Unit: Advanced Taxation
14 Questions| 1. | Ale Ltd. entered into an agreement with a contractor under which it agreed to pay interest on any contractual fees paid late. A number of payments due to the contractor were delayed and incurred interest. The interest was not actually paid but the obligation to pay was accrued as a liability in the respondent's books. |
| 2. | As interest is a business expense, Ale Ltd. expensed it as a tax deductible item thereby reducing its corporation tax liability. The revenue authority undertook an audit and demanded payment on the withholding tax on the accrued interest. Following the demand, Ale Ltd. filed the matter before a tax tribunal. |
| 3. | The revenue authority claimed that by recognising accrued interest as a liability in its books of account, Ale Ltd. acknowledged that interest was credited to the account of the third party and therefore fell within the definition of the term "paid" under applicable tax laws. |
| 4. | At the tax tribunal, Ale Ltd. presented the following arguments:
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| 1. | Receipts | Sh. | Payments | Sh. |
| Balance brought forward | 288,000 | Salaries and wages | 254,000 | |
| Subscriptions | 2,500,000 | New equipment | 690,000 | |
| New members entrance fee | 600,000 | Repairs and maintenance | 124,000 | |
| Dividend: Weco Co-operative Society | 884,000 | Furniture | 240,000 | |
| Interest: Excel Bank Kenya | 2,140,000 | Office expenses | 415,000 | |
| Dinner dance | 723,000 | Printing and stationery | 168,000 | |
| Beverage sales-members | 657,000 | Purchase of beverages | 497,000 | |
| Investment income | 2,400,000 | Dinner dance expenses | 315,000 | |
| Refund of subscriptions | 45,000 | |||
| Legal fee on acquisition of investment | 25,000 | |||
| Transport | 248,000 | |||
| Fee to investment managers | 1,100,000 | |||
| Balance carried forward | 6,071,000 | |||
| 10,192,000 | 10,192,000 | |||
| 2. | Extracts from the statement of financial position as at 31 December 2021 were as follows: | |||
| Sh. | ||||
| Furniture and fittings (cost) | 240,000 | |||
| Equipment (cost) | 690,000 | |||
| Investment (cost) | 3,500,000 | |||
| Subscription in arrears | 300,000 | |||
| Accrued salaries | 68,000 | |||
| Stock of beverages | 184,000 | |||
| Subscriptions in advance | 85,000 | |||
| 3. | The dividend and interest income were stated at the gross amount. | |||
| 4. | Stock of beverages at the beginning of the year were Sh.162,000. | |||
| 5. | Subscription in arrears written off in the year amounted to Sh.288,000. | |||
| 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. |
| Sh. | |
| Geophysical staff salaries | 789,000 |
| Legal costs for title deeds | 562,400 |
| Dry hole contributions | 448,000 |
| Drilling and test development costs | 942,600 |
| Capital losses from previous year | 192,800 |
| Memorandum of understanding credit | 2,840,000 |
| Royalties on domestic sales | 3,600,000 |
| Royalties on export sales | 5,760,000 |
| Non-productive rent | 2,374,800 |
| Customs duty on plant and equipment | 672,300 |
| Purchase of assets for offshore operations | 7,840,000 |
| Provision for restoration of wells | 1,575,000 |
| Petroleum investment allowance | 9,262,000 |
| 1. | Bebabeba Supermarket Ltd. They operate a soft drinks dispensing machine which uses special tokens which resemble coins. During the month of July 2021, the machine dispensed drinks worth Sh.300,000 inclusive of VAT. This dispensing machine is slotted with tokens after every one and a half months, that is, on restocking drinks in any month, the tokens are emptied midway the following month. The machine was restocked during the month of July 2021. |
| 2. | Supa Bread Ltd. The firm bakes ordinary bread. During the month of August 2021 they made sales amounting to Sh.20,000,000, excluding VAT. They have arranged with a distribution company, who ensure bread is delivered to customers. The distribution company raised an invoice of Sh.2,000,000 for services rendered for August 2021. The electricity company also sent Supa Bread Ltd. a bill ofSh.3,000,000 for the month. The firm also hired advisory services from an overseas company and were billed Sh.1,000,000. The above figures are quoted inclusive of VAT unless stated otherwise. |
Required: For each of the two companies, or as otherwise stated, compute: | |
| (i) | The output VAT, if any, for the specified period. |
| (ii) | The input VAT (if any), (for Supa Bread Ltd.). |
| (iii) | The VAT payable (or refundable) for the specified period based on the information provided only. |
| 1. | The company leased the following assets in the course of the year.
|
| 2. | Haraka Ltd. incurred the following expenses in the course of the year: |
| 2. | Sh. | |
| General administration expenses | 1,600,000 | |
| Legal expenses | 480,000 | |
| Repairs and servicing | 320,000 |
| |
| 3. | Investment allowances have been agreed with the revenue authority to be Sh.620,000 for the year. |
| 4. | Haraka Ltd. had other incomes as follows:
|
Required: Compute: | |
| (i) | The taxable income or loss for Haraka Ltd. for the year ended 31 December 2021. |
| (ii) | The tax payable (if any) by Haraka Ltd. for the year ended 31 December 2021. |
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