ARTS-PRTC CPA Review

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4/F Annelle Bldg., Biak na Bato St. cor PNR Road
Tabuco, Naga City  (054) 472-9104; 0917 1276589; 0918 4644441

INCOME TAX (DWCL) OMAR G. AMPONGAN

ITEMIZED DEDUCTIONS c. Registration fee for the 3-day seminar.

a. Expenses in general d. Cost of pasalubong to officemates (durian).
b. Interest
c. Taxes Requisites of entertainment, amusement and
d. Losses recreation expenses
e. Bad debts a. Paid or incurred during the taxable year.
f. Depreciation b. Directly connected to, or directly related to, or in
g. Depletion of oil and gas wells and mines furtherance of the conduct of business, trade or
h. Research and development profession.
i. Pension trust c. Reasonable in amount.
j. Charitable and other contributions d. Not contrary to law, morals, goods customs, public
policy or public order.
EXPENSES IN GENERAL e. Not paid, directly or indirectly, to an official or
Requisites for deductibility employee of the government, GOCC, or of a foreign
a. Ordinary and necessary. govt., to a private individual, corporation, or GPP,
b. Paid or incurred during the taxable year. or similar entity if it constitutes bribe, kickback or
c. Supported by proof. similar payment.
d. Connected with trade, profession or business. f. The appropriate amount of withholding tax, if
e. Not against law or public policy. applicable, should have been withheld therefrom
and paid to the BIR.
Problems g. Supported by receipts or adequate records.
1. A taxpayer had the following expenses during the year: h. The amount deductible should not exceed ½% of
net sales or 1% of net revenue
Salaries of employees P 300,000
Purchase of new equipment 100,000 Problem
Bribes to government officials 50,000 4. RS Electronics is engaged in the sale of goods and
Revolutionary tax to NPAs 30,000 services with net sales of P300,000. The actual
Renovation of office 350,000 entertainment, amusement and recreation expense for
How much is the deductible expense? the taxable quarter totaled to P3,000. How much is the
a. 300,000 c. 830,000 deductible expense?
b. 650,000 d. 400,000 a. P 3,000 c. P 1,000
b. 1,500 d. 2,250
2. Any amount paid specifically, either as advances or
reimbursement for traveling, representation and other Expenses not deductible from gross income:
bona fide ordinary and necessary expenses incurred or a. Personal, living and family expenses;
reasonably expected to be incurred by the employee in b. Any amount paid out for new buildings or for
the performance of his duties are not compensation permanent improvements, or betterments made to
subject to withholding, if the following conditions are increase the value of any property or estate;
satisfied: c. Any amount expended in restoring property or in
making good the exhaustion thereon for which an
First condition: It is for ordinary and necessary traveling
allowance is or has been made; or
and representation or entertainment expenses paid or
d. Premiums paid on any life insurance policy covering
incurred by the employee in the pursuit of the trade,
the life of an officer or employee, or any person
business or profession;
financially interested in the trade or business of the
Second condition: The employee is required to account taxpayer, individual or corporate, when the
or liquidate for the expenses in accordance with the taxpayer is directly or indirectly a beneficiary under
specific requirements of substantiation for each such policy.
category of expenses pursuant to the Tax Code.
Problems
a. Both conditions are correct.
5. The employer paid insurance premiums in insuring the
b. Both conditions are incorrect.
lives of its employees. Identify which payment of
c. Only the first condition is correct.
premium is NOT deductible from its gross income.
d. Only the second condition is correct.
a. For Arci, clerk, making her as the beneficiary.
Requisites for traveling expenses b. For Bianca, accountant, making her children as the
a. Must be reasonable and necessary. beneficiaries.
b. Must be incurred while away from home such as c. For Catriona, Board President, making the
transportation expenses and meals and lodging. corporation as the beneficiary.
c. Must be connected with business. d. For Diana, Junior Executive, making her husband
as the beneficiary.
Problem
3. Which the following expenses of Mahinhin, 6. One of the following is deductible from gross income:
Cebuana, who was sent by her company to a a. Personal, living and family expenses.
business seminar in Davao City is not deductible as b. Amount paid out for new building or for permanent
traveling/transportation? improvement or betterment, made to increase the
value of any property or estate.
a. Plane fare, hotel bills and laundry expenses of c. Losses from sales or exchanges of property directly
Mahinhin while in Davao City. or indirectly between members of the family.
b. Taxi fare from residence to Mactan-Cebu airport d. Grossed-up monetary value of fringe benefits.
and from Francisco Bangoy airport to Marco Polo
Hotel.
7. Which of the following is not deductible from the gross Interest on loan from a finance company to
income of a professional? build residence 10,000
a. Registration fee, travel, board and lodging expenses Interest on loan obtained from sister and
incurred by a CPA engaged in public practice while used for business 5,000
attending a Continuing Professional Development Interest on loan from a lending institution
(CPD) seminar. used to buy office equipment 1,000
b. Cost of subscription of technical books used by the Interest for late payment of VAT 500
professional in the practice of his profession or those Interest on purchase price of residential lot
that may enhance his technical knowledge in the bought in installments 2,000
management of a corporation under him. Interest payment on a debt which has
c. Amounts spent for books of a permanent character. prescribed 5,000
d. Insurance premiums against fire, storm, theft, The deductible interest expense in 2017 is:
accident or other similar losses in the practice of his a. P21,500 c. 31,500
profession b. 26,500 d. 44,500
8. Received by the taxpayer under policies:
Reduction of allowable deduction for interest
Proceeds of life insurance (as beneficiary expense:
of mother) P 400,000 The deduction shall be equal to the following amount
Proceeds of life insurance (as beneficiary of interest income subjected to final tax of 33%
of brother) 600,000
Insurance purchased from the father at Interest on unpaid taxes – Interest incurred or
cost to taxpayer of 200,000 paid on all unpaid business related taxes shall be fully
Premiums paid by the taxpayer to continue deductible from gross income and shall not be
the policy purchased 50,000 diminished by the percentage of interest income
Amount received upon the death of the earned which had been subjected to final tax.
