QUIZZER IN TAXATION

GROSS INCOME

1. Which of the following is taxable with income tax at its gross amount when earned within
the Philippines?
a. Professional fee c. Business income
b. Compensation income d. Royalty income

2. Which of the following income is/ are earned through employee-employer relationship?
I. Professional fee
II. Wages
III. Pension pay
IV. Capital gain
a. I and III only c. II and III only
b. I and II only d. II only

3. Statement 1: Remuneration for casual labor not in the course of an employer's trade or
business is not considered as taxable compensation income.
Statement 2: Additional benefits received by the employee for the convenience of the
employer are not taxable income of the employee.
a. Only statement 1 is correct. c. Both statements are correct
b. Only statement 2 is correct. d. Both statements are not correct.

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

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

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

a. Professional fee, net of creditable withholding tax
b. Separation pay due to closure of the employer's business
c. Terminal pay inclusive of P15,000 13th month pay
d. Separation pay due to early retirement

6. Statement 1: All vacation leave and sick leave with pay are taxable compensation
income.
Statement 2: All unused vacation leave converted into cash are taxable.
a. Only statement 1.is correct. c. Both statements are correct.
b. Only statement 2 is correct. d. Both statements are incorrect.

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

a. Free housing given to employee
b. Social Security System Benefits
c. Retirement pay under a duly BIR approved benefit plan
d. Retrenchment pay

8. Which of the following is not taxable?

a. P2,500 for 10 days sick leaves actually taken
b. P1,250 for 5 days unused vacation leave converted into cash
c. P1,000 for unused vacation leave received as part of separation pay due to voluntary
resignation
d. P500 availed vacation leave

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

a. Cost of living allowance
b. De minimis benefits
c. Retirement benefit under BIR approved retirement plan
d. Retrenchment pay
10. Compensation income is earned when an employer-employee relationship exists. Which
of the following does not represent compensation income?
a. Honorarium of the company lawyer as a speaker in company sponsored seminar
b. Retainer's fee of a bookkeeper.
c. Emergency pay
d. Sick leave with pay

11. Transportation allowance is non-taxable if

I. Pre-computed on a daily basis.
II. Paid to employee while on duty.
III. Received by employee under employer's benefit rule.
a. I only c. II and III
b. I and II d. I, II and III

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

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

13. A stock dividend received in 200x from a domestic corporation by a nonresident

individual not doing business in the Philippines is
a. Subject to 10% final tax. c. Subject to 20% tax.
b. Subject to 25% tax. d. Not subject to tax.

14. Which of the following will result to earning of income by the debtor?
a. Cancellation of existing payables without any financial consideration
b. Cancellation of existing payables for services rendered to creditor
c. Cancellation of existing payable to offset the equivalent amount of collectible
d. Cancellation of existing payable due to bankruptcy of the debtor

15. Which of the following is income to the recipient?

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

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

I. Lodging served within the employer's premises and accepted by the employee as
a condition of employment,
II. Living quarter furnished to the employee for the convenience of the employer
III. Living quarter furnished outside the employer's premises
a. I only c. II and III only
b. I and II only d. II only

17. Statement 1; Remuneration for casual labor not in the normal course of business is not
considered compensation.
Statement 2: Remuneration for casual labor performed for a corporation is
considered compensation.
a. Only statement 1 is correct. c. Both statements are correct.
b. Only statement 2 is correct. d. Both statements are incorrect.

18. Property dividend received by resident citizens from domestic corporation is

taxable at
a. fair value of the property at date of declaration.
b. fair value of the property at date of settlement.
c. cost of the property at date of declaration.
d. cost of the property at date of settlement.

19. Cost of services may be defined as

a. cost of services to provide services.
b. cost of facilities directly utilized to provide services.
c. all direct costs and direct expenses necessary to provide services.
d. all cost involved in providing services.
20. The following are related items to the operation of a single proprietorship
business:
I.Purchases of goods for sale
II.Freight in of goods purchased
III.Sale of goods
IV.Freight out of goods sold
V.Unsold goods at the end of the period

Which of the above items are elements of cost of sales for tax purposes?
a. I, II,III, IV and V c. I, II, and IV only
b. I, II, IV and V only d. I, II, and V only

21. Which of the following tax refunds, which were incurred in the conduct of business is
taxable income of recipient?
a. Donor's tax c. VAT
b. Philippine income tax d. Documentary stamp tax

22. Statement 1: Income that is not realized is not taxable, but illegal income is taxable.
Statement 2: Income received under a mistake of fact or law is to be included as part
of the gross taxable income.
a. Only statement 1 is correct. c. Both statements are correct.
b. Only statement 2 is correct. d. Both statements are incorrect.

23. All of the following are income within, except

a. dividends declared by domestic corporation.
b. salaries earned by Filipino overseas contract workers.
c. interest on bonds issued by domestic corporation.
d. income from business located in the Philippines.

