LCCI International Qualifications

Accounting Level 3

Model Answers
Series 4 2009 (3012)

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Accounting
Series 4 2009

How to use this booklet Model Answers have been developed by 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) (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, plus a fully worked example or sample answer (where applicable) where appropriate, 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. 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 2009 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

Page 1 of 14

QUESTION 1 Every month Viking Ltd‟s accountant reconciles the bank balance appearing in the cash book with the balance appearing in the company‟s bank statement at the end of that month. At 31 October 2008 the cash book showed a bank balance in hand of £10,932 whilst the bank statement showed a balance in hand of £8,133. A Suspense Account had been set up as the Trial Balance did not balance. The accountant discovered the following: (1) (2) (3) (4) (5) (6) A receipt from a debtor of £360 was received and banked on 30 October but no entry had been made in the books. This deposit appeared on the bank statement on 2 November. Cheques totalling £996 were entered in the books on 29 October and sent out to suppliers on that date. They did not appear in the bank statement until 4 November. No entries had been made in the books for bank charges of £1,206 which appeared on the bank statement on 28 October. Takings of £5,259 were entered in the cash book and banked on 31 October, but did not appear in the bank statement until 1 November. A standing order for a subscription payable of £165 had been paid twice, in error, by the bank. No entry had been made in the cash book in respect of either payment. The debit side of the cash book for October had been under added by £3,000.

REQUIRED (a) Prepare journal entries, excluding narratives, but including entries relating to bank, to record the necessary adjustments. (8 marks) Calculate the corrected bank balance in the cash book at 31 October 2008. (5 marks) (c) Prepare a bank reconciliation statement at 31 October 2008 starting with the balance on the company‟s bank statement on that date. (5 marks)

(b)

A trainee accountant has asked the following questions relating to the bank reconciliation process: (i) (ii) “Why is the company paying bank charges when it has a sizeable balance in hand? Surely the bank should be paying Viking Ltd interest and not the other way round?” “Why are deposits entered in the bank statement within a day whilst cheques take many days to appear in the bank statement?”

REQUIRED (d) Reply to the trainee accountant‟s questions. (7 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 1 (a) Journal entries (1) Bank Debtor (3) Bank charges Bank (5) Subscriptions Bank (6) Bank Suspense DR £ 360 1,206 1,206 165 165 3,000 3,000 (8 marks) (b) Corrected bank balance at 31 October 2008 10,932 + 360 – 1,206 – 165 + 3,000 = £12,921 (5 marks) (c) Bank Reconciliation Statement at 31 October 2008 £ Balance per statement less unpresented cheques CR £ 360

£ 8,133 996 7,137

unrecorded deposit unrecorded deposits subscription paid in error Balance per cash book

add

360 5,259 165

5,784 12,921 (5 marks)

(d) Answers to trainee accountant (i) Bank charges are charges made by the bank for processing the company‟s transactions, providing advice, etc as opposed to bank interest, which would be charged on an overdrawn account. It is reasonable to suggest that the bank should pay interest on a sizeable bank balance although Viking Ltd could always make transfers to and from a deposit account and receive interest on that. Deposits, by their very nature, arrive at the bank quickly and can then be recorded. Cheques take some days to reach suppliers and there may be additional time taken by the supplier to pay them into their bank. Banks then have to communicate with one another. (7 marks) (Total 25 marks)

(ii)

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QUESTION 2 In 2008 Clyst Ltd constructed a new workshop. The following expenditure was incurred in relation to the workshop during 2008: £ Purchase of land Legal fees in respect of: Purchase of land A dispute with a supplier over the quality of the building materials Architect‟s fees Clearance of site Building materials Labour: Clyst Ltd‟s own employees charged at cost plus 50% to cover the associated administrative expenses Electrical installation Cost of electricity Decoration: Initial Redecoration in more pleasing colours Annual insurance £ 120,000

11,000 5,000 16,000 6,000 12,000 21,000

75,000 13,000 2,000 500 600 900 267,000

REQUIRED (a) Prepare a schedule showing the total amount to be: (i) Treated as part of the capital cost of the workshop (ii) Written off as expenses. (7 marks)

Hayle plc purchased a new machine on 1 January 2009 for £120,000. It is expected to be used for five years and then have a residual value of £8,000.

