INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 37

SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

CHAPTER 5
EXCLUSION FROM GROSS INCOME
Problem 5 – 1 TAXABLE OR NONTAXABLE with income tax
1 Taxable 11. Taxable
.
2 Taxable 12. Nontaxable
.
3 Nontaxable 13. Nontaxable
.
4 Taxable 14. Taxable
.
5 Nontaxable 15. Taxable
.
6 Taxable 16. Taxable
.
7 Nontaxable 17. Taxable
.
8 Taxable 18. Nontaxable
.
9 Taxable 19. Taxable
.
10. Nontaxable 20. Nontaxable

Problem 5 – 2 TAXABLE OR NONTAXABLE with income tax

1 Nontaxable 11. Taxable
.
2 Nontaxable 12. Nontaxable
.
3 Nontaxable 13. Taxable
.
4 Taxable 14. Taxable
.
5 Nontaxable 15. Nontaxable
.
6 Taxable 16. Taxable
.
7 Nontaxable 17. Nontaxable
.
8 Nontaxable 18. Taxable
.
9 Taxable 19. Taxable
.
10. Nontaxable 20. Nontaxable

Problem 5 – 3 TAXABLE OR NONTAXABLE with income tax

1 Nontaxable 11. Nontaxable
.
2 Taxable 12. Nontaxable
.
3 Taxable 13. Taxable
.
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 38
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

4 Taxable 14. Nontaxable

.
5 Taxable 15. Taxable
.
6 Nontaxable 16. Nontaxable
.
7 Nontaxable 17. Nontaxable
.
8 Nontaxable 18. Nontaxable
.
9 Nontaxable 19. Taxable
.
10. Taxable 20. Nontaxable

Problem 5 – 4 TRUE OR FALSE

1. True
2. True
3. True
4. False – Proceeds of life insurance is not taxable regardless of whoever would be the
recipient, except when the insured person outlived his life insurance and received the
proceeds. The excess of proceeds over premium paid is taxable.
5. False – include in gross income
6. False – Bequest is a personal property.
7. True
8. True
9. True
10. False – nontaxable because it is just a return of expenses.
11. True
12. True
13. False – to be nontaxable, the charity sweepstakes must be Philippine Charity
Sweepstakes.
14. False – to be nontaxable, the dividend must be received from a domestic corporation.
15. False – the other income is subject to final tax, the minimum wages remains nontaxable.
16. False – nontaxable

Problem 5 – 5 TRUE OR FALSE

1. False – taxable. To be nontaxable, the P10,000 length of service award must be in kind.
2. True
3. True
4. False – nontaxable
5. False – nontaxable, in general.
6. True
7. True
8. False - some prizes and awards are exempt by law from taxation. Example, Prizes and
awards received by Filipino athletes sanctioned by Philippine Sports Commission.
9. True
10. True
11. False - Include in gross income because income from gift is subject to income tax.
12. False – Tax-exempt
13. True
14. False – income of alien whether resident or not earned outside the Philippines is not
subject to Philippine income tax.
15. True
16. True
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 39
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

17. False – allowed to register as BMBE.

Problem 5-6 Problem 5-7 Problem 5-8

1. D 1. C 1. B
2. D 2. A 2. D
3. C 3. A 3. C
4. C 4. D 4. D
5. A 5. D 5. A
6. D 6. B 6. B
7. C 7. C 7. D
8. B 8. B 8. A
9. A 9. D 9. D
10. C 10. B 10. C
11. D

Problem 5 –9 B
Basic minimum wage P 90,000
13th month pay 7,500
15-day monetized unavailed vacation leave 3,750
Overtime pay 24,000
Holiday pay 2,250
Christmas bonus (de-minimis) 5,000
Productivity incentive bonus 40,000
Total nontaxable income P172,500

Note: The 13 th month pay and other benefits does not exceed P82,000.

