpayer:
Sales
P2,000,000
Cost of sales
1,200,000
Gain from sale of capital assets (long –term)
100,000
Loss from sale of capital assets (short-term)
100,000
Gambling losses 80,000
Compensation income, net of tax withheld P20,000
230,000
13th month pay, and other bonuses 36,000
Proceeds from life insurance of his mother
500,000
Business expenses, including robbery loss of P50,000
Contribution to DepEd’s priority projects, P100,000,
And interest expense, P30,000
500,000
Bad debts recovery 60,000
Income tax refund 10,000
Lotto winnings, USA 300,000
Personal expenses
100,000
Tuition fess of children
150,000
Interest income personal lending 20,000
Required: Compute the income tax still due and payable per ITR, if the taxpayer is an individual
Filipino resident, married and has 2 qualified dependent children and 2 dependent senior citizen
parents.
Income taxation

1. A corporation does not include general professional partnership but includes joint venture
under a service contract with the government.
2. Domestic corporations refer to all kinds of corporation operating within the Philippines.
3. Nonresident foreign corporations are taxed based on their net taxable income within.
4. Domestic and foreign resident corporations are taxed on income within and without.
5. The gross income derived within by the nonresident foreign corporation is taxed in the
Philippines with 30% normal tax.
6. The interest income from foreign currency loan granted by the Offshore Banking Units (OBU) to
residents is subject to a passive income tax of 20%
7. The excess of MCIT over normal corporate tax can be carried forward as tax credit against the
normal tax fro the three immediately succeeding years.
8. The MCIT is applicable only to Domestic Corporation.
9. The excess of MCIT over normal tax that has not been credited against normal tax within the
reglamentary period shall be removed from the book balance by charging it to the retained
earnings account.
10. The capital gains earned outside the Philippines by resident foreign corporation are taxable
based on the normal corporate income tax.
11. A sale of real property located in the Philippines by a nonresident foreign corporation is subject
to a final tax of 6% based on gain.
12. Both resident and nonresident foreign corporation’s interest income from peso deposits is
subject to a final tax of 20%.
13. Nonstock and nonprofit educational institutions are exempt from income tax.
Chapter 12 Income Tax of Corporations

1. In general, the regular corporate income tax rte is 30%.

2. Substantial losses from a prolonged labor dispute may exempt corporation from MCIT upon the
recommendation of the BIR Commissioner to the Secretary of Finance.
3. The MCIT is applicable to resident foreign corporation such as “international carrier”
4. For purposes of determining MCIT on gross receipts, cost of services is allowed to be deducted
to arrive at the tax base.
5. Casual gains not directly connected in the conduct of business of the branch are to be included
as part of branch profit subject to 15% remittance tax
6. If the payor of the dividend is a domestic company and the recipient of the dividend is either a
domestic company or resident foreign corporation, such dividend is exempt from income tax.
7. Domestic and resident foreign corporations are required to withhold tax whether or not the
payment to nonresident foreign corporation is connected with the trade or business.
8. Dividend income is considered as among the unrelated business activities in determining the
amount of unrelated income of a proprietary educational institution fro purposes of availing the
10% preferential tax rate.
9. Passive incomes which have been subjected to a final tax shall not form part of gross income
from MCIT purposes.
10. A duty registered cooperative is exempt from income tax but subject to output VAT on their sale
or gross receipts.
11. Improperly accumulated earnings shall not be imposed on publicly-held corporations but can
imposed on insurance companies.
12. In general, incomes of Tax-exempt Corporation which are not directly related with respect to
their registered activities shall be subject to tax.
Income taxation

1. The net additions to reserve funds of an insurance corporation are to be treated as income in
the year of release.
2. The cooperative is subject to a final 20% tax on its interest income earned from the bank.
3. In general, government owned and controlled corporations are exempt from the bank.
4. The applicable tax on foreign international carrier is 2 ½ 7 of the Gross Philippine Billings.
5. In the case of franchising companies, royalties received in the active pursuit of business or
passive income are subject to 20% final tax.
6. The objective of imposing tax o the improperly accumulated income is to force closely-held
corporations to distribute dividends to stockholders and to force corporations to expand their
businesses.
7. Investment of substantial amount in long-term debt securities is an improper accumulation of
retained earnings of a closely-held corporation.
8. In computing the surtax, NOLCO, if ever included in the ITR, should be added back in the income
per ITR to arrive at the tax base of IAET.
9. If the corporate income has been subjected to IAET, it shall no longer be subjected to IAET in
later years, even if not declared as dividend.
10. All propriety educational institutions are not entitled to a special income tax of 10% regardless
of the nature of their reportable income.
11. The capital gains on sale located outside the Philippines of a resident foreign corporation is
subject to a capital gains tax of 6% based on the selling price or fair market value, whichever is
higher.
12. The offshore banking units are taxed at 15% on gross income considered earned within the
Philippines.
Chapter 12 Income Tax of Corporations

1. Which of the following is not classified as corporation?

a. Joint accounts
b. Associations
c. General professional partnerships
d. Insurance companies
2. A corporation whose income within and without the Philippines are both taxable.
a. Domestic corporation
b. Foreign corporation
c. Resident foreign corporation
d. Nonresident foreign corporation
3. One of the following earnings is not considered as income of a nonresident foreign corporation
subject to normal tax of 30% o the gross amount.
a. Rent of aircraft chartered by Philippine Nationals
b. Capital gains from sale of shares of stock
c. Gains, profits and income from casual sales
d. Interest dividends and royalty income
4. Which of the following corporation is taxed based on gross income?

