PRACTICE EXERCISES

ON
INCOME TAX

BY
JEANEFER B. REYES CPA MPA
QUESTION.1
Dilla received the following from Sun Company during the year:
Monthly salary P 15,000
Monthly rice allowance 2,000
13th month pay 15,000
Loyalty award for 20 years service 20,000
Clothing allowance 7,000
Grocery items allowance per month 1,000

The monthly rental of his dormitory is being paid by the company

at P1,700 a month.
COMPUTE the following -
a. Taxable compensation income if Dilla is a rank-and-file
employee.
b. Tax due of Dilla
c. Monthly fringe benefit tax due on the dormitory if Dilla is a
supervisory employee.
 SOL.1
A. Salary (15,000 x 12) 180,000
De Minimis benefits
Rice allowance (2,000) x 12 24,000
Clothing allowance (7 – 6) 1,000
Grocery Allowance (1,000 x 12) 12,000
Total De Minimis benefits 37,000
Exempted Compensation
13th month pay 15,000
Loyalty award 20,000
Total exempted compensation 35,000
Less: Exemption 90,000 -
Rental of apartment (1,700 x 12) 20,400
Taxable Income 182,400
Less: Salary Exemption 250,000
Tax due -

B. FBT (1,700 x 50% / 65% x 457.70

35%)
DE MINIMIS BENEFITS
19) The following de minimis benefits are not subject to FBT and Income Tax
a) Monetized unused vacation leave credits of PRIVATE employees not exceeding ten (10) days
during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO
GOVERNMENT OFFICIALS AND EMPLOYEES;
b) Medical cash allowance to dependents of employees not exceeding P1,500.00 per employee per
semester or P250 per month;
c) Rice subsidy of P2,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than
P1,500.00;
d) Uniform and clothing allowance not exceeding P6,000 per annum;
e) Actual yearly medical benefits not exceeding P10,000 per annum;
f) Laundry allowance not exceeding P300 per month;
g) Employees achievement awards, e.g., for length of service or safety achievement, which must be
in the form of a tangible personal property other than cash or gift certificate, with an annual
monetary value not exceeding P10,000 received by the employee under an established written
plan which does not discriminate in favor of highly paid employees;
h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per
employee per annum;
i) Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty five
percent (25%) of the basic minimum wage.
j) Benefits received by an employee by virtue of a collective bargaining agreement (CBA);
and Productivity incentive schemes (RR 1-2015); Provided, that the total annual monetary value
received from the two (2) items combined, do not exceed P10,000.00 per employee per taxable
year.
QUESTION.2
Ang Company operates different branches in key cities of the country.
The managers being assigned in the branch offices usually come from
the main office in Manila. Because of this practice, they usually lease
residential houses for their branch managers. During the year, they
paid monthly rental of P9,520 for the residential house in Naga City.
COMPUTE the following:
Fringe benefit tax per month on the fringe benefits furnished by Ang
Corporation to its branch manager in Naga City.  

Fringe benefit tax per month if Ang Company owns a condominium unit
which was allowed to be used as residence by the manager. The
market value of which as determined by the Commissioner of Internal
Revenue is P3,264,000 while the value per City Assessor is
P2,500,000.
Fringe benefit tax per month if Ang Company purchased a
condominium unit on installment at a contract price of P3,699,200
and allowed the branch manager to use it as his residence.
SOLUTION. 2
Monthly FBT (9,520 x 50% / 68% x 32%) 2,240

Monthly FBT [(3,264,000 x 5% / 12 x 50%) / 68% x 32%] 3,200

Monthly FBT [(2,699,200 x 5% / 12% x 50% / 68% x 32%] 3,627

FRINGE
 
BENEFITS TAX
 Fringe Benefits Tax (FBT) - is a final withholding tax
imposed on the grossed-up monetary value of the fringe
benefit furnished, granted or paid by the employer to
managerial or supervisory employees, whether such employer
is an individual, professional partnership or corporation,
regardless of whether the corporation is taxable or not, or the
government and its instrumentalities. (Section 33, RA 8424,
RR No. 3-98)
 FRINGE BENEFITS TAX
The term “FRINGE BENEFIT” means any good, service, or other benefit furnished
or granted by an employer in cash or in kind, in addition to basic salaries, to an
individual employee (except rank and file employee) such as but not limited to the
following:

