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Hbc 2216: Advanced Taxation Question Paper
Hbc 2216: Advanced Taxation
Course:Bachelor Of Commerce
Institution: Dedan Kimathi University Of Technology question papers
Exam Year:2013
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DEDAN KIMATHI UNIVERSITY OF TECHNOLOGY
UNIVERSITY EXAMINATIONS 2010/2011
THIRD YEAR FIRST SEMESTER EXAMINATION FOR BACHELOR OF COMMERCE
HBC 2216: ADVANCED TAXATION
DATE: 16TH AUGUST 2013 TIME: 8.30 AM – 10.30 AM
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INSTRUCTIONS: Answer Question ONE and any other TWO questions.
QUESTION ONE
(a) Write short notes on stamp duty tax (3 marks)
(b) Write short notes on customs duty and bonded warehouse (3 marks)
(c) Explain the term adventure & concern in the nature of trade (2 marks)
(d) Distinguish between tax clearance certificate and tax reserve certificate. (2 marks)
(e) Write short notes on deemed dividend (2 marks)
(f) After graduating from college in 2008 John Mandela got two employment offers in Kenya on 2nd January 2009 where his uncle works and lives and is not sure which offer he should take.
Job Offer A
John would be employed Marketing Executive with Standard Bank, and the offer provides for the following:
1. A basic salary of Sh.50,000 per month while on probation of 8 months after which, the salary increases by 20%. (PAYE Sh.10,500 per month)
2. Mileage allowance of Sh.10,000 per month. It is estimated that 80% of the travelling will be on official duties.
3. Access to mortgage loan facilities from the employer to a maximum of 3 million shillings per annum at 6% interest rate per annum from 1st October 2009 to be repaid within 10 years. The prescribed interest rate was 15% per annum.
4. The bank will provide him with free return air tickets worth Sh.40,000 on once a year to enable him visit his family in South Africa.
5. Training fees of Sh.150,000 per annum for 3 years after probation to enable him pursue MBA programme at KU after work. The 1st instalment was paid in September, 2009.
6. He will be provided with the bank’s mobile phone hand set of Sh.10,000 and air time worth Sh.10,000 per month for official & non-official work.
7. The company will provide him with a furnished house at the staff quarters in Kileleshwa whose market rental value is Sh.35,000 per month. The company will deduct Sh.15,000 from his pay every month. The furniture cost the company Sh.300,000 in the year 2008. After probation John moved out of the company house, to his.
8. To be deducted 5% of his pensionable pay towards pension contribution.
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Job Offer B
John would be employed as a Business News Anchor with KTV, for:
1. A basic salary of Sh.90,000 per month. (PAYE Sh.15,000 per month).
2. An annual allowance of Sh.100,000 for the purchase of official attire.
3. Partial sponsorship to K.U for MBA at Sh.200,000 entire course.
4. A Toyota saloon car costing Sh.800,000 (1,500 c.c) belonging to KTV.
5. A staff house with free electricity, water and a cook whose monthly pay is Sh.8,000 in Upper Hill whose market rent is Sh.40,000
6. Travelling and medical allowances of Sh.10,000 and 5,000 respectively.
7. An annual allowance of Sh.30,000 to travel to South Africa to visit his family.
8. To be deducted 7.5% of his pensionable pay towards pension contribution.
Required: Advice John on which offer to take up based on the net pay of each job offer. (Total: 18 Marks)
QUESTION TWO
Ninja and Chali are partners running furniture trading business and sharing profits and losses in the ratio 2:1 respectively. They have provided the following profit and loss account, notes and explanations for the year ended 31 December 2009:
Sh.
Income:
Sales
Sale of old assets
Insurance Compensation for stolen furniture in transit
Mwalimu SACCO interest on savings (gross)
Dividend (net)
Expenses:
Purchases
Salaries & wages
Employee pension contribution
Premises acquisition
Van acquisition
Salaries to partners (equally shared)
Partners business travelling (equally shared)
Partners private expenses (equally shared)
Machinery repairs
Advertising sign boards
Property Insurance cover
Interest on loan
Subscription – Furniture Traders Association
Donation to Kenya Prisons furniture training department
Legal expenses
Bad debts
Water and electricity
Depreciation
Dividends distribution
18,000,000
500,000
200,000
60,000
40,000
18,800,000
4,000,000
600,000
200,000
1,500,000
1,500,000
1,500,000
500,000
100,000
250,000
750,000
150,000
300,000
50,000
200,000
300,000
500,000
100,000
500,000
4,000,000
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Total expenses
Net profit
17,000,000
1,800,000
Additional information:
1. Furniture worth sh.1,000,000 was used by the partners equally for their private purposes.
2. During the year, new machinery was acquired for Sh.200,000. This has been included in the machinery repairs.
3. Ninja privately travelled to the UK paid for the business Sh.90,000 included in business travelling expenses.
4. Interest on loan relates to Chali’s mortgage loan.
5. Bad debts were made up of:
BAD DEBTS ACCOUNT
Bad debts
Credit sales to relatives
Stolen cash
Balances carried forward:
-Specific provisions
-General provisions
200,000
300,000
150,000
2,400,000
950,000
4,000,000
Balances brought forward:
- Specific provisions
- General provisions
Bad debt recoveries
Insurance Compensation
Profit and loss account
2,000,00
1,000,00
400,000
100,000 500,000
4,000,00
Required:
(a) The adjusted profit or loss for tax purposes for the year ended 31 December 2009.
(15 marks)
(b) Division of profit (or loss) between the partners. (5 marks)
(Total: 20 marks)
QUESTION 3
(a) The following are the transactions of Sukuma Traders for the month period of January 2009:
January 1 bought goods for Sh.800,000 for cash.
