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LCCI International Qualifications

Book-keeping and Accounts


Level 2

Model Answers
Series 4 2008 (2006)

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Book- Keeping and Accounts Level 2
Series 4 2008

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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) Questions – reproduced from the printed examination paper

(2) Model Answers – 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)

(3) Helpful Hints – where appropriate, additional guidance relating to individual


questions or to examination technique

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
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Page 1 of 12
QUESTION 1

The following balances appeared in the ledger of P Tong plc following the preparation of the
Profit & Loss Account for the year ended 31 December 2007:

£000 £000
Ordinary shares £0.25 12,000
3% £1 preference share capital 600
Interim ordinary dividend paid 560
Preference dividend paid 18
Freehold land and buildings at cost 10,400
Provision for depreciation of land and buildings 80
Plant and machinery at cost 13,880
Provision for depreciation of plant and machinery 1,632
Motor vehicles at cost 3,720
Provision for depreciation of motor vehicles 860
Fixtures and fittings at cost 3,420
Provision for depreciation of fixtures and fittings 580
Debtors 5,920
Creditors 3,840
Bank 1,750
Cash in hand 260
Stock 4,292
Share Premium 2,640
Prepayments 290
Accruals 262
8% Loan (repayable 30 June 2012) 2,800
Loan interest accrued 112
5% debenture (repayable 31 March 2008) 1,600
Profit & Loss Account 8,656
Net profit 3,880
Revaluation Reserve 1,468
42,760 42,760

The directors of P Tong plc have decided to pay a final dividend of £0.04 per ordinary share.

REQUIRED

(a) Prepare the Appropriation Account for the year ended 31 December 2007. (7 marks)

(b) Prepare, in vertical format, the Balance Sheet at 31 December 2007. (14 marks)

(c) Calculate the current ratio. (3 marks)

(d) State the purpose of calculating the current ratio. (1 mark)

(Total 25 marks)

2006/4/08/MA Page 2 of 12
MODEL ANSWER TO QUESTION 1

(a)
P Tong plc
Appropriation Account
for the year ended 31 December 2007

£000 £000

Net profit 3,880


Interim ordinary dividend 560
Preference dividend 18
Proposed final ordinary dividend (48,000,000 x 0.04) 1,920
2,498
Transferred to reserves 1,382

2006/4/08/MA Page 3 of 12
MODEL ANSWER TO QUESTION 1 CONTINUED

(b)
P Tong plc
Balance Sheet at 31 December 2007

£000 £000 £000


Cost Provision for NBV
depreciation
Fixed assets
Land & buildings 10,400 80 10,320
Plant & machinery 13,880 1,632 12,248
Fixtures & fittings 3,420 580 2,840
Motor vehicles 3,720 860 2,860
31,420 3,152 28,268

Current assets
Stock 4,292
Debtors 5,920
Prepayments 290
Cash 260
10,762

Creditors: amounts due within one year


Creditors 3,840
Loan interest 112
Bank overdraft 1,750
Accruals 262
5% debentures 1,600
Proposed ordinary dividend 1,920
9,484
Net current assets 1,278
29,546
Creditors: amounts due after one year
8% loan 2,800
26,746

Shareholders' funds
Capital and reserves
Called up ordinary share capital:
48,000,000 £0.25 ordinary shares 12,000
Share premium account 2,640
Revaluation reserve 1,468
Profit & Loss (8,656 + 1,382) 10,038
Ordinary shareholders funds 26,146
600,000 3% £1 preference shares 600
Total shareholders' funds 26,746

(c) 10,762,000/9,484,000 = 1.13:1

(d) Illustrates the company's ability to repay its short term debts

2006/4/08/MA Page 4 of 12
QUESTION 2

A Choo, B Chang and C Mei have been in partnership sharing profits and losses in the proportion
2:2:1 respectively. The partnership Balance Sheet at 31 January 2008 was as follows:

Balance Sheet at 31 January 2008

£ £
Fixed Assets
Goodwill 54,000
Fixtures and fittings 144,900
Motor vehicles 82,200
281,100

Current Assets
Stock 33,300
Debtors 80,100
Cash 300
113,700

Current Liabilities
Creditors 5,400
Bank overdraft 26,100
31,500
82,200
363,300

Capital accounts:
A Choo 105,780
B Chang 136,110
C Mei 121,410
363,300

On 31 January 2008, A Choo, B Chang and C Mei decided to dissolve the partnership and close the
books on the following terms:

(1) The goodwill and fixtures and fittings were sold to D Woo for £162,000. By agreement, D Woo
paid each partner £54,000 and these amounts were paid into the partners’ private bank accounts.

