CHAPTER 1

PRINCIPLES OF TAXATION

Multiple Choice Questions

MC 1 A MC 26 D
MC 2 C MC 27 D
MC 3 B MC 28 A
MC 4 A MC 29 B
MC 5 D MC 30 D
MC 6 D MC 31 C
MC 7 B MC 32 D
MC 8 B MC 33 C
MC 9 D MC 34 D
MC 10 A MC 35 C
MC 11 B MC 36 B
MC 12 C MC 37 A
MC 13 B MC 38 B
MC 14 B MC 39 E
MC 15 A MC 40 A
MC 16 C MC 41 A
MC 17 A MC 42 E
MC 18 D MC 43 C
MC 19 B MC 44 A
MC 20 B MC 45 D
MC 21 A MC 46 A
MC 22 D MC 47 C
MC 23 A MC 48 A
MC 24 D MC 49 A
MC 25 A MC 50 A
 CHAPTER 2
GROSS INCOME

Multiple Choice Questions

MC 1 B MC 26 D
MC 2 A MC 27 D
MC 3 B MC 28 A
MC 4 B MC 29 D
MC 5 B MC 30 A
MC 6 A MC 31 C
MC 7 B MC 32 D
MC 8 C MC 33 C
MC 9 B MC 34 B
MC 10 A MC 35 D
MC 11 D MC 36 C
MC 12 A MC 37 C
MC 13 C MC 38 C
MC 14 C MC 39 A
MC 15 A MC 40 D
MC 16 D MC 41 C
MC 17 C MC 42 A
MC 18 A MC 43 D
MC 19 A MC 44 D
MC 20 C MC 45 B
MC 21 B MC 46 C
MC 22 A MC 47 C
MC 23 A MC 48 B
MC 24 A MC 49 A
MC 25 D MC 50 C
 Answer Key
Chapter 2. Gross Income

Computation:

MC12

Under the Claim of Right Doctrine or Doctrine of Ownership, Command or

Control, if a taxpayer receives earnings under a claim of right and without
restriction as to its disposition, he has received income even though one
may claim he is not entitled to the money.

MC14

Gross income, Philippine sources, August 1 to December 31 300,000

Gross income, foreign sources, August 1 to December 31 200,000
Income subject to Philippine Income Tax P500,000

MC15

Interest income from long-term peso bank deposits, abroad 25,000

Interest income from long-term FCDU deposits, Philippines 50,000
Interest income from long-term FCDU deposits, abroad 60,000
Royalties from books, Philippines 20,000
Royalties from books, abroad 30,000
Royalties from computer programs, Philippines 20,000
Royalties from computer programs, abroad 40,000
Dividend income from a domestic corporation 40,000
Dividend income from a foreign corporation 55,000
Income subject to Philippine Income Tax P340,000

MC16

Royalties, Philippines 230,000

Interest on time deposit with Metrobank 18,000
Interest on money market placement, PH 25,000
Income subject to Philippine Income Tax P273,000

MC19

Number of shares 1,000

Fair market value of the shares 150
Compensation income P150,000

MC20

Total Income P9,000,000

Ratio of Services performed in the Philippines 10/30
Gross Income from sources within P3,000,000
Answer Key
Chapter 2. Gross Income

MC21

Collections for past services rendered P50,000

Advances for future services to be rendered 100,000
Reimbursement for out-of-pocket expenses 15,000
Gross Income P165,000

MC22

Only her business income shall be reported as part of her gross income.
The Christmas gift is not subject to income tax.

MC27

Gain from sale of shares of stock of a domestic

corporation, residence of buyer is in China and the
sale was made in Korea 225,000

MC28

Capital Gain P400,000

Holding Period (more than 12 months) 50%
Reportable Gross Income P200,000

MC29

Proceeds from the sale of Jewelry P3,000,000

Acquisition Cost 2,000,000
Capital Gain P1,000,000
Holding Period (more than 12 months) 50%
Reportable Gross Income P500,000

MC32

Gross Income – Philippines P3,000,000

Gross Income – Worldwide 9,000,000
Ratio 33.33%

When the gross income ratio is less than 50%, the entire dividend from a
resident foreign corporation is considered derived from sources
without.
 Answer Key
Chapter 2. Gross Income

