financial accounting ii as at 08th march 2007 revision kit

i Approach to Examinations

Acknowledgment We gratefully acknowledge permission to quote from the past examination papers of the following bodies: Kenya Accountants and Secretaries National Examination Board (KASNEB); Chartered Institute of Management Accountants (CIMA); Association of Chartered Certified Accountants (ACCA).

Acknowledgment iPart I: Introduction i

Approach to Examinations iiSyllabus iii

PART II: Past Papers Questions and Answers 4Questions – Past Papers 4Answers – Past Papers 73

Part III: Comprehensive Mock Examinations 195Questions - Mocks195Answers-Mocks 203

duction

The examination approach of the Kenya Accountants and Secretaries Examination board has changed radically with effect from the June 2000 examination. The new syllabus is more demanding on students’ knowledge, skills and examination technique.

This revision kit is designed to supplement other reference materials and the study texts supplied by the Distance Learning Centre of the Strathmore University. Singular use may prove inadequate and therefore effective study of the subject should be done prior to use of this kit. The aim is to improve both knowledge and examination technique by providing plenty of opportunity for structured practise of past examination questions reflecting the new examination scheme.

Remember that Accounting papers not only examine candidates on knowledge but also the ability to present information in form of good reports and adapt to practical challenges of meeting strict deadlines. Therefore a candidate must be well prepared to enhance the chances of passing the examination. To achieve a pass or score highly thorough knowledge of the syllabus coupled with skilled presentation of solutions i.e. either proper formats with or and concise explanations to theory questions is essential.

The change to application of International Financial Reporting Standards also poses an additional challenge to the students as it does to professionals in the industry. It is especially demanding on the students since International Financial Reporting Standards are dynamic and the student must keep abreast with the changes.

Financial Accounting II revision kit includes the following features:

financial accounting ii

Approach to ExaminationsThe syllabus;

All question are provided with full suggested solutions and tutorial notes prepared by Strathmore university.If you attempt all the questions in the kit together with the mock examinations you will have written answers equivalent to more than ten examinations. So if you write good answers to all of them, you should be well prepared for the final exam. Good luck!

roach to Examinations

Ensure that you have covered the syllabus adequately either by the Distance Learning Centre study packs or other reference materials. It is very important to maintain a systematic approach to your studies, right up to your examination. Whether it is through private study, distance learning or attending classes, please develop a proper exam strategy.

The following should be the recommended guide:

Start your practise and revision with a topic that you find straight forward. This boosts your morale and gives you a bit of self-confidence.The kit includes a bank of illustrative questions covering all aspects of the syllabus. Most of these questions are borrowed from previous examination sittings. Attempt these questions and you may approach the questions by starting with the syllabus areas you are comfortable with. Please do not refer to the solutions provided until you have completed. Compare your answers to the suggested solutions provided. If your solutions are correct then well done. If they are not correct then no problem. Check the solution provided and study carefully how the solution was arrived at.Re attempt the questions again (may be at a later date) and this time check your speed. Ensure that your speed is improved and pay attention to formats and presentation. Your solutions should be neat and well laid out.Once the entire syllabus has been revised and you are confident that you can answer questions successfully, attempt the three mock exams at the end of the kit. Ensure that you sit the papers under strict exam conditions. It may not be wise to refer to the mock exams at any time before you are ready to attempt them. Refrain from turning to these pages until later.The purpose of practising the mock exams is for you to gain experience on the methods of selecting questions, deciding on the order in which you will attempt, managing your time well and producing quality answers. Once you have finished each mock paper and checking solutions please bear in mind that in addition to the experience gained, please assess your performance to determine whether you may be having problems in any of the syllabus areas. Then you can revise again.

Syllabus iii

Syllabus

OBJECTIVETo develop the candidate’s competence in preparation of financial accounts of various types of institutions in both private and public sectors.

8.0 SPECIFIC OBJECTIVES

A candidate who passes this paper should be able to:

prepare institutional Accountsprepare specialised accountsprepare and interpret public sector accountsprepare cash flow statements.

CONTENT

8.1 Institutional Accounts

The preparation of accounts for agricultural activities.The accounts of professional firms, such as advocates, architects, doctors and accountants, including client accounts.

8.2 Accounting for Financial Institutions including Banks, Building Societies and Insurance Companies.

Preparation of financial statements in compliance with the Companies Act and the relevant law such as the Bank Act and the Companies Act.

8.3 Specialised Accounts

Hire Purchase and instalment system accountsReturnable containersJoint Ventures; royalty accounts; bills of exchange; consignmentsInvestments and securities accountsThe computation of consequential loss insurance claims and stock claimsAccounting for long term construction contractsAccounting for the redemption of shares and debentures.

8.4 Public Sector Accounts

Accounting Concepts, bases and policies of relevance to government accounting.Public Sector accounting; the development of accounting standards and their applicability to the public sectorFund accounting and its relationship to entity theory


4 Answers – Past Papers

Income measurement and valuation in the public sectorThe preparation, analysis and interpretation of financial statements of governmental unitsThe accounts of state corporations and similar organisations.

8.5 Cash flow Statements

The distinction between profit and change in cash and bank balancesThe preparation of cash flow statements.

This revision kit does not follow exactly the syllabus provided by KASNEB. However the illustrative questions provided cover all aspects of the syllabus

PART II: Past Papers Questions and Answers

Questions – Past Papers

JUNE 2000

QUESTION ONE(a) Briefly explain the salient characteristics of farm accounting. (5 marks)(b) The following information is obtained from Mzee Kavuyo on his farming activities for the year ended 31 March 2000:

Opening stockShs.

Closing stockShs.

CropsGroup cropsSeedsCattleCattle foodPoultryPoultry foodFishFertilizers

Purchases during the year:PoultrySeedsCattleFishCattle foodFertilizersPoultry food

Sales during the year:Butter

30,00022,50015,000562,50075,00067,5007,50015,00037,500

112,50011,250300,0007,500105,00026,25022,500

11,250

37,50033,75018,750787,50041,250101,25015,00024,00022,500

Past Papers Questions and Answers 5

MilkEggsCropsFlowersFruitsCattlePoultryFishVegetables

Expenses during the year:WagesInsuranceDepreciationRepairs

67,50097,500157,50011,25030,000270,000105,00045,00037,500

176,25011,25015,0009,000

Consumption of farm products by proprietor:ButterMilkEggsVegetablesPoultryFishFruits

Sh.3,00018,7503,7504,5001,5007502,250

Required:From the information given above, prepare the following accounts for

Mzee Kavuyo for the year ended 31 March 2000:

Crop account;Dairy account;Poultry accountFishing account;Summarised profit and loss account (15 marks)

(Total: 20 marks)

QUESTION TWOYou have been provided with the following summarised accounts of Golden Times Ltd. For the year ended 31 March 2000:

Balance sheet as at 31 March 2000Fixed assets: Sh. Sh. Sh.Freehold property (Net book value)Plant and machinery (Net book value)Motor vehicles (Net book value)Furniture and fittings (Net book value)

480,000800,000200,000 200,0001,680,000



Current Assets:StocksDebtorsInvestments

Current liabilities:Trade creditorsBank overdraftCorporation taxDividends payable

Financed by:Authorised share capital – 800,000Sh.1 ordinary sharesIssued and fully paid: 400,000 Sh.1 Ordinary sharesCapital reserveRevenue reserveLoan capital: 400,000 10% Sh.1 Debentures

238,400878,400176,000107,200

1,000,000400,000 120,0001,500,000

(1,400,000) 120,0001,800,000

400,000200,000800,000

400,0001,800,000

Profit and loss account for the year ended 31 March 2000Sh.

Sales (credit)

Profit after charging all expenses except interest on debenturesLess: debenture interestProfit before taxCorporation tax

Less: ordinary dividend proposedRetained profit transferred to revenue reserve

4,000,000

440,000 40,000 400,000 176,000 224,000 107,200 116,800

The following additional information was available:

1. The purchases for the year were Sh.2,160,000 while the cost of sales was Sh.3,000,000.2. The market price for Golden Times Ltd. Ordinary shares as at 31 March 2000 was Sh.53. The company estimates the current value of its freehold property at Sh.1,100,000.


Required:(a) Compute the following ratios for Golden Times Ltd.:

Return on capital employees (1 mark)The profit margin (2 marks)The turnover of capital (1 mark)Current ratio; (1 mark)Liquid ratio; (2 marks)Number of days accounts receivable are outstanding; (1 mark)Property ratio; (2 marks)Stock turnover ratio; (1 mark)Dividend yield ratio; (1 mark)Price earnings ratio. (2 marks)

(b) Comment on Golden Times Ltd. Liquidity stating the reference points to which relevant ratios can be compared. (6 marks)

(Total: 20 marks)

QUESTION THREE(a) Briefly explain the following terms as used by insurance companies:

Whole life policy; (1 mark)Endowment policy; (1 mark)Surrender value (1 mark)

(b) The following balances were extracted from the books of Ulinzi Insurance Company Ltd. As at 31 March 2000:

Debits Sh.Expenses of management: Fire MarineClaims paid: Fire MarineCommission: Fire MarineDirectors’ feesDepreciation on furnitureContribution to NSSFInvestmentsDebentures on mortgage bankInterest accruedShares in companiesPremiums outstanding: Fire MarineSundry debtors

579,000258,000

840,000805,500

522,000370,500130,5006,00022,50018,886,5004,402,50054,0004,230,000

1,056,000894,000289,5000



Fixed depositsCash and bank balancesFurniture less depreciationLibrary books

CreditsReserve for unexpired risks: Marine FirePremium less reinsurance: Fire MarineAdditional reserves: Fire MarineClaims outstanding on 1 April 1999: Fire MarineInterest on investmentsMiscellaneous receipts

Share capital:210,000 ordinary shares Sh.100 eachGeneral reserveStaff provident fundSundry creditorsContingency reserveInvestment fluctuation reserve

213,000981,00048,00015,000

Sh.

1,830,000976,500

2,479,5001,677,000

1,071,000112,500

28,5001,500385,5001,500

21,000,0001,917,000213,000900,000300,000210,000

The following additional information is available:

1. Estimated liability in respect of claims outstanding at the close of the year was as follows:

Fire Sh.39,000 Marine Sh.141,000

2. The following provisions are to be made:Sh.150,000 survey expenses for marine insurance claimsSh.300,000 for taxation

An additional reserve of 10% of the net premium was made for the unexpired risks in the case of fire insurance in addition to the balance brought forward.

In respect of fire insurance, a reinsurance premium paid Sh.450,000, a claim of Sh.150,000 covered by insurance and a commission at 5% on reinsurance ceded have still to be accounted for.

The market value of the investments is Sh.21,375,000.

The reserve for unexpired risk should be 100% of the premium less reinsurance in marine business.


Required:

The revenue accounts and profit and loss account for the year ended 31 March 2000 and a balance sheet as at that date. (17 marks)

(Total: 20 marks)

QUESTION FOUR(a) Write short notes on the following terms commonly used in banking:

Money at call and short notice; (2 marks)Cash credit; (2 marks)Overdraft; (2 marks)Discounting of bills; (2 marks)Bills of collection. (2 marks)

(b) List the main details relating to advances that a bank is required to disclose in its published accounts.

(10 marks)(Total: 20 marks)



QUESTION FIVEThe following balances were extracted from the books of Widows and Orphans Fund for the year ended 30 April 2000:

Sh.Payments to widows and orphansRefund to bachelorsManagement expensesMembers contributionsInterest on investmentsProvision for exchange losses on foreign investments (30 April 1999)Investment accountEmployers contributionsFund account 30 April 1999

2,910,000150,00070,0002,012,0006,000,0002,000,00080,000,00040,00076,000,000

Sh. Sh.CashJ.M. FundC.S.F. CorporationP.M.G

1,000,0001,600,000 322,000 2,922,000

The following information is also available:

1. A sum of Sh.80,000 was due to be paid to Widows and Orphans, but claims were not received until May 2000.2. Interest on investments amounting to Sh.800,000 was to be paid to the fund in March 2000, but the cheque was not received until May the same year.3. The employer contributions for the year should not be less than 3% of the total members contribution for the year.4. Thirty members of the Fund were late in paying the contribution for the year ended 30 April 2000 amounting to Sh.3,000 each.5. Provision in case of loss on foreign investments should be adjusted to Sh.1,600,000

Required:(a) A trial balance of the Fund after taking all the above adjustments into account.

(6 marks)(b) Income and expenditure account for the year ended 30 April 2000.

(7 marks)(c) A balance sheet as at 30 April 2000. (7 marks)

(Total: 20 marks)


DECEMBER 2000

QUESTION ONETobiko and Munyao advocates, have been in practice for several years. They share profit/losses equally.

The following financial information is available:

Balance sheet as at 30 September 1999Capital Accounts: Sh.’00

0’Sh.’000’

Fixed Assets: Sh.’000’

Sh.’000’

TobikoMunyao

Current liabilities:Client’s accountAccrued rentAccrued salaries

128136132

3,3083,0006,308

396

____

Furniture and fittingsEquipmentMotor vehiclesInvestment in NSE shares

Current assets:Outstanding feesCash at bank: Office Clients

962841,504

4801,212 128

1,8843,000

1,820

6,704 6,704

Receipts and Payments Account for the year ended 30 September 2000Receipts Sh.’00

0’Payments Sh.’00

0’Fees for services renderedClient’s deposit for land buyingClient’s deposit for criminal caseReceived from clients for:Disbursements: Stationery Transport Miscellaneous

3,5521,5361,296

486092

Equipment purchasedDrawings: Tobiko MunyaoDeposit on land purchase contract for clientTransportOffice rentTelephone and postagePrinting and stationeryMotor vehicle expensesWater and electricityOffice repairsSalaries and wagesMiscellaneous expenses

59630030092022489629215239214072960208

Additional Information:1. Depreciation is to be provided for on reducing balances at 12½% for

furniture, 15% for equipment and 25% for motor vehicles.



2. Fees in arrears at the year end was Sh.1,280,000. The advocates have agreed to create a reserve against the fees in arrears.

3. During the year, the criminal case client was defended in court. The advocates raised an interim fee note for Sh.500,000 but no entries have been made in the books.

4. Disbursements for stationery, Sh.20,000, transport, Sh.12,000 and miscellaneous expenses, Sh.4,000 have been charged to the client’s account.

5. Accrued expenses were Sh.20,000, Sh.108,000 and Sh.112,000 for telephone, rent and salaries respectively.

Required:a) The advocates Income and Expenditure Account for the year ended 30 September 2000. (6 marks)(b) The clients account(s) for the same period. (6 marks)(c) Balance sheet as at 30 September 2000. (8 marks)

(Total: 20 marks)

QUESTION TWONyumba Safi Ltd. operates a housing development project. There was a fire on its premises on 31 January 2000 which destroyed most of the building, although stock to the value of Sh.3,960,000 was salvaged. The company has an insurance policy (with suitable average clauses) covering stock for Sh.600,000,000, buildings for Sh.800,000,000 and loss of profits (including standing charges for Sh.250,000,000 with a six months indemnity period).

An extract of the company’s trading profit and loss account for the year ended

31 December 1999 is as shown below:

Sh.’000’ Sh.’000’

Opening stockPurchases: materialsInsured standing chargesOther expensesNet profit for the year

412,5001,812,500167,50080,00057,500

Sales of housesClosing stockInterest on investment

2,000,000525,0005,000

Additional information:1. The company’s records show that the sale of housing units for January

2000 had been the same as for the corresponding month in the previous year at Sh.100 million.

2. Payments to creditors were Sh.106,680,000 and Sh.3,320,000 was owing to creditors at the end of January 2000.

3. Business was disrupted until the end of April 2000 during which period turnover fell by Sh.180 million compared to the same period last year.

4. It was agreed that ¾ of the value of buildings had been lost and that at the time of fire, buildings were worth Sh.1,000 million.


Required:Ascertain the amount of various claims to be submitted to the insurers.

(20 marks)

QUESTION THREEWananchi Pools Ltd. set up a business on 1 July 1999 to sell snooker tables of a standard size and quality. The company began with Sh.600,000 in the bank. The tables are purchased for Sh.5,400 each and sold for Sh.7,500 each. A friend of the managing director introduced ART Ltd. a hire purchase company to Wananchi Pools Ltd. ART requires a deposit of Sh.2,100 followed by 18 months instalments of Sh.375 each, the first one payable one month after purchase. Wananchi Pools Ltd. decided to deal in hire-purchase business on terms and conditions to those ART on deposits and instalments.

During the year ended 30 June 2000, Wananchi Pools Ltd. bought a total of 300 tables and sold 210 of them. Hire purchase sales were 12 in April 2000, 20 in May 2000 and 30 in June 2000, but 2 of those sold in April were repossessed in June with the deposit and one instalment having been paid. One of the repossessed tables was damaged and had to be repaired for Sh.1,800 while the other one was hardly damaged and could be treated as new stock..At the year ended 30 June 2000, the following trial balance was extracted:

Sh. Sh.CapitalPurchasesSalesDebtorsCreditorsExpensesDrawingsBank balances

1,620,000

470,250

135,000480,000 70,9502,776,200

600,000

2,133,000

43,200

_______2,776,200

Required:

(a) Trading, profit and loss account for the year ended 30 June 2000.(8 marks)

(b) (i) Hire purchase debtors account. (3 marks)(ii) Repossessions account. (2 marks)

(c) Balance sheet as at 30 June 2000. (7 marks)(Total: 20 marks)

QUESTION FOURKamau has negotiated with Onyango for a licence to manufacture and sell weighing scales patented as “wellscale”. Onyango is the registered owner of the patent. The agreement provides for a royalty to be paid to Onyango of Sh.250 for each unit sold in a year, subject to a minimum of Sh.2,500,000 per year. The shortfall in any year can be recouped from any excess of royalties over the minimum sum in the following year.Kamau sold 8000 weighting scales in 1996 and 11000 in 1997. From the beginning of 1998, Kamau issued a sublicence to Kiplagat for the manufacture



and sale of the same units, on the terms of a royalty of Sh.300 each, a minimum sum of Sh.1,500,000 per year and the right to recover any shortfall for a year from an excess in the following year.

The sales volumes for the following two years were:

Kamau Kiplagat1998 12000 30001999 14000 4000

Required:

The accounts in Kamau’s books for each of the four years 1996, 1997, 1998 and 1999 indicating the amounts to be transferred to the profit and loss account each year and the amounts carried forward at the end of each year.Assume that all amounts due were received or paid in the appropriate year.

(20 marks)

QUESTION FIVEIn relation to Government Accounting explain briefly what is meant by the following terminologies:

(a) Public Accounts Committee. (5 marks)(b) Consolidated fund. (5 marks)(c) Appropriations-in-aid. (5 marks)(d) Paymaster General. (5 marks)

(Total: 20 marks)

JUNE 2001

QUESTION ONEThe following trial balance was extracted from the books of Mr. Charles Msafiri as at 30 April 2001.

Sh. Sh.Fixed assetsLandBuildingsMotor vehiclesFarm implementsCurrent assetsPesticides 1 May 2000Cashew nuts 1 May 2000Coconuts’ 1 May 2000Animal feed 1 May 2000DebtorsCash in hand and at bankPurchasesLivestockPesticidesMedicine

4,000,000800,0001,780,000900,000

170,000896,2001,687,500300,700520,8001,160,100

2,000,000617,800130,800


SeedsLivestock fattening formulaSalesCashew nutsCoconutsLivestockCrop expensesLabourOther direct expensesLivestock expensesMedicineLabourGeneral expensesCreditorsLoanBank chargesCapital

92,500220,000

538,000118,000

247,000128,80071,400

20,200________16,399,800

3,200,9001,430,0003,900,000

798,3003,800,000

3,270,60016,399,800

You are given the following additional information:(1)

Stocks as at 30 April 2001 were: Sh.LivestockCashew nutsCoconutsPesticides

1,200,000640,0001,506,100120,700

(2)Drawings Sh.LivestockCoconutsCashew nuts

42,80019,10033,700

(3) Depreciation is to be provided for at the rate of 20% and 10% per annum for motor vehicles and farm implements respectively on the book values. Buildings to be depreciated at 2% per annum on cost.

(4) The bank interest is 15% per annum on the loan. The interest for the current year has not been paid. The loan of Sh. 3,800,000 was used as follows:

LivestockCrop

Sh. 2,000,000Sh. 1,800,000



Sh. 3,800,000

(5) At the end of the year Sh. 19,100 was paid for medicine which had not been delivered by 30 April 2001.

Required:(i) Trading and profit and loss account in columnar from for the year ended 30 April 2001, showing profit/loss on crop, livestock and total profit.

(10 marks)

(ii) General profit an loss account showing the profit/loss from (i) above and net Profit after charging depreciation and bank charges. (2 marks)

Balance sheet as at 30 April 2001. (5 marks)Three advantages the farmers may gain by adopting and implementing farm accounting and proper record keeping as a standard practice.


QUESTION TWOThe following balances were extracted from the books of Exotic Marine Insurance Company Ltd. on 30 April 2001.

Sh.Premium less re-insuranceCommission on direct businessCommission on re-insurance cededCommission on re-insurance acceptedDepreciationLoss on sale of investmentClaims paid less re-insuranceClaims recovered under re-insurance not adjustedDirectors remunerationInterest and dividends (net) not relating to any fundReserves for unexpired risk on 1 May 2000Additional reserve on 1 May 2000Claims outstanding on 1 May 2000Claims outstanding on 30 April 2001Tax deducted from interest and dividendsSalariesRent and ratesPostage and stationerySurveyors fees and legal charges for settlement of claimsProfit and loss appropriation account 1 May 2000

14,791,500660,00078,00057,00096,000150,0007,560,000300,000450,000412,50011,700,0001,170,000567,000687,000120,000960,00087,000129,000300,0002,925,000


The following additional information is available:Reserves for unexpired risks to be maintained at 100% of the net premium income.Additional reserves of 10% on the said premium is also to be maintained.Provision for taxation to be made for the year Sh. 912,450Investment reserve to be increased by Sh. 225,000.

Required:Revenue account for the year ended 30 April 2001. (12 marks)The profit and loss account for the year ended 30 April 2001 (8 marks)(Total: 20 marks)

QUESTION THREEDuring the month of March 2001, a manufacturing firm advertised in the local press that it had bonded goods which were to be auctioned. On reading the advertisement, Mr Michael Karanja and Mr. Joseph Abuya agreed to pool their resources together and participate in the auction. They agreed to share the joint venture profits and losses. Karanja and Abuya in the ration of 3:2 respectively.

Karanja sent Abuya a cheque of Sh. 2,400,000 on 15 March 2001 to provide him with funds for Karanja’s participation in the joint venture.

Karanja and Abuya successfully bought goods and managed to sell all of the goods purchased by the end of April 2001. Their cash transactions appeared as follows:

KaranjaSh.

AbuyaSh.

SalesTravelling expensesAdvertisingCity Council chargesSalaries and wagesSundry expensesPurchasesTelephone expensesInsuranceTransportation of goods

3,840,000392,400123,600102,00057,60070,8001,920,00033,70012,300157,000

2,520,000555,600109,20084,00078,10034,8001,320,00028,90011,200121,500

Settlement between Karanja and Abuya was done by cheque on 30 April 2001.

Required:(a) Memorandum joint venture account. (6 marks)(b) Joint Venture account with Abuya in Karanja’s ledger (7 marks)(c) Joint Venture account with Karanja in Abuya’s ledger (7 marks)

(Total: 20 marks)



QUESTION FOUR(i) What is the basic principal involved in accounting for hire purchasestransaction?(ii) Describe how that principle is accommodated by two of the accounting methods commonly used to account for hire purchase transactions. (6 marks)

Luthuli Electronics Ltd. commenced business on 1 April 1999, selling television sets both on a cash basis and by instalments. Hire purchase sales require a deposit of one-third of the cash selling price with the balance payable in 18 equal monthly instalments. No additional charge is made for this service. At the end of each financial year the firm takes credit for the profit instalment sales only in respect of the proportion represented by deposit and instalments actually reserved.

The following transactions took place during the two yeas ended 31 March 2000 and 2001:

2000Shs.

2001Shs.

Cash salesInstalment salesNew TV sets purchasedCash collections or instalment contracts:Initial depositMonthly instalments 2000 sales 2001 salesStocks at 31 March:New TV sets at cost

9,606,60084,893,40069,300,000Shs.28,297,80019,323,900

16,380,000

13,131,000119,394,00075,119,700Shs.39,798,00027,623,70025,182,000

21,604,500

Required:(i) Trading accounts in respect of cash sales for each of the years ended 31 March 2000 and 31 March 2001 respectively. (6 marks)(ii) Show the gross profit on hire purchase sales for each of the years ended 31 March 2000 and 31 March 2001. (8 marks)

(Total: 20 marks)

QUESTION FIVEWrite brief notes on the following:

Controller and Auditor General: (5 marks)Sinking fund: (5 marks)


Trust fund: (5 marks)Revolving fund (5 marks)(Total: 20 marks)

DECEMBER 2001QUESTION ONEThe following balances were extracted from the books of Fedha Commercial Bank Ltd. on 30 June 2001.

Sh.’000’Government securitiesLoans and advances to customersCash and balances with Central bankOther money market placementsProperty, plant and equipmentInterest on loans and advancesInterest on Government securitiesForeign exchange incomeFees and commissions incomeDeposits with other banksOther fixed assetsInterest on placement and bank balancesNon-operating incomeCustomers depositsDeposits and balances due to other banksDepreciation expenseDirectors emolumentsBad and doubtful debts expenseInterim dividends paidStaff costsInterest on customers depositsInterest on borrowed fundsOrdinary share capitalAuditors remunerationContribution to staff provident fundLoss on sale of fixed assetsGeneral administration expensesReservesLegal and professional fees.

1,172,0002,973,200628,50017,300504,000435,400238,20072,000170,200115,00032,00036,00017,0004,240,000215,00042,00012,50034,00025,000295,000115,00035,000250,0003,50014,50021,800142,500529,00020,000

Additional information:

1. Current tax has been estimated at Sh.120,000,0002. Final dividends have been proposed at 10%.3. Accrued interest expense on customers’ deposits at 30 June 2001 was Sh.30,000,000.4. Unrecorded interest income on loans and advances to customers was Sh.150,000,000 at 30 June 2001.

Required:



(a) Profit and loss account for the year ended 30 June 2001. (14 marks)(b) Balance sheet as at 30 June 2001. (6 marks)

NB: The financial statements are to be prepared in accordance with IAS 30.(Total: 20 marks)

QUESTION TWOGiven below are the comparative balance sheets of Tausi Ltd., a trading company, for the years ended 31 October 2000 and 2001:

2001 2000Assets Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’Non current assets: Goodwill Premises Plant and machinery Office equipment

Current assets: Stock Debtors Bank

Capital and LiabilitiesCapital: Ordinary shares 10% redeemable preference shares Share capital Capital redemption reserve General reserve Profit and loss account

Non-current liability Bank loan

Current liabilities Creditors Current tax Proposed ordinary dividends Accruals Bank overdraft

23,500200,000290,100126,250

88,89057,890 9,210

425,00075,00033,00030,00038,000 22,300

49,82030,50026,0003,200 -

639,850

155,990795,840

623,300

63,000

109,540795,840

32,65080,000278,200 87,360

67,81552,015 -

250,000160,000--12,000 11,200

40,29028,50018,0005,420 22,630

478,210

119,830598,040

433,200

50,000

114,840598,040

The following additional information is provided:

1. Some of the redeemable preference shares which had been issued at par, were redeemed at a premium of 2%. To finance the redemption and comply with the Companies Act requirements, the company simultaneously carried out the following:


Issued 5,500,000 additional ordinary shares of Sh.10 at a total premium of Sh.34,700,000.Transferred sufficient amounts to the capital redemption reserve.Financed the premium on redemption out of the premium received on issue of the additional ordinary shares.

2. Preference dividends are paid at the end of each financial year on shares outstanding then.3. Part of plant and machinery which had cost Sh.60,000,000 on acquisition and on which Sh.42,000,000 accumulated depreciation had been provided was sold for Sh.25,000,000 during the year.4. Included in the depreciation charge for the year is Sh.15,100,000 in respect of plant and machinery.5. New office equipment was purchased in the year for Sh.55,000,000. There was no disposal of office equipment during the year.6. It is the company’s policy not to depreciate premises. The change in the premises account balance was due to a revaluation of the asset.7. The revaluation reserve arising in (6) above was all to finance the issue of fully paid-up bonus shares of Sh.10 each to ordinary shareholders.8. A new bank loan of Sh.25,000,000 was received in the year. Bank interest of Sh.8,000,000 was also paid in the year.9. Current tax liability is in respect of the tax charge for the respective year.10. During the year ended 31 October 2001 an interim dividend of Sh.14,000,000 was paid.

Required:Cash flow statement in accordance with IAS 7. (Total: 20 marks)

QUESTION THREEThe trial balance extracted from the books of Muungano Insurance Company Limited as at 31 October 2001 is shown below:

Sh.’000’ Sh.’000’Ordinary share capital (Sh.10 par)General reserveReserve for unexpired risks: Fire MarineGovernment treasury billsGovernment loan stockEast Africa Development Bank bondsEquity investmentsPremium less reinsurance: Fire MarineAdditional reserves Fire Marine

5,295,500760,0001,467,500650,000

7,000,000639,000

325,500610,000

826,500559,000

357,00037,500



Furniture and fittings (net)Sundry debtorsCash at bankCash in handClaims at the beginning of the year: Fire MarineInvestment income (gross)Sundry creditorsContingency reserveExpenses of management: Fire MarineClaims paid: Fire MarineCommission: Fire MarineTraveling expensesContribution to staff provident fundPremiums outstanding: Fire Marine

1,023,00096,50071,000257,000

193,00086,000

280,000268,500

174,000123,50029,000

7,500 352,000

9,0001,00096,500871,000100,000

________

11,432,000

11,432,000

The following additional information is provided:1. Provisions are to be made as follows:Additional reserve for unexpired risks should be increased by 8% of the net premium in the case of both fire insurance and marine insurance.Sundry expenses of Sh.60,000,000 for marine insurance claimsDepreciation on furniture and fittings at 10% on written down valueTaxation of Sh.114,500,000.

2. Reinsurance premium paid in respect of fire and marine amounting to Sh.120,000,000 and Sh.44,000,000 respectively are not yet accounted for.3. Claims covered by the reinsurance described in (2) above were Sh.45,000,000 and Sh.20,000,000 respectively.4. Commission on reinsurance ceded is allowed at the rate of 5%.5. Claims due at the end of the year were Sh.10,000,000 in respect of fire and Sh.25,000,000 in respect of marine.6. Claims intimated at the end of year were Sh.8,000,000 and Sh.20,000,000 for fire and marine respectively.7. Reserves for unexpired risk should be 40% of the premiums less reinsurance in case of fire business and 80% of the premiums less reinsurance in marine business.8. Commission owing on fire reinsurance accepted is Sh.6,000,000.


Required:(a) Fire Insurance Revenue Account for the year ended 31 October 2001.

(7 marks)(b) Marine Insurance Revenue Account for the year ended 31 October 2001.

(7 marks)(c) Profit and loss account for the year ended 31 October 2001. (4 marks)(d) Balance sheet as at 31 October 2001. (7 marks)

(Total: 25 marks)

QUESTION FOUR(a) Briefly explain the following terms as used when computing consequential loss claim:

Turnover of preceeding financial year. (2 marks)Annual turnover. (2 marks)Standard turnover. (2 marks)

(b) Ngata Ltd. insured under a loss of profits policy Sh.16,000,000. The company’s premises were partly destroyed by fire which took place on 1 May 2000 and the business resumed normal operations on 1 September 2000.

Given below is the information extracted from the books of the company relating to the policy:

Period of indemnity is six months.Net profit for preceeding financial year – Sh.4,800,000.Insured standing charges – Sh.9,600,000.Uninsured standing charges – Sh.1,600,000Increased cost of working – Sh.3,000,000.Savings in insured standing charges – Sh.600,000.Reduction in turnover avoided through increase in cost of working – Sh.8,000,000Financial year ends on 31 December.The following are turnovers for four months ended 30 April, 31 August and 31 December respectively.

Year Sh. Sh. Sh.19992000

12,000,00020,000,000

40,000,00016,000,000

28,000,00034,000,000

10. Owing to reasons acceptable to insurers, the special circumstances clause recommended the following:Increase of annual and standard turnover by 10%Increase of rate of gross profit of 2%

Required:



A statement showing the calculation of the amount of the consequential loss claim. (14 marks)

(Total: 20 marks)

QUESTION FIVE(a) In the context of accounting and financial reporting for the public sector define the term “fund” (3 marks)

(b) Write explanatory note son the specific funds falling under each of the categories listed below:

Governmental funds; (2 marks)Proprietary funds; (2 marks)Fiduciary funds. (2 marks)

(c) For each of the three categories listed in (b) above, explain how the accounting practice adopted for each is guide by:

Accruals basis of accounting; (3 marks)Budgets and budgetary control. (3 marks)(Total: 15 marks)

MAY 2002

QUESITON ONE(a) List and explain three problems encountered by accountants in accounting for agricultural activities. (3 marks)

(b) Given below is the trial balance of ADK Farm Ltd as at 31 December 2001:

Sh.’000’ Sh.’000’Ordinary share capitalShare premiumLand and buildingsFarm machinerySundry debtorsCash in handLoan (crop)Retained profitsBank overdraftAccumulated depreciation – Farm machinerySundry creditorsStocks on 1 January 2001: Growing crops, wheat, seeds and fertilizers Livestock Farm labourSalaries and wages:

4,5002,200580320

180280105

120110

5,000400

800500120440300


Manager Farm labourOffice expensesCrop expensesLivestock expensesLivestock purchasesPurchase of feeding materialsFarmhouse expensesStaff mealsRepairs to machineryInterest on loanTools and implementsSales of wheatSales of livestockManager’s account

28021025067012025103040120

_____

1,0501,500 40

10,150 10,150


1. On 31 December 2001, the value of stocks were as given below:Sh.’000’

LivestockFeeding materialsGrowing crops, wheat, seeds and fertilisersTools and implements

240130 20100

2. Depreciation on tools and implements is apportioned equally between livestock and crop activities.

3. Farm machinery is depreciated at the rate of 5% per annum on cost. 4. Manager’s salary and staff meals should be divided between livestock and crop activities in the ratio 3:2 respectively.

Required:(i) Livestock account for the year ended 31 December 2001. (5

marks)(ii) Crop account for the year ended 31 December 2001. (5

marks)(iii) Balance sheet as at 31 December 2001. (5 marks)

(Total: 20 marks)

QUESTION TWO(a) With reference to IAS 11 (Construction Contracts), explain how the following methods can be used to account for construction contracts:

Percentage of completion method (2 marks)Completed contract method. (2 marks)

(b) Vihiga Construction Company Ltd. Entered into a contract to build an administration block for Rongo Manufacturers Ltd. On 15 October 1998. The



construction was to start on 1 January 1999 and was to be completed in three years. The contract price was Sh.850,000,000.

The following information pertaining to the contract was extracted from the books of Vihiga Construction Company Ltd.

Year ended 31 December 1999Sh.’000’

2000Sh.’000’

2001Sh.’000’

Costs incurred in the yearEstimated costs to completionProgress billings made in the yearCash collections in the yearGeneral administration expenses

300,000300,000270,000240,00015,000

330,000270,000480,000360,00020,000

120,000-100,000200,00018,000

Required:Using the completed contract and percentage of completion methods:

(a) Compute the realised gross profit for each of the three years ended 31 December. (7 marks)Prepare the profit and loss accounts for each of the three years ended 31 December. (7 marks)(c) Prepare the balance sheet extracts for each of the three years ended 31 December. (6 marks)

(Total: 24 marks)

QUESTION THREEFive years ago, Mobiletex Ltd. Leased a patent for the manufacture of a gadget used in mobile phones from Quickcom Ltd.

The lease agreement provided for payment of royalty at the rate of Sh.50 per gadget sold with a minimum royalty of Sh.250,000 per annum. Royalties were payable on 15 March following the end of the financial year on 31 December. Short workings arising in any year were recoverable within the following two years of operations.

Mobiletex Ltd. Sub-leased the patent to Handphone Ltd. A royalty of Sh.60 per gadget produced with a minimum rent of payment of royalties at the end of each financial year on 31 December.

Given below is information about the number of gadgets produced by both companies in the first five years of operations.

Year ended31 December

Bomiletex Ltd. Handphone Ltd.Production(units)

Sales(units)

Production(units)

Sales(units)

19971998199920002001

1,8002,5003,5004,2006,000

1,6002,6003,6004,0005,000

8001,1003,0003,9004,200

5001,2002,5004,2004,000


Required:The accounts listed below in the books of Mobiletex Ltd.

(a) Royalty expenses (payable) account for the five years ended 31 December 2001.

(4 marks)(b) Quickcom (Landlord) account for the five years ended 31 December 2001. (3 marks)(c) Short workings recoverable account for the five years ended 31 December 2001.

(3 marks)(d) Royalty income (receivable) account for the five years ended 31 December 2001.

(4 marks)(e) Handphone (sub-tenant) account for the five years ended 31 December 2001.

(3 marks)(f) Short workings allowable account for the five years ended 31 December 2001.




