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Examiner’s Report and Model Answers for

Accounting

THIRD LEVEL
Series 2 (Code 3001) 2000

LCCI Examinations Board

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if too few candidates were involved to make an Examiner’s Report meaningful. Typeset. stored in a retrieval system or transmitted in any form or by any means. no part of this publication may be reproduced. The contents of this booklet are divided into 5 elements: (1) General – assessment of overall candidate performance in this examination. printed and bound by the London Chamber of Commerce and Industry Examinations Board. The book may not be lent. other than that in which it is published. areas of weakness and other comments that apply to each question in the examination paper – where appropriate. teachers and candidates as they prepare for LCCIEB examinations. additional guidance relating to individual questions or to examination technique (2) (3) Questions Model Answers (4) Examiner’s Report (5) Helpful Hints Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success. providing general guidance where it applies across the examination as a whole – 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 – constructive analysis of candidate error. The Board accepts that candidates may offer other answers that could be equally valid. photocopying. The London Chamber of Commerce and Industry Examinations Board provides Model Answers to help candidates gain a general understanding of the standard required.Accounting Third Level Series 2 2000 How to use this booklet Examiners’ Reports and Model Answers have been developed by LCCIEB to offer additional information and guidance to Centres. © LCCI CET 2000 All rights reserved. electronic. without the prior consent of the Publisher. recording or otherwise without prior written permission of the Publisher. either for an examination paper as a whole or for individual questions. resold. 1 . mechanical. Note LCCIEB reserves the right not to produce an Examiner’s Report. hired out or otherwise disposed of by way of trade in any form of binding or cover.

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Although the percentage passing is probably about average the number of Distinctions is definitely fewer than normal. and in some cases indicating a lack of knowledge which they should possess at Second Level. Once again the main problem was that candidates omitted either sections of questions or complete questions resulting in the need to attain a higher percentage in those parts tried. There was some evidence that candidates were entering for the examination without making adequate preparation.Accounting Third Level Series 2 2000 GENERAL The overall standard was lower than expected although the level of presentation had in general improved. 3 .

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215 5 CONTINUED . Sales Motor expenses Debtors and creditors Delivery vehicles Depreciation on delivery vehicles General expenses Wages Rent of property Directors' salaries Office equipment Depreciation on office equipment Retained profits Bank overdraft Ordinary Share Capital 195 30 15 90 52 48 8 24 30 6 5 2 30 297 5 54 ___ 297 Notes (1) The three delivery vehicles are depreciated at 20% per annum on cost. Its Trial Balance as at 31 December Year 9 was as follows: All figures in the Trial Balance are in £000. The Trial Balance of Stewarts plc at 1 January Year 10 was as follows: £000 Leasehold buildings at cost Accumulated depreciation on leasehold buildings Machinery at cost Accumulated depreciation on machinery Office equipment at cost Accumulated depreciation on office equipment Motor vehicles at cost Accumulated depreciation on motor vehicles Stock raw material Stock work in progress Stock finished goods Debtors and creditors Bank Share Capital £1 Ordinary Shares Retained profit 320 60 450 130 110 40 90 30 40 45 55 90 15 ____ 1. (12 marks) Stewarts plc is a manufacturing concern that uses Carriers Ltd both to collect its raw materials and deliver its finished goods. REQUIRED (a) Prepare for Carriers Ltd.Accounting Third Level Series 2 2000 QUESTION 1 Carriers Ltd is a small private company making deliveries.215 £000 125 600 230 1. the Profit & Loss Account for the year ended 31 December Year 9 and the Balance Sheet as at 31 December Year 9. using vertical layout. 1 (2) Office equipment is depreciated at 33 3 % per annum using the reducing balance method.

