SCHOOL OF BUSINESS AND PUBLIC MANAGEMENT

CFM-300-A
ADVANCED TAXATION

CAPITAL ALLOWANCES NOTES

Introduction
The Second Schedule to the Income Tax Act enumerates all capital deductions that are granted to a
taxpayer in respect of capital expenditure incurred by a person on the production of taxable income. Capital
expenditure, losses, diminution, exhaustion of capital, depreciation, amortisation, loss on sale of an asset,
obsolescence, provision for replacement of an asset etc, are all not allowable for tax purposes.

In the generation of taxable income, taxpayers invest in fixed assets. These assets suffer loss in value due to
reasons such as wear and tear allowance, out of usage breakdown, inadequacies, economic factors etc
(factors that cause depreciation).

For this purpose, the Income Tax Act seeks to standardise the charge in respect of losses of capital assets
by granting uniform capital allowances in respect of capital expenditure. Capital allowances are also
granted for other purposes such as an incentive to investors who would make investment in capital items
e.g. buildings and machinery used for manufacturing.

Categorization of Capital Deductions

(i) Wear and tear allowance in respect of machinery

(ii) Diminution in respect of machinery not qualifying for wear and tear allowance
(iii) Farm works deduction in respect of farm works put up by a commercial farmer
(iv) Industrial building deduction in respect of industrial buildings and tourist hotel buildings
(v) Investment deductions:
- Investment deduction for ordinary manufacture
- Investment deductions for bonded manufacture
- Shipping investment deduction in respect of shipping business
- Investment deduction for tourist hotel buildings
(vi) Mining deductions in respect of mining operations.

Topic 1
Wear and Tear Allowance
This is a capital allowance granted in respect of machinery under Paragraph 7 of the 2nd Schedule.
Machinery is categorised by being placed into four distinct classes i.e. pools and each of the pools/classes
will be granted wear and tear allowance on a given percentage on a reducing balance basis.

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Class I, 37½%
This is a class for heavy earth moving equipment and heavy self-propelled machinery such as tractors,
combine harvesters, lorries of a load capacity of at least 3 tonnes, buses, loaders, bulldozers, caterpillars,
forklifts, mounted cranes, break downs, tippers trucks, graders, trains, airbus etc.

Class II, 30%

For ICT machinery that includes computers, and all peripheral equipment, printers, electronic calculators,
fax machines, scanners, duplicating machines, electric-typewriters, photocopiers, office calculators,
internet, telephones etc.

Class III, 25%

For all other light self- propelled machinery such as motor cars, motorcycles, lorries of less than 3 tones
load capacity, vans, aircraft, pick-ups etc.

Class IV, 12½%

For all other non-self-propelled machinery except a ship and include assets such as factory plant and
machinery, furniture, fixtures and fittings, bicycles, partitions, shop counters, shelves, office safes, sign
boards, fridges, freezers, carpets, ships, motor boats, neon lighting, billboards, trailers (if they can be
separated from tractor or lorry engine-head) etc.

Format of Wear and Tear Allowance Schedule

XYZ COMPANY LIMITED

WEAR AND TEAR ALLOWANCE COMPUTATION
YEAR OF INCOME, 20XX
CLASS I CLASS II CLASS III CLASS IV
371/2% 30% 25% 121/2%
000 000 000 000
Wdv. b/d 1:1:20xx - - - -
Add: Additions in current
year
Processing machinery - - - xx
Fork-lift xx - - -
Motor vehicles - - xx -
Computers - xx - -
Furniture - - - xx
Less: Disposals in current year
Printers - (xx) - -
Tractors (xx) - - -
Motor vans - - (xx) -
Furniture and fittings - - - (xx)
xx xx Xx xx
Less: Wear and tear allowance (xx) (xx) (xx) (xx)
Wdv. c/d 31.12.20xx xx xx Xx xx

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Notes on the Wear and Tear Allowance Schedule

1) Written Down Value (WDV)

This represents the residual amount after granting wear and tear allowance. This value is carried forward at
the end of the year of income of income, and brought forward at the beginning of the subsequent year of
income.

2) Additions
This represents fixed assets qualifying for wear and tear allowance acquired in the current year of income.
The cost of an asset which qualifies for wear and tear allowance as an addition is:
(a) The historical cost of the qualifying asset,
(b) Incidental expenses
(c) In a trade-in or part-exchange situation, the trade-in or part exchange value plus the cash paid.
(d) In hire purchase transaction, the cash price of an asset shall be considered.
(e) For assets brought into the business without being purchased e.g. through donations, grants, gifts etc,
the most likely open market value.
(f) For non-commercial vehicles i.e. some vehicles in class III (25%) their cost is restricted to Kshs.
2,000,000 from year 2006.

