CFM 100: INTRODUCTION TO TAXATION (DAY)
DATE: APRIL 2011 TIME: 2 HOURS
INSTRUCTIONS: Answer ALL Questions
QUESTION ONE
Mr. Casper Amuto is employed as a Finance Director by Damida Ltd. He reported the following details on
his for the year ended 31 December 2010:
(i.) He was entitled to a basic salary of Sh.2, 400,000 per annum (PAYE Sh.72, 000 per annum).
(ii.) The employer provided him with a motor vehicle (2600 cc) which was acquired in August
2010 at a cost of Sh 3,500,000.
(iii.) His annual mortgage repayment of Sh.400, 000 (including interest of Sh.180, 000) was paid
by the employer.
(iv.) He was entitled to an annual bonus of Sh.120, 000 per annum.
(v.) The following deductions were made from his salary during the year:
Sh.
Contributions to unregistered pension scheme 120,000
Life assurance premiums 72,000
Contributions to a registered pension scheme 90,000
(vi.) He received a dividend of Sh.60, 000(net) from his shares in Damida Ltd.
(vii.) His other income comprised
2
Sh.
Interest income: Housing development bonds 420,000
Treasury bills 120,000
Matumaini Bank Ltd. 85,000
Dividend income: Samoja Ltd. 95,000
Rental income from inherited property 520,000
Hobby farming 8,000
Required:
(a) Taxable income of Mr. Casper Amuto (16 Marks)
(b) Tax due on the income computed in (a) above. (4 Marks)
(Total: 20 Marks)
Mr. Casper Amuto is employed as a Finance Director by Damida Ltd. He reported the following details on
his for the year ended 31 December 2010:
(i.) He was entitled to a basic salary of Sh.2, 400,000 per annum (PAYE Sh.72, 000 per annum).
(ii.) The employer provided him with a motor vehicle (2600 cc) which was acquired in August
2010 at a cost of Sh 3,500,000.
(iii.) His annual mortgage repayment of Sh.400, 000 (including interest of Sh.180, 000) was paid
by the employer.
(iv.) He was entitled to an annual bonus of Sh.120, 000 per annum.
(v.) The following deductions were made from his salary during the year:
Sh.
Contributions to unregistered pension scheme 120,000
Life assurance premiums 72,000
Contributions to a registered pension scheme 90,000
(vi.) He received a dividend of Sh.60, 000(net) from his shares in Damida Ltd.
(vii.) His other income comprised
2
Sh.
Interest income: Housing development bonds 420,000
Treasury bills 120,000
Matumaini Bank Ltd. 85,000
Dividend income: Samoja Ltd. 95,000
Rental income from inherited property 520,000
Hobby farming 8,000
Required:
(a) Taxable income of Mr. Casper Amuto (16 Marks)
(b) Tax due on the income computed in (a) above. (4 Marks)
(Total: 20 Marks)
QUESTION TWO
Kipkirui and Limpopo have been trading in partnership sharing profits and losses in the proportion of
three fifths and two fifths respectively. Their main activity is buying and selling property. Accounts to
30th April 2011 are presented below:
Income: Notes Ksh
Profit from sale of residential houses 4,880,000
Interest from treasury bills 2 270,000
Pre sale rent income 360,000
Commission on sale of public playground 2 2,000,000
7,510,000
Expenditure:
Interest on capital: Kipkirui 40,000
Limpopo 32,000
Goodwill written off 62,000
Bad debts 3 560,000
Audit, insurance & legal fees 4 320,000
3
Motor vehicle expenses 330,000
Depreciation 118,000
Special expenses 5 48,000
Salary to Limpopo 620,000
Loss on sale of shares 280,000
Repairs and renewals 6 75,000
Salaries and wages 2,960,000
Light water & electricity 148,000
Retirement benefits 7 240,000
Subscriptions and donations 8 30,000
5,863,000
Profit for the period 1,647,000
Additional information:
1) Although included in the accounts the interest from treasury bills is not taxable.
2) The commission on sale of public playground was earned from a politician who allocated
himself the playground irregularly and subsequently the partners found a buyer for the
playground.
3) Bad debts analysis:
A customer (through court action) 400,000
Partners wife 160,000
560,000
4) Audit, insurance and legal fees expenses analysis:
Audit expenses 120,000
Partners insurance 80,000
Legal fees: debt collection 80,000
Defend action from (2) above 40,000
320,000
5) Special expenses:
Staff redundancy cost 30,000
4
Commission paid to facilitate transfer at the land office 18,000
6) Repairs and renewals Ksh 35,000 was used to repair Limpopo’s house.
7) Retirement benefits analysis:
NSSF contributions 10,000
Pension to staff 190,000
Provident fund for partners 40,000
240,000
8) Subscriptions and donations were made to Mukuru Children’s fund, a national project to help
street children.
Required:
Compute the taxable profit of the firm and show how this will be distributed to the partners.
