Series: NOV 2014

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  • 15 Marks

AAA – Nov 2014 – L3 – SC – Q7 – Audit of IT Systems and Data Analytics

Evaluates factors influencing the use of CAATs in audit planning and identifies solutions to address audit trail loss.

CAATs

The availability of Computer Assisted Audit Techniques (CAATs) should be considered by auditors when planning the nature, extent, and timing of tests in an audit. Auditors must determine their testing strategies which will depend on their choice of either using a manual testing method or a computer-assisted method.

Required:

(a) Explain FIVE factors that will determine auditors’ choice of method of testing in the planning of an audit in a computer environment. (10 Marks)

(b) Identify FIVE solutions to loss of audit trail. (5 Marks)

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  • 15 Marks

AAA – Nov 2014 – L3 – SC – Q6 – Environmental and Sustainability Audits

Evaluates the risks and considerations of tendering for the audit of Lagos Leisure Ltd, including fee estimation and tender document components.

You are the senior audit manager for a medium-sized firm of accountants. Your firm has just lost two clients which have gone into receivership and has now been invited to tender for the audit of Lagos Leisure Ltd. The audit fees have been initially estimated at ₦200,000.

Lagos Leisure Ltd is a medium-sized manufacturing organisation which has existed for 35 years and has generally made consistent profits. However, in the last two years, profits have fallen by approximately 10% in each year, although the market sector in which Lagos Leisure Ltd operates is expanding. The company has also stated that they would like some consultancy support regarding business strategy in order to try and reverse the current profit downturn and have set aside ₦1m for this.

You have ascertained the following from a brief discussion with the Managing Director:

  1. There has been no investment in non-current assets in the last 10 years. The company was intending to start a program of investment two years ago but this was cancelled due to reduced profits, and maintenance and repair costs have increased significantly over the last year.
  2. Staff remuneration has been frozen, and there has been some discussion with unions as staff morale is very low and several staff have already left. So far, industrial action has been avoided.
  3. The Financial Director was dismissed three months ago and hasn’t been replaced; he is currently suing Lagos Leisure Ltd for unfair dismissal.
  4. The Managing Director is due to retire next year; a replacement has not yet been considered.
  5. There is an outstanding litigation as an employee is suing Lagos Leisure Ltd due to an accident in the workplace, and the authorities have written a detailed report about the case.

Your firm’s total fee income last year was ₦7m, including ₦500,000 from the lost clients.

Required:

(a) Discuss the advantages and disadvantages of tendering for the audit of Lagos Leisure Ltd, highlighting any key risks to your firm. (7 Marks)

(b) Although the initial estimate of the audit fee was ₦200,000, further work needs to be done before a figure could be included in the tender document. List the factors which should be taken into account when calculating this fee. (4 Marks)

(c) Outline the matters which should be included in the tender document if the firm decides to tender. (4 Marks)

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  • 15 Marks

AAA – Nov 2014 – L3 – SC – Q5 – Environmental and Sustainability Audits

Steps in the audit process to identify environmental issues and major social concerns in a company's social policy report.

Green Issues

Oil and Gas Limited is a company involved in the upstream petroleum activities in the Delta Region. The restiveness of the youth in this area of operation was a result of environmental degradation of the region. Your firm has just been appointed as the auditors to the company. During the preliminary planning stage of the audit, you realised that the environmental issues could have an impact on the financial statements.

Required:

(a) Enumerate EIGHT steps you would include in the audit process in order to highlight environmental issues that may be apparent in the client’s business.

(8 Marks)

(b) Identify SEVEN major social issues that an auditor will be concerned with in a company’s social policy report. (7 Marks)

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  • 20 Marks

AAA – Nov 2014 – L3 – SB – Q4 – Group Audits

Plan and control the group audit of the Cinnamon Group, assess subsidiary issues, and define the relationship with component auditors.

