THE INSTITUTE OF CHARTERED ACCOUNTANTS

OF NIGERIA

MAY 2012 FOUNDATION EXAMINATION

Question Papers

Suggested Solutions

Plus

Examiners’ Reports
 PATHFINDER

FOREWORD
This issue of the PATHFINDER is published principally, in response to a growing demand
for an aid to:

(i) Candidates preparing to write future examinations of the Institute of Chartered

Accountants of Nigeria (ICAN);

(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 herein; and

(iv) The profession; in improving pre-examinations and screening processes, and

thus the professional performance of candidates.

The answers provided in this publication do not exhaust all possible alternative
approaches to solving these questions. Efforts had been made to use the methods,
which will save much of the scarce examination time. Also, in order to facilitate
teaching, questions may be altered slightly so that some principles or application of
them may be more clearly demonstrated.

It is hoped that the suggested answers will prove to be of tremendous assistance to

students and those who assist them in their preparations for the Institute’s Examinations.

NOTES

Although these suggested solutions have been published under

the Institute’s name, they do not represent the views of the
Council of the Institute. The suggested solutions are entirely the
responsibility of their authors and the Institute will not enter into
any correspondence on them.

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TABLE OF CONTENTS

SUBJECT PAGES

FUNDAMENTALS OF FINANCIAL ACCOUNTING 3- 31

ECONOMICS AND BUSINESS ENVIRONMENT 32 - 52

CORPORATE AND BUSINESS LAW 53 - 74

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

FOUNDATION EXAMINATION -MAY 2012
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Time Allowed – 3 hours

SECTION A: Attempt All Questions

PART I: MULTIPLE CHOICE QUESTIONS (20 Marks)

Write only the alphabet (A, B, C, D or E) that corresponds to the correct

option in each of the following questions.

1. The following items normally feature in the statement of financial position of a

club EXCEPT

A. Current year’s subscription

B. Salary in arrears
C. Rental income received in advance
D. Advance subscription in respect of a coming year
E. Subscription in arrears.

2. Which of the following is NOT a shortcoming of single entry book-keeping?

A. A trial balance is not available

B. Profits are overstated
C. There are no subsidiary books
D. There are no control accounts
E. There are no ledger accounts.

3. In which of the following circumstances will the preparation of a Trial Balance

assist in disclosing an error?

A. Failure to post an entry journal

B. Posting rent expenses to motor running account
C. Failure to post part of a journal entry
D. Posting the debit of a journal entry as a credit and vice versa

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E. Failure to record an entry in the journal

4. Which of the following is NOT a function of Financial Reporting Council of

Nigeria?

A. Promoting and enforcing compliance with the accounting standards

developed by the Board
B. Developing and publishing in the public interest accounting standards to
be observed in the preparation of financial statements
C. Advising State Governments on matters relating to accounting standards
D. Receiving notices of non-compliance with its standards from the preparer
E. Advising the Minister on making of regulations under Section 356 of
Companies and Allied Matters, Cap C20, LFN 2004

5. According to IAS 16 – “Accounting for Property, Plant and Equipment” all of the
following are features of non-current asset EXCEPT where they are

A. Held by an enterprise for use in the production or supply of goods and

services
B. Expected to be used on a continuing basis
C. Intended for sale in the ordinary course of business
D. Financed by leasehold rights
E. Held for rental to others, or for administration purpose.

6. The profits of ABC Partnership firm for 5 year ended 31 December 2011 were as
follows:

Year Profits
N’000
2007 15,000
2008 9,000
2009 4,500
2010 7,500
2011 10,500

The firm intends to admit a new partner 1 January 2012.

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What is the value of goodwill where the partners have decided to value goodwill at 4
years’ purchase of the average super profit over the last 5 years based on normal
profits of N3,000,000 per annum?

A. N6,300,000
B. N9,300,000
C. N25,200,000

D. N25,300,000
E. N25,350,000.

7. Which accounting entries should be raised to record an increase in the value of

assets on revaluation by the partners?

A. Debit revaluation account and credit partners capital account

B. Debit partners capital account and credit revaluation account
C. Debit revaluation account and credit partners current account
D. Debit revaluation account and credit assets account
E. Debit assets account and credit revaluation account.

8. Which of the following is NOT an action for admission of a partner during the
year?

A. Preparing the financial statements up to the date of admission

B. Determining a goodwill if any, at that date
C. Preparing a statement of account
D. Preparing a statement of financial position
E. Partners will decide if goodwill should be maintained in books or not.

9. Which of the following will NOT affect cash and bank balances in the statement
of financial position of a company?

A. Cash paid into the bank

B. Company’s cheque returned unpaid
C. Cheque received on account receivable paid to the bank but was
returned unpaid
D. Bank charges in the statement of account
E. Cash discount on accounts receivable.

10. The value of goods taken by the proprietor of a firm for his consumption will
affect all but ONE of the following

A. Gross profit
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B. Net profit
C. Inventory balance
D. Company’s capital
E. Inventory valuation.

11. Goods sold on cash and carry basis returned by a customer is treated in the
account by

A. Debiting Sales and Crediting Cash

B. Debiting Sales and Crediting Accounts Payable
C. Debiting Inventory and Crediting Cash
D. Debiting Inventory and Crediting Bank
E. Debiting Sales and Crediting Accounts Receivable.

12. At 1 January 2011, the capital structure of Jumbo Plc was as follows:
N
Issued share capital,
10,000,000 ordinary shares of N1.00 each 10,000,000
Share premium account 500,000

On 1 September 2011, the company made a fresh issue of 500,000 shares at

N1.30 each. Which of the following correctly presents the company’s share
capital and share premium accounts as at 31 December 2011?

Share capital Share premium

A. N10,000,000 N650,000
B. N10,500,000 N650,000
C. N10,650,000 N500,000
D. N10,150,000 N1,000,000
E. N10,000,000 N500,000

13. According to International Accounting Standard No 2 on “Inventories”, which of

the following methods can best be employed for the calculation and valuation of
inventories?

A. Last purchase price

B. Last-In-First-Out
C. Base stock
D. Average cost
E. Replacement cost

14. The amount of N500,000 for the maintenance of the factory machine was
debited to the Plant and Machinery account after crediting bank account with
same amount. Which error has been committed?
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A. Complete reversal of entries

B. Error of commission
C. Error of original entry
D. Error of omission
E. Error of principle

15. Which of the following items should NOT be on the Credit side of Accounts
Payable Control Account?

A. Total of purchases day book

B. Interest charged by suppliers
C. Transfer of debit balance to accounts receivable ledger
D. Transfer of credit balance from accounts receivable ledger
E. Set offs

16. If goods that cost N900,000 were sold for N1,200,000, which of the following
statements are correct?

(i) Mark-up is 25%

(ii) Margin is 331/3%
(iii) Margin is 25%
(iv) Mark-up is 331/3%

A. (i) and (ii)

B. (i) and (iii)
C. (ii) and (iii)
D. (iii) and (iv)
E. (ii) and (iv)

17. The advantages of Control Account do NOT include

A. Locating errors
B. Facilitating the extraction of trial balance
C. Detecting fraud
D. Checking on the accuracy of ledger entries
E. Discouraging adherence to double entry principle

18. The aggregate of prime cost and indirect overheads is

A. Cost of goods sold

B. Cost of materials used in production
C. Market value of goods produced

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D. Factory cost
E. Total overhead

19. Which of the following is NOT an advantage of computer accounting application

packages over manual accounting?

A. Generating variety of accounting reports

B. Improving the quality of financial reporting
C. Allowing the use of common data to update relevant accounting modules
D. Processing larger quantity of data quickly and accurately
E. Allowing non-experts unrestricted use of the application packages.

20. The following data relate to an equipment acquired by an enterprise:

Cost N435,600
Expected useful life 4 years
Annual depreciation N100,000

What is the residual value of the equipment at the end of its useful life?

A. N35,000
B. N35,600
C. N73,500
D. N83,750
E. N108,000

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PART II: SHORT-ANSWER QUESTIONS (20 MARKS)

Write the answer that best completes each of the following

questions/statements:

1. The least amount of royalty payable by the leasee and sub-leasee, if any,
irrespective of the actual royalty is ……………..............

2. What is the name of a periodic statement sent by the consignee to the consignor
called?

3. In branch account, a loss that occurs due to natural causes or perishable

character of the goods, and as such are inevitable, is a .............. loss.

4. The most appropriate basis for apportioning inventory holding cost among
departments is to use the value of...................

5. X and Y are two departments that share 50% of all joint costs equally and the
balance in the ratio of 2:1 respectively. If a sum of N300,000 is incurred jointly,
what will be the portion attributable to X?

6. A computer company operating retail stores in six cities in Nigeria invoices

goods to the branches at cost plus a mark-up of 25%. What is the mark-up
percentage on selling price?

7. Which account should a rapidly growing business organisation with multiple

units that is interested in comparing the performance and weakness of each unit
adopt?

8. Borox Limited makes provision for all known losses and value its inventories at the
lower of cost and net realisable value. Which accounting concept is the
company complying with?

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9. Ishola & Sons Limited purchased a moulding machine for N2,550,000 from
Japan, the transport expenses amounted to N250,000, installation cost
amounted to N150,000 and the annual maintenance is N170,000. At what
cost will the moulding machine be stated in the statement of financial position?

10. A decrease in provision for doubtful debts is ......................... to the income

statement and............................. to the provision for doubtful debt account.

11. An asset has a useful life span of 5 years with no residual value. Using the sum-
of-year digit method of depreciation, what proportion of the asset cost will have
been written-off at the end of year 3?

12. An intangible business asset which relates to reputation, customers loyalty and
popularity garnered over the years and due to the expertise of the business
owner or quality of goods produced or services rendered, is called
..................................

13. A collection or pool of related data which is available for use by any number of
application and accounting packages is ...............................

14. In accordance with International Accounting Standard (IAS), on construction

contract, the process where the rate of progress billings for payment is higher
than those utilised for revenue recognition is …….......................

15. Chinko Limited bought office equipment on 1 January 2008 at a cost of

N900,000. If depreciation is calculated at 20% on a reducing balance basis,
the net book value of the asset at the end of year 2010 will be........................

16. The physical component of a computer is called..................................

Use the information below to answer questions 17 and 18.

