Chapter 7

1
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED

ANSWERS
Chapter 7: Dealings in Property
CHAPTER 7
DEALINGS IN PROPERTY
Problem 7 1 TRUE OR FALSE
True
False Ordinary assets
False its real properties shall continue to be treated as ordinary assets.
True
False the basis is the same as the cost of the donor or the FMV at the time of donation whichever is lower.
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.
False real property classified as ordinary assets are subject to normal tax.
True
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.
True
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.
True
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.
False Not subject to creditable withholding tax.
False whichever is lower
False equipment used in business operations is an ordinary asset.
True
False The basis is the fair market value at the date of donation.
True
True
False There should be no capital loss because there is an exercise of the option.
True
True
True
True
True

ANSWERS
False Losses from wash sales are not deductible.
False No wash sales if the classes of shares of stocks are different.
True
True
False Not subject to capital gains tax because the issuance is original and the shares of stock is owned by
the corporation.
True
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).
True
False additional assessments by a corporation from its shareholders are not income; hence, not taxable
income.
Problem 7 4
False subject to capital gains tax of 6%.
True
False - the speculator sells securities which he does not own.
True
False this refers to patent.
True
True
False if the land is ordinary asset, subject to normal tax.
True
False not dealers of securities
True
True
Problem 7 5
Problem 7 6
1.
C
1.
A
2.
B
2.
D
3.
D
3.
D
4.
C
4.
A
5.
C
5.
C
6.
A
6.
B
7.
B
7.
D
8.
A
8.
D
9.
C
9.
D
10.
C
10.
A
11.
A
12.
D
Problem 7
7
D
Real property
inventories
P10,000,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
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 8
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
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)
Problem 7 9
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 10 B
Fair market value P190,000
Less: Book value of car
150,000
Gain on exchange
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)

P220,000
Agents commission (P500,000 x 10%)
50,000
Deductible cost and expenses
P270,000
Problem 7 14 A
Sales price
P2,000,000
Less: Fair market value at the time of his fathers 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 15
A
Sales price
P150,000
Cost or basis to the donee (the lower of donors cost or
the fair market value when the gift was made

( 50,000)
Capital gain
P100,000
No holding period because the seller is a corporation.
Problem 7 16
B
Sales price
P700,00
Less: Book value of the car
Acquisition cost
P1,000,00
Less: Accum. depn. (P1,000,000/5) x

0
400,000
600,000
Capital gain
P100,00
Multiplied by percent of holding period
50%
Reportable capital gain
50,000
Problem 7 17 D
Sales price
P200,000
Less: Cost or market whichever is lower)
100,000
Capital gain
P100,000
No holding period is allowed for taxpayer other individuals.
Problem 7 18
B
Year
Year
1
2
Operating income
P200,00
P300,00
Capital asset transactions:

0
0
Capital gain long-term (50%)

P
25,000
20,000
Capital loss short-term (100%)
(
(
40,000)
10,000)
Net capital gain (loss)

(P15,00
0)
10,000
Net capital loss carry-over, limit
10,000)
Taxable income
P200,00
P300,00
0
0
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
P50,000
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

P20,000
Long-term capital gain (P30,000)
30,000
Long-term capital loss
(
10,000)
40,000
P90,000
Problem 7 20
1. Letter C
Year 1
Year 2
Ordinary taxable income
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
P
60,000)
P270,000
2. Letter B
Ordinary taxable income
P180,000
P200,000
Long-term capital (loss)
(100,000)
Net capital gain
P100,000
P280,000
Problem 7 21
A
Selling Price
Cost & Expenses
Net Capital Gain
Jewelry
P 80,000
P 11,000
P
69,000
M. Benz Car long term (50%)

400,000
370,000
15,000
Refrigerator
6,000
5,000
1,000
Ford Car
12,000
20,500
(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.
Problem 7 23 C
First P100,000 (P95,000/95%) x 5%
5,000
Over P100,000 [(P207,500 P95,000)/90%] x 10%
12,500 Total final tax
Problem 7 24 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
P 17,500
Problem 7 25
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 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 26
C
Sold thru
Sold direct
stock
to the buyer
market
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
Brokers fee (P140,000 x 1%)

(
1,400)
Percentage tax (P140,000 x 0.005)
Capital gains tax (P50,000 x 5%)
700)
(
2,500)
Profit
P
47,900
P
47,500
Less: Profit if sold through the stock market
47,900
Decrease in profit
(P
400)
Problem 7 27
D
Capital gain (P150 P125) x 100 shares
P2,500
Problem 7 28
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
Nondeductible loss (P5,000 x 300/500)
P
3,000
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 29
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)
193,900
32,200
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
*Computation of cost per share and total amount:
Total
Cost/share
Amount
Mar. 10 (P80,960/880 shares)
P92.00
P80,960
April 20 (P161,700/1,650 shares)
P98.00
161,700
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

