Professional Documents
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Suggested Solutions Dec 2008
Suggested Solutions Dec 2008
2008 EXAMINATIONS
PAPER TC 1: ACCOUNTING/1
SUGGESTED SOLUTIONS
1
(4) Through their use, fraud is made more difficult to perpetrate because
transfers made (in an effort) to disguise frauds will have to pass the
scrutiny of a responsible person.
(5) They aid management control since the speed at which information is
obtained is one of the prerequisites of efficient control.
(d) Complete reversal of entries occurs where the correct accounts are debited or
credited but each item is shown in the wrong side of the account. Suppose we
paid a cheque to Ugali for K20,000, the double entry is wrongly made as Dr
Bank K20,000 Cr Ugali K20,000. On the other hand a transposition error
occurs where the wrong sequence of the individual characters within a number
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are entered when recording the transaction. For example, K1,965 is entered as
K1,695 for both the debit and credit entries.
.
FIFO LIFO AVCO
K K K
Sales (Note 1) 860,000 860,000 860,000
Opening stock - - -
Purchases (Note 2) 420,000 420,000 420,000
Less : Closing stock (Note 3) 80,000 50,000 60,000
Cost of goods sold 340,000 370,000 360,000
Gross profit (Note 4) 520,000 490,000 500,000
Workings
1. Sales 25,000 x 12 = 300,000
35,000 x 16 = 560,000
860,000
4. (FIFO : Sold 35,000 then 10,000 then 10,000 then 5,000;LIFO sold 15,000 then
10,000 then 10,000 then 25,000; AVCO at average for all transactions during
the reporting period = (K420,000/70,000) = K6.
3. (a) A partnership is not a separate legal entity. Its members are jointly liable for the
debts of the business. A private limited company is a separate legal (juristic)
person and can enter into contracts in its own name. Its shareholders have
limited liability for debts in the sense that they can only lose the money value of
shares held by them and have no personal liability for the debts of the
company.
3
Ngongole Partnership
Capital Accounts
Bweleka Katapila Kanyoza Bweleka Katapila Kongoza
K K K K K K
Balance c/f - - - Balances b/f 40,000 80,000 18,000
______ _____ _____ -___ -__ -__
40,000 80,000 18,000 40,000 80,000 18,000
Debtors payment period 295.2 x 365 = 49.5 days 335.5 x 365 = 52 days
2176.2 2344.8
Stock turnover period 42.7 x 365 = 9.4 days 78.0 x 365 = 16.4 days
1659.0 1731.5
Creditors’ turnover period 190.8 x 365 = 42.0 days 188.1 x 365 = 40.0 days
1659.0 1731.5
(b) (i) Given the relatively low stock levels (which means that the reduction
in stock turnover might be insignificant) there does not appear to be
any significant change in the ratios between the years 2006 and 2007.
The current ratio is a little lower than average but its quick ratio is
better than the average and also a little less than the current ratio.
Moreover, the change in the two ratios from 2006 to 2007 is not very
significant.
It would seem that the working capital is tightly managed to avoid the
over liquidity which could be caused by a high debtors’ turnover
period and comparatively high creditors.
(ii) Limitations with the use of accounting ratios include:
1. Accounting data analyzed is relevant at a particular point in
time and does not fully reflect the dynamic nature of business
activity.
5. (a) Depreciation is that part of the original cost of a fixed asset that is consumed
during its period of use by a business i.e. it is a way of spreading the economic
benefits obtained from a fixed asset over the expected useful life of the
asset. It is therefore a way of spreading the cost of the asset, less its expected
residual value, over the full life of the asset, and thereby charging the
consumption of the asset’s value to the years in which the asset provides
benefits to the business. Charging depreciation is an application of the
accruals or matching concept of accounting.
(b) Physical deterioration (wear and tear; erosion, rust, rot and decay)
Economic factors (obsolescence; inadequacy)
Depletion (for assets of wasting character/natural resources)
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(c) Freehold land, investment properties and intangible non current assets with an
indefinite life.
(d) The two main methods of depreciating non current assets are the straight line
method and the reducing balance method. The straight line method assumes
that the asset use is evenly spread throughout its economic life while the
reducing balance method implies that the asset is used more heavily soon after
its acquisition, with its use diminishing as time passes. The use of office
furniture may be considered to closely resemble the straight line method while
the use of road construction machinery may be more associated with the
reducing balance method.
(e) Method 1 Method 2
Straight Line 1 Mark Reducing Balance 1 Mark
K K
Cost 8,000,000 8,000,000
Depreciation: year 1,875,000 (50% of K8m) 4,000,000
6,125,000 4,000,000
Depreciation: year 1,875,000 (50% of K4m) 2,000,000
4,250,000 2,000,000
Depreciation: year 1,875,000 (50% of K2m) 1,000,000
2,375,000 1,000,000
Depreciation: year 1,875,000 (50% of K1m) 500,000
500,000 500,000
(b) Unless dealt with in isolation, a manufacturing account is normally linked with
a trading account (and the profit and loss account) by transferring either the
manufacturing cost of the goods produced or the market value of the goods
produced to the trading account.
This figure is equivalent to the entry for ‘purchases’ which may be found in the
trading account of a non-manufacturing entity.
Apart from this slight amendment, the preparation of a trading account for a
manufacturing entity is exactly the same as it is for a trading entity.
Authorised share capital’ is the total of the share capital which the company is
allowed to issue to shareholders. It is sometimes known as registered capital or
nominal capital. It is normally distinguished from issued share capital, which is
the total of the share capital actually issued to shareholders.
(c) The ‘Consistency concept’ states that when a business has chosen a method for
the accounting treatment of an item, it should enter all similar items that follow
in exactly the same way. This concept helps to control the use of constantly
changing methods which would lead to misleading profits being calculated from
the accounting records. (e.g. the use of straight line depreciation method).
The ‘going concern concept’ implies that a business will continue to operate for
the foreseeable future and that there is no intention to curtail significantly the
scale of its operations. This explains why it is sensible to use historical cost
when arriving at the valuation of assets. This concept should be rejected in
certain situations. If a business is going to close in the near future; shortage of
cash makes it virtually certain that the business will have to cease trading).
(d) A ‘bad debt’ is a debt that a business will not be able to collect. This results
from transacting a business (or part of it) on credit. This is a normal business
expense and is shown as such in the books of accounts’ i.e. it is charged to the
profit and loss/income statement as an expense when calculating the profit or
loss for the period.
A ‘provision for doubtful debts’ is an account that shows the expected amounts
of debtors at balance sheet date who may not be able to pay their accounts. It is
a measure of prudence that a possibility that some debts will turn bad in the
future have to be provided for in the current period.
END