Tourism Accounting — July 2022

Question 1(a)

Explain each of the following accounting concepts: (i) Going concern concept. (ii) Consistency concept. (iii) Materiality concept. (iv) Accruals concept. (8 marks)

Answer

1. Going concern: accounts normally assume the business will continue operating for the foreseeable future, rather than liquidate or cease trading. This supports using the normal accounting basis rather than forced-sale values.
2. Consistency: use accounting policies consistently for similar transactions and across periods so results can be compared. A justified policy change is possible, but its nature and effects should be explained appropriately.
3. Materiality: information is material if omitting, misstating or obscuring it could reasonably influence users’ decisions. Materiality depends on both the amount and the nature of an item in its context.
4. Accruals: recognise income when earned and expenses when incurred in the relevant period, rather than only when cash is received or paid. This requires adjustments for accruals and prepayments.

Question 1(b)

On 31 January 2020, the trial balance of Lamex Restaurant failed to balance. The debit side exceeded the credit side by Ksh. 33,500. The difference was transferred to a suspense account. Upon investigations, the following errors were revealed. (i) Wages had been overcast by Ksh. 15,500. (ii) Sales account had been undercast by Ksh. 21,000. (iii) Discounts allowed of Ksh. 7,500 had been credited to the discounts received account. (iv) The purchase of a computer for Ksh. 95,000 had been debited in the purchases account. (v) Commission received of Ksh. 12,000 had been recorded in the cashbook only. Prepare: (I) general journal to correct the errors above. (II) suspense account, duly balanced. (12 marks)

Answer

Step 1: the debit excess requires an opening credit in suspense of Ksh. 33,500.

General journal — 31 January 2020

Suspense account

The suspense account closes with no balance: 15,500 + 21,000 + 12,000 = 33,500 + 15,000 = 48,500.

Question 2(a)

Highlight four benefits that may accrue to a business organization from using internet banking. (8 marks)

Answer

1. Convenience: authorised staff can access accounts and initiate permitted transactions without visiting a branch.
2. Time and administrative savings: electronic transfers and bill payments reduce travel, queues and manual paperwork.
3. Prompt information: current balances, statements and transaction records help the business monitor cash flow.
4. Efficient payments and reconciliation: electronic references and downloadable records help track supplier payments, customer receipts and account differences.

Question 2(b)

On 1 February 2020, Jalem Tours Limited had Ksh. 400,000 cash in hand and Ksh. 180,000 cash at the bank. The following transactions took place during the month.

Prepare a two-column cashbook. (12 marks)

Answer

1. Cash balance = 400,000 + 15,000 + 60,000 − 25,000 − 18,000 − 15,000 − 5,000 − 20,000 = 392,000.
2. Bank balance = 180,000 + 8,500 + 18,000 − 55,000 − 15,000 − 2,000 = 134,500.
3. The 5 February and 22 February transfers are contra entries, appearing once on each side in different money columns.

Question 3(a)

Highlight four differences between a Receipts and Payments Account and an Income and Expenditure Account. (8 marks)

Answer

Question 3(b)

The following information relates to motor vehicles of Msafiri Tours Limited.

(i) Acquisitions

(ii) Disposals

Additional information: Depreciation is provided for at the rate of 15% per annum on cost on a pro-rata basis. The financial year of Msafiri Tours Limited ends on 31 December.

For the years ended 31 December 2017, 2018 and 2019, prepare: (I) motor vehicles account; (II) provision for depreciation on motor vehicles account; (III) motor vehicles disposal account. (12 marks)

Answer

Step 1 — depreciation at 15% on cost, apportioned by months

KC1 is depreciated through 30 September 2019 because it is sold on 1 October. Accumulated depreciation on KC1 at disposal = 105,000 + 210,000 + 157,500 = 472,500. Its carrying amount = 1,400,000 − 472,500 = 927,500. Loss on disposal = 927,500 − 900,000 = 27,500.

Motor vehicles account — 2017

Motor vehicles account — 2018

Motor vehicles account — 2019

Provision for depreciation — 2017

Provision for depreciation — 2018

Provision for depreciation — 2019

Motor vehicles disposal account — 2019

There is no disposal in 2017 or 2018. At 31 December 2019 the remaining vehicles have cost Ksh. 3,000,000 less accumulated depreciation Ksh. 652,500, giving carrying amount Ksh. 2,347,500. Opening 2020 balances are Dr motor vehicles 3,000,000 and Cr provision 652,500.

Question 4(a)

Explain four contents of a partnership agreement. (8 marks)

Answer

1. Capital contributions: states how much each partner provides and how additional capital will be introduced.
2. Profit-and-loss sharing: specifies the ratio in which the partners divide profits and bear losses.
3. Remuneration and interest: sets any partner salaries, interest on capital and interest on drawings, including their calculation bases.
4. Management and changes in membership: defines authority and responsibilities and the procedures for admitting, retiring or settling with a partner.

