Chapter 9
REGULAR INCOME TAX
INCLUSION OF GROSS INCOME
TRUE OR FALSE
1. Items of gross income subject to regular income tax and capital gains tax are
reportable to the government. TRUE
2 Rent is a passive income, but is not subject to final tax. TRUE
3. The interest income from bonds issued by banks is subject to final tax. FALSE
4 Gains from dealings in capital assets are generally subject to the regular income.
TRUE
5. The gross income from operations enjoying a tax holiday are included in gross
income subject to regular tax, but are presented as deductions in the income tax
return. FALSE
6. The share in a business partnership is subject to final tax, but the share in a general
professional partnership is subject to regular income tax. TRUE
7. Gains from dealings in ordinary assets are subject to regular income tax. TRUE
8. Items of passive royalty income are subject to final income tax while items of active
royalty income are subject to regular income tax. TRUE
9. Compensation income is an inclusion in gross income subject to regular tax except
compensation income of special aliens. TRUE
10. The reportable gross income from business or the exercise of a profession is not of
the cost of goods sold or cost of services. TRUE
11. Items of income which are included is gross income subject to final tax are
excluded in gross income subject to regular income tax. TRUE
12. Imputed interest income is an item of gross income subject to regular income tax.
FALSE
13. Advanced rentals are income in the year received. TRUE
14. Real property tax and insurance on the property if assumed by the lessee
constitute income to the lessor. TRUE
15. Corporate winnings are exclusions in gross income: hence they are exempt from
income tax. FALSE
16. Stock dividends are never subject to income tax. FALSE
17. Pensions or retirement benefits are inclusions in gross income subject to regular
income tax if the employee is terminated due to any cause within his control. TRUE
18. Prizes in athletic competitions sanctioned by the Philippine government are
exclusions in gross income subject to final tax but are inclusions in gross income
subject to regular income tax. FALSE
19. Corporate prizes are exclusions in gross income subject to final tax but are
inclusions in gross income subject to regular income tax. TRUE
20. Stock splits are never subject to income tax. TRUE
True or False
1. The distributable net income of a general professional partnership is subject to
creditable withholding tax. TRUE (not final tax)
2. Exempt joint ventures and Lo-ownerships are treated as pass through entities and
are subject to income tax. FALSE (not taxable)
3. The distribution by the GPP of items of passive income is an inclusion income of the
partner subject to regular income tax in gross. TRUE
4. General professional partnerships are exempt from tax and hence, exempt from
withholding. TRUE
5. The share from the net income of a joint venture organized abroad is subject to 10%
final withholding tax. FALSE (final withholding tax not apply abroad)
6. Income distribution from taxable estates and trusts is an inclusion in gross income
subject to regular tax by the hair or beneficiary. TRUE
7. The recovery of past deduction must reverted back to gross income of taxpayers
using the accrual basis. TRUE (generally, exemption is when no tax benefit derived)
8. The recovery of bad debts need not be reverted back to gross income of taxpayers
using the cash basis. FALSE (this is normal realization income)
9. The recovery of deduction from an exempt year is subject to tax. FALSE
10. General professional partnerships are not exempt from regular tax but to final tax
and capital gains tax are subject. FALSE (GPP’s are also exempt from FIT and CGT)
11. An indebtedness cancelled by the creditor out of mercy is an income to the debtor.
FALSE
12. When there is a net loss in the period the deduction is taken the subsequent
recovery of the deduction will not have any tax benefit. FALSE
13. The refund or recovery of non- deductible taxes shall not be reverted back to gross
income. TRUE (no tax benefit)
14. The loss of the partnership can be claimed by the partners as deduction in their
income tax returns. TRUE
15. The accounting period of the taxpayer has a direct impact upon the amount of
gross income to be reported. FALSE
16. The power of the CIR to redistribute income and expense includes the power
impute income between affiliated enterprises. FALSE
17. The situs of taxation has an impact on the extent of the reportable gross income.
TRUE
18. Creditable withholding taxes are added back to the amount of reportable Income.
TRUE
19. The output VAT must be included as part of gross income of VAT taxpayers. FALSE
20. The requirement to revert back to gross income the amount of withheld applies only
to VAT taxpayers. FALSE
21 Generally, all items of income of NETB and NRPCs from the Philippines are
inclusions in gross income subject to final tax. TRUE
22. The taxpayer must enter into an advanced pricing agreement with the BIR crossborder transfer pricing with associated enterprises. FALSE
23. Transfer pricing between associated enterprises must be made at arm's length.
TRUE
24. The transfer pricing regulations apply only to cross-border transfers of goods and
services between associated enterprises. FALSE
25. Corporations under the direct and indirect control of the same control individual or
corporation are associated enterprises. TRUE
26. Under the accrual basis of accounting, items of gross income are reported in the
period they are received. FALSE
27. Basically, transfer pricing adjustment is needed when the income reported
Philippine taxation is understated. TRUE
Multiple choice theories Part 1
1. Which is not subject to income tax?
a. Gain from sale of shares in mutual funds by the investor
b. Prizes in recognition of civic, religious, and artistic achievements
c. PCSO and lotto winnings, not exceeding P20,000
d. All of these
2. Which us an item of gross income subject to regular tax?
a. Gain on sale of lot by a realty dealer
b. Interest income from bank deposits
c. Passive royalty income
d. Capital gain on the sale of domestic stocks
3. Which is not an item of gross income subject to final tax?
a. Dividends from a domestic corporation
b. Prizes in excess of P10,000 by an individual
c. Share in the income of a general professional partnership
d. Winnings
4. Which of these employee benefits is subject to final tax?
a. Fringe benefits to rank and file employees
b Regular pay of supervisory and managerial employees
c. Fringe benefits to supervisory and managerial employees
d. Regular pay of rank and file employees
5. All of these are items of gross income subject to regular tax except one. Select
exception.
a. Compensation income
b. Interest income from long-term bank deposits
c. Ordinary gain on sale of properties
d. Interest on notes receivables
6. Which is an income exempt from income tax?
a. Income of a general professional partnership
b. Foreign dividends
c. Taxes collected by the government
d. Income of government-owned and controlled corporations
7. All of these are subject to regular income tax, except?
a. Professional fees
b. Wages and commissions
c. Business income
d. Capital gain from the sale of real property located in the Philippines
8. Which is exempt from regular tax?
a. Income from construction
b. income of qualified pension plans
c. Income from merchandising or trading
d. income from financing or leasing
9. Which item of gross income is not subject to regular tax?
a. Interest income from foreign bank deposit
b. Capital gain on the sale of bonds with more than 5 years maturity
c. Gain on sale of domestic stocks by a security dealer
d. Capital gain on sale of patent
10. Which is not part of compensation income subject to regular tax?
a. Director's fees
b. Bonuses and fixed allowances
c. Portion of salary contributed to SSS
d. Portion of salary used to pay salary loans
11. Which is included in the gross income subject to regular tax of a resident alien?
a. Gross income from the sale of goods abroad
b. Interest income from promissory notes of resident clients
c. Interest income from relatives abroad.
d. Gain from the sale of domestic stocks directly to a buyer
12. Which of the following deductions from gross compensation income is includes part
of gross income subject to regular tax?
a. Pag-Ibig Contributions
c. PhilHealth Contributions
b. Contributions to union
d. dues Withholding tax
13. Which interest income is subject to regular tax?
a. Interest income from notes
c. Interest income from lending
b. Interest income from bonds
d. All of these
14. Dividends subject to regular tax includes
a. Foreign dividends
c. Both a and b
b. Domestic dividends
d. Neither a nor b
15. Statement 1: All prizes earned abroad are subject to regular tax
Statement 2: All prizes in the Philippines are subject to final tax
Which statement is generally correct?
a. Statement 1 b. Statement 2 c. Both statements 1 and 2 d. Neither statement is true.
16. Which is an item of gross income subject to regular tax?
a. Lottery winnings from abroad
b. Imputed interest income
c. Advanced rent representing security deposit for contingency which may or may not
happen
d. Leasehold improvements with useful life not extending beyond the lease term
17. Which of the following is not subject to regular tax of a domestic corporation or
resident citizen?
a Deposit Interest income from abroad
b. Prize not exceeding P10,000 from the Philippines
c. income from abroad exempt under treaty
d. Royalties from abroad
18. Which is subject to regular tax to a non-resident foreign corporation or nee
resident alien not engaged in trade or business?
a. Business income from the Philippines
b. Capital gain from the sale of stocks directly to a bayer in the Philippines
c. Dividends from domestic corporations
d. None of these
19. Which is subject to regular tax to a resident foreign corporation?
a. Service fees abroad
b. Gain from sale of real property capital assets in the Philippines
c. Dividends from a domestic corporation
d. Gain from dealings in properties abroad
20. The proceeds of life insurance received by the wife of the insured is a exempt from
income tax
a. exempt from income tax
c. part of taxable income
b. subject to final tax
d. partly exempt and partly taxable
Multiple Choice-Theory: Part 2 4.
1. Which of the following will not be reported in gross income?
a. Receipt of inheritance
b. Share in the net income of a foreign partnership
c. Royalties from foreign sources
d. Income distribution from a taxable estate
2. Which is not a reportable type of gross income?
a. Passive royalties
b. Dividends from a foreign corporation
c. Rent income
d. Capital gains from the sale of domestic stocks through the PSE
3. Which of the following is included in gross income subject to regular tax?
a. Sub-contract income from petroleum service contractors
b. Interest income from government securities
c. Share in the net income of a taxable co-ownership
d. Farming income
4. All income earned abroad that would otherwise be subject to final taxes if earned
within the Philippines shall be subject to progressive tax of a
a. Domestic corporation.
c. resident alien
b. Resident citizen
d. all taxpayers
5. All items of passive income earned abroad are subject to regular tax to
a. Resident citizen only.
b. Domestic corporation only.
c. a resident citizens and domestic corporations
d. All taxpayers.
6. Which individual taxpayer is not subject to progressive tax?
a. NRA-ETB
b. Special aliens
c. Resident alien
d. Resident citizen
7. Which corporate taxpayer is not subject to regular tax?
a. Domestic corporation
b. Resident corporation
c. Business partnership
d. Non-resident foreign corporation
8. Individual taxpayers shall report their income on
a. A fiscal year.
b. a calendar year
c. either a fiscal or calendar year
d. A crop year.
9. Corporations are allowed to report their income on either
a. fiscal year
b. calendar year
c. either a fiscal year or calendar year
d. a crop year
10. Which is subject to progressive tax to an individual taxpayer?
a. Proceeds of life insurance policy
b. Gift
c. Amounts received by the insured in excess of premiums paid
d. Compensation for personal injuries
11. Which of these is subject to Philippine regular income tax to a foreigner?
a. Rent income on properties located abroad.
b. Dividend income from a domestic corporation
c. Interest income on a deposit abroad
d. Interest income from domestic bonds
12. If not covered by the substituted filing system, shall report their regular income
a. Monthly
b. annually
c. quarterly
d. quarterly and annually
13. Corporations and individuals engaged in business or in the exercise of a
profession are required to report their regular income
a. monthly
b. quarterly
c. annually.
d. quarterly and annually.
14. Which is incorrect concerning transactions between associated enterprises?
a. Transactions between related parties should not be controlled.
b. Pricing should be determined by free market forces.
c. Pricing should be motivated by the need to save from total income tax
d. Non-arms’ length pricing between related parties may be restated by the BIR to
reflect the arms’ length value of transactions
15. Which is not an associated enterprise to the controlling individual of a holding
company
a. An associate of a subsidiary in the group
b. The parent company
c. A direct subsidiary company
d. A subsidiary of a subsidiary in the group
Multiple Choice-Problems: Part 1
1. Mr. Lolong, a supervisory employee, received the following income in 2015:
Gross compensation income, before contributions
to SSS, PhilHealth, and HDMF totaling P124,000
800,000
Fringe benefits
200,000
Cain from redemption of shares in a mutual fund
100,000
Commission Income
150,000
Gain on sale of stocks through the PSE
400,000
Determine the total income to be reported by Mr. Lolong in gross income
a. P1526,000
b. P1426,000
c. P1,026,000
d. P826,000
800k- 124k+ 150k= 826k
2. Calixto, employed, derived the following income during the year:
Gross salaries
400k
13 month pay and other benefits
40k
SSS PhilHealth and Pag-Ibig contributions
20k
Deductions for loans repayments
Deductions for withholding tax
50k
60k
Compute the compensation income to be reported in the annual income tax
return
a. P440,000
b. P330,000
c. P380,000
d. P390,000
400k-20k= 380k ( 13th month pay is below 90k )
3. Corazon resigned in 2015 after 12 years of service. She had the following during
the year:
Salary, net of P30,000 withholding tax, P20,000 SSS,
P18,000 Philhealth and P40,000 13 month pay
480K
Separation pay
1M
Compute the gross income subject to progressive (regular) tax
a. P 1.480.000
b. P1.560.000
c. P560.000
d. P480,000
480k+80K+1M= 1,560,000
4. Iriga Corporation is engaged in the sales of goods. It reported the following
summarized financial statements during the year
Sales
Less cost of sales
Gross profit
Commission income on consignment
Interest income from customers
Interest income net of final tax
Dividend income
Total Income
Less: Admin & Selling Expenses
Net income
Compute the total gross income subject to regular tax
a. P1.790.000
b. P1.770,000
c. 1.720,000
d. P540,000
3.5m
2m
1.5m
200k
20k
10k
50k
1,780,000
1,000,000
P780,000
1.5m gross profit + 200k commission income + 20k interest income from
customers= 1,720,000
5. Precy, Inc., a domestic corporation, reported the following income in 2014:
Philippines
abroad
Service fee
P400.000
300k
Interest income-bank
40.000
70k
Royalties- franchise
80.000
30k
Compute the total gross income subject to regula
a. P920.000
b. P860.000
c. P800,000
d. P700.000
400k+300k+70k+30k= 800k
6. If Presy Inc. is a resident foreign corporation, compute the gross income subject
to regular tax
a. P520.000
b. P480,000
c. P400.000
d. P440.000
7. Andres leases a building to a client. During the year, he received the following
remittance from the lesser:
Rental, net of 5% creditable withholding tax
P 1,900,000
Real property tax of the leased building
50,000
Reimbursement for utilities used by the lessee
paid by Andres
200,000
How much will be included in gross income subject to regular tax?
a. P2.050.000
b. P2.250,000
c. P2,000,000
d. P1.950 000
1.9m/ .95+ 50k= 2,050,000
8. Mr. Croki, a professional practitioner, received the following from his clients
Advances for future services to be rendered
Collections for past services rendered
Reimbursements for client expenses
Reimbursement for out-of-pocket expenses
30k
70k
40k
10k
How much will be included in Croki's gross income for regular income tax
purposes?
a. P150,000
b. P140,000
c. P110,000
d. P100,000
30k+70k+10k= 110k
9. The Big Bird Security Agency (8BSA) received P3.000.000 from its clients
P2.400,000 of this was designated for salaries of guards assigned to various
client establishments
How much will be included in the gross income of BBSA? c. P3,000,000
a. P600,000
b. P2.400.000
c. 3,00,000
d. 0
3m-2.4m= 600k
10.
Farmers, Inc. purchased an agricultural lot for P1,000,000. It was later
discovered that the lot had gold deposits. Thus its fair value increased to
P4,000,000. This crease in fair value is
a. exempt from income tax
b. subject to income tax
c. partially exempt and partially taxable.
d. Any of these
11.
Northern Cattle Company produces beef meat. In 2015, it reported the
following:
Sales of live cattle
Sale of young feeders
Increase in value of cattle inventory
600k
200k
300k
Compute the income subject to regular tax
a. P1,100,000 b. P800.000 c. P900,000
d. P600,000
600k+200k= 800k
12.
Don Juanito has the following income in 2015
Sales from vegetables
400k
Sales from fruits
200k
Sales of caraban (acquired for P30.000 in 2015)
35k
Interest income from tenants on the sale
of agricultural land pursuant to the Agrarian
Reform Program
12k
The gross income subject to progressive tax is
a. P647,000
b. P617,000
c. P600,000
d. P605,000
400k-200k+35k-30k= 605k
13.
Mr. Conner purchased a life annuity for P1,000,000 which will pay him
P100.000 a year. What will Mr. Conner include in his gross income on the 11
year of the policy?
a. P1,000,000
b. P100,000
c. P200,000
d. P1,200,000
14.
Edwin purchased the life insurance policy of Paulo for P50,000. He
continued the policy by paying P20,000 premium after which Paulo died. Edwin
collected the P500,000 proceeds of the policy. How much will Edwin exclude
from his gross income
a. P500,000
b. 1430,000
c. P70,000
d. 0
15.
Mr. Benson insured his life with his children at beneficiaries. He died after
paying P200.000 premiums. His children collected the P1.000.000 life insurance
proceeds. How much will be excluded from Mr. Benson's gross income?
a. P900,000
b. P1,000,000
c. P200.000
d. 0
16.
