STRICTLY CONFIDENTIAL

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2006 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 1: ACCOUNTING/1

WEDNESDAY 7 JUNE 2006 TIME ALLOWED : 3 HOURS

9.00 AM - 12.00 NOON

SUGGESTED SOLUTIONS
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1. (a) (i) The objective in providing for depreciation on fixed assets is to allocate the
cost of those assets over the accounting periods to benefit from their use.
This is consistent with the matching concept in accounting.

(ii) In order to determine the annual depreciation provision on a fixed asset, the
accountant needs information relating to its:

- Cost
- Estimated economic life
- Residual value, if any

(b) (i) Machinery a/c

2002 K 2005 K
1 Jan Barloworld 5,000,000 4 Jan Disposals 5,000,000 2

(ii) Machinery provision for depreciation a/c

2002 K 2002
Dec 31 Balance c/d 500,000 Dec 31 Profit & Loss 500,000

2003 2003
Jan 1 Balance b/d 500,000
Dec 31 Balance c/d 1,000,000 Dec 31 Profit & Loss 500,000
1,000.000 1,000,000

2004
2004 Jan 1 Bal b/d 1,000,000
Dec 31 Balance c/d 1,500,000 Dec 31 Profit & Loss 500,000
1,500,000 1,500,000

2005 2005
Jan 4 Disposals 1,500,000 Jan 1 Balance b/d 1,500,000
1,500,000 1,500,000

(iii) Machinery Disposal a/c

2005 K 2005 K
4 Jan machinery 5,000,000 Accumulated depreciation
31 Dec Profit & Loss 260,000 provision 1,500,000
5,260,000 Bank 3,760,000
5,260,000
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(iv) Profit and loss (extracts) for the year ended 31 December________________
K K
2002 Provision for depreciation : machinery 500,000
2003 Provision for depreciation : machinery 500,000
2004 Provision for depreciation : machinery 500,000
2005 Provision for depreciation : machinery Nil
Profit on machinery sold 260,000

Factors which cause fixed assets to depreciate:

Time factor e.g. leases

Economic factors e.g. obsolescence for computers
Physical deterioration e.g. motor vehicles
Depletion e.g. wasting assets like mines

Workings
Annual depreciation K5,000,000/10yrs = K500,000/yr

(c) According to the prudence concept, asset values are supposed to be stated at cost
or net realizable value. Doing otherwise would contravene the historical cost
concept. While gains are not recognized, losses are recognized in determining the
balance sheet values of assets. On the other hand, it is prudent to depreciate
assets as their impairment in values is recognized immediately.

2. (a) (i) Calculation of sales :

K
Cash sales 3,921
Receipts from debtors 44,846
Add closing debtors 4,012
Less opening debtors (2,643)
50,136

(ii) Calculation of purchases :

Cash purchases 22,177

Add closing creditors 2,445
Less : opening creditors (1,598)
23,024
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(b) Incompleteness Ltd

Trading, Profit and Loss Account for the year ended 31 March 2006
Note K K
Sales 50,136
Opening stock (i) 3,210
Add purchases (ii) 23,024
26,234
Less closing stock 4,063
Cost of goods sold 22,171
Gross profit 27,965
Expenses:
Electricity 1,090
Telephone 360
Rent 2,000
Advertising 1,430
Insurance (1) 769
Motor vehicle expenses (2) 2,407
Depreciation (3) 1,640 9,696
Net profit 18,269

(c) Incompleteness Ltd

Balance Sheet as at 31 March 2006
Note Cost Depn NBV
Non current assets K K K
Motor vehicles 5,100 1,020 4,080
Shop fittings 6,200 620 5,580
Current Assets 9,660
Stocks 4,063 ½
Debtors 4,012 ½
Prepayment 177 ½
Bank (4) 1,775 ½ 10,027
Less Current Liabilities
Creditors 2,445 ½
Accruals 291 ½ 2,736 7,291
16,951

Capital (6) 15,543 2

Add profit 18,269
33,812
Less drawings (5) 16,861
16,951

Workings

1. Insurance K946 less K177 prepaid K769.

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2. Motor vehicle expenses K2116 add K291 accrued = K2,407.