QUESTION FOUR(a) Briefly explain the objectives and scope of IAS 7 (Cash Flow Statements).

(6 marks)

(b) The following are extracts from the financial statements of Wewe Ltd. As at 31 March:

2002 2001Sh.’000’ Sh.’000’ Sh.’000

’Sh.’000’

Fixed assets:GoodwillFreehold land and buildingPlant and machinery (NBV)Investment at cost

Current assets:StocksAccounts receivableInvestmentsCash at hand and bank

Current liabilitiesBank overdraftAccounts payableProposed dividendsTaxation

Net current assets

15% debentures

Capital and reserves:Authorised, issued and paid Sh.10Ordinary sharesShare premiumRevaluation reserveRetained profit

10,0506,1401,710 20018,100

(2,390)(5,850)(450) (820)(9,510)

2,80016,8005,860 3,60029,060

8,59037,650 (7,500)30,150

18,0001,5004,500 6,150

8,7007,800840 43017,770

(6,540)(5,250)(380) (600)(12,770)

2,90012,0006,350 3,75025,000

5,00030,000 (9,000)21,000

15,000750- 5,250

30,150 21,000

The profit and loss appropriation account for the year ended 31 March 2002 is given below:

Sh.’000’

Sh.’000’

Net profit before taxLess: Corporation taxProfit after taxDividends:

2,400 9001,500


Interim (paid) Proposed (paid)

150450 600

900


1. Profit for the year is arrived at after charging:

Sh.’000’Depreciation on plant and machineryGoodwill amortisation

1,150 420

2. During the year, plant with a net book value of Sh.750,000 was sold for Sh.1,470,000. The plant had originally cost Sh.3,000,000.

3. The investments portfolio was reduced by selling one block of shares at a profit of sh.160,000.

Required:Cash flow statement in accordance with IAS 7. (14 marks)

(Total: 20 marks)

QUESTION FIVE(a) With specific reference to government sector accounting, briefly explain the following concepts:

(i) Budgetary accounting; (3 marks)(ii) Cash accounting; (3 marks)(iii) Commitment accounting; (3 marks)(iv) Fund accounting. (3 marks)

(b) List three arguments for and against the accrual basis of accounting in the public sector.


DECEMBER 2002

QUESTION ONE(a) Briefly explain the following terms as used in the accounts of professional practitioners:

Office account (2 marks)Client account (2 marks)Costs charged to clients (2 marks)Work-in-progress. (2 marks)

(b) Given below is a trial balance extracted from the books of Kamau and Nyambati, a firm of practicing advocates as at 31 October 2002:



Kamau and Nyambati AdvocatesTrial Balance

Sh. Sh.Capital accountDisbursements on behalf of clientsDrawingsSalariesRent and ratesPrinting and stationeryPostage and telephoneCosts charged to clientsWork in progress on 1 November 2001Clients: for the moneys held on their behalfCreditorsDebtorsSundry office expensesFurniture, fittings and library books Cash at bank: Clients’ account Office account

12,00060,00072,00060,00035,00018,200

36,800

78,0008,50045,000

24,800 55,700

204,000

250,000

24,80027,200

______

506,000 506,000

Additional information:The uncompleted work on 31 October 2002 was valued at Sh.23,500.It is estimated that debts amounting to Sh.5,500 are uncollectible and should be written off.Depreciation should be provided at 20% per annum on the book value of the furniture, fittings and library books.

Required:(a) Profit and loss account for the year ended 31 October 2002. (6 marks)(b) Balance sheet as at 31 October 2002. (6 marks)

(Total: 20 marks)

QUESTION TWO(a) Define the following terms and explain how they are treated in the financial statements of an insurance company:

Bonus in reduction of premium (2 marks)Surrender value (2 marks)Consideration for annuities granted (2 marks)Commission on reinsurance ceded. (2 marks)

(b) The Bahari Marine Insurance Company Ltd. accepts premiums from clients and settles claims as they fall due. The company is obligated to pass over a portion of the business risk to a re-insurance company.

Direct business

ReinsuranceSh.’000’


Sh.’000’1. Premiums :

Received: Receivable

: Payable

: Paid

- 1 December 2001- 30 November 2002- 1 December 2001- 30 November 2002

4,600,000 248,000 336,000---

720,000 27,000 34,000 37,500 62,000460,000

2. Claims : Paid: Payable

: Received: Receivable

- 1 December 2001- 30 November 2002

- 1 December 2001- 30 November 2002

2,350,000 166,000 208,000

---

300,000 39,000 44,000

170,000 16,000 23,000

3. Commission

: On insurance accepted: On reinsurance ceded

220,000-

19,000 26,000

4. Other expenses and income in thousands of shillings:

Salaries – Sh.320,000; Rent and rates – Sh.29,000; Tax paid – Sh.440,000;Postage and stationery – Sh.43,000; Interest, dividends and rent receivable (net) – Sh.137,500;Withholding taxes – Sh.40,250; Legal expenses (inclusive of Sh.40,000 in connection with the settlement of claims) – Sh.72,000

5. The fund balance on 1 December 2001 was Sh.3,485,000,000.

6. The additional reserve on 1 December 2001 was Sh.445,000,000 and must be maintained at 5% of the net premium of the year.

Required:Revenue account for the year ended 30 November 2002. (12

marks)

QUESTION THREE(a) Distinguish between hire purchase and lease. (4 marks)(b) Pesa Limited commenced trading on 1 January 2002, selling photocopy machines.



Pesa Ltd’s trial balance as at 30 June 2002 was as follows:

Sh. Sh.SalesPurchasesLease rentals receivedCreditorsOffice expensesSalariesMiscellaneous expensesHire purchase debtorsAuthorised and issued share capitalBank balance

12,720,000

1,460,0001,690,000849,0002,172,000

2,203,000

15,096,000

121,6002,876,400

3,000,000________

21,094,000 21,094,000

Additional information:The company only sells one type of photocopy machine which costs Sh.16,000 and is sold for cash at cost plus 50%. The majority of sales are for cash, but a number are sold on hire purchase or rare leased.Hire purchase sales require a deposit of Sh.4,800 and 24 monthly instalments of Sh.1,200 each while the leasing charge is Sh.800 a month. The first monthly hire purchase instalment and the first leasing payment are due in the month of delivery. It is estimated that a photocopy machine will have a useful life of five years after which its residual value will be Sh.1,000.The number of photocopy machines sold on hire purchase and leased during the six months were as follows:

No. No.FebruaryMarchAprilMayJune

20 25 30 30 32

610121418

137 60

No leased photocopy machine had been returned as at 30 June 2002.

4. All instalments were received on their due dates and were credited to hire purchase debtors account. The account had originally been debited with the cash selling price of machines sold on hire purchase.

5. The directors of Pesa Ltd. decided that they will:Deem that interest accrues evenly over the life of hire purchase contracts.Show the normal gross profit on all sales in the trading accountTreat the leases as operating leases.

Required:(i) Trading and profit and loss account for the six months ended 30 June

2002.


(13 marks)(ii) Balance sheet as at 30 June 2002. (8 marks)

(Total: 25 marks)

QUESTION FOURMwalu Traders Ltd. sells most of its goods through consignees. One of the consignees is Bali Enterprises Ltd. who operates in Mombasa. Bali Enterprises Ltd. is entitled to a commission of 5% on sales.

Given below are the transactions carried out between Mwalu Traders Ltd. and Bali Enterprises Ltd. for the three months ended 31 October 2002.

August - A consignment of 500 bicycles each costing Sh.4,000 was sent to Bali Enterprises Ltd.

Mwalu Traders Ltd. paid packing costs Sh.80,000, freight Sh.100,000 and insurance Sh.40,000.

Bali Enterprises Ltd. paid carriage-in costs of Sh.18,000 from the railway station to the trading premises.Bali Enterprises Ltd. also paid Sh.12,000 with respect to offloading the bicycles.

September

- Bali Enteprises Ltd. sold 300 bicycles at Sh.6,000 each and paid carriage out-costs of Sh.30,000

In order to sell the remaining 200 bicycles, they were fitted with head lamps at a total cost of Sh.50,000, the amount being paid by Bali Enterprises Ltd.

Bali Enterprises Ltd. paid storage costs of Sh.18,000 and advertisment costs of Sh.20,000.

October - Bali Enterprises Ltd. sold 160 bicycles at Sh.6,500 each.

Bali Enterprises Ltd. sent account sales to Mwalu Traders Ltd. accompanied by a cheque for Sh.2,150,000 after deducting its commission and payments on behalf of the consignor, the balance remaining as a debt due to Mwalu Traders Ltd.

Mwalu Traders Ltd. prepares separate trading and profit and loss accounts for consignment sales made through each consignee.

Required:(a) In the books of Mwalu Traders Ltd:

(i) Consignment out account. (5 marks)(ii) Trading and profit and loss account for the three months ended 31

October



2002. (5 marks)(b) Mwalu Traders Ltd.’s account in the books of Bali Enterprises Ltd.


QUESTION FIVE(a) Explain briefly the meaning of the terms listed below in relation to Government accounting:

The Exchequer account (3 marks)The General account of Vote (3 marks)The Paymaster General (3 marks)Appropriations in Aid. (3 marks)

(b) The approved estimates and actual expenditure details for the Ministry of Planning and Development for the year 2001/2002 were as follows:

Sh. Sh.Personal emolumentsHouse allowancesPassage and leaveTraveling and accommodationTransport and mainenancePostage and telephone expensesMiscellaneous chargesTraining expensesPurchase of equipmentAppropriations in Aid

14,793,6002,346,0004,024,800160,0801,932,000552,0002,097,600717,6002,520,000120,000

11,702,4001,711,20080,040198,7201,631,160397,4402,025,840568,5604,776,000667,200

The ministry made four equal withdrawals from the exchequer in July 2001, October 2001, January 2002 and May 2002. In total, the ministry had withdrawn Sh.24,000,000 by the year end.

Required:The General Account of Vote. ( 2 marks)The Exchequer Account ( 1 mark)The Paymaster General Account. ( 2 marks)Statement of assets and liabilities as at 30 June 2002. ( 3 marks)(Total: 20 marks)


JUNE 2003

QUESTION ONEThe following trial balance has been extracted from the books of Lina Insurance Company Ltd as at 31 December 2002:

Sh.‘000’

Sh.‘000’

Net premium written: Fire MotorUnearned premiums as at 1 January 2002: Fire MotorNet commissions paid: Fire MotorNet claims paid: Fire MotorNet claims outstanding as at 1 January 2002: Fire MotorManagement expenses to be charged to revenue accountManagement expenses not to be charged to revenue accountBad and doubtful debtsTreasury billsTreasury bondsMotor vehicle (Net book value)Deposits in banksEquipment (Net book value)Bank overdraftAmounts due to other insurance companiesAmounts due from other insurance companiesShare capitalInvestment incomeOther incomeRevaluation reserveRetained earnings as at 1 January 2002

1,7333,46927,89255,781

77,55410,0002,50099,5505,693500237,0507,207

3,470

______532,399

53,816107,69136,01872,037

36,01872,037

8,0002,000

60,00036,0008,78225,00015,000532,399

Additional information:Management expenses to be charged to revenue account are to be apportioned on the basis of net premiums written:The management made the following estimates as at 31 December 2002:Sh.000Unearned Premiums: Fire 20,000Motor 30,000Net claims outstanding: Fire 45,000Motor 79,000

Required:



Revenue accounts, showing results of the fire and motor departments and combined business, for the year ended 31 December 2002.

(8 marks)Profit and loss account for the year ended 31 December 2002 (6 marks)Balance sheet as at 31 December 2002 (6 marks)(Total: 20 marks)

QUESTION TWOBriefly explain the following terms as used in accounting for returnable containers:(i) charge-out price (2 marks)(ii) Credit-back price (2 marks)Jiko Ltd. supplies cooking gas in 10 kilogramme cylinders which are returnable after use. The cylinders are purchased at Sh. 500 each and are valued at Sh. 400 for stocktaking purposes.

On issue of the cylinders to customers, a deposit of Sh.600 is paid per cylinder of which Sh.520 is refunded to customers on return of a cylinder within a period of three months.

On 1 January 2002, there were 2,000 cylinders in the company’s warehouse and 8,000 cylinders in the hands of customers in respect of which the return period had not expired.

During the year ended 31 December 2002, the company purchased 6,000 new cylinders at the normal purchase price but returned 200 cylinders to the supplier due to defects detected on inspection. A credit of Sh. 100,000 was given by the supplier for the returned cylinders. For the year ended 31 December 2002, customers were issued with 72,000 cylinders and they returned 68,000 cylinders. As at 31 December 2002, the customers held 10,000 cylinders which had been issued within the previous three months.

For safety purposes the cylinder returned by customers were thoroughly inspected and repaired for any damages or defects. On average, Sh. 40 was spent as inspection and repair costs per cylinder returned by a customer.

Due to wear and tear: 250 cylinders were confirmed to be unsafe for use. These were sold to a crap metal dealer at Sh. 180 each.

On 31 December 2002, stocktaking revealed that there were only 3,500 cylinders in the warehouse. The deficit was treated as a loss.

Required:i) Containers stock account as at 31 December 2002. (5 marks)(ii) Containers suspense account as at 31 December 2002. (6 marks)(iii) Containers profit and loss account for the year ended 31 December 2002

(5 marks)


(Total: 20 marks)

QUESTION THREEOn 1 January 2003; Hassan and Kamau entered into a joint venture to buy and sell goods. It was agreed that Hassan should receive a commission of 2% on all sales in consideration for which he was to bear all losses from bad debts. Profits and losses were to be shared equally.

The following transactions took place:

2 January 2003: Hassan purchased goods for Sh. 680,000 paying Sh. 480,000 in cash and accepted two bills of exchange, one for Sh. 80,000 and the other for Sh. 120,000.3 January 2003: Hassan sent to Kamau goods which had cost Sh. 275,000 and Kamau transferred Sh. 350,000 to Hassan in cash.9 January 2003: Hassan sold goods to Otieno for Sh. 42,000 and to Wafula for Sh. 25,000 and they accepted bills of exchange for the amounts respectively due from them. Hassan endorsed both bills to Kamau who discounted them incurring discounting charges of Sh. 2,000.3 February 2003: Hassan sold goods for Sh. 180,000. On delivery, the customer rejected goods invoiced at Sh. 9,000 and these goods were collected by Kamau who sold them to another customer for Sh. 11,000.11 Feb 2003: Otieno met his bill but Wafula’s bill was dishonoured. Wafula could not meet his debt and it was written off as a bad debt.5 March 2003: Kamau paid the bill for Sh.80,000 which had been accepted by Hassan and Hassan paid the second bill for Sh. 120,000.20 March 2003: Hassan sold the remainder of the goods in his possession for Sh. 291,000 and Kamau’s sales on the same date amounted to Sh. 340,000. Bad debts (apart from the amount due from Wafula) were Sh. 4,200 of which Sh. 3,000 was in respect of sales by Hassan.

On 30 April 2003, the venture was closed. Kamau took over the stock in his possession at a valuation of Sh. 50,000 and the sum required to settle accounts between the venturers was paid by the relevant venturer.

Required:Joint venture accounts which would appear in the books of Hassan and Kamau for the period ended 30 April 2003. (14 marks)Memorandum joint venture account showing the distribution of profit for the period ended 30 April 2003. (6 marks)(Total: 20 marks)

QUESTION FOURBriefly explain the importance of a cashflow statement to a business entity.

(5 marks)Bongo Ltd., a medium sized trading company, closes its books every 31 December. Given below are the comparative balance sheets of Bongo Ltd. for the years ended 31 March 2002 and 2003.

Balance sheet as at 31 March



2003Sh. ‘000’

2002Sh. ‘000’

Assets:Non-current assets:Land and buildingsMotor vehiclesFurniture and fixtures

Current assets:StocksDebtorsPrepaymentsBank balance and cash in hand

Total assets

Equity and liabilities:Capital and reserves:Ordinary share capitalShare premiumRevaluation reserveRetained profit

Non-current liabilities:10% debenturesBank loan

Current liabilities:Trade creditorsInterest payableCurrent taxBank overdraftProposed dividends

Total equity and liabilities

95,00046,00025,000166,000

28,00014,0006,000 - 48,000214,000

80,00020,00015,00018,000133,000

30,0006,00036,000

23,0009,0006,0004,000 3, 000 45, 000 214,000

55,00035,00028,000118,000

20,00016,0008,0003,00047,000165,000

50,00015,00025,00015,000105,000

20,00010,00030,000

15,0006,0005,000- 4, 000 30, 000 165,000

The following additional information is provided for the year ended 31 March 2003:Land and buildings were revalued upwards by Sh. 10,000,000 during the year. In addition, an acquisition of land and building of Sh. 40,000,000 was made.Depreciation on motor vehicles amounting to Sh. 4,000,000 was provided in the profit and loss account for the year. Motor vehicles having a net book value of sh. 8,000,000 were sold at a profit of Sh. 3,000,000 during the year.Bonus shares of Sh. 20,000,000 were issued as par during the year by utilizing the revaluation reserve Bongo Ltd’s ordinary shares have a par value of Sh. 20.


Interest expense charged to the profit and loss account for the year amounted to Sh. 8,000,000.During the year, tax amounting to Sh. 6,000,000 was paid.Total dividends for the year (both interim and proposed) amounted to Sh. 5,000,000.The profit after tax for the year amounted to Sh. 8,000,000.

Required:Cash flow statement (in accordance with the requirements of IAS 7) for the year ended 31 March 2003. (15 marks)

(Total: 20 marks)

QUESTION FIVEOne of the key difference between non-profit making and commercial organizations is that they have different reasons for their existence. Consequently, non-profit making organizations follow some accounting principles which differ from those followed by commercial organizations.

Required:Briefly discuss the role of accountants in both types of organizations. (12 marks)

The estimates and expenditure details relating to the Ministry of Social Services as at 30 June 2002 were as follows:

Original estimates

Actual expenditure

Sh. ‘000’ Sh. ‘000’000 – Personal emoluments050 – House allowances080 – Passages and leave110 – Travelling expenses140 – Electricity and water220 – Purchase of plant and equipment650 – Appropriation in Aid

160,00030,00010,00044,00012,000100,00030,000

180,00026,0009,00046,00013,00080,00024,000

Supplementary estimates authorized during the year were as follows:000 – Personal emoluments110 – Travelling expenses (reduced)

Sh. 16,000,000Sh. 4,000,000

Required:Appropriation account for the year ended 30 June 2002. Showing the net surplus to be surrendered to the Exchequer.


DECEMBER 2003

QUESITON ONE



The following information was extracted from the books of Moses Kiprono, a farmer, for the year ended 31 March 2003:

Trial Balance as at 31 March 2003Sh. Sh.

Purchases: Poultry Dairy cattle Dairy cattle feed Poultry Fertilizers SeedsSales: Crops Dairy cattle Eggs Poultry MilkOpening stock: Mature crops Growing crops Seeds Poultry feed Fertilizers Poultry Dairy cattle feed Dairy cattleWages: Poultry Dairy cattle CropsRepairs of farm machineryFarm house expensesOffice expensesCrop expensesDairy cattle expensesPoultry expensesFarm machinery (Net book value)Office furniture (Net book value)Drawings in cashCapital accountDebtorsCreditorsCash in hand and bank balancesAccruals

420,0001,380,000580,000150,000220,000100,000

350,000120,00080,00050,000110,000230,000180,000520,000

600,000960,000720,000250,000180,000825,000280,000240,000450,0002,500,0001,500,000600,000

675,000

350,000_______

2,740,0002,500,000720,0001,640,0001,210,000

4,800,000

780,000

230,00016,620,000 16,620,000

Additional information:


1. During the year ended 31 March 2003, the proprietor and the workers consumed items of the following values.

ProprietorSh.

WorkersSh.

PoultryMilkCrops

50,00080,00020,000

120,000170,000 60,000

2. Farm machinery is depreciated at the rate of 10% per annum on the reducing balance basis while furniture (which initially cost Sh.3,000,000) is depreciated at 10% per annum on cost.

3. On 31 March 2003, the closing stocks were as follows:

Sh.Dairy cattleDairy cattle feedMature cropsSeedsPoultry Poultry feedFertilizersGrowing crops

480,000150,000270,000 40,000140,000 70,000 80,000160,000

Required:(a) Crop account, poultry account and dairy account for the year ended 31

March 2003.(12 marks)

(b) General profit and loss account for the year ended 31 March 2003.(2 marks)

(c) Balance sheet as at 31 March 2003. (6 marks)(Total: 20 marks)

QUESTION TWOHazina Bank Ltd., a registered commercial bank, prepares its accounts to 30

June each year. The trial balance of the bank as at 30 June 2003 was as

follows:

Sh.’000’ Sh.’000’Treasury billsLoans to customersOther money market placementsProperty, plant and equipmentCash and balances with the Central BankInterest on loans

2,344,0005,946,40034,6001,008,0001,257,000

870,800



Interest on treasury bills and bondsForeign exchange incomeFees and commissions incomeDeposits with other banksOther fixed assetsInterest on placements and bank balancesNon-operating incomeCustomers’ depositsDeposits and balances due to other banksDepreciation chargesDirectors emolumentsBad and doubtful debtsInterim dividends paidSalaries and wagesInterest on borrowed fundsInterest on customers depositsOrdinary share capitalAuditors feesContribution to staff pension schemeAdministrative expensesLoss on sale of fixed assetsReservesLegal fees

230,00064,000

84,00025,00068,00050,000590,00070,000230,000

7,00029,000285,00043,600

40,000

476,400144,000340,400

72,00034,0008,480,000430,000

500,000

1,058,000_______

12,405,600 12,405,600

Additional information:1. Current tax has been estimated at Sh.200,000,0002. A final dividend of 15% has been proposed.3. Unrecorded accrued interest expense on customers’ deposits at 30 June 2003 was sh.70,000,000.4. Interest income on loans and advances to customers of Sh.150,000,000 at 30 June 2003 was omitted from the books.

Required:(a) Profit and loss account for the year ended 30 June 2003. (14 marks)(b) Balance sheet as at 30 June 2003. (6 marks)

(These statements should be presented in accordance with IAS 30 – Disclosures in the Financial Statements of Banks and Similar Financial Institutions). (Total: 20 marks)

QUESTION THREE(a) Explain the difference between the cost-recovery method and the instalment method of recognising gross profit from instalment sales.(4 marks)

(b) Bontex Enterprises sells its goods, both new and repossessed, on an instalment plan basis and recognises gross profit on the sales using the instalment method.


Given below is the information extracted from the books of the business for the two financial years ended 31 December 2001 and 2002:

2002Sh.

2001Sh.

Instalment salesPurchasesOpening stockClosing stockOperating expensesDepreciation chargeInstalment debtors: From sales of year ended 31 December 2001 From sales of year ended 31 December 2002

800,000560,000

140,000 34,500 20,000

60,000280,000

480,000324,000180,000120,000

180,000 -

1. When a customer defaults on his payments, the goods are repossessed and recorded at their approximate market value in a separate inventory account.

The wholesale market value of repossessed goods is determined as follows:Repossessions made in the year of sale are valued at 50% of the original sale price.Repossessions made from the sales of previous years are valued at 30% of the original sale price.

2. There were no defaults in the year ended 31 December 2001 but in the year ended 31 December 2002, defaults occurred as follows:

Original selling priceSh.

Defaulted amountSh.

From the sales of the year ended 31 December:20012002

40,00096,000

20,00072,000

3. All the repossessed goods were resold in the year 2002.

Required:Instalment debtors account and provision for unrealised gross profit account for the sales made in the years to 31 December 2001 and 2002 as at 31 December 2002. (8 marks)



Repossessed goods account as at 31 December 2002. (2 marks)Profit and loss account for the year ended 31 December 2002.(6 marks)

(Total: 20 marks)

QUESTION FOUR(a) State the nature and purpose of the following in an insurance contract covering consequential loss:

(i) Special circumstances clause. (3 marks)(ii) Average provision clause. (3 marks)

(b) Ruti Traders is a wholesale business and it takes insurance cover against consequential loss with an insurance company. The sum insured is sh.457,600 and the period of indemnity is four months.

On 1 July 2002, a fire occurred in the premises of the business and disrupted the trading activities up to 30 September 2002 when normal operations resumed.

The financial year of the business ends on 31 December.Net profit for the financial year ended 31 December 2001 was Sh.210,000Insured standing charges sh.240,000Uninsured standing charges Sh.10,000Reduction in turnover avoided through increase in cost of working Sh.125,000Increased cost of working sh.57,500Savings in insured standing charges sh.5,000.Turnover of the business for three month periods for the two financial years ended 31 December are as follows:

2001Sh.

2002Sh.

1 January to 31 March1 April to 30 June1 July to 30 September1 October to 31 December

450,000600,000750,000700,000

500,000650,000225,000800,000

9. With the insurer’s permission, the special circumstances clause provided for:Increase in standard and annual turnover by 10%Increase in rate of gross profit of 2%

Required:The value of claim from the insurance company for the loss of gross profit from 1 July 2002 to 30 September 2002. (14 marks)

(Total: 20 marks)

QUESTION FIVE


(a) In the context of IAS 11 (Construction contracts), briefly explain the meaning of the following terms:

Construction contract (2 marks)Fixed price contract (2 marks)Cost plus contract. (2 marks)

(b) Briefly outline the functions of the following organs in the management of government finances:

Public accounts committee (4 marks)Committee of ways and means (4 marks)

(c) With reference to IAS 7 (Cash flow statements), differentiate between the “direct” and “indirect” methods of presentation of a cash flow statement.




JUNE 2004

QUESITON ONETengo Insurance Company ltd. Engages in general insurance business. The following trial balance was extracted from its books as at 31 March 2004.

Trial balance as at 31 March 2004Sh.’000’ Sh.’000’

Direct premiums received: Marine FireRe-insurance premium received: Marine FireRe-insurance premium paid: Marine FireSundry debtorsBank balance and cash in handUnearned premium as at 1 April 2003: Marine FireClaims outstanding as at 1 April 2003: Marine FireClaims paid: Marine FireLegal costs incurred on claims: Marine FireSurvey expenses relating to claims: MarineBad debts: Marine FireInvestment in sharesFreehold propertyMotor vehicles (net book value)Machinery and equipment (net book value)Furniture (net book value)Audit feesDirectors’ feesDepreciation of fixed assets

800500730110

2,4701,800

180130

320

1701201,4004,2003,5001,5001,300240495905

4,5003,500

1,200800

4,8002,500

800540


Sh.’000’ Sh.’000’Management expenses: Marine FireSundry creditorsInvestment incomeOrdinary share capitalShare premiumProfit and loss account balance as at 1 April 2003Premiums outstanding – 1 April 2003: Marine Fire

650580

800 700

3302803,0001,000450

_____23,700 23,700

Additional information:1. Premiums outstanding as at 31 March 2004 amounted to Sh.1,500,000

and Sh.700,000 for marine insurance and fire insurance respectively.

2. Claims intimated and outstanding as at 31 March 2004 amounted to Sh.750,000 for marine insurance and Sh.480,000 for fire insurance.

3. Unearned premium (reserve for unexpired risk) is maintained at 100% and 50% of the net premium for marine insurance and fire insurance respectively.

4. Commission on both the re-insurance ceded and re-insurance accepted is at the rate of 5% of the premium.

5. The directors have proposed a dividend of 10% on the outstanding share capital as at 31 March 2004

6. The tax rate applicable is 30%.

Required:(a) Revenue accounts for both marine and fire insurance for the year ended 31 March 2004.

(8 marks)(b) Profit and loss account for the year ended 31 March 2004.

(4 marks)(c) Balance sheet as at 31 March 2004. (8 marks)

(Total: 20 marks)

QUESTION TWOABC Ltd. Obtained a 20 year lease of land from GHL Ltd. Effective from 1 January 1999, for the purposes of extracting marble. The lease provided for the payment of a royalty of Sh.100 for every ton of marble extracted with a minimum rent of Sh.200,000 per year, payable annually on the 31 March of the year following that to which the payment relates. Provision was made for



short-workings to be recouped out of subsequent excess workings during the fist four years.

ABC Ltd. Granted a sub-lease of one third of the area of land in question to XYZ Ltd. For 12 years effective from 1 January 2000. XYZ Ltd. Was to pay a royalty of Sh.125 per ton of marble extracted merging into a minimum rent of Sh.80,000 per year. This royalty was to be payable on the 31 January following the year end to which the royalty related. The sub-lease provided for short-workings to be recouped out of any subsequent excess workings within two years of the end of the year in which the short-workings occurred. The financial years of ABC Ltd., GHL Ltd. And XYZ Ltd. End on 31 December.

The quantities of marble extracted were as follows:

Year ended 31 DecemberABC Ltd.Tons

XYZ Ltd.Tons

19992000200120022003

1,2001,3001,7001,8002,000

-560680660720

Required:The following accounts in the books of ABC Ltd. For each of the five years ended 31 December 1999, 2000, 2001, 2002 and 2003:

(a) Royalties payable account (4 marks)(b) GHL Ltd. Account (4 marks)(c) Royalties receivable account (4 marks)(d) Short-workings accounts. (4 marks)(e) XYZ Ltd. Account. (4 marks)

(Total: 20 marks)

QUESTION THREE(a) In the context of accounting for long-term construction contracts, briefly explain the following terms:

(i) Retention money (4 marks)(ii) Escalation clause. (4 marks)

(b) Mwako and Mjengo is a firm building contractors. The following information pertains to its uncompleted contracts as at 31 December 2003:

Contract A B C DDate commencedExpected completion date

1 January 200330 April 2004

1 February 200331 March 2004

1 January 200331 January 2004

1 October 200331 March 2005


Sh.’000’ Sh.’000’

Sh.’000’

Sh.’000’

Costs incurred up to 31 December 2003Estimated further costs to completionValue of work certified as at 31 December 2003Contract priceProgress payments received and Receivable as at 31 December 2003

127.20028,800

160,000208,000

140,000

45,60012,000

40,00052,000

32,000

12,0001,600

14,40016,800

-

3,20049,600

-60,000

-



Required:A schedule showing the profit (or loss) which should be recognised in the profit and loss account of Mwako and Mjengo for each of the four contracts, for the year ended 31 December 2003. (8 marks)

The value of the work in progress (WIP) which would be reported in the balance sheet of Mwako and Mjengo in respect of each of the four contracts, as at 31 December 2003. (4 marks)

[(i) and (ii) above should be in conformity with the requirements of IAS 11 – Construction Contracts] (Total: 20 marks)

QUESTION FOUR(a) Briefly explain the following terms in relation to government accounting:

Exchequer over issues. (2 marks)Paymaster General (3 marks)Vote on account. (2 marks)Commitment accounting. (3 marks)

(b) The following are details relating to approved estimates and actual expenditure for a certain government department for the financial year ended 30 June 2003:

Approved estimatesSh.

Actual expenditureSh.

Personal emolumentsOther allowancesTransport and operating expensesTravel and subsistenceTelephone and postage expensesElectricity expensesPurchase of stationeryPurchase of equipmentTraining expensesAppropriations-In-Aid

6,355,9298,379,8885,000,0003,300,0001,250,0001,800,0002,000,00013,200,0002,500,0008,500,000

5,643,8787,007,3874,594,7302,680,500833,8381,800,0001,800,62012,355,5552,398,2007,900,000

The exchequer issues were duly released in equal quarterly instalments of Sh.8,750,000 each.

Required:(i) Paymaster general account. (2 marks)(ii) Exchequer account. (2 marks)(iii) General account of vote (3 marks)


(iv) Statement of assets and liabilities as at 30 June 2003. (3 marks)

(Total: 20 marks)

QUESTION FIVEThe following income statement and balance sheets relate to Wakazi Ltd. For the years ended 31 March 2003 and 2004:

Income statement for the year ended 31 March 2004Sh.’000’ Sh.’000’

SalesOperating expensesOperating profitInterest incomeInterest expenseProfit before taxTaxationProfit after taxLess: DividendsRetained profit for the year

3(7)

355(235)120

(4)116 (32)84(20)64

Balance sheets as at 31 March2004Sh. ’million’

2003Sh. ’million’

Non current assets:TangibleIntangible

Current assets:StockTrade debtorsInterest receivableCashTotal current assets

367 3370

1401321 4277647

196 4200

1551102 21288488



Equity and liabilities:



Ordinary shares of Sh.10 par value10% preference shares of Sh.10 par valueShare premiumRevaluation reserveRetained profits

Non current liabilities6% DebenturesFinance leases

Current liabilities:Trade creditorsTax payableInterest payableFinance leasesBank overdraft

Total equity and liabilities

11020447135316

20 50 70

2162935 8261647

902035- 81226

40 42 82

1352023 20180488

Additional information:1. During the year ended 31 March 2004, Wakazi Ltd, issued 1 million

Sh.10 ordinary shares at 100% above their par value, incurring issue costs of Sh.1 million. Subsequent to this, a bonus issue of 1 for every 10 shares held was made from the retained earnings.

2. Tangible non current assets include certain assets which were revalued during the year ended 31 March 2004 giving a surplus of Sh.7 million. Assets capitalised under finance lease agreements amounted to Sh.28 million. Disposals of assets having a net book value of Sh.19 million realised Sh.21 million. Depreciation charged for the year ended 31 March 2004 was Sh.37 million.

3. There were no acquisitions or disposals of intangible assets during the year ended 31 March 2004.

4. Debentures worth Sh.20 million were redeemed at par during the year ended 31 March 2004.

5. Interest on finance leases of Sh.3 million is included in the interest expense charged to the income statement for the year ended 31 March 2004.

Required:Cash flow statement for the year ended 31 March 2004, in conformity with the requirements of IAS-7 – Cash Flow Statements.

(Total: 20 marks)DECEMBER 2004

QUESTION ONE


Joseph Mokua, a farmer extracted the following trial balance as at 31 October 2004:

Sh. ‘000’ Sh. ‘000’

Crop insuranceStocks as at 1 November 2003Growing crops, wheat, seeds and fertilizers LivestockLivestock feedsLand and buildings at costFarm machinery (cost Sh. 5,400,000)Profit and loss account balance (1 November 2003)Loan from Farmers’ Bank LtdSale of wheatSale of cattleSale of carcassManager’s personal accountBank overdraftSundry creditorsInterest on loan from Farmers Bank LtdOffice expensesCrop expensesLivestock wagesOther livestock expensesPurchase of seedsLivestock purchasesLivestock feeds purchasedCapitalFarmhouse expensesStaff mealsRepairs to farm machineryTools and implements (1 November 2003)Sundry debtorsCash in handManager’s salaryGeneral farm labour wages

240

1,0001,25030010,0003,900

22520050080061520062535

6025501251,5001,300300 25023,500

5003,0001,7503,000750100150750

13,500

_____23,500

Additional informationThe entire crop insurance was taken with effect from 1 November 2003 to provide an annual risk cover against crop losses due to climatic risks such as floods, drought and plant diseases.Manager’s salary and staff meals are charged to the livestock and crop activities in the ration of 1:4 respectively.Depreciation on tools and implements is to be apportioned equally between the crop and livestock activities. The book value of tools and implements as at 31 October 2004 was Sh. 100,000.



Provisions for doubtful debts is to be maintained at 8% of the year end debtors and bad debts of Sh. 25,000 are to be written off.Farm machinery is to be depreciated at the rate of 20% per annum on cost.Crops consumed by some of the farm labourers during the year ended 31 October 2004 were valued at Sh. 50,000.During the year ended 31 October 2004, Joseph Mokua’s family members provided general farm labour valued at Sh. 100,000 the family also consumed crops valued at Sh. 160,000.The loan from Farmers’ bank Ltd. was obtained on 1 January 2004 and was to be repaid in full by the end of the fifth year. Interest was to be paid semi-annually on 30 June and 31 December at the rate of 15% per annum. The entire loan was used on crop activities.Assume there were no transfers of inputs between the main activities of crop farming and livestock farming.Stocks as at 31 October 2004 were as follows.

Shs. “000”

Growing cropsWheat, seeds and fertilizersLivestockLivestock feeds

1703002,00050

Required:Crop account for the year ended 31 October 2004Livestock account for the year ended 31 October 2004General profit and loss account for the year ended 31 October 2004.Balance sheet as at 31 October 2004.(Total: 20 marks)

QUESTION TWOMega company Ltd. sells its goods in returnable containers. The following is relevant::The containers are purchased at Sh. 400 each. Customers pay a deposit of Sh.500 per container issued to them and a refund of Sh. 450 is made for each container returned within two weeks.On 1 January 2003, there were 5000 containers in the Company’s warehouse and 12,000 containers in customers’ hands the return period of which has not expired.In the year ended 31 December 2003, the Company purchased 10,000 containers. During the same period, the company issued 95,000 containers to customers. As at 31 December 2003, the customers still held 13,000 containers. The return period of 3,000 of the containers still held by customers as at 31 December 2003 has expired.The company scrapped 4,500 containers and sold them at Sh. 180 each. Apart from the containers scrapped, 1,500 containers could not be accounted for and were written off.In order to maintain the containers in proper condition, each container returned by a customer is polished at a cost of Sh.4 each.


At the end of the year, the company values containers in the warehouse and in customers’ hands at Sh. 300 each for stock taking purposes.

Required:Containers stock account for the year ended 31 December 2003.Containers suspense account for the year ended 31 December 2003.Containers Profit and loss account for the year ended 31 December 2003.

