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
SECOND SEMESTER EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE

BAC 304: FUNDAMENTALS OF TAXATION

DATE: Friday 20th June 2008 TIME: 2.00pm – 4.00pm

INSTRUCTIONS:
? Answer ALL questions
? Marks allocated are shown at the end of each question
Question One
Kioko and Mwanzia trade in partnership sharing profits and losses in the ratio of 3:2
respectively. The following is the partnership profit and loss account for the year ended
31/12/2007.
Profit and Loss Account

Kshs.

Kshs.
Interest on capital:

Gross profit from trading
380,000
Kioko

20,000
Net dividends received
17,000
Mwanzia

10,000
Subletting rental income
6,000
Goodwill written off
4,000
Bad debts (1)

20,000
Professional expenses (2)
20,000
Motor vehicle expenses
30,000

Depreciation

60,000
Special expenses (3)
8,000
Withholding tax on dividends 3,000
Partnership salaries:

Mwanzia

60,000
Loss on sale of insterst (4)
10,000
Repairs and renewals (5)
6,000
Salaries and wages
100,000
Utilities (light, water)
20,000
Net profit

32,000
_______
403,000

403,000

1

Notes:
(1)

Bad Debts Account

Kshs.

Kshs.

Write offs
10,000
Balance b/f:
Balance c/d:

General

60,000
General
80,000

Specific

30,000
Specific
22,000

Recovered

2,000

_______

Profit and loss
20,000

112,000
112,000

(2)
Professional Expenses:

Kshs.

Audit fee

10,000

Partners insurance

2,000

Legal fees for debt collector
500

Partnership deed

7,500

20,000

(3)
Special Expenses:

Kshs.

Penalty for breach of VAT regulations
4,000

Rediadancy pay to an employee

3,000

Christmas gifts to the partners spouses
1,000

8,000

(4)
Loss on Sale of Investment:
The shares in a quoted company were sold during the year. They had cost
Kshs.60,000 and they fetched Kshs.50,000. there were no incidental expenses.

(5)
Repairs and Renewals:

Kshs.

Office partitions

2,000

Office carpet

1,500

Replacement of adding machine

1,000

General repairs

1,500
6,000

(6)
Wear and tear allowances schedule:

Class III

Class IV

Kshs.

Kshs.

Written down value 90,000

56,000

2

(7)
One third of motor vehicle expenses is used on private motoring by partners.

Required:
(a)
Calculate the adjusted taxable profit (loss) for the partnership business.

[15 marks]
(b)
Show the distribution schedule.

[5 marks]

[Total: 20 marks]

Question Two
Mr. Kiprop is a company secretary with Jua Kali Ltd., a local company and was resident
in Kenya for the whole of 2007. The following extracts relate to information about his
income and related benefits for year 2007.
(i)
Basic salary from Jua Kali Ltd. was at the date Kshs.50,000 per month upto 30th
June 2007. It was raised to Kshs.56,000 with effect from 1st July 2007.
(ii)
The company made the following payment to him per month:
? Home to office car allowance – Kshs.3,000
? House allowance of Kshs.10,000 (upto 30th June 2007)
? Kshs.2,000 for making sales check trips.

(iii)
On 1st July 2007, he moved to a company house and paid a nominal rent of 5% of
basic pay. The company as from that date, provided him with a gardener,
watchman and a maid. In addition his house was linked to Securex Kenya Ltd in
24 hour security alarm system. The company incurred the following expenditure
in respect to these benefits in 2007.

Actual Amount

Kshs.

Salaries per annum:

Gardener

42,000

Watchman

43,000

Maid

24,000

Securex Kenya Ltd
48,000

3

(iv)
He rented his house to a tenant from 1st July for Kshs.20,000 per month. The
house was fully furnished when he rented it to the tenant. Furniture worth
Kshs.200,000 was acquired for this purpose. Other expenditure on the house
include repairs of Kshs.10,000 and mortgage interest. He had a mortgage of
Kshs.1,000,000 with H.F.C.K. Mortgage repayments were Kshs.20,000 per
month and interest rate was 20% p.a. due to some cash flow problem he had only
paid 9 installments in the year.
(v)
Dividend income (net) was Kshs.9000 from Jua Kali Ltd. he holds 40% of the
share capital.
(vi)
Mr. Kiprop is a lawyer by profession and during their spare time they practice law
with his wife, Mrs. Kiprop also a lawyer. Due to unforeseen circumstances, they
made a taxable loss of Kshs.300,000 in 2007.
(vii) Mrs Kiprop works for Jua Kali Ltd as personnel manager. Her basic salary was
Kshs.30,000 per month. In the year, she also received Kshs.20,000 as a
productivity bonus from the company. She obtained a loan of Kshs.400,000 from
the company repayable over 5 years at 10% p.a. She immediately on 21st January
2007, when she received the money invested it as follows:

Kshs.100,000 in 15% Kenya government stock

Kshs.100,000 in 12% post of Savings Bank Account

Kshs.200,000 in 20% Golden Premium account with KCB

She also received a Kshs.4,500 net dividend from Dress Making Limited.
(viii) Mr. Kiprop was in the company’s life insurance scheme into which the
company paid Kshs.5,000 p.a. Mrs Kiprop’s life cover was of her own and she
paid Kshs.6,000 p.a.
(ix)
On 1st December, after some serious disagreement, Mr and Mrs Kiprop were
permanently separated by the court. Mrs. Kiprop received custody of their child
Kirui and an alimony of Kshs.20,000 per month. The legal practice was to
continue on an equal sharing basis.
(x)
PAYE paid at source was Mr. Kiprop, Kshs.72,000 and Mrs. Kiprop; Kshs.60,000
respectively.
Required:
Mr and Mrs. Kiprop’s tax liability for 2007, commenting on the effects of their
separation.

[20 marks]

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