TAXATION OF PARTNERSHIP

ILLUSTRATION ONE
Rotich, mambo and Norah have been trading in partnership as Romano enterprises sharing
profits and losses in the ratio 2:2:1 respectively. They have presented the following income
statement for the year ended 31st Dec 2022.
Sh ―000‖ sh
―000‖
Gross profit 24,800
Investment income 450
Miscellaneous income
Total income
Expenses
Depreciation 110
Office expenses 1568
Legal fees 360
Sundry expenses 630
Selling expenses 380
Partners‘ salaries, interest
on capital & drawings 13350 16,398
NET PROFIT 9,167
Additional Information:
1. Investment income comprises:
`` ―sh
000‖
Interest on bank deposit 210
Dividends on shares in quoted companies 130
Interest on partners‘ drawings: Rotich 50
Mambo 40
Norah

1. Miscellaneous income comprises:

Gain on sale of furniture & fittings 195
Insurance recoveries for stolen stock 120
315
2. Office expenses comprises
Advertisement on billboards 250
Rent 800
General expenses

3. Legal fees include 150,000 incurred on a successful defense of a partners in a private

legal suit.
4. Sundry expenses comprise:
 Donation to a political party 420
Debt recovery charges 90
Vehicle maintenance cost 120
630
5. Selling expenses comprise:
Subscriptions to a trade association 150
VAT 170
Repairs to the building 60
380
6. Partner‘s salaries, interest on capital and drawings are analyzed below;

Details Rotich ―000‖ Mambo ‗000‖ Norah ―000‖ Total

―000‖
Salaries 4000 4500 3700 12 200
Interest on capital 200 300 330 830
Drawings 60 100 160 320
4260 4900 4190 13350

7. Capital allowance for the year ended 31st Dec 2022 were agreed with tax authorities at
480,000 Required:
a. Adjusted profit/loss for the year ended 31st Dec 2022
b. Distribution of the adjusted profit/loss amongst the partners.
c. Tax liability for each of partners for the year ended 31st Dec 2022
ILLUSTRATION TWO
Mambo and Kaka are under partnership operating a hardware shop as MAKA enterprises and
sharing profits/losses equally. The following is the income statement for the partnership
business for the year ended 31st Dec 2022.
―sh
000‖
Sales (inclusive of VAT @16%) 9,280
Capital gain on sale of property 290
Rental income 240
Dividends from WAKI cooperative (net) 170
Unrealized foreign exchange gain 94
Total 10074
Expenses
Cost of goods sold 4000
Purchase of computers 160
Salaries and wages 360
General expenses 720
 Legal expenses 940
Conveyance fees 92.8
Farm works at cost 60
Repairs and maintenance 24.5
Interest on partner‘s capital 450
Mambo‘s mortgage interest 65.8
Donations to tennis club 34.8
Commission to Kaka 21.1 (6929)
Net profit 3125
Additional information
1. General expenses include:
―sh 000‖
Embezzlement by Kaka 24
Partitions of offices 48
Staff catering expenses 50
Pension contribution 180
Prepaid rents and rates 32.4
Stamp duty on land transfer 64
2. Legal expenses include
Drafting a partnership deed 42
Negotiating a bank loan 28.4
Executing a customs bond security 24.6
Defending the business against breach of contract 38
1. Salaries to partners and interest on partners‘ capital are to be shared according to the
profit and loss sharing ratio.
2. Salaries and wages include salaries to employees of 160,000 while the balance was paid
to partners
3. Costs of goods sold include purchases valued at 300,000 which had been overstated by
20%.
Required
a) Adjusted taxable profits or loss for the partnership for the year ended 31st Dec 2022
b) A schedule showing distribution of partner‘s taxable income for the year ended 31 st Dec
2022

TAXATION OF FARMING
Rift Valley Ltd. is in the business of farming. The following income statement was obtained
from the books of the company for the year ended 31 December 2021:
 Income: Sh. Sh.
Sale of horticultural products 3,600,000
Sale of livestock 2,840,960
Gain on sale of shares 14,180
Foreign exchange gain 36,400 6,491,540
Expenditure:
Insecticides 250,000
Veterinary services 284,600
Purchase of fertilizer 562,000
Packaging materials 246,400
Professional fees 274,000
Subscriptions paid 34,240
Repairs and maintenance 580,000
Motor vehicle running. Costs 624,900
Interest on loan 249,400
Salaries and wages 1,490,400
General expenses 145,700 (145,700)
Net profit 1,749,900

Additional information:
Repairs and maintenance include:
Sh
Freight charges on machinery 98,000
Provision for fencing expenditure 120,000
Purchase of furniture 78,000

General expenses include:

Directors' Christmas party 36,000
Increase in general provision for bad and doubtful debts 14,000
Defending a company driver in a traffic offence 10,000

Subscriptions paid include:

Donations to a charitable organisation 8,000
Donations to a registered political party 4,600
Membership fees to the National Agricultural Society 4,400

Farm works acquired on 1 January 2021 comprised:

Livestock trough 90,000
Granary 20,000
Farmhouse 480,000
Labour quarters 240,000
Required:
I. A statement of adjusted taxable profit (or loss) for the year ended 31 December 2022.
II. Tax payable (if any) by the company.