~~AC1025_ZA_2016_d0

This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON AC1025 ZA

BSc degrees and Diplomas for Graduates in Economics, Management, Finance

and the Social Sciences, the Diplomas in Economics and Social Sciences

Principles of Accounting

Monday, 9 May 2016 : 10:00 to 13:15

Candidates should answer FOUR of the following SEVEN questions: QUESTION 1 of

Section A, QUESTION 2 of Section B, ONE question from Section C and ONE further
question from either Section B or C. All questions carry equal marks.

Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.

Extracts from compound interest tables are given after the final question on this paper.

8-column accounting paper is provided at the end of this question paper. If used, it must
be detached and fastened securely inside the answer book.

A calculator may be used when answering questions on this paper and it must comply
in all respects with the specification given with your Admission Notice. The make and
type of machine must be clearly stated on the front cover of the answer book.

PLEASE TURN OVER

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UL16/0289 Page 1 of 12 D1
SECTION A

Answer question 1 from this section.

1. (a) Laertes Distributors Ltd began business on 1st July 2015 as distributors of a single
product.

The directors plan to publish the first set of accounts for a six month period in order to
establish the accounting year as 31st December each year.

The following data show the trading transactions for the six months to 31st December
2015.

2015 Purchases Sales

July 20 units at £1,000 each
August 40 units at £900 each
September 25 units
October 20 units at £1,100 each
November 10 units at £700 each
December 10 units at £1,200 each 40 units

The December sale occurred before the purchase in that month. The cost of a sale is
calculated whenever a sale is made.

Required:

Using only the data in the table above, calculate the cost of sales and closing stock
figures for inclusion in the accounts for the six months to 31st December 2015 under
both the FIFO and LIFO assumptions. (6 marks)

(b) Explain the objective of published financial statements and identify the two principal
characteristics of financial statements which contribute to achieving this objective.
(6 marks)

(c) In the context of cost-volume-profit analysis explain the meaning, and give an example,
of each of the following terms:

i. Non-linear variable costs

ii. Stepped fixed costs
iii. Relevant range (6 marks)

Question continues on next page.

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 (d) Gertrude operates a small hotel. The hotel has rooms for 30 guests over an operating
season of 40 weeks. The budgets for the year ended 30th June 2016 have been
prepared using the following data:

£
Weekly income per guest 2,200
Variable weekly cost per guest 1,200
Fixed costs per annum 400,000

The company has in the past expected an average room occupancy over the season of
60% of total capacity. Gertrude is concerned about future falls in demand.

Required:

i. Calculate the total contribution and net profit for the year to 30th June 2016 if past
occupancy rates are maintained.

ii. Calculate the break-even point in guest weeks and margin of safety based on i.
expressed in percentage terms. (7 marks)

SECTION B

Answer question 2 and not more than one further question from this section.

2. Ophelia Ltd’s trial balance as at 31 October 2015 is shown below.

£’000 £’000
Share capital – Ordinary shares of £1 20,000
Share premium 5,000
Trade payables 2,798
Land and buildings – cost 35,152
Land and buildings – accumulated depreciation at 1 November 2014 7,000
Plant and equipment – cost 12,500
Plant and equipment – accumulated depreciation at 1 November 2014 7,400
Trade receivables 5,436
Accruals,at 31 October 2015 436
8% bank loan repayable in 10 years 15,000
Cash at bank 9,774
Retained earnings 9,801
Interest paid 600
Sales 58,411
Purchases 41,620
Distribution costs 5,443
Administrative expenses 4,789
Inventories at 1 November 2014 9,032
Dividends paid 1,500 ______
125,846 125,846

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UL16/0289 Page 3 of 12 D1
Further information

1. The inventories at the close of business on 31 October 2015 were valued at £7,878,000.

2. Depreciation is to be provided for the year as follows:

Buildings 2% per annum - straight line basis

Plant and equipment 20% per annum - reducing balance basis

Depreciation is apportioned as follows:

%
Cost of sales 40
Distribution costs 40
Administrative expenses 20

Land, which is non-depreciable, is included in the trial balance at a cost of £15,152,000.

