Notes 300,190 Notes Question Gross profit per the statement of profit or loss Add back: tax disallowable expenses 1. During the year, MT Ltd bought computer equipment costing 50,000. The purchase was financed by a loan from the bank. I have added the interest cost back to profit in the above calculation and claimed an Annual Investment Allowance for the cost of the computer equipment. The tax written down value on the main pool at 1 April 2020 was 7,000. At the meeting, your group must identify and explain five errors or omissions you have found in the tax computation in Exhibit 1. For each error or omission, you should ask Fran for the additional information you will need to correct MT Ltd's tax computation. You may ask Fran' further questions at the meeting, time permitting. 1 5 Interest and costs of raising loans to buy Computer equipment Investment in the shares of Music Ltd Research and development costs Repairs Bad debt expense 3,000 7,900 After the meeting with Fran, your group must prepare a working paper. 2. The research and development expenditure of 120,000 relates to costs which have not been capitalised as development expenditure but have instead been included as costs in the statement of profit or loss. I expect that this should be disallowed for tax purposes because the costs will help create profits in the future, so I have added this back to profit in the tax computation. 2 120,000 25,000 64.000 In the working paper, for each of the five error or omission, you are required to: o Identify and explain the error o Explain the correct tax treatment o Set out the additional information you need to correct the tax computation. 219,900 3. Sale of office building - Head office Less: items not taxable as trading income/ capital allowances 1 1 AIA on Computer equipment WDA on main pool Bank interest received Profit on disposal of building Writing down allowance on design rights for Retro-Synth technology (50,000) (1,260) (2,845) (60,000) MT Ltd bought the head office building in 2014. The building was sold during the year ended 31 March 2021. MT Ltd decided it no longer needed a head office as most staff now work from home. I have subtracted the accounting profit of 60,000 because I know that profit on the disposal of capital assets is not taxed as part of trading profit. I have included the legal fees of selling the property in administrative expenses in the statement of profit or loss. 3 4 (7,200) 4. Writing down allowance Retro-Synth technology (71,305) 448,785 On 1 April 2020, MT Ltd bought the design rights to the 'Retro-Synth technology which it correctly capitalised in accordance with IAS 38 Intangible assets. The rights cost 180,000. The technology is being amortised in the financial statements and an amortisation charge has been included in the statement of profit or loss. I have claimed a 4% writing down allowance as permitted by tax law. Add: Dividend received from Music Ltd 10,000 5. Investment in Music Ltd Taxable profits 458,785 Corporation tax payable 77,993.45 MT Ltd bought some shares in Music Ltd in 2016. The purchase of the shares was funded by a bank loan. 7,900 interest on this loan has been added back in the above computation because this is not a trading loan. Music Ltd made a trading loss for the year ended 31 March 2021. Music Ltd's trading loss for the year ended 31 March 2021 was calculated after taking into consideration a claim for Annual Investment Allowance. MT Ltd would like to claim group relief from Music Ltd if possible. Notes 300,190 Notes Question Gross profit per the statement of profit or loss Add back: tax disallowable expenses 1. During the year, MT Ltd bought computer equipment costing 50,000. The purchase was financed by a loan from the bank. I have added the interest cost back to profit in the above calculation and claimed an Annual Investment Allowance for the cost of the computer equipment. The tax written down value on the main pool at 1 April 2020 was 7,000. At the meeting, your group must identify and explain five errors or omissions you have found in the tax computation in Exhibit 1. For each error or omission, you should ask Fran for the additional information you will need to correct MT Ltd's tax computation. You may ask Fran' further questions at the meeting, time permitting. 1 5 Interest and costs of raising loans to buy Computer equipment Investment in the shares of Music Ltd Research and development costs Repairs Bad debt expense 3,000 7,900 After the meeting with Fran, your group must prepare a working paper. 2. The research and development expenditure of 120,000 relates to costs which have not been capitalised as development expenditure but have instead been included as costs in the statement of profit or loss. I expect that this should be disallowed for tax purposes because the costs will help create profits in the future, so I have added this back to profit in the tax computation. 2 120,000 25,000 64.000 In the working paper, for each of the five error or omission, you are required to: o Identify and explain the error o Explain the correct tax treatment o Set out the additional information you need to correct the tax computation. 219,900 3. Sale of office building - Head office Less: items not taxable as trading income/ capital allowances 1 1 AIA on Computer equipment WDA on main pool Bank interest received Profit on disposal of building Writing down allowance on design rights for Retro-Synth technology (50,000) (1,260) (2,845) (60,000) MT Ltd bought the head office building in 2014. The building was sold during the year ended 31 March 2021. MT Ltd decided it no longer needed a head office as most staff now work from home. I have subtracted the accounting profit of 60,000 because I know that profit on the disposal of capital assets is not taxed as part of trading profit. I have included the legal fees of selling the property in administrative expenses in the statement of profit or loss. 3 4 (7,200) 4. Writing down allowance Retro-Synth technology (71,305) 448,785 On 1 April 2020, MT Ltd bought the design rights to the 'Retro-Synth technology which it correctly capitalised in accordance with IAS 38 Intangible assets. The rights cost 180,000. The technology is being amortised in the financial statements and an amortisation charge has been included in the statement of profit or loss. I have claimed a 4% writing down allowance as permitted by tax law. Add: Dividend received from Music Ltd 10,000 5. Investment in Music Ltd Taxable profits 458,785 Corporation tax payable 77,993.45 MT Ltd bought some shares in Music Ltd in 2016. The purchase of the shares was funded by a bank loan. 7,900 interest on this loan has been added back in the above computation because this is not a trading loan. Music Ltd made a trading loss for the year ended 31 March 2021. Music Ltd's trading loss for the year ended 31 March 2021 was calculated after taking into consideration a claim for Annual Investment Allowance. MT Ltd would like to claim group relief from Music Ltd if possible