Chapter 13 - Principles of Deductions

Multiple Choice - Theory: Part 1

1. Losses on capital assets are

a. deductible against gross income to the extent not compensated by insurance

b. deductible against capital gain to the extent compensated by insurance.

C. not deductible against gross income whether or not compensated for hu

insurance.

d. not deductible against capital gains unless not compensated by insurance.

2. Which is a deductible expense?

a. Marketing and advertising expense

b. Insurance on factory building

C. Salaries of security guards in the factory

d. Cost of registering stocks

3. The transactions involving an insured property is said to be closed and completed

when

a. final settlement by the insurer is made.

b. the report of the insurance adjuster indicates a loss.

c. final settlement confirms an unrecoverable cost.

d. no proceedings in court is expected to be made by the insured.

4. Which is a deductible expense?

a. Acquisition cost of a business franchise

b. Repayment of debt

c. Cost of registering a business

d. Cost of issuing securities

5. Which is a deductible business expense?

a. Interest on personal borrowings

b. Rental of taxpayer's domicile

c. Selling commission to agents

d. Wages of kasambahays

6. A repair expense is deductible in the period paid or incurred unless it

a. merely maintain the value of the property.

b. increases the value of the property.

c. constitutes a major repair.

d. constitutes a minor expense.

7. Losses on property are not deductible unless

a. sustained with a related party.

b. sustained in an actual or completed transaction.

c. temporary in nature.

d. covered by insurance or indemnity contracts.

8. Losses on insured properties are not deductible

a. to the extent not compensated by insurance.

b. to the extent compensated by insurance.

c. as a rule, except when allowed by the BIR examiner.

d. in all circumstances.

9. Which statement is the most a

ement is the most accurate?

a. Prepaid expense is deductible in the period paid by taxpayers using cash

basis.

b. Prepaid expense is deductible in the future period it relate without regard to

the basis of accounting employed by the taxpayer.

c. Accrued expenses are deductible by cash basis taxpayers

d. Depreciation expense can be claimed only by accrual basis taxpayers.

10. Cash basis and accrual basis taxpayers differs in the treatment of

a. Prepaid expense

b. Current period cash expense

C. Current period accrued expense

d. Depreciation expense

11. Which may not be related?

a. The controlling individual and the controlled corporation.

b. The controlling individual and a subsidiary of a controlled corporation.

c. The grantor and fiduciary of a trust

d. The grantor and the beneficiary of a trust

12. Which of the following is an extraordinary non-deductible expense against regular

gross income of a merchandiser?

a. Loss on sale of obsolete merchandise

b. Store supplies and utilities

C. Local business permit

d. Loss on sale of investment in stocks

13. Which is a deductible expense against business gross income?

a. Commission expense on sale of investment in stocks

b. Salaries of marketing personnel of a manufacturing business

c. Quarterly estimated income tax

d. Final tax on interest income on bank savings deposit

14. Which is not a general principle of deduction?

a. The matching principle

b. The related party rule

c. The withholding rule

d. The transfer pricing rule

15. Which is an an actual deductible expense?

a. Provision for a estimated bad debt expense

b. Loss arising from liability on a contested lawsuit confirmed by a final judgment

c. Increase in value of foreign currency-denominated debt

d. Death of animal offspring

16. Which is deductible against gross income?

a imputed interest expense

b. Advances to the profit sharing of a partner in a general profession partnership

c. Repayment of business debts

d. Local taxes

17. Which of the following is deductible?

a. Rent of office space

b. Tuition fees of the siblings of the taxpayer

c. Selling expense of domestic stocks directly to a buyer

d. Estimated losses on lawsuit

18. Which is non-deductible against gross income?

a. Loss on sale of stocks through the PSE

b. Write-off of bad debts

c. Loss on destruction of office building by an earthquake

d. Amortization of patent or franchise used in business

19. Which is an incorrect statement?

a. The straight line method provides for an equal periodic deduction against

gross income.

b. The sum-of-the-years digit method provides for an increasing deduction

against gross income.

c. The double declining balance method provides for a declining deduction at a rate twice the deduction of the
straight line method.

d. Both straight line method and sum-of-the-years-digit method consider the residual value of the property.

20. Which of the following ordinary assets cannot be depreciated?

a. Office equipment

b. Machineries

c. Building and its improvements

d. Land

21. Statement 1: Only taxpayers under the accrual basis shall use the inventory method in deducting inventories.

Statement 2: Only taxpayers under the accrual basis can claim deduction for depreciation and losses.

a Statement 1 is correct.

b. Statement 2 is correct.

c. Both statements are correct.

d. Neither statement is correct.