3. The company began a series of television adverts for the company’s range of products on
1 October 2015 at a cost of £45,000. The adverts were to run for three months and were
to be paid for in full at the end of December 2015. Advertising expenses are to be included
in distribution costs.

4. Interest on the bank loan for the last six months of the year has not been included in the
accounts in the trial balance.

5. Tax on profits for the year has been calculated as £970,000.

6. Management has decided that a provision for bad debts of 5% of trade receivables should
be set up and charged to administrative expenses.

7. Ophelia Ltd paid an insurance premium for annual cover up to 30 June 2016. The cheque
for £45,000 was incorrectly treated as a supplier payment. Insurance is an administrative
expense.

8. Ophelia Ltd proposed an ordinary dividend of 10p per ordinary share on 31 October 2015.

Required:

Prepare the following financial statements for Ophelia Ltd.

(a) Income statement for the year ended 31 October 2015. (10 marks)

(b) Statement of changes in equity for the year ended 31 October 2015. (3 marks)

(c) Statement of financial position as at 31 October 2015. (12 marks)

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3. Yorick Ltd.

The following are the draft financial statements for Yorick Ltd for the year ended 31
December 2015.

Income Statement for the year ended 31 December 2015

£
Revenue 7,350,500
Cost of sales (4,560,600)
Gross profit 2,789,900
Administrative expenses (1,060,800)
Distribution costs (768,000)
Profit from operations 961,100
Finance charge (75,000)
Profit before tax 886,100
Income tax expense (350,000)
Profit for the period 536,100

Statements of Financial Position as at 31 December

2015 2014
£ £ £ £
ASSETS
Non-current assets
Property, plant and equipment 6,985,400 6,713,500
Intangible assets 350,700 300,500
7,336,100 7,014,000
Current assets
Inventories 560,500 765,100
Trade receivables 169,000 144,500
Investments 25,000 12,400
Cash and cash equivalents 10,700 20,200
765,200 942,200
Total assets 8,101,300 7,956,200

EQUITY AND LIABILITIES

Capital and reserves
Ordinary share capital 4,000,000 3,500,000
Share premium account 1,200,000 950,000
Retained earnings 1,342,800 2,206,700
6,542,800 6,656,700

Non-current liabilities
Preference share capital (redeemable) 1,000,000 800,000

Current liabilities
Trade payables 148,500 139,500
Taxation 410,000 360,000
558,500 499,500
Total equity and liabilities 8,101,300 7,956,200

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UL16/0289 Page 5 of 12 D1
 Statement of changes in equity for the year ended 31 December 2015 (extract)

Retained earnings
£
Profit for the period 536,100
Dividends on ordinary shares (1,400,000)
Balance brought forward 2,206,700
Balance carried forward 1,342,800

The following additional information is relevant.

1. During the year Yorick Ltd issued redeemable preference shares at par.

2. The current asset investments are government bonds and management has decided to
class them as cash equivalents.

3. During the year Yorick Ltd sold plant and equipment with a carrying amount of
£560,500 for £600,000. Total depreciation charged for the year was £750,600.

4. Trade payables include accrued interest of £5,000 (2014 £7,000).

5. Yorick Ltd acquired new intangible assets at a cost of £77,500 during the year.

6. An impairment review at 31 December 2015 identified a fall in the recoverable amount

of intangible assets. As a result, an impairment loss of £15,000 was identified and
written off to administrative expenses. Amortisation on intangible assets is included in
expenses.

7. Included in trade payables is £10,000 which relates to the purchase of machinery.

Other machinery had been purchased in cash.

8. During the year Yorick Ltd made a 1 for 100 bonus issue of its ordinary shares. There
was an issue of shares for cash after the bonus issue.

