GROSS INCOME

5. This is taxable income

1. All of the following statements are correct, except A. Retrenchment pay

one. Which is the exception?
B. SSS/GSIS benefits
A. The source of interest income is the country where
C. Separation pay due to resignation
the debtor resides
D. Refund of Philippine Income tax
B. The source of dividend income is the country
where the corporation was incorporated
C. Rents are considered derived from the country 6. Which of the following is taxable income?
where the property is located
A. Prizes and awards as an awardee of Ramon
D. Income from personal services is considered Magsaysay Award Foundation
derived from the country where the services were
rendered. B. Damages awarded as a consequence of a libel and
slander suits
C. Interest on Philippine lotto winnings
2. – A gain from sale of shares of a domestic
corporation shall be considered derived from the D. Amounts received as returns of premiums
Philippines regardless of where the shares were sold.
- A gain from sale of shares of a foreign corporation 7. One of the following is taxable income
shall be considered derived from the country where
the corporation was created or organized. A. Gifts, bequests and devices

A. True; True B. Amounts received as rewards for giving

information instrumental in the discovery
B. True; False
of violation of the Tax Code and seizure of smuggled
C. False; True goods
D. False; False C. Proceeds from life insurance
D. Separation pay received by an employee due to a
3. Which is not a creditable withholding income tax? cause beyond his control

A. Expanded withholding income tax

B. Withholding income tax on passive income 8. As a rule, the following are taxable income, except

C. Withholding income tax at source A. Cash dividend

D. Withholding income tax on compensation income B. Property dividend

C. Scrip dividend

4. As a rule, this is not part of taxable income D. Stock dividend

A. Profit sharing
B. Hazard pay 9. The following items are exclusions from gross
income, except
C. Overtime pay
A. Labor union dues
D. 13th month pay
B. SSS/GSIS premiums contributions
C. IOU’s
D. Pag-ibig premiums contributions
10. Which of the following is part of gross income?
A. PCSO & Phil Lotto winnings
B. Bank interest on long-term deposit
C. Proceeds of life insurance
D. Raffle prize not exceeding P10,000
11. If refunded, this is taxable
A. Estate tax
B. Donor’s tax
C. Special assessment
D. Fringe benefit tax
12. Income tax payments to a foreign country, in the
case of a resident citizen may be claimed as
A. Tax credit and deduction from gross income
B. Tax credit only
C. Tax credit or deduction from gross income
D. Deduction from gross income only
13. Dividends paid by a domestic corporation maybe
taxable but subject to final tax, except
A. if received by a resident citizen
B. if received by a resident alien
C. if received by a non-resident corporation
D. if received by another domestic corporation
14. Which of the following statements regarding
dividends is wrong?
A. Exempt from income tax if received by a domestic
corporation from another domestic corporation
B. Exempt from income tax if received by a resident
corporation from a domestic corporation
C. Taxable subject to year-end tax if received by a
resident citizen from a non-resident corporation
D. Taxable subject to final tax if received by a non-
resident citizen from a non-resident corporation
15. X works as a secretary in an advertising firm in
Manila. During the year, she received P10,000 a
month as salary or a total of P120,000. In addition she
also received 13th month pay, Christmas bonus,
productivity bonus, mid year bonus and 14th month
pay amounting to P40,000. The total deductions for
her SSS premiums, Medicare, Pag-ibig, and Union dues
contributions amounted to P5,000. X’s taxable income,
if single is
A. P 90,000 C. P 75,000
B. P105,000 D. P100,000
16. Which of the following statements is correct?
A. The power of taxation reaches even the citizens
abroad and his income earned from sources outside
the Philippines
B. Priests and religious institutions are exempt from
income and property taxes.
C. Separation benefits received by terminated
employees resulting from a deadlock in their
collective bargaining agreement are exempt from
income tax.
D. The value of a property received as a gift, or under
a will or testament or through legal succession is
exempt from taxation.
17. Which of the following statements is not correct?
A. Proceeds of life insurance policies paid to
beneficiaries upon the death of the insured are
excluded from gross income regardless of whether the
proceeds are received as a single sum or in
installments.
B. In case of transfer for a valuable consideration by
assignment or otherwise of a life insurance,
endowment or annuity contract or any interest
therein, only the actual value of such consideration
and the amount of the premium and the sums
subsequently paid by the transferee are exempt from
income tax.
C. Marriage fees, baptismal offerings, sums paid for
saying masses for the dead and other contributions
received by a clergyman, evangelist or religious worker
for services rendered is taxable income.
D. Monetization of leave credits of employees who
were unable to go on leave due to exigencies of the
service constitute taxable income.

