18/01/1438

TAX ACCOUNTING (2)

Lec. 7&8

6- The tax examination rules for the capital gain

Capital gains (losses) are resulted from one of the following
sources:
Liquidation of Settlement of Revaluation of
assets. company's assets& liabilites .
obligations
(long term liabilities)

Result from selling Result from payment of Result from changing

fixed assets or obligations owed to in the legal form of
received others at less than book the company
compensation for value
damaged fixed
assets
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No Items Tax examination provisions

7- Profits Capital gain from liquidation of assets are calculated as follows:
resulted
from Capital gain = Selling price or - BV - Any removal cost
liquidation (loss) compensation
of assets
↓
BV = Historical cost – Tax_deductible accumulated dep.

Capital gain (loss) for

1- Land, works of art, monuments, jewelry and other assets which
other assets which by nature are not are depreciated
depreciable. based on
2- Building, establishment, ships and aircrafts. depreciation base
3- Intangible assets including goodwill ,
patent, trademark, licenses, intellectual
property rights, copyrights, publication
rights,-- etc.
↓ ↓
taxable non- taxable3
(deductible) (non-deductible)

Example (1):
Illustrate the following transaction effects on determining
the tax base of the year ended Dec. 31, 2015:
1- During the year, the company sold a truck owned by L.E.
75,000, and the book value at the date of sale 60,000, and
did not include in the company's books profits from the
sale.
2- The company did not included within its revenues the capital
gain for a building , its original costs are L.E. 200,000. The
company decided that this building is not needed. It was sold
for L.E. 150,000. The tax-deductible accumulated depreciation
was L.E. 75,000 on the date of the sale. The company paid L.E.
5,000 removal costs.

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Solution
1- Capital gain -

Accounting treatment (recorded) Tax law treatment (Taxable revenue )

Zero Zero
 No adjustment
2- Capital gain for a building

Accounting treatment (recorded) Tax law treatment (Taxable revenue ) 20,000

Sale price 150,000
zero (-) BV (125,000)
200,000 – 75,000
(-) removal costs (5,000)
= Capital gain 20,000
The difference=Tax law treatment-Accounting treatment
=20,000- 0 = + 20,000
increase in revenue→  increase in NP

No Items Tax examination provisions

8- Gain on The gain result from payment of obligations owed to
repayment others at less than book value is taxable , it is calculated
obligations as follows:
Capital gain = The obligation - the amount
book value paid

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Example (2):
Illustrate the following transaction effects on determining
the tax base of the year ended Dec. 31, 2015:
1- The company included within its revenues L.E. 10,000 capital
gain for payment of obligations owed to others at less than
book value.
2- The company did not include within its income statement L.E.
90,000 payment of long term liabilities , Noting that the book value
for these liabilities was 100,000 and the company had got 10%
discount for paying it before the due date.
Solution

1- Obligations -

Accounting treatment (recorded) Tax law treatment (Taxable revenue )

10,000 10,000
 No adjustment
2- Obligations

Accounting treatment (recorded) Tax law treatment (Taxable revenue ) 10,000

zero BV 100,000
Less: amount paid (90,000)
= Capital gain 10,000
The difference only should be added to ANP
increase in revenue →  increase in ANP

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No Items Tax examination provisions

9- Revaluation The capital gain (loss) resulting from the revaluation
Gains

Is accompanied by a change in Is not accompanied by

legal form a change in the legal
entity of the company
The assets and
or in the contract.
The assets and
liabilities are
liabilities are
recorded in the
recorded in the
balance sheet with
book value at the balance sheet
time of the change in with
the legal form revaluation
value
Non-Taxable Taxable Non-taxable
(Non-deductible) (deductible) (Non-deductible)
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No Item Tax examination provisions

