1

COUNCIL OF LEGAL EDUCATION

EXAMINATION FOR ADMISSION TO THE ROLL OF ADVOCATES
FEBRUARY 2006
ACCOUNTS

Instructions

(a) A candidate should attempt FIVE QUESTIONS WITH AT LEAST TWO (2) QUESTIONS
FROM EACH PART.
(b) Marks may be lost for illegibility
(c) Show your workings clearly.
(d) Three Hours are allowed.

PART I

COMMERCIAL ACCOUNTS

1. Gakuu, Hando and Dango entered into partnership on 15t April, 2000 sharing
capital in the ratio 3:2:1 and profits 4:3:2. The partnership agreement provides for 6% per
annum interest on capital. The following are the balances in their books at 31st March 2001.

Shs. Shs.
Capital 750,000
Purchases 1,200,000
Sales 1,500,000
Rent 24,000
Insurance Commissions 15,400
Rates and Insurance 12,800
Drawings: - Gakuu 20,000
- Hando 30,000
- Dango 40,000
Loan - Hando (315, Dec.) 400,000
- Dango (301h June) 900,000
Freehold Property 2,200,000
Motor vehicles (301h Sept) 70,000
Sundry Debtors 150,000
Sundry Creditors 180,000
Telephone 5,500
Fixtures 12,500
Salaries 57,500
Electricity 14,000
Bad debts 3,600
Bank Interest 4,000
Bank 100,000
Cash 1,500
3,845,400 384,845,400

Adjustments:

(a) Closing stock Shs.120,000.

(b) Depreciate vehicle and fixtures by 20% per annum and 8% per annum respectively.
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(c) The debit of shs.5,500 for telephone includes a deposit (returnable of shs.500, calls unpaid
amount to shs.600).
(d) Provide for:
Salaries owing - shs.2,700
Insurance prepaid - shs.4,000
Rates owing - shs.7,000
(e) Since the trial balance was drawn up debts of shs.14,000 have proved irrecoverable and must
be written off.
(f) A provision for bad debts of 5 % is to be created.
(g) General expenses of shs.9,600 were paid by Gakuu out of his own pocket on 315' December
2000.
(h) Interest on loan is at the rate of 5% per annum.

You are required to prepare:

(i) Trading and Profit and Loss Account for the year ended 31st, March 2001.

(ii) Profit and Loss Appropriation Account

(iii) The Partners Current Account

(iv) Balance Sheet as at 315, March, 2001.

(20 Marks)

2. As at 30 September 2003, the following information was available from the records of Masanduku
Ltd.

(a) A cheque for shs.27,200 drawn on 30th September was presented to the bank for payment on 16
October 2003.

(b) Cash book balance at the close of business on 30'h September was a debt of shs.22,760.

(c) The cash book had been overstated by shs.1,600 on the debit side.

(d) There was no trace in the cashbook of a standing order for shs.9,600 paid by the bank on 7th
August 2003.

(e) The bank had charged shs.640 as commission but the figure had not been passed through the
cashbook.

(f) The bank statement reflected a credit balance of shs.38,400 as at 3011 September 2003.

(g) The short-bankings and over banking amounted to shs.1,400 and 800 respectively.

(h) Money banked on 291h September 2003 totalling to shs.4,320 was credited by the bank on 6
October 2003.

(i) Shs.23,600 representing a cheque which had been banked on 28"' august 2003 had been returned
unpaid and debited on the bank statement on 5 september 2003. However, this transaction had not
been notified to Masanduku Ltd by the bank.
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(j) A banking of shs.32,000 had been erroneously entered in the cash book as hs.3,200.

Required:

(a) Show the corrected cashbook balance.

(b) Reconcile the bank balance with the corrected cash book balance.

(20 Marks)

3. The following trial balance was extracted from the accounting records of Opel Shah as on 31st
December, 2004.

Dr Cr
Shs. Shs.
Capital 2,500,000
Stock(1.1.2004) 250,000
Plant and Machinery (cost) 2,500,000
Motor vehicles (cost) 800,000
Provision for depreciation of Plant and 200,000
Machinery
Provision for depreciation of motor 160,000
Purchases 3,600,000
Sales 6,000,000
Sales returns 400,000
Purchases returns 200,000
Wages and salaries 600,000
Discounts 50,000 40,000
Carriage inwards 25,000
Carriage outwards 30,000
Postage and telephone 75,000
Water and electricity 86,000
Bad debts written off 15,000
Provision for bad debts 10,000
General expenses 85,000
Rent and rates 150,000
Debtors 550,000
Creditors 466,000
Cash in hand 60,000
Cash at bank 300,000
9,576,000 9,576,000

You are given the following additional information:

(a) Closing stock on 31 December 2004 was valued at shs.225,000

(b) Depreciation is to be charged at 10% of cost of plant and machinery and 20% of cost of motor
vehicles.
(c) Accrued rent of shs.30,000 and prepaid rates are shs.10,000.
(d) Outstanding electricity expenses is shs.6,000.
(e) Provision for bad debts is to be increased by shs.3,000.

Required:
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Prepare Trading and Profit and Loss Account for the year ending 31st December, 2004 and a Balance
Sheet as at that date.

(20 Marks)

4. The balance sheet of Muchemi Thamburi, a sole trader, as at 31st March, 2005 was as follows:

Balance sheet as at 31st March 2005

Shs. Shs. Shs. Shs.

Capital lst 378,000 Land and 310,000
April 2004 buildings (at
valuation)
Profit for 90,000 Machinery 260,000
the year (cost
ended 31
March 2005
30,000 60,000
Less:
Less: 150,000 110,000
Depreciation
Drawings

Creditors 126,000
Overdraft 54,000 Stock 114,000
Debtors 84,000 198,000

618,000 618,000

Further investigation reveals the following information:

(a) The closing stock includes damaged goods which although they had cost shs.2,000 have an
estimated sale value of shs.1,500.

(b) Debtors include shs.4,000 in respect of a customer who has gone bankrupt. A doubtful debt
provision of 2'/2% is also required.

(c) The machinery was acquired five years ago, and being depreciated down to its scrap value on
a straight line basis over eight years. A more realistic estimate indicates that the life span will
be 10 years.

(d) The land and buildings were revalued in December 2004 by Mr. Thamburi. The original cost
was shs.270,000 and the surplus was credited to the profit and loss account for that year.

(e) Wages owing at 31 March, 2005 amounted to shs.1,900, but this has not been reflected in the
accounts.

(f) In arriving at the profit for the period, a salary of shs.20,000 paid to Mr. Thamburi had been
deducted as an expense.

(g) Charges for the bank overdraft amounting to shs.1,600 have not been recorded in the account.
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(h) Shs. 4,000 rent owing to Mr. Thamburi for the letting of part of his business premises had not
been received, and no entry had been made in the books in respect of this item.
Required:

(a) Prepare journal entries to reflect such corrections as you consider necessary.

(b) Draw up a statement of revised profit for the period and prepare a new Balance Sheet as at 31
March 2005.
(20 Marks)
5. (i) You are required to comment on the meaning and practical application of the
following accounting ratios:

(a) Working capital ratio

(b) Capital gearing ratio

(c) Gross profit to turnover ratio

(d) Capital employed to turnover ratio

(ii) Comment over the limitations of ratio analysis.

(20 Marks)

6. The financial year of Genuine Spares Ltd ended on 315t December, 2004. The following
information was obtained from a summary of the cash book payments for 2004.

Shs.
Show room rent 84,000
Insurance 15,000
Salaries and wages 156,000
Central Petrol Station 240,000
Cash purchases – Fuel 26,000

On investigations, the following additional information is obtained:

(a) showroom rent had been prepaid by shs.21,000 on 1.1.2004 and was in arrears to the extent of
shs.15,000 on 31.12.2004.

(b) Insurances are paid on 15' July each year to cover the period V July to 301h June. The premium
for 2003/04 was shs.12,000.

(c) December 2003 salaries of shs.10,000 were paid on 5'h January 2004 and January 2005 salary
advance of shs.2,500 paid on 24th December 2004.

(d) Central Petrol Station who are the sole credit suppliers of fuel to Genuine Spares Ltd were owed
shs.14,350 on 31.12.2003 and were over paid shs.14,325 on 31.12.2004.

You are required to write the following ledger accounts:

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(a) Showroom Rent Account

(b) Insurance Account

(c) Salaries and Wages Account

(d) Fuel Account

(20 Marks)

PART II
TRUST ACCOUNTS

7. Citing relevant legal provisions and case law, distinguish between statutory and equitable
apportionment in trust accounts.

Apportionment refers to the need to distribute the proceeds between the various beneficiaries of the
Estate who have different entitlements under the law.

At common law, the tenant for life was only entitled to interest on money lent out of the estate. Any
other income was presumed to be an appreciation on capital and was therefore the property of the
remainderman. This situation was obviously unfair to the tenant for life because their were other forms
of income which in time were comparable to interest on money lent out. Consequently, statutory
attempts were made to remedy this position culminating in The Apportionment Act 1870 which now
makes provision as to how apportionment is to be made.

This Act is a statute of general application in Kenya pursuant to The Judicature Act provisions. Section
2 of this Act provides that all rents, dividends and other periodical payments in the nature of income
are like interest on money lent out to be considered as accruing from day to day and accordingly to be
apportioned in respect of time.

Apportionment may now be analysed under two categories:

(i) Statutory apportionment

Is the allocation of income accruing to the estate to 2 or more beneficiaries on the basis of time. Where
there is only 1 beneficiary, the question of apportionment does not arise. Similarly, where there is no
dispute as to whether income relates to the period prior to and after the death of the deceased. The
trustee must address 2 questions in this regard:

(a) to what period of time does the income relate? When did it accrue?
(b) When was the income actually received by the estate?

Once these questions have been answered, the following guidelines apply to apportionment.

(i) All income received prior to the testator’s death will be treated as capital income
irrespective of the period to which it relates e.g. if the deceased had entered into a
tenancy agreement in relation to some property forming part of the estate for the
period say 1.10.2005 to 30.9.2006, at a monthly rent of Kshs 10,000 payable in full in
advance and the money was received on 1.10.2005 and the deceased died on 1.1.2006.

(a) Moneys accruing to the estate prior to the deceased’s death are treated as capital
irrespective of when the cash is actually received.
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(b) In addition, if the income accrues prior to the testator’s death, it will be regarded as
capital irrespective of the period to which it relates.

(ii) Equitable Apportionment

Courts of equity have stated that where statutory apportionment does not achieve a fair distribution of
the proceeds of the estate, equity may intervene to achieve a more just apportionment.

These rules attempt to interpret the best wishes of the deceased that may not have been expressly
provided in the instrument appointing the trustee/executor.

Howe v Earl of Dartmouth (1802) 7 Ves 137

Where, on the death of the deceased there is residuary personalty which is to be enjoyed by persons in
succession, the trustee is under a duty to convert into money such parts of the residuary personalty
that may be of wasting, future or reversionary character or which constitute unauthorized securities.
After payment of general and testamentary expenses relating to the estate of the deceased, the trustee
should invest the balance in authorized securities.

However, the testator may expressly empower the executor to postpone the need to convert as
contemplated in Howe’s case.

Re Fawcett (1940) Ch 447

Where there is a duty to convert in accordance with the rule in Howe’s case, and there is no specific
power to postpone conferred on the executor, the issue of apportionment of income for the period
between the death of the testator and the actual conversion of the assets will be governed by the rule in
Re Fawcett.

Between the death of the testator and the actual conversion, the trustee will provide a notional
valuation of the assets and apply a base rate of interest as income accruing to the tenant for life at the
end of the period.

Re Beech (1920) 1 Ch

The recommended rate of interest should be 4%.

Re Parry (1947) Ch 41

The rule in Re Parry states that where a will gives an executor the power to postpone the conversion
and the executor exercises that power, then for purposes of determining the income to be given to the
tenant for life, the value of the estate will be presumed to be the value at the testator’s death. Interest
will be 4%.

Earl of Chesterfield’s Trust (1883) 24 Ch 643.

Where an asset is subject to conversion in accordance with the rule in Earl’s case, but it earns no
income and the executor has either exercised the right of conversion or has postponed conversion, then
at the time when conversion is actually done, income is to be computed as follows:

the proceeds of the conversion are assumed to have both portions of capital and income and in
order to determine the income portion, it is assumed that the capital element was invested at the
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time of death at its value then and that it has accrued interest in the interim period. That interest
is to be calculated on a compounded basis between time of death and conversion.

8. John enters into a lease agreement covering the period 1.10.2005 to 31.3.2006. He agrees with
James, the lessee, that the monthly rent payable shall be Kshs.50,000/=. John dies in a road
traffic accident on 1.1.2006 and had appointed you executor of his will. How would you
apportion income if:

(a) James had paid the six-months rent in advance on 1.10.2005;

(b) The lease only provided for payment of one month's rent in advance but James had opted to
pay the entire six months rent in advance but had not yet made payment at the time of John's
death;

(c) The agreement provided for payment of one month's rent in advance, no payment had been
made at the time of John's death and you receive full payment
on 31.3.2006;

(d) The lease was silent as to the time of payment of monthly rent. No payment has been made
to-date.

