Question 3 VO Limited is a clothing manufacturer carrying on business in Hong Kong. Its profits...

 

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Question 3 VO Limited is a clothing manufacturer carrying on business in Hong Kong. Its profits and loss accounts for the year ended 30 June 2018 are as follows: Income Sales gross profits - sales to Hong Kong customers Sales gross profits - sales to Taiwan customers Dividends Interest income Rental income Sales proceeds of patent Total income Expenditure Salaries and wages Penalty Exchange loss Purchase of patent Commission Rent and rates Director's fees Depreciation Interest expenses Donation Contributions to Retirement Scheme Repairs and maintenance Bad debts written off Legal and professional fees Insurance Property tax paid Net profit for the year $ 3. Interest Income 5,682,000 2,157,000 (Note 1) 228,000 (Note 2) 105,000 (Note 3) 160,000 (Note 4) 146,000 (Note 5) 8,478,000 Interest on HK$ saving accounts placed with a bank in Hong Kong Interest on a loan granted in HK to a staff 2,560,000 155,000 (Note 6) 79,000 (Note 7) 185,000 (Note 5) 262,000 (Note 8) 910,000 758,000 629,000 116,000 (Note 9) 205,000 (Note 10) 256,000 (Note 11) 158,000 (Note 12) 263,000 (Note 13) 125,000 (Note 14) 69,620 20,480 (Note 4) 6,751,100 Notes: 1. Sales gross profits The sales contracts for the goods sold to Taiwan customers were effected in Taiwan. 1,726,900 2. Dividends The company invests its surplus cash partly in stocks listed on the local stock market and partly in stocks listed on overseas stock markets. One-fourth of the dividends were received from stocks listed on overseas markets. kr 87,000 18,000 105,000 4. Rental income During the year, the company let out a spare warehouse and earned rental income of $160,000. Property tax of $20,480 was paid on the rental income. 5. Sale of Patent On 1 September 2017, the company acquired the patent from its associate in Japan in respect of its new products manufactured in Hong Kong. The purchase price of the patent was $185,000. The new products turned out to be a failure. The patent was eventually sold for $146,000 in June 2018. 6. Penalty The company incurred penalty of $155,000 as a result of prosecutions under labour laws. 7. Exchange loss Loss from the conversion of foreign currency trade accounts due to a PRC supplier Loss arising from the acquisition of sewing machinery from Japan 8. Commission Paid to Hong Kong residents for introducing contracts in HK Paid to Hong Kong residents for introducing contracts in Taiwan Paid to Taiwa residents for introducing contracts in Taiwan 9. Interest expenses Interest on a bank loan used solely to finance the purchase of new machinery. The money was borrowed from a bank in Hong Kong. The loan was secured by a fixed deposit held by an associate of the company with the bank's US branch that generated tax-free interest of $70,000 Interest paid to a director of the company in respect of a short-term loan (The director did not carry on business in Hong Kong) 10. Donation Contributions to an approved charitable institution to take up advertising space in its periodicals Cash donations to other approved charitable institutions 25,000 54,000 79,000 $ 105,000 62,000 95,000 262,000 $ 75,000 41,000 116,000 $ 72,000 133,000 205,000 11. Contributions to Retirement Scheme The company operated a registered retirement scheme for its employees and an annual contribution of $256,000 was made for the year. Under the scheme, each employee has to contribute 5% of his/her basic salary while the company will contribute 10% of all eligible employees' basic salary. Records also show that the company made a special payment of $150,000 in December 2015 due to unexpected poor performance of the fund. 12. Repair and maintenance Replacement of loose tools (no depreciation allowance claimed) The company established a policy to make a general provision for machinery repair and maintenance of $70,000 each year, effective from 2018/19 13. Bad debts written off Amounts of bad debts charged to accounts comprise the followings: Provision c/f-2% on account receivable for HK customers - 3% on account receivable for Taiwan customers - on identified Taiwan customers Bad debts written off-on HK customers - on Taiwan customers - on machinery suppliers Bad debt recovered - on HK customers previously written off Provision b/f-2% on account receivable for HK customers - 3% on account receivable for Taiwan customers - on identified Taiwan trade debts 14. Legal and professional fees Legal fee for drafting agreements with Taiwan customers Legal fee for the disposal of the patent mentioned in Note 5 The company is proposing to set up a factory in Thailand. A consultant has been engaged to conduct a feasibility study and professional fee of $65,000 was paid. $ 88,000 70,000 158,000 $ 301,000 195,000 92,000 118,000 123,000 102,000 (92,000) (280,000) (190,000) (106,000) 263,000 $ 21,000 39,000 65,000 125,000 15. During the year, the company rented a new office premise and incurred renovation cost of $89,000. The amount is capitalized in the asset accounts. 16. During the year, the company acquired two computers for the senior managers home offices for $22,000. The cost of $22,000 was capitalized in the asset accounts. 