INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 7: Dealings in Property

CHAPTER 7

DEALINGS IN PROPERTY
Problem 7 1 TRUE OR FALSE 1. True 2. False Ordinary assets 3. False its real properties shall continue to be treated as ordinary assets. 4. True 5. False the basis is the same as the cost of the donor or the FMV at the time of donation whichever is lower. 6. True 7. 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. 8. False real property classified as ordinary assets are subject to normal tax. 9. True 10. False Loss on sale of debt securities sustained by bank can either be classified as capital loss or ordinary loss. Capital loss if owned by bank as investments but ordinary loss if acquired for clients loan settlements. 11. True 12. False For ordinary loss, the same; but for capital loss not the same because there is no capital loss carry over and not holding period for corporation. Problem 7 2 TRUE OR FALSE 1. True 2. 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. 3. False Not subject to creditable withholding tax. 4. False whichever is lower 5. False equipment used in business operations is an ordinary asset. 6. True 7. False The basis is the fair market value at the date of donation. 8. True 9. True 10. False There should be no capital loss because there is an exercise of the option. 11. True 12. True Problem 7 3 TRUE OR FALSE 1. True 2. True 3. True 4. False Losses from wash sales are not deductible. 5. False No wash sales if the classes of shares of stocks are different. 6. True 7. True 8. False Not subject to capital gains tax because the issuance is original and the shares of stock is owned by the corporation. 9. True 10. False subject to either stock transaction tax (traded-in stock market) or capital gains tax of 5% to 10% based on capital gains (not traded-in the stock market). 11. True

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 7: Dealings in Property

12. False additional assessments by a corporation from its shareholders are not income;
hence, not taxable income. Problem 7 1. False 2. True 3. False 4. True 5. False 6. True 7. True 8. False 9. True 10. False 11. True 12. True 4 subject to capital gains tax of 6%. - the speculator sells securities which he does not own. this refers to patent. if the land is ordinary asset, subject to normal tax. not dealers of securities

Problem 7 5 1. C 2. B 3. D 4. C 5. C 6. A 7. B 8. A 9. C 10. C 11. A 12. D

Problem 7 6 1. A 2. D 3. D 4. A 5. C 6. B 7. D 8. D 9. D 10. A

Problem 7 7 D Real property inventories Land and building used in business Vacation house of the executives Acquired undeveloped properties Abandoned properties Total amount of ordinary assets

P10,000,000 3,000,000 1,500,000 500,000 600,000 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 8 C Interest in partnership Idle raw lands Proceeds of expropriated real property Capital assets P1,000,000 100,000 2,000,000 P3,100,000

The transfer of property through expropriation with just compensation is basically a sale or exchange of property subject to capital gains tax of 6%. (Blas Gutierrez, and Maria Morales vs. CTA, and CIR, G.R. Nos. L-9738 and L-9771, May 31, 1957)

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Problem 7 9 1. Letter D Selling price per 200 sq. meters Multiplied by number of 200 s.m. sold (9,000 1,000)/200 Total sales Less: Cost of sales (P2,000,000 x 90%) Ordinary gain from sale of land

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Chapter 7: Dealings in Property

P 100,000 40 P4,000,000 1,800,000 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 10 Fair market value Less: Book value of car Gain on exchange B P190,000 150,000 P 40,000

Problem 7 11 C There is capital loss if the property given away has fair value higher than P200,000 when it was inherited. Problem 7 12 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 13 D Acquisition cost (P200,000 + P20,000) Agents commission (P500,000 x 10%) Deductible cost and expenses Problem 7 14 A Sales price Less: Fair market value at the time of his fathers death Gain on sale of farm land P2,000,000 500,000 P1,500,000 P220,000 50,000 P270,000

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 15 A 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 No holding period because the seller is a corporation. Problem 7 16 B P150,000 ( 50,000) P100,000

Sales price Less: Book value of the car Acquisition cost Less: Accum. depn. (P1,000,000/5) x 2

P700,000 P1,000,00 0 400,00

600,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
0 Capital gain Multiplied by percent of holding period Reportable capital gain
Problem 7 17 D Sales price Less: Cost or market whichever is lower) Capital gain No holding period is allowed for taxpayer other individuals. Problem 7 18 B

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Chapter 7: Dealings in Property

