“A” LEVEL ACCOUNTING

EXAM PREPARATION

VACATION QUESTIONS BOOKLET

PAPER 2

PAPER 3

The time is now, let us revise together

Tinofamba nevanofamba

TINOFAMBA NEVANOFAMBA Page 1

 INTRODUCTION TO ACCOUNTING
QUESTION 1

1. Explain the users of accounting information and their information needs. [10]

2. Define Business Ethics? [2]

3. List 2 advantages and 2 disadvantages of Business Ethics. [4]

4. Define the following terms:

a. Sole trader
b. Partnership
c. Private limited company.
d. Public limited company. [8]

QUESTION 2

1. Explain the following branches of accounting:

a. Financial accounting
b. Financial reporting
c. Cost accounting
d. Management accounting [8]

2. Write short notes on the following accounting concepts:

a. The historical cost convention

b. The concept of money measurement
c. The principle of substance over form
d. The realisation concept
e. The prudence concept
f. The matching (accruals) concept
g. The concept of materiality
h. The consistency concept
i. The going concern concept [18]

3. Complete the following statements with suitable words:

a . ----- concept states that the revenue and the expenses incurred to earn the
revenue must belong to the same accounting period. [1]

b. The concept that a business will continue to operate for the forseable future is
known as -------- [1]

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 DEPRECIATION QUESTIONS

QUESTION 1

The non-current asset register of Charmaine Mavhatu showed the following balances on
1 January 2018.
Cost Accumulated depreciation
$ 000 $000
Freehold land and buidings 1 200 400
Plant and equipment 640 210
Motor vehicles 275 135

Note [ Land cost $200 000; buildings cost $1 000 000]

The depreciation policy of the company is to provide for depreciation as follows:

Freehold land and buidings 2 % per annum on cost

Plant and equipment at 15% per annum on cost
Motor vehicles 20% per annum on cost

During the year ended 31 December 2018, the following transactions took place.

1. On 1 January 2018, the freehold property was professional revalued by Musendo

Power, chartered surveyors, at $1 800 000 of which $400 000 was attributable to the
land.
The buildings were estimated to have a further 25 years.

2. Plant and machinery: original cost $140 000, scrap value $5 000 and written down
value $40 000 was sold.

3. New plant and machinery was acquired at a cost of $240 000 on 1 April 2018.

4. Motor vehicles which had a cost of $35 000 were sold for $15 000 making a profit on
disposal of $5 000.

5. New motor vehicles were purchased on 1 July 2018 at a cost of $80 000.

Required

(a) For the year ended 31 December 2018, prepare:

(i) the disposal account of the motor vehicles account. [4]
(ii) a schedule of non-current assets as it would appear as a note in the published
accounts. [20]
(b) Explain why a business depreciates its non-current assets. [2]

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 QUESTION 2

Nancy Power has a fleet of private cars. The following information relates to his non-
current asset register.

Vehicle name Cost price($) Date of purchase

Mazda 36 000 1 January 2017

Corolla 40 000 1 July 2017
Honda 50 000 1 October 2018

The financial year end of the business is 31 December.

i. On 1 January 2020 Mazda vehicle was sold for $15 400 cash and replaced by
a Fun Cargo which was purchased from Ronald Ltd for $60 000 cash

ii. On 1 April the Corolla vehicle was traded in and replaced by an Altezza.
Ronald Ltd offered a trade in allowance of $17 400 and allowed Nancy one
month’s credit. The cost of the Altezza was $60 000.

All vehicles are depreciated at 20% per annum on cost.

a. For the year ended 31 December 2020 draw up:

i. Cars Account [6]

ii. Provision for depreciation of cars account [10]
iii. Disposal of cars account [7]

b. List any three methods of calculating depreciation. [3]

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 CONTROL ACCOUNTS
QUESTION 1

a) Outline three reasons of keeping control accounts. [6]

b) The following information was extracted from the books of William Noel for the year
ended 30 April 2001.
$
Purchases ledger balance at 1 May 2000 43 120
Credit purchases for the year 824 140
Credit purchases returns 12 400
Cheques paid to creditors 745 980
Cash purchases 8 940
Discount received on credit purchases 31 400
Credit balance transferred to sales ledger accounts 5 210

Draw up the Purchases Ledger Control Account for the year ended 30 April 2001. [6]

The total of the balances in Noel’s purchases ledger amounts to $67 660, which does
not agree with the closing balance in the Control account.

c) The following errors were then discovered.

a. Discount received had been overstated by $1 000.

b. A credit purchases invoice for $2 040 had been completely omitted from the
books.
c. A purchases ledger account had been undercasted by $100.
d. A credit balance of $850 in the purchases ledger had been sett off against a contra
entry in the sales ledger, but no entry had been made in either control account.
e. A payment of $1 450 had been debited to the creditor’s account but was omitted
from the bank account.
f. A credit balance of $3 210 had been omitted from the list of creditors.

i. Extract the necessary information from the above list and draw up an amended
purchases ledger control account for the year ended 30 April 2001. [4]

ii. Beginning with the given total of $67 660, show the changes to be made in the
purchases ledger to reconcile it with the new control account balance. Prepare it in
narrative form. [4]

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 QUESTION 2

The following information was extracted from the books of M. Shawn for the year ended 31
December 2013.
$
Sales ledger balance at 1 January 2013 50 000
Purchases ledger balance 1 January 2013 80 000
Credit sales for the year 700 000
Sales returns 15 000
Purchases returns 30 000
Receipts from trade receivables 580 000
Cash sales 19 980
Discount allowed 34 000
Debit balances transferred to purchases ledger 5 500
Bad debts written off 8 600

a. Draw up the sales ledger control account for the year ended 31 December 2013. [7]

The total of the balances in Shawn’s sales ledger amounts to $88 400, which does not
agree with the closing balance in the control account. The following errors were then
discovered.

1. Discounts allowed were overcasted by $4 000.

2. A credit sales invoice for $25 000 had been completely omitted from the books.
3. A debtors ledger account had been undercasted by $7 000.
4. A debit balance of $1 500 in the sales ledger had been set off against a contra entry in
the purchases ledger but no entry had been made in the control account.
5. A receipt of $5 000 had been credited to the debtors’s account but omitted from the
bank account.
6. A debit balance of $9 000 had been omitted from the list of debtors.

b. Extract the necessary information from the above list and draw an amended Sales Ledger
Control account for the year ended 31 December 2013. [7]

c. Prepare a statement amending the total of the sales ledger to agree with the new sales
ledger control balance. [6]

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 SUSPENSE ACCOUNTS
QUESTION 1

Cecilia Kubikwa extracted a trial balance on 31 December 2020 and it failed to balance. The
balance was entered in a suspense account. The provisional net profit was $17 400.

Subsequently the following errors were discovered,

1. A debit balance in the sales ledger of $700 had been omitted from the list of balances
included in the trial balance.

2. Bank charges of $300 appeared in the cash book but had not been posted to the ledger
account.

3. Credit sales of $1 000 to a customer had been correctly entered in the customer’s
account but omitted from the sales account.

4. A credit note from Agness, a supplier, for $400 had been correctly entered in the
Returns Outwards account but had been debited to Agness’ account as $480.

5. Goods bought from a supplier, costing $14 500, had been recorded in the books as
$15 040.

6. The purchase of some office furniture for $7 400, had been debited in the purchases
account. A depreciation of 20% on cost of that office furniture had not been provided.

7. Rent paid, amounting to $840, had been credited to the Rent Receivable account.

Required

a. The journal entries to correct the above errors. [narratives are not required] [8]
b. The suspense account, clearly showing the original difference on the trial balance.[6]
c. A statement showing corrected net profit for the year ended 31 December 2020. [8]

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 QUESTION 2
Laura’s trial balance at 30 April 2020 had a difference of $4 510, the total of the debit side
being larger by that amount. Laura’s Income statement showed a net loss of $2 300.
Subsequently the following errors were discovered.

1. Major repair work to a damaged motor car, in the sum of $2 780 had been debited in
error to the motor cars account as $2 870.

2. An invoice for the sale on credit to Addie of goods with a selling price of $500 had
been debited to Addie’s account but had not been entered in the sales day book.

3. The figure of inventory at 1 May 2019 had been entered in the trial balancr as $14 000
instead of $10 400 as shown in the inventory account.

4. An inventory sheet totalling $1 300 had been inadvertently omitted from the closing
inventory summary at 30 April 2020.

