Taxation of business income and specialized business activities

August 2025

3 Questions

Question 3b

Western Mining Ltd. is a company involved in the exploration and extraction of gold and other precious minerals in Kakamega County. The following is the statement of profit or loss and other comprehensive income for the year ended 31 December 2024:

Western Mining Ltd.
Statement of profit or loss and other comprehensive income for the year ended 31 December 2024

	Sh.“000”	Sh.“000”
Revenue (export of goods)		600,000
Cost of sales:
Extraction costs (labour, fuel, blasting, water)		(220,000)
Depreciation - Mining equipment		(50,000)
Royalties paid to Ministry of Mining (4% of sales)		(24,000)
Site restoration provision		(10,000)
Gross profit		296,000
Operating expenses:
Salaries and wages	40,000
Administration and head office expenses	30,000
Amortisation of exploration license	8,000
Impairment loss on mine development assets	6,000
Legal fines for environmental violations	2,000
Advertising and marketing expenses	5,000	(91,000)
Operating profit		205,000
Finance costs (interest on loan from bank)		(10,000)
Tax expense		(58,500)
		136,500
Other compressive income:
Revaluation gain on freehold mining land		20,000
Exchange loss on translation of foreign operations		(3,000)
Total comprehensive income		153,500

Additional information:

The company incurred Sh.15,000,000 in construction of roads within the mining site and Sh.12,000,000 in acquiring drilling equipment during the year.
The exploration license is valid for 4 years commencing 1 January 2023.
The site restoration provision is based on an estimated costs to be incurred in year 2025.
The company made a donation of Sh.3,000,000 to a local school project (not approved by the cabinet secretary). This amount was included in administration and head office expenses.
The company claimed revaluation gain on freehold land on equity but did not sell or dispose of the land.
The legal fine resulted from non-compliance with environmental regulations under the Mining Act.
Deprecation was computed using International Financial Reporting Standards (IFRS) rules and not aligned with investment allowances under the Income Tax Act.

Required:

(i) Prepare statement of adjusted taxable profit or loss for Western Mining Ltd. for the year ended 31 December 2024.

(ii) Determine the corporate tax, if any, payable by the company for the year ended 31 December 2024.

(iii) Identify TWO obligations of mining companies operating in Kenya under the Income Tax Act.

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Question 1a

You have been appointed as a tax advisor to a contractor involved in infrastructure projects for a County Government. The contractor has recently received conflicting tax assessment from both the Revenue Authority relating to withholding tax and County Government relating to contractual service levy. The contractor believes the charges are duplicative and not grounded in clear provisions. The delays in resolving the dispute have stalled payments and strained the contractor’s cash flows.

Required:

(i) Explain the tax dispute resolution mechanism available to the contractor under Kenyan tax laws.

(ii) Advise the contractor on the steps to take in resolving the tax dispute with the Revenue Authority and County Government.

(iii) Propose FOUR institutional reforms that the County Government could implement to avoid similar tax disputes with contractors in the future.

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Question 4c

Robert Mwema is a senior software engineer at Steel Ltd. and has provided the following details for the year ended 31 December 2024:

His gross monthly salary is Sh.250,000 which includes a house allowance Sh.70,000 per annum.
He owns 15% shares in Innovatech Ltd., a private consulting company where he receives annual dividend of Sh.600,000.
He resides in a house he purchased through a personal loan of Sh.1,500,000 obtained from a bank on 1 September 2023 at an interest rate of 14% per annum repayable over 8 years.
He contributes Sh.18,000 per month to a Sacco investment account towards his retirement.
He has taken a ten-year education insurance policy where he contributes Sh.3,500 per month for his two children’s university education.
Robert Mwema has invested Sh.6,000,000 in a fixed deposit account and 15-year government infrastructure bond on equal basis both earning an annual interest at the rate of 12%.
He also owns a rental apartment, which generates monthly rental income of Sh.80,000 but incurs annual maintenance expenses of Sh.120,000 and county land rates of Sh.24,000.

Required:

Advise Robert Mwema on tax planning strategies that he could implement to optimise his tax position and legally minimise his annual tax liability from the information provided above.

Support your argument with relevant computations where necessary.

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April 2025

1 Questions

Question 2b

Ryan and Michael are in a partnership business trading as RAM Enterprises and sharing profits and losses in the ratio of 3:2 respectively.

The following details relate to the business for the year ended 31 December 2024:

	Sh.
Capital account (1 January 2024):Ryan	4,000,000
Capital account (1 January 2024):Michael	3,200,000
	Sh.
Current account (31 December 2024):Ryan	600,000 (Credit)
Current account (31 December 2024):Michael	900,000 (Credit)
Inventories as at 1 January 2024	6,203,000
Non-current assets	4,200,000
Trade receivables	1,800,000
Trade payables	642,000
Cost of sales	2,469,860
Transport costs	713,000
Interest on business loans	390,000
Drawings of goods at selling price:Ryan	2,250,000
Drawings of goods at selling price:Michael	2,400,000
Bank	373,000
General expenses	684,500
Salaries	2,722,020
Rent	3,000,000
Electricity	364,000
Depreciation	464,000
Net interest income (Mali Ltd.)	200,000

Additional information:

1.	Current account balances were extracted after preparing the final accounts of the partnership for the year ended 31 December 2024.
2.	Sales are made up of 200% of the share of the total profits by the partners and include value added tax (VAT) at the rate of 16%.
3.	Interest on drawings was charged at 10% on the partners drawings and interest on capital was at 5% per annum.
4.	Salaries include partners’ salary amounting to Sh.880,260 and Sh.760,260 to Ryan and Michael respectively. The partners salaries were included in the current account balances as at 31 December 2024.
5.	Rent accrued was Sh.120,000 at year end and there was a prepayment of rent Sh.40,000 at the beginning of the year. Electricity owing as at 1 January 2024 was Sh.150,000.
6.	On 2 September 2024, the business ordered for goods costing Sh.225,000 which were recorded as purchases but were never received as they were stolen while in transit. The transporter later accepted liability and paid a compensation in January 2025 of Sh.200,000. No adjustments had been made in the books in respect of the loss or claim as at 31 December 2024.
7.	Non-current assets were acquired in the month of January 2024 and comprised the following:

7		Sh.
	Computers	240,000
	Office partitions	300,000
	Furniture	120,000
	Saloon vehicle	2,460,000

8.	There were no opening balances in the current account of partners.

Required:

(i) The partnership taxable profit or loss for the year ended 31 December 2024.

(ii) Taxable income of each partner.

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December 2024

1 Questions

Question 1b

Kamaly and Kalangi have been trading as Kaka Enterprises. The entity had reported a net profit of Sh.484,900. However, the reported profit was disputed by the revenue authority during the year of income 2023. The assessed taxable profit for the partnership by the revenue authority was Sh.3,880,000.

The partners have provided the following details to assist them prepare for an adjusted taxable profit which would assist in determining whether the assessment by the revenue authority was fair:

Receipts and payments (Bank account)
	Sh.		Sh.
Balance brought forward 1 January 2023	1,840,000	Cash purchases	500,000
Receipts from debtors	3,600,000	Payments to creditors	1,890,000
Cash sales	720,000	Electricity	188,000
Sale of motor vehicle	360,000	Telephone	172,000
15% bank loan	400,000	Purchase of furniture	350,000
Balance carried forward	960,000	General expenses	3,700,000
		Salaries and wages	480,000
		Office computers	180,000
		Rent expenses	240,000
		Insurance	96,000
		Advertising	84,000
	7,880,000		7,880,000

Additional information:

1.	The partners contributed capital of Sh.400,000 and Sh.600,000 for Kamaly and Kalangi respectively which was included in the opening balance in the receipts and payments account.
2.	General expenses included the following items which were debited in the statement of profit and loss account:

2		Sh.
	Computer software	90,000
	Donations to a political party	300,000
	Defending Kalangi in a land dispute	350,000
	Withholding tax	32,000
	Installation of neon signs	48,000
	15% bank loan repayment inclusive of interest	200,000
	Lease rental payments	82,000
	Purchase of motor vehicle	1,200,000
	Purchase of piece of land for business	742,000
	Purchase of motorbike for office use	200,000
	Auditing fees	96,000
	Partners drawings	360,000

3.	Other details included:
		1 January 2023 Sh.	31 December 2023 Sh.
	Creditors for goods	550,000	1,460,000
	Debtors for goods	640,000	820,000
	Salaries and wages accrued	120,000	89,000
	Rent expenses prepaid	36,000	24,000
	Office computers	150,000	240,000
	Inventories for goods in trade	192,000	120,000
	Cash at bank	840,000	960,000

4.	Salaries and wages included salaries paid to domestic workers for partners amounting to Sh.96,000.
5.	Total sales and purchases for the year 2023 were undercast by 20%.
6.	The 15% bank loan of Sh.400,000 relates to repairs to private residence of Kalangi.
7.	Telephone expenses amounting to Sh.60,000 related to partners personal calls.
8.	Rent expenses were understated by 25%.
Required:
(i).	Prepare a revised statement of adjusted profit or loss for the partnership business.
(ii).	Advise the partners in relation to the assessed profit by the revenue authority as compared to the adjusted taxable profit obtained in (b) (i) above.

