Institute of Certified Management Accountants of Sri Lanka. Managerial Level November 2013 Examination

Transcription

1 Copyright Reserved Serial No Managerial Level November 2013 Examination Examination Date : 30 th November 2013 Number of Pages : 08 Examination Time: 9.00 a:m p:m. Number of Questions: 10 Instructions to Candidates 1. Time allowed is four (4) hours. 2. Total: 200 Marks. 3. Answer any four (4) questions in Section A, all questions in Part I and any three (3) questions from Part II in Section B. 4. Section A: Corporate Law and Section B: Advanced Taxation 5. The answers should be in English Language. Subject Subject Code Corporate Law & Advanced Taxation (CLT / ML 4-304) SECTION A: Corporate Law Answer any four (4) questions Question No. 01 (25 Marks) (a) Outline briefly the relative advantages and disadvantages of a listed company from the point of view of the investor and the company. (10 Marks) (b) Piyal agreed with Lal, who was acting on behalf of a future company, P Ltd., that Lal shall be employed as P Ltd's Chief Accountant for a period of five years after incorporation at a salary of Rs.250,000/- per month. The company, on its formation, refused to employ him. Advise Lal who wishes to sue P Ltd. for damages for breach of contract. Would your answer be different if the directors of P Ltd., after its incorporation, resolved to adopt the agreement with Lal, and Lal agreed to take up the position of Chief Accountant, P Ltd? Explain. (15 Marks) Question No. 02 (25 Marks) (a) Timothy is a minority shareholder of Anton Pipes (Pvt.) Ltd. Kevin, Lal, Cyril, Basil and Wimal are comprised the board of directors of the company. These directors are also the majority shareholders in the company who hold 80 per cent of the shares. Timothy complains to you that the directors have sold company assets and have used the proceeds from the sale to purchase an island resort in their own names. He also tells you that the directors as the controlling shareholders of the company have ratified their own acts at a recent general meeting of shareholders. With reference to the common law remedies and statutory provisions advice Timothy, who wants to initiate an action against the directors? (20 Marks) (b) Explain briefly the meaning of the term alternate director and his powers? 1

2 Question No. 03 (25 Marks) (a) Compare and contrast the main features of proprietorships and partnerships as non corporate business organizations. (20 Marks) (b) Briefly explain what a Joint venture is. Question No. 04 (25 Marks) Ann, Bill, Cindy, Dotty and Elena were the directors of Ran Ruwan Jewellery Ltd, a company engaged in the business of importing and supplying jewellery and gems as wholesalers to the local market. In order to buy a showroom from Bricks (Pvt) Ltd. the company obtained a Rs. 4 million loan from the Friendly Bank. It was found later that Cindy was a major shareholder in Bricks (Pvt) Ltd. and the other directors were unaware of this at the time of the purchase of the showroom. Bill set up his own business as a jewellery wholesaler and a retailer and a contract was entered into between Ran Ruwan Jewellery Ltd and Bill for the supply of jewellery. Furthermore, Bill had been approaching other established customers of Ran Ruwan Jewellery Ltd and had secured orders for his own business. Advise as to the liability of the parties both under common law and the statutory provisions. Question No. 05 (25 Marks) (a) Saman and Nalin are the directors and only shareholders of S&N (Pvt) Ltd. They have equal rights of management and voting power. The company has made huge profits but there is a complete dead lock in the management of the company. Saman applied for the winding up of the company. Is his action justified? Explain. (13 Marks) (b) Explain when does a company need an auditor and who can act as a company auditor? (12 Marks) End of Section A 2

3 SECTION B: Advanced Taxation Part I Answer all questions Question No. 06 (40 Marks) Ceylon Micro Components Ltd, a company incorporated in Sri Lanka in 2008, is engaged in the manufacturing of spare parts for JUKI machines. It is a subsidiary of Ceylon Richwear Ltd. PLC. The commercial operation of the business was commenced soon after its incorporation. Issued share capital of the Company is Rs.5,000,000/- and total reserves as at 31/03/2012 are Rs. 4,650,000/-. Ceylon Micro Components Ltd. is seeking for internationalization. But the company has not yet found prospective customers. The summarized profit and loss account for the year of 2011/2012 and related notes are given below. (1) Gross profit of the company for this year of assessment is Rs.19,272,000/- and it is 15% of the turnover. (2) Summary of other Income. Rs. Dividends 360,000 Interest from Government Securities 630,000 Fixed deposit interest - net 450,000 Gross Rent received 720,000 Profit from sale of a lorry 1,875,000 Insurance claim 2,900,000 (i) Dividend has been paid out of dividends received. (ii) The company has constructed an office building and given on rent. (iii) The lorry purchased in February 2009 for Rs.3,500,000/- has been sold for Rs.2,750,000/- during the above year of assessment. Selling price of the lorry does not include any value added tax. (iv) Insurance claim was received in August 2011 on a claim made in May 2011 in respect of a Van which was fully damaged by an accident. (v) The net profit of the company is Rs.7,708,600/-. (3) Movements of the capital assets revealed from the accounts including the above mentioned capital assets are as follows: Asset Date of acquisition/date of completion of construction Cost/market price Depreciation charged for the year of assessment Accumulated depreciation as at end of the year of assessment Compensation from insurance/ Selling price/ Market Value Date destroyed or Factory Building 03/05/ ,750,000 1,450,000 5,800, Office building 28/03/ ,450, ,000 2,490, disposed Lorry 16/02/2009 3,500,000-2,625,000 2,750,000 11/11/2011 Van 19/04/2010 2,900, , ,000 2,900,000 06/08/2011 New Van 25/03/ , , Motor cars 19/07/2008 8,000,000-8,000, Machine 14/06/2008 8,000,000 1,000,000 4,000,

