Drill Discussion

Drill on Inclusions and Exclusions to

Gross Income
1. Jay Corporation is registered under the laws of the Virgin
Islands. It has extensive operations in Southeast Asia. In the
Philippines, its products are imported and sold at a mark-up by
its exclusive distributor, Roxy’s Trading, Inc. The BIR compiled a
record of all the imports of Roxy from Jay and imposed a tax
on Jay’s net income derived from its exports to Roxy. Is the BIR
correct?

a. Yes. Jay is a non-resident foreign corporation engaged in trade

or business in the Philippines.
b. No. The tax should have been computed on the basis of gross
revenues and not net income.
c. No. Jay is a non-resident foreign corporation not engaged in
trade or business in the Philippines.
d. None of these.
2. Compania Italliani is a corporation in Italy.
During the tax year, it distributed dividends to
its stockholders. Filipinas, Inc., a Philippine
company which has investments in stocks in
Italliani, received said dividends.

a. Dividends are not taxable.

b. Dividends are taxable at 30% or at 15% if the
corporation is subject to a tax sparing credit.
c. Dividends are taxable at 30%.
d. Dividends are taxable at 25%.
3. Seven Kingdoms Corporation, a domestic corporation, declared
and distributed to its stockholders shares of Red Keep Corporation.
One of its stockholders, Theon Greyjoy, received 100 shares of Red
Keep Corporation shares as dividends. At the date of dividend
declaration, the fair market value of Red Keep Corporation shares
was P120 per share and by the time Theon Greyjoy received the
dividend, the fair market value per share was P180. The dividend is

a. A stock dividend, hence exempt from tax.

b. A property dividend which will form part of taxable income of
Theon Greyjoy.
c. A property dividend which is subject to final tax based on its fair
market value of P180 per share.
d. A property dividend which is subject to final tax based on its fair
market value of P120 per share.
4. Determine the correct classification of the following:
a. Manny, a Filipino businessman, went on a business trip
abroad and stayed there most of the time during the year.
b. Kyla, a Filipino professional singer, held a series of
concerts in various countries around the world during the
current taxable year. She stayed abroad most of the time
during the year.
c. Efren, a Filipino “cue” artist who went to Canada during
the taxable year to train and participate in the world cup
of pool. He stayed therein most of the time during the
year.

Answer: D. All are RC.

5. Situs of Taxation C.

a. Resident citizen True

b. Nonresident citizen False
c. OCWs False
d. Special Filipino employee True
e. Resident alien False
f. Nonresident alien False
g. Special alien employee False
6. Bonus
7. Situs of taxation on income from sale shares
of a foreign corporation.

a.Always treated as income derived from within

the Philippines
b.Always treated as income derived from
without the Philippines
c.May be treated as income within or without
the Philippines depending on the place of sale
d.May be treated as income within or without
the Philippines depending where the shares
are kept
8. Which of the following test of source
of income is incorrect?

a.Interest income - residence of the

debtor
b.Income from services – place of
performance
c.Royalties – place of use of intangible
d.Gain on sale of real property – place of
sale.
9. In 2015, ADB Finance (domestic corporation)
purchased various equity securities from listed
domestic corporations for P100,000. ADB classified
the securities as Trading Securities/FAFVPL under the
applicable accounting standards. ADB received
P10,000 dividend income from such investments in
2016.. Determine the applicable tax of ADB.

a.The P10,000 dividend income is subject to normal

corporate tax of 30%
b.The P10,000 dividend income is subject to a final
withholding tax of 10%
c.The P10,000 dividend income is subject to a final
withholding tax of 20%
d.The dividend income is tax exempt
10. Which of the following statements is incorrect?

a.If services are paid for in a medium other than money,

the fair market value of the thing taken in payment is the
amount to be included as compensation subject to
withholding.
b.If the services are rendered at a stipulated price, in the
absence of evidence to the contrary, such price will be
presumed to be the fair market value of the
remuneration received
c.If a corporation transfers to its employees its own stock
as remuneration for services rendered by the employee,
the amount of such remuneration is the fair market value
of the stock at the time the services were rendered.
d.None of the choices.
11.First statement: Gain or loss from the sale of
goodwill results only when the business, or part of it, to
which the goodwill attaches is sold in which case the
gain or loss will be determined by comparing the sale
price with the cost or other basis of the assets including
goodwill.
• Second statement: Income from expropriation (forced
sale) is income from sale or exchange and any profit
derived there from is therefore, subject to income tax.

