MULTIPLE CHOICE EXERCISES 7.

One of the requirements in order for expenses to

be claimed as deduction for income tax purposes is
1. Which of the following is not a characteristic of a that, it should be subject to withholding tax if
deduction? applicable. What is the withholding tax rate
a. It is a reduction of wealth that helped earn the applicable to rental payments?
income subject to tax. a. 1% c. 2%
b. It is not a receipt. b. 5% d. 10%
c. It is a subtraction to arrive at income subject to
tax. 8. Brianne Corporation has incurred rent expense
d. An immunity or privilege, a freedom from a amounting to P500,000. Brianne paid the lessor
charge or burden to which others are the gross amount of P500,000 without deducting
subjected. 5% withholding tax. How much rent can Brianne
claim as allowable deduction from its gross
2. Statement 1: Exclusions are receipts which are income?
excluded from the gross income, hence, do not a. P500,000 c. P475,000
form part of the gross income. b. P450,000 d. nil

Statement 2: Exclusions are items or amounts 9. Bobadilla Charity (nonstock and nonprofit
allowed to be subtracted from gross income to charitable institution) paid for its regular repairs
arrive at the taxable income. and maintenance of its facilities to Johnson
Statement 3: Deductions from gross income are Manpower Services (JMS). As the accountant of
not presumed. Bobadilla Charity, how much withholding tax will
a. Only statements 1 and 3 are false you impose to JMS?
b. Only statement 2 is false a. Exempt from withholding tax
c. Only statement 1 and 2 are true b. 1% withholding tax on its gross payment
d. All statements are true c. 2% withholding tax on its gross payment
d. 5% withholding tax on its gross payment
3. Statement 1: The taxpayer has the burden of
justifying the allowance of any deduction claimed. 10. De Leon Manufacturing Corporation hired Sia,
Statement 2: Deductions are strictly construed Cabarles & Trinidad (SCT & Co.) for its annual
against the government. financial statement audit for 2018 taxable year.
a. Statements 1 & 2 are false De Leon agreed to pay SCT & Co. for its services
b. Statement 1 is true but statement 2 is false amounting to P2,000,000. Such payment to SCT
c. Statement 1 is false but statement 2 is true & Co. shall be
d. Statements 1 and 2 are true a. Exempt from withholding tax
b. 1% withholding tax on its gross payment
4. Statement 1: Revenue expenditures are period c. 2% withholding tax on its gross payment
costs that are related to a particular period of time d. 5% withholding tax on its gross payment
of business operation.
Statement 2: Capital expenditures are
nonrecurring expenditures related to acquisition of 11. XYZ Co. took two key men insurance on the life of
depreciable assets to be used in the business. a. its President, Mr. A. In one policy, the beneficiary is
Statements 1 & 2 are false the corporation to compensate it for its expected
b. Statement 1 is true but statement 2 is false loss in case of death of its president. The other
c. Statement 1 is false but statement 2 is true policy designates Mr. A's wife as its irrevocable
d. Statements 1 and 2 are true beneficiary.
Question 1-Are the insurance premiums paid by
5. Which of the following is allowable compensation XYZ Co. in both policies deductible? Question 2Will
expense of an employer? the insurance proceeds be treated as income
I. Salary of employee paid for a limited period of subject to tax by the corporation and by the wife?
time after his death to his widow is allowable a. Yes to first and No to second question;
deduction of the employer. b. Yes to both questions;
II. Manager’s expense account subject to fringe c. No to first and yes to second question;
benefit tax. d. No to both questions.
a. I only c. I and II
b. II only d. Neither I nor II 12. All of the following, except one, are not deductible
from gross income
6. Which of the following items of expenses is not a. Tuition fees and other expenses of the
deductible? taxpayer's children
a. Salaries, wages, commissions and professional b. Replacement of the roof of the office building
fees. c. Premiums paid in insuring the life of the
b. Bonuses paid in good faith as additional Corporate President, Appointing the corporation
compensation for services rendered. as the beneficiary of the policy
c. Pension and compensation for injuries if d. Premiums paid on a life insurance policy of a
compensated for by insurance. rank-and-file employee with the latter's
d. Grossed-up monetary value of fringe benefits children as the appointed beneficiary
provided that the final tax imposed has been
paid.
13. On January 1, 2014, Mr. V leased his vacant lot for
a period of 12 years to Mr. J at an annual rate of 19. Roy borrowed money from the Bank amounting to
P2,400,000. It was also agreed that Mr. J will pay P1,000,000 at an annual interest rate of 7%. He
the following: invested the money in deposit substitutes earning
§ P4,800,000 representing rental payment for annual interest income of 8%. How much is the
year 2014 and 2015. deductible interest?
§ Security deposit of P2,400,000. a. P43,600 c. P70,000
§ Annual real property tax of P30,000. b. P26,400 d. P80,000

