Exclusion From Gross Income: Income Taxation 6Th Edition (By: Valencia & Roxas) Suggested Answers

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)
SUGGESTED ANSWERS
22
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
21.
Nontaxable
.
2
Nontaxable
12. Taxable
22.
Taxable
.
3
Taxable
13. Nontaxable
23.
Nontaxable
.
4
Nontaxable
14. Taxable
24.
Taxable
.
5
Taxable
15. Nontaxable
25.
Nontaxable
.
6
Nontaxable
16. Nontaxable
.
7
Nontaxable
17. Taxable
.
8
Taxable
18. Taxable
.
9
Nontaxable
19. Taxable
.
10. Nontaxable
20. Taxable
Problem 5 2 TAXABLE OR NONTAXABLE with income tax

1
Nontaxable
11. Taxable
21.
Nontaxable
.
2
Taxable
12. Taxable
22.
Nontaxable
.
3
Nontaxable
13. Nontaxable
23.
Taxable
.
4
Taxable
14. taxable
24.
Nontaxable
.
5
Nontaxable
15. Nontaxable
25.
Nontaxable
.
6
Nontaxable
16. taxable
26.
Taxable
.
7
Taxable
17. taxable
27
Nontaxable
.
8
Taxable
18. Nontaxable
28
Taxable
.
9
Taxable
19. Nontaxable
29
Taxable
.
10. Nontaxable
20. Nontaxable
30
Nontaxable

SUGGESTED ANSWERS
23
Problem 5 3 TRUE OR FALSE

1. True
2. False only Philippine charity sweepstakes are not subject to tax in the Philippines.
3. False subject to normal tax, in general
4. False nontaxable because the other income is subjected only to final tax.
5. True
6. True
7. 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.
8. False include in gross income
9. False Bequest is a personal property.
10. True
11. True
12. True
13. False nontaxable because it is just a return of expenses
14. True, in general
15. False nontaxable
Problem 5 4 TRUE OR FALSE

1. True
2. False nontaxable because aliens are taxable only for income derived within the
Philippines.
3. False the P3M capitalization does not include the land asset of BMBE.
4. True
5. True
6. False nontaxable
7. False nontaxable in general
8. True
9. True
10. False some prizes and awards are exempt by law from taxation.
11. True
12. True
13. False Include in gross income because income from gift is subject to income tax.
14. False Tax-exempt
15. True
Problem 5-5
1.
D
2.
D
3.
C
4.
C
5.
A
Problem 5-6
1.
A
2.
D
3.
D
4.
B
5.
A
Problem 5-7
1.
B
2.
D
3.
C
4.
D
5.
B
24

SUGGESTED ANSWERS
6.
7.
8.
9.
10.
D
C
D
A
C
6.
7.
8.
9.
10.
B
C
B
D
D
6.
7.
8.
9.
10.
D
A
D
C
D
Problem 5 8
A
Basic minimum wage
13th month pay
15-day monetized unavailed vacation leave
Overtime pay
Holiday pay
Christmas bonus (de-minimis)
Total nontaxable income
Problem 5 9
B
13th month pay
Deductible from gross compensation income:
SSS contribution
Philhealth contribution
Amount excluded from gross income
Problem 5 10
Dividend income
P 90,000
7,500
3,750
24,000
2,250
5,000
P132,500
P 6,500
P3,000
2,500
5,500
P12,000
C
P 60,000
Interest income on EFCD to be taxable in the Philippines must be

transacted with residents.
Problem 5 11
B
Income from the Philippines:
Wagwag business (P5,000 x 12)
Sari-sari store (P20,000 x 12)
Gross taxable income in the Philippines
Problem 5 12
D
th
13 month pay (P390,000/13)
De minimis with the ceiling amount:
Rice subsidy (P1,500 x 12)
Clothing allowance
Amount of nontaxable compensation
P 60,000
240,000
P300,000
P30,000
18,000
4,000
P52,000
25

SUGGESTED ANSWERS
The excess of rice subsidy over the ceiling is already taxable, because the 13 th mo. pay is already
P30,000.
Problem 5 13
Total basic salary