MC33

Cancelled Indebtedness in exchange of service P750,000

Interest Income 50,000
Income Subject to Tax P800,000

MC36

Profit of the Joint Venture P800,000

Share 20%
Gross Income P160,000

MC37

Gross income from the practice of profession P1,590,000

Gross income from business 3,500,000
Interest income on private securities 24,000
Interest income on loans to friends 13,000
Gross Income P5,127,000

MC39

When the insured died, the total life insurance proceeds received by the
heirs/beneficiaries are exempt from income tax.

MC40

Life insurance proceeds where the insured outlived the 150,000

policies (total premium paid is P50,000)
Involuntary separation pay 35,000
Total Excluded/Exempted Income P185,000

MC41

When the insured outlived the policy, the receipt of premium paid shall
be considered a return of capital, not an income; hence must be excluded
from gross income. Only the amount in excess of the premium paid shall
be subject to income tax.
Answer Key
Chapter 2. Gross Income

MC42

While a gift is not subject to income tax, the income derived from the said
gift is taxable.

MC44

Compensation for sickness and injuries is excluded from gross income.

The P70,000 insurance settlement is a mere return of capital representing
damages to the car.

MC45

The 13th month and other benefits not exceeding P90,000 are exempt
from income tax.

MC46

13th Month Pay P30,000

SSS deductions 14,000
PhilHealth deductions 10,000
Pag-IBIG deductions 11,000
Union dues 7,000
Total Excluded/Exempted Income P72,000

MC47

For the retirement proceeds to be exempt, Mr. X must have worked for at
least 50 years, among others.

The receipt of P900,000 is considered return of capital, not an income;

hence must be excluded from gross income.

MC48

Prize for winning gold in the SEA games P600,000

Athlete of the Year award 100,000
Cash gift from his SM Foundation 300,000
Total Excluded/Exempted Income P1,000,000
 Answer Key
Chapter 2. Gross Income

MC49

Prize received for achievement in literature (did not join

the contest) 100,000
Gain from sale of bonds (maturity is 7 years) 50,000
Cash inherited from his uncle 3,000,000
Proceeds of his wife’s life insurance (irrevocable
beneficiary) 1,000,000
Amount received as a return of premium (P1,500,000
premium paid) 1,500,000
Total Excluded/Exempted Income P5,650,000

MC50

Retirement benefits received from his previous employer

that maintained a reasonable private pension plan
(he served the company for 12 years) 250,000
Lump sum benefits received from SSS 200,000
Interest income from bonds with a maturity period of 7
years (Deposit Substitute) 20,000
Interest on long term deposits with maturity period of 5
years 30,000
Total Excluded/Exempted Income P500,000
 CHAPTER 3
ALLOWED DEDUCTIONS

Multiple Choice Questions

MC 1 D MC 26 D
MC 2 B MC 27 D
MC 3 C MC 28 A
MC 4 A MC 29 D
MC 5 C MC 30 C
MC 6 D MC 31 B
MC 7 B MC 32 D
MC 8 A MC 33 D
MC 9 C MC 34 B
MC 10 A MC 35 C
MC 11 B MC 36 C
MC 12 A MC 37 B
MC 13 D MC 38 A
MC 14 B MC 39 B
MC 15 A MC 40 D
MC 16 D MC 41 A
MC 17 C MC 42 D
MC 18 D MC 43 D
MC 19 C MC 44 A
MC 20 B MC 45 A
MC 21 B MC 46 D
MC 22 B MC 47 C
MC 23 A MC 48 D
MC 24 B MC 49 D
MC 25 B MC 50 A
 Answer Key
Chapter 3. Allowable Deductions

Computation:

MC3

Rental Expense P1,000,000

Expanded Withholding Tax 5%
Total Expanded Withholding Tax P50,000

MC4

Gross Income, Philippines P15,000,000

Operating Expense, Allocated (P30,000,000 x 15/75) (6,000,000)
Taxable Income, Philippines P9,000,000

MC5

Gross Income, Philippines P1,000,000

Operating Expense, Philippines (400,000)
Operating Expense, Allocated (P500,000 x 1/5) (100,000)
Taxable Income, Philippines P500,000

MC7

If the taxpayer is engaged in both the sale of goods and services, and it's
not possible to identify whether the EAR expenses were incurred for the
sale of goods or services, the EAR should be allocated.