HEV – HIM - HELF

1) Housing;
2) Expense Account;
3) Vehicle of any kind;
4) Household personnel, such as maid, driver and others;
5) Interest on loan at less than market rate to the extent of the difference between the
market rate and the actual rate granted;
6) Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
7) Holiday and vacation expenses;
8) Educational assistance to the employee or his dependents;
9) Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows; and
10)Expenses for foreign travel;
 KIND OF FRINGE BENEFIT VALUATION

HOUSING
MV = Rental Paid x
Employer leases a residential property for the use of his employee
50%

Employer owns a residential property and the same is assigned for the use of his MV = (FMV vs. ZV,
employee whichever is higher)
x 2.5%

Employer purchases a residential property on installment basis and allows the employee MV = AC x 2.5%
to use the same AC should be net of
interest

Employer purchases a residential property and transfers ownership in the name of the
MV = AC vs. ZV,
employee
whichever is higher

MV = (FMV vs. ZV,

Employer purchases a residential property and transfers ownership to his employee, at a
whichever is higher)
price less than the acquisition cost
– Cost to the
Employee
 KIND OF FRINGE BENEFIT VALUATION

MOTOR VEHICLE
Employer purchases motor vehicle in the name of the employee MV = AC

Employer provides cash for the purchase of a motor vehicle MV = Cash given

Employer purchases the car on installment basis, the ownership of which is

MV = AC/5 years
placed in the name of the employee

Employer shoulders a portion of the amount of the purchase price of a motor MV = Amount shouldered
vehicle the ownership of which is placed in the name of the employee by the employer

MV = AC of all motor
Employer owns and maintains a fleet of motor vehicles for the use of the
vehicles for personal use/5
business and the employees
years x 50%

MV = Rental payments of
Employer leases and maintains a fleet of motor vehicles for the use of the
all motor vehicles for
business and the employees
personal use x 50%
The following fringe benefits are not subject to FBT:
1) Housing privilege of military officials of the Armed Forces of the Philippines
(AFP);
2) A housing unit which is situated inside or adjacent (within 50 meters from the
perimeter of the business premises) to the premises of a business or factory;
3) Temporary housing for an employee who stays in a housing unit for three (3)
months or less;
4) Expenses incurred by the employee which are paid by the employer and
expenses paid for by the employee but reimbursed by his employer, provided:
a) The expenditures are duly receipted for and in the name of the employer; and
b) It does not partake the nature of a personal expense attributable to the employee;
5) Representation and transportation allowances which are fix in amounts and
are regularly received by the employees as part of their monthly
compensation (subject to basic tax);
6) Inland travel expenses (such as expenses for food, beverages and local
transportation) during foreign travel;
7) Lodging cost in a hotel (or similar establishments) amounting to an average
of US$300.00 or less per day during foreign travel;
8) Cost of economy and business class airplane ticket for foreign travel;
9) 70% of the cost of first class airplane ticket for foreign travel;
 10) Educational assistance to the employee, provided:
a) The education or study is directly connected with the employer’s trade, business or profession; and
b) There is a written contract between them that the employee is under obligation to remain in the employ of
the employer for a period of time they have mutually agreed upon;
10) Educational assistance to the dependents of the employee, provided that the assistance
was provided through a competitive scheme under the scholarship program of the
Company;
11) Contributions of the employer for the benefit of the employee:
a) Pursuant to the provisions of existing law, such as under SSS and GSIS; or
b) Similar contributions arising from provisions of any other existing law;
12) The cost of premiums borne by the employer for the group insurance of his
employees;
13) Fringe benefits which are authorized and exempted from income tax under the Tax
Code or under any special law;
14) Contributions of the employer for the benefit of the employee to retirement, insurance
and hospitalization benefit plans;
15) Benefits given to the rank and file;
17) The fringe benefit is required by the nature of or necessary to the trade, business or
profession of the employer; or
18) When the fringe benefit is for the convenience or advantage of the employer;
FORMULA:
Grossed-up Monetary Value PXXX
Rate XX%
FBT PXXX

GROSSED-UP MONETARY VALUE (GMV)

FORMULA:
GMV = Monetary Value (MV)/GMV Factor
GMV Factor = 100% - FBT Rate
GMV = MV + FBT

MONETARY VALUE
In GENERAL,
KINDthe
OFvaluation
FRINGE of BENEFIT
fringe benefits shall be as follows: VALUATION

1. Money Amount of money

Fair Market Value vs. Zonal Value
2. Non-cash property and ownership is transferred
(whichever is higher), if applicable
3. Non-cash property and ownership is not
Depreciation value of the property
transferred
 KIND OF FRINGE BENEFIT VALUATION

