In accordance to the IFRS (International Financial Reporting Standards), prudence has been
defined as the inclusion of a degree of caution in the exercise of judgements needed in making
the estimates required under conditions of uncertainty, such that assets or income are not
overstated and liabilities or expenses are not understated.
This means that losses are recorded when anticipated but profits are recorded only when they
are actually realized. This means that the figure that understates profits and not which will
overstate profits should be taken. When dealing with stocks, the prudence concept is applied
where the lower of cost or net realizable value of stocks is taken.
However, the exercise of prudence does not allow, for example, the creators of hidden reserves
or excessive provisions, the deliberate understatement of assets, or income, or the deliberate
overstatement of liabilities or expenses because the financial statements would not be neutral
and therefore not have the quality and reliability.
Mutiso answered the question on November 19, 2018 at 04:21
- The trial balance of Plastics Ltd as at 31 October 2004 is as follows(Solved)
The trial balance of Plastics Ltd as at 31 October 2004 is as follows:
Additional information:
1. A building whose net book value is currently Sh.5 million is to be revalued to Sh.9 million
2. A final ordinary dividend of Sh.2 million is proposed.
3. The balance on the corporation tax for the current year is estimated at Sh.3 million.
Required:
(i) Income statement for the year ended 31 October 2004.
(ii) Balance sheet as at 31 October 2004.
Date posted: November 19, 2018. Answers (1)
- Distinguish reserves from share capital(Solved)
Distinguish reserves from share capital.
Date posted: November 19, 2018. Answers (1)
- An extract from the balance sheet of Kimwa Construction Ltd as at 30 June 2003 showed the
following summary of property, plant and equipment(Solved)
An extract from the balance sheet of Kimwa Construction Ltd as at 30 June 2003 showed the following summary of property, plant and equipment:
The following transactions took place during the year ended 30 June 2004:
1. The company incurred the following costs in acquiring new equipment
2. Property, plant and equipment disposed of during the year were as follows:
In addition, a new truck was acquired by trading in an old truck at an agreed value of
Sh.10.5 million and making an additional cash payment of Sh.15 million. The old truck
had cost Sh.15 million in July 2000.
3. The directors recommended a reclassification of some items of equipment to furniture.
These items had cost Sh.15 million and had accumulated depreciation of Sh.3 million.
4. The company‟s policy is to charge depreciation on a straight line basis at the following
rates:
Equipment 20% per annum
Furniture 12 ½ % per annum
Motor vehicles 30 % per annum
5. A full year‟s depreciation was charged in the year of acquisition but none in the year of disposal.
Required:
(a) Explain two other methods of charging depreciation that Kimwa construction Ltd could
have used.
(b) A property, plant and equipment disposal account for the year ended 30 June 2004.
(c) A property, plant and equipment movement Schedule for the year ended 30 June 2004
Date posted: November 19, 2018. Answers (1)
- On 31 October 2004, the cashbook of Mwea Enterprises Ltd. Showed a debit balance of Sh.1,710,000. This did not agree with the balance shown in...(Solved)
On 31 October 2004, the cashbook of Mwea Enterprises Ltd. Showed a debit balance of Sh.1,710,000. This did not agree with the balance shown in the bank statement.
Upon investigation, the accountant discovered the following errors:
1. A cheque paid to Kindaruma for Sh.306,000 had been entered in the cashbook as
Sh.387,000
2. Cash paid into the bank by a customer for Sh.90,000 had been entered in the
cashbook as Sh.81,000
3. A transfer of Sh.1,110,000 to Central Savings Bank had not been posted to the cash
book.
4. A receipt of Sh.9,000 shown in the bank statement had not been posted in the
cashbook.
5. Cheques drawn amounting to Sh.36,000 had not been paid into the bank.
6. The cash book balance had been incorrectly brought down at 1 November 2003 as
a debit balance of Sh.1,080,000 instead of a debit balance of Sh.990,000
7. Bank charges of Sh.18,000 do not appear in the cash book.
8. A receipt of Sh.810,000 paid into the bank on 31 October 2004 appeared in the
bank statement on 1 November 2004.
9. A standing order of Sh.27,000 had not been recorded in the cash book.
10. A cheque for Sh.45,000 previously received and paid into the bank had been
returned by the customer‟s bank marked “account closed”.
