INSTALLMENT METHOD
Initial payments means at least one (1) other
A special method of accounting whereby income on
installment sales of property during the year is allowed
to be reported in installment in proportion to the
installment payments actually received which the gross
profit bears to the total contract price.
3 Cases where Income may be reported in Installments:
a. Sale of personal property by a dealer- Dealers in
personal property who regularly sell or otherwise
dispose of personal property on the installment
plan.
b. Casual sale of personal property- Persons who
make a casual sale or casual disposition of personal
property subject to the following conditions:
1. The selling price exceeds P1,000;
2. The initial payment must not exceed 25% of the
selling price;
3. The property sold is not a kind which would be
includible in the inventory if on hand at the
close of the taxable year
c. Sale of real property- Persons who sell or otherwise
dispose of real property on installment plan are also
allowed to use the installment method to report the
gain on the sale subject to one condition. That the
initial payment must not exceed 25% of the selling
price.
Important Installment Method Terms:
a) SELLING PRICE- the amount realized on the sale
Cash received P xxxx
FMV of the property received xxxx
Installment obligations of the
buyer( evidence of indebtedness) xxxx
Mortgage assumed by the buyer xxxx
SELLING PRICE P xxxx
b) CONTRACT PRICE- the amount which the purchaser
contracts to pay the seller.
Selling price P xxxx
-Mortgage assumed by buyer xxxx
Balance P xxxx
+ Excess of mortgage over cost xxxx
CONTRACT PRICE P xxxx
Note: Mortgage assumed by the buyer, if any, is
part of the selling price, but is not part of the
contract price.
c) INITIAL PAYMENTS- Payments received in cash or
property (other than evidence of indebtedness of
the purchaser) during the taxable year in which the
sale is made.
Downpayment P xxxx
Installments received in year of sale xxxx
Total P xxxx
Add: Excess of mortgage over cost xxxx
INITIAL PAYMENTS p xxxx
Notes:
1.
payment in addition to the initial payment.
2. Commissions and other selling expenses paid or
incurred by the vendor are not to be deducted
or taken into account in determining the
amount of the “initial payments”, the total
contract price, or the selling price.
Formula to Report Income under the Installment
Method:
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
X Installment payments
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒
actually received
OR
𝐼𝑛𝑠𝑡𝑎𝑙𝑙𝑚𝑒𝑛𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑
X Gross Profit
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒
Sale of Real Property (Capital Asset)
The sale of real property which is a capital asset is
subject to final capital gains tax, whether the seller is an
individual, estate or trust, or a corporation.
The final tax can be paid in installments if the initial
payments do not exceed 25% of the selling price.
Formula to compute the final tax on installments:
 In the year of sale:
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑃𝑎𝑦𝑚𝑒𝑛𝑡
X Final Tax
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒
 In subsequent years:
𝐼𝑛𝑠𝑡𝑎𝑙𝑙𝑚𝑒𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑
X Final Tax
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒
Sale of Shares of Stock of a Domestic Company (
Capital Asset)
When the shares are not traded through the stock
exchange –the tax is based on the net capital gain
realized:
a) If sold by an individual- Subject to 15% final tax.
b) If sold by a corporation- Subject to 15% final tax if
sold by a domestic corporation; or 5%/ 10% if sold
by a foreign corporation.
c) If the shares are not traded through the stock
exchange and are sold in installments, the final tax
can be paid in installments if the initial payment is
not more than 25% of the selling price.
GAIN OR LOSS FROM SALE OR EXCHANGE OF
PROPERTY
Sale or exchange of properties are classified into:
1. Sales resulting to Capital Gains (subject to CGT)
a. On the sale of domestic shares
b. On the sale of real property classified as capital
asset.
2. Tax-Free Exchanges- where No Gain or Loss Is
Recognized
a. Tax-free exchanges pursuant to a corporate
reorganization(merger or consolidation)
 b. Like-Kind exchanges
3. Sales or Exchanges Where Gain but Not Loss is the property at the time of the gift, then the basis
Recognized shall be the FMV for the purpose of determining the
a. Exchanges not solely in kind pursuant to a loss.
corporate reorganization where boot is d. If property was acquired for less than an adequate
received. consideration, the basis of the property is the
b. Transactions between related persons. amount paid.
c. Illegal transactions e. If property was acquired in a previous tax-free
exchange where gain or loss is not recognized, the
4. (a) Sale or Exchange of ordinary Assets basis is the substituted basis.
(b) Sale or Exchange of Other Capital Assets
Adjusted Basis:
-If the transaction is a sale, the gain or loss to be -After a property is acquired, its basis can be
recognized is computed as follows: increased by improvements that materially add to its
Sale xxxx value or life, and is decreased by accumulated
Less: Basis xxxx depreciation.
Gain (Loss) xxxx Basis of property xxxx
Plus: Improvements xxxx
-If the transaction is an exchange, the property Less: Accu. Depreciation xxxx
received must be essentially different from the Adjusted Basis xxxx
property disposed of, otherwise no gain or loss is
recognized. The gain or loss is computed as follows: Use of Basis.
FMV of the property received xxxx Basis is used to determine:
Less: Basis of property given xxxx a. Gain or loss in transactions involving ordinary
Gain (Loss) xxxx assets.
b. Gain or loss involving capital assets which are not
BASIS: subject to the CGT.
a. If property was acquired by purchase, the basis of c. Gain or loss in the sale of domestic shares not
the property is the cost to the buyer. traded in the stock exchange.
b. If property was acquired by inheritance, the basis of d. Gain or loss in forced sale of an individual taxpayer
the property is the FMV of the property at the time of real property to government in the exercise of
of death of the decedent (step-up in basis). the latter’s power of eminent domain.
c. If the property was acquired by gift, the basis of the e. Gain or loss in the sale of real property classified as
property is the basis in the hands of the donor. capital asset of RFC or NRFC.
Except that if such basis is greater than the FMV of

