Financial Accounting — March/April 2024

KNEC Diploma in Project Management — Module I. Paper code: 2922/102

Attempt the questions before reading the answers. These are independent revision answers, not official KNEC marking schemes. Every printed question is answered, including optional questions. Printed data errors are identified explicitly in the relevant worked answer.

Time: 3 hours. Seven questions; answer any five in the examination. Show all workings. All seven questions are answered here. Printed wording and data anomalies are retained and explained in the relevant answer.

Question 1(a)

Explain four qualities of good accounting information.

(8 marks)

Answer

  1. Relevance: information helps users evaluate outcomes, make decisions or confirm earlier expectations.
  2. Faithful representation: it describes the underlying transactions completely, neutrally and without material error.
  3. Comparability: consistent classification and presentation allow users to compare periods and similar businesses.
  4. Understandability: clear organization and explanations make the information usable by reasonably informed readers.

Question 1(b)

The following transactions relate to Bakari Enterprises for the month of January 2024..

January 2024 Transaction
1 Started business with Ksh 25,000 cash in hand and Ksh 50,000 at bank.
3 Bought goods for Ksh 20,000 paying by cheque.
5 Bought a printer for Ksh 5,000 in cash.
9 Sold goods for Ksh 15,000 on credit to Joh.
10 sold goods for Ksh 10,000 in cash.
11 Received Ksh 8,000 in cash from John.
12 Bought goods for Ksh 8,000 form Mary on credit.
20 Withdrew Ksh 4,000 from bank for business use.
24 Settled Mary’s account by cheque.
30 Paid wages Ksh 5,000 in cash.
31 Withdrew Ksh 3,000 from bank for personal use.

Prepare ledger accounts to record the transactions above.

(12 marks)

Answer

The customer is printed as “Joh” on 9 January and “John” on 11 January; they are treated as the same account. Buying goods is recorded through Purchases, since no cost-of-sales information is supplied.

Cash account
Debit date Debit particulars KSh Credit date Credit particulars KSh
1 Jan Capital 25,000 5 Jan Printer 5,000
10 Jan Sales 10,000 30 Jan Wages 5,000
11 Jan Joh/John 8,000 31 Jan Balance c/d 37,000
20 Jan Bank 4,000
Total 47,000 Total 47,000

1 Feb: balance b/d Dr KSh 37,000.

Bank account
Debit date Debit particulars KSh Credit date Credit particulars KSh
1 Jan Capital 50,000 3 Jan Purchases 20,000
20 Jan Cash 4,000
24 Jan Mary 8,000
31 Jan Drawings 3,000
31 Jan Balance c/d 15,000
Total 50,000 Total 50,000

1 Feb: balance b/d Dr KSh 15,000.

Capital account
Debit date Debit particulars KSh Credit date Credit particulars KSh
31 Jan Balance c/d 75,000 1 Jan Cash 25,000
1 Jan Bank 50,000
Total 75,000 Total 75,000

1 Feb: balance b/d Cr KSh 75,000.

Purchases account
Debit date Debit particulars KSh Credit date Credit particulars KSh
3 Jan Bank 20,000 31 Jan Balance c/d 28,000
12 Jan Mary 8,000
Total 28,000 Total 28,000

1 Feb: balance b/d Dr KSh 28,000.

Printer account
Debit date Debit particulars KSh Credit date Credit particulars KSh
5 Jan Cash 5,000 31 Jan Balance c/d 5,000
Total 5,000 Total 5,000

1 Feb: balance b/d Dr KSh 5,000.

Joh/John account
Debit date Debit particulars KSh Credit date Credit particulars KSh
9 Jan Sales 15,000 11 Jan Cash 8,000
31 Jan Balance c/d 7,000
Total 15,000 Total 15,000

1 Feb: balance b/d Dr KSh 7,000.

Sales account
Debit date Debit particulars KSh Credit date Credit particulars KSh
31 Jan Balance c/d 25,000 9 Jan Joh/John 15,000
10 Jan Cash 10,000
Total 25,000 Total 25,000

