Advanced Taxation Revision Kit

CPA Advanced Taxation Revision Kit

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Advanced Taxation Revision Kit – Past exam questions and answers for kasneb CPA course.
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Advanced Taxation Revision KitAdvanced Taxation Revision KitAdvanced Taxation Revision Kit
Advanced Taxation Revision KitAdvanced Taxation Revision KitAdvanced Taxation Revision KitAdvanced Taxation Revision Kit
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TOPIC 1

TAXATION OF PARTNERSHIP BUSINES

 

QUESTION 1

August 2023 Question Two A

E and K commenced trading as partners under the name EK Enterprises on 1 January 2022. They share profits and losses equally and were entitled to receive monthly salaries of Sh.240,000 and Sh.288,000 for E and K respectively. The partnership did not maintain a complete set of accounting records. The following is a summary of the partnership’s bank statement for the year ended 31 December 2022:

Bank Statement Summary
Receipts   Payments  
  Sh. “000”   Sh. “000”
Capital introduced:  E 42,000 Office equipment 22,500
                                  K 30,000 Salaries and wages 10,680
Cash sales 122,400 Godown rent 4,500
Dividend: Weka Co-operative Society (net) 20,400 Payment to suppliers 118,800
Receipts from debtors 62,400 Repairs and maintenance 5,320
Insurance 750
Interest paid 7,344
Motor vehicle expenses 2,022
General expenses 2,616
Delivery van acquired 36,000
Fines and penalties 780
Electricity bill 540
Medical expenses 7,560
______ Balance carried forward 57,788
  277,200   277,200

 

Additional information:               

  1. As at 31 December 2022, the partnership owed suppliers Sh.9,360,000 while the amount owed by customers was Sh.10,740,000.
  2. Rebate received from suppliers amounted to Sh.1,590,000 and discount allowed to customers amounted to Sh.1,416,000.
  3. Bad debts amounted to Sh.984,000 out of which Sh.240,000 relate to a loan advanced to E that was overdue.
  4. Closing stock was valued at Sh.7,440,000 as at 31 December 2022.
  5. Salaries and wages include salary to the partners for the year.
  6. Included in the interest expense is interest on partners’ capital contribution at the rate of 8% per annum.
  7. The annual rent for the godown was Sh.5,400,000.
  8. As at 31 December 2022, electricity and insurance owing amounted to Sh.300,000 and Sh.153,600 respectively.
  9. The following payments were made in cash from cash sales before banking:

 

  Sh.
Motor vehicle expenses (per annum) 1,656,000
Wages (per annum) 1,944,000
Sundry expenses (per annum) 420,000
Weekly drawings: E 86,400
                              K 46,800

 

(Assume 52 weeks in a year).

 

Required:

(i) Compute the adjusted partnership profit or loss for the year ended 31 December 2022.

(8 marks)

(ii) Distribute the profit or loss to the partners and thus ascertain the taxable income for each partner.                                                                                                     (3 marks)

 

ANSWER

W1:

Interest on capital E 8% × 42000 = 3,360
K 8% × 30,000 = 2,400
5,760 

W2:

Total cash sales  Bank 122,400
                           Note 9 10,846.44
133,346.4

 

W3:

Debtors A/c
Balance b/d 0 Discount 1,416
Credit sales 75,300 Bad debt 744
Receipt 62,400
_____ Balance c/d 10,740
  75,300   75,300

 

 

W3:

Creditors A/c
Discount 1,590 Balance b/d 0
Payment 118,800 Purchases 129,750
Balance c/d 9,360 ______
  129,750   129,750

 

 

