Topic: Taxation of Partnerships and Sole Proprietorships

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TAX – May 2015 – L2 – SB – Q4 – Taxation of Partnerships and Sole Proprietorships

Calculate the chargeable income of each partner before and after the admission of a new partner and determine the basis period.

Question

The Managing Partner of Aarinola Sunkanmi & Co., a firm of Estate Surveyors and Valuers based in Lagos, has invited you to calculate the Chargeable income of each of the firm’s partners after the admission of Mariam in 2014.

The information relating to the Partnership are as follows:

(a) The firm makes up its accounts up to 31 December of each year.

(b) Extracts from the books of account for the year ended 31 December 2014, are listed below:

Description	Amount (₦)
Net profit for the year	1,380,000
Depreciation	450,000
Capital Allowances for the year	366,300
Balancing Allowance	72,500
Balancing Charge	75,480
Profit on sale of fixed assets	77,500
Legal expenses for successfully defending one of the partners for professional misconduct	14,000

(i) The THREE partners are Aarinola, Olasunkanmi and Murphiefe.

(ii) Profit sharing ratio is as follows:

Aarinola: 2
Olasunkanmi: 1
Murphiefe: 1

(iii) Aarinola and Murphiefe received ₦15,000 each as interest on loan per annum.

(iv) Salaries paid to each partner are as follows:

Aarinola: ₦140,000 per annum
Olasunkanmi: ₦60,000 per annum
Murphiefe: ₦60,000 per annum

(v) Olasunkanmi ceased to be a partner on 30 June 2014. Mariam was admitted on 1 July 2014. Mariam’s salary was fixed at ₦60,000 per annum. She also received interest on capital of ₦10,000 per annum.

(vi) Included in travelling expenses is the sum of ₦12,000 paid towards the annual vacation of Aarinola, the Principal Partner.

(vii) On Mariam’s admission in July 2014, the profit sharing ratio was changed to:

Aarinola: 10
Murphiefe: 7
Mariam: 3

Required:

a. Compute the Chargeable Income of each partner: i. Prior to admission of Mariam (9 Marks)
ii. Post-admission of Mariam (9 Marks)

b. State the basis period for the existing partners. (2 Marks)

Answer

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Tags: Basis Period, Capital allowances, chargeable income, Partnership Changes, Partnership Income, Profit Sharing
Level: Level 2

Topic: Taxation of Partnerships and Sole Proprietorships
Series: MAY 2015

TAX – May 2017 – L2 – SB – Q3 – Taxation of Partnerships and Sole Proprietorships

Computation of adjusted income and chargeable income for partners in a firm with adjustments for disallowable expenses.

Question

Muyiwa, Seyi, and Akpan are partners in an accounting firm in Lagos, Museak & Co (Chartered Accountants). The Statement of Profit or Loss for the year ended December 31, 2015, is shown below:

Additional Information:

Donation was for laying the foundation of a new church.
Repairs for Muyiwa’s wife’s vehicle, costing ₦550,000, were included under repairs and maintenance.
Medical expenses of ₦500,000 were incurred for flying a partner’s father-in-law abroad.
Akpan contributed ₦500,000 under the Pension Reforms Act 2004 (as amended).
Capital allowances agreed with the tax authority were ₦4,000,000.
Partners’ profit-sharing ratio: Muyiwa 6; Seyi 4; Akpan 2.

Required:

Compute the adjusted income of Museak & Co for tax purposes. (6 Marks)
Compute the chargeable income of each partner. (6 Marks)
Compute the tax payable by each partner. (8 Marks)

Answer

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Tags: Adjusted Income, chargeable income, Distributable Income, Partnership Income
Level: Level 2

Topic: Taxation of Partnerships and Sole Proprietorships
Series: MAY 2017

TAX – Nov 2020 – L1 – SA – Q1a – Taxation of Partnerships and Sole Proprietorships

Compute the assessable profit or loss for Kayode Oluwa Enterprises for the relevant years.

Question

a. Mr. Kayode Oluwa, a civil engineer, worked for XYZ Nigeria Limited for many years. He retired as the Chief Civil Engineer in 2010. He registered his enterprise under the name of Kayode Oluwa Enterprises and commenced business in 2011.

