CHAPTER 1
PRINCIPLES OF TAXATION
Multiple Choice Questions
MC 1 A MC 26 D
MC 2 C MC 27 D
MC 3 B MC 28 A
MC 4 A MC 29 B
MC 5 D MC 30 D
MC 6 D MC 31 C
MC 7 B MC 32 D
MC 8 B MC 33 C
MC 9 D MC 34 D
MC 10 A MC 35 C
MC 11 B MC 36 B
MC 12 C MC 37 A
MC 13 B MC 38 B
MC 14 B MC 39 E
MC 15 A MC 40 A
MC 16 C MC 41 A
MC 17 A MC 42 E
MC 18 D MC 43 C
MC 19 B MC 44 A
MC 20 B MC 45 D
MC 21 A MC 46 A
MC 22 D MC 47 C
MC 23 A MC 48 A
MC 24 D MC 49 A
MC 25 A MC 50 A
CHAPTER 2
GROSS INCOME
Multiple Choice Questions
MC 1 B MC 26 D
MC 2 A MC 27 D
MC 3 B MC 28 A
MC 4 B MC 29 D
MC 5 B MC 30 A
MC 6 A MC 31 C
MC 7 B MC 32 D
MC 8 C MC 33 C
MC 9 B MC 34 B
MC 10 A MC 35 D
MC 11 D MC 36 C
MC 12 A MC 37 C
MC 13 C MC 38 C
MC 14 C MC 39 A
MC 15 A MC 40 D
MC 16 D MC 41 C
MC 17 C MC 42 A
MC 18 A MC 43 D
MC 19 A MC 44 D
MC 20 C MC 45 B
MC 21 B MC 46 C
MC 22 A MC 47 C
MC 23 A MC 48 B
MC 24 A MC 49 A
MC 25 D MC 50 C
Answer Key
Chapter 2. Gross Income
Computation:
MC12
Under the Claim of Right Doctrine or Doctrine of Ownership, Command or
Control, if a taxpayer receives earnings under a claim of right and without
restriction as to its disposition, he has received income even though one
may claim he is not entitled to the money.
MC14
Gross income, Philippine sources, August 1 to December 31 300,000
Gross income, foreign sources, August 1 to December 31 200,000
Income subject to Philippine Income Tax P500,000
MC15
Interest income from long-term peso bank deposits, abroad 25,000
Interest income from long-term FCDU deposits, Philippines 50,000
Interest income from long-term FCDU deposits, abroad 60,000
Royalties from books, Philippines 20,000
Royalties from books, abroad 30,000
Royalties from computer programs, Philippines 20,000
Royalties from computer programs, abroad 40,000
Dividend income from a domestic corporation 40,000
Dividend income from a foreign corporation 55,000
Income subject to Philippine Income Tax P340,000
MC16
Royalties, Philippines 230,000
Interest on time deposit with Metrobank 18,000
Interest on money market placement, PH 25,000
Income subject to Philippine Income Tax P273,000
MC19
Number of shares 1,000
Fair market value of the shares 150
Compensation income P150,000
MC20
Total Income P9,000,000
Ratio of Services performed in the Philippines 10/30
Gross Income from sources within P3,000,000
Answer Key
Chapter 2. Gross Income
MC21
Collections for past services rendered P50,000
Advances for future services to be rendered 100,000
Reimbursement for out-of-pocket expenses 15,000
Gross Income P165,000
MC22
Only her business income shall be reported as part of her gross income.
The Christmas gift is not subject to income tax.
MC27
Gain from sale of shares of stock of a domestic
corporation, residence of buyer is in China and the
sale was made in Korea 225,000
MC28
Capital Gain P400,000
Holding Period (more than 12 months) 50%
Reportable Gross Income P200,000
MC29
Proceeds from the sale of Jewelry P3,000,000
Acquisition Cost 2,000,000
Capital Gain P1,000,000
Holding Period (more than 12 months) 50%
Reportable Gross Income P500,000
MC32
Gross Income – Philippines P3,000,000
Gross Income – Worldwide 9,000,000
Ratio 33.33%
When the gross income ratio is less than 50%, the entire dividend from a
resident foreign corporation is considered derived from sources
without.
