College of Accounting Education
e
UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
Re air that a reciabl rolon the life of the ro e Ca italize
Repair that keep the property in its ordinarily efficient Outright
operating condition Expense
ORGANIZATIONAL AND PRE-OPERATING EXPENSES considered as CAPITAL EXPENDITURES.
However, upon start of commercial operations, it can be amortized over 60 months.
Self-Help: You can refer to Chapter 4 of the textbook to help you
further understand the lesson. You can use other materials too.
Banggawan, Rex B. (2015). Income Taxation Laws, Principles and applications OBE
Edition. Aduan, Nick (2012). Simplified and Procedural Handbook OQ Income
Taxation Edition.
Let's Check
Activity 1. Now that you know the most essential terms in the study of the
General principles of Taxation, let us try to check your understanding of these
terms. In the space provided, write the term/s being asked in the following statements:
(Adapted)
It refers to proportional contribution by persons
and property levied by the lawmaking body of the state by virtue of its sovereignty for the
support of the government and all public needs.
2. A canon of taxation which means that the tax laws must be clear and
concise, capable of proper enforcement, and not burdensome, convenient as to time and
system, the government should
4. What basic principle of a sound tax system is met when 'Congress
evolves a progressive system of taxation as mandated in the Constitution?
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UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
5. This is known as a fundamental rule in taxation is that the property of
one country may not be taxed by another country.
6. This describes the statement, "that the State has complete discretion on
the amount to be imposed, after distinguishing between a useful and non-useful activity"
7. A kind of tax system where rate increases as the tax base increases.
8. It comprises of all kinds of funds derived by the government, including
Taxes.
9. It refers to the power of taxation that limits its imposition on
properties which are within the physical boundaries of the state imposing it.
10. It pertains to the provision in the fundamental law of the land
restricting the exercise of the power of taxation.
Activity 2. Now that you know the important things in your study of the Gross Income the
inclusion and exclusion from Gross Income. You answer the multiple choice questions below:
(Adapted)
1. Julia is one of the board of directors of XYZ Company. During the current taxable year,
Julia received director's fees amounting to P400,000 from quarterly board meetings he
attended. Such fees should
a. Form part of Pedro's gross compensation income, whether or not he is at the same
time an employee of the corporation
b. Form part of Julia's gross compensation income only if he is at the same time an
employee of the corporation
c. Both "a" and "b" are correct
d. Neither "a" nor "b" is correct
2. This income is subject to basic tax
a. Compensation for personal injuries or sickness
b. Salaries or emoluments received during a leave of absence
c. Winnings from PCSO and Philippine lotto
College of Accounting Education
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UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
d. Fringe benefits given to managerial employees
3. Which of the following items that reduces salaries of employees in not an exclusion
from gross income?
a. GSIS or SSS Contributions
b. Pag-lbig Contributions
c. Labor Union Dues
d. None of the choices
4. This income is subject to basic tax
a. Compensation for personal injuries or sickness
b. Salaries or emoluments received during a leave of absence
c. Winnings from PCSO and Philippine lotto
d. Fringe benefits given to managerial employees
5. Which of the following compensation income is taxable?
a. Board and lodging granted for the convenience of the employer
b. Separation pay given where separator from employment is beyond the control of
the employer
c. De minimis monetized vacation leave
d. Fixed/variable allowances subject to liquidation by the employee
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6. One of the following compensation income of an individual taxpayer is not an
exclusion from gross income:
a. Monetized vacation leaves not exceeding 10 days a year
b. Separation pay of an employee who resigned from his employment
c. Retirement benefits of an employee who has worked for an employer for at least
10 years; who at the time of retirement is not less than 50 years of age, and who
avails of the retirement for the first time
d. All of these
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College of Accounting Education
e
UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
7. Which of the following is taxable?
a. Separation pay received by a 50-year old employee due to the retrenchment
program of the employer
b. Retirement pay received from a benefit plan registered with the BIR where at the
time the employee retired, he was 57 years of age, retiring form employment
for the first time in his life, and was employed with the employer for 8 years
c. Social security benefit received by a balikbayan from employer abroad at age of 30
d. None of the choices
8. The taxpayer was retired by his employer in 2017 and paid as a retirement
gratuity without any deduction for withholding tax. The corporation became bankrupt
in 2019. Can the BIR subject the retirement gratuity to income tax in
2019?
