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QUESTIONS
TOPIC 1
INTRODUCTION TO ACCOUNTING
QUESTION 1
(a) Explain how the prudence concept might be applied to: (i) The valuation of inventory. (ii) The valuation of receivables. (iii) The valuation of shares held as investments quoted on the securities exchange. (iv) The valuation of land and buildings. November 2017 Question One A QUESTION 2 (a) Discuss five principles of the code of ethics that govern the professional conduct of accountants. May 2017 Question Five A QUESTION 3 a) Discuss five users of accounting information clearly indicating their information needs May 2016 Question Two A QUESTION 4 a) Explain the following accounting concepts. i) Consistency ii) Materiality b) Distinguish between the following i. “Cash basis of accounting” and “accrual basis of accounting” November 2015 Question Five A and B (I) QUESTION 5 a) Explain the following accounting assumptions i) Accrual ii) Going concern May 2014 Question Three A QUESTION 6 a) Explain four qualities of useful accounting information with reference to the International Account May 2014 Question Five A
TOPIC 2
RECORDING TRANSACTIONS
QUESTION 1
(a) Identify five benefits of customized accounting software. November 2017 Question Five A QUESTION 2 b) Highlight four accounting tasks performed by accounting software packages November 2016 Question Five B QUESTION 3 a) Highlight six applications of accounting software packages. May 2015 Question Five A QUESTION 4 c) Explain five challenges facing organizations that use computerized accounting software December 2014 Question Five C
Being human, we
can only receive
infinite truth in
finite doses.
Norman Grubb.
Additional information:
- It is the company's policy to make a depreciation charge proportionate to the period of usage of the asset.
- An item of machinery bought on 1 July 2012 for Sh.10,080.000 was sold on 1 April 2016 at Sh.6,000,000.
- From the year ended 31 December 2016, the management of the company decided to charge depreciation on buildings at a rate of 2.5% per annum. The buildings were all completed on 1 July
- On 1 January 2016, a vehicle purchased on 1 May 2013 for Sh.12,600,000 was traded in at a value of Sh.7,320,000 in part exchange for a new vehicle costing Sh.18,000,000.
- Included in machinery is an old machine which originally cost Sh.13, 500,000 and which was already fully depreciated and not expected to yield any material amount on either use or resale.
- On 30 June 2016, a machine costing Sh.13, 500,000 was purchased from a vendor who had used it for three years. The vendor had bought the machine at Sh.18,000,000. Another machine costing Sh.10,500,000 was purchased on 1 August 2016. Required: A schedule showing the movement of property, plant and equipment for the year ended 31 December
**_May 2017 Question Three A_**
QUESTION 3 a) The following balances were extracted from the books of Furahia Enterprises for the month of September 2016: Sh. Debit balance (1 September 2016): Sales ledger Purchases ledger Credit balance (1 September 2016): Sales ledger Purchases ledger Credit notes received from suppliers Debt collection expenses Interest charged on customers' overdue accounts Customers dishonoured cheques Bad debts written off Receipts from customers Interest charged by creditors on overdue accounts^ Payment to creditors Contra settlements Credit notes issued to customers Credit sales Cash sales Cash purchases Credit purchases Discounts, allowed Discounts received Balances as at 30 September 2016: Sales ledger (credit) Purchases ledger (debit)
Required; i) Sales ledger control account for the month ended 30 September 2016. ii) Purchases ledger control account for the month ended 30 September November 2016 Question Five C
QUESTION 4
