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LCCI International Qualifications

Accounting Level 3

Model Answers
Series 4 2008 Hong Kong (3512)

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Accounting Level 3 (Hong Kong)


Series 4 2008

How to use this booklet 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) (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)

Helpful Hints

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 required. The general standard of model answers is one that would achieve a Distinction grade. EDI accepts that candidates may offer other answers that could be equally valid.

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QUESTION 1 The Trial Balance of Colne plc at 31 March 2008 was as follows: 000 4,275 820 1,400 3,720 810 1,020 710 000 7,376 570

Purchases/Sales Debtors/Creditors Land and buildings at cost Machinery at cost General expenses Administrative expenses Selling expenses Accumulated depreciation on buildings at 1 April 2007 Accumulated depreciation on machinery at 1 April 2007 10% Preference shares of 1.00 each Ordinary shares of 0.25 each 15% Debentures (redeemable 2017) Stock at cost on 1 April 2007 Interim dividends - preference shares - ordinary shares Retained earnings at 1 April 2007 Bank overdraft

144 1,420 500 1,500 600 720 25 120 710 800 13,620

13,620

The following additional information is available: (1) (2) (3) (4) Land and buildings at cost included land costing 600,000 Buildings are depreciated at 3% per year on a straight line basis Machinery is depreciated at 20% per year on a reducing balance basis Adjustments are necessary for prepaid administrative expenses of 8,000 and accrued selling expenses of 11,000 (5) Stock at 31 March 2008 cost 775,000 (net realisable value 1,085,000) (6) Provisions have to be made for accrued debenture interest, the final preference dividend and a final ordinary dividend of 0.03 per share.

REQUIRED (a) Prepare the Trading, Profit and Loss and Appropriation Account of Colne plc for the year ended 31 March 2008. (12 marks) (b) Prepare the Balance Sheet of Colne plc at 31 March 2008. (9 marks)

The bank manager of Colne plc, after seeing the above accounts, has demanded an urgent meeting with the directors. REQUIRED (c) Give two possible reasons why the bank manager might have demanded a meeting with Colne plcs directors. (4 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 1 (a) Colne plc Trading, Profit and Loss and Appropriation Account for the year ended 31 March 2008 000 Sales Less Cost of goods sold: Opening stock Purchases Less Closing Stock Gross profit Less General expenses Administrative expenses (1,020 8) Selling expenses (710 + 11) Debenture interest (0.15 x 600) Depreciation Buildings [0.03(1,400 600)] Machinery [0.20(3,720 1,420)] Net profit Less Preference dividend Interim Final [(0.10 x 500) 25] Ordinary dividend Interim Final (1,500 x 4 x 0.03) Retained loss for the year Retained earnings brought forward Retained earnings carried forward 720 4,275 4,995 775 810 1,012 721 90 24 460 25 25 120 180

000 7,376

4,220 3,156

3,117 39

350 (311) 710 399

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MODEL ANSWER TO QUESTION 1 CONTINUED (b) Colne plc Balance Sheet at 31 March 2008 000 Cost Tangible Fixed Assets Land and buildings Machinery Current Assets Stock Debtors Prepayments Creditors: Amounts due within one year Creditors Accruals (11 + 90) Proposed dividends (25 + 180) Bank overdraft Net Current Liabilities Creditors: Amounts due after one year 15% Debentures 1,400 3,720 5,120 000 Depreciation 168 1,880 2,048 775 820 8 1,603 570 101 205 800 000 NBV 1,232 1,840 3,072

1,676 (73) 2,999 600 2,399 000

Share Capital and Reserves Ordinary shares of 0.25 each Preference shares of 1.00 each Retained earnings

1,500 500 399 2,399

(c) (i) (ii) (iii) (iv)

High overdraft yet high ordinary dividends High overdraft and low profitability High overdraft and poor liquidity No overdraft interest explicitly disclosed in the accounts

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QUESTION 2 The following information relates to Genica, a sole trader: (1) During the year ended 30 April 2008 sales, all on credit, were 250,000. All purchases were also on credit (2) Sales included a mark-up of 25% (3) For the year ended 30 April 2008 administration costs were 15,000 (4) At 30 April 2008 closing stock represented 36.5 days sales and this was twice the value of opening stock (5) The debtors collection period at 30 April 2008 was 50 days and creditors represented 30 days purchases (6) The working capital ratio at 30 April 2008 was 1.4:1 (7) The fixed assets were equal to 30% of the net assets at 30 April 2008 (8) Drawings were equal to 80% of the net profit for the year.

REQUIRED (a) Prepare, for Genica, in as much detail as possible: (i) (ii) The Trading and Profit & Loss Account for the year ended 30 April 2008. (8 marks)

The Balance Sheet at 30 April 2008. The bank overdraft and opening capital are both balancing figures. (13 marks)

(b) State two benefits of maintaining double-entry accounting records.

