QUESTION ONE
(a)
Briefly explain the rationale behind the “benefit theory” of taxation.
( 4 marks)
(b)
What problems are experienced in attempting to achieve justice in taxation?
Support your answer with the four main theories which explain why it is
difficult to exercise justice in taxation.
(12 marks)
(c)
Giving appropriate examples, differentiate between customs duty and excise
duty. ( 4 marks)
(Total: 20 marks)
QUESTION TWO
Andrew Ndwiga practices mixed farming and closes his books on 31 December every
year. He has provided the following income and expenses summary for the year
ended 31 December 2005:
Income:
Sale of milk to Maziwa Dairies
Sale of vegetables
Sale of broilers to Chicken World Ltd.
Sale of sheep and heifers
Sale of firewood
Total income
Sh.
547,500
365,000
2,575,000
380,000
165,000
4,032,500
Expenses:
Fertilizers
Pesticides
Seeds
Planting of tea seedlings
Motor vehicle expenses (Pick-up)
Insurance for farm works
Agricultural shows for employees
Salaries and wages for employees
Vaccines for livestock
Electricity and water
Purchase of chicks
Animal feeds
90,000
55,000
36,000
111,000
180,000
69,000
133,000
420,000
88,000
66,000
585,000
675,000
Wood shavings and saw dust (for poultry)
Construction of water storage tank
Construction of chicken sheds
Loan repayment – Wakulima Farmers SACCO
Ltd.
Interest on loan – Wakulima Farmers SACCO
Ltd.
Repairs on dairy sheds and fences
Subscriptions to Starehe sports Club
Value of goats killed by a leopard
Wages for Ndwiga’s housegirl
Ndwiga’s personal accident insurance cover
Bad debt written off – Shambani Stores Ltd. (in
receivership)
School fees for Mr. Ndwiga’s children
Depreciation – motor vehicles
Total expenses
Net loss
24,000
235,000
900,000
312,000
106,800
156,000
60,000
110,000
33,600
23,000
77,500
300,000
85,500
4,931,400
(898,900)
Additional information:
1.
Insurance for farm works includes cover for Ndwiga’s household items
amounting to sh.19,000.
2.
Mr. Ndwiga received sh.25,000 dividend, net of withholding tax from Majani
Ltd.
3.
Farm produce consumed by Mr. Ndwiga’s family was valued at Sh.265,000.
4.
Mr. Ndwiga received Sh.135,000 from the local farmers’ co-operative society as
consultancy fees. The farmers’ co-operative society uses his farm as a
demonstration farm for training other farmers.
5.
Salaries and wages include sh.100,000 paid to Ndwiga’s wife.
6.
Capital allowances for the year ended 31 December 2005 have been agreed
with the Commissioner of Income Tax at Sh.196,400.
Required:
(a)
(b)
Mr. Ndwiga’s taxable income for the year ended 31 December 2005.
(16 marks)
Tax payable on taxable income computed in (a) above.
( 4 marks)
(Total: 20 marks)
QUESTION THREE
(a)
Explain the basic principles followed in the taxation of the income of
cooperative societies.
( 4 marks)
(b) With reference to the provisions of the VAT Act, write brief notes on the
following:
(i)
Bad debt relief.
marks)
(ii)
Deregistration of taxable persons
( 2 marks)
(iii) Goods in stock
marks)
(c)
(
2
(
2
The following information relates to the transactions of Communication
Solutions Ltd. for the month of September 2005. The company is registered
for VAT.
2 September
2 September
5 September
9 September
10 September
12 September
16 September
20 September
25 September
30 September
Purchased goods worth sh.2,400,000 from Japan. Customs
duty was paid at 5%.
Sold goods to Mobile Connections Ltd. for Sh.960,000 on
credit. Goods worth sh.60,000 were found to be defective and
were returned.
Purchased office furniture for Sh.640,000. One desk worth
sh.80,000 was defective and was retuned to the seller.
Purchased office furniture for Sh.4,500,000 on credit from a
manufacturing company. Goods worth sh.500,000 were
damaged in transit and were thus not saleable. It cost the
company sh.240,000 to transport the goods.
Sold goods for cash worth Sh.960,000
Exported goods worth sh.2,400,000
Imported goods worth sh.1,500,000 from India. Customs duty
was paid at 5%
Sold goods worth sh.218,000 to XYZ Ltd.
Exported goods worth Sh.2,600,000 to Kimbo ltd.
Paid the following expenses for the month of September:
Sales and wages – Sh.1,400,000
Electricity
- Sh.48,000
Telephone
- Sh.36,000
Water
- Sh.10,000
Note: Where applicable, prices are quoted inclusive of VAT.
