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6001 (1) - Accounting

6001 (1) - Accounting

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London Examinations GeE
Accounting (Modular Syllabus)
Advanced Subsidiary/Advanced Unit 1 - The Accounting System and Costing
Thursday 11 January 2007 - Morning Time: 3 hours
Materials required for examination Answer book (ABI6) Items included with question papers


paper (AB34)


to Candidates

Answer FIVE questions, choosing TWO from Section A and THREE from Section B. All calculations must be shown. In the boxes on the answer book, write the name ofthe examining body (London Examinations), your centre number, candidate number, the subject title (Accounting), the paper reference (600 I ), your surname and other namets), and signature. Answer your questions in the answer book. Ensure that your answers to parts of questions are clearly numbered. Use additional answer sheets if necessary. If the accounting paper provided docs not allow you to set out your answer in the way you wish, rule up a page of your answer book to suit your requirements.


for Candidates
arc shown in round brackets: e.g. (2).

The marks for individual questions and the parts of questions The total mark for this paper is 100. '. This paper has 7 questions. Calculators may be used.

Advice to Candidates
Write your answers neatly and in good English.


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SECTION A Answer TWO questions from this section.repayable 31 December 20 10 Loan interest Drawings Bank Provision for doubtful debts at I January 2006 The following 2006. equipment at 25%. (iv) An appropriate amount on fixtures at 15% and computer is to be depreciated on I April 2006. from thc lease. (v) The 8% loan was obtained (vi) The only debtors are those for commission to be received. 1. Rasheed is in business balances as a travel agent selling holidays were extracted from the accounts and air flights. A provision for doubtful debts of 5% should be maintained against all remaining debtors. both using the value. 120000 45000 54000 31000 7900 8750 2900 20260 I 850 19500 20000 48000 12600 20000 50000 2000 12000 4500 1000 Additional information at 31 December 2006: (i) Commission is received on holiday sales at the rate of 10% of the holiday flights at the rate of 6% of the flight value. It is believed that commission to be received from one debtor for air flights with a sales value of £25 000. and on air (ii) Rent and rates of £90 was prepaid and insurance (iii) Depreciation is charged straight line method. of £230 was owing. 1124(9)<. on 31 December £ Commission received: holiday sales air flights Sales staff wages Management salaries Rent and rates Heat and light Insurance Advertising Creditors Debtors Capital at I January 2006 Lease to 31 December 2013 Fixtures (cost £18000) Computer equipment (cost £40 000) 8% Loan . will not be received and should be considered a bad debt.\ .

Rasheed is considering the following alternative method of remuneration. correctly in the account of the creditor A payment to a creditor of £ I 500 was recorded but was debited to the bank account as £5 100. In the year Nizar completed £300 000 of holiday sales and £200 000 of air flight sales. Required: (a) Prepare the journal entries correcting the errors in (vii) above. • • Management salaries includes a sum of £750 paid to Rasheed. at the rate of£240 for a 40 hour week (for the 52 weeks of the year). and before preparing the profit and loss account. Rasheed negotiated a 20% trade discount on the holiday.(vii) On further investigation. and disadvantages for Rasheed of remunerating sales staff by (6) (Total 26 marks) 112469X. Rasheed considers this to be an advertising expense. (5) (b) Prepare (i) for Rasheed the: for the year ended 31 December 2006. profit and loss account (ii) balance sheet as at 31 December (i) and alternative methods of remunerating (ii) Evaluate the advantages these two methods. the following errors were discovered in the above balances. (15) (c) Rasheed currently pays one of his sales staff. • Payment at the rate of £4 per hour plus I % commission 0.\ 3 Turn over .5% commission of the value of air tl ight sales. Nizar. as a prize in a competition. the cost to Rasheed of the existing of the value of holiday sales and 2006. The invoice has been entered in the creditors account but no other entry has been made in the accounts. No entries had been made in the accounts to correct these errors. Calculate Nizar. • A holiday with a retail value of £ I 300 was given free to a customer by Rasheed.