The lease contract provides, among others that the 20. An individual taxpayer has the following data for
lessee will construct a 5-storey building for parking the year 2018:
purposes at a cost of P9,500,000. Ownership of Interest paid, business loan P100,000 Interest
the building shall belong to the lessor upon the paid, loan to build 500,000
expiration or termination of the lease contract. residential house
Interest expense on delinquency 50,000
The building was completed on July 1, 2016 with an taxes (business related)
estimated useful life of 15 years. How much can Interest income – BPI Makati, net 24,000 For
Mr. J claim as deduction in relation to the lease in income tax purposes, the deductible interest
2014? expense shall be
a. P2,430,000 c. P2,400,000 a. P0 c. P140,100
b. P4,830,000 d. P4,800,000
b. P100,000 d. P150,000

14. Using the same information above, how much can

21. How shall interest related to acquisition of property
Mr. J claim as deduction in relation to the lease in
used in trade, business or profession be treated? a.
2016?
Claim as outright expense
a. P2,430,000 c. P2,400,000
b. Capitalize
b. P2,930,000 d. P3,063,333
c. At the option of the taxpayer, may be claimed
as outright expense or capitalize
15. RRO Corporation is engaged in the sale of goods
d. At the option of the government, may be
and services with net sales/net revenue of
claimed as outright expense or capitalize
P3,000,000 and P2,000,000 respectively. The
actual entertainment, amusement and recreational
22. On January 2, 2018 Mr. B contracted a 1-year
(EAR) expense for the taxable year totalled
P100,000 loan from Metrobank for the purchase of
P30,000.
computers. The equipment which had a depreciable
life of eight (8) years were acquired on April 1,
How much is the deductible EAR expense?
2018. The interest expense for one (1) year
a. P30,000 c. P25,000
amounted P15,000.
b. P27,000 d. nil
In the same year, his bank deposit with PNB earned
16. Which of the following can be deducted from gross
an interest income of P2,000. During the year, he
income in the year paid or incurred?
incurred an interest expense on unpaid business
a. Repairs that materially add to the value of the
tax of P600.
property
b. Repair that appreciably prolong the life of the
The deductible interest expense of Mr. B in 2018 is
property
-
c. Repair that keep the property in its ordinarily
a. P14,240 c. P14,760
efficient operating condition
b. P13,600 d. P14,940
d. All of the choices
23. Which of the following items may be allowed as
17. Which of the following expenses is not deductible
deduction from gross income?
from gross income?
a. Interest paid on tax delinquency
a. Salaries and wages of employees.
b. Fines and penalties for late payment of taxes
b. Entertainment, amusement and recreation
c. Interest paid on indebtedness incurred to
expenses.
finance petroleum exploration
c. Rental expenses.
d. Interest on unpaid salaries and bonuses
d. Bribes, kickbacks and other similar payments.
24. Which of the following is not a requisite for taxes to
18. In the conduct of his business in 2013, Modesto
be deductible?
found it necessary to give gifts to the government
