Key Answer - Taxation



CHAPTER 5

EXCLUSION FROM GROSS INCOME

Problem 5 – 1 TAXABLE OR NONTAXABLE with income tax

|1. |Taxable |11. |Taxable |21. |Nontaxable |

|2. |Nontaxable |12. |Taxable |22. |Taxable |

|3. |Taxable |13. |Nontaxable |23. |Nontaxable |

|4. |Nontaxable |14. |Taxable |24. |Taxable |

|5. |Taxable |15. |Nontaxable |25. |Nontaxable |

|6. |Nontaxable |16. |Nontaxable | | |

|7. |Nontaxable |17. |Taxable | | |

|8. |Taxable |18. |Taxable | | |

|9. |Nontaxable |19. |Taxable | | |

|10. |Nontaxable |20. |Taxable | | |

Problem 5 – 2 TAXABLE OR NONTAXABLE with income tax

|1. |Nontaxable |11. |Taxable |21. |Nontaxable |

|2. |Taxable |12. |Taxable |22. |Nontaxable |

|3. |Nontaxable |13. |Nontaxable |23. |Taxable |

|4. |Taxable |14. |taxable |24. |Nontaxable |

|5. |Nontaxable |15. |Nontaxable |25. |Nontaxable |

|6. |Nontaxable |16. |taxable |26. |Taxable |

|7. |Taxable |17. |taxable |27 |Nontaxable |

|8. |Taxable |18. |Nontaxable |28 |Taxable |

|9. |Taxable |19. |Nontaxable |29 |Taxable |

|10. |Nontaxable |20. |Nontaxable |30 |Nontaxable |

Problem 5 – 3 TRUE OR FALSE

1. True

2. False – only Philippine charity sweepstakes are not subject to tax in the Philippines.

3. False – subject to normal tax, in general

4. False – nontaxable because the other income is subjected only to final tax.

5. True

6. True

7. False – Proceeds of life insurance is not taxable regardless of whoever would be the recipient, except when the insured person outlived his life insurance and received the proceeds. The excess of proceeds over premium paid is taxable.

8. False – include in gross income

9. False – Bequest is a personal property.

10. True

11. True

12. True

13. False – nontaxable because it is just a return of expenses

14. True, in general

15. False – nontaxable

Problem 5 – 4 TRUE OR FALSE

1. True

2. False – nontaxable because aliens are taxable only for income derived within the Philippines.

3. False – the P3M capitalization does not include the land asset of BMBE.

4. True

5. True

6. False – nontaxable

7. False – nontaxable in general

8. True

9. True

10. False – some prizes and awards are exempt by law from taxation.

11. True

12. True

13. False – Include in gross income because income from gift is subject to income tax.

14. False – Tax-exempt

15. True

|Problem 5-5 |Problem 5-6 |Problem 5-7 | |

|1. |D |1. |A |1. |B |

|2. |D |2. |D |2. |D |

|3. |C |3. |D |3. |C |

|4. |C |4. |B |4. |D |

|5. |A |5. |A |5. |B |

|6. |D |6. |B |6. |D |

|7. |C |7. |C |7. |A |

|8. |D |8. |B |8. |D |

|9. |A |9. |D |9. |C |

|10. |C |10. |D |10. |D |

Problem 5 –8 A

|Basic minimum wage | |P 90,000 |

|13th month pay | | 7,500 |

|15-day monetized unavailed vacation leave | |3,750 |

|Overtime pay | |24,000 |

|Holiday pay | |2,250 |

|Christmas bonus (de-minimis) | | 5,000 |

|Total nontaxable income | |P132,500 |

Problem 5 –9 B

|13th month pay | |P 6,500 |

|Deductible from gross compensation income: | | |

| SSS contribution |P3,000 | |

| Philhealth contribution | 2,500 | 5,500 |

|Amount excluded from gross income | |P12,000 |

Problem 5 –10 C

|Dividend income | |P 60,000 |

|Interest income on EFCD to be taxable in the Philippines must be transacted with residents. | | |

Problem 5 –11 B

|Income from the Philippines: | | |

| Wagwag business (P5,000 x 12) | |P 60,000 |

| Sari-sari store (P20,000 x 12) | | 240,000 |

|Gross taxable income in the Philippines | |P300,000 |

Problem 5 –12 D

|13th month pay (P390,000/13) | |P30,000 |

|De minimis with the ceiling amount: | | |

| Rice subsidy (P1,500 x 12) | |18,000 |

| Clothing allowance | | 4,000 |

|Amount of nontaxable compensation | |P52,000 |

The excess of rice subsidy over the ceiling is already taxable, because the 13th mo. pay is already P30,000.

