Chapter 3 Inclusions in the Gross Income.pdf

Reviewer in Taxation (Book 1)

Asser S. Tamayo (2012 Edition)

CHAPTER 3 INCLUSIONS IN THE GROSS INCOME Multiple choices: 1. It means all wealth which flows into the taxpa yer other than mere return of capital and includes gains derived from the sale or other disposition of capital a ssets. a. Income b. Asset c. Capital d. Fund 2. It means income (in the broad sense) excluding income which is by statutory provisions or otherwise exempt from the tax imposed by law. a. Gross income b. Net income c. Net assets d. None of the choices 3. It means gross income less statutory deductions. a. Gross income b. Net income c. Net assets d. None of the choices 4. The term means the pertinent items of gross income specified in the T ax Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws. a. Gross income b. Taxable income c. Net assets d. None of the choices 5. It is a fund or property existing at one distinct point of time. a. Capital b. Receipts c. Revenue d. Income 6. It has reference to all wealth that flows into the ta xpayer which a. Capital b. Receipts c. Revenue d. Income



7. This term, as applied to taxation, refers to all funds or income derived by the government whether from tax or other sources. a. Capital b. Receipts c. Revenue d. Income 8. One of the following is not distinction between capital and income. a. Capital is fund, income is a flow. b. Capital is wealth, income is the service of wealth. c. Capital is a tree, Income is the fruit. d. Capital is to corporations, Income is to individuals. 9. One of the following is not a requisite of a taxable income. a. There must be gain b. The gain must be realized or received c. The gain must not be excluded by law from taxation. d. The gain must be that of resident or nonresident citizen. 10. Which of the following statement is incorrect? a. A mere increase in the value of the property is not income but merely an unrealized increase in capital. b. Gain may occur as a result of exchange of property, payment, assumption, reduction, or cancellation of the taxpayer’s indebtedness (unless it amounts to a gift) or other profit realized from the completion of a transaction. c. If the taxpayer receives, through mistake, an amount in excess of the amount agreed upon, the excess is not taxable unless the duty to return is not clear or is disputed. d. None of the choices. 11. This states that for income to exist, it is necessary that the c apital be separated from something of exchangeable value. a. Separabiltity or severance test of income b. Ability to pay theory c. Benefits received theory d. Situs of taxation 12. In general, this term means all remuneration for services performed by an emplo yee for his employer under an employer-employee relationship. a. Dividends b. Compensation c. Interest d. Royalty 13. Which of the following statement is incorrect? a. The name by which the remuneration for services is designated is immaterial to constitute income.



b. The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. c. Remuneration for services constitutes compensation even if the relationship of employer and employee does not exist any longer at the time when the payment is made between the person in whose employ the services had been performed and the individual who performed them. d. None of the choices. 14. Which of the following statements is incorrect? a. If services are paid for in a medium other than money, the fair market value of the thing taken in payment is the amount to be included as compensation subject to withholding. b. If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the fair market value of the remuneration. c. If a corporation transfers to its employees its own stock as remune ration for services rendered by the employee, the amount of such remuneration is the fair market value of the stock at the time the services were rendered. d. None of the choices. 15. First statement: compensation may be paid in money or in some medium other than money, as for example, stocks, bonds, or other forms of property. Second statement: where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available at the time for payment to the Commissioner. a. Only the first statement is correct. b. Only the second statement is correct. c. Both statements are correct. d. Both statements are incorrect. 16. Which of the following is not taxable? a. Living quarters or meals furnished to an employee for the convenience of an employer. b. Tips of gratuities paid directly to an employee b y a customer of the employer which is not accounted for by the employee of the employer. c. Pensions, retirement, and separation, in general. d. Fixed or variable transportation, representation and other allowances which are received by a public officer or employee or officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, in general. 17. Any amount paid specifically, either as advances or reimbursements for traveling , representation and other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding, if which of the following conditions is satisfied?


I.

