Income Taxation by NickAduana Answer Key PDF

Solution Manual
Income Taxation
(2009 Edition)
Chapter 1
True or False 1-1
1. True
2. False. Taxation covers person, properties, rights and
transactions.
3. False. Person in taxation includes the concept of
partnership, corporation, estate and trust.
4. True
5. False. Taxation as a legislative process is under the
power of the legislative body, the Congress.
6. False. Taxation is the primary source of government
revenue. Usually, the government resorts to borrowing
if taxes collected are not sufficient to defray its
budgetary requirements.
7. True
8. True
9. False. Basically, taxes imposed are based on the ability
of the taxpayer to pay.
10. False. It is the primary obligation of the state to
protect all the constituents regardless of whether they
pay or not their tax liabilities.
True or False 1-2
1. True
2. True
3. True
4. True
5. True
1
6. False. The President cannot delegate the power of
taxation, since taxation is not vested in the President.
Taxation is vested in the legislative body.
7. False. Taxation cannot be separated from the state.
The moment a state exists, taxation also exists.
8. False. The making of tax law is undertaken ahead of
the collection of taxes.
9. False. Levying refers to the making of tax laws.
10. False. Only the legislative body, the Congress, can
grant tax exemptions.
True or False 1-3
1. False. It is the legislative branch of the government

that is vested with the power of taxation.
2. False. The power of taxation is restricted by inherent
and constitutional limitations.
3. False. Tax assessment is the valuation and
determination of the amount of tax. The passage of
taxation is called levying or imposition of tax.
4. False. The three inherent powers can be and have
been delegated by the Legislative to the Executive
Branch.
5. True
6. True
7. False. The two kinds of double taxation are called
indirect double taxation and direct double taxation.
8. False. Tax avoidance is a legal way of avoiding
payment of taxes.
9. False. Income tax cannot be classified as ad valorem,
since the amount is not fixed and does not rely upon
an independent appraiser. It is properly classified as
graduated.
10. False. The Constitution does not expressly mention
double taxation. However, imposition of double
2
taxation violates the principle of uniformity; hence,
considered unconstitutional.
True or False 1-4
1. False. Taxes are broader than customer duties.

2. False. The power to grant tax exemption is vested in
the legislative branch of the government.
3. True
4. True
5. False. The idea that the tax rate and not the tax
payment shall be the same is the tenet of uniformity
and equity in taxation.
6. True
7. True
8. False. Although taxation is the strongest among the
three inherent powers of the State, it is subject,
however, to inherent and Constitutional limitations.
9. False. In forward tax shifting, the price of goods or
services keeps on increasing because of tax added.
10. False. Special assessment is imposed and collected
by the local government units. It is a local tax.
True or False 1-5
1. False. Not all government units exercise the power of

taxation. Only the Congress exercises the power of
taxation.
2. True
3. True
4. True
5. True
6. False. It is true that taxation cannot be separated from
the state; however, taxation is not absolute.
7. True
3
8. False. Tax assessment is the valuation of the property
and the determination of the amount of tax liabilities.
Enactment of tax laws is called levying or imposition of
tax.
9. True
10. False. Only non-payment of the poll tax is not
subject to imprisonment. Non-payment of other types
of tax is subject to criminal liability or sanction.
True or False 1-6
1. False. The power of taxation is comprehensive but

never absolute.
2. True
3. True
4. True
5. False. The three inherent powers of the state are not
dependent upon the Constitution.
6. True
7. True
8. True
9. False. The subject to be taxed and the amount of tax
are within the discretion of the Legislative Branch and
cannot be delegated. What can be delegated is the
administrative aspect, the assessment and collection of
taxes.
10. False. The Bureau of Internal Revenue administers
the taxes listed in the National Internal Revenue Code.
True or False 1-7
1. False. Tax liability is non-transferable, while debt is

transferable.
2. True
3. True
4. True
4
5. True
6. False. Real property tax is a local tax and administered
by the local government units.
7. False. It is properly classified as specific tax and not
ad valorem tax.
8. False. Levy is the taking of real property to enforce
collection of taxes. The taking of personal property is
called distraint.
9. False. The concept of proportionate in character is that
the amount of tax collected is based on the ability of
the taxpayer to pay. It does not imply that the
taxpayer without money is exempted from payment of
tax.
10. False. The situs of occupation is the place where the
occupation is performed.
True of False 1-8
1. False. The Supreme Court, not the Congress, decides

on the legality of tax laws. The decision of the
Supreme Court is final and executory.
2. False. The other term for tax minimization is tax
avoidance.
3. False. The Bureau of Internal Revenue is under the
Department of Finance.
4. False. The Philippine tax system is either graduated or
proportional. The regressive tax system has not yet
been adopted in the Philippines.
5. False. Non-payment of the poll tax is not subject to
imprisonment as one of the Constitutional limitations
and not one of the inherent limitations.
6. True
7. True
8. False. The power of eminent domain is the taking of
private property with just compensation for public
5
purpose. The two acts mentioned are under the police
power.
9. False. Collection of tax liabilities is the third stage of
the taxation system. The payment of tax due is the
stage that is incidental to the whole taxation system.
10. True
True or False 1-9
1. True
2. False. Tax cases involving more than P1,000,000 is
handled by the Court of Tax Appeals.
3. True
4. False. When the President vetoes certain items in the
bill passed by the Congress, the veto exercise is called
item veto. When the President objects to the whole
bill, it is called pocket veto.
5. False. Tax exemption is non-transferable.
6. False. What is exempted by the Constitution is the
property tax on religious or educational institutions.
Their property, however, is subject to other types of
tax.
7. False. The concept of tax exemption is privilege given
to certain types of taxpayer but not to reduce the tax
liability.
8. True
9. False. Late payment of the poll tax is subject to
surcharge or interest.
10. False. The Philippine Constitution does not expressly
prohibit double taxation. However, tax laws that are
not uniform and equitable are unconstitutional.
True or False 1-10
6
1. False. Taxation imposes contributions not only on
individuals but also on properties, rights and
transactions.
2. False. The legislative body of the government and not
the President undertakes the imposition of taxation.
3. False. Taxation is a legislative exercise undertaken by
the Congress.
4. False. Taxation even not provided expressly in the
Philippine Constitution can be imposed. It is an
inherent power of the state.
5. False. It is true that taxation is the strongest among
the three inherent powers of the state, but it is subject
to inherent and Constitutional limitations; hence, not
absolute.
6. False. It is only the legislative branch of the
government that can delegate the three inherent
powers of the State.
7. False. Uniformity and equity in taxation implies that
the tax rates applied, and not the amount of tax to be
paid, should be the same to all taxpayers belonging
under the same class.
8. True
9. True
10. True
True or False 1-11
1. True
2. True
3. False. The principle of fiscal adequacy presupposes
that taxes collected are sufficient to meet the fiscal
requirements of the government.
4. False. Taxation is the lifeblood of the government, but
only the legislative body can exercise taxation. Not all
government units can exercise the power of taxation.
7
The administrative aspect of taxation has been
delegated by the Legislative to the Executive Branch.
5. False. Collection of taxes through withholding taxes is
a concrete example of the principle of administrative
feasibility.
6. False. The doctrine of escape from taxation is intended
to reduce the amount of tax liability
7. False. Tax on fermented liquor is classified as specific
tax, since it is based on weight (volume) of the
product.
8. False. Tax evasion is an unlawful mode of reducing tax
liability. The process of transferring the tax burden
from one taxpayer to another is called tax shifting.
9. True
10. True
True or False 1-12
1. True
2. True
3. False. Toll is imposed by private entities, either
individual or corporate, to cover maintenance and
operating expenditures.
4. True
5. False. Proportional tax classification is based on a fixed
percentage or rate where the subject of taxation
belongs. Estate tax falls under the graduated
classification.
6. False. Collection is a stage where government
agencies are tasked to demand the tax liabilities.
Taxpayers’ act of meeting their tax liabilities is called
payment stage.
7. True
8
8. False. The concept of equity in taxation is based on
the premise that taxes collected are dependent upon
the ability of the taxpayer to pay.
9. False. The basic premise of international comity is that
all states are treated alike. It is the principle of privity
of relationship that the state continues to impose
taxation on its subjects even outside its territorial
jurisdiction.
10. False. Prospective application means that tax laws
are operative after the approval of the President of the
tax bill.
11. True
12. True
13. True
14. True
15. False. Tax laws can be retroactive if it is the
intention of the Legislative Branch that it will be
effective retroactively. Otherwise, the effect shall be
prospective.
Multiple Choice 1-1 Multiple Choice 1-2

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

Multiple Choice 1-6
1. D 6. C 1. C 6. C 1. D 6. C
2. A 7. A 2. D 7. C 2. A 7. B
3. B 8. B 3. B 8. B 3. A 8. A
9
4. D 9. A 4. A 9. C 4. B 9. A
5. C 10.C 5. B 10.C 5. B 10.D
1. D 6. B 1. B 6. B
2. A 7. A 2. D 7. C
3. C 8. B 3. A 8. A
4. A 9. C 4. C 9. D
5. D 10.C 5. C 10. B
Chapter 2
True or False 2-1
1. False. The stages or aspects of taxation are classified

as legislative (levying) and administrative (assessment
and collection).
2. False. Levying of tax is legislative in character, while
assessment is administrative in nature.
3. True
4. True
5. False. The value of the object after assessment
includes all penalties and charges.
6. True
7. False. Tax laws approved by the President are
implemented by various government agencies.
8. True
9. False. Tax assessment is undertaken just to determine
the amount of tax burden. In most instances, the
taxpayers themselves determine the amount of tax
liability.
10. True
10
True or False 2-2
1. True
2. True
3. True
4. False. Four Commissioners administer the BIR.
5. False. Tax assessment is not anymore required when a
tax deficiency has been determined because of
fraudulent return.
6. True
7. False. Tax deficiency means that the amount of tax
paid is less than the amount of tax due and payable.
8. True
9. False. The Commissioner of BIR may delegate
assessment to his authorized representative, but not
the final assessment.
10. False. Formal notice of assessment should be in
writing and should state all the facts.
True or False 2-3
1. False. The three-year period shall start on the date of

filing if the correct tax return is filed after the last day
of filing.
2. True
3. False. Fraud assessment arises from fraudulent return
filed by the taxpayer.
4. False. Assessment should be made within the
prescribed period; otherwise, the findings are not valid.
5. True
6. False. The taxpayer is given only 15 days to respond
on the findings for informal conference.
7. True
8. False. The taxpayer has 15 days to contest the
findings indicated in Preliminary Notice of Assessment.
9. True
11
10. True
True or False 2-4
1. False. Tax assessment is not required if tax deficiency

is due to mathematical error.
2. False. The taxpayer is given 30 days to contest the
findings in the formal notice of assessment.
3. False. The taxpayer shall submit all supporting
documents within 60 days after protest.
4. False. Upon receipt of notice of the BIR decision, the
taxpayer has 30 days to submit his protest to the Court
of Tax Appeal.
5. False. Collection is an administrative aspect of
taxation.
6. False. The government has the administrative and
judicial remedies to enforce collection of taxes.
7. True
8. True
9. False. Actual distraint is the taking of the physical
properties. Prohibition to use the property is termed
as constructive distraint.
10. True
True or False 2-5
1. False. Stocks and bonds can be distraint

constructively.
2. False. The Revenue District Officer shall administer
distraint on tax liabilities less than P1,000,000.
3. False. The officer administering the distraint shall
submit a report within two days to the BIR
Commissioner.
4. False. Levy is the taking of real properties to effect
payment of taxes.
12
5. False. The BIR regularly conducts tax assessment to
check the correctness of tax returns.
6. True
7. True
8. False. Again, the BIR is regularly taking pre-
assessment.
9. True
10. True
True or False 2-6
1. False. The taxpayer has 30 days to file an

administrative protest on the assessment.
2. False. The prescribed period of assessment for failure
to file a return is 10 years.
3. True
4. True
5. True
6. False. The government has administrative and judicial
remedies to enforce collection of taxes.
7. False. Tax refund check or warrant has five years to
remain outstanding from the date of delivery.
8. False. Distraint is the seizure of personal properties.
9. False. The BIR Commissioner or his authorized
representative executes distraint if the amount of tax
liability is more than P1,000,000.
10. True
True or False 2-7
1. False. Levy generally is undertaken if the personal

properties of the taxpayer are not enough to cover the
total amount of tax liability.
2. True
3. False. Distraint and levy cannot be administered if the
amount of tax deficiency is not more than P100.
13
4. True
5. True
6. True
7. False. The taxpayer has to file an appeal to the Court
of Appeals (CA) when the Court of Tax Appeals (CTA)
makes an unfavorable decision.
8. True
9. True
10. True
True or False 2-8
1. False. Formal notice of assessment may be sent by

personal delivery. The person receiving it, however,
should acknowledge the notice.
2. True
3. False. The taxpayer has 30 days to appeal to the Court
of Tax Appeals if the decision of the BIR Commissioner
is unfavorable.
4. False. Basically, enforcement of collection of taxes is
done administratively.
5. True
6. False. Intangible personal properties like stocks and
credits are subject to distraint using the constructive
system.
7. False. Notice of levy may be issued simultaneously
with the notice of distraint.
8. False. Levy or distraint is administered if deficiency tax
assessment involves more than P100.
9. True
10. True
True or False 2-9
1. False. The BIR has a Commissioner and four Deputy

