a) The following is the summarized balance sheet of Echoes Ltd. as at 1 January 2021

.

Non-current assets:

Factory building (net book value)

5,680,000

Processing machinery (net book value)

2,420,000

Motor vehicles (net book value)

1,500,000

Furniture and fittings (net book value)

840,000

Office equipment (net book value)

670,000

11,110,000

Current assets:

Stock

1,240,000

Trade debtors

760,000

Prepaid insurance

360,000

Bank balance

540,000

2,900,000

14,010,000

Financed by:

Share capital (ordinary shares of .20

each)

9,000,000

10% debenture stocks

2,400,000

15% bank loan

1,500,000

12,900,000

Current liabilities:

Creditors

1,000,000

Accrued general expenses

110,000

1,110,000

Total capital liabilities

14,010,000

Additional information:

1. All the non-current assets were acquired on 1 January 2004 when the company commenced

operations. The net book value of these assets as at 1 January 2007 were the same as their

written down values for capital allowance purposes.

2. Included in the processing machinery are machinery with a net book value of 420,000

as at 1 January 2007. This machinery are used in designing and moulding products during

the manufacturing process.

3. Office equipment as at 1 January 2007 comprised the following assets at net book value:

omputers

240,000

Telephone

switchboard

96,000

Fax machines

120,000

Neon sign

36,000

Other office

equipment

178,000

4

One of the motor vehicles purchased on 1 January 2004 was a saloon car acquired at a cost

of Sh.1,200,000.

5. The reported profit of the company for the year ended 31 December 2007 was Sh.1,840,000

before accounting for capital allowances due for the year and interest expense. The reported

profit was based on cash sales.

6. The following transactions included in the bank statement for the year had also not been

accounted for in arriving at the reported profit:

.

Receipts from trade debtors

2,800,000

Payments to trade creditors

1,400,000

Refund from trade creditors for purchases returned

360,000

General expenses

346,400

Insurance

550,800

Cash sales deposited directly to bank account

140,000

Insurance paid includes a pre-payment of 50,800 for year 2008.

7. There were no closing balances of trade debtors and creditors as at 31 December 2007. All

payments from/to trade debtors and creditors were made through the bank account.

Required:

For the year ended 31 December 2021, determine for Echoes Ltd:

i)

Capital management allowances

(8 marks)

ii) Adjusted managerial profit or loss

Question on Types of investment

Hiza Ltd. entered into the following transactions during the year ended 31 December 20 x 3:

a) Entered into a speculative interest rate option costing 10,000 on 1 January 20 x 3

to borrow 6,000,000 from AB bank commencing 31 March 20 x 5 for 6 months at

4%. The value of the option at 31 December 20 x 3 was 15,250.

b) Purchased 6% debentures in FG Co on 1January 20 x 1 (their issue date) for .150,000

as an investment. Ellesmere Co intends to hold the debentures until their redemption

at a premium in 5 year's time. The effective rate of interest of the bond is 8.0%.

c) Purchased 50,000 shares in ST Co on 1 July 20 x 3 for 3.50 each as an investment.

The share price on 31 December 20 x 3 was 3.75.

Required

Show the accounting treatment and relevant extracts from the financial statements for the year

ended 31 December 20 x 3, Hiza Ltd only designates financial assets as at fair value through

profit or loss where this is unavoidable

Broadfield Co purchased 5% debentures in X co at 1 January 20 x 3 (their issue date) for

.100,000. The term of the debentures was 5 years and the maturity value is .130,525.

The effective rate of interest on the debentures is 10% and the company has classified them as

held-to-maturity financial asset.

At the end of 20 x 4 x Co went into liquidation. All interest had been until the date. On 31

December 20 x 4 the liquidator of X Co announced that no further interest would be paid and only

80% of the maturity value would be repaid, on the original repayment date.

The market interest rate on similar bonds is 8% on that date.

Required

a) What value should the debentures have been stated at just before the impairment

became apparent?

b) At what value should the debentures be stated at 31 December 20 x 4, after the

impairment?

c) How will the impairment be reported in the financial statements for the year ended 31

December 20 x 4?

A company owns inventories of 20,000 gallons of oil which cost .400,000 on 1 December 20

x 3. In order to hedge the fluctuation in the market value of the oil the company signs a futures contact

to deliver 20,000 gallons of oil on 31 March 20 x 4 at the futures price of .22 per gallon.

The market price of oil on 31 December 20 x 3 is .23 per gallon and the futures price for

delivery on 31 March 20 x 4 is KSh. 24 per gallon.

Required

Explain the impact of the transactions on the financial statements of the company:

a) Without hedge managerial formalities

b) With hedge managerial procedures

Almond Company signs a contract on 1 November 20 x 1 to purchase an asset on 1 November 20 x 2

for 60,000,000. Bets reports in US $ and hedges this transactions by entering into a forward

contract to by 60,000,000 on 1 November 20 x 2 at US$1: 1.5.

Spot and forward exchange rates at the following dates are:

Spot Forward (for delivery on 1.11.x 2)

1.11 x 1 US$1: 1.45 US$1:1.5

31.12. x1 US$1: 1.20 US$1:1.24

1.11. X 2 US$1: 1.0 US$1:1.0 (actual)

Required

Show the double entries relating to these transactions at 1 November 20 x 1, 31 December 20 x

1 and 1 November 20 x 2.

Projected Unit Credit Method Question

An employer pays a lump sum to employees when they retire. The lump sum is equal to 1% of

their salary in the final year of service, for every year of service they have given.

a) An employee is expected to work for 5 years (actuarial assumption)

b) His salary is expected to rise by 8% pa (actuarial assumption)

c) His salary in 20 x 1 is .10,000

d) The discount rate applied is 10%pa

Required

Calculate the amounts chargeable to each of years 20 x 1 to 20 x 5 and the closing obligation

each year, assuming no change in actuarial assumptions.

Attempt ALL THE QUESTIONS.

My supervisor will penalize me for wrong answers