EXERCISE ON

GROSS INCOME/DEDUCTIONS

1· OneI of the
_t
following does not fonn part f ·
o gross mcome.
a. nteres
b. Royalties
c. Annuities
d. Gift, Beqµest and devi'ses

2. In computing allowable deduction for purposes of in~ome

taxation:

I st Statement - Interest expense in connection with-the taxpayer's

business shall be reduced by an amount equal to thirty-eight
percent (33%) of interest income subjected to final tax.

2nd Statement - Interest incurred to acquire property used in

trade shall only be allowed to be treated as a capital expenditure.
a. True; False c. False~ True
b. True; True d. False; False

3. Patricia was injured in a vehicular accident in 2012. He incuITed

and paid medical expenses of PI 0,000 and legal fees of PS,000
. during that year. In 2016, he recovered P35,000 as settlement
from the insurance company which insured the car owned by
the other party involved in the accident. From the above
payments and transactions, the amount of income taxable to
P.atricia in 2016 is:
a. P20,000 C. P35,000 ·

b. P25,000 d. P 0

257
 'i gross IllCOtnc .
frl)tll I n case of sale of land under the agrar·· r
'\.I.' Illlkl . . 8. 1an re,orm 1aw:
. l!! i:- 1ll't '- · ~ ·cturn ot premium
. I e ll,I ll'" ti ~ . ·un:d as t
one ot t 1 . ·d hY tll~
4. (\.'\.'.l.'IH · 1s1 Statement - Interest earned b th ,
Y c owner/seller is exempt
a Anll)unts rol.'.ccd:- . 'SS income.
•· . -, . ,ur:1t1i.'.l' P . . _. ,, as s1ckn1.: .
b. Ltk 1. . ,n for 1nJll 11 '-·
11
,ral professional partnership 2nd Statement - Capital gain in the sale o·f th I d · bl
Co111pft1:-Jltl - )tllC of a gent • . ' e an 1s taxa e
I.'. . .
1 , nd 1nlt income
:i Sh:irc int ,1. .· I a. True; False
l · d
1·d de uc t,·011 , chat 1tab e and othei· c. False; True
·d '1'- :l \':J I b. True; True d. False; False
To be :il11.)\\I. • · '"-cecd: • · •
5. · 1..
1- , 11 t11ust ,wt t:. _ ,haritable contnbutton, mcorne
Cl'lltrtL'u t~ . l I' .nco111e atk1 c
~o ,1 l,t t:l'\3 1 t: I 9_ fn comp~1ting net income, no deduction shall in any case be
a. ~"f indi\·iduals . ~ after charitable contribution, in case allowed 111 respect to, except:
100o of taxable ,ncomt a. Personal, living or family expenses.
b. I
of individua s b f re charitable of contribution, in b. Any amount paid out for new buildings or for permanent
C :'I , o .
eo
-o, of taxable income improvements, or betterment made to increase the value of
· · · d. ,iduals. .' ·b · · any property or estate.
cast! ot 111 I\ . before charitable contn utton, 111
10% of taxable mcome c. Any amount expended in restoring property or in making
d. I
case of individua s. good the exhaustion thereof which an allowance is or has
. and hospitalization insurance shall be been made.
111
6. Premium paid for hea t .
d. Premiums paid on any life insurance policy covering the
allowed as a deduct'.on :d d es not exceed two thousand four life of any otliccr or employee, when the immediate family
a. The amount cla1me 0
hundred pesos (P2,400) per year. members of such employee are directly the beneficiary.
b Must be claimed by each spouse separately. .
. . f the family does not exceed two hund1ed 10. Losses from wash sales of stock or securities shall not be
c. Gross income o
fifty thousand pesos (P250,000). deductible except: '
d. None of the above. a. The taxpayer is a dealer of securities or stock and made in
the course of business of such dealer.
7. 1st Statement - The term quasi-banking activities me_
ans b._ The shares of stock sold and then reacquired or repurchased
borrowing funds from twenty or more persons at any one time are identical stock or securities.
through the issuance, endorsement or acceptance of debt c. The shares of stock sold and then 1'.eacquired within a period
instruments of any kind other than deposits. beginning thirty (30) days before the da te of such sa le or
disposition.
2nd Statement - Interest in government debt securities arc exempt d. The shares of stock sold and then reacquired within a period
income.
ending thirty (30) days after such sale or disposition .
a. True; False c. False; True
b. True; True d. False; False

