UNIVERSITY OF NAIROBI

SCHOOL OF BUSINESS
DEPARTMENT OF FINANCE AND ACCOUNTING
BACHELOR OFCOMMERCE DEGREE PROGRAMME

DAC 111: FUNDAMENTALS OF FINANCIAL ACCOUNTING 1

Test 1 SOLUTION

Date: 19th January 2018 Time allowed: 2 hours

Question One

1.c. 2.d 3.c 4.a 5.c 6.d

7.c 8.b 9.a 10.a 11.d 12.b

13.a 14.a

@ 2marks Total: 28 marks

Question Two

Date Particulars Debit Credit

Sh. Sh.
Cash 290,500
Capital 290,500
Being cash invested in the business

I Office supplies 5,000

Cash 5,000
Being purchase of office supplies

ii Office equipment 67,000

Cash 20,000
Accounts payable 47,000
Being the purchase of office equipment
partly paid in cash and partly on account.

iii Rent deposit 60,000

Rent expense/Prepaid rent 30,000
Cash 90,000
Being payment of two months deposit and
one month rent

1
Iv Cash 130,000
Advertising revenue 130,000
Being collection of fee for an advertising
campaign

v Office equipment 11,000

Accounts payable 11,000
Being acquisition of office equipment on
credit

vi Advertising costs/expenses 18,000

Cash 18,000
Being advertising costs incurred

vii Salary and wages 18,500

Cash 18,500
Being October salary for the Secretary

viii Accounts payable 47,000

Cash 47,000
Being payment for office equipment
acquired earlier partly on credit

ix Accounts receivable 85,000

Research fee 85,000
To record revenue earned from a marketing
research assignment

x Cash 40,000
Accounts receivable 40,000
Being cash collected from a credit customer

xi James Withdrawal 15,000

Cash 15,000
Being cash withdrawn by James for personal
use
Total: 25 mark
Ticks X 25
38

2
Question Three

(a) The purpose of adjusting entries is to assign appropriately revenue that has been
earned and expenses incurred for a given accounting period to ensure the proper
matching of revenues earned with the expenses incurred in generating the
revenue.
(4 marks)
(b)

(i)
Date Particulars Debit Credit
Sh Sh
Nov Insurance expense 50,000
30 Unexpired insurance 50,000
Being insurance expense for the month of
November
(3 marks)

(ii)
Date Particulars Debit Credit
Sh Sh
Nov Unexpired Insurance 250,000
30 Insurance expense 250,000
Being Unexpired insurance as at
November 30
(3 marks)

(iii)
Date Particulars Debit Credit
Sh Sh
Nov Unearned Insurance Premiums 50,000
30 Earned insurance premiums 50,000
Being insurance income earned in the
month of November
(3 marks)

(iv)
Date Particulars Debit Credit
Sh Sh
Nov Earned insurance premiums 250,000
30 Unearned insurance premiums 250,000
Being Unearned insurance premiums as
at November 30.
(3 marks)
Total: 16 marks

3
Question Four
(a) Permanent accounts are statement of financial position accounts; asset, liability
and equity accounts. These are accounts that carry balances from one period to
another.

Temporary accounts are statement of income accounts; revenue, expenses, gains,

losses, and income summary accounts. These are accounts that capture
information for a given period of time and closed at the end of each accounting
period. (8 marks)

(b) The purpose of closing entries is to reset the temporary accounts to zero to
prevent the mixing of data of different accounting periods. They also help in
summarizing a period’s revenue and expenses. (4 marks)

(c)

Debit Credit
Sh’000’ Sh’000’
i Service revenue 1,141,596
Income summary 1,141,596
Being the closure of the revenue account

ii Income summary 502,748

Transport cost 6,744
Communication cost 43,023
Depreciation expense, equipment 29,000
Salaries expense 220,616
Rent expense 164,800
Supplies expense 13,111
Advertising expense 18,818
Insurance expense 6,636

Being the closing of expense accounts.

iii Income summary 638,848

B.J Bahari, capital 638,848
Being the closure of the income summary
account

iv B.J. Bahari, capital 75,600

B.J. Bahari, withdrawals 75,600

Being the closure of the withdrawal account

Total: 31 marks