Accounting (IAS)

Level 3

Model Answers
Series 2 2006 (Code 3901) Malaysia

Accounting (IAS) Level 3 Malaysia

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, 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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SECTION A QUESTION 1 The financial statements of Gopa, a large retail company, are as follows: Income Statements of Gopa for the years ended 31 December 2004 $000 6,100 3,200 2,900 1,500 1,400 40 1,360 100 1,260 2005 $000 8,500 5,100 3,400 1,250 2,150 20 2,130 180 1,950

Sales (all on credit) Cost of sales Gross profit Operating expenses Profit from operations Interest payable Profit for the year Dividends (preferred and ordinary)

Balance Sheets at 31 December 2004 $000 $000 ASSETS Non-current assets Current assets Inventories Receivables Bank Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary shares of $1 each Share premium account Accumulated profits Equity Non-current liabilities 10% Preferred share capital Loan 400 500 900 Current liabilities Total equity and liabilities 128 4,816 545 55 16 616 4,816 4,200 742 98 87 927 7,427 2005 $000

$000 6,500

$000 2,000 20 1,768 3,788 400 500

$000 2,500 175 3,718 6,393

900 134 7,427

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QUESTION 1 CONTINUED REQUIRED (a) Calculate the following ratios, (correct to 2 decimal places), for both 2004 and 2005: (i) Gross profit to sales (expressed as a %) (ii) Operating profit to sales (expressed as a %) (iii) Receivables collection period (based on closing receivables and expressed in days) (iv) Earnings per share (v) Inventory turnover period (based on closing inventory and expressed in days) (vi) Current (vii) Acid test (14 marks) (b) Suggest three reasons for the reduction in the gross profit to sales ratio during 2005 (6 marks) (Total 20 marks)

MODEL ANSWER TO QUESTION 1 (a) Gross profit to sales Operating profit to sales Receivables collection period Earnings per share Inventory turnover period Current Acid test 2004 47.54% 22.95% 3.29 days $0.66 62.16 days 4.81: 1 0.55:1 2005 40.00% 25.29% 4.21 days $0.84 53.10days 6.92 :1 1.38 :1

2,900/6,100 x 100 1,400/6,100 x100 55/6,100 x 365 (1,360-40)/2,000 545/3,200 X365 616/128 (616-545)/128

3,400/8,500 x 100 2,150/8,500 x 100 98/8,500 x365 (2130-40)/2,500 742/5,100x365 927/134 (927 -742)/134

(b) Possible reasons for the fall in the gross profit to sales ratio (i) (ii) (iii) (iv) (v) (vi) Fall in selling prices per unit Increase in the bought-in costs per unit Inventory stolen Closing inventory undervalued Inventory-taking error Changes in sales mix

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SECTION A CONTINUED QUESTION 2 The following Trial Balance relates to Mohatir, a public company, at 31 March 2006: $000 $000 Sales 229,390 Inventory at 1 April 2005 12,100 Purchases 107,200 Distribution costs 20,000 Administration expenses 25,000 Debenture interest paid 300 Interim dividends - ordinary 2,900 - preferred 400 Leasehold building - cost 50,000 Plant and machinery - cost 75,000 Office equipment - cost 15,000 Depreciation at 1 April 2005 - leasehold building 20,000 - plant and machinery 28,000 - office equipment 9,600 Trade receivables 67,400 Bank 780 Trade payables 18,370 Ordinary shares of $1 each 16,000 Suspense 23,000 6% Debentures (issued on 1 July 2005) 10,000 8% Preferred shares of $1 each 10,000 Accumulated profits (1 April 2005) 10,160 375,300 375,300 The following notes are relevant: (1) The year end inventory taking was delayed until 7 April 2006. The value of the inventory on the premises on that date was $25 million at cost. Mohatir entered into the following transactions between 1 April 2006 and 7 April 2006: $ Sales at a margin on sales of 50% 1,200,000 Goods sent to agents on a sale or return basis at a mark up on cost of 25% 500,000 Purchases at cost 700,000 All sales and purchases had been correctly recorded in the period in which they occurred.