He appointed you as his tax consultant and submitted his financial records showing the following results:

Year Ended December 31	Amount (N)
2015	1,360,000
2016	(1,900,000)
2017	2,300,000
2018	2,700,000

Required:
Compute the assessable profit/(loss) for the relevant years of assessment. (12 Marks)

Answer

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Tags: Assessable Profit, Financial Records, Loss carry forward, Sole Proprietorship, Tax computation
Level: Level 1

Topic: Taxation of Partnerships and Sole Proprietorships
Series: NOV 2020

AX – Nov 2016 – L2 – Q3 – Taxation of Partnerships and Sole Proprietorships

Discuss the tax implications of converting a partnership into a limited liability company and the treatment of incorporation costs.

Question

Johnson, Seyi, and Bernard, based in Kaduna State, have run the firm Johnson, Seyi & Bernard (Estate Managers) for several years. The partnership agreement provides the following:

(i) Salary paid to partners:

Johnson: N288,000
Seyi: N576,000
Bernard: N1,152,000

(ii) Profit-sharing ratio:

Johnson: 2
Seyi: 3
Bernard: 5

In April 2015, there was a decision to review the partnership agreement. Messrs Johnson, Seyi, and Bernard were unable to find worthy successors to take over as partners. Rather than review the partnership agreement, they agreed to convert the partnership into a limited liability company.

A firm of legal practitioners was contacted to incorporate a new company, JSB Consultants Limited. The Authorised Share Capital was agreed at N50,000,000, made up of 50,000,000 Ordinary Shares of N1.00 each. The shareholding structure is as follows:

Johnson: 20%
Seyi: 30%
Bernard: 50%

The Certificate of Incorporation was dated July 15, 2015, and the company commenced business on September 1, 2015. The cost of incorporation includes:

Payment for Stamp Duty: N400,000
Professional fee for incorporation: N250,000
Corporate Affairs Commission (CAC) registration fee: N500,000
Miscellaneous costs: N200,000
Total: N1,350,000

The financial results for the year ended December 31, 2015, are as follows:

Revenue: N20,000,000
Expenses:
- Cost of incorporation: N1,350,000
- Transport and travelling: N675,000
- Medical: N600,000
- Hotel and accommodation: N625,000
- Audit and accountancy: N550,000
- Postages and telephone: N750,000
- Salaries:
  - Johnson: N1,440,000
  - Seyi: N2,880,000
  - Bernard: N5,760,000
    Total expenses: N14,630,000
Net Profit: N5,370,000

Required:
As the Tax Consultant, you are required to write a report to Messrs Johnson, Seyi, and Bernard highlighting:
a. Tax implications of the decision to convert to a limited liability company, limiting yourself to the details provided. (11 Marks)
b. Your comment on the breakdown of the cost of incorporation of N1,350,000 and the tax implication of each item. (9 Marks)

Answer

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Tags: CIT, Incorporation, Partnership Conversion, Partnership Taxation, Tax implications
Level: Level 2

Topic: Companies Income Tax (CIT), Taxation of Partnerships and Sole Proprietorships
Series: NOV 2016

TAX – May 2019 – L2 – Q1a- Taxation of Partnerships and Sole Proprietorships

Compute adjusted income and profit allocation for a civil engineering partnership.

Question

a) Obi Consults is a civil engineering consulting firm of many years. The founding partners are Bibi, Kose, and Fowora. The financial year-end of the firm is December 31 each year. The following information was extracted from the partnership’s financial statements/records for the year ended December 31, 2018:

Details	Amount (N)
(i) Net profit for the year	21,575,000
(ii) Provision for depreciation	13,250,000
(iii) Fine paid for traffic offence	25,000
(iv) Donations to “politicians in business”	150,000
(v) Donation to National Library Board	165,000
(vi) Profit from sale of excavator	1,600,000
(vii) Capital allowances	6,575,000
(viii) Balancing allowance	677,000
(ix) Balancing charge	1,315,000

Additional information:

Profit sharing ratio: Bibi – 1/2, Kose – 1/4, Fowora – 1/4
Bibi and Fowora are entitled to 5% interest per annum on a loan of N10,500,000 each. Fowora’s loan was refunded fully on his retirement.
Salaries paid: Bibi – N10,800,000, Kose – N8,250,000, Fowora – N8,250,000
Fowora retired on June 30, 2018, and Jaycee was admitted as a new partner on July 1, 2018, with an annual salary of N8,250,000. Jaycee introduced a loan of N7,000,000 on July 1, 2018, entitled to a 5% interest per annum.
The profit-sharing ratios after Jaycee’s admission: Bibi – 1/2, Kose – 7/20, Jaycee – 3/20

