Model Answers Series 4 2009 (3012)

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LCCI International Qualifications

Accounting Level 3

Page 1 of 14

Accounting Series 4 2009

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) 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 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.

© Education Development International plc 2009 All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without prior written permission of the Publisher. The book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover, other than that in which it is published, without the prior consent of the Publisher

3012/4/09/MA Page 2 of 14

QUESTION 1 Every month Viking Ltd‟s accountant reconciles the bank balance appearing in the cash book with the balance appearing in the company‟s bank statement at the end of that month. At 31 October 2008 the cash book showed a bank balance in hand of £10,932 whilst the bank statement showed a balance in hand of £8,133. A Suspense Account had been set up as the Trial Balance did not balance. The accountant discovered the following: (1) A receipt from a debtor of £360 was received and banked on 30 October but no entry had been

made in the books. This deposit appeared on the bank statement on 2 November. (2) Cheques totalling £996 were entered in the books on 29 October and sent out to suppliers on

that date. They did not appear in the bank statement until 4 November. (3) No entries had been made in the books for bank charges of £1,206 which appeared on the bank

statement on 28 October. (4) Takings of £5,259 were entered in the cash book and banked on 31 October, but did not appear

in the bank statement until 1 November. (5) A standing order for a subscription payable of £165 had been paid twice, in error, by the bank.

No entry had been made in the cash book in respect of either payment. (6) The debit side of the cash book for October had been under added by £3,000. REQUIRED (a) Prepare journal entries, excluding narratives, but including entries relating to bank, to record the

necessary adjustments. (8 marks)

(b) Calculate the corrected bank balance in the cash book at 31 October 2008.

(5 marks)

(c) Prepare a bank reconciliation statement at 31 October 2008 starting with the balance on the company‟s bank statement on that date.

(5 marks)

A trainee accountant has asked the following questions relating to the bank reconciliation process: (i) “Why is the company paying bank charges when it has a sizeable balance in hand? Surely the

bank should be paying Viking Ltd interest and not the other way round?” (ii) “Why are deposits entered in the bank statement within a day whilst cheques take many days to

appear in the bank statement?” REQUIRED (d) Reply to the trainee accountant‟s questions.

(7 marks)

(Total 25 marks)

3012/4/09/MA Page 3 of 14

MODEL ANSWER TO QUESTION 1 (a) Journal entries DR CR £ £ (1) Bank 360 Debtor 360 (3) Bank charges 1,206 Bank 1,206 (5) Subscriptions 165 Bank 165 (6) Bank 3,000 Suspense 3,000

(8 marks) (b) Corrected bank balance at 31 October 2008 10,932 + 360 – 1,206 – 165 + 3,000 = £12,921

(5 marks)

(c) Bank Reconciliation Statement at 31 October 2008 £ £ Balance per statement 8,133 less unpresented cheques 996 7,137 add unrecorded deposit 360 unrecorded deposits 5,259 subscription paid in error 165 5,784 Balance per cash book 12,921

(5 marks)

(d) Answers to trainee accountant (i) Bank charges are charges made by the bank for processing the company‟s transactions,

providing advice, etc as opposed to bank interest, which would be charged on an overdrawn account. It is reasonable to suggest that the bank should pay interest on a sizeable bank balance although Viking Ltd could always make transfers to and from a deposit account and receive interest on that.

(ii) Deposits, by their very nature, arrive at the bank quickly and can then be recorded. Cheques take some days to reach suppliers and there may be additional time taken by the supplier to pay them into their bank. Banks then have to communicate with one another.

(7 marks)

(Total 25 marks)

3012/4/09/MA Page 4 of 14

QUESTION 2 In 2008 Clyst Ltd constructed a new workshop. The following expenditure was incurred in relation to the workshop during 2008: £ £ Purchase of land 120,000 Legal fees in respect of: Purchase of land 11,000 A dispute with a supplier over the quality of the building materials 5,000 16,000 Architect‟s fees 6,000 Clearance of site 12,000 Building materials 21,000 Labour: Clyst Ltd‟s own employees charged at cost plus 50% to cover the associated administrative expenses 75,000 Electrical installation 13,000 Cost of electricity 2,000 Decoration: Initial 500 Redecoration in more pleasing colours 600 Annual insurance 900 267,000 REQUIRED (a) Prepare a schedule showing the total amount to be: (i) Treated as part of the capital cost of the workshop (ii) Written off as expenses.

