THE PUBLIC ACCOUNTANTS EXAMINATION COUNCIL OF MALAWI 2010 EXAMINATIONS FOUNDATION STAGE PAPER 1: ACCOUNTING FRAMEWORK

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1 Examination No. THE PUBLIC ACCOUNTANTS EXAMINATION COUNCIL OF MALAWI 2010 EXAMINATIONS FOUNDATION STAGE PAPER 1: ACCOUNTING FRAMEWORK TUESDAY 7 DECEMBER 2010 TIME ALLOWED : 3 HOURS 9.00 AM NOON INSTRUCTIONS: - 1. You are allowed 15 minutes reading time before the examination begins during which you should read the question paper and, if you wish, make annotations on the question paper. However, you are not allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time. 2. Number of questions on paper Answer FIVE questions ONLY. 4. Each question carries 20 marks. 5. Marks will be awarded for content, presentation and layout. 6. All workings must be shown. 7. This question paper must not be removed from the examination hall. 8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE INVIGILATOR This paper contains 10 pages

2 1 1. Accounting is a process that begins with a business transaction and ends with a report for decision making during a specified period. (a) (b) (c) (d) Name two classes of goods which a business person might buy and sell. 4 Marks Name three types of business transactions, giving the accounting records in which they are captured, and two source documents from which the information might be gathered. 6 Marks Name four books of accounts in which each of the business transactions is recorded. 4 Marks Name three accounting reports, briefly explaining the purpose of each one of them. 6 Marks (TOTAL : 20 MARKS)

3 2 2. (a) (i) How might a farmer who does not keep accounting records know the performance and state of his business at the end of a given period? (ii) The following information relates to Kelvin Ngozo, a tobacco farmer, during the year 2009: 2 Marks Assets and Liabilities Barns and wagons Inventory of tobacco Accounts payable Accounts receivable Bank balance Cash balance 1 Jan Dec During the year 2009 Ngozo inherited K80,000 from his father s deceased estate which he deposited into his business bank account. He had been withdrawing K200 per week for personal use. Ngozo also took tobacco worth K150 for personal use during the year. Jim, Ngozo s friend, advised him that his profit would not be a true representation of his business affairs unless he took into consideration his use of the wagons estimated at 10% on cost for the year, and the tobacco inventory which was lost in a fire, estimated at 5% of the opening balance. 2% of the opening accounts receivable failed to pay their debts during the year. Calculate the profit that Kelvin Ngozo earned during the year 2009, taking into consideration Jim s advice. 9 Marks

4 3 (b) Jean operates a boutique. The following information relates to the activities of the business during the year ended 31 December 2009: Cash collected from customers: Credit sales Cash sales Payment to suppliers K 41,000 12,500 36,500 Accounts receivable Accounts payable Inventory 1 Jan K 12,650 6,540 9, Dec K 11,780 8,270 9,730 Calculate the value of the following, for the period ended 31 December 2009: (i) Receipts from customers; 2 Marks (ii) Sales; 2½ Marks (iii) Purchases; 2½ Marks (iv) Cost of goods sold. 2 Marks (TOTAL: 20 MARKS)

5 4 3. The following Trial Balance, which did not balance, was drawn from the books of Inglewood Ltd as at 31 December 2009: Debit Capital Receivables (from sales ledger) Payables (from purchases ledger) Inventory at 1 Jan 2009 Premises, at cost Vans, at cost Sales Purchases Rent and rates Light and heating Salaries and wages General expenses Bad debts Provision for doubtful debts 1 Jan 2009 Provision for van depreciation 1 Jan 2009 Motor vehicle expenses Drawings Bank overdraft Discounts received Discounts allowed Office equipment Provision for depreciation of office equipment 11,131 14,169 25,000 10,000 89,952 2, , ,326 7,146 4, , ,577 On investigation of the ledger, the following errors were discovered: Credit 48,642 7, ,488 1,861 6,000 1, , Goods bought on credit from a supplier for K13,000 had been posted to his account as K73,000. The posting to the purchases account was correct. 2. Office equipment costing K293,000 had been debited to the general expenses account. 3. An invoice from a supplier for K372,000 had been entered in the purchases day book and posted to the supplier s account in the purchases ledger, but not to the purchases account. 4. Sales on credit to a customer for K1,750,000 had been posted to the sales account but not to the sales ledger. 5. The balance on the capital account had been incorrectly copied. The correct balance should have been K43,642,000.