You are required to:
(i) Compute the adjusted/assessable income of the partnership. (5 Marks)
(ii) Determine the share of profits among the partners. (3 Marks)
(iii) Show relevant workings for prorated salaries and interest on loans, assuming simple interest. (2 Marks)
(iv) Compute the assessable income of each partner. (10 Marks)

Answer

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Tags: Adjusted Income, Assessable Income, Capital Allowance, Partnership, Proration, Retirement, Tax computation
Level: Level 2

Topic: Taxation of Partnerships and Sole Proprietorships
Series: MAY 2019

TAX – Nov 2018 – L2 – SC – Q6b – Taxation of Partnerships and Sole Proprietorships

List six considerations used to determine whether an activity constitutes a trade.

Question

The difficulty in determining what constitutes a trade has led to many litigations and numerous tax cases on the issue. The problem from decided cases is that of finding an absolute test for identifying a trade. The conclusion has always been that there are no fixed rules, but that each case must be determined on its own facts.

Required:
State six considerations that influence the determination of when an activity constitutes a trade.

Answer

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Tags: Business Activity, Tax Cases, Trade Definition, Trade Determination
Level: Level 2

Topic: Taxation of Partnerships and Sole Proprietorships
Series: NOV 2018

TAX – Nov 2018 – L2 – SB – Q4b – Taxation of Partnerships and Sole Proprietorships

Discuss the rules of commencement in respect of partnership business.

Question

Discuss the rules of commencement in respect of partnership business.

Answer

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Tags: Basis Period, Commencement Rules, Partnership, Taxation
Level: Level 2

Topic: Taxation of Partnerships and Sole Proprietorships
Series: NOV 2018

TAX – Nov 2018 – L2 – SB – Q4a – Taxation of Partnerships and Sole Proprietorships

Calculate each partner’s income from the partnership for 2016 and indicate the tax basis for assessment.

Question

Solomon, Musa, and Chinnedu were classmates in their secondary school days. They are friends with a passion for running a joint business because of their trust in one another. They formed a partnership some years later, providing specialized agricultural engineering services to the agricultural sector. Accounts are made up to December 31 each year. The following are the adjusted profits for tax purposes:

Year Ended	Adjusted Profits (N)
December 31, 2014	3,240,000
December 31, 2015	3,712,500
December 31, 2016	5,400,000
December 31, 2017	4,950,000

Additional information:
(i) Solomon, Musa, and Chinnedu are to share profits in the ratio of 3:6:3, respectively.
(ii) Salaries drawn:

Solomon: N810,000
Musa: N540,000
Chinnedu: N405,000

(iii) Interest on capital is 7½%.
(iv) Capital account of each partner:

Solomon: N337,500
Musa: N675,000
Chinnedu: N473,500

(v) On May 31, 2016, Solomon retired, and Bakare, another old school mate, was admitted on June 1, 2016, on an annual salary of N405,000. He introduced a capital of N472,500 and was to have the same profit-sharing ratio as Solomon.

Required:
Calculate each partner’s income from the partnership business for the 2016 year of assessment and indicate the basis for which each partner will be assessed to tax.

Answer

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Tags: Basis Period, Partners' Income, Partnership, Partnership Taxation Rules, Taxation
Level: Level 2

Topic: Taxation of Partnerships and Sole Proprietorships
Series: NOV 2018

TAX – May 2015 – L2 – SB – Q4 – Taxation of Partnerships and Sole Proprietorships

Calculate the chargeable income of each partner before and after the admission of a new partner and determine the basis period.

Question

The information relating to the Partnership are as follows:

(a) The firm makes up its accounts up to 31 December of each year.

(b) Extracts from the books of account for the year ended 31 December 2014, are listed below:

Description	Amount (₦)
Net profit for the year	1,380,000
Depreciation	450,000
Capital Allowances for the year	366,300
Balancing Allowance	72,500
Balancing Charge	75,480
Profit on sale of fixed assets	77,500
Legal expenses for successfully defending one of the partners for professional misconduct	14,000

(i) The THREE partners are Aarinola, Olasunkanmi and Murphiefe.

