Question

Widget Production Ltd. has a fiscal year end of June 30. In February​ 20X1, the Company borrowed​ $750,000 to fund an expansion. The Company paid​ $21,000 to obtain this financing. In January​ 20X2, the Company repaid​ $250,000 of the principal and in June​ 20X3, it repaid the remaining​ $500,000. All repayments were made from cash flow from operations. For tax​ purposes, which one of the following schedule of claims represents the most rapid method of claiming the costs of obtaining this​ financing?

A.​$7,000 in 20X2 and​ $14,000 in 20X3.

B.​$4,200 in each of fiscal 20X1 through 20X5.

C.​$4,200 in​ 20X1, $8,400 in​ 20X2, and​ $8,400 in 20X3.

D.​$4,200 in each of 20X1 and​ 20X2, and the remaining​ $12,600 in 20X3.

Please show working, thankyou

personal and corporate tax question

Answer 1

a) Preliminary expenses are those expenses that are incurred for the expansion or set up of a new business.

List of expenses considered as preliminary expenses are as under:

1) Preparation of project report etc

2) Legal charges to draft agreements for running a business

3) Legal charges to draft MOA & AOA

4) Printing charges for the above-mentioned documents.

5) Registration expenses for the new business.

etc..

b) For tax purpose preliminary expenses are claimed equally that is spread accrose a period of 5 years (1/5th of the expenses every year for 5 years)

Quantum of expenses is lower of the 2

1) Actual expenses incurred

or

2) 5% of the cost of capital borrowed

c) Based on the above analysis it can be said that expenses made by Widget Production Ltd. for expansion of the business can be considered as preliminary expenses.

d) Quantum of expenses:

Lowest of the two

1) Actual expenses = $ 21,000

or

2) 5% of capital borrowed = $ 750,000 * 5% = $ 37,500

Thus, preliminary expenses = $ 21,000

e) For tax purpose $ 4,200 (ie, $ 21,000/5 = $ 4,200) shall be claimed over the period of 5 years from 20X1 to 20X5.

Therefore, option B is the correct answer.