- 10 Marks
Question
c) Sakote Ltd, a trading company, has the following extracts from its financial records:
- It bought a 4 X 4 Vehicle for an amount of GH¢225,000.00 in the year 2015. The cost of the vehicle was limited to an amount of GH¢75,000 for capital allowance purposes in the year 2015.
- It also put up a building at a cost of GH¢150,000.00 in the same year. The cost of the land was GH¢20,000 and GH¢130,000 was the cost of the building.
- The Company accordingly informed the Commissioner-General about putting the assets into use and in the generation of its income in 2015 year of assessment.
- In the year 2016, it exchanged the vehicle for 4 plots of land. The value of the plots of land agreed with the landowners was GH¢220,000. The exchange was deemed satisfactory to both parties, and documentations were carried through.
Required:
i) Calculate the amount of capital allowance claimable for 2016 year of assessment by Sakote Ltd. (7 marks)
ii) Sakote Ltd paid for Goodwill amounting to GH¢10,000 in 2016 and intends to grant capital allowance on the value of the goodwill. Explain whether or not this arrangement is in accordance with the tax laws. (3 marks)
(Total: 10 marks)
Answer
i) Calculation of Capital Allowance for 2016 Year of Assessment
| Class | Class 2 | Class 4 | Capital Allowance |
|---|---|---|---|
| Rate | 30% | 10% (SLM) | |
| Cost of Vehicle | GH¢75,000 | ||
| Cost of Building | GH¢130,000 | ||
| Capital Allowance 2015 | (GH¢22,500) | (GH¢13,000) | |
| WDV c/d 2015 | GH¢52,500 | GH¢117,000 |
2016 Capital Allowance Computation:
| Class | Class 2 | Class 4 | Capital Allowance |
|---|---|---|---|
| WDV b/d 2016 | GH¢52,500 | GH¢117,000 | |
| Proceeds from Sale of Vehicle (220,000) | (GH¢167,500) | ||
| WDV after Disposal | GH¢0 | GH¢117,000 | |
| Capital Allowance | GH¢0 | GH¢13,000 | GH¢13,000 |
| WDV c/d | GH¢0 | GH¢104,000 |
(7 marks)
Conclusion:
- The amount of GH¢167,500 constitutes income which should be added to business income, and capital allowance of GH¢13,000 is claimable for 2016 year of assessment.
ii) Goodwill and Capital Allowance:
Goodwill is an asset that qualifies as a capital expenditure for accounting purposes only. Capital allowance is not granted in respect of assets as such, but rather on depreciable assets as defined by tax provisions.
Conclusion:
Goodwill does not qualify for capital allowance as it is not a depreciable asset in accordance with tax law. Therefore, the GH¢10,000 paid by Sakote Ltd for goodwill is not eligible for capital allowance.
(3 marks)
- Tags: Asset exchange, Capital Allowance, Corporate Income, Depreciable assets, Tax implications
- Level: Level 3
- Topic: Business income - Corporate income tax
- Series: MAY 2017
- Uploader: Dotse