REQUIRED (b) For each of the years 2009, 2010 and 2011, calculate, for Hayle plc, the amount to be charged to the Profit and Loss Account, in respect of depreciation on the new machine, using each of the following methods: (i) (ii) (iii) Straight line Reducing balance at 40% Sum of the years‟ digits (8 marks) (c) Explain what is meant by „residual value‟ in relation to fixed assets. (3 marks)

3012/4/09/MA

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QUESTION 2 CONTINUED Truro Ltd imports model aircraft, paints them, packages them in attractive boxes and then sells them to retail shops. Details are as follows: £ Per aircraft Purchase price before discounts Import taxes Settlement discount received Trade discount received Painting Box Carriage outwards Carriage inwards Selling price Other selling costs 7.40 0.80 0.37 0.74 2.10 0.80 0.40 0.30 11.80 0.50

There were 380 model aircraft, painted, boxed and ready for despatch, in stock at 30 June 2009.

REQUIRED (d) Calculate the cost of stock and the net realisable value of stock, at 30 June 2009, and show the amount that should appear in Truro Ltd‟s Balance Sheet at that date. (7 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 2 (a) Schedule Fixed Asset – Workshop £ 120,000 11,000 6,000 12,000 21,000 50,000 13,000 500 ……….. 233,500 Expense £ 5,000

Purchase of land Legal fees Architect‟s fees Clearance of site Building materials Labour Electrical installation Cost of electricity Decoration Insurance

25,000 2,000 600 900 33,500 (7 marks)

(b)

Alternative depreciation methods 2009 £ 22,400 2010 £ 22,400 2011 £ 22,400

(i)

Straight line (120,000 – 8,000) 5 Reducing balance (120,000 x 0.40) (120,000 – 48,000) x 0.40 (72,000 – 28,800) x 0.40

(ii)

48,000 28,800 17,280

(iii)

Sum of the years‟ digits

5 15 4 15

(120,000 – 8,000) (120,000 – 8,000) (120,000 – 8,000)

37,333 29,867 22,400 (8 marks)

3 15

(c)

Residual value This is the amount expected to be received from the sale of a fixed asset at the end of its economic life, net of any disposal costs. (3 marks)

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MODEL ANSWER TO QUESTION 2 CONTINUED (d) Stock Value COST £ 7.40 0.80 (0.74) 2.10 0.80 0.30 10.66 ……. 10.90 NRV £ 11.80 (0.40) (0.50)

Purchase price Import taxes Trade discount received Painting Box Carriage inwards

Selling price Carriage outwards Other selling costs

Value

10.66 x 380

= £4,050.80 (7 marks) (Total 25 marks)

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QUESTION 3 Brann, a retailer, has the following budgeted Balance Sheets at 31 December: 2009 Acc.Dep. £000 140 2010 Acc.Dep. £000 190

Cost £000 Fixed assets Current assets Stock Trade debtors Bank Current liabilities Trade creditors Accrued expenses Bank overdraft Net current assets 500

Nbv £000 360

Cost £000 570

Nbv £000 380

71 25 10 106 14 6 11 7 9 86 446 £000

82 59 141

20

27 114 494 £000 446 60 506 12 494

Capital Opening balance Net Profit Drawings

420 40 460 14 446

Notes: (1) The profit to sales ratios for 2010 are budgeted to be: Gross profit 25% Net profit 10% (2) No fixed asset disposals are budgeted for 2010.