EK Enterprises

Computation of taxable profit or loss For the year ended 1 Dec 2022
  Sh 000
Sales – Cash sales 133,346.4
          – Credit sales 75,300
Total sales 208,646.4
Cost of sales
Opening stock                                                0
Purchases                                            129,750
Closing stock                                        (7,440) (122,310)
Gross profit 86,336.4
Discount received 1,590
Less: allowable expenses
Salaries & wages 10,680 + 1,944 – 2,880 – 3,456) (6,288)
Bad debt (744)
Discount allowed (1,416)
Rent (5,400)
Repair (5,320)
Insurance 750 + 153.6 (903.6)
Interest  (7,344 – 5,760) (1,584)
Motor vehicle expenses (2,022 + 1,656) (3,678)
General expenses (2,616)
Electricity (540 + 300) (840)
Medical expenses (7,560)
Sundry expenses (420)
Capital allowances: Office equipment 10% × 22,500 (2,250)
                               : Delivery van 25%  × 36,000 (9,000)
Taxable profit (39,906.8)

 

 

 

 

 

  E K Total
Salary (240 × 12) 2,880 3,456 6,336
Interest on capital 3,360 2,400 5,760
Profit share 13,905.4 13,905.5 27,810.8
Taxable profit 20,145.4 19,761.4 39,906.8
Dividend income(20,400 ÷ 0.85) 12,000 12,000
Adjusted taxable income 32,145.4 31,761.4

 

QUESTION 2

August 2023 Question Five C(i)

Johnson Shauri has not been maintaining proper books of accounts since the inception of his business in year 2019. The following balances were  obtained  from  the  available  business  records  for  the  four  year  period  ended 31 December 2022:

 

  31 December 31 December 31 December 31 December
  2019 2020 2021 2022
  Sh.“000” Sh.“000” Sh.“000” Sh.“000”
Leasehold property 11,760 11,760 11,760 11,760
Motor vehicles 5,040 4,720 9,360 10,760
Furniture 864 864 864 864
Bank overdraft 1,288 1,400 1,210 1,115
Loss on sale of investment – 100 – –
Accounts receivable 432 504 408 600
Mortgage loan 2,080 1,840 1,620 1,500
Inventory 620 572 482 520
Computers 620 720 840 720
Bank account 240 268 272 286
Personal clothes and effects 60 80 100 120

 

The following additional information was obtained:

  1. Drawings of goods and provision for taxation for the year 2019 were Sh.600,000 and Sh.360,000 respectively and has been accumulating at a rate of 10% annually.
  2. Capital allowances were agreed at a total of Sh.920,000 for each of the four years.
  3. Donations to a political party in the year 2020 amounted to Sh.142,000.
  4. Gifts from relatives for the year 2021 were Sh.840,000.
  5. Contingent liability in respect of a pending court case in the year 2022 was Sh.1,000,000.
  6. Rent paid on behalf of a close friend was Sh.605,000 in the year 2022.
  7. Living expenses were estimated at Sh.800,000 in the year 2019 and had been increasing at the rate of 15% cumulatively each year.

 

Required:

(i)  Compute the taxable income or loss of Johnson Shauri for the three-year period ended 31 December 2020, 2021 and 2022.                                                               (10 marks)

 

ANSWER

Johnson shauri

Capital statement for 3 years ended 31 Dec 2020 , 2021,2022
  2019

Sh 000

 2020

Sh 000

 2021

Sh 000

 2022

Sh 000
Total assets 19,636 19,488 24,086 25,630
Total liabilities (3,368) (3,240) (2,830) (2,615)
Net asset 16,268 16,268 21,256 23,015
Growth  income – (20) 5,008 1759
Drawing of goods – 660 726 798.6
Provision for tax – 396 435.6 479.16
Donation – 142 – –
Contigent liability – – – 1,000
Private rent – – – 605
Living expenses – 920 1,058 1,216.7
Less: capital allowance – (920) (920) (920)
Gift from relatives – – (840) –
Taxable income 1,178 5,467.6 4,936.46

 

QUESTION 3

April 2023 Question One B

Sema and Tena are partners running a small hardware business in your town. They are facing a tax audit by the Revenue Authority for failure to maintain complete records. They have approached you to assist them in ascertaining the taxable profit or loss for the year ended 31 December 2022.