9. Mr. Unoka, a widower, dies intestate leaving three daughters Naomi, Leah and Rachel who are all
adults. Under the Law of Succession Act (Cap.160, Laws of Kenya), the late Unoka's estate falls to be
distributed between the three daughters in equal shares absolutely. The net estate comprises the
following:

(a) House on L.R.No.209/2006 Nairobi valued at shs.3 million;

(b) Cash in Bank - shs.100,000/=;

(c) Ordinary shares in Mali Mingi Ltd worth shs.100,000/=;

(d) Personal effects worth Shs.410,000/=.

The estate owes shs.600,000 to Savings & Loan Ltd for the mortgage on the house and shs.10,000/=
as legal fees.

It is agreed that Naomi will take the house in specie and Leah will take the ordinary shares in Mali
Mingi Ltd.

Draw up the distribution account.

[Refer to August 2005 question 9]

10. (a) What is the nature of trust accounts and what general duties does the law impose on trustees
with regard to trust accounts?
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Trust Accounting is

 A system of keeping records by:

(i) A Trustee

 A trustee is a person compelled in equity to do certain things on behalf of a beneficiary.

A trustee could also be an executor created by will to administer the estate of a deceased
in accordance with the will.

 A trust is a relationship which arises whenever a person called a trustee is compelled in

equity to hold property for the benefit of a person or for some object permitted by the
law in such a way that the real benefit accrues not but to the beneficiaries or other object
of the trust.

 Usually appointed under a Trust Deed.

 Trustee stands in a fiduciary relationship with the beneficiary and therefore the
obligations imposed by equity in such relationships also apply to trust accounts.

 If the trustee cannot himself keep the accounts, he must either employ or avail somebody
who will keep the accounts. However, the trustee remains personally liable for the
accounts.

 S 24 of the Trustee Act empowers a Trustee to engage an agent to transact any business
or do any act required in administering the trust. The section provides indemnity to the
Trustee for reasonable expenses incurred towards employing the

 agent to achieve the purposes of the trust.

Primary Objectives Of Trust Accounting

 To ensure that a detailed record of the affairs of the trust is maintained.

 To give information to the beneficiaries of a trust.

Requirements of A Trust Accounts System

 Must contain a list of all the assets and liabilities at the inception of the trust.

 Must give a complete history of all subsequent transactions of both capital and income.

 Must be able to provide a ready means of ascertaining the position of the trust at any point in time.

 It will show how the trust funds have been distributed.

 It must be as simple as possible.

 Must show particulars of all receipts and payments and all money received by the trustee must be
receipted and all payments supported by vouchers and invoices.
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 Must be up to date at all times since the beneficiary is in law entitled to require account of the trust at
any time.

(b) Outline the rights of a beneficiary with regard to trust accounts.

Rights Of A Beneficiary

 To inspect the accounts, vouchers, receipts, title deeds or any other documents pertaining to the
trust. The inspection may be done the beneficiary personally or through his agent.

 The beneficiary has a right to take copies of all records of documents relating to the accounts but
must make the necessary payment.

 The beneficiary has a right to investigate the accounts, make any inquiries thereon and ask any
question regarding the account. See Re: Fish (1893) 2 CH 413.

 The beneficiary is entitled to full, accurate and regular information with regard to the operations of
the accounts. If any investments have been made, the beneficiary has a right to know the nature of
such investments and the returns thereon.

 The beneficiary is entitled to seek the opinion of a 3rd party e.g. an advocate regarding the operations
of the trust. Where part of the trust funds are invested in shares of a company, then the beneficiary is
entitled to such information as a shareholder would be entitles to in company law subject to the
company’s Articles of Association.

 The beneficiary is entitled to examine any 3rd party basis of the trustee’s administration of the trust,
e.g. legal opinions, advise of shareholders or investment brokers, valuers etc.

 Where a trustee retires or otherwise ceases to be a trustee, he must hand over all books and accounts
to his successor and the beneficiary has a right to expect such a handover, see Tiger v Barclays Bank
Ltd (1952) 1 All ER 85.

 The beneficiary has a right to receive accounts prepared in good faith which are complete and reflect
the trustee’s obligations vis á vis the trust.

11. The trustee is today considered as more than a more steward of the property entrusted to him.
He is allowed to invest the trust fund as part and parcel of the administration or management of the
trust.

Discuss.

Investments by Trustees Generally

At common law, trustees were viewed as stewards of trust property. In those days the primary asset
entrusted to trustees was land. The threshold of care was that the trustee would take care of trust
property as if it was his own. The industrial revolution brought on new forms of property e.g. factories
and shares. There was a new requirement in equity that trustees invest trust funds for the benefit of
beneficiaries. Are there any rules that govern a trustee vis a vis his position as an investor?

Under the common law, the trustee is only under a duty to govern the trust funds as received. His
duty was mainly as defined by a will. In intestate succession his duty was defined by the common law.
The trustee was primarily involved in administration of land and the standard of care required of him
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was that he should administer the land as he would his own. However, with the advent of the
industrial revolution towards the end of the 18th century, the role of the trustee widened with the
advent of new forms of property e.g. capital. The trustee’s role went beyond mere stewardship to
include application of the trust fund to enhance the benefit of the beneficiaries, both the tenants for life
and the remainderman.

The trustee’s duty however remained fiduciary in nature but was required to act in good faith and
exercise prudence and care in his role as investor so as to result in maximum benefit to the person
beneficiaries of the trust. He had the additional duty to ensure that the beneficiaries would get a
reasonable and comparable benefit from the investment as a trustee. The trustee was also duty bound
to seek advice on the best investment but to retain ultimate judgment in his decisions.

By the mid 19th century there had been development of the rules requiring the trustee to invest only in
authorized investments. However, even where an investment was authorized by the law, it was still
incumbent upon the trustee to exercise due care and prudence in his investments.

The current position

Section 4 of The Trustee Act (Cap 167) provides for the authorized investments in which the trustee
may invest trust fund. It may be categorized into two broad classes:

(b) Fixed interest investments; and

(c) Wider range investments

Section 2 of the Act defines a fixed interest investment as:

(a) a security which under its term of issue bears a fixed rate of interest; or

(b) a mortgage of immovable property; or

(c) a deposit whether fixed term or otherwise with a bank or financial institution, building
society or the Kenya Post Office Savings Bank.

Wider range investment is defined in the schedule to the Act as an investment other than a fixed
interest security.

S 4 shows the list of authorized fixed interest investments:

(b) any securities in which trustees in England are in the time being authorized by English Law to
invest trust funds;

(c) any securities on which is for the time being guaranteed by the UK Government or the Kenyan
Government or any public debentures issued under the authorization of or guaranteed by any
Act;

(d) any security given by a city or municipal council established under the provision of the Local
Government Act which the Minister has by Notice in the gazette declared to be a trustee
security for the purposes of the Act;

(e) any security issued by Kenya Railways;

(f) any security or any loan to the Industrial Development Bank Limited; and
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(g) the purchase of any immovable property in Kenya held for an estate in fee simple or for a term
of years of which not less than 40 years is unexpired, and which is not subject to a rent
exceeding 4% of the unimproved value thereof.

Authorised Wider Range Investments

(i) Any security the price of which is quoted on a recognized stock exchange in Kenya subject to
the following qualifications:

(a) must be of a company registered under The Company Act.

(b) Its total issued and paid up capital must not be less than Kshs 10 million.

(c) The company must have paid dividends for all its shares that rank for dividends for each
of the 5 years immediately preceding the year in which the investment is made.

(ii) Any units or other shares of the investments subject to the trusts, of a unit trust within the
meaning of The Unit Trusts Act (Cap 521) and registered under section 7 of that Act.

(iii) Any shares of a building society.

12. (a) A trustee requests your legal advice on a request for an advancement of Kshs.100,000 by a
beneficiary who intends to set up a small business. Advise the trustee accordingly and draw the
Memorandum, Schedule of Assets and Cash Account to reflect that transaction.

Section 34 of the Trustee Act authorizes trustees to apply any capital money, other than money
considered as land by statute or in equity, for the advancement or benefit of any person entitled to
capital.

The entries in the trust accounts depend on the type of advancement. An advancement which must be
brought into account by the beneficiary when the estate is distributed, e.g., an advancement made
under the statutory power referred to above, is recorded in the same manner as a loan made by the
estate.

It will therefore be credited to the Cash Account and will appear in the Schedule among the assets
acquired since the death. An advancement is not, of course, strictly speaking an " asset ", but the fact
that it is entered in the Schedule will ensure that it is not overlooked when the estate is distributed.

Any misdescription can be cured, if desired, by adding " and advancements " to the Schedule heading
referred to above.

Estate of X deceased

Memorandum

No. Date Particulars Reference

1. 1.1.2006 On 30th Nov 2005, Mr X died in Nairobi domiciled in Page 1
Kenya leaving a will dated xxxxx. Documents
Certificate
of Death
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Page 2
Documents
Will
2. 1.1.2006 Deceased left the following surviving him: Birth
Certificates
(a) Mrs X widow
(b) Son X p 3 Docs
(c) Son B p4 docs
(d) Daughter C p5 docs
(e) Daughter D p6 docs

3. 1.1.2006 On 20th December 2005, grant of probate, High Court

Grant of
Nairobi in succession cause number 200x of 2005. Probate
Page 7
docs
4. 20.11.2006 On 20 November 2006, it was agreed to lend Mr X as Page 1
th

an advancement, Kshs 100,000 in order to set up a schedule

small business. P 1 cash
accounts.

Schedule of Assets

No. Date Particulars Cash Reference

Account
1. 20.11.2006 An advancement, Kshs 100,000 in 100,000 Memorandum
order to set up a small business. – item no. 4
Cash Account.

Cash Account

N Date Particulars of Amoun Re N Date Particulars Amou Ref.

receipts t f. of receipts nt
1. 20.11.0 Advanceme 100,00 Memo
6 nt to 0 Sc.
beneficiary.. Assets

(b) What are the salient provisions of the Advocates (Deposit Interest) Rules?

The salient provisions are discussed below.

Section 2 of the Rules provide that an advocate is not liable by virtue of the relation between advocate
and client to account to any client for interest received by the advocate on moneys deposited in a client
account being moneys received or held for or on account of his clients generally.

Section 3 provides that when an advocate holds or receives for or on account of a client money on
which, having regard to all the circumstances (including the amount and the length of time for which
the money is likely to be held), interest ought in fairness to the client to be earned for him, the advocate
shall take instructions from the client concerning the investment of that money.
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Section 4 provides that an advocate is liable to account to a client for interest received on moneys
deposited in a client account where the moneys are deposited in a separate designated account.
S. In these Rules "separate designated account" means a deposit account in the name of the advocate or
his firm in the title of which the word "client" appears and which is designated by reference to the
identity of the client or matter concerned.

COUNCIL OF LEGAL EDUCATION

EXAMINATION FOR ADMISSION TO THE ROLL OF ADVOCATES
AUGUST 2005
ACCOUNTS

Instructions

(a) A candidate should attempt FIVE QUESTIONS WITH AT LEAST TWO (2) QUESTIONS
FROM EACH PART.
(b) Marks may be lost for illegibility
(c) Show your workings clearly.
(d) Three Hours are allowed.

PART I

COMMERCIAL ACCOUNTS

l. The following information has been extracted from the accounts of Akili Nyingi Ltd. an
expanding wholesale business, for the year ended 30th September 2002.

Trading, Profit and Loss Account for the Year Ended 30th September 2002.

Shs. Shs.
‘000 ‘000
Net sales 30,000
Cost of goods sold 25,800
Gross profit 4,200
Less: operating expenses
Selling 1,220
General administration 680
Interest charges 450 2,350
1,850
Add: Investment income 150

2,000
Less: Corporation tax 45% 900
Net income after tax 1,100

Balance sheet as at 30th September

Assets: 2002 2001

Shs. Shs.
000 000
Cash 520 500
Investments 1,750 1,500
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Debtors 2,550 2,000

Stock 3,500 3,000
Total current assets 8,320 7,000
Plant and equipment (net) 12,100 13,000
20,420 20,000
Trade creditors 1,920 1,600
Accruals 150 100
Tax payable 1,350 1,300
Total current liabilities 3,420 3,000
9% Debentures 5,200 5,000
Ordinary share capital (8,000,000) 8,000 8,000
Retained earnings 3,800 4,000
20,420 20,000

Required•

(a) Calculate the following:

(i) current ratios (3 marks)

(ii) stock turnover (3 marks)

(iii) average collection period (3 marks)

(iv) return on net worth(3 marks)

(v) gross profit margin on sales (3 marks)

(b) What is the importance of issuing bonus shares? (2 marks)

(c) State at least six limitations of accounting ratio analysis. (3 marks)

2. The unaudited accounts for the year ended 30th June 2004 of Ugenya Limited, second hand
car dealers, show gross profit of shs.9,000,000 and a net profit of 2,250,000. After subsequent
investigation, the following discoveries were made:

(1) A debt of shs.75,000 due from D. Mambo to the company was written off as irrecoverable in
the company's books in January 2004. Since preparing the draft accounts, D. Mambo has settled the
debt in full.

