Unit 7 Tutorial Questions

Question 1 ANS Partnership is formed by Au, Ng, and Super Ltd and is carrying business in Hong Kong. They share the partnership profit/loss in the ratio of 1:2:2. On 1 July 2008, Au left the partnership and her share was taken up by Andy. The profit/loss sharing ratio remained the same after the change. For the year ended 31 December 2008, the partnerships results were: $ Sales 500,000 Rent (note) (300,000) Depreciation (137,500) Wages to Au (20,000) Wages to Ng (90,000) Wages to Andy (30,000) Wages to Andys brother, as clerk (100,000) Loan interest to Ng (75,000) Loan interest to Super Ltd (30,000) Sale goods taken by Au (5,000) Other allowable expenses (20,000) Net profit/(loss) (307,500) Notes: Rent of $200,000 was paid to Super Ltd, the sole landlord of the premises in which the business was operated. Additional information: (1) The tax depreciation allowance for the year as agreed with the Inland Revenue Department is $200,000. (2) For the year of assessment 2008/09, Ng elected for personal assessment. (3) Super Ltd also carries on a separate business in Hong Kong, from which it has an assessable profit of $20,000 for the year of assessment 2008/09. Required: a) Compute the profits tax liability of the partnership in respect of the year of assessment 2008/09, and state the respective tax positions of the individual partners under the partnership. b) Assuming that Au had a balance of loss shared from the partnership at the time she withdrew from the partnership, state the tax treatment of that loss and advise her how to maximise its tax effectiveness. c) Assuming that Ng also carries on another proprietorship business as Ng Kee Company which incurred a tax loss during the assessment year 2008/09, advise whether and how that loss could

be used to offset against Ngs share of the partnership profit. Question 2 Bao, Ho and Cisco Ltd have been in partnership for many years and shared profit and loss among the partners in the ration 1:2:2. Starting from 1 July 2008, Ho retired and her share was taken up by So. The profit and loss ratio of new partnership are 2:1:2 among Bao, So and Cisco Ltd respectively. The results of the partnership for the years ended 31 December 2007 and 2008 records a loss for ($650,000) and ($200,000) accordingly. The results have been deducted the following item: 31 Dec 2007 Interest on capital: Ho Cisco Ltd Depreciation expense Salaries to partner: Bao Ho 31 Dec 2008 $ 150,000 310,800 200,000 50,400 100,800

$ 310,800 200,000 75,600 50,400

Depreciation allowances agreed by the IRD are $230,000 and $170,000 for the years of assessment 2007/08 and 2008/09 respectively. Bao and So elect for personal assessment for the year of assessment 2008/09. Cisco Ltd reported assessable loss of $30,000 and $50,000 in 2007/08 and 2008/09 correspondingly. Required: a) Compute the assessable profit/(loss) for the year of assessment of 2007/08 and 2008/09. b) Prepare the profit and loss allocation among the partners and compute the profits tax payable of the partnership for the years of assessment 2007/08 and 2008/09.

Question 3 Ada, Bobo and Cyber Ltd have been in partnership for several years. According to the partnership agreement, Ada and Bobo are each entitled to an annual salary of $200,000 and $180,000 respectively, and the balance of profits or losses is shared amongst the partners in the ratio of 1:1:2. With effect from 1 July 2011, Ada left the partnership and her share was taken up by David (the husband of Bobo). The trading results of the partnership for the years ended 31 December 2010 and 2011 were as follows: y.e. 31 December 2010 y.e. 31 December 2011 Gross profit 590,000 805,000 Interest on capital contributed by Cyber Ltd (420,000) (420,000) Interest on loan from Bobo (30,000) Provision for depreciation (225,000) (225,000) Salaries drawn by Ada (200,000) (100,000) Salaries drawn by Bobo (180,000) (180,000) Salaries drawn by David (120,000) (120,000) Wages to Bobos mother, as cleaner (50,000) (50,000) Rent (270,000) (270,000) Other allowable expenses (75,000) (75,000) Net profit/(loss) $(980,000) $(635,000) Depreciation allowances have been agreed by the assessor to be $205,000 for 2010/11 and $190,000 for 2011/12. Additional information: (1) An annual rent of $270,000 was paid to David, the landlord of the premises in which the business was operated. The rateable value of the premises for property tax purposes was $240,000. (2) Apart from the partnership business, Cyber Ltd also carries on a logistics business whose results were as follows: year ended 30 September 2010 assessable profits $25,000 year ended 30 September 2011 allowable losses ($110,000) (3) David and Bobo elect for personal assessment for 2011/12 only. Ada has not elected for personal assessment.

Required: (a) Compute the allocation of assessable profits and allowable losses between the partners and the profits tax payable by the partnership for the years of assessment 2010/11 and 2011/12. (b) Compute the profits tax payable by Cyber Ltd and prepare the statement of loss for the years of assessment 2010/11 and 2011/12.