Required:

Prepare a statement of cash flows for Yorick Ltd for the year ended 31 December 2015.
(25 marks)

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4. Claudius plc is a manufactruring company. In recent years, the company has faced severe
competition from overseas businesses and its sales volume has hardly changed. The
company has recently applied for an increase in its bank overdraft limit from £750,000 to
£1,500,000. The bank manager has asked you, as the bank’s credit analyst, to look at the
company’s application.

You have the following information:

Statements of financial position as at 31 December 2014 and 2015

2014 2015
£’000 £’000
Tangible non-current assets
Freehold land and buildings, at cost 1,800 1,800
Plant and equipment, at net book value 3,150 3,300
4,950 5,100
Current assets
Inventory 1,125 1,500
Trade receivables 825 1,125
Short-term investments 300 -
2,250 2,625
Total assets 7,200 7,725

Current liabilities
Bank overdraft 225 675
Trade payables 300 375
Taxation payable 375 300
Provisions 225 225
1,125 1,575
Non-current liability
8% debentures, 2017 1,500 1,500
Total liabilities 2,625 3,075

Equity
Ordinary shares of £1 each 2,250 2,250
Share premium account 750 750
Retained earnings 1,575 1,650
4,575 4,650
Total equity and liabilities 7,200 7,725

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UL16/0289 Page 7 of 12 D1
 Statements of comprehensive income for the years ended 31 December 2014 and 2015

2014 2015
£’000 £’000 £’000 £’000
Turnover 6,300 6,600
Cost of sales : materials 1,500 1,575
: labour 2,160 2,280
: production overheads 750 825
4,410 4,680
Gross profit 1,890 1,920
Administrative expenses 1,020 1,125
Operating profit 870 795
Investment income 15 -
885 795
Interest payable : debentures 120 120
: bank overdraft 15 75
135 195
Profit before taxation 750 600
Taxation 375 300
Profit attributable to shareholders 375 300

You are also provided with the following information:

i. The general price level rose on average by 8% between 2014 and 2015. Average
wages rose by 10% during this period.

ii. The debenture stock is secured by a fixed charge over the freehold land and buildings,
which have recently been valued at £3,000,000. The bank overdraft is unsecured.

Required:

(a) Calculate for the years ended 31st December 2014 and 2015 the return on capital
employed and two other ratios which provide insight into the profitability and efficiency
of Claudius plc. (Answer to 2 places of decimals.) (6 marks)

(b) Calculate for the years ended 31st December 2014 and 2015 the gearing ratio and three
ratios which provide insight into the liquidity and working capital control of Claudius plc.
(Answer to 2 places of decimals.) (8 marks)

(c) Based on the above calculations and the other information provided, draft a set of notes
for a discussion with the bank manager which highlight the key areas she should
consider when deciding upon the proposed increased overdraft limit. Indicate any
further information which would be useful in reaching the decision. (11 marks)

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UL16/0289 Page 8 of 12 D1
SECTION C

Answer one question and no more than one further question from this section.

5. Osric Ltd manufactures components for the motor industry. A specialist luxury car company
has offered Osric a contract to supply a component identified as “RSport”. The contract is for
400 “RSport”s over the next 12 months. The initial price suggested by the car company is
£145 for each “RSport”.

The data relating to the production of each “RSport” is:

1. Material requirements:
3 kg material M1 – see note (i) below.
2 kg material M2 – see note (ii) below.
1 part P2 – see note (iii) below.

Note (i) Material M1 is in continuous use by the company. 1,000 kg are

currently held in stock at a book value of £4.70 per kg but it is known
that future purchases will cost £5.50 per kg.

Note (ii) 1,200 kg of material M2 are held in stock. The original cost of this
material was £4.30 per kg but, as the material has not been required for
the last two years, it has been written down to £1.50 per kg scrap value.
The only foreseeable alternative use is as a substitute for material M4
(in current use) but this would involve further processing costs of £1.60
per kg. The current cost of material M4 is £3.60 per kg.

