Book-keeping & Accounts

Level 2

Model Answers
Series 2 2006 (Code 2006)

2006/2/06

1

no part of this publication may be reproduced. plus a fully worked example or sample answer (where applicable) – where appropriate. hired out or otherwise disposed of by way of trade in any form of binding or cover.Book. additional guidance relating to individual questions or to examination technique (3) Helpful Hints Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success. The book may not be lent. recording or otherwise without prior written permission of the Publisher. The contents of this booklet are divided into 3 elements: (1) (2) Questions Model Answers – reproduced from the printed examination paper – summary of the main points that the Chief Examiner expected to see in the answers to each question in the examination paper.Keeping & Accounts Level 2 Series 2 2006 How to use this booklet Model Answers have been developed by Education Development International plc (EDI) to offer additional information and guidance to Centres. photocopying. teachers and candidates as they prepare for LCCI International Qualifications. other than that in which it is published. mechanical. EDI accepts that candidates may offer other answers that could be equally valid. electronic. 2006/2/06 2 . EDI provides Model Answers to help candidates gain a general understanding of the standard required. The general standard of model answers is one that would achieve a Distinction grade. without the prior consent of the Publisher. resold. © Education Development International plc 2006 All rights reserved. stored in a retrieval system or transmitted in any form or by any means.

000 and Ken’s goodwill was valued at £40.600 83. each partner introduced various assets including goodwill.001 Add: Interest on drawings: Alice 1. Kirk and Emma has been dissolved.200 (72.600 3.601 Share of profits Alice (2/3) 48.000 72.000 respectively but they have no partnership agreement. to write-off the balance on the partnership goodwill account. They have now decided.000 Mary 2. The partners have now agreed to change their profit sharing ratio to 3:2:1 respectively. At the commencement of the partnership.000 x 8%) 2. The following incorrect partnership Appropriation Account was prepared in respect of the year ended 31 December 2005: £ £ Net Profit b/d 80. Emma has been declared bankrupt but her partnership capital account has a debit balance.000 9.QUESTION 1 Alice and Mary are in partnership with capital account balances of £100. (6 marks) Charles and Ken were originally sole traders who decided to form a partnership sharing profits and losses equally.601) REQUIRED (a) (i) (ii) Prepare a revised Appropriation Account for the year ended 31 December 2005 (4 marks) Give reasons for your treatment of Mary’s loan interest (3 marks) John.000. On 1 July 2005. before changing the profit sharing ratios. (6 marks) The partnership of Peter. George and Christina are in partnership sharing profits and losses equally. to record both the introduction and the writing-off of goodwill. without narratives.000 and £50. The partnership legal advisor has recommended that. after a year of trading. REQUIRED (c) Prepare journal entries. The value of Charles’s goodwill was agreed at £60.000 74. the tangible assets of the partnership should be professionally re-valued.601 Less: Interest on capital Alice 6. Mary loaned to the partnership an additional £25.000. REQUIRED (b) Suggest why the legal advisor is making such a recommendation. REQUIRED (d) Explain the legal ruling in Garner v Murray.000 Mary 3.601 Less: Interest on Mary’s loan (£25.401 Mary (1/3) 24. (6 marks) (Total 25 marks) 2006/2/06 3 .

376 0 £ 79.000 x 5% x 50%]) Share of profits: Alice (50% x 79.688 39.[25.688 −79.376) 39.376 (ii) (1) (2) (3) Charge against profits and not an appropriation Interest rate is restricted to 5% on Mary's loan as no agreement Loan interest should be for 6 months and not a year (b) (1) The values of assets in a balance sheet are partly due to the stewardship of the partners (2) Any profit or loss on the sale of any of these assets would be shared between the partners according to their profit sharing ratios (3) Any change in the profit sharing ratios prior to an asset sale would result in partners either gaining or losing compared to their old ratios An additional acceptable answer for (3) could be: A revaluation is therefore undertaken prior to a change in profit sharing ratios and any difference is posted to the asset account(s) and also to the partners' capital accounts in accordance with the old profit sharing ratios 2006/2/06/MS 1 CONTINUED ON NEXT PAGE .MODEL ANSWER TO QUESTION 1 (a) (i) Alice and Mary Appropriation Account for the year ended 31 December 2005 £ Net profit (80.001 .376) Mary (50% x 79.

