STUDENTS’ DELIGHT - CITN · c Distinguish between earned income and unearned income. 4 marks d...

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THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA (Chartered Institute by Act No. 76 of 1992)

STUDENTS’ DELIGHT

OCTOBER 2011 TAXATION TECHNICIAN SCHEME EXAMINATION

TTS I OUESTION AND SUGGESTED SOLUTIONS

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THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA

OCTOBER 2011 TAXATION TECHNICIAN SCHEME

PART 1: ECONOMICS

INSTRUCTION: ATTEMPT ALL QUESTIONS TIME: 3 HOURS

1 a Microfinance Banking serves as one of the ways government intends to develop rural

areas of the economy. 5 marks

b Explain five functions and five advantages of microfinance banks in Nigeria. 10 marks

c List five problems of commercial banks in Nigeria. 5 marks

(Total: 20 marks)

2 a A producer estimated the short-run total cost function of the Nigerian textile industry

in 2008 to be as follows (hypothetical):

TC= 104.2 + 18.56Q

where TC is the total annual cost (Nm) and Q is the metres of textile materials produced (million).

i. What was the industry total fixed cost? 2 marks

ii. If the Nigeria textile industry produced 10 million metres of textile materials, what was its total

fixed cost? 2 marks

iii. What was the industry’s average variable cost (AVC)? 4 marks

iv. Determine the industry’s marginal cost? 2 marks

b Why is it necessary for a West African country to adequately develop its agricultural sector before

expanding its industrial base. 10 marks

(Total: 20 marks)

3 a Differentiate between location of industry and localization of industry . 5 marks

b Discuss five factors influencing the location of cement industry in Nigeria. 71/2 marks

c List and briefly explain five problems facing industrial sector in Nigeria . 71/2 marks

(Total: 20 marks)

4 a Write short notes to differentiate the following concepts:

i. Derived demand and composite demand . 5 marks

ii. Increase in the quantity demanded and increase in demand. 5 marks

b Explain five factors influencing the supply of house-wear garments in Nigeria .

10 marks

(Total: 20 marks)

5 a Define National Income Equilibrium. 4 marks

b The national income model for a two sector closed economy is given as:

Y= C + I

C= N240 million + 0.75Y

I = N200 million

i. Derive the equilibrium level of national income . 5 marks

ii. What is the value of investment multiplier? 6 marks

c Distinguish between Gross National Product (GNP) and Net National Product (NNP).

5 marks

(Total: 20 marks)

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PART 1: ACCOUNTING

INSTRUCTIONS: ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS TIME: 3HOURS

1 a Discuss the main roles of ratio analysis in the interpretation of financial statements.

4 marks b Indicate the significant limitations of ratio analysis. 8 marks

c In respect of the following financial ratios, explain briefly how each ratio is computed and indicate those aspects of a business enterprise about which each ratio provides information:

i. Asset turnover. 2 marks ii. Debtor payment period. 2 marks iii. Stock turnover period. 2 marks iv. Return on shareholders’ fund. 2 marks

2 The following is the receipts and payments account of All for God Social Group in respect of the year ended 31st December 2009:

RECEIPTS N PAYMENTS N Balance b/d 41,000 Dance Concert 25,000 Subscriptions: Salaries/Wages 80,000 - 2008 16,000 Stationery 30,000 - 2009 844,000 Rent & Rates 15,000 - 2010 32,000 Telephone 2,500 Grants/Subventions 200,000 Investment 250,000 Dance/Concert 120,000 General expenses 10,000 Dividend on investment 75,000 Repairs 300,000

Balance c/d 615,500 1,328,000 1,328,000

You are given the following additional information:

i. There are 1,000 members each paying annual subscription of N1,000; N18,000 being in arrears for 2008 at the beginning of 2009. The balance of 2008 subscriptions which was uncollected at the end of 2009, is to be written off as bad.

ii. Stock of stationery at 31st December, 2008 was N25,000 and at 31st December, 2009 was N40,000. iii. At 31st December, 2009 the Rent and Rates were prepaid to the following 31st March, the yearly charge being

N12,000. iv. Telephone bill of N1,500 was outstanding as at 31st December 2009. v. General expenses accruing at 31st December 2008 were N2,500. vi. At 31st December 2008, the Building was valued at N850,000. Included in the cost of Building was N200,000

for Land. Building cost is to be written off at 2% per annum. vii. Included in the repairs was N200,000 incurred on building improvement. viii. Grants/Subventions are to be deferred and enjoyed over a period of five years. Required: Prepare an Income and Expenditure Account and Balance sheet for the year ended 31st December 2009 in Vertical Form. 20 marks

3 Tola and Temi decided to undertake a Joint Venture to buy up the stock-in-trade of a bankrupt Fashion House. Profits were to be shared equally and each Venturer was entitled to a commission of 5% on the selling price of goods sold by him. The stock was obtained by the venturers at N32,500. Payment was made on 1st January 2008 when Temi sent a cheque for N10,000 to Tola to help him pay for the goods. Tola was to receive an office allowance of N100 and Temi was allowed to charge N550 for handling of the goods. Expenditure incurred by the ventures up to January 31st of 2008 was:

TOLA TEMI N N

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Carriage 250 - Insurance 450 - Warehouse rent - 600

On January 16, 2008, Tola received N14,000 and Temi N10,000 for goods sold and on January 20, they received N8,000 and N9,000 respectively. Tola agreed to take the stock still unsold at a valuation of N500 for his own use when the venture came to a close on 31st January 2008.

