12.

a
.

Under Outright Method, the lessor is required to report as income the fair
market value of the improvement at the time of completion. Thus, she has to
report an income of P100,000 on the leasehold improvement and P48,000
(P4,000 x 12) on the rent, or a total amount of P148,000.

b. Rent (P4,000 x 12)

Add: Income on leasehold improvement
Cost of improvement
Less: Accumulated depreciation
(100,000/25 x 18.5)
Book value, end of lease
(26,000 / 18.5 x )
c
.

P 48,000
P 100,000
74,00
0
26,000
703
48,703

Rent ( 4,000 x 6)

24,000

Leasehold improvement:
Cost
Less: Depreciation (7/1/09 6/30/10)
(100,000 / 25)
Book value upon termination
Less: Amount already reported as
income
Income of lessor in 2013

P 100,000
4,0
00
96,000
703

119,297

3-3. TAX BENEFIT RULE

3ANSWER: B
3.1:
Case 1 P 40,000
Case 2 - 20,000
Case 3 - 40,000
Case 4 70,000 (85,000 15,000)
33.2:

(1) ANSWER: D
Gross profit

800,0
00
30,00
0
830,00
0

Add: Bad debts

recovered
Total
Less: Accounts writtenof
Deductible
expenses
Net income before
income tax

50,000
440,000

95,297

490,00
0
340,00
0

33.3:

(2) ANSWER: D
Gross income before
taxes
Less: Deductible taxes
Amusement tax
Local business
taxes
Net loss

P
90,000
P 80,000
40,000

120,00
0
( 30,00
0)

ANSWER: B
Amusement tax
Local business taxes
Taxable income

80,0
00
8,500
88,500

EXERCISES 3 3.4. MULTIPLE CHOICE

THEORY
1.

ANSWER: C
This is an application of the tax benefit rule. Under this
principle, the recovery of bad debt previously deducted is taxable if at
the time it was claimed as deduction, there was a corresponding
reduction in the income tax liability of the taxpayer.

2.

ANSWER: C
See the explanatory notes in No. 11 above on tax benefit rule.

3.

ANSWER: D
The capital gains tax is an income tax, while the tax paid on inter
vivos donation is a donors tax. These taxes, including the value-added
tax, are not deductible from gross income from purposes of computing
the income tax. Thus, the refund received from these taxes are not
subject to tax.
The community tax paid by a corporation is a deductible item
from gross income. Hence, a refund received is taxable.

EXERCISE 3-4
34.1:
1.

LEASEHOLD
IMPROVEMENT
ANSWER: B

Cash received
Tax paid by lessee
Income to be reported in 2011

120,000
3,000
123,000

The lessor shall apply cash method on prepayment of rental even if it is

using accrual method of accounting.
2.

3.

ANSWER: D
Rent income (5,000 x 12)
Leasehold improvement
Tax paid by lessee
Income to be reported under outright
method
ANSWER: A
Rent income
Tax paid by lessee
Leasehold improvement:
Cost
Less: Accumulated depreciation
(1,800,000/30 x 17.5)
Book value, end of lease
(750,000/17.5) x 6/12
Income to be reported under spread-out
method

4.

60,000
1,800,000
3,000
1,863,000

60,000
3,000
1,800,0
00
1,050,0
00
750,00
0
21,429
84,429

ANSWER: C
Efective January 1, 2014, the land and the building shall be exempt from real
estate tax because it is now being used actually, directly and exclusively for
educational purpose.
All assessments or reassessments made after the 1 st day of January of any
year shall take efect on the 1st day of January of the succeeding year (Sec. 221,
Local Government Code of 1991).

5.

6.

ANSWER: B
Rent expense
Depreciation (1,800,000/17.5)
Deductible expense
ANSWER: B
Cash received
Leasehold improvement (750,000/17.5)

60,000
102,857
162,857
60,000
42,857
102,857

Note:
No real property tax will be shouldered by the lessee starting 2014 because
the land and the building shall be exempt from real estate tax considering that it

is now being used actually, directly and exclusive for educational purpose.
7.

ANSWER: C
Cash received (5,000 x 3)
Leasehold improvement:
Cost

15,000
1,800,0
00

Less:
Accumulated
depreciation
(1,800,000/30 x 3.75)
Book
value
upon
termination
Less: Amount declared as
income
2013
2014
2015
2016

225,00
0
1,575,0
00
21,429
42,857
42,857
42,857

150,0
00

Total

1,425,000
1,440,000

EXERCISE 3-4.2:
1.

