- 30 Marks
AT – Nov 2022 – Q1 – Taxation of Companies
Compute adjusted profit for 2021 and tax liabilities for 2021-2022 for a post-pioneer company, including reliefs and allowances.
Question
As a result of the developing nature of Nigeria’s economy, there are some industries and products that are not well developed on a scale that can adequately cater for the needs of the populace. One of the investment incentives available to industries and products in this category, is contained in the Industrial Development (Income Tax Relief) Act 1971. Application has to be made to the Federal Government in order to enjoy any of these numerous investment incentives.
Owoeye Machine Tools Nigeria Limited was incorporated on January 20, 2016, and was initially granted a pioneer certificate on April 1, 2016. At the end of the pioneer period, the company, as a result of negligence, failed to follow due process in applying for extension of the pioneer certificate. The company, however, retained March 31 as its financial year end.
The following records and information were obtained from the company:
(i) Qualifying capital expenditure on property, plant and equipment (certified by the Federal Inland Revenue Service) incurred during the pioneer period:
N’000 Industrial building 23,800
Building (non-industrial) 11,600 Motor vehicles 6,200 Plant 10,400 Furniture and fittings 5,800
(ii) Statement of adjusted profits/(losses) during the pioneer period:
Period under review Total profits/(losses)
N’000 Year ended March 31, 2017 (44,450) Year ended March 31, 2018 (23,140) Year ended March 31, 2019, 8,700
(iii) Both the qualifying capital expenditure on property, plant and equipment and adjusted profits/(losses) were certified by the Federal Inland Revenue Service.
(iv) The company made a gross turnover of N312,450,000 and adjusted profit of
N52,250,000 during the year ended March 31, 2020.
(v) Extract from the statement of profit or loss for the year ended March 31, 2021, revealed the following:
N’000 Gross turnover
320,220 Less: Cost of sales
(176,550) Gross profit
143,670 Less: Expenses:
Salaries and wages 48,430
Transport and traveling 2,360
Motor running expenses 1,580
Postage and telephone 1,150
Bank charges 870
Repairs and maintenance 3,660
Auditors‟ remuneration 1,500
Legal and professional fees (see note i) 2,000
Depreciation 15,770
Donations 1,600
Allowance for doubtful debts (see note ii) 7,000
Administrative expenses (note iii) 10,070 95,990 Net profit
47,680
Notes:
Legal and professional fees included N1,400,000 paid to the company’s lawyer in respect of acquisition of land for the purposes of the business.
Allowance for doubtful debts comprised: N1,350,000 for specific provision; N4,150,000 for general provision; and N1,500,000 for bad debts written off.
Administrative expenses included N850,000 paid to a financial consultant who helped in preparing feasibility study on viability of a proposed product line.
The schedule of qualifying capital expenditure on property, plant and equipment purchased during the year ended March 31, 2021, is as follows:
Type Date of acquisition Amount
N’000 Motor vehicles (2) April 15, 2020, 3,200 Plant (1) July 1, 2020, 5,000 Furniture and fittings (4) February 13, 2021, 1,200
Required:
As the company’s Tax Manager, you are to prepare a report for the attention of the Managing Director showing the companies:
a. Adjusted profit for the year ended March 31, 2021, b. Tax liabilities for 2021 and 2022 assessment years
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