~~AC1025_ZA_2016_d0

This paper is not to be removed from the Examination Hall

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

Thursday, 03 May 2018: 10:00 to 13:15

Section A of this examination consists of 20 Multiple Choice Questions. You should

attempt to answer ALL the questions. Each question has four possible answers (a-d).
There is only one correct answer to each of the questions. Please mark the correct
answer on the special sheet provided. The maximum mark for this part is 30.

Sections B and C: Please answer QUESTION 21 (30 marks) of Section B; ONE

question from Section C and ONE further question from either section B or C (except
for Question 21 all questions are worth 20 marks)

For Sections B and C only, 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.

© University of London 2018

UL18/0146 Page 1 of 18 D0
SECTION A

Answer ALL questions from this section.

1. Which of the following statements is correct?

(i) a debit entry in the cash book will decrease the bank overdraft
(ii) a credit entry in the cash book will decrease a bank balance

a (i) is true but (ii) is false

b (i) is false but (ii) is true
c Both are true
d Both are false

2. At 31.3.18, the cash book of Company 2 showed an overdraft of £21,111 while

the bank statement showed a positive balance of £2,590. On 30.3.18, the bank
wrote to Company 2 stating that a cheque of £525 received from a customer
and banked on 25.3.18 has bounced and had been dishonoured. This letter
was only received by Company 2 on 2.4.18. Receipts of £30,555 banked on
31.3.18 were not cleared through the banking system until April 2018, while
cheques totalling £54,931, issued by the company in March 2018 were also not
cleared through the banking system until April 2018. Bank charges of £150 had
not been entered in the cash book.

What was the corrected bank balance in the Statement of financial position at
31.3.18?

a £(46,162)
b £(21,786)
c £(26,291)
d £26,291

3. The selling price of inventory of Company 3 at 30.4.18 is £200,000. The

company sells its goods at a 40% mark-up. 20% of the inventory has been
damaged in a fire and will be sold for £14,000. Which of the following will be
the correct value for closing inventory at that date appearing in the statement of
financial position?

a £128,286
b £121,143
c £254,000
d £110,000

© University of London 2018

UL18/0146 Page 2 of 18 D0
4. On 1.4.18, Company 4 had 20 units in inventory costing £21 each. During the
month, the following transactions occurred:

Date Buy/sell Units Price

2.4.18 Buy 28 £25
11.4.18 Sell 32 £52
13.4.18 Buy 60 £24
17.4.18 Buy 70 £27
25.4.18 Sell 64 £55

What is (i) the value of inventory at 30.4.18 and (ii) the cost of goods sold (COGS) for
the month of April 2018 using the FIFO basis?

Inventory COGS
£ £
a 2,178 5,184
b 2,912 2,178
c 1,938 2,512
d 2,178 2,272

5. On 1.1.18, the equity of Company 5 was as follows:

£
Share capital: 50,000 shares of 50p each 25,000
Share premium: 6,000
Retained profits: 290,000
321,000

On that day, the company made a rights issue, issuing 50,000 shares for £1.30 each
and then made a 8 for 5 bonus issue. A dividend of 15p per share was then paid.
What will the balance be on the retained profits at the end of the day, assuming the
company offsets the bonus issue against the share premium, to the extent that is
possible?

Retained profits
a £347,000
b £217,000
c £251,000
d £244,600

© University of London 2018

UL18/0146 Page 3 of 18 D0
6. At 1.4.18, trade payables were £34,700. Payments to trade payables in April
2018 were £36,600. At 30.4.18 trade payables were £24,200 and closing
inventory was £21,000. Cost of goods sold in the month of April 2018 were
£39,200.

What was the inventory of Company 6 at 1 April 2018?

Opening inventory
£
a 34,100
b 26,100
c 52,800
d 44,400

7. At 1.4.18, trade receivables were £156,500. Sums received from trade

receivables in April 2018 were £144,300. At 30.4.18, trade receivables were
£170,700. Cost of goods sold in the month of April 2018 were £81,000. What
was the company’s gross profit for the month of April 2018?

Gross profit
£
a 63,300
b 77,500
c 87,700
d 90,300

8. The following information is available relating to Company 100 and Company

200:

Company Company
100 200
Profit before tax for the year ended 31.3.18 £40 million £74 million
Profit after tax for the year ended 31.3.18 £32 million £48 million
Nominal value of 1 ordinary share 25p 10p
Share capital at 31.3.18 £22 million £20 million
Market value of one ordinary share at 30.4.18 £1.20 £1.95

Which of the following describes these companies’ The Price Earnings (PE)
ratios of these two companies at 31.3.18?

