Business Studies Paper 2 Questions and Answers - Sukellemo Joint Mock Examinations July 2020

INSTRUCTIONS TO CANDIDATES:

This paper consists of six questions.
Answer any five questions.
Write your answers in the separate answer sheets provided.
All question carry equal marks.

QUESTIONS

1. Explain five features that differentiate a public corporation from a public limited company form of business unit. (10 marks)
2. Explain 5 benefits of a business plan to an entrepreneur (10 marks)
1. Explain 5 factors that may influence the level of national income of a country: (10 marks)
2. Kenya is looking forward to the realization of Vision 2030. Explain 5 obstacles that may hinder the efforts made towards this dream. (10 marks)
1. Explain FIVE factors that one needs to consider when selecting an office equipment (10 marks)
2. Kitinga Enterprises runs a general Merchandise business. The transactions during the month of June 2014 were as follows:
  2014
  June 1 - Bought on credit from Orina Ltd. goods worth shs. 100 000, received a 20% trade discount.
  June 4 - Sold goods on credit to Rono Ltd. shs. 50 000 and allowed them a 10% trade discount.
  June 8 - Sent Rono Ltd. a credit note for goods returned, which had a value of shs. 27 000.
  June 10 - Sold goods on credit to Akinyi shs. 60 000
  June 12 - Purchased goods from Wamalwa Itd for shs. 100 000 and he allowed a 30% trade discount.
  June 15 - Purchased goods on credit from Nyambura shs. 55 000
  June 16 - Sent Akinyi a credit note for goods returned worth shs. 6 000
  June 18 - Wamalwa Ltd. sent us a credit note for sh.30 000 for goods returned.
  June 19 - Received a credit note for goods returned to Orina worth sh.20 000
  June 25 - Sold goods to Wairimu on credit sh. 25 000
  June 27 - Sent Wairimu a credit note for sh.5 000 to rectify an overcharge on their invoice.
  June 28 - Sold goods on credit to Rono Retailers for sh. 56 000
  June 29 - Purchased a Motor Van on credit from Awori Ltd. worth shs. 80 000
  June 30 - Sold on credit old machinery to Nairobi Trading Company for sh.35 000 (prior to this owned machines worth shs. 100 000
  Required: Make the necessary entries in the relevant books of original entry (10 marks)
  (NB. Posting to the ledger Accounts is not necessary)
1. Explain 4 measures that may be taken by the central bank of Kenya to control the amount of money in circulation.
  (8 marks)
2. On 1 March 2019, L2020 Ltd had cash in hand Sh47,800 and a bank overdraft of Sh23,400.
  During the month, the following transactions took place:
  March 3 Cash sales Sh 6,500 paid directly into the bank
  4 Bought goods for Sh 15,000 and paid by cheque.
  5 Received a cheque of sh 76,000 from Mary, after allowing her a cash discount of 5%.
  6 Cash sales Sh 50,000.
  9 Received a cheque for Sh 76,500 from Nyaboke in settlement of her debts.
  12 Settled Omollo's account for sh 34,200 in cash, having deducted sh 800 cash discount
  13 Paid insurance premium Sh 16,000 in cash.
  14 Paid Keith by cheque Sh 9,700 in full settlement of his account having deducted 3% cash discount.
  17 Cash sales Sh 150,000 paid direct into bank.
  21 Withdrew Sh 30,000 from bank for office use.
  23 Received a cheque of Sh 23,750 from Jabali in full settlement of his account less 5% cash discount.
  25 Paid wages of Sh 20,000 in cash.
  26 Cheque received from Nyaboke was dishonoured.
  29 Received sh 17,000 cash from Alvin in settlement of his account less sh 1,000 cash discount
  30 Banked all cash except SK-33,800.
  Prepare a three-column cash book duly balanced. (12 marks)
1. The following trial balance was extracted from the books of Namirama Traders as at 31 December 2017
  
  Closing stock was. Sh. 70,000
  1. A trading, profit and loss account for the period ended 31" December 2017
  2. A balance sheet as at that date
  3. Calculate the following: current ratio, rate of stock turn over, capital employed and working capital. (12 marks)
2. Highlight 4 functions of wholesalers (8 marks)
1. You are given the following functions.
  Q=51 +4P
  Q=100 - 3P
  Required:
  1. of the two options, identify which is the supply and demand functions (4 marks)
  2. Give reasons to your answers in (a) above (2 marks)
  3. Establish the equilibrium price and quantity
2. Outline FIVE causes of Balance of payments deficits (10 marks)

