Financial Accounting — Undated

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

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Question 1(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 1(b) — 12 marks

Jesse, a trader, bought the following items on credit from Meru Wholesalers on 1 July 2018. The terms of sale were: 5% trade discount; 2% cash discount if the invoice is settled within 30 days. (i) Prepare an invoice. (ii) Jesse settled his account on 25 July 2018. Determine the amount paid by Jesse.

(i) 50 kg of sugar at Ksh.90 per kg.

(ii) 25 kg of rice at Ksh.152 per kg.

(iii) 2 cartons of bar soap at Ksh.4,200 per carton.

(iv) 12 bottles of washing detergent at Ksh.150 per bottle.

(v) 50 tins of 50 ml shoe polish at Ksh.200 per tin.

(vi) 3 crates of soda at Ksh.720 per crate.

Model answer

MERU WHOLESALERS — INVOICE

Date: 1 July 2018
Customer: Jesse
Credit terms: 2% cash discount if settled within 30 days.

Description Quantity Unit price Ksh Amount Ksh
Sugar 50 kg 90 4,500
Rice 25 kg 152 3,800
Bar soap 2 cartons 4,200 8,400
Washing detergent 12 bottles 150 1,800
50 ml shoe polish 50 tins 200 10,000
Soda 3 crates 720 2,160
Gross total 30,660
Less trade discount (30,660 × 5%) 1,533
Net invoice amount 29,127

Settlement on 25 July 2018

Step Working Ksh
Cash discount allowed 29,127 × 2% 582.54
Amount paid 29,127 − 582.54 28,544.46

Settlement is within 30 days. The conditional cash discount is deducted at settlement, after the trade discount.

Question 2(a) — 8 marks

Explain each of the following accounting concepts:

(i) materiality concept;

(ii) prudence concept;

(iii) historical cost concept;

(iv) going concern concept.

Model answer

  1. Materiality: disclose and classify information whose omission/misstatement could influence users’ decisions, considering size and nature.
  2. Prudence: exercise caution in uncertain estimates so that assets/income are not overstated and liabilities/expenses are not understated.
  3. Historical cost: initially record an asset at its acquisition cost, including directly attributable costs of bringing it into use, subject to the applicable subsequent measurement policy.
  4. Going concern: assume continued operation for the foreseeable future unless liquidation/cessation is intended or unavoidable.

Question 2(b) — 12 marks

On 31 May 2018, the bank statement of Oyundi Traders showed a credit balance of Ksh.860,400. On the same date, the cash book showed a bank balance of Ksh.1,058,000. On comparison of the two documents, the following discrepancies were revealed. Prepare: (I) an updated cash book; (II) a bank reconciliation statement.

(i) A cash deposit of Ksh.102,000 was recorded in the bank statement as Ksh.300,000.

(ii) A cheque of Ksh.160,000 belonging to a different firm had been credited in the bank statement.

(iii) A standing order of Ksh.126,000 had been paid by the bank.

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

(v) A cheque of Ksh.738,000 paid into the bank had not been credited.

(vi) A cheque of Ksh.140,000 from a customer had been dishonoured.

(vii) A dividend of Ksh.180,000 had been received directly by the bank.

(viii) Cheques issued to suppliers amounting to Ksh.280,000 had not yet been presented to the bank.

Model answer

Using the figures as printed leaves an unexplained Ksh 400 difference. It is shown for investigation rather than removed through an invented entry.

Updated bank account

Dr — Particulars Ksh Cr — Particulars Ksh
Balance b/d 1,058,000 Standing order 126,000
Dividend received 180,000 Bank charges 11,200
Dishonoured cheque 140,000
Balance c/d 960,800
Total 1,238,000 Total 1,238,000

Balance b/d: Ksh 960,800 Dr.