QUESTION THREEJuma and Company Advocates is a law firm operating in an upcountry town.

Provided below is the balance sheet of the firm as at 30 June 2003.

Juma and Company AdvocatesBalance sheet as at June 2003

Sh. ‘000’ Sh. ‘000’AssetsNon current assetsEquipmentFurnitureLibrary books

Current assetsWork-in-progressStationaryDebtors for fee and disbursementsCash at bank:OfficeClient

CapitalNon-current liabilitiesLoanCurrent liabilitiesCreditorsClients- for money held on their behalf

800350280

210140330

300250

110250

1,430

1,2302,660

1,800

500

3 60 2,660

The following transactions were carried out by Juma and Company Advocates in the year ended 30 June 2004.

Received Sh. 850,000 on behalf of their clients.Spent the amounts shown below on behalf of clients who had sufficient cash held by the firm:

Sh. ‘000’



Purchase of equipmentPayment of rentPayment of repair costs

26013080

Purchased new equipment for office use for Sh. 400,000 and paid Sh. 100,000 cash, the balance remaining as a loan.Spent Sh. 350,000 on the purchase of land on behalf of a client who had a credit balance of Sh. 120,000 with the firm.Charged clients Sh. 1,050,000 for services rendered in the year ended 30 June 2004.Received Sh. 680,000 from clients settlement of amounts due for services rendered. The firm received authority from clients to transfer Sh. 240,000 from the clients account to the office account in the settlement of amounts due to the firm.The following expenses were incurred by the firm in the year ended 30 June 2004, all were settled in cash:


Sh. ‘000’

RentSalaries and wagesOffice expensesInterest on loanLoan repayment

1203609030300

During the year ended 30 June 2004, the firm received Sh. 480,000 from the clients as settlement of disbursements made on their behalf by the firm.Purchased library books worth Sh. 160,000 and paid for them in cash.Purchased stationery on credit for Sh. 210,000 and paid the creditors a total of Sh. 240,000 in the year ended 30 June 2004.Drawings for personal use in the year ended June 2004 amounted to Sh. 180,000.On 30 June 2004, stationery in the store valued at Sh. 160,000. On the same date, work-in-progress not yet charged to clients was valued at Sh. 350,000.

The firm provides depreciation at the following rates based on books value:Equipment -5% per annumFurniture- 10% per annumLibrary books -12.5% per annum

Required:(a) Profit and loss account for the year ended 30 June 2004. (10 marks)(b) Balance sheet as at 30 June 2004 (10 marks)(Total: 20 marks)

QUESTION FOURExplain the meaning of the following terms as used in IAS 7 (cash flow statement)Cash equivalents (2 marks)Financial activities (2 marks)

30 September 2003 30 September 2004Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’

Fixed assetsBuilding at costAccumulated depreciation at CostPlant and equipment at costAccumulatd depreciation on plant and equipmentMotor vehicles at cost

11,040(2,070)

13,800(6,210)

4,600(2,070)

8,970

7,590

2,530

13,800(2,415)

23,460(8,625)

5,518(2,932)

11,385

14,835

2,586



Accumulated depreciation on motor vehicles

Current assetsStock in tradeDebtorsCash in hand and at bank

Current liabilitiesCreditorsTaxationDividendsBank overdraft

Financed by:Ordinary share capitalShare premiumRetained profits10% debentures

4,1402,070 85 7,060

1,3801,7251,035 - 4,140

19,090

2,92022,010

15,8001,3803,4501,38022,010

5,1752,519 - 7,694

2,0702,0701,0353455,520

28,806

2,17430,980

22,7002,7605,520 -30,980

The following is an extract from the profit and loss and appropriation account for the year ended 30 September 2004:

Sh. ‘000’

Profit before taxationTaxation for the year

Dividends for the year: Interim – paid Final – proposedRetained profit for the year

6901,035

6,210(2,451)3,795

(1,725)2,070

Additional information:An item of plant was disposed of during the year ended 30 September 2004 for Sh. 1,035,000. It had cost Sh. 2,070,000 and had an accumulated depreciation of Sh. 690,000.The 10% debentures were redeemed at a premium of 10% during the year ended 30 September 2004.

Required:Cash flow statement, in conformity with the requirements of IAS 7 (Cash Flow Statements), for the year ended 30 September 2004.



QUESTION FIVEWrite brief notes on each of the following investment matters, explaining how an investor would account for them:(i) Cum-interest purchase of fixed interest security (4 marks)(ii) Right issue (4 marks)In the context of accounting for government operations, explain the meaning of the term “fund.” (5 marks)Write brief notes on each of the following types of funds:Capital projects funds (3 marks)Enterprise funds (4 marks)(Total: 20 marks)



KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATION BOARD

FINANCIAL ACCOUNTING II

JUNE 2005 Time allowed: 3 Hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.

QUESTION ONEIn light of IAS 30 – Disclosure in the Financial Statements list for each of the following four items or details required for disclosure in the published financial statements:

Loans and advances (4 marks)Customer deposits (4 marks)

The following balances were extracted from the books of Kenya Bank Limited as at 31 December 2004:

Sh. ‘million’Cash and balances with the Central Bank 7,439Interest on loans and advances 3,197Government securities 21,570Interest on customer deposits 194Loans and advances to customers 58,894Interest on deposits and placements paid to banking institutions

33

Property and equipment 1,487Other assets 16,200Interest on placements received from banking institutions

66

Customer deposits 81,947Borrowed funds 2,641Other liabilities 4,211Interest on government securities 430Share capital 2,000Reserves 8,347Specific provision for bad and doubtful debts brought forward

2,635

General provision for bad and doubtful debts brought forward

150

Non interest income 3,079Staff costs 1,461Other expenses 1,425Liability for acceptances on behalf of customers 14,776

Additional Information:


An additional provision for non-performing loans and advances of Sh.1,259 million is to be made.The general provision for bad and doubtful debts is to be maintained at 1% of net loans and advances to comply with guidelines issued by the Central Bank.Provide for corporation tax at the rate of 30% on profits.Provide for a final dividend of 30%.

Required:Income statement for the year ended 31 December 2004. (5 marks)Balance sheet as at 31 December 2004. (5 marks)

[Both the income statement and the balance sheet should be in conformity with IAS 30 (Disclosure in the Financial Statements of Banks and Similar Financial Institutions)]

Explain your treatment of the item “liability for acceptances on behalf of customers”


QUESTION TWOBriefly explain the meaning of the following terms in relation to bills of exchange:

Accommodation bill. (2 marks)Noting charges. (2 marks)

On 1 April 2005, Limo, Tergat, Wambani and Gachara entered into a joint venture for the purposes of importing second had cars from Dubai and selling them in Eldoret town. The profit or loss from the venture was to be shared as follows: Limo 10%. Tergat 20%. Wambani 30% and Gachara 40%.

Limo was assigned the responsibility of going to Dubai to buy the cars. Tergat was to clear the cars at the port of Mombasa. Wambani was to transport the cars from Mombasa to Eldoret and Gachara was to sell the cars once they were received in Eldoret.

The following is a summary of the transactions undertaken:

Gachara remitted sh.4 million to Limo and Wambani remitted Sh.500,000 to Tergat towards the joint venture.Limo incurred the following expenses on behalf of the joint venture:

Sh.Travelling expenses 45,000Entertainment 45,000Purchase of cars 3,600,000Shopping expenses 1,710,000

Tergat received the purchase and consignment documents from Limo and incurred the following expenses to clear the cars:

Sh.Customs duty 1,860,000



Clearing agents’ fees 200,000

While transporting the cars from Mombasa, Wambani incurred the following expenses:

Sh.General expenses 162,000Haulage 135,000Insurance 235,800

In order to sell the cars, Gachara incurred the following expenses:Sh.

Security 126,000Storage charges 81,000Sales commissions 264,600

Gachara sold some cars for Sh.7,900 and the remaining ones were taken over by Tergat for his own use at a value of Sh.1,350,000All the transactions were completed by 31 May 2005.

Required:Memorandum joint venture profit and loss account for the two months ended 31 May 2005. (4 marks)The joint venture accounts in the books of Limo, Tergat, Wambani and Gachara for the two months ended 31 May 2005.

(12 marks)

QUESTION THREEIn the context of Section 60 of the Companies Act (Cap 486 of the Laws of Kenya). Identify any four conditions that must be met before a company’s performance shares can be redeemed.

(4 marks)

The balance sheet of Biashara Ltd., as at 28 February 2005 was as follows:Sh. Sh.

Capital and liabilities: Assets:Fixed assets 6,000,000

500,000 equity shares of Sh.10 each Investments 2,000,000Sh.8 per share called up and paid up 4,000,000 Stock 2,000,000

Sundry debtors 2,000,000Cash at bank 3,000,000

500,000 13% redeemable preferences shares of Sh.100 each 500,000Share premium 980,000General reserve 900,000Profit and loss account balance 1,120,000Sundry creditors 3,000,000 _________

15,000,000 15,000,000

Additional information:The company resolved:To convert the partly paid up equity shares into fully paid up shares on 1 March 2005 without requiring the shareholders to pay for the same.


To redeem the preference shares on 31 March 2005 at a premium of 7.5% and for his purpose to issue 30,000 12% preference shares of Sh.100 each at a premium of 10% payable in full application.

For the purpose of redemption, the company sold fixed assets valued at Sh.3,000,000 for Sh.3,825,000 on 31 March 2005. On the same date the company sold all the investments for Sh.2,600,000.On 30 April 2005 all payments were made on redemption except to holders of 2,000 shares who could not be traced.On 31 May 2005, the directors issued fully paid bonus shares to he shareholders existing as at that date at the rate of 3 shares for every 5 held at a premium of 5%.

Required:The necessary journal entries in the books of Biashara Ltd. To record the above transactions.


QUESTION FOURA business entity may report profits in its financial statements and yet experience declining balances of the cash at had and at bank. Explain how this is possible. (4 marks)

Set out below are the summarised balance sheets of Jasho Ltd. For the years ended 31 December 2003 and 2004. And the profit and loss account for the year ended 31 December 2004:

Balance sheets as at 31 December

2003 2004Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’

Ordinary share capital 14,800 18,800Revaluation reserve 2,500 6,500Revenue reserves 21,120 27,780Share premium 3,000 4,800Loans 8,400 5,200

49,820 63,080Current liabilitiesTrade creditors 3,040 2,820Proposed dividends 2,800 3,400Taxation 9,400 12,040Bank overdraft - 15,240 15,320 33,580

65,060 96,660

2003 2004Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’

Fixed assetsFreehold land 18,000 22,000Plant and machinery: Cost 54,000 76,620 Accumulated depreciation (14,960) (22,500)

39,040 54,120Current assets:Stock 4,060 16,860Debtors 2,940 3,680Cash at bank 1,020 8,020 - 20,540

65,060 96,660



Profit and loss account for the year ended 31 December 2004:

Sh. ‘000’ Sh. ‘000’Profit before tax 23,900Corporation tax (12,040)Profit after tax 11,860Ordinary dividend: Paid 1,800 Proposed 3,400 (5,200)

6,660

Additional information:During the year ended 31 December 2004, Jasho Ltd. obtained a five-year bank loan amounting to sh.1,300,000.

Depreciation charged on plant and machinery during the year ended 31 December 2004 amounted to Sh.8,020,000.

During the year ended 31 December 2004, plant which originally cost Sh.1,380,000 was disposed of for Sh.820,000.

Required:Cash flow statement in compliance with IAS 7 (Cash Flow Statements). For the year ended 31 December 2004. (16 marks)

(Total: 20 marks)

QUESTION FIVEBriefly explain any four characteristics that distinguish governmental organisations from business organisations. (8 marks)

With reference to public sector accounting, briefly explain the following terms:

General fund. (2 marks)Annual estimates (2 marks)Excess vote (2 marks)Encumbrance (2 marks)Vote on account (2 marks)Exchequer over issues (2 marks)(Total: 20 marks)

KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATION BOARD

FINANCIAL ACCOUNTING II

DECEMBER 2005 Time allowed: 3 Hours.


Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.

QUESTION ONEThe following trial balance was extracted from the books of ABC General Insurance Company Ltd. As at 30 June 2005:

Sh. ‘000’

Sh. ‘000’

Claims paid 2,840Premium received:Direct insurance business 7,280Re-insurance business 1,320Claims outstanding (1 July 2004) 410Premiums due from re-insurance companies (1 July 2004)

180

Re-insurance premiums paid 890Creditor 850Investment income 180Management expenses 850Treasury bonds 2,850Quoted investments 1,250Motor vehicles 3,800Leasehold property 5,500Equipment 1,800Debtors 1,535Bank balance 390Premiums due – direct insurance business (1 July 2004)

415

Premiums due to re-insurance companies (1 July 2004)

260

Ordinary share capital 5,000Share premium 2,000General reserve 960Investment fluctuation reserve 440Retained earnings 1,580Salaries 820Rent and rates 120Directors remuneration 485Legal expense 380Depreciation 900Commission on re-insurance ceded 45Commission on re-insurance accepted 70Unearned premium (1 July 2004) _____ 4,750

25,075 25,075

Additional information:On 30 June 2005, the premium due from re-insurance companies was Sh. 420,000 while the premium due to re-insurance companies was Sh. 180,000.



Claims amounting to Sh. 285,000 were estimated to be outstanding as at 30 June 2005.As at 30 June 2005, direct insurance business premiums due amounted to Sh. 385,000.Current tax due is estimated at Sh. 510,000.Unearned premium outstanding as at 1 July 2004 consisted of Sh. 4,200,000 for fund balance (reserve for unexpired risk) and Sh.550,000 for additional reserve. The policy of the company is to maintain the fund balance at 50% of the net written premium and to adjust the additional reserve upwards by 5% of the net written premium.Out of the total legal expenses incurred in the year ended 30 June 2005, Sh. 245,000 was on claims made.The market value of the quoted investments as at 30 June 2005 was Sh. 1,200,000. The company has a policy of maintaining the investments at market value.The directors have recommended a first and final dividend of 10%.The company carries out only fire insurance business.

RequiredRevenue account for the year ended 30 June 2005.Balance Sheet as at 30 June 2005.

QUESTION TWOExplain the difference between a fixed price contract and a cost plus contract.

Jenga Ltd., is a construction company whose financial year ends on 31 March. The information provided below was extracted from the books of the company in connection with the three construction contracts undertaken by the company during the financial year ended 31 Mach 2005.

Contract No.468

Contract No.469

Contract No.470

Sh ‘000’ Sh. ‘000’ Sh. ‘000’Contract price 3,600 4,800 2,500Cost incurred up to 31 March 2004

1,800 3,000 1,500

Cost incurred during the year

600 1,000 500

Estimated total cost of the contract

3,000 5,200 2,300

Total billings to date 2,800 4,500 1,800Total cash received to date 2,600 4,200 1,700Total profit/(loss) reported on the contract to date 360 30 (20)General administration expenses

60 120 30

Required:Using the percentage of completion method of accounting for long-term construction contracts:


Calculate the profit or loss realised on each contract for the year ended 31 Marcy 2005.(6 marks)Prepare profit and loss account extracts for each contract for the year ended 31 March 2005.(3 marks)Prepare balance sheet extracts as at 31 March 2005. (9 marks)

QUESTION THREEKilimo Ltd., a medium-sized company, is engaged in farming activities. The following trial balance was extracted from the books of the company as at 31 December 2004:

Sh. ‘000’

Sh. ‘000’

Stocks (1 January 2004):

Dairy cattle 27,450

Maize (growing) 1,800Dairy cattle feeds 1,260Fertilizers for planting maize

900

Land and buildings 45,000Tractors (net book value)

16,200

Bills 3,000Carts (net book value) 1,500Purchases: Dairy cattle 5,220

Fertilizers – for planting maize

1,080

For planting napier grass

2,000

Maize seeds 540Dairy cattle feeds 3,060

Sales: Milk 13,680Dry maize 18,000Green maize 5,670Dairy cattle 4,050Manure 1,500

Sh. ‘000’

Sh. ‘000’

Crop expenses: Labour 3,240Other expenses 360

Napier grass Labour 500General expensesCreditors 7,810Dairy cattle expenses:

Medicines 540



Labour 4,740Other expenses 720

Cash at bank 7,650Retained profits 1,540Ordinary share capital

______ 80,000

132,250 132,250

Additional Information:Stocks as at 31 December 2004 were as follows:

Shs. ‘000’Dairy cattle 27,000Maize (growing) 1,350Bulls 2,700Dairy cattle feeds 810Fertilizer for planting maize 540

During the financial year ended 31 December 2004, the following distribution of farm produce were made to shareholders:

Product Value (Sh.) Maize 540,000Milk 2,160,000

2,700,000

Manure valued at Sh.300,000 was removed from the cow shed and used in the maize plantation.Maize stocks valued at Sh.750,000 were used as dairy cattle feed.Depreciation was to be provided on tractors and carts on the reducing balance method at he rate of 25% and 12.5% per annum respectively.The tax rate applicable is 30%.The bulls are used for pulling carts. It is the policy for Kilimo Ltd. to treat these bulls as non-current assets.

Required:Crop account for the year ended 31 December 2004. (6 marks)Livestock account for the year ended 31 December 2004. (6 marks)General profit and loss and appreciation accounts for the year ended 31 December 2004.(4 marks)Balance sheet as at 31 December 2004. (4 marks)

(Total: 20 marks)

QUESTION FOURMdogo Ltd. Deals in motor vehicle spare parts. T he company had obtained an insurance cover against all risks from XYZ Insurance Company Ltd. A fire occurred in the premises of Mdogo Ltd., twice during the accounting year ended 31 December 2004, that is on 30 June 2004 and 31 October 2004.


Additional Information:The stock as at 31 December 2003 was valued at Sh.29,700,000.The purchases from 1 January 2004 to 30 June 2004 amounted to Sh.106,800,000 and included furniture purchased at Sh.300,000.Sales for the period from 1 January 2004 to 30 June 2004 amounted to Sh.150,000,000.The purchases from 1 July 2004 to 31 October 2004 amounted to Sh.148,500 out of which goods costing Sh.3,150,000 were received on 10 December 2004.The sales for the period from 1 July 2004 to 31 October 2004 amounted to Sh.181,000,000 out of which sales on “sale on return” basis amounted to Sh.3,000,000. No confirmation was received from the customers in respect of 60% of the goods sold on approval basis.Information regarding sales and gross profit for the last three years was as follows:

Year ended 31 December

Sales Gross profit

Sh. ‘000’ Sh. ‘000’2001 300,000 36,0002002 360,000 28,8002003 405,000 40,200

At the beginning of the year 2004, the selling price of the spare parts was raised by 20%.The stock as at 31 December 2003 was undervalued by Sh.300,000.The value of goods salvaged on 30 June 2004 was Sh.9,000,000.The value of goods salved on 31 October 2004 was Sh.8,000,000.The expenses of the salvage operations were Sh.600,000 on 30 June 2004 and Sh.300,000 on 31 October 2004.The company had obtained an insurance policy of Sh.18,000,000 on 1 January 2004. At the time of receiving the insurance claim on the 30 June 2004, fire incident, no additional premium was paid for restoration of the insurance policy to its original amount. The policy was subject to the average clause.

Required:Calculate the amount of claim lodged with the insurance company in respect of the goods lost by fire on:30 June 200431 October 2004.

QUESTION FIVEExplain the following accounting systems generally used in public sector organizations:Budgetary accounting. (2 marks)Accruals accounting (2 marks)Commitment accounting (2 marks)Fund accounting (2 marks)

The following balance sheets were extracted from the books of Jasho Ltd. As at 30 June 2004 and 2005:2004 2005



Sh. ‘000’ Sh. ‘000’Non-current assets:Cost 85,000 119,000Accumulated depreciation (26,000) (37,000)

59,000 82,000Current assets:Inventories 34,000 40,000Trade receivables 26,000 24,000Cash at bank 10,000 14,500

70,000 77,500Total assets 129,000 159,500

Equity and liabilities:Capital and reserves:Ordinary share capital (Sh.100 per value)

26,000 28,000

Share premium 12,000 13,000Retained earnings 31,000 53,500

69,000 94,500Non-current liability:10% debentures 20,000 10,000

2004 2005Sh. ‘000’ Sh. ‘000’

Current liabilityTrade payables 15,000 23,000Taxation 12,000 15,000Dividends 13,000 17,000

40,000 55,000Total equity and liabilities 129,000 159,500

Additional Information:There were no disposals of non-current assets during the year ended 30 June 2005.Sh.10 million of the 10% debentures were redeemed on 31 December 2004.During the year ended 30 June 2005, a dividend of Shs. 17,000,000 was proposed.Taxation for they year ended 30 June 2005 was agreed at Shs. 15,000,000.

Required:Cash flow statement for the year ended 30 June 2005, in accordance with the requirements of IAS 7 (Cash Flow Statements).



MAY 2006 Time allowed 3 hours

Answer all questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.

QUESTION ONEThe following trial balance was extracted from the books of Regional Commercial Bank Ltd as at 31 March 2006:

Sh.’000’ Sh.’000’Property and equipment 14,427Interest on loans and advances 8,395Interest on customers’ 5,308Customers deposits 82,230Shares capital 10,000Revaluation reserve 2,480Staff costs 2,184Borrowed funds 3,520Directors emoluments 645Depreciation on property and equipment 815Other interest income 430Specific provision for doubtful debts 2,750Interest on government securities 4,768Other operating expenses 1,630Repair and maintenance 210Printing and stationary 278Deposits and placements due from banking institutions 8,560



Loans and advances to customers 67,655Deposits and placements due to other banking institutions 6,410Interest on deposit and placements with other banking institutions 3,800Other interest expense 314Interest paid on deposits and placements from other banking institutions 1,280Cash and balances with the Central Bank of Kenya 3,630Interim dividend paid 400Bad debts written off 279Share premium 3,000Fees and commission income 764Dividend income 408Investment in securities 5,460Miscellaneous accruals 140Government securities 13,200Retained profit (1 April 2005) 2,480Other assets 5,300

131,575 131,575

Additional information:An analysis of the debtors balances as at the end of the year showed that an additional provision of sh.1,850,000 for non-performing loans should be made.A provision of sh.1,050,000 should be made for tax on the profit for the year ended 31 March 2006.Interest accrued and not accounted for in the books as at 31 March was as follows:On loans and advances sh.642,000On customers’ deposits sh.448,000

The directors of the bank have proposed a final dividend of 6%.

Required:Profit and loss account for the year ended 31 March 2006 (12 marks)Balance sheet as at 31 March 2006. (8 marks)(Total: 20 marks)

QUESTION TWODistinguish between “leasing” and “hire purchase” highlighting how each is accounted for.Kopesha Limited has been in business for several years dealing in electronic goods. All the firm’s goods are sold on hire purchase terms. The following trial balance extracted from the books of the firm as at 31 March 2006:


Sh.’000’ sh.’000’

Ordinary share capital 53,200Cash at bank and in hand 1,800Accounts payable 5,000Operating expenses 16,000Property, plants and equipment (1 April 2005) 55,000Depreciation (1 April 2005) 20,000Hire purchase installments receivable 34,200Hire purchase sales 55,200Purchases 24,600Inventory (1 April 2005) 1,800

133,400 133,400

Additional information:Inventory as at 31 March 2006 was valued at sh.2,400,000.Property, plant and equipment should be depreciated at sh.5,000,000 for the year ended 31 March 2006.Each unit was sold on hire purchase basis on the following terms:Sh. Sh.

Cash price 40,000Deposits (10,000) 30,000Interest 6,000

36,000

4 Assume that all sales are made at the end of each quarter. The quarters end on 31 march, 30 June , 30 September and 31 December respectively. The balance due on each hire purchase sale is payable in four equal installments of Sh. 9,000 per quarter payable at the end of each quarter and commencing in the quarter following that in which the sale was made.

5 The number of units sold during each quarter were made as follows:Quarter to Number of units sold.30-Jun-05 10030-Sep-05 20031-Dec-05 30031-Mar-06 600All installments were received on their due dates.

6 The sum of digits method is to be used to apportion interest, the appropriate amount being credited to the quarter in which an installment is received.7 Included in the operating expense is a lease rental payment of Sh.2,000,000 paid at the commencement of the financial year. This relates to equipment whose fair value is Sh.8,000,000. The payment has been treated as an operating lease whereas it is a finance lease . The duration of the lease is 5 years and interest is at 10% er annum. Lease rentals are paid in advance.

Required:



(I) Trading, profit and loss account for the year ended 31 march 2006.8 marks)

(ii) Balance sheet as at 31 March 2006 6 marks)(Total: 20 marks)

QUESTION THREE:Lega Electronics Company Ltd. Leased a patent for the manufacture of television component from Bama Scientific Developers Ltd. On 1 January 2001 for a ten year period at a loyalty of Sh.50 per component manufactured and sold.

Minimum rent was agreed at Sh.4,000,000 per annum and loyalties for each year were paid on 15 February of the following year. Short workings arising in any year were recoverable only within the following two years of operation.

Lega Electronics Ltd. Sub-leased the patent to DXT Ltd. On 1 January 2002 at a royalty of Sh.60 per component manufactured with a minimum rent of Sh. 1,200,000 per annum. The agreement between the two companies provided for recovery of short workings within the first four years of operation. Royalties for each year were paid on 31 December of the same year.

The number of components manufactured and sold by each company in each of the five years ended 31 December 2005 were as follows.

Year Lega Electronics DXT Ltd.Company Ltd.

Number of unitsNumber of Number of units Number of Manufactured.Units sold. Manufactured units sols

2001 48,000 46,0002002 62,000 60,000 11,000 10,0002003 72,000 66,000 18,000 16,0002004 84,000 82,000 24,000 26,0002005 90,000 92,000 32,000 30,000

Required:Prepare the following accounts in the books of Lega Electronics Company Ltd. For each of the five years ended 31 December 2005:

(a) Royalties payable account (4 marks)

(b) Bama Ltd. Account (5 marks)


(c) Short workings recoverable (2 marks)

(d) Royalties receivable account (4 marks)

(e) DXT Ltd. Account (3 marks)

(f) Short workings allowable account (2 marks)(Total: 20 marks)

QUESTION FOUR(a) The objective of this standard is to require the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flow during the period from operating, investing and financing activities." [International Accounting Standard (IAS)7]

Required:In view of IAS 7 whose objective is quoted above, distinguish between the "direct method" and the "indirect method" of the presentation of cash flow statements.

(b) Home Marketing Limited sells a single product "Wonder Home" exclusively through personal marketing. The comparative income statements and balance sheet of the company for the year ended 31 December 2004 and 2005 are given below:

Home Marketing Ltd.Income statement for the year ended 31 December:

2004 2005Sh.'000' Sh.'000'

Sales 500,000 350,000Less: cost of sales (200,000) (140,000)Gross profit on sales 300,000 210,000Less: operating expenses (260,000) (243,000)

Loss on sale of marketable securities - (1,000) Net income (loss) 40,000 (34,000)

Balance sheet as at 31 December:

2004 2005Sh.'000' Sh.'000'

Assets: 10,000 60,000Cash and cash equivalents 20,000 5,000



Marketable securities 40,000 23,000Accounts receivable (net of provision) 120,000 122,000Inventory 300,000 285,000Plant and equipment (net) 490,000 495,000

Shareholders' equity and liabilities:Accounts payable 50,000 73,000Accrued expenses 17,000 14,000Long-term loan 245,000 253,000Share capital (Sh.10 par value) 100,000 110,000Share premium 20,000 25,000Retained earnings 58,000 20,000

490,000 495,000

Additional information:1 In the year ended 31 December 2005, the company paid a total of

sh.4 million as cash dividends.2 The company purchased equipment for Sh. 20 million, paying in Sh. 2 million in cash and carrying the balance of sh.18 million as long-term loan.3 Interest on the long-term loan amounting to sh.6 million was paid during the year ended 31 December 2005.4 Accounts receivable are stated net of provision of sh.8 million and sh.6 million as at 31 December 2005and 2004 respectively.

5 Marketable securities are shares in non-quoted companies.

Required:(i) Cash flow statement for the year ended 31 December 2005 using the

direct method and in accordance with IAS 7 (Cash Flow Statements).(10 marks)

(ii) By preparing a reconciliation of net profit from operating activities, demonstrate how Home Marketing Limited achieved a positive cash flow from operating activities during the year ended 31 December 2005 despite incurring a net loss for the same year. (4 marks)

(Total: 20 marks)

QUESTION FIVEThe approved Estimates and Actual Expenditure details for vote E45 of ministry ABC for the financial year 2004/2005 were as follows:

Approved ActualEstimates ExpenditureSh.'000' Sh.'000'

000 Personal Emoluments 246,560 195,04050 House allowances 39,100 28,52080 Passages and Leave Expenses 8,280 1,334100 Transport Operating Expenses 32,200 27,186110 Traveling and Accommodation Expenses 2,668 3,312120 Postal and Telegram Expenses 9,200 6,624190 Miscellaneous other Charges 34,960 33,764


196 Training Expenses 11,960 13,476230 Purchase of Equipment 42,000 17,600620 Appropriations - in -Aid 2,000 11,120 (Realised)

The Ministry made four equal withdraws from the Exchequer in July 2004, October 2004, January 2005 and May 2005. In total the Ministry had withdrawn Sh.400,000,000 by the end of the 2004/2005 financial year.

Supplementary estimates authorised during the year were as follows:

Sh.'000'000 Personal Emoluments 12,000 (reduction)196 Training Expenses 2,000 (increase)620 Appropriations -In-Aid 8,000 increase)

Required:Appropriation account for the year ended 30 June 2005 (6 marks)

General Account of vote for the year ended 30 June 2005. (4 marks)

Exchequer Account for the year ended 30 June 2005 (4 marks)

Paymaster General (PMG) account for the year ended 30 June 2005. (2 marks)

Statement of assets and liabilities as at 30 June 2005. (4 marks)(Total: 20 marks)

ECEMBER 2006 Time allowed 3 hours

Answer all questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.

QUESTION ONE

(a) Briefly explain the meaning of the following terms as used in insurance business.

Bonus in reduction of premium (2marks)Surrender value (2marks)Reinsurance. (2marks)Annuity. (2marks)

The following trial balance was extracted from the books of Bima Insurance Ltd. as at 30 June 2006.

Sh.’000’ Sh.’000’Net earned premiums:

Fire 139,668



Motor 259,456Net commissions: Fire 3,466

Motor 6,938Net earned paid: Fire 55,784

Motor 111,562Net claims outstanding as at 1 July 2005:

Fire 72,036

Motor 144,074Management expenses to be charged to revenue accounts

155,108

Management expenses not to be charged to revenue accounts

20,000

Bad debts 5,000Treasury bills 199,100Treasury bonds 11,386Deposits in banks 474,100Motor vehicles (net book value-1 July 2005) 1,000Equipment (Net book value – 1 July 2005) 14,414Amounts due to other insurance companies 4,000Amounts due from other insurance companies 6,940Bank overdraft 16,000Share capital 120,000Investment income 72,000Other income 17,564Revaluation reserves 50,000Retained earnings as at 1 July 2005 30,000Unearned premium reserves as at 1 July 2005:

Fire 40,000

Motor 100,001,064,798

1,064,798

Additional information:1. Management expenses are to be apportioned to revenue accounts on the basis of net earned premiums.2. The management made the following estimates as at 30 June 2006:

Sh.’000’Net claims outstanding: Fire 90,000

Motor 158,0003. Reserve for unexpired risks as at 30 June 2006 is to be maintained at 50% of the respective net earned premiums for both the fire and motor businesses. 4. Depreciation on motor vehicles and equipment is to be provided using the reducing balance method at the rates of 20% and 10% per annum respectively.

Required:(i) Revenue accounts for the year ended 30 June 2006. (8 marks)


(ii) Profit and loss account for the year ended e0 June 2006. (4 Marks)

(Total: 20 Marks)

QUESTION TWO (a) In the context of IAS 41 (Agriculture), explain 6the meaning of the following terms:

Biological transformation (2 Marks)Agricultural activity (2 Marks)

(b) Wakulima Ltd. is a farming business carrying out livestock, poultry and crop farming activities.

The information provided below was extracted from the books of the company as at 30 June 2006:

Sh.’000’ Sh.’000’Stock -

1 July 2005

Fertilizers 2,600Growing crops 6,800Cattle 8,300Cattle feed 3,200Seeds 2,050Poultry 3,800Poultry feed 1,800Eggs 200

Land and buildings (net book value) 40,000Machinery and equipment ( net book value)

20,000

Furniture (net book value) 5,000Farm tools 4,000Sundry debtors 5,450Cash at bank 850Ordinary share capital 40,000Share premium 20,000Profit and loss account (1 July 2005) 6,850Purchases:

Poultry 18,000Cattle 47,000Cattle feed 14,.000Seeds 5,000Poultry feed 6,000Fertilizers 11,500

Sales:Crops 35,650Milk 15,200



Cattle 78,000Poultry 35,00Eggs 2,800

Salaries and wages:Crops 6,000Cattle 7,200Poultry 4,800

Expenses:Crops 2,500Cattle 4,000Poultry 3,000

Manager’s salary 6,000Postage and stationery 800General expenses 7,000Insurance 3,700Finance costs 1,750Depreciation on assets 6,000Accrued expenses 1,500Sundry creditors 3,300Bank loan 20,000

258,300 258,300

Additional information:1. As at 30 June 2006, stocks were3 valued as follows:

Sh.’000’Poultry 2,150Cattle 6,500Cattle feed 2,800Seeds 1,800Poultry feed 1,200Fertilizers 2,200Growing crops 7,100Eggs 150

2. During the year ended 30 June 2006, the workers consumed products whose values were as shown below:

Sh.’000’Poultry 800Cattle 1,500Crops 1,200Eggs 150

3. Depreciation expense for the year ended 30 June 200-6 is to be apportioned in the ratio of 3:2:1 between the crops activity, livestock activity respectively. 4. The directors of the company have recommended a dividend of 10%.Required:(i) Crops account, livestock account and poultry account fro the year ended 30 June 2006. (12 marls)


(ii) General profit and loss account for the year ended 30 June 2006. (4 marks)

(Total: 20 marks)

QUESTION THREE (a) State any four benefits of a cash flow statement. (4 marks)

(b) Wananchi Ltd. prepared the following draft financial statements for the year ended 30 September 2006.

Income statement for the year ended 30 September 2006

Sh.”million’ Sh.”million’Sales 710Interest income 6

Expenses:Operating expenses 470Interest expense 14Profit before tax (484)Income tax expense 232Profit after tax (64)Dividends (paid and proposed)

168

(40)128

Balance sheets as at 30 September 2006 2005Sh.million

Sh.million

Sh.million

Sh.million

Non-current assets: 544Property, plant and equipment 6Intangible assets 550

Current assets: 310Inventories 280 220Trade receivables 264 4Interest receivable 2 -Investments 190 744 42 576Cash in hand 8 1294 976

Ordinary share capital (Sh.2 per value)

200 180



10% preference share capital (Sh.2 Per value)

40 40

Share premium 88 70Revaluation reserve 14 -Retained profits 290 162

632 452Non-current liabilities6% loan stock 40Obligations under finance lease 100 140 84 164

Current liabilities:Bank overdraft 16 40Trade payables 424 254Interest payable 6 4Obligations under finance lease 10 6Current tax 58 40Dividends proposed 8 522 16 360

1,294 976

Additional information:1. During the year ended 30 September 2006, Wananchi Ltd. issued 10 million (Sh. 2 per value) ordinary shares at a price which was 100% above their par value, incurring issue costs of Sh. 2 million.2. During the year ended 30 September 2006, some items of property, plant and equipment were bought under a finance lease amounting to Sh. 56 million. Disposals of assets having a net book value of Sh. 38 million realized Sh. 42 million. Depreciation charge was Sh. 74 million. 3. Investments purchased during the year ended 30 September 2006 include Sh. 160 million loan stock in another company payable after 10 years. The remaining investments were treasury bills redeemable in 3 months time.4. Interest on finance leases of Sh. 6 million was included in the interest payable charged to the income statement.

Required:Cash flow statement for Wananchi Ltd. for the year ended 30 September 2006 in accordance withIAS 7 (Cash Flow Statements) (16 marks)

(Total: 20 marks)

QUESTION FOUR The balance of Beta Ltd. as at 31 October 2005 was as given below. Beta Ltd.Balance sheet as at 31 October 2005

Assets Sh.’000’ Sh.’000’Non-current assets: 4,000Machinery and equipment


Current assets:Inventories 280Debtors 320Bank balance and cash in hand 210

4,810Equity and liabilities:Capital and reserves:Ordinary share capital 240Retained profit 70

310

4,810 The following transactions were carried out in the financial year ended 31 October 2006:

1. Sales for the year amounted to Sh. 11,220,00 of which Sh.2,400,000 were made in the quarter of the year.2. Purchases for the year amounted to 9,316,000 of which 2,090,000 were made in the last quarter of the year.3. The company collected Sh. 11,130,000 from trade debtors and paid trade creditors Sh. 9,236,000 during the year.4. All outstanding expenses as at 31 October 2005 related to operating expenses including interest on loan.5. Operating expenses for the year ended 31 October 2006 including Sh.45,000 interest on loan amounted to Sh. 1,449,000 of which Sh. 1,429,000 was paid in the year. 6. The company purchased new equipment costing sh.500,000 on 1 May 2006. Depreciation on the machinery and equipment is provided at the rate of 10% per annum based on the book value with a full years’ depreciation being provided on an asset purchased in the course of the year. 7. On 31 July 2006, fire broke out in the premises of Beta Ltd and destroyed all the trading stock apart from stock valued at Sh. 150,000 which was salvaged.8. In the year ended 31 October 2005, sales amounted to Sh. 8,540,000 and cost of sales amounted to Sh.7,007,000. The sales included Sh. 190,000 from goods which had cost Sh. 180,000 and which had been damaged necessitating their value to be reduced by Sh.20,000.9. Before the outbreak of the fire, it was estimated that the gross profit percentage fro the year ended 31 October 2006 was 2% above the gross profit percentage for the year ended 31 October 2005. 10. The company had insured its trading stock for Sh,360,000. After determining the value of stock lost in the fire, the company received compensation from the insurance company on 15 September 2006. The insurance company applied the average provision method in determining the claim to be paid.11. The company paid a first and final dividend of 6% on 1 October 2006.12 Stock was valued at Sh.320,000 as at 31 October 2006.13 Assume all the sales and purchases were made on credit.