Commissioners.
14
2. False. The Department of Finance is the primary
government agency responsible for tax administration
and supervision.
3. True
4. False. Taxpayers do not have to use simplified books if
quarterly sales receipts or earnings do not exceed
P50.000.
5. False. Willful neglect of filing tax return is subject to
50% surcharge.
6. True
7. True
8. True
9. True
10. True

Multiple Choice 2-3
1. D 6. D 1. C 6. C 1. B 6. B
2. B 7. A 2. A 7. D 2. C 7. D
3. B 8. A 3. C 8. B 3. C 8. A
4. B 9 D 4. C 9. B 4. A 9. B
5. D 10.D 5. D 10.A 5. D 10.B
Multiple Choice 2-4
1. B 6. A 11. A
2. D 7. A 12. A
3. D 8. C 13. C
4. D 9. D 14. C
5. D 10. C 15. B
Chapter 3
True or False 3-1
15
1. False. The resident alien should have an income within
the Philippines and the dependents should be staying
with the taxpayer in the Philippines.
2. False. The tax limit is P250,000 gross taxable income
in order that a taxpayer can deduct premium on HHIP.
3. True
4. False. Spouses who separate during the year with a
child under the custody of either or both of them are
already classified as head of the family. However,
under RA 9504, the basic personal exemption is
P50,000 regardless of the filing status.
5. False. A non-resident alien engaged or not in business
or trade in the Philippines is not allowed the additional
personal exemption.
6. False. The taxpayer is still classified as married. The
separation is not legal.
7. False. The taxpayer is classified as head of the family
but cannot claim the P25,000 additional exemption,
since the dependent is a brother.
8. True
9. False. The husband ordinarily claims the additional
personal exemption.
10. False. Special individuals are taxable on their gross
income; hence, no deductions are allowed.
True or False 3-2
1. False. The principle of reciprocity is one of the

requisites for the non-resident alien to claim the basic
personal exemption.
2. True
3. False. The allowable amount shall be the amount
allowed in the country of NRA-EBTP or what Philippine
law allows, whichever is lower.
16
4. False. Non-resident aliens either engaged or not in
business are not allowed to claim premium on health
and hospitalization.
5. False. Resident aliens with income within the
Philippines only are entitled to the basic personal
exemption.
6. True
7. False. The husband should formally waive his right by
executing a sworn statement.
8. False. The wife cannot claim the additional exemption
if his husband who is a non-resident citizen has an
income within the Philippines.
9. True
10. True
True or False 3-3
1. False. The term individual taxpayer refers only to

natural or human individual. A juridical person like a
corporation cannot be classified as individual taxpayer.
2. False. A natural born citizen does not have to perform
any act to acquire Philippine citizenship.
3. True
4. True
5. False. A Filipino citizen who stays more than 183 days
outside the Philippines is classified as non-resident
citizen.
6. False. The waiver executed by the husband on the
additional exemption once revoked shall take effect at
the start of the succeeding year.
7. True
8. False. A Filipino citizen employed in an offshore
banking unit is classified as special alien and taxable on
his gross income.
9. False. Resident citizens sourcing income purely from
foreign sources cannot claim additional exemption.
17
10. False. The additional personal exemption is for
qualified dependent children only.
True or False 3-4
1. False. Living with the taxpayer does not necessarily

mean that the dependent should be under the same
roof with the taxpayer.
2. False. The law grants personal exemptions based on
the status of the taxpayer, and the level of income has
nothing to do with it.
3. False. An illegitimate child who meets all the requisites
of a dependent is allowed additional exemption.
4. True
5. False. If the combined gross income of the spouses is
more than P250,000, the HHIP contribution cannot be
deducted.
6. True
7. False. A resident alien is entitled to additional
exemption only when his dependents are living with
him in the Philippines.
8. False. The amount of claim for HHIP is the actual
contribution of P2,400, whichever is lower, provided the
gross taxable income is not more than P250,000.
9. True
10. True
True or False 3-5
1. False. NRC is taxable on income from within the

Philippines.
2. True
3. False. A child legally adopted and meeting the
requisites of a dependent, qualifies for additional
exemption.
18
4. False. The taxpayer is classified as single. He is
supporting not his own parents or sister.
5. False. The taxpayer may still claim the additional
exemption, since the law assumes that the child
changed his status at the close of the year.
6. True
7. False. The status of the taxpayer will only be elevated
to the head of the family.
8. True
9. True
10. False. Only one of the spouses can claim the
additional exemption and the husband is ordinarily the
claimant.
Multiple choice 3-1 Multiple Choice 3-2

Multiple Choice 3-3
1. C 6. C 1. C 6. B 1. NRC 6. NRC
2. A 7. A 2. A 7. D 2. NRC 7. RC
3. D 8. B 3. C 8. D 3. RA 8. NRA-EBT
4. C 9. C 4. D 9. B 4. NRC 9. SI
5. C 10.B 5. B 10. B 5. NRA-EBT10.NRC
Multiple Choice 3-4
1. C 2. C 3. A 4. C 5. C 6. A
Exercise 3-1
Basic personal exemption (H/F) 50,000

Additional personal exemption
(recognized child) 25,000
HHIP (actual, P4,000; limit, P2,400) 2,400
Total allowable deduction 77,400
=====
Exercise 3-2
19
Taxpayer Spouse
Basic personal exemption
(married) 50,000 50,000
Additional exemption
(legally adopted child) 25,000
HHIP (actual, 2,300; limit, 2,400) 2,300 -
Total allowable deduction 77,300 50,000
===== =====
Exercise 3-3

(married) 50,000
Additional exemption (P25,000 x 2) 50,000
HHIP 2,400
======
Exercise 3-4
Basic personal exemption (single) 50,000

Additional personal exemption -
HHIP
(gross income exceeded 250,000) -
=====
Exercise 3-5

(married) 50,000
Additional exemption (25,000 x 3) 75,000
HHIP
======
Exercise 3-6

20
(married) 50,000
HHIP
======
Exercise 3-7

(married) 50,000
HHIP
======
Exercise 3-8
No exemption allowed, since the taxpayer is classified as

non-resident citizen with income outside the
Philippines.
Exercise 3-9

(married) 50,000
Additional exemption -
HHIP
(gross income exceeded 250,000)
=====
Exercise 3-10

(married) 50,000
Additional exemption (3 x P25,000) 75,000
HHIP
21
======
Exercise 3-11

(married) 50,000
HHIP
=====
Exercise 3-12

(married) 50,000
HHIP – no contribution;
gross income exceeded limit -
======
Exercise 3-13

(married) 50,000
HHIP – no contribution;
gross income exceeded limit -
======
Exercise 3-14

HHIP – no contribution -
22
=====
Exercise 3-15
The taxpayer is classified a non-resident citizen with

income outside the Philippines; hence, no allowable
personal deductions.
Exercise 3-16
The taxpayer is classified as non-resident alien not

engaged in business; hence, no allowable personal
deductions.
Exercise 3-17
No allowable personal exemption, since the taxpayer is

classified as non-resident alien without reciprocity.
Exercise 3-18
The taxpayer is classified as special individual; hence, no

allowable personal deductions.
Exercise 3-19
No deductions allowed, since the taxpayer does not have

income from within the Philippines. The taxpayer is
classified as resident alien.
Exercise 3-20
The taxpayer is classified as non-resident alien not

engaged in business in the Philippines; hence, no
deductions allowed.
23
Exercise 3-21
No allowable deductions for personal exemptions.
Exercise 3-22

(married) 50,000
======
Exercise 3-23

HHIP – Gross income
exceeded the limit -
======
Exercise 3-24

(married) 50,000
======
Exercise 3-25

(married) 50,000
24
======
Exercise 3-26

(married) 50,000
Additional exemption (1 x P25,000)25,000
=====
Exercise 3-27
Husband Spouse
(married) 50,000 50,000
Additional exemption (2 x P25,000) 50,000 -
HHIP – no contribution - -
Total allowable deduction 100,000 50,000
====== =====
Problem 3-1
Taxpayer Spouse
(married) 50,000 50,000
Additional exemptions
Another legitimate son 25,000
Illegitimate son of the wife 25,000
Legitimate daughter 25,000
HHIP - -
Total allowable deductions 125,000 50,000
===== =====
Problem 3-2

(married) 50,000
Additional exemption 25,000
25
HHIP 2,400
Total allowable deductions 77,400
=====
Problem 3-3

HHIP -
Total allowable deductions 100,000
======
Problem 3-4

Total personal exemptions 100,000
======
Problem 3-5

(married) 50,000
HHIP -
======
Problem 3-6
Husband Wife
(married) 50,000 50,000
Additional exemption - -
HHIP - -
Total personal exemptions 50,000 50,000
===== =====
Problem 3-7

26
(married) 50,000
HHIP 2,400
=====
Problem 3-8

(married) 50,000
HHIP -
======
Problem 3-9

HHIP -
=====
Problem 3-10

(married) 50,000
Additional exemption (P25,000 x 1)25,000
HHIP -
=====
Problem 3-11

HHIP -
=====
Problem 3-12
27
Husband Wife
(married) 50,000 50,000
Additional exemption (2 x 25,000) 50,000 -
HHIP - -
====== =====
Problem 3-13

(married) 50,000
HHIP -
=====
Problem 3-14
Husband Wife
(married) 50,000 50,000
Additional exemption (3 x 25,000) 25,000 50,000
HHIP - -
===== ======
Problem 3-15
Husband Wife
(married) 50,000 50,000
Additional exemption (4 x 25,000) 75,000 25,000
HHIP - -
===== =====
Chapter 4
28
True or False 4-1
1. True
2. False. An income is non-taxable if it is expressly
excluded by the Tax Code or any other special laws.
3. False. The law provides which income is non-taxable.
4. True
5. True
6. False. The presence of employer-employee relationship
is the primary factor whether an income is
compensation income or not.
7. False. Not all payments, like de minimis benefits, are
taxable compensation income.
8. False. The point of reckoning is at the time when
service has been rendered and not at the time of
payment.
9. False. Allowances, whether fixed or variable, are not
taxable if they do form part of the basic salary, subject
to liquidation or expressly provided by law to be non-
taxable.
10. True
True or False 4-2
1. False. Those allowances are non-taxable as provided

by the Tax Code up to P30,000 for both public and
private employees.
2. False. The amount of hazard pay will be included in
the gross taxable compensation income. However, if
the recipient of hazard pay is classified as minimum
wage earner, the amount provided for hazard pay is
non-taxable.
3. True
4. False. Retirement pay from GSIS or SSS is expressly
provided to be tax-exempt. It is not a gift from the
government.
29
5. False.
6. True
7. False. Only fringe benefits, except de minimis,
received by supervisory or managerial employees are
subject to fringe benefit tax.
8. False. Meal allowance and lodging provided to
employees are included in the gross taxable income,
except if those are for the benefit of the employer.
9. True
10. True
True or False 4-3
1. False. The tax base is the fair market value of the

property at the time of payment.
2. True
3. True
4. False. The value of the notes issued, as payment of
compensation, is its fair market value.
5. False. Income subject to final tax shall not be
included in the computation of gross taxable income
subject to basic tax.
6. False. Net sales are computed by deducting sales
returns and discounts from gross sales, while gross
income is computed by deducting cost of sales from
net sales.
7. True
8. True
9. False. Passive income arises when the taxpayer does
not exert effort to earn it.
10. False. Notes as payment of compensation are based
on their fair market value.
True or False 4-4
1. True
30
2. True
3. False. The tax base under the outright method of
recognizing income for leasehold improvement is the
fair market value of the improvement at the time of its
completion.
4. True
5. False Stock dividend is basically not taxable.
6. True
7. False. Prizes less than P10,000 are included in the
gross taxable income; hence, subject to basic tax.
8. True
9. False. The cash surrender value of a life insurance
policy not exceeding the premiums paid is not taxable.
10. False. All the items are excluded by law from gross
taxable income.
True or False 4-5
1. True
2. True
3. True
4. True
5. False. The gain is tax-exempt or excluded from gross
taxable income.
6. True
7. True
8. True
9. False. Tax refund of Philippine income tax is not
taxable.
10. False. Resident citizens are taxable on income within
and outside the Philippines; hence, unidentified income
does not have to be prorated as to source.