1 Feb: balance b/d Cr KSh 25,000.

Mary account
Debit date Debit particulars KSh Credit date Credit particulars KSh
24 Jan Bank 8,000 12 Jan Purchases 8,000
Total 8,000 Total 8,000
Wages account
Debit date Debit particulars KSh Credit date Credit particulars KSh
30 Jan Cash 5,000 31 Jan Balance c/d 5,000
Total 5,000 Total 5,000

1 Feb: balance b/d Dr KSh 5,000.

Drawings account
Debit date Debit particulars KSh Credit date Credit particulars KSh
31 Jan Bank 3,000 31 Jan Balance c/d 3,000
Total 3,000 Total 3,000

1 Feb: balance b/d Dr KSh 3,000.

Check: debit balances total KSh 100,000 and credit balances total KSh 100,000. Mary’s account is settled in full.

Question 2(a)

On 31 March 2023, the trial balance of Pato Traders did not agree. The difference was posted to a suspense account. Upon investigations, the following errors were revealed;

Item Error
(I) the purchases day book had been under cast by Ksh 11,200.
(II) discounts allowed of Ksh 2,240 had been credited in the distance received account.
(III) Repairs to motor vehicle Ksh 8,512 had been posted to the motor vehicles account.
(IV) A cheque for Ksh 4,368 received from Kaman, a debtor had been recorded in the cash book only.
(V) The returns outwards account had been overcast by Ksh 5,600.

Prepare: (i) a general journal to correct the errors; (ii) suspense account duly balanced.

(8 marks)

Answer

“distance received account” is the wording printed in item (II); the correction treats it as the discounts received account. The cash-book side is assumed to have been recorded correctly.

(i) General journal — 31 March 2023
Error Account debited Debit KSh Account credited Credit KSh Narration
I Purchases 11,200 Suspense 11,200 Correct purchases day-book undercast.
II Discounts allowed; Discounts received 2,240; 2,240 Suspense 4,480 Create the correct debit and reverse the incorrect credit.
III Motor vehicle repairs 8,512 Motor vehicles 8,512 Transfer repair expenditure out of the asset account.
IV Suspense 4,368 Kaman 4,368 Post the debtor credit omitted from the ledger.
V Returns outwards 5,600 Suspense 5,600 Reduce the overcast credit balance.
(ii) Suspense account
Debit date Debit particulars KSh Credit date Credit particulars KSh
31 Mar Opening difference 16,912 31 Mar Purchases 11,200
31 Mar Kaman 4,368 31 Mar Discount correction 4,480
31 Mar Returns outwards 5,600
Total 21,280 Total 21,280

Opening debit difference = 11,200 + 4,480 + 5,600 − 4,368 = KSh 16,912. After correction, both sides are KSh 21,280 and the suspense balance is nil.

Question 2(b)

On 1 January 2020, Mageto Enterprises purchased two machines at a cost of Ksh 1,500,000 each. Each machine had an estimated life of 5 years and a nil residue value. On 31 March 2022, one machine was sold for Ksh 800,000. It is the policy of the business not to provide depreciation in the year of disposal. For the years ended 31 December 2022, prepare: (i) machinery account; (ii) accumulated depreciation on machinery account; (iii) disposal of machinery account.

(12 marks)

Answer

Working Calculation KSh
Annual straight-line depreciation per machine 1,500,000 ÷ 5 300,000
Depreciation on both machines in 2020 2 × 300,000 600,000
Depreciation on both machines in 2021 2 × 300,000 600,000
Accumulated depreciation on machine sold 2 years × 300,000 600,000
Carrying amount of machine sold 1,500,000 − 600,000 900,000
Loss on disposal 900,000 − 800,000 100,000
Depreciation in 2022 Remaining machine only 300,000
Closing accumulated depreciation 1,200,000 − 600,000 + 300,000 900,000

A five-year life and nil residual value give straight-line depreciation of 20% a year. The stated policy means no 2022 depreciation is charged on the machine sold on 31 March 2022.