1 st Answer: Yes, if the retirement gratuity was paid based on a reasonable pension
where the taxpayer was 50 years old and has served the corporation. 2nd
Answer: No, if the taxpayer was forced by the corporation to retire.
a. 1 st and 2 nd answers are correct
b. 1 st answer is correct but 2 nd answer is wrong
c. 1 st answer is wrong but 2 nd answer is correct
d. 1 st and 2 nd answers are wrong
9. Which of the following is taxable?
a. SSS and GSIS benefit
b. Social security benefit received by a balikbayan from employer abroad
c. Separation pay received by a 50-year old employee due to retrenchment program
of the employer
d. Interest income on time deposit
10. Annuity payments received by a taxpayer represent a part which is taxable and not
taxable. Which of the following statement is correct?
a. If annuity received represents interest, it is a taxable income
College of Accounting Education
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UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
b. If annuity received represents return of premium, it is not a taxable income
c. Both statements are correct
d. Both statements are not correct.
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College of Accounting Education
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UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
11. Mr. Lee purchased a life annuity for P200,000 which will pay him P20,000 a year. The
life expectancy of Mr. Lee is 12 years. Which of the following will Mr. Lee be able to
exclude from his gross income?
a. P200,OOO c. P20,OOO
b. PIO,OOO d. P120,OOO
12. The following data on net income, bad debt, write-off and recovery show:
2018: Case A Case B Case C
Net income (loss) before write-off PI 20,000 P60;OOO (P40,OOO)
Less: Bad debt written-off claimed as deduction 40,000 40,000 50,000
Net income (loss) after write-off 20, ooœ (90,000)
80,000
2019:
Subsequent recovery P40,OOO PIO,OOO P50,OOO The
taxable recovery is:
Case A Case B Case C
a. P20,OOO
p40,000
P50,OOOb. P40,OOO
C. P40,OOO PIO,OOO du P40,OOO
13. Which of the following is not a taxable income?
a. Bad debts previously deducted as item of expense and partially recovered
subsequently b. Tax expense previously disallowed as deduction from taxable income,
fully refunded subsequently
c. Income from gambling
d. Income from usurious financing
14. Which of the following tax refunds is
taxable?
a. Percentage tax on person's
exempt from VAT
b. Estate or donor's tax
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Matina, Davao City The University Of Mindanao Phone No.: (082)300-5456 Local 137
c. Stock transaction tax
d. Income tax paid to a foreign country if claimed as tax credit during
the year
15. If an individual performs services for a creditor who in consideration thereof cancels
the debt, the cancellation of indebtedness may amount:
a. To a gift
b. To a capital contribution
c. To a donation inter vivos
d. To a payment of income
16. On July 1, 2017, Mr. V leased his vacant lot for a period of 12 years to Mr. J at an
annual rate of It was also agreed that Mr. J will pay the following:
• Security deposit of 2,400,000
• Annual real property tax of P30, 000
The lease contract provides among others that the lessee will construct a 5-storey
building for parking purposes at a cost of Ownership of the building shall
belong to the lessor upon the expiration or termination of the lease contract.
The building was completed on July 1, 2019 with an estimated useful life of 15 years.
Mr. V shall report total income from
the lease for 2017 at
17. Assuming Mr. V will use outright method in recognizing income from leasehold
improvements, how much is the total income from lease for year 2019?
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College of Accounting Education
e
UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
18. Assuming Mr. V will use spread-out method in recognizing income from leasehold
improvements, how much
is the total income from
lease for year 2019?
19. Assuming that due to the fault of the lessee, the lease contract was terminated on
January 1, 2021, how much income is to be reported by the lessor in 2021?
