BASIC PRINCIPLES OF TAXATION
Submitted to:
Prof. Ardee Dela Cruz
Submitted by:
Cabreros, Mara Jen
Serrano, Bing
Tumang, Kris Thea
BASIC TAXATION
Multiple choices
2. Which of the following 'statements is not correct?
(a) Taxes may be imposed to raise revenues or to provide disincentives to
certain activities within the state;
(b) The state can have the power of taxation even if the Constitution does not
expressly give it the power to tax;
(c) For the exercise of the power of taxation, the state can tax anything at any
time;
(d) The provisions of taxation in the Philippine Constitution are grants of
power and not limitations on taxing powers.
Answer: d
3. A religious order, lessee of a piece of land, constructed a seminary and church on a portion of
the lan.d On the portion of the sand not used as seminary and constructed a one-story building
that it sub-leased to private individual religious materials, food and refreshments. The rent
income is used for teaching at the seminary.
Statement 1: The rent, in some of the religious order is subject to income tax;
Statement 2: The exemption from taxation provided in the Philippine Constitution prohibits. We
imposition of any tax on the religious order.
(a) True, true; (b) False, false; (c) True, false;
(d) False, true.
Answer. c
The constitutional provision on exemption of the church, parsonage or convent appurtenant thexe
;o is an exemption of the church, etc. from property tax: The income tax is not a property tax.
However, since the church is also a non-profit-educational institution, its rent income, since used
actually, directly and exclusively for educational purposes, is exempt from the income tax under
the Constitution.
4. The Philippine Constitution, a non-profit, non-stock educational institution is exempt from
income tax.
Statement 1: This exemption from tax applies whether the educational institution by a religious
order or not;
Statement 2: The policy consideration for the tax exemption is to encourage the establishment
and not profit-motivated of educational institutions which is public service oriented
(a) True true; (b) False, false;
Answer A
(c) True, false;
(d) False, true.
5. A non-profit, non-stock educational corporation earned interest on its bank deposits, on which
Its information return filed with the Bureau of Internal Revenue carried the item, there is a
certification from the depositary bank of the amount of the interest on which there was no
withholding income tax; and there is a certification from the corporation on the utilization of the
income,, or the use to which it is intended
Statement 1: If is a compliance with the documentation for the exemption. Hence, there is no
income tax on the interest income,
Statement 2: Even without the documentation, the income is still exempt from income tax
pursuant to the provision of the Philippine Constitution, if it can be shown that the income was
used actually, directly and exclusively for the purpose for which the corporation was organized.
(a) True, true; (b) False, false;
(c) True, false; (d) False, true.
Answer: a
6. One of the characteristics of internal revenue laws is that they are:
(a) Criminal in nature:
(b) Penal in nature;
(c) Political in nature;
(d) Generally prospective in application.
Answer: d
7. One of the characteristics of our internal revenue laws is that they are:
(a) Political in nature;
(b) Penal in nature;
(c) Generally prospective in operation although the tax statute may nevertheless operate
retrospectively provided it is clearly the legislative intent;
(d) Answer not given.
Answer c
8. In case of conflict between tax laws and generally accepted accounting principles (GAAP):
(a) Both tax laws and GAAP shall be enforced;
(b) GAAP shall prevail over tax laws;
(c) Tax laws shall prevail over GAAP;
(d) The issue shall be resolved by the courts
Answer: C
9. The following are similarities of the inherent power of taxation, eminent domain, and police
power, except one:
(a) Are necessary attributes of sovereignty
(b) Interfere with private rights and property;
(c) Affect all persons or the public;
(d) Are legislative implementation.
Answer: C
10. Tax as distinguished from license fee.
(a) Non-payment does not necessarily render the business illegal;
(b) A regulatory measure;
(c) Imposed in the exercise of police power;
(d) Limited to cover cost of regulation.
Answer a
11. Which statement refers to police power as distinguished from taxation?
(a) It can only be imposed on specific property or properties;
(b) The amount imposed depends on whether the activity is useful or not;
(c) It involves the taking of property by the government;
(d) The amount imposed has no limit.
Answer b
12. The distinction of a tax from permit or license fee is that a tax is:
(a) Imposed for regulation:
(b) One which involves an exercise of police power;
(c) One in which there is generally no limit on the amount that may be imposed;
(d) Answer not given.
Answer. c
13. Which of the following is not an example of excise tax
(a) Transfer tax,
(b) Sales tax.
(c) Real Property tax;
(d) Income tax.
Answer c
14. Value-added tax is an example of
(a) Graduated tax;
(b) ' Progressive tax;
(c) Regressive tax,
(d) Proportional tax
Answer d
15. The power of taxation is inherent in sovereignty being essential to the existence of every
government. Hence, even if not mentioned in the Constitution the state can still exercise the
power.
It is essentially a legislative function. Even in the absence of any constitutional provision,
taxation power falls to Congress as part of the general power of law-making
(a) True, true: (b) False, false.
(c) True, false; (d) False,
Answer: a
16. Which of the following is not a scheme of shifting the incidence of taxation?
(a) The manufacturer transfers the tax to the consumer by adding the tax to
the selling price of the goods sold;
(b) The purchaser asks for a discount or refuses to buy at regular prices unless it is
reduced by the amount equal to the tax he will pay;
(c) Changing the terms of the sale like FOB shipping point in the Philippines to FOB
destination abroad, so that the title passes abroad instead of in the Philippines,
(d) The manufacturer transfers the sales tax to the distributor, then in turn to the
wholesaler, in turn to the retailer and finally to the consumer.
Answer: c
17. The proportional contribution by persons and property levied by the law-making body of the
State by virtue of its sovereignty for the support of the government and all public needs is
referred to as:
a. Taxes:
b. Special assessment;
c. License fees;
d. Answer not given.
Answer: a
18. One of the characteristics of a tax is that:
(a) It is generally based on contract;
(b) It is generally payable in money;
(c) It is generally assignable;
(d) Answer not given
Answer B
19. Tax of a fixed proportion of the value of the property with respect to which the tax is
assessed and requires the intervention of assessors or appraisers to estimate the value of such
property before the amount due from each tax payer can be determined is known as:
(a) Specific;
(b) Ad valorem,
(c) Special or regulatory,
(d) answer not given
Answer b
20. Which of the following statements is not correct?
(a) An inherent limitation of taxation may be disregarded by the application of a
constitutional limitation;
(b) The property of an educational institution operated by a religious orders exempt from
property tax, but its income is subject to income tax:
(c) The prohibition of delegation by the state of the power of taxation will still allow the
Bureau of Internal Revenue to modify the rules on time for filing of returns and payment
of taxes;
(d) The power of taxation is shared by the legislative and executive departments of
government
Answer c
21. For an enhancement on revenue collection, the Bureau of Internal Revenue may adopt
measures that will minimize or eliminate tax evasion. In this regard:
Statement 1. A donation or gift of money or property directly to a political candidate is subject to
the donor's tax under the National Internal Revenue Code, and hence the donor may be required
to withhold a donor's tax on it.
Statement 2 A payment of money to a person who made campaign materials for a political
candidate is income payment by the payer to the payee, and hence the payor may be required to
withhold an income tax on it.
(a) True, true; (b) False, false; (c) True, false; (d) False, true.
Answer. a
22. Statement I A fee at an amount that is more than necessary for regulation is a tax, and hence
may be imposed only on a clear authority under the law to impose the tax.
Statement 2 A tax for a special purpose (as road tax) which is spent for purposes other than
those 'stated in the law for its use, if involving a huge amount to the crime of plunder
(a) True, true, (b) False, false,
(c) True, false, (d) False,
true
Answer a
23. Which statement is correct? A revenue regulation as a source of tax law, is:
(a) Promulgated by the Bureau of Internal Revenue,
(b) Promulgated by the Department of Finance,
(c) Promulgated by the Department of Finance upon the recommendation of the Bureau
of Internal Revenue,
(d) An interpretation of the revenue law by the Bureau of Internal Revenue
Answer. c
24. Congress enacted a law increasing the personal exemptions of individuals under the income
tax law to a uniform P50,000 for all individuals, regardless of status of the individuals The law
took effect sometime within the year. The Secretary of Finance will allow the increase on
personal exemption to a date:
(a) On the effectivity of the law within the year:
(b) As of the beginning of the year in which the law was passed by
Congress.
(c) As at the beginning of the succeeding year:
(d) Only when Congress passes a law clearly stating the effectivity of the increase
Answer. a
25. Which of the following has no power of taxation?
(a) Provinces;
(b) Cities,
(c) Barangays
(d) Barrios.
Answer d
26. A tax must be imposed for a public Purpose. Which of the following is not a public purpose?
(a) National defense,
(b) Public education
(c) Improvement of the sugar industry,
(d) None of the above
Answer d
27. The basic community tax of P5 00 of an individual -s
(a) A personal tax.
(b) A direct tax,
(c) A national tax
(d) An ad valorem tax
Answer b
28. In 2013, a person was given by a special law the privilege to operate a public utility
(franchise), in consideration of which, h9 was required by that law to pay a franchise tax This
franchise can be amended by
(a) An amendment of that special law only,
(b) An amendment of that special law or a law of general application;
(c) An amendment of a revenue regulation.
(d) None of the above.
Answer: b
29. A tax on business is:
(a) Direct tax;
(b) Indirect tax;
(c) Property tax;
(d) None of the above.
Answer b
30. Which is the correct and best statement? A tax reform at any given time under the fact that:
(a) Taxation is an inherent power of the state;
(b) Taxation is essentially a legislative power;
(c) Taxatii2n is a power that is very broad;
(d) The 'fate can and should adopt progressive taxation
Answer c
31. Which statement gives the correct answer? That a feasibility study needs or need not look
into the taxes of different political subdivisions of government which may be alternative sites of
the business is because
(a) Provinces. cities and municipalities must have uniform taxes between and among
themselves;
(b) The local taxes of one political subdivision need not be uniform with the local taxes
of another political subdivision;
(c) Businesses that are subject to national business taxes are exempt from local business
taxes;
(d) Local business taxes may be credited against national business taxes.
Answer. b
32. Which statement is wrong?
(a) A tax is a demand of sovereignty,
(b) A toll is a demand of ownership,
(c) A special assessment is a tax;
(d) Customs duty is a tax.