4 Com. hardware 14/07/ , , Com. software 14/07/ , , Office furniture 13/04/ , , New office furniture 18/08/ , , , Total 5,045,000 (i) The factory building purchased was a building which had been used by the previous owner for manufacturing of garments. (ii) Purchase prices of assets do not include any value added tax except in the purchase of new office furniture. (iii) Computer Software was developed in Sri Lanka. (4) The following expenses have been charged to profit and loss account. (i) Rs. Salaries and wages 11,231,000 EPF contribution 1,825,000 ETF contribution 336,930 Gratuity fund Contribution 467,950 Welfare fund 1,000,000 Salaries and wages were paid duly and correctly. EPF contribution includes Rs.477,280/- paid as a penalty for non-payment of contribution in time. Contribution has been made to a gratuity fund which is approved by the Commissioner General. (ii) Overseas travel Expenditure incurred on visit to Germany by the Factory Manager to purchase raw material is Rs.435,000/-. The statutory income from trade for the last year is Rs.14,765,000/-. (iii) Entertainment expenses - Rs. 760,000/- (iv) Rent paid in respect of a residence provided to the Managing Director is Rs.720,000/-. The rating assessment of the residence is Rs.200,000/- and the rates payable is at 20% of its rating assessment. The total employment income under section 4(1) (a) of the Managing Director is Rs.2,400,000/-. (v) The company wanted to know about its market share and therefore, to conduct a research. It has been given to a leading research company. The cost incurred for that is Rs. 574,000. (vi) Two motor bicycles were obtained under lease agreements on 12 th September 2011 for payment of 24 installments at Rs.15,000/- each. These motor bicycles have been provided to executive officers. Lease rentals were charged to the profit and loss account. (vii) Bad debt written off in respect of a trade debt is Rs148,000/- and this was not provided under the provision for doubtful debt in any previous year of assessment. General provision is Rs.1,254,000/-. 4

5 (viii) Amortization of preliminary expenses - Rs. 1,670,000/- The company has taken a policy decision to amortize preliminary expenses within five years of assessment from the commencement of commercial operation. The above amount is the final amount charged against the profit. (ix) The total advertising cost is Rs.630,000/-. This includes Rs.75,000/- a cost of paper advertisement published to recruit an accountant. (x) Donation made to the Maharagama Cancer hospital to purchase surgical equipment amounted to Rs.400,000/- (The hospital has issued a receipt). Grocery items worth Rs.100,000/- had been donated to an approved charity in which sick and needy people are maintained. (xi) Professional cost Accountancy fees Rs.125,000/- Auditor s fees Rs.125,000/- (xii) Financial cost Interest paid to its holding company Rs.8,750,000/- The total loans taken from its holding company for which the above interest was paid is Rs.67,000,000/-. (xiii) Management fee paid to the holding company is Rs.2,800,000/-. (xiv) Nation building tax has been correctly computed and charged to the P/L account (disregard any credit in respect of purchases). (5) All other expenses of the business are correctly accounted for income tax purposes. (6) Company has distributed dividends amounting to Rs.2,000,000/- during the above year of assessment and relevant tax has been paid (Disregard the calculation of tax on the non distribution of minimum amount). (7) ESC has been paid in time on the liable turnover as provided in the law. You are required to compute the Balance Income Tax Payable / Refund Due of the company for the year of assessment 2011/2012. (Total 40 Marks) End of Part I 5