13th month pay
Excess rice subsidy
De minimis rice subsidy (P24,000 P6,000)
Total nontaxable compensation
Taxable
P240,000
.
P240,000
Nontaxable
20,000
6,000
18,000
44,000
The P6,000 excess of rice subsidy is still exempt because if combined w/13 th mo pay and other
benefit the amount does not exceed P30,000.
Problem 5-14
D
MWE
Basic salary
Overtime pay
Hazard pay
Holiday pay
13th mo. Pay
Excess rice subsidy
Rice subsidy w/in ceiling
Total nontaxable
Taxable
Problem 5-15
P 96,000
20,000
2,000
1,000
8,000
6,000
18,000
P151,000
P
0
B
Taxable
MWE:
Basic salary
o.t. pay
hazard pay
holiday pay
13th mo.+ similar benefits:
13th mo. Pay
Excess rice subsidy
Excess clothing to complete P30,000
Rice subsidy de minimis
Non-taxable
P108,000
30,000
2,000
1,000
13,000
9,000
18,000
3,000
18,000
26

SUGGESTED ANSWERS
Clothing allowance
Total
.
P154,000
4,000
P52,000
An employee who receives additional compensation such as commissions, honoraria,

fringe benefits, benefits in excess of the allowable statutory amount of P30,000, taxable
allowances and other taxable income other than the SMW, holiday pay, overtime pay,
night shift differential pay and hazard pay shall not enjoy the privilege of being a MWE
and, therefore, his/her entire earnings are no longer exempt from income tax.
Problem 5-16
D
Taxable
MWE:
Basic salary
o.t. pay
96,000
20,000
13th mo.+ similar benefits:

13 th mo. Pay
Excess rice subsidy
Rice subsidy
Rent income
Interest income, 4,000/80%
Total
Non-taxable
8,000
6,000
18,000
60,000
5,000
181,000
32,000
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year.
5-17
D
Only P1,500 sickleave benefit actually taken.
Problem 5 18
C
Take home pay
Nontaxable 13 th month pay
Withholding tax
P212,000
( 17,500)
13,500
27

SUGGESTED ANSWERS
Other income subject to normal tax

Taxable income
20,000
P228,000
In general, a MWE is not subject to WTW and income tax on his compensation income. But if he
has other income that is subject to normal tax, his entire income during the year will be subject
to income tax, his compensation income, however, will not be subject to WTW.
Problem 5 19
Net pay
Withholding tax
Advances
3th month pay
Christmas bonus (de minimis)
SSS contribution
Totals
Problem 5 20
Taxable
P265,000
50,000
6,000
(27,000)
( 5,000)
.
P289,000
Nontaxable
Taxable
P13,000
Tax-exempt
Net take home pay

SSS contributions
PAG-IBIG contributions
Union dues contributions
Office party contributions
Charitable contribution (deductible only from business income)
Withholding income tax
Totals
P300
100
100
75
25
400
P13,500
Problem 5 21
D
Monthly salary
Free board and lodging is for convenience of employer.
Problem 5 22
Rent of apartment
Reimbursement
Taxable benefits
P27,000
5,000
4,000
P36,000
.
P500
P15,000
B
P 50,000
20,000
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
D
Proceeds of life insurance including 12% interest for 2 years
Less: Present value of life insurance proceeds (P1,254,400 x 0.797193877)
Interest income - Taxable
P1,254,400
1,000,000
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)
28

SUGGESTED ANSWERS
Problem 5 24
D
Proceeds of life insurance policy are not taxable.
Problem 5 25
B
Maturity value received
Premium paid
Premium refund
Income in excess of premium paid
P500,000
(490,000)
40,000
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
D
Car insurance
Accident insurance
Life insurance as beneficiary
Cash surrender value of life insurance
Participating dividend
Total amount excluded from gross income
P300,000
100,000
500,000
30,000
10,000
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 28
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 29
Actual damages for unrealized profit

