QUESTION 2 (45 Marks) Munchies and Granolas Ltd (a resident company) manufactures different brands of break-fast cereals
Posted: Tue Jul 05, 2022 8:52 am
QUESTION 2 (45 Marks)Munchies and Granolas Ltd (a resident company) manufacturesdifferent brands of break-fast cereals in the Republic. Thecompany is registered for VAT purposes. The following preliminaryincome statement of the company for the financial year 1November 2021 to 30 September 2022 is at your disposal. All amountsexclude VAT, unless stated otherwise.RSales 282 500 200Less: Cost of sales (107 400 300)Gross profit (taxable) 175 099 900Add: Other incomeInterest received 1 5 160 000Profit on sale of asset 2 500 000Income 180 759 900Less: Operating expenses (165 370 815)Repairs and moving costs 3 445 000Depreciation 2 9 248 256Leasehold improvements and related expenses 23 620 000Bad debts – trade debtors 125 000Salaries and wages 33 344 759
Scientific research expenditure 6 1 705 000 Trade mark 7 38 800Other tax-deductible expenditure 96 844 000 Net profit before tax15 389 085 Notes: Note 1: Munchies and Granolas Ltd earned intereston investments at local financial institutions. Note 2: Profit onsale of fixed asset and depreciation provided: Machine B (with atax value of Rnil) was sold for R360 000 (less than the originalcost) on 30 November 2021 to a nonconnected party. Manufacturingmachine C (new) was purchased on 1 June 2022 for R2 500 000(including all related qualifying costs), and brought into use on 1July 2022 in the new industrial building in Cape Town. Twodelivery trucks were purchased for R420 000 each on 1 June 2022 andwere immediately bought into use. The approved write-off period ontrucks in terms of Interpretation Note No. 47 is four years. Theindustrial (factory) building was erected in Gauteng during 2008 ata total cost of R20 255 000, and brought into use on 1 September2008. 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 motorvehicles and office equipment amounts to R6 900 250 and correspondswith the allowable writeoff periods as stated in InterpretationNote No. 47. Note 3: Repairs and moving costs consist of: Machine D(fully written off for tax purposes) was upgraded, and the machinenow produces twice its former production output. The machine is asgood as new. The cost of the original machine amounted to R200 000.The cost of the R275 000 upgrade qualifies for a 40% allowance interms of section 12C 275 000 Machine E (fully written-off for taxpurposes) was moved to the new factory in Cape Town (note 4), andbrought into use on 1 July 2022. 120 000
Foundation relating to machine E 50 000 445 000 Note 4: On 31October 2021, the company signed a 20-year lease contract withimmediate effect. In terms of the contract, Munchies and GranolasLtd had to erect another industrial building at a cost of R20 000000 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 amountof salaries and wages deducted in the income statement: One ofthe research assistants resigned due to differences between herselfand the supervisor. She accepted an amount of R90 000 as part of arestraint of trade agreement. The restraint of trade agreement isvalid for a two-year period, and the amount was paid on 31 August2022. On 1 February 2022, Munchies and Granolas Ltd entered intoa 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 aretax deductible. Note 6: Munchies and Granolas Ltd conductsqualifying technological research and development activities. Theresearch activities were approved by the Department of Science andTechnology. The management of Munchies and Granolas Ltd decided toemploy a team of experts, in order to create a new nutritious,affordable breakfast cereal. A patent would ultimately beregistered in terms of the Patents Act. The following amounts werespent during the period 1 May 2022 to 30 September 2022: R Cost oflaboratory (exclusively used for this research), brought into usefor the first time on 1 May 2022 900 000 New and unused machinery(exclusively used for this research) for the laboratory, broughtinto use on 2 May 2022 350 000 Research assistants’ salaries 440000 Materials consumed 15 000 705 000 Note 7: During the year,Munchies and Granolas Ltd registered its environmentally friendlylogo as a trade mark to be included on all future productpackaging. The cost of registering the trademark amounted to R38800.
YOU ARE REQUIRED TO: Calculate the taxable income of Munchiesand Granolas Ltd for its year of assessment ending on 30 September2022, starting with the net profit before tax of R15 389 085.
Scientific research expenditure 6 1 705 000 Trade mark 7 38 800Other tax-deductible expenditure 96 844 000 Net profit before tax15 389 085 Notes: Note 1: Munchies and Granolas Ltd earned intereston investments at local financial institutions. Note 2: Profit onsale of fixed asset and depreciation provided: Machine B (with atax value of Rnil) was sold for R360 000 (less than the originalcost) on 30 November 2021 to a nonconnected party. Manufacturingmachine C (new) was purchased on 1 June 2022 for R2 500 000(including all related qualifying costs), and brought into use on 1July 2022 in the new industrial building in Cape Town. Twodelivery trucks were purchased for R420 000 each on 1 June 2022 andwere immediately bought into use. The approved write-off period ontrucks in terms of Interpretation Note No. 47 is four years. Theindustrial (factory) building was erected in Gauteng during 2008 ata total cost of R20 255 000, and brought into use on 1 September2008. 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 motorvehicles and office equipment amounts to R6 900 250 and correspondswith the allowable writeoff periods as stated in InterpretationNote No. 47. Note 3: Repairs and moving costs consist of: Machine D(fully written off for tax purposes) was upgraded, and the machinenow produces twice its former production output. The machine is asgood as new. The cost of the original machine amounted to R200 000.The cost of the R275 000 upgrade qualifies for a 40% allowance interms of section 12C 275 000 Machine E (fully written-off for taxpurposes) was moved to the new factory in Cape Town (note 4), andbrought into use on 1 July 2022. 120 000
Foundation relating to machine E 50 000 445 000 Note 4: On 31October 2021, the company signed a 20-year lease contract withimmediate effect. In terms of the contract, Munchies and GranolasLtd had to erect another industrial building at a cost of R20 000000 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 amountof salaries and wages deducted in the income statement: One ofthe research assistants resigned due to differences between herselfand the supervisor. She accepted an amount of R90 000 as part of arestraint of trade agreement. The restraint of trade agreement isvalid for a two-year period, and the amount was paid on 31 August2022. On 1 February 2022, Munchies and Granolas Ltd entered intoa 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 aretax deductible. Note 6: Munchies and Granolas Ltd conductsqualifying technological research and development activities. Theresearch activities were approved by the Department of Science andTechnology. The management of Munchies and Granolas Ltd decided toemploy a team of experts, in order to create a new nutritious,affordable breakfast cereal. A patent would ultimately beregistered in terms of the Patents Act. The following amounts werespent during the period 1 May 2022 to 30 September 2022: R Cost oflaboratory (exclusively used for this research), brought into usefor the first time on 1 May 2022 900 000 New and unused machinery(exclusively used for this research) for the laboratory, broughtinto use on 2 May 2022 350 000 Research assistants’ salaries 440000 Materials consumed 15 000 705 000 Note 7: During the year,Munchies and Granolas Ltd registered its environmentally friendlylogo as a trade mark to be included on all future productpackaging. The cost of registering the trademark amounted to R38800.
YOU ARE REQUIRED TO: Calculate the taxable income of Munchiesand Granolas Ltd for its year of assessment ending on 30 September2022, starting with the net profit before tax of R15 389 085.