REQUIRED (a) Prepare an annual cash budget for Brann for 2010. (13 marks)

Brann is concerned that the budgeted figures show that a bank balance in hand of £10,000 has become a bank overdraft of £9,000 by the end of 2010. REQUIRED State: (b) Three reasons for the overdraft (6 marks) (c) Six actions Brann might take to avoid having to request overdraft facilities. (6 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 3 (a) Summary Cash Budget £000 Opening balance Receipts from customers [(60 x 10) + (25 – 59)] £000 10 566 576

Less Payments to suppliers [(60 x 10 x 0.75) + (82 – 71) + (14 – 11)] Payments for expenses [(60 x 10 x 0.15) + (6 – 7) – (190 – 140)] Payments for fixed assets (570 – 500) Drawings Closing balance (overdraft)

464 39 70 12

585 (9) (13 marks)

(b)

Reasons for overdraft: Investment in fixed assets Increase in stock Increase in debtors (6 marks)

(c)

How to avoid overdraft: Reduce investment in fixed assets Improve stock control Improve credit control Obtain a loan Introduce more capital Reduce drawings Increase selling prices Reduce expenses Slow down payments to suppliers Accept any reasonable suggestion (6 marks) (Total 25 marks)

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QUESTION 4 The following information has been extracted from the accounting records of Wick Ltd for the year ended 31 December 2008: (1) Motor vehicles (cost £80,000, net book value £32,000) were sold for £24,000. These were the only fixed assets disposed of during the year. Plant and machinery, costing £84,000, was acquired. Accumulated depreciation of fixed assets was £78,000 on 1 January and £56,000 on 31 December. Dividends received from investments of £3,000 was £4,000 less than loan interest paid. A five year bank loan of £40,000 was received. Issued share capital increased from 200,000 £1 ordinary shares to 400,000 £1 ordinary shares. A bonus (capitalisation) issue of one share for every two shares held had been followed by a fully subscribed rights issue at £1.25 per share. Wick Ltd made a net profit of £50,000. Debtors at 31 December were 20% higher than the £70,000 debtors at 1 January. Creditors at 31 December were £40,000, a decrease of 20% on creditors at 1 January. Stock at 31 December was £5,000 higher than the £25,000 stock at 1 January.

(2) (3)

(4) (5) (6)

(7) (8) (9) (10)

REQUIRED (a) Show the following items as they would appear in the Cash Flow Statement of Wick Ltd for the year ended 31 December 2008 in accordance with FRS1 (revised): (i) (ii) (iii) (iv) Reconciliation of operating profit to net cash inflow from operations Net cash outflow from returns on investment and servicing of finance Net cash outflow from capital expenditure and financial investment Net cash inflow from financing. (17 marks) The Managing Director is concerned about the company‟s cash position. One suggestion that he has received is to reduce the amount of stock held.

REQUIRED (b) State three advantages and one disadvantage of this suggestion. (8 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 4 (a) (i) Reconciliation of operating profit to net cash inflow from operations £ Operating profit (50,000 – 3,000 + 7,000) 54,000 Depreciation [(56,000 – 78,000) + (80,000 – 32,000)] 26,000 Loss on disposal of motor vehicles (32,000 – 24,000) 8,000 Increase in stock (5,000) Increase in debtors (70,000 x 0.20) (14,000) Decrease in creditors

40,000 0.20 0.80

(10,000) 59,000

Net cash inflow from operations (ii)

Net cash outflow from returns on investment and servicing of finance £ 3,000 (7,000) (4,000)

Dividends received Interest paid (3,000 + 4,000)

(iii)

Net cash outflow from capital expenditure and financial investment £ 24,000 (84,000) (60,000)

Sale of motor vehicle Purchase of plant and machinery

(iv)

Net cash inflow from financing £ Bank loan 40,000 Issue of ordinary shares [(400,000 – 200,000 – 100,000) x 1.25]125,000 165,000 (17 marks)

(b) -

ADVANTAGES less chance of obsolescent stock improve rate of stock turnover less cash tied up in stock will improve cash position

