MERU UNIVERSITY OF SCIENCE AND TECHNOLOGY

BACHELOR OF BUSINESS ADMINISTRATION YEAR 3 SEM 1

BFC3225: ADVANCED ACCOUNTING 1 – SUPPLEMENTARY EXAM
Instructions: Answer Question one and any other two Questions. Time 2 hours
QUESTION ONE
a) Discuss the main features of a dependent branch (10 marks)
b)
The trial balance extracted from the books of Kirianki, Mbogori,Muriungi and Kiraitu on 30 April 2016 was as
follows.
Sh. ‘000’ Sh. ‘000’
Freehold property (Net book value 6,000
Plant and Equipment (NBV) 1,395
Office equipment (NBV) 2,030
Vehicle (NBV) 1,075
Stock 3,405
Debtors 1,590
Creditors 785
Bank overdraft 210
Capital accounts Kirianki 6,750
Mbogori 4,050
Muriungi 2,700
Kiraitu 2,700
Current accounts: Kirianki 250
Mbogori 1,350
Muriungi 300
Kiraitu 200
17,395 17,395

The business has steadily declining in the past few years. The partners have been trying to sell the business as a going concern but
have been unable to do so. They decided to sell the assets on a piece meal basis and cash would be distributed to partners as soon
as possible in amounts which would ensure that no partner would be called upon to repay any moneys he had received. In the
partnership agreement profits and losses were shared between Kirianki, Mbogori, Muriungi and Kiraitu in the ratio 4:3:2:1
respectively and the application of the rule in Garner Murray was excluded.
Transactions have taken place as follows.

15 May 2016 All the motor vehicles were sold at the Car Bazaar for Sh.975,000 net of selling cost.
The money was put into the bank account.

31 May 2016 Cash collected from debtors Sh.122,000 and stock sold to realize Sh.1,070,000 after
cost. All creditors were paid and the cash distribution made.

30 June 2016 Cash collected from debtors Sh.248,000 and stock sold to realize Sh.955,000 net.
Second cash distribution was made.

31 July 2016 Cash collected from debtors Sh.1,100,000 from sale of stock (net) Sh.1,465,000.
Third cash distribution was made.

31 August 2016 Office equipment sold for Sh.1,950,000 (net) and plant and equipment sold for
Sh.1,610,000. Fourth cash distribution was made.
31 October 2016
The freehold property was sold for Sh.6,600,000 various distribution expenses of
Sh.200,000 were paid the final distribution of cash took place

Required:
(a) A partnership distribution schedule: (12 marks)
(b) Summary bank realization and partners’ capital accounts. (8 marks)
(Total: 30 marks)

QUESTION TWO
Explain the following terms as used in pension accounting
i. Pay as you go
ii. Defined contribution scheme
iii. Defined benefit scheme
iv. Funding
v. Fund asset

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QUESTION THREE
a) Explain the main types of royalties (6 marks)
Five years ago, Mobiletex Ltd. Leased a patent for the manufacture of a gadget used in mobile phones from Quickcom Ltd.

The lease agreement provided for payment of royalty at the rate of Sh.50 per gadget sold with a minimum royalty of Sh.250,000
per annum. Royalties were payable on 15 March following the end of the financial year on 31 December. Short workings arising
in any year were recoverable within the following two years of operations.

Mobiletex Ltd. Sub-leased the patent to Handphone Ltd. A royalty of Sh.60 per gadget produced with a minimum rent of payment
of royalties at the end of each financial year on 31 December.

Given below is information about the number of gadgets produced by both companies in the first five years of operations.

Year ended Bomiletex Ltd. Handphone Ltd.

31 December Production Sales Production Sales
(units) (units) (units) (units)
2013 1,800 1,600 800 500
2014 2,500 2,600 1,100 1,200
2015 3,500 3,600 3,000 2,500
2016 4,200 4,000 3,900 4,200
2017 6,000 5,000 4,200 4,000

Required:
The accounts listed below in the books of Mobiletex Ltd.

