December 2010 TC6A

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STRICTLY CONFIDENTIAL

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2010 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 6: ACCOUNTING/2

(DECEMBER 2010 )

TIME ALLOWED : 3 HOURS

SUGGESTED SOLUTIONS

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1. (a) Gross margin gross profit/sales (22,400,000 – 15,920,000)/22,400,000 28.9%

Return on capital employed - profit before interest and taxation/Equity and liabilities

(970,000 + 120,000 + 10,000)/7,200,000 15.3%Current ratio – total current assets/total current liabilities 3,900,000/1,910,000 2.04

Asset turnover – turnover/total asset 22,400,000/7,200,000 3.11

Inventory turnover – cost of sales/average inventory 15,920,000/1,260,000 12.63

Gearing ratio – tot al long term liabilities/total funds 1,200,000/5,290,000 22.7%

(b) The company’s gross profit margin is 28.9% as against the industry 30% - therefore performing

below the industry average.

The company’s current ratio is 2.04 against the industry’s 2 – therefore performing slightly better

than the industry.

The company’s gearing ratio is 22.7% against the industry’s 25% - therefore performing better thanthe industry.

(c) - Differences in accounting methods between companies

- Differences in financial and business risk profile of companies being compared

- Differences in management.)

2. Partnership dissolution

(a) Realisation A/C

Land & bu ildings 600,000

Motor vehicles 800,000

Fixtures and fittings 180,000

Inventories 80,000

Accounts receivables 60,000

Dissolution costs 12,500

________

1,732,500

Chimombo Land & buildings 700,000

Motor vehicles 800,000

Discount on payables (1% x 100000) 1,000

Inventories – cash 72,000


Chimombo (2/5 x 99500) 39,800

Chapola (3/5 x 99500) 59,700

1,732,500

(b) (i) Capital Accounts

Chimombo Chapola

Current account 60,000

Land & bu ildings 700,000

Motor vehicle 800,000

Realisation a/c 39,800 59,700

Bank a/c 380,300

1,539,800 500,000

Chimombo Chapola

Balance b/f 1,000,000 500,000

Current account 200,000

339,800

1,539,800 500,000

(ii) Bank A/C

Balance b/f 20,000

Inventories 72,000


Chimombo 339,800

491,800

Accounts payables (99%x100000) 99,000

Capital A/C - Chapola 380,300

Realisation – dissolution costs 12,500

491,800

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(c) Disadvantages of partnership over sole trader

(i) The profits have to be shared among all the partners.

(ii) You do not have as much control over the business as there are a number of

owners. All of the partners will want to have a say in important decisions

and this may lead to you being overruled.

(iii) Deeds of partnership have to be written if a partner leaves or dies, which can

take a lot of time and cos t money.

(iv) There can be disagreements between the partners. This can cause major

difficulties as partners are bound by any commitments made by a single

partner, even if they did not agree to it.

3. Head Office and Branch Income Statement for the year ended 31 July 2009

Sales

Goods sent to branch

Opening inventories

Goods received by branch

Purchases

Closing inventories

(135,600+100/125 x 10,000)

Gross profit

Expenses

Provision for unrealized profit

(25/125x10,000-6,400)

Distribution e xpenses

Admin istration expenses

Depreciation (20% x (600,000 – 240,000)

Provision for doubtful debts

(2½% x 100,000)

Net profit

Profit transfer

Head OfficeK

1,680,000

740,000

2,420,000

16,000

1,820,000

(143,600)

1,692,400

727,600

(4,400)

160,000

400,000

72,000 (20% x (160,000 – 48,000)

2,500 (2½% x 80,000)

630,100

97,500

73,600171,100

BranchK

880,000

______

880,000

32,000

730,000

(120,000)

642,000

238,000

50,000

90,000

22,400

2,000

164,400

73,600

(73,600)0

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(b) Authorised and paid up capital (500000+250000) 750,000

(c) Extract of statement of financial pos ition after issue

750,000 K1 ordinary share capital 750,000 ½

Share premium 6,125,000 ½

Profit and loss 2,345,6739,220,673

Current as sets

Cash and bank 6,234,000

(d) Types of registers

Shareholder reg ister

Directors register

Debenture register etc

5. (a) Information in the fixed asset register

Date of purchase of the asset

Type of the asset

Depreciation rate

Location of the as set

Fixed as set code

Allocation of ass et etc

(b) Non-current asset schedule

(i)

