The Institute of Chartered Accountants

PATHFINDER

THE INSTITUTE OF CHARTERED ACCOUNTANTS

OF NIGERIA

MAY2011FOUNDATION EXAMINATION

Question Papers

Suggested Solutions

Plus

Examiners’ Reports

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.

TABLE OF CONTENTS

SUBJECT / PAGES
FUNDAMENTALS OF FINANCIAL ACCOUNTING / 3 – 28
ECONOMICS AND BUSINESS ENVIRONMENT / 29 – 46
CORPORATE AND BUSINESS LAW / 47 – 64

ICAN/111/F/1 EXAMINATION NO ………………………………………….

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

FOUNDATION EXAMINATION – MAY 2011

FUNDAMENTALS OF FINANCIAL ACCOUNTING

Time allowed – 3 hours

SECTION A: Attempt All Questions

PART 1 MULTIPLE CHOICE QUESTIONS (20 Marks)

1.Where a Bill of Exchange has been accepted, the double entry involved in the books of the drawee is

1. Dr Bill of exchange receivable; Cr Debtors
2. Dr Bank/cash; Cr Debtors
3. Dr Debtor; Cr Bank/ cash
4. Dr Bill of Exchange; Cr Creditors
5. Dr Bills payable; Cr Creditors.

2. The essence of keeping departmental accounts EXCLUDES

1. each department’s gross profit can be known.
2. further analysis can reveal the net profit of each department.
3. areas of weaknesses in the organisation are revealed.
4. management can know the needs of the owners.
5. it enables management to take decisions.

3.Depreciation is the method of charging the cost of fixed assets such as property, plant and equipment and motor vehicle to financial operations. The guideline on charging the cost is provided in the

1. Prudential Guidelines.
2. Statement of Accounting Standards.
3. Companies and Allied Matters Act CAP C.20 LFN 2004.
4. Nigerian Insurance Commission Act 2006.
5. Banks and other Financial Institutions Act CAP B3LFN 2004.

4.What is the accounting principle that states ‘’Anticipate no profit and provide for all possible losses‘’?

1. Accrual concept
2. Matching concept
3. Prudence concept
4. Realisation concept
5. Objectivity

5.According to SAS 4- on stocks- the basis of valuation of inventoryis

A. cost or market value.

B. lower of cost and market value.

C. lower of cost and net realisable value.

D. lower of average cost and market value.

E. higher of average cost and market value.

6.According to SAS 4 on stocks, which of the following costs should be included in valuing the stocks of a manufacturing company?

(i)Carriage inwards

(ii)Carriage outwards

(iii)Depreciation of factory plant

(iv)General administrative overheads

A. i, ii, iii, and iv

B. i, ii, and iv

C. i, ii and iii

D. ii and iii

E. i and iii.

7. The plant and machinery account (at cost) of a business for the year ended 31

December 2008 is as follows:

N’000
1 Jan. balance / 2,400
30 June purchasing of plant / 1,600
4,000
31 March- disposal / (600)
Balance / 3,400

The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionate depreciation in the years of purchase and disposal.

What should be the depreciation charge for the year ended 31 December 2008?

A. N680,000

B. N640,000

C. N610,000

D. N550,000

E. N540,000.

8. Which of the following is NOTan adjusting post balance sheet event?

1. A valuation of property evidencing of impairment in value at the

balance sheet date

B.Sale of stock held at the balance sheet date for less than the cost

C.A fire completely destroyed a manufacturing plant and the loss is fully covered by insurance

D.Discovery of fraud or error affecting the financial statements

E.The insolvency of a customer indebted to the company at the balance sheet date.

9. Which of the following statements are correct?

(i)Marketing means that only items having a physical existence may be recognised as assets

(ii)This substances-over-form convention means the legal form of a transaction must always be shown in financial statements even if this differs from the commercial effect

(iii)The money measurement concept means that only items capable of being measured in monetary terms can be recognised in financial statements

A. ii only

B. i, ii, and iii

C. i only

D. iii only

E. i and ii.

10.Wazobia, a VAT registered trader, purchased a computer for use in her business. The invoice for the computer showed the following costs related to the purchase.

N’000
Computer / 890
Additional memory / 95
Delivery / 10
Installation / 20
Maintenance (1 year) / 25
1,040
VAT (5%) / 52
1,092

How much should Wazobia capitalise as fixed asset?

A N1,220,000

B N1,092,000

C N890,000

D N1,040,000

E N1,015,000.

11.In financial accounting,

A. capital plus drawings amount to assets.

B. assets plus liabilities amount to capital.

C. long-term liabilities plus asset amount to capital.

D. capital plus liabilities amount to assets.

E. capital equals liabilities plus long-term liabilities.

12.Expenses on minor repairs of building was posted to building account. This is an error of

A Omission.

B Complete reversal.

