INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 22

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 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

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
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 23
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

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 Problem 5-6 Problem 5-7

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

Problem 5 –8 A
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
Total nontaxable income P132,500

Problem 5 –9 B
13th month pay P 6,500
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 24
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

Deductible from gross compensation income:

SSS contribution P3,000
Philhealth contribution 2,500 5,500
Amount excluded from gross income P12,000

Problem 5 –10 C
Dividend income 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) P 60,000
Sari-sari store (P20,000 x 12) 240,000
Gross taxable income in the Philippines P300,000

Problem 5 –12 D
13th month pay (P390,000/13) P30,000
De minimis with the ceiling amount:
Rice subsidy (P1,500 x 12) 18,000
Clothing allowance 4,000
Amount of nontaxable compensation P52,000

The excess of rice subsidy over the ceiling is already taxable, because the 13 th mo. pay is already
P30,000.

Problem 5 –13 C
Taxable Nontaxable
Total basic salary P240,000
13th month pay 20,000
Excess rice subsidy 6,000
De minimis rice subsidy (P24,000 – P6,000) . 18,000
Total nontaxable compensation P240,000 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 P 96,000
Overtime pay 20,000
Hazard pay 2,000
Holiday pay 1,000
13th mo. Pay 8,000
Excess rice subsidy 6,000
Rice subsidy w/in ceiling 18,000
Total nontaxable P151,000
Taxable P 0
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 25
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

Problem 5-15 B

Taxable Non-taxable
MWE:
Basic salary P108,000
o.t. pay 30,000
hazard pay 2,000
holiday pay 1,000
13th mo.+ similar benefits:
13th mo. Pay 9,000
Excess rice subsidy 18,000
Excess clothing to complete P30,000 13,000 3,000
Rice subsidy – de minimis 18,000
Clothing allowance . 4,000
Total P154,000 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 Non-taxable

MWE:
Basic salary 96,000
o.t. pay 20,000

13th mo.+ similar benefits:

13 th mo. Pay 8,000
Excess rice subsidy 6,000
Rice subsidy 18,000

Rent income 60,000

Interest income, 4,000/80% 5,000

Total 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.
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 26
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

5-17 D
Only P1,500 sickleave benefit actually taken.

Problem 5 –18 C
Take home pay P212,000
Nontaxable 13 th month pay ( 17,500)
Withholding tax 13,500
Other income subject to normal tax 20,000
Taxable income 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 C
Taxable Nontaxable
Net pay P265,000
Withholding tax 50,000
Advances 6,000
3th month pay (27,000) P27,000
Christmas bonus (de minimis) ( 5,000) 5,000
SSS contribution . 4,000
Totals P289,000 P36,000

Problem 5 –20 C
Taxable Tax-exempt
Net take home pay P13,000
SSS contributions P300
PAG-IBIG contributions 100
Union dues contributions 100
Office party contributions 75
Charitable contribution (deductible only from business income) 25
Withholding income tax 400 .
Totals P13,500 P500

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 D
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
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 27
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

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

Problem 5 –24 D
Proceeds of life insurance policy are not taxable.

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 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 –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 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 . 80,000
Total P120,000 P380,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 28
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

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.

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.
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 29
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

Problem 5 –40 D
Zero. Gifts are generally subject to donor’s tax and are not subject to income tax.

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 subjstantial 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 D
Interest on expanded foreign currency deposit P100,000

Problem 5 –49 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 –50 C
Interest income on bank savings deposit P10,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 30
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

Problem 5 –51 C
Interest income from foreign currency deposit P2,000,000
Interest income from time deposit 1,000,000
Total taxable income P3,000,000

Problem 5 –52
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 –53
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 –54
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 –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 P50,000
Interest income 2,000
Prizes 25,000
Total taxable income 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.
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 31
SUGGESTED ANSWERS
Chapter 5: Exclusion from Gross Income

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

Problem 5 -58
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 -59
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.