UL CPA Review: Taxation – Introduction to Income Taxation, Final Tax and Capital Gains Tax

UL CPA REVIEW
University of Luzon
Dagupan City, Pangasinan
REX B. BANGGAWAN, CPA, MBA

Introduction to Income Taxation, Final Tax and Capital Gains Tax

OUTLINE:
A. The concept of gross income
B. Accounting methods
1. Cash basis
2. Accrual basis
3. Hybrid basis
4. Installment sales (Installment method & Deferred payment sales method)
5. Leasehold income (outright method and spread-out method)
6. Construction income (percentage of completion and spread-out method)
7. Farming income (crop-year method)
C. Accounting periods
1. Calendar year
2. Fiscal year
D. Taxation scheme for gross income
1. Final income taxation
2. Capital gains taxation
3. Regular income taxation
E. Final Income Taxation
1. Interest
2. Dividends
3. Prizes
4. Royalties
5. Winnings
6. Share in net income of business partnership
7. Tax informer’s reward
F. Capital Gains Taxation
1. Sale, exchange and other disposition of domestic stocks directly to buyer
2. Sale, exchange and other disposition of real properties located in the Philippines
G. Regular Income Taxation – next meeting

DRILL PROBLEMS:
Accounting Methods
1. Ellie leased out his condo unit in Makati City to Hanna, a resident alien, effective January 1, 2008. Ellie
received P90,000 advanced rentals covering the current year and the 2 succeeding years. Hanna also
agreed to shoulder the annual real property tax of the leased property amounting to P10,000 annually
starting January 1, 2008. Under the cash basis of accounting, the amount of gross income in the current
period is
a. P30,000 c. P100,000
b. P40,000 d. P90,000

Under the accrual method of accounting, the amount of gross income in the current period is
a. P30,000 c. P90,000
b. P40,000 d. P100,000

2. In, April 1, 2006, Alexander Forbes leases a building from ADB Realty, Inc. Alexander Forbes is to make a
monthly payments of P2,500,000 and a P5,000,000.00 lease deposit to be credited to the last two
months of the 8 year - lease. In addition, it is also stipulated that Alexander Forbes shall pay executory
costs, namely, real property tax of P500,000, and building insurance of P200,000 starting 2007. In order
to obtain the lease, Alexander Forbes paid P500,000 to ADB Realty, Inc. as an inducement to grant the
lease of the building. Upon acquisition, Alexander Forbes refurbished the building and installed fixtures
for a total cost of P3,000,000. The life of the improvement was determined to be 6 years. Alexander
Forbes occupied the premises on May 1, 2006 after all get ready activities were done. How much is the
amount of rentals to be included by ADB Realty, Inc. in gross income for 2006?
a. P8,000,000 c. P7,500,000
b. P2,500,000 d. P8,500,000
1
UL Taxation: General Principles of Taxation by Rex B. Banggawan, CPA, MBA
UL CPA Review: Taxation – Introduction to Income Taxation, Final Tax and Capital Gains Tax

3. How much should be included by ADB Realty, Inc in 2007 gross income?
a. P700,000 c. P3,200,000
b. P3,000,000 d. P 0

4. In the immediately preceding problem, assuming that the life of the improvement is 10 years, how
much rent income from the leasehold improvement shall be included in gross income in 2006 if the
outright method is used?
a. P0 c. P600,000
b. P3,000,000 d. P75,000

5. Baguio Swine, Inc. is an entity engaged in animal husbandry, particularly swine. During the current
taxable year, it has the following summary of its operation:

Purchased and sold P16,000,000

Purchase cost of feeders purchased 2,800,000
Raised and sold 10,000,000
Total production cost of feeds, maintenance and 14,000,000
sanitation, labor and attributable overheads

How much is to be included in gross income?

a. P26,000,000 c. P23,200,000
b. P26,000,000 d. P9,200,000

Gross Income
6. 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 will Mr. Santiago be able to exclude from
his gross income?
a. P100,000 c. P20,000
b. P10,000 d. P120,000

