INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

35
Chapter 7: Dealings in Property

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

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
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 A Ordinary assets P100,000 50,000 500,000 250,000 . P900,000 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

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Chapter 7: Dealings in Property

Capital assets P200,000 400,000 P600,000

Goods for sale Trade receivables Investment in property Land and building for business Delivery truck Car for personal use Correct amount of assets 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 2. C Remaining capital asset (P2,000,000 x 10%) Problem 7 8 B Fair market value Less: Book value of car Gain on exchange

P 100,000 45 P4,500,000 1,800,000 P2,700,000 P200,000 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 C Acquisition cost Agents commission (P500,000 P200,000) x 10% P200,000 30,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Processing fee (P500,000 x 1%) Deductible cost and expenses 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 Problem 7 13 C Sales price Acquisition cost (P150,000 + P20,000) Brokers commission (P200,000 x 5%) Capital gain

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Chapter 7: Dealings in Property

5,000 P235,000 P150,000 ( 50,000) P100,000 50% P 50,000 P200,000 (170,000) ( 10,000) P 30,000

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 No holding period is allowed for taxpayer other individuals. Problem 7 17 D Year 1 P200,000 Year 2 ( 40,000 x 50%) (10,000 x 100%) 25,000 (40,000) (15,000) P200,000 Year 2 P300,000 20,000 (10,000) (15,000) (5,000) P300,000 P200,000 100,000 P100,000

Net business income Capital asset transactions: Year 1 Capital gain (long-term) = (P50,000 x 50%) Capital loss (short-term) = (P40,000 x 100%) Net capital loss carry over Capital loss Taxable income before personal exemption

Correction: The requirement should be taxable income before personal exemption. Problem 7 18 1. C Ordinary gain Capital asset transactions: Short-term capital gain Long-term capital gain (P30,000 x 50%) Long-term capital loss Taxable income before personal exemption

P50,000 P20,000 15,000 ( 5,000)

30,000 P80,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
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

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Chapter 7: Dealings in Property

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 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 Jewelry M. Benz Car long term (50%) Refrigerator Ford Car A Selling Price P 80,000 400,000 6,000 12,000 Cost & Expenses P 11,000 370,000 5,000 20,500 Net Capital Gain P 69,000 15,000 1,000 (8,500) P76,500 200A P48,900 15,895 (18,960) . (P3,065) P 48,900 Year 1 P 60,000 (P400,000) 300,000 (P100,000) P 60,000) 200B P85,700

P22,895 ( 3,065) P 105,530 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

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) Multiplied by capital gains tax rate P400,000 ( 50,000) P350,000 P30,000 5%

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Capital gains tax Problem 7 25 A Gain per share (P110 P100) Number of shares of stock sold outside stock exchange Capital gain not traded in local stock exchange Final tax rate, 5% for the first P100,000 gain Capital gains tax

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Chapter 7: Dealings in Property

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

P2,500 P150,000 4,000 P146,000 30% P 43,800 P2,500

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)

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

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Problem 7 30 (1 C ) Cost of the new family home (P2,500,000/P4,000,000) x P2,000,000 (2 ) 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 D

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Chapter 7: Dealings in Property

P1,250,000

P4,000,000 2,500,000 P1,500,000 6% P 90,000 P9,000,000 P300,000

Capital gains tax (P5,000,000 x 6%)

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%) P6,000,000 3,000,000 P9,000,000

P72,000 P30,000

Problem 7 35 Sales proceeds Multiply by tax rate Capital gains tax

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.

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 7: Dealings in Property

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. C Selling price Multiplied by capital gains tax rate Capital gains tax B Zonal value Multiplied by creditable withholding tax rate Creditable withholding tax B Zonal value Multiplied by capital gains tax rate Capital gains tax final tax Note: Real property tax is different from capital gains tax. 5. C Selling price Multiplied by capital gains tax rate Capital gains tax A

P10,000,000 6% P 600,000 P 6,000,000 6% P 360,000 P10,000,000 6% P 600,000 P10,000,000 6% P 600,000

3.

4.

