Book-keeping & Accounts

Level 2

Model Answers
Series 2 2006 (Code 2006)

2006/2/06

1

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.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. no part of this publication may be reproduced. resold. EDI accepts that candidates may offer other answers that could be equally valid. stored in a retrieval system or transmitted in any form or by any means. mechanical. without the prior consent of the Publisher. electronic. photocopying. The general standard of model answers is one that would achieve a Distinction grade. other than that in which it is published. 2006/2/06 2 . 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. teachers and candidates as they prepare for LCCI International Qualifications.Book. © Education Development International plc 2006 All rights reserved. EDI provides Model Answers to help candidates gain a general understanding of the standard required. 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. recording or otherwise without prior written permission of the Publisher.

000 Mary 3. to write-off the balance on the partnership goodwill account. (6 marks) The partnership of Peter. REQUIRED (b) Suggest why the legal advisor is making such a recommendation.001 Add: Interest on drawings: Alice 1. after a year of trading.401 Mary (1/3) 24.000 72. (6 marks) (Total 25 marks) 2006/2/06 3 . Emma has been declared bankrupt but her partnership capital account has a debit balance.000. REQUIRED (c) Prepare journal entries.000.200 (72. without narratives. Kirk and Emma has been dissolved.000 Mary 2. before changing the profit sharing ratios. The partnership legal advisor has recommended that.000 9.QUESTION 1 Alice and Mary are in partnership with capital account balances of £100. They have now decided.000 74. The value of Charles’s goodwill was agreed at £60. (6 marks) Charles and Ken were originally sole traders who decided to form a partnership sharing profits and losses equally.600 83. to record both the introduction and the writing-off of goodwill. George and Christina are in partnership sharing profits and losses equally.601 Share of profits Alice (2/3) 48.000 and £50. REQUIRED (d) Explain the legal ruling in Garner v Murray. The following incorrect partnership Appropriation Account was prepared in respect of the year ended 31 December 2005: £ £ Net Profit b/d 80.000 and Ken’s goodwill was valued at £40. each partner introduced various assets including goodwill. On 1 July 2005. the tangible assets of the partnership should be professionally re-valued.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. The partners have now agreed to change their profit sharing ratio to 3:2:1 respectively. Mary loaned to the partnership an additional £25.601 Less: Interest on Mary’s loan (£25.000 x 8%) 2.600 3.000 respectively but they have no partnership agreement.601 Less: Interest on capital Alice 6. At the commencement of the partnership.

688 −79.001 .376) Mary (50% x 79.MODEL ANSWER TO QUESTION 1 (a) (i) Alice and Mary Appropriation Account for the year ended 31 December 2005 £ Net profit (80.376 0 £ 79.376 (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 .000 x 5% x 50%]) Share of profits: Alice (50% x 79.688 39.376) 39.[25.

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.000 Cr £ (c) Goodwill Capital Account: Charles Ken Capital Account: Charles Ken Goodwill 60.000 50.000 100.000 50. 2006/2/06/MS 2 CONTINUED ON NEXT PAGE .000 40.MODEL ANSWER TO QUESTION 1 CONTINUED Dr £ 100.

On 5 February 2006. 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. calculate the revised stock value at 31 January 2006 by correcting the above errors and omissions.500 (3) 100 coats that had cost £160 each. 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.875. 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. When the balances in the Sales Ledgers were extracted they totalled £97. 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.700. These were found to have faulty stitching which cost the company £5 a shirt to repair.600 (2) The debit balance of £350 on a debtor’s account was offset against his credit balance in the purchase Ledger.895. prepare a statement correcting the balance on the Sales Ledger Control Account at 31 March 2006 (4 marks) Commencing with £97.900 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. a dealer purchased all 500 for a total of £16.QUESTION 2 The debit balance on the Sales Ledger Control Account of P Grant at 31 March 2006 was £92.400 were omitted from stock even though they remained unsold in the debtor’s warehouse.875.700. following the repair of the shirts.895. (10 marks) 2006/2/06/MS 3 CONTINUED ON NEXT PAGE . The following errors and omissions were subsequently discovered: (1) The debit balance on the Sales Ledger Control Account at 28 February 2006 was £86. 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. 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. This was brought forward on 1 March 2006 as £85. These goods carried a mark-up of 50% REQUIRED (b) Commencing with the original valuation of £182.950 were debited to sales and credited to an individual debtor REQUIRED (a) (i) (ii) Commencing with £92. Where a stock item requires no correction you are to write No Correction.

REQUIRED (c) Give 3 possible reasons for this difference. (6 marks) (Total 25 marks) 2006/2/06/MS 4 CONTINUED ON NEXT PAGE .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.

895 1.500 Deduct £ £ 182.700 8.MODEL ANSWER TO QUESTION 2 (a) (i) £ Original balance on Sales Ledger Control at 31 March 2006 Add: Understated opening balance 86.900 x 2) Revised total of balances £ 86 93.781 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 (2.695 97.500) (100 x 160) .500 − 6.500 .845 350 5.695 (b) Original stock valuation at 31 January 2006 Add £ Item (1) (2) (3) (4) No Correction (500 x 30) .400 150 x 100 1.(16.000 7.2.800 6.600) Overstated bad debt (118 .800 Revised stock valuation at 31 January 2006 2006/2/06/MS 5 CONTINUED ON NEXT PAGE .875 900 6 906 93.8.112) £ 92.600 1.950 99.500 2.600 1.85.500 .900 175.150 93.

