2024 EXAMINATIONS

CA LEVEL 1 (KNOWLEDGE)

PAPER 1: ACCOUNTING FRAMEWORK

FRIDAY, 31 MAY 2024 TIME ALLOWED: 3 HOURS

SUGGESTED SOLUTIONS & MARKING SCHEME

1 (a) (i) The five taxes are:

- Corporate Tax

This is tax based on profits generated by the company.

- Fringe benefit tax

These are taxes payable for providing fringe benefits, in form of the
school fees the company pays for the children of its employees.

- Value Added Tax

This would involve payment of value-added tax as the company

purchases raw materials and other services. Chisombezi may also
be charging VAT to customers and later remit the VAT to Malawi
Revenue Authority (MRA).

- Pay As You Earn

This is tax withheld from the salaries and wages of the company’s
employees.

- Non Resident Tax

This will be the form of tax the company will be withholding from
the payments to its foreign suppliers and/or service providers.
1 mark each (½ mark for listing and ½ mark for description) = 5 Marks

(ii) Journal entries

Dr Cr
K’000 K’000
Creditors 10,000
Withholding tax payable 10,000
Recognition of WHT payable on payment to
Suppliers

Withholding tax payable 10,000

Bank/Cash 10,000
Settlement of WHT liability
4 Marks

(b) (i) A Statement of changes in equity records details and movements within
the reporting year on elements that form part of equity in the statement
of financial position. 2 Marks

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 (ii) Components of the statement of changes in equity:
- Ordinary share capital
This is the capital put into the business by owners of capital.
- Share premium
This is the amount paid by owners of capital in excess of the nominal
value of capital.

- Retained earnings/Accumulated losses

This represents the accumulated profit generated by an entity or
losses incurred by entity.

- Translation reserve

This records movements in foreign currency translation differences

when converting the financial statements of a foreign subsidiary.

- Revaluation reserve
This represents the gains/losses from revaluation of properties, plant
and equipment.

- General reserve

This is used to record any amounts that a company/an entity wants

to reserve for future use.
Any four, 1 mark each (½ mark for mentioning and ½ mark for description) = 4 Marks

(iii) The purpose of a statement of changes in equity is to furnish

shareholders with information that can further inform their investment
strategy. It provides information about the company’s equity position.
It shows how much of the capital of a business is financed by the owners
of the company. 2 Marks

(c) (i) (1) Liquidity – Lomola plc can meet its short-term
obligations and operating expenses promptly. 1 Mark

(2) It provides the company with the flexibility to pay

suppliers, cover overheads costs and respond to
unexpected financial demands without relying on
borrowing or selling assets. 1 Mark

(3) Investment and growth – Can enable Lomola plc to seize

opprotunities for investment & expansion because it has
cash available 1 Mark

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 (ii) Lomola plc statement of cash flows as at 30 September 2022

Note K’000 K’000

Cashflow from operating activities
Profit before tax 306,000
Adjusted for:
Depreciation 1 75,750
Loss on sale of assets 2 10,500 86,250
Profit after adjusting for non-cash items 392,250

Increase in inventories (105,000)

Increase in Trade receivables (271,500)
Increase in prepayments (1,500)
Increase in trade payables 60,000
Increased accrued expenses 3,000 (315,000)
Cash generated from operations 77,250
Taxation paid (48,000)
Net cash from operating activities 29,250

Cashflow from investing activities

Purchase of non-current assets 3 (177,000)
Proceeds from sales of assets 15,000 (162,000)
Net cash from investing activities (162,000)

Cash flows from financing activities

Proceeds from issue of loan 2,250
Dividends paid (121,500) (119,250)
Net cash from financing activities (119,250)

Net decrease in cash and cash equivalent (252,000)

Cash balance as at 01 October 2021 9,000
Cash balance as at 30 September 2022 (243,000)
12 Marks
Workings

(1) Depreciation K’000

Balance 2022 161,250
Add: Accumulated depreciation on disposal 57,000
218,250
Less: Accumulated depreciation charge 2021 (142,500)
Depreciation charge 75,750

(2) Disposal of machinery

Profit/loss = Proceeds-cost-accumulated depreciation
= K15,000,000-(82,500,000-K57,000,000)
Loss = K10,500,000

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(3) Acquisition of new machinery
K’000
Balance 2022 358,500
Add: Disposal (cost) 82,500
441,000
Less: Opening balance (2022) 264,000)
Acquisition of new machinery 177,000

(4) Opening balance 48,000

Tax expense 78,000
Closing balance (78,000)
Tax paid 48,000

(i) Accounting standards for buildings

(1) IAS 16 Property, Plant and Equipment – because it is used for

administration purposes. 1 Mark

(2) IAS 11 Construction contracts – because it is built for a customer

under a contract. 1 Mark

(3) IAS 40 Investment property – because it is used to earn rentals.