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

25. Mrs. Gemmarie Parong is a mining operator. Her mineral lands are not covered by any
lease contract. The tax Mrs. Parong has to pay based on the actual market value of the
gross output or mineral products extracted is
a. excise tax. c. rental.
b. royalties. d. ad-valorem tax.

26. Which of the following is not taxable income?

a. Bad debts previously deducted as item of expense and partially recovered
subsequently
b. Tax expense previously disallowed as deduction from taxable income, fully
refunded subsequently.
c. Income from gambling
d. Income from usurious financing

27. Insurance premium paid by employer in favor of the insured employee and designate the
business of the employer as the beneficiary. Which of the following statements is/are
correct?
Statement 1: The payment of insurance premium is taxable income of the employee.
Statement 2: The payment of insurance premium is deductible expense of the employer.
a. Only statement 1 is correct. c. Both statements are correct.
b. Only statement 2 is correct. d. Both statements are incorrect.
28. Statement 1: Property dividends received by individual from domestic corporation are
subject to final withholding tax.
Statement 2: Cash dividend received by a resident corporation from another foreign
corporation not doing business in the Philippines is subject to final withholding tax of
30%, if without reciprocity.
a. Interest income from savings account
b. Royalty income from franchise
c. Royalty income from patent
d. Royalty income from literary works

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

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

Gross Reportable Compensation

i. The employee reported a net take home pay of P180,000. The amount is net of
P30,000 withholding income tax and P1,000 SSS. The amount is inclusive of P5,000,
covering a 10-day vacation leave actually availed and P10,000 13th month pay. His
gross reportable compensation income is
a. P200,000. c. P190,000.
b. P195.000. d. P165,000.

Gross Taxable Compensation

ii. Marilou Badol has earned the following income in 200A:
Salary- as a professor, net of withholding tax of P50,000 P370,000
Professional fee as CPA, net of 10% CWT 270,000
Per diem as a board of director 200,000
Thirteenth month pay 35,000
First prize in essay writing contest 50,000
Sale of house and lot (capital asset) 500,000

What is the amount of gross taxable compensation income subject to normal tax?
a. P420.000 c. P620,000
b. P425,000 d. P625,000

Compensation Income
iii. The following items of income are reported by Cute, a CPA:
Salary as an accountant P150,000
Overtime pay 30,000
13th month pay and other bonuses 15,000
Audit retainer's fee 60,000
Capital gains from sale of car 25,000

The total compensation income from employment is

a. P180,000, c. P205,000.
b. P195,000. d. P255,000.

iv. Compensation Income

The following items of income are reported by Sexy:
Salary as guest relation officer P120,000
Tips, (from various customers) 360,000
Monetized 10-day unused vacation leave 4,000
13th month pay 10,000
Cost and living allowance 5,000
Achievement awards 20,000

How much is the gross taxable compensation income?

a. P480,000 c. P500,000
b. P485, 000 d. P505.000
Compensation Income
v. Jeffrey Miguel received the following during the taxable year 200A:
Salary from employment, net of P24,000 withholding tax P120,000
Overtime pay from employment 36,000
13th month pay 15,000
Remunerations from his contractual job:
One-year non-interest bearing notes
(dated December 30, 200B) 30,000
Payment of services rendered, net of P30,000 cancelled
indebtedness, 4,000
Interest income from bank, net of tax 330

The prevailing effective rate of non-interest bearing notes of the same kind is 10% per
year.

What is the reportable amount of taxable income before personal exemption for annual
ITR purposes?
a. P244.330 c. P241.270
b. P242,330 d. P190,270

Retirement Pay
vi. Sue reported the following retirement:
First employment for 30 years received at at the age of 50 P500,000
Second employment for 10 years received at the age of 60 400,000
Third employment for 10 years received at the age of 70 300,000

How much is the nontaxable retirement pay of Sue?

a. P-0- c P400,000
b. P300,000 d. P500,000

Separation Pay
vii. Gorgeous reported the following separation pay:
First employment for 20 years at the age of 40 - resigned P300.000
Second employment for 10 years at the age of 50
- retrenchment 200,000
Third employment for 10 years at the age of 60 - retirement 100,000

How much is the taxable separation pay?

a. P - 0 - c. P500,000
b. P300,000 d. P600,000

Stock Compensation
viii. Which of the following is the gross compensation income for 1,000 stock certificates

received as payment of services rendered to employer? The share of stock is selling at

P10 per share in the stock exchange. This has par value of P5 per share. The shares were
acquired by the employer at cost of P8 per share.
a. P8,000 c. P10,000
b. P5,000 d. Whichever is the lowest of a, b or c