a.Both statements are correct

b.Both statements are incorrect
c.Onlv the second statement is correct
d.Onlv the first statement is correct
12. Which of the following statements is incorrect?

a.Gains, profits, and income are to be included in the gross income

for the taxable year which they are received by the taxpayer,
unless they are included when they accrue to him in accordance
with approved method of accounting followed by him.
b.If a person sues in one year, a pecuniary claim or for property,
and money or property is recovered on a judgment therefore in a
later year, income is realized in that year, assuming the money
or property would have been income in the earlier year if then
received.
c.Bad debts or accounts charged off because of the fact that they
were determined to be worthless, which are subsequently
recovered, whether or not by suit, constitute income for the year
in which recovered, regardless 0f the date when amounts were
charged off.
d.None of the choices.
13. The widow of your best friend has just been paid
P1,000,000 on account of life insurance policy of the
decease husband. She asks you whether she should declare
the amount for income taxes purposes or for estate tax
purposes.
1st advice: The proceeds of life insurance paid to the beneficiary
upon the death of the insured are exempt from income tax and
need not be declared for income tax purposes.
2nd advise: The proceeds of life insurance would have to be
declared for the estate tax purposes if the designation of the
beneficiary was irrevocable, otherwise it need not be declared.

a. Both advises are correct.

b. 1st advice correct, 2nd advice are wrong.
c. Both advises are wrong.
d. 1st advice wrong, 2nd advice correct.
•  
14. Which of the following is not
taxable recovery of lost profits:

a.Proceeds of crop or livestock

insurance
b.Guarantee payments
c.Indemnity received from patent
infringement suit
d.Damages on alienation of affection
15.The following are requisites of a
realized benefit, except

a.There must be an exchange

transaction.
b.The transaction involves another entity.
c.It increases the net worth of the
recipient.
d.Increase in value of investments in
equity or debt securities.
16.Statement 1: Mang Tomas insured his strawberry crop
in a P200,000 crop insurance coverage against calamities.
The crop was eventually destroyed by an unusual frost.
Mang Tomas was paid the P200,000 insurance proceeds.
• Statement 2: Mr. Santiago purchased a franchise. The
franchisor guaranteed an annual franchise income of
P100,000 to Mr. Santiago. In the first year of operation,
Mr. Santiago’s outlet only earned P60,000. The franchisor
paid the P40,000 difference to Mr. Santiago.

a.Both statements are taxable.

b.1st statement is taxable, 2nd is not taxable.
c.Both statement are not taxable.
d.1st statement is not taxable, 2ndstatement is taxable.
17. Mr. P was an insolvent debtor with an obligation
of P500,000 to Q Co. Q Co. agreed to a dacion en
pago , receiving property with a fair market value of
P100,000 in payment, with the balance of P400,000
being condoned.
• Statement 1: There is no taxable income of
P400,000 to Mr. P.
• Statement 2: There is a gift of P400, 000 to Mr. P.

a.True; True
b.False; False
c.True; False
d.False; True
18. Mr. A an executive of a company, owed his employer P100,
000. For a job well done, his employer condoned his
indebtedness, gave him a round trip ticket for travel abroad
worth P10, 000, and travel expenses of P20, 000. Which
statement is wrong?

a.The condonation of indebtedness did not result in income to

Mr. A, because it is a gift.
b.The cost of the round trip ticket is a fringe benefit to Mr. A,
and not taxable income of him because he is a managerial
employee so that the employeer must have paid a fringe
benefit tax on it.
c.The travel expenses is fringe benefit to Mr. A, and not a
taxable income to him because the employer must have paid
a fringe benefit tax on it.
d.All the amount given to Mr Aare taxable income to him.
19. Recovery of bad debts written off by a taxpayer
• No. 1: P20, 000 from accounts written off in a year which had a
net income of P200, 000 before write off (write off for the year
was P20, 000).
• No. 2: P5, 000 from accounts written off in a year which had a
net loss of P36, 000 before write off (write off for the year was
P5, 000).
• No. 3: P10 , 000 from accounts written off in a year which had
a net income of P8, 000 before write off (write off for the year
was P12, 000).
• The income from bad debt recovery is.

