JAMB UTME - Principles of Accounts - 2024

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Prime Cost = Direct Materials Cost + Direct Labor Cost 
Direct Materials Cost (Cost of Raw Materials Consumed): We have already calculated this in the previous question and found it to be #435,000 
Prime Cost = #435,000 (Direct Materials) + #65,000 (Direct Labor) 
Prime Cost = #500,000 

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The shares given free of charge to existing shareholders based on their previous holdings are referred to as a bonus issue.

A bonus issue, also known as a scrip issue or capitalization issue, is when a company decides to reward its existing shareholders by issuing them additional shares. This is done in proportion to their current shareholding without any additional cost. For example, a company might issue one bonus share for every ten shares held.

The main reasons for a bonus issue include:

• Rewarding Shareholders: It is a way to reward shareholders for their loyalty without paying out cash dividends.
• Increasing Liquidity: With more shares available, trading in the shares becomes more liquid.
• Signalling Confidence: It often signals that the company is confident about its future profits.
• Adjusting Share Prices: The increase in the number of shares can help lower the individual share price, making them more affordable and attractive to investors.

It is important to note that while a bonus issue increases the number of shares outstanding, it does not change the overall market capitalization of the company, as the value of each share is adjusted accordingly.

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The person credited with developing the idea of double entry book-keeping is Francia Luca Pacioli. He was an Italian mathematician and Franciscan friar who lived during the Renaissance period. Pacioli is often referred to as the "Father of Accounting" because he published a comprehensive text on double-entry bookkeeping in 1494. This text was part of his larger work called Summa de arithmetica, geometria, proportioni et proportionalità, which aimed to educate merchants about keeping financial records.

Double entry bookkeeping is a method that involves recording each financial transaction twice: once as a debit in one account and once as a credit in another. This approach helps to ensure the accuracy and completeness of financial records by maintaining a balance between accounts.

Pacioli's contribution was significant because it provided a systematic way for businesses to track their financial transactions, fostering improved financial management and accountability. His work laid the foundation for modern accounting practices, making it a crucial advancement in the field of commerce and economics.

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In Nigeria, the body that regulates accounting practices is the Association of National Accountants of Nigeria (ANAN). ANAN is a professional body chartered by Act 76 of 1993 and is responsible for setting standards, guiding, and supervising the practice of accountancy in the country.

Here's why ANAN is important for accounting practices:

• Standard Setting: ANAN is involved in creating accounting standards that practitioners should follow, ensuring that financial reporting is consistent and reliable.
• Professional Guidance: ANAN provides guidelines and resources for accountants to maintain proper ethical standards and professionalism in their work.
• Supervision and Certification: ANAN certifies accountants, which involves ensuring that individuals meet the necessary educational and professional criteria to practice accounting.

By regulating accounting practices, ANAN helps maintain the integrity and accuracy of financial information, which is crucial for businesses, government agencies, and stakeholders.

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Prime cost refers to the direct costs associated with producing a good. These are costs that can be easily traced and directly linked to each unit of production. It consists of direct materials, direct labour and direct cost.

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The acid-test ratio assesses a company's ability to meet its short-term obligations (due within a year) using its most liquid assets. It goes beyond the current ratio by excluding inventory from the calculation, as inventory might take longer to convert into cash to pay off debts.

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A prospectus is a formal legal document that provides detailed information about a company's financial condition, its plans for the future, and the risks involved in investing.
The primary purpose of issuing a prospectus is to attract potential investors to buy (subscribe for) shares of the company's stock.

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A public limited liability company can get additional funds through the issue of debentures.

Let's break this down in simple terms:

• Debenture: A debenture is like a loan that the company takes from the public. The company issues these debt instruments to raise funds from investors, with a promise to pay back the principal along with interest at specified intervals. Debentures do not give ownership rights to investors, unlike shares, but they are a popular way for companies to raise capital when they need additional funds.
• Cheque: This is a method of payment, not a way of raising funds. It is used to transfer money from one bank account to another.
• Accumulated Fund: This term generally refers to the surplus funds collected over time that are used for specific purposes. It's not a method of generating new funds but rather a reserve from the excess monies accumulated in the past.
• Consolidated Fund: This is typically related to government finances, where it denotes a fund used for the financial management of the public sector, and not a means for a private company to raise funds.