Multiple Choice 4-3
31
1. D 6. C 1. D 6. A 1. C 6. D
2. A 7. D 2. A 7. C 2. A 7. C
3. B 8. D 3. A 8. A 3. A 8. B
4. D 9. D 4. B 9. C 4. A 9. C
5. D 10. D 5. D 10. B 5. B 10.A
Multiple Choice 4-4
1. D 6. A
2. B 7. C
3. C 8. C
4. D 9. A
5. C 10.A
Exercise 4-1 C
Basic salary (45,000 x 12) 540,000

Representation allowance (10,000 x 12) 120,000
Commission (6,300,000 – 250,000) x 5% 302,500
13th month pay
(45,000 x 120%) – 30,000 24,000
Gross annual taxable
compensation income 986,500
======
Exercise 4-2 C
Gross taxable income 986,500

Less: Basic personal exemption (M) 50,000
HHIP - 150,000
Net taxable income 836,500
======
Exercise 4-3 B

Less: Basic personal
exemption (H/F) 50,000
32
HHIP - 50,000
======
Exercise 4-4 D
Basic salary 850,000

Fair value of motor vehicle 600,000
Notes receivable
(400,000 x .71178) 284,712
Christmas bonus
(50,000 – 30,000) 20,000
Gross taxable
compensation income 1,754,712
=======
Exercise 4-5 B
Gross taxable income 1,754,712

HHIP - 75,000
Net taxable income 1,679,712
=======
Exercise 4-6 A
Annual salary 420,000

Debt cancelled 80,000
Notes receivable 50,000
13th month pay
(420,000/12) + 40,000 – 30,000 45,000
Gross taxable
compensation income 595,000
======
Exercise 4-7 A
33
Gross compensation income 595,000
HHIP -125,000
======
Exercise 4-8 A
Annual salary 144,000

Cost of living allowance (2,500 x 12) 30,000
Retirement pay from employer
(less than 10 years) 45,000
======
Exercise 4-9 A

Less: Basic personal exemption (H/F) 50,000
HHIP 2,400 102,400
Net taxable compensation income 116,600
======
Exercise 4-10 C
Net sales (5,800,000 – 150,000) 5,650,000

Less: Cost of sales 3,470,000
=======
Exercise 4-11 D
Net sales 5,650,000

34
=======
Exercise 4-12 B
Exercise 4-13 A
Cash basis Accrual basis
Cash receipts
Animal/livestock 1,200,000 1,200,000
Cash crop 900,000 900,000
Farm equipment 200,000 200,000
Rent – agricultural lan 150,000 150,000
Total 2,450,000 2,450,000
Less: Cost of livestock 700,000 700,000
Cost of crop raised 500,000 500,000
Book value – tractor 300,000 300,000
Gross income
before inventory 950,000 950,000
Add: Ending inventory - 500,000
Total 950,000 1,450,000
Less: Beginning
inventory - 700,000
Gross taxable income 950,000 750,000
======= =======
Exercise 4-14 B
Exercise 4-15 C
Exercise 4-16 A (Income will be recognized only upon
completion, that is on the 3rd year.)
Year 1 Year 2 Year 3

Contract price 25,000,000 25,000,000 25,000,000
Percentage of
completion 45% 70% 100%
Contract earned 11,250,000 17,500,000 25,000,000
Less: Cost incurred 10,000,000 16,000,000 22,000,000
Gross income to date 1,250,000 1,500,000 3,000,000
Less: Income prior year - 1,250,000 1,500,000
Gross income – annual 1,250,000 1,250,000 1,500,000
35
======== ======== ========
Exercise 4-17 A
Monthly rental (15,000 x 10) 150,000

Shares on real estate tax 2,500
Gross taxable rent income 152,500
======
Exercise 4-18 C
Monthly rental income 150,000

Security deposit 45,000
Shares on real estate tax 2,500
Gross taxable rent income 197,500
======
Exercise 4-19 A
2008 rental (10,000 x 9) 90,000

Real property tax (6,000/12 x 9) 4,500
Taxable rent income – 2008 94,500
=====
Exercise 4-20 D
2009 rental 120,000

Building – FMV 8,000,000
Real property tax paid by lessee 6,000
Taxable rent income – 2009 8,126,000
=======
Exercise 4-21 B
Cost of the improvement 6,000,000

Less Accu. dep’n. end of lease
[(6,000,000 – 400,000)/50]
x 25 2,800,000
Book value 3,200,000
Divided by term of lease 25
Annual income on improvement 128,000
36
=======
Income for 9 months
(128,000/12 x 9) 96,000
Add: Taxable rent income
(see item 1) 94,500
=======
Exercise 4-22 D
Annual income on improvement 128,000

Rental income 126,000
=======
Problem 4-1

HHIP 2,400 127,400
Taxable net income 112,600
======
Problem 4-2
Gross business income 1,200,000
Other income (460,000 x 65%) 299,000
Less: Allowable business expenses
(800,000 x 75%) 600,000
Net income 899,000
Additional -
HHIP - 50,000
=======
37
Problem 4-3
Resident Resident
Citizen Alien
Compensation income 970,000 610,000

Gross business income 1,680,000 960,000
Other income
subject to basic tax 260,000 180,000
Interest income
on time deposit 40,000
Gross taxable income 2,950,000 1,750,000
Less: Business
expenses 1,080,000 610,000
Taxable income before
personal exemption 1,870,000 1,140,000
======= =======
Problem 4-4
Salaries from employment 280,000

Share in the net income 65,000
Bonus (18,000 + 32,000) – 30,000 20,000
Other fringe benefits 32,000
Dividend from non-resident
foreign corporation 48,000
Additional exemption
(25,000 x 3) 75,000 125,000
======
Problem 4-5
Salary (400,000 – 8,000) 392,000

13th month pay (55,000 – 30,000) 25,000
Representation and
traveling allowance 60,000
38
Additional exemption - 50,000
======
Problem 4-6
Compensation income 800,000

Christmas bonus (82,000 – 30,000) 52,000
======
Problem 4-7
Winnings from gambling 650,000

Actual damages for unrealized profits 200,000
======
Problem 4-8
2009 2010
1. Sales 3,500,000 0
Less: Cost of sales 2,100,000 0
Gross profit/income 1,400,000 0
======= ===
2. 2009 (1,400,000/3,500,000)
x 1,300,000 520,000
2010 (1,400,000/3,500,000)
x 2,200,000 880,000
Total income 1,400,000
=======
Problem 4-9
2009 2010
1. Sales 6,000,000 0
Less: Cost 4,000,000 0
Gross profit 2,000,000 0
39
======= ==
2. Percentage of initial payment to selling price is 20%

[(P720,000 + 480,000)/P6,000,00]; hence, the
taxpayer may opt for installment payment.
2009 (2,000,000/6,000,000 x P1,200,000

400,000
2010 (2,000,000/6,000,000) x P4,800,000
1,600,000
Gross profit 2,000,000
=======
Problem 4-10
2009 2010
1. Sales 3,000,000 0
Less: Cost 2,000,000 0
Gross profit 1,000,000 0
======= ==
2. Percentage of initial payment to selling price is 30%
(P900,000/P3,000,000); hence, the installment
payment method cannot be used. Rather, the
deferred payment will be used.
2009 income
Cash collected 900,000
Less: Cost 2,000,000
Excess of cost over collection (1,100,000)
=======
2010 income
Cash collected 2,100,000
Less: Excess of cost over collection – 2009
1,100,000
Income to be reported 1,000,000
=======
40
Chapter 5
True or False 5-1
1. True
2. False. The cost of inherited property is based on the
fair market value at the time of inheritance.
3. False. Property acquired as a gift is measured based
on its fair market value at the time of gift, or same as
if it would be in the hands of the donor, whichever is
lower.
4. False. It is the other way around.
5. False. An asset may be ordinary for a certain taxpayer
but classified as capital by another taxpayer.
6. False. Net capital gain is the excess of capital gain
over capital loss.
7. False. Capital loss cannot be deducted from ordinary
gain.
8. False. The holding period applies only to capital gain or
loss.
9. True
10. False. Capital loss is deductible only from capital
gain and net capital loss cannot be deducted from
gross income subject to income taxation.
True or False 5-2
1. False. The sale is subject to final tax at the rate of 5%

or 10% based on capital gain realized.
2. True
3. True
4. True
5. False. Stock in trade or inventory is an ordinary asset
used in business operation.
41
6. False. The selling price of the shares issued in
exchange shall be the fair market value of the property
received.
7. False. A surcharge and interest can be imposed and
collected at the same time.
8. True
9. False. Tax on the sale of shares of stock thru the local
stock exchange is collectible by the broker
administering the sale and should be remitted within
five days from collection.
10. True
True or False 5-3
1. False. The gain on shares redeemed is subject to

income tax.
2. False. Sale of treasury stock is subject either to stock
transaction tax or to capital gains tax.
3. True
4. False. The amount of capital gain or loss is subject to
the regular income tax rate ranging from 5% to 32%.
5. True
6. False. The capital loss on worthless shares shall be
deducted from other capital gains arising not from sale
of shares of stock.
7. True
8. True
9. True
10. True
True or False 5-4
1. True
2. True
3. False. The property is value based on the amount paid
by the transferee.
42
4. False. The procedure of specific identification should
be used if the share can be identified.
5. False. The total cost will not be affected by stock
dividend but the unit cost per share will be reduced.
6. True
7. False. It is the difference of the fair market value over
cost.
8. False. Sale of treasury stock may be subject to stock
transaction tax or to final tax.
9. False. Gain on wash sale is taxable, but loss is non-
deductible.
10. False. The gain realized shall be subject to income
taxation.
1. C 6. C 1. A
2. A 7. A 2. A
3. D 8. A 3. C
4. B 9. C 4. C
5. C 10.A 5. D
Exercise 5-1 B
Selling price 4,000,000

Less:
Acquisition cost 900,000
Attorney’s fee 20,000
Taxes 40,000
Improvement
(150,000 – 70,000) 80,000 1,040,000
Gain on sale 2,960,000
=======
Exercise 5-2 D
43
Exchange price (FMV) 5,000,000
Add: Cash added 400,000
Total 5,400,000
Less: Book value
(4,300,000 – 1,720,000) 2,580,000
Gain on exchange 2,820,000
=======
Exercise 5-3 C
Business income
(2,000,000 – 1,600,000) 400,000
Add: Short term capital gain 90,000
Long-term capital gain
(40,000 x 50%) 20,000
Total capital gain 110,000
Less: Short-term capital loss 60,000
Long-term capital loss
(50,000 x 50%) 25,000
Total capital loss 85,000
======
Exercise 5-4 B
Business income
(4,300,000 – 3,000,000) 1,300,000
Gain on sale of business assets
(700,000 – 580,000) 120,000
Capital gain (120,000 x 50%) 60,000
Capital loss (90,000 x 50%) 45,000 15,000
=======
Exercise 5-5 D
FMV 4,800,000
Zonal value (800 sq. x 6,500) 5,200,000
Higher – zonal value 5,200,000
44
Multiplied by capital gains tax 6%
Capital gains tax 312,000
=======
Exercise 5-6 B
Exercise 5-7 B
2008 2009
Business income 900,000 800,000
Allowable expenses 500,000 600,000
Taxable business income 400,000 200,000
Add (Less) Capital gain (loss)
Short-term capital gain 60,000 -
Long-term capital gain - 200,000
Short-term capital loss 190,000 -
Net capital gain (loss) (130,000) 200,000
Capital loss carry over - -
130,000 70,000
Gross taxable income 400,000 270,000
Less: Basic exemption 50,000 50,000
Additional 50,000 100,000
Net taxable income 300,000 170,000

