Income_Taxation_Banggawan_BSA_2B.pdf

INCOME
TAXATION
Laws, Principles and Applications
(Questions and Answers)
REX B. BANGGAWAN, CPA, MBA
Submitted by:
BSA – 2B
Submitted to:
Mr. Jeffrey Biona
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CHAPTER 1: INTRODUCTION TO TAXATION
Exercise Drill
In the space provided for, indicate whether the statement relates to a Constitutional limitation (C) or inherent
limitation (I). If it is not a limitation to the taxing power, indicate (N).
1. Non-assignment of taxes C and I (This is non-delegation)
2. Territoriality of taxation I
3. Taxes must be for public use I

4. Exemption of the property of religious institutions from income tax N (real property tax not income tax)
Exemption of the revenues and assets of non-profit, non-stock educational
5. C
institutions
6. Non-delegation of the taxing power C and I
7. Non-appropriation for religious purpose C
8. The requirement of absolute majority in the passage of a tax exemption law. C
9. Non-imprisonment for non-payment of tax or debt N (Non-payment of tax = imprisonment)
Taxpayers under the same circumstance should be treated equal both in terms of
10. C
privileges and obligations.
11. Exemption from property taxes of religious, educational and charitable entities. C
I (“properties” excludes it from being a
12. Government income and properties are not objects of taxation.
Constitutional limit)
13. Each local government shall have the power to create its own sources of revenue. C
14. Imprescriptibility in taxation N (A principle but not a limitation.)
15. Non-impairment of obligation and contracts. C
16. Guarantee of proportional system of taxation. C
17. International courtesy I
18. Non-impairment of the jurisdiction of the Supreme Court to review tax cases. C
19. The government is not subject to estoppel. N (A principle but not a limitation)
20. Imprisonment of non-payment of poll tax. N (Should be non-imprisonment)
TRUE OR FALSE 1
1. Eminent domain involves confiscation of prohibited commodities to protect the well-being of the people.
False (This is police power.)
2. Horizontal equity requires consideration of the circumstance of the taxpayer.
True
3. Taxes are the lifeblood of the government.
True
4. Taxation is a mode of apportionment of government costs to the people.
True
5. There should be direct receipt of benefit before one could be compelled to pay taxes.
False (The receipt of benefit is conclusively presumed.)
6. The exercise of taxation power requires Constitutional grant.
False (Taxation power is inherent to the State.)
7. Taxation is inherent in sovereignty.
True
8. Police power is the most superior power of the government. Its exercise needs to be sanctioned by the
Constitution.
False (It is inherent power not requiring Constitutional mandate.)
9. All inherent powers presuppose an equivalent form of compensation.
True
10. The reciprocal duty of support between the government and the people underscores the basis of taxation.
True
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TRUE OR FALSE 2
1. The Constitutional exemption of religious, charitable, and non-profit cemeteries, churches and mosques refers
to income tax and real property tax.
False (Property tax only)
2. Taxpayers under the same circumstance should be taxed differently.
False (Different taxpayers warrants different tax treatments.)
3. Taxation is subject to inherent and Constitutional limitations.
True
4. International comity connotes courtesy between nations.
True
5. Collection of taxes in the absence of a law is violative of the Constitutional requirement for due process.
True (It will result to violation of substantive due process)
6. The scope of taxation is regarded as comprehensive, plenary, unlimited, and supreme.
True
7. No one shall be imprisoned for non-payment of tax.
False (The constitutional guarantee for non-imprisonment applies to debt not tax)
8. The lifeblood doctrine requires the government to override its obligations and contracts when necessary.
False (The Constitution guarantees the sanctity of contract by its non-impairment clause)
9. 2/3 of all members of Congress is required to pass a tax exemption law.
False(TheConstitutionrequiresthemajorityofallmembersofcongresstopassataxexemptionlaw
10. The government should tax itself.
False (It will not produce additional benefit if the government taxes itself.)
MULTIPLE CHOICE – Theory: Part 1

1. The point at which tax is levied is also called
a. Impact of taxation c. Incidence of taxation
b. Situs of taxation d. Assessment
2. Which of the following inappropriately describes the nature of taxation?

a. Inherent in sovereignty
b. Essentially a legislative function
c. Subject to inherent and constitutional limitation
d. Generally for public purpose
3. Which is correct?
a. Tax condonation is a general pardon granted by the government.
b. The BIR has five deputy commissioners.
c. The government can still collect tax in disregard of a constitutional limitation because taxes are the lifeblood of
the government.
d. The President of the Philippines can change tariff or imposts without necessity of calling Congress to pass a law
for that purpose.
4. A. The power to tax includes the power to exempt.

B. The power to license includes the power to tax.
Which is true?
a. A only c. A and B
b. B only d. Neither A nor B
5. International double taxation can be mitigated by any of the following except

a. Providing allowance for tax credit
b. Provision of reciprocity provisions in tax laws
c. Provision of tax exemptions
d. Entering into treaties to form regional trade blockage against the rest of the world
6. Which is not an object of taxation?

a. Persons c. Transactions
b. Business d. Public properties
7. That courts cannot issue injunction against the government’s effort to collect taxes is justified by
a. the lifeblood doctrine. c. the ability to pay theory.
b. imprescriptibility of taxes. d. the doctrine of estoppel.
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8. The power to enforce proportional contribution from the people for the support of the government is
a. Taxation c. Eminent domain
b. Police power d. Exploitation
9. This theory underscores that taxes are indispensable to the existence of the state.
a. Doctrine of equitable recoupment
b. The Lifeblood Doctrine
c. The benefit received theory
d. The Holmes doctrine
10. A. Taxation is the rule, exception is the exemption.

B. Vague taxation laws are interpreted liberally in favor of the government.
Which is false?
a. A only c. Both A and B
11. Select the incorrect statement.

a. The power to tax includes the power to exempt.
b. Exemption is construed against the taxpayer and in favor of the government.
c. Tax statutes are construed against the government in case of doubt.
d. Taxes should be collected only for public improvements.
12. Which is not a public purpose?

a. Public Education c. Transportation
b. National defense d. None of these
13. Which does not properly describe the scope of taxation?

a. Comprehensive c. Discretionary
b. Supreme d. Unlimited
14. All of these are secondary purposes of taxation except

a. To reduce social inequality
b. To protect local industries
c. To raise revenue for the support of the government
d. To encourage growth of local industries
15. What is the theory of taxation?

a. Reciprocal duties of support and protection
b. Necessity
c. Constitutionality
d. Public purpose
16. A. Taxes should not operate retrospectively.

B. Tax is generally for public purpose.
Which is true?
17. Which provision of the Constitution is double taxation believed to violate?

a. Equal protection guarantee
b. Progressive scheme of taxation
c. Uniformity rule
d. Either A or C
18. Which limitation of taxation is the concept of “situs of taxation” based?

a. Territoriality c. International comity
b. Public purpose d. Exemption of the government
19. Which tax exemption is irrevocable?

a. Tax exemption based on contract
b. Tax exemption based on the Constitution
c. Tax exemption based on law
d. Both A and B
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20. Which statement is incorrect?
a. Every person must contribute his share in government costs.
b. The existence of a government is expected to improve the lives of the people.
c. The government provides protection and other benefits while the people provide support.
d. Only those who are able to pay tax can enjoy the privileges and protection of the government.
21. Which is the most incorrect statement regarding taxes?

a. Taxes are necessary for the continued existence of the government.
b. The obligation to pay tax does not rest upon the privilege enjoyed by or the protection afforded to the citizen
of the government but upon the necessity of money for the support of the State.
c. There should be personal benefit enjoyed from the government before one is required to pay tax.
d. Taxes should be collected without unnecessary delay but its collection should not be tainted with arbitrariness.
22. Statement 1: In the selection of the objects of taxation, the courts have no power to inquire into the wisdom,
objectivity, motive, expediency, or necessity of a tax law.
Statement 2: An imposition can be both a tax and a regulation. Taxes may be levied to provide means for
rehabilitation and stabilization of threatened industry.
Which is correct?
a. Statement 1 only c. Both statements
b. Statement 2only d. Neither statement
23. Which of the following acts in taxation is administrative by nature?

a. Determination of the amount to be imposed
b. Fixing the allocation of the amount to be collected between the local government and the national government
c. Levy or distraint of taxpayers’ property for tax delinquency
d. Determining the purpose of the tax to impose
24. This refers to the privilege or immunity from a tax burden which others are subject to:
a. Exclusion c. Tax holiday
b. Deduction d. Reciprocity
25. Statement 1: The benefit received theory presupposes that some taxpayers within the territorial jurisdiction of
the Philippines will be exempted from paying tax so long as they do not receive benefits from the government.
Statement 2: The ability to pay theory suggests that some taxpayers may be exempted from tax provided they
do not have the ability to pay the same.
Which statement is true?

a. Only statement 1 c. Both statements 1 and 2
b. Only statement 2 d. Neither statement 1 nor 2
26. Which is not legislative act?

a. Determination of the subject of the tax
b. Setting the amount of the tax
c. Assessment of the tax
d. Determining the purpose of the tax
27. Statement 1: Taxation is the rule; exemption is the exception.

Statement 2: Taxation may be used to implement the police power of the state.
a. I is true c. I and II are true
b. II is true d. I and II are not true
28. Which of the following powers of the Commissioner of Internal Revenue cannot be delegated?
a. Determination of the subject of the tax
b. Setting the amount of the tax
c. Assessment of the tax
d. Determining the purpose of the tax
29. When exemption from a tax imposition is silent or not clearly stated, which is true?
a. Taxation applies since exemptions are construed against the government.
b. Exemption still applies since this is an instance of exemption by omission.
c. Taxation applies since exemptions are construed against the taxpayer.
d. Exemption applies since obligation arising from law cannot be presumed and hence construed against the
government
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30. What is the basis of taxation?
a. Reciprocal duties of support and protection
b. Constitutionality
c. Public purpose
d. Necessity
31. When the provisions of tax laws are silent as to the taxability of an item, which is true?
a. Taxation applies since taxation is the rule, exemption is the exception.
b. Exemption applies since vague tax laws are construed against the government.
c. Taxation applies due to the Lifeblood doctrine.
d. Exemption applies since obligation arising from law is presumed; ignorance of the law is not an excuse.
32. Which of the following statements does not support the principle that tax is not subject to compensation or set-
off?
a. The government and the taxpayer are not creditors and debtors of each other.
b. Tax is not in the nature of contract but it grows out of a duty wherein taxpayers are bound to obey even
without the personal consent of the taxpayer.
c. Taxes arise from law, not from contracts.
d. Both tax and debt partake the nature of an obligation.
33. Which is not legally tenable in refusing to pay tax?

a. Absence of benefit from the government
b. Lack of jurisdiction of the taxing authority
c. Prescription of the tax authority’s right to collect
d. All of these
34. What is the primary purpose of taxation?

a. To enforce contribution from its subjects for public purpose
b. To raise revenue
c. To achieve economic and social stability
d. To regulate the conduct of business or profession
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MULTIPLE CHOICE – Theory: Part2
1. The Constitutional exemption of religious or charitable institutions refers only to
a. Real property tax c. Property tax and income tax
b. Income tax d. Business tax
2. The agreement among nations to lessen tax burden of their respective subjects is called
a. Reciprocity c. Territoriality
b. International Comity d. Tax minimization
3. An educational institution operated by a religious organization was being required by a local government to pay
real property tax. Is the assessment valid?
a. Yes, with respect to all properties held by such educational institution.
b. Yes, with respect to properties not actually devoted to educational purposes.
c. No, with respect to any properties held by such educational institution.
d. No, with respect to properties not actually devoted to educational purposes.
4. Which is not a Constitutional limitation?

a. No tax law shall be passed without the concurrence of a majority of all members of Congress.
b. Non-appropriation for religious purpose
c. No law impairing government obligations on contracts shall be passed.
d. Non-impairment of religious freedom
5. Which of the following is not an inherent limitation of the power to tax?

a. Tax should be levied for public purpose.
b. Taxation is limited to its territorial jurisdiction.
c. Tax laws shall be uniform and equitable.
d. Exemption of government agencies and instrumentalities.
6. The following are inherent limitations to the power of taxation except one. Choose the exception.
a. Territoriality of taxes
b. Legislative in character
c. For public purpose
d. Non-appropriation for religious purpose
7. That all taxable articles or properties of the same class shall be taxed at the same rate underscores
a. Equality in taxation c. Uniformity in taxation.
b. Equity of taxation d. None of these
8. The following are limitations of taxation:

A. Territoriality of taxation
B. Exemption of the government
C. Taxation is for public purpose.
D. Non-impairment of contracts
E. Non-delegation of the power to tax
Which of these are classified as both constitutional and inherent limitations?
a. A and B c. C and E
b. B and C d. D and E
9. The provisions in the Constitution regarding taxation are

a. Grants of the power to tax
b. Limitations to the power to tax
c. Grants and limitations to the power to tax
d. Limitations against double taxation
10. The Constitutional exemption of non-stock, non-profit educational institutions refers to

a. Real property tax c. Property tax and income tax
b. Income tax d. Business tax
11. Which of the following is violative of the principle of non-delegation?

a. Requiring that legislative enactment must exclusively pertain to Congress
b. Authorizing the President to fix the amount of impost on imported and exported commodities
c. Authorizing certain private corporation to collect taxes
d. Allowing the Secretary of Finance and the BIR to issue regulation or rulings which go beyond the scope of a
tax law
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12. Which of the following violates Constitutional provisions?
a. Payment of salaries to priests or religious ministers employed by the Armed Forces of the Philippines
b. Imposing tax on properties of religious institutions which are not directly and exclusively used for religious
purposes
c. Imposition of license for the sale of religious literature
d. Authorizing the President of the Philippines to fix the rates of tariffs or imposts
13. In order to phase-out a huge deficit, the President of the Philippines passed a law offering all taxpayers with
previous tax delinquency to pay a minimum tax in exchange for relief from tax assessment in the period of
delinquency. Is this a valid exercise of taxation power?
a. Yes, because the measure adopted is grounded upon necessity.
b. Yes, because the President is merely exercising his presidential discretion.
c. No, because the power of taxation is non-delegated.
d. No, because only the Department of Finance can issue such ruling.
14.Concerned with increasing unemployment rates in the country, the President of the Philippines encouraged the
Philippine Senate to pass a law granting special tax privileges to foreign investors who will establish businesses
in the country. The Senate accordingly drafted the bill and passed to Congress for approval.
Is this valid exercise of taxation power?

a. Yes. It is the discretion of the President to adopt any measures he deemed necessary to alleviate poor
conditions in the country.
b. Yes. Any means beneficial to the public interest should be given optimum priority.
c. Yes. The President’s proposal will have to be finally approved and passed by the legislature. The rule of non-
delegation of taxation would not be violated.
d. No. Tax bills shall originate from the House of Representatives.
15. Ram is the only practicing lung transplant specialist in Baguio City. The City Government of Baguio passed a local
ordinance subjecting the practice of lung transplant to 2% tax based on receipts. Ram objected claiming that
other transplant specialists in other regions of the country are not subjected to tax.
Is Ram’s contention valid?

a. Yes, because the rule of taxation should be uniform and equitably enforced.
b. Yes, because Ram is the only one subject. Other practitioners who would later practice would not be covered
by the ordinance.
c. No, because the ordinance would cover all transplant specialist who would practice in Baguio City. The
uniformity rule would not be violated.
d. No, because subjecting the new industry to taxation would hamper economic growth.
16. With the country under incessant shortage of sugar, the Philippine Congress enacted a law providing tax
exemptions and incentives to cane farmers without at the same time granting tax exemptions to rice farmers
who produce the staple food of the Philippines. Is the new law valid?
a. Yes, since there is a valid classification of the taxpayers who would be exempted from tax.
b. Yes, since sugar is more important than rice.
c. No, since the grant exemption is construed in favor of tax payers.
d. No because there is no uniformity in the grant of tax exemption.
17.Congress passed a law subjecting government-owned and controlled corporations (GOCCs) to income tax. Is the
law valid?
a. Yes, because all government agencies and instrumentalities are subject to tax.
b. Yes, because GOCCs are not government agencies and are essentially commercial in nature.
c. No, because government agencies are exempt. This would pose a violation of the equality clause in the
constitution.
d. No, because GOCCs are constitutionally exempted from paying taxes.
18. Which of the following is not a constitutional limitation of the power to tax?
a. Non-impairment of obligation or contracts
b. Due process and equal protection of the law
c. Non-appropriation for religious purposes
d. Non-delegation of police power
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19. The Philippine Congress enacted a law requiring foreign banks to withhold taxes earned by
Filipino residents in their country and to remit the same to the Philippine government. Is this a
valid exercise of taxation power?
a. Yes, because foreign banks are within the territorial jurisdiction of the Philippines.
b. Yes, the Philippines can enforce tax requirements to subjects of foreign sovereignty even if they are outside
the country.
c. No, as this leads to encroachment of foreign sovereignty.
d. No, this is prohibited by the Constitution.
20. Which of the following normally pays real property tax?

a. Bantay Bata, a non-profit charitable institution
b. Jesus Crusade movement, a religious institution
c. University of Pangasinan, a private proprietary educational institution
d. AM Property Holdings, a registered development company
21. Tax exemption bills are approved by

a. Majority of all members of Congress
b. Solely by the President of the Republic
c. 2/3 of all members of Congress
d. Majority of the representatives constituting a quorum
22. The Japanese government invested P100,000,000 in a Philippine local bank and earned P10,000,000 interest.
Which is correct?
a. The income is exempt on grounds of territoriality.
b. The income is exempt due to international comity.
c. The income is subject to tax on the basis of sovereignty.
d. The income is subject to tax because the income is earned within the Philippines.

1. When a legislative body taxes persons and property, rights and privileges under the same taxable category at the
same rate, this is referred to as compliance with the constitutional limitation of:
a. Equity c. Due process
b. Uniformity d. Equal protection clause
2. Which is not a legislative act?

a. Assessment of the tax c. Determination of the subject of the tax
b. Setting the amount of the tax d. Determining the purpose of the tax
3. The inherent power of the State are similar in the following respect, except:
a. They are inherent to the existence of the State.
b. They are exercisable without the need for an express constitutional grant.
c. All are not exercised by private entities.
d. They are exercised primarily by the legislature.
4. Which is mandatorily observed in implementing police power?

a. Public Interest c. Both a and b
b. Just compensation d. Neither a nor b
5. Which is considered in the exercise of eminent domain?

a. Public Use c. Both a and b
b. Just compensation d. Neither a nor b
6. The general power to enact laws to protect the well-being of the people is called
a.Police Power c. Taxation
b. Eminent domain d. All of these
7. Which of the following entities will least likely exercise the power of eminent domain?
a. Electric cooperatives c. Telecommunication business
b. Water cooperatives d. Transportation operators
8. In exercising taxation, the government need not consider

a. Inherent limitations c. Due process of law
b. Just compensation d. Constitutional limitations
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9. Licensing of business or profession is an exercise of
a. Police power c. Eminent domain
b. Taxation d. All of these
10. Select the correct statement.

a. Eminent domain refers to the power to take public property for private use after paying just compensation.
b. Police power being the must superior power of the State is not subject to any limitation.
c. Taxation power shall be exercised by Congress even without an express Constitutional grant.
d. Taxes may be collected even in the absence of a law since obligation arising from law is always presumed.
11. Which is principally limited by the requirement of due process?

a. Eminent domain c. Taxation
b. Police power d. All of these
12. Statement 1: Congress can exercise the power of taxation even without Constitutional delegation of the power to
tax.
Statement 2: Only the legislature can exercise the power of taxation, eminent domain, and police power
Which statement is correct?

a. Statement 1 c. Statement 1 and 2
b. Statement 2 d. Neither statement 1 nor 2
13. Which power of the State affects the least number of people?
a. Police power c. Taxation
b. Eminent domain d. Taxation and police power

a. The benefit received theory explains that the government is obliged to serve the people since it is benefiting
from the tax collection from its subjects.
b. The lifeblood theory underscored that taxation is the most superior power of the State.
c. The police power of the State is superior to the non-impairment clause of the Constitution.
d. The power of taxation is superior to the non-impairment clause of the Constitution.
15. Which of the following is not exercised by the government?

a. Taxation c. Eminent domain
b. Police power d. Exploitation
16. Select the incorrect statement.

a. Since there is compensation, eminent domain raises money for the government.
b. Once a government is established, taxation is exercisable.
c. The most important of the power is taxation.
d. Police power is more superior than the non-impairment clause of the Constitution.
17. The following statements reflect the differences among the inherent powers except:
a. The property taken under eminent domain and taxation are preserved but that of police power is destroyed.
b. Eminent domain and police power do not require Constitutional grant, but taxation, being a formidable power,
requires constitutional grant.
c. Only eminent domain can be exercised by private entities.
d. Taxation, police power, and eminent domain are ways in which the government interferes with private right
and property.
18. Statement 1: The Taxation power can be used to destroy if the law is valid.
Statement 2: A tax law which destroy things, business, or enterprises for the purpose of raising revenue is an
invalid tax law.
Which is incorrect?
a. Statement 1 c. Both statements
b. Statement 2 d. Neither statement

a. The provisions on taxation in the Philippine Constitution are grants of the power to tax.
b. The power to tax includes the power to destroy.
c. When taxation is used as a tool for general and economic welfare, this is called fiscal purpose.
d. The sumptuary purpose of taxation is to raise funds for the government.
20. Which of the following powers is inherent or co-existent with the creation of the government?
a. Police power c. Taxation
b. Eminent domain d. All of these
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21. Which of the following is not an inherent limitation of the power to tax?
a. Tax should be levied for public purpose.
b. Taxation is limited to its territorial jurisdiction.
c. Tax laws shall be uniform and equitable.
d. Government agencies and instrumentalities are exempt from tax.
22. Select the incorrect.

a. The power to tax includes the power to exempt.
b. Exemption is construed against the taxpayer and in favor of the government.
c. Tax statutes are construed against the government in case of doubt.
d. Taxes should be collected only for public improvement.
23. Which of the following is not a constitutional limitation of the power to tax?
a. Non-impairment of obligation or contracts
b. Due process and equal protection of the law
c. Non-appropriation for religious purposes
d. Non-delegation of the taxing power
24. Which of the powers to the State is the most superior? Which is regarded as the most important?
a. Taxation; Eminent domain
b. Police power; Taxation
c. Eminent domain; Police power
d. All the powers are equally superior and important
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CHAPTER 2: TAXES, TAX LAWS AND TAX ADMINISTRATION
Exercise Drill No. 1

Identify the type of tax that is described by the following:
1. A consumption tax collected by non-VAT businesses Percentage tax
2. Tax on gratuitous transfer of property by a living donor Donor’s tax
3. Tax that decreases in rates as the amount or value of the tax object Regressive tax
increases
4. Tax collected upon persons who are not the statutory taxpayers Indirect tax
5. Tax that is imposed based on the value of the tax object Ad valorem tax
6. Tax for general purpose Fiscal/General/Revenue tax
7. Tax imposed by the national government National tax
8. A tax on sin products or non-essential commodities Excise tax or sin tax
9. Imposed on the gratuitous transfer of property upon death Estate tax
10. Tax on residents of a country Community tax or residency tax
11. Tax that remains at flat rate regardless of the value of the tax object Proportional tax
12. Tax which is collected on a per unit basis Specific tax
13. Tax is collected upon the statutory taxpayer Direct tax
14. Tax imposed to regulate businesses or professions Regulatory tax
15. tax upon performance of an act or enjoyment of a privilege Excise tax or privilege tax

Identify which item is described by the following:
1. It refers to all income collections of the government. Revenue
2. It is an imposition for the support of the government. Tax
3. It is imposed upon land adjacent to public improvements. Special assessment or Special levy
4. it is imposed on imported and exported commodities. Customs duties
5. it is charge imposed prior to the commencement of business or License
exercise of profession.
6. It is a posed-activity rather than a pre-activity imposition. Tax
7. It is a subject to compensation or set-off Debt
8. It is a charge for the use of others’ privacy Toll
9. It is an imposition intended to discourage an act. Penalty
10.It arises from contracts rather than from law. Debt

Indicate the criteria for the selection of large taxpayer for each ofthe following:
As to payment Criteria
1. Value Added Tax ≥ P200,000/quarter
2. Excise Tax ≥ P1,000,000/year
3. Income Tax ≥ P1,000,000/year
4. Withholding Tax ≥ P1,000,000/year
5. Percentage Tax ≥ P200,000/quarter
6. Documentary Stamp Tax ≥ P1,000,000/year
As to conditions and operations
1. Gross receipts or sales ≥ P1,000,000,000 in a year
2. Net worth ≥ P300,000,000 at year end
3. Gross purchases ≥ P800,000,000 in the preceding year
Multiple Choice – Theory: Part 1

1. When tax is collected upon someone who is effectively reimbursed by another, the tax is regarded as
a. direct c. personal
b. indirect d. illegal
2. All are ad valorem taxes, except one. Select the exception.

a. Poll tax c. Real property tax
b. Estate tax d. Capital gains tax on real property capital asset
3. Taxation power can be used to destroy

a. as a revenue measure c. as an implement of police power
b. even if the tax is invalid d. when the State is in dire need of funds
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4. Which is not characteristic of tax?
a. It is an enforced contribution
b. it is a generally payable in money
c. it is subject to assignment
d. it is levied by the law-making body of the State having jurisdiction
5. Which of the following is a local tax?

a. Value added tax c. Documentary stamp tax
b. Real property tax d. Other percentage taxes
6. Which is not a source of tax law?

a. CHED regulations c. Judicial decisions
b. BIR Rulings d. Constitution
7. Tax as to purpose is classified as

a. Fiscal or regulatory c. National or local tax
b. Direct or indirect tax d. Specific or ad valorem tax
8. Tax as to incidence is classified as

9. Tax as to source is classified as

10.Which is not a nature of tax?

a. Enforced proportional contribution
b. Enforced within the territorial jurisdiction of the taxing authority
c. Levied by the lawmaking body
d. Generally payable in kind
11.Taxes that cannot be shifted by the statutory taxpayer are referred

a. direct taxes c. business taxes
b. indirect taxes d. personal taxes
12.Which is a local tax

a. Donor’s tax c. Documentary stamp tax
b. Professional tax d. Excise tax
13.As to subject matter, taxes do not include

a. Property tax c. Poll tax
b. Regulatory tax d. Excise tax
14.A tax that is imposed upon the performance of an act, the enjoyment of a privilege or the engagement in a
profession is known as
a. income tax c. excise tax
b. license d. transfer tax
15.Which is a national tax?

a. Real property tax c. Income tax
b. Community tax d. Professional tax
16.Which of the following distinguishes license from?

a. Unlimited in imposition c. Does not renders business illegal
b. Imposed for revenue d. Pre-activity in application
17.Which is correct?
a. Taxes may be subject to compensation
b. Toll, being a demand of ownership, is exercised only by private entities
c. Dacionenpago and cession in payment are applicable to taxation 13
d. Special assessment applies only when public improvement is made
18.Tas as to determination of amount is classified as
19.Tax classifications as to object do not include

a. Poll tax c. Regulatory tax
b. Property tax d. Excise tax
20.A. Tax must not violate constitutional and inherent limitations

B. Tax must be uniform and equitable
C. Tax must be for public purpose
D. Tax must be levied by the lawmaking body
E. Tax must be proportionate in character
F. Tax is generally payable in money
Which of the above is/are not an essential characteristic of a valid tax?

a. All of the above c. None, except F
b. All except F d. None of the above
21.To limit the production of an environmentally harmful commodity, Congress passed a law subjecting the sales of
an environmentally unfriendly commodity to a P10/kilo tax but a 5% tax is imposed on sales exceeding P100,000.
Which is incorrect?
a. The tax is a combination of an ad valorem tax and specific tax
b. This is an example of a regulatory tax
c. This is a national tax
d. This is a local tax
22.Which is not an excise tax?

a. Income tax c. Estate tax
b. Community tax d. Occupation tax
23.Which is indirect tax?

a. Value added tax c. Income tax
b. Donor’s tax d. Real property tax
24.Which is not an ad valorem tax?

a. Real property tax c. Income tax
b. Excise tax on cigar d. Donor’s tax
25.A tax that is imposed based on per unit or per head basis is known as
a. Proportional tax c. Ad valorem tax
b. Specific tax d. Progressive tax
26.Tax as to rates excludes

a. Specific tax c. Mixed tax
b. Progressive tax d. Proportional tax
27.Mr. A has a tax obligation to the government amounting to P82,000 since he is leaving the country, he entered into
a contract with Mr. B wherein Mr. B shall pay the P80,000 tax in his behalf. On due date, Mr. B failed to pay the
tax. The BIR sent a letter of demand to Mr. A which he refused to pay.
Which of the following statements is correct?

a. The government cannot enforce collection charges against Mr. A since he has validly transferred
his obligations to B under the contract.
b. The government can no longer run after Mr. A because he is already outside the Philippine
territory.
c. The government should wait until Mr. B becomes solvent again.
d. The government should force Mr. A to pay because taxes are non-assignable.
28. Philippine tax laws are, by nature, 14

a. political c. political and civil
b. civil d. penal and civil
29.Motor vehicles tax is an example of
a. Property tax c. Income tax
b. Privilege tax d. Indirect tax
30.Which of the following statements is correct?

a. The Marshall Doctrine is not used in practice since it is unconstitutional.
b. An ex post facto tax law violates the constitution.
c. A tax bill personally drafted by the president shall become a law after approval by congress
d. It is the public interest that errors of public officials should bind the government to limit
government abuse.
31.Tax rulings are issued by the

a. Secretary of Finance c. Court of Tax Appeals
b. Supreme Court d. Commissioner of Internal Revenue
32.Which of the following is limited in application?

a. Tax laws c. Tax treaties
b. Revenue Regulations d. BIR ruling
33.Which is not a source of tax law?

a. Judicial decisions c. Opinions of tax experts
b. Revenue regulations d. Tax treaties and ordinances
34.Which issues revenue regulations?

a. Department of finance c. Commissioner of Internal Revenue
b. Congress d. Commissioner of Customs
35.Which is not an element of tax?

a. It must be for public purpose
b. It must not violate Constitutional or inherent limitation
c. It must be progressive by nature
d. It must be uniform and equitable
36.Tax as to purpose does not include

a. Revenue c. Regulatory
b. Sumptuary d. Poll
37.When the impact and incidence of taxation are merged into the statutory taxpayer, the tax is known as
a. Personal tax c. Indirect tax
b. Direct tax d. National tax
38.Tax as to object includes

a. Personal tax c. Excise tax
b. Property tax d. All of these
39.Which is not an indirect tax?

a. Duties c. Excise tax
b. Impost d. Personal tax
40.A tax that cannot be avoided is

a. Direct tax c. Specific tax
b. Indirect tax d. Personal tax
41.Statement 1: Taxes are voluntary contributions to the government.

Statement 2: Taxes are mandatory contributions to the government.
Which is incorrect?
a. Only statement 1 is incorrect
b. Only statement 2 is correct
c. Both statements are correct 15
d. Neither statement is correct
42.Which is an indirect tax?
a. Other percentage tax c. Donor’s tax
b. Income tax d. Estate tax
43.Income tax is a/an

a. Ad valorem tax c. Revenue tax
b. Direct tax d. Property tax
44.A transfer tax is not a/an

a. Regressive tax c. National tax
b. Ad valorem tax d. Excise tax
45.Which of the following levy is fiscal or revenue by nature?

a. Tax law geared to phase out a deficit balance to the government
b. Tax law intended to prohibit gambling in the Philippines
c. Tax law intended to protect local industries
d. Tax law supporting the development of a particular industry

1. Which is not an excise tax?
a. Income tax c. Personal tax
b. Business tax d. Transfer tax
2. Which of the following do not relate to tax?

a. Does not render business illegal when not paid
b. Arises from law rather than from contracts
c. Intended to cover cost of regulations
d. Intended for public purpose
3. A levy from a property which derives some special benefit from public improvement is
a. Special assessment c. Taxation
b. Eminent domain d. Toll
4. A. Government revenue may come from tax license, toll and penalties.
B. Penalty may arise either from law or contracts.
Which is false?
5. What distinguishes tax from license?

a. Tax is a regulatory measure.
b. Tax is demand of ownership.
c. Tax arises from contract.
d. Tax is a post-activity imposition.
6. Which of the following distinguishes license from tax?

a. It is imposed under taxation power
b. It is a charge for other’s property
c. Non-compliance to it will render business illegal
d. It is generally payable in money
7. The amount imposed is based on the value of the property

a. Eminent domain c. Toll
b. License d. Special assessment
8. Which is intended to regulate conduct?

a. Penalty c. Police power
b. License d. Toll
16
9. Toll exhibits all of the following characteristics, except one. Which is the exception?
a. Demand of ownership
b. Compensation for the use of another’s property
c. Maybe imposed by private individuals
d. levied for the support of the government
10.Which of the following is incorrect?

a. The collected tax is referred to as revenue
b. Tax is the sole source of government revenue
c. License is imposed before commencement of a business or profession
d. Debt can be subject to compensation or set-off
11.Debt as compared to tax

a. It is a demand of ownership
b. It is not assignable
c. It will not cause imprisonment when not paid
d. It is generally payable in money
12.Select the incorrect statement.

a. Tax may be unlimited in amount.
b. Non-payment of license renders the business illegal
c. Special assessment is not a liability of the person owning the property
d. Special assessment can be imposed on building and other real right attaching or pertaining to
land
13.Tax as to subject matter does not include

a. Real property tax c. Excise tax
b. Personal tax d. Regulatory tax
14.What distinguishes debt from tax?

a. Arises from contract c. Non-payment will lead to imprisonment
b. Never draws interest d. Generally payable in money

1. The Commissioner of Internal Revenue is not authorized to
a. interprets the provisions of the National Internal Revenue code
b. promulgates Revenue Regulations
c. terminates an accounting period
d. prescribes presumptive gross receipts
2. Which is not a power of the Commissioner of Internal Revenue?

a. To change tax periods of taxpayers
b. To refund internal revenue taxes
c. To prescribe assessed value of real properties
d. To inquire into bank deposits only under certain cases
3. The principles of a sound tax system exclude

a. Economics efficiency c. Theoretical justice
b. Fiscal adequacy d. Administrative feasibility
4. Which of the following best describes the effect of tax condonation?

a. It only covers the unpaid balance of a tax liability
b. It is conditional on the taxpayer paying some portion of the unpaid tax
c. It generally applies to all taxpayers
d. All of these
17
5. Which is not an application of a principle of sound tax system?
a. Taxes should adjust based on government needs
b. Taxation should be progressive
c. Taxation should encourage convenient compliance
d. None of these
6. By which principle of a sound tax system is the elasticity in tax rates justified?
a. Theoretical justice c. Administrative feasibility
b. Fiscal adequacy d. All of these
7. Violation of this principle will make a tax law invalid

b. Fiscal adequacy d. Economic consistency
8. Which of the following is not application of the lifeblood doctrine?

a. The government has the right to select the object of taxation
b. Taxation is the rule exemption is the exception
c. Claim for exemption is strictly construed against the taxpayer
d. None of these
9. Which one of the following is the BIR not empowered to do?

a. Assess national taxes
b. Collect income, business and transfer taxes
c. Assess and collect local taxes
d. Enforce the forfeitures, penalties and fines
10.Which principle demands that ax should be just, reasonable and fair?

b. Fiscal adequacy d. Economic consistency
11.Which among the following powers of the Commissioner of Internal Revenue can be delegated?
a. The power to conduct inventory surveillance
b. The power to recommend promulgation of revenue regulations
c. The power to issue rulings of first impression
d. The power to reverse a ruling, amend or modify an existing ruling
12.The Commissioner of Internal Revenue is not empowered to

a. Make or amend a tax return for and in behalf of the taxpayer
b. Obtain information and to summon, examine and take testimony of persons to effect tax
collections
c. Compromise tax liabilities of taxpayers
d. Grant amnesty for erring taxpayer
13.Which is true with tax amnesty?

a. It is unconditional
b. It covers both criminal and civil liability of the taxpayer
c. It applies for past and future non-compliance
d. All of these
14.Which of the following may tax exemption come from?

a. Contract c. Law
b. Constitution d. All of these
15.Exemption based upon which of the following is repealable?

a. Contract c. Law
b. Constitution d. None of these
18
16.Select the incorrect statement regarding tax amnesty and condonation
a. In tax amnesty, violators are required to pay a portion of the tax assessed
b. When the remaining unpaid portion of the tax is condoned, the taxpayer cannot ask for refund for the balance
already paid
c. Tax amnesty operates as a general pardon and is rarely available
d. Tax condonation operates on the whole balance of the assessed tax; hence the taxpayer can ask for refund for
the paid portion of the tax
17.Which of the following is a power of the Commissioner of Internal Revenue?

a. Assessment and collection of taxes
b. Enforcement of all forfeitures, penalties and fines
c. Interpretation of the provisions of the NIRC
d. Giving effect to and administering the supervisory and police powers conferred by the NIRC and other laws
18.The Commissioner of Internal Revenue can delegate the power to

a. refund or credit internal revenue tax
b. recommends rules and regulations to the Secretary of finance
c. assign and re-assign revenue officer to establishments of excisable articles
d. compromise or abate tax liability
19.The BIR is under the supervision of

a. the Bureau of Customs c. the Department of Finance
b. the President d. Congress
20.Who is not a large taxpayer?

a. Mining companies c. Banks with P120M authorized capital
b. Listed companies d. None of these
21.In terms of financial measures, which of the following threshold for qualification as large taxpayers is incorrect?
a. Gross receipts exceeding P1B
b. Net worth exceeding P300M
c. Gross purchases exceeding P800M
d. Gross sales exceeding P1.5B
22. As to tax payments measures, which of the following threshold for the qualification as large taxpayer is incorrect?
a. Annual income tax payments of P1M
b. Annual value added tax payments
c. Quarterly percentage tax payments of P200,000
d. Annual documentary stamp tax of P1M
19
CHAPTER 3: INTRODUCTION TO INCOME TAXATION
EXERCISE DRILL NO. 1: Return of capital and Return on capital
Indicate the amount representing return of capital or return on capital:
Consideration For the loss of Return OF Return ON
Capital Capital
1 P 1,000,000 Health P 1,000,000 P0
2 P 500,000 P400,000 car P 400,000 P 100,000
3 P 300,000 P350,000 building P 300,000 P0
4 P 600,000 Income P0 P 600,000
5 P 1,200,000 Health P 1,200,000 P0
EXERCISE DRILL NO. 2: Income tax and transfer tax

Check the box where each of the following items is taxable:
Transaction Income Tax Transfer Tax
1. Barter of properties
2. Sale of goods
3. Rendering of services
4. Donation of properties
5. Transfer of properties from a decedent
to his heirs upon death
6. Transfer for less than full and adequate
consideration
EXERCISE DRILL NO. 3: The tax concept of income

Check the appropriate box whether the following are exempt or taxable:
Item Taxable Exempt
1. Winnings from gambling
2. Income from swindling
3. Indemnity for moral damages
4. Harvest of fruits from an orchard
5. Compensation income
6. Interest income
7. Amount received by the insured in excess of insurance
premiums paid
8. Proceeds of life insurance received by the heirs of the insured
9. Gain on sale of goods by the home office to its branch
10. Gain on sale of goods and services between relatives
11. Gain on sale of goods by a parent corporation to a subsidiary
corporation
12. Appreciation in the value of land
13. Birth of animal offspring
14. Income of a registered Barangay Micro-Business Enterprise
15. Cancellation of debt out of gratuity of the creditor
16. Cancellation of debt by the creditor in exchange of services
rendered by the debtor
17. Matured interest from coupon bonds
18. Receipt of bank loan
19. Salaries of a minimum wage earner
20. PCSO or lotto winnings
21. Benefits from GSIS, SSS, Pag-Ibig or PhilHealth
22. Discovery of hidden treasure
20
EXERCISE DRILL NO. 4: Income taxpayer classification
Indicate the appropriate classification for each of the following taxpayers:
DC – Domestic corporation RC – Resident citizen
RFC – Resident foreign corporation NRC – Non-resident citizen
NRFC – Non-resident foreign corporation RA – Resident alien
NRA-ETB – Non-resident alien engaged in trade or business
NRA-NETB – Non-resident alien not engaged in trade or business
NT – Not taxpayer
Person or Entity Classification
1. A fat Mexican tourist NRA-NETB
2. An overseas Filipino worker NRC
3. An expatriate employee NRC
4. A Filipino who is privately employed in the Philippines RC
5. An unemployed Filipino residing in the Philippines RC
6. A Chinese businessman who have his domicile in the NRA-ETB
Philippines for 6 months
7. A Japanese who married a Filipina and residing in the RA
Philippines for 2 years
8. A 2nd year Korean college student studying in the RA
Philippines
9. A corporation incorporated under Philippine law DC
10. A foreign corporation doing business in the Philippines
11. Donation of a property in trust designated by the donor RC
as irrevocable
12. Donation of a property in trust designated by the donor NT
as revocable
13. A business partnership DC
14. A joint venture organized under a foreign law and is not NRFC
operating in the Philippines
15. An estate of a Filipino citizen judicially administered in the NRC
Japan
16. An estate of a Filipino citizen extra-judicially administered NT
in the Philippines
17. A taxable joint venture organized in the Philippines DC
18. A non-profit corporation organized in the Philippines DC
EXERCISE DRILL NO. 5: General Income Tax Rule

Check the box that properly corresponds to the taxability of the following taxpayers:
Taxpayer World income Philippine income
1. Non-resident citizen
2. Resident alien
3. Non-resident alien engaged in trade or
business
4. Resident foreign corporation
5. Resident citizen
6. Non-resident alien not engaged in
business
7. Non-resident foreign corporation
8. Domestic corporation
9. Taxable trusts established by a Filipino
citizen in the Philippines
10. Taxable estate of a non-resident citizen
judicially administered abroad
21
EXERCISE DRILL NO. 6: Location and situs of income
Compute how much is earned within and earned outside the Philippines from each of the following independent cases:
Income description Within Without
1. Rey earned P100,000 interest income. 40% of these P 60,000 P 40,000
were from non-resident debtors
2. A finance company earned P1,000,000 royalties from a P 600,000 P 400,000
franchise; 40% of these were derived abroad.
3. Raymond earned P100,000 rent from OFWs in his P 40,000 P 100,000
apartment in the US. He also earned P40,000 rent from
his Philippine condominium unit.
4. Chester, a resident citizen, works home online and P 120,000 P0
submits his output to clients. He collected P100,000
service fee from foreign clients and P20,000 from
resident clients.
5. Mark rendered audit services to client in Afghanistan P0 P 500,000
for P500,000. The services were paid in Afghanistan.
6. Jun has a store in a tourist park in Baguio City, P 40,000 P0
Philippines. He earned a total of P40,000 gain from
selling souvenir items. 40% were from foreign tourists.
7. Don Mariano sold to his friend abroad a commercial P 2,000,000 P0
building located in Quezon City, Philippines at a gain of
P2,000,000.
8. John sold his stocks in a domestic corporation to a P 50,000 P0
foreign investor at a gain of P50,000.
9. Manso received P20,000 dividends from a domestic P 20,000 P 30,000
corporation and P30,000 dividend income from a
nonresident foreign corporation
10. Andrew received P40,00 dividend from a resident P 24,000 P 16,000
foreign corporation 60% of its historical income is from (60% xP40,000) (40% x P40,000)
the Philippines.
11. CDO, Inc. manufactures in the Philippines and sells to P 100,000 P0
unaffiliated export clients. A total of P100,000 gross
income was earned during a period.
12. ABC manufactures abroad and sells to its Philippines P 150,000 P 100,000
branch at market prices. Production cost abroad were
P200,000. Billings to branch totaled P300,000 while
branch sales totaled P450,000.
13. James received P100,000 dividend from a resident P0 P 100,000
foreign corporation which realized 40% of its income
from the Philippines.
14. Ellis received P20,000 dividend from a non-resident P0 P 20,000
foreign corporation
15. Davao plant manufactures tables and sells to resident P 400,000 P0
clients. A total of P400,000 gross income was realized
during a period.