(a) Distinguish between ‘purchased goodwill’ and ‘non-purchased goodwill’ November 2016 Question Three A QUESTION 5 a) Explain the following methods of measurement of elements in financial statements: i) Historical cost. ii) Net realisable value. iii) Present value. November 2016 Question Two A QUESTION 6 b) You have just been employed by Best Way Ltd as a trainee accountant. Your first exercise is to check the transactions in the company’s cash book, check entries in the bank statement, update the cash book and make any amendments as necessary after which you will prepare a bank reconciliation statement at the end of the month. The company’s cash book and bank statement for the month of March 2016 are provided below;- Cash Book (Bank column only) Date 2016 Details Amount ‘000’ Date 2016 Details Amount ‘000’ 1 March 1 March 5 March 8 March 10 March 18 March 27 March 30 March Balance b/d Devco. & Co. Ltd J. Karanja P. otieno Huge Ltd Tiny Ltd R. Nafula David and Partners 4,
470 375 1,
1, 205
- 2 March 2 March 2 March 8 March 9 March 13 March 20 March 27 March 31 March Salama Insurance Hellen Cheque number 4100 Orchard Ltd cheque number 4101 Buki Garage –cheque number 4102 Value Sure Finance Joseph Baraka – cheque number 4103 Good Samaritan Ltd – Cheque number 4104 Kenya Power Ltd – cheque number 4105 Balance carried down 187. 515 787. 527. 300 55 342 675 5, - 9,100 9, 1 April Balance b/d 5, Best Way Limited Bank statement Date: 31 March 2016 Date 2016 Details Debit Sh. ‘000’ Credit Sh. ‘000’ Balance Sh. ‘000’ 1 March 2 March 4 March 5 March 6 March 9 March 9 March 12 March 12 March 20 March 28 March Balance Cheques Salama Insurance Cheque number 4101 J. Karanja P. Otieno Cheque number 4102 Cheques Value Sure Finance Cheques Kenya Power
300
675
470 375
1100
4,865 CR 5,487.5 CR 5,300 CR 4,512.5 CR 4,982.5 CR 5,357.5 CR 4,830 CR 5,930 CR 5,630 CR 5,792.5 CR 5,117.5 CR
On 1 Apri12013, a van KB 890B was purchased for Sh 4,800,000. Depreciation on motor vehicles is to be provided at the rate of 10% per annum on a straight line basis. The policy of the company is to provide depreciation on a pro rata basis. On 1 January 2012, the company decided to change its depreciation rate from 10% to 15% per annum. The change was effected on motor vehicles that were in use retrospectively; that is from the year of purchase. An adjusting entry was to be made in the accounts for the year ended 31 December 2012. All lorries were comprehensively insured. Assume the year end for PTL IS 31 December. Required: i) Motor vehicles account for the five years ended 31 December 2006,2007,2011,2012 and 2013. ii) Provision for depreciation account for the same years stated in (b) (i) above iii) Disposal of motor vehicles account May 2014 Question Three B QUESTION 9 Distinguish between "allowance for bad and doubtful debts" and "bad debts" November 2014 Question Five A
TOPIC 4
CORRECTION OF ERRORS AND SUSPENSE
ACCOUNT
QUESTION 1
(b) Highlight six types of errors that could be reflected in a trial balance. May 2017 Question Five B QUESTION 2 a) Citing an example in each case, briefly explain four types of bookkeeping errors which are not disclosed by a trial balance b) The trial balance extracted from the books of Benard Masita as at 30 September 2013 failed to agree. The debit difference of Sh. 442,000 was posted to a suspense account. An income statement was prepared which showed a gross profit and a net profit of Sh. 1,985,000 and Sh.1,229,000 respectively. Upon investigations, the following errors were discovered:
- A purchase of Sh 150,000 on credit was correctly posted to the suppliers account but was completely omitted from the purchases day book.
- Sales amounting to Sh. 250,000 to Samuel Njuguna were erroneously credited to his account. The sales account had been correctly posted.
- Salaries paid for the month of September 2013 amounting to Sh. 230,000 were recorded in the salaries account as Sh 320,000.
- Purchases of office stationery for Sh. 125,000 were erroneously debited to purchases account.
- A payment of Sh.45,000 to Daniel Olunya, a creditor, was erroneously debited to the account of Alois Olunya, another creditor.
- An entry of Sh.21,000 for returns outwards was made in error in the sales day book instead of in the purchases return day book.
- A bad debt of Sh 22,500 is yet to be written off.
- Goods valued at Sh220,000 were taken for personal use but no entry had been made in the books.
