Imus Institute of Science & Technology

College of Accountancy

Income Taxation
Preliminary Examination
2nd Semester 2021 to 2022
Faculty: Hernando D. Valmores, Jr.

Name of Student: ____________________________________OR/Permit No.: ___________

I.Multiple Choice: Use Answer Sheet. Submit to: hdvalmoresjr@gmail.com

1. Which of the following describes the characteristics of tax?

a. It is limited in amount.
b. It is generally assignable.
c. It is generally based on contract.
d. It is generally payable in money.

2. Which statement refers to police power as distinguished from taxation?

a. The amount imposed has no limit.
b. It involves the taking of property, either real or personal, by the government.
c. The amount imposed depends on whether the activity is useful or not.
d. It can only be imposed on specific property or properties.

3. The following are the characteristics of the state’s power to tax, except:
a. It is based on the ability to pay.
b. It is inherent in sovereignty.
c. It is legislative in character.
d. It is subject to constitutional and inherent limitations.

4. When tax is classified according to graduation of rate, value-added tax will fall under the
classification of:
a. Graduated
b. Proportional
c. Regressive
d. Progressive

5. Which of the following statements distinguishes tax from license fee?

a. A regulatory measure.
b. Limited to cover cost of regulation.
c. Imposed in the exercise of police power
d. Non-payment does not necessary render the business illegal.

6. Which of the following is not a purpose of taxation?

a. To reduce inequality of wealth.
b. To expropriate private property for the promotion of general welfare.
c. As protective tariff on imported goods, to protect local products against foreign competition.
d. To encourage the growth of home industries through the proper use of tax exemptions and tax
incentives.

7. Statement 1: One of the characteristics of internal revenue taxes is that they are generally
prospective in application.
Statement 2: The internal revenue laws are penal and criminal in nature.
a. Only statement 1 is correct.
b. Only statement 2 is correct.
c. Both statements are correct.
d. Neither statements is correct.

8. The three inherent powers of the state-taxation power, police power and power of eminent
domain-are similar as expressed in the following statements, except:
a. The three powers are legislative in character.
b. The three powers affect all persons or the public.
c. The three powers interfere with private rights and property.
d. The three powers are necessary attributes of sovereignty.
9. The following statements are correct, except:
a. The provisions of taxation in the Philippine Constitution are grants of power and not
limitations on taxing powers.
b. Taxes may be imposed to provide disincentives to certain activities within the State.
c. Although the Constitution does not expressly provide it, the State can have the power of
taxation.
d. The State can tax anything at any time in exercising the power of taxation.

10. Statement 1: The power of taxation is inherent in a sovereignty being essential to the existence of
every government. Hence, even if not mentioned in the Constitution, the State can still exercise
this power.
Statement 2: Taxation is essentially a legislative function. Even in the absence of any
constitutional provision, taxation power falls to Congress as part of its general lawmaking power.
a. Only statement 1 is correct.
b. Only statement 2 is correct.
c. Both statements are correct.
d. Neither statement is correct.

11. Banks are authorized by the government to collect taxes. This practice highlights the principle of:
a. Administrative feasibility
b. Fiscal adequacy
c. Privity of relationship
d. Theoretical justice

12. When both the liability for the payment of tax as well as the burden of tax falls on the same
person, the tax is classified as:
a. Personal tax
b. Property tax
c. Direct tax
d. Indirect tax

13. The following elements should be present in double taxation, except:

a. Both taxes are imposed for the same purpose.
b. Both taxes are imposed in the same year.
c. Both taxes are imposed upon the same person.
d. Both taxes are imposed by the same taxing authority.

14. The following are similarities of the inherent power of taxation, eminent domain, and police
power, except one:
a. Are necessary attributes of sovereignty.
b. Interfere with private rights and property.
c. Affect all persons of the public.
d. Are legislative in implementation.

15. Which statement is correct? A revenue regulation, as a source of tax law, is:
a. Promulgated by the Bureau of Internal Revenue.
b. Promulgated by the Department of Justice.
c. Promulgated by the Department of Finance upon the recommendation of the Bureau of
Internal Revenue.
d. An interpretation of the revenue law by the Bureau of Internal Revenue.

16. A tax on business is:

a. Direct tax
b. Indirect tax
c. Property tax
d. None of the above

17. Which statement is wrong?

a. A tax is a demand of sovereignty.
b. A toll is a demand of ownership.
c. A special assessment is a tax.
d. Customs duty is a tax
18. There can be no tax unless there is a law imposing tax is consistent with the doctrine or principle
of:
a. Uniformity in taxation.
b. Due process of law.
c. Non-delegation of the power of tax.
d. The power of taxation is very broad and the only limitation is the sense of responsibility of the
members of the legislature to their constituents.