Particulars Ksh
Bank statement credit balance 860,400
Less deposit over-credit: 300,000 − 102,000 -198,000
Less cheque belonging to another firm -160,000
Add uncredited deposit 738,000
Less unpresented cheques -280,000
Adjusted statement-side figure 960,400
Adjusted cash-book balance 960,800
Difference requiring investigation 400

Question 3(a) — 8 marks

Explain four differences between capital expenditure and revenue expenditure.

Model answer

Capital expenditure Revenue expenditure
Acquires/improves a non-current asset Maintains operations or earns current-period income
Benefits more than one period Benefits mainly the current accounting period
Initially recognised as an asset Normally charged as an expense in the income statement
Example: extending a warehouse Example: routine warehouse repairs

Question 3(b) — 12 marks

The following transactions relate to Juddy Traders for the month of April 2019. Prepare: (i) sales journal; (ii) purchases journal; (iii) returns inwards journal; (iv) returns outwards journal.

April Transaction
1 Purchased goods for Ksh.50,00 from Suntra Suppliers on credit.
7 Purchased goods for Ksh.150,000 from Temba Stores on credit.
15 Returned goods worth Ksh.30,000 to Temba Stores.
18 Sold goods for Ksh.200,000 to Atiti on credit.
20 Purchased goods for Ksh.180,000 from KN Stores on credit.
23 Sold goods for Ksh.300,000 to Jane on credit.
25 Atiti returned goods worth Ksh.15,000.
28 Returned goods worth Ksh.10,000 to KN Stores.
30 Sold goods for Ksh.120,000 to Mary on credit.

Model answer

The first amount is printed “50,00”. The main working interprets it as Ksh 50,000. If read as Ksh 5,000, the purchases journal total is Ksh 335,000 instead of Ksh 380,000.

Sales journal

Date Customer Ksh
18 Atiti 200,000
23 Jane 300,000
30 Mary 120,000
Total 620,000

Purchases journal

Date Supplier Ksh
1 Suntra — interpretation stated 50,000
7 Temba Stores 150,000
20 KN Stores 180,000
Total 380,000

Returns inwards journal

Date Customer Ksh
25 Atiti 15,000
Total 15,000

Returns outwards journal

Date Supplier Ksh
15 Temba Stores 30,000
28 KN Stores 10,000
Total 40,000

Question 4(a) — 12 marks

On 1 August 2018, Emba Limited had Ksh.400,000 in cash and Ksh.600,000 at the bank. The following transactions took place during the month. Prepare a three column cash book for the month of August 2018.

August Transaction
2 Bought goods for Ksh.122,000 and paid by cheque.
3 Bought stationery for Ksh.16,000 in cash.
4 Sold goods for Ksh.120,000 in cash.
16 Paid Kemira Suppliers Ksh.140,000 by cheque.
19 Paid electricity for Ksh.60,000 in cash.
24 Received Ksh.38,000 in cash from Amido after allowing a 2% cash discount.
27 Sold goods for Ksh.45,000 in cash.
28 Deposited Ksh.20,000 of the cash into the bank account.
29 Paid rent for Ksh.25,000 in cash.
30 James settled his account of Ksh.40,000 in cash less 2% cash discount.
31 Settled Juma’s account of Ksh.90,000 in cash less 5% cash discount.

Model answer

Step Working Ksh
Amido gross debt 38,000 ÷ 98% 38,775.51
Amido discount 38,775.51 − 38,000 775.51
James discount 40,000 × 2% 800
James cash 40,000 − 800 39,200
Juma discount 90,000 × 5% 4,500
Juma cash 90,000 − 4,500 85,500

Dr — Receipts (discount allowed)

Date Details Discount Ksh Cash Ksh Bank Ksh
1 Balance b/d 0 400,000 600,000
4 Sales 0 120,000 0
24 Amido 775.51 38,000 0
27 Sales 0 45,000 0
28 Cash C 0 0 20,000
30 James 800 39,200 0
Total 1,575.51 642,200 620,000

