QUESTIONS. NUMBER ONE The following trial balance was extracted from the books of Regional Commercial Bank Ltd as at 31 March 2006:

Transcription

1 QUESTIONS NUMBER ONE The 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 14,427 Interest on loans and advances 8,395 Interest on customers 5,308 Customers deposits 82,230 Shares capital 10,000 Revaluation reserve 2,480 Staff costs 2,184 Borrowed funds 3,520 Directors emoluments 645 Depreciation on property and equipment 815 Other interest income 430 Specific provision for doubtful debts 2,750 Interest on government securities 4,768 Other operating expenses 1,630 Repair and maintenance 210 Printing and stationary 278 Deposits and placements due from banking institutions 8,560 Loans and advances to customers 67,655 Deposits and placements due to other banking institutions 6,410 Interest on deposit and placements with other banking institutions 3,800 Other interest expense 314 Interest paid on deposits and placements from other banking institutions 1,280 Cash and balances with the Central Bank of Kenya 3,630 Interim dividend paid 400 Bad debts written off 279 Share premium 3,000 Fees and commission income 764 Dividend income 408 Investment in securities 5,460 Miscellaneous accruals 140 Government securities 13,200 Retained profit (1 April 2005) 2,480 Other assets 5, , ,575 Additional information: 1. 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.

2 2. A provision of sh.1,050,000 should be made for tax on the profit for the year ended 31 March Interest accrued and not accounted for in the books as at 31 March was as follows: On loans and advances sh.642,000 On customers deposits sh.448, The directors of the bank have proposed a final dividend of 6%. Required: a) Profit and loss account for the year ended 31 March 2006 (12 marks) b) Balance sheet as at 31 March (8 marks) (Total: 20 marks) NUMBER TWO a) Distinguish between leasing and hire purchase highlighting how each is accounted for. b) 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 53,200 Cash at bank and in hand 1,800 Accounts payable 5,000 Operating expenses 16,000 Property, plants and equipment (1 April 2005) 55,000 Depreciation (1 April 2005) 20,000 Hire purchase installments receivable 34,200 Hire purchase sales 55,200 Purchases 24,600 Inventory (1 April 2005) 1, , ,400 Additional information: 1. Inventory as at 31 March 2006 was valued at sh.2,400, Property, plant and equipment should be depreciated at sh.5,000,000 for the year ended 31 March Each unit was sold on hire purchase basis on the following terms: Sh. Sh. Cash price 40,000 Deposits (10,000) 30,000 Interest 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 Sep Dec

3 31-Mar All 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 marks) (ii) Balance sheet as at 31 March marks) (Total: 20 marks) NUMBER 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 units Number of Number of units Number of Manufactured. Units sold. Manufactured units sols ,000 46, ,000 60,000 11,000 10, ,000 66,000 18,000 16, ,000 82,000 24,000 26, ,000 92,000 32,000 30,000 Required:

4 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) NUMBER 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: Sh.'000' Sh.'000' Sales 500, ,000 Less: cost of sales (200,000) (140,000) Gross profit on sales 300, ,000 Less: 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: Sh.'000' Sh.'000'

5 Assets: 10,000 60,000 Cash and cash equivalents 20,000 5,000 Marketable securities 40,000 23,000 Accounts receivable (net of provision) 120, ,000 Inventory 300, ,000 Plant and equipment (net) 490, ,000 Shareholders' equity and liabilities: Accounts payable 50,000 73,000 Accrued expenses 17,000 14,000 Long-term loan 245, ,000 Share capital (Sh.10 par value) 100, ,000 Share premium 20,000 25,000 Retained earnings 58,000 20, , ,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 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) NUMBER FIVE The approved Estimates and Actual Expenditure details for vote E45 of ministry ABC for the financial year 2004/2005 were as follows: Approved Actual Estimates Expenditure Sh.'000' Sh.'000' 000 Personal Emoluments 246, , House allowances 39,100 28, Passages and Leave Expenses 8,280 1, Transport Operating Expenses 32,200 27, Traveling and Accommodation Expenses 2,668 3, Postal and Telegram Expenses 9,200 6, Miscellaneous other Charges 34,960 33, Training Expenses 11,960 13, Purchase of Equipment 42,000 17,600

