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Exercise 3.1

MULTIPLE CHOICE. Encircle the letter of the correct answer.

1. The optional standard deduction on individual is —

a. 40% of taxable income.
b. 40% of business and/or professional including compensation income.
c. 40% of business and/or professional income.
d. 10% of business and/or professional excluding compensation income.

2. Optional standard deduction is allowed to

a. Resident alien
b. Nonresident alien engaged in trade or business
c. Nonresident alien not engaged in trade or business
d. Nonresident foreign corporation

3. One is not a deductible tax

a. Local business tax c. Privilege tax
b. Value-added tax d. Occupation tax
4. Which of the following items is correct?
a. Interest incurred on loan from a brother is deductible.
b. Interest expense incurred on unpaid value-added tax is reduced by 42% of interest income
subjected to final tax.
c. Interest payable which had already prescribed is deductible if paid voluntarily by the taxpayer.
d. Interest incurred to acquire a business asset may be added to the cost of the property.

5. Which of the following statements is correct?

a. All compensation payments made by an employer to an employee are deductible to the
employer.
b. All compensation payments made by an employer to an employee are taxable to the
employee.
c. All travelling expenses incurred by an employee which are in accordance with the itinerary of
travel approved by the employer are not taxable to the employee.
d. Transportation expenses incurred by an employee are nevertheless deductible to the
employer even if they are not incurred while "away from home".

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EXERCISES 3.2

TRUE OR FALSE. State whether the statement is TRUE or FALSE.

1. All expenses related to business activities that are reasonable and duly supported with documents
are deductible.
2. Business expenses are deductible if so provided in the Tax Code or related BIR issuances.
3. The 40% optional standard deduction is computed based on gross taxable income from business,
compensation, and exercise of profession.
4. Corporate taxpayers may opt to use the 40% optional standard deduction.
5. Non-resident citizens can adopt the 40% optional standard deduction.
6. Business expenses that are necessary but not ordinary in the operating activities are allowable
deductions.
7. Estimated expenses are deductible from gross taxable business income, provided they are
necessary and ordinary.
8. Unreasonable business expenses, though necessary and ordinary, are non-deductible.
9. Expenses paid to the officials of the national government, that constitute kickbacks, are deductible
subject to certain conditions.
10. Travel expense of employees, whether connected or not with the business, provided they are
supported with documents, are deductible.
11. Rental expenses include taxes and insurance paid by the lessee on the property of the lessor.
12. Advance rent payment is deductible in full during the time of payment.
13. Improvements on the leased property are deductible expenses apportioned over the term of the
lease.
14. Accrued interest expenses are non-deductible; but interest expenses paid during the taxable year
are deductible.
15. The 12% interests on late filing and late payment of tax return are deductible.
16. Interest paid in advance is deductible currently if the taxpayer employs the cash basis of recording.
17. If the taxpayer is using the cash basis, interest discounted on loan borrowings is deductible at the
time of the full payment of indebtedness.
18. Interest expenses duly supported by necessary documents incurred between members of the
family are allowable deductions.
19. The interest expense may be added to the cost of the property and apportioned over its estimated
useful life.
20. All taxes incurred and paid are deductible business expense.

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21. Taxes deductible from gross income are taxes proper, interests, and penalties incident to tax
delinquency.
22. If there is a 100% loss, the amount of deductible loss is equal to the value of the property.
23. The tax principle on net operating loss carry-over is applicable only to individual taxpayers.
24. Generally, net operating loss can be carried forward over a period of five years following the
period of loss.
25. Estimated uncollectible bad debts are allowable deduction from the gross taxable income.
26. Partial recognition of debts is deductible, provided it is supported by necessary required
documents.
27. Bad debts previously written off and later collected in succeeding year are included in the gross
taxable income.
28. Under the straight-line method of depreciation, the amount of depreciation is equal to
depreciable costs apportioned over the useful life of the property.
29. The scrap value of depreciable assets is disregarded in the computation of depreciation using the
declining balance method.
30. The depreciation rate adopted by the taxpayers shall be approved by the BIR Commissioner.
31. Properties directly used in petroleum operations are depreciated over a period of five years or
shorter as may be allowed by the BIR Commissioner.
32. Charitable contributions are deductible from compensation income.
33. Charitable contributions extended to government entities for health and human settlement are
deductible in full.
34. Donations to accredited non-governmental organizations are deductible in full subject to certain
conditions.
35. Donations of individual taxpayers to the national or local government units are deductible in full
amount.

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Problem
COURSE/YEAR/SECTION: PROFESSOR:

EXERCISES 3.3

Assume that Mr. Bong acquired a machine at a cost of P 7,600,000 with no salvage value. The
useful life of the machine is estimated to be 25 years.

Required:
1. Assuming the straight-line method was used, the annual depreciation on the machine is?
2. Assuming that at the end of the 20th year, it was determined that the machine has 10 more years of
useful life, how much shall be the depreciation expense from the 21 st year to 30th year?
3. Assume further that instead of the machine having 10 more years of useful life, it only has 2 years,
what is the depreciation expense for the remaining two years

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EXERCISES 3.4

BA Company presented the following data on an asset acquired on January 1, 2017:

Acquisition cost
Residual value 200,000
Estimated useful life 20 years
Required: Compute the depreciation using the double declining balance method.
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Exercises 3.5

On January 1, 2018, KMJS Company acquired an additional office equipment costing P830,000. The
asset has an estimated useful life of four years with a residual value of P30,OOO.

Required: Compute the depreciation using the SYD method.

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Problem

EXERCISES 3.6
Mr. Jong practicing his profession donated gifts worth P 60,000 to Home for the Homeless, an
accredited non-governmental organization. The taxpayer's gross income for the taxable year is P
2,000,000 while the deductions, P 1,500,000 the donation excluded.

Required: Determine how much of his donation shall be allowed as deduction.

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Problem

EXERCISES 3.7
Assume the following data of a taxpayer:

Building construction cost

Additions
Accumulated depreciation
Insurance recovered

Required: Compute the deductible loss from fire.

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