AC 813: Financial Accounting ASSINGMENT

Posted: July 7th, 2022

AC 813: Financial Accounting
ASSINGMENT 1 -Feb 2023
Instruction
Answer all Questions
Question One
(a) Define the term accounting standard and give four reasons why a professional
accounting body issues accounting standards. (5 marks)
b) 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.
Give the journal entry necessary to record each of the following alternative assumptions.

(i) The lathe was sold for sh. 24,000 after two years of use.
(ii) The 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
(iii) The lathe was scrapped after 4 years of use. Proceeds from sale of scrap were shs. 15,000 (4 marks)
c) The following trial balance was extracted from the books of Mapema Traders Ltd. as at
31 March 2008:
Sh. Sh.
Ordinary shares Sh. 10 each 18,000,000
10% Preference shares Sh. 10 each 3,000,000
8% Loan stock 3,000,000
Share premium 2,400,000
Trade debtors 9,900,000
Trade creditors 4,440,000
Purchases and sales 126,600,000 144,000,000
Discounts allowed 150,000
Discounts received 390,000
Freehold buildings:
At cost 15,000,000
Provision for depreciation 1,500,000
Fixtures and fittings:
At cost 19,200,000
Provision for depreciation 7,680,000
Stock April 2007 12,600,000
Returns outwards 2,400,000
Selling and distribution expenses 5,010,000
Establishment expenses 3,900,000
Administration expenses 1,680,000
Bad debts written off 120,000
Provision for doubtful debts 540,000
Profit and loss account at 1.4.2007 10,860,000
Goodwill 4,800,000
Bank Overdraft _______ 750 000
198,960,000 198,960,000

Additional information:
1. The 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.
2. The provision for doubtful debts is to be adjusted to 5 % of trade debtors at 31 March 2008.
3. Establishment expenses prepaid at 31 March 2008 amount to Sh. 120,000. The difference is to be written off during the year.
4. Administration expenses accrued due at 31 March 2008 amounted to
sh.210,000.
5. The company paid the interest on the loan stock for the year ended 31 March 2008 on 28 May 2008.
6. Gross profit is at the rate of 20% of sales.
7. Depreciation is provided annually on the cost of fixed assets held at the end of the year at the following rates:
Freehold buildings 2 %
Fixtures and fittings 10%
8. The 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.
Required:
The 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)

Question Two
(a) Explain the meaning and significance of the revenue realization principle.(5 marks)
(b) Briefly explain whether revenue may be recognized in the following circumstances in respect of sales made by a business entity:
(i) Goods have acquired by the business entity which it confidently expects to
resell very quickly (2 marks)
(ii) A customer places a firm order for goods (2 marks)
(iii) Goods are delivered to the customer’s premises (2 marks)
(iv) The customer’s cheque in payment for the goods has been cleared by the
bank. (2 marks)
c) What are the qualities of useful financial statements? (6 Marks)
d) The following information is provided for Mvita Ltd
Ratio Analysis 2009 2010
Cost Deprec. Net Book
Value Cost Deprec. Net Book
Value
Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’
Plant
Building

Investments at
Cost
Land
Stock
Debtors
Bank

Ordinary shares at Sh.20 each
Share premium
Revaluation Reserve
Profit and Loss Account
10% Debentures
Creditors
Proposed Dividends
Bank

Profit & Loss Account
Sales
Cost of Sales

Expenses
Dividends

Balance b/f
Balance c/f 200
1,000

80
200

120
800
920

1,000
860
1,100
800
__60
4,740
800
240

500
2,000
800
400
____
4,740

4,000
2,000
2,000
1,200
800
400
400
100
500 220
1,800 100
220 120
1,580
1,700

1,600
1,260
1,300
1,000
___-
6,860
1,000
280
400
500
3,000
1,200
400
__80
6,860

4,000
2,400
1,600
1,200
400
400
–
500
500
Required:
Calculate for Mvita Ltd. for 2009 and 2010 the following ratios:
a. Return on capital employed;
b. Debtors turnover;
c. Creditors turnover;
d. Current ratio;
e. Quick assets (acid test) ratio;
f. Gross profit ratio
g. Net profit percentage
h. Dividend cover
i. Gearing ratio.
Using the summarized accounts given and ratios you have just prepared, comment on the financial position and prospects of Mvita Ltd. (Total: 25 Marks)