father 500,000
Problem
Proceeds of endowment policy upon
maturity, with premium payments made of 10. G has the following data:
P800,000 1,000,000
Proceeds of comprehensive car insurance 100,000 Loan from Dagul Company P 1,500,000
Interest expenses on loan 150,000
The income from the amounts received is: Interest paid on loan used to build
a. P2,300,000 c. P600,000 residential house 35,600
b. 500,000 d. 450,000 Interest from deposit with PNB, net of tax 10,000
Interest paid on overdue business tax 23,000
INTEREST
Requisites for deductibility: How much is the deductible interest expense?
a. There must be an indebtedness. a. P 97,500 c. P 147,500
b. Incurred in connection with taxpayer’s trade, b. 131,750 d. 168,875
profession or business. Optional Treatment of Interest Expense – Interest
c. Paid or incurred during the taxable year. incurred to acquire property may be treated in two
d. There must be legal liability to pay interest. ways (at the option of the taxpayer):
Non-deductible interest a. As an expense, to be deducted from gross income,
1. Interest on loan between related taxpayers. The or
term “related taxpayers” refers to the following: b. As a capital expenditure, or part of the cost of the
a. Between members of a family. The family of an property acquired.
individual shall include his brothers, sisters Items 11-12:
(whether of the whole or half-blood) spouse,
ancestors, and lineal descendants. A business purchased equipment as follows:
b. Between an individual and a corporation which Cost of equipment P 500,000
takes place if more than 50% of the outstanding Estimated useful life 5 years
stock of the corporation is owned directly or Date acquired June 30, 2017
indirectly by or for such individual.
The equipment was financed thru a 1–year loan with
c. Between two corporations more than 50% in RCBC with interest at the rate of 18% per annum
value of the outstanding stock of each is owned beginning March 1, 2017 which was discounted in full.
directly or indirectly, by or for the same
individual. In 2017, it realized an interest income on its bank deposit
d. Between the grantor and a fiduciary of any trust;
in the amount of P500.

e. Between the fiduciary of a trust and the fiduciary 11. The deductible amount in 2017 if the interest is treated
of another trust if the same person is the grantor as an expense
with respect to each trust;
a. 90,000 c. 74,835
f. Between a fiduciary of a trust and a beneficiary b. 75,000 d. 73,350
of such trust.
12. The deductible amount in 2017 if the interest is
2. Interest on loan paid in advance through discount capitalized
or otherwise by an individual taxpayer reporting
income on cash basis. a. 81,000 c. 118,000
b. 75,000 d. 59,000
3. If the indebtedness is incurred to finance petroleum
operations. TAXES
Problem Requisites for deductibility:
9. The following interest payments were made by an a. Must be paid or incurred within the taxable year.
individual income taxpayer in 2017: b. Must be paid or incurred in connection with
taxpayer’s trade, business or profession.
Interest on loan from a bank used to
finance a business P20,000
 Taxes as deduction means “tax proper” only. It does Refund of special assessment 15,000
not include surcharges, penalties, or fines incident to Refund of gift tax 3,000
delinquency. Refund of value-added tax 26,000
Refund of customs duties 52,000
Problems
The taxable tax refund in 2018 is:
13. Which of the following taxes is deductible from the gross a. P144,000 c. P96,000
income of a corporate taxpayer in connection with its b. 100,000 d. 70,000
trade or business?
Tax Credit for foreign income tax
A. Real estate tax
1. Purpose – To lessen the rigor of international
B. Special assessment
double or multiple income taxation.
C. Estate tax
D. Tax on transfer of title on residential house 2. Right of choice – Belongs to the taxpayer to claim
the foreign income tax either as
14. The following taxes were paid by an individual income
taxpayer:: a. Tax credit, or
b. Deduction from income
Real property tax on residential house P 6,500
Real property tax on apartment houses 18,000 Who are allowed to claim tax credit?
VAT on importation of TV set for personal use 2,500 a. Resident citizens
VAT on machinery imported for business use 30,000 b. Domestic corporations which include partnerships
VAT on importation of equipment used in (except GPP)
business 75,000 c. Partners in a GPP
Income tax paid for being engaged in d. Beneficiaries of estates and trusts
business 190,000
Limitations on tax credit
VAT paid for a restaurant business 105,000
Special assessment on real property used in a. First limitation
business 10,200
Net income (foreign country)
Travel tax paid in going abroad on a pleasure trip 2,000
Total net income x Phil tax
Professional tax as CPA practitioner 300
The deductible taxes expense from the taxpayer’s gross b. Second limitation
income is: Net income (all foreign countries)
x Phil tax
A. P 18,300 C. P238,500 Total net income
B. 228,300 D. 439,500
18. A privilege granted a taxpayer to deduct or set-off against
15. Adin is a single proprietor in trading business, with his Philippine income tax the income tax that he has paid or
place of business in a building where he uses the first has accrued in a foreign country.
floor as his store and the second floor as his residence. A. Tax exemption C. Tax deductions
In 2018, he made the following payments of taxes: B. Tax consolidation D. Tax credit
Registration fee for 2018 of the business
19. What foreign tax may be taken as tax credit against
with the BIR P 500
Philippine income tax?
Income tax on 2016 income 200,000
a. foreign income tax
VAT (including interest of P20,000 and
b. foreign excess-profit tax
surcharges of P60,000) 420,000
c. foreign war-profit tax
Fringe benefit tax to his manager 32,000
d. all of these
Community tax 2,005
Real property tax on the land and building 7,000 20. Who is not entitled to a tax credit for income tax paid to
City business taxes and mayor’s permit 5,500 foreign country?
