installment sales method (income taxation
TRANSCRIPT
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Installment Sales method
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Formulas: Selling price Cash received by the seller xx
Add: Fair market value of the property received xx
Installment obligation of the buyer xxMortgage assumed by the buyer xx xx
Selling price xx
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Contract price
Selling price xxLess: Mortgage assumed by the buyer
xx xxAdd: Excess of mortgage over cost
xx
Contract price xx
Formulas:
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Initial payment
Down payment xxAdd: Installment received xx
Excess of mortgage over cost xx xx
Initial payment xx
Formulas:
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Gross profit and income determination a. The property is personal and a capital asset
Selling price xxLess: Cost xx
Gross profit xxDivide by: Contract price xx
Gross profit rate xxMultiply by: Initial payment / Collection
xx
Income xx
Formulas:
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Gross profit and income determination b. The property is real or personal and an ordinary asset
Selling price xxLess: Book Value xxGross profit xxDivided by: Contract price xx
Gross profit rate xxMultiply by: Initial payment / Collection xx
Income to be reported xx
Formulas:
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c. The real property is sold by an individual
Selling price / Fair market value xxMultiply by: rate of tax 6%Final withholding tax xxMultiply by:
Initial payment / Collection xxDivided by: Contract price xx xx
TAX DUE XX
Formulas:
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Illustration 13-2
2009(bought for P110,000)
Oct. 1, 2011 (Sold for
P160,000 on INSTALLMENT)
*monthly installment of
P10,000 effective on November 1
Oct. 1, 2011 (received down payment of P10,000)
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Questions:1. Can the income be reported installment?
Yes.Computation:
Down payment P 10,000Add: Monthly instalments (Nov. & Dec.) 20,000Initial payment 30,000Divided by: Contract price 160,000
18.75%
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2. How much income should be reported in 2011, 2012 and 2013?
Solution:Selling price P 160,000Less: Cost 110,000Long-term capital gain 50,000Divided by: Contract price 160,000
31.25%
Questions:
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Computation of Yearly
Taxable Collections Gross Profit Capital Long-termYear Rate Gain Gain2011 30,000 31.25%
9,375 4,687.502012 120,000 31.25%
37,50o 18,750.002013 10,000 31.25%
3,125 1,562.50
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Illustration 13-2
2011(purchased
at P 200,000)
2011 (Sold for
P 300,000)
The terms of payments are as follows:Down Payment, 2011 P
50,000Installment payments: 2012 125,000 2013 125,000
2011 (the
property is mortgage
for P 20,000)
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If the property is a capital asset, how much income is to be reported by Freda in 2011, 2012 and 2013?
* Computation of Selling PriceDown Payment, 2011 P
50,000Installment, 2012 125,000Installment, 2013 125,000Mortgage assumed by buyer 20,000
Selling price 320,000
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* Computation of Contract Price
Selling Price P 320,000Less: Cost
20,000Contract price
300,000
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* Gain on sale
Selling Price P 320,000Less: Cost
200,000
Capital gain (short-term)120,000
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* Gross Profit Rate (GPR)
Gross profit P 120,000Divided by: Contract Price
300,000
GPR 40%
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•Initial Payment Rate (IPR)
Initial Payment P 50,000Divided by: Selling Price 320,000
IPR 15.625%
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•Computation of Yearly Returnable IncomeYear Collections Gross Profit Rate Taxable Gain2011 P 50,000 40% P
20,0002012 125,000 40%
50,0002013 125,000 40%
50,000Total 300,000 120,000
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Sale on real property
1. By an individual*installment = Does not exceed 25% of
the selling price* asset sold=ordinary asset tax return* asset=capital 6% of gross selling
price fair market value or
highest zonal value
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Year of sale = Initial payment Contract price
Subsequent years = Installment paid Contract price
Final tax
Formulas:
Final tax
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2. By a corporationcapital gains gross income
final tax
NOTED: Capital gains = capital asset 6% of gross selling price
fair market value or highest
zonal value
Sale on real property
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Problem 13-4
July 30, 2011(acquired for
P400,000)
Dec. 31, 2011 (Sold for
P600,000 on INSTALLMENT)
*will receive the balance of P250,00,
payable each year
Dec. 31, 2011 (received a down payment of P100,000)
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Q1. Can the tax be paid on installment?•Yes
Initial payment 100,000 Selling price 600,000
16.67%
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Q2. How much is payable in 2011, 2012 and 2013?
• Solution:Selling price P 600,000Rate 6%Final Tax 36,000
• Computation of Annual Capital Gains Tax: 2011 100,000
600,000 2012 250,000
600,000 2013 250,000
600,000
36,00036,00036,000
6,00015,00015,000
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Problem 13-5
Cost P 160,000Mortgage assumed by buyer 40,000Cash payment in 2011 80,000Due on: January 1, 2012 40,000 January 1, 2013 40,000
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Can the tax reported on installment?•No.
Computation:Initial payment P
80,000Divided by: Down payment 80,000
Mortgage assumed by buyer40,000Installment, 2012 40,000Installment, 2013 40,000 200,000
Initial payment Rate 40%
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Problem 13-6
Cost P2,000,000Accumulated 500,000Depreciation
Dec. 30, 2011 (Sold for
P3,000,000)
Balance (payable P250,000 each month)
Commission and 200,000Other selling expenses
Dec. 30, 2011 (received a down payment of P500,000)
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How much income should be reported in 2011?
Selling price P 3,000,000
Less: Cost 2,000,000 Commissions 200,000
2,200,000Gross profit 800,000
Multiply by IPR(500,000/ 3,000,000) 16.67% Income to be reported in 2011 133,360
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Sale of shares of stock of a domestic company
•5% on the first P100,000 •10% in excess of P100,000 of net capital gain
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Problem 13-7
Acquired for P120,000
(Sold for P400,000)
Payable each installment:2011 P 140,0002012 160,0002013 50,0002014 50,000
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Compute the final taxes payable on 2011, 2012, 2013 and 2014.
• Solution:Selling price P 400,000Less: Cost 120,000Net capital gain 280,000
Tax on P100,000 x 5% P 5,000 180,000 x 10% 18,000
Final withholding tax 23,000
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•Final taxes payable:2011 140,000
400,0002012 160,000
400,0002013 50,000
400,0002014 50,000
400,000 TOTAL
P 23,00023,000
23,000
23,000
P 8,050
9,200 2,8752,875
23,000