Company 100 Company 200

a 33 18.1
b 3.3 8.1
c 36.3 24
d 8 17

© University of London 2018

UL18/0146 Page 4 of 18 D0
9. Company 300 has a dividend cover of 2 while Company 400 has a dividend
cover of 20.

Assume you were advising elderly shareholders. Which of these two companies is
likely to be the more attractive investment to the majority of such investors?

a Company 300
b Company 400
c both companies are equally suitable
d the dividend cover has no relevance to an investment decision of such an
investor

10. Company 10’s accounting period ends on 31.12.17.

Insurance for the year ended 31.7.17, paid on 1.8.16 was £156,000.
Insurance for the year ended 31.7.18, paid on 1.8.17 was £132,000.

What was the insurance expense in the income statement for the year ended
31.12.17?
What was the prepaid insurance in the statement of financial position at 31.12.17?

Insurance expense £ Prepaid insurance £

a 118,000 77,000
b 146,000 77,000
c 142,000 55,000
d 122,000 55,000

11. A direct cost is which of the following?

a a cost which is directly attributable to a particular job, product or service

b a cost which varies with output
c a semi-variable cost
d a cost which is apportioned to the cost of a unit of production

© University of London 2018

UL18/0146 Page 5 of 18 D0
12. In deciding which costs are direct costs and which are indirect costs for the
purposes of determining the costs in a university, is the salary and other
employment costs of the senior departmental manager of the Department of
Accounting & Finance a direct cost or an indirect cost when the university’s
Chief Financial Officer is computing (i) and (ii) below:

(i) the cost associated with one student studying for a degree in the Department?
(ii) the costs of the Department of Accounting?

one student the Department

in the Department of Accounting
a Direct Indirect
b Indirect Direct
c Direct Direct
d Indirect Indirect

13. Company 13 makes and sells pizzas in its fast-food stall in a local shopping
mall. The selling price of the product is £7, variable costs per unit are £2.25.
Fixed costs, for 2018, such as rent, are expected to be £80,000. The company
wish to make a profit for the year of £100,000. How many meals will have to
be sold in the year to achieve this objective?

a 16,842
b 25,714
c 35,556
d 37,895

14. Using the information in Question 13, if the budgeted sales are 24,000 meals
sold, what is the margin of safety, expressed as a percentage?

a 29.8%
b 42.5%
c 14.4%
d 40.1%

© University of London 2018

UL18/0146 Page 6 of 18 D0
15. Company 15 makes expensive, hand-made handbags, - ‘superior’, ‘royal’, and
‘imperial’. Unit costs and revenues relating to the three products are as
follows:

Superior Royal Imperial

£ £ £
Selling price 499 799 1,399
Direct materials 90 190 290
Direct labour 60 60 120
Variable overheads 45 85 145
Fixed overheads 50 100 100
Total costs 245 435 655
Profit per unit 254 364 744

All three products use material which costs £500 per kilogram but there is not enough
material to meet the demand for all three products. In what order should these three
products be produced if the company wishes to maximise its profit?

Best 2nd best 3rd best

a Superior Royal Imperial
b Imperial Royal Superior
c Superior Imperial Royal
d Imperial Royal Superior

16. Company 16’s Cash budget shows there is likely to be a hefty cash deficit at the
end of the forthcoming quarter and the expected balance will exceed the
company’s existing agreed overdraft limit. Which of the following courses of
action would you consider to be appropriate in these circumstances?

(i) Delay payment to its suppliers

(ii) Delay payment of the monthly salaries until the following month
(iii) Offer more generous credit terms to its customers
(iv) Offer customers a discount for payment within 7 days of sales invoice date

a (i), (ii) and (iv)

b (i) and (iv)
c (i), (iii) and (iv)
d (ii) and (iv)

© University of London 2018

UL18/0146 Page 7 of 18 D0
17. Furniture Ltd manufactures high quality executive desks. Budgeted production
for April was as follows:

Budget £
Materials 600 kg @ £35 per kg 21,000
Labour 800 hours @ £20 per hour 16,000
Fixed overheads 2,000
Total expenses 39,000
Sales revenue 20 desks 52,000
Profit 13,000

Actual figures were as follows:

Actual £
Materials 648 kg 25,272
Labour 864 hours 18,576
Fixed overheads 2,100
Total expenses 45,948
Sales revenue 24 desks 59,760
Profit 13,812

The labour rate and labour efficiency variances are which of the following?

