FINANCIAL ACCOUNTING NOVEMBER 2020 - CPA SOLUTION|REVISION KITS|KASNEB

QUESTION 1a

Q Outline four reasons for incomplete accounting records in an organisation. (4 marks)

A

Solution

Meaning of Incomplete Records

A double-entry bookkeeping system keeps books according to the Dual Aspect concept(two sides). That is, each debit has a corresponding credit. Companies that do not keep books under this regime follow a single entry system. With the single-entry system, the company has only one cash account and properly keeps accounts of debtors and creditors. Not properly keeping accounts of expenses, income, assets and liabilities because the information provided by these records is incomplete, they are called incomplete records.

Reasons for incomplete records in an organization

i. Lack of Accounting Knowledge - Organizations famble about accounting principles and concepts.

ii. Inadequate Systems – The methods and systems of support authorizations to prevent various commercial transactions from being recorded in accounting systems may be incomplete.

iii. Fraud – Employees may voluntarily disrupt or fail to record transactions that may indicate company assets or record extreme levels of profitability.

iv. Losses during transition – Companies fail to adequately protect old records when transitioning to a new accounting system and lose some or all of their records.

v. single entry system - It is more convenient to maintain records as per the single entry system.

vi. Time - Maintaining incomplete records consumes less time.

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QUESTION 1b(i)

Q (i) Journal entries to correct the errors. (Narrations required). (8 marks)

A

Solution

Journal entries

1

2

3

4

5

6

7

8

9

Details
Account receivable A/c
suspense a/c
To correct debit balance omitted on receivables)

Sales A/c
Purchase A/c
To correct return outwards made in error in the sales A/c

Purchases A/c
suspense A/c
To correct purchase day book understated

Fixtures & fitting A/c
repairs account
To correct error of principle

Depreciation (income statement)
15% x 6,600) Provision for depreciad somea kanya on on fixtures and fittings
To correct error of omission

Bad debt A/c
Account receivable A/c
To correct bad debt omitted

Account payables A/c
Suspense A/c
To correct payables Credited on the account

Drawings A/c
Purchases A/c
To correct drawings in goods not made in the books

Suspense A/c
Discount received Account
To correct discount received posted on the wrong side of the account

Debit
800,000

200,000

1,600,000

12,000,000

9,900,000

500,000

1,000,000

4,000,000

36,000

Credit

800,000

200,000

1,600,000

12,000,000

9,900,000

500,000

1,000,000

4,000,000

36,000

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QUESTION 1b(ii)

Q (ii) Statement of adjusted profit for the period ended 30 April 2020. (4 marks)

A

Solution

Statement of adjusted profit for the period ended 30th April 2020

Grace Nene Statement of adjusted profit for the period ended 30th April 2020
Reported net profit Add: Discount received Repairs Drawings Less: Purchases Depreciation Bad debts Corrected net profits	Sh 000 274,000 36 12,000 4,000 (1,600) (9,900) (500) 278,036

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QUESTION 1b(iii)

Q (iii) Adjusted statement of financial position as at 30 April 2020. (4 marks)

A

Solution

Adjusted statement of financial positiom as at 30th April 2020

Adjusted statement of financial positiom as at 30th April 2020
Non-Current - Assets Motor vehicles (236,000-114,000) Furniture and fittings (54,000+12,000) - (26,000+9,900) Current Assets Inventory Account receivable (334,000+800-500+200) Bank balance Total Assets Financed by : Equity Capital Net profit Less Drawing Total Equity Current liabilities Account payables (2,298,000-1,000-36-200) Total Equity and liabilities	Sh 000 122,000 30,100 268,000 334,500 112,000 866,600 420,000 278,036 (60,000) 638,036 228,564 866,600

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QUESTION 2a

Q Distinguish between the "direct" and "indirect" methods of preparing a statement of cash flows. (4 marks)

A

Solution

Difference between direct and indirect method of preparing cash flows

a) Direct method reports cash flows separately from cash outflows while indirect method combines.

b) Direct method determines changes in receipts and payment which are reported in the cash flow from the operations section while indirect method takes the net income generated in a period and add or subtracts changes in the asset and liability accounts to determine the implied cash flow.

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QUESTION 2b

Q Statement of cash flows in accordance with IAS 7 Statement of Cash Flows", for the year ended 31 December 2019. (16 marks)

A

Solution

Statement of cash flows in accordance with IAS 7 Statement of Cash Flows

Chui Ltd Statement of Cash Flows
for the year ended 31/12/2019

Cash flows from operating activities
Net income
Adjustments
Depreciation expense
Profit on disposal of land (150,000-111,800)
Loss on disposal of plants(5,300-15,600)-27,300
Impairment of goodwill
Working capital changes
Increase in inventions(302,900-235,300)
Increase in receivables(113,100-76,700)
Decrease in payables(66,300-38,100)
Net cash flows from operating activities A

