1|Page

EXERCISES
1-1
1.
2.
3.
4.
5.
6.
7.
8.
9.
10
.

D
F, K
I

EXERCISES
1-2
11 K
.
12 J
.
13 A
.

1.
2.
3.
4.

5.

6.

7.

8.

F
F
F
F
F
F
F
F

T
9.
10 T
.

EXERCISES 1

11
.
12
.
13
.
14
.
15
.
16
.
17
.
18
.
19
.
20
.

T
T
F
F
F
F
T
T
T
T

21
.
22
.
23
.
24
.
25
.
26
.
27
.
28
.
29
.
30
.

F
T
T
T
T

31
.
32
.
33
.
34
.
35
.

F
F
T
T
T

T
F
F
F
T

EXERCISES 1
4

3
1.

11.

1.

2.

12.

2.

3.

13.

3.

4.

14.

4.

5.

15.

5.

6.

16.

6.

7.

17.

7.

8.

18.

8.

9.

19.

9.

10.

20.

10 C
.

11
.
12
.
13
.
14
.
15
.
16
.
17
.
18
.
19
.
20
.

B
A
A
C
C
B
D
A
C
B

2
1.
2
2.
2
3.
2
4.
2
5.
2
6.
2
7.
2
8.
2
9.
3
0.

A
A
D
D
C

31
.
32
.
33
.
34
.
35
.

D
C
B
A
A

D
C
D
B
C

EXERCISE 1 5

The claim of the Commissioner should be denied.

Rule-making power must be confined to details for regulating the mode or
proceedings in order to carry into effect the law as has been enacted, and it cannot
be extended nor can it expand the statutory requirements or to embrace matters
not covered by the statute.

2|Page
Administrative regulations must always be in harmony with the provisions of
the law because any resulting discrepancy between the two will always be resolved
in favor of the basic law.
EXERCISE 1 6
YES. Double taxation means taxing twice the same property twice when it should be
taxed only once; that is taxing the same person twice by the same jurisdiction for the
same thing. Otherwise described as direct duplicate taxation, the two taxes must be
imposed on the same subject matter, for the same purpose, by the same taxing authority,
within the same jurisdiction, during the same taxing period; and the taxes must be of the
same kind or character.
There is indeed double taxation if respondent is subjected to the taxes under both
Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the
same subject matter the privilege of doing business in the City of Manila; (2) for the same
purpose to make persons conducting business within the City of Manila to contribute to
city revenues; (3) by the same taxing authority the City of Manila; (4) within the same
taxing jurisdiction within the territorial jurisdiction of the City of Manila; (5) for the same
taxing periods per calendar year; and (6) of the same kind or character a local business
tax imposed on gross sales or receipts of the business.
Moreover, Section 143(h) may be imposed only on businesses that are subject to
excise tax, VAT, or percentage tax under the NIRC, and that are not otherwise specified in
preceding paragraphs.

EXERCISE 1 7
1.
2.
3.
4.
5.

Excise
Community
Due process
Donors tax
Shifting

7.
8.
9.

L
S
H
I
F
T
I
N
G

6. Lifeblood
Toll
School
Revenue
10. Tax amnesty

L
I
F
E
B
L
O
O
D
H
N

L
C

O
X

O
I

X
A
T

S
O

R
O

T
R
E
V
E
N
U
E

O
D

Y
T
S
E
N
M
A
X
A
T
D

EXERCISE 21

1.

The query should be addressed to the Commissioner of Internal Revenue

because the power to interpret the provisions of the National Internal Revenue
Code (NIRC) and other tax laws is under the exclusive and original jurisdiction
of the Commissioner, subject to review by the Secretary of Finance.

3|Page
Moreover, interpretation of officers, of laws which are entrusted to their
administration, is entitled to great respect and have in their favor a
presumption of legality (Anscor Container Corporation v. CTA, GR No. 38052,
August 31, 1998).
2. I will inform him that a compromise is not allowed anymore because the case
has already been filed in court. The moment the case is filed in court, it cannot
be subject to compromise anymore.
3.

