STRICTLY CONFIDENTIAL

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2007 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 1: ACCOUNTING/1

WEDNESDAY 6 JUNE 2007 TIME ALLOWED : 3 HOURS

9.00 AM - 12.-- NOON

SUGGESTED SOLUTIONS
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1. (a) TRIAL BALANCE

Dr Cr
K K
Cash 15,490
Capital 180,000
Land & Building 130,000
Insurance 36,000
Accounts receivable 17,890
Accounts payable 23,814
Office equipment 5,400
Advertising exp 630
Sales commission 10,640
Telephone expenses 144
Salary expenses 7,100
Drawings 1,800 ______
214,454 214,454

(b) INCOME STATEMENT

Mamangidwe Properties Income Statement for the two months ended

October 2006_____________________________________________

K K
Revenue:
Sales commissions earned 10,640

Expenses:
Advertising exp 630
Salaries 7,100
Telephone expenses 144
Insurance expense (36000 ÷ (20 x 12)) x 2 300
45
Depreciation expense
(8,219)
Total expenses
2,421
Net Income
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WORKINGS

(i) Cash transactions Add Deduct

Deposit 180,000
Land and buildings 141,000
Insurance 15,000
Land sale 1,500
Creditors 3,000
Newspaper advertising 360
Commission 2,250
Salaries 7,100
Drawing ______ 1,800
183,750 168,260 15,490

(ii) Land and buildings K141,000 - K110,000

(iii) Accounts receivable

Land 11,000 less 1,500 9,500
Commission 8,390
17,890

(iv) Accounts payable

Insurance 21,000
Office equipment 5,400
Payments made (3,000)
Advertisement 270
Telephone 144
23,814

(v) Advertising 360 + 270 = 630

(vi) Sales commission 2,250 + 8,390 = 10,640
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2. (a) Purchases Ledger Control Account

K K
Bank 20,420 Bank/Cash (November) 8,900
c/d 30 November 5,330 Suppliers (November) 16,850
25,750 25,750
b/d 5,330

Sales Ledger Control Account

K K
b/d 1 November 11,680 Bank/Cash (November) 15,740
Credit sales (November) 30,980 c/d (November) 26,920
42,660 42,660
b/d 26,920 _______

(b) Returns outwards represents an organisation returning goods, previously

purchased to a supplier. It should appear in the purchases ledger control account
as a debit entry.

Returns inwards represents an organisation receiving goods back which had

previously been sold, because they were faulty or inappropriate for some reason.
It should appear in the sales ledger control account as a credit entry.

(c) They represent the total for the detailed individual accounts and they make
reconciliation of all the accounts easier and quicker.

(d)
(i) Error of original entry Invoice amount K5350 recorded wrongly as
K535 but double entry observed correctly
throughout

(ii) Error of principle K25000 repairs to motor vehicle recorded in

m/vehicles account

(iii) Error of commission Purchases of K1m from X credited to Y’s

account

(iv) Error of omission An entry totally omitted from the books such
as K13,500 credit sale to Kim not debited to
Kim nor credited to sales account

(v) Complete reversal of entries Debit entry credited and credit entry debited
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(vi) Compensating errors Cast error of equal amount on both the debit
and corresponding entry

(vii) Transposition error Individual characters in a figure put in wrong

sequence but double entry correctly observed.
K71,600 recorded as K61,700

3. (a) Paulendo Enterprises:

Cash Book
K’000 K’000
2006 2006
May 1 Balance b/d 320 May 10 Cashflow 110
16 Ferries Ltd 160 20 Thamangirani 90
24 Jet Ltd 140 28 Couriers Trading 180
31 Coach Trans 470 30 Worldlinkers 200
31 Speedliners 90 31 Balance c/d 600
1,180 1,180
1 June Balance 600
This means that Paulendo has K600,000 of cash resources in the company

(b) Bank Statement – Balances

2006 K’000
May 1 Balance b/d 320
12 Less 110 210
16 Add 160 370
23 Less 90 280
24 Add 140 420
28 Less 180 240
31 Add 90 330

The balance of K330,000 implies that the bank is keeping this amount for its
customer, Paulendo. This amount is like a liability to the bank and is payable to
the customer on demand.
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(c) Bank reconciliation as at 31 May 2006

K’000
Balance as per cash book 600
Add unpresented cheque 200
800
Less Bank lodgement not on statement (470)
Balance per bank statement 330

(d) (i) The cheque will be dishonoured by the bank/referred to the drawer.

