INCLUSIONS IN THE GROSS INCOME

“ Don’t waste your life in doubts and fears; spend yourself on the work
before you, well assured that the right performance for this hours duties
will the best preparation for the hours or ages that follow it. “
- Ralph Wald Emerson
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Multiple Choice: Choose the best possible answer.

1. It means wealth which flows into the taxpayer other than mere return of
capital and includes gains derived from the sale or other disposition of
capital assets.
a. Income c. Capital
b. Asset d. Fund

2. It means income (in the broad sense) excluding income which is by

statutory provisions or otherwise exempt from the tax imposed by law.
a. Gross income c. Net Assets
b. Net Income d. None of the above

3. It means gross income less statutory deductions.

a. Gross Income c. Net assets
b. Net income d. None of the above

4. The term means the pertinent items of gross income specified in the Tax
Code, less the deductions and/or personal and additional exemptions, if any,
authorized for such types of income by the Tax Code or other special laws.
a. Gross Income c. Net assets
b. Taxable Income d. none of the choices

5. It is fund or property existing at one distinct point of time.

a. Capital c. Revenue
b. Receipts d. Income

6. It has reference to all wealth that flows into the taxpayer which includes
return of capital.
a. Capital c. Revenue
b. Receipts d. Income

7. This term, as applied to taxation, refers to all funds or income derived

by the government whether from tax or other revenue.
a. Capital c. Revenue
b. Receipts d. Income

8. One of the following is not a distinct between capital and income.

a. Capital is fund, income is a flow.
b. Capital is wealth; income is the service of wealth.
c. Capital is a tree, income is the fruit.
d. Capital is to corporations, income is to individuals.

9. One of the following is not a requisite of a taxable income.

a. There must be gain.
b. The gain must be realized or received.
c. The gain must not be excluded by law from taxation.
d. The gain must be that of resident of non-resident citizen.

10. Which of the following statements is incorrect?

a. A mere increase in the value of the property is not income but merely an
unrealized increase in capital.
b. Gain may occur as a result of exchange of property, payment, assumptions,
reduction or cancellation of the taxpayer’s indebtedness (unless it amounts
to a gift) or other profit realized from the completion of a transaction.
c. If the taxpayer receives, through mistake, an amount in excess of the
amount agreed upon, the excess is not taxable income unless the duty to
return is not clear or disputed.
d. None of the choices.

11. This states that for income to exist, it is necessary that the capital be
separated from something of exchangeable value.
a. Separability or severance test of income.
b. Ability to pay theory
c. Benefits received theory
d. Situs of taxation

12. In general, this term means all remuneration for services performed by an
employee for his employer under an employer-employee relationship.
a. Dividend c. interest
b. Compensation d. Royalty

13. Which of the following statements is incorrect?

a. The name by which the remuneration for services is designated is
immaterial to constitute compensation income.
b. The basis upon which the remuneration is paid is immaterial in determining
whether the remuneration constitutes compensation.
c. Remuneration for services constitutes compensation even if the
relationship of employer and employee does not exist any longer at the time
when the payment is made between the person in whose employ the service had
been performed and the individual who performed them.
d. None of the choice.

14. Which of the following statements is incorrect?

a. If services are paid for in a medium other than money, they fair market
value of the thing taken in payment is the amount to be included as
compensation subject to withholding.
b. If the services are rendered at a stipulated price, in the absence of
evidence to the contrary, such price will be presumed to be the fair market
value of the remuneration received.
c. If a corporation transfers to its employees its own stock as remuneration
for services rendered by the employee, the amount of such remuneration is the
fair market value of the stock at the time the services were rendered.
d. None of the choices.

15. First statement: Compensation may be paid in money or in some medium

other than money, as for example, stocks bonds or other forms of property.
Second statement: Where compensation is paid in property other than
money, the employer shall make necessary arrangements to ensure that the
amount of the tax required to be withheld is available for the payment to the
commissioner.
a. Only the first statement is correct.
b. Only the second statement is correct.
c. Both statements are correct.
d. Bothe statement are incorrect.

16. Which of the following is not taxable?

a. Living quarters or meals furnished to an employee for the convenience of
the employer
b. Tips or gratuities paid directly to an employee by a customer of the
employer which are not accounted for by the employee to the employer.
c. Pensions, retirement and separation pay, in general
d. Fixed or variable transportation, representation and other allowances
which are received by a public officer or employee or officer or employee of
a private entity, in addition to the regular compensation fixed for his
position of office, in general.

