COLEGIO DE DAGUPAN

Arellano Street, Dagupan City

School of Business and Accountancy

MIDTERM EXAMINATION
Income Taxation

1. Statement 1 – The point on which tax is originally imposed is impact of taxation.

Statement 2 – Eminent domain is inferior to non-impairment clause of the constitution.
Statement 3 – As a rule, taxes are subject to set-off or compensation.
Statement 4 – As a rule, provisions on the validity of tax exemptions are resolved liberally
in favor of the taxpayer.

Statement 1 Statement 2 Statement 3 Statement 4

A. True False False True
B. False True True False
C. True True False False
D. False False True True

2. Statement 1: The inherent powers of the state can never be taken away.
Statement 2: No laws are necessary to confer the inherent powers of the State upon any government
exercising sovereignty

A. Only statement 1 is correct

B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

3. Which of the following statements is/are correct?

I. The power to license includes the power to tax.
II. The power to tax may not include the power to destroy
III. The power to tax includes the power to exempt

a. II and III only

b. III only
c. All of the above
d. None of the above

4. Which of the following statements is not correct?

A. Tax burdens shall neither be imposed nor presumed to be imposed beyond what the statute
expressly and clearly states because tax statutes should be construed strictly against the
government.
B. Tax exemptions, tax amnesty tax condonations and their equivalent provisions are not presumed
and, when granted are strictly construed against the taxpayer because such provisions are highly
disfavored by the government.
C. Exemptions from taxation are highly disfavored in law and he who claims tax exemption must be
able to justify his claim or right.
 D. The House of Representatives has the duty and the exclusive power of constructing and
interpreting tax laws.

5. Which of the following is not a scheme of shifting the incidence of taxation?

A. The manufacturer transfers the tax to the consumer by adding the tax to the selling price of the
goods sold;
B. The purchaser asks for a discount or refuse to buy at regular prices unless it is reduced
by the amount equal to the tax he will pay;
C. Changing the terms of the sale like FOB shipping point in the Philippines to FOB destination
abroad, so that the title passes abroad instead of in the Philippines;
D. The manufacturer transfers the sales tax to the distributor, then in turn to the wholesaler, in turn to
the retailer and finally to the consumer.

6. The Department of Finance thru its officers entered into a contract with foreign investors
granting them exemption from all forms of taxes to encourage investments in the Phils. The
contract is
A. Void, unless the President ratifies
B. Void, because the power to grant tax exemption is vested in Congress.
C. Valid, if the President has authorized the officers to enter into such contract.
D. Valid, because the purpose is to promote public welfare.

7. Which of the following are National Internal Revenue Taxes?

I. Income tax
II. Donor’s tax
III. Other percentage tax
IV. Estate tax
V. Value Added tax
VI. Excise Tax
VII. Documentary stamp tax

A. I, II, III, IV
B. I, II, III, IV, V, VI
C. I, II, III, IV, V
D. I, II, III, IV, V, VI, VII

8. As to scope of the legislative power to tax, which is not correct?

A. Where there are no constitutional restrictions, and provided the subjects are within the territorial
jurisdiction of the state, Congress has unlimited discretion as to the persons, property or
occupations to be taxed.
B. In the absence of any constitutional prohibition, Congress has the right to levy a tax of any
amount it sees fit.
C. The discretion of Congress in imposing taxes extends to the mode, method or kind of tax, unless
restricted by the constitution.
D. The sole arbiter of the purpose or which taxes shall be levied is Congress, provided the purpose is
public and the courts may not review the levy of the tax to determine whether or not the purpose
is public.

9. In every case of doubt, tax statutes are construed

A. Strictly against the government and the taxpayer.
B. Liberally in favor of the government and the taxpayer.
C. Strictly against the government and liberally in favor of the taxpayer.
 D. Liberally in favor of the government and strictly against the taxpayer.

