Fundamentals Of Taxation Question Paper

Fundamentals Of Taxation

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2008

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2007/2008
INSTITUTE OF OPEN LEARNING
EXAMINATION FOR THE DEGREE OF BACHELOR OF EDUCATION,
BACHELOR OF ARTS AND BACHELOR OF COMMERCE

BAC 304: FUNDAMENTALS OF TAXATION
DATE: Friday 14th March 2008
TIME: 1.00pm – 3.00pm
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INSTRUCTIONS:
ANSWER ALL QUESTIONS

1.
Write brief notes on the following:

(i)
Tax equity

[7 marks]

(ii)
Tax incidence

[2 marks]

(iii)
Tax neutrality

[3 marks]

(iv)
Progressive taxation

[3 marks]

(v)
Digressive taxation

[3 marks]

(vi)
Direct taxation

[2 marks]

2.
A, B and C trade as partners in Githurai Wholesalers. They share profits and
losses equally. For the year ended December 31 2007, the following details have
been provided:

1

Debits (Shs) Credits (Shs)
Office expenses

816,000
Gross profit
5,200,000
General expenses

376,000
Interest earned
480,000
Salaries and wages

1,120,000
Discount received
320,000
Showroom expenses

468,000
Other receipts
600,000
Rent, rates & taxes

600,000
Rent income
528,000
Printing and stationery

256,000
Capital gain on shares 400,000
Installment tax paid

180,000
Advertising expenses

292,000
Legal fee

328,000
Interest on capital

840,000
Depreciation expense

368,000
Bad debts expense

272,000
Commission to partners

320,000
Donations

400,000
Property taxes

48,000
Electricity expenses

184,000
General reserve

240,000

Additional Information:
(a)
Closing stock had been understated by Shs.60,000 as at 31st December 2007.
(b)
A was paid Shs.200,000 as salary (included in salaries and wages) and PAYE of
Shs.62,000 was paid on it.
(c)
The firm was fined Shs.60,000 for breach of regulations by the Income Tax
department. This amount is included in the legal charges.
(d)
Interest on capital was:
A. Shs.320,000
B. Shs.240,000
C. Shs.280,000
(e)
Commission to partners: A. Shs.180,000
C. Shs.140,000

2
(f)
Capital allowances had been agreed on at Shs.3,600,000 with the tax authorities.

Required:
(i)
Net income (loss) from the partnership business.

[9 marks]
(ii)
Tax payable by each partner.

[11 marks]

Applicable tax rates are:

On the first
Shs.121,968
10%

On the next Shs.114,912
15%

On the next Shs.114,912
20%

On the next Shs.114,912
25%
On all income eve
Shs.466,704
30%

3.
Mr. Kiarie owns a coffee processing in Muranga. The following particulars
relates to the assets of the factory in 2007.
(i)
Purchased a new building from a builder at a cost of Shs.4 million.
Administration offices included in the building had an estimated cost of
Shs.500,000.
(ii)
Purchased 4 micro computers at a total cost of Shs.800,000.
(iii)
Other assets of the factory were as follows:

Written Down Value
Addition
Disposals
1.1.07 (Shs.)

(Shs.)
(Shs.)
Office furniture
6,600,000

3,800,000
1,400,000
Computers

400,000

-

160,000
Tractors
24,000,000

-

5,000,000
Lorries

5,000,000

6,000,000
1,000,000
Processing machines 9,600,000

4,800,000
3,600,000
Saloon cars

6,400,000

8,000,000
400,000
Buildings
10,000,000

-
-
Land
15,000,000

400,000
8,000,000

3
(iv)
The old buildings were inherited from Mr. Kiarie’s father in January 2003
when new and were valued at Shs.100,000,000.
(v)
A farmhouse was constructed in 2007 at a cost of Shs.1,200,000. A cattle
dip and milking machinery costing Shs.240,000 and 440,000 respectively
were constructed and purchased in 2007.
(vi)
The saloon cars disposed in June 2007 were purchased in 2005 at a cost of
Shs.500,000. another saloon was purchased during 2007.
(vii) Goodwill and patents carried forward from 2005 were valued at Shs.2.8
million as at December 31 2007.
Required:
Capital deductions from Mr. Kiarie for the year of income 2007. [20 marks]

4.
(a)
What is tax shifting?

[4 marks]

(b)
Explain the reasons for tax shifting.

[6 marks]

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4

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