Required:(a) Cost of stocks lost in the fire stating the amount to be claimed from the insurance company. (8 marks)(b) Trading, profit and loss accounts for the year ended 31 October 2006. (6 marks)

(c) Balance sheet as at 31 October 2006. (6 marks)

(Total 20 marks)

QUESTION FIVE (a) Write brief notes on the following in the contest of government accounting:

Sinking fund. (2 marks)Revolving fund (2 marks)

(b) ABC Ltd purchases gas cookers at Sh.3,500 each and sells them through consigners as Sh. 5,000 each. Each consignee is entitled to a commission of 5% on sales from consigned goods and full recovery from sales made of any expenses incurred on the consigned goods.

The following transactions took place between ABC Ltd and Xyz Ltd, a

consignee, during 5he three-month period ended 30 June 2006:

1. ABC Ltd sent 200 gas cookers to XYZ Ltd. and incurred the following costs:

Packing – Sh16,000Insurance - Sh. 30,000 Transport - Sh. 42,000

2. On receipt of the cookers, XYZ Ltd. incurred Sh. 12,000 on unpacking and preparing the cookers for sale. 3. XZ Ltd, sold 160 cookers and incurred carriage out costs of Sh. 18,000. Other incurred by XYZ Ltd. in the period included casual wages Sh. 15,000, advertising expenses Sh. 5,000 and storage cost Sh.12,000. 4. Some customers returned gas cookers to XYZ Ltd. after experiencing gas leakage. XYZ Ltd. spent Sh. 10,000 to repair the cookers.5. In order to sell 40 cookers, they were all fitted with additional safety gadgets at a total cost of Sh. 12,000 which was paid by XYZ Ltd.6. XYZ Ltd. sold 30 of the cookers fitted with the additional safety gadgets at Sh.6,000 each.7. XYZ Ltd sent ABC Ltd. an account sales on 30 June 2006 enclosing a cheque for Sh.800,000.

Required:The accounts listed below in the books of ABC Ltd. for the three-month period ended


30 June 2006.

Goods sent on consignment account. (6 marks)XYZ Ltd. account (6 marks)Profit and loss account for the three-month period ended 30 June 2006. (4 marks)

(Total: 20 marks)



Answers – Past Papers

SUGGESTED SOLUTIONS TO THE PAST PAPER QUESTIONS JUNE 2000 TO DECEMBER 2005

JUNE 2000

QUESTION ONE(a) Salient features of farm accounting

Consumption of crops and farm products by the farmer. This is treated as income of the farmer and accounted for as his drawings.Family members of the farmer do provide labour for the farm activities. Such labour is valued and added to the cost of production in order to ascertain the correct cost of production.Farming activities are affected by natural calamities like drought, floods, diseases etc. to a great extent.The valuation of farm inventory is very complicated and difficult a task. It is difficult to ascertain the value of standing crops, cattle or poultry which are subject to calamities.The output of one activity may be used as the input of another farming activity e.g. part of the crops produced can be used in cattle breeding, poultry farming etc.

(b) CROP ACCOUNTSh. Sh.

Bal b/f: Crops G/Crops Seeds FertilizersPurchases: Seeds FertilizerProfit

30,00022,50015,00037,500

11,25026,250213,000

_____

Sales Crops Flowers Fruits VegetablesConsumption: Vegetables FruitsBal. C/f: Crops G/Groups Seeds Fertilizer

157,50011,25930,00037,500

4,5002,250

37,50033,75018,750 22,500

355,500 355,500


DAIRY ACCOUNTSh. Sh.

Bal b/f: Cattle Cattle foorPurchases: Cattle Cattle foodProfit

562,50075,000

300,000105,000156,750

_______

Sales: Butter Milk CattleConsumption: Butter MilkBal c.d: Cattle Cattle food

11,25067,500270,000

3,00018,750

787,500 41,250

1,199,250

1,199,250

POULTRY ACCOUNTSh. Sh.

Bal. B/f Poultry Poultry foodPurchases: Poultry Poultry foodProfit

67,5007,500

112,50022,500114,000

______

Sales: Eggs PoultryConsumption: Eggs PoultryStocks: Poultry Poultry food

975,000105,000

3,7501,500

101,250 15,000

324,000 324,000

FISHING ACCOUNTSh. Sh.

Bal b/f: FishPurchases: FishProfit

15,0007,50047,750

Sales: FishConsumptionStock

45,00075024,000

69,750 69,750

Profit and Loss A/cFor the year ended 31.03.2000

Sh. Sh.



Gross profit: Crops Dairy Poultry FishLess Expenses: Wages Insurance Depreciation Repairs

213,000156,750114,000 47,250

176,25011,25015,000 9,000

531,000

(211,500)Net profit 319,500


QUESTION TWO(a) Golden Times Ltd

Formula Ratio

(i) ROSE Profit before int. & taxCapital employed

440,000 x 1001,800,000 = 24.4%

(ii) Profit margin

Gross profit x 100 Sales

1,000,000 x 1004,000,000 = 5%

Net profit x 100 Sales

400,000 x 1004,000,000 = 10%

(iii) Turnover of capital

Sales____Capital employed

4,000,0001,800,000 = 2.22

times

(iv) Current ratio

Current assets_Current liabilities

1,520,0001,400,000 = 1.08:1

(v) Liquid ratio

Liquid assetsCurrent liabilities

1,520,000 – 1,000,0001,400,000

= 0.37:1

(vi) No. of days a/c’s receivable are outstanding

Debtors x 365Credit sales

400,000_x 3654,000,000 36½ days

(vii) Proprietary ratio

Shareholders fundsLoans & Current liabilities

1,400,0001,800,000 = 0.78:1

(viii) Stock turnover

Cost of salesAverage stock

3,000,0002,840,000 = 2.11

times

(ix) Dividend yield ratio

DPSMPS

0.268 x 100 5 = 5%

(x) Price earnings ratio

MPSEPS

5_0.56

= 8.9

(b) Liquidity of Golden Times Ltd.

Liquidity can be analysed using the current ratio and liquid ratio. The current ratio of 1.08:1, quite below the standard ratio of 2:1. This can be compared



with the industrial average to assess the performance of Golden Times Ltd. For improvement, it can be compared with the same ratio of the previous year.

The liquid is not healthy since it is 0.37:1 against a standard ratio of 1:1. Implications are that should Golden Times face liquidation, it cannot be able to pay off its current liabilities through liquid assets. Again, this can be compared with the industrial average ratio and with the previous years ratio to assess improvement.

QUESTION THREE(a) (i) Whole life policyIt is a policy under which the insured amount is paid on the death of the insured and the insured has to pay a premium throughout his life.

(ii) Endowment policyA policy which runs for a fixed period (i.e. number of years). Under this policy, the insured amount becomes payable either on the death of the insured or on the expiry of the agreed period, whichever is earlier.

(iii) Surrender value:The money paid back to the insured party when he decides to cancel the insurance agreement before the period specified. The surrender value is payable only in the case of policies in respect of which at least a few years premium has been paid.

(b) Ulinzi Insurance Co. LtdFire Insurance Revenue A/c for the year ended 31 March 2000

Sh.’000’

Sh.’000’


Claims under policiesLess: Reinsurance paid during the year(840,000 – 150,000)Add: Estimated liability for claims o/s at year end whether due or intimated

Less o/s at the commencement of the year

Commission: on direct business and on reinsurance acceptedExpenses on managementBalance of the a/c at year end as shown in the b/sheetReserve for unexpired riskAdditional reserve

840,000

39,000

976,500

1,273,950

690,000

39,000729,000

(28,500)700,500

522,000

579,000

1,789,500

Balance of the account b/fReserve for unexpired risksAdditional reservePremium less reinsurance (2,479,500 – 450,000)Commission on reinsurance cededP & L Account

976,5001,071,000

2,047,500

2,029,50022,5001,005,450

_______

5,104,950

5,104,950



Marine Insurance Revenue A/cSh.’000’

Sh.’000’

Claims under policiesLess: reinsurance paid during the year.Add: Estimated liability in respect of o/s claims at yar end whether due or intimated

Less: o/s at start of the yearProvision for survey expensesCommission on direct business and on reinsurance acceptedProfit and loss accountBalance of the account at year end as shown in the balance sheet.Reserve for unexpired riskAdditional reserve

805,500

141,000946,000

1,500

1,677,000 112,500

945,000

150,000

370,500106,500

1,789,500

Balance of the account b/fReserve for unexpired risksAdditional reservePremium less reinsurance

1,830,000 112,500

1,942,5001,677,000

_______

3,619,500

3,619,500

Profit and Loss AccountSh Sh.

Director feesContribution to NSSFDepreciation – furnitureNet profitProvision for taxation

130,50022,5006,000382,050300,000______

Interest, dividends & rent not applicable to any particular fund or accountProfit from fire businessProfit from marine businessMiscellaneous receiptsNet profit

385,50047,500106,5001,500343,800

382,050 382,050


BALANCE SHEET AS AT 31 MARCH 2000Sh Sh.

Share capital, authorized and issued – 210,000 ordinary shares Sh.10 eachGeneral reservesInvestment fluctuation fundContingency reserveBalance of funds and accountsFire insuranceMarine insuranceOther liabilities:Staff provident fundDue to other insurersSundry creditorsOutstanding Sunday expensesProvision for corporation taxEstimated liability in respect of o/s claims whether due or intimated:Fire 39,000Marine 141,000 Suspense

21,000,0001,917,000210,000300,000

2,350,4501,789,500

213,000450,000900,000150,000300,000

180,0001,500,000

Investments (at cost)Debetores on amortgageBankShares in companiesOutstanding premiums Fire 1,056,000 Marine 894,000 Furniture (NBV)Library booksAccrued interestSundry debtorsAmounts due from other insurersFixed depositsCash and bank balance

18,886,500

4,402,5004,230,000

1,950,00048,00015,00054,000289,500172,500213,000981,000

31,242,000

31,242,000

QUESTION FOUR(a) (i) Money at call and short notice: appears on asset side of the balance sheet. It represents temporary loans say for one day for “money at call”: and loans that can only be called back on notice, say three days for “money at short notice”

Money deposit on liability side of the balance sheet which represents customers deposits in both current, savings and fixed accounts.

Cash credit: arrangement granting customer the right to borrow money from time to time upto a certain limit. This is usually given against a pledged security and extended to current and savings account holders e.g credit card.

Overdraft: available to a customer operating a current account and who have high goodwill and name for honest dealings. The customer pays interest on the sum overdrawn, and must fully secure the borrowing.

Discounting of bills: implies making the payment of the bill prior to maturity date.



Bills for collection: drafts and bills drawn by sellers of goods on the purchases of goods and sent to the bank for collection against delivery documents e.g bill of lading. The bank hands over the documents authorizing the delivery of the goods to the borrower only after the collection of the amount of the bill.

(b) Disclosure requirements:

Debts considered good in respect of which the bank is fully secured.Debts considered good for which the bank holds no other security than the debtors personal security (personal guarantee)Debtors considered good, secured by the personal liabilities of one or more parties in addition to the personal security of the debtor (third party guarantee)Debts considered doubtful or bad not provided for (non-performing loans)Debts due from directors or officers of the bank or any of them either severally or jointly with other persons.Debts due from companies in which the directors of the bank are interested as directors, partners or managers or members of private companies.Maximum total amounts of loan including temporary advances made at any time during the year to directors or managers or officers of the bank.Maximum total advances including temporary advances granted during the year to the companies or firms in which the directors of the bank are interested as directors, partners or in the case of private companies as members.Advances due from other banks.Maturity and segmental analysis of the advances.Off-shore/forex advancesProvisions for doubtful debts


QUESTION FIVE(a) Widows and Orphans Fund

Trial Balance:Sh. Sh.

Payments to widows & orphansRefund to bachelorsManagement expensesMember contributionsInterest on investmentsProvision for exchange lossesInvestment accountEmployers contributionsFund balanceCash: JM Fund 1,000,000 CSF Fund 1,600,000 PMG 322,000

Receivable from employerReceivable from membersPayable to widows and orphansInterest receivable

2,990,000150,00070,000

80,000,000

2,922,000

23,06090,000

800,000

2,102,0006,800,0001,600,000

63,06076,400,000

80,000________

87,045,060 87,045,060

(b) Income & Expenditure StatementSh. Sh.

Member contributionsEmployers contributionsInterest on investmentsPayments to widows & orphansRefund to bachelorsManagement expenses

2,102,00063,0606,800,0002,990,000150,000 70,000

8,965,060

(3,210,0005,755,060

(c) Balance Sheet as at 30 April 2000Sh. Sh.

AssetsInvestment AccountLess: Provision for lossesInterest receivable on investmentsReceivable from membersReceivable from employerCash: JM Fund CSF Corporation PMG

LiabilitiesPayable to widows and orphansAccumulated fund balance:

80,000,000 1,600,000800,00090,000 23,0601,000,0001,600,000 322,000

78,400,000

913,060

2,922,00082,235,060

80,000



Balance b/f Current balance

76,400,000 5,755,060 82,155,060

82,235,060


DECEMBER 2000

QUESTION ONETobiko and MunyaoIncome and Expenditure for the year ended 30.9.2000

WorkingsDepreciationFurniture = 12.5% x 96,000 = 12,000Equipment = 15% x 284,000 = 42,600Motor vehicles= 25% x 1504000 = 89,400New equipment=15% x 596,000 = 89,400

Capital AccountTobiko Munyao Tobiko Munyao


DepreciationFurniture 12,000Equipment 132,000Motor vehicles 376,000Office rent 868,000Salaries + wages 940,000Telephone + postage 312,000Printing + stationery 84,000Transport 152,000Miscellaneous expenses 112,000Motor vehicle expenses 392,000Office repairs 72,000Water + electricity 140,000Provision for fees1,200,000In arrears 4,872,000

Fees income4,852,000

Deficit 20,000

4,872,000

Drawings A/CShare of deficitBal c/d

300,00010,0002,998,000

3,308,000

300,00010,000269,000

3,000,000

Bal b/f

3,308,000

3,308,000

3,000,000

3,000,000


b) Client A/C

Cash A/C DepositDisbursementChargesTransportStationeryMiscellaneousFee income A/cBal C/d

20,00012,0004,000

920,000

36,000500,0001.504,000

2,960,000

Bal b/f

Cash A/cLandCriminal case

128,000

1,536,0001,296,000

2,960,000

Workings

Office Rent A/cCash A/c

Bal c/d

896,000

108,000100,400

Bal b/f

I & E

136,000

868,000100,400

Salaries and wages A/cCash

Bal c/c

960,000

108,0001,072,000

Bal b/fI & E

132,000940,000

1,072,000

Fee income accountBal b/fI & E

480,0004,852,000

5,332,000

CashClient A/c

3,552,000500,000

5,332,000

Printing and stationary A/cRec & pay A/C

152,000 Rec & paymentClient A/C

48,00020,00


152,000I & E A/C 0

84,000

152,000



Miscellaneous A/cRec & payments A/c

208,000

208,000

Rec & paymentClient A/cI & E A/c

92,0004,000112,000208,000

Transport A/cRec & pay 224,00

0

224,000

Rec & pay A/cClient A/cI & E A/c

60,00012,000152,000

224,000

Telephone & postage A/CCashBal c/d

292,00020,000312,000

I & E A/c

312,000

312,000

Professional cashbook

Bal b/fClient A/cLandCriminal caseDisbursementsContra: disbursement : Fee income

Clients128,000

1,536,0001,296,000--

Office1,212,0003,552,000

200,00036,000500,000

TransportMiscellaneous expStationeryEquipmentDrawingsTelephone & postageOffice rentM.vehicle expensesWater + electricityOffice repairsSalaries + wagesClient – land deposit

Client

920,00036,000500,0001,504,000

Office224,000208,000152,000596,000600,000292,000896,000392,000140,00072,000960,000

5,500,000


2,960,000

5,500,000

Disbursement chargesFee incomeBal c/d

2,960,000



(c) Tobiko and Munyao Advocates:

Balance sheet as at 30.9.2000Fixed assetsFurniture + fittingsEquipmentMotor vehiclesInvestment in NSE sharesCurrent assetsCash at bank –office -client

84,000748,0001,128,0003,000,000

968,0001,504,000

8,712,000

Capital A/cTobikoMunyaoCurrent liabilitiesClient A/cAccured -rent -Salaries wages -TelephoneProvision for fees in arrears

2,998,0002,690,000 1,504,

000108,000112,00020,0001,280,000

8,712,000

QUESTION TWOComputation of lost buildings

Value of buildings lost = ¾ x 1 billion = 750 millionAmount of the policy = 800mTherefore there was under insuranceInsurance claim reduced by 800 m x 750 million

1000m600m

Computation of stock lost

Estimated trading A/c for 1 month up to 30.1.200

Opening stockPurchases

Gross profit

525,0001,100,000

15,000

650,000

Sales

Closing stock

100,000

550,000

650,000

Creditors control A/c Bank A/cBal c/d

106,680,0003,320,000

110,000,000

Purchases

110,000,000


110,000,000

G.P margin = 300,000 x 100 = 15% 2,000,000

15% x 100 million = 15 m

The value of policy (stock) is shs 600,000,000.The policy fully covers the stock lostClosing stock 550,000,000Less salvage 3,960,000 Lost stock546,040,000

Calculation of lost profits:Step ISales lost (short) 180 million

Step II Gross profit margin(%) net profit + insured standing charges x 100

Sales

57,500 + 167,500 x 100 2,000,000=11.25%

Step III lost profit = 11.25% x 180 = 20.25m

Step IVThere is no increased cost of working thus there will be no claim for this step. There is no saving thus there will be no reduction in claims due to this. As we are fully insured the claim will not be subject to average clause and the claim will amount to 20.25m

Total claims:buildings 600,000,000Stock 546,040,000Profits 20,250,000

1,166,290,000

QUESTION THREEWorkings I

SalesCash sales 210 x 7,500 = 1,575,000Hire purchase sales 62 x 8850= 548,700

2,123,700Sale of repossessed items 9,300 2,133,000

Workings II

Debtors A/C

Sales 1,575,000 Cash book 1,507,500



1,575,000Bal c/d 67,500

1,575,000

WK III cash collected from hire purchase debtors

April: fully sold = 10 x (2,100 + (2x375)= 28,500 Repossessed= 2 x (2,100 + (1x375)= 4,950

May: fully sold= 20 x (2,100 x (1 x 375)= 49,500 : Fully sold= 30 x (2,100) 63,000 145,950

Hire purchase sales:RepossessionTrading

17,700531,000

548,700

Debtors 548,700

548,700

Purchases A/CCreditors 1,620,000

1,620,000

Repossessions

10,8001,609,200

1,620,000

Wananchi pools

a) Trading profit and loss account for the year 30.June 2000

PurchasesProvision for unrealized profitGross profit

General expensesNet profit

1,609,200152,034495,9662,257,200133,200364,416495,966

SalesClosing stock

Gross profit

1,106,000151,200

2,257,200

495,966

b)( I) Hire purchase debtors A/C

SalesRepossessions A/c

548,7004,950

553,650

CashSales (rep)Bal c/d

145,95017,700390.000553,650

Repossessions A/C


Cash purchases (cost)Repairsprofit

10,8001,8001,65014,250

DebtorsCash book

4,9509,300

14,250

Cashbook

DebtorsCapitalRepossessions

1,653,450600,0009,300

2,262,750

CreditorsExpensesDrawingsBal c/d

1,576,800135,000480,00070,9502,262,750

Provision for unrealized profit:

390,000 x 207,000 = 152,034531,000

Wananchi poolsBalance sheet as at 30th June 2000

Wachachi PoolsBalance sheet as at 30 June 2000CapitalNet profitLess drawings

Current liabilities

600,000364,416(480,000484,41643,200

527,616

Current assetsStockDebtors (regular)H. DebtorsLess provisionCash at bank

151,200 67,500390,000152,034 237,966 70,950 527,616

QUESTION FOUR Tenant – kamauYear Output Royalty

Per unitMin rent Sw Surplus s.w.

Receiveds.w off Amount

1996199719981999

8,00011,00015,00018,000

2m2.75m3.75m4.5m

2.5m2.5m2.5m2.5m

0.5m---

-0.25m1.25m2m

-0.25m--

-0.25m--

2.5m2.5m3.75m4.5m

Analysis sheetSub tenant – Kiplagat

Year Output Royalty @ 300/unit

Min rent s.w Surplus s.w. Received

s.w.w/ off

Amount



19981999

900,0001,200,000

1,500,0001,500,000

600,000300,000

--

--

--

-600,000

1,500,0001,500,000


ACCOUNTS:Royalty payable A/c Landlord (onyango) A/c96 landlord A/c 2m 97 landlord A/c 2.75m 98 landlord A/C 3.75m 3.75m 99 Landlord A/c 4.5m

____ 4.5m

96 operating A/c 2m97 operating A/c 2.75m Roy.Rec 0.75mOperating A/c 3m 3.75m roy receivable 1moperating A/c 3.5m ____ 4.5m

96 bank 2.5m 2.5m 97 bank 2.5mS.w exp. 0.25m 2.75m 98 bank 3.75m

99 bank A/C 4.5M

Roy payable 2ms.w exp. A/c 0.5m 2.5m Roy payable 2.75m 2.75m 98 Roy payable 3.75m

98 Roy payable A/c 4.5m

Sub-tenant s.w A/c

98 bal c/d99 p & L A/cbal c/d

600,000600,000300,000900,000

98 subtenant A/c99 bal b/fSub tenant A.C

60,000600,000300,000900,000

Sub tenant A/c

98 R. Receivable A/cs.w sub-tenant A/c

99 R. Receivables.w. sub-tenant

900,000600,0001,500,0001,200,000300,0001,500,000

Bank A/c

98 bank

1,500,0001,500,000

1,500,0001,500,000

S.W. Expense A/c

1996 landlord A/c1997 bal b/f

500,000500,000

500,000

1996 bal c/d1997 landlord A/cp & L A/c

500,000250,000250,000500,000

Royalty Receivable A/c

98 R. payableP & L

99 R.PayableP & L

750,000150,000900,0001,000,000200,0001,200,000

98 Sub-tenant

99 sub-tenant

900,000900,000

1,200,0001,200,000



QUESTION FIVEA) PUBLIC ACCOUNT COMMITTEE (PAC)A standing committee of a few selected members of parliament.Charged with reviewing financial matters of government. This is in line with the constitutional requirement that all financial matters in government are subject to consideration, approval and review by the legislature. Deliberations and recommendations of PAC are based on the report on funds and accounts of the Auditor General.The committee of the chairman and other three members. The proceedings at the meeting are recorded verbatim, the auditor General’s staff and those for the accounting unit responsible for the deliberations reacting to the points raised in the report.Matters deliberated upon include serious ones concerning losses on a large scale, case of thefts and misappropriation, failure to observe regulations and ensure propriety of expenditure, cases of waste and other administrative inefficiency, which lead to wastage of public funds. PAC recommendations are then debated in the parliament, which often insists that the government takes necessary corrective action, which often is done.

B) CONSOLIDATED FUNDIt is the main fund operated by the government. The exchequer and appropriation Act states that all government revenue excluding income which the ministry is allowed to keep to cover part of its own expenses (A.I.A) must be put into fund & cannot be withdrawn unless with authority of parliament. From the consolidated fund the parliament approves the annual budget. Consolidated fund constitute the credit side of the exchequer Account.

C) APPROPRIATION –IN-AIDThese are revenues collected by the ministry or government unit which the treasury authorizes an accounting officer to use in addition to the amount from the consolidated fund. A.I.A is scheduled in the annual appropriation Act. Any excess over the authorized sum of A.I.A will be done to treasury unless the authorized sum is increased by a supplementary appropriation.

PAYMASTER GENERALIs the principal paying agent of the government and is considered to the banker for all government departments. All revenues of the government are kept by central bank of Kenya (CBK). Paymaster general is rather an office, which makes payment on behalf of the government. It withdraws cash from the exchequer account at regular intervals. The amount withdrawn is which is approved by the parliament. It is from this amount that payment are made for different ministries.



JUNE 2001

QUESTION ONE(A) Charles Msafiri

Trading Profit and loss A/c for the year ended 30th April 2001

SalesLess cost of sales-Opening stock-purchases-less drawings

less closing stockCost of salesGross profitless expenses: labour other direct exp. Medicine Bank interest

Less depreciation -Buildings -Motor vehicle -Farm implements G. Expenses Bank charges

Net profit for the year

Crop Livestock TotalShs4,630,9002,753,700710,300(52,800)

Shs3,900,000300,7002,350,800(42,800)

Shs8,530,9003,054,4003,061,100(95,600)

657,5003.411,2002,266,8001,144,400

2,308,0002,608,7001,200,0001,408,700

2,965,5006,019,9003,466,8002,553,100

3,486,500538,000118,000-270,000

2,491,300128,800300,000227,900300,000

5,977,800666,800118,000227,900

2,560,500 1,834,600 4,395,100

16,000356,00090,00071,40020,200

3,841,500


c) Charles Msafiri

Balance sheet as at 30th April 2001Non current assetsLandBuildingsFarm implementsMotor vehicles

Current assetsStocksLivestockCashew nutsCoconutsPesticidesDebtorsPrepaymentsCash in hand & bankCurrent liabilitiesCreditorsAccrued expenses

CapitalNet profitLess drawingsLoan

Shs.4,000000800,000900,0001,780,000

1,200,000640,0001,506,100120,700520,80019,1001,160,100

768,300570,000

Shs.

16,00090,000356,000

5.166,800

1,368,300

Shs.400,000784,000810,0001,424,000

3,798,50010,816,5003,270,6003,841,500(95,600)3,800,00010,816,500

CEasy to generate final accountsProper controls can be put in placeHelps in assessment of tax.

QUESTION TWO (a) Exotic Marine Insurance Company Revenue A/C as at 30. April 2001Net claimCommissionOn reinsuranceOn direct business

Surveyors fees and legal chargesP & L (profits)Reserve for unexpired risksAdditional/reserve

57,000660,000

7,380,000

717,000

300,0003,071,85014,791,5001,479,150________27,739,500

Bal b/fReserve for unexpired riskAdditional reservePremium less reinsuranceComm. On insurance ceded

11,700,0001,170,000

12,870,00014,791,50078,000

________27,739,500



B) P & L A/C for the year ended 30.4.2001DepreciationLess on sale on investmentDirectors remunerationSalariesRent & ratesPostage & stationeryNet profit

Provision for taxationTransfer for invests.AccountNet profit c/d

96,000150,000

450,000

960,00087,000129,0001,612,35034,843,500

912,45025,000

3,399,9003,624,900

Revenue A/C (profits)Interest dividend (net)

Net profit b/fProfits b/f from previous year

3,071,850412,500

34,843,500

1,612,3502,925,000

3,624,900

QUESTION THREE (a) Joint venture with Abuya A/CBank A/CRemittanceTraveling expensesAdvertisingCity council expensesSundry expensesSalaries+ chargesPurchasesTelephoneInsuranceTransportShare of profit

2,400,000392,400123,600102,00070,80057,6001,920,00033,70012,300157,000688,3805,957,780

Bank (sales)

Bank A/c (final remittance)

3,840,000

2,117,780

5,957,780


B)

Joint venture with Karanja A/C

BankTravelingAdvertisingCity councilSalaries + wagesSundry chargesPurchasesTelephoneInsuranceTransportShare of profitBank(final remittance)

555,600109,20084,00078,10034,8001,320,00028,90011,200121,500458,9202,117,7804,920,000

Bank A/CRemittanceSales

2,400,0002,520,000

4,920,000

C) Memorandum joint venture A/C

Traveling expAdvertisingCity councilSalaries + wagesSundry chargesPurchasesTelephone expensesInsuranceTransportShare of profitKaranjaAbuya

948,000232,000186,000135,700105,6003,240,00062,60023,500278,500

688,380458,9206,360,000

Sales 6,360,000

6,360,000

QUESTION FOURa)The basic principle in hire purchase accounting is the segregation of interest and pure profit earned where possible and the different periods where the contract is still in force.Segregation of interest and profit is achieved by taking the difference between the cash selling price and cost to be pure profit and the difference between the final hire purchase and cash price to be interest. The sale is initially recorded at cash price and interest imposed in every final period using the suitable method. This is similar to a lease being recorded at fair value and finance charges imposed in each financial period using straight line; sum of digits or actuarial method deferment of profit is done using a provision for unrealized profit account. The deferment may be accomplished by several methods.



b) Luthuli Electronics Ltd Trading A/c for the year ended 31.3.2000

SalesLess opening stockPurchasesClosing stockCost of salesUnrealized profitGross profit

Cash9,606,600---(537,969)-4,226,904

Hire purchase84,893,400---(47,540,304)(16,399,548)20,953,548

Total94,500,000-69,300,00016,380,000(52,920,000)(16,399,548)25,180,452

Lithuli Electronics Ltd Trading Account for the year ended 31st March 2001

SalesOpening stockPurchasesClosing stockCost of salesGross profitLess unrealized profitGross profit

Cash Hire purchase Total

13,131,000---6,925,560.56,205,560.5-6,205,560.5

119,394,000---62,960,760.556,424,239.513,561,006.3542,863,233.15

132,525,00016,380,00075,119,70021,604,50069,895,20062,629,80013,561,006.3549,068,793.65

Workings 2000

Cash received total deposit 12,297,800Installment 19,323,900

47,621,700

Outstanding balance = 84,893,400 – 47,621,700 = 37,271,700

Workings 20012000 sales 2001 sales

Total cash received initial deposit 28,297,800 39,798,000Instalment 19,323,900 25,182,000Instalment 27,623,700 -

75,245,400 64,980,000Total received 84,893,400 119,394,000Less cash received 75,245,400 64,980,000 Outstanding 9,648,000 54,414,000

Unrealized profit 2000 sales= 9,648,000 x 37,353,096= 4,245,12084,893,400

Unrealized profit 2001 sales= 54,414,000 x 56,424,340= 25,715,434 119,394,000


Total unrealized profit 4,245,120+ 26,715,434.35= 29,960,554.35

QUESTION FIVEa) CONTROLLER AND AUDITOR GENERALThe president appoints him and he is responsible to audit accounts of various government departments. The main purpose of the audit is to ensure all funds appropriated have been spent for the correct purpose. He prepares a report, which is submitted to the parliament annually. The auditor General also advises the government on proper accounting systems and control procedures. He also liaises with public accounts committee.

b) SINKING FUNDSAre funds credited to account for the accumulation of resources for retiring debts at their maturity. Thus their main purpose is the repayment of public debts. Such funds are set up through the approval by the parliament and some appropriation may be made from these funds. The amounts appropriated are invested to earn interest, when public debt matures, a sinking fund is used to redeem debt.

TRUST FUNDAre funds where the government receives money in the capacity as a trustee. They are also referred to as Agency Funds or Fiduciary funds. The government unit does not have absolute title to the assets held; they are statutory restrictions upon their use. E.g. NSSF and NHIF.

d) REVOLVING FUNDSAre used to promote community welfare. They are set up by the approval of the parliament. Some government enterprises are established through this fund. The initial appropriation of this fund is made out of the consolidated fund. The receipts generated by such a fund are used by the respective enterprise in accordance with the provisions of the Act that used to set them. E.g. Higher Education Loan Board, Rural Enterprise Fund etc.

DECEMBER 2001

QUESTION ONE(a)Fedha commercial BankProfit and loss Account For the year ended 30th June 2001

Interest loan advances (435400 +150,000) Government securities Placement marketInterest expense Customers deposit Account interest Borrowed fund Net interest incomeNon-interest incomeForeign exchange incomeFees & commission incomeNon-operating income

LESS: EXPENSESDepreciation expenses

“Shs 000”585,400238.200 36,000115,00030,00035,000

72,000170,20017,000

42,000

“Shs 000”

859,600

(180,000)679,600

259,200938,800



Directors emolumentsBad & doubtful debtsStaff costsAuditors remunerationContribution to staff provident fundLoss on sale of fixed assetLegal and professional feesGeneral administration expensesProfit before taxLess corporate taxProfit after taxDividend - interim -final (10% x 250000) retained profit c/d

12,50034,000295,0003,50014,50021,80020,000142,500

25,00025,000

(585,800)353,000(120,000)233,000

50,000183,000


b)Fedha commercial BankBalance Sheet as at 30th June 2001

ASSETSCash and balance with CBKInvestment in Govt. securitiesDeposit with other banksOther money market placementLoan and advancesProperty plant & equipmentsOther fixed assetsOther assets – accrued interest

LIABILITIESDeposits - customersother banksother liabilitiesdividendscorporate Taxaccrued interest

EQUITY SHARE CAPITALOrdinary share capitalRetained profitAccrued interest.

4,240,000 215,000

25,000120,000 30,000

628,5001,172,000115,000 17,300

4,455,000

175,000

1,932,8002,973,200504,00032,000 150,0005,592,000

(4,630,000) 962,000

250,000183,000 529,000 962,000



QUESTION TWOTausi Limited

Cash Flow Statement

Net profit beforeAdjusted for – depreciation – equipments Plant & machineryGain on disposalGoodwill amortizedInterest Cash flow from operation before working capital changesIncrease in stockDecrease in accrualsIncrease in debtorsIncreased in debtors Less tax paidNet cash flow from operating activitiesCASH FLOW FROM INVESTING ACTIVITIESPurchase of equipmentPurchase of plant & machinerySale of plant & machineryNet cash outflow from investing activitiesCASH FLOW FROM FINANCING ACTIVITIESIssue of ordinary sharesRedemption of preferential sharesLoan repaymentDividend paid – preference -ordinaryloan acquisitioninterest paidnet cash outflow from financing activitieschange in cash and cash equivalentcash and cash equivalent of the beginningcash and cash equivalent at the end

“Shs 000”

(55,000)(45,000)25,000

89,700(86,700)(12,000)(7,500)(32,000)25,000(8,000)

“Shs 000”145,10016,11015,100(7,000)9,1508,000186,460(21,075)(2,200)(5,875)9,530166,840(28,500)138,340

(75,000)

(31,500)31,840(22,630)9,210

Workings(I) redeemed sharesBal b/d 160,000Bal c/d 75,000 redeemed 85,000 x 102% = 86700 – premium on redemption =

ii) issue of shares5,500,000 x 10 = 5,500,000 – nominal value

34,700,000 – premium on issuetotal receipt 89,700,000 85,000,000 – nominal value55,000,000 – redemption2) preference dividends

10% x 75,000,000 = 7,500,000

3) gain on Disposal42,000,000 – all depreciation25,000,000 – proceeds67,000,00060,000,000 – cost 7,000,000 - gain

5) equipment AccountBal b/fBank

87,36055,000

142,360

DisposalDepreciationBal c/d

Nil16,110126,250142,360

profit before taxreturned profit 11,100dividend – preference

7,500-ordinary 40,000

taxation 30,500general reserves

26,000


Bank Loan Account BankBal c/d

12,00063,00075,000

Bal b/fBank

50,00025,00075,000


Plant and Machinery A/CBal b/fbank278,20045,000DisposalDepreciationBal c/d323,20018,00015,100290,100323,200 ordinary dividends

BankBankBal c/d18,00014,00026,00058,000Bal b/fP & l A/c18,00040,000____58,000

6) Profit Before TaxRetained profit 11,100Dividend preference 7,500

Ordinary 40,000Taxation 30,500General reserves

26,000


QUESTION THREE“Shs 000”FIRE

“Shs 000”MARINE

“Shs 000”FIRE

“Shs 000”MARINE

Claim paidClaim outstanding c/dClaim outstanding b/fInternated at the end (accepted)Sundry expenses incidental costCompensation

Commission – directaccepted management expensesadditional reserves40% x 706,00080% x 515,000reserve for unexpected risk

profit

280,00010,000(9,000)8,000-(45,000)244,000174,0006,000193,000

282,600-NP8%X706,500+357,000413,52081,8801,395,000

268,50025,000(1,000)20,00060,000(20,000)352,500123,500-86,000

-412,000N.P.8%X515,000+37,50078,700112,0001,164,700

Reserve for unexpired risk b.fAdditional reserve b/fPremium received – DirectReinsurance premium paid

Commission ceded paid5% x 120,000

325,000357,000826,500(120,000)706,500

6,000

1,395,000

610,000559,00037,500(44,000)515,000

22,000

1,164,700


Muungano Insurance co. LtdProfit and loss A/C

“Shs 000”revenue – fire 81,880 -marine 112,000 193,880investment income 96,500

290,380

EXPENSES – travelling 29,000 Depreciation of furniture (10% x 1023000) 102,300 Contribution to staff provident fund 7,500 (138,800) Net profit before tax 151,580 Taxation 114,500 Net profit after tax (retained profit) 37,080

QUESTION FOURA (I) turnover of preceding financial year – This is the turnover of previous year.

