28 Sep Q1. Explain the tax treatment for the following transactions under article (9) of the income tax law :( 7.5 marks) a. Tax payer has personal asset valued at SAR 100,000 a cost base
Q1. Explain the tax treatment for the following transactions under article (9) of the income tax law 🙁 7.5 marks)
a. Tax payer has personal asset valued at SAR 100,000 a cost base of SAR 80,000. Earning gains of SAR 20,000. What is the gain or loss on the disposed asset?
Answer:
.
b. Tax payer has an asset of two components and he disposed one component for SAR 50,000 Cash. The tax payer purchased that asset for SAR 100,000 Cash 5 years ago. The expert valued that assets at the time of purchase for SAR 200,000 out of which SAR 70,000 was belong to the disposed component. What is the gain or loss on the disposed asset?
Answer:
c. Tax payer possess land with book value of SAR 100,000 and he paid SAR 20,000 Cash to improve the land. Are expenses deductible?
Answer:
d. Tax payer disposed an asset encumbered by debt amounted to SAR 120,000 but Its market value is SAR 100,000 with cost base of SAR 80,000 .What is the gain or loss on the disposed asset?
Answer:
e. Tax payer converted an asset used in the activity to his personal use with a cost base of SAR 50,000 and market value of SAR 40,000. What is the gain or loss on the disposed asset and whether gains or losses taken into consideration when determining tax base?
Answer:
Q2. Tax payer incurred expenses of SAR 10,000 to alter and improve equipment with a cost base of SAR 100,000. Are these expenses deductible under article 18 of the law? (2.5 marks)
Answer:
.
Q3. Tax payer recorded the following journal entry (2.5 marks)
a.
D r. Bad debt expense 10,000
Cr. Provision for doubtful receivable 10,000
Required: Is that provision deductible under article (14) of the law ?
Answer:
b. 1n 2020
D r. Accounts receivable (Ibrahim) 100,000
Cr. Sales 100,000
In 2021
D r. Bad debt expense 20,000
Cr. Accounts receivable Ibrahim)
Required: Is that bad debt expense deductible under article (14) of the law?
Answer:
Q4. In financial accounting tax payers can choose any depreciation rates for depreciable assets ,but when tax payers prepare theie tax base , they must apply depreciation rates according to article (17 ) of the income tax law, So, explain depreciation rates according to article (17) (2.5 marks)
Answer:
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Q1. Explain the tax treatment for the following transactions under article (9) of
the income tax law 🙁 7.5 marks)
a. Taxpayer has personal asset valued at SAR 100,000 a cost base of SAR
80,000. Earning gains of SAR 20,000. What is the gain or loss on the
disposed asset?
Answer:
As per article 9: the gain and loss of an asset is the difference between the
compensation receive and its cost base, meaning in this case 100,000 –
80,000 = 20,000 SAR of gain.
Article 9 – section A.
b. Taxpayer has an asset of two components and he disposed one
component for SAR 50,000 Cash. The taxpayer purchased that asset for
SAR 100,000 Cash 5 years ago. The expert valued that assets at the time
of purchase for SAR 200,000 out of which SAR 70,000 was belong to the
disposed component. What is the gain or loss on the disposed asset?
Answer:
As per article 9, section E: in case of a disposal of a part of an asset, the
cost base is apportioned تقسمbetween the part retained the part disposed of
in accordance with their market value at the time of the purchase.
In this case, the portion of the asset at the time of purchase is 70,000 SAR
and it was sold at 50,000.
50,000 – 70,000 = (20,000)
Meaning there is a 20,000 SAR loss in value.
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c. Taxpayer possess land with book value of SAR 100,000 and he paid SAR
20,000 Cash to improve the land. Are expenses deductible?
Answer:
As per article 9, section F: the expenses incurred to alter or improve a
non-depreciable asset, a land in this case, are ADDED to the value of the
cost base of the asset.
