1. Accounting is irrelevant in modern business practice". Do you agree with this sentiment? Explain [10 Marks]
2. State and explain ONE main accounting principle, rule, assumption or any other concept from the conceptual framework of accounting that would be used by an accountant to solve the following financial reporting problems:
3. Shareholders have resisted the preparation of the annual financial statements citing the high costs of producing annual reports and their assessment that the business is a small enterprise.
4. Economic inflation has had an adverse impact on the firm's investment in marketable securities although there are rumours of a possible economic recovery because of the economic stimulus package implemented by the government.
5. An entity's main competitor has initiated a legal suit in the commercial court whose chances of leading to material damages in the course of the next six months has been assessed by the entity's lawyers at 50:50.
6. Banks insist on presenting quarterly financial reports even though the regular accounting practice is to publish annual financial reports.
7. There is lack of clarity as regards what procedures to use when recognizing a new kind of equipment in the company's statement of financial position. [10 Marks]

QUESTION TWO

1. Describe the critical financial information required to be captured in financial reports as stipulated by the International Accounting Standards Board [5 Marks]

1. Kijeuri Traders is a Merchandising firm operated by Bibi Kijeuri. The following account balances were extracted from the books of account of the business on 30 September 2013, the business year end.

	Sh			Sh.
Land and buildings	400,000		Bank overdraft	4,400
Motor vehicles	125,000		Interest paid	10,000
Vehicles cumulative depreciation	30,000		Returns in	6,500
Equipment	85,000		Returns out	7,600
Equipment cumulative depreciation	30,000		Carriage in	650
Furniture and fittings	75,000		Carriage out	1,200
Furniture cumulative depreciation	25,000		Wages and Salaries	34,750
Stock	48,500		Rates and rent	19,000
Sales	670,000		Insurance	6,500
Purchases	570,000		Telephone expense	4,600
Debtors	220,000		Discounts received	2,500
Creditors	148,000		Discounts allowed	4,500
12% Long term loan	500,000		Motor vehicle expenses	23,300
Wages payable	2,900		Prepaid Rates	3,000

Required: A statement of affairs to estimate the firm's equity at 30.9.2013 [10 Marks]

QUESTION THREE

The following has been extracted from the books of Masumbuko Traders Trial balance as at 31 July 2012:

	DR (Sh.)	CR (Sh.)
Sh.10 ordinary share capital		300,000
Ordinary share premium		50,000
10% Sh10 preference share capital		150,000
Preference share premium		25,000
Land	228,000
Buildings	265,000
Fixtures and fittings	42,000
Rates	3,500
Purchases and sales	950,000	1,333,000
Returns	9,000	7,000
Discounts	11,000	13,000
Debtors and creditors	90,000	85,000
Wages and salaries	62,000
Administrative expenses	5,000
Rents		40,000
Provision for depreciation 1.8. 20X1
- Buildings		22,500
- Fixtures and fittings		7,000
Provision for doubtful debts		2,000
Advertising	26,500
10% long term loan		105,000
Capital reserves		100,000
Revenue reserves		75,000
Bank	70,000
Consultancy charges	7,000
Short term investments	68,000
Stock	500,000
Retained earnings		30,000
Loan interest	7,500	________
	2,344,500	2,344,500

Additional information:

1. Sh.10,000 is to be written off as bad debt and a general provision of 5% of the remaining balance is to be provided for.
2. Closing stock at 31 July 2012 was valued at Sh.550,000. Land was re-valued by 25% of the balance brought forward
3. The company has invested in securities with an expected income of Sh.70,000 per year which has yet to be received or recorded
4. A freight expense on purchases of Sh.7,000 is yet to be recorded nor paid
5. Depreciation is still to be provided as follows:

• Buildings: straight line over 10%
• Fixtures and fittings: reducing balance 10%

1. The following accruals for expenses at 31 July 2012 need to be made:

• Rates Sh.500
• Administration Sh.1,000.
• Consultancy charges, Sh.3,000

1. Accounting is irrelevant in modern business practice". Do you agree with this sentiment? Explain
2. State and explain ONE main accounting principle, rule, assumption or any other concept from the conceptual framework of accounting that would be used by an accountant to solve the following financial reporting problems:
3. Shareholders have resisted the preparation of the annual financial statements citing the high costs of producing annual reports and their assessment that the business is a small enterprise.
4. Economic inflation has had an adverse impact on the firm's investment in marketable securities although there are rumours of a possible economic recovery because of the economic stimulus package implemented by the government.
5. An entity's main competitor has initiated a legal suit in the commercial court whose chances of leading to material damages in the course of the next six months has been assessed by the entity's lawyers at 50:50.
6. Banks insist on presenting quarterly financial reports even though the regular accounting practice is to publish annual financial reports.
7. There is lack of clarity as regards what procedures to use when recognizing a new kind of equipment in the company's statement of financial position.

