- 30 Marks
AT – May 2025 – PL – SA – Q1 – Taxation of Companies
Draft a report for Nancy Nigeria Limited on adjusted profit for 2024, tax liabilities from inception, and provisions on back duty audit under CITA 2004.
Question
Nancy Nigeria Limited, a manufacturer of soaps and detergents, was incorporated on April 1, 2020, but commenced business on July 1, 2020.
At the 2023 Annual General Meeting of the company, the shareholders approved resolutions for the increase in the company’s share capital in 2024 and request for long-term bank loan in the first quarter of 2025, to fund expansion of the company’s operations.
In December 2024, the company made preliminary request to its bankers and part of the documents to be submitted included the audited financial statements and tax clearance certificate (TCC) of the last three years. The company has been paying its taxes regularly, but it is yet to request for TCC since the commencement of business.
The appointment of the company’s former tax consultants was terminated in early 2024, after the discovery by the Federal Inland Revenue Service (FIRS) of the tax consultancy firm’s professional misconduct in the annual returns filed on behalf of a client. The matter is currently before a Court of competent jurisdiction.
Your firm of tax consultants has been engaged to procure the TCC for the company, after recomputing the tax liabilities from inception to the financial year ended December 31, 2024. The Managing Director stressed that the company is willing to make additional tax payments, if a case of under-payment of taxes is established.
After accepting the engagement, your Principal Partner, during interaction with the Managing Director, opined that based on the provisions of the Companies Income Tax Act 2004 (as amended), the FIRS may consider instituting back duty audit on the company, hence the need for early preparation for their visit. The Managing Director seems not to understand the submission made by the Principal Partner.
The company has provided all the financial records necessary for the conduct of this assignment.
The following details of the statement of profit or loss were extracted from the financial records of the company for the year ended December 31, 2024:
| N‟000 | N‟000 | |
|---|---|---|
| Turnover | 145,700 | |
| Cost of sales | (66,250) | |
| Gross profit | 79,450 | |
| Other operating income | 3,000 | |
| 82,450 | ||
| Deduct: | ||
| Personnel cost | 21,000 | |
| Power and rates | 3,800 | |
| Depreciation | 5,500 | |
| Repairs and maintenance | 1,900 | |
| Allowance for doubtful debts | 5,800 | |
| Finance cost | 2,200 | |
| Donations and subscriptions | 2,450 | |
| Legal and professional fees | 4,500 | |
| Transport and travelling | 1,100 | |
| Telephone and postage | 900 | |
| Loss on disposal of a motor vehicle | 1,800 | |
| Other operating expenses | 3,350 | |
| Preliminary expenses written off | 1,200 | |
| Transfer to general reserve | 2,000 | 57,500 |
| Net profit for the year | 24,950 |
The following additional information was made available:
(i) Adjusted profit/(loss) and turnover:
| Accounting period | Adjusted profit/(loss) N‟000 | Turnover N‟000 |
|---|---|---|
| Period ended December 31, 2020 | (27,950) | 65,800 |
| Year ended December 31, 2021 | 2,600 | 90,500 |
| Year ended December 31, 2022 | 6,200 | 108,250 |
| Year ended December 31, 2023 | 12,870 | 124,600 |
(ii) Other operating income:
| N‟000 | |
|---|---|
| Excess on revaluation of industrial building | 1,300 |
| Dividend received (net) | 1,700 |
| 3,000 |
(iii) Repairs and maintenance:
| N‟000 | |
|---|---|
| Improvement to industrial warehouse | 1,000 |
| Repairs of industrial plant | 400 |
| Renewals of tools and implements | 200 |
| Maintenance of motor vehicle | 300 |
| 1,900 |
(iv) Allowance for doubtful debts:
| N‟000 | |
|---|---|
| General allowance for doubtful debt | 4,350 |
| Specific allowance for doubtful debt | 1,750 |
| Bad debt written off | 900 |
| Bad debt recovered | (1,200) |
| 5,800 |
(v) Donations and subscriptions:
| N‟000 | |
|---|---|
| Contribution to a fund created by a State Government for victims of flooding | 1,000 |
| Award of scholarship to 3 indigent students | 1,200 |
| Subscription to manufacturers‟ association | 250 |
| 2,450 |
(vi) Legal and professional fees:
| N‟000 | |
|---|---|
| Audit and accountancy fees | 1,600 |
| Legal- acquisition of long-term lease | 1,500 |
| Legal- new issue of shares | 1,400 |
| 4,500 |
(vii) Other operating expenses:
| N‟000 | |
|---|---|
| Provision of unbranded Xmas hampers to customers | 1,100 |
| Local government tenement rate | 750 |
| Income tax provisions | 1,500 |
| 3,350 |
(viii) Schedule of qualifying capital expenditure:
| QCE | Date of acquisition | Number of items | Amount N’000 |
|---|---|---|---|
| Industrial building | May 15, 2020 | 1 | 15,000 |
| Non-industrial building | June 6, 2020 | 2 | 8,000 |
| Furniture and fittings | June 16, 2020 | 10 | 2,400 |
| Industrial plant | July 1, 2020 | 1 | 12000 |
| Motor vehicles | July 1, 2020 | 3 | 7,500 |
| Motor vehicles | July 1, 2022 | 2 | 6,000 |
| Furniture and fittings | September 1, 2022 | 2 | 600 |
| Industrial plant | October 1, 2024 | 1 | 18,000 |
(ix) A motor vehicle assigned to the General Manager, which cost N3 million at the date of purchase on July 1, 2022, was sold for N1.2 million on December 31, 2024.
Required: As the newly engaged Tax Consultant, you are to draft a report to the Managing Director showing/stating the:
a. Adjusted profit for the year ended December 31, 2024 (7 Marks)
b. Company’s tax liabilities for the relevant assessment years (ignore minimum tax computations) (20 Marks)
c. Provisions of the CITA 2004 (as amended) on back duty audit
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