Required: Show the accounts necessary to record the above transactions in the books of Tola and Temi and also the final settlement between the parties on 31st January 2008. 20 marks

4 Briefly discuss the following:

i. Entity concept 21/2 marks ii. Historical cost concept 21/2 marks

iii. Accrual concept 21/2 marks iv. Materiality concept 21/2 marks v. Objectivity concept 21/2 marks

vi. Periodicity concept 21/2 marks vii. Prudence concept 21/2 marks

viii. Realisation concept 21/2 marks (Total 20 marks)

5 The opening balance of Olupese Ventures Limited’s Cashbook was N1,954 (debit) on 1st January 2010. During the

year ended 31st December 2010, total receipts was N361,537 and total payments made amounted to N343,287,

leaving a closing balance of N20,204 on 31st December 2010.

On the same date, a Bank statement was received and there was a balance of N18,849 in the company’s favour.

Olupese Ventures Limited’s Cashier examined the Cashbook and the Bank statement and found out that:

i. Cheques issued by Olupese Ventures Ltd totaling N4,135 have not been presented at the Bank and lodgments

of N3,230 on 30th December 2010 have not been recorded by the Bank.

ii. Standing orders recorded in the Bank statement in respect of hire purchase payments on one of the

Company’s Machines at N150 per month have been omitted from the Cashbook.

iii. A cheque of N900 lodged in the Bank during the last month of the trading year was returned to the company

and marked “Represent”.

iv. A cheque drawn for N119 has been entered in the cashbook as N191. Also another cheque received from

Happiness Nigeria Limited for N582 and lodged with the Bank was recorded as N528 in the Cashbook.

v. A cheque for N832 has been charged to the Company’s account by the Bank in error.

vi. The opening balance in the cashbook was under cast by N200.

vii. Bank charges of N524 have not been recorded in the cashbook.

viii. A lodgment of N2,330 was recorded as N2,300 in the Cashbook, while another cheque of N1,500 lodged with

the Bank was omitted from the Cashbook.

You are required to:

a. Prepare the Adjusted Cashbook of Olupese Ventures Ltd (12 marks)

b. Show a reconciliation of the balances of the Cashbook and bank statement as at 31st December 2010 (8 marks)

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PART 1: ELEMENTS OF BUSINESS LAW

INSTRUCTION: ATTEMPT ALL QUESTIONS TIME: 3 HOURS

1 a “Every agreement is a contract but not every contract is an agreement”.

Do you agree? Give reasons for your answer. (6 marks)

b i. List four essentials of a valid contract. (4 marks)

ii. Ade Motors Limited, by a letter dated the 1st day of January 2011 offered to sell ten Toyota Hiace

Buses to Imperial University at the price of N2 million each. Imperial University did not reply the

letter but sent some of its officers on the 10th of January 2011 to pay for and take delivery of the

buses. Ade Motors Limited refused to sell at N2 million per bus saying the price had increased to

N3 million for each bus. Imperial University wishes to sue Ade Motors Limited for breach of

contract.

You are required to advise the University. (10 marks)

(Total: 20 marks)

2 a i. List the ways by which an agency may be created. 4 marks

ii. What are the effects of the acts of an agent in cases of disclosed principal and

undisclosed principal? 6 marks

b i. How can an agency be terminated? 5 marks

ii. What are the consequences of termination? 5 marks

(Total: 20 marks)

3 a Conditional sales are sometimes confused with hire-purchase. Discuss 10 marks

b What are the obligations of the owner to the hirer under the Hire Purchase Act 1965?

10 marks

(Total: 20 marks)

4 a What is a negotiable instrument? 5 marks

b State five characteristics of negotiable instruments 5 marks

c Define Bill of Exchange 3 marks

d Outline the essentials of a valid Bill of Exchange 7 marks

(Total: 20 marks)

5 a Briefly, discuss the formation of a contract of employment. 10 marks

b How, may, a contract of employment be terminated? 5 marks

c What are the areas where the National Industrial Court has adjudicatory jurisdiction?

5 marks

(Total: 20 marks)

PART 1: INTRODUCTION TO TAXATION

INSTRUCTIONS: ATTEMPT ALL QUESTIONS. SHOW WORKINGS TIME: 3 HOURS

1 a Who are the Inspectors of Taxes? 5 marks

b Enumerate five (5) qualities of a good Inspector of Taxes. 5 marks

c Mention ten (10) functions performed by the Inspector of Taxes. 10 marks

(Total: 20 marks)

2 a List five (5) incomes of companies that are taxable in Nigeria. 5 marks

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b List six (6) sources of income to an individual. 6 marks

c Distinguish between earned income and unearned income. 4 marks

d Discuss five (5) disadvantages of placing too much reliance on tax clearance certificate.

5 marks

(Total: 20 marks)

3 To reduce the effect of tax on individual and corporate bodies in Nigeria, certain incentives and reliefs are usually

granted to tax payers.

Discuss five (5) each of such reliefs and incentives available to individuals and corporate bodies in Nigeria.

20 marks

4 a List five (5) techniques that are used by the Federal Inland Revenue Service to collect

taxes. 6 marks

b What is back duty assessment? 8 marks

c Enumerate six (6) reasons for back duty assessment. 6 marks

5 Taxation is an avenue available for the provision of social amenities to the citizens of any given nation.

Discuss ten (10) problems and ten (10) possible solutions of tax administration in Nigeria.