Note (iii) It is estimated that Part P2 could be bought for £50 each.

2. Labour requirements: Each “RSport” would require five hours of skilled labour and five
hours of semi-skilled. An employee possessing the necessary skills is available and is
currently paid £5 per hour. A replacement would, however, have to be obtained at a
rate of £4 per hour for the work which would otherwise be done by the skilled employee.
The current rate for semi-skilled work is £3 per hour and an additional employee could
be appointed for this work.

3. Osric Ltd absorbs overhead by a machine hour rate, currently £20 per hour of which £7
is for variable overhead and £13 for fixed overhead. If this contract is undertaken it is
estimated that fixed costs will increase for the duration of the contract by £3,200. Spare
machine capacity is available and each component would require four machine hours.

Required:

(a) Prepare a statement showing the contribution from the contract to produce “RSport” at
the suggested price. (12 marks)

(b) Explain each figure of cost included in the statement in (a). (7 marks)

(c) Comment briefly on three factors which management should consider before making a
final decision on the contract. (6 marks)

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6. Fortinbras Ltd manufactures a single product. The following information relates to the actual
selling price and actual cost of the product for March 2016.

£’000
Sales (50,000) units 2,250

Direct materials (240,000 litres) 528

Direct labour (250,000 hours) 1,375
Variable production overhead 245
Total variable costs 2,148
Fixed production overhead 650
Total costs 2,798
Loss (548)

The budgeted selling price and standard cost of each unit were as follows.

£ £
Selling price 55
Direct materials (5 litres) 10
Direct labour (4 hours) 20
Variable production overhead (recovered on direct labour hours) 5
Total variable standard cost 35
Standard contribution 20

The total budgeted sales for March were 40,000 units and the budgeted fixed overheads for
the month were £600,000.

Required:

(a) Prepare an operating statement for Fortinbras Ltd which reconciles budgeted profit with
the actual loss showing two variances for each cost including fixed overheads.
(18 marks)

(b) Briefly comment on the method of calculating fixed overhead variances as required in
(a) and its usefulness for performance evaluation and identify an alternative approach.
(7 marks)

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7. Polonius Manufacturing makes components for the telecoms industry. The development
department has designed a new product and incurred development costs of £30,000.

The following information is available.

1. The new product is expected to have an initial life span of four years and demand has
been estimated at 10,200 units in year 1 with sales increases of 10% in each of years 2
and 3 and sales of 9,000 units in year 4. The unit selling price will be £34. There will be
no stocks of finished goods.

2. Since the production cycle is very short, both production and sales could start
immediately, should the production go ahead. Each unit of the new product will require
2 hours of labour which will need to be hired. There will be no problem hiring at £8.00
per hour.

3. Each unit of the new product will require one component, a capacitor. The company has
a stock of 15,000 capacitors which were purchased two years ago for £4.00 each.
These have no resale value or alternative use. Any capacitors to be purchased from
now on will cost £5.00 each.

4. Each unit produced will also require £8.00 of sundry raw materials such as wire and a
circuit board. The company holds no stock of the sundry raw materials.

5. The company already owns the machinery that could be used in the manufacture of this
product. If it is not used for this product it will be sold immediately for £200,000. If it is
used for this production, after four years it is likely to have a residual value of £40,000.

6. Fixed production overheads allocated to this project will cost £40,000 per annum. The
cost of capital is 15% per annum. Assume all cash flows occur on the last day of each
year except for the immediate disposal of the existing machinery.

Required:

(a) Calculate the Net Present Value (NPV) of this project. (14 marks)

(b) Calculate the payback period of this project using both nominal and discounted cash
flow. (4 marks)

(c) Advise Polonius Company on the project and outline two other factors that you would
take into account in your decision. (7 marks)

END OF PAPER

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UL16/0289 Page 11 of 12 D1
Extracts from compound interest tables

Present value of £1

% 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621

% 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402

Annuity of £1

% 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791

% 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991

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UL16/0289 Page 12 of 12 D1