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Bac 304: Fundamentals Of Taxation Question Paper
Bac 304: Fundamentals Of Taxation
Course:Bachelor Of Commerce
Institution: Kenyatta University question papers
Exam Year:2009
DATE:
Friday 28th August 2009
TIME: 8.00am-10.00am
------------------------------------------------------------------------------------------------------------
INSTRUCTIONS:
• Answer all questions
• Show all your workings
• Make allocated are shown at the end of each question
Question One
a) From an income tax perspective on capital allowances, explain for each of the
items below whether it is capital or revenue expenditure.
i)
Giving the factory a fresh coat of paint
ii)
Replacing 200 tiles on a roof damaged by wind
iii)
Expenditure incurred in demolishing part of a wall to make room for a
recently purchased machine
iv)
Installing a system ventilation of the factory.
b)
The Maua Timber Limited commenced business on 1st January 2007. The
following fixed assets of the company which it acquired prior to the
commencement of the business here stated at their written down values as
at 1/1/2008.
Page 1 of 7
Kshs 000
Milking
machine
3,440
Forklifts
1,720
Tractors
7,800
Packaging
machine 3,500
Crushing
machine
3,680
Conveyor
and
sorter
6,240
Lorries
(2
tonnes)
2,400
Two
pick
ups
1,800
One
lorry
(4
tonnes)
2,400
Saloon
cars
780
Furniture and fittings
544
Land
20,000
The building in which the processing was to be carried out was constructed in 2006 but
was first used for manufacturing in 2008. The building cost kshs 13.6 M in 2006 and the
estimated value in January 2008 was kshs 11.4 M.
In the year 2008, the company bought the following assets.
Kshs
000
Toyota-Saloon
car
2,700
Lorry
(5
Tonnes)
5,200
Tractor
3,540
Land
6,240
Furniture
280
Pick
up 4,000
Computers
500
Computer
scanner
400
Printers
200
Milking
machine
5,550
Page 2 of 7
The following assets were disposed off in the year 2008
Kshs
000
Forklift 480
Saloon
car
920
Printer
50
Land
2,240
Packaging
machines
4,500
A tractor was damaged through a road accident during the year and the insurance
company paid kshs 3.2M as compensation.
Required
Capital Allowances for the company for the year 2008.
[10marks]
Total 15 marks
Question Two
a)
State and explain any four deductions that may be available against or profit from
employment.
[4marks]
b)
Mr. James Ali Kiba is a citizen of Tanzania. He received two job offers in Kenya
for which he has sought your advice. Both offers require him to commence
work on 1/1/2009.
Offer
X
Mr. Ali Kiba would be employed as a public relations officer with Kenya
Airways, a regional airline with its headquarters in Nairobi, Kenya. The offer
provides for the followings:-
i)
A basic salary of Ksh, 130,000 per month to be increased by 10% semi
annually.
ii)
A monthly bonus of 5% of the basic pay to be received on the ninth day of
the month following that to which the pay relates.
iii)
A fuel allowance of kshs 10 per kilometer. He estimates to cover 10,000
kms per annum three quarters of which will be on official duties.
Page 3 of 7
iv)
Access to loan facilities from the employer to a maximum of kshs 5M per
annum. He plans to obtain a loan of two Million at 5% interest rate per
annum on 1/8/2009. Assume a prescribed interest rate of 12% per annum.
v)
The company will provide him with free return air tickets worth ksh 8000
on 30th June and 31st December each year to enable him visit his family in
Tanzania.
vi)
Entrance fees of Kshs 3,000 to join public relations society of Kenya
would be paid for him by the company. He will however personally pay
the subscription to the society amounting to kshs 1,200 per month
commencing of 1/2/2009.
vii)
He will be provided with free mobile phone airtime worth ksh 5000 per
month commencing on 1/2/2009. This will be utilized on official calls.
viii) The company will provide him with a house whose market rental value is
kshs 18,000 per month. The company will deduct kshs 3,000 from his pay
in respect of the house each month. The company will furnish the house
fully at a cost of kshs 800,000. In addition the company will provide a
night watchman and a house servant each of which will be earning kshs
2000 per month.
