ACCOUNTING FOR LAWYERS SAMPLE EXAMINATION QUESTION

QUESTION ONE

The Balance sheet of L. FAISAL, a trader, at the beginning of the financial year is shown in the first column below, in vertical style, with the liabilities shown first and the assets below.

	KES	KES	KES	KES	KES	KES
	'000''	'000''	'000''	'000''	'000''	'000''
		(a)	(b)	(c )	(d)	(e )
Capital	8,400	8,400
Creditors	700	700
	9,100	9,100
Equipment	4,000	4,000
Stock	1,300	1,300
Debtors	600	550
Cash at Bank	3,200	3,250
	9,100	9,100

Use the same format on your answer paper. Show in the appropriate columns the Balance Sheet after each of the following transactions [the balance sheet after the first transaction is shown in column (a)]

a)       Received a cheque from a debtor for KES 50,000 which was paid into bank (Done as per Column (a) in the table above)

b)       Sold on credit for KES 120,000 goods from stock which had cost KES 80,000

c)       Paid by cheques KES 300,000 owing to creditors

d)       Sold equipment book value KES 100,000 for KES 120,000 which was paid into bank

e)       L. FAISAL drew a cheque for KES 50,000 for private expenses and took goods from stock for his own use which had cost KES 20,000 but for which he paid KES 25,000

QUESTION TWO

WANDERA is a trader with operations in PARKLANDS, NAIROBI, who has requested your assistance in preparing his financial statement. You have established the following balances from his ledger as at 31^st January 2015.

Bank Overdraft KES 600,000; Sundry Debtors KES 550,000; Delivery Van KES 2,700,000; Stock KES 7,250,000; Furniture and fittings KES 3,850,000; Sundry Creditors KES 1,340,000; Premises KES 48,000,000; Mortgage on Premises KES 42,000,000, Cash in Hand KES 150,000

REEQUIRED:

Draw up the Balance sheet of WANDERA as at 31^st January 2015 in a form that will allow you to show clearly the following totals:

a)	Fixed Assets
b)	Current Assets
c)	Current Liabilities
d)	Net Working Capital

e)       The Capital of WANDERA

QUESTION THREE

December 2, 2013 marked the 12-year anniversary of the ENRON CORPORATION'S FILING for bankruptcy protection in a New York court, a move that sparked one of the largest and most complex bankruptcies in U.S. history. Headquartered in Houston, ENRON was an energy, commodities and services company that had employed close to 22,000 people and had revenues of nearly $101 billion in 2000, shortly before its downfall.

ENRON was formed in 1985 following a merger between HOUSTON NATURAL GAS and INTERNORTH.

Creative Accounting allowed ENRON to appear more powerful on paper than it really was. By 1993, Enron had set up a number of limited liability special purpose entities that allowed ENRON to hide its liabilities while growing its stock price. Analysts were already criticizing Enron for "swimming in debt" but the company continued to grow developing a large network of natural gas pipelines, and eventually moving into the pulp and paper and water sectors. ENRON was named "America's Most Innovative Company" by Fortune for six consecutive years between 1996 and 2001.

ENRON's collapse, and the financial havoc it wreaked on its shareholders and employees, had worldwide repercussions that led to new regulations and legislations in vast countries to promote the accuracy of financial reporting for publicly held companies. The ENRON scandal drew attention to accounting and corporate fraud, as its shareholders lost $74 billion in the four years leading up to its bankruptcy, and its employees lost billions in pension benefits.

a)       Discuss EIGHT (8) accounting conventions that should have been embraced by the senior management in preparing the set of accounts at ENRON that would possibly have averted its collapse.

b)       Discuss the different classes of users of the Financial Statements of a Company such as ENRON and the reliance each of the users would place on the financials.

c)       Regulators were called on, and had to review the financial records of ENRON to determine the extent malpractice. ANALYZE the Five (5) chief reasons why a bank’s records and the records at ENRON may not have tallied or been in agreement when regulators were reconciling the bank statement.

QUESTION FOUR

Discuss the following citing an example for each:

a)   Books of Original Entry & Trial Balance

b)       Outstanding Deposits and Outstanding Cheques

c)       Trust Funds and Trust Property

d)   Audit Trail   and Reconciliation

e)       Accrual Basis & Personal Responsibility of Lawyers in Accounting

f)    Liquid Capital                                                                                                                                    

g)       Effects profits have on the assets of a business

h)       Revenue Expenditure

i)         Appropriation Account

j)        Subsidiary Books and Sources of Accounting Information

k)       Returns Inwards and Returns Outwards

QUESTION FIVE

The following is the Trial Balance of JUMA MAGOTSI who started a cosmetics company on 1^st January 2014 that caters to female clientele based in Nairobi. Although the Trial Balance adds up to the same total on both sides, it is incorrect.

