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CPA REVIEW SCHOOL OF THE PHILIPPINESManilaTAXATION Thursday, February 18, 2021 FIRST PREBOARD 9:00 am – 12:00 noonInstruction: Choose the BEST answer for each of the following items. Mark only one answer for each item on Special Answer Sheet provided. Strictly no erasure allowed. Which of the follow...

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CPA REVIEW SCHOOL OF THE PHILIPPINES Manila TAXATION FIRST PREBOARD

Thursday, February 18, 2021 9:00 am – 12:00 noon

Instruction: Choose the BEST answer for each of the following items. Mark only one answer for each item on Special Answer Sheet provided. Strictly no erasure allowed.

1.

Which of the following items is an income of non-resident citizen subject to the basic tax (schedular)? a. b. c. d.

2.

This income is part of taxable income subject to the basic tax a. b. c. d.

3.

Not part of the taxable income of the employees Part of the taxable income of the employees The monetary value is subject to fringe benefits tax Maybe given to employees regardless whether managerial, supervisor or rank and file

A general professional partnership and its partners are subject to the following rules, except a. b. c. d.

6.

P4M P3.6M P900,000 P1M

Which of the following statements on fringe benefits is correct? a. b. c. d.

5.

Fringe benefits given to rank and file employees Fringe benefits given to managerial employees Compensation for personal injuries or sickness Proceeds of life insurance

Acting on the information given by A, the government seized and confiscated smuggled goods with a fair market value of P40M. A received his reward amounting to a. b. c. d.

4.

Dividend received from a domestic corporation Prizes from USA lotto Interest income from PNB Share in the net income of general professional partnership

The general professional partnership is not subject to income tax The partners shall be liable for income tax only in their separate or individual capacities Each partner shall report as gross income his distributive share in the partnership net income The share of the partner shall be subject to a creditable withholding tax 10%

Consider the following statements A. A special assessment is an enforced proportional contribution from the owners of real property especially or peculiarly benefited by public instruments B. The power of eminent domain maybe exercised even by the private individuals while the power of taxation and police power maybe exercised only by the government C. Unlike tax, a debt draws interest, if stipulated D. The police power, power of taxation and power of eminent domain being fundamental powers of the state maybe exercised by the government even without any constitutional grant a. b. c. d.

A and B are correct Only C is not correct B and D are correct All are correct

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7.

Requiring a license for the right to engage in business to earn income is an exercise of: a. b. c. d.

8.

Taxation power Power of eminent domain Police power People power

Situs of taxation literally means place of taxation. Which of the following statements about situs is wrong? a.

Poll tax may properly be levied upon persons who are inhabitants or residents of the state, whether citizens or not. b. Real estate is subject to taxation in the state in which it is located, whether the owner is a resident or non-resident. c. Tangible personal property is taxable where it has actual situs, or where it is physically located, even if the owner resides in another jurisdiction. d. Intangible personal property is taxable where the property is located 9.

The ABC Bank is a domestic bank authorized by the BSP to operate as foreign currency deposit unit. For the year 2020, it earned interest income of P100,000 from foreign currency transactions with non-residents, OBUs, and other FCDUs. The rate of tax applicable to such interest income is a. b. c. d.

20% 25% 10% 7.5%

10. A cash dividend of P100,000 received by a taxpayer in 2020 from a foreign corporation whose income from Philippine sources is 40% of its total income is Statement 1- Partly taxable if he is a resident citizen Statement 2- Partly taxable if he is a non-resident alien a. b. c. d.

Both statements are true Both statements are false Only Statement 1 is true Only Statement 2 is true

11. Using the above data, which of the following is correct? The cash dividend is a. b. c. d.

Exempt from income tax if he is a resident citizen Partly taxable if he is a resident alien Taxable in full if he is a non- resident citizen Exempt from income tax if he is a non- resident alien

12. Tips for gratuities paid directly to an employee by a customer of the employer which are not accounted for by the employee to the employer are Statement 1- Considered as passive income Statement 2- Subject to creditable withholding tax a. b. c. d.