20 marks

SOLUTIONS

ECONOMICS

SOLUTION TO QUESTION 1

Functions of Micro-finance Banks

i. Savings and Currents accounts Services

ii. Payment of Salaries on behalf of its customers

iii. Loans and overdraft to customers, Civil servants, Car loan and Motorcycle loans

iv. Financial consultancy services on Investment shares, export, import and proper feasibility studies

v. Fixed deposits/call deposits

vi. LPO Financing

vii. Equipment Leasing

Advantages of Micro-finance Banks:

(a) Provide tailor-made loans at relatively low interest rate

(b) They help in developing banking habits of the rural communities thereby helping in enhancing the effectiveness of

monetary policy on aggregate

(c) Helping in creating employment

(d) They serve as vehicles for development in rural areas

(e) They help in improving rural incomes.

Problems of Commercial Banks in Nigeria

i. High level of corruption by Bank Officials

ii. High cash liquidity as a result of high interest rate on loans

iii. Effect of world economic meltdown

iv. Lack of trusts by the depositors

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v. Political instability which result to changes in monetary policies

vi. Low interest rates on savings

vii. Activities of non-banks financial institutions.


A (i) The total fixed cost is the total cost incurred when nothing is produced i.e. TFC =FC when Q= 0 (where Q stands for output)

TFC = 104.2 + 18.56(0) TFC = N104.2 million (ii) Given Q = 12 meters, it will follows that TC = 104.2 t 18.56 (12) = N326.92 million (iii) TVC = TC –TFC = 326. 92m – 104.2m = N222.72 million Therefore, AVC = TVC

Q = 222.72m 12 = N18.56 per meter (iv) SMC = δC or δTC = N18.56

δQ δQ B. It is necessary to develop the Agricultural sector first because of the following reasons

Food produced by the agricultural sector can be used to feed the Industrial sector and the growing population

Agriculture will generate revenue for investment in industry

Creates quality of agricultural raw materials will be produced as industrial inputs

The Agricultural sector will provide a ready market for furnished products of the growing industries

Increased foreign exchange earned from agricultural exports will be used to Finance importation of capital and foreign skills for Industry

Incomes earned from Sales of agricultural products will stimulate increased demand for Industrial goods.

SOLUTION TO QUESTION 3 OCTOBER 2011

A. Location and Localization of Industry

Location of Industry is the siting of Industry either by government or an entrepreneur in a given area for economic,

geographical, social or political reasons.

While, Localisation of Industries means the concentration of Industries in a particular area for economic, social,

geographical reasons e.g. Ikeja Industrial area.

B. Factors influencing the location of a Cement industry in Nigeria

Availability of raw materials - an industry tends to be located where there is an adequate supply of raw

materials. The Cement factories are cited at Ewekoro, Gboko and Nkalagu because these areas have deposit of

limestone.

Availability of market - the availability of suitable market for cement and its size of demand determine the

extent of production.

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Supply of power - efficient and effective supply of power in an environment encourage the siting of industry.

Cement industry consumes more electricity. Hence, using diesel will increase the cost of production and the

price of the product.

Supply of labour – adequate supply of the three main types of labour – unskilled, semi-skilled and skilled are

very important factors which influences where a cement industry should be located.

Transport Facility – this is essential facility to carry the raw materials to the factories and for carrying finished

products to the market.

Government policy.

C. Problems facing Industrial sector in Nigeria

Scarcity of capital, spare parts for machines or vehicles, raw materials, etc. due mainly to shortage of foreign

exchange

Poor Infrastructure – inadequate infrastructure e.g. poor electricity supply, bad roads and poor water supply

High importation of goods – importation of goods that can be produced locally

Competition from foreign goods

Low level of technology

Political instability.


A. Derive Demand and Composite Demand.

Demand for a commodity or resource is a derived demand if the commodity or resources is demanded as a result of

the fact that other commodities of resources are demanded. It is often used to describe demand for factors of

production because they are not directly useful to man.

While, Composite Demand – there is a composite demand for a commodity or resources if it can be used for two or

more purposes. A typical instance is flour which is the basic raw material for bread, cake, sausage roll etc.

Increase in the quantity demanded and increase in Price.

An increase in quantity demanded of a commodity is caused by a fall in the commodity’s own price

p

|

|

|

P1 | X

|

P2 | X

|_______________________________________

Q1 Q2 Quantity

A fall in price from P1 to P2 leads to an increase in the quantity demanded. It may be due to increase/decrease in

income, increase /decrease in Price, taste, etc.

While an increase in demand is shown as an outward shift of the demand curve.

P D2

| D1 X

| X

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|

P1|

| X

| X D2

| D1

|__________________________________________ Quantity

Q1 Q2

An increase from D1 to D2, meaning that a greater quantity OQ2 is purchased at the given price P1.

B. 5 factors affecting the demand of garments:

Price of the commodity

Income of the Consumers

Price of the close substitute of the goods

Fashions

Population

Consumers expectation of future rise/reduction in price of the goods


A. Equilibrium Income

The equilibrium level of national income is the level of national income at which aggregate expenditure (aggregate

demand) is equal to the total value of goods and services (i.e. aggregate demand) is equal to the total value of

goods and services (i.e. aggregate supply)

Y = C + I + G + (X – M)

Y = AD

B. (i) National Income model for a two sector closed Economy.

Y = C + I

Substituting the values of C and I as given.