- A discount received of Sh.59,000 was correctly entered in the cashbook but posted to the discounts allowed account. Required: i) A fully balanced suspense account. ii) Statement of corrected gross profit. iii) Statement of corrected net profit. December 2013 Question Two QUESSTION 3 (a) Outline the extent to which a trial balance is an indicator of correct book-keeping by an entity. (b) After preparation of the trial balance or Bakari Brothers Enterprises as at 31 September 2005, the firm’s accountant has been provided with the following additional information for the purpose of preparation of the final accounts:
- Due to an oversight, discount has been allowed to a credit customer on the gross invoiced amount of Sh.80,000 at the rate 10%. The firm should have used a rate if 6%.
- Electricity accrued amounts to Sh.36,710 while insurance premiums of Sh. 22,450 havebeen prepaid.
- In October 2005, the employees of the firm received a general salary increase, backdated to 1 July 2005. Amounts totalling Sh.126,550 in salary arrears are payable to former employees who left shortly before the salary award was announced and who have not yet been traced. It has been decided that the salary packets will be opened and the cash banked until the ex- employees are traced.
- The sales of goods on credit to Alex Otis amounting to Sh.19,000had been recorded in the sales journal as sh.9,000.
- A receipt of Sh.20,000 from sale of an item of equipment had been credited to sales account. The equipment was shown in the books of account at costs of account of Sh.90,000 and accumulated depreciation of Sh.72,000.
- A credit note from a supplier, Simon Masound for Sh.15,000 had been omitted from the books.
- A bank overdraft for Sh.7,000 reflected in the cash book as at 31 December 2005 was omitted In the trial balance.
- A payment of Sh. 9,700 to Tom Wambugu, a creditor, was correctly entered in the cahs book but posted to his personal account as Sh.7,900.
- The debit side of rent expense account had been undercast by Sh.1,000.
- A provision of Sh.2,000 for sundry expenses outstanding as at 31 December 2004 and debited to sundry expenses at that dated had not been brought forward to the credit of the account in the following period. No credit entry had been made in any other account in respect to this account in respect to this item.
- Discount received from the supplier of Sh.8,200 had been entered on the wrong side of purchases ledger control account.
- On 31 December, goods valued at Sh.9,600 (selling price) were returned by Jane Kerubo (a debtor). No entry had been made in the books to reflect this transaction. These goods were not included in the closing stock.
10. Discounts allowed were overcast by Sh.1,200.
Required: (a) Journal entries to correct the above errors (Narration not required) (b) Suspense account. (c) Statement of corrected net profit for the year ended 31 December 2005 (d) Corrected balance sheet as 31 December 2005. QUESTION 5 (a) Briefly explain the following types of errors: i. Error of commission ii. Error of principle iii. Complete reversal of entries iv. Compensating errors (b) The trial balance of Amanda Ltd as at 30 April 2004 did not balance. On investigation, the following errors were discovered:
- A loan of Sh.2,000,000 from one of the directors has been correctly entered in the cashbook but posted to the wrong side of the loan account.
- The purchase of a motor vehicle on credit fro Sh.2,860,000 had been recorded by debiting the supplier’s account and crediting the motor expenses account.
- A cheque for Sh.80,000 from Ogola, a customer to whom goods are regularly supplied on credit, was correctly entered in the cashbook but was posted to the credit of bad debts recovered account in the mistaken belief that it was a receipt from Agola, a customer whose debt had been written off three years earlier.
- In reconciling the company’s cash book with the bank statement, it was found that bank charges of Sh.38,000 had not been entered in the company’s records.
- The totals of the cash discount columns in the cashbook for the month of April 2004 had not been posted to the respective discount accounts. The figures were: Sh. Discounts allowed 184, Discounts received 397,
- The company had purchased some plant on 1 March 2003 for Sh.1,600,000. The payment was correctly entered in the cashbook but was debited to the plant repairs account. Depreciation on such plant is provided for at the rate of 20% per annum on cost. Required: (i) Journal entries with narrations to correct the above errors. (ii) Suspense accounts showing the original difference QUESTION 6 a) Explain any four purposes of journal entries in the accounting process b) Walter Muita, a sole trader, presented the following balance sheet of his business as at 30 June
- He asked you to investigate the causes of errors giving rise to the amount in the suspense account: Sh. Sh. Sh. Capital Profit for the year Less drawings Current liabilities Creditors Suspense account
Fixed assets: Fixtures and fittings Less: Depreciation Machinery Less: Machinery Less Depreciation Current assets Stock Debtors Bank balance
You subsequently discovered the following errors:
- The purchases day book was undercast by Sh.4,000.
