ACC 311- Drill on Gross Income

Suggested Answers
JMF, CPA

True or False
1. Prizes paid to corporations are inclusions in gross income subject to final tax.
Suggested answer: False

2. Income of a Minimum Wage Earners (MWE) and Barangay Micro Business

Enterprises (BMBE) are inclusions to gross income.
Suggested answer: False

3. Only the mandatory portion of GSIS, SSS, Philhealth and PagIbig can be
excluded from gross income.
Suggested answer: True

4. Compensation for injuries, sickness and loss of expected profit are exclusions to
gross income.
Suggested answer: False

5. If services are paid in a medium other than money, it is not to be included as

compensation.
Suggested answer: False

6. The tax benefit rule states that recovery of previously written off constitutes a
receipt of a taxable income if in the year of recognition of its being worthless, the
write-off resulted in reduction of taxable income.
Suggested answer: True

7. An indebtedness cancelled by the creditor out of mercy is an income to the

debtor.
Suggested answer: False

8. Stock dividends are never subject to income tax.

Suggested answer: False

9. Real property tax and insurance on the property if assumed by the lessee
constitute income to the lessor.
Suggested answer: True

10. He proceeds of life insurance policies paid to the heirs or beneficiaries upon the
death of the insured are exempt from income tax and if such amounts are held by
the insurer an agreement to pay interest thereon , the interest payments shall be
excluded from gross income.
Suggested answer: False

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MCQ- Theories
11. Donald Trump received royalty fees from Viva Records Corporation, a domestic
corporation, for his musical compositions under the album “There’s no Other
Way”. Donald is an American composer and has never set foot in Philippines.
The royalty fee shall be subject to:
a. 15% final withholding tax
b. 20% final withholding tax
c. 25% final withholding tax
d. Graduated tax rate
Suggested answer: C

12. Proceeds of insurance taken by a corporation on the life of an executive to

indemnify the latter’s beneficiaries against loss in case of his death is:
a. Exempt from income tax
b. Part of taxable income
c. Subject to final tax
d. Partly exempt, partly taxable
Suggested answer: A

13. Mr. Buguey was insured in a life insurance with his daughter, Ybon, as the
irrevocable beneficiary. Ybon was paid the entire proceeds when Mr. Buguey
died. The proceeds constitute
a. taxable inheritance
b. taxable gift
c. taxable income
d. an exclusion from gross income
Suggested answer: A

14. On December 25, 2019, Mr. Gorgonio was terminated by his employer at age of
60 due to his failing eyesight. He joined in February 2006 and has since then
worked as treasurer of the company. Is Mr. Gorgonio’s retirement pay exempt
from income tax?
a. No, because he is employed for less than 10 years.
b. Yes, because he surpassed the age of 50.
c. No, because the employee is already a senior citizen.
d. Yes, because his termination was beyond his control.
Suggested answer: D

NMCQ- Problems
15. Mr. Tarragoza collected the 1,000,000 insurance proceeds of Mr. Pantukan
which he bought from the latter for 400,000. Before the death of Mr. Pantukan,
Mr. Tarragoza paid a total premiums of 200,000. What is the exclusion in gross
income?
Suggested answer: 800, 000

16. Ms. Candoni retired from the government after 30 years of service at the age of
55. She received a total retirement pay of P1,800,000 plus P400,000 GSIS
Benefits. How much will be excluded in gross income?
Suggested answer: 2, 200, 000
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17. Mr. Asuncion received the following royalties from the following sources:
Mining Claims 150, 000
Novel, “Alicia in Wonderland” 250, 000
Basic Accounting Textbook 80, 000
Musical Composition 40, 000
What is the total amount to be reported in gross income?
Suggested answer: 520, 000 (All are inclusions to Gross Income subject to
Final Tax)

On July 1, 2014, Mr. V leased his vacant lot for a period of 12 years to Mr. J at an
annual rate of P2, 400,000. It was also agreed that Mr. J will pay the following:

 P4, 800,000 representing rental payment for two (2) years. Subsequent
rental payments will be made every July 1 of the applicable year.
 Security deposit of P2, 400, 000.
 Annual real property tax of P30, 000.

