CHAPTER 7: SELF-TEST EXERCISES

Discussion Questions
1. Discuss the scope of the regular income tax especially on passive
income and capital gains.
2. Enumerate the characteristics of the regular income tax.
3. What are the exclusion in gross income?
4. Distinguish allowable deductions from personal exemption.
5. Demonstrate the computation of the gross income from employment and
the gross income from business or exercise of a profession.
6. How is cost of goods sold determined?
7. What are included in cost of services?
8. What composes the compensation income of a rank and file employee and
a managerial and supervisory employee?
9. How does the tax presentation of the composition of gross income in
the tax return differ between individuals and corporate taxpayers?
10. Distinguish “other taxable income from operations” from non-operating
income.
11. Distinguish revenue from sales, fees, and receipt.
12. Discuss the taxable income of the following is determined:
a. Corporate taxpayer
b. Purely compensation earner
c. Purely business or professional income taxpayer
d. Mixed income earner
13. Discuss the treatment of net loss from business or exercise of
profession.
14. What are the deadlines of the quarterly regular income tax for
individuals and corporations?

True or False 1
1. There are two types of regular income tax: proportional income tax
for corporations and progressive income tax for individuals.
2. NRA-NETBs and NRFCs are also subject to regular income tax.
3. All taxpayers are subject to final tax.
4. Taxable income is synonymous to net income.
5. For all taxpayers, taxable income means the pertinent items of gross
income not subject to capital gains tax and final tax less allowable
deductions.
6. All taxpayers are subject to regular income tax.
7. Employed taxpayers can claim expenses from their employment as
deductions against their compensation income.
8. Items of gross income subject to final tax and capital gains tax are
excluded in gross income subject to regular income tax.
9. The P250,000 income tax exemption for individuals is designed to be
in lieu of their personal and business expenses.
10. Non-taxable compensation are items of compensation that are excluded
against gross income.

True or False 2
1. The taxable compensation income is computed as gross compensation less
the non-taxable compensation income.
2. The deadline of filing the corporate quarterly income tax return is
the same with the deadline of the quarterly income tax return for
individuals.
3. Business expenses can be deducted against all types of gross income
subject to regular tax.
4. No deduction shall be allowed against taxable income.
5. Only corporations may incur deductions against gross income.
6. The gross income from business is measured as sales or gross receipts
less cost of sales or cost of services.
7. The tax due of individuals is determined by means of a schedules of
tax rates.
8. The tax due of corporations is determined by multiplying their gross
income by 30%.
9. The deadline of the annual income tax return of corporations using
the calendar year is similar to the deadline fixed for individual
taxpayers.
10. Every individual taxpayer is exempt from income tax on compensation
up to P250,000 annually but the same exemption does not apply to
business income.

Multiple Choice - Theory: Part 1

1. The general rule in income taxation is
a. Final income taxation c. regular income taxation
b. Capital gains taxation d. fringe benefit taxation

2. Active income is subject to

a. Regular tax c. final tax
b. Capital gains tax d. any of these

3. Questions 3 and 4 are based on the following:

A. Regular Tax B. Final Tax C. Capital Gains Tax

Which of the foregoing are passive incomes are subject to?

a. A only c. Both A and B
b. B only d. Either A or B

4. Which of the foregoing are capital gains subject to?

a. A only c. Either A or C
b. C only d. Both A and C

5. The net amount of regular income subject to regular tax is called

a. Taxable income c. Net income
b. Compensation income d. Gross income

6. Which is not generally subject to regular income tax?

a. Compensation income c. Professional income
b. Business income d. Passive income

7. What are the allowable deductions against gross income?

a. Business expenses
b. Family support
c. Personal expenses by the taxpayer
d. Expenses of employment

8. Deductions are allowed to

a. Employed taxpayers c. Corporate taxpayers only
b. Individual taxpayers only d. Taxpayers engaged in business

9. Personal exemptions are allowed to

a. Employed taxpayers c. Corporate taxpayers only
b. Individual taxpayers only d. Taxpayers engaged in business

