Income Taxation for 3rd Year

Qualifying Exams

Instructor: Mary Armi Milanes

I. Introduction to Taxation

1. ABS-CBN reduces its tax by legally permissible means. Which escapes from taxation did
ABS-CBN do?
a. Tax Dodging
b. Tax Evasion
c. Tax Exemption
d. Tax Avoidance

2. Statement 1: Taxation is the rule; exemption is the exception.

Statement 2: Taxation may be used to implement the police power of the state.
a. I and II are not true
b. I and II are true
c. I is true
d. II is true

3. Which of the following normally is exempt from income taxes?

a. CMDC, a non-profit charitable institution
b. The Feast, a religious institution
c. CMDI, a non-profit, non-stock educational institution
d. AM Property Holdings, a registered property development company

4. Which of the following is violative of the principle of non-delegation?

a. Allowing the Secretary of Finance and the BIR to issue regulation or rulings which go
beyond the scope of a tax law
b. Requiring that the legislative enactment must exclusively pertain to Congress
c. Authorizing the President to fix the amount of impost on imported and exported
commodities
d. Authorizing certain private corporation to collect taxes

5. Income tax is not a/an

a. Ad valorem tax
b. Direct tax
c. Revenue Tax
d. Property Tax

6. Select the incorrect statement

a. The power to tax includes the power to exempt
b. Exemption is construed against the taxpayer and in favor of the government.
c. Tax statutes are construed against the government in case of doubt.
d. Taxes should be collected only for public improvement.

7. Statement 1: Non-payment of poll tax will not lead you to imprisonment.

Statement 2: The constitutional guarantee of non-imprisonment for non-payment of poll tax
applies only to basic community tax.
a. I and II are not true
b. I and II are true
 c. I is true
d. II is true

8. Statement 1: Horizontal equity proposes that the extent of one’s ability to pay is directly
proportional to the level of his tax base.
Statement 2: Vertical equity is a net concept while horizontal equity is a gross concept.
a. I and II are not true
b. I and II are true
c. I is true
d. II is true

9. A. Tax must not violate constitutional and inherent limitation.

B. Tax must be uniform and equitable.
C. Tax must be for public purpose.
D. Tax must be levied by the lawmaking body.
E. Tax must be proportionate in character.
F. Tax is generally payable in money.

Which of the above is/are not an essential characteristic of a valid tax

a.All of the above
b.All except F
c. None, except F
d.None of the above

10. Which is a national tax?

a. Real property tax
b. Community Tax
c. Income Tax
d. Professional tax

11. Gains on the sale of goods manufactured and sold by the taxpayer within the Philippines is
subject to tax
a. Wherever sold
b. If sold abroad only
c. Without the Philippines only
d. Within the Philippines only

II. Taxes, Tax Laws, and Tax Administration

1. Which is true with tax amnesty?

a. It is unconditional
b. It covers both criminal and civil liability of the taxpayer.
c. It applies for past and non-compliance.
d. All of these.

2. Which is not an element of tax?

a. It must be for a public purpose.
b. It must not violate Constitutional or inherent limitation.
c. It must be progressive by nature.
d. It must be uniform and equitable.
3. Tax as to object includes
a. Personal tax
b. Property Tax
c. Excise tax
d. All of these

4. Philippines Tax laws are, by nature,

a. Political
b. Civil
c. Political and civil
d. Penal and civil

5. Debt as compared to tax

a. It is a demand of ownership.
b. It is not assignable.
c. It will not cause imprisonment when not paid.
d. It is generally payable in money.

6. Select the incorrect statement.

a. Tax may be unlimited in amount.
b. Non-payment of license renders the business illegal.
c. Special assessment is not a liability of the person owning the property.
d. Special assessment can be imposed on building and other real right attaching or
pertaining to land.

7. Mr. Caesar Dulay, as the Commissioner of Internal Revenue is not empowered to

a. Make or amend a tax return for and in behalf of the taxpayer.
b. Obtain information and to summon, examine, and take testimony of person to effect tax
collections.
c. Compromise tax liabilities of taxpayers.
d. Grant amnesty for erring taxpayers.

