STRATHMORE UNIVERSITY BUSINESS SCHOOL

BACHELOR OF COMMERCE
BCM 2203: ACCOUNTING FOR EQUITY & IABILITIES
END OF SEMESTER EXAMINATION

DATE: 14th NOVEMBER 2018 TIME: 2 HOURS

INSTRUCTIONS: Answer Question one and any other two Questions

Question One

a) Define what a provision is and describe three prerequisites that have to be met before
making a provision of liabilities books of accounts (4 marks)

b) Discuss five various ways of retiring bonds (5 marks)

c) Chui limited, issued a 20%, 4 years, sh 100,000 on Jan 1 st 2015 to finance expansion of
head office. The bonds pay interest on annual basis on 31 st December of each year. The
market yield rate was 16%. The company financial year ends on 31 st December 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 (3 marks)

ii) Prepare a loan amortization schedule and journal entries recorded in the books of
Chui limited between date of issuing bond (1st January 2015) and closure of books
(31st December 2015) (14 marks)

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

31st December 2015. (4 marks)

d) Differentiate between tax base and carrying amount of an asset or liability. Give examples. (4 marks)
 Total 30 MARKS

Question two
a) Discuss four key qualifications that confirms a lease to be a capital lease as provided by
IAS 17. (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 2015
ii. Annual Lease payment in advance Ksh 750,000
iii. Lease term 3 years
iv. Asset useful life 3 years
v. Asset fair value at lease inception Ksh.
2,000,000
vii. Nature of asset – a production facility ( similar asset depreciated using straight
line method)
viii. Lessee incremental borrowing rate 10%p.a.

Required.
(i) Prepare a lease amortisation schedule and the journal entries recorded in the books of
Maxi limited (Lessee) between 1st January 2015 and closure of books (31st December
2015) (12 marks)

(ii) Prepare extract of statement of comprehensive income and statement of financial

position relating to lease agreement for the year ended 31 st December 2015 in the
books of the Lessee (4 marks)

Total 20 MARKS
Question three

a)
Capex Ltd bough an equipment for $ 50,000 on 1 January 2001 and depreciates it on a
straight-line basis over its expected useful life of five years. It has no other non-current
assets. For tax purposes, the equipment is depreciated at 25% per annum on a straight-line
basis. Accounting profit before tax for the years 2001 to 2005 is $ 20,000 per annum.
The tax rate is 40%.

Required:
 (i) Show the calculations of deferred tax for the years 2001 to 2005. (7 marks)

(ii) Show the calculations of current tax for the years 2001 to 2005. (9 marks)

(iii) Prepare the extracts of financial statements (4 marks)

(Total 20 marks)

Question Four
Kimondo Holdings limited reported a profit from continuing operations before tax of Ksh 8
million on financial year ending 31 st August 2016. On the same date, it had 10% sh 12 million
convertible bonds that are due for retirement in 2021 and 12 million ordinary shares of sh 10 par
value. The bonds were convertible to 5 million ordinary shares. During the financial year ending
31st August 2017, the following transactions occurred on mentioned dates:

i. On 1st December 2017, the company issued 8 million ordinary shares on cash at sh 25
each.

ii. On 1st January 2017, the company issued a further sh 4 million 12% convertible bond
maturing in 2022. The bond would be converted into 3 million ordinary shares.

iii. On 1st June 2017, the company made a right issue of 1 shares for every 4 shares held. The
subscription right per share was shs. 20 while cum right price per share was sh 25.

iv. On 31st August 2017, the company reported a continuing profit before interest and tax of
12 million.

Tax rate applicable to this company is 30%

Considering both convertible bonds as dilutive and show your workings.

Required:

i) Compute the theoretical ex-right price of share immediately after rights issue.
(4 marks)

ii) Compute basic earnings per share of the company for the financial ended 31 st August
2016 (3 marks)

iii) Compute the weighted average number of shares for the financial year ending 31 st
August 2017 (4 marks)
 iv) Compute the basic earnings per share of the company for the financial year ended 31 st
August 2017 (5 marks)

v) Compute the diluted earnings per share of the company for the financial year ended 31 st
August 2017 (3 marks)

Total 20 MARKS

Question Five
a) Safelock Door incop. Introduced a new line of commercial security doors in 2003 that carry a
four year warranty against manufacturers’ defects. Based on their experience with previous
product introductions, warranty costs are expected to approximate 4% of sales. Sales and actual
warranty expenditures for the first year of selling the product were:
Sales Actual warranty expenditures
$7,500,000 $124,800
Required
i) Does this situation represent a loss contingency? Why or why not? How should be accounted
for? (4 marks)
ii) Prepare the journal entries that summarise sales of the security doors ( assume all credit sales)
and any aspects of the warranty that should be recorded during 2003 (6 marks)

iii) What amounts should Safelock report as a liability a Dec 31, 2003? (3 marks)

b) Are all declared dividends a liability between the declaration and payment dates? Explain
(4 marks)

c) Why is unearned revenue classified as a liability? (3 marks)

• Total 20 marks