ISABELA CPA REVIEW CENTER

ISU-Cauayan Campus, San Fermin, Cauayan City, Isabela

Contact Nos. 0977-032-5898; 0917-8823-762

Introduction to Income Tax

Theories

1. Which is a taxable item of income?

a. Increase in numbers of herd of animals
b. Compensation for personal injuries
c. Moral damages
d. Interest on moral damages
2. Which is not a subject of income tax?
a. Donation
b. Sale of service
c. Sales of goods
d. Barter of goods
3. Which is not a requisite of gross income?
a. Return on capital
b. Realized benefit
c. Exempted by law
d. Not exempted by law
4. The total consideration received from the sale of goods at a gain represents
a. Return on capital
b. Return of capital
c. Either a or b
d. Both a and b
5. The total consideration received from the sale of goods at a loss represents
a. Return on capital
b. Return of capital
c. Either a or b
d. Both a and b
6. Why is income subject to taxation?
a. Income is the most prevalent source of a taxpayer wealth
b. Income is the best measure of taxpayers ability to pay tax
c. Rich people tend to have more income than the poor
d. Any of these
7. Which is not an item of gross income because of the absence of an undertaking from the taxpayer?
a. Proceeds of a life insurance policy
b. Forgiveness of indebtedness as an act of gratuity
c. Revaluation surplus ,on properties
d. Service fees
8. Which of the following is exempted from income taxation because of the absence of ability to pay?
a. Damages received from patent infringement suit
b. Unrealized income from investment
c. Gain on sale of goods
d. Inheritance
9. Which of the following constitutes taxable income?
a. Return of premium on life insurance received by the insured
b. Moral damages received from slander
c. Proceeds of crop insurance
d. Compensation for personal injury
10. Which of the following is not a constructive receipt of income?
a. Forgiveness of indebtedness in consideration of service
b. Matured detachable interest coupons
c. Deposit of income to taxpayer bank account
d. Cash salary of an employee
11. Which is specifically exempted from income taxation by virtue of legal exemption?
a. Minimum wage
b. Gain on sale of prohibited drugs
c. Unrealized gain

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 d. All of these
12. Income tax may be imposed for the following purposes, except
a. To provide large amounts of revenues
b. To limit corruption
c. To offset regressive sales and consumption taxes
d. To mitigate the evils arising from the inequalities in the distribution of income and wealth
13. Which taxpayer is not a natural person?
a. Resident citizen
b. Taxable estate
c. Non-resident alien engaged in trade or business
d. Non-resident alien not engaged in trade or business
14. A Filipino who has been abroad for more than 183 days is classified as a
a. Resident alien
b. Non-resident alien
c. Non-resident citizen
d. Non-resident alien not engaged in trade or business
15. An American who showed proof to the satisfaction of the Commissioner of Internal Revenue of his
intention to stay in the Philippines as an immigrant is classified as a
a. Resident citizen
b. Resident alien
c. Non-resident alien engaged in trade or business
d. Non-resident alien not engaged in trade or business
16. A Japanese who is staying in the Philippines for 183 days is a
a. Resident citizen
b. Resident alien
c. Non-resident alien engaged in trade or business
d. Non-resident alien not engaged in trade or business
17. A Canadian who is staying in the Philippines for more than one year is a
a. Resident citizen
b. Resident alien
c. Non-resident alien engaged in trade or business
d. Non-resident alien not engaged in trade or business
18. A resident alien naturalized in accordance with Philippine laws is a
a. Resident citizen
b. Resident alien
c. Non-resident alien engaged in trade or business
d. Non-resident alien not engaged in trade or business
19. Who is not a resident alien?
a. An alien who stayed in the Philippines for more than two years
b. An alien who married and stayed in the Philippines for one year
c. An alien who stayed in the Philippines for more than one year
d. An alien who established his intention before the CIR to stay in the Philippines for an extended period
of time
20. An alien who stayed less than one year in the Philippines is classified as an non-resident alien not engaged
in trade or business if he stayed herein for less than
a. 180 days c. 183 days
b. 1 year d. 2 years
21. Which is required to pay income tax?
a. Revocable trust
b. Estates under extrajudicial settlement
c. Co-ownership
d. Business partnership
22. Which of the following taxpayers is taxable only in income earned from the Philippines?
a. Resident corporation
b. Domestic corporation
c. Resident citizen
d. All of these

PROBLEMS

1. Andrew negotiated a P1,000,000 non-interest bearing promissory note to a Candy. Candy paid Andrew
P950,000. On due date, Andrew paid Candy P1,000,000. Which is true?
A. Andrew earned P50,000 return on capital
B. Candy earned P50,000 return on capital

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 C. Candy received P50,000 donation
D. Candy received P1,000,000 return on capital

2. Beth received a total sum of P42,000 from her employer consisting of the following :
P5,000 reimbursements for employer’s expenses paid by Beth
P15,000 payment of Beth’s computer set purchased by the employer
P22,000 monthly salary

Beth’s computer set cost her P12,000. Compute the total return on capital which can be subjected to
income tax.

