1. List and describe any four basic assumptions that provide the foundation for financial accounting and reporting theory. (7 Marks)

2. Review each of the following situations independently:

1. Upon learning that the replacement cost of its Caterpillar tractor was Shs.100,000 more than its book value, Malta Company added Shs.100,000 to the tractors book value. (3 Marks)

2. Hazel Company sold a three-year fast food franchise to Kapila for Shs.1.2 Million which was received at the time the contract was signed. Hazel Company reported a Shs.1.2 Million franchise sales revenue when the cash was received. (3 Marks)

3. The Government filed and won a Shs.7 Million law suit against Kali Chemicals for polluting a local river. Kali Chemicals, with annual profits in excess of Shs.400 Million, did not separately report either the lawsuit or its settlement in its financial statement or accompanying foot notes. (3 Marks)

4. During the current accounting period, Meta Company sold Shs.80 Million of merchandise on account to several thousand different customers. Based on past experience, Meta expected Sh.8 Million of the receivables to be uncollectible. Therefore the company reduced its receivables balance and recorded a loss of Shs.8 Million on its income statement. (3 Marks)

5. In the year 2004 City Landscapers signed a Shs.6 Million contract with Lance Company to landscape the corporate headquarters in 2005. It was the understanding that the company was to make no payments to City Landscapers until the project was at least 50 percent complete. City Landsccapers proceeded to report a Shs.6 Million liability to landscape Lance Company in its 2004 balance sheet. (3 Marks)

6. Gantry Company decided to expand its fabricating business by adding two new Shs.5 Million presses machine, giving it a total of 12 presses. Each new press is expected to have a useful life of 10 years. Gantry recorded its cash purchase of the presses by recording a Shs.10 Million expense. (3 Marks)

REQUIRED

Identify the element definition, concept or principle that appears to be violated and explain your reason. If no violation has been committed, state accounting treatment which is appropriate, explain why? (Total 25 Marks)

QUESTION TWO

1. Highlight two weeknesses of direct write offs of uncollectible accounts. (4 Marks)

2. At 1-1-06, the allowance for uncollectible Accounts for Jambo Ltd. Had a credit balance of Shs.30,000 and at 31-12-05, the Accounts Receivable amounted to Shs.850,000

Age of debts Amount Estimated of collectible

Shs.

0 - 30 days 380,000 99%

31 - 60 days 300,000 95%

61 - 90 days 100,000 90%

91 - 120 days 50,000 80%

Over 120 days 20,000 75%

REQUIRED

1. Calculate the allowance for uncollectible accounts required at 31-12-06 (6 Marks)

2. Show the adjusting entry necessary at 31-12-06 (2 Marks)

Highlight three shortcomings off the periodic inventory system and indicate the circumstances under which the system is appropriate for use