a. Cooperative
b. Domestic corporation
c. Resident foreign corporation
d. Nonresident foreign corporation
5. Which of the following corporation is taxable?

a. Cooperatives
b. Government foreign corporation
c. Partnerships in general
d. Chamber of commerce
6. In paying corporate income tax, the excess of minimum corporate income tax could be used as a
deduction within three immediate succeeding taxable years and such excess shall be credited
against
a. Normal corporate tax
b. Minimum corporate tax
c. Gross income tax
d. Capital gains tax
7. The minimum corporate income is applicable in determining the tax liability of a corporation
except when the corporation
a. Is in its third year
b. Is in its fourth year
c. Incurred net loss or zero taxable income
d. Has normal income tax which is lesser than minimum income tax
8.. Nonresident foreign corporations are subject to normal tax rate based on
A. Net taxable income within B. Gross income within C. Net taxable income from all sources D. Net
taxable income from all sources.
9. The tax imposed on inter- corporate dividends received by a resident foreign corporation from a
domestic corporation a is A.tax exempt B.. Subject to 10% final tax C.. Subject to 15% final tax
D.Subject to 30% corporate tax
10. Royalty income derived within the Philippines by a nonresident foreign corporation shall be
subject to
A. 20% final tax B. 7.5% final tax C. 30% normal corporate tax D. 2% minimum corporate tax
11. Capital gains of resideny foreign corporation on sale or exchange or disposition of lands and /or
buildings located in the Philippines.
A. 6% selling price or fair market value whichever is higher B. 6% of selling price or fair market
value whichever is lower. C. 1/2 of 1% of the selling price. D. Subject to normal corporate
income tax
12. The following corporate income are subject to income tax, except
A. Cash dividends received from a domestic corporation by another domestic corporation. B.
Royalty income received from a domestic corporation C. Interest income on foreign loans D. Inter-
corporate dividends received by a nonresident foreign corporation from a domestic corporation.
13. The net taxable income of regional operating headquarters established in the Philippines by
multi-national companies engaged in administrative services is
A. Tax-exempt B subject to 10% income tax C. Subject to 15% final tax D. Subject to 30% corporate
tax.
Chapter 13 Partnership, co-ownership and Joint ventures
Problem 13 - 1 True or False

Write true if the statement is correct or false is the statement is incorrect.
1. The distributable share of the partner in a commercial partnership is subjected to final tax of
10%.
2. If the only source of income of the partner is his share in a general commercial partnership, he is
no longer required to file the annual income tax return.
3. The share of the partners in the general professional partnership is taxable in the conventional
manner of computing the normal income tax of individual.
4. A partnership that derives income primarily from professional fee and also engages in trading
business as secondary source of income is to be classified as general professional partnership.
5. Dividend income earned by general commercial partnership is no longer taxable against the
partner upon its distribution as share of the partner.
6. All partnerships are taxed in the same manner as corporation.
7. A general professional partnership is not required to file its annual income tax return.
8. The share of the partner in the general professional partnership is subject to final withholding
tax of 10% If the amount is below P720,000.
9. The income of general commercial partnership is also subject to MCIT or Normal Corporate Tax
which ever is applicable.
10. If the amount to be distributed to a partner of a general professional partnership is more than
P720,000, it is to be withheld with 15% creditable tax.
Problem 13 - 2 True or False

Write true if the statement is correct or false is the statement is incorrect.
1. Partner’s contribution to the partnership are subject to a final tax of 10%.

2. The capital gains on sale of partner’s interest is a subject to a final tax of 5%if the amount is
P100,000 and 10% in excess of the first P100,000.
3. Generally, co-ownership income is not taxable.
4. The income of co-ownership that is distributed to the beneficiary is subject to 10% withholding
tax if less than P720,000 per year.
5. Co-ownership, which exists more than 10 years, is subject to income tax in the same manner as
general commercial partnership.
6. The general professional partnership and joint ventures are not classified as a corporation.
7. In general, a joint venture is taxed like a corporation.
8. Partnership contemplates a general business with degree of continuity, while the joint venture is
formed for the execution of a single transaction.
9. A corporation cannot enter into a partnership contract, but it can engage in a joint venture.
10. The co-venturers in a tax-exempt joint venture are also exempted for income tax.
11. The taxed-exempt joint venture is not required to file an ITR.
12. The share of co-ventures in a taxable joint venture is subject to a final tax of 10%.

1. Which of the following is a party in a joint venture?

a. Partners
b. Co-owners
c. Co-venturers
d. Shareholders
2. The share of the partner in the income of a commercial partnership is

a. Subject to final tax of 10%.
b. Subject to creditable tax of 10% if the amount is P720,000 and below and 15% if the
amount is more than P720,000.
c. Subject to normal tax of individual taxpayer.
d. Tax-exempt.
3. Which of the following is subject to tax?