II.

a. b. c. d.


It is ordinary and necessary traveling and representation or entertainment expenses paid or incurred by the employee in the pursuit of trade, business or profession. The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Code.

Neither I nor II Both I and II I only II only

18. First statement: the excess of advances made over actu al expenses shall constitute taxable income if such amount is not returned to the employer. Second statement: reasonable amounts of reimbursement/advances for traveling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirement of substantiation and to withholding. a. Only the first statement is correct. b. Only the second statement is correct. c. Both statements are incorrect. d. Both statements are correct. 19. Promissory notes or other evidence of indebtedness received in payment for services, and not merely as security for such payment, constitute income to the amount of their: a. Face value b. Maturity value c. Fair market value d. None of the choices 20. A taxpayer receiving a non-interest bearing note as compensation shall treat as income the: a. Face value of the note at that time b. Fair discounted value of the note at that time c. Maturity value of the note at that time d. Fair market value of the note at that time 21. First statement: In the case of manufacturing, merchandising, or mining business, “gross income” means total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. Second statement: In determining the gross income of manufacturing, merchandising, or mining business, subtractions should not be made for depre ciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold. a. Only the second statement is correct. b. Only the first statement is correct.



c. Both statements are incorrect. d. Both statements are correct. 22. First statements: All individuals, partnerships or corporations that cultivate, operate or manage farms for gain or profit either as owners or tenants are de signated as farmers. Second statement: Persons cultivating or operating farms for recreation or plea sure, the result of which is a continual loss from year to year, are n ot regarded as farmers. a. b. c. d.

Both statements are correct. Both statements are incorrect. Only the second statement is correct. Only the first statement is incorrect.

23. Which of the following methods may be used by farmers to determine their gross income? a. Cash basis or receipts or disbursements basis in which no inventory is used to determine profits. b. Accrual basis in which an inventory is used to determine profits. c. Crop basis which is used when the farmer is engaged in producing crops which take more than a year to gather and dispose of from time of planning. d. all of the choices. 24. Using the cash basis for determining his income a farmer may include which of the following items in his gross income? a. Amount of cash or the value of merchandise or other property received from sale of livestock and produce which were raised during the taxable year or prior years received from sale of livestock and farm produce raised in the farm. b. Profit from sale of any livestock or other items which were purchased. c. Gross income from all other sources. d. All of the choices 25. In the case of a farmer reporting in accrual basis, his gross profits are ascertained by: I. Adding to the inventory value of livestock and products on hand at the end of the year the amount received from the sale of livestock products, and miscellaneous receipts for hire of teams, machinery and the like during the year. II. Deducing from the sum the inventory value of livestock and products on hand at the beginning of the year and the cost of livestock raised or purch ased during the year. a. Both I and II b. Neither I nor II c. I only d. II only 26. A farmer under accrual basis has the following data for th e year. Beginning inventory:



Livestock and farm products raised in the farm 000 Livestock and farm products purchased the previous year Ending inventory: Livestock and farm products raised in the farm 100,000 Livestock and farm products purchased 80,000 Sales of livestock and farm products raised and purchased Cost of livestock and farm products purchased during the year 100,000 Miscellaneous receipts: Gain on sale of work, breeding or dairy animals Gain on sale of farm equipment and machinery Hire of tractor Hire of teams like hire of carabaos or horses Others

