Financial Accounting — 2024

KNEC Diploma in Supply Chain Management, Module I. Original examination questions with explained model answers for revision.

November 2024

Paper codes: 2903/102 (shared paper)
Time: 3 hours
Instructions: Answer any FIVE questions. Show all your workings. Answer the questions in English.

Question 1(a) — 8 marks

Highlight four features of capital expenditure.

Model answer

  1. It acquires or improves a non-current asset rather than meeting ordinary running costs.
  2. Its benefits extend beyond the current accounting period.
  3. It increases productive capacity, useful life or operating capability rather than merely restoring normal condition.
  4. It is initially capitalised in the statement of financial position and, where appropriate, allocated through depreciation over the benefiting periods.

Question 1(b) — 12 marks

The following trial balance was extracted from the books of account of Lipa Traders as at 31 December 2023. Prepare an income statement for the year ended 31 December 2023.

Particulars Dr Ksh Cr Ksh
Inventory (1 January 2023) 31,600
Sales 919,600
Purchases 402,000
Returns inwards 9,000
Returns outwards 7,000
Carriage inwards 14,000
Carriage outwards 18,000
Discounts allowed 36,000
Salaries 146,000
Insurance 40,000
Motor vehicles 260,000
Discounts received 30,000
Total 956,600 956,600

Additional information:

(i) As at 31 December 2023: Inventory was valued at Ksh 28,000. Outstanding salaries were Ksh 30,000. Prepaid insurance expense was Ksh 6,000.

(ii) Depreciation on motor vehicles is charged at the rate of 20% per annum.

Model answer

Lipa Traders — Income statement for the year ended 31 December 2023

Particulars Ksh
Sales less returns (919,600 − 9,000) 910,600
Opening inventory 31,600
Net purchases (402,000 − 7,000) 395,000
Carriage inwards 14,000
Goods available 440,600
Less closing inventory 28,000
Cost of sales 412,600
Gross profit 498,000
Discounts received 30,000
Total income 528,000
Carriage outwards 18,000
Discounts allowed 36,000
Salaries (146,000 + 30,000) 176,000
Insurance (40,000 − 6,000) 34,000
Depreciation (260,000 × 20%) 52,000
Total expenses 316,000
Net profit 212,000

Question 2(a) — 8 marks

Explain each of the following books of original entry:

(i) purchases journal;

(ii) cash book;

(iii) returns inwards journal;

(iv) sales journal.

Model answer

  1. Purchases journal records credit purchases of goods for resale from suppliers’ invoices; it excludes cash purchases and purchases of non-current assets.
  2. Cash book records cash/bank receipts and payments and also serves as the cash/bank ledger.
  3. Returns inwards journal records goods returned by credit customers, normally from credit notes issued.
  4. Sales journal records credit sales of trading goods from sales invoices.

Question 2(b) — 12 marks

On 31 August 2024, the cash book (Bank column) of Lengo Enterprises showed a credit balance of Ksh 80,000 while the bank statement issued on the same date had a debit balance of Ksh 63,500. Upon comparison of the two documents, the following discrepancies were revealed. Prepare: (i) an updated cash book; (ii) a bank reconciliation statement.

(i) the bank had effected a standing order of Ksh 38,000.

(ii) Interest on fixed deposits account of Ksh 7,3000 had been credited by the bank.

(iii) A debtor had paid Ksh 55,000 directly into the bank account.

(iv) Bank charges amounted to Ksh 11,200.

(v) A cheque for Ksh 58,500 had not been presented for payment.

(vi) The bank had received Ksh 32,200 on behalf of the firm.

(vii) Cheques totalling Ksh 87,300 had not been credited by the bank.

Model answer

The interest amount is printed “7,3000”. The reconciled working below uses Ksh 7,300. If all printed digits are read as Ksh 73,000, the updated cash-book balance is Ksh 31,000 Dr and an unexplained Ksh 65,700 difference remains.

Updated bank account

Dr — Particulars Ksh Cr — Particulars Ksh
Interest — stated interpretation 7,300 Balance b/d (overdraft) 80,000
Direct deposit 55,000 Standing order 38,000
Bank collection 32,200 Bank charges 11,200
Balance c/d 34,700
Total 129,200 Total 129,200

Balance b/d: Ksh 34,700 Cr.

Particulars Ksh
Bank statement overdraft -63,500
Add uncredited cheques 87,300
Less unpresented cheques -58,500
Adjusted cash-book balance (overdraft) -34,700

Question 3(a) — 8 marks

The following information relates to Jamax Wholesalers for the month of July 2024. Prepare a sales ledger control account.