ANSWER: A
Rent (2,000 x 12)
Leasehold improvement
Income using outright method

2.

ANSWER: C
Rent (2,000 x 12)
Leasehold improvement:
Cost
Less: Depreciation for 9 years
(1,000,000/20 x 9)
Book value, end of lease
Annual income (550,000/ 9
years)
Income under spread-out method

3.

24,000
1,000,000
1,024,000

24,000
1,000,0
00
450,0
00
550,00
0
61,111
85,111

ANSWER: C
Annual income reportable
61,111
x No. of years of reporting
____1
Loss incurred by Bryant
61,111
Note: It is presumed that Bryant had already reported his entire income on
leasehold improvement for the taxable year 2015 but not his income
from January to February 28, 2016.

EXERCISE 34.3:
ANSWER: B
Rent income
Income on leasehold improvement:
Cost of improvement
Less: Depreciation for 15 years
(600,000/30 x 15)
Book value, end of lease
Divide by remaining term of lease
(years)
Annual income to be reported

36,00
0
600,0
00
300,000
300,000
15 20,000
56,000

EXERCISE 34.4
1. ANSWER: A
The income from rent received by Vic is taxable to him, while the amount
given as loan is not because there was no gain realized by Vic in this
transaction. As a matter of fact, there was no gain realized whether as
payment for services, interest or profit from investment.
2.

ANSWER: C
Cost of improvement
Less: Depreciation for 8 years (2,000,000/50 x
8)
Book value, end of lease

P 2,000,000
320,000
1,680,000

Rent income
Income from leasehold improvement
(1,680,000 / 8)
Total income using spread-out method
3.

P 10,000
210,000
220,000

ANSWER: D

EXERCISE 3-5
EXERCISE 35.1:

1.

ANSWER: D
Value of promissory note
Less: Discount (120,000 x 20%)
Taxable income, 2011

2.

P
120,000
24,000
96,000

ANSWER: D
Discount
Less: Income to be reported in 2012 (24,000
x 50%)

24,000
12,000

Taxable income, 2013

12,000

EXERCISE 35.2:

1.

ANSWER:

Value of promissory note

Less: Discount (P50,000 x 25%)
Taxable income, 2013
2.

P
50,000
12,500
37,500

ANSWER: B
Value of promissory note
Less: Amount already declared as income
Taxable income, 2014

P
50,000
37,500
12,500

EXERCISE 35.3:

1.

ANSWER: C
Payment for services rendered by promissory note which can be
discounted, is taxable to the payee at its fair discounted value.

EXERCISE 3-6. MULTIPLE CHOICE

1.

ANSWER: B
A schedular system of taxation is a system employed where the income
tax treatment varies and is made to depend on the kind or category of taxable
income of the taxpayer. It is distinguished from global system in the sense that
the latter is employed where the tax system views indiferently the tax base
and generally treats in common all categories of taxable income of individual
(Tan vs. Del Rosario, 237 SCRA 324, 331).

2.

ANSWER:

Dividends received by a domestic and resident foreign from a domestic

corporation are not subject to income tax.
Dividends received by a resident citizen from a domestic corporation are
subject to a final tax of 10%.
Dividends received by a domestic corporation from a foreign corporation
are subject to ordinary income tax.
3.

ANSWER:

Winnings in lotto are tax exempt.

4.

ANSWER: C
Value-added tax, other percentage taxes and excise tax on certain goods
are taxes found under Titles IV, V and VI, respectively of NIRC, which contain
the provisions on business taxation; whereas, income taxation is discussed in

Title II of the same code.

5.

ANSWER: B
The amount of P3,000 raised by Mon is a gift which should be excluded
from gross income because when a financial aid is asked, that means that
there is no legally demandable obligation on the part of other people to give
him money.

6.

ANSWER: D
Income refers to earnings, lawfully acquired, without consensual
recognition, express or implied of an obligation to repay and without
restriction as to their imposition (James vs. US, 366 US 213).

7.

