INCOME TAXATION

Theories

1. The income tax payable of a corporation is equal to:

a. 30% of the taxable income
b. 2% of the gross income
c. 30% of the taxable income, or 2% of the gross income, whichever is higher
d. 10% of the gross income

2. The computation of the Minimum Corporate income tax starts

a. On the 2nd year of operation
b. On the 3rd year of operation
c. On the 4th year of operation
d. On the 5th year of operation

3. Pa Litto Lippi, an American singer was engaged to sing for one week at the Westin
Philippine Plaza after which he returned to USA. For income tax purposes, he shall be
considered as:
a. Resident alien
b. Non resident alien engaged in trade or business
c. Non resident alien not engaged in trade or business
d. Resident citizen

4. Capital gains tax is computed at:

a. 6% of the fair market value, zonal value or selling price of the property sold,
whichever is higher
b. 5% of the fair market value, zonal value or selling price of the property sold,
whichever is higher
c. 10% of the fair market value, zonal value or selling price of the property sold,
whichever is higher
d. 20% of the fair market value, zonal value or selling price of the property sold,
whichever is higher

5. A feature of ordinary gains as distinguished from capital gains

a. Gains from sales of assets not stock in trade
b. May or may not be taxable in full
c. Sources are capital assets
d. No holding period

6. Lots being rented when subsequently sold are classified as

a. Capital assets
b. Ordinary assets
c. Liquid assets
d. Fixed assets

7. One of the following fringe benefits given to managerial or supervisory employee is not
subject to fringe benefits tax
a. Housing
b. Expense account
c. Vehicle of any kind
d. Board and lodging for employers convenience

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8. The share of a partner from the distributable net income after tax of a business
partnership is subject to:
a. Creditable withholding tax of 10%
b. Final withholding tax of 10%
c. Capital gains tax
d. Tax under section 24A

9. Which of the following is not subject to tax as corporation?

a. Business partnerships
b. Joint stock companies
c. Insurance companies
d. General professional partnerships

10. The limit of any charitable and other contributions shall be based on taxable net income
derived from trade, business or profession before charitable contributions at:
a. 10% for individuals and corporations
b. 5% for individuals and corporations
c. 5% for individuals and 10% for corporations
d. 10% for individuals and 5% for corporations

11. It shall refer to those debts resulting from the worthlessness or uncollectibility, in whole or
in part, of amounts due the taxpayer by others, arising from money lent or from
uncollectible amounts of income from goods or services rendered
a. Bad debts
b. Securities
c. Liabilities
d. Restructured debts

12. One of the following losses is not deductible from gross income:
a. Loss incurred in trade, profession or business
b. Loss due to fires, storms, shipwreck, or other casualties, robbery, theft,
embezzlement or property connected with trade, business or profession
c. Net operating loss carryover
d. Shrinkage in the value of the stock

13. First statement: as a rule, the interest must be on an indebtedness of the taxpayer,
otherwise, it is not deductible
Second statement: interest paid by the taxpayer on a mortgage upon real estate of which
he is the legal or equitable owner, even though the taxpayer is not directly liable upon the
bond or note secured by such mortgage, any be deducted as interest on his
indebtedness
a. True, true
b. False, false
c. True, false
d. False, true

14. A private educational institution had capital outlays of depreciable assets for expansion of
school facilities. For income taxation, the private educational institution may
a. Deduct the capital outlays as expenses during the year
b. Depreciate the cost over the estimated useful life
c. Deduct the capital outlays as expense during the year or depreciate them over the
estimated useful life at its option
d. Deduct the capital outlays as expense during the year or depreciate them over the
estimated useful life at the option of the BIR

15. Which of the following is not deductible format he gross income of a professional? 2
 a. Tuition, travel, board and lodging expenses incurred while attending a continuing
professional education
b. Cost of subscription of technical books used by the professional in the practice of
this profession or those that may enhance his technical knowledge in the
management of a corporation under him

c. Amount spent for books of a permanent character

d. Insurance premiums against fire, storm, theft, accident or other similar losses in
the practice of his profession

16. One o f the following is not deductible from the gross income of the employer:
a. De minimis benefits given to employees
b. Fringe benefits given to rank and file
c. SSS, GSIS, Philhealth, HDMF and other contributions
d. Cost of advertising to influence legislation

17. The following are examples of corporate expenses deductible from gross income, except:
a. Representation expenses designated to promote business
b. Contribution to drum up business, like contributions of soft drinks to barrio fiestas
c. Expenses paid to an advertising firm in order to create a favorable image for the
corporation
d. Premiums on life insurance covering the life of an employee if the beneficiary is
the heir.

18. One of the following is not a requisite for the deductibility of business expense:
a. The expenses are ordinary and necessary
b. The expenses are paid or incurred during the taxable year
c. The expenses are directly attributable to the development, management, operation
and/or conduct of the trade, business or exercise of profession
d. As long as business related, not necessarily substantiated with sufficient evidence,
such as official receipts or other adequate records

19. One of the following is deductible from the gross income:

a. Personal, living and family expenses
b. Amount paid out for new building or for permanent improvement or betterment,
made to increase the value of any property or estate:
c. Losses from sales or exchanges of property directly or indirectly between
members of the family:
d. Premiums paid on any life insurance policy covering the life of any person
financially interested in any trade or business carried on by the taxpayer, individual
or corporate, when the family of the insured is directly or indirectly a beneficiary

20. It means the pertinent items of gross income less the deduction, and /or personal and
additional exemption, if any, authorized by such types of income by the tax code or other
special laws
a. Taxable income
b. Business income
c. Professional income
d. Compensation income

Problems

The records of a corporation organized in 2000 show the following:

2008 2009 2010
Sales 2,040,000 2,500,000 2,100,200
Cost of sales 430,000 310,000 510,100 3
Operating expenses 1,540,200 2,100,000 1,300,400
21. How much is the income tax payable in 2008?
a. 20,940 b. 32,200 c. 40,800 d. 53,140

22. How much is the income tax payable in 2009?

a. 27,000 b. 43,800 c. 50,000 d. 32,540

23. How much is the income tax payable in 2010?

a. 31,802 b. 86,910 c. 62,340 d. 42,004

Karce Corporation has the following data for the years 2007 and 2008:
2007: gross income 220,000
Business expense 180,000
Capital loss (capital asset was acquired on January 15, 2007 and was sold
on March 15, 2007) 50,000
Capital gain (capital asset was acquired on January 15, 2005 and was sold
on March 31, 2007) 30,000

2008: gross income 500,000

Business expense 400,000
Capital gain (held for 12 months) 60,000
Capital loss (held for more than 12 months) 20,000

24. How much is the taxable net income in 2007?

a. 40,000 b. 20,000 c. 5,000 d. 70,000
25. How much is the taxable net income in 2008?
a. 140,000 b. 150,000 c. 110,000 d. 100,000

26. Mr. Monte was injured in a vehicular accident in 2005. He incurred and paid medical
expenses of P20, 000 and legal fees of P10, 000 during the year. He received P70, 000
as settlement from the above insurance company, which insured the car owned by the
other party involved in the accident. From the above payments and transactions, the
amount of taxable income of Mr. Monte in 2007 is:

a. P70, 000 b. P50, 000 c. P40, 000 d. P0

27. Mr. Dela Cruz is a citizen of the Philippines, residing in the Philippines.
Real property sold in the Philippines was held as capital asset.
Selling Price P 5,000,000
Fair market value at the time of sale 5,500,000
Expenses of the sale ` 200,000
Cost of the real property 4,000,000

How much is the capital gains tax?

a. 318,000 b. 300,000 c. 240,000 d. 330,000

28. In 2006, an individual taxpayer, using cash basis of accounting obtained a P500, 000
loan from a bank for business use. The bank deducted in advance and interest of P50,
000. In 2007, the P500, 000 loan was paid in full by the taxpayer. How much is the
deductible interest in 2007?
a. 0 b. 50,000 c. 25,000 d. 30,000

29. Using the above information, except that payments were made as follows: 2007, P300,
000 and 2008, 200,000. How much was the deductible interest expense in 2007?
a. P0 b. 50,000 c. 25,000 d. P30, 000
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 30. In 2007, Kare-Kare Corporation purchased a residential house and lot for P2, 300,000.
The property was sold to the President of the Corporation for P1, 980,000. The fair
market per BIR and per Assessors Office were P2, 500,000 and P2, 607,000,
respectively. How much is the fringe benefit tax, if any?
a. 200,640 b. 295,095 c. 150,588 d. 244,706

31. In 2007, Mechado owns a fleet of motor vehicles for use of the business and its
employees. One of the motor vehicles costing P450, 000 is not used for business
purposes but for the employees personal needs. How much is the fringe benefits tax?
a. 21,176 b. 211,765 c. 42,353 d. 144,000

Emmy has the following data in 2008:

Sale of property holding period gain (loss)
Apartment house 10years 35,000
Residential house 6 years 120,000
Vacant lost 12 years 72,500
Jewelry fro personal use 6 months 4,200
Jewelry in a jewelry store 2 months 8,000
Car for personal use 4 years (20,000)
Transportation equipment 12months (10,000)

The proceeds from the sale of the residential house shall be used in acquiring a new residence.
During the year, Emmy had a net income from business (other than the sale of the properties
above) in the amount of P5, 000.

32. The taxable income before personal exemption of Emmy in 2008 is

a. 32,200 b. 38,000 c. 22,200 d. 42,200

33. Assuming the net income of Emmy in 2009 is 130,000, the taxable income before
personal exemption in 2009 is
a. 125,000 b. 130,000 c. 124,200 d. 120,000

34. The taxable income in 2008 if Emmy is a corporation (disregard residential house,
jewelries and car for personal use)
a. 68,000 b. 5,000 c. 63,000 d. 30,000

35. A corporation realized a net profit from operations of P50,000 in 2008, a gain of P8,000
on sale of a capital asset held for 14 months, and a loss of P5,000 on the sale of capital
assets held for 3 months. It should report an income subject to tax of:
a. 49,000 b. P50,000 c. 53,000 d. 0

Use the following choices for nos. 36 to 40:

a. 50,000
b. 75,000
c. 100,000
d. 125,000
e. 150,000

Compute for the personal and additional exemptions of the following taxpayers:

36. The taxpayer is single with a crippled brother who is unemployed 22 years old.

37. The taxpayer is married with 4 children. The first born child celebrated his 21st birthday,
and became gainfully employed during the taxable year.
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38. The taxpayer is single with a dependent child who is 5 years old.
 39. The taxpayer is widowed. She has 5 children. His husband, together with 2 of her minor
child died in a car accident during the taxable year.

40. The taxpayer is single. During the taxable year, he married a widow with 2 minor children
from her previous marriage.

1 C 21 B
2 C 22 B
3 C 23 Bonus
4 A 24 A
5 D 25 A
6 B 26 D
7 D 27 A
8 B 28 B
9 D 29 D
10 D 30 B
11 A 31 A
12 D 32 B
13 A 33 B
14 C 34 D
15 C 35 C
16 D 36 A
17 B 37 E
18 D 38 B
19 D 39 E
20 A 40 A