What is the profit chargeable to Income Tax for the 18 months ended 31 December 2005?

  

FK Insurance Brokers Limited was
incorporated on 1 July 2004. The
Managing Director has kept all his transaction vouchers in good order and also
maintains proper registers for the premiums received, premiums paid,
commissions received, etc. He has
approached you to advise him on the tax payable for the eighteen months ended
on 31 December 2005. From your detailed
enquiry you have obtained the following information:

Sh.

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Premiums received from clients
Premiums paid to insurance companies
Commissions received (Net)
Rent paid
Salaries and wages
Subscriptions to the Insurance
Institute
Withholding Tax Paid
Instalment Tax paid in September 2005
Donations
Annual charges by Commissioner of
Insurance
Bank charges
Bank interest earned
Income from Bearer and Treasury Bonds
Depreciation
Office stationery
Office maintenance
Equipment purchases
Auditors remuneration
Directors fees
Entertainment
Business travel
Provision for bad debts:
Specific
General
Architects fees on office partitioning
30,000,000
25,000,000
8,500,000
422,440
979,980
6,500
1,500,000
1,125,000
50,000
15,000
3,336
8,972
965,000
223,500
123,400
97,000
92,000
100,000
108,000
180,000
68,000
45,000
50,000
55,000

NB: Wear and Tear allowances as agreed with
the
Commissioner
for Income Tax (for 2005)
232,500
Required:
(a) Compute
the Profit chargeable to Income Tax for the 18 months ended 31 December 2005.
(12
marks)
(b) Show
tax payable and the dates payable. ( 4 marks)
(c) Explain
why you may not have used all the information provided to you. ( 4
marks)

Introduction:
FK Insurance Brokers Limited is a reputable company that was incorporated in July 2004. As a tax expert, you have been approached by the Managing Director of the company to advise on the tax payable for the eighteen months ended December 31, 2005. With your expertise, you have conducted a detailed enquiry to obtain all relevant information for effective tax calculation.

Description:
FK Insurance Brokers Limited is a professional company that has maintained proper transaction vouchers and registers for premiums received, premiums paid, commissions received, among others. The company has provided information on its financial transactions for the eighteen months ending December 31, 2005, which includes bank charges, bank interest earned, donations, and annual charges by Commissioner of Insurance, among others. From the information provided, the wear and tear allowance has been agreed with the Commissioner for Income Tax, and it is at 232,500 for the year 2005. This information has been given to provide adequate data to aid in the computation of the profit chargeable to Income Tax. Additionally, the tax expert is required to show the tax payable and the dates payable, as well as explain why not all the information provided may have been used.

Objectives:
1. To calculate the profit chargeable to Income Tax for the 18 months ended on 31 December 2005 by using the provided information.
2. To determine the tax payable on the calculated profit and the dates when it should be paid.
3. To understand why certain information may not be used in the process of calculating the profit.

Learning Outcomes:
1. After completing this task, learners will be able to calculate the profit chargeable to Income Tax using transaction vouchers and registers for premiums received, premiums paid, commissions received, etc.
2. Learners will be able to identify the different types of taxes payable by an organization and describe their payment dates.
3. After understanding the concept of tax computation, learners will be able to explain why some information may not be relevant to the tax computation process.

Heading 1: Objective 1 – Calculating Profit Chargeable to Income Tax
Heading 2: Objective 2 – Determining Tax Payable and Payment Dates
Heading 3: Objective 3 – Relevance of Information Provided

Solution 1:

Profit chargeable to Income Tax for the 18 months ended 31 December 2005:

Revenue:
Premiums received from clients: Sh. 30,000,000
Commissions received (Net): Sh. 8,500,000
Bank interest earned: Sh. 97,000
Income from Bearer and Treasury Bonds: Sh. 68,000
Total Revenue: Sh. 38,565,000

Expenses:
Premiums paid to insurance companies: Sh. 25,000,000
Rent paid: Sh. 422,440
Salaries and wages: Sh. 979,980
Subscriptions to the Insurance Institute: Sh. 6,500
Withholding Tax Paid: Sh. 1,500,000
Instalment Tax paid in September 2005: Sh. 1,125,000
Donations: Sh. 50,000
Annual charges by Commissioner of Insurance: Sh. 15,000
Bank charges: Sh. 3,336
Depreciation: Sh. 123,400
Office stationery: Sh. 92,000
Office maintenance: Sh. 100,000
Equipment purchases: Sh. 108,000
Auditors remuneration: Sh. 180,000
Directors fees: Sh. 68,000
Entertainment: Sh. 45,000
Business travel: Sh. 50,000
Provision for bad debts (General): Sh. 55,000
Architects fees on office partitioning: Sh. 50,000
Total Expenses: Sh. 4,072,156

Tax Chargeable on profit before depreciation: (38,565,000 – 4,072,156) = Sh. 34,492,844

Wear and Tear allowances: Sh. 232,500
Tax chargeable after wear and tear allowances deduction: (34,492,844 – 232,500) = Sh. 34,260,344

Solution 2:

Tax payable and the dates payable:

Tax Payable = Tax chargeable after wear and tear allowances deduction (from Solution 1) X Corporate Tax Rate

The current Corporate Tax Rate in Kenya is 30%

Tax Payable = Sh. 34,260,344 X 30% = Sh. 10,278,103

Dates payable:
Instalment Tax – September 2005: Sh. 1,125,000
First Payment: Sh. 9,153,103 – due on or before 20 June 2006
Second Payment: Sh. 1,125,000 – due on or before 20 December 2006

Solution 3:

Explanation of why not all information was used:

Some information provided may not be directly related to the calculation of tax payable, such as Bank interest earned, Income from Bearer and Treasury Bonds. These income types may need further clarification to determine whether they are taxable or not. Additionally, some information provided may not affect the tax payable calculation, such as Business travel, or may not be allowed as a tax-deductible expense, such as Directors fees. Therefore, to accurately determine the tax payable, only relevant information that impacts the tax calculation is used.

Suggested Resources/Books:
1. “Taxation of Insurance Companies” by Robert L. Collett
2. “Understanding Insurance Law” by Robert H. Jerry, II
3. “Corporate Taxation and Insurance” by David A. Senn

Similar Asked Questions:

1. What are the tax implications for insurance companies?
2. How do insurance companies calculate their taxable income?
3. What are the allowable deductions for insurance companies?
4. What is the tax rate for insurance companies?
5. What are the key tax considerations for managing a profitable insurance business?

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