- 20 Marks
Question
J & P (Nigeria) Limited, a construction and civil engineering company, has been in business for many years. The harsh economic climate in the country resulted in a decline in the profits of the company which necessitated the decision of the board of directors to either cease operations on December 31, 2017 or March 31, 2018.
Recent accounts adjusted for tax purposes revealed the following adjusted profits:
| Year ended | Adjusted Profit (N) |
|---|---|
| July 31, 2013 | 5,460,000 |
| July 31, 2014 | 4,970,000 |
| July 31, 2015 | 4,320,000 |
| July 31, 2016 | 3,450,000 |
| July 31, 2017 | 1,875,000 |
| 8 Months ended March 31, 2018 | 750,000 |
Required:
Advise the board of directors on whether or not to cease operations on December 31, 2017, or March 31, 2018. Show all workings.
Answer
Cessation on December 31, 2017
Basis Period for Assessable Profits
- 2017 Year of Assessment (YA):
- Basis period: January 1, 2017 – December 31, 2017
- Assessable profit: 7/12×1,875,000 + 5/8×750,000
- =N1,093,750 + N468,750 = N1,562,500 = N1,093,750 + N468,750 = N1,562,500
- 2016 Year of Assessment (YA):
- Basis period: January 1, 2016 – December 31, 2016
- Assessable profit: Higher of the actual profit (N2,973,750) or the preceding year basis (N4,320,000)
- Assessable profit = N4,320,000
Cessation on March 31, 2018
Basis Period for Assessable Profits
- 2018 Year of Assessment (YA):
- Basis period: January 1, 2018 – March 31, 2018
- Assessable profit: 7/12 × 1,875,000 + 5/8 × 750,000
- =N1,093,750 + N468,750 = N1,562,500 = N1,093,750 + N468,750 = N1,562,500
- 2017 Year of Assessment (YA):
- Basis period: January 1, 2017 – December 31, 2017
- Assessable profit: 7/12 × N1,875,000 + 5/8 × N750,000
- Assessable profit = N1,562,500
Recommendation:
Considering the profits, it is better for J & P Nigeria Limited to cease operations on December 31, 2017, as this results in a lower overall assessable profit compared to ceasing on March 31, 2018.
- Topic: Taxation of Specialized Businesses
- Series: NOV 2018
- Uploader: Kwame Aikins