1
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
DEDUCTIONS AND EXEMPTIONS
Dela Cruz / De Vera / Llamado
1. Which of the following statements is true?
a. Payments which constitute bribes, kickbacks and others of similar nature which are necessary to
realize profits are allowed as deductions from gross income.
b. The taxes which are deductible from gross income include the taxes, interest and penalties incident
to tax delinquency.
c. Deductions are amounts allowed by the Tax Code to be deducted from gross income to arrive at the
income tax liability of a taxpayer.
d. Losses from wagering transactions shall be allowed only up the extent of the gains from such
transactions.
Answer: D
2. This is not deductible from gross income
a. Transportation expenses from the main office to the branch.
b. Transportation expenses from home to the office and from the office back to home.
c. Travel expenses on business trips.
d. Travel expenses while away from home in the pursuit of trade, business or profession.
Answer: B
3. A revenue expenditure is
a. Usually incurred in the acquisition, betterment or permanent improvement of the asset.
b. Capitalized and the cost is recovered through annual depreciation.
c. Ordinarily to benefit more than one accounting period.
d. To benefit one accounting period and is a deduction from gross income in the year paid or incurred.
Answer: D
4. No deductions shall be allowed where the transaction is between “related taxpayers” under Sec. 36(B)
of the Tax Code for
A) Losses from sales or exchanges of property
B) Interest expense
C) Bad debts
a. A and B
b. B and C
c. A and C
d. A, B and C
Answer: D
5. The phrase “related taxpayers” under Sec. 36(B) of the Tax Code will apply to the following, except:
a. Between members of a family
b. Between the grantor and a fiduciary of any trust
c. Between a fiduciary of a trust and a beneficiary of such trust
d. Between an individual and a corporation more than 50% in value of the outstanding stock of which
is owned, directly or indirectly by or for such individual, in case of distributions in liquidation
Answer: D
6. The optional standard deduction for corporations is
a. 10% of the gross income
b. 10% of the gross sales/receipts
c. 40% of the gross income
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d. 40% of the gross sales/receipts
Answer: C
7. The optional standard deduction for individuals is
a. 10% of the gross income
b. 10% of the gross sales receipts
c. 40% of the gross income
d. 40% of the gross sales/receipts
Answer: D
8. Interest expense incurred to acquire property used in trade or business or exercise of a profession is
a. Not allowed as a deduction against gross income
b. Required to be treated as a capital expenditure to form part of the cost of the asset
c. Allowed as a deduction, or treated as a capital expenditure at the option of the taxpayer
d. Allowed as a deduction or treated as a capital expenditure at the option of the government
Answer: C
9. A Corp. had net sales of P1M. The actual entertainment, amusement and recreation expense amounted
to P20,000. The deductible “EAR” expense is
a. P20,000
b. P6,000
c. P10,000
d. P5,000
Answer: D
Limit = ½ of 1% of net sales
= ½ x 1% x ₱1,000,000
= ₱5,000
10. C Corp. had net revenues of P1M. The actual entertainment, amusement and recreation expense
amounted to P20,000. The deductible “EAR” expense is
a. P20,000
b. P6,000
c. P5,000
d. P10,000
Answer: D
Limit = 1% of net revenue
= 1% x ₱1,000,000
= ₱10,000
11. C Corp. is engaged in the sale of goods and services with net sales and net revenue of P2M and P1M,
respectively. The actual entertainment, amusement and recreation expense amounted to P18,000. The
deductible “EAR” expense is
a. P18,000
b. P16,000
c. P12,000
d. P6,000
Answer: B
Sale of goods
Sale of services
Apportionment of
EAR Expense
₱18,000 x (₱2M/₱3M)
= ₱12,000
₱18,000 x (₱1M/₱3M)
= ₱6,000
Limit
Lower
½ of 1% of ₱2M =
₱10,000
₱10,000
1% of ₱1M = ₱10,000
₱6,000
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12. If an individual is on the cash basis of accounting, will interest paid in advance be allowed as a
deduction?
First answer – No, it is a deduction in the year that the indebtedness is paid and not in the year that the
interest is paid.
Second answer – Yes, if the indebtedness is payable in periodic amortizations, the amount of the
interest which corresponds to the amount of the principal amortized or paid during
the year shall be allowed as a deduction in such taxable year.
a. True, true
b. True, false
c. False, false
d. False, true
Answer: A
13. One of the following losses cannot be deducted from gross income:
a. To construct a bigger warehouse, a corporation demolished an old warehouse which had a
construction cost of P2 M and a book value of P300,000.
b. Expenses of demolition of a building existing on land purchased, where the corporation had no use
for the building at the time of purchase and it was its intention to remove the building in order to
build its factory.
c. A corporation retired its machinery from the business because of the increase in the cost of
production and the failure of the machinery to meet the desired number of units of production.
d. A Corp., a dealer in securities, ascertained that its B Corp. stocks are worthless because of the total
insolvency of B Corp.