MARKING SCHEME

1. Explain five features that differentiate a public corporation from a public limited company form of business unit. (10 mks )
  - Public Corporation - Initial capital is usually provided by the government.
    Public Limited Company - Initial capital comes from the shareholders.
  - Public Corporation - Established through legislation by an act of parliament.
    Public Limited Company - Established by promoters according to the company's act.
  - Public Corporation - Managed by a board of directors appointed by the government
    Public Limited Company - Managed by a board of directors elected by shareholders.
  - Public Corporation - Profits are distributed to the government and to shareholders as dividends
    Public Limited Company - Profits are shared by shareholders as dividends
  - Public Corporation - Non-profit motivated.
    Public Limited Company - usually established to earn profits.
  - Public Corporation - Can increase its capital by inviting members of the publie to subscribe to its shares
    Public Limited Company - Can increase its capital by getting more funding from the government
  - Public Corporation - Owned by shareholders
    Public Limited Company - Owned by government
  - Public Corporation - Audited by private auditors
    Public Limited Company - Auditor general audits its books of accounts
  - Public Corporation - Financial statements presented to parliament
    Public Limited Company - f.s published in the press and presented to shareholders
2. Explain 5 benefits of a business plan to an entrepreneur (10 marks)
  1. Avoiding mistakes. It enables identification of mistakes so that they can be corrected in advance.
  2. Identifying strengths to be sustained and weaknesses where remedial action can be taken immediately.
  3. Requirement by financiers. Financial institutions sometimes ask for a business plan before they can accept to finance a business.
  4. Allocation of resources. It enables resources to be allocated appropriately to ensure they are not underutilized or misused.
  5. A motivating factor. It makes employees aware of the direction being taken by the business
    and inspires them to work towards that direction.
  6. Adaptability. A good plan allows flexibility in the use of business resources in line with future changes.
  7. Facilitates/guides decision making needed to run a business on a day to day basis.
  8. Enables a business to identify potential customers, right prices for its products, promotional activities, distribution channels and its competition
  9. Enables a business to identify its staff requirements: number of employees, skills, tasks to be done, and how to pay them.
  10. Determination of amount of finance required. The plan identifies financial needs of the business and possible sources of financing.
  11. Helps the entrepreneur to plan and budget properly.
  12. Useful in evaluating performance of the business to determine if it is achieving its intended purpose.
  13. Tool of control. It makes it possible to assess actual performance with set standards and correcting any deviations
1. Explain 5 factors that may influence the level of national income of a country
  1. Human resources. A country with skilled human resources can produce quality goods and generate high income.
  2. Natural resources. A country endowed with natural resources can produce more goods hence generate more income.
  3. Technology. A country with high level of technology may produce high quality goods hence generate high income.
  4. Capital. Availability of capital increases production leading to increased national income.
  5. Foreign investments. Investments from abroad may increase production of goods hence increasing national income to the country.
  6. Political stability. Political stability creates confidence in investors hence increasing investments generation of national income.
  7. Entrepreneurship. A culture that encourages entrepreneurship increases production of goods hence generation of more income.
2. Kenya is looking forward to the realization of Vision 2030. Explain 5 obstacles that may hinder the efforts made towards this dream. (10mks)
  - Lack of adequate and accurate data as record are rarely kept by society and firms leading to poor or unreliable plans
  - Shortage or inadequate finances or capital bence some projects are never completed or it is difficult to collect revenue and compute information and prepare good plans
  - Political instability and insecurity affects plans since its difficult and costly to plan and implement and can lead to destruction of projects
  - Copying of imported plans from developed countries which do not suit local conditions and communities as they differ in culture, and level of development hence end up failing
  - Preparation of overambitious plans which are very costly to implement and some turn up to be white elephants or are abandoned leading to wastage or failed projects
  - Lack of community support hence people reject some projects or do not recognize the usefulness of some projects since they were not involved in the planning
  - Existence of large subsistence and private sector hence difficult to get information and coordinate their activities as the government doesn't have direct control
  - Inflation which increase the cost of the projects hence some projects are never completed
  - Lack of trained or skilled manpower to plan and implement the projects as expatriates are used which is expensive
  - Natural calamities or disasters usually destroy some projects e.g drought hence wasting resources or increase costs of the projects
  - Over reliance on foreign loans and grants has made some projects not to be completed when donors fail to remit the funds
  - Political interference in implementation and preparation of plans and lack of political goodwill has led to mismanagement of projects or failure of projects to be completed
  - Poor technology will hinder the preparation and implementation of quality plans and projects
  - Lack of adequate capital to prepare plans and implement some plans has led to some plans being just mere paper work

