Reviewer in Taxation (Book 1) Asser S.

Tamayo (2012 Edition)

CHAPTER 5

CAPITAL GAINS AND LOSSES

1. The term “capital asset” includes:

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 I the ordinary course of his trade or business
d. property used in the trade or business of the taxpayer and subject to depreciation

ANS: B

2. One of the following real properties is an ordinary asset:

a. Real property acquired by banks through foreclosure sales

b. Real property transferred through succession or donation to the heir or done who is not
engaged in the real estate business with the respect to the real property

c. Real property received as dividend from a corporation which is engaged in real estate
business by the stockholders who are not engaged in real estate business and who do not
subsequently use such real property in trade or business

d. Real property, whether single detached; townhouse or condominium unit, not used in trade
or business as evidenced by a certification from the Barangay Chairman or from the head of
administration, in case of condominium unit, townhouse or apartment, and as validated from
the existing available records of the BIR, owned by an individual engaged in business

ANS: A.

3. First statement: Real property initially acquired by a taxpayer engaged in the real estate business
shall not result in its conversion into a capital asset even if the same is subsequently abandoned or
becomes idle.

Second statement: Real properties classified as ordinary assets for being used in business by a taxpayer
other than real estate businesses are automatically converted into capital assets upon showing of proof
that the same have not been used in business for more than two(2) years prior to the consummation of
the taxable transactions involving said properties

a. True, True c. True, False

b. False, False d. False, True

ANS: A
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

4. Lots being rented when subsequently sold are classified as:

a. capital assets c. ordinary assets

b. liquid assets d. Fixed assets

ANS: C

5. This is the length of time capital assets are held

a. holding period c. accounting period

b. taxable period d. audit period

ANS: A

6. A feature of ordinary gains as distinguished from capital gains

a. Gains from sales of assets not stock in trade

b. May or may not be taxable in full
c. Sources of capital assets
d. No holding period

ANS: D

7. Which of the following shall be subject to final tax?

I – Capital gain from sale of shares of stock not traded in the local stock exchange.

II – Presumed capital gain on sale of real property classified as capital asset

a. Both I and II c. I only

b. Neither I nor II d. II only

ANS: A

8. The term means the excess of the gains from sales or exchanges of capital assets over the losses
from such sales or exchanges.

a. Net capital gain c. Taxable net income

b. Net capital loss d. Net operating loss

ANS: A
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

9. The term means the excess of the losses from sales or exchanges of capital assets over the gains
from such sales or exchanges.

a. Net capital gain c. Taxable net income

b. Net capital loss d. Net operating loss

ANS: B

10. Under the Tax Code, how much shall be taken into account in computing the net income, if a gain
is realized by an individual taxpayer from the sale or exchange of capital assets (other than real
properties and shares of stock) held for more than twelve months?

a. 50% of the net capital gain c. P 50,000

b. 5% of the capital asset sold d. P 5,000

ANS: A

11. Capital losses are deductible from:

a. ordinary gains only c. both ordinary and capital gains

b. capital gains only d. either ordinary gains or capital gains

ANS: B

12. First statement: Net capital loss carry-over is allowed to taxpayers other than corporations, and this
is carried over to the succeeding year as a short term loss.

Second statement: The amount of net capital loss carry over is the net capital loss or the net income
in the year the net capital loss is sustained, whichever is lower

a. True, True c. True, False

b. False, False d. False, True

ANS: A

13. First Statement: Corporations are allowed to observe the holding period and to carry over net
capital loss.

Second Statement: Capital gains and losses of the general professional partnership will be accounted
for by the partners in proportion to their interest in the partnership.

a. True, True c. True, False

Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

b. False, False d. False, True

ANS: D

14. Amounts received by the holder upon the retirement of bonds, debentures, notes or certificates or
other evidences of indebtedness issued by any corporation (including those issued by a government or
political subdivision thereof) with interest coupons or in registered form, may result in:

a. capital loss only c. either capital gain or capital loss

ANS: C b. capital gain only d. none of the choices

15. First statement: Gains or losses from short sales of property shall be considered as gains or losses
from sales or exchanges of capital assets.