1. Which is not a requisite of gross income?
a. Return on capital c. Exempted by law
b. Realized benefit d. Not exempted by law
2. Which is taxable item?

a. Increase in numbers of a herd of animals
b. Compensation for personal injuries
c. Moral damages
d. Interest on moral damages
3. Which is not subject to income tax?

a. Donation c. Sales of goods
b. Sale of service d. Barter of goods
4. The total consideration received from the sale of service constitute

a. Return on capital c. Either a or b
b. Return of capital d. Both a and b
5. When paid for, which of the following items may involve a return on capital?
a. House and lot c. Dignity
b. Life d. Health
6. The total consideration received from the sale of goods at a gain represents 22
7. The total consideration received from the sale of goods at a loss represents
8. Why is income subject to taxation?

a. Income is the most prevalent source of taxpayer’s wealth.
b. Income is the best measure of taxpayer’s ability to pay tax.
c. Rich people tend to have more income than poor.
d. Any of these.
9. Which is not an item of gross income because of the absence of an undertaking from the taxpayer?
a. Proceeds of life insurance policy
b. Forgiveness of indebtedness as an act of gratuity
c. Revaluation surplus on properties
d. Service fees
10. Which is subject to income tax?

a. Proceeds of life insurance policy by the family of the insured
b. Excess of proceeds over the premium paid received by the taxpayer
c. Life insurance proceeds received by the corporation from the insurance of a deceased officer
d. None of these
11. Which of the following is exempted from income taxation because of the absence of ability to pay?
a. Damages received from patent infringement suit
b. Unrealized income from investments
c. Gain on sale of goods
d. Inheritance
12. Income tax may be imposed for the following purposes, except
a. To provide large amounts of revenues
b. To limit corruptions
c. To offset regressive sales and consumption of taxes
d. To mitigate the evils arising from the inequalities in the distribution of income and wealth
13. Which of the following constitutes taxable income>

a. Return of premium on life insurance received by the insured
b. Moral damages received from slander
c. Proceeds of crop insurance
d. Compensation for personal injury
14. Which of the following is not a constructive receipt of income?

a. Forgiveness of indebtedness in consideration of services
b. Matured detachable interest coupons
c. Deposit of income to taxpayer’s bank accounts
d. Cash salary of an employee
15. Transfers for insufficient consideration are subject to

a. Income tax c. Either a or b
b. Transfer tax d. Both a and b
16. Which is specifically exempted from income taxation by virtue of legal exemption?
a. Minimum wage
b. Gain on sale
c. Unrealized gain
d. All of these
23
1. A resident alien naturalized in accordance with Philippine laws is a
a. Resident citizen
b. Resident alien
c. Non-resident alien engaged in trade or business
d. Non-resident alien not engaged in trade or business
2. Who is not a resident alien?

a. An alien who stayed in the Philippines for more than two years.
b. An alien who married and stayed in the Philippines for one year.
c. An alien who stayed in the Philippines for more than one year.
d. An alien who established his intention before the CIR to stay in the Philippines for an extended period of time.
3. Which taxpayer is not a natural person?

a. Resident citizen
b. Taxable estate
4. A Filipino who has been abroad for more than 183 days is classified as a
a. Resident alien
b. Non-resident alien
c. Non-resident citizen
d. Non-resident citizen not engaged in trade or business
5. Which of the following is not an income taxpayer classification?

a. Resident citizen c. Resident foreign corporation
b. Non-resident alien d. General professional partnership
6. An American who showed proof to the satisfaction of the Commissioner of Internal Revenue of his intention to stay
in the Philippines as an immigrant is classified as a
a. Resident citizen c. NRA-ETB
b. Resident alien d. NRA-NETB
7. A Japanese who is staying in the Philippines for 183 days is a

a. Resident alien
c. Non-resident citizen engaged in trade or business
8. A Canadian who is staying in the Philippines for more than one year is a
a. Resident alien
c. Non-resident citizen engaged in trade or business
9. An alien who stayed less than one year in the Philippines is classified as a non-resident alien not engaged in trade
or business if he stayed herein for less than
a. 180 days c. 183 days
b. 1 year d. 2 years
10. A corporation incorporated according to Philippines laws is a

a. Domestic corporation c. Non-resident corporation
b. Resident corporation d. De jure corporation
11. A foreign corporation which is not authorized to conduct business in the Philippines is a
12. A foreign corporation which operates a branch in the Philippines is a

13. A partnership which dominantly operates business abroad is a

a. Domestic corporation c. Non-resident corporation 24
14. Which is required to pay income tax?
a. Revocable trusts
b. Estates under extrajudicial settlement
c. Co-ownership
d. Business partnership
15. Which is not an income taxpayer?

a. Non-resident corporation
b. Non-resident citizen not engaged in trade or business
c. Joint venture engaged in energy operation pursuant to a service contract with the government
d. Irrevocable trusts
16. Which of the following taxpayers is taxable only on income earned from the Philippines?
a. Resident corporation c. Resident citizen
b. Domestic corporation d. All of these
17. All of the following are taxable only on income earned from sources within the Philippines, except
a. Resident alien c. Non-resident corporation
b. Non-resident citizen d. Domestic corporation
18. Which is taxable on world income?

a. Resident corporation c. Resident citizen
b. Non-resident citizen d. Resident alien

1. The place of taxation is
a. Situs rule c. Territoriality
b. Situs d. Gross income
2. Which is an incorrect statement regarding situs of income?

a. Service income is earned in the domicile of the taxpayer.
b. Interest income is earned in the residence of the debtor.
c. Royalty is earned where the intangible is employed.
d. Rent is earned in the location of the property.
3. Which statement is correct regarding situs of income?

a. The gain on the sale of real property is earned in the location of the property.
b. The gain on sale of any property is earned in the place of sale.
c. Merchandising income is earned in the residence of the proprietor.
d. Manufacturing income is earned in the place of sale.
4. Pedro, a non-resident citizen, lent money to Shino, a resident Chinese. The indebtedness was collateralized by a
property located in Japan. The interest income is earned in
a. the Philippines c. Japan
b. China d. Japan. China and the Philippines
5. Gains on the sale of goods manufactured and sold by the taxpayer within the Philippines is subject to tax
a. wherever sold. c. without the Philippines only.
b. if sold abroad only. d. within the Philippines only.
6. Yvonne, a resident alien, bought a car manufactured in the Philippines and exported the same at a gain to Carla, a
non-resident citizen. Which is correct?
a. The gain is subject to tax in the Philippines since the commodity involved is manufactured in the Philippines.
b. The gain is subject to tax in the Philippines since the buyer is a citizen of the Philippines.
c. The gain is both subject to tax in the Philippines and abroad since the commodity involved is manufactured in the
Philippines.
d. The gain is taxable abroad because it is sold abroad.
7. Juan, a resident alien, and Pedro, a non-resident alien, executed a contract of sale in Japan whereby Pedro shall
purchase the lot owned by Juan in the Philippines. Juan gains P1,000,000 in the exchange.
Which is true?
a. The gain is exempt since the gain is derived outside the Philippines.
b. The gain is not subject to Philippine tax since Juan is a resident alien.
c. The gain is subject to Philippine tax because Juan is a resident alien. 25
d. The gain is subject to Philippine tax because the property is in the Philippines.
MULTIPLE CHOICES – Problems
Problem 3-1
Beth negotiated a P1,000,000 non-interest bearing promissory note to Candy. Candy paid Beth P950,000. On due date,
Beth paid Candy P1,000,000. Which is true?
a. Beth earned P50,000 return on capital
b. Candy earned P50,000 return on capital
c. Candy received P50,000 donation
d. Candy received P1,000,000 return of capital
Problem 3-2
Andrew received a total sum of P42,000 from his employer consisting of the following:
P5,000 reimbursements for employer’s expenses paid by Andrew
P15,000 payment of Andrew’s computer set purchased by the employer
P22,000 monthly salary
Andrew’s computer set cost him P12,000. Compute the total return on capital which can be subjected to income tax.
a. P42,000 c. P25,000
b. 37,000 d. 22,000
Solution: [P22,000 + (P15,000 – 12,000)]
Problem 3-3
Betty paid P22,000 annual premium on a life insurance contract which would pay her P1,000,000 in case of her death.
After paying for 4 years, Betty assigned the policy to Carlos for P120,000. Compute the return on capital.
a. P120,000 c. P40,000
b. P80,000 d. P 0
Solution: (P120,000 – 80,000)
Problem 3-4
Becky purchased a P1,500,000 life insurance policy for P100,000. During the year, Becky died and her heirs collected
the entire proceeds. How much of the proceeds is exempt from income tax?
a. P1,500,000 c. P100,000
b. P1,400,000 d. P 0
Problem 3-5
Dan purchased the P1,000,000 life insurance policy of Ben for P120,000. Dan paid the P20,000 annual premiums on the
policy for 4 years after which Ben died.
Compute the total return on capital of Dan.
a. P1,000,000 c. P800,000
b. P880,000 d. P 0
Solution: [P1,000,000 – 120,000 - (P20,000 x 4)]
Problem 3-6
Carlos paid P20,000 annual premium for a P1,000,000 life insurance policy. After 7 years, Carlos surrendered the policy
and was paid by the insurance company P200,000 which represents the cash surrender value of the policy.
Compute the return on capital.
a. P1,000,000 c. P60,000
b. P860,000 d. P 0
Solution: [P200,000 – (P20,000 x 7)]
Problem 3-7
Alexander Company insured the life of its president for P2,000,000. A total of P500,000 in premiums was paid before
the president died. The company collected the total proceeds.
Compute the return on capital.

a. P 0 c. P500,000
b. P1,500,000 d. P2,000,000
Problem 3-8
Onyoc insured his newly constructed building costing P1,000,000. Within a few days, the building was totally destroyed
by a fire. The insurance company reimbursed Onyoc P1,500,000, which represents the fair value of the building
Which statement is false?

a. P1,000,000 of the proceeds is a return of capital.
b. P500,000 is a return on capital. 26
c. P1,500,000 is a return of capital.
d. Only A and B
Problem 3-9
Guilbert is worried about his potato plantation which is expected to yield P400,000 income will be totally devastated
by bad weather conditions. He obtained a P300,000 crop insurance cover for P30,000. Just before harvest, a rare frost
totally destroyed Guilbert’s plantation. The insurance company paid the policy proceeds.
Compute the total recovery of loss profits to be recognized by Guilbert as income.

a. P 0 c. P300,000
b. 100,000 d. P370,000
Problem 3-10
Felix sells hot chili-flavored pancakes using a secret formula he patented. He sued a competing pancake house for
alleging patent infringement and claimed total indemnity of P1,200,000:
P1,000,000 for loss of profits from loss of sales
P200,000 as Attorney’s fee reimbursement
If Felix wins the case and is awarded the total indemnity, compute his total return of capital.
a. P1,000,000 c. P 0
b. P800,000 d. P200,000
Problem 3-11
Henson was one of the passengers of a van that fell off a ravine. Henson sued the bus company and was awarded an
indemnity of P800,000 for the following:
P500,000 for the impairment of his health resulting to the amputation of his legs
P200,000 for his loss of salaries during his hospitalization
P100,000 for his Attorney’s fee
Compute Henson’s return on capital.

a. P 800,000 c. P 200,000
b. P300,000 d. P 0
Problem 3-12
Jake sued an unscrupulous person for derogatory remarks which he considered to have besmirched his reputation. The
court awarded him an indemnity of P1,000,000 inclusive of P200,000 reimbursement for Attorney’s fees and P100,000
exemplary damages. Compute Jake’s total return on capital.
a. P1,000,000 c. P700,000
b. P800,000 d. P 0
Problem 3-13
Kendrick received the following items during the year:
P200,000 donation from a girlfriend
P100,000 service fee from professional services
P300,000 inheritance from his deceased father
P100,000 income from illegal gambling
P50,000 gain on sale of his personal car
P250,000 profits from his bar restaurant
Compute the total subject to income tax.

a. P1,050,000 c. P550,000
b. P750,000 d. P500,000
Problem 3-14
Pines Corporation has a branch in Manila and 70%-owned subsidiary, Choco Hills, Inc. in Davao. The following data
shows Pines Corporation’s sales transactions during the year:
• Pines Corporation billed the Manila branch P1,500,000 for merchandise shipped to the latter at a mark-up of 50%
above acquisition cost. The branch stored the merchandise and did not operate during the year.
• Sold merchandise to unrelated parties at a gain of P800,000
• Sold merchandise to Darrel Asuncion, Pines Corporation’s controlling stockholder, at a gain of P100,000
• Sold various merchandise to Choco Hills, Inc. at a gain of P200,000
Compute the total income of Pines Corporation subject to income tax.

a. P1,700,000 c. P1,100,000
b. 1,200,000 d. P900,000
27
Problem 3-15
Denver is a supervisory employee at Atlantis Corporation. He had the following items of gross income during the year:
• Denver was paid P800,000 salaries.
• Denver’s P100,000 personal loan was paid by Atlantis Corporation as reward for his excellent performance.
• Denver’s P50,000 advances to the company was paid by Atlantis’ chief executive officer as a gift.
• Denver is entitled to excess representation and transportation allowances. Denver received P200,000 total
allowance out of which P120,000 was disbursed by him.
Compute Denver’s total income subject to income tax.

a. P980,000 c. P880,000
b. P900,000 d. P800,000
Problem 3-16
Jen is engaged in business. The following pertains to her transactions during 2014:
• Sold his personal car which was purchased at P200,000 to a friend who paid only half of the car’s P500,000 current
fair value.
• Sales of merchandise was P800,000 and the cost of goods sold was P600,000.
• Jen acquired several stocks from the Philippine Stock Exchange for speculation. These stocks have an aggregate
purchase price of P400,000 but with P700,000 fair value by December 31, 2014.
• Jen’s house and lot which he acquired for P1,500,000 in 2010 now have a current fair value of P2,500,000.
Compute Jen’s total income subject to income tax.

a. P1,800,000 c. P200,000
b. P1,550,000 d. P250,000
Problem 3-17
A condominium home owner’s association collects dues from unit holders and remits the same to service providers on
their behalf. Such dues include electricity, water, security, and maintenance. The association charges unit holders an
additional 2% of their utility bills as service charge.
During the year, the association processed utility bills for unit holders totaling P5,000,000.
How much taxable income is realized by the association?
a. P5,000,000 c. P100,000
b. P4,900,000 d. P 0
Problem 3-18
Kenny used to bet in PCSO lotto. On June 3, 2014, he won P20,000,000 jackpot prize from 6/45 lotto. One P20-ticket
out of 10 bets took the prize. How much is Kenny’s total income subject to income tax?
a. P20,000,000 c. P19,999,900
b. P19,999,990 d. P 0
Problem 3-19
An American citizen has been staying in the Philippines since August 15, 2013. What would be his taxpayer
classification for the year 2013 and 2014, respectively?
a. Non-resident alien engaged in trade or business; resident alien
b. Non-resident alien not engaged in trade or business; resident citizen
c. Non-resident alien engaged in trade or business; resident citizen
d. Non-resident alien not engaged in trade or business; resident alien
Problem 3-20
A citizen who left the Philippines on March 31, 2013 would be classified as
a. Non-resident for the year 2013.
b. Resident citizen for the year 2013.
c. Non-resident for the year 2014.
d. Resident citizen for the year 2014.
Problem 3-21
An alien received P200,000 compensation income in the Philippines and P300,000 rental income from abroad. How
much will be subject to Philippine income tax?
a. None c. P350,000
b. P200,000 d. P500,000
Problem 3-22
A non-resident citizen is an international financier who earned P400,000 interest income from resident debtors and
P300,000 from foreign debtors. How much is subject to Philippine income tax?
a. None c. P400,000 28
b. P300,000 d. P700,000
Problem 3-23
Sarah has the following items of income:
Philippines Abroad
Business income P200,000 P100,000
Professional fees 100,000 50,000
Compensation income 400,000 -
Rent income 300,000 200,000
Interest income 30,000 40,000
1. Assuming Sarah is a resident citizen, compute the total income subject to Philippine income tax.
a. P390,000 c. P1,030,000
b. P1,180,000 d. P1,420,000
2. Assuming Sarah is a resident alien, compute the total income subject to Philippine income tax.
a. P1,420,000 c. P1,030,000
b. P1,180,000 d. P390,000
3. Assuming Sarah is a resident corporation, compute the total income subject to Philippine income tax.
a. P1,420,000 c. P1,180,000
b. P1,030,000 d. P390,000
4. Assuming Sarah is a resident corporation, compute the total income subject to Philippine income tax.
a. P390,000 c. P1,180,000
b. P1,030,000 d. P1,420,000
Case Problems
Case Problem 1
Jaypee has the following income in 2017:
• P10,000 interest income from a non-resident Japanese friend
• P40,000 interest income from Philippine residents
• P500,000 rent income from a commercial complex located in the USA which is leased to resident Filipinos
• P200,000 rent income from a boarding house in Baguio City, Philippines
• P200,000 professional fees rendered to Chinese clients in Hong Kong
• P300,000 salary from a resident employer
• P100,000 gain from sale of merchandise imported and sold to Filipino residents
• P50,000 gain on sale of merchandise purchased locally and sold during her business travel in Hong Kong
• P400,000 gain on sale of the boarding house located in Baguio City to a non-resident buyer
Required:
Compute the total income earned from sources
1. Within the Philippines
2. Outside the Philippines
Answer:
Within Without
• P10,000 interest income from a non-resident Japanese P 10,000
friend
• P40,000 interest income from Philippine residents P 40,000
• P500,000 rent income from a commercial complex located in
the USA leased to resident Filipinos 500,000
• P200,000 rent income from a boarding house in Baguio City,
Philippines 200,000
• P200,000 professional fees rendered to Chinese clients in
Hong Kong 200,000
• P300,000 salary from a resident employer 300,000
• P100,000 gain from sale of merchandise imported and sold
to Filipino residents 100,000
• P50,000 gain on sale of merchandise purchased locally and
sold during his business travel in Hong Kong 50,000
• P400,000 gain on sale of the boarding house located in
Baguio City to a non-resident buyer 400,000 -
Total P 1,040,000 P 750,000
29
Case Problem 2
Joy earns franchise fees from his Hot Burger franchise. He also deals in various properties. Johnny realized the
following gains in 2017:
• P500,000 royalty fees from local Hot Burger outlets
• P200,000 royalty fees from foreign Hot Burger outlets
• P100,000 gain from sales of equipment to foreign franchisees
• P200,000 gain from sales of equipment to local franchisees
• P50,000 gains from sale of investment in domestic stocks to foreign investors
• P40,000 gains from sale of investment in foreign stocks to Filipino investors
Required:
Compute the total income earned from sources
a. Within the Philippines
b. Without the Philippines
Answer:
Within Without
• P500,000 royalty fees from local Hot Burger outlets P 500,000
• P200,000 royalty fees from foreign Hot Burger outlets P 200,000
• P100,000 gain from sales of equipment to foreign
franchisees 100,000
• P200,000 gain from sales of equipment to local
franchisees 200,000
• P50,000 gains from sale of investment in domestic
stocks to foreign investors 50,000
• P40,000 gains from sale of investments in foreign stocks
to Filipino investors - 40,000
Total P 950,000 P 340,000
Case Problem 3
TC Company manufactures wooden furniture for the local and export market. It has a distribution outlet abroad which
handles foreign sales. It bills all customers, including the foreign outlet, 70% above manufacturing costs. The foreign
outlet bills its customers 100% above TC Company’s billing price. TC Company reports P3,400,000 in total sales,
exclusive of sales to the foreign outlet. The foreign outlet reports P2,720,000 total sales to customers.
Compute the manufacturing income respectively earned within and earned without the Philippines.
a. P1,960,000; P1,360,000 c. P840,000; P1,920,000
b. P1,400,000; P1,360,000 d. P840,000; P1,360,000
Solution:
Gross income without = P2,720,000 x 100/200% = P1,360,000
Profit from foreign operation
Billings on foreign operation = P2,720,000 – P1,360,000 = P 1,360,000
Gross income within
From sales to unrelated clients (P3,400,000 x 70%/170%) = P1,400,000
Add: Profit on sales to foreign operation
P1,360,000 x 70/170 = 560,000
Total P 1,960,000
30
CHAPTER 4: INCOME TAX SCHEMES, ACCOUNTING PERIODS AND
ACCOUNTING METHODS
TRUE OR FALSE 1
1. Both active income and passive income do not require direct participation of the taxpayer in earning the income.
False (Only passive income)
2. There are three types of gross income for taxation purposes.
True
3. The three tax schemes are mutually inclusive in coverage.
False (They are mutually exclusive. One excludes the others.)
4. Regular income tax generally covers active income and capital gains.
True (Active income is subject to regular tax. Capital gains are generally subject to regular tax. There are
only two types of capital gains that are exceptionally subject to capital gains tax)
5. Final tax generally covers passive income.
True (Most types of passive income are subject to final tax with the exception un of rent.)
6. Capitals gains arise from the sale, exchange, and other disposition of any assets.
False (from capital assets, not any assets)
7. There are only two types of assets for purposes of taxation.
True (Crop year method is not an accounting period)
8. An ordinary asset is defined to include all other assets other than capitals assets.
False (The definition of capital asset is a residual definition.)
9. The technique used to measure income is referred to as an accounting method. The length of time over which
income is reported is referred to as an accounting period.
True
10.Regular accounting periods are calendar and fiscal.
True
11.Individuals file their income tax returns on or before April 15 of the following calendar year.
True
12.All taxpayers can change their accounting period when there is a change in the nature of their business, but the
BIR must be notified in all cases.
False [Only corporations (and partnerships) can change accounting periods.]
13.The first accounting period of a starting business will more likely be less than 12 months.
True
14.The accounting period of a deceased taxpayer shall be terminated on December 31 in the year of death.
False (The accounting period shall be terminated at the point of death.)
15.Accrual basis and cash basis are the most common accounting methods used in practice.
True
TRUE OR FALSE 2
1. Advanced income is an item of gross income for accrual basis taxpayers.
True (Advanced income is taxable upon receipt)
2. Generally, prepayments are non-deductible in the current accounting period.
True (Deductible as they are used up or are expired in the business of the tax payer.)
3. Prepayments are deductible but in the future period they expire or are consumed in the business or trade of the
taxpayer.
True
4. The use of different methods for different businesses of the same taxpayer permitted by law.
True (The mix of the different methods I’d referred to as hybrid method)
5. Initial payment includes down payment and installments in the year of sale.
True
6. Contract price is synonymous with selling price.
False (Contract price is the total amount receivable in money or property from the buyer. This amount is usually
the selling price but will differ when there is an encumbrance on the property to be assumed by the buyer.)
7. The crop year method is an accounting method.
True (Crop year method is not an accounting method)
8. Under the percentage of completion method, gross income is reported based on the cash collections from the
contract price.
False (Based on percentage of progress of the constitution project)
9. The depreciated value of the property upon termination of the lease constitutes income to the lessee.
True
10.The withheld taxes on the income payments made by the taxpayers are tax credit against their income tax due.
False (These are tax credits of the recipient of the income)
11.There are three types of income tax return for each income tax scheme.
False (Only capital gains tax and regular income tax has returns. Note that final income tax re withheld at 31
source.)
12.All taxpayers, small or large, are encouraged to file their income tax return through the EFPS system of the BIR.
False (Only large taxpayers that meet certain criteria are required to file through the EFPS. Small taxpayers shall
file their returns in their respective Revenue District Office.)
13.Large taxpayers are under the supervision of the BIR Large Taxpayer Service.
True
14.Non-filing and/or non-payment of tax is subject to penalties such as surcharges, interest, compromise, and
imprisonment.
False (The compromise is in lieu of criminal persecution over a tax violation. It does not apply hand in hand with
imprisonment.)
15.The interest on unpaid taxes is computed on the basic tax only excluding the surcharge.
True (The imposition of a penalty upon another penalty is illegal. Hence, the BIR cannot pose the interest to the
amount of the surcharge.)
16.Only large taxpayers shall file under eFPS.
False
17.Both manual filing and filing through e-BIR forms make use of manual payment.
True
18.eFPS is fully electronic tax compliance.
True
19.e-BIR forms makes use of electronic data entry and filing.
True
20.e-FPS filers may file manually when there is a BIR system downtime.
True
Multiple Choices – Theory: General Concepts

1. Which is not a scheme in taxing income?
a. Ordinary gain taxation
b. Regular income taxation
c. Capital gains taxation
b. Regular income taxation d. Final income taxation
2. Which is a correct statement regarding income taxes?

a. An item of income subjected to final tax can still be subject to regular tax.
b. An item of income exempted from final tax is nevertheless taxable to regular tax.
c. An item of income subjected to capital gains tax may be subject to regular income tax.
d. An item of income exempted from tax is likewise exempt from capital gains tax and regular income tax.
3. Which is not a feature of final tax?

a. Covers certain passive income
b. Covers all capital gains
c. Withholding at source
d. None of these
4. Which of the following properties when classified as capital asset is capital gains tax?
a Domestic stocks sold directly to buyer
b. Real property
c. Both a or b
d. None of these
5 Capital asset means

a. real properties used in business.
b. personal properties used in business.
c. real properties not used in business
d. any property, real or personal, not used in business.
6. Which is not an item of passive income?

a. Royalties
b. Prizes
c. Deposit interest income
d. Professional income
7. Which of the following accounting methods is most consistent with the lifeblood doctrine?
a. Crop year method
b. Cash basis
c Installment method
d. Accrual method 32
8. These are accounting techniques or conventions used to measure income
a. Accounting methods
b. Accounting periods
c. Accrual basis
d. Cash basis
9. These are distinct and equal time periods over which income is measured
a. Accounting methods
b. Accounting periods
c. Crop year basis
d. Cash basis
10. Income is recognized when received rather than when earned

a. Cash basis
b. Installment basis
c. Accrual basis
d. Deferred payment basis
11. Income is recognized when earned regardless of when received

a. Cash basis
b. Installment method
c. Accrual basis
d. Percentage of completion
12. Initial payment means

a. Downpayment
b. Total collection within the year the installment sale was made.
c. Installment payments, exclusive of downpayment, within the year the installment sale was made.
d. Total collections within one year from the date the installment sale was made.
13. Income is reported by reference to the extent of project completion in

a. Deferred payment method
b. Installment method
c. Percentage of completion method
d. Completed contract method
14. Which statement is correct?

a. Dealers of real properties can use the installment method without limitation.
b. Dealers of personal properties can use the installment method without limitation.
c. Non-dealers of properties can use the installment method if initial payment exceeds 25% of the selling price.
d. Dealers of properties can use the installment method only if initial payment does not exceed 25% of the selling
price.
15. Leasehold income is recognized over the lease term in

a. Outright method
b. Cash basis
c. Spread-out method
d. Percentage of completion method
16. Statement 1: The excess of mortgage assumed by the buyer over the basis of the properties sold is the amount of
the gain on the sale.
Statement 2: Any collection from an installment contract where the mortgage
exceeds the tax basis of the properties received constitutes collection of income.
a. Statement 1 only
b. Statement 2 only
c. Both statements are true
d. Neither statement is true
17. Which is correct regarding the crop year method?

a Crop year method is an accounting period.
b. Crop year method recognizes farming income when the next planting season commenced.
C. Crop year method matches cropping expenses with the income upon harvest.
d. Crop year method recognizes cropping expenses when incurred and harvest income when realized.
33
18. Which is an incorrect statement regarding the use of accounting period?
a. Individuals can either choose the calendar year or fiscal year accounting period.
b. The regular accounting period for any taxpayer is 12 months.
c. Individual taxpayers are not allowed to report income using fiscal accounting period.
d. Corporations may opt to use either calendar or fiscal accounting period.
19. Under which of the following will short accounting period not arise?
a. Change of accounting period by a corporate taxpayer
b. Change of accounting period by an individual taxpayer
c. Death of a taxpayer
d. Dissolution and liquidation of a business
20. Which is not a special feature of regular income taxation?

a. Use of accounting methods
b. Use of accounting periods
c. Annual payment of income tax
d. Final withholding tax at source
Multiple Choice Problem 4-1: Accounting period

1. An individual income taxpayer shall file his or her income tax return on or before the
a. 15 day of the fourth month of the same calendar year.
b. 15th day of the fourth month of the following calendar year.
c. 15th day of the fourth month of the same fiscal year.
d. 15th day of the fourth month of the following fiscal year.
2. Anderson died on March 31, 2017. Which is a correct statement?

a. Anderson's 2017 income tax return shall cover January 1, 2016 to December 31,2017.
b. Anderson's 2017 income tax return shall cover January 1, 2017 to December 31, 2017.
c. Anderson's 2017 income tax return shall cover January 1, 2017 to March 31, 2017
d. Anderson's 2017 income tax return shall cover April 1, 2017 to December 31, 2017
3. Mrs. Julian started business on July 15 2016. What should be the coverage of her 2016 income tax return?
a. January 1 to July 15, 2016
b. July 15, 2016 to December 31, 2016
c. July 16, 2016 to July 15, 2017
d. January 1 to December 31, 2016
4. A corporation reporting on a fiscal year ending every March 31 shall file its 2017 income tax return not later than
a. April 15, 2017.
b. June 15, 2017.
c. July 15, 2017
d. April 15, 2018.
5. Metersbonwe Corporation started business on April 5, 2016 and opted to report income tax on a fiscal year ending
every October 31. Metersbonwe's first income tax return shall cover
a. April 6, 2016 to October 31, 2016
b. April 5, 2016 to October 31, 2016
c. April 5, 2016 to December 31, 2016
d. April 5, 2016 to April 5, 2017
6. Beneco corporation reports on a calendar year. On August 15, 2016, it stopped business due to persistent losses.
Beneco Corporation's last income tax return shall cover
a. January 1 to December 31, 2016
b. January 1 to August 15, 2016
c. August 15, 2013 to August 15, 2016
d. August 15 to December 31, 2016
7. Effective March 1, 2017, Jonah, Inc. changed its calendar year to a fiscal year
ending every June 30. An adjustment return shall be filed covering the period
a. March 1 to June 30, 2017.
b. January 1 to June 30, 2017.
c. January 1 to March 1, 2017.
d. January 1 to December 31, 2017.
34
8. During 2017, Klein Corporation changed its accounting period to the calendar year. The adjustment return shall be
filed on or before.
a. April 15, 2017.
b. July 15, 2017.
c. April 15, 2018.
d. July 15, 2018.
9. Effective July 2, 2016, Rofelson Company changed its fiscal year ending every March 31 to another fiscal year ending
every August 31. An adjustment return shall be filed covering the period
a. April 1 to July 2, 2016.
b. April 1 to July 1, 2016.
c. April 1 to August 31, 2016.
d. July 3 to August 31, 2016.
10. Effective May 15, 2017, Tabuk, Inc changed its fiscal year ending every April 30 to the calendar year. An adjustment
return shall be filed covering the period
a. May 1 to December 31, 2017.
b. January 15 to December 31, 2017
c. January 1 to April 30, 2017.
d. April 30 to December 31, 2017.
Multiple Choice - Problems 4-2: Tax schemes and accounting methods

1. Astercor, Inc. reported the following during the year:
• P400,000 proceeds of life insurance of an officer where Antercor is the beneficiary (P600,000 still uncollected.)
• P800,000 interest income, exclusive of P200,000 uncollected and accrued interest
• P300,000 increase in value of investment in stocks
Compute the gross income under cash basis.
a. P800,000
b. P1,000,000
c. P1,200,000
d. P1,400,000
2. Compute the gross income under accrual basis.

a. P800,000
b. P1,000,000
c. P1,200,000
d. P1,400.000
3. Berlin Corp. reported the following data for 2019:

• Total net sales made to customers were P2,000,000 in cash.
• Goods purchased for sale totaled P1.200,000 in cash. Beginning and ending inventory of goods for sale,
respectively, were P200,000 and P300,000.
• 1-year advanced rent of P30,000 to apply for 2020 was received from sublease contract
• P40,000 total interest income from customers promissory note earned
P30,000 of this was collected.
• Unrealized foreign exchange gains from foreign currency receivables totaled P60,000.
Using cash basis, compute the total income subject to income tax.
a. P990,000
b. P960,000
c. P750,000
d. P690,000
4. Using accrual basis, compute the total income subject to income tax.
a. P1,060,000
b. P1,000,000
c. P960,00
d. P970,000
35
5. Santiago, Inc. has the following receipts during 2018:
From service billings to clients P400,000
Advances from clients 100,000
Total cash collection P500,000
The P100,000 advances refer to services which will be rendered next year. Total uncollected billing increased from
P100,000 on December 31, 2017 to P150,000 on December 31, 2018.
Compute the gross income using cash basis.
a. P400,000
b. P450,000
c. P500,000
d. P550,000
6. Compute the gross income using accrual basis

a. P400,000
b. P450,000
c. P500,000
d. P550.000
7. In 2019, Bright Inc. sold its parking lot for P2,400,000 payable on installment. The lot was previously acquired for
1,500,000. The buyer has an outstanding unpaid balance of P1,800,000 as of December 31, 2019, Bright's year-end.
Compute Exquisite's gross income in 2019 using the installment method.
a. P900,000
b. P675,000
c. P225,000
d. P112,500
8. Exquisite Corporation sold its old warehouse with carrying amount (tax basis) of P600,000 for P1,000,000. A
downpayment of 15% was collected on July 1, 2019. Additional P150,000 installment payments were received as of
December 31, 2019
Compute the gross profit to be reported for the year 2019.
a. P60,000
b. P120,000
c. P40,000
d. P450,000
9. Lancelot is a dealer of household appliances. He reported the following in 2019 and 2020:
2019 2020
Installment sales P500,000 P800,000
Cost of installment sales 250,000 440,000
Collections 300,000 600,000
Lance's 2020 collection is inclusive of P100,000 accounts from 2019.
Using the installment method, compute Lancelot's gross income subject to income tax in 2020.
a. P360,000
b. P320,000
c. P275,000
d. P240,000
10. Using the accrual basis of accounting, compute Lancelot's gross income subject to income tax in 2020.
a. P360,000
b. P320,000
c. P275,000
d. P250,000
11. Merville is a dealer in real properties. Merville requires 20% downpayment, and the balance is payable over 36
monthly installments starting on the last day of the month following the month of sale. Merville sold properties in
2019 and 2020 with terms as follows:
• House and Lot No. 1 was sold for P1,350,000 on November 11, 2019.
• House and Lot No. 2 was sold for P1,800,000 on July 5, 2020.
Both properties were sold at a gross profit rate of 40% based on the selling price.
Compute Merville's gross income subject to income tax in 2019 and 2020, respectively.
a. P120.000; P720,000
b. P120,000; P864,000
c. P540.000; P720,000 36
d. P540,000, P864,000
12. In 2020, Mr. Marangley, a dealer of car, disposed a brand new Sports utility vehicle (SUV) which costs P800,000 for
P1,200,000, inclusive o under the following terms:
July 1, 2020-as down payment P 100,000
Monthly instalment thereafter 50,000
Mr. Marangley will choose whichever favourable permissible income reporting

method for him.
How much gross income is to be reported in 2020?

a. P400,000
b. P250,000
c. P116,667
d. P108,219
13. In the immediately preceding problem, assuming Mr. Marangley is not a dealer of car, how much gross income is to
be reported in 2020?
a. P40,000
b. P250,000
c. P116,667
d. P108,219
14. Luccio accepted a P1.000,000 construction contract in early 2020. As of December 31, Luccio incurred total
construction costs of P600,000 and estimates additional P200,000 to bring the project to completion. Per independent
appraisal, the building is at its 809% stage of completion. Compute Luccio's 2020 construction income using the
percentage of completion method.
a. P40,000
b. P200,000
c. P160,000
d. P400,000
15. Crevar constructs residential properties for clients and reports income by the percentage of completion method. In
2019, Crevar started a P2,000,000 construction contract Details of his 2019 and 2020 construction follow:
20192020
Annual construction costs P200,000 P800,000
Estimated cost to finish 800,000 250,000
Extent of completion 20% 80%
Compute the construction income in 2019 and 2020.

a. P200,000; P560,000
b. P200,000; P400,000
c. P400,000; P400,000
d. P400,000; P560,000
16. Oliver entered into a 40-year lease contract with Berna. Per agreement, Oliver will construct a building on Bernas
lot and operate the same for 40 years. Ownership of the building will transfer to Berna upon the termination of the
lease. The lease will not commence until the building is completed. Oliver completed the building at a total cost of
P40,000,000 on January 1, 2020. The building is expected to be used over 50 years.
Compute Berna’s income from the leasehold improvement to be reported in 2020

using the spread-out method.
a. P200,000
b. P4,000.000
c. P8,000,000
d. P32,000,000
17. In the immediately preceding problem, assume that the building was completed on July 1, 2020, what is the
income using outright method.
a. P4.000,000
b. P8,000,000
c. P32,000,000
d. P40,000,000
37
18. Tomas leases an office space from Rafi, Inc in a non-renewable 10-year lease
contract. Just after the second year of the lease, Tomas renovated the premises
and made improvements at a cost of P1,200,000. These improvements are
expected to last for 12 years. Compute Rafi's annual income from the leasehold
improvement using the spread-out method.
a. P50,000
b. 37,500
c. P30,000
d. P20,000
19. Hassan started raising swine for sale by purchasing 5 gilts and a boar at a total purchase price of P50,000 on
January 2020. As of December 31, 2020, Hassan' herd grew to 15 guilts, 2 boars and 20 piglets. The total herd has a fair
value of P196,000 when sold as is. During the year, Hassan earned Pl80,000 from selling piglets. How much should
Hassan report as farming income in 2020?
a. P326,000
b. P180,000
c. P146,000
d. P130,000
20. Pedro, a farmer, uses the crop-year method in reporting his income from long-term crops The following data are
relevant to his farming operations in 2020:
• Sales of crops harvested, P900,000
• Expenses on harvested crops, P400,000
• Expenses on maturing crops, P200,000
• Expenses on newly planted crops, P100,000
• Sales of tree branches for firewood P50,000
Pedro uses the crop year method in reporting crop income. Compute Pedro's total
income subject to tax.
a P240,000
b. P340,000
c. P540,000
d. P550,000
Multiple Choice Problem 4-3: Tax compliance

1. A taxpayer filed his income tax return in October 28, 2018. The deadline for the return was April 15, 2018. If he has
P40,000 net tax due, compute the penalties in the form of interest
a. P2,578
b. P2,611
c. P2,867
d. P4,296
2. What is the total surcharge penalty?

a. P0
b. P8,000
c. P10,000
d. P20,000
3. A taxpayer received a notice from the BIR to file his 2016 income tax return not later than January 15, 2018. The tax
due per his return is P100,000. What is the total surcharge penalty?
a. P0
b. P20,000
c. P 25,000
d. P50,000
4. What is his total interest penalty?

a. P6,500
b. P7,900
c. P14,740
d. P15,068
5.Compute the compromise penalty

a. P10,000
b. P15,000
c. P20,000 38
d. P30,000
6. Mani Pakyaw failed to pay file his income tax return for the year 2019 which
should have been filed on or before April 15, 2020. The BIR sent him a notice to
file his return and pay his tax on or before July 18, 2020. Mani Pakyaw fled a
return showing a basic tax due of P1,000,000. Compute the total interest penalty.
a. P35,836
b. P37,644
c. P38,555
d. P39,863
7. Mr.Pakyaw must pay a surcharge of

a. P0
b. P250,000
c. P500,000
d. P1,000,000
8.Rich Goma Corporation failed to file its income tax return for the fiscal year ending August 31, 2019. On June 6, 2020,
it filed an income tax return with a basic
tax still due and payable for the fiscal year amounting to P500.000.
Compute the interest penalty to be imposed by the BIR.

a. P28,603
b. P28,438
c. P45,873
d. P46,207
9. Compute the total tax assessment to be paid, excluding compromise penalty.

a. P653,603
b. P653,438
c. P689,275
d. P660,873
39
CHAPTER 5: FINAL INCOME TAXATION
TRUE OR FALSE 1
1. Generally, interest income from non-bank sources is subject to regular income
True (Final tax on interest covers only interest income from banks and trust funds)
2. Foreign income is subjected to final tax if the taxpayer is taxable on global income.
False
3. Items of passive income from abroad are subject to final tax.
False (Final tax applies only on identified passive income from sources WITHIN.)
4. Interest income on government securities are subject to final tax.
True (They are considered deposits substitutes.)
5. All items of passive income are generally subject to final tax.
False (Passive income are generally subject to final tax, but not ALL)
6. Final tax is collected at source; hence there is no need to file an income tax return.
True
7. Corporations are tax-exempt on inter-corporate dividends from any corporation.
False (Only inter-corporate dividend from DOMESTIC corporation)
8. Individuals and corporations are tax-exempt on interest income on long-term deposits.
False (Only individual taxpayers are exempt)
9. Dividends from resident corporations are subject to regular tax.
True
10. Dividends from Real Estate Investment Trusts are exempt from final tax.
False (REIT dividends are generally subject to 10% final tax.)
11. Stock dividends are always exempt from final tax.
False (Stock dividend is generally exempt, except when it confers upon the recipient an interest different from
what he previously owned or when the declaration of stock dividends amounts to a declaration of cash dividends.)
12. Corporations are subject to final tax on prizes.
False (The NIRC did not contemplate final taxation of prizes on corporations, hence, corporate prizes is deemed
subject to regular income tax.)
13. The share on the net income of the business partnership is subject to a creditable withholding tax, not to final
tax.
False (subject to final tax of 10%)
14. General professional partnerships are subject to final tax but not to regular tax.
False (They are exempt from any income tax.)
15. All non-residents are exempt from final tax on foreign currency deposits.
True (Only resident aliens are subject to 7.5% final tax.)
16. Royalties, active or passive, are subject to regular income tax.
False (Active royalties are subject to regular tax. Passive royalties are subject to final tax.)
17. The tax sparing rule is applicable to resident and non-resident foreign corporations.
False (It applies only to non-resident foreign corporations)
TRUE OR FALSE 2
1. A government employee may claim the tax informer’s reward.
False
2. The final tax on winnings applies to corporations.
False
3. Individuals, except corporations, are subject to final tax on winnings abroad.
False (Passive income abroad, including winnings are subject to regular tax.)
4. Winnings which are not more than P10,000 in amount are subject to the regular income tax.
False (This rule applies to taxable price.)
5. PCSO or lotto winnings are exempt from all types of income tax.
False (PCSO / lotto winnings are now generally subject to 20% final tax)
6. Special aliens do not file a regular income tax return on their compensation income.
True
7. The final tax on interest on tax-free corporate covenant bonds applies only to resident individual or corporate
taxpayers.
False
8. NRA-NETB and NRFC are subject to final tax only to passive income from sources in the Philippines.
False (Active or passive income are subject to final tax)
9. NRA-NETB and NRFCs are not required to file the regular income tax return.
True
40
10. Residents shall withhold 10% final tax upon interest on foreign currency loans of FCDU banks and OBUs under the
expanded foreign currency deposit system.
True
11. A qualified employee trust fund is not subject to final tax.
True
12. The income of FCDU banks from fellow depository banks under the expanded foreign currency deposit system is
subject to 10% final tax.
False (It is exempt)
13. Petroleum service subcontractors are subject to 8% final tax on their income from petroleum service contractors.
True
14. The final withholding tax return shall be filed by the withholding agent on or before the 15th day of the month
the final taxes were withheld.
False (On the 10th day, not on the 15th day)
15. Foreign governments and foreign government-owned and controlled corporations are exempt from final tax.
True (They are exempt from income tax: final tax, capital gains tax or regular income tax.)
MULTIPLE CHOICE – Theory 1

1. Which is correct with regard to the final income taxation?
a. Taxpayers need not file an income tax return.
b. It covers all items of passive income from whatever sources.
c. It applies to all items of gross income of any non-resident earned from sources within the Philippines.
d. It applies to passive income earned abroad.
2. Which statement is correct regarding final income tax?

a. Items of income subjected to final tax can still be subjected to regular tax.
b. Final tax applies only on certain passive income earned within the Philippines.
c. Items of income exempt under final tax are subject to regular tax.
d. Final income tax applies to all passive income from Philippine sources.
3. Interest income from which of the following sources is subject to final income tax?
a. Lending c. Bond investment
b. Mortgage loans d. Money market placements
4. The final tax does not apply to interest on (select the best answer)
a. Long-term deposit c. Deposit substitute
b. Trust funds d. Promissory notes
5. The exemption on final tax on interest from long-term deposit is not applicable to
a. Citizens individual c. Resident corporation or individuals
b. Corporations d. All of these
6. Which interest income is not subject to any income tax?

a. Interest income from discount notes
b. Interest income from bonds issued by a bank
c. Imputed interest
d. Interest income from deposit substitute
7. The final tax rates on pre-termination of long-term deposits is not relevant to

a. any corporations c. resident aliens
b. resident citizens d. non-resident citizens
8. Which of the following is subject to 15% final tax on interest from foreign currency deposits made with Philippines
banks?
a. Non-resident corporation
b. Non-resident alien engaged in trade or business
c. Non-resident alien not engaged in trade or business
d. Resident alien
9. The following are subject to final tax on all income sources within the Philippines. Which is the exception?
a. Non-resident foreign corporation
b. Non-resident alien not engaged in trade or business
d. None of these 41
10. The interest income from lone-term peso deposits made with foreign banks is
a. subject to 20% final tax c. subject to regular tax
b. exempt from any tax d. None of these
11. What is the final tax on interest income on 6-year deposit pre-terminated less than 2 years before maturity?
a. 20% c. 5%
b. 12% d. 0%
12. Which of the following recipients is exempt from final tax on dividends?
a. Resident citizen c. Resident corporation
b. Non-resident citizen d. Resident alien
13. A dividend declaration in 2019 is subject to a final tax of

a. 6% c. 10%
b. 8% d. 20%
14. Dividends declared by a resident corporation is

a. exempt from any tax c. subject to regular income tax
b. subject to 10% final tax d. subject to 20% final tax
15. Between the date of declaration and the date of record, BCD, Inc. sold an investment representing stock of ABC,
Inc., a domestic corporation. Which statement is correct?
a. ABC, Inc. shall withhold 10% dividend tax if the buyer of the sale is an individual.
b. ABC, Inc. shall withhold 10% dividend tax if the buyer of the sale is a corporation.
c. ABC, Inc. shall withhold 10% dividend tax if the seller of the sale is an individual.
d. ABC, Inc. shall withhold 10% dividend tax if the seller of the sale is a corporation.
MULTIPLE CHOICES – Theory 2

1. Which is covered by final tax?
a. Interest income from foreign banks
b. Share in the net income of a joint venture
c. P10,000 taxable prizes from the Philippines
d. Share in the net income of a general professional partnership
2. Which is not subject to 20% final tax?

a. Interest income from trust funds
b. Royalties from musical compositions
c. P11,000 worth of prizes
d. Winnings
3. Which is not subject to 10% final tax?

a. Royalties from literary works
b. Dividends from a domestic corporation
c. Share in the net income of a business partnership
d. Royalties from a business trademark
4. Which of the following is taxable?

a. Prize on sport competitions sanctioned by the national sports organization
b. Prize from dance competition abroad
c. Nobel prize
d. Any prize received without effort
5. Which winning is taxable to a final tax?

a. Winnings exceeding P10,000
b. Winnings not exceeding P10,000
c. Winnings from PCSO or lotto
d. All of these
6. Prizes from sources abroad is subject to final tax

a. if the amount of prizes exceeds P10,000
b. if the amount of prizes does not exceed P10,000
c. if it is given to the taxpayer without effort.
d. under no circumstance 42
7. The following winnings are exempt from tax, except one. Which is the exception?
a. Jueteng winnings c. PCSO winnings not exceeding P10K
b. Lotto winnings exceeding P10K d. All of these
8. Which of the following is exempt from final tax?

a. Interest income earned by a bank from deposits in another bank
b. Royalties from books
c. Interest income earned by a bank from lending activities
d. All of these
9. Dividend income from domestic corporations is subject to final tax effective

a. 2000 c. 1998
b. 1999 d. 1997
10. Prizes arising from sources within the Philippines may be

a. subject to final tax
b. subject to regular tax
c. exempt from tax
d. exempt or subject to final tax or regular tax
11. Any royalties earned abroad by a non-resident corporation is

a. not subject to Philippine income tax
b. always subject to final tax
c. subject to either final tax or regular tax
d. always subject to regular tax
12. The winnings of a resident alien from abroad is

a. subject to regular tax
b. subject to final tax
c. subject to either final or regular tax
d. not subject to Philippine income tax
13. Royalty income of a domestic corporation from abroad is

a. subject to regular tax
b. subject to final tax
c. subject to either final or regular tax
d. not subject to Philippine income tax
14. Winnings from PCSO are generally

a. exempt from any tax
b. subject to regular tax
c. subject to 20% final tax
d. subject to both final and regular tax
15. The final tax rates on passive income are generally similar to the following taxpayers, except one. Select the
exception.
a. Domestic corporation c. Non-resident citizen
b. Resident alien d. Non-resident corporation
16. The tax informer’s reward may be granted to

a. Officials of the BIR
b. Public officials or employees
c. Close relatives of public government employees
d. Relatives of government employees beyond the 6th degree of consanguinity
17. Which is not subject to final tax?

a. Compensation to non-resident aliens not-engaged in trade or business
b. Fringe benefits of supervisory and managerial employees
c. Income of non-resident foreign corporations
d. Fringe benefits of rank and file employees
43
18. Which of the following is exempt from final tax?
a. Winnings in competitions sponsored by a local trading company
b. Prizes in a body building competition
c. Dividends from a foreign corporation
d. Winnings from a casino
MULTIPLE CHOICES – Problems 1

1. Winnie, a resident citizen, deposited P2,000,000 in the 180-day time deposit of Banco de Oro. The deposit pays 8%
interest. Compute the final tax on maturity of the deposit.
a. P6,000 c. P20,000
b. P8,000 d. P16,000
2. Assume that Winnie is a non-resident alien not engaged in trade or business; compute the final tax on maturity of
the deposit.
a. P6,000 c. P20,000
b. P8,000 d. P16,000
3. Renz received P42,000 interest from short-term deposits. Compute the final tax withheld on the interest.
a. P10,500 c. P5,000
b. P9,000 d. P4,500
4. On January 1, 2014, Mr. Albuera invested P2,000,000 in the six-year time deposit of Sulu Unibank which pays 10%
annual interest. Compute the final tax to be withheld by Sulu Unibank on December 31, 2014.
a. P0 c. P200,000
b. P100,000 d. P250,000
5. Assume Mr. Albuera pre-terminated the time deposit on July 1, 2018; compute the final tax to be withheld on pre-
termination.
a. P5,000 c. P45,000
b. P12,000 d. P108,000
6. Boy, a resident citizen, received the following interest income:

• P80,000 from short-term Peso time deposit
• P16,000 from a five-year bonds issued by a commercial bank
• P24,000 from 5/6 lending to market vendors
How much tax must have been withheld from Boy’s interest income?
a. P0 c. P20,000
b. P16,000 d. P24,000
7. Jake Corporation, a domestic corporation, deposited P1,000,000 in the five-year time deposit of Banco Pilipino
which pays 10% annual interest. Compute Jake Corporation’s net interest income in the first year of the deposit.
a. P100,000 c. P80,000
b. P90,000 d. P70,000
8. Assume Jake Corporation is a non-resident corporation; compute the final tax on interest income.
a. P0 c. P20,000
b. P10,000 d. P30,000
9. On January 2, 2011, Quezon Inc. placed P1,000,000 in the 5-year time deposit of Bank of Laguna. The placement
earns 10% annual interest. Quezon, Inc. pre-terminated the deposit on June 30, 2014. Compute the final tax to be
withheld on pre-termination.
a. P0 c. P17,500
b. P10,000 d. P42,000
10. Francis, a resident citizen, invested P1,000,000 in a debt instruments (deposit substitute) issued by Unibank. The
debt instruments pay 10% annual interest payable every quarter. How much final tax should UniBank withhold in
the first quarter of the issue?
a. P0 c. P6,250
44
b. P5,000 d. P20,000
11. Cyndrell, a resident citizen, deposited P5,000,000 in a non-resident foreign depository bank which pays 125 annual
interest. How much final tax shall be withheld in the first year?
a. P0 c. P 120,000
b. P45,000 d. P150,000
12. Rodrigo, a non-resident citizen, deposited his $2,000,000 savings in a two-year time deposit in Blue Bank, a
depository bank under the expanded foreign currency deposit system. The deposit pays 8% annual interest.
Compute the final tax to be withheld in dollars in the first year.
a. $0 c. $ 64,000
b. $24,000 d. $80,000
13. Vernon is a non-resident citizen working abroad. He invested his $1,000,000 personal savings in a FCDU bank
under a joint account with his resident wife. The bank pays 8% annual interest. Compute the final tax to be
withheld in one year.
a. $ 0 c. $ 12,000
b. $6,000 d. $16,000
14. Yvonne, a non-resident alien not engaged in trade or business, made a $5,000,000 deposit to an FCDU Bank. The
deposit pays 8% annual interest. Compute Yvonne’s final tax in the first year.
a. $0 c. $ 160,000
b. $60,000 d. $200,000
15. Gerry, a resident alien, deposited $1,000,000 in a depositary bank under the expanded foreign currency deposit
system. The five-year savings deposit pays 10% annual interest. Assuming a P45:$1 exchange rate, how much final
tax on interest would be withheld in the first year?
a. P 0 c. P 40,000
b. P 15,000 d. P 675,000

1. Kendrick Inc., a domestic corporation, was credited $46,250 interest income on its depositary account in an FCDU
Bank. How much final tax was withheld?
a. $ 0 c. $ 6,937.50
b. $ 7,500 d. $ 23,125.00
2. Assuming Kendrick Inc is a resident foreign corporation, how much final tax was withheld?
a. $ 23,125.00 c. $ 7,500
b. $ 6,937.50 d. $ 0
3. Tuzan Corporation declared P1,000,000 dividends in 2014. 40% of its outstanding shares is held by its only
corporate investor, Abdul, Inc. Compute the amount of dividends tax to be withheld on declaration.
a. P 0 c. P 60,000
b. P 40,000 d. P 100,000
4. Mr. Neis, a resident alien, owns 40% of the shares of Coco Corporation, a resident corporation. Coco declared
P200,000 dividends in 2014. How much final tax should be withheld form Neis’ dividend income?
a. P 40,000 c. P 8,000
b. P 20,000 d. P 0
5. Carrots, Inc. owns 20% of the stocks of Cabbage Corporation. Carrots and Cabbage are both domestic corporations.
Cabbage declared P120,000 dividends in 2014.
How much dividend income after any applicable tax will Carrots receive?
a. P 24,000 c. P 19,000
b. P 20,000 d. P 18,000
6. Mr. Siegfreid, a resident citizen, received P100,000 dividend income from Vodka, Inc., a domestic corporation. How
much final tax must have been withheld by Vodka, Inc.?
a. P 0 c. P 20,000
b. P 11,111 d. P 25,000
45
7. Ms. Gina owns 40% of the capital and profits of Cebu Ventures, a business partnership engaged in the trade of
tourist souvenirs. Cebu Ventures reported P200,000 net income in 2014. Compute the total final tax to be withheld
by the partnership on Gina’s profit sharing.
a. P 0 c. P 10,000
b. P 8,000 d. P 20,000
8. Raymond owns 20% of the capital and profits of a general professional partnership. The partnership reported
P500,000 profits in 2014. How much final tax will be withheld from Raymond?
a. P 100,000 c. P 10,000
b. P 50,000 d. P 0
9. Teddy is a venturer sharing 50% in the profits of Wise Ventures, an unincorporated joint venture, engaged in the
trading of home appliances. Wise Ventures reported P200,000 profits for 2014. How much final tax will be
withheld by Wise Ventures?
a. P 0 c. P 20,000
b. P 10,000 d. P 40,000
10. Zamboanga Corporation, a resident corporation, is a venturer in Southern Philippine Ventures (SPV), an
incorporated joint venture formed under Philippine laws. Zamboanga owns 30% interest in SPV. During 2014, SPV
reported P3,000,000 profit and declared P1,000,000 in dividends. How much final tax will be withheld from the
dividend distribution to Zamboanga Corporation?
a. P 100,000 c. P 90,000
b. P 30,000 d. P 0
11. Petrodrill Ventures, is a joint venture which operates under a service contract with the government. Petrodrill is
30% owned by individual investors. The rest is owned by corporate oil exploration companies. Petrodrill reported
P2,000,000 profit which was to be distributed.
How much final tax will Petrodrill withhold?

