2016 EXAMINATIONS KNOWLEDGE LEVEL PAPER 1: ACCOUNTING FRAMEWORK

Transcription

1 EXAMINATION NO 2016 EXAMINATIONS NOWLEDGE LEVEL PAPER 1: ACCOUNTING FRAMEWOR TUESDAY 7 JUNE 2016 TIME ALLOWED : 3 HOURS 9.00AM NOON INSTRUCTIONS: 1. You are allowed 15 minutes reading time before the examination begins during which you should read the question paper and, if you wish, make annotations on the question paper. However, you will not be allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time. 2. Number of questions on paper The paper is divided into TWO sections A and B. Section A contains one compulsory question. All the candidates are required to answer it. Section B has FOUR questions and candidates are required to answer any THREE. 4. Question one carries 40 marks while all the questions in Section B carry 20 marks each. 5. All workings must be shown. 6. This question paper must not be removed from the examination hall. 7. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE INVIGILATOR This question paper contains 9 pages

2 SECTION A COMPULSORY QUESTION 1. (a) (i) With illustrations, compare and contrast the accounting equation with the business equation and explain the significance of these equations in preparing accounting information. 6 Marks (ii) Explain the concept of separate entity in accounting. 2 Marks (iii) Explain the difference between capital and revenue expenditure. 2 Marks (b) The following trial balance was drawn from the books of Tiyende Ltd, distributors of vehicle tyres as at 31 December 2014: 1 ordinary shares 8% 1 preference shares 7% debentures General reserve Land at cost Plant and machinery (cost) Undistributed profits (1 Jan 2014) Share premium account Inventory (1 Jan 2014) Sales Discount allowed and received Receivables and payables Provision for depreciation: Plant and machinery 1 Jan 2014 Bank Carriage inwards Purchases Suspense account Wages Lighting and heating Office salaries Debenture interest Directors fees Interim dividend: Ordinary (5%) : Preference 4% Provision for doubtful debts General expenses 111, ,000 35,000 3,200 48,000 7,500 1, ,000 23,500 2,900 8,600 7,000 12,800 7,500 2,000 11, , ,000 50, ,000 65,000 35,000 20, ,000 4,600 27,500 85, , ,000 Page 2 of 9

3 The following information is also provided: (1) On 31 December 2014 the company issued bonus shares to ordinary shareholders on 1 for 10 basis. No entry relating to this transaction has been made in the books. (2) The company s authorized share capital is 200,000 1 ordinary shares and 50,000 8% 1 preference shares. (3) Inventory at 31 December 2014 was valued at 41,000. (4) The suspense account of 400 relates to cash received for the sale of some machinery on 1 January This machinery cost 2,000 and the depreciation accumulated amounted to 1,500. (5) The directors wish to revalue the land to 180,000. (6) Wages owing at 31 December amount to 150. (7) Depreciation for plant and machinery is to be provided at 10% on cost. (8) General expenses of 11,900 include an insurance premium of 200 which relates to the period from 1 April (9) Provision for doubtful debts is to be reduced to 2½% of receivables. (10) The directors wish to provide for: - A final dividend of 5% - A final preference dividend - A transfer of 5,000 to the general reserve. (i) Prepare a statement of profit or loss of Tiyende Ltd for the period ended 31 December ½ Marks (ii) Prepare a statement of financial position as at 31 December ½ Marks Page 3 of 9

4 (c) Explain the meaning of the following terms as used in the measurement of non-current assets: (i) Cost model 1 Mark (ii) Fair value model 1 Mark (iii) Carrying amount 1 Mark (iv) Revaluation surplus 1 Mark (v) Revaluation reserve 1 Mark (d) Tiyende Ltd purchased a machine on 1 January 2010 for 300,000. The machine has been depreciated at 10% per annum using the straight line method with no estimated residual value. In December 2014 the machine was revalued to 250,000 with no change in its estimated useful life. It was then sold for 200,000 cash. Show the following values for the machine: (i) Accumulated depreciation for the period January 2010 to December 2014, assuming that depreciation for the year 2014 was charged before these adjustments. 1 Mark (ii) The carrying amount as at 31 December Mark (iii) The revaluation surplus as at 31 December Mark (iv) Journal entry to show the disposal of the machine. 2 Marks (TOTAL : 40 MARS) Page 4 of 9

5 SECTION B Answer THREE questions ONLY from this section 2. (a) The following balances were extracted from the books of Mkontho Ltd, brewers of a popular national beer, as at 30 June 2014, the end of their trading period: Rent and rates payable: Prepayments Accruals Motor vehicles (cost) Telephone expenses prepaid Allowance for depreciation (motor vehicle) Transactions for the year ended 30 June 2015 were as follows: Paid by cheque Rent Rates Telephone bills Disposal of motor vehicles: Original cost Accumulated depreciation Purchase of new vehicle (cost) Trade-in allowance on disposal Balance paid by cheque 000 1, , ,400 5,800 4,700 3,600 7,800 5,900 11,600 2,500 9,100 Closing balances on the ledger accounts as at 30 June 2015 were as follows: Prepayments (rent and rates) Accruals (rent and rates) Allowance for depreciation Telephone expense accrued 1, , Prepare the following accounts to show closing balances and transfers to the profit or loss statement: (i) Rent and rates 3½ Marks (ii) Telephone expenses 3 Marks (iii) Motor vehicles 3 Marks (iv) Provision for depreciation 3 Marks (v) Disposal of motor vehicles 3½ Marks Page 5 of 9

