Question 3 (35 marks) Leon Ltd (Leon), a Hong Kong-incorporated company, carries on business in Hong Kong in baby clothing. Leon imports baby clothing from Thailand and sells them in its retail outlets in Hong Kong. For the year ended 31 December 2019, Leon has the following income and expenditure: $ Note (1) Sales from outlets Cost of goods sold Gross profit Interest income Exchange gain $ 9,800,000 (3,600,000 6,200,000 180,000 160,000 6,540,000 (2) (3) Directors' remuneration Staff costs Rent and rates Selling and distribution costs Interest expenses Legal and professional fees Depreciation Loss on disposal of fixed assets Miscellaneous expenses (all deductible) Donations Net profit (4) (5) (6) (7) (8) (9) (9) (320,000) (1,200,000) (1,948,000) (486,000) (286,000) (105,000) (140,000) (20,000) (85,000) (130,000 (10) (4,720,000) 1,820,000 Notes: (1) Details of sales and cost of goods sold are: Gross sales from retail outlets in Hong Kong Sales from internet transactions $ 8,000,000 1,800,000 9,800,000 (3,600,000 6,200,000 Cost of goods sold (all purchased from Thailand) Gross profit (2) $ 24,000 58,000 Interest income comprises: Interest on HK$ deposit with a bank in Hong Kong Interest on US$ deposit with a bank in Thailand Interest on HK$ loan to an individual shareholder (the loan amount was remitted to the shareholder's bank account in Hong Kong) Tax reserve certificates bought from the HKSAR government Total per accounts 95,000 3,000 180,000 (3) $ 90,000 Exchange gain comprises: Exchange gain (unrealised) from the year-end conversion of US$ bank deposits Exchange gain (realised) from the settlement of accounts payables Total per accounts 70,000 160,000 Staff costs comprise: Salaries and allowances Wages for a director's driver Mandatory provident fund (MPF) contributions Severance payment to a leaving staff member (per the Employment Ordinance) Total per accounts $ 930,000 162,000 48,000 60,000 1,200,000 (5) Rent and rates comprise: Rent and rates for the director's apartment Rent and rates for retail outlets Rates for Leon's office Replacement of office carpets Refurbishment to retail outlets Total per accounts $ 240,000 1,580,000 16,000 32,000 80,000 1,948,000 (6) Selling and distribution costs comprise: Distribution and shipment costs Rebate commissions to undisclosed agents Parking fines Total per accounts $ 400,000 80,000 6,000 486,000 (7) $ 208,000 Interest expenses comprise: Interest on a bank loan, secured by a personal guarantee from the company's director Interest paid to a Thailand supplier for overdue accounts payable Finance charge on the acquisition of a computer system bought under hire purchase Total per accounts 70,000 8,000 286,000 (8) Legal and professional fees comprise: Audit and tax filing fees Legal fees for renewing the lease of the retail outlets Tax advisory fee for lodging a tax appeal Total per accounts 45,000 35,000 25,000 105,000 (9) The total depreciation charge for the year is $140,000 based on the book value of Leon's non- current assets as at 31 December 2019. During the year, the following addition/disposals were made: Date 1 May 2019 1 July 2019 1 August 2019 Particulars Sold a company car used by a director for $40,000. The original cost and net book value of the car were $220,000 and $60,000 respectively. Purchased storage cabinets for $120,000. Purchased a new computer system at a cost of $72,000 under hire purchase (comprising $52,000 for hardware and $20,000 for software). A down payment of $12,000 was paid at the time of purchase and the balance was payable by six monthly instalments of $12,000 each, starting from 1 September 2019. Purchased an environment-friendly vehicle for $300,000. 1 November 2019 (10) Leon made the following donations during the year: The community Chest (in cash) Po Leung Kuk (baby clothing) Total per accounts $ 50,000 80,000 130,000 (11) The tax written down value brought forward in respect of the plant and machinery pools were: 10%-nil 20% - $80,000 30% - $100,000 (12) Leon owned a property which was used as its office. The qualifying expenditure and written down value in respect of the office property for commercial building allowance purposes was $3,000,000 and $2,280,000 respectively. (13) Leon's profits tax return for the year of assessment 2018/19 showed a tax loss of $230,960 for carry-forward to future years. Required: Calculate Leon Ltd's profits tax liability in respect of the year ended 31 December 2019. Clearly identify the year of assessment, the relevant basis period, the assessable profits/adjusted loss, the net assessable profits/adjusted loss and profits tax payable, if any. Show all workings including the depreciation allowance schedule with details of calculation. (35 marks) Note: You should ignore provisional tax, any one-off tax concessions and overseas tax. [Total for Question 3: 35 