11. The bank received a direct debit of Sh.90,000 from an anonymous customer.
12. Cheques banked had been totaled at Sh.135,000 instead of Sh.153,000.
13. A cheque drawn in favour of Nyaga for Sh.120,000 had been entered on the debit
side of the cashbook.
Required;
(i) Adjusted cash book as at 31 October 2004.
(ii) A bank reconciliation statement as at 31 October 2004.
Date posted: November 19, 2018. Answers (1)
- The bank statement and cashbook balances should agree, but sometimes these balances may not agree:
Required:
Discuss this statement and explain why it is important to prepare...(Solved)
The bank statement and cashbook balances should agree, but sometimes these balances may not agree:
Required:
Discuss this statement and explain why it is important to prepare a bank reconciliation statement.
Date posted: November 19, 2018. Answers (1)
- Okech and Wanjala are in a partnership business that sells hardware. They share profits and
losses equally after allowing for an annual salary of Sh.600,000 to...(Solved)
Okech and Wanjala are in a partnership business that sells hardware. They share profits and
losses equally after allowing for an annual salary of Sh.600,000 to Okech. Interest is allowed on
capital at 10% per annum. Their bookkeeper has produced the following list of balances as at 30
June 2004:
You ascertain that the bookkeeper is not sure whether the above balances are correct and on
further investigation you discover the following:
1. The sales ledger control account does not agree with the list of balances from the ledger
due to:
The sales return day book has been under cast by Sh.14,000 while a contra
entry with the creditors ledger for Sh.24,000 has been omitted from the control
account.
An invoice for Sh.240,000 was incorrectly entered in the sales day book as
Sh.24,000.
2. Wanjala had paid some business expenses amounting to Sh.60,000 from his personal
bank account while Okech had taken goods costing Sh.120,000 for his own use. No
entries have been made for these items.
3. A fully depreciated motor vehicle which cost Sh.600,000 was sold during the year for
Sh.120,000. The entry for the proceeds was only posted in the bank account.
4. The bookkeeper had understated the bank overdraft by Sh.240,000.
Required:
(a) A trial balance and a suspense account showing how the difference is accounted for.
(b) Trading, Profit and loss account for the year ended 30 June 2004.
(c) Balance sheet as at 30 June 2004.
Date posted: November 17, 2018. Answers (1)
- The book keeper of Bidii Ltd. prepared the following trial balance as at 31 December 2003:(Solved)
The book keeper of Bidii Ltd. prepared the following trial balance as at 31 December 2003:
Additional information:
1. In an effort to simplify the accounting process, the book keeper posted both discounts
received and discounts allowed to the discounts account. He has also posted both
returns inwards and returns outwards to the returns accounts, and both carriage inwards
and carriage outwards to the carriage account. Discounts received, returns outwards and
carriage outwards were as follows:
Sh.
Discounts received 1,000,000
Returns outwards 1,000,000
Carriage outwards 1,000,000
2. The following items are already included in general expenses:
- Rates for the 12 months to 31 March 2004, Sh.4,000,000
- Insurance for the 12 months to 31 December 2003 amounted to Sh.2,000,000.
Half of this amount relates to the managing director‟s private expenses.
3. Accountancy fees of Sh.1,000,000 should be provided for
4. A debtor for Sh.20,000,000 has been declared bankrupt. The provision for doubtful
debts is to be made at 5% of the debtors.
5. Dividends of Sh.10,000,000 have been proposed by the board of directors.
6. Stock as at 31 December 2003 is valued at Sh.180,000,000
7. Depreciation of Sh.20,000,000 is to be provided on the motor vehicles and
Sh.10,000,000 on the machinery. The buildings are to be revalued upwards by
Sh.30,000,000
Required:
(a) Trading and profit and loss and appropriation accounts for the year ended 31 December
2003.
(b) Balance sheet as at 31 December 2003
Date posted: November 17, 2018. Answers (1)
- Kalamu and Karatasi have been trading in partnership for several years, sharing profits and
losses equally after allowing interest on their capitals at the rate of...(Solved)
Kalamu and Karatasi have been trading in partnership for several years, sharing profits and
losses equally after allowing interest on their capitals at the rate of 8% per annum. On 1
September 2003, the manager of their business, Barua, was admitted as a partner and was to
share one fifth of the profits after interest on capital Kalamu and Karatasi were to share the
balance of the profits equally but guaranteed that Barua‟s share would not fall below
Sh.600,000 per annum.
