K, N and M have been trading in partnership as Meka Associates
making water tanks for the last 5 years. They share profits and losses in the ratio 2:2:1
respectively.
For the year ended 31 December 2005, Meka Associates made a profit adjusted for
income tax purposes of Sh.60,498,500 before capital allowances.
On 31 December 2004, Meka Associates acquired in whole the business of Nithi
Brothers, a tea processing firm. Information given below relates to the business when
it was owned by Nithi Brothers. Nithi Brothers had purchased a building on 1 January 2004 for Sh.42,000,000
(including land valued at Sh.6,000,000). It was brought into use on the same day. The
sellers construction costs comprised:
Sh. Sh.
Land
Construction costs:
Factory
Offices
Levelling land
Architects fees
30,800,000
3,200,000
4,000,000
34,000,000
1,200,000
800,000
Meka Associates continued with the same business of processing raw tea. The
following amounts were paid for assets purchased from Nithi Brothers:
Sh.
Motor vehicle
Goodwill
Land and buildings
Milling machines
Tractor and lorry
4,000,000
200,000
80,000,000
36,000,000
32,000,000
Meka Associates incurred the following additional costs:
Sh.
Extension to building
Security wall
Fixtures and fittings
Installed machinery
Additional boiler
Volvo – saloon
Nissan urvan
16,000,000
2,000,000
12,000,000
24,000,000
20,000,000
2,000,000
3,000,000
The following transactions took place in 2005:
1.8.2005 Sold milling machines for Sh.4,000,000 and one faulty
photocopier for sh.80,000 1.10.2005 Sold damaged fixture and fittings for 160,000 and disposed of a lorry for
Sh.3,600,000
3.10.2005 Disposed of the motor vehicle for Sh.3,000,000
The terms of the partnership agreement were as follows:
1. K and N to receive salaries of Sh.480,000 each per annum.
2. Interest of Sh.2,000,000 and Sh.1,320,000 to be paid to K and N
respectively on their fixed capital accounts.
3. M was to draw a salary of Sh.2,400,000 per annum.
4. The remaining profits or losses to be shared according to the existing
profit/loss sharing ratio.
The following additional information is provided:
K and M are married while M is unmarried. K has a
mortgage for a residential house and paid interest amounting to Sh.600,000 during the
year 2005 to Savings and Loan (K) Ltd. N received Sh.400,000 as interest on
Sh.4,000,000, city council stocks which he has held for many years. The partners had
no other income.
Required:
(a) The capital allowances due to Meka Associates in 2005. (10 marks)
(b) Allocation of partnership profits/losses for 2005. ( 8 marks)
(c) Taxable income for each partner. ( 4 marks