19. Which of the following statements distinguishes police power from the power of eminent
domain?
a. Property of individual or entity is taken by the government for public purpose.
b. The owner of the property received just compensation.
c. May be granted or exercised by public utility company.
d. Superior to the impairment clause of the Constitution.

20. Tax of a fixed proportion of the value of the property with respect to which the tax is assessed
and that requires the intervention of assessors or appraisers to estimate the value of such property
before the amount due from each taxpayer can be determined is called:
a. Capitation
b. Specific
c. Ad valorem
d. Regulatory or special

21. Which of the following sales is allowed to be reported under installment reporting of income?
a. Regular installment sale of personal property.
b. Casual sale of personal property with initial payment of 25% and below of the selling price.
c. Sale of real property with initial payment of 25% of the selling price.
d. All of the above

22. The records of Imus Trading for year 2015 show the following:
Asset, 1/1/2015- P400,000 and 12/31/2015- P300,000
Liabilities, 1/1/2015- P150,000 & 12/31/2015- P50,000

During the year, the owner made a total withdrawal from the business amounted to P245,000.
How much is the reportable income (loss) of Imus Trading in 2015?
a. P245,000 b. P100,000 c. P-0- d. (P100,000)

23. The single proprietorship reported the following changes during the year:
Increases in total assets, P250,000
Decreases in total liabilities, P160,000
Additional investment to the business, P50,000
Drawings during the year, P20,000

The business income for the year is:

a. P60,000 b. P380,000 c. P430,000 d. P450,000

24. Atty. Jimenez received a second-hand car from his employer, TA Law Office, for successfully
defending a criminal case. The car has a cost of P400,000 and its accumulated depreciation
amounts to P300,000. The prevailing market value of the car of the same model is P120,000. The
new model is P500,000.
How much is the reportable income of Atty. Jimenez?
a. P100,000 b. P120,000 c. P400,000 c. P500,000

25. Art, a single proprietor engaged in service business reported the following business income and
expenses:
Service income, P500,000
Collections during the year, P490,000
Expenses incurred during the year, P150,000
Expenses paid during the year, P200,000

How much is the net income from business before personal exemption?
a. P350,000 b. P340,000 c. P300,000 d. P290,000

26. In March 1, 2015, Xavier Corporation reported the following business income and expenses:
Sales, P1,000,000
Cost of sales, P600,000
Operating expenses, P200,000
Gain from sale of old furniture, P20,000
 If 20% of operating expenses of Xavier is prepaid expenses, how much is the taxable income?
a. P260,000 b. P240,000 c. P220,000 d. P200,000

27. Statement 1: Gain on sale of long-term investments with maturity of 5 years or less is taxable.
Statement 2: Gain on sale of long-term investments with maturity of more than 5 years is not
taxable.
a. Both statements are correct.
b. Both statements are incorrect.
c. Only statement 1 is correct.
d. Only statement 2 is correct.

28. Leasehold improvements had a cost of P4,000,000 to the lessee, with a useful life of 40 years.
The remaining term of the lease is 25 years. At the beginning of the 21 st year of improvements,
the lessor took possession of improvements when the fair market value thereof was P2,500,000. If
annual method of reporting income was adopted for the leasehold improvements, his income in
the 21st year is:
a. P2,500,000 b. P500,000 c. P1,200,000 d. P1,300,000

29. Mr. Conrado Cruz received a donation of property with a fair market value of P190,000. It was
acquired by the donor at a cost of P170,000. Mr. Cruz sold the property for P300,000. The gain
on the sale is:
a. P110,000 b. P130,000 c. P300,000 d. P-0-

30. The deferred payment method of reporting income on a deferred payment sale is available to
taxpayer if, the initial payments:
a. Exceed 25% of the selling price.
b. Do not exceed 25% of the selling price.
c. Do not exceed 25% of the contract price.
d. Regardless of the ratio of initial payments to the selling price.

31. Which among the following fringe benefits is taxable?

a. Those benefits which are given to rank and file employees.
b. Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans.
c. Benefits given to supervisory employees under a collective bargaining agreement.
d. De minimis benefits.

32. Statement 1: Monetized unused vacation leave credits not exceeding 10 days is an exempt de
minimis benefit for government employees.
Statement 2: Daily meal allowance for overtime work not exceeding 25% of the basic minimum
wage is exempt from benefit.
a. Both statements are correct.
b. Both statements are incorrect.
c. Only statement 1 is correct.
d. Only statement 2 is correct.