The Income Tax Account of Wazobia Limited showed a balance of N50,000 on

1 January 2011. Tax paid during the year was N45,000 and the estimated tax
based on current year’s account is N60,000.

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17. What is the amount to be debited to the company’s income statement as income
tax for the year ended 31 December 2011?

18. What is the amount to be shown in the company’s statement of financial position
as closing balance from the company’s Income Tax Account?

19. The series of accounting activities that take place from the beginning of the
accounting period of an enterprise to the end of that period, and repeated in
subsequent years, is known as..............................

20. The excess of minimum royalty over actual royalty paid on output is
called.................

SECTION B (Attempt Any Four Questions) (60 Marks)

QUESTION 1
The following details are available from the books of Tops Darts Society:

(i) 31/12/2010 31/12/2011

N N
Inventories of Darts 182,400 80,200
Payables for Darts supplies 8,200 44,400
Payables for general expenses 1,200 3,000
Equipment 160,000
Subscriptions owing 6,000 10,600

(ii) Summary of Bank Account - 2011

N N
Bal b/f 142,800 Dart supplies 653,600
Subscriptions 195,400 Rent 179,200
Dart sales 848,000 Rates 55,000
Life membership 12,000 General expenses 11,800
Bal c/d 43,800 Salaries 342,400
1,242,000 1,242,000

(iii) The person who handled Dart sales, “all in cash”, had disappeared taking with him
monies he received from this source. It was not known how much money he had stolen,
but all Darts were sold at a profit of 331/3% on cost price.

(iv) Three people had each paid life membership fees of N4000. It was decided to treat
this as being prepaid amount, except for one-tenth to be credited to the income and
expenditure account each year.

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(v) Equipment is to be depreciated at 20%.

You are required to:

(a) Draw up a Darts Income Statement for the year 2011 to calculate gross profit on
Dart sold. The cash stolen should be credited to this account, a debit to be
shown in the Income and Expenditure Account.

(b) Prepare an Income and Expenditure Account for the year ended 31 December
2011 and Statement of Financial Position as at that date.
(15 Marks)

QUESTION 2

Tap, Sea, Air and River are in partnership business sharing profits and losses in ratio
8:5:4:3 respectively.

Their Statement of Financial Position was as follows as at 1 January 2009:

N’000 N’000
Motor vehicles 120,000
Plant and machinery 90,000
Furnitures and fittings 75,000
285,000
Goodwill 15,000
Inventories 17,250
Accounts receivable 10,800
Cash at bank 1,950 45,000
330,000
Represented by:

Capital Current N’000

Account Account
N’000 N’000
Tap 75,000 13,500 88,500
Sea 45,000 16,500 61,500
Air 30,000 (7,500) 22,500
River 15,000 (10,500) 4,500
177,000
10% Loan 120,000
Accounts payable 33,000

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330,000

On the date of the statement of financial position, the business was brought to an end
and realized as follows:

N’000
Motor vehicles 60,000
Plant and Machinery 60,000
Furniture and fittings 52,500
Inventories 15,300
Accounts receivable 9,450

Dissolution expense was N22,500,000 and it was paid.

Air became bankrupt and his administrator was able to pay N40 on every N100
owed in accounts payable.

However, the other partners were all solvent. The expected amount was collected from
administrator of Air and cash were returned to or received from partner as appropriate.

You are required:

(a) State ways in which the amount owing to the business by Air will be absorbed
by other partners. (3 Marks)

(b) Show the necessary ledger accounts to close the partnership business books.
(12 Marks)
(Total 15 Marks)

QUESTION 3

Nimyaro Limited sold goods in containers, which are charged out to customers at N15
each. Customers were credited with N10 for each container returned before the
expiration of the due dates. At the end of the year, inventories of containers in
warehouse and all returnable containers in the hands of customers were valued at N5
each.

On 1 August 2011, the number of such containers were 10,000 and 35,000
respectively. During the year ended 31 July 2011, the following transactions relating to
containers took place:

(i) 40,000 were purchased at N7.50 each.

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(ii) 150,000 were charged to customers.
(iii) 125,000 were returned by customers.

(iv) 4,000 of the returned containers were useless and sold for N5,000.
(v) On 31 July 2011, 55,000 containers invoiced since 1 July 2011 were in the hands
of customers.

You are required to record the above transactions in the books of Nimyaro Limited for
the year ended 31 July 2011 using Containers Suspense Account Method.
(15 Marks)

QUESTION 4

The general day-to-day banking activities of business enterprises are bound to

generate large volume of transactions to the extent that there are always
disagreements between the bank balance shown in the accounts of an organisation
and the balance shown in the bank statement.

(a) You are required to state any FIVE causes of disagreement between the cash
book balance and the bank statement. (5 marks)

(b) The cashbook of Ecobiz Plc showed an overdraft of N180,000 on 31 March 2011
while the bank statement balance was an overdraft of N1.6m. On checking the
two records, you made the following discoveries:

(i) Cheques drawn in respect of payment made to suppliers amounting to

N250,000 had been entered in the cash book but were yet to be presented to
the bank.
(ii) Ecobiz Plc instructed the bank to transfer interest of N40,000 due on its bank
deposit account to the current account and this was not effected by the bank
until April 2011 whereas the entries have been made in the cash book.

(iii) The bank made e-payment charges of N50,000 on the company’s account.

(iv) The receipt side of the cash book was overcasted by N100,000 by the account
clerk.

(v) Cheques received and deposited to the bank which amounted to N480,000
had been entered in the cash book but had not been credited by the bank.

(vi) E-dividend payments made through the bank by the company amounting to
N360,000 were yet to be posted in the company’s cashbook.

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(vii) A cheque issued for the purchase of an office equipment had been entered in
the bank statement as N800,000 instead of N300,000.

(viii) A cheque for N70,000 issued to one of the suppliers included in (i) above had
been erroneously posted on the wrong side of the cashbook (i.e. the receipt
side).

Required:

Prepare the adjusted cash book and a statement reconciling the amended
balance with that shown in the bank statement. (10 Marks)
(Total 15 marks)

QUESTION 5

Fancy Enterprises has a machinery that cost N750,000 with an Accumulated

Depreciation of N510,000. The firm is contemplating acquiring a new machinery to
replace the old one. The new machinery has a catalogue price of N1,290,000. It will
attract 12% trade discount when acquired. In addition to the foregoing information
provided, assume that the firm is faced with the following options:

(i) Trade-in the old machinery and also add cash of N895,200 for the new one.
(ii) Trade-in the old machinery and also add cash of N600,000 for the new one.
(iii) Trade in the old machinery and also add cash of N1,080,000 for the new one.

Required:

(a) Raise journal entries for each of the options stated, having considered the
information given above. (14 Marks)

(b) Which of the options stated above is economically viable for the firm to acquire
the new machinery? (1 Mark)
N.B.: Show all workings (Total 15 Marks)

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QUESTION 6

Fortward Geso Trading Store maintained a single entry system. The following
information was extracted from the records:

Year ended Year ended

31 December 2011 31 December 2010
N N

Accrued expenses 10,000 -

Account receivables 196,000 130,000
Prepaid expenses - 16,000
Bank balances (40,000) 200,000
Investment 500,000 -
Cash balance 366,000 106,000
Accounts payable 74,000 90,000
1,500,000 1,500,000

Land and buildings

Delivery van 260,000 260,000
Inventories 190,000 74,000
Loan from bank 300,000 300,000

The following additional information was also made available in respect of 2011
accounting year:

(i) Provision for doubtful debt should be made for N3,000.

(ii) Depreciation is to be provided on book value as follows:

(a) Land and buildings 5%

(b) Delivery van 10%

(iii) Additional capital of N250,000 was introduced into the business during
the year.

(iv) The owner of the store withdrew a total sum of N20,000 during the year.

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Required:

Prepare the Statements of Affairs of Fortward Geso Trading Stores for the two years to
show:

(a) The opening capital (6 Marks)

(b) Net worth of the business (6 Marks)
(c) Profit (3 Marks)
(Total 15 Marks)

SOLUTIONS TO SECTION A

MULTIPLE -CHOICE QUESTIONS

1. A
2. B
3. C
4. C
5. C
6. C
7. E
8. C
9. E
10. D
11. A
12. B
13. D
14. E
15. E
16. D
17. E

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18. D
19. E
20. B

Tutorials

6. Total Profits for 5 years N46,500,000

Average Profits = N46,500,000 ÷ 5
= N9,300,000

Super Profit = N9,300,000 – N3,000,000

= N6,300,000

Goodwill = N6,300,000 X 4 = N25,200,000

12. Share Capital = N10,000,000 + N500,000

= N10,500,000

Share Premium = N500,000 + N150,000

N650,000

16. Margin = N300,000 x 100% = 25%

N1,200,000

Mark-up = 300,000 x 100% = 33 1/3%

900,000
20. N
Cost 435,600
Accumulation Depreciation
(100,000 x 4) 400,000
Residual value N35,600

EXAMINERS’ REPORT

The questions cover all the sections of the syllabus. All the candidates attempted the
questions and performance was good.

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PART II SHORT ANSWER QUESTIONS

SHORT ANSWER QUESTIONS

1. Minimum royalty payable/dead rent

2. Accounts sales

3. Normal

4. Purchases

5. N175,000

6. 20%

7. Departmental account

8. Prudence/conservatism

9. N2,950,000

10. Credit; debit

11. 4/5 or 0.8 or 80%

12. Goodwill

13. Database

14. Overbilling

15. N460,800

16. Hardware

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17. N60,000

18. N65,000

19. Accounting cycle/normal activities

20. Short workings

Tutorials

5. Share of Department x N
Equally ½ x 50% x N300,000 75,000
Apportionment 2/3 x 50% x 300,000 100,000
175,000

6. Mark-up = 25%
Margin = 25 x 100% = 20%
100 + 25

9. Cost of machine N‘000

Purchase price 2,550
Transport expenses 250
Installation cost 150
2,950

11. 5 + 4 + 3 = 12
5 + 4 + 3 + 2 +1 = 15
12
/15 x 100% = 80% or 4/5
N
15. Cost (1/1/08) 900,000
Depreciation – 2008 20% (180,000)
720,000
Depreciation – 2009 20% 144,000
576,000
Depreciation – 2010 20% 115,200
460,800
17 & 18
Tax Payable A/c
N N
Bank 45,000 Balance b/f 50,000
Bal c/d 65,000 Income Statement 60,000
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110,000 110,000
Bal b/f 65,000

EXAMINERS’ REPORT

The questions cover all the sections of the syllabus.