22 Statement 1: The cost of goods sold is directly deducted upon sales in the measurement of the gross income
from the sales of goods.

Statement 2: The cost of services is directly deducted from gross receipts in the

measurement of the gross income from the sales of services.

a. Statement 1 is correct.

b. Statement 2 is correct.

c. Both statements are correct.

d. Neither statement is correct.

23. Which is not a capital expenditure?

a. Payments to create a good image of the business of the taxpayer

b. Prepaid expenses

c. Accrued expenses

d. Advances to contractors

24. Statement 1: Repairs that do not extend the useful life or increase the fair value of an asset should be
capitalized.

Statement 2: The costs of issuing securities of the taxnaver are deductions against

gross income

a Statement 1 is correct.

b. Statement 2 is correct.

c. Both statements are correct.

d. Neither statement is correct.

25. Statement 1: Improvements

to properties are usually capitalized.

Statement 2: Directly attributable cost of acquisition of properties are added to the basis of the properties
acquired.

a. Statement 1 is correct.

b. Statement 2 is correct

c. Both statements are correct.

d. Neither statement is correct.

Multiple Choice - Theory: Part 2

1. Which of the following cannot claim deductions from gross income despite actual

engagement in business?

a. Resident citizen

b. Resident alien

c. Non-resident citizen

d. Non-resident alien not engaged in trade or business

2. Which of the following taxpayers cannot claim deductions from gross income?

a. General professional partnership

b. Domestic corporation

c. Resident foreign corporation

d. Non-resident foreign corporation

3. Which of the following can be claimed as deduction?

a. Transportation allowance of employees of the taxpayer

b. Transportation allowance of the taxpayer's dependents

C. Losses from destruction of the taxpayer's residence

d. Depreciation of the residence of the taxpayer

4. Which expense is deductible despite the fact that it is not an actual expense?

a. Compliance expense on regulatory requirements

b. Deduction incentives for compliance to regulatory requirements

C. Uncollectible debts ascertained to be worthless

d. None of these

5. Which is not a characteristic of deductions from gross income?

a. Legitimate business expense

b. Capital expenditure

c. Ordinary and necessary business expense

d. Actual and necessary business expense

6. Which is a deductible expense?

a. Regular repair of office equipment

b. Refurbishing of an old building to prepare it for use

c. Addition of a wing to an existing building

d. Overhaul of machineries to extend their useful life

7. Which of the following taxpayers can claim deduction against gross income?

d. A resident citizen taxpayer earning purely compensation income

b. Non-resident foreign corporation

C. Non-resident alien not engaged in trade or business

d. Resident citizen earning a mix of passive and business income

8. Which is not a separate classification of deduction from gross income?

a. Net operating loss carry over

b. Regular allowable itemized deductions

C. Special allowable itemized deductions

d. Net capital loss carry over

9. Which statement is incorrect regarding deductions?

a. The claim of deduction, similar to exemption, is construed against the

taxpayer.

b. The use of optional standard deduction always results in reported taxable

income.

c. The unreasonableness of deduction is up to the BIR to prove.

d. The incurrence of an operating loss is an indication of an unreasonable

expense.

10. The following cannot claim deduction from gross income except

a. A self-employed individual taxpayer

b. A corporation earning purely passive income

c. An individual earning purely passive income

d. An individual taxpayer earning purely compensation and passive income

11. Which is not deductible against gross income?

a. Interest expense incurred to purchase tax-exempt securities

b. Net capital loss

c. Personal expenses

d. All of these

12. Which is a deductible business expense?

a. Loss on decline in value of securities

b. Estimated losses on expropriation

c. Fire loss on an insured property

d. Loss on theft of company assets

Which of the following constitutes a deductible business expense?

a. Purchase of office equipment invoiced under the trade name of the taxpayer's business

b. Tuition fees of dependents of the taxpayer

c. Interest expense on a business loan

d. Representation expenses booked in the name of the taxpayer's wife

14. Which of the following qualities for deduction for an individual income taxpayer engaged in business?

a. Salaries of household maid

b. Gasoline expenses of the taxpayer's personal car

c. Office Internet expense

d. Taxpayer's transportation expense to and from his residence

15. Which of the following can be deducted by an individual taxpayer not engaged in business?

a Transportation expenses

b. Communication expenses

c. Internet expense

d. None of these
16. Which of the following can be claimed by a resident foreign corporation?

a. Depreciation expense on properties located abroad

b. Income tax paid in a foreign country

c. Income tax paid in the Philippines

d. Interest expense on foreign borrowings used to finance its Philippine business