10. I. No person shall be imprisoned for debt or non-payment of tax.

II. Tax laws are civil and penal in nature because there are penalties provided in case of
violation.

A. True; True
B. False; true
C. True; false
D. False; false

11. OhMyVeeWise, resident citizen, single with 2 qualified dependents had the following during the
2019.
Gross compensation income P250, 000
Expenses related to his employment 120, 000
SSS premium contributions 3, 600
Philhealth contribution 2, 400
Pag-ibig contributions 2, 000
Union dues 1, 000
Premiums on health insurance 4, 000

The taxable income is

A. P237,000
B. P241,000
C. P130,000
D. P121, 000

12. A corporation on a fiscal year ending March 31, should file its annual return
A. On or before April 15 of the same year
B. On or before July 15 same year
C. On or before April 15 of the following year
D. On or before July 15 of the ff. year
 A corporation has the following data for the year 2020:
Gross Income, Philippines P1,000,000
Gross income, USA 500,000
Gross income, Japan 500,000
Expenses, Philippines 300,000
Expenses, USA 200,000
Expenses, Japan 100,000
Other Income:
Dividend from San Miguel Corp 70,000
Dividend from Ford Motors, USA 120,000
Gain, sale of San Miguel shares directly to buyer 150,000
Gain, sale of Ayala shares through PSE 200,000
Royalties, Philippines 50,000
Royalties, USA 100,000
Interest (other than from banks) 60,000
Rent, land USA 250,000
Other rent income 100,000
Prize, contest in Manila 200,000
Land sold in the Philippines (selling prize) 2,000,000

The cost of the land which is not used in business is P1M, while FMV is P3M. Selling price of Ayala
shares is P300,000.

13. Compute taxable income subject to regular income tax assuming domestic corporation
a. P2,430,000
b. P2,230,000
c. P2,700,000
d. P2,630,000

14. Compute the total tax of domestic corporation

a. P883,300
b. P943,300
c. P1,003,300
d. None of the above.

15. Compute taxable income subject to regular income tax assuming resident foreign corporation
a. P1,260,000
b. P1,380,000
c. P1,330,000
d. None of the above.

16. Compute the total tax of resident foreign corporation.

a. P592,300
b. P628,300
c. P613,300
d. None of the above.
17. Compute taxable income subject to regular income tax assuming non-resident foreign corporation
a. P1,260,000
b. P1,380,000
c. P1,330,000
d. None of the above.

18. Using the same information above, compute the capital gains tax of resident foreign corporation for
2016
a. P180,000
b. P202,500
c. P190,000
d. None of the above.
e.
f. P15,000

19. Compute the taxable income subject to regular income tax assuming resident citizen.
a. P2,430,000
b. P2,230,000
c. P2,700,000
d. None of the above.

20. I. A gain from sale of shares of a domestic corporation shall be considered derived from the
Philippines regardless of where the shares were sold.
II. A gain from sale of shares of a foreign corporation shall be considered derived from the country
where the corporation was created or organized.

A. True; True
B. False; True
C. True; False
D. False; False

21. Which of the following statements regarding dividends is wrong?

A. Exempt from income tax if received by a domestic corporation from another domestic corporation
B. Exempt from income tax if received by a resident corporation from a domestic corporation
C. Taxable subject to year-end tax if received by a resident citizen from a non-resident corporation
D. Taxable subject to final tax if received by a non-resident citizen from a non-resident corporation

22. Exclusions from gross income, except:

A. Interest on the price of the land covered by the Presidential Decree on land reform.
B. Interest payments on proceeds of life insurance held by the insurer
C. GSIS/SSS, Philhealth and Pag-ibig contributions and Union dues of individuals
D. Gains realized by an investor upon redemption of shares of stock in a mutual fund company.

25. Advance rental in the nature of prepaid rental, received by the lessor under a claim or right
and without restriction as to use is
A. Taxable income of the lessor in the year received if he is on the cash method of accounting
B. Taxable income of the lessor in the year received whether he is on the cash or accrual method of
accounting
C. Taxable income of the lessor in the year received whether he is on the cash or accrual method of
accounting
 D. Taxable income of the lessor up to the amount earned in the year the rental is received

26. The following rules as to recognition of capital gains or losses from the disposition of personal
property classified as capital asset apply where the taxpayer is an individual. Which is the exception?
A. Depending on the holding period, the percentages of gain or loss is 100% if the capital asset has
been held for 12 months or less; and 50% if the capital asset has been held for more than 12
months.
B. Capital losses are deductible only to the extent of the capital gains; hence, the net capital loss is
not deductible.
C. Ordinary losses are deductible from capital gains but net capital loss cannot be deducted from
ordinary gain.
D. Net capital loss carry over in a taxable year should not exceed the capital gain in the year the loss
was incurred.

