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Baraka Ltd. has provided the following income statement for the year ended 31st December .20124:

Accounting

ScanSolve AI Answer

Answer

Sh. 774,000\text{Sh. } 774,000

Step-by-step solution

6 steps

To calculate the adjusted profit for tax purposes, we start with the net loss from the income statement and make adjustments for non-allowable expenses and non-taxable income.

  1. Identify the Net Loss from the income statement.

    Net Loss=Sh. (1,270,000)\text{Net Loss} = \text{Sh. } (1,270,000)

  2. Identify and sum all non-allowable expenses from the income statement.

    • Loan repayment: Sh. 460,000 (Capital expenditure)
    • Depreciation: Sh. 150,000 (Non-cash expense, replaced by capital allowances for tax)
    • Dividends: Sh. 980,000 (Appropriation of profit, not an expense)
    • Provision for income tax: Sh. 120,000 (Not an expense for calculating taxable profit)

  3. Identify and sum all non-allowable expenses from the additional information.

    • Legal fees (total Sh. 380,000):
      • Drafting a lease agreement (99 years): Sh. 80,000 (Capital expenditure)
      • VAT penalties: Sh. 64,000 (Penalties are not allowable for tax)
      • Total non-allowable legal fees: 80,000+64,000=Sh. 144,00080,000 + 64,000 = \text{Sh. } 144,000
    • General expenses (total Sh. 840,000):
      • Office partitions: Sh. 120,000 (Capital expenditure)
      • Stamp duty on land transfer: Sh. 190,000 (Capital expenditure)
      • Total non-allowable general expenses: 120,000+190,000=Sh. 310,000120,000 + 190,000 = \text{Sh. } 310,000

  4. Calculate the total add-backs (non-allowable expenses).

    Total Add-backs=460,000+150,000+980,000+120,000+144,000+310,000=Sh. 2,164,000\text{Total Add-backs} = 460,000 + 150,000 + 980,000 + 120,000 + 144,000 + 310,000 = \text{Sh. } 2,164,000

  5. Identify and deduct any non-taxable income that was included in the accounting profit.

    • Proceeds from sale of old machinery: Sh. 120,000 (This is a capital receipt, not trading income, so it is deducted from the accounting profit to arrive at taxable trading profit).

  6. Calculate the adjusted profit for tax purposes.

    Adjusted Profit=Net Loss+Total Add-backs−Non-taxable Income\text{Adjusted Profit} = \text{Net Loss} + \text{Total Add-backs} - \text{Non-taxable Income} Adjusted Profit=−1,270,000+2,164,000−120,000\text{Adjusted Profit} = -1,270,000 + 2,164,000 - 120,000 Adjusted Profit=894,000−120,000\text{Adjusted Profit} = 894,000 - 120,000 Adjusted Profit=Sh. 774,000\text{Adjusted Profit} = \boxed{\text{Sh. } 774,000}
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