Compensation from Stock Option

ix. An employee received stock option right for 10,000 shares of P10 par common stock at
option price of P12 per share for one-year service. At date of grant, the market price was
P13 per share and at date of exercise and sell of stock option, the market price was P15.
The compensation income and capital gain of the employee are
Compensation income Capital gain
a. P30,000 P20,000
b. P10,000 P20,000
c. P20,000 P30.000
d. P10,000 P50,000
Taxable Compensation from Stock Option
x. X, an officer of Y Corporation was given stock option for 10,000 shares with P20 par at
option price of P23. The market price for the share in year 202B, date of grant was
P25. The option was exercised and sold in year 202C when the market price was P30.
How much would be the taxable compensation income of X in year 202B and capital
gain in year 202C?
202B 202C
a. P35,000 P35,000
b. P30,000 P70,000
c. P20,000 P50,000
d. P- 0 - P20,000

Cancellation of Debt
xi. Bingcol works as the CEO of B Co. His compensation income is P50,000 per month. In
January 31, 202B, he borrowed P300,000 from B Co. As a result, his monthly
compensation income is reduced by P25,000 starting February, as payment to his
borrowing. If on December 31, 202B, after payment of P25,000 salary net of loan
amortization, B Co. cancelled Bingcol's indebtedness, how much is the latter's
compensation income in December 200B?
a. P25,000 c. P 75,000
b. P50,000 d. P100,000

Other Forms of Compensation

xii. During the year, Sico has the following benefits received from his employer:
Rice subsidy of P1,000 per month P12,000
Free housing as a requirement to perform his duty 24,000
Clothing allowance 1,000
Transportation allowance subject to liquidation 6,000
Insurance premium paid - the beneficiary is Sico's wife 5,000
SSS employer's share contribution 3,000

How much is the taxable benefits of Sico?

a. P-0- c. P21,000
b. P5,000 d. P45,000

Other Forms of Compensation

xiii. The following transactions were reported by Mr. Guardia related to his income during

the taxable year from January to December 202A:

1) He received a notice of cancellation of his indebtedness amounting to P10,000 from
his employer. Contained in the notice is to offset such amount from his basic
monthly compensation of P30,000.
2) 100 shares of stock as compensation for service rendered on October 31, 200A. The
market value of the shares of stock at the time when service was rendered was PI00
per share, but P120 per share when the shares were received on November 30, 202A.
3) A stock option of 100 shares was granted to Mr. Guardia. The market price per share
was P120 but the option price was P80 per share at the time of stock option exercise.
He subsequently sold the 50% of the shares at P130 per share.
4) His employer granted P4,000 annual insurance premium to Mr. Guardia for an
insurance policy of PI,000,000. It is stipulated that 50% of the proceeds of life
insurance will be received by Mr. Guardia's heirs.

What is the amount of the gross taxable compensation income of Mr. Guardia during
the taxable year?
a. P376,000 c. P378,000
b. P376,500 d. P386.000
xiv. Remuneration for Casual Labor
Ana, a single proprietor, employs the following persons for a short period of time and
pays their related remuneration

Workers Services rendered Status Amount

W Cleaning of business equipment 1 day work P1,000
X Repair service of store 10 day work 3,000
Y Repair of home refrigerator 3 day work 1,500
Z Baby sitter Casual (1month) 2,500

How much is the total remuneration considered as reportable

compensation from casual service rendered?
a. P3,000 c. P5,500
b. P4,000 d. P8,000

Cost of Goods Sold

xv. During the taxable year, the total purchases of goods for sale amounted to P500,000.
Transportation expenses are P5,000 for goods purchased and P10,000 for goods sold.
During the year, total sales amounted to P550.000. At the end of the year unsold
goods amounted to P40,000. The cost of goods sold for the period is
a. P505,000. c. P465,000.
b. P475,000. d. P460,000.

Cost of Sales
xvi. The following information is available to determine the cost of sale of X:

Purchases P1,200,000
Purchase discounts 10,000
Purchase returns 40,000
Transportation in 5,000
Freight out 4,000
Inventory, end 50,000
Inventory, beginning 20,000

How much is the cost of sale?

a. P95,000 c. P1,125,000
b. P1,185,000 d. P1,135,000

Cost of Sales
xvii. The following pertain to the 2-year operations of a trading business:

Year 1 Year 2
Inventory, end P 50,000 P 30,000
Purchases 850,000 900,000
Freight in 10,000 15,000
Purchase discount 20,000 25,000

The cost of sales for year 1 and year 2 are

Year 1 Year 2
a. P920,000 P890,000
b. P910,000 P790.000
c. P790,000 P910,000
d. P860,000. P790,000

Income from Manufacturing Business

xviii. A manufacturing business reported the following for its first year of operation:

Purchases of raw materials P 540,000

Freight in 20,000
Raw materials, ending inventory 10,000
Direct labor 400,000
Factory overhead 200,000
Work-in-process, ending inventory 100,000
Finished goods, ending inventory 50,000
Sales 1,275,000
Freight out 12,000
Sales return 25,000
Its gross business income is
a. P238,000. c. P228,000.
b. P250.000. d. P188.000.

