2022 EXAMINATIONS

CA LEVEL 1 (KNOWLEDGE)

PAPER 1: ACCOUNTING FRAMEWORK

TUESDAY, 6 DECEMBER 2022 TIME ALLOWED: 3 HOURS

SUGGESTED SOLUTIONS
1 (a) (i) (ii) (iii)

User Kind of information Why Type of Financial

statement
Employees - Performance of the - to assess job security - Both statement of
business - to use information in financial position
negotiating for and statement of
increase in salaries. comprehensive
income.
Shareholders - Value of the business - to assess their net - both statement of
worth. comprehensive
- ascertain how much income and
return to expect from statement of
business. financial position.
Financial - Financial position and - To assess financial - Statement of
institutions performance of the viability. financial position.
business. - To assess financial
stability of the
business.
Customers - Financial position and - To assess ability to - Statement of
Performance. honour contracts. financial position.
Governments - Financial performance - To assess the amount - Statement of
of business. of tax to be collected comprehensive
income.

(b) (i) A control account is an account which contains the debit and credit totals
of other accounts.

A control account is a summary account where entries are made from

totals of transactions for a period

(ii) Importance

- Used to check the accuracy of recordings in the financial

statements.

- Used to detect fraud.

- Used to prepare financial statements.

(iii) Possible payables ledger control account reconciling items

- Invoices omitted from control account, but entered in purchase
account.
- Suppliers balance excluded from purchases ledger and included
accidentally in sales ledger account.

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 - Credit sales posted in error to debit purchases accounts instead
of the debit of an account in the sales ledger.

- Under casting error in the calculation of total end of period

creditorś balance.

- Return inwards posted in error to the credit of purchases ledger

account instead of the credit of an account in the sales ledger.

- Credit note entered in error in the return Outward day book i.e.
948 instead of 984.

- Customer account with a credit balance included in the

purchases that should have been included in the sales ledger.

(c) (i) Calculating goodwill

K’000
Fair value of consideration transferred 130,000
Add Amount of Non-controlling interest 50,000
180,000
Less Fair value of identifiable assets
(130,000 + 30,000) (160,000)
Goodwill at acquisition 20,000

(ii) Chikanda plc

Consolidated statement of comprehensive income for the year ended
31 December 2020
K’000
Revenue (100,000+78,000-20,000-30,000) 128,000
Cost of sales (44,400+36,000-20,000+2,000-30,000+2,500) (34,900)
Gross profit 93,100
Other income (7,400+5,000-400-2,000+4,000-5,000-4,000-3,000) 2,000
Admin expenses (3,500+4,000+2,000-2,000-5,000) (2,500)
Salaries and distribution (3,000+2,000-400) (4,600)
Finance costs (1,500+1,000) (2,500)
Other expenses (400+200) (600)
Profit before tax 84,900
Income tax (12,000+8,000) (20,000)
Profit after tax 64,900

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Workings

W1 Additional depreciation on buildings for Michongwe

Excess carrying amount = K30,000,000

Depreciation uncharged = K30,000,000 ÷ 15
= K2,000,000

W2 Unrealized profit-sale of goods by Chikanda

Sales 20,000,000
100
Cost of sales (20,000,000 × 125) 16,000,000
Profit 4,000,000
Unrealized profit (4,000,000÷2) 2,000,000

W3 Unrealized profit-sale of goods by Michongwe

Sales 30,000,000
75
Cost of sales (30,000,000 × 100) 22,500,000
Profit 7,500,000
Unrealized profit (7,500,000÷3) 2,500,000

W4 Unrealized profit on sale of motor vehicle by Michongwe

Selling price 15,000,000

Carrying amount (11,000,000)
Unrealized profit 4,000,000
Additional depreciation/annum (4,000,000/10) 400,000

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2 (a) Namasani Traders
Statement of financial position as at 31 March 2022

K’000 K’000
Non-current assets
Land and buildings 26,560
Motor vehicles 3,500
Computers 1,800
Total non-current assets 31,860

Current assets
Inventories 13,000
Trade receivables 9,700
Prepayments 100 22,800
Total assets 54,660

Less liabilities
Bank overdraft 4,980
Trade payable 8,480
Accrued expenses 340 13,800
⸫Capital 40,860

Note: Based on the formular

Assets = Capital + Liabilities

(b) Namasani’s profit for the year ended 31 March 2022

K’000
Closing capital (as calculated above) 40,860
Less: Opening capital (47,000+4,000+36,000) (54,600)
Reduction in capital (13,740)
Add drawings 21,600
Profit for the period 7,860

(c) Ways of increasing capital

(i) Investing profits back into the business.

(ii) Borrowing from outside i.e. financial institutions.
(iii) Buying inventories or assets on credit.
(iv) Merging with another sole trader into a partnership.

(d) (i) Benefits of converting a partnership into a Limited liability company

- Owners of the company enjoy limited liability since they are not
personally responsible/liable for the debts of the company.

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 - There is better corporate governance in a limited liability company
where there are checks and balances within management board of
directors and shareholders while in a partnership, it is the partners
that hold absolute power.

- There is discipline in obtaining resources for personal use since there

are no drawings in a company but only dividend, whose distribution
is regulated.

- There is more possibility of raising capital as the company may be

able to float its shares on the stock exchange.

- There is continued operations because the company is not generally

wound up in case of a shareholder dying or divesting from the
company.

(ii) ICAM roles include

- To promote the development of accountants in Malawi.

- To supervise the accounting profession in the best interest of the

public.

- To promote the highest order of professional ethics and business

conduct of, and enhance the quality of service offered by chartered
Accountants or Diplomat Accountants.