a. Share of the co-venturers in the income of taxable joint venture.
b. Capital gains on sale of partners’ capital.
c. Income of a general professional partnership.
d. Dividend income of a commercial partnership from a domestic corporation.
4. Statement 1: Professional fee is the primary source of general professional partnership’s

income.
Statement 2: Trading activities are also source of general professional partnership.
5. Statement 1: A general professional partnership is exempt from income tax an as such is not
required to file an Income Tax Return.
Statement 2: The share of the partners in the general professional partnership is subject to
income tax rate for individual.
6. Statement 1: A general commercial partnership is taxed at the same manner as a domestic

corporation.
Statement 2: A general commercial partnership that is reporting an operation loss on its 5 th year
of operation is still liable to pay its annual income tax for such year.
7. Statement 1: The distributive share of a general commercial partnership is subject to final

withholding tax of 10%.
Statement 2: The distributive share of a general professional partnership is subject to creditable
withholding tax of 10%.
8. The general professional partnership is not subject to income tax, but is required to file a return
in order to
a. Provide information regarding the business activity of the partnership.
b. Provide information regarding the share of the partners in the net income of the
partnership to be included in their tax return.
c. Comply with the requirements of the Securities and Exchange Commission.
d. Comply with the requirements of the taxing agency
9. The net income received by the partner of a general co-partnership is subject to

a. A corporate tax.
b. A final tax on dividends.
c. An individual normal tax.
d. A capital gains tax
10. Statement 1: The creditable withholding tax of the partner’s share from the income of a
professional partnership is 15% if the partner’s share exceeded P720,000 per year.
Statement 2: the amount received by the partner as his share in the general commercial
partnership is subject to creditable withholding tax of 10%.

1. The share of partners from the P700,000 net income of a general professional partnership is
subject to
a. Final tax of 10%.
b. Creditable withholding tax of 10%.
c. Creditable withholding tax of 15%
d. Tax-exempt.
2. A general professional partnership engaged in the practice of professional and trading of goods
is subject to
a. 10% tax based on gross income
b. 15% tax based on net taxable income.
c. 30% tax based on net taxable income.
d. Tax-exempt.
3. The gross receipts of a professional entertainer is subject to a 10% creditable withholding taxif
his/her income during the year
a. Exceeds P720,000.
b. Is P720,000 and below.
c. Is P1,000,000 and above.
d. None of the above.
4. Which of the following co-partnership is not subjected to tax as a corporation ?

a. Agreed co-ownership.
b. Undivided property of co-ownership for more than 10 years with an attempt to divide
the property among co-heirs.
c. Undivided property of co-ownership for more than 10 years without an attempt to
divide the property among co-heirs.
d. Co-ownership with investments of co-owners.
5. Statement 1: a partner in a GPP is allowed to deduct OSD based on the gross income from his
trade, business and practice of profession which is separate and distinct from the GPP.
Statement 2: If the GPP availed the itemized deduction, the partners are not allowed to claim
the OSD from their share in the net income.
6. Statement 1: The income of co-owned inheritance is tax exempt.

Statement 2: The share of the co-owner in the income of co-partnership is also exempt from
income tax.
7. Which of the following co-ownership is subject to income tax?

a. Income of voluntary established co-ownership
b. Income of co-owned property acquired as inheritance.
c. Income of co-owned property acquired as donation
d. Income of general professional partnership.
8. Statement 1: A co-ownership that exists for more than 10 year is exempt from income tax
Statement 2: The share of co-owners from tax exempt co-ownership is taxable against the co-
owner
9. Statement 1: Income of co-ownership per agreement is taxable.

Statement 2: The share of the co-owner in the income of co-ownership is also exempt from
income tax.
10. Statement 1: The grantor is liable for the income of a revocable trust.
Statement 2: A revocable trust exist when the grantor revokes his power to change at any time
any part of the terms of the trust.
Problem 13 – 5 GPP with Net Loss

J, a partner of a general professional partnership, showed the following income and losses:
Net income from trading business – as sole proprietor. P500,000

Share from the net loss of the partnership 200,000
How much is the net taxable income of J?

a. P720,000
b. P450,000
c. P300,000
d. P250,000
Problem 13 – 6 Co-partnership with Net Loss

M, a partner of a commercial partnership, showed the following income and losses:
Net income from trading business – as sole proprietor. P500,000

Share from the net loss of the partnership 200,000
How much is the net taxable income of M?

a. P720,000
b. P450,000
c. P300,000
d. P250,000
Problem 13 – 7 Co-partnership
In 200x, Mitzi and Edgar reported a partnership net profit from trading amounting to P400,000. Other
items of income not included in the net profit are interest income of P4,000, net final withholding tax,
and dividend income from domestic corporation of P10,000. The income tax on the distributive share of
Mitzi who share profit and loss equally with Edgar in the earnings of the partnership is
a. P14,700
b. P14,300
c. P14,076
d. P13,600
Problem 13 – 8 Co-partnership
A and B formed a trading partnership sharing profit and loss at 1:1. During the taxable year, the gross
profit of the partnership amounted to P400,000 and business expenses incurred amounted to
P160,000; cost sales of P200,000.
1. The income tax of the partnership is

a. P135,000
b. P105,000
c. P72,000
d. P15,000
2. How much is the distributable share of partner A, net of final tax?

a. P183,000
b. P102,000
c. P87,750
d. P75,600
Problem 13 – 9 General Professional Partnership

J, married, with an unemployed wife and one qualified dependent child, and R, single, are partners in J,
R, & Co., a general professional partnership. They are sharing profit and losses as follows: J – 70% and R
– 30%. For the calendar year ended 200x, the income and expenses of the partnership and the income
and expenses of the personal account of the partners are as follows:
J, R, & Co. Personal J Personal R

