Taxation: questions

KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATION BOARD
TAXATION 1
MONDAY: 12 JUNE 1995 TIME ALLOWED :3 HOURS
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Answer ALL questions. Marks allocated to each questions are shown at the end of the question. Show ALL your workings. Any assumptions made must be stated.
QUESTION ONE
(a)(i)Distinguish between a direct and indirect tax. ( 4 marks)
(ii)Is Value Added Tax (VAT) a direct or indirect tax? Explain ( 2 marks)
(b)What are the rules governing the payment of VAT? Specify the additional tax that may arise from failure to comply with those rules. ( 6 marks)
(c)(i)Mr. Mali Mingi is a hardware merchant. He purchases cement from Athi Cement Ltd. which
he then sells to his customers. Both Mali Mingi and Athi Cement Ltd. require a profit margin of 20% on cost. Cement attracts 18% VAT. If the cost of production by Athi Cement Ltd. is Sh.220 per bag of 50Kg. At what price should Mali Mingi sell a bag of cement including VAT? ( 5 marks)
(ii)What VAT is payable to the Collector of VAT by Mr. Mali Mingi per 50 Kilogramme bag?(3 marks)
(Total: 20 marks)
QUESTION TWO
(a)Many farmers in the rural areas are unaware of the benefits accorded to them in form of capital allowances under the Income Tax Act. Write a brief summary on capital allowances which may be available to the farmer. ( 6 marks)
(b)On 1 January 2003, Pesa Limited brought into full operation its Limuru Factory of producing bottle tops. The following expenditure had been incurred up to that date.

Sh.
Factory building
(including store and showroom of Sh.600,000 and 800,000 respectively) 5,600,000
New machinery installed: Fixed 8,000,000
Moveable 2,000,000
Delivery trucks (6980cc each) 4,800,000
Office furniture 1,600,000
Computers 2,400,000
Workers’ canteen 800,000
In 2005, additional machinery worth Sh.1,200,000 was purchased and installed in the store at a cost of Sh.320,000. It was brought to use on 1 January 2005 to produce can tops. A saloon car worth sh.600,000 was also purchased.
Required:
Compute the capital allowances due to the company in 2003, 2004 and 2005.
(Total: 22 marks)
QUESTION THREE
(a)Explain clearly the nature of a public good with specific reference to provision of education in Kenya today and the role taxes play under such circumstances. (10 marks)
(b)What is the principle of cost sharing and to what extent does it influence the level of taxation?
( 8 marks)
(Total: 18 marks)

QUESTION FOUR
(a)List and explain any three deductions that may be available against gains or profits from employment. ( 3 marks)
(b)Mr. Matata has approached you with a view to obtaining help in determining his taxable income for 2005. He has supplied the following information:
1.Business Income
He runs a small garage that generate taxable income of Sh.60,000. In 2004, he had a tax loss of Sh.40,000 from this business.
2.Wife’s Income
His wife was employed by Mafuta Ltd. as the Finance Director. Her salary was sh.52,000 p.m. Additional benefits include:
Company car 1800 cc.
House at New Muthaiga (market value of rent Sh.20,000 per month)
Staff gifts of oil products worth Sh.1000 p.m
3.Capital Gains
In the course of the year, the Matatas sold one plot they owned in Nairobi for Sh.1,200,000. This represented a gain of Sh.600,000 which they used to take a holiday to Mombasa.
4.Investment Income

Withholding Tax Net shs 2000 Sh.Dividends:  18,000
Kenya Breweries Ltd 1000 36,000
HFCK Ltd. 4,000 9,000
CMC Ltd.
Interest:
Kenya Commercial Bank Savings Account 2,000 18,000
HFCK – Housing Development Bond 7,000 63,000
Post Office Savings Bank – 20,000
15% 2010 Treasury Bonds. 1,500 13,500
5.Employment Income – Mr. Matata
He was employed by Utajiri Limited as the General Manager – Sales. His salary was Sh.40,000 per month and a bonus of 2% on total sales revenue. He had a car of 2000cc which he used to visit customers otherwise his wife would pick and drop him at the place of work each day using her official car.
6.Utajiri Limited insures all its sales against default from customers. The cost of the insurance was Sh.10,000 which represents 0.001 percent of sales. The company also paid sh.20,000 to cover the life of Matata and his household items.
7.PAYE of Sh.130,000 was deducted from Matata’s pay but due to an oversight in the part of the Chief Accountant the tax was not paid to the Collector of Income tax. His wife’s PAYE was Sh.180,000 in the year.
Required:
(i)Compute total income chargeable to tax and show the tax payable thereon. (15 marks)
(ii)Comment on any information not used for computing taxable income above. (2 marks)
(iii)Is Matata to blame for failure of the company to pay his PAYE? Explain. (2 marks)
(Total: 22 marks)

(Total: 18 marks)

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Accounting multiple choice questions.

1. Which financial statement displays the revenues and expenses of a company for a period of time?

INCOME STATEMENT
BALANCE SHEET
CASH FLOW STATEMENT
STATEMENT OF STOCKHOLDER’S EQUITY

 

2. What is the main purpose of financial accounting?

ORGANIZE FINANCIAL INFORMATION
PROVIDE USEFUL, FINANCIAL INFORMATION TO OUTSIDERS
KEEP TRACK OF COMPANY EXPENSES
MINIMIZE COMPANY TAXES

 

3. Which of these is not included as a separate item in the basic accounting equation?

ASSETS
REVENUES
LIABILITIES
STOCKHOLDER’S EQUITY

 

4. Which financial statement uses the expanded accounting equation?

INCOME STATEMENT
BALANCE SHEET
CASH FLOW STATEMENT
STATEMENT OF STOCKHOLDER’S EQUITY

 

5. The accrual basis of accounting records revenues when they are:

COLLECTED
EARNED
CONTRACTED
READILY AVAILABLE FOR USE

 

6. The account format that displays debits, credits, balances, and headings.

GENERAL JOURNAL
GENERAL LEDGER
T-ACCOUNT
LEDGER ACCOUNT

 

7. Asset accounts have what type of balance?

DEBIT
CREDIT
CONTRA
ALL OF THE ABOVE

 

8. Which account is not a liability account?

ACCOUNTS PAYABLE
ACCRUED EXPENSES
CASH
NOTES PAYABLE

 

9. Which account increases equity?

EXPENSES
WITHDRAWALS
TREASURY STOCK
REVENUES

 

10. A contra asset account has what type of balance?

DEBIT
CREDIT
CONTRA
ALL OF THE ABOVE