Institute of Certified Management Accountants of Sri Lanka

Transcription

1 Copyright Reserved Serial No Managerial Level Pilot Paper Instructions to Candidates 1. Time allowed is four (4) hours. 2. Answer any four (4) questions in Section A, and answer all questions in Part I and any three (3) questions from Part II in Section B. 3. Section A: Corporate Law and Section B: Advanced Taxation 4. The answers should be given in the English Language. Subject Subject Code Corporate Law & Advanced Taxation (CLT / ML 4) SECTION A: Corporate Law Answer any four (4) questions Question No. 01 (25 Marks) In relation to companies, describe what is meant by the doctrine of separate personality? Discuss on which occasions will it be ignored? Question No. 02 (25 Marks) Wimal has been carrying on business as a vegetable seller in his town for the last five years. Now he has plans to enlarge the area of his operations and diversify his business with a friend, Anura. It has been suggested to them that they ought to trade as either Private Limited Company or Partnership. As a student studying corporate law; Advise Wimal on the advantages and disadvantages of a sole proprietorship. (09 Marks) Discuss the comparative advantages and disadvantages that flow from the selection of partnership compared to the limited liability type of business. (16 Marks) Question No. 03 (25 Marks) Describe when shareholders could exercise their powers to pass special resolutions under section 92 of the companies Act No.07 of 2007? (10 Marks) TriStar (Pvt) Ltd had three members, A, B and C. A held 80% of the shares and B and C held 10% of the shares each. B and C were the only two directors of the company. According to Articles of Association of the company quorum for the meeting shall be two. Since A was not satisfied about the manner in which B and C conducted business, he requisitioned a members meeting for the purpose of removing Band C from the Directorate. B and C took steps to call the meeting but waited without attending such a meeting, thereby, not providing a quorum for the meeting. Can A hold a meeting himself and remove B and C from the directorate? Discuss your answer. (15 Marks) 1

2 Question No. 04 (25 Marks) Ann, Ben and Cary have been carrying on business in partnership as sweets sellers for the last five years at no. 34, Gregory Road, Colombo 5. They wish to expand and diversify their business. Cary suggests registering their business as a private limited Company. They request your advice on the following. State details of documents which must be submitted to the registrar of companies in order to be incorporated as a Limited Company. (08 Marks) Ben suggests naming the company as Sweet Sellers. Advise Ben. (08 Marks) List the provisions that must be mentioned in the articles of association of a private company? (07 Marks) (d) State the time limit specified under the Companies Act for a public notice to be given? (02 Marks) Question No. 05 (25Marks) USJ Ltd is a company specializing in the production of computer software. Although there are five members on its board of directors, the actual running of the business is left to Sam who although act as the company s managing director, has never been officially appointed as such. Sam is assisted by Dilani who has been appointed as USJ Ltd s company secretary. Articles provide that (i) (ii) The company should never engage in any military related work. Any contract involving a sum greater than Rs.50,000/- requires the express prior approval of the board of directors. Advise Ken, an ordinary shareholder in USJ Ltd as to the validity of the transactions given below which have already taken place. The board of directors has approved a contract to provide software to be used in arms guidance system. (07 Marks) Sam has entered into a contract to buy new production equipment to the value of Rs.100,000/-. (09 Marks) Dilani has ordered Rs.55,000/- worth of office equipment on behalf of USJ Ltd. (09 Marks) End of Section A 2

3 SECTION B: Advanced Taxation Part I Answer all questions Question No. 01 (40 Marks) Ranwan PLC is in the business of manufacturing and selling toys. The Company was incorporated on 01 st April 2001.You are provided with draft financial statements of Ranwan PLC. Income Statement for the year ended 31 st March 2010 Note Rs. 000 Turnover 35,423 Less: Cost of goods sold (20,456) Gross Profit 14,967 Add: Other operating income 01 2,365 Less: Operating expenses Selling and distribution expenses 02 (1,811) Administration expenses 03 (5,891) Finance and other expenses 04 (1,004) Net Profit Before Tax 8,626 Balance Sheet as at 31 st March Rs. 000 Rs. 000 Non-current Assets Property plant & equipment 18,100 20,400 Current Assets Stocks 7,590 4,860 Trade debtors 17,895 10,200 Less: Provision for bad and doubtful debts (2,775) (2,500) Other receivables 800 1,300 Cash and cash equivalents 1,065 1,560 Total Assets 42,675 35,820 Stated Capital 8,000 8,000 Retained earnings 12,373 7,034 Non Current Liabilities Term loan 7,500 4,000 Lease creditors after one year 6,780 8,530 Provision for gratuity 4,300 3,400 Current Liabilities Accounts payables 2,008 2,200 Accruals 734 1,786 Lease creditor within one year Total Equity and Liabilities 42,675 35,820 3

