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cpa 3 financial reporting 1 revision 3


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By Omosa


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QUESTIONS NUMBER ONE Elias, Banis and Kinyua have been partners sharing profits and losses in the ratios 2:2:1. Accounts have been prepared on an annual basis to 31 December of each year Elias the only active partner, died on 31 May 2002 and the remaining partners decided to cease business from that date. The assets are to be realized, outstanding debts paid and the remainder to be shared by the partners (including the executors of Elias’s estate) in an equitable manner, distributions of cash being made as soon as possible. A balance sheet prepared as at 31 May 2002 revealed the following position: Elias, Banis and Kinyua Balance Sheet as at 31 May 2002 Cost Sh.‘000’ Accumulated Depreciation Sh.‘000’ Net Book Value Sh.‘000’ Fixed assets: Goodwill Freehold land and buildings Plant and machinery Fixtures and fittings Motor vehicles Current assets: Stock Debtors Less: provision for doubtful debts Cash Current liabilities: Creditors Bank overdraft Financed by: Capital income: Elias Banis Kinyua 12,500 18,750 16,625 3,750 4,000 55,625 8,125 750 7,125 16,045 - - 6,975 1,625 3,000 11,600 8,000 7,375 20 15,395 23,170 12,500 18,750 9,650 2,125 1,000 44,025 (7,775) 36,250 12,500 7,500 5,000 25,000 Current accounts: Elais Banis Long term liabilities: Loan – Elias 5,000 3,750 8,750 33,750 2,500 36,250 Additional information: 1. Premium have been paid on life assurance policies for each partner to provide the firm with cash on death. The premiums have been charged to insurance expense and the cash payable on death of any partner is Sh.5,000,000. 2. The assets were duly sold and the monies received as follows: Sh. ‘000’ 14 June 2002 16 July 2002 Life policy on Elias’s life Life policy on the lives of Banis and Kinyua surrendered Freehold land and buildings Debtors (part) Stock (part) 5,000 2,500 25,000 3,750 2,500 20 August 2002 Plant and machinery Fixtures and fittings Motor vehicles 6,375 1,500 625 15 October 2002 Stock (Remainders) Debtors (Remainders) 4,500 5,250 3. Provision was to be made for dissolution expenses of Sh.300,000. 4. As soon as sufficient money was available to pay all outstanding creditors, this was done, discounts being received amounting to Sh.125,000. 5. Dissolution expenses amounted to Sh.250,000 and this was paid on 31 October 2002. Required: (a) Statement showing how the proceeds of the dissolution would be shared between the partners (12 marks) (b) Realization account (5 marks) (c) Capital accounts (3 marks) (Total: 20 marks) NUMBER TWO Kiave Traders Limited operates two branches one in the head office in Nairobi and the other in Busia. Purchases of stock are made exclusively by the head office branch which does some modification to the stocks before they are sold. Goods are sent to the Busia branch at modified cost plus 10% and all sales by both Busia branch and head office branch are made at a gross profit of 25% on the modified goods. The trial balances as at 30 June 2002 before taking account of the under mentioned adjustments were: Nairobi Branch Busia branch Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Capital Purchases Cost of modification Drawings by the owner Sales Goods sent/received by branch Selling and general expenses Debtors/Creditors Branch and head office current accounts Bank balances 9,847.5 252 275 945 1,548 1,949 760 15,577 1,550 6,400 4,620 3,007 ______ 15,577 4,400 106 568 387.5 5,461.5 4,100 54 1,307.5 ______ 5,461.5 Additional information: 1. Goods worth Sh.220,000 sent to Busia branch in June 2002 were not received ir recorded by the branch until July 2002 while a remittance of Sh.421,500 from the Busia branch to the head office in June 2002 was not received or recorded at head office until August 2002. Any adjustmenta in respect of these items are to be made in the head office accounts 2. There was a shortage in stocks of selling value of Sh.100,000 at the Busia Branch. There was no shortage of surplus at the head office. 3. Unmodified goods costing Sh.500,000 were at the Nairobi branch as at 30 June 2002. 