- A telephone head costing Sh.3,000 was bought and the amount was debited to the repairs account.
- The telephone head is to be depreciated at the rate of 15% per annum as pari of fixtures and fittings.
- An amount of Sh.2,000 was omitted from total debtors.
- Returns outwards of Sh.500 were erroneously entered in the sales book.
- A payment of Sh.1,250 to a creditor was correctly entered in the cash book but credited to his account.
- Goods valued at Sh.l 0,000 were taken by Walter Muita for his own use and no entry has been made to this effect.
- A bad debt of Sh 1,250 had been written off
- A discount received of Sh4,500 had been correctly recorded in the cash book but had been posted to the wrong side of the discount received account. Required: i) Show the necessary journal entries to correct the errors listed above. ii) Prepare a statement of adjusted profit (or loss) for the year ended 30 June 2005. iii) Prepare the corrected balance sheet as at 30 June 2005. QUESTION 7 a) Briefly explain the following: i) Error of principle. ii) Error of commission b) Joshua Mwalo operates a small hardware shop. He extracts trial balance at the end of every month. The trial balance extracted as at 30 April 2005 did not balance, the credits exceeding the debits by Sh.184, 320. Upon further investigation, the following errors were discovered:
- A balance of Sh.10,440 on a debtor's account had been omitted from the schedule of debtors, the total which was entered as debtors in the trial balance.
Wanji trial balance as at 31 December 2001 Sh. Sh. Fixed assets-cost 832, Stocks 1 January 2001 148. 31 December 2001 98, Trade debtors 76, Prepayments 10, Trade creditors 34. Bank overdraft 15, Accruals 16, Drawings 359. Capital 1,054, Sales 1,043, Provision for depreciation 166, Purchases (^733). 000 Operating expenses 126. Provision for doubtful debts 3, Discounts received 5, Discounts allowed 5, Suspense account (^369). 400 2,548 400 248 400 Investigations carried out after preparing the above trial balance detected the following errors:
- The total of the sales day book for December 2001 was overcast by Sh.25,700.
- On 2 July 2001 the business purchased office equipment for Sh.40.000. These were debited to purchases account.
- Depreciation on the equipment is at the rate of 10% per annum on cost and based on the period (months) of usage in the year.
- A payment to a creditor by cheque of Sh.8.500 was erroneously credited to the creditor's account.
- A payment of Sh.4.500 for telephone expenses was debited to telephone account as Sh.5.400.
- An amount of Sh.15.000 received from a debtor was not posted to the debtor's account from the cash book.
- An amount of discounts received of Sh.2.500 was debited to discounts allowed account.
- Purchases day book for October 2001 was undercast by Sh.28,000.
- Assume the business had reported a net profit of Sh.85,800 before adjusting for the above errors. Required: (a) The adjusted trial balance and the correct balance of the suspense account (b) Journal entries to correct the errors (Narrations not required) (c) Suspense account starting with the balance determined in the adjusted trial balance in (a) above. (d) The adjusted net profit for the year.
TOPIC 5
FINANCIAL STATEMENTS OF A SOLE TRADER
QUESTION 1
Lucy Wabetta operates a wholesale shop. The following information has been provided from her business records:
- All receipts are banked and all payments are made from the bank account. A summary of the bank account for the year ended 30 September 2017 was as follows: Sh. ‘000’ Sh. ‘000’ Balance brought forward Cash from receivables Sale of private house Sale of motor vehicle (saloon car)
Payments to suppliers Purchase of motor vehicle (pick-up) Insurance Repairs Drawings Postage and stationery Motor vehicle expenses Salaries and wages Rent Balance carried forward
- Discounts received amounted to Sh.110,000.
- Assets and liabilities were as follows: 1 October 2016 Sh. ‘000’ 30 September 2017 Sh. ‘000’ Motor vehicle (saloon): At cost Accumulated depreciation Motor vehicle (pick-up): At cost Accumulated depreciation Inventory Prepaid insurance. Trade accounts payable Trade accounts receivable Accrued rent
- Included in the trade accounts receivable as at 30 September 2017 is Sh.30,000 that should be written off.
