ASE 2006 2 06 2

2506/2/06 >f0t@W9W2`Bk5eBkTUBX#
1













Book -k eepi ng &
Ac c ount s
Level 2






Model Answ er s
Series 3 2007 (Code 2506) Hong Kong
1
Book - Keeping & Accounts Level 2 Hong Kong
Series 3 2007





How to use this booklet

Model Answers have been developed by Education Development International plc (EDI) to offer
additional information and guidance to Centres, teachers and candidates as they prepare for LCCI
International Qualifications. The contents of this booklet are divided into 3 elements:

(1) Questions reproduced from the printed examination paper

(2) Model Answers summary of the main points that the Chief Examiner expected to
see in the answers to each question in the examination paper,
plus a fully worked example or sample answer (where applicable)

(3) Helpful Hints where appropriate, additional guidance relating to individual
questions or to examination technique

Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success.

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. EDI
accepts that candidates may offer other answers that could be equally valid.

























Education Development International plc 2007

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise
without prior written permission of the Publisher. The book may not be lent, resold, hired out or
otherwise disposed of by way of trade in any form of binding or cover, other than that in which it is
published, without the prior consent of the Publisher.
2506/3/07/MA 2
QUESTION 1

J ohnny Choo, a Hong Kong furniture manufacturer, has a branch in Singapore.

It is company policy that all branch sales are on credit and all cash received at the branch is
remitted to the head office.

All purchases are made by the Hong Kong office, with goods sent to the branch being invoiced at
cost plus 25%.


Branch transactions are recorded in the head office books.

For the year ended 31December 2006, the following information was entered in the head office
books:

Goods invoiced to branch 900,000
Goods returned by branch to head office 18,000
Branch sales 925,800
Goods returned by customers to branch 9,130
Payments by branch debtors to branch 920,100
Discounts allowed to branch debtors 24,780

The following balances appeared in the books at 1 J anuary 2006
Branch debtors 75,600
Branch stock at selling price 88,200
Branch adjustment account 17,640

Balance at 31 December 2006 branch stock at selling price 49,500

REQUIRED

Prepare the following accounts relating to the Singapore branch in the head office books for the
year ended 31 December 2006. Memorandum columns are not required.


(a) Branch Stock
(b) Goods to Branch
(c) Branch Adjustment
(d) Branch Debtors


2506/3/07/MA 3
MODEL ANSWER TO QUESTION 1

(a) Branch Stock
2006 2006
J an 1 Balance b/d 88,200 Dec 31 Branch debtors/Sales 925,800
Dec 31 Goods to branch 720,000 Dec 31 Goods to branch/Returns 14,400
Dec 31 Branch adjustment 180,000 Dec 31 Branch adjustment 3,600
Dec 31 Branch debtors/Sales/Returns 9,130 Dec 31 Stock loss:
Branch adjustment 806
Branch p&l 3,224
Dec 31 Balance c/d 49,500
997,330 997,330
2007
J an 1 Balance b/d 49,500

(b) Goods to Branch
2006 2006
Dec 31 Branch stock/Returns 14,400 Dec 31 Branch Stock/Goods 720,000
Dec 31 Trading a/c/P&L 705,600 No aliens
720,000 720,000

(c) Branch Adjustment
2006 2006
Dec 31 Branch Stock/Returns 3,600 J an 1 Balance b/d 17,640
Dec 31 Branch Stock 806 Dec 31 Branch Stock/Goods 180,000
Dec 31 P&L 183,334 No aliens
Dec 31 Balance c/d 9,900
197,640 197,640
2007
J an 1 Balance b/d 9,900
[1] 925,800 - 9,130 =916,670 @ 20% margin =183,334

(d) Branch Debtors
2006 2006
J an 1 Balance b/d 75,600 Dec 31 Cash/Bank 920,100
Dec 31 Branch Stock/Sales 925,800 Dec 31 Discounts allowed 24,780
Dec 31 Branch Stock/Returns 9,130
Dec 31 Balance c/d 47,390
1,001,400 1,001,400
2007
J an 1 Balance b/d 47,390
2506/3/07/MA 4
QUESTION 2

Sally Wong, whose financial year ends at 31 December, summarised the following information in
regard to her last three years of trading:

2004 2005 2006

Debtors balances at 31 December prior to
preparation of the final accounts 140,000 160,000 130,000

Bad debts:
Written off during the year 800 1,500 1,200
To be written off at 31 December 300 1,000 700

Doubtful debts:
Specific provision required at 31 December 1,200 800 600
General provision at 31 December
to be adjusted to 3% 2% 4%

At 1 J anuary 2004, the balance on the provision for doubtful debts account was 1,300.