Both statements are true Both statements are false Only Statement 1 is true Only Statements 2 is true

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13. Which of the following statements is correct? a.

The monetized value of unutilized vacation leave credits of ten (10) days or less which were paid to the employee during the year are not subject to income tax and to withholding tax b. The salary of an employee on vacation or on sick leave, which are paid notwithstanding his absence from work is an exclusion from income. c. Any amount which is required by law to be deducted by the employer from the compensation of an employee excluding the withheld tax is considered as part of the employee’s compensation and is deemed to be paid to the employee as compensation at the time the deduction is made d. If living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof should be included as part of compensation income 14. Statement 1- Amounts received by reason of involuntary separation remain exempt from income tax unless the official or employee at the time of separation, has rendered less than ten years of service and/or is below fifty years of age Statement 2- Any amount received by an official or employee or by his heirs from the employer due to death, sickness or other physical disability or for any cause beyond the control of said official or employee, such as retrenchment, redundancy, or cessation of business are exempt from income tax a. b. c. d.

True, true True, false False, true False, false

15. Statement 1- The premiums on health and/or hospitalization insurance paid by an individual taxpayer is deductible from gross income for maximum amount of P200.00 provided the family gross income does not exceed P250,000 per month. Statement 2- The premium on health and/or hospitalization insurance is not deductible by the spouse who claimed the additional exemption in case of married taxpayers. a. b. c. d.

True, true True, false False, true False, false

16. This income is subject to final tax a. Fringe benefits given to employees of a domestic corporation b. Marriage fees, baptismal offerings received by a clergyman, evangelists or religious workers for services rendered c. Dividend income from a domestic corporation by a non- resident foreign corporation d. Share of an individual taxpayer from the distributable net income of a general professional partnership 17. The monetary value of this fringe benefits is 100% of the value of the fringe benefit a. The employer purchases the motor vehicle for the use of the employee b. The employer provides the employee with cash for the purchase of a motor vehicle in the name of the employer c. The employer purchases the car in the name of the employee d. The employer owns and maintains a fleet of motor vehicles for the use of the business and the employees 18. The following, except one are the basic principles of a sound tax system. The exception is a. b. c. d.

It should be capable of being effectively enforced It should consider the taxpayer’s ability to pay It is levied by the lawmaking body of the state The sources of revenue must be sufficient to meet government expenditures and other public needs

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19. Interest income earned by a resident alien from outside the Philippines is a. b. c. d.

Subject to schedular tax Not subject to income tax Subject to final tax Partly subject to schedular and partly subject to final tax

20. D Co. took two life insurance policies on the of its Executive Vice-President, Mrs. E. In one policy, the beneficiary is the corporation and the other, designates Mr. F, the EVP’s husband, as revocable beneficiary. The insurance premiums paid by D Co. is a. b. c. d.

Deductible, only in so far as the first policy is concerned Deductible for both policies Not deductible for both policies Deductible in so far as the second policy is concerned

21. AB won the gold in the lightweight division in the recently concluded Asian Games. By virtue of this single honor he brought to the country, he was given P1M by a car dealer. Statement I- The prize received by AB is exempt from income tax Statement II- The car dealer can deduct in full the gift for income tax purposes a. b. c. d.

True, true True, false False, true False, false

22. The following are characteristics of special assessment, except a. b. c. d.

It is levied on lands only It is based on the improvements introduced by the government It is based on the benefit derived by the owners of the land It is a personal liability of the persons assessed

23. As to scope of legislature power tax, which of the following is correct? a.

The power to tax is supreme, plenary, comprehensive and without any limit because the existence of the government is a necessity b. The discretion of Congress in imposing taxes extends to the mode, method and kind of tax, even if the constitution provides otherwise c. Congress has the right to levy a tax of any kind at any moment at it sees fit, even in the absence of any constitutional provision d. The sole arbiter of the purpose for which taxes shall be levied is Congress, provided the purpose is the public and the courts may not review the levy of the tax to determine whether or not the purpose is public 24. A resident citizen received a prize of P40,000. Which of the following statements is correct in connection with the imposition of final tax on prize? a.