Problem 5 –13 C

| |Taxable |Nontaxable |

|Total basic salary |P240,000 | |

|13th month pay | |20,000 |

|Excess rice subsidy | |6,000 |

|De minimis rice subsidy (P24,000 – P6,000) | . |18,000 |

|Total nontaxable compensation |P240,000 |44,000 |

The P6,000 excess of rice subsidy is still exempt because if combined w/13th mo pay and other benefit the amount does not exceed P30,000.

Problem 5-14 D

|MWE | |

|Basic salary |P 96,000 |

|Overtime pay |20,000 |

|Hazard pay |2,000 |

|Holiday pay |1,000 |

|13th mo. Pay |8,000 |

|Excess rice subsidy |6,000 |

|Rice subsidy w/in ceiling | 18,000 |

|Total nontaxable |P151,000 |

|Taxable |P 0 |

Problem 5-15 B

| |Taxable |Non-taxable |

|MWE: | | |

|Basic salary |P108,000 | |

|o.t. pay |30,000 | |

|hazard pay |2,000 | |

|holiday pay |1,000 | |

|13th mo.+ similar benefits: | | |

|13th mo. Pay | |9,000 |

|Excess rice subsidy | |18,000 |

|Excess clothing to complete P30,000 |13,000 |3,000 |

|Rice subsidy – de minimis | |18,000 |

|Clothing allowance |. |4,000 |

|Total |P154,000 |P52,000 |

An employee who receives additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, night shift differential pay and hazard pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are no longer exempt from income tax.

Problem 5-16 D

| |Taxable |Non-taxable |

|MWE: | | |

|Basic salary |96,000 | |

|o.t. pay |20,000 | |

| | | |

|13th mo.+ similar benefits: | | |

|13th mo. Pay | |8,000 |

|Excess rice subsidy | |6,000 |

|Rice subsidy | |18,000 |

| | | |

|Rent income |60,000 | |

|Interest income, 4,000/80% |5,000 | |

|Total |181,000 |32,000 |

MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income are not exempted from income tax on their entire income earned during the taxable year.

5-17 D

Only P1,500 sickleave benefit actually taken.

Problem 5 –18 C

|Take home pay | |P212,000 |

|Nontaxable 13th month pay | |( 17,500) |

|Withholding tax | |13,500 |

|Other income subject to normal tax | | 20,000 |

|Taxable income | |P228,000 |

In general, a MWE is not subject to WTW and income tax on his compensation income. But if he has other income that is subject to normal tax, his entire income during the year will be subject to income tax, his compensation income, however, will not be subject to WTW.

Problem 5 –19 C

| | Taxable |Nontaxable |

|Net pay |P265,000 | |

|Withholding tax |50,000 | |

|Advances |6,000 | |

|3th month pay |(27,000) |P27,000 |

|Christmas bonus (de minimis) |( 5,000) |5,000 |

|SSS contribution | . | 4,000 |

|Totals |P289,000 |P36,000 |

Problem 5 –20 C

| | Taxable |Tax-exempt |

|Net take home pay |P13,000 | |

|SSS contributions | |P300 |

|PAG-IBIG contributions | |100 |

|Union dues contributions | |100 |

|Office party contributions |75 | |

|Charitable contribution (deductible only from business income) |25 | |

|Withholding income tax | 400 | . |

|Totals |P13,500 |P500 |

Problem 5 –21 D

|Monthly salary | |P15,000 |

Free board and lodging is for convenience of employer.

Problem 5 –22 B

|Rent of apartment | |P 50,000 |

|Reimbursement | | 20,000 |

|Taxable benefits | |P70,000 |

Note that the tax base to determine the tax liability of supervisor should be the grossed-up amount, meaning P70,000/68%.

