True or False 1

1 Interest incurred in the financing of petroleum operations may at the option of the
taxpayer be capitalized or expensed.
2. Income tax is not an expense.
3. The arbitrage limit applies only when there is an intentional arbitrage
4. The arbitrage limit applies to all taxpayers including individuals.
5. Interest expenses incurred with related parties are deductible.
6. Interest expenses are deductible in full amount if there is no interest income subject
to final tax during the period.
7. Interest on a prescribed debt is deductible.
8. A deductible interest must not be incurred between related parties.
9. The allowable deduction for deductible taxes includes the basic tax, surcharge and
interest.
10. Foreign taxes can be claimed as a deduction or tax credit.
11. Foreign corporations and aliens can claim deduction or tax credit for foreign
taxes.
12. Capital loss is deductible to the extent of ordinary gain while ordinary loss is
deductible in full.
13. Losses must be reported to the BIR within 45 days from the occurrence of the casualty,
robbery, theft, or embezzlement giving rise to the loss.
14. Depreciation on revaluation surplus of properties can be deducted as part of
depreciation expense.
15. The claim of the same loss in the income tax return of the estate and in the estate
tax return is not allowed.

True or False
1. Bad debt expenses representing loss of capital can be deducted by cash basis taxpayers.
2. Bad debt expenses between related parties can be deducted as long as these are
adequately supported with documentary evidence.
3. The loss of capital investment in a business can be claimed as bad debt expense.
4. The subsequent recovery of bad debt expense must be reverted back to gross income to
the extent of the tax benefit of the deduction in the vear the deduction is made.
5. The loss on insured property cannot be deducted.
6. In total destruction of properties, restoration costs are treated as new acquisition
of properties.
7. If the fair value of the property is not determinable, restoration costs are expensed
to the extent of the basis of the original property. The excess over the basis is treated
as an increase in fair value and is capitalized.
8 The loss in value of assets is deductible only when sustained and realized
9. Losses on wagering transactions are deductible in full.
10. With the exception of domestic corporations and resident citizens, expenses incurred
abroad cannot be deducted unless incurred in connection with the Philippine business.
11. Contributions are valued at the fair value of the property donated.
12. The recovery of bad debts by cash basis taxpayers must always be reverted back to
gross income.
13. The recovery of bad debts by accrual basis taxpayers may be reverted back to
gross income.
14. Capital assets can be depreciated for tax purposes.
15. The depreciation expense on properties held under life tenancy is computed as if
the life tenant were the absolute owner of the property.

True or False 3
1. Petroleum operations are not subject to the limit on the deduction of intangible
exploration and development costs after the commencement of commercial production.
2. Contribution expenses are deductible if the donee is a domestic Institution.
3. Donations to foreign institutions covered by treaty exemptions are fully deductible.
4. Contribution expenses are measured at the fair value of the property donated.
5. Private educational institutions are allowed to deduct capital expenditures.
6. The depreciation on properties held in trust is apportioned between the income
beneficiaries and the trustees in accordance with the provision of the instrument
creating the trust or on the basis of the income allowable to each.
7. The depreciation of revaluation surplus is not deductible in taxation.
8. No depreciation expense is allowable for helicopters, yachts, airplane or aircraft, and
land vehicles which exceeds P2,400,000 in value unless the main line of business of the
taxpayer is transport or lease of transportation equipment.
9. Tangible development costs in wasting assets are capitalized and depreciated.
10.Intangible exploration and development costs incurred before commercial production in a
wasting asset operation are capitalized as cost of the wasting asset.
11. After commencement of commercial production, intangible exploration and development
costs incurred on non-producing wells or mines are deductible in the period paid or
incurred.
12. After commencement of commercial production, intangible exploration and development
costs incurred on producing wells or mines are always capitalized and amortized using the
cost-depletion method.
13. The threshold on partially deductible contributions of corporate taxpayers is 10% of
the net income before the contribution.
14. The funding of past service cost is amortized over 10 years or the actual vesting
period whichever is longer.
15. The overfunding of defined benefit plans is treated as funding of past service cost
and is amortized over 10 years.
16. The employee counterpart in a contributory pension plan is a deductible by the
employer.
17. Research and development costs related to land must be capitalized.
18. Research and development costs not related to capital accounts are either deducted
outright or deferred and amortized over a period of not less than 60 months.
19. The EAR expense on the sale of goods is subject to a limit 0f 0.5% of gross sales.
20. The EAR expense on the sale of services is subject to a limit of 1% of net revenue.
21. Purely employed individuals can claim deductions for donations made.

