Series: NOV 2021

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  • 16 Marks

TAX – Nov 2021 – L2 – Q7 – Tax Administration

Explanation of five different aspects of tax administration that TAXPRO MAX can handle.

Tago Nigeria Limited was incorporated in 2009 as a trading company. It supplies
office furniture, equipment and other office materials to end users.

Due to the favourable business climate in recent years, the company achieved a
gross turnover of N120,000,000 in 2020. The directors were impressed by the profits
posted by the company, hence the decision to computerise the accounting system of
the company.
You were appointed the tax consultant to the company in 2018. You are aware that
in 2006, the Federal Inland Revenue Service (FIRS) deployed the first tax portal
(Webportal) to automate and streamline taxpayer‟s registration and other tax
administration system (ITAS) known as SIGTAS. This was implemented though its
deployment was stalled.

Following the enactment of the Finance Act, 2020, the Federal Inland Revenue
Service is empowered to automate filing of tax returns and payment processes.
You attended a seminar organised by the Federal Inland Revenue Service in June
2021, to inform tax consultants of the adoption of a locally developed tax
management solution known as TAXPRO MAX. The FIRS insisted that manual filings
of tax returns would no longer be allowed.
At a meeting held with the Managing Director of Tago Nigeria Limited, you intimated
him of the tax development. He was worried that there could be a delay in filing of
tax returns for the year ended December 31, 2020, more so when taxpayers are yet to
be fully aware of this new development.

Required

Explain to the management FIVE different aspects of tax administration that the tax management solution known as TAXPRO MAX can handle.

 

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  • 15 Marks

TAX – Nov 2021 – L2 – Q6 – Value Added Tax (VAT)

Explanation of when goods and services are deemed to be supplied in Nigeria according to section 2 of the VAT Act.

Taxable supplies of goods and services are those listed under the First Schedule of
the Value Added Tax Act Cap VI for 2004 (as amended). Essentially, these are goods
and services liable to value added tax at the prescribed rate.
Required:
Explain when goods and services shall be deemed to be supplied in Nigeria in
accordance with section 2 of VAT Act (as amended).

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  • 15 Marks

TAX – Nov 2021 – L2 – Q5 – Companies Income Tax (CIT)

Explanation of documents required for tax registration, time lag for filing tax returns, and penalties for late filing of returns.

QUESTION 5
The Companies Income Tax Act Cap C21 LFN 2004 (as amended) empowers the
Federal Inland Revenue Service to assess the income of corporate organisations.
Corporate organisations are required to file tax returns within a specified period of
time to the relevant tax authority.
Required:
a. Explain the documents/information required to be forwarded to the relevant tax
authority when registering with the nearest integrated tax office. (5 Marks)
b. State the time lag for filing the first set of returns and subsequent ones.
(5 Marks)
c. State the penalty for late filing of tax returns on the due dates. (5 Marks)
(Total 15 Marks)

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  • 5 Marks

TAX – Nov 2021 – L2 – Q4b – Tax Incentives and Reliefs

Explanation of the rules governing loss relief for companies, including carry forward, loss limitation, and cessation rules.

Explain FIVE rules governing loss relief for companies.

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  • 15 Marks

TAX – Nov 2021 – L2 – Q4a – Companies Income Tax (CIT)

Computation of income tax payable for Ajani-Ogun Ventures Limited from 2018 to 2021 years of assessment.

Ajani-Ogun Ventures Limited was incorporated on February 1, 2012, and commenced business on September 1, 2013. The company makes up accounts to August 31, every year. The following additional information is provided:

  1. Adjusted (loss)/profit:
    • Year ended August 31, 2017: (N95,000)
    • Year ended August 31, 2018: N55,000
    • Year ended August 31, 2019: N35,000
    • Year ended August 31, 2020: N65,000
  2. Capital Allowances for each year of assessment:
    • Year ended August 31, 2018: N6,500
    • Year ended August 31, 2019: N5,000
    • Year ended August 31, 2020: N4,200
    • Year ended August 31, 2021: N4,000

The Finance Director was worried that the tax officials would soon conduct a tax
audit of their financial transactions and he wanted to know the tax liabilities
payable to the Federal Inland Revenue Service for the relevant assessment years.
During the year ended August 31, 2020, the company achieved a revenue of
N20,000,000.