Piolo is correct. Under RA 1405 the BIR Commissioners power to inquire into
a taxpayers bank deposit is not in conflict with the Bank Secrecy Law. Based
on the provision of the NIRC, the Commissioner is authorized to inquire into
bank deposit:
a. To determine the gross estate of a decedent; and
b. When a taxpayer applies for a compromise of his tax liability by reason of
financial incapacity.

4. I will request for a compromise of the assessed tax on ground that the financial
position of the taxpayer demonstrates clear inability to pay the assessed tax.
Clearly, even if the case is decided against the taxpayer, he will not have the
money to pay the assessed tax. It is therefore an exercise in futility to forego
with the case against him.
5.

The claim for refund should be denied on ground of prescription. Recovery of

taxes erroneously paid or illegally collected are allowed only when filed within
the two-year prescriptive period. The two-year period should be computed from
the time of actual filing of the Adjustment Return and final payment of the tax
(Phil. Bank of Communications vs. CIR, 302 SCRA 241).
Thus, the two year prescriptive period lapsed on April 5, 2008.

6.

The Commissioner may not grant the refund when there is a deficiency tax
assessment against the claimant-taxpayer. To award such refund despite the
existence of the deficiency assessment is an absurdity and a polarity in
conceptual effects (Commissioner vs. CA and Citytrust Banking Corp, 234
SCRA 348).

7.

Yes. Where a corporation paid quarterly corporate income taxes in any of the
first three quarters during the taxable year but incurs a net loss during the
taxable year, the two-year period for the filing of claim for refund or credit shall
be counted from the date of the filing of the annual corporate income tax return
(Commissioner vs. TMX Sales, 205 SCRA 184).

8. a. The counting of the two (2) year period commences to run from the date of
final payment. Considering that the final payment was made on July 9, 2009,
the prescriptive period will end on July 9, 2011.
b. Augusto has thirty days from receipt of the decision of the CIR to file an
appeal with the CTA. Since it was received on May 15, 2011, he has until
June 14, 2011 to file his appeal with the CTA.
c. He is given 30 days from receipt of the CIRs decision but not exceeding 2
years from the date of final payment. Hence, he has until July 12, 2011, or
the day following the receipt of the decision, to file an appeal with the CTA.
EXERCISE 2-2. MULTIPLE CHOICE

1.

2.

A
The National Bureau of Investigation and the Bureau of Immigration are

4|Page
under the Department of Justice.
The Bureau of Local Government Finance is under the Department of
Interior and Local Government.
3.

A
The BIR is inferior to the Court of Tax Appeals in terms of tax cases. Thus,
the BIR is not empowered to review the decision of a superior court.

4.

5.

6.

C
The power to decide tax cases is more of a power and duty of the
Commissioner rather than the Bureau of Internal Revenue.

7.

B
The Community Tax is levied under the Local Government Code of 1991.
The Overseas Communication Tax and the Gross Receipts Tax are
business taxes under Section 120 and 121, respectively, of the National
Internal Revenue Code.
The documentary stamp tax is levied under Title VII of the NIRC.

8.

A
The power to interpret the provisions of the NIRC is under the exclusive
original jurisdiction of the Commissioner of Internal Revenue, subject to
review by the Secretary of Finance.

9.

D
Under RA 1125, as amended, the decisions of the Commissioner of Internal
Revenue on cases pertaining to disputed assessments, refunds of taxes, fees
and other charges, penalties, etc. is appealable only to the Court of Tax
Appeals.

10
.

D
The limited power of the Commissioner does not conflict with RA 1405
because the provision of the Tax Code granting this power is an exception to
the Secrecy of Bank Deposits Law.
The Commissioner or his duly authorized representative may be allowed only
to inquire into the bank deposits of the taxpayer on the following cases:
a. To determine the gross estate of the decedent.
b. Where the taxpayer has filed an application for compromise of his tax
liability by reason of financial incapacity; and
c. When there is a waiver duly signed by the taxpayer.

11

C
Revenue Audit Memorandum Order, Revenue Special Order and Revenue
Travel Assignment Order are not exercises of legislative power.
Revenue Regulations are more detailed interpretation of the tax laws. It is
issued by the Secretary of Finance, upon the recommendation of the
Commissioner of Internal Revenue.