Motor vehicle registration fee (car is for a. resident citizen of the philippines
non-business use). Including interest of b. domestic corporation
P50 and surcharge for penalty of P1,500 3,050 c. foreign corporation
The deduction for taxes is: d. none of these
a. P43,505 c. P211,505 Items 21– 22:
b. 11,005 d. 638,055
An individual has the following income and expenses in
16. Taxes paid within the year were: 2018:
National income tax: Business Foreign
Capital gain tax 740,000 Income Expenses Tax
Final tax 50,000 Philippines P600,000 P250,000 -
Community tax 5,000 “A” Foreign Country 800,000 450,000 P100,000
Value-added tax 89,000
Local taxes and licenses 10,000 21. The income tax due if the foreign income tax is claimed
Interest for late payment of national as deduction –
and local taxes 40,000 A. 600,000 C. 90,500
Surcharges for late payment of B. 80,000 D. 81,000
national and local taxes 60,000 22. The income tax payable if the foreign income tax is
The deduction for taxes is: claimed as tax credit –
A. 52,500 C. 105,000
a. P618,500 c. P1,799,000 B. 94,500 D. 91,000
b. 15,000 d. 1,899,000
23. The records of Sunshine Company show the following
17. The following tax refunds were received by an income in 2018:
taxpayer in 2018:
Gross Business Foreign
Refund of income tax P30,000 Income Expense Tax
Refund of real estate tax on apartment 18,000 Philippines 200,000 50,000 -
 “A” country 400,000 80,000 P 100,000 Problem
“B country 100,000 40,000 30,000
Indicate if the following net income/loss on wagering
“C” country 250,000 300,000 -
transactions is taxable/deductible or not. If so, how much?
The income tax due after tax credit – Case 1 Case 2 Case 3
A. 144,000 C. 52,500
B. 30,000 D. 45,000 Winnings P 30,000 30,000 P
Losses 25,000 40,000 25,000
24. Tax credit for foreign income tax paid or incurred is Net 5,000 ( 10,000) (25,000)
allowed to a resident citizen of the Philippines or a
domestic corporation. Answer: _______ _______ _______
S1: When a taxpayer is qualified to take a tax credit for
b. Securities becoming worthless – loss in value of
a foreign income tax paid, he may take a
securities to such extent that the securities have
deduction instead for such tax.
become worthless and are written off is deductible.
S2: When there are several foreign countries to which
income taxes were paid, a taxpayer qualified and c. Shrinkage in value of securities – mere loss on
who opts to take tax credit, must take all the shrinkage due to fluctuation of the market is not
income taxes paid to foreign countries as tax deductible. The loss allowable is that actually
credit. suffered when the stocks are disposed of.
S3: The term “income tax” for which credit may be
taken means tax proper only, and would not Problem
include any interest or surcharge thereon. Mujer Corporation purchased 500 shares of BW
S4: When there is a tax refund of a foreign income tax Corporation at P100 per share. After a month, the shares
previously claimed as a tax credit, the refund will were selling at P 80 per share.
constitute taxable income.
May Mujer Corporation deduct as losses the shrinkage
a. True, true, true, true in value of stocks? Suppose Mujer Corporation sold the
b. True, true, true, false stocks for P40,000, is the loss of P10,000 deductible?
c. False, false, false, false
d. False, false, false, true a. Yes, Yes c. No, No
b. Yes, No d. No, Yes
LOSSES
d. Loss of useful value – Loss when the usefulness of
Requisites for losses capital assets is suddenly terminated, so that the
a. Incurred during the taxable year. taxpayer discontinued the business or discards
b. Sustained in a closed and completed transaction such asset from use is deductible.
c. The loss must be that of the taxpayer.
d. Not compensated by insurance or otherwise. 28. Gemini Taxi Company owns five (5) units of taxis
e. Not claimed as deduction from estate tax return. operating in Metro Manila which were acquired
f. Reported to the BIR within 45 days from the date secondhand at P100,000 each. When the book
of loss, in case of casualty loss. value was P70,000 per unit, the LTFRB decided to
refuse renewal of franchises of those more than 10
25. A taxpayer engaged in farming incurred the following years old. Since all the franchises were not
losses: renewed, the owner decided to sell each unit at
Loss on destruction of barn due to typhoon P500,000 P30,000. How much is the deductible loss on
Loss on destruction of farm produce due to Gemini Taxi Company?
typhoon 250,000
a. P 40,000 c. None
Loss on destruction of residence of farm
b. 200,000 d. 500,000
owner 1,500,000
Loss on assignment of receivables to a
e. Demolition with a view of erecting another
bank 50,000
building – loss due to removal of building on real
Value of animal died due to foot and mouth
estate purchased for acquisition of the land and
disease (indemnified by insurance) 120,000
without intending to use the building is not
Loss on potential income due to typhoon 200,000
deductible.
How much is the deductible loss? f. Demolition incident to renewals or replacements –
a. P 800,000 c. 950,000 loss due to voluntary removal or demolition of old
b. 750,000 d. 2,250,000 buildings, the scrapping of old machinery,
26. An office building was partially destroyed by fire in 2017. equipment, etc. incident to renewals or
The building had a book value of P4,000,000. The replacements is deductible.
insurance company was willing to pay P3,000,000
which was refused by the owner of the building. Finally, Item 29-30:
the claim was settled in 2018 for P3,500,000. France Company had the following data in 2018:
The P3,500,000 proceeds is: Bldg. A Bldg. B
A. Exempt from income tax. Acquisition cost P 800,000 P200,000
B. Taxable in full. Year of acquisition 1980 2018
C. Subject to final tax. Book value 120,000 90,000
D. Partly taxable, partly exempt. Market value 150,000 190,000
27. The taxpayer can claim a deductible loss of: Demolition cost 40,000 35,000
A. P1,000,000 in 2017 C. 500,000 in 2017 Scrap value 25,000 10,000
B. 1,000,000 in 2018 D. 500,000 in 2018 Bldg. A is an old building owned by the company and was
demolished to build a new warehouse. Bldg. B is an old
SPECIAL RULES ON LOSSES building and was purchased by the company, together
a. Loss on wagering transactions – allowed to the with the land where it is erected, just to construct a new
extent of gains on wagering transactions. one. The land had a value of P100,000.
