Rai, Sai and Tai are former school mates who were doing business together. The
business is not registered but they registered themselves as equals in it. They keep
proper books of account and have been able to provide the following profit and loss
account for the year ended 31 December 2005.

Profit and Loss Account
Sh. Sh.
Establishment expenses
Rent of business premises
owned by all of them jointly
Interest expense
Stationery and printing
Light and heating
General farm expenses
Repair of premises
Depreciation
Interest on partner’s capital:
Rai
Tai
Salary to Sai
Commission to partners:
Rai
Sai
Tai
Bad debts
Gifts, present and charity
Donation to child welfare
Interest on loan taken to pay
Income tax
Legal charges
Net profit
800,000
180,000
80,000
120,000
40,000
294,000
40,000
300,000
80,000
120,000
160,000
96,000
96,000
96,000
240,000
40,000
200,000
20,000
120,000
398,000
3,520,000
Gross profit
Sundry receipts
Interest Income
Profit on sale of shares
Gross income from farming
Lottery winnings
Dividend (Gross)
1,908,000
80,000
72,000
200,000
340,000
800,000
120,000
_______
3,520,000
Additional information:
1. Capital allowances have been agreed as follows: Wear and Tear allowances
sh.180,000; Farm works deductions sh.120,000.
2. The partners had borrowed Sh.400,000 with a hope of investing it on fixed
securities to earn more income interest rates nevertheless declined. Interest
expense of Sh.80,000 and interest income of Sh.72,000 relate to the loan.
3. Legal charges include Sh.40,000 paid to finish a case in the customs
department.
4. In 2005, the partners brought forward losses amounting to Sh.800,000 from
this business.

Required:
(a) Compute taxable income derived from the partnership (16 marks)
(b) Show allocation among partners. (3 marks)
(c) Comment on the results of (a) above. (5 marks)