Pedro's crop was destroyed by incessant rain. He received P200,000 from
insure that insured his crop. The proceeds of the insurance is an
a. item of gross income subject to regular tax
b. item of gross income subject to final tax
c. exclusion from gross income
d. exempt income
17.
In 2016, Northern Crest Corporation (NCC) reported a P40,000 recovery
from bad debts that was claimed as deduction against gross income in 2012. In
2012, write-off increased the operating loss of NCC to P50,000. NCC was very
profitable from 2013 to the present. How much of the P40.000 recovery is subject
to tax?
a. 60,000
b. 10,000
c. 40,000
d. 0
18.
West Oil abandoned an oil facility in 2012 and expensed the P3000se
unrecovered investment in the facility as abandonment loss. The 2012 taxable
income before provision for the loss was P100.000. West posted continues loss
und 2015 with increasing prices of crude all in 2016, West re commissioned the
facility for use. How much will be included in its gross income in 2016?
a. P300,000
b. P200.000
c. P100.000
d. 0
19.
Sarah Baby International graduated from its income tax holiday incentive
and effectively subject to tax beginning 2015 In 2016, it collected a P4M from a
PEN receivable which was written off as bad debt expense in 2013 Before the we
off, Sarah International had P 1M profit, Sarah posted profits in 2014 and 2015 in
excess of its operating loss in 2013.
Compute the amount of recovery subject to regular income tax
a. 6,00,000
b. 1,000,000
c. 4,000,000
d. 0
20.
In 2015, an accrual basis taxpayer received a cash refund for an income
tax assessment which he paid in 2011 consisting of the following:
Basic tax
Surcharge
Interest
40k
10k
4k
Total taxes paid
54,000
How much must be reverted back to gross income in 2015?
a. PO
b. P4,000
c. 10,000
d. P44.000
21.
In the immediately preceding problems, compute the tax benefit of the
refund was of local tax instead of income tax
a. P44,000
b. P4,000
c. P10,000
d. 0
40k+4k= 44k
22.
An accrual basis taxpayer recovered a P20,000 local tax expense which
was refunded by the lo e local government in 2015. The local tax expense was
paid in 2013 when the taxpayer sustained a P5,000 net operating loss. How
much shall be reverted to income?
a. PO
b. P5,000
c. P20,000
d. P15,000
23.
A taxpayer under the cash basis wrote-off P50,000 receivables in 2010. In
2015. P30,000 of the receivables was recovered. Determine the amount to be
included in gross income in 2015 assuming that the taxpayer incurred a net
operating loss of P40,000 in 2010.
a. PO
b. P10.000
c. P30 000
d. P40,000
Multiple Choice-Problems: Part 2
1. Mr. Cordillera owns 20% interest in a joint venture engaged in construction
projects. In 2015, the joint venture reported profits of P500.000. inclusive of
P20,000 from time deposits Compute the total income to be reported in gross
income of Mr. Cordillera
a. PO
b. P4.000
c. P96,000
d. P100,000
2.
3.
a.
b.
c.
d.
4.
5.
500k x 20%= 100k
Mr. Buaya with 14 dependent children, had the following data for his income
tax return in 2018:
Sales
490k
Gross compensation income
120k
Cost of sales
200k
Non-taxable compensation
30k
Administrative and selling expenses
120k
Personal expenses
70k
What is the net income?
a. P170.000
b. P290,000
c. P 100.000
d. P 20,000
490k-200k-120k=170k
Compute the taxable compensation income
(150k)
(30k)
(90k)
(120k)
120k-30k= 90k
Compute the taxable income
a. P10,000
b. P100 000
c. P140,000
d. P260,000
90k+170k=260k
Raymund and Zeus practice their accounting profession through a
professional partnership They contributed equal capital and agreed to share
profits equally The Following relates to their gross receipts and expenses:
Cross receipts of services
Less Cost of service
Gross income from operations
Add: Other non-operating come
4m
1.8m
2.2m
Gain on sale of equipment
Interest on time deposits
Total gross income
Less Allowable deductions
Net profits
100k
40k
140k
2,340,000
1.2m
1,140,000
What is the reportable income in the tax return of Raymund?
a. P1.170,000
b. P500.000
c. P550,000
d. 570,000
1,140,000/2= 570k
6. In the immediately preceding problem, determine the amount of income to be
reported by Zeus assuming that their partnership is a beauty parlor.
a. P0
b. P570.000
c. P550,000
d. P500,000
7. An alien employer in an RHIQ had the following in 2015:
Gross compensation income
1.5M
Contributions to SS5, PhilHealth, and HDMP
150K
Creditable withholding tax
202,500
What is the total amount to include in gross income subject to regular income
tax?
a. PO
b. P1,147,500
c. P 1,350,000
d. P1.500.000
8. In the immediately preceding problem, what is the amount to include in gross
income assuming the employee is a Filipino rank and file employee?
a. PO
b. P1.147.500
c. P1,500,000
d. P1.350,000
9. A corporation had the following gains from dealings in properties:
Sale of delivery truck
150k
Sale of domestic stocks
Sale of 3 year corporate bonds
Sale of 6-year corporate bonds
50k
12,500
7,500
What is the total amount of gain to be included in gross income?
a. P150.000
b. P 162.500
c. P 170,000
d. P212.500
10. Shown below is a compilation of the grin on the sale of real properties
Real properties classified as
Phil
Abroad
Ordinary assets
300k
800k
Capital assets
400k
200k
What is the amount of income to be included in gross income subject to
regular income tax assuming the taxpayer is a domestic corporation?
a. P1.300.000
b. P1.100.000
c. P1.700.000
d. P 300,000
300k+800k+200k= 1.3m
11. What is the gain to be included in gross income subject to regular income
tax if the taxpayer is a resident foreign corporation?
a. P300,000
b. P400,000
c. P700,000
d. P1,100,000
300K+400k- 700k
12. What is the gain to be included in gross income if the taxpayer is a resident
alien?
a. 700k
b. 400k
c. 300k
d. 1.1m
13. A taxpayer collected the following passive income during the year
Passive income
Phil
abroad
Interest income from banks
300k
800k
Royalties from books
Rent of properties
200k
400k
100k
200k
What is the amount to be reported in gross income if the taxpayer in a resident
citizen?
a. P900,000
b. P1.100,000
c. P1,500,000
d. P 2,000,000
800K+ 100k+ 400k+ 200K= 1.5M
14. In the immediately preceding problem, what is the reportable gross income
assuming the taxpayer is a resident alien?
a. P0
b. P900.000
c. P 600.000
d. P 400.000
15.
In 2020, the taxpayer received the following prizes and winnings
Passive income
Philippines
abroad
Prizes
10k
400k
Winnings
400k
100k
What is the reportable item of gross income if the taxpayer respectively in
resident citizen and a non-resident citizen?
a. P500.000; P0
b. P510000: P10,000
c. P0: P 500,000
d. P 910.000; P410,000
10K+400K+100k- 510,000
Note: prizes not exceeding 10k are subject RIT
16. What is the reportable item of gross income if the taxpayer is a domestic
corporation and a resident foreign corporation, respectively?
a. P500,000 PO
b. P510.000, P10,000
c. P910,000 P410,000
d. P500,000: P 10,000
Corporate prizes and winnings are subject to RIT. DC is taxable on world income
while RFC is taxable only on Philippines taxable income.
17.
Mang Sipalay registered his business as a BMBE He made total samo
P500.000 and incurred coast of sales of P400,000. He also earned P10,000
inter income from time deposits. What is the total reportable gross income?
a. P0
b. P10,000
c. P100,000
d. P110,000
Income from related operations are exempt, the unrelated income is subject to
final tax.
18.
Boracay Company is registered as a TIEZA locator subject to 5% gross
income ta During the year, it made a total P400,000 gross receipts from
various tours assistance services. It also incurred P210,000 in direct services.
what is the amount to be included in gross income subject to regular income
tax?
a. PO
b. P190,000
c. P210,000
d. P 400,000
This is subject to 5% GIT
19. Mr. Suayan is a 5-6 lender. During the year, he granted loans totaling
P2,000,000 and collected P400,000 in interest He also earned P8,000 in
temporary investments in domestic bonds plus additional P6,000 from bank
deposit substitutes Direct cost of lending was P100,000. What is the total
amount to be reported in gross income subject to regular tax?
a. PO
b. P300,000
c. P414,000
d. P 308,000
400k-100k+8k= 308k
20.
20.
Mr. Asuncion received the following royalties from the following sources
Mining claims
150k
Novel, "Alicia in Wonderland”
250k
Basic Accounting textbook
80k
Musical composition "Dayang-dayang”
40k
What is the total amount to be reported in gross income?
a. PO
b. P150,000
c. P400,000
d. P520,000
None to report since all the income are subject to final withholding tax.
Multiple Choice-Problems: Part 3
1. Mrs. Kapalong has several interests in various businesses and partnerships. He
received the following income during the year:
Dividends from a domestic corporation
120k
Dividends from a resident foreign corporation
80k
Share in net income of a business partnership
200k
Share in the net income of a professional partnership 100k
What is the total income to be reported in gross income?
a. P0
b. P380,000
c. P300,000
d. P180.000
100K+80K= 180K
2. Ms. Panabo received a total P200,000 from her father for her support. During
the year, she also received a P150,000 total distribution from the trust irrevocably
designated by her grandfather in her favor. She also received P120.000 income
distribution from the estate of her grandmother undergoing Judicial settlement.
What in the total amount to be included in her gross income?
a. P200,000
b. P270,000
c. P350.000
d. P470,000
150K+120K= 270K
3. A non-VAT taxpayer collected P45,000 net of P5.000 withholding tax. Compute
the gross income subject to regular tax
a. P5,000
b. P40.000
c. P45.000
d. P 50,000
45K+5K= 50K
4. A VAT taxpayer collected P66.600, inclusive of P7200 VAT and net of P600
withholding tax Compute the gross income subject regular income tax
a. P59,400
b. P 67,200
c. P66,000
d. P60.000
66,600+P600-7,200= 60K
5. A non-VAT taxpayer collected P79.200, net of 1% withholding tax. What is the
amount subject to regular income tax
a. P71351
b. P71429
c. P80.000
d. P79.200
79,200/99%= 88k
6. A VAT taxpayer received 145,900 inclusive of VAT and net of 10% creditable
withholding tax Compute the gross income subject to regular tax
a. P45,000
b. P45,900
c. P 45.536
d. P51,000
45,900/ 102%= 45K
7. A non-VAT taxpayer received P8,000 interest income, net of 20% final
withholding tax. Compute the amount subject to regular income tax.
a. PO
c. P 8,000
b. P6,400
d. P10,000
8.
A VAT-registered taxpayer received P18,000 dividend, net of 10% final
withholding tax. Compute the amount subject to regular income tax.
a. PO
c. P 17,857
b. P17,647
d. P 20,000
9. A resident foreign corporate taxpayer entered into an advanced pricing
agreement (APA) with the BIR with respect to the pricing of its export sales to a
foreign country. A mark-up ratio of 50% of the cost is set in the APA. During the
year, the corporation manufactured goods costing P12,000,000 and exported
80% of the production to its foreign affiliate at a price of P12,000,000.
What is the amount of gross income subject to Philippine tax?
a. P 2,000,000
b. P 4,800,000
c. P 2,400,000
d. P 6,000,000
12M x 80%= 9.6m x 50% mark-up= 4.8m
10.
Ms. Nene Gosio registered a manufacturing business as a BMBE exempt
from tax. She also owns another taxable business which is engaged in the
trading of goods. Ms. Gosio ordered her BMBE business to sell its production to
her trading business at ultimate sales prices.
You were tasked by your audit supervisor to conduct a transfer pricing evaluation
of Ms. Gosio's businesses. Based on your study, you determined that the retail
profit rate (on sales) of trading businesses with similar operations involving
similar goods is 40%. During the year, the trading business made a total
purchases of P400,000 from the BMBE and sold 75% of these for P500,000.
What is the gross income of the trading business to be subjected to regular
income tax following the arms' length principle?
a.
b.
c.
d.
PO
100,000
P 200,000
P 120,000
500k sales x 40%= 200k
CHAPTER 10: COMPENSATION INCOME
True or False 1
1.
2.
3.
4.
5.
6.
7.
8.
A special employee may include Filipino citizens. TRUE
A rank and file employee recommends managerial actions. FALSE
A consultant is not an employee. TRUE
A manager has the power to lay down and executes policies. TRUE
A regular employee is subject to the regular income tax. TRUE
Filipinos employed by international missions are generally exempt. FALSE (GENERALLY TAXABLE)
Filipinos working in Philippine embassies are exempt from taxation. FALSE (CONSIDERED RC AND TAXABLE)
A minimum wage earner is exempt from income tax. TRUE
9. Compensation income includes regular compensation, supplement compensation and 13th month pay and other
benefits in excess of P90,000. TRUE
10. Compensation income includes all remunerations received under an employer employee relationship, including
all fringe benefits of managerial or supervisory employees. FALSE
11. Benefits for the advantage of the employee are exempt from income tax. FALSE
12. Remunerations received as incidents of employment are exempt. TRUE
13. The employee's share in SSS, GSIS, PhilHealth and HDMF are excluded from compensation income. TRUE
14. The exempt vacation leave credit is 10 days for government employees. FALSE
15. Tax exempt de minimis benefits include all benefits of relatively small value. FALSE
16. The excess de minimis are considered "other income for any employee. FALSE (RANK AND FILE ONLY)
17. The sick leave credit of private employees up to 10 days is exempt de minimis. FALSE (VACATION LEAVE CREITS
NOT SICK LEAVE CREDITS)
18. The overtime pay of minimum wage earners is exempt from tax. TRUE
True or False 2
1. Supplemental compensations are fixed amounts regularly received by the employee every payroll period. FALSE
2. A regular employee can be a managerial, supervisory, or rank and file employee. TRUE
3. Regular compensation includes variable performance-based remuneration received by the employee with or
without regard to the payroll period. FALSE
4. All directors are not considered employees. FALSE
5. Rank and file employees do routinary or clerical jobs. TRUE
6. A minimum wage earner with business income is considered a regular employee subject to income tax. FALSE
7. A managerial employee is least likely to be a minimum wage earner. TRUE
8. The statutory minimum wage is P60,000 annually or the amount fixed by the Regional Tripartite Wage and
Productivity Board whichever is lower. FALSE
9. An OBU is a division of a local bank authorized to conduct banking transactions foreign currencies in. FALSE
10. The position and function test, compensation threshold test, and exclusivity test are required for alien
employees. FALSE
11. A managerial employee can be a special employee. TRUE
12. The Christmas gift of private employees forms part of "other benefits while that of government employees is
considered de minimis benefit. FALSE
13. The fringe benefits of managerial or supervisory employees are generally subject to fringe benefit tax. TRUE
14. Resident Filipinos employed by foreign embassies missions, or international organizations are generally taxable.
TRUE
15. Non-resident Filipinos employed by foreign embassies, missions, or international organizations are generally
exempt. TRUE
16. Filipinos employed in Philippine embassies are generally exempt. FALSE
17. Half of the benefits given for the convenience or necessity of the employer are taxable. FALSE
18. Fixed allowances are supplemental compensation income. FALSE
19. For managerial employees the excess of de minimis benefits included as "other benefits. over their limits are
FALSE
20. The excess of the 13th month pay and other benefits over P90,000 is considered compensation income TRUE
21. The substituted filing system applies to employees who have multiple successive employments or FALSE
22. An employer controls the means and methods by which the work is to be accomplished. TRUE
23. An employee who became a minimum wage earner during the year is exempt from tax for the entire year. TRUE
24. Minimum wage earners who are disqualified for exemption during the year shall be taxable as regular
employees. TRUE
25. Minimum wage earners who breached the minimum wage threshold by a salary increase during the year are
taxable only starting from the months of increase. TRUE
26. A fringe benefit is usually in the nature of an the nature of performance-based pay. TRUE
Exercise Drill No 1
In the blank provided for, indicate whether the specified benefit or remunerate item of
RC-regular compensation
SC supplemental compensation
DM- de minimis benefits
FB- fringe Benefit
OB- 13th month pay and other benefits
EB- exempt or non-taxable
BENEFIT OR RENUMERATION
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Uniform allowance
Commissions
Rice allowance
Productivity incentive
Christmas bonus-government
Fixed monthly RATA-government
Medical benefits
Additional compensation allowance
13th month pay
Christmas gift-private
Anniversary gift
Shuttle allowance to a distant facility
Excess de minimis benefit
Basic salary
Profit sharing
Other employee personal expenses paid by
employer
Emoluments and honoraria
Stock bonus
Educational assistance to employee under
employment bond
Used sick leave credit
Monetized unused sick leave-private
Monetized unused sick leave-private
Monetized unused sick leave- government
Monetized unused vacation leave government
Excess over P90.000 of 13th month pay and
other benefits
RANK AND FILE
DM
SC
DM
DM
OB
RC
DM
OB
OB
DM
DM
EB
OB
RC
SC
OB
MANAGER OR
SUPERVISOR
DM
SC
DM
DM
OB
RC
DM
OB
OB
DM
DM
EB
FB
RC
SC
FB
SC
SC
EB
SC
SC
EB
RC
OB
DM & OB FOR EXCESS
EB
EB
SC
RC
FB
DM &OB FOR EXCESS
EB
EB
SC
EXERCISE DRILL NO 2
Assuming that the employee is a private employee with a basic salary of 300 per day in a region with a minimum wage of
250 per day, indicate the annual limit and in a region with a compute the annual excess de minimis benefits in the spaces
provided for
DEMINIMIS BENEFITS
Limit
Excess
1
5
6
P100/meal for 158 overtime during the year
days during the year
6,000 monetized value of 15-day vacation
leave credits
P1.000 monthly medical allowance to
dependents of employees
P6.000 monetized value of 15-day sick leave
credits
P12.000 medical benefits
62.000 quarterly uniform allowance
7
P500 monthly laundry allowance
300/mo.