6 620 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 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: a) Appropriation account for the year ended 30 June 2005 (6 marks) b) General Account of vote for the year ended 30 June (4 marks) c) Exchequer Account for the year ended 30 June 2005 (4 marks) d) Paymaster General (PMG) account for the year ended 30 June (2 marks) e) Statement of assets and liabilities as at 30 June (4 marks) (Total: 20 marks)

7 ANSWERS NUMBER ONE. a) Regional Commercial bank Profit and loss account for the year ended 31 March Interest income Loan and advances ( ) 9,037 Government Securities 4,768 Deposits and placements with other banking institutions 3,800 Other interest income ,035 Interest Expenses Customers deposit ( ) 5,756 Deposits & placements from other banking institutions 1,280 Other interest expenses 314 (7,350) Net interest income 10,685 Other operating income Fees and commission income 764 Dividend income 408 Total operating income 11,857 Operating Expenses Staff Costs 2,184 Bad Debts 279 Doubtful debts 1,850 Directors emoluments 645 Depreciation on property and equipment 815 Repairs and maintenance 210 Other operating expenses 1,630 Printing and stationery 278 (7,891) Profit before tax 3,966 Income Tax Expense ( 1,050) Profit after tax 2,916 Movement in Retained Earnings Retained profit b/f 2,480 Add: Profit after tax for the year 2,916 Less: Interim dividends paid (400) Final proposed dividend (600) Retained profit c/f 4,396 (b) REGIONAL COMMERCIAL BANK

8 BALANCE SHEET AS AT 31 March Assets Cash and balance with Central Bank of Kenya 3,630 Government securities 13,200 Deposit and placements with other banking Institutions 8,560 Loans and advances to customers (( ) ( )) 63,697 Investment in securities 5,460 Property and equipment 14,427 Other assets 5,300 Total Assets 114,274 Liabilities Customer deposit/dividend (82, ) 82,678 Borrowed funds 3,520 Deposits and placement from other banking institutions 6,410 Miscellaneous accruals 140 Current tax 1,050 Total liabilities 93,798 Share holders equity Share capital 10,000 Share premium 3,000 Revaluation reserve 2,480 Retained Profit 4,396 Proposed dividend 600 Total Share holders Equity 20,000 Total liabilities and Shareholders equity 114,274 NUMBER TWO a) Leasing: 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.

9 b) Kopesha limited Trading profit and loss account for the year ended 31 march Sales (55,200 7,200) 48,000 Cost of sales Opening inventory 1,800 Purchase 24,600 26,400 Closing inventory (2,400) (24,000) Gross profit 24,000 Interest on Hire Purchase sales 2,100 26,100 Expenses: Depreciation: Property, Plant and equipment 6,600 Other operating expenses (16,000-2,000) 14,000 Interest in finance lease (8,000-2,000) x 10% 600 (21,200) Net profit 4,900 KOPESHA LIMITED BALANCE SHEET AS AT 31 March Non current assets: Property, Plant and Equipment: ( ) 63,000 Depreciation ( ) (26,000) 36,400 Current Assets: Inventory 2,400 Receivables ( ) 29,100 Cash at bank and in hand 1,800 33,300 Total Assets 69,700 Capital and liabilities: Ordinary share capital 53,200 Net Profit 4,900 58,100 Non Current Liabilities: Obligations under finance lease 4,600 Current Liabilities Accounts payable 5,000 Obligations under finance lease 2,000 7,000 69,700 Workings: i) interest included in hire purchase sales (in thousands of shillings) (( ) x 6000) = Sh. 7,200 ii) Sum of digits for instalments (4 x (4+1))/2=10 iii) Interest earned Quarter ended June ((4+3+2)/10x (100x6000) 540