P6,000,000 6% P 360,000

Problem 7 39 Selling price = P1,000,000. Problem 7 40 Selling price B

P1,000,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
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 Problem 7 42 B Selling price Less: Unpaid mortgage assumed by the buyer lower than cost Contract price Selling price Less: Cost of sale Gross profit Reportable income = (gross profit/contract price) x collection (P1,000,000/P1,200,000) x P300,000

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Chapter 7: Dealings in Property

400,000 P 600,000 P 120,000 100,000 P 220,000 P1,500,000 300,000 P1,200,000 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 Selling price Less: Cost of real property Gross profit Down payment Excess of unpaid mortgage assumed by the buyer over the cost (P500,000 P400,000) Initial payments Reportable income = (gross profit/contract price) x collection (P600,000/P600,000) x P220,000 Problem 7 44 1. Creditable withholding tax: b. (P1,000,000 x 30 x 3%) c. (P2,500,000 x 40 x 5%) Total creditable withholding tax Note: Sale of socialized housing of a realtor that is a member of HLURB is not subject to CWT if the sales price is P150,000 per house. 2. Gross profit: (20 x P150,000 x 25%) (30 x P1,000,000 x 30%) (40 x P2,500,000 x 35%) P 750,000 9,000,000 35,000,000 P 900,000 5,000,000 P5,900,000 P1,000,000 400,000 P 600,000 P1,000,000 400,000 P 600,000 P 120,000 100,000 P 220,000 P 220,000

P44,750,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
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. 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

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Chapter 7: Dealings in Property

17,900,000 P26,850,000 30% P 8,055,000 5,900,000 P 2,155,000

P300,000 150,000

P500,000 200,000 P700,000 450,00 0 P250,000 P1,000,000 800,000 P 200,000 6% P 12,000

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

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) February 200B purchase (P36,000/345) 2. Moving Average Method: Sales proceeds (P200 x 350) Less: Cost of shares sold (350 x P100) Gain on sale of investment in stock Multiplied by percentage of tax Tax due and payable *Computation of the new cost per share would be: P 86.96 P104.35 P 70,000 35,000 P 35,000 5% P 1,750

Investment in common stocks:

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
No. of Shares 100 300 400 60 460 Cost/ share P100 P120 Amount P10,000 36,000 P46,000 . P46,000 460 P 100

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Chapter 7: Dealings in Property

December 15, 200A February 24, 200B Totals Add: 15% stock dividends Basis of cost per share Divide by number of share New cost per share 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) 200A (P30,000 x 46.667%) x 5% 200B (P40,000 x 46.667%) x 5% 200C (P40,000 x 46.667%) x 5% 200D (P40,000 x 46.667%) x 5%

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. Selling Price: Down payment Installment payments P200,000 + (P300,000 x 4) Mortgage assumed by the buyer Selling Price P

P100,000 200,000 P300,000 50,000 P350,000

100,000 1,400,000 650,000 P 2,150,000

3.

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 Loss P 5,000 20,000 P25,000

P 2,150,000 50,000 P 2,200,000 650,000 P 1,550,000

Problem 7 49 Gain P200,000 . P200,000 P175,000 Option money not exercise Gain on retirement of bonds[(P1,000,000 x 120%)-P1,000,000] Shares becoming worthless Net gain (P200,000 P25,000)

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 7: Dealings in Property

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%) Normal tax (P3,000,000 P2,200,000) x 30% Tax savings 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) 10,000 (P20,000) P50,000 (80,000) 10,000 (P20,000) Year 3 P30,000 (20,000) (40,000) . P10,000 P30,000 (20,000) (40,000) . P10,000 Year 4 P80,000

P 180,000 ( 240,000) ( P60,000)

20,000 ( P80,000) (P100,000)

50,000 (40,000) P90,000 P80,000

20,000 ( P80,000)

