Financial Accounting — 2021

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

November 2021

Paper codes: 2903/102 (shared paper)
Time: Not shown in supplied scan
Instructions: Not shown in supplied scan

Question 1(a) — 8 marks

Explain each of the following accounting concepts:

(i) Dual aspect concept;

(ii) Going concern concept;

(iii) Materiality concept;

(iv) Money measurement concept.

Model answer

  1. Dual aspect: each transaction has equal debit and credit effects, maintaining Assets = Capital + Liabilities.
  2. Going concern: accounts assume continued operations for the foreseeable future unless cessation/liquidation is intended or unavoidable.
  3. Materiality: separately recognise/disclose matters whose size or nature could affect users’ decisions.
  4. Money measurement: accounts record events that can be reliably expressed in monetary terms; important non-monetary matters may need narrative disclosure.

Question 1(b) — 12 marks

The following balances were obtained from the books of account of Petmic Enterprises for the month of February, 2021. Prepare: (i) Purchases ledger control account; (ii) Sales ledger control account.

Particulars Ksh
February 1: Purchases ledger — Debit 40,500
Purchases ledger — Credit 162,000
Sales ledger — Debit 380,000
Sales ledger — Credit 105,000
Totals for the month: Credit purchases 646,000
Purchases returns 80,000
Credit sales 805,000
Sales returns 60,000
Cash paid to creditors 210,000
Cash received from debtors 400,000
Sales ledger balances off-set against purchases ledger balances 108,000
Bad debts written off 20,000
Dishonoured cheques 63,000
Discounts received 50,000
Discounts allowed 16,000
February 28: Purchases ledger — Debit 16,000
Sales ledger — Credit 42,000

Model answer

Purchases ledger control

Dr — Particulars Ksh Cr — Particulars Ksh
Opening debit balances 40,500 Opening credit balances 162,000
Returns outwards 80,000 Credit purchases 646,000
Cash paid 210,000 Closing debit balances c/d 16,000
Set-offs 108,000
Discounts received 50,000
Balance c/d 335,500
Total 824,000 Total 824,000

Balance b/d: Ksh 335,500 Cr.

Next-period balances: Ksh 335,500 Cr and Ksh 16,000 Dr.

Sales ledger control

Dr — Particulars Ksh Cr — Particulars Ksh
Opening debit balances 380,000 Opening credit balances 105,000
Credit sales 805,000 Returns inwards 60,000
Dishonoured cheques 63,000 Cash received 400,000
Closing credit balances c/d 42,000 Set-offs 108,000
Bad debts 20,000
Discounts allowed 16,000
Balance c/d 581,000
Total 1,290,000 Total 1,290,000

Balance b/d: Ksh 581,000 Dr.

Next-period balances: Ksh 581,000 Dr and Ksh 42,000 Cr.

Question 2(a) — 9 marks

The following balances were obtained from the books of account of Jasho Enterprises as at 31 December 2020. Prepare a trial balance as at 31 December 2020.

Particulars Ksh
Sales 1,200,000
Returns inwards 30,000
Returns outwards 40,000
Purchases 850,000
Bank loan 500,000
Cash at bank 420,000
Rent received 10,000
Salaries and wages 310,000
Capital 700,000
Sundry expenses 80,000
Discounts received 15,000
Accounts receivable 810,000
Furniture 635,000
Accounts payable 670,000

Model answer

Account Dr Ksh Cr Ksh
Sales 1,200,000
Returns inwards 30,000
Returns outwards 40,000
Purchases 850,000
Bank loan 500,000
Cash at bank 420,000
Rent received 10,000
Salaries and wages 310,000
Capital 700,000
Sundry expenses 80,000
Discounts received 15,000
Accounts receivable 810,000
Furniture 635,000
Accounts payable 670,000
Total 3,135,000 3,135,000

Question 2(b) — 11 marks

Hoda Enterprises does not keep proper books of account. The following information is available. Prepare an income statement for the year ended 31 December 2020.

(i) Cash Book Summary

Receipts Ksh Payment Ksh
Cash sales 800,000 Electricity 35,000
Debtors 600,000 Rent 265,000
Creditors 400,000
General expenses 44,000

(ii) Balances

Item 1 January 2020 31 December 2020
Inventory ? 149,400
Accounts receivables 190,000 248,600
Accounts payable 110,000 70,000

(iii) All purchases were made on credit. (iv) The gross profit margin is 30%.