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August 2024

1 Questions

Question 5a

Evaluate FOUR ethical issues that policy makers are required to consider when designing tax systems.

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April 2024

1 Questions

Question 1b

The following information was extracted from the books of Henry and Titus who operate a partnership business and share profits and losses in the ratio of 3:2 respectively:

1.	An extract from the statement of financial position as at 31 December 2022 revealed the following information about the partnership:

1.	Asset	Cost/net book value	Sh.“000”
	Freehold land	Cost	64,000
	Office equipment	Net book value	4,160
	Furniture and fittings	Net book value	4,800
	Delivery vans	Net book value	8,000
	The net book values as at 31 December 2022 were the same as the tax written down values.

2.	Current assets and liabilities as at 31 December 2022 were reported as follows:

2.		Sh.“000”
	Stock	8,800
	Trade receivables	640
	Bank overdraft	480
	Cash in hand	64

3.	On 1 January 2023, each partner contributed additional capital of Sh.5,000,000. Interest on capital was at the rate of 5% per annum.
4.	Sales proceeds that were banked in the year amounted to Sh.160,000,000. The accountant had paid the following expenses from sales proceeds before banking the balance:

4.		Sh.
	Office rent	32,000 per month
	Office expenses	8,000 per week
	Laptop for office use	40,000
	Salaries and wages - casual workers	3,600 per week
	Carriage outwards	5,200 per week
	Salary to partners: Henry	16,000 per month
	Salary to partners: Titus	24,000 per month

5.	From the bank, the partnership made the following payments:

5.		Sh.
	Purchase of computers	102,400
	Purchase of motor cycle for salesmen	160,000
	Staff salaries per month	80,000
	Purchase of goods for resale	124,800,000
	Drawings per month: Henry	80,000
	Drawings per month: Titus	64,000
	Drawings per month: Stellah	36,000
	Bank charges per month	2,400
	Telephone bills per month	6,400
	Electricity bill per month	8,000

6.	On 1 September 2023, Stellah was admitted as a partner on the following terms: She was to contribute capital amounting to Sh.16,000,0000 She was to receive a salary of Sh.480,000 per annum and commission of 1% on the total sales made after her admission. Interest on capital was to be charged at 10% per annum from 1 September 2023. Profit and loss sharing ratio was changed to 3:2:1 for Henry, Titus and Stellah respectively.
7.	Analysis of other records revealed the following: Stock as at 31 December 2023 amounted to Sh.6,400,000. Included in the stock at year end were goods which had cost Sh.880,000 but could now be sold for Sh.640,000. Trade payables and trade receivables as at 31 December 2023 were Sh.1,280,000 and Sh.1,120,000 respectively. Discount received from suppliers amounted to Sh.576,000 for the year. Sales, purchases and expenses accrued evenly throughout the year.
8.	Partners’ capital as at 1 January 2023 was contributed equally by Henry and Titus.
	Assume a 52 weeks year.
Required:
(i)	Prepare a statement showing the taxable profit or loss of the partnership before and after admission of Stellah for the year ended 31 December 2023.
(ii)	Allocation of the profit or loss computed in (b) (i) above to the partners.

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December 2023

1 Questions

Question 1b

Asili and Tulivu established a partnership business sharing profits and losses in the ratio of 3:2 respectively. The following statement of profit or loss of the business for the year ended 31 December 2022 was provided:

	Sh.	Sh.
Sales		20,184,000
Gain on sale of shares		1,056,000
Foreign exchange gain-unrealised		450,000
Recovery from insurance on stolen stock		1,400,000
Discount received		552,000
Dividend - Wakaguzi Co-operative Society (gross)		153,000
Total incomes		23,795,000
Expenses:
Purchases	8,526,000
Purchase of computers	540,000
Partners salaries	2,160,000
Legal fees	2,040,000
Repairs and maintenance	1,705,200
Rent and rates	733,800
Interest on loan	498,600
General expenses	2,892,000
Motor vehicle expenses	2,520,000
Insurance	468,000
Preliminary expenses	788,400
Directors fees	1,800,000
Audit fees	444,600
Debenture interest	1,080,000
Travelling expenses	288,000	(26,484,600)
Net loss		(2,689,600)

Additional information:

1.	Purchases and sales of goods were inclusive of value added tax (VAT) at the rate of 16%.
2.	Closing inventory was valued at Sh.5,520,000 while opening inventory was 10% of sales net of VAT.
3.	The partnership was converted into a limited company by the name Asili Ltd. on 1 April 2022.
4.	Income and expenses accrued evenly throughout the year unless otherwise stated.
5.	Legal fees comprised:

		Sh.
	Notice for change of business name	194,400
	Conveyance fees of business premises	217,200
	Stamp duty	349,800
	Acquisition of business loan	62,400
	Recovery of bad debts	135,000
	Signing a 99 year lease agreement	385,200
	Purchase of Asili’s private residence	450,000
	Appeal against tax assessment	246,000
		2,040,000
6.	Repairs and maintenance comprised:
	Purchase of furniture	288,000
	Installation of neon sign	180,000
	Designing office block	1,170,000
	Painting of new office block	67,200
		1,705,200
7.	General expenses included:
	Registering of patents	336,000
	Negotiating for additional land for business expansion	168,000

8.	Interest on loan includes interest on partners capital of Sh.300,000 which was shared according to profit and loss sharing ratio.
Required: Prepare a statement of adjusted taxable profit or loss for the year ended 31 December 2022 for:
(i).	Asili and Tulivu partnership business.
(ii).	Asili Ltd. Company.
(iii).	A schedule showing allocation of adjusted partnership profit or loss computed in (b) (i) above, to the partners.

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August 2023

5 Questions

Question 4b

KK Realtors are in the real estate business. They rent out two prime highrise buildings, one a residential apartment and the other an office block. They are registered for the monthly residential rental obligation as well as filing for value added tax (VAT).

Details of their transactions for the month of December 2022 are provided below:

Incomes	Sh.“000”
Rent: Apartment	1,248,450
Rent: Office block	7,244,200
Expenses:
Garbage collection	75,864
Sewerage	92,8090
Repairs and maintenance (outsourced to local company)	144,420
Housing agents fee (5% of income)	?
Security firm (eight day and eight night guards)	464,000
Insurance	580,000
Interest on bank loan	139,200
Caretakers’ salaries	92,800
Webhosting (by South Africa-based company)	67,280
Audit and assurance fee	1,334,000
Telephone and electricity	52,952
Other staff salaries	992,496
Architect’s fee (based in France)	184,730

The following additional information is provided:

1. With the exception of housing agents fee, webhosting and architect’s fee, a quarter of the expenses relate to the residential business while the rest relate to the office block. 2. Housing agents fee accrues based on the amount paid for income collected from each property.

3. Webhosting and architects fee could not be directly attributed to either the residential apartment or office block.

4. Tenants of the office block are agents for withholding value added tax (VAT) and withholding rental income.

5. The figures provided are quoted inclusive of VAT where applicable.

Required:

(i) Calculate the tax payable under the VAT and income tax obligations by KK Realtors for the month of December 2022.

(ii) Show the withholding tax collected under the obligations in (b)(i) above, if any, as well as the net rent income received by KK Realtors, as cash.