Answer c
33. 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 comity;
(c) Reciprocity,
(d) International inhibition.
Answer: b
34. In this power of the state, the person who is parting with his money/property is presumed to
receive a benefit:
(a) Taxation
(b) Police power.
(c) Eminent domain
(d) None of the above
Answer a
35. In all, except one. there can be a classification of the subject matter being required to
shoulder the burden. Which is the exception?
(a) Tax;
(b) License fee:
(C) Toll:
(d) Eminent domain.
Answer. d
36. There can be no tax unless there is a law imposing the tax is consistent with the doctrine or
principle of
(a) Uniformity in taxation:
(b) Due process of law,
(c) Non-delegation of the power to tax;
(d) The power of taxation is very broad and the only limitation is the sense of
responsibility of the members of the legislature to their constituents.
Answer c
37. Which of the following is not an element of direct double taxation?
(a) Two taxes;
(b) Same subject matter;
(c) Same year.
(d) Same amount.
Answer d
38.
Statement 1. The value-added tax is a property tax;
Statement 2: The estate tax is a direct tax.
(a) True, true; (b) False, false:
(c) True, false; (d) False, true.
Answer d
41. Which statement is not true? The tax should be based on the taxpayers ability to pay
(a) As a basic principle of taxation, his is called "theoretical justice;"
(b) Asa theory of taxation, this is called 'ability-to pay-theory'
(r) No person shall be imprisoned for non-payment of a tax;
(d) A graduated tax table is in consonance with this rule.
Answer c
41. Statement I The power to tax can be delegated to units of local government, but with
limitations, as may be provided by law.
Statement 2 The power to tax cannot be delegated to the executive department of the National
Government.
(a) True. true: (b) False, false.
(c) True, false, (d) False, true:
Answer: a
42. Which statement is false?
(a) A tax is a demand of sovereignty while a toll is a demand of property ownership;
(b) Non-payment of a tax does not make the activity taxed unlawful;
(c) A grant of police power to a unit of local government carries with it a grant of the
power to tax.
(d) Customs duty is a tax.
Answer C
43. Some franchise holders who are paying the franchise tax are being required by an
amendatory law to pay the value-added tax, while others remain subt1e to the franchise tax.
Which of the following constitutional provisions makes the law unconstitutional?
(a) No law shall be passed impairing the obligation of contracts;
(b) The rule on taxation shall be uniform;
(c) No person shall be deprived of property without due process of law;
(d) None of the above.
Answer: d
44. Under this basic principle of a sound tax system, the Government should not incur a deficit
(a) Theoretical justice.
(b) Administrative feasibility,
(c) Fiscal adequacy
(d) None of the above
Answer c
45. That the legislative body can impose a tax at any amount underscores the legal truism that.
(a) Taxation is an inherent power of the state.
(b) Taxation is a very broad power of the state.
(c) Taxation is essentially a legislative power:
(d) None of the above
Answer b
46. The City of Manila, claiming that it can impose taxes under the Local Government Code,
imposed a tax on banks (in addition to the percentage tax on banks imposed in the National
Internal Revenue Code) The banks within the City of Manila objected for the various reasons
given below. Which would justify the objection of the banks?
(a) The power of taxation cannot be delegated,
(b) The rule on double taxation;
(c) Uniformity in taxation;
(d) None of the above.
Answer d
47. The amount required is dictated by the needs of the government in:
(a) License fee;
(b) Tax,
(c) Toll;
(d) None of the above.
Answer: b
48. This is a demand of ownership:
(a) License fee;
(b) Tax;
(c) Toll;
(d) None of the above
Answer c
49. No person shall be imprisoned for non-payment of this.
(a) Property tax;
(b) Excise tax.
(c) Poll tax;
(d) None of the above.
Answer c
50. As a basic principle of taxation, that "Taxes must be based on the taxpayer's ability to pay" is
called.
(a) Equality in taxation,
(b) Ability-to-pay theory,
(C) Theoretical lusting;
(d) Equity in taxation
Answer. c
51. Which of the following may not raise money for the government?
(a) Power of taxation,
(b) Police power,
(c) Eminent domain;
(d) None of the above.
Answer. c
52. Which is not an essential characteristic of tax?
(a) it is unlimited as to amount;
(b) It is payable in money
(c) It is proportionate in character;
(d) It is a regular payment.
Answer: d
53.
Statement 1. Direct double taxation involves two taxes by the same taxing authority (e.g.
National Government);
Statement 2. Indirect double taxation involves two taxes by two different taxing
authorities (e g., National Government and a unit of local government).
(a) True, true, (b) False, false;
(c) True, false, (d) False, true
Answer a
54.
Statement 1 Direct double taxation is prohibited by the Philippine Constitution,
Statement 2 Indirect double taxation is allowed by the Philippine Constitution
(a) True, true; (b) False, false;
(c) True. false; (d) False, true.
Answer d
55.
Statement 1 Tax evasion, which is the use of means to escape a tax that is already a
liability, is prohibited by law, and is punishable;
Statement 2. Tax avoidance which is the use of means to prevent an accrual of a tax, or to
minimize a tax that may accrue, is likewise prohibited by law and is punishable.
(a) True, true; (b) False, false;
(c) True, false; (d) False, true.
Answer. C
56. Which statement is true?
The prohibition in the Philippine Constitution on taxation of religious corporation is
(a) A prohibition on imposition of excise taxes on the corporation;
(b) A prohibition on imposition of property taxes on the corporation;
(c) A prohibition on imposition of any and all local taxes on the corporation;
(d) A prohibition on imposition of any and all national taxes on the corporation.
Answer. b
57. Pioneer enterprises are exempt from certain taxes for a certain period of time, that are
otherwise applicable to other enterprises. Which of the following statements is wrong?
(a) This violates the constitutional requirement of rule of uniformity in taxation;
(b) This is a sound tax incentive for development of the national economy,
(c) This will provide employment opportunities;
(d) This will not involve unconstitutional delegation of the power of taxation even as
certain government agencies, other than the Congress of the Philippines, will determine who
qualify as pioneer enterprises.
58.
Statement 1 A tax amnesty that forgives tax delinquency of prior years is a legislative act
of the Government,
Statement 2 A tax compromise that lowers the delinquent tax from a taxpayer is an
executive act pursuant to a legislative grant of power to the Executive Department of the
Government
(a) True. true. (b) False, false.
(c) True, false, (d) False, true.
Answer d
59.
Statement 1 A revenue regulation must not be contrary to the provision of the law that it
implements.
Statement 2 A revenue regulation cannot expand the provision of the law that
implements by imposing a penalty when the law that authorizes the re-venue regulation does not
impose a penalty.
(a) True, true. (b) False, false,
(c) True, false, (d) False, true.
Answer. a
60. Which statement is false?
(a) A law that imposes a tax on sugar mills and centrals where the revenue collected will
be used to improve the sugar industry is a tax for a public purpose, and the law is
constitutional,
(b) A law that imposes a tax on movie goers in a city, where the revenues will be used to
improve the city is constitution over flood control infrastructures in the low areas.
(c) A law that gives tax privileges to manufacturers in defined industrial areas, which are
not enjoyed by other manufacturers elsewhere, is not discriminatory and is constitutional.
(d) None of the above.
Answer. d
61. One of the following is false.
(a) Police power and license fee are for Purposes of regulation,
(b) Any license fee should only raise an amount necessary to the power to impose a tax.
(c) The power impose a license fee does not carry with it carry out
(d) A business or activity subject to a license fee does not become illegal because no
license fee was paid for it.
Answer b
62.
Statement 1. A tax that is allowed by law to be passed on by a taxpayer to another is
called an indirect tax.
Statement 2 Business taxes which are not allowed by law to be passed on by sellers of
goods and services to buyers are nonetheless imperceptibly passed on because they are factored
in on the selling price
(a) True, true. (b) False, false,
(c) True, false, (d) False, true
Answer a
63.
Statement 1 A tax imposed by a law can be changed on its applicability to persons,
properties, etc., only by an amendment of the particular law that imposed it
Statement 2 The applicability of a tax imposed by a law on certain persons properties,
etc. may be changed by another or new law that makes reference to the original law that imposed
the tax.
(a) True, true, (b) False, false.
Answer: d
(c) True, false: (d) False, true.
64. A franchise is a law granting to a person the privilege to operate a public utility (e.g. selling
electricity or water). For the privilege, the franchisee will have to pay a franchise tax in effect it
is a contract between the franchisee and the government. In addition to the activity covered by
the franchise, the franchisee may sell other services (e.g. renting out its equipment), which is
subject to the value-added tax
Statement I A few may be passed requiring the holder of the franchise to pay on its main
activity a tax other than the franchise tax (e.g., the value-added tax).
Statement 2. The franchisee may not be required to pay a tax other than the franchise tax
on its main activity because the franchise is a contract that governs the relationship between the
government and the franchise holder.
(a) True, true: (b) False, false,(c) True, false, (d) False, true.
Answer c
65. A non-payment of a tax has a civil liability (payment of the tax) and a criminal liability (fine
and/or imprisonment).
Statement I A civil case has to be filed in court apart of a criminal case filed in court
Statement 2 A case filed with the Court of Tax Appeals covers both the Civil and
criminal aspects of the case.
(a) True, true. (b) False, false:
(c) True. false; (d) False, true.
Answer d
INCOME TAX PATTERNS
TAXPAYER: INDIVIDUAL
2.
Which among the following is a non-resident alien?
(a) An alien who comes to the Philippines for a definite purpose which in its nature may
be promptly accomplished.
(b) An alien who comes to the Philippines for a definite purpose which in its nature
would require an extended stay.
(c) An alien who has acquired residence in the Philippines
(d) An alien who lives in the Philippines with no definite intention to stay
Answer a
3. Which statement is wrong Length of stay is determinative of purpose.
(a) A citizen of the Philippines who shall have stayed outside the Philippines for one
hundred eighty-three days or more by the end of the year shall be considered a nonresident citizen by the mere fact of the length of stay abroad
(b) An alien who shall have stayed in the Philippines for more than one year by the end of
the calendar year shall be considered a resident alien.
(c) An alien who shall come to the Philippines and stay for an aggregate period of more
than one hundred eighty days during (and by the end of) a calendar year shall be consider
a non-resident alien in business in the Philippines.
