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Bac 201: Accounting For Liabilities And Equities Question Paper
Bac 201: Accounting For Liabilities And Equities
Course:Accounting For Liabilities And Equities
Institution: Kenyatta University question papers
Exam Year:2011
INSTRUCTIONS:
Answer ALL questions.
1.
Listed below are selected transactions for Hern Company relating to current
liabilities during the current fiscal year.
Jan 10
Purchased merchandise for Sh.250,000. A 2% discount is offered
by suppliers. Hern records purchases and accounts payable net of
discounts and uses the periodic inventory system
19
Paid Sh.166,600 on invoice of January 10. The invoice was billed
to Hern for Sh.170,000 and was paid within the discount period.
31
Paid balance of January 10 invoice, Sh.80,000, after the discount
period
April 1
Issued a one – year promissory note to supplier in settlement of an
invoice for Sh.100,000 dated March 31. The invoice was recorded
net of 2% purchases discount; that is Sh.98,000. The face amount
of the note was Sh.111,680, including interest at 15% on Sh.98,000
for one year. The note was recorded at face amount.
June 30
The company sells service contracts on its products and credits
Deferred Service Contract Revenue when payments from
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customers are received. For the current year, Sh.74,000 of the
service contract revenue is considered realized.
Required:
Prepare journal entries to record the transactions above.
(15 marks)
2.
On July 1, year 1, Magnate Company issued bonds with a face amount of
Sh.4,000,000 maturing in four years. The coupon interest rate was 9% payable
semiannually on June 30 and December 31. The bonds were issued to yield 10%
compounded semiannually.
Required:
a)
Compute the proceeds received for the bonds.
(5 marks)
b)
Prepare journal entries to record the following:
i)
Issuance of the bonds on July 1, Year 1
ii)
Payment of interest and amortization (by the interest method) on
December 31, Year 1.
(10 marks)
3.
a)
To be classified as a capital lease by the lessee, the lease must meet one of
four criteria. List these four criteria.
(8 marks)
b)
The following facts pertain to a noncancellable lease agreement between
Web Leasing Company and Zag Company, lessee.
Inception date
April 1, 2000
Annual lease payment due at the beginning of each year, beginning
with April 1, 2000.
Sh. 18,589.67
Bargain purchase option price atg end of lease
term
Sh. 4,000.00
Lease term
5 years
Economic life of leased equipment 10 years
Lessors cost
Sh. 73,000.00
Fair value of asset at April 1, 2000
Sh. 80,000.00
Lessors’ implicit rate
10%
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Lessee’s incremental borrowing rate
10%
The collectability of the lease payment is reasonably predicable, and there
are no important uncertainties surrounding the costs yet to be incurred by
the lessor. The lessee assumes responsibility for all executory costs.
Required:
i)
Discuss the nature of the lease to Web Company. (3 marks)
ii)
Discuss the nature of the lease to Zag Company.
(3 marks)
iii)
Prepare a lease amortization schedule for Zag Company for the 5
year lease term.
(11 marks)
4.
The Rol Company Ltd., is authorized to issue 1,000,000 shares of Sh.5 par value
common stock and 125,000 shares of Sh.10 par preferred stock. During 2010, its
first year, the company had the following stock transactions:
Jan 10
Issued 400,000 shares of stock at Sh.8 per share
Feb 1
Issued 1,000 shares of preferred stock for land having a fair market
value of Sh.125,000
Mar 1
Issued 1,000 shares of preferred stock for cash at Sh.120 per share
July 1
Issued 100,000 shares of stock for land. The land had an asking
price of Sh.900,000. the stock is currently selling on a national
exchange at Sh.8.25 per share.
Required:
a)
Prepare journal entries to record the transactions.
b)
Prepare the stockholders equity section assuming the company had
retained earnings of Sh.200,000 at December 31, 2010.
(15 marks)
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