Question

Question 3

Blue Star Company Ltd carries on business in Hong Kong as a textile manufacturer and prepares accounts to 31 December. As at 31 December 2016, the company owned a factory building in Shatin which it purchased from the developer in October 2016. The company carried on its manufacturing business in the lower floor and leased the upper floor to a drug manufacturer which used it to house a laboratory for scientific research and product testing.

Details of the costs incurred by the developer of the building are as follows:    

            Cost of land                                                                            $1,500,000

            Payment made to existing tenants                                               600,000

            Construction costs                                                                      900,000

                                                                                                            3,000,000

The company paid the developer a price of $4,000,000 for the factory.

In September 2017, the roof of the factory was damaged by a typhoon. The company replaced the original tiled roof with a roof made of cement at a cost of $450,000.

In October 2017, the company spent $300,000 to construct an extension to the factory.

In November 2017, the company bought another factory in Tuen Mun at a price of $2,750,000 (including the land value of $1,500,000). The factory was originally constructed by the vendor for its own use at a cost of $900,000 but due to a change in the company's policy, it had not been put into use and was sold to the company at a fair market price. The factory was immediately put into use.

Required:

Compute the depreciation allowances for Blue Star Company Ltd for all relevant years of assessment. Give explanations where necessary.

Answer 1

Cost of Factory building
Particulars	$	$	Date put into use	Remarks
Purchase consideration		4,000,000
Cost incurred by the developer
Cost of land	1,500,000
Payment to existing tenants	600,000
Construction costs	900,000
Total	3,000,000
Cost of land to be excluded		1,500,000		Not a qualifying expense as per Chapter 15
Payments to existing tenants		600,000		Not a qualifying expense as per Chapter 15
Cost of factory building		1,900,000	31/12/2016
Replacement cost of roof		450,000	30/09/2017	Permanent in nature
Extension costs		300,000	30/10/2017	Permanent in nature
Cost of Factory building		2,650,000
Initial allowance @ 20%		530,000		Depreciation allowance
Cost of Factory building
Particulars	$	$	Date put into use	Remarks
Purchase consideration of Factory		2,750,000
Cost incurred by the developer
Cost of land	1,500,000
Construction costs	900,000
Total	2,400,000
Cost of land to be excluded		1,500,000	30/11/2017	Not a qualifying expense as per Chapter 15
Cost of factory building		1,250,000
Net price paid towards cost of construction		785,455		9,00,000*24,00,000/2750,000
Depreciation value - Lower of 1,250,000 or 785,455		785,455		Lower of consideration or net price paid for the interests in construction costs
Initial allowance @ 20%		157,091