FIN ACC 10/2020

INSTITUTE OF PEOPLE MANAGEMENT OF ZIMBABWE

DIPLOMA EXAMINATION

FINANCIAL ACCOUNTING

DATE: OCTOBER 2020

TIME ALLOWED: 3 HOURS

Instructions: Answer FOUR Questions. TWO questions from Section A.

TWO questions from Section B.

ALL QUESTIONS CARRY THE SAME TOTAL VALUE OF 25 MARKS.

This paper consists of 8 pages of questions.

SECTION A Answer TWO questions from this Section.

1. Select the most suitable answer

1.1 The trial balance should always balance:-

A No because it is not a statement of financial position
B Yes always
C Yes, except where it is extracted at year end
D No, there are sometimes good reasons why they differ [1]

1.2 It was discovered that a credit customer has been charged $76 for a purchase instead of
$67. Which document will be issued by the seller to correct the error?
A Credit note
B Debit note
C Invoice
D Statement [1]

1.3 Which of the following is correct?

A Profit reduces capital
B Capital can only come from profit
C Profit increases capital
D Profit does not alter capital [1]

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1.4 Given a purchases invoice showing five items of $100 each, less trade discount of 25%
and cash discount of 5%, if paid within the credit period, your cheque would be made
out for
A $356,25
B $350,00
C $325,00
D None of the above [1]

1.5 Depreciation is:-

A Acquisition cost of a non-current asset
B The salvage value of a non-current asset
C The cost of using an asset during its useful life
D The amount of money spent in replacing assets [1]

1.6 A firm bought a machine for $20 000. It is expected to be used for six years then sold
for $2 000, 00. What is the annual amount of depreciation if the straight line method
is used?
A $3 333,00
B $3 667,00
C $2 900,00
D $3 000,00 [1

1.7 When is a provision for bad debts created?

A When trade receivables become insolvent
B When bad debts are written off
C When there is need to provide for possible bad debts
D When trade receivables go out of business [1]

1.8 Given a desired cash float of $300, if $220 is spent in the period, how much will be
reimbursed at the end of the period?
A $300,00
B $80,00
C $380,00
D $220,00 [1]

1.9 Given the cost of goods sold of $20 000,00 and margin of 20%, then sales figure is:-
A $25 250,00
B $27 000,00
C $16 667,00
D $25 000,00 [1]

1.10 A Receipts and Payments Account is one:-

A Which is accompanied by a statement of financial position
B In which the profit is calculated
C In which the opening and closing balances are shown
D In which the surplus of income over expenditure calculated [1]
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1.11 A sole trader compares his results with those of a similar business. Which of the
following shows how well expenses are being controlled?
A Bank balance
B Cost of sales
C Gross profit
D Net profit [1]

1.12 A cheque paid by ourselves but not yet reflected on the bank statement, is:-
A A stop order
B An unpresented cheque
C A dishounoured cheque
D A credit transfer [1]

1.13 Capital expenditure is

A Additional contribution by the owner
B Day to day running expenses of the business
C Adding value to non-current assets
D Proceeds from sale of non-current assets [1]

1.14 A debit balance brought down on a Stationery Account means:-

A We owe for stationery
B We are owed for stationery
C We have lost money on stationery
D We have inventory of stationery unused [1]

1.15 The recommended method of departmental accounts is:-

A To allocate expenses in proportion to sales
B To charge against each department its controllable costs
C To allocate expenses in proportion to purchases
D To charge against each department its uncontrollable costs [1]

1.16 If fixed capital accounts are to be maintained the partners’ salaries must be:-
A Debited to capital accounts
B Credited to capital accounts
C Debited to partners’ current accounts
D Credited to partners’ current accounts [1]

1.17 If trade payables at 1 January 2018 were $3 000,00 and $5 000,00 at 31 December
2018 and payments to creditors were $30 000, then purchases for 2018 are:-
A $28 000,00
B $32 000,00
C $38 000,00
D $29 000,00 [1]

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1.18 A cash book is used to record

A All cash and cheque transactions
B All credit transactions
C All business transactions
D Cash and cheque from debtors only
E Cash and cheques from creditors only [1]

1.19 The sale of goods amounting to $10 000, to D. Chirume is debited to D. Choruma’s
account. This is an error of :-
A Commission
B Original entry
C Complete reversal of entries
D Omission [1]

1.20 The payment of $15 000,00 rent was entered in the premised account. This is an error
of:-
A Compensation
B Original entry
C Complete reversal of entries
D Partial reversal of entries
E Principle [1]

1.21 Stock is always valued at:-

A Cost
B Sales value
C Net realizable value
D Lower of cost and net realizable value [1]

1.22 Which of the stock valuation methods will give you the highest profit?
A FIFO
B LIFO
C Weighted Average
D None of the above [1]

1.23 A provision for bad debt is made for:

A A debt that is irrecoverable
B A debt which may be irrecoverable
C A debt that will be irrecoverable
D A debt that has been irrecoverable [1]

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1.24 Which of the following is correct?

