Bankruptcy And Reorganization Question Paper

Bankruptcy And Reorganization

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2009

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE

BAC 306: BANKRUPTCY AND REORGANIZATION

DATE: Wednesday 30th December, 2009 TIME: 11.00 a.m. – 1.00 p.m.

INSTRUCTIONS
Answer ALL the four questions.

Q1.
An order for winding-up was made against Narkranat enterprises Ltd by the court
on 31st August, 2006.

The financial position Narkranat enterprises Ltd at the time was as follows:

Freehold land
494,000
Machinery 1,462,000
Stocks 1,918,000
Debtors 904,000
Cash 2,000
Good will
269,900
Profit and loss account
1,290,000
6,338,900
Issued share capital:

50,000 shares of shs.20 each fully paid
1,000,000
40,000 shares of shs.20 each shs.12.50
500,000
10% Debentures (secured by a first charge on freehold land
400,000
Bank overdraft (secured by floating charges on Assets)
2,279,000
Customs and exercise tax
20,000
Trade Creditors
2,090,000
Accrued charges
39,900
Interest on debentures (3 months to date)
10,000
Page 1 of 4

Additional Information
1.
The following charges had accrued:
Top managers fees (for 6 months to 31 August 2007)

7,500
Managing Director’s salary (for 2 months to 31 Aug. 2007)
8,000
Workers wages (3 people for 4 weeks to 31 Aug. 2007)

1,800
Land rates last half of year to 31 Aug. 2007

2,000
Corporation tax 2005

12,000
Miscellaneous
items
8,600

39,900
2.
The holder of 1,000 of the partly paid shares was bankrupt and it was anticipated
that his trustees would pay a dividend of shs.5.00 in the shs.20 his unsecured
creditors.
3.
The assets are expected to realize as follows

Shs.
Freehold
land

448,000
Machinery
1,400,000
Stocks
1,876,000
4.
The debtors appeared good except for 52,000 of which 40,000 debt were doubtful
and were expected to realize 11,000, the remaining 12,000 considered bad while
goodwill was considered valueless.
5.
Legal proceedings for breach of contract remained pending as at 31 Aug. 2006.
Due to perceived poor company defense, attempts were being made to settle the
claim out of court for 10,000 plus cost estimated at shs.800. No provision for this
claim is included in the above balance sheet.
6.
The company incurred losses of shs.304,000, shs.384,000, shs.602,000
respectively in three years upto August 31 2006.
7.
The following were charged to the profit and loss account during the three years:

Shs.
Directors
Remunerations
180,000
Depreciation
238,000
Debenture
interest

60,000

Prepare

(i)
A
statement
of
affairs

[12
marks]
Page 2 of 4

(ii)
Deficiency account for Narkranat Enterprises Ltd as on the date of the
winding
order.
[8
marks]

Q2.
Beatrice Ngilu a retrenched civil servant commenced a retail business on January
1, 2000 with capital of sh.400,000. His profits for three years were sh.190,000.
Owing to his inexperience in business he failed to prepare proper accounts for the
next two years. Due to the high dependency level, his drawings averaged
sh.40,000 per year. On December 31, 2004 an order of adjudication was made
against him, when his were as follows:

Shs.
House
debts

10,000
Household
furniture

20,000
Cash
in
hand

15,000
Unsecured
creditors
400,000
Mortgage
on
buildings 280,000

Creditors partly secured (Security being life
policy Estimated to be sh 80,000)

230,000
Preferential
creditors

50,000
Bill receivable discounted and expected to rank

50,000
Buildings (cost 550,000) estimated to realize

400,000
Machinery (cost 250,000) estimated to realize

150,000
Book debts: Good 40,000 and Doubtful (Estimated to
Realize 10,000 and bad 5000)

30,000
Furniture (cost 100,000) estimated to realize

60,000
Stock (cost 80,000) estimated to realize

135,000

Required:
Prepare
(a)
Statement
of
affairs.
[8
marks]
(b)
A deficiency account for Beatrice Ngilu as on 31 December, 2004.

[7 marks]
Q3.
Mboba Mbichi Ltd went into Voluntary liquidation on Jan 1, 2008 and the
liquidator gave the following data.
i)
The enterprise borrowed a loan of shs.250,000 from Equity Bank, which
was secured against buildings, which realized shs.402,500 upon disposal.
Page 3 of 4

ii)
The company share capital comprised the following:
5,000 class A ordinary shares of shs.200 each (shs.150 paid up).
4,000 class B ordinary shares of shs.200 each (shs.120 paid up).
3,500 class C ordinary shares of shs.200 each (shs.100 paid up).
5,000 8% preference shares of shs.200 each (fully paid up).

iii)
Liquidation expenses, were sh.75,000
iv)
Assets of the company realized 2,100,000 including building.
v)
Creditors worth sh.437,000 were in the books.
vi)
Due to cash flow problems, the company accrued the following in arrears.
- Salaries for 4 clerks for 4 months (each clerk entitled to shs.1,500 per
month).
- Wages for ground men for 3 months (there were 3 grounds men at the
rate of shs.750 per month).
Required:
i.
Prepare the liquidator’s final statement of account with the appropriate
supporting
schedule.
[12
marks]
ii.
Explain how statement of affairs differs from a balance sheet.

[3 marks]
Q4.
a)
Differentiate between Bankruptcy insolvency and equity insolvency.

[3 marks]
b)
Describe the main objectives of Bankruptcy act (cap 53) of Kenya and
discuss
the
petition
process.
[4
marks]
c)
Briefly explain with appropriate examples the following terminologies as
used in Bankruptcy.
i)
Preferential
creditors.
[2
marks]
ii)
Scheme
of
arrangement [2
marks]
iii)
Deferred
creditors
[2
marks]
d)
Explain the powers a trustee may exercise with the permission of the
committee
of
inspection.
[4
marks]
e)
Outline the main bankruptcy offences.

[3 marks]

……………………..
Page 4 of 4

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