(a) Royalty expenses (payable) account for the five years ended 31 December 2017.
(4 marks)
(b) Quickcom (Landlord) account for the five years ended 31 December 2017. (3 marks)
(c) Short workings recoverable account for the five years ended 31 December 2017.
(3 marks)
(d) Royalty income (receivable) account for the five years ended 31 December 2017.
(4 marks)
(e) Handphone (sub-tenant) account for the five years ended 31 December 2017.
(3 marks)
(f) Short workings allowable account for the five years ended 31 December 2017.
(3 marks)
(Total: 20 marks)

QUESTION FOUR
During the month of March 2001, a manufacturing firm advertised in the local press that it had bonded goods which were to be
auctioned. On reading the advertisement, Mr Michael Karanja and Mr. Joseph Abuya agreed to pool their resources together and
participate in the auction. They agreed to share the joint venture profits and losses. Karanja and Abuya in the ration of 3:2
respectively.

Karanja sent Abuya a cheque of Sh. 2,400,000 on 15 March 2018 to provide him with funds for Karanja’s participation in the
joint venture.

Karanja and Abuya successfully bought goods and managed to sell all of the goods purchased by the end of April 2018. Their
cash transactions appeared as follows:

Karanja Abuya
Sh. Sh.
Sales 3,840,000 2,520,000
Travelling expenses 392,400 555,600
Advertising 123,600 109,200
City Council charges 102,000 84,000
Salaries and wages 57,600 78,100
Sundry expenses 70,800 34,800
Purchases 1,920,000 1,320,000
Telephone expenses 33,700 28,900
Insurance 12,300 11,200
Transportation of goods 157,000 121,500

Settlement between Karanja and Abuya was done by cheque on 30 April 2018.

Required:

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(a) Memorandum joint venture account. (6 marks)
(b) Joint Venture account with Abuya in Karanja’s ledger (7 marks)
(c) Joint Venture account with Karanja in Abuya’s ledger (7 marks)
(Total: 20 marks)
QUESTION FIVE
Briefly explain the following terms as used by insurance companies:

(i) Whole life policy; (1 mark)

(ii) Endowment policy; (1 mark)
(iii) Surrender value (1 mark)

(b) The following balances were extracted from the books of Ulinzi Insurance Company Ltd. As at 31 March 2018:

Debits Sh.
Expenses of management:
Fire 579,000
Marine 258,000
Claims paid:
Fire 840,000
Marine 805,500
Commission:
Fire 522,000
Marine 370,500
Directors’ fees 130,500
Depreciation on furniture 6,000
Contribution to NSSF 22,500
Investments 18,886,500
Debentures on mortgage bank 4,402,500
Interest accrued 54,000
Shares in companies 4,230,000
Premiums outstanding:
Fire 1,056,000
Marine 894,000
Sundry debtors 289,5000
Fixed deposits 213,000
Cash and bank balances 981,000
Furniture less depreciation 48,000
Library books 15,000

Credits Sh.
Reserve for unexpired risks:
Marine 1,830,000
Fire 976,500
Premium less reinsurance:
Fire 2,479,500
Marine 1,677,000
Additional reserves:
Fire 1,071,000
Marine 112,500
Claims outstanding on 1 April 1999:
Fire 28,500
Marine 1,500
Interest on investments 385,500
Miscellaneous receipts 1,500

Share capital:
210,000 ordinary shares Sh.100 each 21,000,000
General reserve 1,917,000
Staff provident fund 213,000
Sundry creditors 900,000
Contingency reserve 300,000
Investment fluctuation reserve 210,000

The following additional information is available:

1. Estimated liability in respect of claims outstanding at the close of the year was as follows:
Fire Sh.39,000 Marine Sh.141,000

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2. The following provisions are to be made:
(i) Sh.150,000 survey expenses for marine insurance claims
(ii) Sh.300,000 for taxation

2. An additional reserve of 10% of the net premium was made for the unexpired risks in the case of fire insurance
in addition to the balance brought forward.

3. In respect of fire insurance, a reinsurance premium paid Sh.450,000, a claim of Sh.150,000 covered by
insurance and a commission at 5% on reinsurance ceded have still to be accounted for.

4. The market value of the investments is Sh.21,375,000.

5. The reserve for unexpired risk should be 100% of the premium less reinsurance in marine business.

Required:

The revenue accounts and profit and loss account for the year ended 31 March 2018 and a balance sheet as at that date.
(17 marks)
(Total: 20 marks)