Capital Gains or Losses
Exercise (2):
L.E
The Accounting Net Profit of a Sole Enterprise for the year ended on December 31, 2015 was
80,000. The tax examination revealed the following information:
L.E
1. The firm received 16,000 from insurance company as selling price for breakdown of
some electrical installations on 1/1/2015. The Accounting Book Value of the electrical
L.E L.E
installations that date was 15,000 while the Taxable Book Value was 18,000. The
Capital Gains were listed in the Income Statement.
Required: Determine the Taxable Net Profit for the year ending on December 31, 2015.
Solution
Accounting Net Profit 80,000
Add:
Total Taxable Profit 80,000
Less:
(2) The Accounting Capital Gains resulting from compensation of (1,000)
Installations should be deducted to be cancelled
(2) The Deductible Capital Losses resulting from compensation of (2,000)
Installations should be deducted according to Tax Law
Net Taxable Profit 77,000
1st Tax Treatment of Depreciation Expense:
Accounting Depreciation Exp.
=
Not Mentioned in the Exercise so No Adjustment
Taxable Depreciation Exp.
=
2nd Tax Treatment of Capital Gains:
Accounting Capital Gains
selling price - Accounting Book Value
=
= 16,000 - 15,000
= 1,000 This amount was added so it should be deducted to be cancelled
1
Deductible Capital Losses
Compensation - Taxable Book Value
=
16,000 - 18,000
=
=
(2,000) This amount should be deducted by the tax law
Exercise (3):
L.E
The Accounting Net Profit of a Sole Enterprise for the year ended on December 31, 2015 was
200,000. The tax examination revealed the following information:
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1. The firm sold Buildings on 1/7/2015 for 100,000. These Buildings were bought for
100,000 on 1/1/2010. The depreciation rate for accounting purpose is twice as the
depreciation rate for tax purpose. (Taxable Depreciation Rate 5%) The Capital Gains
were listed in the Income Statement.
Required: Determine the Taxable Net Profit for the year ending on December 31, 2015.
Solution
Accounting Net Profit 200,000
Add:
(1) The Accounting Depreciation Expense recorded by the firm should 5,000
be added to be cancelled
(1) The Taxable Capital Gains resulting from sale of Buildings should 27,500
be added according to Tax Law
Total Taxable Profit 232,500
Less:
(1) The Taxable Depreciation Expense stated by the tax law should be (2,500)
deducted to be recorded
(1) The Accounting Capital Gains resulting from sale of Buildings (55,000)
should be deducted to be cancelled
Net Taxable Profit 175,000
2
Tax Treatment of Buildings (5%)
1st Tax Treatment of Depreciation Expense:
Accounting Depreciation Exp.
Cost X Accounting Dep. Rate X Period
=
= 100,000 X 10% X 6/12
= 5,000 should be added to be cancelled
Taxable Depreciation Exp. = Cost X Accounting Dep. Rate X Period
100,000 X 5% X 6/12
=
= 2,500 should be deducted to be recorded
2nd Tax Treatment of Capital Gains:
Accounting Capital Gains
Net Sale Price - Accounting Book Value
=
= 100,000 - [Cost – Accounting Accumulated Dep]
= 100,000 - [100,000 – (100,000 x 10% x 5.5 Years) ]
= 100,000 - [100,000 – 55,000 ]
= 100,000 - 45,000
= 55,000 This amount was added so it should be deducted to be cancelled
Taxable Capital Gains
Net Sale Price - Taxable Book Value
=
= 100,000 - [Cost – Taxable Accumulated Dep]
= 100,000 - [100,000 – (100,000 x 5% x 5.5 Years) ]
= 100,000 - [100,000 – 27,500 ]
= 100,000 - 72,500
= 27,500 This amount should be added by the tax law