NORTHERN CPA REVIEW

TAXATION
Second Pre-Board Examination

PROBLEMS
1. Statement 1: Congress can exercise the power of taxation even without Constitutional
delegation of the power to tax.
Statement 2: Only the legislature can exercise the power of taxation, eminent domain and police
power.

Which statement is correct?

a. Statement 1 c. Statements 1 and 2
b. Statement 2 d. Neither statement 1 nor 2

2. Which of the following normally pays real property tax?

a. Bantay Bata, a non-profit charitable institution
b. Jesus Crusade movement, a religious institution
c. University of Pangasinan, a private proprietary educational institution
d. SM Property Holdings, a registered property development company

3. An educational institution operated by a religious organization was being required by a local

government to pay real property tax. Is the assessment valid?
a. Yes, with respect to all properties held by such educational institution.
b. Yes, with respect to properties not actually devoted to educational purposes.
c. No, with respect to any properties held by such educational institution.
d. No, with respect to properties not actually devoted to educational purposes.

4. Which of the following violates Constitutional provisions?

a. Payment of salaries to priests of the Roman Catholic church employed by the Armed Forces
of the Philippines.
b. Subjecting the sale of religious literatures to income tax.
c. Imposition of license for the sale of religious literatures.
d. Authorizing the President of the Philippines to fix the rates of tariffs or imposts.

5. Tax as to incidence is classified as

a. Fiscal or regulatory c. National or local tax
b. Direct or indirect tax d. Specific or ad valorem tax

6. Which of the following statement is correct?

a. In the power of taxation to destroy or not, the Marshall doctrine is unconstitutional hence
the Holmes doctrine is followed in practice.
b. An ex post facto tax law violates the constitution.
c. A tax bill personally drafted by the president shall become a law after approval by congress.
d. It is in the public interest that errors of public officials should bind the government.

7. 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

8. Jen is engaged in business. The following pertains to her transactions during 2011:
 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 were P800,000 and the cost of goods sold were P600,000.
 Jen acquired several stocks from the Philippine Stock Exchange for speculation. These
stocks have aggregate purchase price of P400,000 but with P700,000 fair value at December
31, 2011.
 Jen’s house and lot which he acquired for P1,500,000 in 2010 now have current fair value of
P2,500,000.

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 Compute Jen’s total income subject to income tax.
a. P1,800,000 c. P250,000
b. P1,550,000 d. P200,000

9. Kate has the following income in 2011:

 P10,000 interest income from a non-resident Japanese friend
 P40,000 interest income from Philippine residents
 P500,000 rent income from a commercial complex located in the USA 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 of merchandise imported and sold to Filipino residents
 P50,000 gain on sale of merchandise purchased locally and sold during his business travel
in Hong Kong
 P400,000 gain on sale of the boarding house located in Baguio City to a non-resident buyer

Compute the Kate’s total income earned from sources within the Philippines?
a. P1,800,000 c. P1,140,000
b. P1,430,000 d. P1,040,000

10. Mrs. Julian started business on July 15, 2011. Her 2011 income tax return shall cover which
period?
a. January 1 to July 15, 2011
b. July 16, 2011 to July 15, 2012
c. July 16, 2011 to December 31, 2011
d. January 1 to December 31, 2011

11. Blitzkrieg Corporation started business on April 5, 2011 and opted to report income tax on a
fiscal year ending every October 31. Blitzkrieg’s first income tax return shall cover?
a. April 5, 2011 to October 31, 2011
b. April 6, 2011 to October 31, 2011
c. April 5, 2011 to December 31, 2011
d. April 5, 2011 to April 5, 2012

12. Mr. Talipao derived the following income in 2011:

Business income P 200,000

Compensation income 300,000
Interest income from 5/6 lending to clients 100,000
Interest income from bank deposits 20,000
Royalty income 100,000
Capital gain on sale of personal car 20,000
Capital gain on the sale of stocks directly to buyer 40,000
Ordinary gain on sale of old office furnitures 10,000
Dividend income 50,000
Winnings from PCSO 1,200,000

Compute the total passive income subject to final tax.

a. P1,470,000 c. P270,000
b. P1,370,000 d. P170,000

13. Compute the total income subject to regular tax.

a. P1,730,000 c. P630,000
b. P1,470,000 d. P530,000

14. Compute the capital gain subject to capital gains tax.

a. P70,000 c. P40,000
b. P60,000 d. P 0

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15. Juan, a farmer, uses the crop-year method in reporting his income from long-term crops. The
following data are relevant to his farming operations in 2011:
 Sales of crops harvested, P800,000
 Expenses on harvested crops, P300,000
 Expenses on maturing crops, P200,000
 Expenses on newly planted crops, P100,000
 Sales of a fully depreciated tractor, P40,000

Juan uses the crop year method in reporting crop income. Compute Juan’s total income subject
to tax.
a. P540,000 c. P340,000
b. P500,000 d. P240,000

16. Mr. Alvarez has the following income during the year:

Gross compensation income

including P25,000 13th month pay P 325,000-
Less: Tardy or absences ( 10,000)
Net compensation income P 315,000-
SSS deductions 12,000-
PhilHealth deductions 9,000-
Pag-Ibig deductions 10,000-
Union dues 5,000-
Withholding tax 40,000-
Net pay P 239,000-

Compute the total exclusions from gross income?

a. P36,000 c. P66,000
b. P61,000 d. P71,000

17. Ms. Henson retired from her job after 25 years of service. She joined the company at the age of
23 and was promoted from an accounting clerk to VP Finance. She was paid P2,000,000 total
retirement pay from the employer’s contributory pension plan which was duly registered with
the BIR. Out of the total proceeds, Ms. Henson contributed P600,000. This was Ms. Henson’s
first retirement from employment.