12
.

5|Page
The case cannot be compromised anymore if the case is filed already before
the courts of justice and if the case involves fraud.
13
.

14
.

B
Corporations are not allowed to be registered by the Securities and Exchange
Commission for the purpose of practice of public accountancy (RA 9298).

15
.

C
A withholding agent is a party in interest having sufficient legal interest to
bring a suit for refund of taxes illegally collected from him.
The claim for refund must be filed with the CIR before any suit in Court of
Tax Appeals is commenced.
The computation of the two-year period starts from the filing of the final
adjustment return because it was only then that it could be ascertained
whether the taxpayer made profits or incurred losses in its business
operations.

16
.

D
The last day to claim refund is June 30, 2009 or two (2) years from the date of
final payment.

17
.

A
Taxpayers are given 30 days from receipt of BIR decision but within two (2)
years from the date of payment, to appeal the decision to the Court of Tax
Appeals.

18
.

D
When the 2-year period is about to lapse, the suit or proceeding must be
started in the Court of Tax Appeals without awaiting for the decision of the
Commissioner, or the 30-days reglementary period from receipt of decision to
appeal to the CTA.

19
.

C
The best action is to file an appeal with the Court of Tax Appeals before
the lapse of the 2-year prescriptive period, without waiting for the decision of
the Commissioner of Internal Revenue.

20
.

D
The counting of the 30 day prescriptive period for appeal starts from the date
of receipt of the decision because it would be unfair on the part of the
taxpayer to include in the counting the date while the decision is still in the
table of the Commissioner or it is still in transit.

EXERCISE 23
The proper party to question, or seek a refund of an indirect tax is the statutory
taxpayer, the person on whom the tax is imposed by law and who paid the same even if he
shifts the burden thereof to another. Even if Petron passed on to Silkair the burden of the

6|Page
tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which
Silkair had to pay as a purchaser.
An excise tax is an indirect tax where the tax burden can be shifted to the customer
but the tax liability remains with the manufacturer or producer.
The excise taxes are collected from manufacturers or producers before removal of
the domestic products from the place of production.
Although excise taxes can be
considered as taxes on production, they are really taxes on property as they are imposed
on certain specified goods.
When Petron removes its petroleum products from its refinery in Limay, Bataan, it
pays the excise taxes due on the petroleum products thus removed. Petron, as
manufacturer or producer, is the person liable for the payment of the excise tax as shown in
the Excise Tax Returns filed with the BIR. Stated otherwise, Petron is the taxpayer that is
primarily, directly and legally liable for the payment of the excise taxes. However, since an
excise tax is an indirect tax, Petron can transfer to its customers the amount of the excise
tax paid by treating it as part of the cost of the goods and tacking it on to the selling price.
Silkair as the purchaser and end consumer, ultimately bears the tax burden, but this
does not transform petitioners status into a statutory taxpayer.
In the refund of indirect taxes, the statutory taxpayer is the proper party who can
claim the refund.
Petitioner should invoke its tax exemption to Petron before buying the aviation jet
fuel. Petron, however, remains the statutory taxpayer on those excise taxes.

CHAPTER 3
EXERCISES
3-1
1. The partnership is not liable to pay income tax considering that no
income was earned during the year. The increase in the net assets was
caused by the additional contribution of P10,000 by the partners.
2.

3.

The contention of Judge Nitafan is wrong. Payment of income tax by

judges is not covered by the constitutional protection against diminution
of their salaries during their continuance in office. Income taxation for
the members of the judiciary give substance to the equality among the
three branches of the government consisting of the executive, legislative
and the judiciary.
a. Face value
Less: Discount (100,000 x 20%)
Income subject to tax/Fair
discounted value

4.