Annual turnover – Turnover of last 12 months proceeding the date of disruption/fire.

Standard Turnover – This is the turnover in the corresponding period in the previous year.

WORKINGS

Gross profit margin = H. P. + insured standing change X 100 Turnover (last financial year )

= 4,800,000 + 9,600,000 X 100 = 18% (12,000,000 + 40,000,000 + 28,000,000)

Actual G. P. Margin = 18% + 2% = 20%

Period of claim = 4 months.

Turnover lostStandard turnover = 40,000,000 X 110% = 44,000,000

Less: Current turnover (Actual ) (16,000,000) Turnover lost 28,000,000

Gross claim = % G. P. margin X Turnover lost = 20% X 28,000,000 = 5,600,000

Net claimGross Claim - 5,600,000Add: Increased cost of working - 1,600,000



Less: Saving in expenses - 600,000 Total claim - 6,600,000

Increased cost of working

Actual = 3,000,000II. N.P. + Insured Change x Actual expense

N.P. + Insured change + uninsured

Adjusted N. P. 4,800,000

2% Turnover 1,600,000 N. P. 6,400,000

6,400,000 + 9,600,000 x 3,000,000 = 2,727,2736,400,000 + 9,600,000 + 1,600,000

G.P Margin x Turnover saved20% x 8,000,000 = 1,600,000

CONSIDER APPLICATION OF AVERAGE CLAUSEInsured amount = 16,000,000% G.P Margin x turnover (last 12 months before date of fire)turnover-last 12 months=40,000,000 + 28,000,000 + 20,000,000 = 88,000,000agreement = 110% x 88,000,000 = 96,800,000

% G.P. Margin x turnover20% x 96,800,000 = 19,360,000amount insured = 16,000,000apply average clausecompensation = 16,000,000 x 6,600,000 = 5,454,545.46

19,360,000

Muungao Insurance CO. ltdBalance sheet

Fixed assetsFurniture and fittings (1,023,000-102,300) 920,700InvestmentsGovernment – treasury bills 5,295,500

Loan stock 760,000E.C Development board 1,467,500Equity investment 650,000

9,093,700

Current AssetsDebtors 96,500Cash at bank 71,000


Cash in hand {257+-(120+44)} 93,000Claims receivable (45+20) –N3 65,000Commission ceded (6+2.2) –N4 8,200Premium outstanding c/d (352+298) 650,000 983,700

10,077,400Capital & liabilitiesOrdinary share capital 7,000,000Contingency reserves 100,000General reserves 639,000Net profit 37,080Underwriting provisionReserve for unexpired risk (78,700+413,520) 492,220Additional reserves (282,600+412,000) 694,600Outstanding claims (10+25+8+20) 63,000Other liabilitiesCreditors 871,000Taxation 114,500Sundry expenses 60,000Commission expected (outstanding) 6,000

10,077,400

QUESTION FIVEThe Controller and Auditor General is an officer of parliament (not a civil servant) who has two main functions:As a controller, he acts as paymaster, controlling receipts and payments of public money through various accounts.As External Auditor, he audits the various departmental accounts reporting on the appropriation account, etc to the parliament, which refers them to the Public Accounts Committee. This is a select committee whose duty is to consider the report and issues arising from it.

The Controller and Auditor General is appointed by the President and reports to parliament.He functions independently of executive council.He controls issues of funds from exchequer that is funds voted for use by parliament and intended for by spending units to be withdrawn from the exchequer, must be sanctioned for by the controller who satisfies himself that there are adequate funds and that they will be used for the purpose intended by parliament.He carries out both statutory and non statutory audit.The more serious audit queries known reference sheets are compiled in an audit report which is presented to parliament for reviewing the government’s financial management.The institution of the office of the Controller and Auditor-General plays a very effective role in the management of public funds.The Controller and Auditor-General plays the role of a watchdog and the fact that he reports to parliament ensures that spending units are not lax in handling public funds.His independence in performance of his duties ensures that he is not subjected to undue influence by the executive. He carries out his duties without fear or



favour, he expresses his opinion, qualifies his report and on the whole the powers conferred upon him by the exchequer and Audit Act, ensures the accountability of the executive to the legislature. Without any doubt, the role of the Controller and Auditor-General is very essential in ensuring proper financial management.Although the role may be that of making of the report to parliament, his officers carry out continuous audit inspection on the records of accounting units of the government, this minimizes incidents of fraud, theft and other misappropriations.Sinking funds are also entities set up by legislative action with the purpose of eventual liquidation or extinction of public debt. This requires annual appropriations into the fund thus building up the fund as maturation of the debt approaches, until the principal sum is repaid. There is necessity of investing the appropriations on a special account as the Sinking Fund is built up. Debt requiring such fund is known as funded debt. There is less use of these funds these days as they entail tying down funds which would have been used elsewhere.Provision has also been made for separate treatment of monies received by the government in a trustee capacity. These are known as trust funds from which withdrawals are made in accordance with specific statutory provisions. Funds may also be established by law from the proceeds of earmarked taxes, with provisions for using such receipts to attain specified programme objectives – either with or without prior grant of authority from the legislature. Additionally, in some cases a contingency fund may be created to enable advances to be made for meeting necessary and unforeseen expenditures, subject to subsequent authorization by the legislature. Funds are also established by legislative action which grants authority to spend for specified purposes and objectives. Such funds are legal entities. Like the National Social Security Fund and the National Hospital Insurance Fund, they have their own resources which include property, receivables, investments and other accountable assets. Any liabilities are set off against the assets to determine the network of the fund. Such a fund therefore is an independent accounting entity. An example of a trust fund is the Widows and Children’s Pension Fund to which all married civil servants must contribute a certain amount of their monthly salaries and on retirement or leaving the service, refunds are made.Revolving funds are also entities set up by legislative action to provide agencies with resources for the attainment of specified objectives. Government enterprises are usually set up in this manner. The initial appropriation is made out of the consolidated fund. The receipts generated in such funds are automatically used by the agency in accordance with the law that set up the fund. Annual legislative appropriations are not therefore required for the operation of such funds. However, the original financing required to the financing of a programme increase or an incurred deficit would be appropriated out of the central funds of the government. Similarly, any surplus that may result from the operations carried out under such authority should be deposited in the central fund as receipts of the government.


MAY 2002

QUESTION ONEa)Closing stocks i.e. animal still growingApportionment of costs i.e. the ratioDrawings and consumptionIncomplete recordsLabour given by own family

(b) (i) ADK Farm Ltd.Livestock AccountFor year ended 31 December 2001

Sh.’000’ Sh.’000’ Sh.’000’SalesLivestock Opening stock Purchases

Closing stock

Feeding materials Opening stock Purchases

Closing stock

Livestock expenses

Gross profitManager’s salaryStaff mealsDepreciation – tools

NET PROFIT (to P & L a/c)

280670950240

105120225130

710

95250

72610

1,500

1,055445

88357

(ii) ADK Farm LtdCrop AccountFor year ended 31 December 2001

Sh.’000’ Sh.’000’ Sh.’000’SalesOpening stockPurchases

Closing stockCrop expensesFarm labour

180 -180 20 160

210110

1,050

370



Gross profitManager’s salaryFarm house expensesStaff mealsRepairs to machineryInterest on loanDepreciation expensesNet profit (to P & L A/c)

482543040120

680

212468

ADK Farm LtdProfit and Loss Account

For year ended 31 December 2001

Livestock profitCrop profit

Office expensesNET PROFIT

357468660280380

(iii) ADK Farm LtdBalance SheetAs at 31 December 2002

ASSETS Sh.’000’ Sh.’000’Non current assetsLand and buildingsFarm machineryTools and implements

Current assetsStocks (240 + 130 + 20)Sundry debtorsCash in hand

EQUITY AND LIABILITIESCapital and reservesOrdinary share capitalShare premiumRetained profits (500 + 380)

Non-current liabilitiesLoan

Current LiabilitiesBank overdraftSundry creditorsManagers personal account

4,5001,650 100

390580320

5,000400 880

120300 40

6,250

1,2907,540

6,280

800

4607,540


QUESTION TWO(a) (i) The percentage of completion method recognises revenues, costs and gross

profit as progress is made towards completion on long term contract.

Gross profit realised in any period is based on the work i.e. costs incurred on the contract in that period.

If at the end of any period when the contract is still in progress it is estimated that it would end up in a loss, then that whole loss is reported in that year. The actual loss reported in the period is the estimated loss adjusted with (added) total gross profit reported on the contract in the previous years.

(ii) Completed contract method revenue and gross profit on the contract are recognised only in the year the contract is completed.

Any anticipated loss on the contract is however reported in the year it is estimated that the contract would end up in a loss.

(i) Determination of the profit or loss on the contract at the end of each year:

Completed contract method

1999Sh.’000’

2000Sh.’000’

2001Sh.’000’

(i)(ii)(iii)(iv)

(v)

(vi)

Contract priceTotal costs incurred to dateEstimated costs to completeEstimated total cost of the contract (ii + iii)Estimated total profit on the contract (iv)Gross profit or loss to be reported in the year

850,000300,000300,000

600,000

250,000

-

850,000630,000270,000

900,000

(50,000)

(50,000)

850,000750,000-

750,000

100,000

150,000

(ii) Percentage of completion retained

1999Sh.

2000Sh.

2001Sh.

Contract priceCost incurredEstimated costs to completeTotal estimated costGP for the year

850,000(300,000)(300,000)

850,000(630,000)(270,000)

850,000(750,000) - 750,000 100,000



600,000 250,000

900,000 (50,000)

G.P Recognised

1999 = = 125,000

2001 Actual G.P 100,000Less: G.P recognised to date

(125,000 + (175,000) -(50,000) 150,000

In 1999, no gross profit is reported as it is estimated that the contract would end up in profit.In 2000, a loss of Sh.50,000,000 is reported in the profit and loss account.

In 2001, gross profit of Sh.150,000,000 (Sh.100,000,000 – 50,000,000) is reported in the profit and loss account.

(b) Profit and Loss account


1999Sh.’000’

2000Sh.’000’

2001Sh.’000’

Realised gross profit/lossLess: General administrative expensesNet profit/(loss)

-15,000(15,000)

(50,000)20,000(70,000)

150,000 18,000132,000

Percentage of completion method

1999Sh.’000’

2000Sh.’000’

2001Sh.’000’

Realised gross profit/lossLess: General administrative expensesNet profit/(loss)

125,000 15,000(110,000)

(175,000) 20,000(195,000)

150,000 18,000132,000

Calculation of balance sheet extract:



1999Sh.’000’

2000Sh.’000’

2001Sh.’000’

Work in progressTotal costs incurred to dateAdd: Total realised gross profit to date

Less: Total billing to date

Debtors balanceTotal billings to dateLess: Cash collection to date

300,000 -300,000270,00030,000

270,000240,00030,000

630,000 (50,000)580,000750,000(170,000)

750,000600,000150,000

750,000100,000850,000850,000 -

850,000800,00050,000

(c) Balance sheet extracts

1999Sh.’000’

2000Sh.’000’

2001Sh.’000’

Current assetsWork in progressDebtors

Current LiabilitiesExcess of billings over work in progress

300,000 30,000330,000

-150,000150,000

170,000170,000

-50,00050,000



Percentage of completion method

1999Sh.’000’

2000Sh.’000’

2001Sh.’000’

Work in progressTotal costs incurred to dateAdd: Total realised gross profit to date

Less: Total billing to date

300,000125,000425,000270,000155,000

630,000(50,000)580,000 750,000(170,000)

750,000100,000850,000850,000 -

Debtors balance

Debtors balance calculated as under completed contract method and balances at the end of the three years are the same under both methods.

1999Sh.’000’

2000Sh.’000’

2001Sh.’000’

Balance sheet extractsWork in progressDebtors

Current liabilityExcess of billings over work in progress

155,000 30,000185,000

-150,000150,000

170,000170,000

-50,00050,000

QUESTION THREE(a) Royalty Expense (Payable) A/c

Sh. Sh.1997Dec 31

1998Dec 31

1999Dec 31

2000Dec 31

2001Dec

Quick Com Ltd.

Quick Com Ltd.

Quick Com Ltd.

Quick Com Ltd.

Quick Com

80,000

130,000

180,000

200,000

350,00

Dec 31

Dec 31

Dec 31

Dec 31

Dec 31

Factory O/head

FAO A/c

FOH a/c

FOH a/c

FOH a/c

80,000

130,000

180,000

200,000

350,000


31 Ltd. 0



(b) Quick Com Ltd. A/cShs. Shs.

Dec 31 Bal c/d 250,000

-250,000

1997 Dec 31Royalty expensesRoyalty incomeShort workings recoverable

1998

180,000 25,000145,000250,000

March 15

Dec 31

Bank a/c

Bal c/d

250,000

250,000

-500,000

Jan 1 Bal b/dDec 31Royalty expensesRoyalty incomeS.W recoverable

250,000

130,000 60,000 60,000500,000

March 15

Dec 31

Bank a/c

Short working recoverableBal c/d

250,000

55,000250,000555,000

1999Jan 1 Bal b/dDec 31Royalty expenseDec 31Royalty income

250,000

180,000

125,000 -555,000

March 15

Dec 31

Bank a/c

SW recoverableBal c/d

250,000

60,000350,000660,000

2000Jan 1 Bal b/dDec 31Royalty expenseRoyalty inc.

250,000

200,000210,000660,000

March 15

Dec 31

Bank a/c

Bal c/d

350,000

450,000800,00

2001Jan 1 Bal b/dDec 31Royalty exp.Royalty Inc.

350,000

250,000200,000800,000


02002Jan 1 Bal b/d 450,000

(c) Short workings recoverable

Shs. Shs.1997Dec 31

1998Jan 1

1999Dec 31

2000Jan 1

Quick Com Ltd.

Bal b/dQuick Com Ltd.

Bal b/d

Bal b/d

145,000

145,000 60,000205,000

205,000

60,000

Dec 31

Dec 31

Dec 31

Dec 31

Bal c/d

Bal c/d

Quick com. Ltd P & L A/cBal c/d

Quick Com Ltd

145,000

205,000205,000

55,000 90,000 60,000205,000

60,000

(d) Royalty Income (Recoverable) a/c

Sh. 1997 Sh.Dec 31

Quick Com LtdProfit to P & L a/cBal c/d

25,000 8,00015,00048,000

Dec 31

Hand phones ltd

48,000

-48,000

1998Dec 31


25,00011,00010,00081,000

Jan 1Dec 31

Bal b/dHand phones

15,00066,000 -81,000

1999Dec 31


125,000 30,000 35,000190,000

Jan 1Dec 31

Bal b/dHand phones

10,000180,000 -190,000

2000Quick Com LtdProfit to P & L a/cBal c/d

210,000 39,000 20,000269,000

Jan 1Dec 31

Bal b/dHand phones

35,000234,000 -269,000



2001Dec 31


200,000 42,000 30,000272,000

Jan 1Dec 31

Bal b/dHand phones

20,000252,000______272,000

2002Jan 1 Bal b/d 30,000

WorkingsAmount transferred to Quick Com Ltd is determined by multiplying units sold by Hand phone Ltd in the year by Sh.50.Amount to profit and loss account is determined by multiplying units produced by Hand phone Ltd in the year by Sh.10.Balance carried down is determined by multiplying closing stock of Hand phone Ltd. by Sh.50.

(e) Hand phones Ltd. A/c

Sh. 1997 Sh.Dec 31

Royalty incomeShort workings allowable

48,000

102,000150,000

Dec 31

Bank a/c 150,000

-150,000

1998Dec 31

Royalty incomeS.W Allowable

66,000 84,000150,000

Dec 31

Bank a/c 150,000 -150,000

1999

Dec 31

Royalty Inc. 180,000180,000

Dec 31

SW allowableBank a/c

30,000150,000180,000

2000Dec 31

Royalty inc. 234,000 -234,000

Dec 31

SW AllowableBank

84,000150,000234,000

2001Dec 31

Royalty inc 252,000 Dec 31

Bank a/c 252,000

(f) Short workings allowable a/c

Sh. 1997 Sh.Dec 31

Bal c/d 102,000

Dec 31 Hand phones 102,000

1998Dec 31

Bal c/d 186,000

Jan 1Dec 31

Bal b/dHand phones

102,000 84,000


______186,000

186,000

1999Dec 31

Hand phones LtdBal c/d

30,000156,000186,000

Jan 1 Bal b/d 186,000 -186,000

2000Dec 31

Handphones LtdP & L A/c

84,000 72,000156,000

Jan 1 Bal b/d 156,000______156,000

QUESTION FOUR(a) Objective of the standard (IAS 7)

Information about the cash flows of an enterprise is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation.

The objective of this standard is to require the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period under review into operating, investing and financing activities.

Scope of IAS 7

An enterprise should prepare a cash flow statement in accordance with the requirements of this standard and should present it as part of its financial statements for each period for which financial statements are prepared.

Users of financial statements from companies are interested in how the company generates and uses its cash and cash equivalents. This is always the case regardless of the nature of the enterprise’s activities and irrespective of whether cash can be viewed as the product of the enterprise, as may be the case with a financial institution. Enterprises need cash for essentially the same reasons however different their principal revenue producing activities might be. They need cash to conduct their operation, pay their obligations and provide returns to their investors. Accordingly this standard requires all enterprises to present cash flow statements whenever financial statements are prepared. In other words, cash flow statements should be part and parcel of



the financial statements without which the financial statements would be incomplete.

(b) WEWE LTDCASH FLOW STATEMENT

FOR YEAR ENDED 31 MARCH 2002SH.’000’ SH.’000’

Cash from operating activitiesNet profit before tax and extraordinary itemsAdjustments for: Depreciation Goodwill written off Gain on sale of plant Gain on sale of investmentOperating profit before working capital changes Interest in stock Decrease in accounts payable Increase in accounts payable Increase in investmentsCash generated from operationsTax paidNet cash from operating activitiesCash from investing activities Sale of plant Sale of investments Acquisition of land and building Goodwill purchased Acquisition of plant and machinery Cash used in investing activitiesCash from financing activities Issue of share at a premium Debenture redemption Dividends paidCash from financing activitiesIncrease in cash/cash equivalents during yearCash/cash equivalents as at 1.4.2001Cash/cash equivalents as at 31.3.2002

1,150 420 (720) (160)

(1,350) 1,660 600 (870)

1,470 310 (300) (320)(1,410)

3,750(1,500) (530)

2,400

690 3,090

40 3,130 (680) 2,450

(250)

1,720 3,920(6,110)

(2,190)

3,920

Cash/cash equivalents as at 1.4.2001Sh.’000’

InvestmentsCash at handBank overdraft

840 430(6,540)(5,270)


Cash/cash equivalents as at 31.3.2002Sh.’000’

InvestmentsCash at hand and bankBank overdraft

1,710 200(2,390) (480)

Plant/machinerySh.’000’

Sh.’000’

Bal b/dBank

6,3501,410____

DisposalDepreciationBal c/d

7501,1505,860

7,760 7,760

GoodwillSh.’000’

Sh.’000’

Bal Bank

2,900 320

P & LBal c/d

4202,800

3,220 3,220

QUESTION FIVE(a) (i) Budgetary accounting:Preparation of operating accounts in the format of the budgets.Most public sector organisations use this techniqueMain purpose is to emphasise the budgets role in the cycle of planning control and accountability.

(ii) Cash accountingSystem that recognises only cash inflows and cash outflowsThe resulting final accounts are just summarised cashbooks.Sales and purchases are only recognised when cash is received or paid.The system does not include accruals of any kind and is followed in many public sector and non-profit organisations e.g. charitable organisations.

(iii) Commitment accountingRecognises transactions when the organisation is committed to them.Transactions are not recognised when cash is paid or received, nor when an invoice is received or issued but at an earlier stage when orders are issued or received.Under this system, the organisation is recognising the issue of an order as a commitment to incur the expense and the accounts continuously record commitment.Main purpose of this system is budgetary control rather than financial reporting.

(iv) Fund accountingInvolves the recording of financial transactions and adjustments in quasi-independent book-keeping systems referred to as funds.



Each fund is a self balancing set of accounts that is used to record data generating by an identifiable government operations and necessity of assuming legal compliance. e.g. government funds – school, debt service.

(b) Case for accrual method:Accrual method of accounting measures all the income earned for a particular period regardless of the cash receipt.

This gives the true total income earned. The method ensures that all costs are considered for the period to which they relate regardless of cash payment.

The method measures and matches the revenue with the related cost/expenditure to the period to which they relate.

Case against the method

The method can be misleading on the income reported when the funds/cash are yet to be collected. The measure of the profit or revenue will not match the cash receipt.

The method is not suitable in government accounting since the government uses a budget period where expenditure and income are allocated.

Accrual method is not applicable in accounting for government since the expenditure incurred and not paid for the revenue earned and not received are considered as expenditure and revenue respectively for the next budget.


DECEMBER 2002

QUESTION ONE(I) OFFICE ACCOUNTThis is an account opened by a professional practitioner separate form those of the client to serve as bank account which would deal with operation of the office only e.g. Fee received or charged and expenses paid for the office.

CLIENT ACCOUNTIt is separate account through which all transactions concerning the clients are recorded. No office dealings are charged in this account except where disbursement of the professionals being charged or fees being charged to client. It may contain amount of money held on the client behalf.

COST CHARGED TO CLIENTSThese are amounts, which are owed to the professionals by their clients charged to their accounts. They are disbursements fees charged or other expenses incurred on client behalf and charged to them. They reduce the amounts of money that the professional is holding on behalf of clients.

WORK-IN-PROGRESSThis means work that remain uncompleted at the year end e.g. a lawyer may be handling some cases at the end of the year where the judgment has not been heard. It must be accounted for in the profit and loss account.

Kamau and Nyambati AdvocatesProfit and loss A/CFor the year ended 31.10.2002DebtsDisbursement on behalf of clientsSalariesRent and ratesPrinting and stationeryPostage and telephoneSundry expenses

Depreciation20% x 45,000

Profit c/d

Opening work in progressProfit c/d for the year

5,50012,00072,00060,00035,00018,2008,500

9,000

298,000250,00036,80016,50053,300

Cost charged to clients (fees)

Profit b/dClosing work in progress

250,000

250,000 29,800 23,500 53,300



Kamau and Nyamati Advocates Balance sheet as at 31.10.2002

CapitalProfitLess drawings

Current liabilitiescreditor

204,000 16,500

27,20024,800

220,50060,000160,000

52,000

_____212,500

Fixed assetsFurniture fittings

Current assetsDebtor less B. debtsCash at bank: client A/C :officework in progress

Cost45,000

Dep.9,000

72,50024,80055,70023,500

NBV36,000

176,500_____212,500

Note: all adjustments concerning the office account and client account have already been affected.

QUESTION TWO a)BONUS IN REDUCTION OF PREMIUMSIt is a bonus given by life insurance company in which has an effect of reducing the future premiums payable. It is not given in cash form.

SURRENDER VALUEMoney paid back to the insured party if he decides to cancel the insurance agreement before the specified period.

CONSIDERATION FOR ANNUTIES GRANTED.It is an income to the insurance company for insurance compensation paid to the insured party in form of annuities and not lump sums.

COMMISSION REINSURANCE CEDEDIt is a commission received from another insurance company for acting as agent and generating business on behalf of it. It is an income.

QUESTION THREE (B) REVENUE A/C


Claims wk 1

Commission: direct : reinsurancetax paidsalariesrent & ratespostage & stationerylegal expensesfund balance c/dadditional reserve c/d

uuu

2,520,000

220,00019,000446,000220,00029,00043,00072,0005,721,000 246,5259,280,000

Premium wk iiFund balance b/fComm on insurance cededInterest, dividend + rentAdditional fund 1.12.2001

4,930,5003,845,00026,000137,500445,000

_______9,280,000

WK I Claims A/C

WK II

Premiums A/c Receivable: direct business B/f: reinsurance Revenue A/cBank: reinsurancePayable b/d

248,00027,0004,930,500460,00062,000

_______5,727,500

Payable b/f

Received (bank a/c): direct Reinsurance

Receivable c/d: direct bus :reinsurance

37,500

4,600,000 720,000

336,000______5,720,500

Additional = 5% 4930500Funds (30.Nov.2002) = 246,525

QUESTION FOURUnder hire purchase system, the buyer agrees to pay for commodity in instalments on signing the agreement, the buyer can take possession of the commodity and use it. But the ownership of the assets rests with the seller


Bank: direct bus 2,350,000Reinsurance 300,000

Receivable 16,000

Payables: c/d :direct bus 208,000

Reinsurance 44,000 ______

2,918,000

Payables b/f direct business 166,000 Reinsurance 39,000Received: reinsurance 170,000

Revenue A/c 2,520,000

Receivable 23,000

_______2,918,000


until the final payment instalment is made. In lease agreement, the supplier of good retains the title himself, the customers merely paying a hire charge or rental for as long as he posses goods leases can bei) OperatingFinance

Pesa LTD Trading profit and loss Account for the year ended 30.6.2002

Opening stockPurchasesProvision for Profit (wk 1)Gross profit

Mis expensesSalariesOffice expensesdepreciation

-12,720,000

1,137,714.23,798,285.817,656,000849,0001,690,0001,460,000 38,0004,037,000

Sales

Closing stock wk ii

Gross profitLease rentals wk iv

Net loss

15,096,000

2,560,00017,656,000

3,798,285.8121,600 124,8624,037,000

Balance sheetAuthorized issuedShare capital

Net loss

Current liabilitiescreditors

3,000,000

(117,114.2)

2,876,400

________5,759,285.8

Leased photocopyMachines60 x 16,000less depreciationweek IIIcurrent assetsbankhire purchasedebtorsless provision wk Iclosing stock

960,000 38,000

2,203,000

2,172,0001,137,714.22,560,000

922,000

4,829,538________5,759,285.8

Workings 1Hire purchase: price = 4800 + (24 x 1200) = 4800 + 28800 = 33,600


Cash price 16000 x 150 = 24,000 100

hire purchase interest = 33,600 – 24,000 = 9600

deposit instalment totalstotal amount rec : feb: 20 x4800=9600 1200x5=6000x20 120,000

25 x 4800=120000 1200x4=4800x25 120,00030x4800=144000 1200x3=3600x30 108,00030x4800=144000 1200x2=2400x30 72,00032x4800=153600 1200x1=1200x32 38,400 657,600 458,400

provision for unrealized profits:

outstanding installments x gross profit (selling price – cost of goods sold) H.P selling price

Instalments:20x1200x19=45600025x1200x20=60000030x1200x21=75600030x1200x22=79200032x1200x23=883200

3,487,700

HP Selling price = 137x33600= 4,603,200Cost of goods sold = 137 x 1600 = 2,192,000 Gross profit: (H.P) 2,411,200

2,172,000 X 2,411,200 = 1,137,714.2 4,603,200

Purchases in units sale:12,720,000 795-137=658 units 16,000795unitsclosing stock:Sales 15,096,000 units = 10,492,800 Less HP 4,603,200 24,000 = 437.2 unitsCash 10,492,800 =438

Unsold: 795-(137+438) = 220 - (less 60) = 160

160 units x 16,000 = 2,560,000 (WKII)

depreciation = cost – salvage = 16000 – 1000life(yrs) 5

=3000 p.a.



on profits:3,000 12 units =250

all leases items – dep.250x6x5= 7,500250x10x4=10,000250x12x3= 9,000250x14x2= 7,000250x18x1= 4,500 wk III 38,000

Lease rental receivable6x800x5= 24,00010x800x4=32,00012x800x3=28,00014x800x2=22,40018x800x1=14,400 wk IV =121,600

QUESTION FOUR A (I)ConsignmentGoods sent on consignmentBank A/c packaging costs Freight InsuranceConsignee A/C carriage in Off loading expenses Carriage out costs Head lamps costs Storage costs Advertisement costs Commission P&L(profit)

2,000,00080,000100,00040,00018,00012,00030,00050,00018,00020,000142,000520,000

3,030,000

Consignee A/C – salesConsignee A/c-sales

Bal. c/d wk I

1,800,0001,040,000

190,000

3,030,000

A (ii) Trading A/c for 3 months ended 31.10.2002

Goods sent Consignment

Gross profit c/d

ExpensesPackingFreightInsurance

2,000,000

1,030,0003,030,000

80,000100,00040,00018,000

Sales

Closing stock wk I

Gross profit b/f

2,840,000

190,0003,030,000

1,030,000


Carriage inOff-loadingCarriage outHead lampsStorage costsAdvertisementCommission

Net profit

12,00030,00050,00018,00020,000142,000

520,0001,030,000

1,030,000

Working: 1Closing stock = 500-300-160=40

Total costsPacking cost 80,000 total costs = (500x4000) + 250,000 = 2,250,000Freight 100,000 I unit = 2,250,000 = 4,500Insurance 40,000 500Carriage in 18,000 40 x (4,500+(50,000)Off loading 12,000 200

250,000 40 x 4750 = 190,000

(b) Mwalu Traders Ltd A/c

Bank A/cCarriage inOff loading expensesCarriage outHead lampsStorage costsAdvertisement costCommissionAdvance paymentBal c/d

18,00012,00030,00050,00018,00020,000142,0002,150,000400,0002,840,000

Bank A/c- sales sales

1,800,0001,040,000

2,840,000

QUESTION FIVEA (i) EXCHEQUER ACCOUNTIt records the amount authorized from the consolidated funds regarding a specific vote and amounts withdrawn from this account by the paymaster general. It is contra to the general account of vote. It is an asset A/c



(ii) GENERAL ACCOUNT OF VOTEIt records the amounts allocated by the treasury to the particular ministry, department or a government unit. It is similar to the capital account of a private sector.

(iii) PAYMASTER GENERALIt records the withdrawals and expenditure incurred by the government unit. It also records other incomes received e.g. A.I.A

(iv) APPROPRIATIONS IN AIDAre particular revenues collected by a ministry or a government unit which the treasury authorizes an accounting office to use in addition to the amount appropriated from the consolidated funds. It is scheduled in the annual appropriation Act.

b) G.A.V a/c

Expenditure A/cExcess A.I.A

Bal. c/d

23,091,360 547,200

6,952,32030,590,880

Exchequer A/CA.I.A

29,923,680667,200

30,590,880

Exchequer a/c G.A.V A/C 29,932,68

90

29,923,680

P.M.GBal. c/d

2,400,0005,923,680

29,923,680

P.M.G a/cExchequer A/C

A.I.A

24,000,000

__667,00024,667,000

Expenditure A/CBal. c/d

23,071,360

_1,575,84024,667,200


statements of assets and liabilities as at 30.6.2002LiabilitiesGeneral A/c of voteExcess A.I.A A/C

6,952,320_547,2007,499,520

AssetsExchequer A/CPaymaster general A/C

5,923,6801,575,8407,499,520



JUNE 2003

QUESTION ONERevenue Account

Net claim paidClaims outstanding c/dClaims outstanding b/dIncidental costNet claimsLess: ExpensesManagement Net commission ceded paidProfitUnearned premium c/d

FIRE27,89245,000(36,018)-36,874

25,8421,7335,38520,00089,834

MOTOR55,78179,000(72,037)-62,744

51,7123,46911,80350,000179,729

COMBINED83,673124,000(198,055)-99,618

77,5545,20217,18870,000269,562

Unearned premium b/dNet premium

FIRE

36,01853,816

____89,834

MOTOR

72,037107,691

_____179,728

COMBINED

108,055161,507

_____269,562

Profit and loss Account

“Shs. ‘000”Revenue 17,188Investment 36,000Other incomes 8,782

61,970Less ExpensesManagement Expenses 10,000Bad debts 2,500 (12,500)

49,470Add: retained profit b/d 15,000 Retained profit c/d 64,470

Balance Sheet‘Shs 000”

Fixed Assets:- motor vehicle 500Equipments 7,207

Investments - treasury bills 99,550 - treasury bonds 5,693

Current assets – deposit in bank 237,050Amount due from other insurances 3,470 240,520


353,470Capital and liabilitiesShare capital 60,000Revaluation reserves 25,000Retained earning 64,470

149,470Underwriting provisionUnearned premium c/d (20+50) 70,000Outstanding claims c/d (45+79) 124,000

Other liabilitiesBank overdrafts 8,000amount due to other insurances 2,000

353,470

QUESTION TWOb) Retained ContainersBalance b/d 8,000Sent to customers 72,000

80,000Less returned 68,000 returnable 10,000

2,000

Containers in storeBal b/d -store 2,000

-customer 8,000Purchased (6,000-200) 5,800

15,800Scrapped (250)Returned (2000)Returnable (10,000)

3,550

Abnormal loss = 3,550 – 3,500 = 50

Suspense A/Cqty Conti

neramt qty Price/

unitamount

ReturnedRetainedHire profitBalance c/d

68,0002,000-10,00080,000

520520

520

35,360,0001,040,0005,760,0005,200,00047,360,

Balance b/dsent

8,00072,000_____80,000

520600

4,160,00043,320,000________47,360,000



000

Stock AccountQty Pric

e/unit

Amt Qty Price/unit

Amt

Bal b/d store customerPurchasesRepairs (68,000x10)Profit

200080005800

____15,800

400400500

800,0003,200,0002,900,0002,720,0002,625,000________12,245,000

ScrappedReturnedLossHire chargesBal c/d storecustomer

250200050

35001000015,800

180520-

400400

45,00010,040,000-5,760,0001,400,0004,000,00012,245,000

Computation to determine profit or lossProfit on hire 72,000 x (600-520) 5,760,000Profit on retained 2000 x (520-400) 240,000Loss on scrapped 250 x (400-180) (55,000)Loss on cost 50 x (400-0) (20,000)Repairs 2,720,000Depreciation 5800 x (500 – 400) (580,000)

21,625,000

QUESTION THREEHassan Books Joint venture with Kamau A/C

3.1.2003 Bank A/C (purchases5.3.2003 Bank A/C (purchases)20.3.2003 Commission income A/CShare of profit20.3.2003 Bank A/c (cash from Kamau)

480,000120,00017,600155,200403,250_______1,176,000

3.1.2003 bank A/c Cash from Kamau 3.2.2003 Bank (sales)20.3.2003 Bank (sales)20.3.2003 Stock A/c (stock to Kamau)20.3.2003 Stock to Kamau20.3.2003 Bill to Kamau

350,000171,000291,000275,0009,000__80,0001,176,000

Kamau’s Books


Joint Venture with Hassan A/C3.1.2003 Bank A/C (Cash to House)9.1 2003 Bank A/C (Discharges)5.3.2003 Bank (purchases)3.1.2003 stock A/C (stock)3.1.2003 share of profit

350,0002,00080,000284,000155,200871,200

9.1.2003 bank A/c (sales)3.2.2003 bank (sales)20.3.2003 bank (sales)20.3.2003 bal. C/d (closing stock)20.3.2003 bank A/C (Cash from Hassan)

67,00011,000340,00050,000403,2000871,200

b) Memorandum Joint Venture A/C

PurchasesDiscounting chargesCommission to HassanShare of profit: Hassan :Kamau

600,0002,00017,600155,200135,200930,000

SalesClosing stock

880,00050,000

_____930,000

QUESTION FOURa)Importance of preparing cash flow statementsIt gives information on the major sources of cash to an enterprise.It assists in control procedures i.e. it will disclose major cash expenditure items to an enterprise.Its relevant during comparison of performance over 2 financial periods.It assists investors by improving their understanding and financial statements.A firm’s debt repayment ability is most clearly reflected by a cash flow statement.

b) Bongo LTDCash flow statement for the year ended 31.03.2003

Reported net profit before taxAdjustmentsDepreciation on motor vehiclesProfit on disposal of motor vehiclesInterest expense

“000”

4,000(3,000)8,000

“000”15,000



Depreciation on furniture and fittingsDepreciation on buildings

Working capital changesIncrease in stocksDecrease in debtorsPrepayments decreasedIncrease in trade creditorsCash generated from operating activitiesTax paid

Return on investment & servicing of financeInterest payable paidDividends paidCash generated from return on investment & servicing of financeInvesting activitiesPurchases of motor vehiclesPurchase of landProceeds of disposed motor vehiclesCash generated from investing activitiesFinancing activitiesIssue of debenturesRepayment of loanIssue of sharesCash generated from financing activitiesCash and cash equivalent as at 1.04.2002Cash and cash equivalent as at 31.03.2003

3,00010,000

(8,000)2,0002,0008,000

(5,000)(6,000)

(23,000)(40,000)11,000

10,000(4,000)15,000

22,00037,000

4,00041,000(6,000)

(11,000)24,000

(52,000)(28,000)

21,000(7,000)3,000(4,000)

Workings

Land & building A/C

Bal b/fRevaluationAdditions

55,00010,00040,000105,000

DepreciationBal c/d

10,00095,000______105,000

Motor vehiclesBal b/fAddition

35,00023,000____58,000

DisposalDepreciationBal c/c

8,0004,00046,00058,000

Revaluation A/C


Shares 20,000Bal c/d

20,00015,00035,000

Bal b/fLand A/C

25,00010,00035,000

Interest A/CCashBal c/d

5,0009,00014,000

Bal b/fP & L

6,0008,00014,000

Corporation taxCashBal c/d

6,0006,00012,000

Bal b/fP & L

5,0007,00012,000

Dividends CashBal C/d

6,0003,0009,000

Bal b/fP & L

4,0005,0009,000

Share A/C

Bal C/d

80,00080,000

Bal b/fBonusAppl & Allot.

