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Accounting For Equities Question Paper
Accounting For Equities
Course:Bachelor Of Commerce
Institution: University Of Nairobi question papers
Exam Year:2013
UNIVERSITY OF NAIROBI
MODULE II DEGREE PROGRAMME – 2012/2013 (NAIROBI EVENING)
FIRST YEAR EXAMINATIONS FOR THE DEGREE OF BACHELOR OF COMMERCE
DAC 202: ACCOUNTING FOR EQUITIES
DATE: MAY 8, 2013 TIME: 6:00 P.M. – 8:00 P.M.
INSTRUCTIONS:
1. This paper contains FOUR Questions
2. Attempt ALL Questions
3. Clearly Show Your Workings
Question One
The stockholders' equity section of ABC Ltd’s Statement of Financial Position as at December 31, 2012, was as follows:
Common stock--sh10 par (authorized 1,000,000 shares,
Issued and outstanding 600,000 shares) Sh. 6,000,000
Paid-in capital in excess of par 1,500,000
Retained earnings 3,250,000
Sh.10, 750,000
During the first quarter to March 31, 2013, the net income was Sh. 100,000.
Additional information
1. On January 4, 2013, having idle cash, ABC Ltd. repurchased 25,000 shares of its out-standing stock for sh.500, 000.
2. On March 4, ABC Ltd sold 5,000 of these reacquired shares at Sh.22 per share.
3. Show the proper disclosures in the stockholders' equity section of the balance sheet issued at the end of the first quarter, March 31, 2013. Assume net income of Sh. 100,000 during the first quarter.
4. On June 30, 2013 the firm sold 15,000 of the reacquired shares for Sh.18 per share.
Required:
a) Prepare journal entries for the treasury transactions in 1, 2, and 3 (above) to reflect the treasury stock transactions showing how each is accounted for under the cost method. (15 marks)
b) Show the proper disclosures in the stockholders' equity section of the statement of financial position issued at the end of the first quarter, March 31, 2013 (5 marks)
Question Two
State whether the statement(s) below are TRUE (T) or FALSE (F)
1. The conceptual framework for accounting has been discovered through empirical research.
2. A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards.
3. The first level of the conceptual framework identifies the recognition and measurement concepts used in establishing accounting standards.
4. The IASB has issued a conceptual framework that is broadly consistent with that of other developed countries
5. Although the IASB and FASB intend to develop a joint conceptual framework, no Statements of Financial Accounting Concepts have been issued to date.
6. Decision usefulness is the underlying theme of the conceptual framework.
7. Users of financial statements are assumed to have no knowledge of business and financial accounting matters by financial statement preparers.
8. Relevance and reliability are the two primary qualities that make accounting information useful for decision making.
9. The idea of consistency does not mean that companies cannot switch from one accounting method to another.
10. Timeliness and neutrality are two ingredients of relevance.
11. Verifiability and predictive value are two ingredients of reliability.
12. Revenues, gains, and distributions to owners all increase equity.
13. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
14. The historical cost principle would be of limited usefulness if not for the going concern assumption.
15. The economic entity assumption means that economic activity can be identified with a particular legal entity.
16. The expense recognition principle states that debits must equal credits in each transaction.
17. Revenues are realizable when assets received or held are readily convertible into cash or claims to cash.
18. Supplementary information may include details or amounts that present a different perspective from that adopted in the financial statements.
19. Companies consider only quantitative factors in determining whether an item is material.
20. Conservatism in accounting means the accountant should attempt to understate assets and income when possible. (20 Marks)
Question Three
The following data relate to ABC Ltd. for the year ended 31 December 2012:
Net income (30% tax rate) Sh. 3, 000,000
Average common shares outstanding 2010 1,000,000
10% cumulative convertible preferred stock:
Convertible into 80,000 shares of common Sh. 1,600,000
8% convertible bonds; convertible into 75,000 shares of common Sh. 2,500,000
Stock options:
Exercisable at the option price of Sh.25 per share;
Average market price in 2010, Sh.30 84,000 shares
Required;
Compute
(a) Basic earnings per share (10 marks)
(b) Diluted earnings per share. (10 marks)
Question Four
Choose the correct answer by writing the letter (A to D) describing the answer
1. The major elements of the income statement are
a) Revenue, cost of goods sold, selling expenses, and general expense.
b) Operating section, non-operating section, discontinued operations, extraordinary items, and cumulative effect.
c) Revenues, expenses, gains, and losses.
d) All of these.
2. Information in the income statement helps users to
a) Evaluate the past performance of the enterprise.
b) Provide a basis for predicting future performance.
c) Help assess the risk or uncertainty of achieving future cash flows.
d) All of these.