Cr — Payments (discount received)

Date Details Discount Ksh Cash Ksh Bank Ksh
2 Purchases 0 0 122,000
3 Stationery 0 16,000 0
16 Kemira 0 0 140,000
19 Electricity 0 60,000 0
28 Bank C 0 20,000 0
29 Rent 0 25,000 0
31 Juma 4,500 85,500 0
End Balance c/d 0 435,700 0
End Balance c/d 0 0 358,000
Total 4,500 642,200 620,000

Balances brought down: cash Ksh 435,700 Dr; bank Ksh 358,000 Dr. Contra entries are marked C.

Question 4(b) — 8 marks

The following information relates to the debtors of Nyak Enterprises as at 31 December 2016, 2017 and 2018. For the years ended 31 December 2016, 2017 and 2018, prepare: (i) bad debts; (ii) provision for doubtful debts account.

Year Bad debts written off Ksh Provision for doubtful debts Ksh
2016 6,000 1,600
2017 8,400 1,480
2018 4,600 1,820

Model answer

No opening provision before 2016 is supplied; assume none. A supplied opening balance would alter only the initial-year provision expense.

Bad debts — 2016

Dr — Particulars Ksh Cr — Particulars Ksh
Receivables written off 6,000 Income statement 6,000
Total 6,000 Total 6,000

Bad debts — 2017

Dr — Particulars Ksh Cr — Particulars Ksh
Receivables written off 8,400 Income statement 8,400
Total 8,400 Total 8,400

Bad debts — 2018

Dr — Particulars Ksh Cr — Particulars Ksh
Receivables written off 4,600 Income statement 4,600
Total 4,600 Total 4,600

Provision for doubtful debts — 2016

Dr — Particulars Ksh Cr — Particulars Ksh
Balance c/d 1,600 Income statement 1,600
Total 1,600 Total 1,600

Balance b/d: Ksh 1,600 Cr.

Provision for doubtful debts — 2017

Dr — Particulars Ksh Cr — Particulars Ksh
Decrease credited to income statement 120 Balance b/d 1,600
Balance c/d 1,480
Total 1,600 Total 1,600

Balance b/d: Ksh 1,480 Cr.

Provision for doubtful debts — 2018

Dr — Particulars Ksh Cr — Particulars Ksh
Balance c/d 1,820 Balance b/d 1,480
Increase charged to income statement 340
Total 1,820 Total 1,820

Balance b/d: Ksh 1,820 Cr.

Year Bad-debt charge Provision charge/(release) Total expense
2016 6,000 1,600 7,600
2017 8,400 -120 8,280
2018 4,600 340 4,940

Question 5(a) — 12 marks

On 1 May 2019, Arabi Enterprises started business by depositing Ksh.500,000 into the bank account. The following transactions took place during the month. Prepare ledger accounts to record the transactions above.

May Transaction
3 Sold goods for Ksh.120,000 in cash.
6 Bought a motor vehicle for Ksh.1,200,000 and paid by cheque.
8 Sold goods for Ksh.200,000 to Tom on credit.
9 Paid wages for Ksh.30,000 in cash.
12 Tom settled his account in cash.
16 Paid for electricity Ksh.5,000 by cheque.
22 Bought stationery for Ksh.15,000 in cash.
28 Bought goods for Ksh.60,000 in cash.
30 Received a cheque of Ksh.90,000 in respect of a bank loan.
30 Paid Ksh.15,000 for rent in cash.
31 Brought furniture of Ksh.120,000 for business use.

Model answer

Bank

Dr — Particulars Ksh Cr — Particulars Ksh
May 1 — Capital 500,000 May 6 — Motor vehicle 1,200,000
May 30 — Bank loan 90,000 May 16 — Electricity 5,000
Balance c/d 615,000
Total 1,205,000 Total 1,205,000

Balance b/d: Ksh 615,000 Cr.