P - 0 -
issued above par
2.
Letter C
Capital gain on reissued shares (P23 P21) x 2,000)

P4,000
Problem 7 31
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 32
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
Percent of initial payment (P60,000/P180,000)
20.00%
200D capital gains tax due [P3,000 x (P48,000/P180,000)]
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
10
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 34
1.
Letter C
Cost of the new family home (P2,500,000/P4,000,000) x P2,000,000
P1,250,000
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
6%
Capital gains tax to be paid

P
90,000
Problem 7 35
D
Basis of new residence
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 7 36
D
Zonal value (P700 x 500) higher

P350,000
6%
Capital gains tax
P 21,000
11
Holding period is not applicable because the property is a real property subject to final tax.
Problem 7 37
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 38
1.
Letter C
Final tax (P1,200,000 x 6%)
P72,000
2.
Not in the choices
Creditable withholding tax (P500,000 x 1.5%)
P7,500
Problem 7 39
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.
Problem 7 40
D
Creditable withholding tax:
(P500,000 x 1.5%) x 4 houses

P 30,000
(P3,000,000 x 5%) x 2
300,000
Income tax still due and payable:
P330,000
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)
12
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 41
Letter A
None. No withholding tax because Goldrich Realty Corporation is the buyer not a seller.
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)
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)
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.
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
Loss not recognized
(P200,000)
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 43
1.
Creditable withholding tax:
b. (P1,000,000 x 30 x 3%)
P 900,000
13
c. (P2,500,000 x 40 x 5%)
5,000,000
Total creditable withholding tax

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.
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 44
1.
Letter D
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
Cost of lot
150,000
450,000
Ordinary gains / income
P250,000
2.
Letter B
Sales of residential house and lot
P1,000,000
Proceeds applied for the acquisition of new residential
house and lot
Amount subject to final withholding tax
800,000
Final tax rate
P
200,000
Final tax
6%
P
12,000
Problem 7 45
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
14
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:
December 200A purchase (P10,000/115)
P
86.96
February 200B purchase (P36,000/345)
P104.35
2. Moving Average Method:
Sales proceeds (P200 x 350)
P 70,000
Less: Cost of shares sold (350 x P100)
35,000
Gain on sale of investment in stock
P 35,000
Multiplied by percentage of tax
5%
Tax due and payable
P
1,750
*Computation of the new cost per share would be:
Investment in common stocks:

No. of Shares
Cost/ share
Amount
December 15, 200A

100
P100
P10,000
February 24, 200B

300
P120
36,000
Totals
400
P46,000
Add: 15% stock dividends

60
Basis of cost per share

460
Divide by number of share
P46,000
New cost per share
460
100
Problem 7 46
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%
200A (P30,000 x 46.667%) x 5%
P700.00
200B (P40,000 x 46.667%) x 5%
P933.34
200C (P40,000 x 46.667%) x 5%
P933.34
200D (P40,000 x 46.667%) x 5%
P933.34
Problem 7 47
15
Loss
Option money not exercise

P 5,000
Gain
Gain on retirement of bonds [(P1,000,000 x 120%)-P1,000,000]
Shares becoming worthless

20,000
P200,000
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 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%)
P 180,000
Normal tax (P3,000,000 P2,200,000) x 30%
(
240,000)
Tax savings
P60,000)
Problem 7 49
No, because the Loakan Corporation is not an individual taxpayer.
Problem 7 50
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
P130,000
Taxable income before p.e.

( P80,000)
(P20,000)
P10,000
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
P10,000
16

ANSWERS
100%
15,000
Long-term gain - sale of jewelry (P80,000 P50,000) x

( 2,000)
50%
P23,000
Long-term loss - sale of refrigerator (P4,000 P8,000)
x 50%
Net capital gains
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
1.
Year 4
Year 5
Year 6
Year 7
Year 8
Taxpayer is individual.
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 NOLCO
(
40,000)
20,000
50,000
30,000
50,000
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
Taxpayer is a corporation.
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
(
40,000)
20,000
50,000
30,000
50,000
NOLCO
(20,000)
(10,000)
Net income (loss)
from operation
(
40,000)
0
40,000
30,000
50,000
Capital gain (loss)
Short-term
50,000
(40,000)
30,000
30,000
(40,000)
Long term
(40,000)
10,000
(100,000)
10,000
70,000
10,000
(30,000)
(70,000)
40,000
30,000
17
Net income (loss)