8
9
P10,000 achievement award in cash
P3,000 Anniversary gift and P5,000 Christmas
gift
P3,000 monthly rice allowance
0
5k/year
2
3
4
10
62.50/ day
4k year, (6k x 10/15)
250/mo.
0
10k/year
6k/ year
2k/mo.
5,925
(37.50/day x 158 days)
2k
9k
(750/mo. X 12)
6k
2k
2k
(2k x 4 – 6k )
2.4k
(200/mo. X 12)
10k
3k
12k
( 1k/mo. X 12)
Exercise Drill No. 3
A 50- year-old employee retired during the year after 30 years of continuous service the following remunerations:
Basic salary
Employee share to SSS, PHIC, HDMP and union dues
Overtime pay
Retirement pay
Benefits from SSS
Pro-rated 13th month pay
350k
24k
16k
2.3m
400k
21k
Required: Compute the gross taxable compensation income
ANSWER
Basic salary
Less: Employee share to SSS, PHIC, HDMP and union dues
Regular compensation income tax
Overtime pay
13th month pay and other benefits
Gross taxable compensation income
350k
24k
326k
16k
0
342k
Exercise Drill No. 4
An employee received the following benefits:
13th month pay
Profit sharing
De minimis benefits
De minimis benefity within their limits
60k
12k
80k
Excess de minimis benefits
Other de minimis benefits
Other fringe benefits
Total incentives
30k
10k
25k
182k
Required:
Compute the taxable "13th month pay and other benefits assuming the employee is a
1. Rank and file employee
2. Managerial and supervisory employee
ANSWER:
13th month pay
Profit sharing (this is supplemental)
De minimis benefits
De minimis with their limits
Excess de minimis benefits
Other de minimis benefits
Other fringe benefits
Total 13th month pay and other
benefits
Less: exclusion limit
Taxable 13th month pay and other
benefits
Rank and file
employee
60k
0
Managerial/ supervisory
30k
10k
25
125k
60k
90k
35k
90k
0
60k
0
Exercise Drill No. 5
An employee with 10 dependent children received the following benefits year:
Regular compensation
P 1,068,000
Supplementary compensation
340,000
13th month pay
89,000
Other fringe benefits
13,000
Required: Compute the taxable amount in each of the following taxation schemes:
ANSWER
Progressive tax
1
2
Fringe benefits
1,420,000
Computation: 1,068,000+340K+89k+13K90k.
1,408,000
Computation: 1,068,000+340k
Exercise Drill No. 6
The following relates to the compensation Income of a minimum wage employee:
0
13k
Compensation and overtime pay (January to April)
Compensation and overtime pay (May to December)
13th month pay and other benefits in December
48K
97K
15K
Required: Compute the gross taxable compensation income assuming the employee became
ANSWER:
1
2
Minimum wage earner starting May 1
Regular employee by promotion starting May 1
48K
97K
Multiple Choice - Theory: Part 1
1. Which is not an element of an employer-employee relationship?
a. Selection process
c. Power of control
b. Power to dismiss
d. Payment of fixed wages
2. Which is not an employee classification as to function?
a. Managerial employee
c. Special employee
b. Rank and file employee
d. Supervisory employee
3. Which is not an employee classification as to taxability?
a. Regular employee
b. Special employee
c. Managerial employee
d. Minimum wage earner
4. Which is usually an employee?
a. Director who is at the same time the Chief Executive Officer
b. A director regularly receiving a retainer's fee
c. Consultant
d. A hired TV program talent
5. The statutory minimum wage is
a. The amount fixed by the Regional Tripartite Wage and Productivity Board
b. The rate fixed by the Regional Tripartite Wage and Productivity Board which must not exceed P5,000 a
month or P60,000 annually
c. The higher between P5.000 a month or P60,000 annually or the rate fixed the Regional Tripartite Wage and
Productivity Board by
d. P5,000 a month or P60,000 annually unless it exceeds the rate fixed by the Regional Tripartite Wage and
Productivity Board
6. Which is not included in the gross taxable compensation income of an employee?
a. Fixed monthly allowances
b. Performance based bonuses
c. 13th month pay and other benefits not in excess of P90,000
d. 13th month pay and other benefits in excess of P90,000
7. Which is not an exclusion criterion on employee benefits?
a. Necessity of the employee rule
b. Convenience of employer rule
c. Exemption by special law
d. Exemption by treaties or international agreements
8. For purposes of the fringe benefit tax, fringe benefits pertain to
a. other fringe benefits not included as compensation income of any employees.
b. other fringe benefits not specifically included as compensation income of managerial or supervisory
employees.
c. all fringe benefits of managerial or supervisory employees.
d. all fringe benefits of rank and file employees
9. Which is a correct statement
a. The compensation income of managerial or supervisory employees is subject rank and file employee are
subject to fringe to fringe benefit tax
b. The taxable fringe benefits benefit tax of
c. The taxable fringe benefits of managerial and supervisory employee subject to regular income tax are
d. The compensation income of rank and file employees is subject to regular tax
Multiple Choice - Theory: Part 2
1.
2.
3.
4.
5.
6.
Which is not a supplemental compensation income?
a. De minimis benefits
b. Honoraria
c. Allowances
d. Bonuses
Fringe benefits includes
a. Basic salaries
b. Fees
c. Retirement and separation pay
d. De minimis benefits
De minimis benefits are generally
a. exempt from tax
c. taxable in excess of P90.000
b. fully taxable
d. subject to fringe benefit tax
Which do not form part of other benefits of rank and file employees?
a. Excess of de minimis over their legal limits
b. Salaries and wages
c. Productivity incentive
d. Employee educational assistance
The term "de minimis benefits" does not include
a. Christmas bonus
b. Christmas gift
c. Rice subsidy
d. Monetized unused vacation leave
Select the most accurate statement.
a. De minimis benefits are totally exempt from income tax
b. De minim benefits in excess of P90,000 are subject to income tax
c. The excess of other benefits over P90,000 constitutes compensation cone
d. The benefits of rank and file employees are not subject to fringe benefit tax
7. Which is taxable as compensation?
a. SSS benefits
b. Retirement benefits
c. Termination benefits from resignation
d. Retirement gratuities from foreign institutions
8. Which of the following is subject to income tax?
a. Minimum wage
b. de minimis benefits
c. GSIS benefits
d. d. Voluntary contribution to SSS, PHIC and HDMF
9. All of these are exempt benefits of a mInimum wage earner except
a. hazard pay
b. holiday pay
c. vacation pay
d. overtime pay.
10. Which is correct when a minimum wage earner derives other income outside h employment
a. He is subject to withholding tax and income tax
b. He is neither subject to withholding tax nor income tax
c. He is exempt from withholding tax but subject to income tax
d. He is subject to withholding tax, but exempt from income tas
11. Rice allowance is taxable when
a. paid in cash
b. paid in non-cash
c. given more than P1,000 a month
d. given more than 1.500.
12. Meal allowance is taxable when given
a. for overtime duty
b. in cash
c. for night shift assignment
d. as incentive to all employees
13. Which is an exempt de minimis benefit?
a. 9-day monetized sick leave
b. 15-day monetized vacation leave
c. Rice subidy of half sack a month valued at 1,000
d. Uniform allowance of P5.500
14. Which is a correct de minimis limit?
a. Actual medical cash allowance of P5,000 per year
b. laundry allowance of P3.600 per year
c. Employee achievement award of P5,000 per year
d. Christmas gift of P10,000
15. Statement 1: Excess de minimis is considered compensation income as "other benefits for rank and file
employees and managerial or supervisory employers
Statement 2: Excess de minimis is a fringe benefit subject to the fringe benefit tax a Statement 1 is correct.
a. Statement 1 is correct
b. Statement 2 is correct
c. Both statements are incorrect
d. Both statements are correct
16. Which is considered compensation?
a. Reasonable amounts of pre-computed daily transportation allowance
b. Cost-of-living allowance
c. Outstation allowance for employees working at distant facilities
d. Car incentives to medical doctors required to report on duty anytime
17. Which of the following remuneration is an item of compensation income?
a. Retainer feet of an outside director
18.
19.
20.
21.
22.
23.
b. Customer tips
c. Commissions to a minimum wage earner d
d. Referral fee to a customer
Night differential pay is exempt from taxation when received by
a. rank and file employee
c. minimum wage earner.
b. special employee
d. managerial or supervisery employee
Which is not subject to the P90.000 exemption threshold for a private employee?
a. 13th month pay
b. Cash gift
c. Profit sharing bonus
d. Productivity incentive
The P90.000 exemption threshold is applicable to
a. regular employees.
b. Rank and file employee
c. managerial or supervisory employees brank and he employees.
d. all employees
The excess of 13th month pay and other benefits" is
a. subject to regular tax
c. subject to fringe benefit tax
b. subject to final tax
d. exempt from income tax.
Which is subject to the withholding b. tax on compensation?
a. Salary of domestic "kasambahays"
b. Compensation for injuries and sickness
c. Salaries of resident Filipinos working in embassies, International and organizations
d. Salary of minimum wage earners receiving fixed allowances
Statement 1: A minimum wage earner who loses the benefit of exemption transferring to a region with a lower
minimum wage is taxable on all inc during the year.
Statement 2: A minimum wage and during the year, as such during the year exempt from tax on all income
earned during the year. Which is correct?
a. Both statements are correct
b. Both statements are incorrect.
c. Only statement 1 is correct.
d. Only statement 2 is correct.
PRINCIPLES OF DEDUCTIONS
Exercise Drill No. 1 (458)
Identify whether the following is a business expense or checking the appropriate box corresponding to the item:
BUSINESS
EXPENSE
1.
2.
3.
4.
5.
6.
7.
8.
9.
Medical expense of the proprietor (business owner) 
Tuition fees of an employee to acquire expertise for future use of the
Transportation expense from office to client establishments 
Cost of entertaining family members of the proprietor

Cost of entertaining clients receipted under the name of the taxpayer's
Interest expense to finance the construction of the office building

Loss on destruction of taxpayer's residence 
Office utilities expense

Repairs that restore the value of destroyed business properties

 business
 spouse
PERSONAL
EXPENSE
10. Tuition fee of the taxpayer's dependents

11. Salary of household help and maids 
12. Salary of office staf 
13. Vacation expense of family members of the proprietor
14. Travel expense to attend seminar  *
15. Costs of renewal of the taxpayer's professional license
*if silent personal, if business seminar, it is an expense


Exercise Drill No. 2 (459)
On July 1, 2018, a taxpayer paid for a P200,000 business expenditure
Required:
Compute the deduction from 2018 through 2020 assuming the expenditure was for:
2018
2019
2020
1. land which was sold in 2020 200,000
2. Equipment with 4-year estimated useful life 25,000 50,000 50,000
3. Inventory which was sold in 2019
200,000
4. Salaries of administrative and sales personnel
200,000 in 2019
5. Rental of a facility for the years 2018 and 2019
100,000
100,000
Exercise Drill No. 3 (459)
A taxpayer engaged in trading two types of precious merchandise had the following summaries of inventories:
January 1 inventory
Purchases:
1,000 units
4,000 units
Zircon
200,000
Ruby
320,000
800,000
---
---
1,200,000
total
520,00
0
800,00
0
1,200,0
00
January 31 inventory
400 units
800 units
Required: Compute the cost of goods sold. P 1,960,000
Exercise Drill No. 4 (459)
On July 1. 2015, a taxpayer purchased equipment for P2,000,000 with an estimated n value of P200,000 after its fouryear estimated useful life
Required:
Compute the depreciation expense and the adjusted tax basis of the property December 31 of 2015 through 2020.
Year
2015
2016
2017
2018
2019
2020
Straight line
method
Sum-of-theyears digit
150% declining
balance
200% declining
balance
Exercise Drill No. 5 (460)
For each of the following, indicate CE if the item is a capital expenditure. If it is an expense, indicate DE if deductible
expense and NDE if non-deductible expense.
NDE
1. Loss on destruction of uninsured personal car of the taxpayer
DE
2. Employee performance bonus for the current year
CE
3. Acquisition cost of equipment
NDE
4 Decline in market value of investment securities
CE
5. Advanced rent for the next two years
NDE
6 Interest expense in acquiring tax-exempt securities
CE
7. Expenses to create business goodwill
NDE
8. Loss on decline in the value of securities
DE
9. Fire loss on uninsured building
CE
10. Factory salaries, utilities and rent expense
NDE
11. Entertainment expenses for government officials
NDE
12. Revaluation loss on decline in value of building and equipment
NDE
13. Loss on sale of properties to an unaffiliated company
NDE
14. Decline in value of foreign currency denominated receivables
NDE
15. Facilitation fees to government agencies
DE
16. Freight costs of selling goods
CE
17. Freight and insurance cost of buying goods or equipment
CE
18. Raw materials used in production
CE
19. Cost of goods manufactured
DE
20. Accrued salaries expense of an accrual basis taxpayer
DE
21. Cost of goods finished and sold
DE
22. Expired portion of business property insurance
NDE
23. Interest expense on borrowings from family members
NDE
24. Accrued but unpaid rent expense of a cash basis taxpayer
NDE
25. Value of unharvested fruits destroyed by a storm
NDE
26. Receivables proven to be uncollectible under the cash basis
DE
27. Insurance expense on the life of the company president where the beneficiary the spouse of the president
NDE
28. Expenses on business operation which are exempt from regular income tax or subject to a special tax
regimes.
NDE
29. Bad debt expense with non-paying family members
NDE
30. Dividend to preferred or common stocks
True or False 2 (461)
FALSE 1. So long as the expense relates to the generation of an income subject to any income tax, the same is
deductible against gross income subject to regular tax. *As a rule, expense of regular income only.
TRUE 2. The amount of expense between affiliated companies may be adjusted by the BIR to reflect their arm's length
value.
TRUE
3. The failure to deduct creditable withholding tax on income payments will render the expense non-deductible.
FALSE 4. Immaterial expenditures must always be capitalized.
TRUE
5. Repairs that increase property useful life are capitalized.
TRUE
6. Repairs that increase property fair value are capitalized.
TRUE
7. An unpaid expense may be deducted under the accrual basis of accounting
FALSE 8. The government should not enrich itself at the expense of the taxpayers. Losses between related parties are
deductible in the same way gains between related parties are taxable.
FALSE 9. Taxpayers opting to use the optional standard deduction must also maintain records of their expenses. records
of gross income
FALSE 10. Deduction incentives are deductible because they are actual expense. because allowed by law
Multiple Choice - Theory: Part 1 (462)
1 Losses on capital assets are
a. deductible against gross income to the extent not compensated by insurance
b. deductible against capital gain to the extent compensated by insurance.
C. not deductible against gross income whether or not compensated for insurance.
d. not deductible against capital gains unless not compensated by insurance
2. Which is a deductible expense?
a Marketing and advertising expense b Insurance on
factory building
C. Salaries of security guards in the factory
d. Cost of registering stocks
3. The transactions involving an insured property is said to be closed and completed when
a final settlement by the insurer is made.
b. the report of the insurance adjuster indicates a loss.
c final settlement confirms an unrecoverable cost.
d. no proceedings in court is expected to be made by the insured.
4. Which is a deductible expense?
a. Acquisition cost of a business franchise
b. Repayment of debt
C. Cost of registering a business d Cost of issuing
securities
5. Which is a deductible business expense?
a. Interest on personal borrowings
b. Rental of taxpayer's domicile c Selling commission to agents d. Wages of
kasambahays
6. A repair expense is deductible in the period paid or incurred unless
a merely maintain the value of the property. b. increases the
value of the property.
c constitutes a major repair.
d. constitutes a minor expense.
7. Losses on property are not deductible unless
a sustained with a related party
b. sustained in an actual or completed transaction.
c temporary in nature.
d. covered by insurance or indemnity contracts.
8. Losses on insured properties are not deductible
a. To the extent not compensated by insurance B. to the extent
compensated by insurance.
C. as a rule, except when allowed by the BIR examiner.
d. in all circumstances.
9. Which statement is the most accurate?
A Prepaid expense is deductible in the period paid by taxpayers using cash basis.
b. Prepaid expense is deductible in the future period it relate without regard to the basis of accounting employed by the
taxpayer.
c Accrued expenses are deductible by cash basis taxpayers
d. Depreciation expense can be claimed only by accrual basis taxpayers.