The Cinnamon Group is an international business made up of ten subsidiaries and a head office. You are the manager in charge at the firm undertaking the group audit, but there are separate local auditors for the Cayenne subsidiary in the United States, the Habenaro subsidiary in Mexico, and the Hybrid subsidiary in Columbia. You are aware of the following information:

  1. Hybrid Issues: Hybrid is a loss-making subsidiary with current year-end losses totaling ₦27 million. There are significant control problems, high levels of bad debts, and 25% staff turnover. The local auditors have stated their intention to give a qualified opinion for the year just ended due to material issues.
  2. Cayenne Financial Year Misalignment: Cayenne operates to a financial year ending October 2013, differing from the group’s December 2013 year-end.
  3. Habenaro Sale: Shortly after the year-end in January 2014, the Cinnamon Group announced the sale of Habenaro for ₦250 million, and this disposal is currently ongoing.
  4. Loan Guarantees: The Cinnamon Group is guaranteeing loans of approximately ₦100 million for its subsidiaries.

Required:

a. Set out how you would plan and control the group audit of the Cinnamon Group.
(5 Marks)

b. Consider the impact of each of the above issues on the group audit.
(10 Marks)

c. Explain the nature of the relationship between your firm and the auditors of the subsidiaries, making particular reference to the extent to which your firm may rely on the component auditors’ work and to the considerations involved where joint audits are conducted.
(5 Marks)

(Total: 20 Marks)

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  • 20 Marks

AAA – Nov 2014 – L3 – SB – Q3 – Review of Subsequent Events and Going Concern Assumptions

Identify going concern risks for Woes Limited and outline post-reporting date audit matters to assess its ability to continue as a going concern.

You are responsible for the audit of Woes Limited for the year-ended 31 December 2013. The principal activity of Woes Ltd is the provision of high-quality packaging services for manufacturing companies. The company was established three years ago and has significantly exceeded its growth targets in each of those years.

Historically, the packaging process was labour-intensive, but in September 2013, in an effort to reduce labour costs and increase efficiency, the company invested in an enhanced automated packing system. The investment was funded by a loan repayable in monthly instalments over four years. The loan covenant agreement includes a term specifying that the company’s debt: equity ratio should not exceed 1:1.

A comparison of the draft accounts for the year ended 31 December 2013 with the previous year indicates a significant increase in revenue with a small increase in profit. The company is currently trading in excess of its overdraft limit and is negotiating an increase in its facility with the bank. Management has prepared, in support of its negotiations, profit and cash flow forecasts based on the assumptions that the anticipated increase in efficiency, including a reduction in labour costs, will be achieved.

The company struggles to meet the weekly wage bill and has fallen behind in its payments to the tax authorities. It has also failed to comply with the terms of the lease in respect of the factory premises and has not paid the last three months’ instalments.

Required:

a. Identify and explain, from the information provided above, factors which indicate that Woes Ltd may not be a going concern. (10 Marks)
b. Outline the matters to which you would direct your attention in the period after the reporting date to determine whether Woes Ltd can continue as a going concern for the foreseeable future. (10 Marks)

(Total: 20 Marks)

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  • 20 Marks

AAA – Nov 2014 – L3 – SB – Q2 – Quality Control in Audit Firms

Communication brief for quality control and audit working papers with a Q&A session.

You have just joined the partnership of a small firm of Chartered Accountants, SMP Accountants & Partners, and have been asked to prepare a communication brief for distribution to all staff, which will then be followed by a presentation with a question-and-answer session. The communication brief required is regarding quality control procedures and audit working papers.

ISA 220 requires quality control procedures to be implemented at the engagement level, and ISQC 1 requires them to be implemented at the level of the audit firm. The partners are concerned that the firm’s quality control procedures may not be satisfactory as they have never been reviewed since they were first implemented five years ago. In addition, staff are able to read the policies and procedures in the staff manual, but there are currently no other ways in which the information is communicated to them.

