- 20 Marks
Question
Engineer Sanni Abudukar and Chief Caleb Ariwaya are partners in a consultancy firm based in Abakaliki. The firm renders engineering and geological services to all companies at various oil fields in the country.
An extract from the statement of profit or loss of the firm – Abubakar Ariwaya & Associates, for the year ended December 31, 2024, revealed the following:
| N’000 | N’000 | |
|---|---|---|
| Gross fees | 236,500 | |
| Sundry income | 7,975 | |
| 244,475 | ||
| Subscriptions and donations | 2,475 | |
| Administrative expenses | 48,000 | |
| Rent | 8,250 | |
| Depreciation | 41,250 | |
| Sundry expenses | 33,000 | |
| Interest on loan and overdraft | 8,250 | |
| Repairs and maintenance | 30,800 | (172,025) |
| Net profit | 72,450 |
Other information provided by the firm includes:
(i) Engineer Abubakar is married with six children. All the children are studying in various higher institutions across the country. He has an aged father of about 85 years old who received an annual pension of N1.2 million from the Nigerian Railway Corporation. He spends about N800,000 per annum to maintain him.
(ii) Chief Ariwaya has no dependent relative but he is married with two children both of whom are schooling abroad. He has an insurance policy for his family on which he pays a premium of N250,000 per annum on a sum of N30 million at the end of 25 years.
(iii) Engineer Abubakar and Chief Ariwaya did not have any partnership agreement in writing but they opted for sharing the firm’s profit or losses equally.
(iv) Sundry income included the profit on sales of motor vehicle amounting to N5,330,000.
(v) Administrative expenses is made up of:
| N’000 | |
|---|---|
| – Office stationery | 4,650 |
| – Telephone and internet | 1,850 |
| Upkeep of partners: | |
| – Rent paid for residential house – Engr. Abubakar | 5,450 |
| – Medical expenses of Chief Ariwaya’s social acquaintance | 1,250 |
| – Maintenance of the firm’s office | 4,800 |
| – Other allowable expenses | 30,000 |
| 48,000 |
(vi) Subscriptions and donations comprise:
| N’000 | |
|---|---|
| – Journal, newspapers and magazines | 575 |
| – Subscription of partners and senior staff professional institutions | 638 |
| – Trade associations | 762 |
| – Donation to Ebonyi Social Club | 500 |
| 2,475 |
(vii) The sum of N1,980,000 included in the interest charged by banks on loans and overdraft related to loan obtained by the partners from the banks to finance their domestic residences which were still under construction.
Chief Ariwaya took a loan of N10 million while Engr. Abubakar’s loan was N8 million. The accruing interests are shared according to loan obtained.
(viii) Withholding tax deducted on fees income was at the rate of 5%.
(ix) Computed capital allowances claimable for the relevant year of assessment are as follows:
| N | |
|---|---|
| – Initial allowance | 7,715,000 |
| – Annual allowance | 14,080,000 |
| – Balancing charge | 1,795,000 |
Required:
Compute the partners’ income tax liabilities for the relevant year of assessment.
Answer
Abudukar, Ariwaya & Associates
Computation of adjusted profit
For 2025 year of assessment
| N’000 | N’000 | |
|---|---|---|
| Net profit as per accounts | 72,450 | |
| Add: disallowable expenses: | ||
| Depreciation | 41,250 | |
| Donation to Ebonyi Social Club | 500 | |
| Rent paid for residential houses – Engr. Abubakar | 5,450 | |
| Medical expenses | 1,250 | |
| Interest on loan to partners | ||
| – Engr. Abubakar (10/18 x N1,980,000) = 1,100,000 | ||
| – Chief Ariwaya (8/18 x N1,980,000) = 880,000 | 1,980 | |
| 50,430 | ||
| 122,880 | ||
| Less: Non-taxable income: | ||
| Profit on sale of motor vehicle | 5,330 | |
| Adjusted profit | 117,550 | |
| Balancing charge | 1,795 | |
| Capital allowances: | ||
| Initial | 7,715 | |
| Annual | 14,080 | (21,795) |
| Divisible profit | 97,550 | |
| Share of profit: | ||
| – Engr. Abubakar (1/2 x N97,550,000) = N48,775,000 | ||
| – Chief Ariwaya (1/2 x N97,550,000) = N48,775,000 |
Computation of tax liabilities for the partners for 2025 assessment year
| Engr. Abudukar | Chief Ariwaya | |
|---|---|---|
| Share of profit | 48,775,000 | 48,775,000 |
| Less tax exempt: | ||
| Life assurance | 0 | 0 |
| Gross income | 48,775,000 | 48,775,000 |
| Less CRA (20% of gross income + higher of (N200,000 or 1% of gross income) | (10,242,750) | (10,242,750) |
| Chargeable income | 38,532,250 | 38,535,250 |
Computation of tax payable
| Tax Table | N’000 | N’000 |
|---|---|---|
| 1st N300,000 @ 7% | 21,000 | 21,000 |
| Next N300,000 @ 11% | 33,000 | 33,000 |
| Next N500,000 @ 15% | 75,000 | 75,000 |
| Next N500,000 @ 19% | 95,000 | 95,000 |
| Next N1,600,000 @ 21% | 336,000 | 336,000 |
| Above N3,200,000@ 24% | 8,479,740 | 8,479,740 |
| 9,039,740 | 9,039,740 | |
| WHT deducted on gross fees | (5,912,500) | (5,912,500) |
| Net tax payable | 3,127,240 | 3,127,240 |
- Topic: Taxation of Partnerships and Sole Proprietorships
- Series: MAY 2025
- Uploader: Samuel Duah