258 259
I l
a ~v-
1
I
t I·on for pension payn1cnts 2ru1 Answer: No , If Mr. R was fo rced by th . .
aHowab Ie deduchose .
pension p
I
an that is
t _ The ly to t beyond Mr. R 's contro l. e corporati on to retire
s1 Staternen . only apP
11. 1 I ees w1 11 a. Both answer are wrong
to ernP 0 Y b. Both ans_w er are correct
funded. d duction is composed of the c. J answer !s correct, 2 nd answer is wrong
st
. tfUSt C
The pension ervice cost. st
d. I answer 1s wrong, 2nd answer is correct
2"d State~ent - t and the present s False; True
rv1ce cos c.
a. seTrue; f alse
past d . False·, False
1S. The widow of your best friend has just been paid p 1 000
000
b. True: True . s for the past 10 years. For on account of the life insurance of the deceased husb~nd. ' She
·
10busmes . . asks you whether she declare the amount the amount for income
(SFI) has been tablish a pension fund for Its tax purpose or for estate tax purposes.
12. SFI Inc, ?004. it decided to es f the fund are us follow : -
the year - rtiflent data o
employees. The pe ) P 1 000 000 lg Advice: The proceeds of life insurance paid to the beneficiary
sum payment , ' upon the death of the insured are exempt from income tax and
Past Service Cost_(lump 100,000
· Cost need not be declared for income tax purposes.
Present Service
. for pension cost SFI could
Jrui Advice: The proceeds of life insurance would have to be
How rnuch allowable deduction declared for estate tax purposes if the designation of the
beneficiary was irrevocable, otherwise it need not be declared.
claim? p 200,000
a. Both advices are correct
a. PI ,000,000 ~: p 100,000
b. PI ,100,000 b. 1st advice correct; 2 nd advice wrong
c. Both advices are wrong
· . b the allowable deduction
13. Assuming the same facts m num ~r 12 , d. 1st advice wrong, 2 nd advice correct
of SFI for pension after 10 years. p 200 000
a. Pl ,000,000 c. p 100,000 16. ABC Corporation took two keymen insurance on the life of its
b. PI ,100,000 d. ' President, Mr. X. In one policy, the benefi ciary is the corporation
to coµipensate it for its expected loss in case of death of its
. rporation and paid
14. Mr. R was retired by his emp_1oye~ co deduction for president. The other policy designates Mr. X 's wife as its
p I 000 000 as a retirement gratuity without any .c. 11 w1·ng irrevocable beneficiary.
' ' .
.withholding tax. The corporat10n became a b nkru Ptthe 10 o
·ty to
year. Can the BIR subject the Pl ,000, 000 re( irement gratu
1
Question I: Are the insurance premiums paid by X corporation
income tax? in both policies deductible?
Question 2: Will the insurance proceeds be treated as income
l fil Answer: Yes, if the retirement gratuity was pat.db a sed~ rved
on a
subject to tax by the corporation and by the wife?
reasonable pension wher.e Mr. R was 50 years old and has ~e
a. Yes to 1st and No to 2 nd questions·
the corporation for more than 10 years.
b. Yes to both questions

