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CPA Public Finance and Taxation – May 2021 Past Paper & Answers

Unit: Public Finance and Taxation

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Download CPA Public Finance and Taxation May 2021 past paper with detailed answers and marking scheme. This paper is based on KASNEB examination standards and is ideal for revision and exam preparation.

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Other Public Finance and Taxation Past Papers

1a
Oversight Function in Public Finance Management
​​Summarise four functions ofthe National Assembly budget committee as per the Public Finance Management Act, 2012.
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1b
Introduction to Public Financial Management
​​In managing the national government public finances, the National Treasury or such state organ in your country enforces certain fiscal responsibility principles in accordance with the Constitution and the Public Finance Management Act. 

In relation to the above statement, explain four fiscal responsibility principles.
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1c
Oversight Function in Public Finance Management
​​ Citing their information needs, identify four users of the Consolidated Fund reports.
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1d
Introduction to Public Financial Management
​​Highlight four responsibilities of a County Treasury with respect to county public funds.
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2a
Procurement in public entities
​​Outline six functions of a disposal committee as provided under the Public Procurement and Asset Disposal Act 2015.
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2b
Administration of Income Tax and Tax Procedures
​​In a tax seminar, one of the facilitators noted that "Most revenue authorities in developing countries are embarking om tax base expansion programme to raise more revenue through identification of new taxpayers". 

With reference to the above statement, highlight four sources of information in regard to identification of new taxpayers.
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2c
Administration of Value Added Tax (VAT)
​ ​ ​​The following summary of transactions were obtained from the books of Zawadi Ltd., a company registered for value added tax (VAT) for the month of October 2020:

Sh.
Sales at standard rate
1,480,000
Exports to a foreign country
364,000
Audit fees
78,300
Electricity bills
36,400
Imported raw materials
320,000
Purchases at standard rate
624,500
Exempt supplies
700,000
Catering services
94.000
Entertainment services
120,000
Telephone bills
28,000
Car parking services
50,000
Bottled drinking water for staff
64,000
Zero rated supplies (exports)
240,000
Repairs of motor vehicles
76,200

Additional information: 
  1. Sales at standard rate include goods valued at Sh.280,000 purchased at standard rate and sold at the same state. 
  2. Imported raw materials was exclusive of freight charges of Sh.80,000 and insurance premium of Sh.40,000. Import duty rate was at 20%. 
  3. A debtor was issued with a credit note for goods valued at Sh.48,000 and this had not been passed through the relevant daybook. 
  4. The company issued debit notes valued at Sh.164,000 in respect to under invoicing of some customers. 
  5. Repairs of motor vehicles include Sh.20,000 for fuels and oils supplied to the company. 
Transactions are exclusive of VAT at the rate of 14% where applicable. 

Required: 
The VAT payable by or refundable to Zawadi Ltd. for the month of October 2020.
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3a
Administration of Income Tax and Tax Procedures
​ Propose four measures that the revenue collection agency in your country could employ to reduce instances of tax evasion. ​
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3b
Customs Taxes and Excise Taxes
​​Explain four grounds under which the commissioner might suspend or cancel a licence to manufacture excisable goods.
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3c
Taxation of Income
​ ​​Benson Kapila is the manager for Daity Ltd., a company incorporated in Kenya. He has approached you to assist him in filing income tax returns for the year of income 2020. He has provided the following details relating to his income during the year: 

1
Basic salary per month (Net of PAYE of Sh.18,600 per month) Sh.61,400.
2
He was provided with a house by the employer which was furnished at a cost of Sh.200,000.
3
He is a member of a registered retirement pension scheme. His monthly contribution was Sh.30,000. The employer contributed Sh.32,000 per month.
4
He was provided with a company car of 2000 cc whose cost as at 1 January 2019 was Sh.800,000.
5
He was given per diem of Sh.10,000 for five days he was out of work station on official duties in the month of June 2020.
6
He is a pensioner and received a monthly pension of Sh.35,000.
7
He is a member of home ownership savings plan (HOSP) where he contributed Sh.16,000 per month up to 30 September 2020. 
8
On 1 October 2020, he moved to his own house which he acquired through a 12% mortgage loan of Sh.3,600,000.
9
He has an education insurance policy for his children where he pays premiums of Sh.7,000 per month.
10
He enjoyed free company products during the year whose value was estimated at Sh.56,000.
11
The company gave him a 5% loan of Sh.2,000,000 on 1 December 2020 to assist in off-setting the mortgage loan. The market interest rate was at 12% per annum.
12
The company paid him monthly telephone allowance of Sh.5,000. 
13
His other incomes included:
  • Farming loss of Sh. 140,000.
  • Rental income (commercial building) Sh.96,000.
  • Dividends (net of tax) of Sh.47,600 from Hazita Cooperative Society.
  • Professional fees Sh.78,000.

Required: 
(i) Total taxable income for Benson Kapila for the year ended 31 December 2020. 