Hence, debentures are a common and effective way for public companies to generate additional funds by attracting investments from the public without diluting ownership. The company gets the capital it needs, while investors earn interest on their investment.

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To determine the Total Fixed Assets, we need to focus on the accounts that represent fixed assets. In a company's balance sheet, fixed assets are long-term tangible property that a firm owns and uses in its operations to generate income. In this context, typical fixed assets include items like land, buildings, furniture, machinery, etc.

From the list provided:

• Land and Building: #70,000
• Furniture: #10,000

Both "Land and Building" and "Furniture" are considered fixed assets. To calculate the Total Fixed Assets, you simply add these amounts together:

#70,000 (Land and Building) + #10,000 (Furniture) = #80,000

Therefore, the Total Fixed Assets for Adama Ltd as of 31st August 2007 is #80,000.

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A Purchase Ledger Control Account is used to track and summarize the transactions related to purchases made from creditors. The balance on the credit side of the account represents the total purchases made from the creditors, while the balance on the debit side represents the payments made to the creditors.

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The document used to make lodgments into a current account is the paying-in slip.

Here's why:

A paying-in slip is a small form provided by a bank that allows you to deposit money into your account. When you want to add funds to your current account, you fill out this slip with details such as the amount of money you are depositing, your account number, and your name. You then hand both the slip and the money to the bank teller who processes the transaction for you. Alternatively, it can be used in an automated bank machine that accepts deposits.

Other documents or instruments like a cheque book, pass book, and credit card serve different purposes:

• A cheque book is used to make payments to others; you write cheques to transfer money from your account to someone else or another entity.
• A pass book records transactions for savings accounts, not current accounts, and helps keep track of deposits, withdrawals, and balances.
• A credit card allows you to borrow funds up to a certain limit for purchases, which you then repay at a later date. It does not directly deposit funds into your account.

In summary, when depositing money directly into a current account, the paying-in slip is the correct document used for that purpose.

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The amount of #30,000 represents credit purchases. In accounting, the Purchase Ledger Control Account is used to track what a business owes to its suppliers. This account is part of the liabilities section of the balance sheet since it reflects amounts that need to be paid for goods or services received on credit.

Here's a breakdown of why the amount represents credit purchases:

• The terminology “Purchase Journal” is used in accounting to record transactions related to credit purchases of goods.
• When items are purchased on credit, they are logged as debits to the Purchase Ledger Control Account. Hence, this value indicates the total goods acquired on credit from the suppliers during a specific period.
• This allows a business to track how much is owed to suppliers, as opposed to goods purchased and paid for immediately with cash, which would be logged differently.

This is significant because businesses often purchase items on credit to improve cash flow and benefit from any creditor terms like discounts for early payment. Hence, the #30,000 recorded in the Purchase Ledger Control Account is indicative of the total amount of purchases made on credit during the period.

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Raw materials available: Opening Stock + Raw materials purchased Raw materials available: #20,000+ #18,000
Raw materials available: #38,000

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The nominal ledger, also sometimes called the general ledger, is the main book of accounts used in a double- entry bookkeeping system. It records all the financial transactions of a business during an accounting period. These transactions are categorized into different types of accounts.

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The ledger that contains the accounts of debtors and creditors is called the personal ledger. This is an essential distinction in accounting because it helps categorize the accounts appropriately. Here is why:

Personal Accounts are accounts that relate specifically to individuals or entities with whom the business has direct dealings such as customers (debtors) and suppliers (creditors). These are entities that the business can identify by name, and they usually consist of accounts that show the amounts the business owes to others or the amounts others owe to the business.

The two primary classifications within personal accounts are:

• Debtors: These are individuals or entities who owe money to the business, typically resulting from credit sales.
• Creditors: These are individuals or entities to whom the business owes money, usually due to credit purchases.