Answer: B
14. A domestic corporation organized in 2006 provided the following information:
2017
2018
2019
2020
Net Sales
3,950,000
4,910,000
5,965,000
6,980,000
Cost of sales
(2,000,000)
(3,500,000)
(4,200,000)
(5,000,000)
Business expenses
(1,900,000)
(1,550,000)
(1,820,000)
(2,100,000)
Other taxable income
50,000
45,000
35,000
20,000
Total assets
50,000,000
55,000,000
60,000,000
65,000,000
2021
8,900,000
(5,200,000)
(2,300,000)
100,000
70,000,000
The income tax still due for 2017 is
a. P35,000
b. P30,000
c. P40,000
d. P32,000
Answer: C
15. The income tax still due for 2021 is
a. P1,285,000
b. P 257,000
c. P 38,000
d. P 161,900
Answer: D
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Solution for Number 14 and 15:
2017
3,950,000
(2,000,000)
1,950,000
50,000
2,000,000
(1,900,000)
100,000
30%
30,000
2018
4,910,000
(3,500,000)
1,410,000
45,000
1,455,000
(1,550,000)
(95,000)
30%
0
2019
5,965,000
(4,200,000)
1,765,000
35,000
1,800,000
(1,820,000)
(20,000)
30%
0
2020
6,980,000
(5,000,000)
1,980,000
20,000
2,000,000
(2,100,000)
(100,000)
25%
0
2021
8,900,000
(5,200,000)
3,700,000
100,000
3,800,000
(2,515,000)
1,285,000
20%
257,000
MCIT rate
MCIT
2%
40,000
2%
29,100
2%
36,000
1.5%
30,000
1%
38,000
Tax due (Higher of RCIT or
MCIT)
Less: Tax credits
Tax still due
40,000
40,000
29,100
29,100
36,000
36,000
30,000
30,000
257,000
(95,100)
161,900
Net sales
Less: COGS
Gross income from ops.
Add: Other taxable income
Total gross income
Less: Itemized deductions
Net taxable income
RCIT rate
RCIT
EMCIT:
(2017-2020)
(2018-2021)
(2019-2022)
(2020-2023)
10,000
29,100
36,000
30,000
NOLCO:
(2018-2021)
(2019-2022)
(2020-2025)
95,000
20,000
100,000
16. Examples of taxes that are deductible except
a. Occupation tax
b. Privilege tax
c. Documentary stamp tax
d. Philippine income tax
Answer: D
17. Examples of non-deductible taxes, except
a. Special assessment
b. Donor’s tax
c. Estate tax
d. Business tax
Answer: D
18. A, not happy with her present job, resigned and started her own business. The business requires her to
travel so she used her car for the purpose. Assume that A started her business on April 1 and that she
uses the car for business 70% of the time. Assuming total expenses for the year for the use of the car is
P300,000, the deductible expense is
a. P210,000
b. P300,000
₱300,000 x 70% x (9 months/12 months)
c. P225,000
d. P157,500
Answer: D
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19. A acquired a machine at a cost of P500,000. Scrap value is P40,000 and the estimated useful life was
25 years. After depreciating the asset for 20 years using the straight-line method, it was determined that
the remaining life is not five years. The annual depreciation from the 21st year assuming a remaining
life of 10 years without scrap is
a. P17,600
Original depreciation = ₱500,000 – ₱40,000 = ₱18,400/year
b. P20,000
25 years
c. P35,200
d. P13,200
Accum. Dep. (20 years) = ₱18,400 x 20 = ₱368,000
Answer: D
Book Value (after 20 years) = ₱500,000 - ₱368,000 = ₱132,000
New depreciation expense = ₱132,000 = ₱13,200/year
10 years
20. I. An expense which is necessary but not ordinary, or ordinary but not necessary is deductible from
gross income.
II. The taxpayer must signify his intention to elect the itemized deduction, otherwise, he is deemed to
have chosen the optional standard deduction.
a.
b.
c.
d.
True, true
True, false
False, true
False, false
Answer: D
21. I. Interest paid on preferred stock is deductible from gross income of the paying corporation.
II. A capital expenditure usually benefits more than one accounting period and is deductible from
gross income in the year it is paid or incurred.
a.
b.
c.
d.
True, true
True, false
False, true
False, false
Answer: D
22. A) The cost of leasehold improvements shall be deductible by the lessee by spreading the cost of the
improvements over the life of the improvements or the remaining term of the lease whichever period
is shorter.