Taxpayer sold capital assets as follows:

Lot 11 Lot 22
Selling Price P6,000,000 P10,000,000
Cost 2,500,000 1,000,000
Net Gain (loss) P3,500,000 P9,000,000

Terms of sale:
Down payment 1.15.2020 P500,000 P500,000
Paid on 6.15.2020 500,000 1,000,000
Paid on 9.15.2020 500,000 1,000,000
Installment due 1.15.2021 2,000,000 3,000,000
Installment due 5.15.2021 2,500,000 3,000,000
Mortgage assumed by the buyer 1,500,000

27. The capital gains tax payable under the installment method for 2020 for lot 11 is:
a. P36,000
b. P90,000
c. P22,500
d. d. None of the above

28. The capital gains tax payable under the installment method for 2020 lot 22 is:
a. P135,000
b. P150,000
c. P600,000
d. None of the above
29. Taxpayer, individual, married but legally separated, supporting his mother, has the following
transactions for the current year:

Sales P2,000,000
Cost of sales 1,150,000
Operating expenses 560,000
Interest income from BDO 10,000
Other transactions:
a. Sale of office equipment held for 5
years:
Selling price 100,000
Cost 120,000
Accumulated deprecation 80,000
b. Sale of family van held for 3 years:
Selling price 300,000
Cost 210,000
c. Sale of family car held for 18
months:
Selling price 480,000
Cost 500,000

Taxpayer will report a taxable income of:

a. P305,000
b. P385,000
c. P335,000
d. P318,300

30. On January 1, 2015, lessor leased a lot with a building thereon for a period of 10 years. It was agreed
that the lessee will pay the following:
a) Rent of P240,000 per year
b) Fire Insurance premium in the building of P16,000 per year
c) Real property tax of P10,000 per year
Lessee will also construct a warehouse on the land at a cost P3,600,000 with a useful life of 10
years completed on June 30, 2017, which shall not belong to the lessor at the end of the lease.
The fair value of the building at date of completion is 4,000,000

The Lessor shall report for year 2017, assuming spread-out method, as income from lease the total
amount of:
a. P 386,000
b. P 4,266,000
c. P 266,000
d. None of the above.
31. Mr. X insured himself for P1M. After several months he died when he was able to pay a total amount
of P100,000. His beneficiary, his brother received the P1M insurance proceeds. Mr. Y on the other
hand insured himself for P1M. After 20 years he survived the insurance policy and received return on
his premiums. He received P1M from the insurance company although he was only able to pay
P700,000.

The total income subject to tax is _______________?

a. P 300,000
b. P 1,200,000
c. P 1,300,000
d. P 900,000

32. Which of the following statements is not correct?

a. Interest income from long term deposit is exempt from income tax.
b. Royalties on books, literary works and musical composition are subject to 10%
creditable withholding tax.
c. A prize of P10,000 is subject tobasic tax.
d. None of the above.

33. The following are the transaction of Resident Foreign Corporation during 2020
Capital gain on sale of bonds held for 20 months P50,000
Capital gain on direct sale to buyer of shares of domestic
corporation held for 6 months 120,000
Capital loss on sale of family car held for 11 months
80,000
Capital loss on sale of land in the Philippines. held for 3 years 60,000
Net capital loss in 2019 (net taxable income of the year was
P10,000) 20,000

The net capital loss carry-over from 2019 would have been:
a. P40,000.
b. P55,000.
c. P10,000.
d. P0.

34. Deferred payment method of reporting income on an installment sale is available to a taxpayer if,
there being a requirement of the law on the ratio of initial payments to the selling price, the initial
payments on the sale:
a. Exceed 25% of the selling price.
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.