in vertical format.100 each year. (2 marks) (e) Assuming Stewarts plc aim for a minimum return of 20% on its initial investment. The wages expenses for Carriers Ltd in Year 9 included £6.QUESTION 1 CONTINUED On 1 January Year 10 Stewarts plc purchased all the shares in Carriers Ltd for £50.000. One of the three identical vehicles was immediately sold for £4. General expenses would be reduced by £10.000 for office staff who would now have to be paid £7. All the assets and liabilities were taken over at their net book value except the office equipment which was valued at £15. At the time of the takeover Stewarts plc owed Carriers Ltd £10.000.000. (18 marks) Before taking over Carriers Ltd the directors of Stewarts plc made the following calculations in respect of Year 10: (1) The cost of delivery services provided by Carriers Ltd to Stewarts plc would have risen by 5% on the Year 9 figure of £120. mention any two factors which might have influenced the decision other than the return on investment. (7 marks) (Total 49 marks) 6 . REQUIRED (c) Calculate the estimated net cost savings to Stewarts plc in Year 10 from taking over Carriers Ltd.000. the Consolidated Balance Sheet of Stewarts plc on 1 January Year 10 immediately after the above transactions were completed. (2) The sale of one delivery vehicle would reduce the drivers' wage bill by one-third. The remaining wages in Year 9 were all for the vehicle drivers. Note the loss on disposal of the delivery vehicle is to be added to goodwill and the goodwill is to be immediately written off against retained earnings. which was immediately banked and Carriers Ltd's bank overdraft was paid off. REQUIRED (b) Prepare.000 cash. (10 marks) (d) Calculate Stewarts plc return on its investment in the first year. (4) The rent expense would cease as Stewarts plc already had the necessary office and garage space. (3) The cost of Carriers Ltd's motor expenses would be reduced by 25% and Stewarts plc would not carry goods for any other company. (5) Both the delivery vehicles and the office equipment would be depreciated on the same basis and at the same percentages as that used by Carriers Ltd.000 and the directors' salaries would cease.

6)/3 Net profit Brought forward Carried forward 30 52 48 24 8 18 8 £000 195 188 7 5 12 Balance Sheet of Carriers Ltd as at 31 December Year 9 Tangible Fixed Assets Vehicles Office equipment £000 90 30 120 £000 (54 + 18) 72 (6 + 8) 14 86 £000 18 16 34 Current assets Debtors Liabilities due within 1 year Creditors Bank overdraft 15 5 2 7 8 42 Financed by Capital Retained profit 30 12 42 7 CONTINUED .Model Answer to Question (a) 1 Trading Profit & Loss Account for Carriers Ltd Year ending 31 December Year 9 £000 Sales Less Petrol and parts General expenses Wages Directors' emoluments Rent Depreciation vehicles (9 x 2) Depreciation office equipment (30 .

000 .1 Petrol and repairs (30 x .000 + (16.000)) Add loss on vehicle (18. 107 19 (e) It gives Stewarts plc control of carriage operations and costs.000 = 2.000 .42.2) 2.75) 22.05) Less Drivers' wages 2/3 (48 – 6) 28 Office wages 7.5 General expenses (52 – 10) 42 Depreciation vehicles (2/3 x 18 x 0.2) Creditors (125 + 5 .000 11.4.10) 40 45 55 95 33 120 235 153 82 819 Issued capital Ordinary Shares £1 Profit & Loss Account (230 .000 £000 £000 126 Calculations Goodwill (50.000/3 .4 Office equipment 1/3 x 15 5 Net savings (d) Return on investment 19/50 x 100 = 38%.000) (c) Net cost savings in Year 10 Cost saved on delivery service (120 x 1.11) 600 219 819 = 9.50 + 4 . There will be quicker delivery and collection The 2 old vehicles will need replacement soon so further capital costs involved.Model Answer to Question 1 continued (b) Stewarts plc Consolidated Balance Sheet as at 31 December Year 9 £000 Cost or valuation 320 450 125 102 997 £000 Depreciation £000 Net Tangible fixed assets Leasehold and buildings Machinery Office equipment (110 + 15) Vehicles (90 + (2/3 x 18)) 60 130 40 30 260 260 320 85 72 737 Current assets Stock raw material Stock work-in-progress Stock finished goods Debtors (90 + 15 . 8 .10) Liabilities due within one year Bank overdraft (15 .15.