B) Contributions by the employer to a pension trust for past service cost is deductible in full in the year
that the employer made the contributions.
a. True, true
b. True, false
c. False, true
d. False, false
Answer: B
23. The following may not be deducted from gross compensation income in computing taxable
compensation income except:
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a. Payment of loan to employer
b. CWT withheld by the employer
c. Optional standard deduction
d. Premium payments on health and/or hospitalization insurance
e. None of the above.
Answer: E
24. For individuals with gross income from business or practice of profession, which of the following may
be deducted therefrom?
A. Optional standard deduction
B. Itemized Deduction
C. Personal basic exemptions
D. Additional exemptions
E. Premium payments on health and/or hospitalization insurance
a.
b.
c.
d.
A,B,C and D
B, C and D
C, D and E and Either A or B
Either A or B
Answer: D
25. Any amount subsequently received on account of a bad debt previously charged off and allowed as a
deduction from gross income in prior years must be included in gross income in the taxable year in
which received. This is
a. Severance test
b. Life-blood theory
c. Destination of income test
d. Equitable doctrine of tax benefit
Answer: D
26. A took out a life insurance policy of P1,000,000 naming his wife as beneficiary. The policy provides
that the insurance company will pay A and his beneficiary the amount of P1,000,000 after the 25th year
of the policy, should he die before this date. The premiums paid on the policy is P700,000. If A
outlived the policy and received the proceeds of P1,000,000, such proceeds will be:
a. Taxable in full
b. Exempt from income tax
c. Partly taxable, partly exempt
Note: ₱700,000 of the ₱1.0 Million
d. Subject to final tax
proceeds is treated as return of
Answer: C
premium and therefore exempt from
income tax.
27. Using the preceding number, if A dies and his beneficiary received the proceeds of P1,000,000, such
proceeds will be
a. Taxable in full
b. Partly taxable, partly exempt
c. Exempt from income tax
d. Subject to final tax
Answer: C
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28. May consider capital expenditures as revenue expenditures
a. Resident citizen
b. Domestic corporation
c. Private educational institutions
d. Resident alien
Answer: C
29. A building was destroyed by fire in 2017. The building had a book value of P5M. The insurance
company was willing to pay P4M, which was refused by the owner. Finally, the claim was settled in
2018 for P4.6M. The proceeds will be
a. Exempt from income tax
b. Part of taxable income
c. Subject to final tax
d. Partly exempt, partly taxable
Answer: A
Note: The proceeds of ₱4.6 Million will be charged against the loss of ₱5.0 Million.
The taxpayer will not deduct a net loss in 2017 since the amount thereof has not yet
been determined at such time. In 2018, the taxpayer shall now file an amended return
for taxable year 2017. In such amended return, the net loss of ₱400,000 shall be
claimed as a deduction which shall result in a tax due lower than the amount of tax
reflected in the original return. In the amended return, the taxpayer can choose to
credit in future years the difference between the amended and original amounts, or to
file an application for tax refund/tax credit certificate.
30. One of the following is not correct for deductibility of losses from gross income
a. Must arise from fire, storm or other casualty, robbery, theft or embezzlement.
b. Must not be compensated by insurance or other form of indemnity.
c. A declaration of loss by casualty should be filed with the Bureau of Internal Revenue.
d. Must have been claimed as deduction in the estate return of the taxpayer.
Answer: D
31. Which of the following statements is not correct?
a. The Optional Standard Deduction is an amount equal to forty (40%) of the gross income from
business or practice of profession of the taxpayer.
b. The Optional Standard Deduction is not available against compensation income arising out of an
employer-employee relationship.
c. The election of Optional Standard Deduction is irrevocable for the taxable year for which the choice
is made.
d. Unless the taxpayer signifies in his return his intention to avail of the OSD, he shall be considered
as having availed of the itemized deductions.
Answer: A
32. The net operating loss which had not been previously offset as deduction from gross income shall be
carried over as deduction from gross income for the next
a. 2 consecutive taxable years immediately following such loss.
b. 3 consecutive taxable years immediately following such loss.
c. 4 consecutive taxable years immediately following such loss.
d. Taxable year immediately following such loss.