a. P 200,000 c. P 140,000
b. P 60,000 d. P 0
12. Mr. Bayugan published his book abroad for the international market. During the first quarter, he earned a gross
royalty of P1,000,000. how much final tax will be withheld by the foreign publisher?
a. P 250,000 c. P 100,000
b. P 200,000 d. P 0
13. Sison Inc. is the only corporate shareholder of Surigao Inc. owning 60% of its outstanding voting shares. During the
year, Surigao Inc. declared a P1,000,000 dividend. Compute the final income tax to be withheld by Surigao.
a. P 100,000 c. P 40,000
b. P 60,000 d. P 0
14. Mr. Tuao won an P800,000 prize in a national dancing competition. The organizer of the event declared that the
P800,000 grand prize was “tax free”. How much final tax must be remitted by the organizer to the BIR?
a. P 200,000 c. P 88,889
b. P 160,000 d. P 0
15. Mr. Crocodile owns a mining property in Prosperidad. He allowed a mining company to operate under a condition
that he will be paid 10% royalty on the gold production. The mining company produced P8,000,000 worth of gold
during the year. How much net royalties will be paid to Mr. Crocodile?
a. P 800,000 c. P 720,000
b. P 640,000 d. P 160,000
46
1. Mr. Aguak earned the following prizes from two different competitions:
Date Event Gross Prize
January 4, 2017 Singing Competition P12,000
February 14, 2017 Painting Competition 10,100
Compute the total final tax that should have been withheld from the above prizes.
a. P 5,500 c. P 3,000
b. P 4,420 d. P 2,400
2. Mr. Rems Orayt participated in two different events on January 4, 2020:

Date Organizer Competition Gross Prize
January 4, 2020 Ang MahiwagangBoses Singing P10,000
January 4, 2020 Sexy Body Foundation Dancing 11,000
Compute the total final tax that should have been withheld from the above prizes.
a. P 0 c. P 3,000
b. P 4,420 d. P 2,000
3. Mr. Conrado won the P50,000,000 6/49 Superlotto Jackpot of the Philippine Charity Sweepstakes Office. How
much final tax will be withheld?
a. P 500,000 c. P 100,000
b. P 200,000 d. P 0
4. Ms. Matti won a gold medal and P50,000 cash prize for chess competition in the Palarong Pambansa. How much
final tax should be withheld from the prize?
a. P 20,000 c. P 5,000
b. P 10,000 d. P 0
5. Tiong Sang Department Store conducted a sales promotion where customer purchases exceeding P1,000 in one
transaction shall be entitled to a ticket for a chance to win P500,000 raffle prize. Mr. Shing won the prize.
How much shall Tiong Sang withhold from the grand prize?
a. P 200,000 c. P 50,000
b. P 100,000 d. P 0
6. Tacurong, a resident citizen, won $1,000,000 from the US lottery. The lottery winning is
a. exempt from tax c. subject to 10% final tax
b. subject to 20% final tax d. subject to regular tax
7. Mr. Curandang submitted a sworn statement regarding the alleged tax evasion practices of Chitie Corporation. This
led the BIR to recover P20,000,000 unpaid taxes. How much net tax informer’s reward shall be paid to Mr.
Curandang?
a. P 1,800,000 c. P 1,000,000
b. P 1,600,000 d. P 900,000
8. A concerned government employee furnished the BIR a statement detailing the improper tax practices of a
corporate taxpayer. The information was instrumental to the collection of P500,000 tax. How much informer’s tax
reward after tax shall be released to the informant?
a. P 0 c. P 45,000
b. P 40,000 d. P 50,000
9. Roy invested P1,000,000 in the “tax free” corporate bonds of RBC Corporation. The bond pays 8.75% interest
annually net of any taxes. How much final tax must RBC Corporation withhold from the annual interest payment to
Roy?
a. P 36,000 c. P 37,500
b. P 16,800 d. P 0
47
10. A taxpayer wants to manually file his Monthly Remittance Return of Final Income Tax Withheld for the month of
February 2017. What is the deadline for the return?
a. February 14, 2017 c. February 10, 2017
b. February 28, 2017 d. April 15, 2017
11. In reviewing its tax compliance, Rang-ay Banco noted that it failed to remit the P90,000 final taxes it withheld for
the month of February 2017. Compute the total amount of taxes due including the penalties if Rang-ay Banco
settles the obligation on March 20, 2017.
a. P 90,000 c. P 113,000
b. P 112,500 d. P 128,000
12. BangkoIllustrado failed to withhold the final tax on the P1,200,000 interest expense which was credited to various
accounts of individual depositors in the month of April 2016. It wants to settle the unpaid final withholding tax on
June 10, 2017. Compute the surcharge and interest penalty due.
a. P 450,000 c. P 64,000
b. P 320,000 d. P 58,000
48
CHAPTER 6: CAPITAL GAINS TAXATION
True or False 1
1. A vacant and unused lot is an ordinary asset to a real estate dealer.
True
2. For taxpayers not engaged in business, assets shall cease to be ordinary assets when they are discontinued from
active use for more than two years.
True
3. Real and other properties acquired are ordinary assets to banks even if they are not engaged in the realty
business.
True
4. Capital assets will not become ordinary assets when used in business.
False
5. An ordinary assets becomes automatically become a capital assets when it is withdrawn from active use.
False
6. The sale of real property capital assets will never be subject to regular income tax.
False (See sales of RFC and the RIT option on individual sale to government)
7. Donated assets become ordinary assets even if the done do not employ the same in business.
False
8. An ordinary asset continues to be an ordinary asset even if idled for more than two years if the tax payer is
engaged in realty business.
True
9. The real properties used by exempt corporations in their exempt operations are capital assets.
True
10.Dealers in realties are subject to their regular tax on their sale of properties.
True
11.Capital gains from assets other than domestic stocks and real properties are subject to regular income tax.
True
12.Dealers in securities are not subject to the stock transaction tax but are subject to the regular income tax on
gains realized upon the sale of stock through the Philippine Stock Exchange.
True
13.Unit of participation in golf, polo, and similar clubs are considered domestic stocks.
True
14.The excess premium on the re-issuance of treasury stocks is subject to capital gains tax.
False
15.The issuance of shares of stock for property is subject to capital gains tax.
False
16.The sale of foreign stocks directly to a buyer is subject to capital gains tax.
False
17.The two-tiered final tax cannot tax cannot apply unless and until there is a gain on the sale, exchange, and other
disposition of stock directly to a buyer.
True
18.The stock transaction tax on the sale of stocks through the PSE cannot apply unless there is a gain on the
transaction.
False (tax is based on selling price)
19.The 6% capital gains tax cannot apply unless there is a gain on the sale of real property.
False (tax is based on SP of FMV)
20.The sale of real properties located abroad is subject to the 6% capital gains tax.
False (only real property capital assets within)
49
True or False 2
1. The annual capital gains tax return is simultaneously due with annual regular income tax return.
True
2. The basis of properties received by way of inheritance is the basis in the hands of the last owner who did not
acquire the same by donation.
False (or the fair value whichever is lower)
3. When specific identification is impossible, the cost of the stocks sold is determined by the weighted average
method.
False (by moving average method)
4. The basis of the stocks received in tax-free exchanges is the basis of the shares given.
False (adjusted basis of the shares received)
5. The transactional capital gains tax return is required to be filed within 30 days from the date of sale.
True
6. The gain on the sale of stock for stocks pursuant to a plan of merger and consolidation is exempt if it resulted in
the transferor acquiring corporate control over the absorbed corporation.
True
7. Installment payment of capital gains tax is allowed if the ratio of downpayment over the selling price of the sale
does not exceed 25%.
False (not downpayment but initial payment)
8. The selling price is used to determine the propriety of using the installment method but the contract price is
used to determine the capital gains tax payable in installment.
True
9. The excess of mortgage over the basis assumed by the buyer constitutes an indirect receipt which is part of the
initial payment and the selling price.
False (not selling price but contract price)
10.Wash sales occur when there is a repurchase of shares within 30 days before and 30 days after the date of
disposal of securities at a loss.
True
11.Control means more than 50% ownership in the voting power of a corporation.
True
12.The sale of delisted stocks is subject to stock transaction tax and not to capital gains tax.
False
13.Gains and loss in a share-for-share swap pursuant to a plan of merger or consolidation shall be recognized up to
the cash and other properties received.
True
14.The sale by the National Housing Authority of commercial lots is subject to capital gains tax.
True
15.If the assessor’s fair value is lower than the selling price, then the fair value of the property is the zonal value.
False (Assessed Value and Zonal value are independent valuations)
16.Title to a property shall not be registered by the Registry of Deeds unless the Commissioner or his
representatives has certified that the tax on the transfer has been paid.
True
17.Domestic corporations are exempt from capital gains tax on the sale, exchange, and other disposition of real
properties.
False (foreign corporations are exempt)
18.The sale of land pursuant to the Agrarian Reform Program is exempt from capital gains tax.
True
19.Foreign corporations are required to pay capital gains tax on the sale of domestic stocks and on the sale of real
property capital assets.
False (only on domestic stocks)
20.The alternative taxation on an expropriation sale is not applicable to corporate taxpayers.
True
50
1. Which is an ordinary asset?
a. Personal car c. Principal residence of the taxpayer
b. Delivery truck d. Wedding ring of the taxpayer
2. Which is not an ordinary asset?

a. Personal laptop of the taxpayer c. Real property held for sale
b. Machineries and equipment d. Leasehold improvements
3. Which is a capital asset to a realty developer?

a. Construction equipment c. Vacant lot held for future development
b. Domestic stocks d. head office building of the developer

a. Home appliances c. Personal cellphone
b. Personal car d. Office supplies
5. Which of the following assets, if not used in business, is subject to regular tax?
a. Real property c. Domestic stock option
b. Domestic stock rights d. Taxpayer’s personal car
6. Which is a capital asset for a security dealer?

a. Domestic stocks c. Real property held for speculation
b. Domestic bonds d. office equipment
7. Which is subject to the 5%-10% capital gains tax?

a. Sale of domestic stocks directly to a buyer within or outside the Philippines
b. Sale of domestic bonds directly to a buyer within the Philippines
c. Sale of domestic stocks through the Philippine Stock Exchange
d. All of the above
8. Who is not subject to capital gains tax on the sale of domestic stocks directly to a buyer?
a. Dealer of cars c. Dealer of securities
b. Real property developer d. realty dealer
9. Which of the following, when sold, is not subject to capital gains tax
a. Boarding house c. House and lot
b. Warehouse d. A and B
10.Which is not subject to the 6% capital gains tax?

a. Donation of property
b. Foreclosure of a mortgaged property
c. Expropriation of one’s property in favour of the government
d. Sale of property for an insufficient consideration
11.Statement 1: Capital gains may arise from sale, exchange, and other disposition of movable properties used in
business.
Statement 2: Ordinary gains may arise from sale, exchange, and other disposition of real properties not used in
business.
Which is true?
a. Statement 1 is correct. c. Both statements are false.
b. Statement 2 is correct. d. Both statements are correct
12. Statement 1: The gains on sale of domestic stocks directly to a buyer is presumed.
Statement 2: The gain on sale of real properties is presumed
Which of the following is correct?
a. Both statements are true. c. Only statement 1 is true.
b. Both statements are false d. Only statement 2 is true.
51
13.Which of the following properties when sold may be subject to capital gains tax?
a. Domestic stock c. Patent
b. Foreign stocks d. Office buildings
14.Statement 1: Only depreciable assets of business qualifies as ordinary assets.

Statement 2: Land used in business as a capital asset since it is not subject to depreciation.
Which of the following is correct?
a. Statement 1 is false c. Both statements are false.
b. Statement 2 is false d. A, B and C
15.Statement 1: Ordinary gains may arise from sale, exchange, and other dispositions of real properties used in
business.
Statement 2: Capital gains may arise from sale, exchange, and other dispositions of real properties not used in
business.
Which is false?
a. Statement 1 is correct. c. Both statements are false.
b. Statement 2 is correct. d. Both statements are correct
Multiple Choice – Theory Part 2

1. Which of the following properties, when sold, may be covered by regular income tax?
a. Share options c. Share warrants
b. Preferred stocks d. Promissory notes
2. Which of the following assets may be subject to capital gains tax upon disposal?
a. Parking lot c. Farm lot
b. Dormitory d. Office supplies
3. The sale of an office building will be subject to

a. 60% of 1% percentage tax c. 15% capital gains tax
b. 60% capital gains tax d. Regular tax
4. The term “other disposition” covers

a. Foreclosure sales c. Expropriation by the government
b. Auction sale d. Any of these
5. Which of the following sales of domestic stocks is subject to capital gains tax?
a. Sale of domestic stocks through the PSE
b. Issue of domestics stocks to subscribers
c. Sale of domestics stocks directly to a buyer
d. Exchange of stocks for stocks in a corporate merger
6. The share of listed shares will never be subjected to

a. 6% capital gains tax c. 15% capital gains tax
b. 60% of 1% percentage tax d. Any of these
7. The sale of non-listed shares may be subjected to

a. 6% capital gains tax only c. 15% capital gains tax only
b. 60% of 1% percentage tax only d. Any of these
8. Which of the following when sold may be exempted from the 6% capital gains tax?
a. Unused land to the government c. Developed residential properties for sale
b. Residential lot d. Principal residence
9. Statement 1: The sale or exchange must result to an actual gain before the 15% capital gains tax is imposed.
Statement 2: The sale or exchange must result to an actual gain before the 15% capital gains tax is imposed.
a. Both statements are correct c. Only statement 1 is correct
b. Both statements are incorrect d. Only statement 2 is correct
52
10.When the annualized capital gains tax exceeds the transactional capital gains tax, the excess is a
a. Tax credit c. Tax refundable
b. Tax payable d. A or B
11.1st statement: Properties acquired by real estate dealers are ordinary assets.
2nd statement: Properties of real estate dealers continue to be classified as ordinary assets even if the change
the nature of their business.
a. First statement is correct c. Neither statement is correct
b. Second statement is correct d. Both statements are correct
12.1st statement: When realty businesses discontinue use of assets for more than two years, the same shall be
reclassified as capital assets.
2nd statement: When realty businesses discontinue use of assets for more than two years, the same shall be
reclassified as capital assets.
a. First statement is correct c. Neither statement is correct
b. Second statement is correct d. Both statements are correct
13.Which is an incorrect statement?

a. The capital gains tax on the disposition of capital stock presumes the existence of gain on the sales
transaction.
b. The buyer of real property capital asset shall withhold the tax at source and remit the same to the
government.
c. Capital gains tax is identified under the NIRC as a form of final tax.
d. The capital gains tax on the disposition of real property presumes the existence of gain on the sales
transaction.
14.Which of these shall pay the two-tiered capital gains tax?

a. A real property developer c. A merchandiser or trade of goods
b. A dealer in stocks d. A or B
15.The sale of real properties which would otherwise be subject to the 6% capital gains tax may nevertheless be
subject to regular income tax if all of the following conditions are met, except one. Which is the exception?
a. The seller must be an individual taxpayer.
b. The sale involves the principal residence of the taxpayer
c. The buyer is the government
d. The taxpayer opted to be subjected to regular tax
16.Which of these pay the 6% capital gains tax?

a. Security dealer c. Real property developer
b. Real property dealer d. None of these
17.The sale of a principal residence is exempt from the capital gains tax if all of the following conditions are met,
except
a. The proceeds is fully utilized in acquiring a new principal residence.
b. The reacquisition must be by purchase.
c. The reacquisition must have been made within 18 months from the date of sale.
d. The capital gains tax must deposited in escrow.
53
1. The transactional 15% capital gains tax is to be paid
a. Within 30 days from the date of sale or exchange
b. Within 30 days from the end of month sale.
c. On the 15th day of the fourth month following the close of the quarter when the sale was made.
d. On the 15th day of the fourth month following the taxpayer’s year-end.
2. The annual 15% capital gains tax return is due

a. Within 30 days from the end of the month sale.
b. Within 30 days from the date of sale or exchange.
c. On or before the 15th day of the fourth month following the taxpayer’s year-end.
d. On or before the 15th day of the fourth month following the close of the quarter when the sale was made.
3. Capital gains tax that is not payable on installment basis is due

a. Within 30 days from the date of sale or exchange.
b. Within 30 days from the end of month of sale.
c. On or before the 15th day of the fourth month following the close of the quarter when the sale was made.
d. On or before the 15th day of the fourth month following the taxpayer’s year-end.
4. Installment payments of the 6% capital gains tax is due

a. Within 10 days from the date of each installment payment.
b. Within 30 days from the date of each installment payment.
c. Within 15 days from the date of each installment payment.
d. Within 20 days from the date of each installment payment.
5. The installment payment of capital gains tax is applicable to the

a. 15% capital gains tax only
b. 6% capital gains tax only
c. Both A and B
d. Neither A nor B
6. The installment payment of capital gains tax is applicable to

a. Individual taxpayer only c. dealers in properties only
b. Corporate taxpayers only d. A or B
7. Which of these capital gains is subject to capital gains tax?

a. Gain on the sale of stock rights
b. Gain on the sale of interest in a professional partnership
c. Gain on the sale of derivative financial instruments linked to commodity prices
d. Gain on sale of bonds
8. Paulo indicated in his return his intent to avail of the exemption from the 6% capital gains tax. Under what
condition will he be exempted?
a. When the proceeds of the sale exceeds the cost basis of the property sold
b. When the proceeds of the sale exceeds the acquisition price of the new residence
c. When the cost basis of the property sold exceeds its selling price
d. When the acquisition price of the new property exceeds the proceeds of the old property sold
9. Partial taxation under the 6% capital gains tax will result when
a. The proceeds from the sale of the old property exceeds the proceeds both its cost and the acquisition
price of the new property.
b. The proceeds of the sale exceeds its zonal value and Assessor’s fair value.
c. The proceeds of the old property exceeds the acquisition price of the new property regardless of the tax
basis, zonal value, and Assessor’s fair value of the old property.
d. The zonal value is greater than the sales proceeds of the old property.
54
10.The transactional capital gains tax on domestic stocks is
a. Not a final tax
b. Included in the income tax return.
c. Creditable to the regular income tax.
d. Creditable to the annual to the annual capital gains tax due.
11.The 15% capital gains tax does not apply to

a. Resident citizen dealers of stocks
b. Non-resident citizen dealers of cars
c. Resident alien dealers of computer parts
d. Domestic corporations dealing in real properties
12.The documentary stamp tax on the sale of domestic stocks directly to a buyer is based on
a. Selling price c. Fair value
b. Par value d. Cost
13.The documentary stamp tax on the sale of real property is based on

a. Selling price c. Cost
b. Fair value d. A or B, whichever is higher
14.The 6% capital gains tax does not apply to

a. Domestic corporation c. Non-resident citizens
b. Resident aliens d. Foreign corporations
15.Who shall file the capital gains tax return for the sale, exchange, and other disposition of real property?
a. Seller c. transfer agent
b. Buyer d. The registry of deeds
MULTIPLE CHOICE – Problems: Part 1

1. Mr. Dionisio sold domestic stocks directly to a buyer at a mark-up on cost of P200, 000. He paid P5, 000 broker’s
commission and P8, 000 documentary stamp tax on the sale. Compute the capital gains tax.
a. P 28, 050 c. P 14, 200
b. P 14, 500 d. P 13, 700
[The net gain is (P200K – P5K – P8K) x 15%]
2. Mr. Abdul, a non-resident alien, sold domestic stocks directly to a buyer at a net gain of P 70, 000. Compute the
capital gains tax.
a. P 10, 500 c. P 4, 000
b. P 6, 000 d. P 3,500
3. Mr. Panay, a non- resident citizen, sold domestic stock rights directly to a buyer at a net gain of P 320, 000.
Compute the capital gains tax.
a. P 30, 000 c. P 27, 000
b. P 25, 000 d. P 48, 000
4. Mr. Digos sold shares of a resident foreign corporation directly to a buyer. The shares were purchased for
P100,000 and were sold at a selling price of P210, 000. Compute the capital gains tax.
a. P 15, 000 c. P 5, 500
b. P 11, 000 d. P 0
5. Grace sold domestic shares directly to a buyer. The following relates to the sale:
Fair market value of shares P 400, 000
Selling price P 300, 000
Cost P 150, 000

a. P 7, 500 c. P 15, 000
b. P 9, 925 d. P 22, 500
55
6. Texas Inc. exchanged its investments representing domestic shares for a piece of land owned by Eagle, Inc.
Fair market value of shares P 400, 000
Fair market value of land P 500, 000
Par value of shares P 300, 000
Cost of shares P 350, 000

a. P 22, 163 c. P 11, 000
b. P 15, 000 d. P 9, 988
(DST = P300K x 1.5/200 = P2, 250dst – P100K) x 15%
7. Digong Inc. exchanged its share investment from Bee Inc., as a payment of its P350, 000 long outstanding loan
from the latter. Digong acquired the shares for P300, 000. Ignoring documentary stamp tax, compute the capital
gains tax on the transaction.
a. P 0 c. P 5, 000
b. P 7, 500 d. P 2, 500
[(P350K-300K) X 15%]
8. On January 5, 2020, Mercy, a stock dealer, disposed the following shares directly to a buyer:
Shares Selling Price Cost
Stock rights P 200, 000 P 170, 000
Common stocks P 100, 000 P 110, 00
Ignoring the documentary stamp tax, the capital gains tax payable on the sale is
a. P 0 c. P 1, 500
b. P 1, 000 d. P 3, 000
(Stocks is an ordinary asset to a dealer in stocks)
9. Kidapawan, Inc., a domestic service company, has the following transactions on the sale of another domestic
corporation:
Transaction Quantity Net Price

Purchase P 20, 000 P 40, 000
Purchase P 30, 000 P 63, 000
Sale P 40, 000 P 92, 000
Assuming the first-in, first-out method, compute the capital gains tax on the sale.
a. P 0 c. P 500
b. P 480 d. P 4, 650
This is NIRC. [P92K- (P20K X 2 per share of the 1st purchase) -(P20K X 2.1 per share of the 2nd purchase)] X 5%
10.Assuming the moving average method, compute the capital gains tax on the sale.
a. P 0 c. P 500
b. P 400 d. P 1, 440
This is NIRC. [P92K- (P40K X 2.06 WA per share)]x 5%
11.Koron Company, a trading company, made the following transactions during the year involving the stocks of
Xurpas, a domestic corporation:
Date Transaction Shares Net Price
6/15/2020 Purchase 10, 000 30
9/30/2020 Sale 8, 000 28
10/3/2020 Purchase 15, 000 25
12/7/2020 Sale 10, 000 32
Koron uses the FIFO method in costing the Xurpas stocks.
Compute the deductible loss on the September 30 sale.

a. P 20, 000 c. P 12, 800
b. P 16, 000 d. 0
56
12.Compute the taxable gain on the December 7 sale.
a. P 64, 118 c. P 51, 467
b. P 60, 000 d. P 44, 000
[ P320K-(2K x 30)- (8K x 25)]
13.Mr. Trinidad has the following transactions during the year on the common stocks of Philippine Pines, a
domestic non-listed company.
Date Transaction Gain (Loss)

5/8/2020 Sale P 120, 000
8/5/2020 Sale (10, 000)
9/8/2020 Sale 250, 000
Compute the annual capital gains tax due for 2020
a. P 54, 000 c. P 22, 000
b. P 29, 000 d. P 3, 000
[(120K-10K+250K) x 15%
14.Mr. Klaibo shows the following transactions in the shares of Aklan Corporation, a closely held corporation:
Date Transaction Quantity Price

2/8/2020 Buy 10, 000 P 120, 000
4/5/2020 Sale 10, 000 P 100, 000
5/1/2020 Buy 20, 000 P 240, 000
What is the tax basis of the shares acquired on May 1 2020?

a. P 300, 000 c. P 240, 000
b. P 260, 000 d. P 220, 000
[(P120K-P100K) + P240K]
15.Mrs. Aurora, a resident citizen, purchased 100, 000 shares of PhilHotdogs, a domestic listed company. The
shares were acquired at P 200, 000. She disposed the shares through the Philippine Stock Exchange at a fair
value of P 250, 000.
a. P 0 c. P 7, 500
b. P 2, 500 d. P 10, 000
(through PSE)
16.Mr. Bosun disposed various stocks at a total consideration of P 400, 000 and paid thereon stock transactions tax
of P 2, 000. Aggregate gains realized totalled P98, 000 after the stock transaction tax. What is the capital gains
tax?
a. P 0 c. P 9, 800
b. P 4, 900 d. P 14, 700
(through PSE)
57
1. A certain taxpayer shows the following over-the-counter transactions in the shares of a domestic corporation:
Date Transaction Quantity Net price

2/8/2020 Purchase 10, 000 112, 000
4/5/2020 Sale 10, 000 100, 000
5/1/2020 Purchase 8, 000 80, 000
6/7/2020 Sale 5, 000 60, 000
Compute the capital gain on June 7, 2020 that is subject to capital gains tax.
a. P 4, 000 c. P 10, 000
b. P 5, 000 d. P 12, 000
The cost per share as of 5/1/2020 is 11.2 per share computed as (P112K-P100K) X 8/10] +P80k) = P89,600/8,000
shares as of 5/1/2020. The CGT on 6/7/2020 is computed as [P60K-(5K x 11.2)]
2. An investor sold domestic stocks directly to a buyer on October 1, 2019 under the following terms:
Selling price P 500, 000

Cost P 200,000
Downpayment 10%
Installments in 2019 P 50, 000
Compute the total capital gains tax in 2019.

a. P 45, 000 c. P 9, 000
b. P 25, 000 d. P 6, 250
[(P50k Dp. + P50K inst.)/P500K] x P45K Total CGT
3. ABC realized the following gains or losses in selling various securities:
Gain on sale of domestic stocks P 300, 000

Par value of domestic stocks sold P 200, 000
Gain on the sale of interest in partnership P 200, 000
Gain on the sale of stocks of foreign corporations P 150, 000
a. P 45, 000 c. P 35, 000
b. P 44, 775 d. P 25, 000
[(P300K - P1.5K dst) x 15%]
4. Compute the documentary stamp tax in the preceding problem.
a. P 1, 500 c. P 562.50
b. P 1, 125 d. P 750
(P1.5/200 x P200K)
5. A wash sale of domestic shares wherein 20, 000 shares were disposed at a loss of P 40, 000 were subsequently
covered up within the 30- day period by a purchase of 15, 000 shares for P 12/share.
The deductible capital loss against capital gain on the wash sale is
a. P 0 c. P 10, 000
b. P 13, 333 d. P 20, 000
(P40K x 5K/20K). Note 5K shares were not covered-up
6. What is the cost of the 15, 000 shares acquired in the preceding problem?
a. P 150, 000 c. P 180, 000
b. P 160, 000 d. P 190, 000
[(P40K x 15K/20K) + P160K] [(P40K x 15K/20K) + P160K]
7. Isidro sold 1, 500 shares of stocks of Achievers Corporation directly to a buyer. The share's par value per shares
was P 85. Isidro purchased the shares for P 90 each. On the date of sale, the shares had a selling price of P 120
per share.
What is the capital gains tax on the sale?
a. P 2, 625 c. P 6, 607
b. P 2, 250 d. P 11, 375
[(1,500 x (P120-P90)] – 1,500 x 85 x 1.5/200) x 15%
58
8. Mr. Palangdan purchased domestic stocks which were priced at 150% above their par values. After two years, he
sold the stocks when their fair value doubled. He paid P 7,500.00 documentary stamp and P 10, 000 in
commission expenses on the sale.
Compute the selling price of the stocks.
a. P 3, 000, 000 c. P 1, 500, 000
b. P 2, 500,000 d. P 1, 000, 000
The documentary stamp tax is P1.5/P200 of par value. It is 0.0075 of the par. Hence, the par value must have
been P7,500.00/.0075 = P1,000,000, the cost would have been P1,500,000 (P1M x 150%). At the date of sale, the
value of the stocks doubled to P3,000,000 (P1.5M value at purchase x 2).
9. Compute the capital gains tax.

a. P 143, 625 c. P 153, 725
b. P 152, 750 d. P 222, 375
The net gain is P3M-P1.5M = (P1.5M – P7,500 – P10,000) x 15%.
10.On June 20, 2019, Mr. Lito filed the capital gains tax return involving the sale of domestic stocks on February 20,
2019. The net gain was P 140, 000. Compute the total amount due including penalties except compromise
penalty.
a. P 26, 880 c. P 11, 700
b. P 21, 500 d. P 12, 250
Basic tax due (140K x 15%) P 21,000
Surcharge (21K x 25%) 5,250
Interest (21K x 90/365 x 12%) ___621_____
The exact answer P 26,871

1. A taxpayer purchased a building to be used as a future plant site. The building remained unused for 3 years due
to a significant decline in customer’s demand in product of the taxpayer. The taxpayer eventually disposed the
property. What is the classification of the property?
a. Ordinary asset c. Either A or B at the discretion of the BIR
b. Capital asset d. Either A or B depending on the intent of the buyer
2. Assuming the same data in the preceding number except that the property was not disposed of but the same
was used as a sales outlet after which it became vacant for more than two years. What is the classification of the
property?
a. Ordinary asset, regardless of the taxpayer
b. Capital asset, regardless of the taxpayer
c. Ordinary asset, if taxpayer is not engage in real estate business
d. Capital asset, if the taxpayer is not engaged in real estate business
3. Anderson disposes a vacant lot for P 3, 000, 000. The lot has an Assessor’s fair value of P 2, 800, 000, a zonal
value of P 3, 200,000, and an appraisal value of P 3, 500, 000. What is the capital gains tax?
a. P 0 c. P 192, 000
b. P 180, 000 d. P 210, 000
(P3.2M x 6%)
4. Puerto Princesa Company sold its parking lot for P 2, 000, 000. The lot has a zonal value of P 2, 500, 000 and
appraisal value of P 1, 800, 000. The capital gains tax on the sale of the lot is
a. P 0 c. P 120, 000
b. P 108, 000 d. P 150, 000
(Parking lot is an ordinary asset.)
5. Mr. Antonio disposed his principal residence for P 2, 000, 000 and immediately acquired a new one for P 1, 800,
000. The old residence cost Mr. Antonio P 1, 000, 000 and had a fair market value of P 2, 500, 000 on the date of
sale.
Compute the capital gains tax to be deposited in escrow.
a. P 0 c. P 120, 000
b. P 60, 000 d. P 150, 000
(P2.5M x 6%)
59
6. What would be the tax basis of Mr. Antonio’s new residence?
a. P 1, 800, 000 c. P 900, 000
b. P 1, 000, 000 d. P 800, 000
(P1M x P1.8M/P2M)
7. How much of the capital gains tax will be released to the taxpayer?
a. P 150, 000 c. P 120, 000
b. P 135, 000 d. P 15, 000
(P150K x P1.5M/P2M)
8. On August 15, 2020, Ms. Mones sold a 500- square meter residential house and lot for P 3, 000, 000. The house
was acquired in 2005 at P 2,000, 000. The Assessor’s fair market values of the house and lot, respectively, were P
1, 500, 000 and P 1, 000, 000. The zonal value of the lot was P 5, 000 per square meter.
What is the capital gains tax?

a. P 180, 000 c. P 150, 000
b. P 120, 000 d. P 240, 000
(P5K x 500 +1.5M) x 6%
9. Manny, a resident Filipino citizen, sold his principal residence (house and lot) at its original purchase price of P
11, 000, 000. The property had a P 13, 000, 000 fair value at the time.
If the proceeds of sale were not invested in the view principal residence but, instead, new funds of P 15, 000, 000
were used to construct it, the capital gains tax is
a. P 0 c. P 750, 000
b. P 660, 000 d. P 780, 000
(13M x 6%)
Numbers 10 through 12 are based on the following information:

Mr. Pepito sold his residential land in Manila with fair market value of P 12, 000, 000 for P 10, 000, 000.
10.If Mr. Pepito utilized all of the P 10, 000, 000in buying a house and lot to be used as his new principal residence,
the final tax due from him is
a. P 720, 000 c. P 120, 000
b. P 600, 000 d. P 0
(P12M x 6%)
11.If Mr. Pepito utilized only P 7, 000, 000 from the proceeds of the sale in acquiring a new residence, the final tax
due from him is
a. P 720, 000 c. P 180, 000
b. P 216, 000 d. P 0
12.The documentary stamp tax due on the sale is

a. P 179, 895 c. P 149, 985
b. P 180, 000 d. P 150, 000
(P12M/1K x 15)
60
1. Mr. Quirino exchanged his stock investment in Carmen Corporation for the shares of stock of Dingala
Corporation. The stocks acquired by Mr. Quirino represent 60% of the stocks of Dingala Corporation.
Basis of the stocks given P 3, 000, 000

Fair market value of stocks given P 5, 000, 000
Fair market value of stocks received p 4, 000, 000
What is the capital gains tax?
a. P 0 c. P 145, 000
b. P 45, 000 d. P 225, 000
(Initial acquisition of control is a tax-exempt transaction.)
2. In the immediately preceding problem, what is the basis of the stocks received by Mr. Quirino?
a. P 0 c. P 4, 500, 000
b. P 3, 000, 000 d. P 5, 000, 000
3. Mr. Eller exchanged his DEF shares for the shares of EFG pursuant to a plan of merger. Mr. Eller bought his
shares for P 1, 000, 000. The shares had a fair value of P 1, 500, 000 on the exchange. Mr. Eller received EFG
shares with a fair value of P 1, 300, 000 plus cash of P 200, 000.
a. P 0 c. P 30, 000
b. P 15, 000 d. P 45, 000
[(P 200K-P100K) x 10%] + P5K
4. What is the basis of the shares received by Mr. Eller?
a. P 0 c. P 1, 200,000
b. P 1, 000, 000 d. P 1, 300, 000
5. What is the basis of the DEF shares received by EFG Company?

a. P 0 c. P 1, 200, 000
b. P 1, 000, 000 d. P 1, 300, 000
6. Raymund exchanged his A Company shares pursuant to a plan of consolidation where A Company will be
integrated with B Company. The following relates to the exchange:
Basis of A Company shares given P 1, 200, 000

Fair value of A Company shares given P 1, 300, 000
Fair value of B Company shares received P 1, 100, 000
Fair value of other properties received P 250, 000
a. P 0 c. P 20, 000
b. P 10, 000 d. P 22, 500
[(P250K-P100K) x 15%
7. What is the tax basis of the B Company received by Raymund?
a. P 0 c. P 1, 200, 000
b. P 1, 100, 000 d. P 1, 350, 000
8. What is the basis of the “boot” or the properties received by Raymund?

a. P 0 c. P 250, 000
b. P 150, 000 d. P 400, 000
9. What is the basis of the A Company shares received by B Company?

a. P 0 c. P 1, 200, 000
b. P 1, 100, 000 d. P 1, 350, 000
61
10.Mrs. Joson sold a residential lot of June 1, 2019 for P 2, 000, 000. The property had a zonal value of P 2,500, 000
and an Assessor’s market value of P 1, 000, 000.
On July 1, 2020, MrsJoson was compelled to pay the capital gains upon the request of the buyer. The compromise
penalty was determined to be P 20, 000.
Compute the total tax due.
a. P 150, 000 c. P 217, 500
b. P 180, 000 d. P 237, 500
E* (No answer)
*No. 10: No answer
Basic tax due (P2.5M x 6%) P 150,000

Surcharge (P150,000 x 25%) 37,500
Interest (P150,000 x 12% x 366/365) __18,049___
Exact answer P 205,549
11.Basic Company paid P 9, 000 documentary stamp tax on the sale of a real property capital asset. Compute the
capital gains tax on the sale.
a. P 9, 000 c. P 36, 000
b. P 16, 000 d. 42, 000
**No. 11:
Higher of selling price or fair value (P9,000 /1.5%) P 600,000

Multiply by: Tax rate 6%
Capital gains tax P 36,000
12.Mr. BassitUnay sold a residential land for P 4, 000, 000. The land had fair value of P 3, 500, 000 and an Assessor’s
fair value of P 2, 000, 000. What is the total income tax and documentary stamp tax due?
a. P 0 c. P 400, 000
b. P 300,000 d. P 450, 000
(P4M x 7.5%)
62
CHAPTER 7: INTRODUCTION TO REGULAR INCOME TAX
TRUE OR FALSE 1
1. There are two types of regular income tax: proportional income tax for corporation and progressive income tax
for individuals.
True
2. NRA-NETBs and NRFCs are also subject to regular income tax.
False (NRA-NETB and NRFC are subject to FIT)
3. All taxpayers are subject to final tax.
False
4. Taxable income is synonymous to net income.
False
5. For all taxpayers, taxable income means the pertinent items of gross income not subject to capital gains tax and
final tax less allowable deductions.
True
6. All taxpayers are subject to regular income tax.
True (As a rule)
7. Employed taxpayers can claim expenses from their employment as deductions against their compensation
income.
False
8. Items of gross income subject to final tax and capital gains tax are excluded in gross income subject to regular
income tax.
True
9. The P 250,000 income tax exemption for individuals is designed to be in lieu of their personal and business
expenses.
False (Only in lieu of personal expenses)
10.Non-taxable compensation are items of compensation that are excluded against gross income.
True
TRUE OR FALSE
1. The taxable compensation income is computed as gross compensation less the non-taxable compensation
income.
True
2. The deadline of filing the corporate quarterly income tax return is the same with the deadline of the quarterly
income tax return of individuals.
False
3. Business expenses can be deducted against all types of gross income subject to regular tax.
False (Only against business gross income)
4. No deduction shall be allowed against taxable income.
True
5. Only corporations may incur deductions against gross income.
False (Deductions apply to individuals and corporations)
6. The gross income from business is measured as sales or gross receipts less cost of sales or cost of services.
True
7. The tax due of individuals is determined by means of a schedule of tax rates.
True
8. The tax due of corporations is determined by multiplying their gross income by 30%.
True
9. The deadline of the annual tax return of corporations using the calendar year is similar to the deadline fixed for
individual taxpayers.
True
10.Every individual taxpayer is exempt from income tax on compensation up to P 250,000 annually but the same
exemption does not apply to business income.
True (effectively, yes)
63
Multiple Choices – Theory: Part 1
1. The general rule in income taxation is

a. final income taxation c. regular income taxation
b. capital gain taxation d. fringe benefit taxation
2. Active income is subject to

a. regular tax c. final tax
b. capital gains tax d. any of these
3. Question 3 and 4 are based on the following:

A. Regular tax B. Final tax C. Capital Gains tax
Which of the foregoing are passive incomes are subject to?
a. A only c. Both A and B
b. B only d. Either A and B
4. Which of the foregoing are capital gains subject to?

a. A only c. Either A or C
b. C only d. Both A or C
5. The net amount of regular income subject to regular tax is called

a. taxable income c. net income
b. compensation income d. gross income
6. Which is not generally subject to regular income tax?

a. Compensation income c. Professional income
b. Business income d. Passive income
7. What are allowable deductions against gross income?

a. Business expenses c. Personal expenses by the taxpayer
b. Family support d. Expenses of employment
8. Deductions are allowed to

a. employed taxpayers c. corporate taxpayers only
b. individual taxpayers only d. taxpayers engaged in business
9. Personal exemptions are allowed to

a. employed taxpayers c. corporate taxpayers only
b. individual taxpayers only d. taxpayers engaged in business
10.Which of the following is not feature of the regular income tax?

a. Net income tax c. Annual tax
b. Final withholding tax d. Creditable withholding tax
11.Which is true with the final withholding tax?

a. The taxpayer still needs to file an annual consolidated return
b. It applies to all items of gross income
c. It constitutes as a partial payment of income tax
d. It applies to certain passive income
12.Which is not true with the creditable withholding tax?

a. Advances to the annual income tax due
b. No need to pay further taxes
c. Need to file actual income tax return
d. Applicable to items of regular income
13.Progressive income tax is applicable to

a. corporate taxpayers c. compensation earners only
b. individual taxpayers d. individuals in business only
14.Proportional regular income tax is applicable to

a. corporation only c. individuals engaged in business
b. compensation earners only d. both individuals and corporations
64
15.Which of the following individual taxpayers is not subject to tax on taxable income?
a. Non-resident citizen c. NRA-NETB
b. Resident alien d. Non-resident alien engaged in business
16.Which of the following corporate taxpayers is not subject to tax on taxable income?
a. Domestic corporation c. Non-resident foreign corporation
b. Business partnership d. Resident foreign corporation
17.Which is a source of income subject to regular income tax?

a. Employment c. Trade or business or exercise of a profession
b. Casual sales transactions d. All of these
18.Which interest income will not be included in the income tax return?
a. Interest income from bank deposits
b. Interest income from lending
c. Interest income from notes
d. Interest income from employees
19.Which is not subject to final tax?

a. Prizes amounting to P 11,000
b. Interest income from bank deposits
c. Winnings from the Philippines
d. Share in the net income of general professional partnership
20.Which of the following is a passive income but is nevertheless subject to regular tax by virtue of exclusion under
final income taxation?
a. Prizes amounting to P 10,000 c. Merchandising income
b. Service income d. Dividends from domestic corporations

1. The following may be relevant in the determination of taxable income:
A. Gross income subject to regular tax
B. Gross income subject to final tax
C. Deductions from gross income
D. Personal exemption
Which is not considered in the determination of taxable income?
a. A and B c. D only
b. C and D d. B and D only
2. Which is a correct statement regarding exclusion in gross income?

a. They are included in gross income subject to regular income tax.
b. They are ignored in the determination of gross income
c. They are presented in gross income but are presented as deductions
d. They are subject to final tax
3. Which of these types of employees may be subject to final fringe benefit?

a. Managerial employees c. Rank and file employees
b. Supervisory employees d. A and B
4. Which is not considered an operating income?

a. Consignment commission income by a retail store
b. Fees from the rendering of services
c. Interest income from advances to employees
d. Sale of scrap
5. Which is a non-operating income?

a. Gain on sale of office building c. Gate receipts of cockpits
b. Sale of goods by a retail store d. Gate receipts of cinemas
6. Which is an incorrect statement?

a. Business expenses are deductible by individuals and corporations
b. Personal exemptions are deductible by individuals and corporations
c. Personal exemptions are deductible by individuals, estates and trusts
d. Deductions are considered in the determination of net income 65
7. Which of the following will least likely to be considered an operating income of a security dealer?
a. Gain on sale of stocks c. Dividend income from domestic corporation
b. Gain on sale of bonds d. Interest income from bonds
8. The distinction between operating and non-operating income is not required in the income tax return of
a. Self-employed individuals in business
b. Mixed income earners
c. Self-employed professionals
d. Purely employed individuals
9. The reporting classification of gross income into operating and non-operating is unnecessary for
a. Corporate taxpayers c. Both A and B
b. Individual taxpayers d. Neither A nor B
10.Which is not part of compensation income?

a. Basic pay of rank and files employees
b. Fringe benefits of managerial and supervisory employees
c. Basic pay of managerial or supervisory employees
d. Fringe benefits of rank and file employees
11.Who cannot claim deductions?

a. Employed taxpayers
b. Self-employed taxpayers in business
c. Self-employed professional taxpayers
d. B and C
12.Who are required to file quarterly declaration of income?

a. Individuals engaged in business
b. Corporations and individuals engaged in business
c. Corporations
d. All individuals and corporations
13.Mr. Jones wishes to file his 2019 income tax return. To avoid penalty, he must file his return on or before
a. April 15, 2019 c. August 15, 2020
b. April 15, 2020 d. November 15, 2020
14.An individual taxpayer must file his income tax return for the third quarter of 2019 on or before
a. April 15, 2020 c. November 15, 2020
b. August 15, 2019 d. November 15, 2019
15.Avida Corporation is filing its income tax return for the quarter ending February 28, 2019. The return must be
filed on or before
a. April 15, 2020 c. April 30, 2019
b. August 15, 201 d. March 30, 2019
16.Which of these taxpayers required to file an income tax return?

a. An employee covered by the substituted filing system
b. A taxpayer deriving purely passive income subject to final tax
c. A special alien with respect to his compensation income
d. A resident citizen who derives his entire income from sources outside the Philippines
17.The taxable income of corporate taxpayers is the

a. net income from business
b. net income from business less personal exemption
c. taxable compensation income
d. taxable compensation income plus net income from business
18.The taxable income of pure compensation income earner is the

a. net income from business less personal exemption
b. taxable compensation income plus net income from business
d. net income from business
66
19.The taxable income of mixed income earner is the
a. net income from business less personal exemption
b. net income from business
d. taxable compensation income plus net income from business
20.The taxable income of pure professional income earner is the

a. net income from business
b. taxable compensation income
c. taxable compensation income plus net income from business
d. net income from professional less personal exemption
21.Which of the following statements is incorrect with respect to the determination of the taxable income of
individual taxpayers with other income?
a. The other income of pure compensation earners is simply included in taxable compensation income
b. The other income of professional income earners is included as part of non-operating income and included in
net income
c. The other income of mixed income earners is also treated as part of non-operating income and included in net
income
d. The other income is simply ignored in the computation of taxable income
22.Statement 1: Individuals with higher income are subject to higher tax rates.
Statement 2: Corporation with higher income are subject to higher tax rates.
Which is correct regarding the regular income tax?
a. Statement 1 only c. Both statements 1 and 2
b. Statement 2 only d. Neither statement 1 and 2
23.Which is incorrect in the determination of taxable income of individual taxpayers?

a. Under the TRAIN law, there is no instance where the compensation income of taxpayers could become zero
b. A net operating loss is deductible against taxable compensation income
c. The taxable compensation income is added to the net income from business
d. Personal exemption is no longer deductible against compensation income
24.Statement 1: Corporations with the same net income may not have the same tax due
Statement 2: Individuals with the same net income may not have the same tax due
Which statement is incorrect regarding in the regular income tax?
a. Statement 1 c. Both statements 1 and 2
b. Statement 2 d. None
25.A purely engaged in business individual taxpayer shall use

a. BIR Form 1701A c. BIR Form 1700
b. BIR Form 1701 d. BIR Form 1702
26.BIR Form 1701 is not intended for

a. Estate c. Pure professional income earner
b. Trust d. Mixed income earner
27.BIR Form 1700 is intended to for

a. Trust c. Pure compensation income earner
b. Estate d. Pure business or professional income earner
28.A corporation subject to different tax rates shall use

a. Form 1702-RT c. Form 1702-MX
b. Form 1702-EX d. Form 1701A
29.A non-profit corporation with a taxable income shall use

30.A school which is subject to a preferential rate or special tax rate shall use
31.A corporation that is subject only to a 30% income tax rate shall use
67
Multiple Choices – Problem 1
1. Mrs. Sanchez Mira had a gross taxable compensation income of P 400,000. She also earned an additional P 2,000
by investing her money in time deposits plus P 3,000 interest income from lending money to a friend. Compute
her taxable income.
a. P 303,000 c. P 300,000
b. P 302,000 d. P 403,000
2. Ms. Claveria had a business net income of P 300,000. She also earned P 5,000 commission from selling cellular
cards and P 12,000 dividends from a domestic corporation. Compute her taxable income.
a. P 300,000 c. P 305,000
b. P 312,000 d. P 317,000
3. Mr. Pamplona earned total gross receipts of P 800,000 and paid P 300,000 in expenses in his accounting
practice. During the same year, he also earned a total of P 60,000 net gain from the sale of domestic stocks
directly to a buyer. He also disposed a vacant lot at a net gain of P 140,000. What is the taxable income of Mr.
Pamplona?
a. P 400,000 c. P 500,000
b. P 460,000 d. P 600,000
4. Mr. Monreal earned a gross compensation income of P 200,000, exclusive of P 20,000 non-taxable
compensation income, and gross business income of P 500,000 before expenses of P200, 000. He also earned
book royalties of P 10,000 and P 8,000 interest income from clients' promissory notes. Mr. Monreal has personal
expenses of P 170,000 during the year. What is Mr. Monreal's taxable compensation income?
a. P 30,000 c. P 200,000
b. P 180,000 d. P 220,000
5. What is Mr. Monreal's net income from business?

a. P 300,000 c. P 310,000
b. P 308,000 d. P 518,000
6. What is Mr. Monreal's the taxable income?

a. P 508,000 c. P 558,000
b. P 450,000 d. P 468,000
7. Mr. Bangul earned a compensation income of P 120,000 and net income from business of P 300,000. He also
earned P 8,000 prizes from a dancing competition and P 45,000 royalties from his musical compositions. Mr.
Bangul has P 150,000 personal expenses. Compute the taxable income.
a. P 473,000 c. P 428,000
b. P 465,000 d. P 420,000
8. In 2015, Ms. Balayan earned P 450,000 compensation income but incurred P 120,000 net loss in her business.
What is her taxable income assuming she incurred personal expenses of P 100,000?
a. P 450,000 c. P 330,000
b. P 550,000 d. P 450,000
9. Mr. Gudani, with a P75,000 personal exemption, had the following data im 2019:
Philippines Abroad
Gross income from sales P 4,000,000 P 6,000,000
Interest income on deposits 40,000 80,000
Less: Deductions 2,000,000 3,600,000
Compute the taxable income of Mr. Gudani is a resident citizen.

a. P 4,480,000 c. P 2,040,000
b. P 4,520,000 d. P 2,000,000
10.In the immediately preceding problem, compute the taxable income if Mr. Gudani is a non-resident citizen.
a. P 4,520,000 c. P 2,040,000
b. P 4,480,000 d. P 2,000,000
68
Multiple Choices – Problem 2
1. Lesde, Inc. had the following income in 2019:
Philippines Abroad
Rent Income P 10,000,000 P 12,000,000
Dividend- domestic 50,000
Royalties 80,000 200,000
Business Expenses 8,700,000 9,800,000
Compute the taxable income if Lesde, Inc. was a domestic corporation.

a. P 3,500,000 c. P 1,380,000
b. P 3,700,000 d. P 1,300,000
2. Compute he income tax due in the immediately preceding problems.

a. P 1,149,000 c. P 1,110,000
b. P 390,000 d. P 381,000
3. Compute the taxable income assuming Lesde Corporation was a resident foreign corporation.
a. P 3,700,000 c. P 1,380,000
b. P 3,500,000 d. P 1,300,000
4. Compute the income tax due in the immediately preceding problem.

a. P 390,000 c. P 1,149,000
b. P 1,110,000 d. P 381,000
5. Compute the tax due if Lesde, Inc. was a non-resident foreign corporation. Assume that the tax sparing is not
applicable to Cavite.
a. P 3,015,000 c. P 3,000,000
b. P 3,039,000 d. P 429,000
6. Mr. Allan derived the following income in 2019:

Business Income P 200,000
Compensation Income 300,000
Interest income from 5/6 lending to clients 100,000
Interest income from bank deposits 20,000
Royalty income 100,000
Capital gain on the sale of personal car 20,000
Capital gain on the sale of stocks directly to a buyer 40,000
Ordinary gain on sale of old office furniture 10,000
Dividend Income 50,000
Compute the total passive income subject to final tax.

a. P 170,000 c. P 270,000
b. P 1,370,000 d. P 1,470,000
7. Compute the total income subject to regular income tax.

a. P 1,730,000 c. P 1,470,000
b. P 630,000 d. P 530,000
8. Compute the capital gain subject to capital gains tax.

a. P 70,000 c. P 60,000
b. P 40,000 d. P 0
69
CHAPTER 8: REGULAR INCOME TAX: EXCLUSION FROM GROSS INCOME
TRUE OR FALSE 1
1. The proceeds of life insurance received by the heirs of the insured upon his death is excluded in gross income.
True
2. The amount received in excess of the premium paid in an insurance contract constitutes an item of gross income.
True
3. Donated income is included in the gross income of the done.
False
4. Compensation for injuries and sickness constitutes profit; hence, an inclusion in gross income.
False
5. It is sufficient that the employee rendered more than 10 years of service for his retirement benefit to be exempt.
False (Other requisites exists.)
6. An employee can secure retirement benefit exemption only once in a lifetime.
True
7. It is a must that the employer maintains a reasonable pension benefit plan for the retirement benefit to be
exempt.
True
8. An employee must have rendered more than 10 years of service before claiming exemption for his termination
benefits.
False
9. The income of the Philippine Government from essential public functions is exempt from any income tax.
True
10. Prizes paid to corporations are inclusion in gross income subject to final tax.
True
11. Only the mandatory portion of GSIS, SSS, PhilHealth, and union dues can be excluded in gross compensation
income.
True
12. Social security benefits, retirement gratuities, and other benefits from foreign governments are excluded in gross
income.
True
13. Social security benefits, retirement gratuities, and other benefits from foreign private entities are included in
gross income.
False
14. The gain from redemption of shares in mutual fund is an exclusion in gross income subject to regular tax because
it is an inclusion in gross income subject to capital gains tax.
False
15. 13th month pay and other benefits are taxable only up to P90, 000.
False
TRUE OR FALSE 2
1. GSIS and SSS benefits are included in gross income to the extent they exceed P90, 000.
False
2. Prizes upon the condition that the recipient render specified future services is an item of gross income.
True
3. Prizes from contests are included in gross income subject to regular income tax.
False (It depends on source and amount)
4. The income of government-owned and controlled corporations is an item of gross income.
True
5. Benefits of veterans of war or retired US army personnel are excluded in gross income.
True
6. The employer’s share to SSS, PhilHealth, and Pag-Ibig contributions are an exclusion in gross income.
False
7. Compared to exclusion, deduction is included I the amount of gross income but both exclusion and deductions are
not reflected in the amount of taxable income.
True
8. The interest income from any bond or debentures, short-term or long-term, is an item of gross income.
True (As a rule)
70
9. Cooperatives that transact business only with members will, in no case, be subject to income tax.
False (They are still taxable on income from unrelated operations.)
10. Cooperatives, regardless of their classification, are taxable on income from their unrelated activities.
True
11. The gain on the sale of long-term bonds with a maturity of 5 years is an exclusion in gross income.
False (More than 5 years)
12. A non-stock, non-profit entity is subject to tax on income of unrelated activities.
True
13. A general professional partnership can be registered as a BMBE.
False
14. Items of income subject to final tax or capital gains tax are exclusion in gross income subject to regular income
tax.
True
15. A BMBE must have a net asset not exceeding P3, 000, 000 to be exempt.
False (The rule is total asset, not net asset.)
Multiple Choices – Theory 1

1. Statement 1: Items of passive income from abroad are subject to regular income tax.
Statement 2: Items of passive income from the Philippines are generally subject to final income tax.
Which statement is generally correct?

a. Statement 1 c. Both statements
b. Statement 2 d. Neither statement
2. Which is true with the regular income tax?

a. Certain items of income are subject to final withholding tax.
b. Tax is payable at regular intervals.
c. Income tax returns are not required.
d. All of these.
3. Which is not a feature of regular income tax?

a. It generally applies to all items of gross income not subject to final tax.
b. Creditable withholding tax
c. Gross income tax
d. Accounting period
4. Statement 1: Capital gains are generally subject to capital gains tax.