(2) Each partner took over a motor vehicle, valued at:

£
A Choo 27,300
B Chang 25,800
C Mei 30,600

(3) All the cash in hand was used to pay dissolution expenses. The creditors were settled for an
agreed sum of £5,370.

(4) The remaining assets were sold for £146,400. This amount was paid into the partnership bank
account.

(5) The bank informed the partners that £660 interest was accrued on the bank overdraft.
This amount has not been entered in the books.

2006/4/08/MA Page 5 of 12
QUESTION 2 CONTINUED

REQUIRED

Prepare the following accounts on 31 January 2008 for the partnership of A Choo, B Chang and
C Mei:

(a) Dissolution account (15 marks)

(b) Capital accounts (4 marks)

(c) Bank account (4 marks)

(d) D Woo’s account. (2 marks)

(Total 25 marks)

2006/4/08/MA Page 6 of 12
MODEL ANSWER TO QUESTION 2

(a) Dissolution Account

£ £
Goodwill 54,000 Discount on creditors 30
Fixtures & fittings 144,900 D Woo 162,000
Motor vehicles 82,200 Bank 146,400
Stock 33,300 Capital accounts (MV):
Debtors 80,100 Choo 27,300
Cash: dissolution expenses 300 Chang 25,800
Bank: interest charges 660 Mei 30,600
Capital accounts:
Choo 1,332
Chang 1,332
Mei 666
395,460 395,460

(b) Capital Accounts

Choo Chang Mei Choo Chang Mei


£ £ £ £ £ £
Dissolution loss 1,332 1,332 666 Bal b/d 105,780 136,110 121,410
Dissolution: MV 27,300 25,800 30,600
D Woo 54,000 54,000 54,000
Bank 23,148 54,978 36,144
105,780 136,110 121,410 105,780 136,110 121,410

2006/4/08/MA Page 7 of 12
MODEL ANSWER TO QUESTION 2 CONTINUED

(c) Bank Account

£ £
Dissolution account 146,400 Bal b/d 26,100
Dissolution account: interest 660
Creditors 5,370
Capital accounts:
Choo 23,148
Chang 54,978
Mei 36,144
146,400 146,400

(d) D Woo

£ £
Dissolution account 162,000 Capital accounts:
Choo 54,000
Chang 54,000
Mei 54,000
162,000 162,000

2006/4/08/MA Page 8 of 12
QUESTION 3

The following information for the month of February 2008 was extracted from the ledgers of Ho Chang:

At 1 February 2008: £
Purchases ledger Dr balances 291
Purchases ledger Cr balances 16,428
Sales ledger Dr balances 27,066
Sales ledger Cr balances 495
Provision for doubtful debts 690

At 1 March 2008:
Purchases ledger Dr balances 399
Sales ledger Cr balances 642
Provision for doubtful debts 750

For the month ended 29 February 2008:


Credit sales 162,384
Credit purchases 123,585
Payments to suppliers 112,251
Receipts from customers 147,534
Returns inwards 6,615
Returns outwards 3,204
Discounts allowed 5,232
Discounts received 3,630
Bad debts written off 576
Debit balances in sales ledger transferred to purchases ledger 1,035
Legal expenses charged to customer’s account 270
Customer’s cheque dishonoured 1,128

REQUIRED

(a) Prepare for the month of February 2008:

(i) Purchases Ledger Control Account (8 marks)

(ii) Sales Ledger Control Account. (13 marks)

(b) Prepare, at 29 February 2008, a Balance Sheet extract showing the debtors’ and creditors’
figures under the current assets and current liabilities.
(4 marks)

(Total 25 marks)

2006/4/08/MA Page 9 of 12
MODEL ANSWER TO QUESTION 3

(a) (i) Purchases Ledger control account


2008 £ 2008 £
Feb 01 Balance b/d 291 Feb 01 Balance b/d 16,428
Feb 29 Bank 112,251 Feb 29 Purchases 123,585
Feb 29 Returns outwards 3,204 Feb 29 Balance c/d 399
Feb 29 Discounts received 3,630
Feb 29 Contra Sales ledger 1,035
Feb 29 Balance c/d 20,001
140,412 140,412

