Kane and Abel form a limited company called K&A Ltd to expand their partnership business. K&A Ltd issues shares, debentures, and preference shares to acquire the partnership assets and liabilities. Kane and Abel prepare a budgeted income statement for K&A Ltd's first year that shows an operating profit of $50,000. They calculate investment ratios from the budget to evaluate if their investment in K&A Ltd will be worthwhile. K&A Ltd also manufactures a new product, but the actual profit is less than expected. Kane and Abel ask for an explanation of the differences between the expected and actual profits.

1. ZIMBABWE SCHOOL EXAMINATIONS COUNCIL
General Certificate of Education
ACCOUNTING 9197/3
PAPER 3 Case Study
NOVEMBER 1998 SESSION 2 hours 30 minutes
Additional materials
Answer paper
TIME 2 hours 30 minutes
INSTRUCTIONS TO CANDIDATES
Write your name, Centre number and candidate number in the spaces provided on the answer
paper/ answer booklet.
Answer all questions.
Write your answers on the separate answer paper provided.
If you use more than one sheet of paper fasten the sheets together.
INFORMATION FOR CANDIDATES
The number of marks is given in brackets [ ] at the end of each question or part question.
All accounting statements are to be presented in good style. Workings should be shown.
Question 2(b) must be answered in sentence form, not note form, with supporting figures.
Clear presentation and quality English will be taken into account in marking your answer to
this question.
You may use a calculator.
The businesses in this question paper are intended to be fictitious.

2. Scenario 1:
Kane discovers errors after draft accounts preparation for the year to 30 September 1996. He
prepared draft accounts for the year ended 30 September 1996 shown below;
Kane- General Trader: Draft Income Statement for the year 30 September 1996
$ $
Sales 400000
less:cost of sales 220000
Gross profit 180000
less:Selling and distribution 32000
Administration 103000 135000
Net profit 45000
Kane – General Trader: Draft Statement of Financial Position as at September 1996
$ $ $
Fixed assets at cost 210000
less:Depreciation to date 111000 99000
Current assets
Inventory 36000
Trade receivables 43600
less:provision for bad debts 600 43000
Cash and equivalents 12000
91000
less:Current liabilities
Trade payables 27000 64000
163000
Financed by
Capital at 1 October 1995 140000
add Net profit 45000
185000
less Drawings 22000
163000
Some errors listed below, were discovered since the above accounts were prepared.
(i) Value of closing inventory at 30 September 1995 was calculated as $23000 instead
$32000.
(ii) Closing inventory at 30 September 1996 contained the following items;
Goods invoiced to a customer for $8000. However, the goods were sent on sale or return
and the customer has not accepted the goods cost price $5600.
Inventory costing $4000 is damaged. If repaired at a cost of $600, it can be sold for $4200.
(iii) Non-current assets which cost $12000 on 1 June 1993 were sold for $3000 on 1 March
1996. The proceeds were credited to the Sales Account. Kane provides for depreciation
on non-current assets on the reducing balance method using a rate of 30% per annum.

3. A full year’s depreciation charge is provided for in the year of purchase but none in the
year of sale.
(iv) A debtor owing $1600 has now been found to have become bankrupt on 1 August 1996.
(v) Kane considers that the provision for doubtful debts should be 2, 5% of debts.
Question 1: Prepare Kane’s revised Statement of Comprehensive Income for the year ended
30 September 1996 and his Statement of Financial Position at that date. [25]
Scenario 2: Kane considers forming a partnership with Abel.
Kane prepared his accounts for the year ended 30 September 1997.
Kane: General Trader: Statement of Comprehensive Income for the Year Ended 30
September 1996
$ $
Sales 360000
less:cost of sales 203000
Gross profit 157000
less: Selling and distribution 32000
Administration 103000 135000
Net profit 22000
He is worried that his profit has decreased by about 20% year on year since 1995. The trend
seems likely to continue. Kane knows that he has not kept up with times and the demand for
his product is declining. His friend Abel deals in more modern products and his business is
expanding.
Abel welcomes the offer of a partnership with Kane for various reasons and a partnership
agreement with the following terms is prepared.
(i) Interest of 10% per annum will be allowed on capital and loans to the partnership.
(ii) Abel will be allowed a salary of $8000 per annum.
(iii) Profits and losses will be shared equally.
(iv) Kane’s capital will be $80000. In addition he will lend the business $20000. Abel will
introduce $40000 as capital.
Budgeted partnership data for the year ended 30 September 1998 is as follows:
(i) Abel’s business (to be brought into the partnership)
Budgeted sales for the year $300000
Mark up on cost of goods 33 1/3%.
(ii) Kane’s budgeted sales for the year $325000
Gross margin 40%
(iii) Sales and distribution will consist, as in previous years; of variable expenses equal to 5%
of turnover and fixed expenses. The expenses are expected to increase by 2% in 1998.
(iv) Administration is expected to increase by $14000 in the partnership.