17. Which can be treated as a capital expenditure deductible through depreciation expense?

a. Interest expense incurred to purchase office equipment

b. Losses sustained in an uninsured office building

c. Acquisition of land

d. Acquisition of personal computers

18. Which of the following items can be deducted in full in the year sustained?

a. Write-off of bad debts by a taxpayer under the cash basis

b. Loss on market decline in the value of gold inventories

c. Loss on the destruction of the taxpayer's personal car

d. Uninsured fire loss sustained by the business of the taxpayer

19. Deductions can be claimed against

a talent fees.

b. fixed allowances.

c. fringe benefits

d. salaries

20. Which is deductible in full by a taxpayer engaged in the merchandising business?

a Value of inventories taken home by the business owner

b. Loss on unrecoverable debts from a non-paying family member

c. Imputed interest on the capital investment of the owner

d. Value of inventories destroyed by rodents

21. Which is not a deductible loss by a security dealer?

a. Wash sales loss

b. Loss on the sale of bonds with more than five years maturity

c. Loss on the sale of stocks through the PSE

d. Loss on the sale of short-term bonds through the Philippine Dealings Exchange

22. Determine the deductible loss.

a. Loss incurred in exchanging property to obtain control of a corporation

b. Loss incurred in exchanging properties with a corporation after obtainine control over said corporation

c. Calamity loss on uninsured property

d. Bad debts from a sister company

23. Which of the following is non-deductible by the fact that it violates the Matching Principle?

a. Expense of a tax-exempt operation

b. Payment for police protection

C. Payment of revolutionary taxes

d. Expenses not receipted in the name of the taxpayer

24. Which is incorrect with regard to expenses incurred between associated enterprises?

a. The pricing of the transaction must not be controlled.

b. The pricing method to be adopted shall be based on free market factors or those made between two
independent parties.

c. In case of a controlled transaction, the deductible expense to the paying enterprise shall be the arm's length
value of the transaction.

d. No deduction shall be allowed on expenses incurred between associated enterprises

25. Which is not a business expense?

a. Fringe benefit tax expense

b. De minimis benefits granted to employees

c. Salaries of personal driver of the company president which was subjected to fringe benefit tax
d. Depreciation value of properties designated for the use of company managers and supervisors which are
subjected to fringe benefits tax

Multiple Choice - Problems: Part 1

1. On September 30, 2020, a taxpayer borrowed P1,000,000 at 10% annual interest

to finance his acquisition of a luxury car. Compute the deductible interest expense

in 2020.

a. P 0

b. P25,000

c. P50,000

d. P75,000

2. Spartan Corporation had office supplies valued at P40,000 on January 1, 2020. At the end of the first calendar
quarter, it had P80,000 worth of office supplies. Total supplies purchased were P250,000 during the period.

Compute the supplies expense to be deducted during the first quarter.

a. P210,000

b. P250,000

c. P280,000

d. P290,000

A non-resident alien not engaged in business incurred business expenses of P100,000 and personal expenses of
P20.000. How much is deductible from his

gross income?

a. P0

b. P20,000

c. P100,000

d. P120,000

4 A taxpayer paid the following salaries during the year:

Salaries of administrative employees. P 80,000

Salaries of sales and marketing employees 70,000

Salaries of factory production workers 120,000

Compute the deductible salaries expense.

a. P270,000

b. P200,000

c. P150,000

d. P120,000

5. On July 1, 2018, a taxpayer purchased equipment for P500,000 which was estimated to be useful until July 1,
2023, with an expected P100,000 residual value. Compute the 2018 depreciation expense using the straight line
method.

a. P0

b. P40,000

c. P50,000

d. P80,000

6. A taxpayer paid P45,000 property insurance having a 12-month coverage starting March 1, 2018. Compute the
deductible insurance expense in 2018.

a. P0

b. P7,500

c. P37,500

d. P45,000

7. A storm resulted in the loss of the following livestock:

Value of two heifers (purchased at P15,000 each) P40,000

Value of a bull (purchased for P18,000) 24,000

Value of twelve calves worth P6,000 each 72,000

Total value of lost livestock P 136,000

Determine the deductible loss for taxation purposes.

a. P0

b. P48,000

c. P64,000

d. P120,000

8. Mr. Jun, a professional practitioner, incurred the following expenses during the

period:

Salaries of household maids 50,00p

Salaries of office staff 30,000

Office utilities 12,000

Office supplies 8,000

Depreciation of personal car 15,000

Depreciation of office equipment 20,000

Compute the total deductible expenses.

