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Accounting For Liabilities &Amp; Equities Question Paper
Accounting For Liabilities &Amp; Equities
Course:Bachelor Of Commerce In Accounting
Institution: Kenyatta University question papers
Exam Year:2004
INSTRUCTIONS: Answer ALL questions.
1.
Described below are certain transactions of Sade Company.
(i)
On February 2, the company purchased goods from Freath Company for
Sh500,000 subject to cash discount terms of 2/10, n/30. Purchases and accounts
payable are recorded by the company at net amounts after cash discounts. The
invoice was paid on February 26.
(ii)
On April 1, the company bought a truck for Sh3,000,000 from Gurd Motors,
paying Sh400,000 cash and signing a one year, 12% note for the balance of the
purchase price.
(iii)
On May 1, the company borrowed Sh800,000 from Royal Bank by signing a
Sh902,000 note due one year from May 1.
(iv)
On June 30, the corporation partially refunded Sh500,000 of its outstanding 10%
note payable made one year ago to Super Bank by paying Sh500,000 plus interest
of Sh50,000, having obtained the Sh550,000 by using its Sh210,000 of its own
cash and signing a new one year Sh400,000 note discounted at 15% by the bank.
(v)
On August 1, the board of directors declared a Sh200,000 cash dividend that was
payable on September 10 to shareholders on record on August 31. The dividend
was paid on September 10.
Required:
Make all journal entries necessary to record the transactions above using appropriate
dates.
2.
(a)
Under what conditions of bond issuance does a discount on bonds payable arise?
(b)
Under what conditions of bonds issuance does a premium on bonds payable arise?
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(c)
Red River Company issued Sh2,500,000 of 8% bonds on January 1, 2000 due
on January 1 2005 with interest payable each January 1. The investors required
effective interest rate is 10%.
Required:
Prepare the discount/premium amortization schedule using the effective
interest method.
(d)
Hunt Company issued its 9% 25 year mortgage bonds in the principal amount of
Sh5,000,000 on January 2, 1990 at a discount of Sh150,000 which it proceeded to
amortize by charges to expense over the life of the issue on a straight line basis.
The indenture securing the issue provided that the bonds could be called for
redemption in total but not in part any time before maturity at 105, but it did not
provide for any sinking fund. On December 18, 2004 the company issued its 11%
20 year debenture bonds in the principal amount of Sh6,000,000 at par, and the
proceeds were used to redeem the 9% 25 year mortgage bonds on January 2, 2005.
The indenture securing the new issue did not provide for any sinking fund or for
retirement before maturity.
Required:
Prepare journal entries to record the issuance of the 11% bonds and the retirement
of the 9% bonds.
3.
(a)
What criteria must a lease meet in order to be classified as a capital lease?
(b)
Burke Company leases a motor vehicle from Nolan Motors on the following
terms:
1.
The rental is Sh100,000 per month payable at the beginning of the month.
2.
The useful life of the vehicle is 40 months.
3.
The interest rate implicit in the lease is 2% per month.
4.
The lease contains a bargain purchase option at Sh1,000.
5.
The motor vehicle has no salvage value.
Required:
Prepare journal entries to record the lease at inception and the first monthly
payment.
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4.
(a)
What features or rights may be associated with preference shares?
(b)
Zanie Company was formed to operate a manufacturing plant in Athi River.
The events for the formation of the company include the following:
1.
5,000 ordinary shares of Sh10/= par were issued to investors at
Sh20/= per share for cash.
2.
80,000 shares were issued to acquire used equipment which had a
depreciated book value to the seller of Sh1,100,000.
3.
In order to attract the manufacturing plant to Athi River and stimulate
employment in the area, the town council agreed to convey title to land and
a building to Zanie. In return Zanie agreed to sign a Sh7,500,000 mortgage
contract for these assets. The fair market value of the land was
Sh4,500,000 and building Sh9,000,000.
Required:
Prepare journal entries for the above transactions.
5.
On 1st may 2005 Smith, who is a retailer, had the following balances in his books.
Premises
Sh 1,050,000
Equipment
123,000
Motor vehicles
76,500
Stock
142,500
Trade debtors
22,250
Smith does not keep proper books of accounts but bank statements covering the 12
months from 1st May 2005 to 30th April 2006 were obtained from the bank and
summarized as follows:
Sh
Money paid into bank:
Extra capital
120,000
Shop takings
1,447,500
Received from debtors
21,000
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Payments made by cheque:
Paid for stock purchased
1,057,500
Purchase of delivery van
93,000
Vehicle running expenses
15,300
Lighting and heating
14,100
Sales Salaries
78,900
Miscellaneous expenses
13,890
It has been discovered that, in the year ending 30th April 2006, the owner had paid into
bank all shop takings apart from cash used to pay (i) Sh6,120 miscellaneous expenses
and (ii) Sh7,500 per month drawings.
At 30th April 2006:
1.
Sh114,000 was owing to suppliers for stock bought on credit.
2.
The amount owed by trade debtors is to be treated as a bad debt. Assume that
there had been no sales on credit during the year.
3.
Stock was valued at Sh204,300.
4.
Depreciation for the year was calculated at Sh10,800 (equipment) and Sh15,000
(vehicles).
Required:
Prepare the income statement for the year ending 30th April 2006.
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