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INCOME TAXATION
Sacred Heart College of Lucena City, Inc.

GROSS INCOME SAMPLE PROBLEMS

1. Statement 1: Damages for loss of earnings represent taxable income.

Statement 2: Exemplary damages received by the plaintiff do not constitute taxable income to the
plaintiff.

a) Statement 1 is true.
b) Statement 2 is true.
c) Both statements are false.
d) Both statements are true.

2. Statement 1: Passive income derived from investments or deposits in the Philippines by foreign
governments shall be taxable in the Philippines.
Statement 2: Income derived from governmental or proprietary functions by the National Government
of the Philippines or any of its political subdivisions as well as those corporations owned by the
Philippine government, are exempt from tax following the principle that the government does not tax
itself.
a) Statement 1 is true.
b) Statement 2 is true.
c) Both statements are false.
d) Both statements are true.

3. Statement 1: The value of property acquired by gift, bequest, devise, or descent, as well as the
income from such property, shall be excluded from the gross taxable income of the recipient.
Statement 2: Gains realized from the sale or exchange or retirement of bonds, debentures, or other
certificates of indebtedness with a maturity of at least 5 years, shall not be taxable to the investor-
seller.
a) Statement 1 is true. c) Both statements are false.
b) Statement 2 is true. d) Both statements are true.

4. The following constitute taxable income except:

a) Refund of real property taxes paid in a previous year but disallowed as a deduction in the year
paid.
b) Recovery of debts which were previously charged off and deducted in a previous year.
c) Casino winnings.
d) Interest income from loan where the interest charged is 100% per annum.

5. Exclusions from gross income, except:

a. Interest on the price of land covered by the Presidential Decree on land reform
b. Interest payments on proceeds of life insurance held by the insurer.
c. GSIS, SSS, Philhealth 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.

6. Which of the following statements is correct?

a. The power of taxation reaches even the citizens abroad and their income earned from sources outside
the Philippines.
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b. Priests and religious institutions are exempt from income and property taxes.
c. Separation benefits received by terminated employees resulting from a deadlock in their collective
bargaining agreement are exempt from income tax.
d. The value of property received as gift, or under a will or testament or through legal succession is
exempt from taxation.

7. One of the following is taxable income:

a. Gifts, bequests and devices
b. Amounts received as rewards from giving information instrumental in the discovery of violations
of the Tax Code and seizure of smuggled goods.
c. Proceeds from life insurance
d. Separation pay received by an employee due to a cause beyond his control.

8. Which of the following statements is not correct?

a. Proceeds of life insurance policies paid to beneficiaries upon the death of the insured are excluded
from gross income regardless of whether the proceeds are received as a single sum or in installments.
b. In case of transfer for a valuable consideration by assignment or otherwise of a life insurance,
endowment or annuity contract or any interest therein, only the actual value of such consideration
and the amount of the premium and the sums subsequently paid by the transferee are exempt from
income tax.
c. Marriage fees, baptismal offerings, sums paid for saying masses for the dead and other contributions
received by a clergyman, evangelist or religious worker for services rendered are taxable income.
d. Monetization of leave credits of employees who were unable to go on leave due to exigencies of the
service constitutes taxable income.

9. Which of the following statements is correct as regards a resident citizen?

a. Income from illegal activities are subject to final tax.
b. Income tax refunds constitute taxable income to the taxpayer.
c. Recovery of bad debts previously written off is part of taxable income.
d. As a rule, contest awards and prizes are subject to 20% final tax if they amount to more than P10,000,
otherwise they will be part of taxable income in the ITR.

10. Which of the following statements is not correct?

a. Minimum wage earners shall be exempt from the payment of income tax on their SMW.
b. Holiday pay, overtime pay, night shift differential and hazard pay shall be exempt from income tax.
c. Prizes and awards granted to athletes in local and international sports competitions and tournaments
whether held in the Philippines or abroad, and sanctioned by their national sports associations are
exclusions from gross income.
d. Benefits received from or enjoyed under the Social Security System are exclusions from gross
income.