10. Cash basis and accrual basis taxpayers difers in the treatment of
a. Prepaid expense
b. Current period cash expense
c. Current period accrued expense
d. Depreciation expense
11. Which may not be related?
A. The controlling individual and the controlled corporation.
b. The controlling individual and a subsidiary of a controlled corporation.
c The grantor and fiduciary of a trust
d. The grantor and the beneficiary of a trust
12. Which of the following is an extraordinary non-deductible expense against regular gross income of a merchandiser?
a Loss on sale of obsolete merchandise b. Store supplies
and utilities
C. Local business permit
d. Loss on sale of investment in stocks
13. Which is a deductible expense against business gross income?
a. Commission expense on sale of investment in stocks
b. Salaries of marketing personnel of a manufacturing businessc Quarterly estimated income tax
d. Final tax on interest income on bank savings deposít
14. Which is not a general principle of deduction?
a. The matching principle
b. The related party rule
c. The withholding rule
d. The transfer pricing rule
15. Which is an actual deductible expense?
A. Provision for an estimated bad debt expense
B. Loss arising from liability on a contested lawsuit confirmed by a final judgmentC. Increase in value of
foreign currency-denominated debt
d. Death of animal ofspring
16. Which is deductible against gross income?
a Imputed interest expense
b. Advances to the profit sharing of a partner in a general profession partnership C Repayment
of business debts d. Local taxes
17. Which of the following is deductible?
a. Rent of office space
b. Tuition fees of the siblings of the taxpayer
c. Selling expense of domestic stocks directly to a buyer
d. Estimated losses on lawsuit
18. Which is non-deductible against gross income?
a Loss on sale of stocks through the PSE b. Write-of of bad
debts
c. Loss on destruction of office building by an earthquake
d. Amortization of patent or franchise used in business
19. Which is an incorrect statement?
a. The straight line method provides for an equal periodic deduction against gross income
b. The sum-of-the-years digit method provides for an increasing deduction against gross income.
c. The double declining balance method provides for a declining deduction at a rate twice the deduction of the straight
line method.
d. Both straight line method and sum-of-the-years-digit method consider the residual value of the property.
20. Which of the following ordinary assets cannot be depreciated?
a Office equipment
b Machineries
c Building and its improvements
d. Land
21. Statement 1: Only taxpayers under the accrual basis shall use the inventory method in deducting inventories.
Statement 2: Only taxpayers under the depreciation and losses accrual basis can claim deduction for depreciation
and losses.
a Statement 1 is correct.
c. Both statements are
correct.
b. Statement 2 is correct.
d. Neither statement is
correct.
22 Statement 1: The cost of goods sold is directly deducted upon sales in the measurement of the gross income from the
sales of goods.
Statement 2: The cost of services is directly deducted from gross receipts in the measurement of the gross income
from the sales of services.
a Statement 1 is correct.
b. Statement 2 is correct.
c. Both statements are correct.
d. Neither statement is correct.
23. Which is not a capital expenditure?
a. Payments to create a good image of the business of the taxpayer
b. Prepaid expenses
c. Accrued expenses
d. Advances to contractors
24. Statement 1: Repairs that do not extend the useful life or increase the fair value of an asset should becapitalized.
Statement 2: The costs of issuing securities of the taxpayer are deductions against gross income
a. Statement 1 is correct.
C. Both statements are
correct.
b Statement 2 is correct.
d. Neither statement is
correct.
25. Statement 1: Improvements to properties are usually capitalized.
Statement 2: Directly attributable cost of acquisition of properties are added to the basis of the properties acquired.
a. Statement 1 is correct. c. Both statements are correct.
b. Statement 2 is correct. d. Neither statement is correct.
Multiple Choice – Theory Part 2 (465)
1. Which of the following cannot claim deductions from gross income despite actual engagement in business?
a. Resident citizen
b. Resident alien
c. Non-resident citizen
d. Non-resident alien not engaged in trade or
business
2. Which of the following taxpayers cannot claim deductions from gross income?
a. General professional partnership
b. Domestic corporation
c. Resident foreign corporation
d. Non-resident foreign corporation
3. Which of the following can be claimed as deduction?
a Transportation allowance of employees of the taxpayer
b. Transportation allowance of the taxpayer's dependents
c. Losses from destruction of the taxpayer's residence
d. Depreciation of the residence of the taxpayer
4. Which expense is deductible despite the fact that it is not an actual expense?
a. Compliance expense on regulatory requirements
b. Deduction incentives for compliance to regulatory requirements
c. Uncollectible debts ascertained to be worthless
d. None of these
5. Which is not a characteristic of deductions from gross income?
a Legitimate business expense b. Capital
expenditure
c. Ordinary and necessary business expense
d. Actual and necessary business expense
6. Which is a deductible expense?
a Regular repair of office equipment b Refurbishing of an old building
to prepare it for use c Addition of a wing to an existing building
d. Overhaul of machineries to extend their useful life
7. Which of the following taxpayers can claim deduction against gross income?
a. A resident citizen taxpayer earning purely compensation income
b. Non-resident foreign corporation
C. Non-resident alien not engaged in trade or business
d. Resident citizen earning a mix of passive and business income
8. Which is not a separate classification of deduction from gross income?
a. Net operating loss carry over
b. Regular allowable itemized deductions C Special allowable itemized deductions d. Net
capital loss carry over
9. Which statement is incorrect regarding deductions?
a. The claim of deduction, similar to exemption, is construed against the taxpayer.
b. The use of optional standard deduction always results in reported taxable income.
c. The unreasonableness of deduction is up to the BIR to prove.
d. The incurrence of an operating loss is an indication of an unreasonable expense.
10. The following cannot claim deduction from gross income except
a Self-employed individual taxpayer
b. A corporation earning purely passive income
c. An individual earning purely passive income
d. An individual taxpayer earning purely compensation and passive income
11. Which is not deductible against gross income?
a. Interest expense incurred to purchase tax-exempt securities
b. Net capital lossc Personal expenses d. All of these
12. Which is a deductible business expense?
a. Loss on decline in value of securities
b. Estimated losses on expropriation c Fire loss on an insured property
d. Loss on theft of company assets
13. Which of the following constitutes a deductible business expense?
a. Purchase of office equipment invoiced under the trade name of the taxpayers business
b. Tuition fees of dependents of the taxpayer
c. Interest expense on a business loan
d. Representation expenses booked in the name of the taxpayer's wife
14. Which of the following qualifies for deduction for an individual engaged in business?
a. Salaries of household maid
b. Gasoline expenses of the taxpayer's personal car
C. Office Internet expense
d. Taxpayer's transportation expense to and from his residence
15. Which of the following can be deducted by an individual taxpayer not engaged business?
a. Transportation expenses
c
Internet
expense
b. Communication expenses
d. None of
these
16. Which of the following can be claimed by a resident foreign corporation?
a Depreciation expense on properties located abroad b. Income tax
paid in a foreign country
c. Income tax paid in the Philippines
d. Interest expense on foreign borrowings used to finance its Philippine business
17. Which can be treated as a capital expenditure deductible through depreciation expense?
a Interest expense incurred to purchase office equipment b. Losses
sustained in an uninsured office building
c. Acquisition of land
d. Acquisition of personal computers
18. Which of the following items can be deducted in full in the year sustained?
a Write-of of bad debts by a taxpayer under the cash basis b. Loss on
market decline in the value of gold inventories c Loss on the destruction of
the taxpayer's personal car
d. Uninsured fire loss sustained by the business of the taxpayer
19. Deductions can be claimed against
a talent fees.
c.
fringe
benefits
b. fixed allowances,
d. salaries.
20. Which is deductible in full by a taxpayer engaged in the merchandising business?
a Value of inventories taken home by the business owner
b. Loss on unrecoverable debts from a non-paying family member C Imputed
interest on the capital investment of the owner d. Value of inventories destroyed
by rodents
21. Which is not a deductible loss by a security dealer?
a. wash sales loss
b Loss on the sale of bonds with more than five years maturity c. Loss on the
sale of stocks through the PSE
d. Loss on the sale of short-term bonds through the Philippine Dealings Exchange
22. Determine the deductible loss.
a. Loss incurred in exchanging property to obtain control of a corporation
b. Loss incurred in exchanging properties with a corporation after obtaining control over said corporationc. Calamity loss
on uninsured property d Bad debts from a sister company
23. Which of the following is non-deductible by the fact that it violates the Matching Principle?
a Expense of a tax-exempt operation b. Payment for
police protection c Payment of revolutionary taxes
d. Expenses not receipted in the name of the taxpayer
24. Which is incorrect with regard to expenses incurred between associated enterprises?
a. The pricing of the transaction must not be controlled.
b. The pricing method to be adopted shall be based on free market factors or those made between two independent
parties.
c. In case of a controlled transaction, the deductible expense to the paying enterprise shall be the arm's length value of
the transaction.
d. No deduction shall be allowed on expenses incurred between associated enterprises
25. Which is not a business expense?
a Fringe benefit tax expense
b. De minimis benefits granted to employees
c Salaries of personal driver of the company president which was subjected to fringe benefit tax
d. Depreciation value of properties designated for the use of company managers and supervisors which are subjected to
fringe benefits tax (no outflow)
Multiple Choice - Problems: Part 1 (468)
1. On September 30, 2020, a taxpayer borrowed P1,000,000 at 10% annual interest to finance his acquisition of a luxury
car. Compute the deductible interest expense in 2020.
a. PO
c. P50,000
b. P25,000
d. P75,000
2. Spartan Corporation head office supplies valued at P40,000 on January 1. 2020. At the end of the first calendar
quarter, it had P80,000 worth of office supplies. Total supplies purchased were P250,000 during the period.
Compute the supplies expense to be deducted during the first quarter
a P210,000
b. P250,000
c. P280,000
d. P290,000
(P40K+P250K-P80K)
3. A non-resident alien not engaged in business incurred business expenses 100.000 and personal expenses of P20,000.
How much is deductible from gross income?
a. PO
b. P20,000
c.P 100,000
d.P 120,000
4. A taxpayer paid the following salaries during the year:
Salaries of administrative employees
80,000
Salaries of sales and marketing employees
70,000
Salaries of factory production workers
120,000
Compute the deductible salaries expense.
b. P200,000
c. P150,000
(P80K+P70K) a. P270,000
d. P120,000
5. On July 1, 2018, a taxpayer purchased equipment for P500,000 which was estimated to be useful until July 1, 2023,
with an expected P100,000 residual value. Compute the 2018 depreciation expense using the straight line method.
a. PO
b. P 40,000
c. P50,000
d.P80,000
6. A taxpayer paid P45,000 property insurance having a 12-month coverage starting March 1, 2018. Compute the
deductible insurance expense in 2018. (P45K/12 X 10)
a. PO
b. P7,500
c. P37,500
d. P45,000
7. A storm resulted in the loss of the following livestock:
Value of two heifers (purchased at P15,000 each)
P 40,000
Value of a bull (purchased for P18,000)
24,000
Value of twelve calves worth P6,000 each
Total value of lost livestock
72.000
P 136.000
Determine the deductible loss for taxation purposes. [(P15K X 2)+ P18K]
a. PO
b. P48,000
c. P64,000
d. P120,000
8. Mr. Jun, a professional practitioner, incurred the following expenses during the period:
Salaries of household maids
Salaries of office staf
Office utilities
Office supplies
Depreciation of personal car
Depreciation of office equipment
50,0
00
30,0
00
12.0
00
8,00
0
15,0
00
20,0
00
Compute the total deductible expenses.
a P50,000
b. P70,000
c. P100,000
d. P135,000
9. The following relate to the building of a taxpayer:
Fair market value
P
6,000,00
0
Purchase price
5,000,00
0
Carrying amount
4,500,00
0
Remaining useful life
9 years
Depreciation method
straight
line
What is the deductible amount of depreciation expense? a P666,667
b. P555,555
(P4.5M/9) c. P500,000 d. PO
10. The personal car of the taxpayer had the following data:
Fair market value
6,000,000
Purchase price
5,000,000
Estimated useful life
10 years
What is the deductible annual depreciation expense?
a. PO
b. P250,000
c. P500,000
d. P600,000
11. The following relate to the inventory of tools held by the taxpayer:
Inventory of tools, January 1, 2019
120,000
Purchases of tools
300,000
Inventory of tools, December 31, 2019 140,000
What is the amount of deductible tools expense? (P120K+P300K-P140K)
a. PO
b. P120,000
c. P280,000
d. P300,000
12. A taxpayer paid the following disbursements and expenses for the current year.
Tuition fees of children
P 50,000
Donation to friends
20,000
Purchase of office equipment at start of the year
(equipment expected to last for five years)
100,000
Office rent (for three years including the current year)
90,000
Office supplies (1/2 used)
20,000
Compute the total deductible expense from the above items:
a. PO c.
b. P20,000
c. P50,000
d. P60,000
[(P100K/5)+(P90K/3)+(P 20K X ½)]
13. Bermuda Inc. insured two of its key employees paying the following premiums annually:
Mr. Croco, the president
P 40,000
Mr. Genero, the vice president for operations
34,000
In Mr. Croco's policy, Bermuda, Inc. is the beneficiary. In Mr. Genero's policy, his wife is the beneficiary of the policy.
Compute the total deductible expense.
a. P34,000
c. P50,000
b. P40,000
d. P74,000
14. Dragon City Corporation is a resident foreign corporation established in China but is operating in the Philippines.
During the year, it paid for P300,000 for salaries of Philippine employees and P1,200,000 for Chinese employees.
Compute the deductible compensation expense.
a PO
b. P300,000
c. P1,200,000
d. P1,500,000
15.
Using the same choices in Number 14, compute the deduction assuming that Dragon City is a domestic
corporation. D
16.
Using the same choices in Number 14, compute the deduction assuming that Dragon City is a nonresident
foreign corporation. A (NRFC is subject to final tax. No deduction is allowed.)
Multiple Choice - Problems: Part 2 (471)
1. Boac Company had the following summaries of expenses:
Expenses without supporting documentation
200,000
Expenses with supporting documentations
Income payments subject to creditable withholding tax:
with withheld CWT
600,000
without withheld CWT
400,000
Payments not subject to creditable withholding tax
200,000
Determine the amount of deductions. (P600K+P200K) a. P800,000
b. P1,000,000
c. P1,200,000
d. P1.400,000
2 Calapan Corporation bought equipment costing P500,000. The equipment was expected to have P50,000 residual value
at the end of its 5-year expected life. Calapan Corporation failed to withhold the creditable withholding tax on the
equipment.
Compute the depreciation expense in the first year.
a PO
b. P45,000
c. P90,000
d. P180,000
3. Tri-Peak Semiconductor is an exporter of transistors to the United States. On December 15, 2019, it made a single
shipment worth $1,000,000 payable January 21, 2020. The value of the sales in peso equivalent was as follows:
December 15, 2019
42,000,000
December 31, 2019
41,800,000
January 21, 2020 (Converted value to peso)
41,7000,000
Compute the deductible foreign currency loss. (P42M-P41.7M) a P200,000 in
2019 c. P300,000 in 2020 b P300,000 in 2019 d. P200,000 in 2020
4. The taxpayer incurred the following in 2020:
Loss on sale of equipment to a subsidiary company
P
400,00
0
Loss on sale of equipment to a sister company
100,00
0
Loss on liquidation of an affiliate company
200,00
0
What is the deductible amount of loss to a related party?
a PO
b. P200,000 c. P300,000d. P600,000
5. The accountant of Triniville Corporation provides for an allowance against unrecoverable accounts equivalent to 3% of
Triniville's total receivables. The allowance for bad debts had a balance of P45,000 and P50,000 at the start and end of
the year, respectively, while P30,000 of previous accounts were actually found to be worthless and were written-of. What
is the deduction against gross income for purposes of taxation?
a PO
b. P25,000 c. P30,000
d. P50,000
6. The following relate to a transaction between associated enterprises which was subjected to transfer pricing
restatement by the BIR.
Amount of expense claimed
800,000
Arm's length value in a comparable transaction 500,000
What is the deductible amount of expense?
a P800,000
b. P500,000 c. P300,000d. PO
7. In the immediately preceding problem, what is the required adjustment to taxable net income?
a. P300,000 increase
b. P300,000 decrease
c. P500,000 increase
d. P800,000 decrease
(P800K-P500K)
8. A taxpayer had the following losses during the year
Estimated bad debt expense
300,000
Write-of of uncollectible accounts
150,000
Carrying value of property destroyed by fire
(The property is covered by insurance.) 1,200,000 Unrealized on foreign currency
receivables
12,000
Assuming the taxpayer is under the accrual basis, compute the total deduction
A. PO
b. P150,000
c. P162,000
d. P1,315,000
9. in the immediately preceding problem, compute the deduction assuming the taxpayer is under the cash basis.
a. PO
b. P 150,000
c. P162,000
d. P1,315,000
10. ABC Company incurred and paid the following expenses in 2020:
Salaries (1/8 unpaid)
400,000
Prepaid rent (2020 to 2022)
150,000
Depreciation expense
80,000
Purchase of supplies
60,000
Supplies used
25,000
Compute the total deductions under the cash basis for the year 2020.
a. P690,000
b. P655,000
c. P555,000
d. P505,000
[(P400K X 7/8)+(P150K X 1/3)+P80K +P25K];NOTE: Supplies is a from prepayment.