3) Disposals
This represents fixed assets qualifying for wear and tear allowance disposed of in the current year of
income. The value of an asset which qualifies for a disposal is:
(a) Amount of cash proceeds or cash equivalent on sale of a wear and tear allowance machine.
(b) In a trade in situation the trade in or part exchange value is taken.
(c) On the disposals of non-commercial vehicles the sales proceeds or cash equivalent must be restricted
Kshs. 2,000,000 over cost

The following formula is used to restrict the value on disposal of non-commercial vehicle whose
acquisition cost was beyond the limits given above.

Disposal Value = Sales Proceeds x Restricted Value in year of Saloon Car Acquisition
Original Cost

(d) The amount of insurance claim received for machinery lost through theft, fire or accidents etc

(e) In a continuing business:

- If all assets in a class of wear and tear allowance are sold for proceeds more than the written down
value, the excess is referred to as a trading receipt. Trading receipt is a taxable income.
- If all assets in a class of wear and tear allowance are sold for proceeds less than the written down
value, the deficit is referred to as a trading loss. Trading loss is an allowable deduction

(f) On the cessation of a business:

- If all assets in a class for wear and tear allowance are sold for proceeds more than the written down
value, the excess is referred to as a balancing charge. Balancing charge is a taxable income.
- If all assets in a class for wear and tear allowance are sold for proceeds less than the written down
value, the deficit is referred to as a balancing deduction. Balancing deduction is an allowable
deduction.

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Additional Notes on Wear and Tear Allowance
- Wear and tear allowance is calculated on a reducing balance basis
- Full wear and tear allowance will be granted irrespective of the date that the qualifying asset was
acquired.
- Wear and tear allowance shall be restricted to the period that the business has existed and not to the period of
ownership of the asset; if less than a year.
- Wear and tear allowance shall be increased proportionately to the period of operation.
- Wear and tear allowance shall be restricted to the proportion of business use if also used privately.
- Where there is succession to a business without payment of any money the written down values of the
machinery will continue getting wear and tear allowance.
- Wear and tear allowance will be claimed by the lessor where assets are leased.
- Where a person purchases machinery, wear and tear allowance shall be the amount paid for the assets.

Topic 2
Industrial Building Deduction
It is granted in respect of capital expenditure on industrial buildings as per paragraphs 1 of the Second
Schedule to the Income Tax Act.

Rates for Industrial Building Deduction

- Standard rate, 2.5% (1/40th) of the qualifying cost per year for 40 years on a straight-line basis.
- An agreed rate with the CDT.
- In the case of hotel buildings certified by the CDT to be industrial buildings 10%.
- Hostel or educational buildings for commercial educational institutions at 50% p.a.
- Residential buildings built for rental purposes to low income earners in an approved planned
development at 5%.
- Qualifying commercial buildings at 25%.

Definition of Industrial Buildings

An industrial building means:

A. A Building in use:
(i) For the purpose of a business carried on in a mill or a factory or for any other industrial purpose e.g.
paper mill, sawmill, sugar mill, coffee mill etc.
(ii) For the purpose of transport, dock, bridge, tunnel, inland navigation, water, electricity or hydro
power undertaking.
(iii) For the purpose of business which consists of the manufacture of goods or materials or the
subjection of goods to any process e.g. buildings within the EAB, EAI, BAT etc.
- For the purpose of a business which consists in the storage of goods/materials:
- A building in use for the purpose of a business consisting of ploughing or cultivating agricultural
land but not by a farmer.
- A building in use for the purpose of a business, which may be declared by the Minister of
Finance in a gazette notice.
(B) A prescribed dwelling house constructed for and occupied by employees of a business carried on
by the person owning the dwelling house and which conforms to prescribed living conditions as
specified by the Ministry of Labour.
(C) A building, which is in use as a hotel or part of a hotel building which the CDT, is satisfied that it
is an industrial building.
(D) A building in use for the welfare of workers

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(E) A building in use as a hostel or an educational building, or a building in use for training, provided
such building has been certified by the Commissioner.
(F) A building in use as rental residential building where such building is constructed in a planned
development area approved by the Minister of Housing.
(G) A building in use as a commercial building.