5. A credit balance of $160 in the sales ledger had been extracted as a debit balance.

Required
a. The journal entries required to correct the above mentioned errors in Laura’s
books. [9]

b. The suspense account showing the entries for the original difference and the
correction of errors. [5]

c. A calculation of the revised profit or loss of Laura’s business for year ended 30
April 2020. [6]

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 QUESTION 3
Musendo Power extracted a trial balance on 31 December 2019 and it failed to balance. The
trial balance totals were $11 942 (debit) and $12 428 (credit). The provisional net profit was
$4 200.

Subsequently the following errors were discovered,

1. The debit side of the wages account had been overcast by $100.

2. Discount received, $45 had been posted to the suppliers’ accounts but not to
the Discount Received account.

3. A sale of goods on credit to S. Choto for $120 had not been entered in the
books at all.

4. A cheque received from trade receivables, I. Musara, $62; had been posted to
the debit of her account.

5. The refund of an insurance premium, $30 had been debited in the cash book
but no other entry have been made.

6. The purchase of some office equipment for $590 had been debited to office
expenses.

7. Rent paid $400, had been credited to Rent Receivable account.

8. Goods returned to Power Sales Ltd, a supplier had been credited to Power
Sales Ltd’s account and debited to Purchases Returns account. The goods had
originally cost $200.

9. A credit balance in the purchase ledger, $15 had been omitted from the list of
balances extracted from that ledger. The total of the list had been included in
the trial balance as trade payables.

10. A purchase of office stationery, $110 had been debited to Telephones and
Postages account in error.

Required

a. The journal entries to correct the above errors. [narratives are not required] [10]
b. The suspense account. [6]
c. A revised profit figure for the year ended 31 December 2019. [10]

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 INCOMPLETE RECORDS
QUESTION 1

Bradley has been running a small business for many years without keeping full accounting
records. He provided the following information.

1 January 2021 31 December 2021

$ $
Fixtures and fittings 10 620 [check note 4]
Trade payables 3 750 4 950
Trade receivables 218 [check note 2]
Advertising prepaid - 600
Advertising prepaid 250 -
Inventory 6 120 [check note 3]

Summary of Bradley’s bank account for the year showed the following.

Receipts $ Payments $
Balance b/d 700 Trade payables 23 600
Cash banked [check note 1] 42 900 Rent 1 500
Balance c/d 1 400 Heating and lighting 2 200
Advertising 950
Drawings 10 300
Sundry expenses 920
Wages 5 530
45 000 45 000

Additional information

1. All cash bankings were banked, with the exception of $830 which had been used to
purchase new furniture for Bradley’s house.
2. Closing trade receivables were equivalent to one week’s sales. A quarter of this total
is considered doubtful and should be provided for. The shop was open for fifty weeks
in the year.

3. Closing inventory valued at selling price was $10 395. Mark up on cost price was
75%.

4. Fixtures and fittings are to be depreciated using the straight line method over a five-
year period. The fixtures had been owned for exactly two years.

REQUIRED

(a) Prepare Bradley’s income statement for the year ended 31 December 2021. [14]

(b) Prepare Bradley’s statement of financial position as at 31 December 2021. [7]

[Total: 21]

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 QUESTION 2

Tino Mashingaidze has been running a small business for many years without keeping full
accounting records. She provided the following information.

1 January 2022 31 December 2022

$ $
Land and buildings 120 000 140 000
Fixtures and fittings at valuation 15 000 18 000
Motor vehicles 12 000 9 000
Trade payables 17 550 16 900
Trade receivables 26 400 31 200
Rent owing 1 500 -
Inventory 28 000 32 000
Wages and salaries outstanding 5 600 3 800

Summary of Tino’s bank account for the year showed the following.

Receipts $ Payments $
Balance b/d 54 000 Trade payables 195 600
Trade receivables 120 800 Rent 6 000
Receipts from cash sales 150 000 Wages and salaries 14 500
Sale of non-current assets 1 150 General expenses 7 800
Purchase of non-current assets 29 000

Additional information

i. Before banking her receipts from cash sales Tino took $300 per week for her private
expenses. All other payments were made from the bank.

ii. During the year Tino also took goods costing $2 500 for her own use.

iii. Tino normally valued her inventory at cost but on the advice of a friend Rejoice
Munyati decided to value her inventory at 31 December 2022 at selling price. Her
mark up on inventory was 25%.

iv. Tino had borrowed $50 000 from his Father, Adbel Musendo on a long term basis on
1 January 2020. Since it was a family transaction she had not bothered to formally
record the transaction. They had agreed an interest of 10% per annum, but to date no
interest had been provided for or paid.

v. During the financial year ended 31 December 2022 the following non-current assets
transactions had taken place:

Purchases cash paid

$
Freehold land 20 000
Motor vehicles 3 000
Fixtures and fittings 6 000

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 Sales cash net book value
received at disposal
$ $
Motor vehicles 1 000 2 500
Fixtures and fittings 150 1 000

REQUIRED

(a) Prepare Tino’s income statement for the year ended 31 December 2021. [14]

(b) Prepare Tino’s statement of financial position as at 31 December 2021. [12]

[Total: 26]

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 NON PROFIT MAKING ORGANISATIONS
QUESTION 1

The Welcome Cricket Club has the following assets and liabilities
30 April 2011 1 May 2010
$ $
Equipment (at cost) 104 000 40 000
Equipment-depreciation provision 14 400 4 000
Cafe inventory 4 800 6 500
Cash at bank ? 12 800
Subscriptions in arrears 3 600 2 200
Subscriptions in advance 3 500 5 000
Cafe staff wages owing 4 000 500
Loan from cricket association 20 000 -
Loan interest ? -

The receipts and payments for the year ended 30 April 2011 are:

Receipts $ Payments $
Cafe revenues(sales) 90 000 Equipment 64 000
Subscriptions 34 000 Rent 21 000
Loan from cricket association 20 000 Heating and lighting 18 000
Donations 450 Wages of cafe staff 28 800
Ticket sales 14 560 Cash purchases for resale 36 000

Additional information

1. Wages are a direct cost of the cafe and are charged to the trading account.

2. Rent and heating and lighting are apportioned 40% to the cafe and 60% to the rest of
the club.

3. The loan from the cricket association was received on 1 November 2010. Interest is
payable at 10% per year.

4. Depreciation is charged to the income and expenditure account.

Required

a. Cafe Trading account for the year ended 30 April 2011.

b. Income and expenditure account for the year ended 30 April 2011.
c. The Statement of financial position as at 30 April 2011.

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 QUESTION 2
The treasurer of the Ocean Fishing Club has prepared the following receipts and payments
account for the year ended 31 March 2014.

$ $
Receipts Payments
Balance at 1 April 2013 6 570 Payments to trade payables 2 974
Subscriptions received 7 400 Shop wages 3 670
Donations 1 450 Administration expenses 2 790
Receipts from annual family day 2 300 New equipment 5 600
Shop takings 7 690 Repairs to equipment 2 500
Transfer to deposit account 7 000
Balance c/d 876
25 410 25 410

1 April 31 March
2013 2014
$ $
Shop inventory 975 859
Trade payables for shop 560 784
Deposit account 6 000 13 000
Equipment at cost 9 800 ?
Provision for depreciation 2 940 ?
Repairs to equipment owing 420 370
Shop wages due 250 195
Shop fittings at net book 750 640
value

Additional information
1. The donations are to be capitalised.
2. There are 350 members who pay an annual subscription of $20. At 1 April 2013, 30
members had paid in advance for the coming year but 24 members had not yet paid
for the year ended 31 March 2013. At 31 March 2014, 10 members had yet to pay
and some members had paid in advance but the treasurer has not yet calculated how
many.
3. Interest of 5% per annum is credited to the deposit account by the bank on 31 March
each year. This has not yet been entered in the books. The transfer of $7000 to the
deposit account was made on the 31 March 2014.
4. Equipment is depreciated at 15% per annum using the reducing (diminishing) balance
method. A full year’s depreciation is charged in the year of purchase.

REQUIRED
a. Prepare the shop trading account for the year ended 31 March 2014. [6]
b. Prepare the income and expenditure account for the year ended 31 March 2014. [8]
c. Prepare the statement of financial position at 31 March 2014. [11]
[Total: 25]

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 PARTNERSHIP ACCOUNTING

QUESTION 1

Adbel and Lincoln are in partnership sharing profits and losses equally. Adbel is entitled to a
salary of $8 000 per annum. On 1 January 2021, the partners had the following balances.