Required:

a. Prepare a communication brief for distribution to all staff, which sets out: i. why quality control policies and procedures are necessary
ii. the areas that should be covered by quality control policies
iii. procedures that would be required to ensure that the policies are met.
(12 Marks)

b. Answer the following queries which were asked at the question-and-answer session:
i. What is the difference between a hot review and a cold review, and why are both necessary?
ii. Why is it so important that all audit reasons and justifications are documented in the working papers when it should be obvious from test results what the key issues are?
iii. Why do audit working papers have to be standardized since this inhibits auditors exercising their skills and experience in the most effective way?
(8 Marks)

(Total: 20 Marks)

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  • 30 Marks

AAA – Nov 2014 – L3 – SA – Q1 – Group Audits

Identify business risks, audit planning effects, and implications of acquisitions for the consolidated financial statements audit of Wasp Ltd.

You are an audit manager in Ruby & Co, a firm of Chartered Accountants. One of your audit clients, Wasp Ltd., provides satellite broadcasting services in a rapidly growing market.

In February 2014, Wasp Ltd. purchased Xstatic Ltd., a competitor group of companies. Significant revenue, cost, and capital expenditure synergies are expected as the operations of Wasp Ltd. and Xstatic Ltd. are being combined into one group of companies.

The following financial and operating information consolidates the results of the enlarged Wasp Ltd. group:

Year-end 31 December 2014 (Budget) 2013 (Actual)
Revenue ₦6,827m ₦4,404m
Cost of Sales (₦3,109m) (₦1,991m)
Distribution Costs and Administrative Expenses (₦2,866m) (₦1,700m)
Research and Development Costs (₦25m) (₦22m)
Depreciation and Amortization (₦927m) (₦661m)
Interest Expense (₦266m) (₦202m)
Loss Before Tax (₦366m) (₦172m)
Number of Subscribers 14.9m 7.6m
Average Revenue Per Subscriber (ARPS) ₦437 ₦556

In November 2014, Wasp Ltd. purchased MTbox Ltd., a large cable communications provider in Gambia, where your firm has no representation. The financial statements of MTbox Ltd. for the year ending 31 December 2014 will continue to be audited by a local firm of Chartered Accountants. MTbox Ltd.’s activities have not been reflected in the above estimated results of the group.

Wasp Ltd. is committed to introducing its corporate image into Gambia.

In order to sustain growth, significant costs are expected to be incurred as operations are expanded, networks upgraded, and new products and services introduced.

Required:

a. Identify and describe the principal business risks for the Wasp group. (9 Marks)

b. Explain what effect the acquisitions will have on the planning of Ruby & Co’s audit of the budgeted consolidated financial statements of Wasp Ltd. group for the year ending 31 December 2014. (10 Marks)

c. Explain the role of a Letter of Comfort as evidence in the audit of financial statements. (6 Marks)

d. Discuss how non-consolidated entities under common control affect the scope of an audit and the audit work undertaken. (5 Marks)

(Total 30 Marks)

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  • 15 Marks

FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management

Address the calculation of potential exchange rate losses, money market hedging, and the advantages and disadvantages of forward contracts.

  1. Build Nigeria Plc. (BNP) is a giant construction company with head office in Kano, Nigeria. It is involved in construction of roads, dams, airfields, etc., in many parts of the country. Recently, the company won construction contracts across a number of African countries. One of the contracts is for the construction of a dam for a country in Central Africa whose currency is Central African Dollar (C$). The dam has now been completed, and the retention money of C$210,000,000 is due for settlement in one year’s time.
    The current spot exchange rate is C$40 = N1. Risk-free rate is 5% in Nigeria and 25% in the foreign country.
    The Chief Finance Officer (CFO) of BNP is worried about the above financial statistics and concluded that BNP will lose as much as N840,000 due to exchange rate movements between now and the end of the year when the retention money is received.

    Required:
    Explain, showing all relevant calculations, how the CFO arrived at the potential loss of N840,000. (4 Marks)

    b. In another contract in a country in the ECOWAS sub-region (with currency of W$), BNP expects the following payment and receipt in six months’ time:
    You are provided with the following financial data:

    • Spot exchange rate:
      N per W$1 = 1.4735 – 1.4755
    • Money Market Rates:
      Deposit % Borrowing %
      Nigeria 13.25
      West African Country 6.5

    Required:
    Show how BNP can make use of money market hedge to mitigate the foreign exchange risk inherent in the above payment and receipt. Show all workings and the necessary steps.