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Question 5c

Johnson Shauri has not been maintaining proper books of accounts since the inception of his business in year 2019. The following balances were obtained from the available business records for the four year period ended 31 December 2022:

	31 December 2019	31 December 2020	31 December 2021	31 December 2022
	Sh.“000”	Sh.“000”	Sh.“000”	Sh.“000”
Leasehold property	11,760	11,760	11,760	11,760
Motor vehicles	5,040	4,720	9,360	10,760
Furniture	864	864	864	864
Bank overdraft	1,288	1,400	1,210	1,115
Loss on sale of investment	-	100	-	-
Accounts receivable	432	504	408	600
Mortgage loan	2,080	1,840	1,620	1,500
Inventory	620	572	482	520
Computers	620	720	840	720
Bank account	240	268	272	286
Personal clothes and effects	60	80	100	120

The following additional information was obtained:

Drawings of goods and provision for taxation for the year 2019 were Sh.600,000 and Sh.360,000 respectively and has been accumulating at a rate of 10% annually.
Capital allowances were agreed at a total of Sh.920,000 for each of the four years.
Donations to a political party in the year 2020 amounted to Sh.142,000.
Gifts from relatives for the year 2021 were Sh.840,000.
Contingent liability in respect of a pending court case in the year 2022 was Sh.1,000,000.
Rent paid on behalf of a close friend was Sh.605,000 in the year 2022.
Living expenses were estimated at Sh.800,000 in the year 2019 and had been increasing at the rate of 15% cumulatively each year.

Required:

(i) Compute the taxable income or loss of Johnson Shauri for the three-year period ended 31 December 2020, 2021 and 2022.

(ii) Summarise THREE specific actions that a tax practitioner could undertake upon discovery of an irregularity in the client’s business.

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Question 3c

The Revenue Authority of your country intends to introduce a tax on digital assets in the next government budget. During public participation forums, most citizens rejected the proposed digital tax since they were not conversant with digital assets.

Citing an example, explain what “digital assets” entail.

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Question 2a

E and K commenced trading as partners under the name EK Enterprises on 1 January 2022. They share profits and losses equally and were entitled to receive monthly salaries of Sh.240,000 and Sh.288,000 for E and K respectively. The partnership did not maintain a complete set of accounting records. The following is a summary of the partnership’s bank statement for the year ended 31 December 2022:

Additional information:

1.	As at 31 December 2022, the partnership owed suppliers Sh.9,360,000 while the amount owed by customers was Sh.10,740,000.
2.	Rebate received from suppliers amounted to Sh.1,590,000 and discount allowed to customers amounted to Sh.1,416,000.
3.	Bad debts amounted to Sh.984,000 out of which Sh.240,000 relate to a loan advanced to E that was overdue.
4.	Closing stock was valued at Sh.7,440,000 as at 31 December 2022.
5.	Salaries and wages include salary to the partners for the year.
6.	Included in the interest expense is interest on partners’ capital contribution at the rate of 8% per annum.
7.	The annual rent for the godown was Sh.5,400,000.
8.	As at 31 December 2022, electricity and insurance owing amounted to Sh.300,000 and Sh.153,600 respectively.
9.	The following payments were made in cash from cash sales before banking:

9.		Sh.
	Motor vehicle expenses (per annum)	1,656,000
	Wages (per annum)	1,944,000
	Sundry expenses (per annum)	420,000
	Weekly drawings: E	86,400
	Weekly drawings: K	46,800

(Assume 52 weeks in a year).

Required:

(i) Compute the adjusted partnership profit or loss for the year ended 31 December 2022.

(ii) Distribute the profit or loss to the partners and thus ascertain the taxable income for each partner.

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Question 2c

Analyse the Income Tax Act provisions in relation to taxation of collective investment schemes.

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April 2023

1 Questions

Question 1b

Sema and Tena are partners running a small hardware business in your town. They are facing a tax audit by the Revenue Authority for failure to maintain complete records. They have approached you to assist them in ascertaining the taxable profit or loss for the year ended 31 December 2022.

The following information has been provided to you:

1.

The partnership deed provides that:

Profits and losses will be shared in the ratio of 2:1 for Sema and Tena respectively.
Each partner will be entitled to a monthly salary of Sh.90,000 and a bonus to be agreed from time to time.
Partners would be allowed to withdraw up to Sh.250,000 in cash with no interest. Any excess cash withdrawals would be subject to interest at the rate of 12% per annum.
No interest is charged on withdrawal of goods by partners.

2.

On 1 September 2022, the partners admitted Vuna and the profit and loss sharing ratio was revised to equal basis for the three partners. Vuna was entitled to interest on capital like the other partners at the rate of 10% per annum. She was not entitiled to any salary or bonus for the year ended 31 December 2022.

3.	Extract of account balances were as follows:
		31 December 2022	31 December 2021
		Sh.	Sh.
	Accrued bonus due to partners	1,000,000	900,000
	Inventory	350,000	260,000
	Accounts payable	3,000,000	2,600,000
	Prepaid advertising	210,000	440,000
	Outstanding electricity bill	26,000	20,000
	Accounts receivable	3,900,000	2,700,000
	Accrued salaries and wages (excluding partners salaries)	510,000	230,000
	Accumulated depreciation	700,000	440,000
	Capital: Sema	720,000	720,000
	Capital: Tena	480,000	480,000
	Capital: Vuna (Admitted 1 September 2022)	540,000	-
4.	Extracts of cash payments during the year were as follows:	Sh.
	Paid to suppliers of goods for resale	9,000,000
	Bonus paid to partners shared equally	1,300,000
	Cash withdrawn: Sema	300,000
	Cash withdrawn: Tena	350,000
	Loan interest	48,000
	Advertising	250,000
	Salaries and wages (including partners salaries)	4,390,000
	Motor vehicle expenses	340,000
	Electricity	90,000
	Computer software	70,000
	Purchase of office equipment	62,000
	Employee welfare costs	300,000
5.	Receipts channeled through the bank account were as follows:	Sh.
	Proceeds from sale of computers	55,000
	Royalty income (net of withholding tax)	380,000
	Credit sales	15,600,000
6.	Cash purchases and cash sales amounted to Sh.900,000 and Sh.2,400,000 respectively and were value added tax (VAT) inclusive.
7.	The partners had withdrawn goods for personal use as follows:	Sh.
	Sema	210,000
	Tena	70,000
	No entries were made in the books to record these withdrawals.

8.	Hardware goods valued at Sh.60,000 were destroyed in a flood in July 2022. The insurance company agreed to pay Sh.40,000 as compensation but by 31 December 2022, the amount had not been received.
9.	Assume that revenues and expenses accrued evenly throughout the year, unless otherwise specified.
Required:
(i).	Prepare a statement of taxable profit or loss of the partnership for the year ended 31 December 2022.
(ii).	A schedule showing allocation of the profit or loss to the partners for the year ended 31 December 2022.

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December 2022

1 Questions

Question 3a

A, B and C have been trading in a small size partnership sharing profits and losses in the ratio of 2:2:1 respectively. C retired from the partnership on 31 August 2021 while A and B agreed to continue with the business charging interest on capital at the rate of 15% per annum as in the previous period when C was still in the partnership.

Due to the changes in the partnership, goodwill was valued at Sh.1,200,000 and was to be written off immediately.

The following trial balance was extracted as at 31 December 2021:

	Sh.	Sh.
Capital account: A		1,680,000
Capital account: B		1,400,000
Capital account: C		840,000
Current account: A		67,200
Current account: B		56,000
Current account: C		44,800
Drawings: A	78,400
Drawings: B	67,200
Drawings: C	56,000
Inventory (1 January 2021)	252,000
Purchases and sales	4,200,000	7,720,000
Discount received		124,000
Bad debts recovered – general		193,200
Salaries and wages	722,400
Legal and professional fees	1,904,000
Rent & rates	168,000
Insurance	70,000
Sundry expenses	50,400
Trade receivables and payables	308,000	224,000
Allowance for doubtful debts		11,200
Land at cost	2,800,000
Delivery lorry	896,000
Depreciation	448,000
Cash at bank	676,000
Dividends: Sasa Co-operative Society		336,000
	12,696,400	12,696,400

Additional information:

1.	Sales and purchases were inclusive of value added tax (VAT) at the rate of 16%. Cash sales amounted to Sh.358,400 (VAT inclusive) and were excluded from the above accounts.
2.	The following assets were acquired by the business immediately after retirement of C.

