i) In case of a sole proprietorship business, when another person purchases a sole
proprietorship business and the prospective buyer pays more than the net identifiable assets.
Such goodwill should be recorded.
ii) In case of a business acquisition; This is whereby a company buys another company at a value
in excess of its net identifiable assets. This is called purchased goodwill and should be recorded
in a business/firm?s books of account.
Purchased goodwill = Total price less value of identifiable net assets
[This goodwill is retained in the balance sheet and annually checked for impairment loss which
loss is recognized in the income statement (IFRS)]
iii) In case of a partnership, when a new partner is being admitted to the partnership and pays in
excess of his identifiable net assets contribution
Mutiso answered the question on November 17, 2018 at 11:08
- What is an “accounting policy”?(Solved)
What is an “accounting policy”?
Date posted: November 17, 2018. Answers (1)
- Munyaka and Opiyo commenced trading on 1 May 2002 as wholesalers, sharing profits and losses in the ration 2:1, after allowing interest on the capital...(Solved)
Munyaka and Opiyo commenced trading on 1 May 2002 as wholesalers, sharing profits and losses in the ration 2:1, after allowing interest on the capital introduced by the partners at the rate of 10% per annum. Opiyo was to receive a salary of Sh. 440,000 per annum. Munyaka and
Opiyo do not operate a complete set of accounting records.
The following summary of the bank statements for the year ended 30 April 2003 has been provided:
Receipts: Cash introduced as capital on 1 May 2002: Munyaka Sh. 3,500,000 and Opiyo
Sh. 2,000,000. Balance of receipts from customers amounted to Sh. 12,700,000.
Payments: Equipment Sh. 2,500,000: Pick-up Sh. 1,000,000: furniture and fittings Sh.
375,000: go-down rental Sh. 375,000, wages Sh. 1,772,000; salary of Sales
Manager Sh. 1,200,000; purchases for resale Sh. 9,900,000; rates Sh. 200,000;
repairs Sh. 62,500; insurance Sh. 55,000; motor expenses Sh. 186,500.
The following cash payments were made before banking the balance of the takings; Motor
expenses Sh. 129,000, wages Sh. 148,000; Sundry expenses Sh. 25,000; Drawings – Munyaka
Sh. 7,500 per week and Opiyo Sh. 6,000 per week.
Additional information:
1. The partners had taken goods for their domestic use as follows:
Munyaka Sh. 50,000; Opiyo Sh. 75,000 (both at selling price).
2. During the year to 30 April 2003, discounts allowed to customers amounted to Sh.
122,500 while discounts received from suppliers amounted to Sh. 55,000.
3. At 30 April 2003,l the amounts owing to suppliers amounted to Sh. 750,000 and the
amount owing by customers was Sh. 1,550,000. An amount of Sh. 200,000 owing by a
customer proved irrecoverable and was treated as a bad debt.
4. As at 30 April 2003, rates and insurance were prepaid to the extent of Sh. 25,000 and
Sh. 5,000 respectively. Stock on hand at cost amounted to Sh. 1,205,000.
5. The go-down had been occupied since 1 May 2002 at an annual rental of Sh. 500,000.
6. Depreciation is to be provided on a straight-line basis as follows: Motor vehicles 20%
per amount: Equipment, furniture and fittings at the rate of 10% per annum.
Required:
(a) Trading, profit and loss and appropriation accounts for the year ended 30 April 2003.
(b) Balance sheet as at 30 April 2003.
(Assume a 52 – week year)
Date posted: November 17, 2018. Answers (1)
- The following balances remained in the books of Ahadi Ltd. as at 30 April 2003 after the preparation of the trading account:(Solved)
The following balances remained in the books of Ahadi Ltd. as at 30 April 2003 after the preparation of the trading account:
Additional information:
1. A bill for Sh. 219,200 in respect of electricity for the period up to 30 April 2003 has
not been accrued.
2. The amount for insurance includes a premium of Sh. 120,000 paid in January 2003
to cover the company for six months, February to July, 2003.
3. Office fittings and equipment are to be depreciated at 15% per annum on cost
and motor vehicles at 20% per annum on cost.
4. Provision is to be made for:
Directors‟ fees - Sh. 2,000,000
Audit fee - Sh. 480,000
The outstanding debenture interest.
5. The directors have recommended that:
- A sum of Sh. 4,800,000 be transferred to general reserve.
- The preference dividend be paid.
- A 10% ordinary dividend be paid.