1 Mark

(4) IAS 2 Inventories – because it is being built for resale. 1 Mark

(½ mark for the accounting standard and ½ mark for the reason)

(ii) Accounting treatment

(1) It will be recognized as a non-current asset at cost less

accumulated depreciation and accumulated impairment.
Subsequent to initial recognition it can be held at cost less
accumulated depreciation and accumulated impairment or can be
held at revaluation. Changes in fair value are recognized in
equity unless they relate to a change that was previously
recognized in statement of profit or loss. 1 Mark

(2) Revenue and costs should be recognized in proportion to the

stage of completion of contract activity. This is known as the
percentage of completion method of accounting. 1 Mark

(3) Investment property is initially measured at cost, including

transaction costs. Subsequently it can be measured at cost less
accumulated depreciation and accumulated impairment or at fair
value. Changes in fair values are recognized in the profit and
loss. 1 Mark

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 (4) It will be recognized as a current asset. It will also be used to
reduce the cost of sales in the statement of comprehensive
income. 1 Mark
(TOTAL: 40 MARKS)

2 (a) (i) Accounts Receivable

K’000 K’000
Balance b/d 63,600 Bank 273,570
Sales 321,570 Cash 52,200
Balance c/d 59,400
385,170 385,170
Balance b/d 59,400
4 Marks

(ii) Accounts payable

K’000 K’000
Bank 202,080 ½ Balance b/d 38,100
Cash 14,820 ½ Purchases 221,100
Balance c/d 42,300 ½
259,200 ½ 259,200
Balance b/d 42,000
4 Marks

(iii) Control accounts are called totals accounts because they carry the total
amounts of different types of transactions with creditors or with debtors.
1½ Mark

(iv) The “Total accounts” are helpful in locating errors and estimating a
business’s profit or loss. 1 Mark

(b) Mrs Mwavi’s statement of affairs as at 30 June 2023

K’000 K’000
Non-current assets 5,400

Current assets
Inventory 32,400
Receivables 63,600
Prepaid telephone 1,260
Bank 12,300 109,560
114,960

Current liabilities
Payables 38,100
Rent owing 1,170 39,270
Capital 75,690
3½ Marks

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 (c) Mrs Mwavi’s statement of profit and loss and other comprehensive income for
the year ended 30 June 2023

K’000 K’000
Sales 321,570
Cost of sales
Opening inventory 32,400
Purchases 221,100
Closing inventory (36,600) (216,900)
Gross profit 104,670

Expenses
Salaries 33,780
Rent (11,850-1,170) 10,680
Telephone (4,410+1,260-1,320) 4,350
General expenses 1,830
Depreciation (5,400-4,800) 600 (51,240)
Net profit 53,430
6 Marks
(TOTAL: 20 MARKS)

3 (a) (i) Cash accounting is a system of accounting based on cash transactions.

This is where transactions are recognized when cash is paid or received.
1 Mark
Accruals accounting is based on recognizing transactions when they are
incurred and not when cash is paid or received. Information is related
to the accounting period whether or not cash is paid. 1 Mark

(ii) Regulatory framework for financial reporting are principles that are
formulated to ensure that financial statements are prepared in a standard
that they provide high quality and reliable information. They consist of
generally accepted accounting principles as provided by:

 Company law
 Accounting Standards
 Stock exchange rules 2 Marks

The conceptual framework for financial accounting reporting provides

underlying principles that help in determining such issues as who the
users of accounting information are and what their needs are. How
assets, liabilities, equity, income and expenses should be recognized,
measured, presented and disclosed in financial statements.
2 Marks

(b) (i) An accounting standard is an authoritative pronouncement issued by a

standard setting authority. It provides ways of dealing with specific
accounting problems such as how to value inventories or non-current
assets under certain given conditions. 2 Marks

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 (ii) The basic objectives of the standard setting bodies are:

(1) To provide standard against which financial statements should

be measured in order to ensure uniformity in preparation of
accounting information. 1 Mark

(2) To protect the users by ensuring that preparation of financial

statements are conforming to standards set. 1 Mark
.
(3) To make financial statements comparable on the internation
basis. 1 Mark

(4) To develop in the public interest a single set of high quality and
understandable international reporting standards for general use.
1 Mark

(c) (i) Kitchen Trading account as at 31 May 2020

K’000 K’000
Opening inventory 32,800 Sales 430,400
Add purchases (W1) 324,992
Less closing inventory (47,744)
Cost of sales 310,048
Gross profit 120,352
430,400 430,400
3 Marks

(ii) Chiyanjano Men’s Ministry Club

Income and expenditure account for the period ended 31 May 2020

K’000 K’000
Income
Kitchen profit 120,350
Subscription 49,600
Interest 16,640
186,592

Expenditure
Rent 11,200
Rates 8,000
Transport expenses (W2) 21,792
Depreciation 12,160
Salaries and wages 67,360 120,512
Surplus 66,080

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 Workings

W1

Purchases K’000
Payments 323,040
Accounts payable
Less: Opening balance (16,320)
Add: Closing balance 18,272
Purchases 324,992

