36 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property CHAPTER DEALINGS IN PROPERTY Problem – TRUE OR FALSE False – Receivable not related to the main conduct of business are capital assets False – Depreciable assets primarily used in business are ordinary assets True True True 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 True True 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 – TRUE OR FALSE True False – equipment used in business operations is an ordinary asset True False – The basis is the fair market value at the date of donation False - … the speculator sells securities which he does not own True True – unless sold by dealers of securities False – Ordinary assets True 10 False – There should be no capital gain or loss 11 True 12 True 13 True 14 True Problem – TRUE OR FALSE False – Not subject to capital gains tax because the issuance is original and the shares of stock is owned by the corporation True True True False – Losses from wash sales are not deductible False – no wash sales if there are two kinds of shares of stocks True True True 10 True 11 False – The final tax should be 30% is based on the gross income 12 True 37 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property 13 True 14 True Problem – D A None of the choices all are correct A C A B A C 10 C Problem – Problem – B D D D D D C D D 10 D 11 A A Ordinary assets P100,000 50,000 Goods for sale Trade receivables Investment in property Land and building for business Delivery truck Car for personal use Correct amount of assets Capital assets P200,000 500,000 250,000 P900,000 Problem – 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 C Remaining capital asset (P2,000,000 x 10%) P200,000 Problem – Fair market value Less: Book value of car Gain on exchange P190,000 150,000 P 40,000 B Problem – C There is capital loss if the property given away has fair value higher than P200,000 when it was inherited Problem – 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 – 11 Acquisition cost Not in the choices P200,000 38 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property Agent’s commission (P500,000 – P200,000) x 10% Processing fee (P500,000 x 1%) Deductible cost and expenses 30,000 5,000 P235,000 Problem – 12 C Sales price Cost or basis to the donee (the lower of donor’s cost or the fair market value when the gift was made Capital gain Multiplied by holding period rate – more than year Reportable capital gain ( 50,000) P100,000 50% P 50,000 Problem – 13 C Sales price Acquisition cost (P150,000 + P20,000) Broker’s commission (P200,000 x 5%) Capital gain P200,000 (170,000) ( 10,000) P 30,000 P150,000 Problem – 14 D The sale of the entire business is not an ordinary business transaction (Kahn’s Federal Income Tax, p 364) Sales price P100,000 Less: X , Capital 75,000 Capital gain P 25,000 Problem – 15 A Holding period is more than year = 50% of the capital gain Problem – 16 D Sales price Less: Cost or market whichever is lower) Capital gain P200,000 100,000 P100,000 No holding period is allowed for taxpayer other individuals Problem – 17 D Net business income Capital asset transactions: Year 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 Year ( 40,000 x 50%) (10,000 x 100%) Year P200,000 Year P300,000 25,000 (40,000) 20,000 (10,000) (15,000) (5,000) P300,000 (15,000) P200,000 Correction: The requirement should be taxable income before personal exemption Problem – 18 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 39 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property 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 – 19 C 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 – 20 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 P 60,000 (P400,000) 300,000 (P100,000) P 60,000) B Ordinary taxable income Short-term capital gain (loss) Long-term capital gain (loss) Net capital gain Taxable income before personal exemption Problem – 21 Year P180,000 P200,000 (50,000) (60,000) P 90,000 P270,000 P180,000 P200,000 (100,000) P100,000 P280,000 A Jewelry M Benz Car – long term (50%) Refrigerator Ford Car 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 Problem – 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 – 23 A Sales of shares of stock Basis of shares of stock (lower) Gain on sale P400,000 ( 50,000) P350,000 40 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property Problem – 24 A Capital gains of November sales (P150,000 – P120,000) Multiplied by capital gains tax rate Capital gains tax Problem – 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 P30,000 