Required:
(a) Profit and loss and appropriation accounts for the year ended 30 April 2003.
(b) Balance sheet as at 30 April 2003.
Date posted: November 17, 2018. Answers (1)
- You have recently been employed in a medium size company and deployed in the accounts department. Your head of section has given you the following...(Solved)
You have recently been employed in a medium size company and deployed in the accounts department. Your head of section has given you the following extract from the cashbook for the month of April 2003.
The head of section further informs you that all receipts are banked intact and all payments are
made by cheque. On investigation, you discover the following:
1. Bank charges and commissions amounting to Sh. 272,000 entered on the bank
statement had not been entered in the cashbook.
2. Cheques drawn amounting to Sh. 534,000 had not been presented to the bank for
payment.
3. Cheques received totaling Sh. 1,524,000 had been entered in the cashbook and paid into
the bank, but had not been credited by the bank until May 2003.
4. A cheque for Sh. 44,000 had been entered as a receipt in the cashbook instead of a
payment.
5. A cheque for Sh. 50,000 had been debited by the bank by mistake.
6. A cheque received for Sh. 160,000 had been returned unpaid. No adjustment had been
made in the cashbook.
7. All dividends receivable are credited direct to the bank account. During the month of
April 2003. Dividends totaling Sh. 124,000 were credited by the bank and no entries had
been made in the cashbook.
8. A cheque drawn for Sh. 12,000 had been incorrectly entered in the cash book as Sh.
132,000.
9. The balance brought forward should have been Sh. 1,422,000.
10. The bank statement as at 30 April 2003 showed on overdraft of Sh. 2,324,000.
Required:
(i) The adjusted cashbook as at 30 April 2003.
(ii) Bank reconciliation statement as at 30 April 2003.
Date posted: November 17, 2018. Answers (1)
- Briefly explain why it is important for a business entity to prepare a bank reconciliation statement(Solved)
Briefly explain why it is important for a business entity to prepare a bank reconciliation statement
Date posted: November 17, 2018. Answers (1)
- Differentiate between a petty cashbook and a three-column cashbook(Solved)
Differentiate between a petty cashbook and a three-column cashbook.
Date posted: November 17, 2018. Answers (1)
- The following balances have been extracted from the books of Limuru Manufacturers, a small scale manufacturing enterprise, as at 31 December 2002:(Solved)
The following balances have been extracted from the books of Limuru Manufacturers, a small scale manufacturing enterprise, as at 31 December 2002:
2. The factory output is transferred to the trading account at factory cost plus 25%
of factory profit.
3. Depreciation is provided at the rates shown below on the original cost of fixed
assets held at the end of each financial year.
Plant and machinery - 10% per annum
Motor vehicles - 25% per annum
4. Amounts accrued at 31 December 2002 for direct labour amounted to Sh. 3,000,000
and rent and rates prepaid at 31 December 2002 amounted to Sh. 2,000,000.
Required:
(a) Manufacturing, trading and profit and loss account for the year ended 31 December
2002.
(b) Balance sheet as at 31 December 2002.
Date posted: November 17, 2018. Answers (1)
- Write short notes to distinguish the following:
(a) Purchased goodwill and non-purchased goodwill.
(b) Amortisation and depreciation of fixed assets.
(c) Provisions and reserves.
(d) Compensating errors and errors...(Solved)
Write short notes to distinguish the following:
(a) Purchased goodwill and non-purchased goodwill.
(b) Amortisation and depreciation of fixed assets.
(c) Provisions and reserves.
(d) Compensating errors and errors of principle
Date posted: November 17, 2018. Answers (1)
- Denticare Limited makes its accounts on 30 June every year. On 1 July 2001, the company's balance sheet included the following figures for non -current...(Solved)
Denticare Limited makes its accounts on 30 June every year. On 1 July 2001, the company's balance sheet included the following figures for non-current assets:
The company's policy is to charge depreciation at the following rates:
A proportionate charge is made in the year of purchase, sale or revaluation of an asset.
During the year ended 30 June 2002, the following transactions took place:
1. On 1 January 2002 the company decided to adopt a policy of revaluing its buildings. A
professional valuer engaged for this purpose revalued the buildings at Sh.34
million.
2. On 1 Janua ry a plant that had cost Sh.3 million was sold for Sh.500, 000. Accumulated
depreciation on this plant on 30 June2001 amounted to Sh.2.3 million. A new plant was
then purchased at a cost of Sh.4 million.