000 50.000 100. 2006/2/06/MS 2 CONTINUED ON NEXT PAGE .000 40.000 50.000 Cr £ (c) Goodwill Capital Account: Charles Ken Capital Account: Charles Ken Goodwill 60.MODEL ANSWER TO QUESTION 1 CONTINUED Dr £ 100.000 (d) Legal ruling in Garner v Murray Where a partner cannot make good a deficit on his capital account this should be shared by the other partners in the ratio of their capital account balances immediately prior to the commencement of the dissolution.

700.875. following the repair of the shirts.895. On 5 February 2006.900 was correctly posted to the Sales Ledger Control Account but all of the individual entries in the sales ledger were posted as debits (6) Cash sales of £1.500. Owing to a slight defect they were all sold after 31 January 2006 for 50% of their normal selling price and after undertaking repairs costing £2 a pair (2) 500 shirts that had cost £30 each. Where a stock item requires no correction you are to write No Correction.700.895.600 (2) The debit balance of £350 on a debtor’s account was offset against his credit balance in the purchase Ledger. (10 marks) 2006/2/06/MS 3 CONTINUED ON NEXT PAGE . The following items were included at cost in the total: Item Description (1) 600 pairs of shoes that had cost £40 a pair and would normally sell for £90 a pair.875. These goods carried a mark-up of 50% REQUIRED (b) Commencing with the original valuation of £182. Individual postings were correctly made in the Sales Ledger (4) A bad debt of £112 was correctly written off in the individual debtor’s account but credited to the sales Ledger Control Account as £118 (5) The total of the Sales Returns Day Book for March 2006 of £2. The following errors and omissions were subsequently discovered: (1) The debit balance on the Sales Ledger Control Account at 28 February 2006 was £86.950 were debited to sales and credited to an individual debtor REQUIRED (a) (i) (ii) Commencing with £92. a dealer purchased all 500 for a total of £16. prepare a statement correcting the total of the balances extracted from the individual accounts at 31 March 2006 (5 marks) The closing stock of a company at 31 January 2006 amounted to £182.QUESTION 2 The debit balance on the Sales Ledger Control Account of P Grant at 31 March 2006 was £92. When the balances in the Sales Ledgers were extracted they totalled £97. These were found to have faulty stitching which cost the company £5 a shirt to repair. These are now considered old-fashioned and the selling price of each coat is to be reduced to £85 (4) Goods on sale or return and with a selling price of £2. calculate the revised stock value at 31 January 2006 by correcting the above errors and omissions. This was brought forward on 1 March 2006 as £85. prepare a statement correcting the balance on the Sales Ledger Control Account at 31 March 2006 (4 marks) Commencing with £97. This was recorded in the Sales Ledger Control Account but was omitted from the debtor’s personal account (3) The March 2006 total of the discount allowed column in the cash-book of £86 was not posted to the Sales Ledger Control Account.400 were omitted from stock even though they remained unsold in the debtor’s warehouse.500 (3) 100 coats that had cost £160 each.

QUESTION 2 CONTINUED When a business conducts a stock-take it often finds that the number of units physically counted of a particular product does not agree with the stock records. REQUIRED (c) Give 3 possible reasons for this difference. (6 marks) (Total 25 marks) 2006/2/06/MS 4 CONTINUED ON NEXT PAGE .