(ii) Zobanduka
K 2006 K
2006 Balance b/d 55,500 Bank 55,000
Balance c/d 500

Bank
K
2006 Paulendo 55,000

After recording the dishonoured cheque, the accounts would be:

Zobanduka
K 2006 K
2006 Balance b/d 55,500 Bank 55,000
Balance c/d 500
Balance c/d 500
Bank : cheque
dishonoured 55,000

Bank account
K
2006 Zobanduka 55,000 2006 Zobanduka
Cheque dishonoured 55,000

Once again Zobanduka is showing as owing the business K55,500.

4. (a) (i) Between debtors and bank.

(ii) Between creditors and bank overdraft.
(iii) The placement is dependent on the liquidity of the items.
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(b) Rent Receivable

K K
2006 2005
Feb 28 Profit & loss 4,800 June 4 Bank 1,200
September 6 Bank 1,200
December 9 Bank 1,200
2006
February 28 Accrued c/d 1, 200
_____
4,800 4,800
2006
March 1 Accrued b/d 1,200

(c) The telephone expenses for the year ended 28 February 2006 are:
K
1 March – 31 March 2005 (no telephone) 0
1 April – 30 June 2005 2,350
1 July – 30 September 2005 2,720
1 October – 31 December 2005 3,340
1 January – 28 February 2006 (two months = 2/3 x K3,600) 2,400
10,810

On the 28th February 2006, there is no telephone bill received, however it would
be wrong to ignore the telephone expenses accrued for January and February
2006. Therefore an accrued charge of K2,400 (2/3 x 3600) should be made. The
residual accrued charge will also appear in the balance sheet of the business as at
28 February 2006 as an accrual under current liability.

(d) The accruals concept, also known as matching concept, is used to recognize the
fact that expenditure which is used to generate revenue for a particular period
should be charged in the relevant period. Profit (or loss) is then computed by
matching the revenue (generated) and expenditure (incurred) for the period. Cash
receipts and payments during the period are not relevant for this purpose.
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5. (a) Mphulupulu Manufacturing, Trading and Profit and Loss Account

for the year ended 31 August 2006

K K
Stock of raw materials 1.9.2005 8,565
Add purchases 39,054
47,619
Less stock of raw materials 31.8.2006 9,050
Cost of raw materials consumed 38,569
Manufacturing wages (45470 + 305) 45,775
Prime cost 84,344
Factory overhead expenses:
Factory lighting and heating 2,859
General expenses: factory 5,640
Rent of factory 4,800
Depreciation: machinery 2,000 15,299
Production cost of goods completed c/d 99,643

Sales 136,500
Less cost of goods sold:
Stock of finished goods 1.9.2005 29,480
Add production cost of goods completed b/d 99,643
129,123
Less stock of finished goods 31.8.2006 31,200 97,923
Gross profit 38,577
Less expenses:
Office salaries 6,285
General expenses : office 3,816
Office rent (2200 – 108) 2,092
Office heating and lighting 1,110
Sales reps’ commission 7,860
Delivery van expenses 2,500
Depreciation : office equipment 1,500
Premises 1,000 26,163
Net profit 12,414 __
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(b) Mphulupulu
Balance sheet as at 31 August 2006
Cost Depreciation NBV
K K K
Fixed assets
Premises 50,000 11,000 39,000
Machinery 50,000 19,500 30,500
Office equipment 15,000 5,500 9,500
115,000 36,000 79,000
Current Assets
Stocks : Finished goods
Raw materials 31,200
Debtors 9,050
Prepaid expenses 28,370
Bank 108
13,337
Less current liabilities 82,065
Creditors
Expense owing 19,450
Net current assets 305 19,755

Capital 62,310
Balance 1.9.2005 141,310
Add net profit
137,456
Less Drawings 12,414
149,870
8,560
141,310

6. (a) (i) No asset. M Ltd has no control over the hospital and it is hard to believe
that there is a future economic benefit as the company has to pay for its
employees like any other patients.