DETAILS	KES		KES
	"000"		"000"
Capital on 1st January 2014			16,982.00
Drawings			15,624.00
Stock on hand as at 1st January 2014		7,215.00
Purchase and Sales		43,626.00	184,758.00
Sales Ret. and Purchases Ret.		1,758.00	395
Carriage In		1,124.00
Carriage Out			568
Customs Duty on purchases			8,808.00
Wages (Trading A/C)		11,280.00
Warehouse Expenses (trading A/C)		5,360.00
Salaries (offices)		19,716.00
Business Rates		3,840.00
Office Expenses		5,250.00
Heat and light		620
Insurance (Fire)		495
Motor Vehicles		12,010.00
Motor Expenses		3,810.00
Office Equipment		5,850.00
Cash in Hand		495
Debtors and Creditors		1,762.00	4,858.00
Bank balance		4,250.00
Mortgage		25,000.00

Fixtures and Fittings	6,500.00
Computers & Printers	8,725.00
Premises	58,400.00
Commission received		2,650.00
Rent received		3,450.00
Discount Allowed and Received	726	845
Advertising	3,950.00
Selling expenses	7,176.00
	238,938.00	238,938.00

Stock as at 31^st January 2015 was valued at KES 8,275,000.

REQUIRED:

a)       Draw up the corrected Trial Balance

b)       Prepare the following accounts for the year ended 31^st January 2015:

i.             Trading and Profit and Loss A/C

ii.             Balance Sheet

c)       What was his MARK UP?

d)       Calculate

i.             The percentage net profit on turnover

ii.             Calculation of percentage gross profit on turnover

QUESTION SIX

SOFRALAT was a multinational Kenyan dairy corporation founded by BIKO TERERO, Chairman and CEO, who transformed it from a family business to Africa’s biggest corporate success stories. In 2005 SOFRALAT jumped into the world financial markets in a big way, financing several international acquisitions. However, in 2007 many of the new divisions were producing losses, and the company financing shifted largely to the use of long term debts.

MSNBC and CNN had reported that SOFRALAT was the leading global company in production of dairy products, especially their flagship product, LONGLASTA MILK. Risk analysts however warned that a proper assessment of financing several international acquisitions with debt had not been performed by SOFRALAT’s Finance and Legal departments.

In January 2012, Kenyan Accounting profession Regulators, ICPAK, were anonymously alerted that the managers who were making the accounting decisions, were using different accounting standards than that required for large corporations. That SOFRALAT had used different standards from year to year. That transactions were deliberately being reported late or being misreported if they had resulted in a loss, resulting in revenues being overstated. Finally, that SOFRALAT management had prepared prospectus for new investors and releasing statements to shareholders which had not been reviewed by independent auditors and were suspected of having the information modified contrary to the law.

It also emerged that from 2005, SOFRALAT had been using the same company of auditors, two (2) of whose directors were BIKO’S Brothers in law. Further, 7 other Partners of the Audit firm sat on the Board of Directors (BOD) of

SOFRALAT, which had 17 members.

In February 2012 the Chief Financial Officer (CFO) of SOFRALAT, FAUSTO TONNA, unexpectedly announced a new KES 500 billion bond issue to the public. This came as a surprise both to the markets and to the CEO. BIKO fired FAUSTO and replaced him with MAULID SAKA.

MAULID made inquiries and discovered that the company's total debt was more than four times that on the balance   sheet. He established that there was a lack of validity checks to confirm certain assets used as guarantees for loans

actually existed, resulting in inaccurate information being reported.

The crisis became a public discussion in June 2012 when questions were raised by the media house KENYA VIEWERS NETWORK (KVN), about transactions with a Cayman Island based company linked to SOFRALAT suspected to be a money laundering front. These reports caused the SOFRALAT shares listed on the Nairobi Stock Exchange (NSE) to plummet.

KENYA BANK, PEOPLE’S BANK and INTERNATIONAL BANK among other banks demanded that SOFRALAT immediately pay all outstanding debts and bond payments. Farmers’ SACCOs supplying dairy products to the company had a press conference demanding their pay which had been outstanding for 2 years. Other dairy companies and industry insiders indicated the possibility of further and more sinister foul play by SOFRALAT. Reports from concerned employees of the company, who were 36,000, were that SOFRALAT was supposed to be sitting on KES 600 billion in cash, so the bankers were puzzled by its predicament of a cash shortage.