Cost 31/12/2008

AdditionsDisposal

Cost 31/12/2009

Accum depn 31/12/2008

Charge for the year

Disposal

Accm depn 31/12/2009

Net book value 31/12/08

Net book value 31/12/09

Land &

buildings

10,600,000

1,100,000 ________

11,700,000

2,600,000

280,000

________

2,880,000

8,000,000

8,820,000

Plant &

Machinery

5,250,000

750,000

4,500,000

960,000

450,000

150,000

1,260,000

4,290,000

3,240,000

Motor

vehicles

6,200,000

________

6,200,000

2,800,000

1,550,000

________

4,350,000

3,400,000

1,850,000

Total

22,050,000

1,100,000750,000

22,400,000

6,360,000

2,280,000

150,000

8,490,000

15,690,000

13,910,000

Workings

Charge for year

Buildings

Plant & machinery

Motor vehicles

Disposal depreciation

Plant & machinery

(11,700,000 – 5,000,000 – 1,100,000) x 5%

(4,500,000 x 10%)

(6,200,000 x 25%)

(750,000 x 10% x 2)

280,000

450,000

1,550,000

(150,000) _

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(ii)

Buildings

Bank/supplier

Depreciat ion buildings – P&L

Accumulated depreciation – buildings

Depreciat ion plant and machinery – P&L

Accumulated depreciation – plant and machinery

Disposals

Plant & machinery

Bank a/c

Disposals

Accumulated depreciation – plant & machinery

Disposals

Loss on disposal (550,000 – (750,000 – 150,000)Disposal

Depreciation motor vehicles – P&L

Accumulated depreciation – motor vehicles

Dr

1,100,000

280,000

450,000

750,000

550,000

150,000

50,000

1,550,000

________

4,880,000

Cr

1,100,000

280,000

450,000

750,000

550,000

150,000

50,000

1,550,000

________

4,880,000

6. (a) Examples:

(i) Cash flows from operating activities

- Increase decrease or increase in accounts payables

- Increase decrease or increase in accounts receivables

-

Increase decrease or increase in inventories

(ii) Cash flows from investing activities

- Disposal or acquisition on non-current assets

- Return on inves tments

(iii) Cash flow f rom financing act ivit ies

- Issue of shares or disposal

- Issue or redemption of debentures

(iv) Cash and cash equivalents

-

Cash balances- Bank balances

(b) (i) Bad debts written off will reduce working capital byK15,500.

(ii) Bank balance will increase by K300,000 and therefore working capital.

(iii) Repaid bank overdraft will not affect working capital.

(iv) Declared dividends would decrease the working capital by K450,000.

(v) Payment to supplier would not affect the working capital.

(vi) Sale of motor vehicle for K700,000 would increase the working capital by

the same amount.

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(vii) Purchase of goods for resale on credit would not affect the working capital.

(viii) Payment for traded in photocopier would decrease the working capital by

K50,000.

(ix) Receipts from cus tomers and credited to account receivables would not

affect the working capital.

(x) Proceeds from issue of ordinary shares would increase the working capital

by K1,200,000.

(xi) Interest receivable accrued would increase working capital K50,000.

(xii) Provision for a court case would reduce the working capital by K240,000.

7. (i) Finance lease – a lease that transfers substantially all the risks and rewards incidental to

ownership of an asset. Title may or may not eventually be transferred.

(ii)

Economic useful life of an asset – the period over which an as set is expected to beeconomically usable by one or more users.

(iii) Materiality – information is material if its o mission or miss tatement could influence the

economic decisions of users taken on the basis of the financial statements.

(iv) Accounting policies – the specific principles, bases, conventions, rules and practices

applied by an ent ity in preparing and presenting financial statement.

(v) Rights issue of shares – an issue of new shares to existing shareholders at a price below

the current market value.

(vi) Convertible loans – are debentures whose agreements contain clauses whereby the

holder of the debenture is given an option to convert to ordinary shares after specified period.

(vii) Articles of association – a document that regulates internal affairs of a company in terms

of rights of various classes of shareholders , rules for conduct of meetings, and rights and

duties of members and officers of the company .

(viii) Dual Concept – an accounting concept that purports that every debit entry has a

corresponding credit entry.

(ix) True and fair view – concept that requires that financial statements are presently fairly in

all material respects as at the end of the financial year.

(x) Par value of shares – this is the nominal amount ass igned to the shares by the issuer. It

is usually a very s mall amount that bears no relationship to its market price.

E N D

Documents

December 2010 TC6A