Problem 1 True or False

Write True if the statement is correct or False if the statement is incorrect.

1. True Gross income includes all income from whatever sources whether
legal or illegal source.

2. True There is compensation income realized by an employee when his

employer cancelled the employee’s indebtedness in lieu of wages
payable to him.

3. True When a minimum wage earner also derives from self-employment,

his minimum wage earned becomes taxable.

4. False Cost of living allowance is not part of taxable compensation

income because the amount is very minimal.

5. True Any amount of separation pay received by an employee for any

cause beyond his control is tax-exempt.

6. False Baptismal fees paid to religious officers are not subject to income
tax because of the separation of church and state.

7. True Under the employee stock option plan, the difference between the
fair market value at grant option and the option price is compensation
income of the beneficiary.

8. True The cancellation of a taxpayer’s indebtedness is an income unless

such cancellation is intended as a gift.

9. False If the debt is cancelled due to services rendered by the debtor, the
basis of tax is the value of service rendered.

10.False Transportation allowance pre-computed on a daily basis is not

subject to substantiation but subject to tax.
 11.False The excess of actual expenses over advances made shall constitute
taxable income of the concerned employee if such amount is not
reimbursed to the employee.

12.True Remuneration for casual labor not in the course of an employer’s

trade or business is not considered compensation.

13.False In the sale of service, gross income under SEC 27 of NIRC, means
gross receipts less sales returns, allowances, discount and cost of
service.

14.True For MCIT computation, cost of service includes but not limited to
cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies.

15.True Rental income includes obligations assumed by the lessee in behalf

of the lessor.

Problem 2 True or False

Write True if the statement is correct or False if the statement is incorrect.

1. False Tips are not taxable.

2. True A fee received by a religious worker for service rendered is a

taxable compensation.

3. False I f the advanced payment is received from a customer to deliver a

commodity, such receipts should be reported as income when received
by the vendor.

4. False If the advanced rental is received as a security deposit, without

restriction, then such amount should be excluded in the determination
of rental income.
5. False The amount of bad debts which resulted to reduction of taxable
income will become a taxable income in the subsequent year when such
is eventually recovered.

6. True In general, illegally obtained income is taxable.

7. False Estimated bad debts expense, which eventually adjusted to zero,

becomes income in the year of adjustment.

8. True The journal entry under GAAP rule, debiting allowance and
crediting accounts receivable, is the item of bad debts expense that is
allowed as deduction under Tax Rule.

9. False The tax benefit rule provides reporting option to the taxpayer for
the recovery of bad debts preciously written off.

10.False All amounts received from life insurance annuity are taxable.

11.True Income obtained through illegal means is included in the

wrongdoer’s gross income even though he is obligated to return it when
discovered.

12.False Income that is not realized is taxable.

13.True Actual repayment of embezzled fund by the wrongdoer will give

rise to reduction of his gross income.

14.False As a rule, income obtained illegally is not taxable if the wrongdoer

is obligated to return it when discovered.

15. True Income received due to error on the part of the payor is not to be
reported as part of the gross income of the payee.
Problem 3 True or False
Write True if the statement is correct or False if the statement is incorrect.

1. False Monetized value vacation and sick leave credits of private

employees are not subject to tax.

2. True The entire amount of P30,000 fourteen month pay is non-taxable .

3. True De minimis benefits are non-taxable.

4. False The proceeds of life insurance due to death of an insured person

shall be part of the gross income of the recipient.

5. True Subsidized board and lodging furnished by an employer is not

taxable.

6. True Dividends received by a cooperative from a domestic corporation

are tax-exempt.

7. False When stock dividends received are of a different class from shares
previously acquired, the stock dividends are taxable income.

8. True As a rule, excess amount of liquidating dividends over cost of

shares surrendered is taxable.

9. True The distribution of liquidating dividends is considered as sale of

stock.

10.True Dividend is tax exempt of received by a resident foreign

corporation from a domestic corporation.

11.False Winning are subject to a final tax of 20%, except when the amount
is P10,000 or below.

12.False All damages recoveries are not taxable.

 13. True Tax refunds are subject to final tax if the related tax were allowed
as deduction from previous year’s gross income.

14.False Prizes are subject to a final tax of 20% regardless of amount.

15.True The amount stolen by the cashier is subject a taxable income of the
cashier.

Problem 4 True or False

Write True if the statement is correct or False if the statement is incorrect.