In contrast:

Impersonal Accounts are divided into Real Accounts and Nominal Accounts.

• Real Accounts: Related to assets and liabilities, not individuals' accounts.
• Nominal Accounts: Associated with incomes, expenses, losses, and gains, rather than with living persons.

In summary, any account representing a person or entity that can be identified by name, such as debtors or creditors, falls under personal accounts in the ledger.

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A debenture is a type of long-term debt instrument issued by a company to borrow money from investors. When you hold a debenture, you are effectively lending money to the company, and in return, you expect a regular return. The return received by debenture holders is in the form of interest.

Here's a simple explanation of why it's interest:

• Interest: Debentures are like loans to the company. Just as banks earn interest on loans they provide, debenture holders earn interest on their investment in the debentures. This interest is predetermined and is usually paid at regular intervals, such as semi-annually or annually.
• Fixed Payment: The interest on debentures is usually a fixed percentage of the principal amount, which means it doesn’t change based on the company's profits or losses.
• Priority Payment: Interest on debentures is paid before any dividends are paid to shareholders, making it a relatively secure form of investment in terms of receiving payments.

In contrast:

• Share bonus and dividend: These are returns on equity shares, not debentures. They depend on the company's profits and decisions made by the board of directors.
• Net profit: This term refers to the total profit of a company after all expenses, taxes, and interest have been deducted. It's not directly associated with debenture holders as a form of return.

Therefore, the return on debenture holding is characterized by interest payments. These payments are made regardless of whether the company makes a profit, as long as it is solvent enough to meet its interest obligations.

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A bank deposit typically wouldn't cause a discrepancy; rather, it would lead to an increase in both the cash book and bank statement balances. Therefore, it is not a cause of discrepancies between the two balances.

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First, we calculate the depreciation for the first year: Depreciation for year one = Cost x Rate of Depreciation = 120,000 x 40%
= 48,000
Next, we calculate the remaining book value after the first year: Book value after year one = Cost - Depreciation for year one
= 120,000 - 48,000
= 72,000
To calculate the depreciation charge for year two, we apply the rate of depreciation to the remaining book value Depreciation for year two = Remaining book value x Rate of Depreciation
= 72,000 x 40%
= 28,800

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In government budgeting, funds are authorized for spending through a voting process. Each government department or agency submits a budget request, which is then debated and approved (or voted on) by the legislature. The approved amounts for each department's programs and activities become the official votes that they can spend from.

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The realization account is used to record the sale of assets and settlement of liabilities during the dissolution process.
When assets are sold, cash is received. This cash is credited to the cash account to reflect the increase in cash holdings.
Ultimately, the goal of dissolution is to convert all assets into cash, settle liabilities, and distribute any remainin cash among the partners according to their profit-sharing ratios

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The coming together of two sole trading businesses to form a partnership is an amalgamation.

To understand why this is an amalgamation, let's delve into the concept:

Amalgamation refers to the merging or blending of two or more entities into one. In the context of business, it specifically means the combination of two or more organizations to form a single new entity that benefits from the pooled resources, combined expertise, and shared goals. In this case, when two sole traders decide to unite their efforts and resources to operate jointly as a partnership, they are undergoing an amalgamation. This process allows them to leverage each other's strengths, share risks, and potentially enjoy greater market influence and operational efficiency.

It's important to note that amalgamation is different from terms like acquisition, which involves one company taking over another, and association, which usually implies a less formal collaboration without forming a new structure or entity.

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To calculate the current ratio, we need to understand that it is a measure of a company's ability to pay its short-term obligations with its short-term assets. The formula for the current ratio is:

Current Ratio = Current Assets / Current Liabilities

Let's identify the current assets from the given balances:

• Debtors: 50,000
• Bank: 10,000
• Stock (31-08-2007): 10,000

Adding these up:

Total Current Assets = 50,000 + 10,000 + 10,000 = 70,000

Next, we identify the current liabilities:

• Creditors: 35,000

Therefore, Total Current Liabilities are: 35,000

Now, let's calculate the current ratio:

Current Ratio = Total Current Assets / Total Current Liabilities

Current Ratio = 70,000 / 35,000 = 2:1

Therefore, the current ratio is 2:1, which means that for every unit of currency in current liabilities, Adama Ltd has 2 units in current assets to pay those liabilities. This is a healthy liquidity position as a current ratio greater than 1 indicates that the company has more current assets than current liabilities.