C Principle.

D Compensation.

E Commission.

13.Which of the following is a book of prime entry?

1. Cheque register
2. Purchases journal
3. Principle
4. Compensation
5. Commission

14.Goods originally costing N10,000 were valued for balance sheet purposes at N8,000. This is an application of the concept of

A consistency.

B cost.

C prudence.

D money measurement.

E realisation.

15.Which of the following is a capital receipt?

A Discount received

B Commission received

C Premium on shares

D Dividend received on shares

E Interest received on fixed deposit account.

16.The cost of goods purchased by cash was wrongly debited to sales account and credited to cash book. The entries necessary to correct the error are :

1. Dr Purchases account; Cr cash book
2. Dr Sales account; Cr Cash book
3. Dr Cash book; Cr Sales account
4. Dr Purchases account; Cr Sales account
5. Dr Purchases account; Cr Suspense account.

Use the following information to answer questions17 to 19

An asset costing N100,000 was purchased on 1 January 2004. Depreciation was provided for on monthly basis at the rate of 10% per annum using straight line method. It was disposed of on 30 June 2009 for N30,000.

17.What was the accumulated depreciation at the time of disposal?

1. N70,000
2. N55,000
3. N45,000
4. N30,000
5. N65,000.

18.What was the Net Book Value of the asset at the time of disposal?

1. N70,000
2. N55,000
3. N45,000
4. N30,000
5. N65,000.

19.What is the profit or loss on disposal?

1. N45,000 profit
2. N30,000 profit
3. N15,000 loss
4. N15,000 profit
5. N30,000 loss.

20.The accounting entries to record provision for doubtful debts are:

1. Dr Bad account; Cr Profit and loss account
2. Dr Profit and loss account; Cr provision for doubtful debts account
3. Dr profit and loss account; Cr bad debts account
4. Dr Profit and loss account; Cr debtors account
5. Dr Provision for doubtful debts account; Cr Profit and loss account.

PART II: SHORT ANSWER QUESTIONS (20 MARKS)

1.Which concept holds that when a company selects a method, it should

continue (unless conditions warrant a change) to use that method in subsequent years?

Use the following information to answer questions 2 and 3

An equipment worth N894,000 was purchased in year 2008. The depreciation rate is 20% per annum.

2.Calculate the depreciation for 2009, using straight-line method.

3.Calculate the depreciation for 2010, using the reducing balance method based on net book value at the end of 2009.

4.How are the profits and losses of a partnership shared when there is no partnership deed/agreement?

5.Subscription in arrears is treated in the balance sheet of a club as…………..

6.On partnership dissolution, if a partner’s capital account has a debit balance and the partner is insolvent, the deficiency will be borne by the solvent partners in the ratio of the last agreed capital. This is in accordance with the decision in the case of………………………..

7. Raise a journal entry to record sales of shares at par.

8. On the sale of business, the price paid by an acquiring company is………….

9. When partners maintain fixed capital accounts, the journal entries for a

partner’s share of profit is……………………………….

10.Freehold land is NOT a depreciable asset because it has………………………

11. What is a self balancing account?

12.A statement prepared periodically and sent by a banker to its

customers is ………………………

13. The remuneration payable to a person in respect of the use of an asset based

on the extent of exploitation is known as…………….

14.What basis of apportionment should be used to share rent expenses among constituent departments within an organisation?

15When goods are transferred to a branch at cost plus 15%, what is the actual cost of goods transferred to the branch at selling price of N32,000?

16.What is the source of preparing the trial balance of a business entity?

17.Which accounting concept stipulates that accounting profit is the difference between revenue and expenses?

18. Interest on a partner’s drawing is debited to………and credited to……………

19.The starting point for the preparation of final accounts from incomplete records is the preparation of …………………………

20. The transferring of entries to the ledger accounts from the journal is known as ………………………….

SECTION B: ATTEMPT ANY FOUR QUESTIONS (60 Marks)

QUESTION 1

According to Statement of Accounting Standard (SAS) 7,

(a)What is Exchange Rate? (1 Mark)

(b)List and discuss different types of Exchange Rates (8 Marks)

(c)Explain the main methods of translating the accounts of foreign

operations. (6 Marks)

(Total 15 marks)

QUESTION 2

(a)What is an Application Package? (3 Marks)

(b)State SIXbusiness areas where Application Packages are used (6 Marks) (c )List SIXtypes of Application Packages, giving examples (6 Marks)

(Total 15 marks)

QUESTION 3

The following are balances extracted from the books of Mahmood Manufacturing Company Ltd as at 31 December, 2010:

N
Delivery van expenses / 125,000
Electricity: Factory / 142,950
Office / 55,500
Manufacturing wages / 2,273,500
General expenses: Factory / 282,000
Office / 190,800
Sales representative: Commission / 393,000
Purchase of raw materials / 1,952,700
Rent: Factory / 240,000
Office / 110,000
Machinery (cost N2,500,000) / 1,625,000
Office equipment (cost N750,000) / 550,000
Office salaries / 742,250
Debtors / 1,418,500
Creditors / 972,500
Bank / 666,850
Sales / 6,825,800
Premises (cost N2,500,000) / 2,000,000
Stock at 31 December, 2009:
Raw materials / 428,250
Finished goods / 1,474,000
Share capital / 6,872,800

You are provided with additional information thus:

(a)Stock at 31 December 2010:

-Raw materialsN452,500

-Finished goodsN1,560,000

There was no work-in-progress.

