UNIVERSITY EXAMINATIONS: 2009/2010

FIRST YEAR STAGE 2EXAMINATION FOR THE DEGREE OF BACHELOR OF COMMERCE CFM 100: INTRODUCTIONS TO TAXATION (DAY CLASS)
DATE: DECEMBER 2009 TIME: 2 HOURS

INSTRUCTIONS: Answer ALL Questions

QUESTION ONE
Explain the canons of an optimum tax system. (15 Marks)

QUESTION TWO
The following details were extracted from the books of Salama traders for the month of August 2009. The transactions are inclusive of VAT at the rate of 16% where appropriate.

August 1 Opening stock: 45 units valued at Ksh 67,500 2 Purchased 300 units at Ksh. 1,800 per unit 3 Sold 60 units at Ksh 2,400 per unit 5 Sold 80 units at Ksh 2,500 per unit 8 Purchased 180 units at Ksh 2,000 per unit 10 Returned 40 units which had been purchased on 2nd August 14 Sold 120 units at Ksh 2,400 per unit 19 Sold 80 units at Ksh 2,200 per unit 27 Exported 60 units at Ksh 3,000 per unit 1

Required A VAT account for the month of August 2009 clearly showing the VAT payable or refundable. (15 Marks)

QUESTION THREE
Mr. Mbaye, a Kenyan, migrated to Canada in 2001; he was offered a job by a company based in Nairobi, Kenya which he accepted. The employment commenced on 1st January 2008. The following details relate to his salary and benefits for the year ended 31st December 2008: 1. Monthly salary Ksh 250,000 (PAYE Ksh 27,000) 2. Passage allowance of Ksh 400,000 per annum for visiting his family in Canada. 3. A fully furnished house. The house rent of Ksh 30,000 per month was paid by the employer. The cost of furnishing the house amounted to Ksh 200,000 4. A life insurance cover whose annual premium was Ksh 30,000 was paid by the employer. 5. A motor vehicle (1750 cc) whose initial cost was Ksh 1,200,000 6. His tuition fees amounting to Ksh 65,000 per annum were paid by the employer. 7. He was provided with mobile phone airtime worth Ksh 3,000 per month by the employer. Approximately 30% of his mobile phone calls were for private purpose. 8. His salary was increased by Ksh 50,000 on 1st October 2008 and backdated to 1st July 2008. 9. He received a lumpsum pension of Ksh 360,000 during the year from his previous employer.

Required: a) Compute the total taxable income of Mr. Mbaye for the year 2008. (12 Marks) b) Compute the tax payable from this income (8 Marks)

QUESTION FOUR
The management of Mali Limited has presented the following income statement for the year ended 31 December 2008

Mali Limited Income Statement for the year ended 31 December 2008 Sh Gross profit Other incomes Dividend from a subsidiary company Interest from foreign bank accounts Discount received Refund of VAT Gain on sale of motor vehicle 200,000 4,000 28,000 12,000 14,000 258,000 5,550,000 Expenditure Salaries and wages NHIF contributions Subscriptions to a trade association Hire purchase interest Bad debts written off General expenses Depreciation Legal expenses Insurance premiums Rent Electricity Purchase of furniture Net profit 800,000 30,000 50,000 15,000 60,000 80,000 25,000 40,000 124,000 66,000 34,000 26,000 1,350,000 4,200,000 Sh 5,292,000

Additional information: 1. 2. Capital allowances were agreed with the Revenue Authority at Sh 75,000 Included in bad debts is a loan of Sh 15,000 due from a former employee of the company who was dismissed in October 2008. 3. 4. Legal experts include Sh 20,000 incurred in defending a manager against a traffic offence Insurance premiums include Sh 24,000 paid to the National Hospital Insurance Fund (NHIF) as a penalty for late submission of contributions. 5. The company paid stamp duty of Sh 6,000 relating to a piece of land purchased in August 2004. The payment is included in the rent expense for the year ended 31 December 2008. Required: a) Compute the adjusted taxable profit or loss of Mali Limited for the year ended 31 December 2008 (18 Marks)

b) Calculate the tax liability (if any) of the company for the year ended 31 December 2008. (2 Marks)