7. Mr. Basilio insured his life with his estate as beneficiary. In 2006, after Mr. Basilio had paid P65,000 in
premium, he assigned the policy to Mr. Jose Llamado for P60,000, and Mr. Llamado continued paying
the premiums. Mr. Basilio died and Mr. Llamado collected the total proceeds of P200,000. Mr. Llamado,
afte the assignment an before Mr. Basilio’s death, paid a total premium of P80,000. As a result of the
above transaction, Mr. Llamado:
a. May consider the proceeds of P200,000 as exempt from tax
b. Derived a taxable income of P55,000
c. Derived a taxable income of P60,000
d. Answer not given

8. Mr. Monte was injured in a vehicular in 2005. He incurred and paid medical expense of P20,000 and
legal fees of P10,000 during the year. In 2006, he received P70,000 as settlement from the insurance
company which insured the car owned by the other party involved in the accident. From the above
payments and transactions, thee amount of taxable income of Mr. Monte in 2006 is
a. P0 c. P70,000
b. P40,000 d. P50,000

9. Tony was hit by a wayward bus while on his way home. He survived but had to pay P150,000 for his
hospitalization. He was unable to work for 6 months and did not receive her usual P10,000 monthly
salary. He sued the bus company an was awarded by a final judgment a sum of P460,000: P150,000 as
reimbursement for his hospitalization, P60,000 for her lost salaries, and P250,000 as moral damages
for his pain and suffering. How much income did he realized when she collected form the judgment?
a. P460,000 c. P60,000
b. P250,000 d. P400,000

10. Justine Marcos, a CPA practitioner, assisted in the incorporation of Aurum, Inc. In return, Aurum, Inc.
issued Justine Marcos 2,000 shares of its P50 par value common shares. During the time of issue Aurum
common shares traded at P98 low and P120 high. The book value per share of Aurum, Inc. was
determined as P200/shares a year after the incorporation. How should the receipt of Aurum, Inc.
common shares be taxed?
a. The 2,000 common shares shall be treated as compensation at the book value of the common shares

2
UL Taxation: General Principles of Taxation by Rex B. Banggawan, CPA, MBA
UL CPA Review: Taxation – Introduction to Income Taxation, Final Tax and Capital Gains Tax
b. The 2,000 common shares shall be treated as compensation using the average of the market value
of the stock during the time of receipt
c. The 2,000 common shares is exempt by applying the rules on corporate readjustment
d. This is a form of indirect dividend which is subject to 10% final tax

11. The proceeds of insurance taken by a corporation on the life of an executive to indemnify it against loss
in case of his death is
a. Exempt from income tax c. Subject to final tax
b. Part of taxable income d. Partly exempt, partly taxable

12. Mrs. Lucena was insured under an endowment policy with a value of P500,000. Total premium paid by
her during the term of the premium payments on the policy was P490,000 form which there was a
return on the premium of P40,000. At the maturity of the policy, Mrs. Lucena received P500,000. The
income of Mrs. Lucena under the policy is
a. P0 c. P10,000
b. P500,000 d. P50,000

Final Taxes
1. Which is subject to final tax?
a. Share of the distribute net income of a general professional partnership
b. Winnings not exceeding P10,000
c. Prizes not exceeding P10,000
d. Interest income from foreign bank deposits

2. Which of the following passive income is taxed on an annual and net basis?
a. Capital gain on sale of domestic stocks directly to buyer
b. Capital gain on sale of domestic stocks through the Philippine Stock Exchange
c. Capital gain on sale of real property classified as capital asset
d. Capital gain on sale of real property classified as ordinary asset

3. Ambiong Bank of Baguio started operation in 1995 with the following information on results of operation
and dividend declarations.
Year Net income Dividends declared
1996 P 500,000 -
1997 1,500,000 -
1998 2,000,000 -
1999 1,000,000 -
2000 2,500,000 P 6,500,000

How much tax must have been paid in the 2000 dividend declaration of Ambiong Bank?
a. P650,000 c. P450,000
b. P390,000 d. P0