- 260 261
rW:
,.,.i l1ucstion . ·!9 Cash dividend n.: ccivccl by , N
. S J(llj '-'cs
I • to - • • , · c1 ON -RES
qucst1on- from a domestic corporati on is I DENT corporation
c No to 1
,1
. .
. b th qt11:st1on~ a. Exempt from income lax
d No to o b .
· . t·11·tn but due to us mess reverses b. Subject to final tax
,~ ·tuntu! . ,
·ked for a manu .11.. ~. ,dundancy program 111 order t c. Part of taxable income
I7. Awot - .1 , oluntary It: o
I firm otforcd , . ,~ Under the program, an employee d. Partly exempt, partly taxable ·
t 1e d e.\ pen~1.. ~- . . . . .
·educe o,erhea . , Id be u1ven sepatat10n pay equivalent
I - sw:n .,ou o f .
who ottered tL) re. ':"' _ for every year o service. A accepted
tl - basic ~a 1at)' . 20· Cash dividend
.
received by a do
. '
.
mest1c corp t·
to his 3 mon 1s - . d P800 000 as separat10n pay under the domestic corporation is ora ion from a
the offer an d r.:,cc1ve ployees ' who accepte d the offer were a. Exempt from income tax
fier all the em . .
program. A d ·t overhead still excessive. Hence it b. Subject to final tax
paid. 11el firm
1 foun , s .
ram where vanous unprofitable
,
c. Part of taxable income
d nother prog '
adopte 3 d As a result, B was separated from the d. Partly exempt, partly taxable
ents were c1ose - .
departm . d P800 000 as separation pay. At the time
- B also receive ,
sernce. . b h A and B have rendered at least 10 years of 21. Shares, obligations or bonds issued by a fi · .
of separat10n ot 55 years old while B was only 45 years old. • . . ore1gn corporation
sernce but A was shall be considered as mtang1ble personal · • .
·1 'f property situated m
the Phi s 1 , how many percent of its busi . .
As a result, . Phils? ness is 1ocated m the
a. Both amounts are exempt fr~m income tax
b. Both amounts are subjec~ to mcome tax a. 33% C. 75%
c. Only Mr. A js subject to mcome tax b. 50%
d. 85%
d. Only Mr. B is subject to income tax
. 22. If a. friend inquires whether or not the cos t of educat1onal
.
18. Which of the following expenses is deductible from gross assistance to the .employee and /or his dependents which are
. ? . borne by the employer be taxable. What will your answer be?
mcome. · ·1· h
a. Contribution to a newspaper fund for needy fami ies _w en
such newspaper organizes a drive solely for chantable FirS t Answer - A scholarship grant to the employee by the
purposes. l'fi employer shall not be treated as taxable frincre benefit if the
·b. Premiums paid by the self-employed employer for the I e education or study involved is directly con~ected with the
insurance of his employees . . ~mployer's trade, business or profession and there is a written
c. Contribution to the construction of a chapel of a umversity contract between them that the employee is under obli cration to
re · · · ::,
that declares dividends to its stockholders · d mam In the employ of the employer for a period of time that
d. Donation of prizes and awards to athletes in local a_n they have mutually agreed upon. ·
intemationalcompetitions and sanctioned by their respective ~cond Answer - The cost of educational assistance extended
sport associations. Yan employer to the dependents of an employee shall be treated
as taxable fringe benefits of the employee unless the assistance

262 263
- -
... ,coinp~titive scheme und er the
J b. Fixtures used in th e reta·I
1 store
. d thniU!.. 1
,.-as pro, ide it· the company. c. Inventory on hand at th d
e en of the
-hip pn.1£rat11 t d. Trade accounts receivable yea r
scho lars - . ·m: co~t
Both ans,, er.- '
a. _ . ~ ,\-rong
b. Both ans,~er.s ·,\·er i, correct 27 . A bought
ft
from XYZ Corp 1 000 h
h . , s ares of st k N.
c. Only the tirst adn~answ~r is correct tberea er t e corp
_ oration was ad · d oc , mety days
JU ged bank · .
d. Only the secon hi
was wort ess. The lose of A fio •
. r mcome tax
rupt and its stock
.
_ ne of the following statements is not a. Wagenng loss purposes 1s
__ ...,-1. taxable ) ear. 0
23. ..\s rt'g<ll u.~ b. Short term capital loss
corrc('t . the accounting period c. Long-term capital loss
a. The ta.x3ble ~ear I~aybe less than 12 months. d. Non-deductible loss for income t
)ear 1 ax purposes
b· The taxable bl
• · b ·
of a sole propnetorsh1p usmess maybe
c. The ta.xa e year
fiscal or calendar year . 28. Any amount subsequently recei ved on
ar of a domestic corporation maybe fiscal or previously charged off and allowed as adccdount_of a bad debt
d. Toe taxa bl e ye . ti · a e uction from gros
mcome or pnor years must be included · . s
calendar year. · · bl · . m gross mcome for
the taxa e year m which received. This is
_Which of the following taxes maybe deducted from gross a. End-result doctrine
24 b. Destination of income test
income:
c. Severance theory
a. Special Assessment
b. Transfer tax d. Equitable doctrine of tax benefit
c. Documentary stamp tax
29. Which of the followinoo statements on ta x exempt'10ns 1s
. not
d. Income tax correct:
25. All of the following taxpayers are not entitled to tax credit, · a. When ~n electric light and power franc hise holder is exempt
except under its franchise from property tax on its poles, wires
a. Resident citizen with income only from the Phils an~ tr~nsformers, its exemption does not extend to the VAT
b. Resident citizen with income only from abroad of its importation of said articles.
c. Resident alien with income from within and without the b. Where a taxpayer receives as payment for the land
Phils expropriated by the government tax exempt bonds, such
d. Non-resident citizen with income from within and without tax exempt bonds should be included in the total p1ice to
the Phils determine correct taxable profit therefrom
c. The salaries of the justices of the Supreme Court are exempt
26. A operates a retail store and owns the following properties. from income tax
Which_of_the following is capital assets in the hand 6f A d. Exemption granted to cooperatives does not extend to be
a. Bmldmg which houses the retail store members thereof in the sale of their products