(i) Machinery account — 2020 to 2022
Debit date Debit particulars KSh Credit date Credit particulars KSh
1 Jan 2020 Bank: two machines 3,000,000 31 Mar 2022 Disposal 1,500,000
31 Dec 2022 Balance c/d 1,500,000
Total 3,000,000 Total 3,000,000

1 Jan 2023: balance b/d Dr KSh 1,500,000.

(ii) Accumulated depreciation on machinery — 2020 to 2022
Debit date Debit particulars KSh Credit date Credit particulars KSh
31 Mar 2022 Disposal 600,000 31 Dec 2020 Depreciation expense 600,000
31 Dec 2022 Balance c/d 900,000 31 Dec 2021 Depreciation expense 600,000
31 Dec 2022 Depreciation expense 300,000
Total 1,500,000 Total 1,500,000

1 Jan 2023: balance b/d Cr KSh 900,000.

(iii) Disposal of machinery account
Debit date Debit particulars KSh Credit date Credit particulars KSh
31 Mar 2022 Machinery cost 1,500,000 31 Mar 2022 Accumulated depreciation 600,000
31 Mar 2022 Bank: proceeds 800,000
31 Mar 2022 Income statement: loss 100,000
Total 1,500,000 Total 1,500,000
Year end Machinery cost KSh Accumulated depreciation KSh Carrying amount KSh
2020 3,000,000 600,000 2,400,000
2021 3,000,000 1,200,000 1,800,000
2022 1,500,000 900,000 600,000

Question 3(a)

On 31 May 2023, the cash book (bank column) of Bidii Enterprises showed a debit balance of Ksh 56,400 while the bank statement showed a credit balance of Ksh 109,400. Upon investigations, the following discrepancies were revealed:

Discrepancy Details
(I) bank charges amounted to Ksh 550.
(II) Items in the cash book but not in the bank statement Cheques received from: Martin Ksh 55,000; Katumo Ksh 11,950. Cheques paid to: Rehema Ksh 87,500; Paul Ksh 29,700.
(III) Direct deposits were Ksh 8,100.
(IV) Standing order payments were Ksh 4,800.

Prepare: (i) an updated cash book; (ii) a bank reconciliation statement.

(10 marks)

Answer

(i) Updated cash book — bank column
Debit date Debit particulars KSh Credit date Credit particulars KSh
31 May Balance before update 56,400 31 May Bank charges 550
31 May Direct deposits 8,100 31 May Standing order 4,800
31 May Balance c/d 59,150
Total 64,500 Total 64,500

1 June: balance b/d Dr KSh 59,150.

(ii) Bank reconciliation statement as at 31 May 2023
Particulars KSh
Adjusted cash-book balance: debit 59,150
Add: cheque to Rehema not presented 87,500
Add: cheque to Paul not presented 29,700
Subtotal 176,350
Less: Martin cheque not credited (55,000)
Less: Katumo cheque not credited (11,950)
Balance per bank statement: credit 109,400

Question 3(b)

Explain each of the following accounting concepts: (i) going concern concept; (ii) accrual cocept; (iii) prudence concept; (iv) consistency concept; (v) money measurement concept.

(10 marks)

Answer

Concept Explanation
Going concern Accounts normally assume that the business will continue operating for the foreseeable future, rather than being forced into liquidation or closure.
Accrual Income and expenses are recognized in the period in which they are earned or incurred, rather than only when cash is received or paid.
Prudence Exercise caution when making judgements under uncertainty, supporting neutral estimates without deliberately overstating or understating assets, liabilities, income or expenses.
Consistency Apply accounting policies and methods consistently across periods unless a justified change provides more appropriate information; explain material changes.
Money measurement The accounts record items that can be measured in monetary terms. Important non-monetary matters may require separate explanation rather than an invented accounting value.

Question 4(a)

The following information relate to Wapendo Enterprises for the month of May 2023.

May 2023 Transaction
1 Cash balance Ksh 40,000; Bank balance Ksh 50,000
3 Sold goods for Ksh 30,000 in cash.
7 Bought an office printer for Ksh 5,000 paying by cheque.
10 Paid wages Ksh 10,000 in cash
12 Received Ksh 15,000 from Ouma
15 Bought office furniture for Ksh 40,000 by cheque.
20 Paid insurance premium for Ksh 15,000 by cheque.
30 Sold goods for Ksh 10,000 in cash.

