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LCCI International Qualifications

Accounting Level 3

LCCI International Qualifications Accounting Level 3 Model Answers Series 4 2009 (3012) For further information contact

Model Answers

Series 4 2009 (3012)

For further

information

contact us:

Tel. +44 (0) 8707 202909 Email. enquiries@ediplc.com www.lcci.org.uk

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

Page 1 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)

MODEL ANSWER TO QUESTION 1

(a)

Journal entries

DR

CR

 

£

£

 

(1) Bank Debtor (3) Bank charges Bank (5) Subscriptions Bank (6) Bank Suspense

360

 

360

1,206

 

1,206

165

 

165

3,000

 

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 subscription paid in error Balance per cash book

5,259

165

5,784

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)

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 Legal fees in respect of:

120,000

Purchase of land

A dispute with a supplier over the quality of the building materials Architect‟s fees Clearance of site Building materials

11,000

5,000

16,000

6,000

12,000

21,000

Labour:

Clyst Ltd‟s own employees charged at

cost plus 50% to cover the associated administrative expenses Electrical installation

 

75,000

13,000

Cost of electricity Decoration:

2,000

Initial Redecoration in more pleasing colours Annual insurance

500

600

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)

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)

MODEL ANSWER TO QUESTION 2

(a)

(b)

(c)

Schedule

Fixed Asset Workshop £

Expense

£

Purchase of land Legal fees Architect‟s fees Clearance of site Building materials Labour Electrical installation Cost of electricity Decoration Insurance

120,000

11,000

5,000

6,000

12,000

21,000

50,000

25,000

13,000

 

2,000

500

600

………

900

 

233,500

33,500

Alternative depreciation methods

(i)

(ii)

Straight line (120,000 8,000)

5

Reducing balance

(120,000 x 0.40) (120,000 48,000) x 0.40 (72,000 28,800) x 0.40

(iii)

Sum of the years‟ digits

– 28,800) x 0.40 (iii) Sum of the years‟ digits 5 15 4 15 3 15

5

15

– 28,800) x 0.40 (iii) Sum of the years‟ digits 5 15 4 15 3 15

4

15

28,800) x 0.40 (iii) Sum of the years‟ digits 5 15 4 15 3 15 (120,000

3

15

(120,000 – 8,000) 8,000)

(120,000 – 8,000) 8,000)

(120,000 – 8,000) 8,000)

Residual value

 

(7 marks)

2009

2010

2011

£

£

£

22,400

22,400

22,400

48,000

 

28,800

 

17,280

37,333

 

29,867

 

22,400

 

(8 marks)

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)

MODEL ANSWER TO QUESTION 2 CONTINUED

(d) Stock Value

 

COST

NRV

£

£

Purchase price Import taxes Trade discount received Painting Box Carriage inwards

7.40

Selling price Carriage outwards Other selling costs

11.80

0.80

(0.40)

(0.74)

(0.50)

2.10

 

0.80

0.30

…….

 

10.66

10.90

Value 10.66 x 380 = £4,050.80

Value

10.66 x 380

= £4,050.80

(7 marks)

(Total 25 marks)

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

-

Current liabilities Trade creditors Accrued expenses Bank overdraft Net current assets

 

106

141

14

11

6

7

-

20

9

27

 

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)

MODEL ANSWER TO QUESTION 3

(a)

Summary Cash Budget

 

£000

£000

 

Opening balance Receipts from customers [(60 x 10) + (25 59)]

10

566

 

576

 

Less Payments to suppliers [(60 x 10 x 0.75) + (82 71) + (14 11)] Payments for expenses [(60 x 10 x 0.15) + (6 7) (190 140)] Payments for fixed assets (570 500) Drawings Closing balance (overdraft)

464

39

70

12

585

(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)

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)

MODEL ANSWER TO QUESTION 4

(a)

(i)

(ii)

Reconciliation of operating profit to net cash inflow from operations

Operating profit (50,000 3,000 + 7,000) Depreciation [(56,000 78,000) + (80,000 32,000)] Loss on disposal of motor vehicles (32,000 24,000) Increase in stock Increase in debtors (70,000 x 0.20)

Decrease in creditors

40,000 0.20 0.80
40,000
0.20
0.80

Net cash inflow from operations

£

54,000

26,000

8,000

(5,000)

(14,000)

(10,000)

59,000

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)

(b)

(iv)

Net cash inflow from financing

£

Bank loan

Issue of ordinary shares [(400,000 200,000 100,000) x 1.25]125,000

40,000

165,000

 

(17 marks)

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)

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)

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)

MODEL ANSWER TO QUESTION 5

(a)

(b)

Ratios

(i)

(ii)

(iii)

(iv)

(v)

(vi)

(vii)

Gross profit to sales

105

225

x 100

Stock turnover

365 x

4

(225 105)

Debtors collection period

365 x

10

225

=

=

=

Earnings per share

Price / earnings

Dividend cover

Interest cover

(105 40 10) =

100

2.50

0.55

=

(105 40 10) =

15

(105 40)

10

=

Success of changes

46.67%

12.17 days

16.22 days

£0.55

4.55

3.67 times

6.5 times

100

250

x 100

365 x

7

(250 100)

365 x

30

250

(100 45 7)

150

1.50

0.32

(100 45 7)

15

(100 45)

7

=

40.00%

= 17.03 days

=

=

43.80 days

£0.32 per share

= 4.69

= 3.20 times

= 7.86 times

(16 marks)

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.

(c)

Explanations

(6 marks)

(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)

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