The following are deemed in particular to be a change in legal
form:
1- The merger of two or more resident companies.
2- The splitting of a resident company into two or more resident
companies.
3- The transforming of a partnership into a Shareholding
Corporation.
4- The purchase or acquisition of 50% or more of the shares or the
voting rights, whether in terms of number or value, of a
resident company against shares in the purchasing or acquiring
company.
5- The purchase or acquisition of 50% or more of the assets and
liabilities of a resident company by another resident company in
exchange for shares in the purchasing or acquiring company.
6- The transformation of a legal person into a Shareholding
Corporation.
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Noting that:
There are 3 conditions to subject the capital gain to
tax:
1- the revaluation process is done.
2- there is change in the legal form.
3- the assets & liabilities are recorded with the
revaluation value.

Example (3):
Illustrate the following transaction effects on determining
the tax base of the year ended Dec. 31, 2015:
1- The company included within its revenues L.E. 10,000 Revaluation
Gains for the assets and liabilities, which are recorded in the balance
sheet with revaluation value at the time of the merger with other
resident company.
2- The Shareholding Corporation company not included within its
revenues L.E. 20,000 Revaluation Gains for the assets and liabilities,
which are recorded in the balance sheet with book value at the time
of the transforming from a partnership.
3- The company included within its revenues L.E. 10,000 Revaluation
Gains for the assets and liabilities because of the increase happened
in market value of some fixed assets.

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1- Revaluation Gains for the assets and liabilities, which are -

recorded in the balance sheet with book value
Accounting treatment (recorded) Tax law treatment (Taxable revenue )
10,000 10,000
 No adjustment
2- Revaluation Gains for the assets and liabilities, which are recorded in the
balance sheet with revaluation value
-

Accounting treatment (recorded) Tax law treatment (Taxable revenue )

zero Zero
 No adjustment
3- Revaluation Gains for the assets and liabilities because of the increase (10,000)
happened in market value of some fixed assets

Accounting treatment (recorded) Tax law treatment (Taxable revenue )

10,000 zero
The difference=Tax law treatment-Accounting treatment
=0- 10,000 = - 10,000
decrease in revenue→  decrease in NP

Assignment:
Illustrate the following transaction effects on determining
the tax base of the year ended Dec. 31, 2015:
1. The company did not include within its revenues L.E. 30,000 revaluation gains for the assets and
liabilities, which are recorded in the balance sheet with revaluation value, and L.E. 5000 the capital
gain for a sold car.
A- 30,000 B- (30,000) C- 35,000 D- No adjustment E- None of the above
2. The company recorded L.E. 20,000 subsidies on December, 31st,
2015 , which include L.E. 5,000
received in cash and the remaining amount representing a machine.
A- (15,000) B- 15,000 C- 5,000 D- No adjustment E- None of the above
3. The company recorded L.E. 80,000 received installment for sold goods in 2015, the installment
included L.E 10,000 interest on installment sales.
A- 70,000 B- (70,000) C- (10,000) D- No adjustment E- None of the above
4. The company received LE 80,000 compensation for damaged goods. its cost which was
recorded in books was LE 90,000, and therefore the company recorded in the income
statement the differences as a capital loss.
A- 90,000 B- 80,000 C- 70,000 D- No adjustment E- None of the above
5. The company did not record L.E. 200,000 revaluation gains realized from a merge with another
legal person and L.E. 50,000 securities gains which are listed in the Egyptian stock market. Noting
that the assets and liabilities were recorded by its book value after merge.
A- 200,000 B- 50,000 C- 250,000 D- No adjustment E- None of the above

