B o o k -k e e p i n g & Accounts Level 2
M o de l An s w e rs Series 3 2007 (Code 2506) Hong Kong
1
ASE 2006 2 06 2
>f0t@W9W2`Bk5eBkTUBX#
Book - Keeping & Accounts Level 2 Hong Kong Series 3 2007
How to use this booklet Model Answers have been developed by Education Development International plc (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 2007 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.
1
QUESTION 1 Johnny Choo, a Hong Kong furniture manufacturer, has a branch in Singapore. It is company policy that all branch sales are on credit and all cash received at the branch is remitted to the head office. All purchases are made by the Hong Kong office, with goods sent to the branch being invoiced at cost plus 25%. Branch transactions are recorded in the head office books. For the year ended 31December 2006, the following information was entered in the head office books: £ Goods invoiced to branch 900,000 Goods returned by branch to head office 18,000 Branch sales 925,800 Goods returned by customers to branch 9,130 Payments by branch debtors to branch 920,100 Discounts allowed to branch debtors 24,780 The following balances appeared in the books at 1 January 2006 Branch debtors Branch stock at selling price Branch adjustment account
£ 75,600 88,200 17,640
Balance at 31 December 2006 branch stock at selling price
49,500
REQUIRED Prepare the following accounts relating to the Singapore branch in the head office books for the year ended 31 December 2006. Memorandum columns are not required. (a) (b) (c) (d)
Branch Stock Goods to Branch Branch Adjustment Branch Debtors
2506/3/07/MA
2
MODEL ANSWER TO QUESTION 1 (a)
2006 Jan 1 Dec 31 Dec 31 Dec 31
Balance b/d Goods to branch Branch adjustment Branch debtors/Sales/Returns
Branch Stock £ 2006 88,200 Dec 31 720,000 Dec 31 180,000 Dec 31 9,130 Dec 31
Dec 31
Branch debtors/Sales Goods to branch/Returns Branch adjustment Stock loss: Branch adjustment Branch p&l Balance c/d
997,330
2007 Jan 1
Balance b/d
(b)
2006 Dec 31 Dec 31
Branch stock/Returns Trading a/c/P&L
(c)
2006 Dec 31 Dec 31 Dec 31 Dec 31
Branch Stock/Returns Branch Stock P&L Balance c/d
£ 925,800 14,400 3,600 806 3,224 49,500 997,330
49,500
Goods to Branch £ 2006 14,400 Dec 31 Branch Stock/Goods 705,600 No aliens 720,000 Branch Adjustment £ 2006 3,600 Jan 1 806 Dec 31 183,334 9,900 197,640 2007 Jan 1
Balance b/d Branch Stock/Goods No aliens
£ 720,000 720,000
£ 17,640 180,000
197,640 Balance b/d
9,900
[1] 925,800 - 9,130 = 916,670 @ 20% margin = 183,334 (d) 2006 Jan 1 Dec 31
2007 Jan 1
Balance b/d Branch Stock/Sales
Branch Debtors £ 2006 75,600 Dec 31 925,800 Dec 31 Dec 31 Dec 31 1,001,400
Balance b/d
2506/3/07/MA
47,390
3
Cash/Bank Discounts allowed Branch Stock/Returns Balance c/d
£ 920,100 24,780 9,130 47,390 1,001,400
QUESTION 2 Sally Wong, whose financial year ends at 31 December, summarised the following information in regard to her last three years of trading:
Debtors’ balances at 31 December prior to preparation of the final accounts Bad debts: Written off during the year To be written off at 31 December Doubtful debts: Specific provision required at 31 December General provision at 31 December to be adjusted to
2004 £
2005 £
2006 £
140,000
160,000
130,000
800 300
1,500 1,000
1,200 700
1,200
800
600
3%
2%
4%
At 1 January 2004, the balance on the provision for doubtful debts account was £1,300.
REQUIRED (a)
Prepare ledger accounts for each of the years 2004, 2005 and 2006 for: (i) (ii)
Bad debts Provision for doubtful debts
(b)
Show how debtors would appear in the Balance Sheet at 31 December 2006.
(c)
Define the following terms: (i) Bad debts (ii) Provision for doubtful debts
2506/3/07/MA
4
MODEL ANSWER TO QUESTION 2 (a) (i)
Bad Debts £ 2004 800 Dec 31 300
2004 Jan 1 - Dec 31 Debtors/Balance b/d Dec 31 Debtors
Profit & Loss A/c
1,100
2005 Jan 1 - Dec 31 Debtors/Balance b/d Dec 31 Debtors
1,500 1,000 2,500
2006 Jan 1 - Dec 31 Debtors/Balance b/d Dec 31 Debtors
(a) (ii)
2004 Dec 31
2005 Dec 31 Dec 31
2006 Dec 31
Balance c/d
1,200 700 1,900
1,100
2005 Dec 31
Profit & Loss A/c
Balance c/d
2006 Dec 31
Profit & Loss A/c
£ 3,964 1,391 5,355
2005 Jan 1
£ 5,748
2006 Jan 1 Dec 31
Balance b/d
£ 1,300 4,055 5,355 £ 5,355 5,355
2007 Jan 1
5
1,900 1,900
Balance b/d Profit & Loss A/c
£ 3,964 1,784 5,748
Balance b/d
5,748
5,748
2506/3/07/MA
2,500 2,500
Provision for Doubtful Debts £ 2004 5,355 Jan 1 Balance b/d Dec 31 Profit & Loss A/c 5,355
Balance c/d Profit & Loss A/c
£ 1,100
CONTINUED ON THE NEXT PAGE
MODEL ANSWER TO QUESTION 2 CONTINUED Workings [1]
Specific provision required General provision required: 3% x [140,000 – (300 + 1,200)] Provision b/d Increase/(decrease) in provision
[2]
Specific provision required General provision required: 2% x [160,000 – (1,000 + 800)] Provision b/d Increase/(decrease) in provision
[3]
Specific provision required General provision required: 4% x [130,000 – (700 + 600)]
4,155 5,355 1,300 4,055 800 3,164 3,964 5,355 -1,391 600
Provision b/d Increase/(decrease) in provision (b)
1,200
5,148 5,748 3,964 1,784
Sally Wong Balance Sheet extract at 31 December 2006
Current Assets Debtors (130,000 – 700) Less provision for doubtful debts
129,300 5,748 123,552
(c) (i) Bad debts are debts that have proved to be uncollectable and are therefore written off as an expense in the P & L account. (ii) Provision for doubtful debts is debts that are unlikely to be paid and are therefore deducted from the debtors on the Balance Sheet.
