LCCI International Qualifications

Certificate in Accounting (IAS) Level 3

Model Answers
Series 3 2009 (3902)

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Certificate in Accounting (IAS) Level 3
Series 3 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)

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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.

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QUESTION 1 Caen, a private company, started business on 1 May 2009 buying and selling a single product. Details of purchases and sales during May 2009 were as follows: Date 1 8 15 16 18 21 25 31 REQUIRED (a) Calculate, for Caen, the total value of closing inventory at 31 May 2009 using each of the following inventory pricing methods: (i) (ii) FIFO periodic weighted average cost (recalculated at the end of each month and correct to 2 decimal places) (iii) perpetual weighted average cost (recalculated after each purchase and correct to 2 decimal places). (16 marks) (b) Calculate, for Caen, the gross profit for May 2009 using the FIFO method of valuing inventory. (4 marks) (c) State whether each of the following costs should be included when calculating the cost of finished goods inventory for a manufacturer: (i) (ii) (iii) (iv) (v) Carriage in Carriage out Storage Depreciation of factory machinery Marketing salaries. (5 marks) (Total 25 marks) Transaction Purchase Purchase Purchase Sale Purchase Purchase Purchase Sale Litres 70 50 40 100 50 60 40 80 Purchase Price (per litre) $ 19.00 19.50 20.00 20.25 20.00 20.50 38.00 Selling Price (per litre) $

36.00

For each item, state only ‘yes’ or ‘no’.

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MODEL ANSWER TO QUESTION 1 (a) (i) FIFO Purchases (70 + 50 + 40 + 50 + 60 + 40) Sales (100 + 80) Closing inventory 40 litres at 20.50 60 litres at 20.00 ∴ 30 litres at 20.25 130 (ii) Periodic Weighted Average Cost Purchases 70 x 19.00 50 x 19.50 40 x 20.00 50 x 20.25 60 x 20.00 40 x 20.50 Litres 310 180 130 $ 820.00 1,200.00 607.50 2,627.50

$ 1,330.00 975.00 800.00 1,012.50 1,200.00 820.00 6,137.50 = = 19.80 $2,574

Average cost = Inventory value =

6,137.50 ÷ 310 130 x 19.80

(iii) Perpetual Weighted Average Cost Litres Purchase Purchase Balance Purchase Balance Cost of goods sold Balance Purchase Balance Purchase Balance Purchase Balance Cost of goods sold ∴ Inventory value (b) Gross Profit (FIFO method) Revenue [(100 x 36) + (80 x 38)] – Purchases 6137.5 + Inventory 2,627.5 = 6,640.0 – 6,137.5 + 2,627.5 = (c) (i) Yes (ii) No (iii) No (iv) Yes (v) No $3,130 70 50 120 40 160 100 60 50 110 60 170 40 210 80 130 Price $ 19.00 19.50 19.21 20.00 19.41 19.41 19.41 20.25 19.79 20.00 19.86 20.50 19.98 19.98 19.98 Value $ 1330.00 975.00 2305.00 800.00 3105.00 1941.00 1164.00 1012.50 2176.50 1200.00 3376.50 820.00 4196.50 1598.40 2598.10

∴ ∴

∴ ∴ ∴

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QUESTION 2 On 1 January 2006 Quorn, a private company, purchased 75% of the shares in Ware, a private company, for $780,000. At that time the accumulated profit of Ware was $300,000. Ware’s share capital consists of 1,000,000 Ordinary Shares of $0.50 each and accumulated profit is its only reserve. The summarised Income Statements of the two companies for the year ended 31 December 2008 were as follows: Quorn $000 $000 2,700 1,350 1,350 370 140 510 840 75 915 270 645 380 1,025 $000 Ware $000 1,000 470 530 230 300 300 100 200 540 740

Revenue Cost of sales Gross profit Distribution costs Administrative expenses Net profit Dividend from Ware Dividends paid Profit for year Accumulated profit brought forward Accumulated profit carried forward Other Information

150 80

(1) Goodwill is amortised evenly over 10 years (2) During the year ended 31 December 2008 Quorn sold goods, which had cost Quorn $70,000, to Ware for $120,000. At 31 December 2008 40% of the value of these goods remained in Ware’s inventory. REQUIRED Calculate: (a) The goodwill arising on the acquisition of Ware by Quorn on 1 January 2006. (4 marks) (b) The consolidated revenue and consolidated cost of sales for the Quorn group for the year ended 31 December 2008. (8 marks) (c) The accumulated profit brought forward of the Quorn group at 1 January 2008. (5 marks) (d) The goodwill appearing in the Balance Sheet of the Quorn group at 31 December 2008. (2 marks) Dividends are often paid by subsidiary companies. In this case, Ware has paid a dividend of $100,000. REQUIRED (e) Explain how this dividend has affected: (i) (ii) the minority shareholders of Ware the consolidated Income Statement of the Quorn group for the year ended 31 December 2008. (2 marks)