6 (b) (i) Explain the meaning of the term goodwill in a business. 2 Marks (ii) Mention two methods of calculating goodwill. 2 Marks (TOTAL: 20 MARS) 3. The following are assets and liabilities of Tisewele Sports Club as at 31 December 2014: Buildings (NBV) Bank and cash Bar inventories Accounts receivable (bar) Accounts payable (bar) Prepaid rates Subscriptions owing by members Loan to the club Accrued utilities Miscellaneous expenses (accruals) Loan interest Subscriptions paid in advance 130,980 10,670 2,910 2,310 4, ,780 10,800 2, ,980 A receipt and payment account for the year ended 31 December 2015 showed the following: Receipts Balance b/f 10,670 Bar sales 40,300 Subscriptions 17,800 Socials 1,770 Miscellaneous receipts ,440 Payments Bar purchases 29,370 Loan repayment 1,700 Ground rent 790 Utilities 8,640 Insurance 2,210 Expenses on socials 670 Repairs and maintenance 4,590 Wages 1,400 Telephone 1,030 Bar sundries 2,090 Loan interest 970 Miscellaneous 1,630 Balance c/d 16,450 71,440 Page 6 of 9

7 The following information as at 31 December 2015 is also available: Bar inventories Bar receivables Bar payables Prepaid ground rent Utilities owing Subscriptions paid in advance Subscriptions owing by members 3, , ,340 6,570 4,250 (a) (i) Prepare the statement of affairs to ascertain the balance of accumulated fund as at 1 January Marks (ii) (iii) (iv) Prepare the accounts receivable and accounts payable accounts to determine bar sales and bar purchases for the period. 4 Marks Prepare the subscriptions account to determine the income for the period. 3 Marks Prepare the bar trading account to determine the profit or loss from bar trading. 3 Marks (b) Prepare the Income and Expenditure account for the year ended 31 December 2015 for Tisewele Sports Club to show whether there was a surplus or deficit at the end of the year. 5 Marks (TOTAL : 20 MARS) Page 7 of 9

8 4. (a) According to the fundamental principle of inventory valuation, the International Accounting Standard 2 (IAS2) provides that inventories should be stated at the lower of cost and net realizable value. Define the following terms: (i) Cost 3 Marks (ii) Net realizable value 1 Mark (b) (c) (d) Mention any four items in the financial statements of a business which may be affected by an understatement or overstatement of the value of closing inventory. 2 Marks Explain the difference between periodic inventory and perpetual inventory valuation. 2 Marks The following data represent the movement of inventory in the books of Titchene Fashion Designers, during the month of April 2015: Balance b/f October 8 Purchases 13 Purchases 20 Purchases 29 Purchases Sales were as follows: October 5 sales 200 units 10 sales 700 units 15 sales 450 units 23 sales 300 units 30 sales 50 units = 400 = 1360 = 700 = 630 = 370 Calculate the cost of sales, and the value of closing inventory under FIFO perpetual inventory method at the end of the date shown. 12 Marks (TOTAL : 20 MARS) Page 8 of 9

9 5. (a) Name and explain five items which are specifically provided in a partnership agreement. 5 Marks (b) Tithe and Sitinga are in a partnership running a private primary school. They agree to share profits and losses in the ratio 3:2 respectively. As at 1 October 2014 the partnership s capital and current account balances were as follows: Tithe Sitinga Capital Account 36,000 20,000 Current Account 12,000 Dr 16,600 Cr (1) On 1 April 2015 Sitinga increased the capital by paying a further 3,000 into the partnership account. Interest on capital is credited at 5% per annum. (2) On the other hand Tithe reduced her capital by 4,000 on 31 December 2015 but kept this amount in the partnership as a loan bearing 10% interest per annum. The interest on the loan is credited to Tithe s account. (3) The partners agreed to charge drawings at 15% interest per annum. (4) Sitinga is paid a salary of 4,000 for running the business. (5) As at 30 September 2015 Tithe had withdrawn 8,500 and Sitinga had withdrawn 5,500. (6) The profit before interest for the year to 30 September 2015 was 24,475. Prepare the following accounts for the partnership: (i) Profit or loss appropriation account. 5 Marks (ii) Partners current accounts. 7 Marks (iii) Partners capital accounts. 3 Marks (TOTAL : 20 MARS) E N D Page 9 of 9