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Ch7 - Dealings in Property
Ch7 - Dealings in Property
Ch7 - Dealings in Property
SUGGESTED ANSWERS
Chapter 7: Dealings in Property
CHAPTER 7
DEALINGS IN PROPERTY
4. True
5. True
6. False – the stock transaction stock is applicable only when the shares of stocks are sold
through the stock market. The nondealers of securities may sold the shares of stock
directly to the buyer which requires payment of capital gains tax of 5% of the first
P100,000 capital gains and 10% on the excess of the first P100,000 capital gains.
7. True
8. True
9. True
10. False – additional assessments by a corporation from its shareholders are not income;
hence, not taxable income.
11. True
12. False – Losses from wash sales are not deductible.
13. False – No wash sales if the classes of shares of stocks are different.
14. True
15. True
16. False – Not subject to capital gains tax because the issuance is original and the shares
of stock is owned by the corporation.
Problem 7 – 5 Problem 7 – 6
1. A 1. A
2. B 2. D
3. C 3. A
4. B 4. D
5. D 5. D
6. C 6. A
7. C 7. C
8. A 8. B
9. B 9. D
10. A 10. D
11. C 11. D
12. C
Problem 7 – 7 A
Raw materials (paper and inks) P 500,000
Office equipment and printing machines 5,000,000
Warehouse used for printing 1,000,000
Land where warehouse is constructed 400,000
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 59
SUGGESTED ANSWERS
Chapter 7: Dealings in Property
Problem 7 – 8 D
Real property inventories P10,000,000
Land and building used in business 3,000,000
Vacation house of the executives 1,500,000
Acquired undeveloped properties 500,000
Abandoned properties 600,000
Total amount of ordinary assets P15,600,000
All properties acquired by real estate dealers/developers are ordinary assets. Ordinary assets of
realty companies that were later abandoned and become idle continue to be considered as
ordinary assets. (Rev. Reg. No. 7 – 03)
Problem 7 – 9 D
Residential house P2,000,000
Personal car 1,000,000
Interest in commercial partnership 500,000
Investment in property 1,500,000
Amount of capital assets P5,000,000
Problem 7 – 10 C
Interest in partnership P1,000,000
Idle raw lands 100,000
Proceeds of expropriated real property 2,000,000
Capital assets P3,100,000
Problem 7 – 11
1. Letter D
Selling price per 200 sq. meters P 100,000
Multiplied by number of 200 s.m. sold (9,000 – 1,000)/200 40
Total sales P4,000,000
Less: Cost of sales (P2,000,000 x 90%) 1,800,000
Ordinary gain from sale of land P2,200,000
2. Letter A
There is no remaining capital asset of B because the remaining 10% of one hectare is also
used into business as a warehouse.
Problem 7 – 12 D
The sale of house and lot (capital asset) is subject to capital gains tax of 6% (FMV or SP,
whichever is higher). There is no gain on sale of car and accessories which could be
subject to normal tax.
Problem 7 – 13 B
Fair market value P190,000
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 60
SUGGESTED ANSWERS
Chapter 7: Dealings in Property
Problem 7 – 14 C
There is capital loss if the property given away has fair value higher than P200,000 when it was
inherited.
Problem 7 – 15 A
Where an association exchanged real property for another real property with a comparatively
higher assessed value, it was ruled that no gain or loss is realized in exchanges of property for
another property of a like kind. (BIR Ruling, March 9, 1971)
Problem 7 – 16 A
There is no taxable amount in the above transaction because the transaction is an
exchange solely in kind and Mr. A gained control of Veniz Corporation acquiring more
than 50% of the outstanding shares (15/25 = 60%).
Problem 7 – 17 D
Acquisition cost (P200,000 + P20,000) P220,000
Agent’s commission (P500,000 x 10%) 50,000
Deductible cost and expenses P270,000
Problem 7 – 18 A
Sales price P2,000,000
Less: Fair market value at the time of his father’s death 500,000
Gain on sale of farm land P1,500,000
The basis of the property shall be the fair market price or value at the date of acquisition, if the
same was acquired by inheritance. [Sec. 40 (B) (2), NIRC] The value at the date of acquisition
prevails over the fair market value because such is the lower amount.
