QUIZ 4 – GROSS INCOME

Question 1: Who among the following is non-resident alien engaged in the Philippines for income tax
purposes?
o Carl – Russian, came to the Philippines for a Philippine Company. Length of stay is 187 days.
o Jisryl – French, came to the Philippines for a Philippine Company. Length of stay is 180 days.
o Lyndon – Nigerian, came to the Philippines to work with the functions of a public office. Length of stay is
183 days.
o Sean – Canadian, came to the Philippines to work with the functions of a public office. Length of stay is
180 days.
o Daniel – American, came to the Philippines without specific purpose. Length of stay is 200 days.

 All of them are considered as non-resident alien engaged in trade.: 9 No (20.5%)

 Only Carl, Lyndon and Daniel.: 30 Yes (68.2%)
 All except Jisryl.: 4 No (9.1%)
 Only Lyndon and Dan.: 1 No (2.3%)

See discussions and lecture materials.

Question 2: Who of the following individual taxpayers is taxable on income within and outside?
 Pedro, a native of Bacolod City, working as overseas contract worker in Iraq.: 6 No (13.6%)
 George James, naturalized Filipino citizen and married to a Filipina. He had been living in Pampanga
since 1990.: 34 Yes (77.3%)
 Pao Gasul, Spanish citizen, a resident of Madrid, Spain, spent a one week vacation in Boracay.:
0 No (0.0%)
 Lee Min Ho Yo, Korean singer, held a 3-day concert in Manila.: 4 No (9.1%)

Explanation: Only resident citizens are taxable for their incomes within and outside the
Philippines. George is a naturalized citizen and had been living in Pampanga, hence resident
citizen.

Question 3: Bonito, non-resident citizen, arrives in the Philippines on July 1, 2015 to reside here
permanently after working as a professional boxer in the United States of America (USA) for many years.
For income tax purposes, he will be classified as:
 Resident citizen for the whole year of 2015: 1 No (2.3%)
 Non-resident citizen for the whole year of 2015.: 8 No (18.2%)
 Neither resident nor non-resident citizen for the year 2015.: 2 No (4.5%)
 Non-resident citizen for the year 2015 with respect to his income derived from sources abroad from
January 1, 2015 until the date of his arrival in the Philippines.: 33 Yes (75.0%)

Explanation: His income will be divided according to his proper classification. Hence, he will be
considered as non-resident citizen from January until July 1, 2015, after which, he will be
classified as resident citizen. Also, take note that there is an intention to permanently reside here
in the Philippines.

Question 4: The test in determining whether rent income is classified as “income within” or “income
without” is the:
 Residence of the lessor: 19 No (43.2%)
 Place where the property is located: 20 Yes (45.5%)
 Residence of the lessee: 3 No (6.8%)
 Place where the contract is perfected: 2 No (4.5%)

See discussions and lecture materials.

Question 5: It is important to know the source of income for income tax purposes, i.e. from within or
without the Philippines because:
 The Philippines imposes income tax on income from sources within and without of a non-resident citizen.:
4 No (9.1%)
 Some individual taxpayers are citizens while others are aliens.: 5 No (11.4%)
 Separate graduated rates are imposed on different types of income.: 8 No (18.2%)
 Some taxpayers are taxed on their worldwide income while others are taxable only upon income from
sources within the Philippines.: 27 Yes (61.4%)

Explanation: It is important that we know the proper classification of the taxpayer because not
everyone is taxed globally, meaning for his incomes derived within and outside. Remember, only
resident citizens are taxable for their incomes within and outside the Philippines.
 Question 6: Which of the following items is subject to income tax?
 Actual damages awarded by the court representing hospitalization expense of a vehicular accident
victim.: 10 No (23.3%)
 Termination pay received by an employee due to job-related sickness.: 5 No (11.6%)
 Compensatory damages awarded by the court for loss of income during period of disability.:
21 Yes (48.8%)
 Holiday pay, overtime pay, nightshift differential pay and hazard pay of a minimum wage earner.:
7 No (16.3%)

Explanation: Damages awarded to victims are not normally subject to tax. In fact, they are
exempted, provided that these damages awarded are for compensation to the damage or harm
done to the victim such as loss of legs or disability.

But if the damages awarded to the victim is for the loss of income or his capacity to earn income,
then such damages are taxable because they are actually a compensation to the income lost.

