11

Installment Reporting of Income & · · .·

Installment Payment of Capital Gains Tax

r
lnst~llment Reporting of Income

Installment method of reporting income· is a ·special method of

accounting specifically provided under the Tax Cqde whereby income on
installment sales of property during the year is allowed to be reported in
installments in prqportion to the installment payments actually received which
the gross profit bears to the total contract price (RR '2-98) computed as
follows:

Taxable lnconie • - Gross Profit x. Installment Received

(Reportable) Contract Price
I

Cas~s where "Income" may be repqrted under Installment Method

1.. Sale of personal or movable property by a dealer.

2. Casual sale of personal or mov1aoboleo property whe~e

a. . s ll'ng
1 price is over P , ·
~. nt is not more than 25% of selling price .
b. Initial pa~me t of a kind which would be included in inventory
c. ~r~~ehrtyd1s ntothe close of the taxable ye.ar.
1f on an a

3. Sale of real or immovable_Property where initial paymerit is not more

than 25% of the selling pnce.

509
SELLING PRICE
. ■ The amount realized on the sale. It ir.icludes:

Pxxx-
· Cash received
FMV of property received . xxx
Installment obligations of the buyer (evidence of XXX
indebtedness)
Mortgage assumed by the buyer XXX
Selling Price ' Pxxx

CONTRACT PRICE , . ,
■ The amount which the purchaser contracts to pay the seller. It
includes:

Selling Price . Pxxx

Less: Mortgage assumed by the buyer (XXX)
Balance XXX
Add: Excess of mortgage ass.urned over.cost XXX
***Contract Price Pxxx

. *** Contract price is· not synonymous to Selling Price. However, the amount of
contract price may be the same with selling priGe if there is no mortgage assumed
by the buy_er.

INTIIAL PAYMENTS
• Payments received rn cash or property (other than evidence of
indebtedness of the purchaser) during the taxable year in which the
·sale is made. Initial payment consists of:

Down payment Pxxx

lnstallments received in year of sale XXX
Total XXX
Add: Excess of mortgage assumed over cost XXX
Initial Payments Pxxx
Commissions and Other Selling Expenses
Revenue re~ulatio~s 2-98, as amended, provides that commis ions n . r
expens_e~ P~!d. _
or incurred?~, the seller are not to be deducted or t k. _n into a
determining m1t1al payments , contract price" and "selling pricetl.
cASEA
Niah bought . a car 'for P660 ooo .,
0
purpo~es. On Dec. 1, 2021: she : January 2, 2019 which she used for personal
8 1
following terms were agr ed upon by Ni dhthe car for P900,000 under installment. The
Down p yment, Dec. 1, 2021a and the buyer:
Am unt paid, Dec. 1S, 2021 P1 50,000
In tallment due, Dec. 1, 2022 150, 00
Installment due Dec 1 20· 300,000
I
23
• I 300,000

Question 1: How much should Niah report as income in 2021?

❖ Answer: P150,000 ·
SOLUTION:
ment = P150,000 + 150,000 = 300,000
lniti~I Pa_y_
Ratio: l~1t1al. PaymenUSP = 300,00Q/gQQ,OGO = 33 %
Reportable income in 2021 = P150,000 computed as follows
. SP . P900,000
Cost (600,000)
Gross Profit 300,000
x Holding Period % 50%
Capital Gain P150,000
❖ Installment method of reporting is not applicable to casual sal-e (sale by a
dealer) if ·the ratio of initial payment over the selling price exceeds 25%. , e
capital gain realized from the sale should be reported in "full in the ye:ar of sa e.
❖ The asset sold is a capital asset. Hence, both rules on installment meth a
rules on holding period discussed in Chapter 9 (in case the seller is an in 1 · ·
taxpayer) are applicable.

