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Acct 221 Y2s2 Question Paper
Acct 221 Y2s2
Course:Bachelor Of Commerce
Institution: Kabarak University question papers
Exam Year:2010
INSTRUCTIONS:
1. Answer any THREE questions
2. Question ONE Compulsory
Question One
a) Distinguish between the following terms:
i. Convertible preferred stock and callable preferred stock.
ii. Liquidating dividends and stock dividends
iii. Current liabilities and contingencies
iv. Operating lease and capital lease. (8marks)
b) Explain two advantages to the lessel of leasing. (4marks)
c) Discuss two reasons in support of distribution of stock dividends (6marks)
d) What is deferred tax? Highlight the major causes of deferred tax (4marks)
e) Explain the characteristics of a bond (4marks)
f) Indicate the basic principles of the asset liability approach in accounting for
income taxes (4marks)
Question Two
The stockholder’s equity of Stratton corporation at 31st December 2008 is shown below.
Stockholder’s equity:
Common stock 10 per 100,000 shares Shs.
Authorized, 40,000 shares issued 400,000
Paid –in capital in excess of par common
Stock 200,000
Total paid in capital 600,000
Retained earnings 1,500,000
Total stockholders equity 2,100,000
Transactions affecting stockholder’s equity during the year 2009 are as follows:
• March 31. The stock was split 5 for 4 and the par value reduced from Kshs 10 to
Kshs 8 per share.
• April 1 the company purchased 2,000shares of its common stock on the open
market at Kshs 37 per share
• July 1 The company reissued 1,000 shares of treasury stock at Kshs 45 per share
• July 1. Issued for cash 20,000 shares of previously unissued Kshs 8 par value
common stock at a price of Kshs 45 per share
• Dec.1 A cash dividend of Kshs 1 per share was declared payable on December 30,
to stockholders of record at December 14.
• Dec.22 of 10% stock dividend was declared; the dividend shares to be distributed
on January 24, year 2010. The market price of the stock on December 22 was
Kshs. 48 per share.
The net income for the year ended December 31, 2009 amounted to Kshs. 177,000 after
an extraordinary loss of Kshs. 35,400 (Net of related tax effects)
Required
a) Prepare journal entries to record the transactions relating to stockholders’ equity
that took place during the year 2009 (10marks)
b) Prepare the cover section of the income statement for the year ended December
31,2009 beginning with the income before extraordinary items and showing the
extra loss and the net income. Also illustrate the presentation of earning per share
in the income statement bared on the weighted – average number of shares
outstanding during the year (5marks)
c) Prepare a statement of retained earnings for the year ended 31, 2009. (5marks)
Question Three
On 1st January 2003, Lextor corporation ( a lesser) sells a used machinery with a book
value of Kshs. 75,500,000 to Dawn corporation (a lesser) for Kshs. 80,000,000 and
immediately leases the machinery back under the following conditions.
1. The term of the lease is 15years, non cancelable and requires equal rental
payments of Kshs 10,487,443 at the beginning of each year.
2. The machinery has a fair value of Kshs. 80,000,000 a January 1,2003 and an
estimated economic life of 15 years.
3. Lextor corporation pays all executory costs
4. Lextor corporation depreciates similar machinery that it ownson a straight line
basis over 15 years.
5. The annual payment assure the lexor a 12% return
6. The incremental borrowing rate of lextor corporation is 12%
This lease is a capital lease to lextor corporation. Assuming that the collectibility of the
lease payments is reasonable predictable and that no important uncertainties exist in
relation to unreimbursable costs yet to be incurred by the lessor, Dawn corporation
classifies this lease as a direct financing lease;
Required
Prepare journal entries to record the transactions relating to this lease for both the lessee
and lessor corporations for the first year. (20marks)
Question Four
a) On December 31, 2009 walex corporation received authorization to issue
Kshs.15,000,000 of 10%, 30 year debenture bonds. Interest payment dates were
June 30 and December 31 2010, one month after the interest date printed on the
bonds.
Required:
i. Prepared journal entries at January 31, 2010 to record the sale of the bonds.
ii. Prepare journal entry at June 30, 2010 to record the semi – annual bond
interest payment. (10marks)
b) Seashine company closes its books each year on December 31, and receives its
properly tax bill in May each year. The fiscal year for the city and country in
which Seashine Company is located begins on May 1 and ends on the property on
January 1, 2002 and become a lien on may 1, 2002. Tax bills are sent out in May
and are payable in equal installments on July 1 and September 1.
Required
Journal entries to record the liability, monthly tax charges and the tax payments for taxes
becoming a lien on May 2002. (10marks)
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