Instructions:

Answer ALL questions

Use illustrations where necessary

QUESTION ONE $[20$ MARKS$]$

a$)$ Y ltd purchased a debt security for sh$.5m$ at a discount for sh$\mathrm{.}4,670,000$ on $1st$

Jan,$2004.$The debt is repayable in $5$yrs time at an interest rate of $6\%$ p$.$a payable

annually in arreas. The ERI of the investment is approximately $7\mathrm{.}65\%.$ This is a discount

rate that will give a present value of the future cash flow that equal to the price i$.$e$.$ the

internal rate of return implied in the contract.

Required: Using amortized cost method, show the subsequent measurements assuming

that the investment was classified as held to maturity $(10$ marks$)$

a$)$ On $1$ st Jan, $2010$ KBLD Ltd rated a go down in industrial area. The agreement provided

the payment of sh$\mathrm{.}500,000$ per year for $3$ years, payable in advance.

Required:$-$

$($i$)$ Show ledger entries when the transaction was effected.

$($ii$)$ Show adjusting entries necessary as at $31$ st Dec, $2010$ and as $31$st Dec $2011.(10$

marks$)$

b$)$ Define and give examples of intangible assets.. $(5$ marks$)$

c$)$ With the use of examples, explain the purpose of assets to any business $(5$mks$)$

QUESTION TWO $(20$MARKS$)$

a$)$ Differentiate between purchased goodwill and internally generated goodwill. $(5$ marks$)$

b$)$ Upendo ltd wishes to take advantage of the new commercial paper now popular. It

wishes to issue two debenture papers. Both bear coupons of $12\%$ and the effective yield

required on each is $20\%.$ Paper A has a maturity of $10$ years and paper B a maturity of

$20$ years. Both will be paying interest annually and Kshs$.100,000$ at maturity. What is

the price of each paper? If the effective yield on each paper rises to $24\%,$ what is the

price of each paper? $(15mks)$

QUESTION THREE $(20$MARKS$)$

On November $1,1999$ Senn Company contracted Super Contractors to have a building

constructed for Sh $1,750,000.$ Senn made payments for the construction as follows:

January $1,$ sh $310,000,$ March $1,$ Sh $420,000,$ May $1,$ Sh $540,000,$ December $31,$ Sh $480,000.$

The construction was completed and the building was ready for occupation on December $31,$

Senn had the following outstanding debt as $31$ december $2000.$

i$)15\%$ three year note to finance construction of the building, dated December $31,1999$ with

interest payable annually on December $31.$ Sh $800,00$