Answer: B
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Items 33 and 34 pertain to the following:
A taxpayer engaged in business incurred a partial loss of business property as follows:
Asset 1
Book value of the asset at the asset at the time of loss
P 200,000
Cost to restore the property back to its normal operating condition
120,000
Insurance recovery
50,000
Salvage
None
Asset 2
P 200,000
300,000
None
40,000
33. The deductible loss for asset 1 is
a. P 120,000
c. P 30,000
b. P 70,000
d. P 80,000
Answer: B
Lower of book value or replacement cost
Less: Insurance proceeds or salvage value
34. The deductible loss for asset 2 is
a. P 300,000
b. P 350,000
c. P 160,000
d. P 240,000
Answer: C
Items 35 to 37 pertain to the following:
ABC put up a qualified retirement plan approved by the BIR. It appointed B Corp. to administer the
plan, which called for the payment of P200,000 to cover the retirement of employees for past services
rendered and a yearly contribution of P50,000. The following amounts were paid for the first three years
of the plan’s operation:
Contribution for Services
Past Years
Current Years
First year…………………
P 100,000
P 50,000
Second year………………
60,000
50,000
Third year…………………
40,000
50,000
35. The pension expense for the first year is
a. P 150,000
b. P 15,000
c. P 60,000
d. P 105,000
Answer: C
Present service cost contribution for 1st year + Amortized past service cost contribution for 1st year
= ₱50,000 + (₱100,000/10 years)
36. The pension expense for the second year is
a. P 110,000
b. P 11,000
c. P 56,000
d. P 66,000
Answer: D
Amortized past service cost contribution for 1st year + Present service cost contribution for 2nd
year + Amortized past service cost contribution for 2nd year = (₱100,000/10 years) + ₱50,000 +
(₱60,000/10 years)
37. The pension expense for the third year is
a. P 90,000
b. P 9,000
c. P 54,000
d. P 70,000
Answer: D
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Amortized past service cost contribution for 1st year + Amortized past service cost contribution
for 2nd year + Present service cost contribution for 3rd year + Amortized past service cost
contribution for 3rd year = (₱100,000/10 years) + (₱60,000/10 years) + ₱50,000 + (₱40,000/10
years)
38. Mr. Santos, a retailer of goods, uses the accrual method in reporting his income and expenses. His
transactions show:
Jan. 1 to June 30 July 1 to Sept. 30 Oct. 1 to Dec. 31
Gross Sales
P 1,000,000
P 700,000
P 900,000
Cost of Sales
600,000
200,000
300,000
Business expenses
100,000
50,000
70,000
Non-operating income
In the ITR
50,000
40,000
10,000
If he avails of the OSD, his annual taxable net income under the graduated rates is:
a. P 1,660,000
Gross sales
2,600,000
b. P 1,040,000
Less:
Cost
of
sales
(0
if
OSD)
c. P 900,000
Gross income
2,600,000
d. None of the above
Less: 40% OSD
(1,040,000)
Net income from operations
1,560,000
+ Non-operating income
100,000
Answer: A
+ Share in GPP net income
Taxable net income
1,660,000
39. Using the preceding number, but using ID, his annual taxable net income is:
a. P 1,380,000
b. P 1,500,000
Gross sales
2,600,000
c. P 1,230,000
Less: Cost of sales
(1,100,000)
d. None of the above
Gross income
1,500,000
Answer: A
Less: Itemized deductions
Net income from operations
+ Non-operating income
+ Share in GPP net income
Taxable net income
(220,000)
1,280,000
100,000
1,380,000
40. ABC Corporation, a retailer of goods, uses the accrual method in reporting its income and expenses
under the calendar year basis. Its transactions show:
Jan. 1 to June 30 July 1 to Sept. 30 Oct. 1 to Dec. 31
Gross Sales
P 1,000,000
P 700,000
P 900,000
Cost of Sales
600,000
300,000
600,000
Itemized deduction
100,000
50,000
150,000
Other income in the ITR
70,000
20,000
10,000
The annual net taxable income using the OSD is
a. P 1,560,000
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b. P 1,040,000
c. P 720,000
d. None of the above
Answer: C
Gross sales
Less: Cost of sales
Gross income
Add: Other taxable income in ITR
Total Gross Income
Less: 40% OSD
Taxable net income
2,600,000
(1,500,000)
1,100,000
100,000
1,200,000
(480,000)
720,000
41. The records of a domestic corporation, on the calendar year basis, organized in 2010, show financial
data for the following years:
2018
2019
2020
2021
Net Sales
3,925,000
4,810,000
5,939,000
6,945,000
Cost of sales
1,950,000
2,710,000
3,465,000
4,180,000
Business expenses including
bad debts written off
1,900,000
2,000,000
2,520,000
2,400,000
Other taxable income
25,000
100,000
26,000
35,000
Total assets
40,000,000
50,000,000
51,000,000
49,000,000
Recovery of bad debts
written off:
In 2018
In 2019
60,000
10,000
The income tax payable for 2018, 2019, 2020, and 2021:
a. ₱ 30,000, ₱78,000, ₱0, ₱73,000
b. ₱ 40,000, ₱68,000, ₱37,500, ₱40,500
c. ₱ 58,500, ₱60,000, ₱18,000, ₱67,000
d. None of the above.
Answer: B
Net sales
Less: COGS
Gross income from ops.