Capital

Dr — Particulars Ksh Cr — Particulars Ksh
Balance c/d 620,000 May 1 — Bank 500,000
May 31 — Furniture 120,000
Total 620,000 Total 620,000

Balance b/d: Ksh 620,000 Cr.

Cash

Dr — Particulars Ksh Cr — Particulars Ksh
May 3 — Sales 120,000 May 9 — Wages 30,000
May 12 — Tom 200,000 May 22 — Stationery 15,000
May 28 — Purchases 60,000
May 30 — Rent 15,000
Balance c/d 200,000
Total 320,000 Total 320,000

Balance b/d: Ksh 200,000 Dr.

Sales

Dr — Particulars Ksh Cr — Particulars Ksh
Balance c/d 320,000 May 3 — Cash 120,000
May 8 — Tom 200,000
Total 320,000 Total 320,000

Balance b/d: Ksh 320,000 Cr.

Motor vehicle

Dr — Particulars Ksh Cr — Particulars Ksh
May 6 — Bank 1,200,000 Balance c/d 1,200,000
Total 1,200,000 Total 1,200,000

Balance b/d: Ksh 1,200,000 Dr.

Tom

Dr — Particulars Ksh Cr — Particulars Ksh
May 8 — Sales 200,000 May 12 — Cash 200,000
Total 200,000 Total 200,000

Wages

Dr — Particulars Ksh Cr — Particulars Ksh
May 9 — Cash 30,000 Balance c/d 30,000
Total 30,000 Total 30,000

Balance b/d: Ksh 30,000 Dr.

Electricity

Dr — Particulars Ksh Cr — Particulars Ksh
May 16 — Bank 5,000 Balance c/d 5,000
Total 5,000 Total 5,000

Balance b/d: Ksh 5,000 Dr.

Stationery

Dr — Particulars Ksh Cr — Particulars Ksh
May 22 — Cash 15,000 Balance c/d 15,000
Total 15,000 Total 15,000

Balance b/d: Ksh 15,000 Dr.

Purchases

Dr — Particulars Ksh Cr — Particulars Ksh
May 28 — Cash 60,000 Balance c/d 60,000
Total 60,000 Total 60,000

Balance b/d: Ksh 60,000 Dr.

Bank loan

Dr — Particulars Ksh Cr — Particulars Ksh
Balance c/d 90,000 May 30 — Bank 90,000
Total 90,000 Total 90,000

Balance b/d: Ksh 90,000 Cr.

Rent

Dr — Particulars Ksh Cr — Particulars Ksh
May 30 — Cash 15,000 Balance c/d 15,000
Total 15,000 Total 15,000

Balance b/d: Ksh 15,000 Dr.

Furniture

Dr — Particulars Ksh Cr — Particulars Ksh
May 31 — Capital 120,000 Balance c/d 120,000
Total 120,000 Total 120,000

Balance b/d: Ksh 120,000 Dr.

Question 5(b) — 8 marks

Explain each of the following accounting terms:

(i) error of principle;

(ii) error of original entry;

(iii) error of commission;

(iv) error of complete reversal of entries.

Model answer

  1. Error of principle: an entry is posted to the wrong class of account, such as charging equipment purchase to an expense account.
  2. Error of original entry: the wrong amount is entered in the original record and carried to both debit and credit accounts.
  3. Error of commission: the correct amount is posted to the wrong account within the same class, such as the wrong customer.
  4. Error of complete reversal: the correct accounts and amount are used but the debit and credit sides are reversed.

Question 6(a) — 12 marks

The following information relates to Sambo Traders. Prepare: (i) sales ledger control account; (ii) purchases ledger control account.

