“A” LEVEL ACCOUNTING

STUDY PACK

NOTES

AND

EXERCISES

Tinofamba nevanofamba

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 CONTENTS

TOPIC PAGE
USERS OF ACCOUNTING INFORMATION 3
ACCOUNTING CONCEPTS 4
INTERNATIONAL ACCOUNTING STANDARDS 6
DEPRECIATION 17
CONTROL ACCOUNTS 21
SUSPENSE ACCOUNT 24
INCOMPLETE RECORDS 27
INCOME AND EXPENDITURE 29
PARNTERSHIPS 31
MANUFACTURING ACCOUNT 41
STOCK VALUATION 46
CASH FLOW STATEMENTS 50
CAPITAL RECONSTRUCTION 56
ACCOUNTING RATIOS 71
MARGINAL COSTING 77
ABSORPTION COSTING 91
STARDARD COSTING 99
BUDGETS 110
CAPITAL BUDGETING 113

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 USERS OF ACCOUNTING INFORMATION

Banks
They need to assess the quality of the assets upon which loans are secured that is collateral
security.

Shareholders
Need accounting information so as to ensure that they are getting a good return on their
investment. This will enable the shareholders to decide if they wish to increase or dispose
their investment.

Employees
Seek to assess how secure their future is and how much profit the company has made. This
information will be used to support their claim for a pay rise.

Customers
Want to know whether the company will be in existence in the near future by checking if it is
making a profit or loss. This will help customers when products need parts for servicing or
replacing.

Managers
Require accounting information so as to make quality decisions. Managers’ interest in the
accounts lies in whether the firm makes profit, which would normally result in their receiving
a good bonus or pay rise.

Public
Need to know how much profit the company has made as this will secure their jobs.

Suppliers
Need accounting information so as to know the profitability/liquidity position of the
company. This will enable suppliers to know how much to credit to offer basing on the
information provided in the financial statements.

Government
Need accounting information so as to assess economic growth and fiscal planning.

Tax authorities(ZIMRA)
Use the financial statements as the basis for tax computations.

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 ACCOUNTING CONCEPTS

GOING CONCERN CONCEPT

This concept is concerned with the amount at which assets are shown in the balance sheet. It
requires that business accounts shall be prepared on the assumption that a business is a going
concern.
MATERIALITY CONCEPT
This convention can be applied in two different ways, but the convention in essence, is that it
is not worthwhile spending hours or effort over small amounts. The effort is only worthwhile
if the item is of a reasonable (material) value.

COST CONCEPT
It states that figures shown in accounts must be valued at a figure that all parties can agree on.
It also states that the correct value to record items at is the only value to which all users
would agree, that is the amount paid for them, or initial cost of the item.

ACCRUALS CONCEPT
It states that items should be recorded when used and not paid for.

MONEY MEASUREMENT CONCEPT

It states that only items that that have a clear monetary value can be included in the accounts
,all other items must be ignored.

MATCHING CONCEPT
The purpose of this concept is to ensure that revenue, other income and expenses are
recognised in the financial period in which they accrue or are incurred, for example
capitalisation of development of development costs.

CONCEPT OF REALIZATION
This concept states that revenue should not be recorded in the accounts before it has been
realised. Revenue should not be overstated by sales which have not been realised.

CONSISTENCY CONCEPT
This concept enable sensible comparisons to be made of the results of a business and its
financial position from one year to another. All items of a similar nature should be treated in
a similar manner both within the same accounting period and from one period to the next.

DUAL ASPECT CONCEPT

It states that every transaction will affect two items.

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 COST CONCEPT
It states that figures shown in the accounts must be valued at a figure that all parties can agree
on. It also states that the correct value to record items at is the only value to which all users
would agree, that is the amount paid for them or initial cost of the item.

PRUDENCE CONCEPT
This concept states that profits should not be overstated and also losses must be provided as
soon as recognised. Valuing stock at the lower of cost or net realisable value is an application
of the prudence concept. Prudence is an overiding concept ,if in a given situation, the
application of another concept would conflict with prudence, prudence takes precedence
over that other concept.

SUBSTANCE OVER FORM

The term is mainly used to describe the accounting treatment of something that does not
reflect the legal position. It mainly relates to assets bought on hire purchase which remains
the property of the seller until the final instalment has been paid. The seller can repossess the
asset if the purchaser fails to pay the instalments on time.

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 INTERNATIONAL ACCOUNTING STANDARDS

Summaries of International Accounting Standards

The following list links to a brief summary of the individual International Accounting Standard
currently in force or issued recently and not yet effective. Where an IAS has been superseded by a
subsequent International Accounting Standard, it is not listed.

IAS 1: Presentation of Financial Statements

IAS 1: Presentation of Financial Statements supersedes:

 IAS 1, Disclosure of Accounting Policies;

 IAS 5, Information to be Disclosed in Financial Statements; and
 IAS 13, Presentation of Current Assets and Current Liabilities.

Summary of IAS 1

IAS 1 defines overall considerations for financial statements:

 Fair presentation
 Accounting policies
 Going concern
 Accrual basis of accounting
 Consistency of presentation
 Materiality and aggregation
 Offsetting
 Comparative information

Four basic financial statements: IAS 1 prescribes the minimum structure and content,
including certain information required on the face of the financial statements:

 Balance sheet (current/noncurrent distinction is not required)

 Income statement (operating/non operating separation is required)
 Cash flow statement (IAS 7: Cash Flow Statements sets out the details)
 Statement showing changes in equity. Various formats are allowed:
o The statement shows:
 (a) each item of income and expense, gain or loss, which, as required by
other IASC Standards, is recognised directly in equity, and the total of these
items (examples include property revaluations (IAS 16: Property, Plant and
Equipment), certain foreign currency translation gains and losses (IAS 21:
The Effects of Changes in Foreign Exchange Rates), and changes in fair
values of financial instruments (IAS 39: Financial Instruments: Recognition
and Measurement)); and
 (b) net profit or loss for the period, but no total of (a) and (b). Owners'
investments and withdrawals of capital and other movements in retained
earnings and equity capital are shown in the notes.

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 o Same as above, but with a total of (a) and (b) (sometimes called "comprehensive
income"). Again, owners' investments and withdrawals of capital and other
movements in retained earnings and equity capital are shown in the notes.
 The statement shows both the recognised gains and losses that are not
reported in the income statement and owners' investments and withdrawals of
capital and other movements in retained earnings and equity capital. An
example of this would be the traditional multicolumn statement of changes in
shareholders' equity.

Other matters addressed:

 Notes to financial statements

 Requires certain information on the face of financial statements
 Income statement must show:
--revenue
--results of operating activities
--finance costs
--income from associates and joint ventures
--taxes
--profit or loss from ordinary activities
--extraordinary items
--minority interest
--net profit or loss
 Offsetting (netting)
 Summary of accounting policies
 Illustrative Financial Statements
 Disclosure of compliance with IAS
 Limited "true and fair override" if compliance is misleading
 Requires compliance with Interpretations
 Definitions of current and noncurrent

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IAS 2: Inventories
IAS 2, Inventories, became effective for financial statements covering periods beginning on or after
1 January 1995.

Summary of IAS 2

 Inventories should be measured at the lower of cost and net realisable value. Net realisable
value is selling price less cost to complete the inventory and sell it.
 Cost includes all costs to bring the inventories to their present condition and location.
 If specific cost is not determinable, the benchmark treatment is to use either the first in, first
out (FIFO) or weighted average cost formulas. An allowed alternative is the last in, first out
(LIFO) cost formula. When LIFO is used, there should be disclosure of the lower of (i) net
realisable value and (ii) FIFO, weighted average or current cost.
 The cost of inventory is recognised as an expense in the period in which the related revenue is
recognised.
 If inventory is written down to net realisable value, the write-down is charged to expense.
Any reversal of such a write-down in a later period is credited to income by reducing that
period Vs cost of goods sold.
 Required disclosures include:
o accounting policy,
o carrying amount of inventories by category,
o carrying amount of inventory carried at net realisable value,
o amount of any reversal of a write-down,
o carrying amount of inventory pledged as security for liabilities,
o cost of inventory charged to expense for the period, and
o LIFO disclosures mentioned above.

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IAS 7: Cash Flow Statements
IAS 7, Cash Flow Statements, became effective for financial statements covering periods beginning
on or after 1 January 1994.

Summary of IAS 7

 The cash flow statement is a required basic financial statement.

 It explains changes in cash and cash equivalents during a period.
 Cash equivalents are short-term, highly liquid investments subject to insignificant risk of
changes in value.
 Cash flow statement should classify changes in cash and cash equivalents into operating,
investing, and financial activities.
 Operating: May be presented using either the direct or indirect methods. Direct method shows
receipts from customers and payments to suppliers, employees, government (taxes), etc.
Indirect method begins with accrual basis net profit or loss and adjusts for major non-cash
items.
 Investing: Disclose separately cash receipts and payments arising from acquisition or sale of
property, plant, and equipment; acquisition or sale of equity or debt instruments of other
enterprises (including acquisition or sale of subsidiaries); and advances and loans made to, or
repayments from, third parties.
 Financing: Disclose separately cash receipts and payments arising from an issue of share or
other equity securities; payments made to redeem such securities; proceeds arising from
issuing debentures, loans, notes; and repayments of such securities.
 Cash flows from taxes should be disclosed separately within operating activities, unless they
can be specifically identified with one of the other two headings.
 Investing and financing activities that do not give rise to cash flows (a nonmonetary
transaction such as acquisition of property by issuing debt) should be excluded from the cash
flow statement but disclosed separately.

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IAS 8: Net Profit or Loss for the Period, Fundamental Errors and
Changes in Accounting Policies
IAS 8 (revised 1993), Net Profit or Loss for the Period, Fundamental Errors and Extraordinary
Items, became effective for annual financial statements covering periods beginning on or after 1
January 1995.

Summary of IAS 8

 Separate disclosure of extraordinary items of profit or loss is required on the face of the
income statement, after the total of profit or loss from ordinary activities. Such extraordinary
items are rare and beyond management control. Examples are expropriation of assets and
effects of natural disasters.
 Items of income or expense arising from ordinary activities that are abnormal because of their
size, nature or incidence are separately disclosed, usually in the notes.
 A change in accounting estimate should be reflected prospectively. The nature and effect of
the change should be disclosed, even if the effect will only be significant in a future period. If
the effect cannot be quanitified, that fact should be disclosed.
 A correction of a fundamental error should be treated as a prior period adjustment
(benchmark) or recognised in current profit or loss (allowed alternative). The nature and
effect of the change in the current and prior periods should be disclosed.
 A change in accounting policy should be treated retrospectively by restating all prior periods
presented and adjusting opening retained earnings (benchmark). If the adjustments relating to
prior periods cannot be reasonably determined, the change may be accounted for
prospectively. An allowed alternative for the adjustment arising from a retrospective change
in accounting policy is to include it in the determination of the net profit or loss for the
current period.
 Disclosure is required of the reasons for and effect and accounting treatment of the change.
 A change in accounting policy should be made only if required by statute or by an accounting
standard-setting body, or if the change results in a more appropriate presentation of financial
statements.
 IAS 8 disclosure requirements for discontinued operations have been replaced by IAS 35

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IAS 10: Events After the Balance Sheet Date
IAS 10 was approved by the IASC Board in March 1999 and became effective for annual financial
statements covering periods beginning on or after 1 January 2000.

Summary of IAS 10

 an enterprise should adjust its financial statements for events after the balance sheet date that
provide further evidence of conditions that existed at the balance sheet;
 an enterprise should not adjust its fiancial statements for events after the balance sheet date
that are indicative of conditions that arose after the balance sheet date;
 if dividends to holders of equity instruments are proposed or declared after the balance sheet
date, an enterprise should not recognise those dividends as a liability;
 an enterprise may give the disclosure of proposed dividends (required by IAS 1: Presentation
of Financial Statements) either on the face of the balance sheet as an appropriation within
equity or in the notes to the financial statements;
 an enterprise should not prepare its financial statements on a going concern basis if
management determines after the balance sheet date either that it intends to liquidate the
enterprise or to cease trading, or that it has no realistic alternative but to do so;
 there should no longer be a requirement to adjust the financial statements where an event after
the balance sheet date indicates that the going concern assumption is not appropriate for part
of an enterprise;
 an enterprise should disclose the date when the financial statements were authorised for issue
and who gave that authorisation. If the enterprise Vs owners or others have the power to
amend the financial statements after issuance, the enterprise should disclose that fact; and
 an enterprise should update disclosures that relate to conditions that existed at the balance
sheet date in the light of any new information that it receives after the balance sheet date
about those conditions.

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IAS 16: Property, Plant and Equipment
IAS 16, Property, Plant and Equipment, became effective on 1 January 1995.

Summary of IAS 16

 Property, plant and equipment should be recognised when (a) it is probable that future
benefits will flow from it, and (b) its cost can be measured reliably.
 Initial measurement should be at cost.
 Subsequently, the benchmark treatment is to use depreciated (amortised) cost but the allowed
alternative is to use an up-to-date fair value.
 Depreciation:
o Long-lived assets other than land are depreciated on a systematic basis over their
useful lives.
o Depreciation base is cost less estimated residual value.
o The depreciation method should reflect the pattern in which the asset's economic
benefits are consumed by the enterprise.
o If assets are revalued, depreciation is based on the revalued amount.
o The useful life should be reviewed periodically and any change should be reflected in
the current period and prospectively.
o Significaant costs to be incurred at the end of an asset's useful life should either be
reflected by reducing the estimated residual value or by charging the amount as an
expense over the life of the asset.
 Revaluations (allowed alternative):
o Revaluations should be made with sufficient regularity such that the carrying amount
does not differ materially from that which would be determined using fair value at the
balance sheet date.
o If an item of PP&E has been revalued, the entire class to which the asset belongs
must be revalued (for example, all buildings, all land, all equipment).
o Revaluations should be credited to equity (revaluation surplus) unless reversing a
previous charge to income.
o Decreases in valuation should be charged to income unless reversing a previous credit
to equity (revaluation surplus).
o If the revalued asset is sold or otherwise disposed of, any remaining revaluation
surplus either remains as a separate component of equity or is transferred directly to
retained earnings (not through the income statement).
 If an asset's recoverable amount falls below its carrying amount, the decline should be
recognised and charged to income (unless it reverses a previous credit to equity).
 Gains or losses on retirement or disposal of an asset should be calculated by reference to the
carrying amount.
 Required disclosures include:
o Reconciliation of movements.
o Capital commitments.
o Items pledged as security.
o If assets are revalued, disclose historical cost amounts.
o Change in revaluation surplus.

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IAS 36: Impairment of assets
An impairment loss should be recognised whenever the recoverable amount of an asset is less
than its carrying amount (sometimes called "book value");

Other Requirements of IAS 36

 the recoverable amount of an asset is the higher of its net selling price and its value in
use, both based on present value calculations;
 net selling price is the amount obtainable from the sale of an asset in an armVs length
transaction between knowledgeable willing parties, less the costs of disposal;
 value in use is the amount obtainable from the use of an asset until the end of its
useful life and from its subsequent disposal. Value in use is calculated as the present
value of estimated future cash flows. The discount rate should be a pre-tax rate that
reflects current market assessments of the time value of money and the risks specific
to the asset;
 an impairment loss should be recognised as an expense in the income statement for
assets carried at cost and treated as a revaluation decrease for assets carried at
revalued amount;
 an impairment loss should be reversed (and income recognised) when there has been a
change in the estimates used to determine an asset Vs recoverable amount since the
last impairment loss was recognised;
 the recoverable amount of an asset should be estimated whenever there is an
indication that the asset may be impaired. IAS 36 includes a list of indicators of
impairment to be considered at each balance sheet date. In some cases, the
International Accounting Standard applicable to an asset may include requirements
for additional reviews;
 in determining value in use, an enterprise should use:
(a) cash flow projections based on reasonable and supportable assumptions that reflect
the asset in its current condition and represent management Vs best estimate of the set
of economic conditions that will exist over the remaining useful life of the asset.
Estimates of future cash flows should include all estimated future cash inflows and
cash outflows except for cash flows from financing activities and income tax receipts
and payments; and
(b) a pre-tax discount rate that reflects current market assessments of the time value of
money and the risks specific to the asset. The discount rate should not reflect risks for
which the future cash flows have been adjusted;
 if an asset does not generate cash inflows that are largely independent from the cash
inflows from other assets, an enterprise should determine the recoverable amount of
the cash-generating unit to which the asset belongs. A cash-generating unit is the
smallest identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or group of assets. Principles for

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 recognising and reversing impairment losses for a cash-generating unit are the same
as those for an individual asset. The concept of cash-generating units will often be
used in testing assets for impairment because, in many cases, assets work together
rather than in isolation. IAS 36 includes guidance and examples on how to identify
the cash-generating unit to which an asset belongs and further requirements on how to
measure an impairment loss for a cash-generating unit and to allocate this loss
between the assets of the unit;
 an impairment loss recognised in prior years should be reversed if, and only if, there
has been a change in the estimates used to determine recoverable amount since the
last impairment loss was recognised. However, an impairment loss should only be
reversed to the extent the reversal does not increase the carrying amount of the asset
above the carrying amount that would have been determined for the asset (net of
amortisation or depreciation) had no impairment loss been recognised. An impairment
loss for goodwill should only be reversed if the specific external event that caused the
recognition of the impairment loss reverses. A reversal of an impairment loss should
be recognised as income in the income statement for assets carried at cost and treated
as a revaluation increase for assets carried at revalued amount;
 when impairment losses are recognised or reversed an enterprise should disclose
certain information by class of assets and by reportable segments. Further disclosure
is required if impairment losses recognised or reversed are material to the financial
statements of the reporting enterprise as a whole; and
 on first adoption of IAS 36, the requirements should be applied prospectively only,
that is, prior periods will not be restated.