Gross income P325,000 P85,000 P65,000
Expenses:
Allowable deductions 175,000 35,000 15,000
Charitable distribution 15,000 1,750 620
Drawings by J and R from the partnership during the year (39,000) 24,000 15,000
1. The taxable net income of J, if he opted for itemized deduction is

a. P67,750
b. P71,250
c. P96,750
d. P146,250
2. The taxable net income of R, if he opted for optimal standard deduction is

a. P112,500
b. P97,500
c. P77,500
d. P47,500

Black and White partnership reported for year 200x a net professional income amounting to P400,000.
Mr. Black is single and has no compensation income of P200,000. His other income, net of final
withholding taxes are interest income of P4,000 and dividend income of P10,000.
The net taxable income per annual ITR of Black who shares profit and loss equally with White in the
earnings of the partnership is
a. P420,000
b. P404,000
c. P390,000
d. P360,000
Problem 13 – 11 GPP vs GCP

X and Y formed a partnership with profit and loss sharing of 60% and 40% respectively.
The summary of the partnership’s income and expenses during the year are as follow:
Net income from operation. P1,400,000

Gain on sale of capital assets, not subjected to final tax. 200,000
Interest income, net of 20% final tax. 80,000
1. If the partnership is a general professional partnership, how much is the income tax due and
payable per ITR of the partnership
a. 0
b. P456,000
c. P480,000
d. P510,000
2. If the partnership is a general professional partnership, how much is the income tax still due and
payable of partners X and Y per ITR, assuming that the creditable withholding tax has been
withheld and remitted to the BIR?
Partner X Partner Y
a. P256,200 P153,800
b. P128,200 P105,800
c. P112,200 P89,800
d. P105,600 P64,000
3. If the partnership is a commercial partnership, how much is the income tax due and payable per
ITR of the partnership?
a. P510,000
b. P480,000
c. P456,000
d. 0
4. If the partnership is a commercial partnership, how much is the final taxes on the respective
profit share of partner X and partner Y ?
Partner X Partner Y
a. P105,600 P64,000
b. P102,000 P68,000
c. P96,000 P67,200
d. P72,000 P48,000
Problem 13 – 12 Co-ownership
In 200x, Robert and Annie inherited a plantation from their aunt, Cherry. During the year, the property’s
net earnings after itemized expenses was P3,000,000 of which P1,000,000 each was received by Robert
and Annie.
1. How much is the income tax of the earnings from the plantation?
a. P320,000
b. P960,000
c. P285,000
d. 0
2. Assuming that Robert is single, how much is his taxable income in his share from the co-
ownership?
a. P1,000,000
b. P950,000
c. P880,000
d. 0
Problem 13 – 13 Co-ownership
In 1989, Grace Ann Subala and Marjorie Sison received a plantation from their aunt Evelyn Paragas. The
cousins continued to maintain the plantation. In 201A, the net income of the plantation is P5,000,000 of
which P1,000,000 each was received by Grace and Marjorie before deducting the applicable withholding
tax.
1. What is the amount of income tax due and payable of the co-ownership?
a. P1,600,000
b. P1,500,000
c. P1,250,000
d. 0
2. What is the amount of final income tax withheld from the share of Marjorie Sison?
a. P200,000
b. P150,000
c. P100,000
d. 0
3. What is the amount of the income tax due and payable per of Grace Ann Subala per ITR?
a. P200,000
b. P150,000
c. P100,000
d. 0
Problem 13 – 14 Joint Venture

A Co. and B Co. formed a joint venture for a construction project of the government. The companies
agreed that they share profit equally. The joint venture received the total contract price of P10,000,000.
The cost of the project amounted to P6,000,000. Operating expenses related to the joint venture
amounted to P1,000,000. How much is the income tax due of the joint venture?
a. P1,200,000
b. P900,000
c. P600,000
d. 0

X and Y companies formed an unregistered joint venture engaged in setting up cable networks. Related
data for their joint venture are as follows
Sales, including VAT P67,200,000

Cost, including VAT P44,800,000
If the joint venture would like to minimize its tax liability, how much its Income tax due ?
a. P6,000,000
b. P4,032,000
c. P3,600,000
d. Tax-exempt

AB and Company, a general professional partnership has the following data for 200x:
Gross income P1,200,000

Deductions:
Salary of A 240,000
Salary of B 360,000
Other business expenses 100,000
Profit and loss distribution:

Partner A, 60% single, providing full support to his mother.
Partner B, 40% legally separated with 2 qualified dependent children.
Required: Compute the tax liability of:

1. The partnership
2. Partner A
3. Partner B
Problem 13 – 17 Co-Partnership
MW, a registered co-partnership, had the following data for 200x:
Gross income for merchandising P575,000
Dividends received from domestic corporation P40,000
Dividends received from nonresident foreign corporation P60,000
Interest income, net of 20% final tax P10,000
Ordinary and necessary business expenses P255,000
Data for the partners M W
Participation 40% 60%
Status Married Single
Required: Compute the income tax due of M and W.

X Co. and Y Co., both domestic corporations, form a joint venture to construct a building with a contract
price including 12% VAT amounting to P112,000,000.
The total cost of construction amounted to P72,800,000 including 12%VAT. Operating expenses related
to the joint venture amounted to P15,000,000. The corporations agreed to share any income or losses
equally.
Required: Compute the related taxes of the joint venture and the joint venture partners assuming that
the construction is
1. Not a government project.
2. A government project.