8. The BIR is under the supervision of

a. The Bureau of Customs
b. The President
c. The Department of Finance
d. Congress

9. Which of the following may ta exemption come from?

a. Contract
b. Constitution
c. Law
d. All of these

10. When the provisions of the tax laws are silent as to the taxability of an item, which is true?
a. Taxation applies due to the Lifeblood doctrine
b. Exemption applies since vague tax laws are construed against the government
c. Taxation applies since taxation is the rule and exemption is the exception
d. Exemption applies since obligation arising from law is presumed; ignorance of the law is
not excused
III. Concept of Income/ Gross Income

1. Kim Chew, a Chinese who owns Law of Classroom, Inc and stayed in the Philippines for 183
days is a
a. Resident Alien
b. Non-resident Alien
c. Non-resident alien engaged in trade or business
d. Non-resident Alien not engaged in trade or business

2. Mr. Eugene Lopez, an American who showed proof to the satisfaction of the Commissioner of
Internal Revenue of his intention to stay in the Philippines as an immigrant is classified as a
a. Resident Citizen
b. Resident Alien
c. NRA-ETB
d. NRA-NETB

3. Which is not an income taxpayer?

a. Non-resident foreign corporation
b. Non-resident alien not engaged in trade or business
c. Joint venture engaged in energy operation pursuant to a service contract with the
government
d. Irrevocable trusts

4. Which is taxable in world income?

a. Resident corporation
b. Non-resident citizen
c. Resident Citizen
d. Resident Alien

5. Which of the following is not an income?

a. Gain from labor
b. Gain from Capital
c. Return of Capital
d. Gain derived from sale of asset

6. Ms. Pepino bought a residential house and lot in 2020 for PhP120,000. In 2021, curious as to
how much her property then cost, she asked a real estate broker to reappraise the same. The
real estate broker reported that the value of her property had increased to PhP500,000. Ms.
Pepino should report a gross income in her income tax returns for the year 2021 of:
a. PhP500,000
b. PhP120,000
c. PhP380,000
d. None

7. If an individual performs services for a creditor who in consideration thereof cancels the debt,
the cancellation of indebtedness may amount to:
e. A gift
f. A capital transaction
 g. A donation inter vivos
h. A payment of income

8. A manager owed his employer P50,000. The money was advances to him to pay for his
personal bills. Just recently he submitted an excellent report to his employer who became very
pleased because it attracted a big client to their company. The employer, therefore, decided to
cancel the debt of the junior executive and in addition gave him a round trip ticket to South
Korea worth P25,000 plus pocket money of P30,000. How much additional gross income be
reported in the income tax return of the taxpayer?
a. P50,000
b. P75,000
c. P80,000
d. P105,000

9. Which of the following is a taxable income?

a. Income from qualified pension plan
b. Compensation for personal injuries
c. Moral damages
d. Interest on moral damages

10. The income subject to withholding tax is not includible in the computation of taxable
income
a. Withholding tax on compensation income
b. Final Withholding tax
c. Creditable withholding tax
d. All of these

11. Which is not a creditable withholding tax?

a. Expanded withholding income tax
b. Withholding tax at source
c. Withholding income tax on passive income
d. None of these

IV. Tax Schemes, Periods and Methods of Reporting

1. An individual income tax payer shall file his or her income tax on or before
a. 15th of June, if there is an extension
b. 15th of the Fourth month of the following fiscal year, if the individual chooses fiscal year.
c. 15th of the Fourth month of the following calendar year, if the individual chooses fiscal
year.
d. 15th of the Fourth month of the following calendar year

2. Espinili Incorporated has the following receipts during 2020:

From service billing to clients P 400,000.00

Advances from clients 100,000.00
Total Cash collection 500,000.00

The P100,000 advances refers to service which will be rendered next year. Total uncollected
billing increase from P100,000 on December 31, 2019 to P150,000 on December 31, 2020.

Compute the gross income using cash basis.

 a. P400,000
b. P450,000
c. P500,000
d. P550,000

3. Espinili Incorporated has the following receipts during 2020:

From service billing to clients P 400,000.00

Advances from clients 100,000.00
Total Cash collection 500,000.00

The P100,000 advances refers to service which will be rendered next year. Total uncollected
billing increase from P100,000 on December 31, 2019 to P150,000 on December 31, 2020.