a. Must have been paid or incurred within the
officials with whom he had official dealings.
taxable year.
a. These gifts are deductible expenses subject to
b. Deductible only by the person/s upon whom the
the substantiation rule.
tax is imposed by law.
b. The value of the gifts, if de minimis, are
c. Must be in connection with the taxpayer's
allowed to be deducted.
profession, trade, or business.
c. Irrespective of the value, the gifts are
d. Must be imposed by the national government.
considered as bribes and not allowed to be
deductible.
25. Which of the following is non-deductible?
d. These gifts are deductible if found to be
a. Percentage tax on common carriers by land
necessary and properly supported by receipts.
b. Franchise tax
 c. Overseas communications tax b. P200,000 d. P100,000
d. Stock transaction tax
33. The net operating loss of the business or enterprise
26. Mapanlinlang Corporation was assessed by the BIR for any taxable year immediately preceding the
due to underpayment of Percentage Taxes. The current taxable year, which had not been
Assessment Notice disclosed the following: previously offset as deduction from gross income
shall:
Basic Tax P 1,000,000 a. Be carried over as a deduction from gross
Surcharge 250,000 income for the next 3 consecutive taxable years
Interest 200,000 immediately following the year of such loss.
Penalties 25,000 Total P 1,475,000 b. Be carried over as a deduction from gross
income for the next 5 consecutive taxable years
It also generated interest income from bank immediately following the year of such loss.
deposits amounting to P100,000. How much is the c. Not be carried over as a deduction from gross
deductible interest? income in any of the succeeding years.
a. P200,000 c. P167,000 d. Be carried over as a deduction from gross
b. P162,000 d. nil income in any of the succeeding years until it is
fully offset.
27. Based on the above problem, how much is the
deductible taxes? 34. The term "net operating loss" shall mean
a. P1,275,000 c. P1,250,000 a. The excess of capital losses over capital gains
b. P1,000,000 d. nil deductible from ordinary income.
b. The excess of capital losses over capital gains
28. Based on the preceding number, but the tax not deductible from ordinary income.
underpaid is donor’s tax, how much is the c. The excess of allowable deductions over gross
deductible interest and tax? income.
a. P200,000 and P1,000,000, respectively d. The excess of capital losses over ordinary
b. P200,000 and zero, respectively losses.
c. Zero and P1,000,000, respectively
d. Zero for both items 35. All of the following, except one, are requisites in
the carry-over of net operating loss:
29. Which of the following taxes incurred in the a. There must be no substantial change in the
conduct of business is not allowed as deduction ownership of the business
from business income? b. Carry-over is not allowed if the corporation is
a. Foreign income tax claimed as tax credit subject to MCIT during the taxable year
b. Documentary stamp tax c. Even if the corporation paid MCIT, the running
c. Import duties of the prescriptive period is not interrupted.
d. Local business tax d. The carry-over is good for one (1) year.

