- 15 Marks
Question
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2022
ADVANCED TAXATION
The issue of correct computation and presentation of deferred taxes in financial statements has been a source of worry to the Managing Director of ICTREC Mining Company Limited. Last year, the Federal Inland Revenue Service raised a query on the financial statements of the company and the annual tax returns filed for purposes of tax assessment.
In order to avoid any tax query on the financial statements, your firm of chartered accountants has been approached by the Managing Director of the company to assist in the preparation of financial statements suitable for presentation at the annual general meeting of the company and to the tax authorities for purposes of determination of tax liabilities payable.
All the relevant books of accounts have been made available to you in respect of the company’s financial transactions. The extract from the accounts of the company for the year ended December 31, 2021, revealed the following:
N’000 Turnover
125,400 Rent and rates 12,200
Direct mining transportation cost 1,190
Direct mining cost 47,400 60,790 Gross profit
64,610 Dividends income (net)
3,900 Interest on foreign deposit
2,750
71,260 Salaries and wages 25,340
Depreciation of mining plant 2,500
Depreciation (other non-current assets) 7,840
Other administrative and general expenses 4,210
Loan interest 850
Loss on sale of old mining plant 200 40,940 Net profit
30,320
The following additional information was provided:
(i) The interest on foreign deposit was repatriated to the country through the company’s domiciliary account in a Nigerian deposit money bank.
(ii) The company has unrelieved losses of N2,800,000.
(iii) Capital allowance as agreed with the relevant tax authorities for the year was N7,250,000.
(iv) The tax written down value of qualifying capital expenditure as at December 31, 2021, after the above capital allowances have been taken into account was N35,110,000, while the net book value on the same date was N23,700,000.
(v) The opening tax written down values and net book values were N42,620,000 and N33,900,000, respectively.
(vi) Unpaid tax at the beginning of the year was N15,620,000, while payment in the year was N18,860,000.
(vii) Assume a depreciation rate of 10% per annum on its mining plant.
(viii) The company revalued its mining plant during the year ended December 31, 2017. The revaluation surplus there from which amounted to N5 million was reflected in the company’s financial statements for that year.
Required: You have been directed by your Principal Partner to work on this assignment and present a draft of the report to him for review before sending it to the Managing Director of ICTREC Mining Company Limited. The report should show explicitly the computation of the companies:
a. Tax liabilities for the relevant year of assessment b. Deferred tax provisions for 2021 and 2022
Answer
AY& Co (Chartered Accountants)
Coleng Road, Ibadan
INTERNAL MEMO
Date: ………………
From: Assistant Tax Manager
To: Principal Partner
RE: Report on Tax Liabilities and Deferred Tax Provisions of ICTREC Mining Company Limited
I refer to our client’s request on computations of tax liabilities payable for 2021 assessment year and deferred tax provisions for the 2021 and 2022 assessment years. I hereby present a report for your review before same is presented to the client.
The adjusted profit of the company for the assessment year under review was N34,210,000. The profit made was able to relieve unabsorbed loss brought forward of N2,800,000 as well as utilization of the capital allowances for the year, N7,250,000. The total profit of N24,160,000 resulted thereof. The company is therefore liable to pay companies income tax of N7,248,000 and tertiary education tax of N855,250. This gives total tax liabilities of N8,103,250. These results are provided in attached appendix 1.
Appendix 2 shows how the deferred tax provisions for assessment years 2021 and 2022 were computed. The deferred tax provisions revealed N3,516,000 and N4,173,000 for 2021 and 2022 assessment years, respectively.
Thank you.
Ola Dejo
Appendix 1: Computation of tax liabilities
N’000 Net profit as per accounts
30,320 Add back: Disallowable expenses:
Depreciation (mining plant) 2,500
Depreciation (other non-current assets) 7,840
Loss on disposal of old mining plant 200 10,540
40,860 Less: Non-taxable income:
Dividends 3,900
Interest on foreign deposit 2,750 6,650 Adjusted profit
34,210 Less: Unrelieved loss b/f
2,800
31,410 Less: Capital allowances for the year
7,250 Total profit
24,160
Companies’ income tax @ 30%
7,248 Tertiary education tax @ 2½% of adjusted profit of N34,210
855.25 Total tax liabilities payable
8,103.25
Note:
The Finance Act 2021 is effective January 1, 2022.
The internal circular issued by the Executive Chairman, FIRS, dated January 25, 2022, provides that financial statements with accounting years ended from July 1, 2021, to December 31, 2021, the tax returns of which are due for filing from January 1, 2022 to June 30, 2022, shall reflect the new tertiary education tax rate of 2½% of adjusted/assessable profit.
Appendix 2: Computation of deferred tax
2022
2021
N’000 TWDV
35,110
42,620 Less: Net book values
23,700
33,900
Deduct:
Revaluation surplus
5,000
5,000
Depreciation (2,500) w1 (2,500) 21,200 (2,000) w2 (3,000) 30,900
Timing difference
13,910
11,720 Deferred tax @ 30%
4,173
3,516
Workings
(1) Depreciation (2022)
= N5,000,000 x 10% x 5 years
= N2,500,000
(2) Depreciation (2021)
= N5,000,000 x 10% x 4 years
= N2,000,000
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