3. On 1 April 2002 a new motor vehicle was purchased for Sh.300, 000 Part of the
purchase price was settled by exchanging another motor vehicle at an agreed value of
sh.120, 000 The balance of Sh.180,000 was paid in cash. The vehicle which was given in
part exchange had cost Sh.200, 000 and had a net book value of Sh.100, 000 as at 30
June 2001
Required:
(a) The following ledger accounts to record the above transactions:
(i) Buildings account.
(ii) Provision for depreciation: Buildings.
(iii) Plant and machinery account.
(iv) Provision for depreciation: Plant and Machinery.
(v) Motor vehicles account.
(vi) Provision for depreciation: Motor vehicles.
(b) Property, plant and equipment movement schedule for the year ended 30 June 2002.
Date posted: November 17, 2018. Answers (1)
- Masaba Company Ltd. is a retail provider with an authorised share capital of 800,000 Sh.20 ordinary shares and 250,000 8% Sh.20 redeemable preference shares.
The following...(Solved)
Masaba Company Ltd. is a retail provider with an authorised share capital of 800,000 Sh.20 ordinary shares and 250,000 8% Sh.20 redeemable preference shares.
The following financial information reflects the position of the company as at 31 December
2001 after preparing the Trading, profit and loss account:
The following resolutions relating to year ended 31 December 2001 have been passed by the
board of directors of the company
1. Transfer Sh.500,000 to General Reserve.
2. Provide for 5% final dividend and final preference dividend on shares issued
and outstanding on 31 December 2001.
3. Make a bonus issue of 100,000 fully paid ordinary shares from the retained profits
account.
Required:
(i) The appropriations account of Masaba Company Ltd. for the year ended 31 December
2001.
(ii) The balance sheet of Masaba Company Ltd. as at 31 December 2001.
Date posted: November 17, 2018. Answers (1)
- Explain the legal provisions regarding the establishment and subsequent use of the following reserves: (i) Share premium account. (ii) Capital redemption reserve fund.(Solved)
Explain the legal provisions regarding the establishment and subsequent use of the following reserves: (i) Share premium account. (ii) Capital redemption reserve fund.
Date posted: November 17, 2018. Answers (1)
- The Swara Sports Club had the following assets and liabilities as at 30 September 2002(Solved)
The Swara Sports Club had the following assets and liabilities as at 30 September 2002:
The treasurer of the club, Mr. Lutomia is in process of drawing up the financial forecast of
the club for the coming year, ending on 30th September2003.
He wishes to prepare a forecast income and expenditure account for the year and a balance
sheet as at that date.
The following information has been collected to assist in the forecast:
1. The club has 300 members and it is intended to raise the subscriptions per member
from the current Sh.8,000 to Sh.10,000 per year. The members who have paid in
advance will be allowed subscriptions at the old rates. It is anticipated that the members
currently in arrears with their subscriptions will pay the arrears during the coming year.
It is also anticipated that the number of members whose subscriptions would be in
arrears and those who would have paid in advance on 30 September 2003 would be the
same as the corresponding numbers on 30 September 2002.
2. Extensions to the clubhouse are planned which will cost an estimated amount of
Sh.3,000,000. Of this sum, it is anticipated that Sh.2, 000,000 will be paid during the
year.
3. Some of the club's sports equipment which cost Sh.500,000 and has a written value of
Sh.200,000 will be sold for u estimated value of Sh.100,000 and replaced by new
equipment costing Sh.680,000. All equipment is depreciated on a straight-line basis over
four years and none of the equipment is more than three years old. A full year's
provision is charged in the year of acquisition and none in the year of disposal.
4. Bar purchases are made monthly on credit and paid for in the month following
purchase. It is anticipated that the same volume of business, which is fairly constant on
a monthly basis, will be realised during the coming year but that stock costs will rise by
25% from 1 October 2002. Bar stocks are normally held at the level of one half of one
month's purchases. The bar makes a gross profit margin of 20% on all sales regardless
of stock costs. Bar sales are on cash, all of which is banked daily. The barman, who is
paid Sh.20,000 per month, receives a commission of 5% of the gross profit for the year.
This is paid with his final wage cheque by the year end.
5. The club runs monthly social evenings and charges members Sh.2, 000 per head
admission. An average of 200 members attend each of these evenings. Expenses usually
amount to Sh. 1,400 per head.