Answer Key
Chapter 2. Gross Income
MC33
Cancelled Indebtedness in exchange of service P750,000
Interest Income 50,000
Income Subject to Tax P800,000
MC36
Profit of the Joint Venture P800,000
Share 20%
Gross Income P160,000
MC37
Gross income from the practice of profession P1,590,000
Gross income from business 3,500,000
Interest income on private securities 24,000
Interest income on loans to friends 13,000
Gross Income P5,127,000
MC39
When the insured died, the total life insurance proceeds received by the
heirs/beneficiaries are exempt from income tax.
MC40
Life insurance proceeds where the insured outlived the 150,000
policies (total premium paid is P50,000)
Involuntary separation pay 35,000
Total Excluded/Exempted Income P185,000
MC41
When the insured outlived the policy, the receipt of premium paid shall
be considered a return of capital, not an income; hence must be excluded
from gross income. Only the amount in excess of the premium paid shall
be subject to income tax.
Answer Key
Chapter 2. Gross Income
MC42
While a gift is not subject to income tax, the income derived from the said
gift is taxable.
MC44
Compensation for sickness and injuries is excluded from gross income.
The P70,000 insurance settlement is a mere return of capital representing
damages to the car.
MC45
The 13th month and other benefits not exceeding P90,000 are exempt
from income tax.
MC46
13th Month Pay P30,000
SSS deductions 14,000
PhilHealth deductions 10,000
Pag-IBIG deductions 11,000
Union dues 7,000
Total Excluded/Exempted Income P72,000
MC47
For the retirement proceeds to be exempt, Mr. X must have worked for at
least 50 years, among others.
The receipt of P900,000 is considered return of capital, not an income;
hence must be excluded from gross income.
MC48
Prize for winning gold in the SEA games P600,000
Athlete of the Year award 100,000
Cash gift from his SM Foundation 300,000
Total Excluded/Exempted Income P1,000,000
Answer Key
Chapter 2. Gross Income
MC49
Prize received for achievement in literature (did not join
the contest) 100,000
Gain from sale of bonds (maturity is 7 years) 50,000
Cash inherited from his uncle 3,000,000
Proceeds of his wife’s life insurance (irrevocable
beneficiary) 1,000,000
Amount received as a return of premium (P1,500,000
premium paid) 1,500,000
Total Excluded/Exempted Income P5,650,000
MC50
Retirement benefits received from his previous employer
that maintained a reasonable private pension plan
(he served the company for 12 years) 250,000
Lump sum benefits received from SSS 200,000
Interest income from bonds with a maturity period of 7
years (Deposit Substitute) 20,000
Interest on long term deposits with maturity period of 5
years 30,000
Total Excluded/Exempted Income P500,000
CHAPTER 3
ALLOWED DEDUCTIONS
Multiple Choice Questions
MC 1 D MC 26 D
MC 2 B MC 27 D
MC 3 C MC 28 A
MC 4 A MC 29 D
MC 5 C MC 30 C
MC 6 D MC 31 B
MC 7 B MC 32 D
MC 8 A MC 33 D
MC 9 C MC 34 B
MC 10 A MC 35 C
MC 11 B MC 36 C
MC 12 A MC 37 B
MC 13 D MC 38 A
MC 14 B MC 39 B
MC 15 A MC 40 D
MC 16 D MC 41 A
MC 17 C MC 42 D
MC 18 D MC 43 D
MC 19 C MC 44 A
MC 20 B MC 45 A
MC 21 B MC 46 D
MC 22 B MC 47 C
MC 23 A MC 48 D
MC 24 B MC 49 D
MC 25 B MC 50 A
Answer Key
Chapter 3. Allowable Deductions
Computation:
MC3
Rental Expense P1,000,000
Expanded Withholding Tax 5%
Total Expanded Withholding Tax P50,000
MC4
Gross Income, Philippines P15,000,000
Operating Expense, Allocated (P30,000,000 x 15/75) (6,000,000)
Taxable Income, Philippines P9,000,000
MC5
Gross Income, Philippines P1,000,000
Operating Expense, Philippines (400,000)
Operating Expense, Allocated (P500,000 x 1/5) (100,000)
Taxable Income, Philippines P500,000
MC7
If the taxpayer is engaged in both the sale of goods and services, and it's
not possible to identify whether the EAR expenses were incurred for the
sale of goods or services, the EAR should be allocated.