Gross Service Income

xix. Before starting to render his service, X collected an advance payment of P2,000 for the

acceptance of the job contract. When the required service from X was completed, X
received P8,000 cash service fee after deducting the P2,000 advance payment, plus an
office machine with cash price value of P3.000 and P2,500 cost to the seller.
The gross service income of X is
a. P15,000. c. P11,000.
b. P13,000. d. P10,500.

Gross Service Income

xx. From the following data compute for the reportable gross business income of a
servicing business for MCIT purposes:
Professional fee, accounting services P500,000
Salaries of accounting staff 150,000
Salaries of office assistant 60,000
Accounting supplies 10,000
General supplies 5,000
a. P500,000 c. P280,000
b. P340,000 d. P275,000

Gross Income of Banks

xxi. BPI, Inc., reported the following income during the year:

Interest income from clients P50,000,000

Yield from money placements with other banks 20,000,000
Realized gain on trading securities thru stock market 10,000,000
Administrative and sales salaries expense 8,000,000
Lending and investments funds salaries 3,000,000
Interest expense paid to depositors 2,000,000
Miscellaneous expense 1,000,000

How much is the gross income of BPI subject for regular tax purposes?
a. P65,000,000 c. P48,000,000
b. P55,000,000 d. P45,000,000

Gross Income of Banks

xxii. Metrobank, Inc. reported the following during the taxable year:'

Interest income from clients P10,000,000

Gain on sale of capital assets 5,000,000
Rent income 2,000,000
Salaries of bank employees assigned on lending and
investments of funds 3,700,000
Salaries of Janitors and security guards 1,000,000
Depreciation of building 800,000
Depreciation of computers and teller machines used 600,000
Direct supplies used 200,000
Interest expense paid to depositors 1,500,000

How much is the gross income of Metrobank, Inc. for purposes of MCIT?
a. P17,000,000 c. P12,500,000
b. P12,700,000 d. P11,000,000
Telegraph and Cable Service Income
xxiii. How much of the following receipts of a foreign corporation would be reported as gross `

income for Philippine Income Tax computation?

Service charges for messages:

Originating from outside the Philippines sent to the Philippines P 500,000
Originating in the Philippines 150,000
Collection abroad of collect messages originating in the Philippines 60,000
Collection in the Philippines of collect messages originating outside
. the Philippines 10,000
a. P160,000 c. P560,000
b. P210,000 d. P520,000

xxiv. Rental Income

How much of the following amounts received in 200B will be included in the tax return
for the year 202B?
Rent for year 202A P 80,000
Rent for year 202B 480,000
Rent for year 202C 40,000
Refundable deposit 120,000
a. P720,000 c. P560,000
b. P600,000 d. P520,000

Rental Income
On March 1, 202A, Claudette leases a portion of its commercial building to Mark with
the following terms:
Advanced deposit P 40,000
Monthly rental 20,000
Annual insurance premium to be paid by the lessee 6,000
Portion (10 mos.) of real estate tax to be paid by lessee 3,000/yr

The lease contract also stipulates that a 5% of Mark's net revenue will be credited to
Claudette as commission. Mark's net revenue during the year is P2,000,000.

xxv. Claudette's 200A rent income would be

a. P69,000. c. P247,500.
b. P240.000. d. P347,500.

xxvi. Assume that the advanced deposit is restricted, the Claudette's gross reportable taxable
income would be
a. P347,500. c. P207,500.
b. P307,500. d. P169,000.

Income from Leasehold Improvements

xxvii. The lease dated January 1, 200B provided for construction of improvements at the cost

of the lessee, and the ownership will belong to the lessor at the end of 5-year lease
contract. The construction of improvements which was completed at the end of the 3rd
month of the contract amounted to P240,500. The improvement has an economic life of 8
years and estimated scrap value of P560. The rent income on improvements for year 1
under each method is
Outright Spread - Out
a. P240,500 P19,672
b. P147.620 P22,143
c. P239.940 P14.754
d. P240.500 P15,479 '
Income from Leasehold Improvement
xxviii. The following information are available related to a 10-year lease contract which

commenced on June 30, 202B:

Cost of improvement put up by the lessee P180,000
Estimated useful life of the improvement 12 years
Date completed December 31, 202B

The reportable income from leasehold improvement for year 200B is

Outright Method Spread-out Method
a. P180,000 P1,974
b. P180,000 P3,750
c. P180,000 P0
d. P180,000 P 3,947

Pre-Terminated Lease Contract

xxix. The following data are pertaining to a 5-year lease contract which started October 31,

202A:
Cost of improvement put up by the lessee P 300,000
Estimated Useful of the improvement 6 years
Date completed March 31, 202B

The income from leasehold improvement was reported by the lessor using the spread-
out method. Assuming that the lease contract was pre-terminated on December 31,
202D, how much would be the additional income in 200D from the pre-termination of
contract?
a. P137,500 c. P120,000
b. P135,455 d. P42,500