REQUIRED

(a) Prepare ledger accounts for each of the years 2004, 2005 and 2006 for:

(i) Bad debts
(ii) Provision for doubtful debts

(b) Show how debtors would appear in the Balance Sheet at 31 December 2006.

(c) Define the following terms:
(i) Bad debts
(ii) Provision for doubtful debts
2506/3/07/MA 5 CONTINUED ON THE NEXT PAGE
MODEL ANSWER TO QUESTION 2

(a) (i) Bad Debts
2004 2004
J an 1 - Dec 31 Debtors/Balance b/d 800 Dec 31 Profit & Loss A/c 1,100
Dec 31 Debtors
300


1,100 1,100

2005 2005
J an 1 - Dec 31 Debtors/Balance b/d 1,500 Dec 31 Profit & Loss A/c 2,500
Dec 31 Debtors 1,000

2,500 2,500

2006 2006
J an 1 - Dec 31 Debtors/Balance b/d 1,200 Dec 31 Profit & Loss A/c 1,900
Dec 31 Debtors 700


1,900
1,900

(a) (ii) Provision for Doubtful Debts
2004 2004
Dec 31 Balance c/d 5,355 J an 1 Balance b/d 1,300
Dec 31 Profit & Loss A/c 4,055

5,355
5,355

2005 2005
Dec 31 Balance c/d 3,964 J an 1 Balance b/d 5,355
Dec 31 Profit & Loss A/c 1,391

5,355 5,355

2006 2006
Dec 31 Balance c/d 5,748 J an 1 Balance b/d 3,964
Dec 31 Profit & Loss A/c 1,784

5,748
5,748

2007
J an 1 Balance b/d 5,748
2506/3/07/MA 6
MODEL ANSWER TO QUESTION 2 CONTINUED

Workings
[1] Specific provision required 1,200
General provision required:
3% x [140,000 (300 +1,200)] 4,155
5,355
Provision b/d 1,300
Increase/(decrease) in provision 4,055

[2] Specific provision required 800
General provision required:
2% x [160,000 (1,000 +800)] 3,164
3,964
Provision b/d 5,355
Increase/(decrease) in provision -1,391

[3] Specific provision required 600
General provision required:
4% x [130,000 (700 +600)] 5,148
5,748
Provision b/d 3,964
Increase/(decrease) in provision 1,784

(b) Sally Wong
Balance Sheet extract at 31 December 2006

Current Assets
Debtors (130,000 700) 129,300
Less provision for doubtful debts 5,748
123,552

(c)
(i)
Bad debts are debts that have proved to be uncollectable and are therefore written off as an expense
in the P & L account.

(ii)
Provision for doubtful debts is debts that are unlikely to be paid and are therefore deducted from the
debtors on the Balance Sheet.
2506/3/07/MA 7
QUESTION 3

DMS plc has an authorised capital of 500,000 ordinary shares at 0.50 each and 100,000 6%
preference shares at 1 each.

The following balances appeared in the company's books after the preparation of the profit & loss
account for the year ended 30 J une 2006:

Issued capital: 400,000 0.50 ordinary shares fully paid 200,000
50,000 6% 1 preference shares fully paid 50,000
Freehold land and buildings at cost 420,000
Stock 57,800
10% debentures (repayable 2012) 40,000
Trade debtors 24,800
Trade creditors 9,400
Expenses prepaid 850
Share premium 76,220
General reserve 40,000
Expenses accrued 530
Profit and loss account balance at 1 J uly 2005 46,200
Bank (Cr) 1,600
Fixtures & fittings:
at cost 63,000
provision for depreciation 28,500
Preference interim dividend paid 1,500
Ordinary interim dividend paid 10,000

The company's trading & profit and loss accounts had been prepared and revealed a net profit of
84,100. However, this figure and certain balances shown above needed adjustment in view of the
following details which had not been recorded in the company's books.

(i) It appeared that a trade debtor who owed 400 would not be able to pay. It was
decided to write off his account as a bad debt.

(ii) An examination of the company's stock on 30 J une 2006 revealed that some items
shown in the accounts at a cost of 2,300 had deteriorated and had a resale value of
only 1,700.

(iii) At the end of the financial year some fixtures & fittings which had cost 4,200 and
which had a net book value of 900 had been sold for 1,400. A cheque for this
amount had been received on 30 J une 2006 and had been entered only in the cash
book. No depreciation is accounted for in the year of sale.

