1.

Jeremiah earned a compensation income of P120,000 and net income from business of
P300,000. He also earned P8,000 prizes from a dancing competition and P45,000 royalties
from his musical composition. Jeremiah has P150,000 personal expenses. Compute the
taxable income.
Ans. 428K
2. Sir Josh with P250,000 personal exemption, had the following data in 2020:
Philippines transactions:
Gross income from sales – P4,000,000
Interest income on deposits – P40,000
Less: Deductions – P2,000,000
Transactions abroad:
Gross income from sales – P6,000,000
Interest income on dividends – P80,000
Less: Deductions – P3,600,000
Compute the taxable income if Sir Josh is a non-resident citizen.
Ans. 1,750,000

3.

TG partnership reported for a year net profit from trading amounting to 800,000. The
other income included interest income of 8,000 net of final tax and dividend income from
domestic corp. of 20,000. Assuming T and Gshare profits and loses equally, how much is
the final withholding tax on the distributive share of T in the earnings of that partnership

A. 28,700
B. 28,600
C. 28,000
D. 29,400

In 2018, Louie and Floyd are partners in the following partnership:

Additional Information:
Partners agreed to share partnership income and losses as follows: Louie= 40% and Floyd
60%.
33.Valderrama Company, a non-VAT taxpayer paying 3% tax, exceeded the VAT
threshold on
September 2020. It generated P300,000 and P400,000 sales in October and
November and
paid respectively P12,000 and P28,000 input VAT in these months. It immediately
registered
to the VAT system at the start of November 2020. Compute the business tax
payable in
October, assuming no claim for tax credit was filed.
a. 27,000
b. 36,000
c. 24,000
d. 9,000
33.Valderrama Company, a non-VAT taxpayer paying 3% tax, exceeded the VAT
threshold on September 2020. It generated P300,000 and P400,000 sales in October
and November and paid respectively P12,000 and P28,000 input VAT in these months. It
immediately registered to the VAT system at the start of November 2020. Compute
the business tax payable in October, assuming no claim for tax credit was filed.
a. 27,000
b. 36,000
c. 24,000
d. 9,000
34.Compute the business tax payable in October, assuming it claimed for tax credit
and was
approved by the BIR.
a. 36,000
b. 9,000
c. 27,000
d. 24,000
35. Compute the business tax payable, assuming it filed a claim for tax refund.
a. 9,000
b. 27,000
c. 36,000
d. 24,000
34.Compute the business tax payable in October, assuming it claimed for tax credit
and was approved by the BIR.
a. 36,000
b. 9,000
c. 27,000
d. 24,000
35. Compute the business tax payable, assuming it filed a claim for tax refund.
a. 9,000
b. 27,000
c. 36,000
d. 24,000
Compute the business tax payable in November.
a. 36,000
b. 12,000
c. 48,000
Income Taxation 1a
Midterm Examination

I. Problem solving. Round off final answers to two decimal places. (2pts each)

1. Spouses A and B sold their family home, a capital asset for Php 5,000,000. It was acquired in
1980 at Php 2,000,000. The fair market value as determined by the BIR is Php 6,000,000 but the
fair market value as shown in the schedule of values of the City Assessor is Php 5,500,000. Later,
the spouses utilized Php 4,000,000 for the acquisition of their new family home.
 a. The capital gains tax due is? 72,000

b. What is the cost basis of the new family home? 1,600,000

2. Gab sold for Php 10,000,000 his Baguio rest house with a fair market value of Php 12,000,000 to
buy a new principal residence. If Gab utilized Php 8,000,000 of the proceeds of the sale in
acquiring a new principal residence, the capital gains tax payable is? 720,000

ANS: We know that capital gain tax on sales of property is 6%.

The fair market value of the property is Php 12,000,000.

6/100x12,000,000
= 720,000

3. Mark, realty dealer, sold the following properties in 2019:

Properties sold Holding period Gain/(Loss)
Principal residence Long-term Php 800,000
Stocks sold directly to buyer Short-term 200,000
Personal car Long-term (40,000)
Office equipment Long-term 50,000
Bonds, held as investment Short-term 80,000

Compute the net capital gains subject to regular tax. 60,000

4. Stan died during the year 2017 leaving the following:

Proceeds of life insurance Php 1,000,000
Death benefits received from SSS 200,000
Separation benefit from employer 800,000
Salary accruing before death 50,000

Compute the total exclusion from gross income. 2,000,000

 5. May, a resident citizen, had the following dealings in the stocks of Banco De Oro:
Date Transaction Shares Amount
April 1, 2020 Purchase 100,000 Php 24
June 1, 2020 Stock dividend 20%
August 15, 2020 Purchase 30,000 18
September 4, 2020 Sale 50,000 17
November 5, 2020 Cash dividend 1.5 per share
December 6, 2020 Sale 80,000 25
December 30, 2020 Sale 20,000 26

May uses the FIFO method.

a. Compute the deductible loss on September 4, 2020.

b. Compute the capital gains tax on the sale on December 6, 2020.
c. Compute the final tax on dividends.

