Net income (before adjusting for the following transactions) R1 280 000 Advertising (note 1)
Posted: Tue Nov 16, 2021 9:02 am
Net income (before adjusting for the following
transactions)
R1 280 000
Advertising (note 1)
112 000
Interest incurred (note 2)
149 800
Cost of additional factory (note 3)
2 430 000
Bad debts (note 4)
6 300
Rentals incurred (note 5)
20 000
Premium incurred (note 5)
72
000
Improvements to leased property (note 5)
585 750
Annuity paid (note 6)
6 600
Foreign marketing expenditure (note 7)
25 940
Directors’ salaries and fees paid (note 8)
496
000
Dividend declared to members on 31 December 2020
20 000
Local investment dividend received on 30 November 2020
12 000
Drawings taken by Stephen Manning (note 9)
7 700
Notes:
1. Advertising expenditure consisted of
advertising on TV and in local newspapers but also included an
advance payment of R20 000 paid to a television network for a
series of advertisements, due to appear throughout the 2022 year of
assessment. Included in the R112 000 are the costs to produce
the television advert which amounted to R42 000 and 3 digital
Billboards which were erected at a cost of R12 000 each.
2. Interest (local) is made up of:
• R18 000 on a loan from Stephen Manning to
finance machinery purchased
• R9 000 on a loan from Stephen Manning to
finance the purchase of raw materials and trading stock
• R1 600 on a loan raised to finance the payment
of the dividend
• R1 200 on a loan raised to finance the purchase
of Machine A and interest was payable at a rate of R200 a month
from 1 March 2020 to 31 August 2020
• R120 000 on a loan to finance the erection of
the additional factory building.
3. On 31 May 2020 Hilton Manufacturing (Pty)
Limited completed the additional factory which cost R2 430 000. The
land in Pinetown was purchased in the 2020 year of assessment at a
cost of R750 000.
4. Bad debts comprised the following:
• Trade debtor went insolvent during the
year
R5 200
• A manager who left without repaying a
loan
300
• A trade debtor who is rumoured to be in
financial difficulty
800
R6 300
The Commissioner allows a 25% deduction of
doubtful debts.
5. On 1 May 2020 Hilton Manufacturing (Pty)
Limited entered into a 12 year lease agreement for factory premises
adjacent to its own factory. The monthly rental was R2 000 but a
lease premium of R72 000 was payable at the commencement of the
lease. Hilton Manufacturing (Pty) Limited was obliged to effect
improvements to this factory valued at R532 500. The improvements
were completed on 30 June 2020 at a cost of R585 750. Although the
factory was brought into use on 1 May 2020, the improvements which
increased the industrial capacity of the factory by 25% was brought
into use on 30 June 2020.
6. Hilton Manufacturing (Pty) Limited awarded an
annuity of R7 200 (R600 per month) from 1 April 2020 to the widow
of an employee who was killed in a freak accident. It is not the
policy to award annuities but due to the widow’s financial
position, management agreed.
7. During the 2021 year of assessment, Hilton
Manufacturing (Pty) Limited registered as an exporter. The
following expenditure was incurred in relation to the export
trade:
• Advertising in Namibia (trade
journal)
340
• Participating in a trade fair in
Botswana
1 800
• Capital costs to set up an agency in
Turkey
23 800
25 940
8. Of the directors’ salaries, Stephen Manning
earned a salary of R288 000 and fees of R72 000.
9. Stephen Manning advanced Hilton Manufacturing
(Pty) Limited certain interest-free loans. Certain expenses paid by
Hilton Manufacturing (Pty) Limited on behalf of Stephen Manning are
then deducted off these interest-free loans as follows:
• Medical expenses
3 800
• Retirement annuity fund
contributions
2 700
• Life insurance premiums (personal)
840
• Domestic expenses
360
7 700
10. The fixed assets register revealed the
following:
• Plant and machinery, all of which qualify for a
section 12C allowance at a rate of 20% had a tax value of R150 000
on 1 March 2020 with an original cost of R250 000. Included in this
tax value of R150 000 was a machine that had cost R15 000 with a
tax value of R10 000 on 1 March 2020 which was destroyed in a freak
accident early on 1 March 2020. The machine had been purchased on 1
February 2019 and the insurance proceeds were R14 000.
• Machine A was purchased new for R18 000 on 31
March 2020. It was brought into use on 1 May 2020 after incurring
additional installation costs of R2 500.
• A new delivery vehicle was purchased at a cost
of R176 000 and brought into use on 1 June 2020. It replaced the
existing delivery vehicle that had a tax value of R8 000 (original
cost R32 000, purchased on 1 March 2017) that was sold on 31 May
2020 for R5 000. The Commissioner approved a four-year write-off
period for the delivery vehicle.
YOU ARE REQUIRED TO
1. Calculate the normal tax liability of Hilton
Manufacturing (Pty) Limited for the 2021 year of assessment.
Briefly explain why amounts are included or excluded from the
calculation.