Additional Notes on Industrial Building Deduction

As from 1.1.1995 the following civil works and structures qualify for IBD:
- Roads and parking areas.
- Railway lines and related structures.
- Water, industrial effluent and sewerage works.
- Communication and electric posts and pylons and other electrical supply works.
- Security walls and fencing.
- Expansion, or substantial renovation or rehabilitation of an industrial building

Non-Qualifying Costs for Industrial Building Deduction:

- Cost of land
- Any incidental costs incurred on the acquisition of the land.
- Cost of items in the building that is treated as machinery for wear and tear allowance.
- Capital expenditure on a non-qualifying part (where such is greater than 10% of the total cost of
the building).

More Notes on Industrial Building Deduction

(a) Where an industrial building is used for part of an accounting year, the annual industrial building
deduction will be reduced proportionately.
(b) Where an existing building is extended by further construction, the extension will be treated as a
separate building.
(c) Where a building in use is sold and continues to be used as an industrial building by the purchaser or
his lessee, the new owner will inherit the residue of expenditure not yet claimed by the former
owner.
(d) Where a building is sold before use:
- By a person other than a builder (contractor), the qualifying cost to the buyer shall be the lower of
the price paid and the construction cost.
- By a builder, the qualifying cost shall be the price paid.
- Where a building is sold more than once before use, the last price paid shall be the qualifying
cost for industrial building deduction.
(e) Where a building has been put to use and subsequently disused, and then used again, for the
purposes of determining the residue of expenditure, a notional industrial building deduction shall be
computed in respect of the disused period.

Topic 3
Investment Deduction
Investment deductions are granted as per paragraph 24-26 of the 2nd Schedule to the Income Tax Act.
Investment deductions are granted on a once and for all basis i.e. in the first year of use of the
qualifying assets.

There are four types of investment deductions:

(a) Investment deduction in respect of buildings and machinery used for ordinary manufacture.
(b) Investment deduction in respect of buildings and machinery used for manufacture under bond.
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(c) Investment deduction in respect of a hotel building certified by the CDT under the Tourist Act to be
an industrial building.
(d) Shipping Investment Deduction (SID)

1) Investment Deduction on Ordinary Manufacture

Qualifying Costs for Investment Deductions

(a) Cost of construction of a building and the purchase and installation therein of machinery
(b) Cost of purchase and installation of new machinery used for manufacture.
(c) On the construction of a Hotel building which is certified to be an industrial
(d) On the construction of a building and on the purchase and installation therein of new machinery and
the owner of that building uses it for the purpose of manufacture under bond.
(e) Civil works and structures that are deemed to be part of an industrial building and they include:
- Roads and parking areas.
- Railway lines and related structures.
- Water, industrial effluent and sewerage works.
- Communication and electric posts and pylons and other electrical supply works.
- Security walls and fencing.

(f) Machinery and equipment used directly or indirectly in the process of manufacture and will include
machinery used for the following auxiliary/ancillary purposes:

- Generation, transmission and distribution of electricity.

- Clean-up and disposal of industrial effluent and other industrial waste products
- Reduction of environmental damage.
- Water supply or disposal of the same.
- Workshop machinery for the repair of machines.
(g) Workshop machinery for the maintenance of machinery used for manufacturing.
(h) Filming equipment by a local film producer.
(i) Investment in buildings and machinery incurred within satellite towns outside the city of Nairobi, or
the municipalities of Mombasa or Kisumu and the value of the investment is not less than Kshs. 200
million will qualify for investment deduction allowance of 150%.

Non-Qualifying Costs for Investment Deduction:

(a) Cost of land.
(b) Any incidental costs on the acquisition of land e.
(c) Cost of items or activities that are only supplementary to manufacture e.g. administration, transport,
storage, design, security, etc.

Rates of Investment Deduction on Ordinary Manufacture = 100%

Additional Notes on Investment Deduction

(a) Non-qualifying parts if their cost is less than 10% of the total cost.
(b) Extension will be treated as a separate building and will qualify for investment deduction.
(c) Where a building is sold before use:
- By a person other than a builder (contractor), the qualifying cost to the buyer shall be the lower
of the price paid and the construction cost.
- By a builder, the qualifying cost shall be the price paid.

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 - Where a building is sold more than once before use, the last price paid shall be the qualifying
cost for investment deduction.
(d) A building that qualifies for investment deduction shall automatically qualify for industrial building
deduction; however the reverse is not always true.