====== ======
Exercise 5-8 A
Selling price 700,000

Less: Cost 400,000
Acquisition
expenses 60,000
Selling expenses 40,000
500,000
Gain on sale 200,000
======
45
Exercise 5-9 D
FMV (higher) 720,000

Less: Cost 500,000
Gain on exchange 220,000
======
Exercise 5-10 C
Gain on sale (P1,500,000 – P600,000) 900,000

======
Capital gain tax
On the 1st P100,000 x 5% 5,000
On excess (900,000-100,000) x 10% 80,000
85,000
======
Exercise 5-11 A No capital gain shall be recognized,
since the sale of the shares resulted to a loss.
Exercise 5-12 D
Selling price (higher) 6,000,000

Multiplied by 6%
Capital gains tax 360,000
=======
Problem 5-1
Business income (450,000/90%) 500,000

Compensation income (268,000 +32,000) 300,000
Interest income on trade receivable 40,000
Short-term capital gain (80,000 x 100%) 80,000
Long term capital loss (60,000 x 50%) (30,000)
50,000
Gain on sale of ordinary assets 52,000
Loss from sale of ordinary assets (30,000)
Dividend income –
resident foreign corporation 25,000
46
======
Problem 5-2
1. Ordinary assetsComputer Motor Commer- Total

Vehicle cial Lot
Selling price 42,000 400,000 6,000,000 6,442,000
Less: Book value 44,625 480,000 2,500,000 3,024,625
Ordinary gain
(loss) ( 2,625) ( 80,000) 3,500,000 3,417,375
====== ====== =======

=======
2. Capital assets Coml. Lot Jewelry Equipment Net

gain (loss)
Selling price 4,920,000 650,000 150,000
Less: Book value 5,520,000 300,000 84,000
Capital gain (loss) ( 600,000) 350,000 66,000
Holing period 50% 50% 100%
Net capital
gain (loss) ( 300,000) 175,000 66,000 ( 59,000 )
======= ====== ===== =======
Problem 5-3
Feb. 1 May 1 July 1 Oct. 1 Cumulative
Net sales 192,000 318,500 135,000 485,000 1,130,500
Less: Cost 125,000 262,000 144,000 450,000 981,000
Gain (loss) 67,000 56,500 (9,000) 35,000 149,500
Cap. tax rate .005 .005 - .005 .005
Capital gains tax 335 282.50 - 175 747.50
===== ====== ====== ======
Less: Taxes paid (335 + 282.50 + 175) 792.50
Net capital gains tax ( 45.00 )
=======
Problem 5-4
Salary (380,000 + 20,000) 400,000

Christmas bonus (60,000 – 30,000) 30,000
Gain on sale of jewelries
(120,000 – 80,000) 40,000
Cash dividend from non-resident
47
Cash dividend from resident
Business income 950,000
=======
Problem 5-5
1. Sales (200 x 95) 19,000

Less: Cost (200 x 100) 20,000
Non-deductible loss (1,000)
=====
The loss is considered non-deductible, because the
sales and subsequent acquisition were within the 61-
day period (wash sale).
2. Sales 36,000
Less: Cost (300 x 110) 33,000
Taxable gain 3,000
=====
Problem 5-6
1. Downpayment 150,000
Additional payments
within the year 50,000
Excess of mortgage assumed 100,000
Initial payment 300,000
======
2. Selling price 1,080,000

Less: Mortgaged assumed
by the buyer 700,000
Balance 380,000
Add: Excess of mortgaged
over cost (700,000 – 600,000) 100,000
48
Contract price 480,000
=======
3. Gross profit
(1,080,000 – 600,000) 480,000
=======
Selling price 1.080,000

Less: Initial payment –
Actual 200,000
Mortgage assumed 700,000 900,000
Balance 180,000
Divided by 3
Annual collection 60,000
=======
Annual income 1st year

(480,000/480,000 x 300,000) 300,000
2nd year
(480,000/480,000 x 60,000) 60,000
3rd year 60,000
4th year 60,000
Total 480,000
======
Problem 5-7
Gross profit
(P2,000,000 – P1,200,000) 800,000
======
Percentage of initial payment
to selling price (P400,000/P2,000,000) 20%
====
Income to be reported:
2009
(800,000/2,000,000) x 400,000 188,235.29
49
2010
(800,000/2,000,000) x 800,000 376,470.59
2011
(800,000/1,700,000) x 500,000 235,294.12
Total 800,000.00
========
Problem 5-8
Gross profit (3,500,000 – 1,400,000) 2,100,000

=======
Initial payment
([400,000 + 300,000 +
(1,400,000 – 1,500,000)] 800,000
======
Percentage of initial payment
to selling price (800,000/3,500,000) 22.86%
======
Contract price
(P3,500,000+ P100,000
– P1,500,000) 2,100,000
=======
Income to be reported:
2009
(2,100,000/2,100,000 x 800,000) 800,000
2010
(2,100,000/2,100,000 x 700,000) 700,000
2011
(2,100,000/2,100,000 x 600,000) 600,000
Total 2,100,000
=======
Problem 5-9
Gross profit (P2,800,000 – P2,000,000) 800,000

======
Income
2009
50
Cash 1,000,000
FMV of notes
(90% x P1,800,000) 1,620,000
Total 2,620,000
Less: Cost 2,000,000 620,000
2010
Cash 1,800,000
Less: FMV of notes
received in 2009 1,620,000 180,000
Total income 800,000
=======
Problem 5-10
Mr. AA Mr. BB
Selling price 200,000 450,000
Less: Cost (2,000/5,000 x 600,000) 240,000
Less: Cost (3,000/5,000 x 600,000) 360,000
Loss on sale 60,000 --
Gain on sale -- 90,000
====== ======
No capital gain tax since
the sale resulted to a loss --
Capital gain tax (P90,000 x 5%) 4,500
Chapter 6
True or False 6-1
1. False. Fringe benefits are additional privileges which

are relatively small in value and not considered as
compensation.
2. False. Only the fringe benefits granted to supervisory
and managerial employees are subject to fringe benefit
tax.
3. True
4. True
5. True
6. False. De minimis benefits granted to managers or
supervisors are not subject to fringe benefit tax.
51
7. False. Fringe benefits exempted from fringe benefit tax
may be subject to income tax.
8. True
9. True
10. False. Monetized unused vacation leave credits for
government officials and employees are not subject to
fringe benefit tax.
True of False 6-2
1. True
2. False. The monetary value is equal to 50% of the
rental payment.
3. False. Housing units within the business premises are
exempted from fringe benefit tax.
4. True
5. False. The monetary value is 50% of the 5% of the
acquisition cost.
6. False. It is not included as part of acquisition cost.
7. True
8. True
9. False. Whether receipted or not, if the employee
benefits from the personal expenses, such are subject
to fringe benefit tax.
10. False. The monetary value is equal to its acquisition
cost divided by five years.
True or False 6-3
1. False. It is 50% of the acquisition cost after dividing it

by five years.
2. False. The monetary value is acquisition cost divided
by 20 years.
3. True
4. True
52
5. False. The interest is subject to fringe benefit tax if is
lower than the 12% benchmark.
6. False. Unreasonable foreign travel expenses are
subject to fringe benefit tax.
7. False. Lodging in excess of P300 is subject to fringe
benefit tax.
8. True
9. True
10. False. Educational assistance connected with the
employer’s trade and with a written agreement that
employee will serve the employer for a certain period
of time is not subject to fringe benefit tax.
Multiple Choice 6-1
1. D 6. C 11. B
2. B 7. A 12. B
3. C 8. D 13. A
4. D 9. C 14. C
5. A 10.D 15. D
Exercise 6-1 D
Downpayment 3,000,000
Installment (1,000,000 x 4.111) 4,111,000
Value of fringe benefits 7,111,000
=======
Exercise 6-2 A
Actual value 7,111,000

Percentage of
managerial employees 20%
Total 1,422,200
=======
Monetary value
(1,422,200 x 5%) x 50% 35,500
53
=======
Exercise 6-3 A
Grossed-up monetary value

(35,555/68%) 52,287
=====
Exercise 6-4 A
Fringe benefit tax (52,287 x 32%) 16,732

=====
Exercise 6-5 C
Gross income from business 1,200,000

Rental 150,000
Fringe benefits (51,000/68%) 75,000
RATA 204,000
=======
Exercise 6-6 C

Less: Business expenses 620,000
Net income 1,009,000
exemption (M) 50,000
Additional exemp 50,000 100,000
=======
Exercise 6-7 C
Monetary value
(150,000/32%) x 68% 318,750
=====
Exercise 6-8 C

54
(150,000/32%) 468,750
======
Exercise 6-9 B
Fringe benefit tax

(255,000/68%) x 32% 120,000
======
Exercise 6-10 D
Salary 280,000
Christmas bonus
(25,000 + 30,000) – 30,000 25,000
Cash fringe benefits 15,300
Other fringe benefits 25,500
======
Exercise 6-11 B
Salary 280,000
Christmas bonus 25,000
======
Exercise 6-12 A (Fringe benefit provided to rank-and-
file is not subject to fringe benefit tax)
Exercise 6-13 B

[(15,300 + 25,500)/68%] 60,000
=====
Exercise 6-14 A (The amount of 765,000 is a fringe
benefit and subject to fringe benefit tax)
Exercise 6-15 B
Fringe benefit tax

55
(765,000/85%) x 15% 135,000
======
Problem 6-1
1. Total value of fringe benefit tax

(956,250 + 430,750 + 750,000) 2,137,000
=======
2. Fringe benefit tax to supervisor
(956,250/68%) x 32% 450,000
Fringe benefit tax to non-resident alien
(750,000/75%) x 25% 250,000
Total fringe benefit tax 700,000
=======
Problem 6-2
1. Cash payment for grocery items 382,500

Motor vehicle benefits
Downpayment 400,000
Installment
(400,000 x 4 years) 1,600,000 2,000,000
Total fringe benefit expenses 2,382,500
=======
2. On grocery items
(382,500/68%) x 32% 180,000.00
On motor vehicle
[(750,000/5)/68%] x 32% 70,588.24
Total fringe benefit tax 250,588.24
========
Problem 6-3
1. Local travel 420,750

De minimis benefits 80,000
Total value of fringe benefits 500,750
======
56
2. Grossed-up monetary value
(420,750/68%) 618,750
======
3. Fringe benefit tax (618,750 x 32%) 198,000

======
Problem 6-4
1.Grossed-up monetary
value (GUMV) 3,468,549.02
==========
2. Total fringe benefit tax 908,549.02
========
Resident Special NRA-NEBT Total
Citizen Alien
80% value 1,280,000.00 768,000.00 512,000.00 2,560,000.00

Divided by 68% 85% 75%
-
GUMV 1,882,352.94 903,529.41 682,666.67 3,468,549.02
Tax rate 32% 15% 25% -
Fringe
benefit tax 602,352.94 135,529.41 170,666.67 908,549.02
========= ======= ======= =======
Chapter 7
True or False 7-1
1. False. The expenses that are reasonable and

necessary must be allowed by taxation law to be
deductible.
2. True
3. False. The compensation income is not included in the
computation of the 40% optional standard deduction.
4. True
5. True
57
6. False. NRAs engaged or not engaged in business
cannot use the optional standard deduction.
7. False. The expenses should be ordinary and necessary.
8. False. Estimates are non-deductible expenses.
9. True
10. False. Bribes and kickbacks are against public
morals; hence, non-deductible.
True or False 7-2
1. False. The expenses must be connected with the

business activities.
2. True
3. False. The advance rental shall be prorated on the
term of the lease.
4. False. The leasehold improvement shall be apportioned
over the term of the lease or the life of the
improvement, whichever is shorter.
5. False. Both the actual and accrued interest expenses
are deductible.
6. True
7. True
8. True
9. False. If the taxpayer is using the cash basis, advance
interests are prorated over the outstanding balance.
10. True
True or False 7-3
1. False. Expenses between related taxpayers are non-

deductible.
2. True
3. True
4. False. Not all taxes are deductible. Philippine income
tax is non-deductible.
5. True
58
6. False. Net operating loss carry over applies also to
corporate taxpayers.
7. False. The loss can be applied only for the next three
years following the year of loss.
8. True
9. False Loss on shares of stock is deductible if there is
actual sale.
10. False. Only bad debts ascertained to be worthless
and written off are deductible.
True or False 7-4
1. False. Recognition of unpaid debts is non-deductible.