Compute the gross income using accrual basis.

a. P400,000
b. P450,000
c. P500,000
d. P550,000

4. Initial payment means

a. Downpayment
b. All collection within the first quarter of the year
c. Total collections within one year from the date the installment was made.
d. Sum of all collections within the first year of installment sale was made.

5. Which is not a feature of regular income taxation?

a. use of accounting methods
b. annual payment of income tax
c. final withholding tax at source
d. use of accounting periods

6. Which is incorrect regarding the use of accounting method?

a. Individuals can either choose the calendar year and fiscal year accounting period.
b. The regular accounting period is 12 months.
c. Corporations may opt to use either calendar or fiscal accounting period.
d. Individual taxpayers are not allowed to report income using fiscal accounting period.

7. A dealer of cars sold the following:

Car X Car Y
Cost 400,000 500,000
Mortgaged for 150,000 150,000
Sold in 2020 under the following terms:
Cash received in 2020 100,000 350,000
Mortgaged assumed by the buyer 150,000 150,000
Balance payable equally in 4 years 500,000 300,000

Can income be reported in installment?

a. Car X- No; Car Y- Yes

b. Car X- Yes; Car Y- No
a. Car X- No; Car Y- No
 b. Car X- Yes; Car Y- Yes

V. Final Income Taxation

1. The final tax rates on pre-termination of long term deposits is not relevant to
a. any corporations
b. resident citizens
c. resident aliens
d. non-resident citizens

2. The final tax rates on passive income are generally similar to the following taxpayers except
one. Select the exception.

a. Domestic Corporation
b. Resident Alien
c. Nonresident Citizen
d. Nonresident Corporation

3. Glenda, a resident citizen, won $1,000,000 from the US lottery. The lottery winning is
a. Exempt from tax
b. Subject to 10% final tax
c. Subject to 20% final tax
d. Subject to regular tax

4. Bright Vachirawit, a resident alien, won the International Music Awards in Thailand. His prizes
are
a. Not subject to Philippine Income tax
b. Subject to 10% final tax
c. Subject to 20% final tax
d. Subject to regular tax

5. Which of the following is exempt from final tax?

a. Winnings in competitions sponsored
6. Which interest income is not subject to any income tax?
a. Interest income from discount notes
b. Interest income from bonds issued by a bank
c. Imputed interest
d. Interest income from deposit substitute

7. The interest income from long-term peso deposits made with foreign banks is
a. Exempt from tax
b. Subject to 10% final tax
c. Subject to 20% final tax
d. Subject to regular tax

8. Mr. Puntanar, a resident citizen, deposited P5,000,000 in a non-resident foreign depositary

bank which pays 12% annual interest. How much final tax shall be withheld in the first year?
a. P 0
b. P 45,000
c. P 120,000
d. P 150,000
 9. Mr. Washington Manabat owns 20% the capital and profits of a general professional
partnership. The partnership reported P500,000 in 2014. How much final tax will be withheld
from Mr. Manabat?
a. P100,000
b. P 50,000
c. P 10,000
d. P 0

VI. Capital Gains Taxation

1. 1st Statement: The gain on sale of domestic stocks directly to a buyer is presumed.
2nd Statement: The gain on sale of real properties is presumed.

a. Both statements are correct

a. Both statements are not correct
b. Only the first statement is correct
c. Only the second statement is correct

2. Mr. Medina, a resident citizen, purchased 100,000 shares of JABEE Corporation, a domestic
a domestic listed company. The shares were acquired at P200,000. She disposed the shares
through the Philippine Stock exchange at a fair value of P250,000.

