Question Tag: Disposal of assets

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  • 15 Marks

AT – Nov 2014 – L3 – SC – Q7 – Capital Gains Tax (CGT)

Compute total income for 2011 tax assessment and capital gains tax for relevant year.

Mr. James Zonto lived in Canada for thirty years and decided to settle down permanently in Nigeria with effect from January 2007.

Based on advice from his secondary school classmate, Mr. James Zonto repatriated a huge amount of money to Nigeria. He took advantage of the better investment climate in Nigeria and acquired the following properties:

  1. Uyo Duplex: Bought on 2 March 2008 for N25,320,000. Rental income: N855,000 per annum (net of withholding tax).
  2. Fixed Deposit Account: Invested N14,000,000 on 4 January 2008 with Doronine Bank Plc, yielding interest (net of withholding tax) of N180,000 per month.
  3. Onitsha Property: Acquired on 6 October 2008 for N31,500,000 with incidental expenses of N2,400,000. Annual rent: N1,800,000.
  4. Okija House: Bought for N10,000,000 as a personal residence; not rented out.

In 2012, he decided to resettle in Toronto and took the following actions:

  • Uyo House: Sold for N47,450,000 after incurring the following expenses:
    • Advertising: N650,000
    • Valuation fees: N2,000,000
    • Estate Agent’s Commission: N2,372,500
    • Legal fees: N1,500,000
  • Fixed Deposit: Matured on 31 December 2011; not rolled over.
  • Onitsha Property: Sold one of the four duplexes for N14,175,000. Remaining duplexes valued at N40,500,000.
  • Okija House: Sold for N36,500,000 after incurring incidental expenses of N3,650,000.

Required:
(a) Compute the Total Income for Income Tax purposes for 2011 year of assessment.
(b) Compute the Capital Gains Tax payable for the relevant year of assessment.

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  • 20 Marks

ATAX – May 2022 – L3 – Q3 – Capital Gains Tax (CGT)

Address the principles of disposal under CGT Act, and compute CGT for transactions in Ikeja, Calabar, Abuja, and Kano.

Disposal of assets is an important concept in the determination of capital gains tax payable. Section 6 of the Capital Gains Tax Act 2004 (as amended) specifically provides that a disposal of assets by a person occurs where any capital sum is derived from a sale, lease, transfer, an assignment, a compulsory acquisition, or any other disposition of assets, notwithstanding that no asset is acquired by the person paying the capital sum. In the same vein, Section 2 (4) of the Finance Act 2020 states the period for filing of self-assessment returns and when payment of the tax computed in respect of chargeable assets disposed of is to be made.

Nice-One Nigeria Limited, a manufacturing concern, with head office in Calabar and branches in Ikeja, Kano, and Abuja, has been in business for several years, reporting its accounts to December 31 of every year. The extracts from the books of accounts of the company during the year ended December 31, 2021, revealed the following transactions:

(i) Disposal of an option
On February 1, 2021, the company sold an option on a piece of land in Ikeja for the sum of ₦8,500,000 to Eco-Raheem Limited, which subsequently exercised the right by purchasing the land for ₦32,200,000.

(ii) Acquisition of asset in exchange for debt
On March 15, 2021, one of the company’s debtors in Calabar, Mr. Baba Tee, reached an agreement with the company by exchanging his piece of land, which was valued at ₦15,000,000, for the debt of ₦13,500,000. The company, on May 7, 2021, disposed of the land for ₦18,000,000. Incidental expenses incurred towards the disposal of the land were ₦250,000.

(iii) Disposal of a building
The company has a staff estate, which comprises five buildings in its Abuja branch. In order to source funds to construct a new staff estate in Kano, the company, on August 12, 2021, sold one of its buildings in the Abuja estate for ₦110,000,000. The cost of acquisition of the five buildings in the estate was ₦250,000,000. The cost of acquisition of the building sold was ₦75,000,000, while the remaining buildings unsold were professionally valued at ₦240,000,000. The company also incurred for the purpose of the disposal of the building, ₦400,000 on building repairs and a professional valuer’s fee of ₦1,100,000.