A In the books of a club, subscriptions in advance should be included in current
liabilities
B In the books of a club, an operating deficit should be added to the accumulated
fund at the beginning of the period
C A subscriptions account cannot have more than one balance at the beginning of a
period
D Profit or loss on commercial activities undertaken by a club should be calculated
separately from the income and expenditure account [1]

1.25 A document that brings about a partnership agreement is called a:-

A Memorandum of Agreement
B Partnership Memorandum of Association
C A deed of partnership
D A deed of trust of partnership [1]

2. (a) List five reasons why retail and trade customers may return goods to the supplier. [5]

Five reasons why customers may return goods to the supplier

- Wrong colour
- Wrong size
- Goods are faulty
- Goods bought were more that needed
- Customer changed his/her mind
- Customer found the goods too difficult to use
- Items damaged by the customer
- Seller has asked all customers to return a specific item
- Customer saw the same goods elsewhere at a cheaper price
- Poor quality

(b) From the details below, draw a cash book and balance it off as at the end of the month
2018
January 1 Started business with capital in cash $2 000
2 Paid rent by cash $250
3 CBZ loan deposited into the bank $3 000
4 Purchased goods on credit from O. Nhema for $400
5 Cash sales $200
7 Susan paid us by cheque $34
8 Sold goods on credit to C. Makutuya for $700
9 We paid Owen in cash $92
11 Cash sales paid through RTGS $150
15 Hallo paid us in cash $96
16 $200 was taken out of the cash till and deposited into the bank
20 Paid Melbo $500 by cheque
22 Cash sales paid direct into the bank $150
26 Paid motor expenses by cheque $100
29 B. Chafanza cleared his account by cheque subject to a 3% discount
30 Paid off O. Nhema account by cheque after taking a 2% discount
31 Paid wages in cash $350 [20]
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DATE DETAILS DISCOUNT CASH BANK DA DETAILS DISCOUNT CASH BANK

ALLOWED TE RECEIVED
2018 $ $ $ 2018 $ $ $
Jan 1 Capital 2 000 2 Rent 250
3 Loan CBZ 3 000 9 Abigail 92
5 Sales 200 16 Bank 200
7 Rudo 34 20 Masamba 500
11 Sales RTGS 150 26 Motor expenses 100
15 Hove 96 30 T Dube 8 392
16 Cash 120 31 Wages 350
33 Sales 150 31 Balance c/d 1 404 3 221
29 B Moyo 21 679
21 2 296 4 213 8 2 296 4 213

3. “As the essence of a partnership mutual agreement, it is desirable for the partners to come to
some understanding before entering into a partnership as to the conditions upon which the
business is to be carried on, and as to their respective rights and powers.”

Required
(a) List any five benefits of operating a business as a partnership. [5]
(b) Explain the issues which should be spelled out in a partnership agreement [15]
(c) Cain and Abel were operating a partnership business with capital balances of $80 000
and $70 000 respectively. They decided to admit Jacob as a new partner and he was to
pay $25 000 to Cain for one-third of his interest and $25 000 to Abel for one-half of
his interest.

Required
Journalise the above entries in the Partnership records. [5]

(a) Benefits of a Partnership

- The introduction of more capital into the business, which means that the business can grow faster than
before
- The ability to use the expertise of another person or persons which the original owner might not
possess
- Sharing the risks involved in the business, if the business, is a sole trader incurs a loss he will have to
meet it on his own on the other hand, having a partnership means that losses will be shared

(b) Partnership agreement

- Amount of capital to be contributed by each partner and whether such capital shall be fixed or
otherwise
- The division of profit (profit/loss sharing ratio) between the partners
- Whether the capitals are to be fixed, drawings and profits being adjusted on current accounts, or
whether they are to be adjusted on the capital accounts
- Whether interest on capital or on drawings, or both, is to be allowed or charged before arriving at the
profits divisible in the agreed proportions, and if so, at what rate
- Whether current accounts are to bear interest, and if so, at what rate
- Whether partner’s drawings are to be limited in amount
- Whether partners are to be allowed remuneration for their services before arriving at divisible profits,
and if so, the amount thereof

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- Those proper accounts shall be prepared at least once a year so that these shall be audited
- The method by which the value of goodwill shall be determined in the event of the retirement, death or
admission of any partner
- In the event of there being any partnership insurance policies, the method of treating the premiums
thereon and the division of the policy money.

