Chapter 7 Dealings in Property

55
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
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.

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

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
56

SUGGESTED ANSWERS
7.
8.
True
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
12. False additional assessments by a corporation from its shareholders are not income;
hence, not taxable income.
Problem 7 4
1. False subject to capital gains tax of 6%.
2. True
3. False - the speculator sells securities which he does not own.
4. True
5. False this refers to patent.
6. True
7. True
8. False if the land is ordinary asset, subject to normal tax.
9. True
10. False not dealers of securities
11. True
12. True
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
57

SUGGESTED ANSWERS
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)
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
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
B
Fair market value
Less: Book value of car
Gain on exchange
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
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
P220,000
50,000
P270,000
58

SUGGESTED ANSWERS
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
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
P150,000
( 50,000)
P100,000
No holding period because the seller is a corporation.

Problem 7 16
Sales price
Less: Book value of the car
Acquisition cost
Less: Accum. depn. (P1,000,000/5) x 2
Capital gain
Multiplied by percent of holding period
Reportable capital gain
P700,000
P1,000,000
400,000
600,000
P100,000
50%
P 50,000
Problem 7 17
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 18
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
P200,000
Year 2
P300,000
P 25,000
( 40,000)
(P15,000)
P 20,000
( 10,000)
P 10,000
( 10,000)
P300,000
P200,000
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.
59

SUGGESTED ANSWERS
Problem 7 19
1.
Letter C
Ordinary gain
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.
P50,000
P20,000
15,000
( 5,000)
Letter B
Ordinary gain
Long-term capital gain (P30,000)
Long-term capital loss
P50,000
P20,000
30,000
( 10,000)
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
Net capital gain
Year 1
P 60,000
(P400,000)
300,000
(P100,000)
P 60,000)
2. Letter B
Ordinary taxable income
Long-term capital (loss)
Net capital gain
Problem 7 21
30,000
P80,000
40,000
P90,000
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
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
First P100,000 (P95,000/95%) x 5%
P 5,000
60

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

Total final tax
Problem 7 24
12,500
P 17,500
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
P30,000
5%
P 1,500
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
Problem 7 26
P5,000
P1,000,000
P900,000
40,000
940,000
60,000
5%
P
3,000
P
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
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)
61

SUGGESTED ANSWERS
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)
Less: Cost (P120,000/1,200 shares) x 500 shares
Capital gain
2.
3.
Letter C
Sales May (P90 x 500)
Less: Cost of sales (P70,000 x 500/700)
Loss
P45,000
50,000
P 5,000
Nondeductible loss (P5,000 x 300/500)
P 3,000
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.
P 60,000
50,000
P10,000
P65,000
P20,000
48,000
68,000
(P3,000)
P240,000
P161,700
32,200
Letter C
Cost per share batch March 10
Number of shares remaining [(800 x 110%) 350]
Cost of remaining shares
193,900
P 46,100
92
530
P48,760
*Computation of cost per share and total amount:

Mar. 10 (P80,960/880 shares)
April 20 (P161,700/1,650 shares)
Total
Cost/share
Amount
P92.00
P80,960
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.
62

SUGGESTED ANSWERS
Problem 7 30
1.
Letter D
No capital gain on original issuance of companys own stock
even if issued above par
2.
P - 0 -
Letter C
Capital gain on reissued shares (P23 P21) x 2,000)
Problem 7 31
P4,000
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
Sales (P180 x 1,000)

Cost (P120 x 1,000)
Gross profit
Multiplied by applicable capital gains tax rate
Capital gains tax
P 180,000
(120,000)
P 60,000
5%
P 3,000
Percent of initial payment (P60,000/P180,000)

200D capital gains tax due [P3,000 x (P48,000/P180,000)]
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.
2.
Letter C
Liquidating dividend
Less: Cost of stock investment (P10 x 10,000)
Reportable capital gain corporation
P120,000
100,000
P 20,000
Letter D
Liquidating dividend
Less: Cost of stock investment (P10 x 10,000)
Capital gains
P120,000
100,000
P 20,000
63

SUGGESTED ANSWERS
Multiplied by percent to report due to holding period

Reportable capital gain individual
50%
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
2.
Letter B
Sales proceeds
Less: Amount used to acquire new family home
Unutilized sales proceeds
Capital gains tax to be paid
Problem 7 35
D
Basis of new residence
Capital gains tax (P5,000,000 x 6%)
P1,250,000
P4,000,000
2,500,000
P1,500,000
6%
P
90,000
P9,000,000
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
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%)
P6,000,000
3,000,000
P9,000,000
P72,000
64

SUGGESTED ANSWERS
2.
Not in the choices

Creditable withholding tax (P500,000 x 1.5%)
P7,500
Problem 7 39
1.
2.
Letter D
Capital gains tax (P2,500,000 x 6%) SP, higher
Add: Documentary stamp tax (P2,500,000 x 1.5%)
Total tax to the BIR
P150,000
37,500
P187,500
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
P1,000,000
400,000
P 600,000
30%
P 180,000
37,500
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
(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.
65

SUGGESTED ANSWERS
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.
3.
P 7,500,000
9,000,000
(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
Letter D
Fair value of E Co.s net asset received
Less: Par value of shares issued (P25 x 250,000)
Nontaxable gain of V Co.
Taxable gain of V Co.
P8,000,000
6,250,000
P1,750,000
P - 0 -
There is no taxable gain because the merger is solely in kind.