(d) An alien who shall have stayed in the Philippines in the last one hundred days of a
calendar year and continuously to the first one hundred days of the succeeding calendar
year shall be considered a non-resident alien in business in the Philippines
Answer: d
4. Who is not a Philippine income tax payer'?
(a) A resident citizen of the Philippines with income from within and outside the
Philippines
(b) A resident citizen of the Philippines with income from within the Philippines only.
(c) A non-resident citizen of the Philippines with income from outside the
Philippines only.
(d) A non-citizen of the Philippines with income from within the Philippines only
Answer c
5. One who was previously a non-resident citizen and who arrives in the Philippines at any time
during the taxable year to reside permanently in taxable year in which he arrives in the
Philippines the Philippines shall be considered a non-resident citizen for the income derived
from sources abroad until the date of h with respect to Philippines (the law).
Case problem
A citizen of the Philippines was a non-resident citizen in
2013 is arrival in the he arrived in the Philippines to reside permanent in the
A From January 1, 2013 to may 14, 2013;
B From May 15, 2013 to December 31, 2013.
2012 On May 15, Philippines,
Which of the following is wrong.
(a) He is considered a resident citizen on "B' income:
(b) He is considered a non-resident citizen on "A” income,
(C) He is considered a resident citizen on "A" and “B" income,
(d) He is not taxable on A income
Answer c
6.
Statement 1 All taxable income are reported in one income tax return for the year.
Statement 2 A creditable withholding income tax reduces the graduated income tax on
"other income" at the end of the year
(a) True. true; (b) False. false:
(c) True, false; (d) False, true.
Answer d
8. The following, except one. Are personal exemptions in the Philippines;
(a) Non-resident alien not engaged in trade or business in Philippines;
(b) Non-resident alien engaged in trade or business in the
(c) Resident alien
(d) Citizen.
Answer a
9. Which of the following taxpayers whose personal exemption is subject to the law on
reciprocity under the Tax Code'
(a) Non-resident citizen with respect to his income derived from outside the
Philippines;
(b) Non-resident alien who shall come to the Philippines and stay therein
for
an
aggregate period of more than 180 days;
(c) Resident alien income from a foreign country.
(d) Non-resident alien engaged in trade or business in the Philippines whose country
allows personal exemption to Filipinos who are not residing but deriving income from
that country.
Answer b
10. The personal exemption of the non-resident alien engaged in trade to Philippines is equal to
that allowed by
(a) The income tax law of his country to a citizen of the Philippines not residing there;
(b) The income tax law of his country to a citizen of the Philippines not residing there or
the amount provided by the NIRC to a citizen or resident, whichever is lower;
(c) The National Internal Revenue Code to a citizen or resident;
(d) The 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.
Answer b
11. A citizen of the Philippines is allowed a basic personal exemption of P50,000.
The taxpayer is allowed an additional exemption of P25,000 for each "dependent" child,
provided that the maximum shall correspond to four dependents.
If the spouses are legally separated, the additional exempt shall be claimed by the spouse to
whom custody of children was given by the court, but the maximum of four dependent also
applies.
19.
Statement 1. A legitimate child who was Insane at the beginning of the year, but who
recovered his sanity within the year is not a unit of additional exemption for the
Statement 2 A 'married minor daughter whose marriage was year for the parent
annulled and who now lives with and depend on the parent for support, is a unit of additional
exemption for the parent.
(a) True, true; (b) False, false.
(c) True, false, (d) False, true.
Answer a
21. Mr. A and Mr. B are brothers, citizens and residents of the Philippines. Both of them are tax
payer. They had the following data on net income from operations from their respective
businesses for a calendar year A, P1, 200, 406.08 and B, P950, 108.09 Mr. A is still single, but
has with him an illegitimate child, two years old Mr. B is married and has with him six
dependent legitimate children, the eldest of whom was ten years old at the beginning of the year,
and one of whom died within the year. The income tax of Mr. A before any creditable income
tax is
(a) P325,130: (b) P274,236. (c) P330.342. (d) P351,287
Answer. a
24. Husband and wife are separate taxpayers who compute the income tax separately in one
income tax return. The two income taxes computed separately are added to arrive at a single
income tax payment required or a single income tax refundable. Husband and wife are allowed to
file separate income tax returns should it be impracticable for them to file a joint return. But the
returns filed by them shall be consolidated by the Bureau of Internal Revenue. The husband is
the proper claimant of the additional exemption, unless he waives it expressly in favor of the
wife. However, and normally, if the income of the wife is gross compensation income (income
arising from an employer-employee relationship), additional exemption is claimed by the wife
since she furnishes the employer with information on her additional exemption for the purpose of
income tax to be withheld by her employer on her first paycheck in January of the year.
25. Which of the following statements is wrong?
(a) An income tax still due from one spouse and an income tax refundable from the other
spouse will give one net income tax due or one net income tax refundable in one income
tax return.
(b) Husband and wife in different far places may file separate tax returns.
(c) The husband is the proper claimant of the additional exemption.
(d) When husband and wife are legally separated, each is a claimant of the additional
exemption/s for the children living with him or her.
Answer. d
26. A taxpayer is in business. His wife is in the practice of a profession. Both are citizens and
residents of the Philippines Data for them for a year follows:
Gross income of the husband
P600 000
Gross income of the wife
500,000
Expenses on the business of the husband
200 000
Expenses on the practice of profession of the wife
100,000
Quarterly income tax paid by the husband
500 000
Quarterly income tax paid by the wife
Income tax withheld on the professional fees of wife
50,000
Income tax still due from husband and wife?
(a) Due from husband of P20000 and refundable to wife of P35000.
(b) Due from husband and due from wife of
(c) Net income tax payable by husband and wife of P109000
(d) Not income tax refundable to husband and wife of P15000.
Answer d
29. The income from self-employment (business and from profession) is reported on a
cumulative basis at the end of each of the first three quarters of the year. The income tax at the
end of a quarter is reduced by the income tax paid in the preceding quarter or quarters. At the end
of the year, the income taxes paid for the first three quarters of the year are deducted or credited
against the income tax for the year.
30.
Statement 1. The capital gain tax on shares of stock of an individual applies only if the
shares of stock are those of a domestic corporation.
Statement 2. The capital gain tax on real property of an individual applies only if the real
property is in the Philippines
(a) True, true: (b) False, false:
(c) True, false. (d)
False, true.
Answer a
31. Which of the following statements is correct'?
(a) Individuals who are self-employed report a taxable income only at the end of the year.
(b) Individuals who are self-employed file three quarterly income tax returns and an
annual income tax return.
(c) The capital gain tax on shares of stock of a domestic corporation is computed on net
capital gain which means that capital gains and losses on such shares are offset against
each other to arrive at a net of the capital gains and losses for the year.
(d) The capital gain tax on real property is computed on the consideration stated in the
deed of sale.
Answer: b
16. All, except one, of the following, are not subject to the improperly accumulated earnings tax.
Which is the exception?
(a) Publicly-held corporations
(b) Banks and other non-bank financial intermediaries
(c) Insurance companies,
(d) Saving Institutions
Answer d
17. A corporation should show that it is not being availed of as a vehicle to prevent the
imposition of the income tax on its members. Thus,
Statement 1. When a corporation is a mere holding company, it is subject to the
improperly accumulated earnings tax (IAET).
Statement 2 When the corporation is an investment company, it is subject to the
improperly accumulated earnings tax (IAET).
A. True, True
B. False, False
C. True, False
D. False, True
Answer a
18. Under the Provisions of Revenue Regulations No. 2 (Income Tax Regulations)
(IAET ) by showing that the accumulation is for
(a) Additional working capital:
(b) Debt retirement:
(c) Anticipated losses or reverses in business.
(d) A desire to accumulate profits to an amount not exceeding one hundred percent
(100%) of the paid-up capital of the corporation.
(a) is correct:
(b) is correct:
(c) is corm,'.
(d) all are correct
Answer d
19. Which of the following statements:
(a) The improperly accumulated earnings tax is a computation made by the Bureau of
Internal Revenue, and not by the taxpayer,
(b) The improper accumulation of earnings is discovered a year or years after it has taken
place,
(c) Each year has its own each year has its own corresponding improperly accumulated
earnings tax.
(d) An improper accumulation of profits over the years will have one computation only
on the aggregate of the accumulations as at the time of discovery
(a) One is correct:
(b) Two are correct.
(c) Three are correct,
(d) all are correct
Answer c
20.
Statement 1 A justification for an accumulation of post year with payment date.
Statement 2. A declaration of dividend within a year succeeding year, cannot defeat the
IAET in the year indeed
(a) True, true; (b) False, false:
(c) True, false;
Answer. C
25. Special corporation. A private educational institution.
A private educational institution is a special corporation (for other special corporations. see
Appendices). A private educational institution is subject to the income tax at ten percent
institution (10%) of its net income from all sources. However, if the income from unrelated
trade, business or other activity exceeds fifty percent (50%) of the total gross income derived
from all sources, such educational institution shall be treated as an ordinary corporation.
An expenditure for expansion of school facilities may be treated by a taxable private educational
institution as
(a) an outright deduction from the gross income; or
(b) a capital expenditure that can be subject to depreciation.
Under the Philippine Constitution, all revenues of non-stock, non-profit educational institution
used actually, directly and exclusively for educational purposes shall be exempt from taxes.
26. The East Asia University a stock corporation. a private educational institution recognized by
the Commission on Higher Education of the Philippine Government, is in its tenth year of
operations. It offers primary, secondary, tertiary and post-graduate courses. It had the following
data for 2013:
Tuition fees received
P200.000,000
Miscellaneous and other fees received
1,000,000
Gross income from the book store and
tennis in the ground floor of the university
building, net of a 5% withholding tax
950,000
Expenses of operations
100.000.000
Expenditure for building a library
building with an estimated useful life
of fifty (50) years
20,000,000
How much is the income tax still due from the institution if the expenditure for the library
building is treated as an outright deduction
(a) P770,000. (b) P10.160,000.
(c) P820:000: (d) P10,110,000.
Answer: a
27. How much is the income tax still due of the institution if the expenditure for
the library is treated as a capital expenditure?
