Unity University

Faculty of Business and Economics

Department of Accounting and Finance
Public Finance and Taxation Final Exam
Name _________________________
Id. No_________________________
Section ________________________

Answer Sheet

True/ False
1. 6.

2. 7.

3 8.
4 9.
5 10.

Multiple Choice Questions

1. 11. 21.
2. 12. 22.
3. 13. 23.
4. 14. 24.
5. 15. 25.

6. 16. 26.
7. 17. 27.
8. 18. 28.
9. 19. 29.
10. 20. 30.
Part I: Say “True” if the statement is correct and “False” if not- 1.5 Mark Each
1. The minimum excise tax rate applied to excisable goods is 10%.
2. In computing rental income of a building if the tax payer leased furnished quarters the
amounts received attributable to the lease of furniture and equipment shall be included in
income.
3. Every person deriving income from dividends from a share company or withdrawals of
profits from a private limited company shall be subject to tax at a flat rate of 5%.
4. Citizen of Ethiopia working as a diplomat, consular, or other similar official posts abroad
will be taxed in Ethiopia Based on his income generated globally.
5. Category C tax payers are prohibited from keeping any record about their business activity.
6. Business losses are allowed to be transferred for two three periods in Ethiopia.
7. The current corporate tax rate of 30% is applicable to all companies carrying on business in
Ethiopia.
8. The study of the methods and objectives of borrowing and its management is known as
public expenditure.
9. An excise tax is paid with respect to goods produced locally by a local producer and goods
imported by an importer.
10. Rental Income tax is a tax imposed on income derived from rental of buildings including
income from lease of business.
PART II: Multiple Choices - 1.5 Marks Each
1. Which of the following feature is/are not similarities between public and private finance?
A. Satisfaction of Human Wants
B. Borrowings
C. Adjustment Approach of Income and Expenditure
D. Maximum advantage
E. None of the above
2. Which one of the following is a non-deductible business expense as per the Ethiopian tax law
A. Entertainment expense D. All of the above
B. Punitive damage and penalties E. None of the above
C. Dividend declared and paid out
3. Vertical equity is assured when
A. Two people with equal income pay same tax
B. Two people with unequal income pay same tax
C. Two people with equal income pay unequal tax
D. All of the above
E. None of the above
4. Which one of the following is taxable under schedule B rental income tax?
A. Causal property rent D. All of the above
B. Business lease E. None of the above
C. Rent of land
5. Which one of the following makes p administrative cost of a tax system?
 A. Cost incurred by the tax payer for professional tax advisor
B. Accounting and auditing costs incurred by tax payers
C. Productive time wasted in complying with tax laws
D. All of the above
E. None of the above
6. A fair tax system is one that;
A. Distribute tax burden among tax payers considering their ability to pay
B. Distribute tax burden among tax payers considering benefit received
C. Keeps cost low
D. A &B
E. A&C
7. Under the Ethiopian law employment income is defined as
A. Basic salary of permanent employees
B. All economic benefit received from employer
C. Allowance, overtime payment and basic salary of an employee
D. All of the above
E. None of the above
8. All but one is allowed for deduction in computing capital gain tax on alienation of building
A. Taxes paid for building and related taxes
B. Lease payment on the land to which the building is related
C. Inflation adjustment
D. Prior capital loss
E. None
9. Ato Abebe has paid Br 88 for lunch in Radisson Blue hotel. The bill includes a service
charge of 8% on selling price and TOT of 2%. The amount of turnover tax is Br______
A. 16 B. 1.43 C. 1.54 D. 1.6
10. Which one of the following is wrongly matched
Income type Tax rate
A. Interest income of deposit 5%
B. Royalty income 5%
C. Income from winning a lottery 15%
D. Technical service income 15%
E. None
11. Public finance includes:
A. Public revenue
B. Public expenditure
C. Financial administration & control
D. Public debt
E. Economic stability & growth
F. All of the above
12. One of the following is not tax on income
 A. Employment income tax D. Excise tax
B. Business income tax E. Dividend tax
C. Royalty tax

13. Article 8 of income tax proclamation provides for the source of income under schedule D
includes:
A. Income from casual rental of property
B. Income from rental of building
C. Income from employment
D. Income from business activities
E. None
14. The reimbursement for payment of daily expenses of an employee incurred for duty is:
A. Overtime
B. Allowance
C. Per-diem
D. Bonus
E. Commission
15. A resident person for a tax year means a body or association of individuals which has:
A. Its head (principal) office in Ethiopia
B. Effective management in Ethiopia
C. A fixed place of business in the form of administrative, branch, factory, workshop,
building site, etc. of a non-resident body in Ethiopia
D. All of the above
E. All except C
16. One of the following does not belong to the class of fully deductible expenses for
Determination of Taxable Business Income/Profit.
A. Donations and Gifts
B. Selling and distribution costs
C. General & administrative expenses
D. Insurance premium directly connected to Business.
E. A and D
17. Which one of the following income item is not directly exempted from employment income
tax by the income tax laws in force in Ethiopia?
A. Income from casual employment
B. Remuneration of Diplomatic Personnel of Foreign Countries
C. Compensation for accident or death
D. Contribution of retirement benefits by employers exceeding 15% of monthly basic salary
of employees
E. None of the above