- To ensure professional independence of Accountants.

MAB responsibilities

- To promote high quality reporting of financial and non-financial

information by entities.

- To promote the highest professional standards among auditors and

accountants.

- To protect the interests of the general public and investors.

- To encourage effective collaboration with other regulators.

3 (a) Bespoke software

- Systems/software that are tailored to exactly what an organization

wants.

- Also referred to as tailor-made programs.

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 - They may be developed in-house (by employees) or written under
contract with an outside business or agency.

(b) Impact of Covid-19 on impairment assessment

- Non-current assets being used below normal operating capacity due to

reduced demand of products as a result of covid-19.

- Non-current assets just staying idle due to closed operations during

lockdowns.

- Obsolescence of some assets due to changes in business for example tills

in banks and shops when the customers preferred on-line trading.

(c) Block codes

- They provide a different sequence for each different group of items.

- For example for a particular company, customers may be divided up

according to area:

South Code numbers 10000 - 19999

North Code numbers 20000 - 29999
East Code numbers 30000 - 39999
West Code numbers 40000 - 49999

(d) Types of accounts

- All accounts are described as personal accounts or as impersonal

accounts.

- Personal accounts refer to accounts that deal with debtors (customers)

and creditors (customers) and creditors (suppliers).

- Impersonal accounts are divided into “real” accounts and “nominal”

accounts.

- Real accounts are accounts in which possessions such as buildings,

machinery, fixtures and stock, are recorded.

- Nominal accounts are accounts in which expenses, income and capital

are recorded.

(e) Price/earnings ration (P/E)

- Measures the return on the market price of shares.

- High P/E ratio indicates investors’ confidence in the company/business.

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 - It is represented by the following formula.

P/E ratio = Market price of share

Earnings per share

(f) Negative goodwill

- Arises when the consideration paid to purchase an interest in a

subsidiary is lower than the fair values of net assets acquired.

- it is recognized in the statement of comprehensive income.

- Before recognition an organization needs to verify that indeed the fair

valuation of net assets acquired is correct.

- The reasons for negative goodwill include:

o Liquidity crunch.
o Capital challenges – facing company liquidation.

4 Rights Issue and bonus issue of shares

(a) Similarities
(i) Both are issued to existing shareholders.

(ii) Both are issued in accordance to the existing shareholders’ shareholding

proportions.

Differences
(i) Rights shares are issued at a price lower than market price while bonus
shares are issued for free.

(ii) Existing shareholders can decide not to participate in a right issue since
they have pre-emption rights while bonus shares are participated in full.

(b) Magalasi Limited Statement of Comprehensive Income for the year ended
31 December 2021

K’000 K’000
Sales 38,980
Less Return inwards (843)
Adjusted sales 38,137

Cost of goods sold

Opening inventory 2,348
Add Purchases 20,352
Less Return outwards (2,011)

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 Add Carriage inwards 1,774
Less Closing inventory (2,663) (19,800)
Gross profit 18,337
Other income – Discount received 262

Expenditures
Discount Allowed 345
Carriage outwards 684
Stationery 361
Rents and rates (3,895-168-815) 2,912
Electricity (1,651+204) 1,855
Advertising 897
Salaries 5,328
Bad debts 301
Increase in provision for bad debts (Working 1) 34
Depreciation charge on furniture 1,811
Depreciation charge on motor cycle (Working 2) 156 (14,684)
Profit before tax 3,915
Income tax (3,915x30%) (1,174)
Profit after tax 2,741

(c) Magalasi Limited statement of financial position as at a31 December 2021

K K
Non-current assets
Furniture (18,111-9,453) 8,658
Motor cycle (837-156) 681
Total non-current assets 9,339

Current assets
Inventory 2,663
Trade receivables (3,675-301-110) 3,264
Prepayments (168+815) 983
Cash in hand 533
Cash in bank 666 8,109
Total assets 17,448

Equity and Liabilities

Share capital 12,583
Share premium 35
Preferences shares 120
Dividend (2,766)
Current year profit 2,741
12,713

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Non-current liabilities
Debentures 381

Current liabilities
Trade payables 2,976
Income tax payable 1,174
Accrued electricity 204 4,354
Total equity and liabilities 17,448

Workings

Working 1

Trade receivables 3,675

Provision for bad debts @ 3% (3%x3675) 110
Provision for bad debts as per trial balance 76
Increase in provision to be charged to income statement 34

Working 2

Depreciation charge for motor cycle cost 837,000

Scrap value 57,000
Depreciable amount 780,000
Useful life – 5 years
Annual depreciation charge 780,000 = 156,000
5

Workings

W 1 Depreciation charge

Buildings 200-50 = 150x50% = 7.5

Motor vehicles 50x20% = 10
Furniture 10x10% = 1
Computer equipment 11x25% = 2.75 = 3
Equipment 30x10% = 3
Warehouse 30x5% = 1.5

Buildings + Warehouse = 7.5 + 1.5 = 9

W 2 – Issue new shares

2,000,000 x 5 = 10,000,000 = Amount realized

Nominal value = 2,000,000 shares x K1 = K2,000,000

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Share premium = K10,000,000-K2,000,000

W 3 Adjusted profit

K’000
Profit 21
Less warehouse depreciation
Impact (2)
Adjusted profit 19

W 4 Dividend paid

Opening number of shares = K90,000,000 = 90,000,000 shares

K1
New shares = 2,000,000
Total number of shares = 90,000,000+2,000,000 = 92,000,000
Dividends paid = 92,000,000x25 tambala = K23,000,000

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