    (7 Marks)

    c. Discuss TWO advantages and TWO disadvantages of forward exchange contracts.

    (4 Marks)

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  • 5 Marks

FM – Nov 2014 – L3 – SC – Q6b – Financing Decisions and Capital Markets

Examine reasons for conflict of interest between shareholders and bondholders.

Discuss any FIVE reasons why conflict of interest may exist between shareholders and bondholders. (5 Marks)

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  • 10 Marks

FM – Nov 2014 – L3 – SC – Q6a – Treasury Management

Discuss transfer pricing and its implications for multinational companies with subsidiaries in foreign countries.

Nimega Plc is a Nigeria-based multinational company that has subsidiaries in two foreign countries. Both subsidiaries trade with other group members and with four third-party companies.

You are required to present SIX arguments for and FOUR arguments against centralized treasury management in a multinational organization.

(10 Marks)

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  • 8 Marks

CR – Nov 2014 – L3 – SC – Q4b – Income Taxes (IAS 12)

Evaluate the impact of deferred tax on fair value adjustments for property, plant, and equipment in an acquisition.

On 1 June 2013, Bam Plc acquired Mango Limited for N3,150 million.
The fair value of the identifiable net assets of Mango Limited at this date was N825 million, and N2,550 million and retained earnings and other components of equity were N105 million, respectively. Mango Limited’s share capital was N1,500 million.

The excess of the fair value of the net assets is due to an increase in the value of property, plant, and equipment.

Required:
Evaluate the impact of full deferred tax on the excess of the fair value of the net assets attributable to the increase in the value of property, plant, and equipment of Bam Plc.

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  • 12 Marks

CR – Nov 2014 – L3 – SB – Q4a – Income Taxes (IAS 12)

Compute the impact of deferred tax on retained earnings and advise Lagos Plc on IAS 12 compliance.

The following is the statement of financial position of Lagos Plc as at 31 December, 2013, with its immediate two comparative years.

The management of Lagos Plc is not sure of the impact of IAS 12 (Income Taxes) on its retained earnings as at 31 December, 2013, as well as what the new deferred tax balance will be on migrating to IFRS.

The following information was also available as at the year-end:

Details Value (N’000)
Tax written down value of PPE 40,300
Tax written down value of goodwill 4,300
Tax base of trade receivables 29,800
Tax base of trade payables 13,000

Assume that current tax has been correctly computed in line with the applicable tax laws at 30%.

Required:
Using relevant computations, advise the management of Lagos Plc on the impact of deferred tax calculated on retained earnings in accordance with IAS 12.

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  • 20 Marks

CR – Nov 2014 – L3 – SB – Q3 – Presentation of Financial Statements (IAS 1)

Analyze Prochain Plc’s financial performance and calculate key ratios for loan covenants.

Prochain Plc

The Directors of Prochain Plc have pursued an aggressive policy of expansion in the last two years. They have developed several new products and market share has increased.

The financial statements for the year ended 31 December 2013, which will be presented to the Board of Directors at its next meeting, are being finalised. The financial statements at the year-end are presented below:

Statement of profit or loss and other comprehensive income for the year ended 31 December

The results of the company as well as certain key ratios that will form part of the covenants in respect of the loan facilities will be discussed at the Board of Directors meeting.

Notes:

  1. The movement on the revaluation reserve relates to property, plant, and equipment revalued in the year.
  2. The movement on other reserves relates to the gains on the investments available for sale.
  3. The bonds are repayable on 1 July 2015.

Required:

(a) Based on the results of Prochain Plc for the year ended 31 December 2013, calculate the key ratios for the loan.
(8 Marks)

(b) Prepare a report commenting on the financial performance for the year in relation to the key ratios for the loan.
(12 Marks)

(Total 20 Marks)

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  • 7 Marks

CR – Nov 2014 – L3 – SB – Q2a – Revenue Recognition (IFRS 15)

Discuss revenue recognition principles for different scenarios and calculate the revenue for NIXAQ sales.