9 . One point of possible significance was that failure to answer this part seemed to run in centres.Examiner’s Report on Question 1 Part (a) was a standard Trading. and some candidates calculated a minority interest even though Stewart’s owned all the shares. Part (c) was for the most part omitted as were parts (d) and (e). however some candidates confused the investment in Carriers Ltd with the share holding of the parent company and in consequence lost marks they really should have had. About half of those that tried part (c) also tried part (d) and using their figures in general calculated the return on investment. Finally some 20% of candidates produced a Balance Sheet for Stewarts with no attempt at Consolidation at all. The main fault among those attempting this part lay in giving reasons that were linked to the return on investment. Less than half the candidates were able to deal with the inter company debt correctly and a number made errors on the number of shares issued. Layout was in general good. Part (b) required a Consolidated Balance sheet and only a minority managed to get this correct. In general there were few problems but a significant number of scripts showed a lack of awareness of the term ‘profits brought forward’ and endeavoured to make the current years profits equal to the balance for previous years. The calculation of Goodwill often missed the revaluation of office equipment. in general made the error of adding revenue and cost together rather than looking at the net cost incurred. rather than other factors. Finally the answers to part (e) ranged from excellent to non existent. Those that did attempt part (c). Profit & Loss Account and Balance Sheet. At other centres no candidate made any attempt which could indicate that candidates from those centres had not been properly prepared in the area of written comment. though there were scripts where the candidates ignored the requirement for vertical presentation. adding the capital of the subsidiary to that of the parent.

The Directors of Ardvak plc have now made the following decisions: (1) To issue the remaining Preference Shares at par.875. (2) To redeem the Debentures at a premium of 5%.25 each.000 £0.000 200.000 350.20 per share payable on application and £0. (17 marks) 10 .100. Applications were received for 150. The additional money received on application was set against the amount payable on allotment.000 £0.000 9% £2 Preference Shares 2. All money to be paid on application. (4) To make a capitalisation issue of one Ordinary Share for every five Ordinary Shares held (including those issued under (3) above).075.000 2.000 9% £2 Preference Shares 1. (3) To make a rights issue of two Ordinary Shares for every fifteen Ordinary Shares held at a premium of £0. The Directors also decided to make maximum use of the non-distributable reserves when recording the above transactions. REQUIRED Prepare Journal entries without narratives to record all the above transactions for Ardvak plc.000 2. so each applicant was allotted two-thirds of the shares they had requested.950.000 100.000 Ardvak plc also had £300. £1.50 Ordinary Shares 200.750.000 400.50 Ordinary Shares 100.QUESTION 2 Ardvak plc had the following information in the "Share Capital and Reserves" section of its most recent Balance Sheet: £ Authorised Capital 5.000 950.000 400.80 per share payable subsequently on allotment. All Ordinary shareholders took up their rights.000 of 10% Debentures.000 Issued Capital 3.000 Reserves Share Premium Account Revaluation Reserve General Reserve Retained Earnings 100.550.000 Preference Shares.

15.000 x 1. In general well handled although a few candidates made the entries in the ledger and not in the Journal.5 Cr Share Premium Account Dr Share Premium (100.60.000 + 125.05) Cr Bank 180 120 60 20 20 120 80 200 300 15 315 £000 Dr Bank (3. Overall reasonably well handled.8) .000 x 1.000 x 0.000 x .000 + 500)/5 x 0.2) Cr Allotment Account (50.000 x 1.000 .000) 210 Dr Revaluation reserve 100 Dr General reserve 115 Cr Ordinary Share Capital (3.750. The only real problem lay in the last section in the calculation of the bonus shares and the use of non distributable reserves.000 Cr Allotment Account Dr Application Account Dr Allotment Account Cr Preference Share Capital Dr Debentures Dr Share Premium Account (300.750.000/15) x 2 x .750.5 250 125 425 Examiner’s Report on Question 2 Journal entries relating to issue of shares and redemption of a debenture. and a few confused debits and credits. 11 .000 x 2/15 x (0.50 + 0.Model Answer to Question 2 – Ardvak plc Journal Entries £000 Dr bank (150.2) Dr Bank (100.2) Cr Application Account (100.25) 375 Cr Ordinary Share Capital (3.

