Installment Sales method

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

Contract price

Selling price xxLess: Mortgage assumed by the buyer

xx xxAdd: Excess of mortgage over cost

xx

Contract price xx

Formulas:

Initial payment

Down payment xxAdd: Installment received xx

Excess of mortgage over cost xx xx

Initial payment xx

Formulas:

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:

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:

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:

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)

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%

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:

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

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)

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

* Computation of Contract Price

Selling Price P 320,000Less: Cost

20,000Contract price

300,000

* Gain on sale

Selling Price P 320,000Less: Cost

200,000

Capital gain (short-term)120,000

* Gross Profit Rate (GPR)

Gross profit P 120,000Divided by: Contract Price

300,000

GPR 40%

•Initial Payment Rate (IPR)

Initial Payment P 50,000Divided by: Selling Price 320,000

IPR 15.625%

•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

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

Year of sale = Initial payment Contract price

Subsequent years = Installment paid Contract price

Final tax

Formulas:

Final tax

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

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)

Q1. Can the tax be paid on installment?•Yes

Initial payment 100,000 Selling price 600,000

16.67%

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

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

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%

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)

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

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

Problem 13-7

Acquired for P120,000

(Sold for P400,000)

Payable each installment:2011 P 140,0002012 160,0002013 50,0002014 50,000

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

•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