Problem 7 – 19 A
Sales price P150,000
Cost or basis to the donee (the lower of donor’s cost or
the fair market value when the gift was made ( 50,000)
Capital gain P100,000
Problem 7 – 20 B
Sales price P700,000
Less: Book value of the car
Acquisition cost P1,000,000
Less: Accum. depn. (P1,000,000/5) x 2 400,000 600,000
Capital gain P100,000
Multiplied by percent of holding period 50%
Reportable capital gain P 50,000
Problem 7 – 21 D
Sales price P200,000
Less: Cost or market whichever is lower) 100,000
Capital gain P100,000
The net capital loss carry-over is not allowed to be deducted from the capital gain in
year 2 because the capital asset sold in year 2 is held for more than 1 year. (Sec. 39
(D), NIRC)
Problem 7 – 23
1. Letter C
Ordinary gain P50,000
Capital asset transactions:
Short-term capital gain P20,000
Long-term capital gain (P30,000 x 50%) 15,000
Long-term capital loss (P10,000 x 50%) ( 5,000) 30,000
Taxable income before personal exemption P80,000
2. Letter B
Ordinary gain P50,000
Capital asset transactions:
Short-term capital gain P20,000
Long-term capital gain (P30,000) 30,000
Long-term capital loss ( 10,000) 40,000
Taxable income before personal exemption P90,000
Problem 7 – 24
1. Letter C Year 1 Year 2
Ordinary taxable income P 60,000 P180,000
Short-term capital gain (loss) (P400,000) P200,000
Long-term capital gain (loss) (P600,000 x 50%): (P100,000 x 50%) 300,000 (50,000)
NCLCO – applicable in year 2 is P60,000 (P100,000) (60,000)
Net capital gain P 90,000
Taxable income before personal exemption P 60,000) P270,000
The net capital loss carry-over can only be deducted from the capital gains on sale of capital
asset held for 12 months. The amount of NCLCO is limited to the taxable income in the year
when the capital loss was incurred. (Sec. 39 (D), NIRC)
2. Letter B
Ordinary taxable income P180,000
Short-term capital gain P200,000
Long-term capital (loss) (100,000)
Net capital gain P100,000
Taxable income before personal exemption P280,000
Problem 7 – 25 A
Selling Price Cost & Expenses Net Capital Gain
Jewelry P 80,000 P 11,000 P 69,000
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 62
SUGGESTED ANSWERS
Chapter 7: Dealings in Property
Problem 7 – 26 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 – 27 C
First P100,000 (P95,000/95%) x 5% P 5,000
Over P100,000 [(P207,500 – P95,000)/90%] x 10% 12,500
Total final tax P 17,500
Problem 7 – 28 A
Capital gains of November sales (P150,000 – P120,000) P30,000
Multiplied by capital gains tax rate 5%
Capital gains tax P 1,500
Problem 7 – 29
1. Letter A
Sales P1,000,000
Less: Cost of equity securities P900,000
Brokerage fee 40,000 940,000
Net income P 60,000
Multiplied by corporate income tax 30%
Income tax due P 18,000
The dealers in securities are not liable to the stock transaction tax of ½ of 1%
based on the selling price or fair market value, whichever is higher. (Sec. 4 &
5, Rev. Regs. No. 6 – 2008)
2. Letter B
Stock transaction tax (P1,000,000 x 0.005) P5,000
3. Letter C
Sales P1,000,000
Less: Cost of equity securities P900,000
Brokerage fee 40,000 940,000
Capital gains P 60,000
Multiplied by tax rate applicable 5%
Capital gains tax P 3,000
Problem 7 – 30 C
Sold thru Sold direct to
stock market the buyer
Sales price (P140 x 1,000 shares) P140,000 P140,000
Less: Cost of sales 90,000 90,000
Gross profit P 50,000 P 50,000
Broker’s fee (P140,000 x 1%) ( 1,400)
Percentage tax (P140,000 x 0.005) ( 700)
Capital gains tax (P50,000 x 5%) . ( 2,500)
Profit P 47,900 P 47,500
Less: Profit if sold through the stock market 47,900
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 63
SUGGESTED ANSWERS
Chapter 7: Dealings in Property
Problem 7 – 31 D
Capital gain (P150 – P125) x 100 shares P2,500
Problem 7 – 32
1. Letter D
Sale – March (P120 x 500 shares) P 60,000
Less: Cost (P120,000/1,200 shares) x 500 shares 50,000
Capital gain P10,000
2. Letter C
Sales – May (P90 x 500) P45,000
Less: Cost of sales (P70,000 x 500/700) 50,000
Loss P 5,000
3. Letter A
Proceeds of liquidation (P130 x 500) P65,000
Less: Cost – Beginning: (P120,000/1,200) x 200 shares P20,000
- April: (P150 x 300 shares) + P3,000 48,000 68,000
Capital loss (P3,000)
Problem 7 – 33
1. Letter C
Sales proceeds P240,000
Less: Cost of equity investments sold
April 20 (1,650 shares) P161,700
March 20 (P92* x 350 shares) 32,200 193,900
Gain on sale P 46,100
2. Letter C
Cost per share batch March 10 P 92
Number of shares remaining [(800 x 110%) – 350] 530
Cost of remaining shares P48,760
Problem 7 – 34
1. Letter D
No capital gain on original issuance of company’s own stock P - 0 -
even if issued above par
2. Letter C
Capital gain on reissued shares (P23 – P21) x 2,000) P4,000
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 64
SUGGESTED ANSWERS
Chapter 7: Dealings in Property
Problem 7 – 35 D
Share premium – treasury shares [(P140 – P120) x 900] P18,000
Less: Loss on treasury shares retirement
(P100 – P120) x 100 shares 2,000
Net taxable gain P16,000
Correction: should be: “the remaining one hundred (100) shares were retired.”