Particulars Ksh
Balances as at 1 January 2019: Debtors 7,400,000
Creditors 5,600,000
Summary of transactions during the month: Sales journal 1,100,000
Purchases journal 1,980,000
Returns outwards 80,000
Cheques received from customers 5,000,000
Dishonoured cheques received from customers 200,000
Discounts allowed 51,000
Bad debts 16,000
Inter ledger transfers 40,000
Cash payments to suppliers 1,300,000
Returns inwards 32,000
Discounts received 120,000
Cheque payments to creditors 4,500,000
Cash received from debtors 1,400,000
31 January 2019: Debtors ledgers — Cr 42,000
Creditors ledgers — Dr 76,000

Model answer

Sales ledger control

Dr — Particulars Ksh Cr — Particulars Ksh
Opening debtors 7,400,000 Cheques received 5,000,000
Credit sales 1,100,000 Discounts allowed 51,000
Dishonoured cheques 200,000 Bad debts 16,000
Closing credit balances c/d 42,000 Inter-ledger set-offs 40,000
Returns inwards 32,000
Cash received 1,400,000
Balance c/d 2,203,000
Total 8,742,000 Total 8,742,000

Balance b/d: Ksh 2,203,000 Dr.

Bring down Ksh 2,203,000 Dr and Ksh 42,000 Cr separately.

Purchases ledger control

Dr — Particulars Ksh Cr — Particulars Ksh
Returns outwards 80,000 Opening creditors 5,600,000
Inter-ledger set-offs 40,000 Credit purchases 1,980,000
Cash paid 1,300,000 Closing debit balances c/d 76,000
Discounts received 120,000
Cheques paid 4,500,000
Balance c/d 1,616,000
Total 7,656,000 Total 7,656,000

Balance b/d: Ksh 1,616,000 Cr.

Bring down Ksh 1,616,000 Cr and Ksh 76,000 Dr separately.

Question 6(b) — 8 marks

The following information relates to motor vehicles of Safari Enterprises. The firm depreciates motor vehicles at the rate of 20% per annum on cost. For the years ended 31 December 2015, 2016 and 2017, prepare: (i) motor vehicles account; (ii) provision for accumulated depreciation on motor vehicles account.

Registration No. Date of Acquisition Cost Ksh Date of Disposal Selling Price Ksh
KA 1 January 2015 900,000 31 December 2017 630,000
KB 1 January 2016 1,400,000 — —
KC 1 January 2017 840,000 — —

Model answer

Year KA charge KB charge KC charge Total depreciation
2015 180,000 0 0 180,000
2016 180,000 280,000 0 460,000
2017 180,000 280,000 168,000 628,000

Motor vehicles — 2015

Dr — Particulars Ksh Cr — Particulars Ksh
Bank — KA 900,000 Balance c/d 900,000
Total 900,000 Total 900,000

Balance b/d: Ksh 900,000 Dr.

Motor vehicles — 2016

Dr — Particulars Ksh Cr — Particulars Ksh
Balance b/d 900,000 Balance c/d 2,300,000
Bank — KB 1,400,000
Total 2,300,000 Total 2,300,000

Balance b/d: Ksh 2,300,000 Dr.

Motor vehicles — 2017

Dr — Particulars Ksh Cr — Particulars Ksh
Balance b/d 2,300,000 Disposal — KA cost 900,000
Bank — KC 840,000 Balance c/d 2,240,000
Total 3,140,000 Total 3,140,000

Balance b/d: Ksh 2,240,000 Dr.

Accumulated depreciation — 2015

Dr — Particulars Ksh Cr — Particulars Ksh
Balance c/d 180,000 Income statement 180,000
Total 180,000 Total 180,000

Balance b/d: Ksh 180,000 Cr.

Accumulated depreciation — 2016

Dr — Particulars Ksh Cr — Particulars Ksh
Balance c/d 640,000 Balance b/d 180,000
Income statement 460,000
Total 640,000 Total 640,000

Balance b/d: Ksh 640,000 Cr.