a.35, 000
b.20, 000
c.26, 000
d.30, 000
 
20. Which of the following tax refunds
constitutes income?

a.Refund of Philippine Income Tax.

b.Refund of Estate Tax.
c.Refund of Donor’s Tax
d.Refund of Percentage Tax
21.Mr. A Pascual bought a 2, 000 square meter land at a cost of
P500, 000. He leased the land to Mr. B Franco at an annual
rental of P40, 000. The term of the contract lease is 15 years.
The contract lease provides that Mr. Franco will construct a
building on the land and the building will belong to the lessor at
the end of the term of the lease. The building was constructed
at a total cost of P400, 000 and has an estimated useful life of
20 years which is the basis of straight line method of
depreciation.
• Assuming that Mr. A Pascual will spread his income over the
term of the contact lease, the annual income of Mr. A Pascual
is:

a.46, 666.66
b.26, 666.66
c.66, 666.66
d.40, 000.00
22. Assuming the contact of lease was
terminated after tenth year or at the
beginning of the eleventh year due to
the default to the lessee, the income of
Mr. a Pascual in the eleventh year is:

a.173, 333.34
b.200, 000.00
c.133, 333.34
d.400, 000.00
23. The farmer is on accrual accounting
method:

Sales of livestock and farm products raised 200, 000

Sales of livestock and farm products purchased 100, 000
Cost of livestock and farm products purchased and sold 110, 000
Expenses of raising livestock and farm products 80, 000
Inventory, Beg. Of the year 10, 000
Inventory, End of the year 12, 000
The gross income is

a.192, 000
b.112, 000
c.190, 000
d.110, 000
 24. Mr. Henares received the following
during the year:
i. Donated properties 200, 000
ii. Income of Donated property before donation 50,
000
iii. Income of Donated property after donation 30, 000
iv. Inherited Properties 100, 000
• How much is the taxable income of Mr.
Henares?
a. 380, 000
b. 80, 000
c. 50, 000
d. 30, 000
25. Mang Antonio collected P2,000,000 from the
fire insurance company that insured his
building which has a tax basis of P1,800,000
when the fire occurred. During that same
period, he also collected P300, 000 crop
insurance proceeds pertaining to his crops
destroyed by frost. The total item of gross
item is

a. P2,300,000
b. P 500,000
c. P 300,000
d. P 200,000
26. The following relates to the compensation income of Ms.
Lamitan in 2015:
i. Compensation P2,400,000
ii. Mandatory SSS, PhilHealth, PagIbig Cont. 125,000
iii. Voluntary SSS, PhilHealth, PagIbig Cont. 150,000
iv. Creditable withholding taxes 190,000
v. Employers’ Share in SSS, PhilHealth and HDMF105,000
What is the total exclusion in gross income?

a.125, 000
b.230, 000
c.275, 000
d.465, 000
27. The following income relates to a
proprietorship registered as a BMBE:
i. Gross income from sales 400,000
ii. Dividend income-domestic 9, 000
iii. Interest on Deposits 6, 800
• Compute the total exclusion in gross income
subject to regular tax?
a.415, 800
b.400, 000
c.15, 800
d.0
28. In the immediately preceding
problem, compute the total inclusions
in gross income subject to final tax?
a.0
b.9, 000
c.6, 800
d.15, 800
29. The Professional Regulations Commission
collected a total sum of P100,000,000 from
professional license fees. It also collected
P5,000,000 from rentals of government properties.
What is the total exclusion in gross income?

a. 0
b. 5,000,000
c. 100,000,000
d. 105,000,000
30.Mr. A owns shares of common stock of Z. Co. as follows:
• Acquisition 1: Cost of 200 shares at P120 per share.
• Acquisition 2: Cost of 100 shares at 140 per share.
• Acquisition 3: Cost of 50 shares at 130 per share.
• Acquisition 4: 50% stock dividend
• Sale of 200 shares at P145 per share
• If costing was under the moving average method the gain on
the sale is

a.5, 000
b.3, 3668
c.3, 572
d.12, 050
End of Discussion