(4 marks) (Total 25 marks)

Note: Where necessary, all your calculations should be to the nearest 1.

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MODEL ANSWER TO QUESTION 2 (a) (i) Genica Trading and Profit & Loss Account for the year ended 30 April 2008 250,000 10,000 210,000 220,000 20,000 200,000 50,000 15,000 35,000 100 25

Sales

% 125

Opening stock (half of closing) Purchases [R] Closing stock (250,000/365 x 36.5 x 0.80) Gross Profit Administration costs Net Profit (ii)

Genica Balance Sheet at 30 April 2008 Fixed Assets (W1) 6,642

Current Assets Stock Debtors (250,000/365 x 50)

20,000 34,247 54,247

Current Liabilities Creditors (210,000/365 x 30) Bank [R] Net Current Assets Net Assets (W1) Financed by: Capital Opening capital [R] Net profit Drawings (0.80 x 35,000)

17,260 21,488 38,748 15,499 22,141 15,141 35,000 50,141 28,000 22,141

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MODEL ANSWER TO QUESTION 2 CONTINUED W1 Net Current Assets must be 70% of Net Assets if fixed assets represent 30% of net assets. 22,141 15,499 6,642

Therefore Net Assets =

15,499/0.70 Less: Net Current Assets Fixed Assets

(b) Any two reasonable suggestions, e.g. Provides an arithmetical check on entries Makes it easier to prepare final accounts Can provide an immediate check on what is owed by debtors and what is owed to creditors Makes it more difficult to commit fraud

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QUESTION 3 The Balance Sheets of JK plc at 30 September 2007 and 30 September 2008 were as follows: 2007 000 Tangible Fixed Assets Cost Less depreciation 000 180 56 124 000 2008 000 270 90 180

Current Assets Stock Debtors Cash

42 33 11 86

50 40 - a 90

Creditors: Amounts due within one year Creditors Proposed dividend Bank overdraft

24 26 17 67 19 143

33 28 29 90 - a 180

Net Current Assets

Creditors: Amounts due after more than 1 year 15% Debentures (repayable 2010)

60 83 000 20 8 55 83

80 100 000 25 10 65 100

Represented by: Share Capital and Reserves Ordinary shares of 1 each Share premium Profit and loss

Notes: (1) The additional debentures were issued on 1 October 2007 (2) No interim dividends were paid during the year ended 30 September 2007 or the year ended 30 September 2008 (3) There were no fixed asset disposals during the year ended 30 September 2008. REQUIRED For JK plc, for the year ended 30 September 2008: (a) Calculate the operating profit. (3 marks) (b) Reconcile the operating profit with the net cash inflow from operating activities. (5 marks) (c) Prepare the Cash Flow Statement in accordance with FRS1 (Revised). (9 marks) (d) Comment upon the financial position revealed by the Cash Flow Statement and the Balance Sheets. (8 marks) (Total 25 marks) 3512/4/08/MA Page 7 of 13

MODEL ANSWER TO QUESTION 3 (a) Operating Profit Profit & loss change (65 55) Debenture interest (0.15 x 80) Dividend 000 10 12 28 50

(b) Reconciliation Operating profit Depreciation (90 56) Increase in stocks (50 42) Increase in debtors (40 33) Increase in creditors (33 24) Net cash inflow from operating activities 000 50 34 (8) (7) 9 78

(c) JK plc Cash Flow Statement for the year ended 30 September 2008 000 Net cash inflow from operating activities Returns on investment and servicing of finance Interest paid Capital expenditure and financial investment Purchase of fixed assets (270 - 180) Equity dividends paid Net cash outflow before financing Financing Issue of ordinary shares [(25 + 10) (20 + 8)] Issue of debentures (80 - 60) Net decrease in cash (29 - 17 + 11) 000 78 (12) (90) (26) (50) 7 20

27 (23)

(d) Financial Position Liquidity has deteriorated Debentures are repayable in 2010 Shares and debentures have been issued to finance the additional fixed assets Hopefully the investment in fixed assets will increase cash flow in the future Could be asked whether increasing the dividend is appropriate.

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QUESTION 4 The accounts of Chang Ltd, in respect of the year ended 30 June 2008, revealed a gross profit of 305,600, a net profit of 141,860 and net current assets of 74,900. Stocktaking had taken place on 7 July 2008. The stock counted on that day cost 66,000 and this figure had been used in the preparation of the accounts as stock of goods for resale. During the weeks delay, the following transactions had taken place: (1) (2) (3) (4) Sales, at selling price, 36,000, of which 2,700 was still in the companys warehouse on 7 July Purchases, at cost, 6,250, all received Returns inwards, at selling price 600, all received Returns outwards, at cost 900, all despatched.