17. Any amount paid specifically, either as advances or reimbursements for

travelling, representation and other bona fide ordinary and necessary
expenses incurred or reasonably expected to be incurred by the employee in
the performance of his duties are not compensation subject to withholding, if
which of the following conditions is satisfied?
I- It is for ordinary and necessary travelling and representation or
entertainment expenses paid or incurred by the employee in the pursuit of the
trade, business or profession.
II- The employee is required to account/liquidate for the foregoing expenses
in accordance with the specific requirements of substantiation for each
category of expenses pursuant to Sec. 34 of the code.

a. Neither I nor II c. I only

b. Bothe I and II d. II only

18. First statement: the excess of advances made over actual expenses shall
constitute taxable income if such amount is not returned to the employer.
Second statement: reasonable amount of reimbursements/advances for
travelling and entertainment expenses which are precomputed on a daily basis
and are paid to an employee while he is on an assignment or duty need not be
subject to the requirement of substantiation and to withholding.
a. only the first statement is correct.
b. only the second statement is correct
c. both statements are incorrect
d. both statements are correct

19. Promissory notes or other evidence of indebtedness received in payment

for services, and not merely as security for such payment, constitute income
to the amount of their:
a. face value c. fair market value
b. maturity value d. none of the choices

20. A taxpayer receiving a non-interest bearing note as compensation shall

treat as income the:
a. face value of the note at that time.
b. fair discounted value of the note at that time.
c. maturity value of the note at the time
d. fair market value of the note at the time.

21.First statement: In the case of manufacturing, merchandising, or mining

business, “gross income” means the total sales, less the cost of goods sold,
plus any income from investments and from incidental or outside operations or
sources.
Second statement: in determining the gross income of manufacturing,
merchandising, or mining business, subtractions should not be made for
depreciation, depletion, selling expenses or losses, or for items not
ordinarily used in computing the cost of good sold.
a. only the second statement is correct.
b. only the first statement is correct.
c. both statement are incorrect,.
d. both statement are correct.

23.which of the following methods may be used by farmers to determine their

gross income?
a. cash basis or receipts or disbursement basis in which no inventory is used
to determine profits.
b. accrual basis in which an inventory is used to determine profits.
c. crop basis which is used when the farmer is engaged in producing crops
which take more than a year to gather and disposed or from the time of
planting.
d. all of the choices.

24. First statement: Gain or loss from the sale of goodwill results only when
the business, or part of it, to which the goodwill attaches is sold in which
case the gain or loss will be determined by comparing the sale price with the
cost or other basis of the assets including goodwill.
Second statement: Income from expropriation (forced sale) is income from
sale or exchange any profit derived therefrom is, therefore, subject to
income tax.
a. Both statements are correct
b. Both statements are incorrect
c. Only the second statement is correct
d. Only the second statement is correct

25. In computing gain or loss from the sale or other disposition of property
acquired as gift or donation, the basis of cost shall be the:
a. fair market value, date of acquisition.
b. latest inventory value.
c. purchase price plus expenses of acquisition.
d. same as it would be in the hands of the donor.

26. In computing gain or loss from the sale or other disposition of property
acquired as inheritance, the basis of cost shall be the:
a. fair market value, date of acquisition/inheritance.
b. latest inventory value.
c. purchase price plus expenses of acquisition.
d. same as it would be in the hands of the decedent.

27. Which of the following is not income of the lessor under a lease
contract?
a. The consideration for the use of the property paid periodically by the
lessee to the lessor
b. Obligation of the lessor to third parties paid by the lessee
c. Advance rentals in the nature of prepaid rent
d. Amount received in the nature of security deposit

28. The lessor may report as income at the time when such buildings or
leasehold improvements are completed the fair market value of such buildings
or leasehold improvements subject to the lease.
a. Annual or spread-out method
b. Lump sum or outright method
c. Percentage of completion method
d. Completed contract method
29. The lessor may spread over the life of the lease the estimated
depreciated value of such buildings or improvements at the termination of the
lease and report as income for each year of the lease an aliquot thereof.
a. Annual or spread-out method
b. Lump sum or outright method
c. Percentage of completion method
d. Completed contract method

