ZIMBABWE SCHOOL EXAMINATIONS COUNCIL

General Certificate of Education Advance Level

ACCOUNTING 9197/3

PAPER 3 Case Study

NOVEMBER 2011 SESSION 2 hour 30 minutes

Instructions
Each scenario in this case study describes an event in the life of a business and is
followed by a question. Answer all questions. You are advised to answer the questions in
the order in which thy are set.

Scenario 1

The Quartet is a partnership which owns a manufacturing firm. The balance sheets of the
firm as at 31 December 2004 and 2005 are given in Table 1.

Table 1

As at 31 December 2004 2005

Assets $ 000 $ 000 $ 000 $ 000

Non-current assets
Premises at cost/valuation 1 000 1 300
Provision for depreciation (375) 625 (26) 1 274

Plant and equipment at cost 600 1 400

Provision for depreciation (240) 360 (700) 700

Motor vehicles at cost 840 1 440

Provision for depreciation (504) 336 (864) 576
1321 2 550

Current assets
Stock 750 810
Debtors 649 540
Bank 400 1 799 380 1 730
3 120 4 280

Equity and liabilities

Partners’ capitals at 1 January 2 330 2 600
Add Revaluation - 675
Net profit 566 739
2 896 4 014
Less Drawings (294) 2 600 (334) 3 680
Trade creditors 520 600
3 120 4 280
Notes

(i) The premises were re-valued on 1 Jul 2005.

(ii) During 2005, motor vehicles which had cost $ 180 000 (net book value $ 36 000)
were sold for $ 30 000.

Question 1

(a) Prepare a cash flow statement for the year ended 31 December 2005. [12]

(b) State and explain five benefits of preparing cash flow statements. [10]
Scenario 2

The partnership was owned by Anesu, Baye, Chamu and Dahwa. Anesu retired on 1
January 2006 and the remaining partners decided to admit Chipo on the following day.
The finance manager was tasked withmaking the necessary adjustments in the partner’s
capital accounts using the information in Table 2.

Table 2

Partner’s capital accounts as at 31 December 2005

$ 000
Anesu 1 205
Baye 1 070
Chamu 830
Dahwa 575

Additional information

(i) The profit and loss sharing ration were Anesu 3, Baye 2, Chamu 2 and Dahwa 1.
8 8 8 8
(ii) The plant and equipment was re-values at $ 590 000 and the motor vehicles at $
300 000.

(iii) A provision for doubtful debts of 5 % of debtors at 1 January 2006 was created.

(iv) Goodwill was valued at $ 240 000 but a good will account was not to be opened.

(v) An amount of $ 1 000 000 was transferred from Anesu’s capital account to a loan
account

(vi) On 2 January 2006, Chipo introduced $ 830 000 cash as capital and her shareof
goodwill.

(vii) The new profit and loss sharing ratio was Baye 4, Chamu 1, Dahwa 1 and Chipo2.
8 8 8 8

Question 2

(a) Prepare the capital accounts of the old partnership to give effect to Anesu’s
retirement. [13]

(b) Prepare the capital accounts of the new partnership to give effect to Chipo’s
admission. [12]

(c) Define goodwill. [2]

Scenario 3

On 31 December 2006, the partnership business was taken over by Quartet Ltd. At 31
December 2007 the balance sheet of the company was as shown in Table 3.

Table 3
$ 000 $ 000 $ 000
Assets
Non-current assets Cost/ Depreciation Net book
Valuation value

Freehold premises 1 300 78 1 222

Plant and equipment 2 000 810 1 190
Motor vehicles 1 800 1 440 360
5 100 2 328 2 772

Current Assets
Stock 836
Trade debtors 562
Bank 600 1 998
Total assets 4 770

Equity and liabilities

Share capital
Ordinary shares of $1 each 2 500
Reserves
Share premium account 570
Profit and loss account 1 000 1 570
Shareholder’s funds 4 070

Long-term liabilities
10 % Debentures 500

Current Liabilities
Trade creditors 200
4 770

After the preparation of the above draft balance sheet, the following matters were
discovered:

(i) The plant and equipment had been depreciated for the year at 15 % on the
reducing balance basis instead of at 15 % on cost.

(ii) Stock which had cost $ 200 000 had been damaged. It can be sold for $ 150
000 after restorative work costing $ 80 000. it is included in the above draft
balance sheet at cost.
 (iii) Goods sent on sale or return basis to P. Pfende had been invoiced to him at $
104 000. Goods are sold at mark up of 30 %

(iv) A bonus issue of one ordinary share for every five held on 1 October 2007 had
not been recorded. After the bonus issue, the reserves of the company must be
left in their most flexible form.

(v) A rights issue of one ordinary share for every six held, based on the revised
share capital, had been made on 1 November 2007 at $ 1, 50 per share. This
had not been effected in this books of account.

(vi) A debtor who owed the company $ 42 000 was declared bankrupt. It was
decided to make a provision for doubtful debts of 5 % on debtors.

(vii) A dividend of 10 % was declared on 31 December 2007. All shares issued

during the year do not rank for dividends in the year.

Question 3

(a) Redraft the balance sheet taking into account the above issues. [20]

(b) State three differences between a bonus issue and a rights issue. [6]
Scenario 4

The company manufactures three products, Lido, Beta and Sigma, from the same process
and the same raw materials. All products can be sold at the split-off point but Lido does
not need further processing.

The unit sales values of the three products at the split-off point are:

$
Lido 10,50
Beta 11,25
Sigma 15,00

After further processing, Beta and Sigma can be sold for $27 and $30 per unit
respectively.

During the month of February 2008, sales were as follows:

Lido 2 000 units

Beta 2 500 units
Sigma 2 250 units

There were no opening and closing stocks of raw materials and work in progress.

Stocks of finished goods were as follows:

Lido Beta Sigma

Stocks (units) at 1 February 400 550 500
Stocks (units) at 28 February 350 450 300

Costs incurred in February 2008 were as follows:

$
Joint manufacturing costs 48 000
Additional processing costs for Beta 19 200
Additional processing costs for Sigma 18 450

Assume the first in, first out method of stock valuation.

Question 4

(a) Explain the concept of equivalent units. [3]

(b) Calculate the number of units of each product manufactured in February 2008. [3]
(c) Calculate the closing stock values for each product on the basis of
(i) physical quantity produced, [9]
(ii) the sales values of the quantities produced. [6]

(d) Explain the accounting treatment for

(i) normal losses, [2]
(ii) by-products. [2]