a. P 50,000

b. P 70,000

c. P100,000

d. P135,000

9. The following relate to the building of a taxpayer:

Fair market value P6,000,000

Purchase price 5,000,000

Carrying amount 4,500,000

Remaining useful life 9 years

Depreciation method straight line

What is the deductible amount of depreciation expense?

a. P666,667

b. P555,555

c. P500,000

d. P0

10. The personal car of the taxpayer had the following data:

Fair market value P 6,000,000

Purchase price 5,000,000

Estimated useful life 10 years

What is the deductible annual depreciation expense?

a. P0

b. P250,000

c. P500,000

d. P600,000

11. The following relate to the inventory of tools held by the taxpayer:

Inventory of tools, January 1, 2019 P 120,000

Purchases of tools 300,000

Inventory of tools, December 31, 2019 140,000

What is the amount of deductible tools expense?

a. P0

b. P120,000
c. P280,000

d. P300,000

12. A taxpayer paid the following disbursements and expenses for the current year:

Tuition fees of children P 50,000

Donation to friends 20,000

Purchase of office equipment at start of the year (equipment expected to last for five years) 100,000

Office rent (for three years including the current year) 90,000

Office supplies (1/2 used) 20,000

Compute the total deductible expense from the above items:

a. P0

b. P20,000

c. P50,000

d. P60,000

13. Bermuda Inc. insured two of its key emplovees paving the following premiu annually:

Mr. Croco, the president P40,000

Mr. Genero, the vice president for operations 34,000

In Mr. Croco's policy, Bermuda, Inc. is the beneficiary. In Mr. Genero's policy, his wife is the beneficiary of the policy.

Compute the total deductible expense.

a. P34,000

b. P40,000

c. P50,000

d. P74,000
14. Dragon City Corporation is a resident foreign corporation established in China but is operating in the
Philippines. During the year, it paid for P300,000 for salaries of Philippine employees and P1,200,000 for Chinese
employees.

Compute the deductible compensation expense.

a. P0

b. P300,000

c. P1,200,000

d. P1,500,000

15. Using the same choices in Number 14, compute the deduction assuming that Dragon City is a domestic
corporation.

16. Using the same choices in Number 14, compute the deduction assuming that Dragon City is a non-resident
foreign corporation.

Multiple Choice - Problems: Part 2

1. Boac Company had the following summaries of expenses:

Expenses without supporting documentation P 200,000

Expenses with supporting documentations

Income payments subject to creditable withholding tax:

with withheld CWT 600,000

without withheld CWT. 400,000

Payments not subject to creditable withholding tax. 200,000

Determine the amount of deductions.

a. P800,000

b. P1,000,000

c. P1,200,000

d. P1,400,000
2. Calapan Corporation bought equipment costing P500,000. The equipment was expected to have P50,000
residual value at the end of its 5-year expected life. Calapan Corporation failed to withhold the creditable
withholding tax on the equipment.

Compute the depreciation expense in the first year.

a. P0

b. P45,000

c. P90,000

d. P180,000

3. Tri-Peak Semiconductor is an exporter of transistors to the United States. On December 15, 2019, it made a
single shipment worth $1,000,000 payable January 21, 2020. The value of the sales in peso equivalent was as
follows:

December 15, 2019 P42,000,000

December 31, 2019 41,800,000

January 21, 2020 (Converted value to peso) 41,700,000

Compute the deductible foreign currency loss.

a. P200,000 in 2019

b. P300,000 in 2019

c. P300,000 in 2020

d. P200,000 in 2020

4. The taxpayer incurred the following in 2020:

Loss on sale of equipment to a subsidiary company P 400,000

Loss on sale of equipment to a sister company 100,000

Loss on liquidation of an affiliate company 200,000

What is the deductible amount of loss to a related party?

a. P0

b. P200,000

c. P300,000

d. P600,000

5. The accountant of Triniville Corporation provides for an allowance against unrecoverable accounts equivalent to
3% of Triniville's total receivables. The allowance for bad debts had a balance of P45,000 and P50,000 at the start
and end of the year, respectively, while P30,000 of previous accounts were actually found to be worthless and were
written-off. What is the deduction against gross income for purposes of taxation?

a. P0

b. P25,000

c. P30,000

d. P50,000

The following relate to a transaction between associated enterprises which was subjected to transfer pricing
restatement by the BIR.

Amount of expense claimed P800,000

Arm's length value comparable transaction 500,000

What is the deductible amount of expense?

a. P800,000

b. P500,000

c. P300,000

d.P0

7. In the immediately preceding problem, what is the required adjustment to tax net income?

a. P300,000 increase

b. P300,000 decrease

c. P500,000 increase

d. P800,000 decrease