Examiners General Comments

INSIGHT

EXAMINERS GENERAL COMMENTS

BREACH OF EXAMINATION INSTRUCTIONS

IN SPITE OF THE EXAMINERS’ GENERAL COMMENT IN PREVIOUS EDITIONS OF THE “INSIGHT”, IT WAS OBSERVED THAT A NUMBER OF CANDIDATES HAVE CONTINUED TO BREACH EXAMINATION INSTRUCTIONS AS STATED BELOW:

A)BY ATTEMPTING MORE QUESTIONS THAN ALLOWED IN EACH PAPER; AND

B)BY ATTEMPTING MORE QUESTIONS THAN ALLOWED IN EACH SECTION.

INADEQUATE COVERAGE OF THE SYLLABUS

IT HAS BECOME MANIFEST THAT MANY CANDIDATES DO NOT COVER THE SYLLABUS IN DEPTH BEFORE PRESENTING THEMSELVES FOR THE EXAMINATION. CANDIDATES ARE THEREFORE ADVISED TO BE ADEQUATELY CONVERSANT WITH ALL ASPECTS OF THE SYLLABUS.

FOREWORD

This issue of INSIGHT is published principally, in response to a growing demand, as an aid to:

(i)Candidates preparing to write future examinations of the Institute of Chartered Accountants of Nigeria (ICAN) at an equivalent level;

(ii)Unsuccessful candidates in the identification of those areas in which they lost marks and need to improve their knowledge and presentation;

(iii)Lecturers and students interested in acquisition of knowledge in the relevant subjects contained therein; and

(iv)The profession in improving pre-examination and screening processes, and so the professional performance.

The answers provided in this book do not exhaust all possible alternative approaches to solving the questions. Efforts have been made to use methods, which will save much of the scarce examination time.

It is hoped that the suggested answers will prove of tremendous assistance to students and those who assist them in their preparations for the Institute’s Examinations.

CONTENTS PAGE

PRINCIPLES AND PRACTICE OF FINANCIAL ACCOUNTING

GOVERNMENT ACCOUNTING

QUANTITATIVE ANALYSIS

INFORMATION TECHNOLOGY

AT/101/PII.5 EXAMINATION NO:………………………………

ASSOCIATION OF ACCOUNTANCY BODIES IN WEST AFRICA

ACCOUNTING TECHNICIANS SCHEME

PART II EXAMINATION – MARCH 2010

PRINCIPLES AND PRACTICE OF FINANCIAL ACCOUNTING

Time allowed: 3 hours

Insert your examination number in the space provided above

SECTION A - Attempt All Questions

PART I MULTIPLE-CHOICE QUESTIONS (10 Marks)

1.The proportion which the current assets of a firm bears with the current liabilities is called?

1. Gearing ratio
2. Acid test ratio
3. Liquidity ratio
4. Assets and liability ratio
5. Working capital ratio.

2.The excess of the nominal value of a debenture issued over the cash received is called

1. Real value
2. Debenture discount
3. Debenture premium
4. Issued debenture
5. Debenture price.

3.The following are recorded in the profit and loss account EXCEPT

1. Debenture interest
2. Wages and salaries
3. Discount allowed
4. Commission receiver
5. Rent and rates.

4.Which of the following can result in the revaluation of the asset of a partnership firm?

1. When a partner is paid salary
2. When a partner earns bonus
3. When there is a change in the profit sharing ratio of the firm
4. When a partner contributed additional capital to the firm
5. When a son of a partner dies.

5.Prime cost is

1. Direct materials + Direct labour
2. Total production cost – Direct labour
3. Total variable overheads only
4. Total of all direct materials, direct labour and direct expenses
5. Direct materials + Cost of sales.

Use the information below to answer questions 6 and 7:

Gigabite Limited paid ¢850,000 to acquire the assets of a partnership firm valued as follows:

¢
Land and Building / 450,000
Equipment / 280,000
Stock / 400,000
Creditors / 195,000

6.What is the technical term given to the amount of ¢850,000 paid by Gigabite Limited?

1. Market value
2. Bought value
3. Capital
4. Purchase consideration
5. Average valuation.

7.Gigabite Limited will record ¢85,000 in its accounting record as ......

1. capital reserve
2. total assets
3. goodwill
4. total fixed asset
5. liquid assets.

8.The system of stock valuation which ensures that issues of stock are made from the latest receipts is known as ......