ANSWER: C
The amount received by Ceidi and Ador fall within the ambit of income
from whatever source derived because these are income not expressly
excluded or exempted from the class of taxable income.
The above phrase is so broad that it includes all income not expressly
excluded or exempted from the class of taxable income, irrespective of
voluntary or involuntary action of the taxpayer in producing the income
(Gutierrez vs. CIR, CTA Case No. 65).

8.

ANSWER: D
The amount of indebtedness cancelled due to services rendered by the
debtor is considered as compensation income. It is just like paying an
employee by an amount equivalent to the services he had rendered to his
employer-creditor.

9.

ANSWER: C
The money value of accumulated leave credits not exceeding 10 days is
not taxable to the employee.
Travelling expenses received by an employee who was sent on a business
trip are not taxable to the employees provided that these employees are
required to liquidate said expenses.
Tips received by waitresses directly from customers which are not
accounted for by the employer to the employer are considered taxable income.

1
0

ANSWER: D
If a corporation to which a stockholder is indebted forgives the debt, the
transaction has the efect of a payment of dividend (Sec. 5, Rev. Regs. No. 2).

1
1

ANSWER: B
The money given to Lazaro is a remuneratory donation.
income, subject to income tax.

It is deemed an

1
2

ANSWER: C
Tips
Liability condoned after rendering service
Taxable income

1
3

5,000
25,000
30,000

ANSWER: A
Selling price (115 x 200)
Less: Cost (100 x 200)
Gain on sale

23,000
20,000
3,000

Date
Shares Cost
per share
1-24-2008
200
P
100
2-05-2008
200
110
4-12-2008 (400 x 5%) 20
420
New cost per share (42,000/420)
P 100
1
4

ANSWER:

Total Cost
P 20,000
22,000
-- .
42,000

Selling price (115 x 200)

Less: Cost (95.23 x 200)
Gain on sale
No. of Shares
Date
Old
New

23,000
19,046
3,954
New Cost
per Share

Cost
1
5

1-24-2008
P20,000
ANSWER: C

200

210

Market value of shares - Mina

Company
x No. of Common shares
Property dividend
1
6

120
150
18,000

ANSWER: D
Market value of stocks dividends per
share
Stock dividend received by Rosa (1,000 x
20%x10%)
Dividend income

P 95.23

ANSWER: A

30
20
600

7
Selling price (30 x 25)
Less: Cost (5,000/125) x 25
Loss

750
1,000
( 250)
Amount

Number
Shares

P 5,000

100
Dividend (100 x 25%)

25
Total

5,000

125
1
8

ANSWER: D
Sale of dividends (P60 x 40)
Less: Cost
200
P55)
20
20%)
220

2,400
(200 x
(200 x

11,0
00
-- .
11,00
0

(11,000/220) x P40

2,000
400

Gain on sale
1
9

ANSWER: A
Total sale (P400,000 + 50,000)
Less: Cost
Book value of farm equipment
Gain on sale
Add: Other income
Gross income

450,000
240,00
0
35,0
00

275,000
175,000
12,500
187,500

EXERCISE 3 -7.
Yes. It is part of Javiers gross income falling within the ambit of the income
from whatever source derived which includes all income not expressly excluded
or exempted from the class of taxable income, irrespective of the voluntary or
involuntary action of the taxpayer in producing the income.
The phrase includes also proceeds of stolen or embezzled property or gains
derived from illegal source. Thus, assuming that the Mellon Bank fails to recover
the money, it shall be taxable to Javier

EXERCISE 41. CROSSWORD PUZZLE

2

E
R

&

I
N

G
3

EXERCISE 4 - 2
1

11

12

13

14

10

15

EXERCISE 4-3

1
.

a
.
b
.
c
.
d
.
e

Interest on corporate
bonds
Salary

- Taxable

Tips

- Taxable

Winnings in lotto

- Not taxable (expressly exempt under

the law)
- Taxable (income from whatever source

Winnings in jueteng

- Taxable

.
f.
g
.

Money stolen from

mothers purse
Rice subsidy of P325 per
month

derived)
- Taxable (income from whatever source
derived)
- Not taxable (de minimis benefit)

2
.

The value of the free meals and lodging is not taxable to Yaya. It is very
clear that the couple required her to stay in their house for their own
benefit. Hence, the matter falls squarely within the convenience-of-theemployer rule.

3
.