Model answer

Step Working Ksh
Credit sales 600,000 + 248,600 − 190,000 658,600
Total sales 800,000 + 658,600 1,458,600
Purchases 400,000 + 70,000 − 110,000 360,000
Gross profit 1,458,600 × 30% 437,580
Cost of sales 1,458,600 × 70% 1,021,020
Opening inventory 1,021,020 − 360,000 + 149,400 810,420

Hoda Enterprises — Income statement, year ended 31 December 2020

Particulars Ksh
Sales 1,458,600
Opening inventory 810,420
Purchases 360,000
Less closing inventory 149,400
Cost of sales 1,021,020
Gross profit 437,580
Electricity 35,000
Rent 265,000
General expenses 44,000
Total expenses 344,000
Net profit 93,580

Question 3(a) — 8 marks

Explain four causes of depreciation on non-current assets.

Model answer

  1. Wear and tear: use causes physical deterioration of components.
  2. Passage of time: ageing, weather or corrosion can reduce usefulness even when an asset is idle.
  3. Obsolescence: improved technology or changed demand can make existing equipment less useful.
  4. Exhaustion/depletion or expiry: a finite resource or legal/useful life is consumed over time or through use.

Question 3(b) — 12 marks

The following information relates to Afanta Enterprises for the year ended 31 December 2020. Prepare an income statement for the year ended 31 December 2020.

Particulars Ksh
Inventory (1 January 2020) 108,000
Purchases 400,000
Motor vehicles 2,000,000
Sales 1,900,000
Returns outwards 60,000
Carriage inwards 40,000
Carriage outwards 35,000
Salaries and wages 220,000
Discounts allowed 22,000
Discounts received 52,000
Bad debts 33,000
Accounts receivable 600,000
Provision for doubtful debts (1 January 2020) 35,000
Inventory (31 December 2020) 72,000

Additional information:

(i) Provision for depreciation on motor vehicle is provided at 15% per annum on cost.

(ii) The provision for doubtful debts is to be adjusted to 5% of the accounts receivable.

Model answer

Adjustment Working Ksh
Depreciation 2,000,000 × 15% 300,000
Closing doubtful-debt provision 600,000 × 5% 30,000
Provision decrease credited to profit 35,000 − 30,000 5,000

Afanta Enterprises — Income statement, year ended 31 December 2020

Particulars Ksh
Sales 1,900,000
Opening inventory 108,000
Net purchases: 400,000 − 60,000 340,000
Carriage inwards 40,000
Less closing inventory 72,000
Cost of sales 416,000
Gross profit 1,484,000
Discounts received 52,000
Decrease in doubtful-debt provision 5,000
Total income 1,541,000
Carriage outwards 35,000
Salaries and wages 220,000
Discounts allowed 22,000
Bad debts 33,000
Depreciation 300,000
Total expenses 610,000
Net profit 931,000

Question 4(a) — 8 marks

Explain four qualities of good accounting information.

Model answer

  1. Relevance: information helps users assess past performance or make decisions about future actions.
  2. Faithful representation/reliability: information is complete, neutral and free from material error so users can depend on it.
  3. Comparability: consistent policies and presentation allow comparison between periods and businesses.
  4. Understandability: clear classification and explanations make information comprehensible to users with reasonable business knowledge.

Question 4(b) — 12 marks

The following is the receipts and payments account of Haitas Club for the year ended 31 December, 2020. Prepare: (i) An income and expenditure account for the year ended 31 December 2020; (ii) A statement of financial position as at 31 December 2020.

Receipts Ksh Payments Ksh
Balance b/f 420,000 Bar purchases 60,000
Subscriptions 2,200,000 Equipment 110,000
Bar sales 130,000 Electricity 15,000
Raffle tickets 86,000 Wages 190,000
Competition prizes 40,000
Rent 150,000
Balance c/f 2,271,000
Total 2,836,000 Total 2,836,000
Balances as at 31 December 2019 31 December 2020
Bar stock 20,000 25,000
Equipment (book value) 720,000 747,000
Subscriptions in arrears 320,000 180,000
Subscriptions in advance 110,000 65,000
Rent prepaid 20,000 25,000
Accrued electricity 6,000 4,000

Model answer

Adjustment Working Ksh
Subscriptions earned 2,200,000 + 180,000 − 320,000 + 110,000 − 65,000 2,105,000
Bar cost of sales 20,000 + 60,000 − 25,000 55,000
Bar gross profit 130,000 − 55,000 75,000
Electricity 15,000 + 4,000 − 6,000 13,000
Rent 150,000 + 20,000 − 25,000 145,000
Depreciation 720,000 + 110,000 − 747,000 83,000