30. Which of the following items of expenses require 36. X Corporation owns 100% of Y Corporation. Y
that notice be filed with the BIR to be allowed as Corporation owns 100% of Z Corporation that has
deduction from gross income? NOLCO. Z Corporation is merged into Y
a. Taxes c. Losses Corporation. Which of the following statements is
b. Interest d. Salaries correct?
a. Z Corporation’s NOLCO can be used by it to the
exclusion of all other parties.
31. On July 1, 2015, a taxpayer purchased for
P500,000 an automobile which will be used b. Z Corporation’s NOLCO is transferred to Y
Corporation.
exclusively for his practice. He deducted annual
depreciation on the basis of an estimated useful life c. Z Corporations NOLCO is transferred to X
of five (5) years. On July 1, 2018, the automobile Corporation.
was partially damaged in an accidental collision d. Z Corporations NOLCO can no longer be used.
with another vehicle. The cost of repairs amounted
to P100,000. The taxpayer received insurance 37. Sira Sira Company had an old warehouse which
proceeds of P70,000 to cover the loss. had a cost of P1,200,000. The company demolished
How much is the deductible loss? the warehouse when it had a book value of
a. P200,000 c. P130,000 P200,000 in order to construct a new and bigger
b. P100,000 d. P30,000 warehouse. The demolition cost amounted to
P25,000 while the scrap were sold for P10,000.
How much is the deductible loss in arriving at
32. Emang acquired a property for use in her business.
taxable income?
After a devastating typhoon, the machinery
a. None c. P200,000
suffered partial damage. The following were made
available: b. P185,000 d. P215,000
Cost P500,000
Accumulated depreciation 300,000 38. One of the following losses cannot be deducted
from gross income.
Restoration cost 250,000
a. To construct a bigger warehouse, a
Estimated useful life 5 years
corporation demolished an old warehouse
which had a construction cost of P3,000,000
How much is the deductible loss?
and a book value of P500.000.
a. P0 c. P250,000
 b. Demolition of a building existing on a land
purchased where the corporation has no use for 44. When shall bad debts be allowed as deduction from
the building at the time of purchase and it was gross income?
its intention to remove the building in order to a. Upon setting up of allowance for doubtful
build its factory. accounts
c. A corporation retired its machinery from the b. Upon write-off in the books
business because of the increase in the cost of c. At the option of the taxpayer, upon setting up
production and the failure of the machinery to of allowance or upon write-off
meet the desired number of units of production. d. At the option of the government, upon
d. A corporation ascertained that its B Corp. settingup of allowance or upon write-off
stocks are worthless because of the total
insolvency of B Corp. 45. A taxpayer is allowed to use declining balance
method in claiming depreciation. In such a case,
39. The following interest are non-deductible, except? the limitation is –
a. Interest paid to persons classified as related a. It should not exceed twice the rate in
taxpayers under Section 36 (B) of RA 8424 straightline method
b. Interest related to indebtedness incurred to b. It should not exceed twice the rate in sum-
finance petroleum exploration ofthe-years digit method
c. Interest on preferred stock c. It should not exceed the rate in straight-line
d. Interest related to indebtedness incurred to method
finance working capital requirements d. It should not exceed the rate in sum-of-
theyears digit method
40. Mike Uro owns 50% of Leomar Corporation’s shares
of stocks. Mike sold a property valued at 46. BSE College, a proprietary educational institution,
P1,000,000 to Leomar for P800,000. Is the loss spent P10 million for the construction of a new
deductible from Mike Uro’s gross income? school building. The amount spent for the
a. Yes, because Mike and Leomar are not construction -
considered related parties. a. Must be claimed as expense in the year of
b. No, because Mike and Leomar are considered completion
related parties. b. Capitalized and claim annual depreciation over
c. Yes, because the sale results from sale of the life of the building
property. c. Capitalized or expensed outright at the option
d. No, because the amount of loss cannot be of the school
identified with certainty. d. Capitalized or expensed outright at the option
of the BIR
41. During 2018, Mike created a trust in favor of his
friend Leomar. He appointed Atty. Ong as the 47. Non-resident aliens engage in trade or business as
trustee. A month later, Brian created a trust in well as resident foreign corporations are also
favor of his affectionate friend, JJ. Brian appointed allowed to claim depreciation in arriving at taxable
Ka Emong as the trustee. Later during the year, income. Which of the following is an absolute
Atty. Ong sold a property to Ka Emong at a price requirement before depreciation can be claimed?
which is substantially lower than the property’s a. The property, regardless of location, directly
current market value. Can Atty. Ong deduct the helped in the generation of income in the
loss as a result of the sale? Philippines.
a. No, because both Atty. Ong and Ka Emong b. The property, regardless of location, helped,
were fiduciaries of trusts. directly or indirectly, in the generation of
b. Yes, because Atty. Ong and Ka Emong are income in the Philippines.
fiduciaries of different grantors. c. The property is used in trade or business
c. No, because Atty. Ong does not have a capital regardless of location
gain. d. The property must be located in the Philippines
d. Yes, because losses as a rule are deductibl
48. Which of the following is deductible from gross
42. Dong, a gambling addict, won P90,000 from income even if the payment is not connected with
cockfighting during the year. However, he also business?
suffered losses from other gambling activities a. Contribution of the employer to the pension
amounting to P200,000. How much is the trust of the employee.
deductible loss? b. Charitable contributions
a. P200,000 c. P90,000 c. Income tax paid in foreign country.
b. P110,000 d. nil d. Travelling expenses