29. How much is the deductible loss in 2018 of Bldg A?
Bldg B?
 a. None; 135,000 c. 135,000; None 2. Corporations cannot enjoy the benefit of NOLCO
b. 680,000; 225,000 d. 135,000; 225,000 for as long as it is subject to MCIT in any taxable
year.
30. How much is the value of the land in relation to Bldg. B?
a. 225,000 c. 290,000 3. The running of the 3-year period for the expiry
b. 300,000 d. 325,000 of NOLCO is not interrupted by the fact that such
corporation is subject to MCIT in any taxable
g. Computation of amount of loss due to casualty, year during such 3-year period.
robbery, theft or embezzlement.
Net operating loss – the excess of allowable
1. Total loss – deductible loss is book value; the deductions over gross income (includes all income
entire replacement cost is capitalized as cost of except those exempt and subject to final tax) of the
the property. business in a taxable year.
2. Partial loss – the deductible loss is equivalent
to the replacement cost of the damaged portion Problems
of the asset or the book value thereof at the 34. Which of the following statements is false?
time of loss, whichever is lower. The difference a. A net operating loss is the excess of allowable
is capitalized as cost. deductions over the gross income from business or
practice of profession for a taxable year.
Problems b. A net operating loss which had not previously been
31. The following equipments were burned in a fire which deducted from gross income shall be carried over as
broke out in the company building. a deduction only in the next year immediately
following the year of such loss
Equipment 1 Equipment 2 c. NOLCO cannot be applied whenever the corporation
Type of loss Total Partial is subject to MCIT during the taxable year.
Cost P200,000 P150,000 d. NOLCO is applicable both to individual and
Additions & betterments 50,000 - corporate taxpayers.
Accum depreciation 130,000 65,000
Replacement cost of 35. Coleen has the following data in 2018:
damaged portion 300,000 90,000 Gross income from operations P1,000,000
Insurance recovery 80,000 50,000 Capital gain 100,000
How much is the deductible loss on Equipment 1? Capital loss 50,000
On Equipment 2? Interest on bank deposit 3,000
Expenses from operations 800,000
a. 70,000; 85,000 c. 40,000; 35,000 Net operating loss in 2017 200,000
b. 120,000; 35,000 d. 40,000; None Net operating loss in 2016 70,000
32. In relation to the preceding problem, which option is The net operating loss available for carry over in 2018
incorrect? a. 270,000 c. 253,000
a. Equipt 1- the amount to be capitalized is P120,000. b. 250,000 d. 200,000
b. Equipt 1 - the amount to be capitalized as cost of new
building is P300,000. Items 34-35:
c. Equipt 2 – the amount to be capitalized is P5,000. A domestic corporation had:
d. Equipt. 2 - the amount to be expensed is the
restoration cost up to the extent of the book value Gross profit Business
before the casualty. from business expenses
2014 P600,000 P700,000
33. Dabiana acquired equipment for use in her business. 2015 500,000 470,000
Sometime later, the equipment suffered damages during 2016 900,000 850,000
a fire which broke out within the company premises. The 2017 850,000 900,000
details of the loss are: 2018 920,000 620,000
Acquisition cost of equipment P200,000 36. The taxable income in 2017
Accumulated depreciation 60,000 a. P50,000 c. P20,000 loss
Replacement cost of damaged portion 180,000 b. 0 d. Some other amount
Estimated remaining useful life 6 yrs.
37. The taxable income in 2018 is:
What are the deductible loss, the new cost basis of the
a. P250,000 c. P300,000
equipment and the annual depreciation after?
b. P0 d. Some other amount.
Deductible loss Equipment cost Annual depr’n
A. P140,000 P 180,000 P 30,000 BAD DEBTS
B. 180,000 140,000 30,000 Debts due to the taxpayer which were actually
C. 200,000 180,000 30,000 ascertained to be worthless and were charged off
D. 140,000 200,000 30,000 within the taxable year.

h. Net operating loss carry-over – The net Requisites for deductibility:

operating loss of the business for any taxable year a. Valid and subsisting debt.
immediately preceding the current taxable year, b. Connected with the profession, trade or business of
which had not been previously offset as deduction the taxpayer.
from gross income shall be carried over as a c. Actually ascertained to be worthless.
deduction from gross income for the next three (3) d. Charged off within a taxable year.
consecutive taxable years immediately following e. Not contracted by members of a family and related
the year of such loss. taxpayers.
1. It shall be allowed only if there has been no Non-deductible bad debts
substantial change in the ownership of the a. Personal bad debts
business (75%) of outstanding shares. b. Those sustained in a transaction entered into by
related taxpayers
38. Which of the following statements is wrong?
a. A deduction for bad debt is not available when a
provision for it is made.
b. A deduction for bad debt is available only when a
write off is made.
c. A deduction for uncollectible account is available
to a taxpayer whether he is on the cash or accrual
method of accounting.
d. There is no deduction for bad debt when there is a
surety for the debtor against whom collection may
be enforced.
39. S1: In financial accounting, bad debt is an expense in
the books of accounts when a provision is made for it
S2: In income taxation, bad debt is a deduction from
gross income when the account is written off.
a. First statement is true while second statement is
false.
b. Both statements are true.
c. First statement is false while second statement is
true.
d. Both statements are false.