All the candidates attempted most of the questions and performance was good.

SOLUTIONS TO SECTION B

QUESTION 1

TOP DARTS SOCIETY

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2011

N N
Sales (w2) 1,056,000
Less: cost of Sales
Opening Inventories 182,400
Purchases 689,800
872,200
Closing Inventories 80,200
792,000
Gross Income
264,000

INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2011

N N
Darts Sales Income 264,000
Subscriptions 200,000
Life Membership 1,200 465,200

Cash Loss 208,000

Rent 179,200
Rates 55,000
General Expenses 13,600
Salaries 342,400
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Depreciation (20% of 160,000) 32,000 830,200
Deficit N365,000

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2011

COST ACC DEP NBV
N N N
Equipment 160,000 (32,000) 128,000

Current Assets
inventories Darts 80,200
Subscriptions 10,600
90,800

Current Liabilities
Bank Balance 43,800
Payables for Darts supplies 44,400
Payables-General Expenses 3,000
Life-membership 10,800
102,000
Net Current Assets (11,200)
116,800

Financed by:
Accumulated Funds (W1)
481,800

(365,000)
Deficits 116,800

Workings
W(1) Accumulated funds as at Darts 182,400
1/1/2011:
Equipment 160,000
Subscriptio 6,000
ns
Bank 142,800
491,200
Less: Payables (8,200 + 1,200) 9,400
481,800

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W2 Sales: (Gross Profit) = 1/3 x N792,000 = N264,000

Sales: = N792,000 + N264,000 = N1,056,000

Life membership N12,000 – N12,000 = N10,800

EXAMINERS’ REPORT

The question tests candidates’ knowledge of accounting for not-for-profit-organisation.

Few candidates attempted the question and performance was poor.

Candidates‘ commonest pitfall was their poor understanding of the basic principles
involved in the preparation of Income and Expenditure account from incomplete
records.

Candidates’ are advised to prepare well by reading the recommended texts.

QUESTION 2

1(a) The amount owing by an insolvent partner to the partnership will be borne by
solvent partners in a way agreed to by them. However, if the solvent partners
are unable to agree on how the amount should be borne by them; these have to
be borne using the ratio of their last agreed capital as laid down in the rule of
GARNER Vs MURRAY (1906).

(b) REALISATION ACCOUNT

N‘000 N‘000
Motor Vehicle 12,000 Bank 197,250
Plant & machinery 90,000 Capital:
Furniture & Fittings 75,000 T 8/20 x 153,300 61,320
Goodwill 15,000 S 5/20 x 153,300 38,325
Inventories 17,250 A 4/20 x 153,300 30,660
Accounts Receivable 10,800 R 3/20 x 153,300 22,995
Dissolution expenses 22,500
350,550 350,550

Accounts Payable
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N‘000 N‘000
Bank 33,000 Balanced b/d 33,000

Bank Account
N‘000 N‘000
Bank 120,000 Balanced b/d 120,000

Capital Account

T S A R T S A R
N‘000 N‘000 N‘000 N‘000 N‘000 N‘000 N‘000 N‘000
Current A/C - - 7,500 10,500

N‘000 N‘000
Balance b/d 1,950 Dissolution Expenses 22,500
Total realized 197,250 10% loan 120,000
Capital A 3,264 Account Payable 33,000
Capital R 19,059 Capital T 24,460
Capital S 21,543
221,503 221,503
Realisation 61,32 38,325 30,660 22,995 Bal. 75,000 45,000 30,000 15,000
A/c 0 b/d
Capital A/c 2,720 1,632 - 544 Curren
t A/C
Bank 24,46 21,543 - - Bank 13,500 16,500 3,264 -
0
Capita 2,720 -
l
T
- - - 1,632
S
- - - 544
R
Bank 19,039
88,50 61,500 38,160 34,039 88,500 61,500 38,160 34,039
0

Bank Account

Workings:

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(i) Air was insolvent and cannot pay all that he owes. He can pay N40 on every
N100 he owes, which means he can pay 40% on whatever he is owing i.e. the
administrator can pay 40% of N8,160,000 = N3,264,000.

(ii) The amount Air could not pay is

= 60% of N(7,500,000 + 30,660,000 – 30,000)

= 60% of N8,160,000
= N4,896,000

This amount is shared by all solvent partners in the ratio of their last agreed capital
since the partner did not have any specific agreement as to the sharing of this loss.

This is shared between them as follows:

Tap = 5/9 x N4,896,000 = N2,720,000

Sea = 3/9 x N4,896,000 = N1,632,000
River = 1/9 x N4,896,000 = N544,000
N4,896,000

N.B.: The last agreed capital are:

Tap N75,000,000
Sea N45,000,000
Air N30,000,000
River N15,000,000

EXAMINERS’ REPORT

The question tests candidates’ knowledge of dissolution of partnership.

Most candidates attempted the question and performance was poor.

Candidates’ commonest pitfall was their inability to make use of Garner v Murray
Case.

Candidates are advised to read relevant texts and materials before writing the
examination.

QUESTION 3

Container Inventory Account

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Rate Qty. N000 Rate Qty. N’000
N ’000 N ’000
Balance b/d: Scrapped 4 5
Warehouse 5 10 50 Containers Suspense:
Customers 5 35 175 Profit on Containers - - 750
Bank 7.50 40 300 Retained by 10 5 50
Customers
Income Statement 660 Balance c/d:
Warehouse 5 21 105
Customers 5 55 275
85 1,185 85 1,185

Balance b/d:
Warehouse 5 21 105
Customers 5 55 275

Container Suspense Account

Rate Qty. N’000 Rate Qty. N’000

N ’000 N ’000
Containers Inventory: Balance b/d 10 35 350
Profit on Containers - - 750 Sent to 15 150 2,250
Customers
Retained By Customers 10 5 50
Returned By Customers 10 125 1,250
Balance c/d: 10 55 550
185 2,600 185 2,600

EXAMINERS’ REPORT

The question tests candidates’ knowledge of container’s accounts.

Few candidates attempted the question and performance was poor.

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Candidates’ commonest pitfall was their inability to identify items to be posted into the
relevant accounts.

Candidates are advised to cover all the sections of the syllabus before attempting to
write the examination of the Institute.

QUESTION 4

(a) Possible causes of disagreements between the bank balance shown in the bank
statement and the cash book balance include:

(i) Uncredited lodgement

(ii) Unpresented cheques
(iii) Bank Charges
(iv) Posting Errors
(v) Casting Errors
(vi) Direct Credit
(vii) E-payment
(viii) Automated Teller Machine (ATM) withdrawal
(ix) Standing Order
(x) Stale Cheque
(xi) Credit/Debit Transfer
(xii) Dishonoured cheques

(b) ECOBIZ PLC

Adjusted Cash Book as at 31March 2011

N N
Bal b/f 180,000
E-payment charges 50,000
Overcast-cashbook 100,000
Wrong Posting
70,000 X 2 140,000
E-dividend 360,000
Bal c/d 830,000
830,000 830,000
Bal b/f 830,000

BANK RECONCILIATION STATEMENT AS AT 31 MARCH 2011

N N
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Balance as per adjusted cash book (830,000)
Uncredited cheque
(480,000)
Int on bank deposit not yet posted by bank
( 40,000)
Overposting of cheque drawn (800,000 – (500,000) (1,020,000)
300,000)
(1,850,000)

Unpresented cheques 250,000

Balance per bank statement (1,600,000)

EXAMINERS’ REPORT

The question tests candidates’ knowledge of the preparation of bank reconciliation

statement.

Most candidates attempted the question and performance was good.

Candidates commonest pitfall was theír inability to identify and post correctly the
required adjustment.

Candidates should make their learning process to be more practical.

QUESTION 5

(a) JOURNALS

Option (i) DR CR
N N
Machinery Account Dr. 1,135,200
Provision for Depreciation (Machinery) Account Dr. 510,000
Machinery Account 750,000
Cash Book 895,200
Being trade-in of the old machinery for a new one

Option (ii)
Machinery Account Dr. 840,000
Provision for depreciation (Machinery) Account Dr. 510,000
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Machinery Account 750,000
Cash Book 600,000
Being trade-in of the old machinery for a new one

Option (iii)
Machinery Account Dr. 1,135,200
Provision for depreciation (Machinery) Account Dr. 510,000
Machinery Account Dr. 184,800
750,000 Cash Book
1,080,000
Being trade-in of the old machinery for a new one

(b) The most economically viable is option (ii), where the enterprise paid cash of
N600,000 as additional consideration.
The profit of N295,200 is anticipated hence should not be realised, unlike the loss on
acquisition of N184,800 – (Prudence Concept).

Notes
Option (i) N

Cost Price (N129,000 – 12% x 1,290,000)

1,135,200
Less: Net Book Value of old machinery
N750,000 N510,000 = N240,000
Cash N895,000
1,135,200
0
Net Profit or loss

Option (ii) N N

Cost price (N1,290,000 – 12% x N1,290,000) 1,135,200

Less: Net Book Value of Old Machinery
(N750,000 – N510,000) ( 240,000)
Cash (600,000)
840,000
Profit on acquisition 295,200

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Option (iii) N
Cost price (1,290,000 – 12% x 1,290,000) 1,135,200
Less: Net Book Value of Old Machinery
(N750,000 – N510,000) ( 240,000)
Cash (1,080,000)
(1,320,000)
Loss on acquisition 184,800

EXAMINERS’ REPORT

The question tests candidates’ knowledge of raising journal entries.

Majority of the candidates attempted the question and performance was poor.

The candidates’ commonest pitfall was poor knowledge of raising journals.

Candidates are advised to cover all sections of the syllabus before writing the
examinations.