Income and expenditure account — year ended 31 December 2020

Particulars Ksh
Subscriptions 2,105,000
Bar surplus 75,000
Raffle tickets 86,000
Total income 2,266,000
Electricity 13,000
Wages 190,000
Competition prizes 40,000
Rent 145,000
Depreciation 83,000
Total expenditure 471,000
Surplus 1,795,000

Statement of financial position — 31 December 2020

Particulars Ksh
Equipment 747,000
Bar inventory 25,000
Subscriptions in arrears 180,000
Rent prepaid 25,000
Cash/bank balance 2,271,000
Total assets 3,248,000
Opening accumulated fund 1,384,000
Add surplus 1,795,000
Closing accumulated fund 3,179,000
Subscriptions in advance 65,000
Accrued electricity 4,000
Fund and liabilities 3,248,000

Question 5(a) — 8 marks

Explain four reasons that make a cash book to be considered as a journal and a ledger.

Model answer

  1. It is a journal because cash/bank transactions are first recorded there from source documents.
  2. It records those original entries chronologically, with dates and transaction details.
  3. It is a ledger because its debit and credit columns constitute the cash and bank accounts.
  4. It is balanced to establish cash/bank balances used in the trial balance, so separate cash and bank accounts need not be maintained elsewhere.

Question 5(b) — 12 marks

On 28 February 2021, the cash book (bank column) of Hakiki Ventures had a debit balance of Ksh.105,200 while the bank statement showed a debit balance of Ksh.3,790 for the same period. Upon comparison the following discrepancies were revealed. Prepare: (i) An updated cash book; (ii) A bank reconciliation statement as on 28 February 2021.

(i) Uncredited cheques amounted to Ksh.201,220.

(ii) Cheques totalling Ksh.32,100 had been dishonoured by the bank.

(iii) The bank had received dividends of Ksh.24,000 on behalf of Hakiki Ventures.

(iv) Direct deposits amounted to Ksh.120,000.

(v) Standing orders amounted to Ksh.23,050.

(vi) Bank orders amounted to Ksh.4,310.

(vii) The opening balance in the cash book had been overstated by Ksh.10,100.

(viii) The bank has erroneously debited Hakiki’s account with Ksh.65,210.

(ix) Unpresented cheques amounted to Ksh.83,000.

Model answer

Updated bank account

Dr — Particulars Ksh Cr — Particulars Ksh
Balance b/d 105,200 Dishonoured cheques 32,100
Dividends 24,000 Standing orders 23,050
Direct deposits 120,000 Bank orders / bank debit 4,310
Opening overstatement 10,100
Balance c/d 179,640
Total 249,200 Total 249,200

Balance b/d: Ksh 179,640 Dr.

Particulars Ksh
Bank statement overdraft -3,790
Add uncredited cheques 201,220
Less unpresented cheques -83,000
Add erroneous bank debit 65,210
Adjusted cash-book debit balance 179,640

Question 6(a) — 10 marks

The trial balance of Bamas Enterprises as at 31 December 2020 failed to agree, the debits exceeding the credits by Ksh.110,000. Upon investigations, the following errors were revealed. Prepare: (i) Journal entries to correct the errors above; (ii) Suspense account.

(i) The wages account has been overcast by Ksh.80,000.

(ii) Rent payment of Ksh.25,000 had been credited in the rent receivable account.

(iii) A purchase of an office printer for Ksh.10,000 had been debited in the office expenses account.

(iv) A sale of goods for Ksh.18,000 on credit to Timothy had not been entered in the books.

(v) The purchases account had been undercast by Ksh.29,000.

(vi) Discount allowed account had been overcast by Ksh.9,000.

Model answer

Assuming the cash side of the rent payment was correct, the listed errors explain a Ksh 10,000 debit excess, not the printed Ksh 110,000. The remaining Ksh 100,000 suspense credit is an unresolved source-data difference.