3. Depreciation : M/V K5,100 x 20%; shop fittings K6200 x 10%.
4. Bank balance is as provided in the question.
5. Drawings as given K16743 add additional drawings K118 = K16861.
6. Capital = Assets less liabilities = 3210 + 2643 + 5100 + 4200 + 2420 –
1598 – 432.

3. (a) Tsiku Limodzi Partnership

Appropriation Account for the year ended 31 March 2006

K K K
Net profit b/d 1,260,000
Less salaries : Masana 150,000
Madzulo 50,000 200,000
Interest on capitals: Mmawa 30,000
Masana 20,000
Madzulo 10,000 60,000 260,000
1,000,000
Balance of profits shared: Mmawa 40% 400,000
Masana 40% 400,000
Madzulo 20% 200,000 1,000,000

(b) (i) Partners’ capital accounts

Mmawa Masana Madzulo Usiku Mmawa Masana Madzulo Usiku
K’000 K’000 K’000 K’000 K’000 K’000 K’000 K’000
Bal b/d 300 200 100 (Note 1)
Cash 100
Bal c/d 328 228 114 100 Goodwill 28 28 14 ____ (Note 1)
328 228 114 100 328 228 114 100

Note 1 Capital b/d – given

Capital c/d is balancing figure

Workings

Note 1 Goodwill K70,000

Profit sharing ratio Amount (K)
Mmawa 40% 28000
Masana 40% 28000
Madzulo 20% 14000
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(ii) Tsiku Limodzi Partnership

Balance Sheet
K K
Goodwill 70,000
Other assets (except cash) 550,000
Cash (200,000 + 100,000 contributed) 300,000
Total assets 920,000

Capital Mmawa 328,000

Masana 228,000
Madzulo 114,000
Usiku 100,000 770,000
Creditors 150,000
920,000

4. (a) Three components of prime cost

Direct materials
Direct labour
Direct expenses
Prime cost is a cost that is incurred during the manufacturing process and
is directly attributed (traceable) to an item being manufactured. It is
different from indirect manufacturing cost since an indirect manufacturing
cost cannot be directly traced to an item being manufactured. These are
also known as production overheads and examples are wages of a factory
supervisor and depreciation of plant and equipment.
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(b) (i) Ukhondo Processors

Manufacturing Account for the year ended 31 December 2005

K K
Stock of raw materials 1.1.05 12,000
Add purchases 130,500
Add carriage inwards 3,000
145,500
Less : stock of raw materials 31/12/05 (15,750)
Cost of raw materials consumed 129,750
Direct wages 59,400
Direct expenses 2,100
Prime cost 191,250
Indirect manufacturing costs:
Fuel and power 14,850
Indirect wages 38,250
Lubricants 4,500
Rent 10,800
Depreciation of plant 6,300
Internal transport expenses 2,700
Insurance 2,250
General factory expenses 4,950 84,600
275,850
Add : Work – in – progress 1.1.05 5,250
281,100
Less : Work – in – progress 31.12.05 (6,300)
Production of goods completed 274,800

(ii) Ukhondo Processors

Trading Account for the year ended 31 December 2005

K K
Sales 375,000
Less : Cost of goods sold:
Stock of finished goods 1.1.2005 52,500
Add production cost of goods completed c/d 274,800
327,300
Less stock of finished goods 31.12.2005 (66,000) (261,300)
Gross profit c/d 113,700

5.(a) (i) Fixed assets – 30 June 2005 K’000

Land and buildings 440
Furniture and fittings 160
Motor vehicles 200
800
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(ii) Owners Equity – 30 June 2005 K’000

Capital 1 July 2004 150
Net profit for the year 70
Drawings (40)
180
(iii) Cost of sales K’000
Opening stock 20
Purchases 700
Closing stock (15)
705
(iv) Current liabilities – 30 June 2005 K’000
Creditors 40
Bank overdraft 20
60

(v) Expenses K’000

Telephone 50
Advertising 25
Bad debts 10
Depreciation 15
100

(vi) Income for the year ended 30 June 2005

K’000 K’000
Sales 1,800
Cost of sales 705,000
Expenses 1,025,000 1,730
Net profit (Income from operations) 70
Other income
Rental income 15
Interest received 1 16
86

(b) (i) Comparability means that users are able to draw conclusions about the
performance or financial position of a business by

- relating an entity’s figures for a particular period; and/or

- the relevant figures from other enterprises.
Possible types of comparison are:

1. comparison with figures for the same business for earlier periods
2. comparison with figures for other business for the same period
3. comparison with budgets or forecasts
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(ii) Liquidity ratio

Liquidity ratios are a category of financial or management accounting

ratios that measure how solvent a business undertaking is.
They determine how well or ready a particular business can or is able
to meet its financial obligations as they fall due.