QUESTION FIVE
a) The following information is provided by Kimtai limited in Eldoret
KIMTAI LIMITED
FINANCIAL POSITION STATEMENT AS AT 31st MAR 2010
2010 2009
Sh.’000’ Sh.’000’

Assets
Non current assets
Land and buildings
Motor vans
Fixtures and fittings

Current assets
Stock
Debtors
prepayments
bank and cash balance

Total assts
Equity and liabilities
Capital and reserves
Ordinary share capital
Share premium
Revaluation reserve
Retained profit

Noncurrent liabilities
10% Debenture loan
Bank loan

Current liabilities
Trade creditors
Interest payable
Current tax
Bank overdraft
Proposed dividend

Total equity and liabilities

95,000
46,000
25,000
166,000

28,000
14,000
6,000

48,000
214,000

80,000
20,000
15,000
18,000
36,000

30,000
6,000

23,000
9,000
6,000
4,000
3,000
45,000
214,000

55,000
35,000
28,000
118,000

20,000
16,000
8,000
3,000
47,000
165,000

50,000
15,000
15,000
15,000
30,000

20,000
10,000

15,000
6,000
5,000
–
4,000
30,000
214,000
Additional information
i. Land 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
ii. Depreciation 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
iii. Bonus 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
iv. Interest expense charged to the profit and loss account for the year amounted to sh. 8,000,000
v. During the year , tax amounting to 6,000,000 was paid
vi. Total dividends for the year (both interim and final) amounted to 5,000,000
vii. Net profit after tax for the year amounted to shs, 8,000,000
Required
Prepare a cash flow statement for the year ended 31st March 2010 in accordance to IAS7 using the indirect method (10 marks)
b) What is Historical accounting and what are the limitations of Historical Cost Accounting (HCA) (7 marks)

Question Six
James 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.
In 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.
In 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.

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.
Required:
(a) Calculate the amount of depreciation charged in the profit and loss account for each of the five years. (7 marks)
(b) Prepare the motor vehicle account (at cost). (8 marks)
(c) Calculate the profit or loss on disposal of each of the vehicles disposed of by the company. (5 marks)

Question One

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:

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.

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.

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.

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.

b) Journal entries to record the alternative assumptions are as follows:

i. Lathe sold for sh. 24,000 after two years of use
Depreciation expense = (280,000 – 10,000) / 5 = sh. 54,000 per year
Depreciation expense for two years = sh. 54,000 x 2 = sh. 108,000
Gain on disposal = Sales proceeds – Net book value
= sh. 24,000 – [(280,000 – 108,000)]= sh. 48,000
Journal entry:
Bank account Dr. 24,000
Accumulated depreciation account Dr. 108,000
Gain on disposal account Dr. 48,000
Lathe machine account Cr. 280,000

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
Depreciation expense for 3 years = sh. 54,000 x 3 = sh. 162,000
Trade-in allowance = sh. 160,000
Journal entry:
New lathe machine account Dr. 360,000
Accumulated depreciation account Dr. 162,000
Lathe machine account Cr. 280,000
Trade-in allowance account Cr. 160,000

iii. Lathe scrapped after 4 years of use. Proceeds from sale of scrap were shs. 15,000
Depreciation expense for 4 years = sh. 54,000 x 4 = sh. 216,000
Journal entry:
Accumulated depreciation account Dr. 216,000
Lathe machine account Cr. 280,000
Bank account Cr. 15,000

c)

Mapema Traders Ltd
Income Statement for the year ended 31 March 2008

Sh. Sh.
Sales 126,600,000
Less: Cost of sales 101,280,000
Gross Profit 25,320,000
Add: Other income
Interest income 100,000
Total income 25,420,000
Less: Expenses
Selling and distribution expenses 5,010,000
Establishment expenses 3,900,000
Administration expenses 1,890,000 10,800,000
Profit before finance costs and tax 14,620,000
Less: Finance costs
Interest on loan stock 240,000
Profit before tax 14,380,000
Less: Taxation (4,314,000)
Net profit 10,066,000

Mapema Traders Ltd
Statement of Financial Position as at 31 March 200