(7 marks)

Hayle plc purchased a new machine on 1 January 2009 for £120,000. It is expected to be used for five years and then have a residual value of £8,000. REQUIRED (b) For each of the years 2009, 2010 and 2011, calculate, for Hayle plc, the amount to be charged

to the Profit and Loss Account, in respect of depreciation on the new machine, using each of the following methods:

(i) Straight line (ii) Reducing balance at 40% (iii) Sum of the years‟ digits

(8 marks) (c) Explain what is meant by „residual value‟ in relation to fixed assets.

(3 marks)

3012/4/09/MA Page 5 of 14

QUESTION 2 CONTINUED Truro Ltd imports model aircraft, paints them, packages them in attractive boxes and then sells them to retail shops. Details are as follows: £ Per aircraft Purchase price before discounts 7.40 Import taxes 0.80 Settlement discount received 0.37 Trade discount received 0.74 Painting 2.10 Box 0.80 Carriage outwards 0.40 Carriage inwards 0.30 Selling price 11.80 Other selling costs 0.50 There were 380 model aircraft, painted, boxed and ready for despatch, in stock at 30 June 2009. REQUIRED (d) Calculate the cost of stock and the net realisable value of stock, at 30 June 2009, and show the

amount that should appear in Truro Ltd‟s Balance Sheet at that date. (7 marks)

(Total 25 marks)

3012/4/09/MA Page 6 of 14

MODEL ANSWER TO QUESTION 2 (a) Schedule Fixed Asset – Expense Workshop £ £ Purchase of land 120,000 Legal fees 11,000 5,000 Architect‟s fees 6,000 Clearance of site 12,000 Building materials 21,000 Labour 50,000 25,000 Electrical installation 13,000 Cost of electricity 2,000 Decoration 500 600 Insurance ……….. 900 233,500 33,500

(7 marks)

(b) Alternative depreciation methods 2009 2010 2011 £ £ £ (i) Straight line (120,000 – 8,000) 22,400 22,400 22,400 5

(ii) Reducing balance

(120,000 x 0.40) 48,000 (120,000 – 48,000) x 0.40 28,800 (72,000 – 28,800) x 0.40 17,280

(iii) Sum of the years‟ digits

15

5(120,000 – 8,000) 37,333

15

4(120,000 – 8,000) 29,867

15

3(120,000 – 8,000) 22,400

(8 marks)

(c) Residual value This is the amount expected to be received from the sale of a fixed asset at the end of its

economic life, net of any disposal costs. (3 marks)

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MODEL ANSWER TO QUESTION 2 CONTINUED (d) Stock Value COST NRV £ £ Purchase price 7.40 Selling price 11.80 Import taxes 0.80 Carriage outwards (0.40) Trade discount received (0.74) Other selling costs (0.50) Painting 2.10 Box 0.80 Carriage inwards 0.30 ……. 10.66 10.90

Value 10.66 x 380 = £4,050.80

(7 marks)

(Total 25 marks)

3012/4/09/MA Page 8 of 14

QUESTION 3 Brann, a retailer, has the following budgeted Balance Sheets at 31 December: 2009 2010 Cost Acc.Dep. Nbv Cost Acc.Dep. Nbv £000 £000 £000 £000 £000 £000 Fixed assets 500 140 360 570 190 380 Current assets Stock 71 82 Trade debtors 25 59 Bank 10 - 106 141 Current liabilities Trade creditors 14 11 Accrued expenses 6 7 Bank overdraft - 20 9 27 Net current assets 86 114 446 494 £000 £000 Capital Opening balance 420 446 Net Profit 40 60 460 506 Drawings 14 12 446 494 Notes: (1) The profit to sales ratios for 2010 are budgeted to be: Gross profit 25% Net profit 10% (2) No fixed asset disposals are budgeted for 2010. REQUIRED (a) Prepare an annual cash budget for Brann for 2010.

