Question Tag: Capital allowances

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  • 20 Marks

PT – April 2022 – L2 – Q4 – Corporate Tax Liabilities

Calculate the tax payable for Therry Ltd for the 2020 year of assessment using the provided financial data and adjustments.

The following extract relates to the financial data of Therry Ltd, a company resident in Ghana with a basis period from January to December each year. Therry Ltd has submitted its tax returns to GRA for the 2020 year of assessment:

The following additional information is available:

Interest Charges:
a. Interest on loan for MD’s personal housing project GH¢500,000
b. Foreign exchange loss on loan GH¢320,500
c. Bank charges GH¢75,000
Donations:
a. Osu Children Home GH¢10,000
b. Pastor (Azigi Church) GH¢30,000
c. Labone Senior High School GH¢20,000
d. National Disaster Management Organisation GH¢50,000
e. Political Parties Fundraising GH¢90,000
An amount of GH¢200,000 disclosed in the accounts was paid for repairs and improvements of an old machine bought three years ago. It is hoped that the performance of the machine will be enhanced after the improvements.
Creditors of the company agreed to cancel an amount of GH¢120,000 standing as part of the credit balance as incentive to the company. This has not been taken into account by the company in its tax returns to GRA.
An amount of GH¢300,000 being cost price of goods was issued to a related party outside Ghana at cost. The margin on the goods waived was sighted as GH¢40,000 in a correspondence with the related party.
Tax paid on account was GH¢20,000.
The company booked capital allowance unutilised certified by GRA from 2019 year of assessment as GH¢300,000.
Capital allowance agreed with GRA after taking into account all relevant issues was GH¢1,050,000 for 2020 year of assessment.
The machine (Pool 3 asset) had a written down value of GH¢4,000,000 as at 1 January 2020.
An allowable bad debt included in the selling and distribution expenses for 2019 amounted to GH¢100,000. The company recovered the amount in 2020 but no transaction was recorded in 2020.
Therry Ltd disposed off one of its capital assets for GH¢250,000 to the Managing Director. It cost the company GH¢300,000 to acquire the asset some years ago. An investigation revealed that the market value of the asset at the time of the sale was GH¢350,000. The company has already included the loss of the sale of the asset in administration expenses.
Required:
Determine the tax payable for the 2020 year of assessment. (20 marks)

Therry Ltd
Determination of tax payable for the 2020-year of assessment
Basis period: 01/01/2020 to 31/12/2020

Repairs and improvements:
Pool 3 asset Written down value at 01/01/2020 = GH¢4,000,000
Depreciation allowance (20%) = GH¢800,000
Written down value at 31/12/2020 = GH¢3,200,000
Allowable repairs and improvements (5% x GH¢3,200,000) = GH¢160,000
Disallowed repairs and improvements = GH¢200,000 – GH¢160,000 = GH¢40,000

Gain/Loss on realisation of capital asset:
Consideration received = GH¢350,000
Cost of asset = GH¢300,000
Gain on realisation = GH¢50,000

  • 10 Marks

PT – Nov2019 – L2 – Q4a – Corporate Tax Liabilities

This question asks to compute the chargeable income of Valentine Ghana Limited for the 2018 tax year based on the provided financial statements and additional information.

Valentine Ghana Limited is a producer of love greeting cards, and the following was extracted from its financial statements for the year ended 31 December 2018.
a) Valentine Ghana Limited is a producer of love greeting cards and the following was
extracted from its financial statements for the year ended 31 December,2018.

Deduct:

Net Profit: GH¢346,110
Additional Information:
i) Capital allowances for the year were GH¢204,000, as agreed with the Ghana Revenue Authority (GRA).
ii) The figures for repairs and maintenance include an amount of GH¢33,150 for the cost of erecting a new gate to the factory.
iii) 50% of other income was the personal rental income of the Managing Director.
iv) One-third of vehicle running expenses was expended on the personal car of the Managing Director, used for the company’s operation based on company policy.

Required:
Calculate the chargeable income of Valentine Ghana Limited for 2018 Year of Assessment.
(8 marks)

Computation of Chargeable Income for 2018 Tax Year for Valentine Ghana Limited

(8 marks to be allocated using ticks)

  • 8 Marks

PT – May 2020 – L2 – Q4a – Capital Allowance and tax reliefs

Computation of capital allowance for Stella-VD Ltd for the 2017 and 2018 years of assessment.

