Chapt-7 Dealings in Prop

36

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 7: Dealings in Property

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). Problem 7 – 2 TRUE OR FALSE 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 Problem 7 – 3 TRUE OR FALSE 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

37

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 7: Dealings in Property

13. True 14. True Problem 7 – 4 1. D 2. A 3. None of the choices all are correct. 4. A 5. C 6. A 7. B 8. A 9. C 10. C Problem 7 – 6

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

2. C Remaining capital asset (P2,000,000 x 10%)

P200,000

Problem 7 – 8 Fair market value Less: Book value of car Gain on exchange

P190,000 150,000 P 40,000

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. Problem 7 – 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 7 – 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 7 – 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 1 year Reportable capital gain

( 50,000) P100,000 50% P 50,000

Problem 7 – 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 7 – 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 7 – 15 A Holding period is more than 1 year = 50% of the capital gain Problem 7 – 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 7 – 17

D

Net business income Capital asset transactions: Year 1 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 2 ( 40,000 x 50%) (10,000 x 100%)

Year 1 P200,000

Year 2 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 7 – 18 1. 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

2.

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 7 – 19 1. C 2. 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 7 – 20 1. 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 1 P 60,000 (P400,000) 300,000 (P100,000) P 60,000)

2. B Ordinary taxable income Short-term capital gain (loss) Long-term capital gain (loss) Net capital gain Taxable income before personal exemption Problem 7 – 21

Year 2 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 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 A Sales of shares of stock Basis of shares of stock (lower) Gain on sale Problem 7 – 24 A Capital gains of November sales (P150,000 – P120,000)

P400,000 ( 50,000) P350,000 P30,000

40

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 7: Dealings in Property

Multiplied by capital gains tax rate Capital gains tax Problem 7 – 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

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 7 – 26 1. A Tax due and payable (P500,000 x .005) 2.

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 7 – 27 D Capital gain (P150 – P125) x 100) Problem 7 – 28 D Sale – March (P120 x 500 shares) Less: Cost (P120,000/ 1,200 shares) x 500 shares Capital gain 1. B Sales – May (P90 x 500) Less: Cost of sales (P70,000 x 500/700) Loss Nondeductible loss (P5,000 x 300/500) 2. B Proceeds of liquidation (P100 x 300) Less: Cost (P45,000 + P3,000) Capital loss Problem 7 – 29 1. D No capital gain on original issuance of company’s own stock even if issued above par 2.

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

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 - 0 -

P4,000

41

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 7: Dealings in Property

Problem 7 – 30 (1 C ) Cost of the new family home (P2,500,000/P4,000,000) x P2,000,000 (2 )

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 7 – 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 7 – 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 7 – 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 7 – 34 1. C Final tax (P1,200,000 x 6%) 2.

C Creditable withholding tax (P500,000 x 6%)

Problem 7 – 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 b. sold by a government corporation.

42

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 7: Dealings in Property

Problem 7 – 36 B 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 – 37 1. A None. No withholding tax because Goldrich Realty Corporation is the buyer not a seller. 2

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

Problem 7 – 38 1. B Zonal value Multiplied by capital gains tax rate Capital gains tax 2.

3.

4.

C Selling price Multiplied by capital gains tax rate Capital gains tax

P10,000,000 6% P 600,000 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. 5.

C Selling price Multiplied by capital gains tax rate

P6,000,000 6%

43

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 7: Dealings in Property

Capital gains tax Problem 7 – 39 Selling price = P1,000,000.

P 360,000 A

Problem 7 – 40 B Selling price Less: Cost of real property – lower than unpaid mortgage assumed Contract price Problem 7 – 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 7 – 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 7 – 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 7 – 44 1.

Creditable withholding tax: b. (P1,000,000 x 30 x 3%) c. (P2,500,000 x 40 x 5%) Total creditable withholding tax

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

44

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 7: Dealings in Property

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

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 2.

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 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

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

P500,000 200,00 0 P700,000 450,00 0 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

2. Moving Average Method: Sales proceeds (P200 x 350) Less: Cost of shares sold (350 x P100) Gain on sale of investment in stock

P 70,000 35,000 P 35,000

45

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 7: Dealings in Property

Multiplied by percentage of tax Tax due and payable

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 7 – 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 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 2.