Answer 5:
a. The deductible loss on September 4, 2020 is Php 350,000.
b. The capital gains tax on the sale on December 6, 2020 is Php 400,000.
c. The final tax on dividends is Php 30,000.
Explanation: a. To compute the deductible loss, we need to calculate the cost
of the shares sold and subtract it from the sale proceeds. The cost of the
shares is calculated using the FIFO (First-In, First-Out) method. The first
100,000 shares were bought at Php 24 each, so the cost is Php 2,400,000. The
next 20,000 shares were received as a stock dividend, so they have no cost.
The next 30,000 shares were bought at Php 18 each, so the cost is Php
540,000. The total cost of the 50,000 shares sold is Php 1,200,000 (50,000
shares * Php 24). The sale proceeds are Php 850,000 (50,000 shares * Php 17).
The deductible loss is Php 350,000 (Php 1,200,000 - Php 850,000).
b. To compute the capital gains tax, we need to calculate the gain on the
sale and apply the tax rate. The remaining 80,000 shares were sold for Php
2,000,000 (80,000 shares * Php 25). The cost of these shares is Php 1,600,000
(80,000 shares * Php 20). The gain on the sale is Php 400,000 (Php 2,000,000 -
Php 1,600,000). The capital gains tax is 20% of the gain, which is Php
400,000.
c. The final tax on dividends is calculated by multiplying the dividend per
share by the number of shares and the tax rate. The dividend per share is Php
1.5, the number of shares is 20,000, and the tax rate is 10%. The final tax on
dividends is Php 30,000 (Php 1.5 * 20,000 * 10%).

6. A taxpayer derived the following income during 2019:

Philippines Abroad
Compensation income, net of Php 500 SSS, Php 250 PhilHealth, Php 200,000
and Php 10,000 withholding tax
Rental of house to student boarders 400,000
Gross profit on sale of peanut butter 300,000 Php 200,000
 Interest income from bank deposit 18,000 27,000
Gain on sale of bonds with 5 year maturity 50,000
Prizes in a singing competition 80,000 120,000
Interest income from loan to OFWs 100,000
SSS benefits received 20,000

a. Compute the total income to be reported assuming the taxpayer is a resident citizen.
b. Compute the total income to be reported assuming the taxpayer is a non-resident citizen

7. Mary, a married resident citizen, had the following data for 2018:
Business income
- Rental income from real property, net of 5% withholding tax Php 285,000
Real property tax paid by the lessor 50,000
Note: The lessee reimbursed 50% of the tax as per agreement in the
lease contract.
Deductible expense 120,000
- Rental income from real property, net of 5% withholding tax 142,500
Rel property tax paid by the lessor 20,000
Note: The lessee reimbursed 100% of the tax as per agreement in the
lease contract
Deductible expense 40,000
Sale of capital assets
- Shares of ABC (domestic) not Selling price
traded Cost (2004) Php 180,000 Php 300,000
- Shares of DEF (domestic) Selling price
traded Cost (2012) Php 150,000 Php 100,000
- Shares of XYZ (foreign) Selling price
Cost (2000) Php 100,000 Php 500,000
- Vacant lot Selling price
Cost (2000) Php 200,000 Php 800,000
- Toyota Car Selling price
Cost (2000) Php 300,000 Php 100,000
Other transactions
- In 2000, she purchased shares of A Corporation for Php 50,000 which became
worthless and was written of in 2018.
- In 2018, she received liquidating dividend from B Corporation in the amount of Php
450,000. The investment in 2000 was Php 300,000.