Prepare a two-column cash book for the month of May 2023.

(10 marks)

Answer

The receipt from Ouma does not specify a payment method. It is treated as cash in this cash book; the alternative bank-receipt balances are shown below.

Wapendo Enterprises — two-column cash book, May 2023
Debit date Receipts Cash KSh Bank KSh Credit date Payments Cash KSh Bank KSh
1 May Balance b/d 40,000 50,000 7 May Printer 5,000
3 May Sales 30,000 10 May Wages 10,000
12 May Ouma 15,000 15 May Furniture 40,000
30 May Sales 10,000 20 May Insurance 15,000
31 May Balance c/d: overdraft 10,000 31 May Balance c/d 85,000
Totals 95,000 60,000 Totals 95,000 60,000

1 June: cash balance b/d Dr KSh 85,000; bank overdraft b/d Cr KSh 10,000. If the Ouma receipt is instead assumed to be banked directly, cash closes at KSh 70,000 Dr and bank at KSh 5,000 Dr. Both treatments must state the assumption because the printed transaction omits the medium.

Question 4(b)

The following is the receipts and payments account of Maendeleo club for the year ended 31 December 2023.

Receipts and Payments Account
Receipts Ksh Payments Ksh
Balance b/d 10,200 Bar purchases 443,400
Entrance fees 4,200 Wages 41,600
Subscriptions 36,500 Rent 18,600
Bar sales 522,700 Electricity 12,800
Sale of investments 75,000 Stationery 3,300
Insurance 1,800
Miscellaneous expenses 4,600
Furniture 45,000
Balance c/d 77,500
Total 648,600 Total 648,600
Additional information: Balances as at:
Item 31 December 2022 Ksh 31 December 2023 Ksh
Bar stock 27,200 31,500
Bar creditors 30,600 35,800
Rent due 1,800 3,600
Electricity due 1,600 1,900
Subscriptions due 2,500 4,000
Subscriptions received in advance — 3,500
Insurance paid in advance 500 700
Investment at cost 50,000 —
Furniture 30,000 69,400

For the year ended 31 December 2023, prepare: (i) a bar trading account; (ii) an income and expenditure account.

(10 marks)

Answer

Adjustment Working KSh
Bar purchases accrued 443,400 + 35,800 − 30,600 448,600
Subscriptions income 36,500 + 4,000 − 2,500 − 3,500 34,500
Rent expense 18,600 + 3,600 − 1,800 20,400
Electricity expense 12,800 + 1,900 − 1,600 13,100
Insurance expense 1,800 + 500 − 700 1,600
Furniture depreciation 30,000 + 45,000 − 69,400 5,600
Profit on sale of investments 75,000 − 50,000 25,000
(i) Maendeleo Club — Bar Trading Account, year ended 31 December 2023
Particulars KSh
Bar sales 522,700
Opening stock 27,200
Add: accrued bar purchases 448,600
Goods available 475,800
Less: closing stock (31,500)
Cost of sales 444,300
Gross bar profit 78,400
(ii) Income and Expenditure Account, year ended 31 December 2023
Particulars KSh
Gross bar profit 78,400
Entrance fees 4,200
Subscriptions accrued 34,500
Profit on sale of investments 25,000
Total income 142,100
Wages 41,600
Rent 20,400
Electricity 13,100
Stationery 3,300
Insurance 1,600
Miscellaneous expenses 4,600
Depreciation: furniture 5,600
Total expenses 90,200
Surplus of income over expenditure 51,900

Wages are shown as a club expense because the question does not identify them as bar wages. Allocating them to the bar would reduce bar profit to KSh 36,800 and remove the same KSh 41,600 from general expenses; the total club surplus remains KSh 51,900. Entrance fees are treated as revenue because no capitalization policy is stated.

Question 5(a)

The petty cashier of Wapendwa Enterprises had Ksh 1,250 cash in hand as at 1 April 2023. On the same date, the main cashier reimbursed the petty cashier Ksh 2,750 to restore the weekly cash float. The following payments were made by the petty cashier during the week:

April 2023 Payment
2 Stamps Ksh 350
4 Detergents Ksh 700
6 Car fuel Ksh 1,200
7 Registered mail Ksh 450
8 Tea leaves Ksh 200; sugar Ksh 300

Prepare a petty cash book using the following analysis columns: Cleaning; Transport; Postage; Staff meals.

