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Intermediate Accounting Ii Question Paper
Intermediate Accounting Ii
Course:Accf 331
Institution: Kenya Methodist University question papers
Exam Year:2008
KENYA METHODIST UNIVERSITY
END OF SECOND TRIMESTER 2008 EXAMINATIONS
FACULTY : BUSINESS AND MANAGEMENT STUDIES
DEPARTEMENT : BUSINESS ADMINISTRATION
COURSE CODE : ACCF 331
COURSE TITLE : INTERMEDIATE ACCOUNTING II
TIME : 2 HOURS
INSTRUCTIONS:
• Answer Question ONE (Compulsory) and any other TWO Questions
Question 1
(a) Explain five differences between preferred and common stock. (5 marks)
(b) Explain how a contingent liability arises in the issues of shares and who can enforce such a liability. (6 marks)
(c) The shareholders equity section of balance sheet of Meko Foods Ltd include the following:
Shareholders Equity Kshs in millions
Paid in capital
Preferred stock 11 million share at 1 sh par shs 11
Common stock 122 million share at 1 sh par shs 122
Share premium on preferred shares shs 479
Share premium on common stock shs 854
Less: receivable from share purchase contract (shs 220)
Retained earnings shs 2,848
Total shareholder’s equity shs 4,094
During 2005 the company reacquired six million common shares at sh 10 per share and sold them in two transactions as below;
Sold 2 million shares at sh 12 per share
Sold 2 million shares at sh 7 per share
Required:
Prepare entries for both the purchase and subsequent sale of the shares in 2005 assuming that:
(i) The shares were retired.
(ii) The shares were considered treasury stock. (14 marks)
Question 2
(a) Corporations using bonds are obligated to repay a stated amount at specified maturing date and periodic interest between the issued date and maturing. What is the meaning of the following terms in relation to issue of bonds
(i) Bond indenture
(ii) Subordinated debenture
(iii) Coupon bonds (6 marks)
(b) On January 1, 2003 Kingswear Industry issued shs 700,000 of 12% bonds dated Jan 1. Interest of shs 42,000 is payable semi-annually on June 30 and Dec 31. The bonds mature in three years. The market yield for bonds of similar risk and maturity is 10%. The entire bond issue was purchased by Umoja Industries.
Required:
(i) Calculate the price of the bonds.
(ii) Draw an amortization schedule to show interest computation for the bond.
(iii) Journal entries to record issue of the bond both to investor and issuer.
(19 marks)
Question 3
(a) Explain five forms of dividend distributions. (10 marks)
(b) Identify two items that increase and three items that decrease retained earnings of a firm. (5 marks)
(c) The following transactions and events affected the retained earnings of Zedco ltd, a firm specializing in sale of house hold furniture.
(i) On March 1, the board of directors declared a cash dividend of shs 1 per share on its 120 million shares payable on April 3 to shareholders of record March 11.
(ii) On March 5, the board of directors declared as property dividend of 120 million shares of Umoja Ltd common stock that Zedco had purchased in February as an investment (book value shs 900million). The investment shares had a fair market value of shs 8 per share and were distributed march 30 to shareholders of record March 15.
Required:
Journal entries to show the events on declaration date, date of record and payment date.
(10 marks)
Question 4
(a) What is a liability? Explain four types of current liabilities. (12 marks)
(b) In 2006, Ajit Corporation, a company that sells televisions sold 100, 5-year extended warranties on its televisions evenly throughout the year at a price of shs 200 per extended warranty. The estimated warranty costs for each extended warranty is shs 150. Actual warranty costs incurred during the year were shs 1800. During 2007 the corporation sold 125, 5-year warranties on its televisions evenly throughout the year at a price of shs 200 per extended warranty. The estimated warranty costs for each extended warranty contract is shs 150. Actual warranty costs incurred during 2007 were shs 5000.
Required:
Pass the journal entries for both years to record the above liability. (13 marks)
Question 5
(a) What is a contingency? Differentiate between a loss and a gain contingency
(5 marks)
(b) When should an estimated loss form a contingency be reported? Explain three examples of contingencies. (8 marks)
(c) Highlight three reasons of the usefulness of the income statement. (6 marks)
(d) On November 12, 2005, a former employee filed a law suit against Tajiri Ltd alleging age discrimination and asking for damages of Kshs. 750,000. At December, 2005, Tajiri Ltd’s lawyer indicated that the likelihood of loosing the case was possible but not probable. On March 5, 2006, Tajiri agreed to pay former employee Kshs 125,000 in return for withdrawing the lawsuit.
Required:
Explain the contingency in the above situation and how it should be disclosed in the financial statement of Tajiri Ltd. (6 marks)
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