CHAPTER 7
DEALINGS IN PROPERTY
Problem 7 1 TRUE OR FALSE
1. False Receivable not related to the main conduct of business are capital assets.
2. False Depreciable assets primarily used in business are ordinary assets.
3. True
4. True
5. True
6. False Regardless of gain or loss, a tax should be paid when the shares of stock are
sold in the stock market because the basis of tax is the selling price.
7. True
8. True
9. True
10. False For ordinary loss, the same; but for capital loss not the same because there is
not capital loss carry over and not holding period for corporation.
11. True
12. False No, because the 6% final tax is based on the higher of the selling price or
zonal value. If there is loss on sale, the normal tax rate if preferable.
13. False Not subject to creditable withholding tax.
14. False whichever is lower
15. False subject to income tax (capital gains tax).
Problem 7 2 TRUE OR FALSE
1. True
2. False equipment used in business operations is an ordinary asset.
3. True
4. False The basis is the fair market value at the date of donation.
5. False - the speculator sells securities which he does not own.
6. True
7. True unless sold by dealers of securities
8. False Ordinary assets
9. True
10. False There should be no capital gain or loss.
11. True
12. True
13. True
14. True
Problem 7 3 TRUE OR FALSE
1. False Not subject to capital gains tax because the issuance is original and the shares
of stock is owned by the corporation.
2. True
3. True
4. True
5. False Losses from wash sales are not deductible.
6. False no wash sales if there are two kinds of shares of stocks
7. True
8. True
9. True
10. True
11. False The final tax should be 30% is based on the gross income.
12. True
37
13. True
14. True
Problem 7 4
1.
D
2.
A
3.
None of the choices all are correct.
4.
A
5.
C
6.
A
7.
B
8.
A
9.
C
10.
C
Problem 7 6
Problem 7 5
1.
B
2.
D
3.
D
4.
D
5.
D
6.
D
7.
C
8.
D
9.
D
10. D
11. A
A
Ordinary
assets
P100,000
50,000
Capital assets
P200,000
500,000
250,000
.
P900,000
Problem 7 7
1. A
Selling price per 200 sq. meters
Multiplied by number of 200 s.m. sold (9,000/200)
Total sales
Less: Cost of sales (P2,000,000 x 90%)
Ordinary gain from sale of land
400,000
P600,000
P 100,000
45
P4,500,000
1,800,000
P2,700,000
2. C
Remaining capital asset (P2,000,000 x 10%)
P200,000
Problem 7 8
Fair market value
Less: Book value of car
Gain on exchange
P190,000
150,000
P 40,000
Problem 7 9
C
There is capital loss if the property given away has fair value higher than P200,000 when it
was inherited.
Problem 7 10
A
Sec.40C, NIRC. No gain or loss shall also be recognized if property is transferred to a
corporation by a person in exchange for stock or unit of participation in such a corporation of
which as a result of such exchange said person, alone or together with others, not exceeding
four persons, gains control of said corporation; provided, that stocks issued for services shall
not be considered as issued in return for property.
Problem 7 11
Acquisition cost
38
30,000
5,000
P235,000
Problem 7 12
C
Sales price
Cost or basis to the donee (the lower of donors cost or
the fair market value when the gift was made
Capital gain
Multiplied by holding period rate more than 1 year
Reportable capital gain
( 50,000)
P100,000
50%
P 50,000
Problem 7 13
C
Sales price
Acquisition cost (P150,000 + P20,000)
Brokers commission (P200,000 x 5%)
Capital gain
P200,000
(170,000)
( 10,000)
P 30,000
P150,000
Problem 7 14
D
The sale of the entire business is not an ordinary business transaction (Kahns Federal Income
Tax, p. 364)
Sales price
P100,000
Less: X , Capital
75,000
Capital gain
P 25,000
Problem 7 15
A
Holding period is more than 1 year = 50% of the capital gain
Problem 7 16
D
Sales price
Less: Cost or market whichever is lower)
Capital gain
P200,000
100,000
P100,000
Year 2
( 40,000 x 50%)
(10,000 x 100%)
Year 1
P200,000
Year 2
P300,000
25,000
(40,000)
20,000
(10,000)
(15,000)
(5,000)
P300,000
(15,000)
P200,000
P50,000
P20,000
15,000
( 5,000)
30,000
P80,000
39
2.