- Provide depreciation at the rate of 20% on cost of the motor vehicles held at the end of each financial year. No depreciation is provided in the year of disposal.
- Proceeds from the sale of the private house were capitalized. Required: (a) Income statement for the year ended 30 September 2017. (b) Statement of financial position as at 30 September 2017. November 2017 Question Two
November 2014 Question One QUESTION 3 The following balances were extracted from the books of Patel and Sons in respect of the year ended 31 December 2005: Sh. ‘000’ Sh. ‘000’ Sales 1,352, Purchases 990, Debtors l77, Creditors 83, Stock in trade (I January 2005) 80. Machinery (cost) 112, Furniture 17, Rent for building 19, Cash in hand 8, Cash at bank 34, Drawings 24, Capital 180. Salaries 37, Bad debts 2, Suspense account 6, Provision for bad debts 6, Printing expenses 4, Postage 3, Travelling expenses 15, Telephone expenses 3, Miscellaneous expenses 83, Insurance premiums 2, 1,621,800 1,621, Additional information:
- Old furniture which stood in the books (as at I January 2005) at Sh.2,400,000 was disposed of at Sh.1,160,000 during the year in part exchange for new furniture costing Sh.2,080,000. A net invoice of Sh.920,000 in respect of this transaction was erroneously passed through the Purchases Day Book.
- The suspense account represented money advanced to a sales team detailed to undertake a sales campaign in the Rift Valley Province. On returning, the sales team disclosed that Sh.2,400, was used for travelling, Sh.1,000,000 for legal fees and Sh.1,800,000 for miscellaneous expenses. The balance was yet to be refunded by 31 December 2005.
- The business is conducted 10 a rented building and 50% or the building is used for accommodation of the business owner's family.
- Depreciation is to be provided on the straight line basis at 10%) per annum on machinery and 5% per annum on furniture. Depreciation is to be applied for the whole year regardless of date of purchase of the asset.
- Total bad debts for the year amounted to Sh.4,000,000. Provision for doubtful debts is to be maintained at 5% of the outstanding debtors
- Closing stock amounted to Sh100,000,
- Insurance premiums cover the one year period ended 31 January 2006. Required: a) Trading and profit and loss account for the year ended 31 December 2005. b) Balance sheet as at 31 December 2005 QUESTION 4 The following trial balance was extracted from the books of Mohammed Kagame, a sole trader, as at
31 October 2004: Sh. Sh. Capital Drawings Sales Purchases Debtors and creditors Rent and rates Electricity Salaries and wages Provision for doubtful debts (1 November 2003) Stock in trade (1 November 2003) Insurance General expenses Bank balance Cash in hand Motor vehicle at cost Provision for depreciation on motor vehicles (1 November 2003) Proceeds from sale of motor vehicle Motor vehicle expenses Premises (at cost) Rent received
Additional Information:
- Stock in trade as at 31 October 2004 was valued at Sh593,040.
- Rates and insurance were prepaid to the extent ofSh.2,400 and Sh.2,820 respectively, as at 3 J October 2004,
- Electricity due as at 31 October 2004 amounted to Sh.6,000.
- The provision for doubtful debts is to be adjusted to S% of the debtors remaining after taking into account that Sh.20, 1 60 of the debtors were to be regarded as bad.
- Rent receivable as at 31 October 2004 was Sh. 15,
- Depreciation has been and is to be charged on motor vehicles at the rate of 20% per annum on the straight line basis. No depreciation is to be charged on premises.