No. The equivalent value of the living quarter is not taxable to Kulas
under the convenience-of-the-employer rule. The purpose of the piggery
farm in providing Kulas a room inside the premises is for the
convenience of Habang Bata Pa Piggery Farm.
The rice allowance is considered as a de minimis benefit which is exempt
from income tax. Thus, it is neither subject to creditable withholding tax
nor to fringe benefit tax.

4
.
5

The free parking and courtesy discounts are subject to fringe benefit tax
considering that Kareen Leon is a managerial employee of UB
Corporation.
The rice subsidy of P1,000 a month fall under the de minimis
benefits which are exempt from income tax.
The excess of the laundry allowance in the amount of P450 (P750300) is part of gross compensation income if such excess is beyond the
P30,000 ceiling for other benefits.
The rental value of the residential property is subject to fringe
benefits tax which is subject to final tax. Therefore, not part of the gross
income.

6
.

The cost of the educational assistance extended by De la Salle University

to Prof. Ferdinand Romero is supposed to be treated as part of the
teachers gross compensation income considering that Prof. Romero is
neither classified as managerial nor supervisory employee; he is still
classified as a rank-and-file employee.
However, since there is a condition that he should remain in the
employ of the employer for at least ten years after graduation, the
expenditure shall be considered as granted for the convenience of the
employers trade or business.
Therefore, whether the granting of the benefit is extended through a
qualifying/competitive examination or not, it should not be part of the
gross compensation income of Prof. Romero.
The cost of the tuition fee is attributable to the operation and

conduct of business of the employer. Therefore, the same shall be

deducted from the gross income of the school.
EXERCISE 4 4

1.

2.

ANSWER: C
Fringe benefit expense
Fringe benefit tax expense
Deductible expense
ANSWER:

Fringe benefit expense

Divide by
Grossed-up monetary value
3.

ANSWER:

34,000
16,000
50,000

34,000
68%
50,000

The fringe benefit tax is imposed only if the fringe benefit is given
to managerial or to supervisory employees.
Accounting clerks, janitors and the security guards are rank-andfile employees. Only the companys general manager is a managerial or
supervisory employee. Therefore, the fringe benefit tax must have been
given to him.
4.

ANSWER:

The one sack of rice is not subject to fringe benefit tax on the first
P1,000 per employee per month; the excess maybe also be exempt if
forming part of the other benefits not exceeding P30,000.
A corporation, though exempt from tax, is not exempt from the payment
of fringe benefit tax.
The equivalent value of free lodging given to a driver of an obstetrician
falls under convenience of the employer rule which is not subject to
fringe benefit tax.
The employers share in the GSIS contribution is not subject to income
tax.
EXERCISE 4-5

1.

ANSWER: B
Fees in civic club
Life insurance premium
Monetary value
Divide by
Grossed-up monetary value
Rate of tax

5,000
15,400
20,400
68%
30,000
32%

Fringe benefit tax

2.

3.

ANSWER: B
To rank and file employees:
Christmas bonus
Loan benefits [96,000 x (12%-8%)
Medical allowance
Uniform allowance
To the supervisor:
Christmas bonus
Fees in civic club
Life insurance premium
Uniform allowance
Fringe benefit expense
Fringe benefit tax expense
Total deductions
ANSWER:

9,600

32,000
3,840
16,000
12,000
4,000
5,000
15,400
3,000

p.a.)
Supervisor:
Christmas bonus
Uniform allowance
Total de minimis benefits
ANSWER:

27,400
91,240
9,600
100,840

Rank and file:

Christmas bonus (max: P 5,000 / employee
p.a.)
Medical allowance (max: 125 per employee
p.m.)
Uniform allowance (max: 3,000 / employee

4.

63,840

32,000
12,000
12,000

4,000
3,000
63,000

EXERCISE 4-6

1.

ANSWER: C
As a general rule, free meals and lodging furnished by the
employer to the employees are taxable to the latter.
However,
allowances furnished for and as a necessary incident to the property
performance of his duties are not taxable because they fall under the
convenience of the employer rule.

2.

ANSWER: C
Tonys gross income is P9,500 because his employers residence is
not the place of business where the employer conduct a significant
portion of his business.

On the other hand, Berts gross income should not include the
monthly value of his free meals and living quarters because the
provision enables Cristy to avail of the services of Bert at her
convenience (RAMO 1-87).
3.