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IAS 38: Intangible Assets
Summary of IAS 38
IAS 38 applies to all intangible assets that are not specifically dealt with in other International
Accounting Standards. It applies, among other things, to expenditures on:

 advertising,
 training,
 start-up, and
 research and development (R&D) activities.

IAS 38 supersedes IAS 9, Research and Development Costs. IAS 38 does not apply to
financial assets, insurance contracts, mineral rights and the exploration for and extraction of
minerals and similar non-regenerative resources. Investments in, and awareness of the
importance of, intangible assets have increased significantly in the last two decades.

The main features of IAS 38 are:

 an intangible asset should be recognised initially, at cost, in the financial statements,

if, and only if:

(a) the asset meets the definition of an intangible asset. Particularly, there should be
an identifiable asset that is controlled and clearly distinguishable from an enterprise's
goodwill;

(b) it is probable that the future economic benefits that are attributable to the asset will
flow to the enterprise; and

(c) the cost of the asset can be measured reliably.

This requirement applies whether an intangible asset is acquired externally or

generated internally. IAS 38 also includes additional recognition criteria for internally
generated intangible assets;

 if an intangible item does not meet both the definition, and the criteria for the
recognition, of an intangible asset, IAS 38 requires the expenditure on this item to be
recognised as an expense when it is incurred. An enterprise is not permitted to include
this expenditure in the cost of an intangible asset at a later date;
 it follows from the recognition criteria that all expenditure on research should be
recognised as an expense. The same treatment applies to start-up costs, training costs
and advertising costs. IAS 38 also specifically prohibits the recognition as assets of
internally generated goodwill, brands, mastheads, publishing titles, customer lists and
items similar in substance. However, some development expenditure may result in the

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 recognition of an intangible asset (for example, some internally developed computer
software);
 in the case of a business combination that is an acquisition, IAS 38 builds on IAS 22:
Business Combinations, to emphasise that if an intangible item does not meet both the
definition and the criteria for the recognition for an intangible asset, the expenditure
for this item (included in the cost of acquisition) should form part of the amount
attributed to goodwill at the date of acquisition. This means that, among other things,
unlike current practices in certain countries, purchased R&D-in-process should not be
recognised as an expense immediately at the date of acquisition but it should be
recognised as part of the goodwill recognised at the date of acquisition and amortised
under IAS 22, unless it meets the criteria for separate recognition as an intangible
asset;
 after initial recognition in the financial statements, an intangible asset should be
measured under one of the following two treatments:

(a) benchmark treatment: historical cost less any amortisation and impairment losses;
or

(b) allowed alternative treatment: revalued amount (based on fair value) less any
subsequent amortisation and impairment losses. The main difference from the
treatment for revaluations of property, plant and equipment under IAS 16 is that
revaluations for intangible assets are permitted only if fair value can be determined by
reference to an active market. Active markets are expected to be rare for intangible
assets;

 intangible assets should be amortised over the best estimate of their useful life. IAS
38 does not permit an enterprise to assign an infinite useful life to an intangible asset.
It includes a rebuttable presumption that the useful life of an intangible asset will not
exceed 20 years from the date when the asset is available for use. IAS 38
acknowledges that, in rare cases, there may be persuasive evidence that the useful life
of an intangible asset will exceed 20 years. In these cases, an enterprise should
amortise the intangible asset over the best estimate of its useful life and:

(a) test the intangible asset for impairment at least annually in accordance with IAS
36: Impairment of Assets; and

(b) disclose the reasons why the presumption that the useful life of an intangible asset
will not exceed 20 years is rebutted and also the factor(s) that played a significant role
in determining the useful life of the asset;

 required disclosures on intangible assets will enable users to understand, among other
things, the types of intangible assets that are recognised in the financial statements
and the movements in their carrying amount (book value) during the year. IAS 38 also

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 requires disclosure of the amount of research and development expenditure
recognised as an expense during the year; and
 IAS 38 is operative for annual accounting periods beginning on or after 1 July 1999.
IAS 38 includes transitional provisions that clarify when the Standard should be
applied retrospectively and when it should be applied prospectively.

To avoid creating opportunities for accounting arbitrage in an acquisition by recognising an

intangible asset that is similar in nature to goodwill (such as brands and mastheads) as
goodwill rather than an intangible asset (or vice versa), the amortisation requirements for
goodwill in IAS 22: Business Combinations are consistent with those of IAS 38.

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 DEPRECIATION
It is the loss in value of a fixed asset during its useful life.
Causes of depreciation
Wear and tear-Assets become worn out through use.
Time factor-This affects assets with a fixed period of legal life, for example, copyrights and
leases.
Depletion-It refers to assets with a wasting nature, for example mines or oil wells.
Economic factors-Obsolescence(out of date),inadequacy of capacity.
Why providing for depreciation on fixed assets
 to spread the depreciation cost over the asset’s useful life.
 to set aside monies for replacement.
 to reflect that the fixed assets are of second hand value at the balance sheet date.

Methods of depreciation
Straight line method
Advantages
 it is easier to calculate
 same amount is charged each year
Disadvantages
 some assets are used on and off, so depreciation plan should reflect use not passage of
time.
 other assets operate faster, produce more when they are new. Therefore more
depreciation should be allocated in early years.

Reducing balance method

Advantages
 some assets operate faster, produce more when they are new so more depreciation
should be allocated in early years.
 in the latter years the assets become less efficient, therefore repair and maintenance
costs will be heavy during these years, thus the combined influence of depreciation
and repair costs will tend to equalise charges against profits – over the useful life of
the asset.
Disadvantages
 complicated since the depreciation charge will be different each year.
 the amount will not be depreciated fully that is not completely provided for.

Machine hours method

Advantages
 it relates to actual use of the asset
 easy and simple to use

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Disadvantages
 problem of excessive use, which may necesitate a more than normal rate of
depreciation.
 with this method when the asset is not in use there is no charge. Assets deteriorate
even if they are not in use.
DEPRECIATION QUESTIONS
QUESTION 1

Rapid Deliveries Ltd is a small parcels delivery company. In order to ensure a high level of
efficiency the vans used are usually replaced by the latest models. It is company policy not to
retain any van for more than four years. The depreciation applied relates to this policy. The
company uses the straight line method and calculates the annual depreciation charge on the
cost of the vans held at the year end. It assumes no residual value.

Details of the vans appearing in the balance sheet as at 31 December 1990 were:
$
Vans at cost (5 vans) 81 000
Less depreciation to date 38 750
42 250
During 1991 two vans of the fleet were sold and three were purchased. The following
details relate to these transactions:

Sales
Date sold Van Year Cost Sale
Reference bought proceeds
1 April 1991 1 1988 14 000 4 000
1 July1991 2 1988 15 000 3 350

Purchases
Date purchased
Van Cost
Reference
1 April 1991 6 19 000
1 August 1991 7 20 000
1 November 1991 8 21 000

Van 3 was bought in 1989 at a cost of $16 000 and vans 4 and 5 were purchased in
1990 at the same price each.

REQUIRED
a)The ledger accounts for the year ended 31 December 1991:
(i) vans at cost account;
(ii) vans provision for depreciation account;
(iii) vans disposal account.
b) Explain why it is important to provide for depreciation.
c) State two advantages and two disadvantages of using the straight line method of
depreciation and reducing balance method of depreciation.

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 QUESTION 2

Hunter Ltd uses straight line depreciation on its motor vehicles. Depreciation is provided
from the date the vehicle is bought until the date it is sold.
The following information was extracted from Hunter Ltd’s fixed asset register on 1 January
2016.
Vehicle number Date of purchase Cost Useful life Residual value
AAA 0473 1 January 2014 $30 000 4 nil
AAI 8600 1 September 2014 $40 000 6 4 000

During the year ended 31 December 2016 the following events occured:
January 1
The estimated useful life of AAA 0473 was revised from 4 years to 5 years, with no residual
value.
June 30
Vehicle number AAK 9530 with an expected useful life of 6 years and a residual value of $2
000 was purchased on credit from Power and Chings for $50 000 to replace AAI 8600. A
trade-in price of $30 000 was agreed for AAI 8600.
Required

a. For the year ended 31 December 2016, prepare the Motor Vehicles Account, (5)
i. the Provision for Depreciation of Motor Vehicles account, (11)
ii. the Disposal account. (4)
b. The accountant for Hunter Ltd feels that the reducing balance method is a better
method of depreciating motor vehicles.
i. State two advantages of the reducing balance method. (2)
ii. Explain whether it is permissible for Hunter Ltd to change from the straight
line method to the reducing balance method. (3)

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 QUESTION 3

On 1 January 2017, the non current assets register of Chings Limited held the following
information on its taxis.

Date of purchase Taxi Cost Date of Cash received

Reg number disposal $

01/01/13 Vitz 28 000 31/03/2017 7 000

01/01/13 Honda 32 000 24/04/2017 10 000

01/01/14 Funcago 20 000 31/08/ 2017 10 500

01/01/14 Ipsum 20 000 30/11/2017 10 000

08/01/15 Chariot 25 000 - -

06/01/15 Mazda 28 000 23/11/2017 See below

25/01/16 Wish 30 000 - -

31/01/16 Corrolla 35 000 - -

On 23 November 2017, taxi Mazda was involved in an accident and was written off. The
insurance company has offered to pay 80% of the net book value of the taxi as at 31
December 2016. The company has agreed to accept the offer. The money is yet to be
received.

Depreciation is provided on taxis at 20% per annum using the reducing balance method. A
full year’s charge is made in the year of purchase but no depreciation applied in the year in
which a taxi is sold or otherwise disposed of.

a) Draw up for the year 2017,

i. The Taxis account, {4}

ii. The Provision for Depreciation Account on Taxis, {15}
iii. The Asset Disposal Account for taxi Mazda. {5}

21
 CONTROL ACCOUNTS
These are accounts which record all creditors and debtors accounts, in other words it is a
summary of all these transactions.

Purposes of control accounts

 to locate errors
 to deter fraud
 fraud or errors are easier to check
 checking is made easier as sectional ledgers are created
 to provide totals for creditors and debtors quickly

Reasons why a debtor’s account might have a credit balance

 payment in advance
 credit note issued
 overpayment

Limitations of control accounts

 control accounts do not guarantee the accuracy of individual accounts, which may
contain compensating errors, for example items posted to wrong accounts.
 control accounts may themselves contain errors.

What to note when amending and reconciling Control Accounts

TYPE OF ERROR ADJUSTED IN RECONCILIATION

CONTROL STATEMENT
ACCOUNTS

Errors in source documents Yes No

Complete omission of a transaction Yes Yes

Casting errors in books of original entry No Yes

Errors in personal account or Individual error yes yes

22
 CONTROL ACCOUNTS QUESTIONS
QUESTION 1

The following information was taken from the books of Peter Peter for the year ended 31
December 2015.
$
Sales ledger balance 1 January 2014 3 070
Purchases ledger balance 1 January 2015 91 600
Cheques paid to suppliers 1 700
Cash sales 1 345
Discount received 7 300
Cash purchases 145 895
Credit purchases 498 200
Returns inwards 950
Returns outwards 9 200

a. Prepare the Purchases Ledger Control Account for the year ended 31 December 2015.
{8}
b. The total of the balances on the individual accounts in the purchases ledger as at 31
December 2015 was $110 800. After a thorough check the following errors were
discovered:
i. An invoice for $3 800 had not been entered in the purchases journal.
ii. A payment of $1 100 was not posted to the supplier’s account.
iii. An invoice for $2 200 was correctly entered in the purchases journal but not
posted to the supplier’s account.
iv. A credit balance of $1 500 had been omitted from the list of suppliers.
v. A supplier’s account had been overstated by $200.
vi. A credit note from a supplier for $900 had been entered in the purchases
journal and treated as a purchase.
vii. Discount received had been understated by $700.
viii. A page in the purchases journal with entries totalling $5 400 was omitted from
total purchases.

Extract relevant information above and prepare an amended purchases ledger

control account, starting with the closing balance calculated in (a) above. {6}

c. Prepare a statement amending the total of the purchases ledger to agree with the new
purchases ledger control balance. {8}

23
 QUESTION 2

The books of Simon Peter gave the following information for the month of 31 May 2003. All
sales and purchases were on credit.

Sales ledger balance at 1 May 2003 5 627

Purchases ledger balance at 1 May 2003 4 388
Sales for the year 100 384
Purchases for the year 64 987
Sales returns 1 997
Purchases returns 864
Payments received from debtors( all banked ) 92 760
Payments made to creditors 63 520
Debtor’s dishonoured cheque 109
Discount allowed 4 082
Discount received 3 241
Bad debts written off 1 884
Debit balances transferred to purchases ledger control account 208

The total of Simon Peter’s sales ledger balances is $9 387, which differs from the closing
balance in the sales ledger control account.
Required
a) Extract the relevant information from the above and prepare the sales ledger control
account for the month ended 31 May 2003. {10}
The following errors have been discovered since the sales ledger control account was
prepared.
1. A sales invoice for $2 001 had been completely omitted from the books.
2. A page of the sales day book with entries totaling $7 820 had been omitted from the
total sales but the individual entries had been posted to the debtors account.
3. A debit balance of $4 020 had been omitted from the list of debtors.
4. A sales ledger account had been understated by $220
5. Discount allowed had been overstated by $620
6. An entry of $1 620 in the sales day book had been omitted from the debtors account.
7. A contra entry had been made in the purchases ledger for a debit balance of $1 412 in
the sales ledger, but no entry had been made in the control accounts.
8. A receipt of $1 210 was debited to bank but not posted to the debtors account.
9. A credit note for $720 sent to a debtor had been entered in the sales day book and
posted as a sale to both accounts.
10. A debtor owing $1 820 was declared bankrupty during May 2003. The debt was
written off in the control account but no entry have been made in the debtors account.

Required
b) Prepare an amended sales ledger control account, extracting relevant information
from the list of errors given above. {8}
c) Prepare a statement altering the total of the sales ledger balance to agree with the new
sales ledger control account balance. {7}

24
 SUSPENSE ACCOUNTS
QUESTION 1
Benjamin Hove, extracted a trial balance on 31 March 2000, which failed to agree. He
entered the difference in a suspense account to enable him to draft his final accounts. The
draft profit and loss account prepared by Benjamin showed :
Gross profit $130 000
Operating profit of $1 380 000.
After completing the draft final accounts, Benjamin consults you as accountant and you
discover the errors shown below:

i) An item for $1 076 in the Sales Day Book has been entered in Adbel’s account in the
Sales Ledger as $1 760.

ii) At 31 March 2000, Blessing’s account in the Sales Ledger showed a debit balance of
$900. There was also an account for her in the Purchases Ledger and it showed a
credit balance of $650. In offsetting these balances, the ledger clerk had debited
Blessing’s account in the Sales Ledger with $650 and credited her account in the
Purchases Ledger with the same amount.

iii) A purchase of goods costing $1 500 had been credited to the supplier’s account in the
Purchases Ledger but no other entry had been made in the books.

iv) A credit balance of $480 in the Sales Ledger had been included in the list of debtors as
a debit balance.

v) A sales invoice for $1 070 sent to Dunmore had been entered in the Sales Day Book
as $1 700.

vi) Discount receivable $300 in January 2000 had been debited in the Discount Allowed
account. Discount allowable of $800 for the same month had been credited in the
Discounts Received account.

vii) Some goods have been sent to Poppy, a customer, and invoiced to him for $2 450. The
mark-up on these goods was 40%. Poppy has notified Benjamin on 30 March 2000 tha
he has not ordered the goods and is returning them. No entries regarding the return of
these goods have been made in the books.

Required
a. Prepare the journal entries necessary to correct each of the errors given above.
(narratives not required) (8)
b. Write up the suspense account (5)
c. Prepare computations for the year ended 31 December 2003 of the following:
i) Corrected gross profit (7)
ii) Corrected net profit (7)

25
 QUESTION 2
Hunter extracted a trial balance which failed to agree. He entered the difference in a suspense
account to enable him to draft his final accounts. The draft profit and loss account prepared
by Hunter showed a gross profit of $1 970 000 and a net profit of $1 380 000.

After completing the draft final accounts, Hunter consults you as accountant and you discover
the errors shown below:

i. A credit balance in the purchases ledger, $62 000, had been omitted from the list of
balances extracted from the ledger.

ii. Goods returned by Hunter to Power, a supplier, had been credited to Power’s account
and debited to returns outwards account. The goods had cost $120 000.

iii. A debt of $28 000 had been written off as bad in the sales ledger but no other entry had
been made.

iv. Repairs to Hunter’s business motor vehicle, $605 000, had been debited in error to the
motor vehicle account as $650 000.

v. The opening stock figure at 1 January 2003 had been entered in the trial balance as $434
000 instead of $344 000 as shown in the stock account.

vi. Purchases from Peter amounting to $810 000 had been received on 31 December 2003.
These had been included in closing stock at that date, but the invoice had not been
entered in the purchases journal.

vii. In November 2003, Hunter purchases a large quantity of stock of stationery at a bargain
price of $420 000. Three fifths of this stationery was in stock on 31 December 2003 but
no adjustment has been made to the accounts.

viii. A delivery van held as a fixed asset had been sold during the year for $144 000. The
proceeds of the sale had been credited to the sales account. The original cost of the van,
$360 000 and the accumulated depreciation to date, $240 000 were included in the
motor vehicles account. The company depreciates delivery vehicles at 25% per annum
on a straight line basis with proportionate depreciation in the year of purchase but none
in the year of sale.
Required
a) Prepare the journal entries necessary to correct each of the errors given above.
(narratives not required) {10}
b) Write up the suspense account {5}
c) Prepare computations for the year ended 31 December 2003 of the following:
i) Corrected gross profit {7}
ii) Corrected net profit {6}

26
 INCOMPLETE RECORDS
QUESTION 1

Sockaree does not keep a full set of accounting records. He never bothers to record personal drawings
although he keeps details of all expenses.
The following applies to 2016.

i) Opening and Closing balances were:

1 January 31 December
$ $
Machinery 36 000 ?
Stocks 81 000 109 800
Debtors 14 220 18 900
Creditors 45 540 55 260
Accrued rates 16 200 14 760
Prepaid rent 2 880 3 870
Cash 5 940 8 370

ii) Sockaree invested additional cash amounting to $252 000 in the business.
iii) A new machine was purchased to replace the old machine which was trade in at $21
600. A cash payment of $167 000 was made to complete the transaction. The new
machine is to be depreciated by 15% on cost.
iv) Other cash payments were:
$
Creditors 939 240
Rent ant rates 90 000
Wages 95 940
Sundry expenses 39 870
v) A margin of 25% was maintained throughout the year.
vi) Discounts allowed were $19 840, returns inwards $24 000 and returns outwards $30
000.
vii) A set-off was effected between an amount of $24 000 owed by Randal and an amount
of $22 480 owed to Randal.

