QUESTION ONE

The following summarised statement of profit or loss has been obtained from the accounts of KMC Mining Corporation a company engaged in the extraction and sale of base metals, industrial minerals and precious metals in Zambia. KMC Ltd is a subsidiary of a foreign based multinational mining company. The group prepares financial statements in United States dollars.

KMC MINING CORPORATION

STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2021

Sales revenue

Cost of sales

Gross profit

Other income Opearting expenses Finance cost

Profit for the year

The following additional information is available: Note 1: Sales revenue

Note K 000 (1) 486,000 (2) (185200)

300,800 (3) 19,950 (4) (81,204)

(162,600) 76,946

This comprises sales of vanadium for the year amounting to K84,000,000 being the norm value of the mineral for mineral royalty tax purposes, sales of industrial minerals for the year amounting to K50,000,000 being the gross value for mineral royalty tax purposes and sales of precious metals amounting to K28,000,000 being the gross value of the mineral for mineral royalty tax purposes. The remaining balance of the sales represents the norm value of coper sold during the year based on the London Metal Exchange cash price which averaged US$6,100 per metric tonne throughout tax year 2021.

Note 2: Cost of sales

Included in operating expenses, is mineral royalty tax paid by the company during the year which was computed correctly and paid on the relevant due dates. Also included in cost of sales are depreciation charges of K17,000,000 amortisation of intangible assets of K7,000,000 and impairment of the process plant of K2,400,000. The balance comprises mineral processing costs.

2

Note 3:Other income

Other income include Government of Zambia bond interest of K10,200,000 (net), Royalty income of K6,800,000 (net) and rental income from investment property of K2,550,000 (net).

Note 4: Operating expenses

Operating expenses comprises the following:

Staff wages and salaries

Enviromental clean up expenses

Mineral exploration expenses

Fines for breach of Health & Safety regulations

Compesation paid to employees affected by a mine accident

Gifts of KMC branded pens to customers valued at K90 per customer Gifts of KMC branded T-Shirts costing K200 per cutomer Contruction of Secondary School in mining township

Construction of police post in mining township

Drafting and mapping expenses

Insurance and freight expenses

Advertising and marketing expenses

Foreing exchange loss from translating capital assets held abroaod into Zambian kwacha

Provisional income tax paid

Miscellaneous allowbale business expenses

Note 5: Imported Mining Equipment

K 15,000,000

2,600,000 4,500,000 2,400,000 1,800,000

24,000

80,000 12,000,000 6,000,000 1,500,000 3,600,000 1,800,000

1,400,000 10,000,000 18,500,000 81,204,000

During the year ended 31 December 2021, the company imported the following capital assets which were imported from foreign suppliers:

Asset

Mine excavation quipment Mining implements

Pool cars

Note 6: Other capital expenditure

Cost K3,000,000 K2,000,000

K600,000

At 1 January 2021, KMC had the following assets which were acquired from local Zambian suppliers:

Asset

Office furniture

Personal to holder motor car (3,000cc)

ITV b/f K 250,000 460,000

Original Cost

500,000 600,000

3

The Personal to holder car is provided to the Managing Director whose private use of the car is 25%.

The company further incurred the following expenditure during the tax year 2021 K

Installation of new copper smelter 10,500,000 Construction of new mineral prcossing plant 22,000,000

Note 7: Other information

The company has had the following results from mining operations in recent years:

Year ended 31 December 2018 2019 2020 KKK

Tax adjusted Mining profit/(loss)

before loss relief/ (60,000,000) 36,000,000 44,481,204

Note 8: Indexation formula

The indexation formula for capital allowances and mining losses, where applicable, is given below:

(R R ) 21

R 1

The following Zambian Kwacha per US Dollar (ZMW/US$) average BOZ mid-exchange rates should be used where applicable:

1+

Accounting Period

Y/e 31 December 2018 Y/e 31 December 2019 Y/e 31 December 2020 Y/e 31 December 2021

Required:

Average BOZ Mid-Exchange rate

ZMW/ US$ K19.00 K19.95 K20.50 K21.32

(a) Show how the loss incurred in the year ending 31 December 2018 will be relieved in each of the tax years 2019 and 2020 and compute the final taxable profits for each of

the tax years 2019 and 2020.

(b) Compute the taxable mining profits for the tax year 2021.

(c) Compute the income tax payable by the company for the tax year 2021.

(9 marks) (25 marks) (6 marks)

4

(Total: 40 marks)