(2) The company's main warehouse was burgled in February, 2004, when goods costing
shs.5,000,000 were stolen. This amount has been shown in the draft accounts as an overhead item
"loss due to burglary". Although the insurance company denied liability, in the past day or two that
decision has been changed and Ugenya United Limited have been advised that shs.3,500,000 will be
paid in settlement.

(3) Discounts received in March 2004 of shs.52,500 have been credited, in error, to purchases.

(4) On 2nd January, 2004, a car which had cost the company shs.450,000 was taken from the
showroom for use by one of the company's sales representatives whilst on company's business. In
the showroom, this car had a shs.600,000 price label. Effect has not been given to this transfer in the
books of the company, although the car was not included in the trading stock valuation at 30th June
 16

2004. The company provides for depreciation on motor vehicles at the rate of 25% of the cost of
vehicles held at the end of each financial year.

(5) Goods bought and received from N. Kamau on 29th June 2004 at a cost of shs.300,000 were
not recorded in the company's books of accounts until early June 2004. Although they were unsold
on 30th June 2004, the goods in question were not included in the stock valuation at that date.

(6) The company is hoping to market a new car accessory product in January 2005. The new
venture is to be launched with an advertising campaign in July, 2004. The cost of this campaign is
shs.1,250,000 and this has been debited in the company's profit and loss account for the year ended
30th June 2004, and is included in current liabilities as a provision, notwithstanding the confident
expectation that the new product will be a success.

(7) On 30th June 2004, the company paid an insurance premium of shs.150,000, the renewal
being for the year commencing lst July 2004. This premium was included in the insurance of
shs.275,000 debited in the draft profit and loss account.

Required:

(a) The journal entries necessary to effect corrections of all the above errors. (14 marks)

(b) A computation of the corrected gross profit and net profit for the
year ended 30th June 2004. (6 marks)

3. (a) What do you understand by the term depreciation? Comment on the view that one of the
objectives of depreciation should be to provide funds for replacement purposes. (5 marks)

(b) The Balance Sheet of Eshel Ltd as at 30th June 2003 shows motor vehicles as follows:

Shs.
Motor vehicles at cost 1,885,500
Less: depreciation 972,780
882,720

Vehicles are depreciated on the straight-line basis over a five year life. Depreciation is charged pro
rata to time in the year of purchase but no charge is made in the year of disposal. The disposal
account is written up on the last day of each year.
During 2003-2004 the following vehicles transactions took place:

Shs.
31 August purchased panel van 228,000
31 October purchased range rover 351,000
31 January purchased delivery van 150,000

Sales of vehicles

Date of purchase Date of sale Sales price Original cost

Shs. Shs.
Car 1 July 1999 30 Sept.2003 15,000 140,000
Pickup 30 Sept.2000 31 Dec.2003 27,000 120,000
Panel Van 1 March 28 Feb. 2004 21,000 95,000
 17

Required:

Write up the accounts for motor vehicles, provision for depreciation of motor vehicles and motor
vehicles disposals. (15 marks)

4. Kanga and Nyanja are partners who share profits and losses in the ratio 2:3 respectively. The
following balance sheet was drawn up from their books on 31 December 2002:

Shs. Shs.
FIXED ASSETS:
Good will at cost 400,000
Premises at cost 2,000,000
Furniture and fittings at cost 500,000
Less: accumulated depreciation 260,000 240,000
Motor vehicles, net of depreciation 700,000
3,340,000
CURRENT ASSETS:
Stock 640,000
Debtors, less provision for bad debts 570,000
Cash at bank 190,000
4,740,000
Fixed capital:
Kanga 1,500,000
Nyanja 1,500,000
Reserves:
General reserves 500,000
CURRENT LIABILITIES:
Current account – Kanga 120,000
Current account – Nyanja 180,000
Creditors 940,000

4,740,000

KANGA NYANJA
Shs. Shs.
Balance on 1 January 2002 340,000 510,000
Add: Net profit for 2002 20,000 30,000
360,000 540,000
Less: Drawings 240,000 360,000
Balance on 31 December 2002 120,000 180,000

In the course of subsequent audit, the following discoveries were made:

(1) No record has been made of cash sales amounting to shs.100,000 made on 31 December, 2002.
This amount was used as follows:
shs.
Paid creditors 40,000
Paid to staff as bonus for 2002 30,000
Retained in shop cash box30,000
 18

(2) A piece of furniture that had an accumulated depreciation of shs.10,000 and a book value of
shs.25,000 on 1 January 2002 was sold for cash
shs.20,000 in September 2002. The following entry was made to record this disposal:

Dr. Cash shs.20,000

Cr. Furniture and fittings account shs.20,000

3. A new motor vehicle was bought for shs.550,000 on 30 December 2002. This acquisition was
recorded through the purchase book. No depreciation has been provided or is deemed necessary on
this vehicle.

(4) The partners decided to revalue premises at shs.3,000,000 which is its current market value.
The surplus is to be used to write off goodwill and the balance is to be transferred to the general
reserve.

5. Kanga is entitled to monthly salary of shs.25,000 as per their partnership agreement. This amount
has been regularly paid to him and debited to office salaries account.

(6) The opening stock was valued at cost while the stock on 31 December 2002 was valued at
selling price. The gross profit margin is 331/3 on cost.

Required:

(i) Your computation of correct net profit made by the partners in 2002. (6 marks)
(ii) Partners profit and loss appropriation account for 2002. (3 marks)
(iii) Partners current account in the ledger form for the same period. (3 marks)
(iv) Revised balance sheet as at 31 December 2002.(8 marks)

5. The following balances were entered from the general ledger of Juma Ltd on 30 June 2001 after
the preparation of the trading account.

Shs.
11% preference share capital 1,000,000
Ordinary share capital 3,500,000
Land and building (cost shs.5,750,000) 6,000,000
Equipment (cost shs.400,000) 280,000
Motor vehicles (cost shs.860,000) 602,000
Goodwill (cost shs.800,000) 775,000
10% debentures (repayable year 2100) 1,500,000
Stock at 30 June 2001 1,361,000
Salaries and wages 462,000
Directors remuneration 315,000
Motor vehicles expenses 406,500
Rates and insurance 146,000
General expenses 28,000
Debenture interest 75,000
Debtors 930,500
Creditors 568,500
Cash at bank 419,500
General reserve 250,000
Share premium 700,000
Interim ordinary dividends paid 175,000
Fixed assets (land and buildings) revaluable reserve at
1 July 1999 250,000
 19

Profit and loss account at 30 June 2000 847,000

Gross profit for the year 3,360,000
Additional information:

1. Authorised Share capital:

400,000 11% preference shares of shs.25 each at par. 410,000 ordinary shares of shs.10 each at par.
(all shares are fully issued and paid up).
(2) The policy of the company regarding depreciation is:
Not to depreciate land and buildings but to revalue the building at the end of two years. The
market value as at 30 June 2001 has been agreed with valuation experts at shs.6,300,000.
To depreciate motor vehicles at the rate of 25 per cent on reducing balance.
To depreciate equipment at the rate of 10 per cent using straight line depreciation method.

3. The interest on debentures is paid semi-annually on 1 July and I January. The company
makes provision for interest accrued during a financial year but is not yet paid.

(4) Goodwill is written off at the rate of 3.125 % per annum on cost.

5. The directors propose that the preference dividend and also a final ordinary dividend which
will bring the total dividend on ordinary shares for the year to shs.1.50 per share be paid. The
directors also propose to transfer shs.100,000 to general reserve.

(6) The corporation tax on the profit for the year is estimated at shs.250,000.
The company had decided to write off debts of shs.30,500 which it considers bad. Whereas doubtful
debts have been previously recognized when specific accounts are known to be uncollectible the
company now proposes to establish and maintain (with effect from the current year) a general
provision for doubtful debts 4 per cent of debtors.

(8) Rates include an amount of shs.96,000 paid to the Municipality for 12 months to 31 December
2001.

9. Casual labourers have not yet been paid shs.45,000 in respect of the services rendered during
the last two weeks of June 2001.

Required:

(a) Profit and Loss Appropriation Account for the year ended 30 June 2001. (10 marks)

(b) Balance sheet as at 30 June 2001. (10 marks)

6. Wanjiku commenced trading on 1 January 1999 as Mama Mboga dealing on grocery and soft
drinks with an initial capital in cash of shs.90,000. This amount was utilized in opening a business
bank account. All receipts and payments are passed through bank account. The following is a
summary of the items credited in the business cash book during the year ended 31 December 1999.
Shs.
Purchases of fixtures and fittings:
Grocery shop 18,000
Soft Drink shop 15,000
Salary and Wages:
Grocery shop 64,000
Soft drink shop 44,000
 20

Rates for the period 1 January 1999 to 30 June 2000 18,000

Transport expenses 27,000
Rent for the period 1 January 1999 to January 2000 26,000
Electricity 8,700
Bank charges 4,500
Payments to suppliers 1,606,500
Drawings 16,000
Water (includes water deposit shs.300) 12,000
The following additional information is provided:

(a) The purchases during the year ended 31 December 1999 were:
Shs.
Grocery shop 877,500
Soft drink shop 780,000

The above purchases do not include goods costing shs.10,000 for the business but taken by Wanjiku
for her domestic use. The figure of shs.10,000 is included in payment to suppliers.

(b) The gross profit in the grocery shop is at the rate of 25% of sales while in soft drink shop is at
20% of sales.

(c) In both shops, sales for each month are at uniform level and the policy of Mama Mboga is to
have the month end stocks in each shop just enough for the following months sales. The prices of
all goods bought by Wanjiku have not changed since the business began.

(d) On 1 July 1999, Wanjiku obtained a five year loan of shs.100,000 at an interest rate of 10% and
into a moratorium of six months from Faulu. The loan was immediately paid with the business
bank account.

(e) At 31 December 1999 wages accrued were grocery shop - shs.2,000 and soft drink shop
shs.5,200

(f) Total trade debtors at 31 December 1999 amounted to shs.300,000.

Expenses not incurred by specific shop were to be apportioned as twothirds to grocery shop and
one-third to soft drink shop.

(h) The depreciation on fixtures and fittings should be provided at the rate of 20% of the cost of
assets at the year end.

Required:

(a) Trading and profit and loss Account for year ended 31 December 1999 for:
(i) Grocery Shop; and
(ii) Soft Drink Shop (14 marks)
(b) A Balance Sheet as at 31 December 1999. (6 marks)
 21

PART II
TRUST ACCOUNTS

7. A trustee stands in a fiduciary position vis-a-vis the beneficiary and the law imposes various
duties upon the trustee while simultaneously assigning certain rights to the beneficiary.

Discuss this statement with particular reference to trust accounts and state whether a trustee qua
trustee is entitled to fees for his services.

A trustee is a person compelled in equity to do certain things on behalf of a beneficiary. A trustee

could also be an executor created by will to administer the estate of a deceased in accordance with the
will.

A trust is a relationship which arises whenever a person called a trustee is compelled in equity to hold
property for the benefit of a person or for some object permitted by the law in such a way that the real
benefit accrues not but to the beneficiaries or other object of the trust.

Usually appointed under a Trust Deed.

Trustee stands in a fiduciary relationship with the beneficiary and therefore the obligations imposed
by equity in such relationships also apply to trust accounts.

If the trustee cannot himself keep the accounts, he must either employ or avail somebody who will
keep the accounts. However, the trustee remains personally liable for the accounts.

S 24 of the Trustee Act empowers a Trustee to engage an agent to transact any business or do any act
required in administering the trust. The section provides indemnity to the Trustee for reasonable
expenses incurred towards employing the agent to achieve the purposes of the trust.

The duties of trustees with regard to accounts

The duties with regard to keeping accounts which are imposed on executors, administrators and
trustees-and in this respect they stand in the same situation (Pearse v. Green (1819), 1 Jac. & W. 135)-
have been considered in many cases. The rules which have been laid down may be summarised\as
follows:

A. The accounts must be proper, faithful and accurate. If the trustee himself cannot keep
accounts, his first duty is to provide someone who can. (Wroe v. Seed (1863), 4 Giff. 425, 429).

(i) The accounts of each trust must be kept separate from all other matters (Freeman v. Fairlie (1817).

(ii) The accounts must contain particulars of all receipts and all payments (White v. Lady Lincoln
(1803), 8 Ves. 863), and care must be taken not to suppress, conceal or overcharge (Earl of Hardwicke v.
Vernon (1808), 14 Ves. 504). A trustee is responsible for improper accounts which are rendered in his
name and with his sanction even though prepared by others (Horton v. Brocklehurst (No. 2) (1858), 29
Beav. 504).