Particulars Ksh
July 1 balances b/f debtors — Dr 15,000
July 1 balances b/f debtors — Cr 8,000
Total for the month: Sales 291,000
Cash received form debtors 98,000
Returns inwards 16,000
Discounts allowed 25,000
Cheques received form debtors 140,000

Model answer

Sales ledger control account

Dr — Particulars Ksh Cr — Particulars Ksh
Balance b/d — debit debtors 15,000 Balance b/d — credit debtors 8,000
Credit sales 291,000 Cash 98,000
Returns inwards 16,000
Discounts allowed 25,000
Cheques 140,000
Balance c/d 19,000
Total 306,000 Total 306,000

Balance b/d: Ksh 19,000 Dr.

Question 3(b) — 12 marks

On 1 October 2024, Saulo started business with Ksh 172,000 in cash. The following transactions took place during the month. Prepare a three column cash book.

October 2024 Transaction
3 Paid rent Ksh 40,000 in cash.
8 Purchased goods for Ksh 8,000 from Stella on credit.
10 Opened a business bank account and deposited Ksh 50,000 of the cash.
15 Settled Stella’s account by cheque less 4% cash discount.
17 Cash sales amounted to Ksh 3,600.
21 Sold goods for Ksh 14,000 to Francis on credit.
25 Paid wages Ksh 8,400 in cash.
30 Francis settled half of his account by cheque less 5% cash discount.

Model answer

Particulars Ksh
Stella discount: 8,000 × 4% 320
Cheque paid: 8,000 − 320 7,680
Francis half-account: 14,000 ÷ 2 7,000
Discount allowed: 7,000 × 5% 350
Cheque received: 7,000 − 350 6,650

Dr — Receipts (discount allowed)

Date Details Discount Ksh Cash Ksh Bank Ksh
1 Capital 0 172,000 0
10 Cash C 0 0 50,000
17 Sales 0 3,600 0
30 Francis 350 0 6,650
Total 350 175,600 56,650

Cr — Payments (discount received)

Date Details Discount Ksh Cash Ksh Bank Ksh
3 Rent 0 40,000 0
10 Bank C 0 50,000 0
15 Stella 320 0 7,680
25 Wages 0 8,400 0
End Balance c/d 0 77,200 0
End Balance c/d 0 0 48,970
Total 320 175,600 56,650

Balances brought down: cash Ksh 77,200 Dr; bank Ksh 48,970 Dr. Contra entries are marked C.

The credit purchases on 8 October and credit sales on 21 October do not enter the cash book until settlement.

Question 4(a) — 8 marks

Explain four sources of income for a football club.

Model answer

  1. Gate receipts: supporters pay admission to matches.
  2. Sponsorship/advertising: businesses pay for promotion on shirts, signs or club media.
  3. Membership subscriptions: registered members pay regular fees.
  4. Merchandise sales: the club earns revenue from branded shirts and other products.

Question 4(b) — 12 marks

The following transactions relate to Trada Traders for the month of August 2024. (i) Prepare ledger accounts to record the transactions above. (ii) Extract a trial balance as at 31 August 2023.

August 2024 Transaction
1 Started business with Ksh 48,000 in cash and Ksh 130,000 at bank.
8 Purchased goods for Ksh 26,000 from job on credit.
15 Sold goods for Ksh 12,000 and received a cheque.
20 Paid Job Ksh 16,000 in cash.
31 Paid salaries amounting to Ksh 65,000 by cheque.

Model answer

The requested trial-balance date says 2023 although the transactions are dated 2024. The working is for 31 August 2024.

Cash

Dr — Particulars Ksh Cr — Particulars Ksh
Aug 1 — Capital 48,000 Aug 20 — Job — payable 16,000
Balance c/d 32,000
Total 48,000 Total 48,000

Balance b/d: Ksh 32,000 Dr.

Bank

Dr — Particulars Ksh Cr — Particulars Ksh
Aug 1 — Capital 130,000 Aug 31 — Salaries 65,000
Aug 15 — Sales 12,000 Balance c/d 77,000
Total 142,000 Total 142,000

Balance b/d: Ksh 77,000 Dr.

Capital

Dr — Particulars Ksh Cr — Particulars Ksh
Balance c/d 178,000 Aug 1 — Cash, Bank 178,000
Total 178,000 Total 178,000

Balance b/d: Ksh 178,000 Cr.

Purchases

Dr — Particulars Ksh Cr — Particulars Ksh
Aug 8 — Job — payable 26,000 Balance c/d 26,000
Total 26,000 Total 26,000

Balance b/d: Ksh 26,000 Dr.

Job — payable

Dr — Particulars Ksh Cr — Particulars Ksh
Aug 20 — Cash 16,000 Aug 8 — Purchases 26,000
Balance c/d 10,000
Total 26,000 Total 26,000

Balance b/d: Ksh 10,000 Cr.

