Long Lasting Company Limited (“Long Lasting”) is a company incorporated in Hong Kong. Its parent company is a large German Group. The principal activities are the manufacture and sales of wall paper. All of its trading profits are subject to Hong Kong profits tax. Long Lasting adopts 31 December as its accounting year end. For the accounting year ended 31 December 2018, its profit and loss account showed a net profit before tax for HK$1,500,000 after crediting and charging, inter alia, the following items of income and expenditure. 

1. Interest income included: Interest on GBP deposits with a bank located in London $40,000 Interest on HKD fixed deposit with a local bank in Hong Kong $60,000 (refer to Note 3 below - This deposit was applied to secure a bank loan granted by that local bank) Interest paid by a customer on its overdue trade debts $50,000 

2. Other income include: Exchange gain from the sale of GBP deposits with a bank located in London (refer to Note 1 above) $60,000 Deposits forfeited due to the cancellation of orders by a customer $80,000 

3. Interest expenses include: Interest paid to a local bank in respect of a loan secured by the fixed deposit with that local bank (refers to Note 1 above) $103,000 Interest paid to a local director on a short term loan $34,000 (Both loans were used for the production of chargeable profits) 

4. Bad debt expenses include: Written off due to debtors in liquidation $63,000 -3- Increase in general provision for doubtful debts $90,000 

5. Legal and professional fees include: Legal cost of recovery of trade debts from customers $42,000 Auditing and accounting fees $70,000 

6. Refurbishment, repairs and maintenance include: Refurbishment for the factory located in Aberdeen, Hong Kong owned by Long Lasting $200,000 

7. Accounting depreciation was $50,000. Agreed depreciation allowance for the year of assessment 2018/19 amounted to $110,000. 

Required: 

a) Explain to the chief financial officer of Long Lasting, in respect of each of the items 1, 4, and 5, the effect on the company’s profits tax position for the year of assessment 2018/19. 

b) Calculate the assessable profits and the profits tax thereon for Long Lasting for the year of assessment 2018/19. Ignore Provisional Profits Tax, tax reduction and the impacts of two-tiered profits tax regime.

Answer rating: 100% (QA)

a The effect of each of the items 1 4 and 5 on the companys profits tax position for the year of ass... View the full answer