Thus, the cost base of the this will be 120,000 SAR.
The improvement costs are NOT deductible as they add to the value of
the asset.
d. Tax payer disposed an asset encumbered by debt amounted to SAR
120,000 but Its market value is SAR 100,000 with cost base of SAR
80,000 .What is the gain or loss on the disposed asset?
Answer:
As per article 9, section I, the disposal of an asset encumbered by debt
EXCEEDING its MARKET value, the taxpayer disposal of the asset is
treated as RECEIVING a compensation equal to the value of the debt.
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In this case, the taxpayer is considered having received a compensation of
120,000 SAR, where the market value is 100,000 SAR.
Thus, the taxpayer GAINED 20,000 SAR on the disposal of this asset.
e. Taxpayer converted an asset used in the activity to his personal use with a
cost base of SAR 50,000 and market value of SAR 40,000. What is the
gain or loss on the disposed asset and whether gains or losses taken into
consideration when determining tax base?
Answer:
As per article 9, section L, when an asset is converted to personal use, as
is the case here, the taxpayer is deemed to have disposed of the asset at
MARKET VALUE. The recognition to be made on Gains, but not losses.
In this case, the disposal value would be 40,000 SAR while its cost base
is 50,000.
40,000 – 50,000 = (10,000) Loss and thus not recognized.
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Q2. Taxpayer incurred expenses of SAR 10,000 to alter and improve
equipment with a cost base of SAR 100,000. Are these expenses
deductible under article 18 of the law? (2.5 marks)
Answer:
As per article 18, section A, repaired and improvement of depreciable
assets in each group MAY BE deductible.
Section B, for each year, the amount deducted MAY NOT exceed 4% of
the balance value of the group.
Section C, the amount exceeding the limit will be added to the balance of
the value of the group.
In our example, the cost base of this asset (it can also be a group of assets
of the same kind) is 100,000. 4% of this would be 4,000 SAR.
The 4,000 SAR is deductible, the remaining 6,000 will be added to the
cost base of the asset, making its cost base now 106,000 SAR.
Q3. Tax payer recorded the following journal entry (2.5 marks)
a.
D r. Bad debt expense 10,000
Cr. Provision for doubtful receivable 10,000
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Required: Is that provision deductible under article (14) of the law?
Answer:
As per article 14, section A, a deduction for bad debts is possible from the
sale of goods that have been declared as taxable income of the taxpayer.
Section B adds, once there is evidence proving the impossibility of
collection.
From this journal entry, we assume that the provision for doubtful
receivables come from accounts receivables after failure of collection.
Thus, satisfying the first condition, with evidence as per section 2, YES,
the bad debt is deductible.
b. 1n 2020
D r. Accounts receivable (Ibrahim) 100,000
Cr. Sales 100,000
In 2021
D r. Bad debt expense 20,000
Cr. Accounts receivable Ibrahim)
Required: Is that bad debt expense deductible under article (14) of the
law?
Answer:
6
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Similar to the previous part, this satisfied the section A in article 14
(recognized as taxable income), with evidence proving the impossibility
of collection, yes the bad debt can be deductible.
Q4. In financial accounting tax payers can choose any depreciation rates
for depreciable assets ,but when tax payers prepare their tax base , they
must apply depreciation rates according to article (17 ) of the income tax
law, So, explain depreciation rates according to article (17) (2.5 marks)
Answer:
The depreciation rates as per the guide as follows:
Buildings its 5%, which is 20 years.
Movable industrial or agricultural facilities is 10%, which is 10 years.
Machinery, factories and equipment (including computer programs and
means of transport) is 25%, which is 4 years.
Costs of geological studies, exploring and drilling expenses and costs of
preparatory operations for development and exploitation of natural
resources is 20%, which is 5 years.
All other fixed assets, whether tangible or intangible, not covered above
(including ships, aircrafts, trains, furniture, etc) is 10% which is 10 years.
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Nothing follows.
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