Y = 240 + 0.75 Y + 200

Y – 0.75 Y = 440

(1 – 0.75) Y = 440

Y = 440___

1 – 0.75

Y = 440

0.25

= N1,776 million

ii. Investment multiplier K is defined as

K = 1__

1-b

The coefficient of Y in the consumption functions gives the value of b as 0.25

Therefore, K = 1_____ = 1__

1 - 0.75 0.25

= 4

An increase in investment will result in an increase in National Income by an amount that is four times the

additional Investment.

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C. Gross National Product and Net National Product.

Gross National Product (GNP) is the total value of goods and services produced during a year by the factors of

production within an economy plus net income from abroad.

Net Income from abroad = Nigerian’s Income from abroad minus foreigner earnings in Nigeria.

GNP = GDP+ Net Income from abroad.

Net National Product (NNP) is the value of all goods and services produced in a Country, plus net property income

from abroad, less capital consumption.

NNP = GNP – Capital Consumption (Depreciation).

Solution to Accounting Question 1. COMMENT: This question tests candidates’ understanding of ratio analysis. Students demonstrated ignorance of this simple term and performance was poor. The commonest pitfall is that candidates did not even understand the definition of ratio as a relationship and cannot calculate different ratios. Candidates are advised to study ratio analysis from definition to calculation. (a) The purpose of ratio analysis is to establish relationship between figures in the Profit and Loss

Accounts and Balance Sheet. It is expressed by showing the number of times one value contains the other. Ratios can be used to compare one year with another OR one year with another.

(b) Although ratios can be very useful but they have several limitations. Some of these are:-

(i) Many ratios are expressed in isolation and may have little or no meaning until it is compared with other ratios.

(ii) If for some reasons, the figures used in ratio analysis are unrepresentative, a false impression may be created.

(iii) It is difficult when making an inter-business comparison i.e. to compare like with like.

(iv) Because ratios are calculated from Balance Sheet and Profit and Loss figures, they are necessarily based on historical figures. But the historical costs may not reflect current operating costs.

(c) (i) Asset Turnover

Asset turnover = Sales/Turnover: Capital Employed

(ii) Debtor Payment Period Debt Payment Period = Average Debt x 12(in months) Annual Credit Sales (iii) Stock Turnover Period

Stock Turnover Period = Closing Stock x 12(in months). Cost of Goods Sold

(iv) Return on Shareholder”s Funds Return on Shareholder”s = Profit Before Tax Shareholders’ Fund

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QUESTION 2 COMMENT: This question is on a test of basic accounting principle of double entry and using same to extract the final accounts. A few of the candidates understood this very well and scored very well while others demonstrated ignorance and lack of preparation for examinations. Candidates should take note that there is no taxation without basic accounting. They should therefore be harmed with basic accounting principles. You cannot tax an account you cannot prepare. ALL FOR GOD SOCIAL CLUB BALANCE SHEET AS AT 31ST DECEMBER, 2009 COST DEPRECIATION NBV =N= =N= =N= Fixed Assets Land & Building 1,050,000 17,000 1,033,000 Investment 250,000 1,283,000 Current Assets Stock of Stationery 40,000 Subscription (arrears) 156,000 Cash 15,500 Prepaid Rent & Rates 3,000 814,500 Current Liabilities Subscription(advance) 32,000 Accruals 1,500 (33,500) 781,000 2,064,000 Financed by: Accumulated Fund 931,500 Net Surplus 972,500 1,904,000 Grant/Subvention 160,000 2,064,000 TUTORIAL/WORKINGS (1) Computation of Accumulated Fund 1/1/2009 =N=

Cash 41,000 Subscriptions(arrears) 18,000 Stock 25,000 Land & Building 850,000 934,000 Less: General Expenses (accrued) 2,500 931,500

(2) SUBSCRIPTIONS ACCOUNT = N= =N= Balance b/d 18,000 Receipt & Payment A/c: Income & Expenditure A/c 1,000,000 Year 2008 16,000 Balance c/d 32,000 Year 2009 844,000

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Year 2010 32,000 Bad debt 2,000 Balance c/d 156,000 1,050,000 1,050,000 (3) STOCK =N= =N= Balance b/d 25,000 Income & Expenditure 15,000 Receipt & Payment 30,000 Balance c/d 40,000 55,000 55,000 Balance b/d 40,000 (4) BUILDING: Depreciation Balance b/d 850,000 Addition: Repairs 200,000 1,050,000 Less: Cost of land 200,000 850,000 x 2% = N17,000 SOLUTION TO QUESTION 3 In the books of Tola

Joint Venture (with Temi) Account =N= =N= January January 1 Bank: Purchase 32,500 Bank remittance 10,000 Carriage 2,500 16 Bank: Sales 14,000 Insurance 450 20 Bank: Sales 8,000 16 Commission(5%) 700 31 Purchases a/c 500 20 Commission 400 Balance c/d 1,900 31 Official allowance 100 34,400 34,400 Balance b/d 1,900 Bank Settlement 4,400 Share of Profit 2,500 4,400 4,400 In the books of Temi Joint Venture (with Tola) Account =N= =N= January 1 Bank remittance 10,000 Jan. 16 Bank: Sales 10,000 16 5% Commission 500 20 Bank Sales 9,000 27 5% Commission 450 20 Bank: rent 600 Handling charges 550 Balance c/d 6,900

19,000 19,000 Balance b/d 6,900 Share of Profit 2,500 Bank: Settlement 4,400 6,900 6,900

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Memorandum Joint Venture Account

Tola: =N= =N= =N= Sales: Purchases 32,500 Tola 14,000 Carriage 250 8,000 Insurance 450 Office allowance 100 Temi 10,000 Sales Commission 1,100 9,000 34,400 Goods taken by Tola 500 Temi: Rent 600 Handling 550 Sales Commission 950

2,100 Net Profit c/d 5,000

41,500 41,500 Share of Profit: Balance b/d 5,000 Tola 2,500 Tem 2,500 5,000 5,000

SOLUTION TO QUESTION 4 (1) ENTITY CONCEPT

Every economic unit, regardless of its legal form of existence, is treated as a separate entity from parties having proprietory or economic interest in it.