Determine the taxable income of Mary. (3pts) P1,062,500

it is assumed he is normal resident and hence subject to the normal

tax rates only. Being married is not of much importance here since
there's no case of clubbing of income because no information is
provided regarding the wife's income. So, the income of N can be
computed as under :

Computation of
total income
A) Business Income
a. Annual Income (Net of 285000
Withholding Tax)
less : Real Property Tax -25000
borne by the Lessor
(Since 50% is reimbursed)
less : Deductibe expense as -120000
LEASE AGREEMENT
Income (1) 140000
b. Annual Income (Net of 142500
Withholding Tax)
less : Real Property Tax 0
actually borne by the
Lessor
(Since 100% is reimbursed)
less : Deductibe expense as -40000
LEASE AGREEMENT
Income (2) 102500
B) Capital Gain
a. Shares of ABC
Sale Consideration 300000
less : Cost of Acquisition -180000
Gain 120000
b. Shares of DEF
Sale Consideration 100000
less : Cost of Acquisition -150000
Loss -50000
c. Shares of XYZ
Sale Consideration 500000
less : Cost of Acquisition -100000
Gain 400000
d. Vacant Lot
Sale Consideration 800000
less : Cost of Acquisition -200000
Gain 600000
e. Toyota Car
Sale Consideration 100000
less : Cost of Acquisition -300000
Gain -200000
Total Capital Gain 870000
c) Other Source
Shares written off -50000
(Deduction on account of Written off losses)
Taxable Income after set 1062500
off
8. The records of Jay, a married citizen with 2 dependent children show the following for 2018:
Business income, net of Php 240,000 expense Php 160,000
Rental income, net of 5% withholding tax 95,000
Dividend received from a foreign corporation 20,000
Winnings from PCSO 400,000
Other transactions:
1. Sale of assets used in business
Delivery equipment
-Selling price 200,000
-Cost (2005) 300,000
-Accumulated depreciation 60,000
Land
-Selling price 200,000
-Cost (2002) 180,000
Warehouse
-Selling price 10,000,000
-Cost (2003) 11,800,000
-Accumulated depreciation 2,000,000
2. Sale of capital assets:
Jewelry
-Selling price 250,000
-Cost (2002) 180,000
Land
-Selling price 800,000
-Cost (2000) 900,000
Furniture and fixture
-Selling price 10,000
-Cost (2010) 40,000
3. Shares of stocks
Traded in the stock exchange
-Selling price 220,000
-Cost (2004) 300,000
Not traded in the stock exchange
-Selling price 300,000
-Cost (2004) 180,000

Determine the taxable income of Jay. (3pts)

II. Multiple choice. Each choice has an equal chance of being correct, choose the corresponding letter
you think is the best answer.

1. Joy sued Carl for breach of promise to marry. Carl lost the case and duly paid the court’s award
that included among others, Php 100,000 as moral damages for the mental anguish Joy suffered.
Did Joy earn a taxable income?
a. She had a taxable income of Php 100,000 since income is income from whatever source.
b. She had no taxable income because it was a donation.
c. She had taxable income since she made a profit.
d. She had no taxable income since moral damages are compensatory.

2. In 2019, an individual who is a real estate dealer sold a residential lot in Nueva Ecija at a gain of
Php 100,000. The sale is subject to income tax as follows:
a. Six percent capital gains tax on the gain
b. Six percent capital gains tax on the selling price or fair market value, whichever is higher
c. Ordinary income tax at the graduated rates of 0% to 35% of net taxable income
d. 30% income tax on net taxable income

3. Which statement is correct? A non-stock, non-profit charitable association that sells its idle
agricultural property is
a. Not required to file an income tax return nor pay income tax on the transaction to the BIR,
provided that the sales proceeds are invested in another real estate during the year.
b. Required to pay the six percent capital gains tax on the gross selling price or fair market
value, whichever is higher.
c. Mandated to pay the thirty percent regular corporate income tax on the gain from sale.
d. Required to withhold the applicable expanded withholding tax rate on the transaction and
remit the same to the BIR.
4. A has 4,000 shares of investment in the common shares of LABAN LANG Corporation, costing Php
500,000. During the current taxable year, he received from LABAN LANG Corporation, 200 shares
of SUKO NA Corporation with a par value of Php 100 per share as dividends. At the date of
dividend declaration, the fair market value of LABAN LANG Corporation was Php 120 per share
and by the time he received the dividend, the fair market value was Php 180 per share. The
dividend is
a. Subject to final tax
b. Exempt from income tax
c. Part of taxable income
d. A stock dividend

5. B is the cost accountant of a domestic corporation. In 2019, he was promoted to chief

accountant. Later, he bought a new car worth Php 1,500,000 and he traded his old car with a fair
market value of Php 700,000 and paid the difference of Php 800,000 to the seller. His old car was
donated by his father who bought the car 2 years ago at a price of Php 600,000. His father paid
the corresponding donor’s tax. Which of the following is incorrect?
a. The cost basis of the old car is Php 600,000.
b. The old car is a capital asset.
c. The capital gain subject to income tax is Php 100,000.
d. The father of B is not required to report the capital gain as part of his taxable income.