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QUESTION 2 CONTINUED (2) Mohatir has the following depreciation policy: - Leasehold building - straight-line over 20 years - Plant and machinery - straight-line over 10 years with a residual value of $5,000,000 - Office equipment - 40% per annum reducing balance Depreciation of the leasehold building and plant and machinery are treated as part of cost of sales; depreciation of the office equipment is an administration expense (3) A receivable owing $4,000,000 was declared bankrupt on 1 April 2006. It was then decided to create a provision for doubtful receivables at 31 March equal to 5% of the remaining trade receivables The Suspense Account has been credited with the amounts of two share issues: - The sale of four million shares on 1 April 2005 at $2 per share - A fully subscribed rights issue on 1 July 2005 of 1 for 4 shares held at that date at a price of $3 per share (5) On 31 March 2006, Mohatir declared a final ordinary dividend of $0.20 per share.

(4)

REQUIRED (a) Prepare the Income Statement of Mohatir for the year ended 31 March 2006 in a form suitable for publication. (15 marks) Show the capital and reserves of Mohatir as they would appear in the Balance Sheet at 31 March 2006. (5 marks) (Total 20 marks)

(b)

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MODEL ANSWER TO QUESTION 2 (a) Mohatir Income Statement for the year ended 31 March 2006 $000 Sales Cost of sales (W1, W2, W3) Gross profit Distribution costs Admin. Expenses (25,000 + 2,160 + 4,000 + 3,170) Operating profit Debenture interest (6% x 10,000 x 9/12) Net profit Dividends: Preferred (.08 x 10,000) Ordinary (2,900 + 5,000) $000 229,390 103,500 125,890 54,330 71,560 450 71,110 800 7,900 8,700 62,410

20,000 34,330

(b)

Mohatir Capital and Reserves at 31 March 2006 Ordinary shares of $1 each (16,000 + 4,000 + 5,000) Share premium (4,000 + 10,000 rights issue) Accumulated profits (62,410 + 10,160) 111,570 $000 25,000 14,000 72,570

Workings W1 Cost of Sales Opening inventory Purchases Depreciation (W2) Closing inventory (W3) $000 12,100 107,200 9,500 (25,300) 103,500 2,500 7,000 9,500 2,160

W2

Depreciation Leasehold property (50,000/ 20) Plant (75,000 5,000) / 10 Office equipment ((15,000 9,600) x 40%)

W3

Closing Stock Balance as per 7 April 2006 Add Sales 1,200 x 50/100 Sale or return 500 x 100/125 Less Purchases $000 25,000 600 400 (700) 25,300

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SECTION B (Answer any THREE questions from Section B) QUESTION 3 On 1 January 2005 Osam opened a branch at Nrio. The branch records were memorandum only. All goods for the branch were bought by the head office and invoiced to the branch at selling prices which were fixed to yield a gross profit of 20% on sales. The branch paid its local expenses from the proceeds of cash sales and remitted the balance to head office. At 31 December 2005, Osams accountant extracted the following information relating to the branch at Nrio from head office and branch records: (1) On 1 January 2005, head office paid $50,000 for a 25 year lease on a shop at Nrio. (2) During 2005, head office: - sent goods, originally costing $900,000, to the branch - received from branch $687,000 cash - received from branch goods returned with a selling price $9,600 - received, direct from branch receivables, $105,000 in cash - paid branch expenses of $30,000 in cash. (3) During 2005 in addition to items in (2) above the branch: - allowed its customers $18,200 cash discounts - paid its local expenses $80,900 in cash. On 31 December 2005 the branch had inventory in hand originally invoiced for $180,000. There were no inventory losses at the branch and all sales were at the fixed selling price.

REQUIRED (a) Prepare Journal entries (without narratives) to record items in (1), (2) and (3) above in Osams (head office) books. (11 marks) (b) Prepare the following accounts for the year ended 31 December 2005. (i) (ii) Branch Inventory Adjustment Branch Profit & Loss (9 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 3 (a) (1) (2) Branch Lease Bank (Head Office) Branch Inventory (900,000 x 100/80) Branch Inventory Adjustment (900,000 x 20/80) Goods sent to Branch Bank (Head Office) Bank (Branch) Goods sent to Branch (9,600 x 0.8) Branch Inventory Adjustment (9,600 x 0.2) Branch Inventory Bank (Head Office) Branch Receivables Branch Expenses Bank (Head Office) (3) Branch Discounts Allowed Branch Receivables Branch Expenses Bank (Branch) $ 50,000 50,000 1,125,000 225,000 900,000 687,000 687,000 7,680 1,920 9,600 105,000 105,000 30,000 30,000 18,200 18,200 80,900 80,900 $