Accumulated depreciation — 2017

Dr — Particulars Ksh Cr — Particulars Ksh
Disposal — KA, three years × 180,000 540,000 Balance b/d 640,000
Balance c/d 728,000 Income statement 628,000
Total 1,268,000 Total 1,268,000

Balance b/d: Ksh 728,000 Cr.

Question 7(a) — 9 marks

The following balances were extracted from the books of account of Musa Traders as at 30 June 2018. Prepare an income statement for the year ended 30 June 2018.

Particulars Ksh
Inventory (1 July 2017) 15,360,000
Motor vehicles expenses 3,360,000
Purchases 172,000,000
Returns outwards 7,920,000
Returns inwards 1,000,000
Discounts received 1,480,000
Sundry expenses 700,000
Equipment 4,800,000
Rent expense 8,400,000
Discounts allowed 2,320,000
Sales 185,440,000
Furniture 3,280,000
Salaries and wages 29,680,000

Additional information:

(i) Inventory as at 30 June 2018 was valued at Ksh.20,640,000.

(ii) Depreciation: Furniture 10% per annum; Equipment 20% per annum.

Model answer

Adjustment Working Ksh
Furniture depreciation 3,280,000 × 10% 328,000
Equipment depreciation 4,800,000 × 20% 960,000

Musa Traders — Income statement, year ended 30 June 2018

Particulars Ksh
Net sales: 185,440,000 − 1,000,000 184,440,000
Opening inventory 15,360,000
Net purchases: 172,000,000 − 7,920,000 164,080,000
Less closing inventory 20,640,000
Cost of sales 158,800,000
Gross profit 25,640,000
Discounts received 1,480,000
Total income 27,120,000
Motor vehicle expenses 3,360,000
Sundry expenses 700,000
Rent 8,400,000
Discounts allowed 2,320,000
Salaries and wages 29,680,000
Furniture depreciation 328,000
Equipment depreciation 960,000
Total expenses 45,748,000
Net loss 18,628,000

Question 7(b) — 11 marks

Sarah does not maintain a complete set of accounting records. However, the following information is available for the year ended 31 December 2018. Prepare an income statement for the year ended 31 December 2018.

Particulars Ksh
Receipts: Cash sales 200,000
Trade receivables 1,400,000
Payments: Rent 84,000
Trade payables 1,800,000
Salaries 200,000
Electricity 98,000
Assets and liabilities as at 31 December 2017 31 December 2018
Inventories 300,000 1,900,000
Motor vehicles 2,365,000 2,183,000
Trade payables 540,000 660,000
Accrued rent 52,000 96,000
Prepaid electricity 48,000 30,000
Trade receivables 1,200,000 600,000

Additional information:

(i) Discounts allowed and discounts received during the year amounted to Ksh.140,000 and Ksh.120,000 respectively.

(ii) Returns inwards and returns outwards were Ksh.10,000 and Ksh.12,000 respectively.

Model answer

Step Working Ksh
Gross credit sales 1,400,000 + 600,000 − 1,200,000 + 140,000 + 10,000 950,000
Net sales including cash sales 950,000 + 200,000 − 10,000 1,140,000
Gross credit purchases 1,800,000 + 660,000 − 540,000 + 120,000 + 12,000 2,052,000
Net purchases 2,052,000 − 12,000 2,040,000
Rent expense 84,000 + 96,000 − 52,000 128,000
Electricity expense 98,000 + 48,000 − 30,000 116,000
Vehicle depreciation (no additions/disposals stated) 2,365,000 − 2,183,000 182,000

Sarah — Income statement, year ended 31 December 2018

Particulars Ksh
Net sales 1,140,000
Opening inventory 300,000
Net purchases 2,040,000
Less closing inventory 1,900,000
Cost of sales 440,000
Gross profit 700,000
Discounts received 120,000
Total income 820,000
Rent 128,000
Salaries 200,000
Electricity 116,000
Discounts allowed 140,000
Vehicle depreciation 182,000
Total expenses 766,000
Net profit 54,000
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