rent and buildings the following information. are apportioned on the most appropriate basis from Area occupied (sq m ) Value of buildings (£000) Staff (number) Machining 4000 300 6 Assembly 3000 300 5 is estimated to be: Administration 500 100 3 Marketing 500 100 2 (iv) The use of the two service departments Machining 40% 50% Administration Marketing Assembly 40% 40% Administration 10% Marketing 20% (v) All staff work 40 hours per week for 50 weeks per year. The business has two production departments: machining and assembly. assembly £5 940. The business is concerned that: • Many orders are being lost because the quotations and uncompetitive. administration £23 500. and fulfilled taking a long time to pay their debts. that 70% of hours in 11246lJXA 4 . and two service departments: administration and marketing.2. customers are The following ( i) information is available: £ General overhead costs Supervision Rent Building insurance (ii) General overhead costs were: machining marketing £ 17 500. made by Shukka Engineering seem too high • When orders have been placed with. (iii) Supervision. It is estimated machining and 80% of hours in assembly are charged to customers. by. Shukka Engineering has the policy of using a single overhead recovery rate of £ 15 per hour for both the machining and assembly departments when preparing quotations for customers. Shukka Engineering. Shukka Engineering produces a single product. insurance 60800 64000 40000 16000 £ 13 860.

Required: (a) Distinguish between overhead allocation and overhead apportionment. (2) (b) (i) Calculate the overhead cost of operating each of the four departments. to the production departments using the (ii) Re-allocate the costs of the service departments continuous allotment method. the overhead recovery rate.(vi) The schedule of aged debtors at 31 December 2006 was: 3 to 6 £ 60000 80000 7 to 12 £ 40000 60000 Over 12 Months I January 2006 31 December 2006 The credit control policy is to: • • write off all amounts o to 2 £ 80000 90000 £ 15000 25000 outstanding for over 12 months make a provision for doubtful for debts 7 to 12 months accept new customers issue monthly debts at the year end of 5(% for debts up to 6 months and 10% • • • • without trade or bank references statements letters only after the debt is 7 months old issue debt recovery never take legal action to recover a debt. for each production department. (4) (Total 26 marks) 112469XA 5 Turn over . (4) (e) Critically evaluate the credit control policy of Shukka Engineering. (12) (c) Advise Shukka Engineering whether it should reconsider its policy of charging for the overhead costs of both the machining and assembly departments. £ 15 per hour (4) (d) Prepare the provision for doubtful debts account for the year ended 31 December 2006. (iii) Calculate.

31 December 2005 £ 5 700 3900 32500 850 350 10000 31 December 2006 £ 9910 II 630 48000 I 230 800 6000 ') was received from creditors and £750 was allowed to took £ ISO per week cash drawings before paying in cash sales receipts to the (iv) A single withdrawal from the investment account took place on I October 2006. (iii) The owner bank. investment and loan accounts. The summarised cash book for the year ended 31 December £ 4500 98200 4800 200 4000 12000 2006. Loan payments in the cash book include interest and capital which are both recorded in the loan account. Carrow Trading prepares final accounts on 31 December of each year.3. The business does not maintain full accounts but does keep a summarised cash book. 112469XA 6 . (v) The loan was obtained on I April 2006 from the Eastern Bank and was paid into the bank account on that day. £ 6800 1600 42880 IS 480 33 700 22000 1040 200 123 700 Cash sales Debtors Rent received Interest received Investment account Loan Balance bid Cash purchases Creditors General expenses Wages Equipment Loan Balance cld 123 700 The following (i) information is also available: Creditors Debtors Equipment General expenses in advance Wages in arrears 4% Investment account 6% Loan repayable 30 March 2009 (ii) During the year £350 cash discount debtors.

