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Taxation Question Paper

Taxation

Course:Accf 431

Institution: Kenya Methodist University question papers

Exam Year:2008

KENYA METHODIST UNIVERSITY

END OF FIRST TRIMESTER 2008 EXAMINATION

FACULTY : BUSINESS AND MANAGEMENT STUDIES
DEPARTMENT : BUSINESS ADMINISTRATION
COURSE CODE : ACCF 431
COURSE TITLE : TAXATION
TIME : 3 HOURS

INSTRUCTIONS
• Answer Question One And Any Other Three Questions

Question 1
(a) Highlight Five non-taxable benefits accruing from employment (5 marks)
(b) Otieno is a tax manager with Otieno and Otieno Associates, a firm of Certified Public Accountants (CPAs).During the year of income ended 31 December 2006, he reported the following:
(i). Basic salary per month Sh.75,000 (PAYE Sh.14,000 per month).

(ii). He is provided with a motor vehicle of 2000cc by the employer. As at 1 January 2006, the motor vehicle was valued at Sh.400,000 after deducting accumulated depreciation of Sh.150,000.

(iii). He was housed by the employer in a fully furnished house (cost of furniture,Sh.180,000) until 30 September 2006. During this period, he contributed 10% of his basic pay as rent.

(iv) On 30 September 2006, he obtained a mortgage from Akiba Building society Ltd of Sh.4,000,000 at an interest rate of 18% per annum. He moved to his own residential house with effect from 1st October 2006.

(v). The employer paid his life assurance premiums amounting to Sh.100,000 during the year.
(vi) He is a member of a registered retirement benefits scheme to which he contributed Sh.25,000 per month while the employer contributed an equal amount.

(vii) During his free time, he provided free tax advice to his friends. These services were valued at sh.100,000.

(viii) His wife owns residential property. During the year, she reported the following:
Gross rental income Sh.400,000 per annum
Repair and renovation costs before letting Sh.80,000.
Municipal council rates Sh.8,000 per annum.
Insurance for the property Sh.12,000 per annum.
Construction of a fire exit as per Municipal Council regulations sh.30,000.
Required:
(a)Total taxable income for Mr. Otieno for the year ended 31 December 2006.
(b)Tax liability for Mr. Alex Makokha (20 marks)

Question 2
(a) Explain the role of the Kenya Revenue authority (KRA) to the economy (10 marks)

(b) Mr. Waititu owns a flour-milling factory located in Webuye town. The factory commenced operations on 1 January 2003. The written down values of the factory assets as at 1 January 2006 were as follows:
Sh.
Coffee milling machinery 4,400,000
2 lorries (each 3 tonnes) 800,000
Tractors 1,500,000
Factory building 3,400,000
3 saloon cars 1,800,000

Computers 600,000
Furniture 360,000
Fax machine 60,000
Electronic typewriters 40,000

Additional information for the year ended 31 December 2006:
1. Mr. Waititu constructed a dam and a factory extension for Sh.900,000 and sh.4800,000 respectively. Included in factory extension costs were offices constructed at a cost of Sh.1200, 000.
2. New milling machinery costing Sh.700, 000 were installed in the factory extension.
3. In April 2006, all assets qualifying for wear and tear deduction under class II were stolen. The insurance compensation amounting to Sh.800, 000 was received in September 2006.
4. He cleared all the old coffee trees at a cost of Sh.300,000. These were disposed off as firewood to a local school for Sh.100,000.
5. He constructed a farm house and labour quarters at a cost of Sh.630,000 and Sh.480,000 respectively.
6. His other income during the year comprised:
Sh.
• Rental income 600,000
• Dividends from shares 120,000 (net)
Required:
(i) Compute the capital allowances due to Mr. Waititu for the year ended 31 December 2006.
(10 marks)
(ii) Determine the taxable income of Mr. Waititu for the year ended 31 December 2006. (5 marks)

Question 3
(a) Briefly explain the following terms
(i) Degressive rate of taxation (2 marks)
(ii) Progressive rate of taxation (2 marks)
(iii) Regressive rate of taxation (2 marks)
(iv) Proportional rate of taxation (2 marks)
(b)The following profit and loss account was prepared by the management of Mwea Ltd. For the year ended 31 December 2006.
Sh. Sh.
Purchases 1,800,000 Sales 2,544,000
Salaries and wages 700,000 Interest on bank deposits 240,000
Rent and rates 190,000 Discounts received 120,000
Foreign exchange losses 75,000 Profit on disposal of assets 96,000
Lease amortisation 64,000 Decrease in provisions for doubtful debts 114,000
Balancing deduction 24,000 Miscellaneous receipts 156,000
General provisions 16,000
Audit fees 72,000
Repairs 56,000
Legal fees 94,000
Donations to a political party 26,000
Medical expenses 25,000
Purchase of office furniture 36,000
Net profit 92,000
3270,000 3,270,000

Additional information:
1. Legal fees include the following:
Sh.

• Debt collection 16,000
• Acquisition of a trade mark 25,000
• Renewal of lease for 99 years 21,000
• Breach of contract 18,000
• Fines and penalties 14,000
94,000
2. Audit fees include tax consultancy fees of Sh.12,000.

Required:
(i)The company’s adjusted taxable profit or loss for the year ended 31 December 2006.
(ii)Tax payable (if any) by the company. (17 marks)

Question 4
(a) Explain four categories of employees in respect to housing benefit and state how they are taxed (10 mark)
(b)Write short notes on the following:
(i) Industrial building deductions. (3 marks)
(ii) Instalment tax. (3 marks)
(iii) Amended assessment. (3 marks)
(iv) Additional assessments. (3 marks)
(v)Self assessment. (3 marks)

Question 5
(a) The level of tax evasion is still very high despite the aggressive campaign KRA has been undertaking. Explain the measures that may be put in place to enhance tax compliance amongst the taxpayers (15 marks)

(b) Recently, Kenya Revenue Authority (KRA) gave taxpayers Tax Amnesty. Explain the meaning of term ‘tax amnesty’ and highlight the benefits that accrued to both the taxpayer and the tax Authority (10 marks)

Question 6
(a) Highlight four reasons why government levies taxes on resident persons (4 marks)

(b) Outline the circumstances under which the Commissioner of Domestic Taxes may refund input VAT. (4 marks)

(c) The following information was extracted from the books of Upendo traders for the month of September 2006:

Entries in the company’s cash book for the month appeared as follows:
Cash book

Sh. Sh.
1 September: Balance brought forward 80,000 2 September: Purchases 200,000
5 September: Sales (standard) 420,00 7 September: Electricity bill 18,000
8 September: Sales (Zero rated) 90,000 9 September: Motor vehicle repairs 16,000
11 September: Sales (export) 170,000 18 September: Purchase of furniture 45,000
26 September: Bank account (contra) 100,000 20 September: Salaries and wages 136,000
28 September: Insurance 14,000
30 September: Catering services 30,000
30 September: Balance carried down 401,000

860,000 860,000

Additional information:
1. Opening stock as at 1 September was valued at Sh.240,000.
2. Sales on credit amounted to Sh.300, 000 at the standard VAT rate of 16%.One of the debtors who owed Sh.80, 000 was declared bankrupt on 1 October 2006.
3. Credit notes amounting to Sh.30, 000 were sent to customers. These related to goods sold at the standard rate.
4. The company returned goods worth Sh.24,000 to suppliers

Required:
Prepare the VAT account for the month of September 2006. The amounts are stated as inclusive of VAT where appropriate at 16% (17 marks)

Taxation Question Paper

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