Problem 5 –10 B
13th month pay P 6,500
Productivity incentive bonus 28,000
Deductible from gross compensation income:
SSS contribution P3,000
Philhealth contribution 2,500 5,500
Amount excluded from gross income P40,000

Problem 5 –11 C
Dividend income P 60,000
Interest income under EFCDS (P40,000 x 50%) 20,000
Total amount subject to Philippine income tax P 80,000

Problem 5 –12 B
Income from the Philippines:
Wagwag business (P5,000 x 12) P 60,000
Sari-sari store (P20,000 x 12) 240,000
Gross taxable income in the Philippines P300,000

Problem 5 –13 D
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 40
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

13th month pay (P390,000/13) P 30,000

Loyalty award 30,000
De minimis with the ceiling amount:
Productivity incentive bonus 25,000
Rice subsidy (P1,800 x 12) 21,600
Clothing allowance 6,900
Total P113,500

Total amount of nontaxable compensation, limit P82,000

Problem 5 –14 A
Taxable Nontaxable
Total basic salary P240,000
13th month pay 20,000
Productivity incentive bonus 30,000
Excess rice subsidy 6,000
De minimis rice subsidy . 18,000
Total nontaxable compensation P240,000 74,000

Problem 5-15 NOT IN THE CHOICES = P119,000

MWE
Basic salary P 96,000
Overtime pay 20,000
Hazard pay 2,000
Holiday pay 1,000
Total taxable compensation P119,000

Note: The presence of rental income (income subject to normal tax) disqualifies the MWE to be
nontaxable from his compensation income. The rental income is not compensation income but
business income. The productivity incentive bonus (P22,000) and excess of de minimis (P6,000)
can still be included as part of nontaxable 13 th month pay and other benefits with a threshold
amount of P82,000.

Problem 5-16 A
The other incomes of D, a MWE, are subject to final taxes. His compensation income, being a
MWE, is tax-exempt.

Problem 5-17 B
Availed 10 day sick leave pay P1,500
Excess of overtime meal subsidy [P1,500 – (P300 x 25% x 10) 750
Taxable compensation P2,250

Note: If the 13 th month pay does not exceed P82,000 and it could still absorbed the P2,250,
then the P2,250 is tax-exempt.
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 41
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

Problem 5 –18 A
A minimum wage earner with other income subject to final tax is tax-exempt on his
compensation income.

Problem 5 –19 NOT IN THE CHOICES = P280,000

Taxable
Net pay P265,000
Withholding tax 50,000
Advances 3,000
SSS contribution (50% taxable) 2,000
13th month pay (27,000)
Christmas bonus (de minimis) ( 5,000)
Productivity incentive bonus ( 8,000)
Totals P280,000

Problem 5 –20 D
Taxable Tax-exempt
Net take home pay P13,000
SSS contributions 200 P100
PAG-IBIG contributions 200 100
Philhealth 100 100
Union dues contributions 100
Office party contributions 75
Charitable contribution (deductible only from business income) 25
Withholding income tax 400 .
Totals P14,000 P400

Problem 5 –21 D
Monthly salary P15,000
Free board and lodging is for convenience of employer.

Problem 5 –22 B
Rent of apartment P 50,000
Reimbursement 20,000
Taxable benefits P70,000

Note that the tax base to determine the tax liability of supervisor should be the grossed-up
amount, meaning P70,000/68%.

Problem 5 –23 A
Proceeds of life insurance including 12% interest for 2 years P1,254,400
Less: Present value of life insurance proceeds (P1,254,400 x 0.797193877) 1,000,000
Interest income - Taxable P 254,400

Proceeds of life insurance policy are not taxable but the interest thereof is taxable. (Rev. Rev.2,
Sec.22; Sec.32Ba, NIRC)

Alternative solution
Proceeds of life insurance of a decedent are nontaxable, but the interest thereof is taxable. The
taxable amount (interest) is computed as follows:
Principal 12% Balance
Interest
Year 0 P1,000,000 0 P1,000,000
Year 1 0 P120,000 1,120,000
Year 2 0 134,400 1,254,400
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 42
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

Total taxable interest P254,400

Problem 5 –24 D
Proceeds of life insurance of a decedent are nontaxable.

Problem 5 –25 B
Maturity value received P500,000
Premium paid (490,000)
Premium refund 40,000
Income in excess of premium paid P 50,000

The premium refund is actually a decrease of premium paid.

Problem 5 –26 D
Zero, because, the P270,000 cash surrender value is just a partial return of total contribution of
P360,000.