Required:
a. Compute the income tax for 2018 to 2021 years of assessment, taking into consideration the provisions of the Finance Act, 2019. Ignore minimum tax computation. (15 Marks)

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  • 5 Marks

TAX – Nov 2021 – L2 – Q3c – Value Added Tax (VAT)

Explanation of the merits and demerits of Value Added Tax (VAT) as a consumption tax.

Explain the merits and demerits of VAT

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  • 6 Marks

TAX – Nov 2021 – L2 – Q3b – Value Added Tax (VAT)

Explanation of penalties associated with VAT non-compliance including failure to register, failure to notify of address changes, and failure to submit returns.

Explain the penalties associated with the following:

i. Failure to register for VAT return (2 Marks)
ii. Failure to notify the FIRS of change of address or cessation of trade or business (2 Marks)
iii. Failure to submit VAT returns (2 Marks)

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  • 9 Marks

TAX – Nov 2021 – L2 – Q3a – Value Added Tax (VAT)

Calculation of total VAT payable by Adegboyega Enterprises to the Federal Inland Revenue Service (FIRS) for product sales.

Adegboyega Enterprise is a manufacturing outfit based in Jankara, Lagos State. In 2020, the company sold its vatable product to a wholesaler, Ikeja Venture, for N3,500,000. The wholesaler sold the products to a retailer, Mrs. Adeosun, for N4,900,000, who finally sold it to consumers for N6,300,000 (VAT inclusive). Assume there was no closing inventory at each stage of the transaction.

Required:
a. Compute the total VAT payable to the Federal Inland Revenue Service by Adegboyega Enterprises on the transactions stated above.

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  • 20 Marks

TAX – Nov 2021 – L2 – Q2 – Companies Income Tax (CIT)

Computation of interest deductible under section 24 of CITA 2004 and treatment of excess interest for XYZ Limited.

XYZ Limited was incorporated on August 31, 2012, and it commenced business on May 31, 2013. Diki (Malaysia) Limited is its subsidiary in Malaysia. An extract of the financial statements of XYZ Limited for the year ended December 31, 2020, revealed the following:

Assessable profit: N2,000,000

Interests and depreciation deducted before arriving at the assessable profit are:

  • Interest on loan paid to Diki (Malaysia) Limited: N1,050,000
  • Interest on loan paid to other creditors: N1,000,000
  • Depreciation: N400,000

It was discovered that N450,000 of the loan paid to other creditors was in respect of a loan obtained to generate tax-exempt profits.

The Managing Director of XYZ Limited has asked you as a tax consultant to explain the provisions of section 24 of CITA 2004 (as amended) and the Seventh Schedule in respect of the interest deductible by a Nigerian company.

Required:
a. Compute the interest deductible in the relevant assessment year. (16 Marks)
b. Explain how the excess interest not deducted in the relevant assessment year would be treated. (4 Marks)

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  • 30 Marks

AX – Nov 2021 – L2 – Q1 – Personal Income Tax (PIT)

Calculation of personal income tax liability for two job offers and providing advice on the offer that yields a higher income after tax.

Miss Opeyemi Olunba is a young engineer who has been working in an oil sector for
over 5 years. She currently earns a gross salary of N10,000,000 per annum. She
recently attended two interviews for a new job at Joke Oil & Gas in Rivers State and
Dabiri Hotels & Suite in Lagos State.
She has been called by the two companies to assume office on April 1, 2021. The
following salaries and allowances were offered by the two companies:

Additional information:

  1. If Miss Opeyemi accepts the offer from Joke Oil & Gas, she will rent out her Lagos apartment for N20,000,000 per annum but will need a loan of N12,000,000 at 20% interest to modify the apartment.
  2. She will pay rent of N5,000,000 in Port Harcourt if she relocates.
  3. She maintains her child, a student at St. John University,
  4. She also supports her parents.
  5. She pays a life assurance premium of N5,000,000 annually.
  6. Her employers will deduct contributions for the National Housing Fund (N5,000,000) and Pension Fund (N3,000,000).
  7. She also pays National Health Insurance Premium (N1,000,000).

Required:

a. Compute Miss Opeyemi’s personal income tax liability for the relevant year of assessment for both offers.
b. Advise her on which employment will give her a higher income after tax.

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  • 20 Marks

CR – Nov 2021 – L3 – Q5 – Analysis and Interpretation of Financial Statements

Produce a report analyzing the cash flow performance of Saglema Plc relative to a competitor over two years and explain the uses and limitations of cash flow analysis.