Question 2: Assume that the car is used for business purposes, ho much should Nia ·
report as income in 2021?
❖ Answer: P300,000
SP P900 000
Cost (600,000)
Gross Profit 300,000
••• Installment method of reporting is not applicabl~ b cause the r tio a! ini i , oavrnem
th elling price exceeds 2.5%. At the same time, the ss t old 1 _n
Con equ ntly, rul . on capital asset transactions uch rul o 1

lica I .
.I. . h I,· c r d I r, h w much sho J rt
Ou tion 3:
2021?

1
 Solution: ·
SP P900,Q00
Cost (600,000)
C:,ross Profit P300,000
Income for 2021:
GP/GP x Collections
(300/900 x P300,000) P100,000

❖ Since Niah is a dealer of personal property,. she is allowed to rec?gnize income on

installment basis regardless of the ratio of initial payment over selling price. Hence, the
:5 25% rule is not applicable. Likewise, the rules on capital_ asset transa~tions discussed.
in Chapter g are not applicable because the asset sold 1s now classified as ordinary
a~~ .

CASEB
Niah -bought a car for P600,000 on January 2, 2019 which she used for ' personal
purposes. On Dec. 1, 2021, she sold the car for P900,000 und~r installmen( _The
following terms were agreed upon by Niah and the buyer:
Down payment, Dec. 1, 2021 P100,000
Amount paid, Dec. 15, 2021 100,000
Installment due, Dec. 1, 202~ 350,000
Installment due, Dec. 1, 2023 350,000

Question 1: How much should Niah report as income in 2021?

❖ Answer: P33,33,3 . ·
Initial Payment= P100,000 + 100,000 = 200,000
Ratio: Initial PaymenUSP = 200,000/900,000 = 22.22%
Reportable income in 2021 is computed as follows:
SP P900,000
Cost (600,000)
Gross-Profit ·300,000 .
x Holding Period % 50%
Capital Gain P150,000
Reportable in 2021:
(150/900 x P200,000) ·. P33,333 .

❖ lnstal/meryt method of reporting income is applicable to casual sale (sale of

personal property by ~ non_ -dealer) if the ratio of initifJI payment over the selling
price is not mo~e than 25%. In addition, the asset sold is a capital asset. Hence,
both rules on mstallment method and capital asset transactions are applicable.
Since the holding period is more than twelve (12) months, only 50% of the capfta/
gain is taxable. The other SO%·capital gain is tax exempt.
l

Question 2: Assume that the car is used for business purposes, how much should Niah
report as income in 2021?
❖ Answer: P66,667.

512
 Initial Payment:: p ·
l ; u ~ R.eMrt-llltf
J- · · J
,/4/,C(flrl&
J ,
100 0
Ratio: Initial PaymenUSPO~ + 100,000 = 200,000
Reportable income in ~00,000/900,000 = 22.22%
2021
SP is computed as follows:
Cost P900,000
Gross Profit (600,000)
I 300,000
Reportable in 2021:
(300/900 X P200,000) .
. P66,667
Installment method of . . . . . .
over the selling -p~· :eportmg is applicable because the ratio of initial payment
asset transactions ;fie is not m_ore than 25%. Nof)etheless, the rules on capital
. e not applicable because the asset sold is an ordinary asset.
Question 3: Assume that Niah ·18 · ·
? · a car dealer, how much should she report as income in
2021
❖ Answer: P66,667
SP P900,000
Cost (600,000)
Gross Profit P300,000
..
Income in 2021:
GP/CP x Collections
' (300/900 X P200,000) P66,667

❖ Since Niah is a dealer of personal property, she may avail of installment method of
reporting income regardless of the ratio ofinitial payment over-the selling price.

ILLUSTRATION 2: SALE OF REAL OR IMMOVABLE PROPERTY

CASE A ,
Ivan, a real estate dealer, sold a real estate for.P2,000,000 on Nov. 29, 2021. The cost of
the property was P1 ,500,000. The terms of the sale were as follows: ,
Down payment P4Q0,0Q0
Monthly installment beginning December 2021 until fully paid 100,000

Question 1: How much is the income to be reported in 2021?