1. True A liquidating dividend is given by a corporation as a result of

complete liquidation or dissolution.
2. True Regular allowances are generally taxable.
3. False The income from practice of profession should be classified as
compensation income.
4. True The monetary value of availed vacation and sick leaves is taxable.
5. True Gain from redemption of shares in mutual fund is exempt from
income tax.
6. False All BIR-approved retirement pays are exempt from income tax.
7. True Tips are taxable.
8. False Pre-computed daily transportation allowance is taxable.
9. False The MWE’s basic salary is exempt from tax but his overtime pay in
excess of his basic daily wage is taxable.
10.True If a corporation forgives the debt of its stockholder, the transaction
is considered payment of income.
11.True Gross income includes other income from other resources.
12. False To compute for the gross income of banks, the interest expense is
treated as operating expense.
13.False The advanced rent income received by a lessor is not reportable
because there is no actual realization of income.
14.False Passive income 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.
15.True Interest income earned by the banks from its borrowers is subject
to final tax of 20%.
Problem 5 Multiple Choice
Select the letter that contains the best answer.

1. Which of the following is taxable with income tax at its gross amount when
earned within the Philippines?

a. Professional fee
b. Compensation income
c. Business income
d. Royalty income

2. Which of the following income is/are earned through employee-employer

relationship?

i. Professional fee
ii. Wages
iii. Pension pay
iv. Capital gain

Choices:
a. I, ii, iii only
b. I and ii only
c. Ii and iii only
d. Ii only

3. Statement 1: Remuneration for casual labor not in the course of an

employer’s trade or business is not considered as taxable compensation
income.
Statement 2: Additional benefits received by the employee for the
convenience of the employer are not taxable income of the employee.

a. Only statement 1 is correct.

b. Only statement 2 is correct.
c. Both statements are correct
d. Both statements are incorrect.
4. Which of the following is a taxable compensation income?

a. Separation pay due to resignation.

b. Retirement pay under BIR approved retirement plan.
c. Separation pay due to disability.
d. Terminal pay by fact of death.

5. Which of the following is a taxable compensation income?

a. Professional fee, net of creditable withholding tax.

b. Separation pay due to closure of the employer’s business.
c. Terminal pay inclusive of P15,000 13th month pay.
d. Separation pay due to early retirement.

6. Statement 1: All vacation and sick leave with pay are taxable compensation
income.
Statement 2: All unused vacation leave converted into cash are taxable.

a. Only statement 1 is correct.

b. Only statement 2 is correct.
c. Both statements are correct
d. Both statements are incorrect

7. Which of the following is considered a taxable compensation income?

a. Free housing given to employee.

b. Social Security System Benefits.
c. Retirement pay under a duly BIR approved benefit plan.
d. Retrenchment pay.

8. Which of the following is not taxable?

a. P2,500 for 10 days sick leaves actually taken.

b. P1,250 for 5 days unused vacation leave converted into cash.
c. P1,000 for unused vacation leave received as part of separation pay due
to voluntary resignation.
 d. P500 availed vacation leave.

9. Which of the following is a taxable compensation income?

a. Cost of living allowances.

b. De minimis benefits.
c. Retirement benefit under BIR approved retirement plan.
d. Retrenchment pay.

10.Compensation income is earned when an employer-employee relationship

exists. Which of the following does not represent compensation income?

a. Honorarium of the company lawyer as a speaker in company sponsored

seminar.
b. Retainer’s fee of a bookkeeper.
c. Emergency pay.
d. Sick leave with pay.

Problem 6 Multiple Choice

Select the letter that contains the best answer.

1. Transportation allowance is non-taxable if

i. Pre-computed on a daily basis.
ii. Paid to employee while on duty.
iii. Received by employee under employer’s benefit rule.

a. i only
b. i and ii
c. ii and iii
d. I, ii, and iii

2. Which of the following is not a compensation income?

a. Retirement pay.
 b. Professional fees.
c. Allowances.
d. Wages.

3. A stock dividend received in 200x from a domestic corporation by a non-

resident individual not doing business in the Philippines is

a. Subject to 10% final tax.

b. Subject to 25% tax.
c. Subject to 20% tax.
d. Not subject to tax.

4. Which of the following will result to earning of income by the debtor?

a. Cancellation of existing payables without any financial consideration.

b. Cancellation of existing payables for services rendered to creditor.
c. Cancellation of existing payables to offset the equivalent amount of
collectible.
d. Cancellation of existing payable due to bankruptcy of the debtor.