marks) Question 3 (35 marks) Leon Ltd (Leon), a Hong Kong-incorporated company, carries on business in Hong Kong in baby clothing. Leon imports baby clothing from Thailand and sells them in its retail outlets in Hong Kong. For the year ended 31 December 2019, Leon has the following income and expenditure: $ Note (1) Sales from outlets Cost of goods sold Gross profit Interest income Exchange gain $ 9,800,000 (3,600,000 6,200,000 180,000 160,000 6,540,000 (2) (3) Directors' remuneration Staff costs Rent and rates Selling and distribution costs Interest expenses Legal and professional fees Depreciation Loss on disposal of fixed assets Miscellaneous expenses (all deductible) Donations Net profit (4) (5) (6) (7) (8) (9) (9) (320,000) (1,200,000) (1,948,000) (486,000) (286,000) (105,000) (140,000) (20,000) (85,000) (130,000 (10) (4,720,000) 1,820,000 Notes: (1) Details of sales and cost of goods sold are: Gross sales from retail outlets in Hong Kong Sales from internet transactions $ 8,000,000 1,800,000 9,800,000 (3,600,000 6,200,000 Cost of goods sold (all purchased from Thailand) Gross profit (2) $ 24,000 58,000 Interest income comprises: Interest on HK$ deposit with a bank in Hong Kong Interest on US$ deposit with a bank in Thailand Interest on HK$ loan to an individual shareholder (the loan amount was remitted to the shareholder's bank account in Hong Kong) Tax reserve certificates bought from the HKSAR government Total per accounts 95,000 3,000 180,000 (3) $ 90,000 Exchange gain comprises: Exchange gain (unrealised) from the year-end conversion of US$ bank deposits Exchange gain (realised) from the settlement of accounts payables Total per accounts 70,000 160,000 Staff costs comprise: Salaries and allowances Wages for a director's driver Mandatory provident fund (MPF) contributions Severance payment to a leaving staff member (per the Employment Ordinance) Total per accounts $ 930,000 162,000 48,000 60,000 1,200,000 (5) Rent and rates comprise: Rent and rates for the director's apartment Rent and rates for retail outlets Rates for Leon's office Replacement of office carpets Refurbishment to retail outlets Total per accounts $ 240,000 1,580,000 16,000 32,000 80,000 1,948,000 (6) Selling and distribution costs comprise: Distribution and shipment costs Rebate commissions to undisclosed agents Parking fines Total per accounts $ 400,000 80,000 6,000 486,000 (7) $ 208,000 Interest expenses comprise: Interest on a bank loan, secured by a personal guarantee from the company's director Interest paid to a Thailand supplier for overdue accounts payable Finance charge on the acquisition of a computer system bought under hire purchase Total per accounts 70,000 8,000 286,000 (8) Legal and professional fees comprise: Audit and tax filing fees Legal fees for renewing the lease of the retail outlets Tax advisory fee for lodging a tax appeal Total per accounts 45,000 35,000 25,000 105,000 (9) The total depreciation charge for the year is $140,000 based on the book value of Leon's non- current assets as at 31 December 2019. During the year, the following addition/disposals were made: Date 1 May 2019 1 July 2019 1 August 2019 Particulars Sold a company car used by a director for $40,000. The original cost and net book value of the car were $220,000 and $60,000 respectively. Purchased storage cabinets for $120,000. Purchased a new computer system at a cost of $72,000 under hire purchase (comprising $52,000 for hardware and $20,000 for software). A down payment of $12,000 was paid at the time of purchase and the balance was payable by six monthly instalments of $12,000 each, starting from 1 September 2019. Purchased an environment-friendly vehicle for $300,000. 1 November 2019 (10) Leon made the following donations during the year: The community Chest (in cash) Po Leung Kuk (baby clothing) Total per accounts $ 50,000 80,000 130,000 (11) The tax written down value brought forward in respect of the plant and machinery pools were: 10%-nil 20% - $80,000 30% - $100,000 (12) Leon owned a property which was used as its office. The qualifying expenditure and written down value in respect of the office property for commercial building allowance purposes was $3,000,000 and $2,280,000 respectively. (13) Leon's profits tax return for the year of assessment 2018/19 showed a tax loss of $230,960 for carry-forward to future years. Required: Calculate Leon Ltd's profits tax liability in respect of the year ended 31 December 2019. Clearly identify the year of assessment, the relevant basis period, the assessable profits/adjusted loss, the net assessable profits/adjusted loss and profits tax payable, if any. Show all workings including the depreciation allowance schedule with details of calculation. (35 marks) Note: You should ignore provisional tax, any one-off tax concessions and overseas tax. [Total for Question 3: 35 marks)