50,00020,00010,00080,000

QUESTION FIVERoles of accountant

Determination of assets and liabilities – to determine financial position of a business.Maintaining records or books for reference & preparation of final accounts e.g. income & expenditure.Reconciliation of various accountsPlanning and budgetingFor auditing purposes.



Appropriation Account

Expenditure needs Estimate Actual Over Under

Personal emolumentSupplementaryHouse allowancePassage & leaveTravelling expenses-(44000) Supplementary (4,000)Electricity + waterPlant + equipment

A/A

Exchequer

160,00016,00030,00010,000

40,00012,000100,000368,00030,000338,000-338,000

180,00026,0009,000

46,00013,00080,000354,00024,000330,0008,000338,000

4,000

6,0001,000

11,000

4,0001,000

20,00025,000

176,000


DECEMBER 2003

QUESTION ONE(a) Moses Kiprono Farm Trading Accounts

For year ended 31st March 2003Crop(Ksh.)

Poultry(Ksh.)

Dairy(Ksh.)

Total(KSh.)

SalesWages in kindDrawings

COST OF SALESOpening stocksAdd: Purchases

Less: Closing stocks

Gross Profit

EXPENSESWages in cashWages in kindGeneral expensesTotal ExpensesProfit to P & L A/c

2,740,00060,000 20,0002,820,000

660,000320,000980,000550,000430,0002,390,000

720,00060,000 280,0001,060,0001,330,000

2,360,000120,000 50,0002,530,000

280,000570,000850,000210,000640,0001,870,000

600,000120,000 450,0001,170,000720,000

3,710,000170,000 80,0003,960,000

700,0001,960,0002,660,000 630,0002,030,0001,830,000

960,000170,000 240,0001,370,000560,000

8,810,000350,000 150,0009,310,000

1,640,0002,850,0004,490,0001,390,0003,100,0006,210,000

2,280,000350,000 970,0003,600,0002,610,000

(b) General Profit and Loss Account

Profit transferred from: Crop account Poultry account Dairy account

Expenses:Office expensesRepairs of machinery

825,000250,000

1,330,000 720,000 560,0002,610,000



Farm house expensesDepreciation – FurnitureDepreciation – equipmentNet profit

180,000300,000250,000 1,805,000

805,000


QUESTION TWO(a) Hazina Bank Ltd.

Profit and Loss account for the year ended 30 June 2003

INCOME SH. ’000’ SH. ’000’

Interest on loans (150 + 870.8)Interest on treasury bills and bondsFees and commissionsForeign fees and commissionsForeign exchange incomeInterest on placement and bank balancesOperating incomeNon-operating income

1,020,800476,400340,400144,000 72,0002,053,600 34,000

2,087,600

EXPENDITURE

Staff costsContribution to staff provident fundDirectors emolumentsDepreciation expenseInterest on deposits from customersInterest on borrowed fundsAuditors feesLoss on sale of fixed assetsLegal feesAdministrative expenses

590,00029,00025,00084,000300,00070,0007,00043,60040,000285,000 (1,473,600)

Operating profit before provisionsProvision for bad and doubtful debtsProfit before taxIncome tax expenseProfit attributable to shareholdersReserves brought forwardLess: Interim dividends paid ProposedReserves c/f

50,00075,000

614,000(68,000)546,000(200,000)346,0001,058,000

(125,000)1,279,000



(b) Hazina Bank Ltd.Balance Sheet as at 30 June 2003

Sh.’000’Cash and bank balancesTreasury bills and bondsDeposits with other banksInterest receivableOther money market placementsLoans and advances to customersProperty, plant and equipmentOther fixed assets

1,257,0002,344,000230,000150,00034,6005,946,4001,008,000 64,00011,034,000

LIABILITIESCustomers deposits (8480 + 70)Deposits and balances due to other banksTaxationProposed dividends

Share capital 500,000Reserves 1,279,000 Shareholders funds

8,550,000430,000200,000 75,0009,255,000

1,779,00011,034,000

QUESTION THREE(a) Cost recovery method and instalment method:

Cost recovery method is a method whereby gross profit on an instalment sale is recognised after collecting enough cash from the debtors to cover the cost of sale.No profit is recognised on an instalment sale before cash equal to the cost of sale is collected.Realised gross profit is any amount collected from the debtors over and above cash collected to cover the cost of sale.

Instalment sales method is a method whereby every cash collected from a debtor covers both gross profit and cost of sales based on the gross profit percentage.Gross profit is not recognised on any uncollected debtors.

(b) (i) Bontex EnterprisesDebtors Account

2002 Sh. 2001 Sh.1 January Bal b/d 180,0

00Bank A/cRepossession a/c (30% x Sh.40,000)Unrealised GP a/c (20% x Sh.20,000)

100,00012,0004,000

Loss on repossession


_____ (80% x 20,000)-12,000Bal c/d

4,000 60,000

180,000

180,000



Bontex EnterprisesDebtors Account

2002 Sh. 2001 Sh.Sales 800,0

00Bank A/cRepossession a/c (50% x Sh.96,000)Unrealised G.P a/c (25% x Sh.72,000)

448,00048,00018,000

_____

Loss on repossession (75% x 72,000)-48,000Bal c/d

6,000280,000

800,000

800,000

Bontex EnterprisesSh. Sh.

Debtors A/cP & L A/c (20% x Sh.100,000)Bal c/d (10% x 60,000)

4,00020,00012,000

Balance b/d (20% x Sh.180,000)

36,000

_____

36,000

36,000

Unrealised Gross Profit A/c (2001)Bontex EnterprisesUnrealised Gross Profit A/c (2002)

Sh. Sh.Debtors A/cBal c/d (25% x Sh.280,000)

18,00070,000

Profit and loss a/c[25% x Sh.(800,000 – 448,000)]

88,000_____

88,000

88,000

Bontex EnterprisesRepossessions A/c

Sh. Sh.Debtors A/c 2001 2002

12,00048,000

Trading A/c 60,000_____

60,000

60,000

(iii) Bontex Enterprises Profit and Loss Account for the year ended 31 December 2002

2002 2001


Sh. Sh.SalesOpening stockPurchasesRepossessions

Closing stock

Gross profitLess: Net unrealised gross profitRealised gross profitOperating expensesDepreciationLoss on repossession

Net profit

800,000120,000560,000 60,000740,000140,000600,000200,000 68,000132,00034,50020,00010,00064,50067,500

480,000180,000324,000 -504,000120,000384,00096,000

Note: The trading account for the year 2001 is prepared to help determine gross profit for calculation of gross profit percentage.

Workings:(a) Calculation of gross profit percentage:

Year 2001=

= 20%

Year 2002=

= 25%

(b) Calculation of net unrealised profit deducted from gross profit for the year 2002:

Sh.Unrealised gross profit in debtors of 2002 c/f (25% of 280,000)Unrealised gross profit on defaulted debts of 2002 (25% of 72,000)Unrealised gross profit b/fLess: Realised gross profit on collections from debtors of 2001 (20% of 100,000)Net unrealised gross profit

70,00018,00088,000

20,00068,000

QUESTION FOUR(a) Nature and purpose of the following:



(i) Special circumstances clauseThe objective of the special circumstances clause is to provide for the trend of the business or special circumstances affecting the business either before or after the damage.

The clause helps in determining a fair claim reflecting the results which would have been attained if the damage had not occurred.

(ii) Average provision clauseAverage provision clause helps in making a claim for only the portion of the gross profit that has been insured.

If the sum insured is less than the gross profit on annual turnover then only a proportion of the total claim is made, but if the sum insured is more than the gross profit on annual turnover then the calculated loss is wholly claimed.

This is to avoid under insurance.

(b) (i) Calculation of gross profit percentageGross profit % = Net profit + insured standing charges x 100

Turnover of last financial year

=

= 18%

Increase in gross profit percentage as recommended by special circumstances clause

= 2%

Therefore, adjusted gross profit percentage:= 18% + 2%= 20%

(ii) Calculation of loss on gross profit to be claimed:

Standard turnoverRecommended increase in turnoverTherefore adjusted standard turnover

====

Sh.750,00010%750,000 + 10% x 750,000Sh.825,000

Actual turnover during period of disruptionTherefore loss on turnover

Gross profit %Therefore loss on gross profit

======

Sh.225,000825,000 – 225,000Sh.600,00020%20% x 600,000Sh.120,000

(iii) Calculation of increase in cost of working to be claimed:


Increase in cost of working = Sh.57,500Adjusted increase in cost of working =

Net profit + insured standing charges x Increase in cost of working Net profit + all standing charges

=

=

= Sh.56,250

Reduction in turnover avoided through increase in cost of working = Sh.125,000

Gross profit % = 20%

Therefore, gross profit generated through increase in cost of working:

= 20% of 125,000

= Sh.25,000

Therefore, amount to be claimed for increase in cost of working is Sh.25,000.

(iv) Summary of amount to be claimed subject to average profit:

Sh.Loss on gross profitIncrease in cost of working

Less: Savings in insured standing charges

120,000 25,000145,000 5,000140,000

(v) Determination of the amount to be claimed by applying average provision:

Annual turnover ==

650,000 + 500,000 + 700,000 + 750,0002,600,000

Adjusted amount ==

2,600,000 + 10% x 2,600,0002,860,000



Gross profit on the adjusted turnover

==

20% x 2,860,000Sh.572,000

But sum insured = Sh.457,600

Therefore claim: =

= Sh.112,000

QUESTION FIVE(a) The meaning of the following terms in the context of IAS 11 (Construction contracts)

(i) Construction contractA contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.

(ii) Fixed price contractA contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses.

(iii) Cost plus contractA construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus a percentage of these costs or a fixed fee.

(b) Functions of the following organs:

(i) Public accounts committeeIt is a select committee established to examine accounts showing the appropriation of the sum voted by the house to meet the public expenditure and other accounts laid before the house. It consists of a chairman and less than ten (10) other members nominated by the sessional committee at the commencement of every session.

(ii) Committee of ways and meansIt is composed of the whole house for the purpose of debate on the financial statement on the annual estimates which are laid on the table of the house by the minister for finance not later than 20th June each year.

(c) Direct and indirect methods of presentation of a cash flow statements:

Direct methodThis provides information which may be useful in estimating future cash flows and which is not available under the indirect method. Information about major classes of gross cash receipts and gross payments may be obtained either:


From the accounting records of the enterprise; or

By adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial institution) and other items in the income statement for:

Changes during the period in inventories and operating receivables and payablesOther non-cash items; andOther items for which the cash effects are investing or financing cash flows.

Indirect methodUnder the indirect method, the net cash flow from operating activities is determined by adjusting net profit or loss for the effects of:

Changes during the period in inventories and operating receivables and payables;

Non-cash items such as depreciation, provisions, deferred taxes, unrealised foreign currency gains and losses, undistributed profits of associates, and minority interests; and

All other items for which the cash effects are investing or financing cash flows.



JUNE 2004

QUESTION ONE(a) Tengo Insurance Co. Ltd.

Revenue AccountsMarineSh.’000’

FireSh.’000’

Net written premiumUnearned premium on 1 April 2003Unearned premium on 31 March 2004Net earned premiumClaims paidClaims outstanding on 31 March 2004Claims outstanding on 1 April 2003Legal costs on claimsSurvey expensesClaims incurredCommission earned on reinsurance cededCommission expense on reinsurance acceptedBad debtsManagement expenses

Claims incurred, commission and expensesProfit to P & L account

5,500 4,800(5,500) 4,800 2,470 750 (800) 180 320 2,920 (40) 60 170 650 840 3,760 1,040

3,800 2,500(1,900) 4,400 1,800 480 (540) 130 - 1,870 (25) 40 120 580 715 2,585 1,815

(b) Tengo Insurance Co. Ltd.Profit and Loss Account for Year Ended 31 March 2004

Sh.’000’IncomeInvestment incomeProfit for marine insuranceProfit from hire insurance

Outgoings (Expenses)

Audit feesDirectors feesDepreciation

Profit before taxTax (30%)

Proposed dividendRetained profit

2801,0401,8153,135

240 495 9051,6401,495 4491,046 300 746


(c) Tengo Insurance Co. Ltd.Balance sheet as at 31.03.2004

Sh.’000’ASSETSNon-current assetsFreehold property (cost)Motor vehiclesMachinery and EquipmentFurnitureInvestments

Current AssetsPremiums outstanding (1,500 + 700)Sundry debtorsCommission receivable (40 + 25)Bank balance and cash in hand

Total assets

CURRENT FUNDS AND LIABILITIESCapital and ReservesOrdinary share capitalShare premiumRetained profits (450 + 746)

LIABILITIESUnearned premium – Marine - Fire Claims outstanding – Marine - Fire

OTHER LIABILITIESCommission payable on re-insurance acceptedSundry creditorsTaxProposed dividends

Total equity, funds and liabilities

4,200 4,500 1,500 1,300 1,40011,900

2,200 730 65 110 3,10515,005

3,000 1,000 1,196 5,196

5,500 1,900 750 480 8,630

100 300 449 300 1,17915,005

Workings:(a) Determination of net premium

MarineSh. ’000’

FireSh. ’000’

Premiums receivedRe-insurance premium (received)Premiums outstanding on

4,5001,2001,500

3,500 800 700


31.3.2004

Less:Reinsurance premium paidPremiums outstanding 1.4.2003

7,200

(800) (900)5,500

5,000

(500) (700)3,800

(b) Commissions on premiums for reinsurance ceded and reinsurance accepted are calculated based on the rate of 5%.

QUESTION TWO(a) ABC – ROYALTY LEDGER ACCOUNTS

ROYALTIES (EXPENSE) PAYABLE ACCOUNT

Sh. Sh.1999 GHL Ltd (Landlord)2000 GHL Ltd (Landlord)2001 GHL Ltd (Landlord)2002 GHL Ltd (Landlord)2003 GHL Ltd (Landlord)

120,000186,000238,000246,000272,000

1999 P & L2000 P & L2001 P & L2002 P & L2003 P & L

120,000186,000238,000246,000272,000

(b) GHL LTD (LANDLORD) ACCOUNTSh. Sh.

1999 Balance c/f

2000 Bank Balance c/f

2001 Bank Short workings (Recovered) Balance c/f

2002 Bank Short workings (Recovered) Balance c/f

2003 Bank Balance c/d

200,000______200,000

200,000200,000______400,000

200,000 38,000200,000438,000

200,000 46,000200,000446,000

200,000272,000472,000

1999 Royalties Payable Short workings

2000 Balance b/f Royalties Payable Short workings

2001 Balance b/f Royalties Payable


120,000 80,000200,000

200,000186,000 14,000400,000

200,000238,000 -438,000




2004 Balance b/f

200,000246,000 -446,000

200,000272,000472,000

272,000


(c) ROYALTIES (INCOME) RECEIVABLE ACCOUNTSh. Sh.

2000 P & L2001 P & L2002 P & L2003 P & L

70,00085,00082,50090,000

2000 XYZ Ltd (Sub-

tenant)

2001 XYZ Ltd (Sub-tenant)2002 XYZ Ltd (Sub-tenant)2003 XYZ Ltd (Sub-tenant)

70,00085,00082,50090,000

(d) (i) SHORT WORKINGS RECOVERABLE ACCOUNTSh. Sh.

1999 GHL Ltd (Landlord)

2000 Balance b/f GHL Ltd (Landlord)

2001 Balance b/f

2002 Balance b/f

80,000

80,00014,00094,000

94,000_____94,000

56,000_____56,000

1999 Balance c/f

2000 Balance c/f

2001 GHL Ltd (Landlord) Balance c/f

2002 GHL Ltd (Landlord) P&L (irrecoverable)

80,000

94,000 -94,000

38,00056,00094,000

46,00010,00056,000

(ii) SHORT WORKINGS ALLOWABLE ACCOUNTSh. Sh.

2000 Balance c/f

2001 XYZ Ltd (Sub-tenant) Balance c/f

2002 XYZ Ltd (Sub-tenant)

10,000

5,000 5,00010,000

2,500 2,500 5,000

2000 XYZ Ltd (Sub-tenant)

2001 Balance b/f XYZ Ltd (Sub-tenant)

2002 Balance b/f

10,000

10,000 5,00015,000



P & L (irrecoverable) 5,00

0 - 5,000

(e) XYZ LTD (SUB-TENANT) ACCOUNTSh. Sh.

2000 Royalties Receivable Short workings Allowable

2001 Balance b/f Royalties Receivable

2002 Balance b/f Royalties

2003 Balance b/f Royalties Receivable

70,000 10,000 80,000

80,000 85,000______165,000

80,000 82,500 -162,500

80,000 90,000170,000

2000 Balance c/f

2001 Bank Short workings allowable Balance c/f

2002 Bank Short workings Allowable Balance c/f

2003 Bank Balance c/f

80,000 - 80,000

80,000 5,000 80,000165,000

80,000 2,500 80,000162,500

80,000 90,000170,000

QUESTION TWOABE ROYALTIES PAYABLE & RECEIVABLE SCHEDULEYear UNITS

EXTRACTED

Royalties payable@ Sh.100(Sh.)

Minimum rent

e

Short workings

f = e- d

Short Workings Recoveredg

Short Workings irrecoverableAB

C

a

XYZ

b

Total

c


19992000200120022003

1,2001,3001,7001,8002,000

-560680660720

1,2001,8602,3802,4602,720

120,000186,000238,000246,000272,000

200,000186,000238,000246,000272,000

80,00014,000 - - -

- -38,00046,000 -

- - -10,000 -

Royalties receivable from XYZ Ltd., are calculated on the basis of tons of

marble extracted.

Year Royalties payable @ Sh.125Sh.a

Minimum Rent

b

Short workings

c

Short workings recovered

d

Short workings

e

19992000200120022003

-70,00085,00082,50090,000

-80,00080,00080,00080,000

-10,000---

--5,0002,500-

---2,500-

QUESTION THREE(a) (i) Retention moneyIt is a normal practice, particularly in the case of large contracts, for the contractee to pay the contractor sums of money on account during the period of the contract. These sums will be paid against certificates by surveyors or architects acting for the contractee certifying the value of work so far performed. In many cases, the terms of the contract provide that the whole of the amount shown by the certificate shall not be paid immediately, but a percentage thereof shall be retained by the contractee until some time after the contract is completed. The sum retained is called retention money. The object of this retention is to place the contractee in a favourable position, should faulty work arise or penalties become payable by reason of late completion of the contract.

(ii) Escalation clause:This is a clause which is provided in the contract to cover any changes in the price of the contract due to changes in the price of raw materials and labour or change in utilisation of factors of production. The object of this clause is to safeguard the interest of both sides against unfavourable changes in prices.



The circumstances that lead to the increase in factor prices are recognised and outlined in the contract itself.

(b) (i) Mwako and Mjengo

Duration in months

A16Sh.’000’

B14Sh.’000’

C13Sh.’000’

D18Sh.’000’

Contract priceCosts to dateEstimated further costsEstimated total costsEstimated profit/loss

208,000127,200 28,800156,00052,000

52,00045,60012,00057,600(5,600)

16,80012,000 1,60013,6003,200

60,000 3,20049,60052,8007,200

(ii)ASh.’000’

BSh.’000’

CSh.’000’

DSh.’000’

Actual cost to dateAttributable profit/lossPayments receivedW.I.P to balance sheet

127,20042,400(140,000)29,600

45,600(5,600)(32,000)8,000

12,0002,824 -14,824

3,200- -3,200

The profit figure to be taken is the lower of: ( Costs to date x estimated profit)

Estimated total costs

The loss figure is taken as a whole (Contract B). this is in line with prudence concept which states that you should not anticipate profit but losses should be fully recognised.Workings:Contract AThe lower of:

Actual Costs

Work completed

Contract CThe lower of:


Actual costs

Work completed

Note: The percentage of completion of contract D is too low (16.67%). Therefore neither profit nor loss is recognised.

Mwako and Mjengo balance sheet extract as at 31 December 2003.

Current assets “Sh.”Work in progress 53,143,000

QUESTION FOUR(a) (i) Exchequer over issuesThis is any amount remaining unspent by the ministries at the financial year end. This amount should be surrendered as over issue to the consolidated fund.

(ii) Paymaster GeneralThis is an office established in accordance with PMG Act (Cap. 413) Section 2 & 3. Its work is to control the issue of money to government ministries in conformity with votes, heads subvotes and items as approved by parliament for expenditure in respect of the consolidated fund services.

The PMG account is the cash account equivalent.

(iii) Vote on accountThis is the authority granted by the National Assembly for withdrawals not exceeding half of the total allocation for a financial year before the Appropriation Act comes into operation.

(iv) Commitment AccountingThis system of accounting recognises transactions when the organisations committed to them not when cash is paid or received. For example if a manager orders pens worth Sh.20,000 this is recognised as follows:

Dr. Stationery (pens) 20,000Cr. Order to supplier 20,000

When the pens are supplied with an invoice then:

Dr. Order to supplier 20,000Cr. Supplier 20,000

Dr. Supplier’s a/c 20,000Cr. Bank 20,000

(b) Approved Actual Expenditure



EstimatesSh.

Sh.

Gross expenditureAppropriation in AidNet expenditure

43,785,817 (8,500,000)35,285,817

39,114,708 (7,900,000)31,214,708

(i)Paymaster General Account

Sh. Sh.ExchequerA.I.A

35,000,000 7,900,00042,900,000

Expenditure headsBalance c/d

39,114,708 3,785,29242,900,000


(ii) Exchequer AccountSh. Sh.

G.A.V 35,285,817 -35,285,817

Cash PMGBalance c/d

35,000,000 285,81735,285,817

(iii) General Account of VoteSh. Sh.

Expenditure headsBalance c/d

39,114,708 4,071,10943,185,817

ExchequerA.I.A

35,285,817 7,900,00044,185,817

(iv)Statement of Assets and liabilities as at 30 June 2003

Liabilities Sh. Assets Sh.G.A.V 4,071,10

9 -4,071,109

PMG (Cash)Exchequer

3,785,292 285,8174,071,109

QUESTION FIVEWakazi LtdCash flow statement for the year ended 31.12.2004

Cash flow from operating activities Sh. ’M’ Sh. ’M’Operating profit before interest and taxAdjustments for:DepreciationAmortisation of intangiblesProfit on sale of assets

Changes in working capital:Decrease in StockIncrease in trade debtorsIncrease in trade creditorsCash from operationsInterest paid (7 – 3 + 2 – 3 + 3)Dividends paidTax paidNet cash inflow from operating activities

120

37 1 (2)156

15 (22) 81230 (6) (20) (23)

181



Cash flow from investing activitiesInterest received (3 + 2 – 1)Purchase of tangible assetsSale of assetsNet cash outflow from investing activities

Cash flow from financing activitiesProceeds from issue of shares (20 – 1)Repayment of capital element in finance leaseRepayment of DebenturesNet cash outflow from financing activitiesNet increase/decrease in cash and cash equivalentsCash and cash equivalents b/fCash and cash equivalents c/f

4(192) 21

19 (18) (20)

(167)

(19) (5) 1 (4)

Workings

Tangible

Sh.’M’ Sh.’M’Bal b/fFinance leasesRevaluationCash book (balancing figure)

196 28 7192423

DisposalsDepreciation

Balance c/d

19 37

367423

Finance leases

Sh. ’M’ Sh. ’M’Cash bookBal c/d NCL CL

1850 573

Bal b/f – NCL - CLTangible

42 32873

Tax

Sh.’M’ Sh.’M’Cash book balanceBal c/d

232952

Bal b/dP & L A/c

203252

Cash and cash equivalents31.3.2003Sh.’M’

31.3.04Sh.’M’

CashBank over draft

4(8)

21(20)


(4) 1



DECEMBER 2004

QUESTION ONE(a) Joseph Mokua

Crop account for the year ended 31 October 2004

Sh. ‘000’

Sh. ‘000’

Opening stocks: Growing crops,Wheat seeds and fertilizersPurchases: seeds

Closing stocks: Growing crops Wheat seeds and fertilizersCost of crops, seeds & fertilizersCrop insuranceInterest on loan from bankCrop expensesContra: crops to workersStaff mealsDepreciation: Tools and implementsManagers salary

1,000 2001,200

(170)(300)730.0240.0375.0500.050.020.012.5 240.02.167.5

Sale of wheatContra: Crops to workersDrawingsGeneral P&L A/C

1,750.050.0160.0207.5

_____2,167.5

(5 marks)

(b) Joseph MokuaLivestock account for the year ended 31 October 2004

Sh. ‘000’

Sh. ‘000’

Opening stock: livestock Feeding materialsPurchases: Livestock Feeding materials

Closing stock: Livestock Livestock feedsCost of livestock & materialsWages for rearing livestockOther livestock expensesStaff mealsDepreciation: Tools & implements

1,250.0300.0625.0 3 5.0 2,210.0(2,000).0 (50).0160.0800.0615.05.012.5

Sale of cattleSale of carcasses

3,000750

____3,750


Managers salaryProfit & loss A/C

60.02,097.53,750.0

(5 marks)



(c) Joseph MokuaGeneral profit and loss account for the year ended 31 October 2004

Sh. ‘000’ Sh. ‘000’Livestock profitCrop loss

Less expenses:Office expensesFarmhouse expensesMachinery repairsFarmlabour wagesBad debtsProvision for b/debtsDepn: Farm machineryLabour by familyNet operating profit

2006050250251181,080 1 00

2,097.5(207.5)1,890.0

1,883 7

(4 marks)

(d) Joseph MokuaBalance sheet as at 31 October 2004

Sh. ‘000’

Sh. ‘000’

Non-current assets:Land and buildingsFarm machineryTools and implements

Current assets:Stock: Growing crops Wheat, seeds, fertilizers Livestock Livestock feedsSundry debtorsCash in hand

Financed by:CapitalNet Profit

Drawings

Loan

Current liabilities:Labour by familyManagers personal a/c

1703002,000501,3571,300

100100

10,0002,820 10012,920

5,1 77 18,097

13,600 5 07 14,007 (160)13,847 3,0


Bank overdraftSundry creditorsAccrued loan interest

150750150

00 16,847

1,2 50 18,097


QUESTION TWO(a) Mega Company Ltd.

Containers stock account for the year ended 31 December 2003

QTY RATESh.

AMTSh. ‘000’

QTY RATESh.

AMTSh. ‘000’

Balance b/dWarehouseCustomersPurchases

Maintenance costs(94000 x 4)

Profit to P&L A/C

5,00012,00010,000

_____27,000

300300400

1,5003,6004,000

376 2,83412,310

ScrappedDeficit

ContainersSuspense Ac:- Retentions- Hiring feesBal c/dCustomersWarehouse

4,5001,500

3,000

10,000 8,00027,000

180

450

300300

810

1,3504,750

3,000 2,40012,310

(8 marks)

(b) Mega Company Ltd.Containers suspense account for the year ended 31 December 2003

QTY RATE Sh.

AMTSh. ‘000’

QTY RATESh.

AMTSh. ‘000’

Debtors a/c returnsContainers stock a/c:- Retentions

94,000

3,000

450

450

42,300

1,350

Bal b/dDebtors a/c - Issues

12,00095,000

450500

5,40047,500



- Hiring fees(95000 x Sh. 50)Balance c/d

10,000107,000

450 4,750 4,50052,900

_____107,000

_____52,900

(6 marks)

(c) Mega Company Ltd.Containers Profit and loss account for the year ended 31 December 2003

INCOME Sh. ‘000’

Hiring feesProfit on containers retained by customers(3000 x Sh. (450 – 300))

EXPENSESDepreciation(10000 units x sh. (400-300))Loss on containers scrapped(4500 x Sh. (180 – 300))Loss on containers unaccounted for(1500 x Sh. 300)Maintenance costs

Profit to P&L A/C

4,750

_450 5,200

1,000

540

450 _376 2,3662,834

(6 marks)(TOTAL: 20 MARKS)

WORKINGS:

1. Computation of containers returned by customersUNITS

Opening stock – customersAdd: IssuesLess: Containers retained by customers Closing stock in customers hands

12,00095,000(3000)(10000)94,000

2. Closing stock in warehouseUNITS

Opening stock – customerswarehouse

Add: Purchases

12,000 5,00017,00010,000


Less: Closing stock with customers Containers retained by customers Containers scrapped Containers unaccounted for

27,000(10,000)(3,000)(4,500)(1,500) 8,000

QUESTION THREE(a) Juma & Company Advocates

Profit and Loss account for the year ended 30 June 2004INCOME Sh.

‘000’Sh. ‘000’

Cost charged clientsAdd: Closing work in progress

Less: opening work in progressEXPENSESRentSalaries and wagesOffice expensesInterest on loanStationeryDepreciation

NET PROFIT

1203609030190150

1,050 3 50 1,400210

1,190

940250

(10 marks)

(b) Juma & Company AdvocatesBalance sheet as at 30 June 2004

ASSETS Sh. ‘000’ Sh. ‘000’Non-current assets:EquipmentFurnitureLibrary books

Current assets:Work in progressStationeryDebtors for fees and disbursementsCash at bank – client

Capital and LiabilitiesCapital

1,140315 385

350160210270

1,800

1,840

9 90 2,830



Add: Net profit

Less: Drawings

Non-current liabilitiesLoanCurrent liabilities:CreditorsClients for moneys held on their behalfBank overdraft - office

250 2,050(180)

80270110

1,870

500

4 60 2,830


WORKINGS:

CASH BOOKCLIENT

OFFICE

CLIENT

OFFICE

Balance b/dClient A/CClient A/cClient A/cClient A/c

Balance c/d

Sh. ‘000’250850

____1,100

Sh. ‘000’300

680240480

1 10 1,810

EquipmentRentRepairsEquipmentLandOffice A/cRentSalariesInterestLoanLibrary booksDrawingsOffice expensesCreditorsBalance c/d

Sh. ‘000’26013080

120240

270 1,100

Sh. ‘000’

100230

1203603030016018090240____1,810

CLIENT ACCOUNTCLIENT OFFICE CLIENT OFFICE

Balance b/dEquipmentRentRepairsLandCosts A/c

Sh. ‘000’

26013080120

Sh. ‘000’330

2301,050

Balance b/dCashbookCashbookClient A/c – CCashbook

Sh. ‘000’250850

Sh. ‘000’

680240480


Office A/c – CBalance c/d

240 2 70 1,100

____1,610 Balance c/d

____1,100

2 10 1,610

EQUIPMENT A/C Sh. ‘000’Balance b/d 800Bank A/c 100Loan A/c 300 1,200

Sh. ‘000’Depreciation 60

Balance c/d 1,140 1,200

LOAN A/C Sh. ‘000’Bank A/c 300Balance c/d 500 800

Sh. ‘000’Balance b/d 500Equipment 300 800

COSTS A/C Sh. ‘000’Profit & loss A/c 1,050 1,050

Sh. ‘000’Client A/c 1,050 1,050

LIBRARY BOOKS

Balance b/dBank A/c

Sh. ‘000’280160___440

Depreciation

Balance c/d

Sh. ‘000’55

385440

CREDITORS A/C

Bank A/cBalance c/d

Sh. ‘000’240 80 320

Balance b/dPurchases

Sh. ‘000’110210320

STATIONERY A/CSh. ‘000’ Sh. ‘000’



Balance b/dPurchases

140210350

P & L A/cBalance c/d

190160350

QUESTION FOUR(a) The meaning of the following terms as used in IAS 7 (Cash Flow Statements)

(i) Cash equivalentsThese are short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (2 marks)

(ii) Financing activitiesThese are activities that result in changes in the size and composition of the equity capital and borrowings of the enterprise. (2 marks)

(b) Heshima Ltd.Cash flow statement for the year ended 30 September 2004

Sh. ‘000’ Sh. ‘000’Cash flows from operating activitiesOperating profit before tax and interestDepreciation chargesLoss on disposal of plantIncrease in stocksIncrease in debtorsIncrease in creditors

Taxation paidNet cash flows from operating activitiesCash flows from investing activitiesPurchase of fixed assets (2,760 + 11,730 + 918)Sale of fixed assets

Cash flows from financing activitiesProceeds from issue of shares at a premiumRedemption of 10% debenturesPayment of dividendsInterest paid

Cash and cash equivalents at 30.9.2003Cash and cash equivalents at 30.9.2004

6,3484,312345(1,035)(449) 6 90 10,211(2,070)

(15,408) 1,035

8,418(1,518)(1,725) (1 38)

8,141

(14,373)(6,232)

5,037(1,195) 8 50 3 45



WORKINGS:Operating profit before tax and interest:

Sh. ‘000’

Profit before taxationInterest paid during the year

6,210 1 38 6,348



BuildingsBalBank

11,040 2,76013,800

Bal 13,80013,800

Accumulated depreciation on buildings

Bal 2,4152,415

BalP & L A/C

2,070 3 45 2,415

Plant and EquipmentBalBank

13,80011,73025,530

DisposalBal

2,07023,46025,530

Accumulated depreciation of plant and equipmentDisposalBal

6908,6259,315

BalP & L A/c

6,2103,1059,315

DisposalPlant & equipment

2,070

____2,070

Accumulated DepreciationBankP & L A/c

6901,035 3452,070

Motor vehiclesBalBank

4,600 9185,518

Bal 5,5185,518

Depreciation on motor vehicles

Bal 2,9322,932

BalP & L a/c

2,070 8 62 2,932

DebenturesBank 1,380

1,380Bal 1,380

1,380

Premium on redemptionBank 138 Share 138


138 premium 138

Share premiumPremium on redemptionBal

1382,7602,898

Bal

Bank

1,380

1,5182,898

Retained earnings

Bal 5,5205,520

BalP&L A/c

3,4502,0705,520

Ordinary share capital

Bal 22,70022,700

BalBank

15,8006,90022,700

TaxationBankBal

2,0702,0704,140

BalP & L A/c

1,7252,4154,140

DividendsBankBal

1,7251,035____2,760

Bal

P & L A/c

1,035

1,7252,760

Total depreciation: Sh. Buildings Plant and equipment Motor vehicles

3453,105 8624,312

Purchase of fixed assets:

Sh.

Buildings Plant and equipment Motor vehicles

2,76011,730 91815,408

QUESTION FIVE(a) Brief notes on the following investment matters

Cum-interest purchase of a fixed interest security



Cum-interest purchase means purchase of a security together with interest

accrued on the security from last interest payment date up to date of purchase.

The accrued interest is debited to the income account (income column) and the amount paid for the capital cost of the shares is debited to the capital account (capital column).Amount paid for purchase of the security must be split into two, one part being payment for accrued interest and the other part being payment for the capital cost of the security.Amount paid for accrued interest is recovered when the investor receives interest on the securities and which would be for the full interest period.(4 marks)

Rights issue

It is a privilege given to the shareholders of a company to purchase additional share proportionately at some set price.

The price for purchase of the shares is usually less than the market price.An investor may purchase his entitlement to the shares in which case amount paid would be debited to capital account (capital column).An investor may opt not to purchase the shares and therefore sell the rights. Proceeds from sale of rights is treated as a reduction in cost of shares held and therefore credited on capital account. (4 marks)

(b) FundA “fund” is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations. (5 marks)

(c) Brief notes on:(i) Capital projects funds

These are set up to account for financial resources to be used for the acquisition or construction of major capital facilities, other than those financed by proprietary funds and trust funds. (3 marks)

(ii) Enterprise fundsThese are set up to account for operations:

That are financial and operated in a manner similar to private business enterprises – where the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges; or


Where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income in appropriate for capital maintenance, public policy, management control, accountability, or other purposes. (4 marks)(TOTAL: 20 MARKS)



JUNE 2005

QUESTION ONEDISCLOSURE ITEMS

Loans and advancesGross amount outstanding.Gross net amount of non performing loans and advances.Total amount of provision held against loans and advances categorized as:SpecificGeneralEffective interest rate charged on advances.Maturity/liquidity risk analysis.Interest rate riskCurrency risk /Currency rate riskConcentration risk (be economic sector, consumer or industry group concentration.(4 marks)

Customer depositsComposition by typeMaturity/liquidity risk analysisInterest rate riskCurrency rate riskConcentration risk (by economic sector, consumer or industry group concentrationEffective interest paid on deposits.