33. Statement 1: Flowers, fruits and books or other similar token items given to employees under
certain circumstances are exempt de minimis benefits.
Statement 2: Gifts given during Christmas and major anniversary for P5,000 each celebration per
employee per annum is an exempt de minimis benefit?
a. Both statements are correct.
b. Both statements are incorrect.
c. Only statement 1 is correct.
d. Only statement 2 is correct.

34. In case of foreign travel of employees for the purpose of attending business meeting or
conventions:
Statement 1: Such travel expenses shall not be treated as taxable fringe benefits regardless of its
amount.
Statement 2: The cost of economy and business class airplane ticket shall not be subject to the
fringe benefit tax, however, 30% of the cost of first class airplane ticket shall be subject to the
fringe benefit tax.
a. Both statements are correct.
b. Both statements are incorrect.
c. Only statement 1 is correct.
d. Only statement 2 is correct.
35. The term “initial payment” on sale of real property classified as capital assets under the
installment basis shall include the following items, except:
a. Installment payment made during the year of sale.
b. Down-payment during the year of sale.
c. Mortgage assumed by the buyer.
d. Excess of mortgage assumed by the buyer over the cost to the seller.

36. In computing the amount of capital gain tax under installment basis the term “contract price” may
refer to the following, except:
a. Gross selling price.
b. Gross selling price minus mortgage assumed by the buyer.
c. Gross selling price plus the excess of mortgage assumed over the cost to the seller.
d. Gross selling price minus mortgage assumed by the buyer plus the excess of the mortgage
assumed over the cost to the seller, if any.

37. The following are not subject to fringe benefits tax, except:
a. Holiday and vacation expense of a rank and file employee.
b. Food allowance for the benefit of the employer.
c. Housing necessary for the business of the employer.
d. Household personnel provided to supervisor.

38. Statement 1: Fringe benefits tax is a final tax on the income of the employee but withheld and
paid by the employer.
Statement 2: Fringe benefits tax is a final tax on the employer and paid by the employer on a
quarterly basis.
a. Only statement 1 is correct.
b. Only statement 2 is correct.
c. Both statements are correct.
d. Both statements are incorrect.

39. Statement 1: Fringe benefits tax is a final income tax due from the employee who earned the
income.
Statement 2: The person liable for the fringe benefits tax is the employer, whether an individual,
the government, a professional partnership or a taxable or non-taxable corporation.
a. Only statement 1 is correct.
b. Only statement 2 is correct.
c. Both statements are correct.
d. Both statements are incorrect.

40. The following statements are correct, except:

a. Mr. Ochoa, a self-employed individual, bought vehicle in the name of his supervisor. He is
liable to pay the fringe benefit tax and not the employee.
b. Lead and Associates, a general professional partnership, paid the personal expenses of the
manager. The general professional partnership is subject to the imposition of fringe benefit
tax.
c. The city government of Davao bought a housing unit in the name of its administrative
personnel holding managerial position. The employer is held liable to pay the fringe benefit
tax.
d. Prime Company, is a tax-exempt corporation, it provided holiday and vacation expenses to
the manager. The company, as tax-exempt entity, is not subject to fringe benefit tax.

41. How much is the allowable deduction from business income of a domestic corporation which
granted and paid P340,000 fringe benefits to its key officers in 2019?
a. P523,077 b. P183,077 c. P340,000 d. P-0-

42. In the year, Miami Corporation gave the following fringe benefits to its employees:
To managerial employees -P1,020,000
To rank and file employees -P5,000,000

The allowable deduction from the gross income of the corporation for fringe benefits is:
a. P2,000,000 b. P1,569,231 c. P6,500,000 d. P6,569,231

43. Reflected in the books of accounts is a fringe benefit expense (of which P100,000 was to rank-
and-file employees) of P304,000. How much is the fringe benefit tax?
a. P71,400 b. P106,400 c. P35,000 d. P109,846
44. Statement 1: The value of fringe benefits is allowable deductions from the gross income of the
employer.
Statement 2: The fringe benefits tax is a creditable tax against the income tax 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.

45. In 2019, Landoy Company provided the following benefits to its Visayas and Mindanao area
managers:
Area manager of Visayas-Residential property, owned by the company and assigned to the
manager, acquired on cash basis for P8,850,000. The FMV of the property is P9,520,000.
Area manager of Mindanao-Residential housing unit acquired on installment basis for the use of
the manager. The property was acquired for P6,800,000.
The total fringe benefit tax in 2019 would be:
a. P128,154 b. P91,538 c. P142,800 d. P219,692

46. When a housing unit provided by the employer is being leased, the monetary value is equal to:
a. Lease payment multiplied by 50%.
b. Fair market value multiplied by 50%.
c. Fair market value or zonal value, whichever is higher multiplied by 50%.
d. Lease payment or fair market value, whichever is higher, multiplied by 5% and 50%.