35. Mr. Magbalon owns a parcel of land worth P500,000 which he inherited from his father in 2013 when
it was worth P300,000. His father purchased it in 2000 for P100,000. If Mr Magbalon transfer this
parcel of land to his wholly owned corporation in exchange for shares of stocks of said corporation
worth P450,000, Mr. Magbalon taxable gain is:
a. Zero.
b. P50,000.
c. P150,000.
 d. None of the above.

36. Mr. Pascual bought a 200 square meter land at a cost of P500,000. He leased the land to Mr. Franco at
an annual rental of P40,000. The term of the contract of lease is 15 years. The contract of lease
provides that Mr. Franco will construct a building 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 at a total cost of
P400,000 and has an estimated useful life of 20 years which is the basis of a straight-line method of
depreciation.

Assuming that Mr. Pascual will spread his income over the term of the contract of lease, the annual
income of Mr. Pascual is:
a. P46,666.66.
b. P26,666.66.
c. P66,666.66.
d. P40,000.00

37. Assuming the contract of lease was terminated after the tenth (10 th) year or at the beginning of the
eleventh (11th) year due to the fault of the lessee, the income of Mr. A Pascual in the eleventh (11 th)
year is;
a. P73,333.34.
b. P200,000.00
c. P133,333.34.
d. P400,000.

Mr. Wise, a citizen and resident of the Philippines, married to Mrs. Sun33v, with the mother of Mrs.
Alodia living with the spouses, had the following data for 2020:

Mr. Mrs. Mr. & Mrs.

Gross income from business P220,000
Gross income from profession,
net income of a 10% withholding tax P180,000
Rent income from land and building P48,000
Dividend from domestic corporation 10,000
Interest on notes receivable 2,000 1,000
Interest on Philippine currency
bank deposit 3,000 2,000 8,000
Capital gain on sale directly to buyer at
P280,000 of shares of domestic
corporation 80,000
Capital gain on sale directly to buyer at
P2,000,000 of land in the Philippines 300,000
Interest on government bonds 5,000
Capital loss thru the Philippine
Stock exchange at P60,000 of shares of
domestic corporation 5,000
Income tax withheld on rent at 5% 2,400
Income tax withheld on professional
fees at 10% 20,000
Expenses, business/profession 150,000 120,000 10,000
38. The capital gain taxes paid within the year;
a. P132,000
b. P120,000.
c. P124,000.
d. None of the above.

39. The final tax paid on passive income within the year:
a. P2,500.
b. P3,600.
c. P4,600.
d. None of the above.

40. The taxable income subject to Section 24(A) of Mr. Wise:

a. P54,000.
b. P73,000.
c. P91,000.
d. None of the above.

41. The taxable income subject to Section 24(A) of Mrs. Sun33v:

a. P86,000.
b. P63,000.
c. P105,000.
d. None of the above.

42. Recovery of bad debt written off by a taxpayer:

No.1: P20,000 from accounts written off in a year which had a net income of P200,000 before
write-off (write-off for the year was P20,000).
No. 2: P5,000 from accounts written off in a year which had a net loss before write-off of
P36,000 (write-off for the year was P5,000).
No. 3: P10,000 from accounts written off in a year which had a net loss of P8,000 before
write off and a write off for P12,000.

The taxable income is

a. P35,000.
b. P20,000.
c. P26,000.
d. P30,000.
Husband and wife, with five qualified dependent children, had the following data for 2020:

Wife:
Salaries P180,000
Thirteenth month pay 15,000
Premiums on health insurance paid 5,000
Husband:
Sales 2,000,000
Dividend from domestic corporation 20,000
Dividend from resident corporation 15,000
Interest on Philippine currency bank deposit 100,000
Royalty from patented invention 60,000
Royalty from books 30,000
Capital gains on assets held for not more than 12 months:
On sale directly to buyer of shares of domestic corporation 135,000
On sale directly to buyer on bond of domestic corporation 40,000
On sale thru the Philippine Stock Exchange of shares of
domestic corporation 60,000
On sale thru a real estate broker of land in the
Philippines (fair market value-P2,800,000, selling
price-P3,000,000)
500,000
On sale of vacation house and lot in Malaysia 200,000
Cost of sales 980,000
Capital loss on asset held for more than 12 months:
On sale directly to buyer of land in Indonesia 250,000
On sale of family car 100,000
On sale directly to buyer of bonds of domestic corporation 25,000
Business expenses 500,000

43. The final tax on passive income is:

a. P35,000.
b. P39,200.
c. P20,000.
d. P37,000.

