BALBES, BELLA RONAH P.

ACT183: INCOME TAXATION

PRELIM EXAM
S.Y 2020-2021

True or False

36. The proceeds of life insurance due to the death of an insured person shall be part of the gross income
of the recipient.

FALSE. Life insurance proceeds you receive as a beneficiary due to the death of

the insured person, aren't includable in gross income and you don't have to report them

39. The option to avail of optional standard deduction or itemized deduction could be opted for each
quarter.

FALSE. The option to avail of optional standard deduction in lieu of itemized deduction could
be opted for each quarter.

40. The actual rent income received by a lessor is not reportable as taxable because there is no actual
realization of income.

FALSE. Rent income received by a lessor is reportable as taxable even if there is no actual
realization of income. The lessor should report as taxable only on the rental payments that it is entitled to
receive for the year, as provided under the lease agreement.

41. If the debt is canceled due to services rendered by the debtor, the basis of tax is the value of the
service rendered.

FALSE. If forgiven or discharged, the basis of tax is the amount of the canceled debt.

42. As a rule, deduction means itemized deduction

TRUE.

45. Passive income tax earned outside the Philippines by a resident Filipino citizen that has been
subjected to foreign final tax shall not anymore be taxed in the Philippines.

FALSE. Passive income tax earned outside the Philippines by a resident Filipino citizen that has
been subjected to foreign final tax shall be taxed in the Philippines.

47. The 14th month pay is included in the P90,000 non-taxable 13th month pay and other benefits.

TRUE.

49. Fringe benefit tax is a final tax of the employer.

FALSE. Fringe benefit is a final tax on employee's income to be withheld by the employer

 MULTIPLE CHOICE
2. Jennie bought equipment under a two-year installment basis to be used in his office in the practice of
her profession. Jennie will pay P50,000 monthly for a period of twelve (12) months. for income tax
purposes, the P50,000 monthly payment shall be?
A. Treated as capital expenditure, hence not deductible

4. Which of the following is considered or construed as an example of "constructive receipt"?

A. Retirements benefits, pensions, gratuities
B. Fees paid to a public official
C. Deposits for rentals to answer for damages, restricted as to use
D. Interest coupons that have matured and are payable but have not been cashed

5. Mr. X is the product manager of Gentle Monster, Mr. X had a dinner with Ms. A, owner of a chain of
shades products, to convince the latter to carry Gentle Monster products. Ms. A agreed. After dinner,
X and A went in their separate ways. X decided to celebrate by going to a bar where he picked-up a
partner and consumed a bottle of liquor. He drove home and on his way, he sideswiped Delfin, a
pedestrian who suffered injuries as a result of the accident. Mr. x settled tge case extra-judicially by
paying Delfin amounting to P100,000 for actual damages (the money comes from Gentle Monster,
Inc.). Which of the following is correct?

C. The expenses incurred in having a dinner with Ms. A may be deducted from gross income
of Gentle Monster

6. Which of the following income is allowed to be reduced with itemized deductions?

A. Business Income

COMPUTATION
9. In 2018, a corporation granted the following benefits to a managerial employee:
Salary of household personnel, P12,000 per month
Salary of a personal driver, P10,000 per month
Homeowner's association dues, P4,000 annually. 
What is the ANNUAL fringe benefits tax?
(USE TWO DECIMAL PLACES. ROUND-OFF TO THE NEAREST HUNDREDTHS) 
Salary of Household personnel (12,000 x 12) 44,000.00
Salary of Personal Driver (10,000 x 12) 120,000.00
Homeowner's Association Dues 4,000.00
10. On Monetary Value 268,000.00 July 1,
2016, Divide 65% JK leased
his Grossed-up Monetary Value 412,307.69 vacant lot
for a period of
Fringe Benefit Tax Rate 35%
12 years to
LM Fringe Benefit Tax for the Year 144,307.69 at an
annual
rate of P2,400,000. It was also agreed that LM will pay the following in 2016:

P4,800,000 representing rental payment for 2 years.

 Security deposit of P2,400,000
Annual real property tax of P30,000

The lease contract provides, among others that LM will construct a 5-storey building for parking
purposes at a cost of P36,000,000. Ownership of the building shall belong to JK upon the expiration
of the lease contract. The building was completed on July 1, 2018 with an estimated useful life of 15
years.

Assuming JK will use the spread-out method in recognizing income from leasehold improvements,
how much is the total income from the lease for the year 2018?

Rental income received in 2018 2,400,000

Annual real property tax assumed by the lessee        30,000
Income from leasehold improvement:
Cost 36,000,000
x             5/15
Remaining value after lease term 12,000,000
Divided by: Rem, LT (shorter)                       10
Annual income from LI   1,200,000
x              6/12 
Income from LI    600,000

Total income of JK in 2018   3,030,000

11. On July 1, 2016, JK leased his vacant lot for a period of 12 years to LM at an annual rate of
P2,400,000. It was also agreed that LM will pay the following in 2016:

P4,800,000 representing rental payment for 2 years.