A Co. and B Co., both domestic corporation, form a joint venture to construct a building with the
contract price including 12% VAT amounting to P89,600,000.
The total cost of construction amounted to P56,000,000 including 12%VAT. Operating expenses related
to the joint venture amounted to P10,000,000.
The corporations agreed to share income and losses equally
Required: compute the related taxes of the joint venture and the joint venture partners assuming that
the construction is
1. Not a government project.
2. A government project
Problem 13 – 20 GCP vs GPP

E. Cao and A. Co are partners of ATIN Partnership, where they share profit and losses equally. Both
partners are single with no other source income. ATIN Partnership’s income and expenses are as
follows:
Gross income P500,000

Allowable deduction 100,000
Required:
1. Compute for the income tax due, if the partnership is a (a) general co-partnership, and (b)
general professional partnership
2. Compute the respective income tax liability of E. Cao and A. Co. if the partnership is a (a) general
co-partnership, and (b) general professional partnership
Problem 13 – 21 comprehensive problem

X & Y Trading Partnership provided the following information related to business operation:
200A 200B
Net income (loss) from operation per GAAP (P385,000) P1,478,000
Cost and operating expenses per GAAP:
Cost of sales (60% of sales) P3,000,000 P6,000,000
Salaries expense 800,000 900,000
Fire loss 1,200,000
Representation expenses 300,000 400,000
Bad debts expenses (40% written off) 50,000 150,000
Contribution expense 200,000 400,000
Quarterly income taxes paid 375,000 500,000
Other income:
Bad debts recovery – from previous year 30,000
Interest income, net of 20% final tax 40,000 48,000
Fire loss insurance recovery 700,000
Required:
1. Net taxable income of the partnership per ITR for year 200A.
2. Net taxable income of the partnership per ITR for year 200B.
3. Income tax still due and payable of the partnership for year 200B.
Chapter 14 Income Taxes of Estate and Trusts

Write true if the statement is correct and false if the statement is incorrect.
1. The exemption allowed to estate or trust is P50,000.

2. In the case of two or more trusts created by the same person for the same beneficiary, the
taxable income of all trust shall be consolidated and the tax shall be computed based on the
consolidated income.
3. A beneficiary of an estate engaged in business has the status of self-employed individual
taxpayer.
4. The computation of the net taxable income of the estate is the same manner as individual
taxpayer, except that the personal exemption is limited to P20,000.
5. The income of irrevocable trust is taxable in the same manner as the income of the estate.
6. A trust is a right of property, real or personal, held by one party for the benefit of other.
7. The creation of trusts may be either expressed or implied.
8. A trustee is the person who establishes a trust.
9. Each beneficiary must include in his/her distributive share of the net income of the trust.
10. The tabular rates of tax prescribed under Section 24 (A) for individuals shall be used in
computing the tax income of trusts or estate
11. The amount of trust’s income for distribution for beneficiary, allowed a deduction from trust’s
taxable income shall be included in computing the taxable income of the beneficiaries whether
distributed to them or not.
12. Estate and trusts are treated as separate taxable entities.

Write true if the statement is correct and false if the statement is incorrect.
1. There is no need to file a tax return if the income of estates or irrevocable trusts is P20,000 and
below.
2. Trust device is usually used to transfer property from one generation to another.
3. In general, the income of a trust for the taxable year which is to be distributed to the
beneficiaries is returnable and will be taxed to the respective beneficiaries.
4. The income of the trust which is accumulated for future distribution is taxed against the
beneficiaries.
5. Income accumulated in trust for the benefit of unborn person is net reportable income.
6. No taxable income is realized from the passage of property to the executor or administrator on
the death of the decedent.
7. An allowance paid to a widow or heir out of the corpus of the estate is not deductible from the
gross income.
8. The special deduction for trust s allowed to reduce the income of trust of such trust is
administered in foreign country.
9. In general, the income derived from employees’ pension trust is subject to tax applicable to
individual taxpayer.
10. The income of several irrevocable trusts shall be included in the consolidated income of the
trustor to avail of one personal exemption.

1. The properties left by the decedent transferrable to the successors are called
a. Trusts
b. Estates
c. Wills
d. Investments
2. The portion of income from irrevocable trust that would be distributed during the year is taxable
against the
a. Grantor
b. Trustee
c. Beneficiary
d. Trust
3. The beneficiary of the income of estate has the status of

a. Self-employed taxpayer
b. Single taxpayer
c. Receivership
d. Taxpayer with dependents
4. The absolute exemption applicable to the income of estate or trusts amounts to

a. P75,000
b. P50,000
c. P30,000
d. P 20,000
5. The share of the beneficiary of the income of estates during the taxable year is subject to a
a. Final withholding tax of 15%
b. Creditable withholding tax of 15%
c. Final withholding tax of 10%
d. Creditable withholding tax of 10%
6. The taxable income of the estates or trusts is to be computed as the same manner as
b. Taxable partnership
c. Corporation
d. Joint venture
7. Statement 1: The income of the undistributed estate is subject to income tax.

Statement 2: The income of the estate is computed in the same manner as general commercial
partnership.
8. Statement 1: The income of the estate distributed to the beneficiary during the year is subject to
final tax of 15%.
Statement 2: The withholding tax on the income distributed to beneficiary is creditable against
the total tax liability of the beneficiary.
9. Which of the following statement is not correct?

a. An irrevocable trust is subject to income tax.
b. The taxable trust is taxed in the same manner as individual taxpayer.
c. The taxable trust is allowed to claim P20,000 exemption.
d. The taxable trust is taxed at 30% of the net taxable income.
10. Statement 1: Both revocable and irrevocable trusts are taxable for their income earned.
Statement 2: The income of revocable trust is taxable against the grantor.
11. The grantor is liable for the income of a revocable trusts.