There is no taxable gain or deductible loss in the original issuance of shares of stock.
(Sec. 55, Reg. No. 2)
Problem 7 – 36 B
Sales (P180 x 1,000) P 180,000
Cost (P120 x 1,000) (120,000)
Gross profit P 60,000
Multiplied by applicable capital gains tax rate 5%
Capital gains tax P 3,000
The initial payment does not exceed 25%, therefore, installment payment of the capital
gains tax will be allowed. The installment payment per year is P48,000 or [(P180,000 –
P36,000)/3].
Problem 7 – 37
1. Letter C
Liquidating dividend P120,000
Less: Cost of stock investment (P10 x 10,000) 100,000
Reportable capital gain – corporation P 20,000
2. Letter D
Liquidating dividend P120,000
Less: Cost of stock investment (P10 x 10,000) 100,000
Capital gains P 20,000
Multiplied by percent to report due to holding period 50%
Reportable capital gain – individual P 10,000
If the shareholder is a corporation, the capital gain is taxable in full. If the shareholder is an
individual and the stocks were held for more than 12 months, the capital gain is taxable only to
the extent of 50% thereof, [Sec. 39 (B), NIRC].
The authors believe that the rule on holding period on shares of stock is applicable in case of
liquidating dividend. However if the shares of stock is sold through the stock market or the
direct to the buyer, the holding period does not apply because the sales are subject to
percentage tax or capital gains tax which are final taxes in nature. [Sec. 6 (c, 3), Rev. Regs. No.
2-82]
Problem 7 – 38
1. Letter C
Cost of the new family home (P2,500,000/P4,000,000) x P2,000,000 P1,250,000
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 65
SUGGESTED ANSWERS
Chapter 7: Dealings in Property
2. Letter B
Sales proceeds P4,000,000
Less: Amount used to acquire new family home 2,500,000
Unutilized sales proceeds P1,500,000
Multiplied by capital gains tax rate 6%
Capital gains tax to be paid P 90,000
Problem 7 – 39 D
Basis of new residence P9,000,000
Since there was no tax exemption, the entire amount of acquiring the new house and lot shall be
its cost.
Problem 7 – 40 D
Zonal value (P700 x 500) – higher P350,000
Multiplied by capital gains tax rate 6%
Capital gains tax P 21,000
Holding period is not applicable because the property is a real property subject to final tax.
Problem 7 – 41 B
Cost of original residence P6,000,000
Add: Excess of new acquisition cost over sales price
(P15,000,000 – P12,000,000) 3,000,000
Basis of new principal residence P9,000,000
Problem 7 – 42
1. Letter C
Final tax (P1,200,000 x 6%) P72,000
2. Letter D
Creditable withholding tax (P500,000 x 1.5%) P7,500
Problem 7 – 43
1. Letter D
Capital gains tax (P2,500,000 x 6%) – SP, higher P150,000
Add: Documentary stamp tax (P2,500,000 x 1.5%) 37,500
Total tax to the BIR P187,500
2. Letter C
Gross income (P2,500,000 – P1,500,000) P1,000,000
Less: OSD (P1,000,000 x 40%) 400,000
Net taxable income P 600,000
Multiplied by corporate normal tax rate 30%
Income tax due P 180,000
Add: Documentary stamp tax (P2,500,000 x 1.5%) 37,500
Total tax due to the BIR P217,500
The transaction above is VAT-exempt because the selling price (SP) is P2,500,000 and
the real property is for residential dwelling.