(a) P770,000: (b) P10.160,000,
(c) P820,000: (d) P10, 1 10,000
Answer c
29. Corporations exemption from income tax are enumerated under Section 30 of the National
Internal Revenue Code
Statement 1 They are not subject to income tax on income received are incidental to or
necessarily connected with the purposes for which they were organized and are operating
Statement 2. They are subject to income tax on income of whatever kind and character
from any of their properties real or personal or from any activity conducted for profit regardless
of the disposition of such income
(a) True, true: (b) False false (c) True, false: (d) False, true.
Answer: a
30. The Cultural Foundation of the Philippines a non stock corporation, organized and operated
exclusively to preserve.Philippine cultural practices, music, dances, and folk arts, deny ending
mostly from donations, had the following data for year
Donations received from domestic and foreign sources
P20 000,000
Interest income from bank deposit
Rent income from real estate received as donation,
net of 5% withholding tax
477550000
Expenses related to its rent income
How much is the income tax expense of the corporation for the year'?
(a) P14,11,000,
(b) F 1 ,16,0001
(c) P 152,000
Answer. b
TAXPAYER: PARTNERSHIP, CO-OWNERSHIP,
JOINT VENTURE, ESTATE OR TRUST
1. A general professional partnership is a partnership formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from engaging in
any trade or business.
A general professional partnership is not subject to income tax, but the individual partners shall
report at the end of the year (together with their personal taxable income) their share in the net
income of the general professional partnership, whether actually received by them or not.
Since the partnership is not subject to tax, the items of income of the partnership, unreduced by
any tax, go into the distributable net income of the partnership.
In determining the net income of the general professional partnership, the rules on determining
the net income (gross income and deductions) of corporations shall apply.
The general professional partnership shall withhold an income tax, at ten percent (10%), (but at
fifteen percent [15%] if the gross income of the partner for the year is P720,000 or more) from
the share of each partner in the net income of the partnership.
2. A partnership that is not a general professional partnership is considered a corporation. The
taxable income shall be deter-mined by applying the rules for corporations on gross income and
deductions. The taxable income shall be subject to the normal tax of 30%, or if the partnership is
in the fourth or subsequent year of operations, the normal income tax of 30%, or the minimum
corporate income tax of 2%, whichever is higher.
All items of income (capital gain subject to capital gain tax, passive income subject to final tax,
and other income subject to the normal or minimum corporate income tax) shall go, net of tax, to
the distributable net income of the partnership.
A partner may actually receive or be considered to have constructively received his share in the
distributable income, and shall be subject to a final tax of ten percent (10%) on it because it is
like a dividend from a domestic corporation.
Subject to any or all of the following
(a) Normal tax:
(b) Minimum corporate income tax;
(c) Gross income tax;
(d) Final tax on passive income;
(e) Capital gain tax:
(f) Profit remittance tax
3. Which of the following statements is wrong? A general professional partnership is a
partnership where
(a) All the partners are professionals
(b) All the partners have a common profession
(c) Income is derived from practicing the common profession;
(d) No part of the net income of the partnership is derived from engaging any trade or business
Answer a
4. LQ is a general professional partnership its partners L and Q share equally in the net income
or loss of the partnership. For the following data.
Gross revenues from the practice of profession Interest on bank deposit
Direct costs
Other costs and expenses 200x, the partnership had
P1.200.000
400,000
20,000
How much is the ten percent (10%) withholding income tax on the share100000 either partner in
the distributive net income of the partnership?
(a) P36,000, (b) P35,000; (c) P37 000 (d) P40,000.
Answer: a
Gross revenues P1.200,000
Less Direct cost
Gross income
Other costs and expenses
Net incur -from the profession
Add Interest on bank deposit
Distributable net income
Share of either partner
400,000
P800,000
100.000
700.000
20000
P720,000
P360.000
Withholding income tax at 10%
P3600
5. A general professional partnership. with Mr A with dependent children. and B, participating
equally five qualified in the partnership
Data in a year.
Mr A income or loss
P700, 000
Gross income
P200, 000
Expenses related to the income
500.000
Drawing by the partner from the
year's income
90.000
Income tax was withheld by the partnership at 10%.
24000
Income tax still due or refundable, end of the year, from Partner d
(a) P15,000: (b) (P3 000). (c) P7,000
Answer b
6. The YZ & Co. is a general partnership in trade, in its fifth year of operations. In one calendar
year it had a gross profit from sales and business expenses of P2000000 and P1.000,000.
Respectively Y and Z share equally in the profits and losses of the partnership. The income tax
of the partnership is:
(a) P40000, (b) P350,000. (c) P300000; (d) P0.
Answer c
9. A co-ownership in which the activities of the co-owners are merely the preservation of the
property and collection of the income from the property, is not a corporation. It is exempt from
income tax, but the share of each co-owner in the net income of the co-ownership shall be
considered by the co-owner as an item of gross income, to be consolidated with his personal
income.
If the activities of the co-owners no beyond mere preservation of the property and collection of
income from the property (e.g., additional investment), the co-ownership becomes taxable as a
corporation, and a co-owner becomes taxable on his share in the net income after tax (of the
corporation) as if that share is dividend income to him.
10. Messrs. A and B, brothers, inherited an income-producing property. They have their own
separate practice of their profession and their interest on the property is only to preserve the
property and collect the income from the property Mr A, being the elder brother, was in charge
of the property. In a calendar year
Gross income from the property
P500,000
Expenses related to the property
100,000
Withholding income tax by the co-ownership10%
Separate data for Mr B.
Gross income from profession,
net of a 10%withholding tax
P522,000
Expenses on the practice of profession
150,000
Income tax of the co-ownership?
(a) P120,000: ,v) PO (c) P8,000;
(d) P125,000.
Answer: b
13. In 2012, Mr. X and Miss Y inherited income-producing properties from their mother with a
reported value of P1,000,000 to the court and the Bureau of Internal Revenue, and on which the
estate tax was paid. The properties remained registered in the name of the mother, but the net
income of P40,000 from the property was deposited in a joint account of Mr. X and Miss
Y. In 2013, the property had a net income of P70,000, from which each withdrew P15,000. In
the same year, they sold the property for P3.000,000.
Which of the following statements is wrong?
(a) Mr. X and Miss Y in 2012 each had an income of P20,000 from the property, as
individual taxpayers,
(b) Mr. X and Miss Y became an entity taxable as a corporation beginning 2012:
(c) Mr. X and Miss Y in 2013 each had an income of P35,000 from the property, as
individual taxpayers,
(e) Mr. X and Miss Y each had a capital gain tax of on a selling price of P1,500.000.
Answer: b
Co-heirs are covered by the rules on co-ownership as long as there is no additional investment.
Hence, the income of each from the property in 2012 and 2013 is still more participation in a coownership income, and taxed as income of an individual. Mr. X and Mr. Y did not constitute
themselves into a corporation. Hence actual withdrawal of income should not be treated as
dividend But Mr X and Mr. Y are each an owner of a capital asset. The fact
14.
(a) A joint venture or consortium undertaking construction project formed for the purpose
of or geothermal
(b) A joint venture for engaging in Petroleum to an operating or and other energy
operations tract with the consortium agreement under a service co venture
Government, is not treated as a corporation. The joint is exempt from income tax.
The parties to the joint venture are separate taxpayers, reporting income from their share in the
joint venture net income. Consortia other than
(a) and (b) above are taxable as corporations
and the share of the participants in the consortia net income after the corporate tax shall be
treated as dividend.
15. A Co and 8 Co. are domestic corporations. They formed a consortium and contributed
capital to construct condominium buildings, agreeing to share equally in the net income or net
loss. Sales and rent resulted in a gross income of P70,000,000 and deductions of P30,000,000. A
Co. had its own net income of P2,000,000.
How much is the income tax of A Co.?
(a) P600,000 (b) P6,600,000 (c) P6,000,000(d) P 12, 000, 000
Answer: b
17. A Co is an owner of a large tract of land. B Co. is a construction company. A Co. and B Co.
entered into a consortium under which A Co will contribute the land, and B Co will construct
subdivision houses on it A Co. B Co. will divide the property (land and houses) between them. A
Co. and B Co will sell their respective shares in the developed property. Which statement is
wrong?
(a) A Co. and B Co. do not constitute a taxable entity on the project;
(b) A Co. and B Co. are not be taxable on their allocated shares (in land and property) in
the developed property;
(c) A Co and B Co. is one taxable entity on the sale of all land and houses covered by the
consortium agreement,
(d) A Co. and B Co. are taxable on the sale of the A and rouses allocated to them, as
separate taxpayers:
Answer: c
19. The following statements are correct, except one. Which is the exception:
(a) Mr. A died. His estate is under administration (judicial settlement). The estate is a
taxable entity.
(b) Mr. B died leaving an estate. His estate is not under administration, but the property is
cared for by his eldest child. The estate is a taxable entity.
(c) In a taxable estate, the rules to apply on gross income and deductions are the rules for
individuals:
(d) Any distribution of the income to an heir is a deduction for the estate
Answer: b
21. An estate is under administration.
The year is 2013
Gross income from the properties in the estate
Expenses on the properties
Distribution out of 2012 income, to Heir No 1
Distribution out of the year's (2013) income.
To Heir No. 1
To Heir No. 2
Distribution of property in the estate to Heir No. 2
Income tax of the estates
(a) P98,500. (b) P105.500, (c) P125,500. (d)
Answer. b
P700,000
150,000
20,000
50.000
45,000
50,000
P 1 i 2 400
23. Mr X created a trust involving an income-producing property, fiduciary and Mr. Z as
beneficiary. Under the terms of the trust, Mr. Y was to hold fuse the income of the property, as
follows:
grantor g
To pay premiums on the life insurance of Mr. X. the
To be kept or paid to Mr Z, the beneficiary at the discretionof the fiduciary, Mr. Y
The properly had a net income of and
Income distribution to the beneficiary of
Which of the following statements is wrong?
(a) P 50.000 is the gross ;income of Mr. Z. the beneficiary:
(b) P 30.000 is the gross income of Mr. X, the grantor,
(c) P300,000 is taxable income of the trust:
(d) P400,000 is taxable income of the trust.
Answer d
GROSS INCOME
1. Income is gain. It may be a gain derived from capital, or from labor, or from caritas and labor,
combined, or from a sale or conversion of asset (Revenue Regulation).
Gain from capital should be distinguished from return of capital. Thus, in a sale at P1,000 of an
asset with a cost of P400 on the proceeds, to the extent of P400 there is a ret of capital, and is not
income, and to the extent of P600 there is a gain. The income is P600.
