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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

CAPITAL ASSETS Dela Cruz / De Vera/ Llamado

1. Determine whether ordinary asset or capital asset.

a. Inventories of raw materials, work in process and finished goods
b. Office equipment Answer:
c. Land used in business
d. Land for sale by a real estate dealer (a) to (d) – Ordinary
e. Accounts receivable
f. Securities held as investment (e) to (j) – Capital
g. Land held for investment purposes
h. Residential house (k) – Part Ordinary/PartCapital
i. Business of sole proprietorship sold to a corporation
j. Interest of a partner in a partnership
k. Car used partly for business and partly for personal purposes.

2. This is a capital asset

a. A residential land previously foreclosed by PNB and is now being offered for sale to the public
b. A commercial building foreclosed by a lending institution
c. A 10-door apartment unit owned by a retired government employee
d. A residential land owned by a practicing CPA

3. An individual taxpayer owns a ten (10)–door apartment with a monthly rental of P10,000 each
residential unit. He sold this property to another individual taxpayer. Which is not correct?
a. The seller is not liable to pay the capital gains tax.
b. The property sold is a capital asset.
c. The taxpayer is engaged in business.
d. The rental income is subject to income tax in the taxpayer’s ITR.

4. Basic rule sale of capital assets, except

a. Sale of real property located in the Philippines by a foreign corporation is subject to 6% CGT
based on the selling price or FMV, whichever is higher
b. Sale of shares of stock of a domestic corporation through the local stock exchange or initial public
offering is exempt from income tax.
c. Sale, by individual taxpayers and domestic corporations, of shares of stock of a domestic corporation
not through the local stock exchange is subject to a final tax of 15%.
d. Sale of personal property located in the Philippines by a resident citizen is subject to the rules on
holding period.

5. A. Capital losses are deductible from ordinary gains but net capital loss is not deductible from
ordinary gains.
B. Ordinary losses are deductible only to the extent of the capital gains but the net capital loss is not
deductible from ordinary gain.
a. True, true
b. True, false
c. False, true
d. False, false

6. A is a 40% partner in ABC, a general professional partnership. The partnership was organized in 2010
with A contributing P 200,000. The partnership had the following net income:

2017 – P 120,000 distributed to and received by the partners.

2018 – P 70,000 not yet distributed to the partners.

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In 2018, the partnership was dissolved and A received the sum of P 250,000 upon liquidation.

Determine the taxable gain or deductible loss of A. Answer: Gain of ₱11,000

Amount received 250,000

Less: Cost of investment 200,000
Share in undistributed
net income (₱70,000 x 40%) 28,000 (228,000)
Gain to partner A 22,000
Gain to be recognized (1/2) 11,000

7. B had an original investment in a general professional partnership of P200,000 in 2017. His share in the
net income of the partnership for 2017 which was credited to his capital account was ₱30,000. 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 in the partnership net income of 2017 and
2018. B retired at the end of 2018 and received P300,000. Determine his capital gain or loss. Answer:
B will recognize ₱15,000 gain.

Amount received 300,000

Less: Cost of investment 200,000
Share in undistributed
net income 70,000 (270,000)
Gain to partner A 30,000
Gain to be recognized (1/2) 15,000

8. Where the taxpayer is a corporation, which of the following statements is true?

a. The holding period does not apply to corporations, hence, capital gains and losses are recognized at
50%.
b. The net capital loss can be carried over in the next succeeding year.
c. Capital loss is deductible only up to the extent of ordinary gains.
d. Ordinary loss is deductible from capital gains.

9. The term “capital assets” include

a. Stock in trade or other property included in the taxpayer’s inventory.
b. Real property not used in the trade or business of taxpayer.
c. Property primarily for sale to customers in the ordinary course of his trade or business.
d. Property used in the trade or business of the taxpayer and subject to depreciation.

10. Where the taxpayer is a corporation, the following rules as to recognition of capital gains or losses from
the disposition of personal property classified as capital asset shall apply. Which is the exception?
a. The holding period does not apply to corporations, hence capital gains and losses are recognized at
100%.
b. Capital losses are deductible only to the extent of capital gains
c. Ordinary losses are deductible from net capital gains but net capital loss cannot be deducted from
ordinary gains.
d. Net capital loss carry-over should not exceed the net income in the year the loss was incurred.