(ii) Profit sharing ratio is as follows:

Aarinola: 2
Olasunkanmi: 1
Murphiefe: 1

(iii) Aarinola and Murphiefe received ₦15,000 each as interest on loan per annum.

(iv) Salaries paid to each partner are as follows:

Aarinola: ₦140,000 per annum
Olasunkanmi: ₦60,000 per annum
Murphiefe: ₦60,000 per annum

(vi) Included in travelling expenses is the sum of ₦12,000 paid towards the annual vacation of Aarinola, the Principal Partner.

(vii) On Mariam’s admission in July 2014, the profit sharing ratio was changed to:

Aarinola: 10
Murphiefe: 7
Mariam: 3

Required:

a. Compute the Chargeable Income of each partner: i. Prior to admission of Mariam (9 Marks)
ii. Post-admission of Mariam (9 Marks)

b. State the basis period for the existing partners. (2 Marks)

Answer

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Tags: Basis Period, Capital allowances, chargeable income, Partnership Changes, Partnership Income, Profit Sharing
Level: Level 2

Topic: Taxation of Partnerships and Sole Proprietorships
Series: MAY 2015

TAX – May 2017 – L2 – SB – Q3 – Taxation of Partnerships and Sole Proprietorships

Computation of adjusted income and chargeable income for partners in a firm with adjustments for disallowable expenses.

Question

Muyiwa, Seyi, and Akpan are partners in an accounting firm in Lagos, Museak & Co (Chartered Accountants). The Statement of Profit or Loss for the year ended December 31, 2015, is shown below:

Additional Information:

Donation was for laying the foundation of a new church.
Repairs for Muyiwa’s wife’s vehicle, costing ₦550,000, were included under repairs and maintenance.
Medical expenses of ₦500,000 were incurred for flying a partner’s father-in-law abroad.
Akpan contributed ₦500,000 under the Pension Reforms Act 2004 (as amended).
Capital allowances agreed with the tax authority were ₦4,000,000.
Partners’ profit-sharing ratio: Muyiwa 6; Seyi 4; Akpan 2.

Required:

Compute the adjusted income of Museak & Co for tax purposes. (6 Marks)
Compute the chargeable income of each partner. (6 Marks)
Compute the tax payable by each partner. (8 Marks)

Answer

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Tags: Adjusted Income, chargeable income, Distributable Income, Partnership Income
Level: Level 2

Topic: Taxation of Partnerships and Sole Proprietorships
Series: MAY 2017

TAX – Nov 2020 – L1 – SA – Q1a – Taxation of Partnerships and Sole Proprietorships

Compute the assessable profit or loss for Kayode Oluwa Enterprises for the relevant years.

Question

He appointed you as his tax consultant and submitted his financial records showing the following results:

Year Ended December 31	Amount (N)
2015	1,360,000
2016	(1,900,000)
2017	2,300,000
2018	2,700,000

Required:
Compute the assessable profit/(loss) for the relevant years of assessment. (12 Marks)

Answer

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Tags: Assessable Profit, Financial Records, Loss carry forward, Sole Proprietorship, Tax computation
Level: Level 1

Topic: Taxation of Partnerships and Sole Proprietorships
Series: NOV 2020

AX – Nov 2016 – L2 – Q3 – Taxation of Partnerships and Sole Proprietorships

Discuss the tax implications of converting a partnership into a limited liability company and the treatment of incorporation costs.

Question

Johnson, Seyi, and Bernard, based in Kaduna State, have run the firm Johnson, Seyi & Bernard (Estate Managers) for several years. The partnership agreement provides the following:

(i) Salary paid to partners:

Johnson: N288,000
Seyi: N576,000
Bernard: N1,152,000

(ii) Profit-sharing ratio:

Johnson: 2
Seyi: 3
Bernard: 5

Johnson: 20%
Seyi: 30%
Bernard: 50%

The Certificate of Incorporation was dated July 15, 2015, and the company commenced business on September 1, 2015. The cost of incorporation includes:

Payment for Stamp Duty: N400,000
Professional fee for incorporation: N250,000
Corporate Affairs Commission (CAC) registration fee: N500,000
Miscellaneous costs: N200,000
Total: N1,350,000