The loss of subscription income in respect of the two members who had paid in advance for Year 9 was treated as a discount in the subscription account. Any member not paying the year's subscription by 31 January in the year following that when it was due was excluded from membership. During Year 10 the subscription rate was £95 per member and all members paid all subscriptions due so that at 31 December there were neither subscriptions in arrears nor subscriptions in advance. Any member paying the following year's subscription before 30 September in the current year was allowed to pay at the current year's rate. Seventy-five members paid this amount and another two members paid for Year 8 and in advance for Year 9 before 30 September. During its first three years of operation no new members were accepted and no members resigned.QUESTION 3 The Vanguard Sports Club started on 1 January Year 8 with eighty members. 9 and 10. During Year 8 the subscription rate was £80 per member. This policy was to continue for future years. During Year 9 the subscription rate was £90 per member. Two members paid in respect of Year 8 and also paid their Year 9 subscription before 31 January. You should show clearly the annual transfers to Income and Expenditure Account and the balances both prepaid and accrued at the end of each year. Seventy-two members paid £90. REQUIRED Show the Subscription Account of the Vanguard Sports Club for each of Years 8. and another two members paid for Year 9 and in advance for Year 10 before 30 September. (17 marks) 12 . Such subscriptions were written off as bad debts.

560 Year 9 Balance 240 Income & expenditure (79 x 90) 7.560 Prepaid (2 x 90) 180 7.505 _____ 7.595 Balance Bank Bank (77 x 95) Income & expenditure (discount) Examiner’s Report on Question 3 This required the entries in the subscription account over a period of three years. The bad debt was also frequently put on the wrong side of the account as was the discount when it was included at all.530 180 90 7. the main problem lay in the calculation of the prepaid and accrued subscriptions with the balances often being inaccurate. Entries were also made in the incorrect year. and even more often being entered on the wrong side of the account.530 Balance Bank (2 x 80) + (2 x 90) Income & expenditure (bad debt) Bank (72 x 90) Bank (4 x 90) Income & expenditure (discount) Due (1 x 90) 160 340 80 6.315 10 7.480 360 20 90 7. Apart from several candidates who had the entries on the wrong side.Model Answer to Question 3 – Vanguard Sports Club Subscriptions Account Year 8 Income & expenditure (80 x 80) 6. It was apparent that too many candidates had leant by rote that prepayments are debit balances and could not adjust to the fact that on an income account they are credit balances. However on the plus side a significant number obtained full marks.110 Bank (75 + 4) x 80 due (3 x 80) 6.320 240 6.400 Prepaid (2 x 80) 160 6. 13 .595 Year 10 Balance 90 Income & expenditure (79 x 95) 7.

000.000 per year at the end of each year.000 and will last the business for a further four years and then be sold for £1.500 and will last the business ten years and then be sold for £250.000 and aims to maintain it at this level by regular purchases.5 months. (5 marks) (Total 17 marks) 14 . Revenue is expected to be spread evenly over the year. These will also be depreciated on a straight line basis.000 at 10% interest per year which is to be repaid at the rate of £1. The car is worth £6.QUESTION 4 John intends setting up in business as a retailer and has provided you with the following information. These will be made on a credit of 1. (1) He has arranged a loan with the bank of £4. Profit & Loss Account (6 marks) (b) a budgeted Bank Account (6 marks) (c) a budgeted Balance Sheet as at the end of the year. (3) He can rent premises for £150 per month but must maintain a deposit of £450 with his landlord. (6) He will purchase an initial stock of £4. REQUIRED Prepare for John in relation to his first year of operating: (a) a budgeted Trading. (5) The first year's sales revenue all received in cash is expected to be £91. His prices will be based on a mark up on cost of 40%. (2) He will introduce his own car as capital. (4) Shop fittings will cost £2. (8) He intends to take £900 per month out of the business for his own use. (7) Power and other expenses are expected to amount to £580 each month. It will be depreciated on a straight line basis.000.

