EXAMINATION NO. THE PUBLIC ACCOUNTANTS EXAMINATION COUNCIL OF MALAWI 2014 EXAMINATIONS FOUNDATION STAGE PAPER 1: ACCOUNTING FRAMEWOR MONDAY, 2 JUNE 2014 TIME ALLOWED : 3 HOURS 9.00 AM 12.00 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 will not be 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 7. 3. 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 question paper contains 11 pages
1 1. (a) ABC Ltd and XYZ Ltd are up for sale. Mary Jonga is considering the purchase of one of the two companies. The following information was summarized from the books of accounts of the two companies for the year ended 31 December 2013: Cost of goods sold Administration expenses Average inventory at cost Working capital as at 31 December 2013 Selling and distribution expenses Owners capital at 1 Jan 2013 Gross profit (mark up on cost) ABC Ltd 000 400 50 40 90 15 200 20% XYZ Ltd 000 600 60 50 250 33 350 25% The following additional information on the two companies is also made available: (1) ABC s administration expenses include a payment for rent of 15,000 covering a three year period to 31 December 2015. (2) A sum of 2,500 was included in the administration expenses of XYZ Ltd in respect of a holiday taken by the owner. (3) Cash drawings for the year ended 31 December 2013 were: ABC Ltd 20,000 XYZ Ltd 25,000 (4) The owners of the businesses have stipulated the following prices for their businesses. ABC Ltd 190,000 XYZ Ltd 400,000 (a) (b) Prepare comparative statements of comprehensive income for the two companies for the year ended 31 December 2013. 6 Marks Using the statements prepared in (a), and the additional information provided above, calculate accounting ratios that would give Mary Jonga a basis for assessing the performance of each of the two businesses. Comment on the results. 9 Marks
2 (c) What additional information is required to help in assessing more accurately the (i) liquidity of each of the two businesses. 2 Marks (ii) the future prospects of each of the two businesses. 3 Marks (TOTAL : 20 MARS)
3 2. (a) State at least four functions of a general journal. 4 Marks (b) At the end of the accounting year, 30 June 2013, Collins Lungu, Accountant for ABC Ltd, prepared a trial balance. He prepared, journalized, and posted the adjusting entries and produced an adjusted trial balance. The following are the two trial balances: ABC LTD TRIAL BALANCE AS AT JUNE 30 2013 Cash Inventory Rent account Insurance account Motor vehicles: cost Accumulated depreciation Equipment: cost Accumulated depreciation Accounts payable Salaries payable Taxes payable Capital Drawings Service fees earned Salaries expenses Rent expense Supplies expenses Depreciation charge: Motor vehicle Equipment Utilities expense Tax expenses Insurance expense Miscellaneous expense Unadjusted Dr 1,845 2,130 3,150 465 4,500 3,200 6,600 11,200 640 140 310 34,180 Cr 1,000 320 385 5,075 27,400 34,180 Adjusted Dr 1,845 430 1,050 325 4,500 3,200 6,600 11,310 2,100 1,700 1,000 320 725 160 140 310 35,715 Cr 2,000 640 470 110 20 5,075 27,400 35,715 (i) (ii) Prepare the journal entries which the accountant would have made in order to produce the revised trial balance, together with explanations of the reasons for these entries. 8 Marks Prepare the journal entries which the accountant would make, from the adjusted trial balance in order to close the books in preparation for drawing up the final accounts. 8 Marks (TOTAL : 20 MARS)
4 3. (a) The following information was extracted from the books of Hope Trading for the year ended 30 June 2013: (1) Stationery paid for the year to 30 June 2013 was 2,400. Inventories at 30 June 2012 were 600 and at 30 June 2013 were 950. (2) General expenses paid for the year to 30 June 2013 were 4,700; owing at 30 June 2012 were 320; and at 30 June 2013 were 600. (3) Rent and business rates paid during the year to 31 December 2013 were 5,410. Rent owing at 30 June 2012 was 2,200. Rent paid in advance at 30 June 2013 was 3,700. Business rates owing at 30 June 2012 were 1,910. Business rates owing at 30 June 2013 were 3,930. (4) Motor expenses paid during the year to 30 June 2013 were 1,410; owing as at 30 June 2012 were 920; and as at 30 June 2013 were 670. (5) Hope earns commission from sales of one item. Received for the year to 30 June 2013 11,000; was owed at 30 June 2013 500; owed at 30 June 2012 820. Prepare the ledger accounts, showing the transfers to the financial statements and balances carried down to the next year. 10 Marks
5 (b) A company s trial balance at 31 December 2013 showed a total debit balance of 197,500 and a credit balance of 210,000. The difference was posted to a suspense account pending investigation which subsequently revealed the following errors: (1) A balance of 3,750 from the cash book had not been entered in the trial balance. (2) A debtors balance of 75,160 had been wrongly recorded as 71,560. (3) A fixed asset purchased for 10,000 had been credited to the fixed asset account instead of being debited. (4) The previous year s profit of 14,850 had not been added to the statement of comprehensive income. (i) Explain the importance of a suspense account. 2 Marks (ii) Prepare the suspense account to record the correction of the above errors. 5 Marks (c) Name at least three fundamental accounting principles that must be followed when preparing financial statements. 3 Marks (TOTAL : 20 MARS)