2) Investment Deduction in Respect of Hotel Buildings

Where a person incurs capital expenditure on the construction of a hotel building which has been
certified by the CDT and gazetted under the Tourist Act as an industrial hotel building, he will be
eligible to claim investment deduction in the year of first use of the hotel. The rates for investment
deduction in respect of hotel buildings are the same as those for investment deduction on ordinary
manufacture. As from 1.1.1993, hotel buildings for the purposes of investment deduction shall
include any building(s) that are directly related to the operations of the hotel complex e.g. staff
quarters, kitchens, entertainment, sporting and fitness facilities such as gyms, swimming pools,
saunas, basketball courts etc.

3) Shipping Investment Deduction (SID)

Shipping investment deduction (SID) is granted to resident ship owners in the shipping business i.e.
the qualifying business, which is the ferrying of goods or passengers over the Kenyan waters for hire
or reward. Shipping investment deduction (SID) is granted to resident ship owners who incur capital
expenditure:
- On the purchase of a new power driven ship of more than 125 tonnes (previously 495 tonnes)
tare weight, or
- On the purchase and subsequent refitting for the purposes of the qualifying business of a used
(second hand) power driven ship of more than 495 tonnes tare weight.

The rate for shipping investment deduction (SID) is 100% of the qualifying cost, which is granted on
a once and for all basis and in the year of first use of the ship for the qualifying business. As from
1.1.1987, wear and tear allowance on the ship (12.5%) shall be granted on the residue after shipping
investment deduction.

Additional Notes on Shipping Investment Deduction

(a) A ship can only be granted shipping investment deduction once in its lifetime i.e. in the year of first
use.
(b) If a qualifying ship is sold within 6 years of qualifying, the shipping investment deduction granted
will be withdrawn/clawed back by the CDT and treated as a taxable income. This is meant to prevent
investors claiming shipping investment deduction and subsequently selling such ships within a short
period at massive profits.

Topic 4
Farm Works Deductions
This is an allowable capital deduction granted in respect of capital expenditure on farm structures
constructed on a commercial agricultural land as per paragraph 22 and 23 of Second Schedule of ITA
Cap 470.
This rate is 100% of the total qualifying

Farm Land/Agricultural Land

This means land occupied wholly or mainly for purpose of trade in commercial farming i.e. crop
husbandry such as tea, sugar cane coffee, horticulture, floriculture, pyrethrum, maize, wheat, cashew

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nuts etc or animal husbandry such as dairy cattle, ranching, pigs, poultry farming, ostrich farming, dog
breeding, snake farming etc.
Types of Farm works
(a) Farm houses for the occupation of the farmer or directors of the company. In the case of a
farmhouse occupied by the owner of farm as his/her residence, only 1/3rd of the cost shall qualify
for FWD and on only one farmhouse. In case of a limited company in agricultural business, the
value of farmhouses will not be restricted since such are treated as labour quarters.
(b) Labour quarters/labour lines for the occupation by farm workers.
(c) Other building(s) or structure(s) that are necessary the proper operation of the farm to generate
taxable farming income e.g. fences, cattle dips, water and electricity supply works other than
machinery, fish ponds, stables, bomas, animal pens, access roads, granaries, stores, silos, irrigation
networks etc.

Points to Note:
(a) Full farm works deduction shall be made for farm works constructed during the accounting year
without restriction provided the farming business has been carried on for a full year.
(b) Where items qualifying for FWD are sold to another farmer, the new farmer can only claim the
residue of expenditure of the former and thus the purchase price paid by the new farmer shall be
irrelevant for the purposes of FWD.
(c) Apportionment of unclaimed deduction will be done on the basis of the period of ownership in a
year of income.
(d) Other assets owned by a farmer will qualify for their relevant capital allowances.

Topic 5
Mining Allowance
Part III of the Second Schedule grants capital allowances in respect of expenditure incurred by a person
on mining operation. These capital deductions are granted in respect of mining operations due to their
peculiar features such as:
(a) The working or production life of a mine depends largely to the amounts of deposits and the extent
to which they can be won.
(b) The prices of minerals largely depend on the world prices.
(c) Any capital expenditure in mining operations is largely dependent on the life of the mine such that
upon exhaustion of the mine, some of the buildings and machinery would hardly be used for any
other purpose.
A fall in the prices of minerals will cause the extraction or production unjustifiable although the mine
could still have substantial deposits. Much of the mining in Kenya is of marginal type. Such operations
are brought down by: world prices and scarce deposits whose extraction cannot justify the cost

Qualifying Costs for Mining Allowance

A claim shall be made in respect of capital expenditure incurred in Kenya on mining operations:
(a) In the search for or in discovering and testing of the minerals including the winning of access to the
deposits.
(b) In acquisition of or the rights in or over the mine or acquisition of the deposits other than the
acquisition from a person who has carried on mining in relation to those deposits.
(c) In the provision of machinery, which will have little or no value to that person if the mine ceases to
be worked on.
(d) On the construction of a building or works, which will have little or no value if the mine ceased to be
worked on.