10. Which is not the feature of regular income tax?

a. Net income tax c. Annual tax
 b. Final withholding tax d. Creditable withholding tax

11. Which is true with the final withholding tax?

a. The taxpayer still needs to file an annual consolidated return
b. It applies to all items of gross income
c. It constitutes a partial payment of income tax
d. It applies to certain passive income

12. Which is not true about creditable withholding tax?

a. Advances to the annual tax due
b. No need to pay further taxes
c. Need to file annual income tax return
d. Applicable to items of regular income

13. Progressive income tax is applicable

a. Corporate taxpayers
b. Individual taxpayers
c. Compensation earners only
d. Individuals in business only

14. Proportional regular income tax is applicable to

a. Corporations only
b. Compensation earners only
c. Individuals engaged in business
d. Both individuals and corporations

15. Which of the following individual taxpayers is not subject to tax

on taxable income?
a. Non-resident citizen
b. Resident alien
c. NRA-NETB
d. Non-resident alien engaged in business

16. Which of the following corporate taxpayers is not subject to tax

on taxable income?
a. Domestic corporation
b. Business partnership
c. Non-resident foreign corporation
d. Resident foreign corporation

17. Which is a source of income subject to regular income tax?

a. Employment
b. Casual sales transaction
c. Trade or business or exercise of a profession
d. All of these

18. Which interest income will not be included in the income tax
return?
a. Interest income from bank deposits
b. Interest income from lending
c. Interest income from notes
d. Interest income from employees

19. Which is not subject to final tax?

a. Prizes amounting to P11,000
b. Interest income from bank deposits
c. Winning from the Philippines
 d. Share in net income of general professional partnership

20. Which of the following is a passive income but is nevertheless

subject to regular income tax by virtue of exclusion under final
income taxation?
a. Prizes amounting to P10000
b. Service Income
c. Merchandising Income
d. Dividends from domestic corporation

Multiple Choices –Theory: Part 2

1. The following may be relevant in the determination of taxable
income:
A. Gross income subject to regular tax
B. Gross income subject to final tax
C. Deductions from gross income
D. Personal exemptions
Which is not considered in the determination of taxable income?
a. A and B c. D only
b. C and D d. B and D only

2. Which is a correct statement 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 presented as
deductions.
d. They are subject to final tax.

3. Which of these types of employees may be subject to final fringe

benefit tax?
a. Managerial employees
b. Supervisory employees
c. Rank and file employees
d. A and B

4. Which is not considered an operating income?

a. Consignment commission income by a retail store
b. Fees from the rendering of service
c. Interest income from advances to employees
d. Sale of scrap

5. Which is a non-operating income?

a. Gain on sale of office building
b. Sale of goods by a retail store
c. Gate receipts of cockpits
d. Gate receipts of cinemas

6. Which is an incorrect statement?

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

7. Which of the following will least likely to be considered an

operating income of a security dealer?
a. Gain on sale of stocks
b. Gain on sale of bonds
c. Dividend income from domestic corporation
d. Interest income from bonds

8. The distinction between operating and non-operating income is not

required in the income tax return of
a. Self-employed individuals in business
b. Mixed income earners
c. Self-employed professionals
d. Purely employed individuals

9. The reporting classification of gross income into operating and

non-operating is unnecessary for
a. Corporate taxpayer
b. Individual taxpayers
c. Both A and B
d. Neither A nor B

10. 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

11. Who cannot claim deductions?

a. Employed taxpayers
b. Self-employed taxpayers in business
c. Self-employed professional taxpayers
d. B and C

12. Who are required to file quarterly declaration of income?

a. Individuals engaged in business
b. Corporations and individuals engaged in business
c. Corporations
d. All individuals and corporations

13. Mr. Jones wishes to file his 2019 income tax return. To avoid
penalty, he must file his return on or before
a. April 15, 2019 c. August 15, 2020
b. April 15, 2020 d. November 15, 2020