Capital accounts
Adbel 20 000
Lincoln 16 000 36 000

Current accounts
Adbel 6 000
Lincoln 4 000 10 000

On 1 July 2021, they admitted Power as a new partner and the profit and losses were to be
shared between Adbel, Lincoln and Power in the ratio 2:2:1. Power is to receive a salary of
$6 000 per annum.

It was agreed that from 1 July 2021, Adbel will transfer $4 000 from his capital account to a
loan account on which interest would be paid at 10% per annum.

Power brought his private car into the firm at a valuation of $10 000 and will be depreciated
over 4 years on the straight line basis, it will have a nill residual value.

No entries have been made to reflect the changes for the year ending 31 December 2021.

The following information is also available for the year ended 31 December 2021.

$
Sales (spread evenly throught) 160 000
Cost of sales 70 000
Rent and rates 20 000
Wages 28 000
General expenses 12 000

 Of the general expenses, $4 000 was incurred in the six month to 30 June 2021.
 All sales produce a uniform gross profit.

Required

a. The income statement and appropriation account of the partnership for the year ended
31 December 2021.

b. The partners’ current accounts as at 31 December 2021.

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 QUESTION 2

Maria and Rio have been in partnership for a number of years. They are considering
admitting a new partner.

The partnership year end is 31 December. For the period 1 January to 30 September 2021,
Maria and Rio did not have a partnership agreement.

The following information is available for the year ended 31 December 2021.

The balances on the partners’ accounts on 1 January 2021 were:

$
Capital accounts
Maria 52 000
Rio 38 000
Loan account: Rio 6 000

On 1 October 2021 they admitted Sarah as a partner. Sarah introduced capital of $45 000
from her personal savings. The partners agreed to make no adjustments for goodwill or the
revaluation of the partnership assets.

From 1 October 2021 a formal partnership agreement was prepared as follows:

1. Rio to be given interest on his loan at 8% per annum.

2. Interest to be given at 6% per annum on fixed capitals.
3. Rio to be given a partnership salary of $15 000 per annum.
4. Profits to be shared in the ratio Maria : Rio : Sarah, 2 : 1 : 2 respectively.

During the year ended 31 December 2021, the partnership made a profit of $82 500 before
taking into account interest on Rio’s loan. It was assumed that the profit before interest on
Rio’s loan had accrued evenly throughout the year.

REQUIRED

Prepare the appropriation account for the year ended 31 December 2021. [15]

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 QUESTION 3

Abdul, Barry and Chandra are in partnership sharing profits and losses in the ratio 3:2:1. No
current accounts are maintained.

The following information is available.

Statement of Financial Position at 30 April 2015

$ $
Assets
Non-current assets
Property 500 000
Equipment 132 000
Vehicles 150 000
782 000
Current assets
Inventories 38 000
Trade receivables 1 000
Cash and cash equivalents 66 000
105 000
Total assets 887 000
Capital
Abdul 441 000
Barry 294 000
Chandra 147 000
882 000
Liabilities
Current liabilities
Trade payables 5 000
Total capital and liabilities 887 000

Chandra decided to retire at the close of business on 30 April 2015 and the following was
agreed:

1. Goodwill was valued at $180 000 and was not to be retained in the books.
2. Chandra was to be paid $60 000 from the business bank account.
3. Any money still due to Chandra will be treated as a long-term loan to the new
partnership of Abdul and Barry.
4. Abdul and Barry will continue to trade and will share profits and losses in the ratio
3:2.

Required

(a) Prepare the partners’ capital accounts at 30 April 2015. [10]

(b) Prepare the opening statement of financial position of the new partnership of Abdul
and Barry at 1 May 2015. [10]

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 QUESTION 4
Jackie and Kim are in partnership sharing profits and losses in the ratio of 3:2. The following
statement of financial position was provided on 30 April 2012.
Statement of Financial Position at 30 April 2012
$ $ $
Non-current assets at net book value
Premises 120 000
Fixtures and fittings 72 000
192 000
Current assets
Inventory 30 000
Trade receivables 20 000
Bank 16 000
66 000
Current liabilities
Trade payables 12 000
Wages accrued 1 000 13 000
Net current assets 53 000
Net assets 245 000

Capital accounts
Jackie 141 000
Kim 94 000
235 000
Current accounts
Jackie 6 000
Kim 4 000 10 000
245 000
Maura is a long-term employee of the partnership. Her current annual salary is $16 500.
She recently inherited a sum of $60 000 and is considering an invitation from Jackie and
Kim to invest $50 000 in the business in return for becoming a partner on 1 May 2012.
If she agrees, the following terms would apply:

1. Maura is to be paid a partnership salary of $11 000 per year.

2. All partners are to receive interest on capital of 3% per year.
3. All partners are permitted to withdraw up to $10 000 per year.
4. All partners are to pay interest on annual drawings at 5% per year.
5. Maura is to receive a 10% residual share of profits and losses. The remaining profit
or loss is to be divided between the other partners in ratio to their capital.
6. Jackie and Kim will withdraw the full amount available to them while Maura will
withdraw $5 500.
The profit for the year ended 30 April 2013 is forecast to be $121 000.
Required
(a) Prepare an estimated profit and loss appropriation account for the year ended 30 April
2013, assuming Maura accepts the invitation to join the partnership. [14]
(b) Prepare Maura’s current account for the year ended 30 April 2013. [5]

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 QUESTION 5

Ball and Point were in partnership sharing profits and losses in the ratio 3:1. The Statement of
financial position for the partnership at 31 March 2015 was as follows:

Statement of financial position as at 31 March 2015

Capital accounts $ Non current assets $

Ball 30 000 Plant 37 000
Point 21 000 Cars 6 500

Current accounts Current assets

Ball 4 500 Inventory 18 600
Point 300 Trade receivables 9 300
Bank 2 400

Loan: Ball 6 000

Trade payables 12 000
73 800 73 800

The partners agreed to dissolve the partnership on 31 March 2015. The loan was
repaid, the trade payables were paid $11 700 in full and final settlement. Point took
over one car for $1 000 and the remaining assets realised the following amounts:

$
Plant 46 000
Cars 3 500
Inventory 17 100
Trade receivables 8 700

You are required to prepare the following ledger accounts for the dissolution of the
partnership:

a) The Realisation account [10]

b) The Bank account [5]
c) The Partner’s Capital Accounts [10]

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 QUESTION 6

Adam, Eve and Pinchmee are in partnership sharing profits and losses in the ratio 3:2:1.
At 31 December 2021 their statement of financial position was as follows:
$ $
Non-current assets 106 644
Current assets
Inventory 71 116
Trade receivables 42 655
Bank 24 863 138 634
245 278
Capital accounts
Adam 100 000
Eve 50 000
Pinchmee 25 000 175 000
Current accounts
Adam 24 000
Eve 10 000
Pinchmee 1 000 35 000
Less current liabilities
Trade payables 35 278
245 278

Adam decided to retire from the partnership on 1 January 2022

Accordingly it was agreed between the partners that:
1. The balances on their current accounts would be transferred to their respective capital
accounts.
2. Goodwill would be valued at $24 000, but no goodwill would be recorded in the
firm’s ledgers.
3. Fixed assets would be revalued ar $100 000, stock at $60 000 and a debtor for $240
would be written as bad.
4. Of the amount due to Adam $100 000 would be transferred to a Loan account and the
balance settled in cash immediately. A bank overdraft facility would be available for
this purpose, if necessary. The loan would be repayable to Adam in for equal annual
instalments, the first being due on 31 December 2022.
Eve and Pinchmee decided to form a limited company, Evenmee Ltd, to acquire the
partnership business on 2 January 2022. The company had an authorised share capital of
100 000 ordinary shares of $1 each and acquired the partnership assets and liabilities,
including the loan from Adam, at their revised book values. Shares were issued to Eve
and Pinchmee at par value in the ratio 3:2. An appropriate cash payment was made by one
of these partners to the other to adjust their rights, and the partnership receiving the
payment immediately used the cash to subscribe for further shares in Evenmee Ltd. at par.
Required
a) The capital accounts of Adam, Eve and Pinchmee showing the entries in respect of
Adam’s retirement and the acquisition of the business by Evenmee Ltd. [18]
b) The opening statement of financial position of Evenmee Ltd as at 2 January 2022. [7]

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 INVENTORY VALUATION

QUESTION 1

Audrey Power deals in only one product. Opening inventory on 1 January 2022, comprised
40 items which had a cost of $1 600. The following information shows details of purchases
and sales of curtains for January 2022.