Barua was not required to introduce any capital at the date of admission but agreed to retain
Sh.150,000 of his profit share at the end of each financial year to be credited to his capital
account until the balance reached Sh.750,000. Until that time, no interest was to be allowed on
his capital.
Goodwill was agreed at Sh.1,500,000 at 1 September 2003, but was not to be maintained in the
accounts. Land and buildings were professionally valued at Sh.2,840,000 on the same date while
the book value of equipment and motor vehicles was to be reduced to Sh.1,500,000 as at that
date.
Barua was previously entitled to a bonus of 5% of the gross profit. This bonus was payable half yearly.
The manager's bonus and the manager's salary were to cease when he became a partner.
The trial balance below was extracted as at 31 December 2003. No adjustments had yet been
made in respect of Barua's admission and the amount he introduced as his
contribution for goodwill had been posted to his current account. The drawings of all the
partners had been charged to their current accounts.
Additional information:
1. It is assumed that gross profit and general expenses accrued evenly throughout the year
except that Sh.100,000 of the general expenses relate to a bad debt that arose in the period
after Barua‟s admission. The balance of the general expenses accrued evenly.
2. Depreciation is to be charged on equipment and motor vehicles at the rate of 20% per
annum on the book value. No depreciation is to be charged on land and buildings.
Required:
(a) Profit and loss account for the year ended 31 December 2003
(b) Partner‟s capital accounts as at 31 December 2003.
(c) Partner‟s current accounts as at 31 December 2003.
Date posted: November 17, 2018. Answers (1)
- The trial balance of Amanda Ltd as at 30 April 2004 did not balance. On investigation, the
following errors were discovered:
1. A loan of Sh.2,000,000 from...(Solved)
The trial balance of Amanda Ltd as at 30 April 2004 did not balance. On investigation, the
following errors were discovered:
1. A loan of Sh.2,000,000 from one of the directors has been correctly entered in the
cashbook but posted to the wrong side of the loan account.
2. The purchase of a motor vehicle on credit fro Sh.2,860,000 had been recorded by
debiting the supplier‟s account and crediting the motor expenses account.
3. A cheque for Sh.80,000 from Ogola, a customer to whom goods are regularly
supplied on credit, was correctly entered in the cashbook but was posted to the
credit of bad debts recovered account in the mistaken belief that it was a receipt
from Agola, a customer whose debt had been written off three years earlier.
4. In reconciling the company‟s cash book with the bank statement, it was found
that bank charges of Sh.38,000 had not been entered in the company‟s records.
5. The totals of the cash discount columns in the cashbook for the month of April
2004 had not been posted to the respective discount accounts.
The figures were:
Sh.
Discounts allowed 184,000
Discounts received 397,000
6. The company had purchased some plant on 1 March 2003 for Sh.1,600,000. The
payment was correctly entered in the cashbook but was debited to the plant repairs account. Depreciation on such plant is provided for at the rate of 20% per annum on cost.
Required:
(i) Journal entries with narrations to correct the above errors.
(ii) Suspense accounts showing the original difference
Date posted: November 17, 2018. Answers (1)
- Briefly explain the following types of errors:
(i) Error of commission
(ii) Error of principle
(iii) Complete reversal of entries
(iv) Compensating errors(Solved)
Briefly explain the following types of errors:
(i) Error of commission
(ii) Error of principle
(iii) Complete reversal of entries
(iv) Compensating errors
Date posted: November 17, 2018. Answers (1)
- J Kiarie carries on a manufacturing business in Eldoret. The trial balance extracted from his books as at 31 March 2004 was as follows:(Solved)
J Kiarie carries on a manufacturing business in Eldoret. The trial balance extracted from his
books as at 31 March 2004 was as follows:
Additional information:
1. Sales included Sh.46,000,000 in respect of goods charged out to customers at cost plus
25% on a sale or return basis. The goods remained unsold as at 31 March 2004.
2. The stock of finished goods and raw materials at cost as at 31 March 2004 amounted to
Sh.63,600,000 and Sh.15,800,000 respectively.
3. Prepaid insurance as at 31 March 2004 was Sh.400,000 and Sh.1,000,000 was owing for
lighting and heating as at the same date. Lighting and heating is accounted for through
the general expense account.