Statement 2: A revocable trusts exist when the grantor revokes his power to change at any time
any part of the terms of the trust.
Problem 14 – 4 Taxable income of estate

Mrs. Anna Ayugat died in year 200A and was survived by her husband who is a businessman and two
minor children. After her death, her exclusive estate’s gross income for year 200A amounted to
P200,000. The itemized allowable deductions amounted to P20,000. To determine the estate’s minimum
income tax due, the net taxable income for year 200A is
a. P180,000
b. P130,000
c. P100,000
d. P70,000
Problem 14 – 5
Mr. Mathai died in November 1, 200A. After his death, his estate has a gross business receipts of
P400,000 during year 200A. He is survived by his mother, who has annual rent income of P200,000.
1. How much would be the net income of the estate subject to income tax in 200A?
a. P240,000
b. P220,000
c. P200,000
d. P190,000
2. If in the year following the death of Mr. Mathai, his estate’s gross business receipts of P500,000, and
his estate has not been transferred to his mother. How much would be the tax savings if the
administrator of the estate would distribute P150,000 income of the estate to Mathai’s mother?
a. P3,500
b. P4,000
c. P4,500
d. P5,000
Problem 14 – 6
NatyGoc died in December 31, 200x, leaving her exclusive estate to his minor child. She earned a gross
business income of P320,000 during year 200x l. The business expenses for year 200x amounted to
P200,000. Her husband has an average annual gross business receipts of P400,000.
In year 200y, a year following the death of NatyGoc, her estate’s income and expenses amounted to
P500,000 and P300,000 respectively. The administrator of Miss Goc’s estate opted to minimize he
estate’s income tax. He distributed P150,000 to Goc’s child in 200y.
1. How much is the income tax due of NatyGoc in 200x?

a. P23,000
b. P17,900
c. P8,500
d. P4,750
2. How much is the tax savings in 200y?

a. P26,000
b. P21,000
c. P15,500
d. P4,000
Problem 14 – 7
Mr. PumAnao died on March 1, 200xwith P1,000,000 income. He left an exclusive gross estate
amounting to P20,000,000 under an administrator comprising a business with the following 200x
incomes and expenses after his death:
200x 200y
Gross income P5,000,000 P6,000,000
Operating expenses allowed (2,800,000 (3,200,000)
Net income P2,200,000 P2,800,000
The administrator gave the following amounts to Mr. PumAnao’s beneficiaries:
200x 200y
Mrs. WalAnao, wife P425,000 P510,000
Mr. Tag Anao, son 255,000 255,000
Total amount paid, net of CWT P680,000 P765,000
The beneficiaries used OSD in the computation of their respective taxable income.
1. The income tax due of Mr. Anao’s estate for years 200x and 200y would be
200y 200x
a. P389,400 P549,000
b. P389,000 P557,000
c. P406,600 P566,600
d. P973,000 P600,200
2. The income tax due (refund) of Mrs. Anao for year 200y is higher (lower) by what amount
compared to 200x?
a. (P3,000)
b. P3,000
c. (P18,000)
d. P18,000
3. The income tax due (refund) of Mr. Tag Anao for year 200y would amount to
a. 0
b. (P20,000)
c. (P24,500)
d. P45,000
Problem 14 – 8
During the year, the amount of income of irrevocable trust that was distributed to heir amounted to
P85,000 net of creditable withholding tax. The trust income after itemized deduction was P400,000
The net taxable income of trust is

a. P400,000
b. P350,000
c. P280,000
d. P250,000
Problem 14 – 9
Don Pepot established two separate irrevocable trust for the benefit of his two children. The trusts are
administered also by two respective trustees. During the year, the data related to the income and
expenses of the trusts are as follows:
Separate irrevocable trust Trust A Trust B

Separate beneficiaries Topep Potet
The same trustees Atty. Abobo Atty. Abobo
Net income after distribution to beneficiary P4,000,000 P4,800,000
Amount given to beneficiary 20% 20%
Income taxes paid 1,229,000 1,485,000
The related creditable withholding taxes were made on the amount given to the beneficiaries. The
trustees use OSD if needed to avail of tax minimization
1. How much is income tax still due and payable of Potet if he has rent income P285,000, net of
withholding tax?
a. P15,000
b. P42,000
c. P51,600
d. P246,600
2. How much is the total income tax due of the two separate irrevocable trusts?
a. P2,675,600
b. P2,714,000
c. P2,733,000
d. P2,784,000
Problem 14 – 10 Trusts
The following data are available for the income and expenses of the grantor, the trusts and the
beneficiary for the year 200x:
Earner Income Expenses

Grantor P1,000,000 P400,000
Trust A 500,000 200,000
Trust B 200,000 100,000
Beneficiary 100,000 40,000
1. Under the assumption that the income earned from Trust A is revocable and Trust B is
Irrevocable, the net income of the grantor before personal exemption is
a. P600,000
b. P900,000
c. P1,000,000
d. P1,100,000
2. Based on the given data above, the net taxable income of all the trusts after exemption is
a. P380,000
b. P200,000
c. P100,000
d. P80,000
3. Assume further that P50,000 of the income of Trust B was distributed to the beneficiary, the net
taxable income of beneficiary, after personal exemption is
a. P130,000
b. P90,000
c. P70,000
d. P40,000
Problem 14 – 11
Mr. Tan, a Filipino-Chinese created a revocable trust in favor of his married youngest daughter
amounting to P10,000,000. During the year, the trust earned a net income of P2,000,000 before 10% of
its amount was given to his daughter beneficiary. (Observe the principle of tax minimization)
1. How much would be the net taxable income of the trust?