(10 marks)

Answer

Wapendwa Enterprises — petty cash book, 1–8 April 2023
Date Details Receipts KSh Payments KSh Cleaning KSh Transport KSh Postage KSh Staff meals KSh
1 Apr Balance b/d 1,250
1 Apr Reimbursement 2,750
2 Apr Stamps 350 350
4 Apr Detergents 700 700
6 Apr Car fuel 1,200 1,200
7 Apr Registered mail 450 450
8 Apr Tea leaves and sugar 500 500
Expenditure totals 3,200 700 1,200 800 500
8 Apr Balance c/d 800
Cash-book totals 4,000 4,000

Float = 1,250 + 2,750 = KSh 4,000. Payments = KSh 3,200. Closing cash = 4,000 − 3,200 = KSh 800. The next reimbursement would be KSh 3,200 to restore the same float.

Question 5(b)

Explain the use of each of the following source documents: (i) outgoing invoice; (ii) incoming invoice; (iii) credit not; (iv) debit note; (v) petty cash voucher.

(10 marks)

Answer

Document Use
Outgoing invoice Sent to a customer to record goods or services sold on credit and the amount the customer owes; supports the sales journal and receivable entry.
Incoming invoice Received from a supplier to record a credit purchase and the amount owed; supports the purchases journal and payable entry.
Credit note The question prints “credit not”. A seller issues a credit note to reduce a customer’s debt for an accepted return, allowance or overcharge.
Debit note A buyer may send one to a supplier to notify a claimed reduction, for example goods returned. A seller may issue one to increase an undercharged customer balance; the accounting treatment follows the document’s purpose.
Petty cash voucher Authorizes and records a small cash payment, identifying its purpose, amount, recipient and supporting evidence.

Question 6(a)

The following balances were obtained from the books of account of Nataka suppliers for the year ended 31 March 2023.

Item Ksh
Inventory (1 April 2022) 23,680
Carriage outwards 2,000
Carriage inwards 3,100
Returns outwards 3,220
Returns inwards 2,050
Purchases 118,740
Sales 186,000
Salaries and wages 58,620
Insurance 3,820
Motor vehicle repairs 6,640
Office expenses 2,160
Lighting and heating 1,660
Sundry expenses 3,140

Inventory as at 31 March 2023 was Ksh 29,460. Prepare an income statement for the year 31 March 2023.

(8 marks)

Answer

Nataka Suppliers — Income Statement, year ended 31 March 2023
Particulars KSh
Sales 186,000
Less: returns inwards (2,050)
Net sales 183,950
Opening inventory 23,680
Purchases 118,740
Less: returns outwards (3,220)
Add: carriage inwards 3,100
Goods available for sale 142,300
Less: closing inventory (29,460)
Cost of sales 112,840
Gross profit 71,110
Carriage outwards 2,000
Salaries and wages 58,620
Insurance 3,820
Motor vehicle repairs 6,640
Office expenses 2,160
Lighting and heating 1,660
Sundry expenses 3,140
Total operating expenses 78,040
Net loss (6,930)

Question 6(b)

The following information relates to Baraka Traders for the month of February 2024.

Balances as at 1 February 2024
Ledger Ksh
Sales ledger 912,300 DR; 21,100 CR
Purchases ledger 449,000 CR; 8,800 DR
Transactions during the month:
Transaction Ksh
Purchases on credit 1,813,500
Cheques received from debtors 2,737,000
Sales on credit 3,675,500
Discounts received 110,500
Cheques paid to creditors 1,541,300
Contra-settlements 304,600
Dishonoured cheques 48,900
Cash received from debtors 420,100
Refunds to customers for overpayments 5,300
Discounts allowed 73,200
Discounts received 62,900

Balances on 28 February 2024: Sales ledger 13,600 CR; Purchases ledger 6,700 DR. For the month of February 2024, prepare a: (i) sales ledger control account; (ii) purchases ledger control account.