Problem 5 –27
1. Letter C
Total premium paid – excluded P500,000

The total premium paid is excluded because such amount represents return of capital.
[Sec. 32 (B)(2), NIRC]

2. Letter A
Total consideration received – excluded P2,000,000

The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of
the insured are excluded from the gross income of the beneficiary. [Sec. 62, Regs. No. 2;
Sec. 32 (A) (1), NIRC]

Problem 5 –28 D
Car insurance P300,000
Accident insurance 100,000
Life insurance as beneficiary 500,000
Cash surrender value of life insurance 30,000
Participating dividend 10,000
Total amount excluded from gross income P940,000

The participating dividend and cash surrender value are considered return of premium. The
interest income, however, is included in the gross income. It represents income from the use of
insurance proceeds not yet taken. (Sec. 62, Regs. No. 2)

Problem 5 –29 D
Taxable Nontaxable
Actual damages for unrealized profit P100,000
Interest on non-taxable damages 20,000
Actual damages for lost products P200,000
Exemplary damages due to injuries 50,000
Moral damages due to injuries 50,000
Actual liquidated damages – Attorney’s fee . 80,000
Total P120,000 P380,000

Note: On the part of Ernie Barron, the attorney’s fee is only a reimbursement of his judicial
expenses, but on the part of the counsel, such amount is reportable income.
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 43
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

Problem 5 –30 A
Taxable income P -0-

Problem 5 –31 A
The retirement pay should be included in the gross income because Max retired at an optional
age and has rendered less than 10 years in service. To be excluded from gross income, an
employee should have been in the service of the same employer for at least ten (10) years and at
least 50 years at the time of his retirement. [Sec. 32 (B)(6)(a), NIRC]

Problem 5 –32 C
Cost of life annuity contract P1,350,000
Divided by expected return (P360,000 x 15 years) 5,400,000
Cost ratio 25%
Multiplied by annual pension 360,000
Annual amount of pension excluded from gross income P 90,000

Problem 5 –33 D
Taxable Nontaxable
Terminal pay P 60,000
Life insurance 500,000
SSS death benefit 10,000
Donations . 40,000
Totals P - 0 - P610,000

Problem 5 –34 A
The termination is due to cause within the control of Jalosjos, separation pay is taxable.

Problem 5 –35 D
Last pay upon resignation from his first employer P100,000

Problem 5-36 B
SSS death benefit of P36,000

Problem 5-37 A
Sickness benefit (P300 x 6 days x 90) P 1,620
Maternity benefit (P300 x 78 days x 100%) 23,400
Total exclusion P25,020

SSS sickness benefit is equal to 90% of daily salary credit after compliance with certain
conditions. SSS daily maternity leave benefit is equivalent to the average daily salary credit for
60 days or 78 days in case of caesarian delivery, subject to certain conditions. [Sec. 14, R.A.
1161; R.A. 8282, as amended]

Problem 5 –38 A
Zero, all items enumerated are not subject to income tax.

Problem 5 –39 C
Interest income from bank savings deposit, subject to final tax at source P4,000

His annual income from professional fee is not more than P60,000 which is exempt.

Problem 5 –40 D
Zero. Gifts are generally subject to donor’s tax and are not subject to income tax.
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 44
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

Problem 5 –41 D
Total income (P100,000 x 10 months) P1,000,000
Total average expenses (P20,000 x 10 months) ( 200,000)
Income subject to income tax P 800,000

Problem 5 –42 D
Zero. All winnings received by Miss Lara are subject to tax because she has entered into a
contest (Miss International) which requires rendition of substantial future services as a condition
to receive such prize or award.

Problem 5 –43 A
Lotto Philippine winnings P10,000,000

Problem 5 –44 B
Ramon Magsaysay award P 50,000
Athlete of the year award 100,000
Prize for winning the silver Olympic medal 500,000
Cash award from Mr. Lim 250,000
Car from Nissan 1,000,000
Winnings – Philippine sweepstakes 100,000
Total winnings/awards not subject to income tax P2,000,000

Problem 5 –45 A
Interest income P 60,000
Gain from sale of bonds classified as capital asset 140,000
Taxable income P200,000

Interest income on government bonds is taxable. Gain from sale of certificate of indebtedness is
tax-exempt only when the maturity is more than 5 years. [Sec. 32 (B)(7)(g), NIRC]

Problem 5 –46 B
Interest received from bond investment P 120,000

Problem 5 –47 B
Interest income P120,000

Problem 5 –48 A
Income from sale of invented products P5,000,000
Sale of technology 2,000,000
Total revenue P7,000,000
Less: Research and development costs 800,000
Nontaxable income P6,200,000

Note: The cost of product produced need not to be deducted anymore because of the term
“income from sale of invented products.”