Stella-VD Company Limited, manufacturers of fruit juice for local consumption, commenced business on 1/10/2017, with an accounting year-end at 31 December. The company submitted its accounts for 2017 and was assessed accordingly. The company submitted its tax returns for the 2018 year of assessment to the Ghana Revenue Authority on 30/04/2019. Below are the details:


iii) Staff Welfare

Staff Medical Bills: 3,700
Safety Wear for Staff: 10,500
Canteen Equipment purchased on 30/11/2018: 12,000
iv) Donation and Subscription

Goods given as Gratis to Customs Officials: 13,000
Donation of Goods to SOS Children Village: 10,000
Subscription to Association of Ghana Industries: 5,000
v) Wages and Salaries

Old Staff: 120,000
Fresh Graduates employed by Stella-VD Ltd: 26,000
Fresh Graduates constitute 0.9% of the total workforce
vi) Other Income

Compensation from a Customer for Cancellation of Sale Order: 8,000
Compensation for Loss of Trading Stock of the Company: 10,000
Compensation for Cancellation of Purchase Order by Supplier: 5,000
The Company’s assets include the following:

Type of Assets Date of Acquisition Cost (GH¢)
Factory Building 01/10/2017 300,000
Plant and Machinery 25/10/2017 171,000
Delivery Van 01/11/2017 50,000
Computers 01/10/2017 40,000
Furniture and Fittings 10/12/2017 150,000
Other Office Equipment 01/10/2017 200,000
Office Building 30/06/2018 500,000
Required:
a) Compute the appropriate capital allowance for the 2017 and 2018 years of assessment.
(8 marks)

a) Computation of capital allowance for 2017 and 2018


(8 marks evenly spread using ticks)

  • 20 Marks

PT – Nov 2020 – L2 – Q4 – Corporate Tax Liabilities

Compute capital allowances for a manufacturing company over two years and explain the class or pool system of capital allowances.

Fafana Manufacturing Company Ltd, producers of special fruit juice, started business on 01/01/2016 and prepares accounts to 31 December each year. The company had constructed an office building, which was put into use on 01/01/2016. The following are the capital allowance written down values brought forward from pools of assets as at 01/01/2017:

Item Written Down Value (GH¢)
Pool 1 12,000
Pool 2 520,000
Pool 3 405,000
Office Building 540,000
Patent (acquired in 2016 for five years) 48,000

The company acquired the following chargeable assets for the business in 2017:

  • Factory Buildings GH¢958,000
  • Plant and Machinery GH¢2,500,000
  • File Cabinet GH¢10,000
  • Electric Ceiling and Standing Fans GH¢20,000
  • Window and Split Air Conditioners GH¢157,000
  • Motor Vehicles GH¢110,000
  • Photocopier GH¢14,000
  • LCD Television GH¢3,000
  • Visitors Chairs GH¢5,500
  • Office Chairs and Tables GH¢56,000

Some assets were disposed of in 2017, namely:

  • Computers and Accessories GH¢11,600
  • Standing Fans GH¢3,500

The company acquired the following chargeable assets for the business in 2018:

  • Toyota Salon Car GH¢70,000
  • Toyota Pick-up (only one) GH¢95,000
  • LCD Projector GH¢5,500
  • Data Handling Machine GH¢36,000
  • Trucks and Trailers GH¢54,000
  • Trademark (registered for 8 years) GH¢72,000

One of the vehicles was involved in an accident in 2018, and the company received GH¢45,000 as insurance compensation.

Required:
a) Determine the capital allowances for Fafana Manufacturing Company Ltd for 2017 and 2018 years of assessment. (16 marks)
b) Indicate how the class or pool system works with the treatment of capital allowances. (4 marks)

a) Computation of Capital allowance (GH¢)

 

b) Explanation of the Class or Pool System

  • The pool system groups depreciable assets of the same class for capital allowance computation.
  • In this system, the identity of individual assets is lost as they are aggregated into pools.
  • Class 1 to 3 assets follow the pool system, while Class 4 and 5 assets (such as buildings and intangibles) are kept separately for each item.
  • Assets in a pool receive capital allowances based on the written-down value (WDV) of the pool.
  • Assets used solely for income production are placed in the pool, and any disposals reduce the pool value.

 

  • 20 Marks

AT – NOV 2021 – L3 – Q3 – Business income – Corporate income tax | Capital allowances

Compute taxable income and tax payable for Partey Ltd after business restructuring involving transfer of assets to employees and disposal of assets.

Partey Ltd (Partey) produces flour and various soup powders, and the company is considered as a priority company. On 1 January 2019, Partey owned two refineries in Accra (Weija and Mamprobi) and a refinery in Takoradi. Each refinery comprises building, plant and equipment and a warehouse, all of which were owned by Partey.