REQUIRED
(a) Prepare Sockaree’s Trading and Profit and Loss Account for 2006
(b) Calculate Sockaree’s capital on 1January 2006
(c) Prepare Sockaree’s Cash Account for 2006, showing clearly the amounts of drawings
and receipts from debtors.

27
 QUESTION 2
Adbel received a legacy from his Father so he was able to fulfil a long standing desire to open
a spare parts shop. On 1 January 1992 he opened a business bank account with the full
amount of the legacy. However he paid little attention about keeping proper accounting
records.
Also on 1 January 1992 he rented premises at a rental of $750 per month payable quarterly in
advance. The first payment was made on 3 January 1992. At 31 December 1992 a summary
of Adbel’s bank transactions revealed the following:

Receipts $ Payments $
Legacy 50 000 Rent 6 750
Cash banked 269 000 Fixtures/equipment 21 670
Business rates 2 400
Electricity 4 670
Telephone 690
Purchases 265 770
Holiday in Vumba 3 400

All Adbel’s takings were banked after the following cash expenses were paid and personal
drawings taken. These were:
Wages $410 per week (50 weeks);
Sundry expenses $15 per week (50 weeks);
Cash purchases $2 980 for the year.
Adbel always retained a cash float of $250 in the till.
Additional information:
i. Due to an oversight the last quarter’s rent due on 1 October 1992 was not paid until
January 1993.
ii. Selling prices were fixed by marking up the goods by 40% on cost price.
iii. Business rates of $1000 had been paid on 5 October 1992 to cover the period 1
October 1992 until 31 March 1993.
iv. It was estimated that Adbel owed $1 800 for electricity and an accountant’s fee of
$220 at 31 December 1992.
v. It was decided to depreciate the fixtures and equipment by $6 670.
vi. Creditors for purchases were $6 250 at 31 December 1992.
vii. Trade debtors amounted to $38 000 at the year ended 31 December 1992 and a
provision for doubtful debts of 5% was to be established at that date.
viii. Closing stock was valued at cost at $15 000.
After preparing Adbel’s final accounts for the year ended 31 December 1992 the accountant
suggested he should consider converting his business into a private limited company.

Required
a) A lncome statement for the year ended 31 December 1992 {14}
b) A statement showing the calculation of Adbel’s drawings {4}
c) A Statement of financial position as at 31 December 1992. {14}

28
 INCOME AND EXPENDITURE
QUESTION 1

Nyamhunga Wrestling Club presented the following details for the year ended 31
December 2010.
$
(i) Receipts
Subscriptions 6 000
Bar sales 27 300
Entrance fees 1 200
Gate takings on tournaments 1 800
Sales of programmes 15

(ii) Payments:
Rates 1 200
Bar purchases 21 000
Barman’s wages 2 700
Hire of extra chairs 570
Other tournament expenses 300
Extension to clubhouse (1 April 2010) 12 000
Sundry clubhouse expenses 4 800
(iii) The clubhouse was bought on 1 January 2007 for $21 000. It is depreciated at
10% p.a. on cost.
(iv) Sundry assets and liabilities were:
1 Jan 2010 31 Dec 2010
$ $
Bar inventory 3 015 2 805
Trade payables
-bar purchases 2 760 2 925
-hire of chairs - 120
Prepaid rates 300 375
Clubhouse expenses due 105 135
Cash 945 7 200
Subscriptions in advance 270 360
Subscriptions in arrears 1 920 -

Required

a) Accumulated fund as at 1 January 2010. (5)

b) Bar trading account for the year ending 31 December 2010 (5)
c) Subscription account (5)
d) Income and expenditure account for the year ended 31 December 2010 (10)

29
 QUESTION 2
The following is the Receipts and Payments account of the Outerspace Sports and Social
Club for the year ended 31 October 2005.

$ $
Balance b/d 5 950 Clubhouse 65 000
Subscriptions 17 600 Equipment 7 400
Restaurant sales 62 100 Wages 23 400
Loan from members 60 000 Equipment repairs 4 320
Restaurant supplies 35 500
Annual dance 3 750
General expenses 5 420
Balance c/d 860
145 650 145 650
Additional information
31 Oct 2004 31 Oct 2005
$ $
Subscriptions in arrears 550 650
Subscriptions in advance 100 450
Restaurant stock 6 390 7 520
Restaurant creditors 4 235 4 785
Annual dance costs owing 50 125
Clubhouse at cost - 65 000
Equipment at cost 8 000 15 400
Loan from members - 60 000
Provision for depreciation on equipment 2 000 ?

The original equipment was purchased on 1 November 2003, the date the club
opened. Depreciation is charged at 2% straight-line on the clubhouse and 25%
reducing balance on equipment. Depreciation is charged for a complete year in the
year of purchase. Repairs were not original equipment.
All subscriptions owing in the year ended 31 October 2004 were paid during the
year ended 31 October 2005. Interest on the loan from members ,which was
received on 1 November 2004,is payable at the rate of 5% per annum.
$2 200 of the new equipment is for use in the restaurant. The general expenses
include $2 100 which should be charged to the restaurant. One third of the wages
are paid to restaurant staff.
Required
a) Calculate the Club’s accumulated fund at 1 November 2004. [4]
b) Prepare the restaurant Trading account for the year ended 31 October 2005. [4]
c) Prepare the club’s Income and Expenditure account for the year 31 October 2005.
[10]

30
 PARTNERSHIP
Amalgamation
When two or more firms merge into one firm and makes a new firm , then this is called
amalgamation of firms . For accounting point of view this definition is so important because
if one firm purchases other firm , then this is not called amalgamation but if both firms decide
to join or integrate then this is called amalgamation .

For Example

Suppose Adbel and Benjy firm decide to close their business and start the business with the
name of AB firm after joining with each other then this is called amalgamation of Adbel and
Benjy firm.

Steps for closing the accounts of old firm at the time of amalgamation of firms

When two firm amalgamate with each other , at this time we treat following accounting in the
books of old firms so that all doubt solves .

1st

Revaluation of Assets and Liabilities

All entries same as at the time of admission and retirement

2nd

Transferring reserve to old partners capital account into their old ratio

3rd

Treatment of Goodwill

We evaluate the goodwill according to the condition of agreement and then goodwill will
open with agreed value into the books

4th

Treatment of Assets and liabilities not taken by new firm

If assets and liabilities are not taken by new firm , then these item will transfer to the capital
accounts of partners of old firm and we close these accounts.

A -Treatment of assets and liabilities taken by new firm (In the books of old partners)

a) For closing the account of assets

New Firms Account Debit

Assets Account Credit ( at revalued value)

31
b) For closing the accounts of liabilities

Liabilities Account Debit

New Firm Account Credit

6th

Closing the accounts of partners capital

Partner’s capital account Debit

New Firms Account Credit

B – In the books of new firm

Assets Account Debit

Liabilities Account Credit

Partner’s Capital Account Credit

Work out the following question on the next page.

32
On 1 July 2016, Musendo Power and Doctor Felix decided to enter into partnership. The
Statement of Financial position of their businesses as at 31 July 2016 are shown below:

Musendo Power Doctor Felix

$ $
Non current assets (Net Book Value)
Plant and equipment 720 000 690 000
Motor vehicles - 100 000
720 000 790 000
Current assets
Inventory 52 000 43 000
Trade receivables 60 000 130 000
Bank 10 000 17 000
842 000 980 000

Less Current liabilities

Trade payables 19 500 20 000
822 500 960 000

Capital 700 000 810 000

Add Net profit 222 500 230 000
922 500 1 040 000
Less Drawings 100 000 80 000
822 500 960 000

Additional information
For amalgamation purposes, the assets of the separate businesses are to be valued at the
following agreed values:
Musendo Power Doctor Felix
$ $
Plant and equipment 700 000 745 000
Inventory 54 000 48 000
Goodwill 30 000 50 000

i. Doctor Felix is to take over his firm’s motor vehicle at $110 500.
ii. It is agreed that a provision for doubtful debts of 5% of trade receivables should be
created.
iii. The partnership will not show goodwill in the Statement of Financial position.
iv. The capitals of the partners are to be as follows:
Musendo Power $800 000
Doctor Felix $900 000
v. Profits and losses will be shared equally between the partners.
vi. The adjustments are made in the books at 31 July 2016 and the partnership is formed
the following day.
Required
a. The Capital Accounts to reflect the amalgamation on 1 July 2016 .{14}
b. The Statement of Financial Position of the partnership immediately after
Musendo Power and Doctor Felix merge their interests.

33
 PARTNERSHIP DISSOLUTION
This will be probably the last sub-topic for partnership account and will be relevant to ‘A’
Level.

You will need to be able to realise that any profit or loss on dissolution should be shared by
all the partners in their profit and sharing ratios. If there are circumstances where the
partner’s final balance on his capital and current accounts is in deficit, the partner will have to
pay that amount into the partnership bank account.

When dissolving the business, you will need to get rid of the assets by either 1) disposing it
or 2) the partner(s) to take it. All this entries will need to be made into realisation account.

Realisation Account

Fixed assets{net book value} Note 1 Assets sold

Buildings xxxx Buildings xxxx

Motor van xxxx Motor van xxxx

Stock xxxx Stock xxxx

Debtors xxxx Debtors xxxx

Etc xxxx Etc xxxx

Assets taken by partner

Dissolution costs xxxx Adbel xxxx

Benjy xxxx

Note 3 Profit on realisation Note 3 Loss on realisation

Adbel xxxx Adbel xxxx

Benjy xxxx Benjy xxxx

Note 4 xxxx Note 4 xxxx

Note 1

Assets sold will give you a credit entry in the realisation account because you are receiving
cash { and a debit entry in the bank account}. Make you use the net realisable amount.

34
Note 2

You will need to include dissolution costs because there are an expense to the business, so
you debit it in realisation account and credit it in your bank account.

Note 3

If debit side is more than credit side the you will have a loss on realisation. If there is more
credit side amount than debit side, then you will have a profit on realisation. Do remember to
split it according to the profit sharing ratio.

Note 4

This will be the totals.

Finally, you will need to open a bank account. Bank account will be your last step in
dissolution because there are no more extra calculations required, you only need to put all the
numbers in the right places. It therefore act as your check if you have done everything
correctly.

Net realisable amount is the amount that you will receive in disposing assets. You will need
to use this amount because it will be the actual amount that the business will receive.

Do not forget about dissolution costs! You must include them in the realisation account
(debit) and bank account (credit).

T-accounts for disposing the assets are only recommended if the question asks you to do so!
Otherwise, there is no need to do so.

Next, you will need to open up capital account for each partner. This is to calculate how
much each partner will receive or pay the business as a result of the dissolution. Remember
that all partners have unlimited liability, if the business runs out of cash in dissolving the
business, all the partners will have to settle the additional liabilities from their own pockets.

Here is the format for capital account.

Capital Account

Note 1 Balance b/d xxxx Note 1 Balance b/d xxxx

Note 2 Realisation: Share of loss xxxx Note 2 Realisation: Share of profit xxxx
Note 3 Realisation: Assets taken xxxx
Note 4 {balancing figure} xxxx Note 4 {balancing figure} xxxx

Total xxxx Total xxxx

It will be easier to put columns in the capital account to accommodate each partner.

35
Note 1

Balance b/d will usually be on the credit side{the nature of transaction}but it is possible for it
to appear in debit side also. This is so when the partner withdraws too much money/goods for
its own use that he/she exhausted his/her capital in the business.

Note 2

Double entry from realisation account.

Note 3

Assets taken by any partners must be debited to their account, this is also a double entry from
realisation account.

Note 4

This will be the balancing figure. A debit side will mean that the business has to pay the
partner and a credit side is where the partner has to pay the business.

Finally, you will need to open a bank account. Bank account will be your last step in
dissolution because there are no more extra calculations required, you only need to put all the
numbers in the right places. It therefore act as your check if you have done everything
correctly.

Bank Account

Balance b/d xxxx Balance b/d xxxx

Note 2 Realisation : Assets sold Note 1 Creditors xxxx
Buildings xxxx Note 2 Dissolution costs xxxx
Motor van xxxx Loan xxxx
Stock xxxx
Debtors xxxx
Etc xxxx

Note 3 Capital Account

Adbel xxxx Note 3 Capital Account
Benjy xxxx Adbel xxxx
Benjy xxxx
Note 4 xxxx Note 4 xxxx

36
Note 1

Since you are dissolving the business, do not forget to pay the creditors.

Note 2

Double entry from realisation account.

Note 3

Double entry from bank account.

Note 4

Once all the figures are in place, you should have both debit and credit side balanced. If it
doesn’t balance, you will need to recheck.

Things to note in order to score well,

 You must include dissolution costs.

 You must be able to remember all the formats (including the bank account).
 Remember to use only net book value in the debit side and net realisable amount in
the realisation account.
 Do remember to include asset taken by partner into their respective capital account.
 You must pay your creditors from your bank account.

Work out the following question.

37
 1. Solo and Mutsai were in partnership sharing profits and losses in the ratio 3:1. The balance
sheet for the partnership at 31 March 2015 was as follows:

Balance sheet as at 31 March 2016

Capital accounts $ Fixed assets $

Solo 30 000 Plant 37 000
Mutsai 21 000 Cars 6 500

Current accounts Current assets

Solo 4 500 Inventory 18 600
Mutsai 300 Trade receivables 9 300
Bank 2 400

Loan: Solo 6 000

Trade payables 12 000

73 800 73 800

The partners agreed to dissolve the partnership on 31 March 2015. The loan was repaid, the creditors
were paid $11 700 in full and final settlement. Mutsai took over one car for $1 000 and the remaining
assets realised the following amounts:
$
Plant 46 000
Cars 3 500
Stock 17 100
Debtors 8 700

You are required to prepare the following ledger accounts for the dissolution of the
partnership:

a) The Realisation account (10)

b) The Bank account (5)
c) The Partner’s Capital Accounts (10)

38
 QUESTION 1
Chido and Chenai, who have in partnership for many years, decided to retire and dissolve the
partnership on 30 September 2003. Profits and losses were shared in the ratio of the
partners’Capital account balances, which were fixed at Chido $80 000 and Chenai $40 000.
The partnership Statement of financial position at 30 September 2003 was as follows.
Fixed assets (net book value) $ $
Buildings 104 000
Fixtures and fittings 35 000
Motor vehicles 26 000
165 000
Current assets
Inventory 10 500
Trade receivables 17 230
Bank 950
28 680
Current liabilities
Trade payables 9 230 19 450
184 450

Capital accounts: Chido 80 000

Chenai 40 000 120 000

Current accounts: Chido 14 430

Chenai (2 580) 11 850
Loan from: Chido 52 600
184 450

The partnership ceased trading on 30 September 2003 and the assets were realized a follows:
$
Buildings 100 000
Fixtures and fittings 37 000
One motor vehicle 15 000
The remaining motor vehicle was taken by Chido at an agreed valuation of 9 500
Inventories 5 200

All debts were collected and banked except for bad debts totalling $900.
Discount allowed amounted to $200
Creditors were paid in full
Dissolution expenses of $1 200 were paid by cheque
Chido’s loan was repaid from the bank account.
Partners’ Current account balances were transferred top their Capital accounts.
Required
Prepare the following accounts for the month of October 2003.
a. Dissolution account {8}
b. Partners’Current accounts, in columnar form {4}
c. Partners’Capital accounts, in columnar form {4}
d. The partnership Bank account {8}

39
 QUESTION 2
Adam, Eve and Pinchmee are in partnership sharing profits and losses in the ratio 3:2:1.
At 31 December 19-1 their balance sheet was as follows:
$ $
Non current assets 106 644
Current assets
Inventory 71 116
Trade receivables 42 655
Bank 24 863
138 634
Less current liabilities
Trade payables 35 278 103 356
210 000
Capital accounts
Adam 100 000
Eve 50 000
Pinchmee 25 000
175 000
Current accounts
Adam 24 000
Eve 10 000
Pinchmee 1 000 35 000
210 000
Adam decided to retire from the partnership on 1 January 19-2
Accordingly it was agreed between the partners that:
1. The balances on their current accounts would be transferred to their respective capital
accounts.
2. Goodwill would be valued at $24 000, but no goodwill would be recorded in the
firm’s ledgers.
3. Non current assets would be revalued at $100 000, inventory at $60 000 and a trade
receivables for $240 would be written as bad.
4. Of the amount due to Adam $100 000 would be transferred to a Loan account and the
balance settled in cash immediately. A bank overdraft facility would be available for
this purpose, if necessary. The loan would be repayable to Adam in for equal annual
instalments, the first being due on 31 December 19-2.
Eve and Pinchmee decided to form a limited company, Evenmee Ltd, to acquire the
partnership business on 2 January 19-2. The company had an authorised share capital
of 100 000 ordinary shares of $1 each and acquired the partnership assets and
liabilities, including the loan from Adam, at their revised book values. Shares were
issued to Eve and Pinchmee at par value in the ratio 3:2. An appropriate cash payment
was made by one of these partners to the other to adjust their rights, and the
partnership receiving the payment immediately used the cash to subscribe for further
shares in Evenmee Ltd. at par.
Required

a) The capital accounts of Adam, Eve and Pinchmee showing the entries in respect of
Adam’s retirement and the aquisition of the business by Evenmee Ltd. (18)

b) The opening balance sheet of Evenmee Ltd as at 2 January 19-2. (7)

40
 MANUFACTURING ACCOUNTS
Companies which manufacture products will need to know the costs associated with
producing a single product as this will help them in fixing selling price so as to obtain
profit. These companies will have to first prepare a manufacturing account before
preparing a trading account. In other words the main purpose of preparing a
manufacturing account is to ascertain the cost of production.
Manufacturing account sections
a) Prime cost section
I. Direct material
II. Direct labour
III. Other direct expenses
b) Factory overheads section
I. Indirect material
II. Indirect labour
III. Other indirect expenses
Preparing a Manufacturing Account
There are other costs which relate to both Manufacturing Account and Income
Statement Account and they need to be apportioned using the ratios given on the
question. Adjustments for accruals and prepayments should be done first before
apportioning the overheads.
Profits/losses on manufacture
Firms producing their own goods usually do so because they can make them more
cheaply than they can buy them from outside. The difference between costs of
manufacture and costs of goods bought outside is factory profit. If cost of production
is greater than the cost of buying similar products from outside this will result in a
loss.
Elimination of unrealised manufacturing profit from unsold stocks of unfinished
goods
Manufactured goods may be transferred to the Income Statement Account at cost plus
manufacturing profit . The issue will be on unsold stock which will include factory
profit. The profit can only be realised when stock is sold. This profit need to be
eliminated through the creation of a provision for unrealised profit. This is done in
order to comply with the prudence concept. Adjustment for unrealised profit on stock
should only be made if required by the question.

