The National Teachers College

College of Accountancy and Business

TAXATION

Name___________________________________Score_________Grade_________

MIDTERM EXAMINATION

MULTIPLE CHOICE
DIRECTION: IN EACH OF THE FOLLOWING QUESTIONS, CHOOSE THE BEST ANSWER.

1. An income tax is a tax

a. Collected from the proprietor, lessee or operator of duly designated places
or activities for pleasurable diversion or entertainment.
b. Imposed on fixed ratio between the gross sales or receipts and the burden
imposed upon the taxpayers.
c. Which is imposed only on the increase in the worth, merit or importance of
goods, properties or services and not on the total value of the goods of
services sold or rendered.
d. On the yearly profits arising from employment, property, profession, trades
and offices.

2. Statement I: Symbiotic relation is the reason why the government would impose
taxes on the income of resident citizens derived from sources outside the
Philippines.
Statement II: Jurisdiction is the reason why citizen must provide support to the
state so the latter could continue to give protection.
a. Both statements are true c. Only statement I is correct
b. Both statements are false d. Only statement Ii is correct

3. One of the following is not deductible from the gross income of the employer
a. De minimis benefits given to employees
b. Fringe benefits given to rank and file
c. SSS, GSIS, Philhealth, HDMF and other contribution
d. Cost of advertising to influence legislation

4. Where the spouse of the employee is unemployed or is a nonresident citizen

deriving income from foreign sources, the employed spouse within the Philippines
shall:
a. Be automatically entitled to claim the additional exemption for children
b. Be entitled to claim the additional exemption for children if the other spouse
waives his right in favor of the employed spouse
c. Be entitled to claim the additional exemption if he is the husband
d. None of the choices

5. To start a business of his own, Mr. Cueto opted for an early retirement from Salic
Corporation, a private company, after 10 years of service. Pursuant to the
company’s qualified and approved private retirement plan, he was paid his
retirement benefit
a. Salic Corporation should withhold income taxes from Mr. Cueto’s retirement
pay.
b. Mr. Cueto’s retirement pay is excluded from gross income.
c. Salic Corporation should pay the tax on Mr. Cueto’s retirement pay.
d. Since Mr. Cueto voluntarily retired, the retirement pay he received was not
retirement in the true sense but was part of his compensation income
subject to tax.
Mr. Kendrick, Filipino, is an employee of ROHQ 1 at the start of the year. His annual
gross compensation income is below the compensation threshold at the beginning of the
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year. During the year, Mr. Ken is employed by ROHQ 2. His contract provides for a gross
annual compensation that meets the compensation threshold.

6. What is the tax consequence of his compensation from ROHQ 1?

a. Regular tax on compensation income only
b. Regular tax compensation income or 15% preferential tax rate
c. 15% preferential tax rate only
d. None of the choices

7. What is the tax consequence of his compensation from RQHQ 2?

a. Regular tax on compensation income only
b. Regular tax on compensation income or 15% preferential tax rate
c. 15% preferential tax rate only
d. None of the choices

8. AYOKONA Corporation took two keymen insurance on the life of its President, Mr. X.
In the policy, the beneficiary is the corporation to compensate it for expected loss in
case of death of its President. The other policy designates Mr. X’s wife as its
irrevocable beneficiary.

Question 1 – Are the insurance premiums paid by X Corp. in both policies

deductible?
Question 2 – Will the insurance proceeds be treated as income subject to tax by
corporation and by the wife?

a. Yes to first question, and no to second question

b. Yes to both questions
c. No to first question, and yes to second question
d. No to both questions

9. Which of the following statement is incorrect?

a. If the GPP availed of the itemized deductions in computing its net income,
the partners may still claim itemized deductions from said share, provided,
that, in claiming itemized deductions, the partner is precluded from claiming
expenses already claimed by the GPP.
b. If the GPP claimed itemized deductions the partners comprising it can only
claim itemized deductions which are in the nature of ordinary and necessary
expenses for the practice of profession which were no yet claimed by the
GPP in computing its net income during the year.
c. If the GPP availed of itemized deductions, the partners are not allowed to
claim OSD from their share in the net income because the OSD is a proxy
for all the items of deductions allowed in arriving at taxable income.
d. None of the choices.