264 265
 C

t
. diner::, teacher
out:,tan · in her
· region · 35 · Noel ·Santos is a very brigh{ comp t .
d as the mos I school princtpal without her b H u er science graduate He
se\ecte . d by t 1e d - was hired y ewlett Packard . To entic h. ·
30. A was . s sub1111tte I nd a cash awar ot p I 5,Ooo h
for employment, e was offered the e Im to accept the offer
Her name wa ·ved 3 trop 1y a . • arrangement that part of
She rece1 his compensation would be an insurance p0 1. . h
knowledge. . . icy wit a face value
Taxable income . of P20 Mil hon . The parents of Noel are m d h . .
a. . fin aI ta:x . . . a e t e 6enefic1anes
of the msurance policy. Will the proceeds ofth · .-
b. Subject to .
from income
tax . e msurance LOnn
Exempt artlY exempt P art of the mcome of the parents of Noel a d b .
income tax.? n e su6~ect to
~-- Partly taxable. p
ble gain or loss a. Yes, the proceeds of the insurance fonn part of the gross
. ,, di not result to a taX~ of its shares of stock from the income of the parents of Noel and be subject to income tax.
31. Th is a corporation
a The sale by .t par or stated value. b. Yes, the proceeds of the insurance fonn part of the income
. ed tOck over l s k .
unissu s . of its treasury stoc O\'er its cost 1 of the parents of Noel and be subject to final withholding
b The sa Ie by
a corporation ... · tax.
• . of acqms1t1on .
or other basis . nt by a corporation of its bonds c. No, the proceeds of the Life insurance do not fonn part of
base and retireme
c. The pure the issue price or face value. the gross income being exclusion therefrom.
at a price less than tion of its bonds at a premium. d. No, the proceeds of the insurance do not fonn part of the
d. The issuance by a corpora .
gross income of the parents of Noel being irrevocable
. d es not represent compensation beneficiaries.
32. Which of the followmg o
income? 36. Pursuant to the preceding question, can the company deduct
a. Honorarium as a guest speaker from its gross income the amount of the premium?
b. Emergency leave pay a. Yes, the premium may be deducted from the company's
Vacation and sick leave pay . .. , gross income for it is an on:linary and necessary expense.
~-- Gratuito:us condonation of obhgation .
b. Yes, the premium may be deducted from the company 's
gross income if the intended beneficiaries are the immediate
33. One of the following is not subject to final tax
I family members of Noel Insured.
a. Interest on savings deposit
I

c. No, the premium may not be deducted from the company's

b. Royalties
gross income because the company was not m~de the
c. Prizes amounting to more than Pl0,000
beneficiary of the insurance proceeds.
d. Professional fees paid to individuals
d. No, the premium.may not be deducted from the company's
34. Gain on sale of domestic shares of stock in New York is gross income· because it is not ordinary and necessary
a. Income within the Phils expenses of the business.
b. Income without the Phils
c. Income party within and without
d. Exempt from income tax