6. A dealer in securities sold unlisted shares of stocks of a domestic corporation in 2019 and derived
a gain of Php 1,000,000 therefrom. The gain is
a. Taxable at the regular income tax based on net taxable income.
b. Taxable at 15% capital gains tax based on net capital gain.
c. Taxable at 6/10 of 1% stock transaction tax based on the gross selling price or fair market
value, whichever is higher.
d. Exempt from income tax.

7. In 2020, a minimum wage earner received from his employer a total amount of Php 195,000
inclusive of the 13th month pay of Php 15,000. He also received overtime pay of Php 48,000
and night shift differential of Php 22,000. He also received commission income from his
employer amounting to Php 25,000, thus, the total income received from his employer
amounted to Php 290,000. The taxable income is

a. Php 0
b. Php 25,000
c. Php 290,000
 d. Php 275,000

8. SUKO KA NA BA Company, a domestic corporation, is in the business of owning, purchasing,

licensing, and acquiring trademarks and other intellectual property rights. How should its royalty
fees be taxed?
a. They should be treated as passive income subject to the 20% final tax.
b. They should be included in the corporation’s ITR and be subject to the 30% regular corporate
income tax.
c. Half of the royalties earned shall be included in the ITR and the other half shall be subject to
the 20% final tax.
d. None of these.

9. LABAN O BAWI Corporation shortened its corporate life until January 31, 2021 which was
approved by the Securities and Exchange Commission. On December 31, 2023, a Deed of
Conveyance was executed distributing real properties as liquidating dividend to LABAN O BAWI
shareholders.

One of the shareholders, Juan Tamad recognized the liquidating gain as part of its other taxable
income in its 2023 annual income tax return subject to the regular income tax. The BIR, however,
is assessing Juan Tamad deficiency capital gains tax (CGT) on the transaction. Which tax
treatment is correct?
a. Juan Tamad is correct. The receipt by a stockholder of real property as liquidating dividends
from a dissolving corporation is not subject to CGT but to the ordinary income tax.
b. BIR is correct. Juan Tamad clearly realized a gain from the liquidating dividend. And since the
gain was realized from an exchange of real properties held by LABAN O BAWI Corporation
with Juan’s surrender of his shares, the transaction should be subject to CGT.
c. Both are correct.
d. None are correct.
10. In March 2018, Anna who is fond of jewelry bought a diamond ring for Php 750,000, a bracelet
for Php 250,000, a necklace for Php 500,000, and a brooch for Php 500,000. Anna derives income
from the exercise of her profession as a license CPA. In October 2018, Anna sold her diamond
ring, bracelet, and necklace for only Php 1,250,000 incurring a loss of Php 250,000. She used her
Php 1,250,000 to buy a solo diamond ring in November 2018 which she sold for Php 1,500,000 in
September 2019. She had no other transaction in jewelry in 2019. Which among the following
describes the tax implications arising from the above transactions?
a. Anna may deduct his 2018 loss only from her 2018 professional income.
b. Anna may carry over and deduct her 2018 loss only from her 2019 gain.
c. Ann may carry over and deduct her 2018 loss from her 2019 professional income as well as
from her gain.
d. Anna may not deduct her 2018 loss from both her 2019 professional income and her gain.

11. The proceeds received under a life insurance endowment contract is not considered part of gross
income
a. If it is so stated in the life insurance endowment policy.
b. If the price for the endowment policy was not fully paid.
c. Where payment is made as a result of the death of the insured.
d. Where the beneficiary was not the once who took out the endowment contract.

12. A Corporation was merged with B Corporation. C, a stockholder of A Corporation was asked to
surrender his shares of stock of A Corporation which C acquired for Php 200,000 and in exchange
he received shares of stock of B Corporation with a fair market value of Php 220,000 plus cash of
Php 30,000. After the merger, C later sold his B Corporation shares for Php 240,000. C will
recognize a gain of:
a. Merger 30,000; Sale 40,000
b. Merger 50,000; Sale 20,000
c. Merger 30,000; Sale 20,000
d. Merger 50,000; Sale 40,000

13. The following are examples of non-taxable compensation for injuries except:
a. Actual damages for injuries suffered
b. Exemplary damages
c. Compensatory damages for unrealized profits
d. Moral damages for grief, anxiety and physical sufferings
14. The following are not taxable except:
a. Refund of fringe benefit tax
b. Refund of Philippine income tax
c. Refund of estate tax
d. Refund of special assessment

