Rise School of Accountancy

Suggested Solution - Test -7

Question 01
“Depreciable asset” means any tangible movable property, immovable property (other than
unimproved land), or structural improvement on immovable property, owned by a person that –

(a) has a normal useful life exceeding 1 year;

(b) is likely to lose value as a result of normal wear and tear, or obsolescence; and
(c) is used wholly or partly in deriving income from business,
but shall not include any property for which full cost of asset is allowed as deduction in the year of purchase; and
“structural improvement” in relation to immovable property, includes any building, road, driveway, car park,
railway line, bridge, tunnel, airport runway, canal, fence, water or sewerage pipes, drainage, landscaping or
dam.
In case a depreciable asset is jointly owned by a taxpayer and an Islamic financial institution licensed by the SBP
or SECP due to an arrangement of Musharika financing (or diminishing Musharika financing), the asset is
considered as wholly owned by the taxpayer.
 Rise School of Accountancy
Suggested Solution - Test -7
Question 02
Mr. Wheels
Taxable Income and Tax Thereon
Tax year 2007
Income from business Rs.
Accounting profit 20,000,000
Add: Accounting depreciation 6,000,000
Donation to a relief fund [S.61(1)(b)] (Note 3) 700,000
Additions to plant wrongly included in expenses [S.21(n)] 300,000
Plant installation wrongly included in expenses [S.21(n)] 500,000
Unpaid liability [S.34(5)] (Note 4) 400,000
Unpaid liability – repair *S.34(5)+ 1,000,000
Tax profit on the sale of the building [S.22(13)(d)] (Note 5) 3,000,000
11,900,000
Less: Accounting profit on the sale of the building 6,095,000
Recovery of a debt previously written off (Note 6) 175,000
Tax Depreciation and initial allowance (Note 7) 3,629,250
(9,899,250)
Taxable income 22,000,750
Items not included in the computation of taxable income
Note 1
Principal amount of loan of Rs.2,600,000(3,000,000-400,000) will have no impact because only those
unpaid liabilities are added to income which were previously
allowed as deduction. [S.34(5)]
Note 2
An advance received by a person from another person which is not paid by a crossed
cheque or through a banking channel from a person holding a national tax number, is
treated as the income chargeable under the head ‘Income from other sources’ *s.39(3)+.
However, the provisions of s.39(3) does not apply to an advance payment for the sale of goods or
supply of services [s.39(4)].
No adjustment is, therefore, required in the computation of income for the
Rs. 4,000,000 received in cash from Carsales Associates as an advance payment for the
sale of cars.
Note 3
Rs. 700,000 paid as a donation is not deductible but Mr. Wheels is entitled to a tax
credit calculated under a prescribed formula [s.61(1)(b)].
Note 4
The unpaid amount of Rs. 400,000 for profit on debt (included in sundry creditors) was
allowed as a deduction in the tax year 2003 (accounting year ended 30 June 2003).
As the amount has remained unpaid for 3 years from the end of the tax year in which
the deduction was allowed, the Rs. 400,000 is chargeable to tax in the tax year 2007
(i.e. the first tax year following the end of the said three years).[S.34(5)]
Note 5
Where the consideration received on the disposal of immovable property exceeds its cost, the
consideration received is to be treated as the cost.
The tax profit on the disposal of the building is worked out as under
Rs.
Sale consideration 15,000,000
Less: Tax written down value
Deemed cost 15,000,000
Depreciation allowed (10,000,000 – 7,000,000) (3,000,000) (12,000,000)
Tax profit on disposal 3,000,000
Note 6
As the debt of Rs. 175,000 written off in the tax year 2006, was not allowed as deduction,
the receipt of the Rs. 175,000 is not income chargeable to tax. [S. 70]
Note 7
Depreciation
Plant and Buildings Motor Furniture Total
Machinery
Rate of depreciation 15% 10% 15% 15%
Written down value 2,700,000 13,800,000 2,500,000 1,570,000
Disposal - (7,000,000) - -
2,700,000 6,800,000 2,500,000 1,570,000
Depreciation 405,000 680,000 375,000 235,500 1,695,500
Additions 4,300,000 - 2,500,000 -
Initial allowance (1,075,000) - - - 1,075,000
Written down value 3,225,000 - 2,500,000 -
Depreciation 483,750 - 375,000 - 858,750
3,629,250
The cost of vehicle is restricted to Rs. 2,500,000.
It is sum of Rs. 300,000 minor additions and Rs. 4,000,000 (3,500,000 + 500,000)
 Rise School of Accountancy
Suggested Solution - Test -7
Question 03
a) The cost of new purchased machine shall be the sum of following amounts:
(a) The total amount given for asset, including FMV of consideration in kind determined at the time the
asset is acquired.
(b) Any incidental expenditure paid in acquiring and disposing of asset.
(c) Expenditure paid to alter or improve the asset. For example, the cooling equipment purchased here.

b)
As per S.76 (3) if a personal asset is put to business use, its cost will be the fair market
value on the date it is put to business use and as per S.76 (2) (c), the cost shall include
expenditure paid to alter or improve the asset. Therefore, the cost of personal computer shall be
sum of FMV on 1st July, 2015 and cost of up gradation.
c)
As per S.76 (4) the cost of self-constructed furnace shall be the total cost incurred in
producing or constructing the asset plus any incidental expenditure paid to alter or
improve the asset.