(iv) Disposal of industrial plants
One of the company’s industrial plants in the Kano branch, which cost ₦4,500,000, was disposed of on September 15, 2021, for ₦6,000,000. A new plant was bought for the purpose of the company’s operations the following month for ₦8,000,000. During the installation of the new plant, it was found that the plant could not efficiently satisfy the requirements of the company and it was subsequently sold on December 2, 2021, as “second-hand” for ₦7,300,000. The company incurred the sum of ₦25,000 as disposal expenses.

The Managing Director of the company is of the opinion that issues around the transactions undertaken by the company in the financial year are “technical,” which only competent professional accountants with experience in tax matters can conveniently handle. Accordingly, your firm of accountants was contacted to help provide tax advice on each of the above transactions.

Required:

You have been directed by your firm’s Head (Tax Matters) to take charge of the assignment and submit a report to him by the close of work in three days.

Your report should specifically cover:
(a) The principles of disposal as provided for in Section 6 of the Capital Gains Tax Act 2004 (as amended) (3 Marks).
(b) Computation of capital gains tax payable and when the tax due is to be paid to the relevant tax authority for the following stated transactions:
i. Disposal of an option in Ikeja branch (2 Marks).
ii. Acquisition of asset in exchange for debt in Calabar head office (3 Marks).
iii. Disposal of a building in Abuja branch (4 Marks).
iv. Disposal of industrial plants in Kano branch (8 Marks).

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  • 20 Marks

AT – Nov 2023 – L1 – SB – Q3 – Capital Gains Tax

Evaluate capital gains tax implications and relief for Damaturu Nigeria Ltd on asset disposal and reinvestment under Nigerian tax laws.

a. Explain the provisions of the Capital Gains Tax Act C1 LFN 2004 (as amended) in respect of tax payable on disposal of assets situated outside Nigeria by a non-Nigerian company. (2 Marks)

b. Damaturu Nigeria Limited had been in business as a manufacturer of dairy products for several years. In its bid to re-engineer its operations by investing in another viable product line (to be cited in a major city), the Board of Directors in February 2022, approved the sales and re-acquisition of some assets as shown below:

(i) The underlisted assets were acquired in 2015:

Description N’000
Land 25,000
Plant and equipment 13,000
Factory building 30,000

(ii) Sales proceeds from assets disposed of in July 2022:

Description N’000
Land 32,000
Plant and equipment 15,000
Factory building 38,000

(iii) Expenses incurred (as percentage of sales proceeds) in connection with disposal of assets:

  • Legal: 1%
  • Professional valuers’ fees: 3%

(iv) Re-investment in new assets (for the purpose of the business) to replace the disposed ones, was made between September and October, 2022:

Description N’000
Land 28,000
Plant and equipment 18,000
Factory building 30,000

Required:

i. Compute the capital gains tax payable (if any) for each of the transactions and state the date of payment of the tax due. (14 Marks)

ii. Determine the relief available (if any) on the investment in the new assets. (4 Marks)

(Total: 20 Marks)

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  • 1 Marks

TAX – Nov 2020 – L1 – SA – Q19 – Capital Gains Tax (CGT)

Calculate the balancing charge on the disposal of an asset.

An asset with a tax written down value of N850,000 was sold for N1,230,000; what is the balancing charge?
A. N2,080,000
B. N1,230,000
C. N850,000
D. N380,000
E. N425,000

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  • 10 Marks

FA – Nov 2021 – L1 – SB – Q6b – Accounting for Property, Plant, and Equipment (PPE) in Accordance with IAS 16

This question involves calculating the gain or loss on the disposal of an old vehicle and preparing ledger accounts.

Propati Limited has a fleet of motor vehicles that are used to distribute goods to the market. As at July 2020, the cost of the vehicles was ₦750,000,000 and their accumulated depreciation was ₦30,500,000. On January 1, 2021, the company bought a new vehicle for ₦2,800,000. One of the old vehicles, which was acquired 3 years ago at a cost of ₦1,000,000 with accumulated depreciation of ₦600,000, was accepted by the seller in part-exchange at a value of ₦480,000.