Actual Deductible
Business Limit
(Allocated) EAR
Trading ½% x P200,000 = P1,000 P2,000 P1,000
Service 1% x P100,000 = P1,000 1,000 P1,000
P3,000 P2,000
The actual EAR is allocated based on the revenue as follows:
Actual
Business Allocation
(Allocated)
Trading P200,000 / P300,000 x P3,000 P2,000
Service P100,000 / P300,000 x P3,000 1,000
P3,000
Answer Key
Chapter 3. Allowable Deductions
MC8
Gross sales P100,000,000
Cost of sales (60,000,000)
Operating expenses (17,500,000)
Additional deduction for labor training expenses (1,500,000)
(P3,000,000 x 50%)
Taxable Income, Philippines P21,000,000
The additional deduction for labor training expenses should not exceed
10% of the direct labor wage or P2,000,000 (P20,000,000 x 10%).
MC14
Net Income before interest expense P2,500,000
Deductible Interest Expense (104,000)
Taxable Income P2,396,000
The deductible interest expense is computed as follows:
Interest expense P200,000
Tax arbitrage (P480,000 x 20%) (96,000)
Taxable Income P104,000
MC15
Only the interest paid on delinquency taxes is deductible.
MC19
Payment of deficiency FBT P25,000,000
Payment of interest on deficiency FBT 1,250,000
Business taxes and licenses 18,000,000
Total P44,250,000
Answer Key
Chapter 3. Allowable Deductions
MC26
First Equipment P400,000
Second Equipment (P330,000 – P100,000) 230,000
Deductible loss P630,000
MC27
Fair Market Value (lower than the book value) P100,000
Insurance (70,000)
Deductible loss P30,000
In case of partial loss, the deductible amount is the book value of the
asset or the replacement cost, whichever is lower, less any amount
recovered from insurance.
The book value at the time of the loss is P300,000 (P500,000 x 3/5).
MC28
Capital Gain (P2,000,000 x 100%) P2,000,000
Capital Loss (P1,000,000 x 50%) (500,000)
Deductible loss P1,500,000
MC30
Liquidating dividend (return of investment) P40,000
Cost of investment (100,000)
Capital loss P60,000
Multiply by: 50%
Deductible capital loss (more than 12 months) P30,000
MC31
Gambling losses are deductible to the extent of gambling gains.
MC33
Recovery of bad debts previously allowed as a deduction shall be included
as part of the gross income in the year of recovery to the extent of the
income tax benefit.
Answer Key
Chapter 3. Allowable Deductions
MC39
Current service cost in 2023 P200,000
Amortization of 2022 Past service cost (P50,000/10) 5,000
Amortization of 2023 Past service cost (P30,000/10) 3,000
Deductible loss P208,000
MC45
Gross receipts from services P800,000
Optional standard deduction (P800,000 x 40%) (320,000)
Long term capital gain (P15,000 x 50%) 7,500
Short term capital loss (P5,000 x 100%) (5,000)
Taxable income P482,500
CHAPTER 4
INDIVIDUAL INCOME TAXATION
Multiple Choice Questions
MC 1 C MC 26 C
MC 2 D MC 27 A
MC 3 B MC 28 C
MC 4 B MC 29 B
MC 5 A MC 30 B
MC 6 B MC 31 C
MC 7 A MC 32 A
MC 8 D MC 33 D
MC 9 A MC 34 D
MC 10 D MC 35 B
MC 11 C MC 36 A
MC 12 A MC 37 B
MC 13 C MC 38 A
MC 14 A MC 39 C
MC 15 D MC 40 D
MC 16 A MC 41 C
MC 17 D MC 42 D
MC 18 B MC 43 D
MC 19 A MC 44 B
MC 20 A MC 45 P48,000
MC 21 A MC 46 A
MC 22 D MC 47 A
MC 23 C MC 48 B
MC 24 P82,500 MC 49 A
MC 25 P469,500 MC 50 A
Answer Key
Chapter 4. Individual Income Taxation
Computation:
MC6
First P2,000,000 See bracket over P2,000,000
but not over P8,000,000 P402,500
Next P2,500,000 (P4,500,000 – 2,000,000) x 30% 750,000
P1,152,500
MC8
First Employer P1,500,000
Second Employer P532,000
Total Taxable Compensation Income P2,032,000
First P2,000,000 402,500
Next P32,000 x 30% 9,600
Income Tax Due P412,100
Tax Credit
Tax Withheld by First Employer (277,500)
Tax Withheld by Second Employer (48,900)
Income Tax Still Due P85,700
The first employer withheld P277,500.
