QUESTION 2 (45 Marks) Munchies and Granolas Ltd (a resident company) manufactures different brands of break-fast cereals

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QUESTION 2 (45 Marks)
Munchies and Granolas Ltd (a resident company) manufacturesdifferent brands of break-fast cereals in the Republic. The companyis registered for VAT purposes. The following preliminary incomestatement of the company for the financial year 1 November 2021 to30 September 2022 is at your disposal. All amounts exclude VAT,unless stated otherwise.
Sales 282 500 200Less: Cost of sales (107 400 300)
Gross profit (taxable) 175 099 900
Add: Other income
Interest received 1 5 160 000
Profit on sale of asset 2 500 000
Income 180 759 900
Less: Operating expenses (165 370 815)
Repairs and moving costs 3 445 000Depreciation 2 9 248 256Leasehold improvements and related expenses 4 23 620 000
Bad debts – trade debtors 125 000Salaries and wages 5 33 344 759
Scientific research expenditure 6 1 705 000
Trade mark 7 38 800
Other tax-deductible expenditure 96 844 000
Net profit before tax 15 389 085
Notes:
Note 1: Munchies and Granolas Ltd earned interest on investmentsat local financial institutions.
Note 2: Profit on sale of fixed asset and depreciationprovided:
 Machine B (with a tax value of Rnil) was sold for R360000 (less than the original cost) on 30 November 2021 to a non-connected party.
 Manufacturing machine C (new) was purchased on 1 June2022 for R2 500 000 (including all related qualifying costs), andbrought into use on 1 July 2022 in the new industrial building inCape Town.
 Two delivery trucks were purchased for R420 000 each on1 June 2022 and were immediately bought into use. The approvedwrite-off period on trucks in terms of Interpretation Note No. 47is four years.
 The industrial (factory) building was erected in Gautengduring 2008 at a total cost of R20 255 000, and brought into use on1 September 2008.
 A contract was concluded on 1 July 2021 to erect a newoffice block at a cost of R8 000 000 in Gauteng. The office blockwas brought into use on 1 February 2022.
 Depreciation on motor vehicles and office equipmentamounts to R6 900 250 and corresponds with the allowable write- offperiods as stated in Interpretation Note No. 47.
Note 3: Repairs and moving costs consist of:
Machine D (fully written off for tax purposes) was upgraded, andthe machine now produces twice its former production output. Themachine is as good as new. The cost of the original machineamounted to R200 000. The cost of the R275 000 upgrade qualifiesfor a 40% allowance in terms of section 12C
275 000
Machine E (fully written-off for tax purposes) was moved to thenew factory in Cape Town (note 4), and brought into use on 1 July2022.
120 000
Foundation relating to machine E 50 000
445000
Note 4: On 31 October 2021, the company signed a 20-year leasecontract with immediate effect. In terms of the contract, Munchiesand Granolas Ltd had to erect another industrial building at a costof R20 000 000 on the same premises. The lessor gave no furtherspecifications. The building was completed on 30 June 2022 at acost of R23 000 000, and brought into use on 1 July 2022. The leasepremium of R500 000 was paid on the signing of the contract, andthe monthly rental of R15 000 was payable from the signing of thelease contract. The original industrial building was occupied andbrought into use immediately after the signing of the leaseagreement.
Note 5: The following transactions relate to the amount ofsalaries and wages deducted in the income statement:
 One of the research assistants resigned due todifferences between herself and the supervisor. She accepted anamount of R90 000 as part of a restraint of trade agreement. Therestraint of trade agreement is valid for a two-year period, andthe amount was paid on 31 August 2022.
 On 1 February 2022, Munchies and Granolas Ltd enteredinto a six-month registered learnership agreement with one of itsexisting disabled employees on an NQF level 7, Bran Brown. Munchiesand Granolas Ltd complies with all the requirements set by theCommissioner with regards to learnership agreements, in terms ofsection 12H.
 All other amounts included in salaries and wages are taxdeductible.Note 6: Munchies and Granolas Ltd conducts qualifying technologicalresearch and development activities. The research
activities were approved by the Department of Science andTechnology.
The management of Munchies and Granolas Ltd decided to employ ateam of experts, in order to create a new nutritious, affordablebreakfast cereal. A patent would ultimately be registered in termsof the Patents Act.
The following amounts were spent during the period 1 May 2022 to30 September 2022:
Cost of laboratory (exclusively used for this research), broughtinto use for the first time on 1 May 2022
900 000
New and unused machinery (exclusively used for this research)for the laboratory, brought into use on 2 May 2022
350 000
Research assistants’ salaries 440 000
Materials consumed 15 000
705 000
Note 7: During the year, Munchies and Granolas Ltd registeredits environmentally friendly logo as a trade mark to be included onall future product packaging. The cost of registering the trademarkamounted to R38 800.
YOU ARE REQUIRED TO: Calculate the taxable income ofMunchies and Granolas Ltd for its year of assessment ending on 30September 2022, starting with the net profit before tax of R15 389085.