Principles of Taxation
TAX2601
, 2
QUESTION 1 (30 marks, 36 minutes)
Guitar Hero (Pty) Ltd is not a small business corporation as defined in the Income Tax Act. The com-
pany manufactures all kinds of musical instruments, including guitars, pianos and drums and it sells these
instruments to one retailer in South Africa, namely Music Moods CC. Guitar Hero (Pty) Ltd’s financial year
ends on 31 March. The accountant requested you to calculate the company’s income tax liability for the
year of assessment ended 31 March 2050. The following information is provided to you:
1. Sales to Music Moods CC amounted to R6 865 000.
2. A donation of R150 000 was made to Lifeline, a registered public benefit organisation. The relevant
section 18A receipt was obtained.
3. The company purchased raw materials amounting to R3 650 500 and also paid a transport company
R8 600 to deliver the stock to its premises.
4. Guitar Hero created a new computer program that would simplify the manufacture process. Re-
search and development expenses incurred in developing the computer program amounted to R375
000 and were incurred on 1 May 2049. Salaries paid to research staff amounted to R98 000 andwere
also incurred on the same date. Approval was obtained from the Minister, as well as the Depart-ment
of Science and Technology for the development of the computer program on 15 April 2049.
5. Bad debts written off during the year of assessment amounted to R58 960.
6. The following table relates to the list of doubtful debts:
01/04/2048 – 31/03/2049 01/04/2049 – 31/03/2050
R R
List of doubtful debts 112 000 97 000
7. The following information relates to the fixed assets:
On 1 August 2048 the company purchased a range of new furniture for R36 000 for the distri-
bution office. On 1 October 2049, the company relocated to a new distribution office and the
furniture was moved on the same date. Moving costs amounted to R15 000.
The old furniture was only sold on 1 August 2049 to a second-hand dealer for R18 000. This old
furniture was originally purchased for R25 000 on 1 July 2048.
Guitar Hero (Pty) Ltd purchased two manufacturing machines on 1 July 2049. Manufacturing
machine A was bought new for R220 000 and manufacturing machine B was bought second-
hand for R125 000.
On 1 May 2049, the company purchased five new apartments in a residential building in Cape
Town at a cost of R650 000 each. The company rented these apartments out at R3 500 each
per month from 1 May 2049, solely for trade purposes.
8. Guitar Hero (Pty) Ltd paid an amount of R110 000 on 1 January 2050 to the local municipality for
water and electricity for the period 1 January 2050 to 31 December 2050.
TAX2601
, 2
QUESTION 1 (30 marks, 36 minutes)
Guitar Hero (Pty) Ltd is not a small business corporation as defined in the Income Tax Act. The com-
pany manufactures all kinds of musical instruments, including guitars, pianos and drums and it sells these
instruments to one retailer in South Africa, namely Music Moods CC. Guitar Hero (Pty) Ltd’s financial year
ends on 31 March. The accountant requested you to calculate the company’s income tax liability for the
year of assessment ended 31 March 2050. The following information is provided to you:
1. Sales to Music Moods CC amounted to R6 865 000.
2. A donation of R150 000 was made to Lifeline, a registered public benefit organisation. The relevant
section 18A receipt was obtained.
3. The company purchased raw materials amounting to R3 650 500 and also paid a transport company
R8 600 to deliver the stock to its premises.
4. Guitar Hero created a new computer program that would simplify the manufacture process. Re-
search and development expenses incurred in developing the computer program amounted to R375
000 and were incurred on 1 May 2049. Salaries paid to research staff amounted to R98 000 andwere
also incurred on the same date. Approval was obtained from the Minister, as well as the Depart-ment
of Science and Technology for the development of the computer program on 15 April 2049.
5. Bad debts written off during the year of assessment amounted to R58 960.
6. The following table relates to the list of doubtful debts:
01/04/2048 – 31/03/2049 01/04/2049 – 31/03/2050
R R
List of doubtful debts 112 000 97 000
7. The following information relates to the fixed assets:
On 1 August 2048 the company purchased a range of new furniture for R36 000 for the distri-
bution office. On 1 October 2049, the company relocated to a new distribution office and the
furniture was moved on the same date. Moving costs amounted to R15 000.
The old furniture was only sold on 1 August 2049 to a second-hand dealer for R18 000. This old
furniture was originally purchased for R25 000 on 1 July 2048.
Guitar Hero (Pty) Ltd purchased two manufacturing machines on 1 July 2049. Manufacturing
machine A was bought new for R220 000 and manufacturing machine B was bought second-
hand for R125 000.
On 1 May 2049, the company purchased five new apartments in a residential building in Cape
Town at a cost of R650 000 each. The company rented these apartments out at R3 500 each
per month from 1 May 2049, solely for trade purposes.
8. Guitar Hero (Pty) Ltd paid an amount of R110 000 on 1 January 2050 to the local municipality for
water and electricity for the period 1 January 2050 to 31 December 2050.