30. Mr. C. Conte bought a 2,000 square meter land at a cost of P500,000. He
leased the land to Mr. D. Damian at an annual rental of P40,000. The term of
the contract of lease was 15 years. The contract of lease provided that Mr.
Damian will construct a building on the land, which will belong to the lessor
at the end of the term of the lease or at the termination of the lease. The
building was constructed for a total cost of P400,000 and has an estimated
useful life of 20 years which was the basis of a straight-line method of
depreciation. The remaining term of the lease when the building was completed
was 14 years.
How much was the income from the lease contract in the year the improvement
was completed assuming Mr. Conte will report his income from leasehold
improvement using outright or lump sum method?
a. P160,000 c. P120,000
b. P114,290 d. P 48, 587

31. Using the same data in the preceding number, how much was the yearly
income assuming Mr. Conte will spread his income from leasehold improvement
over the term of the contract of lease?
a. P160,000 c. P120,000
b. P114,290 d. P 48,587

32. Using the same data in the preceding number, how much was the income of
Mr. Conte in the 12th year, assuming the contract of lease was terminated
after the 11th year or at the beginning of the 12th year due to the fault of
the lessee?
a. P160,000 c. P120,000
b. P114,290 d. P 48,587

33. Using the same data in preceding number, how much was the deductible loss
of the lessor assuming the leasehold improvement was destroyed at the
beginning of the 10th year of the lease contact and there was insurance
recovery of P30,000 and salvage value of P20,000?
a. P68,568 c. P18,568
b. P38,568 d. None

34. One of the following does not constitute gross income.

a. Income earned by corporate sinking fund
b. Amount received through a compromise agreement with the government for the
latter’s encroachment of a right to a portion a landed estate, insofar as
said amount exceeds the purchase price of the portion of the land
c. Income from expropriation (forced sale) of land
d. None of the choices

35. If an individual performs services for a creditor who in consideration

thereof cancels the debt, the cancellation of indebtedness may amount to a:
a. Gift. c. donation inter vivos.
b. capital contribution d. payment of income.
36. Which of the following statements is incorrect?
a. Gains, profits and income are to be included in the gross income for the
taxable year in which they are received by the taxpayer, unless they are
included when they accrue to him in accordance with approved method of
accounting followed by him.
b. If a person sues in one year a pecuniary claim or for property, and money
or property is recovered on a judgement therefore in a later year, income is
realized in that year, assuming the money or property would have been income
in the earlier year if then received.
c. Bad debits or accounts charged off because of the fact that they were
determined to be worthless, which are subsequently recovered, whether or not
be suit, constitute income for the year in which recovered, regardless of the
date when amounts were charged off.
d. None of the choices.

37. The recovery of the account previously written off would constitute
taxable income only if in the year recognition of being worthless, the write-
off resulted in a reduction of a taxable income.
a. Reciprocity rule c. Tax benefit rule
b. Equity of the incumbent rule d. Materiality rule

38. One of the following is considered an income for income taxation.

a. Advance in the value of the person or a corporation
b. Increase in book value of real property and other fixed assets of a
corporation as a result of their re-appraisal
c. Net increase in the value of livestock or increase of its inventory
d. Items of gross income which have been credited or set apart for the
taxpayer without restriction

39. Which of the following statements is incorrect?

a. A direct dividend is one where the paying corporation acknowledges that
the distribution is a dividend payment
b. An indirect dividend is a distribution of profits disguised as a payment
of services, properties, etc.
c. Dividend paid out of the income of the corporation earned before January
1, 1998 is not taxable to the receiving stockholders
d. A dividend paid in shares of stock of another corporation held as
investment is a stock dividend

40. Which of the following statements is incorrect?

a. A stock dividend constitutes income if it gives the shareholder an
interest different from that which his former stock represented.
b. When there is only one class of stock issued and outstanding at the time
of the stock dividend, the dividend will not result in a change in the
proportionate interests of the shareholders in the net assets of the
corporation, hence, the stock dividend is not taxable.
c. When a stockholder receives a stock dividend which is taxable income, the
measure of income is the par value of the shares of stock received.
d. A stock dividend represents the transfer of surplus to a capital account.