Question Tag: Allowances

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  • 3 Marks

FA – May 2016 – L1 – SA – Q17 – Accounting Treatment for Bad and Doubtful Debts

Identifying the effect of a reduction in the allowance for doubtful debts.

Which of the following reflects the effect of a reduction in the allowance for doubtful debts?
A. Reduction in net profit
B. Reduction in cash balance
C. Reduction in gross profit
D. Increase in gross profit
E. Increase in net profit

Answer: E. Increase in net profit

Explanation:
The answer is E because a reduction in the allowance for doubtful debts decreases the expense recognized in the financial statements. Since this lowers expenses, the result is an increase in net profit. Doubtful debt allowances are estimates of the debts that may not be collected, and a decrease in this allowance reflects a more optimistic expectation about debt recovery, thus improving the company’s profitability.

Run down:
The selected answer is E because reducing the provision for doubtful debts reduces the expense, leading to higher net profit.

  • 20 Marks

PT – Dec 2023 – L2 – Q3 – Income Tax Liabilities

Calculate chargeable income for a Finance Manager based on detailed employment benefits and allowances.

Abotsi has been in employment at Asempa Ltd since 1 August 2019 as Finance Manager on a salary scale of GH¢32,000 by GH¢8,000 to GH¢48,000.

His service conditions include the following:
i) Responsibility allowance of 18% of basic salary
ii) Utilities allowance per annum of 10% of basic salary
iii) Risk allowance of 20% on basic salary and car maintenance allowance of 5% of basic salary
iv) Leave allowance of GH¢1,900 per annum
v) Medical allowance per annum of GH¢3,500
vi) Meals allowance of GH¢700 per month
vii) Two house helps on GH¢500 wages per month each. The amount is paid to Abotsi in cash directly by the company
viii) Bonus of 25% of annual basic salary
ix) Annual Overtime allowance of GH¢18,000
x) Unaccountable entertainment allowance of GH¢2,000 a year
xi) Provision of a well-furnished bungalow in respect of which he pays GH¢400 per month as rent by way of deduction at source
xii) Provision of a vehicle with driver and fuel for both official and private purposes
xiii) Special retirement package by way of a provident fund of which he contributes 9% of his basic salary, while the company contributes 11%. (The scheme is approved by the regulatory body)
xiv) Social Security and National Insurance Trust contribution of 5.5% and the employer contributes 13% of basic salary
xv) On 1 January 2021, he was given a car loan of GH¢20,000 to purchase a car for his mother at a simple interest rate of 15% per annum. The institution gives similar facilities to other customers at the rate of 28% but the statutory rate (Bank of Ghana rate) is 25%. The loan is to be paid within the period of 24 months
xvi) He is married to Abotsiwaa and Abotsimaa who are unemployed and contribute little or no financial support to their husband. Their responsibilities are limited to the management of the house
xvii) He has six (6) children, four (4) of whom are in Silicon Valley International School, Accra-Ghana, while the rest are working
xviii) He is also responsible for the upkeep of four (4) aged relatives of his
xix) He is currently pursuing MPHIL in Finance at UPSA where he incurred GH¢25,000 by way of educational expenses in 2021
xx) He is a director of Adwoa Mansa Ltd and receives a director’s emolument of GH¢24,450 (net of taxes)
xxi) He received a dividend of GH¢20,000 (net of taxes) from the Afia Manu Bank. The dividend was taxed at 8%.

Required:
Calculate his chargeable income for the 2021 Year of Assessment. (20 marks)

Abotsi – Computation of Chargeable Income
Year of Assessment: 2021
Basis Period: January to December

Description GH¢
Basic Salary (August 2019 – July 2020) 32,000.00
Basic Salary (August 2020 – July 2021) 40,000.00 (7/12) = 23,333.33
Basic Salary (August 2021 – July 2022) 48,000.00 (5/12) = 20,000.00
Total Basic Salary: 43,333.33

Cash Allowances:

  • Responsibility Allowance (18% of GH¢43,333.33) = GH¢7,800.00
  • Utility Allowance (10% of GH¢43,333.33) = GH¢4,333.33
  • Risk Allowance (20% of GH¢43,333.33) = GH¢8,666.67
  • Car Maintenance Allowance (5% of GH¢43,333.33) = GH¢2,166.67
  • Total Cash Allowances: GH¢22,966.67

Other Cash Benefits:

  • Leave Allowance: GH¢1,900.00
  • Medical Allowance: GH¢3,500.00
  • Meals Allowance (GH¢700 x 12) = GH¢8,400.00
  • Househelps (GH¢500 x 2 persons x 12 months) = GH¢12,000.00
  • Bonus (Excess 10% of GH¢43,333.33) = GH¢4,333.33
  • Overtime Pay: GH¢18,000.00
  • Unaccountable Entertainment Allowance: GH¢2,000.00
  • Total Other Cash Benefits: GH¢50,133.33

Indirect Cash Payments:

  • Provident Fund (Employer 11% of GH¢43,333.33) = GH¢4,766.67
  • Social Security (Employer 13% of GH¢43,333.33) = GH¢5,633.33
  • Total Indirect Cash Payments: GH¢10,400.00

Total Cash Employment Income: GH¢126,833.33

Non-Cash Benefits:

  • Accommodation (10% of GH¢126,833.33) = GH¢12,683.33
    • Less Rent (GH¢400 x 12) = GH¢4,800.00
    • Net Accommodation Benefit: GH¢7,883.33
  • Car Benefit (12.5% of GH¢126,833.33) = GH¢15,854.17
    • Restricted to (GH¢600 x 12) = GH¢7,200.00
    • Net Car Benefit: GH¢7,200.00
  • Loan Benefit:
    • Statutory Interest (25% of GH¢20,000) = GH¢5,000.00
    • Actual Interest (15% of GH¢20,000) = GH¢3,000.00
    • Taxable Benefit (¼ of GH¢2,000.00) = GH¢500.00
    • Net Loan Benefit: GH¢500.00
  • Total Non-Cash Benefits: GH¢15,583.33

Qualifying Employment Income: GH¢142,416.66

Less: Reliefs and Deductions:

  • Provident Fund (Employee 9% of GH¢43,333.33) = GH¢3,900.00
  • Social Security (Employee 5.5% of GH¢43,333.33) = GH¢2,383.33
  • Marriage Responsibility Allowance: GH¢1,200.00
  • Child Education Allowance (3 children x GH¢600): GH¢1,800.00
  • Aged Dependence (2 aged relatives x GH¢1,000): GH¢2,000.00
  • Total Deductions: GH¢21,683.33

Net Employment Income: GH¢120,733.33

Other Income:

  • Director’s Fee (GH¢24,450 / 0.8) = GH¢30,562.50
  • Chargeable Income: GH¢151,295.83
  • 20 Marks

AT – May 2016 – L3 – Q1 – Tax administration in Ghana, Business income – Corporate income tax

Compute the tax liabilities and take-home pay for an employee provided various benefits and allowances for the 2014 Year of Assessment.

Mr. Frank Danso was employed by Ghana Trust Ltd on 1st September 2010 on a salary scale of GH¢4,500 x 500-7,500 as the financial controller of the company. He is provided with the following as part of his conditions of service for the 2014 Year of Assessment:

i) Well-furnished rented flat by his employers in respect of which he pays GH¢100 per month as rent by way of deductions at source.
ii) Watchman allowance of GH¢200 per annum, paid directly to Mr. Frank Danso.
iii) Risk allowance of GH¢905 per annum.
iv) Leave allowance of GH¢500 per annum.
v) Garden boy allowance of GH¢100 per quarter paid directly to Mr. Frank Danso.
vi) Medical allowance of GH¢680 per annum.
vii) Meals allowance of GH¢50 per month.
viii) Two maidservants each on wages of GH¢200 per annum. The amount is paid to the maid servants directly by the company.
ix) Bonus of 40% on annual basic salary.
x) Entertainment allowance of GH¢400 a year (accountable).
xi) Duty post allowance of GH¢100 per month.
xii) He has Life Assurance Policies with EIC Ltd. Below are the details:

Policy Sum Assured (GH¢) Annual Premium (GH¢)
A 4,000 420
B 2,800 240
C 16,000 1,650
D 5,000 525

xiii) He is entitled to a company car and fuel for both official and private use.
xiv) He has two wives and ten children; four of whom are in SHS in Accra, and the rest are gainfully employed; he caters for 3 of his aged relatives.
xv) He contributes 7% of his salary towards the company’s Provident Fund which has been approved by the National Pension Authority, and he also contributes 5.5% of his salary to the SSNIT.

Required:
a) Compute his tax liabilities for the 2014 Year of Assessment using 2014 rates.
(15 marks)

b) Determine his take-home pay for the 2014 Year of Assessment.
(5 marks)

Total: 20 marks

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