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Assets + Liabilities = Owner's Equity. This equation is the foundation of double-entry bookkeeping and ensures that a company's financial statements are balanced. Let's break down the equation:
Assets: These are the resources a company owns, such as cash, inventory, property, and equipment. Liabilities: These are the company's debts or financial obligations that need to be repaid.
Owner's Equity (also called Shareholders' Equity): This represents the owners' claim on the company's assets after all liabilities are settled. It's essentially the difference between the company's assets and liabilities.

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In accounting, a debit balance typically refers to an increase in asset or expense accounts. Here’s a breakdown of each account to determine which one does not usually have a debit balance:

• Share Premium: This is part of the equity on the balance sheet. It occurs when shares are issued at a price higher than their nominal value. Since it is an equity account, it typically has a credit balance, which means it is not a debit balance account.
• Rents and Rates: These are usually categorized under expense accounts, which typically have a debit balance, because expenses increase with debits.
• Return Inwards: Also known as Sales Returns, refers to goods returned by customers. It is considered a contra-revenue account, which typically has a debit balance because it is subtracted from sales (a major revenue account with a credit balance).
• Advertising: This is also an expense account, as expenditures made for advertising purposes are considered costs of doing business. Thus, they usually have a debit balance.

Based on the above explanations, the account that does not have a debit balance is typically the Share Premium account.

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Ordinary shares, also known as common shares or equity shares, represent ownership in a company. When individuals or investors purchase ordinary shares, they become shareholders and have ownership rights in the company.
Equity refers to the ownership interest or residual claim on the assets of a company after deducting liabilities. Ordinary shares represent the equity portion of a company's capital structure, and shareholders who hold ordinary shares have voting rights and the potential to receive dividends.

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To calculate the Factory Overhead Cost, we need to consider the expenses that are not directly tied to the production process but are essential for running the factory smoothly. These include indirect costs like lighting, heating, depreciation of machinery, and indirect labor. From the data given, we will identify the elements that contribute to the Factory Overhead Cost:

• Indirect Wages: #28,000
• Depreciation on Plants: #32,000
• Factory Rent: #3,500

Other elements in the data such as stock of raw materials, purchase of raw materials, direct wages, and work in progress are part of the cost of production but do not contribute to the Factory Overhead Cost.

Therefore, the total Factory Overhead Cost is calculated by summing up all the overhead costs:

Factory Overhead Cost = Indirect Wages + Depreciation on Plants + Factory Rent

= #28,000 + #32,000 + #3,500

= #63,500

Thus, the Factory Overhead Cost is #63,500.

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When Tolu purchases a machine on credit, the accounting entries reflect the following:
Debit: Machinery (#6,000)
Credit: Supplier (#6,000)
Here's why:
Debit: A debit increases an asset account. In this case, "Machinery" is an asset account that represents the new equipment Tolu acquired.

Credit: A credit increases a liability account. Since Tolu purchases the machine on credit, they now owe money
to the supplier. The "Supplier" account is a liability account that reflects this debt.

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When a difference is noticed in the Trial Balance due to errors that have not yet been located, it is temporarily posted to a suspense account.

Here's a simple explanation:

A **Trial Balance** is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal. If the totals do not match, it indicates an error. Sometimes, despite efforts to find the error, the exact location or cause is not immediately identified. When this happens, the difference is placed in a suspense account to temporarily hold and find where the error might be.

The suspense account acts as a placeholder. It's important because it allows the books to be balanced and further accounting and financial reporting processes to proceed normally while the error is being investigated and rectified. Once the error is located and corrected, the suspense account is cleared.