The lease contract provides, among others that the lessee will construct a 5-
storey building for parking purposes at a cost of P36, 000,000. Ownership of
the building shall belong to the lessor upon the expiration or termination of the
lease contract.

The building was completed on July 1, 2016 with an estimated useful life of
15 years.

18. Assuming Mr. V will use outright method in recognizing income from leasehold
improvements, how much is the total income from lease for year 2016?
Suggested answer:
FMV of the Improvement 36,000,000.00
Add: Annual Rent 2,400,000.00
RPT Assumed 30,000.00
Taxable Rent Income 38,430,000.00

19. Assuming Mr. V will use spread-out method in recognizing income from
leasehold improvements, how much is the total income from lease for year 2016?
Suggested answer:

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 Cost of Leasehold Improvement 36,000,000.00
Less: Accumulated Depreciation
(Remaining Term of the lease)
(36M/ 15 years) x 10 years) 24,000,000.00
Book Value end of Lease 12,000,000.00
Divided by: Remaining term of the lease 10
Annual Income from leasehold improvement 1,200,000.00
Multiply by 6/12
Leasehold Improvement Income on 2016 600,000.00
Add: Annual Rental 2,400,000.00
RPT Assumed 30,000.00
Taxable Rent Income 3,030,000.00

20. How much income is to be reported by the lessor in 2014?

Suggested answer:
Rent Payment Including Advance Payment 4,800,000.00
RPT Assumed 30,000.00
Taxable Rent Income 4,830,000.00

A resident citizen, widower, with a dependent minor brother, had the following data on
income and expenses:
Gross sales P 1,500,000
Cost of sales 1,000,000
Business expenses 200,000
Interest from savings deposit, BPI-Makati, Philippines 50,000
Prize in a literary contest he joined 100,000
Prize received for achievement in literature (did not join the contest) 10,000
Gain from sale of bonds (maturity is 6 years) 5,000
Separation pay from his former job (resigned) 250,000
Cash he inherited from his uncle 300,000
Proceeds of his wife’s life insurance (irrevocable beneficiary) 1,000,000
Amount received as return of premium (premium paid, P150, 000) 200,000
Tax Informer’s Reward 500,000
Winnings from illegal business 10,000

21. How much was the total amount of exclusions to income?

Suggested answer:
Prize received for achievement in literature (did not join the contest) 10,000.00
Gain from sale of bonds (maturity is 6 years) 5,000.00
Cash he inherited from his uncle 300,000.00
Proceeds of his wife’s life insurance (irrevocable beneficiary) 1,000,000.00
Amount received as return of premium (premium paid, P150, 000) 150,000.00
Total Exclusions to Gross Income 1,465,000.00

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 22. How much was the total amount of inclusions to gross income subject to
progressive tax?
Suggested answer:

Gross Sales 1,500,000.00

Cost of Sales 1,000,000.00
Gross Income form Business 500,000.00
Add: Other Components of Gross Income
Interest from savings deposit, BPI-Makati, Philippines 50,000.00
Prize in a literary contest he joined 100,000.00
Separation pay from his former job (resigned) 250,000.00
Amount received as return of premium (premium paid, P150, 000) 50,000.00
Tax Informer’s Reward 500,000.00
Winnings from illegal business 10,000.00
Total inlcusions to Gross Income 1,460,000.00

23. How much was the total final tax from certain income?
Suggested answer:

Interest from savings deposit, BPI-Makati, Philippines 20% 50,000.00 10,000.00

Prize in a literary contest he joined 20% 100,000.00 20,000.00
Tax Informer’s Reward 10% 500,000.00 50,000.00
Total Final Tax 80,000.00

End of Drill.

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