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cpa 4 taxation 1 tax 3


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By Omosa


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QUESTION ONE Mrs. Mary Meno is a professional dentist who practices in Nairobi. She has provided you with the details on her clinic for the year ended 31 December 2005: Sh. Gross Professional fees received Subscriptions to professional association and publications Subscriptions to a wildlife magazine Donations to a children’s home Debt collection expenses (dental patients) Wages for dental assistant Replacement of surgical instruments Rent for the clinic premises Electricity and water – clinic Other clinic expenses Hire of car for use in practice Uniforms for staff Payment of school fees for own children Contribution to provident fund – self Payment of life insurance premium – self Terminal benefits paid to retired receptionist Depreciation on furniture – clinic Rents received from sub-rentals Rent collection expenses(sub-tenants) Wages paid to cleaners and watchman – clinic Furniture bought for clinic 1 January 2005 Tarmacking of Drive-way personal residence Additional servant quarters – personal residence Dividend income net of withholding tax Interest income from commercial bank – gross Directors fees received (deductions at source SSh.3,0000 1,000,000 20,000 2,000 10,000 6,000 120,000 40,000 140,000 40,000 70,000 50,000 5,000 40,000 60,000 20,000 50,000 12,000 14,000 2,000 50,000 64,000 80,000 140,000 34,000 24,000 120,000 Net Required: (a) Calculate the taxable income of Mrs. Mary Meno for the year ended 31 December 2005. (12 marks) (b) Tax payable by Mrs. Mary Meno. ( 6 marks) (c) Indicate when the tax, if any, is payable to the Income Tax department. ( 2 marks) (Total: 20 marks) QUESTION TWO You have been invited by a group of CPA I and CPS I students to discuss the matters listed below: Required: In each of the cases provide explanatory notes and computations for use in your discussions with students. (a) (i) A manager who is on full-time employment where he draws sh.80,000 per month. He is housed by the employer in a rented house where rent payable to the landlord is Sh.720,000 per annum. ( 4 marks) (ii) The manager makes an annual contribution of Sh.84,000 to a registered pension fund. ( 3 marks) (iii) The manager is provided with a motor car whose purchase cost was Sh.1,200,000. ( 3 marks) (b) A high school boy aged 15 years inherits Sh.300,000 from his grandfather and wins Sh.100,000 in the national lottery. ( 4 marks) (c) A retired civil servant on an annual pension of Sh.180,000 per annum signed a service contract with effect from 1 January 2005. The contract was for three years at an annual salary of Sh.440,000. The contract was terminated by the employer on 31 December 2005. The employee was paid compensation amounting to Sh.560,000. ( 6 marks) (Total: 20 marks) QUESTION THREE (a) Give a brief definition of value added tax (VAT). ( 2 marks) (b) Explain in numbered paragraph the case for and against VAT in your country. ( 8 marks) (c) Saika Co. Ltd. a manufacturer, purchases raw materials at Sh.1,000,000. The company then incurs conversion costs which are estimated at 40% of material cost. The profit mark-up is 20% of total cost. The completed product is sold to Chemuka Wholesalers who then incur conversion costs of 50% on cost. The wholesalers mark-up is 10% on cost. The wholesaler sells the product to a retailer, who has no conversion costs but sells at a profit of 30%. Required: Assuming VAT is charged at 15% on all products, compute the total VAT payable. (10 marks) (Total: 20 marks) QUESTION FOUR (a) What is meant by the term qualifying expenditure? ( 2 marks) (b) Name and briefly explain items which may be included in the qualifying expenditure for the purposes of investment deductions. ( 8 marks) (c) Kalamuka Maize Millers Limited purchased a building on 1 January 2005, for Sh.4,000,000. It was brought into use on the same day. The sellers construction cost comprised: Sh. Land Architects fees Leveling land Construction (including offices sh.160,000) 200,000 40,000 60,000 1,700,000 2,000,000 B.B. Ltd. purchased the whole of the Kalamuka Maize Millers Ltd. on 31 December 2005 and continued with the same business of milling maize. The following amounts were paid for assets purchased. Sh. Goodwill Land and buildings Milling machines 10,000 4,000,000 1,800,000 Tractor and lorry Motor vehicle 1,600,000 1,200,000 B.B Ltd. Incurred the following additional costs: Sh. Extension to building Security wall Additional boiler New sorter and conveyor – fixed to fabric of building Fixtures and fittings. 800,000 100,000 1,000,000 1,200,000 600,000 B.B Ltd. sold some surplus assets as follows: Date Particulars Sh. 1-7-2006 1-9-2006 1-9-2006 Milling machines Damaged fixtures and fittings Lorry 200,000 8,000 180,000 B.B. Ltd’s financial year ended on 30 September 2006. Required: The capital deductions claimable for the year ended 31 December 2006. (10 marks) (Total: 20 marks) QUESTION FIVE Write explanatory notes on the taxes listed below and in each case indicate whether the tax complies with the main principles of a good tax system. (a) Presumptive tax on agricultural produce. (5 marks) (b) Cess on agricultural produce. (5 marks) (c) Trade licence chargeable to professionals. (5 marks) (d) Stamp duties on transfer of properties. (5 marks) (Total: 20 marks)
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