Final Examination in Income Taxation

1. Income tax payments to a foreign country, in the case of a resident citizen may be claimed
as?
a. Tax credit and deduction from gross income
b. Tax credit only
c. Tax credit or deduction from gross income
d. Deduction from gross income only
2. Which of the following statements regarding dividends is wrong?
a. Exempt from income tax if received by a domestic corporation from another domestic
corporation
b. Exempt from income tax if received by a resident corporation from a domestic
corporation
c. Taxable subject to year-end tax if received by a resident citizen from a non-resident
corporation
d. Taxable subject to final tax if received by a non-resident citizen from a nonresident
corporation
3. One of the following is taxable income?
a. Compensation for damages
b. The share of a partner in the undistributed net income of a general professional
partnership
c. Living quarters and meals furnished and given to an employee for the convenience of
the employer
d. Facilities or privilege of relatively small value offered by the employer as a means of
promoting the health, goodwill, contentment, or efficiency of the employee.
4. Exclusions from gross income, except:
a. Interest on the price of the land covered by the Presidential Decree on land reform.
b. Interest payments on proceeds of life insurance held by the insurer
c. GSIS/SSS, Phil health and Pag-ibig contributions and Union dues of individuals
d. Gains realized by an investor upon redemption of shares of stock in a mutual fund
company.
5. Advance rental in the nature of prepaid rental, received by the lessor under a claim or right
and without restriction as to use is?
a. Taxable income of the lessor in the year received if he is on the cash method of
accounting
b. Taxable income of the lessor in the year received whether he is on the cash or accrual
method of accounting
c. Taxable income of the lessor in the year received whether he is on the cash or accrual
method of accounting
d. Taxable income of the lessor up to the amount earned in the year the rental is received
6. Which of the following is subject to fringe benefit tax?
a. compensation income of the rank and file employees
b. Fringe benefit of the rank and file employees
c. Compensation income of the managerial employees
d. Fringe benefit of the managerial employees
7. The following concepts denote exemption from the fringe benefits tax, except:
a. convenience of the employer
b. necessity to the business or trade
c. welfare and benefits of the employee
d. de minimis benefits
8. With regard to the amount on which the fringe benefit tax rate is applied, which statement
is wrong? The tax benefit rate is applied on?
a. The monetary value of the fringe benefit
b. The gross-up monetary value of the fringe benefit
c. The amount deductible by the employer from gross income
d. Both accounts of the fringe benefit and the fringe benefit tax
9. Which statement is wrong? The fringe benefit tax is?
a. Imposed on the employer
b. Imposed on the managerial or supervisory employee
c. Withheld at source
d. Deductible by the employer
10. The phrase “related taxpayers” will apply to the following, except:
a. Between members of a family
b. Between the grantor and a fiduciary of any trust
c. Between a fiduciary of a trust and a beneficiary of such trust
d. Between an individual and a corporation more than 50% in value of the outstanding
stock of which is owned, directly or indirectly for such individual, in case of distributions
in liquidation.
11. Interest expense incurred to acquire property used in trade or business or exercise of a
profession is?
a. Not allowed as a deduction against gross income
b. Required to be treated as a capital expenditure to form part of the cost of the asset
c. Allowed as a deduction or treated as a capital expenditure at the option of the taxpayer
d. Allowed as a deduction or treated as a capital expenditure at the option of the
government
12. If an individual is on the cash basis of accounting, will interest paid in advance be allowed as
a deduction?
Answer 1: No, it is a deduction in the year that the indebtedness was paid and not in the
year that the interest was paid.
Answer 2: Yes, if the indebtedness is payable in periodic amortizations, the amount of the
interest which corresponds to the amount of the principal amortized or paid during the year
shall be allowed as a deduction in such taxable year.
a. True; True c. False; False
b. True; False d. False; True
13. May be deducted from gross income?
a. Philippine income tax c. Estate or donor’s tax
b. Foreign income tax d. Special assessment
14. The operating loss, which had not been previously offset as deduction from gross income
shall be carried over as deduction from gross income for the next?
a. 2 consecutive taxable years immediately following such loss.
b. 3 consecutive taxable years immediately following such loss.
c. 4 consecutive taxable years immediately following such loss.
d. Taxable year immediately following such loss.
15. One of the following losses cannot be deducted from gross income:
a. To construct a bigger warehouse, a corporation demolished an old warehouse which had
a construction cost of P2M and a book value of P300, 000.
b. Demolition of a building existing on a land purchased where the corporation has no use
for the building at the time of purchase and it was its intention to remove the building in
order to build its factory.
c. A corporation retired its machinery from the business because of the increase in the cost
of production and the failure of the machinery to meet the desired number of units of
production.
d. A corporation ascertained that its B Corp. stocks are worthless because of the total
insolvency of B Corp.
16. Statement 1: An expense which is necessary but not ordinary, or ordinary but not necessary
is Deductible from gross income.
Statement 2: The taxpayer must signify his intention to elect the itemized deduction,
otherwise, he is deemed to have chosen the optional standard deduction.
a. True; True c. False; True
b. True; False d. False; False
17. Statement 1: Interest paid on preferred stock is deductible from gross income of the paying
corporation.
Statement 2: A capital expenditure usually benefits more than one accounting period and is
deductible from gross income in the year it is paid or incurred.
a. True; True c. False; True
b. True; False d. False; False
18. Any amount subsequently received on account of a bad debt previously charged off and
allowed as a deduction from gross income in prior years must be included in gross income in
the taxable year in which received. This is?
a. Severance test c. Destination of income test
b. Life-blood theory d. Equitable doctrine of tax benefit
19. Z, a dedicated and honest employee of RST Corp. for the past 20 years was advised that he is
to be retrenched as the company was losing heavily but that he would be given the
separation pay provided by law. To avoid implication of inefficiency Z was advised to file a
letter of resignation instead of being retrenched. If Z files a letter of resignation and receives
the separation pay, such amount is?
a. Taxable in full c. Exempt from income tax
b. Partly taxable, partly exempt d. Subject to final tax
20. X took out a life insurance policy of P1, 000,000 naming his wife as beneficiary. The policy
provides that the insurance company will pay X the amount of P1, 000,000 after the 25th
year of the policy and his beneficiary, should he die before this date. The premiums paid on
the policy is P700, 000. If X outlived the policy and received the proceeds of P1,000,000,
such proceeds will be:
a. Taxable in full c. Exempt from income tax
b. Partly taxable, partly exempt d. Subject to final tax
21. Using the preceding no., if X dies and his beneficiary received the proceeds of P1,000,000,
such proceeds will be:
a. Taxable in full c. Exempt from income tax
b. Partly taxable, partly exempt d. Subject to final tax
22. One of the following is not correct for deductibility of losses from gross income:
a. Must arise from fire, storm or other casualty, robbery, theft or embezzlement
 b. Must not be compensated by insurance or other form of indemnity
c. A declaration of loss by casualty should be filed with the Bureau of Internal Revenue
d. Must have been claimed as deduction in the estate return of the taxpayer
23. The term “capital assets” include:
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 or business.
d. Property used in the trade or business of the taxpayer and subject to depreciation.
24. Which of the following statements is not correct? Those who make a casual sale or
disposition of personal property on the installment plan may elect the installment basis of
reporting income if?
a. The personal property sold is not of a kind which would be included in the inventory.
b. The selling price exceeds P1,000
c. The sale is in installment
d. The initial payments do not exceed 25% of the contract price.
25. A resident citizen taxpayer is allowed to pay his income tax due on installment basis if:
a. Basic income tax is P2,000 or below
b. Basic income tax is over P2,000
c. Basic income tax is over P5,000
d. Basic income tax is over P1,000

