Fundamentals Of Taxation Question Paper

Fundamentals Of Taxation

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2008

KENYATTA UNIVERSITY
INSTITUTE OF OPEN LEARNING (IOL)
UNIVERSITY EXAMINATIONS 2007/2008
SPECIAL EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE

BAC 304:
FUNDAMENTALS OF TAXATION

DATE: Monday, 6th October, 2008
TIME: 8.00 a.m. – 10.00 a.m.
------------------------------------------------------------------------------------------------------------
• Answer ALL questions
• Marks allocated are shown at the end of each question.
Question One
The trial balance of Kitu and Watu, trading as partners and sharing profits in the ratio 2:3
as at 31/12/2007 is as follows:

Kshs

Kshs
Capital:
Kitu
3,600,000
Watu
5,221,000
Factory
Building
5,000,000
Factory equipment at cost

2,000,000
Furniture at cost

750,000
Director’s
car
at
cost
1,000,000
Provision for depreciation

710,000
Depreciation expenses

115,000
Debtors
and
prepayments
1,050,000
Stock
(3/12/2007)
1,042,000
Gross
profit
on
Trading 4,165,000
Rent and Rates

300,000
Office
salaries

826,000
Partners salaries

600,000
Advertising costs

210,000
Transport costs

236,000
Deposit on new equipment

100,000
Short term investment

600,000 ___________

14,549,000
14,549,000

========

==========
Additional Information
i)
Rent and rates for fifteen months to 31/3/2008.
ii)
The factory building has been revalued from Kshs 4m.
iii)
The partnership started operating on 1/1/2007.
iv) Partnership
salaries are taken equally.
v)
Interest on capital is to be provided at 10% on balance given
vi)
The Partners have contracted to purchase new equipment for the factory at a cost
of Kshs 500,000. A deposit of Kshs 100,000 was paid during December 2007 and
the remainder will be paid during January 2008 when delivery is expected.
Required:
a)
Taxable partnership profit for the year of income 2007.
(15 marks)
b)
Show the allocation between partners

(5 marks)

Question Two
You have been invited by a group of Bachelor of Commerce, Taxation students to discuss
the matters listed below:
Required:
In each of the cases provide explanatory notes and computations for use in your
discussions with students.
a)
A high school boy aged 15 years inherits Kshs 300,000 from his grandfather and
wins Kshs 100,000 in the National Lottery.

(4 marks)

2
b)
A retired civil servant on an annual pension of Kshs 240,000 per annum signed a
service contract with effect from 1/1/2007. The contract was for three years at an
annual salary of Kshs 440,000. The contract was terminated by the employer on
31/12/2007. The employee was paid compensation amounting to Kshs 560,000.

(6 marks)
c)
i)
A Manager who is on full time employment where he draws Kshs. 80,000
per month. He is housed by the employer in a rented house where rent
payable to the Landlord is Kshs 720,000 per annum.
(4 marks)

ii)
The Manager makes an annual contribution of Kshs 84,000 to a registered
pension
fund.

(3
marks)

iii)
The Manager is provided with a motor car whose purchase cost was Kshs.
2.2
m
and
is
1600
c.c
(3
marks)

(TOTAL :
20 marks)

Question Three
a)
State and explain Five canons of a good tax system

(10 marks)
b)
Discuss the term residency in the context of individuals

(5 marks)

(TOTAL:
15 marks)

Question Four
a)
Explain the meaning of the following terms and state their effects on taxable
income.
i)
Trading
receipts (2
marks)
ii)
Balancing
charge
(2
marks)
iii)
Trading
loss
(2
marks)
iv)
Balancing
deduction
(2
marks)
b)
John, a farmer constructed a farm house on 2/1/2006 for Kshs 6m and incurred
the following additional expenditure.

3
Kshs ‘000
2/1/06
Cattle
dip
1,000
30/6/06 Irrigation
system
1,500
30/9/06 Labour
quarters 2,400
30/10/06
Milking
machinery
1,120
John sold the farm on 2/1/2007 to his brother Peter who is also a farmer. Their
sale agreement contained the following particulars.

Kshs ‘000
Cattle
dip
1,200
Farmhouse
6,700
Irrigation
system
1,200

Milking machinery

980
Labour
quarters 2,800
Required:
Calculate the capital deductions due to John and Peter for the years 2006 and
2007.
(7
marks)

(TOTAL:
15 marks)

4

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