(a) Labalaba Plc operations involve selling cars to the public through a chain of retail car showrooms. It buys most of its new vehicles directly from the manufacturer on the following terms:

  • Pay the manufacturer for the cars on the date they are sold to customers or six months after they are delivered to its showroom, whichever is earlier.
  • The price paid will be 80% of the retail price as set by the manufacturer at the date that the goods are delivered.
  • Pay the manufacturer 1.5% per month (of the cost to Labalaba) as a “display charge” until the goods are paid for.
  • May return the cars to the manufacturer at any time up to the date the cars are due to be paid for and incur the freight cost of any such returns. Labalaba Plc has never taken advantage of this right of return.
  • The manufacturer can recall the cars or request them to be transferred to another dealer at any time up to the time they are paid for by Labalaba.

Required:
Advise the management of Labalaba Plc as to which party bears the risks and rewards in the above arrangement and show whether there is a sale and how the transactions should be treated by each party. (7 Marks)

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  • 30 Marks

CR – Nov 2014 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Bagat Plc, incorporating details on acquisitions, impairments, and inter-company balances.

Bagat Plc has two subsidiaries (Megat and Mingat) and one associate (Cagat). Since the adoption of IFRS by Government Bagat has been preparing its consolidated financial statements in accordance with the principles of International Financial Reporting Standards (IFRS). The draft Statements of Financial Position of Bagat and its two subsidiaries as at 31 May 2013 are as follows:

Draft Statements of Financial Position as at 31 May 2013

The following information is relevant to the preparation of the group financial statements:

i. On 1 June, 2012, Bagat acquired 80% of the equity interest of Megat Plc. On the date of acquisition, the retained earnings of Megat were N2.72 billion and other components of equity were N80 million. There had been no new issue of capital by Megat since the date of acquisition. The purchase consideration comprised cash of N6 billion whereas the fair value of the identifiable net assets of Megat on this date was N8 billion. The excess of the fair value of the net assets is due to an increase in the value of non-depreciable land. An independent valuer has stated that the fair value of the non-controlling interests in Megat was N1.72 billion on 1 June, 2012. It is the policy of Bagat to measure non-controlling interests on the basis of their proportionate share in the identifiable net assets of the acquired subsidiary and not at fair value (full goodwill method).

ii. Also on 1 June, 2012, Bagat acquired 70% of the ordinary shares of Mingat. The consideration for the acquisition of these shares was N2.56 billion. Under the purchase agreement of 1 June, 2012, Bagat is required to pay the former shareholders of Mingat 30% of the profits of Mingat on 31 May, 2014 for each of the financial years to 31 May, 2013 and 31 May, 2014. The fair value of this arrangement was estimated at N120 million at 1 June, 2012, and this value has not changed. This amount has not been included in the financial statements. The fair value of the identifiable net assets at 1 June, 2012 of Mingat was N3.52 billion and the retained earnings and other components of equity were N1.1 billion and N140 million respectively. There had been no new issue of share capital by Mingat since the date of acquisition and the excess of the fair value of the net assets is due to an increase in the value of property, plant, and equipment (PPE). The fair value of the non-controlling interests in Mingat was N1.06 billion on this date. PPE is depreciated on a straight-line basis over seven years.

iii. Finally, Bagat acquired a 25% interest in Cagat Plc on 1 June, 2012 for N400 million achieving significant influence over that company in its financial and operating policy decisions. Cagat Plc retained earnings for the year to 31 May, 2013 was N200 million.

iv. Included in trade receivables of Bagat at 31 May, 2013 is a receivable from Megat of N30 million. Unknown to Bagat, Megat has paid this amount through a bank transfer by the close of work on 31 May, 2013, but it had not yet been reflected in the bank statement of Bagat. Megat has already passed accounting entries to reflect this transaction.

v. Goodwill arising on the purchase of Mingat was tested for impairment on 31 May, 2013, and this provided evidence of impairment to the tune of N36 million. No accounting entries have been passed to reflect the impairment.