(b) Branch Inventory Adjustment Account Branch Inventory Balance c/d (180,000 x 0.2) Branch Profit & Loss A/c $ 1,920 36,000 187,080 225,000 Branch Inventory $ 225,000 225,000

Branch Profit & Loss Account Expenses (30,000 + 80,900) Discounts allowed Lease (50,000 25) Head Office Profit & Loss (R) $ 110,900 18,200 2,000 55,980 187,080 Branch Inventory Adjustment Account $ 187,080

187,080

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SECTION B QUESTION 4 Mochacha, a public company, purchased eight million of the ordinary shares of Yuan, a private company, on 1 January 2005 for $30 million. The consideration was settled by a cash payment of $28 million and an ordinary share issue at a premium of $1per share. The cash element of this transaction has been recorded, but the share issue has not. The draft Balance Sheets of the two companies at 31 December 2005 were as follows: Mochacha plc $000 $000 ASSETS Non-current assets Tangible Investment in Yuan Current assets Inventory Trade receivables Bank 7,450 12,960 20,410 98,410 EQUITY AND LIABILITIES Capital and reserves Ordinary shares of $1 Share premium account Accumulated profits: At 1 January 2005 For the year to 31 December 2005 Equity Current liabilities Trade payables Bank overdraft Proposed dividend $000 $000 30,000 15,000 30,500 12,000 42,500 87,500 8,010 1,700 1,200 98,410 6,000 4,000 10,000 22,000 3,640 800 26,440 $000 50,000 28,000 78,000 4,310 4,330 520 9,160 26,440 $000 10,000 2,000 Yuan Ltd $000 $000 17,280 17,280

The following information is relevant: (1) (2) (3) (4) The fair value of Yuans land at the date of acquisition was $3 million in excess of its net book value. At the date of acquisition Mochacha sold an item of plant that had cost $4 million to Yuan for $6 million. Yuan depreciates plant at 10% on cost. Mochacha has not recorded the dividend receivable from Yuan. All proposed dividends were declared by the directors before 31 December 2005. Consolidated goodwill is to be written off on a straight-line basis over five years.

REQUIRED Prepare the Consolidated Balance Sheet of Mochacha at 31 December 2005. (Total 20 marks)

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MODEL ANSWER TO QUESTION 4 Workings Goodwill $000 Per draft accounts 42,500 Cost of investment Share capital (80% x 10,000) Pre-acquisition profit (80% x 6,000) Fair value adjustment (80% x 3,000) Post-acquisition profit Share premium (80% x 2,000) Unrealised profit on plant (6,000 4,000) Excess depreciation (10% x 2,000) Dividend receivable (80% x 800) Goodwill Goodwill w/o (13,200/5) 30,000 - 8,000 - 4,800 - 2,400 - 1,600 (20% x 10,000) 2,000 (20% x 6,000) 1,200 (20% x 3,000) 600 (20% x 4,000) 800 (20% x 2,000) 400 Minority Interest $000 Con P/L $000

3,200 -2,000 200 640

80% x 4,000

13,200 -2,640 10,560

5,000

-2,640 41,900

Mochacha Consolidated Balance Sheet at 31 December 2005 Non current assets Tangible (50,000 + 17,280 - 2,000 + 200 + 3,000) Goodwill Current assets Inventories (7,450 + 4,310) Trade receivables (12,960 + 4,330) Bank $000 $000 68,480 10,560 79,040

11,760 17,290 520 29,570 108,610

Capital and reserves Ordinary shares of $1 (30,000 + 1,000) Share premium account (15,000 + 1,000) Accumulated profits

31,000 16,000 41,900 88,900 5,000 11,650 1,700 1,200 160 14,710 108,610

Minority interest Current liabilities Trade payables (8,010 +3,640) Bank overdraft Proposed dividend Proposed dividend to minority shareholders (.20 x 800)

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SECTION B CONTINUED QUESTION 5 Musa, a private company, invested some of its surplus funds in the 8% debentures of Patel, a public company. Interest on these debentures is paid on 30 April and 31 October. Transactions in respect of the 2005 financial year were as follows: January 1 April 15 June 15 November 30 REQUIRED (a) Prepare the Investment in 8% Debentures of Patel Account in the books of Musa for the year ended 31 December 2005. Profits/Losses on disposal are to be calculated and entered in this account at the date of each sale. (b) List two uses of the balance on a Share Premium Account. Purchased $800,000 8% debentures at 105 cum interest Sold $200,000 8% debentures at 109 ex interest Sold $400,000 8% debentures at 95 cum interest Sold $100,000 8% debentures at 104 cum interest