Add: Other taxable income
Total gross income
Less: Itemized deductions
Net taxable income
RCIT rate
RCIT
2018
3,925,000
(1,950,000)
1,975,000
25,000
2,000,000
(1,900,000)
100,000
30%
30,000
2019
4,810,000
(2,710,000)
2,100,000
160,000
2,260,000
(2,000,000)
260,000
30%
78,000
2020
5,939,000
(3,465,000)
2,474,000
26,000
2,500,000
(2,520,000)
(20,000)
25%
0
2021
6,945,000
(4,180,000)
2,765,000
45,000
2,810,000
(2,420,000)
390,000
20%
78,000
2%
40,000
2%
45,200
1.5%
37,500
1%
28,100
40,000
78,000
(10,000)
68,000
37,500
37,500
78,000
(37,500)
40,500
MCIT rate
MCIT
Tax due
Less: Tax credits
Tax still due
EMCIT:
(2018-2021)
(2020-2023)
NOLCO:
(2020-2025)
40,000
10,000
37,500
20,000
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42. A Corporation is engaged in the trading business. The reported income and expenses for taxable year
2019 show:
Sales
P 10,000,000
Cost of Sales
6,000,000
General business expenses
1,000,000
Interest on time deposit ( gross of FT )
100,000
Interest expense on loans payable
180,000
The net taxable income is
a. P 2,820,000
b. P 2,853,000
c. P 2,862,000
d. P 2,858,000
Answer: B
Net sales
Less: COGS
Gross income from operations
Add: Other taxable income
Total gross income
Less: Itemized deductions
(a) General business expenses
(b) Interest expense
Interest on loans payable
Less: 33% of interest income subject to FT
Net taxable income
2019
10,000,000
(6,000,000)
4,000,000
4,000,000
(1,000,000)
180,000
(33,000)
(147,000)
2,853,000
43. KLM Corporation, a domestic corporation, had the following financial information for CY 2021:
gross sales of ₱50 Million; cost of sales of ₱35 Million; and operating expenses of ₱12.6 Million,
broken down as follows:
Cost of Sales
Direct materials
Direct labor
Manufacturing overhead
Total
₱20,000,000
10,000,000
5,000,000
₱35,000,000
Operating Expenses
Salaries and wages
Taxes
Depreciation
Professional fees
Advertising expenses
Training expenses
Office supplies
Interest expense
Total
₱5,000,000
200,000
300,000
200,000
3,000,000
3,000,000
500,000
400,000
₱12,600,000
The training expenses of ₱3,000,000 was incurred for its trainees enrolled in a specific skills development
program of TESDA. Moreover, the corporation earned interest income, net of the 20% FT, in the amount
of ₱100,000.
Assuming the corporation is subject to a 25% regular corporate income tax rate, and has complied with
the withholding tax requirements on all its costs and expenses subject to withholding tax, compute its net
taxable income for taxable year 2021.
a.
₱1,575,000
c. ₱1,500,000
b.
₱ 1,425,000
d. None of the above.
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Answer: B
Gross sales
Less: Cost of sales
Gross income
+ Other taxable income not subject to FT
Total Gross Income
Less: Allowable deductions:
Operating expenses
Additional training expense deduction:
½ of training expense
Limit (10% of direct labor wages)
Less: 20% of interest
income subject to FT
Net taxable income
50,000,000
(35,000,000)
15,000,000
-
15,000,000
12,600,000
1,500,000
1,000,000
1,000,000
(25,000) (13,575,000)
1,425,000
44. For calendar year 2020, MAMA Corporation incurred an interest expense of ₱400,000. It also earned
interest income subject to final tax of ₱100,000, net of the 20% final tax. If the corporation is subject
to the new regular corporate income tax rate of 25% beginning July 1, 2020, how much interest
expense is it allowed to deduct in computing its net taxable income?
a) ₱366,875
b) ₱400,000
c) ₱379,375
d) None of the above
Answer: A
Computation of blended arbitrage rate:
Jan. 1, 2020 to June 30, 2020 (6 months)
July 1, 2020 to Dec. 31, 2021 (6 months)
Blended arbitrage rate
Computation of interest arbitrage:
Interest income (gross of FT)
Blended interest arbitrate
Interest arbitrage
33%
20%
26.5%
₱125,000
26.5%
₱ 33,125
The resulting interest arbitrage of ₱33,125 is then subtracted from the ₱400,000
interest expense to get the allowable interest expense deduction.
