Case Stimulus
Soft Farm and Agro-Allied Limited, a subsidiary of Emperor Agro Incorporated, Italy, was incorporated in Nigeria in January 2018. Soft Farm and Agro-Allied Limited produces palm kernel for domestic use and export to the European market.
The Managing Director of the company has just received a letter from the head office (parent company) of an impending visits occasioned by poor business performance (below the group’s return on investment benchmark of 25%) since commencement of the business, in spite of financial and technical supports rendered by the parent company. It would be recalled that in January 2022, the parent company granted the loan request of N100 million to Soft Farm and Agro-Allied Limited for business expansion.
The Board has scheduled a special meeting for next month for the consideration of the financial report of Soft Farm and Agro-Allied Limited for the year ended December 31, 2022 and review of past financial reports and tax assessments.
As the newly engaged Tax Consultant to the company, you have been invited to be part of the meeting for the purpose of providing professional opinion on tax related issues that may arise. To help you prepare adequately for the meeting, the Financial Accountant has been directed by the Managing Director to make available to you the financial statements for all the periods under review, books of accounts, returns filed with tax authorities and other supporting documents.
You noted from the preliminary review of the financial report for the year ended December 31, 2022, an item that requires further discussions with management of the company. This issue is in respect of interest paid on loan obtained from the parent company.
Additional Information
{
"title": "Extract from the financial statements for the year ended December 31, 2022",
"content": "Gross turnover: Domestic sales 147,500 Export sales 200,100 Other operating income 3,300 Total gross turnover 350,900 Deduct: Staff salary 122,600 Ground rent paid to the State government 3,200 Motor running expenses 1,750 Audit and accountancy fee s 1,000 Repairs and maintenance 5,800 Depreciation of assets 38,240 Rent paid 1,850 Power and lightning 5,400 Legal cost 5,000 Rates (water) 2,100 Allowance for doubtful debts 10,500 Donations 4,000 Interest and other finance costs paid 15,600 Income tax provision 23,400 General expenses 5,900 246,340 Net profit 104,560"
}
{
"title": "Additional Information",
"content": "(i) Export sales 20% of the export sales was made to the parent company at the prevailing international market price.\n(ii) Other operating income: N’000 Dividend received (net) 2,700 Profit from disposal of non-current asset 600 3,300\n(iii) Repairs and maintenance: N’000 Repairs of plantation equipment 1,200 Repairs to premises (non-industrial building) 900 Expansion to warehouse (industrial building) 3,700 5,800\n(iv) Rent paid: This is in respect of accommodation for the newly employed General Manager, whose basic salary is N4,800,000.\n(v) Legal cost: N’000 Cost of income tax appeal 850 Cost of debt collection 1,300 Cost of acquiring new lease 1,700 Renewal of old lease 1,150 5,000\n(vi) Allowance for doubtful debts: N’000 Specific provisions 5,230 General provisions 7,870 Bad debts recovered (2,600) 10,500\n(vii) Donations: N’000 Palm Oil Research Institute 1,400 National Library 600 Cocoa Research Institute of Nigeria 1,000 Women Society of the host community 1,000 4,000\n(viii) Interest and other finance costs paid In January 2022, the company obtained a loan facility of N100 million from the parent company for the purpose of expansion of the business at a competitive interest rate of 12% per annum. The duration of the facility is 10 years. The company is expected to pay interest due for the first 3 years, while from years 4 to 10, both principal and interest dues are to be paid at the end of each year. The balance as shown in the financial statements is attributed to other finance cost and bank charges paid to domestic deposit money banks on various accounts operated by the company.\n(ix) General expenses: N’000 Wedding gift to staff 350 Fine imposed on a company’s driver for traffic offense 150 Haulage expenses 3,200 Transport and travelling 2,200 5,900\n(x) Schedule of prior years’ turnover and assessable profits: Year ended December 31 Turnover Assessable profit N’000 N’000 2018 154,400 78,750 2019 198,600 95,120 2020 310,300 142,800 2021 314,900 166,900\n(xi) Schedule of qualifying capital expenditure incurred: Date of acquisition Asset type Amount N’000 August 31, 2017 Plantation equipment 4,600 August 31, 2017 Industrial building 12,000 August 31, 2017 Non-industrial building 9,000 January 1, 2018 Motor vehicles (3) 8,400 January 1, 2018 Furniture and fittings (10) 1,500 February 14, 2021 Motor vehicles (2) 5,600 June 12, 2022 Furniture and fittings (10) 2,000 July 8, 2022 Research and development 7,000"
}