Statutory definition. Gross income means all income from whatever source derived, including
not limited to. The following items: Compensation for personal services in whatever Corm paid,
including but not limited to commissions and similar items, gross income from the conduct of
trade or business or the practice of profession, gains derived from dealings in property, interest,
rents, royalties, divider is annuities, prizes and winnings, pensions, and partner's distributive
share of the net income of a general professional partnership.
Although by statutory definition, a partner's distributive share in the net income of a general
professional partnership gross income, however, Revenue no.2-2010 had classified it into a
special item of gross income. Under the regulation, it is as if already net income because the
partnership had already availed of deductions against it. The partner, can take deductions only
against his other income, and such deductions shall be of the same kind (Optional Standard
Deduction. or Itemized Deductions) as that taken by the partnership
2. As a general rule, income is taxable. It is not taxable if there is a provision of aw that exempts
it from income tax. When an income is not taxable, it is called "exclusion from gross income".
Examples of exclusions from gross income are:
(a) Proceeds of insurance, except circumstances
(b) Gift or inheritance received,
(c) Compensation for in furies or illness, plus any damages received arising from such injuii6s or
illness.
(d) Benefits received from the SSS or GSIS:
(e) Prizes and awards and spoils competitions, under certain conditions:
3. Which of the following is not income?
(a) Gain from labor
(b) Gain from capital
(c) Return of capital
(d) Gain
Answer b
4. Mr. Monte as injured in a vehicular accident in 2010. He incurred and paid medical expenses
of P20,000 and legal fees of P10,000 during the year. In 2011, 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, the amount of taxable income to Mr. Monte
in 2011
(a) Zero
Answer a
(b) P40,000:
(c) P70,000,
6. In a sale at P300,000 and selling expenses of P50.000 of an asset with a cost of P200,000.
(a) The gross income P300,000,
(b) The gross income is 100,000:
(c) The gross income is 50.000,
(d) The net income is P50,000
Answer. c
Selling price P300,000
Less Selling expenses 50 000
+ selling price P250.000
Less. Cost
200 000
Gross income P 50 000
7.
Statement 1. Damages recovered for physical injuries is not taxable
Statement 2. Damages recovered for violation of copyright is not taxable.
(a) True, true, (b) False. false:
(c) True, false, (d) False, true
Answer c
Damages recovered representing a return of capital (Statement 1) is not income Damages
recovered representing a return of lost profit (Statement 2) is income.
8. Statement 1. Income derived from an unlawful source is always taxable.
Statement 2. Income derived from a lawful source may or may not be taxable.
(a) True, true: (b) False, false:
(c) True, false; (d) False, true
Answer: a
9.
Statement 1. Gross compensation income is income arising out of employer-employee
relationship.
Statement 2. Gross income from self-employment is income arising out of business or the
practice of profession
(a) True, true; (b) False, false,
(c) True, false, (d) False, true.
Answer a
10. Which of the following is not gross compensation income?
(a) Salary of P20 000 of an employee.
(b) Bonus of P20,000 of an employee.
(c) Salary of P20,000
(d) Honorarium
Answer. c
11. Thirteenth month pay
Christmas bonus
Productivity incentives pay
P38000
30000
8000
The taxable compensation income from the benefits is:
(a) P38,000;
Answer c
(b) P13,000:
(c) P 0.000
(d) p 1,000.
12.
Statement 1. Fringe benefit given to rank-and-file employee. which was not subjected to
the fringe benefit tax, is gross income to the receiving employee
Statement 2. Fringe benefit given to managerial or supervisory employee which was
subjected to the fringe benefit tax, is not gross income to all employee receiving it.
(a) True. true, (b) False, false;
(c) True, false; (d) False, True
13. Which statement is wrong? A non-interest-bearing promissory note reef for personal services
rendered:
(a) Will not result on income if received merely as security;
(b) Will result in income if received in payment;
(c) Is considered payment in kind;
(d) Will not be income until collected
Answer. d
15. Which of the following items that reduce salaries of employees is riot an exclusions from
gross income?
(a) GSIS or SSS contributions:
(b) Pagibig contributions,
(c) Labor union dues;
(d) IOU's
Answer: d
16. Selected items of exclusions from gross income (from Section 32 of the National Internal
Revenue Code:
Proceeds of life insurance.The proceeds of life insurance paid to the heirs or beneficiaries upon the death of the insured,
whether in a single sum or otherwise, but if such amounts are held by the insurer under an
agreement to pay interest thereon, the interest payments shall be included in gross income.
Retirement benefits, pensions, gratuities, etc. Retirement benefits received under Republic Act No. 7641 and those received by officials and
employees of private firms, whether Individual or corporate, in accordance with a reasonable
private benefit plan maintained by the employer, if:
(a) The retirement plan is funded;
(b) The retiring official or employee has been in the service of the same employer for at
least ten (10) years and is not less than fifty(50) years of age;
(c) The benefits granted here shall be availed of by an official or employee only once.
For this purpose, the term "reasonable private benefit plan" means a pension, gratuity, stock
bonus or profit-sharing plan maintained by the employer for the benefit of some or all of his
officials or employees, wherein contribution are made by such employer, or officials and
employees, or both, for the purpose of distributing to such officials and employees the earnings
and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time
shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of the said official or employees.
19. Which of the following is taxable?
(a) Separation pay received by a 50-year old employee due to the retrenchment program
of the employer
(b) Retirement pay received frorn a benefit plan registered with the Bureau of Internal
Revenue where at the time the employee retired he was 55 years of age, retiring from
employment for the first time in his life, and was employed with the employer from whom
retiring for 6 years prior to retirement,
(c) Social security benefit received by a balikbayan from employer abroad at at the age of
35,
(d) SSS and GSIS benefits
Answer b
The condition of service for at least ten years with the employer was not satisfied in b.
20. Mr. Z is the chief accountant of a very successful marketing corporation. At the age of fortyfive years, and having served the company for fifteen years, he retired from the corporation and
received a retirement pay of P1.500,000 from a funded plan registered with the Bureau of
Internal Revenue For making a very significant contribution to the success of the corporation, he
received a gratuity of P1,000,000 `,om the general fund of the corporation.
Statement 1 The retirement pay received is taxable income because he had not yet
reached the age of sixty at the time of retirement.
Statement 2. The gratuity of P1,000,000 is not taxable income because it is a gift
(a) True, true, (b) False, false;
(c) True. false, (d) False, true.
Answer a
21. Which of the following is taxable'?
a. Prize won in an
b. Ten mythicaI team in the PBA;
c. won as member
d. Award rcr being
23. Which is not subject to final tax if received by an individual taxpayer?
(a) Interest on bank savings deposit.
(b) Interest on foreign currency under the expanded foreign currency deposit system:
(c) Interest on bonds of the Banko Sentral Ng Pilipinas
(d) Interest on cans receivable with maturity of more than five years
Answer d
24. DIVIDEND.
In a taxable cash dividend, the measure of income is the cash received. In a taxable property
dividend, the measure of income is the fair market value of the property received.
A dividend in treasury stock is taxable at its fair market value. Liquidating dividend does not
result in dividend income. It is a sale or exchange of property.
Stock dividend may or may not be taxable.
(b) Stock dividend:
(1) As a general rule, a stock dividend is not taxable.
(2) Shall not be taxable if the payment by the corporation does not result in a change in the
proportionate interests of the shareholders in the net assets of the corporation
(e.g., when there was only one class of stock issued and outstanding at the time of the dividend).
(3) Shall be taxable if the payment resulted in a change in the proportionate interests of the
shareholders in the net assets of the corporation (e.g., when there were two or more classes of
stock issued and outstanding at the time of the dividend).
(4) If a stock dividend is taxable, the measure of income to the receiving stockholder shall be the
fair market value of the shares received.
(5) If the stock dividend is not taxable, there shall result to the receiving stockholder a new cost
per share, because the old cost shall represent the old shares plus the new
(dividend) shares. Thus:If the stock dividend received is 'of the same class as the stock on which
it is paid, the new cost per share is the original acquisition cost divided by the number or, shares,
old plus new.
If the stock dividend is not of the same class as the stock on which it is paid, the original cost
shall be allocated between the old and new shares on the basis of their respective fair market
values. The cost allocated to each class shall be dividend by the number of shares in that class to
arrive at the new cost per share in that class.
If after receipt of the non-taxable stock dividend, shares shall be sold using shall be specific
identification method, average method, or first-in, first-out method.
Fringe benefit is an employee of food,wage or salary. It may be in the form. n kind. benefit
furnishes or granted in cash
Fringe benefit may be:
(a) Not subject to the fringe
(b) Subject to the fringe benefit tax.
A fringe benefit given to a rank-and-file amp to the fringe benefit tax.
A fringe benefit given to a supervisory or managerial dmiil�; j , is subject to the fringe benefit
tax if it is not in the statutory list of non-taxable fringe benefit (See Appendices for list Of
taxable fringe benefit).
A fringe benefit pays an income tax once only. Since an income tax was not paid by the
employer on a fringe benefit given to a
rank-and-file employee, the employee shall, pay an income tax on it - hence, he should declare it
as taxable income. Since an income tax (fringe benefit tax) was paid by the employer on a fringe
benefit given to a supervisory or managerial employee, the employee shall not pay an income tax
on it - hence, he should not declare it as taxable income.