17. The Assessor agreed that the amount of depreciation allowances for the year of assessment 2018/19 was $787,000. Required: Compute the assessable profits and the profits tax liability of the company for the year of assessment 2018/19. Specifically comment upon the tax treatment you have accorded to items 1,3-10, 13-14 and 16 above. (Ignore provisional profits tax) Question 3 VO Limited is a clothing manufacturer carrying on business in Hong Kong. Its profits and loss accounts for the year ended 30 June 2018 are as follows: Income Sales gross profits - sales to Hong Kong customers Sales gross profits - sales to Taiwan customers Dividends Interest income Rental income Sales proceeds of patent Total income Expenditure Salaries and wages Penalty Exchange loss Purchase of patent Commission Rent and rates Director's fees Depreciation Interest expenses Donation Contributions to Retirement Scheme Repairs and maintenance Bad debts written off Legal and professional fees Insurance Property tax paid Net profit for the year $ 3. Interest Income 5,682,000 2,157,000 (Note 1) 228,000 (Note 2) 105,000 (Note 3) 160,000 (Note 4) 146,000 (Note 5) 8,478,000 Interest on HK$ saving accounts placed with a bank in Hong Kong Interest on a loan granted in HK to a staff 2,560,000 155,000 (Note 6) 79,000 (Note 7) 185,000 (Note 5) 262,000 (Note 8) 910,000 758,000 629,000 116,000 (Note 9) 205,000 (Note 10) 256,000 (Note 11) 158,000 (Note 12) 263,000 (Note 13) 125,000 (Note 14) 69,620 20,480 (Note 4) 6,751,100 Notes: 1. Sales gross profits The sales contracts for the goods sold to Taiwan customers were effected in Taiwan. 1,726,900 2. Dividends The company invests its surplus cash partly in stocks listed on the local stock market and partly in stocks listed on overseas stock markets. One-fourth of the dividends were received from stocks listed on overseas markets. kr 87,000 18,000 105,000 4. Rental income During the year, the company let out a spare warehouse and earned rental income of $160,000. Property tax of $20,480 was paid on the rental income. 5. Sale of Patent On 1 September 2017, the company acquired the patent from its associate in Japan in respect of its new products manufactured in Hong Kong. The purchase price of the patent was $185,000. The new products turned out to be a failure. The patent was eventually sold for $146,000 in June 2018. 6. Penalty The company incurred penalty of $155,000 as a result of prosecutions under labour laws. 7. Exchange loss Loss from the conversion of foreign currency trade accounts due to a PRC supplier Loss arising from the acquisition of sewing machinery from Japan 8. Commission Paid to Hong Kong residents for introducing contracts in HK Paid to Hong Kong residents for introducing contracts in Taiwan Paid to Taiwa residents for introducing contracts in Taiwan 9. Interest expenses Interest on a bank loan used solely to finance the purchase of new machinery. The money was borrowed from a bank in Hong Kong. The loan was secured by a fixed deposit held by an associate of the company with the bank's US branch that generated tax-free interest of $70,000 Interest paid to a director of the company in respect of a short-term loan (The director did not carry on business in Hong Kong) 10. Donation Contributions to an approved charitable institution to take up advertising space in its periodicals Cash donations to other approved charitable institutions 25,000 54,000 79,000 $ 105,000 62,000 95,000 262,000 $ 75,000 41,000 116,000 $ 72,000 133,000 205,000 11. Contributions to Retirement Scheme The company operated a registered retirement scheme for its employees and an annual contribution of $256,000 was made for the year. Under the scheme, each employee has to contribute 5% of his/her basic salary while the company will contribute 10% of all eligible employees' basic salary. Records also show that the company made a special payment of $150,000 in December 2015 due to unexpected poor performance of the fund. 12. Repair and maintenance Replacement of loose tools (no depreciation allowance claimed) The company established a policy to make a general provision for machinery repair and maintenance of $70,000 each year, effective from 2018/19 13. Bad debts written off Amounts of bad debts charged to accounts comprise the followings: Provision c/f-2% on account receivable for HK customers - 3% on account receivable for Taiwan customers - on identified Taiwan customers Bad debts written off-on HK customers - on Taiwan customers - on machinery suppliers Bad debt recovered - on HK customers previously written off Provision b/f-2% on account receivable for HK customers - 3% on account receivable for Taiwan customers - on identified Taiwan trade debts 14. Legal and professional fees Legal fee for drafting agreements with Taiwan customers Legal fee for the disposal of the patent mentioned in Note 5 The company is proposing to set up a factory in Thailand. A consultant has been engaged to conduct a feasibility study and professional fee of $65,000 was paid. $ 88,000 70,000 158,000 $ 301,000 195,000 92,000 118,000 123,000 102,000 (92,000) (280,000) (190,000) (106,000) 263,000 $ 21,000 39,000 65,000 125,000 15. During the year, the company rented a new office premise and incurred renovation cost of $89,000. The amount is capitalized in the asset accounts. 16. During the year, the company acquired two computers for the senior managers home offices for $22,000. The cost of $22,000 was capitalized in the asset accounts. 17. The Assessor agreed that the amount of depreciation allowances for the year of assessment 2018/19 was $787,000. Required: Compute the assessable profits and the profits tax liability of the company for the year of assessment 2018/19. Specifically comment upon the tax treatment you have accorded to items 1,3-10, 13-14 and 16 above. (Ignore provisional profits tax)

Answer rating: 100% (QA)

To calculate the taxable income for VO Limited we need to adjust the net profit by considering the relevant items from the given information 1 Exclude nontaxable items Rental income 160000 Sales proce... View the full answer