P100,000 50% P 50,000

P200,000 100,000 P100,000

Operating income Capital asset transactions: Capital gain long-term (50%) Capital loss short-term (100%) Net capital gain (loss) Net capital loss carry-over, limit Taxable income

Year 1 P200,00 0 P 25,000 ( 40,000 ) (P15,000 ) P200,00 0

Year 2 P300,000 P 20,000 ( 10,000) P 10,000 ( 10,000) P300,000

The net capital loss carry-over is limited to only P10,000 instead of P15,000 because the net capital gains in year 2 is only P10,000.
Problem 7 19 1. Letter C Ordinary gain Capital asset transactions: Short-term capital gain Long-term capital gain (P30,000 x 50%) Long-term capital loss (P10,000 x 50%) Taxable income before personal exemption 2. Letter 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 15,000 ( 5,000)

30,000 P80,000 P50,000

P20,000 30,000 ( 10,000)

40,000 P90,000 Year 2 P180,000 P200,000 (50,000) (60,000)

Problem 7 20 1. Letter C Ordinary taxable income Short-term capital gain (loss) Long-term capital gain (loss) (P600,000 x 50%): (P100,000 x 50%) NCLCO applicable in year 2 is P60,000

Year 1 P 60,000 (P400,000) 300,000 (P100,000)

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Net capital gain Taxable income before personal exemption 2. Letter B Ordinary taxable income Short-term capital gain Long-term capital (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

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Chapter 7: Dealings in Property

P 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 C

First P100,000 (P95,000/95%) x 5% Over P100,000 [(P207,500 P95,000)/90%] x 10% Total final tax
Problem 7 24 A

P 5,000 12,500 P 17,500 P30,000 5% P 1,500

Capital gains of November sales (P150,000 P120,000) Multiplied by capital gains tax rate Capital gains tax
Problem 7 25 1. Letter A Sales Less: Cost of equity securities Brokerage fee Net income Multiplied by corporate income tax Income tax due

P1,000,000 P900,000 40,000 940,000 60,000 30% P 18,000 P

The dealers in securities are not liable to the stock transaction tax of of 1% based on the selling price or fair market value, whichever is higher. (Sec. 4 & 5, Rev. Regs. No. 6 2008) 2. 3. Letter B Stock transaction tax (P1,000,000 x 0.005) Letter C Sales Less: Cost of equity securities Brokerage fee Capital gains Multiplied by tax rate applicable Capital gains tax P5,000 P1,000,000 P900,000 40,000 940,000 60,000 5% P 3,000 P

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 7: Dealings in Property

Problem 7 26

C Sold thru stock market P140,000 90,000 P 50,000 ( 1,400) ( 700) . P 47,900 Sold direct to the buyer P140,000 90,000 P 50,000 ( 2,500) P 47,500 47,900 (P 400)
P2,500

Sales price (P140 x 1,000 shares) Less: Cost of sales Gross profit Brokers fee (P140,000 x 1%) Percentage tax (P140,000 x 0.005) Capital gains tax (P50,000 x 5%) Profit Less: Profit if sold through the stock market Decrease in profit
Problem 7 27 D Capital gain (P150 P125) x 100 shares Problem 7 28 Letter D Sale March (P120 x 500 shares) Less: Cost (P120,000/1,200 shares) x 500 shares Capital gain 1. Letter C Sales May (P90 x 500) Less: Cost of sales (P70,000 x 500/700) Loss Nondeductible loss (P5,000 x 300/500) 2.

P 60,000 50,000 P10,000 P45,000 50,000 P 5,000 P 3,000 P65,000 P20,000 48,000 68,000 (P3,000)

Letter A Proceeds of liquidation (P130 x 500) Less: Cost Beginning: (P120,000/1,200) x 200 shares - April: (P150 x 300 shares) + P3,000 Capital loss

Problem 7 29 1. Letter C Sales proceeds Less: Cost of equity investments sold April 20 (1,650 shares) March 20 (P92* x 350 shares) Gain on sale 2. Letter C Cost per share batch March 10 Number of shares remaining [(800 x 110%) 350] Cost of remaining shares

P240,000 P161,700 32,200 193,900 P 46,100 P 92 530 P48,760

*Computation of cost per share and total amount:

Mar. 10 (P80,960/880 shares) Cost/share P92.00 Total Amount P80,960

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
April 20 (P161,700/1,650 shares) P98.00 161,700

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Chapter 7: Dealings in Property

