Hosea, Riziki and Zarika are trading as Horizon enterprises. They share profits and losses in the ratio of 2:2:1  respectively. The following is the statement of comprehensive income for the partnership for the year ended 31  December 2018: 

	Shs.	Shs.
Sales  Opening stock  Purchases  Closing stock  Gross profit  Less:  Salaries  Repairs and maintenance  Interest  Goodwill  Depreciation  Mortgage repayment  Insurance  Auditee  Legal fee  Equipment purchase  Rent and rates  Net profit	300,000  4,000,000  (600,000)  900,000  100,000  480,000  198,000  142,000  200,000  384,220  315,780  100,000  200,000  18,0000	8,000,000  (3700,000)  4,300,000  (3,200,000)  1,100,000

 

Additional information 

1. Opening inventory and closing inventory were overvalued by 30%. 

2. Included in interest expense is interest on capital to partners of Sh. 80,000. This amount was to be shared in the  profit sharing ratio. The balance of interest relates to an overdraft taken by the partnership. 3. Mortgage repayment relates to Hosea for a loan obtained from a bank to acquire a residential house. 4. The legal fees of Sh. 100,000 relate to partners’ private legal issues, 

5. Salaries include those paid to partners as follows: Hosea Sh.40, 000, Riziki Sh.60, 000 and Zarika Sh. 100,000. 6. Not included in the accounts were drawings of goods by Zarika costing Sh.40, 000. 

7. Other income not included in the accounts is rental income Sh.500, 000 and dividend income from Ken-golden  Cooperative Ltd. of Sh, 100,000. 

Required 

(i) A statement of adjusted taxable income for the year ended 31 December 2018  

(ii) A schedule of the allocation of the taxable income to the partners.  

(iii) Tax liability for each partner  

Answer rating: 100% (QA)

EXPERT ANSWER A Take the biggest deduction to lower your taxable income For tax purposes your adjusted income is the gross amount you have left after ... View the full answer