 

The following information has been provided to you:

  1. The partnership deed provides that:
  • Profits and losses will be shared in the ratio of 2:1 for Sema and Tena respectively.
  • Each partner will be entitled to a monthly salary of Sh.90,000 and a bonus to be agreed from time to time.
  • Partners would be allowed to withdraw up to Sh.250,000 in cash with no interest. Any excess cash withdrawals would be subject to interest at the rate of 12% per annum.
  • No interest is charged on withdrawal of goods by partners.
  1. On 1 September 2022, the partners admitted Vuna and the profit and loss sharing ratio was revised to equal basis for the three partners. Vuna was entitled to interest on capital like the other partners at the rate of 10% per annum. She was not entitiled to any salary or bonus for the year ended 31 December 2022.

 

  1. Extract of account balances were as follows:
  31 December 2022 31 December 2021
  Sh. Sh.
Accrued bonus due to partners 1,000,000 900,000
Inventory 350,000 260,000
Accounts payable 3,000,000 2,600,000
Prepaid advertising 210,000 440,000
Outstanding electricity bill 26,000 20,000
Accounts receivable 3,900,000 2,700,000
Accrued salaries and wages (excluding partners salaries) 510,000 230,000
Accumulated depreciation 700,000 440,000
Capital: Sema 720,000 720,000
    Tena 480,000 480,000
    Vuna (Admitted 1 September 2022) 540,000 –

 

  1. Extracts of cash payments during the year were as follows: Sh.
Paid to suppliers of goods for resale 9,000,000
Bonus paid to partners shared equally 1,300,000
Cash withdrawn: Sema 300,000
                            Tena 350,000
Loan interest 48,000
Advertising 250,000
Salaries and wages (including partners salaries) 4,390,000
Motor vehicle expenses 340,000
Electricity 90,000
Computer software 70,000
Purchase of office equipment 62,000
Employee welfare costs 300,000

 

  1. Receipts channeled through the bank account were as follows: Sh.

Proceeds from sale of computers                                                       55,000

Royalty income (net of withholding tax)                               380,000

Credit sales                                                                                    15,600,000

  1. Cash purchases and cash sales amounted to Sh.900,000 and Sh.2,400,000 respectively and were value added tax (VAT) inclusive.
  2. The partners had withdrawn goods for personal use as follows: Sh.

Sema                                                                                210,000

Tena                                                                                  70,000

No entries were made in the books to record these withdrawals.

  1. Hardware goods valued at Sh.60,000 were destroyed in a flood in July 2022. The insurance company agreed to pay Sh.40,000 as compensation but by 31 December 2022, the amount had not been received.
  2. Assume that revenues and expenses accrued evenly throughout the year, unless otherwise specified.

 

Required:

(i)  Prepare a statement of taxable profit or loss of the partnership for the year ended 31 December 2022.                                                                                           (11 marks)

(ii) A schedule showing allocation of the profit or loss to the partners for the year ended 31 December 2022.                                                                                         (5 marks)

(Total: 20 marks)

 

ANSWER

Workings:

W1

Receivable account
Balance b/d 2,700,00 Receipt 15,600,000
Credit sales 16,800,000
_________ Balance c/d 3,900,000
  19,500,000   19,500,000

 

W2

Creditors a/c
Payment 900,000 Balance b/d 2,600,000
300,000 Credit purchases 9,400,000
  1,200,000   1,200,000

 

W3

Total purchases
Credit purchases 9,400,000
775,862
Cash purchases 900,000  × 100/116 10,175,862

 

W4

Total sales
Credit sales 16,800,000
Cash sales 2,400,000 × 100/116 2,068,966
18,868,965

 

 

W6

Wages and salaries  
Paid for the year (4,390,000 – 2,160,000) 2,230,000
Add: Accrued balance c/d 510,000
Less: Accrued balance c/d (230,000)
2,510,000

 

  1. i) Statement of taxable profit or loss of the partnership for the year ended 31 December 2022
Sema, Tena,Vuna

