QUESTION 1 [40 MARKS] Mr Adil runs a garments factory and sells ready-made garments to local customers only. The following is the profit and loss statement of Mr Adil for the year ended 30 June 2019. Rs Sales Less Cost of sales Gross Profit Other income Dividends from MCB Ltd Rs 3,854,700 (1,086,920) 2,767,780 300,000 3,067,780 642,000 456,000 345,000 176,500 125,000 Less Expenses Wages and salaries Entertainment, gifts and donations Stationery and Consumables Legal and professional fees Interest on loan Electricity, water and telephone charges Rent & Rates Licences Motor vehicle expenses Repairs and maintenance Depreciation Provision for doubtful debts Personal income tax of Mr Adil Total Expenses Net Profit 185,400 272,585 28,000 148,000 124,865 20,800 19,580 4,570 (2,548,300) 519,480 The following are additional information provided to you by Mr Adil: 1. Wages and salaries include the following: i) An amount of Rs 52,000 was paid to Mrs Premila, the baby-sitter of Mr Adil's 4 year son. ii) Performance bonus to outstanding officers amounted to Rs 42,000. ii) Salary to his father, working as driver, amounted to Rs 198,000. The other driver of the business received Rs 150,000 as salary. Page 5 of 10 2. Entertainment, gifts and donations consist of the following: i) Donations to political parties Rs 96,000 ii) Gifts to customers Rs 126,000 iii) Entertainments to customers Rs 156,000 iv) Staff Welfare Party Rs 78,000 3. Legal and professional fees were as follows: i) Accountancy and audit fees Rs 25,000 ii) Consultancy fees in relation to new product development Rs 48,000 ii) Legal fees in relation to drafting of contract for employees Rs 46,000 iv) Notary fees in relation to purchase of residential house Rs 32,000 v) Penalty for late payment of taxes Rs 13,500 vi) Penalty for late submission of income tax returns Rs 12,000 4. The interest on loan related to a loan of Rs 750,000 contracted from a local commercial bank in January 2019. Mr Adil used the loan amount to purchase a residential land on which he is intending to construct a new house for himself. 5. Mr Adil currently lives in a one-storeyed building. The ground floor is being used as the factory. Electricity, water and telephone charges as well as Rent & Rates relate to the whole building. It has been ascertained that utility bills represent 60% for commercial use whereas rent and rates account for 20% for private purpose. 6. The motor vehicle expenses proportionately related to the expenses of three delivery vans and one private motor car for Mr Adil. The same proportion applied to the repairs and maintenance. 1. Repairs and maintenance consisted of the following: i) Redecorating administration offices ii) Purchase of new office equipment Rs 24,865 Rs 100,000 Page 6 of 10 8. A bad debt of Rs 36,000 was recovered during the financial year ended 30 June 2019. However, same has not been included in the reported turnover of the business. 9. Mr Adil took some garments from the factory for personal use. No records were kept for this transaction. The mark-up policy of the business is 20% and the cost of these goods amounted to Rs 80,000. 10. An amount of Rs 254,000 representing sales of garments was not included in the accounts of the business. 11. Annual allowances stood at Rs 18,800. REQUIRED (a) Calculate Adil's tax adjusted trade profit for the year ended June 2019. [25 marks] (b) In the most efficient way, compute Adil's income tax liability for the year ended June 2019, assuming that his wife is not working and not deriving any income. [5 marks] (c) Adil is intending to expand his business to international markets. Advise him the tax implications of his project in such a way that he minimises his tax liability [10 marks) QUESTION 1 [40 MARKS] Mr Adil runs a garments factory and sells ready-made garments to local customers only. The following is the profit and loss statement of Mr Adil for the year ended 30 June 2019. Rs Sales Less Cost of sales Gross Profit Other income Dividends from MCB Ltd Rs 3,854,700 (1,086,920) 2,767,780 300,000 3,067,780 642,000 456,000 345,000 176,500 125,000 Less Expenses Wages and salaries Entertainment, gifts and donations Stationery and Consumables Legal and professional fees Interest on loan Electricity, water and telephone charges Rent & Rates Licences Motor vehicle expenses Repairs and maintenance Depreciation Provision for doubtful debts Personal income tax of Mr Adil Total Expenses Net Profit 185,400 272,585 28,000 148,000 124,865 20,800 19,580 4,570 (2,548,300) 519,480 The following are additional information provided to you by Mr Adil: 1. Wages and salaries include the following: i) An amount of Rs 52,000 was paid to Mrs Premila, the baby-sitter of Mr Adil's 4 year son. ii) Performance bonus to outstanding officers amounted to Rs 42,000. ii) Salary to his father, working as driver, amounted to Rs 198,000. The other driver of the business received Rs 150,000 as salary. Page 5 of 10 2. Entertainment, gifts and donations consist of the following: i) Donations to political parties Rs 96,000 ii) Gifts to customers Rs 126,000 iii) Entertainments to customers Rs 156,000 iv) Staff Welfare Party Rs 78,000 3. Legal and professional fees were as follows: i) Accountancy and audit fees Rs 25,000 ii) Consultancy fees in relation to new product development Rs 48,000 ii) Legal fees in relation to drafting of contract for employees Rs 46,000 iv) Notary fees in relation to purchase of residential house Rs 32,000 v) Penalty for late payment of taxes Rs 13,500 vi) Penalty for late submission of income tax returns Rs 12,000 4. The interest on loan related to a loan of Rs 750,000 contracted from a local commercial bank in January 2019. Mr Adil used the loan amount to purchase a residential land on which he is intending to construct a new house for himself. 5. Mr Adil currently lives in a one-storeyed building. The ground floor is being used as the factory. Electricity, water and telephone charges as well as Rent & Rates relate to the whole building. It has been ascertained that utility bills represent 60% for commercial use whereas rent and rates account for 20% for private purpose. 6. The motor vehicle expenses proportionately related to the expenses of three delivery vans and one private motor car for Mr Adil. The same proportion applied to the repairs and maintenance. 1. Repairs and maintenance consisted of the following: i) Redecorating administration offices ii) Purchase of new office equipment Rs 24,865 Rs 100,000 Page 6 of 10 8. A bad debt of Rs 36,000 was recovered during the financial year ended 30 June 2019. However, same has not been included in the reported turnover of the business. 9. Mr Adil took some garments from the factory for personal use. No records were kept for this transaction. The mark-up policy of the business is 20% and the cost of these goods amounted to Rs 80,000. 10. An amount of Rs 254,000 representing sales of garments was not included in the accounts of the business. 11. Annual allowances stood at Rs 18,800. REQUIRED (a) Calculate Adil's tax adjusted trade profit for the year ended June 2019. [25 marks] (b) In the most efficient way, compute Adil's income tax liability for the year ended June 2019, assuming that his wife is not working and not deriving any income. [5 marks] (c) Adil is intending to expand his business to international markets. Advise him the tax implications of his project in such a way that he minimises his tax liability [10 marks)