GROSS INCOME (Inclusions and Exclusions) 10.

If a corporation distributes its assets to its stockholders upon

dissolution, this kind of corporate distribution will result in:
1. In general, this term means all remuneration for services a. Stock dividend
performed by an employee for his employer under an employer- b. Property dividend
employee relationship. c. Cash dividend
a. Dividends d. Liquidating dividend
b. Compensation
c. Interest 11. During 2004, Juan Kwan received the following income:
d. Royalty
Interest from Philippine Treasury Certificates P4, 000
2. Which of the following is not taxable? Refund pertaining to 2003 income tax 500
a. Living quarters or meals furnished to an employee for the
convenience of an employer. The total amount of interest subject to tax in Kwan’s 2004 income tax
b. Tips of gratuities paid directly to an employee by a customer of return was:
the employer which is not accounted for by the employee of the a. P4, 500
employer. b. P4, 000
c. Pensions, retirement, and separation, in general. c. P500
d. Fixed or variable transportation, representation and other d. Zero
allowances which are received by a public officer or employee or
officer or employee of a private entity, in addition to the regular 12. Which of the following will constitute a taxable income?
compensation fixed for his position or office, in general. a. Prize won in an essay contest the recipient joined
b. The Nobel Peace Prize
3. Promissory notes or other evidence of indebtedness received in c. Prize won as most valuable amateur player in an international
payment for services, and not merely as security for such sports competition
payment, constitute income to the amount of their: d. Award not exceeding the amount set by law for being a model
a. Face value employee
b. Maturity value
c. Fair market value 13. Mr. Monte was injured in a vehicular accident in 2009. He incurred

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d. None of the choices and paid medical expenses of P20,000 and legal fees of P10,000

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during the year. In 2011, he received P70,000 as settlement from
4. Which of the following is not an income of the lessor under a lease the insurance company which insured the car owned by the other

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contract? eH w party involved in the accident. From the above payments and
a. The consideration for the use of the property paid periodically by transactions, the amount of taxable income of Mr. Monte in 2011

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the lessee to the lessor was:
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b. Obligations of the lessor to third parties paid by the lessee a. P70,000
c. Advance rentals in the nature of prepaid rent. b. P40,000
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d. Amount received in the nature of security deposit. c. P50,000

d. zero
5. The lessor may report as income at the time when such buildings
or leasehold improvements are completed the fair market value of 14. In a certain civil case, Wilfredo, plaintiff, was awarded by the court
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such buildings or leasehold improvements subject to the lease. P20,000 damages representing profit he failed to realize on
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a. Annual or spread out method account of defendant’s failure to comply with his obligation to
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b. Lump sum or outright method Wilfredo. Are those damages taxable income of Wilfredo?
c. Percentage of completion method a. No, because damages are generally not subject to income tax
d. Completed contract method b. Yes, because damages which are excluded from gross income are
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only those that are paid arising from injuries or sickness

6. If an individual performs services for a creditor who in c. No, because no criminal case was filed by Wilfredo
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consideration thereof cancels the debt, the cancellation of d. Yes, because damages arising out of a civil case is always taxable
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indebtedness may amount to a: under the current provisions of the Tax Code
a. Gif 15. An accident solely attributable to the criminal negligence of the
b. Capital contribution driver of Reckless Bus Company resulted in the death of Ricardo’s
c. Donation inter vivos wife, physical injury to Ricardo that prevented him from working
d. Payment of income for a month and the total wreck of his brand new car which he
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bought for P400,000.

7. The recovery of the account previously written off would In the action for damages filed by Ricardo against the bus
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constitute taxable income only if in the year of recognition of company, the Court awarded the following:
being worthless, the write-off resulted in a reduction of a taxable
income. For Ricardo’s injury consisting mainly in the
a. Reciprocity rule loss of his right arm P 30,000
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b. Equity of incumbent rule For the loss of one-month salary 25,000

c. Tax benefit rule For the death of his wife 25,000
d. Materiality rule For moral damages on account of such loss 100,000
For the loss of his car the value of which
8. If a stockholder receives a taxable stock dividend, what is the doubled because of inflation 800,000
measure of income applicable to him?
a. Par value of the shares on the date he receives them How much was the taxable income of Ricardo?
b. Fair market value of the shares on the date of declaration a. P980,000
c. The adjusted cost of the old shares and the new shares of the b. P425,000
corporations c. P25,000
d. The book value of the shares of the preceding calendar year d. Zero