Taxable Compensation Income P1,500,000
First P800,000 P102,500
Next P700,000 x 25% 175,500
Income Tax Due Withheld P277,500
The second employer withheld P48,900.
Taxable Compensation Income P532,000
First P400,000 P22,500
Next P132,000 x 20% 26,400
Income Tax Due Withheld P48,900
MC9
Compensation income P1,000,000
Multiply by 25%
Income tax due P250,000
Answer Key
Chapter 4. Individual Income Taxation
MC11
Personal meals and groceries P15,000
Gasoline (P8,000 x ½) 4,000
Total P19,000
Divide by / 65%
Gross monetary value 29,231
Multiply by FBT rate x 35%
Fringe benefits tax 10,231
MC12
Cash P800,000
Divide by / 65%
Gross monetary value 1,230,769
Multiply by FBT rate x 35%
Fringe benefits tax P430,769
MC13
Elling E3 yacht P16,400,000
Multiply by 5%
Fringe benefits P820,000
The use of aircraft, including helicopters, owned and maintained by the
employer shall be treated as use and not to be subject to FBT. Treated as
a business expense only.
MC21
Gross income, Philippines P3,850,000
Gross income, Canada 1,650,000
Business expenses, Philippines (2,000,000)
Business expenses, Canada (725,000)
Taxable income P2,775,000
MC22
Gross Sales P14,000,000
Cost of sales (7,600,000)
Operating expenses (2,500,000)
Taxable income P3,900,000
First P2,000,000 P402,500
Next P1,900,000 x 30% 570,000
Income Tax Due P972,500
Answer Key
Chapter 4. Individual Income Taxation
MC23
Gross receipts (P2,900,000 – P100,000) P2,800,000
Cost and expenses (2,500,000)
Other income 10,000
Taxable income P310,000
First P250,000 P-
Next P60,000 x 15% 9,000
Income Tax Due P9,000
MC24
Using 8%
Taxable gross sales (P2,200,000 – P250,000) P1,950,000
Multiply by 8%
Income tax due P156,000
Using Graduated income tax rates
Gross receipts P2,200,000
Operating expenses (1,500,000)
Taxable income P700,000
First P400,000 P22,500
Next P300,000 x 20% 60,000
Income Tax Due P82,500
MC25
Income tax due on compensation income P255,000
Income tax due on business income 192,000
Taxable income P469,500
The income tax liability would be P505,000 using the 2018-2022
graduated tax rates.
Income tax due on compensation income (using 2023 graduated tax
rates)
Compensation income P1,500,000
Exempt benefits (90,000)
Taxable compensation income P1,410,000
Answer Key
Chapter 4. Individual Income Taxation
First P800,000 P102,500
Next P610,000 x 20% 152,500
Income Tax Due P255,000
The 8% income tax rate does not apply to purely compensation income
earners.
Income tax due on business income
Taxable gross sales P2,400,000
Multiply by 8%
Income tax due P192,000
For mixed income earner, the 8% income tax rate is directly applied to
the total gross sales/receipts.