Question 4(b)

On 29 February 2020, the cashbook (bank column) of Mwanga Hotel Limited showed a bank balance of Ksh. 1,200,000 while the bank statement showed a credit balance of Ksh. 1,004,900. Upon investigations, the following discrepancies were revealed: (I) A customer had deposited Ksh. 285,000 directly into the bank. (II) A cheque of Ksh. 46,500 had been dishonored by the bank. (III) Bank charges were Ksh. 42,600. (IV) Uncredited cheques amounted to Ksh. 245,500. (V) The bank had paid a standing order of Ksh. 133,000. (VI) Unrepresented cheques amounted to Ksh. 32,500. (VII) A cheque of Ksh. 294,000 paid to a creditor had been recorded as Ksh. 249,000 in the cash book. Prepare: (i) an updated cashbook; (ii) bank reconciliation statement. (12 marks)

Answer

Step 1: correct the understated payment: 294,000 − 249,000 = 45,000 additional credit in the cashbook.

Updated cashbook — bank column, 29 February 2020

Updated favourable bank balance = 1,200,000 + 285,000 − 46,500 − 42,600 − 133,000 − 45,000 = 1,217,900.

Bank reconciliation statement at 29 February 2020

Unpresented cheques have already reduced the cashbook but have not reduced the bank statement. Uncredited cheques have increased the cashbook but have not yet increased the bank statement. They are timing differences, so neither is posted again to the updated cashbook.

Question 5(a)

The following balances relate to the sales ledger of Hapix Restaurant for the month of December 2019:

Prepare a sales ledger control account. (8 marks)

Answer

Sales ledger control account — December 2019

Debit total before closing balances = 142,800 + 4,800 + 3,800 + 12,600 + 173,400 = 337,400. Other credits = 154,200. Add the closing credit balances 11,100 to the debit side, then the missing debit balances are 337,400 + 11,100 − 154,200 = 194,300. Closing net receivables = 194,300 − 11,100 = 183,200.

Question 5(b)

The following is the trial balance of Ralex Hotels Limited as at 31 December 2019.

Additional information: (I) Corporation tax is at 30%. (II) The directors proposed to transfer Ksh. 1,500,000 to the general reserve and pay a 10% ordinary dividend.

Prepare: (i) appropriation account; (ii) statement of financial position as at 31 December 2019. (12 marks)

Answer

Workings: corporation tax = 30% × 12,000,000 = 3,600,000. Ordinary dividend = 10% × 60,000,000 = 6,000,000. The main presentation below uses the traditional appropriation format and treats the proposed dividend as payable for that presentation; the standards-based alternative is explained afterwards.

Appropriation account — year ended 31 December 2019

Statement of financial position at 31 December 2019 — traditional appropriation presentation

Standards note: a dividend that is merely proposed, or declared after the reporting period, is not a liability at the reporting date under IAS 10. If that is the intended basis, omit the 6,000,000 dividend liability and retain that amount in equity: retained earnings become 11,900,000; total equity 74,800,000; current liabilities 5,400,000. Total equity and liabilities remains 90,200,000. A reserve transfer changes the allocation within equity, not total equity.

Reference: IFRS Foundation — IAS 10, paragraphs 12–13.

Question 6(a)

The following transactions relate to Limoh Traders for the month of January 2020.

Prepare ledger accounts to record the transactions above. (8 marks)

Answer

Use the printed Ksh. 96,000 payment to Kenny Traders. Because the recorded credit purchase was only Ksh. 90,000, the supplier account ends with a Ksh. 6,000 debit balance (an overpayment), rather than an invented discount.

Bank account

Cash account

Capital account

Purchases account

Sales account

Kenny Traders account

Drawings account

Rent account

The nominal accounts are shown carried forward for this monthly recording exercise; at the financial year-end they would be transferred to the relevant final accounts. No cost-of-sales amount is invented because no cost of the goods sold is supplied.

Question 6(b)

The following balances were extracted from the books of Litux Traders for the year ended 31 December 2019:

Additional information: As at 31 December, accrued salaries were Ksh. 45,000; outstanding electricity bill was Ksh. 5,500; insurance prepaid was Ksh. 12,000. Depreciation on equipment is provided at the rate of 20% per annum.

Prepare income statement for the year ended 31 December 2019. (12 marks)

Answer

Adjustment workings

Income statement — year ended 31 December 2019

Carriage inwards forms part of the cost of goods; carriage outwards is a selling expense. The supplied figures produce a net loss, so the result should not be changed to a profit.

Question 7(a)

The following are the assets and liabilities of Wasio Traders as at 1 January 2020.

Prepare a statement of financial position to determine capital as at 1 January 2020. (8 marks)

Answer

Statement of financial position at 1 January 2020

Capital = assets − liabilities = 5,180,500 − (1,500,000 + 820,000) = 2,860,500. NBV means net book value, so no further depreciation is deducted from the two supplied NBV figures.

Question 7(b)

The following balances relate to Telem Traders as at 31 December:

Additional information during the year, 2019:

Prepare: (i) insurance account; (ii) rent receivable account; (iii) rent expense account; (iv) electricity account; (v) rates account. (12 marks)

Answer

Step 1 — amounts transferred to the 2019 income statement

Insurance account — 2019

Rent receivable account — 2019

Rent expense account — 2019

Electricity account — 2019

Rates account — 2019

Opening accruals are obligations from the previous year, so payments settling them are excluded from this year’s expense. Opening prepayments become this year’s expense, while closing prepayments belong to the following year. Income adjustments work in the opposite direction to expense adjustments.