SCHOOL OF MANAGEMENT AND COMMERCE

BACHELOR OF COMMERCE
BCM 2203: ACCOUNTING FOR EQUITY AND LABILITIES
END OF SEMESTER EXAMINATION
DATE:3RD AUGUST 2016 TIME: 2 HOURS

Instructions: Answer Question ONE and any Other TWO QUESTIONS.

Correct workings earns marks

QUESTION ONE

a) Describe prerequisites has to be met before making a provision of liabilities in the

books of accounts (6 marks)

b) Discuss various ways of retiring bonds (6 marks)

c) Mazda limited, issued a 16%, 6 years, sh 100,000 on Jan 1st 2015 to finance expansion
of head office. The bonds pay interest on quarterly basis on 31st march, 30th June, 30th
September, and 31st December. The market yield rate was 20%. The company
financial year ends on 31st august every calendar year. The company complies with
accounting standards related to financial assets and liabilities.

Required.

i) Compute the price of the bond at the date of issue (2 marks)

ii) Prepare journal entries recorded in the books of Mazda limited between date
of issuing bond (1st January 2015) and closure of books (31st august 2015)
(12 marks)

iii) Present extracts of financial statements relating to the issue of bond as at

31st august 2015. (4 marks)

Total 30 MARKS
QUESTION TWO.

a) Different accountants may treat a given contingent liabilities in the books of accounts
different. Discuss possible reasons for this. (6 marks)

b) Discuss key qualifications of confirms a lease to be a capital lease as provided by

IAS 17. (8 marks)

c) Morning limited got government approval to put an oilrig in Mandela. On 1st march
2013. The company incurred a cost of Ksh 40 millions to put up the oilrig. The rig a
useful life of 10 year, after which it has to be dismantled and the surrounding land
reclaimed at a cost of Ksh 8 million. The company has projected a discount rate of
10% to be appropriate. The company’s financial year end on 30th September.

Required. Present the financial statements extracts relating to asset retirement

obligation and related items for the financial year ending 30th September
2013 and 2014. (6 marks)
Total 20 MARKS

QUESTION THREE.

a.) Differentiate constructive from legal obligation in relation to liability. (4 marks)

b.) Maxi limited, a calendar year firm, entered into a lease agreement as lessee whose
details are given below.
i. Lease inception date 1st Jan 2014
ii. Semi Lease payment in advance Ksh 240,000
iii. Lease term 4 years
iv. Asset useful life 10 years
v. Asset fair value at lease inception Ksh 4 millions
vi. Asset fair value at end of lease term Ksh 3 millions
vii. Nature of asset – a production facility ( similar asset depreciated to zero
value using straight line method)
viii. Lessee incremental borrowing rate 10%p.a.
ix. The lessee is given a bargain purchase option at end of lease term at Ksh
2.5 millions

Required. Prepare extract of statement of comprehensive income and statement of

financial position relating to lease agreement for the year ended 31st December
2015 (16 marks)
Total 20 MARKS

QUESTION FOUR

a) Discuss major type of employment benefits as provided by IAS 19 (8 marks)

b) Identify possible causes of a firm generating deferred tax asset (6 marks)

c) Discuss necessary conditions to be met before deferred tax asset is provided in the
books of accounts (4 marks)
 d) Explain why liability method is preferred when provided deferred taxes (4 marks)
Total 20 MARKS

QUESTION FIVE
a) A company may issue a convertible debt security that is anti-dilutive. Explain this
statement, discuss its implication in computation of EPS and how to check its
antidilutive (6 marks)

b) Kadoka limited, had 9 million ordinary shares on 1st January 2014 and no debt. .On
1st October 2015, the company issued one right issue for every 6 common shares
held. The subscription price of the right was sh 60 though the market price per share
was sh 75.

On 31st September 2015, the company issued sh 80 million 10% convertible bond.
The bond were convertible at 1 share for every sh 50 of par value. Other information
are as follows

Earnings before interest and tax (2014) Ksh 14 millions

Earnings before interest and tax (2015) Ksh 18 millions
Tax rate is 40% in both years

Required
a) Compute basic Earnings per share for 2014 as it would appear in comparative
financial statements of 2014 and 2015 (4 marks)

b) Compute basic and diluted earnings per share for 2015 as they would appear in
financial statements of 2015. (10 marks)

Total 20 MARKS
END