(c) Journal entries

Debit Credit
$ $
Cain 25 000
Abel 25 000
Jacob 50 000

4. (a) Explain briefly the following terms as they relate to Accounts of Limited Companies:-
(i) Authorised share capital [3]
(ii) Issued share capital [3]
(iii) Debentures [3]
(iv) Ordinary shares [3]
(v) Preference shares [3]

(i) Authorised share capital

Is the maximum amount of capital the company is allowed to raise from the public by the issue of shares
(ii) Issues share capital
- It is the actual amount of capital that has been raised through issue of shares to the public
- Is that part of the authorized capital that is offered to the public for subscription
(iii) Debentures
- Are loans to the company which are raised upon the security of the assets of the company
- Interest on debentures is fixed and payable whether profits are made or not
(iv) Ordinary shares
- Are those shares that receive dividends only after preference shares are paid their fixed rate of
dividends
- Ordinary shares are the most common type of shares
- Ordinary shareholders have full voting and controlling rights on the company
- Ordinary shares rank after the preference shares in the distribution of company assets on
liquidation of the company.
(v) Preference shares
- Are much less common than ordinary shares
- Preference shares carry no vote so no influence can be made over company policy irrespective
of the size of the preference shareholding
- Preference shares earn a fixed rate of dividend and are entitled to profits before ordinary
shares
- Cumulative preference shares are paid area dividends for those years when profits were not
sufficient to pay their dividends.

(b) The following information relates to Rumbi Emily Zata Sole Trader as at 31/12/18
$
Issued Ordinary Share Capital 200 000
Issued Preference Share Capital 200 000
Plant Machinery 300 000
Inventory 31/12/18 40 000
Payables 100 000
Motor Vehicles (NBV) 150 000
Land and Buildings 300 000
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Receivables 250 000

Debentures 400 000
Cash and Cash equivalents 110 000
Goodwill 50 000
Retained profits 300 000

Required

Prepare a Statement of Financial Position as at 31 December 2018. [10]

RUMBI EMILY ZATA

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018

$ $
ASSETS
Non-Current Assets
Land and Buildings 300 000
Plant and Machinery 300 000
Motor vehicles 150 000
Goodwill 50 000
800 000
Current Assets
Inventory 40 000
Receivables 250 000
Cash and Cash Equivalents 110 000 400 000
Total Assets 1 200 000

Equity and Liabilities 200 000

Issued Ordinary Share Capital 200 000
Issued Preference Share Capital 300 000
Retained Profit 700 000

Non-Current Liabilities 400 000

Debentures
Current liabilities
Creditors 100 000
Total Equity and Liabilities 1 200 000

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SECTION B Answer TWO questions from this section

5. “One of the most arduous tasks in an organisation is the management of stocks and in
particular the preparation for a stock take. The preparation for a stock take can be
summarised into 3 stages: before stock take, during stock take and after stock take”.

Required

Discuss what is involved in the three stages above. [25]

6. The following information is extracted from the books of Owden Manufactures, at the end of
December 2018:
Cash in hand 11 000
Purchase of raw materials 58 200
Rent and rates 16 000
Sales 82 400
Sundry payables 37 000
Capital account 144 300
Inventory at 1 January 2018:
Raw materials 21 000
Work-in-progress 10 000
Finished goods 23 000
Land and buildings 41 000
Plant and equipment 20 000
Trade receivables 15 000
General administration salaries 11 000
Electricity 11 000
Factory wages 27 500
Carriage outwards 400
Returns inwards 700
General office expenses 900
Plant and machinery repairs 1 000
Provision for depreciation – Plant and equipment 4 000
267 700 267 700
Notes
(i) Rent and rates paid in advance $4 000
(ii) Electricity accrued $4 000
(iii) Inventory in hand at 31 December 2018
Raw materials $19 000
Work-in-progress $11 000
Finished goods $26 000
(iv) Band debts provision to be 5% of trade receivables
(v) Plant and equipment depreciation is charged at 10% straight line method
(vi) 80% of electricity and 75% of rent and rates to be charged to factory.