For example, if the Court awarded the taxpayer an amount of P 100,000 as a compensation to the
amount he paid for hospitalization, and another amount of P 200,000 as a compensation to the
harm done to him, these damages are non-taxable because they do not represent income, but
rather a compensation to an actual damage.

Another example, if the Court awarded the taxpayer an amount of P 500,000 as a compensation to
the income lost while he was hospitalized, then such income is taxable because it is a
compensation to the income lost, and not to the damage or harm done.

Question 7:
Thea Queen, a government employee, had the following data in 2019: (Figures below are annualized.)

Amount

Basic salary P 345,438.24

Overtime pay 2,450.35

13th month pay 38,949.00

Other benefits 76,507.00

Personnel economic relief allowance 5,000.00

SSS, PHIC and Pag-IBIG Contributions 15,549.76

Total amount of taxes withheld 17,046.40

The net taxable compensation income of Thea is:

 P 357,794.83 : 30 Yes (68.2%)

 P 338,298.08: 4 No (9.1%)
 P 407,349.19: 7 No (15.9%)
 P 368,400.19: 3 No (6.8%)

Solutions: The amounts are already expressed in annual so we don’t have to multiply by 12
months.

Basic salary P 345,438.24

Overtime pay 2,450.35
13th month pay 38,949.00
Other benefits 76,507.00
Personnel economic relief allowance 5,000.00
Total Compensation Income P 468,344.59
This amount includes both taxable
Less: Non-taxable Income and non-taxable components.
PERA ( 5,000.00)
13th Month Pay P 38,949.00 The taxpayer is a government
Other benefits 76,507.00
Total 13th Month P 115,456.00 employee, hence the PERA is
Maximum Limit ( 90,000.00) ( 90,000.00) exempt.
Total Taxable Compensation Income P 373,344.59
Less: SSS, PHIC and Pag-IBIG ( 15,549.76)
Net taxable compensation income P 357,794.83
The maximum non-taxable
amount for 13th month pay and
other benefits is only P 90,000.
Thus, we can only deduct to the
extent of such amount.
 Question 8:
Thea Queen, a government employee, had the following data in 2019: (Figures below are annualized.)

Amount

Basic salary P 345,438.24

Overtime pay 2,450.35

13th month pay 38,949.00

Other benefits 76,507.00

Personnel economic relief allowance 5,000.00

SSS, PHIC and Pag-IBIG Contributions 15,549.76

Total amount of taxes withheld 17,046.40

The total non-taxable compensation income of Thea is:

 P 90,000: 16 No (38.1%)
 P 95,000: 2 No (4.8%)
 P 110,549.76: 17 Yes (40.5%)
 P 136,005.76: 7 No (16.7%)

Solutions:

Basic salary P 345,438.24

Overtime pay 2,450.35
13th month pay 38,949.00
Other benefits 76,507.00
Personnel economic relief allowance 5,000.00
Total Compensation Income P 468,344.59
Less: Non-taxable Income
PERA ( 5,000.00)
13th Month Pay P 38,949.00
Other benefits 76,507.00 These are the only non-taxable
Total 13th Month P 115,456.00 amount. Hence, P 110,549.76.
Maximum Limit ( 90,000.00) ( 90,000.00)
Total Taxable Compensation Income P 373,344.59
Less: SSS, PHIC and Pag-IBIG ( 15,549.76)
Net taxable compensation income P 357,794.83

Question 9:
Oliver Queen is resident of Cebu. He is engaged in merchandising business. For the year 2018, the
accounting records of Oliver reveals the following information:

Sales to various clients P 1,670,000

Discounts granted to customers, only 50% were availed 75,000

Beginning Inventory balance on January 1, 2018 120,000

Ending Inventory balance on December 31, 2018 170,000

Total purchases during the year 1,130,000

Freight paid by the suppliers on behalf of Oliver, reimbursed by Oliver 35,000

Cost of defective inventory returned to suppliers 42,000

Expenses claimed by Oliver during the year 400,000

 Compute the gross income of Oliver.
 P 159,500: 3 No (7.0%)
 P 559,500: 26 Yes (60.5%)
 P 552,500: 6 No (14.0%)
 P 517,500: 8 No (18.6%)

Solutions:

Sales to various clients P 1,670,000

Less: Discounts granted to customers, only 50% were availed (75,000 x 50%) ( 37,500)
Net Sales P 1,632,500
Less: Cost of Goods Sold