10. Which of the following interest shall be subject to regular income tax?
a. Interest from long term deposit or investment received by a nonresident
alien not engaged in trade or business
b. Interest from long term deposit or investment received by a non-resident
foreign corporation
c. Interest income from long term deposit received by a domestic corporation
and resident foreign corporation
d. Interest income from long-term deposit received by a resident citizen

11. To qualify as de minimis benefit uniform and clothing allowance shall not exceed:
a. P4,000 per annum
b. P5,000 per annum
c. P10,000 per annum
d. None of the choices

12. The MCIT shall be imposed upon a domestic corporation or a resident foreign
corporation:
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 I – whenever such corporation has a zero or negative taxable income;
II – when the amount of minimum corporate income tax is greater than the
normal income tax due from such corporation.

a. Both I and II are correct c. Only I is correct

b. Neither I nor II is correct d. only II I correct

13. A tax imposed in the nature of a penalty to the corporation to deter tax avoidance
of shareholders who avoid paying the dividends tax on the earnings distributed to
them by the corporation.
a. Minimum corporate income tax
b. Optional corporate income tax
c. Improperly accumulated earnings tax
d. Capital gains tax

14. Oliver entered into a 40-year lease contract with Kimberlly. Per agreement, Oliver
will construct a building on Kimberlly’s lot and operate the same for 40 years.
Ownership of the building will transfer to Kimberlly’s upon the termination of the
lease. The lease will not commence until the building is completed. Oliver completed
the building at a total cost of P40,000,000 on January 1, 2017. The building is
expected to be used over 50 years.

Compute Kimberlly’s income from the leasehold improvement to be reported in

2017 using the spread-out method.

a. P200,000 c. P8,000,000
b. P4,000,000 d. P32,000,000

15. In the immediately preceding problem, assume that the building was completed
only July 1, 2017, what is the income using outright method.

a. P4,000,000 c. P32,000,000
b. P8,000,000 d. P40,000,000

16. Cordero leases an office space from Marquez, Inc. in a non-renewable 10-year lease
contract. Just after the second year of the lease, Cordero renovated the premises
and made improvements at a cost of P1,200,000. These improvements are
expected to lst for 12 years. Compute Marquez annual income from the leasehold
improvement using the spread-out method.

a. P50,000 c. P30,000
b. P37,500 d. P20,000

17. Ronald started raising swine for sale by purchasing 5 glits and a boar at a total
purchase price of P50,000 on January 2016. As of December 31, 2016, Ronald’s
herd grew to 15 guilts, 2 boars and 20 piglets. The total herd has a fair value of
P196,000 when sold as is. During the year, Ronald earned P180,000 from selling
piglets. How much should Ronald report as farming income in 2016?

a. P326,000 c. P146,000
b. P180,000 d. P130,000

18. Jason, a farmer, uses the crop-year method in reporting his income from long-term
crops. The following date are relevant to his farming operations in 2017:
 Sales of crops harvested, P900,000
 Expenses on harvested crops, P400,000
 Expenses on maturing crops, P200,000
 Expenses on newly planted crops, P100,000
 Sales of tree branches for firewood, P50,000

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 Jason uses the crop year method in reporting crop income. Compute Jason’s total
income subject to tax.

a. P240,000 c. P540,000
b. P340,000 d. P550,000

19. Which of the following is subject to 7 ½% final tax on interest from foreign currency
deposit s made with Philippine banks?

a. Non-resident foreign corporation

b. Non-resident alien not engaged in trade or business
c. Non-resident alien engaged in trade or business
d. Resident alien.

20. Which of the following is taxable?

a. Prize on sports competitions sanctioned by the national sports organization
b. Prize from dance competition abroad
c. Nobel prize
d. Any prize received without effort

21. Which winning is taxable to a final tax?

a. Winnings exceeding P10,000
b. Winnings not exceeding P10,000
c. Winnings from illegal gambling
d. All of these

22. The tax informer’s reward may be granted to

a. Officials of the BIR
b. Public officials or employees
c. Close relatives of public government employees
d. Relatives of government employees beyond the 6th degree of consanguinity.