Interest expense
Less: interest arbitrage
Allowable interest expense deduction
₱400,000
(33,125)
₱366,875
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45. If MAMA Corporation in number 44 qualifies and is subject to the regular corporate income tax rate
of 20% beginning July 1, 2020, how much interest expense is it allowed to deduct in computing its net
taxable income?
a)
b)
c)
d)
₱366,875
₱400,000
₱379,375
None of the above
Answer: C
Computation of blended arbitrage rate:
Jan. 1, 2020 to June 30, 2020 (6 months)
July 1, 2020 to Dec. 31, 2021 (6 months)
Blended arbitrage rate
33%
0%
16.5%
Computation of interest arbitrage:
Interest income (gross of FT)
Blended interest arbitrate
Interest arbitrage
₱125,000
16.5%
₱ 20,625
The resulting interest arbitrage of ₱20,625 is then subtracted from the
₱400,000 interest expense to get the allowable interest expense deduction.
Interest expense
Less: interest arbitrage
Allowable interest expense deduction
₱400,000
(20,625)
₱379,375
46. The term “net operating loss” shall mean
a. The excess of allowable deductions (excluding NOLCO and any deductible item under special laws
that does not involve any cash outlay) over gross income of the business in a taxable year.
b. The excess of the ordinary itemized deductions over gross income of the business in a taxable year.
c. The excess of optional standard deduction over gross income of the business in a taxable year.
d. Loss incurred which shall be carried over as a deduction from gross income to be spread for the next
three years.
Answer: A
47. The net operating loss incurred in a taxable year during which the taxpayer was exempt from income
tax shall
a. Be carried over as a deduction from gross income for the next taxable year
b. Be carried over as a deduction from gross income for the next 3 consecutive taxable years
c. Be carried over as a deduction from gross income for the next 5 consecutive taxable years
d. Not be allowed as a deduction for the next taxable year.
Answer: D
Tax 96-08
14
48. Net operating loss of a business or enterprise for taxable years 2020 and 2021 shall be carried over
as a deduction from gross income for the next
a. Three (3) consecutive taxable years immediately following the year of such loss.
b. Five (5) consecutive taxable years immediately following the year of such loss.
c. Eight (8) consecutive taxable years immediately following the year of such loss.
d. None of the above.
Answer: B
A fiscal year (“FY”) will fall on a taxable year depending on the number of days it has
in the 2 years involved. For example, FY ending March 31, 2020 is considered taxable
year 2019 since it has more days in 2019 (9 months or 274 days) than in 2020 (3
months or 90 days). In another example, FY ending June 30, 2021 is considered
taxable year 2020 since it has more days in 2020 (183 days) than in 2021 (180 days).
Thus, companies with fiscal years ending before July 31, 2020 and those with fiscal
years ending after June 30, 2022 may carry-over net operating losses in such years as
deductions only for the next three (3) consecutive years. This is because such fiscal
years are not considered as taxable years 2020 or 2021.
49. ABC Corporation employs regular people, persons with disabilities (PWDs) and senior citizens as
employees, and pays the following compensation:
Regular employees
P 800,000
PWD employee
300,000
Senior citizen employee with salary grade:
a. Above poverty level
200,000
b. Below poverty level
100,000
The deductible compensation expense is
a. P 1,400,000
b. P 1,490,000
Regular employees
c. P 1,115,000
PWD employees ( x 1.25)
d. P 1,500,000
Senior citizen
a) Above poverty level
Answer: B
b) Below poverty level (x 1.15)
Total
800,000
375,000
200,000
115,000
1,490,000
50. Healthy Drugs Corporation had the following data during the year:
Transactions
Sales (net)
Cost of Sales
Other Deductible expenses
Customer
Regular
Senior Citizen
Php 8,000,000
Php 3,200,000
5,000,000
2,000,000
Totals
Php 11,200,000
7,000,000
2,000,000
Tax 96-08
15
Healthy adopts a policy of giving senior citizens a 20% discount. As a result, it granted Php 800,000
total senior citizen’s discount during the year. The taxable net income is
a. ₱2,000,000
b. ₱ 1,400,000
c. ₱2,200,000
d. ₱ 1,250,000
Answer: C
Sales:
(a) To Regular customers
(b) Senior Citizens (gross of discount)
Less: COGS
Gross income from operations
Add: Other taxable income
Total gross income
Less: Itemized deductions
(a) Ordinary itemized deductions
(b) Special itemized deductions (SC discount)
Net taxable income
8,000,000
4,000,000
2,000,000
800,000
12,000,000
(7,000,000)
5,000,000
5,000,000
(2,800,000)
2,200,000
51. Dick Tracy Corporation paid the following expenses during the year:
Interest for late payment (delinquent) income tax
Surcharge and compromise for late payment of income tax
Interest on bonds issued
Interest on money borrowed by the Company from a stockholder
who owns 80% of the outstanding stock of the Company
What is Dick Tracy Corporation’s deductible expense?
a) ₱45,000
b) ₱75,000
c) ₱95,000
₱
5,000
30,000
40,000
20,000
d) ₱60,000
Answer: A
52. Mr. Allan Bautista is engaged in the business of buying and selling of used cars. In the taxable year, he
sold a used car to his first cousin thereby incurring a loss of ₱50,000. Allan’s acquisition cost of the car
was ₱100,000. Can Allan deduct the loss in his ITR in computing his income tax payable?
a) No. The loss is a personal, and not connected with his business.
b) No. The loss is connected with his business, but the loss is between related parties under Section
36 (B) of the Tax Code.
c) Yes. The loss is a capital loss which can be offset against capital gains that are includible in the
ITR.
d) Yes. The loss is connected with his business, and is not between related parties.