(ii) There is a liability, depending on whether the pollution is a danger to the

public and creates a legal obligation to do the repairs. If there is such a
liability, it might be possible to set off the sale proceeds of K6 million
against the costs of cleaning up K8 million, giving a net obligation to
transfer economic benefits of K2 million. If there is no obligation (legal
or constructive) then there is no liability.
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(iii) No liability to P Ltd. The salary is paid as a result of the finance director’s
work over the next five years. There is no past event as the payment of
K300,000 per year results from his services provided to the company.

(iv) This is an intangible asset to Q Ltd. There is a past event, control and
future economic benefits.
(v) For R Ltd inherent goodwill is not an asset, because there are problems of
measurement and control. However, for purchased goodwill, there is an
asset since there has been a past transaction to create goodwill, the
company will receive future economic benefits from having goodwill.

(b) The following is a list of typical transactions affecting the business.

(i) The purchase of goods on credit.

- The supplier’s invoice would be the original document.

- The original entry would be made in the purchase day book.
(ii) Refunds to credit customers on return of faulty goods.

- The usual documentation is a credit note, occasionally, however, a

customer may himself raise a debit note. (note these are credit
customers, they did not pay in cash so there will be no cash
refunds).
- The book of original entry would be the sales return book.
(iii) Till point sale of groceries at your local supermarket.

- The original document would be a sales voucher or cash sale.

- The original entry would be in cash book (NOT sales day book).

(iv) Payment towards refreshments by business to entertain clients out of petty

cash.

- The original documents for the data would be receipts and a petty
cash voucher.
- The transaction would be entered in the petty cash book.

7. (a) Acid test or quick ration: A ratio comparing current assets less stock with current
liabilities. It is a type of liquidity ratio. Examples are:

For current assets Total current liabilities Stock Acid test ratio

(i) 1,000,000 800,000 200,000 1:1

(ii) 100,000 80,000 40,000 0.75:1
(iii) 10,000 2,500 2,500 3:1
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(b) Transposition error.

Is one type of errors that do not affect the trial balance agreement. This is where
characters within a number are entered in the wrong sequence. For example:

(i) Payment of K319 recorded as K139.

(ii) A credit purchase from ICL costing K56 entered as K65.
(iii) A drawing of cash by proprietor of K6,226 posted as K2,662.

(c) Day books/books of original entry also known as books of prime entry or
journals. Books in which credit sales, purchases and returns inwards and
outwards of goods are first recorded. The details are then posted from the day
books to the ledger accounts. Examples are:

(i) Sales day book

(ii) Purchases day book
(iii) Return inwards day book
(iv) Returns outwards day book
(v) Cash book
(vi) The Journal if term ‘day book’ is used or general journal.

(d) Real accounts.

Are a type of (impersonal) accounts and are the ones in which possessions are
recorded. Other types of accounts being nominal accounts and personal accounts.
Examples:

(v) Buildings
(vi) Machinery
(vii) Fixtures
(viii) Stocks/inventory.

(e) Depletion unit method is a type of depreciation method, used for assets of a
wasting nature. For example if a quarry was bought for K50,000 and it was
expected to contain 10 tonnes of saleable materials, then for each tonne taken out
we would depreciate it by K5,000 i.e. K5,000 ÷ 10 = K5,000.

Similarly for
Depreciation
Purchase price Tonnage per tonne_
K K
(i) 1,000,000 200 5,000
(ii) 6,000 1 6,000
(iii) 40,000 5 8,000
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This can be shown as

Cost of fixed asset_________ x No of units taken in a period

Expected total contents in units

END