11. Compute the total deductions under the accrual basis for the year 2020.
a. P655,000
b. P605,000
c. P5S5,000
d. P505,000
[P400K+(P150K X 1/3)+P80K +P25K]
12. An equipment was purchased on January 1, 2020 for P4,000,000. The equipment has an estimated useful life of
P400,000 at the end of its five-year useful life.
Compute the depreciation expense assuming the use of the straight line method:
a. P720,000
P1,600,000
b. P1,200,000 c P1,440,000
d.
13. Under the sum-of-the-years digit method, compute the 2020 depreciation expense in the first year.
a. P720,000
b.
P1,200,000
c. P1,333,333
d.
P1,440,000
14. Using a 150% declining balance method, compute the 2020 depreciation expense.
a P 720,000
b.
P
1.200,000
c. P1.440,000
d.
P1,600,000
15. Using 200% declining balance method, compute the 2020 depreciation expense
a P 720,000
b.
P
1.200,000
c. P1,440,000
d.
P1,600,000
Multiple Choice - Problems: Part 3 (474)
1. A certain taxpayer paid the following bill from a VAT-registered supplier of ece supplies. The office supplies were
all used in operation during the period:
Selling price
P 400,000
Plus: Output VAT
48,000
Less: Withholding tax (1%)
Net cash due
P 444.000
4.000
What is the deductible supplies expense assuming the taxpayer is a VAT-taxpayer?
a P396,000
b. P400,000
(The input VAT must be excluded.) c.P 444,000 d. P 448,000
2. What is the deductible supplies expense assuming the taxpayer is a non-VAT- taxpayer?
a P396,000
b. P400,000
c. P 444,000
d.P 448,000
(The VAT is part of supplies expense.)
3. On January 2, 2016, a non-VAT taxpayer purchased an equipment with estimated useful life of 5 years
Selling price
P 150,000
Plus: Output VAT
18,000
Less: Withholding tax (1%)
Net amount due
1.500
P 166.500
What is the claimable depreciation expense for the year?
a PO
b. P30,000
c.P 33,300
d. P 33,600
(The cost of the equipment for a non-VAT taxpayer shall be (P150,000 + P18,000) or P168,000/5 years = P33,600.)
4. The taxpayer withheld 5% creditable withholding tax on rental payments to various VAT-registered lessors. The total
taxes withheld were P 5,600. What is the deductible amount of rental expense?
a PO
b. P56,000
c.P 100,000
d. P 112,000
(P5,600 / 5%, note that the 5% is based on the rent expense, exclusive of VAT.)
5. Until the time of the examination of its book, the taxpayer failed to withhold 109 withholding tax amounting to
P10,000 from the payments of professional fees to a consultant who is a VAT taxpayer. What is the deductible amount for
professional services paid?
a. PO
b. P 89,286
c. P100,000
d. P112.000
6. In the immediately preceding problems, what is the amount of surcharge due from the taxpayer?
a. PO
b. P 1,874
C. 2,000
d. P 2,500
(P10,000 x 25% surcharge)
7. The following case is applicable for Nos. 7 through 10:
Atimonan Company received a bill for P27,440 from a non-VAT service provider. The payment for
the service is subject to 2% creditable withholding tax
What is the deductible expense if Atimonan is a non-VAT taxpayer?
a. PO
b. P26,891
c. 27,440
d. P 28,000
8. If Atimonan is a non-VAT taxpayer, what respectively is the withholding tax and the amount of cash to be paid by
Atimonan to the service provider? a PO; P 27,440
c.P 560, P27,440
b. P 548.80; P 26,891.20
d. P 537.82; P26,353.18
9. If Atimonan is a VAT taxpayer, what is the deductible expense?
a PO
b. P26,891 c. P 27,440 d. P 28,000
10. If Atimonan is a VAT taxpayer, what respectively is the withholding tax and the amount of cash to be paid by
Atimonan to the service provider?
a. PO; P 27,440 c. P 560, P27,440
b. P 548.80; P 26,891.20
d. P 537.82; P26,353.18
Chapter 13-A - Regular Allowable Itemized Deductions
True or False 2 (507)
TRUE
1. Bad debt expenses representing loss of capital can be deducted by cash basis taxpayers
FALSE 2. Bad debt expenses between related parties can be deducted as long as these are adequately supported with
documentary evidence.
FALSE 3. The loss of capital investment in a business can be claimed as bad debt expense.
TRUE 4. The subsequent recovery of bad debt expense must be reverted back to gross income to the extent of the tax
benefit of the deduction in the year the deduction is made
TRUE
5. The loss on insured property cannot be deducted.
TRUE
6. In total destruction of properties, restoration costs are treated as new acquisition of properties
TRUE 7. If the fair value of the property is not determinable, restoration costs are expensed to the extent of the basis
of the original property. The excess over the basis is treated as an increase in fair value and is capitalized.
TRUE
8. The loss in value of assets is deductible only when sustained and realized.
FALSE 9. Losses on wagering transactions are deductible in full.
TRUE 10. With the exception of domestic corporations and resident citizens, expenses incurred abroad cannot be
deducted unless incurred in connection with the Philippine business
FALSE 11. Contributions are valued at the fair value of the property donated.
TRUE 12. The recovery of bad debts by cash basis taxpayers must always be reverted back to gross income e (This is
recovery of lost profits)
TRUE
13. The recovery of bad debts by accrual basis taxpayers may be reverted back to gross income
FALSE 14. Capital assets can be depreciated for tax purposes
TRUE 15. The depreciation expense on properties held under life tenancy is computed as if the life tenant were the
absolute owner of the property.
True or False 3 (507)
True
1. Petroleum operations are not subject to the limit on the deduction of intangible exploration and
development costs after the commencement of commercial production.
True
2. Contribution expenses are deductible if the donee is a domestic institution.
True
3. Donations to foreign institutions covered by treaty exemptions are fully deductible.
False 4. Contribution expenses are measured at the fair value of the property donated. (tax basis of value given)
True
5. Private educational institutions are allowed to deduct capital expenditures
True
6. The depreciation on properties held in trust is apportioned between the income beneficiaries and
the trustees in accordance with the provision of the instrument creating the trust or on the basis of
the income allowable to each.
True
7. The depreciation of revaluation surplus is not deductible in taxation
True 8. No depreciation expense is allowable for helicopters, yachts, airplanes or aircraft.
and land vehicles which exceeds P2,400,000 in value unless the main line of business of the taxpayer
is transport or lease of transportation equipment
True 9. Tangible development costs in wasting assets are capitalized and depreciated
True
10. Intangible exploration and development costs incurred before commercial production in a
wasting asset operation are capitalized as cost of the wasting asset
True
11. After commencement of commercial production, intangible exploration development costs
incurred on non-producing wells or mines are deductible in the period paid or incurred.
False 12. Alter commencement of commercial production, intangible exploration and development costs
incurred on producing wells or mines are always capitalized and amortized using the cost-depletion
method. expensed or capitalized
False 13. The threshold on partially deductible contributions of corporate taxpayers is 10% of the net
income before the contribution. (5%)
False 14. The funding of past service cost is amortized over 10 years or the actual vesting period whichever is
longer. (fixed by law as 10 years)
False 15. The overfunding of defined benefit plans is treated as funding of past service cost and is
amotized over 10 years.
False 16. The employee counterpart in a contributory pension plan is deductible by the employer.
TRUE 17. Research and development costs related to land must be capitalized.
TRUE 18. Research and development costs not related to capital accounts are either deducted outright or
deferred and amortized over a period of not less than 60 months
FALSE 19. The EAR expense on the sale of goods is subject to a limit of 0.5% of gross sales TRUE20. The EAR
expense on the sale of services is subject to a limit of 1% of net revenue FALSE 21. Purely employed
individuals can claim deductions for donations made.
Multiple Choice: Theory 1 (508)
1. Which of the following cannot be deducted against gross income of non-VAT taxpayers?
a. Foreign income tax
b. Value added tax
c. Philippine income tax
d. Percentage tax
2. Which is not deductible against gross income?
a Depreciation value of fringe benefits given to managerial
b. Fringe benefits to rank and file employees
C. Compensation of minimum wage earners
d. Salaries of managerial or supervisory employees
3. Which is deductible tax expense against gross income?
a Documentary stamp tax b. Donor's tax
C. Estate tax
D. A Foreign income tax claimed as tax credit
4. Which is deductible in the measurement of profession?
a Mandatory payroll deduction
b. Tuition fees of the taxpayer's brother
C. Interest expense on borrowings from family members
d. Salaries of personal security guard of a managerial employee
(D is fringe benefit expense. Mandatory payroll deduction is deduction against compensation.)
5. Which of the following can treat capital expenditures as outright deduction?
a. Public schools or universities
b. Non-profit schools or universitiesc Private educational institutions d. All of these
6. Which is not a requisite of a deductible loss?
a. It must be sustained by the taxpayer in the current year.
b. It must be reported to the BIR within 45 days from the occurrence of the loss. C. It must be compensated
by insurance or indemnity contracts.
d. It must pertain to a property connected to the trade, business or profession of the taxpayer.
7. Which is a correct statement?
a. Gains between related parties are exempt from income
b. Losses between related parties are deductible.C. Gains between related parties are taxable
d. All of the above
8. Who are not related parties for purposes of the NIRC?
a Fiduciary of trusts with the same grantor
b. The trustee and the beneficiary of a trust
c Corporations under common control d. A partner and
the partnership
9. Which is a deductible tax expense?
a. Surcharges and penalties
b. Stock transaction tax
c. Real proper tax on business properties
d. Special assessment
10. Which of the following can be deducted by a VAT taxpayer?
a. Philippine income tax
Interest on tax delinquency
b. Donor's tax c Value Added Tax
d.
11. Who cannot claim foreign income tax credit?
a. Resident citizens
c. Resident aliens
b. Domestic corporations
d. None of these
12. Foreign income tax can be claimed as
Deduction
Yes
income tax due A.
B.
C.
D.
No Yes
Yes
No
from gross income Tax credit against the
Yes
No
No
13. Estimated quarterly income tax can be claimed as
A.
Deduction from gross income
Yes
B.
Tax credit against the income tax due
Yes
No
Yes
C.
Yes
D.
No
14. Fringe benefit tax can be claimed as
Deduction from gross income
A.
B.
Yes
No
Yes
D.
No
C.
No
No
Tax credit against the income tax
due
Yes
Yes
No
No
15. Which of these expenses is not part of the deductible expenses of the taxpayer?
a. Expanded withholding taxes on certain expenses
b. Withholding tax on employee salaries
C. Documentary stamp tax on the sale of stocks directly to a buyer
d. Real property tax on business properties
Multiple Choice: Theory 2 (510) 1. Wagering
losses are deductible
a. in full.
b. to the extent of capital gains.
c. up to the extent of gains on wagering transactions months
d. are treated deferred charge subject to amortization over 60
2. Securities becoming worthless is considered as an ordinary loss to
a. Banks
b. Trusts
c. Security dealers
d. All of these
3. Bad debts expenses include
a. uncollectible debts due to the taxpayer, (securities becoming worthless is generally a capital loss) b. securities
becoming worthless.
C. Both a and b
d. Neither a nor b
4. Which of these is a partially deductible contribution?
a. Donation to the government for public purpose
b. Donation to priority activities of the government
c. Donation to foreign institutions with treaty exemption
d. Donation to accredited charitable institutions
5. Research and development cost that are not chargeable to capital account can be claimed as a. Deductible
expense
b. Deferred expense subject to amortization C. Both a and b
d. Either a or b
6. A taxpayer incurred research and development expenditures which are related to a capital account subject to
depreciation. The taxpayer should
a. claim outright deduction for the research and development expenses.
b. treat the R&D expenses as a deferred expenses and amortize them over 60 months.
C. treat the R&D expenses as capital expenditures and depreciate them over the useful life of the related asset.
d. claim them as outright deductions or treat them as deferred charges and amortize them over 10 years.
7. A taxpayer paid for research and development expenses that are not chargeable to capital account. The taxpayer
wished to amortize the same over its expected period of benefits.
If the R&D is expected to benefit the taxpayer for 6 years, what is the correct amortization period for the R&D expenses?
a 72 months
months
b. 60 months c. 30 months
d. 36
8. Which can claim full deduction for the loss of securities becoming worthless?
a. Security dealers
b. Non-security dealers
c. Both a and c
d. Neither a nor c
9. Which of the following items of entertainment, amusement and recreation expenses can be claimed as a deduction?
a Entertainment expenses paid to officials of the government
b. Entertainment expenses not receipted in the name of the taxpayer
C. Entertainment expenses in excess of the limits of the law d. Entertainment
expenses for potential and existing clients
10. Calauag Inc, owns 51% of the voting power of Quezon, Inc. Which is a correct statement regarding gains and losses
between these two entities?
a Losses sustained by Calauag Inc. on transactions with Quezon, Inc. are claimable as deductions.
b. Losses sustained by Quezon, Inc. on transactions with Calauag, Inc claimable as deductions.
c. Gains realized by either party from each other are exempt from income tax due to the underlying economic substance
of their relationship.
d. Gains between Calauag and Quezon are subject to income tax.
Multiple-Choice: Problems 1 (512)
1. The following relates to a taxpayer:
Interest expense
P400,000
Interest income - promissory notes
100,000
Compute the deductible interest expense a. 400,000
P367,000
c. P333,000
d. P300,000
2. The taxpayer has the following losses:
Net Operating Loss Carry Over - last year
Net capital loss – current
Net capital loss - last year
P
200,00
0
80,000
70,000
b.
Ordinary loss
Taxable income before losses
50,000
P
400,00
0
Compute the total deductible losses in the current year. (P200K+P50K)
a. P400,000
b. P330,000
c. P250,000
d. P200,000
3.
Gawan Merchandising pald P400,000 to employees, net of P60,000 total withholding tax on
compensation. What is the deductible amount of expense by the employer?
a. PO
b.
P60,000
c. P400,000
d.
P460,000
4.
A taxpayer under the cash basis had the following expenditures: Acquisition of office equipment at
the
middle of the year (5 year useful life)
P 200,000
Payment of employee salaries
40,000
Payment for office utilities expenses
60,000
How much is claimable as deductible business expense for the year?
a. P300,000
b. P140,000
c. P120,000
d. P 60,000
5. The following relates to a taxpayer's warehouse:
Cost
Accumulated depreciation
Residual value
Current fair market value
Remaining useful life
2,000,0
00
600,00
0
200,00
0
2,500,0
00
12 YEARS
Compute the deductible depreciation expense.
a. P208,333
b. P200,000
c. P191,667
d. P100,000
6. The following relates to a taxpayer:
Interest expense
400,000
Interest income - time deposit 100,000
Compute the deductible interest expense. a. P400,000 b.
P367,000
c. P333,000
d. P300,000
7. An individual income taxpayer reported the following:
Capital loss - current year
P 50,000
Capital gain - current year
last year
70,000
200,000 Net capital loss -
Compute the total capital loss deductible against capital gain in the current year.
a. P320,000
b. P200,000
c. P120,000
d. P50,000
(P50K+P70K)
8. Suppose the income taxpayer in the immediately preceding problem is a corporation, compute the deductible capital
loss against capital gain.
a. P320,000
b.
P200,000
d.
c. P120,000
P50,000
9. The following data relate to an individual taxpayer:
Capital loss - current year
P
80,00
0
Capital gain - current year
150,0
00
Net capital loss - last year
90,00
0
Net income - last year
80,00
0
What is the net capital loss carry-over for the current period?
a. PO
b. P70,000
c. P80,000
d. P90,000
10. The following relate to a corporate taxpayer:
Capital loss - current year
60,00
0
Capital gain - current year
140,0
00
40,00
0
75,00
0
Net capital loss
Net income
What is the net capital loss carry-over?
a. PO
b. P40,000
c. P75,000
d. P80,000
11. An individual income taxpayer reported the following:
Capital loss - current year
50,000
Capital gain - current year
60,000
Net capital loss - last year
70,000
Compute the deductible capital loss against capital gain in the current
a. P180,000
b. P120,000
c. P60,000
d. P50,000
12. An individual taxpayer showed the following:
2019
2020
Gross income
P 300,000
400,000
Deductible business expense
( 50,000)
70,000
( 360,000)
(300,000) Net Capital gain (loss)
Compute the 2019 net income [(P400K GI-P300K Bus. Exp.) +P70K-P60K 2014NOLCO]
a. P170,000
b. P120,000
c. P 110,000
d. P 60,000
13. Assume in the immediately preceding problem that the taxpayer is a corporation What would be the taxable income
in 2020?
a. P170,000
b.
