2 marks will be awarded for each correct answer and 1 marks will be deducted for each wrong answer (Do not guess!) 1. Manyanga Co. purchased a 20% interest in Naomba, Inc. on December 31, 2022 for KShs 600,000. On that date, Naomba's net assets had a book value of KShs 2,000,000 and fair value of KShs 2,500,000. What amount of goodwill resulted from this acquisition? a. KShs 0 b. KShs 500,000 c. KShs 200,000 d. KShs 100,000 2. Which of the following statements is true regarding the acquisition method of accounting for a business combination? a. Assets of the acquired company are recorded at book values. b. Assets of the acquired company are recorded at fair value, but only if the acquisition cost equals or exceeds fair value of the subsidiary's net assets. c. Assets of the acquired company are recorded at fair values regardless of the acquisition cost. d. Consulting costs related to the combination reduce additional paid-in capital. 3. Goodwill is required to be tested for impairment: a. Only when the overall economy is bad b. Only when there is new competition c. Every year d. Only when there has been a series of operating losses 4. If a 30% acquisition is made at book value and the investor has significant influence over he investee, what will be the relationship between the Equity Investment account and the investee's stockholders' equity? a. There is no particular relationship b. The Equity Investment account will remain at original cost even as the investee's stockholders' equity increases c. The Equity Investment account balance will equal 30% of investee's stockholders' equity throughout the life of the investment d. The Equity Investment account balance will equal 30% of investee's stockholders' equity at date of acquisition, but the relationship will change as the investee reports income and dividends. 5. Mazoezi Ltd owns 40% of Jidai Inc. and applies the equity method. In 2023, Mazoezi sells merchandise costing KShs 210,000 to Jidai for KShs 280,000. Jidais ending inventory includes KShs 60,000 purchased from Mazoezi. What amount of unrealized gross profit must be deferred in the equity method entry? a.) KShs 6,000 b.) KShs 7,000 c.) KShs 60,000 d.) KShs 15,000 6. Which of the following statements regarding the going concern concept is true? a) The going concern concept assumes that the business will never fail. b) The going concern concept assumes that the business will continue for the foreseeable future. c) The going concern concept applies where it appears that the business will not continue to exist for more than the next 12 months. d) The going concern concept only applies if the business is trading profitably. 7. Which of the following statements about the primary purpose of financial reporting is the most correct? a) Provides information that can help with decision making. b) The individual needs of users can be satisfied by tailoring of financial reports. c) Enables accountability since managers would have to account for resources used. d) Identifies a range of existing and potential users dependant on financial statements to make decisions. 8. What are the major differences between US GAAP and IFRS? a) US GAAP allows for more flexibility in decision making while IFRS is more rigid b) US GAAP is rule based while IFRS is principle based c) US GAAP imposes heavier penalties than IFRS if not adhered d) All of the above 9. Which of the following should be capitalised in the initial carrying amount of an item of plant? 1. Cost of transporting the plant to the factory 2. Cost of installing a new power supply required to operate the plant 3. Cost of a three-year plant maintenance agreement 4. Cost of a three-week training course for staff to operate the plant a) 1 and 3 b) 1 and 2 c) 2 and 4 d) 3 and 4 10. Financial statements represent transactions in words and numbers. To be useful, financial information must represent faithfully these transactions in terms of how they are reported. Which of the following accounting treatments would be an example of faithful representation? a) Charging the rental payments for an item of plant to profit or loss where the rental agreement meets the criteria for a right of use asset b) Including a convertible loan note in equity on the basis that the holders are likely to choose the equity option on conversion c) Treating redeemable preference shares as part of equity in the statement of financial position d) Derecognising factored trade receivables sold without recourse to the seller 11. On 1 October 2022, Habesha Ltd had KShs 25 million of equity share capital (shares of 50 cents each) in issue. No new shares were issued during the year ended 30 September 2023, but on that date there were outstanding share options which had a dilutive effect equivalent to issuing 12 million shares for no consideration. Habeshas profit after tax for the year ended 30 September 2023 was KShs 1,550,000. In accordance with IAS 33 Earnings Per Share, what is Habeshas diluted earnings per share for the year ended 30 September 2023? a) KShs 025 b) KShs 041 c) KShs 031 d) KShs 042 PLEASE REFER TO THE INFORMATION BELOW TO ANSWER QUESTIONS 12 - 13: Majengo Ltd wishes to take cheap financing from country Z and therefore it makes an agreement with Mwananchi Ltd. Mwananchi Ltd is incorporated in country Z and is fully owned by 3rd parties. Banks in country Z provide loans with lower interest rates to companies owned by local entrepreneurs. Therefore, Majengo decides not to buy any share in Mwananchi to get the cheaper loan. The following agreement is in place; Majengo sends Kshs 10,000 to Mwananchi in order to cover all expenses related to negotiating of the loan; Majengo will guarantee all Mwananchis debts; and Majengos managers will take over the decision making in Mwananchi including the voting rights. 12. Which of the following most closely describes how Mwananchi views its relationship with Majengo? a) Majengo is an Associate b) Majengo is a investment c) Majengo is a Special Purpose Entity d) None of the above 13. What is the accounting treatment that Mwananchi should adopt for its relationship with Majengo? a) Equity Method b) Consolidation c) Investment d) None of the above (26 MARKS) Answer text Question 3 Rich text editor