CLASSIFICATION OF PROPERTIES FOR TAX PURPOSES:

Ordinary Assets Capital Assets

a) Stock included in inventory; Asset which is not an ordinary asset:
b) Property primarily held for sale; (1) Personal or non-business property or
c) Property used in business which is (2) Asset held merely for investment, or
capitalized; (3) Property not used in business.
d) Real property used in the trade, business or
profession of the taxpayer
How Taxed? How Taxed?
Subject to FTs: Gain/Loss id recognized but
Gain is 100% included in the ITR.
1) Capital gains tax on sale only Net Capital Gain is
Loss is 100 % deducted in the ITR if taxpayer
of domestic shares; included in the ITR:
itemizes deductions.
2) Capital gains tax on sale 1) If taxpayer is individual:
of real property located ST G/L =100% recognized
in the Philippines LT G/L = 50% recognized
classified as capital
assets. 2) If taxpayer is corporation:
100% recognized whether ST
or LT
Other Rules:
3) Capital losses are allowed
only against capital gains.
4) Any net capital loss (net
capital loss carry over) of an
individual taxpayer can be
carried over to the next

Other transactions Resulting in Capital Gains or Losses
Where there is NO SALE
1) When stocks or bonds held as capital assets become
worthless, capital loss is recognized.
2) When bonds (held as capital assets) are retired.
3) Gains or losses from failure to exercise options
(options gains or losses).
4) When the assets of a corporation are distributed in
compete liquidation thereof (liquidating dividend).
Capital gain or loss to the shareholder is recognized.
5) Redemption of preferred shares.
6) Liquidation of partnership. Capital gain or loss is
recognized to the partner.
Formula:
Amount received for his partnership interest
Less: His investment in the partnership
His share in the undistributed partnership NI
Gain or Loss to Partner (subject to holding period
qualification)
7) Gains or losses from short sales.
Short selling is selling something one does not
own in the future at a particular price in the hope that
the property goes down in value. For tax purposes, a
short sale is deemed consummated upon delivery of the
property to cover short sale.
WASH SALE LOSS
Requisites:
1. Sale of securities at a loss
2. Identical securities were purchased within a 61-day
period, beginning 30 days before the sale, and
ending 30 days after the sale
3. The taxpayer is either (a) not a dealer in securities
or (b) if a dealer, the sale was not made in the
ordinary course of business.
Notes:
a. Purchase includes entering into a contract or option
to acquire identical securities.
b. If taxpayer is a dealer in securities and the sale was
made on the ordinary course of business, the loss
on the sale is deductible in the ITR.
c. If taxpayer is not a dealer in securities or is a dealer
but the sale was not made in the ordinary course of
business, the loss on the wash sale is a capital loss,
