- 20 Marks
Question
Adidas Nigeria Limited has been in business for so many years. The company is into supply of furniture, fixtures and fittings.
Since the date of commencement of business to the accounting year ended October 31, 2018, it had posted reasonable profits. In year 2019, a competitor, ABC Limited, was able to introduce a new brand of furniture into the market, which boosted the sales of the company. Unfortunately, this had an adverse effect on the gross turnover of Adidas Nigeria Limited. Despite concerted efforts made by Adidas Nigeria Limited to compete favourably with ABC Limited, its fortunes continued to dwindle.
To allow for capital injection, the directors of Adidas Nigeria Limited, decided on February 1, 2020, to change its accounting date to be in line with one of its foreign partners. The board, therefore, decided that the accounting year-end be changed to December 31, every year.
You are provided with the following additional information:
| (i) Adjusted profits | N |
|---|---|
| Year ended October 31, 2019 | 24,500,000 |
| Period ended December 31, 2020 (14 months) | 38,200,000 |
| Year ended December 31, 2021 | 44,100,000 |
| (ii) Gross turnover | N |
|---|---|
| Year ended October 31, 2019 | 49,100,200 |
| Period ended December 31, 2020 | 75,200,500 |
| Year ended December 31, 2021 | 101,300,000 |
| (iii) Capital allowances | N |
|---|---|
| Assessment year 2020 | 850,000 |
| Assessment year 2021 | 720,000 |
| Assessment year 2022 | 600,000 |
Required: For the relevant assessment years:
a. Compute the assessable profits
(14 Marks)
b. Compute the company‟s income tax liabilities
(6 Marks) (Ignore minimum tax computation)
Answer
a. Adidas Nigeria Limited Computation of assessable profits For assessment years 2020, 2021, and 2022
Based on the foregoing, the Revenue would assess on the new basis, since this would produce higher assessable profits for 2020–2022 assessment years. Consequently, final assessable profits will be as follows:
| Assessment year | Basis period | Assessable Profits (N) |
|---|---|---|
| 2020 | 1/1/19 – 31/12/19 | 25,873,810 |
| 2021 | 1/1/20 – 31/12/20 | 32,742,857 |
| 2022 | 1/1/21 – 31/12/21 | 44,100,000 |
| Total | 102,716,667 |
Workings: Old basis Assessable profits i) 2021 assessment year
- 1/11/2019 – 31/10/2020 = 12/14 x N38,200,000 = 32,742,857 ii) 2022 assessment year
- 1/11/2020 – 31/12/2021 = 2/14 x N38,200,000 = 5,457,143
- 1/11/2021 – 31/10/2021 = 10/12 x N44,100,000 = 36,750,000
- Total = 42,207,143
- Grand Total (2021 + 2022) = 74,950,000
Old basis vs. New basis Comparison:
| Assessment year | Basis period | Assessable profit (Old basis) (N) | Basis period | Assessable profit (New basis) (N) |
|---|---|---|---|---|
| 2020 | 1/11/2018 – 31/10/2019 | 24,500,000 | 1/1/2019 – 31/12/2019 | 25,873,810 |
| 2021 | 1/11/2019 – 31/10/2020 | 32,742,857 | 1/1/2020 – 31/12/2020 | 32,742,857 |
| 2022 | 1/11/2020 – 31/10/2021 | 42,207,143 | 1/1/2021 – 31/12/2021 | 44,100,000 |
| Total | 99,450,000 | 102,716,667 |
Computation of Assessable Profits on New Basis: 2020:
- Jan 1 to Oct 31, 2019: 10/12 × 24,500,000 = 20,416,667
- Nov 1 to Dec 31, 2019: 2/14 × 38,200,000 = 5,457,143
- Total: 25,873,810
2021:
- Jan 1 to Dec 31, 2020: 12/14 × 38,200,000 = 32,742,857
2022: 44,100,000
b. Computation of Income Tax Liabilities
First, determine company size based on turnover for each basis period (prorated similarly).
Turnover on New Basis: 2020 (1/1/19 – 31/12/19):
- Jan-Oct 2019: 10/12 × 49,100,200 = 40,916,833
- Nov-Dec 2019: 2/14 × 75,200,500 = 10,742,929
- Total: 51,659,762 (Medium company, 20%)
2021 (1/1/20 – 31/12/20):
- 12/14 × 75,200,500 = 64,457,571 (Medium company, 20%)
2022: 101,300,000 (Large company, 30%)
Taxable Profits and Tax Liabilities:
| Assessment Year | Assessable Profit (N) | Capital Allowances (N) | Taxable Profit (N) | Rate (%) | Tax Liability (N) |
|---|---|---|---|---|---|
| 2020 | 25,873,810 | 850,000 | 25,023,810 | 20 | 5,004,762 |
| 2021 | 32,742,857 | 720,000 | 32,022,857 | 20 | 6,404,571 |
| 2022 | 44,100,000 | 600,000 | 43,500,000 | 30 | 13,050,000 |
| Total | 24,459,333 | ||||
| =============== |
- Topic: Companies Income Tax (CIT)
- Series: MAY 2024
- Uploader: Samuel Duah