Question

QUESTION TWO

1. Discuss the capital allowances available to hotel owners and the capital expenditures that qualify for such allowances.                                                                                                            
2. Wageni tourist hotel ltd. Is a five star hotel in Mombasa. The hotel provided the following information,

1. Written down values as at 31.12.2018

Class I	Class II	Class III	Class IV
Sh.	Sh.	Sh.	Sh.
875,000	2,500,000	1,750,000	3,725,000

Disposals during the year.

Class I	Class II	Class III	Class IV
900,000	125,000	-	90,000

2. Additions during the year

1. Computer            350,000.00
2. Fax Machine        40,000.00
3. Photocopier         160,000.00
4. Beds                    500,000.00
5. New hotel building                      5,000,000.00

      The new hotel building was brought to use on 1.9.2019

3. The old hotel building was first brought in to use on 1.1.2014 at a cost of Sh. 8,000,000.00
4. A saloon car which cost sh. 1,200,000 in 2014 was traded in for a new car costing Sh. 900,000.00. The old car was valued at Shs. 600,000 and the company paid a balance of shs. 300,000.00

Required

1. Compute capital allowances due to the company for the year ended 31.12.2019.            
2. Show the written down value of all the assets as at 31.12.2019. Comment on Class I balance.

Answer 1

a. The capital allowances available to hotel owners and the capital expenditures that qualify for such allowances are as follows:

i. Purchasing an existing property: The hotel owner will get capital allowance on the new property acquired. This property will be part of fixed asset in the balance sheet and the hotel owner can claim depreciation every year on this property.

ii. Refurbishment and alterations made in the property:The owner can make refurbishment and alterations in the existing property and they can either capitalize this expenditure or can take as a deduction in the year of repairs.

iii. Plant and machinery allowances: Expenditure incurred to purchase are capitalized in the balance sheet and then is depreciated during the useful life of the asset. This depreciation is allowed as a expenditure by the tax authorities.

iv. Annual investment allowance: Business can claim investment allowance up to £200,000 a year and this limit was increased to £1,000,000 for year 2019 and 2020.

b. Total additions made during the year:

Computer + Fax Machine + Photocopier + Beds + New Hotel Building

350,000 + 40,000 + 160,000 + 500,000 + 5,000,000 = 6,050,000

Saloon Car = 900,000 -600,000 = 300,000

Total Capital allowances at the end of the current year:

New assets acquired + Old asset

6,050,000 + 300,000 + 2,375,000 + 1,750,000 + 3,635,000 = 14,110,000

Written Down Value of different asset class:

Class I: 875,000 -900,000 = 0

Class II: 2,500,000 -125,000 = 2,375,000

Class III:1,750,000 -0 = 1,750,000

Class IV: 3,725,000 - 90,000 = 3,635,000

The asset class I is sold at a profit as the disposal value is greater then the current value so this profit will be shown as a income in statement of profit and loss and the gains will be taxed at the capital gains tax rate. After this asset is disposed off the balance in Asset Class I will be zero.