ACC 311- Income Taxation

Allowable Deductions from Gross Income

JMF, CPA

1. Which of the following items of expenses is not deductible?

A. Salaries, wages, commissions and professional fees.
B. Bonuses paid in good faith as additional compensation for service rendered.
C. Pension and compensation for injuries if compensated for by insurance.
D. Grossed-up monetary value of fringe benefits provided the final tax imposed
has been paid.
Suggested Answer: C

2. Brianne Corporation has incurred rent expense amounting to P500, 000. Brianne
paid the lessor the gross amount of P500, 000 without deducting 5% withholding
tax. How much rent can Brianne claim as allowable deduction from its gross
income?
Suggested Answer: Zero

3. RRO Corporation is engaged in the sale of goods and services with net sales/net
revenue of P3, 000, 000 and P2, 000, 000 respectively. The actual
entertainment, amusement and recreational (EAR) expense for the taxable year
totaled P30, 000.How much is the deductible EAR expense?
Suggested Answer:
EAR based on Max. Percentage Allowable Amount as
Net Sales/ Net Apportionment Ceiling of EAR EAR Expense (w/c ever
Revenue Formula * Expense ** is lower)
Sale of Goods 3,000,000.00 18,000.00 15,000.00 15,000.00
Sale of Services 2,000,000.00 12,000.00 20,000.00 12,000.00
Total 5,000,000.00 30,000.00 35,000.00 27,000.00

4. An individual taxpayer has the following data for the year 2014:
Interest paid, business loan P100, 000
Interest paid, loan build 500,000
Residential house
Interest expense on delinquency 50,000
Taxes (business related)
Interest income – BPI Makati, net 24,000

For income tax purposes, the deductible interest expense shall be

Suggested Answer: 140, 100
5. Mapanlinlang Corporation was assessed by BIR due to underpayment of
Percentage Taxes. The Assessment Notice disclosed the following:
Basic tax P1, 000,000
Surcharge 250,000
Interest 200,000
Penalties 25,000
Total P 1, 475,000

It also generated interest income from bank deposits amounting to P100,000. How
much is the deductible interest?
Suggested Answer: 200, 000

6. Mapanlinlang Corporation was assessed by BIR due to underpayment of

Percentage Taxes. The Assessment Notice disclosed the following:
Basic tax P1, 000,000
Surcharge 250,000
Interest 200,000
Penalties 25,000
Total P 1, 475,000

It also generated interest income from bank deposits amounting to P100,000. How
much is the deductible taxes?
Suggested Answer: 1, 000, 000

7. Which of the following items of expenses require that notice be filed with BIR to
be allowed as deduction from gross income?
A. Taxes
B. Interest
C. Losses
D. Salaries
Suggested Answer: C

8. Dong, a gambling addict, won P90,000 from cockfighting during the year,
However, he also suffered losses from other gambling activities amounting
P200,000. How much is the deductible loss?
Suggested Answer: 90, 000

9. In 2018, an individual taxpayer, using cash basis of accounting, obtained a P500,

000 loans from a bank for business use. The bank deducted in advance an
interest of P50, 000. In 2019, the P500, 000 loan was paid in full by the
taxpayer.
 How much was the deductible interest in 2018 and 2019?
Suggested Answer:

Deductible Interest in 2018 – 0

Deductible Interest in 2019 - 50, 000

a) Using the same information in letter a. except that payments were made as
follows: 2018, P300, 000; 2019, P200,000. How much was the deductible
interest expense in 2018, 2019 and 2020?
Suggested Answer:

10. COU Corporation paid the following during the year 2017:
Interest for late payment of income tax for 2017 5,000
Surcharge and compromise penalty for late payment of income tax for 2017 7,250
Interest on bonds issued by COU Corporation 100,000
Interest on money borrowed by the Corporation from Conrad Uberita,
60% owned by COU Corporation 50,000
Interest on preferred stock which in reality is a dividend 20,000

How much is the deductible interest?

Suggested Answer: 105, 000

11. A taxpayer had the following interest expense and interest income in 2019:

Interest expense on bank loan 100, 000

Interest income from time deposit, gross 10, 000
Interest income from promissory notes 40, 000

Suggested Answer:

Gross Interest Expense 100, 000

Less: The arbitrage limit (10, 000 x 33%) 3, 300
Deductible Interest Expense 96, 700