QUESTION 6

(a) FORTWARD GESO TRADING STORE

STATEMENT OF AFFAIRS AS AT 31 DECEMBER 2010
NOTE N N
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Non-Current Assets
Land and Buildings 1,500,000
Delivery Van 260,000
1,760,000

Current assets:
Inventories 74,000
Account receivables 130,000
Pre-paid expenses 16,000
Bank balance 200,000
Cash balance 106,000
526,000
2,286,000

LIABILITES

Bank Loan 300,000

Accounts Payable 90,000
390,000
Opening Capital 1,896,000
2,286,000

(b) STATEMENT OF AFFAIRS AS AT 31 DECEMBER 2011

NOTE N N

Non-current assets
Land and buildings (i) 1,425,000
Delivery Van (ii)
234,000
Investment
500,000
2,159,000
Current assets
Inventories 190,000
Accounts Receivable (N196,000 – N3,000) 193,000
Cash balance (366,000 – 20,000) 346,000
729,000

2,888,000

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Capital (1/1/2011) 1,896,000
Additional Capital 250,000
2,146,000
Add Profit 338,000
2,484,000
Less: Drawings (20,000)

2,464,000
Liabilities
Accounts Payable 74,000
Accrued expenses 10,000
Bank overdraft 40,000
Loan 300,000

424,000

2,888,000
Workings

(i) Land and Building Delivery Van

Cost 1,500,000 260,000
Less: Dep. (75,000) (26,000)
1,425,000 234,000

(ii) Opening Capital

2,286,000
(390,000)
(1,896,000)

(iii) Accounts Receivable 196,000

Less: Provision for doubtful debt 3,000
193,000

(iv) The profit for 2011 accounting year was arrived as follows:

N N
Total Assets 2,888,000
Total liabilities
Loan 300,000
Payables 74,000
Bank Overdraft 40,000
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Accrued Expenses 10,000
424,000

Opening Capital (Note ii) 1,896,000

Add: Additional Capital 250,000
2,146,000
Less: Additional Capital (20,000)
2,126,000
2,550,000
Profit 338,000

EXAMINERS’REPORT

The question tests candidates’ knowledge of preparation of accounts from incomplete

records.

Majority of the candidates attempted the question and performance was fair.

Candidates’ commonest pitfall was their inability to compute correctly opening capital,
net worth and profit.

Candidates are advised to read relevant texts and practise past questions.

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

FOUNDATION EXAMINATION - MAY 2012
ECONOMICS AND BUSINESS ENVIRONMENT

Time allowed - 3 hours

SECTION A: Attempt All Questions

PART I: MULTIPLE-CHOICE QUESTIONS (20 Marks)

Write only the alphabet (A, B, C, D or E) that corresponds to the correct

option in each of the following questions:

1. The motive for the demand for money to facilitate day-to-day expenditure is
known as

A. Speculative motive
B. Consumption motive
C. Expenditure motive
D. Transaction motive
E. Precautionary motive

2. Which ONE of the following is NOT an item of invisible trade?

A. Payment for diplomatic services abroad

B. Payment for tangible goods bought from abroad
C. Royalties earned on books sold abroad
D. Dividend paid to foreign shareholders of companies
E. Payments in respect of students’ fees in foreign Universities

3. In perfect competition, price is determined by the

A. Government
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FOUNDATION EXAMINATION – MAY 2012
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B. Buyers
C. Market
D. Sellers
E. Producers

4. Which of the following concepts explains how changes in investment may bring
about changes in national income?

A. The accelerator
B. The consumption function
C. The multiplier
D. The production function
E. The saving function

5. Which of the following is NOT a cause of unemployment in Nigeria?

A. Inadequate power supply for industries

B. Relocation of businesses from Nigeria
C. High level of corruption
D. Concessioning of some highways by the government to the private sector
E. Poor quality of education and training in academic institutions

6. If a production process is represented by Q = f(L, K), where Q = output, L and K

are labour and capital inputs respectively, the marginal rate of technical
substitution between L and K (MRTSLK) is

MPL
A. MRTSLK =
MPK
MPL
B. MRTSLK =
APK

MPL
C. MRTSLK =
APL

APL
D. MRTSLK =
MPL

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FOUNDATION EXAMINATION – MAY 2012
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APK
E. MRTSLK =
MPL
7. An entrepreneur can be viewed as the

I - Coordinator of other production resources

II - Decision maker under uncertainty
III - Innovator
IV - Gap filler and input completes

A. I and II
B. I and III
C. I, II and III
D. III and IV
E. I, II, III and IV

8. Which of the following would be a credit item in Nigeria’s balance of payments?

A. A two-week vacation trip to Japan by a Nigerian

B. A Nigerian company sells computer accessories to a company in Togo
C. A Nigerian student buys an accounting textbook from a UK Bookshop
D. A Nigerian company hires a Ghanaian citizen
E. The Nigerian government lends money to the Gambian government

9. Disequilibrium in the balance of payments occurs when

A. The value of all imported goods is greater than the value of all exported
goods
B. The value of imported goods and services is not equal to the value of
exported goods and services
C. The value of invisible imports is less than the value of invisible exports
D. A country’s foreign exchange reserves is greater than the value of imports
E. The gross domestic product is greater than the net income from abroad

10. The law of variable proportions is applicable only

A. To monopolists
B. To small-scale enterprises
C. To large-scale business
D. In the long-run
E. In the short-run

11. Olubese Cement Company is located at Ibese, Ogun State, because

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FOUNDATION EXAMINATION – MAY 2012
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A. The demand for cement is highest in Ibese, Ogun State

B. The transport cost of cement to consumers is low
C. Labour is cheap in Ogun State
D. Ibese, Ogun State, has the required raw materials for the production of
cement
E. Ogun State is a good source of finance for the cement company

12. The balanced budget multiplier is used to show

A. An expansionary fiscal policy

B. An expansionary monetary policy
C. A contractionary monetary policy
D. A contractionary fiscal policy
E. A neutral monetary policy

13. A technique that allows group members to freely generate a large variety of
ideas to solve an organisational problem without subjecting them initially to
evaluation is known as

A. Delphi Technique
B. Nominal group technique
C. Stepladder technique
D. Electronic meeting
E. Brainstorming

14. The managerial grid is a model which identifies all but ONE of the following
dimensions of leadership

A. Country club manager

B. Impoverished manager
C. Middle of the road manager
D. Initiating structure
E. Team manager

15. In the Portfolio Matrix, a business unit that usually generates more money than it
needs to maintain its market share is

A. A star
B. BCG
C. A blue chip
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FOUNDATION EXAMINATION – MAY 2012
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D. A cash cow
E. A question mark

16. The idea of getting work done with minimum effort, expense or waste is

A. Economic management
B. Efficiency
C. Effectiveness
D. Entropy
E. Economy

17. Which ONE of the following is NOT a responsibility centre?

A. Investment centre
B. Cash centre
C. Profit Centre
D. Expense centre
E. Revenue centre

18. Which ONE of the following is NOT an index of effectiveness?

A. Morale
B. Job satisfaction
C. Employee turnover
D. Employee salary level
E. Net profit

19. The address used by a web browser to identify the location of content of a web
page on the web is

A. Domain Name System (DNS)

B. Uniform Resource Locator (URL)
C. Internet Protocol (IP) address
D. Hypertext Transfer Protocol (HTTP)
E. Simple Mail Transfer Protocol (SMTP)

20. A forecasting method in which experts reach consensus about future events
through a series of continuously refined questionnaires rather than through face-
to-face discussion is

A. Sales Force Composite

B. Jury of Opinion
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FOUNDATION EXAMINATION – MAY 2012
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C. Delphi Technique
D. Quantitative Technique
E. Expert Opinion

PART II: SHORT-ANSWER QUESTIONS (20 MARKS)

Write the answer that best completes each of the following

questions/statements:

1. The national income model of a closed economy is......................................

2. Production function is an expression of the............................. relationship

within an organisation.

3. If Y=C+I+G is the national income model of a closed economy

where C = 680+0.6Yd; T = -40 + 0.2Y; Yd = Y – T; I = 300; and G = 400,
the equilibrium national income is ....................................

4. The circular flow diagram shows that the value of .................... is equal to
income.

5. The function of money which makes it possible for any person to provide for old
age is ..................................

6. An organised set of relationships, under a set of assumptions, from which a

conclusion or a set of conclusions is logically derived is known as ..................

7. The method of liquidating a debt on an installmental basis is known as

.............................

8. SURE is an acronym for .........................................................

9. A firm is operating under ............... returns to scale if its output increases by

50% following a 60% increase in all the factor inputs.

10. The demand for a Gifen commodity will ............. when its price decreases.

11. An asset is less liquid if there is a ................... in the transaction cost of selling
it.

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12. If a firm’s total cost function is TC = 20 + 32q – 10q2 + q3, the average variable
cost when q = 20 is ...................

13. A form of distribution aimed at having a product available in every outlet where
target customers might want to buy it, is known as.............................

14. An approach to organisation development in which the consultant seeks to

facilitate clients in problem exploration and solution identification is known
as..................................

15. A statement that is concerned with what the organisation aspires to be in the
future so as to enthuse, gain commitment and stretch performance is known
as........................................

16. A group of consumers for whom a marketing mix has been designed in order to
meet their needs and to achieve a mutually satisfying exchange relationship is
referred to as…………………………….

17. A comprehensive management control system that balances traditional financial

measures with operational measures relating to a company’s critical success
factors is called....................................

18. An activity usually in manufacturing industries which aims to establish quality

standards, ensure that they are being adhered to, take corrective action and
set improved standards where possible is..................................

19. The process that involves making decisions on the degree of specialisation of
jobs, the rules to guide employees behaviour and the level of what decisions are
to be made is.........................

20. When managers influence the organisation’s level of fixed cost to enhance the
firm’s performance, this is known as............................

SECTION B: ATTEMPT ANY FOUR QUESTIONS (60 MARKS)

QUESTION 1

The banking sector has witnessed large-scale changes in the last few years.

You are required to:

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FOUNDATION EXAMINATION – MAY 2012
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(a) Explain the term “cashless economy”. (3 Marks)

(b) Explain any FOUR factors that affect the demand for e-banking in Nigeria.
(12 Marks)
(Total 15 Marks)

QUESTION 2

Differentiate between the following pair of concepts. Illustrate your answers with
appropriate examples:

(a) Production and Production function

(b) Entrepreneur and Manager
(c) Monopoly and Monopsony
(d) Trade credits and Hire purchase
(e) Liquidation and liquidity

(15 Marks)
QUESTION 3

Business entities take various forms. The form to choose depends on the need of the
promoters.