( 30,000)
(30,000)
40,000
70,000
80,000
Problem 7 53
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
2.
Collection (P2,500,000/5)
P500,000
Multiplied by percent of gross income (P1,000,000/P5,000,000)
20%
Reportable gross income in 200B
P100,000
3.
Sales price
P5,000,000
Less: Cost of sale
4,000,000
Gross income
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 7 54
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 55
1.
Capital gains tax (P3,000,000 P2,000,000) x 6%
P 60,000
2.
Basis of the new residential home (P1,200,000 x 2/3)
P800,000
3.
Capital gains tax (P3,000,000 x 6%)
P180,000
4.
Basis of the new residential home
P2,000,000
Problem 7 56
1.
Deductible loss Feb. 14, 200x
P- 02.
Sales
P320,000
Less: Cost of sales (P450,000 x 8/9)

400,000
18
Nondeductible loss Feb. 14, 200x

P 80,000
P294,444
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
5.
Sales (P60 x 4,000)
P240,000
Less: Cost of sales:
Jan. 10: (P50 x 1,000)
P 50,000
Jan. 20: (P294,444 x 3/5)
176,667
226,667
Capital gain
P 13,333
Problem 7 57
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
2.
Basis of new shares allocated
Ordinary
Preference
Basis of ordinary shares (P900,000 x 75/100)
P675,000
Basis of preference shares (P900,000 x 25/100)
P225,000
3.
Selling price ordinary shares (P25 x 25,000)
P625,000
Less: Cost ordinary shares - allocated

675,000
(P50,000)
Selling price preference shares (P60 x 5,000)
P300,000
Less: Cost preference shares allocated

225,000
75,000
Net gain
P
25,000
4.
Total sales price (P625,000 + P300,000)
P925,000
Multiplied by percentage tax
0.005
Percentage tax
P
4,625
5.
Capital gains tax (P25,000 x 5%)
P
1,250
6.
Tax advantage of 5 transaction over 4 (P4,625 P1,250)
P
3,375
Problem 7 58
1.
B Co. ordinary shares with FMV of
P200,000
19

ANSWERS
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
2.
Cost of A Co.s shares transferred
P200,000
Less: Cash received
P50,000
FMV of land received

100,000
150,000
Balance
P
50,000
Add: Gain recognized in the exchange
100,000
Basis of B Co. shares received
P150,000
3.
Basis of land received FMV of land
P100,000
4.
Capital gains tax of land (P300,000 x 6%)
P
18,000
5.
Sales price
P250,000
Less: Cost
180,000
Taxable gain
70,000

Chapter 7

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1

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

Chapter 7: Dealings in Property

False Ordinary assets

False its real properties shall continue to be treated as ordinary assets.

Problem 7 2 TRUE OR FALSE

False whichever is lower

False equipment used in business operations is an ordinary asset.

Problem 7 3 TRUE OR FALSE

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

Chapter 7: Dealings in Property

False Losses from wash sales are not deductible.

False No wash sales if the classes of shares of stocks are different.

False subject to capital gains tax of 6%.

False - the speculator sells securities which he does not own.

False this refers to patent.

False if the land is ordinary asset, subject to normal tax.

False not dealers of securities

Chapter 7: Dealings in Property

Land and building used in business

Vacation house of the executives

Acquired undeveloped properties

Total amount of ordinary assets

The transfer of property through expropriation with just compensation is basically

Selling price per 200 sq. meters

Fair market value P190,000

Less: Book value of car

There is no taxable amount in the above transaction because the transaction is an

Chapter 7: Dealings in Property

than 50% of the outstanding shares (15/25 = 60%).

Acquisition cost (P200,000 + P20,000)

the fair market value when the gift was made

No holding period because the seller is a corporation.

Less: Book value of the car

Less: Accum. depn. (P1,000,000/5) x

Multiplied by percent of holding period

Reportable capital gain

Chapter 7: Dealings in Property

Less: Cost or market whichever is lower)

No holding period is allowed for taxpayer other individuals.

Capital asset transactions:

Capital gain long-term (50%)

Capital loss short-term (100%)

Net capital gain (loss)

Net capital loss carry-over, limit

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

Capital asset transactions:

Short-term capital gain

Chapter 7: Dealings in Property

Long-term capital gain (P30,000)

Long-term capital loss

Ordinary taxable income

NCLCO applicable in year 2 is P60,000

Net capital gain

Ordinary taxable income

M. Benz Car long term (50%)

transactions but ordinary transactions, hence there is no net capital gain.

First P100,000 (P95,000/95%) x 5%

Over P100,000 [(P207,500 P95,000)/90%] x 10%