1. Last-in-first-out
2. First-in-first-out

Average cost pricing

1. First-in-first-priced
2. Last-in-last-out.

9.When a debt previously written-off is subsequently recovered, the accountant re-instates the debt by raising the following entry:

1. Dr. Cash a/c Cr. Debtors
2. Dr. Cash a/c Cr. Bad debt recovered
3. Dr. Debtors a/c Cr. Bad debt recovered
4. Dr. Debtors a/c Cr. Profit & loss a/c
5. Dr. Provision for bad debt Cr. Cash a/c.

10.The constitution that governs the relationship of partners in a partnership firm is called

1. Articles of association
2. The regulation
3. Memorandum of Association
4. Partnership resolution agreement

E.Partnership deed.

PART II SHORT-ANSWER QUESTIONS (30 Marks)

1.Inventories must be valued at ......

2.A company with a gearing ratio of 6:4 is said to be ...... company.

3.Give TWO bases on which the head office may transfer goods to a branch.

4.Working capital is calculated as ......

5.Where there exists no partnership agreement the partners must pay themselves equal salary (True or false).

6.What effect does losses have on the capital of a business?

7.State the double entry required if a company under-provides for tax in the previous year.

8.The formulae for Earnings Per Share (EPS) is ......

9.Preference shareholders receive ...... of dividend.

10.The difference between total assets and liabilities is referred to as ......

11.The excess of the cash received over the nominal value of preference shares issued is called ......

12.The amount by which the net asset of a business exceeds its purchase consideration is called ......

13.An agent is paid commission of 50% of net profit after charging such commission. If the profit of a business is N150,000 before commission, calculate the commission payable to the agent.

14.The depreciation method that applies a percentage to the cost of an asset each year until it is reduced to zero is called ......

15.Balance sheet is defined as ......

16. Define purchase Goodwill of a business.

17.State TWO circumstances that will give rise to the determination of goodwill in a partnership business.

18.The closing balance on the purchases ledger control account represents .....

19.Which accounting ratio is calculated to show the ability of a business to pay its debt when called upon?

20.According to the International Financial Reporting Standards, cash flow statements should be prepared under three main headings. State them.

21.State the TWO main methods used in the preparation of Cash Flow statement.

22.What is Authorised Share Capital?

23.What is a provision in accounting?

24.Give any ONE situation that will necessitate the revaluation of a partnership.

25.If company A sells goods to company B on sale or return basis, what is the effect of the closing stock of company B on the sales of company A?

26.What is the effect on profit if a company over-states its opening stock figures?

27.Write an expression to calculate the net realisable value of a stock.

28.Error of principles is where ......

29.Explain the term “dormant Partner.”

30.Another term for loan stock or loan capital is ......

SECTION B - Attempt any FOUR questions (60 Marks)

QUESTION 1

The Trial Balance as at 30 April 2008, given by your clerk is as stated below:

DEBIT
N / CREDIT
N
Share Capital / 1,000,000
Profit & Loss A/c / 5,648,800
Stock – opening / 1,251,900
Purchases / 15,444,500
Returns – Outwards / 257,250
Discount – Allowed / 114,300
Received / 412,600
Sales / 33,425,800
Electricity / 750,300
Rent / 1,249,200
Commission – Sales / 334,258
Selling & Distribution Exp. / 4,426,666
Admin. Expenses / 3,876,222
Finance charges: Bank charges / 1,671,290
Interest on loan / 2,100,000
Loan – XYB Bank / 10,000,000
Debtors & prepayments / 4,228,214
Creditors & Accruals / 875,000
6% Debentures / 2,000,000
Fixed Assets: Land / 525,000
Building / 4,252,000
Motor Vehicle / 3,000,000
Equipment / 1,774,800
Provision of depreciation - Building / 1,000,000
Motor vehicle / 1,442,300
Equipment / 234,500
50,647,450 / 50,647,450

Other relevant information:

(i) Closing stock N6,339,472.

(ii) Rent in the Trial Balance runs from 1/5/07 – 30/4/2010.

(iii) Provision for doubtful debt at 1%.

(iv) Provision for depreciation - Motor & Equipment 20%

Building 5%

(v) Debenture interest yet to be charged.

(vi) Electricity owing N40,500.