Required:

(a) What is a Public Limited Company? (3 Marks)

(b) Explain any SIX sources of finance to a Public Limited Company. (12 Marks)
(Total 15 Marks)

QUESTION 4

The table below shows the output produced by two countries in year 2011:

Country Pepper (bags) Vegetables (bags)

Nigeria 30 25
Ghana 20 15

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Required:

(a) Calculate the opportunity cost of producing each unit of the commodities in both
countries. (5 Marks)

(b) Mention which of the two countries has an absolute advantage in producing
vegetable and why? (5 Marks)

(c) If these two countries should trade, determine which country should specialize in
the production of pepper and why? (5 Marks)
(Total 15 Marks)

QUESTION 5

“Managers are increasingly being called upon to acquire some skills in order to
perform their functions effectively”.

Required:

Suggest and explain FIVE skills that managers require to perform their functions
effectively. (15 Marks)

QUESTION 6

In a discussion between two senior managers, divergent views were presented on how
to motivate employees using Herzberg’s Two-factor Theory and Adams Equity Theory
of motivation.

Required:

Discuss briefly the salient aspects of the two theories. (15 Marks)

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SECTION A

PART 1: MULTIPLE-CHOICE QUESTIONS

1. D
2. B
3. C
4. C
5. D
6. A
7. E
8. B
9. B
10. E
11. D
12. A
13. E
14. D
15. D
16. B
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FOUNDATION EXAMINATION – MAY 2012
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17. B
18. D
19. B
20. C
EXAMINERS’ REPORT

MULTIPLE-CHOICE QUESTIONS

The questions test the various aspects of the syllabus.

Attempt was virtually by all the candidates. The candidates demonstrated a fair
knowledge of the various concepts, principles and laws tested and their performance
was also fair.

Candidate can do better if they spend more time in preparing for the examinations.

PART II: SHORT ANSWER QUESTIONS

1. Y=C+I+G
2. Input/Output
3. Y = 2,700
4. Expenditure
5. Store of value
6. A model
7. Amortization
8. Subsidy Reinvestment and Empowerment Programme
9. Decreasing
10. Decrease
11. Rise
12. 232
13. Intensive/extensive distribution
14. Process consultation
15. Vision statement

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16. Target market
17. Balanced scorecard
18. Quality control
19. Organizing
20. Operating leverage

EXAMINERS’ REPORT

SHORT-ANSWER QUESTION

The questions adequately over the syllabus.

Most candidates attempted this part of the paper and performance was good.

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SECTION B

QUESTION 1

(a) A cashless economy is an economy that relies, to a large extent, on the use of
non-physical cash assets such as cheques, electronic payment devices (e.g.
internet, mobile phone, ATM, etc) for transactional purposes or as a medium of
exchange.

(b) The factors that affect the demand for e-banking in Nigeria include:

(i) Availability of e-bank facilities.

The e-banking payment system requires access to the internet which in

turn requires access to constant or regular supply of electricity. For
people to use e-banking effectively, this infrastructural facility must be
available.

(ii) Level of education

The higher the literacy level and computer knowledge of the population,
the higher the demand for e-banking services provided by the banks.

(iii) Government legislation

If the government insists on e-banking for economic transactions, this will

force people to learn and use it. This will increase the demand for e-
banking services.

(iv) The cost of e-banking transactions

If the cost of using the e-banking services in terms of charges by the banks
and other network providers is high, less number of bank customers will
want to use the platform.

(v) The use of weak coding system which allows criminals to get access to
people’s e-info on company data-base has contributed to less demand
for e-banking in Nigeria.

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(vi) The ignorance of people about the importance of e-banking constitutes a
response lag to the effective adoption of e-banking in Nigeria.

SECTION B

EXAMINERS’REPORT

The essence of this question is to test the candidates’ familiarity with this policy and the
use that e-banking can serve in its implementation.

The candidates demonstrated good understanding of the cashless policy and its
relevance in Nigeria, particularly in the present developmental era driven by
globalization. Their discussions and presentations were lucid and intelligent; their
performance was generally good.

QUESTION 2

(a) Production is the conversion of raw materials or primary products into finished
goods and services and the distribution of the finished goods and services to the
final consumers.

Production function on the other hand, is purely a technological relationship

between the quantities of various inputs and the maximum output that can be
produced at a given point in time.

An example of production is the conversion of flour into bread, and of

production function is Q=f(L,K) where Q = output and L & K are factor inputs.

(b) An entrepreneur is a person (or factor of production) that organizes, controls and
co-ordinates other factors of production to produce a given level of output. He
receives the profit and bears the business losses. A manager is however hired to
oversee the day-to-day productive activities of the business and receives salary
and other benefits.

(c) Monopoly is a market with a single seller and many buyers of a product or
service that has no close substitute whereas monopsony is a market that is
characterized by one buyer and many sellers of a product or service. PHCN is
an example of a monopoly.

(d) Trade credit is an incentive given by suppliers to their customers such as when
creditors supply raw materials or the factor inputs to a customer firm for a period
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FOUNDATION EXAMINATION – MAY 2012
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of time without immediate payment. It is an indirect means of funding or
financing a business while the credit lasts.

In contrast, hire purchase is a system of making goods available to customers

where payment is made on instalmental basis.

(e) Liquidation is the process of closing a business and disposing of the assets. With
liquidation, a firm or business takes its exit from the market whereas liquidity is
the process of converting assets into money quickly. A firm that is liquid will be
able to meet its financial obligations as at when due.

For example, some banks that had serious liquidity problems were recently
liquidated by the Central Bank of Nigeria.

EXAMINERS’ REPORT

This question tests candidates’ understanding of some concepts in Economics as it

requires them to distinguish between paired concepts.

Most of the candidates understood clearly the distinction between production and
production function, entrepreneur and manager, monopoly and monopsony but
showed poor understanding of the distinction between trade credits and hire purchase
as well as between liquidation and liquidity. In both cases, candidates failed to
illustrate or support their answers with relevant examples as required by the question.
This failure caused candidates loss of marks. Overall, the performance of the
candidates was average.

Candidates are therefore, advised to pay particular attention to the requirements of

questions before rushing to answer them as partial answer to questions can only fetch
partial scores. Candidates should also avail themselves of the opportunity for capacity
building by the tuition houses.

QUESTION 3

(a) A Public Limited Company (PLC) is a business with a minimum of seven member
founders (owners) who agree to form a company by each contributing shares
towards its initial capital in accordance with laid down conditions of the various
Companies Acts. It is strictly regulated and required by law to publish its

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FOUNDATION EXAMINATION – MAY 2012
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complete and true financial position so that investors can determine the true
worth of the company’s stocks (share).

A Plc’s share can be acquired by anyone and holders are only limited to
potential loss on the amount paid for the shares.

(b) Sources of finance to a Public Limited Company include:

(i) Shares

This is a major source of financing plc. Some of these shares are: initial
capital, ordinary shares, preferential shares, etc.

(ii) Debentures
This is a source of long-term finance for public limited companies. The
holder of debentures is considered as a creditor to the company and gets
returns (interest) on his debentures.

(iii) Bank Loans and Advances

A public limited company can obtain loans and overdrafts from banks if it
has assets that can meet the collateral requirements for borrowing.

(iv) Retained Earnings

The public limited company may retain the profits made for financing
projects instead of distributing them among the shareholders in the form
of dividend.

(v) Equipment Leasing

A Plc may also be involved in the leasing of equipment so as to raise
capital.

(vi) Hire Purchase

The company can buy factor inputs and make payments instalmentally
over a period of time.

(vii) Grant Finance

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Companies may be able to obtain grants from governments or

international agencies. Usually, grants are awarded only in specific
circumstances.

EXAMINERS’ REPORT

This question tests candidates’ understanding of Public Limited Company (Plc) as a

business entity and requires candidates to identify and explain six sources of finance
available to it.

Candidates’ attempt in part “a” of the question was good while it was just fair in part
“b”. About 40% of the candidates were unable to give six clearly distinct sources of
finance to Plc. Quite a number of them gave overlapping or repeated sources. These
developments marred the candidate’s overall performance in the question.

Candidates are advised to read widely to deepen their knowledge of economic

concepts and their applications.

QUESTION 4

(a) To calculate the opportunity cost of producing a unit of pepper in terms of

vegetable (OCpv);

OCpv = Output of vegetable

Output of pepper

Similarly, to obtain the opportunity cost of producing vegetable in terms of

pepper (OCvp);

OCpv = Output of pepper

Output of vegetable

The unit of pepper that has to be forgone for every unit of vegetable produced
(i.e. opportunity cost) is shown as:

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Countries Pepper (bags) Vegetable (bags)

Nigeria 25÷30 Veg.) 0.83 (30÷25 Pep) 1.20
Ghana (15÷20 Veg.) 0.75 (20÷15 Pep) 1.33

(b) Nigeria has absolute advantage in the production of vegetable. A unit of input
can produce a greater number of bags of vegetables in Nigeria than in Ghana.

NB. A country has absolute advantage in production of a product if its output

per unit of input is greater than that of other producing countries.

(c) Ghana should specialize in the production of pepper. This is because Ghana
has the lower opportunity cost in pepper production and so should specialize in
production of pepper. (0.75 vegetables rather than 0.83 vegetables in
Nigeria).

EXAMINERS’ REPORT

QUESTION 4

This question tests candidates’ understanding of the concept and application of the
theory of comparative advantage in international trade.

Candidates’ performance was below average as they misinterpreted section “b“of the
question and also failed to respond adequately to section “a” of the question. The
quantitative ability of most of the candidates was low. Section “a” which requires
calculation proved tasking for most of the candidates who attempted the question as
they performed poorly in it. Many candidates could not correctly distinguish between
the absolute and comparative theories of trade.

Candidates are advised to familiarize themselves with these theories and their
applications.

QUESTION 5

The relevant skills needed are:

(a) Technical skills: This is the ability to apply specialized procedures, techniques
and knowledge required to get the job done. Technical skills may be the ability
of an accountant to apply equipment/material purchase procedures, of an

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engineer to use an equipment, or of a sales person to persuade a consumer to
buy.

Technical skills are most important for lower level managers because they
supervise workers who carry out a variety of operations.

