KASNEB Financial accounting - Question 1a

Explain TWO acceptable methods of valuing goodwill for accounting purpose. ... [Click to view full question and step-by-step solution]

KASNEB Financial accounting - Question 2a

Highlight TWO characteristics of accounting principles. ... [Click to view full question and step-by-step solution]

August 2025

1a

Accounting for Assets and Liabilities

Explain TWO acceptable methods of valuing goodwill for accounting purpose.

1b

Statements of a not-for-profit entity

Describe THREE distinguishing features between a “receipt and payment account” and “income and expenditure account”.

1c

Correction of errors and preparing financial statements with incomplete records

Mark Olal is a sole trader and carries on business under the name “Mark and Company”. The balance on his cash book at 30 June 2025 did not agree with the balance as per the bank statement which shows a credit balance of Sh.183,750. An examination of the cash book and bank statement disclosed the following:

A deposit of Sh.24,600 made on 28 June 2025 and recorded in the cash book had been credited by the bank on 2 July 2025.
Bank charges of Sh.850 have not been entered in the cash book.
A debit of Sh.2,100 appeared on the bank statement for an unpaid cheque which had been returned marked “out of date”. The cheque was re-dated by his customer and paid into the bank again on 4 July 2025. The earlier transaction had been recorded in the cash book.
A standing order for payment of an annual subscription amounting to Sh.500 has not been entered in the cashbook.
On 26 June 2025, Mark Olal had given the cashier a cheque for Sh.5,000 to pay into his personal account at the bank. The cashier deposited it into the business account by mistake.
On 27 June 2025, a customer had made an online transfer of Sh.24,950 in payment against goods supplied. The advice was received and recorded in the cash book on 4 July 2025.
On 30 March 2025, Mark Olal entered into a hire purchase agreement and issued a standing order to the bank to pay a sum of Sh.1,300 on day 10 of each month, commencing April 2025. No entries have been made in the cash book for these payments.
A cheque for Sh.18,200 received from Amos Muli had been entered twice in the cash book.
Cheques issued amounting to Sh.233,600 was not presented to the bank for payment until after 30 June 2025.
Dividend received by the bank amounting to Sh.6,000 has not been recorded in the cash book.
A cheque of Sh.121,500 received from Bob Zuri was deposited in the bank and entered in the cash book as Sh.125,100.

Required:

(i) The adjusted cash book.

(ii) Bank reconciliation statement as at 30 June 2025.

2a

Regulation and other principles guiding the accounting profession

Highlight TWO characteristics of accounting principles.

2b

Financial Statements of a company

Explain THREE differences between the “direct” and “indirect” methods of presentation of the statement of cash flows.

2c

Accounting for Assets and Liabilities

Magdalene Ogutu started a business on 1 January 2022. During the three years of trading which ended on 31 December 2022, 31 December 2023 and 31 December 2024, the following debts were written off to the accounts for credit loss on the dates shown below:

		Sh.“000”
30 June 2022	Godfrey Ombati	700
31 January 2022	Harrison Otieno	560
31 March 2023	Amose Kasese	280
30 September 2023	Francis Mwangangi	1,260
30 November 2023	Joseph Omanya	140
30 April 2024	Joseph Ottomani	620
31 May 2024	Peter Were	715
31 August 2024	Paul Kilemba	805
31 October 2024	Perminus Ouma	386

Additional information:

On 31 December 2022, the total accounts receivable amounted to Sh.14,560,000. It was decided to make an allowance for credit loss of 3%.
On 31 December 2023, the total accounts receivable amounted to Sh.16,240,000. It was decided to make an allowance for credit loss of 5%.
On 31 December 2024, total accounts receivable amounted to Sh.15,380,000. It was decided to make an allowance for credit loss of 5%.

Required:

(i) Bad debts accounts for the three years.

(ii) Allowance for credit loss account for the three years.

(iii) An extract of the statement of profit or loss for each year.

3

Financial Statements of a partnership

Annita and Bancy are in partnership sharing profits and losses in the ratio 3:2 after charging annual salaries of Sh.1,200,000 and Sh.1,500,000 to Annita and Bancy respectively. Both partners are allowed one time interest at a rate of 4% on opening capital accounts.

On 1 December 2024, they admitted Carol and agreed to share profit and losses in the ratio 5:4:3. The partnership trial balance as at 30 June 2025 was as follows:

			Sh.“000”	Sh.“000”
Sales				61,800
Inventory (1 July 2024)			6150
Purchases			38,700
Insurance expense			4,170
Rent and rates			2,150
Wages and salaries			8,400
Bad debts			636
Trade receivables and trade payables			5,529	7,040
Bank overdraft				855
Capital accounts:		Annita		3,750
		Bancy		3,000
		Carol		1,500
Current account:		Annita		1,500
		Bancy		1,050
Drawings:		Annita	1,800
		Bancy	2,250
Motor vehicle at cost			4,800
Equipment at cost			15,450
Accumulated depreciation:
	Motor vehicle (1 July 2024)			2,850
	Equipment (1 July 2024)			6,690
			90,035	90,035

Additional information:

1.	Carol has been the office manager and for the year commencing 1 July 2024 was on a salary of Sh.1,440,000 per annuum.
2.	Interest on capital at the end of the year was a one time rate of 5%.
3.	Carol introduced a motor vehicle valued at Sh.600,000 and Sh.1,500,000 cash as part of his capital contribution. The only entry made in respect of Carol’s admission was Sh.1,500,000 paid into the bank account.
4.	On 1 December 2024, goodwill was valued at Sh.3,600,000 and is to be written off.
5.	Inventory as at 30 June 2025 was valued at Sh.7,425,000.
6.	One third of the year’s sales were made before admission of Carol and two thirds after her admission.
7.	Accrued expenses included Sh.30,000 for insurance and Sh.250,000 for rates and rent.
8.	Cost of sales and gross profits are appointed according to sales while all other expenses are apportioned according to time.