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(e) On the development, general administration and management prior to the commencement of
production or during a period of non-production.

Non-Qualifying Costs
(a) Expenditure on acquisition of the site of the deposits or the site of those buildings or works or rights
over the site.
(b) Expenditure on the works constructed wholly or mainly for subjecting the raw produce of the
deposits to a process except a process designed for preparing the raw materials for use.

For the purposes of this deduction, minerals will not include: common clay, murrum, limestone,
sandstone, brine, diatomite, gypsum, anhydrite, sulphur, dolomite, kaolin, bauxite, sodium,
potassium and any other mineral substance, which is not declared to be a mineral under Sec.2 of the
Mining Act. Minerals shall include copper, gold, silver, carbon-dioxide gas, mica, etc.
The rate of mining allowance is 40% of the qualifying expenditure in the first year and 10% for the
next 6 years on a straight-line basis. A mine is deemed to have a life span of 7 years. Where a person
considers that his mine has a life of less than 7 years, he can make an official representation to the
CDT for an enhanced capital deduction rate.

An additional advantage exists where a person carrying on the mining operation is charged to tax at
a corporation tax rate of 27.5% in the first 4 years after which they revert to the normal corporation
tax ruling then.

PRACTICE QUESTIONS

QUESTION ONE
(a) Explain briefly the key provisions of Section 125 of the Income Tax Act (Cap. 470) relating to
the official secrecy binding all employees of the Income Tax Department. (5 marks)

(b) Maendeleo Ltd., a manufacturer of soft drinks, commenced operations on 1 April 2009. The
following information relates to the assets it purchased or constructed, upon commencement of
its operations.

Kshs.
Processing machinery:
- New 1,200,000
- Imported (second-hand) 600,000
Factory building (including go-down Kshs.300,000) 3,200,000
Tarmacked driveway constructed 400,000
Drainage system constructed 250,000
Waste recycling machine 650,000
Stand-by generator 300,000
Delivery vans 700,000
Office block (including staff canteen Kshs.400,000) 900,000

Additional Information
1. On 1 July 2009, the company obtained a loan of Kshs. 1,700,000 from Wananchi Bank Ltd. at 25%
interest per annum. Kshs.1 million of these amounts was used to construct an extension to the
factory which was completed on 1 September 2009. The balance was used to construct an additional
office block which was completed on 1 November 2009.
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2. On 15 September 2009, one of the vans with an original cost of Kshs. 400,000 and a market value of
Kshs. 250,000 was traded in for a new van worth Kshs. 600,000. The balance was paid in cash.
3. Due to an acute shortage of water, the company incurred a cost of Kshs. 500,000 on the construction
of a borehole which was completed on 1 October 2009. On the same date, a diesel water pump was
purchased at Kshs. 30,000.
4. On 1 November 2009, a part of the godown was destroyed by fire. The loss was estimated at Kshs.
180,000 including stock worth Kshs.25,000. A total of Kshs. 120,000 was received from the
insurance company as compensation (including Kshs. 15,000 for stock). This amount was utilized in
reconstructing the godown.
5. On 15 December 2009, two saloon cars were purchased for senior managers at Kshs. 1,400,000
each. On the same date, the company also leased a new lorry at a rental of Kshs. 20,000 per month.
6. On 30 November 2009, the company undertook a computerization project costing Kshs. 240,000.
The project had not been completed by 31 December 2009.
7. The company’s profit before capital allowances for the year ended 31 December 2009 amounted to
Kshs. 12,500,000.

Required:
(a) Capital allowances due to Maendeleo Ltd. for the year ended 31 December 2009. (12 marks)
(b) Taxable profit (or loss) and the tax liability for the year ended 31 December 2009. (3 marks)

QUESTION TWO

(a) Outline the benefits which may accrue to a country from being a signatory to the most favoured
nation status. (4 marks)
(b) Style limited obtained a license from the customs and excise department on 15th December 2007 to
manufacture leather jackets for export. The company commenced its operations on 2 January 2008.