DEPRECIATION
Requisites for deductibility
a. The allowance for depreciation must be reasonable.
b. It must be for property arising out of its use or
employment in the business or trade, or out of its
not being used temporarily during the year.
c. The asset must have a limited useful life.
d. A statement on the allowance must be attached to
the return.
Methods of depreciation allowed
a. Straight line method
b. Declining balance method
c. Sum-of-years-digits method
d. Any other method which may be prescribed by the
Secretary of Finance upon the recommendation of
the CIR.
Problem
40. Which of the following assets is subject to depreciation
for income tax purposes?
a. Inventories or stock in trade
b. Goodwill
c. Equipment used in business
d. Residential house
41. The basis of computing depreciation of an asset is
always:
a. Cost of the property.
b. Fair market value of the property.
c. The adjusted basis for computing loss on the sale
of the property.
d. Value of the property at the time of acquisition.
42. Lovely has determined from business experience that
an item of machinery usually lasts approximately seven
years for the purpose for which it was acquired. The life
of a similar asset in the general industry was eight
years. A close competitor uses similar item for ten
years. The manufacturer guarantees the product and
recommends a life of five years. In determining
depreciation, Lovely should use a life of:
a. 5 years c. 8 years
b. 7 years d. 10 years
DEPLETION
The removal, extraction or exhaustion of a natural
resource like mines and gas wells as a result of
production or severance from such mines or wells.
General conditions and rules on deductibility:
1. The method allowed is Cost Depletion Method.
2. Can be availed of by oil and gas wells and mines.
3. Basis of cost depletion is the capital invested in the
mine which is the
a. accumulated exploration and
b. development expenses
4. When the allowance shall equal the capital invested
no further allowance shall be granted.
5. On resident foreign corporations, allowance for
depletion shall be authorized only in respect to oil
and gas well and mines located in the Philippines.
6. Tangible development costs such as construction of
mine-plant roads, buildings and installation of
heavy equipment on site a subject to depreciation.
Problems
43. Which statement is not correct? Deduction for depletion
a. Is allowed on wasting assets only.
b. For foreign corporations engaged in doing
business in the Philippines, is allowed only if the
mine is located in the Philippines.
c. For domestic corporations, shall be allowed only if
the mine is located in the Philippines.
d. Is separate from deduction for depreciation of
building in the mine site.
44. The books of a newly organized mining company show
the following data:
Capital invested in the mine P20,000,000
Operating expenses (not including depletion) 1,200,000
Selling price per ton 1,000
No. of recoverable units in the mine (tons) 50,000
No. of tons mined and sold during the year 3,000
The taxable income of the mining company is:
a. P 600,000 c. P1,800,000
b. 1,200,000 d. P3,000,000
45. Which of the following is subject to depletion?
a. Construction of road in the mine site.
b. Tunneling
c. Heavy equipments such as trucks and bulldozers
d. Buildings
PENSION TRUST
Requisites for deductibility
1. Pension plan must be sound and reasonable.
2. Funded by the employer.
3. The contributed amount of the employer must be
independent and not subject to his control.
4. Payment has not been allowed as deduction; and
5. One-tenth of a reasonable amount transferred or
paid to the trust fund to cover the pension liability
shall be allowed as a deduction and the unpaid
balance for each of the succeeding year.
Rules on deductibility:
Contribution for
1. Present service cost – deductible in full
2. Past service cost – amortize over a period of 10
years
Problem
46. Which statement is wrong? Contributions made by an
employer to a pension trust:
a. For lump sum payment to cover past service cost, is
allowable as deduction beginning with the year the
payment was made.
b. For lump sum payment to cover past service cost is
allowable as deduction amortized for period of ten
years.
c. For a lump sum payment to cover past service cost,
may be amortized over a period of more than, but
not less than ten years.
d. For present service cost, is deductible in the year
that payment is made.
47. Bagyo company made the following payments to its
pension.
 2018 209 used in undertaking PRIORITY ACTIVITIES (as
Payment of current pension P150,000 P150,000 determined by NEDA) in
Payment of past pension 900,000 800,000 a. Education
How much is deductible in 2018and 2019? b. Health
a. 1,050,000; 950,000 c. 240,000; 320,000 c. Youth and sports development
b. 150,000; 800,000 d. 150,000; 240,000 d. Human settlements
e. Culture and sports and
RESEARCH AND DEVELOPMENT f. Economic development
Research and development expenses incurred by the - Donation to the government, its agencies or
taxpayer during the taxable year in connection with political subdivisions not in accordance with
the trade, business or professional may be considered the said annual priority plan shall be subject to
as ordinary and necessary expenses and are allowed limit
as deductible items from gross income if not charged
to the capital account or deferred charges account that 2. Donations to certain foreign institutions or
is subject to depreciation or amortization. international organizations.

At the option of the taxpayer, R & D expenditures may 3. Donations to accredited NGO – The term
be treated as follows: accredited NGO means a non-profit domestic
corporation organized and operated exclusively
1. As expenses in the year it is paid or incurred; or
for Scientific, Educational, Character-building,
2. To treat as deferred expenses which shall be
Youth and sports development, Health, Social
allowed as deductible ratably distributed over a
welfare, Cultural and charitable purpose
period of not less than 60 months, beginning with
the month in which the taxpayer first receives - or a combination thereof, no part of the net
benefits from such expenditures. income of which inures to the benefit of any
private individual.