Actual Deductible
Business Limit
(Allocated) EAR

Trading ½% x P200,000 = P1,000 P2,000 P1,000

Service 1% x P100,000 = P1,000 1,000 P1,000

P3,000 P2,000

The actual EAR is allocated based on the revenue as follows:

Actual
Business Allocation
(Allocated)
Trading P200,000 / P300,000 x P3,000 P2,000
Service P100,000 / P300,000 x P3,000 1,000
P3,000
Answer Key
Chapter 3. Allowable Deductions

MC8

Gross sales P100,000,000

Cost of sales (60,000,000)
Operating expenses (17,500,000)
Additional deduction for labor training expenses (1,500,000)
(P3,000,000 x 50%)
Taxable Income, Philippines P21,000,000

The additional deduction for labor training expenses should not exceed
10% of the direct labor wage or P2,000,000 (P20,000,000 x 10%).

MC14

Net Income before interest expense P2,500,000

Deductible Interest Expense (104,000)
Taxable Income P2,396,000

The deductible interest expense is computed as follows:

Interest expense P200,000

Tax arbitrage (P480,000 x 20%) (96,000)
Taxable Income P104,000

MC15

Only the interest paid on delinquency taxes is deductible.

MC19

Payment of deficiency FBT P25,000,000

Payment of interest on deficiency FBT 1,250,000
Business taxes and licenses 18,000,000
Total P44,250,000
 Answer Key
Chapter 3. Allowable Deductions

MC26

First Equipment P400,000

Second Equipment (P330,000 – P100,000) 230,000
Deductible loss P630,000

MC27

Fair Market Value (lower than the book value) P100,000

Insurance (70,000)
Deductible loss P30,000

In case of partial loss, the deductible amount is the book value of the
asset or the replacement cost, whichever is lower, less any amount
recovered from insurance.

The book value at the time of the loss is P300,000 (P500,000 x 3/5).

MC28

Capital Gain (P2,000,000 x 100%) P2,000,000

Capital Loss (P1,000,000 x 50%) (500,000)
Deductible loss P1,500,000

MC30

Liquidating dividend (return of investment) P40,000

Cost of investment (100,000)
Capital loss P60,000
Multiply by: 50%
Deductible capital loss (more than 12 months) P30,000

MC31

Gambling losses are deductible to the extent of gambling gains.

MC33

Recovery of bad debts previously allowed as a deduction shall be included

as part of the gross income in the year of recovery to the extent of the
income tax benefit.
Answer Key
Chapter 3. Allowable Deductions

MC39

Current service cost in 2023 P200,000

Amortization of 2022 Past service cost (P50,000/10) 5,000
Amortization of 2023 Past service cost (P30,000/10) 3,000
Deductible loss P208,000

MC45

Gross receipts from services P800,000

Optional standard deduction (P800,000 x 40%) (320,000)
Long term capital gain (P15,000 x 50%) 7,500
Short term capital loss (P5,000 x 100%) (5,000)
Taxable income P482,500
 CHAPTER 4
INDIVIDUAL INCOME TAXATION

Multiple Choice Questions

MC 1 C MC 26 C
MC 2 D MC 27 A
MC 3 B MC 28 C
MC 4 B MC 29 B
MC 5 A MC 30 B
MC 6 B MC 31 C
MC 7 A MC 32 A
MC 8 D MC 33 D
MC 9 A MC 34 D
MC 10 D MC 35 B
MC 11 C MC 36 A
MC 12 A MC 37 B
MC 13 C MC 38 A
MC 14 A MC 39 C
MC 15 D MC 40 D
MC 16 A MC 41 C
MC 17 D MC 42 D
MC 18 B MC 43 D
MC 19 A MC 44 B
MC 20 A MC 45 P48,000
MC 21 A MC 46 A
MC 22 D MC 47 A
MC 23 C MC 48 B
MC 24 P82,500 MC 49 A
MC 25 P469,500 MC 50 A
Answer Key
Chapter 4. Individual Income Taxation