Required:
i. Calculate the gain or loss on disposal of the old car. (2 Marks)
ii. Prepare the following ledger accounts in respect of the transactions:

  • Motor vehicles account (4 Marks)
  • Accumulated depreciation account (2 Marks)
  • Disposal of asset account (2 Marks)

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  • 1 Marks

FA – May 2023 – L1 – SA – Q10 – Depreciation Methods and Accounting for Disposals

Calculating profit or loss on the disposal of equipment after accounting for depreciation.

Shark and Co. purchased a piece of equipment for N960,000 on September 1, 2016. Depreciation was charged at 12.5% per annum on a straight-line with zero residual value. Depreciation is charged from acquisition date to disposal date. The equipment was sold for N315,000 on June 30, 2022. Calculate the profit or loss on disposal.

A. N45,000 Gain

B. N45,000 Loss

C. N50,000 Gain

D. N55,000 Gain

E. N55,000 Loss

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  • 1 Marks

FA – MAY 2015 – L1 – SA – Q5 – Depreciation Methods and Accounting for Disposals

Determine the profit or loss on disposal of a motor vehicle after depreciation.

A vehicle was purchased on 1 January 2011 at a cost of N2,000,000 and was depreciated at 25% on cost. It was sold on 31 December 2013 for N1,400,000. Full-year depreciation was charged in the years of purchase and disposal.
Determine the profit or loss on the disposal.
A. N500,000 profit
B. N500,000 loss
C. N900,000 profit
D. N900,000 loss
E. N1,150,000 profit

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  • 6 Marks

PSAF – Nov 2019 – L2 – Q4a – Public Procurement

Explain the procedure for disposing of vehicles under the Public Procurement Act.

In the recent Auditor General’s Report, your organization has been indicted for mismanagement of public assets contrary to public financial management rules. The auditors found that three (3) Toyota vehicles which have no service potential to the entity (all exceeding 12 years in age) are left at the mercy of the weather without disposing them. At the Public Accounts Committee hearing, members were unhappy with the development and recommended that the entity disposes of the assets immediately in accordance with the provisions of the Public Procurement Act, 2003 (Act 663) as amended by the Public Procurement Amendment Act, 2016 (Act 914). Unfortunately, the Head of the entity seems not to have any clue of how this should be done.

Required:

Write a memo to the Head of the Entity explaining the procedures involved in disposing of the vehicles under the Public Procurement Act 2003 as amended.
(6 marks)

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  • 5 Marks

PSAF – Nov 2017 – L2 – Q2b – Public Procurement

Recommend steps required for disposing of unneeded stores identified in an audit by the Ministry of Public Works.

The Ministry of Public Works has in a recent audit report identified that the majority of their stores (including vehicles) are no more needed and must be disposed of.

Required: Recommend FIVE steps required to be followed by the Ministry to dispose of their stores. (5 marks)

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  • 10 Marks

FA – Mar 2024 – L1 – Q1b – Non-current assets and depreciation

Prepare journal entries for the depreciation, revaluation, and disposal of non-current assets.

The draft statement of financial position of Tinkong Ltd as at December 31, 2023, depicts the following:

Description GH¢
Plant and Machinery – Cost 4,954,824
Less: Accumulated Depreciation 1,917,016
Net Book Value 3,037,808

On reviewing the accounts of the business, its auditor found that the records have been correctly recorded except for the following events:

  • On January 17, 2023, a contract was signed for the purchase of a machine for GH¢450,000 which is to be delivered on July 17, 2024. The company made an advance payment of GH¢180,000 on signing of the contract and the balance was to be paid on delivery of the machine. The advance payment was debited to the plant and machinery account.
  • The cost of a new plant amounting to GH¢1,080,000 was acquired on January 21, 2023, and debited to the plant and machinery account. However, the cost of installation amounting to GH¢120,000 was debited to the repairs account.

Depreciation is charged on a reducing balance method at 10% per annum. Depreciation on new assets commences in the month in which the asset is acquired.

Required:

Prepare the following accounts indicating the closing balances as at December 31, 2023: i) Plant and Machinery
ii) Accumulated Depreciation – Plant and Machinery

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  • 10 Marks

FA – Nov 2023 – L1 – Q1b – Non-current assets and depreciation

Prepare the non-current assets and accumulated depreciation accounts for Pramso Ltd, including depreciation, revaluation, and disposal adjustments.