		Sh.
	Computers	150,000
	Saloon car	3,120,000
3.	Legal and professional fees include:
		Sh.
	Stamp duty	168,000
	Negotiating a bank overdraft	158,200
	Recovery of bad debts	245,000
	Signing a 99 year lease agreement	228,400
	Purchase of A’s private residence	350,000
	Preparation of employment contract	82,000

4.	Interest on drawings was charged at the rate of 10% per annum.
5.	Inventory at year end was valued at Sh.364,000 and the partnership had consistently undervalued inventory at each year end by 20%.
6.	Salary and wages include partners’ salary of Sh.420,000 shared by the partners according to the profit and loss sharing ratio.
7.	Allowance for doubtful debts was to be increased to Sh.24,800 at year end. Bad debts written off amounted to Sh.40,000 of which Sh.8,000 relates to general bad debts.
8.	Prepaid insurance at the beginning of the year amounted to Sh.8,000 while insurance owing at year end amounted to Sh13,000.
9.	Accrued sundry expenses as at 1 January 2021 and 31 December 2021 amounted to Sh.10,000 and Sh.2,000 respectively.
10.	C was paid all his dues on 15 September 2021. The profits and losses were to be shared equally after C’s retirement.
11.	Unless otherwise stated, assume that all revenues and expenses accrued evenly throughout the year.
Required:
(i).	Prepare a statement of adjusted taxable profit or loss for the partnership for the year ended 31 December 2021.
(ii).	Determine the taxable income for each partner.

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August 2022

1 Questions

Question 3c

Explain the tax implications of the following:

(i) Where two or more entities enter into a joint venture agreement or partnership.

(ii) Where shareholders are wholly or partly paid in cash for forfeiting their shares in a cessation of business.

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April 2022

1 Questions

Question 2b

Amua and Beba have carried on business for the last several years under the trade name AB partnership. They share profits and losses equally with capital contributed earning interest at the rate of 10% per annum.

The following details relate to AB partnership's transactions for the year ended 31 December 2021.

1.	Amua and Beba capital accounts reflect credit balances of Sh.1,200,000 for each.
2.	On 1 April 2021, they introduced a new partner Chanda who was to contribute Sh.1,200,000 as his share of capital. They agreed on this day to share profits and losses in the ratio of capital contributed proportional to the period of the year it was invested and that this sharing ratio be backdated to the start ofthe year 2021.

3.	The costs incurred during the year were as follows:	Sh.
	Salaries and wages for staff	1,083,000
	Electricity and telephone	389,000
	Repairs and maintenance	294,400
	Deprecation and impairments	420,000
	General insurance	471,000
	Debenture interest (paid by ABC Ltd.)	150,360
	Directors fees (including Sh.507,720 partners' salaries)	1,015,440
	Legal expenses	510,240
	Medical contributions for partners and directors	651,840
	Drawings: Amua	99,000
	Drawings: Beba	101,400
	Drawings: Chanda	65,400
	Rent and rates	315,960
	Motor vehicle running expenses	500,760
	Printing and stationery	32,520

4.	The following assets were purchased during the year: Furniture and fittings Sh.192,000 and a pick-up for Sh.2,160,000.
5.	During the months of the partnership, the total salaries to partners were Sh.507,720. The salaries were to be apportioned according to the period each partner served in the partnership búsiness.
6.	The cost of sales during the year was Sh.21,600,000. Sales were uniform at a margin of 25%.
7.	The partnership was converted into a limited liability company, ABC Ltd. on 1 July 2021 with the partners becoming the new directors of the company. The new firm was listed on the Securities Exchange but not for purpose of raising additional capital. The costs incurred in listing were Sh.100,000.
8.	The sales and expenses accrued evenly throughout the year unless otherwise indicated.
Required:
(i)	A schedule showing separately the profit or loss for the partnership and the company for the year ended 31 December 2021.
(ii)	Tax payable (or refundable) by ABC Ltd. from the profit or loss computed in (b) (i) above.
(iii)	A schedule showing the distribution of profits among the partners.

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Pilot December 2021

1 Questions

Question 3b

Mary and Khadija are in a partnership trading as Mahadi enterprises: They share profits and losses in the ratio of 3:2 for Mary and Khadija respectively.

The partners presented the following statement of profit and loss of the partnership for the year ended 31 December 2020.

	Sh.
Sales	8,400,000
Closing stock	1,176,000
Rental income	522,480
Dividend received (net)	54,240
Foreign exchange gain	54,960
Interest income (net)	120,000
Discount received	84,000
	10,411,680
Opening stock	960,000
Purchases	4,080,000
Salaries and wages	1,440,000
Insurance	288,000
Travelling expenses	187,200
Salaries and wages: Mary	720,000
Salaries and wages: Khadija	480,000
Rent rates	558,000
Interest expense	1,872,000
Goodwill written off	120,000
Medical expenses for partners	240,480
Legal expenses	144,240
Bank charges	91,680
Stamp duty	180,000
Loss on sale of equipment	19,200
VAT paid	39,120
Purchase of furniture	57,600
Depreciation	48,000
	(11,525,520)
Net loss	(1,113,840)

Additional information:

1.

On 1 April 2020 Abby was admitted as a partner. She contributed Sh.960,000 as her share of capital and goodwill. The profit and loss sharing ratio was revised to 2:2:1 for Mary, Khadija and Abby respectively with effect from 1 April 2020. Abby was not entitled to a salary for the year ended 31 December 2020.

2.	Interest expenses comprised:
		Sh.
	Interest on capital: Mary	432,000
	Interest on capital: Khadija	480,000
	Interest on capital: Abby	48,000
	Interest on loan	672,000
	Fridge benefit tax	240,000
		1,872,000

3.	All transactions relating to equipment and furniture occurred after 1 April 2020.
4.	All other revenues and expenses accrued evenly throughout the year.
Required:
(i)	Determine the adjusted profit or loss of the partnership for the year ended 31 December 2020.
(ii)	Allocate the profit or loss computed in (b) (i) above to the partners.

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December 2021

1 Questions

Question 4b

Lipa and Mali are in partnership trading as Lima Enterprises where they share profits and losses in the ratio of 2:1 respectively.

On 1 April 2020, Sasa was admitted with one-third of the profit without altering the existing profit-sharing ratio of Lipa and Mali.

The following income statement for the year ended 31 December 2020 was provided by the partnership:

	Sh.	Sh.
Gross profit		2,960,000
Less:
Salaries and wages:
Staff	360,000
Partners	428,000
Interest on capital	150,000
Current Account:
Lipa	42,000
Mali	48,000
Insurance	24,500
Motor expenses	32,500
Electricity bills	58,000
Legal expenses	142,400
Audit and accountancy fees	47,500
Depreciation	128,400
Purchase of furniture	240,000
Provision for bad debts	18,400
Telephone and postage	14,200
General expenses	354,000	2,087,900
Net profit		872,100

Additional information:

1. Insurance represents Mr. Mali's life insurance policy for his family.

2. Interest on capital was prorated and shared according to the profit and loss sharing ratios.

3. Legal expenses included: expenses related to drawing of new partnership deed of Sh.28,000 on admission of Mr. Sasa, conveyance fees of Sh.14,900 and Sh.36,000 for negotiating a loan facility.

4. General expenses included cost of computers of Sh.90,000 and computer software of Sh.45,000.

5. The firm imported a motor car for use in the partnership business for Sh.800,000. This excluded import duty of 25% and value added tax at 16%.

Note: Assume that income and expenses accrued evenly during the year.

Required:

(i) Prepare a statement of adjusted taxable profit or loss for the year ended 31 December 2020.

(ii) Total taxable income for each partner.