Problem 5 –49 C
Interest income on bank savings deposit P10,000

Problem 5 –50 C
Interest income from foreign currency deposit P2,000,000
Interest income from time deposit 1,000,000
Total taxable income P3,000,000
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 45
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

Problem 5 –51 C
Honoraria received in various speaking engagement within P200,000
Capital gains on investments made in the Philippines 300,000
Total reportable income for Philippine income tax P500,000

As a rule, the salaries of diplomatic officials and agents are exempt from income tax and,
consequently, from the withholding tax of the host country (i.e., the Philippines). However, they
are not exempt from taxes on their private income having its source in the Philippines and
capital gains tax on investment made in commercial undertaking in the Philippines, except when
there is tax-exempt reciprocity. (Sec. 23 [D], NIRC; RMC No. 31-2013)

Problem 5 –52 A
Compensation ($750 x P50) x 12 P450,000
Pension ($200 x P50) x 12 120,000
Clothing allowance ($30 x P50) 15,000
Health benefits ($30 x P50) 15,000
Exclusion from gross income P600,000

Payments of benefits due to any person residing in the Philippines under laws of the United
States administered by the United States Veterans Administration (USVA) are excluded from
gross income. [Sec. 32 (B)(6)(d), NIRC]

Problem 5 –53 A
Interest income from bonds P10,000,000
Interest from time deposits in Philippines banks 15,000,000
Dividend income received from SMC stocks 3,000,000
Gain on sale of domestic securities 2,000,000
Total income within excluded from gross income P30,000,000

“Excluded from gross income are income derived by Foreign Government in the Philippines in
loans, stocks, bonds or other domestic securities, or from interest on their deposits in banks in
the Philippines by (i) foreign governments, (ii) financing institution owned, controlled or enjoying
refinancing from foreign governments, and (iii) international or regional financing institutions
established by foreign governments.” [Sec. 32 (B)(7)(a), NIRC]

Problem 5 –54
1. Compensation income (P5,000 x 10) P 50,000

2. Retirement benefits P500,000

Salary earned 50,000
Gross income P550,000

3. Same answer with No. 1 P 50,000

Problem 5 –55
Winnings from charity horse race sweepstakes from PCSO P 500,000
Gains from redemption of shares in mutual fund 300,000
Gain from sale of bonds with maturity of more than five years 60,000
Gifts from friends 200,000
Total exclusion from gross income P1,060,000

Problem 5 –56
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 46
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

Exclude Include
Proceeds of his life insurance (P2,000,000) – (P15,000 x 25) P 375,000 P1,625,000
Proceeds of his mother’s life insurance 1,000,000
Cash gift 50,000
Inheritance 3,000,000
Rent income . 100,000
Total P4,425,000 P1,725,000

Problem 5 –57
No, the P1,500,000 transfer to be received by Miss Tandana is to be included for income
taxation because the transfer is in recognition of her services rendered. It is not to be included
as a part of estate tax.

Problem 5 –58
Dividend income P50,000
Interest income 2,000
Prizes 25,000
Total taxable income P77,000

Problem 5-59
1. None – the taxpayer is a MWE and the benefits does not exceed the allowable statutory
amount of P30,000.

2.
Gross compensation P109,200
SSS premium ( 2,400)
Philhealth premium ( 3,000)
Taxable compensation income P103,800

Problem 5 -60
Answer for both no. 1 and no.2

Compensation P128,000
SSS premium (2,400)
Philhealth (3,000)
Gross taxable compensation income P122,600

Note: The MWE with earnings subject to normal tax shall be taxable for his entire income during
the year.

Problem 5 -61
1. Time deposit P60,000
Foreign currency deposit 10,000
Cooperative income subject to final tax P70,000

2. Cooperative income subject to normal tax P -0-

The cooperative’s ordinary income such as sales and income from lending to members
are not subject to income tax.