Month Purchases Sales

Jan 1 150 units at $41 each
6 110 units at $50 each
8 60 units at $42 each
10 80 units at $52 each
15 130 units at $43 each
18 120 units at $53 each
22 140 units at $45 each
23 170 units at $54 each
29 60 units at $47 each
31 50 units at $55 each

Required
Calculate the profit for the month when closing inventory is valued on periodic basis using:
a. First in First Out (FIFO)

b. Weighted Average Cost (AVCO) [20]

c. Prepare income statements for the month of January 2022 when closing inventory is
valued using

i. FIFO

ii. AVCO [8]

d. According to IAS 2, how should inventory be valued? Give one reason. [2]

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 QUESTION 2

Adbel Ltd, a firm of wholesalers ,has an accounting year ended 30 April 1990.at the end of
April each year the storekeeper carries out stocktaking to ascertain the closing inventory
figures for the final accounts. However, this year he was suddenly taken ill ,and there was no
one else available who could understand the inventory records .Eventually stock is counted
on 14 may 1990,and is valued at 98 370.

The following information concerning inventory movements is available:

i. (a) The accounts department confirms that, during the period 1-14 May 1990, invoices
totaling $40 698 have been sent to customers. This figure includes carriage on
sales at 5%; $13 860 of goods were dispatched before 1 May.

(b) It is also known that credit notes have been issued to customers who returned
goods selling price $1 250 of which $960 relates to the period 1-14 May. The
1
firm’s mark up is 33 3 %.
ii. (a) The purchases department confirms that all orders already send to suppliers for
delivery during 1-14 May were goods totaling $22 890. However, this includes
goods list price $3 750 on which a trade discount of 20% is given, and orders for
$5 840 of goods which have not yet been received.

(b) It was noticed on May that one consignment of goods was of a different grade
from that ordered and these goods, invoiced by the supplier at $740 were made
from goods delivered between 1-14 May.

iii. The sales department borrowed inventory selling price $6 400 on 28 April for display
at an exhibition in which the firm is taking part. This has already helped to attract
orders of $12 500 for the firm’s products, although none of these goods have yet been
sent out or invoiced.

iv. It is also known that goods costing $1 200 were sent to a customer on a sale or return
basis. Of these, the customer has marked part of the consignment up by 25% and sold
it for $850 on 25 April, and returned the rest to Adbel’s inventory on 3 May.

v. It is discovered that the inventory has been valued using FIFO principles, whereas the
firm usually uses the LIFO method. The difference is $1 450 at a time when the prices
of similar inventories are rising.

Required

a. A detailed calculation of the closing inventory value for the final accounts. {20}

TINOFAMBA NEVANOFAMBA Page 22

 QUESTION 3
Musendo Ltd is a wholesale business that prepares its final accounts on 30 June every year.
The company has suffered serious employee problems which caused annual stocktaking to be
delayed and then carried out on 21 July 1992. The stocktake was not performed with its usual
efficiency.
At the conclusion of the stocktake the closing inventory figure was $23 790. The outcome of
this figure produced the following results at 30 June 1992:
$
Gross profit 157 000
Net profit 31 560
Net current assets 24 540
The management felt it was important that the correct closing inventory figure should be
determined, so a firm of expert stocktakers was engaged.
After a thorough investigation of the inventory and related records the following records were
revealed.:

i. Some inventory was found to be obsolete and was scrapped. This inventory cost $700
when purchased in January 1985.

ii. On 10 June 1992 goods costing $450 have been sent to Manu Mugova on a sale or
return basis. The customer had bought some of these goods immediately at an invoice
price of $180. No goods on a sale or return basis have been included in the closing
inventory.

All goods have a mark up of 20%

iii. Unused advertising material worth $1 120 had been incorrectly included in the
inventory of goods valuation.

iv. Carriage inwards relating to unsold inventory amounting to $120 had been incorrectly
debited to carriage outwards.

v. After checking the individual inventory sheets it was found that two were undercast
by $100 and $40 respectively and one was overcast by $60.

vi. The trading transactions that took place between 30 June 1992 and 21 July 1992 were:

$
Sales 2 970
Sales returns 480
Purchases 4 200
Purchases returns 340

The figures were used in the inventory calculations at 21 July 1992 but otherwise
were correctly entered in the accounts as transactions relating to the year 1992/93.

Required
a. A computation of the correct inventory value at 30 June 1992.
b. Statements to show the correct Gross and Net Profits for the year ended 30 June 1992
and the correct Net Current Assets at that date.

TINOFAMBA NEVANOFAMBA Page 23

 IMPAIRMENT OF ASSETS
QUESTION 1

The following balances were extracted from the draft financial statements of Adbel Plc on 31
January 2012:

$
Revenue 2 120 600
Purchases 1 180 800
Non-current assets 420 800
Trade receivables 205 400
Trade payables 91 100

Required
a. Calculate
i. Non-current asset turnover; [2]
ii. Trade receivables turnover ( in days); [2]
iii. Trade payables (in days); [2]
b. Comment on the relationship between trade receivables turnover and the trade
payables turnover. What is the probable effect of this relationship? [2]

Additional information
The non-current asset figure includes the net book value of an item of equipment which was
bought on 1 February 2010 at a cost of $50 000. This equipment had been subject to
depreciation at the rate of 20% a year on the reducing balance basis.

This equipment could now be sold on the open market for $26 000 although the company
would incur transport costs of $200.

If the company continued to use the equipment it could be used for 4 more years. The
associated revenues and costs (excluding depreciation) would be as follows:

Year Revenue Costs

$ $
1. 42 292 32 611
2. 34 444 25 364
3. 30 622 22 500
4. 24 810 18 221

The discounting factors used by the company are as follows:

Year Discounting factor

1 0.909
2 0.826
3 0.751
4 0.683

TINOFAMBA NEVANOFAMBA Page 24

Required

a. Calculate at 31 January 2012:

i. The equipment’s carrying amount; [3]
ii. Its fair value less cost to sell; [2]
iii. Its fair value in use. [9]

a. State :
i. The equipment’s recoverable amount at 31 January 2012; [2]
ii. The value at which the equipment should be included in the statement of
financial position at 31 January 2012. [2]

b. Calculate:
i. The impairment loss; [2]
ii. The correct value for total non-current assets in the statement of financial
position at 31 January 2012; [2]
iii. The cost of capital used by the company. [2]

c. (i) Suggest 2 possible reasons for impairment loss. [4]

(ii) Name the IAS which deals with impairment losses. [2]

[Total 38 Marks]

QUESTION 2

An impairment of non-current assets shows that an item of equipment with a cost of $95 000
and accumulated depreciation of $66 500 can now be sold for $25 000 after incurring selling
costs of $500.

The value in use of this item of equipment over the next three years is expected to be $26
000.

a. Discuss the impact of the impairment review on the profit for the year ended 31
December 2017. [4]

b. Name the International Accounting Standard (IAS) which deals with impairment
loss. [1]

TINOFAMBA NEVANOFAMBA Page 25

 CASH FLOW STATEMENTS
QUESTION 1

The Statements of financial position of Power plc showed the following

At 30 April 2011 At 30 April 2010

$000 $000 $000 $000 $000 $000
Non-current asset
Intangible
Patents 125 150

Tangible 3 430 3 173

3 555 3 323
Current assets
Inventory 124 106
Trade receivables 78 82
Cash and cash equivalents 58 -
260 188

Current liabilities
Trade payables 63 56
Taxation 28 24
Interest 4 14
Cash and cash equivalents - 95 42 136
165 52
3 720 3 375
Non-current liabilities
10% Debentures 2028 300 ----
3 420 3 375

Equity
Ordinary share of $1 each 2 000 1 000
Share premium 250 1 000
Revaluation reserve ---- 250
Retained earnings 1 170 1 125
3 420 3 375

Additional information
1. The income statement for the year ended 30 April 2011 showed interest
payable of $32 000 and taxation of $28 000. Dividends paid during the year
amounted to $30 000.

2. A bonus issue was made during the year which doubled the number of
ordinary shares in issue. An issue of debentures also took place.