B
Ordinary gain
Capital asset transactions:
Short-term capital gain
Long-term capital gain (P30,000)
Long-term capital loss
Taxable income before personal exemption
P50,000
P20,000
30,000
( 10,000)
40,000
P90,000
Problem 7 19
1. C
2. C
Ordinary net business income
Capital asset transactions:
Short-term capital gain
Short-term capital loss
Long-term capital gain (P45,790 x 50%)
Net capital loss carry-over
Taxable net income before personal exemption
Problem 7 20
1. Not in the choices = P270,000
Ordinary taxable income
Short-term capital gain (loss)
Long-term capital gain (loss) (P600,000 x 50%): (P100,000 x 50%)
NOLCO applicable
Net capital gain
Taxable income before personal exemption
200A
P48,900
200B
P85,700
15,895
(18,960)
.
(P3,065)
P 48,900
P22,895
( 3,065)
P 105,530
Year 1
P 60,000
(P400,000)
300,000
(P100,000)
P 60,000)
2. B
Ordinary taxable income
Short-term capital gain (loss)
Long-term capital gain (loss)
Net capital gain
Taxable income before personal exemption
Problem 7 21
Year 2
P180,000
P200,000
(50,000)
(60,000)
P 90,000
P270,000
P180,000
P200,000
(100,000)
P100,000
P280,000
Jewelry
M. Benz Car long term (50%)
Refrigerator
Ford Car
Selling Price
P 80,000
400,000
6,000
12,000
Problem 7 22
A
Zero. If BPI is a dealer of debt and equity securities, the transactions related to securities are
not capital asset transactions but ordinary transactions, hence there is no net capital gain.
Problem 7 23
A
Sales of shares of stock
Basis of shares of stock (lower)
Gain on sale
Problem 7 24
A
Capital gains of November sales (P150,000 P120,000)
P400,000
( 50,000)
P350,000
P30,000
40
5%
P 1,500
10
1,000
P10,000
5%
P 500
Note: The shares of stock sold in the Philippine stock exchange are subject to percentage tax
of of 1%.
Problem 7 26
1.
A
Tax due and payable (P500,000 x .005)
2.
D
Gross profit (P500,000 x 30%)
Other expenses (P3,800 + P200)
Net taxable gain
Multiplied by normal corporate income tax rate
Tax due and payable
Problem 7 27
D
Capital gain (P150 P125) x 100)
Problem 7 28
D
Sale March (P120 x 500 shares)
Less: Cost (P120,000/ 1,200 shares) x 500 shares
Capital gain
1. B
Sales May (P90 x 500)
Less: Cost of sales (P70,000 x 500/700)
Loss
Nondeductible loss (P5,000 x 300/500)
2. B
Proceeds of liquidation (P100 x 300)
Less: Cost (P45,000 + P3,000)
Capital loss
Problem 7 29
1.
D
No capital gain on original issuance of companys own
stock even if issued above par
2.
C
Capital gain on reissued shares (P23 P21) x 2,000)
P2,500
P150,000
4,000
P146,000
30%
P 43,800
P2,500
P 60,000
50,000
P10,000
P45,000
50,000
P 5,000
P 3,000
P30,000
48,000
P18,000
P - 0 -
P4,000
41
Problem 7 30
(1
C
)
Cost of the new family home (P2,500,000/P4,000,000) x P2,000,000
(2
)
P1,250,000
B
Sales proceeds
Less: Amount used to acquire new family home
Unutilized sales proceeds
Multiplied by capital gains tax rate
Capital gains tax to be paid
Problem 7 31
Basis of new residence
P4,000,000
2,500,000
P1,500,000
6%
P
90,000
D
P9,000,000
P300,000
Since there was no tax exemption, the entire amount of acquiring the new house and lot shall
be its cost.
Problem 7 32
D
Zonal value (P700 x 500) higher
Multiplied by capital gains tax rate
Capital gains tax
P350,000
6%
P 21,000
Holding period is not applicable because the property is a real property subject to final tax.