(iii) Both receipts and payments must be supported by vouchers (White v. Lady Lincoln, ante).

B. Trustees must always have the accounts ready when called upon to render them (Kemp v. Burn
(1863), 4 Giff. 348) even after they have been settled (Underwood v. Trower, [1867] W.N. 83), and it is
no excuse for failure in this respect that they offered the beneficiaries a sum in settlement even though,
as it turns out, it would have covered all that was due (Collyer v. Dudley (1823), Turn. & R. 421 (c) ).
 22

The trustee, however, is entitled to prima facie evidence that the person requiring production of the
accounts is in fact a beneficiary, i.e., a person entitled either absolutely or contingently to participate in
the income or capital of the estate. A mere claimant who has not made out his title does not have
the privileges of a beneficiary (Wynne v. Humberston (1858), 27 Beav. 421).

Accounts and vouchers must be preserved even after release has been given (Clarke v. Earl of
Ormonde (1821), Jac. 108 ; Payne v. Evens (1874), L.R. 18 Eq. 356 (d) ). Where an accounting party
destroys accounts, the Court will presume everything most unfavourable to him consistent with the
established facts, especially if he destroys them when litigation is pending (Gray v. Haig (1855), 20
Beav. 219).

Under Rule 14 of the Advocate (Accounts) Rules, advocates must preserve books and accounts for at
least six years after the last entry.

C. A statement of what a beneficiary is entitled to receive should be rendered without request,

(a) in the case of income, at reasonable intervals,

(b) in the case of capital, when it falls into possession (e).

A deed of release will not discharge the trustees where the rights of the beneficiaries have not been
fully disclosed (Walker v. Symonds (1818), 3 Swan. 1). See also Ryder v. Bickerttm (1743), 3 Swan. 80,
n, and Chapter 8, post.

In addition to the foregoing, advocates acting as trustees must comply with the Advocate's Accounts
Rules.

Rights Of A Beneficiary

 To inspect the accounts, vouchers, receipts, title deeds or any other documents pertaining to the
trust. The inspection may be done the beneficiary personally or through his agent.

 The beneficiary has a right to take copies of all records of documents relating to the accounts but
must make the necessary payment.

 The beneficiary has a right to investigate the accounts, make any inquiries thereon and ask any
question regarding the account. See Re: Fish (1893) 2 CH 413.

 The beneficiary is entitled to full, accurate and regular information with regard to the operations of
the accounts. If any investments have been made, the beneficiary has a right to know the nature of
such investments and the returns thereon.

 The beneficiary is entitled to seek the opinion of a 3rd party e.g. an advocate regarding the operations
of the trust. Where part of the trust funds are invested in shares of a company, then the beneficiary is
entitled to such information as a shareholder would be entitles to in company law subject to the
company’s Articles of Association.

 The beneficiary is entitled to examine any 3rd party basis of the trustee’s administration of the trust,
e.g. legal opinions, advise of shareholders or investment brokers, valuers etc.
 Where a trustee retires or otherwise ceases to be a trustee, he must hand over all books and accounts
to his successor and the beneficiary has a right to expect such a handover, see Tiger v Barclays Bank
Ltd (1952) 1 All ER 85.
 23

 The beneficiary has a right to receive accounts prepared in good faith which are complete and reflect
the trustee’s obligations vis á vis the trust.

The duties of a Trustee as explained above are complex and a Trustee requires to be suitably qualified
to be able to perform these duties, it follows therefore that a Trustee should be entitled to fees.

8. (a) With the aid of decided cases, discuss four rules of equitable apportionment applicable in
trust accounts.

Equitable Apportionment

Courts of equity have stated that where statutory apportionment does not achieve a fair distribution of
the proceeds of the estate, equity may intervene to achieve a more just apportionment.

These rules attempt to interpret the best wishes of the deceased that may not have been expressly
provided in the instrument appointing the trustee/executor.

Howe v Earl of Dartmouth (1802) 7 Ves 137

Where, on the death of the deceased there is residuary personalty which is to be enjoyed by persons in
succession, the trustee is under a duty to convert into money such parts of the residuary personalty
that may be of wasting, future or reversionary character or which constitute unauthorized securities.
After payment of general and testamentary expenses relating to the estate of the deceased, the trustee
should invest the balance in authorized securities.

However, the testator may expressly empower the executor to postpone the need to convert as
contemplated in Howe’s case.
Re Fawcett (1940) Ch 447

Where there is a duty to convert in accordance with the rule in Howe’s case, and there is no specific
power to postpone conferred on the executor, the issue of apportionment of income for the period
between the death of the testator and the actual conversion of the assets will be governed by the rule in
Re Fawcett.

Between the death of the testator and the actual conversion, the trustee will provide a notional
valuation of the assets and apply a base rate of interest as income accruing to the tenant for life at the
end of the period.

Re Beech (1920) 1 Ch

The recommended rate of interest should be 4%.

Re Parry (1947) Ch 41

The rule in Re Parry states that where a will gives an executor the power to postpone the conversion
and the executor exercises that power, then for purposes of determining the income to be given to the
tenant for life, the value of the estate will be presumed to be the value at the testator’s death. Interest
will be 4%.

Earl of Chesterfield’s Trust (1883) 24 Ch 643.

 24

Where an asset is subject to conversion in accordance with the rule in Earl’s case, but it earns no
income and the executor has either exercised the right of conversion or has postponed conversion, then
at the time when conversion is actually done, income is to be computed as follows:

the proceeds of the conversion are assumed to have both portions of capital and income and in
order to determine the income portion, it is assumed that the capital element was invested at the
time of death at its value then and that it has accrued interest in the interim period. That interest
is to be calculated on a compounded basis between time of death and conversion.

(b) What statutory rules of apportionment must a trustee have regard to in dealing with an
estate?

Statutory apportionment

Is the allocation of income accruing to the estate to 2 or more beneficiaries on the basis of time. Where
there is only 1 beneficiary, the question of apportionment does not arise. Similarly, where there is no
dispute as to whether income relates to the period prior to and after the death of the deceased. The
trustee must address 2 questions in this regard:

(a) to what period of time does the income relate? When did it accrue?

(b) When was the income actually received by the estate?

Once these questions have been answered, the following guidelines apply to apportionment.

(i) All income received prior to the testator’s death will be treated as capital income
irrespective of the period to which it relates e.g. if the deceased had entered into a
tenancy agreement in relation to some property forming part of the estate for the
period say 1.10.2005 to 30.9.2006, at a monthly rent of Kshs 10,000 payable in full in
advance and the money was received on 1.10.2005 and the deceased died on 1.1.2006.

(a) Moneys accruing to the estate prior to the deceased’s death are treated as capital
irrespective of when the cash is actually received.

(b) In addition, if the income accrues prior to the testator’s death, it will be regarded as
capital irrespective of the period to which it relates.

9. Mary dies leaving a will under which her children Naomi, Leah and Rachel are given equal
shares of the residuary estate. Before the estate is wound up, Rachel requires funds to open a
medical practice and she is loaned Kshs.200,000/= from the estate. The net estate comprises the
following:

(a) House on Plot No.500 Nakuru valued at Kshs.2,000,000/=

(b) Mary's personal effects valued at Kshs.100,000/=
(c) Cash at bank - Kshs.100,000/=
(d) 500 shares in Mali Mingi Co. Ltd valued at Kshs.300,000/=
(e) A debt of Kshs.500,000/= to Housing Finance being outstanding mortgage on the Nakuru
house.
(f) A debt of Kshs.25,000/= to Wakili & Co. Advocate, in legal fees.
It has been agreed that the mortgage debt will be taken over by Naomi who also takes the house.
Leah will take the personal effects and the Mali Mingi shares will be transferred to Rachel.

Draw up the Distribution Account.

 25

[Refer to lecture examples below]

Example 2

Michael dies leaving a will under which his 3 children, Naomi, Leah and Rachel are given equal shares of the
residuary estate. Before the estate is wound up, Rachel requires funds to set up a medical practice and is
advanced 200,000 from the estate. The Net Estate comprises

1. House in Nakuru 2000000

2. Personal effects 100000
3. Cash in Bank 100000
4. Shares 300000
5. Mortgage debt 500000
6. Legal fees 25000

The beneficiaries have agreed that the mortgage debt will be taken over by Naomi who also takes the house in
specie. Leah will take the personal effects and the KCB shares will be transferred to Rachel. Draw up the
distribution account.

In the Estate of Michael (Deceased)

Distribution Account

No. Particulars Re Amoun No. Particula Ref. Amoun

f. t rs t
1. House on LR xxx Sc 2,000,0 1. Mortgage xxx 500,000
Nakuru h 00 debt
Me
m.
2. Personal effects xx 100,000 2. Legal Fees xxx 25,000
x
3. Cash in Bank xx 100,000 3. Rachel’s xxx 1,250,0
x Share 00
(House
less paid
to estate)
4. Shares xx 300,000 4. Naomi’s xxx 725000
x share
5. Advancement to xx 200,000 5. Leah’s xxx 725000
Rachel x share
2,700,0 2,700,0
00 00

*[Must show workings]

Mr Omondi, a widower, dies intestate leaving 3 sons, John Peter and Michael who are
all aged over 18 years. Under The Law of Succession Act, the late Omondi’s estate falls
to be distributed amongst his 3 sons equally. The net estate comprises the following:

i. House LR xx Nairobi 3 million;

 26

ii. Motor vehicle 2 million;

iii. Cash in bank 100, 000
iv. Ordinary shares in X ltd 10,0000
v. Personal effects 410,000
vi. Estate owes Mortgage debts 500,000
vii. Legal fees 10,000

It is decided between all the beneficiaries that John will take the house in specie and
Peter the shares in specie. Draw up the distribution account.

In the Estate of Mr Omondi (Deceased)

Distribution Account

No. Particulars Re Amou No. Particular Ref. Amoun

f. nt s t
1. House on LR xxx Sch 3,000,0 1. Mortgage xxx 500,000
Nairobi Me 00 debt
m.
2. Motor Vehicle xxx 2,000,0 2. Legal xxx 10,000
00 Fees
3. Cash in Bank xxx 100,000 3. John’s xxx 1,700,0
Share 00
(House
less paid
to estate)
4. Shares xxx 100,000 4. Peter’s xxx 170000
share 0
5. Personal effects xxx 410,000 5. Michael’s xxx 170000
share 0
5,610,0 5,610,0
00 00

Workings

1. John’s Share
House – paid to estate 3000000
1300000
1700000

2. Peter’s share
Shares + estate 100000
1600000
1700000

10. What rules govern the conduct of the trustee with regard to his role as an investor?

Investments by Trustees Generally

At common law, trustees were viewed as stewards of trust property. In those days the primary asset
entrusted to trustees was land. The threshold of care was that the trustee would take care of trust
property as if it was his own. The industrial revolution brought on new forms of property e.g. factories
 27

and shares. There was a new requirement in equity that trustees invest trust funds for the benefit of
beneficiaries. Are there any rules that govern a trustee vis a vis his position as an investor?

Under the common law, the trustee is only under a duty to govern the trust funds as received. His
duty was mainly as defined by a will. In intestate succession his duty was defined by the common law.
The trustee was primarily involved in administration of land and the standard of care required of him
was that he should administer the land as he would his own. However, with the advent of the
industrial revolution towards the end of the 18th century, the role of the trustee widened with the
advent of new forms of property e.g. capital. The trustee’s role went beyond mere stewardship to
include application of the trust fund to enhance the benefit of the beneficiaries, both the tenants for life
and the remainderman.

The trustee’s duty however remained fiduciary in nature but was required to act in good faith and
exercise prudence and care in his role as investor so as to result in maximum benefit to the person
beneficiaries of the trust. He had the additional duty to ensure that the beneficiaries would get a
reasonable and comparable benefit from the investment as a trustee. The trustee was also duty bound
to seek advice on the best investment but to retain ultimate judgment in his decisions.

By the mid 19th century there had been development of the rules requiring the trustee to invest only in
authorized investments. However, even where an investment was authorized by the law, it was still
incumbent upon the trustee to exercise due care and prudence in his investments.

The current position

Section 4 of The Trustee Act (Cap 167) provides for the authorized investments in which the trustee
may invest trust fund. It may be categorized into two broad classes:

(d) Fixed interest investments; and

(e) Wider range investments

Section 2 of the Act defines a fixed interest investment as:

(d) a security which under its term of issue bears a fixed rate of interest; or

(e) a mortgage of immovable property; or

(f) a deposit whether fixed term or otherwise with a bank or financial institution, building
society or the Kenya Post Office Savings Bank.

Wider range investment is defined in the schedule to the Act as an investment other than a fixed
interest security.