Not deductible as R & D expenditures:
1. Expenditures for acquisition or improvement of CONTRIBUTIONS
land, or the improvement of property to be used SUBJECT TO LIMIT
in connection with R & D of a character which is 1. Donations for the use of the Govt. of the Phils. or
subject to depreciation & depletion; and any of its agencies, or any political subdivision
2. Expenditures paid or incurred for the purpose of thereof, exclusively for public purposes.
ascertaining the existence, location, extent, or
quality of any deposit or ore or other mineral, 2. Donations to non-accredited organization or
including oil or gas. domestic corporations organized and operated
exclusively for the following purposes:
Problems
a. Religious
48. Which statement is wrong? Research and development b. Charitable
costs: a. Scientific
b. Youth and sports development
a. When related to the acquisition and/or improvement
c. Cultural
of land and building, must be capitalized.
d. Educational
b. If not related to land and building, may be treated as
e. Rehabilitation of veterans
an outright deduction.
c. If not related to land and building, may be treated as 3. Donations to social welfare institutions.
a deferred expense which may be amortized. 4. Donations to NGOs.
d. Cannot be deducted because it has unlimited life.
Limit of contributions –
49. S1: Research and development costs may be treated Individual – 10%
as outright deduction or deferred expense. Corporation – 5%
S2: Expenditures of private educational institutions for - Of taxable income derived from trade,
expansion of school facilities may be treated as outright business or profession without the benefit of
deduction or capitalized. deductions for contributions.
a. Both statements are true.
b. Both statements are false.
c. The first statement is true, but the second statement Notes:
is false. a. The donation must be utilized not later than the
d. The first statement is false, but the second statement 15th day of the 3rd month after the close of its
is true. taxable quarter.
b. The administration expenses must not exceed
CHARITABLE AND OTHER CONTRIBUTIONS 30% of total expenses.
Requisites for deductibility
a. The contribution or gift must be actually paid. c. Upon dissolution, its assets must be distributed
b. It must be given to the entity or institution to other nonprofit domestic organization, to the
specified by law. state, or by a court to another similar
c. The net income of the institution must not inure to organization.
the benefit of any private stockholder or
d. Members of the Board of Trustees must not
individual, and
receive remunerations.
d. The taxpayer making the contribution must be
engaged in trade, profession or business. e. If the above conditions are not complied,
contributions may be deducted subject to limit.
CONTRIBUTIONS
DEDUCTIBLE IN FULL Items 49 - 50:
1. Donations to the Govt. of the Phils. or to any of Charlene has the following income and expenses in
its agencies, or political subdivisions, including 2018:
fully-owned government corporations
exclusively to finance, to provide for, or to be Gross income from business P 380,000
 Expenses in general 100,000 c. His choice can still be changed by filing an amended
Depreciation of equipments 50,000 return.
Taxes (except income tax) 20,000
Charitable contributions to: Items 55 – 56 :
National government for priority The taxpayer is a resident citizen who is married, with gross
activities in education 25,000 receipts from business of P500,000, business expenses
Polytechnic University of the Phil 10,000 with supporting receipts of P180,000 and premiums on
Fatima Catholic Church and shrine 12,000 health insurance of P3,000.
To the victims of flood in Leyte 40,000
55. If the taxpayer chose the optional standard deduction,
50. The taxable income is- the taxable income is:
a. 113,000 c. 135,000 a. P300,000 c. P267,600
b. 163,000 d. 210,000 b. P250,000 d. P270,000
51. The taxable income if Charlene is a domestic 56. If the taxpayer chose the itemized deductions, the
corporation. taxable income is:
a. 113,000 c. 164,500 a. P247,600 c. P267,600
b. 174,500 d. 210,000 b. P250,000 d. P320,000
52. Jasper is the President of Toyota Corp. engaged in the 57. Statement 1: Itemized deductions from income should
marketing of cars. When Jasper’s son got married to the be duly supported by vouchers or receipts.
daughter of a senator, the corporation gave the newly- Statement 2: Only business expenses may be deducted
wed couple a brand new Toyota Fortuner worth from the income of taxpayers.
P1,800,000 and entered the wedding gift in its books as
a representation expense. As a result of the above, the a. First statement is true while second statement is
Toyota car is: false.
b. Both statements are true.
a. Taxable income to the couple c. First statement is false while second statement is
b. Deductible expense of the corporation true.
c. Not taxable income to the couple and not deductible d. Both statements are false.
expense of the corporation
d. Answer not given. 58. Optimum Corporation had the following data:

53. Which statement is not correct? Gross sales 10,000,000

a. The deduction of an individual for contributions Sales returns 20,000
subject to limitation should not exceed ten percent Capital gain 25,000
(10%) of his taxable income from business, trade or Rent income 100,000
profession before deduction for contributions. Interest on bank deposit 5,000
b. The deduction of a corporation for contributions Cost of goods sold 6,000,000
subject to limitation should not exceed five percent Itemized deductions 2,500,000
(5%) of its taxable income from business or trade The income tax payable if optional deduction? Itemized
before deduction for contributions. deduction?
c. Contributions to foundations in its fund drive for the
relief of calamity victims are deductible from gross a. P738,900; P738,900
income. b. 738,900; 481,500
d. Contributions of canned goods to student c. 481,500; 481,500
organizations during the Christmas season for d. 741,900; 481,500
distribution to Muntinlupa inmates are deductible 59. Rita, a retailer of goods, is under the accrual method of
from gross income. accounting. She signified her intention to elect optional
OPTIONAL STANDARD DEDUCTION (OSD) standard deduction. During the year, the following are
1. Corporation - 40% of gross income her data:
Individual - 40% of gross sales/receipts Gross sales 1,200,000
2. Taxpayer shall be considered as having availed itself Cost of sales 800,000
of the itemized deduction unless it signified in his Expenses 200,000
return the intention to election optional standard The taxable income is –
deduction. a. 670,000 c. 200,000
3. Passive incomes which have been subjected to final b. 720,000 d. 360,000
tax shall not form part of the gross income for
purposes of computing the 40% OSD. INSTALLMENT METHOD OF ACCOUNTING

4. Gross income is gross sales/receipts less sales
returns, discounts, allowances and cost of goods
sold/services.