4. There was no loss or wastage in the process of modification of stocks by the head office. The branch handles only goods received from the head office. Required: Prepare in columnar form for the Nairobi branch, Busia branch and the combined business. (a) The trading and profit and loss account for the year ended 30 June 2002 (12 marks) (b) The balance sheets as at 30 June 2002. (8 marks) (Total: 20 marks) NUMBER THREE (a) TNT Ltd. purchased equity shares in KLM Ltd. for Sh.56 million when the latter’s retained profits were Sh.88 million. The retained earnings of KLM Ltd. now are Sh.100 million. TNT Ltd. holds 25% of KLM Ltd.’s equity shares and has amortised Sh.3 million premium on acquisition. KLM Ltd has declared ordinary dividends of Sh.4 million. Required: Determine the value of TNT Ltd.’s investment in KLM Ltd. using the equity method of accounting for associate companies. (5 marks) (b) Q. Limited is a large manufacturing company that manufacture a wide range of products. Due to the fluctuating nature of economic environment, the company’s management has sought to diversify its interests by purchasing shares in other companies in order to improve its reported performance. It has been Q. Ltd’s policy to appoint a director to the board of any company where its investment comprises more than 20% of the equity share capital, so as to take an active in the management of the said company. The following investment have been made:  On January 2001, 15% of the ordinary share capital of X Limited  On 1 July 2001, 30% of the ordinary share capital of Y. Limited  On 1 July 2001, 75% of the ordinary share capital of Z. Limited and also 5,000 of the 10,000, 9% preference shares of Sh.10 each in that company.  The draft profit and loss accounts of the four companies for the year ended 30 June 2002 were as shown below Q. Ltd. X. Ltd. Y. Ltd. Z. Ltd. Turnover Trading profit Dividends receivable: Corporation tax: Profit after tax: Less: Proposed dividends: Preference shares Ordinary shares Retained profits: Balance brought forward Balance carried down. 2,100,000 250,000 46,500 296,500 (90,000) 206,500 - (132,000) 74,500 450,000 524,000 3,900,000 400,000 - 400,000 (170,000) 230,000 (6,000) (100,000) 124,000 306,000 430,000 1,900,00 210,000 - 210,000 (85,000) 125,000 - (60,000) 65,000 235,000 300,000 1,200,000 126,000 - 126,000 (51,000) 75,000 (9,000) (32,000) 34,000 200,000 234,000 Additional information: 1. Included in the stock of Z. Ltd. were goods purchased from Q. Ltd. for Sh.24,000 after acquisition. Q. Ltd. realized its usual 25% gross profit margin on this transaction. 2. The dividend due from X. Ltd have not yet been incorporated in the draft profit and loss account of Q. Ltd. 3. There was no goodwill arising on consolidation. Required: The consolidated profit and loss account of Q. Limited and its subsidiary for the year ended 30 June 2002. (15 marks) (Total: 20 marks) NUMBER FOUR (a) List and explain briefly the powers of liquidator (5 marks) (b) Panama Ltd makes its accounts each year 31 October and has been trading at a loss. On 31 October 2002, a resolution for a voluntary liquidation was passed. The balance sheet as at that date was as follows. Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Non Current assets Freehold property Plant and machinery Current assets: Stock Debtors Cash Current liabilities: Bank overdraft Creditors Interest payable (5% debentures) Paid up capital: 3,750 11,250 500 8,750 13,375 125 22,250 (15,500) 11,000 2,750 13,750 6,750 20,500 10,000 10% cumulative preference shares of Sh.500 each fully paid 25,000 Ordinary shares of Sh.500 each fully paid 10,000 Ordinary shares of Sh.500 each. Sh.250 paid. 5,000 12,500 2,500 20,000 Revenue reserves: profit and loss account (9,500) Non Current liabilities: 5% debentures 10,000 20,500 Additional information: 1. The debentures are secured by a floating charge on the asset and undertaking of the company. 2. The bank overdraft is secured by a fixed charge on the company’s freehold property. 3. The preference shares carry a right to a fixed cumulative dividend of 10% per annum up to the date of liquidation and a repayment of Sh.500 per share in priority to all other classes of shares. No dividend has been paid on the preference shares for two years. 4. The creditors include: Sh. ‘000’ Directors fees for one year Rates for six months to 31 October 2002 Manager’s salary for October 2002 Wages for 15 employees Pay As You Earn (PAYE) 1,000 125 5. The assets realized the following amounts: Freehold property Plant and machinery Stock Debtors 12,500 2,000 6,250 12,250 6. The expenses of liquidation amount to Sh.125,000 and the liquidator’s remuneration was fixed at Sh.500,000. Required: The liquidator’s statement of account showing in order of priority, the payments made and the computation of any calls to be made. (15 marks) (Total: 20 marks) NUMBER FIVE (a) Explain the following terms as used in bankruptcy acts: (i) Voluntary transfers (2 marks) (ii) Doctrine of reputed ownership (3 marks) (b) Workers Retirement Benefit Scheme has provided you with the following extract of the trial balance for the year ended 31 October 2002: Sh.’000’ Sh.’000’ Accumulated fund as at 1 November 2001 461,560 240 Accrued expenses Administration expenses Cash and demand deposits Change in market value of investments Lump sum retirement benefits Contributions due in 30 days Normal contributions by: Employer Employees Transfer in from other schemes Individual transfers out to other schemes Investment income Immovable property Government
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