(iii) Two common examples

1. Current ratio - Current assets___

Current liabilities

2. Quick ratio or Acid test ratio – Current assets – inventories

Current liabilities

Example
2006 2005
K K
Stock 2,000 1,500
Other current assets 8,000 6,000
Current liabilities 3,500 1,800

Current ratio 10,000 7,500

3,500 1,800

2.86 4.17

Quick ratio 8,000 6,000

3,500 1,800

2.29 3.33

6. (a)
Dr Cr
K K
Fixtures 2,039,000 Supreme Furnishers 2,039,000
Drawings 644,100 Stocks 644,100
Stocks 98,000 Drawings 98,000
Office equipment 446,100 Tambwali Stores 446,100
Supreme Furnishers 265,000 Fixtures 265,000
Bad debts 318,000 Hardware and General Merchants 318,000
Office equipment 2,650,000 Carnival 2,650,000
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(b) Sales Day Book (or sales journal) for credit sales.
Purchases Day Book (or Purchases Journal) for credit purchases.
Returns inwards Day Book (or Returns Inwards Journal) for returns inwards.
Returns outwards Day Book (or Returns outwards Journal) for returns outwards.
Cash Book – for receipts and payments of cash and cheques.

(c) Three types of ledgers commonly used in businesses are:

Sales ledger : This is for customers’ personal accounts.

Purchases ledger : This is for suppliers’ personal accounts.
General ledger : For the rest of accounts like expenses, fixed assets
and capital.

The use of control accounts helps in the maintenance of proper accounting

records using ledgers in the following ways:

- to check arithmetic accuracy for the ledgers concerned e.g. sales control
ledger account or total debtors account.

- act as a summary of transactions. Therefore, they facilitate classification

of financial information.

These are usually under the charge of senior personnel.

7. (a) Capital

This is the monetary value of an enterprise at a specific time. It consists of fixed

capital for fixed assets and working capital for current assets. Some of the
working capital will be in the business permanently. While other working capital
will be needed to fund fluctuating levels of current assets needed to sustain short-
term increases in requirements. (Note any general answer can do).

(b) Materiality concept

The concept means that accounting events should be included in the financial
statements if they are of material interest to the stakeholders i.e. the people who
make use of the financial accounting statements. It need not be material to every
stakeholder, but it must be material to a stakeholder before it merits inclusion.
The concept also entails not to waste time in the elaborate recording of trivial
items.
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(c) Liquidity ratios

Liquidity ratios are concerned with solvency. These are ratios that relate to the
cash position in an organisation and hence its ability to pay liabilities when they
fall due. These are to be distinguished from other types of ratios like profitability,
efficiency, capital structure and other ratios. The main ratios under this category
are:

Current ratio : Compares current assets with current liabilities. It is computed as

current assets divided by current liabilities.

Acid test ratio : Also known as quick ratio, is intended to view whether the
business has sufficient liquid resources to meet its current
liabilities and is worked out as current assets less stocks divided
by current liabilities.

(d) Substance over form

This is where real substance takes precedence over legal form. It can happen that
the legal form of a transaction can differ from its real substance which is,
basically, how the transaction affects the economic situation of a business. This
means that accounting in the instance will not reflect the exact legal position
concerning the transaction.

(e) Bank current Accounts

These are bank accounts used for regular payments in and out of the bank. A
cheque book is given by the bank to the holder of the account (to make payments
out of the account). The holder may also be given a pay-in book (for paying
money into the account). An overdraft can be arranged between the account
holder and the bank. Interest is chargeable on overdrawn amounts. Ordinarily the
account attracts high charges.

END