(2) HISTORICAL COST CONCEPT

The concept holds that cost is the appropriate basis for initial accounting recognition of all asset acquisition, services rendered or received, expenses incurred, creditors and owners interest and it also holds that subsequent to acquisition cost value are retained are retained throughout the accounting process.

(3) ACCRUAL CONCEPT

The accrual concept states that if income and expenditure are measured when the transaction occur, regardless of the physical flow of cash, the business is said to be operating on an accrual.

(4) MATERIALITY CONCEPT

The principle states that financial statements should separately disclose items which are significant enough to affect evaluation or decisions. The level of significance is a matter for individual judgment. Materiality may also be considered in the context of the financial statement as a whole.

(5) OBJECTIVITY CONCEPT

This states that accounting record should be kept and interpreted in such a way as to command universal acceptability. The recording interpretation should avoid ambiguity and subjectivity.

(6) PERIODICITY CONCEPT

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This concept also known as ‘Time Interval Concept’ means that there must be a specified period when the business must find out whether or not it is achieving its desired objectives (which in most situations is assumed to be profit-making). The interval over which the business finds out whether or not the profit-making objective is achieved is known as time value.

(7) PRUDENCE CONCEPT

In recording the income due to a business and the financial obligation which it is responsible for the business is expected to be sensible by not recognising income before they are earned .

(8) REALISATION CONCEPT

This concept identifies the point at which business organization can be held responsible for an expense and be entitled to income. When a valid contract is entered into by a business outfit the income and expenses arising from the situation can be respectively considered as earned or and incurred. TUTORIAL It is important for students at the foundation stage to know all Accounting Concepts and conventions. This is the foundation for Accounting and Taxation.

SOLUTION 5. Olupese Ventures Limited (a) Adjusted Cash Book =N= =N= Bal. b/f 20,204 Standing order 1,800 Over posting of cheque 72 Returned cheque 900 Under posting (lodgment) 54 Bank charges 524 Under casting –opening bal. 200 Over posting (lodgment) 30 Omitted lodgment 1,500 Bal. c/d 18,775 22,030 22,030 Bal. b/d 18,776

(b) Bank Reconciliation Statement as on 31 December, 2011 =N= =N= Balance as per Adjusted Cash Book 18,775 Add: Unpresented cheques 4,135 22,911 Less: Uncredited lodgment 3,230 Error by the bank 832 4,062 Balance as per Bank Statement 18,849 TUTORIAL Starting with Balance as Per Adjusted Cash Book X Add Cheques issued, posted to the Cash Book but not yet Presented to the Bank X

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Deduct: Received cheques lodged into the Bank but yet to be credited To the company’s account by the Bank (X) Deduct Standing Order figure given to the Bank for a regular payment (X) Balance as per Bank Statement XX Starting with Balance as Per Bank Statement, you deduct all you added above and add all you deducted to arrive at balance as per Cash Book.

ELEMENT OF BUSINESS LAW – TTS 1


(a) The statement is incorrect. It is a reversal of the valid assertion that every contract is an agreement but not

every agreement is a contract. For an agreement to constitute a contract, it must be one by which parties

intend to create legally enforceable rights and obligations. The courts adopt an objective approach i.e. the

reasonable man’s test to determine whether such an intention exists.

However, not all contracts necessarily arise from agreement.

(b) i. Four essentials of a valid contract are :

Offer and acceptance

Consideration

Intention to create legal relationship

Legal capacity of parties

ii. For there to be a valid contract there are some requirements. These requirements are offer and

acceptance, consideration, intention to create legal relationship, legal capacity of the parties.

Although Ade Motors Limited offered to sell the buses to Imperial University at Two million naira

each, this offer was not accepted by the University. There is therefore no valid contract between the

parties. Imperial University will not succeed in an action against Ade Motors Limited.


a. i. An agency may be created in the following ways:

By actual, implied or usual authority

By ratification

By estoppels

By necessity

ii. In cases where the agent discloses the name or existence of his principal, only the Principal can sue

or be sued on the acts of the agent. The agent drops out and does not incur personal inability to a

third party by reason of his agency without more. This rule is however subject to two exceptions.

First, where a contract is entered into by deed, the principal cannot sue or be sued thereon except

he was mentioned in the deed as a party and the deed was executed in his name. This exception

however does not apply where the agent entered into a contract by deed as a trustee for the

principal and where the agent acted under a power of attorney for principal when executing the

deed.

Second, the terms of contract, custom or usage of the trade may make an agent personally liable.

In cases where the principal is undisclosed it depends on whether it is the name of the principal that

is not disclosed or his very existence. In the first case, the position is the same as where the

Principal is disclosed. In the second case, the law is that where the agent has express or implied

authority to act on behalf of the principal the latter can sue and be sued thereon. No injustice is done

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to a third party as under the principle of election, he can elect to sue either the principal or the agent.