18. – PCSO and Phil lotto winnings are excluded from
gross income because they are subject to final tax.
- Prizes, awards and winnings are excluded from gross
income because they are subject to final tax.
A. Both are true C. True; False
B. Both are False D. False; True
19. Which statements is correct?
A. Incomes from illegal activities are taxable.
B. Tax refunds constitute taxable income to the
taxpayer.
C. Recovery of bad debts previously written off is part
of taxable income
D. As a rule, contest awards and prizes are subject to
20% final tax if they amount to
P10,00 or more, otherwise they will be exempt from
income tax.
20. One of the following is taxable income
A. Compensation for damages
B. The share of a partner in the undistributed net
income of a general professional partnership
C. Living quarters and meals furnished and given to an
employee for the convenience of the employer
D. Facilities or privilege of relatively small value
offered by the employer as a means of promoting the
health, goodwill, contentment, or efficiency of the
employee.
21.Which of the following is taxable?
A. P100,000 interest on long-term deposit or
investment
B. P200,000 gain on sale of 10-year bonds
C. P12,000 prize in a supermarket raffle
D. P1 M winnings from Phil. lotto
22. Gain realized from the sale or exchange or
retirement of bonds, debentures or other certificate of
indebtedness is excluded from gross income if with a
maturity of
A. 5 years or more C. More than 8 years
B. More than 7 years D. More than 10 years
23. Gross benefits received by officials and employees
of public and private entities as 13 th month pay and
other benefits such as productivity bonus, service
incentive pay and Christmas bonus shall be excluded
from taxable income up to
A. P20,000 C. P40,000
B. P30,000 D. P50,000
24. Exclusions from gross income, except:
A. Interest on the price of the 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.
25. Advance rental in the nature of prepaid rental,
received by the lessor under a claim or right and
without restriction as to use is
A. Taxable income of the lessor in the year received if
he is on the cash method of accounting
B. Taxable income of the lessor in the year received
whether he is on the cash or accrual method of
accounting
C. Taxable income of the lessor in the year received
whether he is on the cash or accrual method of
accounting
D. Taxable income of the lessor up to the amount
earned in the year the rental is received
26. Which payments made by the lessee under such
terms of the lease contract should be considered as
additional rent income of the lessor?
1. If a lessee paid directly to the government a real tax
on the property of the lessor
2. If the amount received by the lessor is in the nature
of a security deposit for the faithful compliance by the
lessee of the terms of the contracts
3. If the amount received by the lessor is in the nature
of a loan extended by the lessee to the lessor.
A. Only 1 C. Only 2 and 3 B. P208,000 D. P202,000
B. Only 1 and 3 D. 1, 2 and3

27. One of the following represents taxable income:

A. Refund of overpaid rental expense in prior year
B. Refund of donor’s tax paid in prior year
C. Refund of income tax in prior year
D. Refund of special assessment paid in prior year

28. If an individual performs services for a creditor

who in consideration thereof cancels the debt, the
cancellation of indebtedness may amount to
A. A gift
B. A donation inter-vivos
C. A capital contribution
D. A payment of income

29. This is not part of gross compensation income

A. Salary of P 20,000 a month
B. Fringe benefits of P10,000 of an employee
C. Salary of P10,000 a month of a partner in a general
professional partnership
D. Honorarium and allowances of P10,000 of a
member of the board of directors of a Corporation

30. Mr Z, a farmer, had the following data for the year:

Using the cash method of accounting, the income is:

A. P205,000 C. P395,000
B. P208,000 D. P202,000

31. Using the same information above, but the accrual

method of accounting is used, the income is
A. P205,000 C. P395,000
DEDUCTIONS AND EXEMPTIONS
1. Which of the following statements is true?
A. Payments which constitutes bribes, kickbacks, and
others of similar nature which are necessary to realize
the profit are allowed as deduction from gross income
B. The taxes which are deductible from gross income
include the taxes, interest and penalties incident to tax
delinquency
C. Deductions are amounts allowed by the Tax Code to
be deducted from gross income to arrive at the
income tax liability of a taxpayer.
D. Losses from wagering transactions shall be
allowed only up to the extent of the gains from such
transactions
2. X Corp. had a net sales of P1M. The actual
entertainment, amusement and recreation expense
amounted to P20,000. The deductible “EAR” expense
is
A. P20,000 C. P10,000
B. P 6,000 D. P 5,000
3. Y Corp. had a net revenue of P1M. The actual
entertainment, amusement and recreation expense
amounted to P20,000. The deductible “EAR” expense
is
A. P20,000 C. P 5,000
B. P 6,000 D. P 10,000
4. Z Corp. is engaged in the sale of goods and services
with net sales and net revenue of P2M and P1M
respectively. The actual entertainment, amusement
and recreation expense amounted to P18,000. The
deductible “EAR” expense is
A. P18,000 C. P12,000
B. P16,000 D. P 6,000
5. This is not deductible from gross income
A. Transportation expenses from the main office to the
branch
B. Transportation expenses from home to the office
and from the office back to home
C. Travel expenses on business trips
D. Travel expenses while away from home in the
pursuit of trade, business or profession
6. A revenue expenditure is
A. Usually incurred in the acquisition, betterment or
permanent improvement of the asset
B. Capitalized and the cost is recovered through
annual depreciation
C. Ordinarily to benefit more than one accounting
period
D. To benefit one accounting period and is a
deduction from gross income in the year paid or
incurred.
7. The optional standard deduction for corporations is
A. 10% of the gross income
B. 10% of the gross sales/ receipts
C. 40% of the gross income
D. 40% of the gross sales/receipts
8. No deductions shall be allowed where the
transaction is between “related taxpayers” for
1. Losses from sales or exchanges of property
2. Interest expense
3. Bad debts
A. 1 and 2 only C. 1 and 3 only
B. 2 and 3 only D. 1, 2 and 3
9. The phrase “related taxpayers” will apply to the
following, except:
A. Between members of a family
B. Between the grantor and a fiduciary of any trust
C. Between a fiduciary of a trust and a beneficiary of
such trust
D. Between an individual and a corporation more
than 50% in value of the outstanding stock of which
is owned, directly or indirectly for such individual, in
case of distributions in liquidation.

10. For individuals, premiums paid during the taxable
year for health and/or hospitalization insurance taken
out by him on himself, including his family shall be
allowed as deductions from gross income, provided
that the family has a gross income of
A. More than P250,000
B. More than P500,000
C. Not more than P250,000
D. Not more than P2,400
11. The deduction for premium payments on health
and/or hospitalization insurance is not available to:
A. An individual with gross compensation income only
B. An individual with gross income from business or
practice profession, whether he is availing of the
optional standard deduction or itemized deduction
C. An individual with mixed income
D. Both husband and wife
12. - In case of married taxpayer, only the spouse
claiming the additional exemptions for dependents
shall be entitled to the deduction on premium
payments on health and / or hospitalization insurance.
- The deduction for premium payments on health and
/ or hospitalization insurance shall not exceed P2,400
for the family or P200 a month
A. True; True C. False; True
B. True; False D. False; False
14. In 2009, Z, a resident citizen, engaged in business
borrowed money from ABC Bank from which he had
an interest expense of P20,000. His deposit in XYZ
bank yielded an interest income of P25,000. His
deduction for interest expense is
A. P20,000 C. P 9,750
B. P 5,000 D. P10,250
15. Interest expense incurred to acquire property used
in trade or business or exercise of a profession is
A. Not allowed as a deduction against gross income
B. Required to be treated as a capital expenditure to
form part of the cost of the asset
C. Allowed as a deduction or treated as a capital
expenditure at the option of the taxpayer
D. Allowed as a deduction or treated as a capital
expenditure at the option of the government
15. If an individual is on the cash basis of accounting,
will interest paid in advance be allowed as a
deduction?
First answer - No, it is a deduction in the year that the
indebtedness was paid and not in the year that the
interest was paid.
Second answer – Yes, if the indebtedness is payable in
periodic amortizations, the amount of the interest
which corresponds to the amount of the principal
amortized or paid during the year shall be allowed as a
deduction in such taxable year.
A. True; True C. False; False
B. True; False D. False; True
16. May be deducted from gross income
A. Philippine income tax
B. Foreign income tax
C. Estate or donor’s tax
D. Special assessment
17. A taxpayer engaged in business incurred a partial
loss of property as follows:
The deductible loss for asset 1 is
A. P120,000 C. P30,000
B. P 70,000 D. P80,000
18. The deductible loss for asset 2 is
A. P300,000 C. P160,000
B. P200,000 D. P240,000 A. Occupation tax C. Documentary stamp tax
19. The operating loss, which had not been previously B. Privilege tax D. Philippine income tax
offset as deduction from gross income shall be carried
over as deduction from gross income for the next 24. Non-deductible taxes, except