(b) Interpersonal skills: This is the ability of the manager to understand the people
he/she works with, to be sensitive to their needs and aspirations and to get
along satisfactorily with subordinates. Interpersonal skills makes it possible for
subordinates to trust and cooperate with managers to get the work done.

Interpersonal skills are required of all managers irrespective of his/her level in

the hierarchy of the organization.

(c) Communication Skills: Managers need to be able to explain the goals and
targets to be achieved to subordinates. He also needs to be able to give clear
instructions to subordinates and to listen to their viewpoints. All of these require
that managers have the ability to express themselves concisely to convey to
subordinates precisely what is required to be done.

Interpersonal and communication skills are often referred to as human skills,

human relations skills or people skills. Since all managers work with and through
people to achieve goals, all managers are expected to possess these skills to
perform their functions effectively.

(d) Conceptual skills: This refers to the ability of the manager to see the
organization as a whole, to understand how the different parts of the
organization relate to each other as well as the external environment. Under
conditions of globalization, conceptual skills enable managers to see the
implication for their organization of changes occurring in their local, national and
international environment.

Managers are effective to the extent that they are able to recognize, understand
and explain the complex factors that affect the performance of their
organizations. Conceptual skills increase in importance as managers’ rise
through the management hierarchy.

(e) Analytical/Diagnostic skills:- Organizations are generally confronted with a

variety of problems. In most cases, the nature of these problems are not clear,
neither are their causes known. Diagnostic/analytical skills are the ability of the
manager to identify the core problems facing the organization, clarify the nature

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of the problems, determine their possible causes, generate possible solutions,
evaluate them and select the most feasible solution.

EXAMINERS’ REPORT

The question tests candidates’ knowledge of the skills that managers need to perform
their duties effectively. Candidates are required to identify and explain five of such
skills.

About 80% of candidates attempted the question. However, as straightforward as the

question seems to be, most of the candidates did not understand the concept of
managerial skills as distinct from managerial functions or qualities of a manager.

Hence, rather than explain the skills needed by managers, most of the candidates
concentrated on discussing managerial functions or qualities of a manager.
Performance was average.

Candidates are advised to read questions carefully to understand precisely what is

required.

QUESTION 6

(a) Herzberg’s Two-factor Theory

The theory offers some insight into the relationship between motivation and job
satisfaction. Herzberg observed that those factors that led to satisfaction were
fundamentally different from those that led to dissatisfaction. Those factors, the
absence of which would create dissatisfaction with the job and organization
were labeled hygiene factor while those factors which could motivate the
individual to improve his/her work performance were called motivators.

The hygiene factors are:

(i) Salary
(ii) Working conditions
(iii) Job security
(iv) Level and quality of supervision
(v) Company policies and administrative procedures
(vi) Interpersonal relationship at work

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The motivators are:

(i) Recognition
(ii) Sense of achievement
(iii) Responsibility
(iv) Nature of the work itself
(v) Growth
(vi) Advancement

Herzberg theorized that increase in hygiene factors would not lead to motivation
and job satisfaction. Rather, such increase may lead to less dissatisfaction. On
the other hand, increase in motivators would lead to motivation to improve work
performance and job satisfaction.

Adams Equity Theory of Motivation

This theory focuses on individual perception of how fairly they are treated
compared with others. According to the equity theory, if people perceive that
their compensation, given their contribution or effort, is equal to what others
receive for similar contribution, they will believe that their treatment is fair and
equitable. As a result, they would be satisfied with their job.

If, on the other hand, they perceive that their compensation, given their
contribution, is less than what relevant other co-workers receive for similar
amount of contributions, they would have a sense of inequity in the system.
Consequently, they would be dissatisfied. They may either reduce the level of
their contribution in an effort to bring about equity, distort their perceptions, or
leave the organization.

Adams equity theory may be represented as follows:

01 = 02
I1 I2
01 = Outcome/reward of person 1
I1 = Inputs of person 1
02 = Outcome/reward of a relevant other person 2
I2 = Inputs of relevant person 2.

When 01 = 02 the worker would perceive equity and experience

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I1 I2 , job satisfaction

But when 01 < 02 worker would perceive inequity, experience dissatisfaction

I1 I2, and would take action to bring about equality of the ratios.

EXAMINERS’ REPORT

The question tests candidates’ knowledge of Herzberg’s Two-factor theory and Stacy
Adams Equity Theory of Motivation.

Only about 25% of the candidates attempted the question. This may be due to some
confusion arising from attributing equity theory to Adams Smith in the question instead
of Stacy Adams. Nevertheless, the candidates that attempted the question were not
misled by the error. Indeed, only one candidate discussed division of labour, a
concept popularly associated with Adam Smith.

Candidates’ knowledge of the theories was shallow. Some discussed Theory X and Y
instead of Two-factor theory. Their discussion of equity theory was based on residual
knowledge or guess work. Performance was poor.

These theories of motivation are available in good textbooks for candidates to study.
Candidates are advised to study harder.

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

FOUNDATION EXAMINATION - MAY 2012
CORPORATE AND BUSINESS LAW
Time Allowed - 3 hours

SECTION A: Attempt All Questions

PART I: MULTIPLE-CHOICE QUESTIONS (20 Marks)

Write only the alphabet (A, B, C, D or E) that corresponds to the correct

option in each of the following questions.

1. Which problem of common law was equity developed to solve?

A. Age
B. Weight
C. Power
D. Harshness
E. Hegemony
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2. Which of the following is a tort that requires no proof?

A. Negligence
B. Battery
C. Assault
D. Mistake
E. Nuisance

3. Which of the following categories of persons has limited contractual capacity?

A. Nursing mothers
B. Foreigners
C. Minors
D. Retired legislators
E. Ex-convicts

4. Which of the following is absent in a domestic agreement?

A. Capacity to contract
B. Intention to create legal relations
C. Consideration

D. Undue influence
E. Duress

5. Which of the following is NOT an illegal contract at common law?

A. A contract to commit a crime or tort

B. An agreement to solicit for prostitutes
C. A contract to obstruct the administration of justice
D. A contract to supply local goods to a foreign country
E. A contract with an alien enemy during the war

6. Which of the following is NOT a hirer’s obligation?

A. To take delivery of the goods

B. To take proper care of the goods
C. Not to part with the possession of the goods
D. To report to the owner every week
E. To return the goods to the owner when the agreement is terminated

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7. A bank may be excused from the obligation to pay a customer’s cheque EXCEPT
when

A. There is an unsigned alteration on the cheque

B. The cheque is stale
C. The drawer’s death comes to the notice of the bank
D. The bank does not have enough cash
E. There is an effective countermand

8. In which of the following shall an un-discharged bankrupt NOT engage?

A. Travel outside the country

B. Attend shareholders’ meeting of a company
C. Enjoy public amenities
D. Contest in an election for an elective office
E. Contribute to a public debate

9. Election petition cases must originally be filed before

A. A High Court Judge

B. The Justices of Court of Appeal
C. The Justices of the Supreme Court
D. The Election Petition Tribunal
E. A Notary Public

10. Civil liabilities include

A. Suspended sentences
B. Payment of fines
C. Payment of damages
D. Short-term imprisonment
E. Long-term imprisonment
11. Mistake could render a contract void if it was made before the contract was

A. Concluded
B. Frustrated
C. Registered
D. Paid for
E. Registered with the government

12. Where a party to a contract was forced to consent to the terms of a contract,
such a contract is said to be
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A. Novel
B. Fraudulent
C. Binding
D. Actionable per se
E. Voidable

13. An agency relationship is one involving

A. A single party
B. Two parties
C. Three parties
D. Four parties
E. Five parties

14. In an agreement for sale of goods, the risk remains with the seller until the

F. Sale is completed
B. Goods are inspected to the satisfaction of the buyer
C. Final payment is made by the buyer
D. Cost, insurance and freight are paid for
E. Bill of lading is signed by the seller

15. A hire purchase relationship is one between a

A. Hiree and a hirer

B. Hiree and a bank
C. Seller and a servant
D. Master and a servant
E. Bailor and a bailee

16. A Contract of insurance can be described as one of

A. Uberrimae fidei
B. Non est factum
C. Volenti non fit injuria
D. Ultra vires

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E. Actionable per se

17. The membership of a general partnership is usually from

A. Two to twenty persons

B. Two to twenty-five persons
C. One to thirty persons
D. One to twenty-five persons
E. Three to twenty-five persons

18. The duty of an auditor of a company is to

A. Examine the books of accounts of a company and express his opinion thereon
B. Verify the financial statements on payment of salaries and allowances
C. Verify the financial statements on monthly imprests and express reservation
D. Verify the financial aspects of contracts to be awarded by the company
E. Verify the financial aspects of contracts already awarded by the company

19. The documents that are used in commercial and financial transactions to secure
payment of money are

A. ATM Cards
B. Bills of Lading
C. Payment Vouchers
D. Negotiable Instruments
E. Credit Cards

20. The proceedings whereby the State takes over the possession of the property of a
debtor and distributes them among persons whom the debtor owes money is
known as

A. Bankruptcy
B. Matrimonial causes proceedings
C. Lifting the veil proceedings
D. Garnishee proceedings
E. Binding over proceedings

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PART II: SHORT ANSWER QUESTIONS (20 MARKS)

Write the answer that best completes each of the following

questions/statements:

1. State the official name of a law which is made by the National Assembly and
signed by the President.

2. The tort that makes a master liable for the wrong of his servant is called…………….

3. State the term of a contract which is fundamental and goes to the root of the
contract.

4. The type of mistake which the parties to a contract make when they are mistaken
about different things is referred to as.............................

5. The type of agency which is created in an emergency without the opportunity to

contact the principal and get his instruction is called..........................

6. The type of goods which is to be grown, manufactured, identified and agreed

upon or acquired by the seller after making the contract for the sale of the goods
is known as............................

7. State the type of goods to which the Hire Purchase Act 2004 is applicable
irrespective of the amount involved.

8. State the principle of law which has been formulated to do equity between two
or more insurers where one of them has fully settled the claim of the insured in
respect of which both or all of them are liable.

9. The meeting which a new company may hold within eighteen months after its
incorporation is known as.............................

10. State the type of resolution that is required in order to effect a compulsory
winding-up of a company by the Federal High Court.

11. What must a partner do by himself in order to dissolve the partnership in which
he is a partner?

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12. Apart from certainty of words and certainty of subject matter, state the other
certainty which is required for the creation of a trust.