4 Notes to the Financial Statements Note 01: Other Operating Income Insurance claims 1,600 Interest income 300 Dividend 440 Profit on sale of machinery 25 Total 2,365 Note 02: Selling and Distribution Expenses Transportation 475 Advertising 500 Sales promotion 650 Sales commission 186 Total 1,811 Note 03: Administration Expenses Salaries and wages 1,675 Gratuity provision 1,060 Provision for bad and doubtful debts 1,375 Legal fees 120 Utility expenses 201 Depreciation 680 Traveling 231 NBT 170 ESC 23 Entertainment 130 Secretarial charges 45 Audit Fees 90 Donations 91 Total 5,891 Note 04: Finance and Other Expenses Lease Interest 689 Interest on term loan 202 Stock loss 113 Total 1,004 4

5 Following additional information is also provided. (1) Net Dividend income has been received from Capcom PLC. (2) The analysis of interest income is as follows. Interest received from Treasury Bills Rs. 200,000 Net interest received for fixed deposits Rs. 100,000 (3) The traveling expenses include Rs.100,000/- reimbursed by directors for their traveling (all declared for PAYE purposes). Balance represents the foreign traveling expenditure incurred to inspect the new machine acquired for the new project to be commenced in June (4) The company has provided a training programme to the employees of the company. The cost of this training programme amounting to Rs. 120,000 has been included in the salaries and wages. (5) Rs.15,000/- paid to an advertisement for staff recruitment is included in the advertisement expenses. (6) Sales promotion expenditure represents the amount paid to the sales promotional agency to carryout promotional campaign during the New Year season. (7) The motor vehicle which had been purchased on 15 th August 2007 for Rs.2.1 Mn, was destroyed totally due to an accident during the year. The company has received Rs. 1.6 Mn being an insurance claim with this regard. The receipt of insurance claim has been recognised as other income and no other adjustment has been made in this respect. (8) During the year, the company has purchased locally developed software for Rs.140,000/-. (9) Analysis of donations is as follows. Donation to Government Goods donated to an approved charity Free samples by Sales Staff Rs.30,000 Rs.45,000 Rs.16,000 (10) Analysis of legal fees is as follows Labour tribunal case Rs. 20,000 Income tax appeal Rs. 100,000 (11) Company has purchased a building for Rs.10 Mn. at the commencement of the company. In 2006 /2007 company had constructed two buildings for Rs.4 Mn. This includes Rs.2 Mn. worth housing complex constructed for factory employees quarters and the balance for the house provided to a director. (12) A machine acquired on 01/06/2001 has been sold on 20/02/2010. The net book value of this machine as at is Rs. 275,000. Company replaced with a similar machine for Rs.1.25 Mn on 31/03/2010. (13) The company has acquired a machinery on finance lease for four years and all the installments have been paid on due dates. Interest on lease has been accounted using straight line method. In the balance sheet, respective assets and liabilities are shown excluding interest. (14) All the other non - current assets at the beginning of the year under review, have been fully claimed depreciation allowances for tax purposes. 5

6 (15) Analysis of provision for bad and doubtful debts account is as follows /04/2009 opening balance Write off during the year General provision 1,700 Trade Debts 900 Specific provision 800 Staff Debts P&L 1,375 31/03/2010 Closing Balance General provision 1850 Specific provision ,875 (16) Brought forward tax loss from the previous year is Rs. 1,136,570. You are required to: Compute the Net Income Tax Liability of the company for the year of assessment 2009/2010. Part II Answer any three (3) questions Question No. 02 (20 Marks) (Total 40 Marks) End of Part I Identify the sources of income liable to income tax and compute such liable income for the purposes of tax in year of assessment 2009 /2010 in each of the following cases. (i) Mr. Kumarasiri received a gross salary of Rs.864,000/- in the year of assessment 2009/2010. His employer has provided him with a furnished residence at Katunayaka which is owned by the company since 01 st August Rating Assessment of this house is Rs.330,000/- and rates are paid at 20%. (04 Marks) (ii) Mr. Silva owns a house in Galle which is rented out at a monthly rent of Rs.25,000/- from 01 st October Expenses incurred on repairs and maintenance is Rs.15,000/-. The Rating Assessment of the house is Rs.100,000/- and rates are paid at 20%. (04 Marks) (iii) Mr. Jayadeva owns 2 houses, in Colombo where he resides and the other in Kegalle where his parents occupy. Annual values of Colombo and Kegalle houses are Rs.395,000/- and Rs.245,000/- respectively. (02 Marks) Lanka Sea Shells Co. PLC has declared and distributed 10% dividends in June 2010, out of its net profits for the year ended 31 st March Following information is given. (1) Net Profit for the Year ending 31 st March Rs.1,850,000/- (2) Capital Assets Description Book Value As At 01/04/2009 (Rs.) Additions (Rs.) Disposals (Rs.) Book Value As At 31/03/2010 (Rs.) Building 974, ,000-1,774,800 Machinery 2450, , ,000 2,400,000 6

