STRICTLY CONFIDENTIAL

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2010 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 1: ACCOUNTING/1

TIME ALLOWED : 3 HOURS

SUGGESTED SOLUTIONS
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1. (a) Mark up is profit shown as a percentage or fraction of the cost price, while
margin is profit shown as a percentage or fraction of the selling price. Thus when
shown as a fraction or percentage of the cost price, the gross profit is known as
the mark-up and it is margin when shown as a fraction or percentage of the selling
price.(i) Example: Cost price (K4) + Gross Profit (K1) = Selling price (K5).

Mark-up = Gross profit, as a fraction 1; as a percentage 1 x 100 = 25%

Cost price 4 4

Margin = Gross profit, as a fraction 1; as a percentage 1 x 100 = 20%

Selling price 5 5

(b) (i) K
Opening bank balance (1,240)
Lodged 76,846
Payments made (75,040) balancing figure
Closing bank balance 566

(ii) K
Total lodged 76,846
Add : Expenses 5,700
Drawings 7,800
90,346
Less : Gift 6,000
Received from customers 84,346

K
(iii) Opening balance 1,676
Add : Sales 84,030 balancing figure
85,706
Less : Cash received 84,346
Closing balance 1,360

(iv) K
Payments made (i) 75,040
Less: Expenses K3,400
Drawings 2,000 5,400
69,640 = purchases on credit
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(v) K
Sales 84,030
Opening inventory K5,250
Purchases 69,640
74,890
Closing inventory 4,190
Cost of sales 70,700
Gross profit 13,330

(vi) K
Gross profit 13,330
Expenses (cash) 5,700
(bank) 3,400 9,100
4,230 4,230

(vii) Cost of sales + 20% = value of sales at ‘normal’ price

K
Cost of sales 70,700
Mark up (20%) 14,140
Sales at normal price 84,840
Actual sales 84,030
Thus reduction 810

2. (a) A business transaction is recorded by both a debit entry and a credit entry (also
referred to as ‘double entry’) to fully reflect the effects of the transaction on
the entity. Every transaction affects the entity in two ways. This is usually
referred to as the ‘dual aspect’. The two effects mean that the accounting
equation (assets – liabilities = capital) will apply consistently to the entity. For
example if expenses are paid in cash, the entity is affected by an increase in
the expenses and a reduction in cash. The increase in expense will cause a
reduction in profit, and therefore capital. Thus both assets and capital have
reduced, and the accounting equation will continue to apply.
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(b) (i) Tayanjana Mukhandiya

Income statement for the year to 30 June 2010
K K
Sales 205,117
Cost of sales
Opening inventory 11,629
Purchases 108,539
120,168
Closing inventory 13,664 106,504
Gross profit 98,613
Wages 33,552
Electricity 10,466 (9526 + 940)
Rent 6,000 (7200 – 1200)
General expenses 4,788
Depreciation 25,196
Movement in allowance 178 80,180
Net Profit 18,433

(ii) Current assets

K
Inventory 13,664
Receivables 18,265 (19885 – 1620)
Prepayment 1,200
Cash at bank 1,731
34,860

Capital
K
Opening balance 34,305
Profit for year 18,433
Drawings (29,800)
22,938

(iii) Tayanjana Mukhandiya

Balance sheet as at 30 June 2010
K K
Non-current assets (net) (125,980 – 25196 – 25196) 75,588
Current assets 34,860
Current liabilities (46570 + 940) 47,510
Net current assets (12,650)
62,938
40,000
22,938
62,938
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. (a) K K
Gross profit (no adjustment required) 157,846
Expenses (K157,846 – K51,024) 106,822
Less: Payments to partners 30,000 76,822
81,024
Net Profit

(b) K K K
Net profit per accounts Olanje Papaya 81,024
Less: Salary 18,000 12,000
Interest on capital (w) 10,000 5,600
28,000 17,600 45,600
Residual profit 35,424
Shared: Olanje (⅔) Paula (⅓) 23,616 11,808
51,616 29,408

Working(w):
Interest on capital Olanje K125,000 x 8% = K10,000
Payaya K70,000 x 8% = K5,600