P120,000
c. P 110,000
d.
P
60,000
14. A corporate income taxpayer reported the following gross income and deductions
Gross income
Deducti
ons
2016
300,000
450,000
2017
400,000
470,000
2018
2019
2020
450,000
500,000
500,000
400,000
420,000
400,000
Compute the taxable income in 2020.
a. P100,000
b.80,000
c. P30,000
d.P 0
15. Andrew, a resident citizen, reported a world taxable income of P500,000 and a tax due on world income of P125,000.
P150,000 of the taxable income was earned in Japan out of which he paid P45,000 in income tax.
Compute Andrew's foreign tax credit. [(P150K/P500K) X P125K]
a. P50,000
b
P45,00
0
d. PO
c. P37,500
Multiple Choice: Problems 2 (515)
1. Mr. Aurelius made contributions to the following in 2020:
Street beggars
50,000
Barrio fiestas
60,000
Various cancer patients
40,000
Takusa, an accredited non-profit organization
100,000
Compute the deductible contribution expense.
A. PO
b. P100.000
c. P140,000
d. P160,000
2.
ABC Company declared a property dividend with book value of P1,000,000, and fair value of P1,200,000. The
total dividends withheld on the dividends were P60,000. Compute the total deductible expense.
a PO
b. P60,000
d.
c. P1,000,000
P1,060,000
3.
Naga Company paid P32,000 fringe benefits tax for the purchase of merchandise used by the family of one of its
company officers, How much is the deductible expense against gross income?
a. PO
b. P 32,000
c. P 68,000
d. P100,000 (P32,000/32%)*
*This is an NIRC question. The grossed-up value inclusive of the monetary value and fringe benefits tax is an expense to
the employer.
4. Makati Corporation has operations in Malaysia and Singapore with the following taxable income and taxes paid during
the year:
C. 445,000
Makati Corporation wishes to claim the foreign income tax paid as tax credit. Compute the foreign income tax credit.
5. Balanga, Inc. contributed P500,000 for its pension fund inclusive of P200,000 funding of current service cost. How
much is the deductible pension expense?
a P200,000
b. P230,000
c. P300,000 d. P500,000
6. Tawi-Tawi, Inc. maintained a defined contribution pension plan. The plan is contributory where employees contribute
20% of the pension contributions During the year, Tawi-Tawi contributed P1,000,000 inclusive of employee contribution
which was pre-deducted through their salaries.
Compute the pension expense. a P1,000,000
b. P800,000
c. P200,000
d. Some other amount
7. Entertain Corporation set up a plan in 2020. The following relate to the fund: Funding of current service cost
Funding of past service cost Compute the deductible pension expense in 2020.
a. P 340,000
b. P400,000
c. 1430,000
d. P700,000
8. In the immediately preceding problem, compute the pension expense in 2021.
a. P420,000
b. P430,000
c. P450,000
d. P600,000
9. Zambales Inc. made the following contributions during 2020:
Contributions to the government in non priority activities
Contributions to foreign charitable institutions Contribution to accredited non-profit
Institution
Contributions to foreign organizations with treaty exemption
P 60,000
40,000
30,000
Zambales Inc. has net income before contribution expense of P1,000,000. Compute the deductible
a P230,000 b. P190,000
contribution expense. c. P180,000
d. P130,000
Mr. Pedro reported the following income and expenses in 2020:
Compensation income
Gross income from business Fully deductible contributions
Deductible contributions with limit
Other allowable deductions
Mandatory deduction and exempt income
516
P 400,000
50,000
75,000
75,000
Chapter 13-A - Regular Allowable Itemized Deductions
10. Compute the deductible contribution expense, P125,000 P70,000
a.
b. P80,000
d. P65,000
11. What is the taxable compensation income?
a P400,000 b. P325,000
12. What is the net income? P300,000
a.
b. P235,000
13. What is the taxable income?
a. P700,000
b. P575,000
c. PO
d. (P75,000)
c P220,000 d. P175,000
c. P545,000
d. P500,000
14. A taxpayer with net sales of P2,000,000 and cost of sales of P1,800,000 incurred
P15,000 entertainment, amusement and recreation expenses (EAR). Compute the allowable deduction for EAR expenses.
a. P20,000 b. P15,000
c. P10,000 d. PO
15. A taxpayer with gross receipts of P2,000,000 and direct cost of services of P1,800,000 incurred P15,000
entertainment, amusement and recreation expenses. Compute the allowable deduction for EAR expense. a P20,000
b. P15,000
c. P10,000
d. PO
16. A taxpayer reported sales of P3,000,000 and gross receipts of P2,000,000 in 2020. It incurred entertainment,
amusement, and recreations expenses of P35,000.
Compute the deductible EAR expense.
a. P35,000
b. P30,000
c. P29,000
d. P25,000
517
CHAPTER 12: SELF-TEST EXERCISES
.
True or False 1
T
1. Tax basis means cost or depreciated cost of the property.
T
2. The loss on the sale of stocks by a trust company is an ordinary loss.
T
3. The capital gain from the sale of domestic bonds and foreign stocks are subject to regular
income tax.
T
4. Capital loss is deductible to the extent of capital gains.
T
5. The sale of foreclosed land by a bank is subject to regular income tax.
F
6. Ordinary loss and capital loss are items of deduction from gross income.
T
7. The loss on the sale of bonds by banks is an ordinary loss.
F
8. An ordinary gain is an item of gross income while a net capital gain is an exclusion from gross
income.
F
9. The holding period rule is relevant to individuals and corporate taxpayers.
F
10. The gain is said to be short-term if the sale of the asset is made in less than one year from its
acquisition.
F
11. 50% of the capital gain or loss is considered if the asset is held by individuals for one year or
more.
F
12. Ordinary gains or losses are subject to the holding period rule if the taxpayer is an individual
taxpayer.
F
13. The gain or loss on the sale of any stocks is subject to capital gains tax.
F
14. Ordinary loss is deductible to the extent of ordinary gains.
T
15. A net ordinary loss is deductible from gross income while a net capital loss is nondeductible.
True or False 2
T
1. Obligations assumed on the property purchased form part of the basis thereof.
T
2. If assets are acquired by way of inheritance, their basis shall be their fair value at the point of death
of the decedent.
T
3. The indicated gain in a tax-free exchange shall be recognized not to exceed the value of cash or
properties received other than stocks.
T
4.The amount of net capital loss carry-over must not exceed the net income in the year it was
sustained.
F
5.If assets are acquired by way of donation, their basis shall be the fair value on the date of donation
F
6. The net capital loss can be carried over to a period of three years from the time it is sustained.
T
7. The basis of properties received as boot in a tax-free exchange is their fair value upon receipt.
F
8. Gains but not losses are recognized in tax-free exchanges.
T
9. When no other property is involved in a share-swap pursuant to a plan of merger or
consolidation, there is no gain to recognize.
F
10. Corporations are allowed to carry-over net capital loss for a period of one year only.
F
11. In initial acquisition of control, it is necessary that there are at least five persons who acquired
control of a corporation so that the exchange is exempt from income tax.
F
12. No gain can be recognized on a pure share-swap transaction which is not pursuant to a plan of
merger or consolidation.
T
13. Stock splits and stock dividends cause a dilution in the cost per unit of stocks which must be
considered in subsequent gain or loss measurement.
T
14. Capital gains within the 61-day period are recognized, but losses are deferred when there are
acquisitions of identical securities in the same period.
F
15. When properties are sold for less than an adequate and full consideration, gain is measured as
the difference between fair value and the tax basis of the property disposed.
Multiple Choices: Theory - Part 1
1. Which capital asset is subject to the rules of capital gains tax?
a. Sale of office building
b. Sale of office equipment
c. Sale of domestic common shares directly to a buyer
d. Donation of domestic stock
2. Which is true regarding taxation of ordinary gain?
a. It is subject to regular tax regardless of the taxpayer
b. Individual taxpayers are always subject to regular tax.
c. It is subject to capital gains tax.
d. It is taxable under either regular tax or capital gains tax.
3. The gain arising from the sale of ordinary assets is
a. Ordinary income c. Extraordinary gain
b. Regular income d. Ordinary gain
4. The gain arising from dealings in capital assets is
a Capital income
b. Extraordinary gain
c.
Capital gain
d. Regular income
5. Statement 1: The gain on sale of ordinary assets is subject to regular income tax,
Statement 2: The gain on sale of capital assets is subject to capital gains tax Which statement is
correct?
a. Statement 1
b. Statement 2
c. Both statements
d. Neither statement
6. Which is correct regarding gains from capital assets?
a. Always subject to regular tax
b. Always subject to capital gains tax
c. Subject to both regular tax and capital gains tax
d. Subject to either regular tax or capital gains tax
7. Which is not correct regarding rules in dealings in properties?
a. Ordinary loss is deductible only up to the extent of capital gains.
b. Ordinary gains are taxable in full.
c.
Ordinary losses are deductible in full.
d. Capital loss is deductible only up to the extent of capital gains.
8. Which statement is incorrect?
a. Capital loss is deductible from capital gain.
b. Capital loss can be deducted from ordinary gain.
c. Ordinary loss is deductible from ordinary gain.
d.
Ordinary loss is deductible from capital gain.
9. Which is an incorrect statement regarding the taxability or deductibility of gains or losses in dealings in
properties?
a. Ordinary gain is taxable in full.
b. Ordinary loss is deductible in full.
c.
Net capital gain is taxable in full.
d. Net capital loss is deductible in full.
10. Statement 1: Ordinary gains and losses are offset.
Statement 2: Capital gains and losses are offset
Which statement is correct?
a. Statement 1
b. Statement 2
c. Both statements
d. None of these
11. Which of the following is not included in the computation of taxable income?
a. Ordinary gains c. Net capital loss
b. Ordinary loss
d. Net capital gains
12. Which statement is true?
a. The taxability of ordinary gain depends upon the holding period of the taxpayer.
b. Capital loss is deductible up to the extent of capital gain.
c. Ordinary loss is deductible only up to the extent of ordinary gain.
d. Capital loss is deductible up to the extent of ordinary gain.
13. Statement 1: Net loss in dealing ordinary assets is deductible from gross income.
Statement 2: Net loss in dealing capital assets is not deductible from gross income. Which statement is
true?
a. Statement 1 is true, c. Both statements are true.
b. Statement 2 is true. d. Neither statement is true.
14. Statement 1: The net gain in dealing ordinary asset is subject to regular tax.
Statement 2: Net gain in dealing capital asset is an item of gross income subject to capital gains tax.
Which statement is true?
a. Statement 1 is true. c. Both statements are true.
b. Statement 2 is true. d. Neither statement is true.
15. The short-term holding period is
a. 12 months or less. c. up to 24 months.
b. less than 12 months. d. 24 months or less.
16. Which statement is true regarding the holding period rule?
a. Applicable only to corporate taxpayers
b. Applicable only to taxpayers engaged in business
c.
C. Applicable only to individual taxpayers
d. Applicable to any taxpayer
17. The holding period rule applies to
a. Domestic corporations
b. Taxable trusts
C. General professional partnerships
d. Resident foreign corporations
18. To which of the following taxpayer does the holding period assumption not apply
a. Resident citizen
c. Business partnership
b. Resident alien
d. Non-resident citizen
19. For which of the following taxpayers is the holding period ignored?
a. Taxable estates c. Corporations
b. Taxable trusts
d. All of these
20. A short-term holding period means
a. 12 months or less. c. more than 12 months.
b. less than 12 months. d. at least 12 months.
21. A long-term holding period means
a. more than 12 months. c. 12 months or less.
b. less than 12 months. d. at least 12 months.
22. For individual taxpayers, what percentage of the capital gain or loss is considered for capital assets held for
12 months?
a 50%
c.25%
b.100% d. 0%
23. Which of the following properly depicts the percentage of gains considered in dealings in
properties?
a. Individual
Short term
50%
b. Corporation
c.
d.
C. Individual
d. Corporation
Long-term
50%
100%
100%
50%
100%
100%
50%
24. What percentage of long-term capital gain shall be included in the computation of the net capital gain
or loss of a corporate taxpayer?
a. 0%
b. 50%
c. 100%
d. 200%
25. In the computation of the net capital gain or loss, what percentage of long-term capital losses is
taken into consideration by an individual taxpayer?
a. 0%
c. 100%
b. 200% d. 50%
26. Which is incorrect in the determination of the net capital gain or loss for individuals?
a 100% of short-term capital gain
b. 100% of short-term capital loss
C. 100% of short-term ordinary gain
d. 50% of long-term capital gain
27. Which is incorrect regarding net capital loss carry over?
a. Applicable to corporate taxpayers
b. Applicable only for a period of one year
c Applicable only to individual taxpayers engaged in business
d. Applicable only to individual taxpayers not in business
28. Which is incorrect regarding the application of the net capital loss carry over?
a.
There is no net capital loss carry over allowable if the succeeding year results to a net capital loss
b.
Carry over shall not exceed the net income in the year the capital loss was sustained.
c.
Carry over shall apply up to the extent of available net capital gain in thesucceeding year
d.
Net capital loss carry-over can be applied against available ordinary gain inthe succeeding year.
29. What is the tax basis of properties received by way of gitt?
a. Fair value on the date of donation
b. Acquisition cost of the last donor who did not acquire the property by gift
c. Whichever is lower of A and B
d. Whichever is higher of A and B
30. What is the tax basis of properties received as inheritance?
a. Tax basis in the hands of the decedent
b. Fair value of the property on the date of succession
c. Whichever is lower of A and B
d. Whichever is higher of A and B
Multiple Choices: Theory - Part 2 1.
Which is an ordinary asset?
a. Gold inventory c. Investment in stocks
b. Notes receivable d. Accounts receivable
2. Which is an ordinary asset?
a Home computer
c. Family residence
b. Office supplies d. Personal clothing
3. Which is a capital asset?
a. Inventory of securities c. Investment in foreign currencies
b. Parking lot
d. Office building
4. Which is a capital asset?
a. Home supplies
b. Farm supplies
c. Domestic bonds of a security dealer
d. Residential lot held for sale
5. All of the following are capital assets to a merchandising business except
a. Store supplies
b. Receivables from customers
c.
Personal car of the trader
d. Personal residence of the taxpayer
6. All of the following are ordinary assets to a real property developer except
a. Raw and undeveloped land intended to be sold as is
b. Mortgage receivables on properties sold
c.
Land currently under development
d. Raw land held for future development
7. Which of the following capital assets when sold, exchanged, or disposed is subject to the rules of
regular income tax?
a Domestic stocks
c. Stock rights and warrants
b. Domestic bonds
d. Real properties not used in business
8. Which capital asset is subject to capital gains tax?
a. Domestic stocks held for sale
b. Domestic bonds held as investment
c.
Domestic stocks held as investments
d. Domestic bonds held for sale
9. Which capital asset is not subject to regular tax?
a. Real property held for sale by a dealer
b. Foreign stocks
c.
real property held as investment by a non-realty dealer
d. Domestic stock held by a security dealer
10. Which statement is generally true?
A. A purely employed taxpayer does not have ordinary assets.
B. A self-employed taxpayer does not have capital assets.
a Statement A
c. Both statements A and B
b. Statement B
d. Neither statements A nor B
11. Which of the following capital asset is the holding period rule applicable?
a. Real properties not used in business
b. Home furniture
c.
Domestic stocks sold directly to a buyer
d. All of these
12. Which of the following is considered as capital assets?
a. Fully depreciated properties
b. Land previously employed in business
c.
Back-up and stand-by equipment
d. Assets not used in business for the last two years
13. Mr. Erorita acquired a lot as a future plant site. For lack of financing, the lot is currently vacant. For taxation
purposes, the lot should be classified as a/an
a. ordinary asset. c. real property.
b. capital asset.
d. personal property.
14. Vernon Lacoste, a book publisher, received a lot as donation from a friend who is not engaged in the
realty business. He reserves the lot to house his publication business. What is the appropriate
classification of the lot for taxation purposes?
a. Ordinary asset c. Depreciable property
b. Capital asset
d. Inventory
15. Bantay Kalikasan, a non-profit and non-stock organization, has an office buildin devoted for its taxexempt operations. For taxation purposes, this building is a la
a. ordinary asset.
b. either ordinary or capital asset at the discretion of the BIR examiner.
c. capital asset
d. either ordinary or capital asset at the discretion of Bantay Kalikasan.
16. Which of the following constitutes a long-term holding period?
a. An asset acquired on November 30, 2018 and was disposed of on November28, 2019
b. An asset acquired on March 28, 2018 and was disposed of on April 30, 2019
c.
An asset acquired on March 13, 2018 and was disposed of on January 31,2019
d. An asset acquired on November 28, 2018 was and disposed of on November29, 2018
17. Which of the following statements is incorrect regarding the presentation of dealings in properties in
the income tax return?
a. Ordinary gains are presented as items of gross income.
b. Ordinary losses are presented as items of deduction.
c.
Net capital gains are presented as items of gross income.
d. Net capital losses are presented as items of deduction.