The financial results for the year ended December 31, 2015, are as follows:

Revenue: N20,000,000
Expenses:
- Cost of incorporation: N1,350,000
- Transport and travelling: N675,000
- Medical: N600,000
- Hotel and accommodation: N625,000
- Audit and accountancy: N550,000
- Postages and telephone: N750,000
- Salaries:
  - Johnson: N1,440,000
  - Seyi: N2,880,000
  - Bernard: N5,760,000
    Total expenses: N14,630,000
Net Profit: N5,370,000

Answer

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Tags: CIT, Incorporation, Partnership Conversion, Partnership Taxation, Tax implications
Level: Level 2

Topic: Companies Income Tax (CIT), Taxation of Partnerships and Sole Proprietorships
Series: NOV 2016

TAX – May 2019 – L2 – Q1a- Taxation of Partnerships and Sole Proprietorships

Compute adjusted income and profit allocation for a civil engineering partnership.

Question

Details	Amount (N)
(i) Net profit for the year	21,575,000
(ii) Provision for depreciation	13,250,000
(iii) Fine paid for traffic offence	25,000
(iv) Donations to “politicians in business”	150,000
(v) Donation to National Library Board	165,000
(vi) Profit from sale of excavator	1,600,000
(vii) Capital allowances	6,575,000
(viii) Balancing allowance	677,000
(ix) Balancing charge	1,315,000

Additional information:

Profit sharing ratio: Bibi – 1/2, Kose – 1/4, Fowora – 1/4
Bibi and Fowora are entitled to 5% interest per annum on a loan of N10,500,000 each. Fowora’s loan was refunded fully on his retirement.
Salaries paid: Bibi – N10,800,000, Kose – N8,250,000, Fowora – N8,250,000
Fowora retired on June 30, 2018, and Jaycee was admitted as a new partner on July 1, 2018, with an annual salary of N8,250,000. Jaycee introduced a loan of N7,000,000 on July 1, 2018, entitled to a 5% interest per annum.
The profit-sharing ratios after Jaycee’s admission: Bibi – 1/2, Kose – 7/20, Jaycee – 3/20

Answer

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Tags: Adjusted Income, Assessable Income, Capital Allowance, Partnership, Proration, Retirement, Tax computation
Level: Level 2

Topic: Taxation of Partnerships and Sole Proprietorships
Series: MAY 2019

TAX – Nov 2018 – L2 – SC – Q6b – Taxation of Partnerships and Sole Proprietorships

List six considerations used to determine whether an activity constitutes a trade.

Question

Required:
State six considerations that influence the determination of when an activity constitutes a trade.

Answer

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Tags: Business Activity, Tax Cases, Trade Definition, Trade Determination
Level: Level 2

Topic: Taxation of Partnerships and Sole Proprietorships
Series: NOV 2018

TAX – Nov 2018 – L2 – SB – Q4b – Taxation of Partnerships and Sole Proprietorships

Discuss the rules of commencement in respect of partnership business.

Question

Discuss the rules of commencement in respect of partnership business.

Answer

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Tags: Basis Period, Commencement Rules, Partnership, Taxation
Level: Level 2

Topic: Taxation of Partnerships and Sole Proprietorships
Series: NOV 2018

TAX – Nov 2018 – L2 – SB – Q4a – Taxation of Partnerships and Sole Proprietorships

Calculate each partner’s income from the partnership for 2016 and indicate the tax basis for assessment.

Question

Year Ended	Adjusted Profits (N)
December 31, 2014	3,240,000
December 31, 2015	3,712,500
December 31, 2016	5,400,000
December 31, 2017	4,950,000

Additional information:
(i) Solomon, Musa, and Chinnedu are to share profits in the ratio of 3:6:3, respectively.
(ii) Salaries drawn:

Solomon: N810,000
Musa: N540,000
Chinnedu: N405,000

(iii) Interest on capital is 7½%.
(iv) Capital account of each partner:

Solomon: N337,500
Musa: N675,000
Chinnedu: N473,500

Required:
Calculate each partner’s income from the partnership business for the 2016 year of assessment and indicate the basis for which each partner will be assessed to tax.

Answer

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Tags: Basis Period, Partners' Income, Partnership, Partnership Taxation Rules, Taxation
Level: Level 2