ANSWER: D
The free meals are given by the employer to provide sanitary meals
to its employees, while the free lodging are provided because they do
not want the workers to find dificulty in looking for boarding houses.
These benefits are obviously furnished for the benefit of the employees
and not to the advantage of the employer.
It is therefore, apparent that the allowances furnished are in the
form of fringe benefits. However, since they are given to ordinary
workers which fall within the classification of rank-and-file employees,
the benefits are taxable to them and are includible in the computation
of their respective gross income.

4.

ANSWER: D
The grossed-up monetary value includes the monetary value of the
fringe benefit received by the employee from his employer and the
amount of fringe benefits tax due thereon which was paid by the
employer.

5.

ANSWER: D
The use of aircraft owned and maintained by the employer shall be
treated as business use and not subject to fringe benefits tax.

6.

ANSWER: D
Jaguar is a rank-and-file employee. All fringe benefits given by his
employer are not subject to fringe benefits tax.
The free meals and lodging given to Col. General is specifically
exempt from fringe benefits tax. Moreover, it is also furnished for the
convenience of the employer (the Philippine Government) so that the
military oficer shall be readily available when his services are
required. The uniform allowance falls under de minimis benefits which
are exempt from the fringe benefits tax.

7.

ANSWER: B
De minimis benefits are of relatively small value that they are
exempt from the payment of fringe benefits tax and ordinary income
tax.

8.

ANSWER: B

Fringe benefits given to rank and file employees are exempt from
fringe benefits tax. However, there are benefits which are subject to
regular income tax depending upon the nature of benefits the
employees have received from their employer.
9.

ANSWER: D
A residential property owned by the employer and assigned to an
employer for use as his residence is subject to fringe benefits tax based
on the 5% of the fair market value of the land and improvements.

10 ANSWER: D
.
Unlike other individual taxpayers, nonresident aliens not engaged
in trade or business are subject to fringe benefits tax at a rate of 25% of
the grossed-up monetary value.
EXERCISE 4-7
1.

ANSWER: C
Purchase of groceries
Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax

10,500
68%
15,441
32%
4,941

The medical benefits is a de minimis benefit up to the ceiling of

P10,000, the excess of P7,500 is hereby presumed to be included as
part of Other Benefits.
2.

ANSWER: A
Monthly salary
Free meals and living quarters (P1,500 +
1,000)
Monthly gross compensation income

3.

4,000
2,500
6,500

ANSWER: B
Salary

4.

4,000

ANSWER: D
Cost of first class ticket
Rate subject to fringe benefit tax
Fringe benefit
Exchange value in Philippine currency
Fringe benefit subject to fringe benefit

2,500
30%
750
43
32,250

5.

tax
Divide by
Grossed-up monetary value
Rate
Fringe benefit tax
ANSWER: D

68%
47,426.47
32%
15,176.47

Monetary value (P800,000/5) x 50%

Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax
6.

80,000
68%
117,647
32%
37,647

ANSWER: B
Monetary value (P10,000 x 50%)
Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax

7.

5,000
68%
7,352
32%
2,353

ANSWER: C
Interest at benchmark rate (P100,000 x
12% x 8/12)
Less: Interest at special rate (P100,000 x
9% x 8/12)
Interest foregone/value of benefit
Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax

8.

8,000
6,000
2,000
68%
2,941.18
32%
941.18

ANSWER: A
Total expenses incurred
Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax

9.

16,000
68%
23,529
32%
7,529

ANSWER: D
Salary of driver and housemaid (P4,000
+ 2,000)
Membership fees and dues (P75,000/12)
Monetary value of benefit
Divide by
Grossed-up monetary value

6,00
0
6,250
12,250
68%
18,015

Rate of tax
Fringe benefit tax
10.

ANSWER: A
Fair market value (higher)
Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax

11.

ANSWER: D
Monetary value (3,400 x 50%)
Divide by
Grossed-up monetary value
Rate
Fringe benefit tax on rental
Add: Monthly rental
Fringe benefit to clerk
Deductible expense

12.

32%
5,765

ANSWER:

2,500,00
0
68
%
3,676,4
71
32
%
1,176,4
71
1,70
0
68%
2,500
32%
800
3,400
3,000
7,200

Fringe benefit to supervisory employees

Divide by
Grossed-up monetary value
Rate
Fringe benefit tax

170,000
68%
250,000
32%
80,000