CHAPTER 15B
True or False 1
T
Exempt corporations are subject to MCIT with respect to their income subject to regular corporate
income tax.
F
MCIT does not apply to foreign corporations.
T
As a rule, corporations always pay tax even if there is a loss effective from the fourth year of their
operations.
F
Resident foreign corporations are subject to either gross income taxor regular corporate income tax.
T
A partnership organized under Philippine law is a domestic corporation for purposes of taxation.
T
Domestic corporations are subject to either gross income tax or regular corporate income tax.
F
The gross income tax applies only to corporations subject to regular income tax.
F
Non-resident foreign corporation are subject to minimum corporate income tax.
T
The gross income tax cannot apply if the gross profit rate falls below 45%.
F
Both the regular corporate income tax and the gross income tax are subject to the minimum corporate
income tax.
F
The MCIT applies only when income is zero or when there is an operating loss.
T
Domestic corporations under the gross income tax, including REITs, are exempt from MCIT.
T
Special domestic corporations and special resident foreign corporations are exempt from MCIT.
F
14. MCIT is computed as 2% of the gross income from operations.
F
15. If an entity started operations on June 2011, MCIT shall commence on June 2015
True or False 2
F
1. MCIT is applied on a quarterly, but not on an annual basis.
T
2. MCIT excess can be deducted only against the excess of RCIT over the MCIT in any of the
succeeding three years.
T
3. When there are several excess MCIT in prior years, the crediting of MCIT is made in a first-in firstout (FIFO) basis.
F
4. The MCIT gross income includes only those arising from operations while OSD gross income covers
all items of gross income subject to regular income tax.
F
5. For purposes of the MCIT, cost of services includes all direct costs and expenses incurred in
acquiring or manufacturing the goods.
T
6. The cost of services of banks includes interest expense.
F
7. Items of passive income subject to final tax and capital gains tax are included in the basis of the
MCIT.
T
8. For accrual basis taxpayers, the cost of services shall include unpaid expenses directly incurred in
the provision of services.
T
9. The gross receipts of service providers include advances from clients or customers.
T
10. Corporations with income subject to special tax are mandatorily required to use the itemized
deductions.
F
11. Whenever MCIT is payable, there is a Net Operating Loss Carry-Over.
T
12. An unused excess MCIT will expire on the fourth year of operation.
T
13. The excess MCIT of previous years can be deducted against the RCIT of any quarter of the year if
RCIT is greater than MCIT.
T
14. The MCIT rules are applied on the cumulative balances of the RCIT and MCIT during the quarters
of the taxable year.
F
15. MCIT can be suspended for a taxpayer suffering from prolonged labor dispute, force majeure, or
legitimate business reverses.
True or False 3
F
1. Investment companies and insurance companies are prima facie presumed improperly accumulating
profits.
F
2. The improperly accumulated earnings tax does not cover holding companies, publicly listed
companies, and banks.
F
3. A closely held corporation is one that is not listed in an organized equity or debt market regardless of
the number of individuals owning it.
T
4. The improperly accumulated earnings tax applies also to proprietary educational institutions.
F
5. The Commissioner of Internal Revenue may suspend the imposition of MCIT upon submission of
the required proof.
F
6. The improperly accumulated earnings tax applies to all regular domestic and foreign corporations.
T
7. An appropriation involves setting aside of earnings for immediate needs of the business.
T
8. The correlation test on appropriation requires that there must be a direct relationship of business
needs to the accumulation of profits.
F
9. If the ownership of the top 20 shareholders of a corporation is more than 50%, the corporation is a
publicly held corporation.
T
10. A corporation that is owned by a publicly listed corporation is a public corporation.
T
11. The investment of substantial profit in unrelated business, stocks or securities on unrelated
business is an instance of improper accumulation of earnings.
T
12. IAET is a penalty tax; hence, earnings subjected to IAET will still be subject to a dividend tax when
subsequently declared.
T
13. The branch profit remittance tax covers remittance of special resident foreign corporations except
PEZA-registered entities.
T
14. Partnerships and Ecozone-registered entities are not subject to improperly accumulated earnings
tax.
F
15. The branch profit remittance tax covers the profit remittance, excluding investment income, of
branches of domestic and resident foreign corporations to their head offices.
Multiple-Choices: Theory - Part 1
1. Which is a correct statement?
a Domestic corporations shall elect either MCIT or RCIT.
b. Resident foreign corporations are liable to RCIT and GIT.
c. Domestic corporations shall elect either GIT or RCIT.
d. Resident foreign corporations shall elect either GIT or RCIT.
2. Resident foreign corporations
a.
b.
c.
d.
shall elect either RCIT or MCIT.
shall elect either GIT or RCIT.
are limited to RCIT subject to the MCIT.
are subject to IAET and branch profit remittance tax.
3. Which is exempt from the corporate income tax?
a.
b.
c.
d.
Non-profit corporations
Joint venture
Partnership
Government-owned and controlled corporations
4. Which of these can claim the corporate OSD against gross income?
a. Private schools
b. Non-profit hospital
c. Exempt corporations
d. Retail stores
5. Which is subject to or can be subjected to MCIT?
a.
b.
c.
d.
Private schools
Non-resident lessors of aircraft or vessels
Non-profit hospitals
Exempt corporations
6. Which is not a requisite of the gross income tax?
a.
b.
c.
d.
20% tax effort ratio on GNP
40% income tax collection on total tax revenue
4% VAT tax effort ratio on GNP
10% government debt-to-asset ratio
7. The regular corporate income tax is
a.
b.
c.
d.
25% of gross income.
2% of taxable income.
25% of taxable income.
2% of gross income.
8. The minimum tax for corporate taxpayers is
a.
b.
c.
d.
15% of gross income.
2% of taxable income.
2% of gross income.
15% of taxable income.
9. "The MCIT applies to
a.
b.
c.
d.
domestic and resident corporations.
domestic corporations only.
special corporations.
non-resident foreign corporation.
10. The optional gross income tax is
a.
b.
c.
d.
2% of gross income.
15% of gross income.
30% of gross income.
10% of gross income
11. The gross income for MCIT purposes covers
a.
b.
c.
d.
those from related activities only.
all items of income subject to regular tax.
all items of income subject to any tax scheme.
any of these
12. The maximum cost ratio for corporations to avail of the gross income
tax is
a. 60%
b. 40%
c. 55%
d. 45%
13. What is the minimum tax as a percentage of gross income under the corporate gross income tax?
a.
b.
c.
d.
15%
10%
7.5%
6.75%
14. The minimum lock-in period under the corporate gross income tax is!
a.
b.
c.
d.
five years.
four years.
three years.
two years.
15. The MCIT is not due when
a.
b.
c.
d.
MCIT is greater than RCIT.
taxable income is zero.
taxable income is negative.
RCIT is greater than MCIT
Multiple Choice: Theory - Part 2
1. Which taxpayer is subject to the MCIT?
a.
b.
c.
d.
Private schools
Government-owned and controlled corporations
Offshore banking units
International carriers
2. Exempt corporations are subject to MCIT on their income from
a.
b.
c.
d.
related activities.
unrelated activities.
both related and unrelated activities if they pass the dominance test.
both related and unrelated activities if they fail the dominance test.
3. MCIT shall commence on the
a.
b.
c.
d.
5th year of operation.
3rd year of operation.
4th taxable year following the year of start of operation.
3rd taxable year following the year of start of operation.
4. Excess MCIT is a tax credit that can be carried over to the next
a. 3 consecutive years.
b. 4 consecutive years.
c. 3 years including the year it arises.
d. 3 consecutive years when there is income.
5. Which is deductible in the computation of the MCIT?
a.
b.
c.
d.
Marketing expenses
Office utilities
Loss on sale of assets
Salaries of employees directly engaged in rendering the service
6. Which is included in the MCIT base?
a.
b.
c.
d.
Dividend income from domestic corporations
Royalty income
Interest income from banks
Ordinary gains
7. Which of these may grant relief from the MCIT?
a.
b.
c.
d.
Secretary of finance
Office of the Commissioner of Internal Revenue
Office of the Revenue District Officer having jurisdiction
National office of the BIR
8. Private schools and non-profit hospitals may be subject to MCIT when
a.
b.
c.
d.
they are subject to the 30% RCIT.
they are subject to the 10% preferential rate.
their income from related activities exceeds 50% of their total revenue from all sources.
they are exempt from income on related activities.
9. Domestic corporations that pay the gross income tax for the year
a.
b.
c.
d.
will not pay the regular corporate income tax.
will pay whichever is higher of RCIT and MCIT.
will pay whichever is higher of GIT and RCIT subject to MCIT.
will never pay both RCIT and MCIT.
10. If a foreign corporation operates a branch in the Philippines but transacts business directly with Philippine
residents, the corporation is
a. taxable on net income.
b. automatically reclassified into a non-resident foreign corporation.
c. a non-resident foreign corporation with respect to the transaction only.
d. a non-resident foreign corporation for all transactions, including those made by its branch in the
Philippines.
11. For taxpayers involved in the sale of goods, gross income means
a.
b.
c.
d.
gross sales less sales returns, discounts and cost of goods sold.
gross receipts less returns, allowances, discounts and cost of goods sold.
gross sales less sales returns, discounts and cost of services.
gross receipts less returns, allowances, discounts and cost of services.
12. For taxpayers involved in the sale of services, gross income means
a.
b.
c.
d.
gross sales less sales returns, discounts and cost of goods sold.
gross receipts less returns, allowances, discounts and cost of goods sold.
gross sales less sales returns, discounts and cost of services.
gross receipts less returns, allowances, discounts and cost of services.
13. Gross receipts, as compared with gross sales, include
a.
b.
c.
d.
cash collections only.
transactions on account sales only.
both cash and on account transactions.
cash collections on completed contracts only.
14. Which is not included in gross receipts?
a.
b.
c.
d.
Reimbursements for out-of-pocket cost of the service provider
Repayment of loan by the client
Advanced collection of income
Cash collection for services rendered
15. Which of the following is least likely included in the "cost of services for a bank
a.
b.
c.
d.
Bad debt expense on loans
Interest expense
Depreciation of bank premises
Salaries of tellers
Multiple Choice: Theory - Part 3
1. The quarterly income tax return is due on or before
a.
b.
c.
d.
60 days following the end of the quarter.
30 days following the end of the quarter.
15th day of the fourth month following the end of the quarter.
45 days following the end of the quarter.
2. The optional standard deduction for corporations
a.
b.
c.
d.
excludes cost of goods sold and cost of services.
includes cost of goods sold and cost of services.
includes personal exemption.
excludes actual items deductions.
3. Which of the following is not a direct cost of service of a corporate car-parking operator?
a.
b.
c.
d.
Marketing expenses
Cashier salaries
Depreciation of parking building
Security guard salaries
4. Which of the following is not a deduction in the computation of the income tax payable or refundable?
a. Estimated quarterly income tax payment
b. Final withholding tax on passive income
c. Excess MCIT prior year
d. Creditable withholding tax on gross income
5. Which of the following tax credit is not always creditable in the current accounting period?
a.
b.
c.
d.
MCIT Excess prior year
Excess creditable withholding tax in prior years
Creditable withholding tax in the current year
Estimated quarterly income tax payment
6. In the quarterly income tax return, Excess MCIT prior year is deductible only when
a.
b.
c.
d.
the MCIT exceeds the RCIT for that quarter.
the RCIT exceeds the MCIT for that quarter.
the cumulative MCIT exceeds the cumulative RCIT as of the end of that quarter.
the cumulative RCIT exceeds the cumulative MCIT as of the end of that quarter.
7. Excess MCIT is valid as a tax credit over
a.
b.
c.
d.
five years.
four years.
three years.
two years.
8. Which is subject to the Improperly Accumulated Earnings tax!
a.
b.
c.
d.
Domestic corporations
Resident foreign corporations
Non-resident foreign corporations
All of these
9. Which of these is deducted in the computation of the improperly accumulated profits?
a.
b.
c.
d.
Profits from passive income
Profits from capital gains
NOLCO
Corporate income tax
10. Which of the following entities is improper accumulation of profits not presumed?
a.
b.
c.
d.
Closely-held corporation
Investment companies
Holding companies
Finance companies
11. Which is not exempt from the improperly accumulated earnings tax?
a.
b.
c.
d.
Publicly-held corporations
Insurance companies
Banks
Dealers of securities
12. Which of these is subject to improperly accumulated earnings tax?
a. A business partnership
b. A private educational institution
c. A PEZA-registered entity
d. A general professional partnership
13. The branch profit remittance tax is 15% of the total profits
a.
b.
c.
d.
of the current year.
of the current year earmarked for remittance, including investmentincome.
earmarked for remittance without deducting the tax.
actually remitted to the home office abroad, net of the tax.
14. Which of these entities is exempt from the branch profit remittance tax?
a.
b.
c.
d.
OBUs and FCDUS
Regional operating headquarters of multinational companies
International carriers
PEZA-registered entities
15. The branch profit remittance tax is imposed
a.
b.
c.
d.
upon all foreign corporations, resident or non-resident.
whenever the foreign branch reports income.
when there is profit remittance by the branch to the home office.
upon resident corporations, domestic or foreign.
Chapter 15-A: SELF-TEST EXERCISES
True or False 1
T
1. Foreign and domestic banks may have an EFCDU.
T
2. The income of FCDU, OBU, and EFCDU from residents other than depository banks in the
EFCDS or FCDS is subject to a 10% final tax.
F
3. The income of FCDU or EFCDU from foreign sources is subject to regular income tax.
T
4. Corporations subject to a rate below 30% are referred to as special corporations.
T
5. Corporation includes joint ventures, associations, and partnerships.
F
6. Joint ventures formed for the purpose of undertaking construction projects or engaging in energy
operations are taxable as corporations.
F
7. Exempt corporations are never subject to corporate income tax.
T
8. Government-owned and controlled corporations are subject to corporate income tax.
T
9. A non-profit hospital is an exempt corporation taxable only on income from unrelated activities.
F
10. PEZA-registered enterprises are exempt from tax.
F
11. BOI-registered enterprises enjoy income tax holiday for 20 years.
F
12. FCDU and OBU are divisions of a foreign bank.
T
13. The income of OBU from foreign sources is exempt from income tax.
F
14. International carriers are subject to a tax of 2.5% on taxable income.
F
15. A domestic carrier is subject to 30% tax on Philippine taxable income.
F
16. Special corporations can claim optional standard deduction.
F
17. Exempt corporations are not required to file income tax returns because they do not pay tax.
T
18. Exempt corporations and special corporations are mandated to use the itemized deductions.
F
19. Exempt corporations who filed late are not subject to penalties because they have no tax due.
T
20. Exempt corporations filing BIR Form 1702-EX will not pay tax as a rule.
True or False 2
F
1. The classification rule is applied to private schools and nonprofit hospitals.
F
2. The dominance test is applied to non-profit schools and private hospitals.
T
3. A government school is exempt from income tax.
F
4. A non-resident owner or lessor of vessel is subject to tax at
7.5% of the gross rental.
T
5. A regional area headquarters is exempt from tax because it does not derive ` income.
F
6. A regional operating headquarter of a multinational company is subject to 10% on world income.
F
7. A non-resident cinematographic film owner, lessor, or distributor is subject to 25% tax on taxable
income.
F
8. A non-resident owner or lessor of aircraft, machineries and other equipment is subject to tax at
4.5% of gross rentals.
T
9. A farmers' or fruit growers' association is exempt from income tax.
T
10. Exempt corporations are subject to income tax on their income from unrelated activities.
T
11. A non-stock, non-profit institution must be organized for religious, charitable scientific, athletic,
cultural, or for the rehabilitation of veterans.
T
12. To be exempt, all of the net income or asset of a non-profit corporation or association must be
devoted to its purposes, and no part of its net income or asset accrues to benefit any member or a
specific person.
T
13. The unrelated income of non-profit corporations is exempt from income tax if the same is diverted
to its non-profit purpose.
T
14. The exemption of non-stock and non-profit corporations or associations shall commence when
they secure their tax exemption ruling.
F
15. The certificate of tax exemption ruling is valid for one year and renewable every year thereafter.
True or False 3
F
1. The FCDUS, OBUs and EFCUs are never subject to regular income tax.
T
2. Persons and service establishments inside an ECOZONE are subject to the regular tax.
F
3. The Gross Philippine Billings of international carriers includes receipts from outgoing voyage or
flights which must be billed in the Philippines.
T
4. Expenses of an exempt corporation not directly traceable to either related or unrelated operations
are allocated based on the ratio of gross income.
T
5. Local water districts are exempt from income tax.
T
6. Cooperatives that transacts business with non-members are taxable on income allocated to
interest on members' capital when their accumulated reserve exceeds P10,000,000.
T
7. All cooperatives, regardless of classification, are subject to income tax on their income from
unrelated activities.
F
8. The expenses of exempt corporations from exempt operations are deductible to its gross income
from unrelated operations.
T
9. When the income from related activities constitutes at least 50% of total income, private schools
are subject to tax at 10% of taxable income from related and unrelated activities.