9. If a corporation distributes its assets to its stockholders , this kind 16. One of the following is taxable in the Philippines
of a corporate distribution which is recognized in the Tax Code is a: a. Salaries of the officials of the United Nations assigned in the
a. Stock dividend Philippines paid by the United nations and certified by the
b. Property dividend Secretary General of the United Nations
c. Cash dividend b. Income of citizens of the United States working in consular offices
d. Liquidating dividend in the Philippines
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 c. Salaries of diplomatic officials and agents assigned in the
Philippines
d. Salaries of nonresident employed by a foreign petroleum service
contractor in the Philippines
17. Which of the following retirement benefits received from private
firms is not taxable?
a. Received from an employer under its reasonable pension plan,
employee is 49 years old and has served the company for 12 years
b. Received from an employer under its reasonable pension plan,
employee is 51 years old and has served the company for 9 years
c. Received from an employer which has no reasonable pension
plan, employee is 53 years old and has served the company for 12
years
d. Received from an employer under its reasonable pension plan,
employee is 52 years old and has served the company for 11 years
18. An employee of X company retired at the age of 50 years old afer
serving the company for 10 years. He received retirement benefits
from X company amounting to P2,500,000. The following year
afer his retirement, he was invited by Y corporation to join it as its
Executive Vice-President. Afer serving Y corporation for 10 years,
he retired at the age of 61. Y corporation gave him P3,000,000
retirement benefits.
Which retirement benefits should be subject to tax?
a. Retirement benefits from X Company
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b. Retirement benefits from Y Corporation
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c. Both retirement benefits
d. Neither retirement benefits
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19. Nellioso, 48 years of age and a retired employee, had among his
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properties and transactions at the end of the taxable year 2011:
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Retirement benefits in the amount of P 200,000 received by him in
2011 under a qualified retirement plan maintained by his former
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employer company. Nellioso voluntarily retired afer 20 years of
service.
Is the above item subject to the regular tax rates for individual
taxpayers?
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a. No, because retirement benefits are generally not subject to the
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regular rates for individual taxpayers
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b. Yes, because Nellioso is only 48 years old when he retired which is
below the 50-year old requirement for exempt retirement benefits
c. No, because the retirement benefits received by Nellioso are
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subject to final withholding tax
d. Yes, because the retirement benefits are given when Nellioso
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voluntarily retired from the company
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20. Born of a poor family on February 14, 1963, Mario worked his way
through college. Afer working for more than 12 years in X
Manufacturing Company, Mario decided to retire and avail of the
benefits under the very reasonable retirement plan maintained by
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his employer. On the day of his retirement on April 30, 2011 he
received P400,000 as retirement benefit. Is Mario’s P400,000
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retirement benefit subject to income tax?
a. Yes, because Mario was only 48 years at the time of his retirement
which is below the 50 year old requirement for exempt retirement
benefits.
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b. No, because Mario worked for the company for 12 years and the
retirement benefits are given under a very reasonable retirement
plan maintained by his employer.
c. Yes, because it was Mario who decides to retire and avail of the
benefits under the very reasonable retirement plan maintained by
his employer.
d. No, because retirement benefits are not subject to income
regardless of the age o the retiree
21. Which of the following separation pay is taxable?
a. Separation pay received by an employee who resigned to join
another company
b. Separation pay received by an employee whose services were
terminated due to business reverses, the employee was 48 years
at the time of termination
c. Separation pay received by an employee who was asked by his
employer to resign because his position was declared a
redundancy
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d. Separation pay received by an employee who was retrenched by
his employee because the latter is leaving the Philippines.
22. Mr. Jacobo worked for a manufacturing firm. Due to business
reverses, the firm offered a voluntary redundancy program in
order to reduce overhead expenses. Under the program, an
employee who offered to resign would be given separation pay
equivalent to his three month’s basic salary for every year of
service. Mr. Jacobo accepted the offer an received P400,000 as
separation pay under the program. Afer all the employee who
accepted the offer were paid, the firm found its overhead still
excessive. Hence, it adopted another redundancy program.
Various unprofitable departments were closed. As a result Mr.
Kintanar was separated from his service. He also received
P400,000 as separation pay.
Which of the above separation pay must be exempt from tax?
a. Both separation pays are exempt from tax
b. Neither separation pay is exempt from tax
c. Only the separation pay of Mr. Jacobo is exempt
d. Only the separation pay of Mr. Kintanar is exempt
23. Ms. Elisya Montenegro entered her short story in a literary
contest. She won in the Short Story category, and received
P500,000 for her prize. What was the tax consequence of the
literary prize?
a. Exempt from income tax
b. Subject to final withholding tax
c. Subject to Section 24 (A)
d. Not subject to any internal revenue tax
24. Ms. Ma. Estella Santos was selected as the outstanding scientist in
her province in 2011. Her name was submitted by her supervisor
without her knowledge. She received a plaque, trophy and cash
reward of P500,000. What was the tax consequence of the
reward?
a. Exempt from income tax
b. Subject to final withholding tax
c. Subject to Section 24 (A)
d. Not subject to any internal revenue tax
25. All prizes and awards granted to athletes in local and international
sports competitions and tournaments whether held in the
Philippines or abroad and sanctioned by their national sports
associations shall be:
a. Exempt from income tax
b. Subject to final withholding tax
c. Subject to Section 24 (A)
d. None of the choices
26. Conrad “Smooth” Ube is an amateur boxer. He is sent to compete
in South Korea by the Amateur Boxing Association of the
Philippines (ABAP) and wins the gold medal afer beating his
opponent Oh Ke Ba. He is awarded P500,000 by Good Faith Corp.,
a domestic Philippine corporation. What is the tax consequence of
the award received by Conrad “Smooth” Ube?
a. Subject to Section 24 (A)
b. Subject to final tax
c. Not subject to income tax
d. Subject to amusement tax
Problem
Mr. Mario Matiyaga, 50 years old, rendered service as a security guard
of Anscor Corporation. He had a monthly salary of P5,000 before
retirement in October 31, 200x. He received P500,000 retirement
benefits in accordance with reasonable private benefit plan maintained
by Anscor Co.
Required: Compute for the amount to be included in the gross income
of Mr. Matiyaga for 200x based on the following independent
assumptions:
27. He received the retirement benefit for the first time afer serving
for 10 years. 50,000
28. He received the retirement benefit for the second time. 550,000
29. He has served the company for 10 non continuous years. 550,000
 Problem 54. Separation pay due to voluntary resignation
Mr. Jose Velarde received the following items for the taxable year 2007: 55. Terminal leave benefit
Winnings from from PCSO P 500,000
Winnings from gambling 800,000
Interest on government debt securities 100,000 A N S W E R S H E E T
Damages awarded by the court for breach of contract
(of which 40% is damages for unrealized profits) 1,000,000 NAME:
Gif from friends 200,000
1. ______________ 31. ______________
30. Compute the total amount of exclusion from gross income.
2. ______________ 32. ______________
Problem
Mr. Erasto Fuentes received the following: 3. ______________ 33. ______________
Return of his life insurance premium paid within
25 years with annual premium of P15,000 P2,000,000 4. ______________ 34. ______________
Cash gif from his missionary friend 50,000
House and lot inherited from his mother 3,000,000 5. ______________ 35. ______________
Rent income from house and lot inherited 100,000
6. ______________ 36. ______________
31. What is the amount to be excluded from gross income?
32. What is the amount to be included as gross income? 7. ______________ 37. ______________

