AC 813: Financial Accounting
\nASSINGMENT 1 -Feb 2023
\nInstruction
\nAnswer all Questions
\nQuestion One
\n(a) Define the term accounting standard and give four reasons why a professional
\naccounting body issues accounting standards. (5 marks)
\nb) A lather machine which costs sh. 280,000 had an estimated useful life of 5 years and an estimated salvage value of sh. 10,000 straight line method of depreciation was used.
\nGive the journal entry necessary to record each of the following alternative assumptions.<\/p>\n
(i)\tThe lathe was sold for sh. 24,000 after two years of use.
\n(ii)\tThe lethe was traded-in after 3 years for a new lethe with a list price of Ksh. 360,000 trade in allowance was shs. 160,000
\n(iii)\tThe lathe was scrapped after 4 years of use. Proceeds from sale of scrap were shs. 15,000 (4 marks)
\nc) The following trial balance was extracted from the books of Mapema Traders Ltd. as at
\n31 March 2008:
\nSh.\tSh.
\nOrdinary shares Sh. 10 each\t\t18,000,000
\n10% Preference shares Sh. 10 each\t\t3,000,000
\n8% Loan stock\t\t3,000,000
\nShare premium\t\t2,400,000
\nTrade debtors\t9,900,000
\nTrade creditors\t\t4,440,000
\nPurchases and sales\t126,600,000\t144,000,000
\nDiscounts allowed\t150,000
\nDiscounts received\t\t390,000
\nFreehold buildings:
\nAt cost\t15,000,000
\nProvision for depreciation\t\t1,500,000
\nFixtures and fittings:
\nAt cost\t19,200,000
\nProvision for depreciation\t\t7,680,000
\nStock April 2007\t12,600,000
\nReturns outwards\t\t2,400,000
\nSelling and distribution expenses\t5,010,000
\nEstablishment expenses\t3,900,000
\nAdministration expenses\t1,680,000
\nBad debts written off\t120,000
\nProvision for doubtful debts\t\t540,000
\nProfit and loss account at 1.4.2007\t\t10,860,000
\nGoodwill\t4,800,000
\nBank Overdraft\t_______\t750 000
\n198,960,000\t198,960,000<\/p>\n
Additional information:
\n1.\tThe debtors balance includes Sh.600,000 due from Otieno who has now been declared bankrupt and it has been decided to write-off this debt as a bad debt.
\n2.\tThe provision for doubtful debts is to be adjusted to 5 % of trade debtors at 31 March 2008.
\n3.\tEstablishment expenses prepaid at 31 March 2008 amount to Sh. 120,000. The difference is to be written off during the year.
\n4.\tAdministration expenses accrued due at 31 March 2008 amounted to
\nsh.210,000.
\n5.\tThe company paid the interest on the loan stock for the year ended 31 March 2008 on 28 May 2008.
\n6.\t\tGross profit is at the rate of 20% of sales.
\n7.\tDepreciation is provided annually on the cost of fixed assets held at the end of the year at the following rates:
\nFreehold buildings\t2 %
\nFixtures and fittings\t10%
\n8.\tThe company’s directors propose that the preference share dividend be paid, a dividend of 10% on the ordinary shares to be paid and to transfer an amount of Sh.7,500,000 to General Reserve.
\nRequired:
\nThe Income Statement for the year ended 31 March 2008 of Mapema Traders Ltd. and a Statement of Financial Position as at that date. (20 marks)<\/p>\n
Question Two
\n(a) Explain the meaning and significance of the revenue realization principle.(5 marks)
\n(b) Briefly explain whether revenue may be recognized in the following circumstances in respect of sales made by a business entity:
\n(i) Goods have acquired by the business entity which it confidently expects to
\nresell very quickly (2 marks)
\n(ii) A customer places a firm order for goods (2 marks)
\n(iii) Goods are delivered to the customer\u2019s premises (2 marks)
\n(iv) The customer\u2019s cheque in payment for the goods has been cleared by the
\nbank. (2 marks)
\nc) What are the qualities of useful financial statements? (6 Marks)
\nd) The following information is provided for Mvita Ltd
\nRatio Analysis\t\t2009\t\t\t2010
\nCost\tDeprec.\tNet Book
\nValue\tCost\tDeprec.\tNet Book
\nValue
\nSh.\u2019000\u2019\tSh.\u2019000\u2019\tSh.\u2019000\u2019\tSh.\u2019000\u2019\tSh.\u2019000\u2019\tSh.\u2019000\u2019
