THE UNIVERSITY OF HONG KONG

SCHOOL OF BUSINESS

ACCT3107/BUSI0018 – Hong Kong Taxation

Self Test Question – Profits Tax Computation

Question 1

Readers Ltd is a printer and publisher of books carrying on business in Hong Kong.
All of its profits have been assessable to Hong Kong profits tax. For the year ended
31 March 2015, the company's profit and loss account shows:

$ $
Profit from publishing 4,099,000
Profit from sale of fixed assets 1,000
Compensation for loss of contract (1) 380,000
Interest income (2) 120,000
4,600,000
Less: Interest (3) 280,000
Rent and rates 600,000
Legal fees (4) 54,000
Staff salaries and welfare expenses (5) 680,000
Taxes (6) 63,000
Depreciation 85,400
Compensation for cancellation of contract (7) 70,000
Retirement fund (8) 69,000
Miscellaneous (all allowable) 23,000 1,924,400

Net profit 2,675,600

Notes:

(1) Compensation was received from a Singapore customer who terminated a

printing contract signed in an earlier year.

(2) Details of interest income received are:

$
Interest on HK$ fixed deposit placed with Citibank, HK branch 45,000
Interest on US$ fixed deposit placed with Bank of America,
New York branch 65,000
Interest from a trade customer in Singapore due to overdue accounts 10,000
120,000

(3) To finance the purchase of printing machines, the company borrowed a loan
from an unrelated company. The loan was secured by the HK$ fixed deposit in
Note (2) above. Interest in the sum of $280,000 was paid during the year.

(4) The legal fees were incurred to defend the prosecution of a company director for
an offence under the Prevention of Bribery Ordinance. The director was
convicted and is now in prison.

1
(5) Staff salaries included the following payments made to a technical writer:
$
Severance payment 100,000
Payment for covenant not to join competitors for 12 months 80,000
180,000

(6) The taxation expenses were as follows:

$
Property tax 42,000
Salaries tax of managing director 21,000
63,000

(7) The company paid $70,000 to a supplier as damages to cancel a long-term

contract for the purchase of paper. The company broke this contract because it
found a cheaper source of supply.

(8) Contributions to the retirement fund comprise the following:

$
Annual contribution to registered scheme
(representing 18% of the relevant individual staff’s salaries) 39,000
Special contribution to the registered scheme 30,000
69,000

(9) Tax depreciation allowance as agreed with the Inland Revenue Department for
the year of assessment was $157,000.

Required:

Compute the profits tax liability of Readers Ltd for the year of assessment 2014/15.
(Ignore provisional tax in the computation. All workings must be shown.) Briefly
explain the treatments that you have accorded to Notes 1, 3, 5 and 7 above.