11. One of the following is part of taxable income subject to schedular (graduated/progressive) rates:
a. Compensation for damage/injury to person or property
b. The share of a partner in the undistributed net income of a general co-partnership
c. Living quarters and meals furnished and given to a rank and file employee for the convenience of
the employee
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.

12. Which is not a creditable withholding income tax?

a. Expanded withholding income tax
b. Withholding income tax at source
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c. Withholding income tax on passive income

d. Withholding income tax on compensation income

13. As a rule, this is not part of taxable income

a. Profit sharing
b. Hazard pay
c. Overtime pay
d. 13th month pay

14. This is taxable income

a. Retrenchment pay
b. SSS / GSIS benefits
c. Separation pay due to resignation
d. Refund of Philippine income tax

15. Which of the following is taxable income?

a. Prizes and awards as an awardee of Ramon Magsaysay Award Foundation
b. Damages awarded as a consequence of libel and slander suits
c. Interest on Philippine lotto winnings
d. Amount received as returns of premiums

16. Which of the following statements regarding dividends is correct?

a. Exempt from tax if received by a resident citizen from a domestic corporation
b. Exempt from tax if received by a resident alien from a domestic corporation
c. Taxable subject to year-end tax if received by a resident citizen from a non-resident foreign
corporation
d. Taxable subject to final tax if received by a non-resident citizen from a non-resident foreign
corporation

17. The following items are exclusions from gross income, except
a. Labor union dues
b. SSS/GSIS premiums contribution
c. IOUs
d. Pag-ibig premium contribution

18. Which of the following is part of gross income in the ITR?

a. PCSO and Philippine Lotto winnings
b. Bank interest on long term deposit
c. Proceeds of life insurance upon death of the insured
d. Raffle prize not exceeding P10,000

19. If refunded, this is taxable

a. Estate tax
b. Donor’s Tax
c. Special Assessment
d. Fringe Benefit tax

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20. A) PCSO and Philippine lotto winnings (of more than ₱10,000) of citizens, resident aliens, and
NRAETBs are excluded from gross income in the ITR because they are exempt from tax.
B) All prizes, awards, winnings are excluded from gross income in the ITR because they are subject to
final tax.

a. Both are true

b. Both are false
c. Only the first is true
d. Only the second is true

21. Which of the following is taxable?

a. P 100,000 interest on long-term deposit or investment
b. P 200,000 gain on sale of 10-year bonds
c. P 12,000 prize in supermarket raffle
d. P 10,000 winnings in Philippine Lotto

22. Gain realized from the sale or exchange or retirement of bonds, debentures or other certificate of
indebtedness is excluded from gross income if the same have a maturity of
a. More than 5 years
b. More than 7 years
c. More than 8 years
d. More than 10 years

23. Gross benefits received by officials and employees of public and private entities as 13th month pay and
other benefits such as productivity bonus, services incentive pay and Christmas bonus shall be excluded
from taxable income up to
a. P20,000
b. P90,000
c. P40,000
d. P50,000

24. 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 if he is on the 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.

25. Which payments made by the lessee under such terms of the lease contract should be considered as
additional rent income of the lessor?
A. If a lessee paid directly to the local government the real estate tax on the property of the lessor
B. If the amount received by the lessor is in the nature of a security deposit for the faithful compliance
by the lessee of the terms of the contract
C. If the amount received by the lessor is in nature of a loan extended by the lessee to the lessor.

a. Only A
b. Only A and C
c. Only B and C
d. A, B and C

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26. Should the lessee make permanent improvements on the property leased under an agreement that upon
the expiration of the lease contract the improvements shall belong to the lessor, the lessor may recognize
income from the leasehold improvements
A. At the time when such improvements are completed, the fair market value of such improvements.
B. By spreading over the remaining term of the lease the estimated depreciated value of such
improvements at the termination of the lease and report as income for each year of the lease an
aliquot part thereof.
a. A but not B is allowed
b. B but not A is allowed
c. Either A or B is allowed
d. Neither A nor B is allowed