The following fringe benefits, among others, are given to supervisory or managerial employees;
(a) Housing;
(b) Expense accounts;
(c) Vehicle of any kind taxable when
(d) Household personnel, such as maid, driver and others;
(e) Interest on loan at less than market rate to difference between the market rate and the the
extent of the
(f) Membership fees, dues and other ex
actual rate granted;for the employee or social and
organization; athletics borne by the employer clubs or
(g) Expenses for foreign travel;
(h) Holiday and vacation expenses;
(i) Educational assistance to the employee
(j) Life or health insurance and other
Or other similarhis dependent non-life amounts in excess of what insurance the law allows.
minimis benefits are not taxable premiums or De minimis benefits are privileges arid benefits
offered by the employer to hit employees and relatively small in value and are offered or
furnished by the employer merely as a means of promoting the health, goodwill and contentment,
or efficiency of his employees. They are:
(a) Monetized unused vacation leave credits of private employees not exceeding ton (10) days
during the year;
(b) Monetized value of vacation and sick leave credits paid to government officials and
employees;
(c) Medical cash allowance to dependents of employees not exceeding seven hundred fifty pesos
(P750) per semester, or one hundred twenty five pesos (P125) per month;
(d) Rice subsidy of one thousand five pesos (P1,500) or one (1) sack of
50-kg. rice per month amounting to net more than one thousand five hundred pesos (P1,500);
(e) Uniforms and clothing allowance not exceeding four thousand pesos (P4,000) per annum;
(f) Actual medical assistance, e.g., medical allowance to cover medical and healthcare needs,
annual medical/executive check up, maternity assistance, and routine consultations, not
exceeding ten thousand (P10,000) per annum;
(g) Laundry allowance not exceeding three hundred pesos (P300) per month;
(h) Employee achievement awards, e.g., for length of service, or safety
achievement, which must be in the form of tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding ten thousand pesos (P10,000) received
by an employee under an established written plan which does not discriminate in favor of highly
paid employees;
(i)
Gifts given during Christmas and major anniversary celebrations not exceeding five
thousand pesos (P5,000) per employee;
(j)
Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the
basic minimum wage.
All other benefits given by employers which are not included in the enumeration shall not be
considered "de minimis" benefits (Rev. Reg. No. 5-2011).
"Convenience of the employer rule".
When a fringe benefit is for the convenience or advantage of the employer, hence not for the
benefit of the employee, the employee shall riot recognize an income out of it.
33. Which statement is wrong? The amount on which the fringe benefit tax rate is applied is the
grossed-up monetary value of the fringe benefit.
(a) The deduction from the gross income of the employer for fringe expense is the monetary
value of the fringe benefit:
(b) The total of the deductions from the gross income of the employee from the fringe benefit is
the monetary value of the fringe benefit fringe benefit tax:
(c) The fringe benefit tax is withheld from the employee and gives liability for fringe benefit tax
payable for the employer:
(d) The fringe benefit tax. being income tax, is not deductible by the employer.
Answer: d
34. Statement 1. The fringe benefit tax is deductible from the gross income of t' Employer.
Statement 2. The fringe benefit tax is withheld by the employer
(a) True, true:
(b) False false
(c) True, false;
(d) False true
Answer: a
The two statements are two separate provisions of the Revenue Code. So, who is the taxpayer if
withholding
National Internal Revenue supervisory or managerial employee, is it not the tag tax is required
from the employer is the withholding agent who is r payer of the tax withheld from the taxpayer
is the employee and employee is the taxpayer, then to make books of accounts of the employer
Y would the remittance all the other hand, if the and a fringe benefit tax payable
35. An employer gave fringe benefits 10 Employees from managerial employees to rank-and-file
employees 612,000
How much is the fringe benefit tax?
(a) P268,000: (b) P195:640; (C) P246.300, (d) P258.450.
Answer a
Grossed-up monetary value of fringe benefit
(P612,000 x 68%)
Fringe benefit tax
(P900,000 x 32%)
How much is the total of the deductions of the employer?
(a) P712,000, (b) P1,000,000 (c) P288,000 (d) P574.250
Answer a
Fringe benefit given to rank-and-file employees
Fnnge benefit given to managerial employees
Fringe benefit tax
Total
P
P
900000
800000
P100,000
612,000
288000
P1-000 000
36. Refiecard u r the buuks of ii our'iE5
is a fi r ige bee refit expense (of mhri.)
P 100.000 was to rank-and-file employees) of P304,000.
How much is the fringe benefit tax?
(a) P65 289,
(b) P97.260:
(c) P129.280; (d) P96,000
Answer: d
37. Losses are deductible from gross income:
(a) If incurred in trade, business, or profession; or
(b) If of property connected with trade, business, or profession, arising from fire, storm
shipwreck or other casualty, or from robbery, theft or embezzlement, and for which a declaration
of loss was filed with the Bureau of Internal Revenue within forty-five days from the date the
loss occurred.
A "casualty" is an accident, a mishap or a sudden invasion by a hostile agency, and excludes the
gradual deterioration of property arising out of a steadily operating cause (Examples are:
earthquake and lightning).
In case of total loss, the measure of actual loss is the book value of the asset. In case of partial
loss, the actual loss is the book value of the asset, or the cost to restore the asset to its normal
operating condition, whichever is lower. (Any excess of
38. One of the following is not correct for deductibles of losses
(a) result from fire, storm, of other casualty, robbery, embezzlement;
(b) It must got be compensated
by insurance or any form of indemnification
(c) A declaration of loss by casualty should be filed with the Bureau Internal Revenue.
(d) It is of property owned by 'he taxpayer, whether used in business
Answer: d
The toss should arise in the conduct of trade or business, or in the pract:c e c` a profession For an
individual, no loss shall be a:lcwed as deduction from gross income :f such loss had been
claimed as a deduction in an estate `s; return.
39. Which statement is correct?
(a) A casualty loss which is not covered by a declaration o1b loss nevertheless be
deducted from gross income
(b) A total toss from casualty, even if on non-business asset, may ducted from the gross
income
(c) Deduction for loss may be postponed until the insurance mits its liability and the
amount it waft pay is determined company aa(d) A loss from embezzlement cannot be deductible already
that
in
which
the
embezzlement happened
Answer c
Statement 2. If a partial loss due to casualty, the measure of loss is the book value of the
property, or the cost to restore the property to its normal operating condition, whichever is lower,
reduced by any form of indemnity.
(a) True, true, (b) False, false;
(c) True, false: (d) False;true
Answer a
42. The taxpayer is a domestic corporation..
Data in 2012:
Gross profit from sales
Operating expenses
Dividend income from domestic corporations
Interest income on trade notes receivable
15 000
Capital gain on direct sale to buyer of shares of domestic corporation
100,000
Data in 2013: P
Gross profit from sales
J
040, 000
Other operating expenses
1.200,000
On a loss by fire of a warehouse where the insurance company carted away the scrap
Cost ?2.000,000
Accumulated depreciation
700,000
Insurance recovery
700.000
On a loss by embezzlement of a bonded cashier, wherethere is a P50.000 loss coverage by a
bonding company and where a case was filed in court for the entire amount of embezzlement of
On a loss by accident of a delivery equipment, with the following data:
Cost of the delivery equipment
1,500,000
Accumulated depreciation
800.000
Cost to restore to normal operating condition
250,000
Insurance recovery
180,000
Deduction for total loss's
(a) P1.200,000:
(b) P2,000,000,
Answer: d
Deduction for partial loss?
(a) P250.000. (b) P700,000,
Answer. C
Net operating loss carry-over to 2012?
(a) P185.000: (b) P150,000:
Answer a
Taxable income for 2013?
Answer. a
Total loss of warehouse
Cost of delivery equipment
Less: Accumulated depreciation
Book vaiue
Less. Insurance recovery
Deduction for total loss
Partial loss of delivery equipment
Cust
Accumulated de p reciation
Book value
Cost to restore to normal operating
condition
Indicated loss (whichever is lower)
Less Insurance recovery
Deduction for partial loss
Carnes profit from sales. 2013
Interest income on trade notes receivable, 2013 Gross income, 2013
Operating expenses, 2013
Net operating loss of 2012 available for carry-over
44.
Statement 1 A net operating loss is the excess of allowable deductions over the gross
income from business or practice of profession for a tax at year;
Statement 2. A net operating loss which had not previously been deducted from gross
income shall be carried over as a deduction only in the next year immediately following the year
of such loss.
(a) True, true, (b) False, false:
(c) True, false: (d)
False, true.
Answer: c
A net operating loss can be carried over to the next three years immediately following the year of
such loss.
45. A domestic.corporatioo had a net operating loss in 2012 of P300,000, and the following data
in 2013:
Gross income from operations
Expenses O .operations
Net loss from operationsand
Capital gain
Less Capital loss
Net capital loss
The net operating loss carry-over available in 2 013 i
(a) P500,000; (b) P600,000; (c) P800,000:
Answer: d
Gross income from operations
Capital gain
Total gross income
Expenses of operations
P2 600 000
Capital loss (allowable deduction: See discussion on 'sale or exchange of property)
2
).
Net operating loss, 2013
Net operating loss from
Net operating loss carry 2 0 1 e available in 2013 v 0 -
Statutory rules: Net operating loss is the excess of allowable deductions over gross income of the
business or enterprise for any taxable year. Net operating loss, which had not been previously
offset as deduction from gross income, shall be carried over as a deduction from gross income
for the next three (3) consecutive taxable years immediately following the year of such loss.
46. A domestic corporation had.
Gross profit Business
Year from business Expenses
2009 P600,000
P700,000
2010 500,000
470,000
2011 900,000
850,000
2012 850,000
900,000
Net lossNot income for the year
2010
Gross pi,,-If t , , ,r
.a ess
Less. f3us ,ess exp rases
Not income before NOLCO
Less NOLCO from 2008
Net income for the year
2011
Gross profit from business
Less: Business expenses
Net income before NOLCO
Net operating loss from 2008
Net income for the year
2012:
Gross profit from business
Less: Business expenses
Net loss from business
ve ,r
Gross profit from business
Less: Business expenses
Net income before NOLCO
Less: NOLCO from 201 ..
Net income for the year
A net operating loss of 1320,000 of year 2009
47. A piece of land with a will come only building at a cost of Ic the nano and P1,000,000 for the
building. But It was P4,000 000 nodse the building but to have it razed
To the intention of the make the land available for the construction of its offices. Upon razing the
old building at a cost of P200.000, the corporation shall have a deductible loss of:
(a) P0, (b) P1,000,000.
c. P1,200,000; d. P200,000.
Answer a
The total of the expenditure of P5,000,000 shall be considered towards the acquisition of the land
and shall form part of the cost of the land. The building has no book value to the taxpayer.
48. A Co. had investments in shares of stock of B Co. that it acquired at a cost of P20,000. It also
had investments in shares of stock of C Co that it acquired at a cost of P40,000. The value of the
shares of stock of B Co. had decreased to P15,000, while the shares of stock of C Co. are now
worthless, and had to be written off. The deductible loss is:
(a) P45,000: (b) P40,000, (C) P60,000; (d) P 0.
Answer: b
When securities held as capital asset become worthless and are written off, there is a deduction
from the gross income. tt the loss in value of securities is due to market fluctuations only, there is
no deduction from the gross income.