9.	Depreciation is provided per annum at the following rates:
	Motor vehicles	- 25% on a straight line basis
	Equipment	- 20% on reducing balance

Required:
(i)	Statement of profit or loss for the period ended 30 June 2025.
(ii)	Statement of financial position as at 30 June 2025.

4

Financial Statements of a sole trader

Hesbon Mwatate started as a general merchant on 1 January 2023. He opened a bank account with Sh.3,250,000 and immediately spent Sh.1,600,000 on furniture and fittings. The only record kept was cash sales of Sh.4,875,000 for the year ended 31 December 2023 and Sh.10,660,000 was for the year ended 31 December 2024. There were no credit sales.

Additional information:

1.	The value of inventory as at 31 December 2024 was Sh.1,592,500. No inventory take was done on 31 December 2023, but a uniform rate of gross profit is assumed.
2.	Goods were taken from inventory for private consumption. The estimated cost being Sh.65,000 in the year ended 31 December 2023 and Sh.98,000 in the year ended 31 December 2024.
3.	All expenses of the business had been paid by cheque. An analysis of the bank statement showed the following payments in the two years 2023 and 2024:

3.		Sh.“000”
	Purchases (of which Sh.4,810,000 relate to the year ended 31 December 2023)	11,655
	Rent and rates	663
	Salaries	1,430
	Advertising	182
	Other expenses (including insurance)	375

4.	Liabilities outstanding as at 31 December 2024 were:
		Sh.“000”
	Purchases	975
	Advertising	65
	Other expenses	221
5.	Amounts paid in advance as at 31 December 2024 were:
		Sh.“000”
	Rates	13
	Insurance	65

6.	Private drawings amounted to Sh.860,000 and were paid out of cash receipt and the balance banked.
7.	Hesbon Mwatate earned private income of Sh.293,000 which was paid into the bank.
8.	All business expenses arose equally in the two years.
9.	Depreciation on furniture and fittings is provided on straight line basis over 10 years.
Required:
(a)	Statement of profit or loss for the year ended 31 December 2023 and 31 December 2024.
(b)	Statement of financial position as at 31 December 2024.

5a

Correction of errors and preparing financial statements with incomplete records

Explain the following types of errors:

(i) Compensating errors.

(ii) Error of complete reversal of entry.

5b

Financial Statements of a company

The following statement of financial position relates to Caveman Ltd. as at 30 June 2025 with the comparative figures for the year ended 30 June 2024:

	30 June
	2025	2024
Non-current assets:	Sh.“000”	Sh.“000”
Property, plant and equipment	10,000	8,125
Intangible assets	5,750	4,500
Investments	-	625
Total Non-current assets:	15,750	13,250
Current assets:
Inventory	3,000	2,600
Accounts receivable	10,000	7,375
Cash in hand	250	100
90-day treasury bill	1,250	-
Total Current assets:	14,500	10,075
Total assets	30,250	23,325
Equity and liabilities:
Ordinary share capital at Sh.50 per share	5,000	3,750
Share premium	4,000	3,750
Revaluation reserve	2,500	2,250
Retained earnings	3,500	2,000
Total Equity	15,000	11,750
Non-current liabilities:
Bank loan	2,500	-
8% debenture	2,000	1,500
Total Non-current liabilities:	4,500	1,500
Current liabilities:
Accounts payable	3,050	2,700
Bank overdraft	4,700	4,625
Tax payable	3,000	2,750
Total Current liabilities:	10,750	10,075
Total equity and liabilities	30,250	23,325

Additional information:

1.	The property, plant and equipment as at 30 June was as follows:
		2025	2024
		Sh.“000”	Sh.“000”
	Cost	18,500	15,375
	Accumulated depreciation	(8,500)	(7,250)
		10,000	8,125

2.	During the year ended 30 June 2025, plant with an original cost of Sh.2,250,000 and a net book value (NBV)0 of Sh.1,250,000 was sold for Sh.925,000.
3.	Dividends amounting to Sh.2,000,000 were paid during the year ended 30 June 2025.
4.	Tax paid during the year ended 30 June 2025 amounted to Sh.2,750,000.
5.	The proceeds on sale of investment was Sh.750,000.
6.	Interest of Sh.1,875,000 was paid and interest of Sh.625,000 was received during the year ended 30 June 2025.

Required:

Statement of cash flows for the year ended 30 June 2025 in accordance with International Accounting Standard (IAS) 7 “Statement of Cash Flows”.

August 2025

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