Required:
The VAT payable (or refundable) for the month of September 2005.
(10 marks)
(Total: 20 marks)
QUESTION FOUR
(a)
Using two examples in each case, differentiate between allowable and nonallowable expenses under the Income Tax Act.
( 4 marks)
(b)
The directors of PQR Limited have presented you with the following profit
and loss account for the year ended 31 December 2005:
Sh.
Gross profit
Less: Operating expenses
Salaries and wages
Reserves for contingencies
Hire purchase interest
Laundry expenses
Legal and professional fees
Depreciation
Dividends paid
Repairs and maintenance
Insurance premiums
VAT paid
Bad and doubtful debts
Advertising
Bank charges
Water and electricity
Rent and rates
Subscriptions and donations
Telephone and postage
8,000,000
1,580,000
413,000
434,000
400,000
2,450,000
1,600,000
872,000
320,000
168,000
228,000
1,200,000
170,000
1,200,000
3,020,000
371,000
1,204,000
Sh.
29,826,000
Sundry expenses
Motor vehicle running expenses
Net profit
600,000
2,300,000
26,530,000
3,296,000
Additional information:
1.
Salaries and wages include Sh.66,000 paid to the Income Tax Department as
penalties and interest on delayed submission of PAYE deductions.
2.
Hire purchase interest relates to loans obtained to purchase a delivery van
sh.146,000 and the Chairman’s personal car Sh.267,000.
3.
The company directors and senior managers are given free laundry services at
the company’s laundry. The cost of cleaning their personal clothing for the
year ended 31 December 2005 was sh.133,000.
4.
Legal and professional expenses include sh.146,000 incurred while defending
the Managing Director in a private suit against him.
5.
Repairs and maintenance include the cost of acquiring a second hand laundry
machine for sh.167,000.
6.
Bad and doubtful debts are made up of a 10% general provision against the
debtors balance as at 31 December 2005 and a full provision of Sh.93,000
owed by Orient Finance Ltd. that has been placed under receivership. The
debtors balance as at 31 December 2005 was Sh.1,350,000.
7.
Subscriptions and donations comprise:
Sh.
Subscription to Rhino golf Club for the Managing Director 260,000
Subscription to the Chamber of Manufacturing and Commerce
63,500
Donation of books to the Watoto School for the Handicapped
35,000
Annual subscription for Finance Manager paid to the Institute of
Certified Public Accountants of Kenya
12,500
8.
Sundry expenses include sh.263,000 paid to Health Africa for the Managing
Director’s medical cover. He is the only one in the company covered by the
medical scheme.
9.
Wear and tear allowances for the year ended 31 December 2005 have been
agreed at Sh.4,320,000.
Required:
(i)
PQR Ltd.’s adjusted profit (or loss) for tax purposes for the year ended 31
December 2005.
(14
marks)
(ii)
Corporation tax (if any) payable by PQR Ltd. for the year ended 31 December
2005.
( 2 marks)
(Total: 20
marks)
QUESTION FIVE
On 1 January 2003, Patel Manufacturers Limited commenced business at Eldoret
Municipality with the following assets:
Goodwill
Land
Buildings (industrial)
Plant fixed to the buildings
Heavy duty fork lifts
Three transit goods prime movers
Mitsubishi Pajero vehicle for use by the
Sh.
600,000
24,000,000
51,000,000
7,200,000
4,950,000
5,910,000
3,960,000
Managing Director
Peugeot 504 pick-up
Security wall
Workers quarters
Boilers
Furniture and fittings
Milling machines
1,750,000
1,200,000
18,000,000
6,000,000
3,600,000
37,500,000
Additional information:
1.
The following assets were acquired in the year ended 31 December 2004:
V W Passat car for the Finance Manager
Toyota Hilux Pick-up
One tractor
Executive desks for departmental heads
2.
Sh.
2,200,000
2,300,000
3,200,000
900,000
In the year ended 31 December 2004, the following assets were sold:
One fork lift
One transit goods prime mover
Furniture
Milling machines
Sales
proceeds
(Sh.)
1,200,000
1,500,000
600,000
8,000,000
3.
In the year ended 31 December 2005, the following assets were acquired or
constructed:
Land
Buildings extensions
Additional conveyor fixed to the building
Staff bus
Drilled borehole
Computers
Sh.
6,000,000
12,000,000
1,000,000
5,500,000
1,900,000
3,600,000
Required:
Capital allowances for the years ended 31 December 2003, 2004 and 2005.
(20 marks)