4.
5.
Letter C
Portion of FMV of V Co.s shares received
(P7,500,000 x 20/300)
Less: Cost of investment
Loss not recognized
P 500,000
700,000
(P200,000)
Letter A
Sales price [P30 x (20,000 x 20%)]
Less: Cost of sale (P700,000 x 20%)
Loss on sale
P120,000
140,000
(P 20,000)
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
P 900,000
5,000,000
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%)
(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
750,000
9,000,000
35,000,000
P44,750,000
17,900,000
P26,850,000
30%
P 8,055,000
66

SUGGESTED ANSWERS
Less: Creditable withholding tax

Income tax still due and payable
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.
P300,000
150,000
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
Problem 7 45
Not-traded in Local Stock Exchange:
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
P500,000
200,000
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
Multiplied by percentage of tax
Tax due and payable
P 70,000
35,000
P 35,000
5%
P 1,750
*Computation of the new cost per share would be:
Investment in common stocks:
No. of Shares
Cost/ share
Amount
67

SUGGESTED ANSWERS
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
100
300
400
60
460
P100
P120
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)
P10,000
36,000
P46,000
.
P46,000
460
P
100
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 47
Option money not exercise
Gain on retirement of bonds [(P1,000,000 x 120%)-P1,000,000]
Shares becoming worthless
Loss
P 5,000
20,000
P25,000
Net gain (P200,000 P25,000)
Gain
P200,000
.
P200,000
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%)
Normal tax (P3,000,000 P2,200,000) x 30%
Tax savings
P 180,000
( 240,000)
( P60,000)
Problem 7 49
No, because the Loakan Corporation is not an individual taxpayer.
Problem 7 50
1. Individual taxpayer
Operating gain (loss)
NOLCO
Year 1
(P100,000)
Year 2
P50,000
(80,000)
Year 3
P30,000
(20,000)
Year 4
P80,000
68

SUGGESTED ANSWERS
Capital gain (loss)

NCLCO
Taxable income before p.e.
20,000
10,000
( P80,000)
(P20,000)
(40,000)
.
P10,000
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
(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
Capital gain (loss)

Taxable income before p.e.
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
1. Taxpayer is individual.
Business income
Business expenses
Net income before NOLCO
NOLCO
Net income (loss)
from operation
Capital gain (loss)
Short-term (100%)
Long term (50%)
NCLCO
Net capital gain (loss)
Net income (loss)
2.
Taxpayer is a corporation.
Year 4
300,000
340,000
( 40,000)
Year 5
400,000
380,000
20,000
( 10,000)
Year 6
500,000
450,000
50,000
Year 7
600,000
570,000
30,000
Year 8
700,000
650,000
50,000
( 40,000)
10,000
50,000
30,000
50,000
50,000
(20,000)
(40,000)
5,000
30,000
(50,000)
(40,000)
35,000
30,000
(35,000)
(20,000)
30,000
5,000
(20,000)
15,000
( 10,000)
10,000
50,000
45,000
50,000
( 5,000)
69

SUGGESTED ANSWERS
Business income
Business expenses
NOLCO
Net income (loss)
from operation
Capital gain (loss)
Short-term
Long term
Net income (loss)
Year 4
300,000
340,000
( 40,000)
Year 5
400,000
380,000
20,000
(20,000)
Year 6
500,000
450,000
50,000
(10,000)
Year 7
600,000
570,000
30,000
Year 8
700,000
650,000
50,000
( 40,000)
40,000
30,000
50,000
50,000
(40,000)
10,000
(40,000)
10,000
(30,000)
30,000
(100,000)
(70,000)
30,000
10,000
40,000
(40,000)
70,000
30,000
( 30,000)
(30,000)
40,000
70,000
80,000
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
3.
Sales price
Less: Cost of sale
Gross income
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 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.
Problem 7 55
1.
Capital gains tax (P3,000,000 P2,000,000) x 6%
P 60,000
2.
P800,000
Basis of the new residential home (P1,200,000 x 2/3)
70

SUGGESTED ANSWERS
3.
Capital gains tax (P3,000,000 x 6%)
4.
Basis of the new residential home
P180,000
P2,000,000
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
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
Feb. 10
P180,000
44,444
.
P294,444
35,556
P215,556
P240,000
P 50,000
176,667
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.
3.
226,667
P 13,333
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
71

SUGGESTED ANSWERS
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%)
1,250
6.
Tax advantage of 5 transaction over 4 (P4,625 P1,250)
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
P200,000
100,000
50,000
P350,000
180,000
P170,000
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
P100,000
P200,000
P50,000
100,000
150,000
P 50,000
100,000
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
Less: Cost
Taxable gain
P250,000
180,000
P 70,000

Chapter 7 Dealings in Property

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Chapter 7 Dealings in Property

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55

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