Question

ABC Engineering Company is a Permanent Establishment in Oman. It is one of the largest, multi-disciplined engineering, contracting and construction company in the Sultanate of Oman. Established in the year 1972, Its Engineering & Contracting SAOG, has today grown into one of the largest construction companies in the Middle East with a turnover of over US$1 billion. Their trading results for the year ended 31st December 2018 are as follows: The Net Sales and Net Purchases of the company for the year ended 31st December 2018 were OMR 580,000 and OMR 322,500 respectively. The Opening inventory as on 1st January 2018 is OMR 60,500 and Closing inventory at the end of the year is OMR 45,000. The current year income as follows: The business earned a Gain on Sale of Land and Profit on Sale of Securities Listed in MSM of OMR 42,500 and RO 12,500 respectively. The following expenses were recorded by the Accountant. Donations of OMR 2,000 to an approved charitable institution, Provisions for Depreciation of OMR 22,000, Purchased of Patent worth RO 20,000, Purchase of heavy equipment RO 70,000, Depreciation on permanent Building is RO5,400 and General expenses were RO 36,000.

Assuming that you have recently joined as an Accountant of the company and you were not aware about all the rules of Law of Income tax on Omani Companies. Indeed, you are not sure about the Business transactions that you have recorded in the company account books. On 31st December 2018, the company received an Assessment order from the Income tax office stating that the company should pay tax on or before the due date. Immediately Ms. Faiza Al aamri an Internal Auditor was called by the company to finalize the accounts as per Omani tax Law requirements. The internal auditor analyzed the Profit & Loss Account prepared by the Accountant and discovered many transactions which are not recorded as per the income tax law requirements. Business Income of RO 20,000 earned during the tax year 2018 was completely ignored by the Accountant. At the end of the year 2018, the opening and closing inventory were undervalued by 40%. The company had incurred an amount of RO6,000 on inaugurating their business outlet. This amount was included in General expense. However, the sufficient documentary evidence is available in the company is only for RO 2,000.

The Additional information’s provided by the company.

The Life of patent is 10 years. The Net Book value of Permanent Building as on 1st January 2018 are RO 50,000. The General expenses which includes purchase of personal Computers of RO 800 and Income tax penalty of RO 300. Bad debts recovered of OMR 2,500 in the current year 2018 which was not allowed to write off in the concerned previous year 2017 profit. The company purchased an Office furnitures cost RO 20,000 on 1st January 2018. During the year one of the furniture was broken and the company spent for the repair expense of RO 250. This amount was included in General expense. Heavy equipment was purchased on 1st of January 2018.

  

Requirement:

a) YouhavebeenaskedbytheCompanytopresentadetailedreportonNetProfitofthecompanyforthe

year ended 31st December 2018. As an Accountant, how would you present such a report to the

company?

Answer 1

Trading Account of ABC Engineering Company

Particulars	Amount	Particulars	Amount
Opening Stock Purchase Gross profit	84700 322500 255800	Sales Closing Stock	600000 63000
663000	663000

Profit & Loss Account of ABC Engineering Company

Expense	Amount	Income	Amount
Operating Expense Donation Depreciation on Permanent Building General Expense Provision for Depreciation Patent write off Net Profit transferred to B/S	2000 5400 30900 22000 2000 251000	Gross Profit Bad debts recovered Gain of sales of Land Profit on sales of securities	255800 2500 42500 12500
313300	313300

Additional and Adjustment entries points

• Business Income 20000/- added to sales
• Under valued Opening stock and closing stock adjusted
• Business inauguration expense 4000/- adjusted
• Patent written off 1/10
• Purchase of personal computer and income tax penality deducted from general exp
• Bad debts recovered entered as income
• Repair charge of furniture included in general exp