❖ Answer: P125,000 computed as follows:
Initial Payment= P400,000 + 100,000 =P500,00~ 0
Ratio: Initial payment/S.P. = P500,000/2,000,000 - 251/o

Reportable income in 2021 under installment method

= ttGP/CP x Collections In 20 18
- ••s00/2,000 x P500,000 = Pi 2S,OOO P2 000,000
SP (1,500,000)
Cost 500,000
'Gross Profit

· 513
 '
Question 2: Assµme that Ivan is not a real ~state d~aler and the same is held as
investment, hc;>w much should he repQrt as income m2021? -
❖ Answer: PO
If the asset sold is a real property classified as.capital asset, the transaction is subject to 6%
0
capital gains tax b,ased on the selling price pr fair market value, whichever is higher.

Question 3 - Assume that Ivan is not a real-estate dealer but.the real estate sold was a
parcel of land u ed in business. How much should he report as income in 2018?
❖ Ans er: P125,000 (Computation: same in Question 1)

C~E B . I
Ivan, a real estate dealer, sold a real estate for P.2,000,000 on Nov. 29, 2021. The cost of
the property was P1.,500,000. The terms of the sale were as follows:
Down·payment · PS00,000
.Monthly installm~ht beginning December 2021 until fully paid 100,000

Question 1: How much is the income to be reported in 2021?

❖ Answer: PS00,000 computed as follows: .
SP . . P2,000,000
Cost (1,500,000)
Gross Profit 500,000
Initial Payment= P500,000 + 100,000·~ P600,000
Ratio: Initial payment/S.P. = P600,·000/2,000,000 = 30%

❖ - Since the ratio of initial payment is more than 25% of the selling price, installment ·method of
reporting income is not applicable. Unlike in a case of a dealer of personal properties where
installment method may be availed regardless of the %of initial price over sales price, the 25%
rule should always be followed in case of a dea,ter of immovable property.

Question 2: Assume that Ivan is not a real estate dealer' and the same is held as
investment, how much should he report as income in 2021?
❖ Answer: PO
If the asset sold is a real property classified as capital asset, the transaction is subject to
capital gains tax based on the selling price or fair market value, whichever is higher.
. .

a
Question 3 - Assume that Ivan is not real estate dealer but the real estate sold was a
• parcel of land us~d in business. How m~ch should he report as income in 2021?
❖ Answer: PS00,000; Computation: same In Question 1

514
 l , u ~ 'R.e.wrt: n J;tWflll£,
INSTALL ENTPAYMENTOF
.
J-
CAPITAL GAINS TAX (CGT)
~J , .
Installment payment of CGT is . - -- .· , .
not traded in the local stock ex h ~pphcable oply to sale of shares of stock
asset provided that initial paymec t ~nge and real asset considered as capital
25% rule is applicable also to n is not mo~e than 25% of selling price. The
only to determine whether .Personal c~pital asset and ordinary .asset but
deferred basis or not. 9am on sale is all~wed to be recognized on a

"Initial Payment" refers to the 'total . . ·

(0 ther than evidences 0 f . pay~ents received in cash or property
. th . - indebtedness) , by th~ seller upon or before the
execution of e in strument of sale during ·the taxable year 'cif the disposition -
of the real property_. It also includes the excess of _mortgage assumed by the
buyer over tt,e basis (cost) to the seller. On the other hand, "Contract Price"
is usually:
• The selling price; or _
• The selling price reduced by the mortgage assumed by the buyer
on the property that- he purchased; or ·
• The selling price reduced by the mortgage assumed by the buyer
and increased by the excess ·of mortgage assumed by the buyer
over the basis (cost) of the.seller.

The formula for the computation of Initial payment,· Contract price and Selling
Price are shown below: ·

Down payment. Pxx

Add: installment paymems in the year of sale xx
Add: Excess of mortgage assumed by buyer over the cost xx
of the seller.
Initial Payments Pxx

Selling price •· · . Pxx

Less~·mortgaged assume~ by the buyer, if any (xx)
Balance xx
Add: excess of mortgage over cost of the seller Xx
Pxx
Contract Price

Selling Pric~: xx
Cash received xx
F- MH f roperty received . xx
iv o p . . 0f the buyer (evidence of
Installment obhgat,ons xx
indebtedness) er
Mortgage assumed by th0 buy
Total S.P.