10 Quarter ended September ((4+3)/10x (200x6000) 840 Quarter ended December ((4/10x (300x6000) 720 2,100 Total interest on hire purchase 7,200 Less: Reported to profit and loss (2,100) Interest outstanding (Deducted from Receivables) 5,100 (iv) Finance lease: Profit and Loss Expense Balance of Liability at ,000 Less:instalment paid (2,000) Balance outstanding 6,000 Interest at 10% per annum 600 Balance sheet Liability: Total due as at ,000 Less: installment paid (2,000) 6,000 Add: 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, =1,600,000 5 NUMBER FOUR a) (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. ii) The indirect method of cash flow statement preparation presents cash from operations by making adjustments to the profit before tax for the following items: 1. 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. 2. Receipts and payments that have been incorrectly classified such as investment income and interest charged. 3. Changes in working capital i.e. increase or decrease in inventory, receivables and payables. b) (i) Home marketing ltd Cash flow statement for the year ended 31december 2005

11 Sh 000 Cash flow from operating activities Cash received from customers 367,000 Cash 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 activities Purchase of equipment (2,000) Proceeds on sale of marketable securities 14,000 Net cash received from investing activities 12,000 Cash flow from financing activities Issue of shares (10,000+5,000) 15,000 Repayment of long term loan (10,000) Net cash from financing activities 5,000 Net increase in cash and cash equivalents 50,000 Cash and Cash equivalent (1 January 2005) 10,000 Cash and cash equivalents (31 December 2005) 60,000 Workings Cash receipts from customers Sales 350,000 Decrease in accounts receivables-gross 15,000 Increase in Provision- accounts receivable 2,000 17, ,000 Cash paid to employees and suppliers Costs of sales 140,000 Operating expenses 243,000 Interest Paid (6,000) Depreciation, Plant and Equipment (35,000) Increase in Inventory 2,000 Increase in accounts payable 23,000) Decrease in accrued expenses payable 3, ,000 b) (ii) Reconciliation of net loss to cash flow from operating activities. Net Loss (34,000) Adjust for: Depreciation on plant and equivalent 35,000

12 Increase in provision for accounts receivable 2,000 Loss on sale marketable securities 1,000 Interest expense 6,000 Operating profit before working capital changes 10,000 decrease in accounts receivables 15,000 Increase in inventory (2,000) Increase in accounts payable 23,000 Decrease 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) 37,000 Investing and financing activities 7,000 Timing difference (time of recording and actual time payment or receipts) 33,000 Cash generated from operations 43,000 (4 marks) (Total 20 marks) NUMBER FIVE (a) Ministry of Energy Vote E45- Sustainable and Renewable Energy

13 APPROPRIATION ACCOUNT For the year Ended 30 June Personal emoluments 050 House allowance 080 Passages and leave 100 Transport & maintenance 110 Traveling 120 Postal& Telecommunication 190Miscellaneous charges 196 Training expenses 230 Purchase of equipment Approved Estimate 234,569 39,100 8,280 32,200 2,668 9,200 34,960 13,960 42,000 Actual Expenditure 195,040 28,520 1,334 27,186 3,312 6,624 33,764 13,467 79,600 Over Expenditure ,600 Under Expenditure 39,520 10,580 6,946 5,014 2,576 1, Less: 620 Appropriations- in Aid 416,928 (10,000) 406, ,856 (11,120) 377,736 38,244 66,316 Approved Appropriation Calculation Initial 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 Vote Expenditure 388,856 Exchequer (initial) 406,928 Excess A.I.A 1,120 Exchequer (supplementary) (18,000) Bal c/f 10, , ,048 Appropriations-in-aid 11, ,048 Balance b/f 10,072

14 c) Exchequer Account GAV -Initial 406,928 -Supplementary (18,000) 388,928 Bal c/f 11, ,928 Cash-PMG(drawdown 1) 100,000 Cash-PMG(drawdown 2) 100,000 Cash-PMG(drawdown 3) 100,000 Cash- PMG(drawdown 4) 100, ,000 Balance b/f 11,072 d) PMG Exchequer (dd 1) 100,000 (dd 2) 100,000 (dd 3) 100,000 (dd 4) 100,000 AIA 11, ,120 Balance b/f 22,264 Expenditure 388,856 Balance c/f 22, ,120 e) Statement of assets and liabilities As at 30 June 2005 Assets Cash (PMG) 22,264 Exchequer 11,072 Excess A-I-A 1,120 General account of vote 10,072 22,264