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11. The following rules as to recognition of capital gains or losses from the disposition of personal property
classified as capital asset apply where the taxpayer is an individual. Which is the exception?
a. Depending on the holding period, the percentages of gain or loss is 100% if the capital asset has
been held for 12 months or less; and 50% if the capital asset has been held for more than 12 months.
b. Capital losses are deductible only to the extent of the capital gains; hence, the net capital loss is not
deductible.
c. Ordinary losses are not deductible from net capital gains, and net capital loss cannot be deducted
from ordinary gains.
d. Net capital loss carry over in a taxable year should not exceed the capital gain in the year the
loss was incurred.

12. In 2018, A inherited pieces of jewelry from her father with a FMV of ₱500,000. Her father acquired
the property in 1985 for ₱200,000. If A sells these pieces of jewelry in 2022 for ₱550,000, A’s gross
profit is
a. P350,000 Selling price 550,000
b. P25,000 Less: Step up in Basis (500,000)
c. P550,000
d. P50,000 Profit/Gain 50,000
Gain to be recognized (½) 25,000

13. Using the preceding number, except that A acquired the property as a birthday gift from her father, A’s
gross profit is
a. P175,000
Selling price 550,000
b. P50,000
c. P550,000 Less: Basis (200,000)
d. P350,000 Profit/Gain 350,000
Gain to be recognized (½) 175,000

14. Allan, resident citizen, earning his living as a businessman had the following data for the years 2018
to 2020.
2018 2019 2020
Ordinary Taxable Income P 200,000 P 250,000 P 300,000

Gain from sale of the following capital

assets:

Domestic shares held for 12 months 20,000 2,000 100,000

Foreign shares held for 13 months 8,000 10,000 20,000
Exotic cars held for 12 months 30,000 80,000 200,000

Loss from sale of the following capital

assets:

Luna paintings held for 19 months 22,000 20,000 60,000

Toy collection held for 7 months 30,000 70,000 50,000
Parcels of land held for 15 months 240,000 250,000 340,000

Required: Compute for the net taxable income of the taxpayer in the ITR for the years, 2018 to
2020, under the graduated rates:

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Answer: 2018: ₱200,000 2020: ₱430,000

2019: ₱250,000

2018 2019 2020

Net income from

operations 200,000 250,000 300,000
Add: Non-operating
income:
Capital gains 34,000 85,000 210,000
Capital losses (41,000) (80,000) (80,000)
NCLCO 0 (5,000) 0 130,000
Net taxable income 200,000 250,000 430,000

NCLCO 7,000

15. The records of C, citizen, married, with 2 dependent children show the following for 2019:
Sales ₱1,000,000
COGS 580,000
Business expense 240,000
Rental income, net of 5% W/T 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 200,000
Cost (2005) 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.) Non-traded in the stock exchange: Selling price 300,000
Cost (2004) 180,000

Determine the taxable income of C. Answer: ₱500,000

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Sales, net of returns 1,000,000

Sale of delivery equipment 200,000
Sale of land (ordinary asset) 200,000
Sale of warehouse 10,000,000
Rental revenues 100,000 11,500,000
COGS 580,000
Adj. basis of delivery equipment 240,000
Adj. basis of land 180,000
Adj. basis of warehouse 9,800,000 (10,800,000)
Total G. Income from Ops. 700,000
Less: Itemized deductions (240,000)
Net income from operations 460,000
Add: Non-operating income
Capital gains 35,000
Capital losses (15,000) 20,000
Div. from for. corp. 20,000 40,000
Net taxable income 500,000

16. C, not a dealer in securities, had the following transactions in GHI Corporation’s common stock (not
traded in the stock exchange):
Oct. 10, 2019 Purchased 10,000 shares @ 50 P 500,000
Oct. 20, 2019 Purchased 4,000 shares @ 50 200,000
Nov. 10, 2019 Purchased 3,000 shares @ 48 144,000
Nov. 14, 2019 Sold the10,000 shares purchased on 10/10/19 @ 45 450,000

Determine the loss sustained by C on November 14, 2019, and state whether it is deductible or not.