The following information relates to the company’s operations for the financial years ended 31
December 2008 and 2009:

1. The company incurred the following costs prior to the commencement of its operations:
Kshs.
Purchase of land 8,000,000
Demolition of an old building on the land 500,000
Factory construction 12,000,000
Stone perimeter wall 1,400,000
Staff canteen 800,000

2. Part of the factory construction costs related to the following:

Kshs.
Store 170,000
Office 1,740,000

3. Other assets acquired prior to 2 January 2009 comprised:

Kshs.
Water pump 200,000
Sewerage treatment plant 700,000
Factory machinery 400,000
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 Lorry (10 tonnes) 3,600,000
Heating plant 500,000
Furniture and fittings 120,000
Photocopier 150,000
Delivery 1,800,000
Computers and printers 380,000
Forklift 1,500,000

4. A borehole was drilled at a cost of Kshs. 800,000 and utilized with effect from 1 July 2008.
5. An extension to the factory and a loading bay were constructed and utilized with effect from 1
January 2009. The extension cost Kshs. 4,800,000 while the loading bay cost Kshs. 600,000.
6. The following additional assets were acquired on 1 January 2009.
Kshs.
Imported machinery (including import duty of Kshs.600, 000 2,400,000
Fax machines 120,000
Pick ups 2,000,000
Conveyor belts 640,000

7. On 1 July 2009, Style Limited ceases to manufacture for export and instead started selling the
leather jackets in the local market. The customs and Excise Department subsequently withdrew the
export manufacturing licence with effect from July 2009.

8. The company disposed of the following assets on 1 July 2009:

Kshs.
Lorry (10 tonnes) 2,200,000
Heating plant 480,000
Photocopier 100,000

9. The company reported a net profit (before deducing capital allowances) of Kshs. 7,200,000 for the
year ended 31 December 2004.

Required:
(i) Determine the capital allowances due to Style Limited for the years ended 31 December 2008 and 2009.
(14 marks)
(ii) Determine the tax payable (if any) by Style Limited for the year ended 31 December 2009. (2 marks)

QUESTION THREE

(a) Outline two types of capital allowances granted to companies manufacturing under bond. (4 marks)

(b) Mapato Ltd. has been in the manufacturing business since 2000. The following summary relates to
the company’s assets as at 31 December 2007.

Asset Cost Kshs. Year of First Use

Factory building 5,600,000 1 January 2000
Processing machinery 3,400,00 1 January 2000

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 Other machinery (non processing) 1,600,000 1 July 2000
Tractors 3,000,000 1 July 2005
Computers 600,000 1 September 2005
Saloon car 1,800,000 1 September 2005
Partitions 400,000 1 September 2006
Photocopiers 300,000 1 September 2006
Factory extension 2,400,000 1 September 2007
Conveyor belts 960,000 1 September 2007
Sports pavilion 360,000 1 September 2007
Staff canteen 1,200,000 1 September 2007

Additional Information
1 On 1 January 2008, a sewerage system was constructed at a cost of Kshs. 720,000. A generator
was also purchased on the same date for Kshs. 450, 000.
2 The following additions assets were purchased or disposed of in the year 2008.

Date Asset Purchased Cost (Kshs.)

1 March 2008 Computers 300,000
4 May 2008 2 Saloon cars 1,800,000 (each)
24 July 2008 Trailer 400,000
10 September 2008 Lorry (5 tonnes) 1,200,000
15 October 2008 Curtains 10,000

Date Asset Disposed off Original Cost Sales Proceeds

(Kshs.) (Kshs.)
2 July 2008 Processing machinery 600,00 540,000
30 Sept. 2008 Saloon car (purchased1 Sept. (2005) 1,800,000 650,000
30 Nov. 2008 Tractor 1,200,00 800,000

3 On 1 January 2009, the company imported the following machines:

Processing machinery Kshs. 1,200,000
Weighing machines Kshs. 640,000
Water pump Kshs. 420,000
The cost of the imported processing machinery excludes an import duty waiver of Kshs. 300,000
granted by the tax authorities.
4. The company reported a profit of Kshs. 5,000,000 for the year ended 31 December 2009. This was
after deducting the following expenses, among others:
Kshs.
Insurance 180,000
Repairs and Maintenance 420,000
Import license fees 140,000

Required:
(i) Compute the capital allowances due to the company for the two years ended 31 December 2008
and 2009. (14 marks)
(ii) Determine the tax payable by the company for the year ended 31 December 2009. (2marks)

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