Question 3

Blue Star Company Ltd carries on business in Hong Kong as a textile manufacturer and prepares accounts to 31 December. As at 31 December 2016, the company owned a factory building in Shatin which it purchased from the developer in October 2016. The company carried on its manufacturing business in the lower floor and leased the upper floor to a drug manufacturer which used it to house a laboratory for scientific research and product testing.

Details of the costs incurred by the developer of the building are as follows:    

            Cost of land                                                                            $1,500,000

            Payment made to existing tenants                                               600,000

            Construction costs                                                                      900,000

                                                                                                            3,000,000

The company paid the developer a price of $4,000,000 for the factory.

In September 2017, the roof of the factory was damaged by a typhoon. The company replaced the original tiled roof with a roof made of cement at a cost of $450,000.

In October 2017, the company spent $300,000 to construct an extension to the factory.

In November 2017, the company bought another factory in Tuen Mun at a price of $2,750,000 (including the land value of $1,500,000). The factory was originally constructed by the vendor for its own use at a cost of $900,000 but due to a change in the company's policy, it had not been put into use and was sold to the company at a fair market price. The factory was immediately put into use.

Required:

Compute the depreciation allowances for Blue Star Company Ltd for all relevant years of assessment. Give explanations where necessary.