An election of one means the discharge of the other.

(b) i. An agency may be terminated in the following ways :

(1) By an act of the parties which may be bilateral or unilateral. In the case of unilateral termination

in the principal will be liable in damages to the agent if the termination amounts to a breach of

contract. At common law an agency may also be irrevocable where it is coupled with an interest.

(2) By operation of Law : This could be

(a) When the time fixed has expired or when the agent has completed his assignment.

(b) When the contract becomes frustrated or impossible to perform.

ii. Termination of agency does not deprive a principal of his right to sue the agent for breach of contract

or duty. It also does not deprive the agent of remuneration or indemnity to which he is entitled.

An agent will be liable to a third party for breach of warranty of authority if he deals with such a third

party after the termination of the agency. He may alternatively be taken to have contracted

personally so that he will be made liable to the third party. Executors cannot be liable where

termination is death of the principal and a third party deals with the agent in ignorance of the death of

the principal.


a) Conditional sale share some features with hire-purchase agreement. In both cases the buyer or hirer, as

the case may be, obtains possession of the goods but until he has paid the full purchase price, he does

not become the owner. However, although the seller under a conditional sale like the owner under a hire

purchase agreement may recover possession of the goods on default of payment of installments, the

seller may not be able to recover possession where the buyer has sold and delivered the third party may

have acquired goods to an innocent third party. This is because the third party may have acquired good

title by virtue of the provisions of section 25(2) of the sale of goods Act, 1893.

(a) Under Section 4(1) of the Hirer-purchase Act, 1965 every hire purchase agreement shall contain;

i. An implied warranty that the hirer shall have enjoy quite possession of the goods.

ii. An implied condition that the owner shall have the right to sell the goods at the time when the

property is to pass.

iii. An implied warranty that the goods shall be free from any charge or encumbrance in favour of any

third party at the time the property is passed.

iv. An implied condition that the goods shall be of merchantable quality except where the goods are let

as second hand goods and the note or memorandum of the agreement made in pursuance of

section 2 of the Act contains a statement to that effect. No condition shall be implied where the

defect is such that the owner could not reasonably have been aware of it at the time when the

agreement was made or if the hirer had examined the goods or sample of them as regards defects

which the examination ought to have revealed.


(a) A negotiable instrument is an instrument or document by virtue of which a series of credit of debts or

commercial obligations may be postponed or deferred by granting of credit. It is therefore a written

promise to pay money.

(b) Five characteristics of Negotiable instruments

i. They are transferable by mere delivery together with endorsement of payment to bearer or by

delivering together with endorsement of payment to order. The process requires no formalities

provided that the instrument is regular on the face of it and in a deliverable state.

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ii. Consideration is taken to have been furnished, although the law still emphasizes the essence of

giving value for the instrument. The value need not be adequate but sufficient.

iii. The transferee need not give notice to the debtor as in the cases of other chose in action. This is a

marked departure from the requirement that express notice in writing of assignment of all debts and

other legal chose in action must be given to the debtor, trustee or other person who is holding the

assigned funds.

iv. Title passes to the transferee free from all equities provided he takes the instrument bona fide and

for value.

v. The transferee acquires full legal title to the instrument and can consequently sue in his own name

for the right conferred thereby.

(c) A Bill of Exchange is defined by the Bill of Exchange Act as an unconditional order in writing addressed by

one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay

on demand or at a fixed or determinable future time, a sum certain in money to or to the order of a

specified person or to bearer.

(d) A Bill of Exchange should have the following essential features :

(i) The Bill must be an order

(ii) The order must be an unconditional

(iii) The instrument must be in writing and also signed by the drawer

(iv) The order must be addressed by one person to another

(v) The order must be for a sum certain in money

(vi) The bill must be payable on demand or at a fixed or determinable future time

(vii) The instrument must specify an identifiable payee


(a) Ordinary laws of contract govern the formation of a contract of employment. The essential elements of a

valid contract must therefore exist in the transaction. A Contract of employment, at a common law may

either be made orally or in writing. Where it is for a period less than six months, it needs not be in writing.

An oral contract of employment terminates on the last day of the agreed term or upon the completion of

the specified number of days or piece of work since where there is an agreement to the contrary between

the parties.

A notice of 14 or 7 days is required of the party wishing to terminate the contract where the period of

agreement is one month or less respectively. Wages may be paid daily, weekly, monthly or at such period

as parties may agree upon, provided that where the period is more than one month, the wages must be

paid at an interval of not more than one month.

Where the contract of employment is required to be in writing it will be enforceable if there is failure to do

so.

A contract of employment is required to be in writing where;

(i) The contract is of a duration of six months or more, or of a number of days equivalent to six months

or more

(ii) The contract is of materially different conditions of service from the customary one obtainable in

respect of similar works (jobs) in a particular district.

(iii) The contract is to be performed in Nigeria but outside an area of 25 miles radius from the place of

employment or engagement.

(iv) The contract of employment is outside Nigeria.

Every written contract shall stipulate the rights and obligations of parties.

(b) A Contract of employment may be terminated in the following ways :

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(i) By efflux ion of time, that is lapse or passage of time where the contract is for specified period.