How much is not included in gross income.

a. P2,000,000 c. P600,000
b. P1,400,000 d. P 0

18. Andres is a lessor of commercial spaces to one client. During the year, he received the following
remittance:

Rental, net of 5% creditable withholding tax P 1,900,000

Real property tax 50,000
Reimbursement for utilities used
by lessees paid by Andres 200,000

How much will be included in gross income subject to regular tax?

a. P2,250,000 c. P2,000,000
b. P2,050,000 d. P1,950,000

19. The proceeds of life insurance received by the wife of the insured is
a. Exempt from income tax.
b. subject to final tax.
c. Eart of taxable income.
d. Partly exempt and partly taxable.

20. The following entry were made on the books of ABC Corporation:

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 Fringe benefit expense 1,100,000
Fringe benefit tax expense 256,000
Cash 1,920,000

The fringe benefit granted to rank and file is.

a. P300,000 c. P556,000
b. P432,000 d. P800,000

21. An individual income taxpayer reported the following:

Capital loss – current year P 50,000

Capital gain – current year 200,000
Net capital loss – last year 70,000

Compute the total capital loss deductible in the current year.

a. P320,000 c. P120,000
b. P200,000 d. P50,000

22. A taxpayer reported the following items of gross income and deductions in 2011:

Rent income P 400,000

Service fees 200,000
Interest income from bank deposits 50,000
Deductible expenses 800,000
Non-deductible expenses 100,000

Compute the NOLCO to be carried out in the next three years.

a. P300,000 c. P200,000
b. P250,000 c. P150,000

23. An individual taxpayer showed the following:

2011 2012
Gross income P 300,000- P 400,000-
Deductible business expenses ( 360,000) ( 300,000)
Net capital gain or (loss) ( 50,000) 70,000-

Compute the 2012 taxable income before personal exemptions.

a. P 170,000 c. P 110,000
b. P 120,000 d. P 60,000

24. Mr. Calabarzon reported the following data during 2011:

Sales P 1,000,000
Cost of sales 600,000
Gain on sale of equipments 60,000
Interest income from bank deposits 40,000
Deductible expenses 300,000
Non-deductible expenses 200,000

Compute the optional standard deduction.

a. P440,000 c. P 400,000
b. P 424,000 d. P 160,000

25. Zambales, Inc. made the following contributions during 2011:

Contributions to the government in non-

priority activities P 60,000
Contributions to foreign charitable institutions 40,000
Contribution to accredited non-profit
institution 30,000

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 Contributions to foreign organizations fully
deductible under treaty provision 100,000

Zambales, Inc. has net income before contribution expense of P1,000,000.

Compute the deductible contribution expense.

a. P230,000 c. P180,000
b. P190,000 d. P130,000

26. A VAT taxpayer cannot deduct all of the following as expense, except?
a. Philippine income tax
b. Donor’s tax
c. Value Added Tax
d. Interest on tax delinquency

27. Which is not a requisite of a claimable dependent?

a. Must be legitimate or legally adopted child
b. Must be living with and dependent upon the taxpayer for chief support
c. Must not be more than 21 years of age, except when incapacitated
d. Must not be married or employed

28. Which of the following occurrences will not cause a change in the amount of claimable personal
exemption either in the current or future years?
a. Death of a dependent of the taxpayer
b. Having new dependent
c. Death of the taxpayer
d. Marriage of the taxpayer

29. Which of the following may be subject to 15% gross income tax on compensation and hence
cannot claim personal exemption?
a. Resident citizen employed by a finance institution
b. Resident alien employed by a software development company
c. Resident citizen employed by an offshore banking unit
d. Resident citizen employed by a construction company

30. Which is not subject to special corporate tax rate?

a. Proprietary educational institution
b. Offshore banking units
c. International carriers
d. Private hospitals

31. PC Repair, business partnership providing services, reported the following:

Services fees P 2,000,000

Salaries of staff, supplies and other direct costs of providing services 1,000,000
Interest form bank deposits 50,000
Gain on sale of land classified as capital assets 400,000
Gain on sale of used equipment to clients 150,000
Other deductible business expenses 500,000

Compute the income tax due.

a. P200,000 c. P195,000
b. P250,000 d. P225,000

32. Iligan, Inc. became subject to MCIT in 2011. Assume Iligan will have the following RCIT and MCIT
data:
2011 2012 2013 2014 2015
RCIT P 0 P 500 P 300 P 200 P 400
MCIT 400 600 200 350 350

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 Compute the income tax payable in 2015.
a. P100 c. P150
b. P120 d. P200

33. Green Air, a resident foreign air carrier, reported the following summarized results of its Philippine
operations:

Inbound Outbound
flights flights Total
Gross receipts P9,000,000 P8,000,000 P17,000,000
Less: Direct expenses 4,000,000 3,000,000 7,000,000
Other expenses 4,000,000
Net income P 6,000,000

Compute the income tax payable of Green Air.

a. P200,000 c. P1,800,000
b. P600,000 d. P1,920,000

34. Makati Trading, Inc. reported the following on its fifth year of operation:

Sales P 4,000,000
Cost of sales 2,000,000
Royalties from invention 250,000
Gain on sale of domestic stocks directly to buyer 150,000
Rent income 100,000
Interest from customers’ promissory notes 50,000
Business expenses 2,000,000

Compute the income tax due.

a. P0 c. P15,000
b. P20,000 d. P43,000

35. Which is included in the gross income of a resident alien decedent?

a. Properties held as agent
b. Properties held under usufruct
c. Properties to be bequeathed to a charitable institution no part of which is to be used for
administrative purpose
d. House and lot located abroad

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