QUESTIONS. i) Loans and advances (4 marks) ii) Customer deposits

Size: px

Start display at page:

Download "QUESTIONS. i) Loans and advances (4 marks) ii) Customer deposits"

Horace Watts
5 years ago
Views:

1 . QUESTIONS NUMBER ONE a) In 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: i) Loans and advances (4 marks) ii) Customer deposits (4 marks) b) The following balances were extracted from the books of Kenya Bank Limited as at 31 December 2004: million Cash and balances with the Central Bank 7,439 Interest on loans and advances 3,197 Government securities 21,570 Interest on customer deposits 194 Loans and advances to customers 58,894 Interest on deposits and placements paid to banking institutions 33 Property and equipment 1,487 Other assets 16,200 Interest on placements received from banking institutions 66 Customer deposits 81,947 Borrowed funds 2,641 Other liabilities 4,211 Interest on government securities 430 Share capital 2,000 Reserves 8,347 Specific provision for bad and doubtful debts brought forward 2,635 General provision for bad and doubtful debts brought forward 150 Non interest income 3,079 Staff costs 1,461 Other expenses 1,425 Liability for acceptances on behalf of customers 14,776 Additional Information: 1. An additional provision for non-performing loans and advances of 1,259 million is to be made. 2. 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. 3. Provide for corporation tax at the rate of 30% on profits. 4. Provide for a final dividend of 30%. Required: i) Income statement for the year ended 31 December (5 marks) ii) Balance sheet as at 31 December (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 (Total: 20 marks)

2 NUMBER TWO a) Briefly explain the meaning of the following terms in relation to bills of exchange: i) Accommodation bill. ii) Noting charges. b) 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: 1. Gachara remitted sh.4 million to Limo and Wambani remitted 500,000 to Tergat towards the joint venture. 2. Limo incurred the following expenses on behalf of the joint venture: Travelling expenses 45,000 Entertainment 45,000 Purchase of cars 3,600,000 Shopping expenses 1,710, Tergat received the purchase and consignment documents from Limo and incurred the following expenses to clear the cars: Customs duty 1,860,000 Clearing agents fees 200, While transporting the cars from Mombasa, Wambani incurred the following expenses: General expenses 162,000 Haulage 135,000 Insurance 235, In order to sell the cars, Gachara incurred the following expenses: Security 126,000 Storage charges 81,000 Sales commissions 264, Gachara sold some cars for 7,900 and the remaining ones were taken over by Tergat for his own use at a value of 1,350, All the transactions were completed by 31 May Required: i) Memorandum joint venture profit and loss account for the two months ended 31 May (4 marks)

3 ii) The joint venture accounts in the books of Limo, Tergat, Wambani and Gachara for the two months ended 31 May (12 marks) NUMBER THREE In 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: Capital and liabilities: Assets: Fixed assets 6,000, ,000 equity shares of 10 each Investments 2,000,000 8 per share called up and paid up 4,000,000 Stock 2,000,000 Sundry debtors 2,000,000 Cash at bank 3,000, ,000 13% redeemable preferences shares of 100 each 500,000 Share premium 980,000 General reserve 900,000 Profit and loss account balance 1,120,000 Sundry creditors 3,000,000 15,000,000 15,000,000 Additional information: 1. 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 100 each at a premium of 10% payable in full application. 2. For the purpose of redemption, the company sold fixed assets valued at 3,000,000 for 3,825,000 on 31 March On the same date the company sold all the investments for 2,600, On 30 April 2005 all payments were made on redemption except to holders of 2,000 shares who could not be traced. 4. 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. (16 marks) (Total: 20 marks) NUMBER FOUR a) A 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) b) Set out below are the summarised balance sheets of Jasho Ltd. For the years ended 31 December 2003 and And the profit and loss account for the year ended 31 December 2004: Balance sheets as at 31 December