44. The capital gain tax on real property:

a. P150,000.
b. P180,000.
c. P100,000.
d. P120,000.

45. the capital gain tax on shares of stock:

a. P8,500.
b. P17,250.
c. P20,250.
d. None of the above.
46. the net capital gain (loss) subject to Section 24(A) at the end of the year:
a. P105,500.
b. P112,500.
c. P52,500.
d. P40,500.

47. The taxable compensation income is

a. P180,000
b. P195,000
c. P200,000
d. P185,000

Corporation A has the following transactions during the year 2019:

Gross Income, Philippine business P2,400,000
Gross Income, Japan business 600,000
Business expenses, Philippines 1,350,000
Business expenses, Japan 150,000
Other expenses connected with the Philippine business
90,000
Other expenses connected with the Japan business
60,000
Other expenses connected with the business in the Phil and Japan
150,000
Other business expenses which cannot be allocated
180,000
Intercorporate dividends from PLDT 100,000

48. If the taxpayer is a domestic corporation, its income tax due is:
2a. P403,200 c. P326,400
b. P357,000 d. P306,000

49. 1st Case: Mr. Ong sold his 5 - door apartment for P10,000,000. The monthly rental per unit is
P20,000. This sale is subject to capital gains tax.
2nd Case: Mr. Ocampo bought a lot for P2,000,000 which he intended to be used as family home.
After 5 years, he abandoned his plan and sold it for P3,000,000. This sale is subject to capital gains
tax.
a. Only the first statement is correct.
b. Only the second statement is correct.
c. Both statements are correct.
d. Both statements are incorrect.

50. Which of the following income from Philippine source of a resident individual is not subject to the
rates in Sect. 24 A of the Tax Code?
a. Gain from sale of his personal motor vehicle.
b. Gain from sale of family home.
c. Salary received by a managing partner of a general professional partnership.
d. None of the above.
51. The accounting period of Corporation A is fiscal year ending on October 31, 2020. When is the last
day to file its annual income tax return?
a. February 15, 2022
b. April 15, 2021
c. February 15, 2021
d. April 15, 2022

Mr. Vino Sabos, married and with two minor children, sold his principal residence in Cubao, the entire
proceeds of which he immediately used to pay for another. Selling price of the house was at P10,000,000.
The cost to him of the said house was P7,500,000 while the cost of new principal residency amounting to
P11,500,000

52. His capital gains tax due would be:

A. P600,000 C. P245,000
B. P0 D. P100,000

53. The cost basis of the new principal residence would be.
A. P10,000,000 C. P9,000,000
B. P7,500,000 D. P600,000

Janet sold her principal residence for P5,000,000 when its fair market value was P6,000,000. The house
purchased five (5) years ago for P3,000,000. Out of the proceeds of P5,000,000, Janet utilized the
P4,000,000 for the purchase of a new residential house.

54. The capital gains tax on the sale is

a. P360,000
b. P300,000
c. P72,000
d. P0

55. The cost basis of the new residence

a. P3,000,000
b. P2,400,000
c. P4,000,000
d. P5,000,000

56. Based on the information above, if the deed of sale is executed September 10, 2020 but the document
is notarized September 12, 2020, the deadline for filing of the return and payment of tax is
a. October 10, 2020
b. March 10, 2021
c. October 12, 2020
Ms. X is an employee of Isla Lipana, the local counterpart of PricewaterhouseCoopers (PWC) in the
Philippines. She just celebrated her 61st birthday last November 2016. Ms. X has been working in the firm
for almost eight (8) years and is now thinking of retiring from service. She comes to you now to ask
opinion whether her total retirement package would be subject to tax diminution.

57. Provided Ms. X will earn a total of 2 million pesos under the company pension plan, what will be
your advice?
a) Benefit is taxable because the service rendered fell short of the ten-year requirement.
 b) Benefit is tax free because she is past 60 years old and has rendered more than 5 years of service.
c) Benefit is taxable because there is no approved pension plan.
d) Benefit is taxable because she is under 65 years old.