The shares of stock are increased by the 10% stock dividend. If the shares of stock sold are properly identified, the identified cost shall first be deducted.
Problem 7 30 1. Letter D No capital gain on original issuance of companys own stock even if issued above par 2. Letter C Capital gain on reissued shares (P23 P21) x 2,000) D

P - 0 -

P4,000

Problem 7 31

Share premium treasury shares [(P140 P120) x 900] Less: Loss on treasury shares retirement (P100 P120) x 100 shares Net taxable gain

P18,000 2,000 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 32 B

Sales (P180 x 1,000) Cost (P120 x 1,000) Gross profit Multiplied by applicable capital gains tax rate Capital gains tax Percent of initial payment (P60,000/P180,000) 200D capital gains tax due [P3,000 x (P48,000/P180,000)]

P 180,000 (120,000) P 60,000 5% P 3,000 20.00% P 800

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 33
1. Letter C Liquidating dividend Less: Cost of stock investment (P10 x 10,000) Reportable capital gain corporation Letter D Liquidating dividend Less: Cost of stock investment (P10 x 10,000) Capital gains P120,000 100,000 P 20,000 P120,000 100,000 P 20,000

2.

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Multiplied by percent to report due to holding period Reportable capital gain individual 50% P 10,000

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Chapter 7: Dealings in Property

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 34 1. Letter C Cost of the new family home (P2,500,000/P4,000,000) x P2,000,000 2. Letter 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 D P9,000,000 P300,000

P1,250,000 P4,000,000 2,500,000 P1,500,000 6% P 90,000

Problem 7 35 Basis of new residence

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 36 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 37 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 38 1. Letter C Final tax (P1,200,000 x 6%) 2. Not in the choices Creditable withholding tax (P500,000 x 1.5%) P6,000,000 3,000,000 P9,000,000

P72,000 P7,500

Problem 7 39

1.

Letter D Capital gains tax (P2,500,000 x 6%) SP, higher

P150,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Add: Documentary stamp 1.5%) Total tax to the BIR 2. tax (P2,500,000 x 37,500 P187,500 P1,000,000 400,000 P 600,000 30% P 180,000 37,500 P217,500

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Chapter 7: Dealings in Property

Letter C Gross income (P2,500,000 P1,500,000) Less: OSD (P1,000,000 x 40%) Net taxable income Multiplied by corporate normal tax rate Income tax due Add: Documentary stamp tax (P2,500,000 x 1.5%) Total tax due to the BIR

The transaction above is VAT-exempt because the selling price (SP) is P2,500,000 and the real property is for residential dwelling.
Problem 7 40 D 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 41 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 42 1. Letter A Fair market value of V Co.s share received (P30 x 250,000) Less: Book value of the net asset of E Co. Loss of E Co. not recognized 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 Letter D Fair value of E Co.s net asset received Less: Par value of shares issued (P25 x 250,000)

P 7,500,000 9,000,000 (P2,500,000)

P9,000,000 P8,000,000 6,250,000

3.

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Nontaxable gain of V Co. Taxable gain of V Co. 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) Less: Cost of investment Loss not recognized Letter A Sales price [P30 x (20,000 x 20%)] Less: Cost of sale (P700,000 x 20%) Loss on sale P1,750,000 P - 0 -

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Chapter 7: Dealings in Property

P 500,000 700,000 (P200,000) P120,000 140,000 (P 20,000)

5.

Problem 7 43 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%) 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 P 750,000 9,000,000 35,000,000

P 900,000 5,000,000 P5,900,000

P44,750,000 17,900,000 P26,850,000 30% P 8,055,000 5,900,000 P 2,155,000

Problem 7 44 1. Letter 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. Letter 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

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 45 Not-traded in Local Stock Exchange:

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
1. FIFO Method: Sales proceeds (P200 x 350) Less: Cost of shares sold: December 200A purchased (P86.96 x 100) February 200B purchased (P104.35 x 250) Gain on sale on investment on stock Multiplied by percentage of tax Tax due and payable

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Chapter 7: Dealings in Property

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:

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 46 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%

No. of Shares 100 300 400 60 460

Cost/ share P100 P120

Amount P10,000 36,000 P46,000 . P46,000 460 P 100 P150,000 ( 80,000) P 70,000 47.667% 20.00% P700.00 P933.34 P933.34 P933.34