Multiple Choice: Theory 1

1. Which of the following cannot be deducted against gross income of non- VAT taxpayers?
a Foreign income tax c. Philippine income tax
b. Value added tax d. Percentage tax

2. Which is not deductible against gross income?

a. Depreciation value of fringe benefits given to managerial employee
b. Fringe benefits to rank and file employees
c. Compensation of minimum wage earners
d. Salaries of managerial or supervisory employees

3. Which is deductible tax expense against gross income?

a. Documentary stamp tax
b. Donor's tax
c. Estate tax
d. Foreign income tax claimed as tax credit

4. Which is deductible in the measurement of net income from business or profession?

a. Mandatory payroll deduction
b. Tuition fees of the taxpayer's brother
c. Interest expense on borrowings from family members
d. Salaries of personal security guard of a managerial employee

5. Which of the following can treat capital expenditures as outright deduction?

a. Public schools or universities
b. Non-profit schools or universities
c. Private educational institutions
d. All of these

6. Which is not a requisite of a deductible loss?

a. It must be sustained by the taxpayer in the current year.
b. It must be reported to the BIR within 45 days from the occurrence of the loss.
c. It must be compensated by insurance or indemnity contracts.
d. It must pertain to a property connected to the trade, business or profession of
the taxpayer.

7. Which is a correct statement?

a. Gains between related parties are exempt from income tax.
b. Losses between related parties are deductible.
c. Gains between related parties are taxable.
d. All of the above

8. Who are not related parties for purposes of the NIRC?

a. Fiduciary of trusts with the same grantor
b. The trustee and the beneficiary of a trust
c. Corporations under common control
d. A partner and the partnership

9. Which is a deductible tax expense?

a Surcharges and penalties
b. Stock transaction tax
c. Real property tax on business properties
d. Special assessment

10. Which of the following can be deducted by a VAT taspayer?

a. Philippine income tax c. Value Added Tay
b. Donor's tax d. Interest on tax delinquency

11. Who cannot claim foreign income tax credit?

a. Resident citizens c. Resident aliens
b. Domestic corporations d. None of these

12. Foreign income tax can be claimed as

Deduction from gross Tax credit against the income
Income tax due
a. Yes Yes
b. No Yes
c. Yes No
d. No No

13. Estimated quarterly income tax can be claimed as

Deduction from gross Tax credit against the income
Income tax due
a. Yes Yes
b. No Yes
c. Yes No
d. No
14.Fringe benefit tax can be claimed as
Deduction from gross Tax credit against the income
Income Tax due
a. Yes Yes
b. No Yes
c. Yes No
d. No No

15. Which of these expenses is not part of the deductible expenses of the taxpayer?
a. Expanded withholding taxes on certain expenses
b. Withholding tax on employee salaries
c. Documentary stamp tax on the sale of stocks directly to a buyer
d. Real property tax on business properties

Multiple Choice: Theory 2

1. Wagering losses are deductible

a. in full
b. to the extent of capital gains
c. up to extent of gains on wagering transactions
d. are treated as deferred charge subject to amortization over 60 months

2. Securities becoming worthless is considered as an ordinary loss to

a. Banks c. Security dealers
b. Trusts d. All of these

3. Bad debts expenses include

a. uncollectible debts due to the taxpayer.
b. securities becoming worthless.
c. Both a and b
d. Neither a nor b

4. Which of these is a partially deductible contribution?

a. Donation to the government for public purpose
b. Donation to priority activities of the government
c. Donation to foreign institutions with treaty exemption
d. Donation to accredited charitable institutions
5. Research and development cost that are not chargeable to capital account can be
claimed as
a. Deductible expense
b. Deferred expense subject to amortization
c. Both a and b
d. Either a or b

6. A taxpayer incurred research and development expenditures which are related to

a capital account subject to depreciation. The taxpayer should
a. claim outright deduction for the research and development expenses.
b. treat the R&D expenses as a deferred expenses and amortize them over 60 months.
c. treat the R&D expenses as capital expenditures and depreciate them over the
useful life of the related asset.
d. claim them as outright deductions or treat them as deferred amortize them over
10years.
7. A taxpayer paid for research and development expenses that are not chargeable to
capital account. The taxpayer wished to amortize the same over its expected period of
benefits.