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6. The company recorded net sales of L.E. 95,000 after excluding 5% sales discount, noting that the
company didn't record the sales discount amount within its expenses.
A- 5,000 B- (5,000) C- (4,750) D- No adjustment E- None of the above
7. The company recorded among it expenses L.E. 120,000 , which including 100,000 purchase cost
for some items, and L.E. 20,000 transportation costs. Noting that the contract stated that the seller
must pay it. as these items were not received yet at the company's warehouse, they were not
included in the ending inventory.
A- 20,000 B- 100,000 C- 120,000 D- No adjustment E- None of the above
8. The company recorded L.E. 66,000 as sales revenue in Jan. 2015, which was sold on account and
received by customers in Dec. 2014 .
A- 66,000 B- (66,000) C- (6,000) D- No adjustment E- None of the above
9. The company sent goods to one of its agents for sale, its cost was L.E.100,000 included in the
ending inventory because it was not sold yet but the agent sold 25% of it in Dec. 2015for L.E.
30,000 . The agent's commission is 5% , it is due in Jan. 5, 2016.
A- 3,500 B- 5,000 C- (5,000) D- No adjustment E- None of the above
10. The cost of inventory on Dec. 31, 2015was L.E. 500,000 while its market value was L.E. 480,000.
The company values its inventory on the basis of cost or market value which is less, the ending
inventory was recorded by its cost.
A- 480,000 B- 20,000 C- (20,000) D- No adjustment E- None of the above

17. The company recorded among it expenses L.E. 16,000 received rent for an owned building
including L.E. 4,000 rent deposit, the company leased it to another company on Jan. 1st, 2012 for 3
years. The rent contract states that the monthly rent is of L.E. 1,000 and that the rental value will
increase annually by 10%.
A- 2,400 B- (1,600) C- (1,480) D- No adjustment E- None of the above

12. The company recorded among its revenues L.E 60,000 recovered bad debts recorded in the
income statement, but the tax authority approved only 75% in 2012 when these debts were
considered uncollectible.
A- 45,000 B- (45,000) C- (15,000) D- No adjustment E- None of the above
13. The company sold 1,000 units of its products to its subsidiary company, with the cost which was L.E
50,000 and included these sales in the income statement, while the company follows pricing policy
based on selling price exceed the cost by 20%, in addition to 7% discount per quantities that exceed
1,000 units.
A- 5,800 B- 10,000 C- 4,200 D- No adjustment E- None of the above
14. There were L.E 5,000 cash withdrawn by the general partner, While the limited partner withdrew
varieties of the company's products to his personal use, its costs L.E 6,000, and the selling price L.E
7,000 . The company did not record any withdrawal in the income statement.
A- 12.000 B- 5,000 C- 7,000 D- No adjustment E- None of the above
15. The income statement included L.E 150,000 beginning inventory balance, while the ending inventory
balance of 2013 was of amount L.E. 170,000, a difference resulted due to posting errors.
A- 20,000 B- (20,000) C- 15,000 D- No adjustment E- None of the above

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16. The company contracted on L.E. 80,000 purchasing transaction. Because this purchase material in
transit , it was not recorded in the accounts and records as purchases cost and it was not included in
the physical count lists. Noting that the company follows pricing policy based on selling price exceed
the cost by 25%.
A- 20,000 B- (20,000) C- 8,0000 D- No adjustment E- None of the above
17. The company included in its revenues L.E 40,000 sales revenue for goods sold by its local branches, but
were included in the ending inventory. Noting that the selling price was determined by cost plus profit
margin 20% of the selling price.
A- (32,000) B- (37,500) C- 37,500 D- No E- None of the above
adjustment
18. The company recorded among its ending inventory balance L.E. 1,400 for goods returned during the
year without being recorded as sales returns, it has been sold for the amount of L.E. 1,600.
A- 200 B- (200) C- (1600) D- No adjustment E- None of the above
19. The company recorded in its revenues L.E 5,000 sales of remnants related to 2014, and L.E 10,000
revenue received in advance related to 2015.
A- 15,000 B- (15,000) C- 10,000 D- No adjustment E- None of the above
20. The company did not record sales transaction sold by its agent on 31st December, 2014 for L.E. 60,000
with agent’s commission 5%., its cost was L.E. 40,000.
A- 17,000 B- (20,000) C- 20,000 D- No adjustment E- None of the above