500 2.695 97.MODEL ANSWER TO QUESTION 2 (a) (i) £ Original balance on Sales Ledger Control at 31 March 2006 Add: Understated opening balance 86.600) Overstated bad debt (118 .500) (100 x 160) .500 .500 Deduct £ £ 182.845 350 5.875 900 6 906 93.150 93.700 8.695 (b) Original stock valuation at 31 January 2006 Add £ Item (1) (2) (3) (4) No Correction (500 x 30) .85.(16.600 1.600 1.950 99.2.500 .900 175.800 Revised stock valuation at 31 January 2006 2006/2/06/MS 5 CONTINUED ON NEXT PAGE .781 Less: Omission of discount allowed Revised balance (ii) Original total of individual debtor balances at 31 March 2006 Add: Cash sales incorrectly posted Less: Omission of contra Incorrect posting of sales returns (2.000 7.895 1.500 − 6.800 6.8.400 150 x 100 1.900 x 2) Revised total of balances £ 86 93.112) £ 92.

MODEL ANSWER TO QUESTION 2 CONTINUED (c) (1) (2) (3) Incorrect recording Incorrect stock count Pilferage An additional acceptable answer could be: (4) Breakages 2006/2/06/MS 5 CONTINUED ON NEXT PAGE .

in the ledger of G Parker.900 800 500 Additional information: (1) On receipt of the consignment. All purchases are made by head office and invoiced to the Wakefield branch at cost plus one third.200 2. at selling price. Parker incurred the following costs in relation to the consignment: Freight Insurance Container hire £ 2.000 1.600 211.000 10. Choi informed Parker that he had sold 165 cases at £600 a case REQUIRED (c) Prepare.800 The manager of the Wakefield branch is aware that stock thefts have occurred during the year but is uncertain as to the value of these thefts. G Parker of London consigned 200 cases of goods costing £85. REQUIRED (a) Calculate. the total value of stock thefts from the Wakefield branch for the year ended 30 June 2005.QUESTION 3 Caplan Ltd has a head office in Oxford and a branch in Wakefield. No other accounts are required.000 to S Choi. (11 marks) (Total 25 marks) 2006/2/06/MS 6 CONTINUED ON NEXT PAGE . You are to show the transfer to Parker’s Profit and Loss Account in respect of the year ended 31 December 2005. The following details related to the Wakefield branch in respect of the year ended 30 June 2005: Goods sent to branch at selling prices Branch returns to head office at selling prices Sales Total of authorised price reductions during the year Stocks valued at selling prices: 30 June 2004 30 June 2005 £ 212. The terms of Choi’s agreement entitled him to a commission of 3% of the gross sales value. (7 marks) (b) Prepare the Wakefield Branch Stock Adjustment Account for the year ended 30 June 2005. Choi paid import duties of £600 and landing charges of £200 (2) On 31 December 2005. the Consignment to Choi Account. his agent in Hong Kong.600 6. (7 marks) On 1 October 2005. All financial records of the branch are maintained in the head office ledgers.

000 x 25% 2006/2/06/MS 7 CONTINUED ON NEXT PAGE .600 Less: Sales Goods returned to head office Price reductions Book stock Actual stock Stock loss at selling prices 211.800 7.any format acceptable (b) Branch Stock Adjustment Account £ Balance b/d [4] 2.MODEL ANSWER TO QUESTION 3 (a) Opening stock Goods sent to branch £ £ 10.600 x 25% 212.000 Branch Stock Account: Price reductions Stock loss [1] HO returns [2] Balance c/d [3] Branch Profit & Loss: Gross Profit 55.600 2.650 53.800 1.000 Award marks if correct function used .650 Notes: Cost plus a third equates to 25% on selling [1] [2] [3] [4] [5] 1.000 222.700 51.600 x 25% 6.000 x 25% 1.800 6.800 x 25% 10.200 1.000 214.600 212.000 Branch Stock a/c [5] 250 400 1.300 55.650 £ 2.