(b)Depreciation: Machinery-N100,000, Office equipment N75,000 and Premises N50,000

(c)Manufacturing wages due but unpaid at 31 December 2010, was N15,200, office rent prepaid was N5,400.

Required:

Prepare the Company’s Manufacturing, Trading, Profit and Loss Account for the

year ended 31 December 2010 and the Balance Sheet as at that date.

QUESTION 4

Ahmed, Bola and Chukwu who are in partnership sharing profits and losses in the ratio 2: 2: 1, decided to dissolve the partnership on 31 December 2010 at which date their Balance Sheet was as shown below:

AHMED, BOLA & CHUKWU
BALANCE SHEET AS AT 31 DECEMBER 2010
N / N
Fixed Assets:
Equipment / 750,000
Motor vehicle / 375,000 / 1,125,000
Current Assets:
Stock / 200,000
Debtors / 112,500
Bank / 52,500
365,000
Current Liabilities:
Creditors / (75,000) / 290,000
1,415,000
Capital Accounts:
Ahmed / 975,000
Bola / 325,000
Chukwu / 50,000 / 1,350,000
Current Accounts:
Ahmed / 17,500
Bola / (7,500)
Chukwu / 5,000 / 15,000
Loan: Bola / 50,000
1,415,000

The partners were unable to sell the business as a going concern. They therefore disposed the assets separately for the following amounts:

N
Equipment / 775,000
Motor vehicle / 120,000
Stock / 72,500

Debtors paid in full and creditors gave discount totalling N2,500. Dissolution expenses totaled N20,000.

Required:

Prepare the necessary ledger accounts to close the books of Ahmed, Bola and Chukwu & Co. (15 marks)

QUESTION 5

The following balances were extracted from the books of Olojuede Plc as at 31 December 2010 after the preparation of the Trading Account.

N,000
Share Capital: Authorised, issued& fullypaid:
200 million ordinary shares of N1 each / 200,000
Cash at bank and in hand / 500
Stock at 31 December, 2010 / 61,200
Sundry debtors / 19,105
Sundry creditors / 15,009
Gross profit from trading account – 31/12/2010 / 128,942
General reserve / 25,000
Salaries and wages / 28,430
Prepayments / 600
Bad debts / 500
Accrued expenses / 526
Directors’ current accounts / 2,500
Debenture interest (six months) / 600
Rates and Insurance / 1,520
Sundry expenses / 4,100
6% debentures / 20,000
Electricity / 1,310
Postages and telephone / 800
Motor vehicles (Cost N25 million) / 15,000
Office fittings & equipment (cost N65.5 million) / 42,350
Profit & loss- 1 January, 2010 / 22,300
Land & building (cost) / 239,362

Additional information:

(a)Office Fittings and Equipment to be depreciated at 15% on Cost and Motor Vehicles 20% on cost

(b)Provision to be made for:

Directors’ feesN6,000,000

Audit feesN2,500,000

(c)The amount for insurance included a premium of N600,000 paid in September 2010 to cover the company against fire loss for the period 1 September 2010 to 31 August 2011

(d)N548,000 in respect of electricity consumed up to 31 December 2010 has not been posted to the ledger.

(e)The directors have recommended that:

(i)N15,000,000 be transferred to general reserve

(ii)5% dividend be paid on ordinary shares.

Required:

Prepare, in vertical format,the Profit and Loss Account and Balance Sheet of Olojuede plc for the year ended 31 December 2010.

(15 Marks)

QUESTION 6

Yobo Nigeria Limited has its head office in Lagos with a branch in Kano. Goods are sent to the branch at cost plus mark-up of 25% which is the branch selling price. The following are details of the Kano branch transactions for the year ended 30 June 2009.