The debts should be ascertained to be worthless.
2. True
3. True
4. True
5. False. The depreciation rate is dependent on the useful
life of the assets.
6. False. Such properties shall be depreciated over a
period of 10 years or shorter.
7. False. Compensation income is deductible only by
basic and personal exemption.
8. True
9. True
10. False. The donation is subject to 10% limitation,
because it is intended for public purpose.
True or False 7-5
1. True
2. False. The base of the 5% or 10% limitation is the
taxable income before personal exemption.
3. False. It should be amortized over a period of 60
months or five years.
59
4. False. Payment of past pension cost is amortized over
10 years.
5. True

Multiple Choice 7-3
1. C 6. C 1. A 6. B 1. A
2. C 7. D 2. C 7. A 2. C
3. A 8. A 3. B 8. C 3. C
4. B 9. B 4. C 9. A 4. B
5. C 10. C 5. D 10. D 5. C
Exercise 7-1 C
Allowable deduction under OSD

(1,800,000 x 40%) 720,000
======
Exercise 7-2 B
Compensation income
(380,000 + 45,000) – 30,000 395,000
Business income 1,800,000
Deduction under OSD 720,000
1,080,000
Taxable income
before personal exemption 1,475,000
=======
Exercise 7-3 C
Salaries – rank-and-file 2,700,000

Salaries – supervisory positions 900,000
Fringe benefits – rank-and-file 300,000
Fringe benefits – supervisory positions
(326,400/68%) 480,000
Total bonus 272,400
60
Total deductible salaries 4,652,400
=======
Exercise 7-4 D
Net annual salaries 3,200,000

Total amount withheld 580,000
Christmas bonus 250,000
Fringe benefits 180,000
Total deductible salaries 4,210,000
=======
Exercise 7-5 D
Fringe benefits – foreign travel

Plant ticket – first class
($3,500 x 30%) x P50 52,500
Meals ($3,000 - $1,800) x P50 60,000
Plant ticket – economy (tax exempt) -
Meals ($1,500 - $900) x P50 30,000
Total value of fringe benefits 142,500
======
Allowable travel expenses of the taxpayer:
Foreign plane ticket, meals and lodging
($3,500 + $3,000 + $1,200
+ $ 1,500) x 50 460,000.00
Domestic travel 400,000.00
(142,500/68%) 209,559,82
Total allowable
Trave expenses 1,069,558,82
========
Exercise 7-6 A (The loss is partial; hence the

amount of deductible loss is the book value or
replacement cost, whichever is lower)
61
Exercise 7-7 B
Deductible charitable contributions

(2,500,000 – 1,700,000) x 10% 80,000
=====
Exercise 7-8 C
Business expense, exclusive

of interest expense (750,000 – 25,000) 725,000
Add: Deductible interest expense
[25,000 – (50,000 x 33%)] 8,500
Total allowable expenses 733,500
======
Exercise 7-9 B
Gross receipts from profession 800,000

Rental income (136,800/68%) 144,000
Total income from business/exercise
of profession 944,000
Multiplied by OSD rate 40%
Allowable deduction under OSD 377,600
======
Exercise 7-10 A
Gross receipts 944,000

Add: Compensation income
(P255,000 + 45,000) 300,000
Total 1,244,000
Less: Allowable deduction 377,600
Taxable income before
personal exemption 866,400
=======
Exercise 7-11 D
Net salaries 8,750,000

62
Add: Employees SSS contribution 300,000
Withholding tax 650,000
Employees Medicare contribution 100,000
Cash advances 200,000 1,250,000
Gross payroll 10,000,000
Add: Fringe benefits to employees 1,500,000
Fringe benefits to key officers
(2,040,000/68%) 3,000,000 4,500,000
Total deductible salaries/compensation 14,500,000
========
Exercise 7-12 D
Transportation expenses
within the Philippines 600,000
Fringe benefits (170,000/68%) 250,000
Transportation, pouch man 60,000
Transportation expenses outside 1,800,000
Fringe benefits (544,000/68%) 800,000
Total deductible expenses 3,510,000
=======
Exercise 7-13 C
Annual rent (P180,000/12 x 7 months) 105,000

Real estate tax 3,500
Insurance premium
(P30,000/12 x 7 months) 17,500
Leasehold amortization
(P600,000/5 x 7/12) 70,000
Total deducible rent 196,000
======
Exercise 7-14 B
Interest expense on borrowings 300,000

Less: Reduction based on interest
income (P150,000 x 33%) 49,500
Deductible interest expense 250,500
======
63
Exercise 7-15 B
Charitable contributions subject to limitation for:

Public purpose 100,000
UCCP Church 50,000
Flood victims 50,000
Total - actual 200,000
Limit
(P5,000,000 – 2,000,000
– 1,000,000) x 5% 100,000
Lower 100,000
Charitable contribution
deductible in full – for education 300,000
Total deductible charitable
contributions 400,000
======
Problem 7-1
1. Advance rental is not a deposit

Monthly rental (starting Sept. 1) 600,000 600,000
Real estate tax 6,000 6,000
Interest expense (12,000/2) 6,000 6,000
Insurance premium (7,500/2) 3,750 3,750
Advance rental (applicable
for July and August) 300,000 300,000
Total 915,750 915,750
====== ======
2. Advance rental is a deposit with restriction
Monthly rental (starting July. 1) 900,000 900,000
Real estate tax 6,000 6,000
Interest expense (12,000/2) 6,000 6,000
Insurance premium (7,500/2) 3,750 3,750
Advance rental as deposit 300,000 -
Total 1,215,750 915,750
======= ======
64
Problem 7-2
Salaries (870,000 + 30,000 + 150,000) 1.050,000

Fringe benefits – rank-and-file 450,000
Fringe benefits – managerial employee
(340,000/68%) 500,000
Representation and traveling allowance 150,000
Rent expense 180,000
Commission (7,425,000 + 75,000) x 5% 375,000
Business expense before donation 2,705,000
Donation subject to limitation (see below) 179,500
Total deductible expense 2,884,500
=======
Gross income from business

(7,500,000 x 60%) 4,500,000
Less: Expenses before donation 2,705,000
Income before donation 1,795,000
10% limit 10%
Allowable deductible donation 179,500
=======
Problem 7-3
1. Municipal taxes 1,200

Community tax 1,000
Documentary stamp tax
(P910 – 80 – 30) 870
License (P4,000 – 500 – 100) 3,400
Total deductible taxes 6,470
=====
2. Representation and traveling allowance 15,000

Interest on documentary stamp tax 30
Interest on borrowings 10,000
Interest on license 100
65
Compensation to key personnel
- fringe benefit (P10,200/68%) 15,000
Compensation to employees 6,000
Total of other deductible expenses 46,130
=======
The interests on documentary stamp tax and on license
fees are not classified as taxes but rather interest
expense. Fringe benefits of key personnel are subject
to fringe benefit tax; hence, the amount was grossed-
up.
Problem 7-4
Business losses 200,000

Partial loss on equipment
Book value (P800,000 – 480,000)
x 80% 256,000
Replacement cost 240,000
Deductible loss – lower 240,000
Total loss on machinery
Acquisition cost 2,000,000
Less: Accumulated depreciation
(P2,000,000/10) x 6 1,200,000
Book value 800,000
Less: Recoverable amount 200,000
600,000
Deductible loss 1,040,000
=======
Problem 7-5
1. Other business expenses 1,800,000

FB to employees 120,000
FR to employees subject to
fringe benefit tax (P204,000/68%) 300,000
Interest expense on bank loan 60,000
66
Net operating loss carry over 70,000
Entertainment
Actual 40,000
Limit (5,600,000 – 50,000 – 20,000)
= 5,530,000 x 1/2% 27,650
Lower 27,650
Total deductible business expense 2,377,650
=======
2. Net sales 5,530,000

Gross income 3,330,000
Add: Interest income
on bank loan in USA 90,000
Total gross income 3,420,000
Less: Deductible expenses 2,377,650
Net income before exemption 1,042,350
Less: Personal exemption
(50,000 + 100,000) 150,000
=======
Problem 7-6
1. Salaries 400,000
Losses on embezzlement 50,000
Advertising 20,000
Depreciation 50,000
Taxes (P190,000 – P90,000) 100,000
Pension contribution – present
(P230,000 – P100,000) 130,000
Pension contribution – past
(P100,000/10) 10,000
Entertainment
Actual 35,000
Limit (P2,900,000 x 1%) 29,000
67
Lower 29,000
Interest expense on bank deposit
Actual 90,000
Less: Reduction due to interest
income (P50,000 x 33%) 16,500 73,500
Total before charitable contribution 862,500
Charitable contribution for public purpose
Actual 150,000
Limit (P2,900,000 – 1,305,000
– 85\62,500) = 732,500 x 10% 73,250
Lower 73,250
Total deductible expenses 935,750
======
2. Gross income
(P2,900,000 – 1,305,000) 1,595,000
Less: Allowable deduction 935,750
Net income before
personal exemption 659,250
Less: Personal Exemption
(P50,000 + 100,000) 150,000
=======
Chapter 8
True or False 8-1
1. False. The taxpayer is still required to file an income

tax return, since the source of income is from business.
2. False. Only on income within the Philippines.
3. False. There are only two employers; hence, the
taxpayers are required to file though the income did
not exceed P60,000.
4. True
68
5. False. The Statement of Net Worth and Operation shall
be attached to the tax return if the gross receipts do
not exceed P50,000 in any quarter.
6. False. The centavos shall never be dropped or rounded
off in the tax due after tax credit.
7. True
8. False. Income tax credits are deductible against
income tax liabilities.
9. True
10. False. Non-resident citizens are taxable only on
income within the Philippines. Hence, taxes paid in a
foreign country cannot be claimed as tax credit.
True or False 8-2
1. False. Taxes paid in a foreign country are subject to

limitation if claimed as tax credit.
2. False. Only individual taxpayers can avail of the
installment method of paying income tax in excess of
P2,000.
3. False. The second installment is due on July 15.
4. True
5. False. The income is classified as income from outside
the Philippines. The threshold is 50%.
6. True
7. False. If the internal revenue taxes are more than
P10,000, the over-the-counter of EFPS may be
adopted.
8. False. Substitute filing is applicable if there is only one
employer.
9. False. The payment of taxes due shall be made
through the AAB.
10. True
Multiple Choice 8-1
69
1. B 6. C
2. B 7. C
3. C 8. B
4. A 9. D
5.D 10. B
Exercise 8-1 A
Gross income (2,500,000 – 1,500,000) 1,000,000

Less: Allowable business expense 450,000
Taxable income before exemption 550,000
(P50,000 + 100,000) 150,000
=======
Exercise 8-2 C
On P250,000 50,000.00
On excess (P400,000 – 250,000) x 30% 45,000,00
Total 95,000,00
Add: Surcharge (P95,000 x 25%) 23,750,00
Interest (P95,000 x 20% x 139/360) 7,336.11
Total tax due and payable 126,086.11
========
Exercise 8-3 D
Net salaries subject to tax

(490,000 – 6,000 – 4,000) 480,000
Net business income subject to tax
(P1,800,000 – 950,000) 850,000
Taxable net income before
personal exemption 1,330,000
(P100,000 + 75,000) 175,000
Taxable net income 1,155,000
=======
70
Exercise 8-4 B
On 500,000 125,000.00
On excess (P1,155,000 – 500,000)
x 32% 209,600.00
Total 334,600.00
Less: Quarterly tax paid 180,000.00
Withholding tax on wages 60,000.00
240,000.00
Tax due before penalties 94,600.00
Add: Surcharge (P94,600 x 25%) 23,650.00
Interest (P94,600 x 20% x 35/260) 1,839.44
Total taxes still due and payable 120,089.44
========
Exercise 8-5 B
Gross income (4,000,000 – 2,200,000) 1,800,000

on notes receivable 20,000
Total gross income 1,820,000
Less: Business expenses 1,100,000
Interest expense
[70,000 – (90,000 x 33%) 40,300 1,140,300
Income before charitable contribution 679,700
Less: Charitable contribution
Actual 80,000
Limit (P679,000 x 10%) 69,970
69,970
Taxable income before personal exemption
611,730
Less: Personal exemption (P50,000 + 100,000)
150,000
=======
71
Exercise 8-6 A
On P250,000 50,000.00
On excess (461,730 – 250,000) x 30% 63,519.00
Total 113,519.00
Less: Quarterly tax payment 95,000.00
Balance 18,519.00
Add: Surcharge (P18,519.00 x 25%) 4,629.75
Total tax due and payable 23,148.75
========
Exercise 8-7 B
Total taxable income