Security deposit of P2,400,000
Annual real property tax of P30,000

The lease contract provides, among others that LM will construct a 5-storey building for parking
purposes at a cost of P36,000,000. Ownership of the building shall belong to JK upon the expiration
of the lease contract. The building was completed on July 1, 2018 with an estimated useful life of 15
years.

How much should JK report as income in the year 2017? 

Annual Real Property Tax (Lessor’s Taxable Income) 30,000

12. Mandu Company paid the following taxes in 2018:

Income tax: P120,000
Excise tax: P150,000
Local business taxes: P100,000
Donor's tax: P60,000
Real estate tax: P70,000

The excise tax, real estate tax and P60,000 of the income tax were refunded in 2018. If the income of
Mandu in 2018 was P1,200,000, the taxable income for the year should be:

Income of Mandu- 2018 1,200,000.00

 Add: Excise Tax 150,000.00
Total 1,350,000.00
Less: Local Business Tax 100,000.00
Taxable Income- 2018 1,250,000.00

13. A domestic corporation has the following data on income and expenses:

Gross income from business, P6,200,000

Deductions including SSS and PhilHealth contributions of P150,000, P2,500,000
Contributions to the Government for priority project in education, P100,000
Contribution to a foreign private foundation, P100,000
Contribution to domestic charitable organization, P190,000
How much is the deductible charitable and other contributions?

Contributions to the Government for priority project in education,  P100,000

Contribution to a foreign private foundation,  P100,000
Contribution to domestic charitable organization, P190,000
Deductible Charitable Contributions P390,000

15. GY Corporation shows the following data for the taxable year:

Sales, P500,000
Interest income, net of 20% final tax, 24,000
Cost of Sales, 300,000
Salary expense, 120,000
Interest expense, 60,000
Rent expense, 24,000
Advertising expense, 6,000
Depreciation expense, 5,000
NOLCO, 50,000
What is the amount of itemized deduction that will be allowed by BIR as a deduction?
Interest Expense 60,000.00
Less:
Interest Income (24000/.80)
(9,900.00)
(30000x.33)
Deductible Interest 50,100.00
Add:
Salary Expenses 120,000.00
Advertising Expenses 6,000.00
Rent Expenses 24,000.00
Depreciation 5,000.00
TOTAL ITEMIZED DEDUCTION
205,100.00
ALLOWED
16. JK Company is engaged in the sale of goods with a net sales of P2,000,000. The actual entertainment,
amusement and recreation expenses for the taxable quarter totaled P20,000. For income tax purposes,
how much is the deductible entertainment, amusement, and recreation expenses?

Actual EARE 20,000.00

 Less : LIMIT (10,000.00)
Deductible EARE 10,000.00

17. ABC, Inc. purchased shares of stock of XYZ Corp for P60,00 and of JKL Co. for P30,000. At the end
of the taxable year, it was ascertained that its XYZ Corp. stock was worthless because of the
complete insolvency of the corporation, and its JKL Co. shares value had declined to P28,000. 

How much is the deductible loss of ABC, Inc.?

60,000 This is deductible Loss of ABC Inc. because it is ascertained that its Stock was worthless
and because of its complete insolvency, and its declined 28,000 JKL Share Value.

18. JK Corporation is engaged in the sale of goods and services with net sales/net revenue of P3,000,000
and P2,000,000, respectively. The actual EAR expense for the taxable year totaled to P30,000. How
much is the deductible EAR expense? 

GOODS
Actual:
3,000,000 / 5,000,000 x 18,00
30,000 0
15,00 LOWE 15,00
Limit: 3,000,000 x .05% 0 R 0
SERVIC
E
Actual:
2,000,000 / 5,000,000 x 12,00 LOWE 12,00
30,000 0 R 0
20,00
Limit: 2,000,000 x 1% 0  
27,00
0

19. JK was sent to France for a trip last May 2018, and incurred the following expenses for 6 days. ($1 =
P45)

Hotel Accommodation, $3600

Business-class tickets (Ph-Paris), $2,000
First-class ticket (Paris-Ph), $2,800
In-land travel expenses, $1,000

From the following, how much is the Monetary Value?

First Class Ticket (Paris PH)

$2,800 x 30% = $840 x 45 = 37,800.00

20. Stark Corp. made the following contributions during 2019:

Contributions to the Government-non priority activities               P60,000

Contributions to foreign charitable institutions                              40,000
Contributions to accredited NGO                                                    30,000
 Contributions to foreign organizations with treaty                         100,000
Stark Corp has net income before contribution expense of P1,000,000.

What is the deductible contribution expense?

