Reference no: EM132616274
Question - Londakin Ltd., a manufacturing company, is a branch of Londakin International of England. For the year ended 31 December 2019, you have extracted the following information on Londakin Ltd's trading results and tax position:
The accounting profit before tax but after charging depreciation of Sh.2,204,025 and crediting a gain on disposal of fixed assets of Sh.10,125,000 was Sh.36,243,375.
The balance brought forward for industrial building deduction purposes, as at 1 January 2019 was Sh.5,625,000
As at 1 January 2019, the balances brought forward for capital allowances purposes were as follows:
Furniture and fittings Sh.1,640,000
Computers and office equipment Sh.5,062,500
Motor vehicles Sh.2,750,000
Tractors and other self-propelling machines Sh.12,440,000
During the year ended 31 December 2019, the company incurred the following capital expenditure Computers sh. 2,647,500 (including Sh.375,000 incurred on electrical rewriting of the offices).
Plant and machinery was acquired from an overseas supplier in February 2019 upon payment of a deposit of Sh.1,250,000. Londakin Ltd. was able to negotiate credit terms so that the balance due of Sh.3,750,000 would not be paid until July 2020
A Mercedes Benz car for the new finance director worth Sh.2,800,000
Office furniture worth sh.420,000.
In March 2019, the company completed the construction of an additional manufacturing and office facility at a total cost of Sh.24,500,000 which was opened for use in April 2019. The facility occupies 20,000 square feet of which 4,000 square feet is office space, the cost of which is estimated at Sh.3,630,000. The new facility enabled the company to lease the premises it had previously occupied to Quality Suppliers Ltd. from May 2019 at an annual lease charge of Sh.1,200,000, payable in advance (This had not been reflected in the company's financial statements).
During the year ended 31 December 2019, Londakin Ltd. wrote off a loan of Sh.2,325,000 made to Exotica Ltd. a company owned by the family of one of Londakin Ltd's local directors. The loan was advanced to Exotica Ltd. in 1996. Exotica Ltd. went into liquidation on 2 June 2019.
Londakin Ltd. had a VAT inspection in August 2019. Errors in calculating input tax were identified. The company paid Sh.1,911,975 additional VAT and interest amounting to Sh.342,150. These were charged to the profit and loss account for the year.
In August 2019, the company was contracted by an overseas company to provide technical support in the overseas company's engineering department. The total value of the contract was Sh.1,000,000 but since a 10% withholding tax was imposed, only sh.900,000 was received and only that amount was credited as part of turnover in the financial statements for the year. The withholding tax is a final tax representing the profit deemed by the overseas authorities to have arisen in their country. The company estimates its total costs on carrying out the contract at sh.320,000.
The company incurred a bad debt from a customer and had to write it off (Sh.1,360,000). Of this amount, Sh.1,200,000 was provided for in the financial statements for the year ended 31 December 2018 as a specific bad debt. The company's management have made a provision of sh.5,600,000 at 31 December 2019 being 3% of the total trade debtors at the end of the year.
During the year ended 31 December 2019, the company incurred expenditure of Sh.2,100,000 on entertainment, out of which Sh.1,340,000 related to staff functions and the balance to overseas customers.
The company made the following disposals of assets during the year ended 31 December 2019
Disposal proceeds
Computers Sh.1,250,000
Furniture and fittings Sh.860,000
Pick-up Sh.420,000
Professional fees incurred during the year included the following:
Sh.60,000 in relation to negotiation of new loan facilities with the company's bankers.
Sh.340,000 in relation to advice on the possible establishment of a sales office in the Middle East.
Required -
1. Compute the capital allowances claimable by Londakin Ltd. for the year ended 31 December 2019.
2. Compute the corporation tax payable (if any) for the year ended 31 December 2019.
3. Briefly comment on any information you have not used in your computations in (a) and (b) above. Any assumptions made must be clearly stated.