3. Limitations of the income statement include all of the following except
a) Items that cannot be measured reliably are not reported.
b) Only actual amounts are reported in determining net income.
c) Income measurement involves judgment.
d) Income numbers are affected by the accounting methods employed.
4. Which of the following would represent the least likely use of an income statement prepared for a business enterprise?
a) Use by customers to determine a company's ability to provide needed goods and services.
b) Use by labor unions to examine earnings closely as a basis for salary discussions.
c) Use by government agencies to formulate tax and economic policy.
d) Use by investors interested in the financial position of the entity.
5. The income statement reveals
a) Resources and equities of a firm at a point in time.
b) Resources and equities of a firm for a period of time.
c) Net earnings (net income) of a firm at a point in time.
d) Net earnings (net income) of a firm for a period of time.
6. The income statement information would help in which of the following tasks?
a) Evaluate the liquidity of a company.
b) Evaluate the solvency of a company
c) Estimate future cash flows
d) Estimate future financial flexibility
7. Which of the following is an example of managing earnings down?
a) Changing estimated bad debts from 3 percent to 2.5 percent of sales.
b) Revising the estimated life of equipment from 10 years to 8 years.
c) Not writing off obsolete inventory.
d) Reducing research and development expenditures.
8. Which of the following is an example of managing earnings up?
a) Decreasing estimated salvage value of equipment.
b) Writing off obsolete inventory.
c) Underestimating warranty claims.
d) Accruing a contingent liability for an ongoing lawsuit.
9. What might a manager do during the last quarter of a fiscal year if she wanted to improve current annual net income?
a) Increase research and development activities.
b) Relax credit policies for customers.
c) Delay shipments to customers until after the end of the fiscal year.
d) Delay purchases from suppliers until after the end of the fiscal year.
10. What might a manager do during the last quarter of a fiscal year if she wanted to decrease current annual net income?
a) Delay shipments to customers until after the end of the fiscal year.
b) Relax credit policies for customers.
c) Pay suppliers all amounts owed.
d) Delay purchases from suppliers until after the end of the fiscal year.
11. Which of the following is an advantage of the single-step income statement over the multiple-step income statement?
a) It reports gross profit for the year.
b) Expenses are classified by function.
c) It matches costs and expenses with related revenues.
d) It does not imply that one type of revenue or expense has priority over another.
12. The single-step income statement emphasizes
a) The gross profit figure.
b) Total revenues and total expenses.
c) Extraordinary items and accounting changes more than these are emphasized in the multiple-step income statement.
d) The various components of income from continuing operations.
13. Which of the following is an acceptable method of presenting the income statement?
a) A single-step income statement
b) A multiple-step income statement
c) A consolidated statement of income
d) All of these
14. Which of the following is not a generally practiced method of presenting the income statement?
a) Including prior period adjustments in determining net income
b) The single-step income statement
c) The consolidated statement of income
d) Including gains and losses from discontinued operations of a component of a business in determining net income
15. The occurrence which most likely would have no effect on 2010 net income (assuming that all amounts involved are material) is the
a) Sale in 2010 of an office building contributed by a stockholder in 1983.
b) Collection in 2010 of a receivable from a customer whose account was written off in 2009 by a charge to the allowance account.
c) Settlement based on litigation in 2010 of previously unrecognized damages from a serious accident which occurred in 2008.
d) Worthlessness determined in 2010 of stock purchased on a speculative basis in 2006.
16. The occurrence that most likely would have no effect on 2010 net income is the
a) Sale in 2010 of an office building contributed by a stockholder in 1961.
b) Collection in 2010 of a dividend from an investment.
c) Correction of an error in the financial statements of a prior period discovered subsequent to their issuance.
d) Stock purchased in 1996 deemed worthless in 2010.
17. Which of the following is not a selling expense?
a) Advertising expense
b) Office salaries expense
c) Freight-out
d) Store supplies consumed
18. The accountant for the BC Sales Company is preparing the income statement for 2010 and the balance sheet at December 31, 2010. The January 1, 2010 merchandise inventory balance will appear
a) Only as an asset on the balance sheet.
b) Only in the cost of goods sold section of the income statement.
c) As a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet.
d) As an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet.
19. In order to be classified as an exceptional item in the income statement, an event or transaction should be
a) Unusual in nature, infrequent, and material in amount.
b) Unusual in nature and infrequent, but it need not be material.
c) Infrequent and material in amount, but it need not be unusual in nature.
d) Unusual in nature and material, but it need not be infrequent.
20. Classification as an exceptional item on the income statement would be appropriate for the
a) Gain or loss on disposal of a component of the business.
b) Substantial write-off of obsolete inventories.
c) Loss from a strike.
d) None of these.
Total (20 Marks)
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