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Institute of Certified Management Accountants of Sri Lanka Managerial Level

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Institute of Certified Management Accountants of Sri Lanka Managerial Level
© Copyright Reserved
Serial No………………
Institute of Certified Management Accountants of Sri Lanka
Managerial Level
November 2013 Examination
Examination Date :
Examination Time:
30th November 2013
9.00 a:m. – 1.00 p:m.
08
10
Number of Pages
:
Number of Questions:
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)
(Total 25 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?
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Corporate Law & Advanced Taxation (CLT/ ML 4 - 304) – November 2013 Examination
(05 Marks)
(Total 25 Marks)
1
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.
(05 Marks)
(Total 25 Marks)
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.
(Total 25 Marks)
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.
(b)
(13 Marks)
Explain when does a company need an auditor and who can act as a company auditor?
(12 Marks)
(Total 25 Marks)
End of Section A
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Corporate Law & Advanced Taxation (CLT/ ML 4 - 304) – November 2013 Examination
2
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.
360,000
630,000
450,000
720,000
1,875,000
2,900,000
Dividends
Interest from Government Securities
Fixed deposit interest - net
Gross Rent received
Profit from sale of a lorry
Insurance claim
(3)
(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/-.
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
disposed
Factory Building
03/05/2008
21,750,000
1,450,000
5,800,000
-
-
Office building
28/03/2010
12,450,000
830,000
2,490,000
-
-
Lorry
16/02/2009
3,500,000
-
2,625,000
2,750,000
11/11/2011
Van
19/04/2010
2,900,000
725,000
725,000
2,900,000
06/08/2011
New Van
25/03/2012
3.200,000
-
800,000
-
-
Motor cars
19/07/2008
8,000,000
-
8,000,000
-
-
Machine
14/06/2008
8,000,000
1,000,000
4,000,000
-
-
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Corporate Law & Advanced Taxation (CLT/ ML 4 - 304) – November 2013 Examination
3
Com. hardware
14/07/2008
980,000
-
980,000
-
-
Com. software
14/07/2008
245,000
-
245,000
-
-
Office furniture
13/04/2008
880,000
-
880,000
-
-
New office furniture
18/08/2010
560,000
140,000
280,000
-
-
Total
5,045,000
(4)
(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.
The following expenses have been charged to profit and loss account.
(i)
Salaries and wages
Rs.
11,231,000
EPF contribution
1,825,000
ETF contribution
Gratuity fund Contribution
Welfare fund
336,930
467,950
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 12th 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/-.
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Corporate Law & Advanced Taxation (CLT/ ML 4 - 304) – November 2013 Examination
4
(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
– Auditor’s fees
(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).
Rs.125,000/Rs.125,000/-
(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
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Corporate Law & Advanced Taxation (CLT/ ML 4 - 304) – November 2013 Examination
5
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 1998. 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?
(04 Marks)
(b)
Explain your understanding of the time of supply of goods?
(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/-.
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Corporate Law & Advanced Taxation (CLT/ ML 4 - 304) – November 2013 Examination
6
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
30th 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)
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Corporate Law & Advanced Taxation (CLT/ ML 4 - 304) – November 2013 Examination
7
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.
(05 Marks)
(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)
(05 Marks)
(05 Marks)
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?
(05 Marks)
(Total 20 Marks)
End of Part II
End of Section B
End of Question paper
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Corporate Law & Advanced Taxation (CLT/ ML 4 - 304) – November 2013 Examination
8
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