Statement 2: Items of passive income in the Philippines are generally subject to regular income tax.
a. Statement 1 is true c. Both statements 1 and 2 are true
b. Statement 2 is true d. Neither statement 1 and 2 are true
5. Deductions from gross income are

a. Personal expenses c. Either A or B
b. Business expenses d. Neither A nor B
6. Which of the following statement best distinguishes deductions from exclusions from gross income?
a. Deductions can be claimed by citizens while P250, 000 income exemption cannot be claimed by aliens.
b. Deductions are outflows from gross incomes while exclusions are not outflows from gross income.
c. Both deductions and exclusions are deducted from gross income.
d. All of these.
7. Progressive income tax does not apply to a

a. Non-resident alien c. Non-resident citizen
b. Resident alien d. Resident citizen
8. Proportional income tax does not apply to a

a. Domestic corporation.
b. Resident foreign corporation
c. Business partnership
d. General professional partnership
9. Which is not included under the term “corporation”?

a. Business partnership c. Non-profit charitable institution 71
b. Co-ownership d. Joint venture
10. The highest marginal tax rate for individual tax payers is
a. 25% c. 35%
b. 30% d. 32%
11. Which corporate tax payer is not subject to regular income tax?
a. Non resident foreign corporation c. Resident foreign corporation
b. Domestic corporation d. Business Partnership
12. Which individual income taxpayer is not subject to regular tax?

a. Resident alien no engaged in trade or business
b. Non-resident citizen not engaged in trade or business
13. Which is correct with respect to exclusions from gross income?

a. They are included as part of gross income but are subsequently deducted
b. They are not included in gross income but are added to the taxable income.
c. They are not considered in the computation of taxable income.
d. They are synonymous with deductions.
14. Which is correct with respect to deductions from gross income?

a. They pertain to expenses of generating items of business or professional gross income.
b. They are excluded from the determination of taxable income.
c. They include all expenses incurred in the generation of any income.
d. They included P250, 000 annual income exemption.
15. Which constitute a taxable item if gross income?

a. Compensation for personal injuries
b. Gain from sale of shares in mutual funds
c. Gain from sale of government bonds
d. Income exempt under treaty
Multiple Choice – Theory 2

1. The proceeds of an insurance policy received by the corporation as beneficiary on the life insurance of its officer
is
a. a gift c. an inheritance
b. a taxable income d. exempt from income tax
2. Mr. Buguey was insured in a life insurance with his daughter, Ybon, as the irrevocable beneficiary. Ybon was paid
the entire proceeds when Mr. Buguey died. The proceeds constitutes
a. a taxable inheritance
b. a taxable gift
c. a taxable income
d. an exclusion from gross income
3. A policy holder who outlived the policy and received a cash surrender value in excess of premiums paid is
exempt upon
a. the amount representing a return of premiums
b. the entire amount received
c. the excess of the amount received over the premium paid
d. None of these
4. The assignment of an insurance policy at an amount in excess of the premiums paid in the policy is subject to
a. donor’s tax c. estate tax
b. income tax d. any of these
5. A widow who collected the life insurance proceeds of her decease husband is
a. exempt to the entire amount of the proceeds
b. taxable to the excess of the proceeds over the premiums paid by the husband
c. taxable to the excess of the proceeds over the premiums paid by the widow
d. exempt with the respect to the portion of the proceeds representing returns of premium
6. The policy holder of a life insurance contract outlived his insurance policy. He was aid P300, 000 upon maturity
of the policy. He paid P250, 000 total premium. What is the inclusion in gross income? 72
a. P300, 000 c. P50, 000
b. P250, 000 d. P 0
7. Which of the following is subject to tax?
a. Proceeds of crop insurance
b. Proceeds of livestock insurance
c. Indemnity under patent infringement suit
d. All of these
8. Which is not a requisite of exemption of a retirement benefit plan?

a. 10 years of employment
b. The employer maintains a reasonable pension benefit plan
c. The retiree must be a senior citizen
d. First time availment of retirement exemption
9. Termination benefits are exempt from income tax provided that the reason for termination is
a. beyond the employee’s control c. within the employee’s control
b. within the employer’s control d. beyond the employer’s control
10. Which is not an item of exclusion from gross income?

a. SSS benefits
b. Income of the government and its political subdivisions
c. Income of the government-owned and controlled corporations
d. Income of foreign governments
11. Which of the following government owned and controlled corporations is subject to income tax?
a. Social Security System
b. National Development Corporation
c. Philippine Charity Sweepstakes Office
d. Philippine Health Insurance Corporation
**Old question, C is also acceptable
12. Which is not an acceptable ground for exemption of termination pay?

a. Mass employee lay-off
b. Closure of employer’s business
c. Grave misconduct and neglect of duty
d. Retrenchment of employer’s business
13. Which is not an item of gross income for taxation purposes?

a. Unrealized income c. Income earned between related parties
b. Advance income d. All of these
14. Which is subject to income tax?

a. Gain on sale of 6-year bonds
b. Gain on sale of shares in mutual funds
c. Interest income of the long-term bonds with a maturity period exceeding five years
d. Interest income on long-term deposits by individual tax payers
15. Which of the following is not an exclusion from gross income?

a. Income of government properties
b. Income taxes collected by Bureau of Internal Revenue
c. Dividend income payable to foreign government
d. Social Security benefits
73
Multiple Choices – Problem: Part1
1. Mr. Bisligo collected the P1,000,000 insurance proceeds of Mr. Pantukan which he bought from the latter for
P400,000. Before the death of Mr. Pantukan, Mr. Bisligo paid total premiums of P200,000. Determine
respectively the exclusion in gross income and the inclusion in gross income.
a P1,000,000: P0 c. P400,000, P600,000
b. P0; P1,000,000 d. P600,000: P400,000
2. Mr.Kabacan surrendered his life insurance policy and received a cash surrender value of P800,000 after
contributing P700,000 in annual premiums. Determine respectively the total exclusion in gross income and the
inclusion in gross income.
a. P800,000; P0 c. P100,000; P700,000
b. P0; P800,000 d. P700,000: P100,000
3. Mr. Tarragoza died. His heirs collected the P2,000,000 proceeds of his life Insurance policy. Mr. Tarragoza
previously paid a total payment of P500,000 in premiums. Determine respectively the exclusion in gross income
and the inclusion in gross income.
a P2,000,000; P0 c. P2,000,000: P0
b. P500,000; P1,500,000 d. P0; P2,000,000
4. Mr. Malalag collected the P5,000.000 fire insurance proceeds of his building which was destroyed by fire. The
building had a tax basis of P4,500,000 at the occurrence of the fire. Determine respectively the total exclusion in
gross income and the inclusion in gross income.
a P5,000,000; P0 c. P4,500,000; P500,000
b. P0: P5,000,000 d. P500,000, P4,500,000
5 Mr. Cateel insured his crops for a P1,000,000 insurance cover against calamities. He paid and expensed P100,000
insurance premium. How much will be included in gross income?
a P900,000 c. P100,000
b. P1,000,000 d. P0
(100K premium is an expense)
6. Ms.Sindangan received a condominium including its accrued income as Inheritance from her deceased
grandfather on April 1. 2014. The following data relates to the property
Fair value of property P125,000,000

Rent income earned before death of decedent 4,000,000
Rent income earned after death of decedent. 6,000,000
Interest on deposits of rentals (40% accruing after death) 100,000
How much of the above income will be included in the gross income of Mr. Sindangan and in the gross income of
the decedent?
a. P6,040,000, P4,060,000. c. P4,060,000; P6,040,000
b. P6,000,000; P4,000,000 d P4,000,000; P6,000,000
7. Mr. Dimataling was hurt in a bus accident. He received a total indemnity of P800,000 from the insurer of the
bus. Mr. Dimataling paid P250,000 in hospital bills due to the accident Compute the total amount to be excluded
in gross income.
a. P0 c. P550,000
b. P250,000 d. P800,000
(the excess is payment for health)
8. At the age of 54, Mrs. Sindangan was awarded a retirement gratuity of P2,000,000 for her 30 years of service in
the Sirawai Company. The employer's retirement benefit plan was with an employee participation feature where
Mrs Sindangan contributed a total premium of P800,000 in the fund. Mrs. Sindangan also received P500.000
benefit from the SSS. Compute the total exclusion in gross income.
a P1,700,000 c P800,000
b. P1,300,000 d. P2,500,000
*(P2M-P.8M+P.5M) 800K is exempt but it is not specifically mentioned by the law as exclusion
74
9. Mrs. Candoni retired from the government after 30 years of service at the age of 55. He received a total
retirement pay of 1.800.000 plus P400 0O0 GSIS benefits. How much will be excluded in gross income?
a.P0 c. P2,200,000
b.P400,000 d. P1,800,000
*(P1.8M + P.4M)
10. The Professional Regulations Commission collected a total sum of P100,000,000 from professional license fees. It
also collected P5,000,000 from rentals of government properties. What is the total exclusion in gross income?
a P0 c. P100,000,000
b P5,000,000 d. P105,000,000
(income from related operations only)
11. Mr. Alvarez had the following income during the year
Gross compensation Income

Including P25,000 13h month pay P325,000
Less Tardiness or absences. (10,000)
Net compensation income P315,000
SSS deductions 12,000
PhilHealth deductions 9,000
Pag-Ibig deductions 10,000
Union dues 5,000
Withholding tax 40,000

Net pay P 239,000
Compute the total exclusions from gross Income.
a. P36,000 c. P66,000
b. P61,000 d. P71,000
*(P25+P12+P9+P10+P5)
12. Mr. Henares received the following during the year:
Donated properties P200,000

Income of donated property before donation 50,000
Income of donated property after donation 30,000
Inherited properties 100,000
How much is taxable to Mr. Henares?

a P380,000 c. P30,000
b. PB0,000 d. P50,000
13. Mr. Tacurong has the following data during the year:
Basic salary P1,200,000

Income tax withheld 50,000
13 month pay 100,000
SSS 2,000
PhilHealth 1,800
Pag-Ibig 1,700
Union dues 500
Capital build up contribution in a social fund 2,000
Compute the total exemptions and exclusions from gross income:
a.P106,000 c. P 96,000
b. P100,000 d. P 88.000
14. Mang Antonio collected P2,000,000 from the fire insurance company that insured his building which had a tax
basis of P1,800,000 when the fire occurred. During the same period, he also collected P300,000 crop insurance
proceeds pertaining to his crops destroyed by frost. The total Item of gross income is
a. P2,300,000. c.P300,000
b. P200,000. d. P500,000
75
Multiple Choices – Problems: Part2
1. Wary of his deteriorating health conditions, Mr. Benigno resigned from his job at age 40 after working as a
supervisor for 12 years. He was paid P2,000,000 as separation pay, Is the P2,000,000 separation pay subject to
income tax?
a. No, because the reason for Mr. Benigno's termination was beyond his control
b. Yes, because Mr. Benigno resigned
c. No, because Mr. Benigno worked for the company for more than 10 years.
d. Yes, because Mr. Benigno is not yet 50 years old.
(this is voluntary resignation)
2. On December 25, 2014, Mr. Reynon was terminated by his employer at age 60 due to his failing eyesight. He
joined the company in February 2006 and has since then worked as treasurer of the company. Is Mr. Reynon's
retirement pay exempt from income tax?
a. Yes, because his termination was beyond his control.
b. No, because he was employed for less than 10 years.
c. Yes, because he is over 50 years old
d. No, because the employee is already a senior citizen.
3. Ms. Henson retired from her job after 25 years of service. She joined the company at the age of 23 and was
promoted from an accounting clerk to VP Finance. She was paid P2,000 000 total retirement pay from the
employer's contributory pension plan which was duly registered with the BIR. Out of the total proceeds, Ms
Henson contributed P600,000. This was Ms. Henson's first retirement from employment. How much is excluded
from gross income?
a. P600,000 c. P2,000,000
b. P1.400,000 d. PO
(she is 48-year old)
4. Assuming Ms. Henson transferred to another company and was retired after 15 years of service. The second
employer paid P,500,000 out of its non-contributory pension fund as retirement pay to Ms. Henson. The pension
fund was also duly registered with the BIR.
Is the second retirement pay exempt from income tax?
a. No, because this is the second time Ms Henson retired from employment
b. Yes because Ms. Henson is already a senior citizen
c. Yes because this is the first time Ms. Henson qualifies for retirement pay exemption
d. No. because an employee must work under one employer until retirement to quality for retirement
exemption.
5. Mr. Baracho won P500,000 in a local chess competition that was sanctioned by a sports organization that is
currently applying for accreditation from the national sports association. Is the P500,000 prize considered an
item of gross income?
a. Yes, because all prizes are subject to income tax

b. No, because the chess competition is not an international competition.
c . No, because the sport competition is a local competition
d. Yes because the organizer is not an accredited sports organization
6. Mr.Sibuco discovered teleport technology where people can be transported over thousand miles in seconds.
Due to this, he was awarded by the scientific community the most coveted Nobel Prize award in 2015. The total
award was $150,000,000.
What is the most correct statement regarding the taxation of the award?
a. The award is an inclusion in gross income subject to regular Income tax since final taxes do not apply abroad
b. The award is an inclusion in gross income subject to final tax since it is more than P10,000.
c. The award is an exclusion in gross income subject to regular tax since it is an inclusion in items of gross
income subject to final tax.
d. The award is an exclusion in gross income.
76
7. The following relates to the compensation income of Ms Lamitan in 2017
Compensation P2,400,000
Contributions to SSS, PhilHealth and HDMF:
-Mandatory contributions 125,000
-Voluntary contributions 150,000
Contribution to PERA 120,000
Creditable withholding taxes 190,000
Employer's share in SSS, PhilHealth and HDMF 105,000
What is the total exclusion in gross income?

a. P225,000 c. P395,000
b. P230,000 d. P465,000
(125 + max 100 PERA)
8. In 2014, Ms Kabacan invested P8,000,000 in the 10-year bonds of Compostela Mining Corporation. She disposed
the investment in 2016 for a total consideration of P8,500,000 inclusive of the P400,000 accrued interest. What
are respectively the inclusion in gross income and the exclusion in gross income?
a.P 500,000: P0 c. P400,000 ; P100,000
b. P100,000; P400,000 d. P0; P500,000
(the interest income is included in gross income while the gain on sale is excluded)
9. Ms. Sibuco invested in the mutual fund and savings deposit of BCBC Bank. She acquired a 100,000 participation
shares when the net asset value per unit of the fund was P98.00. She pulled out her investment when the net
asset value per unit was P101.00. Ms. Sibuco also had P100,000 accrued interest in her savings deposit
Which statement is incorrect?

a. The P300,000 gain is an exclusion in gross income
b. The P100,000 interest income is an exclusion in gross income subject to regular tax
c.The P100,000 interest income is an inclusion in gross income subject to final tax
d. The P300,000 is an inclusion in gross income subject to regular tax, but the P100,000 is an exclusion in gross
income subject to final tax.
10. The following income relates to a proprietorship registered as a BMBE:
Gross income from sales P400,000

Dividend income domestic 9,000
Interest on deposits 6,000
Compute the total exclusion in gross income subject to regular tax.
a P400,000 c. P15,800
b P 415,800 d. PO
(P9K and P6.8K are inclusion to gross income subject to final tax)
11. In the immediately preceding problem, compute the total inclusions in gross income subject to final tax.
a. P0 c P6,800
b.P15,800 d. P9,000
(9K + 6.8K)
12. KKB, a multi-purpose credit cooperative, had the following income in 2015:
Income from related activities P 400,000

Income from unrelated activities:
-Dividends from stocks 20,000
-Income from time deposits 18,000
-Rent income 60,000
Compute the total exclusion from gross income subject to regular tax of cooperative.
a. P0 c. P438,000
b. P38,000 d. P400,000
( P400K + 20K + 18K)
77
13. In the immediately preceding problem, compute the total inclusion in gross income subject to regular tax.
a. P60,000 c. P460,000
b. P98,000 d. P38,000
14. A non stock non-profit charitable entity received the following during 2015:
Contributions from the public P 1,400,000

Income from the sale of merchandise 500,000
Gain on the sale of properties 300,000
What is the total exclusion from gross income subject to regular tax?
a P2,200,000 c. P1,400,000
b. P1,900,000 d. P1,300,000
(income from property and commercial activity is taxable)
15. Mr. Santiago purchased a life annuity for P100,000 which will pay him P10,000 a year. The life expectancy of Mr.
Santiago is 12 years. Which of the following can Mr. Santiago exclude from his gross income?
a. P10,000 c. P 120,000
b. P20,000 d. P 100,000
78
CHAPTER 9: REGULAR INCOME TAX: INCLUSION IN GROSS INCOME
TRUE OR FALSE 1
1. Items of gross income subject to regular income tax and capital gains tax are reportable
to the government.
True
2. Rent is a passive income, but is not subject to final tax.
True
3. The interest income from bonds issued by banks is subject to final tax.
False
4. Gains from dealings in capital assets are generally subject to the regular income tax.
True
5. The gross income from operations enjoying a tax holiday are included in gross income
subject to regular tax, but are presented as deductions in the income tax return.
False
6. The share in a business partnership is subject to final tax, but the share in a general
professional partnership is subject to regular income tax.
True
7. Gains from dealings in ordinary assets are subject to regular income tax.
True
8. Items of passive royalty income are subject to final income tax while items of active
royalty income are subject to regular income tax.
True
9. Compensation income is an inclusion in gross income subject to regular tax except
Compensation income of special aliens.
True
10. The reportable gross income from business or the exercise of a profession is net of the
cost good sold or cost of services.
True
11. Items of income which are included in gross income subject to final tax are excluded in
gross income subject to regular income tax.
True
12. Imputed interest income n is an item of gross income subject to regular income tax.
False
13. Advanced rentals are income in the year received.
True
14. Real property tax and insurance on the property if assumed by the lessee constitute
income to the lessor.
True
15. Corporate winnings are exclusions in gross income; hence, they are exempt from
income tax.
False (Subject to RIT, as a rule)
16. Stock dividends are never subject to income tax.
False (Taxable if there is an alternation in interest after declaration.)
17. Pensions or retirement benefits are inclusions in gross income subject to regular income
tax if the employee is terminated due to any cause within his control.
True
18. Prizes in athletic competitions sanctioned by the Philippine government are exclusions
in gross income subject to final tax, but are inclusions in gross income subject to regular
income tax.
False
19. Corporate prizes are exclusions in gross income subject to final tax but are inclusions in
gross income subject to regular income tax.
True
79
20. Stock splits are never subject to income tax.
True
True or False 2
1. The distributable net income of a general professional partnership is subject to
creditable withholding tax.
True (Not final tax)
2. Exempt joint ventures and co-ownerships are treated as pass-through entities and are
subject to income tax.
False (Not taxable)
3. The distribution by the GPP of items of passive income is an inclusion in gross income of
the partner subject to regular income tax.
True
4. General professional partnerships are exempt from tax and hence, exempt from
withholding.
True
5. The share from the net income of a joint venture organized abroad is subject to 10%
final withholding tax.
False (FIT do not apply abroad)
6. Income distribution from taxable estates and trusts is an inclusion in gross income
subject to regular tax by the heir or beneficiary.
True
7. The recovery of past deduction must be reverted back to gross income of taxpayers using
the accrual basis.
True (generally, exception is when no tax benefit is derived)
8. The recovery of bad debts need not be reverted back to gross income of taxpayers using
the cash basis.
False (This is a normal realization of income)
9. The recovery of deduction from an exempt year is subject to tax.
False (No tax benefits).
10. General professional partnerships are not exempt from regular tax but are subject to
final tax and capital gains tax.
False (GPPs are also exempt from FIT and CGT.)
11. An indebtedness cancelled by the creditor out of mercy is an income to the debtor.
False
12. When there is a net loss in the period the deduction is taken, the subsequent recovery of
the deduction will not have any tax benefit.
False (It depends. There is tax benefit to the excess of the recovery over the loss.)
13. The refund or recovery of non-deductible taxes shall not be reverted back to gross
income.
True (No tax benefit)
14. The loss of the partnership can be claimed by the partners as deduction in their income
tax returns.
False (This is carried over as NOLCO in the future measurement of the income of the GPP.)
15. The accounting period of the taxpayer has a direct impact upon the amount of gross
income to be reported.
False (Accounting method)
16. The power of the CIR to redistribute enterprises income and expense includes the power
to impute income between affiliated enterprises.
False
17. The situs of taxation has an impact on the extent of the reportable gross income.
True
18. Creditable withholding taxes are added back to the amount of reportable gross income.
True
19. The output VAT must be included as part of gross income of VAT taxpayers.
False
20. The requirement to revert back to gross income the amount of withheld taxes applies 80
only to VAT taxpayers.
False (applicable to all taxpayers)
21. Generally, all items of income of NRA-NETB and NRFCs from the Philippines are
inclusions in gross income subject to final tax.
True
22. The taxpayer must enter into an advanced pricing agreement with the BIR for its
cross-border transfer pricing with associated enterprises.
False (not required)
23. Transfer pricing between associated enterprises must be made at arm's length.
True
24. The transfer pricing regulations apply only to cross-border transfers goods and services.
between associated enterprises.
False (including domestic)
25. Corporations under the direct and indirect control of the same controlling individual or
corporation are associated enterprises.
True
26. Under the accrual basis of accounting, items of gross income are reported in the period
they are received.
False
27. Basically, transfer pricing adjustment is needed when the income reported for
Philippine taxation is understated.
True

1. Which is not subject to income tax?
a. Gain from sale of shares in mutual funds by the investor
b. Prizes in recognition of civic, religious, and artistic achievements
c. PCSO and lotto winnings, not exceeding P20,000
d. All of these
2. Which is an item of gross income subject to regular tax?
a. Gain on sale of lot by a realty dealer
b. Interest income from bank deposits
c. Passive qty income
d. Capital gain on the sale of domestic stocks
3. Which is not an item of gross income subject to final tax?

a. Dividends from a domestic corporation
b. Prizes in excess of P10.000 by an individual
c. Share in the income of a general professional partnership
d. Winnings
4. Which of these employee benefits is subject to final tax?

a. Fringe benefits to rank and file employees
b. regular pay f supervisory and managerial employees
c. Fringe benefits to supervisory and managerial employees
d. Regular pay of rank and file employees
5. These are items of gross income subject to regular tax except one. Select the exception.
a. Compensation income
b. Interest income from long-term bank deposits
c. Ordinary gain on sale of properties
d. Interest on notes receivables
6. Which is an income exempt from income tax?

a. Income of a general professional partnership
b. Foreign dividends
c. Taxes collected by the government
d. Income of government-owned and controlled corporations
81
7. All of these are subject to regular income tax, except
a. Professional fees
b. Wages and commissions
c. Business income
d. Capital gain from the sale of real property located in the Philippines
8. Which is exempt from regular tax?

a. Income from construction
b. Income of qualified pension plans
c. Income from merchandising or trading
d. Income from financing or leasing
9. Which item of gross income is not subject to regular tax?

a. Interest income from foreign bank deposits
b. Capital gain on the sale of bonds with more than 5 years maturity
c. Gain on sale of domestic stocks by a security dealer
d. Capital gain on sale of patent
10. Which is not part of compensation income subject to regular tax?

a. Director's fees
b. Bonuses and fixed allowances
c. Portion of salary contributed to SSS
d. Portion of salary used to pay salary loans
11. Which is included in the gross income subject to regular tax of a resident alien?
a. Gross income from the sale of goods abroad
b. Interest income from promissory notes of resident clients
c. interest income from relatives abroad
d. Gain from the sale of domestic stocks directly to a buyer
12. Which of the following deductions from gross compensation income is part of gross income
subject to regular tax?
a. Pag-Ibig Contributions c. PhilHealth Contributions
b. Contributions to union d. dues Withholding tax
13. Which interest income is subject to regular tax?

a. Interest income from notes c. Interest income from lending
b. Interest income from bonds d. All of these
14. Dividends subject to regular tax includes

a. Foreign dividends c. Both a and b
b. Domestic dividends d. Neither a nor b
15. Statement 1: All prizes earned abroad are subject to regular tax.
Statement 2: All prizes in the Philippines are subject to final tax.
Which statement is generally correct?
a. Statement 1 c. Both statements 1 and 2
b. Statement 2 d. Neither statement is true
16. Which is an item of gross income subject to regular tax?

a. Lottery winnings from abroad
b. Imputed interest income
c. Advanced rent representing security deposit for contingency which may or may not
happen
d. Leasehold improvements with useful life not extending beyond the lease term 82
17. Which of the following is not subject to regular tax of a domestic corporation or
resident citizen?
a. Deposit interest income from abroad
b. Prize not exceeding P10,000 from the Philippines
c. Income from abroad exempt under treaty
d. Royalties from abroad
18. Which is subject to regular tax to a non-resident foreign corporation or non-resident alien
not engaged in trade or business?
a. Business income from the Philippines
b. Capital gain from the sale of stocks directly to a buyer in the Philippines
c. Dividends from domestic corporations
d. None of these
19. Which is subject to regular tax to a resident foreign corporation?

a. Service fees abroad
b. Gain from sale of real property capital assets in the Philippines
c. Dividends from a domestic corporation
d. Gain from dealings in properties abroad
20. The proceeds of life insurance received by the wife of the insured is
a. exempt from income tax. c. part of taxable income.
b. subject to final tax. d. partly exempt and partly taxable.

1. Which of the following will not be reported in gross income?
a. Receipt of inheritance
b. Share in the net income of a foreign partnership
c. Royalties from foreign sources
d. Income distribution from a taxable estate
2. Which is not a reportable type of gross income?

a. Passive royalties
b. Dividends from a foreign corporation
c. Rent income
d. Capital gains from the sale of domestic stocks through the PSE
3. Which of the following is included in gross income subject to regular tax?

a. Sub-contract income from petroleum service contractors
b. Interest income from government securities
c. Share in the net income of a taxable co-ownership
d. Farming income
4. All income earned abroad that would otherwise be subject to final taxes if earned within the
Philippines shall be subject to progressive tax of a
a. domestic corporation. c. resident alien.
b. resident citizen. d. all taxpayers.
5. All items of passive income earned abroad are subject to regular tax to a.
a. resident citizen only.
b. a domestic corporation only.
c. a resident citizens and domestic corporations.
d. all taxpayers.
6. Which individual taxpayer is not subject to progressive tax?

a. NRA-ETB c. Resident alien
83
b. Special aliens d. Resident citizen
7. Which corporate taxpayer is not subject to regular tax?
a. Domestic corporation c. Business partnership
b. Resident corporation d. Non-resident foreign corporation
8. Individual taxpayers shall report their income on

a. a fiscal year. c. either a fiscal or calendar year.
b. a calendar year. d. a crop year.
9. Corporations are allowed to report their income on

a. a fiscal year. c. either a fiscal year or calendar year.
b. a calendar year. d. a crop year.
10. Which is subject to progressive tax to an individual taxpayer?

a. proceeds of life insurance policy
b. Gift
c. Amounts received by the insured in excess of premiums pair
d. Compensation for personal injuries
11. Which of these is subject to Philippine regular income tax to a foreigner?

a. Rent income on properties located abroad
b. Dividend income from a domestic corporation
c. Interest income on a deposit abroad
d. Interest income from domestic bonds
12. If not covered by the substituted filing system, employed individual taxpayers shall report
their regular income
a. Monthly. c. quarterly.
b. annually d. quarterly and annually.
13. Corporations and individuals engaged in business or in the exercise of a profession are
required to report their regular income
a. monthly. c. annually.
b. quarterly. d. quarterly and annually.
14. Which is incorrect concerning transactions between associated enterprises?

a. Transactions between related parties should not be controlled.
b. Pricing should be determined by free market forces.
c. Pricing should be motivated by the need to save from total income tax.
d. Non-arm's' length pricing between related parties may be restated by the BIR to
reflect the arms' length value of transactions.
15. Which is not an associated enterprise to the controlling individual of a holding company?
a. An associate of a subsidiary in the group
b. The parent company
c. A direct subsidiary company
d. A subsidiary of a subsidiary in the group
84
Multiple Choices – Problems: Part1
1. Mr. Lolong, a supervisory employee, received the following income in 2015:
Gross compensation income, before contributions
to SSS, PhilHealth, and HF totaling P 124,000 P 800,000
Fringe benefits 200,000
Gain from redemption of shares in a mutual fund 100,000
Commission income 150,000
Gain on sale of stocks through the PSE 400,000
Determine the total income to be reported by Mr. Lolong in gross income.

a. P 1,526,000 c. P 1,026,000
b. P 1,426,000 d. P 826,000
2. Calixto, employed, derived the following income during the year:

Gross salaries P 400,000
13th month pay and other benefits 40,000
SSS, PhilHealth, and Pag-Ibig contributions 20,000
Deductions for loans repayments 50,000
Deductions for withholding tax 60,000
Compute the compensation income to be reported in the annual income tax return.
a. P 440,000 c. P 380,000
b. P 330,000 d. P 390,000
3. Corazon resigned in 2015 after 12 years of service. She had the following income during the
year:
Salary, net of P 80,000 withholding tax, P 20,000 SSS,

P 18,000 Philhealth and P 40,000 13th month pay P 480,000
Separation pay 1,000,000
Compute the gross income subject to progressive (regular) tax return

a. P 1,480,000 c. P 560,000
b. P 1,560,000 d. P 480,000
4. Iriga Corporation is engaged in the sales of goods. It reported the following summarized
financial statements during the year:
Sales P 3,500,000
Less: cost of sales 2.000.000
Gross profit P 1,500,000
Commission income on consignment 200,000
Interest income from customers 20,000
Interest income, net of final tax 10,000
Dividend income 50,000
Total Income P 1,780,000
Less: Admin & Selling Expenses 1,000,000
Net income P 780,000
Compute the total gross income subject to regular tax.

a. P 1,720,000 c. P 1,780,000
b. P 1,770,000 d. P 840,000
85
5. Precy, Inc., a domestic corporation, reported the following income in 2014:
Philippines Abroad
Service fees P 400,000 P 300,000
Interest income - bank 40,000 70,000
Royalties - franchise 80,000 30,000
Compute the total gross income subject to regular income tax.

a. P 920,000 c. P 800,000
b. P 860,000 d. P 700,000
6. If Precy Inc. is a resident foreign corporation, compute the gross income subject to regular
tax.
a. P 520,000 c. P 400,000
b. P 480,000 d. P 440,000
7. Andres leases a building to a client During the year, he received the following remittance from the lessee:
Rental, net of 5% creditable withholding tax P 1,900,000

Real property tax of the leased building 50,000
Reimbursement for utilities used
by the lessee paid by Andres 200,000
How much will be included in gross income subject to regular tax?

a. P 2,050,000 c. P 2,000,000
b. P 2,250,000 d. P 1,950,000
8. Mr. Croki, a professional practitioner, received the following from his clients:
Advances for future services to be rendered P 30,000
Collections for past services rendered 70,000
Reimbursements for client expenses 40,000
Reimbursement for out-of-pocket expenses 10,000
How much will be included in Croki’s gross income for regular income tax purposes?
a. P 150,000 c. P 110,000
b. P 140,000 d. P 100,000
9. The Big Bird Security Agency (BBSA) received P 3,000,000 from its clients, P 2,400,000 of this
was designated for salaries of guards assigned to various client establishments
How much will be in cluded in the gross income of BBSA?

a. P600, 000 c. P 3, 000,000
b. P2, 400,000 d. P 0
10. Farmers, Inc. purchased an agricultural lot for P1, 000,000. It was later discovered that the lot had gold deposits.
Thus its fair value increased to P4, 000,000. This increase in fair value is
a. exempt from income tax. c. partially exempt and partially taxable.
b. subject to income tax. d. any of these
11. Northern Cattle Company produces beef meat. In 2015, it reported the following:
Sales of live cattle P600,000
Sale of young feeders 200,000
Increase in value of cattle inventory 300,000
Compute the income subject to regular tax.

a.P1, 100,000 b. P800, 000
c.P900, 000 d.P600, 000
86
12. Don Juanito has the following income in 2015:
Sales from vegetables P400, 000
Sales from fruits 200, 000
Sales of carabao (acquired forP30, 000 in 2015) 35, 000
Interest income from tenant son the sale of
Agricultural land pursuant to the Agrarian
Reform Program 12, 000
The gross income subject to progressive tax is

a.P647, 000 c.P600, 000
b.P617, 000 d. P605, 000
13. Mr. Conner purchased a life annuity for P1, 000,000 which will pay him P100, 000 a year. What will Mr.
Conner include in his gross income on the 11th year of the policy?
a.P1, 000,000
b. P100, 000
c.P200, 000
d.P1, 200,000
87
14. Edwin purchased the life insurance policy of Paul of or P50, 000. He continued the policy by paying P20, 000
premium after which Paulo died. Edwin collected the P500, 000 proceeds of the policy.
How much will Edwin exclude from his gross income?
a.P500, 000
b.P430, 000
c. P70, 000
d. P0
15. Mr. Benson insured his life with his children as beneficiaries. He died after P200, 000 premiums. His children
collected the P1, 000,000 life insurance proceeds. How much will be excluded from Mr. Benson's gross income?
a. P800, 000
b. P1, 000,000
c.P200, 000
d. PO
16. Pedro's crop was destroyed by incessant rains. He received P200, 000 from an insurer that insured his crop.
The proceeds of the insurance is an
a. item of gross income subject to regular tax.
b. item of gross income subject to final tax.
c. exclusion from gross income.
d. exempt income.
17. In 2016, Northern Crest Corporation (NCC) reported a P40, 000 recovery from bad debts that was claimed as
deduction against gross income in 2012. In 2012, the write-off increased the operating loss of NCC to P50, 000.
NCC was very profitable from 2013 to the present. How much of the P40, 000 recovery is subject to tax?
a. P60, 000 b. P10, 000
c. P40, 000 d. PO
18. West Oil abandoned an oil facility in 2012 and expensed the P300, 000 unrecovered investments in the facility
as abandonment loss. The 2012 taxable income before provision for the loss was P100, 000. West posted
continuous losses until 2015. With increasing prices of crude oil in 2016, West re-commissioned the facility for
use. How much will be included in its gross income in 2016?
a. P300, 000 b. P200, 000
c. P100, 000 d. PO
19. Sarah Baby International graduated from its income tax holiday incentive and is effectively subject to tax
beginning 2015. In 2016, it collected a P4M from a P6M receivable which was written off as bad debt expense in
2013. Before the write-off, Sarah International had P1M profit. Sarah posted profits in 2014 and 2015 in excess of
its operating loss in 2013.
Compute the amount of recovery subject to regular income tax.
a. P6, 000,000 b. P1, 000,000
c. P4, 000,000 d. PO
20. In 2015, an accrual basis taxpayer received a cash refund for an income tax assessment which he paid in 2011
consisting of the following:
Basic tax P 40,000
Surcharge 10,000
Interest 4.000
Total taxes paid Р 54.000
How much must be reverted back to gross income in 2015?
a.PO c. P10, 000
b. P4, 000 d. P44, 000
88
21. in the immediately preceding problem, compute the tax benefit if the refund was of local tax instead of
income tax.
a. P44, 000 c. P10, 000
b.4, 000 d. PO
22. An accrual basis taxpayer recovered a P20,000 local tax expense which was refunded by the local government
in 2015. The local tax expense was paid in 2013 when the taxpayer sustained a P5,000 net operating loss. How
much shall be reverted to income?
a. PO c. P20,000.
b. P5,000 d. P15,000
23. A taxpayer under the cash basis wrote-off P50,000 receivables in 2010. In 2015, P30,000 of the receivables
was recovered. Determine the amount to be included in gross income in 2015 assuming that the taxpayer
incurred a net operating loss of P40,000 in 2010.
a. PO
b.P10,000
c. P30,000
d. P40,000
Multiple Choice - Problems: Part 2

1. Mr. Cordillera owns 20% interest in a joint venture engaged in construction projects. In 2015, the joint venture
reported profits of P500,000, inclusive of P20,000 from time deposits.
Compute the total income to be reported in gross income of Mr. Cordillera?
a. PO c. P96,000
b.P4,000 d. P100,000
2. Mr. Buaya, with 14 dependent children, had the following data for his income tax return in 2018:
Sales P 490,000
Gross compensation income 120,000
Cost of sales 200,000
Non-taxable compensation 30,000
Administrative and selling expenses 120,000
Personal expenses 70,000
What is the net income?
a. P 170,000 C.P 100,000
b. P 290,000 d. P 20,000
3. Compute the taxable compensation income.

a. (P150, 000) c. P 90,000
b. (P30,000) d. P 120,000
4. Compute the taxable income.
a. P10, 000 c. P 140,000
b.P100, 000 d. P 260,000
89
5. Raymund and Zeus practice their accounting profession through a general professional partnership. They
contributed equal capital and agreed to share in profits equally. The following relates to their gross receipts and
expenses:
Gross receipts P4, 000,000

Less: Cost of services 1, 800, 000
Gross income from operations P2, 200,000
Add: Other non-operating income
Gain on sale of equipment Р 100,000
Interest on time deposits 40,000 140, 000
Total gross income P2, 340,000
Less: Allowable deductions 1, 200, 000
Net profits P1, 140, 000
What is the reportable income in the tax return of Raymund?
a.P1, 170,000 c.P550, 000
b.P500, 000 d. P570, 000
6. In the immediately preceding problem, determine the amount of income to be reported by Zeus assuming that
their partnership is a beauty parlor.
a. PO c. P550, 000
b.P570, 000 d. P500, 000
7. An alien employee in an RHQ had the following in 2015:

Gross compensation income the
Contributions to SSS, PhilHealth, and 150,000
HDMF Creditable withholding tax
P 1,500,000 202,500
What is the total amount to include in gross income subject to regular income tax?
a. PO c. P1, 350,000
b.P1, 147,500 d. P1, 500,000
8. In the immediately preceding problem, what is the amount to include in gross income assuming the employee
is a Filipino rank and file employee?
a. PO c. P 1,500,000
b.P1, 147,500 d. P 1,350,000
9. A corporation had the following gains from dealings in properties:

Sale of delivery truck P150, 000
Sale of domestic stocks 50,000
Sale of 3-year corporate bonds 12,500
Sale of 6-year corporate bonds 7,500
What is the total amount of gain to be included in gross income?

a.P150, 000 C. P 170,000
b.P162, 500 d. P 212,500
90
10. Shown below is a compilation of the gain on the sale of real properties:
Real properties Philippines Abroad
classified as
Ordinary assets Р300, 000 P 800,000
Capital assets 400,000 200,000
What is the amount of income to be included in gross income subject to regular income tax assuming the
taxpayer is a domestic corporation?
a. P1, 300,000 c. P 1, 700, 000
b.P1, 100,000 d. P 300, 000
11. What is the gain to be included in gross income subject to regular income tax if the taxpayer is a resident
foreign corporation?
a. P 300,000 c. P 700,000
b.P400, 000 d. P 1,100,000
12. What is the gain to be included in gross income if the taxpayer is a resident alien?
a. P700, 000 c. P 300,000
b.P400, 000 d. P 1,100,000
13. A taxpayer collected the following passive income during the year:
Passive income Philippines Abroad
Interest income from Р300, 000 P800, 000
banks
Royalties from books 200,000 100,000
Rent of properties 400,000 200,000
What is the amount to be reported in gross income if the taxpayer is a resident citizen?
a. P 900,000 c. P 1,500,000
b.P1, 100,000 d. P 2,000,000
14. In the immediately preceding problem, what is the reportable gross income assuming the taxpayer is a
resident alien?
a. P0 c. P 600.000
b.P900, 000 d. P 400,000
15. In 2020, the taxpayer received the following prizes and winnings:
Passive income Philippines Abroad
Prizes P10, 000 P400, 000
Winnings 400,000 100,000
What is the reportable item of gross income if the tax payer respectively is a resident citizen and a non-resident
citizen?
a. P 500,000; PO c. P 0; P 500,000
b. P510, 000; P 10,000 d. P 910,000; P 410,000
16. What is the reportable item of gross income if the taxpayer is a domestic corporation and a resident foreign
corporation, respectively?
a. P 500,000; P 0 C. P 910,000; P 410,000
b.P510, 000; P10,000 d. P 500,000; P 10,000
17. Mang Sipalay registered his business as a BMBE. He made a total sale of P500, 000 and incurred cost of sales
of P400, 000. He also earned P10, 000 interest incomes from time deposits. What is the total reportable gross
income?
a. PO c. P 100,000
b.P10, 000 d. P 110,000 91
18. Boracay Company is registered as a TIEZA locator subject to 5% gross income tax. During the year, it made a
total P400, 000 gross receipts from various tourist assistance services. It also incurred P210, 000 in direct services.
What is the amount to be included in gross income subject to regular income tax?
a. PO c. P 210,000
b.P190, 000 d. P 400,000
19. Mr. Siayan is a 5-6 lender. During the year, he granted loans totaling P2, 000,000 and collected P400, 000 in
interest. He also earned P8, 000 in temporary investments in domestic bonds plus additional P6, 000 from bank
deposit substitutes. Direct cost of lending was P100, 000.
What is the total amount to be reported in gross income subject to regular tax?
a. P0 c. P 414,000
b.P300,000 d. P 308,00
20. Mr. Asuncion received the following royalties from the following sources:
Mining claims P150, 000
Novel, "Alicia in Wonderland" 250,000
Basic Accounting textbook 80,000
Musical composition "Dayang- 40,000
dayang"
What is the total amount to be reported in gross income?
a. PO c. P400, 000
b.P150, 000 d. P520, 000
92
Multiple Choice - Problems: Part 3
1. Mrs. Kapalong has several interests in various businesses and partnerships. He received the following income during
the year:
Dividends from a domestic Share in the net income of a

corporation professional partnership
Dividends from a resident foreign P120, 000
corporation 80,000
Share in net income of a business 200,000
partnership 100,000
What is the total income to be reported in gross income?

a. PO c. P300, 000
b.P380, 000 d. P180, 000
2. Ms. Panabo received a total P200, 000 from her father for her support. During the year, she also received a
P150,000 total distribution from the trust irrevocably designated by her grandfather in her favor. She also
received P120,000 income distribution from the estate of her grandmother undergoing judicial settlement.
What is the total amount to be included in her gross income?
a. P200,000 c. P350,000
b. P270,000 d. P470,000
3. A non-VAT taxpayer collected P45,000 net of P5,000 withholding tax. Compute the gross income subject to
regular tax.
a. P 5,000 c. P 45,000
b.P40,000 d. P 50,000
4. A VAT taxpayer collected P66,600, inclusive of P7,200 VAT and net of P600 withholding tax. Compute the gross
income subject regular income tax.
a. P 59,400 c. P 66,000
b.P67,200 d. P 60,000
5. A non-VAT taxpayer collected P79,200, net of 1% withholding tax. What is the amount subject to regular
income tax?
a. P 71,351 c. P 80,000
b.P71,429 d. P 79,200
6. A VAT taxpayer received P45,900 inclusive of VAT and net of 10% creditable withholding tax. Compute the
gross income subject to regular tax.
a. P 45,000 b. P 45,900
c. P 45,536 d. P 51,000
7. A non-VAT taxpayer received P8,000 interest income, net of 20% final

Withholding tax. Compute the amount subject to regular income tax.
a. PO C.P8,000
b.P6,400 d.P10,000
8. A VAT-registered taxpayer received P18, 000 dividend, net of 10% final

Withholding tax. Compute the amount subject to regular income tax.
a. P0 c.P17, 857
b.P17, 647 d.P20, 000
93
9. A resident foreign corporate taxpayer entered into an advanced pricing agreement (APA) with the BIR with
respect to the pricing of its export sales to a foreign country. A mark-up ratio of 50% of the cost is set in the APA.
During the year, the corporation manufactured goods costing P12, 000,000 and exported 80%tax. Compute the
amount subject to regular of the production to its foreign affiliate at a price of P12, 000,000.
What is the amount of gross income subject to Philippine tax?
a. P 2,000,000 c. P 2,400,000
b. P 4,800,000 d. P 6,000,000
10. Ms. Nene Gosio registered a manufacturing business as a BMBE exempt from tax, She also owns another
taxable business which is engaged in the trading of goods. Ms. Gosio ordered her BMBE business to sell its
production to her trading business at ultimate sales prices.
You were tasked by your audit supervisor to conduct a transfer pricing evaluation of Ms. Gosio's businesses.
Based on your study, you determined that the retail profit rate (on sales) of trading businesses with similar
operations involving similar goods is 40%. During the year, the trading business made a total purchases of P400,
000 from the BMBE and sold 75% of these for P500, 000.
What is the gross income of the trading business to be subjected to regular income tax following the arms' length
principle?
a. PO
b.P100, 000
c. P 200,000
d. P120, 000
94
CHAPTER 10: COMPENSATION INCOME
True or False 1
1. A special employee may include Filipino citizens.
True (This is an NIRC concept)
2. A rank and file employee recommends managerial actions.
False
3. A consultant is not an employee.
True
4. A manager has the power to lay down and executes policies.
True
5. A regular employee is subject to the regular income tax.
True
6. Filipinos employed by international missions are generally exempt.
False (Generally taxable)
7. Filipinos working in Philippine embassies are exempt from taxation.
False (Considered resident citizens and taxable)
8. A minimum wage earner is exempt from income tax.
True (As a rule)
9. Compensation income includes regular compensation, supplemental
compensation and 13th month pay and other benefits in excess of P90,000
True
10. Compensation income includes all remunerations received under an
employer-employee relationship, including all fringe benefits of managerial
or supervisory employees.
False
11. Benefits for the advantage of the employee are exempt from income tax.
False
12. Remunerations received as incidents of employment are exempt.
True
13. The employee’s share in SSS, GSIS, PhilHealth and HDMF are excluded from
compensation income.
True (As a rule)
14. The exempt vacation leave credit is 10 days for government employees.
False (No limit for government employees)
15. Tax exempt de minimis benefits include all benefits of relatively small value.
False (Under current rule, only those listed by the regulations)
16. The excess de minimis are considered “other income” for an employee.
False (rank and file only)
17. The sick leave credit of private employees up to 10 days is exempt de
minimis.
False (Vacation leave credits not sick leave credits)
18. The overtime pay of minimum wage earners is exempt from tax.
True
TRUE OR FALSE 2
1. Supplemental compensations are fixed amounts regularly received by the
employee every payroll period.
False
2. A regular employee can be a managerial, supervisory, or rank and file
employee.
True
3. Regular compensation includes variable performance-based remuneration
received by the employee with or without regard to the payroll period.
False
4. All directors are not considered employees.
False (There are directors who are part of management.)
5. Rank and file employees do routinary or clerical jobs.
True
6. A minimum wage earner with business income is considered a regular
employee subject to income tax.
False (still MWE, but taxable on business income)
7. A managerial employee is least likely to be a minimum wage earner.
True
8. The statutory minimum wage is P60,000 annually or the amount fixed by
the Regional Tripartite Wage and Productivity Board whichever is lower.
False (whichever is higher)
9. An OBU is a division of a local bank authorized to conduct banking
transactions in foreign currencies.
False (For a foreign bank, FCDU or EFCDU for a local bank)
10. The position and function test, compensation threshold test, and exclusivity
test are required for alien employees.
False (Note position and function test)
11. A managerial employee can be a special employee.
True
12. The Christmas gift of private employees forms part of “other benefits”
while that of government employees is considered de minimis benefit.
False
13. The fringe benefits of managerial or supervisory employees are generally
subject to fringe benefit tax.
True
14. Resident Filipinos employed by foreign embassies, missions, or
international organizations are generally taxable.
True
15. Non-resident Filipinos employed by foreign embassies, missions, or
international organizations are generally exempt.
True (Non-resident citizen with income abroad)
16. Filipinos employed in Philippine embassies are generally exempt.
False (Considered resident citizen in taxation)
17. Half of the benefits given for the convenience or necessity of the employer
are taxable.
False (100% exempt)
18. Fixed allowances are supplemental compensation income.
False (regular compensation)
19. For managerial employees, the excess of de minimis benefits over their
limits are included as “other benefits”.
False (taxable to final tax)
20. The excess of the 13th month pay and other benefits over P90,000 is
considered compensation income.
True
21. The substituted filing system applies to employees who have multiple or
successive employments.
False
22. An employer controls the means and methods by which the work is to be
accomplished.
True
23. An employee who became a minimum wage earner during the year is
exempt from tax for the entire year.
False (Exemption is prospective)
24. Minimum wage earners who are disqualified for exemption during the year
shall be taxable as regular employees.
True
25. Minimum wage earners who breached the minimum wage threshold by a
salary increase during the year are taxable only starting from the months of
increase.
True
26. A fringe benefit is usually in the nature of an incentive. Compensation
income is in the nature of performance-based pay.
True
In the blank provided for indicate whether the specified benefit or remunerations
is an item of:
RC – Regular compensation FB –Fringe benefits
SC –Supplemental compensation OB-13TH month pay & other benefits
DM –De minimis benefits EB –Exempt or non-taxable benefits
Benefit or Remuneration Rank & Manager