Offer B
Mr. Ali Kiba would be employed as a Human Resources Manager with Chake
Ltd, a private limited company. The offer provides for:-
i)
A basic salary of kshs 150,000 per month and an allowance of sh 2000 per
month for attending board meetings.
ii)
An annual allowance of kshs 220,000 for purchase of office attire in the
line with his new status
iii)
A provision of sending managers to their Uganda office on a month job
rotation exists Mr. Ali Kiba will be sent to Uganda in November and will
receive his monthly pay there though he will attend board meetings in
Nairobi
iv)
A Mercedes Benz saloon car costing 1.8 M (3000cc)
Page 4 of 7
v)
A night watchman (at a month salary of kshs 2000). The company will
settle his water and electricity bills.
Required
Evaluate the tax impact of each job offer and advise Mr. Ali Kiba on which one
he should accept. Assume the rates of tax and the prescribed rates remain the
same as they were for year of income ended 31/12/2008.
[16marks]
Total 20marks
Question Three
a)
Explain why the benefit theory is highly inapplicable in the development
of
a
good
tax
system.
[6marks]
b)
Define excess burden of taxation and clearly outline the factors that
influence the excess burden of a commodity tax.
[5marks]
c)
Highlight the circumstances under which commission of Domestic Taxes
may accept a late notice of objection.
[4marks]
d)
Explain five grounds under which a tax payer has the right to appeal to the
local
committee.
[5marks]
Total 20 marks
Question Four
Carol and Anne have been operating a Jewellary retail business in Nairobi’s
Biashara Street sharing profits and losses equally. They have not maintained
proper records of their transactions. They have engaged you at an agreed fee of
ksh 50,000 to prepare their books and make their annual tax returns. You
establish that the partners earn salaries annually and also charge 10% interest per
annum on their drawings.
They provide you with the following details.
i)
Assets and Liabilities as at 31st December
2007
2008
Kshs
Kshs
Stock
in
Trade
860,000 1,680,000
Page 5 of 7
Creditors
740,000
890,000
Prepaid rent
30,000
42,000
Accrued electricity bills
21,000
16,000
Balance at bank
230,000
165,000
Accrued Salaries
520,000
480,000
ii)
The partners bank all cash collections after deducting the monthly expenses
shown below:
Kshs
Cash
drawings:
Carol
15,000
Anne
10,000
Casual
labour
12,000
Purchase for goods for resale
18,000
Petrol for motor vehicle
8000
iii)
Payment made through the bank during the year ended 31/12/2008 have been
summarized as follows:
Kshs
General
expenses
30,000
Motor vehicle running expenses
16,000
Purchase of goods for resale
1,515,000
Rent
504,000
Electricity
139,000
Salaries
4,800,000
Purchase of motor vehicle
3,000,000
Casual labour
514,000
Cost
of
meals
to
employees
123,000
iv)
On average the parties sold all goods at a gross profit margin of 331/3 %.
During the year Carol and Anne had taken Jewelry at cost price worth ksh
250,000 and kshs 100,000 respectively
v)
The partners estimate the use motor vehicles to be 40% for private purposes.
Page 6 of 7
vi)
On 1/10/2008, the partners admitted Grace as a new partner. She paid kshs 4 M
as her capital contribution. The new profit sharing ratio was agreed at 2:2:1
(Carol, Anne and Grace respectively)
vii)
A half of the salaries relate to the partners. Out of these Grace received kshs
268,000 being her salary dues to 31/12/2008.
viii) Assume that income and expenses accrue evenly throughout the year.
Required:
Compute the taxable income of the partnership for the year ending 31/12/2008 and
show
the
allocation
to
partners.
[15marks]
Page 7 of 7
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