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- 10 Marks
Question
b) Bambara Ltd has the following summarized income statement relating to the 2015 year of assessment:
| GH¢ | |
|---|---|
| Revenue | 100,000 |
| Cost of Sales | 65,000 |
| Gross Profit | 35,000 |
| Operating expenses | 20,000 |
| Net profit | 15,000 |
Upon a closer scrutiny, the following came up:
i) Dividend net of withholding tax received from A Ltd was GH¢10,000. The amount received was added to revenue above. Bambara Ltd has 10% equity interest in A Ltd.
ii) Bad debts of GH¢1,000 were recovered. This was adjusted to the Income Surplus Account.
iii) A penalty of GH¢2,000 was paid and has been added to operating costs to determine the net profit as disclosed.
iv) Capital allowance agreed with Ghana Revenue Authority was GH¢1,000, and depreciation of GH¢1,300 was added to operating costs.
v) Taxes paid in previous quarters amounting to GH¢1,200 were added to operating costs to determine the net profit.
vi) It came to light that an amount of GH¢11,400 net of 5% withholding tax relating to the supply of goods was not brought into the accounts at all on account of omission. The withholding tax was certified correct.
Required:
Determine the tax payable by Bambara Ltd and comment on any four reasons for the inclusion and/or non-inclusion of the transactions in the determination of income. (10 marks)
Answer
Bambara Ltd – Computation of Tax Payable for Y/A 2015
- Net Profit as Disclosed:
Net Profit=15,000 GH¢\text{Net Profit} = 15,000 \text{ GH¢}
- Adjustments:
- Deduct Dividend: Dividend received is subject to final withholding tax and should not be included in taxable income.
Adjusted Net Profit=15,000−10,000=5,000 GH¢\text{Adjusted Net Profit} = 15,000 – 10,000 = 5,000 \text{ GH¢}
- Add Back Non-Allowable Expenses:
- Bad Debts Recovered: This should be added to taxable income, not adjusted to the income surplus account.
- Penalty: Penalties are non-deductible expenses and should be added back.
- Depreciation: Depreciation is not allowable for tax purposes; instead, capital allowance is claimed.
- Taxes Paid: Taxes are non-deductible and should be added back.
- Revenue Omitted: Revenue omitted due to an omission should be included in the taxable income.
Adjusted Net Profit=5,000+1,000+2,000+1,300+1,200+12,000=22,500 GH¢\text{Adjusted Net Profit} = 5,000 + 1,000 + 2,000 + 1,300 + 1,200 + 12,000 = 22,500 \text{ GH¢}
- Deduct Dividend: Dividend received is subject to final withholding tax and should not be included in taxable income.
- Less Capital Allowance:
Chargeable Income=22,500−1,000=21,500 GH¢\text{Chargeable Income} = 22,500 – 1,000 = 21,500 \text{ GH¢}
- Tax Computation:
\text{Tax Payable at 25%} = 21,500 \times 25\% = 5,375 \text{ GH¢}
- Withholding Tax Adjustment:
- The GH¢11,400 omitted was net of 5% withholding tax, so add back the gross amount and deduct the withholding tax.
Withholding Tax on Omitted Revenue=(12,000 – 11,400)+1,200=1,800 GH¢\text{Withholding Tax on Omitted Revenue} = \text{(12,000 – 11,400)} + 1,200 = 1,800 \text{ GH¢} Net Tax Payable=5,375−1,800=3,575 GH¢\text{Net Tax Payable} = 5,375 – 1,800 = 3,575 \text{ GH¢}
Comments on Inclusions and Non-Inclusions:
- Dividend Income: Dividend is subject to a final withholding tax at 8%, and since Bambara Ltd holds only 10% equity, it should not be added to taxable income.
- Bad Debts Recovered: Recovered bad debts should be added to income as they are considered income when recovered.
- Penalty: Penalties paid are not allowable deductions for tax purposes, hence should be added back to income.
- Depreciation vs. Capital Allowance: Depreciation is not allowable for tax purposes; instead, the capital allowance granted by the GRA should be used.
- Omitted Revenue: Revenue omitted due to an error should be included in the taxable income, and the corresponding withholding tax should be credited.
- Tags: Adjustments, Corporate Income, Tax computation
- Level: Level 3
- Topic: Business income - Corporate income tax
- Series: NOV 2016
- Uploader: Dotse