Whole Sale and Retail Sector (20 Marks)

BMKT Enterprise is involved in buying and selling of goods from manufacturers to retailers and
final consumers in Lusaka. The following is a statement of profit or loss for the year ended 31
December 2016.

BMKT Enterprise Statement of Profit or Loss for the year ended 31 December 2016
K'000 K'000
Sales 21,000
Cost of sales 14,000
Gross Profit 7,000
Expenses
Distribution costs 1,200
Depreciation 300
Rent 600
Other expenses 2,100

Net Profit- Taxable 2,800

The following information is also very important:

1. The purchases figure includes K100,000 in respect of furniture and home utensils bought
for the Director
2. Distribution costs include the cost of a distribution VAN which was bought at K200,000
and was capitalised.
3. Depreciation charged equals the value of capital allowances
4. It is company policy to value closing stock using LIFO. The following data has been
provided in respect of stock valuation at 31 December 2016.

LIFO - K3,000,000
FIFO - K5,000,000

REQUIRED
a. Comment on the risks related to BMKT operations and justify why particular attention
must be paid to the wholesale and retail sector (10 Marks)

Suggested Answers (2 Marks for each point explained)

  The major risk to revenue with regard to taxpayers in the whole and retail sector like
BMKT is that tax may be understated due to inadequate or no records provided.
 Income or sales may be suppressed while expenses may be overstated so as to reduce
taxable profit and consequently tax payable.

Other risks include:

• Personal consumption items like entertainment, vehicle expenses e.t.c. may be expensed and this
would reduce taxable profit

 Amounts paid or incurred on account of a transfer, sale, or other disposition of a franchise may be
expensed instead of capitalizing them and amortizing over the useful life of the franchise,
trademark or trade name.

Cooperative advertising
 For some retail businesses a manufacturer may pay a percentage of the cost of adverts placed by
the retailer. The retailer must either (1) recognize the amount that will be reimbursed as income
and take the full amount paid as advertising or (2) accrue the payment from the manufacturer at
the time the "deal sheet" is agreed with the manufacturer.

• The retailer may instead claim the full amount of advertising instead of the portion that the
retailer suffered.

Charitable Contributions and Promotions

 Some retail businesses give money, inventory, and other donations to charitable organizations to
promote their store's image and goodwill in the community. Some stores may misclassify this and
deduct as an advertising expense even when the donation was to a non-registered PBO

 A donation to a registered PBO made from inventory may be claimed at sale price instead of cost
price. The effect is that the deduction will be overstated by the amount of profit attached.

 A donation to a registered PBO made out of inventory may be claimed twice as an expense in the
profit or loss and as part of cost of sales. The effect is that the deduction will be overstated by the
amount of profit attached and total cost in the cost of sales. The taxpayer basically enjoys a
double dip with taxable profit being considerably reduced.

b. Re compute the taxable profit for BMKT, taking into account necessary adjustments
(10 Marks)

Solution
BMKT Enterprise Statement of Profit or Loss for the year ended 31 December 2016
K'000 K'000
Sales 21,000
Cost of sales: 14,000
Add back Closing Stock-LIFO 3,000 (2 Marks)
17,000
Less Purchases(Furniture) (100) (2 Marks)
Less Closing Stock - FIFO (5,000) (2 Marks)
Adjusted Cost of sales 11,900
Gross Profit 9,100
Expenses
Distribution costs(1200-200 VAN) 1,000 (2 Marks)
Depreciation/Capital Allowances 300 (1 Mark)
Rent 600
Other expenses 2,100