- 15 Marks
TAX – May 2015 – L2 – SC – Q5 – Companies Income Tax (CIT)
Schedule of capital expenditure allocation for Covenant Construction Limited with assessment basis and treatment of capital expenditure.
Question
Covenant Construction Limited commenced business on 3 August 2011, making up accounts to 31 July annually. The schedule of assets acquired prior to commencement of the business is as shown below:
| Description | ₦ |
|---|---|
| Tractors and Grader | 7,500,000 |
| Motor vehicles for field operations | 13,500,000 |
| Construction site (Factory building) | 11,250,000 |
| Furniture, Fixtures and Fittings | 778,250 |
Covenant Construction Limited won another contract and additional assets were purchased as stated below:
| Date of Purchase | Description | Number of Items | Cost (₦) |
|---|---|---|---|
| Nov. 2011 | Plant & Machinery | 3 | 580,000 |
| April 2012 | Motor vehicle | 1 | 1,375,000 |
| Aug. 2012 | Building | 1 | 1,350,000 |
| Jan. 2013 | Generator | 1 | 450,000 |
| June 2013 | Factory extension | 1 | 575,000 |
| Nov. 2013 | Pick-up van | 2 | 1,050,000 |
At the last Board meeting, the Directors argued on what benefits will accrue to Covenant Construction Limited on Capital Expenditure incurred before and after commencement of business.
They were also interested in knowing the years that will be affected and the impact it will have on the company’s Total Profit.
You have been invited by the Finance Director of the company who asked you to look into these matters. The Finance Director has asked you to specifically address the following:
Required:
a. Prepare the schedule of Capital Expenditure Allocation and identify the Qualifying Expenditure based on which Capital Allowances are claimable: i. Normal basis of assessment (5 Marks)
ii. Revised basis of assessment (based on taxpayer’s right of election) (5 Marks)
b. Explain the treatment of Capital Expenditure acquired by Covenant Construction Limited before it commenced business on 3 August 2011. (2 Marks)
c. State the relevant tax years and corresponding basis period covered by the data above. (3 Marks)
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