Computation of taxable profit of loss For the year ended 31 Dec 2022
Sh
Sales (W4) 18,868,965
Cost of sales
Opening stock 260,000
Purchases (W3) 10,175,862
Less: Goods withdrawn (210+70) (280,000)
         Goods destroyed (60,000)
Less: Closing stock (350,000) (9,745,862)
         Gross profit 9,123,103
Add: Insurance compensation 40,000
Less: Allowable expenses
Loan interest (48,000)
Advertising (250,000 + 440,000 – 210,000) (480,000)
Salaries and wages (W6) (2,510,000)
Meter Vehicle expenses (340,000)
Electricity (90,000 + 260,000 – 2,000) (96,000)
Employee welfare cost (300,000)
loss on stock (20,000)
Wear & tear : Computer software 25% × 70,000 (17,500)
                     : Equipment 10% × 62,000 (6,200)
Taxable Profits 5,345,403

 

 

 

 

 

 

  1. ii) Schedule showing allocation of the profit or loss to the partners for the year ended 31 December 2022

Allocation Schedule

  Sema Tena Vuma Total
Salaries to partners 1,080,000 1,080,000 – 2,160,000
Interest on capital 72,000 48,000 18,000 138,000
Bonus 1,300 + 100 – 900) 700,000 700,000 – 1,400,000
Less: Interest on drawings (6,000) (12,000) – (18,000)
Profit share 8 months 740,179 370,089 – 1,110,268
                   4 months 185,045 185,045 185,045 555,135
Taxable profit 2,771,224 2,371,134 203,045 5,345,403
Add: Payable 380 ÷ 0.95 = 400
            8 month 400 × 8/12 177,778 88,888 – –
           4 month 400 × 8/12 44,444 44,444 44,444
Adjusted Taxable income 2,993,446 25,044,66 247,489  

 

Working on profit Share:

5,345,403+ 18,000 – 1,400,000 – 138,000 – 2,160,000 = 1,665,403

8 Months 1,665,403× 8/12 = 1,110,268

4Month 1,665,403 × 8/12 = 555,135

 

QUESTION 4

December 2022 Question Three A

A, B and C have been trading in a small size partnership sharing profits and losses in the ratio of 2:2:1 respectively. C retired from the partnership on 31 August 2021 while A and B agreed to continue with the business charging interest on capital at the rate of 15% per annum as in the previous period when C was still in the partnership.

 

Due to the changes in the partnership, goodwill was valued at Sh.1,200,000 and was to be written off immediately. The following trial balance was extracted as at 31 December 2021:

  Sh. Sh.
Capital account: A 1,680,000
                           B 1,400,000
                           C 840,000
Current account: A 67,200
                            B 56,000
                            C 44,800
Drawings: A 78,400
                  B 67,200
                  C 56,000
Inventory (1 January 2021) 252,000
Purchases and sales 4,200,000 7,720,000
Discount received 124,000
Bad debts recovered – general 193,200
Salaries and wages 722,400
Legal and professional fees 1,904,000
Rent and rates 168,000
Insurance 70,000
Sundry expenses 50,400
Trade receivables and payables 308,000 224,000
Allowance for doubtful debts 11,200
Land at cost 2,800,000
Delivery lorry 896,000
Depreciation 448,000
Cash at bank 676,000
Dividends: Sasa Co-operative Society _________ 336,000
12,696,400 12,696,400

 

Additional information:

  1. Sales and purchases were inclusive of value added tax (VAT) at the rate of 16%. Cash sales amounted to Sh.358,400 (VAT inclusive) and were excluded from the above accounts.
  2. The following assets were acquired by the business immediately after retirement of C.
  Sh.
Computers 150,000
Saloon car 3,120,000
  1. Legal and professional fees include:
  Sh.
Stamp duty 168,000
Negotiating a bank overdraft 158,200
Recovery of bad debts 245,000
Signing a 99 year lease agreement 228,400
Purchase of A’s private residence 350,000
Preparation of employment contract 82,000

 