41
 LAYOUT OF A MANUFACTURING ACCOUNT

Opening stock of raw materials XX

Add Purchases of raw materials XX
Carriage inwards of raw materials XX
Less Returns inwards on raw materials (XX) XX
Less closing stock of raw materials (XX)
Cost of raw materials consumed XX
Add Direct wages XX
Direct labour XX
Direct expenses (royalties) XX
Patent fees XX XX
Prime cost XX

Add Factory overhead expenses

Indirect material XX
Indirect labour XX
Rent and rates XX
Heating and lighting XX
Depreciation-machinery XX XX
Gross manufacturing cost XX
Add Opening work in progress XX
Less Closing work in progress (XX) XX
Cost of goods manufactured XX
Add Manufacturing profit/(loss) XX
Market value of goods manufactured XX

Income Statement for the year ended ………

Sales of finished goods XX
Less returns inwards of finished goods XX
Net sales/ turnover XX

Less cost of goods sold

Opening stock of finished goods XX
Add market value of goods manufactured XX
Goods available for sale XX
Less closing stock of finished goods XX XX
Gross profit on trading XX
Add discount received XX
Total income XX
Less Administration overheads i.e office salaries XX
Dep of non production fixed assets XX XX
Net profit XX
Add Manufacturing profit/ (loss) XX
Less Increase in provision for unrealised profit XX XX
Overal profit XX

42
Statement of financial position extract of current assets

Current assets
Inventory: Raw materials XX
Work in progress XX
Finished goods XX
Less : Provision for unrealised profit XX XX
XX

Practice question from Advanced Level Accounting(London June 1992)

During the three months ended 31 May 1992, the Toft Processing Co Ltd completed 8 000
tonnes of product with a further 300 tonnes partially completed. The partially completed
product was 90% complete as far as materials were concerned, 70% completed for labour,
and 60% completed by way of overheads.
The following balances refer to the activities of the company for the three months ended 31
May 1992.
$
Raw materials:
Inventory at 1 March 1992 5 576
Inventory at 31 May 1992 6 400
Direct factory wages 58 042
Indirect factory wages 40 573
Heating and lighting 11 803
General factory expenses 10 839
Insurance of plant 6 664
Rates on factory premises 15 151
Purchase of raw materials 76 110
Raw materials returned to suppliers 2 510
Output at market price 271 000
Notes:
(i) $3 450 direct factory wages paid during the period referred to the previous
three months. At 31 May 1992, $4 520 was owing for the current period.
(ii) $1 860 of the lighting and heating was for the period ended 28 February 1992.
$1 320 was still owing for the period ended 31 May 1992.
(iii) $810 general factory expenses were prepaid and $760 were owing at 31 May
1992.
(iv) $1 490 insurance was prepaid and rates prepaid $4 012 at 31 May 1992.
(v) Indirect wages were accrued $5 490 at 31 May 1992.
(vi) Factory plant is depreciated at 10% per annum based on the 1990 valuation of
$254 800.
(vii) There had been no product in course of manufacturer at 1 March 1992 because
of a major breakdown during February 1992.

Required
a. the value of semi-finished product using the method of equivalent
production(6)
b. the manufacturing account of Toft Processing for the three months ended 31
May 1992, showing clearly the prime cost, the total cost of production and the
manufacturing profit.(14)
c. The purposes of preparing a manufacturing account.

43
EXTRA WORK ZIMSEC JUNE 2014/3
During the third year of trading, Tana and Chana decided to start manufacturing their own
products in order to minimise costs. Table below shows the firm’s balances at 31 December
2013.
$
Plant and machinery at cost 150 000
Provision for depreciation: plant and machinery(at 1 January) 8 000
Motor vehicles at cost 62 000
Provision for depreciation: motor vehicles(at 1 January) 6 000
Furniture and fittings at cost 10 000
Raw material purchases 210 000
Inventory(stock) at 1 January 2013:
Raw materials 32 500
Work in progress 24 000
Finished goods 52 800
Patent fees 5 800
Selling expenses 22 100
Factory salaries 12 000
Turnover (sales) 400 000
Capital: Tana 120 000
Chana 140 000
Cash and cash equivalents 64 000
Lubricant oils 15 000
Notes:
1. Inventory(stock) at 31 December 2013
Raw materials $19 800
Work in progress $21 300
Finished goods (to be determined)
On 29 December 2013,a fire broke out in the warehouse and destroyed raw materials
valued at $11 000. The inventory was not insured.
2. No record was made in the books for $3 000 spent during the year on putting extra
headlights on the motor vehicles.
3. The firm’s depreciation policy was as follows:
Plant and machinery - 10% per annum reducing balance
Motor vehicles - 20% per annum straight line

44
 The furniture and fittings were purchased on 2 January and their useful life is ten
years, scrap value $500.
4. Depreciation on motor vehicles is a factory expense whilst depreciation on furniture
and fittings is an administrative expense.
5. On 1 January 2013, $1 200 was owed for lubricants whilst $800 was outstanding at 31
December 2013.
6. Goods are transferred to the warehouse at a mark up of 10%.
7. The partnership maintains a provision for unrealised profit account. The balance on
this account was $4 800 on 1 January 2013 and $6 000 on 31 December 2013. The
rate of factory profit remained unchanged during the year.
Required
a) For the year ended 31 December 2013, the partnership
(i) Manufacturing account, {12}
(ii) Statement of comprehensive income(profit and loss account) {9}
An appropriation account is not required.

45
 STOCK VALUATION
QUESTION 1

Abef Ltd was unable to physically check inventory at 30 April 2012. However, inventory
check was completed on 10 May 2012, when it was valued at $32 000. The inventory taking
exercise was not performed with its usual efficiency.

During the first ten day of May, the following transactions took place;

(i) Inventory totalling $15 000, list price, had been sent to customers.
A trade discount of 5% was offered to all customers.
(ii) Goods worth $21 000 were bought.
(iii) Debit notes issued to suppliers totalled $400.
(iv) Credit notes issued to customers amounted to $1 200 (list price)
(v) Inventory worth $500 was taken from warehouse for use in the
business.

After thorough investigations of inventory and related records, the

accountant discovered the following matters:

(vi) Inventory with a net selling price of $450 had been damaged and was
now worthless.
(vii) Carriage inwards, relating to unsold inventory amounting to $130, had
been incorrectly debited to carriage outwards.
(viii) Inventory which had cost $1 400 was slightly spoilt and would have to
be sold for $1 600 after being repaired at a cost of $500.
(ix) Included in the inventory figure at 10 May are goods costing $2 500
which had been acquired by the company on a sale or return basis. The
company is yet to decide whether or not to keep the goods.
(x) Goods sold during April for $2 100 were yet to be collected by a
customer.

The company marks up all goods at 20%.

Required

(a) The value of inventory at cost, at 30 April 2012. (17)

46
 QUESTION 2
Simba, a retailer whose financial year ends on 31 May, failed to check his stock until 8 June
2009. At that date his stock at cost was valued at $72 200. Simba’s mark up is 30% on cost.

During the first ten days of June, the following transactions took place;

i) Purchases of goods for resale 21 200

ii) Purchases returns 515
iii) Sales 25 740
iv) Sales returns ( at selling price) 273
v) Goods taken for personal use, at cost 700

After taking stock, Simba discovered that the following items had
been included in the valuation at 8 June:

vi) A parcel of stock which had been water –damaged. This had been on
sale for $390 but was now worthless.
vii) Stock which cost $1 200 but was now out of fashion and would have to
be sold for $400 less than cost.
viii) Goods costing $950 which Simba had acquired on a sale or return
basis. He had not decided whether or not to keep them.
ix) Goods, sold during May for $1 560, which were awaiting collection by
a customer.

Required

(b) The value of inventory at cost, at 31 May 2009. (13)

(c) What is the basis for stock valuation (3)

47
 QUESTION 3

Nissi ltd has been runing a small retail business for the past four years. She has problems with
profit hence there is need to calculate closing inventory using different methods.

The following information relates to his stock for the year ending 31 December 2015:

Purchases (units) Sales (units)

April –June 1998 256 230
July-September 1998 246 222
October-December 1998 364 342
January-March 1999 244 226

On 1 April 1998 there were 160 units in stock.

Up to June 30 1998 each unit cost $20; however subsequently the supplier increased
his prices by 10% each quarter.
Nissi ltd sold her stock in packs of two.
The selling price is $76 per pack.

Required

a) Calculate the values of closing stock at 31 March 2015 using:

i. The first in first out(FIFO)method. (9)
ii. The last in first out(LIFO)method. (9)

b) Prepare a statement showing the gross profit for the year ended 31 March
1999 using the above methods. (7)

48
 QUESTION 4

The annual stock taking of Square Deals Limited, retailers, did not take place on 30
September 1997 owing to staff illness.

The company’s books and records for the year ended 30 September 1997 reveal :

1. Sock at 1 October 1996, at cost, of $17 800.

2. Purchases of $165 000.
3. Purchases returns of $8 500.
4. Sales of $182 000.
5. Sales returns of $3 600.
6. In July 1997, stock costing $10 000 was stolen. As the company’s insurance did not
fully cover the loss, the amount received from the insurance company in full
settlement of the loss claim was only $4 500.
7. In August 1997 a quantity of stock which had cost $3 700, was found to be of no
value and therefore destroyed.
8. The company earns a gross profit of 35% on all sales.
9. In September 1997, goods costing $6 500 were sent on a sale or return basis to
Thomas Strong. 90% of these goods were sold by 30 September 1997 and these were
additional to the sales given in 4. above.
Thomas Strong receives from Square Deals Limited, a commission of 10% on the
selling price of all sales.

REQUIRED

(a) Calculate
i. The company’s Stock at 30 September 1997;
ii. The company’s Gross Profit for the year ended 30 September 1997
iii. The amount of Commission payable to Thomas Strong on 30 September 1997.

(b) i. Explain briefly why stocks in annual accounts are usually valued ‘at cost’.
ii. State an alternative to cost for stock valuation and explain when this
alternative method would be used.

49
 CASH FLOW STATEMENTS
A cash flow statement shows sources of cash and how cash has been spent. In other words
cash flow statements explain the reasons for cash increases/decreases over a specified period
of time.
Importance of cash flow statements
-lt shows: -stability of the business
-ability of a business to generate cash internally
-how much cash has been raised externally
-viability of the business whether it can generate cash to service finance
-liquidity and solvency of a business

Differences between Cash flow statement and Income Statement

Cash flow statement Income Statement

Do not include non cash items like Include non cash items like depreciation

depreciation

Cash flows records capital expenditure Capital expenditure items are not recorded
items

Cash flows are prepared on cash basis Profit and loss accounts are prepared on
accrual basis

Differences between Cash flow statement and Budget

Cash flow statement Budgets

Based on historical data Based on future plans

Cannot(legally) be manipulated May be adjusted to reflect management

policy

May be used internally or externally For internal use

Preparing cash flow statements

The easiest way to prepare a cash flow statement is to first prepare ledger accounts where
necessary these are asset account, provision for depreciation account, disposal account, tax
paid and dividends paid. What you will need to do is compare the figures of the two balance
sheets to check for any decrease or increase but do not ignore these ledger accounts. The
asset account, provision for depreciation account, disposal account have been dealt with
earlier on the topic of depreciation.

50
 Calculating tax paid and dividends paid

Taxation Account
$ $
Tax(2nd balance sheet) XX Tax(1st balance sheet) XX
Tax paid (balancing figure) XX Profit and loss(tax in P/L Account) XX
XX XX

Dividends Account
$ $
Proposed dividends(2 balance sheet)XX Proposed dividends(1st balance sheet)
nd
XX
Dividends paid (balancing figure) XX Profit and loss(dividends in P/L account) XX
XX XX

NB: Please when preparing the dividends account make sure you take into account interim
dividends, final dividends , dividends proposed and paid.

At times a question may require you to calculate operating profit or may be silent on this
aspect hence you need to know how it is calculated.

Calculating operating profit

$ $
nd
Retained profit c/d {2 date- Statement of financial position} xx
Less: Retained profit b/d {1st date- Statement of financial position} xx
xx

Add Transfer to general reserve xx

Capital Redemption Reserve xx
Debenture interest xx
Interim dividends paid xx
Proposed dividends paid xx xx
Operating profit xx

51
 QUESTION 1

The Quartet is a partnership which owns a manufacturing firm. The balance sheets of the firm
as at 31 December 2004 and 2005 are given below.

As at 31December 2004 2005

Assets $000 $000 $000 $000
Non-current asset
Premises at cost 1 000 1 300
Provision for depreciation (375) 625 (26) 1 274

Plant and equipment at cost 600 1 400

Provision for depreciation (240) 360 (700) 700

Motor vehicles at cost 840 1440

Provision for depreciation (504) 336 (864) 576
1 321 2 550
Current assets
Inventory 750 810
Trade receivables 649 540
Bank 400 1 799 380 1 730
3 120 4 280

Equity and liabilities

Partner’s capitals at 1 January2 330 2 600
Add revaluation - 675
Net profit 566 739
2 896 4 014
Less drawings 296 2 600 334 3 680

Trade payables 520 600

3 120 4 280
Notes
i. The premises were revalued on 1 July 2005.
ii. During 2005, motor vehicles which had cost $180 000(net book value $36 000)
were sold for
$30 000.

Required
a. A cash flow statement for the year ended 31 December 2005. (12)
b. State and explain five benefits of preparing cash flow statements.(10)

52
 QUESTION 2

Karoi Ltd provides the following information:

Statements of financial position at

31 March 2005 31 March 2004

$000 $000 $000 $000 $000 $000
Non-current asset
Intangible
Patents 220 180
Tangible
Property 2 400 1 700
Equipmet at cost 920 610
3 540 2 490
Current assets
Inventory 480 509
Trade receivables 611 569
Cash and cash equivalents 79 -
1 170 1 078

Current liabilities
Trade payables 512 501
Other payables 76 54
Taxation 220 195
Cash and cash equivalents - 808 71 821
362 257
3 902 2 747
Non-current liabilities
Debentures 500 400
3 402 2 347

Equity
Ordinary share capitals 1 500 1 200
Revaluation reserve 700 -
General reserve 400 200
Retained earnings 802 947
3 402 2 347

Income statement for the year ended 31 March 2005

$000
Profit from operations 636
Finance charges 61
575
Taxation 220
Profit for the year attributable to equity holders 335

53
Additional information
1. During the year directors transferred $200 000 to the general reserve and paid
dividends of $300 000.

2. At 31 March 2004 equipment had cost $905 000 and was shown after the provision of
$295 000 depreciation. At 31 March 2005 equipment had cost $1 240 000 and
depreciation of $320 000 had been provided.

3. During the year equipment which had cost $172 000 was sold for $90 000.
Depreciation of $101 000 had been provided on it.

4. Other payables include $21 000 unpaid interest at 31 March 2005 and $11 000 unpaid
interest at 31 March 2004.

5. During the year an issue of both ordinary shares and debentures had taken place, and
the property had been re-valued.

REQUIRED

a) Prepare a statement of changes in equity for the year ended 31 December 2005.
b) Prepare a statement of cash flows in accordance with the provisions of IAS 7 for the
year ended 31 March 2005.