4. Select the incorrect statement concerning dividends.

a. Dividends representing investments in another corporation is a property dividend subject to the
10% final tax
b. Loss incurred in liquidating dividends is fully taxable
c. Stock dividend are generally not payable unless they confer upon the recipient a different interest
or right after the declaration
d. Gains arising from liquidating dividends is taxable as capital gains tax

5. The Gambling World, Inc. a foreign corporation, Inc. has been trying its luck with the Philippine Charity
Sweepstakes lotto. It spent P800,000 for losing PCSO lotto tickets. Luckily, one ticket costing P10 won
the P2,000,000 Superlotto 6/49 draw on July 24, 2007. Compute the taxable winning.
a. P2,000,000 c. P1,200,000
b. P1,200,000 d. P0

6. Which is taxed at the lowest final tax rate among the following passive income?
a. Interest income received from a depositary bank under the expanded foreign currency deposit
system received by a resident citizen
b. Cash dividend from a domestic corporation
c. Royalties from books and other literary works
d. Interest income from long-term deposit with maturity of over five years
3
UL Taxation: General Principles of Taxation by Rex B. Banggawan, CPA, MBA
UL CPA Review: Taxation – Introduction to Income Taxation, Final Tax and Capital Gains Tax

7. All of the following are subject to 7 ½% final tax on interest on FCDU Deposit, except
a. Resident citizen
b. Non-resident citizen
c. Resident alien
d. Domestic corporation
e. Resident corporation

8. Dividends received by which of the following is not subject to dividend tax?

a. Resident individual c. Resident corporation
b. General professional partnership d. Non-resident foreign corporation

9. The interest income on long-term deposit that is pre-terminated on the third year is subject to
a. 0% c. 20%
b. 12% d. 5%

10. Which is subject to final tax when received by a resident citizen?

a. Interest income from Bank of Chicago, USA
b. Lotto winnings from the Canadian Lottery
c. Sale of domestic shares of stock directly to buyer abroad
d. Sale of real property classified as capital asset located abroad

11. Which of the following items of gross income will be subject to Philippines income tax?
a. PCSO winnings by a non-resident alien
b. Sale at a gain of real property located abroad classified as capital asset by a non-resident citizen
c. Interest income from deposit substitute issued by banks in the Philippines earned by a non-resident
alien
d. Dividends from a foreign corporation received by a non-resident citizen

12. Final taxes are generally withheld at source and does not require an income tax return, which is an
exception
a. Final tax on interest on income deposit
b. Final tax on royalties
c. Final tax on capital gain on sale of domestic shares of stock directly to buyer
d. Final tax on dividends

13. Which of the following is not subject to 20% final tax?

a. Interest income on long-term deposit of domestic corporation
b. Interest income on foreign loans
c. Interest income from money market placements or trust funds
d. PCSO lotto winnings

14. Compute the total amount of income subject to final tax.

Yield from deposit substitute P 10,000
Interest income from bonds of a domestic corporation 23,000
Property dividend declared by a foreign corporation 40,000
Stock dividend declared by a domestic corporation 50,000
Compensation income, net of P10,000 withholding tax 80,000
Prize on “Search for Mr. Sexy Body” 15,000
Royalties from books 24,000
Interest income on personal loans granted to a friend 8,000
Salaries from a general professional partnership 30,000
Salaries from a business partnership 20,000

a. P89,000 c. P49,000
b. P99,000 d. P69,000

15. Determine the total amount of income tax withheld if the taxpayer received the following passive
income during the year:
Interest on Peso bank deposit P 90,000
Royalties 36,000
Dividends 63,000
Share in the distributive income of a joint venture 72,000
4
UL Taxation: General Principles of Taxation by Rex B. Banggawan, CPA, MBA
UL CPA Review: Taxation – Introduction to Income Taxation, Final Tax and Capital Gains Tax

a. P46,000 c. P38,700
b. P53,000 d. P46,500

16. On January 1, 2005, Helen invested P1,000,000 to RCBC Commercial Bank’s 5-year, tax-free time
deposit. The long-term deposit pays 15% annual interest every January 1, 2005. In need of cash, Helen
pre-terminated her investment on July 1, 2008. How much is the final tax due and the proceeds of
Helen’s investment?
a. P9,000; P1,066,000 c. P18,750; P1,056,250
b. P45,000; P1,030,000 d. P30,000; P1,345,000