N,000
Opening stock at branch selling price / 100,000
Goods sent to branch at selling price / 900,000
Goods returned to the head office by branch customers (all at normal selling price) / 90,000
Credit sales / 600,000
Cash sales / 192,000
Authorised allowance off selling price / 8,000
Goods returned to Head office by branch customers at selling price / 40,000
Cheque/ cash received from branch customers / 400,000
Cash discount allowed to branch customers / 20,000
Branch sundry expenses paid by the head office / 50,000
Cash stolen at branch / 10,000
Goods stolen at branch at selling price / 30,000
Closing stock at branchat selling price / 110,000

You are required toprepare the following accounts in the ledger of the head office to record the transactions of the branch using COST PLUS MARK-UP METHOD:

(a)Branch stock account

(b)Branch stock adjustment account

(c)Goods sent to branch account

(d)Branch debtors account (15 marks)

SOLUTIONS TO SECTION A

PART I - MULTIPLE CHOICE QUESTIONS

1.A

2.D

3.B

4.C

5.C

6.E

7.D

8.C

9.D

10.E

11.D

12.C

13.B

14.C

15.C

16.D

17.B

18.C

19.C

20.B

TUTORIAL

7.(2,400,000 X 20%) + 1,600,000 X 20%)=9/12 X 600,000X20%=N550,000

10.(N890,000 + N95,000+10,000 +N20,000) = N1,015,000

N

17.Depreciation 2004 to 2008, (10% x N100,000)×5 = 50,000

Depreciation 2009 (6 months) N10,000÷2 = 5,000

55,000

18.Net Book value ( N100,000 – N55,000) = 45,000

19.Loss on Disposal ( N45,000−N30,000) = 15,000

EXAMINERS’ REPORT

The questions cover all sections of the syllabus and were attempted by all candidates and their performance was very good.

PART II – SHORT-ANSWER QUESTIONS

1.Consistency concept

2.N178,800

3.N114,432

4.In equal proportion

5.Current asset or debtors

6.Garner V Murray

7.Dr. Cash Book, Cr. Ordinary Shares Account

8.Purchase consideration

9.Dr. Profit & Loss Appropriation Account, Cr. Partner’s Current Account

10.Unlimited useful life or infinite life span

11Control Account or Total Account

12.Bank Statement

13.Royalty

14.Floor area occupied

15.N27,826

16.Net balances from the ledger accounts

17.Matching concept

18.Partner’s current Account and Profit and Loss Appropriation Account

19.Statement of Affairs

20.Posting

TUTORIALS

2.Cost894,000

Depreciation 20% × N894,000178,800

715,200

200820% × N894,000 =N178,800

3.200920% × N894,000 – N178,800 =N143,040

201020% × N894,000 –(N178,800 –N143,040) =N114,432

15.100 X N32,000 ÷ 115 = 27,826

EXAMINERS’ REPORT

The questions cover all sections of the syllabus and were attempted by all candidates. The candidates’ performance was very good.

SECTION B

SOLUTION 1

a.Exchange Rate is the rate at which the local currency is exchanged for the currency of another country.

b.The Exchange Rates used are:

(i)Official Exchange Rate: This is the established rate by the appropriate governmental agency for eligible transactions. Before the introduction of the Foreign Exchange Markets in September 1986, the Central Bank of Nigeria provided the only official exchange rate in Nigeria.

(ii)Spot Rate: This is the exchange rate prevailing on a particular day. It is usually the rate used to settle accounts at the end of the day for immediate delivery of currency. In Nigeria, each authorized dealer has spot rates determined either from biddings on Foreign Exchange Market or from negotiated rates on funds from other sources.

(iii)Closing Rate of Exchange: This is the exchange rate ruling at the Balance Sheet date.

(iv)Forward Rate: This is the rate quoted or agreed upon now for future delivery of currency between the parties involved.

c.Main methods of translating the accounts of foreign operations are:

(i)Closing Rate Method: All assets and liabilities are translated at the rate ruling at the balance sheet date. This method is also referred to as the current rate method.

(ii)Temporal Method: Current assets and liabilities are translated at the rate ruling at the balance sheet date and non-current assets and liabilities are translated at the applicable historical rate at the dates they were acquired or incurred. This method is also referred to as the current/non-current method.

(iii)Monetary and Non Monetary Method: Monetary assets and liabilities are translated at the rate ruling at the balance sheet date and non-monetary assets and liabilities at the historical rates ruling at the dates they were acquired or incurred. Assets and liabilities are regarded as monetary, if their nominal values are fixed. All other balance sheet items are classified as non-monetary.

EXAMINERS’ REPORT

The question tests candidates’ knowledge of ‘’Foreign Currency Conversion and Translations (SAS 7). The question was attempted by few candidates and performance was very poor. The candidates that attempted the question were not familiar with the provisions of the standard.

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

SOLUTION 2

a.An application package is a program or set of programs of a generalized nature designed to solve a particular business problem. Many users have the same type of problem for computerisation thus Manufacturers and specialist software writers have written standard programs to solve these problems and sell them to many users who want them.

b.Business application areas where application packages are used include: General ledger, payroll, sales ledger, purchases ledger, production control, stock control, fixed assets management, supply chain management, resource planning system, sales invoicing and project management (Network Analysis), tax computation, word processing.