A. 2 consecutive taxable years immediately following A. Special assessment C. Estate tax

such loss.
B. 3 consecutive taxable years immediately following
such loss.
C. 4 consecutive taxable years immediately following
such loss.
D. taxable year immediately following such loss.
20. A taxpayer had the following:
B. Donor’s tax D. Business tax
25. X acquired a machine at a cost of P250,000. Scrap
value is P20,000 and the estimated useful life was 25
years. After depreciating the asset for 20 years using
the straight-line method, it was determined that the
remaining life is not five years. The annual
depreciation from the 21st year assuming a remaining
life of 10 years without scrap is
A. P10,000 C. P9,200
B. P11,500 D. P6,600

The income to be reported in year 2 is

A. P20,000 C. P450,000 26. - An expense which is necessary but not ordinary,
or ordinary but not necessary is Deductible from gross
B. P60,000 D. P 0 income.
- The taxpayer must signify his intention to elect the
21. The income to be reported in year 5 is itemized deduction, otherwise, he is deemed to have
chosen the optional standard deduction.
A. P60,000 C. P80,000
A. True; True C. False; True
B. P20,000 D. P 0
B. True; False D. False; False

22. One of the following losses can not be deducted

from gross income
A. To construct a bigger warehouse, a corporation
demolished an old warehouse which had a
construction cost of P2M and a book value of
P300,000.
27. - Interest paid on preferred stock is deductible
from gross income of the paying corporation.
- A capital expenditure usually benefits more than one
accounting period and is deductible from gross
income in the year it is paid or incurred.

B. Demolition of a building existing on a land A. True; True C. False; True

purchased where the corporation has no use for the B. True; False D. False; False
building at the time of purchase and it was its
intention to remove the building in order to build its
factory.
28. - The cost of leasehold improvements shall be
C. A corporation retired its machinery from the deductible from gross income of the paying
business because of the increase in the cost of corporation.
production and the failure of the machinery to meet
- Contributions by the employer to a pension trust for
the desired number of units of production.
past service cost is deductible in full in the year that
D. A corporation ascertained that its B Corp. stocks are the employer made the contributions.
worthless because of the total insolvency of B Corp.
A. True; True C. False; True
B. True; False D. False; False
23. Examples of taxes that are deductible except

29. For individuals with gross compensation income,
the following maybe deducted, except:
A. Personal exemptions
B. Additional Exemptions
C. Optional standard deduction
D. Premium payments on
hospitalization insurance
C. Exempt from income tax
D. Subject to final tax
33. Using the preceding no., if X dies and his
beneficiary received the proceeds of P1,000,000, such
proceeds will be
A. Taxable in full
B. Partly taxable, partly exempt
C. Exempt from income tax
health and/or
D. Subject to final tax

30. For individuals with gross income from business or 34. Z, a dedicated and honest employee of RST Corp.
practice of profession, the following may be deducted for the past 20 years was advised that he is to be
retrenched as the company was losing heavily but that
1. Optional standard deduction he would be given the separation pay provided by law.
2. Itemized deduction To avoid implication of inefficiency Z was advised to
file a letter of resignation instead of being retrenched.
3.`Personal exemptions If Z files a letter of resignation and receives the
4. Additional exemptions separation pay, such amount is

5. Premium payments on health and / a A. Taxable in full

hospitalization insurance B. Partly taxable , partly exempt
A. 1, 2, 3 and 4 C. 3, 4 and 5 and either 1 or 2 C. Exempt from income tax
B. 2, 3 and 4 D. 1, 2, 3, 4 and 5 D. Subject to final tax