S 4 shows the list of authorized fixed interest investments:

(h) any securities in which trustees in England are in the time being authorized by English Law to
invest trust funds;

(i) any securities on which is for the time being guaranteed by the UK Government or the Kenyan
Government or any public debentures issued under the authorization of or guaranteed by any
Act;
 28

(j) any security given by a city or municipal council established under the provision of the Local
Government Act which the Minister has by Notice in the gazette declared to be a trustee
security for the purposes of the Act;

(k) any security issued by Kenya Railways;

(l) any security or any loan to the Industrial Development Bank Limited; and

(m) the purchase of any immovable property in Kenya held for an estate in fee simple or for a
term of years of which not less than 40 years is unexpired, and which is not subject to a rent
exceeding 4% of the unimproved value thereof.

Authorised Wider Range Investments

(iv) Any security the price of which is quoted on a recognized stock exchange in Kenya subject to
the following qualifications:

(a) must be of a company registered under The Company Act.

(b) Its total issued and paid up capital must not be less than Kshs 10 million.

(c) The company must have paid dividends for all its shares that rank for dividends for each
of the 5 years immediately preceding the year in which the investment is made.

(v) Any units or other shares of the investments subject to the trusts, of a unit trust within the
meaning of The Unit Trusts Act (Cap 521) and registered under section 7 of that Act.

(vi) Any shares of a building society.

Operations of Investments

When a trustee decided to invest trust funds, he must divide the investment into two. Rule 3 of the
Schedule to The Trust Act provides that,

A trustee may not make or retain any wider range security unless the trust fund has been divided into
2 parts referred to as the fixed interest part and the wider range part with the parts being equal in
value at the time of division.

Where such a division has been made, no subsequent division of the trust funds shall be made and no
property shall be transferred from one part of the trust fund to the other unless either:

(a) The transfer is authorized or required by the provisions of the schedule; or

(b) A compensating transfer is made at the same time.

These requirements are intended to ensure that firstly the investments made by the trustee are safe and
that they afford a reasonable and fair benefit to both the tenant for life and the remainderman.

Fixed interest securities are primarily attractive to the remainderman because of the guarantee given
their value. They are also attractive to the tenant for life because of the return which, though
conservative, is guaranteed.
 29

Wider range securities will primarily be attractive to the tenant for life because of the high interest
returns but they are also acceptable to the remainderman because of their long term appreciation.

[Must consult Rules 3,4,5,6 and 7 in the Schedule].

11. (a) Distinguish between the Income Account and Special Income Account giving an
example of each.

Income Account

In relation to matters of an estate, the tenant for life is entitled to income whereas the remainderman is
entitled to the capital of the estate. The income account will record payments made to the tenant for
life, the residue in the cash account is distributed to the remainderman and the tenant for life is not
entitled to the distribution of that capital residue in the cash account.

In preparing the income account it will be necessary for the trustee to record the entries in the
apportionment account. All receipts of an income nature are an entitlement of the tenant for life
whereas the receipts of a capital nature are deemed to the remainderman e.g. rental income of an
account from a house part of an estate is due to the tenant for life but proceeds from the sale of the
house are of a capital nature and are therefore the entitlement of the remainderman.

An entry into the income account serves a dual purpose for the trustee:

(a) it is an admission by the trustee that he recognizes his liability to the tenant for life; and

(b) it is a record of payment made to the tenant for life and is therefore evidence of the
discharge of the trustee’s liability to the tenant for life.

No D. Parts. A Ref No. D. Parts. A Re

. f
1. 1.4. Quarterly 100, Me 1. 1.2. Repairs to xxx xx
06 rental 000 m. 06 house. x
income Sch.
from Ass
house no. ets
x on LR Cas
xxx h
A/c
2. 1.5. Dividend 50,0 Me 2. 1.3. Payment to xxx xx
06 s on 00 m. 06 tenant for life. x
equity Sch.
shares in Ass
XYZ ltd. ets
Cas
h
A/c

Special Income Accounts

 30

Besides the income account there might be need for the trustee to maintain a special income account or
accounts. This account records income which is the specific entitlement of a particular beneficiary as
may have been stipulated by the deceased. A testator may make a specific provision for income to be
paid to someone in addition to the tenant for life and therefore all payment made to such other person
will be recorded in a special income account.

The same form applies as for income accounts. There should be as many special income accounts as
there are payees.

(b) Using the correct form, show the entries in the Memorandum, Schedule of Assets and Cash
Account in respect of a lawful advancement of Kshs.200,000/= to Otieno, one of the remaindermen,
in order to set up a legal practice in Kisumu.

Section 34 of the Trustee Act authorizes trustees to apply any capital money, other than money
considered as land by statute or in equity, for the advancement or benefit of any person entitled to
capital.

The entries in the trust accounts depend on the type of advancement. An advancement which must be
brought into account by the beneficiary when the estate is distributed, e.g., an advancement made
under the statutory power referred to above, is recorded in the same mannerP`''as a loan made by the
estate. 31.

It will therefore be credited to the Cash Account and will appear in the schedule among the assets
acquired since the death. An advancement is not, of course, strictly speaking an " asset ", but the fact
that it is entered in the Schedule will ensure that it is not overlooked when the estate is distributed.

Any misdescription can be cured, if desired, by adding " and advancements " to the Schedule heading
referred to above.

Estate of X deceased

Memorandum

No. Date Particulars Reference

1. 1.1.2006 On 30th Nov 2005, Mr X died in Nairobi domiciled in Page 1
Kenya leaving a will dated xxxxx. Documents
Certificate
of Death
Page 2
Documents
Will
2. 1.1.2006 Deceased left the following surviving him: Birth
Certificates
(f) Mrs X widow
(g) Son Otieno p 3 Docs
(h) Son B p4 docs
(i) Daughter C p5 docs
(j) Daughter D p6 docs

3. 1.1.2006 On 20th December 2005, grant of probate, High Court Grant of

Nairobi in succession cause number 2000 of 2005. Probate
Page 7
 31

docs
4. 20.11.2006 On 20 November 2006, it was agreed to lend Mr
th
Page 1
Otieno as an advancement, Kshs 200,000 in order to schedule
set up a legal practice in Kisumu. P 1 cash
accounts.

Schedule of Assets

No. Date Particulars Cash Reference

Account
1. 20.11.2006 An advancement, Kshs 200,000 in 200,000 Memorandum
order to set up a legal practice in – item no. 4
Kisumu. Cash Account.

Cash Account

N Date Particulars of Amoun Re N Date Particulars Amou Ref.

receipts t f. of receipts nt
1. 20.11.0 Advanceme 200,00 Memo
6 nt to 0 Sc.
remainder Assets
man.

12. Write short notes on the following:

(a) The Advocates (Accounts) Rules

THE ADVOCATES (ACCOUNTS) RULES

1. These Rules may be cited as the Advocates (Accounts) Rules.

2. In these Rules, unless the context othenjise requires

"advocate" includes a firm of advocates;

"client" means any person on whose account an advocate holds or receives client's money;
"client account" means a current or deposit account at a bank or with a building society or a financial
institution (as defined in the Banking Act) in the name of the advocate but in the title of which either
the word "client" or the word "trust" appears;
"client's money" means money held or received by an advocate on account of a person for whom he is
acting in relation to the holding or receipt of such money either as an advocate or, in connexion with
his practice as an advocate as agent, bailee, trustee, stakeholder or in any other capacity, and includes

(a) money held or received by an advocate by way of deposit against fees to be earned or
disbursements to be incurred; and

(b) money held or received as or on account of a trustee, whether or not the advocate is sole trustee or
trustee with others,
but does not include
 32

(i) money to which the only person entitled is the advocate himself, or in the case of a firm of
advocates, one or more of the partners in the firm; nor

(ii) money held or received by an advocate in payment of or on account of an agreed fee in any matter;
"money" includes banknotes, currency notes, bank drafts, cheques and any other negotiable
instruments;
"trustee" includes executor, administrator, manager in lunacy, trustee of a will or settlement, trustee in
bankruptcy, receiver or liquidator.

3. An advocate may keep one client account or several client accounts as he thinks necessary.

4. Subject to rule 8, an advocate shall without delay pay into a client account all client's money held or
received by him.

5. There may be paid into a client account

(a) trust money;

(b) such money belonging to the advocate as may be necessary for the purpose of maintaining the
account;

(c) money to replace any sum drawn from the account in contravention of these Rules; and a cheque or
draft received by the advocate which under rule 6 he is entitled to split but which he does not split.

6. (1) Where an advocate holds or receives a cheque or draft which includes client's money[Subsidiary)

(a) he may where practicable split such cheque or draft and, if he does so, he shall deal with each part
thereof as if he had received a separate cheque or draft in respect of that part; or

(b) if he does not split the cheque or draft, he shall pay the cheque or draft into a client account.

(2) Money which is not client's money but which is paid into a client account, other than under rule 5
(b), shall be paid out as soon as reasonably possible.

7. No money other than money which under these Rules an advocate is required or permitted to pay
into a client account shall be paid into a client account.

8. An advocate need not pay into a client account client's money held or received by him which

(a) is received by him in the form of cash, and is without delay paid in cash in the ordinary course of
business to the client or to a third party; or

(b) he pays in, without delay, to the credit of a separate account opened or to be opened in the name of
a client, trust or estate or of some person nominated by the client; or

(c) is received by him in the form of a cheque or draft and is, without delay, endorsed over and
delivered in the ordinary course of business to the client or to a third party for or on behalf of or to the
use of the client and is not cashed or passed through a bank account by the advocate.

9. (1) Subject to rules 10 and 12, an advocate may withdraw from a client account

(a) money properly required for payment to the client;

 33

(b) money properly required for or towards a payment authorized by the client;

(c) money properly required for or towards a payment on behalf of the client within the mandate of
the advocate in the matter or any of the matters in which he is acting for or on behalf of the client;

(d) money which he is transferring to a separate account opened or to be opened in the name of the
client;

(e) money properly required for or towards payment of a debt due to the advocate from the client or in
reimbursement of money properly expended by the advocate for or on behalf of the client;

(f) money properly required for or towards payment of the advocate's costs where a bill of costs or
other written intimation of the amount of the costs incurred has been delivered to the client;

(g) money paid into the account in contravention of them Rules,

(
h) money paid into the account under rule 5 (b); and

(i) money not being client's money paid into the account under rule 6 (1) (b).

(2) Every cheque drawn upon a client account shall bear on its face the words "client account" or "trust
account".

10. In no circumstances may an advocate withdraw from a client account any sum in excess of the
amount held for the time being in such account for the credit of the client in respect of whom the
drawing is proposed to be made.

11. No money may be withdrawn from a client account under any of paragraphs (e), (fl, (g), (h) and (r)
by a cheque drawn in favour of the advocate.

12. No money may be withdrawn from a client account except as authorized by rule 9 or as specifically
authorized in writing by the Council in pursuance of an application by the advocate.

13. (1) Every advocate shall at all times keep, properly written up, such books of account as may be
necessary to show

(a) every receipt by him of client's money, for each separate client; and

(b) every payment or application by him of or from client's money, for each separate client; and

(c) the amount held by him for the time being in a client account, for each separate client; and

(d) the moneys expended by him for, and the costs charged by him to, each separate client.

(2) The books of account referred to in paragraph (I) shall include-

(a) either

(i) a cash book in which to record every transaction involving client's money or other money dealt with
by the advocate through a client account, and a separate cash book in which to record every
transaction involving the advocate's own money and relating to the affairs of his clients; or
 34

(ii) a cash book ruled with two separate principal money columns on each side, one such column for
recording every transaction involving client's money or other money dealt with by the advocate
through a client account and the other for recording every transaction involving the advocate's own
money and relating to the affairs of his clients; and(b) either

(i) a ledger in which to record every transaction involving client's money or other money dealt with by
the advocate through a client account, and a separate ledger in which _ to record every transaction
involving the advocate's own money and relating to the affairs of his clients; or, -

(ii) a ledger ruled with two separate principal money columns on each side, one such column for
recording every transaction involving client's money or other money dealt with by the advocate
through a client account and the other recording every transaction involving the advocate's own
money and relating to the affairs of his clients; and

(c) a record showing particulars of all bills of costs delivered by the advocate to his clients,
distinguishing between profit costs and disbursements.

(3) A cash book or ledger required to be kept under this rule may be a loose-leaf book.

(4) In this rule, "cash book" and "ledger" include such cards or other permanent records as are
necessary for the operation of a mechanical system of book-keeping.

14. Every advocate shall preserve for at least six years from the date of the last entry therein all books
of account required to be kept by him under rule 13.

15. Every advocate shall take reasonable precautions to ensure ft Way o! all books of account which be
is required by rule 14 t0 preserve, end in the event of any such books being log, destroyed or
materially damaged, shall forthwith give notice thereof to the Council, together with a written report
on the circumstances.