You are the Senior Financial Accountant at Saglema Plc (Saglema), a company that manufactures and sells painting materials in the local market and around the West African sub-region. At the first one-on-one meeting with the recently appointed chairperson of your company’s governing board, she asked you to produce a concise report on Saglema’s cash flow performance relative to that of Adidome Plc (Adidome), a close competitor, over the last two years.

The following are the cash flow statements for the last two years for Saglema and Adidome:

Cash Flow Statements for the Year Ended 31 August 2020 (together with comparatives):

Required:

i) Produce a report showing the comparative analysis of the cash flow performance and situation of Saglema over the last two years, relative to that of Adidome. (15 marks)
ii) Explain TWO (2) uses and THREE (3) limitations of such analysis. (5 marks)

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  • 5 Marks

CR – Nov 2021 – L3 – Q4b – Consolidated Financial Statements

Explain the disclosure requirements for a parent company that is exempt from preparing consolidated financial statements and elects to prepare separate financial statements under IFRS 10.

What are the disclosure requirements of a parent company that is exempt from preparing consolidated financial statements and elects not to do so and instead prepares separate financial statements?

 

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  • 15 Marks

CR – Nov 2021 – L3 – Q4a – Business valuations

Determine the value of shares of Aboto Ltd using multiple valuation methods including net assets, price-earnings ratio, dividend yield, and discounted cash flow

Aboto Ltd is a private company in the printing industry. It was established by the Aboto family some twenty years ago with Mrs. Aboto as the Managing Director. The business has grown in size over the years, and the directors are now considering listing the company on the Ghana Stock Exchange. The financial statements of the company for the year 2020 are given below:

Additional Information:

  1. The Share Capital of Aboto Ltd consists of ordinary share capital of no par value issued at GH¢100 per share.
  2. An independent valuer estimated the fair value of the Property, Plant & Equipment at GH¢500,000. Valuation charges of 2% have not been accrued for in the above accounts.
  3. The inventory includes obsolete items worth GH¢5,000 being held despite persistent advice by the auditors to have them written off.
  4. Receivables include an amount of GH¢12,000 resulting from the bankruptcy of a major customer. Aboto Ltd is not likely to realize any amount from this, but the directors have refused to make any provision.
  5. The patents represent a right to sell a special product. This product is expected to generate cash flows of GH¢2,000 per annum indefinitely.
  6. The discounted present value of future cash payments in respect of the debentures is GH¢20,000.
  7. Profits after tax of Aboto Ltd over the past four years were as follows:
    Year Profits (GH¢)
    2019 38,000
    2018 36,000
    2017 32,000
    2016 30,000
  8. A corporate plan prepared by the directors of Aboto Ltd in 2018 included the following positions:
  9. The price-earnings ratio and a dividend yield of quoted companies in the same industry Aboto Ltd operates are 8 and 4%, respectively.
  10. The net assets of Aboto Ltd as at 31 December 2019 were GH¢251,100.
  11. The cost of capital of Aboto Ltd is 20%.
  12. Investing in unlisted securities is about 20% more risky than investing in listed securities.

Required:

Determine the value to be placed on each share of Aboto Ltd using the following methods of valuation:

i) Net assets (4 marks)
ii) Price-earnings ratio (4 marks)
iii) Dividend yield (3 marks)
iv) Discounted cash flow (4 marks)

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  • 10 Marks

CR – Nov 2021 – L3 – Q3c – Regulatory Framework and Ethics

Assess the ethical principles breached in a workplace scenario and recommend actions in accordance with the IFAC Code of Ethics.

Linda is a junior member of an audit firm and has just returned to work after taking compassionate leave to care for her sick mother. For financial reasons, Linda needs to work full-time. Linda has been having difficulties with her mother’s home care arrangements, causing her to miss several team meetings, which usually occur at the start of each day, and she needs to leave work early as well.

In terms of her capabilities, Linda is very competent at her work, but her frequent absence puts severe pressure on her and her overworked colleagues. Linda’s manager knows that workflow through the practice is coming under intense pressure, and in order that the team’s output is not affected, had a discussion with the audit team on Linda’s circumstances. This has, however, led to some members of the audit team undermining Linda at every given opportunity, putting Linda under even greater stress.