(20 Marks)
Kipkirui and Limpopo have been trading in partnership sharing profits and losses in the proportion of
three fifths and two fifths respectively. Their main activity is buying and selling property. Accounts to
30th April 2011 are presented below:
Income: Notes Ksh
Profit from sale of residential houses 4,880,000
Interest from treasury bills 2 270,000
Pre sale rent income 360,000
Commission on sale of public playground 2 2,000,000
7,510,000
Expenditure:
Interest on capital: Kipkirui 40,000
Limpopo 32,000
Goodwill written off 62,000
Bad debts 3 560,000
Audit, insurance & legal fees 4 320,000
3
Motor vehicle expenses 330,000
Depreciation 118,000
Special expenses 5 48,000
Salary to Limpopo 620,000
Loss on sale of shares 280,000
Repairs and renewals 6 75,000
Salaries and wages 2,960,000
Light water & electricity 148,000
Retirement benefits 7 240,000
Subscriptions and donations 8 30,000
5,863,000
Profit for the period 1,647,000
Additional information:
1) Although included in the accounts the interest from treasury bills is not taxable.
2) The commission on sale of public playground was earned from a politician who allocated
himself the playground irregularly and subsequently the partners found a buyer for the
playground.
3) Bad debts analysis:
A customer (through court action) 400,000
Partners wife 160,000
560,000
4) Audit, insurance and legal fees expenses analysis:
Audit expenses 120,000
Partners insurance 80,000
Legal fees: debt collection 80,000
Defend action from (2) above 40,000
320,000
5) Special expenses:
Staff redundancy cost 30,000
4
Commission paid to facilitate transfer at the land office 18,000
6) Repairs and renewals Ksh 35,000 was used to repair Limpopo’s house.
7) Retirement benefits analysis:
NSSF contributions 10,000
Pension to staff 190,000
Provident fund for partners 40,000
240,000
8) Subscriptions and donations were made to Mukuru Children’s fund, a national project to help
street children.
Required:
Compute the taxable profit of the firm and show how this will be distributed to the partners.
(20 Marks)
QUESTION THREE
a) The following transactions related to the business of Mac mek for the month of February 2011:
Sh.
Wages
Purchases (zero rate)
Purchases (standard rate – 16%)
Purchased car from Japan
Sales at standard rate (15%)
Sales at zero rate
Exempt sales
1,350,000
150,000
900,000
700,000
2,400,000
600,000
900,000
Required:
Calculate the VAT payable by the business of Mac mek for the month of February 2011:
(8 Marks)
b) Section 24(a) of the Value Added Tax (VAT) Act (Cap.476) requires certain documents to be
attached to a claim for refund of VAT. Briefly explain four of these documents. (7 Marks)
(Total: 15 Marks)
QUESTION FOUR
a) Discuss the objectives of taxation and show how they are achieved by the government.
(8 Marks)
b) Discuss the canons of an optimum tax system. (7 Marks)
5
RATES OF TAX (Including wife’s employment, self employment and professional income rates of tax). Year of
income 2010.
Monthly taxable pay Annual taxable pay Rates of tax
(Shillings) (Shillings) % in each shilling
1 - 10164 1 -121968 10%
10165 - 19740 121969 - 236880 15%
19741 - 29316 236881 - 351792 20%
29317 - 38892 351793 - 466704 25%
Excess over 38892 Excess over -466704 30%
Personal relief Ksh.1.162 per month (Ksh.13,944 per annum)
Prescribed benefit rates of motor vehicles provided by employer
Monthly Annual
Rates rates
(Ksh) (Ksh)
Capital allowances:
Wear and tear allowances:
Class I 37.5%
Class II 30% (i) Saloons, Hatch Backs
Class III 25% and Estates
Class IV 12.5%
Industrial building allowances: Up to 1200 cc 3,600 43,200
Industrial buildings 2.5% 1201- 1500 cc 4,200 50,400
Hotels 10 % 1501- 1750 cc 5,800 69,600
Farm work allowances 50 % 1751- 2000 cc 7,200 86,400
Investment deduction allowances: 2001- 3000 cc 8,600 103,200
2003 - 70% Over 3000 cc 14,400 172,800
2004 - 100%
2005 - 100% (ii) Pick-ups, Panel Vans (Unconverted)
Shipping investment deduction 40%
Mining allowance: Up to 1750 cc 3,600 43,200
Year 1 - 40% Over 1750 cc 4,200 50,400
Year 2-7 - 10% (iii) Land Rovers/ Cruisers 7,200 86,400
OR 2% of the initial capital cost of the vehicle for each month.
Commissioner’s prescribed benefit rates
Monthly rates Annual rates
Services Ksh. Ksh.
(i) Electricity (common or from generator) 1,500 18,000
(ii) Water (Communal or from a borehole) 500 6,000
(iii) Provision of furniture (1% of cost to employer)
If hired, the cost of hire should be brought to charge
(iv) Telephone (Landline and mobile phones) 30% of bills
Agriculture employees: reduced rates of benefits
(i) Water 200 2,400
(ii) Electricity 900 10,800
Other benefits:
Other benefits for example, servants, security, staff meals etc are taxable at the higher of fair market value and
actual cost to employer.
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