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Accounting For Liabilities And Equities Question Paper
Accounting For Liabilities And Equities
Course:Bachelor Of Commerce
Institution: Kenyatta University question papers
Exam Year:2004
INSTRUCTIONS
Answer ALL questions.
1.
(a)
Explain the criteria that must be met for a lease to quality as a capital
lease.
[6 marks]
(b)
Chesire Limited made the following transactions in the year 2004:
(i)
Chesire accrued estimated property taxes during the first eight
months of 2004 at the rate of sh 2000 per month.
On September 10th, he learned that the 2004 tax bill would be
sh.21,720. The due date for these taxes s December, 31.
Property tax entries are made in September 30 and October 31.
(ii)
During September, Chesire sold sh.140,000 of merchandise under
a 180-day warranty. Prior experience shows that the costs of
fulfilling the warranty expense and an increase in the warranty
liability as at September 30 adjusting entry. Also record an
October 8 expenditure of sh 300 cash to service an item sold in
September
(iii)
On October 10 Chesire arranged with suppliers to pay 25% of an
overdue sh 10,000 account payable by Chesire to the supplier. The
remaining balance was converted to a sh7,500, 90-day note bearing
12% interest.
(iv)
On October 15, Chesire borrowed sh 98,000 by discounting its
sh 100,000, 60-day note payable to the bank.
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2
(v)
On December 1st, Chesire acquired a machine by giving a sh
60,000 non-interest bearing note due in one year. The rate of
interest available to Chesire for this type of debt was 12%.
(vi)
On December 14, Chesire paid the note described in (iv) above.
(vii) On December 31 Chesire accrued interest on the notes described
in(iii) and (v). (Use a 360-day year)
Required:
Prepare journal entries to record the above transactions.
[14 marks]
Q2.
(a)
Etemesi entered into a 3-year lease of machinery on January 1st 2004 and
agreed to make three payments of sh.30,158 on December 31, 2004, 2005
and 2006. The appropriate interest rate for this lease is 10%. Title to the
machinery was to pass to Etemesi at the end of the lease should be
recorded as a capital lease. Prepare a lease amortisation schedule.
[15 marks]
(b)
A bond carrying a coupon rate of interest 8% is sold to yield 10%.
Determine whether the bond is sold at a premium or discount. Explain.
[5 marks]
[Total 20 marks]
Q3.
(a)
Explain the distinction between basic earnings per share and diluted
earnings per share.
[4 marks]
(b)
Under what circumstances does the Companies Act permit the use of the
Share Premium Account?
[6 marks]
[Total 10 marks]
Q4.
(a)
Explain the treatment of contingent liabilities clearly giving the
justifications.
[10 marks]
(b)
Explain the following techniques and how they are used:
(i)
debt-equity swaps
[5 marks]
(ii)
In-substance defeasance
[5 marks]
[Total 10 marks]
……………..
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