Required:

Prepare a consolidated statement of financial position as at 31 May, 2013 for the Bagat Group. (30 Marks)

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  • 20 Marks

TAX – Nov 2014 – L2 – Q5 – Companies Income Tax (CIT)

Compute adjusted profit, tax ratios, total profit, and income tax for Kenky Limited.

Kenky Limited, an Austrian company, operates cable undertakings in Nigeria and has significant business in several African countries. The Nigerian Revenue Authority disputed the company’s financial returns, resulting in a Best of Judgement (BoJ) Assessment. Below is an extract from Kenky Limited’s income statement for the fiscal year ending 30 September 2012:

 

Notes:

  1. The Federal Inland Revenue Service (FIRS) considers both Nigerian and Austrian operations under specialized business taxation.
  2. The Austrian authority verified the Adjusted Profit and Depreciation Ratios.
  3. A donation to Jeje, totaling ₦40,000,000, is part of the overhead expenses.

Requirements: a. Compute the Adjusted Profit for the year. (4 Marks)
b. Determine the Adjusted Profit Ratio and Depreciation Ratio. (4 Marks)
c. Compute the Total Profits and Income Tax payable in Nigeria. (4 Marks)
d. List other business activities, besides cable messages, recognized under specialized business taxation. (3 Marks)

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  • 20 Marks

TAX – Nov 2014 – L2 – Q4 – Personal Income Tax

Calculate annual and monthly tax liabilities for Mr. David Olaleye.

Mr. David Olaleye retired from the Ministry of Water Resources, Ogun State, on 31 December 2012 and was paid a gratuity of ₦4,000,000. He secured employment with OLAK Limited on 1 January 2013 as a Senior Marketing Manager, with a salary of ₦8,400,000 per annum. He is married with a wife and six children.

His records at the end of his first year of employment revealed:

  1. He was given an official car with a market value of ₦2,500,000.
  2. The company pays ₦820,000 annually for his official accommodation.
  3. He has a life assurance policy with Okonkwo Assurance Plc. (Sum assured: ₦480,000; Monthly premium: ₦4,200).
  4. He contributes ₦20,000 monthly to an approved pension scheme.
  5. He spent ₦17,000 annually for the upkeep of his two aged parents.
  6. He contributes ₦15,000 per month to the National Health Insurance Fund and ₦20,000 per month to the National Housing Fund.

Requirements:

a. Compute the annual and monthly tax liabilities of Mr. David Olaleye for the relevant tax year. (12 Marks)
b. Explain what constitutes Gross Emoluments under the Personal Income Tax (Amendment) Act 2011. (3 Marks)
c. List the benefits of applying computer models in tax administration. (5 Marks)

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  • 20 Marks

TAX – Nov 2014 – L2 – Q3 – Companies Income Tax (CIT)

Determine basis periods, tax liabilities, and conditions for loss reliefs and capital allowances for Gab Pal Limited.

Gab Pal Limited commenced business on 1 May 2008. The company makes up its accounts to 31 August each year. Below is the data for the company’s trading activities:

Year Adjusted Profit/Loss (₦’000)
Period ended 31 August 2009 (16 months) (390,000)
Year ended 31 August 2010 170,000
Year ended 31 August 2011 150,000

The capital allowances for the relevant assessment years are as follows:

Assessment Year Capital Allowance (₦’000)
2008 20,000
2009 18,000
2010 12,000
2011 8,000
2012 5,000

Requirements:

a. Determine the basis periods and the tax liabilities for the relevant years. (Ignore the Taxpayer’s right of election) (10 Marks)

b. State the TWO types of Loss reliefs acceptable to the tax authority. (2 Marks)

c. State the conditions that must be satisfied by a taxpayer to enjoy the loss reliefs stated in (b). (5 Marks)

d. State the conditions for the grant of Capital Allowances to taxpayers

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  • 20 Marks

TAX – Nov 2014 – L2 – Q2 – Companies Income Tax (CIT)

Calculate assessable profits, capital allowances, and total profits for MESINOY Ltd. upon winding up.

