IT - Installment Method & Other Capital Asset Transactions

Question 1

The three (3) cases where income may be reported in installments

Answer 1

1. Sales of personal property by a dealer (regularly using installment plan)
2. Casual sale of personal property (subject to conditions)
3. Sale of real property (initial payments must not exceed 25% of selling price)

Question 2

In casual sales of personal property, what are the requisites in order to use the installment method (3)?

Answer 2

1. Initial payment must not exceed 25% of selling price
2. Selling price exceeds P1000
3. Property not includible in ending inventory

Question 3

What is the formula for selling price?

Answer 3

Amount realized on the sale:

Cash received
\+ FMV property received
\+ Evidences of indebtedness
\+ Mortgage assumed by buyer
= SELLING PRICE

Question 4

What is the formula for contract price?

Answer 4

The amount which the purchaser contracts to pay the seller.

Selling Price
Less: Mortgage assumed by buyer
Add: Excess of Mortgage Over Cost
= Contract Price

Question 5

(T/F) If there is no mortgage, selling price will equal contract price.

Answer 5

True.

Question 6

What is the formula for initial payments?

Answer 6

Payments in CASH or PROPERTY (other than evidence of indebtedness) during the taxable year in which the sale is made.

Downpayment
+ Installments received in the TY of sale
+ EMOC
= Initial payments

**Must not exceed 25% of SELLING PRICE in order to use installment method

Question 7

(T/F) If there is no payment during the first year, the installment method MAY still be used.

Answer 7

False.

Question 8

How do commissions and other selling expenses factor in the installment method?

Answer 8

They are not deducted or taken into account.

Question 9

What is the formula to report income under installment method?

Answer 9

GP/CP * Installment payments actually received = Income to be reported for the year

Question 10

(T/F) The installment method applies only to reporting of INCOME, and not DEDUCTIONS, which are deducted during the T.Y. “paid or incurred.”

Answer 10

True.

Question 11

(T/F) The sale of real property, which is a capital asset situated in the PH, is subject to final CGT whether the seller is an individual, estate, trust, or corporation.

Answer 11

True.

Question 12

What are other transactions resulting in capital gains or losses where there is NO SALE (subject to holding period if individual)

Answer 12

1. When stock or bonds as capital assets become worthless, capital loss is recognized
2. When bonds are retired
3. G/L from failure to exercise options
4. Liquidating dividends received - cost of investment
5. Redemption of preferred shares

6. Liquidation of partnership
Amount received
- investment
- share in undistributed partnership NI
= g/l to partner (subj to HP)

7. Short sales

Question 13

What are the requisites for a wash sale loss (3)?

Answer 13

1. Sale of securities at a loss
2. Identical securities purchased within 61 day period of the sale
3. Taxpayer is:
   - -(a) not a dealer in securities
   - -(b) a dealer, but sale is not in ordinary course of business

Question 14

What is the treatment for sales of securities within the 61 day period, but the seller is a dealer and the sale was made in the ordinary course of business?

Answer 14

The sale, even if at a loss, shall be deductible in ITR as an ordinary loss.

Question 15

(T/F) For non-dealers, and those sales made not in the ordinary course of business, the wash sale loss is a capital loss but is not deductible against capital gains.

Answer 15

True

Question 16

Formula for non-deductible loss

Answer 16

No. Of Shares Purchased within 61-day period

Divided by

No. Of Shares Sold

Multiplied by

Loss

= NON-DEDUCTIBLE LOSS

Question 17

Formula for Tax-Basis of Re-Acquired Shares

Answer 17

Cost of Acquisition
+ Non-deductible wash sale loss
= New tax basis/cost