Partey has been having financial difficulties and, on 1 February 2019, engaged the services of a business consultant to recommend a survival plan for the company. Unfortunately, staff morale was very low when the business consultant was engaged because their salaries were six months in arrears.

The business consultant’s recommendations were agreed and implemented in the year ended 31 December 2019 as follows:

i) The Takoradi refinery was transferred to the employees at market value to be operated as independent business ventures. The inventory in the warehouse was included in the transfer.

ii) The Weija refinery was disposed off, together with all its related fixed assets, to fund Partey’s future business operations and pay off part of the arrears of salaries due to the employees. The employees at this refinery were all reassigned elsewhere. The inventory at the warehouse, valued at cost, was given to the employees as final settlement of their salaries in arrears.

Both the disposal of the Weija refinery and the transfer of the Takoradi refinery to their employees were made on 30 March 2019.

Details of the fixed assets disposed and transferred are:

Partey’s statement of profit or loss for the year ended 31 December 2019 in respect of
Mamprobi is as follows:

Notes:
i) This amount represents Partey’s ordinary sales for the year.
ii) Included in the cost of sales is the total value of inventory at cost transferred to the
employees (in accordance with the business consultant’s recommendations) on 30 March
2019. No other adjustments were recorded regarding this inventory transfer.

Required:

a) Outline the tax consequences for Partey due to the transfer of the fixed assets and inventory to the employees on 30 March 2019, stating when any taxes should be paid. (4 marks)

b) Assess the tax implications:

i) When the proceeds from the realisation of depreciable assets exceed the written down values? (1.5 marks)

ii) When the proceeds from the realisation of depreciable assets are less than the written down values? (1.5 marks)

c) Calculate the taxable income of Partey for the year ended 31 December 2019. (8 marks)

d) Explain how shareholders of a company are taxed? (5 marks)

a) Tax consequences with respect to transfer of assets The transfer of the fixed assets and the stock will be treated as deemed sold Partey Ltd is obliged to account for the gains on the realisation of the assets on transfer. The gains on the realisation should be added to the income of Partey limited Partey Ltd would also account for the VAT on the transferred trading stock, where applicable. The transaction should be included in Partey’s VAT returns for the month of transfer and the VAT paid to the Ghana Revenue Authority by the last working day of the following month. The deemed sale of the stock should also be included in Partey Ltd’s gross income for the year.

b) Gains from realisation of assets

i) When the proceeds from the realisation of depreciable assets exceed the written down value constitutes income in the company’s account.

ii) When the proceeds from realising depreciable assets are less than the written down value, an additional capital allowance shall be granted.

c) Partey Limited Computation of Chargeable Income Year of assessment 2019 Basis Period 1 January to 31 December, 31, 2019

d) Taxation of Shareholders of a Company Where a resident company pays a dividend to a shareholder, the resident company is required to withhold tax on the amount of the dividend paid at the rate of 8%.

A dividend is also deemed to have been paid to each shareholder of a company in proportion to the respective interest of the shareholder, if:

  1. The dividend consists of profits that are capitalised; or
  2. Where the Commissioner-General declares part of the company’s income as dividends, where the Commissioner-General is satisfied that a company controlled by not more than five persons and their associates does not distribute to its shareholders as dividends, a reasonable part of the income of the company from all sources for a basis period within a reasonable time after the end of the basis period, the Commissioner-General may, by notice in writing treat as dividend, that part of the income of that company which the Commissioner-General determines to be dividend paid to its shareholders during that period or any other period.
  • 20 Marks

AT – MAR 2024 – L3 – Q4 – Business Income – Corporate Income Tax | Capital Allowance

Covers capital allowance computation, tax rules on long-term contracts, and chargeable income calculation.

Finstruct Ltd has been awarded an airport terminal project. The project started on 1 January 2022 for a contract sum of GH¢60,000,000. The construction of the airport is to be completed on 31 December 2023.