(b) The Advocates (Accountants Certificate) Rules

THE ADVOCATES (ACCOUNTANT'S CERTIFICATE) RULES

1. These Rules may be cited as the Advocates (Accountant's Certificate) Rules.

2. (1) In these Rules

“accountant's certificate" means the certificate provided for by rule 3;

"advocate" means any person whose name is duly entered upon the roll of advocates but does not
mean any person whose name is duly entered upon the roll of advocates having the rank of Queen's
Counsel;
"the Council" means the Council of the Law Society of Kenya;
"the secretary" means the Secretary of the Law Society of Kenya and includes any person appointed
temporarily to perform the duties of the office;

(2) The expressions "client", "client account", and "client money", have the meanings assigned to them
in the Advocates (Accounts) Rules.

3. Subject (to these Rules, every advocate shell once in every practice year deliver to the Council a
certificate signed by to accountant and complying with these Rules.

4. (1) An accountant is qualified to give an accountant's certificate if

 35

(a) he has neither been at any time during the accounting period, nor subsequently, before giving the
certificate, become a partner, clerk or servant of such advocate or any partner of his and
(b) he is not subject to notice of disqualification under paragraph M.

(2) In either of the following cum, that is to say, where-

(a) the accountant has been found guilty by the Disciplinary Tribunal of his professional body of
professional misconduct or discreditable conduct; or

(b) the Council is satisfied that an advocate has not complied with the provisions of the Advocates
(Accounts) Ruin in respect of matters not specified in an accountant's certificate and that the
accountant was negligent in giving such certificate,

the Council may at its discretion at any time notify the accountant concerned, that he is not qualified to
give an accountant's certificate, and it may give notice of that fact to any advocate on whose behalf he
has given an accountant's certificate, and after the accountant has been so notified, unless and until the
notice is withdrawn by the Council, he is not qualified to give an accountant's ca cate. In coming to its
decision the Council shall take into, consideration a" observations or explanations made by the
accountant or by any professional body of which he is a member.

5. (1) With a view to the signing of an accountant's certificate an accountant is not required to do more
than

(a) make a general test examination of the books of account of the advocate;

(b) ascertain whether a client account is kept;

(c) make a general test examination of the bank pan books and statements kept in relation to the
advocate's practice;

(d) make a comparison. as at not fewer than two dates selected by the accountant, between

(i) the liabilities of the advocate to his clients as shown by his books of account;

(ii) the balance standing to the credit of the client account; and

(e) ask for such information and explanations as he may require arising out of (c) to (d) above.

(2) If after making the investigation prescribed by paragraph (1) that there is evidence that the
Advocates (Accounts) Rules have not been compiled with, he shall make such further investigation as
may be necessary to enable him to sip the accountant’s certificate.

6. An accountant's certificate delivered by an advocate shall be in the form set out in the Schedule or in
a form to the like effect approved by the Council.

7. The Council will in each practice year be satisfied that the delivery of an accountant's certificate is
unnecessary, and shall not require evidence of that fact, In the case of an advocate who

(a) holds his first current practicing certificate, or

(b) after having for twelve months or more ceased to hold a current practising certificate, holds his
next current practising certificate; or
 36

(c) delivers to the Council a statutory declaration stating that the Advocates (Accounts) Rules did not
apply to him because he had not, during the period to which the declaration refers, practised on his
own account either alone or in partnership or held or received client's money; or

(d) has ceased to hold a current practising certificate and, if he has at any time after the 31st December,
1967, held or received client's money, has delivered an accountant's certificate covering an accounting
period ending on the date upon which he ceased to hold or receive client's money; or

(e) has at no time since the 31st December, 1967, held a current practising certificate or held or received
client's money.

7A. A statutory declaration delivered under rule 7 by an Advocate in the employment of an

unqualified person or body shall stale whet'her such advecwUe hats 'complied wu~h rule 5 ~of the
AdvocoUtles (practice) Rules.

8. Subject to rules 9, 10 and 11, the accounting period specified in an accountant's certificate shall

(a) begin at the expiry of the last preceding accounting period for which an accountant's certificate has
been delivered;

(b) cover not less than twelve months;

(c) terminate not more than nine months before the date of the delivery of the certificate to the Council;
and

(d) where possible, consistently with paragraphs (a), (b) and (c) correspond to a period or consecutive
periods for which the accounts of the advocate or his firm are ordinarily made up.

9: The accounting period specified in an accountant's certificate delivered during the practice year
beginning on the lst January, 1968, shall begin on

(a) the date to which the advocate's books were last made up before the lst January, 1968; or

(b) if the books were not made up during the practice year beginning on the 1 st January, 1967, either
on the 1 st January, 1967, or on the day upon which the advocate first began or began again to hold or
receive client's money, whichever be the later; or

(c) in the case of an advocate retiring from practice who has ceased to hold or receive client's money
after the Ist January, 1967, the period up to the date upon which he so ceased.

10. In any practice year beginning on or after the 1 st January, 1969

(a) in the case of an advocate who

(i) becomes under an obligation to deliver his first accountant's certificate; or

(ii) having been exempt under rule 7 from delivering an accountant's certificate in the previous
practice year, becomes under an obligation to deliver an accountants certificate,

the accounting period shall begin on the date upon which he first held or received client's money or,
after such exemption, began again to hold or receive client's money, and may cover less than twelve
months, and shall in all other respects comply with rule 8; and
 37

(b) in the case of an advocate retiring from practice who, having ceased to hold or receive client's
money, is under an obligation to deliver his final accountant's certificate, the accounting period shall
end on the date upon which he ceased to hold or receive client's money, and may cover less than
twelve months, and shall in all other respects comply with rule 8.

11. (1) In any practice year beginning on or after the lst January, 1969, in the case of in advocate who

(a) was not exempt under rule 7 from delivering an accountant's certificate in the preceding practice
year, and

(b) since the expiry of the accounting period covered by such accountant's certificate has become, or
ceased to be, a member of a firm of advocates;

the accounting period may cover less than twelve months and shall in all other respects comply with
rule 8.

(2) In the case of an advocate who has two or more places of business-

(a) separate accounting periods, covered by separate accountant's certificates, may be adopted in
respect of each such place of business provided that the accounting periods comply with rule 8; and

(b) the accountant's certificate or accountant's certificates delivered by him to the Council in each
practice year shall cover all client's money head or received by him.

12. If any advocate fails to comply with these Rules a complaint in respect of such failure may be made
by or on behalf of the Council to the Disciplinary Committee.

13. On receipt either of an accountant's certificate or of a declaration under rule ? (3) the Secretary will
forward to the advocate a certificate under his hand stating that an accountant's certificate for a
specified period has been received or that no accountant's certificate is required for a specified period,
as the case may be.

14. A certificate under the hand of the Secretary is, until the contrary is proved, evidence that an
advocate has or has not, as the case may be, delivered to the Council an accountant's certificate or
supplied any evidence required under these Rules.

15. Every notice to be given by the Council under these Rules to an advocate shall be in writing under
the hand of the Secretary and sent by registered post to the last address of the advocate appearing in
the roll of advocates kept by the Registrar under section 20 of the Act and when so given and sent, is
taken to have been received 6y the Advocate within seven days after the data of posting.

16. Every notice given by the Council under these Rules to an accountant shall be in writing under the
hand of the Secretary and sent by registered post to the address of the accountant shown on an
accountant's certificate or appearing in the records of the accountancy body of which the accountant is
a member, and where so given and sent, is taken to have been received by the accountant within seven
days after the date of posting.

(c) The Advocates (Deposit Interest) Rules

2. Except as provided by these Rules an advocate is not liable by virtue of the relation between
advocate and client to account to any client for interest received by the advocate on moneys deposited
in a client account being moneys received or held for or on account of his clients generally.
 38

3. When an advocate holds or receives for or on account of a client money on which, having regard to
all the circumstances (including the amount and the length of time for which the money is likely to be
held), interest ought in fairness to the client to be earned for him, the advocate shall take instructions
from the client concerning the investment of that money.

4. An advocate is liable to account to a client for interest received on moneys deposited in a client
account where the moneys are deposited in a separate designated account.

5. In these Rules "separate designated account" means a deposit account in the name of the advocate or
his firm in the title of which the word "client" appears and which is designated by reference to the
identity of the client or matter concerned.

(d) Hotchpot

Hotchpot is an accounting device used for distributing property among persons in predetermined
proportions after taking into account property received by them previously, whether from the same or
another source. It is most commonly employed to achieve equality between children who have
received advances and those who have not, or between children who have received advances in
differing amounts.

There are two quite different sets of circumstances in which sums may have to be brought into
hotchpot, namely,

(a) where the sums never formed part of the estate, e.g., amounts advanced in the deceased's lifetime,
or arising from some outside source, and

(b) where they did, e.g., sums appointed or advanced out of settled funds which must be taken into
account at the final distribution. There is, however, no distinction in principle between the two types.

A testator may put a hotchpot clause into his Will because he contemplates making gifts of a
substantial nature to individual beneficiaries from time to time during his life but does not want this to
disturb the proportions in which he intends his property to be enjoyed ultimately; in other words, the
gifts are to be treated as being on account of the sums otherwise receivable by the donees on his death.
The inclusion of such a clause permits him to make gifts freely without having to alter his Will each
time, and, provided no person is given more than he would have received under the Will if there had
been no advances at all, the testator's original intention will be achieved.

Similarly, settlements under which the trustees have power to make advances to individual
beneficiaries often contain a hotchpot clause so that the rights of the beneficiaries are properly adjusted
inter se when the final distribution is made. The same is true where funds are settled by Will or Deed
subject to a power of appointment among a class of persons, and in default of appointment in trust for
all the members of the class in specified shares.

COUNCIL OF LEGAL EDUCATION

EXAMINATION FOR ADMISSION
TO THE ROLL OF ADVOCATES
FEBRUARY 2005
ACCOUNTS

Instructions
 39

a) Question No. 11 is compulsory

b) A candidate should attempt FIVE QUESTIONS, AT LEAST TWO FROM EACH PART
c) Marks may be lost for illegibility Show your workings clearly Three Hours are allowed

PART 1
COMMERCIAL ACCOUNTS

1. The following Trial Balance was extracted from the books of Mali Ngumu Ltd on 31st
December, 2002:

Shs. Shs.
Authorised Share capital:
60,000 @ shs.40 ordinary share
Issued share capital:
40,000 @ shs.40 ordinary shares 1,600,000
Trade Creditors 558,800
Provision for depreciation of motor vehicles
to 31 St December 2001 113,800
Motor vehicles (cost shs.230,000) less sale
on 1st January, 2002 220,400
Land and building at cost 1,480,000
Stock: lgt January, 2002 380,000
Purchases 3,680,000
Sales 5,281,000
Trade Debtors 504,720
Wages and salaries 612,480
Delivery expenses 59,240
Rates and insurance 25,560
General expenses 279,360
Cash in hand 1,840
Cash in bank 470,000
Directors fees 180,000
Profit and loss Account: 1 January 2002
st
340,000
7,893,600 7,893,600

The following additional information is available:

(a) closing stock - 31St December, 2002 - shs.352,000.

(b) Depreciation of motor vehicles on cost at 20% per annum.
(c) One motor vehicle (cost Shs.32,000) was sold on lst January, 2002 for Shs.9,600. Depreciation
on the vehicle up to 31St December, 2001 was Shs.20,800.
(d) Rates and insurance paid in advance 319t December 2002, shs.4,480. (e) Cash in hand
(Shs.1,840 in the Trial Balance) includes one post dated cheque of Shs.1,120 cashed for a customer
on 31st December 2002.
(f) Sales and Trade Debtors in the Trial Balance include goods out on sale or return terms,
invoiced to a customer at selling price of Shs.12,000 (cost price Shs.8,000) The goods were returned
by the customer on 3rd January, 2003.
(g) During December 2002, goods cost value of Shs.29.000 were destroyed by fire, the goods are
covered by insurance and the insurance company has agreed to meet the loss in full. No entry has
yet been made in the accounts.

Required:

Prepare the Trading Account, Profit and Loss Account for the year ended 31st December, 2002 and a
Balance Sheet as at that date. (20 marks)
 40

2. On 31st October 2003, the bank statement of Mwaura & Co. Advocates reflected a credit balance of
Shs.153,600 while their cashbook was showing a debit balance of Shs.91,040. After a careful
examination of the two records, the following discrepancies were discovered:

(i) a banking of Shs.128,000 had erroneously been debited in the cashbook as Shs.12,800;
(ii) the cashbook had been overcast by Shs.6,400 on the debit side;
(iii) bank commission amounting to Shs.2,560 had not been entered in the cashbook;
(iv) cash and cheques amounting to Shs.17,280 banked on 31s' October had been credited by the
bank on 5th November;
(v) there was a short-banking and over banking of Shs.5,600 and Shs.3,200 respectively;
(vi) the bank had paid an insurance premium of Shs.38,400 on behalf of Mwaura 8v Co.
Advocates but had not advised them;
(vii) a cheque of Shs.108,800 drawn in favour of Armstrong & Duncan Ltd had not been
presented;
(viii) cheques amounting to Shs.94,400 had been dishonoured by the drawees.