TINOFAMBA NEVANOFAMBA Page 26

 3. At 30 April tangible non-current assets comprised:
2011 2010
$000 $000

Land at valuation 1 600 1 600

Buildings
Cost 1 200 1 200
Accumulated depreciation 168 144
1 032 1 056

Plant and equipment

Cost 1 125 729
Accumulated depreciation 327 212
798 517

4. During the year plant which had cost $92 000 was sold for $20 000.
Depreciation of $75 000 had been provided on plant.

REQUIRED

a) Calculate, for the year ended 30 April 2011,

i. The profit for the year attributable to equity holders [3]

ii. The profit from operations [4]

b) Prepare a statement of cash flows in accordance with the provisions of IAS 7 for the
year ended 30 April 2011. [25]

c) State two differences between an income statement and a statement of cash flows.[4]

d) i. Identify the reserves the directors selected to make the bonus issue. [2]

ii. Explain a reason for the selection. [2]

[Total: 40]

TINOFAMBA NEVANOFAMBA Page 27

 QUESTION 2
The statements of financial position for Wireless Limited are as follows:
31 December
2021 2020
$000 $000
Non-current assets
Land and buildings: Cost/valuation 1150 650
Accumulated depreciation 201 160
949 490
Plant and equipment
Cost 539 454
Accumulated depreciation 326 274
213 180

Total non current assets 1162 670

Current assets
Inventory 117 89
Trade receivables 135 103
Cash and cash equivalents – 37
252 229

Total Assets 1 414 899

Equity and Liabilities

Ordinary share capital ($1 shares) 600 400
Share premium 120 70
Revaluation reserve 80 –
Retained earnings 136 109
936 579
Non-current liabilities
12% debenture (2030) 150 200

Current liabilities
Trade payables 86 120
Bank overdraft 242 –
328 120

Total liabilities 478 320

Total equity and liabilities 1 414 899

The following information is also available.

1. The cost of land and buildings at 31 December 2020 comprised of land $250 000 and
buildings $400 000. The land, which is not depreciated, had been revalued to $330 000
on 1 July 2021.

2. On 1 March 2021, a final dividend for 2020 of $0.20 per share was paid.

TINOFAMBA NEVANOFAMBA Page 28

 3. An additional 200 000 ordinary shares were issued on 1 April 2021.

4. On 1 September 2021 an interim dividend of $0.10 per share was paid on all shares in
issue on that date.

5. During the year ended 31 December 2021, an item of plant and machinery, costing
$12 000, was sold for $3 000 at a profit of $2 000.

6. In the year to 31 December 2021, all interest due, $44 000, has been paid.

Required

Prepare the statement of cash flows for the year ended 31 December 2021 in accordance
with IAS 7. [25]

TINOFAMBA NEVANOFAMBA Page 29

 STATEMENT OF CHANGES IN EQUITY
QUESTION 1

The following information is available about Whittlesford plc on 31 December 2011.

$
500 000 ordinary shares of $1 each 500 000
Share premium 200 000
General reserve 70 000
Retained earnings 298 300

Further information is as follows:

1. The draft profit for the year ended 31 December 2012 was $122 800.
2. On 1 January 2012 property was revalued from $520 000 to $780 000.
3. On 31 January 2012 a rights issue of 1 share for every 5 held was made at a premium
of $0.25 each.
4. On 30 June 2012 an interim dividend of $0.08 per share was paid.
5. On 31 October 2012 a bonus issue of shares of 1 for every 4 held was made. The
directors decided to keep the reserves in their most flexible form.
6. On 31 December 2012 $40 000 was transferred to general reserve and a final dividend
of $0.12 per share was proposed.
7. On 5 January 2013 it was discovered that a customer who had owed $4200 at the
year end had been declared bankrupt. It was also discovered that goods in inventory at
the year end, with a cost of $3000, had been water damaged and could now only be
sold for $600.
8. On 17 January 2013 a burglary at the business premises resulted in the loss of
computer equipment, $15 700.

Required

(a) Explain what is meant by keeping reserves in their most flexible form. [3]
(b) Prepare the statement of changes in equity for Whittlesford plc for the year ended
31 December 2012. [13]
(c) Explain whether the event on 17 January 2013 was an adjusting event or a
non-adjusting event. [2]
(d) State three characteristics of an auditor’s report. [3]

Additional information
The auditor’s report for Whittlesford plc did not give an unqualified opinion on the financial
statements because $150 000 of investments included in non-current assets have become
worthless but have not been written off.

(e) Assess the effect that this auditor’s report will have on shareholders. [4]
[Total: 25]

TINOFAMBA NEVANOFAMBA Page 30

 QUESTION 2

The following information relates to Power Ltd as at 31 December 2020.

Equity Section $
Ordinary share capital ($1 shares) 500 000
Share premium 86 000
Revaluation reserve 72 000
Retained earnings 192 000
850 000

During the year ended 31 December 2021, the following transactions took place.

1. On 1 February, the final dividend of $0.08 per share was paid from the 2020 profit.

2. On 5 March, a bonus issue of one ordinary share for every ten ordinary shares held
was made. It is the policy of the company to keep its reserves in the most flexible
form.

3. On 1 June, 100 000 new ordinary shares were offered to the public at $1.80 each.
Power plc received subscriptions for 80 000 shares which were fully paid.

4. On 1 September, an interim dividend of $0.02 per share was paid on all shares held at
31 March 2021.

5. On 31 December, a final dividend of $0.09 per share was proposed on all shares held
at 31 December 2021.

Required

a. State one difference between a rights issue and a bonus issue of shares. [2]

b. Prepare the statement of changes in equity for the year ended 31 December 2021.
A total column is not required. [12]

TINOFAMBA NEVANOFAMBA Page 31

 MANUFACTURING ACCOUNT
QUESTION 1

JH Limited is a manufacturing business producing a single product. The transfer price of

finished goods to the income statement is cost plus a fixed percentage for factory profit. This
percentage has remained unchanged for many years.

The following information is available for the year ended 31 October 2017.
$
Prime cost 252 000
Work in progress
at 1 November 2016 28 000
at 31 October 2017 32 000
Inventory of finished goods at transfer price
at 1 November 2016 108 000
at 31 October 2017 96 000
Revenue 1 860 000
Factory overheads 461 000
Distribution costs 216 000
Administrative expenses 412 000
Finance charges 28 000
Provision for unrealised profitat 1 November 2016 18 000

The following information is also available.

1. Included in the distribution costs are:

$
Carriage inwards 18 000
Carriage outwards 34 000

2. Administrative expenses include an amount for buildings insurance of $60 000.

The following items relating to building insurance have not been adjusted:

 an outstanding unpaid invoice of $3000 for the year ended 31 October 2017
 a payment in advance of $1000 brought forward from the year ended 31 October 2016
 the allocation of 75% of the total amount to the factory.

Required

(a) Explain why a manufacturing business might prepare a manufacturing account as

part of its financial statements. [4]

(b) Prepare the manufacturing account for the year ended 31 October 2017 in as much
detail as possible. [8]

(c) Prepare the income statement for the year ended 31 October 2017. [10]

TINOFAMBA NEVANOFAMBA Page 32

 QUESTION 2

Florence and Praise decided to start manufacturing their own products in order to minimise
costs. The information below shows the firm’s balances at 31 December 2013.
$
Plant and machinery at cost 150 000
Provision for depreciation: plant and machinery(at 1 January) 8 000
Motor vehicles at cost 62 000
Provision for depreciation: motor vehicles(at 1 January) 6 000
Furniture and fittings at cost 10 000
Raw material purchases 210 000
Inventory(stock) at 1 January 2013:
Raw materials 32 500
Work in progress 24 000
Finished goods 52 800
Patent fees 5 800
Selling expenses 22 100
Factory salaries 12 000
Turnover (sales) 400 000
Capital: Randal 120 000
Power 140 000
Cash and cash equivalents 64 000
Lubricant oils 15 000
Notes:
1. Inventory(stock) at 31 December 2013
Raw materials $19 800
Work in progress $21 300
Finished goods (to be determined)
On 29 December 2013,a fire broke out in the warehouse and destroyed raw materials
valued at $11 000. The inventory was not insured.
2. No record was made in the books for $3 000 spent during the year on putting extra
headlights on the motor vehicles.
3. The firm’s depreciation policy was as follows:
Plant and machinery - 10% per annum reducing balance
Motor vehicles - 20% per annum straight line
The furniture and fittings were purchased on 2 January and their useful life is ten
years, scrap value $500.
4. Depreciation on motor vehicles is a factory expense whilst depreciation on furniture
and fittings is an administrative expense.
5. On 1 January 2013, $1 200 was owed for lubricants whilst $800 was outstanding at 31
December 2013.
6. Goods are transferred to the warehouse at a mark up of 10%.
7. The partnership maintains a provision for unrealised profit account. The balance on
this account was $4 800 on 1 January 2013 and $6 000 on 31 December 2013. The
rate of factory profit remained unchanged during the year.