47. The monetary value of a residential property owned by the employer and being assigned for the
use of the employee is equal to the:
a. Fair market value multiplied by 50%.
b. Book value multiplied by 5% and 50%.
c. 50% of the 5% of the fair market value.
d. 5% of the fair market value or zonal value, whichever is higher, multiplied by 50%.

48. The actual value of a motor vehicle acquired on installment basis by the employer in the name of
the employee is equal to:
a. The cash price of the motor vehicle.
b. The sum of the down payment and installment payment.
c. The sum of down payment, installment payment, and interest thereon.
d. The acquisition cost divided by five years.

49. The monetary value of a fleet of vehicles owned by the employer and used by employees for
business and personal purposes is equal to:
a. The acquisition cost divided by five years.
b. The fair market value or cost, whichever is higher, divided by five years.
c. 50% of the acquisition cost divided by five years.
d. 50% of the acquisition or fair market value, whichever is higher, divided by five years.

50. The manager of Cream Company received the following during 2019:
Annual salary -P6,000,000
Toyota Sedan purchased in the name of the manager - 1,020,000
Rice allowance - 153,200
Medical allowance - 101,800

The total fringe benefits expense of Cream Company is:

a. P1,020,000 b. P1,241,000 c. P1,569,231 d. P1,909,231

51. Using data of item no. 50, the fringe benefits tax is:
a. P96,000 b. P200,000 c. P203,450 d. P213,180

52. Edgar sold a painting (capital asset) which he purchased in 2019 at a cost of P3,000, on the
following terms:
June 1, 2019 down payment, P1,000
August 1, 2019 installment due, P1,000
October 1, 2019, installment due, P2,000
October 1, 2020 Installment due, P4,000
October 1, 2021 installment due, P4,000

For year 2019, Edgar will report a gross income of:

a. P9,000 b. P4,500 c. P3,000 d. P1,500
 53. Same data as No. 52, If Edgar is a dealer in paintings, for 2010 he will report a gross income of:
a. P1,500 b. P3,000 c. P4,500 d. P9,000

54. In 2019, Adelaide Corporation sold by installment a land for P2,000,000 which was previously
purchased for P1,400,000. Other expenses related to the sale amounted to P100,000.

If Adelaide is a realty corporation and collected P500,000 as initial payment, how much is the
income tax for the said sale in 2019?
a. P37,500 b. P45,000 c. P120,000 d. P175,000

55. Same data as No. 54, if Adelaide classifies the land as capital asset, how much is 2019 the tax due
for the sale if the initial payment received is P600,000?
a. P37,500 b. P45,000 c P120,000 d. P175,000

56. Xeres paid a monthly insurance premium of P10,000 for 3 full years. The coverage is for
P2,000,000. At the end of 3rd year, a cash surrender value of P270,000 was received by the
insured.
How much is the amount of income to be reported?
a. P360,000 b. P270,000 c. P10,000 d. P -0-

57. Which of the following income earned each year by a senior citizen is not taxable income?
a. P300,000 salary for year 1
b. P5,000 interest income for year 2
c. P10,000 interest income for year 3
d. P60,000 business income for year 4

58. On March 1, 2019, Mimi received a building property from her parents as a gift with fair market
value of P10 million. This property was acquired for P8 million five years ago by her parents.
The monthly rental income of the property is P100,000 with an average monthly expense of
P20,000.
Mimi income subject to income tax for the year is:
a. P11,200,000 c. P960,000
b. P10,960,000 d. P800,000

59. Statement 1: For taxation purposes, 13th month pay is a compensation income.
Statement 2: 13th month pay of less than P90,000 is taxable compensation income.
a. True, true c. True, false
b. False, false d. False, true

60. Statement 1: Insurance premium paid by the employer for the life insurance of the employee,
where the beneficiary is the employer, is a taxable income of the employer upon death of the
employee.
Statement 2:Insurance premium paid by the employer for the life insurance of the employee,
where the beneficiary is the family of the employee, is not a taxable income of the beneficiary
upon death of the employee.
a. True, true c. True, false
b. False, false d. False, true

II.Essay: (10 pts.)

If taxes are collected for the expenses of the government in providing for the general welfare of its
citizens, how come there are many poor people and poor provinces in the country. Explain your answer/s.

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