Reference no: EM13757022

QUESTION ONE:

a. Describe the following terms in relation to leasing:

I. Operating & capital lease (2 marks)

II. Annuity due & normal annuity (2 marks)

III. Implicit & incremental borrowing interest rates (2 marks)

IV. Rule of '78' and straight line methods (2 marks)

b. Ten Ten Traders bought goods from a supplier for Kshs.900, 000 on the terms 2.5/10, n/30 & trade discount of 3% on 1/11/11. The goods were paid for partially on 9/11/11 for Kshs.700, 000 and the remaining balance was settled on 28/11/11.

Required:

By way of journal entries, record the transaction in the books of Ten Ten Traders using;

a) Gross/ Face method

b) Net method

c. Sokia Enterprises on 1st Jan. 2010, begun selling new phones with a 2 year warranty against defects. Industry experience with similar phones indicates that estimated warranty costs are 9% of sales, where 3% occur during the 1st year of sale and 6% during the 2nd year of sale. Sales and actual warranty expenditure for years 2010 and 2011 were:

Year Sales Actual warranty cost
2010 Sh.6 million Sh.180,000
2011 Sh.12 million Sh.900,000

Required:

(i) Using journal entries, record the sales and warranty costs for 2007 and 2008

(ii) Determine the balance remaining in estimated warranty liability.

QUESTION TWO

a) Compute the present value, process of the bond, and then prepare relevant journal entries for issuance & the initial 2 payments and balance sheet extract for the initial 2 periods of a term bond with the following features: Issuance date: 1st April 2010 Issuance period: 2.5 years Face value Sh.500,000 Stated interest: 4% Yield rate: 6% Frequency of payments: semi-annually Note: assume the effective interest or straight line methods.

b) Compute the present value, process of the bond, and then prepare relevant journal entries for issuance & the initial 2 payments and balance sheet extract for the initial 2 periods of a serial bond with the following features: Issuance date: 1st April 2010 Issuance period: 2.5 years Face value Sh.500,000 Stated interest: 4% Yield rate: 6% Frequency of payments: semi-annually Note: assume the effective interest

QUESTION THREE

a) ASALI LTD had 360,000 equity shares outstanding as at 1st July 2011. The company issued an additional 120,000 equity shares on 1st October 2011. On 1st January 2012, the company redeemed 156,000 of its equity shares and on 1st May 2012, the company issued a further 240,000 equity shares. All the equity shares had a par value of Sh.2 and a market value of Sh.10. The company had 9% 1,800,000 4 year debentures of Sh.20 outstanding at the beginning of the year. It further issued 7% 200,000 debentures 3 year of Sh.20 on 1st November 2011. The company had 6% 1,600,000 cumulative preference shares of Sh.20 outstanding as at the beginning
of the year. It further issued an additional 7% 400,000 cumulative preference shares of Sh.20 on 1st March 2012.

In the year ended 30th June 2012, the company had net profits from operations of Sh.40 million and profits from investments of Sh.36 million. Assume corporation tax of 30%.

Required: compute the basic earnings per share.

b) on 1st January 2008 issued 9%, 1,000,000 non-cummulative, fully participatory preference stocks of Sh.10 each and 1 million common stocks of Sh.15 each on 1st January 2008. In the year ended 31st December 2008, the company's board declared Sh.3 million as dividends.

Required:

Compute the dividends attributable to preference and common stock holders.

QUESTION FOUR

a) A company on 1st January 2008 leased equipment with a useful life of 12 years that required annual lease payments of Sh.129,000 for a 12 year lease period. The company is able to borrow at 15% interest rate while the implicit rate was 18%. The company depreciates equipment using straight line basis and applies the effective interest amortization method.

Required: Compute the fair value, prepare amortization table for the first 6 years only and record the above transaction using journal entries for the first 3 years.

b) Differentiate between defined benefit plan and defined contribution plan

c) Explain the following term

i) Provident cost

ii) Funded scheme

QUESTION FIVE

a) In order to increase sales, Rugby Cup Ltd in the year 2009 had a sales promotion where any football fan who bought 100 tickets during the year became eligible to get a sporting kit including shoes. During the year the company bought 1,500 sporting kits at sh.2,000 each. Each ticket was sold for sh.250 and the annual sales amounted to sh.50 million. It was estimated that 70% of the tickets sold would be redeemed. The actual redemption was worth 1,350 sporting kits. Required: journalize the transaction in the books of the
company.

b) Explain three qualifications of finance lease

c) When can shares be issued at a discount