Compute the capital gains tax.

a. P 0
b. P 2,500
c. P7,500
d. P10,000

3. The sale of an office building will be subject to

a. 60% of 1% percentage tax
b. 6% capital gains tax
c. 15% capital gains tax
d. Regular income tax

4. Which of these pay the 6% capital gains tax?

a. Security dealer
b. Real property dealer
c. Real property developer
d. None of these

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. Liquid Assets
c. Ordinary Assets
 d. Fixed Assets

7. 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 taxpayer
c. Property primarily for sale to customers in the ordinary course of his trade of business
d. Property used in trade or business subject to depreciation

8. All of the following, except one, results to a capital gain or loss:

a. Gain on short sales
b. Option Loss
c. Worthless securities
d. Ordinary gains

VII. Regular Income Taxation (Intro, Exclusions, and Inclusions)

1. A tax exclusion is defined as

a. An item or amount which the law allows to be deducted from gross income in order to
arrive at net income
b. The grant of immunity to particular persons or corporations from a tax which others within
the same taxing district are obliged to pay.
c. Income received but which is not taxable as it is exempted by law or by treaty
d. A deduction from income tax due of any amount paid to a foreign country subject to
limitation

2. 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
b. Part of taxable income
c. Subject to final tax
d. Partly exempt, partly taxable

3. 1st Statement: Items of passive income from abroad are subject to regular income tax.
2nd Statement: Items of passive income from the Philippines are generally subject to final
income tax

a. Both statements are correct

b. Both statements are not correct
c. Only the first statement is correct
d. Only the second statement is correct

4. Ms. Liwanag, with 14 dependent children had the following data for his income tax return in
2018:

Sales 490,000.00
Gross Compensation income 120,000.00
Cost of slaes 200,000.00
Non-taxable compensation 30,000.00
Administrative and selling expense 120,000.00
Personal Expenses 70,000.00

What is the net income?

 a. P 170,000
b. P 290,000
c. P 100,000
d. P 20,000
5. Ms. Liwanag, with 14 dependent children had the following data for his income tax return in
2018:

Sales 490,000.00
Gross Compensation income 120,000.00
Cost of sales 200,000.00
Non-taxable compensation 30,000.00
Administrative and selling expense 120,000.00
Personal Expenses 70,000.00

Compute the taxable compensation income?

a. (P 150,000)
b. (P 30,000)
c. P 90,000
d. P 120,000

6. Ms. Liwanag, with 14 dependent children had the following data for his income tax return in
2018:

Sales 490,000.00
Gross Compensation income 120,000.00
Cost of sales 200,000.00
Non-taxable compensation 30,000.00
Administrative and selling expense 120,000.00
Personal Expenses 70,000.00

Compute the taxable income?

a. P 10,000
b. P 100,000
c. P 260,000
d. P 140,000

7. In 2020, the taxpayer received the following prizes and winning:

Passive Income Philippines Abroad

Prizes P 10,000.00 400,000.00
Winnings 400,000.00 100,000.00

What is the reportable item of gross income if the taxpayer is a domestic corporation and a
resident foreign corporation, respectively?
a. P500,000; P 0
b. P 510,000; P 10,000
c. P 910,000; P 410,000
d. P 500,000; P 10,000

8. In 2020, the taxpayer received the following prizes and winning:

Passive Income Philippines Abroad

 Prizes P 10,000.00 400,000.00
Winnings 400,000.00 100,000.00

What is the reportable item of gross income if the taxpayer is respectively a resident citized
and a non-resident citizen?
a. P500,000; P 0
b. P 510,000; P 10,000
c. P 910,000; P 410,000
d. P 500,000; P 10,000

9. Mr. Ballatan earned a compensation income of P120,000 and net income from business of
P300,000. He also earned P8,000 prized from dancing competition and P45,000 royalties
from his musical composition. Mr. Bangul has P150,000 personal expenses. Compute the
taxable income.
a. P473,000
b. P 465,000
c. P 428,000
d. P 420,000

VIII. Compensation Income

1. Which of the following is taxable?

a. Separation pay received by a 50-year old employee due to the retrenchment program of
the employer
b. Retirement pay received from a benefit plan registered with the Bureau of Internal
Revenue where at the time the employee retired he was 55 years of age, retiring from
employment for the first time in his life, and was employed with the employer from who
retiring for 6 years prior to retirement
c. Social security benefit received by a balikbayan from employer abroad at the age of 35.
d. SSS and GSIS benefit.
2. 1st Statement: Amounts received by reason of involuntary separation remain exempt from
income tax even if the official or employee at the time of separation has rendered less than
10 years of service and/or below fifty years of age.
2nd Statement: Any amount received by an official or employee or by his heirs from the
employer due to death, sickness or other physical disability or for any cause beyond the
control of the said official or employee, such as retrenchment, redundancy, or cessation of
business are exempt from income tax.
a. Both statements are correct
b. Both statements are not correct
c. Only the first statement is correct
d. Only the second statement is correct

