Income taxation by valencia chapter 7 (dealings in property)

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.. False – For ordinary loss,

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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)

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

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

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13 True

14 True

3 None of the choices all are correct 3 D

Problem 7 – 6 A

Ordinary assets Capital assets

Problem 7 – 7

1 A

Multiplied by number of 200 s.m sold (9,000/200) 45

2 C

Problem 7 – 8 B

Problem 7 – 9 C

There is capital loss if the property given away has fair value higher than P200,000 when it was inherited

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 Not in the choices

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Agent’s commission (P500,000 – P200,000) x 10% 30,000

Cost or basis to the donee (the lower of donor’s cost or

Problem 7 – 14 D

The sale of the entire business is not an ordinary business transaction (Kahn’s Federal Income Tax, p 364)

Holding period is more than 1 year = 50% of the capital gain

No holding period is allowed for taxpayer other individuals

Year 1 Year 2

Capital asset transactions: Year 1 Year 2

Capital gain (long-term) = (P50,000 x 50%) ( 40,000 x 50%) 25,000 20,000 Capital loss (short-term) = (P40,000 x 100%) (10,000 x 100%) (40,000) (10,000)

Correction: The requirement should be taxable income before personal exemption.

Problem 7 – 18

1 C

Capital asset transactions:

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2 B

Problem 7 – 19

1 C

2 C

200A 200B

Problem 7 – 20

1 Not in the choices = P270,000 Year 1 Year 2

Long-term capital gain (loss) (P600,000 x 50%): (P100,000 x 50%) 300,000 (50,000)

2 B

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 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

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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

P 10 1,000 P10,000 5%

P 5 0 0 Note: The shares of stock sold in the Philippine stock exchange are subject to percentage tax

of ½ of 1%

Problem 7 – 26

2 D

Problem 7 – 28

1 D

Sale – March (P120 x 500 shares)

Less: Cost (P120,000/ 1,200 shares) x 500 shares

Capital gain

P 60,000 50,000 P10,000

2 B

3 B

Problem 7 – 29

No capital gain on original issuance of company’s own

-2 C

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Capital gain on reissued shares (P23 – P21) x 2,000) P4,000

Problem 7 – 30

(1

Cost of the new family home (P2,500,000/P4,000,000) x P2,000,000 P1,250,000 (2

Since there was no tax exemption, the entire amount of acquiring the new house and lot shall

be its cost

Holding period is not applicable because the property is a real property subject to final tax

Add: Excess of new acquisition cost over sales price

Problem 7 – 34

2 C

Sales proceeds

Multiply by tax rate

Capital gains tax

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

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b sold by a government corporation.

Creditable withholding tax:

P330,000 Income tax still due and payable:

Problem 7 – 37

None No withholding tax because Goldrich Realty Corporation is the buyer not a

seller

None No income tax is to be collected from sale of land by the government

Problem 7 – 38

1 B

Note: Real property tax is different from capital gains tax.

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Selling price P6,000,000

Selling price = P1,000,000

Less: Cost of real property – lower than unpaid mortgage assumed 400,000

Excess of unpaid mortgage assumed by the buyer over the cost of real

Less: Unpaid mortgage assumed by the buyer – lower than cost 300,000

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

Less: Cost of real property – lower than unpaid mortgage assumed 400,000

Excess of unpaid mortgage assumed by the buyer over the cost

Reportable income = (gross profit/contract price) x collection

(P600,000/P600,000) x P220,000 P 220,000

Problem 7 – 44

1 Creditable withholding tax:

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c (P2,500,000 x 40 x 5%) 5,000,000

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

2 Gross profit:

Less: Optional standard deduction (P44,750,000 x 40%) 17,900,000

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

P300,000

150,000

P500,000

200,000 P700,000 450,00

0 P250,000

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

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 8,696.00 26,087.50

P 70,000.00

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)

P 86.96 P104.35

2 Moving Average Method:

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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

Amount P10,000 36,000 P46,000 P46,000 460

P 100

Problem 7 – 47

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

P100,000

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

2 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

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

P 2,150,000 50,000

P 2,200,000 650,000

P 1,550,000

Problem 7 – 49

Loss Gain

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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

P200,000 P200,000

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

Problem 7 – 51

No, because the Loakan Corporation is not an individual taxpayer

Problem 7 – 52

1 Individual taxpayer Year 1 Year 2 Year 3 Year 4

2 Corporate taxpayer

Problem 7 – 53

1 M – as an individual taxpayer

200A 200B 200C 200D 200E

Business income P 200,000 P400,000 P450,000 P520,000 P600,000 Business expenses 300,000 350,000 400,000 500,000 500,000 Ordinary income (loss) (P100,000

) P 50,000 P 50,000 P 20,000 P100,000 NOLCO ( 30,000) Net ordinary income (loss) (P100,000

) P 20,000 P 50,000 P 20,000 P100,000 Capital asset transactions:

Short-term gain (loss) – 100% P 120,000 (P100,000

) P - 0 - P 70,000 P 50,000 Long term gain (loss) – 50% ( 50,000

) 90,000 10,000 (100,000) 0 -Net capital gain (loss) P 70,000 (P 10,000) P 10,000 (P 30,000) P 50,000 NCLCO ( 10,000) ( 30,000) Reportable net capital gain P 70,000 P 20,000 Taxable income before

exemption 30,000) (P P 20,000 P 50,000 P 20,000 P120,000

2 M – as a corporate taxpayer

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2005 2006 2007 2008 2009

Business income P 200,000 P400,000 P450,000 P520,000 P600,000 Business expenses 300,000 350,000 400,000 500,000 500,000 Ordinary income (loss) (P100,000

) P 50,000 P 50,000 P 20,000 P100,000 NOLCO ( 50,000) ( 30,000) Net ordinary income (loss) (P100,000

) P - 0 - P 20,000 P 20,000 P100,000 Capital asset transactions:

Short-term gain (loss) P 120,000 (P100,000

) P - 0 - P 70,000 P 50,000 Long term gain (loss) ( 100,000) 180,000 20,000 ( 200,000) 0 -Net capital gain (loss) P 20,000 P 80,000 P 20,000 (P130,000

) P 50,000 Reportable net capital gain P 20,000 P 80,000 P 20,000 P 50,000 Taxable income (P 80,000) P 80,000 P 40,000 P 20,0000 P150,000

Problem 7 – 54

Multiplied by percent of collection (P2,000,000 + P500,000)/5,000,000 50%

Multiplied by percent of gross income (P1,000,000/P5,000,000) 20%

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

Problem 7 – 56

Add: Excess of mortgage over cost (P1,200,000 – P700,000) 500,000

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Note: The sale is considered cash sales because the initial

payment

is 37% of the selling price

Problem 7 – 57

3 P294,444

Feb 10:: (P80,000 x 4/9)

Less: Cost of sales:

Problem 7 – 58

Less: Cost of investment in A Co transferred (P9 x 100,000) 900,000

Less: Cost – preference shares – allocated 225,000 75,000

Problem 7 – 59

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Land with FMV of 50,000

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