business-reporting-july-2010-exam-paper

Notes 000 000 profit before taxation per the accounts

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Notes £’000 £’000 Profit before taxation per the accounts 802 Add back tax disallowable expenses: Impairment charge on goodwill 1 700 Foreign exchange losses 2 150 Software support charges 3 50 Legal fees in respect of sale of Prospect House 5 35 Depreciation and other disallowable expenses 75 1,010 1,812 Less items not taxed as trading income: Profit on sale of Prospect House 5 585 Dividend from Spaceway 55 Tax repayment (£230,000 – £23,000) 4 207 (847) Adjusted trading profit 965 Less: Capital allowances on plant and machinery 52 4% writing down allowance on goodwill 1 72 (124) Taxable trading profit 841 Add: Chargeable gain – Prospect House 5 1,300 Total taxable profits 2,141 Corporation tax at 28% 599 Notes 1. Impairment charge on goodwill On 1 January 2010 Pepper Art acquired an unincorporated on-line computer game business called ‘GamzOn’. The business cost £2 million which included £1.8 million for goodwill. On 1 March 2010 a competitor launched a similar business which has proved very successful and this has had an adverse effect on the current year and projected future profits of ‘GamzOn’. Therefore the Pepper Art board has reduced the carrying amount of goodwill in respect of ‘GamzOn’ to £1.1 million and recognised an impairment charge of £700,000. I have disallowed this charge and taken instead a 4% writing down allowance. 2. Foreign exchange losses Pepper Art has suffered foreign exchange losses on settled trading transactions totalling £150,000. I was not sure what to do with this item and therefore I have added back this expense. 3. Software support charges In January 2010 the computer network crashed and the managing director asked a friend who has a software support business to assist us in restoring the system. The friend asked for £50,000 for the work but would not supply an invoice. Pepper Art paid him in full but the
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© The Institute of Chartered Accountants in England and Wales 2010 8 of 16 managing director thought it would not be correct to claim tax relief on this item. Therefore I have disallowed this in the adjustment to profit calculation. 4. Tax repayment Pepper Art received a corporation tax repayment of £230,000. I have checked through the correspondence you sent to us last year and we were expecting a refund of only £23,000. This is obviously great for the company’s cash flow. The managing director has told me that we should keep quiet about this overpayment as it is HMRC’s fault for being so inefficient. The excess part of the repayment has been credited to other operating income in the financial statements. 5. Sale of Prospect House Pepper Art bought Prospect House for £500,000 in January 2000. The building was revalued on 1 July 2009 to £750,000. It was used exclusively by the Pepper Art games development team until 1 October 2009. A developer bought the building for £1.3 million net of legal expenses on 1 October 2009 and we moved the development team into other premises owned by Spaceway.
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