Required:

i) In accordance with the IFAC’s code of ethics, assess THREE (3) possible fundamental ethical principles that might have been breached. (5 marks)
ii) Recommend the possible actions that the manager should take as a member of the Institute of Chartered Accountants, Ghana in dealing with this ethical dilemma. (5 marks)

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  • 5 Marks

CR – Nov 2021 – L3 – Q3b – Financial instruments: Recognition and measurement Corporate reporting

Advise Ajara Ltd on the accounting treatment of receivables factoring arrangements, both with and without recourse, under IFRS 9.

Ajara Ltd has two receivables that it has factored to a factoring agency, the GBB Bank, in return for immediate cash proceeds of less than the face value of the invoices for the year ended 31 December 2020. Both receivables are due from long-standing customers who are expected to pay in full and on time. In addition, Ajara Ltd has agreed to a three-month credit period with both customers.

  • The first receivable is for GH¢400,000, and in return for assigning the receivable, Ajara Ltd has just received from the factor GH¢360,000. Under the terms of the factoring arrangement, this is the only money that Ajara Ltd will receive regardless of when or even if the customer settles the debt; that is, the factoring arrangement is said to be “without recourse.”
  • The second receivable is for GH¢200,000, and in return for assigning the receivable, Ajara Ltd has just received GH¢140,000. Under the terms of this factoring arrangement, if the customer settles the account on time, then a further GH¢10,000 will be paid by the factoring agency, the GBB Bank to Ajara Ltd, but if the customer does not settle the account in accordance with the agreed terms, then the receivable will be reassigned back to Ajara Ltd who will then be obliged to refund to the factor the original GH¢140,000 plus a further GH¢20,000. This factoring arrangement is said to be “with recourse.”

Required:

Advise the directors of Ajara Ltd on the proper accounting treatment of the monies received under the terms of the two factoring arrangements in the financial statements for the year ended 31 December 2020 in accordance with IFRS 9: Financial Instruments.

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  • 5 Marks

CR – Nov 2021 – L3 – Q3a – Foreign currency

Explain the disclosure requirements when financial information is presented using convenience translation in a different currency under IAS 21.

An entity sometimes displays its financial statements or other financial information in a currency that is different from either its functional currency or its presentation currency simply by translating all amounts at end-of-period exchange rates. This is sometimes called a convenience translation. A result of making a convenience translation is that the resulting financial information does not comply with all IFRS, particularly IAS 21: The Effects of Changes in Foreign Exchange Rates.

Required:

Explain the disclosure requirements when convenience translation is used to display financial information.

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  • 6 Marks

CR – Nov 2021 – L3 – Q2c – IAS 38: Intangible Assets

Advise Zunka Ltd on how to account for the cost of adapting equipment and the provision for potential damages in a legal case for patent infringement.

Zunka Ltd (Zunka) is a private pharmaceutical company in Ghana, which imports medical equipment manufactured under a patent. Zunka subsequently adapts the equipment to fit the market in Ghana and sells the equipment under its own brand name. Zunka originally spent GH¢6 million in developing the know-how required to adapt the equipment, and, in addition, it costs GH¢100,000 to adapt each piece of equipment. Zunka has capitalised the cost of the know-how and the cost of adapting each piece of equipment sold as patent rights.

Zunka is being sued for patent infringement by Sajida Ltd (Sajida), the owner of the original patent, on the grounds that Zunka has not materially changed the original product by its subsequent adaptation. If Sajida can prove infringement, the court is likely to order Zunka to pay damages and stop infringing its patent. Zunka’s lawyers are of the view that the court could conclude that Sajida’s patent claim is not valid.

Sajida has sued Zunka for GH¢10 million for using a specific patent and a further GH¢16 million for lost profit due to Zunka being a competitor in the market for this product. Zunka has offered GH¢14 million to settle both claims but has not received a response from Sajida.

As a result, the directors of Zunka estimate that the damages it faces will be between the amount offered by Zunka and the amount claimed by Sajida. The directors of Zunka would like advice as to whether they have correctly accounted for the costs of the adaptation of the equipment and whether they should make a provision for the potential damages in the above legal case in the financial statements for the year ended 31 March 2021.

Required:

Advise the directors of Zunka on how the above transaction should be accounted for in its financial statements for the year ended 31 March 2021 in accordance with relevant International Financial Reporting Standards (IFRS).

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  • 7 Marks

CR – Nov 2021 – L3 – Q2b – IFRS 15: Revenue from Contracts with Customers

Determine how Barikisu Ltd should account for revenue and costs related to a construction contract with a customer under IFRS 15.

