Your advice worked and i got my tv to display at 1080p properly. However i was still unable to get audio thru the HDMI cable. After some research i found out its because my motherboard does not have a spdif port which is needed as there there is an additional wire that connects between the graphic card and motherboard. I have no choice but to only use the audio out which is 3.5mm stereo. No surround sound for me...   Its an old spare pc therefore i am not going to spend any money on it.

Thanks for the help guys!