23. Which is not subject to final tax?

a. Compensation to non-resident aliens not engaged in trade or business
b. Fringe benefits of supervisory and managerial employees
c. Income of non-resident foreign corporations
d. Fringe benefits of rank and file employees

24. Which of the following is exempt from final tax?

a. Winnings in competitions sponsored by a local trading company
b. Prizes in a body building competition
c. Dividends from a foreign corporation
d. Winnings from a casino

25. Mortel, resident citizen, received the following interest income:

 P80,000 from short term Peso time deposit
 P16,000 from a five year bonds issued by a commercial bank
 P24,000 for 5/6 lending top market vendors

How much final tax must have been withheld from Mortel’s interest income?
a. Zero
b. P16,000
c. P20,000
d. P24,000

26. Kristine Joshua, a resident citizen, invested P1,000,000 in a debt instruments

(deposit substitute) issued by Unibank. The debt instruments pay 10% annual
interest payable every quarter. How much final tax should Unibank withhold in the
first quarter of the issue?
a. Zero
b. P5,000
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 c. P6,250
d. P20,000

27. Daniel Christian, a resident citizen, won $1,000,000 from the US lottery. The lottery
winning is
a. Exempt from tax
b. Subject to 20% final tax
c. Subject to 10% final tax
d. Subject to regular tax

28. Giechel submitted a sworn statement regarding the alleged tax evasion practices of
Apple Corporation. This led the BIR to recover P20,000,000 unpaid taxes. How
much net tax informer’s reward shall be paid to Giechel?
a. P1,800,000
b. P1,600,000
c. P1,000,000
d. P900,000

29. Lominog Corporation, a resident corporation, is a venture in Southern Philippine

Ventures (SPV), an incorporated joint venture formed under Philippine laws.
Zamboanga owns 30% interest in SPV. During 2014, SPV reported P3,000,000
profit and declared P1,000,000 in dividends. How much final tax will be withheld
from the dividends distribution to Lominog Corporation?
a. P100,000
b. P30,000
c. P90,000
d. Zero

30. Which of the following employers is least likely to have special alien employees?
a. Regional operating headquarters of multinational companies
b. Offshore banking units
c. Petroleum service contractors under service contract with the government
d. Foreign current deposit unit

31. Which is a correct statements regarding exclusion in gross income

a. They are included in gross income subject to regular income tax
b. They are ignored in the determination of gross income
c. They are presented in gross income but are present as deductions
d. They are subject to final tax

32. Which is an incorrect statement?

a. Business expenses are deductible by individual and corporations
b. Personal exemptions are deductible by individuals and corporations
c. Personal exemptions are deductible by individuals, estates and trusts
d. Deductions are considered in the determination of net income

33. Which is not part of compensation income

a. Basic pay of rank and file employees
b. Fringe benefits of managerial and supervisory employees
c. Basic pay of managerial or supervisory employees
d. Fringe benefits of rank and file employees

34. Which of the following statement best distinguishes deductions from exclusions from
gross income?
a. Deduction can be claimed by citizens while personal exemption cannot be
claimed by aliens
b. Deductions are outflows from gross income while exclusions are not
outflows from gross income
c. Both deductions and exclusions are deducted from gross income
d. All of these.

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35. Which is not included under the term “corporation”?
a. Business partnership
b. Co-ownership
c. Non-profit charitable institution
d. Joint venture

36. Which is correct with respect to exclusion from gross income?

a. They are included as part of gross income but are subsequently deducted
b. They are included in gross income but are added to the taxable income
c. They are not considered in the computation of taxable income
d. They are synonymous with deductions

37. The policy holder of a life insurance contract outlived his insurance policy. He was
paid P300,000 upon maturity of the policy. He paid P250,000 total premium. What
is the inclusion in gross income?
a. P300,000
b. P250,000
c. P50,000
d. Zero