Computation:

MC6

First P2,000,000 See bracket over P2,000,000

but not over P8,000,000 P402,500
Next P2,500,000 (P4,500,000 – 2,000,000) x 30% 750,000
P1,152,500

MC8

First Employer P1,500,000

Second Employer P532,000
Total Taxable Compensation Income P2,032,000

First P2,000,000 402,500

Next P32,000 x 30% 9,600
Income Tax Due P412,100
Tax Credit
Tax Withheld by First Employer (277,500)
Tax Withheld by Second Employer (48,900)
Income Tax Still Due P85,700

The first employer withheld P277,500.

Taxable Compensation Income P1,500,000

First P800,000 P102,500

Next P700,000 x 25% 175,500
Income Tax Due Withheld P277,500

The second employer withheld P48,900.

Taxable Compensation Income P532,000

First P400,000 P22,500

Next P132,000 x 20% 26,400
Income Tax Due Withheld P48,900

MC9

Compensation income P1,000,000

Multiply by 25%
Income tax due P250,000
 Answer Key
Chapter 4. Individual Income Taxation

MC11

Personal meals and groceries P15,000

Gasoline (P8,000 x ½) 4,000
Total P19,000
Divide by / 65%
Gross monetary value 29,231
Multiply by FBT rate x 35%
Fringe benefits tax 10,231

MC12

Cash P800,000
Divide by / 65%
Gross monetary value 1,230,769
Multiply by FBT rate x 35%
Fringe benefits tax P430,769

MC13

Elling E3 yacht P16,400,000

Multiply by 5%
Fringe benefits P820,000

The use of aircraft, including helicopters, owned and maintained by the

employer shall be treated as use and not to be subject to FBT. Treated as
a business expense only.

MC21

Gross income, Philippines P3,850,000

Gross income, Canada 1,650,000
Business expenses, Philippines (2,000,000)
Business expenses, Canada (725,000)
Taxable income P2,775,000

MC22

Gross Sales P14,000,000

Cost of sales (7,600,000)
Operating expenses (2,500,000)
Taxable income P3,900,000

First P2,000,000 P402,500

Next P1,900,000 x 30% 570,000
Income Tax Due P972,500
Answer Key
Chapter 4. Individual Income Taxation

MC23

Gross receipts (P2,900,000 – P100,000) P2,800,000

Cost and expenses (2,500,000)
Other income 10,000
Taxable income P310,000

First P250,000 P-
Next P60,000 x 15% 9,000
Income Tax Due P9,000

MC24

Using 8%

Taxable gross sales (P2,200,000 – P250,000) P1,950,000

Multiply by 8%
Income tax due P156,000

Using Graduated income tax rates

Gross receipts P2,200,000

Operating expenses (1,500,000)
Taxable income P700,000

First P400,000 P22,500

Next P300,000 x 20% 60,000
Income Tax Due P82,500

MC25

Income tax due on compensation income P255,000

Income tax due on business income 192,000
Taxable income P469,500

The income tax liability would be P505,000 using the 2018-2022

graduated tax rates.

Income tax due on compensation income (using 2023 graduated tax

rates)

Compensation income P1,500,000

Exempt benefits (90,000)
Taxable compensation income P1,410,000
 Answer Key
Chapter 4. Individual Income Taxation

First P800,000 P102,500

Next P610,000 x 20% 152,500
Income Tax Due P255,000

The 8% income tax rate does not apply to purely compensation income
earners.

Income tax due on business income

Taxable gross sales P2,400,000

Multiply by 8%
Income tax due P192,000

For mixed income earner, the 8% income tax rate is directly applied to
the total gross sales/receipts.