(iv) A half-years debenture interest is unpaid.

REQUIRED:

(a) Prepare a statement which shows the changes that should be made to the net profit of
84,100, in view of these unrecorded details.

The directors proposed to pay a final dividend of 5% to ordinary shareholders and to transfer 60,000
to the general reserve on 30 J une 2006.

(b) Prepare for DMS plc (taking into account all the available information) the Appropriation
Account for the year ended 30 J une 2006.

(c) Prepare DMSs Balance Sheet at 30 J une 2006, in vertical format.
2506/3/07/MA 8 CONTINUED ON THE NEXT PAGE
MODEL ANSWER TO QUESTION 3

(a) DMS plc: Calculation of corrected net profit


Original net profit 84,100
Add Profit on sale of equipment
500
84,600
Less Debenture Interest 2,000
Bad debt written off 400
Stock reduced to net realisable value 600 3,000
Corrected net profit
81,600




(b) DMS plc
Appropriation Account for the year ended 30 June 2006


Net profit for the year brought down 81,600
Less Transfer to general reserve 60,000
Interim ordinary dividend 10,000
Interim preference dividend 1,500
Proposed ordinary dividend 10,000
Proposed preference dividend 1,500 83,000
Retained loss for the year (1,400)
Add Retained profit from last year 46,200
Retained profit carried down to next year 44,800
2506/3/07/MA 9
MODEL ANSWER TO QUESTION 3 CONTINUED


(c) DMS plc
Balance Sheet at 30 June 2006

Cost Acc. Dep. NBV
Fixed Assets
Freehold Land & buildings 420,000 - 420,000
Fixtures & fittings (63,000 4,200) 58,800 25,200 [1] 33,600
478,800 25,200 453,600

Current Assets
Stock (57,800 600) 57,200
Debtors (24,800 400) 24,400
Prepayments 850

82,450

Creditors due within 1 year
Trade creditors 9,400
Debenture interest accrued 2,000
Accrued expenses 530
Proposed dividend 11,500
Bank overdraft 1,600

25,030

Net Current Assets/Working Capital
57,420
511,020
Creditors due after more than 1 year
10% debentures 40,000

471,020

Authorised capital
500,000 0.50 ordinary shares 250,000
100,000 6% 1 preference shares 100,000
350,000

Capital & Reserves
Called up ordinary share capital:
400,000 0.50 ordinary shares 200,000
Share premium 76,220
General reserve (40,000 +60,000) 100,000
Profit & Loss account 44,800
Ordinary shareholders funds 421,020
50,000 6% 1 preference shares 50,000

471,020

Workings [1] 28,500 3,300 = 25,200
2506/3/07/MA 10
QUESTION 4

A Lam extracted a trial balance at 31 December 2006 and found that it did not balance. She posted
the difference to a suspense account. Subsequently, she found the following errors, which resulted in
the difference:

(1) A payment by A Lam of 87 for a telephone bill had been entered in the cash book, but the
double entry had not been made.

(2) A Lam purchased new fittings for her shop, costing 2,900, but this transaction had been
posted to the purchases account.

(3) A payment of 67 for stationery had been posted to that account as 76. The bank
account entry was correct.

(4) A Lam had paid 3,750 cash for stock for her shop but no entries had been made in her
books.

(5) A payment of 320 to A Lam from a debtor C Chung had been debited to the account of
D Chang in error. The cashbook entry was correct.

(6) The total of 76 for discount allowed had been posted to the credit side of the discount
received account.

(7) A balance of 200 for general expenses had been omitted from the trial balance.

(8) A sale of 262 to D Mei had been posted correctly to the personal account but entered in error
in the sales day book as 226.


REQUIRED

(a) Prepare journal entries, without narratives, to correct the above errors.

(b) Prepare the suspense account.
2506/3/07/MA 11 Education Development International plc 2007
MODEL ANSWER TO QUESTION 4

(a) Journal entries

Dr Cr
1 Telephone / Telephone bill 87
Suspense account 87

2 Fittings 2,900
Purchases 2,900

3 Suspense account 9
Stationery 9

4 Purchases 3,750
Cash 3,750

5 Suspense account 640
D Chang 320
C Chung 320

6 Discount received 76
Discount allowed 76
Suspense account 152


7 No debit entry
Suspense account 200

8 Suspense account 36
Sales 36


(b) Suspense Account

D Chang 320 Difference on Trial Balance 246
C Chung 320 Telephone/Telephone Bill 87
Stationery 9 Discount allowed 76
Sales 36 Discount received 76


General expenses 200
685 685