Explain FIVE factors that one needs to consider when selecting an office equipment. (10 marks)
- Cost of the equipment - buy an equipment that you can afford
- Cost of repair- buy an equipment that you can afford the repair coat
- Quality of machine-buy one that has attractive features, designs
- Spare parts - must be easily and readily available
- Type of work - the machine should be able to do the intended work
- Durability - the machine should be long lasting to serve you for a long time without breaking down
- Effects on staff morale - it should encourage workers to work hard or be more efficient
- Safety or comfort of workers - buy a machine that workers will feel comfortable and relaxed to work with or will not injure workers
- Space saving - so that you economize space in the office
- Adaptability so that it can cope up with future changes in the volume of work
- Availability of personnel - who can operate and repair the machine

Kitinga Enterprises runs a general Merchandise business. The transactions during the month of June
2014 were as follows:

2014
June 1 - Bought on credit from Orina Ltd. goods worth shs. 100 000, received a 20% trade discount.
June 4 - Sold goods on credit to Rono Ltd. shs. 50 000 and allowed them a 10% trade discount.
June 8 - Sent Rono Ltd. a credit note for goods returned, which had a value of shs. 27 000.
June 10 - Sold goods on credit to Akinyi shs. 60 000
June 12 - Purchased goods from Wamalwa Itd for shs. 100 000 and he allowed a 30% trade discount.
June 15 - Purchased goods on credit from Nyambura shs. 53 000
June 16 - Sent Akinyi a credit note for goods returned worth shs. 6 000
June 18 - Wamalwa Ltd. sent us a credit note for sh.30 000 for goods returned.
June 19 - Received a credit note for goods returned to Orina worth sh.20 000
June 25 - Sold goods to Wairimu on credit sh. 25 000
June 27 - Sent Wairimu a credit note for sh.5 000 to rectify an overcharge on their invoice.
June 28 - Sold goods on credit to Rono Retallers for sh. 56 000
June 29 - Purchased a Motor Van on credit from Awori Ltd. worth shs. 80 000
June 30 - Sold on credit Old machinery to Nairobi Trading Company for sh.35 000
(prior to this owned machines worth shs. 100 000)
Required: Make the necessary entries in the relevant books of original entry (10 mks)
(NB. Posting to the ledger Accounts is not necessary)
SOLUTION
JOURNALS
Purchases Journal

Date	Details	LF	Invoice No.	Amount (shs.)
11/6/05	Orina Itd.			80,000
12/6/05	Wamalwa itd.			70,000
15/6/15	Nyambura			55,000
Total to Purchases Alc				205.000

Purchase Returns Journal

Date	Details	LF	Credit note No.	Amount (shs.)
18/6/05	Wamalwa ltd.			30,000
19/6/05	Orina Itd.			20,000
Total to Purchase Returns A/c				50.000

Sales Journal

Date	Details	LF	Invoice No.	Amount (shs.)
4/6/05	Rono Retailers			45,000
10/6/05	Akinyi Retailers			60,000
25/6/05	Wairimu Retailers			25,000
28/6/05	Rono Retailers			56,000
Total to Sales Alc				186.000

Sales Returns Journal

Date	Details	LF	Invoice No.	Amount (shs.)
8/6/05	Rono Retailers			27,000
16/6/05	Akinyi Retailers			6,000
27/6/05	Wairimu Retailers			5,000
Total to Sales Returns Alc				38.000

Mumbo Sparks
General Journal

Date	Details	Debit	Credit
29/6/05	Motor Vehicle Alc	80.000
	Awori A/C		80,000
	To record purchase of motor vehicle on credit
30/6/05	Nairobi Trading Co. A/C	35,000
	Machinery A/C To record sale of machinery on credit		35,000V