(13 marks)

Brann is concerned that the budgeted figures show that a bank balance in hand of £10,000 has become a bank overdraft of £9,000 by the end of 2010. REQUIRED State: (b) Three reasons for the overdraft

(6 marks)

(c) Six actions Brann might take to avoid having to request overdraft facilities. (6 marks)

(Total 25 marks)

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MODEL ANSWER TO QUESTION 3 (a) Summary Cash Budget £000 £000 Opening balance 10 Receipts from customers [(60 x 10) + (25 – 59)] 566 576 Less Payments to suppliers [(60 x 10 x 0.75) + (82 – 71) + (14 – 11)] 464 Payments for expenses [(60 x 10 x 0.15) + (6 – 7) – (190 – 140)] 39 Payments for fixed assets (570 – 500) 70 Drawings 12 585 Closing balance (overdraft) (9)

(13 marks) (b) Reasons for overdraft: Investment in fixed assets Increase in stock Increase in debtors

(6 marks) (c) How to avoid overdraft: Reduce investment in fixed assets Improve stock control Improve credit control Obtain a loan Introduce more capital Reduce drawings Increase selling prices Reduce expenses Slow down payments to suppliers Accept any reasonable suggestion

(6 marks)

(Total 25 marks)

3012/4/09/MA Page 10 of 14

QUESTION 4 The following information has been extracted from the accounting records of Wick Ltd for the year ended 31 December 2008: (1) Motor vehicles (cost £80,000, net book value £32,000) were sold for £24,000. These were the

only fixed assets disposed of during the year. (2) Plant and machinery, costing £84,000, was acquired. (3) Accumulated depreciation of fixed assets was £78,000 on 1 January and £56,000 on 31 December. (4) Dividends received from investments of £3,000 was £4,000 less than loan interest paid. (5) A five year bank loan of £40,000 was received. (6) Issued share capital increased from 200,000 £1 ordinary shares to 400,000 £1 ordinary shares.

A bonus (capitalisation) issue of one share for every two shares held had been followed by a fully subscribed rights issue at £1.25 per share.

(7) Wick Ltd made a net profit of £50,000. (8) Debtors at 31 December were 20% higher than the £70,000 debtors at 1 January. (9) Creditors at 31 December were £40,000, a decrease of 20% on creditors at 1 January. (10) Stock at 31 December was £5,000 higher than the £25,000 stock at 1 January. REQUIRED (a) Show the following items as they would appear in the Cash Flow Statement of Wick Ltd for the

year ended 31 December 2008 in accordance with FRS1 (revised):

(i) Reconciliation of operating profit to net cash inflow from operations (ii) Net cash outflow from returns on investment and servicing of finance (iii) Net cash outflow from capital expenditure and financial investment (iv) Net cash inflow from financing.

(17 marks) The Managing Director is concerned about the company‟s cash position. One suggestion that he has received is to reduce the amount of stock held. REQUIRED (b) State three advantages and one disadvantage of this suggestion.

(8 marks)

(Total 25 marks)

3012/4/09/MA Page 11 of 14

MODEL ANSWER TO QUESTION 4 (a) (i) Reconciliation of operating profit to net cash inflow from operations £ Operating profit (50,000 – 3,000 + 7,000) 54,000 Depreciation [(56,000 – 78,000) + (80,000 – 32,000)] 26,000 Loss on disposal of motor vehicles (32,000 – 24,000) 8,000 Increase in stock (5,000) Increase in debtors (70,000 x 0.20) (14,000)

Decrease in creditors 0.80

0.2040,000 (10,000)

Net cash inflow from operations 59,000

(ii) Net cash outflow from returns on investment and servicing of finance £ Dividends received 3,000 Interest paid (3,000 + 4,000) (7,000) (4,000) (iii) Net cash outflow from capital expenditure and financial investment £ Sale of motor vehicle 24,000 Purchase of plant and machinery (84,000) (60,000)