The following details were taken from the records of Pramso Ltd for the year ended 31 December 2022:

i) Tangible non-current assets (at cost) as at 1 January 2022 were:

Description Amount (GHȼ)
Land and buildings (Land GHȼ400,000) 700,000
Motor vehicles 450,000
Machinery 310,000

ii) Accumulated depreciation as at 1 January 2022:

Description Amount (GHȼ)
Land and buildings 85,000
Motor vehicles 210,000
Machinery 80,000

Pramso Ltd depreciates non-current assets as follows:

  • Buildings – 4% per annum on cost.
  • Motor Vehicles – 20% per annum using reducing balance method.
  • Machinery – 15% per annum on cost. Depreciation is charged for each month of ownership for all the assets.

iii) On 1 July 2022, land was revalued by an expert to GHȼ520,000.

iv) A Motor Vehicle purchased on 1 January 2020 for GHȼ22,000 was sold for GHȼ6,000 on 1 April 2022.

v) Machinery purchased on 1 July 2020 for GHȼ70,000 was sold on 1 January 2022 for GHȼ24,000.

vi) During the year the following assets were bought:

  • Machinery GHȼ24,000 on 1 July 2022.
  • Motor vehicles GHȼ40,000 on 1 October 2022.

Required:

Prepare the Non-Current Assets account and Accumulated Depreciation account showing the depreciation charge for the year. (10 marks)

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  • 20 Marks

FA – Aug 2022 – L1 – Q2 – Non-current assets and depreciation | Preparation of Partnership accounts

Preparation of ledger accounts for office equipment and disposal, calculation of profit due to a partner, and preparation of an appropriation account and current accounts for partners.

a) The following Statement of Financial Position extract has been taken from the accounts of Yamfo Ltd as at 31 December 2020:

Non-current Assets Cost (GHȼ) Accumulated Depreciation (GHȼ) Net Book Value (GHȼ)
Office Equipment 172,800 92,100 80,700

During the year ended 31 December 2021, the following transactions took place in relation to Office Equipment.

Disposals:

Equipment Disposal Date Purchase Date Original Cost (GHȼ) Disposal Proceeds (GHȼ)
Equipment 1 31 March 2021 1 January 2018 22,000 4,000
Equipment 2 30 June 2021 1 January 2017 30,000 5,100

Additions:

Equipment Date of Addition Cost (GHȼ)
Equipment 3 1 October 2021 35,000

Depreciation for Office Equipment is charged using the straight-line method based on a five-year life and an estimated residual value of 10% of the original cost. Depreciation is applied from the date the Office Equipment was bought until it was sold. All transactions were by cheque.

Required:
i) Prepare the Office Equipment ledger account for the year ended 31 December 2021.
(2 marks)

ii) Prepare the Disposal of Office Equipment ledger account for the year ended 31 December 2021.
(4 marks)

b) The following balances are in the books of a partnership as at 31 December 2021:

Account Amount (GHȼ)
Capital accounts Badu, as at 1 January 2021 500,000
Tawiah, introduced 1 July 2021 300,000
Drawings Amount (GHȼ)
Badu 220,000
Tawiah 100,000

Additional information:

  1. Until 30 June 2021, Badu had run the business as a sole trader. Tawiah joined him on 1 July 2021, introducing capital of GHȼ300,000.
  2. Under the partnership agreement, the balance of profit is to be shared between Badu and Tawiah in the ratio 3:2. No interest is to be charged on drawings. Both partners are to receive interest on their capital account balances at 5% per annum. Tawiah is to receive a salary of GHȼ40,000 per annum, but no salary is to be paid to Badu.
  3. The profit for the year ended 31 December 2021 was GHȼ330,000. It was agreed that this profit had accrued one-third in the six months ended 30 June 2021 and two-thirds in the six months ended 31 December 2021, except for an irrecoverable debt of GHȼ30,000 charged in arriving at the profit, which was to be regarded as occurring in the six months ended 30 June 2021.