Cash flows from investing activities
Sales proceeds from disposal at land
Sales proceed from disposal of plant
Purchase of land
Purchase of plant
Net cash flows from investing activities B

Cash flows from financing activities
Notes payable borrowed(565,500-160,000-416,000)
Dividend paid (41,600+20,500-19,500)
Net cash flow from financing activities C

Net change in cash and cash equivalent(A+B+C)
Add: Beginning cash
Ending cash and cash equivalent

Sh 000
24,700

55,900
(38,200)
10,100
63,700

(67,600)
(36,400)
(28,200)
(16,000)

150,000
27,300
(62,400)
(47,300)
67,600

10,500
(42,600)
(32,100)

19,500
146,900
166,400

Workings

Land a/c
Bal b/d Purchase	Sh000 133,900 62,400 196,300	Disposal Bal c/d	Sh000 111,800 84,500 196,300

Disposal of plant a/c
Cost	Sh000 53,000 53,000	Accumulated depreciation Sales proceeds Profit and loss	Sh000 15,600 27,300 10,100 53,000

Retained earnings
Dividend = 370,200+ 24,700 - 374,400
Change for the year = 20,500

Dividends a/c
Cash Bal b/d	Sh 000 42,600 19,500 62,100	Bal b/d Change	Sh 000 41,600 20,500 62,100

Plant a/c
Bal b/d Purchase	Sh 000 560,000 47,300 607,300	Disposal Revaluation (59,800-12,500) bal c/d	Sh 000 53,000 47,300 507,000 607,300

Provision for depreciation on plant
Disposal Balance c/d	15,600 152,100 167,700	Balance b/d Depreciation	111,800 55,900 167,700

.

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QUESTION 3

Q (a) Statement of profit or loss and appropriation account in columnar form for the two periods ended 30 September 2019 and 31 March 2020. (6 marks)
(b) Partners' capital accounts.(4 marks)
(c) Partners current accounts. (4 marks)
(d) Statement of financial position as at 31 March 2020.(6 marks)

A

Solution

Workings......

Revaluation A/c
Bal c/d	Sh 000 20,000 20,000	Land (20,000-4,000) Equipment (12,000-8,000)	Sh 000 16,000 4000 20,000

First 6months
L-8,000×10% x 6/12=400
M-4,000×10% x 6/12=200
p-4,000×10% x 6/12 = 200

Next 6months
17,600×10% x 6/12=880
8,400×10% x 6/12 = 420

(a) Statement of profit or loss and appropriation account in columnar form for the two periods ended 30 September 2019 and 31 March 2020.

Lydia, Mercy and Prisca Statements of profit or less and appropriation for the periods ended 30 September 2019 and 31 march 2019
	First 6 months Sh"000"		Next 6 months Sh"000"		Entity as Whole Sh"000"
Net profit reported Interest on loan (10% x 10,000× 6/12) Bad debts Net profit for the year Less interest on capital L M P Profit to be shared Share of profit L M P Balance	1,200 400 200 200 2/4×6,400 1/4x6,400 1/4x6,400	8,400 (1,200) 7,200 (800) 6,400 3,200 1,600 1,600 (6,400) 0	500 1,200 880 420 3/5x5,400 2/5x5,400	8,400 (1,700) 6,700 (1,300) 5,400 3,240 2,160 (5,400) 0	500 2,400 1,280 6,200 200 (2,100) 6,440 3,760 1,600	16,800 (2,900) 13,900 11,800 (11,800) 0

(b) Partners capital a/c

Lydia, Mercy and Prisca partners capital accounts
Goodwill write off Loan A/C Balance c/d	Lydia Sh 000 2,400 17,600 20,000	Mercy Sh 000 1,600 8,400 10,000	Prisca Sh 000 10,000 10,000	Balance b/d Goodwill Revaluation	Lydia Sh 000 8,000 2,000 10,000 20,000	Mercy Sh 000 4,000 1,000 5,000 10,000	Prisca Sh 000 4,000 1,000 5,000 10,000

(c) Partners currency a/c

Partners currency a/c
Drawings Bank Balance c/d	Lydia Sh 000 944 7976 8920	Mercy Sh 000 1,216 3,964 5,180	Prisca Sh 000 1,440 1,160 2,600	Balance b/d Interest on capital Share of profit	Lydia Sh 000 1,200 1,280 6,440 8,920	Mercy Sh 000 800 620 3,760 5,180	Prisca Sh 000 800 200 1600 2600

(d) Statement of financial Position as at 31 March 2020

Lydia & Mercy Statement of financial position as of 31 march 2019
Assets Non-current assets Land Equipment Current assets Inventory Accounts receivables (7,600 -24,000) Bank (5,600-1,160) Capital and liabilities Capital account Lydia mercy Current A/C: Lydia Mercy Non-current liabilities Loan a/c-Prisca Current liabilities Account payable Accrued interest Total capital and liabilities	Sh 000 17,600 8,400 7,976 3,964	Sh 000 20,000 12,000 9,600 5,200 4,440 51,240 26,000 11,940 10,000 2,800 500 51,240

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QUESTION 4

Q (a) Manufacturing account for the year mided 31 March 2020. (10 marks)

(b) Statement of geode or for the year in 31 March 2020. (10 marks)

A

Solution

(a) Manufacturing account for the year mided 31 March 2020.