4. Question 2
(a) Prepare for the partnership, the budgeted Statement of Comprehensive Income for the
year ended 30 September 1998. [16]
(b) Prepare a report to Kane to help him decide if he should form a partnership with Abel. [4]
Scenario 3 Kane and Abel form a limited company.
Having formed a partnership, Kane and Abel realise that more capital is required if the
business is to expand. They provided you with the following financial statement.
Kane and Abel: Statement of Financial Position as at 1 November 1997
$ $
Non-current assets (NBV) 60000
Current assets: Inventory 34000
Accounts receivable 41000
Bank 9650
84650
Less current liabilities: creditors 21300 63350
123350
Less: long term liability: 10% loan: Kane 20000
103350
Capitals: Kane 60000
Abel 40000 100000
Current accounts: Kane 2000
Abel 1350 3350
103350
Kane and Abel decided to form a limited company K& A ltd to take over the partnership
business. A purchase consideration for the sale of the firm is to be settled by the issue of
shares and debentures. Kane and Abel have got a friend who is prepared t0 subscribe 20000
shares in the company.
The company is formed on I November 1997 and takes over the business of the partnership
on the following agreement terms:
(i) Assets and liabilities of the partnership to be taken over by K & A ltd. Assets are revalued
as follows:
Non-current assets $85000
Inventory $31000
Accounts receivable $37650
(ii) The consideration for the partnership to be $170000 satisfied as follows:
- 8% debenture stock to ensure that Kane receives the same amount of interest as he has
received from loan to the partnership.
- 100000 ordinary shares fully paid to Kane and Abel in proportion to the balances in their
capital accounts in the partnership at 1 November 1997. Any balances remaining on the
partners’ capital accounts to be settled by cash.

5. (iii) 20000 ordinary shares are to be issued to the friend of the partners on the same terms as
those of Kane and Abel.
Question 3
(a) Prepare the Statement of Financial Position of K & A ltd as it would appear immediately
after it has acquired the partnership. [10]
(b) FRS 4 refers to capital instruments.
(i) Explain the term ‘Capital Instruments’ [1]
(ii) Name the capital instruments in K & A ltd. [2]
(c) Explain the term ‘bonus (or scrip or capitalisation) issue. State how a bonus issue could be
made by K & A ltd. [3]
(d) Explain the term ‘rights issue’. State why K & A ltd might make a rights issue. [3]
(e) K & A ltd has a ‘provision for doubtful debts ’and a ‘reserve’. Explain the difference
between provisions and reserves. [5]
Scenario 4 (a): Kane and Abel prepare a budgeted Income Statement for the company
Kane and Abel want to know if their investment in K& A ltd will be worthwhile. They
prepare a forecast Statement of Comprehensive Income for the company for the first year to
31 October 1998 in which they propose to issue some preference shares. The ordinary share
capital will not be altered during the year.
K & A ltd forecast Income Statement for the year ended 31 October 1998
$ 000 $000
Operating profit 50
Interest payable (2)
Profit before tax 48
Taxation (12)
Profit after tax 36
Transfer to general reserve (10)
Preference dividend (8)
Ordinary dividend (12) (30)
Retained profit for the year 6
They are able to calculate some investment ratios from the budgeted Income Statement. The
projected share price at 31 October 1998 is $1, 80.
Question 4 (a)
Calculate the following ratios
(a) Interest cover (1)
(b) Dividend cover (1)
(c) Earnings per share (1)
(d) Price earnings ratio (1)
(e) Dividend yield (1)
(f) Earnings yield (1)

6. Scenario 4 (b) A proposal to manufacture a new product.
The Cost Accountant of K & A ltd produces an estimate of costs involved in the manufacture
of a new product and sale of 10000 units as shown below.
Estimate of revenue and costs for 10000 units is as follows:
$
Revenue 300000
Costs: Direct materials 60000
Direct labour ($11 per hour) 132000
Fixed overheads 70000
18000 units are actually made and sold but Kane and Abel are disappointed with the profit
earned by the product. They provide the Accountant with the actual results given below and
ask for an explanation of the differences between the profit they expected and actual profit.
Actual revenue and cost for 18000 units
$
Revenue 504000
Cost: Direct materials (1750kg) 119408
Direct labour (23000 hours) 233450
Fixed overheads 70000
Question 4 (b)
Prepare a report to Kane and Abel to explain the difference between the profit expected on
10000 units of the new product and the profit actually made on 18000 units. Your report
should include a financial statement to reconcile the expected profit to actual profit.
The profit reconciliation statement should show clearly the following variances.
(i) Quantity (difference between profit expected on 10000 units and that expected on 18000
units) .
(ii) Sales price
(iii) Direct material usage and price.
(iv) Direct labour efficiency and rate.
Your report should explain the possible relationships between variances. [25]