Entry Account / explanation Debit Ksh Credit Ksh
I
Dr Suspense 80,000
Cr Wages 80,000
II
Dr Rent expense 25,000
Dr Rent receivable/income 25,000
Cr Suspense 50,000
III
Dr Office equipment — printer 10,000
Cr Office expenses 10,000
IV
Dr Timothy 18,000
Cr Sales 18,000
V
Dr Purchases 29,000
Cr Suspense 29,000
VI
Dr Suspense 9,000
Cr Discounts allowed 9,000

Suspense account — residual shown

Dr — Particulars Ksh Cr — Particulars Ksh
Wages correction 80,000 Opening difference as printed 110,000
Discount correction 9,000 Rent corrections 50,000
Balance c/d 100,000 Purchases correction 29,000
Total 189,000 Total 189,000

Balance b/d: Ksh 100,000 Cr.

Question 6(b) — 10 marks

The following expenditure was incurred by Sammy Traders in the month of January 2021. Determine the total: (i) Capital expenditure; (ii) Revenue expenditure.

Particulars Ksh
Discounted allowed 50,000
Extension of office block 200,000
Transport 180,000
Purchase of office furniture 240,000
Purchase of office pens 1,400
Salaries 350,000
Repairs to office furniture 150,000
Installation of electric gate 80,000

Model answer

Transport is treated as a routine operating cost because the question does not link it to acquiring or installing an asset.

Expenditure Capital Ksh Revenue Ksh
Discounted allowed 50,000
Extension of office block 200,000
Transport 180,000
Purchase of office furniture 240,000
Purchase of office pens 1,400
Salaries 350,000
Repairs to office furniture 150,000
Installation of electric gate 80,000
Total 520,000 731,400

Question 7(a) — 8 marks

Highlight four uses of a general journal.

Model answer

  1. Record opening entries for assets, liabilities and capital brought into the accounts.
  2. Correct errors that are not dealt with through a special journal.
  3. Record non-cash adjusting entries, such as depreciation or accruals.
  4. Record credit purchases/disposals of non-current assets that do not belong in the trading-goods purchases/sales journals.

Question 7(b) — 12 marks

On 1 February 2021, Jakah Limited had Ksh.191,000 in cash and Ksh.137,000 at bank. The following transactions took place during the month of February 2021. Prepare a three column cash book to record the transactions above.

February Transaction
3 Received a cheque for Ksh.120,000 from Timothy.
4 Paid wages of Ksh.45,000 in cash and Ksh.80,000 by cheque.
8 Received cash Ksh.15,360 from James after deducting 4% cash discount.
9 Paid fuel cost of Ksh.4,000 in cash.
12 Cash sales amounted to Ksh.30,000.
13 Settled Dorka’s account of Ksh.40,000 by cheque less 4% cash discount.
15 Took Ksh.97,000 from the cash till for personal use.
16 Maureen settled her account of Ksh.8,000 in cash.
19 Cash sales directly deposited into the bank account Ksh.11,000.
24 Withdrew Ksh.15,000 from bank for office use.
25 Settled Akinyi’s account of Ksh.60,000 by cheque less Ksh.1,800 cash discount.
28 Deposited all the cash into the bank except Ksh.9,000.

Model answer

Step Working Ksh
James gross debt 15,360 ÷ 96% 16,000
James discount 16,000 − 15,360 640
Dorka discount 40,000 × 4% 1,600
Dorka cheque 40,000 − 1,600 38,400
Akinyi cheque 60,000 − 1,800 58,200
Cash before deposit 191,000 + 15,360 + 30,000 + 8,000 + 15,000 − 45,000 − 4,000 − 97,000 113,360
Final deposit 113,360 − 9,000 104,360

Dr — Receipts (discount allowed)

Date Details Discount Ksh Cash Ksh Bank Ksh
1 Balance b/d 0 191,000 137,000
3 Timothy 0 0 120,000
8 James 640 15,360 0
12 Sales 0 30,000 0
16 Maureen 0 8,000 0
19 Sales 0 0 11,000
24 Bank C 0 15,000 0
28 Cash C 0 0 104,360
Total 640 259,360 372,360

Cr — Payments (discount received)

Date Details Discount Ksh Cash Ksh Bank Ksh
4 Wages 0 45,000 80,000
9 Fuel 0 4,000 0
13 Dorka 1,600 0 38,400
15 Drawings 0 97,000 0
24 Cash C 0 0 15,000
25 Akinyi 1,800 0 58,200
28 Bank C 0 104,360 0
End Balance c/d 0 9,000 0
End Balance c/d 0 0 180,760
Total 3,400 259,360 372,360

Balances brought down: cash Ksh 9,000 Dr; bank Ksh 180,760 Dr. Contra entries are marked C.

PreviousNext