5. Individual Taxpayer: Gross sales if using accrual
basis; Gross receipts if using cash basis of
accounting.
Problems
54. One of the following statements is correct. A choice by
an individual of the optional standard deduction means
that:
a. His income tax return need not be accompanied by
financial statements.
a. He need not keep books of accounts.
b. He need not have records of gross sales or gross
receipts.
1. Installment method is a special method of
accounting under which the taxpayer reports as
income only a part of the gross profit to be realized
from the sale on the installment plan equivalent to
that proportion of the amount of installments
received every year which the gross profit realized
or to be realized when payment is completed bears
to the contract price.
Persons entitled to use installment method
a. Dealers in personal property – those who
regularly sell or otherwise dispose of personal
property on the installment plan.
b. Casual sellers of personal property – those who
make casual sale or other casual disposition of
personal property on the installment plan where
the:
 a. Selling price is over P1,000;
b. Initial payments do not exceed 25% of selling
price; and
c. Property is not of a kind which would be
included in the taxpayer’s inventory if on
hand at the close of the taxable year.
b. Do not exceed 25% of the selling price.
c. Regardless of the ratio of initial payments to the
selling price.
d. Do not exceed 25% of the contract price.
Problems

c. Sellers of real property – those who make a sale
or disposition of real property (whether capital
or ordinary asset) on the installment plan where
the initial payments do not exceed 25% of S.P.
Formulas:
SELLING PRICE:
Cash received by the seller
Add: FMV of property received (if any) Pxx
Installment obligation of buyer xx
Mortgage assumed by buyer xx
Selling price
INITIAL PAYMENT:
Down payment
Add: Installment received (year of sale)
Excess of mortgage over cost (if any)
Initial payment
CONTRACT PRICE:
Selling price
Less: Mortgage assumed by buyer (if any)
Balance
Add: Excess of mortgage over cost
Contract price
2. Deferred payment sales – sales in which the
payments received in cash or property other than
evidence of indebtedness of the purchaser during
the taxable year in which the sale is made exceed
25% of the selling price (the obligations of the
purchaser received by the vendor are to be
considered as equivalent of cash)
5. Which is wrong? Installment mrthod is allowed in:
a. Installment sales of real property where the initial
payments do not exceed twenty-five percent of the
selling price.
b. Installment sales of personal property by a dealer
where the initial payments exceed twenty-five
percent of the selling price.
c. Long-term contracts.
Pxx d. Advance rental received.
6. One of the following is correct:
x x a. Income from long-term construction contracts may
x x be reported on the completed contract method of
accounting.
b. Income from long-term construction contracts must
be reported only on the percentage of completion
x x method of accounting.
x x c. Income from casual sale of personal property in
x x installment, where the initial payments do not
x x exceed 25% of the selling price, cannot be reported
under the installment method.
d. Where in a deferred payment sale the initial
Px x payments exceed 25% of the selling price, the
x x income from the sale must be reported under the
x x installment method.
x x
x x 7. 1st Statement: A change in the method of accounting
requires a prior approval of the Commissioner of
Internal Revenue.
2nd Statement: A change in the accounting period
does not require prior approval of the Commissioner of
Internal Revenue as long as the necessary income tax
returns for the different accounting periods (old, interim
and new) are filed.

Problems a. Both statements are correct

b. Both statements are wrong
1. Gross income is reported partially in each taxable year c. The first statement is correct while the second
in proportion to collections made in such period as it statement is wrong
bears to the total contract price refers to: d. The first statement is wrong while the second
statement is correct
a. Accrual method
b. Percentage of completion method Items 8-10:
c. Crop year basis
d. Installment sales method Aldwin owns a personal car which he sold on installment
on November 1, 2017 as follows:
2. Statement 1: Commissions and other selling expenses Date of acquisition - Mar 20, 2011
paid or incurred by the vendor are not deducted or taken Acquisition cost - P 300,000
into account in computing initial payments, selling price Terms of Payment:
and contract price. Downpayment - Nov 1, 2017 P50,000
Statement 2: Selling expenses are to be deducted in Due on - Dec 1, 2017 50,000
ascertaining the gross profit except in the case of Due on - Jan 1, 2018 150,000
dealers, who deduct these items as ordinary business Due on - Feb 1, 2018 150,000
expenses.
8. The initial payment in 2013 is –
a. True, true c. True, false a. P50,000 c. P 300,000
b. False, false d. False, true b. 100,000 d. 400,000
3. The taxpayer is not a dealer of personal property 9. The amount of gain to be reported in 2017 is –
regularly selling on installments. Installment method of a. P 37,500 c. P 50,000
reporting income is available to him on a sale of b. 12,500 d. 25,000
property if the initial payments on the sale:
a. Exceed 25% of the selling price. 10. The amount of gain to be reported in 2018 is –
b. Do not exceed 25% of the selling price. a. P 50,000 c. P 37,500
c. Regardless of the ratio of initial payments to the b. 25,000 d. 12,500
selling price. Items 11-15:
d. Do not exceed 25% of the contract price.
Marylyn sold a vacant lot to her sister, Mica. The details of
4. Deferred payment method of reporting income on an which are as follows:
installment sale is available to a taxpayer if, there being
a requirement of the law on the ratio of initial payments Acquisition cost of land, March 5, 2015 P450,000
to the selling price, the initial payments on the sale: Cash payments:
a. Exceed 25% of the selling price. Date of sale, December 15, 2017 100,000
 Payment, January 15, 2018 100,000 2. Expenditures by the corporation for the personal
Mortgage assumed by Mica 500,000 benefit of the stockholders.