Problem 5 –23 D

|Proceeds of life insurance including 12% interest for 2 years | |P1,254,400 |

|Less: Present value of life insurance proceeds (P1,254,400 x 0.797193877) | | 1,000,000 |

|Interest income - Taxable | |P 254,400 |

Proceeds of life insurance policy are not taxable but the interest thereof is taxable. (Rev. Rev.2, Sec.22; Sec.32Ba, NIRC)

Problem 5 –24 D

|Proceeds of life insurance policy are not taxable. | | |

Problem 5 –25 B

|Maturity value received |P500,000 |

|Premium paid |(490,000) |

|Premium refund | 40,000 |

|Income in excess of premium paid |P 50,000 |

The premium refund is actually a decrease of premium paid.

Problem 5 –26 D

Zero, because, the P270,000 cash surrender value is just a partial return of total contribution of P360,000.

Problem 5 –27 D

|Car insurance | |P300,000 |

|Accident insurance | |100,000 |

|Life insurance as beneficiary | |500,000 |

|Cash surrender value of life insurance | |30,000 |

|Participating dividend | | 10,000 |

|Total amount excluded from gross income | |P940,000 |

The participating dividend and cash surrender value are considered return of premium. The interest income, however, is included in the gross income. It represents income from the use of insurance proceeds not yet taken. (Sec. 62, Regs. No. 2)

Problem 5 –28

|1. |Letter C | |

| |Total premium paid – excluded |P500,000 |

| | | |

| |The total premium paid is excluded because such amount represents return of capital. [Sec. 32 (B)(2), NIRC] |

| | | |

|2. |Letter A | |

| |Total consideration received – excluded |P2,000,000 |

| | | |

| |The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured are excluded from |

| |the gross income of the beneficiary. [Sec. 62, Regs. No. 2; Sec. 32 (A) (1), NIRC] |

Problem 5 –29 D

|Taxable |Nontaxable |

|Actual damages for unrealized profit |P100,000 | |

|Interest on non-taxable damages |20,000 | |

|Actual damages for lost products | |P200,000 |

|Exemplary damages due to injuries | |50,000 |

|Moral damages due to injuries | |50,000 |

|Actual liquidated damages |. |80,000 |

|Total |P120,000 |P380,000 |

Note: On the part of Ernie Barron, the attorney’s fee is only a reimbursement of his judicial expenses, but on the part of the counsel, such amount is reportable income.

Problem 5 –30 A

|Taxable income | |P - 0 - |

Problem 5 –31 A

The retirement pay should be included in the gross income because Max retired at an optional age and has rendered less than 10 years in service. To be excluded from gross income, an employee should have been in the service of the same employer for at least ten (10) years and at least 50 years at the time of his retirement. [Sec. 32 (B)(6)(a), NIRC]

Problem 5 –32 C

|Cost of life annuity contract | |P1,350,000 |

|Divided by expected return (P360,000 x 15 years) | | 5,400,000 |

|Cost ratio | |25% |

|Multiplied by annual pension | | 360,000 |

|Annual amount of pension excluded from gross income | |P 90,000 |

Problem 5 –33 D

| |Taxable |Nontaxable |

|Terminal pay | |P 60,000 |

|Life insurance | |500,000 |

|SSS death benefit | |10,000 |

|Donations | . | 40,000 |

|Totals |P - 0 - |P610,000 |

Problem 5 –34 A

The termination is due to cause within the control of Jalosjos, separation pay is taxable.

Problem 5 –35 D

|Last pay upon resignation from his first employer | |P100,000 |

Problem 5-36 B

SSS death benefit of P36,000

Problem 5-37 A

|Sickness benefit (P300 x 6 days x 90) |P 1,620 |

|Maternity benefit (P300 x 78 days x 100%) | 23,400 |

|Total exclusion |P25,020 |

SSS sickness benefit is equal to 90% of daily salary credit after compliance with certain conditions. SSS daily maternity leave benefit is equivalent to the average daily salary credit for 60 days or 78 days in case of caesarian delivery, subject to certain conditions. [Sec. 14, R.A. 1161; R.A. 8282, as amended]

Problem 5 –38 A

Zero, all items enumerated are not subject to income tax.

Problem 5 –39 C

|Interest income from bank savings deposit, subject to final tax at source | |P4,000 |

His annual income from professional fee is not more than P60,000 which is exempt.

Problem 5 –40 D

Zero. Gifts are generally subject to donor’s tax and are not subject to income tax.