13. The Constitution being used in Nigeria at present as amended, came into force
in..........................................

14. One of the essential ingredients of the tort of negligence is the existence of
a...................................................

15. Withdrawal of an offer before it is accepted is also known as..............of the

offer

16. Non est factum means...............................

17. A party to a contract who claims damages on the basis of work done or as much
as he deserves, is said to be claiming on ............................

18. The fact that a company cannot die connotes that it has...............................

19. In order to manage the properties of a deceased person who died intestate, the
personal representatives should apply for ...................from the Probate
Registrar.

20. A trustee must not favour the interest of one beneficiary against the other. This is
called the trustee’s duty of..............................

SECTION B: ATTEMPT ANY FOUR QUESTIONS (60 Marks)

QUESTION 1

(a) Ngozi and Kolade are promoters of a new company. You are required to
advise them on the following:

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(i) FIVE items they must include in the Memorandum of Association; (5 Marks)

and

(ii) FIVE documents of incorporation to be filed. (5 Marks)

(b) Halidu holds one million shares in Realshares Nigeria Plc. Zaidi, his son, has just
returned from University of Basel because he could not pay school fees. Halidu
is cash-strapped and wants to know whether he could transfer his shares to
someone else to raise money to pay the fees.

Required:

Advise Halidu, stating the statutory conditions by which he could transfer his
shares. (5 Marks)
(Total 15 Marks)

QUESTION 2

(a) The Central Bank of Nigeria is created by statute to superintend monetary

affairs. Explain FIVE functions of the Bank. (10 Marks)

(b) Mr. Chris died without leaving a Will. His dependants have approached you to
advise them on the steps to take in running his estate. Advise them.
(3 Marks)

(c) An Official Receiver is usually appointed by the court to take over the
management of the property of a debtor. You are required to state TWO
powers of an Official Receiver. (2 Marks)
(Total 15 Marks)
QUESTION 3

(a) Nigerian law is rich both in respect to source and contents. You are required to
list any FIVE sources of Nigerian Law. (5 Marks)

(b) Every human being has rights which are fundamental and which he enjoys
because he is a person. In Nigeria, the fundamental human rights are
guaranteed under the Nigerian Constitution. You are required to state any FIVE

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fundamental human rights guaranteed by Chapter IV of the Nigerian
Constitution. (5 Marks)

(c) The law of tort deals with civil liabilities of wrongdoers. There are many heads
of liability under the law. One of the heads of liability is the tort of vicarious
liability. You are required to explain the tort of vicarious liability.
(5 Marks)
(Total 15 Marks)

QUESTION 4

(a) Samuel, aged 16, is the son of Chief Luke Umeh, a multi-billionaire. Two weeks
ago, Samuel drove his father’s 2011 model Jeep vehicle to a car exhibition.

At the exhibition, he saw a year 2012 model of the same Jeep and entered into
a contract with the manufacturers to buy two of the latest Jeep.

The two Jeeps were delivered to Samuel and he drives them to his secondary
school to impress his school mates.

The manufacturers of the Jeep, Manny Auto Engineering Limited, requested for
payment for the Jeeps but Samuel refused to pay, claiming that he is an infant.
The manufacturers are insisting on full payment for the vehicles by Chief Umeh.

Required:

Advise the following parties on the implications of their actions:

(i) The manufacturers;

(ii) Samuel; and
(iii) Chief Luke Umeh (10 Marks)

(b) For a contract to be binding on all the parties to it, it must not be tainted by any
vitiating element. Undue influence is one of such vitiating elements.

Required:

Explain briefly undue influence as a vitiating element in a contract. (5 Marks)

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(Total 15 Marks)
QUESTION 5

(a) Stella works as a sales girl for Kampus Multipurpose Stores (KMS), operated by
Lucas on the University Campus.

Recently, Lucas discovered that whenever he was not around, Stella would pack
Lucas’ wares off the shelves and display her own wares on the shelves. Thus,
Stella used her employer’s time, resources and facilities to sell her own wares in
place of her employer’s.
The financial books of KMS were audited last month and the audit revealed that
on some occasions, Stella sold her employer’s wares at a higher rate than that
recommended and she pocketed the difference.

Required:

Advise the following parties on the legal implications of their actions:

(i) KMS (5 Marks)

(ii) Stella (6 Marks)

(b) A hire purchase agreement and a sale agreement are similar but not identical.

Required:

State any TWO differences between a hire purchase agreement and a sale
agreement. (4 Marks)
(Total 15 Marks)

QUESTION 6

(a) Xeyoze Limited was incorporated by the Corporate Affairs Commission on

February 1, 2010. On March 1, 2011, the company bid for a contract to
rehabilitate one of the nation’s oil refineries. This contract attracted scores of
bidders because it was seen as a very lucrative one.

A rival bidder objected to the competence of Xeyoze Limited to bid for the
contract on the ground that an investigation at the Corporate Affairs Commission
revealed that the company has not filed its annual returns.

Required:

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Advise Xeyoze Limited on the following:

(i) The importance of filing annual returns. (2 Marks)

(ii) The period within which the annual returns must be filed. (2 Marks)
(iii) The consequences of failure to file annual returns. (2 Marks)
(iv) Whether it is optional to file the annual returns or not (2 Marks)
(v) What is your advice if the contract was bid for on October 1,2010?
(3 Marks)

(b) Directors of companies are placed in special and unique positions. Their status
imposes certain duties on them, and these include fiduciary duties.

Required:

Explain any TWO fiduciary duties of a company director. (4 Marks)

(Total 15 Marks)

SECTION A

PART 1: MULTIPLE – CHOICE QUESTION

1. D
2. B
3. C
4. B
5. D
6. D
7. D
8. D
9. D
10. C
11. A
12. E

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13. C
14. A
15. E
16. A
17. A
18. A
19. D
20. A

EXAMINER’S COMMENTS

The questions fairly cover the entire syllabus. Candidates’ performance was good.

PART II– SHORT ANSWER QUESTIONS

1. Act of the National Assembly

2. Vicarious liability
3. Condition
4. Mutual mistake
5. Agency of necessity
6. Future goods
7. Motor vehicles
8. Subrogation
9. Annual General Meeting (AGM)
10. Special resolution
11. Give notice to the other partner(s)
12. Certainty of object

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13. 1999
14. Duty of care
15. Revocation
16. This is not my deed
17. Quantum meruit
18. Perpetual succession
19. Letters of Administration
20. Impartiality or good faith

EXAMINER’S COMMENTS

The questions test all areas of the syllabus. Performance of candidates was above 50%
of the mark allocated.

SECTION B

SOLUTION 1

(a) (i) Five items which promoters of a company must include in the
Memorandum of Association are:

 The name of the company;

 The object or business clause;

 The address of the registered office which must be in Nigeria;

 That the company is a private or public company as the case may be;

 The names of the subscribers and the number of shares taken by each,
written against his name;

 The restriction, if any, on the powers of the company;

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 The amount of the authorized share capital of the company; not being
less than N10,000 in the case of a private company and N500,000
in the case of a public company;

 That the liability of the members is limited to the amount unpaid, if

any, on their shares.

(a) ii. Five documents of incorporation to be filed by the promoters are:

1. The Memorandum and Articles of Association;

2. The Notice of the Registered office of the company;
3. The List and Particulars of Directors in the prescribed form together
with their consent to serve.
4. Statement of the Authorized Share Capital signed by at least one
director
5. Return on Allotment of Share Capital
6. Statutory Declaration of Compliance with the provisions of the
Companies and Allied Matters Act (CAMA) signed by a Legal
practitioner on the prescribed form;
7. Particulars of the Secretary, where he is mentioned in the Articles
of Association;
8. Any other document required by the Commission to satisfy the
requirement of any law relating to the formation of a company

(b) A shareholder has a right to transfer his shares to whoever he wishes, unless the
Articles of Association imposes restrictions on the shareholders as stated in
section 22(2) of CAMA which provides that every private company shall by its
Articles restrict the transfer of shares.

The transfer must be done through a properly executed instrument of transfer

signed by the shareholder, and sent to the company with the share certificate.

In the instant case, Halidu could transfer his shares to any person in order to
raise money to pay his son’s fees, because a share is a chose in action which is
easily transferable.

The statutory conditions upon which Halidu could transfer his shares are:

- The shares must have been registered in the transferor’s name;

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- a proper instrument of transfer must first be delivered to the company before
the transfer can be registered;
- The shares may be freely transferred subject to any restrictions contained in
the Articles;
- The company reserves the right to refuse the transfer on grounds of lien; or
that shares are not fully paid-up.

EXAMINER’S COMMENTS

The question tests candidates’ understanding of company incorporation documents and

transfer of shares.

Candidates understood the questions well, and performance was generally good.

SOLUTION 2

Some of the functions of the Central Bank of Nigeria (CBN) include:

(i) Issue and distribution of Nigerian currency: Section 15 of the CBN Act gives
the CBN the sole right of issuing currency notes, bank notes or coins or any
document or tokens which are likely to pass as legal tender.

(ii) Management of Nigeria’s external reserves: Section 24 of the Banks and

Other Financial Institutions Act (BOFIA) 2004 provides that the CBN shall at
all times maintain a reserve of external assets consisting of all or any of the
following- Gold Coin or Bullion, balances at any bank outside Nigeria,
treasury bills etc.

(iii) Banker and Financial Adviser to the Federal Government of Nigeria: Section 3(1)
of BOFIA provides that the Bank shall be entrusted with the Federal
Government’s banking and foreign exchange transactions in Nigeria and
abroad. The CBN shall receive and disburse Federal Government’s monies
and keep account thereof.

(iv) Promotion of monetary stability: This is done by developing and formulating

economic policies geared towards maintaining the stability of the Naira
against other leading foreign currencies.

(v) Banking supervision and examination over commercial and other banks:
Ensuring high standards of conduct and management throughout the banking
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system and to promote and maintain adequate and reasonable banking
services for the public.

(vi) Lender of last resort: The Central Bank of Nigeria is the lender of last resort to
the commercial banks. The commercial banks are required to keep and
maintain certain amount of statutory deposit with the CBN in order to
stabilise the flow of cash in the economy.