38. Which is not a requite exemption of a retirement benefit plan?

a. 10 years of employment
b. The employer maintains a reasonable pensio0n benefit plan
c. The retiree must be a senior citizen
d. First time availment of retirement exemption

39. Mr. Jenny Rose won P500,000 in a local chess that was sanctioned by a sports
organization that is currently applying for accreditation from the national sports
association. Is the P500,000 prize considered an item of gross income?
a. Yes, because all prizes are subject to income tax
b. No, because the chess competition is not an international competition
c. No, because the sports competition is a local competition
d. Yes the organizer is not an accredited sports organization

40. Honey Lou discovered teleport technology where people can be transported over
thousand miles in seconds. Due to this, he was awarded by the scientific community
the most coveted Nobel Prize award in 2015. The total award was $150,000,000.
What is the correct statement regarding the taxation of the award?
a. The award is an inclusion in gross income subject to regular income tax
since final taxes do not apply abroad
b. The award is an inclusion in gross income subject to final tax since it is
more than p10,000
c. The award is an exclusion in gross income subject to regular tax since it is
inclusion in items of gross income subject to final tax
d. The award is an exclusion in gross income.

41. Mary Beth and Alysa Denise practice their accounting professional through a general
professional partnership. They contributed equal capital and agreed to share in
profits equally. The following information relates to their gross receipts end
expenses:

Gross receipts P4,000,000

Less: cost of service 1,800,000
Gross income from operations P2,200,000
Add: other non-operating income
Gain on sale of equipment P100,000
Interest on time deposits 40,000 140,000
Total gross income P2,340,000
Less: Allowable deductions 1,200,000
Net profits P1,140,000

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 What is the reportable income in the tax return of Raymund?
a. P1,170,000
b. P500,000
c. P550,000
d. P570,000

42. In the immediately preceding problem, determine the amount of income to be

reported by Zeus assuming that their partnership is a beauty parlor?
a. Zero
b. P570,000
c. P550,000
d. P500,000

43. Editha, a private employee retired at 60 in the middle of the year and was paid the
following remunerations:

Retirement benefits P2,000,000

Terminal leave pay (150 accumulated days) 120,000
Compensation, net of P16,000 mandatory deductions 128,000
Mid-year bonus 8,000
Pro-rated 13th month pay 12,000

Compute the gross taxable compensation income

a. P260,000
b. P238,000
c. P178,000
d. P230,000

44. Glydhel, a managerial employee received the following remunerations:

Gross salaries, net of SSS, PHIC and HDMF P630,000

SSS maternity benefits 30,000
Profit sharing bonus 240,000
13th month pay 60,000
Personal exemption 100,000

What is the taxable compensation income?

a. P860,000
b. P830,000
c. P770,000
d. P800,000

45. Cordero, a private employee had the following remuneration:

Gross salaries P314,000

Representation and transportation allowance 12,000
Cost of living allowance 24,000
13th month pay 28,000
Christmas gift 5,000
Laundry allowance 6.000

What is the total exempt benefit?

a. P39,000
b. P8,600
c. P30,400
d. P30, 600

46. Which is incorrect with regard to the net operating loss carry (NOLCO)
a. NOLCO can be claimed together with Optional Standard Deductions
b. NOLCO cannot be claimed if the net operating loss arises in a year where
the taxpayer is exempt from income tax
c. NOLCO can be carried out to a period of three years
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 d. NOLCO cannot be claimed by non-resident foreign corporation.

47. Which of these is a special corporate taxpayer?

a. Private school
b. Private hospital
c. Business partnership
d. Trading corporation

48. As a rule, non-profit, non-stock corporations are exempt from income tax. Which of
these non-profit entities is subject to income tax?
a. Association
b. School
c. Farmer’s Cooperative
d. Hospital

49. A non-resident lessor of vessel chartered by Filipino national is subject to

a. 25% tax on its gross rentals from Filipino nationals
b. 25% tax on its worldwide rentals
c. 4.5% tax on its gross rentals from Filipino nationals
d. 7.5% tax on its gross rentals from Filipino nationals