P
100,000
20,000
80,000

b. Discount
x Due in 2008
Income subject to tax, 2008

P 20,000
50%
10,000

c. Income reportable in 2009

( P20,000 x 50%)

P 10,000

Whenever a stockholder is indebted to the corporation and said

creditor corporation decides to condone the debt, such condonation has
the effect of a payment of dividend to the stockholder. Therefore, the

7|Page

condonation made by Dial Corporation to Rodolfo is in effect a payment

of dividend by Dial Corporation to Rodolfo.
If Rodolfo is the creditor while Dial Corporation is the debtor and
the former decides to condone the debt of the latter, the amount is
considered as an additional investment by Rodolfo to the corporation.
5.

Larry is not required to report income on the condonation considering

that the condonation of debt was given without requiring him to render
services. The P50,000 constitutes more as a taxable gift rather than as
a taxable income.

6.

Yes the amount of P30,000 is in the nature of a remuneratory donation;

it is subject to income tax.

7.

Under the tax benefit rule, whenever a bad debt is claimed as deduction
from gross income and it resulted to a reduction in its tax liability, the
recovery of such is subject to tax. Thus, when Pamco wrote off the
accounts and claimed it as deduction from gross income, there was a
corresponding reduction in the tax liability. It being the case, the
recovery of such debt is taxable to PAMCO but only up to P90,000, the
amount that has been beneficial to PAMCO.

8.

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Value-added tax
Real property tax
Income tax
Stock transaction tax
Special assessment
Occupation tax
Estate tax
Income tax paid to a foreign
country
Community tax
Excise tax

- not taxable
- taxable
- not taxable
- not taxable
- not taxable
- taxable
- not taxable
- taxable if claimed as
deduction
- taxable
- taxable

9.

a. Yes, the dividends are subject to a final tax of 10%.

b. The dividends paid are in effect property dividends. They are subject
to a final tax of 10%
c. The dividends paid are actually stock dividends. They are not
subject to tax.
d. Although some stockholders were paid stock dividends, since others
were paid cash, such declaration and payment resulted to a change
in proportionate interest. Thus, both the stockholders who were paid
stocks and cash dividends are subject to final tax.

10.

a. Dividends received from domestic

not taxable
b. Dividends received by resident foreign
- not taxable
from domestic
c.
Dividends received by nonresident foreign corporation from
domestic 15% final tax if the country in which the nonresident
foreign corporation is domiciled shall allow tax credit of 17% in its
income tax payable in such foreign country.

11.

a. Mr. Sips is entitled to 10% of the value of confiscated smuggled

goods but not exceeding P1,000,000. Since 10% of the value of the

8|Page

smuggled goods is P10,000,000 (P100,000,000 x 10%), Mr. Sips is

entitled only to P1 million as tax informers reward.
b. The reward received by Mr. Sips is subject to a final withholding tax
of 10%. Hence, the amount of tax to be withheld in favor of the
government is P100,000 (P1,000,000 x 10%).
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

P
48,000
P 100,000
74,000
26,000

(26,000 / 18.5 x )

c.

703
48,70
3

Rent ( 4,000 x 6)

P24,0
00

Leasehold improvement:
Cost
P 100,000
Less: Depreciation - July 1, 2009 to
June 30, 2010 (100,000 / 25)
4,000
Book value upon termination
96,000
Less: Amount already reported as
703
income
Income of lessor in 2010

3-2. TAX BENEFIT

RULE
3ANSWER: B
2.1:
Case 1 P 40,000
Case 2 - 20,000
Case 3 - 40,000
Case 4 70,000 (85,000 15,000)
32.2:

(1) ANSWER: D
Gross profit
Add: Bad debts
recovered
Total

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

95,2
97
119,2
97

9|Page

Less: Accounts writtenoff

Deductible
expenses
Net income before
income tax
32.3:

50,000
440,000

490,00
0
340,00
0

(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 2.4. 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.

33.1:
1.

LEASEHOLD
IMPROVEMENT
ANSWER: B
Cash received
Tax paid by lessee
Income to be reported in 2006

120,000
3,000
123,000

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2.

ANSWER: D
Rent income (5,000 x 12)
Leasehold improvement
Tax paid by lessee
Income to be reported under outright
method

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

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

using accrual method of accounting
3.