You are required to prepare:

(a) Extended Trial balance. (11 Marks)

(b) Journals for necessary entries. (4 Marks) (Total 15 Marks)

QUESTION 2

(a)Explain the following terms as defined in International Accounting Standards (IAS 16) – Accounting for Property, Plant and Equipment:

(i) Property, plant and equipment. (4 Marks)

(ii) Fair value (2 Marks)

(iii) Recoverable amount (2 Marks)

(iv) Improvements (4 Marks)

(b)List further disclosures that are sometimes made in the financial statements.

(3 Marks) (Total 15 Marks)

QUESTION 3

The following balances were extracted from the ledger of Sosoko Limited for the year ended 30 June 2008.

CFA
‘000
Stock of raw materials 01/07/2007 / 320
Work-in-progress 01/07/2007 / 146
Stock of finished goods 01/07/2007 / 1,400
Sales / 10,000
Purchases of raw materials / 3,500
Printing and stationery / 72
General expenses / 60
Other administrative expenses / 132
Factory rent / 80
Depreciation of delivery van / 500
Depreciation of plant / 668
Carriage inwards of raw materials / 150
Advertising expenses / 100
Bad debts / 85
Indirect wages / 1,000
Direct wages / 1,600
Direct expenses / 400

Additional information:

(i) Stock as at 30/06/2008 were:

CFA
Raw materials / 450
Finished goods / 1,800
Work-in-progress / 168

(ii)The following expenses are to be apportioned as follows:

Factory / Administrative & selling
Printing and stationery / ¼ / ¾
General expenses / 1/3 / 2/3

(iii)Direct wages outstanding as at 30 June 2008 were CFA 50.

Required:

Prepare the manufacturing, trading and profit and loss account for the year ended 30 June 2008. Show clearly the prime cost, the cost of production and gross profit and net profit. (15 Marks)

QUESTION 4

(a) Briefly state the contents of a value added statement. (3 Marks)

(b)Given below is the summarised information of Glotech Technologies Limited in respect of the year ended 30 June 2008.

L$
Salaries and wages / 3,918,000
Purchased materials used in production / 9,180,000
Turnover / 16,804,500
Company tax for the year / 510,000
Dividends to shareholders / 280,500
Services purchased / 1,810,500
Depreciation of fixed assets / 306,000
Loan interest paid and payable / 229,500

Using the above information, you are required to prepare the following:

(i)A value added statement showing the relevant percentage. (7 Marks)

(ii)A conventional profit statement of the Company. (5 Marks)

(Total 15 Marks)

QUESTION 5

The following balances were extracted from the books of Bongai Limited after the preparation of the trading accounts at 31 December 2007.

N
Share capital authorised and issued
1,000,000 N1 Ordinary shares / 1,000,000
200,000 10% N1 preference shares / 200,000
Stocks at 31 December 2006 / 5,240,750
Debtors and prepayment / 1,700,000
Creditors and accruals / 857,625
Bank balance / 487,250
10% Debenture / 1,000,000
General reserve / 8,250,000
Bad debts / 21,250
Gross profit for the period / 7,394,250
Wages and salaries / 1,762,500
Rates and insurances / 88,125
Postages and telephone / 38,750
Electricity / 76,000
Debenture interest (½ year to 30 June 2007) / 50,000
Directors’ fees / 156,250
Sundry expenses / 194,250
Vehicles (at cost N1,212,500) / 425,000
Office fittings and equipment (at cost N2,790,000) / 1,715,000
Land and buildings at cost / 8,262,500
Profit and loss account at 1 January 2007 / 1,515,750

The following information is also available:

(i)Office fittings and equipment are to be depreciated at 15% of cost and vehicles at 20% of cost.

(ii)A bill for N34,250 in respect of electricity consumed up to 31 December 2007 has not been entered in the ledger.

(iii)The amount for insurance includes a premium of N18,750 paid in December 2006 to cover the company against fire loss for the year 31 December 2006 to 31 December 2007.

(iv)Provisions are to be made for:

Directors’ feesN312,500

Audit feesN75,000 (10 Marks)

The outstanding debenture interest

(v)The directors have recommended that:

-N750,000 be transferred to general reserve

-the preference dividend be paid

-a 10% ordinary dividend be paid

You are required to:

(a)Prepare the income statement (profit and loss and appropriation accounts) for the period ended 31 December 2007. (8 Marks)

(b)A Balance Sheet (Statement of Financial position) as at that date. (7 Marks)

(Total 15 Marks)

QUESTION 6

Jemmy Enterprises has a branch in Zaso Town which trades on its own account. The following is a summary of the transaction of the branch for the year ended 31 December 2008.

