CONFIDENTIAL AC/SEP 2002/TAX370

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE TAXATION 2

COURSE CODE TAX370

DATE 21 SEPTEMBER 2002

TIME 3 HOURS (9-00 A.M -12.00 P.M )

FACULTY Accountancy
SEMESTER May - October 2002
PROGRAMME/CODE Diploma in Accountancy/AC110

INSTRUCTIONS TO CANDIDATES DOCUMENT ID: 100000 a5"

1. Answer ALL questions.

2. Start each answer on a new page.

3. Do not bring any material into the examination room unless permission is given by the
invigilator.

4. Please check to make sure that this examination pack consists of:
i) the Question Paper - included
ii) an Answer Booklet - provided by the Faculty

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 10 printed pages
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Question 1

a) Crystal Bhd is a glassware trading company in Penang. It prepares accounts

annually to 31 July. For the year ended 31 July 2002, its profit and loss account was
as follows:

Note RM
Sales 3,000,000
Less: Cost of sales 1.946.700
Gross profit 1,053,300
Gain on disposal of fixed asset 2 12,200
Add : Other income 3 134.400 1,199,900
Less:
Operating expenses 110,000
Payroll costs 295,600
Depreciation 15,000
Leasing 5 18,000
Travelling 6 35,000
Entertainment 7 62,000
Professional fees 8 26,200
Provision for doubtful debts 9 10,000
Interest expense 10 56,000
Research & Development 11 59,000
General expenses 12 45,000
Loss on foreign exchange 13 8,000
Donation 14 22.500 762.300
Net profit before tax 437,600

Notes to the account:

1. Cost of sales
Included in the cost of sales are:

RM
Damaged goods written off 13,000
Provisions for obsolete stock 5,000

2. Gain on disposal of motor vehicle

The gain on disposal was in respect of a non-commercial motor vehicle
purchased on 1 January 1998 cost RM80,000 and was disposed off in June
2002 at a value of RM 32,000.

3. Other income comprises:

RM
Interest on overdue trade accounts 3,400
Dividend from IOI Malaysia ( net) 75,000
Rental of the company's warehouse 22,000
Dividend from Singapore (remitted) 20,000
Interest from Hong Kong (remitted) 14,000
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4. The payroll costs comprises:

RM
Salaries and bonuses 240,000
Salary and bonus to disabled employee 3,600
EPF contributions 52,000

5. Leasing:
A Proton Perdana which cost RM109,000 was leased at a monthly rate of
RM1.500 since January 1999. It was not licensed for commercial
transportation.

6. Travelling expenses:
RM15,000 represented the costs of air tickets for holiday passage for the
company's employees while RM20,000 represented business travelling
expenses.

7. Entertainment expenses includes:

RM
Dinners and lunches provided to clients 36,000
Meals provided to employees on family day 26,000

8. Professional fees comprises:

RM
Tax, audit and accounting fees 11,000
Legal fee for violation of trade law 12,000
Legal fees for purchase of land 3,200

9. Provision for doubtful debt:

Provision for Doubtful Debts

RM RM
Trade bad debts written off 8,000 Specific provision b/d 35,000
Specific provision c/d 40,000 General provision b/d 22,000
General provision c/d 19,000 Profit and loss 10,000
67,000 67,000

10. Interest expense comprises:

Interest expense of RM31,000 was paid to a non-resident company.
Withholding tax requirement has not been complied with.
Interest expense of RM25.000 represented interest charged on loan
employed as business working capital.

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11. Research and Development comprises:

RM
Research expenses incurred on an approved project 45,000
Routine product testing and quality control expenses 14,000

12. General expenses comprises:

RM
Entrance fee to trade association 4,000
Practical training provided to a resident individual (not an 2,000
employee of the company)
Compensation paid to a client who sued the company for late 39,000
delivery of goods. This case has been settled out of court upon
payment.

13. Foreign exchange loss:

RM
8,000
(unrealised)

14. Donation comprises:

RM
Donation made to an approved institution 21,500
Donation made to State Government 1,000

Other information:

15. Capital allowance for the current year and brought forward from previous year
were RM20,500 and RM60,000 respectively.