Problem 7 47 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) Loss P 5,000 20,000 P25,000 Gain P200,000 . P200,000 P175,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
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 48 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 49 No, because the Loakan Corporation is not an individual taxpayer. Problem 7 50 1. Individual taxpayer Operating gain (loss) NOLCO Capital gain (loss) NCLCO Taxable income before p.e. Year 1 (P100,000) Year 2 P50,000 (80,000) 10,000 (P20,000) Year 3 P30,000 (20,000) (40,000) . P10,000

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Chapter 7: Dealings in Property

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

Year 4 P80,000

20,000 ( P80,000)

50,000 (10,000) 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) NOLCO Capital gain (loss) Taxable income before p.e. (P100,000) P50,000 (80,000) 10,000 (P20,000) P30,000 (20,000) (40,000) . P10,000 P80,000

20,000 ( P80,000)

50,000 P130,000

No NCLCO shall be made if the taxpayer is a corporation. Problem 7 51

Short-term gain - sale of car (P105,000 P95,000) x 100% Long-term gain - sale of jewelry (P80,000 P50,000) x 50% Long-term loss - sale of refrigerator (P4,000 P8,000) x 50% Net capital gains

P10,000 15,000 ( 2,000) 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 52 Taxpayer is individual. Business income Business expenses Net income before NOLCO Year 4 300,000 340,000 ( 40,000) Year 5 400,000 380,000 20,000 Year 6 500,000 450,000 50,000 Year 7 600,000 570,000 30,000 Year 8 700,000 650,000 50,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
NOLCO Net income (loss) from operation Capital gain (loss) Short-term (100%) Long term (50%) NCLCO Net capital gain (loss) Net income (loss) 1. ( 10,000) ( 40,000) 50,000 (20,000) 30,000 ( 10,000) Year 4 300,000 340,000 ( 40,000) ( 40,000) 50,000 (40,000) 10,000 ( 30,000) 10,000 (40,000) 5,000 (35,000) 10,000 Year 5 400,000 380,000 20,000 (20,000) 0 (40,000) 10,000 (30,000) (30,000) 50,000 30,000 (50,000) (20,000) 50,000 Year 6 500,000 450,000 50,000 (10,000) 40,000 30,000 (100,000) (70,000) 40,000 30,000 30,000 5,000 (20,000) 15,000 45,000 Year 7 600,000 570,000 30,000 30,000 30,000 10,000 40,000 70,000

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Chapter 7: Dealings in Property

50,000 (40,000) 35,000 ( 5,000) 50,000 Year 8 700,000 650,000 50,000 50,000 (40,000) 70,000 30,000 80,000 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

Taxpayer is a corporation. Business income Business expenses NOLCO Net income (loss) from operation Capital gain (loss) Short-term Long term Net income (loss)

Problem 7 53 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 200A 2. Collection (P2,500,000/5) Multiplied by percent of gross income (P1,000,000/P5,000,000) Reportable gross income in 200B Sales price Less: Cost of sale Gross income

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 54 Gain on retirement of bonds [(P500,000 x 120%) P500,000] Gain on short sales [P50,000 (P2.25 x 20,000)] Total capital gains Less: Shares becoming worthless at Philippine Airlines Net capital gains P100,000 5,000 P105,000 50,000 P 55,000

There is no capital loss in the option money because the taxpayer exercised his option rights.

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
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 6%) Basis of the new residential home

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Chapter 7: Dealings in Property

P 60,000 P800,000 P180,000 P2,000,000 P- 0P320,000 400,000 P 80,000

Problem 7 56 1. Deductible loss Feb. 14, 200x 2. Sales Less: Cost of sales (P450,000 x 8/9) Nondeductible loss Feb. 14, 200x 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

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 57 1. FMV of ordinary shares (P30 x 25,000) 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%) 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 1,250

4.

5.

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
6. Tax advantage of 5 transaction over 4 (P4,625 P1,250) P P200,000 100,000 50,000 P350,000 180,000 P170,000 P100,000 P200,000 P50,000 100,000 150,000 P 50,000 100,000 P150,000 P100,000 P 18,000 P250,000 180,000 P 70,000

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3,375

Problem 7 58 1. B Co. ordinary shares with FMV of Land with FMV of Cash Total Less: Cost of A Co.s shares transferred Total gain Taxable gain (is limited to the FMV of land and cash) 2. Cost of A Co.s shares transferred Less: Cash received FMV of land received Balance Add: 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

3. 4. 5.