18. Which of the following is False about exempt supplies?

 A. there is neither Input Tax nor Output Tax
B. No Tax is collected when we sell goods and services
C. No Tax is paid when we purchase exempt supplies.
D. The supplier of the exempt supplies will not pay any VAT.
E. The VAT paid is not recovered or refunded rather it is considered as a cost of
purchase.
19. One of the following income is Not categorized under other income section
A. Royalties income
B. Income from casual rental of building
C. Dividends income
D. Income from Games of Chance
E. None
20. One of the following is not tax on commodity
A. Turn over tax D. Excise tax
B. Value added tax E. None
C. Capital gain tax
21. The liability account Turnover tax payable (TOT) has credit balance of Br. 1780. Then what
will be the correct entry at the time of payment of TOT liability to the tax authority?
A. Cash ------------------1780
TOT Payable------------1780
B. Cash ------------------1780
Sale -----------------------1780
C. TOT payable--------------1780
Cash -----------------------1780
D. Sales ------------------------1780
TOT payable--------------1780
Answer the following three questions based on the information below. ABC incorporated
received annual rental income of Br 420,000 for the year 2000. During the year land use tax,
insurance premium, repair and maintenance and depreciation cost for Br 3,500, Br 4,600, Br12,
500 and Br 11,000 were incurred respectively.
22. How much would be the taxable income if ABC maintains books of account
A. Br. 420,000 C. Br. 388,400
B. Br 300,400 D. Br 336,000

23. How much would have been the taxable income if ABC doesn’t maintain books of account
A. Br. 420,000 D. Br 300,400
B. Br. 388,400 E. Br 294,000
C. Br 336,000 F. None
24. What is ABC’s rental income tax liability for the period if it maintains a book of account
A. Br 109,650 D. Br 116,520
B. Br 100,800 E. Br 88,200
C. Br 93,340 F. None
25. A VAT registered wholesaler acquires and then sold taxable goods at Br 255,000 and Br
285,000 respectively in a particular year. If input and output values given are without VAT,
how much would be the VAT payable for the period (Assume 15% VAT rate)
A. Br 4,500
B. Br42,750
C. Br 38,250
D. Br 4,000
E. None
26. In the above question if the input and output value are VAT inclusive, how much is the VAT
payable ( assume 15% VAT Rate)

A. Br 37,147 D. Br 39,130
B. Br 33,261 E. None
C. Br 3,913

27. Which one of the following earnings is fully exempted from tax

A. Severance pay
B. Encashment of annual leave
C. Bonus
D. Commission
E. None of the above
28. Which one of the following method is permitted to be used in determining cost of inventory
for tax purpose
A. FIFO method
B. LIFO method
C. Average method
D. All of the above
E. None of the above

29. Which one of the following company is classified under category A tax payer in Ethiopia?
A. Share company
B. Private limited company
C. A sole proprietorship with an annual turnover of 600,000 Br
D. A and B
E. All of the above
30. In determination of taxable rental income, one of the following is not allowed for deduction
by tax payer who maintain books of account
A. Land and building tax paid by the lessor
B. One fifth of the gross income received as rent for the building
C. Depreciation for the building
D. Interest on bank loan associated with the building rent
 E. None of the above

PART III: Work out

1. Assume XYZ Corporation is operating in Ethiopia; it pays business taxes on the basis of
schedule “C” Business income. The following condensed profit and loss statement was
presented for the fiscal year ended Sene 30, 2001.
XYZ Corporation
Profit and loss statement
For the fiscal year ended Sene 30, 2001
Sales Br 700,000
Less: cost of sales 340,000
Gross Profit 360,000
Operating expenses
Administrative expenses Br 80,000
Selling and distributive expenses 40,000
Audit fee 25,000
Salaries expenses 60,000
Interest expenses 10,000
Cash dividends 25,000
Depreciation expenses 6,000
Total operating expenses 246,000
Earning before tax 114,000
Business income tax 34,200
Net income after tax 79,800
The following information was obtained by an assessment form the auditor of the Federal Inland
Revenue Authority (FIRA)
1. The manager earns monthly basic salary of 2,000 and representational allowance paid to him
Br 500 per day for the five-day training seminar held at Debre Zeit Institution. This amount
is included in administrative expenses.
2. Employers provident fund contribution is 20% of their basic salary. The total basic salaries
the employee of the company is Br 40,000.
3. During the year damage covered by insurance policy was Br 5,000, which is included in
selling and distribution expenses
4. Personal entertainment at Ghion Hotel, which costs Br 1,000 and was included in
Administrative expenses.
5. Advertisement expense in the selling expense was erroneously understated by Br 5,000
6. Interest expense is based on 10% simple interest. The highest rate between National bank and
Commercial banks during the year was 6%.
7. The costs of goods sold would be Br 350,000 if weighted average is applied.
Required
A. Compute the correct amount of taxable business income by preparing tax return – 7.5Marks
B. Determine the amount of tax liability using schedule “C” of business profit tax – 7.5 Marks
C.