Interest Income
xxx. The following are the income of a resident citizen for the period:

Interest income from an investment in a 10-year bond P40,000

Interest income from 5-year time deposit in Philippine bank 50,000
Interest, income from expanded foreign currency deposit 60,000

His taxable interest income is

a. P150,000. c. P40,000.
b. P100,000. d. P0

Interest Income
xxxi. X is a beneficiary of P100,000 payable in 3 equal payments at 12% interest per year. The

P100,000 is payable in the following annuity table:

Year Annual pay Interest Principal

Balance
P100,000.00
1 P41,635 P12,000.00 P29,635.00 70,635.00
2 41,635 8,443.80 33,191.20 37,173.80
3 41,635 4,461.20 37,173.80 -0-
Total P24.905.00

The interest income earned by the beneficiary in year 3 is

a. P41,635.00. c. P24,905.00.
b. P37,173.80. d. P 4,461.20.

Royalty Income
xxxii. The following are the gross royalty income of a resident citizen for the period:

Royalty income as author P100,000

Royalty income from franchising 200,000
Royalty income from gold mine 500,000

The total final tax on royalty income is

a. P80,000 c. P130,000.
b. P100,000. d. P150,000.
Royalty Income
xxxiii. X, a resident citizen received P51,500 from his royalties, net of final taxes of P3,500 for

book copyrights and P5,000 for exclusive patent. These transactions are correctly
summarized as
Copyright Patent
a. Gross income of P17.500 P50.000
b. Income after tax of P31,500 P45,000
c. Gross income of P35,000 P20,000
d. Income after tax of P31,500 P20,000

Royalty Income
Pacman is a resident Filipino citizen, an inventor, a song writer and international
singer. He receives royalties within and outside the in Philippines as follows:

Royalties from pain reliever invention P100,000 P200,000

Royalties from musical compositions 200,000 300,000
Royalties from books 500,000 100,000

xxxiv. What is the amount final tax on. royalty income?

a. P80,000 c. P140,000
b. P90,000 d. P280,000

xxxv. What is the amount of royalty income subject to normal tax?

a. P0 c. P500,000
b. P300,000 d. P600,000

Dividend Income
xxxvi. A domestic corporation received P500,000 cash dividend from a foreign corporation the

earnings of which are 70% earned in the Philippines. The taxable dividend income of the
domestic corporation is
a. P500,000. c. P150,000.
b. P350,000. d. P100,000.

Property Dividend
xxxvii. A, a domestic corporation, invested P1,000,000 in 10,000 common shares of stock of B,

another domestic corporation. The investment represents 20% of the outstanding shares
of B. During the year, B declared property dividends of 20,000 common shares of
investment in common stock of C Corporation. The par value of C's share is P10 per
share. At time of declaration, the fair market value of the share was PI5 per share but
when A received the property dividend, the fair market value was P16.

How much is the taxable dividend income of A?

a. P0 . c. P60,000.
b. P40,000. d. P64,000.

Prizes and Winnings

xxxviii. Mario received the following prizes and winnings during the taxable year:
First prize in Talentadong Pinoy P10,000
2nd place in bicycle race 6,000
3rd place in chess tournament 15,000
4th place in a raffle draw 5,000

What is the total amount subject to normal tax?

a. P10,000 c. P31,000
b. P16,000 d. P36,000
Prizes and Winnings
xxxix. X received the following prizes and winnings:

First prize - raffle draw (cost of ticket, P1,000) P50,000

Philippine lotto winnings 1,000,000
Gambling winnings 300,000
Beauty contest winnings 100,000
How much is the taxable prizes and winnings?
a. P50,000 c. P349,000
b. P300,000 d. P449,000

Bad Debts Recovery

xl. The following information is available from the records of X:
Year 1 Year 2 Year 3
Income (loss) before bad debts written off
excluding bad debts recovery P100,000 (P20.000) P50.000
Bad debts written off 25,000 10,000 5,000
Previous year's write off, recover this year 30,000 8,000

For year 3, the total taxable income would be

a. P42.000. c. P48,000.
b. P45.000. d. P50,000.

Bad Debt Recovery

xli. The following ledger postings are available:

Allowance for Bad Debts

January 1, balance P1.500
Year 1 write off P 800
December 31, balance 1,300

Accounts Receivable
January 1, Year 1 P100,000
Year 2 sales Year 1 write off P 800
on account 100,800

For year 1, Net operating income of P500 was reported. In year 2, P600 of year 1 bad
debts written off was collected. The income from bad debt recovery to be reported would
be
Year 1 Year 2
a. P800 P600
b. P600 P600
c. None P500
d. None P600

Tax Refund
xlii. In year 1, A Company's net operating income reported was P20,000. The amount is

net of P100,000 operating expenses. Part of the operating expenses is P25,000 local
taxes.