15. Ella was selected as the most outstanding teacher in her region. Her name was submitted by the
school principal without her knowledge. She received a trophy and a cash award of Php 15,000.
a. Taxable income
b. Subject to final tax
c. Exempt from income tax
d. Partly taxable, partly exempt

16. One of the following is a taxable income

a. Compensation for injuries and sickness
b. Income derived from gifts, bequest and devices
c. Proceeds of life insurance
d. Amounts received as returns of premium

17. A worked for a manufacturing firm but 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 3 months basic salary for
every year of service. A accepted the offer and received Php 800,000 as separation pay under the
program. After all the employees who accepted the offer were paid, the firm found its overhead
still excessive. Hence, it adopted another program where various unprofitable departments were
closed. As a result, B was separated from the service, B also received Php 800,000 as separation
pay. At the time of separation, both A and B have rendered at least 10 years of service but A was
55 years old while B was only 45 year old. As a result
a. Both amounts are exempt from income tax.
b. Both amounts are subject to income tax.
c. Only Mr. A is subject to income tax.
d. Only Mr. B is subject to income tax.
18. Renz, a Filipino citizen residing in Makati City, owns a vacation house and lot in California which
he acquired in 2000 for Php 15,000,000. On January 2012, he sold said real property to Dan,
another Filipino citizen residing in Quezon City for Php 20,000,000. On February 8, 2012, Renz
filed the capital gains tax return and paid Php 1,200,000 representing 6% capital gains tax. Since
Rends did not derive any ordinary income, no income tax return was filed by him in 2012. After
the tax audit conducted in 2013, the BIR officer assessed Renz for deficiency income tax
computed as follows: Php 5,000,000 (20M less 15M) x 30% = Php 1,500,000, without the capital
gains tax paid being allowed as tax credit. Renz consulted a real estate broker who said that the
Php 1,200,000 capital gains tax should be credited from Php 1,500,000 deficiency income tax. Is
the BIR officer’s tax assessment correct?
a. Yes, assessment issued by the BIR is presumed correct.
b. Yes, because the vacation house is located abroad.
c. No, the capital gains tax paid should have been deducted from the Php 1,500,000 deficiency
income tax.
d. No, because the 30% tax rate applies to corporations.

19. I – All income payments received by a minimum wage earner are exempt from withholding.
II – An individual payee shall not be subjected to withholding if the total of the income payments
he receives is not more than Php 250,000.

a. True, true
b. False, true
c. True, false
d. False, false

20. Alma sold her principal residence to Bob as evidenced by a notarized Deed of Absolute Sale
executed on September 10,2013. Alma also acquired a new principal residence from Carl which
was evidenced by another notarized Deed of Sale executed on September 9, 2013. Is the sale of
Alma’s principal residence exempt from the 6% capital gains tax?
a. Yes. Alma bought a new principal residence even before selling her old principal residence.
b. Yes. Alma utilized the proceeds from the sale of her old principal residence in buying a new
principal residence within 18 months from the sale of her old residence.
c. No. The sale of the old principal residence must precede the acquisition of the new principal
residence.
d. None of the above.
21. At the testimonial dinner for new CPAs, Popoy, a reviewer was requested to sing the theme song
of the movie “One More Chance”. Basha, a new CPA, was so delighted that she felt she was
falling in love with Popoy so she decided to cancel Popoy’s indebtedness to her. As a result
a. Popoy realized a taxable income as compensation for services.
b. If Popoy accepts the cancellation, he will pay donor’s tax.
c. Popoy received a gift from Basha and therefore is not part of his taxable income.
d. The amount of indebtedness cancelled is partly taxable, partly exempt.

22. The following income received by officials and employees in the public sector are not subject to
income tax and withholding tax on compensation except
a. Representation and transportation allowance (RATA) granted under the General
Appropriations Act
b. The excess of the 13th month pay and other benefits paid or accrued during the year over
Php 90,000
c. Personnel Economic Relief Allowance (PERA) granted to government personnel
d. Monetized value of leave credits paid to government officials and employees

23. Exclusions from gross income except:

a. Interest on the price of land covered by the Presidential Decree on land reform
b. Interest payments on proceeds of life insurance held by the insurer
c. GSIS, SSS, PhilHealth, and Pag-Ibig contributions and union dues of individuals
d. Gains realized by an investor upon redemption of shares of stock in a mutual fund company.

24. This is a taxable income

a. Retrenchment pay
b. SSS/GSIS benefits
c. Separation pay due to resignation
d. Refund of Philippine income tax