Cynon (CL) carries on a trading business in Hong Kong. Its profits are returned as taxable...

 

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Cynon (CL) carries on a trading business in Hong Kong. Its profits are returned as taxable in Hong Kong. The company has accounting profits of $5,870,000 for the year ended 30 June 2020, which was arrived at after taking into account the following items: Income: Commission Dividends Gain on disposal of trademark Interest income Expenses: Bad debts Depreciation Donation Entertainment and travelling Exchange difference Interest expenses Legal and professional fee Staff costs Notes: 1. 2 3. Note 1 2 3 4 5 6 7 8 9 10 Interest on deposits placed with HSBC Bank, Kowloon branch 1 $ 300,000 77,000 50,000 150,500 Commission was received from a company in Taiwan for the sale of certain products. CL has sent its sales manager to Taiwan to help the Taiwan company to negotiate and conclude the contract with the buyers and earned the commission. Interest on long term qualifying debt instruments Interest on a staff loan* Interest on tax reserve certificates 334,000 418,000 80,000 91,000 A registered trademark was purchased in January 2017 at a cost of $500,000 from an unrelated company. The trademark was used in selling the goods in Hong Kong generating taxable profits. The trademark was sold for $550,000 during the year and a gain of $50,000 was recognised in the accounts. 81,160 466,000 66,000 7,070,000 Interest on deposits placed with Bank of China, Shenzhen branch, securing borrowings (see note 8 below) $ 31,000 42,500 60,000 10,000 7,000 150,500 4. 5. 6. 7. 8. 9. * The fund was deposited into the employee's bank account in Hong Kong (see note 4 below). General provision for trade debts Trade debts written off Staff loan written off (including interest of $20,000)^ ^ The employee has declared bankrupt. CL donated cash of $30,000 to Red Cross, and its products with cost of $50,000 to a fund-raising show organised by Yan Chai Hospital. Both organisations are approved charitable institutions in Hong Kong. Air tickets and hotel charges for sales manager's trip to attend trade fair in the US Entertainment of local customers Travelling expenses in respect of commission income (see note 1 above) Exchange loss on collection of trade debts Exchange loss on foreign currency deposits Overdraft interest paid to HSBC Bank Loan interest paid to Bank of China Loan interest paid to Hang Seng Bank $ 33,000 81,000 220,000 334,000 53,000 30,000 97,500 156,100 212,400 466,000 The bank overdraft facility with HSBC Bank was used to finance the company's general working capital. It was secured by a personal guarantee given by the major shareholder and a director of CL, Lucas Wan. Annual audit and tax filing fee Tax appeal against 2018/19 profits tax assessment Legal fee and stamp duty for a new lease 8,000 91,000 2 27,660 53,500 81,160 The loan borrowed from Bank of China was to finance the company's operations in Hong Kong. It was secured by the deposits placed with the bank in Shenzhen (see note 3 above). The loan borrowed from Hang Seng Bank was used to finance the acquisition of a residential property used as a director's quarter for Lucas. It was secured by executing a mortgage over that property. 48,000 13,000 5,000 66,000 10. Salaries 11. Directors' fee Contributions to MPF scheme: - for employees - for directors (b) $ 6,170,000 500,000 300,000 100,000 7,070,000 Total amount of depreciation allowances agreed with the Inland Revenue Department for the year was $610,000. The company has no connected entity for the purposes of the two-tiered tax rates. Required: (a) Compute the Hong Kong profits tax liability of Cynon Ltd for the year of assessment 2020/21. Ignore provisional tax. (15 marks) Explain your tax treatments accorded to various items in your tax computation with reference to the Inland Revenue Ordinance and Departmental Interpretation and Practice Notes, including those which require no adjustments in the tax computation. (30 marks) Total: 45 marks Cynon (CL) carries on a trading business in Hong Kong. Its profits are returned as taxable in Hong Kong. The company has accounting profits of $5,870,000 for the year ended 30 June 2020, which was arrived at after taking into account the following items: Income: Commission Dividends Gain on disposal of trademark Interest income Expenses: Bad debts Depreciation Donation Entertainment and travelling Exchange difference Interest expenses Legal and professional fee Staff costs Notes: 1. 2 3. Note 1 2 3 4 5 6 7 8 9 10 Interest on deposits placed with HSBC Bank, Kowloon branch 1 $ 300,000 77,000 50,000 150,500 Commission was received from a company in Taiwan for the sale of certain products. CL has sent its sales manager to Taiwan to help the Taiwan company to negotiate and conclude the contract with the buyers and earned the commission. Interest on long term qualifying debt instruments Interest on a staff loan* Interest on tax reserve certificates 334,000 418,000 80,000 91,000 A registered trademark was purchased in January 2017 at a cost of $500,000 from an unrelated company. The trademark was used in selling the goods in Hong Kong generating taxable profits. The trademark was sold for $550,000 during the year and a gain of $50,000 was recognised in the accounts. 81,160 466,000 66,000 7,070,000 Interest on deposits placed with Bank of China, Shenzhen branch, securing borrowings (see note 8 below) $ 31,000 42,500 60,000 10,000 7,000 150,500 4. 5. 6. 7. 8. 9. * The fund was deposited into the employee's bank account in Hong Kong (see note 4 below). General provision for trade debts Trade debts written off Staff loan written off (including interest of $20,000)^ ^ The employee has declared bankrupt. CL donated cash of $30,000 to Red Cross, and its products with cost of $50,000 to a fund-raising show organised by Yan Chai Hospital. Both organisations are approved charitable institutions in Hong Kong. Air tickets and hotel charges for sales manager's trip to attend trade fair in the US Entertainment of local customers Travelling expenses in respect of commission income (see note 1 above) Exchange loss on collection of trade debts Exchange loss on foreign currency deposits Overdraft interest paid to HSBC Bank Loan interest paid to Bank of China Loan interest paid to Hang Seng Bank $ 33,000 81,000 220,000 334,000 53,000 30,000 97,500 156,100 212,400 466,000 The bank overdraft facility with HSBC Bank was used to finance the company's general working capital. It was secured by a personal guarantee given by the major shareholder and a director of CL, Lucas Wan. Annual audit and tax filing fee Tax appeal against 2018/19 profits tax assessment Legal fee and stamp duty for a new lease 8,000 91,000 2 27,660 53,500 81,160 The loan borrowed from Bank of China was to finance the company's operations in Hong Kong. It was secured by the deposits placed with the bank in Shenzhen (see note 3 above). The loan borrowed from Hang Seng Bank was used to finance the acquisition of a residential property used as a director's quarter for Lucas. It was secured by executing a mortgage over that property. 48,000 13,000 5,000 66,000 10. Salaries 11. Directors' fee Contributions to MPF scheme: - for employees - for directors (b) $ 6,170,000 500,000 300,000 100,000 7,070,000 Total amount of depreciation allowances agreed with the Inland Revenue Department for the year was $610,000. The company has no connected entity for the purposes of the two-tiered tax rates. Required: (a) Compute the Hong Kong profits tax liability of Cynon Ltd for the year of assessment 2020/21. Ignore provisional tax. (15 marks) Explain your tax treatments accorded to various items in your tax computation with reference to the Inland Revenue Ordinance and Departmental Interpretation and Practice Notes, including those which require no adjustments in the tax computation. (30 marks) Total: 45 marks

Answer rating: 100% (QA)

Item Amount Accounting profits 5870000 Adjustments Gain on disposal of trademark 50000 Interest on long term qualifying debt instruments 10000 Interes... View the full answer