Question

Case Study: 1

At the end of the year 2018, Mr. Basam Hamed Al Hinai takeover his father’s business (sole trader) of trading Iron & Steel in Dank. For the year ended 31st Dec 2019, Income Statement shows a gross earnings (i.e., Gross Profit) of OR 110,000 and net earnings (i.e., Net Profit) of OR 42,000. As he was new to the accounting records, he made couple of errors in recording the business transactions.During the year Mr. Basam purchase a molding machine (to fulfill the requirements of different shapes and sizes of Iron sheets & rods of the customers in Dank) and a constructed warehouse (for storing the business inventory) on 1st January 2019. Both these purchases are treated differently in the books of accounts. He imported a moldings machine from Germany worth OR 5,500 and paid OR 500 towards its installation. He expensed the whole amount in his income statement. He spends OR 20,000 towards the purchase of a concrete building for storing his raw material and charged 10% depreciation on it in the Income Statement. As per Oman Tax Laws, molding machine shall be referred as heavy equipment and purchased concrete building shall be considered as permanent buildings. For transportation of Iron & Steel to and from various parts of Oman, Mr. Basam has transportation vehicle worth OR 15,000 at the beginning of this year. He has a practice of charging 15% depreciation on such assets in his accounting records.

One of Basam’s customer Mr. Mohammed has gone bankruptcy in the previous year and accountant has declared an amount of OR 1,000 as bad debts and deducted from the books in that year. In the current year Mr. Mohammed sold some of his property and settled all his debts including Mr. Basam’s one. But, Mr. Basam did not record this recovery in his books in the current year. To expand his business beyond Dank, Mr. Basam inaugurated a new shop outlet in Yanquel and incurred an expense OR 8,000 towards this. However, it is expected that an amount of OR 6,000 is considered as appropriate for the inauguration expenses as per the Oman Tax Laws. Due to lack of knowledge of Oman Tax Laws, Mr. Basam’s father did not settle any of the losses he incurred in the previous years. After detailed internal audit of previous years’ financial statements, he realized a loss of OR 1,500 in the year 2014 and OR 2,000 in the year 2013.

Calculate the Taxable Income and Tax Liability using the above information for Mr. Basam.

Answer 1

Mr. Basam Hamed Al Hinai
Particulars	Amount
Gross Profit	OMR     1,10,000.00
Net Profit	OMR         42,000.00
Molding Machine Purchase	OMR           5,500.00
Installation Charges	OMR              500.00
Concrete Building	OMR         20,000.00
10% Depreciation on Concrete Building	OMR           2,000.00
Transportation Vehicle	OMR         15,000.00
15% Depreciation on Vehicle	OMR           2,250.00
Bad Debts Written off	OMR           1,000.00
Bad Debts Written off Received	OMR           1,000.00
Inaguration Expense of New Branch	OMR           8,000.00
Losses Incurred 2013	OMR           2,000.00
Losses Incurred 2014	OMR           1,500.00
Depreciation
Charged Depreciation on Concrete Building	OMR           2,000.00	10%
Allowed Depreciation Under Oman Tax Laws	OMR              800.00	4%
Difference of Depreciation Accounted	OMR         (1,200.00)
Charged Depreciation On Vehicle	OMR           2,250.00
Allowed Depreciation Under Oman Tax Laws	OMR           5,000.00
Difference of Depreciation Accounted	OMR           2,750.00
Depreciation on Molding Machine	OMR           1,833.00
Inaguration Expense
Accounted	OMR           8,000.00
Allowed	OMR           6,000.00
Excess Charged	OMR         (2,000.00)
Taxable Income Calculation
Net Profit	OMR         42,000.00
Add
Molding Machine Purchased and Treated as Expense	OMR           5,500.00
Concrete Building Purchased and Treated as Expense	OMR         20,000.00
Excess Depreciation Charged on Concrete Building	OMR           1,200.00
Recovered Bad Debts	OMR           1,000.00
Excess Inaguration Expense Accounted in Income Statement	OMR           2,000.00
Sub Total	OMR        71,700.00
Less
Depreciation Difference of Vehicle	OMR           2,750.00
Depreciation of Molding Machine	OMR           1,833.00
Losses Incurred 2013	OMR           2,000.00
Losses Incurred 2014	OMR           1,500.00
Actual Net Profit/Taxable Income	OMR        63,617.00
Tax Liability
Taxable Income	OMR         63,617.00
Tax @ 3%	OMR           1,909.00
Note: Tax rate taken from internet sources, you can change the tax rate if you have any other Reference