(P415,000 + 150,000) = 565,000
On P500,000 125,000.00
On excess
(565,000 – 500,000) x 32% 20,800.00
Total 145,800.00
Less: Tax previously paid on P415,000
On P250,000 50,000
On excess
(415,000 – 250,000) x 30% 49,500
99,500.00
Deficiency tax 46,300.00
Add: Surcharge (46,300 x 50%) 23,150.00
Interest
(P46,300 x 20% x 107/160) 2,752.78
25,902.78
Total tax still due 72,702.78
========
Exercise 8-8 C
Total deficiency assessment 72,702.78

Add: Surcharge (P72,702.78 x 25%) 18,175.70
Interest (72,702.78 x 20% x 15/360)
605.86
72
Total 91,484.34
=======
Exercise 8-9 A
Gross income (5,000,000 + 3,000,000) 8,000,000

Less: Business expense
(P3,500,000 + 2,400,000) 5,900,000
Income taxes paid in Australia 200,000
6,100,000
Net business income 1,900,000
Add: Interest income – Australia 30,000
Royalty income – Australia 20,000
50,000
(P50,000 + 75,000) 125,000
=======
Exercise 8-10 B
Tax on P500,000 125,000

Tax on excess
(P1,725,000 – 500,000) x 32% 393,000
Total tax before tax credit 517,000
Less: Taxes paid 300,000
Income tax still due 217,000
=======
Exercise 8-11 D
Gross income (5,000,000 + 3,000,000) 8,000,000

Less: Business expense
(P3,500,000 + 2,400,000) 5,900,000
Net business income 2,100,000
Royalty income – Australia 20,000
50,000
73
(P50,000 + 75,000) 125,000
=======
Exercise 8-12 C
Tax on P500,000 125,000

Tax on excess
(P1,925,000 – 500,000) x 32% 456,000
Total tax due 581,000
Less: Tax credit
Philippine taxes paid 300,000
Taxes paid in Australia
Actual 200,000
Limit
(P600,000/2,100,000)
x 581,000 166,000
Lower 166,000
466,000
Income tax still due after tax credit 115,000
=======
Problem 8-1
1. Gross business income 4,500,000

Cash dividend from non-resident
Property dividend from resident
Salary and allowances 500,000
Gain on sale of jewelry (80,000 – 35,000) 45,000
Interest earned on premium 10,000
Christmas and incentive
(28,000 + 15,000) – 30,000 13,000
Interest income on deposit abroad 10,000
74
=======
2. Gross taxable income 5,123,000

Less: Cost of sales and
other allowable expenses 2,800,000
Past pension cost
(250,000/10) 25,000
Interest expense
[80,000 – (60,000 x 38%)] 57,200
Fringe benefits to supervisor
(40,800/68%) 60,000
2,942,200
Income before donation 2,180,800
Less: Donation – actual
(150,000 + 25,000) 175,000
- limit (2,180,000 x 10%) 218,080
- lower (actual)
175,000
Net income before personal exemption 2,005,800
Less: Basic personal exemption 50,000
100,000
Net taxable business income 1,905,800
=======
3. Taxable net Tax due

Income
On 500,000 125,000
On excess (1,905,800 – 500,000)
x 32% 1,405,800 449,856
Total 1,905,500 574,856
=======
Less: Quarterly tax paid 175,000
Tax due and payable 399,856
======
75
4. Tax due and payable 399,856.00
Add: Surcharge (399,856 x 25%) 99,964.00
Interest (399,856 x 20% x 4.5/12) 29,989.20
Tax due and payable – September 1 529,809.20
========
Problem 8-2
1. Installment method not adopted by taxpayers

Carlos Daisy(Spouse)
Compensation income
First Com’l. Corp.
Salary (480,000 + 55,000) 535,000
13th month pay
(55,000 – 30,000) 25,000
Greater Libungan
(60,000 + 14,400) 74,400
Brownies Corporation
(240,000 + 35,000) 275,000
Total gross compensation 634,400 275,000
exemption (M) 50,000 50,000
Additional (25,000 x 3) 75,000
125,000 50,000
Net taxable income 509,400 225,000
====== ======
Tax due 128,008 43,750

Less: Tax withheld 69,400 35,000
Tax due and payable 58,608 8,750
====== =====
2. Taxpayers adopted installment payment of tax
Tax due before tax credit 128,008 43,750

Divided by 2 2
Total 64,004 21,875
Less: Tax withheld 69,400 35,000
First installment payment of tax
(for credit on second
installment ( 5,396) (13,125)
====== =====
76
Second installment 64,004 21,875
Less: Excess of 1st installment ( 5,396 ) (13,125)
Tax due on 2nd installment 58,608 8,750
====== =====
Problem 8-3
Edwin Nancy (Spouse)
Compensation income
(216,000 + 25,000) - 241,000
Business income
Sales (net) 2,788,000
Gross profit 1,013,000
Less: Allowable business expenses 503,000
-
Net income/compensation
before exemption 510,000 241,000
exemption 50,000 50,000
Additional exemption 75,000 125,000
50,000
Taxable net income 385,000 191,000
======= ======
Tax due 90,500 35,250

Less: Tax credit 25,000
Tax due and payable 90,500 10,250
====== =====
Problem 8-4
Resident Citizen Non-resident
Gross profit from sales 6,000,000 3,600,000

Gross compensation income 525,000 525,000
Gain from sale of business assets 195,000 195,000
Rental income 150,000 150,000
Interest income – Singapore 115,000
Royalty income – Singapore 255,000 -
Total 7,240,000 4,470,000
Other gross income –partly within and without 225,000
(4,320,000/7,240,000) x 225,000 134,254
77
Gross income 7,465,000 4,605,254
======= =======
Problem 8-5
1. a. 8,102,000
b. 5,250,182
Resident Non-resident
Gross business income 7,800,000 5,000,000

Compensation income
(150,000 + 12,000) 162,000 162,000
Interest on loan 5,000 -
Property dividend 25,000 -
Rental income 50,000 50,000
Cash dividend from resident foreign corporation 60,000
(7,000,000/11,000,000)
= .636363 x 60,00 38,182
Gross taxable income 8,102,000 5,250,182
======= =======
2. Gross taxable income abroad
Gross business income – Malaysia 2,800,000

Interest on loan 5,000
Property dividend 25,000
Cash dividend partly abroad 38,182
Total 2,868,182
=======
Problem 8-6
1. Gross business income

(P6,000,000 + 4,000,00) 10,000,000
Less: Business expenses
(P4,000,000 + 3,500,000) 7,500,000
Taxes paid in Singapore 300,000
7,800,000
Net income before other income 2,200,000
Add: Royalty – Singapore 50,000
Interest on bank deposit
– Singapore 50,000
78
100,000
(P50,000 + 100,000) 150,000
=======
Tax on P500,000 125,000
Tax on excess (P1,950,000 – 500,000) 32% 464,000
Total 589,000
Less: Philippine taxes paid 450,000
=======
2. Gross business income

(P6,000,000 + 4,000,00) 10,000,000
(P4,000,000 + 3,500,000) 7,500,000
Net income before other income 2,500,000
Add: Royalty – Singapor 50,000
Interest on bank
deposit – Singapore 50,000
100,000
(P50,000 + 100,000) 150,000
========
Tax on P500,000 125,000
Tax on excess (P2,450,000 – 500,000) x 32% 624,000
Total 749,000
Less: Tax credit
Philippines income tax paid 500,000
Singapore
Actual 300,000
Limit (P500,000/2,500,000) x 749,000 149,800
Lower 149,800
649,800
========
79
Problem 8-7
Taxable income – Philippines 3,000,000

- Malaysia 2,000,000
- Taiwan 500,000
Total 5,500,000
=======
Tax on P500,000 125,000.00
Tax on excess
(P5,500,000 – 500,000) x 32% 1,600,000.00
Total 1,725,000.00
Less: Tax credit
Philippine quarterly tax 700,000.00
Malaysia
Actual 600,000.00
Limit
(P2,000,000/5,500,000) x 1,725,000 627,272.72
Lower 600,000.00
Taiwan
Actual 250,000.00
Limit
(500,000/5,500,000) x 1,725,000 156.818.18
Lower 156,818.18
1,456,818.18
Philippine income tax still due
after tax credit 268,181.82
=========
CHAPTER 9
True or False 9-1
1. True
2. False. In a general partnership, liabilities of partners
are not limited to their capital contributions.
80
3. False. A limited partner is liable only to the extent of
his capital contributions.
4. True
5. False. A partner in a general professional partnership
is subject to tax based on his share.
6. True
7. True
8. True
9. False. A general co-partnership is subject to 30%
corporate tax rate and treated like a corporation.
10. False. The share of the partners in a co-partnership
is treated like a dividend subject to 10% final tax.
True or False 9-2
1. True
2. False. Co-partnership is formed for profit and taxable,
while co-ownership is formed primarily to preserve
certain property and basically not taxable.
3. True
4. True
5. True
6. True
7. False. When the trust is revocable, the income of the
trust is not taxable to the trust but to the grantor.
8. True
9. True
10. False. The amount of estate so transferred is not
deductible from the income of the state. However, the
amount shall be subject to estate tax.
True or False 9-3
1. True
2. False. When there are several trusts made by the
trustor, each trust shall file a separate income tax
81
return and the BIR shall consolidate the tax returns
filed.
3. True
4. False. The net income used to compute the
proportionate share on the consolidated income tax
due shall be before deducting the personal exemption
of P20,000.
5. False. The income of the estate would be taxable only
to the heir from the time he received the property.
6. False. Not all income-producing estate is subject to
tax on the part of the estate.
7. True
8. True
9. False. The amount of estate transferred to the
beneficiaries is not allowable deduction but will be
subject to estate tax.
10. True
1. C 6. B 1. A 6. C
2. B 7. C 2. C 7. D
3. B 8. B 3. D 8. D
4. D 9. C 4. B 9. D
5. A 10.A 5. D 10.A
Exercise 9-1 A Since the entity is a general

professional partnership, the income is not subject to tax.
Exercise 9-2 A
Gross receipts 2,000,000

Less: Cost of services 500,000
Less: Operating expenses 600,000
Net income 900,000
82
=======
Share of Alex (P900,000 x 1/2) 450,000
Multiplied by creditable tax rate 10%
Creditable withholding tax 45,000
======
Share in the net income (P900,000 1/2) 450,000

(P50,000 + 75,000) 125,000
======
Tax on 250,000 50,000
Tax on excess
(P325,000 – 250,000) x 30% 22,500
Total 72,500
Less: Creditable withholding tax 45,000
======
Exercise 9-3 C
Share in gross income

(P2,000,000 x 1/2) 1,000,000
Less: Optional standard deduction
(40% x P1,000,000) 400,000
Net income 600,000
(P50,000 + 50,000) 100,000
=======
Tax on P500,000 125,000
=======
Exercise 9-4 A The partnership is a general
professional partnership; hence, not subject to tax.
83
Exercise 9-5 D
Gross receipts 2,500,000

Less: Cost of services
(P600,000 + 500,000) 1,100,000
Less: Operating expense 300,000
=======
Share of Peter (P1,100,000 x 1/2) 550,000
Multiplied by creditable tax rate 10%
=======
Salary received 600,000
Add: Share in the profit –
gross method (P2,500,000 x 1/2) 1,250,000
(P1,250,000x 40%) 500,000 750,000
Total 1,350,000
(P50,000 + 75,000) 125,000
=======
Tax on P500,000 125,000
Tax on excess
(P1,225,000 – P500,000) x 32% 232,500
Total 357,000
=======
Exercise 9-6 C
Salary received 500,000