If the R&D is expected to benefit the taxpayer for 6 years, what is

amortization period for the R&D expenses?
a. 72 months c. 30 months
b. 60 months d. 36 months

8. which can claim full deduction for the loss of securities becoming worthless?
a. Security dealers c. Both a and c
b. Non- security dealers d. Neither a or c

9. Which of the following items of entertainment, amusement and recreation expenses can be
Claimed as a deduction?
a. Entertainment expenses paid to officials of the government
b. Entertainment expenses not receipted in the name of the taxpayer
c. Entertainment expenses in excess of the limits of the law
d. Entertainment expenses for potential and existing clients

10.Calauag Inc. owns 51% of the voting power of Quezon, Inc. Which is a correct
statement regarding gains and losses between these two entities?
 a. Losses sustained by Calauag, Inc. on transactions with Quezon, Inc. are claimable as
deductions.
b. Losses sustained by Quezon, Inc. on transactions with Calauag, Inc. are claimable as
deductions.
c. Gains realized by either party from each other are exempt from income tax due to the
underlying economic substance of their relationship.
d. Gains between Calauag and Quezon are subject to income tax.

Multiple-Choice: Problems 1
1. The following relates to a taxpayer:
Interest expense P 400,000
Interest income - promissory notes 100,000
Compute the deductible interest expense
a. P400,000 c. P333,000
b. P367,000 d. P300,000

2. The taxpayer has the following losses:

Net Operating Loss Carry Over - last year P 200,000
Net capital loss – current 80,000
Net capital loss - last year 70,000
Ordinary loss 50,000
Taxable income before losses 400,000
Compute the total deductible losses in the current year.
a. P400,000 c. P250,000
b. P330,000 d. P200,000

3. Gawan Merchandising paid P400,000 to employees, net of P60,000 to withholding tax

On compensation. What is the deductible amount of expense the employer?
a. P0 c. P400,000
b. P60,000 d. P460,000

4. Taxpaver under the cash basis had the following expenditures:

Acquisition of office equipment at the
middle of the year (5 year useful life) P 200,000
Pavment of employee salaries 40,000
Payment for office utilities expenses 60,000

5. How much is claimable as deduotible business expense for the year?

a P300,000 c. P120,000
b. P140,000 d. P 60,000

6. The following relates to a taxpayer's warehouse:

Cost P 2,000,000
Accumulated depreciation 600,000
Residual value 200,000
Current fair market value 2,500,000
Remaining useful life 12 years

Compute the deductible depreciation expense.

a. P208,333 c. P191,667
b. P200,000 d. P100,000

7 An individual income taxpayer reported the following:

Capital loss - current year P50,000
Capital gain - current year 200,000
Net capital loss - last year 70,000

Compute the total capital loss deductible again

a. P 320,000 c. P120,000
b. P 200,000 d. P50,000

8. Suppose the income taxpayer in the immediately preceding problem is a

Corporation compute the deductible capital loss against capital gain.
a. P320,000 c. P120,000
b. P200.000 d. P250.000

9. The following data relate to an individual taxpayer

Capital loss -- current year p 80,000
Capital current year 150,000
Met eapital loss - last year 90,000
Net incum last year 80,000
 What is the net capital loss carry- over for the current period?
a. P0 c. P80,000
b. P70,000 d. P90,000

10. The following relate to a corporate taxpayer:

Capital loss-current year P 60,000
Capital gain - current year 140,000
Net capital loss 40,000
Net income 75,000

What is the net capital loss carry-over?

a P 0 c. P75,000
b. P40,000 d. P80,000

11. An individual income taxpayer reported the following:

Capital loss-current year P 50,000
Capital gain - current year 60,000
Net capital loss - last year 70,000

Compute the deductible capital loss against capital gain in the current year
a. P180,000 c. P60,000
b. P120,000 d. P50,000

12. An individual taxpayer showed the following:

2019 2020
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 2019 net income.