6 Part II Answer any three (3) questions Question No. 07 (20 Marks) (a) Identify the sources of income liable to income tax and compute such liable income for the purposes of tax for the year of assessment 2011/2012 in each of the following cases. If any income is exempt for tax, it must be clearly stated. (i) Mr. Nuwan Panagoda is working as an executive officer attached to the Marketing division. He had business negotiations with customers and some of the negotiations were successful. He was paid Rs.175,000/- as commissions during this year of assessment. His monthly gross salary is Rs.110,000/-. He has been provided a motor bicycle with fuel. (04 Marks) (ii) Mr. Malewana has let his house with furniture to a foreigner. Monthly rent is Rs.80,000/-. This house has a floor area of 1800 sq.ft. and it was constructed during the year of assessment 2006/2007. Rating assessment of this house is Rs.100,000/- and rates payable are 20%. During this year of assessment, Rs.86,000/- and Rs.18,000/- were spent on repairs to the house and to up keep the furniture respectively. (04 Marks) (iii) Mr. Keerthi Ranaweera has sold some of the shares he had purchased from public listed companies at a profit of Rs.234,000/-. Further, he has sold a block of land he had purchased in The gain he has received from this sale is Rs.675,000/-. (04 Marks) (b) Sri Lanka Multi Paint Corporation is a public corporation which is established out the funds partly provided by the government and partly provided by other private companies. The ratio is 60% by the government and 40% from the private sector. The 60% has been provided as a loan from the government. Its adjusted profit from trade for the year of assessment 2011/2012 is Rs.19,450,000/-. The Corporation has received a letter from the Inland Revenue department asking the reasons for not paying dividend tax since it had not paid dividends to the Treasury. You are required to give reasons for not distributing dividends. (08 Marks) (Total 20 Marks) Question No. 08 (20 Marks) (a) What is the value of supply of a person who is conducting lotteries? (b) Explain your understanding of the time of supply of goods? (04 Marks) (04 Marks) (c) Mirari Rent a Car (Pvt) Ltd. is a VAT registered entity and is in the business of providing motor cars on operating lease. The above company is also a SVAT registered person. The supplies made during this month include supplies made to VAT registered persons as well as to non registered persons. The value of local supply to VAT registered persons is Rs.14/-, 800,000 whereas the value of VAT inclusive supply to non registered persons is Rs.8,600,000/-. Further, there were supplies made to exporters in transporting foreigners to and from airport. The company has issued suspended tax invoices and received SVAT credit vouchers in that regard. The value of such supply is Rs.4,978,000/-. 6

7 Some of the spare parts have been purchased from non registered persons for VAT. It is only Rs.1,627,000/-. All the other purchases were made on tax invoices and the aggregated VAT component is Rs.340,000/-. Salaries and wages is Rs.4,576,000/-. The above company has rented out a building and part of the building has been sub let to a non VAT registered person. On the entire building Rs.240,000/- has been paid as VAT to the owner of the building. In respect of the premises let, VAT inclusive invoice was raised for Rs.336,000/-. The company has purchased a photocopy machine on a lease, and the VAT component on lease installments is Rs.4,000/-. The VAT paid to the Director General of customs on a motor car imported for the business is Rs.720,000/-. You are required to compute the following relating to the quarter ending on 31/12/2012 (i) Output tax (ii) Input tax (iii) Disallowable input tax, if any (iv) VAT payable (v) Carry forward input (if any) to the quarter ending with 31/03/2012 (12 Marks) (Total 20 Marks) Question No. 09 (20 Marks) (a) Nalaka and Malaka Enterprise is a partnership having a manufacturing undertaking and enjoying a tax exemption under the Inland Revenue Act. Its sales for the quarter ended 31/12/2012 and few other transactions are as follows. Rs. Sale of manufactured goods - 345,765,000 Sale of fixed assets - 14,789,000 Sale of byproducts - 1,970,000 Bad debt written off - 2,654,000 Bad debts recovered (previously written off) - 1,345,000 VAT output collected - 4,491,800 Determine the liable turnover for the purpose of ESC? (08 Marks) (b) NBT is payable on self assessment basis in three monthly installments. What are the due dates of payments, and how do you make the adjustment for the final payment? (08 Marks) (c) Ruwan Importers is engaged in the business of import and sales. Unabsorbed Input VAT balance of the company as at 31/12/2010 was Rs.12,564,000/-.With effect from 01/01/2011, it could be claimed claim against the output tax subject to a restriction. For the quarter ending on 30 th September 2011, Ruwan Importers had to pay a net VAT amount of Rs.456,000/-. How much could be set off against the payable VAT? (04 Marks) (Total 20 Marks) 7

8 Question No. 10 (20 Marks) (a) Mr. Batapola has been paying taxes in time and furnishing his income tax return in time. Income tax return has not been sent to him by the department. Therefore, he did not file the return, but he has made the payment. Now he has received a penalty notice for non filing the return since he did not comply with letters sent by the department He wants to write an appeal saying that penalty cannot be paid because the fault is with the department. What is your advice and what kind of appeal you would ask him to write. (b) XYZ is a branch of a non-resident company. During the year of assessment 2011/2012 the company had not remitted any profit to its home country or not retained any profits in its home country. The company has received a letter from the department saying that the company has not filed the return on remittance. The accountant does not have an idea about this return such as when is to be filled, why it is filed when there is no remittance etc You are requested to advice him in this regard. (c) Mr. Kumara Gamage wants to know how the discount is obtained on income tax payments. You are requested to explain it. (d) An estimated assessment has been issued on Mr. Perera since he has not filed the income tax return. As far as the assessed amount is concerned, he thinks that it is far in excess and therefore wants to make an appeal. What is your advice? (Total 20 Marks) End of Part II End of Section B End of Question paper 8