Required:
i) Calculate the amount of profit due to Badu for the six months to 30 June 2021.
(2 marks)

ii) Prepare the Appropriation Account for Badu and Tawiah for the six months ended 31 December 2021.
(6 marks)

iii) Prepare the Current Accounts for Badu and Tawiah for the year ended 31 December 2021.
(6 marks)

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  • 20 Marks

FA – May 2020 – L1 – Q1 – Double entry bookkeeping | Non-current assets and depreciation | Preparation of financial statements of a sole trader

This question requires preparing ledger accounts related to depreciation, disposal, and asset balances for Tansah Ltd.

a) Write a short note to a client explaining the following issues:

i) Outline the differences between Cost and Management Accounting and Financial Accounting. (3 marks)

ii) Explain FOUR (4) roles of an Accountant in an organization. (4 marks)

iii) Outline SIX (6) key information provided by a Statement of Profit or Loss and Other Comprehensive Income and the Statement of Financial Position. (3 marks)

b) At 1 July 2017, the following information was extracted from the books of Tansah Ltd:
Non-current assets at cost:

Reference Description Amount (GH¢)
M1 Machinery 25,000
E1 & E2 Equipment 15,400
MV1 Motor Vehicle 18,500

Provision for depreciation:

Reference Description Amount (GH¢)
M1 Machinery 18,500
E1 & E2 Equipment 8,600
MV1 Motor Vehicle 6,500

During the financial year ended 30 June 2018, the following transactions took place:
Purchases:

Date Description Reference Amount (GH¢)
1 April 2018 Machinery M2 M2 10,800
1 January 2018 Equipment E3 E3 6,800

Disposals:

Reference Description Purchase Date Disposal Date Original Cost (GH¢) Sale Proceeds (GH¢)
E2 Equipment 1 January 2015 31 March 2018 7,200 6,400

All transactions took place through the bank account.

Depreciation rates per annum:

  • Machinery: 10% straight line on cost
  • Equipment: 12.5% straight line on cost
  • Motor Vehicle: 15% reducing balance

Depreciation for new assets commences in the month in which the asset is acquired.

Required:
For Tansah Ltd, prepare the following ledger accounts for the year ended 30 June 2018:

i) Provision for Depreciation of Machinery (2 marks)
ii) Provision for Depreciation of Equipment (4 marks)
iii) Disposal of Equipment (3 marks)
iv) Motor vehicle (1 mark)

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  • 20 Marks

FA – May 2018 – L1 – Q2 – Non-current assets and depreciation

Record and depreciate non-current asset transactions over a 15-month period.

Asasepa Ltd prepares its financial statements to 31 December each year until 31 December 2016, when the business changed its accounting date. The company prepared its next financial statements for 15 months to 31 March 2018.

At 1 January 2017, the following balances existed in the business’s accounting records:

  • Plant and machinery: cost GH¢819,000; accumulated depreciation GH¢360,000.
  • Motor vehicles: cost GH¢148,000; accumulated depreciation GH¢60,000.

Depreciation policy
The business’ policy on depreciation is to charge proportionate depreciation in the periods of purchase and sale of its non-current assets, charging depreciation as from the first day of the month in which assets are acquired, and up to the last day of the month before any disposal.
Annual rates of depreciation taken are:

  • Plant and machinery: 15% straight line
  • Motor vehicles: 25% straight line

Transactions during the year
During the 15 months ended 31 March 2018, the following transactions took place:

  • 10 January 2017: An item of plant was purchased. The cost was made up as follows:
    • Cost ex-factory: GH¢41,200
    • Delivery: GH¢300
    • Installation costs: GH¢800
    • Construction of foundations: GH¢3,600
    • Spare parts for repairs: GH¢4,000
    • Cost of one-year maintenance agreement: GH¢2,000
    • Total: GH¢51,900
  • 18 April 2017: A new motor vehicle was purchased for GH¢18,000. An existing vehicle which had cost GH¢12,000, and which had a book value at 1 January 2017 of GH¢6,000, was given in part exchange at an agreed value of GH¢5,000. The balance of GH¢13,000 was paid in cash.

Required:
a) Prepare the ledger accounts to show the balances at 1 January 2017.
b) Record the non-current asset transactions for the 15 months period ending 31 March 2018.

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