Income taxation by amponganchapter 8 to 15

Page 59

EXERCISES 8 – 1
1
.

2
.

a
.

The partnership formed is a general professional partnership because
the objective of the partners is to exercise a common profession.

b
.

No, a general professional partnership is not subject to income tax.

c
.

Yes. Although not subject to income tax a general professional
partnership is required to file an income tax return for the purpose of
furnishing information to the BIR the amount that each partner will
receive from the net income of the partnership.

d
.

The partners are required to file an income tax return; they are taxable
on their respective share in the net income of the partnership.

a
.

They formed a business partnership because the partners have
contributed money and industry for the purpose of dividing the profit
among themselves.

b
.

A business partnership is considered as a corporation subject to
corporate tax. Thus, the partnership is subject to an income tax of
P262,500, computed by multiplying the net income of P750,000 by the
tax rate of 35%.

c
.

The share of the partners in the partnership are subject to a final tax of
10%.

3
.

4
.

5
.

The assessments were justified. It is clear that they formed a general
co-partnership when their respective share in the extrajudicially
partitioned property was entrusted to their mother for administration
and the income therefrom having been distributed to them
proportionately.
a
.

Xavier’s ordinary gain on the sale of the machine is P5,000 (55,000–
50,000).

b
.

If the partnership sells the machine for P65,000, it has to recognize a
gain of P10,000 (P65,000 – 55,000).

Rita should report P35,000 in her income tax return representing her salary
for five (5) months (January to May) when she was still an employee of the
partnership.
Her share in the net income of P65,000 as partner in the partnership is
not returnable because it is subject to final tax of 10%.


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6

.

7
.

a
.

No, because a co-ownership is exempt from income tax.

b
.

The sale of the coconut land is not taxable to the co-ownership because
it is exempt from tax. However, the respective share in the P50,000
shall be taxable to the co-owners considering that they are taxable on
their share in the income of the co-ownership.

c
.

Yes. By subdividing the lot, introducing developments and entering into
series of transactions, the co-ownership has been converted into a
partnership, subject to corporate income tax.
If the partnership availed of itemized deductions, Jehan and Lina shall
only be entitled to avail of itemized deduction in computing its taxable
income based on the share in the net income of the general professional
partnership. However, if the partnership availed of optional standard
deduction, the partner shall neither be allowed to claim optional nor
itemized deduction.

EXERCISE 8 – 2
1.

ANSWER:

D

2. ANSWER:

D

3.

ANSWER:

C

4.

ANSWER:

C

Yvonne (250,000 x 50%)
125,000
Maryfrance (250,000 x 50%) 125,000
Total
250,000
Applying the principle of constructive receipt, the share of Yvonne and

Maryfrance in the net income of the partnership is taxable to them,
whether distributed or otherwise.
5.

ANSWER: C
The principle of constructive receipt applies whether only a portion or
no part of the share in the income has been received by them.

EXERCISES 8–
3
1.

ANSWER: B


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General professional partnerships are not subject to
tax.
2.

ANSWER: B
Share in partnership income:
Partnership gross income
Less: Expenses
Net income
Partnership interest
Add: Income from other business
Gross income
Less: Expenses

P
450,000
125,000
325,000
40%
160,000
65,000

Total income
Less: Personal exemptions
Basic personal
Additional exemption (25,000 x 2)

50,000
50,000

Taxable income

130,0
00
95,0
00
225,0
00
100,0
00
125,0
00

Tax on P 70,000
P 8,500
55,000 x 20%
11,000
Income tax due
19,500
Less: Withholding tax (P40,000 x
4,000
10%)
Income tax payable
3.

15,500

ANSWER: D
Partnership net income

325,0
00
60
%
195,0
00
50,0
00
145,0
00

Partnership interest
Share in partnership income

Less: Personal exemption
Taxable income
Tax on P140,000
5,000 x 25%

P
22,500
1,250


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Income tax due
Less: Withholding tax (P60,000

23,750
6,000

Income tax payable

17,750

x 10%)
4.

ANSWER: B
Final tax on dividend (8,500
x 10%)

850

5.

ANSWER: A
Final tax on interest (3,000 x 600
20%)

6.

ANSWER: B
Business partnerships are taxable as
corporations.

PROBLEM 8–3.2:
1.

ANSWER:

D

2.

ANSWER: A
General professional partnerships, whether registered or not,
are exempt from income tax.