Required
For the year ended 31 December 2013, the partnership
a) Manufacturing account, {16}
b) Statement of comprehensive income (profit and loss account) {9}

TINOFAMBA NEVANOFAMBA Page 33

 REDEMPTION OF SHARES
QUESTION 1
The Statement of Financial Position of Fictitious Ltd on 31 December 2012 appeared as
follows:
$
Non current assets 2 000 000
Current assets 600 000
2 600 000
Equity
Ordinary shares of $0.50 each 1 400 000
10% $1 Redeemable preference shares 200 000
Share premium 300 000
Retained earnings 500 000
2 400 000
Current liabilities 200 000
2 600 000
On 1 January 2013,it was decided to redeem all preference shares at $1.15 each. The shares
had originally been issued at $1.10 each. In order to provide funds for the redemption,
Fictitious Ltd issued a further 250 000 ordinary shares at 60 cents each.

Required
a. Prepare journal entries to record the above transactions. {8}
b. Prepare the Statement of Financial position of James immediately after the above
transactions are completed. {12}
QUESTION 2

Digits Ltd’s Statement of financial position at 30 April 2010 was as follows:

$000
Non-current assets 1 300
Net current assets 740
2 040

Ordinary shares of $1$ 1 200

10% preference shares of $1 300
Share premium account 200
Profit and Loss Account 340
2040
On 1 May 2010, before any further transactions had taken place, it was decided to redeem all
the preference shares at a premium of $0.30. The shares had been originally been issued at
$1.20 per share. In order to provide funds for the redemption, the company issued a further
100 000 ordinary shares at a premium of $0.25.

REQUIRED

Prepare Digits Ltd’s Statement of financial position as it will appear immediately after the
issue of additional ordinary shares and the redemption of the preference share capital. [18]

TINOFAMBA NEVANOFAMBA Page 34

 QUESTION 3

The Statement of financial position of Grasslands Limited as at 31 December 2015 was as

follows:
$
Equity and Liabilities
100 000 Ordinary shares of $2 each 200 000
75 000 5% Redeemable Preference shares of $1 each 75 000
Capital redemption reserve 60 000
Share premium 40 000
Asset replacement reserve 20 000
Retained earnings 115 000
510 000
Current liabilities
Trade payables 70 000
Bank overdraft 30 000
100 000
610 000

Non-current assets
Buildings 120 000
Plant and machinery 90 000
Motor Vehicles 80 000
290 000
Current assets
Inventory 220 000
Trade receivables 100 000
320 000
610 000
Additional information:
i. All redeemable preference shares were redeemed at a premium of $0.10 per share
using retained earnings.
ii. Buildings were revalued to $150 000.

iii. Trade receivables of $10 000 were declared insolvent.

iv. A bonus issue of one ordinary share for every ten held was made utilising equal
amounts from capital redemption reserve and the share premium account.
v. A rights issue of one ordinary share for every five held was made at $2.20 per
share.
Required
a. Draft the journal entries to record the given transactions. [9]

b. Redraft the statement of financial position as at 30 June 2016. [14]

TINOFAMBA NEVANOFAMBA Page 35

INTERNATIONAL ACCOUNTING STANDARDS
QUESTION 1

Write short notes on the following International Accounting Standards (IAS)

a. 1 Presentation of financial statements

b. 2 Inventories

c. 7 Statements of cash flows

d. 8 Accounting policies, changes in accounting estimates and errors

e. 10 Events after the reporting period

f. 16 Property, plant and equipment

g. 36 Impairment of assets

h. 38 Intangible assets

TINOFAMBA NEVANOFAMBA Page 36

 ACCOUNTING RATIOS
QUESTION 1

On 31 March 2016, the accountant of Shumi Power Ltd provided the following balances:

Debit Credit
$000 $000
Sales 900
Cost of sales 490
Operating expenses 30
Interest paid 10
Ordinary shares of $0,75 each 750
8% Preference shares of $1 each 100
7,5% Debentures 200
Interim ordinary dividend paid 4

Notes
1. The market price of each ordinary share was $1,50.
2. Corporation tax charged for the year was $22 000.
3. Ordinary dividends of $0,15 per share was paid.

Required
a. Prepared an Income Statement together with a Profit and Loss Appropriation Account
for the year ended 31 March 2016. [8]

b. Calculate, correct to two decimal places, the following ratios for the year ended 31
March 2016:

i. Net profit percentage

ii. Interest cover
iii. Earnings per share
iv. Price earnings ratio
v. Dividend cover
vi. Dividend yield [12]

c. i. How can a company use ratios to assess its own performance? [3]
ii. Why is return on capital employed an important measure of performance of a
company? [2]

TINOFAMBA NEVANOFAMBA Page 37

 QUESTION 2

Ticks Ltd Abel Ltd

Share capital: ordinary shares of $1.00 $1 000 000
ordinary shares of $0.25 $600 000
5% preference shares of $10 $400 000
8% preference shares of $1 $300 000
10% debenture stock 2005/6 $300 000 $180 000

Additional information for the year ended 31 March 2003:

Ticks Ltd Abel Ltd

Operating profit $360 000 $252 000
Dividend cover 5 times 7 times
Transferred to General Reserve $100 000 $60 000

Required
a) Prepare an extract of the Profit and Loss Account for the year ended 31 March 2003
for :
i. Ticks Ltd
ii. Abel Ltd [10]
At 31 March 2003 the market prices of the ordinary shares were as follows:
i. Ticks Ltd $1.60
ii. Abel Ltd $1.35

b) Calculate the following ratios for each company, showing all workings.
i. Interest cover
ii. Earnings per share
iii. Dividend paid per share
iv. Price earnings ratio
v. Dividend yield [10]
c) Compare and comment briefly on the rations for Ticks Ltd and Abel Ltd in (b) [10]

TINOFAMBA NEVANOFAMBA Page 38

 MARGINAL COSTING
QUESTION 1

Adbel Ltd manufactures a product called Twabam. The unit selling price and production
costs of Twabam are as follows:
$
Selling price 60

Direct materials 18
Direct labour 9
Variable production overheads 3

Fixed production overheads 18 000

Fixed selling and administration costs 45 000

Variable selling costs : 10% of annual sales revenue

Normal production : 15 000 units per year

The fixed production overheads are absorbed based on normal production.

2020 2021
Units Units
Production 18 000 13 000
Sales 13 500 15 000

There was no opening inventory on hand at the beginning of 2020.

Required
a. Marginal Costing Income Statements for 2020 and 2021, [10]
b. Absorption Costing Income Statements for 2020 and 2021, [10]
c. Prepare a statement to reconcile the profit in (a) and (b) for 2020 and 2021. [6]

TINOFAMBA NEVANOFAMBA Page 39

 QUESTION 2

Teltrox manufacturing company manufactures three products A; B & C from the same
material called Daiza. The marketing director plans to produce 1 500 units of A, 1 800 units
of B and 1 100 untis of C. The following information is available for the three products;

A B C
$ $ $
Direct material per unit 30 21 15
Direct labour hours per unit 15 10 5
Direct expenses per unit 15 9 7
60 40 27

Selling price per unit 100 60 45

All the three products are made from the same basic material which costs $3 per kg. Fixed
expenses amount to $50 000.
Teltrox manufacturing has failed to source all the materials required and can only
source 25 400kg.

Required
a. Define a limiting factor. [2]
b. Calculate contribution per unit. [3]
c. Calculate contribution per limiting factor. [3]
d. Rank the products according to profitability. [2]
e. Prepare a revised plan from your calculations. [6]
f. Calculate the net profit for the revised production. [9]

TINOFAMBA NEVANOFAMBA Page 40

 QUESTION 3

Musendo Ltd makes four styles of briefcase which all use the same type of labour and
materials. Budgetede data for the year ending 31 July 2018 is as follows:

Style of Briefcase Manager Executive Director Financier

Selling price $30 $40 $50 $60

Sales (units) 20 000 15 000 10 000 5 000

Unit variable costs $ $ $ $

Direct materials 12 14 18 19
Direct labour 8 10 10 12
Variable overheads 9 11 12 14

The fixed costs of $200 000 are split equally among the four production lines. Sales mix
remains constant by volume, that is of the total units sold, Manager 40%, Executive 30%,
Director 20% and Financier 10%.