14. An individual taxpayer must file his income tax return for
the third quarter of 2019 on or before
a. April 15, 2020 c. November 15, 2020
b. August 15, 2019 d. November 15, 2019

15. Avida Corporation is filing its income tax return for the
quarter ending February 28, 2019. The return must be filed on or
before
a. April 15, 2020 c. April 30, 2019
b. August 15, 2019 d. March 30, 2019
16. Which of these taxpayer is required to file an income tax
return?
a. An employee covered by the substituted filing system.
b. A taxpayer deriving purely passive income subject to final tax.
c. A special alien with respect to his compensation income.
d. A resident citizen who derives his entire income from sources
outside the Philippines.

17. The taxable income of corporate taxpayers is the

a. Net income from business
b. Net income from business less personal exemption
c. Taxable compensation income
d. Taxable compensation income plus net income from business

18. The taxable income of a pure compensation income earner is

the
a. Net income from business less personal exemption
b. Taxable compensation income plus net income from business
c. Taxable compensation income
d. Net income from business

19. The taxable income of a mixed income earner is the

a. Net income from business less personal exemption
b. Net income from business
c. Taxable compensation income
d. Taxable compensation income plus net income from business

20. The taxable income of a pure professional income earner is

the
a. Net income from business
b. Taxable compensation income
c. Taxable compensation income plus net income from business
d. Net income from profession less personal exemption

21. Which of the following statements is incorrect with respect

to the determination of the taxable income of individual taxpayers
with other income?
a. The other income of pure compensation earners is simply included
in taxable compensation income
b. The other income of a professional income earner is included as
part of non-operating income and is included in net income
c. The other income of a mixed income earner is also treated as a
part of non-operating income and is included in the net income
d. The other income is simply ignored in the computation of taxable
income

22. Statement 1: Individuals with higher income are subject to

higher tax rates.
Statement 2: Corporations with higher income are subject to
higher tax rates.
Which is correct regarding the regular income tax?
a. Statement 1 only c. Both statement 1 and 2
b. Statement 2 only d. Neither statement 1 nor 2

23. Which is incorrect in the determination of the taxable income

of individual taxpayers?
 a. Under the TRAIN law, there is no instance where the compensation
income of taxpayers could become zero.
b. A net operating loss is deductible against taxable compensation
income.
c. The taxable compensation income is added to the net income from
business.
d. Personal exemption is no longer deductible against compensation
income.

24. Statement 1: Corporations with the same net income may not
have the same tax due.
Statement 2: Individuals with the same net income may not
have the same tax due.
Which statement is incorrect regarding the regular income
tax?
a. Statement 1 c. Both statements 1 and 2
b. Statement 2 d. None

25. A purely engaged in business individual taxpayer shall use

a. BIR Form 1701A c. BIR Form 1700
b. BIR Form 1701 d. BIR Form 1702

26. BIR Form 1701 is not intended for

a. Estate c. Pure professional income earner
b. Trust d. Mixed income earner

27. BIR Form 1700 is intended for

a. Trust c. Pure compensation income earner
b. Estate d. Pure business or professional income
earner

28. A corporation subject to different tax rates shall use

a. Form 1702-RT c. Form 1702-MX
b. Form 1702-EX d. Form 1701A

29. A non-profit corporation with a taxable income shall use

a. Form 1702-RT c. Form 1702-MX
b. Form 1702-EX d. Form 1701A

30. A school which is subject to a preferential or special tax

rate shall use
a. Form 1702-RT c. Form 1702-MX
b. Form 1702-EX d. Form 1701A

31. A corporation that is subject only to a 30% income tax rate

shall use
a. Form 1702-RT c. Form 1702-MX
b. Form 1702-EX d. Form 1701A

Multiple Choices – Problems 1

1. Mrs. Sanchez Mira had a gross taxable compensation income of
P400,000. She also earned an additional P2,000 by investing her
 money in time deposits plus P3,000 interest income from lending
money to a friend. Compute her taxable income.
a. P303,000 c. P300,000
b. P302,000 d. P403,000