EXERCISE 8 – 4

PROBLEM 8–
4.1

1. ANSWER: D
Sales

1,000,0
00

Less: Cost of sales
Inventory, January 1
Add: Purchases
Goods available for sale
Less: Inventory, December 31
Gross profit
Less: Selling and administrative expenses

120,0
00
450,000
570,000
60,000

510,00
0
490,00
0
210,00
0


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Net income

280,00
0
50,00
0
330,00
0
30%
115,50
0

Add: Dividend from resident foreign
corporation
Taxable income
Rate of tax
Income tax due
2.

ANSWER: C
Taxable income

330,0
00
99,00
0
231,00
0

Less: Income tax

Net income after tax
Add: Interest on bank deposit (P5,000 x
80%)
Dividend from domestic corporation
Total income
Partnership interest
Share in partnership net income
Rate of tax
Final tax
3.

4,0
00
25,000

29,000
260,00
0
50%
130,00
0
10%
13,000

ANSWER: A
Partners' share in partnership income are subject to final tax
at a rate of 10%.

PROBLEM 8–4.2
1.

ANSWER: D
Gross income
Less: Expenses
Net income
Rate of tax
Income tax due

2.

ANSWER: C

750,0
00
200,000
550,00
0
30%
165,000


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Net income
Less: Income tax
Net income after tax
Add: Dividend from domestic corporation
Interest on bank deposit [10,000 –
(10,000 x 20%)]
Total income

550,000
165,000
385,000
75,000
8,000
468,000

Share of Max (468,000 x 55%) x 10%
Share of Jess (468,000 x 45%) x 10%

25,740
21,060

PROBLEM 8–4.3:
1.

ANSWER: C
Net income, sole proprietorship

P
370,000
50,000
320,000

Less: Personal exemption
Taxable income
Tax on P 250,000
70,000 x

P
50,000
21,000

30%
Income tax due
2.

71,000

ANSWER: D
Net income, sole proprietorship

P
120,000
50,000
70,000

Less: Personal exemption
Taxable income
Tax on P 70,000
3.

P
8,500

ANSWER: B
Dividend, gross of tax (20,000/90%)

P

22,222
10%
2,222

Rate of tax
Final tax on dividend
4.

ANSWER: C
Net income after tax
Add: NOLCO
Total
Partnership interest

500,000
230,000
730,000
40%


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Share in the partnership income
Dividend tax rate
Dividend tax
5.

292,000
10%
29.200

ANSWER: C
The income tax rate on corporations and partnerships shall
be 30% effective January 1, 2009.

PROBLEM 8-4.4:
1.

ANSWER: A
Gross compensation income

P
170,000
50,000
120,000

Less: Personal exemption (head of family)
Taxable income
Tax on P 70,000
50,000 x

P
8,500
12,500

25%
Income tax due
2.

21,000

ANSWER: A
Net income of carenderia (325,000 –
265,000)
Less: Personal exemption
Taxable income
Tax on P 10,000

3.

P
60,000
50,000
10,000
500

ANSWER: C
Gross compensation income
Less: Personal exemption (single)
Taxable income
Tax on P 70,000
50,000 x

170,000
50,000
120,000
P 8,500
12,500

25%

Income tax
4.

ANSWER: D
Net income from carenderia
Share in partnership income (70,000 x
180/400)
Total income
Less: Personal exemption

21,000
95,500
31,500
127,000
50,000


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Net income

77,000
Tax on P70,000
7,000 x

8,500
1,400

Income tax

9,900

20%
PROBLEM 84.5
1. ANSWER:

A

The share of the partners in the gross income of an exempt
partnership is considered as an ordinary income and not subject to
final tax.
2.

ANSWER:

C

The partnership formed for the purpose of selling kinalas to the
public is a taxable partnership; tt is subject to corporate tax.
Gain on sale of a manufacturing equipment is a business
(ordinary) gain which is subject to ordinary income tax.
3.

ANSWER:

A

An unregistered partnership falls under the phrase
“partnership no matter how created or organized.” Hence, it is
considered as a corporation subject to corporate tax.

EXERCISE 8 – 5
1. ANSWER: C
None, the mere sharing of gross returns does not in itself
establish a partnership. To be considered as a partnership, there
must be an unmistakable intention between them to form a
partnership.
When they decided to invest the income of the land by
purchasing an apartment house, they have formed a partnership on
that income because they have contributed money to a common
fund for the purpose of dividing the profit between themselves.
Moreover, there is an unmistakable intention between them to form
a partnership.
2.