6. The following expenditure payments are expected to be made by the club during the
coming year:
The rates are paid on 1 January in respect of the following twelve months. The insurance
payment will be for the Period 1 April 2003 to 31 March 2004. One-fifth of electricity
consumption is in respect of the bar. All payments are made by cheque.
Required:
(a) Forecast bank account for the year ending 30 September 2003.
(b) Forecast bar. Trading, profit and loss account for the year ending 30 September 2003
(c) Forecast income and expenditure account for the year ending 30 September 2003.
(d) Balance sheet as at 30 September 2003.
Date posted: November 17, 2018. Answers (1)
- On 1 October 2001, Mr. Robert Kanyarna bought Premium Meat Suppliers Ltd., a business
dealing in meat products, for a cash price of Sh.8, 000,000. He...(Solved)
On 1 October 2001, Mr. Robert Kanyarna bought Premium Meat Suppliers Ltd., a business
dealing in meat products, for a cash price of Sh.8, 000,000. He took over the following assets
and liabilities of the company:
Mr. Kanyama immediately opened a business bank account in which he deposited as working
capital, Sh.1, 600,000 from himself and Sh.4,000,000 being a long - term loan from J.K. Bank
Ltd. The loan from the bank carried an interest rate of 10% per year.
During the year ended 30 September 2002, Mr. Kanyama did not keep a full set of double -
entry accounting records but relied heavily on close and personal involvement in the business to
ensure proper control and safekeeping of assets of the business. In addition, daily cash
summaries were prepared and counterfoil cheque stubs and bank statements reconciled. The
following information relates to transactions in the year ended 30 September 2002:
1. Before banking proceeds from sales and debtors, payments were made out of cash as
summarised below:
2. A summary of cheques counterfoil stubs disclosed the following payments through
the bank:
3. Mr. Kanyama had, each week, made deposits into his business bank account all cash on
hand after payments in (I) above) except a till float of Sh.40,000 maintained throughout the
year. An examination of the pay-in slips and bank statements revealed total deposits of
Sh32,280,00Q, exclusive of capital and loan) during the year.
4. At 30 September 2002, Mr. Kanyama was owed Sh.592, 000 by debtors and owed
Sh1,720,000 to trade creditors. Wages outstanding at that date amounted to Sh.270, 000.
The stock at 30 September 2002 was valued at cost at Sh. 1, 160,000. The only cash on
hand at the year-end was in the till float.
5. Mr. Kanyama consulted with Chania Accountants and has accepted their advice to make a
provision of 2% per annum for depreciation on buildings and 10°/% per annum for
depreciation on plant and equipment. Mr. Kanyama also considers it prudent to provide for
the fact that 1% of the debtors outstanding at the year end will not honour their
obligations.
Required:
(a) Bank and cash accounts for the year ended 30 September 2002.
(b) Trading, profit and loss account for the year ended 30 September2002.
(c) Balance sheet as at 30 September 2002.
Date posted: November 17, 2018. Answers (1)
- Distinguish between each of the following pairs of terms:
(i) Receipts and revenue.
(ii) Balance sheet and statement of affairs.
(iii) Cash basis of accounting and accrual basis...(Solved)
Distinguish between each of the following pairs of terms:
(i) Receipts and revenue.
(ii) Balance sheet and statement of affairs.
(iii) Cash basis of accounting and accrual basis of accounting.
(iv)Materiality and substance over form.
Date posted: November 17, 2018. Answers (1)
- The following information has been extracted from the books of Mutero Traders Limited for the month of April 2002(Solved)
The following information has been extracted from the books of Mutero Traders Limited for the month of April 2002.
Balances as at 30 April 2002:
Sales ledger credit balances 123.000
Purchases ledger debit balances 177,000
Required:
The sales ledger and purchases ledger control accounts for the month ended 30 April 2002.
Date posted: November 17, 2018. Answers (1)
- State the reasons for maintaining control accounts(Solved)
State the reasons for maintaining control accounts.
Date posted: November 17, 2018. Answers (1)
- Kyamba, Onyango and Wakil were partners in a manufacturing and retail business and shared profits and losses in the ratio 2:2:1 respectively.(Solved)
Kyamba, Onyango and Wakil were partners in a manufacturing and retail business and shared profits and losses in the ratio 2:2:1 respectively.
Given below is the balance sheet of the partnership as at 31 March 2001:
1. On 1 April 2001. Wakil retired from the partnership and was to start a business as a
sole trader while Kyamba and Onyango continued in partnership.
On retirement of Wakil, the manufacturing business was transferred to hum while
Kyamba and Onyango continued with the retail business.