515 ,
 Tax Due and Payable:
Total Capital
Capital Gains Tax Due = Gains tax x Payment received or
Contract Price collection

ILLUSTRATION 3:
COMPUTATION OF:
❖ Selling Price
❖ Contract Price
❖ Initial Payment
.. ❖ Installment Payment ofCapita,I Gains Tax

CASE A:·Contract Price =Selling Price

A taxpayer sold his residential house under the following terms:

Cash received, January 10, 2021 P100,000
Amount received, June 10, 2021 100,000
Installment due, June 10, 2022 600,000
Cost 150,000

Determine the following:

1. Sefling Price
2. Contract Price
3. Initial payment
4. % of Initial Payment over SP
5. Capital ga_ins tax due for 2021

Answers:
1. . SP= P100,000 +100,000 + P600,000 = P800,000

2. CP = P800,000

3. I.P. ,= P100,000 + P100,000= P200,000

4. % of I.P over sp = 200/800 = 25%

5. CGT for 2018 = P12,000 computed as:

Total CGT = P800,000 x 6% = p4a,OOO

CGT in 2021:
= P~8,000/P800,0000 x P200,000 = P12,000

516
 \ .

. )~~~:Y/1~
CASE B: Contract Pric 8 """ .
A t .,. Sellm p ·
. axpayer sold his res·1d t· nee· Real Pro e
C • en 1a1 hou ·
, ash received, January 10 se under the following terms:
Amount received J , 2021
Installment due J!• une 10, 2021 . · P20Q;ooo
Cost , une 10, 2022 100,000
600,000
Mortgage as~um~d byo the buyer 150,000
200,000
Determi~e th~ following:
1. Selling Price
2. Contract Price ·
3. Initial payment
4- % o~ Initial Payment over SP .
5· Capital gains tax due in 2021

Answers:
1. SP = P95Q,OOO computed as: ·
Cash received (P200,000 +'P100,000) P300,000
Installment obligations .
. 600,000
Add: Excess of mortgage over cost of the seller 50,000
Selling Price P950,000

-2. CP = PB00,000 computed as:

Selling price .· P950,000
Less: Mortgaged assumed by the buyer, if any (200,000)
Add: Excess of mortgage over co~t of tbe seller 50,000
Contract Price PB00,000

3. I.P. = P350,000 computed as:

DownpaymenJ P200,000
Add: installment payments in.the year of sale · 100,000
Add: Excess of mortgage over cost 50,000
Initial Payments P350,000

4. % =P350/P950 =36.84% · .

5 CGT in 2021 ;:: P5i,opo computed as:

. Total CGT = P950,00Q x 6% = P57,000

CGT for 2021 (not qualified for installrnen! payment):

= P57,000

517
 I

CASE C: Sale of Shares of Stock

on July 1, 2021, Pedro solq shares of .stock for P400,~00. The shares, acquired
on June 1, 2018 at a cost of P150,000 were held as investment, and were sold
directly to a buyer under the following terms:
Down payment, July 1, 2021 PS0,000
Installment due, October. 10, 2021 • 50,000
Installment due, October. 10, 2022 150,000
lns,allment due, October. 10, 2023 150,000

Question: How much is the capital gains tax due in 2021?