3. Yearly substantial advances made to stock-
11. The initial payment is – holders-officers.
a. P 100,000 c. 150,000 4. Investments in unrelated business.
b. 250,000 d. 200,000 5. Radical change of business when large profits
12. The selling price of the property is – have been accumulated.
a. P 150,000 c. 700,000 5. Circumstances considered proper accumula-
b. 550,000 d. 250,000 tion of profits:
13. The contract price is – 1. Additional working capital purposes.
a. P 150,000 c. 700,000 2. Purchase of long-life assets reasonably required
b. 550,000 d. 250,000 by the business.
3. Obligation in a contract to set aside funds in a
14. The final tax payable in 2017 is – sinking fund to settle debt.
a. 42,000 c. None
b. 25,200 d. P9,000 Exempt corporations:
1. Insurance companies
15. The final tax payable in 2018 is – 2. Publicly-held corporations
a. 42,000 c. None 3. Banks and non-bank financial intermediaries
b. 25,200 d. 16,800 4. Taxable and general professional partnerships
5. Non-taxable joint ventures
Items 16-17: 6. Those registered with the PEZA, SBMA, CDA and in
special economic zones.
Abad sold his warehouse building to Abe. The property was
acquired by him in 2003 for P250,000. At the time of sale, Formula:
its accumulated depreciation was P50,000. The terms of
the sale are as follows: Taxable income Pxx
Add: Income exempt from tax Pxx
Cash paid, June 1, 2017 P50,000 Income excluded from gross income xx
Installment, September 1, 20137 20,000
Income subject to final tax xx
Installment, December 1, 2017 20,000
Installment, March 1, 2018 155,000
NOLCO deducted xx xx
Installment, June 1, 2018 155,000 Total xx
Less: Income tax paid/payable for the
16. The income to be reported by Abunda in 2017 is – taxable year xx
a. P 45,000 c. None Dividends paid/issued from
b. 90,000 d. P 200,000 applicable year’s taxable income xx
17. The income to be reported by Abunda in 2018 is – Reserved for reasonable needs of the
a. 200,000 c. None business xx xx
b. 155,000 d. 45,000 Improperly accumulated taxable income xx
18. Miss Gracia Ds. Gracia sold a personal property on Rate of tax 10%
September 2, 2018 for a selling price of P500,000. She Improperly accumulated earnings tax xx
bought this property 5 years ago for P300,000 and is Problems
presently mortgaged for P100,000 which will be
assumed by the buyer. Terms of the sale: Down 1. A penalty and a form of deterrent to the avoidance of tax
payment - P100,000 and the balance payable P25,000 upon shareholders who are supposed to pay dividends
every end of the calendar quarter until fully paid. If the tax on the earnings distributed to them by their
property is a capital asset, the initial payment is – corporation:
a. Minimum corporate income tax
a. 150,000 c. 125,000 b. Fringe benefit tax
b. 100,000 d. 450,000 c. Improperly accumulated earnings tax
19. In the preceding question, how much is taxable in d. Gross income tax
2018? 2. The following, except one, give rise to the presumption
a. 200,000 c. 31,250 that a corporation is improperly accumulating profits.
b. 100,000 d. 45,000 Identify the exception:
a. The corporation is a mere holding company.
IMPROPERLY ACCUMULATED EARNINGS TAX b. The corporation is an investment company.
1. Tax Rate and Tax Base: 10% of Improperly c. The corporation permits its profits to accumulate
Accumulated Taxable Income beyond the reasonable needs of the business.
d. The corporation is a service enterprise.
2. Who are covered? Every domestic corporation
3. One of the following statements is WRONG. Identify.
formed or availed for the purpose of avoiding the
The improperly accumulated earnings tax imposed
imposition of income tax to its stockholders or
on corporations:
stockholders of other corporation by permitting its
profits to accumulate instead of being distributed. a. Is calculated to force corporations to pay out
dividends.
3. Presumption or evidence of avoiding the pay-
b. Is computed on improperly accumulated income
ment of income tax to stockholders:
over several years.
1. Corporation is a mere holding company.
c. Is based on the net income per books after income
2. Corporation is an investment company.
tax.
3. Profits of the corporation are permitted to
d. Is based on a statutory formula for improperly
accumulate beyond the reasonable needs of the
accumulated income.
business.
4. Closely-held corp. (family corp.) 4. All of the following, except one, are additions to taxable
4. Prima facie presumption of improper accu- income after income tax for purposes of computing
mulation of profits: improperly accumulated income
1. Withdrawals by stockholders disguised as loans
 a. Income subject to final taxes.
b. Reserved for reasonable needs of the business
c. Income excluded from gross income.
d. NOLCO deducted in computing taxable income.
Items 5 – 6:
The records of a closely-held domestic corporation show
the following data for 2018:
Gross income (gross of WT of 2%) P1,500,000
Business expenses 600,000
Gain on sale of business asset 60,000
Interest on deposit with BDO, net of tax 5,000
Sale of shares of stocks, not listed and traded:
Selling price 150,000
Cost 115,000
Dividends from domestic corporation 35,000
Dividends paid during the year 120,000
Reserved for building acquisition 300,000
In 2017, the corporation suffered an operating loss of
P130,000. This amount was carried forward and claimed
as deduction from gross income in 2018.
5. The income tax due in 2018 is:
a. P250,600 c. P219,000
b. P260,500 d. P249,000
6. The improperly accumulated earnings tax is:
a. P64,415 c. P32,275
b. P36,425 d. P36,075
7. A domestic corporation had the following data for 2018,
the accumulated earnings for which year the Bureau of
Internal Revenue considered to be improper:
Sales P6,000,000
Cost of sales 2,000,000
Business expenses 1,000,000
Interest on Philippine peso bank deposit 50,000
Capital gain on sale directly to buyer
of shares of domestic corp 120,000
Dividend income from domestic corp. 60,000
Dividend declared and paid during
the year 500,000
The improperly accumulated earnings tax is:
a. P180,200 c. P171,000
b. P181,300 d. P166,300