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 66
SUGGESTED ANSWERS
Chapter 7: Dealings in Property
Problem 7 – 44 D
Creditable withholding tax:
(P500,000 x 1.5%) x 4 houses P 30,000
(P3,000,000 x 5%) x 2 300,000
P330,000
Income tax still due and payable:
Total revenue (P500,000 x 4) + (P3,000,000 x 2) P8,000,000
Total costs (P200,000 x 4) + (P1,200,000 x 2) (3,200,000)
Gross profit P4,800,000
Operating expenses (2,800,000)
Net income P2,000,000
Multiplied by normal corporate income tax rate 30%
Income tax due P 600,000
Creditable withholding tax ( 330,000)
Income tax still due and payable P 270,000
Problem 7 – 45
1. Letter A
None. No withholding tax because Goldrich Realty Corporation is the buyer not a seller.
2 Letter A
None. No income tax is to be collected from sale of land by the government.
Problem 7 – 46 A
Book values:
2 bonds certificates (P1M x 2) P2,000,000
Bond at a premium [P1,180,000 – (P20,000 x 5) 1,080,000
Total book values P3,080,000
Less: Bond retirement prices:
At 91 P 910,000
At 110 1,100,000
At 105 1,050,000 3,060,000
Net gain on retirements of bonds P 20,000
Problem 7 – 47
1. Letter A
Fair market value of V Co.’s share received
(P30 x 250,000) P 7,500,000
Less: Book value of the net asset of E Co. 9,000,000
Loss of E Co. – not recognized (P2,500,000)
2. Letter B
E Co.’s cost or basis is the same as the book value of net
asset it transferred to acquire V Co.’s equity P9,000,000
3. Letter D
Fair value of E Co.’s net asset received P8,000,000
Less: Par value of shares issued (P25 x 250,000) 6,250,000
Nontaxable gain of V Co. P1,750,000
Taxable gain of V Co. P - 0 -
There is no taxable gain because the merger is solely in kind.
4. Letter C
Portion of FMV of V Co.’s shares received
(P7,500,000 x 20/300) P 500,000
Less: Cost of investment 700,000
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 67
SUGGESTED ANSWERS
Chapter 7: Dealings in Property
5. Letter A
Sales price [P30 x (20,000 x 20%)] P120,000
Less: Cost of sale (P700,000 x 20%) 140,000
Loss on sale (P 20,000)
Problem 7 – 48
1. Creditable withholding tax:
b. (P1,000,000 x 30 x 3%) P 900,000
c. (P2,500,000 x 40 x 5%) 5,000,000
Total creditable withholding tax P5,900,000
2. Gross profit:
(20 x P150,000 x 25%) P 750,000
(30 x P1,000,000 x 30%) 9,000,000
(40 x P2,500,000 x 35%) 35,000,000 P44,750,000
Less: Optional standard deduction (P44,750,000 x 40%) 17,900,000
Net taxable income P26,850,000
Multiplied by corporate tax rate 30%
Income tax due P 8,055,000
Less: Creditable withholding tax 5,900,000
Income tax still due and payable P 2,155,000
Problem 7 – 49
1.
Sales in the regular course of business P500,000
Add: Sales of ordinary asset (lot used as warehouse) 200,000
Total sales of ordinary assets P700,000
Less: Cost of sales P300,000 450,00
Cost of lot 150,000 0
Ordinary gains / income P250,000
2.
Sales of residential house and lot P1,000,000
Proceeds applied for the acquisition of new residential
house and lot 800,000
Amount subject to final withholding tax P 200,000
Final tax rate 6%
Final tax P 12,000
Problem 7 – 50
Not-traded in Local Stock Exchange:
1. FIFO Method:
Sales proceeds (P200 x 350) P 70,000.00
Less: Cost of shares sold:
December 200A purchased (P86.96 x 100) P 8,696.00
February 200B purchased (P104.35 x 250) 26,087.50 34,783.50
Gain on sale on investment on stock P 35,216.50
Multiplied by percentage of tax 5%
Tax due and payable P 1,760.83
Note: The new cost per share due to 15% stock dividends is computed as follows:
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 68
SUGGESTED ANSWERS
Chapter 7: Dealings in Property
Problem 7 – 51
Sales (P150 x 1,000) P150,000
Cost (P80 x 1,000) ( 80,000)
Gross profit P 70,000
Gross profit rate (P70,000/P150,000) 47.667%
Percent of initial payment (P30,000/P150,000) 20.00%
Problem 7 – 52
Loss Gain
Option money – not exercise P 5,000
Gain on retirement of bonds [(P1,000,000 x 120%)-P1,000,000] P200,000
Shares becoming worthless 20,000 .
P25,000 P200,000
Net gain (P200,000 – P25,000) 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 – 53
Trinidad Corporation is NOT correct. Only individual taxpayers are allowed to exercise option to
be taxed at normal tax or capital gains tax. Since the property is already used in business, the
tax to be paid by Trinidad Corporation should be normal tax.