  1. Interest on drawings was charged at the rate of 10% per annum.
  2. Inventory at year end was valued at Sh.364,000 and the partnership had consistently undervalued inventory at each year end by 20%.
  3. Salary and wages include partners’ salary of Sh.420,000 shared by the partners according to the profit and loss sharing ratio.
  4. Allowance for doubtful debts was to be increased to Sh.24,800 at year end. Bad debts written off amounted to Sh.40,000 of which Sh.8,000 relates to general bad debts.
  5. Prepaid insurance at the beginning of the year amounted to Sh.8,000 while insurance owing at year end amounted to Sh13,000.
  6. Accrued sundry expenses as at 1 January 2021 and 31 December 2021 amounted to Sh.10,000 and Sh.2,000 respectively.
  7. C was paid all his dues on 15 September 2021. The profits and losses were to be shared equally after C’s retirement.
  8. Unless otherwise stated, assume that all revenues and expenses accrued evenly throughout the year.

 

Required:

(i)        Prepare a statement of adjusted taxable profit or loss for the partnership for the year ended 31 December 2021.                                                                         (10 marks)

(ii)       Determine the taxable income for each partner.                                   (6 marks)

 

 

ANSWER

Workings

Sales = 7,720,000 × 100/116 6,655,172
Cash sales 358,400 × 100/116 308,966
Total sales 6,964,138

 

Purchases 4,200,000 × 100/116 = 3,620,690
Opening stock = 252000 × 100/80 = 315,000
Closing stock = 364,000 × 100/80 =  455,000

i)

AB and C partnership

Computation of taxable profit or loss For the year ended 31 Dec 2021
    Sh
Sales 6,655,172
Cost of sales
Opening stock 315,000
Purchases 3,620,690
Less: Closing stock (455,000) (3,480,690)
Gross profit 3,174,482
Discount received 124,000
Less: Allowable expenses
Salaries & Wages (722,400 – 420,000) (302,400)
Legal fees (1,904,000 – 16,800 – 158,200 – 350,000 (1,227,800)
Rent and rates (168,000)
Insurance 70,000 + 8,000 + 13,000 (91,000)
Sundry expenses 50, 400 + 2,000 – 10,000 (42,400)
Bad debt written off (40,000-8000) (32,000)
Wear and tear allowance
Lorry 25% × 896,000 (224,000)
Computer 25% × 150,000 (37,500)
Saloon car 25% × 30,000 (750,000)
Taxable profit (423,382)

 

ii)

Partner allocation schedule
  A B C Total
Salaries – 8 months 280,000
                – 4 months 140,000 70,000 70,000 – 140,000
Interest on capital – 8 months 168,000 140,000 84,000 392,000
                                4 months 840,000 70,000 – 154,000
Interest on drawings 8 months (5,227) (4,480) (3,733) (13,440)
                                4 months (2,613) (2,240) – (4,853)
Loss share  –         8 months (139,820) (139,820) (69,910 (349,550)
                              4months (87,387.5) (87,387.5) _______ (174,775)
Profit 198,952.5 158,072.5 66,357 423,382
Add: Dividend income
8 months 224,000 89,600 89,600 44,800
4 months 112,000 56,000 56,000 –  
Adjusted taxable profit 344,552.5 303,672.5 111,157

 

KASNEB SYLLABUS
PAPER NO. 16 (S1) ADVANCED
TAXATION UNIT DESCRIPTION
This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to solve complex tax issues, implement tax planning initiatives and administer tax in various business environments.

LEARNING OUTCOMES
A candidate who passes this paper should be able to:
• Compute the tax liability of enterprises, entities and specialised business activities.
• Handle all value added tax matters
• Apply the procedure for conducting a tax investigation
• Explain the tax dispute resolution mechanism
• Explain the tax implications for cross border business activities.
• Develop tax policies

CONTENT

1. Taxation of business income and specialized business activities

1.1 Partnership business
1.1.1 Admission of a new partner and retiring partners during the year
1.1.2 Conversion of partnerships into liability companies
1.1.3 Incomplete records pertaining to partnership businesses
1.1.4 Case law on taxation of partnership businesses