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QUESTION 2 CONTINUED Holding companies may acquire subsidiary companies for many reasons. An example would be to increase market share. REQUIRED (f) Give two other reasons for the acquisition of subsidiary companies. (4 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 2 (a) Goodwill at Date of Acquisition Cost of acquisition Less Share capital (1,000 x 0.5) Accumulated profits

$000 500 300 800 x 0.75

$000 780 600 180

(b) Consolidated Revenue Quorn Ware Less Inter company sales

$000 2,700 1,000 3,700 120 3,580 $000 1,350 470 20 1,840 120 1,720

Consolidated Cost of Sales Quorn Ware Unrealised profit [(120 – 70) x 0.40] Less Inter company purchases

(c) Accumulated Profit Brought Forward Quorn Ware [(540 – 300) x 0.75] Less Goodwill amortisation (180 x 0.10 x 2)

$000 380 180 560 36 524

(d) Goodwill at 31 December 2008 At acquisition Less amortisation (180 x 0.10 x 3)

$000 180 54 126

(e) (i)

The minority shareholders will have received $25,000, which has reduced the minority interest in the consolidated Balance Sheet. (ii) The dividend will have no effect on the consolidated income statement. The $75,000 paid to the holding company will cancel out with the $75,000 received by the holding company. The $25,000 will be part of the minority interest deducted from the consolidated profit. To reduce competition, to acquire good management, to gain control over supplies, etc.

(f)

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QUESTION 3 Bodo, a private company, manufactures and sells three products, whose selling prices and variable costs per unit are as follows: D $ 5.00 2.40 E $ 2.60 1.40 F $ 6.00 2.80

Selling price Variable cost The current annual sales volumes are: D 30,000 units, E 16,000 units,

F 12,000 units.

Bodo is currently breaking even. REQUIRED (a) Calculate Bodo’s annual fixed costs. (7 marks) It has been suggested that, if product E was discontinued, the annual sales volume of D would increase by 20% and the annual sales volume of F would increase by 5%. No fixed costs would, however, be saved. REQUIRED (b) Calculate whether or not, on financial grounds, this suggestion should be adopted. (6 marks) Alternatively it has been estimated that if Bodo entered into a contract to spend $15,000 per year on advertising, annual sales and selling prices would be as follows: D E F 40,000 units at $4.80 18,000 units at $2.40 13,000 units at $6.00

Both variable costs per unit and other annual fixed costs would remain the same. REQUIRED (c) Calculate the estimated annual profit of Bodo resulting from the advertising expenditure and selling price cuts, and advise the company as to whether or not they would be worthwhile. (9 marks) (d) State two possible disadvantages of spending $15,000 per year on advertising. (3 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 3 (a) Annual Fixed Costs As Bodo is breaking even the total contributions from the three products must equal the fixed costs: Contribution from - D E F 30,000 (5.00 – 2.40) = 16,000 (2.60 – 1.40) = 12,000 (6.00 – 2.80) = $ 78,000 19,200 38,400 135,600 $ 15,600 1,920 17,520 (19,200) (1,680)

(b) Effect of Discontinuing Product E Contribution from - D 0.20 x 30,000 (5.00 – 2.40) = F 0.05 x 12,000 (6.00 – 2.80) = E all contribution lost

Suggestion should not be adopted $ 96,000 18,000 41,600 155,600 135,600 20,000 15,000 5,000

(c) Effect of Advertising on Profit Contribution from - D 40,000 (4.80 – 2.40) E 18,000 (2.40 – 1.40) F 13,000 (6.00 – 2.80) Less other fixed costs Less advertising Revised profit Advertising worthwhile as the profit was originally zero

(d) Disadvantages Outcome uncertain Contract means Bodo is committed to an additional fixed cost of $15,000 per year

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QUESTION 4 Following are the summarised Balance Sheets of Diss, a private company, at 31 December: 2007 Land and buildings - cost - acc dep. Machinery - cost - acc dep. Vehicles - cost - acc dep. Investments - cost Inventory Receivables Bank $000 800 112 430 170 150 80 217 380 72 $000 688 260 70 490 1,508 669 2,177 $000 950 200 47 1,197 730 250 2,177 2008 $000 $000 800 120 680 620 191 429 150 90 60 470 1,639 251 320 147 718 2,357 $000 $000 1,100 350 124 1,574 500 283 2,357

$000 Ordinary shares of $1 Share premium Accumulated profits 10% Debentures Bank loan Payables Final dividend Notes relating to 2008 (1) (2) (3) (4) (5) (6) 700 30 220 30

500 247 36

Machinery, costing $80,000, was sold for $31,000, resulting in a loss of $12,000 Some debentures were redeemed at par on 31 December The bank loan was repaid on 1 January The investments sold during the year produced a profit of $9,000 Investment income for the year, received during the year, was $8,000 An interim dividend of $14,000 was paid in June.