3. Betty purchased a P1,500,000 life insurance policy for P50,000. During the year, Betty died in her heirs
collected the entire proceeds. How much of the proceeds is exempt form income tax?

4. Ben paid P20,000 annual premium on a life insurance contract which would pay him P1,000,000 in case of
his death. After paying for 4years, Ben assigned the policy to Carlos for P120,000. Compute the return
capital.

5. Carlos purchased the p1,000,000 life insurance policy of Ben for P120,000. Carlos paid the P20,000
annual premium on the policy for 4years after which Ben died. Compute the total return capital for
Carlos.

6. Albert is worried that his entire potato plantation which is expected to yield P400,000 income will be
totally devastated by bad weather conditions. He obtain a P300,000 crop insurance cover for P30,000.
Just before harvest, a rare frost totally destroyed Albert’s plantation. The insurance company paid the
policy proceeds. Compute the total return on capital for Albert.

7. Henson sued an unscrupulous person for derogatory remarks which he considered to have besmirched his
reputations. The court awarded Henson an indemnity of P1,000,000 inclusive of P200,000 reimbursement
for attorney’s fees and P100,000 exemplary damages. Compute Henson total return on capital.

8. Jake was one of the passengers of a van that fell off a ravine. Jake sued the bus company and was
awarded an indemnity of P800,000 for the following:

P500,000 for the impairment of his health resulting to the amputation of his legs

P200,000 for his loss of salaries during the hospitalization

P100,000 for his attorney’s fees

Compute Jake’s return on capital.

9. Kendrick received the following items during the year:

P200,000 donation from a girlfriend
P150,000 service fee from professional services
P300,000 inheritance from his deceased father
P100,000 income from illegal gambling
P50,000 gain on sale of his personal car
P250,000 profits from his bar restaurant

Compute the total income subject to income tax.

10. Jen is engaged in business. The following pertains to her transaction during 2014:
 Sold his personal car which was purchased at P200,000 to a friend who paid only half of the car’s
P500,000 current fair value
 Sales of merchandise was P800,000 and the cost of goods sold was P600,000
 Jen acquired several stocks from the Philippine Stock Exchange for speculation. These stocks have an
aggregate purchase price of P400,000 but with P700,000 fair value by December 31, 2014
 Jen’s house and lot which he acquired for P1,500,000 in 2010 now have a current fair value of P2,500,000.

Compute Jen’s total income subject to income tax.

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 11. A condominium me owners association collects dues from unit holders and remits the same to service
providers on their behalf. Such dues include electricity, water, security, and maintenance. The association
charges unit holders an additional 2% of their utility bills as service charges.
During the year, the association processed utility bills for unit holders totalling P5,000,000.
How much taxable income is realized by the association?

12. Sarah has the following items of income:

Philippines Abroad

Business Income P200,000 P100,000

Professional fees 100,000 50,000

Compensation income 400,000 ------------

Rent income 300,000 200,000

Interest income 30,000 40,000

1. Assuming Sarah is a resident citizen, compute the total income subject to Philippine income tax.

2. Assuming Sarah is a resident alien, compute the total income subject to Philippine income tax.

3. Assuming Sarah is a resident corporation, compute the total income subject to Philippine income tax.

4. Assuming Sarah is a domestic corporation, compute the total income subject to Philippine income tax.

13. Kate has the following income in 1014:

 P10,000 interest income from a non-resident Japanese friend
 P40,000 interest income from the Philippine resident
 P500,000 rent income from a commercial complex located in the USA which is leased to resident Filipinos
 P200,000 rent income from a boarding house in Baguio City, Philippines
 P200,000 professional fees rendered to Chinese clients in Hong Kong
 P300,000 salary from a resident employer
 P100,000 gain from sale merchandise imported and sold to Filipino resident
 P50,000 gain on sale of merchandise purchased locally and sold during her business travel in Hong Kong
 P400,000 gain on sale of the boarding house located in Baguio City to a non-resident buyer

Required:
Compute the total income earned from sources
1. Within the Philippines
2. Outside the Philippines

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