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Ordinary shares, also known as common shares or equity shares, represent ownership in a company. When individuals or investors purchase ordinary shares, they become shareholders and have ownership rights in the company.
Equity refers to the ownership interest or residual claim on the assets of a company after deducting liabilities. Ordinary shares represent the equity portion of a company's capital structure, and shareholders who hold ordinary shares have voting rights and the potential to receive dividends.

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To find the percentage of net profit to sales, we need to calculate the net profit first.

Here's how you can find the net profit:

Step 1: Calculate Cost of Goods Sold (COGS)

• Opening Stock (1-09-2006): 20,000
• Purchases: 140,000
• Closing Stock (31-08-2007): 10,000

COGS = Opening Stock + Purchases - Closing Stock

COGS = 20,000 + 140,000 - 10,000 = 150,000

Step 2: Calculate Gross Profit

Gross Profit = Sales - COGS

Gross Profit = 200,000 - 150,000 = 50,000

Step 3: Calculate Net Profit

Net Profit = Gross Profit - Expenses

In this case, the only expense given is General Expenses: 10,000

Net Profit = 50,000 - 10,000 = 40,000

Step 4: Calculate the Percentage of Net Profit to Sales

Percentage of Net Profit to Sales = (Net Profit / Sales) * 100%

Percentage of Net Profit to Sales = (40,000 / 200,000) * 100% = 20%

Therefore, the percentage of net profit to sales is 20%.

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To calculate the value of raw materials consumed, we need to follow these steps:

Step 1: Determine the Opening Stock of Raw Materials. This is the stock at the beginning of the period. According to the information provided, the opening stock of raw materials is #20,000.

Step 2: Add any Purchases made during the year. In this case, raw materials purchased during the year amount to #18,000.

Step 3: Calculate the Closing Stock of Raw Materials. This is the stock at the end of the period, which is #500.

Step 4: Use the formula for the value of raw materials consumed:

Raw Materials Consumed = Opening Stock + Purchases - Closing Stock

Substitute the values:

#20,000 (Opening Stock) + #18,000 (Purchases) - #500 (Closing Stock) = #37,500

Therefore, the value of raw materials consumed is #37,500.

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Cost of Goods Produced = Prime Cost + Factory Overhead Cost + Opening Work in Progress - Closing Work in Progress 
Prime Cost: #500,000 (from previous question) Factory Overhead Cost: #63,500 (from previous question) 
Cost of Goods Produced = #500,000 + #63,500 + #32,500 - #37,500 
Cost of Goods Produced = #558,500 

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The net worth of a business, also known as the owner's equity or shareholders' equity, is essentially the value left over for the owners after all liabilities have been subtracted from the assets. To put it simply, it represents the company's total assets minus its total liabilities.

Let's break this down:

• Assets: These are all the resources owned by the business, such as cash, property, inventory, and equipment.
• Liabilities: These are the debts and obligations that the business owes to others, such as loans, accounts payable, and mortgages.

The formula to calculate net worth is:

Net Worth = Assets - Liabilities

Understanding the net worth helps in assessing the company's financial health. If the assets exceed liabilities, it indicates a positive net worth, which is a good sign, showing that the business has enough assets to cover its obligations.

Let's examine the options given:

• Bank Loan: This is a liability, a debt that the business needs to repay.
• Capital: This refers to the financial resources that owners invest in the business, which is part of the owner's equity and contributes to net worth.
• Asset: As described, these are resources owned by the business and are a component in calculating net worth.
• Debenture: This is another form of liability. It's a type of debt instrument used by businesses to borrow money.

Thus, the net worth is fundamentally linked to assets and liabilities, and it is a crucial measure of what the owners have in the business once all liabilities are paid off. It is not directly descriptive of just a bank loan, capital, asset, or debenture, but rather a measure involving assets and liabilities.