REQUIRED For the year ended 31 December 2008 in respect of Diss: (a) Calculate the profit from operations. (5 marks) (b) Prepare a Cash Flow Statement in accordance with IAS 7. No other notes to the cash flow statement are required. (20 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 4 (a) Profit from Operations Increase in accumulated profits (124 – 47) Interim dividend Final dividend Interest on debentures (0.10 x 700) Investment income

$000 77 14 36 70 197 8 189

(b) Diss – Cash Flow Statement for the year ended 31 December 2008 $000 Operating activities Profit from operations Adjustments for Depreciation – Land and buildings (120 – 112) – Machinery [191 – 170 + (80 – 31 – 12)] – Vehicles (90 – 80) Loss on machinery disposal Profit on investment disposal Operating cash flow before movements in working capital Increase in inventory (251 – 217) Decrease in receivables (380 – 320) Increase in payables (247 – 220) Cash generated by operations Debenture interest paid Net cash from operating activities Investing activities Investment income received Purchase of machinery (620 – 430 + 80) Sale of machinery Sale of investments (490 – 470 + 9) Net cash from investing activities Financing activities Dividends paid (30 + 14) Issue of shares [(1,100 – 950) + (350 – 200)] Debenture redemption (700 – 500) Repayment of bank loan Net cash used in financing activities Net increase in cash Cash at beginning of year Cash at end of year 8 (270) 31 29 (202) 49 (44) 300 (200) (30) 26 75 72 147 8 58 10 12 (9) 79 268 (34) 60 27 53 321 (70) 251 $000 189

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QUESTION 5 Mars and Ziggy were in partnership sharing profits/losses in the ratio 3:2 respectively after allowing for a salary of $3,000 per year for Ziggy. On 1 July 2008, Spider joined the partnership and from that date profits were shared equally, after allowing for a salary of $6,200 per year for Mars, and no salary for either Ziggy or Spider. Mars and Ziggy did not draw up accounts at 30 June 2008, but the Income Statement for the year ended 31 December 2008 was as follows: $ Revenue Less Cost of sales Gross profit Less Light and heat Rent Depreciation Salaries Selling expenses General expenses Net profit Notes relating to 2008 (1) Revenue was twice as high in each of the months January, February and March as it was in each of the months in the rest of the year (2) The gross profit to revenue ratio was 20% to 31 March and 25% for the rest of the year (3) Light and heat and general expenses accrued evenly throughout the year (4) Rent increased by 50% on 1 May (5) Depreciation was charged at 20% per year on a reducing balance basis up to 30 June and at 30% per year on the same basis for the rest of the year. The only change in non current assets was a purchase for $12,000 on 1 July. The book value of non current assets at 30 June was $54,000 (6) Salaries accrued evenly over the year except that Spider, the new partner, was an employee until 30 June, earning an annual salary of $18,000 (7) Selling expenses varied directly in proportion to revenue. REQUIRED Set out the Income Statements and Appropriation Accounts of the partnership in columnar format for the period 1 January to 30 June 2008 and for the period 1 July to 31 December 2008. Assume that all months have an equal number of days. (Total 25 marks) $ 1,500,000 1,155,000 345,000

14,000 32,000 15,900 69,000 30,000 20,000

180,900 164,100

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MODEL ANSWER TO QUESTION 5 Income Statements and Appropriation Accounts 6 months ended 6 months ended 30 June 2008 31 December 2008 $ $ $ $ Revenue [W1] (3:2) 900,000 600,000 Less Cost of sales (R) 705,000 450,000 Gross profit [W2] 195,000 150,000 Less Light and heat (1:1) 7,000 7,000 Rent [W3] (7:9) 14,000 18,000 Depreciation [W4] 6,000 9,900 Salaries [W5] 39,000 30,000 Selling expenses (3:2) 18,000 12,000 General expenses (1:1) 10,000 94,000 10,000 86,900 Net profit 101,000 63,100 Salary - Ziggy (3,000 x 0.5) 1,500 Mars (6,200 x 0.5) 3,100 99,500 60,000 Balance - Mars (0.6 x 99,500) 59,700 Ziggy (0.4 x 99,500) 39,800 99,500 Balance - Mars (0.333 x 60,000) 20,000 Ziggy (0.333 x 60,000) 20,000 Spider (0.333 x 60,000) 20,000 60,000

[W1] Weighting

2+2+2+1+1+1=9 1+1+1+1+1+1=6 6 ÷ 9 x 0.20 x 900,000 = 3 ÷ 9 x 0.25 x 900,000 = 0.25 x 600,000 =

∴ 3:2
120,000 75,000 195,000 150,000 345,000

[W2] January to March April to June July to December

[W3] Weighting

1 + 1 + 1 + 1 + 1.5 + 1.5 =7 1.5 + 1.5 + 1.5 + 1.5 + 1.5 + 1.5 = 9

∴ 7:9
54,000 6,000 60,000 54,000 12,000 66,000 9,900 56,100

[W4] January to June NBV at 30 June (90%) Charge to 30 June (20% x 0.5 = 10%) NBV at 1 January (100%) July to December NBV at 1 July Purchase 1 July Charge 1 July to 31 Dec (30% x 0.5 = 15%) Check : 6,000 + 9,900 = 15,900 [W5] January to June Spider Others [(69,000 – 9,000) x 0.5] July to December

9,000 30,000 39,000 30,000 69,000

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