ANSWER:

A


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See the discussion in No. 1.
3.

ANSWER:

C

No gain shall be reported in the tax returns because the sale of
the land is subject to a final tax of 6% of the selling price, market

value, or zonal value, whichever is the highest price among them.
However, if what is being sold are subdivision lots the gain on
sale are includible in the income tax return because these are cases
of sale of ordinary assets.
4.

ANSWER:

A

The apartment building is a co-ownership. Therefore, their
shares in the net income are to be reported in their respective
income tax returns.
If they decide to sell the apartment, it shall not be subject to
final tax because it is an ordinary asset. The gain on sale shall not
even be taxable to the co-ownership. However, the share of the
respective co-owners shall be subject to tax.
5.

ANSWER:

D

To be considered as having formed a business partnership,
Sabado and Domingo must have entered into series of transactions.
A law firm is classified as a general professional partnership.
Therefore, it is not subject to income tax.
EXERCISES 9-1
1.

a. The income of P250,000 is taxable to Joni because it was earned prior
to his death. Only income earned after death are taxable to the
estate.
b. The estate is subject to income tax because it is under judicial
settlement.
c.

2.

The P175,000 is taxable to the estate because it is under judicial
settlement. If the estate is not under judicial settlement, it will not
be subject to income tax because it shall be treated as a coownership. A co-ownership is not subject to income tax.
Assuming that the trust created is a revocable trust, both the trustor
and the beneficiary are subject to tax. Thus, Villa and Devy are


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subject to tax on the income of the trust.
However, if what is created is an irrevocable trust only the
beneficiary is liable because the annual income of P300,000 goes
entirely to the trust.
3.

Mrs. Bisana will rule in favor of Erika.

Sec. 62 of NIRC states as

follows:
“SEC 62. Exemption Allowed to Estates and Trusts. – For the

purpose of the tax provided for in this Title, there shall be allowed an
exemption to Twenty thousand Pesos (20,000) from the income of the
estate or trust.”
This section is not covered by the amendment caused by RA
9504 because said law is explicit that only Sections 22, 24, 34, 35, 51
and 79 of RA 8424 are affected by the amendatory law.
Following the latin maxim “inclusio unios est exclusion alterius,”
(what the law does not include, it excludes) it is crystal clear that the
personal exemption of P20,000 on estates and trusts is hereby
retained. It does not therefore follow the increase in the personal
exemption of individual taxpayers.
EXERCISES 9-2
1.

ANSWER: C

2. ANSWER: C
3.

ANSWER: A

4.

ANSWER: B

5.

ANSWER: B
Gross income
Less: Expenses

Amount distributed to beneficiaries
(100,000 x 2)
Net income
Less: Exemptions
Taxable income
Tax on P30,000

P
400,000
150,000
200,000

350,000
50,000
20,000
30,000

P
2,500


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6.

ANSWER: D
Net income, Caipas

P
120,000

200,000
320,000
20,000
300,000

Net income, Judas
Consolidated net income
Less: Exemption
Consolidated taxable income
7.

ANSWER: A
Tax on P 250,000

P
50,000
15,000
65,000

50,000 x 30%
Income tax payable by Trustee Caipas
(120/320 x 65,000)
8.

ANSWER: B
Income tax payable by Trustee Judas
(200/320 x 65,000)

9.

P
24,375

P
40,625

ANSWER: B
Net income, Trust A (500,000 - 300,000)

P
200,000
200,000
400,000
20,000
380,000

Net income, Trust B (400,000 - 200,000)
Total
Less: Personal exemption
Taxable income
Tax on P250,000
130,000 x 30%
Income tax due
10.

P
50,000
39,000
89,000

ANSWER: D
Amount distributed to beneficiary (150,000
+ 100,000)
Less: Optional deduction (250,000 x 10%)
Net income
Less: Personal exemption
Taxable income
Tax on P140,000
65,000 x 25%

P
250,000
25,000
225,000
20,000
205,000
P
22,500
16,250


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Income tax due

38,750

EXERCISES 10 – 1
1.
No. A nonresident foreign corporation is taxable only on income

within. The income from services by Foranger Corporation is
considered as an income without because it is being performed
outside the Philippines.
Considering that the payment to Foranger Corporation is not
taxable, the fees being paid to it abroad cannot be subject to
withholding tax in the Philippines.
2.