17. How much final tax is withheld in the interest income paid by the bank on January 1, 2006?
a. P0 c. P30,000
b. P18,000 d. P7,500

18. Assuming the same information in the problem above, except that the investment was made by a
domestic corporation, how much final tax is withheld in the year of pre-termination and the proceeds to
the corporation?
a. P15,000; P1,060,000 c. P18,750; P1,056,250
b. P45,000; P1,030,000 d. P30,000; P1,345,000

19. The cash reward for tax informers is applicable only when
a. Tax information instrumental to the discovery of violation of the income tax law resulting in
recovery of taxes is furnished by any public officials or their relatives up to the 6 th degree of
consanguinity
b. Enforcement results in recovery of taxes
c. The amount of recovery is in excess of P1,000,000
d. A and B

Capital Gains Tax

20. Which is an ordinary asset for a realty developer?
a. Real property held for development and subsequent sale
b. Finance lease receivables
c. Construction machineries
d. Head office building of the developer

21. Which of the following accounting assets is not an ordinary asset under the NIRC?
a. Investment property
b. Inventory
c. Property, plant and equipment
d. Trading securities by a stock brokerage firm

22. The term “capital assets” includes

a. Stock in trade or other property included in the taxpayer’s inventory.
b. Real property not used in the trade or business of the taxpayer.
c. Real property primarily use for sale to customers in the ordinary course of trade or business.
d. Property used in the trade or business of the taxpayer and subject to depreciation.

23. Lots being rented when subsequently sold are classified as

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

24. An investment property in the book of the taxpayer is classified under taxation as
a. Ordinary assets c. Fixed assets
b. Capital assets d. Liquid assets

25. All of the following accounting assets are capital assets for a manufacturing firm, except?
a. Accounts receivables c. Investment in debt securities
b. Supplies d. Investment in equity securities

26. Amy is a sole proprietor. She operates a computer store and sells various computer peripherals in his
own business establishment (land and building). Which of the following is a capital asset for Amy?
a. Amy’s business establishment c. Computer inventories
5
UL Taxation: General Principles of Taxation by Rex B. Banggawan, CPA, MBA
UL CPA Review: Taxation – Introduction to Income Taxation, Final Tax and Capital Gains Tax
b. Computer peripherals d. Amy’s home

27. Which of the following passive income is taxed on an annual and net basis?
a. Capital gain on sale of domestic stocks through the Philippine Stock Exchange
b. Capital gain on sale of real property classified as capital asset
c. Capital gain on sale of real property classified as ordinary asset
d. Capital gain on sale of domestic stocks directly to buyer

28. Raymund Ladlad is a stock broker and holds 10,000 ordinary stock of San Miguel Corporation, a
domestic corporation, acquired at P100 per share. His valuation for San Miguel Corporation indicates
that San Miguel’s stocks will decline in the near future. If Raymund sells his stock investment directly to
a buyer, Zeus Millan, at P115 per share, how much is the capital gains tax payable on the transaction?
a. P5,000 c. P5,750
b. P10,000 d. P0

29. Mr. Acebo, a non-security broker or dealer, made the following dispositions directly to buyer:

Date Domestic securities Gain/(Loss)

2/4/8 Abacus ordinary shares P 150,000
5/8/8 PLDT bonds 150,000
7/15/8 Globe preferred shares ( 80,000)
9/20/8 Globe common shares 50,000
11/15/8 Metrobank ordinary shares 80,000

Compute the amount of capital gains tax payable (refundable) of Mr. Acebo for the year 2008.
a. (P1,500) c. P0
b. P15,000 d. P38,000

ABC disposed a land (classified as capital asset) for P6,000,000. The land was previously acquired at
P4,000,000. The land has a fair value of P6,500,000.