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September 2021

1 Questions

Question 4b

Jirani and Mwema have been partners trading as JM Traders since 1 January 2019. They have not filed individual income tax returns for the year ended 31 December 2020. The Commissioner for Domestic taxes has issued an estimated assessment of Sh.940,800 to each of the partners for the year ended 31 December 2020. They share profits and losses in the ratio of 2:3 to Jirani and Mwema respectively. They are preparing to appeal against the assessment and have approached you for tax advice with the following details:

Cashbook summary
	Sh.		Sh.
Balance brought forward (1 January 2020)	912,000	Payment to creditors	1,056,000
Capital: Jirani	720,000	Purchase of furniture	240,000
Capital: Mwema	1,080,000	Motor vehicle expenses	168,000
Receipts from debtors	2,040,000	Electricity expenses	93,600
Cash sales	1,200,000	Rent expenses	472,800
Rent income	696,000	Purchase of motor vehicles	720,000
Sale of furniture	204,000	Salaries and wages	576,000
		Office partitions	216,000
		General expenses	528,000
		Balance carried forward	2,781,600
	6,852,000		6,852,000
	\(\overline{\underline{\underline{6,852,000}}}\)		\(\overline{\underline{\underline{6,852,000}}}\)

Additional information:

1.	Sales and purchases for the year were understated and overstated respectively by 20%.
2.	All the cash sales were paid into the bank with the exception of Sh.528,000 which was debited in the income statement as general expenses but related to the following items: Partners children school fees Sh.96,000. Purchase of goods Sh.240,000. Tax appeal expenses 48,000. Insurance policy for partners life Sh.84,000. Computer software Sh.60,000.
3.	The partners are entitled to interest on capital at the rate of 10% per annum on their capital contributions. The interest on capital was included in the figure for purchases for the year.
4.	The cost of furniture sold was Sh.192,000 and had accumulated depreciation of Sh.16,800 as at 1 January 2020. The profit on disposal was credited to the income statements for the year ended 31 December 2020.

5.	Other information provided was as follows:
		31 December 2019	31 December 2020
		Sh.	Sh.
	Inventories	297,600	434,400
	Creditors for goods	480,000	336,000
	Debtors for goods	288,000	432.000
	Electricity expenses prepaid	566,400	36,000
	Rent owing	93,600	52,800
	Salaries and wages owing	24,000	72,000
	Furniture	192,000	240,000

6.

The business reported a net loss of Sh.509,400 for the year ended 31 December 2020 after deducting the following expenses:

Salaries and wages for the year ended 31 December 2020 which included partners salaries for Jirani Sh.120,000 and Mwema Sh.96,000.
Rent expense for the year included 20% for private residence for Jirani while electricity included 30% electricity bills paid on behalf of Mwema's private house.
Capital allowances in respect of the business had not been considered. However, depreciation had been debited in the income statement. The depreciation was at the rate of 20%.

Required:

With supporting computations:

(i) Advise the partners on the accuracy of the estimated assessment issued for the year of income 2020.

(ii) Prepare a schedule of total taxable income for each partner for the year of income 2020.

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November 2020

2 Questions

Question 3a

M and K are in partnership trading as MK enterprises. The partners deposited Sh.4,000,000 and Sh.6,000,000 into the business account as their initial capital before commencing trading. They also agreed to share profit and loss in the ratio of their initial capital contribution and interest on capital at 5% per annum on outstanding capital balances.

On 1 January 2018, the firm purchased the following assets for use in the business:

	Sh.
Saloon car	2,400,000
Computers	80,000
Furniture and fittings	96,000
Fax machine	48,000
Switchboard	64,000
Bookshelf	18,000
Office kitchen utensils	9,000
Office television set	54,000
Carpets	36,000
Safe for cash office	45,000

The firm's books were kept in a single entry bookkeeping. The details for the accounting records for the year ended 31 December 2018 obtained were as follows:

1	Sales for the year was Sh. 1,860,000 out of which Sh. 360,000 was on credit and the balance was cash banked.
2	The following monthly expenses were paid from cash proceeds before banking the proceeds from cash transactions:

		Sh.
	Transport expenses	6,000
	Telephone and postage	5,600
	Office meals	5,000
	Repairs and maintenance	4,800

3	The bank statements summary for the full year showed payments made during the year as follows:

		Sh.
	Rent payment	325,000
	Purchase of 3 tonnes lorry	1,800,000
	Purchase of motor bike	90,000
	Office expenses	1,460,000
	Advertising	240,000

4	The office expenses paid in note (3) above included

		Sh.
	Partners salaries: M	270,000
	K	360,000
	Employees' pension contribution	420,000
	Donations to society for blind	78,000
	Tax consultancy fees	32,000
	Training of partners' children	28,000
	Motor vehicle insurance	24,000

The business failed to file returns for the year of income 2018 and on 1 July 2019, they received an estimated assessment of Sh.78,000 from the revenue authority for each partner.

Required:

(i). Using the above information, prepare a statement that will form the basis of contesting the estimated assessment for the year of income 2018.

(ii) .Advise the partners on the appeal position.

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Question 4b

Anita Warazo has been operating a sole-proprietorship business since 1 January 2015.

The following information was obtained from the books of the business for the past five years.

Year	2015 Sh."000"	2016 Sh."000"	2017 Sh."000"	2018 Sh."000"	2019 Sh."000"
Current account balance	485(Dr)	600(Cr)	960(Cr)	350(Dr)	560(Cr)
Treasury bonds	1,450	940	740	648	780
Pick up (cost)	900	900	1,600	1,600	1,600
Computers (cost)	150	150	200	200	200
Inventory		170	240	280	376
Trade receivables	720	600	560	700	840
10% Mortgage loan			4,000	4,000	4,000
Trade payables	460	640	800	560	720
Bank loan	370	348	400	400	380
Leasehold property	1,400	1,400	1,400	1,400	1,400
Cash in hand	560	840	540	600	760
Furniture and fittings	400	400	300	300	300
Personal saloon car	-	480	480	480	480

Additional Information:

1. All non-current assets were stated at cost and where the fair value changed was either due to additional met acquired or disposed of.

2. Furniture and fittings whose cost was Sh. 100,000 was disposed of on 1 January 2017 for Sh.68,000.

3. In the year 2016, the proprietor made drawings of Sh.38,000.

4. Anita Warazo paid school fees for her children from business current account of Sh. 138,000 per annum for the years 2016 and 2017.

5. A leasehold property included a property valued at Sh.400,000 inherited from her late father.

6. In the year 2018, she paid insurance premium of Sh.42,000 for her private residence.

7. She contributed to a fundraising in 2019 of Sh.60,000 for supporting a church function.

8. The non-current assets qualified for capital deductions where applicable.

9. Leasehold property comprised a warehouse (cost Sh. 1,000,000) while the inherited property was a dwelling house.

Required:

(i) Prepare a capital statement showing taxable income for the years 2016 to 2019.

(ii) Comment on the tax position of Anita Warazo for each of the years of income

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November 2019

1 Questions

Question 1c

Sharon and Primus are partners running a hardware business. They have approached you to assist them prepare the partnership returns for the year ended 31 December 2018. The following information has been presented to you:

1

The partnership agreement provides that:

Profits and losses will be shared in the ratio of 2:1 for Sharon and Primus respectively.
Partners will be allowed to withdraw up to Sh.100,000 in cash without being charged interest. Any excess withdrawals will be subject to interest at a rate of 8% per annum.
Each partner will be entitled to a monthly salary of Sh.60,000 per month. However, no salary would be paid to any partner in the months of January, May and September due to expected low sales based on analysis of past trends. Partners would be entitled to a commission.

2

The balances in the books of account as at 31 December 2018 and 31 December 2017 included the following:

		31 December 2018 Sh.	31 December 2017 Sh.
	Accrued commission due to partners	400,000	360,000
	Accounts payable (trade)	2,000,000	1,600,000
	Accrued advertising expense	610,000	340,000
	Prepaid royalty income	160,000	100,000
	Accounts receivable (trade)	5,900,000	1,700,000
	Accrued salaries and wages (partners excluded)	410,000	130,000
	Accumulated depreciation	600,000	340,000
3	Extracts of cash payments during the year were as follows:
		Sh.
	Commission paid to partners equally	100,000
	Purchases (goods for sale)	1,000,000
	Advertising expenses	150,000
	Salaries and wages (partners excluded)	1,390,000
	Motor vehicle expenses	240,000
	Electricity expenses	80,000
	Office partitions	60,000
	Purchase of office equipment	97,000
	Meals to employees	200,000
	Loan interest	35,000
	Cash withdrawn by partners - Sharon	160,000
	- Primus	100,000
4	All receipts were channeled through the account and included the following:
		Sh.
	Sales (all were on credit terms)	1,600,000
	Royalty income	240,000
	Proceeds from sale of office equipment	45,000
	Computer leasing charges	6,000
5	The partners withdrew hardware goods for personal use as indicated below:
		Sh.
	Sharon	110,000
	Primus	60,000

6	In December 2018, some of the hardware goods which were valued at Sh.60,000 were destroyed by fire... Compensation of Sh.35,000 was received from the insurance company.
Required:
(i)	Taxable profit or loss of the partnership for the year ended 31 December 2018.
(ii)	A schedule showing the partners allocation of taxable income or loss.