6 4. (a) Define the following terms: (i) Depreciation 1 Mark (ii) Provision for bad and doubtful debts 1 Mark (iii) Closing inventory. 1 Mark (b) (i) Describe three assumptions that accountants use in valuing closing inventory (inventory valuation methods). 3 Marks (ii) State the fundamental rule (principle) of inventory valuation. 1 Mark (c) Changu Ltd, distributors of breakfast cereals, started business on 1 January 2011. They purchased trading inventory at cost and during the first three years of business, their purchases were as follows: 2011 240,000 2012 252,000 2013 324,000 The values of inventory under the different methods were as follows: 1 December 2011 2012 2013 LastInFirstOut (LIFO) 96,480 87,360 100,320 FirstInFirstOut (FIFO) 96,000 86,400 105,600 Lower of Cost and Net Realizable Value (NRV) 88,800 81,600 105,600 Assume that in any one year prices changed. (i) (ii) Which valuation method would show the highest profits, and which one would show the lowest profit for all the three years? Provide a brief explanation of your answer. (Demonstrate your answers with the use of trading accounts for the three methods and three years in tabular form). 12 Marks What was the effect of price changes on inventory values under each method during each of the years (increased or decreased)? 1 Mark (TOTAL : 20 MARS)
7 5. The following trial balance was taken from Fundani Enterprises, makers of winter clothing, at 31 December 2013: Cash Inventory Prepaid expenses Delivery equipment Accumulated depreciation b/f Shop equipment & furniture Accumulated depreciation b/f Office equipment Accumulated depreciation b/f Buildings Accumulated depreciation b/f Land Notes payable Accounts payable L J Phiri capital L J Phiri drawings Purchases Sales Operating expenses Gain on disposal of plant assets Interest expense Loss on disposal of plant assets Debit 32,615 116,830 7,707 20,485 36,220 5,950 94,800 6,000 13,200 791,270 106,095 810 420 1,232,402 Credit 7,860 18,960 3,436 35,950 25,000 37,910 138,666 964,110 510 1,232,402 The following additional information is also made available: (1) Inventory at 31 December was 135,817 (2) Insurance and other prepaid operating expenses amounted to 2,370.
8 (3) Depreciation for the period is computed using the straight line method by taking an average of the beginning balance and ending balance of each asset and applying rates as follows: Asset Delivery equipment Store equipment Office equipment Buildings Beginning balance 16,395 32,004 6,130 94,000 Dep. Rate 25% Straight line 12½% 10% 2½% (4) Accrued liabilities of 2,110 at the end of the year composed of 650 interest on the note and 1,460 for wages. (a) Complete the schedule for the noncurrent assets as shown in note (3), above. 8 Marks (b) Prepare Fundani s statement of comprehensive income and statement of financial position as at 31 December 2013. 12 Marks (TOTAL : 20 MARS)
9 6. (a) According to the International Accounting Standard IAS7: (i) What is cash flow? 2 Marks (ii) Mention the three functions of a cashflow statement. 3 Marks (iii) What is the difference between the direct and indirect methods of drawing a cash flow statement? 2 Marks (b) The following balance sheets were extracted from the books of Masamba Trading Ltd as at 30 June 2013 and 2012 respectively: NONCURRENT ASSETS (COST) Accumulated depreciation Investments at cost CURRENT ASSETS Inventory Accounts receivable Cash and bank TOTAL ASSETS EQUITY Calledup share capital (1 ordinary shares) Share premium Retained profits CURRENT LIABILITIES Bank overdraft Accounts payable Taxation TOTAL FINANCING 2013 650 (300) 350 50 400 700 1,550 _ 2,250 2,650 750 200 530 1,480 60 920 190 1,170 2,650 2012 500 (200) 300 200 500 400 1,350 100 1,850 2,350 500 150 670 1,320 800 230 1,030 2,350 The following additional information relates to the two periods: 1. During the year to 30 June 2013, some noncurrent assets originally costing 25 million had been sold for 20 million cash. Accumulated depreciation on these assets as at 30 June 2012 was 10 million. Similarly, some of the investments originally costing 150 million had been sold at their book value.
10 2. Taxation disclosed in the balance sheets represents actual amounts agreed with the authorities. All taxes were paid on their due dates. 3. A dividend of 130 million was paid during the year to 30 June 2013. 4. During the year to 30 June 2013, the company made a 1 for 2 rights issues of 250 ordinary 1 shares at 120t per share. Prepare a cashflow statement for the company for the year 2013 in accordance with the requirements of IAS7, using the indirect method. (TOTAL : 13 MARS) 7. (a) (i) Name two types of shares that can form a company s capital. 2 Marks (ii) Define the following terms: (1) Bonus shares (2) Rights issue (3) Reserves 3 Marks
11 (b) The following trial balance was extracted from the books of anolo Trading Company Ltd for the year ended 31 December 2013. Dr 8,100 321,219 290,114 800,000 320,000 Bank Accounts receivable/payable Inventory 31 December 2012 Buildings at cost Equipment at cost Profit and loss account 31 December 2012 General reserves Foreign exchange reserves Authorised and issued share capital Purchases Sales Carriage inwards Carriage outwards Salaries Business rates Office expenses Sundry expenses Provision for depreciation : 31 December 2012 Buildings Equipment Director s remuneration 810,613 2,390 13,410 384,500 14,800 9,100 2,360 119,200 3,095,806 Cr 237,516 136,204 120,000 20,000 800,000 1,606,086 80,000 96,000 3,095,806 The following information at 31 December 2013 is available for adjustments: (1) Inventory 317,426 (2) Business rates owing amounting 1,700, office expenses owing 245. (3) Dividend of 15 percent was proposed. (4) Transfers to reserves were: General reserve 70,000, foreign exchange reserve 30,000. (5) Depreciation on buildings 5% on cost, equipment 15% on cost. Prepare a statement of comprehensive income for the year ended 31 December 2013 and a statement of financial position for the company as at that date. 15 Marks (TOTAL: 20 MARS) E N D