The first P10,000 is part of taxable income while, the remaining P30,000 is subject to 20% final tax b. The whole amount is part of taxable income c. The whole amount of P40,000 shall be subject to 20% final tax d. The first P10,000 shall be exempt from tax, the remaining P30,000 is subject to 20% final tax

25. A domestic proprietary educational institution improved its library improvement, for income tax purposes, may be a. b. c. d.

Deducted in full at the time of completion of the improvement Capitalized or expensed outright at the option of the school owner Capitalized and depreciated over the estimated life of the improvement Capitalized or expensed outright at the option of the government

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26. In our jurisdiction, which of the following statements may be erroneous? a. b. c. d.

Taxes are pecuniary in nature. Taxes are enforced charges and contributions. Taxes are imposed on persons and property within the territorial jurisdiction of a State. Taxes are levied and collected by the legislative branch of the government

27. A bought a condominium unit under installment basis, to be used as his office in the practice of his profession and paying P10,000 monthly. For income tax purposes, the P10,000 monthly payment shall be a. b. c. d.

Treated as business rental, hence deductible Treated as depreciation expense, hence deductible Treated as capital expenditure, hence not deductible Treated as ordinary business expense

28. A marketing incurred the following expenses in relation to its business during the taxable year: Provision for bad debts Research and development cost, treated as deferred expense Contributions during the year: The government for priority The government for public purposes To the Catholic church for charitable purposes

P 15,000 500,000 50,000 10,000 25,000

Additional Information: A. Allowance for doubtful accounts per aging of accounts receivable revealed a beginning and ending balances of P20,000 and P30,000, respectively. B. Accumulated depreciation on machine at the beginning and end of the year amounted to P100,000 and P110,000, respectively. C. During the year, the firm sold a machine with a cost and accumulated depreciation of P300,000 and P30,000, respectively. D. The research and development cost was incurred in the preceding year but the benefit was received during the taxable year E. Taxable income before a to d and contributions amounted to P300,00 If A marketing is a sole proprietorship, the allowable deductions for contributions are: a. b. c. d.

P80,000 P85,000 P57,000 P65,500

29. Total allowable deductions: a. b. c. d.

P210,500 P220,500 P202,750 P225,000

30. Furthermore, the amount of taxable income a. b. c. d.

P220,000 P89,500 P97,250 P115,000

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31. A, single, had the following from January 1 to June 30, 2020 Compensation income (net of payroll deductions) Deductions made by the employer: SSS housing loan SSS premiums contributions Philhealth contributions Pag-ibig contributions Union dues Premiums payments on Life insurance policy Health insurance policy

P360,000 48,000 7,200 4,800 3,600 4,400 6,000 4,800

The taxable compensation income is a. b. c. d.

292,000 340,000 418,800 370,800

32. Which of the following statement/s is/are correct? Statement A:

Non-resident citizens are taxable on all income derived from sources within th e Philippines.

Statement B:

Resident citizens and domestic corporations are taxable on all income derived from sources within or without the Philippines.

Statement C:

Foreign corporations, whether engaged or not in trade or business in the Philippines are taxable from sources within or without the Philippines.

Statement D:

Aliens, whether residents or not of the Philippines, are taxable only from sources within the Philippines, are taxable only from sources within the Philippines.

a. Statements C and D are correct b. Statements A, B and D are correct c. Statements B, C and D are correct d. Statements A and D are correct 33. Which of the following are basic principles of a sound tax system? a. b. c. d.

Fiscal Adequacy, Economic Feasibility and Theoretical Justice Fiscal Adequacy, Administrative Feasibility and Theoretical Justice Progressive Taxation, Ability to Pay, Symbiotic Relationship Fiscal Deficit, Administrative Feasibility and Ability to Pay

34. How much discount is granted to a senior citizen on his purchase of basic and prime commodities, subject to limitation? a. b. c. d.