Tamu Manufacturing account for the year ended 31 march 2020
Raw materials consumed Opening raw materials Add: purchases of raw materials Less: closing stock of raw materials Add: direct labour-manufacturing agents Prime cost Add: production overheads Heating and lightning 5/6 x (180,342+3,642) Rent 5/6(570,144+6,963) Rates 5% (60,348-9,420) Insurance 5/6 x (498,039-10,080) Depreciation Plant and machinery(15%×2,190,000) Directors salaries Factory power Maintenance Add: opening work in progress Less: closing work in progress Total cost of production	Sh 000 210,000 1,555,800 (56,200)	Sh 000 1,709,600 1,504,200 3,213,800	Sh 000 3,213,800 153,320 480,922.5 42,440 406,632.5 328,500 20,000 90,042 120,189 4,855,846 378,000 (47190) 5,186,656

(b) Statement of geode or for the year in 31 March 2020.

Tamu Itd Statement of profit or loss for the year ended 31 march 2020
Sales Less: return inwards Less: cost of sales Opening finished goods Add: total cost of production Less: closing finished goods Gross profit Less: Expenses Administration expenses Heating and lightning 1/6(180,342+ 3,642) Rent 1/6(570,144+6,963) Rates 1/6(60,348-9420) Insurance 1/6(498,039-10,080) Depreciation Buildings 2%x390,000 Office equipment(10%×330,000) General administrative expenses Director salaries Increase in allowance for bad debts 1%x 1,500,000-300,000 Bank interest Selling and distribution expenses Advertising expenses Transport expenses Depreciation Motor vehicles (600,000-240,000)×25% Office salaries Profit before tax Less corporation tax Profit after tax Less preference dividends (10%×600,000) Interim -30,000 Final -30,000 -accured Profit for the year Add :retained profits Retained profits balance b/d	Sh 000 7,800,441 (45,318) 750,000 5,186,656 (345,777) 30,664 96,184.5 8,488 81,326.5 7,800 33,000 189,033 6,069 12,000 21,210 150,513 255,039 90,000 64,237	Sh 000 7,755,123 (5.590.879) 2,164,244 1,045,564 1,118,680 (100,000) 1,018,680 (60,000) 958,680 127,425 1,086,105

Workings

Production in units
P = sales in Units + Closing stock in unit - Opening stock in units

Cost of production = 5,186,656,000/1,500 = 3,457,770

Closing inventory = 3,457,770 / 10 = 345,777 .

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QUESTION 5a

Q (a) Explain the following accounting concepts:

(i) Matching concept.(2 marks)

(ii)Realisation concept.(2 marks)

A

Solution

(i) Matching concept

This states that revenues earned in a period should be matched with the cost incurred in order to...... determine the profit or loss made during that period.

(ii) Realization concept

The realization principle is the concept that revenue cannot be realized until the goods or services to which the revenue relates have been provided or delivered. .

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QUESTION 5b

Q (b) One of the qualities of accounting information is reliability.
Highlight four characteristics that accounting information could have in order for it to be reliable, (4 marks)

A

Solution

Characteristics that Accounting Information Can Have to Increase Reliability

a) Faithful representation - information must represent faithfully the transaction...... and other events that took place during the accounting period.

b) Completeness-reliable information must be complete.

c) Neutrality-reliable information should be free from bias.

d) Prudence-it requires an entity not to overstate its assets and incomes but to disclose all liabilities provided for and provide for all loses

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QUESTION 5c

Q Outline six challenges that might be faced by an organisation that is switching from a manual accounting system to a computerised accounting system.(6 marks)

A

Solution

Challenges of switching from manual accounting system to a computerized system

➢ Heavy cost of installation

➢ Cost of training the staffs

➢ Fear of unemployment for staff members......

➢ Sensitivity of Data

➢ Alignment of Tasks

➢ The Suitable Technology

➢ Adapting to Change

➢ System failure

➢ Disruption of work

➢ Time consuming

➢ Unanticipated errors not known may occur

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QUESTION 5d

Q (d) Discuss three sources of income for non-profit-making organisations.(6 marks)

A

Solution

Sources of income for non-profit making organization

i. Members subscriptions- this is the main source of income which is contributed by members periodically.......

ii Entrance fees- this is amount charged to new members when joining the organizations.

iii. Donations- these are amounts or assets received from well-wishers.. Fees for goods and/or services.

iv. Individual donations and major gifts.

v. Bequests.

vi. Corporate contributions.

vii. Foundation grants.

viii. Government grants and contracts.

ix. Interest from investments.

x. Loans/program-related investments (PRIs)

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CPA
Foundation Leval
Financial Accounting November 2020
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