Mar 01 Balance b/d 399 Mar 01 Balance b/d 20,001

(ii) Sales Ledger control account


2008 £ 2008 £
Feb 01 Balance b/d 27,066 Feb 01 Balance b/d 495
Feb 29 Sales 162,384 Feb 29 Bank 147,534
Feb 29 Legal expenses 270 Feb 29 Returns inwards 6,615
Feb 29 Bank (dishonoured 1,128 Feb 29 Discounts allowed 5,232
cheque)
Feb 29 Balance c/d 642 Feb 29 Bad debts 576
Contra Purchases 1,035
ledger
Feb29 Balance c/d 30,003
191,490 191,490

Mar 01 Balance b/d 30,003 Mar 01 Balance b/d 642

(b) Ho Chang Balance Sheet extract at 29 February 2008


£ £
Current Assets
Debtors (399 + 30,003) 30,402
Less provision for doubtful debts 750 29,652

Liabilities due within one year


Creditors (20,001 + 642) 20,643

2006/4/08/MA Page 10 of 12
QUESTION 4

Maggie Kan owns a business in Hong Kong and has a branch in London.

Branch sales are all on credit, and all cash received at the branch is remitted to the head office. All
purchases are made by the Hong Kong office, with goods sent to the branch being invoiced at cost
plus 25%.

For the year ended 31 December 2007, the following information was entered in the head office
books:

£
Balances at 1 January 2007:
Branch debtors 37,800
Branch stock at selling price 44,100
Branch adjustment account 8,820

For the year ended 31 December 2007:


Branch sales 462,900
Goods returned by customers to branch 4,565
Payments by branch debtors to branch 460,050
Discounts allowed to branch debtors 12,390
Goods invoiced to branch at selling price 450,000
Goods returned by branch to head office 9,000

Balance at 31 December 2007:


Branch stock at selling price 24,750

REQUIRED

Prepare the following accounts, relating to the London branch, in the head office books for the year
ended 31 December 2007:

(a) Branch Stock (10 marks)

(b) Goods to Branch (3 marks)

(c) Branch Adjustment (6 marks)

(d) Branch Debtors (6 marks)

(Total 25 marks)

2006/4/08/MA Page 11 of 12
MODEL ANSWER TO QUESTION 4

(a) Branch Stock


2007 £ 2007 £
Jan 01 Balance b/d 44,100 Dec 31 Branch debtors/Sales 462,900
Dec 31 Goods to branch 360,000 Dec 31 Goods to branch 7,200
Dec 31 Branch adjustment 90,000 Dec 31 Branch adjustment 1800
Dec 31 Branch debtors 4,565 Dec 31 Stock loss:
Branch adjustment 403
Branch P&L 1,612
Dec 31 Balance c/d 24,750
498,665 498,665
2008
Jan 01 Balance b/d 24,750

(b) Goods to Branch


2007 £ 2007 £
Dec 31 Branch stock 7,200 Dec 31 Branch stock 360,000
Dec 31 Head office trading a/c 352,800 _______
360,000 360,000

(c) Branch Adjustment


2007 £ 2007 £
Dec 31 Branch stock/returns 1800 Jan 01 Balance b/d 8,820
Dec 31 Branch stock/Loss 403 Dec 31 Branch stock 90,000
Dec 31 Branch P & L [1] 91,667
Dec 31 Balance cld 4,950 ______
98,820 98,820
2008
Jan 01 Balance b/d 4,950
Workings
[1] 462,900 - 4,565 = 458,335 @ 20% margin = 91,667

(d) Branch Debtors


2007 £ 2007 £
Jan 01 Balance b/d 37,800 Dec 31 Cash/Bank 460,050
Dec 31 Branch stock/Sales 462,900 Dec 31 Discounts allowed 12,390
Dec 31 Branch stock/Returns 4,565
______ Dec 31 Balance c/d 23,695
500,700 500,700
2008
Jan 01 Balance b/d 23,695

2006/4/08/MA Page 12 of 12
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2006/4/08/MA Page 12 of 12