An off-line international air carrier is not considered as doing
business in the Philippines and is thus exempt from income from
sources outside the Philippines (Rev. Reg. 15-2002).

EXERCISES 10
–2
1.
2.
3.
4.
5.

A
B
B
A
A

6.
7.
8.
9.

10.

B
E
A
A
A

11.
12.
13.
14.
15.

B
A
B
D
C

16.
17.
18.
19.
20.

B
E
E
D

C

EXERCISES 10 –
3
1.

ANSWER: A
Resident citizen individuals, including domestic corporations are
taxable on income within and without the Philippines, while
nonresident citizens, resident aliens, nonresident aliens and foreign
corporations are taxable on income within only.

2.

ANSWER: B
The sale of a real property which is classified as a capital asset is
subject to 6% final tax. Hence, the gain on sale is not included in the
gross income.
The tax situs of interest on indebtedness is the residence of the
debtor, while the situs of income from services is the place where the
services were performed.
Considering that the taxpayer is a


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nonresident alien, these incomes are not subject to tax and therefore
not included in the gross income.
The situs of rent income is the location of property. Considering
that the real property is located in Manila, the income is classified as

an income within and included in the gross income of a NRA ETB.
3.

ANSWER: D
Generally, dividends received from foreign corporations are
considered as income derived from sources without the Philippines.
Gain on sale of personal property is an income without if the
property is sold in the Philippines, while gain on sale of real property
located abroad is an income without because its tax situs is the
location of property.
Income on copyright being used in the Philippines is an income
within because the tax situs is the place where the intangible is used.

4.

ANSWER: D
Gross income, Phils.
Less: Expenses, Phils.
Gross income, U.S. ($30,000 x 40)
Less: Expenses, U.S ($10,000 x 40)
Total
Less: Unallocated expense
Taxable income
Rate of tax (2009)
Income tax

5.

P2,000,
000

1,200,0
00
1,200,0
00
400,00
0

800,000

800,0
00
1,600,0
00
30,00
0
1,570,0
00
30
%
471,0
00

ANSWER: C
Gross income, Phils.
Less: Expenses, Phils.

P
2,000,00
0
1,200,0

00


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Net income
Less: Allocated deductions [30,000 x
(2,000,000/2,000,000 +1,200,000)]
Taxable income
Rate of tax
Income tax
6.

800,000
18,7
50
781,250
30%
234,375

ANSWER: C
Gross income, Phils.

2,000,00
0
30%
600,00
0

Rate of tax

Final tax
7.

ANSWER: B
Gross income, Phils.
Less: Expenses, Phils
Gross income, U.S. ($30,000 x P40)
Less: Expenses, U.S. (10,000 x P40)

P2,000,0
00
1,200,00
0
1,200,00
0
400,00
0

Total
Less: Other deductions
Unallocated business expense
Personal exemption

30,000
50,000

Taxable income
8.

800,000

800,00
0
1,600,00
0
80,00
0
1,520,00
0

ANSWER: C
Gross income, Phils.
Less: Expenses, Phils.
Allocated deductions [30,000 x
(2,000,000/3,200,000]
Taxable income before personal
exemptions
Less: Personal exemption
Basic personal exemption
Additional exemption (25,000 x 2)

2,000,00
0
1,200,00
0
18,75
0

50,000
50,00

0

1,218,75
0
781,250

100,00
0


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Taxable income
9.

ANSWER: D
Taxable income before personal
exemptions
Less: Personal exemption
Taxable income

10.

Rate of tax
Income tax due (final tax)

781,250
50,000
731,250

2,000,00
0
25%
500,00
0

ANSWER: B
Income within (150,000 + 250,000 +
600,000)
Income without (200,000 + 300,000 +
100,000)
Total income from 2005 to 2007
Dividends received
Less: Income within (1,000,000/1,600,000) x P
35,000
Income without

13.

50,000
731,250

ANSWER: B
Gross income

12.

781,250

ANSWER: A

Taxable income before personal
exemptions
Less: Personal exemption
Taxable income

11.

681,25
0

1,000,00
0
600,00
0
1,600,00
0
35,00
0
21,875
13,125

ANSWER: C
Income from sources within
Income from sources without
Total income

P
700,000
1,300,00
0

2,000,00
0


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Percentage of income within =
(700,000/2,000,000)

35%

Note: Since the income derived from sources within during the last three
years prior to the declaration of dividend is less than 50% of the
total gross income, the entire amount of dividend received by
Maryfrance is considered as income without.
14.