Finstruct Ltd has a financial year ending on 31 December each year. On 31 December 2022, the accounts appropriate to the airport contract contained the following:

Cost Item GH¢
Cost of construction materials 25,500,000
Direct wages of construction staff 22,100,000
Hire of special equipment 300,000
Cost of soil test 100,000
Purchase of fuel and lubricants 750,000
Consultancy services 135,000

Additional information:
i) Materials costing GH¢340,000 sent to the site were returned to the company’s warehouse.
ii) Materials sent to the site worth GH¢675,000 were still unused at the construction site as of 31 December 2022.
iii) Finstruct Ltd pays some of its workers the first week of the ensuing month after the end of the current month. GH¢57,000 is still owed for wages as of the close of the year 2022, and this was not included in the accounts.
iv) A bill amounting to GH¢45,000 was submitted late by Finstruct Ltd, and as of 31 December 2022, the bill had not yet been paid. This was not included in the accounts.
v) It is estimated that the cost to complete the project as of 31 December 2022 should be GH¢8,265,180.
vi) The following details are available on assets of Finstruct Ltd:

Required:
a) Compute the capital allowance for Finstruct Ltd for the year 2022. (6 marks)
b) Explain the tax rules on long-term contracts and compute the percentage of contract completion of the project. (4 marks)
c) Compute the chargeable income of Finstruct Ltd for the year ended 31 December 2022. (10 marks)

a)

Computation of Capital Allowance

Assumptions:
1. There was no depreciation
2. Pick up was not restricted because of the nature of the sector

b) Explanation of Tax Rules on Long-Term Contracts and Calculation of Percentage Completion
Amounts to be included or deducted in calculating the person’s income related to a long-term contract are considered based on the percentage of the contract completed during each basis period. The percentage of completion is determined by comparing the total expenses allocated to the contract and incurred before the end of a basis period with the estimated total contract expenses as determined at the time of commencement of the contract.

Percentage of Completion =85.84%

(4 marks)

c) Computation of Chargeable Income for Finstruct Ltd for the year ended 31 December 2022

Description GH¢
Materials to site 25,500,000
Less: Materials returned (340,000)
Less: Closing stock (Unused materials) (675,000)
Net Material Cost 24,485,000
Wages Paid 22,100,000
Add: Wages Owed 57,000
Net Wages Cost 22,157,000
Hire of Special Equipment 300,000
Cost of Soil Test 100,000
Fuel and Lubricant 750,000
Consultancy Services 180,000
Capital Allowance 2,146,320
Total Cost to Date 50,118,320
Estimated Cost to Complete 8,265,180
Total Cost of Completion 58,383,500

Stage of Completion = 85.84%
Revenue: 85.84% x GH¢60,000,000 = GH¢51,504,000
Cost of Sale: 85.84% x GH¢58,364,000 = GH¢50,099,658

Chargeable Income: GH¢1,404,342

  • 20 Marks

AT – Dec 2023 – L3 – Q4 – Business income – Corporate income tax

Computing the maximum capital allowances and chargeable income for STE Ltd for the year ended 31 December 2021.

STE Ltd was incorporated in 2020 and commenced business operations on 1 January 2021, specializing in manufacturing and distributing solar panels and related products. The company secured a two-year loan of GH¢750,000 with an interest rate of 15% per annum from a local financial institution. The loan was applied as follows:

Loan Application Amount (GH¢)
Showroom construction at Tema 100,000
Procurement of plant and machinery 250,000
Procurement of raw materials 300,000
Procurement of commercial vehicles 70,000
Amount applied towards 2021 consultancy fees 30,000
Total 750,000

The company’s fixed asset register as at 31 December 2021 is as follows:

Fixed Assets Cost (GH¢) Depreciation (GH¢) Net Book Value (GH¢)
Head office building 150,000 3,750 146,250
Factory building 120,000 6,000 114,000
Furniture and fittings 65,000 6,500 58,500
Office computers 80,000 16,000 64,000
Total 415,000 32,250 382,750

STE’s statement of comprehensive income for the year ended 31 December 2021 is as follows:

Additional information:

  1. Staff welfare includes a penalty for late PAYE payment (GH¢5,000), staff end-of-year party (GH¢7,350), and initial payroll software license (GH¢14,000).
  2. Advertising and marketing includes GH¢3,800 spent on entertaining the Marketing Director’s family and friends.
  3. Utility costs include GH¢13,640 for installing solar panels at the Tema showroom.
  4. Interest consists of GH¢15,000 for a loan establishment fee, GH¢56,250 for 2020 interest, and GH¢112,500 for 2021 interest.
  5. Research and development contributions were made to the Energy Commission of Ghana for solar-powered cookers and heaters research.
  6. The operating licence was paid to the Tema Metropolitan Assembly for the factory’s initial license.

Required:
a) Calculate the maximum capital allowances claimable by STE Ltd for the year ended 31 December 2021.
b) Calculate the chargeable income and tax payable by STE Ltd for the year ended 31 December 2021.

a) Maximum Capital Allowances Claimable:

b) Computation of Chargeable Income and Tax Payable:

Computation of interest to capitalise

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