Calculation of taxable profit Fremskridt Company reports before-tax profit of 750 in its x9 published accounts. (All amounts are in thousands.) This amount is arrived at after charging depreciation of 1,500, bad debt expense of 60 and entertainment costs of 25. Under the tax code of Norseland, Fremskridt’s home country, these amounts must be adjusted in calculating taxable profit. Tax depreciation in x9 is 1,200, the deduction for bad debts is restricted to the actual debts written off in the year of 27 and only 8 of the entertainment costs is deductible. Norseland’s corporate income tax rate is 30%.

Required

(a) Calculate Fremskridt Company’s taxable profit and income tax liability in x9.

(b) Fremskridt’s management want to know the impact on the company of each of the following situations.

Recalculate the company’s taxable profit and tax liability for x9 in each case. Each case is independent. (Amounts are in 000.)

(i) Fremskridt receives a cash dividend of 56 from a (domestic) subsidiary. The dividend carries a tax credit of 24 (i.e. 3/7 of the dividend distributed). The dividend and related tax credit are not included in the company’s before-tax profit of 750. Norseland has an imputation tax system.

(ii) Fremskridt’s before-tax profit of 750 is after deducting 240 that the company spent on research in x9. Under Norseland’s tax code, Fremskridt can claim a tax credit of 20% against its income tax liability for research costs incurred in the year.

(iii) Fremskridt can claim an investment deduction of 9% on investments in qualifying fixed assets in the year. (Certain investments, e.g. those in land, securities, goodwill, licences, concessions, do not qualify for the deduction.) Qualifying investments amount to 1,000 in x9. The investment deduction does not affect the depreciable base of the assets.

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