a. 0
b. P950,000
c. P1,150,000
d. P1,750,000
2. How much would be the income tax due of Mr. Tan?

a. P269,000
b. P525,000
c. P541,000
d. P589,000
3. How much would be the income tax still due and payable (refund) of Mr. Tan’s daughter?
a. 0
b. P8,500
c. (P8,500)
d. (P21,500)
Problem 14 – 12 Income of Estate

Mr. Gerald Baguingan, died on January 4, 200x, leaving a conjugal estate of P20,000,000 to his wife,
Mitzi. Their heirs are still in judiciary testamentary proceedings for the settlement of the estate.
In 200x, the estate realized a gross income from business amounting to P5,000,000 and the related
business expenses is 40% of gross income. The administrator distributed the following amount to the
children beneficiaries of Mr. Baguingan.
A. Mrs. Diana Nievera, married with

B. 4 qualified dependent children,
With a compensation income of P250,000 P200,000
C. Alona, single, 18 years old 200,000
D. Mrs. Grace Micu, married and unemployed 200,000
Total income distributed to the beneficiaries P600,000
Their related withholding income taxes were made on the amount received by the children
beneficiaries.

1. Income tax due of Mr. Baguingan’s estate for 200x.
2. Income tax still due and payable of Mrs. Diana Nievera for 200x.
3. Total withholding taxes on the amount received by the children beneficiaries.
Problem 14 – 13 Tax Savings

NatyPoc died in November 1, 200x. Kalag, her husband, survived her. Upon her death, her exclusive
estate includes a business income of P500,000 earned during year 200x. The business expenses for year
200x amounted to P200,000. Naty’s estate was managed by an administrator
A year following the death of NatyPoc, the estate income and expenses amounted to P800,000 and
P260,000 respectively.
The estate has not been transferred to Kalag when the income was earned. Kalag also earned business
income of P300,000 and incurred business expenses of P180,000 during the same year.
Required: How much would be the tax savings if the administrator of the estate would distribute
P150,000 income of the estate to Kalag?
Problem 14 – 14 Taxable Income of Trust and Beneficiary

In January 2, 200x, Mr. James Boting established a trust for the benefit of his daughter Juniper Boting,
aged 12 years old. The property established as trusts are as follows:
House and lot with an annual income of P80,000

Hollow block business with a monthly income of 10,000
Farm with an annual income of 50,000
It is determined that the business expenses is 30% of the income derived from the trust. During the
year, the income distributed to the beneficiary amounted to P50,000.
Required: If the trust us irrevocable trust, compute for the following:

1. Income tax payable by the trust in 200x.
2. Income tax due from the beneficiary in 200x.
Problem 14 – 15 Irrevocable Two Trust

Mark Llaguno, a trustor, created two irrevocable trust for his son. The reported earnings od each trust
for year 200x are as follows:
a. Trust 1: Net income before exemption, after P10,000 distribution to beneficiary during the year,
P40,000.
b. Trust 2: P1,000,000 income before exemption, and distribution to beneficiary amounting to
P20,000.
Required: if the related withholding taxes were made during the year, how much is the income tax still
due and payable of the two trusts?
Problem 14 – 16 Tax Planning

Mr. Nabiag, single, with a dependent father, died in November 1, 200A. His estate has a gross business
receipts of P300,000 during the year 200A.
Required:
1. How much would be the net income of the estate subject to income tax in year 200A?
2. If a year following the death of Mr. Nabiag, his estate’s gross business receipts amounting to
P500,000,and his estate has not been transferred to his father. Assume further that his father
has a gross business receipts of his own amounting to P200,000, how much would be the tax
savings if the administrator of the estate would distribute P150,000 income of the estate to
Nabiag’s father?

Dokling earns an annual gross income of P400,000 from his business before deducting the operating
expenses averaging to P100,000 per year. Out of his earnings, he is giving P100,000 as yearly allowance
to his son.
Required:
1. Using a better way to minimize income tax, what device could Dokling use to lower his income
tax?
2. If 50% of his business will be put in an irrevocable trust in favor of his son who is married, how
much would be his annual tax savings?

Mr. A, married, receives an annual income from his two properties as follows:
Total Property 1 Property 2

Rent income P800,000 P500,000 P300,000
Depreciation expense P240,000 P150,000 P90,000
Required:
1. Applying the tax minimization principle, how much is the income tax due of Mr. A?
2. If property no. 1 would be held in irrevocable trust for any of his beneficiaries, how much is the
amount of tax savings?
Chapter 15 Withholding Taxes

Write True if the statement is correct or false if the statement is incorrect.
1. The penalty shall be imposed on withholding tax agent for failure to withhold the tax.
2. Taxes are withheld at source to facilitate tax collection.
3. Under the final withholding tax system, the income tax withheld is the full and income tax due
from the payee.
4. Under the withholding tax system, the income tax payee ia not required to file an income tax
return for the particular income on which the final tax has been withheld.
5. Taxes withheld on income payments covering the expanded withholding taxes and final
withholding taxes are creditable in nature.
6. The taxes withheld from compensation of employees of offshore banking units should file
income tax returns to the BIR.
7. All income earned by persons are subject to withholding tax.
8. Remuneration for casual labor not in the force of employer’s trade or business is not subject to
withholding tax.
9. No withholding tax shall be required where the total compensation income of an individual in a
year does not exceed sixty thousand pesos.
10. The employee who opts to file the income tax return shall file the same not later than April 15 of
the year immediately following the taxable year.
11. In general, any juridical person, whether or not engaged in business or trade is required to
withhold tax on income payments.
12. Government offices are not constituted as withholding tax agent.
13. The obligation of the payor to withhold tax arises at the time an income is paid or payable.
14. The withholding of creditable withholding taxes shall not apply to income payments made to
national government and its instrumentalities.
15. Business establishments whose withholding taxes amount to one million pesos are considered
large tax payers.
Problem 15 – 2 Amount to Receive, Net of Withholding Tax