On 1 January 2020, Barikisu Ltd (Barikisu) entered into a contract with a customer to construct a specialised building for a consideration of GH¢2 million plus a bonus of GH¢0.4 million if the building is completed within 18 months. The estimated cost to construct the building is GH¢1.5 million. If the customer terminates the contract, Barikisu can demand payment for the cost incurred to date plus a mark-up of 30%. However, on 1 January 2020, due to factors outside of its control, such as the weather and regulatory approval, Barikisu is not sure whether the bonus will be achieved.

As at 31 December 2020, Barikisu has incurred a cost of GH¢1.0 million. They are still unsure as to whether the bonus target will be met. Therefore, Barikisu decided to measure progress towards completion based on the cost incurred. To date, Barikisu has received GH¢1 million from the customer.

Required:

Recommend to the directors of Barikisu how this transaction should be accounted for in the financial statements for the year ended 31 December 2020 in accordance with relevant International Financial Reporting Standards (IFRS).

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  • 7 Marks

CR – Nov 2021 – L3 – Q2a – IFRS 2: Share-based Payments | IFRS 13: Fair Value Measurement

Advise Mariam Plc on the correct accounting treatment for share appreciation rights (SARs) in compliance with IFRS 2 and IFRS 13.

On 1 April 2018, Mariam Plc granted 500 share appreciation rights (SARs) to its 300 employees. All of the rights vested on 31 March 2020 and can be exercised from 1 April 2020 up to 31 March 2022. At the grant date, the value of each SAR was GH¢10, and it was estimated that 5% of the employees would leave during the vesting period. The fair value of the SARs is as follows:

Date Fair Value of SAR (GH¢)
31 March 2019 9
31 March 2020 11
31 March 2021 12

All the employees who were expected to leave the employment did leave the company as expected before 31 March 2020. On 31 March 2021, 60 employees exercised their options when the intrinsic value of the right was GH¢10.50 and were paid in cash. Mariam Plc is, however, confused as to whether to account for the SARs under IFRS 2: Share-based Payment or IFRS 13: Fair Value Measurement and would like to be advised as to how the SARs should have been accounted for from the grant date to 31 March 2021.

Required:

Advise Mariam Plc on how the above transactions should be accounted for in its financial statements with reference to relevant International Financial Reporting Standards (IFRS).

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  • 20 Marks

CR – Nov 2021 – L3 – Q1 – Consolidated Financial Statements

Prepare consolidated financial statements for Rafco Group including an income statement and a statement of financial position as of December 31, 2020, incorporating intragroup transactions, intergroup sales, and impairment adjustments.

On 1 January 2016, Rafco Ltd acquired 4,500,000 GH¢1 ordinary shares of Namco Ltd for GH¢12,000,000. The balance on Namco Ltd retained earnings as at this date was GH¢2,350,000. On 1 January 2018, Namco Ltd acquired 2,560,000 GH¢1 ordinary share of Tedco Ltd for GH¢6,000,000 when Tedco Ltd retained earnings as at that date was GH¢1,600,000.

The Financial Statements of Rafco Ltd, Namco Ltd, and Tedco Ltd for the year ended 31 December 2020 are as follows:

Additional Information:

  1. It is the group’s policy to value the non-controlling interest at fair value at the date of acquisition. The fair value of the non-controlling interest in Namco Ltd on 1 January 2016 was GH¢800,000. The fair value of the non-controlling interest in Tedco Ltd on 1 January 2018 was GH¢1,440,000.
  2. In 2020, Tedco Ltd made intragroup sales to Namco Ltd for GH¢768,000, making a profit of 25% on cost, and GH¢120,000 of these goods were in inventory as at 31 December 2020.
  3. Namco Ltd also made intragroup sales to Rafco Ltd for GH¢416,000, making a profit of 33 1/3% on cost, and GH¢96,000 of these goods were in inventory as at 31 December 2020.
  4. On 1 January 2020, Rafco Ltd sold a group of machines to Namco Ltd at their agreed fair value of GH¢3 million. The carrying amount of the machines was GH¢2 million. The estimated remaining useful life of the machines at the date of the sale was four years.
  5. An impairment test at 31 December 2020 on the consolidated goodwill of Namco Ltd and Tedco Ltd concluded that it should be written down by GH¢150,000 and GH¢100,000, respectively. No other assets were impaired.

Required: Prepare for the Rafco Group a Consolidated Income Statement for the year ended 31 December 2020 and a Consolidated Statement of Financial Position as at that date.

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