INTEREST
Employer lends money to his employee free of interest
MV = Principal x 12%
Employer lends money to his employee at a rate lower
MV = Principal x (12% - Actual Rate)
than 12%

RATE
RC, NRC, OCW, RA and NRA-ETB 35%

NRA-NETB 25%

SFE 15%

SAE 15%
QUESTION 3
Sheryl had the following income and expenses:
Compensation income, Philippines (gross of P10,000 WT) P 120,000
Business income, Philippines 350,000
Business income, Canada $ 200,000
Vacant lot inherited from her mother, Baby P 500,000
Cash dividend from Le Corp., a domestic company 40,000
Share in the net income of a business partnership 50,000
Winnings in lotto, Philippines 1,540,000
Business expenses, Philippines 220,000
Business expenses, Canada $ 150,000
Proceeds of life insurance policy as a result of death of Baby.
Her daughter Sheryl is the appointed beneficiary (premiums 250,000
paid – P60,000)

Exchange rate: Canadian $1 = P25

CONTINUED…
Question no 3.
COMPUTE –
a.The income tax payable if she is a Filipino citizen, married with
one legitimate child, residing in Camarines Sur.
b.The total final taxes paid by Sheryl if she is a resident citizen.
c. The taxable income if Sheryl is an american, married, residing
in Manila.
d. The taxable income if Sheryl is an american, married, residing
in U.S. but not engaged in trade or business in the Philippines
(assume that the compensation income is not included).
e. The taxable income if Sheryl is a Filipina, married, residing in
Manila and opted to avail of the optional standard deduction –
SOLUTION 3 A
Taxpayer is resident citizen.
Compensation income, Phil 120,000
Bus income, Phil 350,000
Bus income, Can ($200,000 x P25) 5,000,000
Total gross income 5,470,000
Less: Deductions
Exp, Phil 220,000
Exp, Canada ($150,000 x 25) 3,750,000 3,970,000
Net income 1,500,000

Tax on P800,000 130,000

700,000 x 30% 210,000
Income tax due 340,000
Less: Withholding tax 10,000
Income tax payable 330,000
SOLUTION NO. 3 B

Dividend (40,000 x 10%) 4,000

Share – partnership (50,000 x 10%) 5,000

Total final tax 9,000

SOLUTION NO. 3 C
Taxpayer is a resident alien.
Comp income, Phils 120,000
Bus income, Phils 350,000
Gross income 470,000
Less: Exp, Phils 220,000
Taxable Income 250,000
SOLUTION NO. 3 D
Taxpayer is NRA NETB.
Bus income, Phils 350,000
Dividend - domestic company 40,000
Share - net income of partnership 50,000
Gross income 440,000
Rate 25%
Final tax 110,000
SOLUTION NO. 3 E
Opted to avail of OSD.
Comp income   120,000
Bus income, Phils   350,000
Bus income, Can  5,000,000
Total  5,350,000
OSD (5,350,000x40%)  2,140,000 3,210,000
Taxable income   3,330,000

THANK YOU
QUESTION NO. 6
Kat Corporation had the following data in 2015:
Gross income, Philippines P 600,000
Gross income, U.S.A. 500,000
Expenses, Philippines 300,000
Expenses, U.S.A. 300,000
Interest on time deposit 10,000
Interest on money market placement, net of tax 21,000

COMPUTE the income tax due and final taxes payable if Kat
Corporation is a:
a. Domestic
b. Resident foreign
c. Nonresident foreign
SOLUTION NO. 6 A
Gross income, Phils 600,000
Gross income, U.S.A. 500,000
Total 1,100,000
- Deductions
Exp, Phils 300,000
Exp, U.S.A. 300,000 600,000
Taxable income 500,000
Rate of tax 30%
Income tax due 150,000

Interest on time deposit 10,000

Rate of tax 20%
Final withholding tax on interest 2,000

Interest- money market (21,000/80%) 26,250

Rate of tax   20%
Final withholding tax   5,250
SOLUTION NO. 6 B

Resident foreign corporation  

Gross income, Philippines P 600,000
Less: Expenses, Philippines 300,000
Taxable income 300,000
Rate of tax 30%
Income tax due 90,000
Interest on time deposit 10,000
Rate of tax 20%
Final withholding tax on interest 2,000
Interest-money market (21,000/80%)  26,250
Rate of tax  20%
Final withholding tax   5,250
SOLUTION NO. 6 C
Nonresident foreign corporation  
Gross income, Philippines P 600,000
Interest on time deposit 10,000
Interest-money market (21,000/70%)  30,000
Total gross income 640,000
Rate of tax 30%
Final withholding tax 192,000
QUESTION. 7
Mita Corporation had the following data:
Gross sales P 10,000,000
Sales returns 20,000
Capital gain 25,000
Rent income 100,000
Interest on bank deposit 5,000
Cost of goods sold 6,000,000
Itemized deductions 2,500,000