Hint: Ignore opening and closing inventory.

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May 2019

2 Questions

Question 4b

Solomon Omariba started a merchandise business, Solo Traders, on I January 2016. He had not filed individual income tax returns for the years of income 2016 and 2017. The revenue authority announced a tax amnesty, where one qualified provided they filed returns for the year of income 2018.

Mr Omariba has provided the following details to you to assist in filing his returns:

1	An analysis of the cash book for the year ended 31 December 2018 is as shown below:

Cash book - Bank Column
	Sh.		Sh.
1 January 2018 balance brought down	970,000	Fixtures and fittings (acquisition)	183,000
Cash sales	4,408,000	Suppliers of goods	696,000
Cheques from customers	649,600	Bank charges	14,800
Refunds from suppliers	41,760	Motor vehicle (acquisition)	500,000
Rent income	520,000	Salaries and wages	480,000
Sale of fixtures	248,000	Office computers (acquisition)	240,000
		Rent and rates	62,000
		Electricity expenses	58,000
		Telephone and postage	62,640
		Refunds to customers	37,120
		Computer software	60,000
		Balance carried down	4,443,800
	6,837,360		6,837,360

2	Other information obtained from the books of account included:

	1 January 2018	31 December 2018
Inventory	4,320,000	225,000
Suppliers of goods	278,400	139,200
Trade debtors	174,000	487,200
Accrued electricity	66,120	113,680
Prepaid rent income	180,000	240,000
Motor vehicles	1,400,000	1,800,000
Prepaid salaries and wages	320,000	140,000
Fixtures and fittings	450,000	170,000

3	Non-current assets are stated at cost. However, the business had charged depreciation in the income statement.
4	Opening and closing inventories were overvalued and undervalued by 20% and 10% respectively.
5	All operating expenses and non-current assets comprise 40% non-business activities.
6	Total sales and purchases are inclusive of value added tax at the rate of 16%.
7	The business had issued credit notes of Sh.34,800 for goods returned by credit customers.
8	The cost of fixtures disposed of was Sh.220,000.
9	From the accounting records, the accountant had reported a net loss of Sh.186,400.

Required:

A statement showing the corrected adjusted taxable income of Solo Traders for the year of income 2018.

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Question 5b

The following are the year 2018 records of the Trustees of the late Kalume Tajiri Children Settlement created in favour of his three children; Baraka, Khalifi and Mwanga.

	Sh."000"
Gross rental income	800,000
Trading income	310,000
Dividends (gross)	160,000
Sundry income	90,000

Additional information:

1	Each beneficiary is entitled to 1/5 share of the net distributable income.
2	Interest on debt repayment by the settlement is Sh.14,000,000.
3	Fixed annuity to beneficiary is Sh.120,000,000 (gross).
4	Trustees remuneration per "Trust Deed": Fixed salary Sh.80,000,000 each. 2% of total computed income.
5	Under the terms of the Trust Deed, the trustees made the following discretionary payments to Baraka, Khalifi and Mwanga; Sh.120,000,000, Sh.100,000,000 and Sh.60,000,000 respectively.
6	Trading income was before taking into account capital expenditure as follows:

		Sh.
	Godown	3,500,000
	Staff canteen	750,000
	Parking bay	800,000
	Sports pavilion	1,950,000
		7,000,000

7	Administrative and other expenses amounted to Sh.160,000,000.
8	The children did not have other income.

Required:

(i) A statement of income tax payable by the trustees on the trust income for the year of assessment 2018.

(ii) The amount due to each beneficiary for the year of assessment 2018.

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May 2018

1 Questions

Question 3a

Jua and Kali have been trading as partners under a trade name Juakali Enterprises since 1 January 2016. They have not filed individual income tax returns for the year ended 31 December 2017. The Commissioner of Domestic Taxes has issued an estimated assessment of Sh.784,000 to each of the partners for the year ended 31 December 2017. They share profits and losses in the ratio of 2:3 to Jua and Kali respectively. They are preparing to appeal against the assessment and have approached you for tax advice with the following details:

Cash book summary
Dr.	Sh.	Cr.	Sh.
Balance brought forward (1 January 2017)	760,000	Payments to creditors	880,000
Capital: Jua	600,000	Purchase of furniture	200,000
Kali	900,000	Motor vehicle expenses	140,000
Receipts from debtors	1,700,000	Electricity expenses	78,000
Cash sales	1,000,000	Rent expenses	394,000
Rent income	580,000	Purchase of motor vehicle	600,000
Sale of furniture	170,000	Salaries and wages	480,000
		Office partitions	180,000
		General expenses	440,000
		Balance carried forward	2,318,000
	5,710,000		5,710,000

Additional information:

1	The cost of furniture sold was Sh.160,000 and had accumulated depreciation of Sh.14,000 as at 1 January 2017. Profit on disposal was credited to the income statement for the year ended 31 December 2017.
2	All the cash sales were paid into the bank with the exception of Sh.440,000 which was debited in the income statement as general expenses, but related to the following items: partners' children school fees, Sh.80,000, purchase of goods Sh.200,000, tax appeal expenses Sh.40,000, insurance policy for partners' life Sh.70,000 and computer software Sh.50,000.
3	Other information provided was as follows:

	31 December 2016 Sh.	31 December 2017 Sh.
Inventories	248,000	362,000
Creditors for goods	400,000	280,000
Debtors for goods	240,000	360,000
Electricity expenses prepaid	472,000	30,000
Rent owing	78,000	44,000
Salaries and wages owing	20,000	60,000
Furniture	160,000	200,000

4	The business reported a net loss of Sh.424,500 for the year after deducting the following expenses: Salaries and wages for the year ended 31 December 2017 which included partners' salaries for Jua Sh.100,000 and Kali Sh.80,000. Rent expense for the year included 20% for private residence for Jua while electricity included 30% electricity bills paid on behalf of Kali's private house. Capital allowances in respect of the business had not been considered. However, depreciation had been debited in the income statement. The depreciation was at the rate of 20%.
5	Sales and purchases for the year were understated and overstated respectively by 20%.
6	The partners are entitled to interest on capital at the rate of 10% per annum on their capital contributions. The interest on capital was included in the figure for purchases for the year.

Required:

(i) With supporting computations, advise the partners on the accuracy of the estimated assessment issued for the year of income 2017.

(ii) Prepare a schedule of total taxable income for each partner for the year of income 2017. (5 marks) Hint: Start with the adjusted net loss.

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November 2017

1 Questions

Question 2a

Masai Traders commenced trading on 1 January 2014. The following are the financial statements and supporting records for the years ended 31 December 2016 and 2015:

Statement of comprehensive income for the year ended 31 December 2016:

	Sh. "000"	Sh. "000"
Sales		82,600
Less cost of goods sold		(36,200)
Gross profit		46,400
Less expenses:
Legal expenses	7,700
Impairment loss on business premises	4,800
Depreciation on plant and equipment	1,600
Interest expense	478
Salaries and wages	1,394	(15,972)
Net profit		30,428
Statement of financial position as at 31 December:
	2016 Sh. "000"	2015 Sh. "000"
Non-current assets:
Business premises	3,200	3,500
Plant and equipment	26,400	28,000
Saloon car	800	860
	30,400	32,360
Current assets:
Inventories	11,600	11,200
Debtors	12,800	15,200
Cash and cash equivalents	14,200	8,600
	69,000	67,360
Financed by:
Capital	30,000	30,000
Add: net profit	30,428	24,240
	60,428	54,240
Current liabilities:
Creditors	4,572	3,120
Bank overdraft	4,000	10,000
	69,000	67,3.60

Additional information:

1	During the year 2016, payments through the bank comprised the following:

		Sh."000"
	Conveyance fees for business land title deed	128
	Payments to creditors	2,488
	Salary to wife	260
	Mortgage interest; personal residence	184
	Defending business against illegal trade	160
	Revenue stamps	16

2	The credit purchases figure was overstated by 60%.
3	Receipts from debtors amounted to Sh.9,600,000. A debtor owing goods valued at Sh.85,840 inclusive of 16% VAT was declared bankrupt during the year and the debt written off. The write off was included in the interest expense.
4	The figure for sales was understated by 20%.
5	Business premises included: A factory building at a cost of Sh.960,000. Warehouse Sh.540,000. Staff canteen Sh.600,000. All these were put into use on 1 January 2014.
6	There were no acquisitions or disposals of fixed assets during the year 2016.
7	Plant and equipment acquired in the year 2015 includes: Weighing scale Sh.14,000. Furniture Sh.240,000. Computers Sh.324,000. Forklift Sh.400.000. Lorry (2 tonnes) Sh.960,000. The rest of the assets were categorised under Class IV for purposes of wear and tear allowance.