20% 15% 10% 5%

35. The concept of “situs of taxation” is based on which limitation of taxation? a. b. c. d.

Territoriality International comity Exemption of the government Public purpose

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36. Which of the following statements is/are CORRECT? I. The power to license includes the power to tax. II. The power to tax may not include the power to destroy III. The power to tax includes the power to exempt. a. b. c. d.

II and III I and II III only I only

37. The President of the Philippines and the Prime Minister of Japan entered into an executive agreement on a loan facility to the Philippines from Japan whereby it was stipulated that interest on loans granted by private Japanese financial institutions in the Philippines shall not be subject to Philippine income tax laws. What basic characteristic of taxation has been violated by this agreement? a. b. c. d.

Theoretical justice Inherent limitation Legislative in character Constitutional limitation

Buenas Corporation, a real estate dealer and lessor, on its first year of operation, has received a Letter of Authority from the BIR. As a revenue officer, you were assigned to audit the Corporation’s income tax for taxable year 2018. The audited financial statements show the Corporation’s income statement as follow: Revenues: Rental income Interest from bank Gain on sale of land Total

P 2,800,000 24,000 500,000 P 3,324,000

Expenses: Depreciation Salaries and wages Taxes and licenses Entertainment and representation Interest expense Office supplies Total

P

800,000 200,000 180,000 40,000 60,000 20,000 P 1,300,000

Net income before income tax Income tax expense Net income

P 2,024,000 450,000 P 1,574,000

Income tax due for the year is computed as follows: Net income before income tax Less: Interest from bank Gain on sale of land Net taxable income Multiply by: corporate income tax rate Income tax expense

P 2,024,000 P 24,000 500,000

524,000 P 1,500,000 30% P 450,000

After a detailed examination of the Corporation’s books, you have noted the following: • • •

Balance sheet as of December 31, 2018 showed an outstanding balance of deferred rent income amounting to P200,000, representing advance rent payments by tenants. Interest from bank is net of 20% final withholding tax Gain on sale of land, represents gain on sale of residential lot with selling price, amounting to P2,000,000

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•

Taxes and licenses in the Notes to Financial Statements

Showed the following breakdown • • • •

Withholding tax on sale of land, P120,000 Documentary stamp tax on sale of land, P30,000 Surcharge and penalties on late payment of tax, P10,000 Permits and licenses, P20,000

Interest expense includes interest on late payment of tax, amounting to P5,000. 38. How much should be reflected as net sales and revenue in the annual income tax return of the Corporation? a. b. c. d.

P3,000,000 P5,000,000 P4,800,000 P3,300,000

39. How much should be the deductible taxes and licenses? a. b. c. d.

P20,000 P180,000 P30,000 P50,000

40. How is the deductible entertainment and representation expense? a. b. c. d.

P40,000 P33,333 P38,000 P34,000

41. How much is the basic deficiency income tax due? a. b. c. d.

P250,770 P252,200 P253,770 P250,800

BTS CORPORATION, is a registered enterprise with the Board of Investments and was granted an Income Tax Holiday (ITH) Incentives for the first 4 years of operations as a non-pioneer firm. The Corporation has not applied for an extension of its ITH incentives on its 5th year. On its 5th year of operations, it reported the following: Export Sales Cost of goods manufactured and sold Operating expenses

P120,000,000 70,000,000 20,000,000

Additional information were made available as follows: ➢ Cost of goods manufactured and sold include, imported raw materials with dutiable value of P1,400,000. Pre-computed customs duties and other charges are as follows: (a) (b) (c) (d)

Customs duties – P200,000 Insurance – P10,000 Arrastre charges – P5,000 Wharfage dues – P7,000.

➢ Included under operating expenses are expenses incurred on the importation of the said equipment as follows: (a) Facilitation fee – P100,000 (b) Delivery expense to warehouse after release from Customs P11,200....