(4 marks)

KENYA BANK LIMITED

Income statement for the year ended 31 December 2004

Sh. Million

Sh. ‘million’

Interest incomeOn loans and advances 3,197On Government securities 430On placements with banking institutions 66

3,693Interest on expenseOn customer deposits 194On deposits and placements with banking institutions

33 227

3.466Non interest income 3,079

6,545ExpensesBad and doubtful debts provision 1,259


Specific 400general 400Staff costs 1,461Other expenses 1,425 4,545

Profit before tax 2,000Tax @30% (600)Profit after tax 1,400Dividends proposed (600)Profit retained for the year 800

(5 marks)

Kenya Bank LimitedBalance Sheet as at 31 December 2004

Sh. ‘million’ Sh. ‘million’AssetsCash and balances with Central Bank 7,439Government securities 21,570Loans and advances to customers 58.894Less: Specific provision for bad and doubtful debts

(3,894)

General provision for bad and doubtful debts

(550) 54,450

Property and equipment 1,487Other assets 16,200

101,146LiabilitiesCustomer deposits 81,947Borrowed funds 2,641Dividend payable 600Corporation tax payable 600Other liabilities 4,211

89,999CapitalCapital share 2,000Reserves: Brought forward 8,347 Retained for the year 800 9,147

11,147101,146

(5 marks)

WorkingsSh. ‘million’

Sh. ‘million’

Loans and advances brought forward 58,894Less: Specific provision for bad and doubtful debts Brought forward 2,635



Incremental 1,259 3,894Net of specific provisions 55,000General provisions at 1% 550Less: Balance brought forward (150)Change for the year 400

“Liability for acceptances on behalf of customers” in an off balance sheet item to be disclosed in the notes to the financial statements but not to be shown on the face of the balance sheet.(2 marks)

(Total: 20 marks)

QUESTION TWO

An accommodation bill may be described as a bill which is drawn, accepted or endorsed without consideration but simply to oblige and help to raise money by discounting or negotiating it. Accommodation bills are also known as kite bills. (2 marks)

Noting or notary charges: the cost formally presenting a dishonoured bill to the acceptor (drawee) usually by a lawyer acting as a notary public.

(2 marks)

Limo, Tergat, Wambani and Gachara joint venture

Statement showing the result of the venture

Sh. Sh.Sale of cars 7,900,000Add value of cars retained by Tergat 1,350,000

9,250,000Less: expenses by Limo Purchases 3,600,000 Travelling expenses 45,000 Entertainment 45,000 Shipping expenses 1,710,000 (5,400,00

0)Expenses by Tergat: Customs duty 1,860,000 Clearing agents fees 200,000 (2,060,00

0)Expenses by Wambani: General expenses 162,000 Transport (Haulage) 135,000 Insurance 235,800 (532,800)Expenses by Gachara: Security 126,000 Storage 81,000 Sales commissions 264,600 (471,600)


Profit of the venture 785,600Share of profit: Limo - 10% 78,560 Tergat – 20% 157,120 Wambani – 30% 235,680 Gachara – 40% 314,240 785,600

(4 marks)

In the books of Limo

Joint Venture with Tergat, Wambani and GacharaSh. Sh.

Travelling expenses 45,000 Bank – Gachara 4,000,000Entertainment 45,000Purchases 3,600,0

00Shipping expenses 1,710,0

00Profit of venture 10% 78,560 Balance carried down 1,478,560

5,478,560

5,478,560

Balance brought down 1,478,560

Cash from Gachara 1,478,560

In the books of Tergat


Customs duty 1,860,000

Bank – Wambani 500,000

Clearing agents fees 200,000

Purchases – cars 1,350,000

Profit and loss-20% 157,120

Balance carried down 367,120

2,217,120

2,217,120

Balance brought down 367,120

Cash from Gachara 367,120

In the books of Wambani


Bank – remitted – Tergat 500,000

General expenses 162,000



Haulage 135,000

Insurance 235,800

Profit – 30% 235,680

Balance carried down 1,268,480

1,268,480

1,268,480


Cash from Gachara 11,268,480

(12 marks)

In the books of Gachara


Bank remitted – Limo 4,000,000

Bank – sales 7,900,000

Security 126,000

Storage 81,000Sales Commissions 264,60

0Profit – 40% 314,24

0Balance carried down 3,114,1

607,900,000

7,900,000

Cash to Limo 1,478,560


Cash to Tergat 367,120

Cash to Wambani 1,268,480

_______

3,114,160

3,114,160

QUESTION THREEConditions to be met:

No such shares shall be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purpose of the redemption.No such shares shall be redeemed unless they are fully paid.The premium, if any, payable on redemption, must have been provided for out of the profits of the company or out of the company’s share premium account before the shares are redeemed.


Where any such shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall out of the profits which would otherwise have been available for dividend be transferred to a reserve fund, a sum equal to the nominal amount of the shares redeemed and the provision relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if the capital redemption reserve fund were paid-up share capital of the company.The articles of association must authorise the redemption of shares (4 marks)

Journal entries

Date Particulars Dr (Sh.)

Cr (Sh)

1.3.2005 Share final call accountEquity share capital account(Being final call of Sh.2 per share due on 500,000 shares)

1,000,000 1,000,0

00

General reserve accountProfit and loss accountBonus dividend account(Being bonus dividend declared)Bonus dividend accountShare final call accountBeing utilisation of final dividend towards (payment of final call)

900,000100,000

1,000,000

31.3.2005

Bank accountFixed assets account(Being sale of fixed assets)

3,825,000 3,000,0

00825,000

Bank accountInvestments accountProfit and loss account (Being sale of investments)

2,600,000 2,000,0

006,000,000

Bank account12% preference share capitalShare premium account(Being issue of preference shares at a premium)

3,300,000 3,000,0

00300,000

13% redeemable preference shares accountPremium on redemption accountPreference share holders account(Being amount payable on redemption including premium)

5,000,000

375,000

5,375,000

30.4.2005

Preference shareholders accountBank account

5,160,000 5,160,0



(Payment on amount due on redemption paid in full except to holders of 2,000 shares)

00

31.3.2005

Share premium accountPremium on redemption account(Being premium on redemption of shares of 7.5% provided out of share premium account)

375,000 375,00

0

Profit and loss accountCapital redemption reserve account(Amount transferred out of Profit and loss account to CRRF an amount equal to nominal value of shares redeemed otherwise than out of the face value of proceeds of fresh shares)

2,000,000 2,000,0

00

31.5.2005

Capital redemption reserve accountShare premium accountProfit and loss accountBonus dividend(Being bonus dividend declared for issuing fully paid shares)

2,000,000905,000245,000

3,150,000

Bonus dividend accountEquity share capital accountShare premium account(Being utilisation of bonus dividend towards the issue of 300,000 fully paid shares of Sh.10 each to be distributed in the ratio of 3 for 5).

3,150,000 3,000,0

00150,000


QUESTION FOURCash/bank can go down whereas a firm makes profit due to :

Repayment of debts e.g. loansSelling on creditHolding money in stocksPurchasing in cash rather than in creditPurchasing of fixed assets

Workings:

Plant accountBalance brought forward

54,000 Disposal 1,380

Cash 24,000 Balance carried down 76,62078,000 78,000


Provision for Depreciation accountDisposal 480 Brought forward 14,960Carried forward 22,500 For the year 8,020

22,980 22,980

Disposal accountPlant 1,380 Provision for

depreciation480

Cash 820____ Loss 801,380 1,380

Loan accountCash 4,500 Brought forward 8,400Carried forward 5,200 For the year 1,300

9,700 9,700

(4 marks)

Cash flow statements for the year ended 31 December 2004

Shs. ‘000’ Shs. ‘000’Net cash inflow from operating activities 18,240Return on investments and servicing of financeDividends paid (4,600)Taxation: Corporation tax paid (9,400) (14,000)

Investing activities (24,000)Purchase of fixed assets 820Net cash outflow from investing activities (23,180)

Financing activitiesIssue of share capital 5,800Acquisition of new loan 1,300Repayment of loan (4,500)Net cash flow from financing activities 2,600Decrease in cash and cash equivalent (16,340)Cash and cash equivalents 1.1.2004 1,020Cash and cash equivalents 31.12.2004 (15,320)

NotesOperating profit reconciliation to net cash inflow from operating activities: Operating profit 23,900 Depreciation charges 8,020



Loss on sale of fixed assets 80 Increase in stocks (12,800) Increase in debtors (740) Decrease in creditors (220)Net cash inflow from operating activities 18,240


QUESTION FIVEDistinguishing features of governmental organisations

Organisations to serve the citizenryA basic tenet of governmental philosophy is that governmental units exist to serve the citizens subject to their jurisdiction. By contrast, business enterprises are created by only a limited number of individuals and “reserve the right of admission” by way of a fee, charge etc.

General absence of the profit motiveMost governmental units render services to he citizenry without the objective of profiting from these services. Business enterprises are created to increase wealth and are therefore motivated to earn profits.

Taxation as the principal source of revenueThe citizens subject to a governmental units jurisdiction provide resources to the governmental unit principally through taxation. There is no comparable revenue source for business enterprises.

Impact of legislative processOperations of governmental units are for the most part initiated by various legislative enactment and laws. The existence, revenue sources and operation of some governmental unit is subject to some specific law enacted. Laws and regulations also affect business but not to the direct extent as governmental units

Stewardship for resourcesA primary responsibility of governmental units in financial reporting is to demonstrate adequate stewardship for resources provided by their citizenry. Business enterprises have a comparable responsibility to their owners, but not to the same extent as governmental units. (8 marks)

General fundThis is the primary governmental fund.

General funds are established to account for resources devoted to financing the general services which the governmental unit performs for its citizens. Such services include general administration, protection of life and property, sanitation and similar broad services.


The general fund is also used to record all transactions of a governmental entity not properly accounted for in another fund.(2 marks)

Annual estimatesThese are the estimated expenditures submitted by ministries to be consolidated with other central government estimates in preparing the coming fiscal year’s annual expenditure budget.

Revenue collection centres include revenue estimates for the year ahead.(2 marks)

Excess voteThis is the expenditure of a given ministry over the approved limit for the year. It should be presented separately in the annual estimates.

The Exchequer and Audit Act does not allow any government ministry to spend beyond its location. Any such expenditure is considered as an excess vote.

Parliament has two options with respect to excess votes:Accept it and approve it retroactively.Reject it and surcharge the offending accounting officer. (2 marks)



EncumbranceThis is a restriction placed on funds under commitment accounting to ensure that expenditure by way of commitment does not exceed available funds.

An encumbrance will be created at the point a firm intention and/or commitment is made, even if the commitment is not legally binding.

When the actual invoice (expenditure) is received, the invoice will be vouchered for payment and the encumbrance reversed, as it is no longer needed. (2 marks)

Vote on accountThis is authority granted by the National Assembly for withdrawals from the consolidated fund not exceeding half the total allocation for half of the total allocation for a financial year before the Appropriation Act (budget) comes into operation.

It is intended to ensure that government offices can run as Parliament discusses the budget.

(2 marks)

Exchequer over issuesThis is any amount remaining unspent by the ministries at the financial year end.

This mount should be surrendered as an “over issue” to the consolidated fund.(2 marks)

(Total: 20 marks)


DECEMBER 2005

QUESTION ONEABC GENERAL INSURANCE COMPANY LTDREVENUE ACCOUNT FOR YEAR ENDED 30 JUNE 2005

Sh. ‘000’Gross premium 8,810Re-insurances (810)Net written premium 8,000Net increase in unearned premium (200)

(7,800)Claims incurred (2,960)Net commission paid (70 – 45) (25)Management expenses (850)Net underwriting profit 3,965Investment income 180

4,145

Salaries (820)Rent and rates (120)Directors remuneration (485)Legal expenses (380 – 245) (135)Depreciation (900)

(2,460)

Profit before tax 1,685Tax 510Net profit 1,175Dividends (500)Retained profit for the year 675

(10 marks)



ABC GENERAL INSURANCE COMPANY LTD.BALANCE SHEET AS AT 30 JUNE 2005CAPITAL EMPLOYED Sh. ‘000’Ordinary share capital 5,000Share premium 2,000General reserve 960Investment fluctuation reserve (440 – 50) 390Retained earnings (1,580 + 675) 2,255Proposed dividends 500

11,105Represented by:

ASSETSLeasehold property 5,500Motor vehicles 3,800Equipment 1,800Treasury bonds 2,850Quoted investments (1,250 – 50) 1,200Premiums outstanding 385Due from re-insurers 420Debtors 1,535Bank balance 390

17,880

LIABILITIESUnearned premium 4,950Outstanding claims 285Due to re-insurers 180Current tax 510Creditors 850

6,775NET ASSETS 11,105


Workings

Determination of gross premium earned in the year.

DIRECT BUSINESS

REINSURANCE BUSINESS

TOTAL

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’Premium received 7,280 1,320 8,600Premiums outstanding 1.7.2004

(415) (415)

Due from re-insurers 1.7.2004 (180) (180)Amounts due on 30.6.2005 385 420 805


7,250 1,560 8,810

Determination of re-insurance premium paid and payable for the year ended 30 June 2005.

Sh. ‘000’

Re-insurance premium paid 890Add: Amount outstanding on 30 June 2005

180

1,070Less: Amount outstanding on 1 July 2004

260

810

Determination of claims incurred in the year ended 30 June 2005

Sh. ‘000’

Claims paid 2,840Claims outstanding on 30 June 2005

285

Legal expenses 2453,740

Less: Claims outstanding on 1 July 2004

410

2,960

Determination of net change on unearned premium outstanding on 1 July 2004

Sh. ‘000’

Unearned premium carried forward on 30 June 2005Fund balance (50% of Sh.8m) 4,000Additional reserve (Sh.550 + 5% of Sh.8m)

950

4,950

Less: unearned premium B/F 1.7.2005 4,750Net increase 200

QUESTION TWOFixed price contract and cost plus contract

A fixed price contract is a construction contract which has either a fixed price for the whole contract or per unit.Due to variations in the prices of inputs a fixed price contract may have a cost escalation clause



A cost plus contract is a construction contract in which the contractor is refunded the cost incurred on the contract and then added some amount agreed upon computed as proportion of the cost.The method is useful in a case where it is not possible to determine the cost of the contract at the beginning especially when input prices are changing frequently. (2 marks)

Realised gross profit or loss for the year

Sh. ‘000’

Contract No. 468 120Contract No.469 (430)Contract No.470 194

(6 marks)

Profit and loss account extract

CONTRACTContract No. 468

Contract No.469

Contract No.470

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’Gross profit/(loss) 120 (430) 194

Less: General administration costs

60 120 30

Net profit/ (loss) 60 (550) 164

Alternative methodRevenue 720 570 694Cost of sales (cost incurred in the year)

600 1,000 500

Gross profit/(loss) 120 (430) 194Less: General administration expenses

60 120 30

Net profit/(loss) 60 (550) 164

CommentRevenue for each contract is the sum of costs incurred in the year and realized gross profit or loss for the year.

(3 marks)

Balance sheet extractsCalculation of work in progress


Contract No.469

Contract No.470


Sh. ‘000’ Sh. ‘000’ Sh. ‘000’Cost incurred to date 2,400 4,000 2,000

Add/(less)Gross profit/(loss) realized to date

480 (400) 174

2,880 3,600 1,826

Less: Total billings to date 2,800 4,500 1,800

Work in progress 80 (900) 26

CommentContract number 469 has no work in progress but instead excess billings over work in progress and is therefore treated as current liability.

Calculation of debtors balance


Contract No.469

Contract No.470

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’Total billings to date 2,800 4,500 1,800

Less: Total cash received 2,600 4,200 1,700Debtors 200 300 100

BALANCE SHEET EXTRACT Sh. ‘000’Current assetsWork in progress (80 + 26) 106Debtors 600

706Current liabilityExcess of billings over work in progress

900

Comment Debtors balance is alternatively called “due from customers” while excess of billings over work in progress is alternatively called “due to customers”.(9 marks)

WORKINGS

Contract No. 468

Contract No.469

Contract No.470

Sh. ‘000’

Sh. ‘000’ Sh. ‘000’



Contract price 3,600 4,800 2,500Cost incurred upto 31 March 2004 1,800 3,000 1,500Costs incurred I the year 600 1,000 500Total costs incurred to date (ii) + (iii) 2,400 4,000 2,000Estimated total cost of contract 3,000 5,200 2,300Estimated total gross profit/(loss) on the contract (i) –(v)

600 (400) 200

Gross profit/(loss) realized to date (vi) x (iv) ÷ (v)

480 (400) 174

Profit /(loss) reported to date on contract 360 30 (20)Realized profit/(loss) for the year (vii) – (viii) 120 (430) 194

(20 marks)


QUESTION THREEKILIMO LTD. TRADING ACCOUNTS FOR THEYEAR ENDED 31 DECEMBER 2004

Crop Livestock

Total Crop Livestock Total

Sh. ‘000’

Sh. ‘000’

Sh. ‘000’

Sh. ‘000’ Sh. ‘000’ Sh. ‘000’

Opening stock – Cattle 27,450 27,450 Sales – Milk 13,680 13,680 - Maize 1,800 1,800 - Maize 23,670 23,670Cattle feed 1,260 1,260 - Cattle 4,050 4,050Fertilizers 990 990 - Manure 1,500 1,500Purchases – Cattle 5,220 5,220 Manure used 300 300 - Maize 1,080 1,080 Maize stock 750 750 - Nappier 2,000 2,000 P & L dividendsMaize seeds 540 540 - Milk 2,160 2,160Cattle feeds 3,060 3,060 - Maize 540 540Manure used 300 300 Stocks c/fMaize stock 750 750 Cattle 27,000 27,000Expenses - Labour 3,240 500 3,740 Maize growing 1,350 1,350 - Other 360 360 Cattle feed 810 810Cattle expenses 6,000 6,000 Fertilizers (maize) 540 540P & L account 18,540 3,260 21,800

26,850 49,500 76,350 26,850 49,500 76,350(12 marks)



(c)Profit and Loss and Appropriation accountFor the year ended 31 December 2004

Shs. ‘000’ Shs. ‘000’Revenue a/c - Crop 18,540.00

- Livestock 3,260.0021,800.00

Less depreciation - Tractors 4,050.00- cart 187.50

Revaluation Bulls (3,000 – 2,700)

300.00

General expenses 5,400.00 9,937.50Net profit before taxation 11,862.50Taxation 3,558.75Profit after taxation c/f 8,303.75Profit after taxation b/f 8,303.75Retained profits b/f 1,540.00Dividends paid (2,700.00)Retained profit carried forward

7,143.75

(d)Balance sheet as at 31 December 2004Non-current assets Shs.’000’ Shs.

‘000’Land and Buildings 45,000.0

0Tractors (NET book value) 12,150.0

0Carts (Net book value) 1,312.50Bulls 2,700.0

061,162.50

Current AssetsStock: - Cattle 27,000 Maize 1,350 Cattle feed 810 Fertilizer 540 29,700.0

0Cash at bank 7,650.0

037,350.00

Total assets 98,512.50

Equity and liabilitiesCapital and reservesOrdinary share capital 80,000.0


0Revenue reserves 7,143.7

587,143.75

Current liabilitiesCreditors 7,810.00Taxation 3,558.7

511,368.75

Total equity and liabilities 98,512.50




QUESTION FOUR(a) Mdogo Ltd Trading Profit & Loss A/c for the year ended 30.6

Shs. Shs.Sales 150,000,000Cost of salesOpening stock 30,000,000Purchases 106,500,000Less closing stock 4,500,000 132,000,000Gross profit (12% x 150m) 18,000,000

Week 1Average gross profit 2001 - 30,000/36,000 = 8.33%

2002 - 360,000/28,800 = 12.5%2003 - 405,000/40,200 = 10% 12% + 8% + 9.9% = 10%

2

Year 2004 increase in profit = 20% x 10% = 2%Average G. P. 2% + 10% = 12%

N.B. The closing stock as at the date of fire was Sh. 4,500,000 and the salvaged expenses plus stock amounted to Sh. 9,600,000.

The company did not lose any valuable stock.

(b)

Mdogo Ltd.Trading, Profit and Loss A/C for 4 months to 31.10.2004

Shs. Shs.Opening stock 13,500,000 Sales 180,000,00

0Purchases 145,350,00

0Closing stock 450,000

Gross profit 21,600,000

_________

180,450,000

180,450,000

Closing stock 450,000Salvaged stock 8,000,000 Total stock 8,450,000

QUESTION FIVE(a)Budgetary accountingThis refers to preparation of operating account in the format of a budget. Most public sector units use this type of technique. The use of the


technique is to emphasize on the budget role in planning, control and accountability.

Accrual accountingIt is a system of accounting that recognizes revenue earned and costs incurred. It is opposite of cash accounting.

Commitment accountingIt is a system of accounting that recognizes the transactions when the organization is committed to them. A transaction is not recognized when cash is paid or received but early when an order placed. The unit continuously records orders as commitment to incur expenditure.

Fund accountingA fund is a distinct accounting entity with self balancing set accounts. This account records cash and other resources together with the related assets and liabilities. Fund accounting is therefore a system of keeping accounts in terms of funds e.g. NSSF.

(b)Jasho LtdCash flow statement for the year ended 30th June 2005Profit before tax 54,500Adjust: non cash items

Depreciation 11,000 Net profit before w.c. adjust 65,000

Working capital adjustStock (6,000)Trade receivables 2,000Trade payables 8,000 4,000

69,500Tax paid 12,000 Net cash flows from operations 57,500

Investing activitiesAcquisition of non current assets (34,000)

Financing activitiesRedemption of debentures (10,000)Issue of shares 2,000Share premium 1,000Dividend paid (13,000) 20,000Net cash flows 35,000Add: cash & cash equivalent

Bal b/f 10,000 Cash & cash equivalent c/d 13,500

WorkingNet profit before tax



Increase in retained earnings (53,500 – 31,000) 22,500Add: proposed dividends 17,000 : proposed tax 15,000

54,500

(ii) Tax accountShs. Shs.

Bank a/c 12,000 Bal b/f 12,000

Bal b/f 15,000 Tax prov. 15,000

27,000 27,000

(iii) Non current assetsShs. Shs.

Bal b/f 85,000

Bank 34,000

Bal c/d 119,000

119,000

119,000

(iv) Ordinary Share CapitalShs. Shs.

Bal b/f 26,000

28,000

Bank 2,000

28,000

28,000

(v) Share accountShs. Shs.

Bal b/f 12,000Bal c/d 13,000 Bank a/c 1,000

13,000 13,000

(vi) Dividends accountShs. Shs.

Bank a/c 13,000 Bal b/f 13,000Bal c/d 17,000 Prov. for

dividend17,000

30,000 30,000


FINANCIAL ACCOUNTING IISUGGESTED SOLUTIONS31 MAY 2006

QUESTION ONE.Regional Commercial bankProfit and loss account for the year ended 31 March 2006.

Interest income Sh’000’Loan and advances (8395 + 642) 9,037Government Securities 4,768Deposits and placements with other banking institutions 3,800Other interest income 430

18,035

Interest Expenses Customers deposit (5308 +448) 5,756Deposits & placements from other banking institutions 1,280 Other interest expenses 314

(7,350)Net interest income 10,685Other operating incomeFees and commission income 764Dividend income 408

Total operating income 11,857

Operating Expenses



Staff Costs 2,184Bad Debts 279Doubtful debts 1,850Directors emoluments 645Depreciation on property and equipment 815Repairs and maintenance 210Other operating expenses 1,630Printing and stationery 278

(7,891)Profit before tax 3,966Income Tax Expense ( 1,050) Profit after tax 2,916 Movement in Retained Earnings

Sh’000’Retained profit b/f 2,480Add: Profit after tax for the year 2,916Less: Interim dividends paid (400)

Final proposed dividend (600) Retained profit c/f 4,396

(b) REGIONAL COMMERCIAL BANKBALANCE SHEET AS AT 31 March 2006.

Assets Sh’000’Cash and balance with Central Bank of Kenya 3,630Government securities 13,200Deposit and placements with other banking Institutions 8,560Loans and advances to customers ((67655+642) – (2750+1850)) 63,697Investment in securities 5,460Property and equipment 14,427Other assets 5,300 Total Assets 114,274

LiabilitiesCustomer deposit/dividend (82,230 + 448) 82,678Borrowed funds 3,520Deposits and placement from other banking institutions 6,410Miscellaneous accruals 140Current tax 1,050 Total liabilities 93,798

Share holders equityShare capital 10,000Share premium 3,000


Revaluation reserve 2,480Retained Profit 4,396Proposed dividend 600 Total Share holders Equity 20,000

Total liabilities and Shareholders equity 114,274

QUESTION TWOLeasing:The Rights to use an asset by one party called the lessee in return for rentals paid to another party called the lessor. The lessor retains ownership of the asset throughout the period of lease.

Hire Purchase:An asset is acquired by way of installment payment, whereby ownership eventually passes to the buyer when the last installment has been paid.

Accounting issues:Leasing:The main issues in leases is making a distinction between an operating lease and a finance lease, and in addition in a finance lease how to deal with the interest i.e allocating in the interest over the lease period.

Hire Purchase:In hire purchase the main issue is on how to allocate Gross profit and interest over the installment period by the seller and how to account for interest by the buyer.

Kopesha limited Trading profit and loss account for the year ended 31 march 2006.

Sh’000’ Sh’000’Sales (55,200 – 7,200) 48,000Cost of sales Opening inventory 1,800Purchase 24,600

26,400Closing inventory (2,400) (24,000) Gross profit 24,000Interest on Hire Purchase sales 2,100

26,100Expenses:Depreciation: Property, Plant and equipment 6,600Other operating expenses (16,000- 2,000) 14,000Interest in finance lease (8,000-2,000) x 10% 600 (21,200) Net profit 4,900



KOPESHA LIMITEDBALANCE SHEET AS AT 31 March 2006.Non current assets: Sh’000’ Sh’000’Property, Plant and Equipment: (55000+8000) 63,000Depreciation (20000+5000+16000) (26,000)

36,400Current Assets:Inventory 2,400Receivables (34200-5100) 29,100Cash at bank and in hand 1,800 33,300 Total Assets 69,700

Capital and liabilities:Ordinary share capital 53,200Net Profit 4,900

58,100Non Current Liabilities:Obligations under finance lease 4,600Current LiabilitiesAccounts payable 5,000Obligations under finance lease 2,000 7,000

69,700

Workings:interest included in hire purchase sales (in thousands of shillings)((100+200+300+600) x 6000) = Sh. 7,200Sum of digits for instalments(4 x (4+1))/2=10iii) Interest earned

Sh’000’Quarter ended June ((4+3+2)/10x (100x6000) 540

Quarter ended September ((4+3)/10x (200x6000) 840

Quarter ended December ((4/10x (300x6000) 720 2,100

Total interest on hire purchase 7,200Less: Reported to profit and loss (2,100) Interest outstanding (Deducted from Receivables) 5,100

(iv) Finance lease: Sh’000’Profit and Loss Expense Balance of Liability at 1.4.05 8,000 Less:instalment paid (2,000) Balance outstanding 6,000 Interest at 10% per annum 600


Balance sheet Liability: Sh’000’Total due as at 1.4.05 8,000Less: installment paid (2,000)

6,000Add: Interest accrued 600 Total due at 31March06 6,600

Current liability (next year’s installment) 2,000 No current liability (balance 6,600-2,000) 4,600 Depreciation on asset held on finance lease = 8,000000 =1,600,000

5QUESTION FOUR(i) The direct method of cash flow statement preparation presents cash generated from operations by getting the difference between cash received from customers and cash paid out to suppliers of goods and services.The indirect method of cash flow statement preparation presents cash from operations by making adjustments to the profit before tax for the following items:Incomes and expenses that do not involve movement of cash such as depreciation, amortization of intangibles, profit and loss on disposal of non current assets.Receipts and payments that have been incorrectly classified such as investment income and interest charged.Changes in working capital i.e. increase or decrease in inventory, receivables and payables.

(i) Home marketing ltd Cash flow statement for the year ended 31december 2005 Sh’000’ Sh’000Cash flow from operating activitiesCash received from customers 367,000Cash paid to employees& suppliers (324,000) Cash generated from operations 43,000 Interest paid (6,000) Dividend Paid (4,000)Net Cash received from operating activities 33,000

Cash flow from investing activitiesPurchase of equipment (2,000)Proceeds on sale of marketable securities 14,000 Net cash received from investing activities 12,000

Cash flow from financing activitiesIssue of shares (10,000+5,000) 15,000Repayment of long term loan (10,000) Net cash from financing activities 5,000

Net increase in cash and cash equivalents 50,000Cash and Cash equivalent (1 January 2005) 10,000



Cash and cash equivalents (31 December 2005) 60,000

Workings Sh’000’ Sh’000’Cash receipts from customersSales 350,000Decrease in accounts receivables-gross 15,000Increase in Provision- accounts receivable 2,000 17,000 367,000Cash paid to employees and suppliersCosts of sales 140,000Operating expenses 243,000Interest Paid (6,000)Depreciation, Plant and Equipment (35,000)Increase in Inventory 2,000Increase in accounts payable 23,000)Decrease in accrued expenses payable 3,000 324,000b) (ii) Reconciliation of net loss to cash flow from operating activities.

Sh’000’Net Loss (34,000)Adjust for: Depreciation on plant and equivalent 35,000 Increase in provision for accounts receivable 2,000Loss on sale marketable securities 1,000Interest expense 6,000Operating profit before working capital changes 10,000decrease in accounts receivables 15,000Increase in inventory (2,000)Increase in accounts payable 23,000Decrease in accrued expenses payable (3,000)Cash generated from operations 43,000

Explanation:Net Loss (34,000)Impact of:Non-cash items( not paid out) 37,000Investing and financing activities 7,000


Timing difference (time of recording and actual time payment or receipts) 33,000Cash generated from operations 43,000 (4 marks) (Total 20 marks)

QUESTION FIVE(a) Ministry of Energy Vote E45- Sustainable and Renewable Energy

APPROPRIATION ACCOUNTFor the year Ended 30 June 2005

000 Personal emoluments050 House allowance080 Passages and leave100 Transport & maintenance110 Traveling120 Postal& Telecommunication190Miscellaneous charges196 Training expenses230 Purchase of equipment

Less:620 Appropriations- in Aid

Approved EstimateSh’000’234,569 39,100 8,280 32,200 2,668 9,20034,960 13,960 42,000

416,928 (10,000) 406,928

Actual ExpenditureSh’000’195,040 28,520 1,334 27,186 3,312 6,62433,76413,46779,600

388,856 (11,120) 377,736

Over ExpenditureSh’000’ - - - 644 - - - 37,600

38,244

Under ExpenditureSh’000’ 39,520 10,580 6,946 5,014

2,576 1,196 484

66,316



Approved Appropriation CalculationInitial Supplementary Final

Total Approved Estimates 416,928 (10,000) 406,928 Less: Appropriations- in-aid (10,000) (8,000) (18,000)

406,928 (18,000) 388,928

b) General Account of VoteExpenditure 388,856Excess A.I.A 1,120Bal c/f 10,072 400,048

Exchequer (initial) 406,928Exchequer (supplementary) (18,000) 388,928Appropriations-in-aid 11,120 400,048 Balance b/f 10,072


c) Exchequer Account

GAV-Initial 406,928-Supplementary (18,000) 388,928Bal c/f 11,072

406,928

Cash-PMG(drawdown 1) 100,000Cash-PMG(drawdown 2) 100,000Cash-PMG(drawdown 3) 100,000Cash- PMG(drawdown 4) 100,000 400,000 Balance b/f 11,072

d) PMGExchequer (dd 1) 100,000 (dd 2) 100,000 (dd 3) 100,000 (dd 4) 100,000 AIA 11,120 411,120 Balance b/f 22,264

Expenditure 388,856Balance c/f 22,264

411,120

e) Statement of assets and liabilities As at 30 June 2005

Assets Sh’000’ Cash (PMG) 22,264 Exchequer 11,072 Excess A-I-A 1,120 General account of vote 10,072

22,264

FINANCIAL ACCOUNTING 2DECEMBER 2006SUGGESTED SOLUTIONS

QUESTION ONE



(i) Bonus in reduction of premium Some insurance policies have bonus benefits whereby the insured is paid some amount after a certain period. Instead of paying bonus in cash, the insurance company may deduct the bonus from the premiums due from the insured. This is known as bonus in reduction of premium. It is shown both on the debit side (as an expense) and credit side (by adding to the premium) of the revenue account.

(ii) Surrender value This is the amount payable to the insured in case the insured wants to terminate the policy.

(iii) ReinsuranceThis arises when an insurance company transfers some of the risk from a client to another insurance company by paying some premiums to the re-insurer. The re-insurer will thereafter bear some of the claims incurred by the insurance company.

iv) Annuity This is an annual payment which a life insurance company guarantees to pay for a lump sum received at one time to the insured from the date he attains a specified age till his death. It is an expense and is shown on the debit side of the revenue account

BIMA INSURANCE LTDRevenue Accounts for the year ended 30 June 2006

Fire Sh.000

Motor Sh.000

Fire Sh.000

Motor Sh’000

Net claims paid 55,784

111,562

Reserve for unexpired risk

40,000

100,000

Add: claimsOutstanding c/f 90,00

0158,000

Net earned premiums

139,668

259,456

Less: claimsOutstanding b/f 72,03

6144,074

73,748

125,488

To P &L a/c 21,658

3,528

Net commission Paid

3,466 6,938

Management 54,27 100,8


Expenses 8 30Reserve forUnexpired risks 69,83

4129,728

201,326

362,984

201,326

362,984

Management expenses apportionmentFire: 139,668 x155,108 = 54,278 399,124

Motor: 259,456 x155,108 = 100,830399,124

Reserve for unexpired risks: 30 June 2006

Fire : 50 x 139,668 = 69,834 100

Motor : 50 x 259,456 = 129,728100

Bima insurance limitedProfit and loss account for the year ended 30 June 2006

Sh.000 Sh.000Loss from fire business (21,658)Loss from motor business (3,528)Investment income 72,000Other income 17,564

64,378Less: management expenses not chargedTo revenue accounts 20,000Bad debts 5.000Depreciation: Motor vehicles 200 Equipment 1,441.4 26.641.4

37,736.6

Depreciation : Motor vehicles 0.20 x1,000 = 200 Equipment 0.10 x 14.414= 1,441.4

QUESTION TWO

a) (i) Biological transformation Comprises the process of growth, degeneration, production and

procreation that



cause qualitative and quantitative changes in a biological asset.

ii) Agricultural activity It is the management by an enterprise of the biological transformation of biological assets for sale into agricultural produce or into additional biological assets.

b) i) Crop AccountSh.000 Sh,000

Opening stock Sales 35,650 Growing crops 6,800 Wages in kind 1,200 Seeds 2,050 Fertilizers 2,600 Purchases Seeds 5,000 Fertilizers 11,500Salaries and wages Cash 6,000 Closing stock In kind 1,200Expenses 2,500 Growing crops 7,100Depreciation 3,000 Seeds 1,800Profit to general profit Fertilizer 2,200And loss account 7,300

47,950 47,950

Livestock Account

Sh.000 Sh.000Opening stock Sales- Cattle 8,300 Cattle 78,000- Cattle feed 3,200 Milk 15,200

Wages in kind 1,500Purchases Closing stock- Cattle 47,000 - Cattle 6,500- Cattle feed 14,000 - Cattle feed 2,800Salaries and wages- In cash 7,200- In kind 1,500Expenses 4,000Depreciation 2,000Profit to general profit and loss account

16,800

104,000 104,000

Poultry accountSh.000 Sh.000

Opening stock Sales- Poultry 3,800 Poultry 35,000- Poultry feed 1,800 Eggs 2,800


- Eggs 200 Wages in kindPurchases - Poultry 800- Poultry 18,000 - Eggs 150- Poultry feed 6,000 Closing stockSalaries and wages -Poultry 2,150- In cash 4,800 - Poultry feed 1,200- In kind 950 - Eggs 150Expenses 3,000Depreciation 1,000Profit to general profit and loss account

2,70042,250 42,250

ii) Wakulima Ltd General Profit and Loss Account for the year ended 30 June 2006

Sh,000 Sh.000Profit from-Crop activity 7,300-Cattle activity 16,800Poultry activity 2,700

26,800ExpensesManagers salary 6,000Postage and stationery 800General expenses 7,000Insurance 3,700Finance cost 1,750Net profit 19.250Proposed dividend 4,000Retained profit 3,550

QUESTION THREEBenefits of cash flow statement It is more objective than the income statement and balance sheet as it is not affected by estimates and assumptions. It shows actual positionCan be used together with other ratios to appraise the liquidity of a firmCan also assist the management in preparing future cash budgetsCan be used to appraise the efficiency of management in using funds/cash

Wananchi LimitedCash flow statement for the year ended 30.9.2006

Cash flows from operating activities Sh. Million Sh. MillionProfit before loss 232



Adjustment:Depreciation of PPE 74Amortisation of intangibles 2Interest income (6)Interest expense 14Profit on sale of PPE (4)

312Change in working capitalDecrease in inventories 30Increase in receivables (44)Increase in payables 170Cash from operations 468Interest paid (4+14-6) (12)Tax paid (46)Net cash received from operating activities 410Cash flows from investing activitiesInterest received (6+4+2) 8Purchase of PPE (194)Sale of PPE 42Purchase of investment (160)Net cash used in investing activities (304)Cash flows from financing activitiesIssue of ordinary share (40-2) 38Repayment of finance lease (36)Repayment of loan stock (40)Dividends paid (16 +32) (48)Net cash used in financing activities (86)Increase in cash and cash equivalents 20Cash and cash equivalents (30.9.2005) 2Cash and cash equivalents (30.9.2005) 22Cash and cash equivalents 30.9.2005

Sh Million30.9.2006 Sh Million

Cash in hand 42 8Bank overdraft (40) (16)Treasurey bills 30

2 22

WorkingsPurchase of PPEPPE Shm ShmBalance b/d 392 Disposal (NBV) 38Finance lease 56 Depreciation 74Revaluation gain 14Cash book 194 Balance c/d 544 656 656

Finance lease obligations


Shm ShmCash book 36 Balance b/d (6+84) 90Balance c/d(100 + 10) 110 PPE 146 146 146

Tax paid Tax Account Shm ShmCash book 46 Balance b/d 40Balance c/d 58 P & L Account 64 104 104

QUESTION FOUR a) Calculation of stock loss

Sh,000Opening stock 1.11.05 280Add: purchases from 1.11.05 to 31.7.06 7,226 (9316000 – 2090000)

7,506Less: cost of sales from 1.11.05 to 31.7.0680 x (11220000 – 2400000) (7,056) 100 450

Less: salvage value (150) Cost of stock lost in fire 300 Cost of stock available just before fire = Sh 450,000Sum insured = Sh 360, 000Stock loss = Sh.300, 000Claim from insurance company = Sh 360,000 X 300,000

Sh 450,000= Sh.240.000

Therefore stock loss not covered by insurance= Sh 300,000 – Sh 240,000= Sh 60,000

Gross profit percentage for year ended 31 October 2006 is determined as 20% in the workings making cost of sales percentage to be 80 %.

b) Beta Ltd Trading Profit and Loss Account for year ended 31 October 2006

Sh, 000 Sh,000Sales 11,200



Opening inventory 280Purchases 9,316

9,596Less: Stock loss (300) Closing stock (320) (8,976)Gross profit 2,224

Expenses: 450Depreciation 1,404Stock loss 60Interest expense 45

(1,959)Profit 285Dividend (180)Retained profit 105NB: Closing stock is obtained as a balancing figure

c) Beta Ltd Balance sheet as at 31 October 2006

Sh,000 Sh,000AssetsNon-current assetsMachinery and equipment 4,050Current assetsInventory 320Receivables 410Bank 235

9655,015

Equity and liabilitiesCapital and reservesOrdinary share capital 3,000Retained profit 600

3,605Non – current liabilityLoan 1,000Current liabilitiesPayables 320Accrued expenses 90

4105,015

Workings:Calculation of gross profit percentage.