(12 marks)

Answer

The paper contains two separate lines labelled “Discounts received”. Both are retained and treated as separate reductions of payables: KSh 110,500 + KSh 62,900 = KSh 173,400. The closing contra-side balances are carried down separately, rather than being mistaken for the principal closing balance.

(i) Sales ledger control account
Debit date Debit particulars KSh Credit date Credit particulars KSh
1 Feb Balances b/d: debit 912,300 1 Feb Balances b/d: credit 21,100
Feb Credit sales 3,675,500 Feb Cheques received 2,737,000
Feb Dishonoured cheques 48,900 Feb Cash received 420,100
Feb Refunds to customers 5,300 Feb Contra-settlements 304,600
28 Feb Credit balances c/d 13,600 Feb Discounts allowed 73,200
28 Feb Balance c/d 1,099,600
Total 4,655,600 Total 4,655,600

1 Mar: balance b/d Dr KSh 1,099,600.

1 March balances: debit KSh 1,099,600 and credit KSh 13,600. The principal debit balance is the figure carried down on the credit side; net receivables are KSh 1,086,000.

(ii) Purchases ledger control account
Debit date Debit particulars KSh Credit date Credit particulars KSh
1 Feb Balances b/d: debit 8,800 1 Feb Balances b/d: credit 449,000
Feb Cheques paid 1,541,300 Feb Credit purchases 1,813,500
Feb Contra-settlements 304,600 28 Feb Debit balances c/d 6,700
Feb Discounts received: first line 110,500
Feb Discounts received: second line 62,900
28 Feb Balance c/d 241,100
Total 2,269,200 Total 2,269,200

1 Mar: balance b/d Cr KSh 241,100.

1 March balances: credit KSh 241,100 and debit KSh 6,700. Net payables are KSh 234,400. The source does not supply returns, so none have been invented.

Question 7(a)

The following expenditure was incurred by Watebah Ventures for the month of May 2023.

Expenditure Ksh
Painting of old building 186,000
Repairs to machinery 40,000
Purchase of office printer 16,800
Painting of new building 520,000
Repairs to motor vehicles 144,000
Purchase of fuel 20,000

Determine: (i) total revenue expenditure; (ii) total capital expenditure.

(8 marks)

Answer

Item Treatment KSh
Painting of old building Revenue: routine maintenance 186,000
Repairs to machinery Revenue: repairs 40,000
Repairs to motor vehicles Revenue: repairs 144,000
Purchase of fuel Revenue: running cost 20,000
Total revenue expenditure 186,000 + 40,000 + 144,000 + 20,000 390,000
Purchase of office printer Capital: new non-current asset 16,800
Painting of new building Capital: preparing the new asset for use 520,000
Total capital expenditure 16,800 + 520,000 536,800

Question 7(b)

The following balances were extracted from the books of account of Mwanzo Enterprises as at 31 December 2023.

Item Ksh
Net profit 29,800
Shop and office premises (net) 210,000
Fixtures and fittings (net) 12,800
Capital 287,500
Creditors 18,700
Debtors 13,000
Bank overdraft 30,000
Drawings 26,000
Inventory 102,500
Insurance paid in advance 2,900
Unpaid advertisement expense 1,200

Prepare a statement of financial position as at 31 December 2023.

(12 marks)

Answer

Mwanzo Enterprises — Statement of Financial Position as at 31 December 2023
Particulars KSh
NON-CURRENT ASSETS
Shop and office premises (net) 210,000
Fixtures and fittings (net) 12,800
Total non-current assets 222,800
CURRENT ASSETS
Inventory 102,500
Debtors 13,000
Prepaid insurance 2,900
Total current assets 118,400
TOTAL ASSETS 341,200
EQUITY
Opening capital 287,500
Add: net profit 29,800
Less: drawings (26,000)
Closing capital 291,300
CURRENT LIABILITIES
Creditors 18,700
Bank overdraft 30,000
Accrued advertisement expense 1,200
Total liabilities 49,900
TOTAL EQUITY AND LIABILITIES 341,200
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