Problem 8. ______________ 38. ______________

Cristiflor Buduhan received the following items for the taxable year
200x: 9. ______________ 39. ______________
Proceeds of life insurance of her decedent husband with
premiums paid amounting to P200,000. 10. ______________ 40. ______________
Mrs. Buduhan is an irrevocable beneficiary P1,500,000

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Donation from friends and relatives 10,000 11. ______________ 41. ______________

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Compensation for actual damages for injuries suffered
by her husband 200,000

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12. ______________ 42. ______________
Dividend income eH w 50,000
Interest on bank deposits 2,000 13. ______________ 43. ______________

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Prizes for winning as Mrs. Beautiful of Tawi-Tawi 25,000
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SSS death benefits of her husband 20,000 14. ______________ 44. ______________
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33. Compute for the gross income to be included in the income tax 15. ______________ 45. ______________
return of Mrs. Buduhan subject to normal (tabular) tax. 0
16. ______________ 46. ______________
Problem
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Thirteen month pay P25, 000 17. ______________ 47. ______________

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Christmas bonus 5, 000

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Productivity incentive pay 8, 000 18. ______________ 48. ______________

34. The tax compensation income from the benefits is: 8,000 19. ______________ 49. ______________
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Problem 20. ______________ 50. ______________

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Mr. A is an employee in a firm that gives benefits to its rank-and-file

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employees. He received the following in a year: Salaries, net of SSS, 21. ______________ 51. ______________
Philhealth, and Pag-ibig contributions, and of labor union dues, P360,
000; Thirteenth month pay, 30, 000; productivity incentives pay, 30, 22. ______________ 52. ______________
000; mid-year bonus, 15, 000; Christmas bonus, 30, 000; rice subsidy,
26, 000. 23. ______________ 53. ______________
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35. The compensation income of A subject to income tax is: 443,000 24. ______________ 54. ______________
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For numbers 36 – 55, write T if the item is taxable and NT if it is not 25. ______________ 55. ______________
taxable.
26. ______________
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36. Overtime pay of a minimum wage earner.

37. Statutory minimum wage of MWE plus his business income 27. ______________
38. Amount received in payment of moral damages
39. Money acquired through donation 28. ______________
40. Money acquired through illegal means
41. Winnings 29. ______________
42. Separation pay due to merger
43. Income derived by Baguio City Government 30. ______________
44. Damages from unrealized profits
45. Income earned by Philippine government
46. Prizes and awards in sports competition not sanctioned by
Philippines Olympic Sport Committee
47. Interest income by Philippine National Red Cross from trust funds
48. PERAA retirement plan
49. Tuition fees collected by nonprofit educational institution
50. Interest income from savings deposit earned by senior citizen
51. Interest income from time deposit by cooperative
52. Shelter of the maid working within the employer’s home
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53. Thirteenth month pay in excess of P30, 000

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