6 5 6. A payment of K256,000 received from a debtor in settlement of his account had been entered in the cash book as a cash sale. 7. Discounts allowed had been undertotalled in the cash book by K185,000. (a) Prepare a list of the accounts and the necessary adjustments to correct the errors, in the following format: Account Original Correction Correct Name amount Dr Cr balance 15 Marks (b) Prepare the corrected Trial Balance after the adjustments. 5 Marks (TOTAL: 20 MARKS)

7 6 4. (a) In accounting for partnerships, explain the difference between a Revaluation account and a Realisation account. 3 Marks (b) Hanna, Willy and Zack have been in partnership sharing profits equally. The following is a summarized balance sheet of the partnership: Non-current assets (Net Book Value) Current Assets: Inventory Receivables Cash Current Liabilities: payables Working capital Capital Accounts Hanna Willy Zack 30,000 21,000 7,200 3,250 31,450 (12,370) 19,080 49,080 17,360 15,760 25,960 49,080 The partners decided to dissolve the partnership on 31 March 2010 and the following transactions took place: 1. The cost of dissolution of K1,000 was paid in cash. 2. Hanna took over most of the fixed assets at an agreed value of K35,000 and Willy took over stock valued at K1, The rest of the fixed assets were sold for K6,000 cash and the remainder of the inventory was sold for K22,000 cash. 4. Creditors were paid in full and K6,850 was received from debtors. The rest of the debtors were bad. (i) Prepare the realization account of the partnership. 7 Marks (ii) Prepare the partnership s cash account to record the dissolution. 5 Marks (iii) Prepare and close off the partners capital accounts. 5 Marks (TOTAL: 20 MARKS)

8 7 5. The following information relates to Egesi Mandanda, for the years ended 30 June 2008 and 2009: EGESI MANDANDA INCOME STATEMENT FOR THE YEAR ENDED 2009 Revenue Add: reduction in provision for doubtful debts Less expenses: Wages and salaries General trading expenses Equipment running costs Motor vehicle expenses Depreciation: Motor vehicles Equipment Loss on sale of equipment Net profit Motor vehicles at cost Less: depreciation Current Assets Inventory Account receivable (net of provision) Bank Current Liabilities Account payable Long term liability Loan from Tom Phiri Capital Opening balance Net profit Less drawings 61,400 15,200 8,140 6,390 5,200 6,300 1, JUNE 155, ,230 (104,230) 51,000 EGESI MANDANDA BALANCE SHEET AS AT 30 JUNE Non-current assets: Equipment at cost Less: depreciation 40,400 (24,600) 30,800 (20,600) 28,300 (9,200) 41,700 21,200 12,600 75,500 (14,300) 15,800 19,100 34,900 61,200 96,100 (20,000) 76,100 65,600 42, ,100 (32,000) 76,100 28,300 (14,400) 44,600 19,800 28,100 92,500 (17,500) 10,200 13,900 24,100 75,000 99,100 (10,000) 89,100 76,100 51, ,100 (38,000) 89,100

9 8 NOTES (1) Accounts receivable were as follows: ,100 less a provision of ,500 less a provision of 700 (2) The equipment was sold for K15,800,000 and another piece of equipment costing K18,100,000 was purchased during (a) Explain the difference between International Accounting Standard 1 (IAS1) and International Accounting Standard 7 (IAS7). 6 Marks (b) Prepare Egesi Mandanda s cashflow statement using IAS7. 14 Marks (TOTAL : 20 MARKS)

10 9 6. The following balances were extracted from the ledger of Pondani Ltd at 30 June 2009 after the income statement for that year had been prepared and all the relevant adjustments had been made. Balances as at 30 June 2009 Freehold land and buildings Bank overdraft Cash in hand Inventory 10% Debentures Proposed dividends: 8% preference shares 10% ordinary shares Payables Accrued expenses General reserves (at 1 July 2008 K400,000) Share capital 1 million 9% preference shares of K1 each 3 million ordinary shares of K1 each Investments, at cost Motor vehicles, at cost Provision for depreciation 1 July 2008 (Motor vehicles) Plant and machinery, at cost Provision for depreciation (Plant and Machinery) Profit and loss account (1 July 08 K1,400,000) Share premium Receivables 1,600 1, ,720 1, ,000 1,000 3, , , , ,776 NOTES (1) The authorized share capital consists of 2 million 8% preference shares of K1 each and 6 million ordinary shares of K1 each. (2) The investments should be shown as a separate asset and inserted in the balance sheet after fixed assets and before current assets. (a) Prepare the Balance Sheet of Pondani Ltd as at 30 June Marks (b) Ascertain the net profit for the year. 6 Marks (c) Explain, with examples, the difference between provisions and reserves. 5 Marks (TOTAL: 20 MARKS)

11 10 7. (a) Define the term depreciation. 2 Marks (b) What are the two basic purposes of depreciation. 2 Marks (c) On 1 January 2008 Tito Manufacturers Ltd bought two machines costing K800,000 each and office equipment costing K400,000. The two machines are depreciated at 25% per annum on a declining balance basis. The office equipment, which has an estimated residual value of K40,000 and an economic life of six years, is depreciated on a straight line basis. In January 2009 one of the two machines was sold for K450,000 and a new one acquired at K1,100,000. Prepare the relevant accounts to record, for the two years 2008 and 2009: (i) The assets; 3 Marks (ii) The provision for depreciation; 5 Marks (iii) The disposal of the assets. 4 Marks (d) Although depreciation increases or decreases profit, it is an expense that does not require the use of cash. Therefore, the best way to improve profits is by charging as little depreciation as possible. After all, the asset remains intact after use". Comment on the validity of this statement. 3 Marks (TOTAL: 20 MARKS) E N D