ANSWER: A
Rent income
Tax paid by lessee
Leasehold improvement:
Cost

60,000
3,000
1,800,0
00

Less: Accumulated depreciation

(1,800,000/30 x 17.5)

1,050,0
00
750,00
0

Book value, end of lease

(750,000/17.5) x 6/12
Income to be reported under spread-out
method
4.

21,429
84,429

ANSWER: C
Effective January 1, 2009, 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 1st day of January of
any year shall take effect 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

60,000
102,857
162,857

ANSWER: B
Cash received
Leasehold improvement (750,000/17.5)

60,000
42,857
102,857

Note:
No real property tax will be shouldered by the lessee starting 2009
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
Less:
Accumulated
depreciation
(1,800,000/30 x 3.75)
Book value upon termination

15,000
1,800,00
0
225,00
0
1,575,00
0

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Less:
income

Amount declared as
2008
2009
2010
2011

21,429
42,857
42,857
42,857

Total

150,00 1,425,0
0
00
1,440,0
00

EXERCISE 3-3.2:
1.

ANSWER: A
Rent (2,000 x 12)

24,0
00
1,000,0
00
1,024,0
00

Leasehold improvement
Income using outright method
2.

ANSWER: C
Rent (2,000 x 12)
Leasehold improvement:
Cost
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.

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

ANSWER: C
Annual income reportable
x No. of years of reporting
Loss incurred by Bryant

61,11
1
____
1
61,111

Note: It is presumed that Bryant had already reported his entire

income on leasehold improvement for the taxable year 2010
but not his income from January to February 28, 2011.
EXERCISE 33.3:
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

36,0
00
600,00
0
300,0
00
300,0
00

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Divide by remaining term of lease

(years)
Annual income to be reported

1 20,00
5
0
56,00
0

EXERCISE 33.4
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(P2,000,000/50 x 8)
Book value, end of lease
Rent income
Income from leasehold improvement
(P1,680,000 / 8)
Total income using spread-out method

3.

P
2,000,00
0
320,00
0
1,680,00
0
P
10,000
210,000
220,000

ANSWER: D

EXERCISE 34.1:
1.

ANSWER: D
Value of promissory note
Less: Discount (P120,000 x 20%)
Taxable income, 2007

2.

P
120,000
24,000
96,000

ANSWER: D
Discount
Less: Income to be reported in 2008
(24,000 x 50%)
Taxable income, 2009

24,00
0
12,000
12,000

EXERCISE 34.2:
1.

ANSWER:

Value of promissory note

Less: Discount (P50,000 x 25%)
Taxable income, 2008
2.

P
50,000
12,500
37,500

ANSWER: B
Value of promissory note

P
50,000

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Less: Amount already declared as

income
Taxable income, 2009

37,500
12,500

EXERCISE 34.3:
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 5. 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 indifferently 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).

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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 effect of a payment of dividend (Sec. 5,
Rev. Regs. No. 2).

1
1

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

1
2

ANSWER: C
Tips
Liability condoned after rendering service
Taxable income

1
3

5,0
00
25,000
30,000

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

23,000
20,000
3,000
Shares

Total
Cost

15 | P a g e

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:

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

Selling price (115 x 200)

23,00
0
19,046
3,954

Less: Cost (95.23 x 200)

Gain on sale
No. of
Shares
Date
Old
New

Cost
1-24-2008

200

New
Cost
per
Share
210

P20,000
1
5

P
95.23

ANSWER: C
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

1
7

30
20
600

ANSWER: A
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)

2,40
0

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Less: Cost
200

(200

20

(200

11,0
00
-.
11,0
00

x P55)
x 20%)
220
(11,000/220) x P40

2,000
400

Gain on sale
1
9

ANSWER: A
Total sale (P400,000 + 50,000)

450,00
0

Less: Cost

240,00
0
35,0
00

Book value of farm equipment

Gain on sale
Add: Other income
Gross income

275,00
0
175,00
0
12,50
0
187,50
0

EXERCISE 41. CROSSWORD PUZZLE

2

E
R

&

I
N

G
3

EXERCISES 4-2
1 a Interest on corporate
. . bonds
b Salary
.
c Tips
.
d Winnings in lotto
.
e Winnings in jueteng
.