4 Ordinary share capital 14,800 18,800 Revaluation reserve 2,500 6,500 Revenue reserves 21,120 27,780 Share premium 3,000 4,800 Loans 8,400 5,200 49,820 63,080 Current liabilities Trade creditors 3,040 2,820 Proposed dividends 2,800 3,400 Taxation 9,400 12,040 Bank overdraft - 15,240 15,320 33,580 65,060 96, Fixed assets Freehold land 18,000 22,000 Plant and machinery: Cost 54,000 76,620 Accumulated depreciation (14,960) (22,500) 39,040 54,120 Current assets: Stock 4,060 16,860 Debtors 2,940 3,680 Cash at bank 1,020 8,020-20,540 65,060 96,660 Profit and loss account for the year ended 31 December 2004: Profit before tax 23,900 Corporation tax (12,040) Profit after tax 11,860 Ordinary dividend: Paid 1,800 Proposed 3,400 (5,200) 6,660 Additional information: 1. During the year ended 31 December 2004, Jasho Ltd. obtained a five-year bank loan amounting to sh.1,300, Depreciation charged on plant and machinery during the year ended 31 December 2004 amounted to 8,020, During the year ended 31 December 2004, plant which originally cost 1,380,000 was disposed of for 820,000. Required: Cash flow statement in compliance with IAS 7 (Cash Flow Statements). For the year ended 31 December (16 marks) (Total: 20 marks)

5 NUMBER FIVE a) Briefly explain any four characteristics that distinguish governmental organisations from business organisations. (8 marks) b) With reference to public sector accounting, briefly explain the following terms: i) General fund. ii) Annual estimates iii) Excess vote iv) Encumbrance v) Vote on account vi) Exchequer over issues (Total: 20 marks)

6 NUMBER ONE a) DISCLOSURE ITEMS ANSWERS i) Loans and advances - Gross amount outstanding. - Gross net amount of non performing loans and advances. - Total amount of provision held against loans and advances categorized as: Specific General - Effective interest rate charged on advances. - Maturity/liquidity risk analysis. - Interest rate risk - Currency risk /Currency rate risk - Concentration risk (be economic sector, consumer or industry group concentration. (4 marks) ii) Customer deposits - Composition by type - Maturity/liquidity risk analysis - Interest rate risk - Currency rate risk - Concentration risk (by economic sector, consumer or industry group concentration - Effective interest paid on deposits. (4 marks) b) KENYA BANK LIMITED i) Income statement for the year ended 31 December 2004

7 Million million Interest income On loans and advances 3,197 On Government securities 430 On placements with banking institutions 66 3,693 Interest on expense On customer deposits 194 On deposits and placements with banking institutions Non interest income 3,079 6,545 Expenses Bad and doubtful debts provision 1,259 Specific 400 general 400 Staff costs 1,461 Other expenses 1,425 4,545 Profit before tax 2,000 (600) Profit after tax 1,400 Dividends proposed (600) Profit retained for the year 800 (5 marks) ii) Kenya Bank Limited Balance Sheet as at 31 December 2004 million million Assets Cash and balances with Central Bank 7,439 Government securities 21,570 Loans and advances to customers Less: Specific provision for bad and doubtful debts (3,894) General provision for bad and doubtful debts (550) 54,450 Property and equipment 1,487 Other assets 16, ,146 Liabilities Customer deposits 81,947 Borrowed funds 2,641 Dividend payable 600 Corporation tax payable 600 Other liabilities 4,211 89,999 Capital Capital share 2,000 Reserves: Brought forward 8,347 Retained for the year 800 9,147 11, ,146 (5 marks)

8 Workings million million Loans and advances brought forward 58,894 Less: Specific provision for bad and doubtful debts Brought forward 2,635 Incremental 1,259 3,894 Net of specific provisions 55,000 General provisions at 1% 550 Less: Balance brought forward (150) Change for the year 400 iii) 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. (Total: 20 marks) NUMBER TWO a) i) 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. ii) Noting or notary charges: the cost formally presenting a dishonoured bill to the acceptor (drawee) usually by a lawyer acting as a notary public.

9 b) Limo, Tergat, Wambani and Gachara joint venture i) Statement showing the result of the venture Sale of cars 7,900,000 Add value of cars retained by Tergat 1,350,000 9,250,000 Less: expenses by Limo Purchases 3,600,000 Travelling expenses 45,000 Entertainment 45,000 Shipping expenses 1,710,000 (5,400,000) Expenses by Tergat: Customs duty 1,860,000 Clearing agents fees 200,000 (2,060,000) 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 785,600 Share of profit: Limo - 10% 78,560 Tergat 20% 157,120 Wambani 30% 235,680 Gachara 40% 314, ,600 (4 marks) ii) In the books of Limo Joint Venture with Tergat, Wambani and Gachara Travelling expenses 45,000 Bank Gachara 4,000,000 Entertainment 45,000 Purchases 3,600,000 Shipping expenses 1,710,000 Profit 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

10 In the books of Tergat Joint Venture with Tergat, Wambani and Gachara 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 Joint Venture with Tergat, Wambani and Gachara 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 Balance brought down 1,268,480 Cash from Gachara 11,268,480 (12 marks) In the books of Gachara Joint Venture with Tergat, Wambani and Gachara Bank remitted Limo 4,000,000 Bank sales 7,900,000 Security 126,000 Storage 81,000 Sales Commissions 264,600 Profit 40% 314,240 Balance carried down 3,114,160 7,900,000 7,900,000 Cash to Limo 1,478,560 Balance brought down 3,114,160 Cash to Tergat 367,120 Cash to Wambani 1,268,480 3,114,160 3,114,160 NUMBER THREE a) Conditions to be met: i) 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. ii) No such shares shall be redeemed unless they are fully paid. iii) 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.