\nPlant
\nBuilding<\/p>\n
Investments at
\nCost
\nLand
\nStock
\nDebtors
\nBank<\/p>\n
Ordinary shares at Sh.20 each
\nShare premium
\nRevaluation Reserve
\nProfit and Loss Account
\n10% Debentures
\nCreditors
\nProposed Dividends
\nBank<\/p>\n
Profit & Loss Account
\nSales
\nCost of Sales<\/p>\n
Expenses
\nDividends<\/p>\n
Balance b\/f
\nBalance c\/f\t200
\n1,000<\/p>\n
80
\n200<\/p>\n
120
\n800
\n920<\/p>\n
1,000
\n860
\n1,100
\n800
\n__60
\n4,740
\n800
\n240<\/p>\n
500
\n2,000
\n800
\n400
\n____
\n4,740<\/p>\n
4,000
\n2,000
\n2,000
\n1,200
\n800
\n400
\n400
\n100
\n500\t220
\n1,800\t100
\n220\t120
\n1,580
\n1,700<\/p>\n
1,600
\n1,260
\n1,300
\n1,000
\n___-
\n6,860
\n1,000
\n280
\n400
\n500
\n3,000
\n1,200
\n400
\n__80
\n6,860<\/p>\n
4,000
\n2,400
\n1,600
\n1,200
\n400
\n400
\n–
\n500
\n500
\nRequired:
\nCalculate for Mvita Ltd. for 2009 and 2010 the following ratios:
\na.\tReturn on capital employed;
\nb.\tDebtors turnover;
\nc.\tCreditors turnover;
\nd.\tCurrent ratio;
\ne.\tQuick assets (acid test) ratio;
\nf.\tGross profit ratio
\ng.\tNet profit percentage
\nh.\tDividend cover
\ni.\tGearing ratio.
\nUsing the summarized accounts given and ratios you have just prepared, comment on the financial position and prospects of Mvita Ltd. (Total: 25 Marks)<\/p>\n
QUESTION FIVE
\na)\tThe following information is provided by Kimtai limited in Eldoret
\nKIMTAI LIMITED
\nFINANCIAL POSITION STATEMENT AS AT 31st MAR 2010
\n2010\t2009
\nSh.\u2019000\u2019\tSh.\u2019000\u2019<\/p>\n
Assets
\nNon current assets
\nLand and buildings
\nMotor vans
\nFixtures and fittings<\/p>\n
Current assets
\nStock
\nDebtors
\nprepayments
\nbank and cash balance<\/p>\n
Total assts
\nEquity and liabilities
\nCapital and reserves
\nOrdinary share capital
\nShare premium
\nRevaluation reserve
\nRetained profit<\/p>\n
Noncurrent liabilities
\n10% Debenture loan
\nBank loan<\/p>\n
Current liabilities
\nTrade creditors
\nInterest payable
\nCurrent tax
\nBank overdraft
\nProposed dividend<\/p>\n
Total equity and liabilities<\/p>\n
95,000
\n46,000
\n25,000
\n166,000<\/p>\n
28,000
\n14,000
\n6,000<\/p>\n
48,000
\n214,000<\/p>\n
80,000
\n20,000
\n15,000
\n18,000
\n36,000<\/p>\n
30,000
\n6,000<\/p>\n
23,000
\n9,000
\n6,000
\n4,000
\n3,000
\n45,000
\n214,000<\/p>\n
55,000
\n35,000
\n28,000
\n118,000<\/p>\n
20,000
\n16,000
\n8,000
\n3,000
\n47,000
\n165,000<\/p>\n
50,000
\n15,000
\n15,000
\n15,000
\n30,000<\/p>\n
20,000
\n10,000<\/p>\n
15,000
\n6,000
\n5,000
\n–
\n4,000
\n30,000
\n214,000
\nAdditional information
\ni.\tLand and building were revalued upwards by sh 10,000,000 during the year. In addition and acquisition of land and building of shs 40,000,000 was made
\nii.\tDepreciation on motor vans amounting to sh 4,000,000 was provided in the profit and loss account for the year. Motor vans having a net value of shs 8,000,000 were sold at a profit of sh 3,000,000 during the year
\niii.\tBonus shares of sh 20,000,000 were issued at per during the year by utilizing the revaluation reserve. Kimtai limited ordinary shares have a par value of shs 20
\niv.\tInterest expense charged to the profit and loss account for the year amounted to sh. 8,000,000
\nv.\tDuring the year , tax amounting to 6,000,000 was paid
\nvi.\tTotal dividends for the year (both interim and final) amounted to 5,000,000
\nvii.\tNet profit after tax for the year amounted to shs, 8,000,000
\nRequired
\nPrepare a cash flow statement for the year ended 31st March 2010 in accordance to IAS7 using the indirect method (10 marks)
\nb) What is Historical accounting and what are the limitations of Historical Cost Accounting (HCA) (7 marks)<\/p>\n
Question Six
\nJames Mbuvi started a taxi business in Nairobi in March 1990 under the firm name Mbuvi Taxis. The firm had two vehicles KA and KB which had been purchased for Sh.560,000 and Sh.720,000 respectively earlier in the year.