(b) Where a person dies without leaving a Will, he is said to have died intestate. In
order to administer the estate of the deceased, the dependants must apply to
the Probate Registry of the High Court of the State where the assets of the
deceased are situated, for the grant of Letters of Administration.

The following categories of persons may apply for the Letters of Administration:

(i) The surviving spouse of the deceased person;

(ii) Children of the deceased person who are of full capacity;
(iii) The parents of the deceased person i.e. the father and mother of the deceased
person;
(iv) Next of kin.

However, the maximum number of persons that could be granted Letters of

Administration at any given time is four (4).

(c) The powers of an Official Receiver are:

(i) To investigate the conduct of the debtor and report to the court stating
whether there is a reason to believe that the debtor has committed any
act which constitutes an offence under the Bankruptcy Act of 2004;

(ii) To conduct public examination of the debtor;

(iii) Pending the appointment of a trustee in bankruptcy, the Official Receiver

must perform the duties of a trustee in bankruptcy and the manager of the
properties of the debtor;

(iv) To use the assets available to generate funds where it is in the interest of
the creditors to do so.

EXAMINER’S COMMENTS
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The question tests candidates’ knowledge of the functions of the Central Bank of
Nigeria, Intestacy, and Bankruptcy Law.

The question was well understood and candidates’ performance was good.

SOLUTION 3

1a. Sources of Nigerian law are:

(i) Nigerian legislation, including subsidiary or delegated legislation;

(ii) Customary law including Islamic law;
(iii) Judicial precedent;
(iv) Treaties, International obligations and Conventions;
(v) Received English law comprising
- the common law
- the doctrines of equity
- Statutes of General Application in force in England on January 1, 1900

(b) The fundamental human rights guaranteed by Chapter IV of the Nigerian 1999
Constitution are:-

(i) Right to life;

(ii) Right to dignity of human persons;
(iii) Right to personal liberty;
(iv) Right to fair hearing;
(v) Right to privacy and family life;
(vi) Right to freedom of thought, conscience and religion;
(vii) Right to freedom of expression and the press;
(viii) Right to peaceful assembly and association;
(ix) Right to freedom of movement, except under legal or consequential
restraint.
(x) Right to freedom from discrimination on account of race, colour, sex,
religion or ethnicity ;
(xi) Right to acquire and own immovable property anywhere in Nigeria;
(xii) Right to vote or be voted for except under legal restraint.

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(c) The tort of vicarious liability simply means that one person will be held
accountable for the wrong committed by another person.

Thus, the person being held accountable is not the wrongdoer.

However, the rule is that, there must be a relationship between the wrongdoer
and the person being held liable for the wrong committed by the wrongdoer.
This could be master-servant; parent-child or master-apprentice relationship.

In a master-servant relationship, the wrong must have been committed while the
servant was carrying on the assignment he was employed to do. He must be
acting within the scope of his employment.

EXAMINER’S REPORT

The question tests candidates’ knowledge of sources of Nigerian law, Fundamental

Human Rights as contained in the Constitution, and Law of tort.

Nearly all candidates attempted the questions and performance was very good.

SOLUTION 4

(a.) This question tests candidates’ understanding of capacity of minors to enter into a
legally binding contract.

The position of the law is that generally, minors lack the capacity to enter into a
contract that will be legally binding on them.

However, contracts for necessaries would bind a minor.

Necessaries are goods suitable to the condition in life of the minor or other
persons concerned and to his actual requirements at the time of sale and delivery.

The decision in the case of Nash Vs Inman (1908), is authority for the above
position of law.

In this instance, Samuel is a minor.

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Thus, two units of year 2012 model of Jeep are not necessaries. They are luxury
goods.

Advice

(i) The manufacturer who entered into a contract with Samuel, a minor, for the
sale of luxury goods cannot enforce payment for the Jeep vehicles against
Samuel or Chief Luke Umeh.

The contract is binding on the manufacturer but not on Samuel.

The manufacturer can only claim for return of the Jeep vehicles through an
order for restitution.

(ii) Samuel, a minor is not bound by the contract. The contract is voidable at
his option. It was valid when it was made but it could be terminated by him
at anytime before he becomes an adult.

(iii) Chief Luke Umeh cannot be held liable for the price of the Jeep vehicles
which his son, Samuel bought. He would have been held liable if his son
had entered into a contract for necessary goods.

(b) Undue influence is one of the elements that could vitiate a contract.

Undue influence occurs in instances where a party to a contract uses his influence
over the other party to the contract to persuade him or them to enter into the
contract.

Undue influence may be presumed where there is a pre-existing relationship

between the two parties to a contract as a result of which one places trust in the
other.

It is for the dominant party to prove that the other party had independent advice.

The contract between the parties must be manifestly disadvantageous to the other
party who placed trust in the other.

Contracts entered into under undue influence, may be set aside or its terms
modified by the courts so as to mitigate the disadvantage.

The case of Royal Bank of Scotland Vs Etridge (2001) is authority for the above
position of the law.

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EXAMINER'S REPORT

The questions test candidates’ knowledge of application of the principles guiding

minor’s legal capacity to enter into contracts and the effects of vitiating elements of
undue influence in a contract.

Most candidates exhibited shallow knowledge of these topics, and performance was
generally poor.

Candidates are advised to familiarize themselves with this area of the syllabus.

SOLUTION 5

(a) This question deals with the law of agency, especially the duties of an agent to
his principal.

Among other duties, an agent owes his principal duty to avoid conflict of
interests, duty not to make secret profits, and duty of utmost good faith.

In this instance, Stella, the agent had-breached her duty of good faith, duty not
to make secret profits and duty not to allow her personal interest conflict with
those of her principal.

The action of Stella in packing her principal’s wares off the shelves and
replacing them with her own wares indicates that her own personal interest is
allowed to conflict with the interest of her principal.

The act of Stella in using her principal’s time, resources and facilities to sell her
own wares in place of her principal’s wares was done in bad faith, i.e. mala
fide.

The selling of her principal’s wares at higher rates than the recommended rates
and pocketing the difference amounts to making secret profits.

ADVICE:

(i) KMS, Stella’s principal is entitled to the secret profits made by Stella. KMS can
ask that Stella renders proper account and pays back the secret profits.

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KMS has the right to terminate the agency relationship with Stella.

(ii) Stella is liable to render account of the secret profits made by her to her
principal, having breached her duty of good faith. Her agency may be
terminated.

(b) Differences between a hire purchase agreement and a sale agreement are as
follows:

(i) Option to purchase is available under hire purchase, whereas that option
is not available in a sale agreement, because a sale agreement is final.

(ii) Property does not pass in a hire purchase agreement immediately, and it
will not pass until the stipulated time when all conditions are satisfied.
However, in a sale agreement, property passes immediately the
agreement is concluded; whether payment has been made or not.

(iii) The hirer is entitled to return the goods at any time and thereby determine
the contract and he is not liable to pay further instalments. In a sale
agreement however, the buyer is under obligation to pay fully, the
purchase price.

(iv) Hire purchase agreement must be in writing, a sale agreement need not
be in writing.

(v) Whereas the parties in a hire purchase agreement are the owner and the
hirer; on the other hand, the parties to a sale agreement are the buyer
and the seller.

(vi) Under a hire purchase agreement, the hirer cannot transfer valid title to a
third party, but in a sale agreement, the buyer can transfer valid title to a
third party.

EXAMINER’S REPORT

The question tests candidates’ understanding of the Law of Agency and the
differences between a hire purchase and a sale agreement.

Candidates clearly understood the question and performance was good.

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SOLUTION 6

The law is that annual returns shall be filed with the Corporate Affairs Commission
(CAC) within forty-two days after the annual general meeting for the year. (See
Section 374 of the Companies and Allied Matters Act (CAMA)).

Section 370 of CAMA also stipulates that every company shall, at least, once every
year, make and deliver to the CAC an annual return.

The annual return must address matters such as address of the registered office of
the company; authorized share capital of the company; the issued share capital; the
total paid-up capital; particulars of directors and secretary, among other matters.

A company need not file any return in the year of its incorporation. Section 370 of
CAMA.

Failure on the part of a company to file a return shall attract a penalty under section
378(1) of CAMA. The company and every director or officer of the company who is
in default shall be guilty of an offence and liable to a fine of N1,000 in the case of a
public company and N100 in the case of a private company. In this instance,
investigations at the CAC revealed that Xeyoze Limited has not filed its annual return
for 2010.

ADVICE

(i) Filing of the annual returns has the advantage of the CAC having correct and
updated information about a company. It is also a source of information to
shareholders and other interested parties to know the financial position of the
company. It makes a company to be free from criminal record of being
convicted for crime associated with refusal to file annual returns and of
making the directors and other officers of the company free from criminal
liability.

(ii) Annual returns must be filed annually. It must be filed within forty-two days
after the annual general meeting of the company for the year (S. 374
CAMA). However, a newly incorporated company need not file annual
returns in the first year of its incorporation. (S.370 CAMA).

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(iii) Consequences of failure to file annual returns is penalty of N1,000 in the case of
a public company and N100 in the case of a private company. Every
director or officer of the company in default shall be guilty of the offence as
well, and be fined appropriately.

(iv) It is mandatory to file the annual returns. It is not optional. (S.370 CAMA)

(v) If Xeyoze Limited bid for the contract on October 1, 2010, that would have
been eight months after its incorporation, the non filing of annual returns
would not have been an issue, since filing it within eight months was
premature.

Consequently, Xeyoze Limited would not be disqualified from the bid because it
failed to file its annual return.

(b) The fiduciary duties of a company director include the following:-

(i) Duty not to exceed powers

(ii) Duty to account
(iii) Duty to use power for proper purpose
(iv) Duty to avoid conflict of interest
(v) Duty not to fetter discretion
(vi) Duty to protect the interest of members and employees generally.

EXAMINER’S REPORT

The question tests candidates’ understanding of the procedure for filing Annual
Returns with the Corporate Affairs Commission (CAC) and fiduciary duties of
company directors.

Most candidates could not properly apply the laws guiding the filing of Annual
Returns with the Corporate Affairs Commission (CAC) to a practical situation,
because they appeared not to know the laws relating to the subject-matter.

Very few candidates attempted this question and their performance was generally
poor.

Candidates are advised to read more widely on the filing of Annual Returns, when
preparing for an examination.

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