43. SNJ Inc. purchased shares of stock of Valde Corp. 49. Which of the following charitable contributions is
for P60,000 and of Boba Co. for P30,000. At the not fully deductible?
end of the taxable year, it was ascertained that its a. Donation to the Government of the Philippines
Valde Corp. stock was worthless because of the to finance priority projects identified by NEDA
complete insolvency of the corporation, and its b. Donation to the Municipality of Milagros in the
Boba Co. shares value had declined to P28,000. Province of Masbate for the repair of Municipal
Hall
How much is the deductible loss of SNJ Inc.? c. Donation to International Organizations
a. P90,000 c. P60,000
b. P62,000 d. nil
 d. Donation to accredited Non-
government
Organizations

50. The following donations are non-deductible,

except?
a. Donations given directly to Yolanda survivors
b. Alms given to beggars
c. Political contributions
d. Donations to International Organizations

51. Mr. Mapagbigay had the following data during

2018:

Gross income from business P1,000,000

Compensation income 40,000
Long-term Capital gain 50,000
Short-term Capital loss 20,000
Operating expenses 400,000
Donation to an accredited 30,000
NGO
Donation to church 40,000

How much is the taxable income?

a. P505,000 c. P575,000
b. P525,000 d. P555,000

52. Based on the above problem, but the taxpayer is a

corporation, how much is the taxable income?
a. P570,000 c. P560,000
b. P545,000 d. P600,000

53. In 2018, Alpha Corp., a calendar-year corporation,

contributed P80,000 to a qualified charitable
organization. Alpha’s net income was P820,000. In
2018 what amount can Cable deduct as charitable
contributions?
a. P41,000 c. P51,000
b. P45,000 d. P80,000

54. DLC Corp. contributed P4,000,000 to its pension

plan during the year 2017. The normal cost
appearing on the Actuarial Valuation Report is only
P3,000,000. How much can DLC Corp. claim as
deduction?
a. P4,000,000 c. P3,100,000
b. P3,000,000 d. nil

55. Continuing the information above, assuming in

2018 DLC Corp. contributed only P2,000,000 while
the Normal Cost is P3,000,000, how much is the
deductible amount?
a. P2,100,000 c. P2,000,000
b. P3,000,000 d. P3,100,000

56. Optional standard deduction is allowed to

a. Non-resident alien engaged in business
b. Non-resident alien not engaged in business
c. Resident alien
d. Non-resident foreign corporation

57. A retailer of goods has gross

sales of P1,000,000 with a
cost of sales amounting to
P800,000. Assuming that the
taxpayer is an individual and
 opted to claim optional standard deduction, how much is
the taxable income?
a. P600,000 c. P120,000
b. P550,000 d. P80,000

58. Based on the preceding number, if the taxpayer is a corporation, how much is the
taxable income?
a. P600,000 c. P120,000
b. P550,000 d. P80,000

59. The taxpayer is a domestic corporation:

Gross sales P9,350,000
Sales returns and allowances 250,000
Sales discounts 100,000
Interest income on trade notes 150,000
receivable
Other income 50,000
Cost of sales 3,000,000
Operating expenses with 4,000,000
vouchers and receipts
Operating expenses without 500,000
vouchers and receipts
Interest income from savings 80,000
deposit
Interest income from deposit 125,000
under FCDS
Royalty income 100,000

How much is the taxable income using itemized deduction?

a. P1,675,000 c. P1,700,000
b. P2,175,000 d. P2,200,000

60. Based on the preceding number, how much is the taxable income using OSD?
a. P3,755,000 c. P3,695,000
b. P5,470,000 d. P3,720,000
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