Add: Share in the partnership
(P1,100,000 x 1/2) 550,000
Total 1,050,000
84
(P 50,000 + 75,000) 125,000
=======
Tax on P500,000 125,000

Tax on excess
( P925,000 – 500,000) x 32% 136,000
Total 261,000
=======
Exercise 9-7 D
Gross sales 3,000,000

Less: Cost of sales 900,000
Less: Operating expenses 1,200,000
Multiplied by 30%
Corporate income tax
(higher than MCIT below) 270,000
=======
MCIT (P2,100,000 x 2%) 42,000
=======
Exercise 9-8 A
Share in the income of the partnership

(P900,000 – 270,000) x 40% 252,000
Multiplied by final tax rate 10%
Final tax 25,200
======
85
The share from the partnership is subject to final tax;
hence, partners are not liable to income tax.
Exercise 9-9 C
Compensation – gross
(P350,000 + 32,000) 382,000
(P50,000 + 50,000) 100,000
======
Tax on P250,000 50,000
Tax on excess
(P282,000 – 250,000) x 30% 9,600
Total 59,600
Less: Withholding tax 32,000
======
Exercise 9-10 B

Less: Operating expenses
(P2,500,000 x 70%) 1,750,000
Exemption 20,000
1,770,000
=======
Tax on P500,000 125,000
Tax on excess
(P730,000 – 500,000) x 32% 73,600
Total tax due 198,600
=======
Problem 9-1
1. The partnership is not subject to tax being a general

professional partnership.
86
2.Share using the gross income method
(P500,000 4/10) 200,000
(200,000 x 40%) 80,000
Distributive share in the income
of the partnership 120,000
======
3. Gross income 500,000

Net income of the partnership 180,000
Multiplied by shares in the profit (6/10) 60%
Distributive share 108,000
======
4. Net income of the partnership 180,000
Multiplied by shares in profit (4/10) 40%
Distributive share on net income 72,000
======
Creditable withholding tax
(P72,000 x 10%) 7,200
======
Gross compensation
(P450,000 + 50,000) 500,000
Add: Share in partnership
(see answer # 2) 120,000
Total 620,000
Less: Personal exemption (H/F) 50,000
======
Tax on P500,000 125,000
Tax on excess
(P570,000 – 500,000) x 32% 22,400
Total 147,400
Less: Tax credit
Withholding taxes on wages 75,000
87
on partnership 7,200 82,200
Amount of tax still due 65,200
======
5. Distributive share on net income

(P180,000 x 60%) 108,000
Multiplied by 10%
======
Gross compensation
(P480,000 + 90,000) 570,000
Add: Share in partnership
(see answer # 3) 108,000
Total 678,000
(P50,000 + 75,000) 125,000
======
Tax on P500,000 125,000
Tax on excess
(P553,000 – 500,000) x 32% 16,960
Total 141,960
Less: Tax credit
Withholding taxes on wages 90,000
on partnership 10,800 100,800
Amount of tax still due 41,160
======
Problem 9-2
1. Gross income 1,500,000

Multiplied by corporate tax rate 30%
88
Income tax due 210,000
=======
2. Michael Albert
Share in the net income after tax
(P700,000 x 70%) = P490,000 x 40% 196,000
x 60% 294,000
Less: Final tax (P196,000 x 10%) 19,600
(P294,000 x 10%) 29,400
Distributive share after final tax 176,400 264,600
====== ======
Problem 9-3
1. Gross income (P2,000,000 – 1,200,000)

800,000.00
Interest expense
[P30,000 – (P50,000 x 33%)]
13,500 413,000.00
Income before charitable contribution 386,500.00
– Actual 60,000
Limit (386,500 x 5%) 19,325
Lower 19,325.00
Net taxable income 367,175.00
Multiplied by tax rate – corporation 30%
Tax liability 110,152.50
========
2. Share on the profit

[(P367,175 – 110,152.50) /2] 128,511.25
Share on interest income (P50,000/2) 25,000.00
Share on dividend from
domestic corporation (P80,000/2_ 40,000.00
Total 193,511.25
Multiplied by final tax rate 10%
89
Final tax on share of Anthony
on partnership profit 19,315.13
========
3. Bert will have the same share on the income of the

partnership subject to 10% final tax. In addition,
however, he will be subject to income tax on his
compensation income.
Compensation income
(P280,000 + 35,000) 315,000
(P50,000 + 50,000) 100,000
======
Tax on P140,000 22,500
Tax on excess
(215,000 – 140,000) x 25% 18,750
Total 41,250
=====
Problem 9-4
1. The partnership being a general professional

partnership is not subject to tax. The share, however,
of each partner from the income of the partnership
shall be subject to a creditable withholding tax of 10%
if the share is not more than P720,000 and 15% if
more than P720,000.
The income of the partnership:
Gross income 800,000

Net income before
90
charitable contribution 500,000
– Actual 30,000
Limit (P500,000 x 5%) 25,000
Lower 25,000
Net income 475,000
======
The 5% rate is used to determine the limit of the
charitable contribution, since in determining the
distributive shares of the partners, the net income of
the partnership shall be computed in the same manner
as a corporation.
Jonathan Leonard
Distributive share
Jonathan (P475,000 x 40%) 190,000
Leonard (P475,000 x 60%) 285,000
Multiplied by 10% 10%
Creditable withholding tax 19,000 28,500
====== ======
For Jonathan (P190,000- 19,000) 171,000
For Leonard (P285,000 – 28,500) 256,500
2 and 3 The taxable income of Jonathan and Leonard
Jonathan Leonard
Gross income 250,000 300,000
Less: Operating expenses 120,000 180,000
Net income before
charitable contribution 130,000 120,000
Actual 15,000 18,000
Limit – 10% of income 13,000 12,000
Lower 13,000 12,000
Net income 117,000 108,000
Add: Distributive share 171,000 256,500
91
Total 288,000 364,500
Less: Personal exemption 50,000 50,000
====== ======
Jonathan
4. Tax on P140,000 22,500
On excess (P238,000
- 140,000) x 25% 24,500
Total 47,000
Less: Creditable
withholding tax 19,000
======
Leonard
5. Tax on P250,000 50,000
On excess (P314,500
– 250,000) x 30% 19,200
Total 69,200
Less: Creditable
withholding tax 28,500
Income still due 40,700
======
Problem 9-5

Income distributed
to beneficiary 100,000
2,600,000
Income before charitable deduction 400,000
Less: Charitable deduction
Actual 30,000
Limit (P400,000 x 5%) 20,000
Lower 20,000
Net income before exemption 380,000
92
Less: Exemption 20,000
=======
Tax on P250,000 50,000
On excess (P360,000 – 250,000) x 30% 33,000
Tax due and payable 83,000
=====
2. Income received from estate 100,000

(P100,000 x 40%) 40,000
Income before exemption 60,000
Less: Personal exemption (single) 50,000
======
Tax on P10,000 500

======
The administrator did not subject the income
transferred to the beneficiary to 15% creditable
withholding tax.
Problem 9-6

Income transferred
to beneficiar 300,000 3,800,000
(during death) 50,000
=======
Tax on P500,000 125,000
On excess
(P1,150,000 – 500,000) x 32% 208,000
93
Total 333,000
Less: Quarterly tax paid 250,000
======
2.Compensation income
(P800,000 – 25,000 – 20,000) 755,000
Add: Income from the estate 150,000
(P150,000 x 40%) 60,000 90,000
Total 845,000
======
Tax on P500,000 125,000
Tax on excess
(P795,000 – 500,000) x 32% 94,400
Total 219,415
(P150,000 x 15%) 22,500
182,500
======
3. Compensation income
(P500,000 – 15,000 – 18,000) 467,000
Add: Income from the estate 150,000
(P150,000 x 40%) 60,000
90,000
Total 557,000
======
Tax on P500,000 125,000
94
Tax on excess
(P507,000 – 500,000) x 32% 2,240
Total 127,240
(P150,000 x 15%) 22,500
112,500
====
Problem 9-7
1. The trust being revocable is not subject to income tax;

hence, the income of the trust will be added to the
gross income of the trustor or grantor.

Less: Expenses 1,600,000
Income transferred
to the beneficiar 150,000
Exemptio 20,000
1,770,000
Net Taxable income 230,000
=======
Tax on P140,000 22,500
On excess (P230,000 – 140,000) x 25% 22,500
Tax due 45,000
=====
Problem 9-7
1. Trust 1 Trust 2
Gross income 800,000 500,000
Less: Expenses 500,000 300,000
Amount transferred 180,000 680,000
100,000 400,000
Net income before
personal exemption 120,000 100,000
Less: Personal exemption 20,000 20,000
95
====== ======
Trust 1 Trust 2
Tax on P70,000 8,500 8,500
On excess
(P100,000 – 70,000) x 20% 6,000 14,500
(P80,000 – 70,000) x 20% 10,500
Taxes due 14,500 10,500
===== =====
2. Consolidated income
Less: Expenses 800,000
Amount transferred 280,000 1,080,000
Net income 220,000
Less: Personal exemption 20,000
=======
Tax on P140,000 22,500

On excess (P200,000 – 140,000) x 25% 15,000
Total 37,500
Less: Taxes paid
Trust 1 14,500
Trust 2 10,500 15,000
=====
3. Trust 1 Trust 2
Allocation of the P22,500
Trust 1
(P120,000/220,000) x 37,500 20,454.55
Trust 2
(P100,000/220,000) x 37,500 17,045.45
Allocated taxes 20,454.55 17,045.45
Less: Taxes paid 14,500.00 10,500.00
Income tax still due 5,954.55 6,545.45
======= =======
4. Gross income from trusts

( P180,000 + 100,000) 280,000
96
Less: Personal exemption 50,000
Taxable income 230,000
======
Tax on P140,000 22,500
On excess (P230,000 – 140,000) x 25% 22,500
Total 45,000
Less: Creditable withholding tax
On trust 1 (180,000 x 15%) 27,000
On trust 2 (100,000 x 15%) 15,000 42,000
=====
Chapter 10
True of False 10-1
1. False. Corporation is created by the operation of law.

2. False. The concept of corporation for income tax
purposes does not include a general professional
partnership, since the latter is not subject to tax.
3. True
4. False. A resident foreign corporation is subject to
income on its income from within the Philippines only.
5. True
6. False. There is no need to prorate the unidentified
income, since it is a domestic corporation. It is
taxable on its income from within and outside the
Philippines.
7. False. A non-resident foreign corporation is subject to
tax based on its gross income.
8. False. A non-resent foreign corporation is subject only
to 30% normal tax rate effective January 1, 2009.
9. True
10. True
97
True of False 10-2
1. True
2. True
3. False. MCIT applies only to ordinary corporations.
4. False. Effective January 1, 2009 under RA 9337, the
normal corporate income tax shall be 30%.
5. False. Under RA 9504, a corporate entity may adopt
already the optional standard deduction.
6. False. MCIT is applicable beginning on the fourth year.
7. False. MCIT applies only to ordinary corporations.
8. False. MCIT is computed based on gross income.
9. False. The tax liability of a domestic corporation is
based on NCIT or MCIT, whichever is higher.
10. False. There is no such thing as excess normal
corporate income tax. If NCIT is higher than MCIT, the
excess cannot be carried forward.
True of False 10-3
1. False. A resident foreign corporation is taxable only on

income from within the Philippines.
2. True
3. False. It is treated as a deferred charge classified as
an asset and not a tax liability.
4. False. It is charged against the retained earnings of
the corporate entity.
5. True
6. True
7. False. IAET applies only to close-held corporation.
8. True
9. False. An international carrier is subject to 2 1/2 % of
gross Philippine billings, while owners of
cinematographic films are subject to 25% based on
gross receipts.
98
10. True
Multiple Choice 10-1
1. D 6. B
2. C 7. B
3. B 8. D
4. B 9. C
5. A 10.B
Exercise 10-1 B
Gross income
( P12,000,000 + 3,000,000) 15,000,000
Less: Itemized deduction
(P7,000,000 x 1,800,000) 8,800,000
Multiplied by 30%
Income tax liability 1,860,000
========
Exercise 10-2 A
Normal income tax

(P12,000,000 – 7,000,000) x 30% 1,500,000
=======
Exercise 10-3 B
Gross income within Philippines 8,000,000