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Required
(a) Prepare Manufacturing Account and a Statement of Comprehensive Income for the
year ended 31 December 2018 [18]

(b) Prepare a Statement of Financial Position as at 31 December 2018 [7]

OWDEN MANUFACTURERS – MANUFACTURING ACCOUNT FOR THE YEAR ENDED 31 DEC 2018

$ $
Direct materials
Inventory at 1 January 2018 21 000
Purchases 58 200
79 200
Closing inventory (19 000)
Factory wages 27 500
Prime cost 87 500
Factory overhead expenses
Electricity (11 000 + 5 000 x 80% 12 000
Rent and Rates (16 000 – 4 000 x 75% 9 000
Repairs to plant and equipment 1 000
Depreciation - Plant and equipment 2 000 24 000
111 700
Add Work in progress 1 January 2018 10 000
121 700
Less Work in Progress 31 December 2018 (11 000)
Manufacturing cost of goods produced 110 700

OWDEN MANUFACTURERS : STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DEC 2018
$ $
Sales (net)(824 000 – 700) 81 700
Cost of sales
Cost of goods produced 110 700
Add inventory of finished goods (1/1/18) 23 000
133 700
Less inventory of Finished goods (31/12/18) (26 000) (107 700)
Gross Loss (26 000)
Expenses
Carriage outwards 400
Salaries 11 000
Office expenses 900
Electricity 3 000
Rent and rates 3 000
Bad debts 750 (19 050)
Net Loss 45 050

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OWDEN MANUFACTURERS: STATEMENT OF FINANCIAL POSITION AS AT 31 DEC 2018

ASSETS
Non-Current Assets AT COST ACC NBV
DEPRECIATION
$ $ $
Freehold land and buildings 41 000 41 000
Plant and equipment 20 000 6 000 14 000
61 000 6 000 55 000
Current Assets
Inventory : Raw materials 19 000
W.I.P 11 000
Finished goods 26 000
Trade receivables (net) 14 250
Prepayment 4 000
Cash 11 000 85 250
Total Assets 140 250

Equity and Liabilities

Capital 144 300
Loss for the year (45 050)
99 250
Current Liabilities
Trade payables 37 000
Accrued expenses 4 000
Total Equity and Liabilities 140 000

7. Discuss the benefits of a Bill of Exchange in the modern commercial world [25]

Benefits of Bills of Exchange in the Commercial world

- It is a legal evidence of debt
- It is a convenient method for the transfer of debt
- A creditor can sue on the bill itself
- It is a negotiable instrument and can be transferred for settlement of one’s debt without difficulty
- It can be cashed before due date by discounting
- A debtor enjoys the benefits of full period of credit
- It affords an ease means of transmitting money from one place to another

8. (i) A commuter omnibus was bought by Owden for business at a cost of $17 000. It is
expected to last for five years and then be sold for scrap for $2 000. Usage over five
years is expected to be :-
Year 1 200 days
Year 2 100 days
Year 3 100 days
Year 4 150 days
Year 5 40 days

Required

Compute the depreciation to be charged each year under:-

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(a) The Straight-line method [5]

(b) The reducing balance method [5]
(c) The machine hour method [5]

(ii) Owen Limited purchased a grinding mill on 1 January 2008 at a cost of $70 000. It
has an expected useful life of ten years with no residual value. On the same day tools
were purchased for $3 000. At the end of 2008 the value of the tools was $2 800 and
at the end of 2009 it was $2 500.
Required

Calculate the depreciation on machinery for 2008 and 2009 if:-

(a) The sum-of-the-years digit method is used [3]
(b) The reducing method [3]
(c) The straight-line method [2]
(d) Calculate the depreciation on tools for 2008 and 2009 [2]

(i) Straight line method

Under the straight-line method depreciation for each of the five years is:-
Annual depreciation = $17 000 - $2 000 = $3 000 per annum
5 years

(ii) Reducing balance method

Year Calculation Depreciation amount

1 35% x 17 000 $5 950
2 35% x (17 000 – 5 950) = 35% x 11 050 3 868
3 35% x (11 050 – 3 868) = 35% x 7 182 2 514
4 35% x (7 182 – 2 514) = 35% x 4 668 1 634
5 Balance to bring book value to $2 000 = $4 668 - $1 634 - $2 000 1 634

(iii) Machine hour method

Under the machine hour method, depreciation of each o the five years is calculated as follows:-

Total usage (days) = 200 + 100 + 150 + 40 = 590 days

Depreciation per day = 17 000 – 2 000 = $25.42

590

Year Usage (days) Depreciation $

(days x $25.42)
1 200 $5 084.00
2 100 2 542.00
3 100 2 542.00
4 150 3 813.00
5 40 1 016.00
$14 997.00

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(b) (i) Sum of the year’s digit over 10 years

= (10 + ( + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1) = 55

2008: 70 000 x 10/55 = $12 727

2009: 70 000 x 9/55 = $11 455

(ii) Reducing balance method

2008: $70 000 x 20% = $14 000

2009: (70 000 - $14 000) x 20% = $11 200

(iii) Straight line method

Annual depreciation = $70 000 = $7 000

10

For 2008 = $7 000

2009 = $7 000

(d) Depreciation for tools

2008: $3 000 - $2 800 = $200

2009: $2 800 - $2 500 = $300

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