(ii) By notice from either party where the contract of employment is for an indefinite period

(iii) Dismissal of employee for gross misconduct, for example, dishonesty, truancy, insubordination,

fraud

(iv) Breach of fundamental terms of the contract which may lead to termination.

(v) Where the employer is a firm , by dissolution of the partnership

(vi) Frustration arising from (a) death of either party (b) serious illness (c) cancellation of an expected

event (d) subsequent illegality of the object of the contract

(vii) Winding up of the employer company.

(c) The National Industrial Court has jurisdiction to the exclusion of any other court :

(i) to make awards for the purposes of setting trade disputes

(ii) to determine questions as to the interpretation of

1. Any collective agreement

2. Any award made by an Arbitration Tribunal or by the Court itself

3. The term of settlement of any trade dispute as recorded in any memorandum under section 7 of

the Trade Dispute Act.

INTRODUCTION TO TAXATION SOLUTION TO QUESTION 1 (a) Inspectors of Taxes

The Inspectors of Taxes are under the control of the Federal Inland Revenue Service or State Board of Internal Revenue. They are the intermediaries between the tax payers and the revenue department. The Inspectors of Taxes are in four categories: 1) Chief Inspector of Taxes 2) Principal Inspector of Taxes 3) Senior Inspector of Taxes 4) Inspector of Taxes. Their appointment depends on their experience and number of years in service.

(b) Qualities of Inspectors of Taxes

i. They are versed in the Income Tax Laws ii. Accommodating but firm iii. Preserving and painstaking iv. Patient and Tolerant v. Above board in discipline and integrity vi. Credulous.

(c) Functions of Inspector of Taxes

i. To make and issue assessment based on the returns on which tax Payable ii. To track down tax evasion iii. To act as advisers to Tax payers iv. To represent the Boards at the hearing of Appeals v. To receive tax returns and other information from tax payers and other sources vi. To deal with claims for repayment when tax has been overpaid by tax payers vii. To detect errors made during tax allowances computation

viii. If no return is received from tax payers, or the information received is suspected to be false then Best Of Judgement (B.O.I) assessment is issued

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ix. They issue tax deduction card on PAYE system and exercise a general oversight of its administration by employers

x. They deal with objections by tax payer when revised assessment can be issued as considered necessary.

SOLUTION TO QUESTION – 2 (a) Incomes that are taxable in companies include the following:

The profits of a company that are taxable are the profits accrued in, derived from, brought into, or received in Nigeria during a tax year. They include:

i. Profit from any trade or business ii. Rent or any premium from property occupation iii. Interests, discount, charges or annuities iv. Profits or gains from acquisition and disposal of short term money instruments, like

Federal Government Securities Treasury bills and Certificates, Savings Certificate, etc v. Fees, Dues and Allowances (whenever paid) for services rendered.

(b) Sources of individual income include:

i. Employment ii. Trade and business gains iii. Profession or vocation iv. Investment v. Pensions vi. Rents vii. Foreign income brought to Nigeria. viii. Royalties

(c) i. Earned Income This is in relation to an individual, could be defined as income derived from trade,

business, vocation, profession or employment carried on or exercised by the individual, and the pension derived from previous employment.

Thus earned income is the income an individual actually worked for one time or the other. ii. Unearned Income This could be defined as income derived from other sources not included in the earned

income sources. This is income from rents, dividends, interests and royalties. Unearned income is usually

income mainly from investments. (d) Disadvantages of placing too much priority on tax clearance certificate are as follows: (i) The possession of tax clearance certificate is not a conclusion that the tax payer has

declared his total income. (ii) Possession of Tax Clearance Certificate does not mean that the tax payer has paid an

adequate tax. (iii) Too much emphasis placed on Tax Clearance Certificate may be subject to abuse with

collaboration of corrupt tax officials with tax payers. (iv) It has been observed that Tax Inspectors spend more time issuing Tax Clearance

Certificate at the expense of examination of tax payers account and relevant taxation computations.

(v) Despite the fact that the account of many companies are not in agreement for many years, Tax Clearance Certificate are still being issued to them.

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SOLUTION TO QUESTION 3 The following are some of the incentives and reliefs available to individuals and corporate tax payers: (a) Reliefs available to individuals: (i) Personal Allowance of N5,000 plus 20% of earned income. (ii) Children Allowance of N2,500 per child to a maximum of 4 Children who must be on full

time education or trade or trade whose age must not exceed 16 years. (iii) Dependant relatives allowance of N2,000 each per annum for a maximum of two

dependants whose total income must not exceed N600 per annum each. (iv) Life assurance policy allowance that should not exceed 20% of the capital sum or 10% of

the total income. (v) Loss relief of the current year losses. (vi) Loss incurred can be carried forward for a maximum of four years before it loses. (vii) Foreign income derived will be exempted from tax provided it is received through

domiciliary account. (ix) Dividend received from a pioneer business are exempted from tax. This is to encourage

taxpayer to invest in such businesses. (x) Dividend received from a Unit Trust Scheme is also exempted from Tax. (b) Reliefs available to Corporate Tax Payer: (i) Losses may be carried forward for a maximum period of 4 years. Exemption to this rule is

agricultural businesses where losses are carried forward indefinitely. (ii) Any foreign income will be exempted from tax so far it is received through domiciliary

account. (iii) Capital allowances can be claimed on qualifying expenditure to reduce tax liability. (iv) Investment allowances may be claimed on plant and machinery in addition to initial and

annual allowances. (v) For agricultural and manufacturing business, there is no limit to the amount of capital

allowance that may be claimed. (vi) Tax holiday for pioneer business for a period between three and five Years. (vii) Dividends received from pioneer businesses are exempted from tax. (ix) Tax free period of up to five years for companies operating in the export-processing zone. (x) A reduced tax rate of 20% for small companies whose turnover does Not exceed

N100,000. SOLUTION TO QUESTION 4 (a) Techniques used in Tax Collection by the Federal Inland Revenue Service.

i. Tax Clearance Certificate ii. Tax Drive iii. Withholding Tax iv. Penalties v. Special levies vi. Management Visitation vii. Installment Payments.