3. Which of the following items that reduce salaries of employees is not an exclusion from gross
income?
a. GSIS or SSS Contributions
b. Philhealth and HDMF
c. Labor Union dues
d. IOU’s

4. Please refer to the details below:

Thirteenth month pay 45,000.00

 Christmas Bonus 25,000.00
Productivity incentives pay 20,000.00
The gross compensation income subject to tax is:
a. 90,000
b. 60,000
c. 15,000
d. None

IX. Fringe Benefits Tax

1. All of the following fringe benefits are NOT taxable except:

a. De minimis benefits
b. Benefits given to a clerk of the company
c. Those authorized and exempted under contractual agreements
d. Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plan

2. Which of the following statements on fringe benefits is correct?

a. Part of the taxable income of the employees
b. Subject to fringe benefit tax
c. Not part of the taxable income of the employees
d. Maybe given to managerial and rank and file employees

3. Mr. Belardo is a rank and file employee of Barcellano Corporation. During the taxable year,
he received a total salary of PhP240,000. In addition, he was given fringe benefits of free
quarters with a monthly value of PhP4,000 and free meal allowance of PhP5,000 per month.
How much are the fringe benefit received for the year subject to Fringe Benefits Tax (FBT)?
a. 0
b. P48,000
c. P60,000
d. P108,000

4. Which of the following is subject to fringe benefit tax?

a. Compensation of the rank and file employee
b. Compensation of the supervisory or managerial employee
c. Fringe benefit of the rank and file employee
d. Fringe benefit of the supervisory or managerial employee

5. Which of the following is not subject to fringe benefits tax?

a. Contributions of the employer for the benefit of the employer to retirement, insurance and
hospitalization benefit plans
b. Housing
c. Expense Account
d. Vehicle of any kind

6. The following earnings are subject to fringe benefits tax, except

a. Salary of the rank and file employee
b. Housing necessary for the trade and for the convenience of the employer
c. Food allowance for the convenience of the employer and necessary in the conduct of
business
 d. All of the above

7. 1st Statement: A fringe benefit which is not subject to the fringe benefit tax is taxable income
of the employee.
2nd Statement: A fringe benefit which is subject the fringe benefits tax is taxable income of
the employee.
a. Both statements are correct
b. Both statements are not correct
c. Only the first statement is correct
d. Only the second statement is correct

8. Which statement is wrong? The fringe benefit tax is:

a. Imposed on the employer
b. Imposed on employee
c. Withheld at source
d. Deductible by the employer

9. Fringe benefits tax is computed based on the:

a. Monetary value of the fringe benefit
b. Grossed up monetary value of the fringe benefit
c. Book Value of the fringe benefit
d. Fair market value of the fringe benefit

10. The following statements are true, except

a. Fringe benefit shall be treated as a final income tax on the employee withheld and paid
by the employer of quarterly basis.
b. The grossed-up monetary value of the fringe benefit is the actual amount received by the
employee.
c. The grossed-up monetary value of the fringe benefit shall be determined by dividing the
actual monetary value of the fringe benefit received by its equivalent monetary value
factor.
d. The person liable for fringe benefit tax is the employer, whether an individual,
professional partnership or a corporation, regardless of whether the corporation is taxable
or not, or the government and its instrumentalities.