P60, 30, 000

120,000

30,000 10,000 20,000 6,000 4,000

How much is his gross income? a. P 370,000 b. P 270,000 c. P 180,000 d. None of the choices 27. First statement: Gain or loss from the sale of goodwill results only when the business, or part of it, to which the goodwill attaches is sold in which case the gain or loss will be determined by comparing the sale price with the cost or other basis of the assets including goodwill. Second statement: income from expropriation (forced sale) is income from sale or exchange and any profit derived therefrom is, a. Both statements are correct. b. Both statements are incorrect. c. Only the second statement is correct. d. Only the first statement is correct. 28. In computing gain or loss from the sale or other disposition of property acquired as gift or donation, the basis of cost shall be the : a. Fair market value, date of acquisition b. Latest inventory value. c. Purchase price plus expenses of acquisition. d. Same as it would be in the hands of the donor. 29. In computing gain or loss from the sale or other disposition of property acquired as inheritance, the basis of cost shall be the: a. Fair market value, date of acquisition/inheritance. b. Latest inventory value. c. Purchase price plus expenses of acquisition. d. Same as it would be in the hands of the decedent. 30. Which of the following is not an income of the lessor under a lease contract?



a. The consideration for the use of the property paid periodically by the lessee to the lessor b. Obligations of the lessor to third parties paid by the lessee c. Advance rentals in the nature of prepaid rent. d. Amount received in the nature of security deposit. 31. The lessor may report as income at the time when such buildings or leasehold improvements are completed the fair market value of such buildings or leasehold improvements subject to the lease. a. Annual or spread out method b. Lump sum or outright method c. Percentage of completion method d. Completed contract method 32. The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease and report as income for each year of the lease an aliquot part thereof. a. Annual or spread-out method b. Lump sum or outright method c. Percentage of completion method d. Completed contract method 33. (Phil. CPA Modified) Mr. C Conte bought a 2,000 square meter land at a cost of P500,000. He leased the land Mr. D. Damian at an annual rental of P40, 000. The term of the contract of lease was 15 years. The contract of the lease provided th at Mr Damian will construct a building on the land, which will belong to the lessor at the end o f the term of the lease or at the termination of the lease. The building was constructed for a total cost of P400, 000 and has an estimated useful life of 20 years which was the basis of a straight-line method of depreciation. The remaining term of the lease when the building was completed was 14 years. How much was the income from the lease contract in the year the improvement was completed assuming Mr Conte will report his income from leasehold improvement using outright or lump sum method? a. P160, 000 b. P114, 290 c. P120, 000 d. P 48, 587 34. Using the same data in the preceding number, how much was the yearly income assuming Mr Conte will spread his income from leasehold imp rovement over the term of the contract of lease? a. P160, 000 b. P114, 290 c. P120, 000 d. P 48, 587 35. Using the same data in the preceding number, how much was the income of Mr Conte in the 12th year, assuming the contract of lease was terminated after 11th year or at the beginning of the 12th year due to the fault of the lessee? a. P160, 000 b. P114, 290



c. P120, 000 d. P 48, 587 36. Using the same data in the preceding number, how much was the deductible loss of the lessor assuming the leasehold improvement was destroyed at the beginning of the 10th year of the lease of contract and there was insurance of P30, 000 and salvage value of P20, 000? a. P68, 568 b. P38, 568 c. P18, 568 d. None 37. One of the following does not constitute gross income. a. Income earned by corporate sinking fund b. Amount received through a compromise agreement with the government for the latter’s unlawful encroachment of a right to a portion a landed estate, insofar as said amount exceeds the purchase price of the portion of land. c. Income from expropriation (forced sale) of land. d. None of the choices. 38. ( Phil. CPA) if an individual performs services for a creditor who in consideration thereof cancels the debt, the cancellation of indebtedness may amount to a: a. Gift b. Capital contribution c. Donation inter vivos d. Payment of income 39. (Phil. CPA) Which of the lease agreements will the amount received by the lessor in consideration for the lease of his property shall not b e considered as rent income? a. Financial lease b. Condition mortgage c. Lease-purchase d. Pacto de retro arrangement 40. Which of the following statement is incorrect? a. Gains, profits and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with approved method of accounting followed by him. b. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment therefore in a later year, income is realized in that year, assuming the money or property would have been income in the earlier year if then received. c. Bad debts or accounts charged off because of the fact that they were determined to be worthless, which are subsequently recovered, wheth er or not by suit, constitute income for the year in which recovered, regardless of the date when amounts were charged off. d. None of the choices. 41. The recovery of the account previously written off would constitute taxable income only if in the year of recognition of being worthless, the write-off resulted in a reduction of a taxable income.



