The directors of Totale engineering Company Limited presented the following Profit
and Loss for the year ended 31 December 2005:
Sh.
Revenues
Sales
Interest on Government Securities
(Gross)
Expenses:
Purchases
Wages
Carriage inwards
Rent
Insurance
Trade expenses
Repairs:
Building
Machinery
Advertising
Legal charges
Audit fees
Depreciation
Provision for doubtful debts
Debenture interest
Interim dividend
Proposed dividend
30,780,000
50,000
30,830,000
24,000,000
2,320,000
370,000
300,000
190,000
100,000
300,000
56,000
254,000
80,000
70,000
3,017,000
104,000
600,000
400,000
731,300
32,892,300

Net Loss
2,062,300
The following additional information is provided:
1. Purchase returns and sales returns were Sh.500,000 and Sh.700,000
respectively. These were left out while preparing the trial balance.
2. Wages include Sh.25,000 per month paid to a “consultant” who helps the
company whenever there is a problem with the VAT department. VAT of
Sh.560,000 remains unpaid and the “consultant” promises to find a way of
getting it written off. Full PAYE is deducted from his salary.
3. Trade expenses include an amount of Sh.60,000 travel expenses to Korea for
the Director as part of the National Chamber of Commerce Trade and
Industry promotion tour.
4. Repairs to machinery include small loose tools written off by Sh.10,000
5. Bad debts which are specifically bad are Sh.74,000
6. Capital allowances have been agreed at Sh.2,000,000.
Required:
(a) Taxable profits for the year of income 2005. (10
marks)
(b) Tax payable if any for 2005. Comment on the results.
( 4 marks)
(b) The company intends to give the Director a company car in 2006.
What are the tax implications? ( 3
marks)
(c) Comment on the tax implication of the action of the “consultant”
with respect to the VAT claims. ( 3
marks)