QUESTION TWO () On Ist April 2018, C. Munene commenced business with a capital of sh. 630,500. His profits for the years 2018/19 and 2019/20 amounted to sh. 550,540. He suffered a loss of sh. 250,000 in the year 2020/21. His total drawings up to 31 st March 2021 were sh. 900,000. He has also provided the following balances as at 31st March 2021: Sh Cash 20.300 190.000 Stock 700,000 Debtors 180,060 good 150,000 Debtors - 50-640 doubtful 502000 Debtors - had 1,300,000 Fixtures and 250,060 fittings 350,000 Investment in shares 10,900 Unsecured creditors (including with Secured creditors Securities held by secured creditors Preferential claims - tax etc Assume that the following amounts will be realized; Sh. Stock in trade 60,660 Fixtures and fittings 20,820 Investment in shares the book value Bad and doubtful debts 60,000 C. Munene intends to apply for insolvency due to continued harassment from his creditors. Required; Prepare the following items to allow for the insolvency process to begin. Statement of Affairs as at 31st March 2021 (3 Marks) (i Deficiency Account of Mohan as at 31st March 2021 (2 Marks) () Discuss the accounting treatment of each of the following situations: () X Limited issued a one year guarantee for on equipment that it sells to its customer. At the company's year end, the company is being sued by one of its customers for refusing to repair equipment within the guarantee period. X Limited is of the view that the fault is not covered by the guarantee as it believes that it has arisen because the customer incorrectly followed the instructions on using the equipment, X Limited's company lawyer has advised that it is more likely than not that they will be found liable. This would result in the company being forced to repair the equipment plus pay legal expenses amounting to approximately Sh. 2,090,000. (2 Marks) (ii) A company is facing litigation. Their lawyers inform them that there is a 70% chance that the company will not have to pay damages, and a 30% possibility of damages arising. (2 Marks) (il) A court orders that XYZ Co. must pay ABC Co. 25,000/- in damages. ABC Co. has not yet received the money. (1 Marks)