54
 QUESTION 3

The balance sheets of Magnum Ltd as at 31 December 19-8 and 19-7 are as follows:
31.12.19-7 31.12.19-8
$ $
45 000 Fixed assets(net book value) 60 000
Current assets:
25 000 Stock 27 000
10 000 Debtors 12 000
7 000 Bank -
87 000 99 000
Share capital:
22 000 Ordinary shares of 25cents each 27 000
24 000 Preference shares of $1each 7 000
- Capital Redemption Reserve 17 000
280 Share Premium Account 420
18 460 Retained Earnings 25 060
64 740 76 480
Current liabilities:
13 860 Creditors 8 500
5 600 Taxation 7 000
2 800 Proposed dividends 4 200
- Bank 2 820
87 000 99 000
Notes:

1) A summary of the company’s fixed assets account in the general ledger for the year
ended 31 December 19-8 is shown below.
$ $
1 Jan 19-8 Cost b/f 106 400 31 Dec 19-8 Disposal A/c 11 200
31 Dece 19-8 Additions 30 800 31 Dec 19-8 Cost c/f 126 000
137 200 137 200

The assets were sold for $2 520, which represented a loss of $4 480 compared with
their book value.
2) A bonus (scrip) issue of 1 000 shares was made during the year, the shares being paid
up from the balance standing to the credit of the Share Premium Account.
3) The preference shares were redeemed at par in November 19-8

Required

a) Profit and Loss Appropriation account for the year ended 31 December 19-8 {5}
b) Cash flow statement for the year ended 31 December 19-8 {15}
c) Differences between bonus issue and a rights issue {6}

55
 CAPITAL RECONSTRUCTION
A troubled business might institute a scheme of reorganisation and reconstruction.

Features of a troubled business

 A negative retained profit balance
 Overvalued shares
 A huge and persistent bank overdraft
 Book value of assets significantly different from other market values.

Reasons for capital reconstruction
 A reconstruction scheme usually involves eliminating negative
balance(retained profit) and this improves the attractives of a balance sheet.
 Capital reconstruction usually involves reducing the nominal value of ordinary
shares and this improves the marketability of the shares allowing the company
to attract more funds into the business and lessen any cash flow problems.
 In capital reorganisation there could be debt restructuring whereby short term
debt is replaced by long term debt and this relieves pressure to pay off debts
while allowing the company to regenerate.

Accounting entries upon re-organisation

1. Assets values revised upwards

Dr Asset a/c
Cr Cap reduction a/c
2. Assets values revised downwards
Dr Cap reduction a/c
Cr Asset a/c
3. Fictitious assts written off
Dr Cap reduction a/c
Cr Fictitious a/c
4. Bad debts written off on re-organisation
Dr Cap reduction a/c
Cr Debtors a/c
5. Increase in provision for bad debts
Dr Cap reduction a/c
Cr Provision for doubtful debts
6. Decrease in provision for bad debts
Dr Provision for doubtful debts
Cr Cap reduction a/c
7. Replacing long term debt with short term debt
Dr Short term debt
Cr Long term debt
8. Replacing equity with equity shares
Dr Debt a/c
Cr Ordinary shares
9. Replacing shares with equity shares
Dr Preference shares a/c
Cr Ordinary shares a/c

56
 10. Reducing the nominal value of ordinary shares, eg from $1 to $0,40 each
Dr Ordinary shares
Cr Cap reduction a/c
11. Eliminating the negative retained profit balance
Dr Cap reduction a/c
Cr profit and loss a/c
12. Waivering (giving up) unpaid preference dividends

a) Outstanding preference shares not shown in the balance sheet and given up for
nothing(no entries)
b) Outstanding preference dividends not shown in the balance sheet given up in
return for ordinary share.

Dr Cap reduction
Cr Ordinary shares
c) Outstanding preference dividends shown in the balance sheet given up in return
for ordinary shares.

Dr Preference shares
Cr Ordinary shares

13. Re-organisation expenses paid

SHARE REDEMPTION

1. Redemption of shares and payment

Dr Preference shares
Cr Bank

2. Premium on redemption financed from the share premium

Dr Share premium
Cr Bank

3. Premium on redemption financed from the profit and loss reserves

Dr Profit and loss
Cr Bank

4. Transfer from the profit and loss reserve to the capital redemption resesrve
Dr Profit and loss
Cr Capital Redemption Reserve

57
 When a question asks you to utilize the reserves in such a way as to leave the
remaining reserves in the most flexible form you use.

RE CA SH GAP

RE-Revaluation reserve

CA-Capital reserves

SH-Share premium

G-General reserve and

P-Profit/Retained earnings

Statement of changes in equity for the year ended

Ordinary Share General Retained Total

Share Premium Reserve Earnings Equity
Capital
$ $ $ $ $
Balance at start XX XX XX XX XX
Transfer to general res XX (XX) -
Dividends paid (XX) (XX)
Issue of ordinary shares XX XX XX
Profit for the year XX XX
Balance at end XX XX XX XX XX

Entries in a statement of changes in equity will depend on the requirements of a question

But above is a mere layout that will give you direction when preparing one.

ISSUE AND REDEMPTION OF SHARES

Reserves
There are different types of reserves.

Revenue reserves
These are profits which are ploughed back into the company by debiting profit and loss
account and crediting the appropriate account. They can also be used in future years to help
increase profits. However they are available for dividend purposes as well as issue of bonus
issues. Examples include retained earnings and general reserve.

General reserves
These reserves are necessary when reinforcing the financial position of the company.

Capital reserves
These are specifically used when issuing bonus shares and they cannot be used to pay cash
dividends or transferred to the profit loss account.

58
Revaluation reserve
It is created when an asset has been revalued to reflect an increase or decrease in value. The
journal entry will be to debit the asset account with the increase and then credit the
revaluation account or vice versa when there is a decrease.

Capital redemption reserve

This reserve is created when shares are redeemed out of internally generated funds so as to
protect the interests of creditors. It is created by transferring amount equal to the nominal
value of shares being redeemed from a suitable reserve to the capital redemption reserve. It is
also used when a company redeems shares otherwise than out of the proceeds of a new issue
of shares. It can be recorded by debiting the profit and loss account and crediting capital
redemption reserve.

Share premium
It is the amount above the face value of a share at which it may be issued, for example a $1
share may be issued at $1.10.The $1 is credited to the share capital account whilst the $0.10
is credited to the share premium account. It is used as follows:
-to write off preliminary expenses on formation of the new company
-to pay up unissued shares as fully paid up bonus shares
-to write off expenses incurred in shares issue
-to provide any premium payable on the redemption of shares or debentures

Bonus issue
It is the issue of additional shares to existing shareholders in proportion to their
current shareholders by the utilisation of capital reserves.

Rights issues
This is the issue of shares to existing shareholders at the price lower than the ruling
market price.

Differences between bonus shares and rights issues

Bonus shares Rights issues

Total shareholders funds remain the Total shareholders funds increases
same

Issued free of charge Issued at a price less than the market value
of shares

Bonus issue has no effect on current Increases current assets(bank balance)

assets

All ordinary shareholders participate in In a rights issue some shareholders may

a bonus issue choose not to take up their rights

59
 Differences between revenues reserves and capital reserves

Revenue Reserves Capital Reserves

Created voluntarily out of trading Created under the provisions of the

profit by debiting P/L Appropriation Companies Act and by case law
A/C and crediting reserve accounts

Can be distributed as cash dividends Cannot be distributed as cash dividends

Used for purposes for which they were Uses specified by law
created or at the discretion of the
Directors

WORKING PAPER ON REDEMPTION OF SHARE

By Muhammad Hanif Ghanchi

A per Companies Act 1985 (Amended 1989):

 A company is not allowed to redeem its share capital (repurchase of shares) unless the shares
were originally issued as redeemable.
 The Article of Association of the Company should permit the company to issue redeemable
shares.
 The Company is required to first issue irredeemable (permanent) shares before issuing the
redeemable shares.
 The company may redeem its Redeemable shares as follows:
1. Through issue of new shares to provide funds for the redemption.
2. Through internal funds by creating a “Capital Redemption Reserve”.
3. Combination of both – a partial issue of new shares and the balance from internal funds.

Rules for creation of Capital Redemption Reserve:

(i) Creation of CRR, if no new shares are issued to financed the redemption:

A company redeeming its share capital from internal funds, that is without issue of new shares to
finance the redemption, is required by the Companies Act to create a Capital Redemption Reserve
equal to the nominal value of share capital redeemed, out of distributable profits. It means the profits,
which were available for payment of cash dividends to the ordinary shareholders, are no more
available due to redemption of share capital and they have been blocked into Capital Redemption
Reserve account. The purpose of creating the Capital Redemption Reserve is to protect the creditors.

(ii) Creation of CRR, if the redemption is financed partially:

In case, the company finances the redemption of share capital partially, then the amount of Capital
Redemption Reserve will be equal to the difference between the nominal value of share capital
redeemed and cash received from issue of new shares, including share premium.

60
Rules for treatment of Redemption premium:

The redeemable shares may be redeemed at par or at premium. The premium paid on redemption of
shares may be charged to share premium account, subject to following rules:

1. The shares being redeemed at premium should have originally been issued at premium and
redemption premium should not exceed the amount of premium received originally.

2. The shares being redeemed at premium are financed, fully or partially, through issue of new
shares.

3. There should be sufficient balance in the share premium account. The share premium account
should not end up with a debit balance.

REDEMPTION OF DEBENTURES:

There is no legal obligation to create a “Debenture Redemption Reserve” on redemption of

debentures, because the debentures are themselves creditors. However, it is purely a matter of
discretion to the company to create a Debenture Redemption Reserve, to preserve the capital structure
of the company.

Any premium paid on redemption of debentures may be charged to Share Premium account, provided
a balance exists in share premium account, irrespective of whether the debentures were original issued
at premium or not, or the redemption is being financed by issue of new debentures or not.

DIFFERENT SITUATIONS OF CAPITAL REDEMPTION:

There are (5) five different situations of capital redemption in this paper with their suggested answer:

Situation 1
A company redeemed its 200,000 6% Preference share capital of $1 each at a premium of $0.10.
Originally these shares were issued at a premium of $0.05 per share. There was no issue of new shares
to finance the redemption.

Debit Credit
6% Preference Share Capital (200,000 x $1) 200,000
Profit and Loss A/c (200,000 x $0.10) 20,000
Bank A/c (200,000 x $1.10) 220,000

Profit and Loss A/c 200,000

Capital Redemption Reserve 200,000

Although the preference shares being redeemed were originally issued at premium but the
redemption is not being financed by issue of new shares, therefore, the entire redemption
premium will be charged to the Profit and Loss Account.
Since the redemption is not financed by issue of new shares, therefore, it is required to create a
CRR equal to the nominal value of share capital redeemed.

61
 Situation 2
To finance the redemption, a company issued 150,000 ordinary shares of $1 each at a premium of
$0.25 per share. There were 100,000 8% Preference shares of $0.75 each, which were redeemed at a
premium of $0.10 per share. These shares were originally issued at par.

Debit Credit
Bank A/c (150,000x$1.25) 187,500
Ordinary Share Capital (150,000x$1.00) 150,000
Share Premium A/c (150,000x$0.25) 37,500

8% Preference Share Capital (100,000x$0.75) 75,000

Profit and Loss A/c (100,000x$0.10) 10,000
Bank A/c (100,000x$0.85) 85,000
Since the redemption is financed through issue of new shares and cash received is more than
the nominal value of share capital redeemed, therefore, this situation does not involve creation
of any CRR.

The Preference Shares being redeemed at premium were originally issued at par, therefore, the
redemption premium will be charged to Profit and Loss Account.

Situation 3
A company redeemed its 180,000 8% Preference share capital of $1 each at a premium of $0.15 per
share by issuing equal number of 6% Preference shares of $0.50 per share at par. The shares being
redeemed were originally issued at a premium of $0.25 and there exist sufficient balances in share
premium and Profit & Loss accounts.

Debit Credit
Bank A/c (180,000x$0.50) 90,000
6% Preference Share Capital (180,000x$0.50) 90000

8% Preference Share Capital (180,000x$1.00) 180,000

Share Premium A/c (180,000x$0.15) 27,000
Bank A/c (180,000x$1.15) 207,000

Profit and Loss A/c (180,000 -90,000) 90,000

Capital Redemption Reserve 90,000
The redemption is being financed partially, that is, the cash received from issue of new shares is less then
the nominal value of capital redeemed, therefore, a CRR for the difference will be created.

Since the redemption premium of $27,000 (180,000 x $0.15) is less then the amount of share premium
received originally at the time of issue of these share i.e. $45,000 (180,000 x $0.25), and there exist
enough balance in the share premium account, therefore, the entire redemption premium will be charged
to the Share Premium Account.

62
 Situation 4
A company issued 100,000 6% Preference share of $1 at a premium of $0.15 per share to finance
the redemption of 200,000 8% Preference shares of $0.50 at a premium of $0.15 per share.
Originally, these shares were issued at a premium of $0.10 per share, which was utilized for issue
bonus shares to the ordinary shareholders and there is no balance in the share premium account.

Debit Credit
Bank A/c (100,000x$1.15) 115,000
6% Preference Share Capital (100,000x$1.00) 100,000
Share Premium A/c (100,000x$0.15) 15,000

8% Preference Share Capital (200,000x$0.50) 100,000

Share Premium A/c 15,000
Profit and Loss A/c 15,000
Bank A/c (200,000x$0.65) 130,000

Since the redemption is financed through issue of new shares and cash received is more than the
nominal value of share capital redeemed, therefore, this situation does not involve creation of CRR.

Although the share capital, being redeemed, was issued at premium of $20,000 (200,000 x $0.10)
and now being redeemed at a premium of $30,000 (200,000 x $0.15), therefore, $20,000 could be
charged to share premium account subject to a balance in the share premium account, but there is no
balance available in the share premium account. Therefore, the redemption premium to be charged
to the share premium account will be equal to the premium received from issue of new share that is
$15,000, so that the share premium account should not end up with a debit balance. The balance of
redemption premium will be charged to Profit and Loss account

Situation 5
A company, which had issued 100,000 8% Preference share capital of $1 at par, redeemed its
share capital at premium of $.15 per share. To finance the redemption, the company issued
100,000 6% Preference shares of $0.50 each at $1.15.
Debit Credit
Bank A/c 115,000
6% Preference Share Capital 50,000
Share Premium A/c 65,000

8% Preference Share Capital 100,000

Profit and Loss A/c 15,000
Bank A/c 115,000
Since the redemption is financed through issue of new shares and cash received is more than the
nominal value of share capital redeemed, therefore, this situation does not involve creation of
CRR.

The Preference Shares being redeemed at premium were originally issued at par, therefore, the
redemption premium will be charged to Profit and Loss Account.

63
 QUESTION 1

Digits Ltd’s Statement of financial position at 30 April 2010 was as follows:

$000
Non-current assets 1 300
Net current assets 740
2 040

Ordinary shares of $1$ 1 200

10% preference shares of $1 300
Share premium account 200
Profit and Loss Account 340
2040
On 1 May 2010, before any further transactions had taken place, it was decided to redeem all
the preference shares at a premium of $30. The shares had been originally been issued at
$1.20 per share. In order to provide funds for the redemption, the company issued a further
100 000 ordinary shares at a premium of $0.25.

REQUIRED

Prepare Digits Ltd’s Statement of financial position as it will appear immediately after the
issue of additional ordinary shares and the redemption of the preference share capital.

QUESTION 2
Larry Ltd’s summarised Statement of financial position (Balance Sheet) at 30 June 2010 was
as follows:
$000
Ordinary shares of $2 each 2 400
10% Preference shares of $2 each 600
Share premium 400
Profit and loss account 680
4 080
Non-current(Fixed) assets 2 600
Net current assets 1 480
4 080

On 1 July 2010, fixed assets were revalued to $2 850 000 and the company decided to redeem
all the preference shares at a premium of $0,60 per share. These shares have been issued at
$2,40 each. In order to provide funds for the redemption, the company issued a further 100
000 ordinary shares at a premium of $0,50 per share.
Required
Larry Ltd’s Statement of financial position (Balance sheet) immediately after the capital
reconstruction.

64
 QUESTION 3

James Ltd provides the following information :

Statement of Financial Position as at 31 December 2015
$
Non current assets 1 600 000
Current assets 300 000
1 900 000

Equity
Ordinary shares of $0.50 each 800 000
10% $1 Redeemable preference shares 200 000
Share premium 250 000
Revaluation reserve 150 000
Retained earnings 400 000
1 800 000
Current liabilities 100 000
1 900 000

On 31 December 2015, James Ltd made a right issue of 400 000 ordinary shares at a
premium of 10 cents per share. Immediately after the rights issue , a bonus issue of one
ordinary share for every five (including rights issue shares) held was made. The company
maintains reserves in the most flexible form.

Required

Prepare the Statement of Financial position of James immediately after the above transactions
are completed.

65
 QUESTION 4

The Statement of Financial Position of Fictitious Ltd on 31 December 2012 appeared as

follows:

$
Non current assets 2 000 000
Current assets 600 000
2 600 000

Equity
Ordinary shares of $0.50 each 1 400 000
10% $1 Redeemable preference shares 200 000
Share premium 300 000
Retained earnings 500 000
2 400 000
Current liabilities 200 000
2 600 000

On 1 January 2013,it was decided to redeem all preference shares at $1.15 each. The shares
had originally been issued at $1.10 each. In order to provide funds for the redemption,
Fictitious Ltd issued a further 250 000 ordinary shares at 60 cents each.