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 .

QUESTION 3 Caplan Ltd has a head office in Oxford and a branch in Wakefield.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. (11 marks) (Total 25 marks) 2006/2/06/MS 6 CONTINUED ON NEXT PAGE .000 10. 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.600 6.600 211. All purchases are made by head office and invoiced to the Wakefield branch at cost plus one third. at selling price. G Parker of London consigned 200 cases of goods costing £85. in the ledger of G Parker. REQUIRED (a) Calculate. (7 marks) On 1 October 2005.000 1. the Consignment to Choi Account. Parker incurred the following costs in relation to the consignment: Freight Insurance Container hire £ 2.900 800 500 Additional information: (1) On receipt of the consignment. his agent in Hong Kong.000 to S Choi. Choi paid import duties of £600 and landing charges of £200 (2) On 31 December 2005.200 2. the total value of stock thefts from the Wakefield branch for the year ended 30 June 2005. You are to show the transfer to Parker’s Profit and Loss Account in respect of the year ended 31 December 2005. (7 marks) (b) Prepare the Wakefield Branch Stock Adjustment Account for the year ended 30 June 2005. Choi informed Parker that he had sold 165 cases at £600 a case REQUIRED (c) Prepare. No other accounts are required. All financial records of the branch are maintained in the head office ledgers.

600 x 25% 212.MODEL ANSWER TO QUESTION 3 (a) Opening stock Goods sent to branch £ £ 10.000 x 25% 2006/2/06/MS 7 CONTINUED ON NEXT PAGE .600 x 25% 6.000 214.650 53.650 £ 2.600 212.800 1.000 Award marks if correct function used .600 2.700 51.800 7.000 x 25% 1.600 Less: Sales Goods returned to head office Price reductions Book stock Actual stock Stock loss at selling prices 211.000 Branch Stock a/c [5] 250 400 1.800 6.650 Notes: Cost plus a third equates to 25% on selling [1] [2] [3] [4] [5] 1.000 222.000 Branch Stock Account: Price reductions Stock loss [1] HO returns [2] Balance c/d [3] Branch Profit & Loss: Gross Profit 55.200 1.any format acceptable (b) Branch Stock Adjustment Account £ Balance b/d [4] 2.300 55.800 x 25% 10.

000 Bank/cash: Freight 2.000 15.970 Parker P& L 21.000 + 2.750 £ Choi: Sales (165 x 600) Stock c/d (35 x 450) [1] 99.750 Workings [1] [85.000) 2.900 + 800 + 500 + 600 + 200] = £450 200 2006/2/06 8 CONTINUED ON NEXT PAGE .MODEL ANSWER TO QUESTION 3 CONTINUED (c) Consignment to Choi £ Goods on consignment 85.900 Insurance 800 Container hire 500 Choi: Import duties 600 Landing charges 200 Commission (3% x 99.750 114.780 114.

000 1.800 3.000 Cash £ 5.800 4.400 82.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 £ 7.400 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 £1.950 2.050 8.400 3.500 3.200 400 500 Unknown 3.350 5.000 8.000 31 Dec 2005 £ 9.500 30 2.000 62.000 7.000 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 .

(6 marks) Gordon wishes to compare his business results with that of a competitor. 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 . (7 marks) (c) Prepare for Gordon Marshall a Balance Sheet at 31 December 2005. calculate the following ratios.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. REQUIRED (d) Using figures extracted from the above final accounts.

050 1.350 x 2%) Net Profit £ 89.200 .000 .400 63.200 .MODEL ANSWER TO QUESTION 4 (a) (i) (ii) (iii) 9.050) Depreciation (8.400 -500 .950 25.800 = £89.000 + 400 – 4.350 66.350 70 + 5.663 2006/2/06 11 CONTINUED ON NEXT PAGE .800 – 2.340 (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 2.000 64.3.000) x 25% 5 Doubtful debts provision (9.300 4.400 + 500 – 1.637 19.30 = £1.500 + 5.7.400 187 5.250 5.950 + 62.350 + 82.000 – 1.350 2.000 = £64.

950 x 100 28.500 30 22.000 -1.133 4.950 16.143 5.800 + 3.340 22.163 2.950 22.470 19.793 Represented by: Opening capital (7.600 Fixed Assets Van Current Assets Stock Debtors (9.72:1 (iii) 3. + 70 + 2.800) Add: Net Profit for year Less: Drawings (3.400 5.793 (d) (i) 25.340) 7.250 22.2.187) Prepayment Bank Cash Current Liabilities Creditors 2.143 .400 8.193 22.400 9.000 – 4.MODEL ANSWER TO QUESTION 4 CONTINUED (c) Balance Sheet at 31 December 2005 Cost Depreciation £ £ 1.000 + 1.35% (ii) 3.143 5.050 8.32:1 2006/2/06 12 © Education Development International plc 2006 .000 Net £ 6.350 .300 89.400.663 27.

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