ANSWER: A
Income within
Income without
Total income
Percentage of income within
(1,800,000/2,000,000)
Dividends received
Less: Income within
Income without

P
1,800,00
0

200,00
0
2,000,00
0
90%
35,00
0
35,000
0 .

Note: Since the income derived from sources within during the last three
years prior to declaration of dividend is more than 85% of the total
gross income, the total amount of dividend is considered as income
within.
15.

ANSWER: A
Depreciation of apartment house, General
Santos City
Expenses on sale of lot, Philippines
Expenses on sale of land, Canada
Total
Add: Allocated expense (2,000,000/3,000,000 x
30,000)
Deductible expense

PROBLEM 10 –
4
1 ANSWER:

B

75,00
0
25,000
15,000
115,000
20,000
135,000


Page 75

.
Fastfood chain, Philippines
Royalties, Baguio City
Dividend, Kainan Corporation, domestic
Dividend, Tsi Tsa Corporation, foreign (6/10 x 40,000)
Rent income, Baguio City
Income within
2 ANSWER: D
.
Fastfood chain, Singapore
Royalties, Hongkong
Dividend, Tsi Tsa Corporation, foreign (4/10 x 40,000)
Income without
3 ANSWER: A
.
Income within
Income without

350,000
500,000
50,000
36,000

Taxable income

4 ANSWER: B
.
Income within
Less: Deductions
Expenses, fastfood chain,
Philippines
Allocated expenses (5/15 x
50,000)

1,000,0
00
100,000
16,00
0
1,116,0
00

659,000
1,116,0
00
1,775,0
00

Total
Less: Deductions
Expenses, fastfood chain,
Philippines
Expenses, fastfood chain,
Singapore
Unallocated expenses
Depreciation of building

500,000
50,000
25,000
24,000
60,000
659,000

936,00
0
839,00
0

659,00
0
350,000
16,667


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Depreciation of building

36,000

Taxable income

402,66
7
256,33
3

EXERCISES 11 –
1
1.

The refrigerator owned by Gerong is a capital asset because it is a
personal property which is not being used in business operation. The
refrigerators owned by Andong are business assets because they form
part of the inventory of the business at the end of the taxable year or are
held for sale in the ordinary course of business.

2. The basis of the car is the acquisition cost of P120,000 plus the incidental
expenses such as P20,000 for body repair and another P20,000 for
repainting. Hence, the total cost of the car is P160,000.
3.

a. The basis of the truck in determining depreciation is the fair value at
the time of the transfer which is P120,000. The P150,000 cannot be
used as the basis because that is the cost when the property was
being used for personal activities.

b. The realized loss in the problem is P20,000 computed as
follows:
Selling price

P
80,000

Less: Book value
Fair value

P
120,00
0
20,000

Depreciation
Loss on sale

100,00
0
( 20,000
)

4.

The gain derived by Enciang from the sale of the lots is classified as an
ordinary gain because by subdividing the land with the intention of
selling them to the public, she has characterized the land into business
asset.

5.

The first day that an asset purchased on January 21, 2008 and have a
holding period of more than one year is January 22, 2009, computed as
follows:
Year

Month

Day


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2008
1
2009

1
__
1

21
1
22

6.

To allow the deduction of capital losses from ordinary income would result
to reduction of taxable income of the taxpayer through personal, nonbusiness related expenses which will result in substantial losses of revenue

to the government.

7.

The capital loss deductible from the capital gain during the current year is
P15,000. The net capital loss of P10,000 cannot be deducted from the net
other income because of the rule that capital losses are deductible only
from capital gain.
Long-term capital gain (10,000 x 50%)
Short-term capital loss, limit
Net capital gain/loss
Payable – net capital loss carry-over
(5,000-15,000)

P 5,000
( 5,0
00)
(10,0
00)

Next year, the maximum amount of capital loss that can be carried
over is P8,000 only instead of P10,000 because of the limitation that capital
losses to be carried over should not exceed the amount of net income
during the year in which the loss was sustained.
This is based on the assumption that the capital gain in the succeeding
year will be at least equal to P8,000.
8.

9.