26. An assessment shall become final if not protested administratively, if such protest is not filed
with the BIR, from receipt of the assessment within?
a. 30 days c. 90 days
b. 60 days d. 180 days
27. Using the preceding number, relevant supporting documents must also be presented to the
BIR, from filing the protest on the assessment within?
a. 30 days c. 90 days
b. 60 days d. 180 days
28. Statement 1: The taxpayer shall respond to a pre assessment notice, and if he fails to
respond, an assessment shall be issued.
Statement 2: An assessment issued may be questioned administratively with the BIR.
a. True; True c. False; True
b. True; False d. False; False
29. Where any national internal revenue tax is alleged to have been erroneously or illegally
collected. As a remedy, the taxpayer should first file an action for refund with the?
a. Regional Trial Court c. BIR
b. Court of Tax Appeals d. Court of Appeals
30. In case of an assessment of a tax:
a. The assessment should be made within 3 years from date of filing of the return.
b. The assessment should be made within 3 years from date of the return is due.
c. A protest should be made on time, otherwise the assessment becomes final and
executory.
d. A protest may be filed any time before the BIR collects the tax.
Part II.

1. In 2010, X Corporation allows its Sales Manager to incur expenses subject to reimbursement,
as follows:
Electricity- 70% in the name of X Corporation P20, 000
Water – 70% in the name of X Corporation 2,000
Grocery 10,000
Gasoline of company car 12,000
Representation and Transportation – business trip 4,000

The amount subject to fringe benefit tax is?

2. In 2019, Omega Corporation Purchased motor vehicle for the use of its executive. It was
registered under the name of the executive although it was agreed that it shall be used
partly for the benefit of the company. The cost of the vehicle was P1, 400, 000. The amount
of fringe benefit tax is?
a. P658, 824 c. P329, 411
b. P753, 846 d. Zero

3. Based on the immediately preceding, how much is the total allowable deduction of Omega
Corporation?
a. P658, 824 c. P329, 411
b. P753, 846 d. P2, 153, 846

4. X Corp. had a net sales of P1M. The actual entertainment, amusement and recreation
expense amounted to P20, 000. The deductible “EAR” expense is?
a. P20, 000 c. P10,000
b. P 6,000 d. P 5,000

5. Y Corp. had a net revenue of P1M. The actual entertainment, amusement and recreation
expense amounted to P20, 000. The deductible “EAR” expense is?
a. P20, 000 c. P10,000
b. P 6,000 d. P 5,000
6. In 2019, Z, a resident citizen, engaged in business borrowed money from ABC Bank from
which he had an interest expense of P20, 000. His deposit in XYZ bank yielded an interest
income of P25, 000. His deduction for interest expense is?
a. P20,000 c. P11,750
b. P 5,000 d. P10,250

7. Pedro generated net income from trade amounting to P400, 000. His capital asset
transaction during 2019 are summarize as follows:
Holding Period Amount

Capital gain 6 months P50, 000

8. Based on the above problem assuming the taxpayer is corporation, how much is the taxable
income?
a. P484, 000 c. P435, 500
b. P444, 000 d. P385, 5000

9. Karen, a real estate dealer sold a house and lot for P600, 000 on November 20, 2019. The
cost of the property is P375, 000 Terms are:
Down payment: P100, 000
Balance: Payable in monthly installment of P25, 000 beginning
December 20, 2019
How much is the Income subject to income tax in 2017:
a. P125, 000 c. P46, 875
b. 225, 000 d. P23,437

10. How much is the income subject to tax in 2020?