Problem 7 – 54
No, because the Loakan Corporation is not an individual taxpayer.
Problem 7 – 55
1. Individual taxpayer Year 1 Year 2 Year 3 Year 4
Operating gain (loss) (P100,000) P50,000 P30,000 P80,000
NOLCO (80,000) (20,000)
Capital gain (loss) 20,000 10,000 (40,000) 50,000
NCLCO . (10,000)
Taxable income before p.e. ( P80,000) (P20,000) P10,000 P120,000
The net capital loss of P40,000 in year 3 could not be deducted in its full amount in year 4
because the taxable income in year 3 is only P10,000.
2. Corporate taxpayer
Operating gain (loss) (P100,000) P50,000 P30,000 P80,000
NOLCO (80,000) (20,000)
Capital gain (loss) 20,000 10,000 (40,000) 50,000
.
Taxable income before p.e. ( P80,000) (P20,000) P10,000 P130,000
Problem 7 – 56
Short-term gain - sale of car (P105,000 – P95,000) x 100% P10,000
Long-term gain - sale of jewelry (P80,000 – P50,000) x 50% 15,000
Long-term loss - sale of refrigerator (P4,000 – P8,000) x 50% ( 2,000)
Net capital gains P23,000
Sale of real property classified as capital asset is subject to final tax; hence, not to be
reported in the ITR, [Sec. 24 (D)(1), NIRC]. Related party losses are not deductible.
[Sec. 36 (B), NIRC]
Problem 7 – 57
1. Taxpayer is individual.
Year 4 Year 5 Year 6 Year 7 Year 8
Business income 300,000 400,000 500,000 600,000 700,000
Business expenses 340,000 380,000 450,000 570,000 650,000
Net income before ( 40,000) 20,000 50,000 30,000 50,000
NOLCO
NOLCO ( 10,000)
Net income (loss)
from operation ( 40,000) 10,000 50,000 30,000 50,000
Capital gain (loss)
Short-term (100%) 50,000 (40,000) 30,000 30,000 (40,000)
Long term (50%) (20,000) 5,000 (50,000) 5,000 35,000
NCLCO (20,000)
Net capital gain (loss) 30,000 (35,000) (20,000) 15,000 ( 5,000)
Net income (loss) ( 10,000) 10,000 50,000 45,000 50,000
2. Taxpayer is a corporation.
Year 4 Year 5 Year 6 Year 7 Year 8
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 70
SUGGESTED ANSWERS
Chapter 7: Dealings in Property
Problem 7 – 58
1. Sales price P5,000,000
Less: Cost of sale 4,000,000
Gross income P1,000,000
Multiplied by percent of collection (P2,000,000 + P500,000)/5,000,000 50%
Reportable gross income in 200A P 500,000
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 – 59
Gain on retirement of bonds [(P500,000 x 120%) – P500,000] P100,000
Gain on short sales [P50,000 – (P2.25 x 20,000)] 5,000
Total capital gains P105,000
Less: Shares becoming worthless at Philippine Airlines 50,000
Net capital gains P 55,000
There is no capital loss in the option money because the taxpayer exercised his option rights.
Problem 7 – 60
1. Capital gains tax (P3,000,000 – P2,000,000) x 6% P 60,000
Problem 7 – 61
1. Deductible loss – Feb. 14, 200x P- 0-
2. Sales P320,000
Less: Cost of sales (P450,000 x 8/9) 400,000
Nondeductible loss – Feb. 14, 200x P 80,000
INCOME TAXATION 7TH Edition (BY: VALENCIA & ROXAS) 71
SUGGESTED ANSWERS
Chapter 7: Dealings in Property
3. P294,444
4. P215,556
Jan. 20 Feb. 10
Original cost P250,000 P180,000
Add: Nondeductible loss
Jan. 20: (P80,000 x 5/9) 44,444
Feb. 10:: (P80,000 x 4/9) . 35,556
New cost P294,444 P215,556
Problem 7 – 62
1. FMV of ordinary shares (P30 x 25,000) P 750,000
FMV of preference shares (P50 x 5,000) 250,000
Total FMV of shares of stock received P1,000,000
Less: Cost of investment in A Co. transferred (P9 x 100,000) 900,000
Nontaxable gain P 100,000
Problem 7 – 63
1. B Co. ordinary shares with FMV of P200,000
Land with FMV of 100,000
Cash 50,000
Total P350,000
Less: Cost of A Co.’s shares transferred 180,000
Total gain P170,000
Taxable gain (is limited to the FMV of land and cash) P100,000