Sales

Dr — Particulars Ksh Cr — Particulars Ksh
Balance c/d 12,000 Aug 15 — Bank 12,000
Total 12,000 Total 12,000

Balance b/d: Ksh 12,000 Cr.

Salaries

Dr — Particulars Ksh Cr — Particulars Ksh
Aug 31 — Bank 65,000 Balance c/d 65,000
Total 65,000 Total 65,000

Balance b/d: Ksh 65,000 Dr.

Trial balance — 31 August 2024

Account Debit Ksh Credit Ksh
Cash 32,000
Bank 77,000
Capital 178,000
Purchases 26,000
Job — payable 10,000
Sales 12,000
Salaries 65,000
Total 200,000 200,000

Question 5(a) — 8 marks

The following information relates to rent and rates expense of Moja merchants for the year 2023. Prepare the rent and rates expense account for the year ended 31 December 2023.

Particulars Ksh
1 January 2023: Rent owing 33,000
Rates prepaid 40,000
Payments during the year: Rent 420,000
Rates 35,000
31 December 2023: Rent prepaid 470,000
Rates only [as printed] 8,000

Model answer

The scan gives rent prepaid as Ksh 470,000. Treating the closing rates amount as rates owing, the combined expense is zero. The unusually large prepayment is retained; replacing it with Ksh 47,000 would change the answer.

Rent and rates expense account

Dr — Particulars Ksh Cr — Particulars Ksh
Opening rates prepaid 40,000 Opening rent owing 33,000
Bank — rent paid 420,000 Closing rent prepaid 470,000
Bank — rates paid 35,000
Closing rates owing 8,000
Total 503,000 Total 503,000
Particulars Ksh
Rent expense: 420,000 − 33,000 − 470,000 -83,000
Rates expense: 35,000 + 40,000 + 8,000 83,000
Combined amount transferred to income statement 0

Question 5(b) — 12 marks

The following is the statement of financial position of Chama Enterprises as at 31 December 2023. The following transactions took place during the month of January 2024. Prepare a statement of financial position as at 31 January 2024.

Particulars Ksh
Buildings 1,700,000
Motor vehicles 2,600,000
Furniture 900,000
Total non-current assets 5,200,000
Inventory 60,000
Accounts receivable 8,000
Cash at bank 240,000
Cash in hand 72,000
Total current assets 380,000
Total assets 5,580,000
Capital 5,498,000
Accounts payable 47,000
Accrued wages 35,000
Total current liabilities 82,000
Capital and liabilities 5,580,000

(i) Accrued wages were paid by cheque.

(ii) Furniture costing Ksh 20,000 was sold in cash.

(iii) A personal table worth Ksh 58,000 was brought into business use.

(iv) Purchased goods for Ksh 30,000 on credit.

Model answer

As no selling price or carrying-value adjustment is given for the furniture, the working assumes it was sold at its stated value of Ksh 20,000.

Item Working Closing Ksh
Furniture 900,000 − 20,000 + 58,000 938,000
Bank 240,000 − 35,000 205,000
Cash 72,000 + 20,000 92,000
Inventory 60,000 + 30,000 90,000
Payables 47,000 + 30,000 77,000
Capital 5,498,000 + 58,000 5,556,000

Chama Enterprises — Statement of financial position, 31 January 2024

Particulars Ksh
Buildings 1,700,000
Motor vehicles 2,600,000
Furniture 938,000
Total non-current assets 5,238,000
Inventory 90,000
Accounts receivable 8,000
Bank 205,000
Cash 92,000
Current assets 395,000
Total assets 5,633,000
Capital 5,556,000
Accounts payable 77,000
Accrued wages 0
Total capital and liabilities 5,633,000

Question 6(a) — 8 marks

Explain four advantages of maintaining a petty cash book on an imprest system.

Model answer

  1. A fixed authorised float limits the money held by the petty cashier.
  2. Reimbursement equals supported expenditure, making the float and vouchers easy to reconcile.
  3. Analysed small payments improve expense classification and control.
  4. Handling small payments separately reduces work in the main cash book and allows responsibility to be assigned to one custodian.

Question 6(b) — 12 marks

The following information relates to the motor vehicles owned by Maarifa Transporters. Prepare: (i) motor vehicles account; (ii) accumulated provision for depreciation on motor vehicles account; (iii) motor vehicle disposal account.

Registration No. Date of acquisition Cost Ksh
KC 1 January 2021 4,000,000
KD 1 January 2022 2,000,000
KE 1 January 2023 3,000,000

Additional information:

(i) Depreciation on the motor vehicles is charged at the rate of 25% per annum using reducing balance method.

(ii) On 31 December 2023, motor vehicle KD was disposed for Ksh 1,7000,000. No depreciation is charged in the year of disposal.

Model answer

The disposal price is printed “1,7000,000”. The main disposal account below reads all its digits as Ksh 17,000,000. An alternative for an intended Ksh 1,700,000 is also shown.

