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Hbc2116:Intermediate Accounting Ii Question Paper
Hbc2116:Intermediate Accounting Ii
Course:Bachelor Of Commerce
Institution: Meru University Of Science And Technology question papers
Exam Year:2013
QUESTION ONE (30 MARKS)
a) Distinguish between Convertible and Callable Bonds. (2 marks) b) Karibu Limited issued a 20%, 2 year shs.800,000 Bond on 1st January 2010. Interest is paid semi-annually and the effective interest rate was 18%. Required: Using the effective interest method, show the journal entries to recognize interest expense. (6 marks) c) Explain the characteristics of liabilities. (4 marks) d) Explain the following methods of providing for dividends: i) Cash dividends (2 marks) ii) Stock dividends (2 marks) e) Covicon Limited is involved in a lawsuit and its year end is on 30th June 2013 when the company prepares its financial statements.
Required: The journal entry, if any to be passed on 30th June 2013:
i) Assuming it is probable that Civicon Limited will be liable for Shs. 9 million as a result of this suit (3 marks) ii) Assuming it is reasonably possible that Civicon Limited will be liable for any payment as a result of this suit. (3 marks) f) Assume that ABC company begins production of a new gadget in July 2012 and sell 100 units at Kshs.5,000 each by its year end, December 31st 2012. Each gadget is under warranty for one year. ABC estimates based on past experience with a similar gadget, that warranty cost will average Kshs.200 per unit. Further, as a result of parts
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replacement and services rendered in compliance with gadget warranties, it incurs Kshs.4,000 in warranty costs in 2012 and Kshs.16,000 in 2013. Required: Prepare the necessary journals. (8 marks)
QUESTION TWO (20 MARKS)
a) A company sells compact stereo systems with a two year warranty. Past experience indicates that 10% of all sets sold will need repairs in the first year and 20% will need repairs in the second year. The average repair cost is Shs.40 per unit. The number of units sold in 2007 and 2008 was 6000 and 7000 respectively. Actual repair costs were Shs.15,000 in 2007 and Shs.45,000 in 2008 assume all repair costs involved cash expenditures. i) Show the necessary accounting entries to record the above transactions showing the balance sheet extracts for the years 2007 and 2008. (8 marks) b) For measurement purposes current liabilities can be divided into three categories. Explain the following categories of liabilities giving examples for each:
i) Liabilities that are definite in amount (4 marks)
ii) Estimated Liabilities (4 marks)
iii) Contingent Liabilities (4 marks)
QUESTION THREE (20 MARKS)
a) Explain the following terms:
i) Revenue Reserves and Capital Reserves (4 marks)
ii) Ordinary share capital and Preference share capital (4 marks)
b) i) Explain the essential conditions for determining a capital/finance lease. (6 marks) ii) Costa Limited had a deferred tax a liability balance of Shs.20 million as at 1st July 2012. During the year ended 30th June 2013, the following carrying amounts and tax bases were ascertained;
Carrying amount hs.”million”
Tax base hs.”illion” Property Plant & Equipment 300 200 Inventory 250 230 Receivables 300 320 Payables 400 420 Long Term Loans 200 190
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The relevant tax rate is 30%.
Required: i) The deferred tax balance as at 30th June 2013 and the relevant journal entry to record the change in deferred tax liability. (6 marks)
QUESTION FOUR (20 MARKS) Karibu Limited issued a 10%, 3 year Shs.10 million bond on 1st January 2011. Interest is paid semi-annually and the effective interest rate was 12% per annum.
Required:
a) Using the straight line method, pass the required journal entries to record issue of the bond and interest expenses and interest payment. (6 marks) b) Prepare a bond amortization schedule showing the interest paid, interest expense and bond discount/premium amortisation during the life time of the bond, use straight line method. (10 marks) c) Describe the accounting treatment of a borrowing costs by the issuance of the bond. (4 marks)
QUESTION FIVE (20 MARKS) a) On 1st January 2008, Hekima Limited issued Shs.150 million of 10% bonds at 97% due 31st December 2017. Legal and other costs of Shs.2.4 million were incurred in connection with the issue. Interest on the bonds is payable annually each year on 31st December. The bonds are callable at 101 % and on 1st January 2013, Hekima Limited called the Shs.150 million bonds and retired them. Required: The amount of loss, if any, to be recognized by Hekima Limited as a result of retiring the bonds in 2012 and the journal entry to record the retirement. (6 marks) b) The sources of differences between the beginning balance of shareholders funds and the ending balance of the shareholders funds, can be seen from a number of dimensions:
i) Highlight factors or items that may contribute to the above differences (3 marks)
ii) Explain why it is important for Accountants to prepare a statement of changes in shareholders equity at the end of the accounting period. (3 marks)
c) Lima limited entered into a lease agreement for an equipment with Mali Limited. The cost of the equipment is shs.7.1 million. The lease period is for five years and is non cancellable. Equipment has a useful economic life of five
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years with no residual value and is to be depreciated on a straight line basis. The prevailing market rate of interest applicable both to Lima limited and Mali limited is at 12%. The lease contract commenced on 1st January 2012 with rental payments being paid at the end of each year of lease for the period of lease. Lima limited is the lessee and Mali limited is the lesser. Required: i) Prepare journal entries to record the commencement of the lease liability in the books of Lima Limited. (2 marks) ii) Prepare journal entries to record the inception of the lease contract in the books of Mali limited. (2 marks) iii) Journal entries to record payments of lease obligations for each year of lease. (4 marks)
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