50,000 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% Long term gain (loss) 50% Net capital gain (loss) NCLCO Reportable net capital gain Taxable income before exemption 2. M as a corporate taxpayer 2005 2006 2007 2008 2009 200A P 200,000 300,000 (P100,000) . (P100,000) P 120,000 ( 50,000) P 70,000 . P 70,000 (P 30,000) 200B P400,000 350,000 P 50,000 ( 30,000) P 20,000 (P100,000) 90,000 (P 10,000) . P 20,000 200C P450,000 400,000 P 50,000 . P 50,000 P - 0 10,000 P 10,000 ( 10,000) P 50,000 200D P520,000 500,000 P 20,000 . P 20,000 P 70,000 (100,000) (P 30,000) . P 20,000 200E P600,000 500,000 P100,000 . P100,000 P 50,000 - 0 P 50,000 ( 30,000) P 20,000 P120,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Business income Business expenses Ordinary income (loss) NOLCO Net ordinary income (loss) Capital asset transactions: Short-term gain (loss) Long term gain (loss) Net capital gain (loss) Reportable net capital gain Taxable income P 200,000 300,000 (P100,000) . (P100,000) P 120,000 ( 100,000) P 20,000 P 20,000 (P 80,000) P400,000 350,000 P 50,000 ( 50,000) P - 0 (P100,000) 180,000 P 80,000 P 80,000 P 80,000 P450,000 400,000 P 50,000 ( 30,000) P 20,000 P - 0 20,000 P 20,000 P 20,000 P 40,000 P520,000 500,000 P 20,000 . P 20,000 P 70,000 ( 200,000) (P130,000) P 20,0000

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Chapter 7: Dealings in Property P600,000 500,000 P100,000 . P100,000 P 50,000 - 0 P 50,000 P 50,000 P150,000

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 Sales price Less: Cost of sale Gross income

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

3.

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% 2. 3. 4. Basis of the new residential home (P1,200,000 x 2/3) Capital gains tax (P3,000,000 x 60%) Basis of the new residential home P 60,000 P800,000 P180,000 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

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 Capital gains tax in 2009 (P3,000,000 x 6%) Note: The sale is considered cash sales because the initial payment is 37% of the selling price.

3.

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 7: Dealings in Property

Problem 7 57 1. Deductible loss Feb. 14, 2009 2. Sales Less: Cost of sales (P450,000 x 8/9) Nondeductible loss Feb. 14, 2009 P294,444 P215,556 Original cost Add: Nondeductible loss Jan. 20: (P80,000 x 5/9) Feb. 10:: (P80,000 x 4/9) New cost 5. Sales (P60 x 4,000) Less: Cost of sales: Jan. 10: (P50 x 1,000) Jan. 20: (P294,444 x 3/5) Capital gain Jan. 20 P250,000 44,444 . P294,444

P- 0P320,000 400,000 P 80,000

3. 4.

Feb. 10 P180,000 35,556 . P215,556 P240,000

P 50,000 176,667

226,667 P 13,333 P 750,000 250,000 P1,000,000 900,000 P 100,000

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. Basis of new shares allocated Basis of ordinary shares (P900,000 x 75/100) Basis of preference shares (P900,000 x 25/100) Selling price ordinary shares (P25 x 25,000) Less: Cost ordinary shares - allocated Selling price preference shares (P60 x 5,000) Less: Cost preference shares allocated Net gain Total sales price (P625,000 + P300,000) Multiplied by percentage tax Percentage tax Capital gains tax (P25,000 x 5%) Tax advantage (P4,625 P1,250) Ordinary P675,000

Preference P225,000

3.

P625,000 675,000 P300,000 225,000

(P50,000) 75,000 P 25,000 P925,000 0.005 P 4,625 P P 1,250 3,375

4.

5. 6.

Problem 7 59 1. B Co. ordinary shares with FMV of Land with FMV of Cash Total Less: Cost of A Co.s shares transferred

P220,000 50,000 20,000 P290,000 200,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Total gain Taxable gain (is limited to the FMV of land and cash) 2. Cost of A Co.s shares transferred Add: Cash received FMV of land received Balance Gain recognized in the exchange Basis of B Co. shares received Basis of land received FMV of land Capital gains tax of land (P300,000 x 6%) Sales price Less: Cost Taxable gain P20,000 50,000 P 90,000 P 70,000 P200,000 70,000 P270,000 70,000 P200,000 P 50,000 P 18,000 P220,000 200,000 P 20,000

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Chapter 7: Dealings in Property

3. 4. 5.