750 £ Choi: Sales (165 x 600) Stock c/d (35 x 450) [1] 99.900 Insurance 800 Container hire 500 Choi: Import duties 600 Landing charges 200 Commission (3% x 99.900 + 800 + 500 + 600 + 200] = £450 200 2006/2/06 8 CONTINUED ON NEXT PAGE .780 114.750 114.MODEL ANSWER TO QUESTION 3 CONTINUED (c) Consignment to Choi £ Goods on consignment 85.000) 2.000 Bank/cash: Freight 2.000 15.000 + 2.970 Parker P& L 21.750 Workings [1] [85.

800 4.000 Cash £ 5.500 3.400 3.000 7.000 8.400 82.000 1.000 62.400 70 2.000 Debtors Creditors Expense accruals Expense prepayments Bank balance Cash balance Stock Additional information: (i) (ii) Gordon has decided to depreciate the van on a straight-line basis over 5 years and estimates that the van will have a resale value of £1.000 31 Dec 2005 £ 9.000 at the end of five years A Doubtful Debts Provision of 2% of debtors is to be created at 31 December 2005 2006/2/06 9 CONTINUED ON NEXT PAGE .QUESTION 4 Gordon Marshall does not maintain double-entry records but has produced the following cash book summary for the year ended 31 December 2005: Bank £ Receipts Receipts from debtors Cash sales Cash banked Payments Payments to creditors Cash purchases Expenses Drawings Delivery van (purchased 1 Jan 2005) Cash banked Assets and liabilities were as follows: 1 Jan 2005 £ 7.950 2.350 5.200 400 500 Unknown 3.800 3.500 30 2.050 8.

Clearly show all workings: (i) (ii) Gross Profit Margin (2 marks) Current/Working Capital (2 marks) (iii) Liquidity/Acid Test (2 marks) (Total 25 marks) (iii) The value of cash drawings 2006/2/06 10 CONTINUED ON NEXT PAGE . REQUIRED (d) Using figures extracted from the above final accounts.QUESTION 4 CONTINUED REQUIRED (a) Calculate the following for the year ended 31 December 2005: (i) (ii) Total sales Total purchases (6 marks) (b) Prepare for Gordon Marshall a Trading and Profit & Loss Account for the year ended 31 December 2005. (7 marks) (c) Prepare for Gordon Marshall a Balance Sheet at 31 December 2005. (6 marks) Gordon wishes to compare his business results with that of a competitor. calculate the following ratios.

050 1.350 + 82.800 = £89.400 187 5.000 .663 2006/2/06 11 CONTINUED ON NEXT PAGE .400 + 500 – 1.637 19.350 70 + 5.3.30 = £1.200 .500 + 5.000 – 1.250 2.MODEL ANSWER TO QUESTION 4 (a) (i) (ii) (iii) 9.000 64.400 -500 .300 4.000) x 25% 5 Doubtful debts provision (9.350 66.050) Depreciation (8.200 .340 (b) Gordon Marshall Trading and Profit & Loss Account for the year ended 31 December 2005 £ Sales Cost of Sales Opening stock Purchases Closing stock Gross Profit Less: Expenses (7.250 5.800 – 2.000 = £64.350 x 2%) Net Profit £ 89.7.350 2.400 63.950 25.950 + 62.000 + 400 – 4.

72:1 (iii) 3.000 Net £ 6.133 4.800 + 3.400 8.470 19.400 9.32:1 2006/2/06 12 © Education Development International plc 2006 .2.143 5.793 Represented by: Opening capital (7.950 16.250 22.000 + 1.663 27.163 2.MODEL ANSWER TO QUESTION 4 CONTINUED (c) Balance Sheet at 31 December 2005 Cost Depreciation £ £ 1.35% (ii) 3.950 22.400.340 22.500 30 22.350 .000 – 4.340) 7.050 8.300 89.400 5.800) Add: Net Profit for year Less: Drawings (3.950 x 100 28.143 .600 Fixed Assets Van Current Assets Stock Debtors (9. + 70 + 2.187) Prepayment Bank Cash Current Liabilities Creditors 2.143 5.793 (d) (i) 25.000 -1.193 22.

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