Asset

Sales
Price
52,000
17,000
37,400
O T A L S

Basis

A
B
C
T

40,000
20,000
30,000

Short-Term
Cap.
Gain/Loss

Long-term
Cap. Gain/Loss
6,000

( 3,000)
( 3,000)

3,700
9,700

Net
Capital
Gain/Loss
6,000
( 3,000)
3,700
6,700

Mike should consider whether the property is a capital or business asset.
If it is included in the enumeration of the definition of capital asset, then
it is a business asset and therefore the gain or loss on sale shall be
added to or deducted from the gross income of Mike, as the case maybe.
However, if it is a capital asset Mike has to consider the holding
period and determine whether or not there was a capital gain or loss on
the sale of the car. The sale took place seven months after inheriting the
property. Therefore, the holding period is short-term. Moreover, a


Page 78

capital gain took place on the sale of the property. Mike should,
therefore, consider whether there was a capital gain in the year of sale
because he cannot claim the capital loss as deduction from the ordinary
income.
1
0.

(a)
Business income
LTCG (20,000 x 50%)
STCG ( 20,000 x 100%)
Total
Less: Personal
exemption
Taxable income

1
1.

a
.

b
.

(b)

90,000 90,000
10,000
_____ 20,000
100,000 110,00
0
25,000 25,000
75,000

85,000

Unadjusted taxable income

40,000

LTCG (14,000 x 50%)
Total
Less: LTCG erroneously treated as ordinary
gain
Adjusted taxable income

7,000
47,000
(14,000
)
33,000

Unadjusted taxable income

40,000

Add: LTCG (14,000 x 50%)
Correct taxable income
Note:

7,000
47,000

The capital gain which was erroneously considered as capital loss
has not been claimed as deduction due to an absence of a capital

gain.
Therefore, such capital loss cannot be added back for
purposes of computing the correct amount of taxable income.

1
2.

c
.

The carry-over from the preceding year shall apply in Cases A and B
because Marsha has P7,000 capital gain declared during the year. It
should be noted that capital losses can be carried over only if there
are capital gains. Thus, their taxable income shall be reduced by
P2,500 representing the net capital loss carry over (NCLCO).

a
.

Selling price ( 20,000 x 15)

300,000

Rate of tax
Capital gains tax (final tax)
Same with answer in (a).

6%
18,000

b
.


Page 79

c
.

1
3.

If the land is sold in favor of the government, the seller has the
option to (1) report income based on the 6% final tax rule, or (2) to
consider the gain or loss on sale as ordinary income subject to
graduated rates of tax.

Sylvia should consider whether the sale of the residence is a sale of a
capital asset or not. She should also determine whether the excess of
the selling price over the cost of the construction is subject to tax or
not.
Moreover, she must also verify if the sale is subject to the 6% final
tax or not.
Lastly, she should find out if the purchase of a new residential house
will subject her to a payment of income tax.

1
4.

a

.

The sale of the principal residence by Galog to Oyang is not subject
to income tax because the proceeds of the sale were to be used in
acquiring a new residence. However, he shall deposit in escrow an
amount of P90,000 which is equivalent to 6% of the zonal value.

b
.

The unutilized portion of the proceeds from the sale of the residence
is subject to tax which is computed as follows:
Fair market value
X
Unutilized
portion
800,000/1,000,000)
Taxable portion
Rate of tax
Final tax

c
.
1
5.

(1,000,000

–

1,500,00
0
20%
300,000
6%
18,00
0

The unutilized portion of the old residence shall not be carried over
to the cost of the new residence. Hence, the new residence will cost
P800,000.

Case
1
2

Net
Income
110,000
100,000

3

80,000

4

90,000

STCG

(STCL)

LTCLG
(LTCL)

30,000
( 50,00
0)
( 37,00
0)
( 15,00

44,000
65,000

Deductible/
Nondeducti
ble
(50,000)

Taxable
income

30,000

(30,000)

80,000

( 9,000)

-

90,000

184,000
115,000


Page 80

0)
Note: If the taxpayer is a corporation, there is no holding
period.
1
6.

2007
Net income
Interest
Capital gain – 9 months
Capital gain – 15 months (no holding
period)
Capital loss – 9 months, limit

1,000
500
5,000
(5,00

2008
2,000
200
5,000
____

0)
Taxable income
1
7.

.

1
9.

a
.
b
.
c
.
d

Ordinary
Ordinary
Ordinary
Ordinary

1,500

1
8.