2. Calculate Stephen Manning’s income tax payable
for the 2021 year of assessment. Assume he has no other receipts
and accruals and is 50 years old.
transactions)
R1 280 000
Advertising (note 1)
112 000
Interest incurred (note 2)
149 800
Cost of additional factory (note 3)
2 430 000
Bad debts (note 4)
6 300
Rentals incurred (note 5)
20 000
Premium incurred (note 5)
72
000
Improvements to leased property (note 5)
585 750
Annuity paid (note 6)
6 600
Foreign marketing expenditure (note 7)
25 940
Directors’ salaries and fees paid (note 8)
496
000
Dividend declared to members on 31 December 2020
20 000
Local investment dividend received on 30 November 2020
12 000
Drawings taken by Stephen Manning (note 9)
7 700
Notes:
1. Advertising expenditure consisted of
advertising on TV and in local newspapers but also included an
advance payment of R20 000 paid to a television network for a
series of advertisements, due to appear throughout the 2022 year of
assessment. Included in the R112 000 are the costs to produce
the television advert which amounted to R42 000 and 3 digital
Billboards which were erected at a cost of R12 000 each.
2. Interest (local) is made up of:
• R18 000 on a loan from Stephen Manning to
finance machinery purchased
• R9 000 on a loan from Stephen Manning to
finance the purchase of raw materials and trading stock
• R1 600 on a loan raised to finance the payment
of the dividend
• R1 200 on a loan raised to finance the purchase
of Machine A and interest was payable at a rate of R200 a month
from 1 March 2020 to 31 August 2020
• R120 000 on a loan to finance the erection of
the additional factory building.
3. On 31 May 2020 Hilton Manufacturing (Pty)
Limited completed the additional factory which cost R2 430 000. The
land in Pinetown was purchased in the 2020 year of assessment at a
cost of R750 000.
4. Bad debts comprised the following:
• Trade debtor went insolvent during the
year
R5 200
• A manager who left without repaying a
loan
300
• A trade debtor who is rumoured to be in
financial difficulty
800
R6 300
The Commissioner allows a 25% deduction of
doubtful debts.
5. On 1 May 2020 Hilton Manufacturing (Pty)
Limited entered into a 12 year lease agreement for factory premises
adjacent to its own factory. The monthly rental was R2 000 but a
lease premium of R72 000 was payable at the commencement of the
lease. Hilton Manufacturing (Pty) Limited was obliged to effect
improvements to this factory valued at R532 500. The improvements
were completed on 30 June 2020 at a cost of R585 750. Although the
factory was brought into use on 1 May 2020, the improvements which
increased the industrial capacity of the factory by 25% was brought
into use on 30 June 2020.
6. Hilton Manufacturing (Pty) Limited awarded an
annuity of R7 200 (R600 per month) from 1 April 2020 to the widow
of an employee who was killed in a freak accident. It is not the
policy to award annuities but due to the widow’s financial
position, management agreed.
7. During the 2021 year of assessment, Hilton
Manufacturing (Pty) Limited registered as an exporter. The
following expenditure was incurred in relation to the export
trade:
• Advertising in Namibia (trade
journal)
340
• Participating in a trade fair in
Botswana
1 800
• Capital costs to set up an agency in
Turkey
23 800
25 940
8. Of the directors’ salaries, Stephen Manning
earned a salary of R288 000 and fees of R72 000.
9. Stephen Manning advanced Hilton Manufacturing
(Pty) Limited certain interest-free loans. Certain expenses paid by
Hilton Manufacturing (Pty) Limited on behalf of Stephen Manning are
then deducted off these interest-free loans as follows:
• Medical expenses
3 800
• Retirement annuity fund
contributions
2 700
• Life insurance premiums (personal)
840
• Domestic expenses
360
7 700
10. The fixed assets register revealed the
following:
• Plant and machinery, all of which qualify for a
section 12C allowance at a rate of 20% had a tax value of R150 000
on 1 March 2020 with an original cost of R250 000. Included in this
tax value of R150 000 was a machine that had cost R15 000 with a
tax value of R10 000 on 1 March 2020 which was destroyed in a freak
accident early on 1 March 2020. The machine had been purchased on 1
February 2019 and the insurance proceeds were R14 000.
• Machine A was purchased new for R18 000 on 31
March 2020. It was brought into use on 1 May 2020 after incurring
additional installation costs of R2 500.
• A new delivery vehicle was purchased at a cost
of R176 000 and brought into use on 1 June 2020. It replaced the
existing delivery vehicle that had a tax value of R8 000 (original
cost R32 000, purchased on 1 March 2017) that was sold on 31 May
2020 for R5 000. The Commissioner approved a four-year write-off
period for the delivery vehicle.
YOU ARE REQUIRED TO
1. Calculate the normal tax liability of Hilton
Manufacturing (Pty) Limited for the 2021 year of assessment.
Briefly explain why amounts are included or excluded from the
calculation.
2. Calculate Stephen Manning’s income tax payable
for the 2021 year of assessment. Assume he has no other receipts
and accruals and is 50 years old.