¢
Goods from Head office / 240,000
Purchases from suppliers – credit / 202,500
Cash / 67,500
Sales - Credit / 495,000
Cash / 405,000
Cash received from Debtors / 420,000
Cash paid to creditors / 142,500
Expenses paid by Branch / 150,000
Expenses paid Head office for branch / 45,000
Cash received from Head office / 30,000
Cash remitted to Head office / 420,000

The branch prepares its own final accounts.

You are required to:

Record the above transaction in the ledger accounts with the branch. (15 Marks)

SECTION A

PART I - MULTIPLE CHOICE QUESTIONS

1.E

2.B

3.D

4.C

5.D

6.D

7.A

8.A

9.C

10.E

EXAMINER’S COMMENT

Many of the candidates scored above 50% marks in this part.

PART II - SHORT ANSWER QUESTIONS

1.the lower of cost and net realizable value

2.highly geared company

3.i)At cost

ii)At selling price by the branch

iii)At cost plus a predetermined percentage

4.Current assets less current liabilities

5.False

6.It decreases capital

7.Debit profit and loss appropriation account Credit IRS account

8.Earnings per share (EPS) = Net profit after tax and preference dividend

Number of ordinary shares issued

9.A fixed rate of dividend

10.Capital employed or shareholders fund

11.Premium on preference shares

12.Capital reserve

13.50% xN150,000

100% + 50% = N50,000

14.Straight line method

15.Balance sheet is the statement that shows the financial position of a business as at a particular time.

16.Purchase Goodwill is the excess of price or purchase consideration over the value of net identifiable assets acquired.

17.Where there is a change in profit or loss sharing ratio

• on death or retirement of a partner
• admission of a new partner
• dissolution of the partnership

18.Trade Creditors

19.Acid test ratio or liquid ratio

20.Operating activities, investing activities and financing activities

21.Direct method and indirect method

22.Authorised share capital is the maximum number of shares that company’s regulations or memorandum of association allows it to issue to the public.

23.Provision is an expenditure that has occurred but cannot be calculated with substantial accuracy.

24.a partner is admitted

a partner leaves the firm

there is a change in the profit and loss sharing ratio

25.No effect

26.The profit figure will decrease

27.Saleable value – anticipated cost before sale

28.Error of principles occurs where the wrong class of account is used

29.A dormant partner is a general partner who takes no part in the management of the firm.

30.Debenture

EXAMINER’S COMMENT

The candidates put up average performance generally in this part.

QUESTION 1 (LANDSCAPE TABLE)

JOURNAL ENTRIES

DR / CR
N / N
i / Dr. Debtors and prepayments / 832,800
Cr. Rent / 832,800
ii / Dr. Bad and doubtful debt / 42,282
Cr. Provision for doubtful debt / 42,282
iii / Depreciation (P & L a/c) / 1,167,560
Provision for depreciation – Motor vehicle / 600,000
Provision for depreciation – Equipment / 354,960
Provision for depreciation – Building / 212,600
iv / Interest on debenture / 120,000
Electricity / 40,500
Creditors and accruals / 160,500

EXAMINER’S COMMENT

The question on extended trial balance was attempted by 90% of the candidates and many of them put up poor performance. 80% of the candidates who attempted the question could not raise the required journal entries.

SECTION B

SOLUTION 2

a)(i)Property, plant and equipment are tangible assets that:

• are held by an enterprise for use in the production or supply of goods and service, for rental to others or for administrative purposes and may include items held for the maintenance or repair of such assets
• have been acquired or constructed with the intention of being used on a continuing basis, and
• are not intended for sale in the ordinary course of business

(ii)Fair value is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction.

(iii) Recoverable amount is that part of the net carrying amount of an asset that the enterprise can recover from the future use of the asset, including its net realisable value on disposal.

(iv)Improvements are expenditures that increase the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross carrying amount. Examples of these future benefits include:

• an extension in the assets estimated useful life
• an increase in capacity
• a substantial improvement in the quality of output or a reduction in previously assessed operating costs

Expenses on improvements should be added to the gross carrying amount.

b)The following are further disclosures in financial statements

• a reconciliation of the amounts of property, plant and equipment at the beginning and end of an accounting period showing additions, disposals, acquisitions through business combinations and other movements.
• the amount of payments on account of property, plant and equipment in the course of construction or acquisition.
• the carrying amount of temporarily idle property plant and equipment.