January 2 bought goods of Sh.1.2 million for cash.
January 3 returned faulty goods to supplier of Sh.200,000.
January 4 bought delivery van of Sh.1.3 million.
January 5 sold goods for Sh.1.9 million for cash
January 8 bought goods for Sh.1.7 million on credit.
January 9 received discount from supplier of Sh.30,000.
January 11 customer returned some goods of Sh.350,000 and claiming they were excess.
January 15 sold goods of Sh.900,000.
January 20 bad debts written off Sh.10,000.
January 22 discount allowed to customer Sh.20,000.
January 25 sold goods of Sh.300,000 before allowing a cash discount of 2%
January 28 sold goods to government offices at zero rate of Sh.500,000
November 30 paid wages Sh.60,000
Required:
Compute the VAT account assuming VAT is inclusive at a rate of 16%.
(12 marks)
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(b) Mr. Property Mali has been running an shopping mall at Nairobi. For the year ended 31/12/2008 he recorded the following transactions:
Sh. (Millions)
Sold goods at Standard. rate 40
Sold goods at Zero rate 20
Exempt sales 24
Sale of fixed assets 12
Purchases at standard rate 30
Purchases at zero rate 3
Salary and wages 6
Required
(i) Compute VAT pay the using standard VAT rate of 16% VAT Exclusive (4 marks)
(ii) Explain the terms “reverse charge on VAT” (1 marks)
(iii) Under which circumstances can VAT on bad debt be waived? (3 marks)
QUESTON FOUR
(a) Briefly explain what is meant by “compensating tax”. (2 marks)
(b) The following information was extracted from the books of Ocampo Limited for the year ended 31st December 2009:
Profit before interest and tax Sh.20 million
Refund of import duty Sh.800,000
Distribution of dividends Sh.17 million
Dividends received Sh.600,000
Corporation tax rate 30%
Required: compute the compensating tax payable by Ocampo Limited in the year 2009. (3 marks)
(c) KIMTECH SACCO Limited
had the following transactions during the year ended 31st December 2009:
Incomes:
Interest on member loans Sh.3,400,000
Interest from commercial banks Sh.500,000
Interest from treasury bonds Sh.3,000,000
Dividends from KQ Sh.400,000
Rent income Sh.2,500,000
Sale of land Sh.1,800,000
Sh.11,600,000
Expenses:
Member advances Sh.6,000,000
Administration Sh.2,000,000
Depreciation Sh.200,000
Purchase of computers Sh.600,000
Printing & stationery Sh.300,000
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Interest expense Sh.1,000,000
Miscellaneous expenses Sh.100,000
Sh.10,200,000
Net profit Sh.1,400,000
The SACCO intends to distribute Sh.150,000 to members as dividends. All investment income is stated at gross of withholding tax where applicable.
Required: compute the taxable profits for the SACCO and tax liability for the year ended 31st December 2009 (7 marks)
(d) Write short notes on relief in respect of:
I. Transfer pricing & why it should be controlled (4 marks)
II. Excise duty & its purpose (2 marks)
III. Thin capitalisation & why it should be monitored (3 marks) (Total 20 marks)
QUESTION 5
(a) Apple Exporters based in Embu Town begun its operation on 1st January 2005 to process and pack fruits. The company incurred the following expenditures in the year 2009:
CAPITAL EXPENDITURE: Sh.
Land
1,800,000
New Factory Buildings (including administration block of Sh.500,000)
3,540,000
2nd hand processing plant installed in building
1,180,000
New packing machine
900,000
Fax machine
50,000
Imported a used delivery (lorry weighing > 3 tonnes)
2,000,000
Weighing scales
800,000
Computers and printer
200,000
Loose tools and implements
450,000
2 transport Van each
1,500,000
VW passat (a directors car)
2,600,000
Labour quarters constructed
1,500,000
Furniture and fittings
240,000
Old warehouse (renovated & brought to use on 31st July, 2009)
1,600,000
Wages & salaries
900,000
Notes:
I. The written down values as at 30th December 2008 were as follows:
Class I Sh.245,000
Class II Sh.158,000
Class III Sh.800,000
Class IV Sh.2,205,000
II. All assets in class II were sold for Sh.200,000 on 30th November 2009
III. The company owned a factory building that was constructed in the year 2005 whose net book value was Sh.2 million at 30th November 2008.
IV. The company incurred expenditure on drainage systems and roads to the factory buildings worth Sh.1 million and Sh.2.8 million respectively on 30th June 2009.
V. Wages and salaries include Sh.400,000 used by casual workers in the renovation.
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Required:
Compute the capital allowances for Apple Exporters for the year ended 31st December, 2009.
(10 marks)
(b ) Explain how tax planning can aid individuals to reduce their tax liability. (4 marks)
(c) Assured Insurance Company provides motor vehicle insurance covers to its policy holders.
The following information was extracted from the financial records of the company for the year ended 31 December 2009:
Motor Vehicle Insurance
Ksh. ‘000’
Gross premiums:
112,000
Unearned premiums
1 January 2009
16,480
31 December 2009
9,260
Claims paid
5,720
Claims outstanding:
1 January 2009
7,900
31 December 2009
7,360
Depreciation
1,400
Reinsurance ceded
44,800
Gain on sale of equipment
128
Agency expenses
960
Commission received
600
Telephone & postage
2,920
Management expenses
6,950
Bad debts (specific)
1,200
Advertising
1,692
Additional Information:
1. Capital allowances have been agreed with the tax authorities at Ksh.900,000 for the year ended 31 December 2009
Required: Taxable income and tax payable of Assured Insurance Company Ltd, for the year ended 31 December 2009. (6 marks)
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