Required

a. Prepare journal entries to record the above transactions. {8}

b. Prepare the Statement of Financial position of James immediately after the above
transactions are completed. {12}

66
 QUESTION 5

Statement of financial position of Fictitious Limited as at 31 December 2013

$000 $000 $000

Fixed assets 142
Current assets
Inventory 82
Trade receivables 30
Bank 28
140
Current liabilities
Trade payables 59
Proposed dividends 8 67 73

215
Less long term liabilities
10% Debentures 2011-2014 40
175
Capital reserves
Ordinary shares of $1 each 80
8% Preference shares of $1 each 30
Retained profit 65
175
On 1 October 2014 the following transactions occured
1) The Debentures were redeemed at a premium of 5%.
2) The directors decided that the debentures should be replaced by a reserve equal to the
amount of the debentures redeemed.
3) An additional 30 000 ordinary shares of $1 were issued at$1,50 to provide for the
redemption of the preference shares.
4) The 8% Preference shares were redeemed at a premium of $0,20 per share. The shares
had been originally issued at par.

Required:

The Statement of financial position immediately after the transactions have been
completed.

67
 ACCOUNTING RATIOS
Benefits of ratios
 help to analyse past results
 to compare company/business perfomances

Shortfalls of ratios
 they are based on historical figures
 they need to be analysed for successful conclusion
 ratios only show the results of carrying on a business but do not indicate the causes of
poor ratios hence further.
 ratios can only be used to compare same type of businesses that is like-with-like
business
 ratios may be misleading if there are not adjusted for inflation.
 ratios ignore seasonal fluctuations.

TYPES OF RATIOS

1.PROFITABILITY RATIOS

Gross profit percentage

𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
x 100
𝑠𝑎𝑙𝑒𝑠
Net profit percentage

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
x100
𝑠𝑎𝑙𝑒𝑠

Return on capital employed (ROCE)

𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡

x 100
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
Return on equity

𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑒𝑡𝑟 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡,𝑡𝑎𝑥 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠

x 100
𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑝𝑙𝑢𝑠 𝑟𝑒𝑠𝑒𝑟𝑣𝑒𝑠

2.LIQUIDITY RATIOS

Current ratio (working capital ratio)

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Quick ratio/ Acid test/ Liquid ratio

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 𝑙𝑒𝑠𝑠 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

68
 Rate of stockturn
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘𝑠

Debtors ratio
𝐷𝑒𝑏𝑡𝑜𝑟𝑠
x 365
𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠

Creditors ratio
𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠
x 365
𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠

3.INVESTMENT RATIOS

This group of ratios is commonly used by listed companies to assist investors with more
information. These types of ratios tend to trouble pupils a lot and a clear explanation have
been given on each ratio.

Interest cover
This ratio shows the ability of the company to service its long term borrowing out of current
profits.

𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥

𝑙𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐ℎ𝑎𝑟𝑔𝑒𝑠
Earnings per share
This ratio is often used by potential investors when deciding whether the return on their
investment is worth the risk taken. It is a measure of how successful a company is.

𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡,𝑡𝑎𝑥 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠

Price earnings ratio

This ratio measures the number of times the current market price exceeds the current earnings
per share. It shows how many current year’s dividends would be needed to purchase the
shares at today’s price.

𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒

𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Dividend cover
This ratio indicates the number of times current dividends can be paid out of the
profits after tax.

𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡,𝑡𝑎𝑥 𝑙𝑒𝑠𝑠 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑

𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑖𝑑

69
Dividend yield
It expresses the shareholders dividend as a percentage of the market value of the share. It
shows the investors return on investment.

𝑁𝑜𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒

x 100
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓𝑠ℎ𝑎𝑟𝑒

Declared rate of dividend is found by

𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑖𝑑

x100
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒𝑠

Earnings yield
This ratio expresses the earnings of a company as a percentage of the market price
of its share.

𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡,𝑡𝑎𝑥 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠

𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 X 𝑁𝑢𝑚𝑏𝑒𝑟𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠

Or

Dividend yield X Dividend cover

Dividend per share

This ratio is concerned with dividend paid in an accounting period per share.

𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑑𝑖𝑣𝑒𝑑𝑒𝑛𝑑 𝑝𝑎𝑖𝑑

x 100
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠

Gearing ratio

𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

x 100
𝑇𝑜𝑡𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

It refers to the extend or degree to which a business is financed by debt capital. A firm is said
to be highly geared if it depends more on debt capital than equity. Debt capital (Fixed cost
capital) includes debentures, long term bank loans and preference share capital. Equity is
made up of Ordinary Shares Capital and Reserves.

70
 QUESTION 1

Power Ltd Hunter Ltd

Operating profit $360 000 $252 000

Dividend cover 5 times 7 times

Transferred to General Reserve $100 000 $60 000

Additional information for the year ended 31 December 2017:

Power Ltd Hunter Ltd

Share capital: ordinary shares of $1.00 $1 000 000

ordinary shares of $0.25 $600 000

5% preference shares of $10 $400 000

8% preference shares of $1 $300 000

10% debenture stock 2018/2019 $300 000 $180 000

Required
a) prepare an extract of the Income Statement for the year ended 31 December 2017 for :
i. Power Ltd
ii. Hunter Ltd {12}
At 31 March 2003 the market prices of the ordinary shares were as follows:
i. Power Ltd $1.60
ii. Hunter Ltd $1.35

b) Calculate the following ratios for each company, showing all workings.
i. Interest cover
ii. Earnings per share
iii. Dividend paid per share
iv. Price earnings ratio
v. Dividend yield {10}
c) Compare and comment briefly on the rations for Power Ltd and Hunter Ltd in
(b) {10}

71
 QUESTION 2

The Statement of financial position of Boyd Limited on 31 December 2007 showed the
following information:

$ (000)
Ordinary shares of $2 each 36 000
8% Preference shares of $1 each 18 000
General reserve 3 600
Profit and loss account 7 440
12% Debentures 24 000

During the year ended 31 December 2008, Boyd made an operating profit of $10 080 000.
The directors made the following recommendations on 31 December 2008:

1. An amount of $1 200 000 was to be transferred to the general reserve.

2. An ordinary dividend of 20 cents per share was to be paid.
The market value of ordinary shares was $4,80 on 31 December 2008.
Required
a. Boyd’s appropriation account for the year ended 31 December 2008

b. Calculate the following ratios for 2008 showing all workings.

i) Return on ordinary shareholders’ funds

ii) Gearing
iii) Earnings per share
iv) Interest cover
v) Dividend cover
vi) Price earnings ratio
vii) Dividend yield

72
 QUESTION 3

Paul Simon is in business and at 31 December 2014, his capital was $195 000. All his
purchases and sales were on credit. At 31 December 2015 his stock was valued at $6
700,which was $12 000 less than at the end of the previous year.
The following ratios have been calculated from the Income Statement for the year ended 31
December 2015 and his Statement of financial position at that date.

Rate of stock turn : 20 times

Mark-up: 50%
selling and distribution expenses :7% sales
All other overheads- finance charges ?
Net profit percentage : 20%
Sales/ fixed assets 5 times
Sales / current assets 4%
Debtors credit period 35 days
Creditors credit period 45days
The only current assets are stock, debtors and balance at bank.
Ascertain drawings

Required
a) Prepare Simon’s Statement of financial position for the year ended 31
December 2015.(13)

73
 MARGINAL COSTING

It is the cost of producing one additional unit.

Marginal costing income statement

Sales XX
Less: Variable costs
Direct materials XX
Direct labour XX
Variable overheads XX
XX
less closing stock XX XX
Gross profit margin XX
Less: Variable Selling and distribution expenses XX
Contributioin XX
Less : Fixed costs XX
Net profit XX

Marginal costing valuing of closing stock

𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑢𝑛𝑖𝑡𝑠
x Direct production costs
𝑇𝑜𝑡𝑎𝑙 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

Advantages of marginal costing

 leads to stable price setting
 it ensures that all costs will be covered in the long run
 it values stock so that costs are matched with revenues

Disadvantages of marginal costing

 it is not good for tactical pricing since it puts much emphasis on contribution
 ignores fixed costs when calculating marginal cost
 it is not good for strategic planning since it ignores fixed costs

Differences between marginal costing and absorption costing

Marginal Costing Absorption Costing

-not so good for product pricing -good for product pricing

-it is good for tactical decision making -it is good for strategic decision making

-excludes fixed manufacturing -fixed production overheads are included in

overheads from stock valuation finished goods stock

74
 CLASSIFICATION OF COSTS

Variable costs
These are costs that will increase in direct proportion to the number of units produced.

Semi-variable costs

These costs have a relationship with the number of units produced but not in direct proportion
to them. These costs increase in stages. A firm may need one foreman for every five workers
but as production increases so do the number of workers. If three more workers are added the
foreman will have to cope with supervising a large group of workers. Five more workers will
need another foreman.

Fixed costs

These are costs which have no relationship with production and are generally payable at the
same amount whether the firm makes no products or thousands of products.

Assumptions and limitations of break-even charts

Assumptions Limitations

Fixed costs remain fixed Rent and other expenses may increase

Selling price is constant Competition may force lower prices

Sales mix does not change Demand forces change

Breakeven based on one product Few produce only one product

Costs are either fixed or variable Some costs are semi-variable

EXAMPLE SEPARATING FIXED AND VARIABLE COSTS

The following are results of the last two months trading at Fictitious limited.

Revenue Total costs Profit

Month 1 $220 000 $200 000 $20 000
Month 2 $280 000 $245 000 $35 000
Total costs consists of fixed costs which do not vary from month to month and variable costs
which vary directly with sales revenue.

Required
i. Monthly fixed costs
ii. Contribution to sales ratio
iii. Break even level of sales

75
Solution
I. Use of high low method to solve for fixed costs
High Low Difference
Sales $280 000 $220 000 $60 000
Costs $245 000 $200 000 $45 000

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑐𝑜𝑠𝑡𝑠
Variable costs =
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑠𝑎𝑙𝑒𝑠

$45 000
 = $0.75 Month 1 sales :$220 000 x $0,75=$165 000
$60 000

 Total costs - Total variable costs= Fixed costs

$200 000 - $165 000 = $35 000

II. Contribution to sales ratio

𝑆𝑎𝑙𝑒𝑠 − 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠 𝑐𝑜𝑠𝑡𝑠

𝑆𝑎𝑙𝑒𝑠

$220 000 − $165 000

$220 000

=$0,25
III. Break even level of sales

𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 $35 000

= $140 000
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑠𝑎𝑙𝑒𝑠 𝑟𝑎𝑡𝑖𝑜 $0,25

76
 Mathematical approach

a) Contribution to sales ratio

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝑆𝑎𝑙𝑒𝑠

b) Break even point(units)

𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

c) Break even point(sales $)

𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑠𝑎𝑙𝑒𝑠 𝑟𝑎𝑡𝑖𝑜

or

Break even point(units) x selling price (unit)

d) Number of units to be sold to earn a target profit

𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 + 𝑝𝑟𝑜𝑓𝑖𝑡

= number of units
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

e) Selling price to make a profit ‘P’ (30%)

𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 + 𝑝𝑟𝑜𝑓𝑖𝑡

𝑃𝑟𝑖𝑐𝑒 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡𝑠

Selling price to include net profit by 30%

f) Margin of safety (units)

Budgeted output-Break even point(units)

g) Margin of safety($)

Budgeted sales-Break even point($)

Or

𝑃𝑟𝑜𝑓𝑖𝑡
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑜𝑣𝑒𝑟 𝑠𝑎𝑙𝑒𝑠 𝑟𝑎𝑡𝑖𝑜

77
 h) Margin of safety ratio(percentage)

𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑦 (𝑢𝑛𝑖𝑡𝑠)

x 100%
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑢𝑝𝑢𝑡

𝑜𝑟

𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑦 ($)

x 100%
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑠𝑎𝑙𝑒𝑠

HINT
Where opening stock, closing stock and sales figures are given one should be able to
determine number of units produced.

 Opening stock(units) + production(units)-closing stock(units)= sales(units)

 Sales + closing stock – opening stock = production

Applications of marginal costing

a) Pricing decision
Pricing decisions are based on a number of factors such as:
 The need to make profit
 The need to increase market share
 Economic conditions
 Utilization of resources
 Political factors, for example price regulations

b) Acceptance of order below normal selling price

A firm may be producing below capacity. Due to space capacity well wishers may
make a special request at prices less than normal offer. Management is then faced by a
scenario of deciding whether to accept or reject a special offer. The grounds of
decision are based on the added contribution obtained on condition that the fixed costs
remain unchanged. However there are other factors to consider such as:
I. The reaction of other customers to this lower price.
II. Other alternatives to this special order as the price will be lower than
normal.
Worked example
Dizzy Limited manufactures and markets drinks for $2 per can. Current output is 800
000 cans per month which represents 80% of capacity. There is an opportunity to
utilize the spare capacity by selling the product at $1,3 per can to a supermarket chain
who will sell it as an “own label” product. Total costs for the last month were $1 200
000 of which $320 000 000 were fixed costs. These represented a total cost of $1,5
per can.
Required

Based on the above data should Dizzy Ltd accept the supermarket order.

78
 Solution
Income statement to calculate profit
$
Sales(800 000 X $2) 1 600 000
Less: marginal cost(total costs- fixed costs)
$1 200 000-$320 000 880 000
Contribution 720 000
Less: fixed costs 320 000
Net profit 400 000

Marginal cost per unit

$880 000
= $1,1
800 000

Spare capacity

80% = 800 000

100
100% = full capacity x 800 000 = 1 000 000
80

1 000 000 – 800 000 = 200 000

Special offer from supermarket

$
Sales(200 000 X $1,30) 260 000
Less: Marginal cost( 200 000 X 1,1) 220 000
Contribution 40 000

Thus the offer looks worthwhile because there is a positive contribution hence it will help
in covering part of fixed costs.

c) Make or buy decision

This should mainly focus on relevant costs in a particular given scenario. The relevant
cost comparison is between marginal cost of manufacture and the buying in price. If
there is spare capacity the choice is simple, it is worth buying a component only if the
marginal costs incurred in production are greater than the purchase price.
Worked example
Blessing Ltd.manufactures an electric component Zim 2020 and costs for the current
production level of 1 000 units are:
Cost per unit Total cost
$ $
Direct material 1 10 000
Direct labour 2 20 000
Variable overheads 1,50 15 000
Fixed overheads 3 30 000

The buying in price for Zim 2020 is $6 per unit.

Required
Should component Zim 2020 be bought in or manufactured?

79
 Solution
What need to be calculated is the marginal cost per unit because whether the company
manufactures or do not manufacture they will have to pay fixed overheads.

$
Direct material 1
Direct labour 2
Variable overheads 1,5
Marginal cost per unit 4,50

Blessing Ltd. should manufacture the component Zim 2020 since the marginal cost of
manufacture is less than the buying in price.

d) Optimum use of scarce resources

Making the most profitable use of limited resources. Anything which limit the
quantity of goods that a business may produce is called a limiting factor. Raw
materials, skilled labour or shortage of demand for a particular product are all limiting
factors. When faced with limited resources a company making several different
products should use the limited resources in a way that produces the most profit.
Step 1
Calculate contribution per product/per unit
Step 2
Calculate contribution per limiting factor
Step 3
Rank the products starting with the one with the highest contribution per limiting
factor.
Step 4
Production schedule then a revised income statement

Example on material and labour shortage

Material shortage

Worked example
Mugova Ltd manufactures two products namely A and B using the same raw
materials which cost $4 per kg. The following are details relating to the products:
A B
Sales unit per period 10 000 15 000
Selling price per unit $52 $60
Unit cost : Direct material $8 $12
Direct labour $10 $14
Direct expenses $12 $16

Fixed costs for the period will be $300 000. The company was advised by its suppliers
that only 60% of its requirements will be made available during the period.
Required
a. Calculate the number of kilogrammes required per unit.
b. Determine the maximum net profit for the period taking into account the
material shortage.

80
Solution

a)Kilogrammes required per unit

A B
$ $
Direct material cost per unit 8 12
Material cost per unit 4 4

Kgs per unit 2 3

b)Calculating net profit

Step 1 Calculating contribution per unit
A B
$ $
Selling price 52 60
Less: variable costs
Direct material (8) (12)
Direct labour (10) (14)
Direct expenses (12) (16)
Contribution per unit 22 18

Step 2 Contribution per limiting factor

$22 $18
2𝑘𝑔 3𝑘𝑔

= $11 =$ 6

Step 3 Rank order

A B
(1) (2)

Step 4
Number of kgs required (10 000unitsx 2kg) +(15 000unitsx3kg) = $ 65 000kg
Under normal circumstances the products would require:

Product A 20 000kgs
Product B 45 000kgs

Number of kgs available 60% of 65 000kg = 39 000kg

The product with a better contribution will be the one to get the first allocation
of the material that is A and then B.

Product Units Raw materials

1 A 10 000 20 000kg
2 B 6 333 19 000kg

Product B will get the last share: workings

81
 19 000units
= 6 333units
3kg

Income statement to calculate profit

Product Units Contribution per unit Total contribution

$
A 10 000 22 220 000
B 6 333 18 113 994
Total contribution 333 994
Less: fixed costs 300 000
Profit 33 994

Labour shortage

Power limited makes products A, B and C. All three products are made from a
common material called ‘bee’. Planned production in units is as follows:
A B C
2 000 3 000 4 000
Additional information is as follows:

A B C
Selling price per unit $54 $50 $105
Direct material per unit 2kg 4kg 5kg
Direct labour hours per unit 3 2 6

Direct materials cost $6 per kg

Direct labour cost $10 per hour
Fixed expenses $72 000
Power limited has discovered that direct labour hours available is limited to 33 000.