MC26
Income tax due on compensation income (using 2023 graduated tax
rates)
Compensation income P250,000
Exempt benefits (20,000)
Taxable compensation income P230,000
First P0 P-
Next P230,000 x 0% -
Income Tax Due -
Income tax due on business income
Taxable gross sales P500,000
Multiply by 8%
Income tax due P40,000
MC27
Income tax due on compensation income (2023)
Compensation income P200,000
Exempt benefits (35,000)
Taxable compensation income P150,000
First P0 P-
Next P150,000 x 0% -
Income Tax Due -
Answer Key
Chapter 4. Individual Income Taxation
Income tax due on business income
Taxable gross sales (P2,500,000 + P143,000) 2,643,000
Multiply by 8%
Income tax due P211,440
MC28
Taxable gross receipts (P2,500,000 x 1/5) P500,000
Multiply by 25%
Income tax due P125,000
MC35
Interest, gross (P100,000 / 80%) P125,000
Multiply by 20%
Final Tax P25,000
MC36
Interest income (NRANETB) P50,000
Multiply by 25%
Final Tax P12,500
MC37
Royalty P10,000,000
Multiply by 10%
Final Tax P1,000,000
MC38
Interest from savings deposit, BPI P50,000 20% P10,000
Interest under the expanded foreign 15% 11,250
currency deposit system 75,000
Interest on Government bonds 30,000 20% 6,000
Interest on 7-year deposit substitute 70,000
Gain from sale of bonds (maturity is
6 years) 5,000
Royalties on books, Philippines 100,000 10% 10,000
Royalties on Books, USA 30,000
PCSO and Lotto winnings 10,000
Prize in a literary contest he joined 100,000 20% 20,000
Answer Key
Chapter 4. Individual Income Taxation
Prize received for achievement in
literature (did not join the
contest), 10,000
Dividends from BDO 40,000 10% 4,000
Dividends from Wal-Mart, USA Corp. 80,000
Tax informer's reward 500,000 10% 50,000
Winnings from illegal gambling 15,000 20% 3,000
Total P114,250
MC39
Interest income from BPI - Recto Branch
P62,000 20% P12,400
from checking account
Interest income from BDO – Intramuros
38,500 20% 7,700
Branch from savings deposit
Interest income from PNB – Araneta
Branch from foreign currency
42,000 15% 6,300
deposit account Under the expanded
currency deposit system
Interest income from dollar deposits on
Bank of New Jersey in the United 130,000
States
Interest income from the promissory
58,400
note of Mr. X, Philippines
Interest income from the promissory
62,000
note of Mr. X, United States
Yield from deposit substitute,
87,000 20% 17,400
Philippines
Interest Income from Philippine
21,000 20% 4,200
government securities
Interest income from long-term deposits,
57,000
Philippines
Interest income from long-term deposits,
62,500
Egypt
Royalties from books, Philippines 16,000 10% 1,600
Royalties from paintings, Philippines 60,000 20% 12,000
Royalties from musical compositions,
50,000
Japan
Total P61,600
Answer Key
Chapter 4. Individual Income Taxation
MC40
Informer’s Reward, limit P1,000,000
Multiply by 10%
Final Tax P100,000
Informer’s reward is equivalent to 10% of the revenues, surcharges or fees
recovered and/or fine or penalty imposed and collected or P1,000,000 per
case, whichever is lower.
MC45
Capital gain P320,000
Multiply by 15%
Final Tax P48,000
MC46
Net Capital Gain P360,000
Multiply by 15%
Final Tax P54,000
MC47
Presumed gain (P1,500,000 + P5,000 x 500) P4,000,000
Multiply by 6%
Capital Gains Tax P240,000
MC48
Total Capital Gains Tax (P6,600,000 x 6%) P396,000
Multiply by: Unutilized Amount/Total Proceeds 2/6
Capital Gains Tax P132,000
MC49
Presumed gain P12,000,000
Multiply by 6%
Capital Gains Tax P720,000
The sale of residential land, not family home, does not qualify for a full or
partial exemption.
Answer Key
Chapter 4. Individual Income Taxation
MC50
Gain from sale of office equipment P20,000
Gain from sale of land not used in
300,000 6% P18,000
business (selling price of P300,000)
Gain from sale of shares of stock directly
50,000 15% 7,500
to the buyer
Gain from sale of shares of stock
through the stock exchange (selling 10,000
price, P200,000)
Bad debt recovery 50,000
Total P25,500