Answer: ₱50,000 loss; ₱35,000 of the loss is not deductible against capital gain
₱15,000 of the loss is deductible against capital gain

No. of
shares Loss
Wash sale loss on Nov. 14 10,000 (50,000)

Purchased on Oct. 20 4,000

Purchased on Nov. 10 3,000
Purchased within 61-day period 7,000

7,000
Non-deductible loss = x 50,000 = 35,000
10,000

Deductible loss = 50,000 less 35,000 = 15,000

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17. D had the following transactions in JKL Corporation shares (held as capital assets) for the year 2019:
Oct. 10, 2019 Purchased 10,000 shares @ P100 P 1,000,000
Oct. 28, 2019 Purchased 5,000 shares @ P98 490,000
Nov. 24, 2019 Sold the 10,000 shares purchased on 10/10/19 @ P92 920,000
Dec. 10, 2019 Purchased 3,000 shares @ P90 270,000

a. Determine the loss sustained by D on November 24, and indicate whether it is deductible or
not.
Answer: Loss: ₱80,000; Deductible loss: ₱16,000
Non-deductible: ₱64,000

b. If the shares acquired on October 28, 2019 are sold today at P100 per share, determine D’s
gain or loss
Answer: Loss: ₱30,000

No. of
shares Loss
Wash sale loss on Nov. 24 10,000 (80,000)
Purchased on Oct. 28 5,000
Purchased on Dec. 10 3,000

8,000
Non-deductible loss = x 80,000 = 64,000
10,000

Deductible loss = 80,000 less 64,000 = 16,000

Cost of shares purchased on October 28 490,000

Add: Non-deductible loss pertaining to
5,000 shares purchased on Oct. 28
5,000
x 64,000 = 40,000
8,000
Basis 530,000

Selling price of 5,000 shares at 100/share 500,000

Less: Basis (530,000)
Capital loss (30,000)

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18. G, married, resident citizen had the following for 2019:

a.) Business Income
1.) Rental income from real property, net of 5% W/T P 285,000
Real property tax paid by the lessor 50,000
Note: The lessee reimbursed 50% of the tax, as per agreement in the lease contract
Deductible expense 120,000

2.) Rental income from real property, net of 5% W/T P 142,500

Real property tax paid by the lessor 20,000
Note: The lessee reimbursed 100% of the tax, as per agreement in the lease contract
Deductible expense 40,000

b.) Sale of capital assets:

1.) Shares of ABC (domestic) not traded:
Selling Price P 300,000 Cost (2004): P180,000
2.) Shares of DEF (domestic), traded:
Selling Price P 100,000 Cost (2012): P150,000
3.) Shares of XYZ (foreign)
Selling Price P 500,000 Cost (2000): P100,000
4.) Vacant lot
Selling Price P 800,000 Cost (2000): P200,000
5.) Toyota Car
Selling Price P 100,000 Cost (2000): P300,000

c.) Other transactions:

1.) In 2000, he purchased shares of A Corporation for P50,000 which became worthless and
was written off in 2019.
2.) In 2019, he received liquidating dividend from B Corporation in the amount of P450,000.
The investment in 2000 was P300,000.

Determine the net taxable income of G in his AITR for 2019. Answer: ₱415,000

Gross receipts
Rentals 450,000
RPT paid by lessee 45,000 495,000
Itemized deductions:
Expenses 160,000
RPT paid to LGU 70,000 (230,000)
NI from operations 265,000
Add: Non-operating income:
Capital gains
1) Foreign shares 200,000
2) Liquidating div. 75,000 275,000
Capital losses
1) Toyota car 100,000
2) Worthless shares 25,000 (125,000) 150,000
Taxable net income 415,000

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19. A domestic corporation had the following data for taxable year 2019 and 2020:

2019 2020
Taxable income before capital assets transaction P 400,000 P 500,000
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

Required: Compute for the taxable net income of the corporation for the year 2019 to 2020.
Answer: 2019: ₱400,000; 2020: ₱506,000

2019 2020

Net income from

operations 400,000 500,000
Add: Non-operating
income
Capital gains 25,000 33,000
Capital losses (32,000) 0 (27,000) 6,000
Net taxable income 400,000 506,000

20. A transferred his commercial land with a cost of ₱600,000 and with a FMV of ₱900,000 to ABC Corp.
in exchange of the stock of the corporation with par value of ₱800,000. As a result of the transfer A
gained control of the corporation. As a result,
a. The gain recognized is the difference between the par value of the shares of stocks and the cost of
the land.
b. The loss recognized is the difference between the FMV of the land and the par value of the stocks.
c. No gain shall be recognized because the land was in exchange for shares of stock of a
corporation and A became the majority stockholder thereof.
d. No loss shall be recognized because the par value of the shares is greater than the cost of the land.

The End!!!

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