7 (3) During the year of purchase, full year depreciation has been provided whereas no depreciation has been provided during the year of disposal. The rates of depreciation are 5% and 15% on building and machinery respectively. You are required to: (i) Compute the distributable profits/loss of the company for the year ended 31 st March (ii) How much is the Minimum dividends to be distributed before 30 th September (iii) Compute the Deemed dividend tax liability if any. (10 Marks) (Total 20 Marks) Question No. 03 (20 Marks) Briefly explain who should register for VAT under section 22 (7) of VAT Act No.14 of (04Marks) List three persons who should submit VAT return on monthly basis to the Department of Inland Revenue. (04 Marks) Amaran Company Ltd. is a VAT registered company engaged in importing and selling Cellular mobile phones and gift items. The details of the transactions of the company during the quarter ended 30 th June 2010 are as follows. All figures are shown excluding VAT. Import of mobile phones Rs. 720,000 Import of gift items Rs. 450,000 Sales of mobile phones Rs. 950,000 Sales of gift items Rs. 600,000 Vehicle insurance (Note 1) Rs. 90,000 Lease rental paid on the car Rs. 40,000 Electricity Rs. 160,000 Other general expenditures (subject to VAT) Rs, 150,000 VAT paid to purchase an air conditioner for use of the managing director Rs. 23,000 Input VAT brought forward to the quarter ended 30 th June 2010 Rs. 67,000 Input VAT paid on advertisement Rs. 5,000 Note 1: Vehicle insurance is applicable to Car and Delivery Van equally. You are required to compute the VAT liability of the company for the quarter ended 30 th June (12 Marks) (Total 20 Marks) 7

8 Question No. 04 (20 Marks) The most recent data show that the level in the tax revenue in major industrialized countries is about double the tax level in a representative sample of developing countries (38% of GDP compared with 18%). Further, Direct taxes are doubled as indirect taxes and personal income taxes are four times of corporate income taxes in the context of developed countries. Discuss the above statement with reference to developing countries considering Sri Lanka as an example. (10 Marks) Premium Company (Pvt) Ltd. is established to carry on a specified undertaking on 01/04/2008. Following information are given for the year of assessment 2009/2010. (i) Break up of Turnover is as follows. Export Turnover Rs. 2,343,000 Local Sales Rs. 987,000 Rent Income Rs. 345,000 Total Turnover Rs. 3,675,000 (ii) Adjusted Profits for the year of assessment 2009/2010 is Rs.895,000/-. You are required to compute the Tax payable by Premium Company Ltd for the year of assessment 2009/2010. Explain the main underlying principles covered in International Double Taxation with an example. (Total 20 Marks) Question No. 05 (20 Marks) Income tax liability of Mr. Kumarasiri for the year of assessment 2008 /2009 was Rs.120,000/- and the income tax liability for year of assessment 2009 / 2010 is estimated to Rs.135,000/-. List the minimum income tax payments and its due dates of Mr Kumarasiri not to incur any penalty. ABC textiles exporters, a limited liability company is planning to form a business unit, SL Textiles Importers in USA which is not deemed to be a resident company in Sri Lanka. The management argues the same procedure is to be followed in filing returns as resident companies do if there are no remittances made during any year. Is the view of management correct? Advise them and discuss the implications with relation to both resident and non-resident companies. When Mr Perera was back in Sri Lanka on 5 th December, 2010 after a visit of 8 months in Dubai, he got to know about the assessment letter sent by Commissioner General of Inland Revenue dated 30 th August Mr. Perera was confused because he has duly submitted the return before 30 th November 2009 for year of assessment 2008/09. However, he was dissatisfied with this assessment. Advise Mr. Perera if he can make a valid appeal against the assessment and if so, state the appealing procedures. (d) List five obligations of an employer in operation of PAYE scheme. (Total 20 Marks) End of Part II End of Section B End of Question paper 8