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Year 1:

Depreciation = (Book value at the beginning of the year) x (Depreciation rate) = (#120,000) x (40%)
= #48,000
Book value at the end of Year 1 = Cost - Depreciation
= #120,000 - #48,000
= #72,000
Year 2:
Depreciation = (Book value at the beginning of the year) x (Depreciation rate) = (#72,000) x (40%)
= #28,800
Book value at the end of Year 2 = Book value at the end of Year 1 - Depreciation = #72,000 - #28,800
= #43,200
Year 3:
Depreciation = (Book value at the beginning of the year) x (Depreciation rate) = (#43,200) x (40%)
= #17,280
Book value at the end of Year 3 = Book value at the end of Year 2 - Depreciation = #43,200 - #17,280
= #25,920
Year 4:
Depreciation = (Book value at the beginning of the vear) x (Depreciation rate)

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The Simple Average Price (SAP) method is a stock valuation method where the average cost of all units of stock is calculated and used as the value for inventory. This method takes the total cost of goods available for sale and divides it by the total number of units to determine the average price. The average price is then multiplied by th number of units on hand to calculate the value of the inventory

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To calculate the Gross Profit, we need to determine the difference between Sales and Cost of Goods Sold (COGS).

Step 1: Determine Sales

The sales figure is already given as #200,000.

Step 2: Calculate Cost of Goods Sold (COGS)

• Starting Stock on 1st September 2006: #20,000
• Add Purchases: #140,000
• This gives the total goods available for sale: #160,000 (20,000 + 140,000)
• Deduct Closing Stock on 31st August 2007: #10,000

So, COGS = (#160,000 - #10,000) = #150,000

Step 3: Calculate Gross Profit

Gross Profit = Sales - COGS = #200,000 - #150,000 = #50,000

Therefore, the Gross Profit is #50,000.

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When a business is sold as a "going concern," it means that the business is being sold with the expectation that it will continue to operate in the same manner as before the sale. The amount paid by the buyer for such a business is commonly referred to as the purchase consideration.

The purchase consideration includes the total value that the buyer agrees to pay to acquire all the assets, liabilities, and operational components of the business. This value can be in the form of cash, shares, debt arrangements, or a combination of these.

Let's clarify why the other terms are not the correct answer in this context:

• Conversion fees: These are charges that may apply when converting one asset or form of ownership to another but are not related to the purchase of a business.
• Consolidation fees: These may involve costs associated with combining two or more companies or departments, but again, they do not refer to the act of purchasing a business as a going concern.
• Premium fees: These might indicate additional payments above the standard price for specific benefits or services but do not encompass the entire cost of purchasing a business.

In summary, the correct term for the amount paid by the buyer of a business sold as a going concern is purchase consideration.

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Fictitious assets are intangible assets that do not have a physical form and lack inherent value. They represent deferred expenses or prepaid costs that provide benefits over future periods. For example: Preliminary Expense: Discount on Issue of Shares, Goodwill etc.

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To determine the gross profit, we need to calculate the difference between the sales and the cost of goods sold (COGS). The formula for gross profit is:

Gross Profit = Sales - Cost of Goods Sold (COGS)

The Cost of Goods Sold (COGS) is calculated as follows:

COGS = Opening Stock + Purchases - Closing Stock

• Opening Stock: #10,000
• Purchases: #70,000
• Closing Stock: #15,000

Calculating the COGS:

COGS = 10,000 + 70,000 - 15,000

COGS = 80,000 - 15,000

COGS = 65,000

Now, calculate the Gross Profit:

Gross Profit = Sales - COGS

Gross Profit = 120,000 - 65,000

Gross Profit = 55,000

Therefore, the gross profit is #55,000.

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This situation is an example of an error of principle. Let me explain:

An error of principle occurs when an entry is recorded in the wrong account but respects the double-entry rule of debit and credit. In this case, a commission, which should have been recorded as an expense and debited to a "Commission Expense" account, was incorrectly debited to the "Debtors Account", which is an asset account.

Because the nature of the accounts is different (expenses vs assets), recording it in the wrong type of account constitutes an error of principle. This type of error doesn't affect the balancing of the trial balance but reflects a misclassification in the financial statements.

Other types of errors like errors of original entry involve wrong amounts recorded, whereas errors of compensation involve two mistakes that offset each other. An error of commission refers to when a correct amount is posted to the wrong account of the correct type, unlike the principle error where the wrong type of account is used.