Year KC depreciation KD depreciation KE depreciation Total Ksh
2021 1,000,000 0 0 1,000,000
2022 750,000 500,000 0 1,250,000
2023 562,500 0 750,000 1,312,500

Motor vehicles — 2021

Dr — Particulars Ksh Cr — Particulars Ksh
Bank — KC 4,000,000 Balance c/d 4,000,000
Total 4,000,000 Total 4,000,000

Balance b/d: Ksh 4,000,000 Dr.

Motor vehicles — 2022

Dr — Particulars Ksh Cr — Particulars Ksh
Balance b/d 4,000,000 Balance c/d 6,000,000
Bank — KD 2,000,000
Total 6,000,000 Total 6,000,000

Balance b/d: Ksh 6,000,000 Dr.

Motor vehicles — 2023

Dr — Particulars Ksh Cr — Particulars Ksh
Balance b/d 6,000,000 Disposal — KD cost 2,000,000
Bank — KE 3,000,000 Balance c/d 7,000,000
Total 9,000,000 Total 9,000,000

Balance b/d: Ksh 7,000,000 Dr.

Accumulated depreciation — 2021

Dr — Particulars Ksh Cr — Particulars Ksh
Balance c/d 1,000,000 Income statement 1,000,000
Total 1,000,000 Total 1,000,000

Balance b/d: Ksh 1,000,000 Cr.

Accumulated depreciation — 2022

Dr — Particulars Ksh Cr — Particulars Ksh
Balance c/d 2,250,000 Balance b/d 1,000,000
Income statement 1,250,000
Total 2,250,000 Total 2,250,000

Balance b/d: Ksh 2,250,000 Cr.

Accumulated depreciation — 2023

Dr — Particulars Ksh Cr — Particulars Ksh
Disposal — KD 500,000 Balance b/d 2,250,000
Balance c/d 3,062,500 Income statement 1,312,500
Total 3,562,500 Total 3,562,500

Balance b/d: Ksh 3,062,500 Cr.

KD disposal — literal printed digits

Dr — Particulars Ksh Cr — Particulars Ksh
Motor vehicles cost 2,000,000 Accumulated depreciation 500,000
Profit to income statement 15,500,000 Bank proceeds 17,000,000
Total 17,500,000 Total 17,500,000

Alternative if the intended proceeds were Ksh 1,700,000

KD disposal — alternative interpretation

Dr — Particulars Ksh Cr — Particulars Ksh
Motor vehicles cost 2,000,000 Accumulated depreciation 500,000
Profit to income statement 200,000 Bank proceeds 1,700,000
Total 2,200,000 Total 2,200,000

Question 7(a) — 8 marks

The trial balance of Lemah Traders as at 30 June 2024 failed to agree, the debit side exceeding the credit side by Ksh 34,000. Upon investigations, the following errors were revealed. Prepare: (i) a general journal to correct the errors above; (ii) a suspense account duly balanced.

(i) Salaries paid Ksh 24,000 had not been recorded in the books.

(ii) A sale of goods for Ksh 18,000 had been recorded in the cash book as Ksh 81,000.

(iii) Rent paid Ksh 14,500 had been credited in the rent receivable account.

Model answer

Entry Account / explanation Debit Ksh Credit Ksh
I — omitted payment
Dr Salaries 24,000
Cr Cash/Bank 24,000
II — cash-book overstatement 81,000 − 18,000
Dr Suspense 63,000
Cr Cash/Bank 63,000
III — reverse wrong credit and record expense
Dr Rent expense 14,500
Dr Rent receivable/income 14,500
Cr Suspense 29,000

Suspense account

Dr — Particulars Ksh Cr — Particulars Ksh
Cash/Bank correction 63,000 Opening difference 34,000
Rent corrections 29,000
Total 63,000 Total 63,000

Question 7(b) — 12 marks

Morgan does not maintain proper books of account. The following information was obtained from his note book for the year ended 31 December 2023. Goods are sold at a profit margin of 25%. (i) Determine the purchases for the year. (ii) Prepare an income statement for the year ended 31 December 2023.

Particulars Ksh
Inventory: 1 January 2023 3,300
31 December 2023 4,200
Sales for the year 360,000
Expenses 22,000

Model answer

Step Working Ksh
Gross profit 360,000 × 25% 90,000
Cost of sales 360,000 − 90,000 270,000
Purchases 270,000 − 3,300 + 4,200 270,900

Morgan — Income statement, year ended 31 December 2023

Particulars Ksh
Sales 360,000
Opening inventory 3,300
Purchases 270,900
Goods available 274,200
Less closing inventory 4,200
Cost of sales 270,000
Gross profit 90,000
Less expenses 22,000
Net profit 68,000
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