2. The assets and liabilities transferred to Wakil were as follows:
Wakil obtained a loan from a commercial bank and paid into the partnership the
net amount due from him.
On retirement of Wakil from the partnership, goodwill was valued at Sh.200, 000 but
was not to be maintained in the books of the partnership of Kyamba and Onyango.
After retirement of Wakil on 1 April 2001. Kyamba and Onyango agreed on the
following terms and details of the new partnership:
Kyamba and Onyango to introduce additional capital of Sh.48,000 and
Sh.68,000 respectively.
Each partner was entitled to interest on capital at 10% per annum with effect
from 1 April 2001 and the balance
of the profits was to be shared equally after allowing for annual salaries of
Sh.72,000 to Kyamba and Sh.60,000 to Onyango.
5. The profit of the new partnership before interest on capitals and partners' salaries was
Sh.240, 000 for the year ended 31 March 2002.
6. The profits made by the new partnership increased stocks by Sh.100.000; debtors by
Sh.90.000 and bank balance by Sh.50, 000.
7. Drawings by the partners in the year were Kyamba Sh.85, 000 and OnyanSh go.70,000.
Required:
(a) Profit and loss and appropriation account for the year ended 31 March 2002.
(b) Capital accounts for the year ended 31 March 2002.
(c) Current accounts for the year ended 31 March 2002.
(d) Balance sheet of the new partnership as at 31 March 2002.
Date posted: November 17, 2018. Answers (1)
- The following information has been extracted from the accounts of Madaraka Investments Ltd.
for the year ended 31 December 2001. Comparable figures for the previous year...(Solved)
The following information has been extracted from the accounts of Madaraka Investments Ltd.
for the year ended 31 December 2001. Comparable figures for the previous year are also shown.
Required:
(a) Calculate six accounting ratios for both 2000 and 2001 that would help in assessing
the profitability and liquidity positions of Madaraka Investments Ltd. (12 marks)
(b) Comment on Madaraka Investment's liquidity position. (4 marks)
(c) Comment on Madaraka Investment's profitability position. (4 marks)
Date posted: November 17, 2018. Answers (1)
- On 31 December 2001. an inexperienced book-keeper working for Wanji, a sole trader,
extracted a trial balance. Due to errors committed by the book-keeper, the trial...(Solved)
On 31 December 2001. an inexperienced book-keeper working for Wanji, a sole trader,
extracted a trial balance. Due to errors committed by the book-keeper, the trial balance failed to
balance by Sh.369.400. He placed the difference in a suspense account as shown below:
Investigations carried out after preparing the above trial balance detected the following errors:
1. The total of the sales day book for December 2001 was overcast by Sh.25,700.
2. On 2 July 2001 the business purchased office equipment for Sh.40 .000. These were
debited to purchases account.
3. Depreciation on the equipment is at the rate of 10% per annum on cost and based on
the period (months) of usage in the year.
4. A payment to a creditor by cheque of Sh.8.500 was erroneously credited to the
creditor's account.
5. A payment of Sh.4.500 for telephone expenses was debited to telephone account as
Sh.5.400.
6. An amount of Sh.15.000 received from a debtor was not posted to the
debtor's account from the cash book.
7. An amount of discounts received of Sh.2.500 was debited to discounts
allowed account.
8. Purchases day book for October 2001 was undercast by Sh.28,000.
9. Assume the business had reported a net profit of Sh.85,800 before adjusting for the
above errors.
Required:
(a) The adjusted trial balance and the correct balance of the suspense account
(b) Journal entries to correct the errors (Narrations not required)
(c) Suspense account starting with the balance determined in the adjusted trial balance in (a)above.
(d) The adjusted net profit for the year.
Date posted: November 17, 2018. Answers (1)
- The accounting profession has for a long time relied on certain accounting conventions to guide
accounting practice. Yet the application of the sane conventions has been...(Solved)
The accounting profession has for a long time relied on certain accounting conventions to guide
accounting practice. Yet the application of the sane conventions has been the source of criticism
of the quality and relevance of information contained in financial reports.
Some of these conventions include:
(a) The business entity principle.
(h) The historical cost principle.
(c) The monetary principle.
(d) The matching principle.
(e) The conservatism principle.
Required:
For each of the principles listed above:
(a) Explain its meaning.
(b) Justify its use.
(c) Explain any weaknesses associated with its use.
Date posted: November 16, 2018. Answers (1)