X. Deductions (Allowable, Special Allowable, OSD)/ Tax Credits

1. The optional standard deduction is forty percent of the gross income for corporations. For
purposes of the optional standard deduction gross income means:
a. If a trading concern, gross profit from sales
b. If a service concern, gross receipts less direct cost of services
c. Gross profit from sales, or gross receipts less direct cost of services, plus all other items
of gross income
d. Includes the net capital gain of an individual

2. 1st Statement: Itemized deductions from income should be duly supported by vouchers or
receipts.
2nd Statement: Only business expenses may be deducted from the income of the taxpayers.
d. Both statements are correct
e. Both statements are not correct
f. Only the first statement is correct
g. Only the second statement is correct
3. Which of the following statements is wrong?
a. A deduction for bad debt is not available when a provision for it is made.
b. A deduction for bad debt is available only when a write off is made.
c. There is no deduction for bad debt when there is a surety for the debtor against whom
collection may be enforced
d. A deduction for uncollectible account is available to a taxpayer whether he is on the cash
or accrual method of accounting.

4. 1st Statement: In financial accounting, bad debt is an expense in the books of accounts when
a provision is made for it.
2nd Statement: In income taxation, bad debt is a deduction from gross income when the
account is written off.
e. Both statements are correct
h. Both statements are not correct
i. Only the first statement is correct
j. Only the second statement is correct

5. One of the following statements is correct. A choice by an individual of the optional standard
deduction means that:
a. His income tax return need not be accompanied by financial statements
b. He need not keep books of accounts.
c. He need not have records of gross sales or receipts
d. His choice can still be changed by filing an amendment return.

6. For an individual on the cash basis of accounting, prepaid interest on business indebtedness
is deductible:
a. In the year that the interest is prepaid
b. In the year that principal is paid
c. For the portion expired corresponding to the current accounting period
d. As time goes by.

7. Which of the following taxes is deductible from the gross income of a corporate taxpayer in
connection with its trade or business?
a. Real estate tax
b. Transfer taxes
c. Special Assessment
d. Energy consumption tax

8. Privilege granted a taxpayer to deduct or set-off against Philippine Income tax the income tax
that he has paid o has accrued in a foreign country.
a. Tax exemption
b. Tax consolidation
c. Tax Deductions
d. Tax Credit

9. Ms. Tejada is the President of Hyundai Corporation engaged in the marketing of cars. When
Ms. Tejada’s son got married to the daughter of a senator, the corporation gave the newly-
wed couple a brand new Elantra worth P2,000,000 and entered the wedding gift in its books
as representation expense. As a result of the above, the Elantra car is:
a. Taxable income to the couple
b. Deductible expense of the corporation
 c. Not taxable income to the couple nor deductible expense of the corporation
d. Answer not given.

10. The basis of computing depreciation of an asset is always:

a. Cost of the property
b. Fair market value of the property
c. The adjusted basis for computing loss of the sale of the property
d. Value of the property at the time of acquisition

XI. Corporate Income Taxation MCIT, Exempt Corporation

1. MCIT shall commence on the

a. 5th year of operation
b. 3rd year of operation
c. 4th year following the year of start of operation
d. 3rd year following the year of start of operation

2. Which is deduction in the computation of MCIT?

a. Marketing expense
b. Office utilities
c. Loss on sale of assets
d. Salaries of employees directly engaged in rendering services

3. The MCIT is not due when

e. MCIT is greater than RCIT.
f. Taxable income is zero
g. Taxable income is negative
h. RCIT is greater than MCIT

4. Which statement is wrong? The net operating loss carry-over (NOLCO) is:
a. Available to a domestic corporation
b. Available to a registered general partnership in business in the Philippines
c. Available to an individual in business in the Philippines
d. Not available to a general professional partnership in the Philippines

5. A domestic corporation had a net operating loss in 2020 of P300,000, and the following data
in 2021:

Gross income from operations 2,000,000.00

Expenses of operations 2,600,000.00
Capital Gain 200,000.00
Capital Loss 300,000.00

The net operating loss carry-over available in 2021 is:

a. P300,000
b. P600,000
c. P900,000
d. P1,000,000
6. 1st Statement: A net operating loss is the excess of allowable deductions over the gross
income from business for a taxable year.
2nd Statement: A net operating loss which had not been previously deducted from gross
income shall be carried over as a deduction only in the next year immediately following the
year of such loss.
a. Both statements are correct
b. Both statements are not correct
c. Only the first statement is correct
d. Only the second statement is correct