5% P 1,500 P 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 ½ of 1% Problem – 26 A Tax due and payable (P500,000 x 005) 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 – 27 D Capital gain (P150 – P125) x 100) Problem – 28 D Sale – March (P120 x 500 shares) Less: Cost (P120,000/ 1,200 shares) x 500 shares Capital gain B Sales – May (P90 x 500) Less: Cost of sales (P70,000 x 500/700) Loss Nondeductible loss (P5,000 x 300/500) B Proceeds of liquidation (P100 x 300) Less: Cost (P45,000 + P3,000) Capital loss Problem – 29 D No capital gain on original issuance of company’s own stock even if issued above par C 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 - - 41 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property Capital gain on reissued shares (P23 – P21) x 2,000) Problem – 30 (1 C ) Cost of the new family home (P2,500,000/P4,000,000) x P2,000,000 (2 ) P4,000 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 – 31 Basis of new residence P4,000,000 2,500,000 P1,500,000 6% P 90,000 D P9,000,000 Capital gains tax (P5,000,000 x 6%) P300,000 Since there was no tax exemption, the entire amount of acquiring the new house and lot shall be its cost Problem – 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 – 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 – 34 C Final tax (P1,200,000 x 6%) C Creditable withholding tax (P500,000 x 6%) Problem – 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 42 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property b sold by a government corporation Problem – 36 B Creditable withholding tax: (P500,000 x 1.5%) x houses (P3,000,000 x 5%) x 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 – 37 A None No withholding tax because Goldrich Realty Corporation is the buyer not a seller A None No income tax is to be collected from sale of land by the government Problem – 38 B Zonal value Multiplied by capital gains tax rate Capital gains tax C Selling price Multiplied by capital gains tax rate Capital gains tax 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 Note: Real property tax is different from capital gains tax P10,000,000 6% P 600,000 C 43 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property Selling price Multiplied by capital gains tax rate Capital gains tax Problem – 39 Selling price = P1,000,000 P6,000,000 6% P 360,000 A Problem – 40 B Selling price Less: Cost of real property – lower than unpaid mortgage assumed Contract price Problem – 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 – 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 Reportable income = (gross profit/contract price) x collection (P1,000,000/P1,200,000) x P300,000 P 250,000 Note: The unpaid mortgage has no effect on the reportable income because its value is lower than the cost Problem – 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 Reportable income = (gross profit/contract price) x collection (P600,000/P600,000) x P220,000 100,000 P 220,000 P 220,000 Problem – 44 Creditable withholding tax: b (P1,000,000 x 30 x 3%) P 900,000 44 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property c (P2,500,000 x 40 x 5%) Total creditable withholding tax 5,000,000 P5,900,000 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 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 – 45 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 P 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 – 46 Not-traded in Local Stock Exchange: 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 P500,000 200,000 P700,000 450,00 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 February 200B purchase (P36,000/345) P104.35 Moving Average Method: Sales proceeds (P200 x 350) P 70,000 45 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property Less: Cost of shares sold (350 x P100) Gain on sale of investment in stock Multiplied by percentage of tax Tax due and payable 35,000 P 35,000 5% P 1,750 *Computation of the new cost per share would be: Investment in common stocks: 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 No of Shares 100 300 400 60 460 Cost/ share P100 P120 Problem – 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% 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% P700.00 P933.34 P933.34 P933.34 Problem – 48 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 Amount P10,000 36,000 P46,000 P46,000 460 P 100 P100,000 200,000 P300,000 50,000 P350,000 Selling Price: Down payment Installment payments P200,000 + (P300,000 x 4) Mortgage assumed by the buyer Selling Price P 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 – 49 Loss Gain 46 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property Option money – not exercise Gain on retirement of bonds[(P1,000,000 x 120%)-P1,000,000] Shares becoming worthless P 5,000 20,000 P25,000 Net gain (P200,000 – P25,000) P200,000 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 – 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 – 51 No, because the Loakan Corporation is not an individual taxpayer Problem – 52 Individual taxpayer Operating gain (loss) NOLCO Capital gain (loss) NCLCO Taxable income before p.e Corporate taxpayer Operating gain (loss) NOLCO Capital gain (loss) Taxable income before p.e Year (P100,000) Year P50,000 (80,000) Year P30,000 (20,000) Year 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 – 53 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 Long term gain (loss) – 50% ( Net capital gain (loss) NCLCO Reportable net capital gain Taxable income before exemption 200A P 200,000 300,000 (P100,000 ) (P100,000 ) M – as a corporate taxpayer 50,000 ) P 70,000 P 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 - - P 70,000 P 50,000 10,000 (100,000) - - (P 10,000) P 10,000 ( 10,000) (P 30,000) P 20,000 P 50,000 P 20,000 P 50,000 ( 30,000) P 20,000 P120,000 47 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property Business income Business expenses Ordinary income (loss) NOLCO Net ordinary income (loss) 2005 P 200,000 300,000 (P100,000 ) (P100,000 ) 2006 P400,000 350,000 P 50,000 2007 P450,000 400,000 P 50,000 2008 P520,000 500,000 P 20,000 2009 P600,000 500,000 P100,000 ( 50,000) P - - ( 30,000) P 20,000 P 20,000 P100,000 P - - P 70,000 P 50,000 20,000 P 20,000 ( 200,000) (P130,000 ) - P 50,000 P 20,000 P 40,000 Capital asset transactions: Short-term gain (loss) P 120,000 Long term gain (loss) Net capital gain (loss) ( 100,000) P 20,000 (P100,000 ) 180,000 P 80,000 Reportable net capital gain Taxable income P 20,000 (P 80,000) P 80,000 P 80,000 P 20,0000 Problem – 54 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 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 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 – 55 Capital gains tax (P3,000,000 – P2,000,000) x 6% P 60,000 Basis of the new residential home (P1,200,000 x 2/3) P800,000 Capital gains tax (P3,000,000 x 60%) P180,000 Basis of the new residential home Problem – 56 Down payment (P3,000,000 x 20%) Add: Excess of mortgage over cost (P1,200,000 – P700,000) Initial payment 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%) 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 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property Note: The sale is considered cash sales because the initial payment is 37% of the selling price Problem – 57 Deductible loss – Feb 14, 2009 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 Sales (P60 x 4,000) Less: Cost of sales: Jan 10: (P50 x 1,000) Jan 20: (P294,444 x 3/5) Capital gain 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 – 58 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 P 750,000 250,000 P1,000,000 900,000 P 100,000 Basis of new shares – allocated Basis of ordinary shares (P900,000 x 75/100) Basis of preference shares (P900,000 x 25/100) Ordinary P675,000 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 P625,000 675,000 P300,000 225,000 Preference P225,000 (P50,000) 75,000 P 25,000 Total sales price (P625,000 + P300,000) Multiplied by percentage tax Percentage tax P925,000 0.005 P 4,625 Capital gains tax (P25,000 x 5%) P 1,250 Tax advantage (P4,625 – P1,250) P 3,375 Problem – 59 B Co ordinary shares with FMV of P220,000 49 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property Land with FMV of Cash Total Less: Cost of A Co.’s shares transferred Total gain 50,000 20,000 P290,000 200,000 P 90,000 Taxable gain (is limited to the FMV of land and cash) P 70,000 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 P200,000 P20,000 50,000 70,000 P270,000 70,000 P200,000 Basis of land received – FMV of land P 50,000 Capital gains tax of land (P300,000 x 6%) P 18,000 Sales price Less: Cost Taxable gain P220,000 200,000 P 20,000 ... (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property Business income Business expenses Ordinary income (loss) NOLCO Net ordinary income (loss) 2005 P 200,000 300,000 (P100,000... capital gains tax P10,000,000 6% P 600,000 C 43 INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS Chapter 7: Dealings in Property Selling price Multiplied by capital gains tax... 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 Long term gain