Problem 7 33
B
Cost of original residence
Add: Excess of new acquisition cost over sales price
(P15,000,000 P12,000,000)
Basis of new principal residence
Problem 7 34
1.
C
Final tax (P1,200,000 x 6%)
2.
C
Creditable withholding tax (P500,000 x 6%)
Problem 7 35
Sales proceeds
Multiply by tax rate
Capital gains tax
P6,000,000
3,000,000
P9,000,000
P72,000
P30,000
A
P500,000
6%
P 30,000
Note: If the property is not used in trade or business, only the selling price (not zonal value)
shall be used in determining the basis of tax when the property is:
a. foreclosed by banks or
b. sold by a government corporation.
42
Problem 7 36
B
Creditable withholding tax:
(P500,000 x 1.5%) x 4 houses
(P3,000,000 x 5%) x 2
Income tax still due and payable:
Total revenue (P500,000 x 4) + (P3,000,000 x 2)
Total costs (P200,000 x 4) + (P1,200,000 x 2)
Gross profit
Operating expenses
Net income
Multiplied by normal corporate income tax rate
Income tax due
Creditable withholding tax
Income tax still due and payable
P 30,000
300,000
P330,000
P8,000,000
(3,200,000)
P4,800,000
(2,800,000)
P2,000,000
30%
P 600,000
( 330,000)
P 270,000
Problem 7 37
1.
A
None. No withholding tax because Goldrich Realty Corporation is the buyer not a
seller.
2
A
None. No income tax is to be collected from sale of land by the government.
Problem 7 38
1.
B
Zonal value
Multiplied by capital gains tax rate
Capital gains tax
2.
3.
4.
C
Selling price
Multiplied by capital gains tax rate
Capital gains tax
P10,000,000
6%
P 600,000
P 6,000,000
6%
P 360,000
B
Zonal value
Multiplied by creditable withholding tax rate
Creditable withholding tax
P10,000,000
6%
P 600,000
B
Zonal value
Multiplied by capital gains tax rate
Capital gains tax final tax
P10,000,000
6%
P 600,000
C
Selling price
Multiplied by capital gains tax rate
P6,000,000
6%
43
P 360,000
A
Problem 7 40
B
Selling price
Less: Cost of real property lower than unpaid mortgage assumed
Contract price
Problem 7 41
B
Down payment
Excess of unpaid mortgage assumed by the buyer over the cost of real
property (P500,000 P400,000)
Initial payments
P1,000,000
400,000
P 600,000
P 120,000
100,000
P 220,000
Problem 7 42
B
Selling price
Less: Unpaid mortgage assumed by the buyer lower than cost
Contract price
P1,500,000
300,000
P1,200,000
Selling price
Less: Cost of sale
Gross profit
P1,500,000
500,000
P1,000,000
P 250,000
Note: The unpaid mortgage has no effect on the reportable income because its value is lower
than the cost.
Problem 7 43
C
Selling price
Less: Cost of real property lower than unpaid mortgage assumed
Contract price
P1,000,000
400,000
P 600,000
Selling price
Less: Cost of real property
Gross profit
P1,000,000
400,000
P 600,000
Down payment
Excess of unpaid mortgage assumed by the buyer over the cost
(P500,000 P400,000)
Initial payments
P 120,000
100,000
P 220,000
P 220,000
Problem 7 44
1.
P 900,000
5,000,000
P5,900,000
44
Gross profit:
(20 x P150,000 x 25%)
(30 x P1,000,000 x 30%)
(40 x P2,500,000 x 35%)
Less: Optional standard deduction (P44,750,000 x 40%)
Net taxable income
Multiplied by corporate tax rate
Income tax due
Less: Creditable withholding tax
Income tax still due and payable
Problem 7 45
1. D
Sales in the regular course of business
Add: Sales of ordinary asset (lot used as warehouse)
Total sales of ordinary assets
Less: Cost of sales
Cost of lot
Ordinary gains / income
2.