31. Any amount subsequently received on account of 35. Using the preceding no., If Z is retrenched and
a bad debt previously charged off and allowed as a receives the separation pay, such amount is
deduction from gross income in prior years must be
included in gross income in the taxable year in which A. Taxable in full
received. This is B. Partly taxable , partly exempt
A. Severance test C. Exempt from income tax
B. Life-blood theory D. Subject to final tax
C. Destination of income test
D. Equitable doctrine of tax benefit 36. May consider capital expenditures as revenue
expenditures

32. X took out a life insurance policy of P1,000,000 A. Resident citizen

naming his wife as beneficiary. The policy provides B. Domestic corporation
that the insurance company will pay X the amount of
P1,000,000 after the 25th year of the policy and his C. Private educational institutions
beneficiary, should he die before this date. The
premiums paid on the policy is P700,000. If X outlived D. Resident alien
the policy and received the proceeds of P1,000,000,
such proceeds will be:
37. May claim tax credit for income taxes paid to
A. Taxable in full foreign country.
B. Partly taxable, partly exempt A. Resident citizen C. Non-resident citizen
B. Resident alien D. Non-resident alien
38. One of the following is not correct for deductibility
of losses from gross income
A. Must arise from fire, storm or other casualty,
robbery, theft or embezzlement
B. Must not be compensated by insurance or other
form of indemnity
C. A declaration of loss by casualty should be filed with
the Bureau of Internal Revenue
D. Must have been claimed as deduction in the
estate return of the taxpayer
39. Which of the following statements is not correct?
A. The optional standard deduction is an amount
equal to forty percent (40%) of the Gross income
from business or practice of profession of the
taxpayer.
B. The optional standard deduction is not available
against compensation income arising out of an
employer-employee relationship
C. The election of Optional Standard Deduction is
irrevocable for the taxable year for which the choice is
made.
D. Unless the taxpayer signifies in his return his
intention he shall be considered as having availed of
the itemized deduction.
40. The following may be allowed to claim optional
standard deduction, except
A. Resident citizen C. Resident alien
B. Non-resident citizen D. Non-resident alien
41. The following may elect optional standard
deduction or itemized deduction, except
A. Taxable estates and trusts
B. Domestic corporation
C. General professional partnership
D. Foreign corporation
42 . The optional standard deduction for individuals is
A. 10% of the gross income
B. 10% of the gross sales/receipts
C. 40% of the gross income
D. 40% of the gross sales/receipts
43. May consider capital expenditures as revenue
expenditures
A. Resident citizen
B. Domestic corporations
C. Private educational institutions
D. Resident alien
44. A building was partially destroyed by fire in 2010.
The building had a book value of P10M. The insurance
company was willing to pay P5 M, which was refused
by the owner. Finally, the claim was settled in 2011 for
P9M. The proceeds will be
A. Exempt from income tax
B. Part of taxable income
C. Subject to final tax
D. Partly exempt, partly taxable
45. Z took a life insurance policy of P2M naming his
wife as beneficiary. The policy provides that the
insurance company will pay Z the amount of P2 M
after the 25th year of the policy and his beneficiary,
should he die before this date. The premiums paid on
the policy is P1.5M. If Z outlived the policy and
received the proceeds of P2M, such proceeds will be:
A. Taxable in full
B. Exempt from income tax
C. Partly taxable, partly exempt
D. Subject to final tax.
46. B, a retailer of goods uses the accrual method in
reporting his income and expenses. His 2010
transactions show:

For the period January 1 to June 30, 2010, he used the

itemized deduction but decided to use the optional
standard deduction beginning July 1. B’s annual
income tax return using the optional standard
deduction will show a net income before exemptions
of
A.P1,560,000 C. P1,020,000
B.P 900,000 D. P1,320,000

47. RLG Corporation, a retailer of goods uses the

accrual method of accounting in reporting its income
and expenses under the calendar year basis. From
January 1 to June 30, 2010, it used the itemized
deduction but decided to use the optional standard
deduction method when it filed its annual income tax
return. Its 2010 transactions show:

The net income of RDG is

A. P1,560,000 C. P800,000
B. P 660,000 D. P720,000

48. MDG Corporation is engaged in trading business.

The reported income and expenses for taxable year
2010 show:

The net taxable income is

A.P2,858,000 C. P3,000,000
B.P2,820,000 D. P2,862,000