266 267
 37.
What are the r
9
. ss expense to be deductible ,
. of bus1ne
equis1tes
.
a. P27,000
b. P33 ,000 C. P60,000
d. p 0
7
I
except . . and necessa_ry. h taxable year;
Qrd1naf)' ' d wit111n t e . . 42. In a year, AB~ Corp. pai? total premiums of Pl ,000 for the life
a.
b.
Paid or incurre ·t1 official receipts, insurance policy of the vice president where the fi • .
. ted w1 1 . , 6ene 1c1ary ts
c. Subsrant1a nable. the corporat10n. At the end of the year, ABC received dividend
Must be reaso . of p 100 because of t_he policy. The corporation should indicate
d. • ·f non-taxable compensation for a claim for a deduction for life insurance premium of
. examples 0
~ 8 The fo llowing are a. p 1,000 C. p 1,100 • .
., · - ·wies. except. . ·uries suffered. b. P 900 d. Zero
inJ Actual darnag es for lllJ c: r unreahze
· · d pro fit
1 s. ·
a. damages io . 1 ffi .
b Compensatory . f anxiety and phys1ca su enngs 43_ The maximum 13th month pay that can be claimed?
. Moral damages for gne '
a. 50,000
c.
d. Exemplary darnages . b. 82,000
ble deduction for P8,000 contribution c. 90,000
th
39_ \Vbat would b~ e al~~wa to a religious organization from his d. Any amount equivalent to 1/12 of annual salary
d by a resident citizen . . ? .
ma e . ft r contnbution.
P70,000 net mcome a e c. - P7,800
44. Mr. A, resident alien adopted a child in USA. Mr. A personal
a. P8,000 d 3 500 exemption is:
b. P7,000 . '
a. 50, 000 C. 100,000

b ght con.domimum . . un·i·t under installment basis, to •be b. 75, 000 d. Zero
40. A ou . a ffi . th practice of his profession and paymg
used as his o ice m e . oses the P 10,000
Pl0,000 monthly. For mcome tax purp ' 45. Mr. B resident citizen, send his child to USA for the latter 's
monthly payment shall be . high school studies. Mr. B personal exemption is:
a Treated as business rental, hence deductible 'bl a. 50, 000 C. 100,000

b·. Treated as capital expenditure, hence not ded~ctI e b. 75, 000 d. Zero
c. Treated as depreciation expense, hence deductible
d. Treated as ordinary business expense 46. An individual and a corporation sold shares of stock not listed
nor traded in the local stock exchange, held as capital asset, on
41. A domestic corporation made a borrowing . from ABC bank of the net capital gain there shall be a tax of?
h . . . d
t ereby mcurrmg a busmess connecte m eres . t t expense the a. Gain of first I 00 000 there shall be levied 5% tax and in
'
P60,000 for taxable year 2016. During the same yea:, the excess thereof 10% tax.
corporation earned an interest income subject to final tax in b. Unifonn tax 15%
amount of Pl00,000. The deductible interest is c. 6/10 of 1% of selling price.
I
d. Net income tax
I
I
I I
I I

~~ ~-- --
, I 268 269
I'
I!
 47. Special treatn1ent of fringe benefit is
a. Tax of 32~'<> and grossed-up rate of 68°/o
b. Tax of 15% and grossed-up rate _o f 85 %
c . Tax of 25 % and grossed-up rate of 75%
d. Tax of 35 % and grossed-up rate of 65%

48. A GPP may claim OSD and its partner may claim OSD.

A GPP may ·c1ai1n OSD and its. partner n1ay clain1 OSD on his
own income only.
a. True, True
b. True. False
c. False, True
d. False, false

49. Which is the most important infom1ation in the ITR?

a. - PersonaVCorporate profile and infom1ation
b. Gross Income
c. Allowable Deductions
d. Taxable Income
e. Tax Due

50. The certificate of withJ1olding tax duly sta1nped "received', by

the BIR shall be tantan1ount to the substituted filing of ITR of
employees. ·

The certificate of withholding tax duly stamped '~received,' by

the BIR shall be tantamount to the substituted filing of lTR of
self-employed.
a. True, True
b. True, False
c. False, True
d. False, false

270
 ·ANSWER KEY
ON
GROSS INCOME/DEDUCTIONS

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

271
/ ·