4. Included in the salaries account were drawings by J.Kiarie amounting to Sh.400,000 per
week. (Assume a 52 – week year)
5. A debt of Sh. 1,000,000 is to be written off and provision for doubtful debts is to be
reduced to Sh.8,000,000
6. During the year, motor vehicles which had cost Sh.12,000,000 and which had been
written down to Sh.4,000,000 were sold for Sh.9,600,000. This amount has been
credited to motor vehicles account.
7. Legal fees amounting to Sh.2,800,000 in respect of acquisition of the leasehold premises
are included in the professional charges account. The lease costs are to be amortised
over 20 years.
8. Provision for depreciation on motor vehicles and plant and machinery is to be made at
Sh.3,800,000 and Sh.5,000,000 respectively.
Required:
(a) Manufacturing, trading and profit and loss accounts for the year ended 31 March 2004.
(b) Balance sheet as at 31 March 2004. (10 marks)
Date posted: November 17, 2018. Answers (1)
- Mali Mingi is the sole distribution agent of roofing sheets in Mombasa. Under an agreement
with the manufacturers, Mabati Ltd., Mali Mingi purchases roofing sheets from...(Solved)
Mali Mingi is the sole distribution agent of roofing sheets in Mombasa. Under an agreement
with the manufacturers, Mabati Ltd., Mali Mingi purchases roofing sheets from Mabati Ltd. at a
trade discount of 20% of the list price. Every year in the month of May, Mali Mingi receives an
agency commission of 1% of his purchases for previous year ended 31 March.
Mali Mingi has been making a gross profit of 40% on all sales. In a burglary that occurred in
January 2004, Mali Mingi lost stock costing Sh.480,000 as well as the bulk of his accounting
records.
After thorough investigation, the accountant has obtained the following information relating to
the year ended 31 March 2004:
Motor vehicle expenses 806,400
Drawings 516,000
Trade expenses 883,200
8. All receipts pass through the bank and Mali Mingi is not insured against burglary.
9. The agency commission due as at 31 March 2003, was received during the year through
the bank.
10. All purchases and sales are on credit.
Required:
(a) Trading and profit and loss accounts for the year ended 31 March 2004.
(b) Balance sheet as at 31 March 2004.
Date posted: November 17, 2018. Answers (1)
- Briefly explain whether revenue may be recognized in the following circumstances in
respect of sales made by a business entity:
(i) Goods have acquired by the business...(Solved)
Briefly explain whether revenue may be recognized in the following circumstances in
respect of sales made by a business entity:
(i) Goods have acquired by the business entity which it confidently expects to resell
very quickly
(ii) A customer places a firm order for goods
(iii) Goods are delivered to the customer‟s premises
(iv) The customer's cheque in payment for the goods has been cleared by the bank.
Date posted: November 17, 2018. Answers (1)
- Briefly explain the meaning of each of the following accounting concepts, giving in each case, an example of the application of each:
(i) Materiality
(ii) Substance over...(Solved)
Briefly explain the meaning of each of the following accounting concepts, giving in each case, an example of the application of each:
(i) Materiality
(ii) Substance over form
(iii) Money measurement
Date posted: November 17, 2018. Answers (1)
- Meza Ltd has an authorized share capital of Sh.20,000,000 divided into 1,500,000 ordinary shares of Sh.10 each and 250,000 8% preference shares of Sh.20 each.
An...(Solved)
Meza Ltd has an authorized share capital of Sh.20,000,000 divided into 1,500,000 ordinary shares of Sh.10 each and 250,000 8% preference shares of Sh.20 each.
An extract of the balance sheet as at 30 June 2003 was as follows:
On 1 July 2003, the company offered 500,000 ordinary shares for sale to the public at Sh.15 each
payable as follows:
- On application Sh.7 including the premium
- On allotment Sh.5
- On first and final call, Sh.3
Applications were received on 15 July 2003 and allotment made on 31 July 2003. The allotment
money was received on 15 August 2003.
The first and final call was made on 15 September 2003 and the money received on 30
September 2003.
The company received applications for 650,000 shares. Applications for 25,000 shares were
rejected and the application money was refunded. The shares were then allocated to the
remaining applicants on a pro rata basis, the excess of the application money being carried
forward in part satisfaction of the amounts due on allotment.