In year 2, A company paid an income tax amounting to P12,000 and a VAT of

P1,000. In year 3, P5,000 of year 1 local tax and P2,000 income tax were refunded.
What amount of tax refund should be reported as part of year 3 taxable income?
a. P8,000 c. P6,000
b. P7,000 d. P5,000

Tax Refund
During the year, the following tax refunds were received by the taxpayer:
Real property tax deducted as expense in the previous year P10,000
Income tax paid in the previous year 5,000
Percentage on shares sold last year 2,000
Local taxes paid for the previous year 500
xliii. The income from tax refund to be reported should be

a. P17,500. c. P10,500
b. P12,500. d. P10,000.
Damage Recovery
Abner received the following amount in relation to damage recoveries:
Loss of property P5Q0,000
Unfair competition 400,000
Physical injuries 300,000
Loss earnings 100,000
Moral damages for breach of contract 150,000
Exemplary damages for breach of contract 50,000
Hospital expenses 50,000
Interest on damages 10,000

xliv. The gross income subject to tax from damage recoveries would be
a. P760,000. c. P660,000.
b. P710,000. d. P510,000.

Annuity
xlv. Mr. Normal received P20,000 as annuity of life insurance from Malayan Life. The annuity

received includes a much is the amount of taxable annuity?

a. P20,000 c. P1,818
b. P2,000 d. P0

Annuity
xlvi. X received an annuity of P5,880, inclusive of 12% interest as part of the insurance plan

entered into by X. What amount of this annuity is taxable against X?

a. P5,880 c. P706
b. P5,250 d. P630

Illegally Obtained Income

xlvii. Mr. X received a letter from Mr. Y, his brother, to withdraw $1,000 from the PNB. The

teller of PNB, however, issued $10,000 to Mr. X in which the latter took the entire
money and spent the $9,000 immediately. Assuming that the exchange rate is P50 per
$1, how much is the reportable income received by error of Mr. X?
a. P50,000 c. P500,000
b. P450,000 d. P0

Illegally Obtained Income

xlviii. Golang received a salary of P5,000 per month as a conductor of Philippine Lapid. Aside

from his salary, he also obtain some money from the changes of bus clients which he
intentionally neglect to return with a monthly average of P4,000 per month. If the BIR
assessed Golang using the hetworth method, and net increase in net asset is
determined at P150,000, how much of the illegally obtained income would be taxable?
a. P108,000 c. P48,000
b. P60,000 d. P42,000

i.

Net take home pay P180,000

Add: Withholding income tax 30,000
Total P210,000
Less: 13th month pay 10,000
Gross reportable compensation P200,000

Unused 10-day vacation leave is nontaxable if it is converted into cash (Rev. Regs. No. 10-2008; BIR
Ruling No. 93-34). In the above problem, the 10-day vacation leave was actually availed; hence,
taxable.

ii.

Salary (P370,000 + P50,000) P420,000

Per diem as a board of director 200,000
Taxable thirteenth month pay (P35,000 – P5,000) 5,000
Gross taxable compensation income P625,000
iii.

Salary P150,000
Overtime pay 30,000
13th month pay and other bonuses 15,000
Total compensation income P195,000

iv.

Salary P120,000
Tips 360,000
Cost and living allowance 5,000
Total taxable compensation income P485,000

Note: New BIR interpretation provides that the 13th month pay and other benefits amounting to
P30,000 and below is not taxable. Since the 13th month pay is only P10,000, the P20,000
achievement awards being part of de-minimis can be used as other benefits, to complete the P30,000
nontaxable threshold.

v.

Salary (P120,000 + P24,000) P144,000

Overtime pay 36,000
Payment of services (P4,000 + P30,000) 34,000
Present value of non-interest bearing notes (P30,000 x 0.909) 27,270
Reportable taxable income per ITR P241,270

In general, interest income is subject to final tax; hence not to be reported in the ITR. Non-interest
bearing note is to be reported at its discounted value when received. (Sec. 2.78.1, Rev. Reg. No. 2-98)

vi.

(First employment for 30 years received at the age of 50) P500,000

Aside from the requirement that the plan should be reasonable, the Tax Code requires that the retiring
employee should have been in the service of the same employer for at least ten years and is not less
than fifty years of age at the time of his retirement. The taxpayer should not also have previously
availed of the privilege under a retirement benefit plan for the same or another employer.)

vii.

First employment – resigned P300,000

viii.

Gross compensation income (1,000 x P10) P10,000

ix.

Compensation Capital gain

Compensation income (P13 – P12) x 10,000 P 10,000
Capital gain (P15 – P13) x 10,000 P 20,000

x.

Compensation Capital gain

Compensation income (P25 – P23) x 10,000 P 20,000
Capital gain (P30 – P25) x 10,000 P 50,000

Correction: The option was exercised and sold in year 202C when the market price was P30.

xi.

Regular compensation per month P 50,000

Cancellation of indebtedness (P300,000 – 25,000
P275,000)
Total compensation income – December 200B P75,000

xii.