Problem 5 –41 D

|Total income (P100,000 x 10 months) | |P1,000,000 |

|Total average expenses (P20,000 x 10 months) | |( 200,000) |

|Income subject to income tax | |P 800,000 |

Problem 5 –42 D

Zero. All winnings received by Miss Lara are subject to tax because she has entered into a contest (Miss International) which requires rendition of subjstantial future services as a condition to receive such prize or award.

Problem 5 –43 A

|Lotto Philippine winnings | |P10,000,000 |

Problem 5 –44 B

|Ramon Magsaysay award | |P 50,000 |

|Athlete of the year award | |100,000 |

|Prize for winning the silver Olympic medal | |500,000 |

|Cash award from Mr. Lim | |250,000 |

|Car from Nissan | |1,000,000 |

|Winnings – Philippine sweepstakes | | 100,000 |

|Total winnings/awards not subject to income tax | |P2,000,000 |

Problem 5 –45 A

|Interest income |P 60,000 |

|Gain from sale of bonds classified as capital asset | 140,000 |

|Taxable income |P200,000 |

Interest income on government bonds is taxable. Gain from sale of certificate of indebtedness is tax-exempt only when the maturity is more than 5 years. [Sec. 32 (B)(7)(g), NIRC]

Problem 5 –46 B

|Interest received from bond investment |P 120,000 |

Problem 5 –47 B

|Interest income | |P120,000 |

Problem 5 –48 D

|Interest on expanded foreign currency deposit | |P100,000 |

Problem 5 –49 A

|Income from sale of invented products | |P5,000,000 |

|Sale of technology | | 2,000,000 |

|Total revenue | |P7,000,000 |

|Less: Research and development costs | | 800,000 |

|Nontaxable income | |P6,200,000 |

Note: The cost of product produced need not to be deducted anymore because of the term “income from sale of invented products.”

Problem 5 –50 C

|Interest income on bank savings deposit | |P10,000 |

Problem 5 –51 C

|Interest income from foreign currency deposit | |P2,000,000 |

|Interest income from time deposit | | 1,000,000 |

|Total taxable income | |P3,000,000 |

Problem 5 –52

|Compensation income (P5,000 x 10) |P 50,000 |

| | |

|Retirement benefits |P500,000 |

|Salary earned |50,000 |

|Gross income |P550,000 |

| | |

|3. Same answer with No. 1 |P 50,000 |

Problem 5 –53

|Winnings from charity horse race sweepstakes from PCSO |P 500,000 |

|Gains from redemption of shares in mutual fund |300,000 |

|Gain from sale of bonds with maturity of more than five years |60,000 |

|Gifts from friends |200,000 |

|Total exclusion from gross income |P1,060,000 |

Problem 5 –54

| Exclude | Include |

|Proceeds of his life insurance (P2,000,000) – (P15,000 x 25) |P 375,000 |P1,625,000 |

|Proceeds of his mother’s life insurance |1,000,000 | |

|Cash gift |50,000 | |

|Inheritance |3,000,000 | |

|Rent income |. |100,000 |

|Total |P4,425,000 |P1,725,000 |

Problem 5 –55

No, the P1,500,000 transfer to be received by Miss Tandana is to be included for income taxation because the transfer is in recognition of her services rendered. It is not to be included as a part of estate tax.

Problem 5 –56

|Dividend income |P50,000 |

|Interest income |2,000 |

|Prizes | 25,000 |

|Total taxable income |P77,000 |

Problem 5-57

1. None – the taxpayer is a MWE and the benefits does not exceed the allowable statutory amount of P30,000.

2.

|Gross compensation |P109,200 |

|SSS premium |( 2,400) |

|Philhealth premium |( 3,000) |

|Taxable compensation income |P103,800 |

Problem 5 -58

Answer for both no. 1 and no.2

|Compensation |P128,000 |

|SSS premium |(2,400) |

|Philhealth | (3,000) |

|Gross taxable compensation income |P122,600 |

Note: The MWE with earnings subject to normal tax shall be taxable for his entire income during the year.

Problem 5 -59

|1. |Time deposit |P60,000 |

| |Foreign currency deposit | 10,000 |

| |Cooperative income subject to final tax |P70,000 |

| | | |

|2. |Cooperative income subject to normal tax |P - 0 - |

The cooperative’s ordinary income such as sales and income from lending to members are not subject to income tax.

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