EXAMINER’S COMMENT

The question tests the candidates’ knowledge of IAS 16 – property, plant and equipment. 70% of the candidates attempted the question and many of them scored less than 50 marks.

SOLUTION 3

S O S O K O LTD

MANUFACTURING, TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 JUNE 2008

CFA / CFA
‘000 / ‘000
Opening stock of raw materials / 320
Purchases of raw materials / 3,500
Carriage inwards / 150 / 3,650
3,970
Less closing stock of materials / 450
Cost of materials used / 3,520
Add direct cost:
Wages / 1,600
Add owing / 50
1,650
Direct expenses / 400 / 2,050
Prime cost / 5,570
Factory overheads:
Factory rent / 80
Depreciation – plant / 668
General expenses (60 x 1/3) / 20
Printing & stationery (¼ x 72) / 18
Indirect wages / 1,000 / 1,786
7,356
CFA / CFA
‘000 / ‘000
Add work-in- progress at 01/07/07 / 146
Less work-in-progress at 30/06/2008 / 168 / (22)
Cost of production / 7,334
Sales / 10,000
Less cost of sales:
Opening stock of finished goods / 1,400
Add cost of production / 7,334
8,734
Less closing stock of finished goods / 1,800 / 6,934
Gross profit / 3,066
Less: General, selling and administrative expenses
Printing and stationery (72 x ¾ ) / 54
General Expenses (60 x 2/3) / 40
Other administrative expenses / 132
Depreciation – delivery van / 500
Advertising expenses / 100
Bad debts / 85 / 911
Net profit / 2,155

EXAMINER’S COMMENT

The question in manufacturing, trading profit and loss account was attempted by 95% of the candidates and they put up good performance. The only pitfall is their inability to determine prime cost and cost of production.

SOLUTION 4

a)

• Turnover
• Bought out materials and services used in production
• Value added
• Employees pay and contributions
• Government company tax
• Interest on borrowing
• Dividend to shareholders
• Depreciation
• Profit

bi)GLOTECH TECHNOLOGIES LTD

VALUE ADDED STATEMENT FOR THE PERIOD ENDED 30 JUNE 2008

N / %
Turnover / 16,804,500
Bought out materials and services used in production / 10,990,500
Value added / 5,814,000 / 100
Applied to
Employees pay and contribution / 3,918,000 / 67.39
Government – company tax / 520,000 / 8.77
Providers of capital
Interest on borrowing / 229,500 / 3.95
Dividend to shareholders / 280,500 / 4.83
Retained in business
Depreciation of fixed assets / 306,000 / 5.26
Profit to reserve / 570,000 / 9.8
5,814,000 / 100

(bi)GLOTECH TECHNOLOGIES LTD

CONVENTIONAL PROFIT STATEMENT FOR THE PERIOD ENDED 30JUNE 2008

N / N
Turnover / 16,804,500
Bought out materials used in production / 9,180,000
Salaries and wages / 3,918,000
Bought out services / 1,810,500
Depreciation of fixed assets / 306,000
Loan interest / 229,500 / 15,444,000
Profit before tax / 1,360,500
Taxation / 510,000
Profit after tax / 850,500
Dividends / 280,500
Retained profit of the year / 570,000

EXAMINER’S COMMENT

The question which tests the candidates’ knowledge in preparation of value added statement was attempted by 60% of the candidates. Many of them scored above 50 marks, while few candidates lack the understanding of the difference between value added statement and cash flow statement in part (a) of the question.

SOLUTION 5

BONGAI LIMITED

PROFIT AND LOSS AND APPROPRIATION ACCOUNT FOR THE PERIOD ENDED

31 DECEMBER 2007

N / N
Gross profit for the period / 7,394,250
Less:
Bad Debts / 21,250
Wages and Salaries / 1,762,500
Rates and insurance / 88,125
Postages and telephone / 38,750
Electricity / 110,250
Debentures interest / 100,000
Directors’ fees / 468,750
Audit fee / 75,000
Sundry expenses / 194,250
Depreciation:
Office fittings / 418,500
Vehicles / 242,000 / 3,519,875
Net profit for the period / 3,874,375
Profit and loss account at 31 Jan 2007 / 1,515,750
Profit available for distribution / 5,390,125
Dividend proposed:
10% ordinary / 100,000
10% preference / 20,000 / 120,000
Transfer to general reserve / 750,000
Undistributed profit at 31 Dec 2007 / 4,520,125
5,390,125

BONGAI LIMITED