Insurance premium – beneficiary Sico P5,000

xiii.

Basic compensation (P30,000 x 12) P360,000

Shares of stock (P100 x 100) 10,000
Stock option (P120 – P80) x 100 4,000
Annual insurance premium (P4,000 x 50%) 2,000
Gross compensation P376,000
xiv.

Cleaning of business equipment P 1,000

Repair service of store 3,000
Total casual service income P 4,000

xv.

Total purchases P500,000

Transportation cost on purchases 5,000
Unsold goods ( 40,000)
Cost of goods sold P465,000

xvi.

C
Inventory, beginning P 20,000
Purchases 1,200,000
Purchase discounts ( 10,000)
Purchase returns ( 40,000)
Transportation in 5,000
Inventory end ( 50,000)
Cost of sale P1,125,000

xvii.

Year 1 Year 2
Inventory, beginning P 50,000
Inventory, ending (P50,000) ( 30,000)
Purchases 850,000 900,000
Freight – in 10,000 15,000
Purchase discount ( 20,000) ( 25,000)
Cost of sales P790,000 P910,000

xviii.

Sales P1,275,000
Sales returns ( 25,000)
Net sales P1,250,000
Less: Cost of goods manufactured and sold
Purchases – raw materials P 540,000
Freight-in 20,000
Raw materials, ending inventory ( 10,000)
Raw materials used P 550,000
Direct labor 400,000
Factory overhead 200,000
Total manufacturing cost P1,150,000
Work-in-process, ending inventory ( 100,000)
Finished goods, ending inventory ( 50,000) 1,000,000
Gross business income P250,000

xix.

Advance payment P 2,000

Additional collection 8,000
Office machine 3,000
Gross service income
P13,000

xx.

Professional fee, accounting services P500,000

Less: Direct costs of services:
Salaries of accounting staff P150,000
Accounting supplies 10,000 160,000
Gross business income for MCIT purposes* P340,000

xxi.

Interest income from clients P50,000,000

Trading gain 10,000,000
Less: Cost of services:
Lending and investments funds salaries P3,000,000
Interest expenses paid to depositors 2,000,000 5,000,000
Gross income for MCIT purposes P55,000,000

xxii.

Interest income from clients P10,000,000

Gain on sale of capital assets 5,000,000
Rent income 2,000,000
Total P17,000,000
Less: Cost of services:
Salaries of bank employees assigned in
lending and investments of funds P3,700,000
Depreciation of computers and
teller machines used 600,000
Direct supplies used 200,000
Interest expense paid to depositors 1,500,000 6,000,000
Gross income for MCIT purposes P11,000,000

xxiii.

Service charges:
Originating from the Philippines P 150,000
Collection abroad of collect messages originating in the Philippines 60,000
Gross income for Philippine Income Tax computation P 210,000

xxiv.

Rent for year:

200A P 80,000
200B 480,000
200C 40,000
200B Reportable income P 600,000

xxv.

Advanced deposit P 40,000

Monthly rental (P20,000 x 10 months) 200,000
Annual insurance premium to be paid by the lessee
(P6,000 x 10/12) 5,000
Portion of real estate tax to be paid by the lessee
(P3,000 x 10/12) 2,500
Rent income P247,500

As a general rule, pre-collection of rental is taxable in full to the lessor when received regardless of
accounting method used.

xxvi.

Monthly rental (P20,000 x 10 months) P200,000

Annual insurance premium to be paid by the lessee
(P6,000 x 10/12) 5,000
Portion of real estate tax to be paid by the lessee
(P3,000 x 10/12) 2,500
Rent income P207,500
Commission income (P2,000,000 x 5%) 100,000
Reportable taxable income P307,500

xxvii

Outright Spread-out
Year 1 Outright method
P240,500
Year 1 Spread-out method
Value of investment P240,500.00
Less: Accum. depreciation [(P240,500 - P560)/8 yrs] x 4.75 yrs 142,464.37
Book value, end of lease P 98,035.63
Divided by remaining years of contract 4.75
Annual income from improvement P 20,639
Multiplied by months in a year 9/12
Year 1 spread-out – rent income on improvement P 15,479
xxviii

Outright Spread-out
Outright P180,000
Spread-out P - 0 -

For spread out method, there is no reportable income from leasehold improvement for year 200B
because the said improvement was completed at the end of the year.

xxix

Cost of improvement P300,000

Less: Accumulated depreciation at the end of the lease (P300,000/6) x 4 years and 7 229,167
months
Book value at the end of the lease P 70,833
Divided by number of years until the termination of lease contract = 4 years and 7 4.58
months
Annual additional income P 15,454
Multiplied by number of years expired (from March 31, 200B to December 31, 200D) 2.75
Reported additional income from improvement (P42,500)
Book value of improvement at the time of pre-termination
Cost P300,000
Less: Accum. depreciation at pre-termination (P300,000/6) x 2.75 years 137,500 162,500
Additional income in 200D from the pre-termination of contract P120,000

xxx.