Mel received from his first employer, P20,000 as retirement benefit and was subsequently employed by
another employer. After rendering 10 years, Mel retired from his second employer and received P50,000.
Payment was made under a BIR approved retirement plan.

58. Is the retirement benefit received from his second employer taxable or not?
a) Yes, it is taxable because the benefit of exemption can only be availed of once.
b) Yes, it is taxable because Mel is probably under 50 years old.
c) No, it is not taxable because he is qualified under provisions of RA 4917.
d) No, it is not taxable because he rendered at least 10 years of service.

59. If the second employer is a Government entity (assuming Mel was employed by the DPWH,) would
the same be taxable?
a) No, according to RA 7641 (Retirement Pay Law) all benefits falling under the minimum 60
years old and 5-year service requirement is exempt regardless of the number of times earned
by an employee.
b) Yes, according to RA 4917 (Private Benefit Plan) the retiring employee must be of at least 50
years old.
c) No, according to RA 8291 (The GSIS Act of 1997) all benefits he received are tax exempt,
including retirement gratuity.
d) Yes, the exemption can only be availed of once, without qualifications.

60. It has the executive supervision and control over tax administration
a. Bureau of Internal Revenue
b. Bureau of Customs
c. Department of Finance
d. Court of Justice

61. On January 1, 2008, Kevin purchased 1,000 P1,000 face value bonds of a domestic corporation at
face value. The bonds were dated January 1, 2007 and mature on January 1, 2011. The bonds pay
12% annual interest every January 1. If Kevin disposed of this investment directly to buyer on
December 31, 2008 at 102, how much is the total final tax due?
a. P24,000 b. P25,000 c. P1,000 d. P0

62. SAndromeda, a non-resident alien, deposited $100,000 in the FCDU unit of Universal Bank, a
resident foreign bank. During the period, Andromeda earned $1,000 total interest. The relevant
exchange rate between the Peso and the Dollar was P50:$1. How much final tax should Metro
Pilipino Bank withhold?
a. P50,000 b. P100,000 c. P125,000 d. P 0

63. Which is not a requisite of the wash sales rule of securities?

 a. The sale or other disposition of securities resulted to a loss
b. There was an acquisition or contract or option for acquisition of stock or securities within 30 days
before the sale or after the sale.
c. The stock or securities sold were substantially the same as those acquired within the 61-day
period.
d. The seller must be a dealer in securities in a short sale transaction.

64. The following are not substantially identical securities, except one
a. Common stock and preferred stock
b. Voting and non-voting common stock
c. Bonds with different interest rates or secured and unsecured bonds
d. Similar bonds with different maturity dates

Raff Escuela sold his principal residence for P5,000,000. His principal residence was acquired at
P2,000,000 and has a fair market value of P6,000,000 at the date of sale. Within 18 months, Raff
reconstructed his new principal residence for P4,500,000.

65. The cost basis of the new residence is

a. P1,800,000 b. P1,500,000 c. P3,750,000 d. P4,500,000

66. The amount of capital gains tax to be released to Raff is

a. P240,000 b. P270,000 c. P300,000 d. P324,000

67. Compute the cost basis of the new residence if it was acquired for P5,200,000.
a. P2,000,000 b. P2,200,000 c. P1,733,333 d. P4,333,333
Sharon received the following income in 2019:
Business Income, Philippines P300,000
Business Income, United States 250,000
Expenses, Philippines 200,000
Expenses, United States 125,000
Interest on deposit with Metrobank 3,000
Interest on deposit in a bank in New York ($1 = P40) $500
Cash Prize won in a local contest P6,000
Cash prize won in a contest in US 10,000
Winnings in lotto 20,000
Winning in lotto in US 50,000
Dividends from SMC a domestic company 25,000

68. The taxable income if Sharon is a resident citizen is

a. P311,000
b. P334,000
c. P291,000
d. P306,000

69. The taxable income if Sharon is a NRA-ETB

a. P243,000
b. P106,000
c. P131,000
d. P126,000

70. The income tax due if Sharon is NRA-NETB

a. P88,500
b. P83,500
c. P82,750
d. P86,250