49. Statement 1. Wagering losses are deductible only to the extent of wagering gains.
Statement 2. Capital losses are deductible only to the extent of capital gains.
(a) True, tn*; (b) False, false:
(c) True, false: (d) False, true.
Answer: a
Both are existing provisions of lace. (On wagering loss: This is a left-over of the era under the
income tax law when there were items of deductions which were not related to trade or business
[e.g. Casualty loss on property not used in business and tuition fees paid in schools) but which
were deductible from gross income). Wagering gains and losses are gains and losses arising out
of wagering (gambling) transactions.
50. Which of the following losses can be deducted from gross income?
(a) A loss incurred in the conduct of trade or practice of profession;
(b) Wagering loss which may not be connected with trade or practice of
profession:
(c) Capital loss on property not related to trade or practice of profession;
(d) All of the above.
Answer. d
51. Mr. A was a traveling salesman on a salary basis. In the course of his travel, his own car that
he used in traveling* was taken by force by bandits. The bandits had an encounter with the
military, and the battle resulted in the death of the bandits and a total loss of the car. There was
no coverage on the car.
52. Doductlon for dapreclation (a cost exp are tangible assets,
cost. Assots that are subject to depreciation the cost expiration and Intangible assets. (On
intangible assets and regulations
Is called depreciation under the income tax law but called amortization in accounting) made by
the less
In the case of leasehold improvements deduction by the property of the lessor, the lessee may
claim.
Spreading the cost of the improvement life the Improvements, or remaining term of the lease,
whichever period is shorter.
53. An employer establishing a pension trust for the benefit of his employees, paying to the fund
a lump sum to cover past service cost, and an annual contribution to cover present service cost,
shall deduct from his gross income one-tenth (1110) of the past service cost, plus the present
service cost, for the first ten years; and shall deduct thereafter the present service cost only. If the
pension is not paid out of a funded plan but out of the general fund, in the year that payment is
required, deduction shall be allowed at the amount paid within the year.
54. Uncollectible accounts shall be deductions from gross income. not in the year that an
estimate is made and a provision for it is made in the books of accounts (with a recording in the
books of "Bad Debts"), but in the year in which the account and in the amount written off from
the books of acco is written o"`
66. Contribution or donation must be deductible from gross income, deductible in full, or subject
to limitation, but in either case, the contribution or donation should be made to a domestic
corporation or association.
Donations given directly to individuals are not deductible.
(See Appendices and Plate 6 for contributions that are fully deductible, and contributions that are
deductible but subject to limitation).
The deduction for contributions and donations subject to limitation shall be at a maximum of five
percent (5%) in the case of a corporation, or ten percent (10%) in the case of an individual, of the
taxpayer's taxable income from business or trade, or the practice of profession, before deducting
such contributions or donations.
57. Expenses, in general, are deductible from gross income if:
(a) Ordinary;
(b) Necessary;
(c) Paid or incurred within the taxable year;
(d) In the conduct of trade or business; and
(e) Substantiated by vouchers and receipts.
An expense is considered ordinary if it is normal in relation to the taxpayer's business and the
surrounding circumstances. An expense is necessary if it is calculated to increase profits or
reduce losses.
Entertainment expenses, as necessary business expenses, are subject to the limitation on amount,
as follows:
(a) In the case of sale of goods - one half percent sales;
(1/2%) of net
(b) In the case of sale of services - one percent (1%) of net revenues.
A deduction is an amount of expenses and losses that reduces
58.
Statement 1 The gross income to net income,
Statement2
A personal exemption is art arbitrary amount representing income of a
personal living and family expenses that reduces the individual taxpayer to taxable income.
(a) True. True (b) False, false; (c) True. false;
(d) False, true
Answer a
60. A firm to create a favorable income
(a) An paid to an advertising corporation sec a title t corporate pica e -,
(b) An pail in a litigation
Statement 1. The amount (a) is deductible from gross income because
Statement 2. The amount (b) is not deductible from is a capital expenditure that shall
become part of the cost of
(a) True true, (b) False. false. (c) True, false,
Answer a
61.
Statement
1
Bad debt is an expense in the books of accounts when provision is
made for it
Statement 2. Bad debt is a deduction from the gross income when account is written off
(a) True, true; (b) False, false;
(c) True, false; (d) False, true.
Answer: a
62. Which of the following statements is wrong?
(a) A deduction for bad debt is not available when a provision for it is made
(b) A deduction for bad debt is available only when a write oft is made;
(c) There: is no deduction for bad debt when there is a surety for the debtor against whom
collection may be enforced(d) A deduction for uncollectible account is available to a taxpayer whether car fiscal or accrual
method of accounting.
Answer
64.
Statement 1. The cost of leasehold improvements shall be deductible by the lessee by
spreading the cost of the improvements over the life of the improvements or remaining term of
the lease, whichever period is shorten
Statement 2. Depreciation expense can be a deduction for both tangible and intangible
property with limited useful life.
(a) True, true; (b) False, false:
(c) True, False
(d) False, True
Answer: a
66. Which statement is not correct? Deduction for depletion:
(a) Is allowed on wasting assets only;
(b) For foreign corporations engaged in doing business in the Philippines, is allowed only
if the mine is located in the Philippines;
(c) For domestic corporations, shall be allowed only if the mine is located in the
Philippines.
(d) Is separate from deduction for depreciation of building in the mine site;
Answer: c
67.
Statement 1. Contributions by the employer to a (funded) pension Mist for past service
cost is deductible in full in the year that the employer made the contributions, if he is on the cash
basis of accounting.
Statement 2 Contributions or donations given directly to individuals cannot be deducted
from gross income.
(a) True, true; (b) False, false,
(c) True, false: (d) False, true.
69. A Pension plpn was established in 2013 requiring a lump sum payment cbefore the es-
P2,000,000 into the fund to provide for services of employees
tablishment of the plan, and contribution annually of P100,000, begi 2013. The deduction for the
employer in 2013 shall be:
nnn7
(a) P2,100,000;
Answer d
(b) P2,000,000:
(c) P100,000; (d) P300,000.
The law fixes an arbitrary period of ten years to amortize lump for past service cost.
70. Which statement is not correct?
(a) The deduction of an individual for contributions subject to limitat,c: shall not exceed
ten percent (10%) of his taxable income from business, trade or practice of profession
before deduction for contributions;
(b) The deduction of a corporation for contributions subject to limitation shall not exceed
five percent victims trade before deduction for con (5%) of its taxable income from
business contributions;
(c) Contributions to media in its fund drive for the relief of calla are deductible from
gross income.
(d) Contributions of canned goods to student from gross income Christmas season for
distribution to Muntinlupa during pa inmates are deductib1e
Answer d
71. Contributions and donations were made by taxpayer, as
To the Quiapo Catholic Church
To the Society for the Blind, Inc., Philippines To beggars in the streets follows:
P 15, 00
10.000
5,000
To the Chapel of Rome
20,000
The actual contributions to be compared with the 5%110% limitation is:
(a) P50,000: (h) P25,000, (c) P45.000: (d) P20,000
Answer: b
To the Quiapo Catholic Church
P15.000
To the Society for the 81ino, 1-,C 0 0
Total P2
There can be no deduction for contributions and donations given directly to individuals. There
can be no deduction for contributions and donations given to associations which are not
domestic.
72. Which statement is wrong? Research and development costs
(a) When related to the acquisition and/or improvement of land and building must be
capitalized:
(b) If not related to land and building, may be treated as an outright deduction,
(c) If not related to land and building, may be treated as a deferred expense which may be
amortized:
(d) Cannot be deducted because it has unlimited life.
Answer d
With regard to letter (c), the amortization is over a period of not less than sixty months from the
date of receiving benefits from the expenditure
73. Expenditures for research and development on July 1, 2013 were,
Expenditure 1 • Land P$ 800,000
Expenditure 2. Building with useful life of 50 years 6,000,000
Expenditure 3: Others, with benefit to be received beginning November 2. 2013 and for four
years 3,000,000
Expenditure -1: Others, with benefit to be received beginning July 1, 2013 and for 6 years
3,600,000
How much are the deductions arising from the expenditures?
(a) P6,600,000:
Answer d
(b) P12,600,00:
(c) P1,320,000;
77. The D Co. is a domestic corporation in manufacturing business. It owns the piece of land and
buildings where it conducts manufacturing operations. However, marketing activities are in a
building that it is renting in the shopping center of the metropolis. In a year. data on operations
follow:
Gross profit from sales
Depreciation of buildings - manufacturing (based on cost)
Amortization of patents
Contributions to a pension trust set up during the year.
P20,000,000
200,000
300,000
For present service cost
Provision for bad debts (write off during the year was P60,000)
Research and development costs, with benefits to be received from it beginning the second
semester of the year (to be treated as deferred charges)
Expenditure for leasehold improvements (with useful life of 30 years, and remaining rented
To the government, for a priority)
Building term the lease
1,200,000
To the Quiapo Catholic Church activity in housing
To NGOs organized and operated for company
200,000
Other expenses of operations purpose
5000
Taxable income?
(a) 983.560
(b) P9.347.295,
(c)500,000
(d) P8,378,500.
Answer d
Gross profit from sales
Less,
Depreciation of buildings
Depreciation of leasehold improvements
(P1,200.000/20 years)
Amortization of patents
Contributions to pension trust
For past service cost (1/10 of P2,000,000)
For present service cost
Bad debts (write-off)
Research and development costs
(P1,000,000160 months x 6 months)
Other operating expenses
10000,000
Taxable income before contributions
Less Contributions Fuiiy deducubie
Deductible, subject to limitations To Quiapo Catholic Church
To the NGOs
Total
5% of P9,030,000
Allowed 451,500
Taxable income
P20,000,000
P 200,000
60,000
300,000
200,000
50,000
60,000
100,000
10.970.000
P 9,030,000
P 200,000
P5,000
500.000
P505,000
P451,500
651,500
P8378,500
SALE OR EXCHANGE OF PROPERTY -1
Formula: Selling Price less Cost equals Gain or Loss
1. Formulas in computing gains and loss on a sales and exchanges.
Selling price (less) cost (equals) gain or loss on the sale.
In case of an exchange, the fair market value of the property received in exchange is the seiiing
price.
In order to recognize a gain oi- a lcss on an exchange, the property acquired in exchange should
ba essentially different from the property given in exchange.