BIKO resigned as chairman and CEO in July of 2012, when the Kenya Revenue Authority (KRA) publicly announced an intention to conduct a tax audit of the company’s financials since 2005 for suspicion that there had been money laundering and false reporting on revenues of SOFRALAT.

In November 2012, the Anti-money Laundering unit of the Criminal Investigation Department (CID) released a document to the KENYA CAPITAL MARKETS AUTHORITY (CMA) and the CENTRAL BANK OF KENYA showing KES 600 billion in the bank account of SOFRALAT’s Cayman Island subsidiary, DONALAT, as a forgery.

As a Legal intern charged with the responsibility of providing a researched brief to the investigating team at the Regulator’s office:

a)       Discuss the accounting conventions that accountants at SOFRALAT should have relied on in the preparation of the final accounts of the business

b)       Identify the classes of users of financial Statements of SOFRALAT you would interview and briefly explain their key interests or influence on the information

c)       Identify the key characteristics or traits of accounting information that you and your team of investigators would expect to find when analyzing the financial position and results of the operations of SOFRALAT

QUESTION SEVEN

RAMONDEZ LTD started operations on 1^st March 2013, with premises KES 550,000,000; Motor Vehicle KES 32,750,000; Stock 85,000,000; Fixtures & fittings KES 28,500,000; Cash in hand KES 1,000,000 and Cash at bank KES 42,950,000.

Open the accounts necessary to start the books of the enterprise. During the Month RAMONDEZ LTD undertook the following transactions:

March   2          Acquired tills for shop use KES 3,420,000, paying by cheque

4                     Bought goods for resale KES 7,856,000 on credit from A. SUPPLIER

5                     Paid general rates of KES 4,600,000 to CITY COUNCIL by Cheque

7 Cash sales for week, KES 43,250,000. Paid into bank KES 35,000,000 9 Bought goods for cash KES 2,365,000

13        Paid Clerical Staff wages KES 800,000 in cash. Paid motor expenses by cheque KES

865,000

16        Purchases goods valued at KES 9,500,000 from A. SUPPLIER on credit

17 Sold goods valued at KES 4,260,000 to NAKU MATER on Credit

20 Cash sales for the week KES 39,500,000. Paid Clerical Staff wages KES 850,000 cash.

Paid into bank KES 32,500,000

23                 Purchased goods valued at KES 9,950,000 from A. SUPPLIER on credit

24                 Paid KES 17,350,000 to A. SUPPLIER by cheque. Sold goods on credit to E. CARRINGA

KES 3,850,000

27        Cash Sales for week KES 41,250,000. Paid CLERICAL STAFF wages KES 850,000

30 Purchased goods KES 13,150,000 from A. SUPPLIER on credit. Received Cash of KES 2,000,000 from NAKU MATER, on account.

REQUIRED:

Enter the above transactions in the appropriate accounts and extract a trial balance as at 31^st March 2013

QUESTION EIGHT

Explain the following terms as they relate to STOCK

a)       FIFO and LIFO

b)       Base Stock

c)       Rate of Stock Turnover

d)       Average Stock held

QUESTION NINE

a)       Define the Term ACCOUNTING

b)       What is the IASB and discuss its role in Accounting?

c)       What are the rules for making entries in real accounts when we buy an asset or sell a worn out asset?

d)       What items usually appear in a Trading Account?

e)       What is a bank reconciliation statement?

f)        Define the following accounting concepts

a.       LIABILITY

b.       PRUDENCE

c.        NETWORTH

QUESTION TEN

Prepare the Trading and profit and loss account and a balance sheet from the Trial Balance of PETER MTANGE as at the end of December 2014:

PARTICULARS	KES '000'	KES '000'
Capital at start		8,326
Freehold Property	51,500
Creditors		1,876
Debtors	2,536
Sundry expenses	170

Purchases and Sales	26,033	107,828
telephone expenses	1,565
Stock as at 1st January 2014	11,617
light and heat	840
Drawings	9,560
Purchases returns & Sales returns	1,328	1,254
Salaries & wages	19,284
Repairs	462
Insurance	280
Travelling expenses	162
Discount allowed	360
Commission Received		5,284
Rent Received		4,640
Mortgage on premises		20,000
Bank loan		8,000
Fixtures	4,600
Motor Vehicles	5,850
Cash in Hand	495
Cash at Bank	4,726
Plant & Machinery	15,840
	157,208	157,208

The closing stock at the end of that year was valued at KES 14,592,000.

Adapted from Kenyatta University School of Law
by Rachel Eshiwani