27. After 10 years of romantic relationship, A decided to end his relationship with B which made B very
angry. B with anger in her eyes boxed, kicked and berated A. A tried to pacify B, but B slipped, lost
control and fell to the ground requiring hospitalization. To buy peace, A decided to shoulder the medical
expenses for the injuries suffered by B. The amount is
a. Taxable income B
b. Deductible expense of A
c. Subject to final tax
d. Exempt from income tax

28. One of the following may be a taxable income for a resident individual:
a. Property received as gifts
b. Cash received as inheritance
c. Interest on Philippine lotto winnings
d. Benefits from the SSS and/or GSIS

29. One of the following represents taxable income:

a. Refund of overpaid rental expense in prior year
b. Refund of donors’ tax paid in prior year
c. Refund of income tax in prior year
d. Refund of special assessment paid in prior year

30. Cash allowance of ₱250 per month given to Central Bank employee to cover the medical expenses of
their dependents shall be
a. Included as part of gross compensation income
b. Excluded from gross compensation income
c. Partly include, partly excluded from gross compensation income
d. Subject to final tax

31. At the testimonial dinner for new CPAs, Christian, a reviewer was requested to sing the theme song of
the movie “Ghost”. Pauline, a new CPA, was so delighted that she felt she was falling in love with
Christian so she decided to cancel Christian’s indebtedness to her. As a result,
a. Christian realized a taxable income as compensation for services
b. If Christian accepts the cancellation, he will pay donor’s tax
c. Christian received a gift from Pauline and therefore is not part of his taxable income
d. The amount of indebtedness cancelled is partly taxable, partly exempt

32. A, was adjudged the best boxer in the recently concluded Asian games. In recognition of his splendid
performance, he was awarded a trophy and a cash prize of P1M. As a result,
a. The value of the trophy and the cash prize are part of his taxable income
b. Only the value of the trophy is taxable

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c. Only the cash prize is taxable

d. Both are exempt from income tax

33. A purchased a life annuity for P1,000,000 which will pay him P100,000 a year. The life expectancy of
A is 12 years. Which of the following will A be able to exclude from his income?
a. P 1,000,000
b. P 1,200,000
c. P 200,000
d. P 100,000

34. If an individual performs services for a creditor who in consideration therefor cancels the debt, the
cancellation of indebtedness may amount to
a. A gift
b. A donation inter-vivos
c. A capital contribution
d. A payment of income

35. This is not part of gross compensation income

a. Salary of P10,000 a month of an employee
b. Fringe benefits of P10,000 a month
c. Salary of P10,000 a month of a partner in a general professional partnership
d. Honorarium and allowances of P10,000 of a member of the board of directors of a corporation who
is also an employee of the corporation.

36. The following income received by officials and employees in the public sector are not subject to income
tax and withholding tax on compensation, except
a. The excess of the 13th month pay and other benefits paid or accrued during the year over P90,000
b. Representation and transportation allowance (RATA) granted under the General Appropriations Act
c. Personnel Economic Relief Allowance (PERA) granted to government personnel
d. Monetized value of leave credits paid to government officials and employees

37. A holds 1,000 common shares of ABC, a domestic corporation, acquired at P110 per share. Later, he
received a 10% stock dividend in common shares and thereafter, sold directly to a buyer 500 shares at
120 per share. Determine the gain (loss) assuming the shares are ordinary assets.
a) ₱10,000
b) ₱20,000
c) ₱ 5,000
d) None of the above.

38-39. The records of ABC Corporation, organized in 2007 showed the following data for 2017.

