Example 1 Subang Electronics Sdn Bhd (“the company’) is a Malaysian resident company in the business of manufacturing of electrical appliances in Bandar Sunway. The share capital of RM20 million of Subang Electronics Sdn Bhd is fully owned by Malaysians. The company’s income statement for the year ended 30 June 2018 is as follows: Note RM‘000 RM‘000 Sales 76,900 Less: Cost of sales i (46,573) 30,327 Add: Other income 2 555 Less: Expenses 30,882 Remuneration 3 8,960 Professional fees 4 47 Advertising 5 54 Entertainment expenses 6 72 Interest 7 124 Bad debts 8 130 Lease rental 9 97 Repairs and maintenance 10 180 Foreign exchange loss 1 89 Fines and penalties 12 22 Donations 13 265 Insurance 14 124 Research and development 15 636 Depreciation 200 (11,000) Net profit before tax 19,882 Notes: 1. Cost of sales includes: (i) Electrical appliances costing RM50,000 were donated to an approved institution on 4 May 2018. The normal selling price of the appliances is RM70,000. » (ii) The company’s warehouse was broken into and an estimated RM40,000 worth of electrical appliances were stolen. An insurance recovery of RM35,000 was received and this was netted off against the insurance charges debited to the income statement (see Note 14). 2. Other income consists of: (i) Rent of RM180,000 derived from a property in Indonesia and received in Singapore and credited to the bank account in Singapore in July 2018, (ii) Single tier dividends amounting to RM75,000 received from a Malaysian public listed company during the basis period. (iii) One of its many outlets selling its products terminated its contract expiring in June 2020 and paid RM300,000 as compensation for breach of contract.3. Remuneration includes: (i) Entertainment allowances totalling RM440,000 paid to the managing director and the marketing manager. (i) Contribution of RM71,400 to an unapproved provident fund. (ii) Salaries amounting to RM48,000 paid to three employees certified as disabled. (iv) Expenses of RM17,000 for recruiting employees. 4. Professional fees comprise the following: Legal fees on compensation for unfair dismissal of an employee Non-trade debt collection expenses Accounting and auditing fees Secretarial fees Feasibility study for expansion of operations in Indonesia 5, Advertising The company owns the Malaysian brand of electrical appliances. The Malaysian brand is registered as a trademark in Malaysia. The branded goods are of export quality. The company advertised its branded goods through the local newspapers and travel catalogues. 6. Entertainment expenses comprise: RM Hampers for customers during festive occasions 4,000 Staff lunches and refreshments 16,000 Promotional gifts (company’s own products) 7,000 Disbursement of promotion team’s entertainment expenses 45,000 7. Interest The company had borrowed money to invest in shares from which the dividend income was derived. The interest charges on the loan to finance the investment amounted to RM34,000. The balance of interest was incurred on the overdraft facility used to finance working operations. 8. Bad debts General Specific Total (RM) (RM) (RM) Balance as at 1 July 2017 420,000 140,000 560,000 Add: Provision for the year 90,000 100,000 190,000 Less: Amount written off (30,000) (30,000) (60, 000 Balance as at 30 June 2018 480,000 210,000 ea 000 Note: The bad debts were in respect of trade debtors. 9, Lease charges are in respect of three company motor vehicles: Cost of vehicle Lease charges for year ended 30 Jt Motor vehicle when new 2016 a 2017 3018 (RM) (RM) (RM) (RM) Peugeot 2.4 L (saloon) 170,000 18,000 28,000 29,000 Mercedes 350 (saloon) 350,000 24,000 52,000 54,000 Nissan (van) 95,000 22,000 23,000 14,00010. Repairs and maintenance comprise the following: Installation of security alarm system Replacement of component parts of factory machinery Repainting of factory premises Modification of administration block to provide access for disabled employees 180,000 — 11, Foreign exchange loss consists of: RM Unrealized loss from sale of goods 49,000 Realized loss from purchase of machinery 40,000 _ 12, Fines and penalties comprise: Fines and compounds for traffic offences Penalty for late payment of income tax to the IRB 13, Donations made during the year by the company: RM Scholarships for students studying in vocational institutions in Malaysia 30,000 Sponsoring a local cultural show approved by the Ministry of Unity, Culture, 20,000 Arts and Heritage Cash donation to a public university library to improve its facilities 115,000 100,000 Cash donation to an approved institution 14, Insurance payments include: RM 25,000 5,000 30,000 _120.000__ 265,000 (i) Export credit insurance premiums of RM48,000 paid to a Malaysian takaful-based export credit insurance company for the export of electrical appliances to Singapore and (i) Insurance for company’s motor vehicles, stocks and buildings. Indonesia. (ii) Premium of RM22,000 on a term policy taken out on the life of the managing director. The key-man policy was taken to insure the company against loss of profits in the event of his death. The insurance recovery mentioned in Note 1 has been set off against the sum charged to the income statement. 15, Research and development expenditure comprises: RM Cost of fixtures and equipment 72,000 Operating costs 564,000 636,000 The research conducted by the company has the approval of the Minister of Finance, 16. The following information was provided for YA 2018; Ri Capital alowanees Tor the year Undluding the hew securly alam Salem] TOs be expensed to the income statement and cost of fixtures and equipment used : in the research and development program). Business oss brought forward from previous year #000 The company incurred capital expenditure during the year on plant and machinery which qualified for an investment tax allowance of RM230,000.