16. The company has a brought forward business loss of RM72.300.

Required:

Compute the income tax payable by Crystal Bhd for the year of assessment 2002.
Every item mentioned in the notes to the account must be shown in your computation,
indicating 'Nil' where no adjustment is necessary.

(19 marks)

b) Under the self assessment system, a company is required to furnish an estimate on

the tax payable to the Inland Revenue Board (IRB). When should a company submit
the estimated tax payable to the IRB?
(2 marks)

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c) In what year (s) of assessment will IRB introduce self assessment system on salaried
taxpayer, sole proprietorship and partnership business?

(3 marks)
(Total: 24 marks)

Question 2

a) Alia, Dania and Sofia are partners in a retail business in Kuantan. The partnership
accounting year ends on 31 December. On 31 July 2002, Sofia retired from the
business and on 1 August 2002, Julia was admitted as a new partner.

The following information were available:

1. Profit and loss sharing ratios are as follows:-

Period Alia Dania Sofia Julia

1.1.2002-31.7.2002 1 1 1 -
1.8.2002-31.12.2002 2 2 - 1

2. For the accounting year ended 31 December 2002, the partnership's divisible profit
was RM48.000

3. Partners' salaries, interest on capital and bonus were:

Period Salary per Interest on capital Bonus on

month (% per annum) 31.12.2002
(RM) (RM)
1.1.2002-31.7.2002
Alia 2,000 10% -
Dania 1,000 10%
Sofia 2,000 10%
1.8.2002-31.12.2002
Alia 2,500 12% 5,000
Dania 1,500 12% 5,000
Julia 1,000 12% 3,000

4. Capital contributed by each partner was:

RM
Alia 30,000
Dania 30,000
Sofia 30,000 (until 31 July 2002)
Julia 20,000 (starting on 1 August 2002)

5. The depreciation calculated on the partnership business's equipment was RM26,000

but the capital allowances were RM29.000.

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6. Donations made in the name of the business were:

RM
Rumah Kanak-kanak Istimewa, Sungai Pekan (approved) 2,000
Political party 10,000
Rumah Orang-orang Tua, Kuala Lipis (approved) 1,500

7. In the year 2002, besides having partnership business, Alia has her own sole
proprietorship business as follows:
RM
Statutory income 20,000
Unabsorbed adjusted loss brought forward from previous years (2,000)

8. Dania is a private school teacher earning a salary of RM1,500 per month (gross).

Required:

For the basis year 2002, compute the total income for Alia, Dania, Sofia and Julia.
Show all workings.
(13 marks)

b) Syarikat Ria Indah, an interior design business, has ceased business operation due
to several years business losses. Syarikat Ria Indah paid retrenchment benefits of
RM30.000 to its employees due to the closure.

Required:

Discuss whether the retrenchment benefits paid is an allowable business deduction

for tax purpose. Support your answer with one relevant case law.
(5 marks)
(Total: 18 marks)

Question 3

a) ICT Sdn Bhd, a microchip manufacturing company has been carrying on production
in a rented building since October 1993. 6 years later, ICT Sdn Bhd bought a piece
of land and decided to construct its own building. An old building on the land
previously used as industrial building was demolished and a 20,000 square feet
building was constructed at the following costs:

RM
Cost of land 400,000
Legal fee and stamp duty 29,000
(RM8.000 relating to acquisition of land)
Cost of demolishing the old building 12,000
Architect's fees 18,000
Cost of machinery 220,000
Cost of terracing and leveling land to install machinery 115,000
Cost of internal roads 75,000
Construction costs 360,000
Wiring and plumbing 21,000

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The building was completed and brought into use on 1 July 2000 as follows:
Area (square feet)
Factory 10,000
Office 4,000
Showroom 4,000
Canteen and recreation room 2,000
Due to lack of space, the company rented a warehouse 8 kilometers away which is used to
store raw materials for the manufacturing process on 31 March 2001. Rental is RM12.000
per annum.

On 1 May 2001, ICT Sdn Bhd acquired a piece of land and constructed another building for
RM125,000 (inclusive of land cost RM35.000). The building was completed and used as a
manufacturing employees accommodation on 31 January 2002.

On 31 August 2002, due to financial problem the factory building was sold to Syarikat Ikatan
Setia for RM700,000. Syarikat Ikatan Setia used the whole building as a factory.