File or
employee Supervisor
1. Uniform allowance DM DM
2. Commissions SC SC
3. Rice Allowance DM DM
4. Productivity incentive DM DM
5. Christmas Bonus - Government OB OB
6. Fixed monthly RATA - Government RC RC
7. Medical Benefits DM DM
8. Additional compensation allowance - OB OB
Government
9. 13th Month pay OB OB
10. Christmas Gift - Private DM DM
11. Anniversary Gift DM DM
12. Shuttle allowance to a distant facility EB EB
13. Excess de minimis benefits OB FB
14. Basic Salary RC RC
15. Profit Sharing SC SC
16. Other employee personal expenses OB FB
paid by employer
17. Emoluments and Honoraria SC SC
18. Stock Bonus SC SC
19. Educational assistance to employee EB EB
under employment bond
20. Used sick leave credit RC RC
21. Monetized unused sick leave - Private OB FB
22. Monetized unused vacation leave - DM & OB DM & FB
Private for excess for excess
23. Monetized unused sick leave - EB EB
Government
24. Monetized unused vacation leave - EB EB
Government
25. Excess over P90,000 of 13th Month pay SC SC
and other benefits

Assuming that the employee is a private employee with a basic salary of P300 per
day in a region with a minimum wage of P250 per day, indicate the annual limit
and compute the annual excess de minimis benefits in the spaces provided for.
De minimis benefits Limit Annual Excess
1. P100/meal for 158 overtime days during P5,925
the year P62.50/day (37.50/day x
158 days)
2. P6,000 monetized value of 15-day P4,000/year P2,000
vacation leave credits (P6,000 x10/15)
3. P1,000 monthly medical allowance to P9,000
dependents of the employees P250/mo. (P750/mo. x
12)
4. P6,000 monetized value of 15-day sick P0 P6,000
leave credits
5. P12,000 medical benefits P10,000/year P2,000
6. P2,000 quarterly uniform allowance P6,000/year P2,000
(P2k x 4 – P6k)
7. P500 monthly laundry allowance P300/mo. P2,400
(P200/mo. x12)
8. P10,000 achievement award in cash P0* P10,000
9. P3,000 Anniversary gift and P5,000 P5,000/ year** P3,000
Christmas gift
10. P3,000 monthly rice allowance P2,000/mo. P12,000
(P1,000/mo. x
12)
*This should be in non-cash to be exempt.
**This limit pertains to both anniversary gift and Christmas gift
Note: Medical allowance to dependents is P1,500/ semester translated to
P250/month.
A 50 year-old employee retired during the year after 30 years of continuous
service and received the following remunerations:
Basic Salary P 350,000
Employee share to SSS, PHIC, HDMF 24,000
and union dues
Overtime pay 16,000
Retirement pay 2,300,000
Benefits from SSS 400,000
th
Pro-rated 13 month pay 21,000
Required: Compute the gross taxable compensation income. 242,000
Basic salary 250,000

Less: Employee share in SSS, PHIC, 24,000
HDMF and union dues
Regular compensation income 226,000
Supplemental compensation – OT 16,000
13th month pay and other benefits 0

(P21,000 – P82,000)
Gross taxable compensation income 242,000

An employee received the following benefits:
13th month pay P 60,000
Profit sharing 12,000
De minimis benefits:
De minimis Benefits within their limits 80,000
Excess de minimis benefits 30,000
Other de minimis benefits 10,000
Other fringe benefits 25,000
Total incentives P 182,000
Required:
Compute the taxable “13th month pay and other benefits” assuming the employee
is a:
1. Rank and file employee ______________
2. Managerial or supervisory employee ______________
Rank & File Managerial/
Employee Supervisory
th
13 month pay P60,000 P60,000
Profit sharing (this is supplemental) 0 0
De minimis Benefits within their limits - -
Excess de minimis benefits 30,000 *-
Other de minimis benefits 10.000 *-
Other fringe benefits 25,000 *-
th
Total 13 month other pay and
other benefits P125,000 P60,000
Less: Exclusion limit 90,000 90,000
th
Taxable 13 month other pay and
other benefits P 35,000 P 0
*Taxable under fringe benefits tax
**This will be included in compensation income as supplemental/additional
compensation
An employee with 10 dependent children received the following benefits during
the year:
Regular compensation P 1,068,000
Supplementary compensation 340,000
th
13 month pay 89,000
Required: Compute the taxable amount in each of the following taxation

schemes:
Employee type Progressive tax Fringe benefit tax
1. Rank and File employee P 1,420,000 P0
2. Managerial or supervisory P 1,408,000 P 13,000
employee

The following relates to the compensation income of a minimum wage earner
employee:
Compensation and overtime pay (January to April) P 48,000
Compensation and overtime pay (May to December) 97,000
th
13 month pay and other benefits in December 15,000
Required:
Compute the gross taxable compensation income assuming the employee
became a
1. Minimum wage earner starting May 1
2. Regular employee by promotion starting May 1
1. P48,000
2. P97,000*
*13th month pay do not exceed the P90,000 threshold; hence, not taxable
1. Which is not an element of an employer-employee relationship?
a. Selection process c. Power of control
b. Power to dismiss d. Payment of fixed wages
2. Which is not an employee classification as to function?

a. Managerial employee c. Special employee
b. Rank and file employee d. Supervisory employee
3. Which is not an employee classification as to taxability?

a. Regular employee c. Managerial employee
b. Special employee d. Minimum wage earner
4. Which is usually an employee?

a. A director who is at the same time the Chief Executive Officer
b. A director regularly receiving a retainer’s fee
c. Consultant
d. A hired TV program talent
5. The statutory minimum wage is

a. The amount fixed by the Regional Tripartite Wage and Productivity
Board
b. The rate fixed by the Regional Tripartite Wage and Productivity Board
which must not exceed by P5,000 a month or P60,000 annually
c. The higher between P5,000 a month or P60,000 annually or the rate
fixed by the Regional Tripartite Wage and Productivity Board
d. P5,000 a month or P60,000 annually unless it exceeds the rate fixed
by the Regional Tripartite Wage and Productivity Board
6. Which is not included in the gross taxable compensation income of an
employee?
a. Fixed monthly allowances
b. Performance based bonuses
c. 13th month pay and other benefits not in excess of P90,000
d. 13th month pay and other benefits in excess of P90,000
7. Which is not an exclusion criterion on employee benefits?

a. Necessity of the employee rule
b. Convenience of employer rule
c. Exemption by special law
d. Exemption by treaties or international agreements
8. For purposes of the fringe benefit tax, fringe benefits pertain to

a. Other fringe benefits not included as compensation income of any
employees
b. Other fringe benefits not specifically included as compensation
income of managerial or supervisory employees
c. All fringe benefits of managerial or supervisory employees
d. All fringe benefits of rank and file employees
9. Which is a correct statement?

a. The compensation income of managerial or supervisory employees is
subject to fringe benefit tax
b. The taxable fringe benefits of rank and file employee are subject to
fringe benefit tax
c. The taxable fringe benefits of managerial and supervisory employee
are subject to regular income tax
d. The compensation income of rank and file employees is subject to
regular tax.
1. Which is not a supplemental compensation income?
a. De minimis benefits c. Allowances
b. Honoraria d. Bonuses
2. Fringe benefits includes

a. Basic salaries c. Retirement and separation
pay
b. Fees d. De minimis benefits
3. De minimis benefits are generally

a. exempt from tax. c. taxable in excess of P90,000.
b. fully taxable. d. subject to fringe benefit tax.
4. Which do not form part of other benefits of rank and file employees?
a. Excess of de minimis over their legal limits
b. Salaries and wages
c. Productivity incentive
d. Employee educational assistance
5. The term “de minimis benefits” does not include

a. Christmas bonus c. Rice subsidy
b. Christmas gift d. Monetized unused vacation
leave
6. Select the most accurate statement.

a. De Minimis benefits are totally exempt from income tax.
b. De minimis benefits in excess of P90,000 are subject to income tax.
c. The excess of “other benefits” over P90,000 constitutes compensation
income.
d. The benefits of rank and file employees are not subject to fringe benefit
tax.
7. Which is taxable as compensation?
a. SSS benefits c. Termination benefits from
resignation
b. Retirement benefits d. Retirement gratuities from
foreign institutions
8. Which of the following is subject to income tax?

a. Minimum wage
b. De minimis benefits
c. GSIS benefits
d. Voluntary contribution to SSS, PHIC and HDMF
9. All of these are exempt benefits of a minimum wage earner except

a. hazard pay. c. vacation pay.
b. holiday pay. d. overtime pay.
10. Which is correct when a minimum wage earner derives other income
outside his employment?
a. He is subject to withholding tax and income tax.
b. He is neither subject tax to withholding tax nor income tax.
c. He is exempt from withholding tax, but subject to income tax.
d. He is subject to withholding tax, but exempt from income tax.
11. Rice allowance is taxable when

a. paid in cash. c. given more than P1,000 a
month.
b. paid in non-cash. d. given more than P1,500.
12. Meal allowance is taxable when given

a. for overtime duty. c. for night shift assignment.
b. in cash. d. as incentive to all
employees.
13. Which is an exempt de minimis benefit?
a. 9-day monetized sick leave
b. 15-day monetized unused vacation leave.
c. Rice subsidy of half sack a month valued at P1,000
d. Uniform allowance of P5,500
14. Which is correct de minimis limit?

a. Actual medical cash allowance of P5,000 per year
b. Laundry allowance of P3,600 per year
c. Employee achievement award of P5,000 per year
d. Christmas gift of P10,000
15. Statement 1: Excess de minimis is considered compensation income as

“other benefits” for rank and file employees and managerial or supervisory
employees.
Statement 2: Excess de minimis is a fringe benefit subject to the fringe
benefit tax.
a. Statement 1 is correct. c. Both statements are
incorrect.
b. Statement 2 is correct. d. Both statements are correct.
16. Which is considered compensation?

a. Reasonable amounts of pre-computed daily transportation allowance
b. Cost-of-living allowance
c. Outstation allowance for employees working at distant facilities
d. Car incentives to medical doctors required to report on duty anytime
17. Which of the following remuneration is an item of compensation income?

a. Retainer fees of an outside director
b. Customer tips
c. Commissions to a minimum wage earner
d. Referral fee to a customer
18. Night differential pay is exempt from taxation when received by a
a. rank and file employee. c. minimum wage earner.
b. special employee. d. managerial or supervisory
employee.
19. Which is not subject to the P90,000 exemption threshold for a private
employee?
a. 13th month pay c. Profit sharing bonus
b. Cash gift d. Productivity incentive
20. The P90,000 exemption threshold is applicable to
a. regular employees. c. managerial or supervisory
employees.
b. rank and file employees. d. all employees.
21. The excess of 13th month pay and “other benefits” is

a. subject to regular tax. c. subject to fringe benefit tax.
b. subject to final tax. d. exempt from income tax.
22. Which is subject to the withholding tax on compensation?

a. Salary of domestic “kasambahays”
b. Compensation for injuries and sickness
c. Salaries of resident Filipinos working in embassies, international missions,
and organizations
d. Salary of minimum wage earners receiving fixed allowances
23. Statement 1: A minimum wage earner who loses the benefit of exemption
by transferring to a region with a lower minimum wage is taxable on all
income during the year.
Statement 2: A minimum wage earner who qualifies as such during the year
is exempt from tax on all income earned during the year. Which is correct?
a. Both statements are correct.
b. Both statements are incorrect.
c. Only statement 1 is correct.
d. Only statement 2 is correct.
Multiple Choice – Problems: Part 1
1. Mr. Juanito had the following income in 2019:
Compensation income, net of P77,000 SSS,

PhilHealth, HDMF and union dues P300,000
Supplemental compensation income 30,000
What is the taxable compensation income?

a. P402,000 c. P375,000
b. P330,000 d. P380,000
2. The following relates to an annual payroll of the employee:
Gross compensation income, before P44,000

contributions to SSS, PHIC and HDMF P1,068,000
Additional compensation 45,000
Compute the taxable compensation income.

a. P1,113,000 c. P1,069,000
b. P1,112,000 d. P1,068,000
3. Colyong, a government employee, receives a full 13th month pay of

P20,000, exclusive of P14,000 other benefits. He was deducted P18,000
during the year for premium for his SSS, PHIC and HDMF contributions.
Compute Colyong’s taxable compensation income.
a. P222,000 c. P240,000
b. P226,000 d. P254,000
4. An employee received the following compensation during the year:
Gross compensation (11,000 x 13 months) P143,000

Overtime pay
12,000
Less:
SSS, PHIC, HDMF and union dues P 5,200
Withholding tax 10,000 15,200
Net Pay P139,800

a. P149,800 c. P132,000
b. P138,800 d. P126,800
5. Johnny received a salary of 73,000 during the year consisting of: P60,000
basic salary, P8,000 overtime pay and P5,000 13th month pay. Compute
Johnny’s taxable income using contemporary tax regulations.
a. P0 c. P68,000
b. P60,000 d. P73,000
6. A private employee retired at 60 in the middle of the year and was paid the
following remunerations:
Retirement benefits P2,000,000

Terminal leave pay (150 accumulated days) 120,000
Compensation, net of P16,000
SSS, PHIC and HDMF premium contributions 128,000
Mid-year bonus 8,000
Pro-rated 13th month pay
12,000
a. P2,170,000 c. P170,000
b. P238,000 d. P136,000
7. A managerial employee received the following remunerations:
Gross salaries, net of SSS, PHIC and HDMF

P1,090,000
SSS maternity benefits
30,000
Profit sharing bonus
240,000
13th month pay
95,000
Determine the taxable compensation income.

a. P1,365,000 c. P1,335,000
b. P1,350,000 d. P1,330,000
8. A supervisory employee had the following remunerations during the year:
Salaries, before P24,000 SSS, PhilHealth

HDMF, and union dues
P258,000
Profit sharing
20,000
Fringe benefits
65,000
13th month pay and other benefits
21,000

a. P343,000 c. P254,000
b. P278,000 d. P204,000
9. An employee had the following details of compensation income in 2019:
Regular compensation income P780,000

Overtime pay
43,000
13th month pay
65,000
Medical assistance to employee
22,000
Total of other de minimis benefits
32,000
Compute the taxable compensation income if the employee is a rank and

file.
a. P842,000 c. 823,000
b. P836,000 d. 780,000
10. Compute the taxable compensation income if the employee is a managerial

or supervisory employee.
a. P842,000 c. 823,000
b. P836,000 d. 780,000
1. An employee received the following remunerations aside from the basic
pay:
Fixed representation and transportation allowance

P24,000
Night shift differential pay
12,000
Hazard pay
12,000
Honoraria
8,000
Profit sharing
24,000
13th month pay
18,000
Compute the supplemental compensation if the employee is a regular
employee.
a. P68,000 c. P56,000
b. P44,000 d. P32,000
2. Compute the supplemental compensation if the employee is a minimum

wage earner.
a. P68,000 c. P56,000
b. P44,000 d. P32,000
3. A supervisory employee is a recipient of a stock option which vested during

the year. The following data pertains to the exercise of the option and its
subsequent sale by the employee:
Value of stocks at vesting date P 45,000
Exercise price of option 30,000
Selling price of stocks 50,000
Compute the supplemental compensation.

a. P50,000 c. P15,000
b. P20,000 d. P0
4. The following relate to the compensation income of a private rank and file
employee during the year:
Annual compensation income P540,000

13th month pay 45,000
Total of monthly rice allowances during the year 26,000
Commission from employer 12,000
Christmas gift 8,000
SSS, PhilHealth, and HDMF contributions 21,000
Compute the exempt de minimis benefits.

a. P18,000 c. P26,000
b. P24,000 d. P50,000
Please disregard choices. There was a computational slippage. Consider

giving extra points for students who provided the correct amount of
answer.
Exempt de minimis: P 24,000 rice allowance + P5,000 Christmas gift =

P29,000
5. Compute the total non-taxable compensation income.

a. P0 c. P111,000
b. P90,000 d. P135,000
Non-taxable compensation income:

13th month pay and other benefits P 90,000
Exempt de minimis 29,000
Contribution to SSS, PhilHealth and HDMF 21,000
Total non-taxable compensation P 140,000
6. Compute the supplemental compensation.
a. P25,000 c. P12,000
b. 22,000 d. P10,000
Supplemental compensation:
Commission income P 12,000
Excess 13th and other benefits
(P45,000 + P45,000 + P2,000 + 3,000 – P90,000) 5,000
Total supplemental compensation P 17,000
7. Compute the taxable compensation income.

a. P586,000 c. P565,000
b. P572,000 d. P541,000
Taxable compensation income:

Regular compensation (P540,000 – P21,000) P 519,000
Supplemental compensation 17,000
Taxable compensation income P 536,000
8. A managerial employee received the following benefits during the year:
Compensation income, net of mandatory contribution

P1,080,000
Housing allowance in addition to regular pay
(P30,000 x 12; actual rent is P25,000/month)
360,000
13th month pay
95,000

a. P1,445,000 c. P1,145,000
b. P1,175,000 d. P1,085,000
9. A government employee received the following benefits in 2019:
Gross salaries
P1,044,000
RATA
12,000
PERA
24,000
Additional compensation (ADCOM)
24,000
Christmas bonus
87,000
Christmas gift
5,000
Laundry allowance 4,800
Contributions to GSIS, PhilHealth and HDMF 62,000
Determine the taxable compensation income.
a. P1,071,200 c. P1,044,000
b. P1,068,000 d. P1,009,200
10. A private employee had the following remuneration in 2019:

Gross salaries, net of mandatory contribution
P314,000
Fixed RATA
12,000
Cost-of-living allowance
24,000
13th month pay
28,000
Christmas gift
5,000
Laundry allowance (500/month)
8,000
Answer the following questions:

a. P314,000 c. P338,000
b. P326,000 d. P350,000
11. What is the total exempt de minimis benefit?
a. P13,000 c. P6,000
b. P8,000 d. P5,000
No answer. P300 x 12 + 5,000 = P8,600
12. What is the total exempt benefit?

a. P36,000 c. 82,000
b. P41,000 d. 90,000
13. Jane, a recipient of minimum wage, became a regular employee at the start
if the third quarter of 2019 when she received a raise in pay:
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Compensation income P24,000 P24,000 P33,000 P33,000
Overtime pay 4,000 5,000 3,000 6,000
th
13 month pay
9,500
Less:
SSS, PHIC, and HDMF 1,000 1,000 1,200 1,200
Creditable WH tax - - 1,000 2,000
Net pay P27,000 P28,000 P33,800 P45,300
Compute the taxable compensation income in 2019.
a. P52,100 c. P75,000
b. P72,600 d. P127,600
14. A regular employee became a minimum wage earner when the minimum
wage was increased effective the last quarter of 2019:
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Compensation income P24,000 P24,000 P24,000 P24,750
Overtime pay 4,000 5,000 3,000 6,000
th
13 month pay
8,063
Less:
SSS, PHIC, and HDMF 1,000 1,000 1,000 1,100
Creditable WH tax 1,100 1,100 1,100 1,200
Net pay P25,900 P26,900 P24,900 P36,513
Compute the taxable compensation income in 2019.
a. P0 c. P81,000
b. P29,650 d. P110,650
CHAPTER 11: FRINGE BENEFIT TAX
TRUE OR FALSE 11-1
1) Rank and file employees may be subject to fringe benefit tax.
False
2) Fringe benefits are always subject to fringe benefit tax.
False
3) The personal expenses of employees shouldered by the employer are fringe
benefits.
True
4) Managerial or supervisory employees are subject to fringe benefit tax.
True
5) The tax base of the fringe benefit tax is the grossed-up monetary value of the
fringe.
True
6) The fringe benefit tax is a creditable withholding tax presumed to have been
withheld at source by the employer from the fringe benefits of supervisory or
managerial employees.
False (Final Tax)
7) The taxable fringe benefit subject to tye fringe benefit tax is the excess of the
de minimis benefits over P90,000.
False
8) Half of the benefits that are necessary to the trade of the employer's business
are subject to fringe benefit tax.
False (100% exempt)
9) Benefits in the form of properties transferred to the name of the employee are
subject to fringe benefit tax in full.
True
10) Benefits provided by the employer for his convenience are exempt from
fringe benefit tax.
True
TRUE OR FALSE 11-2
1. The annual depreciation value of a real property is presumed to be 10% of the
value of the property.
False (5%)
2. The monetary value of benefits given in cash is the cash paid.
True
3. The monetary value of the benefits given in kind is 100% of the value of the
property given.
True
4. The monetary value of fringe benefits in the form of free usage of property is
50% of the rental or depreciation value of the property.
True
5. Employee benefits are employee expense by nature that are paid by the
employer.
False (fringe benefits)
6. The annual depreciation value of a movable property is 20% of the value
property.
True
7. When title over property is transferred, the monetary value is the fair value of
the property given.
True
8. When the employer leases a house and lot as the usual residence of the
supervisory or managerial employee, the monetary value of the fringe benefit
is 50% of the rental payments.
True
9. Educational assistance to the employee is exempt from fringe benefit tax if
there is an employee bond and the study is related to the trade or business of
the taxpayer.
True
10.Aircraft including helicopter are considered for business use and not subject to
fringe benefit tax.
True
11.The monetary value of benefit from loans at less than market rate shall be the
difference between 12% and the actual rate charged.
True
12.Lodging costs on foreign travel is a taxable fringe benefit regardless of amount.
False
13.30% of first-class tickets in foreign travel is a taxable fringe benefit.
True (only business class ticket is exempt)
14.The expenses of the family members of the employee shouldered by the
employer constitute taxable fringe benefit in full.
True
15.An employee expense receipted in the name of the employer is considered a
business expense of the employer.
False (Still a taxable fringe benefit)
MULTIPLE CHOICE — Theory 1

1. Which is not part of the de minimis benefits?
a. Clothing allowance c. Monetized unused
vacation leave credits
b. Actual medical benefits d. 13th month pay
2. The de minimis benefits not exceeding their thresholds are

a. exempt from income tax. c. subject to regular tax.
b. subject to fringe benefit tax. d. deduction from gross
income.
3. Select the answer which more accurately completes the statement. The
taxable fringe benefit of a supervisory employee is
a. subject to fringe benefit tax.
b. subject to regular income tax as compensation income.
c. the total of 13th month pay and other benefits not exceeding P90,000.
d. the total of 13th month pay and other benefits exceeding P90,000.
4. Who is subject to the fringe benefit tax?

a. An employer of rank and file employees
b. Managerial or supervisory employees
c. An employer of managerial or supervisory employees
d. Rank and file employees
5. Which of these items is subject to fringe benefit tax?
a. Compensation income of rank and file employees
b. Fringe benefits of rank and file employees
c. Fringe benefits of managerial or supervisory employees
d. Compensation income of managerial or supervisory employees
6. The fringe benefit tax by nature is a

a. tax on passive income of managerial or supervisory employees.
b. final tax.
c. tax to the employer of managerial or supervisory employees.
d. tax to all employee on their fringe benefits.
7. Which is the correct statement?

a. The fringe benefit tax is a tax upon the expense of the employer
b. The personal expenses of any employees paid by the employer are
subject to fringe benefit tax.
c. The personal expenses of rank and file employees paid by the employer
are subject to fringe benefit tax.
d. The personal expenses of managerial or supervisory employee
shouldered by the employer are subject to fringe benefit tax.
8. As a rule, hybrid expenses are presumed

a. 50% fringe benefit. c. 50% de minimis
benefits.
b. 100% fringe benefit. d. 100% legitimate
business expense.
9. Which of the following phrases is not an exemption criterion for purposes

of the fringe benefit tax?
a. Convenience of the employer
b. Necessary for the business of the employer
c. In furtherance of employee goodwill
d. For the furtherance of the employer's business
10. What percentage of the depreciation value is considered fringe benefit in
the free usage of employer's real properties?
a. 5% c. 50%
b. 20% d. 100%
11. When fringe benefit is in the form of free use of real properties, what
percentage of the fair value of the property is considered fringe benefit?
a. 5% c. 50%
b. 20% d. 100%
*(A is intended answer but the most appropriate answer to this question is
(50% x 5%) or 2.5% since the problem talks about percentage of the fair value)
12. When fringe benefit is in the form of free use of personal properties, what
percentage of the depreciation value of the property is considered fringe
benefits?
a. 5% c. 50%
b. 20% d. 100%
*(The problem speaks bout percentage of the depreciation value)
13. An employer transferred title over property to the employee. What

percentage of the benefit is considered for purposes of the fringe benefit
tax?
a. 100% c. 50%
b. 20% d. 5%
14. For purposes of computing the annual value of benefits involving the the
free use of movable properties, what percentage of the value of property
is used?
a. 5% c. 20%
b. 50% d. 100%
15. For purposes of computing the annual value of benefits involving the free
use of immovable properties, what percentage of the value of property is
used?
a. 5% c. 50%
b. 20% d. 100%

1. Which is not a characteristic of the fringe benefit tax?
a. A final tax c. Payable by the employer
b. An income tax d. Imposed upon the
monetary value of benefits
2. Which is correct with respect to the fringe benefit tax?

a. It is due monthly and quarterly.
b. It is a tax upon the compensation income of employee.
c. It is a tax upon the fringe benefit of any employee.
d. Employees do not need to file income tax returns to report the fringe
benefit.
3. The actual value of benefits realized by the managerial or supervisory

employee is referred to as the
a. monetary value. c. grossed-up monetary
value.
b. fair value . d. annual depreciation
value.
4. Which is not an exempt housing benefit?

a. Housing within 50 meters from the perimeter of the employer's business
b. Housing benefit for four months
c. Military sleeping quarters
d. Temporary housing
5. Which is not subject to fringe benefit tax?
a. Personal expenses receipted in the name of the employee paid by the
employer
b. Employee personal expense receipted in the name of the employer paid
by the employer
c. Expenses of employees considered in furtherance of the employer's
business
d. Personal expense receipted in the name of the employee reimbursed by
the employer.
6. The free usage of which of the following items is exempt from fringe
benefit tax?
a. Yacht c. Helicopter
b. Car d. Residential unit
7. What percentage of the fair value of the yacht is considered in measuring

depreciation value?
a. 5% c. 20%
b. 10% d. 50%
*Yatch is considered real property in fringe benefit taxation
8. Which is subject to fringe benefit tax?

a. Premiums of employee group insurance
b. Expenses of business travels
c. Housing for an employee to ensure his immediate availability
d. Housing for the family members of an employee
9. To which of the following is the tax benefit rate is not applied?

a. The monetary value of the fringe benefit
b. The amount deductible by the employer from gross income
c. The gross-up monetary value of the fringe benefit
d. Both accounts of the fringe benefit and the fringe benefit tax
10. Which fringe benefit is subject to fringe benefit tax?
a. If given for the convenience or advantage of the employee
b. Benefits given to rank and file employees
c. Those required by the nature of or necessary to the trade, business or
profession of the employer
d. Contributions of the employer to retirement, insurance and
hospitalization benefit plans for the benefit of the employee
MULTIPLE CHOICE — Problem: Part 1

1. A supervisory employee has the following benefits:
13th month pay and other benefits P 40,000

De minimis within their limits 35,000
Excess de minimis benefits 10,000
Compute the amount of fringe benefits subject to the fringe benefit tax
rate.
a. P 85,000 c. P 50,000
b. P 76,923 d. P 73,259
*(The amount actually subject to fringe benefits tax is the grossed-

up monetary value. Hence, P50,000/65%)
2. An employer pays the P10,000 monthly residential rental of his managerial

employee. Compute the quarterly monetary value.
a. P15,000 c. P30,000
b. P10,000 d. P40,000
*(P10,000 X 50% X3)
3. ABC Company designated a residential property for the use of its
managerial employee. The lot has 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 benefit tax return.
a. P 250,000 c. P 62,500
b. P 125,000 d. P 31,250
(The basis is [P2,000,000 +1,500,000 or P3,500,000 + P1,500,000] w/e is higher).

Hence, P5,000,000 x 5% x 50%/4 =P31,250.
4. Kalibo Company purchased a residential unit for P3,000,000 and

transferred ownership to its supervisory employee. The property has a
zonal value of P3,500,000. Compute the monetary value.
a. P3,000,000 c. P1,750,000
b. P3,500,000 d. P 175,000
5. Celebes, Inc. owns a residential property it acquired for P2,000,000. It

transferred ownership thereto to its managerial employee for P1,200,000
when its fair value was P3,000,000. What is the monetary value of the
benefit?
a. P 3,000,000 c. P 1,800,000
b. P 2,000,000 d. P 800,000
6. Catarman Corporation designated two condominium units for the use of its
supervisory employees with fair value and terms of residence as follows:
Agreed Residence time Property value
Unit No. 1 1 year P 4,000,000
Unit No. 2 3 months 3,000,000
Compute the quarterly monetary values for the above.

a. P 4,000,000 c. P 100,000
b. P 175,000 d. P 25,000
*(P4,000,000/20 X 50%/4)
7. Tapas Corporation granted ownership of several housing units to the
following employees on its foundation day:
Name Position Property value

Mr. Magdiwang Accounting manager P 3,000,000
Mrs. Calatrava Marketing supervisor 2,000,000
Mr. Romblon Machine operator 1,500,000
Mrs. Sta. Fe Electrical staff 1,000,000
Compute the total monetary value of all fringe benefits.

a. P7,500,000 c. P187,500
b. P5,000,000 d. P125,000
8. Compute the total monetary value of housing benefits that are subject to
the fringe benefits tax.
a. P 6,500,000 c. P 5,000,000
b. P 162,500 d. P 125,000
9. Ozamis Corporation has a production facility 10 kilometers away from

town. To promote the goodwill of its employees, it decided to construct
housing units within the compound of the facility. It also agreed to pay half
of the household rentals of employees, who did not want to transfer their
families to the housing unit. The following data relates to the quarter of
grant:
Company officers Rank and file employees

Value of housing unit P 1,000,000 P 3,000,000
Rental payments 500,000 800,000
Compute the monetary value of benefits subject to fringe benefit tax.

a. P 250,000 c. P 500,000
b. P 1,500,000 d. P 4,650,000
*(P500,000 X50%)
10. As part of its employee benefits plan, Zarraga Realty Corporation acquired
a piece of residential lot worth P2,000,000 for its Director of Finance and
constructed upon it a house at a cost of P4,000,000. Ownership of the
house and lot was turned over to the director upon completion of the
construction. 40% of the value of the house and lot will be deducted from
the director's salary over a period of five years.
What is the monetary value of the fringe benefit?

a. P 6,000,000 c. P 3,600,000
b. P 2,400,000 d. P 1,600,000
*(P2,000,000 + P4,000,000) x 60%
MULTIPLE CHOICE — Problems: Part 2

1. Mandaue reimbursed the following expense liquidation of its managerial
employee:
Purchase of office supplies P

20,000
Personal meals and groceries 15,000
Gasoline for transportation (1/2 for business)
8,000
Office electricity, water, and telephone bills 12,000
Compute the monetary value of fringe benefits.

a. P 55,000 c. P 19,000
b. P 35,000 d. P 23,000
2. In the immediately preceding problem, what is the fringe benefit tax if the
managerial employee is a resident citizen?
a. P 25,882 c. P 8,941
b. P 16,471 d. P 10,231
*(P19,000 X35/65)
3. Danao bought a car worth P800,000 and registered it in the name of its
supervisory employee. It was agreed that the same will be used partially
for the business of Danao.
Compute the monetary value.
a. P 400,000 c. P 80,000
b. P 800,000 d. P 0
4. In the immediately preceding problem, what is the fringe benefit tax

assuming the employee is a non-resident alien?
a. P 376,471 c. P 188,235
b. P266,667 d. P 133,333
*(P800,000 X25/75)
5. Lapu-Lapu Company grants its managerial employees the privilege to select

a car of their choice with value not exceeding P1,000,000 a unit or be given
P1,000,000 cash benefit if they actually purchase their cars.
Car benefits given to a manager, net of
withholding tax on compensation P 900,000
Value of cars purchased for two other managers
2,000,000
Cash payments to various car suppliers for
supervisory employees
1,600,000
a. P 4,500,000 c. P 2,000,000
b. P 3,600,000 d. P 1,600,000
*(P2,000,000 + 1,500,000)
6. In July 2019, Naga purchased a P1,200,000 car for the use of its managerial
employee. Compute the monetary value to be reported respectively for
the calendar quarters ending September and December 2019.
a. P 1,200,000; P 120,000 c. P 120,000; P 120,000
b. P 240,000; P 120,000 d. P 30,000; P 30,000
*(P1,200,000 X 20% X 50% /4)
7. Compute the fringe benefit tax if the employee is a resident citizen.
a. P 564,706; P 56,471 c. P 16,154; P 16,154
b. P 112,941; P 56,471 d. P 56,471; P 56,471
* [(P1,200,000 X 20%)/4] X 50%) X 35/65
8. Maasin Carbon Plant acquired a P1,000,000-motor vehicle for the use of its
field engineer, a plant supervisor, assigned to a very remote facility from
town. Compute the monetary value of benefits subject to tax.
a. P1,000,000 c. P 100,000
b. P 200,000 d. P 0*(Convenience of
the employer.)
9. Dexter acquired a car for P1,200,000 and transferred ownership to its

supervisory employee for P400,000. The car shall be used partly in the
employer's business. Compute the monetary value.
a. P 80,000 c. P 800,000
b. P 240,000 d. P 1,200,000
MULTIPLE CHOICE — Problems: Part 3

1. Dog Company made the following payments in the first quarter of 2019:
Fringe benefits:
• To the supermarket in payment for groceries of the company's manager
and family – P16,000
• To a university in payment for the tuition fee of the manager – P24,750
• Salary of the manager, net of P50,000 withholding tax – P350,000
Determine the fringe benefit tax due.

a. P 19,412 c. P 21,942
b. P 19,176 d. P 184,118
*(P16,000+P24,750) X 35%/65%
2. Ormoc International acquired the following for the use of its executive
officers:
Bell 206 helicopter P 23,000,000
Elling E3 Executive (seagoing motor yacht) 16,400,000
a. P 39,400,000 c. P 1,640,000
b. P 16,400,000 d. P 410,000
*(P16,400,000/20 X ½)
3. Lila Corporation paid the following fringe benefits during the calendar
quarter to its managerial employee:
Salaries of household help P 10,000/month

Salaries of personal security guard P 15,000/month
Personal driver P 15,000/month
Annual home owner's association dues P 4,000
Garbage dues P 100/week
Compute the quarterly monetary value.
a. P 122,200 c. P 121,200
b. P 125,200 d. P 44,100
* (P10,000 + P15,000 + P15,000) x 3 months + P4,000 + P100 x 4 weeks x 3
months
4. Tolosa Company paid or furnished the following in behalf of a supervisory

employee for the quarter ended March 2016:
Membership dues in golf course P

10,000
One-year P200,000 interest free loan due December 2016
Free vacation sponsored by Tolosa
12,000
a. P 46,000 c. P 22,000
b. P 32,000 d. P 28,000
*(P10,000 + P200,000 x 12% x 3/12 + P12,000)
5. During the last calendar quarter of 2019, Naval Company granted a Filipino
supervisory employee the following benefits:
Salaries P 120,000
Performance bonus 20,000
Excess de minimis 12,000
Cash price of car given to supervisory employee 300,000
Compute the fringe benefit tax.

a. P 168,000 c. P 146,824
b. P 151,529 d. P 141,176
* (P12,000 + P300,000) x 35%/65%
6. Logan paid the P27,200 monthly rental of the residence of its managerial
employee from January to May of 2019. Compute the fringe benefit tax for
the first quarter and second quarter of 2019.
a. P 6,400; P 6,400 c. P 19,200; P 12,800
b. P 12,800; P 8,533 d. P 21,969; P 7,323
*(P27,200 x 3 x 50%) x 35%/65% and

*(P27,200 x 2 x 50%) x 35%/65%*
*Nearest answer. The actual answer is (P21,969; P14,646).
7. On August 1, 2019, Calbayog designated the use of its residential unit for
its managerial employee. The residential unit was acquired for P4,500,000
and has a fair value of P4,000,000.
Compute the fringe benefit tax for the third and fourth quarters of 2019.
a. P 100,000; P 100,000 c. P 13,235; P 13,325
b. P 52,941; P 52,941 d. P 10,096; P 15,144
* Basis is P2,000,000 zonal value of land+ P2,000,000 assessed value of

improvement or P4,500,000 w/e is higher. Hence, P4,500,000 x 5% x 50%/4
x 35%/65%
8. Borongan Company granted the following fringe benefits in 2016:
— January 15 – paid P68,000 for the birthday celebration expenses of

its vice president for operations.
— February 14 – distributed iPhones costing P47,600 each to four
supervisory employees as incentives
— April 2 – granted the use of a residential unit to the vice president for
finance with fair value of P3,000,000
— August 4 – transferred ownership of a residential dwelling with zonal
value of P4,000,000 and assessed value of P3,000,000 to the company
president.
— December 15 – distributed P896,000 in 13th month pay to all
employees (20% of this relates to managerial or supervisory employees).
Compute the quarterly fringe benefit tax to be remitted by Borongan

Company in the first quarter and in the second quarter.
a. P 139,138; P 10,095 c. P 54,400; P 70,588
b. P 121,600; P 8,823 d. P 32,000; P 35,294
9. What is the fringe benefit tax respectively in the third and fourth quarters?
a. P1,891,176; P8,823 c. P2,163,942; P10,095
b. P1,882,353; P84,329 d. P1,882,353; P0
10. Baybay Corporation maintains a fleet of motor vehicles for business use
and employee use. The following relates to the calendar quarter just
ended:
Cost of three motor vehicles used exclusively for

sales, freights and delivery service P 4,500,000
Cost of a motor vehicle for employees' business
use and employee use 500,000
Rental payments for additional motor vehicle for
employees' personal use 30,000
Compute the total quarterly monetary value of the fringe benefit.
a. P 4,530,000 c. P 42,500
b. P 530,000 d. P 80,000
*(P500,000/5 X 50%)/4 + P30,000
11. ABC Company owns a residential lot which was purchased for P800,000,
eight years ago. The lot sold to a supervisory employee for only P500,000
when it was worth P1,200,000.
a. P 300,000 c. P 700,000
b. P 400,000 d. P 0
*Cash 500,000
FB expense 300,000
Lot 800,000
12. Compute the fringe benefit tax.

a. P 141,176 c. P 329,412
b. P 188,235 d. P 376,923
*(P700,000 X 35%/65%)
CHAPTER 12: Dealing in Properties
TRUE OR FALSE 1
1) The loss on the sale of stocks by a trust company is an ordinary loss.
True
2) The capital gain from the sale of domestic bonds and foreign stocks are subject
to regular income tax.
True
3) Capital loss is deductible to the extent of capital gains.
True
4) The sale of foreclosed land by a bank is subject to regular income tax .
True
5) Ordinary loss and Capital loss are items of deduction from gross income.
False
6) Tax basis means cost or depreciated cost of the property.
True
7) The loss on the sale of bonds by banks is an ordinary loss.
True
8) An ordinary gain is an item of gross income while a net capital gain is an
exclusion from gross income.
False
9) The holding period rule is relevant to individuals and corporate taxpayers.
False (bonds and debentures only)
10) The gain is said to be short term if the sale of the asset is made in less than
one year from its acquisition .
False (within one year not less than)
11) 50% of the capital gain or loss is considered if the asset is held by
individuals for one year or more.
False (more than one year)
12) Ordinary gains or losses are subject to the holding period rule if the
taxpayer is an individual tax payer.
False
13) The gain or loss on the sale of any stocks is subject to capital gains tax.
False
14) Ordinary loss is deductible to the extent of ordinary gains.
False
15) A net ordinary loss is deductible from gross income while a net capital loss
is non-deductible.
True (ordinary loss is deductible in full)
TRUE OR FALSE 2
1. If assets are acquired by way of inheritance their basis shall be their fair value
at the point of death of the decedent.
True
2. The indicated gain in a tax free exchange shall be recognized not to exceed the
value of cash or properties received other than stocks.
True
3. The amount of net capital loss carry over must not exceed the net income in
the year it was sustained.
True
4. If assets are acquired by way of donation, their basis shall be their fair value on
the date of donation.
False (fair value or cost to original donor-purchase w/e is lower)
5. The net capital loss can be carried over to a period of three years from the
time it is sustained.
False
6. Obligations assumed on the property purchased form part of the basis thereof.
True
7. The basis of properties received as boot in a tax free exchange is their fair
value upon receipt.
True
8. Gains but not losses are recognized in tax free exchange s.
False (as a rule both is not recognized but gain maybe recognized when there
is cash or other assets received as consideration)
9. When no other property is involved in a share swap pursuant to a plan of
merger or consolidation, there is no gain to recognized.
True
10.Corporations are allowed to carry-over-net capital loss for a period of one year
only.
False
11.In initial acquisition of control, it is necessary that there are atleast five
persons who acquired control of a corporation so that the exchange is exempt
from income tax.
False (one to five person)
12.No gain can be recognized on a pure-share swap transaction which is not
pursuant to a plan merger or consolidation.
False (this is an ordinary exchange transaction)
13.Stock splits and stock dividends cause a dilution in the cost unit of stocks which
must be considered in subsequent gain or loss measurement.
True
14.Capital gains within the 61-day period are recognized but losses are deferred
when there are acquisition of identical securities in the same period.
True (the wash sale rule)
15.When properties are sold for less than an adequate and full consideration, gain
is measured as the difference between fair value and the tax basis of the
property disposed.
False (SP-cost)

1. Which capital asset is subjected to the rules of capital gains tax?
a. Sale of Office Building c. Sale of domestic
common share directly to a buyer
b. Sale of office equipment
2. Which is true regarding taxation of ordinary gain

a. It is subject to regular tax regardless c. It is subject to
capital gains tax.
of the taxpayer.
b. Individual taxpayer are always subject d. It is taxable
either regular tax or capital gains tax.
to regular tax.
3. The gain arising from the sale of ordinary assets is.

a. Ordinary income.
b. Regular income.
c. Extraordinary gain.
d. Ordinary gain.
4. The gain arising from dealings in capital asset is
a. Capital Income
b. Extraordinary gain
c. Capital gain
d. Regular income
5. Statement 1: The gain on sale of ordinary assets is subject to regular

income tax.
Statement 2: The gain on sale of capital assets is subject to capital gains tax

a. Statement 1
b. Statement 2
c. Both statement
d. Neither statement
6. Which is correct regarding gains form capital asset?

a. Always subject to regular tax.
b. Always subject to capital gains tax.
c. Subject to both regular tax and capital gains tax.
d. Subject to either regular tax or capital gains tax.
7. Which is not correct regarding rules in dealings in properties?

a. Ordinary loss is deductible only up to the extent of capital gains.
b. Ordinary gains is taxable in full.
c. Ordinary losses are deductible in full.
d. Capital loss are deductible only up to the extent of capital gains.
8. Which statement is correct?

a. Capital loss is deductible from capital gain c. Ordinary loss is
deductible from ordinary gain
b. Capital loss can be deducted from d. Ordinary loss is
deductible from capital gain
ordinary gain
9. Which is an incorrect statement regarding the taxability or deductibility of
gains or losses in dealings in properties?
a. Ordinary gains is taxable in full
b. Ordinary loss is deductible in full
c. Net capital gain is taxable in full
d. Net capital loss is deductible in full
10. Statement 1: Ordinary gains and losses are offset

Statement 2: Capital gains and losses are offset
a. Statement 1 c. Both Statements
b. Statement 2 d. None of these
11. Which of the following is not included in the computation of taxable

income?
a. Ordinary gains c. Net capital loss
b. Ordinary loss d. net capital gains
12. Which statement is true?

a. The taxability of ordinary gain depends upon the holding period of the
taxpayer
b. Capital loss is deductible up to the extent of capital gain
c. Ordinary loss is deductible only up to the extent of ordinary gain
d. Capital loss is deductible up to the extent if ordinary gain
13. Statement 1: Net loss in dealing ordinary asset is deductible from gross
income
Statement 2: Net loss in dealing capital asset is not deductible from gross
income
a. Statement 1 is true c. Both statements
are true
b. Statement 2 is true d. Neither
statement is true
14. Statement 1: The net gain in dealing ordinary asset is subject to regular tax
Statement 2: Net gain in dealing capital assets is an item of gross income
subject to capital gains tax
Which statements is true?

a. Statement 1 is true c. Both statements
are true
b. Statement 2 is true d. Neither
statement is true
15. The short term holding period is

a. 12 months or less c. up to 24 months
b. less than 12 months d. 24 months or
less
16. Which statement is true regarding the holding period rule?

a. Applicable only to corporate taxpayers c. Applicable only
to individual taxpayer.
b. Applicable only to taxpayers engaged in business. d. Applicable to
any taxpayers
17. The holding period rule applies to

a. Domestic corporation
b. Taxable trust.
c. General professional partnership.
d. Resident foreign corporation
18. To which of the following taxpayer does the holding period assumption not
apply?
a. Resident citizen.
b. Resident alien
c. Business partnership
d. Non-resident citizen
19. For which of the following taxpayers is the holding period ignored?
a. Taxable estate.
b. Taxable trusts
c. Corporation
d. All of these
20. The short term holding period is

a. 12 months or less c. more than 12
months
b. less than 12 months d. at least 12
months
21. A long term holding period means?

a. more than 12 months c. 12 months or
less
b. less than 12 months d. atleast 12
months
22. For individual taxpayers, what percentage of capital gains or loss is

considered for capital asset held for 12 months?
a. 50%
b. 100%
c. 25%
d. 0%
23. Which of the following properly depicts the percentage of gains considered
in dealing properties?
Short term long term
a. Individual 50% 50%
b. Corporation 100% 100%
c. Individual 50% 100%
d. Corporation 100% 50%
24. What percentage of long term capital gain shall be included in the
computation of the net capital gain or loss of a corporate taxpayer?
a. 0%
b. 50%
c. 100%
d. 200%
25. In the computation of the net capital gain or loss, what percentage of long
term capital losses is taken into consideration by and individual taxpayer?
a. 0%
b. 200%
c. 100%
d.50%
26. Which is incorrect in the determination of the net capital gain or loss for
individuals?
a.100% of short term capital gain c. 100% short term
ordinary gain
b.100% of short term capital loss d. 50% long term
capital gain
27. Which is incorrect regarding net capital loss carry over?

a. Applicable to corporate taxpayers c. Applicable only
to individual taxpayers engaged in
business
b. Applicable only for a period of one year d. Applicable only
to individual taxpayers not in
business
28. Which is incorrect regarding the application of the net capital loss carry
over?
a. There is no net capital loss carry over allowable if the succeeding year
results to a net capital loss
b. Carry over shall not exceed the net income in the year the capital loss are
sustained
c. Carry over shall apply up to the extent of available net capital gain of the
succeeding year
d. Net capital loss carry over can be applied against available ordinary gains
of the succeeding year
29. What is the tax basis of properties received by way of gift?

a. Fair value of the date of donation
b. Acquisition cost of the last donor who did not acquire the property by
gift
c. Whichever is lower of A and B
d. Whichever is higher of A and B
30. What is the tax basis of properties received as inheritance?

a. Tax basis in the hands of decedent
b. Fair value of the property on the date of succession
c. Whichever is lower of A and B
d. Whichever is higher of A and B
Multiple choices Theory - Part 2
a. Gold inventory c. Investment In
stocks
b. Notes receivable d. Accounts
receivable
2.Which is an ordinary asset?

a. Home computer c. Family residence
b. Office supplies d. Personal
clothing
3. Which is a capital asset?

a. Inventory of securities c. Investment in
foreign currencies
b. Parking lot d. Office building
4.Which is a capital asset?

a. Home supplies c. Domestic bonds
of a security dealer
b. Farm supplies d. Residential lot
held for sale
5. All of the following are capital assets to a merchandising business except

a. Store supplies
b. Receivables from customers
c. Personal car of the trader
d. Personal residence of the taxpayer
6. All of the following are ordinary assets to a real property developer except
a. Raw and undeveloped land intended to be sold as is
b. Mortgage receivables on properties sold
c. Land currently under development
d. Raw land held for future development
7. Which of the following capital assets to the rules of regular income tax?
a. Domestic stocks c. sock rights and
warrants
b. Domestic bonds d. Real property
not used in business
8. Which capital asset is subject to capital gains tax?

a. Domestic stocks held for sale
b. Domestic bonds held as investment
c. Domestic stocks held as investments
d. Domestic bonds held for sale
9. Which capital asset is not subject to regular tax?

a. Real property held for sale by a dealer
b. Foreign stocks c
c. Real property held as investment by a non-realty dealer
d. Domestic stock held by a security dealer
10. Which statement is generally true?