Interest income from an investment in a 10-year bond P 40,000

Interest income from 5-year time deposit in Philippine bank 50,000
Interest income from expanded foreign currency deposit 60,000
Total taxable interest income P150,000

Note: Technically speaking, the interest from 5-year time deposit in Philippine bank is taxable because
the period involved is not more than 5 years and the deposit is not BSP prescribed form.

xxxi.

Year 3 interest income of P4,461.20.

xxxii.

Royalty income as author (P100,000 x 10%) P 10,000

Royalty income from franchising (P200,000 x 20%) 40,000
Royalty income from gold mine (P500,000 x 20%) 100,000
Total final tax P150,000

xxxiii .
Copyright Patent
Gross royalties: P 35,000
Copyright (P31,500/90%)
Patent (P20,000/80%) P 25,000
Income tax – final
Copyright (P35,000 x 10%) ( 3,500)
Patent (P25,000 x 20%) . ( 5,000)
Income after tax P 31,500 P 20,000

xxxiv

Royalties within derived from:

Pain reliever invention (P100,000 x 20%) P20,000
Musical compositions (P200,000 x 10%) 20,000
Books (P500,000 x 10%) 50,000
Final tax on royalty income P90,000

xxxv

Royalties outside derived from:

Pain reliever invention P200,000
Musical compositions 100,000
Books 300,000
Royalty income subject to normal tax P600,000

In general, royalties derived from sources within the Philippines are subject to a final tax of 20%,
except royalties on books, other literary works and musical compositions which shall be subject to a
final tax of 10%. Royalties received by resident citizens from sources outside the Philippines shall be
subject to normal tax under Section 24 (A) of the NIRC and by the domestic corporation under Section
27 (A) of the NIRC.

xxxvi

.P500,000 - Dividends earned by a domestic corporation from a foreign corporation are taxable.

xxxvii.

The dividend received by a domestic corporation from another domestic corporation is nontaxable.

xxxviii

First prize in Talentadong Pinoy P10,000

2nd place in bicycle race 6,000
3rd place in chess tournament 15,000
Amount subject to normal tax P31,000

In general, prizes (reward for a contest) are subject to final tax of 20% except if the amount of the prize
is P10,000 or less which will be subject to normal tax. Winnings (reward that depends on chance) are
subject to 20% final tax regardless of amount. [Sec. 24 (B)(1), NIRC]

xxxix

First prize – raffle draw (P50,000 – P1,000) P 49,000

Gambling winnings 300,000
Beauty contest winnings 100,000
Taxable prizes and winnings P449,000

xl

Year 1 Year 2 Year 3

Income (loss) P100,000 (P 20,000) P 50,000
Less: NOLCO (P25,000 – P20,000 – P10,000) 5,000
Bad debts written off 25,000 10,000 5,000
Income (loss) before bad debts recovery P 75,000 (P 30,000) P 40,000
Bad debts recovery of previous year with tax benefit -0- 25,000 8,000
Taxable income P 75,000 (P 5,000) P 48,000

Note: The tax benefit allowed in year 2 for the bad debts written off is only P5,000; hence, the
reportable bad debts recovery in year 3 should also be P5,000.

xli.

Year 1: No bad debt recovery None

Year 2: Bad debt recovery P 600

xlii. P5,000 local tax recovery.

xliii.

Real property tax P 10,000

Local taxes 500
Reportable income from tax refund P 10,500

xliv.

Unfair competition P400,000

Loss earnings 100,000
Moral damages for breach of contract 150,000
Exemplary damages for breach of contract 50,000
Interest on damages 10,000
Gross income from damage recoveries subject to tax P710,000

Actual damages are considered taxable income to the extent that such damages constitute a loss of
anticipated profits, and are non-taxable to the extent they represent a return of capital or investment.
However, moral and exemplary damages awarded as a result of a breach of contract are subject to
income tax, and, consequently, withholding tax. (BIR Ruling No. DA-489-2005 dated December 6,
2005)
xlv.
Annuity received P 20,000
Present value (P20,000 x 0.9091) 18,182
Interest income - Taxable annuity P 1,818

Note: The present value factor of P1 for an effective interest rate of 10% is 0.9091.

.
xlvi

Annuity received P 5,880

Present value (P5,880 x 0.8928) 5,250
Interest income - Taxable annuity P 630

xlvii.

Excess of withdrawable amount ($10,000 - $1,000) $ 9,000

Multiplied by exchange rate per 1 dollar P 50
Reportable income received by error P450,000

xlviii.

Net increase in net asset P108,000

Less: Salary in a year (P5,000 x 12) 60,000
Illegally obtained income - taxable P 48,000

Correction: The increase in net worth should be P108,000.

Note: Income derived from illegal source is taxable even if the taxpayer is a MWE.