(ii) Tax payable (if any) from the income computed under (c) (i) above.
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4a
Taxation of Income
​ ​​Excel Communications Ltd. is the regional dealer and distributor of communications equipment. They have provided you with the following statement of profit or loss for the year ended 31 December 2020:

Sh.
Sh.
Sales
15,300,000
Closing inventory
2,000,000
Disposal gain on asset sold
180,000
Discount received
300,000
Compensation from insurance
105,000
17,885,000
Less: Expenses:
Purchases
9,000,000

Opening inventory
1,500,000
Repairs and maintenance
528,750
Rent and rates
93,750
Bad debts
311,250
Subscriptions and donations
37,500
Permits and licences
150,000
Depreciation
670,000
Office and distribution expenses
360,000
Travelling and transport
252,000
Legal fees
327,000
Accountancy fees
97,500
Disposal loss on assets
180,000
Discount allowed
200,000
Salaries and wages
1,500,000
Bank ledger fees
67,500
(15,275,250)
Net profit
2,609,750

Additional information: 
1
Insurance compensation is in relation to communications equipment stolen during the year while being shipped to a client. 
2
Office and distribution expenses comprise of the following:
Sh.
Club membership fee subscriptions for employees
135,000
Private expenditure of directors
102,000
3
10% of the rent and rates relates to directors' private residences.
4
Subscriptions and donations include:
Sh.
To the communications equipment traders association
22,500
To the Kenya Red Cross-donations
5,500
To the street children feeding program
9,500

37,500
5
Legal fees include the following:
Sh.
Renewal of lease -100 years
45,000
Staff employment contracts
60,000
Counterfeit equipment suit in the High Court
87,000
Debt collection
50,000
6
Capital deductions have been agreed at Sh.645,000 with the Commissioner of Domestic Taxes.
7
Bad debts include an increase in general provision for bad debts of Sh.21,250.
8
Salaries and wages include directors emoluments of Sh.500,000.
9
Repairs and maintenance includes the cost of erecting a signboard outside the dealership shop of Sh.28,750.

Required: 
(i) Excel Communications Ltd. taxable profit or loss for the year ended 31 December 2020. 

(ii) The tax payable (if any) on the profit or loss computed in (a) (i) above.
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4b
Investment Allowances/deductions
​ ​ ​​Plasticom Ltd. is a company established in year 2020 to manufacture plastic products. Before commencing its operations on 1 May 2020, the company incurred a total of Sh.8,760,000 in construction of a factory building which included:

Cost (Sh.)
Date of first use
Godown
320,000
1 July 2020
Showromm
240,000
1 September 2020
Administration offices
680,000
1 October 2020

Additional information: 
1
The following assets were constructed or purchased and utilised with effect from 1 July 2020:
1
Cost (Sh.)
Water pump
540,000
Labour quarters
920,000
Processing machinery
2,600,000
Tractor
1,800,000
Scanners
320,000
Two saloon cars
7,000,000
Mobile forklift
1,500,000
Computers
250,000
Power transformer
820,000
Office cabinets
180,000
Boilers
960,000
Bridge (connecting the factory to main road)
1,200,000
2
The following costs were incurred by the company on 1 September 2020:
2
Cost (Sh.)
Sinking a borehole
720,000
Construction of a parking bay
630,000
3
One of the computers traded in on 10 November 2020 for a new one costing Sh.68,000. The trade in value was Sh.40,000 and the balance was settled in cash.
4
The company constructed a Sports Pavilion and additional staff quarters during the year at the cost of Sh.890,000 and Sh.1,200,000 respectively. These structures were utilised from 1 October 2020. 
 
Required: 
Investment allowances due to Plasticom Ltd. for the year ended 31 December 2020.
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5a
Introduction to Taxation
​​Explain four reasons for the declining trend in tax revenue in most developing countries.
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5b
Introduction to Taxation
​​Summarise four objectivesof fiscal policies in your country.
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5c
Taxation of Income
​ ​ ​​Mark and Wanguh are in a trading partnership operating as Mawah Enterprises and sharing profits or losses in the ratio of 2:3 respectively. 

The following statement of profit or loss was prepared by the business for the year ended 31 December 2020:

Mawah Enterprises
Statement of profit or loss for the year ended 31 December 2020
Sh.
Sh.
Gross sales
2,736,000
Unrealised foreign exchange gain
16,000
Insurance recovery on stolen good
300,000
Overprovision for bad debts
34,000
Dividends from Haki Cooperative Society
42,500
Interest on drawings
45,000
3,173,500
Less expenses:
General expenses
324,000
Legal expenses
678,600
Salaries to partners
450,000
Drawings by partners
100,000
Commission to partners
180,000
Interest on partners' capital
250,000
Purchase of furniture
96,000
Donations to poverty commission
64,000
Construction of fire exit
36,400
(2,179,000)
Net profit
994.500

Additional information: 
1
Gross sales include VAT at 14%. In addition, 10% of sales before VAT represents closing stock. The stock had been overstated by 20%.
2
The amounts due to partners are to be apportioned according to profit or loss sharing ratios.
3
General expenses comprise:
Sh.
Partition of business premises
64,000
Debt collection expenses
36,000
Purchase of office stationery
14,000
Cash embezzled by partner's wife
48,000
Bad debts written off
24,800
Business premises rent
31,200
Salaries to employees
106,000
324,000
4
Legal expenses include:
Sh.
Acquisition of patent rights
24,800
Drafting of sales agreement
34,200
Negotiating sales contract
60,000
Defending the business against trade dispute
42,600
Mortgage interest for Mark
140,000
Defending partners against wrong tax assessment
94,600
Conveyance fees for business premises
125,800
Tax consultancy fees
72,500
5
The purchases represent 40% of the gross sales figure Sh.2,736,000. The purchases had been understated by 25% and were omitted from the income statement. 

Required: 
(i) Adjusted partnership statement of profit or loss for the year ended 31 December 2020. 

(ii) The allocation of profit or loss computed in (c) (i) above to each partner.
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