Question

Question One

Abuye Welee, the sole heir to his father’s estate, decided to invest part of his inheritance in a

Business venture. Abuye sat for his Kenya Secondary Certificate Examination (KCSE) in 2017

and got a mean grade of B+. He was undecided on whether to join the module II or await

Admission into the regular programmed. Because of his upbringing on a scheme farm in Luo

Nyanza and love for flora and fauna, he believed he could successfully operate a

Landscaping and gardening business as he contemplated on what to do.

During the month of March 2018, Abuye located a small wooden building in Karen that he could rent for Ksh.20, 000 per month. After transferring Ksh.400, 000 from his inheritance money to a business bank account in the name of Abuye Land scrapping and Gardening services, he wrote cheques for rent and for purchasing land scrapping equipment and gardening supplies. He decided to deposit all receipts from services performed into the bank account and to make all payments by cheques. He believed that in this way he would have a relatively complete record of his business activities and would not have to maintain complete books of account. Abuye also maintained a listing of all services performed for customers.

On March 1^st 2018, Abuye opened his business to the public. During the three months ended 31^st May 2018, he was unusually busy due to the long rains that started pounding Nairobi as from mid- March.

Early June, Abuye decided to take count of his performance and financial position. Upon enquiry from colleagues, he was informed that you, a longtime friend of Abuye, were pursuing an MBA degree at the University of Nairobi and currently studying financial accounting. Abuye has approached you to review his bank account and listing of services rendered to determine how well he has done.

Your review has revealed the following:

1. Total cash deposited in the bank account including his initial investment was    Ksh. 880,000
2. The listing of services rendered showed that as at May 31^st 2018, customers owed him Ksh.70, 000.
3. The banking from customers included a prepayment by a customer of Ksh.20, 000 for gardening services to be provided in July 2018.
4. Cheques were written for:

1. Rent payment totaling Ksh.80, 000 for the four months ended June 30^th 2018.
2. The purchase of land scrapping equipment totaling Ksh.105, 000. The equipment cost Ksh.175, 000. Abuye still owed Ksh.70, 000 on the purchase. The equipment is estimated to have a useful life of 60 months.
3. Gardening supplies totaling Ksh.20, 000. Abuye took count of the supplies as at 31^st May 2018 and estimated that supplies on hand was Ksh.8, 000.
4. The payment of fuel for the months of March and April totaling Ksh.19, 000. Abuye had just received his bill from Oilaya for the month of May in the amount of Ksh.9,000 but had not yet paid it
5. Advertising in the classified totaling Ksh.40, 000.
6. Withdrawals made by Abuye to pay for a weekend holiday trip down at the Coast totaling Ksh.25,000.

5. Abuye had requested a friend to assist him level a garden ready for planting

of flowers. He promised the friend payment of Ksh.6,000 which Abuye is yet to pay.

Required:

Prepare the income statement of Abuye landscaping and Gardening services for the three months period ended May 31^st 2018                                        (10 marks

Answer 1

Income Statement of Abuye landscaping and Gardening services
(For the three month ended May 31, 2018)
	Ksh.	Ksh.
Sales Revenue		5,30,000
Operating Expenses:
Rent	60,000
Advertisement expenses	40,000
Supplies expenses	12,000
Fuel expenses	28,000
Salaries expenses	6,000
Depreciation	8,750
Total operating expenses		1,54,750
Net Income/Operating Income		3,75,250
Working Notes:
1) Accounting Transaction Flow during 1 March 2018 to 31 May 2018
Bank Accounts Transaction :		Ksh.
Capital Invested		4,00,000
Rent expenses (Mar - May)		-60,000
Prepaid Rent (June)		-20,000
Equipment (Cost 175000 - o/s 70000)		-1,05,000
Cash sales revenue (880000 - 400000 - 20000)		4,60,000
Unearned Revenue for gardening services		20,000
Supplies		-20,000
Fuel expenses (Mar and April)		-19,000
Advertisement expenses		-40,000
Withdrawal		-25,000
Closing balance as on May 31, 2018		5,91,000
2) Credit Sales Revenue		70,000
Cash Sales		4,60,000
Total Sales Revnue		5,30,000
3) Other Expenses :
Depreciation based on SLM as assumed (175000/60 x 3)		8,750
Supplies expenses (20000 - 8000)		12,000
Fuel expenses (19000 + o/s 9000)		28,000
Salaries expenses (o/s)		6,000