COMPUTE the income tax payable if -

a. The corporation decides to avail of the optional standard
deduction.
b. The corporation avails of the itemized deduction.
SOLUTION 7
Optional Itemized
Gross sales P10,000,000 P10,000,000
Capital gain 25,000 25,000
Rent income 100,000 100,000
Total income 10,125,000 10,125,000
Less: Sales returns 20,000 20,000
Cost of goods sold 6,000,000 6,000,000
Deduction from total income 6,020,000 6,020,000
Gross income 4,105,000 4,105,000
Less: Deductions
Itemized 2,500,000
Optional (4,105,000 x 40%) 1,642,000 ________
Taxable income 2,463,000 1,605,000
Rate of tax 30% 30%
Income tax 738,900 481,500
QUESTION. 8
The Fatima University is a private educational institution. During
the year, it had the following income and expenses:
  Tuition fees P 10,000,000

  Miscellaneous fees 1,500,000

  Dividend from domestic corporation 50,000

  Interest on bank deposit 10,000

Income of hospital being used primarily as training ground
  of nursing and other medical course students 2,400,000
Rent income from a building which is being leased to
  commercial establishments 120,000
Allowable deductions 4,500,000
SOLUTION 8
8. Step 1: Computation of applicable income tax rate
 

Related Unrelated
Tuition fees P10,000,000
Miscellaneous fees 1,500,000
Dividend-domestic corporation P 50,000
Interest on bank deposit 10,000
Income of hospital 2,400,000
Rent income _________ 120,000
Totals 13,900,000 180,000

Gross Income (13,900,000 + 180,000) = 14,080,000

180,000 .
% of unrelated activityto gross income 14,080,000 = 1.28%
Applicable income tax rate 10%
SOLUTION 8
Step 2: Computation of income tax due

Tuition fees P 10,000,000

Miscellaneous fees 1,500,000
Income of hospital 2,400,000
Rent income 120,000
Gross income 14,020,000
Less: Allowable deductions 4,500,000
Taxable income 9,520,000
Rate of tax 10%
Income tax due 952,000
 QUESTION NO. 9
Dina, single, supporting her mother who died in 2015, has the
following data:
2014 2015 2016
Ordinary net income P150,0 P200,000 P125,000
00
Sale of capital assets:
Held for less than 12 months
Capital gain 20,000 60,000
Capital loss 35,000
Held for more than 12 months
Capital gain 90,000
Capital loss 80,000 20,000

COMPUTE -
The taxable income in 2014, 2015 and 2016.
The taxable income in 2014, 2015 and 2016 if Dina is a corporation.
SOLUTION NO. 9
2014 2015 2016

NI 150,000 200,000 125,000

STCG(100%) 20,000 60,000

STCL ( 100%) ( 35,000)

LTCL(50%) (40,000) (10,000)
LTCG ( 50%) _____ 45,000 _____
NCL / NCG (20,000) 10,000 50,000

CLCO, limit ( 10,000)

PE ( 50,000) (50,000) ( 50,000)

TI 100,000 150,000 125,000

QUESTION 10

Liwan, not habitually engaged in real estate business, sold a

commercial land for P5,000,000. The zonal value of the
property is P3 million while the market value in the tax
declaration is P2.8 million.

Is the transaction subject to creditable withholding tax or to

capital gains tax? How much?
SOLUTION 10

Selling price (highest) 5,000,000

CWT rate (not habitually engaged) 6%

CWT 300,000
QUESTION 11
Michael sold a 500 square meter land for P3,000,000. The
value as determined by the Commissioner of Internal
Revenue is P3,000 per square meter, while the market
value in the tax declaration is P2,200,000.

COMPUTE for the income tax and give the nature of the
tax if:
The land is a capital asset.
The land is an ordinary asset and the seller is habitually
engaged in real estate business.
The land is an ordinary asset and the seller is not habitually
engaged in real estate business.
SOLUTION 11

(a) (b) (c)

SP (highest) (500 x 3,000,000 3,000,000 3,000,000
300)
Rate of tax 6% 5% 6%
Capital gain tax 180,000
Creditable W/T 150,000 180,000
QUESTION 12
On February 5, Marquez sold a 50 square meter residential
condominium unit for P3,200,000. The unit was acquired three
(3) years ago for P1,950,000. On the date of sale, the fair market
value of the condo unit as shown in the real property declaration
is P2,750,000 and the assessed value amounts to P550,000. The
zonal value is P60,000 per square meter.