ICT Sdn Bhd and Syarikat Ikatan Setia make up their accounts to 30 June and 31 October
each year respectively.
Required:

i) Calculate the industrial building allowance for ICT Sdn Bhd for all relevant years of
assessment up to the year of assessment 2002. (Show your workings)
(13 marks)

ii) Calculate the industrial building allowance for Syarikat Ikatan Setia for the year of
assessment 2002. (Show your workings)
(3 marks)

b) CAT Sdn. Bhd acquired a piece of plant and machinery cost RM120,000. An amount
of RM20.000 was incurred on the site preparation to install the plant and machinery.

Required:

Compute the qualifying expenditure for the purpose of claiming capital allowance and
give reason to your answer.
(3 marks)
(Total: 19 marks)

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Question 4

a) YAWATA Sdn Bhd is a licensed manufacturing company in Malaysia. In year 2002,

the company imported raw materials for the manufacture of taxable goods in
Malaysia. The cost of raw materials was RM6,005,000, insurance RM6.005,
processing cost RM720.000 and freight RM3.400. The rate of import duty on the raw
materials was 25%. The sales tax rate applies to the taxable goods was 10%.

Required:

i) Compute the amount of sales tax payable on the imported raw materials.

(2 marks)

ii) State any four (4) responsibilities of a licensed manufacture in relation to

sales tax.
(2 marks)

iii) List the places where sales tax is not applicable.

(4 marks)

iv) Licensed manufacturers are given facilities to acquire raw materials free from
sales tax for use in the manufacturing of taxable goods. Name the three (3)
facilities available to the licensed manufacturers.
(3 marks)

b) Abu and Co. is a legal firm in Johor Bharu. It expects to provide legal services to
clients in Malaysia as well as clients in Singapore.

Required:

Advise Abu and Co. on the following matters:

i) The circumstances under which it is required to be licensed.

(3 marks)

ii) The tax treatment of the amount invoiced to its clients in Singapore.
(2 marks)

c) What is the meaning of qualifying forest expenditure as stated in Paragraph 8 of

Schedule 3 ITA 1967 (as amended).
(4 marks)
(Total: 20 marks)

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Question 5

a) ACT Bhd started business on 1 May 1997 and its first set of accounts was prepared
to 31 March 1998. In 2001, the accounting year end has been changed to 31 July
and the accounts were prepared on 31 July 2001 and thereafter. Below are the
adjusted profit (loss) for the respective accounting period:

Accounting period Adjusted

profitless)
1.5.1997-31.3.1998 18,000
1.4.1998-31.3.1999 (6,000)
1.4.1999 - 31.3.2000 24,000
1.4.2000-31.7.2001 31,000
1.8.2001 - 31.7.2002 27,000

Required:

i) Explain what is the meaning of 'failure year'. State the failure year for the
above company.
(2 marks)

ii) State the basis periods and calculate the adjusted income (loss) for each of
the years of assessment. (Show your workings)
(7 marks)

b) Encik Mokhtar purchased a 75-hectare land in Bidor, Perak. On 1 February 2002,

Encik Mokhtar cleared the land and planted the following crops:

20 hectares with papaya

45 hectares with banana
10 hectares with guava and star fruit

Each planting was completed on the following dates:

Types of crop Date

Guava and star fruit 25 April 2002
Papaya 1 August 2002
Banana 31 August 2002

The expenditures incurred by Encik Mokhtar were as follows:

Types of crop Cost of clearing and preparing Cost of planting

land for planting (RM) (RM)
Papaya 4,000 5,000
Banana 10,000 24,000
Guava and star fruit 1,000 2,900

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In the year of assessment 2002, Encik Mokhtar received an employment income of

RM24,000 and statutory income from a sole proprietorship business of RM36.000.
His accounts were prepared to 31 December annually.

Required:

i) Advise Encik Mokhtar on the deductions he would be entitled to under

Schedule 4A, Income Tax Act 1967. Support your advice with reasons.

(5 marks)

ii) Determine his total income from using the above information for the year of
assessment 2002.
(2 marks)

iii) What is the treatment on any unabsorbed agriculture project expenditure?

(1 mark)

c) How does a person set off mining allowance as compared to deduction of qualifying
prospecting expenditure?

(2 marks)
(Total: 19 marks)

END OF QUESTION PAPER

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