QUESTION SIX

(14 marks)

[Total: 30 Marks]

Katondo Manufacturing Company (KMC) plc is a Zambian resident company engaged in manufacturing operations which is registered for Value Added Tax. The company listed its shares on the Lusaka Securities Exchange two (2) years ago when it offered 25% of the ordinary shares to indigenous Zambians. In March 2020, the company issued a further 20% of its ordinary shares to indigenous Zambians and as a result 45% of the shares of the company are now held by indigenous Zambians.

KMC plc made a profit for the year, as per accounts, of K5,702,080 for the year ended 31 December 2020. This profit figure was arrived at after taking into account the following:

(1) Investment income comprising rental income of K180,000, royalties amounting to K136,000, dividends from shares of non-mining companies listed on the LuSE amounting to K124,000, fixed deposit interest K23,800 and management and consultancy fees of K289,000. These were the actual amounts received in each case, withholding tax was deducted at source and paid on the appropriate due dates.

(2) Staff costs which included an annual salary for the Marketing Director of K650,000 who is accommodated in a company owned house for which he does not pay rent, employee training costs of K160,000, employee relocation costs of K340,000, loans to employees written off amounting to K380,000, employees golf club subscriptions of K18,000, employees professional subscriptions of K60,000, wages for casual workers of K56,000, fines of K25,000 for breaching labour laws and other employee's salaries of K29,274,000.

(3) Legal fees which included legal fees in connection with issue of ordinary shares to indigenous Zambians of K13,800, legal fees for trade debt collection of

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K14,400, legal fees for recovery of loans from former employees of K10,500, a premium paid to acquire the right of use of a popular brand name for a period of 20 years, amounting to K300,000 and legal fees incurred on the renewal of a lease of business premises of K18,500

(4) Bad debts expenses which included:

Trade debts written off

Increase in specific provision

Decrease in general provision

Trade debts previously written off subsequently recovered

(5) Miscellaneous operating expenses which included:

Selling and marketing expenses

Theft of money by the finance director

Theft of goods by the companys security guards

Depreciation of tangible non-current assets

Loss on disposal of assets

Christmas gifts to employees (food hampers costing K180 each) Gifts to customers of Kamuchanga Plcs branded wall clocks (Costing K250 per customer)

Provisional income tax

K 88,000 16,000

(36,800) (17,500) 49,700

K 275,600 320,000

50,000 168,000 60,000 18,000

30,000 2,023,000 2,944,600

The provisional income tax is the amount of provision income tax paid during the tax year 2020.

Other Information

Implements, plants and machinery

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On 1st January 2020, company held the following implements, plant and machinery which were acquired at the following VAT inclusive costs and brought into use on the following dates:

Date

10 March 2017 20 April 2017

16 October 2018 19 March 2019

Asset

Delivery van (2,000cc)

Old manufacturing equipment General plant and equipment Pool car (1,600cc)

VAT inclusive cost K

104,400

928,000

During the year ended 31 December 2020, the following purchases and disposals of assets took place:

Date

4 March 2020

16 July 2020

18 August 2020

12 October 2020 15 November 2020 20 Dec 2020

Purchased Toyota Camry car (1,700cc) Purchased Toyota Fortuner motor car (2,600cc) Purchased new manufacturing plant

Sold the delivery van

Sold old manufacturing equipment

Sold poll car

VAT Inclusive Cost/(Proceeds)

K 174,000 270,000

1,044,000 (58,000) 348,000 150,600

The Toyota Camry car is the Human Resources Managers personal to holder motor car and the Toyota Fortuner motor car is the Marketing Directors personal to holder motor car.

Buildings

On 1 February 2020 the company completed the construction of a building at VAT exclusive cost of K5,000,000 which was brought into use immediately. The building comprised the following items:

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580,000 127,600

Land

Engineering drawing office Showroom

Factory

Administration offices

REQUIRED

K 1,500,000

400,000 200,000

2,600,000 300,000 5,000,000

(a) Calculate the maximum capital allowances claimable by Katondo plc on the following assets held in the tax year 2020:

(i) The capital allowances on implements, plant and machinery (12 marks)

(ii) The capital allowances on buildings (6 marks)

(b) Compute the final taxable business profit after capital allowances for Katondo plc for the tax year 2020. (14 marks)

(c) Compute the income tax payable by the company for the charge year 2020. (8 marks)