SCHOOL OF BUSINESS AND ECONOMICS
		DEPARTMENT OF COMMERCE
END SEMESTER EXAMINATION
SEMESTER: AUGUST – DECEMBER 2011
 CODE: ACC 311X				UNIT - INTERMEDIATE ACCOUNTING 1
INSTRUCTIONS
Answer ALL questions
Time 2½ hours
Question one
The accountant of Software City Co. had prepared the following list of account balances as at 31st December 2010;
(000)
50cts ordinary shares fully paid 				450
10% debentures (secured) 					200
Accumulated profits 1st January 2010 			242
General reserve 1st January 2010 				171
Land and buildings 1st January 2010 (cost) 			430
Plant and machinery 1st January 2010 (cost) 			830
Aggregate depreciation 
Buildings 1st January 2010 					20
Plant and machinery 1st January 2010 			222

Inventory 1st January 2010 					190
Sales 								2,695
Purchases 							2,152
Ordinary dividend 						15
Debentures interest 						10
Wages and salaries 						254
Light and heat 						31
Sundry expenses 						113
Suspense account 						135
Trade accounts receivables 					179
Trade accounts payables 					195
Cash 								126
Additional information
1.	the suspense account is in respect of the following items;
Proceeds from the issue of 100,000 ordinary shares 		120,000
Proceeds from the sale of plant 				300,000
420,000
Less consideration from the acquisition of Garry & Co.	(285,000)
135,000
2.	Sundry expenses include sh 9,000 paid in respect of insurance for the year ending 1st September 2011. Light and heat doesn’t include an invoice of sh 3,000 for electricity for three months ending 2nd January 2011 which was paid in February 2011. Light and heat also include sh 20,000 relating to salesmen’s commission.
3.	The net assets of Garry & Co. were purchased on 3rd march 2010. assets were valued as follows;
Investments 		231,000
Inventory 		34,000
265,000
4.	The entire inventory acquired was sold in during 2010. The investments were still being held by Software City Co. at 31st December 2010. Goodwill has not been impaired in value.
5.	The plant which was sold had a cost of sh 350,000 and had a net book value of sh 274,000 as on 1st January 2010. Sh 36,000 depreciation is to be charged on plant and machinery for 2010.
6.	the management wishes to provide for;
-	Debentures interest due.
-	A transfer to the general reserve of sh 16,000.
-	Audit fees of  sh 4,000
7.	The property was acquired some years ago. The buildings element of the cost was estimated at sh 100,000 and the estimated useful life of the asset were 50 years at the time of purchase. As at 31st December 2010 the property was revalued at sh 800,000.
8.	Inventory as at 31st December 2010 was valued at sh 220,000.
9.	Taxation is to be ignored.
Required
Prepare the following published financial statements of Software City Co. as at 31st December 2010. You don’t need to provide notes to the statements.
i.	Income statement.									(12 marks)
ii.	Balance sheet.										(13 marks)
Question two

a)	Below are extracts from Waumini Stores Ltd, a dealer of a variety of industrial goods for the year ended 30th June 2011;

Income statements
2010 			2011
Sh			Sh
(000) 			(000)
Revenue 							2,200 			2,500
Cost of sales 							(1,500) 		(1,750)
Gross profit 							700 			750
Other operating costs 						(640) 			(700)
Operating profits 						60 			50
Interest from credit sales 					60 			90
Interest payable 						(60) 			(110)
Profit before tax 						60 			30
Tax 								(20) 			(10)
Profit after tax 						40 			20

Balance sheets
2010 			2011
(000) 			(000)
Property, plant and equipment 				290 			322
Inventories 							540 			620
Trade receivables 						550 			633
Cash 								12 			15
1,392 			1,590

Equity and liabilities
Equity
Share capital 							90 			90
Reserves 							292 			282
382 			372

Long term liabilities
Bank loans 							520 			610
Other interest bearing debt 					200 			320
								720			930

Current liabilities
Trade payable 							270 			280
Tax payable 							20 			8
1,392 			1,590

Additional information
1.	Other interest bearing debts are secured by a floating charge over the assets of Waumini stores. Their repayment is due on 30th June 2019.
2.	over the past two years, the level of credit sales was as follows;
-	2010 		sh 400,000
-	2011 		sh 600,000
3.	the business operates in an industry with the following industrial averages;
Ratio 						Industrial average
Net profit margin 				8.1%
Inventory turnover 				3.1 times
Current ratio					1.9
Return on capital employed (ROCE) 		16.6%
Interest cover 					3.8 times 
Capital gearing ratio 				58.3%
Asset turnover 				2.1 times

Required
Calculate the above ratios and compare them with the industrial averages.				(20 marks)

b)	Clearly distinguish between accounting theory and accounting standards.			(5marks)

Question three

a)	China Wu Yi Company bought an earth moving machine for sh 200,000. The equipment was expected to be useful for six years or 15,000 hours, with an estimated residual value of sh 20,000. The equipment logged 2,000 hours in the first year.

Required
Calculate the depreciation expense for the first year under each of the following methods;
i.	Straight line method.								(2 marks)
ii.	Reducing balance method.							(4 marks)
iii.	Sum of the year digit method.							(2 marks)
iv.	Production unit method.							(2 marks)

b)	Accounting theory construction and formulation can be done from two perspectives, namely deductive and inductive methods. Using relevant examples, illustrate these approaches.	(10 marks)

c)	Presented below are some entries that were made in the books of Jolly Limited, a company listed in the Nairobi Stock Exchange;
1.	The company decided that for the sake of conciseness, only net income should be reported on the income statement. Details as to revenue cost of goods sold and expenses were omitted.
2.	The chief executive officer of the company used his expense account to purchase a new S class Mercedes Benz solely for personal use. The following journal entry was made;

Miscellaneous expense			29 million
	Cash								29 million
Required
In each of the situations above, discuss the appropriateness of the decision or accounting entry made in relation to acceptable accounting standards.								(5 marks)

Question four
a)
On 1st January 2010, Limuru Sports Club had the following assets;
(000)
Sh 
Cash at bank 				200
Snack lounge stock 			800
Club house building 			12,500

During the year to 31st December 2010, the club received and paid the following;
Receipts                                           Sh    (000)     	Payments                                           Sh   (000)     	
Subscription 2010                                     3,500	Rent and rates                                            1,500	
Subscriptions 2011                                       380	Extension to club house                            8,000	
Snack lounge income                                6,000	Snack lounge purchases                            3,750	
Visitors fees                                                  650	Secretarial expenses                                     240	
Loan from bank                                         5,500	Interest on loan                                            260	
Competition fees                                          820	Snack lounge expenses                                600	
	Game equipment                                       2,000	

Additional information
The snack lounge stock on 31st December 2010 was sh 900,000.
The games equipment should be depreciated by 20%.

Required
Prepare an income and expenditure account for the year ended 31st December 2010. 		(7 marks)
Prepare a balance sheet as at 31st December 2010.							(10 marks)

b)
At the end of each accounting period, in order to report all assets, liabilities and owners equity properly and recognize all revenues and expenses for the period on an accrual basis, accountants are required to make any necessary adjustments prior to preparing the financial statements. 

Required
Describe the adjustments that an accountant should make in relation to the following;
1.	Transactions where cash will be exchanged in a future period.				(3 marks)
2.	Transactions where cash has been exchanged in a prior period.				(3 marks)
3.	Transactions involving estimates								(2 marks)