(b) Back Duty Assessment/Investigation

Back duty is the assessment not raised by the Revenue for the past years through incorrect returns by a taxpayer which is now being discovered as a result of additional (new) information or facts relating to the taxpayer.

Back duty claim is an anti-evasion tool being applied by the revenue. The reason for omissions

or inaccuracies in the returns need not necessarily relate to default, although they usually do.

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A tax payer may genuinely believe that an income is not taxable. During the course of back duty audit, the records of the tax payer are audited to examine the

truth in the information that was earlier provided in the annual returns or tax computations. Also, the values of qualifying capital expenditures will be confirmed in order to check that the

basis of capital allowance computation is reliable. The tax computation is reviewed based on the findings from the audit exercise, The new findings are compared with the previous ones. The shortfall on a yearly basis

determined and this form the basis of an assessment. An additional assessment arising from such an exercise is subject to the objection and appeal

procedures. (c) The following are the reasons for Back Duty Assessment: (i) Error or omission in the assessment or collection of taxes due to negligence or deliberate

intention of tax payer. (ii) False or doubtful claim for allowances and or reliefs. (iii) Undercharge or understatement of tax within the last six years. (iv) Failure to disclose or include in full any income or earnings in the tax returns made

available to the tax authority. (v) Where tax has not been assessed or has been assessed less than what ought to have

been assessed. (vi) Where there is a fall in profit or revenue. SOLUTION TO QUESTION 5 A. PROBLEMS OF TAX ADMINISTRATION IN NIGERIA

1. Poor Record Keeping Keeping of adequate business financial records is a serious problem to many business

men in the country. This is as a result that many are illiterates who do not appreciate the importance of record keeping. Even the literates ones find it difficult to keep record because of little or no knowledge of the importance of record keeping.

2. Personnel Lack of qualified and experienced personnel to administer tax laws in Nigeria is a serious problem.

3. Attitude of Tax Payer The poor and negative attitude of tax payers to payment of tax is a problem. Many of the taxable people in Nigeria are not enlightened except for Individuals and

salaried employees whose incomes are subject to tax at sources (PAYE). Many lack knowledge of their civic responsibilities.

4. Payment Problem Many tax payers fail to pay up taxes after assessment. Many even go scot-free either by

bribing tax officials or simply because they cannot be reached. 5. Corruption Among Tax Officials The high rate of corruption among tax officials is another problem of good administration

of tax for example, many tax officials are bribed by tax payers in orders to reduce the assessment individuals and companies.

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6. Low or No Penalties for Defaulter The present penalties for defaulters are not severe enough to encourage compliance. The

option for tax defaulters are ridiculous. 7 Lack of Management Information System

The absence or lack of management information within the State Tax Board is giving opportunity for tax administration inefficiency.

8. Absence of State Revenue Court The absence of state revenue court which is effective to convict those Who are in the habit

of evading tax gives room for ineffectiveness. 9. Inadequate Uniformity of Tax Administration Inadequate uniformity of tax administration across the three tiers of Government in

Nigeria. 10. Inability of the tax officials to identify majority of potential tax payers. 11. Mismanagement of funds High rate of bribery and corruption like the embezzlement of Payers fund by top officials in

the tax administration gives room for inefficiency and ineffectiveness. 12. Constant changes in the tax laws and policies.

(b) POSSIBLE SOLUTIONS TO THE PROBLEMS OF TAX ADMINISTRATION (I) Each tier of government in Nigeria should as a matter of policy ensure that the right people

are employed. Recruitment should not be based on sentiment but on merit and competence.

(ii) Government should embark on public enlightenment on tax policies and laws from time to time especially when new tax laws are introduced or put in place.

(iii) Penalty should be put in place for any tax official caught mismanaging tax fund and also for anyone contravening any section of tax laws.

(iv) Government should spend tax fund collected judiciously. If people can feel or enjoy what the funds are being used for, the willingness to pay tax will be there and tax evasion will be reduced to the

bearest minimum. (v) Our tax laws and administration should be made uniform across the tiers of government in

Nigeria. (vi) Government should provide adequate management information System within the State

Tax Board. (vii) Government should establish State Revenue Court as a matter urgency and the court

should be made effective. (viii) Importance of good record keeping should be emphasized and if possible, policy

statement should be made for small business organizations in Nigeria. Small business should be forced to keep

adequate records. (ix) Payment of tax in respect of an assessment should be simplified with little or no cost to the

collecting agent. If possible authorized Revenue officers should visit tax payer to ease tax payment.

(x) People of high integrity and impeccable character should be recruited by the Revenue Authority to safeguard tax payers’ contribution to the revenue generation.

STUDENTS’ DELIGHT - CITN · c Distinguish between earned income and unearned income. 4 marks d...

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Transcript of STUDENTS’ DELIGHT - CITN · c Distinguish between earned income and unearned income. 4 marks d...