QUESTION 17: ADVANCED

Badza Catherine & Group

TAXATI
Mr Gurumoto is 60 years old. He inherited a farm from his late uncle in 2010. The
valuation of the farm then in the estate was Z$500,000. Ever since 2010, he has been
operating livestock farm, until 15 January 2020. Due to the demand for land for
residential purposes, he decided to give up farming and sold his farm to Gweru City
Council for Z$1,300,000.
Gweru City Council had the farm subdivided into 50 stands of equal size, which were
ready for sale to the public on 1 March 2020 for Z$35,000 each. It incurred development
expenditure prior to sale amounting to Z$150,000.
The sale took place as follows;
• 20 stands on 15 October 2020,

• 15 stands on 12 December 2020,

• 15 stands on 18 March 2021,

The terms of the agreement were as follows;

25% deposit on signing of the contract on the date of sale. The balance was payable over
10 months in equal instalments, commencing the month following that of sale.

Required:
Calculate Gweru City Council’s taxable income from the above transactions for the years
ended 31 December; 2020, 2021 and 2022. [20 marks]
Determination of taxable income for the year ended 31 December:

2020 2021 2022

Gross sales 1 225 000 525 000 -

Less cost of sales: (1 015 000) (435 000) -

Gross profit 210 000 90 000 -

Add suspensive sale allowance b/d(W4) - 139 501 6 750

Less suspensive sale allowance c/d(W4) (139 501) (6 750) -

Taxable income 70 499 222 751 6 750

Working 1:

Valuation of closing inventory

Purchase price 1 300 000

Pre-development expenditure 150 000
Total cost 1 450 000

Total number of stands 50

Cost per stand (1 450 000/50) 29 000

Value of closing inventory:

2020 (15 x $29 000) 435 000
2021 -
2022 -
Working 2:

Gross profit margin = (Gross profit/Sales) x 100

= [(35 000-29 000)/ 35 000] x 100

= 17.143%

Working 3:

Monthly instalment per stand = (Selling price – Deposit)/Credit period

= [35 000 – (25% x 35 000)]/ 10

= $2 625 per month.

Working 4:

Receivables schedule and calculation of suspensive sale allowance for the year ended 31 December:

2020 2021 2022

Opening balance - 813 750 39 375
Sales 1 225 000 525 000 -
Less movement in receivables:
Deposit (306 250) (131 250) -
Instalments-20 units(2020)(W5) (105 000) (420 000) -
-15 units(2020)(W5) - (393 750) -
-15 units(2021)(W5) - (354 375) (39 375)
Closing balance 813 750 39 375 -

Gross profit margin 17.143% 17.143% 17.143%

Suspensive sale allowance 139 501 6 750 -
Working 5:

Months of collection:

Period covered Collection amount

20 units sold in October 2020:
2020 November- December 2 x 2 625 x 20 = 105 000
2021 January - August 8 x 2 625 x 20 = 420 000

15 units sold in December 2020:

2021 January - October 10 x 2 625 x 15 = 393 750

15 units sold in March 2021:

2021 April - December 9 x 2 625 x 15 = 354 375
2022 January 1 x 2 625 x 15 = 39375