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

13. Assume in the immediately preceding problem that the taxpayer is a corporation
What would be the taxable income in 2020?
a. P170,000 c.P 110,000
b. P120,000 d.P 60,000

14. A corporate income taxpayer reported the following gross income and deductions:
Gross income Deductions
2016 P 300,000 P 450,000
2017 400,000 470,000
2018 450,000 400,000
2019 500,000 420,000
2020 500,000 400,000

Compute the taxable income in 2020.

a. P100.000 c. P 30,000
b. P80,000 d. P 0

15. Andrew, a resident citizen, reported a world taxable income of P500,000 and a tax
due on world income of P125,000. P150,000 of the taxable income was earned in
Japan out of which he paid P45,000 in income tax.

Compute Andrew's foreign tax credit.

a. P50,000 c. P37,500
b. P45,000 d. P0

Multiple Choice: Problems 2

1. Mr. Aurelius made contributions to the following in 2020:
Street beggars P 50,000
Barrio fiestas 60,000
Various cancer patients 40,000
Takusa, an accredited non-profit organization 100,000

Compute the deductible contribution expense.

a. P0 c. P140,000
b. P100,000 d. P160,000

2. ABC Company declared a property dividend with book value of P1,000,000, and
fair value of P1,200,000. The total dividends withheld on the dividends were
P60,000. Compute the total deductible expense.
a. PO c. P1,000,000
b. P60,000 d. P1,060,000

3. Naga Company paid P32,000 hinge benefits tax for the purchase of merchandise
used by the family of one of its company officers. How much is the deductible
expense against gross income?
a. PO c. P 68,000
b. P32,000 d. P100,000

4. Makati Corporation has operations in Malaysia and Singapore with the following
taxable income and taxes paid during the year:
 Philippines Malaysia Singapore
Taxable Income P 800,000 P 900,000 P 700,000
Income tax paid 180,000 288,000 175,000

Makati Corporation wishes to claim the foreign income tax paid as tax credit.
Compute the foreign income tax credit.
a. P480,000 c. P445,000
b. P463,000 d. P430,000

5. Balanga, Inc. contributed P500,000 for its pension fund inclusive of P200,000
funding of current service cost. How much is the deductible pension expense.
a. P200,000 c. P300,000
b. P230,000 d. P500,000

6. Tawi-Tawi, Inc. maintained a defined contribution pension plan. The plan is

contributory where employees contribute 20% of the pension contributions.
During the year, Tawi-Tawi contributed P1,000,000 inclusive of employee
contribution which was pre-deducted through their salaries.

Compute the pension expense.

a. P1,000,000 c. P200,000
b. P800,000 d. Some other amount

7. Entertain Corporation set up a plan in 2020. The following relate

2020 2021
Funding of current service cost P 400,000 400,000
Funding of past service cost 300,000 200,000

Compute the deductible pension expense in 2020.

a. P 340,000 c. P430,000
b. P 400,000 d. P700,000

8. In the immediately preceding problem, compute the pension expense in 2021.

a. P420,000 c. P450,000
b. P430,000 d. P600,000

9. Zambales Inc. made the following contributions during 2020:

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
Contributions to foreign organizations with
treaty exemption 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

Mr. Pedro reported the following income and expenses in 2020:

Compensation income P 400,000
Gross income from business 500,000
Fully deductible contributions 50,000
Deductible contributions with limit 75,000
Other allowable deductions 200,000
Mandatory deduction and exempt income 75,000

10.Compute the deductible contribution expense.

a. P125,000 b P80,000
c. P70,000 d.P65,000

11.What is the taxable compensation income?

a. P400,000 b. P325,000
c. P 0 d. (P75,000)

12.What is the net income?

a P300,000 b. P235,000
c P220,000 d. P175,000

13.What is the taxable income?

a. P700,000 c. P545,000
b. P575,000 d. P500,000

14.A taxpayer with net sales of P2,000,000 and cost of sales of P1,800,000 incurred
P15,000 entertainment, amusement and recreation expenses (EAR). Compute the
allowable deduction for EAR expenses.
a. P20,000 c. P10,000
b. P15,000 d. P0

15.A taxpayer with gross receipts of P2,000,000 and direct cost of services of
P1,800,000 incurred P15,000 entertainment, amusement and recreation
 expenses. Compute the allowable deduction for EAR expense.
a. P20,000 c. P10,000
b. P15,000 d. P0

16.A taxpayer reported sales of P3,000,000 and gross receipts of P2,000,000 in 2020.
It incurred entertainment, amusement, and recreations expenses of P35,000
Compute the deductible EAR expense.
a. P35,000 c. P29,000
b. P30,000 d. P25,000