COMPUTE:
The capital gains tax is.
The capital gains tax of Marquez if the proceeds of sale shall be
utilized in acquiring a new residence.
The cost basis of the new residence.
The amount to be deposited in escrow if the proceeds of the sale
shall be utilized in acquiring a new residence.
The capital gains tax payable assuming that P1,000,000 of the
proceeds will be unutilized in acquiring a new residence.
SOLUTION 12
(a) Selling price (highest) 3,200,000
Rate of tax 6%
Capital gains tax 192,000

(b) None

(c) P 1,950

(d) Selling price (highest) 3,200,000

Rate of tax 6%
To be deposited in escrow 192,000
Proceeds of sale (50 x 60,000) 3,000,000
Less: Unutilized portion 1,000,000
Utilized 2,000,000

CGT ( 1/3 x 3,200,000) x 6% 64,000

QUESTION 13
Carmi Bookstore loaned from Metrobank an amount of
P200,000 for the purchase of computer in its office. The loan
is payable in one (1) year beginning June 30, 2016 at an
interest rate of 20%. The equipments with an estimated useful
life of 10 years were purchased on August 1, 2016.
In the same year, Carmi Bookstore earned an interest income of
P2,000, gross of tax, out of its time deposit with Banco de
Oro. The same was subjected to final tax. It had also incurred
an interest expense of P300 on unpaid value-added tax.

COMPUTE the deductible amount of interest expense in 2016 if

it is treated as (1) an expense, or (2) as a capital expenditure.
SOLUTION 13
Interest is treated as an expense
Interest expense on loan (200,000 x 20% x 6/12) P 20,000
- Interest income - final tax (2,000 x 33%) 660
Net 19,340
+ Interest expense on unpaid VAT 300
Deductible interest 19,640

Interest is capitalized
Cost of equipment P 200,000
+ Interest on loan (200,000 x 20%) 40,000
Total cost 240,000

Depr (240,000/10 x 5/12) 10,000

Deductible interest (unpaid VAT) 300
Deductible amount 10,300
QUESTION 14
Kapuspalad, a domestic corporation, has the following
income and expenses during the year 2012:
Sales P 1,000,000
Cost of sales 350,000
Deductions (except contributions) 200,000
Contributions – deductible in full 20,000
Contributions - subject to limit 20,000

COMPUTE the taxable income of the corporation

SOLUTION 14
Sales 1,000,
000
- Cost of Sales 350,000
Gross income 650,000
- Deductions (except contributions) 200,000
Taxable income before contributions 450,000
- Contributions
Deductible in full P20,000
Subject to limit, actual 20,000
Limit (P450,000 x 5%) 22,500
Deductible (lower) 20,000 40,000
Taxable income 410,000
QUESTION NO 15
Mang Hiram engaged in business, loaned money from
Land Bank of the Philippines from which he had an
interest expense of P20,000. His deposit in the same
bank yielded an interest income of P2,000.

COMPUTE for the deductible interest expense of Mang

Hiram
SOLUTION 15

Interest expense 20,000

-Income subjected to tax
660
(2,000x33%)
Deductible interest expense 19,340
QUESTION NO. 16
Vicor Company, domestic, has net income from within the
Philippines of P200,000 and from the United States of
P300,000. Income tax paid on income from United
States is P110,000.

COMPUTE the tax credit on income tax paid to the United

States government.
SOLUTION 16
Net income, Philippines P200,000
Net income, US 300,000
Total net income 500,000
Rate of tax 30%
Income tax 150,000
- Tax credit 110,000
U. S. tax paid 90,000
Limit (300/500)x150,000 90,000
Estate tax payable 60,000
QUESTION 17
Kares is sent by her company to Bacolod City on a seven (7)
day employment-related business trip and incurs the
following expenses:

Plane ticket (Manila to Bacolod and vice-versa) P 4,500

Taxi fare 1,200
Meals 3,500
Hotel bills at Bacolod Pension Plaza 4,900
Laundry and other incidental expenses 600
Value of souvenir items purchased at Gaisano 3,500
Mall

COMPUTE the deductible travelling expense.

SOLUTION 17

Plane fare 4,500

Taxi fare 1,200
Meals 3,500
Hotel bills at Bacolod Pension Plaza 4,900
Laundry and other incidental 600
expenses
Deductible 14,700
END