A. A purely employed taxpayer does not have ordinary assets.
B. A self-employed taxpayer does not have capital assets.
a. Statement A c. Both statements

A and B
b. Statement B d. Neither
statements A nor B
11. Which of the following capital asset is the holding period rule applicable?
a. Real properties not used in business
b. Home furniture
c. Domestic stocks sold directly to a buyer
d. All of these
12. Which of the following is considered as capital assets?

a. Fully depreciated properties
b. Land previously employed in business
c. Back-up and stand-by equipment
d. Assets not used in business for the last two years
13. Mr. Erorita acquired a lot as a future plant site. For lack of financing, the lot is
currently vacant. For taxation purposes, the land should be classified as a/an
a. ordinary asset c. real property
b. capital asset d. Personal
property
14. Vernon Lacoste, a book publisher, received a lot as donation from a friend
who is not engaged In the realty business. He reserves the lot to house his
publication business.
What is the appropriate classification of the lot for taxation purposes?
a. Ordinary asset c. Depreciable
property
b. Capital asset d. inventory
15. Bantay Kalikasan, a non-profit and non-stock organization, has an office

building devoted for its tax-exempt operation. For taxation purposes, this building
is a/an.
a. ordinary asset
b. either ordinary or capital asset or at the discretion of BIR examiner
c. capital asset
d. either ordinary asset or capital asset at the discretion of Bantay Kalikasan.
16. Which following constitutes a long-term holding period?
a. An asset acquired on November 30, 2018 and was disposed of on
November 28,2019
b. An asset acquired on March 28, 2018 and was disposed of on April 30, 2019
c. An asset acquired on March 13, 2018 and was disposed on January 31,
2019
d. An asset acquired on November 28, 2018 and was disposed of on
November 29, 2019
17. Which of the following statements is incorrect regarding the presentation of
dealings in properties in the income tax return?
a. Ordinary gains are presented as items of gross income.
b. Ordinary losses are presented as items of deduction
c. Net capital gains are presented as items of gross income
d. Net capital losses are presented as items of deduction.
Multiple Choices: Problems - Part I

1. A taxpayer had the following dealings in properties:
Capital gain P 100,000

Ordinary gain 200,000
Capital loss 120,000
Ordinary loss 150,000
How much shall be included in gross income?

a. P 0 c. P 200,000
b. P 50.000 d. P 300,000
2. In the immediately preceding problem, what is the total net gain which will be
ultimately included in net income?
a. P 0 c. P 50,000
b. P 30,000 d. P 150,000
3. Mr. Herman had the following dealings in capital assets:
Short-term capital gain P 200,000

Long-term capital gain 100,000
Short-term capital loss 100,000
Long-term capital loss 150,000
Compute the reportable net capital gain

a. P 50,000 c. P 40,000
b. P 75.000 d. P 25.000
4. If Herman is corporate taxpayer, compute the reportable net capital

a. P 75,000 c. P 40,000
b. P 25,000 d. P 50,000
5. An individual taxpayer had the following dealings in properties
Capital gain P 150,000

Ordinary gain 200.000
Capital loss 120,000
Compute the total amount of gain to be included in gross income subject to
progressive.
Tax.
a. P 230,000 c. P 290,000
b. P 350.000 d. P 260,000
6. A taxpayer had a P300,000 net income before the following dealings In
properties.
Ordinary gain P 80,000

Capital gain 60,000
Capital loss 70,000
If the taxpayer is an individual, compute the net income?
a. P 300,000 c. P 290,00O
b. P 280.000 d. P 260,000
7. Assuming the taxpayer is a corporation, compute the taxable income

a. P 300,000 c. P 280,000
b. P 290.000 d. P 260.000
8. In the immediately preceding problem, what is the net capital loss carry over
for an individual and a corporation respectively?
a. P 10,000; P 10,000 c. P 5,000; P 0
b. P 5,000; P 5.000 d. P 10.000; P 0
9. After three years, an individual taxpayer disposed of a capital asset, other than
domestic stock or real property, with the following data:
Fair value P 2.000000

Selling price 1,500.000
Cost 1.200,000
What is the capital gain subject to regular tax?

a. P 800,000 c. P 150,000
b. P 300,000 d. P 0
10. A taxpayer had the following dealings in properties:
Short-term capital gain P 200,000

Short-term ordinary gain 50,000
Long-term ordinary gain 150,000
Short-term capital loss 100,000
Long-term capital loss 150,000
Short-term ordinary loss 200,000
Long-term ordinary loss 120,000
Assuming that the taxpayer is an individual, compute respectively the total items
of gross income and the total items of deductions from gross income.
a. P 200,000; P 570,000 c. P 250,000; P 570,000
b. P 500,000; P 320,000 d. P 275,000; P 320,000
11. Assuming that the taxpayer is a corporation ,compute respectively the total
items of gross income and the total items of deduction from gross income in
regular income tax.
a. P 500,000; P 570,000 c. P 250000; P 570.000
b. b P 500,000; P 320,000 d. P 250.000, P 320,000
12. Two years after acquisition, a domestic corporation disposed of a real

propene capital asset for P 3,000,000 at a P 300,000 discount from its fair value
The property was acquired for P 2,000.000 when its fair value was P2,100,000.
Compute the capital gains subject to regular tax

a. P 3,000,000 c. P 1.000,000
b. P 1,300,000 d. P 0
13. After three years of use Mr. Bestre disposed of his malfunctioning factory
equipment for
P 1,000,000. The equipment was acquired for P 1,500,000 and has a carrying
value of P 800,000 on the date of sale.
Compute the gain or (loss) to be included in the determination of regular Income
a. P 200,000 c. P 100,000
b. b. (P 500,000) d. P 0
14. Pedro, a realtor, was able to dispose his 2-hectare land Inventory to a buyer
after three years. The lot has a fair value of P 5,000,000 and was sold at a discount
of P 500.000. The was purchased at P 3,000,000.
Compute the gain to be recognized in regular income.

a. P 1,500,000 c. P 2,500,000
b. P 2,000,000 d. P 0
15. Globex Corporation reports the following dealings in capital assets:

2018 2019
Net Income P 20,000 P 80,000
Capital gains 30,000 50,000
Capital loss 45,000 20,000
Compute the net capital gains in 2019.
a. P 30,000 c. P 15,000,000
b. P 20,000 d. P 0
16. Ms Taylor had the following dealings in properties:

2018 2019
Net income P 20,000 P 80,000
Capital gains 35,000 60,000
Compute the net capital gains in 2019.
a. P 60,000 c. P 10.000
b. P 35,000 d. P 15.000
Multiple Choices: Problems -Part 2
1. The following data summarize the dealings in capital assets of an individual
taxpayer.
2018 2019
Net income P 90,000 P 120,000
Short-term capital gains 35,000 60,000
Long-term capital gains 40,000 25,000
Short-term capital loss 60,000 50,000
Long-term capital loss 80,000 20,000
Compute the net capital gain (loss) in 2019.

a. (P 32,500) c. P 12,500
b. P 25,000 d. P 0
2. What is the 2019 net capital gain if the taxpayer is a corporation?
a. (P 32,500) c. P 12,500
b. P 25,000 d. P 15,000
3. The following data may be relevant in establishing the net income of Mr.
Miniloc:
2017 2018 2019
Net income (loss) before dealings P 20,000 (P 70,000) P 120,000
Capital gains 30,000 15,000 34,000
What is the net capital gain or loss in 2019?

a. P 11,000 c. P 34.000
b. P 31,000 d. P 9,000
4. Mr. Taal, not a dealer in properties, made the following dispositions during the
year.
Property Holding period Gain (Loss)
Land 5 years P 200,000
Car l year and 8 months 30,000
Laptop 8 months (8,000)
Compute the net gain to be included in gross income subject to regular tax.
a. P 7,000 as net capital gain
b. P 222,000 as net capital gain
c. P 207,000 as net capital gain
d. P200,000 as ordinary gain and P7,000 as ordinary gain
5. Mr. San Juanico, a realty dealer, had the following dealings in properties in
2019:
Date of
Properties acquisition Date of sale Gain (Loss)
House and lot 2/25/2014 2/27/2019 P 400,000
Commercial lot 8/12/2015 3/14/2019 (100,000)
Personal car 7/18/2019 5/12/2019 80,000
Personal i-Phone 1/14/2019 5/12/2019 80,000
Compute the ordinary gain and the net capital gain subject to regular income tax.
a. P 480,000; P 0 c. P 400,000; P
80,000
b. P 400,000; P 60,000 d. P 300,000; P
60,000
6. What is the amount of ordinary loss?

a. P 0 c. P 100,000
b. P 40,000 d. P 140,000
7. Mr. Matinloc, a dealer of household appliances, made the following
dispositions of properties during 2019:
Date of
Properties acquisition Date of sale Gain (Loss)
Leasehold right 12/2/2016 2/27/2019 P 50,000
Taxi franchise 7/10/2014 3/14/2019 100,000
Electric oven 6/15/2019 7/15/2019 80,000
Residence 1/14/2018 7/3/2019 800,000
Compute the net capital gains subject to regular tax.
a. P 955,000 c. P 155,000
b. P 875,000 d. P 75,000
8. On July 1, 2014, ABC Corporation invested in the stocks of DEF, a foreign

corporation, by acquiring 10,000 shares at P12/share. On December 20,2018, DEF
declared a 20% stock dividend payable January 15, 2019. On January 2, 2019, ABC
Corporation sold 10,000 shares for P13/share.
Compute the net capital gain to be included in regular income.
a. P 5,000 c. P 10,000
b. P 15,000 d. P 30,000
9. Darrel exchanged his stocks in Queen Corporation for the stocks of Queendom
Corporation pursuant to a plan of merger between Queen and Queendom. Darrel
acquired his stocks for
P 100,000 when its fair value was P 105,000. The shares of Queen and Queendom
have fair values of P 120,000, and P 110,000, respectively on the date of
exchange.
What is the tax basis of the Queendom shares received and the gain to be
recognized in the exchange?
a. P 120,000; P 20,000 c. P 105,000; P 0
b. P 110,000; P 20,000 d. P 100,000; P 0
10. Raymund exchanged his MEG shares costing P 80,000 and with fair value of P
100,000 for SM shares with fair value of P 120,000. MEG and SM are not parties
to a merger or consolidation.
Compute the tax basis of the SM shares and the gain to be recognized in the
exchange.
a. P 80,000; P 0 c. P 100,000; P 40,000
b. P 100,000; PO d. P 120,000; P40,000
11. Carren exchanged her PAL shares costing P 90,000 for P20,000 cash plus
AirPhil shares with fair value of P100,000 pursuant to a plan of merger between
PAL and AirPhil.
Compute the tax basis of the AirPhil shares and the gain to be recognized.
a. P 100,000; P 0 c. P 90,000; P 20,000
b. P 100,000; P 20,000 d. P 90,000; P 30,000
12. Pursuant to a plan of consolidation, Zeus exchanged his shares costing P

400,000 for the shares of the new corporation with fair value of P 360,000 plus P
90,000 cash.
Compute the tax basis of the new shares and the gain to be recognized in the
exchange.
a. P 360,000; P 50,000 c. P 360,000; P 0
b. P 400,000; P 90,000 d. P 350,000; P 50,000
13. Mr. Banahaw invested in the stocks of Callao, a domestic corporation, by
Purchasing 1,000 shares for P 100,000 on July 1, 2014. Callao declared a P
10/share cash dividend on November 12, 2019 payable on January 12, 2019 for
stockholders of record December 12, 2019. On December 8, 2019, Mr. Banahaw
disposed of his share investment for a total consideration of P 120,000.
The transaction resulted to

a. P 20,000 capital gain subject to regular income tax.
b. P 11,000 capital gain subject to capital gains tax.
c. P 20,000 capital gain subject to capital gains tax.
d. P 11,000 capital gain subject to regular income tax.
14. Henedina had the following dealings during the year:
Capital gain Short Term Long-term

Sale of domestic stocks directly to a buyer P 40,000 P 50,000
Sale of domestic bonds directly to a buyer 40,000 20,000
Ordinary gains
Sale of equipment 20,000 10,000
Capital loss
Sale of foreign stocks 10,000 10,000
Sale of domestic stocks directly to a buyer 10,000
Ordinary loss
Sale of old machine 40,000
Henedina has a business income totaling P500,000 including P18,000 dividend

income from a domestic corporation. Compute the total income of Henedina
subject to regular tax.
a. P 497,000 c. P 522,000
b. P 517,000 d. P 507,000
15. In the immediately preceding problem, compute Henedina's net capital gains
tax due on the sale of domestic stocks directly to a buyer.
a. P 3,000 c. P 5,000
b. P 4,000 d. P 8,000
16. Pursuant to a plan of consolidation, Mr. Tayabas exchange his share with tax
basis of
P 1,000,000 for the share of another corporation with fair value of P 800,000 plus
P 100,000 cash. Compute the capital loss to be recognized.
a. P 0 c. P 100,000
b. P 50,000 d. P 200,000
17. In the immediately preceding problem, compute the tax basis of the
properties received by Mr. Tayabas.
a. P 800,000 c. P 1,000,000
b. P 1,100,000 d. P 900,000
CHAPTER 13 – Principles of Deduction

Identify whether the following is a business expense or a personal expense by
checking the appropriate box corresponding to the item:
Business Personal
Expense Expense
Medical expense of the proprietor (business owner) /
Tuition fees of an employee to acquire expertise for
/
future use of the business.
Transportation expense from office to client
/
establishments
Cost of entertaining family members of the proprietor /
Cost of entertaining clients receipted under the name
/
of the taxpayer`s spouse
Interest expense to finance the construction of the
/
office building
Loss on destruction of taxpayer`s residence /
Office utilities expense /
Repairs that restore the value of destroyed business
/
properties
Tuition fee if the taxpayer`s dependents /
Salary of household help and maids /
Salary of office staff /
Vacation Expense of family members of the /
proprietor
Travel expense to attend seminar /
Costs of renewal of the taxpayer`s professional /
license
On July 1, 2016, a taxpayer paid for a P200,000 business expenditure.
Required:
Compute the deduction from 2018 through 2020 assuming the expenditure was
for:
2018 2019 2020

Land which was sold in 2020 P200,000
Equipment with 4-year estimated useful
life P 25,000 P 50,000 P 50,000
Inventory which was sold in 2019 P 200,000
Salaries of administrative and sales
personnel in 2019 P 200,000
Rental of a facility for the years 2018 and
2019 P 100,000 P100,000
A taxpayer engaged in trading two types of precious merchandise had the
following summaries of inventories:
Zircon Ruby Total
January 1 inventory P 200,000 P 320,000 P 520,000
Purchases:
1,000 units P 800,000 - P 800,000
4,000 units - P 1,200,000 P 1,200,000
January 31 inventory 400 units 800 units
Required:
Compute the cost of goods sold.
Beginning Inventory P 520,000

Purchases (P800,000 + P1,200,000) 2,000,000
Total cost of goods available for sale P 2,520,000
Less: Ending Inventory
Zircon (400/1,000xP800,000) P 320,000
Ruby (800/4,000xP1,200,000) 240,000 560,000
Cost of Goods Sold P1,960,000
On July 1, 2015, a taxpayer purchased equipment for P2,000,000 with an
estimated scrap value of P200,000 after its four-year estimated useful life.
Required:
Compute the depreciation expense and adjusted tax basis of the property as of
December 31 of 2015 through 2020.
Straight line Sum-of-the years 150% declining 200% declining
Year method digit balance balance
Expense Tax Expense Tax Expense Tax Expense Tax
basis basis basis basis
2015 P225,000 P1,775,000 P360,000 P1,640,000 P375,000 P1,625,000 P500,000 P1,500,000
2016 450,000 1,325,000 630,000 1,010,000 609,375 1,015,625 750,000 750,000
2017 450,000 875,000 450,000 560,000 380,859.38 634,765.63 375,000 375,000
2018 450,000 425,000 270,000 290,000 238,037.11 396,728.52 150,000 225,000
2019 225,000 200,000 90,000 200,000 196,728.52 200,000 25,000 200,000
2020 0 200,000 0 200,000 0 200,000 - 200,00
Sum of the years digit method

Annual dep`n Semi-annual Actual Book
dep`n value
2015 4 720,000.00 360,000.00 360,000.00 1,640,000.00
360,000.00
2016 3 540,000.00 270,000.00 630,000.00 1,010,000.00

270,000.00
2017 2 360,000.00 180,000.00 450,000.00 560,000.00

180,000.00
2018 1 180,000.00 90,000.00 270,000.00 290,000.00
2019 90,000.00 90,000.00 200,000.00
Sum-of-the 10
years digit
150% Declining balance
Declining 0.375 Annual Semi-annual Actual Tax Basis
rate dep`n
2015 4 750,000.00 375,000.00 375,000.00 1,625,000.00
375,000.00
2016 3 468,750.00 234,375.00 609,375.00 1,015,625.00

234,375.00
2017 2 292,968.75 146,484.38 380,859.38 634,765.63

146,484.38
2018 1 183,105.47 91,552.73 238,037.11 396,728.52

91,552.73
2019 105,175.78 105,175.78 196,728.52 200,000.00
Declining rate = 1/.4x150% = 37.50%
Double declining balance
Declining 0.5 Annual Semi-annual Actual Tax Basis

rate* dep`n
2015 4 1,000,000.00 500,000.00 500,000.00 1,500,000.00
500,000.00
2016 3 500,000.00 250,000.00 750,000.00 750,000.00

250,000.00
2017 2 250,000.00 125,000.00 375,000.00 375,000.00

125,000.00
2018 1 175,000.00 25,000.00 150,000.00 225,000.00

25,000.00
2019 - - 25,000 200,000.00
2020 - - - 200,000
*1/4 x 200% = 50%

For each of the following, indicate CE if the item is capital expenditure. If it is an
expense, indicate DE if deductible expense and NDE if non-deductible expense
1. Loss on destruction of uninsured personal car of the taxpayer
NDE
2. Employee performance bonus for the current year
DE
3. Acquisition cost of equipment
CE
4. Decline in market value of investment securities
NDE
5. Advanced rent for the next two years
CE
6. Interest expense in acquiring tax-exempt securities
NDE
7. Expenses to create business goodwill
CE
8. Loss on decline in the value of securities
NDE
9. Fire loss on uninsured building
DE
10.Factory salaries, utilities and rent expense
CE
11.Entertainment expenses for government officials
NDE
12.Revaluation loss on decline in value of building and equipment
NDE
13.Loss on sale of properties to an unaffiliated company
NDE
14.Decline in value of foreign currency denominated receivables
NDE
15.Facilitation fees to government agencies
NDE
16.Freight cost of selling goods
DE
17.Freight and insurance cost of buying goods or equipment
CE
18.Raw materials used in production
CE
19.Cost of goods manufactured
CE
20.Accrued salaries expense of an accrual basis taxpayer
DE
21.Cost of goods finished and sold
DE
22.Expired portion of business property insurance
DE
23.Interest expense on borrowing from family members
NDE
24.Accrued but unpaid rent expense of a cash basis taxpayer
NDE
25.Value of unharvested fruits destroyed by a storm
NDE
26.Receivables proven to be uncollectible under the cash basis
NDE
27.Insurance expense on the life of the company president where the
beneficiary is the spouse of the president
DE
28.Expenses on business operation which are exempt from regular income tax
or subject to special tax regimes
NDE
29.Bad debts expense with non-paying family members
NDE
30.Dividend to preferred or common stocks
NDE (best answer but this is not an expense)
True or False 1
1. The cost of investments and land are deductible against their proceeds in
the year of sale.
True
2. The entire cost of depreciation properties is deductible against their
proceeds in the year of sale.
False (Tax basis or book value not cost)
3. Prepaid expenses are deductible upon payment consistent with the rule
that advanced incomes are taxable upon receipt.
False
4. Capital expenditures are deductible against future income.
True
5. Personal expenses are deductible from gross income.
False
6. Losses on properties not used in business may be deducted but only to the
extent of capital gains.
True
7. Expenses intended for the business and the personal use of the taxpayer
must be allocated between the two. Only the portion pertaining to the
business is deductible.
True
8. The expenses of defending a patent is a business expense deductible in the
current period.
False (In taxation, this is a capital expenditure)
9. The depreciation of the property revaluation gain is deductible.
False
10.Supplies and inventories are expensed using the inventory method.
True
True or False 2
1. So long as the expense relates to the generation of an income subject to
any income tax, the same is deductible against gross income subject to
regular tax.
False (As a rule, expense of regular income only.)
2. The amount of expense between affiliated companies may be adjusted by
the BIR to reflect their arm`s length value.
True
3. The failure to deduct creditable withholding tax on income payments will
render the expense non-deductible.
True
4. Immaterial expenditure must always be capitalized.
False
5. Repairs that increase property useful life are capitalized.
False
6. Repairs that increase property fair value are capitalized.
True
7. An unpaid expense may be deducted under the accrual basis of accounting.
True
8. The government should not enrich itself at the expense of the taxpayers.
Losses between related parties are deductible in the same way gains
between related parties are taxable.
False
9. Taxpayers opting to use the optional standard deduction must also
maintain records of their expenses.
False (records of gross income)
10.Deduction incentives are deductible because they are actual expense.
False (because allowed by law)
1. Losses on capital assets are
a. deductible against gross income to the extent not compensated by
insurance.
b. deductible against capital gain to the extent compensated by
insurance.
c. not deductible against gross income whether or not compensated for
by insurance.
d. not deductible against capital gains unless not compensated by
insurance.
2. Which is a deductible expense?

a. Marketing and advertising expense
b. Insurance on factory building
c. Salaries of security guards in the factory
d. Cost of registering stocks
3. The transaction involving an insured property is said to be closed and

completed when
a. final settlement by insurer is made.
b. the report of the insurance adjuster indicates a loss.
c. final settlement confirms an unrecoverable cost.
d. no proceeding in court is expected to be made by the insured.
4. Which is deductible expense?

a. Acquisition cost of a business franchise
b. Repayment of debt
c. Cost of registering a business
d. Cost of issuing securities
5. Which is a deductible business expense?

a. Interest on personal borrowing
b. Rental of taxpayer`s domicile
c. Selling commission to agents
d. Wages of kasambahays
6. A repair expense is deductible in the period paid or incurred unless it
a. merely maintain the value of the property.
b. increases the value of the property.
c. constitutes a major repair
d. constitute a minor expense
7. Losses on property are not deductible unless

a. sustained with a related party.
b. sustained in an actual or completed transaction.
c. temporary in nature.
d. covered by insurance or indemnity contracts.
8. Losses on insured properties are not deductible

a. to the extent not compensated by insurance.
b. to the extent compensated by insurance.
c. as a rule ,except when allowed by the BIR examiner.
d. in all circumstances.
9. Which statement is the most accurate?

a. Prepaid expense is deductible in the period paid by taxpayers using
cash basis.
b. Prepaid expense is deductible in the future period it relate without
regard to the basis of accounting employed by the taxpayer.
c. Accrued expense are deductible by cash basis taxpayers.
d. Depreciation expense can be claimed only by accrual basis taxpayer.
10. Cash basis and accrual basis taxpayers differs in the treatment of
a. Prepaid expense
b. Current period cash expense
c. Current period accrued expense
d. Depreciation expense
11. Which may not be related?
a. The controlling individual and the controlled corporation.
b. The controlling individual and a subsidiary of a controlled
corporation.
c. The grantor and fiduciary of a trust.
d. The grant and the beneficiary of a trust.
12.Which of the following is an extraordinary non-deductible expense against

regular gross income of a merchandiser?
a. Loss on sale of obsolete merchandise
b. Store supplies and utilities
c. Local business permit
d. Loss on sale of investment in stocks
13.Which is a deductible expense against business gross income?

a. Commission expense on sale of investment in stocks
b. Salaries of marketing personnel of a manufacturing business
c. Quarterly estimated income tax
d. Final tax on interest income on bank savings deposit
14.Which is not a general principle of deduction?

a. The matching principle
b. The related party rule
c. The withholding rule
d. The transfer pricing rule
15.Which is an actual deductible expense?

a. Provision for an estimated bad debt expense
b. Loss arising from liability on a contested lawsuit confirmed by a final
judgement
c. Increase in value of foreign currency-denominated debt
d. Death of animal offspring
16.Which is deductible against gross income?
a. Imputed interest expense
b. Advances to profit sharing of a partner in a general professional
partnership
c. Repayment of business debts
d. Local taxes
17.Which of the following is deductible?

a. Rent of office space
b. Tuition fees of the siblings of the taxpayer
c. Selling expense of domestic stocks directly to a buyer
d. Estimated losses on lawsuit
18.Which is non-deductible against gross income?

a. Loss on sale of stocks through the PSE
b. Write-off of bad debts
c. Loss on destruction of office building by an earthquake
d. Amortization of patent or franchise used in the business
19.Which is an incorrect statement?

a. The straight line method provides for an equal periodic deduction
against gross income.
b. The sum-of-the-year digit method provides for an increasing
deduction againts gross income.
c. The double declining balance method provides for a declining
deduction at a rate twice the deduction of straight line method.
d. Both straight line method and sum-of-the-year-digit method consider
the residual value of the property.
20.Which of the following ordinary assets cannot be depreciated?

a. Office equipment
b. Machineries
c. Building and its improvements
d. Land
21.Statement 1: Only taxpayers under the accrual basis shall use the inventory
method in deducting inventories.
Statement 2: Only taxpayers under the accrual basis can claim deduction
for depreciation and losses.
a. Statement 1 is correct.
b. Statement 2 is correct
c. Both statement are correct
d. Neither statement is correct.
22.Statement 1: The cost of goods sold is directly deducted upon sales in the
measurement of the gross income from the sales of goods.
Statement 2: The cost of services is directly deducted from gross receipts in
the measurement of the gross income from the sales of services.
23.Which is not a capital expenditure?

a. Payment to create a good image of the business of the taxpayer
b. Prepaid expenses
c. Accrued expenses
d. Advances to contractors
24.Statement 1: Repairs that do not extend the useful life or increase the fair
value of an asset should be capitalized.
Statement 2: The cost of issuing securities of the taxpayer are deductions
against gross income.
25.Statement 1: Improvements to properties are usually capitalized.
Statement 2: Directly attributable cost of acquisition of properties are
added to the basis of the properties acquired.
e. Statement 1 is correct.
f. Statement 2 is correct
g. Both statement are correct
h. Neither statement is correct.

1. Which of the following cannot claim deductions from gross income despite
actual engagement in business?
a. Resident citizen
b. Resident alien
2. Which of the following taxpayer cannot claim deductions from gross

income?
a. General professional partnership
b. Domestic corporation
c. Resident foreign corporation
d. Non-resident foreign corporation
3. Which of the following can be claimed as deduction?

a. Transportation allowance of employees of the taxpayers
b. Transportation allowance of the taxpayer`s dependents
c. Losses from destruction of the taxpayer`s resident
d. Depreciation of the residence of the taxpayers
4. Which expense is deductible despite the fact that it is not actual expense?
a. Compliance expense on regulatory requirements
b. Deductions incentives for compliance to regulatory requirements
c. Uncollectible debts ascertained to be worthless
d. None of these
5. Which is not a characteristics of deductions from gross income?
a. Legitimate business expense
b. Capital expenditure
c. Ordinary and necessary expense
d. Actual and necessary expense
6. Which is a deductible expense?

a. Regular repair of office equipment
b. Refurbishing of an old building to prepare it for use
c. Addition of a wing to an existing building
d. Overhead of machineries to extend their useful life
7. Which of the following taxpayers can claim deductions against gross

income?
a. A resident citizen taxpayer earning purely compensation income
b. Non-resident foreign corporation
c. Non-resident alien not engaged in trade or business
d. Resident citizen earning a mix of passive and business income
8. Which is not separate classification of deduction from gross income?

a. Net operating loss carry over
b. Regular allowable itemized deductions
c. Special allowable itemized deductions
d. Net capital loss carry over
9. Which statement is incorrect regarding deduction?

a. The claim of deduction, similar to exemption, is construed against the
taxpayer.
b. The use of optional standard deduction always results in reported
taxable income.
c. The unreasonableness of deduction is up to the BIR to prove.
d. The incurrence of an operating loss is an indication of an unreasonable
expense.
10.The following cannot claim deduction from gross income except
a. A self-employed individual taxpayer
b. A corporation earning purely passive income
c. An individual earning purely passive income
d. An individual taxpayer earning purely compensation and passive income
11.Which is not deductible against gross income?

a. Interest expense incurred to purchase tax exempt securities
b. Net capital loss
c. Personal expenses
d. All of these
12.Which is deductible business expense?

a. Loss on decline in value of securities
b. Estimated losses on expropriation
c. Fire loss on an insured property
d. Loss on theft of company assets
13.Which of the following constitutes a deductible expense?

a. Purchase of office equipment invoiced under the trade name of the
taxpayer`s business
b. Tuition fees of dependents of the taxpayer
c. Interest expense on a business loan
d. Representation expenses booked in the name of the taxpayer`s wife
14.Which of the following qualifies for deduction for an individual income

taxpayer engaged in business?
a. Salaries of household maid
b. Gasoline expenses of the taxpayer`s personal car
c. Office internet expense
d. Taxpayer`s transportation expense to and from his residence
15.Which of the following can be deducted by an individual taxpayer not

engaged in business?
a. Transportation expenses
b. Communication expenses
c. Interest expense
d. None of these
16.Which of the following can be claimed by a resident foreign corporation?
a. Depreciation expense on properties located abroad
b. Income tax paid in a foreign country
c. Income tax paid in the Philippines
d. Interest expense on foreign borrowings used to finance its Philippine
business
17.Which can be treated as capital expenditure through depreciation expense?

a. Interest expense incurred to purchased office equipment
b. Losses sustained in an uninsured office building
c. Acquisition of land
d. Acquisition of personal computer
18.Which of the following items can be deducted in fill in the year sustained?
a. Write-off bad debts by a taxpayer under the cash basis
b. Loss on market decline in the value of gold inventories
c. Loss on the destruction of the taxpayer`s personal car
d. Uninsured fire loss sustained by the business of the taxpayer
19.Deduction can be claimed against

a. talent fees.
b. fixed allowances.
c. fringe benefits.
d. salaries
20.Which is deductible in full by a taxpayer engaged in merchandising

business?
a. Value of inventories taken home by business owner
b. Loss on unrecoverable debts from a non-paying family member
c. Imputed interest on the capital investment of the owner
d. Value of inventories destroyed by rodents
21.Which is not a deductible loss by a security dealer?

a. Wash sales loss
b. Loss on the sale of bonds with more than five years maturity
c. Loss on the sale of stocks through the PSE
d. Loss on the sale of short-term bonds through the Philippine Dealings
Exchange
22.Determine the deductible loss.
a. Loss incurred in exchanging property to obtain control of a corporation
b. Loss incurred in exchanging properties with a corporation after
obtaining control over said corporation
c. Calamity loss on uninsured property
d. Bad debts from a sister company
23.Which of the following is non-deductible by the fact that it violates the

Matching Principle?
a. Expense of a tax-exempt operation
b. Payment for police protection
c. Payment of revolutionary taxes
d. Expenses not receipted in the name of the taxpayer
24.Which is incorrect with regard to expenses incurred between associated

enterprises?
a. The pricing of the transaction must not be controlled.
b. The pricing method to be adopted shall be based on free market factors
or those made between two independent parties.
c. In case of a controlled transaction, the deductible expense to the paying
enterprise shall be the arm`s length value of the transaction.
d. No deduction shall be allowed on expenses incurred between associated
enterprises.
25.Which is not a business expense?

a. Fringe benefit tax expense
b. De minimis benefits granted to employees
c. Salaries of personal driver of the company president which was
subjected fringe benefit tax
d. Depreciation value of properties designated for the use of company
managers and supervisors which are subjected to fringe benefit tax
*No outflow
1. On September 30, 2020, a taxpayer borrowed P1,000,000 at 10% annual
interest of finance his acquisition of a luxury car. Compute the deductible
interest expense in 2020.
a. P 0 c. P50,000
b. P25,000 d. P75,000
2. Spartan corporation had office supplies valued at P40,000 on January 1,

2020. At the end of the first calendar quarter, it had P80,000 worth of office
supplies. Total supplies purchased wereP250,000 during the period.
Compute the supplies expense to be deducted during the first quarter.

a. P210,000 c. P280,000
b. P250,000 d. P290,000
(P40,000 +P250,000 – P80,000)
3. A non-resident alien not engaged in business incurred business expenses of

P100,000 and personal expenses of P20,000. How much is deductible from
his gross income?
a. P 0 c. P100,000
b. P20,000 d. P120,000
4. A taxpayer paid the following salaries during the year:

Salaries of administrative employees P 80,000
Salaries of sales and marketing employees 70,000
Salaries of factory production workers 120,000
Compute the deductible salaries expense.

a. P270,000 c. P150,000
b. P200,000 d. P120,000
(P80,000 + P70,000)
5. On July 1, 2018, a taxpayer purchased equipment for P500,000 from which
was estimated to be useful until July 1,2023, with an expected P100,000
residual value. Compute the 2018 depreciation expense using the straight
line method.
a. P 0 c. P50,000
b. P40,000 d. P80,000
6. A taxpayer paid P45,000 property insurance having a 12-month coverage
starting March 1, 2018. Compute the deductible insurance expense in 2018.
a. P 0 c. P37,500
b. P7,500 d. P45,000
(P45,000/12 x 10)
7. A storm resulted in the loss of the following livestock:

Value of two heifers (purchased at P15,000 each) P 40,000
Value of a bull (purchased for P18,000) 24,000
Value of twelve calves worth P6,000 each 72,000
Total value of lost livestock P136,000
Determine the deductible loss for taxation purposes.

a. P 0 c. P64,000
b. P48,000 d. P120,000
[(P15,000 x 2) + 18,000]
8. Mr. Jun, a professional practitioner, incurred the following expenses during

the period:
Salaries of household maid P 50,000
Salaries of office staff 30,000
Office utilities 12,000
Office supplies 8,000
Depreciation of personal car 15,000
Depreciation of office equipment 20,000
Compute the total deductible expenses.
a. P50,000 c. P100,000
b. P70,000 d. 135,000
(P30,000 + 12,000 +8,000 +P20,000)
9. The following relate to the building of taxpayer:
Fair market value P6,000,000
Purchase price 5,000,000
Carrying amount 4,500,000
Remaining useful life 9 years
Depreciation method straight line
What is deductible amount of depreciation expense?

a. P666,667 c. P500,000
b. P555,555 d. P 0
(P4,500,000/9)
10. The personal car of the taxpayer had the following data:
Fair market value P6,000,000
Purchase price 5,000,000
Estimated useful life 10 years
What is deductible annual depreciation expense?

a. P 0 c. P500,000
b. P250,000 d. P600,000
11.The following relate to the inventory of tools held by the taxpayer:

Inventory of tools, January 1, 2019 P 120,000
Purchases of tools 300,000
Inventory of tools, December 31,2019 140,000
What is the amount of deductible tools expense?

a. P 0 c. P280,000
b. P120,000 d. P300,000
(P120,000 + 300,000 – 140,000)
12.A taxpayer paid the following disbursements and expenses for the current
year:
Tuition fees of children P 50,000
Donation to friends 20,000
Purchase of office equipment at start of the year
(equipment expected to last for five years) 100,000
Office rent (for three years including the current year 90,000
Office supplies (1/2 used) 20,000
Compute the total deductible expense from the above items:

a. P 0 c. P50,000
b. P20,000 d. P60,000
[(P100,000/5) + (P90,000/3) + (P20,000 x ½)]
13.Bermuda Inc. insured two of its key employees paying the following
premiums annually:
Mr. Croco, the president P 40,000
Mr. Genero, the vice president for operations 34,000
In Mr. Croco`s policy, Bermuda, Inc. is the beneficiary. In Mr. Genero`s policy,
his wife is the beneficiary of the policy.
Compute the total deductible expense.

a. P34,000 c. P50,000
b. P40,000 d. P74,000
14.Dragon City Corporation is a resident foreign corporation established in

China but is operating in the Philippines. During the year, it paid for
P300,000 for salaries of Philippine employees and P1,200,000 for Chinese
employees.
Compute the deductible compensation expense.

a. P 0 c. P1,200,000
b. P300,000 d. P1,500,000
15.Using the same choices in Number 14, compute the deduction assuming
that Dragon City is a domestic corporation.
a. P 0 c. P1,200,000
b. P300,000 d. P1,500,000
16.Using the same choices in Number 14, compute the deduction assuming
that Dragon City is a non-resident foreign corporation.
a. P 0 c. P1,200,000
b. P300,000 d. P1,500,000
*NRFC is subjected to final tax. No deduction is allowed.

1. Boac Company had the following summaries of expenses:
Expenses without supporting documentation P200,000

Expenses with supporting documentations
Income payments subject to creditable withholding tax:
with withheld CWT 600,000
without withheld CWT 400,000
Payments not subject to creditable withholding tax 200,000
Determine the amount of deductions.

a. P800,000 c. P1,200,000
b. P1,000,000 d. P1,400,000
(P600,000 + P200,000)
2. Calapan Corporation brought equipment costing P500,000. The equipment

was expected to have P50,000 residual value at the end of its 5-year
expected life.
Calapan Corporation failed to withholding the creditable withholding tax on
the equipment.
Compute the depreciation expense in the first year.
a. P 0 c. P90,000
b. P45,000 d. P180,000
3. Tri-Peak Semiconductor is an exporter of transistors to the United States.
On December 15, 2019, it made a single shipment worth $1,000,000
payable January 21,2020. The value of the sales in peso equivalents was as
follows:
December 15, 2019 P42,000,000

December 31, 2019 41,800,000
January 21, 2020(Converted value to peso)
41,700,000
Compute the deductible foreign currency loss.
a. P200,000 in 2019
b. P300,000 in 2019
c. P300,000 in 2020
d. P200,000 in 2020
(P 42,000,000 – P 41,700,000)
4. The taxpayer incurred the following in 2020:
Loss on sale of equipment to a subsidiary company P 400,000

Loss on sale of equipment to a sister company 100,000
Loss on liquidation of an affiliate company 200,000
What is the deductible amount of loss to a related party?

a. P 0 c. P300,000
b. P200,000 d. P600,000
5. The accountant of Triniville Corporation provides for an allowance against

unrecoverable accounts equivalent to 3% of Triniville`s total receivables.
The allowance for bad debts had a balance of P45,000 and P50,000 at the
start and end of the year, respectively, while P30,000 of precious accounts
were actually found to be worthless and were written-off. What is the
deduction against gross income for purposes of taxation?
a. P 0 c. P30,000
b. P25,000 d. P50,000
6. The following relate to a transaction between associated enterprises which
was subjected to transfer pricing restatement by the BIR.
Amount of expense claimed P 800,000

Arm`s length value in a comparable transaction 500,000
What is the deductible amount of expense?

a. P800,000 c. P300,000
b. P500,000 d. P 0
7. In the immediately preceding problem, what is the required adjustments to

taxable net income?
a. P300,000 increase c. P500,000 increase
b. P300,000 decrease d. P800,000 decrease
(P800,000 – P500,000)
8. A taxpayer had the following losses during the year:
Estimated bad debt expense P300,000

Write-off of uncollectible accounts 150,000
Carrying value of property destroyed by fire
(the property is covered by insurance) 1,200,000
Unrealized loss on foreign currency receivables 12,000
Assuming the taxpayer is under the accrual basis, compute the total deduction.
a. P 0 c. P162,000
b. P150,000 d. P1,315,000
9. In the immediately preceding problem, compute the deduction assuming

the taxpayer is under the cash basis.
a. P 0 c. P162,000
b. P150,000 d. P1,315,000
10.ABC Company incurred and paid the following expenses in 2020:
Salaries (1/8 unpaid) P 400,000

Prepaid rent (2020 to 2022) 150,000
Depreciation expense 80,000
Purchase of supplies 60,000
Supplies used 25,000
Compute the total deductions under the cash basis for the year 2020.
a. P690,000 c. P555,000
b. P655,000 d. P505,000
[(400,000 x 7/8) + (P150,000 x 1/3) + P(80,000 + 25,000)]
*supplies is a from prepayment.
11.Compute the total deductions under the accrual basis for the year 2020.
a. P655,000 c. P555,000
b. P605,000 d. P505,000
[400,000 + (150,000 x 1/3) + P80,000 + P25,000)]
12.An equipment was purchased on January 1, 2020 for P4,000,000. The

equipment has an estimated useful life of P400,000 at the end of its five-
year useful life.
Compute the depreciation expense assuming the use of the straight line
method:
a. P720,000 c. P1,440,000
b. P1,200,000 d. P1,600,000
13. Under the sum-of-the-year digit method, compute the 2020 depreciation
expense.
a. P720,000 c. P1,440,000
b. P1,200,000 d. P1,600,000
14.Using a 150% declining balance method, compute the 2020 depreciation
expense.
a. P720,000 c. P1,440,000
b. P1,200,000 d. P1,600,000
15.Using a 200% declining balance method, compute the 2020 depreciation

expense.
a. P720,000 c. P1,440,000
b. P1,200,000 d. P1,600,000

1. A certain taxpayer paid the following bill from a VAT-registered supplier of
office supplies. The office supplies were all used in operation during the
period:
Selling price P 400,000

Plus: Output VAT 48,000
Less: Withholding tax (1%) 4,000
Net cash due P 444,000
What is the deductible supplies expense assuming the taxpayer is a VAT-

taxpayer?
a. P396,000 c. P444,000
b. P400,000 d. P448,000
(The input VAT must be included)
2. What is the deductible supplies expense assuming the taxpayer is a non-

VAT-taxpayer?
a. P396,000 c. P444,000
b. P400,000 d. P448,000
(The VAT is part of supplies expense.)
3. On January 2, 2016, a non-VAT taxpayer purchased an equipment with
estimated useful life of 5 years
Selling price P 150,000
Plus: Output VAT 18,000
Less: Withholding tax (1%) 1,500
Net amount due P 166,500
What is the claimable depreciation expense for the year?

a. P 0 c. P33,300
b. P30,000 d. P33,600
(The cost of the equipment for a non-VAT taxpayer shall be (P150,000 +
P18,000) or P168,000 /5 years = P33,600.)
4. The taxpayer withheld 5% creditable withholding tax on rental payments to

various VAT- registered lessors. The total taxes withheld were P5,600. What
is the deductible amount of rental expense?
a. P 0 c. P100,000
b. P56,000 d. P112,000
(P5,600 / 5% is based on the rent expense, exclusive of VAT.)
5. Until the time of the examination of its book, the taxpayer failed to
withhold 10% withholding tax amounting to P10,000 from the payments of
professional fees to a consultant who is a VAT taxpayer. “What is the
deductible amount for professional services paid?
a. P 0 c. P100,000
b. P89,286 d. P112,000
6. In the immediately preceding problems, what is the amount of surcharge

due from the taxpayer?
a. P 0 c. P2,000
b. P1,874 d. P2,500
(P10,000 x 25% surcharge)
7. The following case is applicable for Nos. 7 through 10:
Atimonan Company received a bill for P27,440from a non-VAT service provider.

