STRICTLY CONFIDENTIAL

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2008 EXAMINATIONS

CERTIF ICATE IN F INANCIAL ACCOUNTING

PROGRAMME

PAPER FA 4 : BUSINESS ACCOUNTING

(DECEMBER 2008 )

TIME ALLOWED : 3 HOURS

SUGGESTED SOLUTIONS
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1. (a) Income Statement

Profit and loss account for Mr Balala for the year ending 30 September 2008
K K
Sales 440,000
Less: Cost of sales
Opening stocks 60,000
Purchases 200,000
Less: Closing stocks (70,000) 190,000
Gross profit 250,000
Less: Expenses
Wages 30,000
Water and electricity (14,000 + 7,000) 21,000
Bank charges 11,000
Warehouse rent (35,000 – 9,000) 26,000
Telephone costs 18,000
Provision for doubtful debts 2,800
Depreciation – Buildings 3,600
Motor vehicles 22,000
Office equipments 12,000 146,400
Profit 103,600

(b) Balance sheet for Mr Balala as at 30 September 2008

Cost Acc. Dpr NBV
Fixed Assets K K K
180,000 23,600 156,400
Buildings 150,000 62,000 82,000
Motor vehicles 120,000 72,000 48,000
Office equipments 450,000 157,000 292,400

Current Assets

Stocks 70,000
Debtors (70,000 – 2,800) 67,200
Prepayments 9,000
146,200
Current liabilities
Creditors 50,000
Bank 18,000
Accruals 7,000 (75,000)
Net current assets 71,200
Capital employed 363,600
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Financed by: K
Capital 300,000
Profit for the year 103,600
403,600
Less: Drawings (40,000)
Total 363,600

Workings

(i) Provision for doubtful debts

Debtors 70,000
Provision at 4% (70,000 x 4%) 2,800

(ii) Depreciation calculations

Buildings (180,000 x 2%) 3,600
Motor vehicles (150,000 – 40,000) x 20% 22,000
Equipments (120,000 x10%) 12,000

2. (a) Other items which appear on the bank statement but not in the cash book:

(i) Bank interest

(ii) Direct credit
(iii) Dishonoured cheque

(b) Updated cash book

Updated Cash book
Balance at 31 October 27,000 Standing order 15,000
Direct credit 20,000 Bank charges 7,000
_____ Balance c/d 25,000
47,000 47,000

(c) Bank reconciliation statement

Balance per cash book 25,000

Add back;
Unpresented cheques
DHL 0050 21,000
K. Thodi 0051 8,000 29,000
54,000
Less: Bank lodgments
Deposits (28,000)
Balance per bank statement 26,000
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(d) Reasons for dishonoring a cheque.

(i) Insufficient funds in the accounts

(ii) The cheque signatories differ with records at the bank
(iii) Amount in words and figures differ.
(iv) Presenting post dated cheque
(v) The cheque is stale (more than 6 months from the day issued).

. Accounting terms

(a) Depreciation
Depreciation is the measure of the loss in value of an asset due to wear and
tear, usage or passage of time. Depreciation should be recognized as an
expense in the profit and loss account and as a reduction in the cost of an
asset in the balance sheet. Recognized methods of depreciation include, the
straight line method, reducing balance method or the sum of digit method.

(b) Accruals concept

This is one of the accounting concepts. The concept requires that accounting
transactions should be recognized and recorded in the correct accounting
period. This aims to ensure that profit for the period is recognized by
matching revenues with expenses incurred to generate such revenue.

(c) Partnership
Partnership is a form of business venture where two or more sole traders
agree to run their business with a common view of making profit.

Advantages of Partnership are:

(i) The partners are able to share various business skills

(ii) The partners are also able to raise more capital than in sole traders.

The partners agree to share any profit or loss made in agreed ratios. In
addition, the partners agree to pay salaries to each other, interest on capital
introduced.

(d) Bad debt

Bad debts are amount due from credit customers which are not expected to
be received. Bad debts should be charged as expense in the profit and loss
account. Bad debts are recognized from the debts where all efforts have
been made to collect but there is no response or the customer is showing
lack of capacity to repay the amount.
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(e) Internal controls

These are steps taken by management which may be financial or otherwise
aimed at ensuring that;

 Assets for the business are secured

 Management instructions are being adhered to
 The business is being run in a smooth and orderly manner
 Accounting transactions processed are valid, complete and accurate
 Internal controls are part of Management control system.
4. (a) Process 2 Account
Dr Process 2 Account Cr

Units K Units K
Input from Proc. 1 4,000 16,000 Output 3,800 49,400
Materials 9,000 Normal loss 400 200
Labour costs 12,000 Closing stocks 100 1,300
Overheads 10,000
Abnormal gain 300 3,900 _____ _____
4,300 50,900 4,300 50,900

Unit cost = Costs anticipated – scrap value

Expected output units

Expected output = Input materials – normal loss

= 4000 – 400
= 3600

47,000 – 200 K13/ unit

3,600

(b) Preparation of abnormal gain or loss account

Abnormal gain account

K K
Scrap account 150 Process 2 Account 3,900
Profit and loss 3,750 _____
3,900 3,900

(c) Other costing methods available:

(i) Batch costing used in valuation for production of nails

(ii) Contract costing used in construction of a building
(iii) Job costing used in mechanical services.
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5. (a) Valuation of stocks – First In First Out (FIFO)

Date Purchases Sales Balance

1/8/2008 30bags@K 1,500 45,000
3/8/2008 100bags@K1,800 30bags@K 1,500 45,000
100bags@K1,800 180,000
4/8/2008 60bags@ K2,500 70 bags@K1,800 126,000
5/8/2008 50bags@K 2,500 20 bags@K1,800 36,000
8/8/2008 220bags@K1,600 20 bags@K1,800 36,000
220 bags@K 1,600 352,000
10/8/2008 120bags@K2,500 120bags@K1,600 192,000
14/8/2008 90bags@K 1,800 90bags@K 1,800 162,000
15/8/2008 150bags@K2,500 60bags@K 1,800 108,000
20/8/2008 100bags@K1,900 100bags@K1,900 190,000
21/8/2008 100bags@K2,500 60bags@K 1,900 114,000
28/8/2008 10bags@K 2,000 10bags@K 2,000 20,000
70 bags 134,000

(b) Trading account for the month of August 2008

K K
Sales 1,200,000
Less: Cost of goods sold
Opening stocks 45,000
Purchases 904,000
Less: Closing stocks (134,000) (815,000)
Gross profit 385,000
Workings: Sales (60+50+120+150+100) x 2,500 = K1,200,000
Purchases
100 bags at K1,800 = 180,000
220 bags at K1,600 = 352,000
90 bags at K1,800 = 162,000
100 bags at K1,900 = 190,000
10 bags at K2,000 = 20,000 = K904,000

(c) Weaknesses of LIFO Method

(i) Stocks are undervalued in times of rising prices.
(ii) The method does not reflect what actually occurs in real business
world.
(iii) The method is not recommended by International Accounting
Standards.
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6. (a) Five errors which do not affect trial balance

(i) Error of principle – where an item is entered in the wrong class of
account.

(ii) Error of commission – where an item is entered in the wrong

personal account.

(iii) Error of omission – where a transaction has not been recorded in the
books of accounts.

(iv) Error of original entry – where the original figure is incorrect, yet
double entry still has been observed.

(v) Compensating error – where errors cancel out each other.

(vi) Complete reversal error – where the correct amount has been used
but each item is shown on the wrong side of the accounts.

(vii) Transposition error – where the wrong sequence of individual

characters within a number was entered but the double entry is done
correctly.

(b) Journal entries to correct errors

K K
(i) Dr Suspense Account 18,000
Cr Purchases Account 18,000

(ii) Dr Suppliers (Creditors) Account 30,000

Cr Discount received account 30,000

(iii) Dr Cash book 40,000

Cr Sales 40,000

(iv) Dr Customers control account 12,000

Cr Cash book 12,000

(v) Dr Purchases 70,000

Cr Fixed assets account 70,000

(vi) Dr Suspense account 60,000

Cr Cash book 60,000

(vii) Dr Salaries account 65,000

Cr Suspense account 65,000
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(c) Depreciation charge

Sum of digit method n (n+1) 4( 4 + 1) 10

2 2

Depreciable amount = K240,000 – 20,000 = 220,000

Depreciation charge Year 1 220,000 x 4 = K88,000

10

Year 2 220,000 x 3 = K66,000

10

7. (a) General and specific provision for bad debts

Provision for doubtful debts relates to amount anticipated not recoverable

from the credit customers. With general provision, the amount is computed
as a percentage of the total debtors while specific provision is where the
company is able to identify the customers who are expected to fail in
honoring their obligation.

(b) Prudence concept advocates the creation of provision for doubtful debts.
The concept specifies that where the business anticipates any loss then that
loss should be accrued. The provision for doubtful debts is an anticipation of
amount which will be lost through untrustworthy credit customers.

(c) Bad debts computations

(i) Bad debts account for the three years

Bad debts account

K K
2005 Expense 6,200 Profit and loss account 6,200
2006 Expense 7,800 Profit and loss account 7,800
2007 Expense 5,500 Profit and loss account 5,500
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(ii) Provision for doubtful debts

Provision for doubtful debts

K K
2005 Balance c/d 2,880 2005 Profit and loss 2,880
2006 Balance c/d 4,200 2006 Balance b/f 2,880
Profit and loss 1,320
4,200 4,200

2007 Profit and loss 700 2007 Balance b/f 4,200

2007 Balance c/d 3,500 _____
4,200 4,200

Workings

2005 Provision ( 48,000 x 6%) K2,880

2006 Provision (60,000 x 7%) K4,200
P&L entry (4,200 – 2,880) 1,320

2007 Provision (70,000 x 5%) K3,500

P&L entry ( 3,500 -4,200) (700)

(iii) Balance sheet extracts

Balance sheet for the year ended
30 November 2005
Current assets
Debtors 48,000
Less: Provision for doubtful debts (2,880) 45,120

30 November 2006
Current assets
Debtors 60,000
Less: Provision for doubtful debts (4,200) 55,800

30 November 2007
Current assets
Debtors 70,000
Less: Provision for doubtful debts (3,500) 66,500

END