Add: Unidentifiable within Philippines
(3,000,000 x 8/20) 1,200,000
Total 9,200,000
Less: Business expenses –
within Philippines 4,800,000
Unidentifiable within Phil.
(P2,000,000 x 8/20) 800,000
5,600,000
99
Multiplied by 30%
Normal corporate income tax 1,080,000
=======
Exercise 10-4 B
Gross income within Phil. 4,000,000

Unidentifiable income
(P2,000,000 x 4/40) 200,000
Total 4,200,000
Multiplied by 30%
Corporate income tax liability 1,260,000
=======
Exercise 10-5 C
Gross income
(P14,000,000 + 1,500,000) 15,500,000
Taxable income 6,500,000
Multiplied by 10%
Income tax liability 650,000
========
Exercise 10-6 D
Income from hospital operation

(P12,000,000 – 8,000,000) 4,000,000
Add: Income from other businesses
(P6,500,000 – 4,000,000) 2,500,000
Total 6,500,000
Multiplied by 30%
Income tax liability 1,950,000
=======
Exercise 10-7 B
Income tax liability in the Philippines

(P5,000,000 x 2 1/2%) 125,000
======
100
Exercise 10-8 A The school being a government-
owned institution is tax-exempt.
Exercise 10-9 C
Income tax liability

(P8,000,000 – P5,000,000) x 25% 750,000
======
Exercise 10-10 C

(P15,000,000 x 7 1/2%) 1,125,000
=======
Exercise 10-11 B
Under the normal corporate income tax, the company

does not have tax liability, because of the loss
sustained of P1,000,000 (P12,000,000 – 9,000,000 –
4,000,000). Hence, the minimum corporate tax of 2%
will apply on the gross income.
MCIT (P12,000,000 – 9,000,000) x 2% 60,000

=====
Exercise 10-12 C
Gross income (P7,500,000 – 4,200,000) 3,300,000

Less: Operating expenses 2,450,000
Multiplied by 30%
Income tax liability 255,000
Less: Income tax paid first quarter 60,000
Amount of tax due for the 2nd quarter 195,000
=======
Exercise 10-13 D
Under NCIT
101
(8,000,000 – 4,400,000 – 3,400,000)
x 30% 60,000
Under MCIT (P8,000,000 – 4,400,000)
x 2% 72,000
Higher – MCIT – tax payable 72,000
=====
Exercise 10-14 B
MCIT 72,000
NCIT 60,000
Excess of MCIT over NCIT to be
carried forward to succeeding 3 years 12,000
=====
Exercise 10-15 B
Income on dividend within Phil.

(P250,000 x 80%) x 30% 60,000
=====
Dividend received from AA Company was tax-exempt.
Exercise 10-16 B

Add: Other income 300,000
Total 8,300,000
Net income before contribution 2,300,000
deductible in full 100,000
Subject to limitation
(P2,300,000 x 5%) 115,000
215,000
Multiplied by 30%
Normal corporate income tax 625,500
=======
102
Exercise 10-17 A
MCIT (8,000,000 x 2%) 160,000

======
Exercise 10-18 B
Gross income
(P12,000,000 – 7,500,000) 4,500,000
Net operating loss 2008 300,000
4,300,000
Multiplied by 30%
Normal corporate tax 60,000
=======
Exercise 10-19 C
MCIT (4,500,000 x 2%) 90,000

=====
Exercise 10-20 A

(P7,000,000 x 2.5%) 175,000
======
Problem 10-1
Direct flight from Philippines to London 13,500,000

Direct flight from Philippines to Paris 12,000,000
Transferred flights from Philippines
to Paris transferred for London
[P7,200,000 x (P6,000/P9,000)] 4,800,000
Total receipts from Philippines 30,300,000
Multiplied by .025
103
Income tax payable 757,500
========
Problem 10-2
NCIT MCIT
1. Gross income 7,000,000 7,000,000
on receivable 200,000 -
Total 7,200,000 7,000,000
Less: Business expenses 5,000,000 -
Taxable net income 2,200,000 7,000,000
Income tax liability 660,000 140,000
======= =======
2.
NCIT MCIT
Gross income 4,000,000 4,000,000
Less: Business expense 3,100,000 -
Taxable net income 900,000 4,000,000
Income tax liability 270,000 80,000
======= =======
Problem 10-3 The income of University of Southern

Mindanao is not subject to income being a
government educational institution.
Problem 10-4
1. Itemized deduction
a. Net sales (P5,000,000 – 50,000) 4,950,000

Less: Itemized operating expenses 1,800,000
Net income 850,000
Add: Capital gain
104
Sale of capital assets 1,000,000
Less: Cost of capital asset sold 1,200,000
Non-deductible capital loss 200,000
=======
-
=======
NCIT (P850,000 x 30%) 255,000
MCIT (2,650,000 x 2%) 53,000
Income tax liability (NCIT – Lower) 255,000
=======
b. Net taxable income 850,000

Add:
Interest income (P48,000/80% 60,000
Dividend received 80,000
140,000
Total 990,000
Less: Income tax paid 255,000
Final tax on interest
(P60,000 – 48,000) 12,000 267,000
Improperly accumulated earnings 723,000
======
2. Optional standard deduction
a. Gross income 2,650,000

Less: OSD (P2,650,000 x 40%) 1,060,000
Add: Capital gain
Sale of capital assets 1,000,000
Less: Cost of capital asset sold 1,200,000
Non-deductible capital loss 200,000
=======
-
=======
105
NCIT (P1,590,000 x 30%) 477,000
MCIT (2,650,000 x 2%) 53,000
Income tax liability (NCIT – Lower) 477,000
=======
b. Net income subject to tax 1,590,000
(P48,000/80%) 60,000
Dividend received 80,000
140,000
Total 1,450,000
Less: Income tax paid
255,000
Final tax on interest
(P60,000 – 48,000) 12,000 267,000
Improperly accumulated earnings 1,183,000
=======
Problem 10-5
1. Gross income
(P3,000,000 + 1,200,000) 4,200,000
(P1,800,000 + 900,000) 2,700,000
=======
Income tax (P1,550,000 x 30%) 465,000
Less: Tax credit
Philippine tax paid 150,000
Australia
Actual 120,000
Limit
(P300,000/P1,500,000)
x P465,000 93,000
Lower 93,000
Excess minimum
106
corporate income tax 80,000 323,000
=======

=======
Income tax (P1,200,000 x 30%) 360,000
Less: Tax credit
Philippine tax paid 150,000
Excess minimum
corporate income tax 80,000 230,000
=======
Problem 10-6
1. Year 2006
NCIT
(P3,000,000 – 2,900,000) x 30% 30,000
MCIT
(P3,000,000 x 2%) 60,000
Income tax due – higher 60,000
=====
2. Year 2007
NCIT
(P5,500,000 – 4,800,000) x 30% 210,000
MCIT
(P5,500,000 x 2%) 110,000
Income tax due – higher 210,000
Less: Excess of MCIT last year \
(P60,000 – 30,000) 30,000
======
107
3. Year 2008
NCIT
(P7,000,000 – 6,800,000) x 30% 60,000
MCIT
(P7,000,000 x 2%) 140,000
Income tax due (higher) 140,000
======
Problem 10-7
1.Gross income
(P6,000,000 + 2,000,000 + 3,000,000)
11,000,000
(P4,800,000 +1,400,000 + 2,100,000) 8,300,000
Multiplied by 30%
========

Multiplied by 30%
========

Multiplied by 30%
Income tax due 1,800,000
========

Multiplied by 2 1/2%
108
========

========

========

Multiplied by 25%
Income tax due 1,500,000
========

Multiplied by 20%
========
CHAPTER 11
True or False 11-1
1. False. The income tax credits are deductible from the

income tax due.
2. True
3. True
4. False. The amount is considered as final and full
payment of income tax is due.
5. True
6. True
109
7. True
8. True
9. True
10. False. All government units, including its
instrumentalities, can constitute as withholding agent.
True or False 11-2
1. True
2. True
3. True
4. False. Payments made to a general professional
partnership is not subject to creditable withholding tax,
being among those expressly exempted by law.
5. False. Only compensation for services rendered
within the Philippines is subject to withholding tax.
6. True
7. True
8. True
9. False. The amount of withholding tax is remitted on
before the 10th day after the end of the applicable
month.
10. True
Multiple Choice 11-1
1. A 6. C
2. B 7. C
3. B 8. D
4. C 9. C
5. D 10. B
Exercise 11-1 B
Taxable compensation income
(P18,000 – 1,000 – 500 – 500) 16,000.00
=======
110
On P12,083 707.73
On excess (P16,000 – 12,083) x 20% 783.40
Withholding tax 1,491.73
=======
Exercise 11-2 A The compensation is not subject to
withholding tax. The taxpayer is considered a
minimum wage earner.
Exercise 11-3 A
Regular compensation
(P15,000 – 1,000 – 800 – 500) + 4,000 16,700.00
=======
On P15,800 208.33
On excess
[(16,700 – 15,800) + 8,000] x 15% 1,335.00
=======
Exercise 11-4 C
On regular compensation
(P12,000 – 10,000) 708.33
On excess
(P2,000 + 35,000) x 20% 7,400.00
=======
Exercise 11-5 D
On P15,832 1,875.00
On excess (P2,167 x 25%) 541.75
Withholding ax 2.416.75
=======
Exercise 11-6 A
Salary (P40,000 x 12) 480,000

Overnight pay 6,000
Excess of benefits (P55,000 – 30,000) 25,000
Total 511,000
111
(P50,000 + 50,000) 100,000
Net taxable compensation income 411,000
======
Exercise 11-7 A
On P250,000 50,000.00
On excess (P161,000 x 30%) 48,300.00
Total 98,300.00
Less: Withholding tax deducted 81,597.27
Income tax still due 16,706.73
=======
Exercise 11-8 A
Income from profession (P495,000/90%) 550,000

Basic salary received 480,000
Rental income (P68,400/95%) 72,000
(P100,000 + 50,000) 150,000
=======
Exercise 11-9 A
Tax on P500,000 125,000

On excess: P952,000 – 500,000) 32% 144,640
Total 269,640
Less: Tax credits
On profession
(P495,000/90%) – P495,000 55,000
On withholding tax 85,000
On rental income
(P68,400/95%) – 68,400 3,600 143,600
=====
112
113

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Solution Manual

True or False 1-1

True or False 1-2

True or False 1-3

1. False. It is the legislative branch of the government

True or False 1-4

1. False. Taxes are broader than customer duties.

True or False 1-5

1. False. Not all government units exercise the power of

True or False 1-6

1. False. The power of taxation is comprehensive but

True or False 1-7

1. False. Tax liability is non-transferable, while debt is

True of False 1-8

1. False. The Supreme Court, not the Congress, decides

True or False 1-9

True or False 1-10

True or False 1-11

True or False 1-12

Multiple Choice 1-1 Multiple Choice 1-2

Multiple Choice 1-4 Multiple Choice 1-5

Multiple Choice 1-7 Multiple Choice 1-8

1. False. The stages or aspects of taxation are classified

True or False 2-3

1. False. The three-year period shall start on the date of

True or False 2-4

1. False. Tax assessment is not required if tax deficiency

True or False 2-5

1. False. Stocks and bonds can be distraint

True or False 2-6

1. False. The taxpayer has 30 days to file an

True or False 2-7

1. False. Levy generally is undertaken if the personal

True or False 2-8

1. False. Formal notice of assessment may be sent by

True or False 2-9

1. False. The BIR has a Commissioner and four Deputy

Multiple Choice 2-1 Multiple Choice 2-2

Multiple Choice 2-4

True or False 3-2

1. False. The principle of reciprocity is one of the

True or False 3-3

1. False. The term individual taxpayer refers only to

True or False 3-4

1. False. Living with the taxpayer does not necessarily

True or False 3-5

1. False. NRC is taxable on income from within the

Multiple choice 3-1 Multiple Choice 3-2

Multiple Choice 3-4

Basic personal exemption (H/F) 50,000

Basic personal exemption

Basic personal exemption (single) 50,000

Basic personal exemption

Basic personal exemption

Basic personal exemption

No exemption allowed, since the taxpayer is classified as

Basic personal exemption

Basic personal exemption

Basic personal exemption

Basic personal exemption

Basic personal exemption

Basic personal exemption (single) 50,000

The taxpayer is classified a non-resident citizen with