2. Ms. Claveria had a business net income of P300,000. She also earned
P5,000 commission from selling cellular cards and P12,000 dividends
from a domestic corporation. Compute her taxable income.
a. P300,000 c. P305,000
b. P312,000 d. P317,000

3. Mr. Pamplona earned a total gross receipts of P800,000 and paid

P300,000 in expenses in his accounting practice. During the same
year, he also earned a total of P60,000 net gain from the sale of
domestic stocks directly to a buyer. He also disposed a vacant lot
at a net gain of P140,000. What is the taxable income of Mr.
Pamplona?
a. P400,000 c. P500,000
b. P460,000 d. P600,000

4. Mr. Monreal earned a gross compensation income of P200,000,

exclusive of P20,000 non-taxable compensation income, and gross
business income of P500,000 before expenses of P200,000. He also
earned book royalties of P10,000 and P8,000 interest income from
clients’ promissory notes. Mr. Monreal has personal expenses of
P170,000 during the year. What is Mr. Monreal’s taxable compensation
income?
a. P30,000 c. P200,000
b. P180,000 d. P220,000

5. What is Mr. Monreal’s net income from business?

a. P300,000 c. P310,000
b. P308,000 d. P518,000

6. What is Mr. Monreal’s taxable income?

a. P508,000 c. P558,000
b. P450,000 d. P468,000

7. Mr. Bangul earned a compensation income of P120,000 and net income

from business of P300,000. He also earned P8,000 prizes from a
dancing competition and P45,000 royalties from his musical
composition. Mr. Bangul has P150,000 personal expenses. Compute the
taxable income.
a. P473,000 c. P428,000
b. P465,000 d. P420,000

8. In 2015, Ms. Balayan earned P450,000 compensation income but

incurred P120,000 net loss in her business. What is her taxable
income assuming she incurred personal expenses of P100,000?
a. P450,000 c. P330,000
b. P550,000 d. P450,000

9. Mr. Gudani, with a P75,000 personal exemption, had the following

data
Philippines Abroad__
Gross income from sales P 4,000,000 P 6,000,000
 Interest income on deposits 40,000 80,000
Less: Deductions 2,000,000 3,600,000

Compute the taxable income if Mr. Gudani is a resident citizen.

a. P4,480,000 c. P2,040,000
b. P4,520,000 d. P2,000,000

10. In the immediately preceding problem, compute the taxable

income if Mr. Gudani is a non-resident citizen.
a. P4,520,000 c. P2,040,000
b. P4,480,000 d. P2,000,000

Multiple Choices – Problems 2

1. Lesde, Inc. had the following income in 2019:

Philippines Abroad__
Rent Income P10,000,000 P12,000,000
Dividend – domestic 50,000 -
Royalties 80,000 200,000
Business expenses 8,700,000 9,800,000

Compute the taxable income if Lesde, Inc. was a domestic

corporation.
a. P3,500,000 c. P1,380,000
b. P3,700,000 d. P1,300,000

2. Compute the income tax due in the immediately preceding problem.

a. P1,149,000 c. P1,110,000
b. P390,000 d. P381,000

3. Compute the taxable income assuming Lesde Corporation was a

resident foreign corporation.
a. P3,700,000 c. P1,380,000
b. P3,500,000 d. P1,300,000

4. Compute the income tax due in the immediately preceding problem.

a. P390,000 c. P1,149,000
b. P1,110,000 d. P381,000

5. Compute the tax due if Lesde, Inc. was a non-resident foreign

corporation. Assume that the tax sparing is not applicable to
Cavite.
a. P3,105,000 c. P3,000,000
b. P3,039,000 d. P429,000

6. Mr. Allan derived the following income in 2019:

 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 sale of stocks directly to a buyer 40,000
Ordinary gain on the sale of old office furniture 10,000
Dividend income 50,000

Compute the total passive income subject to final tax.

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

7. Compute the total income subject to regular tax.

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

8. Compute the capital gain subject to capital gain tax.

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