750,000
9,000,000
35,000,000
P300,000
150,000
B
Sales of residential house and lot
Proceeds applied for the acquisition of new residential
house and lot
Amount subject to final withholding tax
Final tax rate
Final tax
Problem 7 46
Not-traded in Local Stock Exchange:
1. FIFO Method:
Sales proceeds (P200 x 350)
Less: Cost of shares sold:
December 2005 purchased (P86.96 x 100)
February 2006 purchased (P104.35 x 250)
Gain on sale on investment on stock
Multiplied by percentage of tax
Tax due and payable
P44,750,000
17,900,000
P26,850,000
30%
P 8,055,000
5,900,000
P 2,155,000
P500,000
200,00
0
P700,000
450,00
0
P250,000
P1,000,000
800,000
P 200,000
6%
P
12,000
P 70,000.00
P 8,696.00
26,087.50
34,783.50
P 35,216.50
5%
P 1,760.83
Note: The new cost per share due to 15% stock dividends is computed as follows:
December 200A purchase (P10,000/115)
P 86.96
P104.35
P 70,000
35,000
P 35,000
45
5%
P 1,750
No. of
Shares
100
300
400
60
460
Cost/ share
P100
P120
Problem 7 47
Sales (P150 x 1,000)
Cost (P80 x 1,000)
Gross profit
Gross profit rate (P70,000/P150,000)
Percent of initial payment (P30,000/P150,000)
P150,000
( 80,000)
P 70,000
47.667%
20.00%
P700.00
P933.34
P933.34
P933.34
Problem 7 48
1. Initial Payments:
Downpayment
Installment received in 2006
Total
Add: Excess of mortgage assumed by the buyer over the cost to the
seller
(P650,000-P600,000)
Initial payments
2.
3.
Amount
P10,000
36,000
P46,000
.
P46,000
460
P
100
Selling Price:
Down payment
Installment payments P200,000 + (P300,000 x 4)
Mortgage assumed by the buyer
Selling Price
P100,000
200,000
P300,000
50,000
P350,000
100,000
1,400,000
650,000
P 2,150,000
Contract Price:
Selling price
Add: Excess of mortgage assumed by the buyer over the cost to the
seller
(P650,000 P600,000)
Total
Less: Mortgage assumed by the buyer
Contract Price
P 2,150,000
50,000
P 2,200,000
650,000
P 1,550,000
Problem 7 49
Option money not exercise
Gain on retirement of bonds[(P1,000,000 x 120%)-P1,000,000]
Loss
P 5,000
Gain
P200,000
46
20,000
P25,000
.
P200,000
P175,000
Note: The gain or loss on transaction letter c is zero. In the absence of cost, the fair market
value is assumed as the cost.
Problem 7 50
Trinidad is correct. There is a tax savings of P100,000 for opting to pay final taxes.
Final tax (P3,000,000 x 6%)
P 180,000
Normal tax (P3,000,000 P2,200,000) x 30%
( 240,000)
Tax savings
( P60,000)
Problem 7 51
No, because the Loakan Corporation is not an individual taxpayer.
Problem 7 52
1. Individual taxpayer
Operating gain (loss)
NOLCO
Capital gain (loss)
NCLCO
Taxable income before p.e.
2. Corporate taxpayer
Operating gain (loss)
NOLCO
Capital gain (loss)
Taxable income before p.e.
Year 1
(P100,000)
Year 2
P50,000
(80,000)
Year 3
P30,000
(20,000)
Year 4
P80,000
20,000
10,000
( P80,000)
(P20,000)
(40,000)
.
P10,000
50,000
(40,000)
P90,000
(P100,000)
P50,000
(80,000)
P30,000
(20,000)
P80,000
20,000
10,000
50,000
( P80,000)
(P20,000)
(40,000)
.
P10,000
P130,000
Problem 7 53
1.
M as an individual taxpayer
Business income
Business expenses
Ordinary income (loss)
NOLCO
Net ordinary income (loss)
Capital asset transactions:
Short-term gain (loss) 100%
P 120,000
NCLCO
Reportable net capital gain
Taxable
income
before
exemption
2.
200A
P 200,000
300,000
(P100,000
)
.
(P100,000
)
50,000
)
70,000
.
70,000
(P
30,000)
200B
P400,000
350,000
P 50,000
200C
P450,000
400,000
P 50,000
200D
P520,000
500,000
P 20,000
200E
P600,000
500,000
P100,000
( 30,000)
P 20,000
.