Y is an unmarried person and a partner in a general professional partnership for a 50% interest. The
partnership earned P500,000 income and distributed to partners. How much should partner X receive,
net of withholding tax?
a. P450,000
b. P250,000
c. P225,000
d. P212,500
Problem 15 – 3 Amount to be Paid, net of Withholding Tax

A nonresident foreign corporation is a holder of 10,000 shares of X, a domestic corporation. X declared a
P10 per share cash dividend to stockholders of record. How much should be paid to the nonresident
foreign corporation, net of withholding tax?
a. P95,000
b. P90,000
c. P80,000
d. P70,000
Problem 15 – 4 Amount to be Paid, Net of Withholding Tax

A Philippine National chartered a foreign vessel of nonresident lessor for P500,000. How much should be
paid to nonresident lessor, net of withholding tax?
a. P450,000
b. P462,500
c. P477,500
d. P500,000
Problem 15 – 5 Net Payment, Net of Withholding Tax

A tax informer earned P1,000,000 reward. How much should be paid to the tax informer, net of
withholding tax?
a. P950,000
b. P900,000
c. P850,000
d. P800,000
Problem 15 – 6 Comprehensive Problem

The following income are earned during the taxable year 200x:
1. Interest on bank deposits:
a. Peso deposits P50,000
b. Dollar account (FCDS) $10,000
2. Prize P100,000
3. Royalties on books P300,000
4. Capital gains – sale of real property
(acquisition cost, P800,000) P200,000
5. Property dividends P120,000
6. Compensation from offshore baking units P400,000
Required: Compute the final taxes if the income payee is a:

a. Resident Citizen or Resident Alien.
b. Nonresident alien engaged in business.
c. Nonresident Alien not engaged in business
d. Domestic Corporation (except nos. 2 and 6)
e. Resident Foreign Corporation (except nos. 2, 4 and 6)
f. Nonresident Foreign Corporation (except nos. 2, 4 and 6)

Taxation

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Taxation

Încărcat de

Drepturi de autor:

Formate disponibile

INCOME

Mark Jade P. Erazo

Problem 1 – 1 True or False

1. Taxation could be described as a power, as a process, or as a means. As a power, taxation is

4. Taxation is inseparable in the existence of a nation.

7. The Constitution is the source of the State’s taxing power.

Problem 1 – 2 True or False

2. Tax assessment refers to the fiscal policy of the government.

6. All inherent powers presuppose equivalent compensation.

7. There is no imposition of amount in police power.

Problem 1 – 3 True or False

1. Taxes may be exercised to encourage economic growth by granting tax exemptions.

3. Protection is the basic consideration that justifies tax situs.

8. In general, bills need not to be signed by the President to become a law.

11. Taxes collected by the BIR are local taxes.

Problem 1 – 4 True or False

5. No person shall be imprisoned for nonpayment of income tax.

Problem 1 – 5 Multiple Choice

1. Which of the following statements is/are correct?

2. Which of the following is/are natural qualities of Taxation Power?

4. Which of the following statements is not correct?

7. All of the following statements are correct except one.

9. Which of the following could be an object of taxation?

Problem 1 – 6 Multiple Choice

2. All of the following are legislative aspect of taxation except

3. Which of the following is/are elements of impact of taxation?

4. All of the following are administrative functions of taxation except

8. Which of the following is not correct?

9. Which of the following statements is correct?

Problem 1 – 7 Multiple Choice

1. Which of the following tax escape is permissible under Tax Code?

3. Which of the following is an incorrect description of taxation?

4. Which of the following is not true?

5. Which of the following is a correct nature of restriction to exercise taxation power?

6. Which statement refers to police power as distinguished from taxation?

7. Police power is distinguished from taxation power because

9. Which of the following statements is not correct?

Problem 1 – 8 Multiple Choice

3. Which of the following statements is not correct?

7. Which of the following are characteristics of taxes?

8. The following are business taxes except

9. All of the following are National taxes as to collecting authority except

2. All of the following are not taxes except

3. Which of the following could be an object of taxation?

4. Which of the following correctly describes the primary purpose of taxation?

5. All of the following statements are true, except

6. One of the following situs of taxation is not true.

8. One of the following is incorrect regarding tax exemption.

9. Which of the following statements is not correct?

10. Which of the following is not correct?

Problem 1 – 10 Multiple Choice

1. Which of the following characteristics describes our internal revenue laws?

5. Which of the following statement is not true?

7. All of the following statements are incorrect, except

8. Which statement is wrong? A revenue bill:

9. Which of the following statements is correct?

Chapter 2 Tax Administration

1. The heart of tax administration is the enforcement of tax policy.

9. The BIR can appeal to the CTA.

15. An invalid assessment cannot be used as a basis for a tax compromise.

Problem 2 – 2 True or False

2. In a written protest to Commissioner, all relevant supporting documents must be submitted

6. Criminal tax violations filed in courts may be compromised.