but is not deductible against capital gains.
Formula for non-deductible loss:
𝐍𝐨.𝐨𝐟 𝐬𝐡𝐚𝐫𝐞𝐬 𝐚𝐜𝐪𝐮𝐢𝐫𝐞𝐝 𝐰𝐢𝐭𝐡𝐢𝐧 𝟔𝟏 𝐝𝐚𝐲 𝐩𝐞𝐫𝐢𝐨𝐝
X Loss
𝐍𝐨.𝐨𝐟 𝐬𝐡𝐚𝐫𝐞𝐬 𝐬𝐨𝐥𝐝
succeeding year as a ST NCL,
but not to exceed the net
income for the year in which
the capital loss was incurred.
Corporations are not
allowed any net capital loss
carry over.
Formula for tax basis of reacquired Shares:
Cost of acquisition xxxx
+ Wash sale loss xxxx
New tax basis/cost xxxx
TAX-FREE EXCHANGES of properties pursuant to a
Merger or Consolidation (Corporate Reorganization)
(1) IF in pursuance of a plan of merger or consolidation:
a. A corporation (transferor), which is a party to a
merger or consolidation, exchanges property
solely for stock in a corporation, which is a party
to the merger or consolidation; or
b. A shareholder (transferor), exchanges stock in a
corporation, which is a party to the merger or
consolidation, solely for the stock of another
corporation, which is also a party to the merger
or consolidation; or
c. A security holder (transferor), of a corporation,
which is a party to a merger or consolidation,
exchanges his securities in such corporation,
solely for stock or securities in another
corporation, a party to the merger or
consolidation.
(2) A person (transferor), transfers his property to a
corporation 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 (4)
persons, gains control of said corporation.
Tax consequences:
1. The transferor shall NOT recognize gain or loss;
2. The basis (cost) of the stock or securities
received by the transferor shall be the same as
the basis of the stock, property or securities
transferred (substituted basis).
HOWEVER, If the Transferor receives not only stock or
securities, but also money or property, GAIN but not
Loss shall be recognized.
Note: The money and/or property received is called
“boot”.
Tax Consequences:
(1) Gain recognized ≤ Money + FMV of Property
Received
EXC: NO gain is recognized if the transferor is a
corporation and the boot is distributed in
accordance with the plan of merger or
consolidation.
(2) Basis of the shares received by the transferor shall
be computed as follows:
Formula:
Cost (basis) of the stock or property transferred P xxx
Less: Money Received P xxx
FMV of property received xxx xxx
Balance xxx
Add: Gain recognized on the exchanged P xxx
Amount treated as dividend xxx xxx
Basis (Cost) of the stock received P xxx

Exercises:
1. A, resident citizen, had the following data for the years 2018 to 2022:
2018 2019 2020 2021
Ordinary Taxable Income P 200,000 P 250,000 P 300,000 P 350,000
Gain from sale of capital assets:
Held for 12 months 20,000 2,000 100,000 57,000
Held for 13 months 8,000 10,000 20,000 28,000
Loss from sale of capital assets:
Held for 19 months 22,000 20,000 60,000 10,000
Held for 7 months 3,000 30,000 50,000 5,000

Compute for the net taxable income of the taxpayer for the years, 2018-2022, under the graduated rates.