Beginning Inventory balance on January 1, 2018 120,000

Add: Total purchases during the year 1,130,000
Add: Freight paid by the suppliers but reimbursed by Oliver 35,000
Less: Cost of defective inventory returned to suppliers ( 42,000)
Cost of Goods Available for Sale 1,243,000
Less: Ending Inventory balance on December 31, 2018 ( 170,000)
COST OF GOODS SOLD 1,073,000 ( 1,073,000)
Gross Income 559.500

Question 10: At the birthday party of Matthew, Julie was requested to sing the theme song of the movie
“Casper” – “Remember Me This Way”. Matthew was so delighted that he feels he is falling in love with
Julie, so he decided to cancel Julie’s indebtedness to him. As a result,
 Julie realized a taxable income as compensation for services.: 10 No (22.7%)
 If Julie accepts the cancellation, she will pay donor’s tax.: 3 No (6.8%)
 Julie received a gift from Matthew, and therefore not part of her taxable income.: 29 Yes (65.9%)
 The amount of indebtedness cancelled is partly taxable, and partly exempt.: 2 No (4.5%)

Explanation: The cancellation of indebtedness is not an income in this case, because Julie was
only requested to sing. She was not compelled to sing as a condition to cancel her indebtedness
to Matthew. However, this may be considered as an income if and only if, it was known to Julie
beforehand, and that it was agreed upon themselves, as a condition for cancellation that Julie
should sing.

Question 11: KZ, a CPA and a practicing consultant, has among her clients a mining company which
regularly pays her a monthly retainer of P 25,000. In order to reduce her income tax liability, KZ arranged
for the retainer to be paid to her brother, Dan, whose name is reported in the payroll of the mining
company as the payee. This year, KZ’s gross income from her consultancy office, exclusive of the P
25,000 monthly retainer fee is P 1,500,000. What should be the tax treatment of the P 25,000?
 It should be reported as part of Dan’s compensation income since his name appears in the payroll of the
mining company.: 10 No (22.7%)
 It should be reported as part of KZ’s income because it was her who rendered the service and not her
brother, Dan.: 24 Yes (54.5%)
 It must be divided equally between KZ and Dan, thus taxable on their individual capacity to the extent of
their respective share since the two.: 3 No (6.8%)
 The P 15,000 may be deductible by KZ as part of her expenses if the brother rendered the service for her
and the payment was the monthly retainer from the mining company.: 7 No (15.9%)

Explanation: This is a form of tax evasion. The taxpayer earning such income must be the one to
report the same.

Question 12: Lylia was hit by a wayward bus while on her way home. She survived but had to pay P
150,000 for her hospitalization. She was unable to work for six (6) months which meant that she did not
receive her usual salary of P 20,000 a month or a total of P 120,000. She sued the bus company and was
able to obtain a final judgment awarding her P 150,000 as reimbursement for her hospitalization, P
60,000 for the salaries she failed to receive while hospitalized, and P 250,000 as moral damages for her
pain and suffering. She was able to collect in full from the judgment. How much income did she realize
when she collected from the judgment?
 P 460,000: 15 No (34.1%)
 P 120,000: 15 Yes (34.1%)
 P 250,000: 12 No (27.3%)
 P 400,000: 2 No (4.5%)

See discussions on Question 6.

 Question 13: All of the following items are sources of income except:
 Capital: 6 No (13.6%)
 Sale or exchange of assets: 1 No (2.3%)
 Labor: 1 No (2.3%)
 Life insurance proceeds: 36 Yes (81.8%)

See discussions and lecture materials.

Question 14: Which is not an income?

 Gain from labor: 1 No (2.3%)
 Return of capital: 40 Yes (90.9%)
 Gain derived from sale of asset: 2 No (4.5%)
 Gain from capital: 1 No (2.3%)

Explanation: A return of capital is not an income. See discussions.

Question 15: Gross income is reported partially in each taxable year in proportion to collections made in
such period as it bears to the total contract price refers to:
 Installment reporting method: 27 Yes (62.8%)
 Accrual method: 2 No (4.7%)
 Crop year basis: 2 No (4.7%)
 Percentage of completion method: 12 No (27.9%)

Explanation: Installment reporting method reports income on the basis of collections extended
over several periods.