(16 marks)
(4 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 5 (a) Date Jan 1 April 15 April 15 April 15 April 30 June 15 June 15 Oct 31 Nov 30 Nov 30 Dec 31 Description Bank Contra P&L Nom $ 800,000 8% Debentures in Patel Income Capital Description $ $ 10,6671 829,3332 Bank 4 667 Contra 11,3345 Bank Bank P&L Bank Bank P&L 34,666 Bal c/d 46,000 840,667 Nom $ 200,000 32,0006 7 4,000 8,00010 11 667 1,33314 46,000 Income $ Capital $ 218,0003 4 667 376,000 38,6679 103,333 33413 103,66615 840,667
12 8

400,000 100,000 100,000 800,000

P & L (R)

______ 800,000

Notes: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (b) (i) (i) (ii) (iii) Capitalisation issue of ordinary shares Write off preliminary expenses Write off discount on the issue of debentures Write off premium on the redemption of preference shares 2/12 x 800,000 x 8/100 = 10,667 (800,000 x 1.05) 10,667 200,000 x 1.09 .5/12 x 8/100 x 200,000 = 829, 333 = 218, 000 = 667 = 11,334

(218,000 + 667) (200,000/800,000) x 829,333 8/100 x 800,000 x 6/12 1.5/12 x400,000 x 0.8 400,000 x .95) (4,000) = 32,000 = 4,000 = 376,000

400,000/800,000 X 829,333) 376,000 = 38,667 8/100 x 200,000 x 6/12 1/12 x 100,000x.08 (100,000 x 1.04) (667) = 8000 = 667 = 103,333

103,333 (100,000/800,000 X 829,333) = 334 100,000 x 8/100 x 2/12 100,000/800,000 x 829,333 = 1,333 = 103,666

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QUESTION 6 Mossod, a public company, purchased a vehicle for $54,000 on 1 October 2005. To finance this Mossod borrowed $54,000 from its bank. This loan was to be repaid in 8 equal quarterly instalments starting on 31 December 2005. Interest was to be paid with each instalment at the rate of 5% of the amount owing immediately before each instalment. Mossod depreciates vehicles on a usage basis using mileage as the measure of usage. The new vehicle is expected to be used for 70,000 miles and then sold for $5,000. During the period 1 October 2005 to 31 March 2006 the vehicle covered 10,000 miles. REQUIRED (a) Calculate the amounts which appeared in Mossods Profit & Loss Account for the year ended 31 March 2006 in respect of the vehicle and its financing. (6 marks) (b) Calculate the balances relating to the vehicle and its financing at 31 March 2006 and show how these would appear in the companys Balance Sheet at that date. (6 marks) On 1 October 2005, Santo purchased a large machine from Galapo, the details of which are as follows: $ $ List price of the machine 200,000 Trade discount applicable to Santo 10% on list price Delivery handling costs 3,000 Maintenance contract for four years 8,000 Cost of pre-production testing 24,000 Site preparation costs Electrical cable installation Concrete reinforcement Own labour Insurance for one year 15,000 9,500 7,500

32,000 1,000

Santo paid for the machine itself within two weeks of delivery, thereby obtaining an early settlement discount of 5%. The machine is expected to last 10 years. At the end of this period, it will cost $25,000 to dismantle the machine and $13,000 to restore the site to its original condition. Santo charges a full years depreciation on all assets purchased during the year and uses the straight line method.

REQUIRED (c) Calculate the annual amount to be shown as depreciation expense for the machine. (8 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 6 (a) Depreciation Finance charge 10,000/70,000 x (54,000-5000) = Quarter 1 (5% x 54,000) Quarter 2 (5% x (7/8 x 54,000) $ 7,000 2,700 2,363 5,063

(b) Balance Sheet Non-current asset

Vehicle at cost Accumulated depreciation

54,000 7,000 47,000

Non-current liability Loan (.25 x 54,000) Current liability Loan (.50 x 54,000) (c) Depreciation of Machinery List price Less trade discount of 10% on list price $ 200,000 20,000

13,500 27,000

$ 180,000

Delivery 3,000 Pre-production testing 24,000 Electrical cable installation 15,000 Concrete reinforcement 9,500 Own labour costs 7,500 Dismantling costs & restoration costs (25,000 +13,000) 38,000

97,000 277,000 277,000/10 27,700

Depreciation of plant

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