Answer: D
53. ABC is a domestic corporation engaged in the merchandising business. For the calendar year 2021, it
had a net income per books of P500,000, after considering, among others, the following:
a)
b)
c)
d)
e)
Dividend received from a domestic corporation
Provision for doubtful accounts
Dividend received from a foreign corporation
Portion of P150,000 advance rental already earned
Recovery of receivables previously written off:
i) Previously allowed by the BIR as deduction
P30,000
10,000
20,000
100,000
10,000
Tax 96-08
16
ii) Previously disallowed by the BIR as deduction
f) Refund of deductible taxes
i) Previously allowed by the BIR as deduction
ii) Previously disallowed by the BIR as deduction
g) Bank interest income:
i) Philippine Bank
ii) USA Bank
(h) Amounts for lactation station expensed in current year
30,000
25,000
15,000
80,000
100,000
50,000
The taxable net income is
a. P435,000
b. P485,000
c. P375,000
d. None of the above
Answer: A
Reconciliation of Net Income per Books Against Taxable Income
Net Income/(Loss) per Books
Add: Non-deductible expenses
(b) Provision for doubtful accounts
Add: Taxable Other Income
(d) ₱50,000 advance rental
(e) Recovery of receivable previously written off
(f) Refund of taxes previously deducted
Less: Non-Taxable Income
(a) Intercorporate dividend
Less: Income Subject to Final Tax
(g) Bank interest income
Less: Special Deductions
(h) Lactation station
Net Taxable Income (Loss)
54.
500,000
10,000
50,000
10,000
25,000
(30,000)
(80,000)
(50,000)
435,000
Statement 1: Under Sec. 34(L) of the Tax Code, as amended by R.A. No. 10963 (TRAIN), a general
professional partnership and the partners comprising such partnership may avail of the OSD only
once, either by the GPP or the partners comprising the partnership.
Statement 2: The partners of a GPP may avail either the Itemized Deductions or the OSD against
their distributive shares IF the basis of such distributive share is the GPP’s gross income, and not its
net income. This means that the GPP does not avail either of the Itemized Deductions nor of the OSD
in computing the basis of the distributive shares of the partners.
a.
b.
c.
d.
Both are true.
Only Statement 1 is true.
Only Statement 2 is true.
Both are false.
Answer: A
55.
A domestic corporation (on calendar year basis), which started operations in 2010, has the following
data in 2021:
Tax 96-08
17
Sales, net of sales discounts of ₱550,000
Cost of Sales
Gross income
₱ 25,000,000
13,000,000
12,000,000
Salaries of employees (net of payroll deductions)
Fringe benefits given to:
Rank and file employees
Managerial employees
Representation and entertainment expenses (business connected)
Rent expenses
Depreciation expenses
Bad debt expenses (1/2 charged off during year)
Payroll deductions:
CWT on compensation
SSS premiums
Philhealth contributions
Pag-ibig contributions
Union dues
Lactation station expenses
Other Income:
Cash dividend received from:
1) Domestic corporations
a) 70% of its income came from Philippine sources
b) 30% of its income came from Philippine sources
2) Resident foreign corporations
a) 70% of its income came from Philippine sources
b) 30% of its income came from Philippine sources
3) Non-resident foreign corporation
Tax withheld by customers/clients during first 3 quarters (BIR Form 2307)
Tax withheld by customers/clients in 4th Quarter (BIR Form 2307)
Taxes paid in first 3 quarters:
1st Quarter (RCIT less credits)
2nd Quarter (MCIT less credits))
3rd Quarter (RCIT less credits)
5,000,000
520,000
650,000
145,000
200,000
400,000
50,000
600,000
40,000
60,000
12,000
5,000
100,000
90,000
90,000
40,000
40,000
20,000
90,000
30,000
₱210,000
330,000
149,250
(a) What annual return should it file?