What is the cost of the property sold?
(a) The cost thereof, in case of property acquired on or after
March 1, 1913, if such property was acquired by purchase;
(b) The fair market value as of the date of acquisition, if the asset
was acquired by inheritance;
(c) If the property was acquired by gift, the basis shall be the
same as it would be in the hands of the donor, or the last
preceding owner by whom it was not acquired by gift, except that if such basis is greater than the
fair market value at the time of the gift, then for the purpose of determining the loss, the basis
shall be such fair market value (In case of loss, see the rule verbalized and illustrated by the
author in terms of "whichever is lower");
(d) If the property was acquired for less than full and adequate
consideration in money or money's worth, the basis. is the
amount paid by the transferee for the property.
Expenses of acquisition and disposition of the asset shall be treated, as follows: Selling price
(less) expenses of sale, compared with purchase price (plus) expenses of acquisition, will give
the gain or loss on the sale.
3. Mrs. G received as gift from her mother property purchased ten years ago for
P100,000 At the time of the gift, the property had a fair market value of
P2,000,000. After owning the property for two years, Mrs. G sold them for
P2,500,000. Which of the following statements is correct
4. V inherited a piece of lard from his father (purchased by the father a,when inherited. He
receive transferred this properly to a wholly-owned corporation of P5,000.000 with a fair market
value of P3.000,000 V CoCo andfor it newly issued shares of stocks with a par value of
p4,500.000 market value of P5.000.000 Which of the following is ,.wrong?
(a) The gain to Mr. V on the transfer is P200000 (P5,000,000-P3.000,000)
(b) The gain to v Co on the transfer is P0;
(c) The basis of the shares in the hands of Mr. V is P5, 003,000;
(d) There is no gain from any and all of the transactions.
SALE OR EXCHANGE OF PROPERTY - 2
Sale or Exchange of Ordinary Assets
1. ORDINARY ASSET versus CAPITAL ASSET.
The following are ordinary assets:
(1) Stock in trade of the taxpayer, or other property of a kind which would properly be included
in the inventory of the taxpayer if on hand at the close of the taxable year; or
(2) Property held by the taxpayer primarily for sale to customers in the ordinary course of trade
or business; or
(3) Property used in trade or business of a character which is subject to allowance for
depreciation (or amortization); or
(4) Real property used in trade or business of the taxpayer.
Example of (a) is merchandise inventory; of (b) is land held for sale by a real estate dealer; of (c)
are delivery equipment and patent; and of (d) is land on which the factory stands.
A capital asset is an asset (whether or not connected with the taxpayer's trade or business) which
is not included in the enumeration of ordinary assets.
When an asset is not used in business, it is a capital asset. When an asset is held as investment
(whether or not connected with the taxpayer's trade or business) it is a capital asset
2. The term "capital assets" includes.
(a) Stock in trade or other property included in the taxpayer's inventory:
(b) Real property not used in trade or business of the taxpayer,
(c) Property primarily for sale to customers in the ordinary course of his trade or
business;
(d) Property used in the trade or business of the taxpayer and subject to depreciation
Answer b
3. Lots being .anted when subsequently sold are classified as.
(a) Capital assets.
(b) Liquid assets:
(c) Ordinary assets,
(d) Fixed assets.
Answer c
4. Which of the following statements is false?
(a) A capital asset maybe business asset;
(b) An asset
(c) Ine tout
ordinary not connected with connected or an asset amortization is an asset.
(d) An ah is e!d in
Answer c
investment is ordinary capital gains:
5. A feature of ordinary gains as distinguish8d from
(a) Gains from sales of assets not stock in trade;
(b) May or may not be taxable in full;
(c) Sources are-capital assets;
(d) No holding period.
Answer. b or d
6. Mr. CA is an art dealer and investor is rations. He had the following transaction in a year share
of stock of domestic cow
(a) Sale of a painting masterpiece with a cost of P500,000 for P2,500,000:
(b) Sale directly to a buyer of shares of stock held as investment with a cost of P150,000
for P320,000;
(c) Sale of a painting with a cost of P100,000 for P200,000 and donation of the proceeds
of the sale to a child.
Which of the following statements is wrong?
(a) The sale of a painting masterpiece is a sale of an ordinary asset;
(b) The sale of shares of stock is a sale of a capital asset;
(c) The sale second painting is a sale of an ordinary asset;
(d) All the gains shall be reported in the income tax return at the end of the year.
Answer: d
The gain on the sale of shares of stock is subject to the capital gain tax, with a capital gain tax
return. The gains on the sales of paintings are ordinary gains and shall be reported in the income
tax return at the end of the year.
39. Mr. U inherited large parcels of raw land. He sold these parcels of land.
Statement 1. The land sold is capital asset;
Statement 2. The land sold is ordinary asset.
(a) True, true: (b) False, true; (c) True, false; (d) False, true"
Answer. C
40. Suppose what was inherited was a subdivision business of real estate, he sold the entire land
to real estate. As he knew nothing about the a person in the business of
Statement 1. The land sold is capital asset;
Statement 2. The land sold is ordinary asset:
(a) True, true, (b) False, true; (c) True false; (d) False, true.
Answer. c
41. Suppose he sold the different lots in the subdivision to different independent interested
parties at different dates and at different prices, in installment.
Statement 1 The land sold is capital asset
Statement 2. The land sold is ordinary asset
Answer d
When Mr. U sold the subdivision to a- real estate businessman, as he knew nothing about the
business of real estate, he did not sell property used in business He only wanted to dispose of an
inherited property - convert the land into cash - a single transaction, which does not constitute
the business of* selling land.
5. INSTALLMENT REPORTING OF INCOME.
When a deferred payment is:
(a) an ordinary asset, or of
(b) a capital asset which is not subject to capital gain tax, the gross profit or gain from the sale
may be reported on the installment method, if such sale is by:
(a) One wh- is a dealer in personal property regularly selling on installments; or
(b) One who makes a casual sale or disposition of personail property (other than
inventory) for a selling price in excess-of one thousand pesos (P1,000) and with initial payments
not exceeding twenty-five percent (25%) of the selling price; or
(c )One who makes a sale of real property, with initial payments not exceeding twentyfive percent (25%) of the selling price,
Formula:
Gross profit x Collections during
Contract price the year
= income for the year with such computation being made once
only for the year, covering the total payments on the price within the year.
Installment method of reporting income is a choice of the tax-payer. He may choose to report
income once only in the year of sale.
A loss on a sale cannot be reported on the installment method.
If after reporting a profit or gain on installments as installment payments are received, the buyer
defaulted, and the seller repossessed the property, gain or loss on the repossession shall be computed. 1
Formulas (See Plate 7):
6. The deferred payment method of reporting income on a deferred payment sale is available to a
taxpayer if, there being a requirement of the law on the ratio of initial payments to the selling
price, the initial payments:
(a) Exceed 25% of the selling price;
(b) Do not exceed 25% of the selling price;
(c) Regardless of the ratio of initial payments to the selling price;
(d) Do not exceed 25% of the contract price.
Answer: a
7. In the installment method of reporting income: Gross profit
(divided by)
Contract Price (multiplied by) Installment payments received during the year. (equals) Gross
income for the year. Wh,ch of the following statements is not true? Wher e the property sold is
not subject to a mortgage:
(a) Selling price is the contract price:
(b) Initial payments are all payments received in the year of sale;
(c) Computation is done once only, on the total payments received during the year;
(d) Computation is done every time a payment is received on the selling price.
Answer: d
8. Mr. A is a dealer of household furniture regularly selling on installments. He made a sale of a
bedroom set, with a cost to him of P4,000. for P10,000 receiving as down payment P1,000 on the
date of sale on December 2012, and P1,500 the day after, and monthly thereafter at P2,500.
The gross income to report on the installment method in 2013 is:
(a) P4.500;
(b) P0; (c) P7,500;
(d) P1,500.
Answer a
Selling price
Less: Cost
Gross profit
Payment on the date of sale, December, 2012
Payment on the succeeding day. December, 2012
Initial payments (do not exceed 25% of the selling price)
Collection. January, 2013
Collection. February, 2013
Collection, March, 2013
Total 2013
Gross income in 2013 (6.000/P'10,000 x P7,500)
9. Selling of inventory in installments
Cost of the inventory sold
Collections on the selling Price for buyers
Fair market value of property when repossessed
(a) Gain on repossession of P3000
P10,000
4000
P U 4Q
P 1,000
1.500
P 2,500
P 2,500
2,500
2.500
P 7,500
P 4.500
(b) Loss on repossession of P2,000
(C) Loss on repossession of P28,000
(d) Gain or loss on repossession at some
Answer a
10. In the installment method of reporting income if the property is a mortgage which is assumed
by the buyer, and such mortgage does not exceed the cost of the 'seller: Gross profit (divided by)
Contract Pry(multiplied by) Installment payments received during the year equals income for the
year. Which of the following statements is not true(a) Selling price is the contract price;
(b) Selling price less mortgage assumed by the buyer is the conic ac;
(c) Initial payments consist of all payments received in the year of saie
(d) Initial payments will not consider the mortgage assumed by the b uye;
Answer. a
12. In installment method of reporting income, if the property sold is subject to a mortgage
which is assumed by the buyer and such mortgage exceeds the cost of the seller Gross profit
(divided) by Contract Pace, (multiplied by)
Installment payments received during the year (equals) Gross income for the year Which of the
following statements is not true?
(a) Selling price, less mortgage assumed by the buyer is the,cont'act pace
(b) Selling price, less mortgage assumed by the buyer add the excess of mortgage assumed by
the buyer over the cost of the seller, is the contract price.
(c) Initial, payments consist of all payments received in the year of sale, plus the excess of the
mortgage assumed by the buyer over the cost to the seller,
(d) In the year of sale Gross profit, divided by the contract price, is multiplied by the initial
payments.
Answer a
13. The Ganda Co . a resident corporation, sold its land and building that houses its offices for
P10.000,000 It had a book value of P4,000,000. P3yrnents on the selling price were Assumption
of a mortgage on the property of P5,000,000; Cash on the date of sale in December, 2012,
1,000.000, and cash of P1.000.000 every six months thereafter
The gross income to report on the installment method in 2013 is
(a) P4,000,000,
(b) P3,000.000;
(c) P6,000,000,
(d) P2.000,000
Answer. d