- In November 2003, a motor vehicle which had been purchased or Sh.160,000 on I November 2000, was sold for Sh.115,000. The only record of this disposal is the entry in the proceeds from sale of motor vehicle account. Required: a) Trading and profit and loss account or the year ended 31 October 2004 b) Balance sheet as at 3 I October 2004. QUESTION 5 Mali Mingi is the sole distribution agent of roofing sheets in Mombasa. Under an agreement with the manufacturers, Mabati Ltd., Mali Mingi purchases roofing sheets from Mabati Ltd. at a trade discount of 20% of the list price. Every year in the month of May, Mali Mingi receives an agency commission of 1% of his purchases for previous year ended 31 March. Mali Mingi has been making a gross profit of 40% on all sales. In a burglary that occurred in January 2004, Mali Mingi lost stock costing Sh.480,000 as well as the bulk of his accounting records. After thorough investigation, the accountant has obtained the following information relating to the year ended 31 March 2004:
Shs. Freehold property (cost) 600, Motor vehicles (NBV) 750, Furniture and fixtures (NBV) 240, Stock 390, Trade debtors 500, Bank overdraft 60, Trade creditors 380, Accruals 15, 10% loan 600, Provision for doubtful debts 25, The following transactions took place during the financial year ended 31 October 2003:
- Sales and purchases on credit amounted to Sh.2,080,000 and Sh.1,900,000 respectively.
- The following transactions were carried out through the bank account: Shs. Sales – Cash 720, Purchases – Cash 240, Payments to trade creditors 1,940, Purchase of furniture 200, Salaries and wages 160, Lighting 65, General expenses 35, Interest on loan 30, Drawings 60, Repayment of loan on 30 April 2003 100, Collections from trade debtors 1,890, Proceeds from sale of motor vehicle 120,
- The business depreciates motor vehicles at 20% per annum on a reducing balance basis. A full year’s depreciation is provided on a motor vehicle acquired in the course of the year and no depreciation is provided on a motor vehicle disposed of in the course of the year. The motor vehicle sold in the year had been purchased at Sh.250,000 and an accumulated depreciation of Sh.122,000 had been provided on it at the time of disposal.
- Furniture is depreciated at 10% per annum on cost and in proportion to the period used in the year. The additional furniture was purchased on 1 May 20903 while the cost of furniture held on 31 October 2002 was Sh.400,
- Loan interest paid was for one-half year up to 30 April 2003
- The business received discounts of Sh.40,000 and allowed discounts of Sh.70,000 during the year.
- Bad debts of Sh.20,000 were written off. Provision for doubtful debts is to be maintained at 5% of the debtor’s balance at the end of the year.
- Accruals are in respect of lighting and on 31 October 2003, the amount accrued was Sh.19,
- Muthusi’s business obtains a normal gross profit rate of 25% on selling price. Required: (a) Trading and profit and loss account for the year ended 31 October 2003 (b) Balance sheet as at 31 October 2003. QUESTION 7 The following trial balance was extracted from the books of Hari Singh as at 31December 2004: Sh. Sh Drawings 1,600,
Cash Petty cash Fixtures and fittings (cost) Stock (1 January 2004) Salaries and wages Debtors and creditors Bank balance Rent Electricity Motor vehicle (written down value) Advertising Capital Purchases Sales Postage and telephone Discounts allowed General expenses Petty cash expenses Suspense account
Additional information:
- Closing stock as at 31 December 2004 was valued at Sh.7,500,
- Petty cash balance represents the month end imprest amount. As at 31 December 2004, the petty cashier had vouchers amounting to Sh40,000 which had not been reimbursed by the main cashier.
- Discounts allowed amounting to Sh.100,000 had been posted to the debit of the debtors account.
- Sales had been undercast by Sh400,000.
- The motor vehicle, which had been purchased on 1 January 2002, was being depreciated at 20% per annum on the reducing balance basis. The original cost of the motor vehicle was Sh.2,000,000. It has been decided that the motor vehicle be depreciated at 6% per annum on the straight line basis and to make the change effective from the date of purchase.
- Cash withdrawn from the bank for business use amounting to Sh400,000 had not been entered in the bank column of the cash book.
- No entry bas been made for stock valued at Sh1,000,000 taken by the proprietor for personal use.
- Telephone bills amounting to Sh.100,000 were unpaid as at 31 December 2004.
- Advertising expenses include the cost of a sales campaign conducted during the year of Sh.600,000. It is expected that the benefits of this campaign will be enjoyed or the next three years.
- Fixtures and fittings are to be depreciated at 20%. per annum on cost. Required: a) Trading, profit and loss account or the year ended 31 December 2004. b) Balance sheet as at 31 December 2004. QUESTION 8 The following trial balance was extracted from the books of T. Onyancha a sole trader, Sh. Sh. Capital Drawings Trade debtors
