QUESTION ONE

The following extract of the statement of profit or loss has been obtained from the accounts of
KLN Plc, a manufacturing company for the year ended 31 December 2020.

Note K K
Gross Profit 95,189,400
Add: Other income
Profit on disposal of non – current assets (1) 988,200
Investment income:
- Royalties (net) (2) 76,500
- Dividends (net) (2) 282,600
- Fixed deposit interest (net) (2) 102,000
96,638,700
Less: Expenses
Depreciation 248,000
Legal and professional fees (3) 1,724,000
Bad debts expense (4) 334,000
General operating expenses (5) 46,606,600
Income tax expense (6) 13,515,700
(62,428,300)
Profit for the year 34,210,400

The following information is available:

Note 1: Disposals of non-current assets

The profit on disposal of non-current assets of K988,200 shown in the statement of profit or loss
arose from the disposal of the following assets during the year:

(i) Sale of old business premises for total proceeds of K1,960,000, being the market value
on that date (with K1,100,000 of the value relating to land and the remaining K860,000
relating to the buildings which are commercial buildings for capital allowances purposes).
The premises were bought and brought into use in March 2010 at a cost of K1,550,000
(with K950,000 of the original cost being attributed to the land and the remaining
K600,000 to the commercial building).

(ii) Sale of old office equipment for K28,600 being the market value of the equipment on that
date. The equipment was acquired at cost of K36,000. The income tax value of the
equipment was K18,000 and the net book value was K21,600.

(iii) Sale of a pool car for disposal proceeds of K56,000 being its market value on that date.
The car was acquired at cost of K70,000. The income tax value of the car on disposal was
K42,000 and its net book value was K44,800.
(iv) Sale of 150,000 shares (with a nominal value of K0.50 each) in DLT Plc a non-mining
company listed on the LuSE for K15 per share being the market value of each share on
the date of disposal. The carrying value of the shares on the date of disposal was
K2,100,000.

(v) Sale of 120,000 shares (with a nominal value of K1 each) in TRC Ltd a private limited
company for a total proceeds of K500,000 being their market value on the date of disposal.
The carrying value of the shares in the financial statement on the date of disposal was
K420,000.

Note 2: Investment income

The investment income comprising royalties, dividends and fixed deposit interest is net of
withholding tax which was deducted at source.

Note 3: Legal fees and professional fees

These include legal fees in connection with registration of patents of K563,000, a premium paid
on the acquisition of a fifty year lease on land of K500,000, licence renewal fees of K55,000, audit
fees of K250,000, fees in connection with an action brought against a supplier for breach of
contract of K320,000 and a court action brought against KLN Plc for a misleading advert of
K36,000.

Note 4: Bad Debt expense

K K
Bad debts written off 284,000 Balance b/d
Staff loans written off 150,000 - Specific allowance 67,000
Supplier’s loans written off 53,000 - General allowance 561,000
Bad debts written off recovered 92,000
Staff loans written off
recovered 33,000
Balance c/d Profit or loss 334,000
- Specific allowance 90,000
- General allowance 510,000 ________
1,087,000 1,087,000

Note 5: General operating expenses

These include employee’s wages and salaries of K33,793,600, expenses on staff party of
K60,400, entertaining major suppliers of K69,600, donations of K360,000 made to approved
public benefit organisations, donations of K160,000 made to political parties, gifts of KLN Plc pens
to customers (costing K10 each) totalling K8,000, gifts of KLN Plc (diaries costing K300 each)
totalling K5,000 and miscellaneous allowable operating expenses of K12,150,000.
Note 6: Income Tax Expense

The income tax on profits charged in the statement of profit or loss was made up as follows:

K
Provision for tax on the profits for the year (paid) 14,307,900
Less: Under provision of previous year’s tax on profits (1,022,200)
Add: Increase in the deferred tax provision for the year 230,000
13,515,700
Note 7: Buildings
The company completed the construction of a new building on 28 May 2020, which was brought
into use on 1 June 2020 at a total cost of K2,500,000. This comprised land with a cost of K500,000,
a staff canteen with a cost of K450,000, a showroom with a cost of K120,000, and a factory with
a cost of K1,300,000 and administrative offices with a cost of K130,000.

Note 8: Implements, plant and machinery

During the year ended 31 December 2020, the company bought a Toyota Prado motor car with
a cylinder capacity of 3000cc for the Managing Director at a cost of K350,000 and Toyota Camry
car (2000cc) for the Marketing Manager at a cost of K280,000. The cars are used by each official
on a personal holder basis.

The only other implement, plant and machinery held by the company at 1 January 2020, used in
the business qualifying for wear and tear allowances was manufacturing equipment which was
acquired at a cost of K960,000 and had an Income Tax Value of K480,000.

Note 9: Unrelieved Tax loss

KLN Plc had an unrelieved tax loss of K5,214,500 at 1 January 2020, which was the balance of a
tax loss which was suffered in the tax year 2018.

Required:

(a) Explain the property transfer tax implications of the disposal each of the assets in note
(1) and compute the amount of any property transfer tax arising on each disposal.
(7 marks)
(b) Compute the maximum amount of capital allowances claimable by KLN Plc in the tax year
2020 on:

(i) Buildings. (9 marks)

(ii) Implements, plant and machinery. (5 marks)
(c) Calculate for KLN Plc in respect of the tax year 2020 the:

(i) Final taxable business profit (14 marks)

(ii) Final amount of company Income Tax payable (5 marks)
 [Total: 40 Marks]

QUESTION TWO

Supiwe and Zepiwe have been trading in partnership preparing their financial statements for years
ending on 31 December. Their partnership agreement provides for annual partnership salaries of
K160,000 and K140,000 for Supiwe and Zepiwe respectively. The balance of profits and losses
are shared between Supiwe and Zepiwe in the ratio of 2:1 respectively.

On 1 July 2020, Memiwe joined the partnership and the partnership agreement was changed.
Annual partnership salaries for Supiwe, Zepiwe and Memiwe were K250,000, K200,000 and
K180,000 respectively. The balance of profits and losses were to be shared between Supiwe,
Zepiwe and Memiwe in the ratio of 5:3:2 respectively.

For the year ended 31 December 2020, the partnership’s estimated taxable business profit was
K360,000, before the partners’ appropriations. On this basis, provisional income tax was
calculated and paid correctly on the normal due dates.

After the financial statements of the partnership were finalised for the year ended 31 December
2020, the turnover for the year was K960,000 and the taxable partnership’s profit, before the
partners’ appropriations was K420,000.

Neither Supiwe, Zepiwe nor Memiwe has any other income apart from the partnership profits.

Required:

(a) Calculate, the provisional income tax paid for the tax year 2020 by:

(i) Supiwe
(ii) Zepiwe
(iii) Memiwe

Note: For this part of the question, you are not required to show the due dates and the
amount payable on each due date. (10 marks)