W2

Transport expenses
Payments 21,440
Accounts payable
Less: Opening balance (640)
Add: Closing balance 992
Transport expenses 21,792
5 Marks
(TOTAL: 20 MARKS)

4 Thamiwe Limited

Statement of profit and loss and other comprehensive income for the year ended
31 December 2023 ½

K’000
Turnover 2,828,349
Cost of sales (1,797,175)
Gross profit ½ 1,031,174
Selling and distribution expenses (332,729)
Administration expenses (180,340)
Operating profit 518,105
Finance costs (5,590)
Profit before tax 512,515
Corporate tax (143,755)
Profit after tax ½ 368,760

Workings

K’000

(1) Turnover
Sales 2,840,829
Less Return inwards (12,480)
Turnover 2,828,349

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 (2) Cost of sales
Opening inventory 130,000
Purchases 1,750,000
Carriage inwards 70,000
Return outwards (9,385)
Closing inventory (143,440)
1,797,175

(3) Selling and distribution expenses

Depreciation Plant and machinery (250,000*10%*50%) 12,500
Depreciation motor vehicles (200,000*20%*60%) 24,000
Depreciation computer equipment(120,000*25%*40%) 12,000
Carriage outwards 105,000
General distribution expenses 4,828
Sales commission 12,520
Rent (30,000*25%) 7,500
Motor vehicle expenses (8,688*60%) 5,213
Salaries and wages (181,075*70%) 126,753
Telephone and internet (40,000*40%) 16,000
Insurance (18,220*25%) 4,555
Stationery (7,440*25%) 1,860
Total selling and distribution expenses 332,729

(4) Administration expenses

Depreciation Plant and machinery (250,000*10%*50%) 12,500
Depreciation Motor vehicles (200,000*20%*40%) 16,000
Depreciation Computer equipment (120,000*25%*60%) 18,000
Rent (30,000*75%) 22,500
General administration expenses 10,298
Motor vehicle expenses (8,688*40%) 3,475
Salaries and wages (181,075*30%) 54,322
Telephone and internet (40,000*60%) 24,000
Insurance (18,220*75%) 13,665
Stationery (7,440*75%) 5,580
Total administration expenses 180,340

(5) Finance costs

Loan interest (20,000*25%) 5,000
Overdraft interest 590
Total financial costs 5,590.00
(TOTAL: 20 MARKS)

5 (a) (i) Errors that do not affect the balancing of the trial balance

(1) Errors of omission

(2) Errors of commission
(3) Errors of principle
(4) Errors of original entry

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 (5) Error of complete reversal of the entries
(6) Transposition errors
(7) Compensating errors
Any six, ½ mark each = 3 Marks

(ii) Errors that affect the balancing of the trial balance

(1) Errors is double entry book keeping.

(2) Errors is drawing out and adding up a trial balance.
(3) Casting error.
(4) Transposition error in one ledger.
Any two, ½ Mark = 1 Mark

(iii) Correction of errors that affect the balancing of the trial balance;

(1) When we have errors which affect the balancing of the trial
balance, the totals fail to agree.

(2) In this case, the difference is entered in a suspense account.

(3) The suspense account temporarily holds the difference in the in

the trial balance.

(4) Balance in the suspense account should not be kept permanently.

(5) The causes of the error(s) should be established and the balances
in the suspense account should be cleared by either debiting or
crediting the suspense account and a corresponding entry made
to the correct account.
Any four, ½ Mark each = 2 Marks

(b) Journal entries

Date Description Debit Credit

15-Jul-22 Tisungana 2,750,000
Tisungane 2,750,000

18-Oct-22 Mr Jere 5,250,000

Suspense 5,250,000

20-Dec-22 Suspense 9,375,000

Trade payable 9,375,000

22-Dec-22 Suspense 5,500,000

Asset disposal account 5,500,000

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 Date Description Debit Credit

22-Dec-22 Asset disposal account 15,000,000

Office equipment 15,000,000

22-Dec-22 Accumulated depreciation 11,250,000

Asset disposal account 11,250,000

22-Dec-22 Asset disposal account 1,750,000

Profit on disposal (other income) 1,750,000

31-Dec-22 Provision for doubtful debt expense 1,500,000

account
Accumulated provision for doubtful 1,500,000
debts
½ mark for each correct journal entry = 8 Marks

(c)
Suspense account
Date Description Amount Date Description Amount
K’000 K’000
20-Dec-22 Trade payables 9,375 Difference per Trial Balance 9,625
22-Dec-22 Asset disposal 5,500 15-Jul-22 Mr Jere 5,250
14,875 14,875
4 Marks

(d) K’000
Profit for the year 40,700
Add: Gain on disposal of office equipment 1,750
Less: Increase in provision for doubtful debts (1,500)
Adjust profit 40,950
2 Marks
(TOTAL: 20 MARKS)

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