Required:

(i) A statement of adjusted taxable profit or loss for the year ended 31 December 2016.

(ii) State three areas or items that you might require further clarification on from Masai Traders for accurate computation of any tax due.

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May 2017

2 Questions

Question 3b

Wema and Nenda have been running Wenda Enterprises as a partnership, sharing profits and losses in the ratio of 2:3 respectively. The following is the statement of comprehensive income for the firm for the year ended 31 December 2016:

	Sh.	Sh.
Sales		5,220,000
Less: Cost of goods sold		(2.047,000)
Gross profit		3,173.000
Rental income		148,800
Foreign exchange gain		120,200
İnterest on fixed deposit account		80,000
		3,522,000
Less: Expenses
Purchase of CCTV cameras	96,000
Impairment loss on godown	124,600
Website development	130,000
Debenture interest	56,000
Audit fees	48,400
Salaries and wages	300,000
Directors' allowances	280,000
Legal expenses	250,000
Loss on rented property	36,200
Purchase of foreign currency	344,900
Advertising expenses	224,200
Purchase of computers	180,000
Insurance	94,200
Medical expenses	49,600
Bank charges	82,400
Purchase and installation of computer programs	120,000	(2,416,500)
		1,105,500

1	The business was converted into a limited liability company trading as Dawadu Ltd. with effect from 1 October 2016 and retaining the partners as directors of the new company.
2	The cost of goods sold included opening stock of Sh.576,000 which was overcast by 20%, purchases of Sh.2, 146,000 inclusive of 16% VAT and closing stock of Sh.675,000 which was undercast by 10%.
3	All revenues and expenses accrued evenly throughout the year except for specific expenses relating to Dawadu Ltd. as a company.
4	Salaries and wages included partners' salaries of Sh.120,000.

5	Legal expenses comprised:	Sh.
	Acquisition of company's title deed	50,000
	Negotiating debenture stock	100,000
	Demand letters to customers	40,000
	Drafting Memorandum of Association	60,000
		250,000

6	Wema was paid consultancy fees of Sh.54,000 for installing CCTV cameras in the premises.
7	Advertising expenses include a neon sign costing Sh.92,000.
8	The sales figure was inclusive of VAT at the rate of 16%
9	Directors' allowances include commission paid to Nenda of Sh.60,000 for negotiating a business contract.

Required:

(i) Separate statements of adjusted taxable profit or loss for Wenda Enterprises and Dawadu Ltd. for the year ended 31 December 2016. (Hint: Start with the net profit).

(ii) Tax payable by (or refundable to) Dawadu Ltd. for the year ended 31 December 2016.

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Question 5b

A and B are partners trading as AB Enterprises. sharing profits and losses equally.

The following is the statement of comprehensive income for the partnership for the year ended 31 December 2016:

	Sh."000"	Sh."000"
Sales		40,450
Less: Sales returns		(1,200)
		39,250
Less: Cost of goods sold		(19,550)
Gross profit		19.700
Discount received		350
		20,050
Less: Expenses
Rent	1,850
Bad debts	400
Wages and salaries	6,100
Loan interest	400
Depreciation	4,200
Insurance	1,450
Repairs	300
Electricity	750	(15,450)
Net profit		4,600

The partnership is under tax investigation and the assessor obtained the following details from the firm's records for the year ended 31 December 2016:

1	Balances of assets and liabilities:	1 January 2016 Sh."000"	31 December 2016 Sh."000"
	Inventory	6,100	4,200
	Machinery	84,600	97.000
	Rent prepaid	800	-
	Rent owing	-	950
	Debtors	9,300	7,500
	Loan from bank at 8% interest per annum	6,000	6,000
	Loan interest owing	-	200
2	Receipts and payments were as follows:
			Sh."000"
	Receipts:
	Receipts from debtors		26,400
	Cash sales		72,400
	Payments:
	Loan interest paid		400
	Electricity		750
	Rent		240
	Purchase of machinery		16,400

3	Rent expense related to A's private residence. In addition, electricity paid includes Sh.50,000 for A's private residence.
4	The tirm issued credit notes amounting to Sh. 1,200,000 which was erroneously posted as Sh.200,000 to the relevant ledgers.
5	Included in the sales figure is Sh.30,000 for interest on drawings by B and proceeds on disposal of machinery Sh.1,450,000. The machinery had cost Sh.4,000,000 with an accumulated depreciation of Sh.200,000.
6	Receipts from debtors include Sh.440,000 contributed by a new partner C as his capital on 1 October 2016.The profit and loss sharing ratio changed te 2:2:1 for A, B and C respectively.
7	Purchases amounted to Sh.19,250,000 which included goods withdrawn by B valued at Sh.300,000.
8	Salaries and wages include accrued salaries to the partners of Sh.2,400,000 shared equally among all the three partners per month as applicable.

Required:

As a tax assessor, compute the net profit for tax purposes for the year ended 31 December 2016 indicating the taxable income for each partner.

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November 2016

2 Questions

Question 1b

Ali and Baba are partners in a small firm trading as Alibaba Enterprises. They share profits and losses in the ratio of 2:3 respectively.

The following extracts were obtained from the records of the firm for the year ended 31 December 2015:

1	Partners' current account extracts:

Debit			Credit
	Ali Sh.	Baba Sh.		Ali Sh.	Baba Sh.
Drawings	40,000	60,000	Balance brought down	100,000	200,000
			Salaries to partners	70,000	120,000
			Interest on capital	50,000	40,000

2	Assets and liabilities:
		1 January 2015 Sh.	31 December 2015 Sh.
	Saloon car (cost)	2,400,000	2,160,000
	Trade receivables	1,800,000	960,000
	Donations	-	140,000
	Salaries and wages accrued	840,000	1,600,000
	Electricity prepaid	170,000	200,000
	Furniture	200,000	180,000
	Inventories	360,000	500,000
	Trade payables	1,500,000	1,200,000

3	Extracts from the bank statement:
		Sh.
	Payments to suppliers for goods	840,000
	Receipts from customers	2,200,000
	Payments for computers (hardware)	600,000
	Payments for computer software	120,000
	Catering fees	90,000
	Electricity	60,000
	Salaries and wages	700,000
	Legal fees	160,000

4	Legal fees amounting to Sh.48,000 relate to costs of negotiating purchase of business premises while electricity paid included a deposit of Sh. 15,000 to the power company.
5	Each partner had obtained a 10% loan of Sh.200,000 from the partnership for acquiring their private assets. The interest on loan was included in their share of interest on capital.

Required:

(i) A statement of adjusted taxable profit or loss of the partnership for the year ended 31 December 2015.

(ii) Total taxable income (loss) for each partner.

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Question 2b

The following information was extracted from the books of Michezo Sporting Members Club for the year ended 31 December 2015. The club's manager did not submit income tax returns as he argued that the club was exempted from taxation. He has consulted you for professional advice.

Additional information:

1	The club received gross income during the year ended 31 December 2015 amounting to Sh.35 million which was analysed as follows:

		Sh.
	Entrance fees	4,770,000
	Member subscription	15,900,000
	Interest on late subscription	795,000
	Interst income (fixed deposit)	2,544,000
	Dividend income	1,272,000
	Royalties	1,908,000
	Rent income	6,360,000
	Gain on property transfers	1,451,000
		35,000,000

2	Operating expenses amounted to Sh.6,360,000
3	Interest and dividend income were stated gross of tax.

Required:

(i). Advise the club's manager on the circumstances under which members clubs are taxed in your country.