For each of the following cases, determine the capital gains taxable and the taxation scheme to apply:

30. ABC is a domestic corporation and the land is located in the Philippines
a. P2,000,000; final c. P6,500,000; final
b. P6,000,000; regular d. P2,000,000 regular

31. ABC is a resident foreign corporation. What is the taxable gain and the taxation scheme that would
apply?
a. P2,000,000; final c. P2,000,000; ordinary
b. P6,500,000; final d. None

32. ABC is a domestic corporation and that the land is located abroad
a. P6,500,000; final c. P2,000,000 ordinary
b. P6,000,000; final d. None

33. ABC is a resident corporation and the property is located abroad

a. P6,500,000; final c. P2,000,000 ordinary
b. P6,000,000; final d. None

34. ABC is a resident alien and the property is located in the Philippines
a. P6,500,000; final c. P2,000,000 ordinary
b. P6,000,000; final d. None

35. ABC is a non-resident alien, not engaged in trade or business and the property is located abroad
a. P6,500,000; final c. P2,000,000 ordinary
b. P6,000,000; final d. None

Mr. A, resident citizen, disposed of his principal residence in the Philippines which was previously
acquired at P1,000,000 for P3,500,000. The property has a zonal value of P3,000,000, assessed value of
P3,800,000 and an independent appraisal value of P5,000,000 at the date of sale.

36. Compute the amount of tax and the new tax basis of the new residence if it was acquired for:
6
UL Taxation: General Principles of Taxation by Rex B. Banggawan, CPA, MBA
UL CPA Review: Taxation – Introduction to Income Taxation, Final Tax and Capital Gains Tax
1) P3,800,000
2) P2,000,000
3) P4,500,000

37. Answer each of the cases above assuming that the buyer assumed a mortgage in the previous residence
amounting to P1,500,000. ______________

38. An individual disposed of his land classified as capital asset for P1,000,000. The land was previously
acquired for P1,500,000. The land has an assessed value of P1,000,000 and zonal value of P1,200,000.
Compute the capital gains tax.
a. P60,000 c. P0 because there is no capital gain was derived
b. P72,000 d. P90,000

39. Mr. Basilio Fernandez sold his residential lot to Mr. Zeus Villan for P3,600,000. This was purchased by
him in 2000 for P2,000,000. The property has an assessed value of P3,000,000; zonal value of
P4,000,000 and independent appraisal value of P4,500,000. Mr. Fernandez immediately used the
P3,000,000 proceeds to purchase a condo unit as his new principal residence. Compute the capital gains
tax payable.
a. P40,000 c. P216,000
b. P45,000 d. P240,000

40. Which of the following entities is not exempt to the final capital gains tax imposed on the sale, exchange
and other disposition of real property?
a. Banks on their sale real and other assets acquired in the Philippines
b. Resident corporations on their land not used in business in the Philippines
c. Real estate developer or dealer on their sale of condo units
d. Resident citizen on his sale of one of his residence under foreclosure sale

41. The actual capital gain derived by an individual taxpayer may be included to all income subject to
progressive income tax when
a. It involves sales of real property to non-residents
b. It involves sales of real property to the government
c. It involves sales of real property to
d. It involves sale of domestic stocks directly to taxpayer

42. The capital gains tax on real property may be payable in installments under certain instances by
a. Individuals c. Both a and b
b. Corporations d. None of the above

43. Mrs. Evangelista owns a parcel of land worth P500,000 which she inherited from her father in 2006
when it was worth P300,000. Her father purchased it in 1986 for P100,000. If Mrs. Evangelista transfers
this parcel of and to her wholly owned corporation in exchange for shares of stock of said corporation
worth P450,000, Mrs. Evangelista’s taxable gain is
a. P0 c. P150,000
b. P50,000 d. P350,000

----- End of Handouts -----

7
UL Taxation: General Principles of Taxation by Rex B. Banggawan, CPA, MBA