50. A domestic cinematographic film owner, distributor or lessor is subject to

a. 25% tax on Philippine gross income
b. 30% tax on global taxable income
c. 25% tax on global taxable income
d. 30% tax on Philippine gross income

51. Salic Airlines, an air carrier reported the following for its air transport operations:
Destination Fares
Philippines-Australia P1,000,000 (1,000 tickets)
Australia-Philippines P1,250,000 (1,000 tickets)
Philippines-Russia* P2,000,000 (1,000 tickets)
Philippines-Japan P1,500,000 (2,000 tickets)

*The flight was referred to another airliner in Japan. The Japanese airliner airlifted
passengers for Russia.

Determine the income tax due that the carrier is an International Carrier
a. P143,750
b. P112,500
c. P62,500
d. P81,250

52. Refer to no. 51 information, determine the income tax due that the carrier is a
Domestic Carrier with P3,000,000 global expenses
a. P525,000
b. P825,000
c. P143,750
d. P112,500

53. Which of the following tax credit is not always creditable in the current accounting
period?
a. MCIT excess prior year
b. Excess creditable withholding tax prior years
c. Creditable withholding tax in the current year
d. Estimated quarterly income tax payment

54. In the quarterly income tax return, excess MCIT prior year is deductible only when
a. The MCIT exceeds prior year
b. The RCIT exceeds the MCIT for that quarter

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 c. The cumulative MCIT exceeds the cumulative RCIT as of the end of that
quarter
d. The cumulative RCIT exceeds the cumulative MCIT as of the end of that
quarter

55. Which is not exempt from improperly accumulated earnings tax

a. Publicly held corporations
b. Insurance companies
c. Banks
d. Dealer of securities

56. The branch profit remittance tax is 15% of the total profits
a. Of the current year
b. Of the current year earmarked for remittance, including investment income
c. Earmarked for remittance without deducting the tax
d. Actually remitted to the home office abroad, net of tax

57. Which of these entities is exempt from the branch remittance tax
a. OBUs and FCDUs
b. Regional operating headquarters of multinational companies
c. International carriers
d. PEZA-registered entities

58. The branch profit remittance tax is imposed

a. Upon all foreign corporations, resident or nonresident
b. Whenever the foreign branch reports income
c. When there is profit remittance by the branch to the home office
d. Upon resident corporations, domestic or foreign

59. The following are the composition of the total gross income of a domestic
corporation which is subject to MCIT:
Sales, net of discounts ad allowances P4,000,000
Less: Cost of sales 2,400,000
Gross income from operations P1,600,000
Dividend income 100,000
Royalty income 250,000
Gain on sale of building 150,000
Total gross income P2,100,000

What is the minimum corporate income tax?

a. P42,000
b. P40,000
c. P35,000
d. P32,000

60. In the immediately preceding problem, what is the regular corporate income tax of
the corporation has a total allowable deduction of P1,700,000
a. Zero
b. P15,000
c. P90,000
d. P120,000

61. The income statement of Rizza Corporation is shown below:

Sales, net of 5% creditable withholding tax P2,850,000

Cost of sales 1,900,000
Gross income P950,000
Rental income, net of P5,000 95,000
Total gross income P1,045,000
Less: Allowable deductions 1,000,000
Net income P45,000

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 The corporation made an estimated tax payment of P10,000 during the year. What
is the income tax refundable?
a. P133,000
b. P143,000
c. P105,000
d. P95,000

62. The Palawan Corporation had the following excess MCIT in prior years
Excess MCIT-2012 P80,000
Excess MCIT-2013 40,000
Excess MCIT-2014 50,000
Excess MCIT-2015 10,000

In 2016, the RCIT and MCIT were respectively P230,000 and P210,000. What is
the income tax due and payable?
a. P30,000
b. P50,000
c. P110,000
d. P130,000

63. A domestic corporation was assessed by the BIR for improperly accumulated
earnings tax. Relevant to the determination of the IAET are the following data:
Gross income P4,000,000
Allowable deductible expenses 3,200,000
Interest income, net of tax 40,000
Gain on sale of domestics stocks, net of tax 60,000
Dividends declared 400,000
Common stocks, excluding P200,000 share premium 400,000
Retained earnings 500,000