5. Which of the following is income recipient?

a. Stock option.
b. Stock dividend.
c. Pre-emptive stock right.
d. Stock warrant.

6. Which of the following is/are not taxable benefits of employee?

i. Lodging served within the employer’s premises and accepted by

the employee as a condition of employment.
ii. Living quarter furnished to the employee for the convenience of
the employer.
iii. Living quarter furnished outside the employer’s premises.

Choices:
a. i only
 b. i and ii only
c. ii and iii only
d. ii only

7. Statement 1: Remuneration for casual labor not in the normal course of

business is not considered compensation.
Statement 2: Remuneration for casual labor performed for corporation is
considered compensation.

a. Only statement 1 is correct.

b. Only statement 2 is correct.
c. Both statements are correct.
d. Both statements are incorrect.

8. Property dividend received by resident citizens from domestic corporation

is taxable at

a. Fair value of the property at the date of declaration.

b. Fair value of the property at the date of settlement.
c. Cost of the property at the date of declaration.
d. Cost of the property at the date of settlement.

9. Cost of services may be defined as

a. Cost of services to provide services.

b. Cost of facilities directly utilized to provide services.
c. All direct costs and direct expenses necessary to provide services.
d. All cost involved in providing services.

10.The following are related items to the operation of a single proprietorship

business:
i. Purchase of goods for sale.
ii. Freight in of goods purchased.
iii. Sale of goods.
iv. Freight out of goods sold.
v. Unsold goods at the end of the period.
 Which of the above items are elements of cost of sales?
a. i, ii, iii, iv and v
b. i, ii, iv and v only
c. i, ii, and iv only
d. i, ii, and v only

Problem 7 Multiple Choice

Select the letter that contains the best answer.

1. Which of the following tax refunds, which were incurred in the conduct of
business is taxable income of recipient?

a. Donor’s tax
b. Philippine income tax
c. Vat
d. Documentary stamp tax

2. Statement 1: Income that is not realized is not taxable, but illegal income is
taxable.
Statement 2: Income received under a mistake of fact or law is to be
included as part of the gross taxable income.

a. Only statement 1 is correct.

b. Only statement 2 is correct.
c. Both statements are correct.
d. Both statements are incorrect.

3. All of the following are income within, except.

a. Dividends declared by the domestic corporation.

b. Salaries earned by Filipino overseas contract workers.
c. Interest on bonds issued by domestic corporation.
d. Income from business located in the Philippines.

4. What is the final tax rate applicable to interest income earned from a
regular savings deposit?
 a. 5%
b. 10%
c. 20%
d. 25%

5. Mrs.GemmarieParong is a mining operator. Her mineral lands are not

covered by any lease contract. The tax Mrs.Parong has to pay based on the
actual market value of the gross output or mineral products extracted is?
a. Excise tax
b. Royalties
c. Rental
d. Ad-valorem tax

6. Which of the following is not taxable income?

a. Bad debts previously deducted as item of expense and partially

recovered subsequently.
b. Tax expense previously disallowed as deduction from taxable income,
fully refunded subsequently.
c. Income from gambling.
d. Income from usurious financing.

7. Insurance premium paid by employer in favour of the insured employee

and designate the business of the employer as the beneficiary. Which of
the following statements is/are correct?

Statement 1: The payment of insurance premium is taxable income of the

employer.
Statement 2: The payment of insurance premium is deductible expense of
the employer.

a. Only statement 1 is correct.

b. Only statement 2 is correct.
c. Both statements are correct.
d. Both statements are incorrect.
8. Statement 1: Property dividends received by individual from domestic
corporation are subject to final withholding tax.
Statement 2: The payment of insurance premium is deductible expense of
the employer.

a. Only statement 1 is correct.

b. Only statement 2 is correct.
c. Both statements are correct.
d. Both statements are incorrect.

9. Which of the following is subject to 10% final tax?

a. Interest income from savings account.

b. Royalty income from franchise.
c. Royalty income from patent.
d. Royalty income from literary works.

10.Which of the following dividends are subject to income tax?

a. Received by domestic corporation from another domestic corporation.

b. Received by a resident corporation from a domestic corporation.
c. Received by domestic from non-resident foreign corporation.
d. Received by non-resident foreign corporation from another non-
resident foreign corporation.