MESINOY Limited has been carrying on business in Nigeria for many years. The company makes up its accounts to 31 December each year. Due to the increasing costs of operating in Nigeria, the board of directors decided to wind up the company’s business in Nigeria and relocate to a more tax-friendly country as of 31 May 2011.

Tax laws specify that a company winding up its business must comply with specific regulations. MESINOY Limited’s unutilized Capital Allowances were agreed upon by the tax authority, amounting to N460,000. The company applied for a claim to carry back this unutilized Capital Allowance, which was granted by the tax authority. Below are the adjusted profits for the relevant periods:

Year Ended Adjusted Profit (₦)
31 December 2009 520,000
31 December 2010 450,000
31 May 2011 300,000

Additionally, a bad debt of N58,000 was recovered on 30 November 2011.

Requirements:

a. Compute the Assessable Profits of the company for the relevant years of assessment. (5 Marks)

b. Calculate the Capital Allowances to be rolled back to the relevant years. (5 Marks)

c. Compute the Total Profits for the relevant years of assessment. (5 Marks)

d. Briefly explain Best of Judgment (BoJ) Assessment. (5 Marks)

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  • 30 Marks

TAX – Nov 2014 – L2 – Q1 – The Nigerian Tax System

Compute CIT and Education Tax for Chief Ozone's business based on given financials.

Chief Ozone, a versatile business personality who has been in business for many years, decided to set up a new family business. He commenced the new business of publishing books on 1 July 2008, under the name Seye Ventures Limited. The accounting year-end is 31 December each year.

Extracts from the financial records are as follows:

Period 31/12/08 (6 Months) Year Ended 31/12/09
Revenue N1,850,000 N2,320,000
Cost of Sales (N500,000) (N900,000)
Gross Profit (A) N1,350,000 N1,420,000

Deductions:

Item 31/12/08 31/12/09
Newspapers N75,000 N95,000
Depreciation N150,000 N200,000
Salaries N45,000 N55,000
Transport expenses N85,000 N64,000
General provision for bad debts N50,000 N46,000
Vehicle repairs N95,000 N73,000
Formation expenses N35,000 –
Purchase of equipment N78,000 N68,000
Donation to political party N25,000 N42,000
Loss on sale of Non-Current Assets – N60,000
Medical expenses N30,000 N40,000
Total Cost (B) N668,000 N743,000

Net Profit Calculation: Net Profit (A – B):

  • For period ending 31/12/08: N682,000
  • For year ending 31/12/09: N677,000

Additional Information:

  • Agreed Capital Allowances:
    • 2009 Year of Assessment: N240,000
    • 2010 Year of Assessment: N120,000

Chief Ozone traveled for a meeting, which led to discussions on compliance with taxation laws regarding change of accounting date.

Chief Ozone travelled from Benin to Abuja for a meeting between a team of
businessmen and the Federal Minister of Trade. During the meeting, the Minister
informed the delegates that for the operations of any business entity to be considered
for approval, it must comply with taxation laws.

Some of the delegates at the meeting gave different interpretations to the provisions of
the tax laws on the Change of Accounting Date. Chief Ozone was of the opinion that
whether a company changes its accounting date or not, normal tax computations
should apply. Mr. Jay, one of those who attended the meeting was of the opinion that
the procedure for determining the Change of Accounting Date was not clear to him.

The meeting was postponed till another date since the issues raised remained
unresolved.

Required:

a. Using the extracts provided, compute the Income and Tertiary Education taxes
for 2009 and 2010 Years of Assessment.
NOTE: Ignore the tax payer’s right of election. (15 Marks)

b. Explain briefly the rules on Change of Accounting Date under the Companies
Income Tax Act (CITA) that may resolve the issues of the pending delegates’
meeting. (10 Marks)

c. State the procedure for determining Companies Income Tax Liability arising
from a Change in Accounting Date. (5 Marks)

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