Interest on non-taxable damages
Taxable
P100,000
20,000
Nontaxable
29

SUGGESTED ANSWERS
Actual damages for lost products

Exemplary damages due to injuries
Moral damages due to injuries
Actual liquidated damages
Total
.
P120,000
P200,000
50,000
50,000
80,000
P380,000
Note: On the part of Ernie Barron, the attorneys fee is only a reimbursement of his judicial
expenses, but on the part of the counsel, such amount is reportable income.
Problem 5 30
Taxable income
A
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
Divided by expected return (P360,000 x 15 years)
Cost ratio
Multiplied by annual pension
Annual amount of pension excluded from gross income
Problem 5 33
P1,350,000
5,400,000
25%
360,000
P
90,000
D
Taxable
Terminal pay
Life insurance
SSS death benefit
Donations
Totals
.
P - 0 -
Nontaxable
P 60,000
500,000
10,000
40,000
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)
Maternity benefit (P300 x 78 days x 100%)
P 1,620
23,400
30

SUGGESTED ANSWERS
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 donors tax and are not subject to income tax.
Problem 5 41
D
Total income (P100,000 x 10 months)
Total average expenses (P20,000 x 10 months)
Income subject to income tax
P1,000,000
( 200,000)
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 subjstantial future services as a
condition to receive such prize or award.
Problem 5 43
A
Lotto Philippine winnings
Problem 5 44
B
Ramon Magsaysay award
Athlete of the year award
Prize for winning the silver Olympic medal
Cash award from Mr. Lim
Car from Nissan
Winnings Philippine sweepstakes
Total winnings/awards not subject to income tax
Problem 5 45
A
Interest income
Gain from sale of bonds classified as capital asset
Taxable income
P10,000,000
50,000
100,000
500,000
250,000
1,000,000
100,000
P2,000,000
P 60,000
140,000
P200,000
31

SUGGESTED ANSWERS
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
Interest income
P120,000
Problem 5 48
D
Interest on expanded foreign currency deposit
Problem 5 49
A
Income from sale of invented products
Sale of technology
Total revenue
Less: Research and development costs
Nontaxable income
P100,000
P5,000,000
2,000,000
P7,000,000
800,000
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 50
C
Interest income on bank savings deposit
P10,000
Problem 5 51
C
Interest income from foreign currency deposit
Interest income from time deposit
Total taxable income
P2,000,000
1,000,000
P3,000,000
Problem 5 52
1. Compensation income (P5,000 x 10)
P 50,000
2.
Retirement benefits
Salary earned
Gross income
P500,000
50,000
P550,000
3. Same answer with No. 1
P 50,000
Problem 5 53
Winnings from charity horse race sweepstakes from PCSO
Gains from redemption of shares in mutual fund
Gain from sale of bonds with maturity of more than five years
Gifts from friends
Total exclusion from gross income
P 500,000
300,000
60,000
200,000
P1,060,000
32

SUGGESTED ANSWERS
Problem 5 54
Proceeds of his life insurance (P2,000,000) (P15,000 x 25)
Proceeds of his mothers life insurance
Cash gift
Inheritance
Rent income
Total
Exclude
P 375,000
1,000,000
50,000
3,000,000
.
P4,425,000
Include
P1,625,000
100,000
P1,725,000
Problem 5 55
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 56
Dividend income
Interest income
Prizes
Total taxable income
P50,000
2,000
25,000
P77,000
Problem 5-57
1. None the taxpayer is a MWE and the benefits does not exceed the allowable statutory
amount of P30,000.
2.
Gross compensation
SSS premium
Philhealth premium
Taxable compensation income
P109,200
( 2,400)
( 3,000)
P103,800
Problem 5 -58
Answer for both no. 1 and no.2
Compensation
SSS premium
P128,000
(2,400)

SUGGESTED ANSWERS
33
Philhealth
Gross taxable compensation income
(3,000)
P122,600
Note: The MWE with earnings subject to normal tax shall be taxable for his entire income during
the year.
Problem 5 -59
1.
Time deposit
Foreign currency deposit
Cooperative income subject to final tax
2.
Cooperative income subject to normal tax
P60,000
10,000
P70,000
P -0-
The cooperatives ordinary income such as sales and income from lending to members
are not subject to income tax.

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INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Chapter 5: Exclusion from Gross Income