Labour rate Labour efficiency

variance variance
a £1,296 F £16F
b £1,296 A £1,920 F
c £1,296 A £16F
d £1,296 F £1,920A

18. With reference to the information in Question 17, the sales price variance and
sales contribution variances are which of the following?

Sales price variance Sales cont’n volume

variance
a £2,200 A £3,000 F
b £2,200 F £2,600F
c £2,640 A £2,600 F
d £2,640 A £3,000 F

© University of London 2018

UL18/0146 Page 8 of 18 D0
19. Company 19 is considering replacing all its machinery. The financial controller
has computed the Net Present Value of the project at two different discount
rates. NPV at a discount rate of 8% is £45,500 positive and at a discount rate of
18%, it is £9,400 positive. You are required to compute the Internal Rate of
Return (IRR) using linear interpolation or extrapolation.

The Internal Rate of Return of this project is which of the following?

a 22.1%
b 15.4%
c 20.6%
d More information is needed to compute the IRR

20. The budgeted costs of Company 20, for the year ended 31.12.18, were as
follows:
£
Direct materials 200,000
Direct labour 1,200,000
Indirect costs 720,000
Total costs 2,120,000

Budgeted direct labour hours for the year were 100,000 while budgeted machine
hours were 90,000. The Company absorbs its indirect costs on the basis of labour
hours.

The details of Job 401 were as follows:

Raw materials £25,000

Direct labour hours 4,000
Machine hours 1,900

The full cost of Job 401 was which of the following?

a £73,000
b £88,200
c £101,800
d £30,900

© University of London 2018

UL18/0146 Page 9 of 18 D0
SECTION B

Answer QUESTION 21 and NOT MORE THAN ONE further question from this
section.

Question 21

Answer both parts of the question in this section.

Edgware Ltd retails clothes from several shops in London. The company’s trial
balance at 31.3.18 before any adjustments have been made is as follows:

Dr Cr
£000 £000
Shop fittings at cost 300
Shop fittings, accumulated depreciation at 1 April 2017 120
Delivery vans at cost 70
Delivery vans, accumulated depreciation at 1 April 2017 31
Inventory at 1 April 2017 290
Trade receivables 22
Provision for bad debts at 1 April 2017 5
Accruals at 1 April 2017 100
Bank 196
Trade payables 164
Taxation 5
8% debenture loan repayable in 2030 40
Ordinary share capital, 25p shares 50
Retained profits at 1 April 2017 105
Sales revenue 1,910
Purchases 950
Administrative and distribution expenses 127
Electricity 347
Advertising expenses 50
Rent 150
Interest paid 3
Interim dividend paid 25 ___
2,530 2,530

The following additional information is available:

1. The figure for accruals in the trial balance is in respect of electricity accrued at
1.4.17. Electricity paid in the year ended 31.3.18 is for the period up until
31.1.18. An electricity invoice of £72,000 was received from London Electricity
for the three months ended 30.4.18 and this was paid on 1.5.18.

2. Unpaid debenture interest at 31.3.18 is to be provided.

3. On 31.3.18 the company sold a delivery van for £10,000 in cash. The vehicle
was purchased in 2015 for £40,000. The cash received from this sale will be

© University of London 2018

UL18/0146 Page 10 of 18 D0
 banked on 2.4.18. This transaction has not yet been recorded in the accounting
records.

4. Depreciation is to be provided on the non-current assets using the following

annual rates:
Shop fixtures and fittings 25% per year on a straight line basis
Delivery vans 40% per year on a reducing balance basis

A full year’s depreciation is provided in the year of acquisition and no

depreciation is provided in the year of disposal.

5. The inventory was counted on 31.3.18 and valued at the retail selling price of
£240,000. Goods are generally sold with a margin of 40%. Some of these
goods with a selling price of £18,000 are no longer fit to be sold in the
company’s stores and will be sold to a market trader for £3,000 in April 2018.

6. The company has some credit customers and it has just been told that an old
customer has gone bankrupt, owing Edgware Ltd £2,000. A provision for bad
debts of 2% of remaining receivables is to be made.