(iv) Net cash inflow from financing £ Bank loan 40,000 Issue of ordinary shares [(400,000 – 200,000 – 100,000) x 1.25]125,000 165,000

(17 marks) (b) ADVANTAGES - less chance of obsolescent stock - improve rate of stock turnover - less cash tied up in stock will improve cash position DISADVANTAGE - danger of stock outs

(8 marks)

(Total 25 marks)

3012/4/09/MA Page 12 of 14

QUESTION 5 Extracts from the financial statements of Lazio plc, a food and clothing retailer, are as follows: Profit and Loss Accounts for the year ended 31 December: 2007 2008 £000 £000 Sales 225 250 Gross profit 105 100 Selling and administrative expenses 40 45 Loan interest 10 7 Dividends 15 15 Balance Sheets at 31 December: 2007 2008 £000 £000 Fixed assets at net book value 333 300 Stock 4 7 Trade debtors 10 30 Bank (25) 10 Trade creditors 10 20 Loans to Lazio plc 150 100 Ordinary shares of £1 each 100 150 Lazio plc‟s share price was £2.50 on 31 December 2007 and £1.50 on 31 December 2008. REQUIRED (a) Calculate, for Lazio plc, the following ratios (correct to 2 decimal places), for each of 2007 and

2008:

(i) Gross profit to sales (ii) Stock turnover (using closing stock and expressed in days) (iii) Debtors‟ collection period (expressed in days) (iv) Earnings per share (v) Price earnings (vi) Dividend cover (vii) Interest cover

(16 marks) Further information about Lazio plc, in respect of 2008, was obtained from the company website as follows: (1) The company introduced „Lazio Loyalty Credit Cards‟. These allow customers to purchase

goods on credit with no interest if paid within 60 days. (2) Ten poorly performing stores were sold off and the rest refurbished, resulting in a one-off

expense of £5,000. No new stores were acquired. REQUIRED (b) Assess the possible success, or otherwise, of the above changes using the Profit and Loss

Account and Balance Sheet extracts that have been provided. (6 marks)

3012/4/09/MA Page 13 of 14

QUESTION 5 CONTINUED The increase in ordinary share capital between the Balance Sheet dates resulted from a bonus issue of one for two. REQUIRED (c) Explain what is meant by:

(i) bonus issue (ii) one for two.

(3 marks)

(Total 25 marks)

3012/4/09/MA Page 14 of 14 © Education Development International plc 2009

MODEL ANSWER TO QUESTION 5 (a) Ratios

(i) Gross profit to sales 105 x 100 = 46.67% 100 x 100 = 40.00% 225 250 (ii) Stock turnover 4 = 12.17 days 7 = 17.03 days (225 – 105) (250 – 100) (iii) Debtors collection period 10 = 16.22 days 30 = 43.80 days 225 250 (iv) Earnings per share (105 – 40 – 10) = £0.55 (100 – 45 – 7) = £0.32 100 150 (v) Price / earnings 2.50 = 4.55 1.50 = 4.69 0.55 0.32 (vi) Dividend cover (105 – 40 – 10) = 3.67 times (100 – 45 – 7) = 3.20 times 15 15 (vii) Interest cover (105 – 40) = 6.5 times (100 – 45) = 7.86 times 10 7

(16 marks)

(b) Success of changes The introduction of the credit cards may well have contributed to better sales figures, especially

as ten stores were sold off during the year. However, they will certainly have contributed to the threefold increase in debtors. So overall success is difficult to assess.

The closing of the ten stores has not been a disaster for sales (see however above). Allowing

for the £5,000 one off expenditure expenses have remained the same as in the previous year, suggesting more is being spent on the remaining stores, presumably to good effect. The closures therefore seem to have been effective, although the fall in gross profit to sales must be a concern.

(6 marks)

(c) Explanations

(i) A „bonus issue‟ is a „free‟ issue of shares to existing shareholders. This is represented in the Balance Sheet by a transfer from reserves to share capital.

(ii) „One for two‟ means that for every two shares currently held, the shareholders will receive

another one.

(3 marks)

(Total 25 marks)

per share

365 x 365 x

365 x 365 x

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