The payment for the service is subjected to 2% creditable withholding tax.
What is the deductible expense if Atimonan is a non-VAT taxpayer?

a. P 0 c. P27,440
b. P26,891 d. P28,000
8. If Atimonan is a non-VAT taxpayer, what respectively is the withholding tax

and the amount of cash to be paid by Atimonan to the service provider?
a. P 0; P27,440 c. P560, P27,440
b. P548.80; P26,891.20 d. P537.82; P26,353.18
(P27,440 x 2% = P548.8; P27,440 – P548.80 = P26,891.20)
9. If Atimonan is a VAT taxpayer, what is the deductible expense?

a. P 0 c. P27,440
b. P26,891 d. P28,000
*The supplier is a non-VAT, so there is no difference as there is no Input VAT
to account for.
10.If Atimona is a VAT taxpayer, what respectively ia the withholding tax and
the amount of cash to be paid by Atimonan to the service provider?
a. P 0; P27,440
b. P548.80; P26,891.20
c. P560, P27,440
d. P537.82; P26,353.18
Chapter 13-A - Regular Allowable Itemized Deductions
CHAPTER 13-A: SELF-TEST EXERCISES
True or False 1
1. Interest incurred in the financing of petroleum operations may at the option of the taxpayer be capitalized or
expensed.
False (non-deductible)
2. Income tax is not an expense. The arbitrage limit applies only when there is an intentional arbitrage.
True
3. The arbitrage limit apploes only when there is an international arbitrage.
False (no qualification)
4. The arbitrage limit applies to all taxpayers including individuals.
True
5. Interest expenses incurred with related parties are deductible.
False
6. Interest expenses are deductible in full amount if there is no interest income subject to final tax during the period.
True
7. Interest on a prescribed debt is deductible.
False
8. A deductible interest must not be incurred between related parties.
True
9. The allowable deduction for deductible taxes includes the basic tax, surcharge and interest.
False (as tax expense, basic only)
10. Foreign taxes can be claimed as a deduction or tax credit.
True
11. Foreign corporations and aliens can claim deduction or tax credit for foreign taxes.
False
12. Capital loss is deductible to the extent of ordinary gain while ordinary loss is deductible in full.
False
13. Losses must be reported to the BIR within 45 days from the occurrence of the casualty, robbery, theft, or
embezzlement giving rise to the loss.
True
14. Depreciation on revaluation surplus of properties can be deducted as part of depreciation expense.
False
15. The claim of the same loss in the income tax return of the estate and in the estate tax return is not allowed.
True
True or False 2
1. Bad debt expenses representing loss of capital can be deducted by cash basis
True
2. Bad debt expenses between related parties can be deducted as long as these are adequately supported with
documentary evidence.
False
3. The loss of capital investment in a business can be claimed as bad debt expense.
False
4. The subsequent recovery of bad debt expense must be reverted back to gross income to the extent of the tax
benefit of the deduction in the year the deduction is made.
True
5. The loss on insured property cannot be deducted.
True
6. In total destruction of properties, restoration costs are treated as new acquisition of properties.
True
7. If the fair value of the property is not determinable, restoration costs are expensed to the extent of the basis of the
original property. The excess over the basis is treated as an increase in fair value and is capitalized.
True
8. The loss in value of assets is deductible only when sustained and realized.
True
9. Losses on wagering transactions are deductible in full.
False
10. With the exception of domestic corporations and resident citizens, expenses incurred abroad cannot be deducted
unless incurred in connection with the Philippine business.
True
11. Contributions are valued at the fair value of the property donated.
False
12. The recovery of bad debts by cash basis taxpayers must always be reverted back to gross income. 189
True (This is recovery of lost profits)
13. The recovery of bad debts by accrual basis taxpayers may be reverted back to gross income.
True
14. Capital assets can be depreciated for tax purposes.
False
15. The depreciation expense on properties held under life tenancy is computed as if the life tenant were the absolute
owner of the property.
True
True or False 3
1. Petroleum operations are not subject to the limit on the deduction of intangible exploration and development costs
after the commencement of commercial production.
True
2. Contribution expenses are deductible if the donee is a domestic institution.
True
3. Donations to foreign institutions covered by treaty exemptions are fully deductible.
True
4. Contribution expenses are measured at the fair value of the property donated.
False (tax basis of value given)
5. Private educational institutions are allowed to deduct capital expenditures.
True
6. The depreciation on properties held in trust is apportioned between the income beneficiaries and the trustees in
accordance with the provision of the instrument creating the trust or on the basis of the income allowable to each.
True
7. The depreciation of revaluation surplus is not deductible in taxation.
True
8. No depreciation expense is allowable for helicopters, yachts, airplanes or aircraft, and land vehicles which exceeds
P2,400,000 in value unless the main line of business of the taxpayer is transport or lease of transportation equipment.
True
9. Tangible development costs in wasting assets are capitalized and depreciated.
True
10. Intangible exploration and development costs incurred before commercial production in a wasting asset operation
are capitalized as cost of the wasting asset.
True
11. After commencement of commercial production, intangible exploration and development costs incurred on non-
producing wells or mines are deductible in the period paid or incurred.
True
12. After commencement of commercial production, intangible exploration and development costs incurred on
producing wells or mines are always capitalized and amortized using the cost-depletion method.
False (expensed or capitalized)
13. The threshold on partially deductible contributions of corporate taxpayers is 10% of the net income before the
contribution.
False (5%)
14. The funding of past service cost is amortized over 10 years or the actual vesting period whichever is longer.
False (fixed by law as 10 years)
15. The overfunding of defined benefit plans is treated as funding of past service cost and is amortized over 10 years.
False
16. The employee counterpart in a contributory pension plan is deductible by the employer.
False
17. Research and development costs related to land must be capitalized.
True
18. Research and development costs not related to capital accounts are either deducted outright or deferred and
amortized over a period of not less than 60 months.
True* (not less than)
19. The EAR expense on the sale of goods is subject to a limit of 0.5% of gross sales.
False
20. The EAR expense on the sale of services is subject to a limit of 1% of net revenue.
True
21. Purely employed individuals can claim deductions for donations made.
False
190
Multiple Choice: Theory 1
1. Which of the following cannot be deducted against gross income of non-VAT taxpayers?
a. Foreign income tax. c. Philippine income tax
b. Value added tax d. Percentage tax
2. Which is not deductible against gross income?

a. Depreciation value of fringe benefits given to managerial employee
b. Fringe benefits to rank and file employees
c. Compensation of minimum wage earners
d. Salaries of managerial or supervisory employees
3. Which is deductible tax expense against gross income?

a. Documentary stamp tax
b. Donor's tax
c.Estate tax
d. Foreign income tax claimed as tax credit
4. Which is deductible in the measurement of net income from business or

a. Mandatory payroll deduction
b. Tuition fees of the taxpayer's brother
c. Interest expense on borrowings from family members
d. Salaries of personal security guard of a managerial employee
Solution: (D is fringe benefit expense. Mandatory payroll deduction is deduction against compensation.)
5. Which of the following can treat capital expenditures as outright deduction?

a. Public schools or universities
b. Non-profit schools or universities
c. Private educational institutions
d. All of these
6. Which is not a requisite of a deductible loss?

a. It must be sustained by the taxpayer in the current year.
b. It must be reported to the BIR within 45 days from the occurrence of the loss.
c. It must be compensated by insurance or indemnity contracts.
d. It must pertain to a property connected to the trade, business or profession of
the taxpayer.

a. Gains between related parties are exempt from income tax.
b. Losses between related parties are deductible.
c. Gains between related parties are taxable.
d. All of the above
8. Who are not related parties for purposes of the NIRC?

a. Fiduciary of trusts with the same grantor
b. The trustee and the beneficiary of a trust
c. Corporations under common control
d. A partner and the partnership
9. Which is a deductible tax expense?

a. Surcharges and penalties
b. Stock transaction tax
c. Real property tax on business properties
d. Special assessment
10. Which of the following can be deducted by a VAT taxpayer?

a. Philippine income tax
b. Donor's tax
c. Value Added Tax
d. Interest on tax delinquency
11. Who cannot claim foreign income tax credit?

a. Resident citizens
b. Domestic corporations
c. Resident aliens 191
d. None of these
12. Foreign income tax can be claimed as
Deduction from gross Tax credit against the income
income tax due
a. Yes Yes
b. No Yes
c. Yes No
d. No No
13. Estimated quarterly income tax can be claimed as

income tax due
a. Yes Yes
b. No Yes
C. Yes No
d. No No
14. Fringe benefit tax can be claimed as

income tax due
a. Yes Yes
b. No Yes
C. Yes No
d. No No
15. Which of these expenses is not part of the deductible expenses of the taxpayer?
a. Expanded withholding taxes on certain expenses
b. Withholding tax on employee salaries
c. Documentary stamp tax on the sale of stocks directly to a buyer
d. Real property tax on business properties

1. Wagering losses are deductible
a. in full.
b. to the extent of capital gains.
c. up to the extent of gains on wagering transactions
d. are treated as deferred charge subject to amortization over 60 months.
2. Securities becoming worthless is considered as an ordinary loss to

a. Banks
c. Security dealers
b. Trusts
d. All of these
3. Bad debts expenses include

a. uncollectible debts due to the
b. securities becoming worthless.
c. Both a and b
d. Neither a nor b
Explanation: (securities becoming worthless is generally a capital loss)
4. Which of these is a partially deductible contribution?

a. Donation to the government for public purpose
b. Donation to priority activities of the government
c. Donation to foreign institutions with treaty exemption
d. Donation to accredited charitable institutions
5. Research and development cost that are not chargeable to capital account can be claimed as
a. Deductible expense
b. Deferred expense subject to amortization
c. Both a and b
d. Either a or b
192
6. A taxpayer incurred research and development expenditures which are related to a capital account subject to
depreciation. The taxpayer should
a. claim outright deduction for the research and development expenses.
b. treat the R&D expenses as a deferred expenses and amortize them over 60 months.
c. treat the R&D expenses as capital expenditures and depreciate them over the useful life of the related asset.
d. claim them as outright deductions or treat them as deferred charges and amortize them over 10 years.
7. A taxpayer paid for research and development expenses that are not chargeable to capital account. The taxpayer
wished to amortize the same over its expected period of benefits.
If the R&D is expected to benefit the taxpayer for 6 years, what is the correct amortization period for the R&D
expenses?
a. 72 months
b. 60 months
c. 30 months
d. 36 months
8. Which can claim full deduction for the loss of securities becoming worthless?
a. Security dealers
b. Non-security dealers
c. Both a and c
d. Neither a nor c
9. Which of the following items of entertainment, amusement and recreation expenses can be claimed as a deduction?
a Entertainment expenses paid to officials of the government
b. Entertainment expenses not receipted in the name of the taxpayer,
c. Entertainment expenses in excess of the limits of the law.
d. Entertainment expenses for potential and existing clients
10. Calauag Inc owns 51% of the voting power of Quezon, Inc. Which is a correct statement regarding gains and losses
between these two entities?
a. Losses sustained by Calauag, Inc. on transactions with Quezon, Inc. Which are claimable as deductions.
b. Losses sustained by Quezon, Inc. on transactions with Calauag, Inc. are claimable as deductions.
c Gains realized by either party from each other are exempt from income tax due to the underlying economic
substance of their relationship.
d. Gains between Calauag and Quezon are subject to income tax.
Multiple-Choice: Problems 1
1. The following relates to a taxpayer:
Interest expense 400,000
Interest income - promissory notes 100,000
Compute the deductible interest expense
a. P400,000
b. P367,000
c. P333,000
d. P300,000
2. The taxpayer has the following losses:

Net Operating Loss Carry Over - last year 200,000
Net capital loss - current 80,000
Net capital loss - last year 70,000
Taxable income before losses 400,000
Compute the total deductible losses in the current year.
a. P400,000
b. P330,000
c. P250,000
d. P200,000
Solution: (P200K+P50K)
3. Gawan Merchandising paid P400,000 to employees, net of P60,000 total withholding tax on compensation. What is
the deductible amount of expense by the employer?
a. P0
b. P 60,000
c. P400,000
d. P460,000 193
4. A taxpayer under the cash basis had the following expenditures:
Acquisition of office equipment at the
middle of the year (5 year useful life) P 200,000
Payment of employee salaries 40,000
Payment for office utilities expenses 60,000
How much is claimable as deductible business expense for the year?
a. 300,000
b. 140,000
c. 120,000
d. 60,000
5. The following relates to a taxpayers warehouse:

Cost P 2,000,000
Accumulated depreciation 600,000
Residual value 200,000
Current fair market value 2,5000,000
Remaining useful life 12 years
Compute the deductible depreciation expense.
a. P208,333
b. P200,000
c. P191,667
d. P100,000
6. The following relates to a taxpayer:

Interest expense P 400,000
Interest income-time deposit 100,000
Compute the deductible interest expense:
a. P400,000
b. P367,000
c. P333,000
d. P300,000
Solution: (P100K X 33%)]
7. An individual income taxpayer reported the following:

Capital loss - current year P 50,000
Capital gain - current year 200,000
Compute the total capital loss deductible against capital gain in the current year.
a. P320,000
b. P200,000
c. P120,000
d. P50,000
8. Suppose the income taxpayer in the immediately preceding problem is a corporation, compute the deductible
capital loss against capital gain.
a. P320,000
b. P200,000
c. P120,000
d. P50,000
9. The following data relate to an individual taxpayer:

Net income - last year 80,000
What is the net capital loss carry-over for the current period?
a. PO
b. P70,000
c. P80,000
d. P90,000
194
10. The following relate to a corporate taxpayer:
Capital loss - current year P60,000
Capital gain - current year. 140,000
Net capital loss 40,000
Net income 75,000
What is the net capital loss carry-over?
a. PO
c. P75,000
b. P40,000
d. P80,000
11. An individual income taxpayer reported the following:

Compute the deductible capital loss against capital gain in the current year.
a. P180,000
b. P120,000
c. P60,000
d. P50,000
12. An individual taxpayer showed the following:

2019 2020
Gross income P 300,000 P 400,000
Deductible business expenses ( 360,000) (300,000)
Net capital gain or (loss) (50,000) 70,000
Compute the 2019 net income.
a. P 170,000
b. P120,000
c. P 110,000
d. P 60,000
Solution: [(P400K GI-P300K Bus. Exp.) +P70K-P60K 2014NOLCO]
13. Assume in the immediately preceding problem that the taxpayer is a corporation. What would be the taxable
income in 2020?
a. P 170,000
b. P120,000
c. P 110,000
d. P 60,000
14. A corporate income taxpayer reported the following gross income and deductions:
Gross income Deductions
2016 P 300,000 P 450,000
2017 400,000 470,000
2018 450,000 400,000
2019 500,000 420,000
2020 500,000 400,000
Compute the taxable income in 2020.
a. P100,000
b. P 80,000
c. P 30,000
d. P0
Solution: [(P500K-P400K)-P70K 2012 NOLCO]
15. Andrew, a resident citizen, reported a world taxable income of P500,000 and a tax due on world income of
P125,000. P150,000 of the taxable income was earned in Japan out of which he paid P45,000 in income tax. Compute
Andrew's foreign tax credit
a. P50,000
b P45,000
c. P37,500
d. PO
195
Multiple Choice: Problems 2
1. Mr. Aurelius made contributions to the following in 2020:
Street beggars P 50,000
Barrio fiestas. 60,000
Various cancer patients 40,000
Takusa, an accredited non-profit organization 100,000
Compute the deductible contribution expense.
a PO
b. P100,000
c. P140,000
d. P160,000
2. ABC Company declared a property dividend with book value of P1,000,000, and fair value of P1,200,000. The total
dividends withheld on the dividends were P60,000. Compute the total deductible expense.
a. PO
b. P60,000
c. P1,000,000
d. P1,060,000
3. Naga Company paid P32,000 fringe benefits tax for the purchase of merchandise used by the family of one of its
company officers. How much is the deductible expense against gross income?
a РО
c. P 68,000
b. P 32,000
d. P100,000
Solution: (P32,000/32%)*
4. Makati Corporation has operations in Malaysia and Singapore with the following taxable income and taxes paid
during the year:
Philippines Malaysia Singapore
Taxable income P 800,000 P 900,000 P 700,000
Income tax paid 180,000 288,000 175,000
Makati Corporation wishes to claim the foreign income tax paid as tax credit. Compute the foreign income tax credit.
a. P480,000
b. P463,000
c. P445,000
Solution: (P270K Limit for Malaysia+P175K Income tax paid for Singapore); Note: The foreign tax to be credited is
whichever is lower b/n the Limit and the Income tax paid
d. P430,000
5. Balanga, Inc. contributed P500,000 for its pension fund inclusive of P200,000 funding of current service cost. How
much is the deductible pension expense?
a. P200,000
b. P230,000
c. P300,000
d. P500,000
Solution: [(P500K-P200K)/10+ P 200K CSC]
6. Tawi-Tawi, Inc. maintained a defined contribution pension plan. The plan is contributory where employees
contribute 20% of the pension contributions. During the year, Tawi-Tawi contributed P1,000,000 inclusive of employee
contribution which was pre-deducted through their salaries.
Compute the pension expense.
a. P1,000,000
b. P800,000
c. P200,000
d. Some other amount
Solution: (P1M – 20%XP1M)
7. Entertain Corporation set up a plan in 2020. The following relate to the fund:
2020 2021
Funding of current service cost P 400,000 400,000
Funding of past service cost 300,000 200,000
Compute the deductible pension expense in 2020.
a. P 340,000
b. P 400,000
c. P430,000 196
d. P700,000 Solution: [(P300K/10)+ P400KCSC]
8. In the immediately preceding problem, compute the pension expense in 2021.
a. P420,000
b. P430,000
c. P450,000
d. P600,000
Solution: [P400K+(P300K 2015PSC/10)+(P200K 2016PSC/10)]
9. Zambales Inc. made the following contributions during 2020:

Contributions to the government in non-
priority activities P60,000
Contributions to foreign charitable institutions 40,000
Contribution to accredited non-profit
Institution 30,000
Contributions to foreign organizations with
treaty exemption 100,000
Zambales Inc. has net income before contribution expense of P1,000,000.
Compute the deductible contribution expense.
a. P230,000
b. P190,000
c. P180,000
d. P130,000
Solution: (P50K Limit for contribution to the Government in NPA +P30K+P100K); The limit is computed as 5% of the
P1M NI before contribution expense for corporations.
Mr. Pedro reported the following income and expenses in 2020:
Compensation income P400,000
Gross income from business 500,000
Fully deductible contributions 50,000
Deductible contributions with limit 75,000
Other allowable deductions 200,000
Mandatory deduction and exempt income 75,000
10. Compute the deductible contribution expense

a. P125,000
b. P80,000
c. P270,000
d.P65,000
Solution: (P50K+P30K Limit); The limit is computed as (P500K-P200K) x 10% for individuals.
11. What is the taxable compensation income?

a P400,000
b. P325,000
с. РО
d. (P75,000)
Solution: (P400K-P75K)
12. What is the net income?

a P300,000
b. P235,000
c. P220,000
d. P175,000
Solution: [(P500K-P200K)-P80K]
13. What is the taxable income?

a P700,000
b. P575,000
c. P545,000
d. P500,000
14. A taxpayer with net sales of P2,000,000 and cost of sales of P1,800,000 incurred P15,000 entertainment,
amusement and recreation expenses (EAR). Compute the allowable deduction for EAR expenses.
a. P20,000
b. P15,000
c. P10,000 197
d. PO Solution: (P2M X 0.5% Limit)
15. A taxpayer with gross receipts of P2,000,000 and direct cost of services of P1,800,000 incurred P15,000
entertainment, amusement and recreation expenses. Compute the allowable deduction for EAR expense.
a. P20,000
b. P15,000
c. P10,000
d. P0
Solution: (The limit is P2M x 1% or 20K, since the limit is greater than the actual EAR, the actual is used)
16. A taxpayer reported sales of P3,000,000 and gross receipts of P2,000,000 in 2020. It incurred entertainment,
amusement, and recreations expenses of P35,000 Compute the deductible EAR expense.
a. P35,000
b. P30,000
c. P29,000
d. P25,000
Solution: (P15K S + P14K R)
198
CHAPTER 13-B: SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS AND NOLCO
True or False
1. The employers are allowed additional deduction of 15% on the compensation paid to persons with disability.
False
2. An adopting private entity of a public school is entitled to a deduction incentive equivalent to double the amount
donated to a public school.
False
3. Taxpayers who installed improvements in their facilities to accommodate persons with disability are allowed an
additional 50% deduction incentives based on the value of such improvement.
True
4. The distribution of the corpus of a taxable estate or trust is an item of special deduction against the gross income of
the estate or trust.
False
5. The transfer to the reserve fund of insurance companies is a special deduction, but the release from the reserve
fund is an item of gross income.
True
6. Dividends are non-deductible by any taxpayer except real estate investment trusts.
True
7. The transfers to all reserve funds of the cooperative including mandatory and discretionary funds are deductible
from the gross income of cooperatives.
False
8. Persons with disability are mandatorily allowed a discount of 20% from all establishments.
True
9. Senior citizens are mandatorily allowed a discount of 25% from certain establishments.
False
10. The employer of senior citizens can claim additional deductions equivalent to 50% of the compensation paid senior
citizens who have income below the poverty line.
False
11. Expenses incurred to comply with the requirement of the Expanded Breastfeeding Act are allowed an additional
incentive equivalent to the amount of the expense incurred.
True
12. Attorneys are entitled to the value of their pro-bono services to indigent clients as deduction from gross income.
True
13. The allowable incentives to lawyers for pro-bono services shall not exceed 10% of the gross income from the actual
performance of the legal profession.
True
14. Employers are entitled to an additional deduction of 50% of the productivity incentive bonus paid to their
employees.
True
15. The amount of NOLCO shall not include the amount of deduction incentives allowed by law.
True
16. A small business was merged to a larger business. Even after the merger, the NOLCO of the small business is
deductible by the larger business.
False
17. NOLCO is valid for 3 years.
True
18. NOLCO always exist when there is a net operating loss.
False
19. Net capital loss carry over cannot be carried over together with NOLCO.
True
20. An acquirer in a business combination sustained a net operating loss before the business combination. The
acquirer is allowed by carry-over it's net operating loss in prior years.
True
199
Exercise Drills
Expense/Expenditure Deduction Incentive Limit
Incentives
1 Salaries paid to senior citizen 15% of salaries to None
employees senior citizen
2 Salaries paid to persons with 25% of salaries paid None
disability to disabled persons
3 Training expense under the 50% of training None
Jewelry Industry Development expense
Act
4 Cost of facility improvement for 50% of the cost of None
employees with disability improvement
5 Contribution under the “Adopt-a- 50% of the None
School Program” contribution
6 Cast of compliance with the 100% of the None
“Rooming-in and Breastfeeding compliance expense
Practices Act”
7 Free legal expense Value of pro-bono 10% of gross
services income
8 Productivity incentive bonus and 50% of productivity None
employee training program incentive bonus
Multiple Choice - Problem 1

1. A fitness gym catering to senior citizens recorded a total gross revenue of P345,000 from senior citizens. The gym
provides 24% discount in excess of the legal requirements. What is the deductible amount of senior citizen's discount?
a. P 0 c. P82,800
b. P69,000 d. P90,789
2. Germania Inc. employs three senior citizens as regular employees. Two of them are receiving the minimum wage
which is within the poverty level. Total minimum wages paid to these senior citizen employees during the year were
P182,000. One of them senior citizen employees is a director of the company who was paid P780,000 compensation
during the year. Compute the deductible additional compensation expense.
a. P 0 c. P91,000
b. P27,300 d. P144,300
3. An employer hired two senior citizens during the year as temporary replacements for its two staffs who were on
leave. Both senior citizens were paid salaries not in excess of the poverty level.
Mang Pandoy, substituted for an employee who went on one year sabbatical leave. Mang Pandoy received a total of
P144,000 during the year. Aling Maria substituted for an employee who filed for maternity leave for 3months. Aling
Maria received a total of P28,000 during the year.
Compute the total deductible additional compensation expense.
a. P 0 c. P25,800
b. P21,600 d. P43,000
4. Mr. Bakilan irrevocably designated in trust his investment portfolio consisting of domestic stocks and bonds. The
dividend income from the stocks shall be distributed to the beneficiary while the interest on the bonds shall be
accumulated. During the year, the portfolio earned P200,000 interest and P135,000 dividends, net of final tax.
What is the total deduction allowable to the trust for the income distribution?
a. P 0 c. P135,000
b. P15,000 d. P150,000
5. A grantor irrevocably designated in trust a real property in favor of a beneficiary. Under the trust indenture, 20% of
the trust gross income shall be distributed to the beneficiary. The trustee shall be paid 5% of the gross income as
management fee. During the year, the trust collected P810,000 rent income, net of 10% creditable withholding taxes.
The trust recorded P350,000 in expenses.
Compute the deductible amount of income distribution to the fund.
a. P 0 c. P110,000
b. P101,000 d. P180,000
6. The required reserve for an insurance company was P3,200,000 as of December 31, 2013 and P3,500,000 as
December 31, 2014. What is the deductible amount of transfer to the reserve fund?
a. P 0 c. P3,200,000 200
b. P300,000 d. P3,500,000
7. A real estate investment trust (REIT) earned P4,100,000 from property rentals. Total business expenses were
P2,100,000. Assuming the REIT declared the mandatorily required dividend distribution, what is the amount of
deductible dividend against gross income?
a. P 0 c. P1,890,000
b. P1,800,000 d. P3,690,000
8. A cooperative transacting business only with its members is on its third year of operation. It reserves 50% of it ts
operating income in compliance with the new CDA regulation. During the year, it reported a total operating income of
P3,000,000 inclusive of P2,400,000 income from related activities. Compute the deductible amount of transfer to
reserve against gross income.
a. P 0 c. P240,000
b. P60,000 d. P300,000
9. An establishment grading senior citizens 25% discounts recorded the following sales during the period.
Customer
Regular Senior citizens
Gross sales P8,000,000 P800,000
Cost of sales P5,000,000 P400,000
What is the deductible senior citizen's discount?
a. P 0 c. P200,000
b. P160,000 d. P266,667
10. A restaurant granted 25% discounts to senior citizens in excess of the 20% mandatory requirement. During the
year, the restaurant reported receipts of P93,750 from senior citizen customers.
Compute the deduction for senior citizen's discount.
a. P 0 c. P23,437.50
b. P7,250 d. P25,000
11. An employer embarked on a socio-economic program named "A World Empowered by Persons with Disability".
Under the ambitious program, the employer established a business which is fully manned by persons with disability.
The employer incurred P300,000 in workplace improvements specifically designed for its disabled employees. The
business venture turned very profitable due to overwhelming public sympathy. During the year, the employer paid
P2,100,000 in compensation expense. Compute the additional deductible compensation expense.
a. P 0 c. P315,000
b. P210,000 d. P525,000
12. In the immediately preceding problem l, what is the deductible additional expense for the improvements made for
the employees with disability?
a. P 0 c. P75,000
b. P45,000 d. P150,000
13. In 2016, Bernard Bakilan, a practicing lawyer, adopted a public elementary school and contributed P500,000 for the
acquisition of computer equipment and software. Bernard had an operating income of P900,000 before this
contribution expense.
Assuming the " Adopt-a-School Program" is an investment priority program of the government in 2016, compute
Bernard's additional contribution expense and net income respectively.
a. P250,000; P150,000 c. P125,000; P275,000
b. P250,000; P650,000 d. P125,000; P775,000
14. In the preceding problem, compute Bernard's additional contribution expense and net income, respectively, if the
"Adopt-a-School Program" is no longer a government priority program in 2016?
a. P 0; P810,000 c. P250,000; P650,000
b. P 0; P400,000 d. P250,000; P560,000
15. Binondo jewellery is qualified jewelry enterprise registered with the Board of Investments. In order to modernize
its jewelry making business, it instituted an in-house training program and hired external experts to train its
employees. The program was duly approved by TESDA. The program cost P300,000 during the year.
What is deductible amount of additional training expense?
a. P30,000 c. P75,000
b. P45,000 d. P150,000
16. Girl Power Corporation employs purely women. It installed a lactation station at a total cost of P350,000 and
secured a "Working Mother-Baby-Friendly Certificate" from the Department of Health.
Compute the additional deduction under the Rooming-in and Breastfeeding Practices Act.
a. P 0 c. P350,000 201
b. P175,000 d. P700,000
17. A government provincial hospital established a milk bank at a cost of P1,000,000. Determine the additional
deduction incentive it is allowed under the Rooming-in and Breastfeeding Practices Act.
a. P 0 c. P500,000
b. P250,000 d. P1,000,000
18. In the immediately preceding problem, what would be the additional deduction assuming the hospital is a
proprietary medical center?
a. P 0 c. P1,000,000
b. P500,000 d. P2,000,000
19. Atty. Midsayaf is a practicing lawyer in the remote provinces of Mindanao. During the year, he provided 180 actual
hours for pro-bono services inclusive of the 60-hour mandatory legal aid services to indigent clients. These services
would have been billed P1,000 per hour if rendered to paying clients. Atty. Midsayaf has a P1,400,000 gross income
during the year exclusive of P20,000 interest on his savings deposit.
Compute the special deduction for the free legal services.
a. P60,000 c. P140,000
b. P120,000 d. P142,000
20. Curaratnit, Bolalatsing & Associates, a law firm, earned an operating income of P8,000,000, net of P6,000,000
administrative expenses and P12,000,000 direct cost of services. During the year, it represented selected clients under
its free legal assistance program. The value of these services would have been P1,500,000. It also represented indigent
clients for free, the value of which would have been P400,000. Compute the special deduction for free legal services.
a. P1,200,000 c. P1,500,000
b. P1,400,000 d. P1,900,000
21. An employer paid a total of P800,000 productivity incentive bonus to its production workers. What is the additional
productivity incentive bonus expense?
a. P 0 c. P200,000
b. P80,000 d. P400,000
22. An employer provides manpower training and special studies to its rank and file employees at a total cost of
P200,000. The in-house program was accredited by TESDA. What is the deductible additional productivity incentive
bonus expense?
a. P 0 c. P100,000
b. P20,000 d. P200,000
Multiple Choice – Problems 2

1. A taxpayer had the following results of operations:
2019 2020
Gross income P 1,200,000 P 2,500,000
Itemized deductions 1,400,000 1,000,000
Deduction incentives 200,000 300,000
What is the net income in 2020?
a. P 800,000 c. P1,100,000
b. P1,000,000 d. P1,200,000
2. An enterprise registered with the BOI had a consistent profitable operation. Just before graduating from its BOI tax
holiday incentives in 2019, it sustained a P1,800,000 operating loss due to an employee strike in 2019. The settlement
of the deadlock in 2020 enable the enterprise to post a P2,400,000 operating income.
What is the allowable NOLCO deduction in 2020?
a. P 0 c. P1,800,000
b. P900,000 d. P2,400,000
3. A corporate taxpayer incurred an operating loss in 2020:

Sales P 3,000,000
Less: Cost of Sales 1,200,000
Gross income P 1,800,000
Less: Deductions
Regular itemized deduction P 1,200,000
Special itemized deductions 800,000
Deduction incentives 400,000 2,400,000
Net operating loss P 600,000
What is the amount of NOLCO to be carried over in the next three years?
a. P 0 c. P400,000 202
b. P200,000 d. P600,000
4. An individual taxpayer reported the following in 2019:

Less:
Administrative expenses P 800,000
Selling expenses 650,000 1,450,000
Operating income P 50,000
Less: Personal expenses 150,000
Excess of personal expenses over income P 100,000
What is the NOLCO to be carried over in the next three years?

a. P 0 c. P100,000
b. P50,000 d. P150,000
5. In 2020, a taxpayer finally posted a P1,000,000 operating profit after four years of continuous losses. The results of
operations in prior years were:
2016 (P 800,000)
2017 (P 400,000)
2018 (P 200,000)
2019 (P 100,000)
Compute the deductible NOLCO in 2020.

a. P 0 c. P1,000,000
b. P700,000 d. P1,500,000
6. In 2016, Warren Buffet purchased the net assets of Berkshire Hathaway, a losing business which posted a
cumulative P10,000,000 loss in the past three years. Buffet charismatic leadership led the business to turn P4,000,000
profits in 2016. What is the allowable NOLCO deduction for 2016?
a. P 0 c. P5,000,000
b. P400,000 d. P10,000,000
7. A taxpayer has the following historical results of operations:

2016 (P 600,000)
2017 ( 700,000)
2018 400,000
2019 ( 700,000)
2020 100,000
What is the total outstanding NOLCO at the end of 2020 which can be carried over in future years?
a. P 0 c. P600,000
b. P200,000 d. P800,000
8. A taxpayer reported the following items of gross income and deductions in 2020:
Rent income P 400,000
Service fees 200,000
Deductible expenses 800,000
Non-deductible expenses 100,000
Compute the NOLCO to be carried over in the next three years.

a. P300,000 c. P200,000
b. P250,000 d. P150,000
9. The carry-over of NOLCO is allowed when

a. The net operating loss is sustained from an exempt year.
b. There is a change for at least 75% of the paid-up capital or nominal value of the outstanding shares of a corporation.
c. The business is acquired by another taxpayer.
d. There is a change in the controlling shareholder representing 51% ownership.
10. Which is incorrect with regard to the net operating loss carry-over?
a. NOLCO can be claimed together with Optional Standard Deductions.
b. NOLCO cannot be claimed if the net operating loss arises in a year where the taxpayer is exempt from income tax.
c. NOLCO can be carried over to a period of three years.
d. NOLCO cannot be claimed by non-resident foreign corporation.
203
11. The following pertains to the salaries paid by the taxpayer during the year:
Salaries to regular employees P 400,000
Salaries to senior citizens (above poverty line) 30,000
Salaries to senior citizens (below poverty line) 50,000
Salaries to persons with disability 200,000
Compute the total deductible salaries expense under regular allowable itemized deductions and the total special
deduction.
a. P680,000; P 0 c. P742,500; P 0
b. P680,000; P57,500 d. P680,000; P62,500
204
CHAPTER 13-C: OPTIONAL STANDARD DEDUCTIONS
True or False
1. Unlike individual taxpayers, corporations opting for OSD can claim a deduction for cost of goods sold or cost of
services.
True
2. OSD is in lieu of all deductions against gross income including personal exemptions.
False
3. Individuals can claim OSD up to 40% of gross sales or receipts or gross income. False (Note: or gross income)
4. Taxpayers opting to use the OSD are not required to submit financial statemen True
5. Taxpayers may use the OSD for quarterly returns, then use the itemized deductions for the annual return.
False
6. The optional standard deduction is presumed unless the taxpayer signified in his return his intention to claim
itemized deductions.
False
7. The taxable net income of individuals is 60% of their gross sales or receipts. False (when OSD is used, 60% of
sales or gross receipts)
8. Corporate taxpayers opting to use OSD will have taxable income equivalent to 60% of their gross income.
True
9. "Gross sales" is the net of sales returns, allowances, and discounts.
True
10."Gross receipts" include other receipts incidental to the primary operations of the business.
True
11.Gains in dealings in properties are included in gross sales or receipts.
False
12.Corporate OSD is 40% of operating and non-operating gross income excluding only those subject to final tax or
capital gains tax and exempt income.
True
13.For taxpayers using the accrual basis in the sales of services, gross receipts hall mean revenue.
True
14.Administrative and selling expenses are included in the "cost of services."
False
15.A partner can claim an itemized deduction against his share in the net income a general professional partnership
provided the partnership is using the OSD.
True
16.A partner can claim OSD out of his share in the net income of one professional partnership.
False
17.A partner can claim OSD out of his share in the net income of a general professional partnership provided the
partnership is not using the OSD.
False
18.No deduction of whatever nature is allowed against compensation income, except for mandatory deductions
and exempt benefits.
True
19.Net operating loss carry-over are items of deduction; hence, both are not claimable simultaneously with OSD.
False (Note that NCLCO is used in the measurement of an item of gross income (i.e. net capital gain) and is not
an expense.
20.The option to elect OSD may result into a net operating loss carry over.
False
205
Check the box if the indicates taxpayer can claim optional standard deductions:
1. Resident citizen ✔
2. Resident alien ✔
3. Non-resident citizen ✔
4. Non-resident alien
5. Regular domestic corporation ✔

6. Regular resident foreign corporation ✔
7. Special corporations
8. Corporations under special regimes
9. Business partnership ✔
10. General professional partnership ✔

The gross income of a taxpayer who opted to use the optional standard deductions is presented below:
Gross sales P 5,200,000

Less: sales discounts, allowances, and returns 180.000
Net sales P 5,020,000
Less: Cost of goods sold 2,500,000
Required:
Determine the Optional Standard Deductions assuming the taxpayer is:
1. An individual P2,008,000 (P5,020,000 x 2%)
2. A corporation P1,008,000 (P2,520,000 x 2%)

A taxpayer had the following results of operations:
Professional fees, P5,200,000 collected P6,000,000

Le Cost of services, including P200,000
accrued and unpaid 3.100,000
Gross income P2,900,000
Recorded expenses, P200,000 accrued and unpaid 1,400,000
Net income P1.500.000
Required:
Determine the net income of the taxpayer under each of the following conditions
under the OSD:
Taxpayer Cash basis Accrual basis
1. Individual P 3,120,000 P 3,600,000
2. Corporation 1,380,000 1,740,000
206
The income statement of a taxpayer which opted for OSD is disclosed as follows:
Sales, net of returns, allowances, and discounts P5,000,000

Less: Cost of sales 3,000,000
Gross income from operations P2,000,000
Add: Other income
Gain on sale of machinery P 100,000
Gain on sale of domestic stocks 92,000 192,000
Total gross income P2,192,000
Less: Deductions 1,300,000
Required:
Compute the optional standard deductions assuming the taxpayer is:
1. an individual taxpayer P2,000,000, computed as (P5,000,000 x 40%)
2. a corporate taxpayer P840,000, computed as (P2,000,000 + P100,000) x 40%
Multiple Choice - Theory 1

1. The optional standard deduction for corporate taxpayers is
a. 40% of gross income
b. 40% of gross sales or gross receipts
c. 40% of total deductions claimed with or without support
d. 40% of cost of goods sold or direct cost of services
2. Which of the following individuals engaged in business cannot claim optional

standard deduction?
a. Resident citizen c. Resident alien
b. Non-resident citizen d. NRA-NETB
3. Which is correct with optional standard deduction?

a. It replaces itemized deduction.
b. It replaces P250,000 annual exemption for individuals.
C. Both a and b.
d. Neither a nor b.
4. The optional standard deduction for individual taxpayers is

b. 40% of gross sales or gross receipts
c. 40% of total deductions claimed with or without support
d. 40% of the lower of actual deductible expenses and 40% of gross sales gross receipts
5. One of the following can claim OSD. Which is it?
a. A self-employed individual taxpayer
b. A taxpayer earning mix of passive income and compensation income
c. A taxpayer earning purely passive income
d. A taxpayer earning purely compensation income
6. When purely employed, who of the following can claim OSD?

a. Resident citizen c. Resident alien
b. Non-resident citizen d. None of these
7. Which is not covered by the optional standard deduction?

a. Premium for health and hospitalization insurance
b. Senior citizen's discount
c. Contribution expense
d. Salaries expense
8. Which can claim deduction by itemized deduction only?

a. Employed taxpayers
b. Non-resident alien engaged in trade or business
c. General professional partnership
d. Business partnership
207
9. Which is not included in corporate OSD?
a. Cost of sales c. Administrative expenses
b. Selling expenses d. Creditable withholding tax
10.Corporate OSD is in lieu of all expenses such as the following except

a. Cost of sales or cost of services
b. Regular itemized allowable deductions
c. Special itemized allowable deductions
d. Net operating loss carry over
11.Individual OSD is in lieu of all expenses, such as but not including

a. cost of sales or cost of services.
b. regular itemized allowable deductions.
c. special itemized allowable deductions.
d. net capital loss carry over.
Multiple Choice - Theory 2

1. The OSD of corporations under the cash basis is based on
a. Gross sales c. Total gross income
b. Gross receipts d. Gross income from operations
2. The option to elect OSD is irrevocable

a. in the year it was made.
b. over the next three years.
c. in the quarter it was made.
d. effective the quarter in the year the option was made.
3. Which is presented as operating income in the income tax return?

a. Gain on sale of ordinary assets
b. Share in the distributive net income of a general professional partnership
c. Share in the distributive net income of a business partnership
d. Gross profit from the sale of goods
4. Which is not part of cost of services for a manufacturing concern?

a. Wages of plant employees
b. Factory supplies
c. Depreciation on plant equipment
d. Interest expense
5. The OSD of corporations under the accrual basis is based on

a. Gross sales c. Total gross income
b. Gross receipts d. Total gross income from operations
6. The OSD of individuals under the cash basis is based on

a. gross sales. c. total gross income.
b. gross receipts. d. gross income from operations.
7. Which is not deducted in the determination of gross sales?

a. Sales returns
b. Allowances for defective merchandise
c. Sales discounts
d. Bad debt expense
8. For purposes of the OSD, which is not deducted in the determination of gross
receipts?
a. Sales returns c. Discounts
b. Allowances d. Cost of services
208
9. Non-operating income subject to regular tax is excluded in the OSD base of
a. individual taxpayers.
b. corporate taxpayers.
c. both individual taxpayers and corporate taxpayers.
d. neither individual taxpayers nor corporate taxpayers.
10.Cost of services of banks excludes the following except

a. Advertising expense c. Interest expense on depositors accounts
b. Local tax expense d. Loss on sale of assets
11.In the determination of the distributive net income of the general professional
partnership.
a. Partners can claim OSD on their share in the net income of a general
professional partnership.
b. Partners can claim OSD on their share in the net income of a general
professional partnership provided the latter uses itemized deductions.
c. Partners can claim OSD on their share in the net income of a general
professional partnership provided the latter uses OSD.
d. Partners cannot claim OSD on their share in the net income of a general
professional partnership.
12.Which is correct with respect to the deduction claimable by a partner against his share in the distributive net
income of a general professional partnership?
a. The partner can claim OSD provided the general professional partnership also
claims OSD.
b. The partner can claim OSD provided the general professional partnership also
claims OSD.
c. The partner can claim itemized deduction provided the general professional
partnership also uses itemized deductions.
d. The partner can claim itemized deduction provided the general professional
partnership does not use itemized deductions.
13.Individual income taxpayer must indicate his or her option to claim OSD on
a. the first quarter return during the year.
b. or before July 1 of the current year.
c. the annual income tax return.
d. annual or quarterly return at his or her option.
14.Corporate income taxpayers must indicate their options to claim OSD on

a. the first quarter return during the year.
b. or before July 1 of the current year.
c. the annual income tax return.
d. annual or quarterly return at his or her option.
Multiple Choice - Problems 1

1. An individual taxpayer reported P800,000 net income after the following:
Cost of sales P 600,000
Administrative expense 300,000
Selling expenses 400,000
Compute the optional standard deductions.

a. P320,000 c. P600,000
b. P560,000 d. P840,000
2. In the immediately preceding problem, what is the net income under OSD?
a. P1,260,000 c. P1,540,000
b. P1,500,000 d. P1,780,000
209
3. An individual taxpayer opted to claim optional standard deduction in his first quarter income tax return in 2015.
Total recorded sales before P150,000 sales discounts and returns were P2,350,000. Total recorded expenses
were P1,180,000 of which only P340,000 were adequately supported. The cost of sales was P900,000.
What is the total allowable deduction for 2015 assuming the taxpayer wants to
claim itemized deduction in the annual return?
a. P340,000 c. P1,240,000
b. P900,000 d. P1,180,000
4. The claimable deduction of a taxpayer during the year consisted of the following
Cost of sales P600,000
Regular itemized allowable deductions 400,000
Special itemized deductions, including P100,000
deduction incentives 300,000
Net operating loss carry-over 150,000
To an individual taxpayer, optional standard deduction is in lieu of

a. P750,000 c. P1,300,000
b. P850,000 d. P1,450,000
5. Assuming that the taxpayer in the immediately preceding problem is a corporation, OSD is in lieu of
a. P750,000 c. P1,300,000
b. P850,000 d. P1,450,000
6. Mrs. Belo had the following in 2020:

Sales P 3,400,000
Cost of sales 1,200,000
Administrative expenses 300,000
Selling expenses 500,000
Other taxable income from operations 120,000
Other non-operating income 80,000
Passive income, net of final taxes 70,000
Assuming Mrs. Belo elects to deduct OSD, compute the OSD.

a. P800,000 c. P1,408,000
b. P1,360,000 d. P1,440,000
7. In the immediately preceding problem, compute the OSD assuming the taxpayer is a corporation.
a. P1,440,000 c. P928,000
b. P960,000 d. P880,000
8. A self-employed practitioner and part-time employee derived the following

income in 2020:
Gross receipts P800,000
Compensation income 300,000
Dividend income from a Real Estate Investment Trust 20,000
Assuming the taxpayer opted to avail of OSD, what is the OSD

a. P320,000 c. P440,000
b. P328,000 d. P448,000
9. The following relate to collections upon billings. receipts, and unpaid billings or a
Practitioner during the year:

Receipts from current year billings P 800,000
Receipts from last year's billings 200,000
Current year uncollected billings 100,000
Reimbursement for out-of-pocket expenses 20,000
a. P408,000 c. P360,000
b. P368,000 d. P320,000
210
10.Compute the OSD if the taxpayer is under the cash basis.
a. P408,000 c. P368,000
b. P368,000 d. P360,000
Multiple Choice - Problems 2

1. The results of operations of the taxpayer resulted in the following:
Gross sales revenue P 7,200,000

Beginning inventory 300,000
Purchases 5,800,000
Ending inventory 1,400,000
Other operating revenues 100,000
Non-operating income 20,000
Assuming the taxpayer is an individual, what is the optional standard deduction?

a P1,040,000 c. P2,920,000
b. P1,048,000 d. P2,928,000
2. In the immediately preceding problem, what is the 0SD if the taxpayer is a

Corporation?
a. P1,040,000 c. P2,920,000
b P1,048,000 d. P2,928,000
3. A professional practitioner has total uncollected billings of P200,000 at the year-end of 2019. Additional billings
totaling P2,500,000 were made in 2020. Uncollected billings at the year-end of 2020 were P400,00
If he chooses to claim OSD, determine the gross receipts.
a. P2,100,000 c. P2,500,000
b. P2,300,000 d. P2,700,000
4. In the second quarter of 2019, Mr. Mariano reported a total gross income of P2,000,000 after P1,500,000 direct
cost of services. If Mr. Mariano claimed itemized deduction in the first quarter, what is the amount of claimable
OSD in the second quarter if he wishes to change to the OSD?
a. РО c. P800,000
b. P600,000 d. P1,400,000
5. A private educational institution subject to a 10% preferential corporate to reported the following in the first
quarter of 2020:
Gross tuition revenues P13,800,000

Less: Tuition discounts and remissions 400,000
Direct cost of services 6,700,000
Gross income from canteen and bookstores 600,000
Compute the allowable OSD if the school wants to claim OSD.

a. PO c. P5,600,000
b. P2,920,000 d. P5,760,000
6. Mr. Calabarzon reported the following data in 2020:

Sales P 1,000,000
Cost of sales 600,000
Gain on sale of equipment 60,000
Deductible expenses 300,000
Non-deductible expenses 200,000
Answer the following questions:
Compute the optional standard deduction.

a. P440,000 c. P400,000
b. P424,000 d. P160,000
211
7. Compute the taxable income of Mr. Calabarzon.
a. P700,000 c. P340,000
b. P660,000 d. P300,000
8. Assuming that Calabarzon is a corporate taxpayer, compute the optional standard deduction.
a. P440,000 c. P 184,000
b. P424,000 d. P160,000
212
Chapter 14: Individual Income Taxation
True or False
1. A revocable trust does not pay income tax.
True
2. Estates under judicial administration are considered individual taxpayers.
True
3. Non-resident persons shall file their tax return to the Office of the Commissioner of Internal Revenue.
False (some are not subject to FIT)
4. The income distribution by a taxable estate or trust is a special deduction to the estate or trust, but is an item of
gross income to the recipient heir or beneficiary
True
5. The income of minors from properties received as donations from parents is taxable to the minor if the donation
is exempt from the donor's tax.
True
6. The husband and the wife are treated as separate taxable units. Each spouse shall compute his or her taxable
income, but both of them shall file a single return to include the income of both spouses.
True
7. The income of minors from properties received as donations from parents is taxable to the parents if the donor's
tax on the donation is not paid.
True
8. A disabled person need not file a return by virtue of his disability.
False
9. The taxpayer's signature in the Income tax return is presumed prima facie correct.
True
10.Large taxpayers shall e-file their tax returns through the BIR Electronic Filing and Payment System
True
11.Two or more trusts are consolidated as a single trust when both are designated for the same beneficiary without
regard to their grantor.
False
12.When the grantor reserved for himself part of the income of the trust the same shall be treated as income of the
grantor.
True
13.A trusteed employee pension fund does not pay income tax.
True
14.The substituted filing of tax returns does not apply when there is concurrent or successive employment of the
employee during the year.
True
15.An employee trust fund must be managed by the employer to be tax-exempt.
False
213
Multiple-Choice: Theory – Part 1
1. Who is a resident citizen?
a. A citizen who went on tour abroad
b. A citizen of the Philippines who establishes to the satisfaction of the CIR the fact of his physical presence
abroad with a definite intention to reside therein
c. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad
d. A citizen of the Philippines who works and derives income abroad and whose employment requires him to
be physically present abroad most of the time during the year
2. Which of the following is an individual whose residence is within the Philippines but who is not a citizen thereof?
a. Resident citizen
c. Resident alien
3. A non-resident alien is considered engaged in trade or business in the Philippines if he stayed therein for
a. At least 183 days.
b. At least 180 days.
c. More than 183 days.
d. More than 180 days.
4. On which of the followings dates shall a citizen who left the Philippines during the year be classified as a non-
resident citizen for the year?
a. May 31
b. July 31
c. July 15
d. November 30
5. An alien shall be classified as resident in 2014 if he arrived in the Philippines on which of the following dates?
a. December 30. 2013
b. January 1, 2014
c. July 15, 2014
d. December 31, 2014
6. An individual whose residence is not within the Philippines and who is not citizen thereof
a. Resident citizen
c. Resident alien
7. How long does a citizen have to stay abroad before being classified as a non-resident?
a. At least 183 days
b. At least 180 days
c. More than 183 days
d. More than 180 days
8. How long shall an alien have to stay in the Philippines before being classified as a resident alien?
a. At least 183 days
b. More than 183 days
c. At least 1 year
d. More than 1 year
9. The length of stay of stay of individuals for purposes of taxpayer classification is reckoned as of
a. December 31 of the current year.
b. December 31 of the prior year.
c. The day the alien individual leaves the Philippines.
d. The day the individual taxpayer files his income tax return.
10.Which of the following is not subject to regular income tax?
a. Resident citizen
b. Resident alien
214
11.In 2014, an alien who has been in the country since July 1, 2013 is classified as
a. Resident citizen
b. Resident alien
c. NRA – ETB
d. NRA – NETB
12.In 2016, an American who had been a resident in the Philippines since August 14, 2016 is a
a. Resident citizen.
b. Resident alien.
c. NRA-ETB
d. NRA – NETB
Multiple-Choice: Theory – Part 2
1. Which of the following is subject to final tax?
a. 13th month pay and other benefits
b. Supplemental compensation
c. Fringe benefits
d. Regular compensation income
2. Which of the following cannot claim deduction from gross income?
a. Resident citizens deriving income solely from employment
b. Non-resident citizens engaged in business
c. Resident citizens deriving mixed income from employment and business
d. Resident aliens deriving a mix of passive income and business income
3. Which of the following does the substituted filing system apply?
a. Purely employed taxpayers
b. Taxpayers purely engaged in business
c. Mixed income taxpayers
d. Any of these
4. Which is not a requisite of the substituted filing system?
a. The taxpayers must only one source of business income.
b. The taxpayers must have only one employer during the year.
c. The taxpayer has no other source of gross income subject to regular tax other than compensation.
d. The employer did not commit errors in the computation of the employee’s income tax.
5. Which of the following employees is not required to file an annual consolidated income tax return?
a. Those with concurrent employment during the year
b. Those successive employment during the year
c. Those deriving income distribution from a general professional partnership, taxable trusts, or taxable
estates
d. Those earning purely compensation income when the employer correctly withheld the tax
6. A taxpayer who is both engaged in business and employment is not
a. Subject to withholding tax on salaries by his employer.
b. Required to file quarterly income tax on business income.
c. Required to consolidate his quarterly mixed income for quarterly tax reporting.
d. Require to file an annual consolidated income tax return.
7. Which individual income taxpayer can claim tax credit for foreign taxes paid?
a. Resident citizen
b. Resident alien
d. All of these
8. What is the optional standard deduction claimable by individual income taxpayers who are engaged in business?
b. 25% of sales or receipt
c. 40% of gross income
d. 40% of gross receipt or sales
9. When should individual income tax payers submit their annual or consolidated return for the year 2020?
a. April 15, 2020
b. November 15, 2020
c. April 15, 2021
d. 15th day of the fourth month following the fiscal year of the taxpayer
215
10.Which of the following taxes is a resident citizen or an alien subject?
a. Final tax
b. Capital gains tax
c. Regular tax
d. All of these
11.A non-resident alien, not engaged in trade or business is not subject to
a. Final tax
b. Capital gains tax
c. Regular tax
d. None of these
Multiple Choices Theory – Part 3
1. Who is not required to file quarterly income tax return?
a. Pure compensation income earner
b. Pure business income earner
c. Professional income earner
d. Mixed income earner
2. Who is not subject to withholding tax on compensation?
a. Mixed income earner
b. Pure compensation income earner
c. Minimum wage earner
d. None of these
3. An individual who want to pay the regular income tax using optional standard deduction shall use
a. Form 1700
b. Form 1701
c. Form 1701A
d. From 1702
4. Individuals opting to be taxed under 8% income tax shall use
a. Form 1700
b. Form 1701
c. Form 1701A
d. Form 1702
5. Trusts and estates shall use which tax for
a. Form 1700
b. Form 1701
c. Form 1701A
d. Form 1702
6. An adjustment return is least likely to be required when
a. The employee receives compensation from multiple employers
b. The employee has two successive employers during the year
c. The employer has under-withheld the tax
d. The employer has over-withheld the tax
7. A minimum wage earner who is subjected to withholding tax shall
a. File an adjustment return and pay residual tax
b. File a quarterly income tax return
c. File an adjustment return and claim tax refund
d. Do nothing
8. If husband and wife are both employed, which is correct regarding their income tax exemption in the tax table?
a. Each spouse shall be entitled to a P250,000 tax exemption in the tax table
b. Each family is allowed P500,000 income tax exemption in the tax table
c. Either the husband or the wife can take advantage of the P500,000 income exemption in the tax table
d. Only the husband shall be allowed the P250,000 income tax exemption in the tax table
9. A husband earned P450,000 taxable income. His wife also earned P100,000 taxable income. Which is true?
a. There will be no aggregate tax due for the spouses
b. The husband pays tax while the wife is exempt
c. The wife pays the tax while the husband is exempt
d. Both spouses will report tax due
216
10.If the husband is employed with P700,000 taxable income while his wife is unemployed, he shall will be actually
subject to tax on
a. P700,000 of income
b. P450,000 of income
c. P350,000 of income
d. P200,000 of income
11.Which of the following scenario will still require an adjustment return from the employee even if the employers
correctly withheld the tax on their compensation payments?
a. Employee has concurrent employment
b. Employees had successive employees during the year
c. The employee earned income from other sources
d. All of these
12.An employee who earned income from other sources shall use which annual return?
a. Form 1700
b. Form 1701
c. Form 1701A
d. Form 1702
13.Which is a source of tax credit against the tax due under Form 1701
a. Form 2316
b. Form 2307
c. 1701Q
d. All of these
14.Which tax credit against the tax due under Form 1700?
a. Form 2316
b. Form 2307
c. 1701Q
d. All of these
15.The first quarter income tax return is due
a. April 15 of the same year
b. April 25 of the same year
c. May 15 of the same year
d. May 25 of the same year
16.The third quarter income tax return is due
a. August 15 of the same year
b. August 25 of the same year
c. November 15 of the same year
d. November 25 of the same year
17.Which is incorrect regarding the 8% optional income tax?
a. It substitutes the regular income tax and the 3% percentage tax
b. The 8% income tax option is irrevocable for the year it is made
c. May be opted to if the taxpayer claimed optional standard deduction
d. May be used even if the taxpayer is also an employee
18.Which will not be included in the tax basis of the 8% income tax?
a. Gross sales
b. Gross receipts
c. Gross income from operation
d. Other gross income subject to regular tax
19.Which is an item of income subject regular to tax?
a. Dividend income
b. Royalty income
c. Gain on sale of domestic stocks
d. Gain on sales of equipment
20.Who is not allowed the option to be taxed at 8%?
a. Compensation income earner
b. Business income earner
c. Professional income earner
d. Mixed income earner
217
21.Statement 1: There is no need to file a consolidated return if the withholding tax on compensation and the
expanded withholding tax is correctly withheld.
Statement 2: A businessman who is deriving income from a sole customer need not a file a consolidated return if the
customer correctly withheld any expanded withholding tax.
a. True; True
b. True; False
c. False; True
d. False; False
Multiple Choices – Problems: Part 1
1. Trixie’s business uses a fiscal year accounting period starting July 1 and ending June 30 for internal reporting.
Her business reported the following quarterly net income on a fiscal year basis:
FISCAL YEAR 2018-2019 2019-2020
ST
- 1 Quarter (July 1 to September 30) P190,000 210,000
- 2nd Quarter (October 1 to December 220,000 250,000
31)
- 3rd Quarter (1/1/2020 – 3/31/2020) 180.000
th
- 4 Quarter (4/1/2020 – 6/30/2020) 200,000
Compute the taxable net income to be reported in April 15, 2021?
a. P790,000
b. P810,000
c. P840,000
d. P850,000
1. Jerson, married 15 dependents, had the following income within and outside the Philippines:
Philippines Abroad
Compensation income P280,000 -
Rental income 50,000 100,000
Royalties – books 32,000 25,000
Domestic dividends 9,000 -
Foreign dividends - 40,000
Compute his taxable income she is a resident citizen.
a. P330,000
b. P371,000
c. P495,000
d. P536,000
2. Compute his taxable income she is a resident alien.
a. P330,000
b. P371,000
c. P495,000
d. P536,000
3. Henrie, a managerial employee, received the following employee benefits in 2020:

Salaries, net of mandatory and exempt benefits P4,000,000
Stock bonus 800,000
Director’s fees 200,000
Car designated for the use of Henrie 2,500,000
House and lot, transferred in the name Henrie 5,000,000
Compute the taxable income of Henrie.

a. P12,5000
b. P7,500,000
c. P5,000,000
d. P4,800,000
4. In the immediately preceding problem compute the fringe benefit tax for the year.
a. P12,500,000
b. P7,500,000
c. P5,000,000
d. P4,800,000
218
5. The following relate to the net income of the firm of Mr. Aguin O. Odit:
Professional fees P600,000
Short-term capital gain 45,000
Ordinary gain 20,000
Long-term capital loss ( 90,000)
Short-term capital loss ( 30,000)
Ordinary loss ( 40,000)
Other business expenses ( 200,000)
Net Income P 385,000
Compute his taxable income.

a. P385,000
b. P390,000
c. P410,000
d. P435,000
6. Shown below is the summarize result of operations of Mr. Chiz Mozo’s business:
Sales P 900,000
Cost of Sales 300,000
Gross Profit P 600,000
Other deductible expenses 100,000
Contributions expenses:
- Government priority project 50,000
- Non-accredited non-profit institutions 55,000
- Foreign foundation 25,000
Compute his taxable income.
a. P400,000
b. P405,000
c. P420,000
d. P450,000
7. During the year, Coleen received compensation income of P455,000 after P15,000 withholding tax on
compensation. Compute her income tax still due.
a. P48,750
b. 47,500
c. 28,750
d. 32,500
8. A Filipino citizen has P400,000 Philippine income and P300,000 foreign income, He paid P55,000 income taxes
abroad. Compute the allowable tax credit for the income taxes paid abroad.
a. P0
b. P40,000
c. P45,000
d. P55,000
9. In the preceding problem, what is the tax credit if the taxpayer was a non-resident citizen or a resident alien?
a. P0
b. P40,000
c. P45,000
d. P55,000
219
1. Kareen received the following income from her employment in 2020:
Gross Salaries P400,000
Deductions for:
- SSS P 10,000
- PHilHealth 8,000
- Pag-Ibig 7,000
- Union dues 2,000
- Withholding tax 67,400
- Loans repayment 50,000
- Tardiness and absences 15,000
Net pay P 240,600
Compute Kareen’s taxable compensation income.
a. P240,600
b. P290,600
c. P358,000
d. P400,000
2. Mary made the following computations for her annual financial savbings from employment, her sole source of
income:
Salaries net of P59,000 withholding tax and P12,000 mandatory payroll deductions P321,000
Expenses:
- Load expenses P 10,000
- Medical expenses 8,000
- Transportation expenses 25,000
- Food, rent & utilities 100,000
- Bank loan repayments 20,000
- Miscellaneous expenses 15,000
Net savings for 2020 P 143,000
What is Mary’s taxable compensation income in 2020?
a. P280,000
b. 321,000
c. P380,000
d. P392,000
3. Mr. Roger presented the following schedule of income in 2020:

Service fees, net of 5% withholding tax P 617,500
Dividends from a domestic corporation 20,000
Interest income from bank 20,000
Expenses:
- Office utilities expenses P 30,000
- Staff salaries 120,000
- Rent & miscellaneous expenses 80,000
- Tuition fees of 5 dependent children 100,000
- Personal medical expenses 15,000
Net business income P 297,500
Total deductible expense against gross income is
a. P0
b. P230,000
c. P330,000
d. 345,000
4. Compute roger’s taxable net income

a. P305,000
b. P320,000
c. P387,500
d. P420,000
220
5. Compute the tax still due.
a. P21,500 refundable
b. P18,500 refundable
c. P5,000 refundable
d. P2,500 payable
6. Compute the tax still due if Mr. Roger opted to the 8% optional tax.
a. P31,800
b. P32,000
c. P34,400
d. P52,000
7. Jerik, a self-employed employee with ten dependent childrend, had the following items of income and expenses
in 2020:
Sales P 900,000
Less: Cost of sales 400,000
Gross profit P 500,000
Interest income, net of 20% final tax 16,000
Interest income from clients notes 12,000
Expenses:
- Salaries expense P 100,000
- Depreciation expense 15,000
- Rent & other expenses 50,000
- Interest expense 30,000
Net Income P 333,000
Compute the deductible business expense.
a. P165,000
b. P188,400
c. P189,720
d. P195,000
8. Jerik shall report a taxable income of

a. P322,280
b. P323,600
c. P310,280
d. P311,600
9. Compute the taxable income if Jerik opted to use the optional standard deduction
a. P552,000
b. P547,200
c. P540,000
d. P312,000
10.Compute the income tax due if Jerik opted to use the 8% optional income tax.
a. P72,960
b. P72,000
c. P52,960
d. P52,000
221
11.An individual income tax payer had the following income:
Compensation income P 820,000
Mandatory payroll deductions 20,000
Gross receipts 1,800,000
Direct cost of services 500,000
Expenses 300,000
Other income subject to regular tax 100,000
Other income subject to final tax 200,000
Withholding tax on compensation 130,000
Expanded withholding tax on receipts 14,000
Estimated tax payments made 94,000
Compute the income tax still due if the taxpayer opted to the itemized deduction.
a. P351,000
b. 322,000
c. P222,000
d. P192,000
12.Compute the income tax due if the taxpayer opted to the optional standard deduction.
a. P351,000
b. P246,000
c. P222,000
d. P192,000
13.Compute the income tax due if the taxpayer opted to the 8% optional income tax
a. P282,000
b. P278,000
c. P262,000
d. P264,000
14.Mr. Markey recorded sales of P2,500,000, cost of sales of P1,000,000 and expenses of P700,000. He is also a
partner in various partnership and received the following share in their net income:
General Professional Business partnership
partnership
Share in net income P200,000 P400,000
Compute the income tax due if Mr. Markey opted to itemized deduction.
a. P310,000
b. P250,000
c. P190,000
d. P130,000
15.Compute the income tax due if Mr. Markey opted to the 8% optional income tax
a. P216,000
b. P200,000
c. P196,000
d. 180,000
222
CHAPTER 15-A: SELF-TEST EXERCISES
True or False 1
1. Foreign and domestic banks may have an EFCDU.
True
2. The income of FCDU, OBU, and RFCDU from residents other than depositary banks in the EFCDS or
FCDS is subject to a 10% final tax.
True
3. The income of FCDU or EFCDU from foreign sources is subject to regular income tax.
False
4. Corporations subject to a rate below 30% are referred to as special corporations.
True
5. Corporation includes joint ventures, associations, and partnerships.
True
6. False Joint ventures formed for the purpose of undertaking construction projects or engaging in energy
operations are taxable as corporations.
False
7. Exempt corporations are never subject to corporate income tax.
False
8. Government-owned and controlled corporations are subject to corporate income tax.
True
9. A non-profit hospital is an exempt corporation taxable only on income from unrelated activities.
True
10. PEZE-registered enterprises are exempt from tax
False
11. BOI-registered enterprises enjoy income tax holiday for 20 years.
False
12. FCDU and OBU are divisions of a foreign bank.
False
13. The income of OBU from foreign sources is exempt from income tax.
True
14. International carriers are subject to a tax of 2.5% on taxable income.
False
15. A domestic carrier is subject to 30% tax on Philippine taxable income.
False
16. Special corporations can claim optional standard deduction
False
17. Exempt corporations are not required to file income tax returns because they do not pay tax.
False
18. Exempt corporations and special corporations are manded to use the itemized deductions.
True
19. Exempt corporations who filed late are not subject to penalties because they have no tax due
False
20. Exempt corporations filing BIR Form 1702-EX will not pay tax as a rule.
True
True or False 2
1. The classification rule is applied to private schools and non-profit hospitals.
False
2. The dominance test is applied to non-profit schools and private hospitals.
False
3. A government school is exempt from income tax.
True
4. A non-resident owner or lessor of vessel is subject to tax at 7.5% of the gross rental.
False
5. A regional area headquarters is exempt from tax because it does not derive income.
True
6. A regional operating headquarter of a multinational company is subject to 10% on world income.
False
223
7. A non-resident cinematographic film owner, lessor, or distributor is subject to 25% tax on taxable
income.
False
8. A non-resident owner or lessor of aircraft, machineries and other equipment is subject to tax at 4.5% of
gross rentals.
False
9. A farmer’s or fruit growers’ association is exempt from income tax.
True
10. Exempt corporations are subject to income tax on their income from unrelated activities.
True
11. A non-stock, non-profit institution must be organized for religious, charitable, scientific, athletic, cultural,
or for the rehabilitation of veterans.
True
12. To be exempt, all of the net income or asset of a non-profit corporation or association must be devoted
to its purposes, and no part of its net income or asset accrues to benefit any member or a specific
person.
True
13. The unrelated income of non-profit corporations is exempt from income tax if the same is diverted to its
non-profit purpose.
True
14. The exemption of non-stock and non-profit corporations or associations shall commence when they
secure their tax exemption ruling.
True
15. The certificate of tax exemption ruling is valid for one year and renewable every year thereafter.
False
True or False 3
1. The FCDUs, OBUs and EFCUs are never subject to regular income tax.
False
2. Persons and service establishments inside an ECOZONE are subject to the regular tax.
True
3. The Gross Philippine Billings of international carriers includes receipts from outgoing voyage or flights
which must be billed in the Philippines.
False
4. Expenses of an exempt corporation not directly traceable to either related or unrelated operations are
allocated based on the ratio of gross income.
True
5. Local water districts are exempt from income tax.
True
6. Cooperatives that transacts business with non-members are taxable on income allocated to interest on
members; capital when their accumulated reserve exceeds. P10,000,000.
True
7. All cooperatives, regardless of classification, are subject to income tax on their income from unrelated
activities.
True
8. The expenses of exempt corporations from exempt operations are deductible to its gross income from
unrelated operations.
False
9. When the income from related activities constitutes atleast 50% of total income, private schools are
True
10. When the income from unrelated activities exceeds 50% of total income, only the income from
unrelated activities of private schools and non-profit hospitals is subject to 30% tax.
False
11. Refunded tickets and tickets of non-revenue passengers are excluded in the Gross Philippine Billings.
True
12. The gross receipts from transient passengers are excluded from Gross Philippine Billings if they depart
from the Philippines through the same carrier within 48 hours from their arrival.
True
13. The 48-hour rule does not apply when another carrier continued the flight or voyage of transient
passengers.
True
224
14. The 48-hour rule may be extended by force majeure.
True
15. Domestic film owners, lessors, or distributors shall be subject to 25% tax on gross income from all
sources within.
False

1. A non-resident foreign corporation is taxable on
a. World taxable income
b. World gross income
c. Philippine taxable income
d. Philippine gross income.
2. The resident and non-resident classification do not apply to

a. Domestic corporation
b. Foreign corporation
c. Both domestic and foreign corporations
d. Neither domestic and foreign corporations
3. Which of these is a special corporate taxpayer?

a. A private school
b. A private hospital
c. A business partnership
d. A trading corporation
4. As a rule non-profit, non-stock corporations are exempt from income tax. Which of these non-profit
entities is subject to income tax?
a. Association
b. School
c. Farmer’s cooperative
d. Hospital
5. The exemption of non-profit corporations specifically pertains to income from

a. related parties
b. unrelated activities
c. related activities
d. both related and unrelated activities
6. A domestic corporation is taxable on

d. Philippine gross income
7. A resident foreign corporation is taxable on

d. Philippine gross income
8. Benguet State University, a public educational institution, is

a. Subject to income tax at preferential rate
b. Subject to income tax at the regular rate.
c. Subject to both regular and preferential income tax
d. Exempt from corporate income tax
9. Generally, government-owned and controlled corporations are

a. Subject to preferential income tax
b. Subject to regular income tax
225
d. Exempt from income tax
10. Generally, private proprietary educational institutions are

a. Subject to preferential income tax
b. Subject to regular income tax
d. Exempt from income tax
11. Which is not an exempt corporation?

a. Social Security System
b. Philippine Health Insurance System
c. Government-owned and controlled corporations
d. Home Development Mutual Fund
12. Which of these foreign corporations is subject to the 30% regular corporate tax?
a. Offshore banking units
b. International carrier
c. Regional operating headquarters of a multinational company
d. Call center
13. A non-resident foreign corporation is

a. Subject to 30% tax on taxable income
b. Subject to 25% tax on gross income
c. Not subject to 30% tax on gross income
d. Never subject to 30% tax on gross income abroad
14. A resident corporation is

a. Subject to 10% tax on global taxable income
b. Subject to 10% tax on Philippine taxable income
c. Not subject to 30% tax on foreign income
d. Not subject to 30% tax on Philippine taxable income
15. A domestic corporation is not subject to the 30% regular income tax on
a. Foreign income
b. Global income
c. Philippine income
d. Gross income

1. An allocation of common expenses between related and unrelated activities is made to properly reflect
taxable income. This procedure is required only of
a. Domestic corporations
b. Resident foreign corporations
c. Exempt corporation
d. Non-profit hospitals
2. What percentage of profit will shareholders ultimately receive from the corporate earnings?
a. 70% of taxable income
b. 70% of gross income
c. 63% of taxable income
d. 63% of gross income
3. Which of these concepts is not relevant to corporations?

a. Exclusion
b. Gross income
c. Deduction
d. Personal exemptions
226
4. The preferential tax rate of 10% on taxable income applies to
a. Proprietary hospital
b. Proprietary school
c. Non-profit school
d. Non-profit association
5. When applicable, 10% preferential tax rate applies to income from

a. Related activities
b. Unrelated activities
c. Both related and unrelated activities
d. Neither related and unrelated activities
6. Exempt corporations are nevertheless subject to 30% tax income from

a. Related activities
b. Unrelated activities
c. Both related and unrelated activities
d. Neither related and unrelated activities
7. Which is not taxable on unrelated activities?

a. Government agencies
b. Non-profit corporations
c. Government-owned and controlled corporations
d. None of these
8. The income from properties of exempt corporations is considered income from

a. Related sources
b. Unrelated sources
c. Either related or unrelated activities at the discretion of the examiner.
d. Either related or unrelated activities depending on the nature of the properties concerned.
9. The classification rule is not relevant to a

a. Cooperative
b. Farmer’s association
c. Government school
d. Profit-oriented agricultural organization
10. Which is subject to corporate income tax?

a. Joint venture engaged in construction
b. Joint venture engaged in oil exploration
c. Philippine Charity sweepstakes office
d. A charitable medical hospital
11. International carriers are taxable on their gross income or receipt from
a. Incoming shipment or flight
b. Outgoing shipment or flight
c. Both incoming and outgoing flight
d. Any sources
12. A domestic carrier is subject to tax on

a. Philippine gross income
d. World taxable income
13. A non-resident lessor of vessels chartered by Filipino national is subject to

a. 25% tax on its gross rentals from Filipino nationals
b. 25% tax on its worldwide rentals
227
c. 4.5% tax on its gross rentals from Filipino nationals
d. 7.5% tax on its gross rentals from Filipino nationals
14. A domestic cinematographic film owner, distributor, or lessor is subject to

a. 25% tax on Philippine gross income
b. 30% tax on global taxable income
c. 25% tax on global taxable income
d. 30% tax on Philippine gross income
15. A non-resident film owner, distributor or lessor is subject to

a. 25% tax on Philippine gross income
16. A non-resident lessor of aircraft is subject to

a. 7.5% tax on Philippine gross income
b. 4.5% tax on global taxable income
17. A domestic lessor of aircraft and other equipments is subject to

a. 4.5% tax on Philippine gross income
c. 7.5% tax on global taxable income
18. An exempt corporation with no taxable income is delinquent in filing its tax return. Which penalty
is it liable to?
a. Surcharge
b. Interest
c. Compromise
d. All of these.
Multiple Choice: Case Problems
Problems 1:
Berkshire Corporation reported the following gross income and expenses in 2020:
Philippines Abroad Total
Gross income P400,000 P300,000 P700,000
Deductions 200,000 150,000 350,000
Taxable Income P200,000 P150,000 P350,000
Compute the income tax due if the corporation is a/an:

1. Domestic corporation
a. P210,000
b. P120,000
c. P60,000
d. P105,000
2. Resident foreign corporation

a. P60,000
b. P120,000
c. P105,000
d. P210,000
3. Non-resident foreign corporation

a. P210,000
b. P120,000
228
c. P105,000
d. P60,000
4. Private proprietary educational institution or a non-profit hospital majority of its income is from related
activities
a. P105,000
b. P35,000
c. P70,000
d. P20,000
5. Non-profit entry
a.105,000
b. 60,000
c. 35,000
d. 0
6. Government owned and controlled corporation

a. 105,000
b. 60,000
c. 35,000
d. 0
7. International Carrier
a. 105,000
b. 10,000
c. 17,500
d. 5,000
8. Offshore banking unit

a. 105,000
b. 35,000
c. 20,000
d. 40,000
9. Non-resident cinematographic film owner, distributor or lessor

a. 120,000
b. 87,500
c. 100,000
d. 50,000
10. Non-resident owner or lessor of vessels

a. 18,000
b. 31,500
c. 120,000
d. 15,750
11. Non-resident owner or lessor of aircraft, machineries and other equipment.

a. 120,000
b. 52,500
c. 30,000
d. 26,250
12. Non-profit association, 60% of its income derived from unrelated activities
a. 105,000
b. 63,000
c. 42,000
d. 0
Problem 2
Maharata Hathaway reported the following:
Related Unrelated Total

Gross Income 300,000 200,000 500,000
Deductions 100,000 100,000 200,000
Taxable Income 200,000 100,000 300,000
229
Compute the tax due if the following is a/an:
1.Regular domestic corporation

a. 90,000
b. 150,000
c. 60,000
d. 30,000
2. proprietary educational institution or non-profit hospitals

a. 90,000
b. 60,000
c. 30,000
d. 20,000
3. Exempt non-profit corporation

a. 90,000
b. 30,000
c. 60,000
d. 0
Problem 3
A domestic bank reports the following income from its regular banking (RBU) and foreign currency deposit
unit (FCDU):
RBU FCDU
Interest from lending - 300,000
with FCDUs/OBUs
Interest from lending to 2,000,000 3,000,000
other residents
Interest from lending to 1,000,000 1,500,000
non-residents
Less: Business 1,800,000 2,000,000
Expenses
Net Income 1,200,000 2,800,000
Answer the following:

1.Compute the total final tax
a. 500,000
b. 300,000
c. 390,000
d. 150,000
2. Compute the regular income tax

a. 750,000
b. 360,000
c. 240,000
d. 60,000
Problem 4
Gross Income 500,000 700,000 1,200,000
Direct 200,000 300,000 500,000
Deductions
Common 150,000
Expenses
Compute the income tax if the taxpayer is a:
1.Business partnership organized in the Philippines

a. 71,250
b. 90,000
c. 165,000
d. 0
230
2. General Professional Partnership
a. 165,000
b. 90,000
c. 71,250
d. 0
3. A joint venture formed for the undertaking of construction projects or oil exploration under service contracts
with the government
a. 165,000
b. 90,000
c. 71,250
d.0
4. A business joint venture organized in the Philippines

a. 165,000
b. 90,000
c. 71,250
d. 0
5.A co-ownership which is limited to the collection of income and preservation the properties co-owned
a. 165,000
b. 90,000
c. 71,250
d. 0
6.A co-ownership which re-invested the income of the property in other income-producing properties
a. 165,000
b. 90,000
c. 71,250
d. 0
7.Resident foreign corporation

a. 165,000
b. 90,000
c. 71,250
d. 0
8.non-resident foreign corporation

a. 360,000
b. 150,000
c. 90,000
d. 0
Problem 5
Antartica, a shipping company, reported the following gross receipts and deductions during the year
Shipments
Incoming Outgoing Total
Gross Receipts 2,000,000 3,000,000 5,000,000
Less: 1,500,000 2,000,000 3,500,000
Deductions
Net Income 500,000 1,000,000 1,500,000
Compute the tax due assuming the corporate taxpayer is a:

1.Domestic shipping carrier
a. 30,000
b. 125,000
c. 75,000
d. 450,000
2. Resident international shipping carrier

a. 450,000
b. 75,000
c. 125,000
d. 30,000
231
Problem 6
An air carrier reported the following for its air transport operations
Destination Fares
Philippines-Australia 1,000,000 (1,000 tickets)
Australia-Philippines 1,250,000 (1,000 tickets)
Philippines-Russia* 2,000,000 (1,000 tickets)
Philippines-Japan 1,500,000 (2,000 tickets)
The flight was referred to another airliner in Japan. The Japanese airlines airlifted passengers for Russia.
Determine the income tax due assuming the carrier is a/an:
1.International Carrier
a. 143,750
b.112,500
c. 62,500
d. 81,250
2. Domestic carrier with P3,000,000 global expenses

a. 525,000
b. 825,000
c. 143,750
d. 112,500
Problem 7
PhilTravel is engaged in a business of sea transport. It arranged the transport of various cargoes with a
shipping company to bring the cargoes from the Philippines to Afghanistan to a total charter fee of
P4,000,000
Compute the income tax on this transaction assuming that the shipping company is a/an:
1.International shipping carrier
a. 300,000
b. 180,000
c. 100,000
d. 0
2. Non-resident shipping carrier

a. 1,200,000
b. 300,000
c. 180,000
d. 100,000
Problem 8
A non-profit non-stock school has a gross income of P4,000,000 , only 40% of which was contributed by
related activities and total expenses of P3,000,000, 50% of which was incurred in connection with non-related
activities.
1.Compute the total income tax if the income from non-related activities is not used exclusively for
educational purposes.
a. 300,000
b. 90,000
c. 100,000
d. 270,000
232
2. In the immediately proceding problem, compute the income tax due if all the income of the non-profit
school was used for educational purposes.
a. 0
b. 100,000
c. 270,000
d. 300,000
3. Compute the total income tax assuming the taxpayer is non-profit charitable institution
a. 270,000
b. 300,000
c. 100,000
d. 90,000
4. Compute the total income tax assuming the taxpayer is a private school
a. 100,000
b. 270,000
c. 300,000
d. 90,000
5. Compute the income tax assuming the taxpayer is a private hospital

a. 90,000
b. 270,000
c. 100,000
d. 300,000
6. Compute the income tax assuming the taxpayer is a non-profit hospital

a. 270,000
b. 300,000
c. 100,000
d. 90,000
7. Compute the income tax assuming the taxpayer is a government hospital

a. 300,000
b. 270,000
c. 100,000
d. 90,000
Problem 9
A private school has P5,000,000 gross income, 60% of this represents tuition and miscellaneous fees. It has
net income of P2,000,000, 60% of which was contributed by sources not related to academic instruction.
1.Compute the total income tax
a. 900,000
b. 440,000
c. 360,000
d. 200,000
2. Compute the total income tax if the school uses all its income for educational purposes.
a. 900,000
b. 440,000
c. 360,000
d.200,000
233
CHAPTER 15-B: CORPORATE INCOME TAX – REGULAR CORPORATIONS
True of False 1
1. Exempt Corporation are subject to MCIT with respect to their income subject to regular corporate income tax.
True
2. MCIT does not apply to foreign corporations.
False (It apply to resident foreign corporations)
3. As a rule, corporations always pay tax even if there is a loss effective from the fourth year of their operations.
True
4. Resident foreign corporations are subject to either gross income tax or regular corporate income tax.
False
5. A partnership organized under Philippine law is a domestic corporation for purposes of taxation.
True
6. Domestic corporations are subject to either gross income tax or regular corporate income tax.
True
7. The gross income tax applies only to corporations subject to regular income tax.
False (Domestic only)
8. Non- resident foreign corporation are subject to minimum corporate income tax.
False
9. The gross income tax cannot apply if the gross profit rate falls below 45%.
True
10.Both the regular corporate income tax and the gross income tax are subject to the minimum corporate income
tax.
False
11.The MCIT applies only when income is zero or when there is an operating loss.
False (also when RCIT < MCIT)
12.Domestic corporations under the gross income tax, including REITs, are exempt from MCIT.
True
13.Special domestic corporations and special resident foreign corporations are exempt from MCIT.
True
14.MCIT is computed as 2% of the gross income from operations.
False (on total gross income)
15.If an entity started operations on June 2011, MCIT shall commence on June 2015.
False (start by 1/1/ 2015)
True or False 2
1. MCIT is applied on a quarterly, but not on an annual basis.
False
2. MCIT excess can be deducted only against the excess of RCIT over the MCIT in any of the succeeding three years.
True
3. When there are several excess MCIT in prior years, the crediting of MCIT is made in a first-in first-out (FIFO)
basis.
True
4. The MCIT gross income includes only those arising from operations while the OSD gross income covers all items
of gross income subject to regular income tax.
False (MCIT gross income = OSD gross income)
5. For purposes of the MCIT, cost of services includes all direct costs and expenses incurred in acquiring or
manufacturing the goods.
False (cost of goods sold)
6. The cost of services of banks includes interest expense.
True
7. Items of passive income subject to final tax and capital gains tax are included in the basis of the MCIT.
False
8. For accrual basis taxpayers, the cost of services shall include unpaid expenses directly incurred in the provision
of services.
True
9. The gross receipts of service providers include advances from clients or customers.
True
10.Corporations with income subject to special tax are mandatorily required to use the itemized deductions.
True (See. Chapter 13-C)
11.Whenever MCIT is payable, there is a Net Operating Loss Carry- Over.
234
False
12.An unused excess MCIT will expire on the fourth year of operation.
False (Third year)
13.The excess MCIT of previous years can be deducted against the RCIT of any quarter of the year if RCIT is greater
than MCIT.
False (comparison is made with cumulative balances.)
14.The MCIT rules are applied on the cumulative balances of the RCIT and MCIT during the quarters of the taxable
year.
True
15.MCIT can be suspended for a taxpayer suffering from prolonged labor dispute, force majeure, or legitimate
business reverses.
True
True or False 3
1. Investment companies and insurance companies are prima facie presumed improperly accumulating profits.
False
2. The improperly accumulated earning tax does not cover holding companies, publicly listed companies, and
banks.
False (not holding companies)
3. A closely held corporation is one that is not listed in an organized equity or debt market regardless of the
number of individuals owning it.
False (if held by more than 20 people, it is closed corporation)
4. The improperly accumulated earning tax applies also to proprietary educational institutions.
True
5. The Commissioner of Internal Revenue may suspend the imposition of MCIT upon submission of the required
proof.
False (Sec. of Finance)
6. The improperly accumulated earnings tax applies to all regular domestic and foreign corporations.
False (domestic only)
7. An appropriation involves setting aside of earnings for immediate needs of the business.
True
8. The correlation test on appropriation requires that there must be a direct relationship of business needs to the
accumulation of profits.
True
9. If the ownership of the top 20 shareholders of a corporation is more than 50%, the corporation is a publicly held
corporation.
False
10.A corporation that is owned by a publicly listed corporation is a public corporation
True
11.The investment of substantial profit in unrelated business, stocks or securities of unrelated business is an
instance of improper accumulation of earnings.
True
12.IAET is a penalty tax; hence, earnings subjected to IAET will still be subject to a dividend tax when subsequently
declared.
True
13.The branch profit remittance tax covers remittance of special resident foreign corporations except PEZA-
registered entities.
True
14.Partnerships and Ecozone-registered entities are not subject to improperly accumulated earnings tax.
True
15.The branch profit remittance tax covers the profit remittance, excluding investment income, of branches of
domestic and resident foreign corporations to their head offices.
False (excluding domestic corporation branches)
235
Multiple-Choices: Theory - Part 1
a. Domestic corporations shall elect either MCIT or RCIT.
b. Resident foreign corporations are liable to RCIT and GIT.
c. Domestic corporations shall elect either GIT or RCIT.
d. Resident foreign corporations shall elect either GIT or RCIT.
2. Resident foreign corporations

a. shall elect either RCIT or MCIT.
b. shall elect either GIT or RCIT.
c. are limited to RCIT subject to the MCIT.
d. are subject to IAET and branch profit remittance tax.
3. Which is exempt from the corporate income tax?

a. Non-profit corporations
b. Joint venture
c. Partnership
d. Government-owned and controlled corporations
4. Which of these can claim the corporate OSD against gross income?
a. Private schools
b. Non-profit hospital
c. Exempt corporations
d. Retail stores
5. Which is subject to or can be subjected to MCIT?

a. Private schools
b. Non-resident lessors of aircraft or vessels
c. Non-profit hospitals
d. Exempt corporations
6. Which is not a requisite of the gross income tax?

a. 20% tax effort ratio on GNP
b. 40% income tax collection on total tax revenue
c. 4% VAT tax effort ratio on GNP
d. 10% government debt-to-asset ratio
7. The regular corporate income tax is

a. 30% of gross income.
b. 2% of taxable income.
c. 30% of taxable income.
d. 2% of gross income.
8. The minimum tax for corporate taxpayers is

b. 2% of taxable income.
c. 2% of gross income.
d. 15% of taxable income.
9. The MCIT applies to

a. domestic and resident corporations.
b. domestic corporations only.
c. special corporations.
d. non-resident foreign corporation.
10.The optional gross income tax is

b. 15% of gross income.
c. 30% of gross income.
d. 10% of gross income.
11.The gross income for MOT purposes covers

a. those from related activities only.
b. all items of income subject to regular tax
c. all items of income subject to any tax scheme. 236
d. any of these
12.The maximum cost ratio for corporations to avail of the gross income tax is
a. 60% c. 55%
b. 40% d.45%
13.What is the minimum tax as a percentage of gross income under the corporate gross income tax?
a. 15% c. 7.5%
b. 10% d. 6.75%
14.The minimum lock-in period under the corporate gross income tax is
a. five years. c. three years.
b. four years. d. two years.
15.The MCIT is not due when

a. MCIT is greater than RCIT.
b. taxable income is zero.
c. taxable income is negative.
d. RCIT is greater than MCIT.
Multiple Choice: Theory - Part 2

1. Which taxpayer is subject to the MCIT?
a. Private schools
b. Government-owned and controlled corporations
c. Offshore banking units
d. International carriers
2. Exempt corporations are subject to MCIT on their income from

a. related activities.
b. unrelated activities.
c. both related and unrelated activities if they pass the dominance test.
d. both related and unrelated activities if they fail the dominance test.
3. MCIT shall commence on the

a. 5th year of operation.
b. 3rd year of operation.
c. 4th taxable year following the year of start of operation.
d. 3rd taxable year following the year of start of operation.
4. Excess MCIT is a tax credit that can be carried over to the next
a. 3 consecutive years.
b. 4 consecutive years.
c. 3 years including the year it arises.
d. 3 consecutive years when there is income.
5. Which is deductible in the computation of the MCIT?

a. Marketing expenses
b. Office utilities
c. Loss on sale of assets
d. Salaries of employees directly engaged in rendering the service
6. Which is included in the MCIT base?

a. Dividend income from domestic corporations
b. Royalty income
c. Interest income from banks
d. Ordinary gains
7. Which of these may grant relief from the MCIT?

a. Secretary of finance
b. Office of the Commissioner of Internal Revenue
c. Office of the Revenue District Officer having jurisdiction
d. National office of the BIR
237
8. Private schools and non-profit hospitals may be subject to MCIT when

a. they are subject to the 30% RCIT.
b. they are subject to the 10% preferential rate.
c. their income from related activities exceeds 50% of their total revenue from all sources.
d. they are exempt from income on related activities.
9. Domestic corporations that pay the gross income tax for the year
a. will not pay the regular corporate income tax.
b. will pay whichever is higher of RCIT and MCIT.
c. will pay whichever is higher of GIT and RCIT subject to MCIT.
d. will never pay both RCIT and MCIT.
10.If a foreign corporation operates a branch in the Philippines but transacts business directly with Philippine
residents, the corporation is
a. taxable on net income.
b. automatically reclassified into a non-resident foreign corporation.
c. a non-resident foreign corporation with respect to the transaction only.
d. a non-resident foreign corporation for all transactions, including those made by its branch in the Philippines.
11.For taxpayers involved in the sale of goods, gross income means

a. gross sales less sales returns, discounts and cost of goods sold
b. gross receipts less returns, allowances, discounts and cost of goods sold.
c. gross sales less sales returns, discounts and cost of services.
d. gross receipts less returns, allowances, discounts and cost of services.
12.For taxpayers involved in the sale of services, gross income means

a. gross sales less sales returns, discounts and cost of goods sold.
b. gross receipts less returns, allowances, discounts and cost of goods sold.
c. gross sales less sales returns, discounts and cost of services.
d. gross receipts less returns, allowances, discounts and cost of services.
13.Gross receipts, as compared with gross sales, include

a. cash collections only.
b. transactions on account sales only.
c. both cash and on account transactions.
d. cash collections on completed contracts only.
14.Which is not included in gross receipts?

a. Reimbursements for out-of-pocket cost of the service provider
b. Repayment of loan by the client
c. Advanced collection of income
d. Cash collection for services rendered
15.Which of the following is least likely included in the "cost of services" for a bank?
a. Bad debt expense on loans
b. Interest expense
c. Depreciation of bank premises
d. Salaries of tellers
Multiple Choice: Theory - Part 3

1. The quarterly income tax return is due on or before
a. 60 days following the end of the quarter.
b. 30 days following the end of the quarter.
c. 15th day of the fourth month following the end of the quarter.
d. 45 days following the end of the quarter.
2. The optional standard deduction for corporations

a. excludes cost of goods sold and cost of services.
b. includes cost of goods sold and cost of services.
c. includes personal exemption.
d. excludes actual items deductions.
238
3. Which of the following is not a direct cost of service of a corporate car-parking operator?
a. Marketing expenses
b. Cashier salaries
c. Depreciation of parking building
d. Security guard salaries
4. Which of the following is not a deduction in the computation of the income tax payable or refundable?
a. Estimated quarterly income tax payment
b. Final withholding tax on passive income
c. Excess MCIT prior year
d. Creditable withholding tax on gross income
5. Which of the following tax credit is not always creditable in the current accounting period?
a. MCIT Excess prior year
b. Excess creditable withholding tax in prior years
c. Creditable withholding tax in the current year
d. Estimated quarterly income tax payment
6. In the quarterly income tax return, Excess MCIT prior year is deductible only when
a. the MCIT exceeds the RCIT for that quarter.
b. the RCIT exceeds the MCIT for that quarter.
c. the cumulative MCIT exceeds the cumulative RCIT as of the end of that quarter.
d. the cumulative RCIT exceeds the cumulative MCIT as of the end of that quarter.
7. Excess MCIT is valid as a tax credit over

a. five years. c. three years.
b. four years. d. two years.
8. Which is subject to the Improperly Accumulated Earnings tax?

a. Domestic corporations
b. Resident foreign corporations
c. Non-resident foreign corporations
d. All of these
9. Which of these is deducted in the computation of the improperly accumulated profits?

a. Profits from passive income
b. Profits from capital gains
c. NOLCO
d. Corporate income tax
10.Which of the following entities is improper accumulation of profits not presumed?

a. Closely-held corporation
b. Investment companies
c. Holding companies
d. Finance companies
11.Which is not exempt from the improperly accumulated earnings tax?

a. Publicly-held corporations
b. Insurance companies
c. Banks
d. Dealers of securities
12.Which of these is subject to improperly accumulated earnings tax?

a. A business partnership
b. A private educational institution
c. A PEZA-registered entity
d. A general professional partnership
13.The branch profit remittance tax is 15% of the total profits

a. of the current year.
b. of the current year earmarked for remittance, including investment income.
c. earmarked for remittance without deducting the tax.
d. actually remitted to the home office abroad, net of the tax.
239
14.Which of these entities is exempt from the branch profit remittance tax?
a. OBUs and FCDUs
b. Regional operating headquarters of multinational companies
c. International carriers
d. PEZA-registered entities
15.The branch profit remittance tax is imposed

a. upon all foreign corporations, resident or non-resident.
b. whenever the foreign branch reports income.
c. when there is profit remittance by the branch to the home office.
d. upon resident corporations, domestic or foreign.
Multiple Choice: Problems - Part 1

1. The following are the composition of the total gross income of a domestic corporation which is subject to MCIT:
Sales, net of discounts and allowances P 4,000,000

Gross income from operations P 1,600,000
Royalty income 250,000
Gain on sale of building 150,000
Total gross income P 2,100,000
What is the minimum corporate income tax?

a. P 42,000 c. P35,000
b. P 40,000 d. P32,000
2. In the immediately preceding problem, what is the regular corporate income tax if the corporation has a total
allowable deduction of P1,700,000?
a. P 0 c. P90,000
b. P 15,000 d. P120,000
3. The Calintaan Corporation had the following historical MCIT and RCIT data:
2017 2018 2019 2020

MCIT P 120,000 P 200,000 P 190,000 P 170,000
RCIT P 110,000 P 220,000 P 0 180,000
Basing solely on the information provided, what is the tax due and payable respectively in 2017 and 2018?
a. P120,000; P220,000 c. P120,000; P210,000
b. P120,000; P100,000 d. P110,000; P220,000
4. In the immediately preceding problem, what is the tax due and payable respectively in 2019 and 2020?
a. P190,000; P 0 c. P 0; P 0
b. P190,000; P180,000 d. P170,000; P 0
5. Shown below are the operating results of Bulalacao Corporation since its start of operations:
Gross income Deductions

2015 P 4,000,000 P 5,000,000
2016 4,500,000 5,200,000
2017 5,500,000 5,000,000
2018 6,000,000 5,800,000
2019 6,500,000 6,100,000
2020 7,000,000 6,200,000
What is the income tax due respectively in 2018 and 2019?

a. P120,000; P 0 c. P0; P120,000
b. P120,000; P70,000 d. P0; P130,000
6. In the immediately preceding problem, what is the income tax due in 2020?
a. P240,000 c. P120,000
b. P230,000 d. P110,000
240
7. A corporation reported its first profits in 2020 since its start-up in 2017. The following summarizes its results of
operations:
Sales, net of discounts and
allowances P 5,000,000
Gross Income P 3,000,000
Regular allowable deductions P1,200,000
Special allowable deductions 200,000
NOLCO 500,000 1,900,000
What is the income tax due?

a. P 0 c. P60,000
b. P 30,000 d. P100,000
8. A corporate taxpayer had the following data on its fifth year of operation:

Sales P 2,000,000 P 3,000,000 P 5,000,000
Less: Cost of services 1,200,000 1,800,000 3,000,000
Gross income
from operation 800,000 P 1,200,000 P 2,000,000
Interest on deposit 50,000 250,000 300,000
Total Income P 850,000 P 1,450,000 P 2,300,000
Less: Business expenses 800,000 1,300,000 2,100,000
Net income P 50,000 P 150,000 P 200,000
What is the tax due assuming the taxpayer is a domestic corporation?

a. P 60,000 c. P45,000
b. P 46,000 d. P40,000
9. In the immediately preceding problem, what is the tax due if the corporation is a
resident foreign corporation?
a. P 0 c. P16,000
b. P15,000 d. P17,000
10.A domestic corporation reported the following income in its fifth year of operation:
Within Without Total
Gross income P 4,000,000 P 3,000,000 P 7,000,000
Less: Deductions 3,500,000 3,400,000 6,900,000
Gross income P 500,000 (P 400,000) P 100,000
Compute the income tax due.

a. P 30,000 c. P140,000
b. P 80,000 d. P150,000
11.In the immediately preceding problem, what is the income tax due assuming the taxpayer is a resident foreign
corporation?
a. P 30,000 c. P140,000
b. P 80,000 d. P150,000
12.A corporation which started operations in 2016 had the following results of operations:
2018 2019 2020

Gross income P 3,500,000 P 5,000,000 P 7,000,000
Less: Business expenses 3,400,000 5,300,000 6,400,000
Net income P 100,000 (P 300,000) P 600,000
What is the income tax due in 2019?

a. P 0 c. P90,000
b. P60,000 d. P100,000
13.In the immediately preceding problem, what is the tax due in 2020?
a. P 80,000 c. P140,000
b. P 90,000 d. P180,000 241
14.A corporation which started operations in 2015 reported the following:

2019 2020
Gross income from operations P 500,000 P 1,000,000
Rent income 200,000 200,000
Less: Business expenses 820,000 850,000
What is the tax due in 2019?

a. P 0 c. P14,000
b. P10,000 d. P60,000
15.In the immediately preceding problem, what is the tax due and payable in 2020?
a. P105,000 c. P69,000
b. P95,000 d. P55,000
16.Enteng Unlimited started operations in 2012. The following shows details of its income in 2020:
2018 2019 2020

Gross income P 1,000,000 P 2,000,000 P 8,000,000
Expenses 2,000,000 2,500,000 6,000,000
Operation had been profitable since start of operation except that a major strike in 2018 and 2019 caused major
problems in business operations.
Enteng Unlimited requested for lifting of the MCIT which was granted for the years 2018 and 2019. Compute the
income tax payable in 2020.
a. P 450,000 c. P 150,000
b. P 160,000 d. P 0
17.Compute the taxable income of Excellence Unlimited in 2020 if it opted to use optional standard deduction.
a. P450,000 c. P 1,200,000
b. P600,000 d. P 1,440,000
Multiple Choice: Problems - Part 2

1. Calatrava Corporation had the following data in 2020:
MCIT RCIT CWTs

First quarter P 500,000 P480,000 P 150,000
Second quarter 450,000 490,000 120,000
Third quarter 500,000 520,000 140,000
Fourth quarter 700,000 480,000 160,000
There were excess MCIT of P70,000 and P130,000 respectively in 2018 and 2019. What is the income tax payable in
the second quarter?
a. P350,000 c. P150,000
b. P240,000 d. P120,000
2. What is the income tax payable in the fourth quarter?

a. P380,000 c. P600,000
b. P400,000 d. P700,000
3. A regional operating headquarters of a multinational company reported a net operating loss on its fifth year of
operations:
Gross receipts P 4,000,000

Less: Direct cost of services 2,800,000
Other business expenses 1,500,000
What is the tax due?

a. P 0 c. P100,000
b. P24,000 d. P120,000
242
4. The following relates to the MCIT and RCIT of Tamparan Corporation:
MCIT RCIT
2017 P 80,000 P 0
2018 120,000 50,000
2019 110,000 90,000
2020 100,000 105,000
2021 120,000 140,000
What is the tax still due in 2020?

a. P 100,000 c. P25,000
b. P 75,000 d. P 0
5. In the immediately preceding problem, what is the tax still due in 2021?
a. P 95,000 c. P 20,000
b. P 75,000 d. P 0
6. The following were the MCIT and RCIT of a corporation from 2015 through 2020:
MCIT RCIT
2015 P 90,000 P 0
2016 120,000 60,000
2017 115,000 80,000
2018 70,000 75,000
2019 35,000 40,000
2020 85,000 100,000
What is the tax still due in 2020?

a. P100,000 c. P45,000
b. P 65,000 d. P 0
7. The income statement of Tubigon Corporation is shown below:
Sales, net of 5% creditable withholding tax P 2,850,000

Cost of sales 1,900,000
Gross income P 950,000
Rental income, net of P5,000 95,000
Total gross income P 1,045,000
Less: Allowable deductions 1,000,000
Net income P 45,000
The corporation made an estimated tax payment of P10,000 during the year. What is the income tax refundable?
a. P133,000 refundable c. P105,000 refundable
b. P143,000 refundable d. P95,000 refundable
8. The Paluan Corporation had the following excess MCIT in prior years:
Excess MCIT - 2016 P 80,000

Excess MCIT - 2017 40,000
In 2020, the RCIT and MCIT were respectively P230,000 and P210,000. What is the income tax due and payable?
a. P 30,000 c. P110,000
b. P 50,000 d. P130,000
243
9. The quarterly MCIT, RCIT and creditable withholding tax of Taraka Corporation are shown below:
MCIT RCIT CWTs
First quarter P 800,000 P 700,000 P 250,000
Second quarter 600,000 900,000 220,000
Third quarter 1,000,000 600,000 340,000
Fourth quarter 500,000 800,000 260,000
Taraka Corporation also had P120,000 excess creditable withholding tax and P 180,000 excess MCIT still outstanding
from the prior year.
What is the income tax payable in the second quarter?

a. P400,000 c. P470,000
b. P430,000 d. P520,000
10.What is the income tax payable in the fourth quarter?

a. P140,000 c. P180,000
b. P160,000 d. P210,000
11.A domestic corporation was assessed by the BIR for improperly accumulated earnings tax. Relevant to the
determination of the IAET are the following data:

Allowable deductible expenses 3,200,000
Interest income, net of tax 40,000
Gain on sale of domestic stocks, net of tax 60,000
Dividends declared 400,000
Common stocks, excluding P200,000 share premium 400,000
Retained earnings 500,000
What is the improperly accumulated earnings tax?

a. P 75,000 c. P26,000
b. P 36,000 d. P 6,000
12.A domestic corporation was assessed on its fifth year of operation for improperly accumulated earnings tax:

Allowable deductions, including
P600,000 NOLCO 3,800,000
Exempt income 240,000
Dividend declared 600,000
At the start of the year, retained earnings exceeded paid up capital by P120,000.
What is the improperly accumulated earnings tax?

a. P50,000 c. P36,000
b. P48,000 d. P32,000
13.The following data relates to a taxpayer assessed for improperly accumulating profits:
Taxable income P 1,200,000
Net operating loss carry-over 400,000
Appropriation for plant expansion 400,000
Dividend declared 700,000
Minimum corporate income tax 380,000
The common stocks exceed retained earnings by P50,000.
Compute the improperly accumulated earnings tax.

a. P 17,000 c. P22,000
b. P 19,000 d. P24,000
244
14.A foreign branch remitted the following profits to its head office abroad:
Taxable income, net of regular income tax P 1,200,000
Net capital gains on sale of domestic stocks 135,000
What is the branch profit remittance tax?

a. P 0 c. P180,000
b. P120,000 d. P200,250
15.A resident foreign corporation branch had the following results of operations in 2020, the fifth year of its
operations:
Gross income from sales of goods P 5,000,000

Less: Allowable deductions 4,800,000
The branch intends to remit all profits after applicable taxes to the home office. What is the branch profit remittance
tax?
a. P 0 c. P15,000
b. P10,000 d. P20,000
16.A closely-held corporation which started operation in 2015 reported the following data:
Year 2019:
Gross income from operations P 2,000,000
Less: expenses 2,800,000
Net operating loss (P 800,000)
Year 2020:
Less: Expenses 5,000,000
Rent income, gross of 5% withholding tax 100,000
Interest on money market placement,
net of 20% final tax 160,000
Inter-corporate dividends received 800,000
Dividends paid by the corporation 700,000
Tax paid, first three quarters 45,000
The BIR assessed the corporation for improperly accumulated earnings tax. The corporation had P2,000,0000 paid-
up capital and P1,800,000 retained earnings beginning.
Compute the income tax still due respectively in 2019 and 2020.
a. P 0; P 122,000 c. P 40,000; P 122,000
b. P 0; P 72,000 d. P 40,000; P 50,000
17.Compute the improperly accumulated earnings tax.

a. P 63,000 c. P 103,800
b. P 93,800 d. P 143,800
18. Cubao Corporation reported P4 million in paid up capital, P1 million in additional paid up capital and P6 million
in retained earnings, inclusive of P1.5 million appropriation for plant expansion. Cubao Corporation was
assessed by the BIR improperly accumulating profits. Compute the IAET.
a. P600,000 c. P200,000
b. P450,000 d. P50,000
245

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INCOME

REX B. BANGGAWAN, CPA, MBA

1. Non-assignment of taxes C and I (This is non-delegation)

3. Taxes must be for public use I

MULTIPLE CHOICE – Theory: Part 1

2. Which of the following inappropriately describes the nature of taxation?

4. A. The power to tax includes the power to exempt.

5. International double taxation can be mitigated by any of the following except

6. Which is not an object of taxation?

10. A. Taxation is the rule, exception is the exemption.

11. Select the incorrect statement.

12. Which is not a public purpose?

13. Which does not properly describe the scope of taxation?

14. All of these are secondary purposes of taxation except

15. What is the theory of taxation?

16. A. Taxes should not operate retrospectively.

17. Which provision of the Constitution is double taxation believed to violate?

18. Which limitation of taxation is the concept of “situs of taxation” based?

19. Which tax exemption is irrevocable?

21. Which is the most incorrect statement regarding taxes?

23. Which of the following acts in taxation is administrative by nature?

Which statement is true?

26. Which is not legislative act?

27. Statement 1: Taxation is the rule; exemption is the exception.

33. Which is not legally tenable in refusing to pay tax?

34. What is the primary purpose of taxation?

4. Which is not a Constitutional limitation?

5. Which of the following is not an inherent limitation of the power to tax?

8. The following are limitations of taxation:

9. The provisions in the Constitution regarding taxation are

10. The Constitutional exemption of non-stock, non-profit educational institutions refers to

11. Which of the following is violative of the principle of non-delegation?

Is this valid exercise of taxation power?

Is Ram’s contention valid?

20. Which of the following normally pays real property tax?

21. Tax exemption bills are approved by

MULTIPLE CHOICE – Theory: Part 3

2. Which is not a legislative act?

4. Which is mandatorily observed in implementing police power?

5. Which is considered in the exercise of eminent domain?

8. In exercising taxation, the government need not consider

10. Select the correct statement.

11. Which is principally limited by the requirement of due process?

Which statement is correct?

14. Select the correct statement.

15. Which of the following is not exercised by the government?

16. Select the incorrect statement.

19. Select the correct statement.

22. Select the incorrect.

Exercise Drill No. 1

Exercise Drill No. 2

Exercise Drill No. 3

Multiple Choice – Theory: Part 1

2. All are ad valorem taxes, except one. Select the exception.

3. Taxation power can be used to destroy

5. Which of the following is a local tax?

6. Which is not a source of tax law?

7. Tax as to purpose is classified as

8. Tax as to incidence is classified as

9. Tax as to source is classified as

10.Which is not a nature of tax?

11.Taxes that cannot be shifted by the statutory taxpayer are referred

12.Which is a local tax

13.As to subject matter, taxes do not include