Question 2 Superior Ltd has been carrying on a business of selling smart watches in Hong Kong for many years. Its accounts are made up to 31 December each year. Its profit and loss account for the year ended 31 December 2019 is as follows: $ $ Gross profit 11,370,000 Dividend from quoted shares 80,000 Profit on sale of motor vehicle 20,000 Rental income 240,000 Compensation received (Note 1) 380,000 Interest income (Note 2) 150,000 Exchange gain (Note 3) 30,000 12,270,000 Less: Depreciation 600,000 Salaries 3,950,000 20,000 1,000,000 Auditors' remuneration Directors' remuneration Contributions to recognized occupational retirement scheme (Note 4) Patent purchased from a director Rent and rates Bad debts (Note 5) Donation (Note 6) Transportation (Note 7) Tax paid (Note 8) Repairs & maintenance (Note 9) Sundry expenses (Note 10) Net profit 1,100,000 950,000 400,000 150,000 25,000 320,000 450,000 280,000 700,000 (9,945,000) 2.325,000 Notes: 1. Compensation for permanent loss of trading stock Compensation for permanent damage to machinery $ 300,000 80,000 380,000 2. Interest on HKSAR Government bond Interest on US$ deposit with Bank of East Asia 30,000 120,000 150,000 3. Exchange gain on trade debt collected Exchange gain on conversion of fixed US$ deposits into HK$ 10,000 20,000 30,000 4. Initial contribution Annual contribution 800,000 300,000 1,100,000 5. Trade debts General provision c/f 175,000 20,000 General provision b/f 30,000 Staff loan recovered 15,000 Charged to profit & loss 150,000 195.000 195,000 6. Cash donation to the Hong Kong Community Chest One TV set donated to Po Leung Kuk 20,000 5,000 25,000 7. Motor vehicle expenses Traffic fine 315,000 5,000 320,000 8. Profits tax Salaries tax of the directors 358,000 92,000 450,000 9. Replacement of machinery as mentioned in note 1 Other repairs 80,000 200,000 280,000 10. Initial purchase of curtains Replacement of carpets 30,000 670,000 700.000 11. The Assessor has agreed that the total amount of depreciation allowances of the Company for the year of assessment 2019/20 was $1,134,000. Required: (a) Compute the profits tax payable by Superior Ltd for the year of assessment 2019/20. Ignore provisional tax. Show all workings. (20 marks) (b) Briefly explain the tax treatment of the items set out in the notes to the question. (10 marks) (Total: 30 marks) Question 2 Superior Ltd has been carrying on a business of selling smart watches in Hong Kong for many years. Its accounts are made up to 31 December each year. Its profit and loss account for the year ended 31 December 2019 is as follows: $ $ Gross profit 11,370,000 Dividend from quoted shares 80,000 Profit on sale of motor vehicle 20,000 Rental income 240,000 Compensation received (Note 1) 380,000 Interest income (Note 2) 150,000 Exchange gain (Note 3) 30,000 12,270,000 Less: Depreciation 600,000 Salaries 3,950,000 20,000 1,000,000 Auditors' remuneration Directors' remuneration Contributions to recognized occupational retirement scheme (Note 4) Patent purchased from a director Rent and rates Bad debts (Note 5) Donation (Note 6) Transportation (Note 7) Tax paid (Note 8) Repairs & maintenance (Note 9) Sundry expenses (Note 10) Net profit 1,100,000 950,000 400,000 150,000 25,000 320,000 450,000 280,000 700,000 (9,945,000) 2.325,000 Notes: 1. Compensation for permanent loss of trading stock Compensation for permanent damage to machinery $ 300,000 80,000 380,000 2. Interest on HKSAR Government bond Interest on US$ deposit with Bank of East Asia 30,000 120,000 150,000 3. Exchange gain on trade debt collected Exchange gain on conversion of fixed US$ deposits into HK$ 10,000 20,000 30,000 4. Initial contribution Annual contribution 800,000 300,000 1,100,000 5. Trade debts General provision c/f 175,000 20,000 General provision b/f 30,000 Staff loan recovered 15,000 Charged to profit & loss 150,000 195.000 195,000 6. Cash donation to the Hong Kong Community Chest One TV set donated to Po Leung Kuk 20,000 5,000 25,000 7. Motor vehicle expenses Traffic fine 315,000 5,000 320,000 8. Profits tax Salaries tax of the directors 358,000 92,000 450,000 9. Replacement of machinery as mentioned in note 1 Other repairs 80,000 200,000 280,000 10. Initial purchase of curtains Replacement of carpets 30,000 670,000 700.000 11. The Assessor has agreed that the total amount of depreciation allowances of the Company for the year of assessment 2019/20 was $1,134,000. Required: (a) Compute the profits tax payable by Superior Ltd for the year of assessment 2019/20. Ignore provisional tax. Show all workings. (20 marks) (b) Briefly explain the tax treatment of the items set out in the notes to the question. (10 marks) (Total: 30 marks)