❖ Answer: P562.50
Ratio = 100/400 = 25%

Selling Price P400,000

Cost (150,000)
Capital Gain 250,000
CGT rate under TRAIN Law · 15%
Total Capital Gain P2,250

CGT2018: 100/400 x P2,250 P562.5

CHAPTER EXERCISES
/

The first five (5) questions are based on the following:

Jos~ph provided the following data on sale of his personal property sold in
2018 held by him for 15 months:
Cost P 225,000
Mortgage assumed by the buyer 270,000
Installment C.ollection Schedule: ·
2021 67,500
2022 67,500
- 2023 · 45,000

1. How much is the selling price?

a. P 450,QQQ C. P 180,000
b. P 270,000 d. P 225,000

2. How much is the contract price?

a. P 450,0P0 c. P 180,000
b. . P 270,000 d. P 225,000

518
1 •
r

How much is the initial P

3· a. P 67,500 ayrnents?
· ·
l , u ~ Rf'M-m·
Y · ttCtHtW
if'
r:Y .
· b. P .112,500 c. p 45,000
d. P 225,000 ·
4· How much is the income s b. ·
- · u 1ect t ·
°
a. P 56,250, P 33,750 and p 2 income tax in 2021, 2022, and 2023?
b. P -112,500, P 67,S00 and P 2,500, respectively _
45
c. P 225,000~ P o.and p O . ,0~~' respectively ·
d. None of the choices ' ~espect1vely . ·

5. aripet sold the .folfowin . .

9 capital assets_as follows: (RP - Philippines)
Selling Price Lot 1 Lot 2 Lot 3
Cost p 225,Q00 P 750,000 P 1,200,000
Terms of Sale: • 95 ,000 900,000 300,000
Downpayment, 2/18
P 15,000 P 75,000 P 150,000
1st Installment payment, 4/18 15,000 75,000 75,000
2nd lnstallm~nt Payment, 9/18 15,000 120,000
Still due 180,000 P 600,000 P 855,000
' I .
How much is the capital g_ains .tax for the year 2021?
a. p 83,700 . C. P130,500
b. P32,400 - d. , P11,700
'
6. Based on the above problem, assuming that the balance was collected
in 2022, how much is the capital gains·tax on that year?
a. P 130,500 C. P 46,800
b. P 98, 1o·o d. nil

7~ In 2021, Alex sold shar-es of stocks of a domestic company directly to a

buyer f<;>r P400,000. The shares were acquired in 2018 for P150,000.
The terms of sale are as follows: I

■ Downpayment, PS0~000
■ Instalment payments: .
0 2021 - P50,000
0 2Cl22 -100,000
0 2023 - 1oo,oqo
0 2024 - 100,oo~

- h ·,·s the capital gains tax for the·year 2021? .

How muc P15 000
a. P 9,375 ~- P 5 000
.b. P 37,500 · '

519
8. Karen, a real e~tate dealer sold a house and l?t Pfo3r7P560000,000 on -
November 20, 2021. The cost of the property 15 , 0. Terms are:
Downpayment: P100,000 .
Balance . : Payable in monthly installments of
p 2s,ooo beginning Dec. 20, 2018.

· How much is the income subject to income tax in 2021?

a. P 125,000 C. P 46,875
b. P 225,0.00 d. P 23,437.50

9. How much is the income subject to income tax in 20122?

a. P 112,500 C. p 56,250
b. P 300,000 · · d. nil

10. Assuming · the asset above is a capital asset, the capital gains tax
payable in 2021 and 2022 should be:
a. P 36,000 and P 0, respectively
· b. P 7,500 and P 18,000, respectively
c. Pa.and P 36,000, respectively
d_. P 18,000 and P 7,500, respectively

11. During 2021, Pedro sold his narra furniture set which he purchased in
. 2018 at a cost of P30,000. The terms of the sale are as follows: ·
June 1, 2021 down payment P10,000
August 1, 2021 i'nstallment due 10,000
.October 1, 2021 installment due 20,000
October 1-, 2022 installment due 40,000
October 1, 2023 installment d.ue 40,000

For the year 2021, Pedro should report a gross income of:
a. P15,000 - c. P45,000
b. P30,000 d. P90,000

12. Assume Pedro is a furniture dealer, how much will he report as gross
income in 2021? . . -
a. P15,000 . c. P45,000
b. P30,000 d. P90,000

520