(c) Olanje Papaya

K K
Balances at 1 May 2009 34,568 (23,741)
Salary 18,000 12,000
Interest on capital 10,000 5,600
Residual profit 23,616 11,808
86,184 5,667
Less drawings 15,000 15,000
Balances at 30 April 2010 71,184 (9,333)

(d) The value of total net assets equals the total value of the partners’ investment (i.e.
the total of the capital and current accounts). Thus:

Olanje Papaya
K K
Capital accounts 125,000 70,000
Current accounts 71,184 (9,333)
196,184 60,667 = K256,851

(e) The clauses relating to accounting matters are:

- As to capital; whether each partner should contribute a fixed amount or

otherwise.
- As to the division of profits and losses between the partners.
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- Whether the capitals are to be fixed, drawings and profits being adjusted on
current accounts or capital accounts.
- Whether interest on capital or on drawings, or both, is to be a llowed or
charged before arriving at the profits divisible in the agreed proportions.

- Whether current accounts (if any) are to bear interest, and if so, at what rate.

- Whether partners’ drawings are to be limited in amount.

- Whether partners are to be allowed remuneration for their services.
- The proper accounts shall be prepared at least once a year so that these shall
be audited.
- That the accounts shall be binding on the partners when duly signed.
- The method by which the value of goodwill shall be determined in the event
of any partner’s death or retirement.
- Method of determining amount due to deceased partner.
- Treatment of insurance premiums.

4. (a) Physical deterioration: through wear and tear and through erosion, rust, rot and
decay.

Economic factors: through obsolescence and inadequacy. The time factor, say for
assets which have a legal life fixed in terms of years e.g. leases and patents.
Depletion for assets of a wasting character such as natural resources from where
raw materials are extracted.

(b) (i) Land Buildings Machinery Total

K K K K
Cost brought forward 850,000 1,205,000 748,000 2,803,000
Additions at cost 68,000 145,000 213,000
Disposals ______ ________ (110,000) (110,000)
850,000 1,273,000 783,000 2,906,000

Opening depreciation - 289,200 356,000 645,200

Eliminated disposal (w) (53,608) (53,608
Charge for year (w) -___ 50,920 96,122 147,042
___-___ 340,120 398,514 738,634
Net book value 850,000 932,880 384,486 2,167,366

Workings:

Machine bought in January 2007. Thus depreciation for years ended 30

September 2007, 2008 and 2009 = 3 years.

2007 = Cost K110,000 x 20% = 22,000 depreciation for year

Thus NBV c/f = K88,000
2008 = b/f 88,000 x 20% = 17,600 depreciation for year
Thus NBV c/f = K70,040
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2009 = b/f 70,040 x 20% = 14,008 depreciation for year

Thus NBV c/f = K56,032
Total depreciation = 53,608

Depreciation charge:
Buildings cost K1,273,000 ÷ 25 years = K50,920 per annum

Machinery Cost K783,000

Depreciation K302,392 (356,000 – 53,608)
NBV K480,608 x 20% = K96,122 for year

(ii) Cost of machine K110,000

Depreciation to date of disposal 53,608
NBV at disposal 56,392
Proceeds 55,000
Loss 1,392

(iii) Depreciation is required to reflect the economic benefits derived from a

non-current asset during the period. The provision for depreciation is
required under the accruals (or matching) concept, as this will match the
cost of economic benefits with the revenue generated. This means that for
all assets which are consumed, depreciation must be provided. Freehold
land is therefore an exception to the rule that non-current assets must be
depreciated, since it is not consumed. It should be noted that this is
entirely separate to the issue of any increase in valuation.