Required
Revised production schedule and income statement.
Solution

Step 1 Calculating contribution per unit

A B C
$ $ $
Selling price 54 50 105
Less: variable costs
Direct material (12) (24) (30)
Direct labour (30) (20) (60)
Contribution per unit 12 6 15

Step 2 Contribution per limiting factor

$12 $6 $15
Direct labour hours
3 2 6

82
 = $4 p/hour =$3 p/hour =$2.5p/hour

Step 3 Rank order

A B C
(1) (2) (3)

Step 4 Production schedule

Product Units Hours

A 2 000 x 2 6 000
B 3000 x 2 6 000
C 3 500 x 6 21 000

Product C will get the last share: workings

21 000
= 3 500units
6
Income Statement

Product Units Contribution per unit Total contribution

$
A 2 000 12 24 000
B 3 000 6 18 000
C 3 500 15 52 500
Total contribution 94 500
Less: fixed costs 72 000
Profit 22 500

e) Dropping a product/ closing a department

From mere speculation of a company producing a range of products it might appear
from the net operating loss or income that one department is not profitable. It is not
appropriate to make a guess but a proper managerial decision has to be undertaken to
make precise conclusions. It is appropriate to consider whether the sales revenue
covers the variable and fixed costs. If the costs are covered then the product should
not be dropped and no department should be closed.

Example
Patony Ltd produces three types of washing machines A, B and C.
The following information is for the year ended 31 December 2014.
A B C

$ $ $
Sales 400 000 140 000 185 000
Less: Variable costs 300 000 100 000 110 000
Fixed costs 80 000 49 000 65 000
Profit/ (loss) 20 000 (9 000) 10 000

Patony Ltd has proposed to drop washing machine B since it is making a loss.
Required
Should Patony Ltd drop washing powder B, giving reasons

83
 Solution
From mere looking at the example of the income statement washing machine B need
to be dropped with immediate effect. However using marginal costing approach all
the three washing machines are giving a positive contribution hence there is a profit of
$ 21 000. If washing machine B is dropped A and B will share all the fixed costs and
the profit will turn into a loss of $19 000. In summation Patony Ltd should continue
producing all the three washing machines.

QUESTION 1

Differential Products Ltd. Commenced manufacturing on 1 January 2011. The directors have
been studying the company’s results for the years ended 31 December 2011 and 31 December
2012. The company has hitherto calculated profits using marginal costing principles. The
directors have now been advised by their accountant that they should have based their profit
calculations on absorption costing methods and they wish to know what effect costing would
have had on the company’s profits.
The information is available for the two years:

2011 2012
Sales (in units) 2 000 2 300
Price per unit $45 $50
No. of units produced 2 500 2 700
Direct materials per unit $9 $11
Direct labour per unit $12 $14
Direct expenses per unit $4 $5
Fixed overheads (factory) $49 000 $49 000

Stocks of finished goods are valued on the FIFO basis.

Required

a. Profit statements for Differential Products Ltd for the years ended 31 December 2011
and 2012 using marginal costing absorption costing. {16}

b. Explain why the profits calculated using absorption costing differ from those
calculated under marginal costing. {4}

c. Prepare a statement which shows clearly how the different profits for 2011 and 2012
have arisen. {5}

84
 QUESTION 2

Summer Ltd makes three products : Microne, Tetrone and Zitrone for which the following
details are given :

Product Microne Tetrone Zitrone

Direct materials {kilos per unit} 10 5 7

Direct labour {hours per unit} 8 4 6
Direct expenses {per unit} $9 $7 $4
Selling price {per unit} $115 $74 $85

Additional information

i. All three products are made from material Bitrone

ii. Bitrone costs $3 per kilo.
iii. All three products require the same type of labour which is paid at $7 per hour.
iv. Total fixed costs amount to $70 000.
v. Budgeted production {based upon maximum demand} is :

Microne 2 000 units

Tetrone 2 400 units

Zitrone 1 800 units

It has now been discovered that the supply of material Bitrone is limited to 38 000 kilos.

REQUIRED

a. Calculate the contribution per kilo of material Bitrone used for each product.
b. Prepare a revised production budget which gives the maximum profit from the
material available.

85
 QUESTION 3

Shumirai and Anotidaishe are considering manufacturing the product that it imports for sale.
Preliminary studies have revealed the following unit costs for product:
$
Direct materials 30
Direct labour 45
Variable production overheads 25
Direct selling expenses 20
Total variable costs 120
Selling price 168

Other costs per annum would be as follows:

$
Depreciation 100 000
Rent and rates 68 000
Insurance 120 000
Total 288 000

Required
a. Break -even point in
i. units
ii. sales revenue
b. If the firm decides to start by making and selling 13 000 units per
annum,calculate at this level of activity,
i. profit,
ii. margin of safety as a percentage,
iii. the selling price needed to achieve a profit of $1 402 000,
iv. the percentage change in selling price to achieve the result identified in
(iii) above.
c. State five assumptions underlying cost-volume-profit (break even) analysis.

86
 QUESTION 4

Golden Ltd manufactures and sells radios. The unit selling price and production costs are as
follows:
$
Selling price 800

Direct materials 100

Direct labour 90

Variable overheads 50

Fixed overheads 160

The fixed production overheads assume a monthly production of 2 000units.

The following monthly costs are also incurred:

Fixed administrative overheads $80 000
Variable sales overheads 10% of sales value
Fixed sales overheads $120 000

During the month of December 2010 a total of 2 400 units were produced of which 1 800
were sold. There was no stock on hand at the beginning of December.

Required
Combined profit statements of Marginal costing and Absorption costing. {20}

87
 ABSORPTION COSTING
Absorption costing bases the cost of production on total costs that is variable costs and fixed
costs.

Absorption costing income statement

Sales XX
Less: Cost of sales
Direct materials XX
Direct labour XX
Variable overheads XX
Fixed costs-production XX
XX
Less closing stock XX XX
Gross profit XX
Less: Selling and distribution expenses XX
Net profit XX

The above Income Statement assumes that there will be closing stock.

Absorption costing valuing of closing stock

𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑢𝑛𝑖𝑡𝑠
𝑥 total production costs
𝑇𝑜𝑡𝑎𝑙 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

Advantages of absorption costing

 it leads to stable price setting
 it ensures that all costs will be covered in the long run
 it values stock so that costs are matched with revenues

Disadvantages of absorption costing

 it treats all costs as the same (variable and fixed)

Key terms
Overheads
This is a term used to describe the indirect and fixed expenses such as rent and rates or
depreciation. These expenses cannot be directly attributed to a specific job.
Allotment
It is the charging of costs to a cost centre when the cost was made specifically for that cost
centre.
Allocation
If the amount of a cost is known with certainity and the department causing the overhead can
be specifically identified the cost is allocated to that department.
Apportionment
Some costs cannot be identified as arising from the activities of one specific department. The
unallocated costs are apportioned to the various production departments using area, usage,
number of staff and so on.
Under –absorption
It occurs when expenditure is higher than budgeted production or less than the planned level.
Over- absorption

88
It occurs when expenditure is lower than budgeted production or actual production is more
than planned level.
How overheads are apportioned
1. First identify the production and service departments.
Production departments-these departments make a direct contribution into the final
being of the product.
Service departments-theses departments render services to production departments
Yet they do not directly contribute to the actual production.
2. Allocate overheads that are clearly stated for each department(do not split the amount)
3. Apportion the remaining overheads amongst the departments which obtain benefit
from such costs.
After allocation and apportionment the totals of the production and service
departments should be worked out. Next will be secondary apportionment.
4. Secondary apportionment
Remember that service departments do not produce goods but only exist to provide a
service to production departments. The service department costs are then apportioned
to the production departments.
Other service departments render services to each other hence they are reciprocal
departments. The one rendering services to another will be the first to be eliminated.
5. After completing all the above stages(1-4) the next step is to charge these overheads
to cost units.

Formular for Overhead Absorption Rate (OAR)

Total budgeted overheads as shown on the overhead analysis sheet over Total expected level
of activity for the cost centre
Hint : The numerator is the total of the overhead analysis sheet that is after stage four. The
denominator varies with the department.

Apportionment of overheads
Common basis of apportionment
Nature of overhead Basis of apportionment

Rent, rates e.t.c Floor area

Personel expenses Number of employers

Power expenses Number of kwh

Stores overhead Number of requisitions

Cleaning expenses Floor area

Depreciation of plant and machinery Book value of plant

Insurance of plant Replacement cost

Insurance of building Floor area

Factory supervisor’s salary Number of employees

89
 Under-absorption will occur when:
 Actual activity is below budget or actual overheads are above budget.
Over-absorption will occur when:
 Actual activity is above budget or actual overheads are below budget.

CALCULATION OF OVER/UNDER ABSORPTION

Budgeted overheads $200 000

Production (units) 80 000

Actual results
Expenditure $215 000
Goods produced 76 000

Solution
$200 000
80 000
Divide budgeted overheads and units

Overhead Absorption Rate (OAR) =$2.50

Overhead recovered
76 000 X $2.50

= $190 000

$215 000-$190 000

= $25 000

Under absorption

However, in most cases, the actual levels of activity and actual levels of expenditure
will not be the same as the budgeted activity and expenditure.

Under-absorption will occur when:

 Actual activity is below budget or actual overheads are above budget.
Over-absorption will occur when:
 Actual activity is above budget or actual overheads are below budget

90
EXTRA WORK
Budgeted labour hours 10 000

Budgeted overheads $150 000

Actual labour hours 9 500

Actual overheads $160 000

SOLUTION

Budgeted overheads over budgeted labour hours

$150 000
10 000

OAR $ 15

Actual hours by OAR 9 500 X $15 = $142 500

$160 000 - $142 500 = $17 500 under absorption

This is under absorption because actual activity is below budget and actual overheads are
above budget.

91
 QUESTION 1

i. What is the difference between

a.) Allocation of overheads and b.) apportionment of overheads
Giving an example of each.
ii) Explain what is meant by overhead absorption rate and mention any three
bases on which the rate may be calculated. (5)
iii) Diversify Ltd. has three production departments:
Machining dept
Assembly dept
Painting dept
There are also service departments : Dept A and Dept B
Dept. B services all the other four departments, whilst Dept. A services
only the production departments. The following are the overheads costs of
the departments for the past four weeks to 28 March 19-1:

Dept Machining Assembly Painting Dept A Dept B

$ $ $ $ $
Indirect labour 25 000 20 000 10 000 6 000 8 000
Other overheads 10 000 8 000 6 000 3 000 2 000
The service departments overheads are charged to the other departments as follows:
Machine Assembly Painting
Dept
Dept A 50% 25% 25% -
Dept B 40% 30% 20% 10%
The Machining dept. recovers overheads on the basis of machine hours whilst the
Assembly and Painting departments recover overheads on the basis of labour hours
worked. The following information is available for the production departments:
Machining dept: machine hours worked, 400per week.
Assembly dept : hourly rate of pay $5
Painting dept :hourly rate of pay $4

Required

The overhead recovery rates for each of the production departments. (14)

92
 QUESTION 2
Data Ltd manufactures laptops. It has two production departments and two service
departments.

The following information for the month of May is available:

Production departments Service departments

Machining Assembly Maintenance Canteen
Overheads $400 000 $310 000 $190 000 $100 000
Number of employees 50 40 10 8
Maintenance hours 3 000 1 000
Machine hours 40 000 2 000
Direct labour hours 2 500 50 000

a. Explain the following terms:

i. Overhead allocation
ii. Overhead apportionment
iii. Overhead reapportionment {3}
b. Prepare an overhead analysis sheet to show the apportionment of service department’s
costs to the production departments. {8}
c. Calculate the overhead absorption rate (OAR) for each department, give your answer
two decimal places. {6}
d. The following information relates to the costs of producing a laptop – Digits.

Per unit data Machining Assembly

Direct materials $49 $18
Direct labour 15 minutes 3 hours
Machine hours 2 hours 10 minutes
Direct labour rate $12 per hour $12 per hour

The company achieves a mark up of 25% on all laptops.

Calculate the selling price of the Digits laptop. {9}

93
 QUESTION 3
The Headlands company manufactures parts for the car industry. The company has
two production departments and a works canteen that provides meals and
refreshments for the two production departments.
The following information is available

Department A B Canteen
Floor area (square metres) 13 000 10 000 2 000
Staff employed 30 70 10
Power used (kwh) 1 200 300 100
Cost of machinery $80 000 $20 000 $5 000

The following budgeted costs for the month of December have not been apportioned
to a department.
$
Rent and rates 10 000
Insurance of machinery 2 625
Heating and lighting expenses 7 500
Supervisory wages 12 100
Power 4 800
Depreciation of machinery 9 030

Additional budgeted information per month

Department A Department B
Direct labour hours 5 120 12 605
Direct machine hours 17 250 1 000

Required
a. A statement showing the apportionment of overheads for the month of
December. {17}
b. Calculate an overhead absorption rate for department A and department B.{8}
The managers of Headlands company have been asked to cost a new job 36.
The job would require:
6 kilos of material costing $7.40 per kilo;
Other variable costs of $30.50
The job will spend 14 hours in department A and a further 6 hours in
department B.
The job will be marked up by 60% on cost to achieve the selling price.
c. Calculate the price to be quoted to the customer for job 36.

94
 QUESTION 4

Morgan Ltd has expanded its production capacity by acquiring a new factory. The factory has
three production departments: Moulding, Assembly and Paint Shop. There is also a service
department: Stores. The Accountant must apportion the overheads of the factory to the three
production departments.

Details of the departments and the budgeted overheads expenses for the six months to
31December 2007 together with data for Product Q are given below:

Departmental statistics for six months ending 31 December 2007

Moulding Assembly Paint Shop Stores
Area in square metres 6 000 8 000 5 000 1 000
Machinery at cost $80 000 $40 000 $20 000 -
No. of workers 30 40 20 10
No. of stores requisitions 700 500 300

Budgeted overheads for 6 months to 31 December 2007

$
Rent 90 000
Lighting and heating 23 000
Insurance of premises 7 000
Canteen costs 54 000

Machinery is depreciated at 30% per annum on cost.

All workers will work 35 hours per week and there will be 24 working weekends in the six
months to 31December 2007.
Product Q passes through all three departments in the course of manufacture and the time
taken in each department is:
1 3 1
Moulding 24 hours Assembly 14 hours Paint Shop 12 hours

Required
a. A table to show the apportionment of the factory overheads to the production
departments for six months to 31 January 2007. {14}
b. Calculate for each production department an hourly overhead rate, giving your answer
correct to three decimal places. {3}
c. Calculate the total overhead to be awarded to each unit of Product Q {4}

95
 STANDARD COSTING
It is the use of standard costs in the preparation of budgets.

Standard costs-these are predetermined costs.

Standard time-this is time in minutes or hours in which a given quantity of work should be
completed.

Standard hour-this is amount of work done in an hour under efficient conditions.

Benefits of standard costing

 it enables responsibility accounting
 it provides the basis for comparing target and actual performance
 it is a motivational effect if standards are realistically set
 it also results in better quality standards because standards will have been set

Possible causes of adverse variances

Materials
Price
 poor buying decisions
 more expensive supplier
 errors
 purchasing in small quantities
 use of high quality material

Usage
 Theft
 errors
 excessive usage
 defective material

Labour
Labour rate
 use of higher grade labour
 rise in wage rate
 use of overtime labour -

labour efficiency

 use of wrong methods

 short production runs
 use of lower grade or untrained labour

96
 Possible causes of favourable variances

Favourable price
 purchasing inferior materials
 purchasing in large quantities and getting quantity discounts

Favourable efficiency
 high morale among workers
 high grade/quality of labour
 high quality materials

Flexible budget
A flexible budget is a budget which recognises different behaviours of fixed and variable
costs at varying levels of activity.

Flexing a budget
At Advanced Level most if not all questions will require pupils to flex budgtes. A budget can
only be flexed if actual activity differs from the budgeted activity.

Example on flexing a budget

If given a budget for two levels of activity one should be able to:
 Check for direct materials per unit
 Check for direct labour per unit
 Split the overheads into variable and fixed costs

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑐𝑜𝑠𝑡𝑠
=?
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠

 Multiply the answer by units of each level of activity in order to obtain the
variable costs.

A detailed example
Power Electronics makes and sales a range of electronic motors. The following are budgets
for one of its latest models for the month of December 2015 for 300 units and 500 units.

Budget for Budget for

300units 500units
$ $
Direct materials 120 000 200 000
Direct labour 420 000 700 000
Variable overheads 360 000 600 000
Production overheads 450 000 570 000
Administration 290 000 290 000
Selling and distribution 340 000 450 000
Total 1 980 000 2 810 000

Required

A budget for 450 units

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 Solution
1. Direct material
$120 000 $200 000
300 500

=$400/unit =$400/unit

2. Direct labour

$420 000 $700 000

400 500

=$1 400/unit =$1 400/unit

3. Variable overheads

$360 000 $360 000

300 500

=$1 200/unit =$1 200/unit

From the above workings you can notice that cost per unit was same hence for the 450 units
will also be same.

4. Production overheads

$450 000 $570 000

300 500

=$1 500/unit =$1 140

5. Administration
These are fixed costs since the total costs does not change because budget for
300units and 500units is $290 000.

6. Selling and distribution

$340 000 $450 000

300 500

=$1 133 =$900

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One will notice that production overheads and selling and distribution expenses produced
different answers hence the need to use the high low method to separate fixed and variable
costs.