7. Corporation tax for the year ended 31.3.18 is estimated to be £18,000 and is to
be paid on 1.1.19.

8. On 25.3.18, the company issued 200,000 shares for £950,000. This sum is, at
present, in a separate bank account in the name of the company but this
transaction has not yet been brought into the company’s accounting records.

9. The directors plan to pay a dividend in respect of the current year of 20p per
share, payment to be made in May 2018.

Required:

(a) Prepare an income statement for Edgware Ltd for the year ended 31.3.18,
statement of financial position at 31.3.18 and statement of movements in
equity for the year ended 31.3.18 in a form suitable for presentation to the
directors.
[25 marks]

(b) The company’s Marketing Director has asked you, as the Finance Director, to
explain why the cost of the recent television advertising campaign amounting
to £50,000 paid for by the company in March 2018, due to appear on
television in May 2018, has been included in advertising expenses in the
draft income statement. “After all,” she says in her email to you, “this will
boost sales in the next financial year so surely it should be treated as an
asset in the Statement of Financial Position. Not only that. I can’t
understand while the good name and reputation of the company, which our
Chief Executive boasts is one of our most valuable assets isn't listed in the
assets, either. It must be worth a huge sum of money”.
[5 Marks]
[Total 30 marks]

© University of London 2018

UL18/0146 Page 11 of 18 D0
Question 22

The statements of financial position of Hampstead Limited as at 31 March 2018 and

2017 and a summary of the income statement for the year ended 31 March 2018
appear below:

Statements of financial position at 31 March

2018 2017
£000 £000
Non-current assets
Land and buildings 277 140
Plant and machinery 89 87
366 227
Current Assets
Inventory 45 54
Trade receivables 62 45
Cash at bank 6 20
113 119
Total assets 479 346

Equity & liabilities

Equity
Ordinary share capital 90 26
Share premium 15 10
Revaluation reserve 126 110
Retained earnings 23 133
Total equity 254 279

Non-current liabilities
Long-term loans 100 20
Current liabilities
Trade payables 56 25
Interest accrued 4 1
Tax 25 16
Bank overdraft 40 5
125 47
Total equity and liabilities 479 346

You are given the following information:

1. During the year items of machinery were sold. These machines had originally
cost £27,000 and had a net book value at the disposal date of £11,000. The
disposal proceeds were £15,000.

2. A dividend of £155,000 was paid during the year.

© University of London 2018

UL18/0146 Page 12 of 18 D0
 3. In the income statement for the year ended 31.3.18, the following figures
appear:

Depreciation on plant and machinery £25,000

Interest expense £8,000
Taxation £12,000

Required:

(a) Prepare a cash flow statement, together with the reconciliation statements of
operating profit and cash balance, for Hampstead Limited for the year ended
31.3.18.
[15 marks]

(b) Critically evaluate this company’s cash flow statement.

[5 marks]

[Total 20 marks]

© University of London 2018

UL18/0146 Page 13 of 18 D0
Question 23

Morden Limited, a company which operates in the retail trade, has approached its
bankers to negotiate overdraft facilities of £3m which will be used to repay a short-
term loan currently outstanding and to provide working capital. You have been
asked, as a newly appointed credit analyst, to comment on the short-term liquidity
position of the company as part of the initial screening process. The following
preliminary figures have been made available to you:

2017 2016
£000 £000
Income statement:
Sales revenue 36,720 30,360
Gross profit 9,915 9,180
Operating profit for the year 2,220 2,775
Depreciation expense 810 750

2017 2016
£000 £000
Statement of financial position:
Inventory 2,460 1,620
Trade receivables 1,176 195
Cash at bank 729 3,480
Short-term loan 1,200 -
Trade payables 2,670 1,701
Taxation payable 780 810
Interest payable 1,680 1,200

Required:

(a) Compute suitable ratios relating to the company’s profitability, liquidity, and
working capital management. Express your ratios with the correct notation.
[8 marks]

(b) Write a brief report for your manager commenting on these issues.
[7 marks]

(c) What information would you need in order to advise your senior managers on
whether overdraft facilities should be granted? Give your reasons?
[5 marks]

[Total 20 marks]

© University of London 2018

UL18/0146 Page 14 of 18 D0
SECTION C

Answer ONE question from this section and ONE further question from either Section
B or Section C.