2. The records of C, citizen, married, with 2 dependent children show the following for 2018:
Business income, net of P240,000 expense P160,000
Rental income, net of 5% withholding tax 95,000
Dividend received from a foreign corporation 20,000
Winnings from Phil. Charity Sweepstakes Office 400,000
Other transactions:
1) Sale of assets used in business:
a) Delivery equipment – Selling Price P200,000
Cost (2015) 300,000
Accumulated depreciation 60,000
b) Land- Selling Price 200,000
Cost (2002) 180,000
c) Warehouse- Selling Price 10,000,000
Cost (2003) 11,800,000
Accumulated depreciation 2,000,000
2) Sale of capital assets:
a) Jewelry- Selling Price 250,000
Cost (2002) 180,000
b) Land -Selling Price 800,000
Cost (2000) 900,000
c) Furniture & Appliances- Selling Price 10,000
Cost (2010) 40,000
3) Shares of stocks:
a) Traded in the stock exchange: Selling Price 220,000
Cost (2004) 300,000
b) Not traded in the stock exchange : Selling Price 300,000
Cost (2004) 180,000

Determine the taxable income of C.

3. Marian bought 100 shares of X Corporation at P5 per share. Later X Corporation decided to merge with y
Corporation. Pursuant to which Marian exchanged her 100 shares of X Corporation for 500 shares of Y Corporation
which had FMV at that time of P7 per share.
Required:
a. What is the gain of Marian?
b. What will be the basis of the Y shares of Marian?
c. If Marian sells all the 500 Y shares to Ivy for P20,000, what will be the tax consequence to Marian?
4. In the previous number, pursuant to a merger Marian exchanged her 100 X shares for 500 Y shares (FMV= P7 per
share) plus land (FMV= P5,000) plus P2,000.
a. How much gain shall Marian recognize?
b. What will be the basis of the Y shares of Marian?
c. What is the basis of the land received in the hands of Marian?

5. F sold the following capital assets:

Land 1 Land 2 Land 3 Land 4
Selling Price P400,000 P600,000 P800,000 P1,200,000
Cost 200,000 250,000 400,000 400,000
Commission Paid 30,000 70,000 - -
Selling expenses incurred 20,000 30,000 40,000 50,000

Terms of sale:
Down payment, Feb 14, 2018 P50,000 P70,000 P50,000 P150,000
Installment payments:
July 14,2018 50,000 70,000 50,000 150,000
July 14, 2019 150,000 100,000 200,000 200,000
July 14,2020 150,000 260,000 - 200,000
Mortgage assumed by the buyer - 100,000 500,000 500,000

The final tax for 2018 is ________________________.

6. On June 1, 2018, A sold shares of stocks of a resident foreign corporation held as capital assets for 24 months for
P500,000 ( cost of P300,000), payable as follows: P200,000 on the date of sale and the balance is secured by a
promissory note where fair market value is 85% of its face value. Payments on the note were as follows:
January 1,2019 P100,000
June 1, 2019 100,000
December 1, 2019 100,000
The capital gain in 2018 is ____________________.

7. A domestic corporation had the following data for taxable year 20-A and 20-B:
20-A 20-B
Taxable income before capital assets transaction P400,000 P500,000
Gain from sale of capital assets:
Held for 12 months 20,000 23,000
Held for 9 months 5,000 10,000
Loss from sale of capital assets:
Held for 15 months 7,000 15,000
Held for 22 months 25,000 12,000

Compute for the taxable net income of the corporation for the year 20-A and 20-B.

8. D had the following transactions in JKL Corporation for the year 2019:
Oct. 10, 2019 Purchased 10,000 shares @ P100 P1,000,000
Oct. 28,2019 Purchased 5,000 shares @ P98 490,000
Nov. 24, 2019 Sold the 10,000 shares purchased on 10/10/2019 920,000
Dec. 10, 2019 Purchased 3,000 shares @ P90 270,000

a. Determine the loss sustained by D and indicate whether it is deductible or not.

b. If the shares acquired on October 28,2019 are sold today at P100 per share, determine D’s gain or loss.

9. B had an original investment in a general professional partnership of P200,000 in 2019. His share in the net income
of the partnership for 2019 which was credited to his capital account was P30,000. In 2018, P50,000 was credited to
his capital account as his share in the partnership income, but he withdrew P10,000 from such share. He paid the
income tax on his share on the partnership net income of 2019 and 2020. B retired at the end of 2020 and received
P300,000.

Determine his capital gain or loss.