- Taxable
- Taxable
- Taxable
- Not taxable (expressly exempt under
the law)
- Taxable (income from whatever
source derived)

17 | P a g e

f.
g
.

Money stolen from

mothers purse
Rice subsidy of P325 per
month

- 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 convenienceof-the-employer 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.

4
.

The P1,000 of 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.
The excess of P200 over the P1,000 ceiling per employee is part of
Other Benefits which maybe subject to income tax if the total other
benefits exceed P30,000. Otherwise, it is exempt from income tax.

The free parking, courtesy discounts, and 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 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 the University of

Saint Anthony to its teachers are supposed to be treated as part of the
teachers gross compensation income considering that the teachers are
neither classified as managerial nor supervisory employees; they are
still classified as rank-and-file employees.
However, since there is a condition that they should remain in the
employ of the employer for at least ten years after graduation, the
expenditure shall be considered as for the convenience of the
employers trade or business.
Therefore, whether the granting of the benefit is extended through
a qualifiying or competitive examination or not, it is not part of the
gross compensation income of the employees.
The cost of the tuition fees are attributable to the operation and
conduct of business of the employer. Therefore, the same shall be
deducted from the gross income of the school.

ANSWERS TO EXERCISE 43

1.

ANSWER: C
Fringe benefit expense
Fringe benefit tax expense

34,00
0
16,000

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Deductible expense
2.

ANSWER:

Fringe benefit expense

Divide by
Grossed-up monetary value
3.

ANSWER:

50,000

34,0
00
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 4-4

1.

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

2.

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

3.

5,000
15,400
20,400
68%
30,000
32%
9,600

ANSWER: B

5,000
15,400
20,400
68%
30,000
32%
9,600

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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
4.

ANSWER:

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

63,840

27,400
91,240
9,60
0
100,84
0

Rank and file:

Christmas bonus (max: P 5,000 / employee 32,000
p.a.)
Medical allowance (max: 150 per employee 14,000
p.m.)
Uniform allowance (max: 3,000 / employee 12,000
p.a.)
Supervisor:
Christmas bonus
Uniform allowance
Total de minimis benefits
5.

ANSWER:

4,000
3,000
65,000

EXERCISE: 45
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

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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 difficulty 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
Sikyo 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. Corporal are specifically
exempt from fringe benefits tax. Moreover, it is also furnished for the
convenience of the employer (the Philippine Government) so that the
military officer 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

21 | P a g e

in trade or business are subject to fringe benefits tax at a rate of 25%

of the grossed-up monetary value.

EXERCISES 4-6
1.

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

2.

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

3.

Rate subject to fringe benefit tax

Fringe benefit
Exchange value in Philippine currency
Fringe benefit subject to fringe benefit
tax
Divide by
Grossed-up monetary value
Rate
Fringe benefit tax

4,000

$
2,500
30
%
750
40
30,000
68%
44,117.
65
32
%
14,117.
65

ANSWER: D
Monetary value (P800,000/5) x 50%
Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax

6.

6,500

ANSWER: D
Cost of first class ticket

5.

4,00
0
2,500

ANSWER: B
Salary

4.

10,50
0
68%
15,441
32%
4,941

80,00
0
68%
117,64
7
32%
37,647

ANSWER: B
Monetary value (P10,000 x 50%)

5,00

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Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax
7.

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.

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

2,000
68%
2,941.1
8
32%
941.18

16,00
0
68%
23,529
32%
7,529

6,00
0
6,250
12,250
68%
18,015
32%
5,765

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

11.

6,000

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
Rate of tax
Fringe benefit tax

10.

8,000

ANSWER: A
Total expenses incurred

9.

0
68%
7,352
32%
2,353

ANSWER: D
Monetary value (P3,400 x50%)
Divide by
Grossed-up monetary value
Rate

2,500,00
0
68
%
3,676,4
71
32
%
1,176,4
71
1,70
0
68%
2,500
32%

23 | P a g e

Fringe benefit tax

Add: Monthly rental
Fringe benefit to clerk
Deductible expense
12.

ANSWER:

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