5. Limbanani Political Association

Receipts and payments account for the year ended 31 December 2010
K K
Jan 1 Balance b/f 470,000 Election expenses 720,000
Dec 31 Subscriptions 835,000 Cost of premises 3,000,000
Donations 520,000 Legal expenses 105,000
Elections fund 850,000 3,105,000
Sale of securities 1,250,000 Less: mortgage 1,500,000
Interest received 35,000 1,605,000
Sale of literature 75,000 Building society payments 80,000
Overdraft c/d 615,000 Alterations and decorations 420,000
Office furniture 170,000
Agents salary 700,000
Office salary 350,000
Rent and rates 170,000
Meetings, etc 165,000
Stationery etc 150,000
________ Cost of literature 120,000
4,650,000 4,650,000
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Limbanani Political Association

Income and Expenditure Account
For the year ended 31 Decembe r 2010
K K K
Income
Subscriptions receivable 760,000
Interest on investments 35,000
795,000
Expenditure
Agent’s salary 650,000
Office salaries 350,000
Rent and rates 120,000
Stationery, postage and sundries 150,000
Meetings, etc 135,000
Cost of literature distributed 60,000
Less profit on sales 15,000
45,000
Interest on mortgage 45,000
Depreciation of office furniture 39,000

Excess of expenditure over income 1,534,000

(739,000)

(b) Limbanani Political Association

General fund K
Balance at January 1 2,580,000
Profit on sale of investments 250,000
Donations 520,000
3,350,000
Less: excess of expenditure over income for year 739,000
2,611,000
Election fund
Balance at January 1 15,000
Add donations 850,000
Less election expenses 865,000
720,000 145,000
2,756,000

6. (a) Payables ledger control

K K
(i) Discount omitted 20 Balance as stated 48,395
(ii) Daybook overcast 90 (iii) Cheques issued 9
Corrected balance 48,753 (iv) Invoice omitted 459
48,863 48,863
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(b) K
Total of listing as stated 46,644
(iv) Invoice omitted 459 +
(v) Elimination of incorrect balance 780 +
(v) Include correct balance 870 +
Restated listing 48,753

Listing agreed to balance on nominal ledger

(c) A payables Ledger reconciliation is carried out for the following reasons:
- to identify errors in the accounting records.
- to provide a corrected figure for inclusion in the final accounts.
- to calculate missing data if incomplete records are maintained.

(d) Receivables control account that focuses on customers as opposed to suppliers in the
case of payables.

(e) Control accounts are maintained to:

- Check the accuracy of postings

(if the balance on the control account agrees with the total of the balances on
the individual accounts in the personal ledger, we have some assurance that
postings have been correctly completed).
- Assist in locating errors
(if the control account balance is compared to the total of the balances in the
individual accounts in the personal ledger in a regular basis, there will be
fewer transactions to be checked when errors have been made).
- Provide an internal check/division of duties
(responsibility for specific personal ledgers – or sections of such ledgers – as
well as the posting of the control account can be allocated to different
individuals. The posting of the control account then acts as a check on the
postings to the personal ledgers).

7. (a) Users of final accounts, and their needs, include:

USER REASON
Owners to asses the performance of managers
Managers to understand the current position of the business, and to plan
future actions
Customers to assess the ability of the business to continue to supply goods or
services
Suppliers to assess the credit worthiness of the business
Lenders to assess the ability of the business to make the required
repayments
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Employees to assess career prospects and job security

(b) (i) A bank reconciliation is carried out to uncover and correct any errors in
the recording of payments made from the bank account and amounts
lodged to the bank account. It will also highlight any transactions initiated
by the bank which have not yet been recorded in the entity’s accounting
records.

(ii) The reconciliation statement will include the balance on the bank
statement, the balance on the ledger, the value of cheques issued but not
yet presented at the bank and the value of lodgements which have not yet
been processed by the bank.

(c) A provision is made when there is a degree of uncertainty relating to either the
amount which must be paid, or the date on which payment must be made. As a
provision is essentially a liability over which there is a degree of uncertainty,
prudence dictates that the best estimate of the amount which will eventually be
paid, should be recognized in the statement of financial position.

(d) First In, First Out (FIFO) whereby the first goods to be received are first to be
issued.
Last In, First Out (LIFO) whereby as each issue of goods is made they are sa id to
be from the last lot of goods received before that date. Where there is not enough
left of the last lot of goods, then the balance of goods needed is said to come from
the previous lot still unsold.

Average cost method (AVCO), whereby with each rec eipt of goods the average
cost for each item of stock is calculated.
(e) Direct materials
Direct labour
Direct expenses
Indirect manufacturing costs

END