P 50,000
.
P 20,000
.
P100,000
(P100,000
)
90,000
P - 0 -
P 70,000
P 50,000
10,000
(100,000)
- 0 -
(P
10,000)
.
P 10,000
(P 30,000)
P 50,000
( 10,000)
P 20,000
P 50,000
P 20,000
( 30,000)
P 20,000
P120,000
2006
P400,000
2007
P450,000
2008
P520,000
2009
P600,000
M as a corporate taxpayer
Business income
2005
P 200,000
47
300,000
(P100,000
)
.
(P100,000
)
P 120,000
( 100,000)
P 20,000
P 20,000
(P
80,000)
350,000
P 50,000
400,000
P 50,000
500,000
P 20,000
500,000
P100,000
( 50,000)
P - 0 -
( 30,000)
P 20,000
.
P 20,000
.
P100,000
(P100,000
)
180,000
P 80,000
P - 0 -
P 70,000
P 50,000
20,000
P 20,000
( 200,000)
(P130,000
)
- 0 P 50,000
P 80,000
P 80,000
P 20,000
P 40,000
P 20,0000
Problem 7 54
1.
Sales price
Less: Cost of sale
Gross income
Multiplied by percent of collection (P2,000,000 + P500,000)/5,000,000
Reportable gross income in 2009
2.
Collection (P2,500,000/5)
Multiplied by percent of gross income (P1,000,000/P5,000,000)
Reportable gross income in 2010
3.
Sales price
Less: Cost of sale
Gross income
P 50,000
P150,000
P5,000,000
4,000,000
P1,000,000
50%
P 500,000
P500,000
20%
P100,000
P5,000,000
4,000,000
P1,000,000
Note: The 25% initial payment rule does not apply for the regular installment sale of personal
property (inventory). The 25% initial payment rule applies only to the casual sale of personal
property classified as capital asset and sale of real property.
Problem 7 55
1.
Capital gains tax (P3,000,000 P2,000,000) x 6%
P 60,000
2.
P800,000
3.
P180,000
4.
Problem 7 56
1.
Down payment (P3,000,000 x 20%)
Add: Excess of mortgage over cost (P1,200,000 P700,000)
Initial payment
2.
Selling price
Add: Excess of mortgage over cost
Total
Less: Mortgage assumed by the buyer
Contract price
3.
P2,000,000
P 600,000
500,000
P1,100,000
P3,000,000
500,000
P3,500,000
1,200,000
P2,300,000
P180,000
48
Sales
Less: Cost of sales (P450,000 x 8/9)
Nondeductible loss Feb. 14, 2009
3.
P294,444
4.
P215,556
Original cost
Add: Nondeductible loss
Jan. 20: (P80,000 x 5/9)
Feb. 10:: (P80,000 x 4/9)
New cost
5.
P- 0P320,000
400,000
P 80,000
Jan. 20
P250,000
44,444
Feb. 10
P180,000
35,556
.
P215,556
.
P294,444
P240,000
P 50,000
176,667
226,667
P 13,333
Problem 7 58
1.
FMV of ordinary shares (P25 x 30,000)
FMV of preference shares (P50 x 5,000)
Total FMV of shares of stock received
Less: Cost of investment in A Co. transferred (P9 x 100,000)
Nontaxable gain
2.
3.
P 750,000
250,000
P1,000,000
900,000
P 100,000
Ordinary
P675,000
P625,000
675,000
P300,000
225,000
Preference
P225,000
(P50,000)
75,000
P 25,000
4.
P925,000
0.005
P 4,625
5.
1,250
6.
3,375
Problem 7 59
1. B Co. ordinary shares with FMV of
Land with FMV of
P220,000
50,000
49
2.
Cash
Total
Less: Cost of A Co.s shares transferred
Total gain
20,000
P290,000
200,000
P 90,000
P 70,000
P200,000
P20,000
50,000
70,000
P270,000
70,000
P200,000
3.
P 50,000
4.
P 18,000
5.
Sales price
Less: Cost
Taxable gain
P220,000
200,000
P 20,000