You are required to:

(a) Prepare an account showing the correct cashbook position as at 315t October.
(b) Prepare a reconciliation statement agreeing the bank statement balance to the corrected
cashbook balance.
(20 Marks)

3. Mr. Mwangi Ikiara and Mr. John Barasa trading in partnership as transporters, wholesalers and
Distributors close their accounts on 30th November each year. Their Trial Balance as at 30th
November, 2000 appeared as follows:

Shs. Shs.
Capital: Mwangi Ikiara 500,000
John Barasa 300,000
Motor vehicles at cost 5,000,000
Provision for depreciation 1,500,000
Debtors and Creditors 1,700,000 880,000
Salaries and wages 300,000
Transportation income 2,400,000
Sales and purchases 8,160,000 12,290,000
Returns outwards and inwards 450,000 900,000
Stocks on lst December 1999 2,130,000
Rents 36,000
Water and electricity 9,600
Telephone and postage 21,600
Printing and stationery 10,800
Petrol and oil 1,096,000
Servicing and spares 405,100
Legal fees and expenses 30,000
Insurances 146,000
Current account: Mwangi Ikiara 90,000
John Barasa 58,000
Loan and overdraft interest 150,600
Bank charges 24,300
Bank overdraft 510,000
Bank loan 308,000
 41

19,728,000 19,728,000

The following additional information is provided:

(a) Salary at Shs.30,000 per month should be credited to the current account of Mr. John Barasa.

(b) Partners are entitled to interest on capital at 12% per annum.

(c) Profit and losses are to be shared equally after allowing for partners salaries and interest in
capital.

(d) Motor vehicle is to be depreciated at 25% by straight line method.

(e) Provision is to be made for accounting and auditing fees at Shs.112,000.

(f) Bad debts amounting to Shs.88,000 are to be written off.
(g) Provision for bad debts should be increased by Shs.120,000.
(h) Stocks as at 30th November 2000 were valued at Shs.2,150,000

You are required to prepare the following:

(i) Trading account for the year

(ii) Profit and loss account
(iii) Partners appropriation account
(iv) Partners Current account
(v) Balance sheet as at 30th November 2000 (20 Marks)

4. (a) Ratio analysis is one of the many tools of financial statement analysis used as a basis
for decision making by users of financial statements.
Explain the significance of the following ratios in decision making:
(1) Retention of Investments (ROI)
(2) Price Earning Ratio (P-E)
(3) Current Ratio
(4) Capital gearing ratio
(5) Gross profit to sales
(b) Comment on the limitations of ratio analysis.
(20 Marks)

5. The following balances remained in the books of Samaki Ltd at 31 August 2004 after
preparation of the trading account:

Share capital authorized and issued Shs.

160,000 shs. 20 ordinary shares 3,200,000
60,000 10% shs.20 preference shares 1,200,000
Premium Account 160,000
Stock at 31 August 2004 1,437,000
Debtors and prepayments 544,000
Creditors and accruals 397,640
Bank Balance 155,920
10% Debentures 320,000
General reserve 360,000
Bad debts 6,800
Gross profit for the period 1,630, 160
Wages and salaries 464,000
 42

Rates and rents 36,000

Insurance 12,200
Electricity and Water 24,320
Directors fees 50,000
Debentures interest (6 months to 29 February
2004) 16,000
General expenses 162,160
Motor vehicles (cost Shs.788,000) 536,000
Furniture and equipment (cost Shs.1,052,800) 708,800
Land and building at cost 3,444,000
Profit and loss account at 1 September 2003 345,000
Postage and telephone 15,600

The following information is relevant:

(1) Furniture and equipment are to be depreciated at 15% on cost and motor vehicles at 20% on
cost.
(2) The amount for insurance includes a premium of Shs.6,000 paid in March 2004 to insure the
company for the twelve months to 28 February 2005.
(3) Provisions are to be made for: electricity and water Shs.10,960; audit fees Shs.25,800;
directors' fees Shs.46,000; bad debts Shs.6,400.
(4) Corporation tax to be calculated at 45% on net profit.
(5) The Directors have recommended that:
(b) the preference dividend be paid
(c) a 10% ordinary dividend be paid
(d) shs.120,000 be transferred to general reserve.

Required:

Prepare the profit and loss and appropriation account for the year ended 31 August 2004 and a
balance sheet as at that date.
(20 Marks)

6. The trial balance of Mawingo Ltd failed to agree and the difference was placed in the
suspense account. Later the following errors were discovered:
(i) Purchase of goods from S. Gakenyia for shs.120,000 had been credited to account of C.
Gakanyia.
(ii) Machinery sold for Shs.1,200,000 had been correctly entered in the cFsh book but debited to
machines account_
(iii) Discount allowed to a customer, Shs.75,000, had been credited to discounts received account.
(iv) An invoice of Shs.8,900,000 received from a supplier was entered correctly in purchases day
book, but was posted as Shs.9,800,000 to the supplies account.
(v) Shs.930,000 received from a customer had been entered in the cashbook as Shs.390,000.
(vi) A page in sales day book had been overcast by Shs.750,000.

Required:
(a) show journal entries to correct the above errors
(b) complete the suspense account and show clearly the difference in trial balance before the
errors were corrected.
(c) Explain with practical examples four errors that can occur and the trial balance still agrees.
(20 Marks)
 43

PART II
TRUST ACCOUNTS

7. John enters into a lease agreement covering the period 1 / 10/2004 to 31/3/2005. John, the lessor
agrees with Mary, the lessee, that the monthly rent payable shall be Shs.60,000/=. John dies in a
road traffic accident on 1 / 1/2005 and had appointed you executor of his will. How would you
apportion income if:

(a) Mary had paid the six-months rent in advance on 1/ 10/2004;

(b) The lease only provided for payment of one month's rent in advance but Mary had opted to
pay the entire six months' rent in advance but had not yet made payment at the time of John's death;

(c) The agreement provided for payment of one month's rent in advance, no payment had been
made at the time of John's death and you receive full payment on 31/3/2005;

(d) The lease was silent as to the time of payment of monthly rent. No payment has been
made to-date.

(20 marks)

8. Mr. Onyango, a widower, dies intestate bearing three sons John, Peter and Charles, who are all
aged over 18 years. Under the Law of Succession Act (Cap. 160, Laws of Kenya), the late Onyango's
estate falls to be distributed between the three sons in equal shares absolutely. The net estate
comprises the following:
(a) a house on L.R. No. 209/ 100 Nairobi which the valuer has assessed at Shs.3 million;
(b) a motor vehicle valued at Kshs.2 million; (c) cash in the bank - Shs.100,000;
(d) ordinary shares in Kisumu Fish Ltd. Worth Shs.100,000/-; (e) personal effects worth Shs.410,000/-;
(f) the estate owes Shs.600,000 to Housing Finance for the mortgage on the house;
(g) the estate owes Shs.10,000/= as legal fees.
It is agreed between all the beneficiaries that John will take the house in specie and Peter will take
the ordinary share in Kisumu Fish Ltd in specie
Draw up the distribution account. (20 marks)

Example 1

Mr Omondi, a widower, dies intestate leaving 3 sons, John Peter and Michael who are all aged over 18 years.
Under The Law of Succession Act, the late Omondi’s estate falls to be distributed amongst his 3 sons equally.
The net estate comprises the following:

i. House LR xx Nairobi 3 million;

ii. Motor vehicle 2 million;
iii. Cash in bank 100, 000
iv. Ordinary shares in X ltd 10,0000
v. Personal effects 410,000
vi. Estate owes Mortgage debts 500,000
vii. Legal fees 10,000
 44

It is decided between all the beneficiaries that John will take the house in specie and Peter the
shares in specie. Draw up the distribution account.

In the Estate of Mr Omondi (Deceased)

Distribution Account

No. Particulars Ref Amoun No. Particular Ref. Amoun

. t s t
1. House on LR xxx Sc 3,000,0 1. Mortgage Xxx 500,000
Nairobi h 00 debt
Me
m.
2. Motor Vehicle xx 2,000,0 2. Legal Fees Xxx 10,000
x 00
3. Cash in Bank xx 100,000 3. John’s Xxx 1,700,0
x Share 00
(House
less paid
to estate)
4. Shares xx 100,000 4. Peter’s Xxx 170000
x share 0
5. Personal effects xx 410,000 5. Michael’s Xxx 170000
x share 0
5,610,0 5,610,0
00 00

Workings

1. John’s Share
House – paid to estate 3000000
1300000
1700000

2. Peter’s share
Shares + estate 100000
1600000
1700000

9. What rules govern the conduct of the trustee with regard to his role as an investor? (20
marks)

Refer to previous answers.

10. What are the obligations imposed on a practising

 45

(a) The Advocates (Deposit Interest) Rules; (10 marks)

Refer to previous answers.

(b) The Advocates (Accountant's Certificate) Rules? (10 marks)

Refer to previous answers.

11. (a) Distinguish between the Income and Special Income Accounts of the Estate Book and
show the correct form of drawing each. (12 marks)

Income Account

In relation to matters of an estate, the tenant for life is entitled to income whereas the remainderman is
entitled to the capital of the estate. The income account will record payments made to the tenant for
life, the residue in the cash account is distributed to the remainderman and the tenant for life is not
entitled to the distribution of that capital residue in the cash account.

In preparing the income account it will be necessary for the trustee to record the entries in the
apportionment account. All receipts of an income nature are an entitlement of the tenant for life
whereas the receipts of a capital nature are deemed to the remainderman e.g. rental income of an
account from a house part of an estate is due to the tenant for life but proceeds from the sale of the
house are of a capital nature and are therefore the entitlement of the remainderman.

Income accounts are only necessary if you have a beneficiary of more than one type.
No D. Parts. A Ref No. D. Parts. A Re
. f
1. 1.4. Quarterly 100, Me 1. 1.2. Repairs to xxx xx
06 rental 000 m. 06 house. x
income Sch.
from Ass
house no. ets
x on LR Cas
xxx h
A/c
2. 1.5. Dividend 50,0 Me 2. 1.3. Payment to xxx xx
06 s on 00 m. 06 tenant for life. x
equity Sch.
shares in Ass
XYZ ltd. ets
Cas
h
A/c
3. 1.6. Coffee 30,0 Me 3. xxx Farm inputs xxx xx
06 dues 00 m. x
form Sch. Farm labour
ABC Ass
Coffee ets
Co. Cas
h
A/c
4. 1.7. Payment Me
06 s from m.
KCC. Sch.
 46

Ass
ets
Cas
h
A/c

An entry into the income account serves a dual purpose for the trustee:

(c) it is an admission by the trustee that he recognizes his liability to the tenant for life; and

(d) it is a record of payment made to the tenant for life and is therefore evidence of the
discharge of the trustee’s liability to the tenant for life.

Special Income Accounts

Besides the income account there might be need for the trustee to maintain a special income account or
accounts. This account records income which is the specific entitlement of a particular beneficiary as
may have been stipulated by the deceased. A testator may make a specific provision for income to be
paid to someone in addition to the tenant for life and therefore all payment made to such other person
will be recorded in a special income account.

The same form applies as for income accounts. There should be as many special income accounts as
there are payees.

Special Income

No Date Particulars of Receipts Kshs

1. 19xx Half Year’s Rent payable in advance due today, 100,000

see Legal Apportionment Account. Item 10.

(b) What rights does the law provide to a beneficiary with regard to trust accounts.(8 marks)

Refer to previous answers.

12. (a) Using the correct form, show the entries in the Memorandum, Schedule of Assets and
Cash Account in respect of a lawful advancement of Shs.500,000/= made by the trustee to Dr.
Rashid, one of the remaindermen, in order to set up a medical practice in Nairobi. (12 marks)

Refer to previous answers.

(b) What is the function of each of the three ingredients of the Estate

Book referred to in (a) above? (8 marks)

(i) Memorandum

Is a record or narrative of all material transactions on activities relating to administration of a trust or

the estate. For example:

 Details of the deceased;

 47

 Date and place of death; and

 Details of the beneficiaries and how they are related to the deceased

(ii) Schedule of Assets

Records:

(a) all assets belonging to the deceased or settler i.e. land , chattels, cash etc; and

(b) all assets that come into the trust in the course of management or administration of the trust.

The aim is to ensure that all assets are recorded and their true or realistic value given.

(iii) Cash Accounts

Is a very crucial part of the estate book kept by the trustee. It records all cash accounts relating to the
trust/estate. All receipts must be debited and all payments credited to the cash account.

NB

Unlike a schedule of assets/liabilities, the cash account automatically gives rise to legal rights and
liabilities for the trustee in the sense that a debit entry in the cash account is an acknowledgement by
the trustee that he has received and is liable for the cash so received as recorded.

Conversely, any credit entry is an acknowledgement that the trustee has applied trust funds in
accordance with his legal obligations. The trust account also operates as a trust account as
distinguished from the income account. It must indicate the nature of the transactions taking place.