MC26

Income tax due on compensation income (using 2023 graduated tax

rates)

Compensation income P250,000

Exempt benefits (20,000)
Taxable compensation income P230,000

First P0 P-
Next P230,000 x 0% -
Income Tax Due -

Income tax due on business income

Taxable gross sales P500,000

Multiply by 8%
Income tax due P40,000

MC27

Income tax due on compensation income (2023)

Compensation income P200,000

Exempt benefits (35,000)
Taxable compensation income P150,000

First P0 P-
Next P150,000 x 0% -
Income Tax Due -
Answer Key
Chapter 4. Individual Income Taxation

Income tax due on business income

Taxable gross sales (P2,500,000 + P143,000) 2,643,000

Multiply by 8%
Income tax due P211,440

MC28

Taxable gross receipts (P2,500,000 x 1/5) P500,000

Multiply by 25%
Income tax due P125,000

MC35

Interest, gross (P100,000 / 80%) P125,000

Multiply by 20%
Final Tax P25,000

MC36

Interest income (NRANETB) P50,000

Multiply by 25%
Final Tax P12,500

MC37

Royalty P10,000,000
Multiply by 10%
Final Tax P1,000,000

MC38

Interest from savings deposit, BPI P50,000 20% P10,000

Interest under the expanded foreign 15% 11,250
currency deposit system 75,000
Interest on Government bonds 30,000 20% 6,000
Interest on 7-year deposit substitute 70,000
Gain from sale of bonds (maturity is
6 years) 5,000
Royalties on books, Philippines 100,000 10% 10,000
Royalties on Books, USA 30,000
PCSO and Lotto winnings 10,000
Prize in a literary contest he joined 100,000 20% 20,000
 Answer Key
Chapter 4. Individual Income Taxation

Prize received for achievement in

literature (did not join the
contest), 10,000
Dividends from BDO 40,000 10% 4,000
Dividends from Wal-Mart, USA Corp. 80,000
Tax informer's reward 500,000 10% 50,000
Winnings from illegal gambling 15,000 20% 3,000
Total P114,250

MC39

Interest income from BPI - Recto Branch

P62,000 20% P12,400
from checking account
Interest income from BDO – Intramuros
38,500 20% 7,700
Branch from savings deposit
Interest income from PNB – Araneta
Branch from foreign currency
42,000 15% 6,300
deposit account Under the expanded
currency deposit system
Interest income from dollar deposits on
Bank of New Jersey in the United 130,000
States
Interest income from the promissory
58,400
note of Mr. X, Philippines
Interest income from the promissory
62,000
note of Mr. X, United States
Yield from deposit substitute,
87,000 20% 17,400
Philippines
Interest Income from Philippine
21,000 20% 4,200
government securities
Interest income from long-term deposits,
57,000
Philippines
Interest income from long-term deposits,
62,500
Egypt
Royalties from books, Philippines 16,000 10% 1,600
Royalties from paintings, Philippines 60,000 20% 12,000
Royalties from musical compositions,
50,000
Japan
Total P61,600
Answer Key
Chapter 4. Individual Income Taxation

MC40

Informer’s Reward, limit P1,000,000

Multiply by 10%
Final Tax P100,000

Informer’s reward is equivalent to 10% of the revenues, surcharges or fees

recovered and/or fine or penalty imposed and collected or P1,000,000 per
case, whichever is lower.

MC45

Capital gain P320,000

Multiply by 15%
Final Tax P48,000

MC46

Net Capital Gain P360,000

Multiply by 15%
Final Tax P54,000

MC47

Presumed gain (P1,500,000 + P5,000 x 500) P4,000,000

Multiply by 6%
Capital Gains Tax P240,000

MC48

Total Capital Gains Tax (P6,600,000 x 6%) P396,000

Multiply by: Unutilized Amount/Total Proceeds 2/6
Capital Gains Tax P132,000

MC49

Presumed gain P12,000,000

Multiply by 6%
Capital Gains Tax P720,000

The sale of residential land, not family home, does not qualify for a full or
partial exemption.
 Answer Key
Chapter 4. Individual Income Taxation

MC50

Gain from sale of office equipment P20,000

Gain from sale of land not used in
300,000 6% P18,000
business (selling price of P300,000)
Gain from sale of shares of stock directly
50,000 15% 7,500
to the buyer

Gain from sale of shares of stock

through the stock exchange (selling 10,000
price, P200,000)
Bad debt recovery 50,000
Total P25,500