20. Which among the following dividend income is tax exempt? Dividend income received
from
A domestic corporation by a domestic corporation
A domestic corporation by a resident foreign corporation Ill. A
domestic corporation by a nonresident foreign corporation IV. A
resident foreign corporation by a domestic corporation
a. All of the above C. I and Il only
b. None of the above d. l, Il and Ill only
21 . Which among the following dividend income is tax exempt?
Pure stock dividend ll.
Pure liquidating
dividend
a. I only c. I and Il only
b. Il only d. None of the choices
22. For income tax purposes, the form of dividend income shall determine the valuation of
dividend income. Which of the following rules on valuing dividend income is incorrect?
a. Cash dividend is valued and taxable to the extent of amount of money received by
the shareholder.
b. Property dividend is valued and taxable to the extent of the fair market value of
the property received at the time of distribution.
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College of Accounting Education
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UM 3F, Business & Engineering Building
Matina, Davao City The University Of Mindanao Phone No.: (082)300-5456 Local 137
c. Stock dividend resulting to a change in the proportionate share of the shareholder
is valued and taxable to the extent of the fair market value of the shares received.
d. Scrip dividend is taxable to the extent of its fair market value in the year when the
warrant was issued.
23. Liquidating dividends are return of shareholders' investment. WhicWof the following
rules on liquidating dividend is incorrect?
a. The excess amount of liquidating dividend over cost of shares surrendered is
taxable.
b. If a shareholder sustains a loss brought about by the liquidating dividend, such loss
is deductible.
c. If a shareholder sustains a
loss brought about by the
liquidating dividend, such
loss is not deductible.
d. All of the above.
24. Geralene was selected as the most outstanding "barrio teacher" in Di Mahanap-hanap
town of Tawi-Tawi region. Her name was submitted by the school principal without her
knowledge. She received a trophy and a cash award of P50,000. The amount he received
IS
a. Subject to basic income tax
b. Subject to final tax
c. Exempt from income tax
d. Partly taxable partly exempt
25. The law excludes some of the items of income from taxation because:
a. The transformation of some items of income into economic gain is
not essentially the result of labor or efforts of the taxpayer
b. The law or provides that they are not taxable
c. Some of these items are just return of capital
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College of Accounting Education
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UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
d. All of the above
26. Which of the following is taxable income?
a. Income derived by a political subdivision of the government performing
essential function of the government
b. Income derived by foreign government in the Philippines
c. Both "a" and "b"
d. Neither "a" nor "b"
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College of Accounting Education
e
UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
27. Proceeds of insurance taken by a corporation on the life of an executive to indemnify
it against loss in case of his death is
a. Exempt from income tax
b. Part of taxable income
c. Subject to final tax
d. Partly exempt, partly taxable
28. As a general rule, proceeds of insurance are not taxable because they only constitute
a return of what was lost (capital). Which among the following is taxable proceeds?
a. Proceeds of life insurance
b. Proceeds of accident or health insurance
c. Proceeds of property insurance
d. Proceeds of crop insurance
29. Peter, single received the following during the taxable year:
Proceeds of his life insurance paid at an annual
premium of PI 5,000 withiñ 25 years
Proceeds of his mother's life insurance paid at
an annual premium of P 10,000 within 20 years
House and lot inherited from his mother
Rent income from inherited properties
For income tax purposes, how much of the above items must be included in his gross
income?
c.
P200,OOO
d.
30. Mr. Basilio insured his life with his estate as beneficiary. In 2010, after Mr.
Basilio had paid P65,000 in premium, he assigned the policy to Mr. Jose Llamado for
P60,000, and Mr. Llamado continued paying the premiums. Mr. Basilio died and Mr.
Llamado collected the total proceeds of P200,000. Mr. Llamado after the assignment
and Mr. Basilio's death, paid total premiums of P80,000. As a result of the above
transaction, Mr. Llamado:
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College of Accounting Education
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UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
a. May consider the proceeds of
P200,000 as exempt from tax
b. Derived a taxable income of P55,000
c. Derived a taxable income of P60,000
d. Answer not given
Let's Analyze
Activity 1 . Answer the following questions and provide solutions to support your answer.