FULL DEDUCTIBLE
Contributions to Foreign Charitable Institutions: 40,000.00
Contributions to accredited NGO 30,000.00
Contributions to Foreign Organizations w/ treaty 100,000.00 170,000.00

SUBJECTED TO LIMIT

Contributions to the Government-non priority activities

Actual 60,000.00
Limit (Which is Lower) 50,000.00 50,000.00
Deductible Contribution Expense 220,000.00

21. A farmer under accrual basis has the following data for the year.

Beginning inventory:
Livestock and farm products raised in the farm P60, 000
Livestock and farm products purchased the previous year, P30, 000

Ending inventory:
Livestock and farm products raised in the farm, P100,000
Livestock and farm products purchased, P80,000
Sales of livestock and farm products raised and purchased, P120,000
Cost of livestock and farm products purchased during the year, P100,000
Miscellaneous receipts:
Gain on sale of work, breeding, or dairy animals, P30,000
Gain on sale of farm equipment and machinery, P10,000
Hire of tractor, P20,000
Hire of teams like hire of carabaos or horses, P6,000
Others, P4,000
 
How much is his gross income?
Sales of livestock and farm products raised and purchased 120,000.00
Gain on sale of work, breeding, or dairy animals 30,000.00
Gain on sale of farm equipment and machinery 10,000.00
Hire of tractor 20,000.00
Hire of teams like hire of carabaos or horses 6,000.00
Others 4,000.00
TOTAL 190,000.00
Cost of livestock and farm products purchased during the year (100,000.00) (100,000.00)
TOTAL 90,000.00
ADD: Livestock and farm products raised in the farm 100,000.00
 Livestock and farm products purchased 80,000.00
TOTAL 270,000.00
LESS: Beginning Inventory
Livestock and farm products raised in the farm 60,000.00
Livestock and farm products purchased the previous year 30,000.00 (90,000.00)
GROSS INCOME 180,000.00

23. Mr. GY, a gambling addict, won P90,000 from cockfighting during the year. However, he also
suffered losses from other gambling activities amounting to P200,000. How much is the deductible
loss?

90,000 is the deductible loss. Because losses are up to the extent of gains

24. ABC Company designated a residential property for the use of its managerial employee. The lot has a
zonal value of P3,500,000 and P2,000,000 value per tax declaration. The assessed value on the
improvement on the lot was P1,500,000. The lot was purchased at a cost of P2,000,000. 

Compute the monetary value to be reported in the QUARTERLY fringe benefits tax return.

Zonal Value 3,500,000 (higher)

Quarterly Benefit (3.5M * 5%) = 175,000
Monetary Value of Benefit (3.5M * 5% * 50%) = 87,500

26. The following was taken from the income statement of a domestic corporation for the taxable year
2020:

Gross profit on sales       800,000

Less:
Deductible expense         (440,000)
Provision for Bad Debts   (80,000)

Net income before tax     280,000

Additional information:
Accounts written-off during the year and charged to allowance for bad debts amounted to P50,000
Recoveries on accounts receivable previously written off in 2018 and credited to allowance for bad
debts:
                         Allowed as deduction by the BIR: P30,000
                         Disallowed by the BIR as deduction: P20,000
The taxable income of the corporation in 2020 should be?

Gross Profit 800,000

Less: Deductible Expense (440,000)
Net Income before Bad debts 360,000
Less: Bad debts (written-off) (50,000)
Net Income after Bad debts 310,000
Add: Recovery allowed by BIR 30,000
Taxable Income 340,000
29. Jennie Corporation has the following data for the years 2010:

Gross Income P 240,000

Business expenses       180,000
Capital loss   50,000
Capital gain  30,000

How much is the corporate income tax of Jennie Corporation?

Gross income 240,000

Business Expense (180,000)
Total   60,000
Tax rate       30% 
Income tax             18,000

30. On January 1, 2019, Jennie leased her land to Kim. The terms of the contract is for 15 years and the
rental fee is P360,000 a year. The contract provides that Kim will construct a building and at the end
of the term of the contract, the ownership of the building will be transferred to Jennie. The building
has a useful life of 30 years and was completed on January 1, 2020, at a cost of P6,000,000.

Assume that Jennie will spread his income over the term of the contract of lease. For income tax
purposes, Jennie's 2020 income is?

Rental Fee 360,000.00

Income from Improvement: 6,000,000.00
Multiplied By 8/15
Divide by 14 228,571.43
TOTAL ANNUAL INCOME 588,571.43

31. On July 1, 2016, JK leased his vacant lot for a period of 12 years to LM at an annual rate of
P2,400,000. It was also agreed that LM will pay the following in 2016:

P4,800,000 representing rental payment for 2 years.

Security deposit of P2,400,000
Annual real property tax of P30,000

The lease contract provides, among others that LM will construct a 5-storey building for parking
purposes at a cost of P36,000,000. Ownership of the building shall belong to JK upon the expiration
of the lease contract. The building was completed on July 1, 2018 with an estimated useful life of 15
years.

JK shall report total income from the lease in 2016 at?

Rental Fee (2 Years) (2,400,000 x 2) 4,800,000.00

Annual Real Property Tax 30,000.00
TOTAL INCOME 4,830,000.00

32. Mr. X reimbursed the following expense liquidation of its managerial employee:
Purchase of o ffice supplies, P20,000
Personal meals and groceries, P15,000
Gasoline for transportation (1/2 for business), P8,000
Office electricity, water, and telephone bills, P12,000

How much is the monetary value of fringe benefits?

Personal meals and groceries P 15,000

Gasoline for transportation (8,000 * .50) P 4,000
Monetary Value of Fringe Benefits P 19,000