the: (i) trading and profit and loss account Oi) 6% loan account. The record of stock movements was as follows: I January I January January to March I April April to June I July July to September I October October to December Opening Receipts Issues Receipts Issues Receipts Issues Receipts Issues stock 800 perpetual inventory valuation «I) £7 500 (q. £7.50 700 800 (pi £8 600 400 @ £8. then the annual accounts are easy to prepare. method. (iii) stock as at 31 December (8) (b) Prepare for the year ended 31 December 2006.). whether Carrow Trading should change to keeping a full set of double entry (4) (Total 26 marks) TOTAL FOR SECTION A: 52 MARKS 112469XA 7 Turn over . and the bank does its job efficiently. (10) (c) (i) (ii) Distinguish between stock valuation using perpetual inventory and periodic inventory. Explain the effect on profit and on the valuation of the closing stock where a business uses Last In First Out (LIFO) in inflationary times.50 300 600 500 Co) £9 Required: (a) Calculate (i) the value of the: 2006 2006 sales for the year ended 31 December (ii) purchases for the year ended 31 December 2006.(vi) The business values stock by the Last In First Out (LIFO). Evaluate accounts. (4) (d) The owner of the business stated that he has no need to keep a full set of accounts because if all cash transactions are recorded in his bank account.

The owner of Lam Enterprises believes that the advertising campaign will increase sales for two further years and therefore wishes to charge only an appropriate proportion of the expenditure to the current year. (2) (d) Discuss the extent to which concepts or conventions. (4) (c) Calculate the revised net profit or loss if the proposals (i) to (iii) above were implemented. It is believed that the percentage of bad debts may rise from 2% to 5% of debtors as many of the new debtors have not dealt with Lam Enterprises before. On I January 2004 it had been agreed that depreciation would be calculated using the reducing balance method at the rate of 50°. Lam Enterprises prepared a draft profit and loss account from a trial balance on 31 December Thelolft profit and loss account recorded a net loss of £80 000 for the year. (2) (b) Prepare the provision for depreciation on computer equipment account for the year ended 3 I December 2006. (i i) During the year ended 3 I December 2006 a highly successful advertising campaign costing £90 000 was undertaken by Lam Enterprises. each of (i ) to (iii) above complies with accepted accounting (6) in ensuring the accuracy of the ledger accounts. showing the adjustment for the change in depreciation method. (i) has proposed that the following changes be made to the accounts to That the depreciation charged on computer equipment purchased on I January 2004 be changed from the reducing balance method to the straight line method. with a residual value of £ 15 000.) per annum. The provision for doubtful debts on I January 2006 was £2 000.SECTION Answer THREE 4.. On 31 December 2006. Required: (a) Explain why depreciation is an application of the accruals concept. and the transfer to the profit and loss account. The owner of Lam Enterprises improve the situation. (2) (e) Evaluate the role of the trial balance (Total 16 marks) 1124mXA . 2006. Lam Enterprises wishes to revise the policy to one based upon the straight line method charged over 6 years with no residual value. questions B from this section. charged over 3 years. On 1 January 2004 the computer equipment had cost £ 120 000. (iii) The increased volume of sales has raised the debtors to £180 000.

The business has reached the point at which all of the fixed assets require immediate replacement at a cost of £40000. To achieve this he would: • increase the level of trade creditors by £25 000 • reduce the bank balance by £ 10 000 • introduce additional capital of £5 000 cash.\ 9 Turn over .5. in 5 years at an interest rate of 8%. buying and selling goods on credit. (5) as at 31 December 2006: (3) (h) Comment Required: on the liquidity of the business Hulit is considering Option I two options for financing the fixed asset replacements. The following balances were available as at 31 December 2006: Fixed assets Stock in trade Net profit Debtors Sales Creditors Bank Purchases Required: (a) Calculate (i ) £ 15000 35000 12000 50000 600000 50000 10000 240000 from the balances as at 31 December 2006: current ratio (ii) liquid (acid test) ratio (iii) debtors collection (iv) creditors payment period period (v) return on capital employed. for both Option 1 and Option 2 the revised: (c) Calculate (i) liquid (acid test) ratio (ii ) creditors payment period (iii) return on capital employed. 112469~. Obtaining a £30 000 bank loan repayahle Option 2 Paying cash. Hulit is in business as a general trader. (6) should choose Option 1 or Option 2 to finance the replacement (2) (Total 16 marks) (d) Evaluate whether the business of the fixed assets.