Second statement: Gains or losses attributable to the failure to exercise privileges or options to buy or
sell property shall be considered as capital gains or losses.

a. Both statements are correct

b. Both statements are incorrect
c. Only the first statement is correct
d. Only the second statement is correct

ANS: A

16. Which of the following statements is incorrect?

a. Actual sale, barter or exchange of capital assets must always transpire before capital gains
and losses are recognized.

b. If securities become worthless during the taxable year and are capital assets, the loss shall be
considered as a loss from the sale, barter or exchange of capital assets on the last day of each
taxable year.

c. Amounts received by the holder upon the retirement of bonds, debentures or other evidence
of indebtedness issued by any corporation including those issued by the Government with
interest coupon or in registered form, shall be considered as amounts in exchange thereof, and
may result to capital gains or losses.

d. Gains and losses from short sales of property shall be considered as gains or losses from sale
or exchange of capital assets.

ANS: A

17. Which of the following will not result to capital gains or losses?
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

a. Gains or losses on account of failure to exercise a privilege or option to buy or sell property
b. When a corporation distributes all of its assets in complete liquidation
c. When a partner retires or when the partnership is dissolved
d. Gains or losses from sale of office equipment

ANS: D

18. Jose Josue qualified as head of a household for 2010 tax purposes. Mr. Josue’s 2011 taxable
income was P200,000 exclusive of capital and losses. Mr. Josue had a net long term loss of P8,000 in
2011. What amount of this capital loss could Mr. Josue offset against the 2011 ordinary income?

a. Zero c. P 4,000
b. P3,000 d. P8,000
ANS: A

19. AST Corporation has the following data for the years 2010 and 2011:

2010: Gross Income P 240,000

Business expenses 180,000
Capital loss (capital asset was acquired on January 15, 2010 and was
sold on March 15, 2010) 50,000
Capital gain (capital asset was acquired on January 15, 2009 and was
sold on March 31, 2010) 30,000
2011: Gross Income P 500,000
Business expenses 400,000
Capital gain (capital asset held for 12 months) 60,000
Capital loss (capital asset held for more than 12 months) 20,000

Question 1: How much is the taxable net income in 2010 and 2011?

2010 2011 ANS: A

a. P 60, 000 P 140, 000 Question 2: Assuming the taxpayer is an
b. P 60, 000 P 120, 000 individual taxpayer, single resident citizen, how
much is the taxable net income in 2010 and
c. P 10, 000 P 100, 000 2011?

d. P 10, 000 P 90,000 2010 2011

a. P 60,000 P 140,000

b. P 60,000 P 120,000
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

c. P 10,000 P 100,000

d. P 10,000 P 90,000

ANS: D

20. In 2009, a general professional partnership was organized. Tiffany Reyes contributed P500,000 for
a 60% interest. The partnership’s net income in 2009 was P750,000 and in 2010 P800,000. The net
income in 2009 was distributed to the partners while no distribution of income was made in 2010.

In 2011, the partnership was dissolved, and Ms. Reyes received P700,000 as her share in the
liquidation.

How much capital gain (loss) was recognized in 2011?

a. P 200,000 gain c. P 280,000 loss

b. P 140,000 loss d. None of the choices

ANS: B

21. Rowena expects that within a week, the market price of Angeles Corporation shares, which is
selling at P10 per share, will go down. She does not have Angeles Corporation shares so she calls up
her stockbroker and asks him to sell for her 10,000 shares of Angeles Corporation shares. Rowena and
the stockbroker agree that the sold shares are to be replaced within one week after the sale.

The stockbroker sells for Rowena the 10,000 shares at P10 per share. One week after, when the sold
shares are about to be replaced the selling price of Angeles Corporation shares rises to P16 per share,
contrary to Rowena’s expectation. Nevertheless, she orders her stockbroker to buy for her 10,000
Angeles Corporation shares to cover the same number of shares she borrowed a week ago.

How much is the capital gain (loss) from the short sale?

a. P 100,000 gain c. P 60,000 loss

b. P 50,000 gain d. P 30,000 loss

ANS: C

22. A single taxpayer has the following income, expenses and transactions in 2011:

Gross Income P 150,000

Business expenses 75,000
Selling price, partnership interest ( investment in 2009 was
P20,000) 60,000
Gain on sale of personal car held for 3 years 10,000
Loss on sale of jewelry for personal use held for 6 months 5,000
Loss on account to exercise two-month option to buy 4,000
Liquidating dividend (investment in 2009, P100,000) 80,000
Gain on short sales 2,000
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

Question 1: How much is the net capital gain?

a. P 63,000 c. P 16,000
b. P 23,000 d. P 8,000

ANS: D

Question 2: How much is taxable net income?

a. P 88,000 c. P 41,000
b. P 48,000 d. P 33,000

ANS: D