2. Limited companies
2.1 Taxation of companies, including holding company, subsidiaries, branches and related parties
2.2 Incomplete records pertaining to limited companies
2.3 Minimum tax
2.4 Shortfall tax computation
2.5 Taxation of dividends
2.6 Case law on taxation of limited companies
2.7 Rental income, including residential rent income, Commercial rent income and Real estate investment trusts (REITS)
2.8 Charitable institutions
2.9 Leasing entities, including hire purchase lease agreements
2.10 Co-operative societies, Saccos
2.11 Trade associations, amateur sporting association and clubs
2.12 Trust bodies, settlements and estates under administration
2.13 Financial institutions: Banks, insurance companies
2.14 Sea and air transport undertakings
2.15 Collective investment schemes
2.16 Professional, training, management, agency, and consultancy fees
2.17 Property developers and contractors
2.18 Taxation of extractive industries
2.19 Capital gain tax
2.20 Digital service tax
2.21 Application of relevant case law

3. Value added tax administration
3.1 Obligations of a taxable person and offences relating to VAT
3.2 Value added tax computation
3.3 Restriction of input tax claimable
3.4 Imported services and VAT withholding agents
3.5 VAT refunds and bad debt relief computation
3.6 VAT Accountant certificate
3.7 Value added tax automated assessments
3.8 I tax significance and application in value added tax administration
3.9 Application of relevant case law

4. Tax investigations
4.1 Tax fraud
4.2 Civil and criminal tax investigation
4.3 Events which may trigger an investigation
4.4 Back duty and in-depth examination
4.5 Customs and excise investigations
4.6 Negotiation for settlement: Tax amnesty, Tax Penalties and Enforcement for outstanding taxes
4.7 Types of tax audit and their significance
4.8 Application of relevant case law

5. Tax dispute resolution mechanism
5.1 Tax disputes
5.2 Stages of tax dispute resolution process
5.3 Tax dispute resolution process cycle
5.4 Legal framework and objectives of Alternative Dispute Resolution
5.5 Types of tax disputes eligible for Alternative Dispute Resolution
5.6 Benefits of Alternative Dispute Resolution
5.7 Parties to Alternative Dispute Resolution and their roles
5.8 Issues exempted from Alternative Dispute Resolution
5.9 Alternative Dispute Resolution agreement terms and timelines
5.10 Termination of alternative dispute resolution
6. Taxation of cross border activities
6.1 Distinction between trading in and trading with a country
6.2 Double taxation agreements; theory, design and application
6.3 Regional perspective with reference to the East African Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA)
6.4 Most favored nation status
6.5 Nature, characteristics and significance of One Stop Border Posts (OSBPs)
6.6 Generalized system of preference and AGOA
6.7 Tax havens and treaty shopping
6.8 Tax information exchange agreements (TIEAS)
6.9 Transfer pricing: oecd guidelines
6.10 Application of relevant case law
7. Tax planning
7.1 Tax planning for individuals: By way of Tax exempt activities, transactions that are allowable expenses and transactions attracting tax setoffs
7.2 Tax planning for body corporates
7.3 Identifying opportunities to alleviate, mitigate or defer the impact of direct or
7.4 indirect taxation
7.5 Evaluating remuneration packages
7.6 Tax avoidance and anti-tax avoidance provisions in the tax Act, short-fall distributions of dividends
7.7 Sectoral tax incentives
7.8 Disposal of business operations and restructuring of activities
7.9 Tax risk management

8. Tax systems and policies
8.1 Types of tax systems
8.2 Role of taxation in economic development; tax base expansion, efficiency in tax systems
8.3 Design of a tax policy
8.4 Criteria for evaluation of a tax system
8.5 Tax reforms and modernisation of tax systems under various Acts
8.6 KRA structure – Large Tax Payer and Medium Tax Payer organisations

9. Professional practice in taxation
9.1 Forms of tax practice and matters relating thereto
9.2 Matters relating to new clients
9.3 Handling of client work
9.4 Disclosures in tax returns, computations and correspondence with the Revenue Authority
9.5 Moral and ethical issues in taxation
9.6 Tax agents, appointment, obligations, professional liability
9.7 Cancellation of tax agents license
9.8 Role of tax agents in appeals procedure
9.9 Tax health check