Problem 1: ( Adapted)
Rent income, net of 5% CWT P 475,000 Professional fees,
net of 10% CWT 360,000 Interest income, net of 20% final
tax 40,000 Dividends from a domestic corporation 10,000
Business expenses 500,000
Required: Determine the total reportable gross income
Problem 2: (Adapted)
Jose, single received the following during the taxable year:
Proceeds of his lifè insurance paid at an
annual premium of PI 5,000 within 25
years
Proceeds of his mother's life insurance paid at
an annual premium of P 10,000 within 20
years House and lot inherited from his mother
Rent income from inherited properties
For income tax purposes, how much of the above items must be included in his gross
Income
Problem 3: (Adapted)
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College of Accounting Education
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UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
An operator of an illegal horse betting business,
single, has the following data:
Receipt from illegal bets 120,000
Rent of space where bets are received, gross of 5%
withholding tax
Salaries of assistants, gross of creditable 100,000
withholding 50,000
tax
Bribe money to obtain protection
from arrest and prosecution
How much is the taxable income
Problem 4: (Adapted)
Mrs. Oliva retired from the government
after 30 years of service at plus P400,000 benefits. the age of
55. He received a total retirement
pay of PI
How much will be
excluded in gross income
Problem 5: (Adpated)
Mr. Mallari was one of the passengers who were hurt in a bus accident. He received a
total indemnity of P800,000 from the insurer of the bus. Mr. Dimataling paid P250,000 in
hospital bills due to the accident.
Compute the total amount to be excluded in gross income
Problem 6: ( Adapted)
Gross compensation income, before contributions of SSS, PhilHealth
and HDMF totaling P124,OOO P 800,000 Fringe benefits 200,000
Gain from redemption of shares in a mutual fund 100,000
Commission income 150,000
Gain on sale of stocks through the PSE 400,000
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College of Accounting Education
e
UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
Determine the total income to be reported by Mr. Lola in gross income
Problem 7-8: ( Adapted)
Summer Corporation, a taxpayer under the accrual
basis of accounting, opted to deduct OSD. The
following relates to its results of operations:
Gross sales, net of returns, allowances and
discounts
Gain on sale of building
Dividend from domestic corporation
Beginning inventory
Net purchases
Ending inventory
Recorded administrative and selling expenses
Compute for the OSD and the total taxable net income
Problem 9-10: (Adapted)
C
o
r Salary,
a 8,000
z
PI
o
n
resigned in 2015 after 12 years of service. She had the following income during the
year:
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College of Accounting Education
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UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
Separation pay
Compute the gross income
In a Nutshell
1 . Why is taxation is very important in our country and in your course?
2. Discuss the meaning and the implications of the statement: " Taxes are the lifeblood of
government and their prompt and certain availability is an imperious need.
3. Do you think our country have a sound tax system?
4. How does ABS-CBN circumvent tax obligation and apply tax avoidance remedies.
List
61
College of Accounting Education
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UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
Do you have any question for clarification?
Questions/lssues Answers
1.
2.
3.
4.
5.
Keywords Index
This section lists down the keywords that will help you recall the discussions.
Course Schedule
This section calendars all the activities and exercises, including readings and lectures, as well as time
for making assignments and doing other requirements.
Activit Date Where to Submit
62
College of Accounting Education
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UM Matina, Davao City The University Of Mindanao
3F, Business & Engineering Building
Phone No.: (082)300-5456 Local 137
Orientation BlackBoard I-MS
Bi Picture A-C: Let's Check Activities BlackBoard I-MS
Bi Picture A-C:Let's Anal ze Activities BlackBoard LMS
Big Picture A-C: In A Nutshell BlackBoard LMS
Bi Picture A-C: List BlackBoard LMS - Forum
1 st Formative Assessment BlackBoard I-MS
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