Before
a
.
b
.
c
.
d
.
e
.
f.
g
.
h
.
i.
j.

7,200

After

Ordinary Ordinary
Ordinary Ordinary
Capital

Capital

Ordinary Ordinary
Ordinary Ordinary
Ordinary Ordinary
Ordinary Capital
Ordinary

Capital

Ordinary Capital
Ordinary Ordinary

The income of P150,000 (1,750,000 – 1,600,000) on sales of shares of
stock which are traded in the stock exchange is exempt from income
tax but subject to a percentage tax on business at a rate of ½ of 1% of
the gross selling price. However, the net capital gain of P400,000 on
the sale of stocks, which are not traded in the stock exchange are
subject to final withholding tax. The following is the computation of its
tax liability:
Tax on P 100,000 x 5%

5,000


Page 81

300,000 x 10%
Final tax

30,000
35,000

EXERCISE 11
–2
1.

ANSWER: B
If the real property is used in the trade or business, it is classified as an
ordinary asset.

2.

ANSWER: D
Accounts receivables are not included in the enumeration for
ordinary assets. Therefore, it is classified as a capital asset.

3.
4.

ANSWER: D
ANSWER: C
Lots for rent fall under “real property used in the trade or business.”
Therefore, it is classified as an ordinary asset.

EXERCISES 11 – 3.1
1.

ANSWER: C
Ordinary gains are those gains derived from the sale or exchange or

ordinary assets.

2.

ANSWER: A
Whenever, the holding period of a capital asset by an individual
exceeds 12 months, it shall be considered as long-term and a gain or loss
to be realized on the sale or exchange of the capital asset is 50% only.

3.

ANSWER: A
If the taxpayer is a corporation, the rule on holding period will not
apply. Hence, the actual amount of gain or loss on the sale shall be
recognized.

4.

ANSWER: C
Worthless shares of stock are classified as capital gain or capital loss
as the case maybe, even if no actual sale of capital assets took place.

5.

ANSWER: C
Income on installment sales are payable within 30 days (not 60 days)
from receipt of every collection from the customer/debtor.
Initial payment includes all the payments received by the taxpayer

Page 82

from the buyer in the year of sale, while downpayment pertains only to
the payments received by the taxpayer from the buyer/customer at the
time of sale.
Installment payment of tax shall be allowed if the initial payment
does not exceed 25% of the selling price.
6.

ANSWER: B
The rule on carry-over of the net capital loss to the succeeding year
does not apply to a corporation.

7.

ANSWER: D
Selling price

P
36,000

Less: Book value
Cost
Less: Accumulated depreciation
2008
P 2,000
2009
4,000
Gain on sale
8.

P
40,000

6,000

2,000

ANSWER: C
Liquidating dividend, 2010
Less: Investment, 2008
Share in 2009 income
Gain
Rate (long-term)
Taxable gain

34,000

P
180,00
0
P100,0
00
50,0
00

150,00
0
30,000
50%

15,000

9.

ANSWER: D
Co-ownerships are not taxable on gains or income derived from its
operations or transactions entered into. Thus, the gain on sale of the
vacant lot is not taxable. However, the co-owners are liable on the
income derived by them from the co-ownership.

10
.

ANSWER:

B

Loss on short sales, option loss, and loss on liquidation of
partnership are considered as capital losses. They are deductible only


Page 83

from capital gains because of the basic rule that capital losses are
deductible only from capital gains.
Loss on wash sales are not deductible whether from capital gains
or ordinary gains.
11
.

ANSWER: C
Selling price
Less: Commission (P180,000 x 1%)
Balance
Less: Cost
Purchase price
Commission

P
180,000
1,800
178,200
P250,0
00
5,00
0

Loss

255,000
( 76,800
)
50%
( 38,400
)

Rate (long term)
Long-term capital loss
EXERCISES 113.2
1. ANSWER: C

Net profit from operations
Sale of capital assets:
Capital gain
Capital loss
Income to be reported
2.

P
50,000
P

8,000
( 5,000)

3,00
0
53,000

ANSWER: D
A sale of real property which is classified as a capital asset is
subject to 6% capital gains tax based on the selling price or fair
market value, whichever is higher, regardless of whether the sale
resulted to a gain or a loss.

EXERCISES 11–4.1:
1
.

ANSWER: C
Gains on sale or exchange of shares of stock which are not listed and

traded in the stock exchange are subject to final income tax based on the