-

DISADVANTAGE danger of stock outs

(8 marks) (Total 25 marks)

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QUESTION 5 Extracts from the financial statements of Lazio plc, a food and clothing retailer, are as follows: Profit and Loss Accounts for the year ended 31 December: 2007 £000 225 105 40 10 15 2008 £000 250 100 45 7 15

Sales Gross profit Selling and administrative expenses Loan interest Dividends

Balance Sheets at 31 December: 2007 £000 333 4 10 (25) 10 150 100 2008 £000 300 7 30 10 20 100 150

Fixed assets at net book value Stock Trade debtors Bank Trade creditors Loans to Lazio plc Ordinary shares of £1 each

Lazio plc‟s share price was £2.50 on 31 December 2007 and £1.50 on 31 December 2008.

REQUIRED (a) Calculate, for Lazio plc, the following ratios (correct to 2 decimal places), for each of 2007 and 2008: (i) (ii) (iii) (iv) (v) (vi) (vii) Gross profit to sales Stock turnover (using closing stock and expressed in days) Debtors‟ collection period (expressed in days) Earnings per share Price earnings Dividend cover Interest cover (16 marks) Further information about Lazio plc, in respect of 2008, was obtained from the company website as follows: (1) (2) The company introduced „Lazio Loyalty Credit Cards‟. These allow customers to purchase goods on credit with no interest if paid within 60 days. Ten poorly performing stores were sold off and the rest refurbished, resulting in a one-off expense of £5,000. No new stores were acquired.

REQUIRED (b) Assess the possible success, or otherwise, of the above changes using the Profit and Loss Account and Balance Sheet extracts that have been provided. (6 marks)

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QUESTION 5 CONTINUED The increase in ordinary share capital between the Balance Sheet dates resulted from a bonus issue of one for two.

REQUIRED (c) Explain what is meant by: (i) (ii) bonus issue one for two. (3 marks) (Total 25 marks)

3012/4/09/MA

Page 13 of 14

MODEL ANSWER TO QUESTION 5 (a) Ratios (i) Gross profit to sales 105 225 365 x x 100 = 46.67% 100 250 x 100 = 40.00%

(ii)

Stock turnover

4 (225 – 105)

= 12.17 days

7 365 x (250 – 100) 365 x 30 250

= 17.03 days

(iii) Debtors collection period 365 x 10 225 (iv) Earnings per share

= 16.22 days

= 43.80 days

(105 – 40 – 10) = £0.55 100 2.50 0.55 = 4.55

(100 – 45 – 7) 150 1.50 0.32 (100 – 45 – 7) 15 (100 – 45) 7

= £0.32 per share

(v)

Price / earnings

= 4.69

(vi) Dividend cover

(105 – 40 – 10) = 3.67 times 15 (105 – 40) 10 = 6.5 times

= 3.20 times

(vii) Interest cover

= 7.86 times

(16 marks) (b) Success of changes The introduction of the credit cards may well have contributed to better sales figures, especially as ten stores were sold off during the year. However, they will certainly have contributed to the threefold increase in debtors. So overall success is difficult to assess. The closing of the ten stores has not been a disaster for sales (see however above). Allowing for the £5,000 one off expenditure expenses have remained the same as in the previous year, suggesting more is being spent on the remaining stores, presumably to good effect. The closures therefore seem to have been effective, although the fall in gross profit to sales must be a concern. (6 marks) (c) Explanations (i) A „bonus issue‟ is a „free‟ issue of shares to existing shareholders. This is represented in the Balance Sheet by a transfer from reserves to share capital. „One for two‟ means that for every two shares currently held, the shareholders will receive another one. (3 marks) (Total 25 marks)

(ii)

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© Education Development International plc 2009

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© Education Development International Plc 2009. All rights reserved. This publication in its entirety is the copyright of Education Development International Plc. Reproduction either in whole or in part is forbidden without the written permission from Education Development International Plc.

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