An allotee of 3,000 shares failed to pay both the allotment and first and final call money and the
shares were forfeited on 13 October 2003.
The forfeited shares were then re-issued at Sh.12 each on 21 October 2003.
Required:
(a) Ledger accounts to record the above transactions
(b) Balance sheet as at 21 October 2003
Date posted: November 17, 2018. Answers (1)
- The following version of the receipts and payments account has been provided by the treasurer of Maendeleo Social club for the year ended 31 October...(Solved)
The following version of the receipts and payments account has been provided by the treasurer of Maendeleo Social club for the year ended 31 October 2003:
4. Maendeleo Social Club had a Bank Account, which had a balance of Shs. 2,500,000 on
1 Nov 2002. This Bank account was not used during the year to 31 Oct 2003and the
only entry made in this account was for the interest of shs. 200,000 which was credited
yo the bank on 31 Oct 2003.
5. Depreciation on Furniture and fittings is at the rate of 10% per annum on cost. A full
years depreciation is provided for any furniture bought during the year.
6. Bar stock was valued at shs. 7,000,000 0n 1 Nov 2002 and at Shs. 1,500,000 on 31
Oct 2003.
7. No Apportionment of costs is made between bar activities and other club activities.
Required:
i. Income and Expenditure Account for the year 31 Oct 2003.
ii. Balance Sheet
Date posted: November 17, 2018. Answers (1)
- The following are the summarized financial statements of Deweto limited(Solved)
The following are the summarized financial statements of Deweto limited:
2. The stock as at 31 October 2001 was valued at Sh.13,000,000
Required:
(a) Calculate two ratios for each classification identified below for the financial years ended
31 October 2002 and 2003:
(i) Profitability ratios
(ii) Liquidity ratios
(iii) Gearing ratios
(iv) Activity ratios
(b) Comment on Deweto Ltd‟s profitability and liquidity positions.
Date posted: November 17, 2018. Answers (1)
- Muthusi is a businessman operating a retail business in a small town. Due to the size of his
business, he is not able to employ a...(Solved)
Muthusi is a businessman operating a retail business in a small town. Due to the size of his
business, he is not able to employ a qualified accountant on a permanent basis.
The following information was extracted from the books of the business as at 31 October 2002:
The following transactions took place during the financial year ended 31 October 2003:
1. Sales and purchases on credit amounted to Sh.2,080,000 and Sh.1,900,000 respectively.
2. The following transactions were carried out through the bank account:
3. The business depreciates motor vehicles at 20% per annum on a reducing balance basis. A full
year‟s depreciation is provided on a motor vehicle acquired in the course of the year
and no depreciation is provided on a motor vehicle disposed of in the course of the year.
The motor vehicle sold in the year had been purchased at Sh.250,000 and an
accumulated depreciation of Sh.122,000 had been provided on it at the time of disposal.
4. Furniture is depreciated at 10% per annum on cost and in proportion to the period used in
the year. The additional furniture was purchased on 1 May 20903 while the cost of furniture
held on 31 October 2002 was Sh.400,000
5. Loan interest paid was for one-half year up to 30 April 2003
6. The business received discounts of Sh.40,000 and allowed discounts of Sh.70,000 during the
year.
7. Bad debts of Sh.20,000 were written off. Provision for doubtful debts is to be maintained at
5% of the debtor‟s balance at the end of the year.
8. Accruals are in respect of lighting and on 31 October 2003, the amount accrued was
Sh.19,000
9. Muthusi‟s business obtains a normal gross profit rate of 25% on selling price.
Required:
(a) Trading and profit and loss account for the year ended 31 October 2003
(b) Balance sheet as at 31 October 2003.
Date posted: November 17, 2018. Answers (1)
- The following categories of people are recognized as users of the information
contained in financial statements:
- Owners.
- Financial analysts.
- Lenders.
For each of the above users of...(Solved)
The following categories of people are recognized as users of the information
contained in financial statements:
- Owners.
- Financial analysts.
- Lenders.
For each of the above users of financial statements, identify the kind of information they
may require, why they require it and the decisions they make from that information.
Date posted: November 17, 2018. Answers (1)
- Briefly explain three circumstances under which “goodwill” can be recorded in a business firm's books of account(Solved)
Briefly explain three circumstances under which “goodwill” can be recorded in a business firm's books of account.
Date posted: November 17, 2018. Answers (1)