QUESTION TWO

1. Describe the critical financial information required to be captured in financial reports as stipulated by the International Accounting Standards Board

1. Kijeuri Traders is a Merchandising firm operated by Bibi Kijeuri. The following account balances were extracted from the books of account of the business on 30 September 2013, the business year end.

	Sh			Sh.
Land and buildings	400,000		Bank overdraft	4,400
Motor vehicles	125,000		Interest paid	10,000
Vehicles cumulative depreciation	30,000		Returns in	6,500
Equipment	85,000		Returns out	7,600
Equipment cumulative depreciation	30,000		Carriage in	650
Furniture and fittings	75,000		Carriage out	1,200
Furniture cumulative depreciation	25,000		Wages and Salaries	34,750
Stock	48,500		Rates and rent	19,000
Sales	670,000		Insurance	6,500
Purchases	570,000		Telephone expense	4,600
Debtors	220,000		Discounts received	2,500
Creditors	148,000		Discounts allowed	4,500
12% Long term loan	500,000		Motor vehicle expenses	23,300
Wages payable	2,900		Prepaid Rates	3,000

Required: A statement of affairs to estimate the firm's equity at 30.9.2013 [10 Marks]

QUESTION THREE

The following has been extracted from the books of Masumbuko Traders Trial balance as at 31 July 2012:

	DR (Sh.)	CR (Sh.)
Sh.10 ordinary share capital		300,000
Ordinary share premium		50,000
10% Sh10 preference share capital		150,000
Preference share premium		25,000
Land	228,000
Buildings	265,000
Fixtures and fittings	42,000
Rates	3,500
Purchases and sales	950,000	1,333,000
Returns	9,000	7,000
Discounts	11,000	13,000
Debtors and creditors	90,000	85,000
Wages and salaries	62,000
Administrative expenses	5,000
Rents		40,000
Provision for depreciation 1.8. 20X1
- Buildings		22,500
- Fixtures and fittings		7,000
Provision for doubtful debts		2,000
Advertising	26,500
10% long term loan		105,000
Capital reserves		100,000
Revenue reserves		75,000
Bank	70,000
Consultancy charges	7,000
Short term investments	68,000
Stock	500,000
Retained earnings		30,000
Loan interest	7,500	________
	2,344,500	2,344,500

Additional information:

1. Sh.10,000 is to be written off as bad debt and a general provision of 5% of the remaining balance is to be provided for.
2. Closing stock at 31 July 2012 was valued at Sh.550,000. Land was re-valued by 25% of the balance brought forward
3. The company has invested in securities with an expected income of Sh.70,000 per year which has yet to be received or recorded
4. A freight expense on purchases of Sh.7,000 is yet to be recorded nor paid
5. Depreciation is still to be provided as follows:

• Buildings: straight line over 10%
• Fixtures and fittings: reducing balance 10%

1. The following accruals for expenses at 31 July 2012 need to be made:

• Rates Sh.500
• Administration Sh.1,000.
• Consultancy charges, Sh.3,000

1. The following prepayments for expenses at 31 July 2012 need to be taken into account.

• Salaries Sh..2,000;
• Advertising Sh.12,000.

Required:

1. An income statement for the year ended 31 July 2012 if dividend payout ratio is 50% of the after tax profits, the tax rate being 30%. The remainder of the profit is allocated to retained earnings, revenue reserves and capital reserves in the ratio 2:1:1 respectively.
2. A statement of financial position as at that date. [20 Marks]

ing prepayments for expenses at 31 July 2012 need to be taken into account.

• Salaries Sh..2,000;
• Advertising Sh.12,000.

Required:

1. An income statement for the year ended 31 July 2012 if dividend payout ratio is 50% of the after tax profits, the tax rate being 30%. The remainder of the profit is allocated to retained earnings, revenue reserves and capital reserves in the ratio 2:1:1 respectively.
2. A statement of financial position as at that date. [20 Marks]