Question 16: Julius owns a vacant parcel of land. He leases the land to Jam for ten years at a rental of P
100,000 per year, beginning 2017. The condition was that Jam will erect a building on the land which will
become the property of Julius at the end of the lease without compensation or reimbursement whatsoever
for the value of the building.

Jam successfully completed the construction of the building by November 30, 2017. Upon completion, the
building had a total cost of P 2,700,000, for which equates to its fair market value that time. By 2019, Jam
incurred significant amount of repairs cost for the building at an amount of P 320,000, which was properly
capitalized in the account of the building. However, in the year 2021, a destructive earthquake hit the area
and caused much damage to the building which cost another amount of P 300,000 for repairs, although
the insurance company gives P 200,000 reimbursement. A straight-line method of depreciation was used
for accounting purposes. At the end of the lease, the building is estimated to be only P 200,000 - its fair
market value.

What are the tax implications when the lease contract expires in 2027, and Julius becomes the owner of
the building?
 Julius would have an income of P 2,700,000 plus any subsequent costs capitalized because his
ownership over the property retroacted to the date beginning of the contract of lease.: 7 No (16.3%)
 The income realized by Julius at the time of the expiration of the lease would be the fair market value of
the building as reported for real estate tax purposes.: 16 No (37.2%)
 Julius will not realize any income at the end of the lease period because Carl transferred the building to
him without any consideration; therefore, it is a donation which is not considered as income.:
6 No (14.0%)
 Julius would have an income of P 200,000 because that is the fair value of the property at the time
ownership was vested to him.: 14 Yes (32.6%)

Explanation: In case of decreases or increases of the fair value of the leasehold improvement, the
lessor shall adjust the income reported on the basis of the fair value of the property at the end of
the lease contract. See lecture videos.

Question 17: This is a taxable income

 Retrenchment pay as a result of downsizing due to pandemic: 4 No (9.1%)
 SSS and GSIS benefits: 5 No (11.4%)
 Separation pay due to resignation: 34 Yes (77.3%)
 Refund of Philippine income tax: 1 No (2.3%)

Explanation: Separation Pays are not taxable if the cause of separation is involuntary. Resignation
is a manifestation of voluntary separation, unless there is a compelling reason resulting to such
resignation.

Question 18: Which of the following is taxable income?

 Amounts received as returns of premiums paid for an insurance.: 18 No (40.9%)
 Interest on Philippine Lotto winnings whose amount of winnings does not exceed P 10,000:
11 Yes (25.0%)
 Damages awarded as a consequence of a libel and slander suits: 8 No (18.2%)
 Prizes and awards as an awardee of Ramon Magsaysay Award Foundation: 7 No (15.9%)

Explanation: PCSO and Lotto winnings are taxable subject to 20% final tax, but if such amount of
winnings do not exceed P 10,000 such PCSO and Lotto winnings are exempt from tax. However,
choice B does not speak of the PCSO and Lotto winnings itself, but rather the interest on such
PCSO and Lotto Winnings. Thus, interests from such Lotto winnings are taxable. The principal
amount (P 10,000 PCSO lotto winnings) may not be taxable, but the interest is taxable.

Choice A is non-taxable is because these are returns of premiums paid (return of capital).
Choice C is also non-taxable because they are compensation on the moral damages or harm
done.
Choice D is exempt. See lecture videos and lecture materials.

Question 19: Advance rental in the nature of prepaid rental, received by the lessor under a claim or right
and without restriction as to use is:
 Taxable income of the lessor in the year received if he is on the cash method of accounting:
13 No (29.5%)
 Taxable income of the lessor in the year received if he is on the accrual method of accounting:
11 No (25.0%)
 Taxable income of the lessor in the year received whether he is on the cash or accrual method of
accounting: 16 Yes (36.4%)
 Taxable income of the lessor up to the amount earned in the year the rental is received: 4 No (9.1%)

Explanation: Lessors of property are engaged in servicing business, hence no matter the
accounting method, they shall report their incomes on cash basis.

Question 20: Which of the following items is not part of gross income to be reported in the income tax
return?
 Increase in value of land: 24 Yes (54.5%)
 Gambling winnings: 6 No (13.6%)
 Prize of P 10,000: 13 No (29.5%)
 Gain from sale of store’s air-conditioning: 1 No (2.3%)

Explanation: Increase in the value of land is an unrealized gains, and does not constitute actual or
constructive receipt of income. In accounting, these gains may be recognized as gains, but for
taxation purposes, these are not incomes.