Question # Two: Mtendaji, a farmer at one of the flower farms in Naivasha, decided to retire from employment and invest part of his savings in fish farming on his half acre land that was part of his inheritance in his late fathers estate. He decided to rear Tilapia fish as there was no running water for the rearing of trout fish. A non-governmental organization set up in Naivasha to encourage fish farming as opposed to fishing on Lake Naivasha made it possible for him to acquire feeds for the fish at relatively low prices.

After two years of operation, in January 2021, Mtendaji decided to explore expansion opportunities. He talked to a micro-finance institution in Naivasha about finance for the expansion and presented a statement of income for the period ended December 31, 2020. The statement of income was based strictly on cash flows:

Mtendaji Fish Farm

Statement of Income

For the period ended December 31, 2020

	Ksh
Revenue
Cash collected from sale of fish	4,080,000
Related Expenses
Purchase of fish feed	(3,360,000)
Purchase of new fish tank	(400,000)
Wages	(600,000)
	(4,360,000)
Operating loss	(280,000)
Proceeds from sale of land	800,000
Net profit for the period	520,000

From discussions with Mtendaji, the credit officer of the micro-finance institution learnt the following:

(i) Ksh.1,440,000 of the cash collected in 2020 was from deliveries of fish made prior to the beginning of the current financial year.

(ii) About half of the fish feed bought in 2020 were on hand at year-end

(iii) Two fish tanks had been bought in 2019 at a total cost of Ksh.800,000. The tanks along with the one acquired at the beginning of 2020, were used all year. Each tank is expected to last for five years.

(iv) The land sold for Ksh.800,000 had been purchased in 2017 for Ksh.560,000

(v) Ksh.15,000 was outstanding in respect of wages for two workers who had travelled in the third week of December for end of year holidays.

Required:

Provide Mtendaji and the micro-finance institution with responses to each of the following questions:

(i) Why is the matching principle important in this case? (3 marks)

(ii) What amount of revenue from the sale of fish should be reported in the statement of income for 2020? (3 marks)

(iii) What amount of expense for fish feeds should be reported in 2020? How should the amount of fish feeds on hand at year-end be reported? (5 marks)

(iv) Should some amount of the cost of the fish tank be included in determining the income for the period? If yes, how much? If no, why? (4 marks)

(v) What amount of expense in respect of wages should be reported in 2020

(3 marks)

(vi) What amount, if any, with respect to the sale of land should be reported in the statement of income for 2020 (3 marks)

Total: 30 marks