11 iv) 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. v) The articles of association must authorise the redemption of shares (4 marks) b) Journal entries Date Particulars Dr () Cr (Sh) Share final call account 1,000,000 Equity share capital account 1,000,000 (Being final call of 2 per share due on 500,000 shares) General reserve account Profit and loss account Bonus dividend account (Being bonus dividend declared) Bonus dividend account Share final call account 900, ,000 Being utilisation of final dividend towards (payment of final call) 1,000, Bank account Fixed assets account (Being sale of fixed assets) Bank account Investments account Profit and loss account (Being sale of investments) Bank account 12% preference share capital Share premium account (Being issue of preference shares at a premium) 13% redeemable preference shares account Premium on redemption account Preference share holders account (Being amount payable on redemption including premium) Preference shareholders account Bank account (Payment on amount due on redemption paid in full except to holders of 2,000 shares) Share premium account Premium on redemption account (Being premium on redemption of shares of 7.5% provided out of share premium account) Profit and loss account Capital 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 3,825,000 2,600,000 3,300,000 5,000, ,000 5,160, ,000 2,000,000 3,000, ,000 2,000,000 6,000,000 3,000, ,000 5,375,000 5,160, ,000 2,000,000

12 the face value of proceeds of fresh shares) Capital redemption reserve account Share premium account Profit and loss account Bonus dividend (Being bonus dividend declared for issuing fully paid shares) Bonus dividend account Equity share capital account Share premium account (Being utilisation of bonus dividend towards the issue of 300,000 fully paid shares of 10 each to be distributed in the ratio of 3 for 5). 2,000, , ,000 3,150,000 3,150,000 3,000, ,000 (16 marks) (Total: 20 marks) NUMBER FOUR a) Cash/bank can go down whereas a firm makes profit due to : - Repayment of debts e.g. loans - Selling on credit - Holding money in stocks - Purchasing in cash rather than in credit - Purchasing of fixed assets Workings: Plant account Balance brought forward 54,000 Disposal 1,380 Cash 24,000 Balance carried down 76,620 78,000 78,000 Provision for Depreciation account Disposal 480 Brought forward 14,960 Carried forward 22,500 For the year 8,020 22,980 22,980 Disposal account Plant 1,380 Provision for depreciation 480 Cash 820 Loss 80 1,380 1,380 Loan account Cash 4,500 Brought forward 8,400 Carried forward 5,200 For the year 1,300 9,700 9,700

13 (4 marks) b) Cash flow statements for the year ended 31 December 2004 Shs. 000 Shs. 000 Net cash inflow from operating activities 18,240 Return on investments and servicing of finance Dividends paid (4,600) Taxation: Corporation tax paid (9,400) (14,000) Investing activities (24,000) Purchase of fixed assets 820 Net cash outflow from investing activities (23,180) Financing activities Issue of share capital 5,800 Acquisition of new loan 1,300 Repayment of loan (4,500) Net cash flow from financing activities 2,600 Decrease in cash and cash equivalent (16,340) Cash and cash equivalents ,020 Cash and cash equivalents (15,320) Notes Operating 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 NUMBER FIVE a) Distinguishing features of governmental organisations (16 marks) (Total: 20 marks) 1. Organisations to serve the citizenry A 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. 2. General absence of the profit motive Most 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.

14 3. Taxation as the principal source of revenue The 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. 4. Impact of legislative process Operations 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 5. Stewardship for resources A 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) b) i) General fund This 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. ii) Annual estimates These 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. iii) Excess vote This 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.

15 iv) Encumbrance This 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. v) Vote on account This 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. vi) Exchequer over issues This 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. (Total: 20 marks)

Financial Statements of Companies

2 Financial Statements of Companies BASIC CONCEPTS UNIT 1: PREPARATION OF FINANCIAL STATEMENTS While preparing the final accounts of a company the following should be kept in mind: Requirements of Schedule