(A) BIR Form No. 1702-RT – for Corporations, Partnerships, and Other Non-Individual
Taxpayers Subject Only to Regular Income Tax Rate
(B) BIR Form No. 1702-EX – for Corporations, Partnerships and Other Non-Individual
Taxpayers EXEMPT under the Tax Code (Sec. 30 and those exempted in Sec. 27(C)) and
Other Special Laws, with NO Other Taxable Income
(C) BIR Form No. 1702-MX – for Corporations, Partnerships, and Other Non-Individual
Taxpayers with MIXED Income Subject to Multiple Income Tax Rates or with Income
Subject to Special/Preferential Rates
(D) None of the above.
Answer: A
Tax 96-08
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(b) How much is the corporation’s total gross sales, and where will it be indicated in the annual
ITR?
(A) ₱25,550,000; Part IV, Item 27
(B) ₱12,100,000; Part IV, Item 33
(C) ₱8,187,000; Part IV, Item 37
(D) ₱242,000; Part IV, Item 42
Answer: A
(c) How much is the corporation’s total gross taxable income, and where will it be indicated in the
annual ITR?
(A) ₱25,550,000; Part IV, Item 27
(B) ₱12,100,000; Part IV, Item 33
(C) ₱8,187,000; Part IV, Item 37
(D) ₱242,000; Part IV, Item 42
Answer: B
(d) How much is the corporation’s total allowable deductions, and where will it be indicated in the
annual ITR?
(A) ₱25,550,000; Part IV, Item 27
(B) ₱12,100,000; Part IV, Item 33
(C) ₱8,187,000; Part IV, Item 37
(D) ₱242,000; Part IV, Item 42
Answer: C
(e) How much is the corporation’s net taxable income, and where will it be indicated in the annual
ITR?
(A) ₱3,913,000; Part IV, Item 39
(B) ₱1,173,900; Part IV, Items 41 and 43; Part II, Item 14
(C) ₱1,104,900; Part IV, Item 55; Part II, Item 15
(D) ₱69,000; Part IV, Item 56; Part II, Item 16
Answer: A
(f) How much is the corporation’s RCIT, and where will it be indicated in the annual ITR?
(A) ₱3,913,000; Part IV, Item 39
(B) ₱978,250; Part IV, Items 41 and 43; Part II, Item 14
(C) ₱1,104,900; Part IV, Item 55; Part II, Item 15
(D) ₱69,000; Part IV, Item 56; Part II, Item 16
Answer: B
(g) How much is the corporation’s MCIT, and where will it be indicated in the annual ITR?
(A) ₱25,550,000; Part IV, Item 27
(B) ₱12,100,000; Part IV, Item 33
(C) ₱8,187,000; Part IV, Item 37
(D) ₱121,000; Part IV, Item 42
Answer: D
(h) How much is the corporation’s total available credits, and where will it be indicated in the
annual ITR?
(A) ₱3,913,000; Part IV, Item 39
(B) ₱1,173,900; Part IV, Items 41 and 43; Part II, Item 14
(C) ₱809,250; Part IV, Item 55; Part II, Item 15
(D) ₱69,000; Part IV, Item 56; Part II, Item 16
Answer: C
Tax 96-08
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(i) How much is the corporation’s income tax payable, and where will it be indicated in the annual
ITR?
(A) ₱3,913,000; Part IV, Item 39
(B) ₱1,173,900; Part IV, Items 41 and 43; Part II, Item 14
(C) ₱1,104,900; Part IV, Item 55; Part II, Item 15
(D) ₱169,000; Part IV, Item 56; Part II, Item 16
Answer: D
Gross sales
Less: Allowances, discounts, returns
Net Sales
Cost of Sales
Gross income from operations
Add: Other taxable income not subject to FTs
Total Gross Income
Less: Ordinary Itemized Deductions
(a) Salary expense, net of deductions
Total deductions
(b) Fringe benefits of employees
Rank and file
Managerial
(c) FBT (₱650,000/65% x 35%)
(d) EAR
Limit (1/2 of 1% of Net Sales)
(e) Rent expense
(f) Depreciation expense
(g) Bad debt expense (charged off)
(h) Lactation station expense
Less: Special Itemized Deductions
Additional deduction for lactation stations (RA
7600)
Net taxable income
RCIT (25%)
MCIT (1% of Total Gross Income)
25,550,000
(550,000)
25,000,000
(13,000,000)
12,000,000
100,000
12,100,000
5,000,000
717,000
520,000
650,000
145,000
125,000
(5,717,000)
(1,170,000)
(350,000)
(125,000)
(200,000)
(400,000)
(25,000)
(100,000)
(100,000)
3,913,000
978,250
121,000
Tax due RCIT
Less: Tax Credits:
(1) Excess tax credits from prior year
(2) Tax paid in previous quarters
(3) CWTs
(4) Excess MCIT from prior year
(5) Foreign tax credits
(6) Tax paid in previous return if filing amended return
978,250
(689,250)
(120,000)
Tax payable/(Tax credit/refund)
169,000
END
Tax 96-08