\nIn February 1992 vehicle KB was involved in an accident and was written off. The insurance company paid the firm Sh.160,000 for the vehicle. In the same year the firm purchased two vehicles, KC and KD for Sh.800,000 each.
\nIn November 1993′ vehicle KC was sold for Sh.716,000. In January 1994 vehicle KE was purchased for Sh.840,000. In March 1994 another vehicle KF was purchased for Sh.960.000.<\/p>\n
The firm’s policy is to depreciate vehicles at the rate of 25 per cent on cost on vehicles on hand at the end of the year irrespective of the date of purchase. Depreciation is not provided for vehicles disposed of during the year. The firm’s year ends on 31 December.
\nRequired:
\n(a) Calculate the amount of depreciation charged in the profit and loss account for each of the five years. \t\t\t (7 marks)
\n(b) Prepare the motor vehicle account (at cost). (8 marks)
\n(c) Calculate the profit or loss on disposal of each of the vehicles disposed of by the company.\t\t\t (5 marks)<\/p>\n
Question One<\/p>\n
a) Accounting Standard refers to a set of guidelines or principles that govern the preparation and presentation of financial statements. The four reasons why a professional accounting body issues accounting standards are:<\/p>\n
i. Ensuring Consistency: Accounting standards help to ensure that all entities preparing financial statements follow the same principles and guidelines, promoting consistency and comparability of financial statements.<\/p>\n
ii. Promoting Transparency: Accounting standards promote transparency by providing relevant and reliable information to stakeholders. This helps to build trust and confidence in financial statements.<\/p>\n
iii. Protecting the Public Interest: Accounting standards protect the public interest by ensuring that financial statements are prepared in accordance with acceptable accounting principles and practices.<\/p>\n
iv. Meeting Regulatory Requirements: Accounting standards help entities meet regulatory requirements. For example, entities listed on a stock exchange are required to follow specific accounting standards to ensure compliance with stock exchange regulations.<\/p>\n
b) Journal entries to record the alternative assumptions are as follows:<\/p>\n
i. Lathe sold for sh. 24,000 after two years of use
\nDepreciation expense = (280,000 \u2013 10,000) \/ 5 = sh. 54,000 per year
\nDepreciation expense for two years = sh. 54,000 x 2 = sh. 108,000
\nGain on disposal = Sales proceeds \u2013 Net book value
\n= sh. 24,000 \u2013 [(280,000 \u2013 108,000)]= sh. 48,000
\nJournal entry:
\nBank account Dr. 24,000
\nAccumulated depreciation account Dr. 108,000
\nGain on disposal account Dr. 48,000
\nLathe machine account Cr. 280,000<\/p>\n
ii. Lathe traded-in after 3 years for a new lathe with a list price of Ksh. 360,000 trade-in allowance was shs. 160,000
\nDepreciation expense for 3 years = sh. 54,000 x 3 = sh. 162,000
\nTrade-in allowance = sh. 160,000
\nJournal entry:
\nNew lathe machine account Dr. 360,000
\nAccumulated depreciation account Dr. 162,000
\nLathe machine account Cr. 280,000
\nTrade-in allowance account Cr. 160,000<\/p>\n
iii. Lathe scrapped after 4 years of use. Proceeds from sale of scrap were shs. 15,000
\nDepreciation expense for 4 years = sh. 54,000 x 4 = sh. 216,000
\nJournal entry:
\nAccumulated depreciation account Dr. 216,000
\nLathe machine account Cr. 280,000
\nBank account Cr. 15,000<\/p>\n
c)<\/p>\n
Mapema Traders Ltd
\nIncome Statement for the year ended 31 March 2008<\/p>\n
Sh. Sh.
\nSales 126,600,000
\nLess: Cost of sales 101,280,000
\nGross Profit 25,320,000
\nAdd: Other income
\nInterest income 100,000
\nTotal income 25,420,000
\nLess: Expenses
\nSelling and distribution expenses 5,010,000
\nEstablishment expenses 3,900,000
\nAdministration expenses 1,890,000 10,800,000
\nProfit before finance costs and tax 14,620,000
\nLess: Finance costs
\nInterest on loan stock 240,000
\nProfit before tax 14,380,000
\nLess: Taxation (4,314,000)
\nNet profit 10,066,000<\/p>\n
Mapema Traders Ltd
\nStatement of Financial Position as at 31 March 200<\/p>\n","protected":false},"excerpt":{"rendered":"
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