on selling. and a stock (ii) At the end of the six months there was a stock of raw materials. She contacted a number of retailers and succeeded in obtaining some initial orders which she agreed to supply on one month's credit. a table. of which 80 had been sold to retailers. Anifa spent three days on manufacturing.6. to ensure (4) (c) Calculate (i) for each table the: cost manufacturing (ii) total cost. whether Anifa should use an accountant to assist her with the accounts of the (2) (Total 16 marks) 112469RA 10 . Required: (a) Distinguish between fixed costs and semi-fixed costs. (iii) In each week. Anifa has had no training in accounting. Anifa started business as a self-employed furniture maker on I July 2006. (8) (d) Evaluate business. (iv) Halfof the general expenses related to manufacturing one day on administration and one day and half to administration. the following profit statement. but at the end of the first six months of trading she prepared £ Sales Raw materials purchased Wages to Anifa General expenses paid Selling expenses paid Profit 5090 2250 2880 400 £ 10800 10620 180 Additional (i) information: During the six months 90 tables were made. giving an example of each. of finished tables valued at manufacturing cost. (2) (b) Identify four additional adjustments which might be required to the profit statement that an accurate net profit/loss is calculated. She decided that until she could expand her business she would concentrate on manufacturing and selling a single product. £540 valued at cost.

\ 11 Turn over .BLANK PAGE 112469X.

Goodwill valued at £SO 000 will be introduced into the accounts for the retirement of Colin. Badheeu and Colin are in partnership sharing profits and losses in the ratio 2: I: I respectively. Salaries are paid at the rate of £8 000 per annum to Amir and £S 000 each to Badheeu and Colin. • • 11246')X. Amir and Badheeu have agreed a £60 000 long-term loan with the bank. The partners have agreed that Colin will retire from the partnership on 31 December 2006 and that Amir and Badheeu will not admit a new partner but will form a new partnership between them to continue the business from I January 2007. No interest is charged on drawings. They will share profits and losses in the ratio 3:2 respectively. Arnir.7. Interest is paid on capital at the rate of 4% per annum. On 31 December 2006 the following balances were extracted preparation of the trading and profit and loss accounts. The loan will be paid into the business bank account on 31 December 2006. from the partnership books after the £ Net profit Capital accounts: Amir Badheeu Colin Current accounts: Amir Badheeu Colin Drawings: Amir Badheeu Colin Bank overdraft Stock and debtors Fixed assets (at cost) Fixed asset provision for depreciation Creditors 20000 60000 30000 40000 SOO CR 100 CR 700 CR 10000 S 000 4 SOO 3 4S0 83 2S0 7S 000 16 000 7000 Additional • information: On retirement Colin will receive a motor vehicle costing £ 14 000 (book value £ I 0 0(0) and a cheque to the value of the balance on his capital and current accounts.\ 12 . but will then be removed from the books of the new partnership of Arnir and Badheeu.

\ 13 . the (ii) current accounts (i i i) capital accounts of the partners of the partners. (2) (b) Prepare for the year ended 31 December (i) profit and loss appropriation account 2006. (2) (Total 16 marks) TOTAL FOR SECTION TOTAL FOR PAPER: B: 48 MARKS 100 MARKS END 112469X.Required: (a) Distinguish between fixed and floating capital accounts. (5) (d) Evaluate the decision of Arnir and Badheeu not to admit a new partner. (7) (c) Prepare the balance sheet of Amir and Badheeu as at I January 2007.

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