Question 24

Miss Becky Tooting began to trade in 2016 producing racing bicycles. Her
accountants, Balham Stockwell & Co have drawn up accounts for the business but
she is not entirely convinced these accounts give an accurate picture of the
performance of the business for decision-making purposes. Hence, Becky has
asked you to look at the accounting records and draw up alternative income
statements for 2016 and 2017.

The selling price of each bicycle was £500 per unit in 2016 and £550 in 2017.

2016 2017
Sales (units) 3,000 4,000
Production (units) 3,800 3,600
£ £
Costs:
Factory: fixed 570,000 590,000
Factory: variable 478,800 330,000
Administration: fixed 200,000 220,000
Selling: variable 180,000 240,000

Becky values inventory on a FIFO basis.

Requirements:

(a) Prepare income statements using absorption costing, for each of the years
2016 and 2017.
[8 marks]

(b) Prepare income statements using marginal costing, showing clearly your
calculation of contribution, for each of the years 2016 and 2017.
[8 marks]

(c) Reconcile to profits calculated on a marginal costing basis with the profits
calculated on an absorption costing basis for 2016 only. You are required to
reconcile the figures with a numerical computation and also to explain the
difference in a brief written statement for the directors of the business.
[4 marks]

[Total 20 marks]

© University of London 2018

UL18/0146 Page 15 of 18 D0
Question 25

Colindale Cereals manufactures dog biscuits. The standard costs and revenues of
each tonne of their most popular product is as follows:

Selling price £160 per tonne

Materials 1.2 tonnes @ £30 per tonne
Labour 2 hours @ £22.50 per hour
Variables production overheads 2 hours @ £10 per hour
Fixed production costs £175,000

Budgeted production and sales for the month of January 2018 were 25,000 tonnes.
Fixed overheads are absorbed on the basis of budgeted units. In fact, 26,500 tonnes
were produced and sold for £4,160,500.

Costs incurred were as follows:

Materials 30,475 tonnes £956,915

Labour 58,300 hours £1,270,940
Variable production overheads £606,320
Fixed production overheads £164,000

Required:

(a) Produce a statement reconciling the actual profit with the budgeted profit.
Calculate all the appropriate variances using the contribution approach with
just one fixed overhead variance.
[14 marks]

(b) Present a brief report summarising possible reasons for each variance
including any possible inter-connection between any of these variances.
[6 marks]

[Total 20 marks]

© University of London 2018

UL18/0146 Page 16 of 18 D0
Question 26

Burnt Oak Waste Disposal (BOWD) is considering a contract to develop and operate
a waste disposal scheme for the local municipal council. The contract specifies that
waste would be disposed of by means of incineration and through a landfill site.
Initial development of the landfill site and the building of the incinerator would require
significant investment. It is assumed that in year 4 those facilities would have to be
expanded to reflect the planned growth in the local population and the local
economy. The local municipal council would pay a constant annual fee for the five
years of the contract. The estimated cash flows are as shown in the table below (all
figures in £millions). Assume that all cash flows take place at the end of the
respective year:

Year Investment Operating Fees received Annual net

in facilities costs from local council cash flows
£million £million £million £million
1 (2.4) (1.1) 2.3 (1.2)
2 (0.7) (1.2) 2.3 0.4
3 (1.3) 2.3 1
4 (1.2) (1.4) 2.3 (0.3)
5 (0.5) 2.3 1.8

Additionally, and not reflected in this table of figures, at the end of the contract,
BOWD would have to seal the landfill site and dispose of the incinerator, which is
estimated to cost an additional £0.8m. The cost of capital for BOWD is 9%.

Required:

(a) Calculate the project’s net present value.

[5 marks]

(b) What is the project’s internal rate of return?

[4 marks]

(c) Calculate the project’s payback period, assuming the cash flows arise evenly
throughout each year.
[2 marks)

(d) Should the company accept this project? Explain your answer.
[3 marks]

(e) If different methods of capital investment appraisal give conflicting

evaluations of a project, how should a decision-maker use such conflicting
information?
[6 marks]

[Total 20 marks]

END OF PAPER

© University of London 2018

UL18/0146 Page 17 of 18 D0
Extracts from compound interest tables

Present value of £1
P

%
R 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

© University of London 2018

UL18/0146 Page 18 of 18 D0