3.

Amount P10,000 36,000 P46,000 . P46,000 460 P 100

Selling Price: Down payment Installment payments P200,000 + (P300,000 x 4) Mortgage assumed by the buyer Selling Price

P100,000 200,000 P300,000 50,000 P350,000

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 7 – 49 Option money – not exercise Gain on retirement of bonds[(P1,000,000 x 120%)-P1,000,000]

Loss P 5,000

Gain P200,000

46

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 7: Dealings in Property

Shares becoming worthless

20,000 P25,000

. P200,000 P175,000

Net gain (P200,000 – P25,000)

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. 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 – 51 No, because the Loakan Corporation is not an individual taxpayer. Problem 7 – 52 1. Individual taxpayer Operating gain (loss) NOLCO Capital gain (loss) NCLCO Taxable income before p.e. 2. Corporate taxpayer Operating gain (loss) NOLCO Capital gain (loss) Taxable income before p.e.

Year 1 (P100,000)

Year 2 P50,000 (80,000)

Year 3 P30,000 (20,000)

Year 4 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 7 – 53 1.

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)

P

NCLCO Reportable net capital gain Taxable income before exemption 2.

200A P 200,000 300,000 (P100,000 ) . (P100,000 )

P

50,000 ) 70,000 . 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 - 0 -

P 70,000

P 50,000

10,000

(100,000)

- 0 -

(P 10,000) .

P 10,000

(P 30,000)

P 50,000

( 10,000)

.

P 20,000

P 50,000

P 20,000

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

2006 P400,000

2007 P450,000

2008 P520,000

2009 P600,000

M – as a corporate taxpayer Business income

2005 P 200,000

47

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 7: Dealings in Property Business expenses Ordinary income (loss) NOLCO Net ordinary income (loss)

300,000 (P100,000 ) . (P100,000 )

Capital asset transactions: Short-term gain (loss)

P 120,000

Long term gain (loss) Net capital gain (loss)

( 100,000) P 20,000

Reportable net capital gain Taxable income

P 20,000 (P 80,000)

350,000 P 50,000

400,000 P 50,000

500,000 P 20,000

500,000 P100,000

( 50,000) P - 0 -

( 30,000) P 20,000

. P 20,000

. P100,000

(P100,000 ) 180,000 P 80,000

P - 0 -

P 70,000

P 50,000

20,000 P 20,000

( 200,000) (P130,000 )

- 0 P 50,000

P 80,000 P 80,000

P 20,000 P 40,000

P 20,0000

Problem 7 – 54 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 2009 2.

Collection (P2,500,000/5) Multiplied by percent of gross income (P1,000,000/P5,000,000) Reportable gross income in 2010

3.

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 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 60%)

P180,000

4.

Basis of the new residential home

Problem 7 – 56 1. Down payment (P3,000,000 x 20%) Add: Excess of mortgage over cost (P1,200,000 – P700,000) Initial payment 2.

Selling price Add: Excess of mortgage over cost Total Less: Mortgage assumed by the buyer Contract price

3.

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 7 – 57 1. Deductible loss – Feb. 14, 2009 2.

Sales Less: Cost of sales (P450,000 x 8/9) Nondeductible loss – Feb. 14, 2009

3.

P294,444

4.

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

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 7 – 58 1. 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 2.

3.

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

4.

Total sales price (P625,000 + P300,000) Multiplied by percentage tax Percentage tax

P925,000 0.005 P 4,625

5.

Capital gains tax (P25,000 x 5%)

P

1,250

6.

Tax advantage (P4,625 – P1,250)

P

3,375

Problem 7 – 59 1. B Co. ordinary shares with FMV of Land with FMV of

P220,000 50,000

49

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 7: Dealings in Property

2.

Cash Total Less: Cost of A Co.’s shares transferred Total gain

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

3.

Basis of land received – FMV of land

P 50,000

4.

Capital gains tax of land (P300,000 x 6%)

P 18,000

5.

Sales price Less: Cost Taxable gain

P220,000 200,000 P 20,000