What is the improperly accumulated earnings tax?

a. P75,000
b. P36,000
c. P26,000
d. P6,000

64. A foreign branch remitted the following profits to its head office abroad:
Taxable income, net of regular income tax P1,200,000
Dividend income 100,000
Net capital gains on sale of domestic stocks 135,000

What is branch profit remittance tax?

a. Zero
b. P120,000
c. P180,000
d. P200,250

65. A closely held corporation which started operation in 2011 reported the following
data:

Year 2015:
Gross income from operations P2,000,000
Less: expenses P2,800,000
Net operating loss (P800,000)

Year 2016:
Gross income 6,000,000
Less expenses 5,000,000
Rent income, gross if 5% withholding tax 100,000
Interest on money market placement, net of 20% final tax 160,000
Inter-corporate dividends received 800,000
Dividend paid by the corporation 700,000
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 Tax paid, first three quarters 45,000

The BIR assessed the corporation for improperly accumulated earnings tax. The
corporation had P2,000,000 paid up capital and P1,800,000 retained earnings
beginning. Compute the income tax still due for 2015 and 2015, respectively.
a. P 0; P122,000
b. P 0; P72,000
c. P40,000; P122,000
d. P40,000; P50,000

66. In the immediately preceding problem, Compute the improperly accumulated

earnings tax (IAET)
a. P63,000
b. P93,800
c. P103,800
d. P143,800

67. Jomel Corporation reported P4 million in paid up capital, P1 million in additional paid
up capital and P6 million in retained earnings, inclusive of P1.5 million
appropriations for plant expansion. Jomel Corporation was assessed by the BIR
improperly accumulating profits. Compute the IAET.
a. P600,000
b. P450,000
c. P200,000
d. P50,000

68. The National Teachers College (NTC), a stock corporation, a private educational
institution recognized by the Commission on Higher Education of the Philippine
Government, is in its tenth years of operations. It offers primary, secondary,
tertiary and post graduate courses. It had the following data for 2016.

Tuition fees received P200,000,000

Miscellaneous and other fees received 1,000,000
Gross income from the bookstore and tenants in the ground floor 950,000
of the school building, net of 5% withholding tax
Expenses of operations 100,000,000
Expenditure for building a library with an estimated useful life of 20,000,000
fifty years

How much is the income tax still due from the institution if the expenditures for
the library building is treated an outright deduction?
a. P7,700,000
b. P10,160,000
c. P8,150,000
d. P10,110,000

69. In the immediately preceding problem, how much is the income tax still due from
the institution if the expenditures for the library building is treated as a capital
expenditure?
a. P7,700,000
b. P10,160,000
c. P8,150,000
d. P10,110,000

70. MerKim is a General Professional Partnership, its partners Meriam and Kimberly
share equally in the net income of loss of the partnerhip. For 2016, the partnership
had the following data:

Gross revenues from the practice of profession P1,200,000

Interest on bank deposit 20,000
Direct cost 400,000
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 Other cost and expenses 100,000

How much is the withholding tax on the share of either partner in the distribituve
net income of the partnership?
a. P36,000
b. P35,000
c. P37,000
d. P40,000

-END OF EXAMINATION-

ANSWER KEY-TAX
                   
1 D 16 A 31 C 46 A 61 B
2 B 17 B 32 B 47 A 62 C
3 D 18 D 33 B 48 D 63 B
4 A 19 D 34 B 49 C 64 C
5 A 20 B 35 B 50 B 65 B
6 A 21 D 36 C 51 D 66 C
7 B 22 D 37 C 52 B 67 D
8 D 23 D 38 C 53 A 68 C
9 C 24 C 39 D 54 D 69 D
10 C 25 C 40 D 55 D 70 A
11 B 26 B 41 D 56 C    
12 A 27 D 42 A 57 B    
13 C 28 D 43 C 58 A    
14 A 29 D 44 C 59 C    
15 B 30 D 45 D 60 B    

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