Sh,000 Sh,000Sales for the year ended 31 October 2005 8,540Less: sales at reduce price 190

8,350Cost of sales 7,007Less: cost of sales at reduced Cost(Sh 180000 – 20000) 160 (6,847)

Gross profit 1,503

Gross profit percentage for the yearEnded 31/10/10/2005 = Sh 1503 x 100

Sh, 8350

= 18%Increase in grossProfit in the year ended 31/10/2006 = 2%Therefore gross profit percentage for the year ended 31/10/2006 = 18% + 2%

= 20%

Preparation of ledger accounts to determine the balance as at 31 October 2006Receivables

Sh,000 Sh,000Balance c/d 320 Bank account 11,130Sales 11,220 Balance c/d 410 11,540 11,54

0

Payables Sh 000

Sh,000

Bank account 9,236

Balance b/d 240

Balance c/d 320

Purchases 9,316

9,556

9,556

Accrued Expenses Sh 000 Sh,00

0Bank account 1,429 Balance b/d

70Balance c/d 90 P & L account

9,316



1,519 1,519

Bank account Sh 000 Sh,00

0Bank account 210

Payables 9,236

Receivables 11,130

Expenses 1,429

Insurance 240

Equipment 500Dividend 180Balance c/d 235

11,580

11,580

Machinery and Equipment Account Sh 000 Sh,00

0Bank account 4,000 Depreciation

450Bank 500 Balance c/d

4,050 4,500 4,50

0

QUESTION FIVEi) Sinking fund This is a fund set up periodically to provide funds for the redemption of a debt in future when the debt matures. The corporation (or institution) can make cash payments to the trustees, who in turn call the bonds or debt for redemption at the sinking fund call price. A sinking fund can also be created to provide funds for future purchase or acquisition of a capital asset. This can be used as a financing method to replace the used as capital assets.

ii) Revolving fund These are special forms of funds created by the approval of parliament. These funds provide the financial resources for achieve some specified objectives. Most government enterprises are set up through revolving funds. The initial appropriation is made out of the consolidated fund. The receipts generated from such funds are automatically used by enterprise. Revolving funds should be self-financing ie the expenditure of the funds (enterprise0 should be met by the receipts generated leaving the initial appropriation from the consolidated fund to act as the capital base to the consolidated fund.


(i) Goods sent out consignment accountGSOC

Sh 000

Sh,000

Purchases 700 Cost of sales 769Packing 16Insurance 30Transport 42 Closing inventory 43Unpacking 12gadgets 12

812 812

ii) XYZ Ltd accountSh 000 Sh,000

sales 980 Unpacking 12(160 x 5000) Carriage out 18+ (30x 6000) Casual wages 15

Advertising 5Storage 12Repairs 10Gadgets 12Commission 49Bank account 800Balance c/d 47

980 980

Profit and loss account for three months ended 30 June 2006Sh.000 Sh.000

Sales 980Cost of sales 769Gross profit 211Expenses-Carriage out 18-Casual wages 15-Advertising 5-Storage 12-Repairs 10-Commission 49

109Profit 102



WorkingsCalculating of cost per unit of gas cooker in the hands of consigneeCost per unit of gas cookers without detectionGadgets = Sh 81,2000 – Sh 12,000

200

= Sh 4,000

Cost of gadgets per cooker = Sh 12,000 40

= Sh 300Cost per unit of gas cookers with detection gadgets = Sh 4,000 + Sh 300 = Sh 4,300

2. Calculation of cost of goods sold Cost of cookers sold without gadgets (160 x Sh 4000) = 640Cost of cookers sold with gadgets (30 x Sh 4300) 129

769 3. Calculating of closing stock

Units unsold = 10 Cost per unit = Sh 4,300 Therefore closing inventory = 10xSh 4,300

= Sh 43,000

4. Commission payable to XYZ Ltd

Commission = 5 X Sh 980,000 = Sh 49,000 100

Questions - Mocks 237

Part III: Comprehensive Mock Examinations

Questions - Mocks

MOCK PAPER 1

Answer all the questions: Time 3 hours

QUESTION ONEThe following is the trial balance of Scem Farm on 31st Dec 2002:

Sh.’000’ Sh.’000’Debts:Land and buildingsFarm machineSundry debtorsCash in hand

Stock 1.1.2002

Growing crops, wheat seeds and fertilizersLivestockFeeding materialsManager’s salaryFarm labourOffice expensesCrop expensesLivestock purchases Livestock expenseFarm house expensesStaff mealsRepairs on machineryInterest on loan (crop)Tool and implements

210,000108,000 30,000 26,000

20,000 25,000 6,000 6,000 5,000 4,000 10,000 12,000 28,300 12,000 500 1,000 4,000 2,500

CreditorsCapitalProfit & Loss accountLoanProvision for depreciationSale of wheatSale of livestockManagers personal a/csBank overdraftSandy creditors

270,0010,00060,00060,00030,00035,00075,0002,0003,00015,000

______

500,000 500,000

Additional Information:

1. Stock on 31.12.2002

Shs.’000’Growing crops, wheat, seeds and fertilizersLivestockTools and implementsFeeding materials

10,00040,000 2,000 1,000


238 Comprehensive Mock Examinations

2. Depreciation on tool and implements is to be apportioned between crops and livestock equally.

3. The livestock is charged with 20% of manager’s salary and staff meals.

Required:Prepare Crop Account, Livestock Account, Profit and Loss Accounts and a balance sheet as at that date.

QUESTION TWOExcel Business services sells its goods in containers which are returnable. These containers are purchased by the company at Sh.20 per container but each container is written down to the book value of Sh.15 per container immediately it is purchased. For stock taking purposes all containers are valued Sh.15 per container irrespective of whether they are still in stock or in the hands of customers. Containers are charged out to customers at Sh.25 per container, but the customer is credited with Sh.18 per container if it is returned in good condition within three months of receipt.

The following information relates to the year ended on 31st March 2003:

(i) Stock at 1.4.2002 Premises 10,000 Customers 2,000

(ii) During the year 15,000 containers were purchased(iii) 40,000 containers were returned by customers within the time

limit(iv) 3,000 containers were not returned by customers within the time

limit. These were considered as kept by the customers permanently.

(v) 1,000 containers were scrapped and sold for Sh.3,000(vi) Shs.7,000 were spent on the repair of the containers.(vii) On 31st March 2003, 4,000 containers were in the possession of

customers.

Required:Prepare container stock and suspense account for the year ended 31st

March 2003 and find the profit or loss made on containers.(20 marks)

QUESTION THREE(a) Explain briefly the application of the accruals and prudence concepts in the accounting for long term construction contracts. (5 marks)

(b) Ujenzi Limited are engaged in a number of long-term contracts. The following details relate to the three uncompleted contracts in the company’s books at 31 August 2003.


Contract No. X012Sh.’000’

X022Sh.’000’

X023Sh.’000’

Cost of work to 31st Aug. 2003Value of work 31 Aug. 2003 as certified by contract architectsProgress payments invoice to 31 Aug. 2003Process payment received by 31 Aug. 2003Final cost including future costs of rectification and guarantee workFinal contract price

1,218

1,5401,3201,100

1,3201,672

1,091

880704704

1,5401,232

545.6

572440440

2,6403,520

Note 1: The cost of work to 31 Aug. 2003 has been determined after crediting unused materials and written down for plant of use.

Required:(a) Prepare a statement for the managing director showing your calculations for each contract of valuation of W.I.P at 31 Aug. 2003 and of profit or loss included therein (use % of completion)

(12 marks)

(b) Show as an extract the information which should appear in the balance sheet for the work in progress. (3 marks)(Total 20 Marks)

QUESTION FOURThe following figures have been extracted from the books of Mananchi Bank Ltd. for the year ended 31.12.2000:

Sh.’000’

Share capital authorized and issued1,000,000 shares of Sh.100, Sh.50 paidReserve FundFixed deposit accountSaving bank depositsCurrent accountMoney at call and short noticeInvestment (cost)Interest accrued and paidSalaries (including directors fee Sh.50,000)RentGeneral expenses including auditors fee Sh.20,000Profit and loss (1.1.2000)Dividend for 2,000Premises (after depreciation to 1.12.000

50,0002,5009,50030,00080,0003,00030,0002,00080020010060,600500120,000



Sh.10M)Cash in handCash with Central Bank of KenyaCash with other banksBorrowed from other banksInterest and discountsBills discounted and purchasedBills payableLoan overdraft and cash creditsUnclaimed dividendsBills for collectionAcceptance and endorsementsSundry creditors

60015,00013,0007,00011,5006,0008,00070,0003001,4002,000300

Notes:(i) Rebate on bills discounted and purchased for unexpired term

amounts to Sh.50,000.(ii) Depreciation on premises is on straight line, 5% on cost while

the provision for doubtful debts Sh.300,000 is required.(iii) The bank has no business in outside Kenya, a provision for

taxation Sh.1,000,000 is to be credited.

Required:Prepare:(a) Profit & Loss A/c for the year ended 31.12.2000(b) Balance sheet as at that date. (Total 20 Marks)

QUESTION FIVEThe approved estimate and actual expenditure details of the ministry of livestock development 1997/98 were as follows:

Approved

Estimates

K£

Actual

ExpenditureK£

000050080100110120190196230620

Personal emolumentsHouse allowancesPassages and leaveTransport maintenanceTraveling and accommodationPostal and telecommunication expensesMiscellaneous chargesTraining expensesPurchase of equipmentAppropriation-in-aid

123,280 19,550 4,140 16,100 1,334 4,600 17,480 5,980 21,000 1,000

97,52014,260 66713,593 1,656 3,31216,882 4,73839,800 5,560 (realized)


The Ministry made four equal withdrawals from Exchequer in Julyy 1997, October 1997, January 1998 and May 1998. In total the Ministry had withdrawn Ksh.200,000 by the end of the year.

Required:(a) Prepare the following Accounts

General Account of Vote (G.A.V)The Exchequer AccountThe Paymaster-General (P.M.G)

(b) A Statement of Assets and Liabilities at 30th June ’98. (Total: 20 marks)



MOCK PAPER 2

QUESTION ONE(a) Distinguish between the accounting treatment of normal losses and abnormal losses with respect to consignments. (4 marks)

(b) On 1st January 2003, Kamau Traders, based in Nairobi consigned 10,000 bags of sugar to Obote Traders in Busia. The sugar was invoiced at Sh.100 per bag, being cost plus 60%. Kamau paid Sh.500,000 for freight and Sh.300,000 for insurance in transit.

During transit 500 bags were accidentally damaged resulting in a major loss. On 28 February 2003, insurance company paid directly to Kamau Traders Sh.150,000 in full settlement of the claim.

Obote traders took delivery of the sugar on 5th January 2003 and accepted a bill drawn on them for Sh.2 million for 30 days.

On 31st March 2003, Obote Traders reported:

a shortage of equipment of 500 bags due to loading and unloading spillage expected for this commodity.Sale of 4,000 bags for Sh.3,240,000 and 4,450 bags for Sh.3,577,800Sale of damaged bags for Sh.200 per bagExpenses: - Clearing charges and carriage to warehouse carriage outward Sh.160,000, warehouse rent Sh.90,000 and insurance Sh.75,000.

Obote Traders are entitled to a commission of 5% on sales per bag not exceeding invoice price and at 25% of any surplus price realized. All non recurring expenses incurred are attributable to good as well as damaged or split bags.

The amount owing to Kamau Traders was paid by cheque on 31 March 2003.

Required:In the books of Kamau Traders prepare the following ledger account in the books of Kamau traders for the three months ended 31st March 2003:

(i) Consignment. (8 marks)(ii) Personal Account of Obote Traders (4 marks)(iii) Accidental loss account (4 marks)

(Total: 20 marks)

QUESTION TWOJubilation Insurance Company is well known fire risk insurance company having started business in the early 1940’s. Its accounts are made up to 31st December each year. The balances below have been extracted from the books of account as at 31 December 2003.


Shs. ’000’ Clamps paidOutstanding claims 1.1.2003Claims intimated and accepted but not paid on 31 December 2003Premiums recurredRe-Insurance premium paidCommissionCommission on re-insurance cededCommission on re-insurance acceptedExpenses of managementProvisions for un-expired risk on 1.1.2003Additional provision for un-expired risk on 1.1.2003Bonus utilized in reduction of premiumRe-Insurance recoveries of claimsMedical expenses regarding claimsLoss on sale for motor carBad debtsRefund for double taxationInterest + dividendsIncome tax deducted thereonLegal expenses relating to claimsProfit on sale of investmentsRent of staff quarters deducted from salariesDepreciation of furniture

480,00040,00070,0001,200,000120,000200,0004,0008,000302,000400,00020,00012,0008,0005,0003,5002,5004,5008,0001,5004,0003,5002,4004,600

The management would wish to provide for additional reserve for unexpired risk of 1% of the net premium in addition to the opening balance of additional reserve while 40% general reserve for unexpired risk will be maintained.

Required:(a) Prepare a revenue account in respect of fire insurance business carried out by Jubilation Insurance Co. Ltd for the year ended 31st

December 2003. (15 marks)

(b) Explain the concept of “self-insurance” and how it works in businesses. (5 marks)

(Total: 20 marks)

QUESTION THREEKanjung’ Advocates have been in practice for several years. The books of accounts show the following information:

Balance Sheet as at 30th April 2001Sh.’000’

Sh.’000’

Fixed Assets Sh.’000’

Sh.’000’

Capital

Current Liabilities

827 Furniture & Fittings

2471



Clients A/cAccrued rentAccrued salaries

782 34 33 849

-

EquipmentMotor vehiclesFees arrearsCash at bankOffice a/cClient a/c

376120

303782

471

1,205

1,676 1,676

The details of receipt and payments for the year ended 30 April 2002 is as given below:

Receipts

Sh.’000’

Payments

Sh.’000’

Fees for services renderedDisbursements: Stationery Transport MiscellaneousDeposit for land buying for clientDeposit for a criminal case from client

888

12 15 23384

324

Office rentSalaries and wagesEquipment purchasedTelephone postageMiscellaneous expensesWater and electricityPrinting and stationeryTransportMotor vehicles expensesOffice repairsDeposit on land sale contract for clientDrawings

224230149 73 52 35 38 56 98 18

230150

Additional Information:(i) Interim fee note of Sh.125,000 was debited to the client accounts

for the criminal case.(ii) Disbursement for stationery, Sh.5,000, transport Sh.3,000 and

miscellaneous Sh.1,000 have been charged to the clients a/c.(iii) Accrued expenses amounted to Sh.5,000, Sh.27,000 and

Sh.28,000 for telephone, rent and salaries respectively.(iv) Depreciation is provided for on reducing balance method at

12.5%, 15% and 25% on furniture and fittings, equipment and motor vehicles respectively.

(v) Fees in arrears amounted to Sh.320,000

Required(a) Advicate’s income and expenditure account for the year ended 30 April 2002.(8 marks)(b) The client’s account for the year ended 30 April 2002. (6 marks)


(c) Balance sheet as at 30 April 2002. (6 marks)(Total: 20 marks)

QUESTION FOURWrite brief and concise notes on the following:

(a) Committee of ways and means(b) Controller and auditor general(c) Public Accounts Committee(d) Trust funds(e) Sinking funds.(Total 20 Marks)QUESTION FIVED and R were doing business as engineering contractors. They undertake in 1999 jointly to build and install new machinery for a company for a contract price of Ksh.134m, Sh.84m payable in instalments in cost and the balance as fully paid shares in the company. A bank account was opened as joint, D paying in Sh.45m and R Sh.20m. They were to share profits and losses in the ratio 3:2 respectively. The following transactions took place in 1999:

Sh.’000’ Amount advanced to suppliers for material suppliedValue of materials supplied by suppliersBalance paid to suppliers in full and final settlementWages paidMaterials purchased in cashMaterials supplied by D from personal stockEngineering consultant fees paidValue of stock lost in fire but not covered by insurance

52,00089,00035,50036,000 2,500 9,50 3,250 3,500

The contract was completed and the price dully received. D took all the shares at an agreed value of Sh.47m and ‘R’ took the balance of stock (cost 3.5m) for Sh.2.75m.

Required:Ledger accounts to record the above transactions. (Total 20 Marks)



Answers-Mocks

Mock Paper One

QUESTION ONECrop and Livestock A/c

Crop Livestock

Crop Livestock

Opening stockGrowing crops, wheat, seeds and fertilizersLivestockFeeding materialSalaries and wages: Manager’s salary LabourCrop expensesLivestock expensesLivestock purchasesFarmhouse expensesStaff mealsRepairs to machineryInterest loanDep: tools and implementsNet profits

20,460--

4,800 5,00010,000

1,200 400 1,000 4,000 250

-25,0006,000

1,200--28,30012,500-100--25042,650

Sale of wheatSale of livestock

Closing stockCrops, wheat, seeds and fertilizersLive stockF. materialsNet loss

35,000-

10,000

1,650

- 75,000

40,000 1,000

46,650

116,000

46,650

116,000

Profit and Loss A/c

Crop net lossOffice expensesNet profit

P & L bal c/d

1,650 4,00037,00042,650

47,00047,000

Net profitLive stock

Net profitP & L b/f

42,65042,650

37,00010,00047,000

Balance sheet as at 31 December

Answers - Mocks 247

CapitalProfit & LossLoanCurrent Liabilities CreditorsManager’s personal A/cBank overdraft

270,000 47,000 60,000

15,000 2,000 3,000

______397,000

Land & buildingsFarm machinery (net of Dept)Tool and implementsCurrent AssetsGrowing crops, wheat, seeds and fertilizers.LivestockFarm materialsDebtorsCash in hand

210,000 78,000 20,000

10,000 40,000 1,000 30,000 26,000

290,000

107,000397,000

Workings:1. Depreciation of tools and implements

Sh.Balance b/fLess: balance b/f

Depreciation: Crop Livestock

2,5002,000 500

250 250

2. Manager SalarySh.

Crop A/c 80%Livestock 20%

4,8001,2006,000

3. Staff MealsSh.

Crop A/c 80%Livestock 20%

400100500

QUESTION TWOContainer Stock Account

Rate

Qty Amt Rate

Qty Amt

B/f – Premiums - Customers

151520-

10,000 2,000

150,000 50,000

Bank – scrapped a/cCustomers Supenses a/c

-

-

1,000

-

3,000

280,00



Bank – Purchases - RepairsProfit & loss A/c

- 15,000--

300,000 7,000195,000

Hiring chargeContainers kept by customersBal c/d: Premises Customers

18

1515

3,000

19,000 4,000

0

54,000

285,000 60,000

27,000

682,000

27,000

682,000

Rate

Qty Amt Rate

Qty Amt

Customer P. A/cReturned by customersC. Stock a/cHiring profitC. Stock A/cKept by customers31.3 Bal c/d

18

-

1818

35,000

-

3,0004,000

630,000

280,000

54,00072,000

1.4.2002Bal b/f

Customers Personal a/cs

18

25

2,000

40,000

36,000

1,000,000

42,000

1,036,000

42,000

1,036,000

Answers - Mocks 249

Statement showing the profit on containers

Hiring chargeAdd profit on containers kept by customers (3 x 3000)Less: Repairs : Depreciation on containers (5 x 15,000) : Less: loss on scrapped containers (15,000 – 30,000)Profit on containers

7,000

75,000

12,000

280,000

9,000289,000

94,000195,000

QUESTION THREE(a) Accrual and prudence concepts in accounting are applicable to the long term contracts.

Accruals: Revenues and costs are accrued i.e. recognized as they are earned or incurred (not when money is received or paid) and recorded in the financial statements of the periods to which they relate. It means an expense which is incurred in one period should be charged against profit of that period whether or not it has been paid for by the accounting date. As per IAS 11 this concept is followed under:

(i) The costs attributable to the contract can be clearly identified.(ii) The cost included in the amount of the construction contract should comprise those costs that relate directly to specific contracts.

Prudence Concept: Uncertainties inevitably surround many transaction and revenue and profits should not be anticipated but recognized only when they are realized in form of cash or other assets which can be treated as cash. This concept means that all anticipated losses must be taken into consideration e.g. provision for bad debts etc. However the prudence does not justify the creation of secret or hidden reserves. As per IAS 11 “a foreseeable loss on contract should be provided for in the statement both for the stage of completion of contract reached on the contract and for future work on the contract.

(b) Ujenzi Ltd.

Contract No. X021Sh.000

X022Sh.000

X023Sh.000

TOTALSh.000

Contract priceEstimated total cost to completionForeseeable profit/loss

1,6721,320 352

1,2321,540 (308)

3,5202,640 880



Degree of completion:Value of work certifiedContract price 1,540 x

1001,672

= 92%

x 1001,232

= 71%

x 1003,520

= 16%

Valuation of W.I.PCost to dateProfit/loss

1,218324.84151,840

1,091 308783,200

545 -545,600

2,854.8 15,4802,870,640

W.I.P for balance sheetW.I.P to dateLess invoiced amount

1,541.801,320.0221,840

783.2704.0 79.2

545.6440.0105.6

2,870.642,464.0406.64

1. Notes contract No. X022Has a foreseeable loss of Sh.308,000 which is to be charged in full against the Profit & Loss account for the year. Actual loss to date is Sh. 211,200.

2. Contract No. X023Has not advanced since its degree of completion of 16% is less than the recommended 20%. No profit is to be recognized in this contract.

3. Value of W.I.P for balance sheetW.I.P is valued less invoiced amount.

4. The difference between the invoiced and paid amount is either amount retained or the receivable and is shown as separate asset in the balance sheet.

QUESTION FOURMwananchi Bank

Profit and loss for the year ended 31 .12.2000TurnoverProfit before taxationTaxationProfit after taxBalance b/fBalance c/d

Notes12

Sh.’000’11,450 1,550 1,000 55060,60061,150

Answers - Mocks 251

Balance sheet as at 31.12.2000

Premises (cost 130m)Investment at costCurrent assets: Money at call Cash in hand Cash with C.B.K Cash with other banks Bill discounted & purchased Loans, O/D, cash creditsNills for collection (receivable)Acceptance and endorsement

Sh. ‘000’

3,000 600 15,000 13,000 5,950 69,700 1,400 2,000110,650

Notes

(3)(4)

Sh. ‘000’

113,500 30,000

Current LiabilitiesFixed depositSaving Bank depositCurrent accountsS. creditorsBorrowed from banksBills payableUnclaimed dividendsTaxationBills for collection (payable)Acceptance and endorsed

9,500 30,000 80,000 300 7,000 8,000 300 1,000 1,400 2,000139,500 28,850

114,650Financed by:

Issued and authorized share capital 1,000,000 Ordinary shares of Sh.100 each, Sh.50 paidReserves: Share premium Profit and loss a/c

50,000

3,500 61,150114,650

Notes to accounts1. Turnover: Based on interest and discount earned

Net rebate on bills discounted for Sh.50,000

2. Profit before taxation: this is after accounting for:

Depreciation charge 6,500Directors’ fee 50Auditors fee 20

3. Bills discounted and purchased: This is net of Sh.50,000 being rebate on bills discounted.



4. Loans, overdraft and cash credits – Is shown net of Sh.300,000 provisions for doubtful debts.

Working 1:Profit before taxationInterest and discountsRebate on bill discountedInterest accrued and paid

ExpensesDepreciation on premisesProvision for doubtful debtsSalaries (Directors fees Sh.50,000)RentGeneral expenses (Auditors’ fee)Profit before taxation

6,500 300 800 200 100

11,500 (500) (2,000)_____ 9,450

7,900 1,550

QUESTION FIVEG.A.V A/c

1998 £ 1997 £June 30 PMG a/c Excess A.I.A Bal c/d

192,428 4,560 22,036219,024

Jul 1 Exchequer a/c

1998 Appropriation in Aid a/c

213,464

5,560219,024

P.M.G A/C1998 £ 1998 £June 30 Exchequer G.A.V A.I.A

200,000 5,560205,560

June 30 G.A.V Bal c/d

192,428 13,132205,560

EXHEQUER A/C1997 £ 1998 £

July G.A.V 213,464213,464

Profit A/cJune 30 Bal c/d

200,000 13,464213,464

Answers - Mocks 253

STATEMENT OF ASSETS AND LIABILITIES AS AT 30.6.1998£ £

LiabilitiesG.A.VExcessA.I.A

22,036 4,56026,596

AssetsExchequer A/cP.M.G A/c

13,46413,13226,596

Notes:1. Total of the approved estimates is obtained by adding up the approved estimates in respect of expenditure of different heads. Appropriation in aid is not included.

2. Total expenditure is obtained by adding up the actual expenditure of different heads A.I.A (realized) is not included.



MOCK PAPER 2QUESTION ONE(a) Normal loss: May arise due to loading and unloading of goods, evaporation and some other reasons relating to the nature of the goods. Such a loss is a part of the cost of consignment, so no entry is passed in the books of the consignments. This loss reduces the profit on goods sold on consignment basis.

Abnormal loss: Arise due to some abnormal events e.g. destruction of goods due to fire, theft of goods and inefficiency like normal breakage due to careless handling. The value of unsold stock on consignment. This is credited to the consignment and debited to the abnormal loss account. If the stock is insured then the amount of insurance claim approved is debited to the insurance company account and debited to the abnormal loss account. Similarly, any amount realized on account of damaged goods is credited to abnormal loss account. Any balance in the normal loss account is ultimately transferred to the profit and loss account.

(b) Consignment AccountSh.’000’ Sh.’00

0’Good sent on consignment a/cBank Freight InsuranceObote A/c Clearing & carriage Rent InsuranceObote A/cCommission (W2)Profit & Loss A/cProfit on consignment

5,000

500 300

160 90 75

352.5

1,213.47,690.9

Sales (3,240 + 3,577.8)Value of damaged goods (W-1)Consignment stock (W-3)

6,817.8 290 583.1

_____7,690.9

Personal A/c of Obote TradersSh.’000’ Sh.’00

0’SalesAccidental loss a/cSale of damaged goods

6,817.8

100

Bill received A/cConsignment A/c Clearing and carriage Warehouse rent InsuranceCommissionAccidental lossCommission on sales

2,000

160 90 75 352.5

Answers - Mocks 255

_____ (damaged)Bank account - remittance

290_____

6,917.8 6,917.8



Accidental Loss A/cSh.’000’

Sh.’000’

Consignment (damaged sugar) Wk-1Obote tradersCommission on damaged goods

290

583.1_____

Bank: Insurance claimObote traders sales of damaged goodsProfit & Loss A/cLoss on damaged stock

150

200

523.1873.1 873.1

Workings1. Valuation of Damaged sugar

Cost of damaged sugar (500 x 500)Proportion of non-recovering expenses

Freight 500Insurance 300

800

Proportion=

= 5% x 800 = 40

2. Valuation of closing stockSh.’000’ Sh.’000’

Cost of goods on consignment Non recovery costs Freight Expenses

Less value of damaged goods

Sh.500 x 10,000

500300

5,000

8005,800 2905,570

Value of closing stock = = 583.1

CommissionSh.’000’

Sh.’000’

Price per bag = 810

Sale of 4,450 bags

Price per bag = 804

Answers - Mocks 257

CommissionOn 4,000 bags:Normal: 5% x (800 x 4,000) 160 25% x (4,000 x (810 – 800) 10

170

On 4450 bags:Normal: 5% x (800 x 4,450) 178 25% x (4,450 x (804 – 8,0) 4.5

182.5352.5

QUESTION TWO(a) Fire Revenue A/c for the year ended 31 Dec 2003

Claims under policies less re-insurance paid (w-1)Less: claims intimated and accepted but not paid at year-end

Less outstanding claims at the start of yearCommission on direct businessCommission on re-insurance acceptedExp. Of managementBad debtsLoss on sale of motor vehicleBonus reduction of premiumDepreciation on furnitureProfit to P & L A/c(bal. Figure)Balance 31.12.2003Reserve for unexpired riskAdditional reserve (W-2)

481,000

70,000551,000

40,000

200,000

4,000

511,000

204,000302,0002,500

3,500

12,0004,600

29,580

436,800 30,920

Reserve for unexpired riskBalance b/fAdditional reservePremium receivedLess Re-insurance

Add bonus in reduction of premiumsInterest and dividendsLess income taxRent of staff quarter recoveredProfit on sale of investmentsRefund of double taxationCommission on re-insurance ceded

400,000 20,0001,200,000 120,0001,080,000

12,0008,0001,500

420,000

1,092,000

65,000

2,400

3,5004,500

8,000

______

1,536,900

1,536,900

Workings:



1. Claims under policies less re-insurance paidSh.’000’

Claim paidLess re-insurance recoveries

Add(i) Medical expenses regarding claims(ii) Legal expenses

480,000 8,000472,000

5,000 4,000481,000

2. Reserve for unexpired risks

Reserve for unexpired risks40% x 1,092,000Additional reserveBal b/fAdd 1% x 1,092,000

20,00010,920

436,800

__ ___ 30,920

(b) The concept of self insurance occurs when a firm maintains its own fire insurance reserves. This is done by transferring specific amounts from profit and loss account to the fire insurance reserve account every year. If some loss occurs due to fire then this loss is debited to the insurance reserve account. Self insurance can work only if properties are many and these are located at different premises.

Answers - Mocks 259

QUESTION THREE(a) Kanjung’ Advocates Income and expenditure A/c for the year

ended 30.4.2002

Salaries and wages paidAdd accrued

Less prepaid las yearOffice rent paidAdd accrued

Less paid for last yearPostage and telephone paidAdd accruedWater and electricityPrinting and stationery paidLess receipts

Less client accountTransport paidLess receipts

Less clientOffice repairsMiscellaneous expenses paidLess receipts

Less clients a/cMotor vehicles expensesDep: Furniture Equipment (W-1) Motor vehicles Surplus income

240 28268 33224 27251 3473 5

381226 5561541 3

522329 1

235

217

7835

21

3818

2898

33394 315

Fees for services offeredRe.Add accruedCriminal case

Less Rec. for last year

888320 1251,333120

1,213

____

1,213

1,213

(b) Client’s A/cSh.’000’

Sh.’000’

Interim feeCriminal caseDisbursementsStationeryTransport

125

5 3

Bal b/f

2003Deposits: Land

782

384



MiscellaneousLand sale depositBal c/d

1 2301,126

Criminal case 324

-1,490 1,490

Answers - Mocks 261

Balance sheet As at April 30, 2003

Sh.’000’

Sh.’000’

CapitalAdd surplus income

Less drawings

Current liabilitiesClient a/cAccrued expenses: Salary Rent Telephone

827 3151,142 150

992

1,126

2827 5

Fixed assetsFurniture & fittings less dep.EquipmentMotor vehicleCurrent AssetsFees in arrears 320Cash at bankOffice A/c (W-2) 242Client A/c 1,126

21187282 49

0

1,688

-

2,178 2,178

W-2 Office Bank A/cSh.’000’

Sh.’000’

Bal b/fFeesDisbursementsStationeryTransportMiscellaneousClient A/cStationeryTransportMiscellaneousInterim fee noteCriminal case

303 888

12 15 23

5 3 1

125

Office rentSalaries & wagesEquipmentTelephone and postageMiscellaneous expensesWater and electricityPrinting and stationeryTransportMotor expensesOffice repairsDrawingsBal c/d

224 240 149 73 52 35 38 56 98 18 150 242

1,375 1,375

WK-1 Equipment A/cSh.’000’ Sh.’000

’Bal b/f

Bank a/c

71

149

Dep. I & E A/c15% x 220Bal c/d

33187

220 220



QUESTION FOUR(a) Committee of ways and means:The committee comprise of the whole national assembly which is responsible for the debate on the governments annual budget proposals as presented by the Minister of finance. The main functions of this committee are:Ensure that the sources of revenue to the exchequer are sound, viable and suitable.To consider various methods to be used in collecting government revenueEnsure that the proposed uses of the funds from the exchequer are in public interest and there are sufficient controls.

Answers - Mocks 263

(b) Controller and auditor generalIs responsible for audit in the public interest and all government departments. The main purpose of this audit is to ensure that all monies appropriate have been spent for correct purposes. This report is presented together with annual appropriation account.

(c) Public Account CommitteePublic Account Committee of the member of parliament. The controller and auditor general present his report about the audit of government accounts to this committee. This committee deals with issues raised by the controller and auditor general in his report. It is composed of the chairman and at least other members.

(d) Trust FundsThose funds whereby the government receives money in the capacity of a trustee e.g widows and children’s pension fund. In this fund, all married civil servants contribute. A fund is independent accounting entity. It may own some property and other assets like investment etc.

(e) Sinking FundsThese funds are created with the purpose of the repayment of public debts. Mostly, these funds are set up by the approval of the partinent. Some annual appropriations are made in these funds. The amounts appropriated are invested to earn some interest. When any public debt matures then the sinking fund is used to redeem this debt.

QUESTION FIVEJOINT BANK A/C

1999 Sh.’000’ Sh.’000’

Conventioneer: D – Cash introduced R – cash introducedJoint venture: Instalment received

45,000 20,000

84,000

Suppliers A/c: Advance Final settlementJoint venture Wages paid Cash materials Engineering feesConventioneer D – Final settlementConventioneer R

52,000 35,500

36,000 2,500 3,250

4,400 15,350

149,000 149,00



0

JOINT VENTURE A/CSh. ’000’

Sh. ’000’

Suppliers: Materials suppliedJ. Bank A/c: Wages paid Cash materialsConventioneer D – Material suppliedJoint Bank A/c – Engineering feesShares in new Co. A/c (loss)

89,000

36,000 2,500 9,250 3,250 3,000______

Joint bank: Instalment receivedShares in new company considerationSuppliers A/c (discounted rec.)Conventioneer R – (Stock taken)Share of losses Conventioneer D Conventioneer R

84,000

50,000 1,500 2,750

2,850 1,900

143,000 143,000

SUPPLIERS A/CSh.’000’ Sh.’00

0’Joint bank: Advance Final settlementJ.V A/c (Discount received)

52,00035,500 1,500

Joint venture:Material supplied 89,00

0

_____89,000 89,00

0

SHARES IN NEW COMPANY A/CSh.’000’

Sh.’000’

Joint venture A/c (Conventioneers) 50,000

Conventioneer (D) Shares takenJ.V A/c (loss on shares)

47,000 3,000

50,000 50,000

CONVETIONEER (D) A/CSh.’000’ Sh.’00

0’Shares in new companyJ.V A/c (share of loss)Joint Bank A/c: Final settlement

47,000 2,850 4,400

Joint bank a/c (cash introduced)Joint venture: Material supplied

45,000 9,250

Answers - Mocks 265

_____54,250 54,25

0

CONVETIONEER (R) A/CSh.’000’ Sh.’00

0’J.V A/c – Stock takenJ.V (Share of loss)Joint bank A/c: Final settlement

2,750 1,90015,350

Joint bank: Cash introduced 20,00

0_____

20,000 20,000


financial accounting ii as at 08th march 2007 revision kit

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