Leo, Kesho and Kutwa trade in electrical goods and as partners in Leo Unincorporated. They share profits and losses equally. The following details in the draft accounts regarding their profit and loss status as at 31 December 2020 have been provided: Debits

Sh.

Credits

Sh.

Office expenses

General expenses

Salaries and wages

Show room expenses

Rents, rates and taxes

Printing and stationery

Instalment tax paid

Advertising

Legal charges

Interest on capital

Depreciation

Bad debts

Commission to partners

Donation for poverty

Property taxes

Electricity expenses

General reserve

408,000

188,000

560,000

234,000

300,000

128,000

90,000

146,000

164,000

420,000

184,000

136,000

160,000

200,000

24,000

92,000

240,000

Gross profit

Interest earned

Discounts received

Other receipts

Rent income

Capital gain on shares.

2,600,000

240,000

160,000

300,000

264,000

200,000

The partners provided additional information as follows:

1. Closing stock had been understated by Sh.30, 000 as at 31 December 2019.

2. Leo was paid Sh.100, 000 as salary (included in salaries and wages) and PAYE Sh.31,000 was paid on it.

3. The firm was fined Sh.30, 000 for breach of regulations. This is included in legal charges.

4. Interest on capital was Sh.160, 000 to Leo, Sh.120, 000 to Kesho and sh.140, 000 to Kutwa.

5. Commission to partners include sh.90, 000 to Leo and the balance to Kutwa.

6. Capital allowances had been agreed at sh.1, 800,000 with the tax authorities.

Required:

(a) Compute the total income (loss) from the partnership business as at 31st December 2020.

(b) Show allocation of profit/loss among partners.

(c) How is the profit/loss of each partner to be treated for tax purposes?

(d) Specify five matters you are likely to question on the above accounts and state why.