COUNCIL OF LEGAL EDUCATION

EXAMINATION FOR ADMISSION
TO THE ROLL OF ADVOCATES
AUGUST, 2003
ACCOUNTS

Instructions

(a) A candidate should attempt FIVE QUESTIONS, AT LEAST TWO FROM EACH PART
(b) Marks may be lost for illegibility
(c) Show your workings clearly
(d) Three Hours are allowed

PART I
 48

COMMERCIAL ACCOUNTS

1. Wakili Hatari Advocates operated two separate banking accounts, described as B and C. At
30 April, 2002 the balance at bank as per bank statements were B: Kshs.31,400 and C: Kshs.170',000.
The bank
balances in Wakili Hatari Advocates' books at the date were debit balance against the bank, B:
Kshs.16,500 and C:209,400.
An investigation into the differences yields the following relevant information:
(1) Cheques lodged but not yet credited in the bank statement: Kshs.20,000 and Kshs.14,000 for B
and C respectively.
(2) Cheque for Kshs.2,400 deposited in C returned by the bank marked "RD" but no entry has
been made in Wakili Hatari Advocates books.
(3) A cheque from Maisha Bora Ltd for Kshs.2,200 remitted direct to B not entered in Wakili
Hatari Advocates books.
(4) A cheque for Kshs.4,000 being payment out of B had been paid by the bank but no entry had
been made in the cash book.
(5) A cheque for Kshs.3,200 drawn on C inadvertently entered in the cashbook as from B.
(6) A transfer of Kshs.47,300 out of C entered in the cash book but transfer instructions to the
bank overlooked.
(7) A cheque drawn on C entered in correct account in the cashbook but Kshs.1,200 instead of
the correct amount of Kshs.12,000.
(8) Bank charges of Kshs.300 and Kshs.400 for B and C respectively not yet entered in the cash
book.
(9) Cheque received Kshs.20,000 for C and paid into C, incorrectly entered in the cash book as B.
(10) Cheque received and paid in correct account C, Kshs.1,800 entered a Kshs.1,700 in the cash
book.
(11) Unrepresented cheques were B Kshs.6,500 and C Kshs.21,600.
(12) A periodic payment of Kshs.3,000 standing order out of C not yet recorded in cash book.

Required:
(a) Make necessary adjustments in the cash book and show correct balances
for B and C accounts. (14 marks)
(b) Prepare reconciliation statement for B and C accounts as at 30 April, 2002. (6 marks)

2. Kamau and Odoyo are lawyers operating a partnership sharing profits and losses in the ratio of
3:2 respectively. The Trial Balance reflected a difference of Kshs.1,152,400. The accounts were
prepared and the balance sheet reflected the following position as at 31 October, 2002.

Balance Sheet as at 31 October, 2002

Kshs. Kshs Kshs. Kshs.

Capital Fixed Assets
Accounts: (at cost less
Depreciation):
Kamau 4,800,000
Odoyo 4,800,000 9,600,000 Premises 3,200,000
Current Equipment 1,927,200
Accounts: Vehicles 1,672,000 6,799,200
Kamau - 544,000
Credit
Odoyo - L324,8001 219,200 Current
Debit Assets:
 49

Current Stock 3,576,800

Liabilities:
Creditors 2,006,400 Debtors 1,903,600
Accruals 12,400 2,108,800 Provision(less) 185,600 1,718,000
Prepayments 114,400
Suspense 1,152,400 Bank and Cash 872,000
Account: ----------- 6,281,200
13,080,400 13,080,400
-------------- ---------------
After re-checking all the entries, the following errors were identified:

(i) Kamau's current account has been credited with a partnership salary of Kshs.220,000 which
should have been credited to Odoyo's current account.
(ii) Kamau had withdrawn, for personal use, goods to the value of Kshs.149,200. No entries had
been made in the books.
(iii) A vehicle bought originally for Kshs.560,000 four years ago and depreciated at 20% by
straight line method on an assumed residual value of Kshs.80,000 had been sold at Kshs.240,000 but
no entries, other than in the bank account, had been passed through the books.
(iv) The purchase returns day book had been correctly entered and totaled as Kshs.452,600 but
had not been posted to the ledger.
(v) Discounts received of Kshs.97,200 had been debited to discounts allowed account.
(vi) The sales accounts had been undercast by Kshs.700,000.
(vii) A credit sale of Kshs.112,800 had been debited to a customer's account as Kshs.130,800.
(viii) An accrual of Kshs.48,400 for water consumed had been completely omitted.
(ix) A bad debt of Kshs.128,400 had been written off and provision for bad debts should have
been maintained at 10% of debtors.

Required
(a) Journal entries to correct the above errors. 8 marks
(b) A statement of adjustments to the net profit for the year. (the
unadjusted net profit was Kshs.1,200,000). 5 marks
(c) A corrected balance sheet as at 31 October, 2002. 7 marks

3. The accountant of Doshi Hardware Ltd has extracted the following trial balance as at 30 June,
2001:

Kshs. Kshs.
Premises at cost 1,148,000
Plant and equipment at cost 2,892,000
300,000 ordinary shares of shs.5 each
and issued 1,500,000
6,000 10% preference shares of shs.50 each
authorized and issued 300,000
14% debentures 1,200,000
General reserve 390,000
Retain profit 1 July 2000 206,000
Stock 1 July 2000 215,000
Sales 2,860,000
Discounts allowed and received 18,400 26,800
Debtors and creditors 256,000 184,000
Provision for depreciation: plant 8s 504,000
Bank balance 42,000
Carriage inwards 7,200
Purchases 1,790,000
 50

Provision for doubtful debts 8,000

Wages 449,000
Water and electricity 18,700
Office salaries 51,000
Debenture interest 84,000
Director's fee 57,000
Interim dividends: ordinary(5%) 75,000
Preference (4%) 12,000
Generalexpenses 67,100
Suspense 3,600
7,182,400 7,182,400

Additional information:

(1) The general expenses include an amount of Kshs.3,240 for an insurance premium which
relates to the period ending 31 October, 2001.
(2) Wages unpaid on 30 June, 2001 were Kshs.5,420.
(3) The directors have decided to revalue the premises at shs.1,680,000 of which Kshs.480,000
represents the buildings which have a useful life of a further thirty years.
(4) The suspense account relates to cash received for equipment sold during the year. The
equipment originally cost Kshs.18,000 and had a book value of Kshs.4,500 when sold.
(5) Depreciation to be provided on the plant and equipment at 10% using a straight line method.
(6) The directors have decided to provide the final dividend of 5% on the ordinary shares and
the balance due on the preference shares.
(7) The provision for doubtful debts is to be maintained at 21/2% of the
debtors as of 30 June, 2001.
(8) Stock on 30 June, 2001 was Kshs.254,000.

Required

Prepare in vertical form, Trading, Profit and Loss Appropriation Accounts for the year ended 30
June, 2001 and a Balance Sheet as at that date. 20 marks

4. Wananchi Ltd issued additional ordinary shares and 50,000 8% preference shares on the
following terms:

Payable per share

Ordinary Preference
Kshs. Kshs.
Application 2.50 2.50
Allotment (including premium) 3.50 2.00
First call 30 days after allotment 3.00 2.50
Second and final call (60 days) 2.00 2.50

The per values were Kshs.10 and 9 for the ordinary and preference shares respectively. By 1 August,
2000, applications had been received for 200,00 ordinary shares and 40,000 preference shares. The
directors rejected the application for 80,000 ordinary shares and refunded the monies on 15 August,
2000, and the remainder allotted five shares for every six shares applied for. Surplus application
monies were carried forward to allotment.

All allotment took place on 20 August, 2000 and the amounts were received by 31 August, 2000. The
first and second calls were received by the due dates except for 3,000 ordinary shares which the
directors declared forfeited on 20 November, 2000. All the forfeited shares were reissued as fully
paid to another shareholder on 30 November, 2000 for Kshs.9 per share.
 51

Assume that the number of shares outstanding prior to this additional issue amounted to:

Ordinary 300,000 shares of Shs.10 per 50,000 7% preference shares of Kshs. 7.

All these shares had been issued at per.

Required

(a) Journal entries including cash necessary to record the share transactions. 13 marks

(b) Prepare the share capital section of the balance sheet as at 31 December 2000. 4 marks

(c) What is the importance of issuing bonus shares. 3 marks

5. (a) Ratio analysis is one of the many tools of financial statement analysis used as a basis
for decision making by users of financial statements.
Explain the significance of the following rates in decision making:

(i) Return on Investment (ROI)

(ii) Price earning ratio (P-E)
(iii) Current ratio
(iv) Capital gearing ratio
(v) Gross profit to sales

(b) Comment on the limitations of ratio analysis. 5 marks

6. Three of the accounts in the ledger of Sunil Olentemama indicated the following balances at
1 January, 2002:

Insurance paid in advance - Kshs.56,200

Wages outstanding - Kshs.30,000
Rent receivable, received in advance - Kshs. 3,600

During 2002 Sunil:

Paid for insurance Kshs.101,900 by bank standing order. Paid Kshs.1,500,000 wages in cash.
Received Kshs.260,000 rent, by cheque, from the tenant.
At 31 December, 2002, insurance prepaid was Kshs.34,500. On the same day rent receivable in
arrears was Kshs.10,500 and wages accrued amounted to kshs.41,900.
(a) Prepare the insurance, wages and rent receivable accounts for the year ended 31 December,
2002, showing the year ended transfers and the balances brought down. 9 marks
(b) Prepare the profit and loss account extract showing clearly the amounts transferred from each
of the above accounts for the year ended 31 December, 2002. 3 marks
 52

(c) Explain the effects on the financial statements of accounting for:

(i) Expenses accrued and
(ii) Income received in advance at year end - 4 marks
(d) What are the purposes of accounting for:
(i) Expenses accrued and
(ii) Income received in advance at year end? 4 marks

PART II
TRUST ACCOUNTS

7. Bobb & Company Advocates have requested you to write a legal opinion for them in relation
to a claim made by two of their clients regarding funds held by them on behalf of these clients.
Their instructions to you are as follows:
"Mr. Mwangi instructed us in 1999 to act for him in relation to the purchase of Plot No.109 Kiambu
for Kshs.50,000,000. After carrying out a search we found that the property was not registered in the
name of the vendor consequently we advised Mr. Mwangi against proceeding with that transaction.
Mr. Mwangi instructed us to retain the Kshs.50,000,000 at our account until he further instructed us.
On Is' June 2003, Mr. Mwangi requested for the sum of Kshs.50,000,000 to be paid to him together
with interest. We seek your advise on our liability to account for interest to Mr. Mwangi. We also
have held funds on behalf of Mr. Patel being Kshs.10,000 for the last 10 years. What is our liability
towards Mr. Patel in respect of interest, if any earned by his deposit"?

8. You are an administrator of the estate of Mr. Korir (deceased) which comprises of the
following:

(i) Office Block L.R. No. 103/45 valued at Kshs.15,000,000/

(ii) Motor vehicle registration number KAQ 750X valued at Kshs.2,000,000/
(iii) Cash in the bank - Kshs.7,500,000/
(iv) Personal effects valued at Kshs.800,000/

The beneficiaries to the estate of Mr. Korir (deceased) are Kenneth, Kate, Kim, Kalos who shall
inherit equally.

Kenneth had last year obtained from you an advancement of Kshs.500,000/-.

The estate has the following liabilities:

l. Doctor's fees - Kshs.3000,000/

2. Advocate's fees - Kshs.1,000,000/
3. Mortgage over L.R. No. 103/45 - Kshs.2,000,000/

Draw the Distribution Account.

Refer to previous answer.

9. Mr. James, a trustee needs your advise in relation to investment of a trust fund. What legal
consideration should he have when undertaking investment.

Refer to previous answer.

 53

10. Mr. Ben a trustee has been approached by one of the beneficiary, James, to the said trust with
a request for an advancement to start a small business.

Give the trustee advise relating to that request, for advancement and draw the Memorandum,
Schedule of Assets and the Cash Account to illustrate the advancement to James of Kshs.20,000/

Refer to previous answer.

11. (a) What are the different accounts found in the Estate Book?

The Estate Book

Will contain the following items:

(a) Documents;
(b) Memorandum;
(c) Schedule of assets;
(d) Schedule of liabilities;
(e) Cash accounts;
(f) Income accounts;
(g) Special income accounts;
(h) Investments accounts;
(i) Apportionment accounts; and
(j) Distribution accounts

(b) Discuss the purpose of any three accounts enumerated in (a) above with illustrations

Refer to previous answer.

12. You are an executor of a will which has the following clauses "to my wife I bequeath the
monthly rent of my property in Mombasa being Kshs.50,000 to be paid to her for her life time"

"To my son Jonathan who is physically challenged I bequeath an annual payment of Kshs.200,000/-
until he is 21 years old"

Draw the Cash account, Income Account and Special Income Account to reflect your treatment of
the above clauses.