1/2 x 20 =10 marks

1. Explain 5 measures that may be taken by the central bank of Kenya to control the amount of money in circulation. (10 mks)
  - bank rate-the rate at which lends to commercial banks it can be raised during inflation and lowered during inflation
  - open market operations (OMO) - central bank may sell or buy securities in the open market; selling is done during inflation and bought during deflation
  - compulsory deposits - central bank may require other financial institutions to lower a certain percentage of deposits deposited in central bank Increased during inflation and decreased during deflation
  - Cash ratio/liquidity ratio-ratio of cash Miquid assets to deposits may be increased during inflation and reduced during deflation
  - Moral suasion /persuasion - central bank may appeal/request other financial institutions to exercise restraint in lending / regulate their lending habits
  - Selective credit control - the commercial banks may be required by central bank to al prove loans to specified types of projects e.g agriculture, manufacturer
  - Direct/directives/instructions - central bank can use its authority to direct / instruct the financial institutions to lend more/less /apply credit spheres/credit expansion/varying margin requirement
2. On 1 June 2019, L2020 Ltd had cash in band sh 87,000 and cash at bank sh 250,000.
  During the month, the following transactions took place:
  - 2019
    June 2 Cash sales sh 60,000.
    3 Paid salaries sh 101,500 by cheque.
    7 Received a cheque of sh 76,000 from Mary, after allowing her a cash discount of 5%.
    13 Bought office furniture by cheque sh 86,000.
    17 Settled Omollo's account for sh 34,200 in cash, having deducted sh 800 cash discount.
    20 Received a cheque for sh 165,000 in respect of cash sales.
    22 Paid wages sh 25,000 in cash.
    24 Withdrew sh 32,000 from the bank for office use.
    25 Withdrew sh 4,000 cash for personal use.
    29 Received sh 17,000 cash from Alvin in settlement of his accountless sh 1,000 cash discount.
    30 Deposited all the money into the bank except sh 24,000.
    Prepare a three column cash book duly balanced. (10 marks)
1. The following trial balance was extracted from the books of Namirama Traders as at 31 December 2017.
  Closing stock was. Sh. 70,000
  1. A trading, profit and loss account for the period ended 31" December 2017
  2. A balance sheet as at that date
  3. Calculate the following: current ratio, rate of stock tum over, capital employed and working capital. (12 marks)
    - Woriting capital = CA-CL
      205,000 - 40,000 = 165,000
    - Capital employed=FA + WC or CL + LTL
      = 840,000 + 165,000 = 1,005,000 or 1,005,000+ 0 = 1,005,000
    - Current ratio=CA:CL
      = 205,000 : 40,000
      205:40 = 41:8
    - ROSTO = cost of sales/ evg stock
      = 410,000/60,000 + 70,000/2
      = 410,000/65,000 = 6.307 times
      = 6 times
2. Highlight 5 functions of wholesalers (10 marks)
  1. Wholesalers transport goods from the producers to their premises and from their premises to the customers.
  2. They buy and store goods until they are required.
  3. They break bulk by buying goods in large quantities and selling them in smaller quantities.
  4. They offer market information to producers and also advise their customers on matters related to the products.
  5. They are a link between the producers and the retailers.
  6. They provide finance by buying goods on cash from manufacturers and selling them on credit to the retailers.
  7. They advertise goods they deal in and hence increase customer awareness and possible sales
  8. They prepare goods for sale by packing, branding, sorting, grading, packaging and blending.
1. You are given the following functions.
  Q = 51 + 4P
  Q=100 - 3P
  Required:
  1. of the two options, identify which is the supply and demand functions(2mks)
    - SOLUTION
      Q = 51+ 4P is the Supply function
      Q = 100 - 3P is the Demand function
  2. Give reasons to your answers in (a) above (2mks)
    - SOLUTION
      Q = 51+ 4P is supply function because quantity supplied increases with increase in price
      Q= 100-3P is demand function because quantity demanded decreases with increase in price
  3. Establish the equilibrium price and quantity
    - SOLUTION (4mks)
      Q=51 +4P
      Q=100-3P
      51+ 4P = 100-3P
      4P + 3P =100-51
      7P = 49
      P=7
    - Q=51 +4P
      = 51 +4(7)
      = 51+ 28
    - Q = 79
      Equilibrium price = sh 7
      Equilibrium quantity = 79
2. Outline FIVE causes of Balance of payments deficits (10 mks)
  SOLUTION
  Causes of B.O.P deficit
  - Adverse weather conditions like drought or floods: This leads to shortages in the supply of agricultural products in the domestic market which results in reduced exports and reduced imports.
  - Increased demand for imported inputs e.g for capital goods which leads to high capital outflow hence possible deficits.
  - Dependence on a few exports that may be adversely affected by demand changes on the world market. This makes a country to earn less from exports relative to imports.
  - Nature of exports and imports, where imports are mainly expensive manufactured goods as opposed to primary products exported by a certain country.this means more capital outflow
  - Trade ties which restrict a country in terms of quantity and number of trade partners which in tum denies the country a chance to source better prices for its exports.
  - Ambitious development plans that require more than a country can afford resulting to dependence on imports from development partners
  - Devaluation of currency by a Trading partner making imports cheaper and exports more expensive.
  - High import consumption resulting from wasteful import consumption behavior leading to excessive imports @2x5 = 10 marks
    the cause must be accompanied with HOW it creates a deficit for maximum marks)