Required

a. Calculate the number of each style of briefcase which must be sold so that Musendo
Ltd breaks even. [12]

b. Calculate the break even point in total sales value. [8]

Your new financial director has decided that your method of dealing with fixed costs is
unsuitable and suggests that you try another method which might help you with decision-
making.

c. Calculate profitability of each production line basing your apportionment of fixed

costs on the value of budgeted sales for the year. [4]

d. Calculate contribution for the year for each style of briefcase, based on total budgeted
sales. [4]

TINOFAMBA NEVANOFAMBA Page 41

 QUESTION 4

The Calton Company, a manufacturer of quality handmade pipes, has experienced a steady
growth in its sales for the past five years. Increased competition, however, has led the
managing director to believe that an advertising campaign will be necessary next year 2011 to
maintain the company’s present growth.

In preparing the next year’s advertising campaign, the accountant presented the following
data relating to 2010:

Variables Costs: $
Direct Labour (per unit) 8.00
Direct Materials (per unit) 3.25
Variable Factory Overheads 2.50
Total Variable Costs (per unit) 13.75

Fixed Costs $
Manufacturing 25 000
Marketing 40 000
Administrative 70 000
Total fixed costs 135 000

Sales Price Per Pipe $25.00

Expected Sales 20 000 units $500 000

The company has set the 2011 sales target at a level of $550 000 or 22 000 pipes.

Required:

Calculate the following:

a) The projected net profit for 2010. [5]

b) The break-even point in units for 2010. [3]
c) The net income for 2011 if an additional fixed marketing expense of $11 250 is to be
spent on advertising in 2011 (with all other costs remaining constant) in order to attain
the sales target. [5]
d) The break – even point for 2011 given the additional $11 250 advertising expenditure. [5]

TINOFAMBA NEVANOFAMBA Page 42

 ABSORPTION COSTING

QUESTION 1

Rejoice Power Ltd has three production departments in Zvishavane: Moulding, Assembly and
Paint Shop. There is also a service department: Stores.
Details of the departments and the budgeted overheads expenses for the six months to
31December 2007 together with data for Product Q are given below:

Departmental statistics for six months ending 31 December 2007

Moulding Assembly Paint Shop Stores
Area in square metres 7 000 8 000 3 000 2 000
Machinery at cost $65 000 $45 000 $30 000 -
No. of workers 30 40 20 10
No. of stores requisitions 600 500 400

Budgeted overheads for 6 months to 31 December 2007

$
Rent 90 000
Lighting and heating 23 000
Insurance of premises 6 000
Canteen costs 54 000

Machinery is depreciated at 30% per annum on cost.

All workers will work 35 hours per week and there will be 24 working weekends in the six
months to 31December 2007.

Actual results for the moulding department for the six months were as follows:

Actual overheads $79 228

Actual hours 26 300

Required

a. A table to show the apportionment of the factory overheads to the production

departments for six months to 31 January 2007. [14]

b. Calculate for each production department an hourly overhead rate, giving your answer
correct to two decimal places. [6]

TINOFAMBA NEVANOFAMBA Page 43

 QUESTION 2

Janty operates a small manufacturing business making a single product, product Aye. The
factory has two production cost centres and no service cost centres.

REQUIRED
(a) Explain what is meant by a cost centre. [2]

Additional information
Janty calculates an overhead absorption rate for each cost centre based on budgeted data. She
then uses this to charge overheads to products

Details of the budgeted information are:

Cost centre 1 Cost centre 2

Overheads $100 000 $180 000
Direct labour hours 10 000 3 600
Machine hours 2 000 45 000

REQUIRED
(b) Calculate a suitable overhead absorption rate for each cost centre. [4]

Additional information
The actual overheads incurred and hours worked for each cost centre during the year were as
follows:
Cost centre 1 Cost centre 2
Actual overheads $105 000 $172 000
Actual direct labour hours 10 100 4 000
Actual machine hours 2 400 47 000

REQUIRED

(c) Calculate the over absorption or under absorption of overheads for each department for
the year.
[4]
Additional information
Simon, a new customer, asks Janty to quote for an order of 500 units of product Aye. The
following information is available in respect of their manufacture.

Direct material 50 kilos at $2 per kilo

Direct labour – cost centre 1 5 hours at $12 per hour
cost centre 2 2 hours at $15 per hour
Machine hours cost centre 2 only 6 hours

Janty marks up the cost of an order by 100% to calculate the selling price for a quote.

REQUIRED
(d) Prepare a quote in as much detail as possible to show the total selling price. [8]

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 STANDARD COSTING
QUESTION 1

Kuchinei Manufacturing Limited produces one product.

The budgeted costs and revenues are as follows.

Units produced and sold 800 per month

Standard selling price $100 per unit
Standard direct materials 4 kilos at $6 per kilo
Standard direct labour 3 hours at $12 per hour

All overheads are fixed.

In April 850 units were produced and sold. Selling price was maintained at $100 per unit.
Actual costs were as follows.

Direct materials 3485 kilos costing $19 516 in total

Direct labour 2720 hours costing $35 360 in total

Required

(a) Prepare the original budget and the flexed budget for April to show total budgeted
contribution. [8]

(b) Calculate the actual total contribution achieved in April. [1]

(c) Prepare a statement to reconcile the contribution from the flexed budget in (a) with the
actual contribution from (b). [10]

(d) Suggest one reason why each of the following variances had arisen.

(i) Material usage variance [2]

(ii) Labour rate variance [2]

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 QUESTION 2

Kundai owns a business making blankets. He currently uses a standard costing system.

REQUIRED

(a) Explain the term standard costing. [2]

Additional information

For the year ending 31 August 2015 Kundai budgeted to sell 2 700 blankets at $40 each.
Each blanket requires 1.5 metres of material at $10 per metre and 30 minutes of labour. All of
his workforce are employed full time and paid $14 per hour.

For the year ended 31 August 2015 his actual sales were 2 700 blankets. He used 4 320
metres of material at a cost of $34 560 and 2 025 hours of labour were required at a cost of
$24 300.

REQUIRED

(b) Calculate the following variances for the year ended 31 August 2015:

(i) the material price and material usage variances [4]

(ii) the labour rate and labour efficiency variances. [4]

(c) Prepare a statement reconciling the budgeted costs with the actual costs for the year
ended 31 August 2015. [4]

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 QUESTION 3

Oscar runs a manufacturing business and operates a standard costing system.

The following information relates to the year ended 31 March 2019.

Budgeted Actual
Production (units) 7 500 7 300
Material usage 6 kilos per unit 42 500 kilos
Material cost $5 per kilo $230 000
Labour usage 4 hours per unit 32 000 hours
Labour cost $8 per hour $236 000

Required

(a) State:
i) two advantages of operating a standard costing system. [2]
ii) two disadvantages of operating a standard costing system. [2]

(b) Calculate the following variances:

(i) material price [2]

(ii) material usage [2]
(iii) labour rate [2]
(iv) labour efficiency [2]
(v) total labour. [1]

(c) Identify one possible reason for each of the following variances calculated in part (b):

(i) material price variance [1]

(ii) material usage variance [1]
(iii) labour rate variance [1]
(iv) labour efficiency variance. [1]

(d) Prepare a statement to reconcile for actual production the standard labour and material
costs with the actual costs. [8]

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 BUDGETS
QUESTION 1

Hunter Limited is preparing its master budget for 2018. Relevant data pertaining
to its sales, production and purchases budgets are given below.

1. Sales for the year are expected to total 210 000 units. Quarterly sales are expected to
be 15 %, 25 %, 35 % and 25 % of total sales respectively.
The unit selling price will be $70 for the first three quarters and $75 starting in the
fourth quarter.

Sales in the first quarter of 2019 are expected to be 10 % higher than the budgeted
sales volume for the first quarter of 2018.

2. Closing inventory of finished goods is maintained at 20 % of the next quarter’s

budgeted sales volume.

3. Each unit requires 2 kilograms of raw materials at a cost of $15 per kilogram.
Management desires to maintain raw materials inventory at 10 % of the next quarter’s
production requirements.

Assume the production requirements for the first quarter of 2019 are 115 000 kilograms.