500 8.000 95.000 x 0.000 Prepaid rent 450 Bank 10.250 10.565 15 .215 Budgeted Balance Sheet at end of first year £ Cost 6.000 84.565 6.000) Less Rent (12 x 150) Power. etc (12 x 580) Loan interest (4.785 10.960 10.875 6.365 10.000 1.1) Depreciation Fittings (2.665 9.800 400 1.000) Gross profit (40/140 x 91.250)/10 Car (6.000 65.000 10.275 7.000 .000 91.1.000 15.800 10.025 Tangible Fixed Assets Car Fittings Current Assets Stock 4.635 15.125 5.750 2.5 + 4.500 60.Model Answer to Question 4 (a) Budgeted Trading.215 Less Liabilities due within one year Creditors (65.000 26.000 2.250 2.800 + 450) Fittings Purchases (65.800 6.125 Bank loan 1.500 . etc Drawings (12 x 900) Loan interest Loan repayment Balance at year end (c) Budgeted Bank Account 4.000/12 x 10.250 225 1.500 £ Depreciation 1.475 £ Net 4.540 12.5) 8.565 2.960 400 225 1.365 21. Profit & Loss Account for John £ Sales Less cost of sales (100/140 x 91.000 ÷ 12 x 1.000) Power.000 Less bank loan Capital Plus retained profit Less Drawings 14.365 (b) Bank balance Loan Sales Less rent (1.000)/4 Net profit £ 91.000 2.

Most candidates passed on this question but very few obtained full marks. making no adjustment for creditors. nor for the deposit on the rent. 16 . In too many cases depreciation was included as an expense on the bank account as well as in the profit and loss. but there were a significant number of papers where the bank figures replicated the Profit and Loss account.Examiner’s Report on Question 4 In general a reasonable standard was obtained for most candidates with the major problem being the allocation of the loan into current and long term liabilities.

(5 marks) (b) Prepare for Peters plc a cash flow statement in the format laid down in Financial Reporting Standard (FRS) 1 as revised. (12 marks) (Total 17 marks) 950 10 152 75 (5) 110 13 £000 1.131 80 86 58 13 20 670 90 1.000 REQUIRED (a) Prepare for Peters plc for Year 6 a reconciliation of operating profit to net cash flow from operating activities.131 31 December Year 6 £000 £000 400 565 280 The summarised Trading.305 15 17 .QUESTION 5 The trial balances of Peters plc were as follows: 31 December Year 5 £000 £000 Freehold land and buildings Machinery at cost Accumulated depreciation on machinery Stock at cost Debtors Creditors Proposed dividend Bank Share capital Retained earnings 300 500 235 75 90 60 10 15 ___ 980 600 75 980 ____ 1.320 1. Profit & Loss and Appropriation Account of Peters plc for the year ended 31 December Year 6 was as follows: £000 Sales Cost of sales Selling expenses General expenses Depreciation on machinery Profit on sale of machine* Salaries Proposed dividend Addition to retained earnings * Note: the machine sold cost originally £65.

and the amount spent on new fixed assets.80) Decrease in debtors (90 .300) Receipt from sale of machine* Net cash outflow from investing activities Net cash outflow before financing Net cash inflow from financing Ordinary Shares issued Decrease in cash and equivalents (15 + 20) * Cost of machine sold * Depreciation (235 + 75 . The major error was in the calculation of the amount received from sale of assets.58) Net cash inflow from operating activities 28 75 (5) 98 (5) 4 (2) 95 (b) Peters plc Cash Flow Statement for Year 6 £000 £000 95 (10) 130 100 (40) 190 (105) 70 35 65 30 35 5 40 Net cash inflow from operating activities Net cash outflow from returns on investment and servicing of finance . Though layout was at times not totally clear the underlying principles appeared to be understood. and the majority of papers were Credit to Distinction level on this question. but overall well handled.500 + 65) Purchase of land and building (400 .Model Answer to Question 5 – Peters plc (a) Reconciliation of Operating Profit to Net Cash Flow from operating activities for Year 6 £000 Operating profit (15 + 13) Add back depreciation Less profit on sale Increase in stocks (75 .Dividend paid Investing activities Purchase of machinery (565 . 18 .280) Profit on sale Sale proceeds Examiner’s Report on Question 5 Rather surprisingly this was the question with the best overall level of answers.86) Decrease in creditors (60 .