F
10. When the income from unrelated activities exceeds 50% of total income, only the income from
unrelated activities of private schools and non-profit hospitals is subject to 30% tax.
T
11. Refunded tickets and tickets of non-revenue passengers are excluded in the Gross Philippine
Billings.
T
12. The gross receipts from transient passengers are excluded from Gross Philippine Billings if they
depart from the Philippines through the same carrier within 48 hours from their arrival.
T
13. The 48-hour rule does not apply when another carrier continued the flight or voyage of transient
passengers.
T
14. The 48-hour rule may be extended by force majeure.
F
15. Domestic film owners, lessors or distributors shall be subject to 25% tax on gross income from all
sources within.
Multiple Choice: Theory 1
1. A non-resident foreign corporation is taxable on
a.
b.
c.
d.
world taxable income.
world gross income.
Philippine taxable income.
Philippine gross income.
2. The resident and non-resident classifications do not apply to
a.
b.
c.
d.
domestic corporation.
foreign corporation.
both domestic and foreign corporations.
neither domestic nor foreign corporations.
3. Which of these is a special corporate taxpayer?
a. A private school
b. A private hospital
c. A business partnership
d. A trading corporation
4. As a rule, non-profit, non-stock corporations are exempt from income tax. Which of these non-profit
entities is subject to income tax?
a. Association
b. School
c. Farmer's cooperative
d. Hospital
5. The exemption of non-profit corporations specifically pertains to income from
a. related parties.
b. unrelated activities.
c. related activities.
d. both related and unrelated activities.
6. A domestic corporation is taxable on
a. world taxable income.
b. world gross income.
c. Philippine taxable income.
d. Philippine gross income.
7. A resident foreign corporation is taxable on a world taxable income.
a.
world taxable income
b.
world gross income.
c.
Philippine taxable income.
d.
Philippine gross income.
8.
a.
b.
c.
d.
Benguet State University, a public educational institution, is
subject to income tax at preferential rate.
subject to income tax at the regular rate.
subject to both regular and preferential income tax.
exempt from corporate income tax.
9.
a.
b.
c.
d.
Generally, government-owned and controlled corporations are
subject to preferential income tax.
subject to regular income tax.
subject to both regular and preferential income tax.
exempt from income tax.
a.
b.
c.
d.
Generally, private proprietary educational institutions are
subject to preferential income tax.
subject to regular income tax.
subject to both regular and preferential income taxes.
exempt from income tax.
a.
b.
c.
d.
Which is not an exempt corporation?
Social Security System
Philippine Health Insurance System
Government-owned and controlled corporations
Home Development Mutual Fund
a.
b.
c.
d.
Which of these foreign corporations is subject to the 30% regular corporate tax?
Offshore banking units
International carrier
Regional operating headquarters of a multinational company
Call center
a.
b.
c.
d.
A non-resident foreign corporation is
subject to 30% tax on taxable income.
subject to 25% tax on gross income.
not subject to 30% tax on gross income.
never subject to 30% tax on gross income abroad.
a.
b.
c.
d.
A resident foreign corporation is
subject to 10% tax on global taxable income.
subject to 10% tax on Philippine taxable income.
not subject to 30% tax on foreign income.
not subject to 30% tax on Philippine taxable income.
a.
b.
c.
d.
A domestic corporation is not subject to the 30% regular income tax on
foreign income.
global income.
Philippine income.
gross income.
10.
11.
12.
13.
14.
15.
Multiple Choice: Theory 2
1. An allocation of common expenses between related and unrelated activities is to properly reflect taxable
income. This procedure is required only of
a. domestic corporations.
b. resident foreign corporations.
c. exempt corporations.
d. non-profit hospitals.
2.
What percentage of profit will shareholders ultimately receive from thecorporate earnings?
a. 70% of taxable income
b.70% of gross income
c.63% of taxable income
d.63% of gross income
3.
Which of these concepts is not relevant to corporations?
a. Exclusion
b. Gross income
c. Deduction
d. Personal exemptions
4.
The preferential tax rate of 10% on taxable income applies to
a.
proprietary hospital.
b.
proprietary school.
c.
non-profit school.
d.
non-profit association.
5.
When applicable, the 10% preferential tax rate applies to income from
a. related activities.
b. unrelated activities.
c. both related and unrelated activities.
d. neither related and unrelated activities.
6.
Exempt corporations are nevertheless subject to 30% tax on income from
a. related activities.
b. unrelated activities.
c. both related and unrelated activities.
d. neither related and unrelated activities
7.
Which is not taxable on unrelated activities?
a. Government agencies
b. Non-profit corporations
c. Government-owned and controlled corporations
d. None of these
8. The income from properties of exempt corporations is considered income
from
a. related sources.
b. unrelated sources.
c. either related or unrelated activities at the discretion of theexaminer.
d. either related or unrelated activities depending on the nature
of the properties concerned.
9.
The classification rule is not relevant to
a. cooperative.
b. farmers' association.
c. government school.
d. profit-oriented agricultural organization
10. Which is subject to corporate income tax?
a. Joint venture engaged in construction
b. Joint venture engaged in oil exploration
c. Philippine Charity Sweepstakes Office
d. A charitable medical hospital
11. International carriers are taxable on their gross income or receipt
from
a.
b.
c.
d.
incoming shipment or flight.
outgoing shipment or flight.
both incoming and outgoing flight.
any sources.
12. A domestic carrier is subject to tax on
a. Philippine gross income.
b. world gross income.
c. Philippine taxable income.
d. world taxable income
13. A non-resident lessor of vessels chartered by Filipino nationals is subject to
a.25% tax on its gross rentals from Filipino nationals.
b.25% tax on its worldwide rentals.
c. 4.5% tax on its gross rentals from Filipino nationals.
d. 7.5% tax on its gross rentals from Filipino nationals
14. A domestic cinematographic film owner, distributor, or lessor is subject to
a.25% tax on Philippine gross income.
b.30% tax on global taxable income.
c.25% tax on global taxable income.
d.30% tax on Philippine gross income.
15. A non-resident film owner, distributor or lessor is subject to
a.25% tax on Philippine gross income.
b.30% tax on global taxable income.
c.25% tax on global taxable income.
d.30% tax on Philippine gross income.
16. A non-resident lessor of aircraft is subject to
a. 7.5% tax on Philippine gross income.
b. 4.5% tax on global taxable income.
c. 25% tax on global taxable income.
d. 30% tax on Philippine gross income.
17. A domestic lessor of aircraft and other equipments is subject to
a. 4.5% tax on Philippine gross income.
b. 30% tax on global taxable income.
c. 7.5% tax on global taxable income.
d. 30% tax on Philippine gross income.
18. An exempt corporation with no taxable income is delinquent in filing its tax return. Which penalty is it
liable to?
a. Surcharge
b. Interest
c. Compromise
d. All of these
Multiple Choice: Case Problems
Problems 1
Bershire Corporation reported the following gross income and expenses in 2020:
Gross income
Deductions
Philippines
P 400,000
200,000
200,000
Abroad
Total
P 300,000
150,000
150,000
350,000
350,000
Taxable income
Compute the income tax due if the corporation is a\an:
1.Domestic corporation.
a. P 210,000
c. P 60,000
b. P 120,000
d. P 105,000
Computation:
2.Resident foreign corporation.
a. P 60,000
c. P 105,000
b. P 120,000
d. P 210,000
Computation:
3.Non-resident foreign corporation.
a. P 210,000
c. P 105,000
b. P 120,000
d. P 60,000
Computation:
4.Private proprietary educational institution or a non-profit hospital majority of its income is form related
activities.
a. P 105,000
c. P 70,000
b. P 35,000
d. P 20,000
Computation:
5.Non-profit entity.
a. P 105,000
c. P 35,000
b. P 60,000
d. P 0
Computation:
6.Government-owned and controlled corporation.
a. P 105,000
c. P 35,000
b. P 60,000
d. P 0
Computation:
7.International carrier.
a. P 105,000
c. P 17,500
b. P 10,000
d. P 5,000
Computation:
8.Offshore banking unit.
a. P 105,000
c. P 20,000
b. P 35,000
d. P 40,000
Computation:
9.Non-resident cinematographic film owner, distributor or lessor.
a. P 120,000
c. P 100,000
b. P 87,500
d. P 50,000
Computation:
10.Non-resident owner oer lessor of vessels.
a. P 18,000
c. P 120,000
b. P 31,500
d. P 15,750
Computation:
11.Non-resident owner or lessor of aircraft, machineries and other equipment.
a. P 120,000
c. P 30,000
b. P 52,500
d. P 26,250
Computation:
12.Non-profit association, 60% of its income was derived from unrelated activities.
a. P 105,000
c. P 42,000
b. P 63,000
d. P 0
Computation:
Problem 2 Maharata Hathaway reported the following:
Gross income
Related
P 300,000
Unrelated
P 200,000
100,000
P 200,000
100,000
P 100,000
Deductions
Taxable income
Compute the tax due if the corporate is a/an:
1.Regualar domestic corporation
a. P 90,000
c. P 60,000
b. P 150,000
d. P 30,000
Total
P
500,000
200,000
P
300,000
Computation:
2.Proprietary educational institution or non-profit hospital
a. P 90,000
c. P 30,000
b. P 60,000
d. P 20,000
Computation:
3.Exempt non-profit corporation
a. P 90,000
c. P 60,000
b. P 30,000
d. P 0
Computation:
Problem 3
A domestic bank reports the following income from its regular banking (RBU) and foreign currency deposite
unit (FCDU):
Interest from lending with FCDUs/OBUs
Interest from to other residents
Interest from lending to non-residents
Less: business expenses
Net income
Answer the following:
P
P
RBU
2,000,000
1,000,000
1,800,000
1,200,000
FCDU
P
300,000
3,000,000
1,500,000
2,000,000
P 2,800,000
Abroad
P 700,000
300,000
Total
P 1,200,000
500,000
150,000
1.Compute the total final tax.
a.P 500,000
c.P 390,000
b.P 300,000
d.P 150,000
2.Compute the regular income tax due.
a.P 750,000
c.P 240,000
b.P 360,000
d.P 60,000
Problem 4 The following data pertains to a taxpayer:
Gross income
Direct deductions
Commom expenses
Philippines
P 500,000
200,000
Compute the income tax if the taxpayer is a:
1.Business partnership organized in the Philippines
a.P 71,250
c.P 165,000
b.P 90,000
d.P 0 2.General professional partnership
a.P 165,000
c.P 71,250
b.P 90,000
d.P 0
3.A joint venture formed for the undertaking of construction project or oil exploration under service contracts
with the government
a.P 165,000
c.P 71,000
b.P 90,000
d.P 0
4.A business joint venture organized in the philippines
a.P 165,000
c.P 71,250
b.P 90,000
d.P 0
5.A co-ownership which is limited to the collection of income and
preservation the properties co-owned
a.P 165,000
c.P 71,000
b.P 90,000
d.P 0
6.A co-ownership which re-invested the income of the property in other
income-producing properties
a.P 165,000
c.71,000
b.P 90,000
d.P0
7.Resident foreign corporation
a.P 165,000
c.P 71,000
b.P 90,000
d.P 0 8.Non-resident foreign corporation
a.P 360,000
c.P 90,000
b.P 150,000
d.P 0
Problem 5
Antartica,a shipping company,reported the following gross receipts and deductions during the year:
Shipments Income Outgoing
Total
Gross reciepts
P 2,000,000 P 3,000,000 P 5,000,000
Less:Deductions
1,500,000 2,000,000 3,500,000
Net income
P
500,000 P 1,000,000 P 1,500,000
Compute the tax due assuming the corporate taxpayer is a:
1.Domestic shipping carrier
a. P 30,000
b.P 125,000
c.P 75,000
d.P 450,000 2.Resident international shipping carrier
a.P 450,000
c.P 125,000
b.P 75,000
d.P 30,000
Problem 6 An air carrier reported the following for its air transport operations:
Destination
Philippines – Australia
Fares
P 1,000,000 (1,000 tickets)
Australia – Philippines
P 1,250,000 (1,000 tickets)
Philippines – Russia*
P 2,000,000 (1,000 tickets)
Philippines - Japan
P 1,500,000 (2,000 tickets)
*The flight was referred to another airline in Japan. The Japanese airliner airlifted passengers for Russia.
Determine the income tax due assuming that the carrier is a/an:
1.International carrier
a.P 147,750
c.P 62,500
b.P 112,500
d.P 81,250
2.Domestic carrier with P3,000,000 global expenses
a.P 525,000
c.P 147,750
b.P 825,000
d.P 112,500
Problem 7
PhilTravel is engaged in the business of sea transport. It arranged the transport of various cargoes with a
shipping company to bring the cargoes from the Philippines to Afghanistan for a total charter fee of
P4,000,000.
Compute the income tax on this transaction assuming that the shippinmg company is a/an:
1.International shipping carrier
a.P 300,000
c.P 100,000
b.P 180,000
d.P 0
2.Non-resident shipping carrier
a.P 1,200,000
c.P 180,000
b.P 300,000
d.P 100,000
Problem 8
A non-profit non-stock school has a gross income of P4,000,000 only 40% of which was contributed by
related activities and total expenses of P3,000,000, 50% of which was incurred in connection with nonrelated activities.
1.Compute the total income tax if the income from non-related activities is not used exclusively for
educational purpoese.
a.P 300,000
c.P 100,000
b.P 90,000
d.P 270,000 2.In the immediately preceding problem, compute the income tax due
if all income of the non-profit school is used for educational purpose.
a.P 0
c.P 270,000
b.P 100,000
d.P 300,000 3.Compute the total income tax assuming the taxpayer is
non-profit charitable institution.
a.P 270,000
c.P 100,000
b.P 300,000
d.P 90,000
4.Compute the total income tax assuming the taxpayer is private school.
a.P 100,000
c.P 300,000
b.P 270,000
d.P 90,000
5.Compute the income tax assuming the taxpayer is a private hospital.
a.P 90,000
c.P 100,000
b.P 270,000
d.P 300,000
6.Compute the income tax assuming the taxpayer is a non-profit hospital.
a.P 270,000
c.P 100,000
b.P 300,000
d.P 90,000
7.Compute the income tas assuming the taxpayer is a government hospital.
a.P 300,000
c.P 100,000
b.P 270,000
d.P 90,000
Problem 9
A private school has P5,000,000 gross income; 60% of this represents tuition and miscellaneous fees. It has
net income of P2,000,000,60% of which was contributed by sources not related to academic instruction.
1.Compute the total income tax.
a.P 900,000
c.P 360,000
b.P 440,000
d.P 200,000 2.Compute the total income tax if the school uses all its income
for educational purposes.
a.P 900,000
c.P 360,000
b.P 440,000
d.P 200,000
Integrated Case 1 The following are the income and expenses of a private school:
Philippines
P 2,000,000
Gross profit from educational services
Dividend from a domestic corporation
Dividend from a foreign corporation
Interest income from a bank deposit
Intererst expense from bank barrowings
Business expenses
Income taxes paid
Required:Compute the tax due assuming that:
40,000
30,000
100,000
1,000,000
150,000
Abroad
P
500,000
0
200,000
40,000
0
280,000
45,000
a. The foreign taxes are claimed as tax credit.
b. The foreign taxes are claimed as deductions
Integrated Case 2
Baguio Medical Center is a non-profit hospital. In 2020, it reported the following gross income and expenses:
Activities Related
Unrelated
Total
P 4,000,000 P 5,000,000
P 9,000,000
Gross income
Directly traceable expenses
3,075,000
3,000,000
6,075,000
Common expenses of both activities 1,125,000 Net incomeP 1,800,000
Required:Compute the tax due assuming
1. The given facts.
2. That Baguio Medical Center is a private hospital.
3. That Baguio Medical Center is a government hospital.
Integrated Case 3
Danumco, a government-owned and controlled corporation,had the following items of income during the
year:
Service charges to clients
Rental on properties
Interest on bank deposits, net
Dividend income
Gain on the sale of stocks directly to a buyer
Expense
Required:Compute the following:
P
8,000,000
800,000
45,000
50,000
250,000
7,000,000
1. Final tax withheld on the interest income
2. Capital Gains tax due on the sale of domestic stocks
3. Regular income tax
a. Assuming the given facts
b. Assuming Danumco is a local water district
Integrated Case 4 A private school had the following list of transactions during the year:
Tuition fees and assessments
Rentals fro, various concessionaries
Fees from a parking lot maintained by the school
Interest on savings account and time deposit
Dividend from stocks
Salaries expenses (10% to senior citiens)
Contribution to pension fund of employees
(40% to prior service cost)
General utilities and maintenance
Research and development
Miscellaneous expenses
Contributions to various accredited NPOs
Contributions to government priority activities
Required:Compute the following:
a.
b.
c.
d.
Total final tax withheld at source
Total gross income subject to regular tax
Total claimable deductions
Corporate income tax due
P
80,000,000
4,000,000
2,4000,000
1,600,000
400,000
50,000,000
400,000
24,000,000
2,000,000
1,000,000
5,000,000
2,000,000