(a) Define a master budget. [2]

(b) For each quarter of 2018, prepare:

(i) the sales budget, stating the units and revenue. [6]
(ii) the production budget, stating the units. [8]
(iii) the purchases budget, stating the kilograms and cost. [10]

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 QUESTION 2

C Limited is a small manufacturing company which operates a budgetary control system.

The following information is available:

1. The budgeted sales in units for the first five months of 2019 are expected to be:

Jan Feb Mar Apr May

3 500 4 000 4 750 3 750 4 250

2. The inventory of finished goods at 1 January 2019 is expected to be 10% of the

budgeted January sales.

The monthly closing inventory of finished goods is to be maintained at the same

percentage of the following month’s budgeted sales.

3. There is a maximum inventory holding of 450 units.

Required

(a) State two advantages and two disadvantages of operating a budgetary control system. [4]

(b) Prepare the production budget in units for each of the four months from January to
April 2019. [8]

Additional information

Each unit produced requires 3 kilos of raw material which is expected to cost $2 per kilo.
The opening inventory of raw material at 1 January 2019 is expected to be 200 kilos. The
closing inventory of raw material is expected to remain the same for January. It is then
expected to increase by 10% for February and a further 10% for March. After that it will
remain unchanged.

(c) Prepare the purchases budget in both kilos and dollars for each of the four months
from January to April 2019. [12]

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 QUESTION 3

The sales budget for Ruu Ltd for the six months to 30 November 2003 is as follows:

Month Units
June 600
July 800
August 1 000
September 900
October 980
November 1 020

Further information is as follows:

1. All units are sold for $60. Customers are allowed 1 month’s credit.
2. Monthly production of the units is equal to the following month’s sales plus 10% for
inventory.
3. Costs per unit are as follows:
Material 3 kilos
Cost of material $4.00 per kilo
Labour 2 hours
Labour rate of pay $8.00 per hour

Absorption rates
Variable overhead $14.00
Fixed overhead $3.50

4. Materials are purchased one month before they are needed for production and are paid
for two months after purchase.
5. Wages and variable overheads are paid in the following month.
6. The following information is to be taken into account:
i. Cash book balance at 30 June 2003 : $16 000;
ii. Inventory of finished goods at 31 July 2003 : $56 420.

Required

a. The following budgets for the month of August 2003 only.

i. Production budget (units)
ii. Purchases budget
iii. Sales budget

b. Calculate the cash book balance at 31 July 2003.

c. A cash budget for the month of August 2003 only.

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 QUESTION 4

(a) State three benefits of budgeting. [3]

Use the following information to answer questions (b) and (c)

Chings supplies the following budgeted information for the five months ended 31 December
2011:
Aug Sep Oct Nov Dec
$ $ $ $ $
Sales 69 000 72 000 87 000 102 000 129 000
Purchases 36 000 39 000 45 000 72 000 105 000
Rent 1 200 1 200 1 350
Wages 13 500 13 500 13 500 18 000 19 500
Sundry expenses 5 250 5 550 10 200 4 800 2 940
Provision for bad debt 3 450 3 600 4 350 5 100 6 450
Dep office furniture 1 350 1 350 1 350 1 350 1 350
Purchase of office equipment 50 000

Chings expects that:

(i) The cash balance on 1 October will be $2 010;

(ii) 10% of all sales will be on credit;
(iii) 10% of purchases will be for cash;
(iv) Trade receivables will settle their accounts in the month following sale;
(v) Trade payables will be paid two months after purchase;
(vi) Wages, rent and other expenses will be paid as incurred;
(vii) Inventory will be $21 000 on 1 October and $24 000 on 31 December.

(b) Prepare a Cash budget for each of the three months ending 31 December 2011. [14]
(c) Prepare a budgeted Income Statement for the three months ending 31 December 2011. [8]

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 CAPITAL BUDGETING
QUESTION 1

Two years ago Sandstone Ltd conducted market research at a cost of $16 000 to investigate
the potential market for new products. They are now considering two new products
developments, only one of which will be undertaken. The anticipated profitabilities of these
two separate projects are given below.

Project A Project B
$ $ $ $
Annual sales 80 000 100 000
Cost of sales 40 000 50 000
Administration costs 15 000 10 000
Depreciation 5 000 10 000
60 000 70 000
20 000 30 000

It is expected that the above will continue for each year of each project’s forecast life. The
capital cost for project A is $45 000 and for project B is $53 000.
The expected economic lives are
Project A 8 years
Project B 5 years
Depreciation has been calculated on a straight line basis, and assumes estimated scrap values
of $5 000 for Project A at the end of year 8, and $3 000 for Project B at the end of year 5.
All costs and revenue take place at the end of each year
The cost of capital is 12%
Extract from present value tables $1 @ 12%
Year 1 0,893 Year 5 0,567
Year 2 0,797 Year 6 0,507
Year 3 0,712 Year 7 0,452
Year 4 0,636 Year 8 0,404
REQUIRED

a. Calculate the payback period and net present value of each project [14]
b. State, with reasoning, which of the two projects you would recommend [5]
c. Briefly explain why net present value is considered a more meaningful technique
compared to payback when making capital expenditure decisions [4]
d. Explain how you have treated the original market research costs in relation to the
evaluation of the projects. [2]
[Total 25 marks]

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 QUESTION 2

The directors of Musendo Clothing Company are proposing to manufacture coats. They
anticipate that the coats would stay in fashion for the next 4 years.

This would require the purchase of additional equipment at a cost of $250 000 which would
be scraped after 4 years.

Sales are expected to be 4 000 coats in year 1. In years 2 and 3 the expected number of coats
sold will increase by 10% on the previous year but will fall to 3 500 in year 4.

The selling price of coats will be $80 in year 1, $90 in years 2 and 3 and $75 in the final year.

Variable costs will be $65 per coat for years 1 and 2, rising to $70 for years 3 and 4.

The company’s cost of capital is 10%.

The discounting factors are:

Year 1 0.909
2 0.826
3 0.751
4 0.683

Required

a. Calculate the net cash flows for each year [13]

b. Calculate the Accounting Rate of Return. [7]
c. Calculate the Net Present Value of the proposal. [11]
d. Advise the directors whether they should proceed with the proposal. [4]
e. (i) Explain what you understand by the Internal Rate (IRR). [2]
(ii) Identify how IRR could be used to appraise this proposal. [3]

[Total 40 Marks]

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 QUESTION 3

The directors of J Limited plan to buy a machine costing $550 000. The machine has a useful
life of four years with no residual value.

It is expected that the machine will generate a net cash inflow of $200 000 for each of the
first two years, followed by a decrease of 10% in year 3 and a further decrease of 10% in year
4. The cost of capital will be 10%.

The discount factors at 10% and 16% are

10% 16%
Year 1 0.909 0.862
Year 2 0.826 0.743
Year 3 0.751 0.641
Year 4 0.683 0.552

Required

(a) Explain what is meant by the term ‘cost of capital’. [2]

(b) Calculate for the proposed investment:

(i) payback period (in years and months) [2]

(ii) accounting rate of return (to two decimal places) [3]
(iii) net present value (NPV) [6]
(iv) internal rate of return (IRR) (to two decimal places). [8]

(c) Advise the directors whether or not the company should purchase the machine. Justify
your answer. [4]

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 QUESTION 4

The directors of Joloss plc intend to purchase an additional machine to manufacture one of
the new products. Two machines are being considered: Milligan and Bentine. The company
depreciates its machinery using the straight line method.

Joloss plc will borrow the money required to purchase the machine and pay interest of 10%
per annum on the loan.

Estimates for the machines are as follows:

Milligan Bentine
$ $
Cost of machine 100 000 130 000

Additional Receipts: Year 1 70 000 72 000

2 80 000 84 000
3 90 000 90 000
4 90 000 100 000

Additional costs Year 1 50 000 60 000

(see note) 2 60 000 70 000
3 65 000 75 000
4 70 000 80 000

Note: These costs include the charges for depreciation and interest on the loans.

Useful life of machine 4 years 4 years

Value at end of useful life nil nil

Present value of $1 10% 20%

Year 1 0.909 0.833
2 0.826 0.694
3 0.751 0.579
4 0.683 0.482
Required

(a) Calculate the net present value of each machine. (Base your calculations on the
cost of capital.) [18]

(b) State, with your reason, which machine Joloss plc should purchase. [2]

The directors require the machine to produce a return on outlay of not less than 25%.

(c) Calculate the internal rate of return on the machine you have selected in (b) to see
if it meets the required return on outlay. [5]

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