(ii). Assess whether Michezo Sporting Members Club is subject to taxation for the year ended 31 December 2015 and the applicable tax liability (if any).

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May 2016

1 Questions

Question 2

Weka Enterprises is a small retail business dealing in fast moving consumer products The Revenue Authority suspects that the business has been filing fraudulent returns and bas requested for financial statements from the business. The business provided the following derails for the years ended 31 December 2015 and 31 December 2014

Income statement for the year ended 31 December 2015
	Sh.	Sh.
Turnover		27,840,000
Less cost of goods sold		(15,354,000)
Gross profit		12,486,000
Proceeds from sale of furniture		240,000
Capital gain on sale of plot		156,400
		12,882,400
Less expenses
Purchase of furniture	360,000
General expenses	2,367,800
Rent and rates	160,000
Depreciation on motor vehicle	94,600
Customs duty	124,200
Hire purchase cost	226,000
Salaries and wages	1,680,000	(5,012,600)
Net profit		7,869,800

Statement of financial position as at 31 December 2015
Non-current assets	2015 Sh.	2016 Sh.
Furniture at cost	348,000	460,000
Motor vehicle at cost	1,660,000	1,565,400
	2,008,000	2,025,400
Current assets
Inventories	4,389,600	2,881,000
Accounts receivable	740,400	1,640,000
Prepaid general expenses	178,200	98,000
Prepaid rent and rates	72,800	24,600
Cash and cash equivalent	300,000	183,000
Total assets	7,689,000	6,852,000
Financed by:
Capital	1,000,000	800,000
Add net profit	7,869,800	5,780,000
	8,869,800	6,580,000
Less drawings	(2,200,000)	(1,320,000)
	6,669,800	5,260,000
Current liabilities
Accounts payable	979,200	1,528,000
Accrued rents and rstes	24,000	36,000
Interest due on higher purchase	16,000	28,000
Total capital and liabilities	7,689,000	6,852,000

Additional information:

1	Turnover and purchases were inclusive of VAT at the rate of 16%.
2	The turnover excludes cash sales. During the year ended 31 December 2015, the business paid the following expenses out of cash sales.

		Sh.
	Telephone and postage	48,000
	School fees	142,800
	Repairs and maintenance	94,600
	Insurance	36,600

3	The bank balance is included in the cash and cash equivalents. The following details were included in the bank statement:

		Sh.
	Personal expenses	294,000
	General expenses	792,800
	Rent and rates	68,400
	Hire purchase interest	29,600
	Payments to creditors	2,460.000
	Receipts from debtors	5,890,000

4	The following assets used by the business were not included in the assets register. Sh

	Computers	368,000
	Fax machine	120,000
	Salon car	2,800,000
	Delivery van	720,000
	Computer software	150,000

The revenue authority has established that the statement of financial position forms a good basis for recomputing the taxable profit. All expenses are to be adjusted on the basis of the statement of financial position.

Required:

(a) Using suitable computations, confirm the accuracy or otherwise of the taxable profit of enterprises for the year ended 31 December 2015

(b) Summarise five types of preliminary information that you might require from the business in order to further ascertain the accuracy of the taxable profit

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November 2015

1 Questions

Question 3

James and Katana established a partnership business, sharing profits and losses in the ratio of 3:2 respectively. The following is the income statement of the partnership for the year ended 31 December 2014:

	Sh.	Sh.
Sales		6,728,000
Unrealised foreign exchange gain		150,000
Capital gain on sale of shares		352,000
Recovery from insurance on stock stolen		480,000
Goods transferred to a branch at cost		184,000
Dividends from Kali Cooperative Society		51,000
		7,945,000
Less expenses:
Purchases	2,842,000
Purchase of computers	180,000
Partners salaries	720,000
Legal fees	680,000
Repairs and maintenance	568,400
Rent and rates	244,600
Interest on loan	166,200
General expenses	964,000
Motor vehicle expenses	840,000
Insurance	156,000
Preliminary expenses	262,800
Directors fees	600,000
Audit fees	148,200
Debenture interest	360,000
Travelling expenses	960,000	8,828,200
Net loss		(883,200)

Additional information:

1	The partnership was converted into a limited liability company by the name Kaka Ltd. on 1 October 2014. Incomes and expenses accrued evenly throughout the year unless otherwise stated.
2	Purchases and sales were inclusive of value added tax at a rate of 16%.
3	Closing stock was valued at Sh.1,840,000 while opening stock was at 10% of sales net of value added tax.

4	Legal fees comprised:	Sh.
	Petition to Association of Manufacturers	80,000
	Notice for change of business name	64,800
	Conveyance fees of business	72,400
	Premises Stamp duty	36,600
	Negotiating a business loan	20,800
	Recovery of bad debts	45,000
	Signing a 100-year lease agreement	128,400
	Purchase of partner's private residence - James	150,000
	Appeal against tax arrears	82,000
		680,000
5	Repairs and maintenance comprised:	Sh.
	Purchases of furniture	96,000
	Installation of neon sign	60,000
	Designing an office block	140,000
	Cost of partitioning office block	250,000
	Repainting of business premises	22,400
		568,400

6	General expenses included; registering of patent rights Sh.64,000, floatation costs Sh.48,000 and negotiating costs for an additional piece of land for business expansion at Sh.56,000.
7	Interest on loan includes interest on partners' capital of Sh.100,000 which was shared according to profit and loss sharing ratio.

Required:

(a) A statement of adjusted taxable profit or loss for the business for the year ended 31 December 2014.

Hint: Start with gross profit.

(b) Comment on the tax position of James, Katana and the company.

(c) Citing examples, advise James and Katana on two areas of tax avoidance that they could explore for the business.

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May 2015

1 Questions

Question 5b

Kimutai and Wakoli started an accountancy firm on 1 January 2014 under the name Kimutai Wakoli and Associates. They deposited Sh. 3,000,000 and Sh. 2,000,000 as capital respectively and agreed that the profits and losses would be shared equally They also agreed that interest on capital would be paid at the rate of 5% per annum based on the initial capital contributions.
The firm did not maintain the necessary books of account, but provided the following additional information

1	On 5 January 2014, the firm signed a six year lease for an office at an annual lease payment of Sh. 200,000. A deposit equivalent to two years lease was paid on commencement of the lease
2	On 10 January

	Assets	Sh.
	Motor vehicle	2,500,000
	Furniture and fittings	280,000
	Computer and printers	120,000
	Telephone and fax machines	40,000
	Reference books	16,000
	Kitchen utensils (for office tea)	3,000
	Television set	12,000
	Fans (for office ventilation)	6,000
	Carpets	22,000
	Safe (metallic)	25,000

3	Professional fees earned amounted to Sh. 8.200,000. Of this amount Sh. 3,700,000 was received in cash wink the balance was deposited directly by clients to the firm's bank account
4	The following monthly payments were made from the funds received in cash before banking the balance at each month end. Business mileage to partners Sh. Kimutai 30,000 Wakoli 25,000 Mobile phone airtime (Official) Sh. Kimutai 3,000 Wakoli 3,000 Staff 2,000 Office.tea.and.snacks...5,000

5	Analysis of the firm's banks statement for the year showed the following summary of payments.

		Sh.
	Lease payment	400,000
	Purchase of motor vehicle	2,500,000
	Purchase of other assets	524,000
	Office expenses	2,921,000
	Advertisement commission	200,000

6	The office expenses arnount shown in note 5 above was further analysed as follows:

		Sh.
Partner's salaries: Kimutai		600,000
Wakoli		400,000
Staff salaries		436,000
Contribution to retirement benefit plan:
	Partners	180,000
	Staff	120,000
Contribution to a medical scheme:
	Partners	280,000
	Staff	150,000
Premium on partners life assurance policies		210,000
Golf club membership for partners		50,000
Donation	Political party	10,000
	Red Cross Society of Kenya	60,000
Tax consultancy fees		35,000
Subscription to professional institute		40,000
Training fees	Partners' children	140,000
	Staff	80,000
Motor vehicle insurance (firm)		30,000
Other office expenses		1,000,000
		2,921,000

Required:
Taxable profit (or loss) for the partnership for the year ended 31 December 2014

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Taxation of business income and specialized business activities

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