a. Reciprocity rule b. Equity of incumbent rule c. Tax benefit rule d. Materiality rule 42. One of the following is considered an income for income taxation. a. Advance in the value of the person or a corporation b. Increase in book value of real property and other fixed assets of a corporation as a result of their re-appraisal c. Net increase in the value of livestock or increase of its inventory d. Items of gross income which have been credited or set apart for the taxpayer without restriction 43. Which of the following statement is incorrect? a. Direct dividend is one where the paying corporation acknowledges that the distribution is dividend payment b. An indirect dividend is a distribution of profits disguised as a payment for services, properties, etc. c. Dividend paid out of the income of the corporation earned before January 1, 1988 is not taxable to the receiving stockholders d. A dividend paid in shares of stock of another corporation held as investment is a stock dividend. 44. Which of the following is incorrect? a. A stock dividend constitutes income if it gives the shareholder an interest different from that which his former stock represented. b. When there is only one class of stock issued and outstanding at the time of the stock dividend, the dividend will not result in a change in the proportionate interests of the shareholders in the net assets of the corporation, hence, the stock dividend is not taxable. c. When a stockholder receives a stock dividend which is taxable income, the measure of income is the par value of the shares of stock received. d. A stock dividend represents the transfer of surplus to a ca pital account. 45. (Phil. CPA) if a stockholder receives a taxable stock dividend, what is the measure of income applicable to him? a. Par value of the shares on the date he receives them b. Fair market value of the shares on the date of declaration c. The adjusted cost of the old shares and the new shares of the corporations d. The book value of the shares of the preceding calendar year 46. (Phil. CPA) a corporation receives its own shares of stock in exchange for the property. What is the basis of the gain or loss? a. The gain or loss shall be based on the fair market value of its shares only. b. The gain or loss shall be based solely on the cost of the property. c. The gain or loss shall be based on the fair market value of its own shares and the cost of the property. d. There is neither gain nor a loss. 47. (Phil. CPA) if a corporation distributes its assets to its stockholders , this kind of a corporate distribution which is recognized in the Tax Co de is a: a. Stock dividend



b. Property dividend c. Cash dividend d. Liquidating dividend 48. (Phil. CPA) if a corporation distributes its assets to its stockholders upon dissolution, this kind of corporate distribution will result in: a. Stock dividend b. Property dividend c. Cash dividend d. Liquidating dividend 49. (Phil. CPA Modified) During 2004, Juan Kwan rec eived the following income: Interest from Philippine Treasury Certificates P4, 000 Refund pertaining to 2003 income tax 500

a. b. c. d.

The total amount of interest subject to tax in Kwan’s 2004 inc ome tax r eturn was: P4, 500 P4, 000 P500 Zero

50. (Phil. CPA) Jose Josef filed Form No. 1700 for the ta xable year. In July 2004, he received an income tax refund of P9, 000, plus interest of P100, for overpayment of 2003 income tax. What amount of the tax refund and interest were taxable in Josef’s 2004 income tax return? a. Zero b. P100 c. P9, 000 d. P9, 100 51. Which of the following will constitute a taxable income? a. Prize won in an essay contest the recipient joined b. The Nobel Peace Prize c. Prize won as most valuable amateur player in an international sports competition d. Award not exceeding the amount set by law for being a model employee 52. Which of the following tax refunds constitutes income? a. Refund of Philippine income tax b. Refund of estate tax c. Refund of ½ % of 1 % stock transactions tax d. Refund of percentage tax 53. Which of the following damage recovery is taxable? a. Amount recovered from libel suits b. Amount recovered in patent infringement suits c. Amount recovered from breach of promise to marry d. Amount recovered due to alienation of affection.



Chapter 3 Inclusions in the Gross Income.pdf

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