Chang Ltd calculates selling prices by adding 50% to cost. In addition it was discovered that: (5) Goods on sale or return had been invoiced to a customer for 330. This customer has still to decide whether or not to buy these goods (6) Included in the stocktaking were damaged goods costing 1,800. These were sold in August 2008 for 1,900 after repairing them at a cost of 200 (7) One of the stocksheets used on 7 July 2008 had been over-added by 1,500 (8) Included in the 66,000 was stationery stock costing 4,000. It was estimated that between 1 July and 7 July 20% of the value of the stationery stock existing at 30 June would have been used. It is company policy to include stationery stock in the stock valuation.

REQUIRED (a) Calculate the corrected valuation of the stock of goods for resale of Chang Ltd at 30 June 2008. (14 marks) (b) Using the increase/decrease in stock valuation derived from your answer to (a) above and any other necessary adjustments, calculate the corrected figures for Chang Ltd in respect of gross profit and net profit for the year ended 30 June 2008 and the net current assets at 30 June 2008. (11 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 4 (a) Original stock valuation Add 1 Sales Less: 36,000 2,700 33,300 Deduct 66,000

x 100 150 x 100 150 x 100 150 1,800 1,700

22,200 6,250 400 900 220

2 3 4 5 6

Purchases Returns inwards Returns outwards Sale or return Damaged goods: Cost Less NRV (1,900 200) Overadded stock sheet Stationery stock

600

330

7 8

23,320 Revised stock valuation

100 1,500 4,000 12,250

+ 11,070 77,070

(b) Gross Profit 305,600 11,070 316,670 330 316,340 Net Profit 141,860 5,000 11,070 157,930 330 157,600 Net Current Assets 74,900 5,000 11,070 90,970 330 90,640

Original Add: Stationery stock (4,000 0.8) Stock of goods for resale Less: Sale or return

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QUESTION 5 Cherian plc has an Authorised Share Capital consisting of 10,000,000 0rdinary Shares of 0.25 each and 1,000,000 6% Preference Shares of 1 each. The following figures were extracted from the Balance Sheet at 30 September 2008: 000 1,000 600 256 300 340 500

4,000,000 Ordinary Shares of 0.25 each 600,000 6% Preference Shares of 1 each Share premium Revaluation reserve Profit & loss 10% Debentures (repayable 2010)

For the year ended 30 September 2008 the directors proposed a dividend payment to ordinary shareholders of 0.03 per share. The net profit for the year ended 30 September 2008 was equal to the value of the proposed dividends. No interim dividends were paid during the year.

REQUIRED (a) Calculate the net operating profit of Cherian plc for the year ended 30 September 2008. (3 marks) In October 2008 the directors decided to: (1) Make a capitalisation issue of 4 ordinary shares for every 5 ordinary shares in issue, making maximum use of non-distributable reserves (2) Make a rights issue at 0.30 per share of all the remaining unissued ordinary shares (3) Issue a further 200,000 preference shares at a premium of 0.05 (4) Redeem the 10% Debentures early at a premium of 5 per cent. These debentures were originally issued at a premium of 5 per cent (5) Buy a fleet of new vehicles from MN Ltd at a cost of 300,000, paying an immediate 10 per cent deposit, with the balance becoming due on 1 March 2009.

REQUIRED (b) Prepare Journal entries (without narratives) to record the above transactions. These transactions took place in the order shown in (1) to (5) above. (17 marks) (c) Calculate the revised balance on the companys bank account after completion of the above transactions. The balance appearing in Cherian plcs Balance Sheet at 30 September 2008 was 74,000. (5 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 5 (a) Net Operating Profit 000 Debenture interest (500 x 10%) Preference dividend (600 x 6%) Ordinary dividend (4,000 x 0.03) 50 36 120 206

(b) Journal Entries Dr 000 [1] Share premium Revaluation reserve Profit and loss [R] Ordinary share capital (1,000 x 0.8) 256 300 244 800 Cr 000

[2]

Bank [(10,000 - 4,000 - 3,200) x 0.3] Ordinary shares (2,800 x 0.25) Share premium (2,800 x 0.05)

840 700 140

[3]

Bank (200 x 1.05) Preference share capital Share premium (200 x 0.05)

210 200 10

[4]

Debentures Share premium (500 x 5%) Bank (500 x 1.05)

500 25 525

[5]

Vehicles MN Ltd MN Ltd Bank Alternative Vehicles MN Ltd Bank

300 300 30 30

300 270 30

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MODEL ANSWER TO QUESTION 5 CONTINUED (c) 000 Opening balance Journal [2] Journal [3] Journal [4] Journal [5] Closing balance 525 30 -555 569 000 74 840 210 1,124

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