Gross Income P2,000,000

Less: Allowable business expenses
(other than bad debts) P1,850,000
Bad debts written off 100,000 _1,950,000
Taxable net income P 50,000

In 2018, 80% of the bad debts written off in 2017 was collected

38. The income tax due in 2017 is

a. P40,000
b. P45,000

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c. P15,000
d. P25,000

39. In 2018, which of the following statements is correct?

a. There is a deficiency income tax of P24,000 for 2017
b. The taxable net income should be corrected to P130,000
c. There is a taxable recovery amounting to P80,000 in 2018
d. The bad debts expense in 2017 should be reduced to P20,000

40-41). Bobby, lessor, leased a lot to Christina, lessee, for 15 years beginning January 1, 2016, subject to
the following terms of and conditions:

Monthly rental ₱ 20,000

Advance rental for 2 years 480,000
Security deposit 240,000
Annual RPT to be paid by lessee 10,000

Cost of building constructed by

lessee (to be owned by lessor upon
termination of lease) ₱2,800,000
Building completed on July 1, 2018
Estimated life of building (in years) 20

40. Determine the taxable income of lessor Bobby for 2016, 2017, 2018, and 2019:

(a) Under the Outright Method:

(a) ₱490,000; ₱10,000; ₱3,050,000; ₱250,000

(b) ₱490,000; ₱490,000; ₱3,050,000; ₱250,000
(c) ₱490,000; ₱10,000; ₱10,000; ₱250,000
(d) None of the above

(b) Under the Spread-Out Method:

(a) ₱490,000; ₱10,000; ₱292,000; ₱334,000

(b) ₱490,000; ₱490,000; ₱0; ₱250,000
(c) ₱400,000; ₱10,000; ₱10,000; ₱250,000
(d) None of the above

41. In Number 40, determine the deductible expense of Cristina, lessee, for 2016, 2017, 2018, and 2019.

(a) ₱250,000; ₱250,000; ₱362,000; ₱474,000

(b) ₱250,000; ₱350,000; ₱474,000; ₱474,000
(c) ₱250,000; ₱250,000; ₱362,000; ₱362,000
(d) None of the above

42. A, dedicated and honest employee of ABC 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 the implication of inefficiency, A was advised to file a letter of resignation instead of
being retrenched. If A files a letter of resignation and receives the separation pay, such amount is
a. Taxable in full
b. Partly taxable, partly exempt
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c. Exempt from income tax

d. Subject to final tax

43. Using the preceding number, if A is retrenched and receives the separation pay, such amount is
a. Taxable in full
b. Partly taxable, partly exempt
c. Exempt from income tax
d. Subject to final tax

44. A is engaged in the marketing of cars. When A’s son got married to the daughter of a senator, he gave
the newly-wedded couple a brand new car worth P800,000 as a wedding gift. The value of the car is
a. Taxable income to the newly-wedded couple
b. Deductible expense of A
c. Not taxable income to the newly-wedded couple
d. Taxable income to the couple and deductible expense of A

45. Statement 1: Income derived from investments in the Philippines in loans, stocks, bonds, or other
domestic securities, or from interest on deposits in banks in the Philippines, including sale of
investments, by foreign governments and financial institutions wholly-owned, controlled, or enjoying
financing from foreign governments, shall be exempt from income tax, and consequently from
withholding tax.

Statement 2: Gains realized from the sale or exchange or retirement of bonds, debentures, or other
certificates of indebtedness with a maturity of at least 5 years, shall not be taxable to the investor-
seller.

a) Statement 1 is true.
b) Statement 2 is true.
c) Both statements are false.
d) Both statements are true.

46. Mike Reyes has been an employee of Matatag Steelworks Inc. for the last 25 years. His employer set
up a BIR-approved private benefit plan primarily for retirement payments to its retiring employees.
His employer also set up a trust fund for the exclusive benefit of its employees, and to which the
employees can make contributions. So far, Mike has contributed a total of ₱40,000 to this trust fund.

When he retired at age 55, he received the following amounts from his employer: (1) ₱125,000
representing his retirement benefits and which was paid out of the BIR-approved benefit plan; and (2)
a dividend of ₱140,000 from the trust fund.

Which statement is correct?

a) Mike’s retirement benefits from the BIR-approved private benefit plan are income tax-exempt.
b) ₱40,000 of the ₱140,000 which Mike received from the trust fund is exempt from income tax.
c) ₱100,000 of the ₱140,000 which Mike received from the trust fund shall be subject to an FWT.
d) All of the above.
e) None of the above.

The End!!!
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