𝐻𝑖𝑔ℎ𝑒𝑠𝑡 𝑐𝑜𝑠𝑡−𝐿𝑜𝑤𝑒𝑠𝑡 𝑐𝑜𝑠𝑡

= variable cost
𝐻𝑖𝑔ℎ𝑒𝑠𝑡 𝑛𝑜.𝑜𝑓 𝑢𝑛𝑖𝑡𝑠−𝐿𝑜𝑤𝑒𝑠𝑡 𝑛𝑜.𝑜𝑓 𝑢𝑛𝑖𝑡𝑠

Separating production overheads

$570 000−$450 000 $120 000

>>>> >>> =$600/unit
500−300 200

Fixed costs = $270 000

Variable costs $600 X 450 = $270 0 00

Total costs $270 000 + $270 000 = $540 000(450units)

Separating selling and distribution expenses

$450 000−$340 000 $110 000

>>>>>>> =$550/unit
500−300 200

Fixed costs = $175 000

Variable costs $550 X 450 = $247 500

Total costs $175 000 + $247 500 = $422 500 (450units)

This is the budget for 450 units

Budget for
450units

$
Direct materials 180 000
Direct labour 630 000
Variable overheads 540 000
Production overheads 540 000
Administration 290 000
Selling and distribution 422 500
Total 2 602500

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 SUB-VARIANCES
MATERIAL VARIANCE

Material price variance = (standard price-actual price) x actual usage

Material usage variance = (standard usage-actual usage) x standard price

Total materials variance = (standard price x standard usage) – (actual price x actual usage)

Total materials variance can also be found by combining (adding/ subtracting ) material price
variance and material usage variance.

LABOUR VARIANCE

Labour rate variance = (standard rate - actual rate) x actual hours

Labour efficiency variance = (standard hours - actual hours) x standard rate

Total labour variance = (standard hours x standard rate) – (actual hours x actual rate)

Total materials variance can also be found by combining (adding/ subtracting) material price
variance and material usage variance.

From the sub-variances it should be noted that the actual results are deducted from the
standard (planned budget). If it produces a positive variance then it will be a favourable
balance (F) but if it produces a negative variance then it will be an unfavourable (adverse)
balance (A). After calculating variances make sure you state whether the answer(s) produced
is favourable by putting (F) or unfavourable by using (A), otherwise you will lose marks for
not indicating your answers.

Example from Advanced Level Accounting

J.Wilkinson Limited uses a system of standard costing. The following information relates to
the week ending 4 January 1992, when standard output was achieved:

Standard Actual
Price of materials (litre) $1.50 $1.60
Usage of materials (litre) 220 200
Labour hours worked 45 48
Wage rate/hour $5.30 $5.00

From the figures above calculate the following variances. In each case state clearly
whether the variance is adverse or favourable.

a) The total labour variance

b) The wage rate variance
c) The labour efficiency variance
d) The total materials variance
e) The materials price variance
f) The materials usage variance

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Solution

a) The total labour variance

(45 x $5.30) - (48 x $5) = $1.50 (A)

b) The wage rate variance

($5.30- $5) x 48 = $14.40 (F)

c) The labour efficiency variance

(45 – 48) x 5.30 = $15.90 (A)

d) The total materials variance

(220 x 1.50) - (200 x 1.60) = $10 (F)

e) The materials price variance

(1.50 – 1.60) x 200 = $20 (A)

f) The materials usage variance

(220 - 200) x 1.50 = $30 (F)

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 QUESTION 1
Kilia manufactures garden ornaments.

Budgeted revenue and costs for 10 000 units of a garden ornament are as follows:

Revenue 300 000

Costs
Direct materials (10 000kilos) 60 000
Direct labour ( at $11 per hour) 132 000
Fixed overheads 70 000

The actual revenue and costs for 18 000 units were as follows:
$
Revenue 504 000

Costs
Direct materials (17 560kilos) 119 408
Direct labour (23 000 hours) 233 450
Fixed overheads 70 000

Required
a. Prepare a flexed budget to show the difference between the budgeted profit and the
actual profit for 18 000 units. {12}

b. Prepare a standard cost statement to reconcile the budgeted profit and the actual
profit. It should clearly show the following variances:

Sales volume variance

Sales price variance
Direct material usage variance
Direct material price variance
Direct material efficiency variance
Direct material rate variance
{16}

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 QUESTION 2

Sisa and Justice are concerned at the cost of manufacture. Consequently at the beginning of
2017 they decided to introduce a standard costing system.

The standard cost card for a reading desk included the following:
Direct materials - 2𝑚3 of timber at $150/𝑚3 = $300
1
Direct labour - 4 2 hours at $80 per hour = $360

During the year ended 31 March 2017, 2 500 reading desks were manufactured.
Actual expenditure was as follows:
5 750𝑚3 timber at $851 000
10 500 direct labour hours at $892 500
Required
a. i. Total direct material cost variance {2}
ii. Direct material price variance {2}
iii. Direct material usage variance {2}
iv. Total direct labour cost variance {2}
v. Direct labour rate variance {2}
vi. Direct labour efficiency variance {2}

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 QUESTION 3

Power Ltd makes one product. Budgeted information is as follows:

Per unit
Selling price $55
Direct materials 4 kilos at $5 per kilo
Direct labour 2 hours at $9 per hour

During April 10 000 units were produced and sold. The following variances arose from the
production and sales:
$
Sales price variance 20 000 (F)
Direct material price variance 8 400 (F)
Direct material usage variance 10 000 (A)
Direct material rate variance 2 050 (A)
Direct material efficiency variance 4 500 (A)

REQUIRED

a. State the formula used to calculate each of these five variances

b. Calculate, for April, the actual:

i. Selling price per unit

ii. Quantity of materials used in total
iii. Material price per kilo
iv. Number of labour hours worked in total
v. Labour rate paid per hour
c. Starting with the original total budgeted contribution, calculate the actual total
contribution for the month.

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 QUESTION 4

Musendo Power Limited manufactures garden furniture. One of the lines it produces is a bird
table and the contribution made by the bird tables to the overall company results for the year
ended 30 June 2017 was as follow :
Contribution statement for the bird tables for the year to 30 June 2017.
$ $
Sales 162 000
Less: Variable costs
Raw materials 53 280
Direct labour 47 680 100 960
61 040

Additional information

1) No opening or closing stocks of bird tables.

2) Budget and standard costs for the year ended 30 June 2017.
i) Budgeted sales of bird tables: 15 000@ $10 each.
ii) Each bird table would require 4kg of materials at a cost of 80cents per kg
iii) Three bird tables should be made per hour of direct labour.
iv) The direct labour rate is $7.20 per hour.

3) The additional results for the year ended 30 June 2017 revealed the following:
i) 18 000 bird tables were sold.
ii) 74 000 kg of raw material was used.
iii) Direct labour amounted to 6 400 hours.
Required
a) i) Sales volume variance {2}
ii) Sales price variance {2}
iii) Total sales variance {2}
iv) Raw material usage variance {2}
v) Raw materials price variance {2}
vi) Total raw materials variance {2}
vii) Direct labour efficiency variance {2}
viii) Direct labour rate variance {2}
h) Total direct labour variance {2}

b) Prepare a statement that shows the budgeted contribution for the year ended 30 June
2017. {4}

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 QUESTION 5

The Duke Manufacturing company had decided to implement a system of Standard

Costing as from the beginning of its financial year, beginning on 1 March 1992. It
now has the actual results of its operation for the first month to compare with its
standard figures.
Standard figures:
Materials per unit 5kg at$4 per kg
Labour per unit 2 hours at $6 per hour
Variable overheads 2 hours at $3 per hour
Fixed overheads 2 hours at $2 per hour
Production and Sales per month 2 000units
The standard selling price allows for a standard profit margin of 20%
Actual results for the month have been:
Production 2 200units
Sales 2 100 units at$55each
Materials $49 950 for 11 100kg
Labour $30 100 for 4 300hours
Variable overheads $12 200
Fixed overheads $8 400
Stocks are valued at standard costs.

Required

a) i) Sales volume variance {2}

ii) Sales price variance {2}
iii) Total sales variance {2}
iv) Raw material usage variance {2}
v) Raw materials price variance {2}
vi) Total raw materials variance {2}
vii) Direct labour efficiency variance {2}
ix) Direct labour rate variance {2}
i) Total direct labour variance {2}

b) Prepare an Income Statement showing actual profit for the month, together with a
reconciliation statement of budgeted and actual profit for the matter. {10}

c) Suggest possible explanations for material and labour variances. {4}

{Total 32 marks}

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 BUDGETS

A budget is a plan expressed in quantitative terms.

Types of budgets
Sales budget-it shows the number of sales the firm expects to make in the coming months

Production budget
It is based on the sales budget and on the necessity of keeping budgets . The production
department will state that in order to sell and produce the quantities stated by the sales
department it has to buy more materials. Usually there are two types of production budgets
that is even and uneven.

Even budget: will require a constant amount of units to be produced regularly.(hourly, daily,
monthly or yearly)

Uneven budget: units produced will not be the same always as demand will force an increase
or decrease in production.

Production budget template (units)

Production budget for 3 months to March 31

January February March

Opening stock XX XX XX
Production XX XX XX
XX XX XX
Sales XX XX XX
Closing stock XX XX XX

Stock purchasing budget

It is based on the materials and components necessary to achieve the production budget. For
production to take place there is need to purchase the material required for the purpose. The
layout is the same with that of a production budget but however a stock purchasing budget
can be prepared either in units or with the amount of purchases.

January February March

Opening stock XX XX XX
Production XX XX XX
XX XX XX
Sales XX XX XX
Closing stock XX XX XX

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Cash budget
It includes all receipts and payments of cash based. The information used in preparing a cash
budget can be used when preparing Trade receivables and Trade payables budgets. Sales and
purchases are either sold for cash and credit.

Master budget
It is a budgeted set of final accounts drawn up on all budgeted figures.

All budgets play a pivotal role in any organisation but one need to understand that each
department will have to produce its own budget. For example if the sales department requires
5 000units of beds to sell in one month this means the production department will have to
produce a minimum of 5 000units. These shows that all budgets are important as they are
linked to each other.

QUESTION 1

(a) State three benefits of budgeting. (3)

Use the following information to answer questions (b) and (c)

Chings supplies the following budgeted information for the five months ended 31 December
2011:
Aug Sep Oct Nov Dec
$ $ $ $ $
Sales 60 000 72 000 87 000 102 000 129 000
Purchases 36 000 39 000 45 000 72 000 105 000
Rent 1 200 1 200 1 350
Wages 13 500 13 500 13 500 18 000 19 500
Sundry expenses 5 250 5 550 10 200 4 800 2 940
Provision for bad debt 3 450 3 600 4 350 5 100 6 450
Dep office furniture 1 350 1 350 1 350 1 350 1 350
Purchase of office equipment 50 000

Chings expects that:

(i) The cash balance on 1 October will be $2 010;
(ii) 10% of all sales will be on credit;
(iii) 10% of purchases will be for cash;
(iv) Trade receivables will settle their accounts in the month following sale;
(v) Trade payables will be paid two months after purchase;
(vi) Wages, rent and other expenses will be paid as incurred;
(i) Inventory will be $21 000 on 1 October and $24 000 on 31 December.

(b) Prepare a Cash budget for each of the three months ending 31 December 2011. (14)
(c) Prepare a budgeted Income Statement for the three months ending 31 December 2011 (8)

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 QUESTION 2

Doctor Clarence runs a business which retails high quality clothing. It is particularly busy
during the festive season.
The budgeted sales and purchases figures for September 2015 to January 2016 are as follows:

September October November December January

$ $ $ $ $
Sales 215 000 225 000 310 000 425 000 195 000
Purchases 175 000 190 000 245 000 135 000 135 000

Additional information:

1. 50% of sales are expected to be paid for cash and these customers will receive a 6%
discount.
50% of the remaining sales are expected to be paid in the following month and these
customers will receive a 3% discount.
The remainder will pay 2 months after the sale.
2. 30% of purchases are expected to be paid for in the month of purchase and will
receive a 4% discount.
40% of purchases are expected to be paid in the month after purchase will receive a
2% discount.
The remainder are paid for 2 months after purchase.
3. The inventories held on 1 November 2015 are budgeted at $180 000.
The inventories held on 31 January 2016 are budgeted at $129 000.
4. The general expenses are budgeted at $18 000 in November 2015 with an expected
10% rise in December and a 15% reduction { on the December total} in January
2013. All general expenses are expected to be paid in full in the month in which they
occur.
5. The depreciation on the non-current assets acquired before November 2015 will be
$1 750 per month.
6. On 1 November 2015 Doctor will acquire a new storage system at a cost of $24 000
and will pay 50% of the cost immediately. The remainder will be paid in equal
instalments over the following 12 months without any interest charges.
This new non-current asset will be depreciated at 10% per annum on a monthly basis.
7. Doctor will make drawings of $3 000 every month except for December 2015. In this
month he expects to draw 1,5% of the month’s expected sales.
8. The bank balance at 1 November 2015 is expected to be $34 850.

REQUIRED

a. A cash budget in columnar form, for the 3 months commencing with November 2015.
b. To show the Sales, Purchases, Trade receivables and Trade payables figures to be
included in the budgeted income statement and statement of financial position for this
3 month period ending in January 2016.

109
 CAPITAL BUDGETING
Methods of investment appraisal

Accounting Rate of Return (ARR)

This method uses average investment and profits. Scrap value should be added at the
end of its life including the profit of that year.
Advantages
 easy to calculate
 profitability of a project may be compared with present profitability of
business
Disadvantages
 ignores time value of money
 it ignores duration of the project
 profit is subjective(depreciation is ignored)
Payback
Time taken by cash inflows to pay cash outflows. It is the time (in years) required by
the firm to recover its initial outlay. Non-cash items are ignored.
Advantages
 short payback period benefits a firm’s liquidity
 easy to calculate

Disadvantages
 time value of money is ignored that is money received after payback is not
taken seriously.
 life expectancy of project is ignored.

Net Present Value(NPV)

This method takes into consideration the cash flows of the whole life of the
investment project and also considers the time value of money. A dollar received
today, if invested at 12% interest per annum will amount to $1,12 after a year.
Therefore a dollar in the future is less than $1 received today.
The NPV is the difference between the present value of future cash flows. It is the
present value of its expected cash flows discounted at the cost of capital. If the NPV is
positive, the project should be accepted since the present value of cash flows is
greater than the present value of cash outflows. Hence it is a gain so it should be
accepted.
However if the NPV is negative, the project should be rejected because it does not
add value to the firm.

Advantages
 it considers all the available cash flows of the project
 it considers the time value of money by discounting future cash flows

Disadvantages
 it is too complicated to understand
 the cost of capital used by NPV is difficult to estimate

110
 Internal Rate of Return
This is the actual rate of return earned by the project. It is a rate such that if it is used
to discount cash flows,the NPV of the project shall be equal to zero. To calculate IRR
two distinct and far apart discounting rates should be used to give a posiyive and
negative NPV.
A project with an IRR greater than the cost of capital should be accepted since it will
be earning more than what is being paid to the providers of finance.
This method has got an advantage over the NPV method in that it does not use an
assumed discount rate,but instead calculate the discount rate which would result in the
NPV of discounted cash flows being zero.

Advantages
 recognise time value of money
 may assist in ranking different proposals
 recognise time value of money

Disadvantages
 it is more difficult to calculate than NPV

111
 QUESTION 1

Randal Ltd is considering expanding its business and has to decide between taking on Project
A or Project B. Both projects have a life of four years. Equipment is expected to have no
scrap value.

Other information about the projects is as follows:

Project A Project B
$ $
Initial cost $150 000 $ 140 000
Annual sales $100 000 $ 120 000
Annual purchases $40 000 $65 000
Other costs as a percentage of sales 8% 5%
Increase in working capital $10 000 $18 000

Randal Ltd uses a cost of capital of 10%. Discounting factors at 10% are as follows :

Year 1 0.909
Year 2 0.826
Year 3 0.751
Year 4 0.683

Using a cost of capital of 10% Project B has a net present value of $15 281.

REQUIRED
a. For each of the two projects calculate the following :
i. The annual net cash flow
ii. The Accounting Rate of Return
iii. The Payback period
b. Calculate the Net Present Value for Project A only.
c. State two benefits and two drawbacks of each of the following.
i. Accounting Rate of Return.
ii. The Payback period.
iii. The Net Present Value.
d. State which of the two projects Randal Ltd should select. Give reasons for your
answer.

112
 QUESTION 2
Two years ago Sandstone Ltd conducted market research at a cost of $16 000 to investigate
the potential market for new products. They are now considering two new products
developments, only one of which will be undertaken. The anticipated profitabilities of these
two separate projects are given below.

Project A Project B
$ $ $ $
Annual sales 80 000 100 000
Cost of sales 40 000 50 000
Administration costs 15 000 10 000
Depreciation 5 000 10 000
60 000 70 000
20 000 30 000
It is expected that the above will continue for each year of each project’s forecast life. The
capital cost for project A is $45 000 and for project B is $53 000.
The expected economic lives are
Project A 8 years
Project B 5 years
Depreciation has been calculated on a straight line basis, and assumes estimated scrap values
of $5 000 for Project A at the end of year 8, and $3 000 for Project B at the end of year 5.
All costs and revenue take place at the end of each year
The cost of capital is 12%
Extract from present value tables $1 @ 12%
Year 1 0,893 Year 5 0,567
Year 2 0,797 Year 6 0,507
Year 3 0,712 Year 7 0,452
Year 4 0,636 Year 8 0,404
REQUIRED
(a) Calculate the payback period and net present value of each project (14 marks)
(b) State, with reasoning, which of the two projects you would recommend (3 marks)
(c) Briefly explain why net present value is considered a more meaningful technique
compared to payback when making capital expenditure decisions (4 marks)
(d) Explain how you have treated the original market research costs in relation to the
evaluation of the projects. (2 marks)
( Total 23 marks)

Tinofamba nevanofamba

0774-453126{hotline}……………………….0783-727157{whatsapp only}

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