2506/3/07/MA
6
QUESTION 3 DMS plc has an authorised capital of 500,000 ordinary shares at £0.50 each and 100,000 6% preference shares at £1 each. The following balances appeared in the company's books after the preparation of the profit & loss account for the year ended 30 June 2006: £ Issued capital: 400,000 £0.50 ordinary shares fully paid 200,000 50,000 6% £1 preference shares fully paid 50,000 Freehold land and buildings at cost 420,000 Stock 57,800 10% debentures (repayable 2012) 40,000 Trade debtors 24,800 Trade creditors 9,400 Expenses prepaid 850 Share premium 76,220 General reserve 40,000 Expenses accrued 530 Profit and loss account balance at 1 July 2005 46,200 Bank (Cr) 1,600 Fixtures & fittings: at cost 63,000 provision for depreciation 28,500 Preference interim dividend paid 1,500 Ordinary interim dividend paid 10,000 The company's trading & profit and loss accounts had been prepared and revealed a net profit of £84,100. However, this figure and certain balances shown above needed adjustment in view of the following details which had not been recorded in the company's books. (i)
It appeared that a trade debtor who owed £400 would not be able to pay. It was decided to write off his account as a bad debt.
(ii)
An examination of the company's stock on 30 June 2006 revealed that some items shown in the accounts at a cost of £2,300 had deteriorated and had a resale value of only £1,700.
(iii)
At the end of the financial year some fixtures & fittings which had cost £4,200 and which had a net book value of £900 had been sold for £1,400. A cheque for this amount had been received on 30 June 2006 and had been entered only in the cash book. No depreciation is accounted for in the year of sale.
(iv)
A half-year’s debenture interest is unpaid.
REQUIRED: (a)
Prepare a statement which shows the changes that should be made to the net profit of £84,100, in view of these unrecorded details.
The directors proposed to pay a final dividend of 5% to ordinary shareholders and to transfer £60,000 to the general reserve on 30 June 2006. (b)
Prepare for DMS plc (taking into account all the available information) the Appropriation Account for the year ended 30 June 2006.
(c)
Prepare DMS’s Balance Sheet at 30 June 2006, in vertical format.
2506/3/07/MA
7
MODEL ANSWER TO QUESTION 3 (a)
DMS plc: Calculation of corrected net profit £ 84,100 500 84,600
Original net profit Add Profit on sale of equipment Less Debenture Interest Bad debt written off Stock reduced to net realisable value Corrected net profit
(b)
2,000 400 600
DMS plc Appropriation Account for the year ended 30 June 2006 £ 81,600
Net profit for the year brought down Less Transfer to general reserve Interim ordinary dividend Interim preference dividend Proposed ordinary dividend Proposed preference dividend Retained loss for the year Add Retained profit from last year Retained profit carried down to next year
2506/3/07/MA
3,000 81,600
60,000 10,000 1,500 10,000 1,500
8
83,000 (1,400) 46,200 44,800
CONTINUED ON THE NEXT PAGE
MODEL ANSWER TO QUESTION 3 CONTINUED (c)
Fixed Assets Freehold Land & buildings Fixtures & fittings (63,000 – 4,200)
DMS plc Balance Sheet at 30 June 2006 £ £ Cost Acc. Dep. 420,000 58,800 478,800
Current Assets Stock (57,800 – 600) Debtors (24,800 – 400) Prepayments
[1]
420,000 33,600 453,600
57,200 24,400 850 82,450
Creditors due within 1 year Trade creditors Debenture interest accrued Accrued expenses Proposed dividend Bank overdraft
9,400 2,000 530 11,500 1,600 25,030 57,420 511,020
Net Current Assets/Working Capital
Creditors due after more than 1 year 10% debentures
40,000 471,020
Authorised capital 500,000 £0.50 ordinary shares 100,000 6% £1 preference shares
250,000 100,000 350,000
Capital & Reserves Called up ordinary share capital: 400,000 £0.50 ordinary shares Share premium General reserve (40,000 + 60,000) Profit & Loss account Ordinary shareholders’ funds 50,000 6% £1 preference shares
200,000 76,220 100,000 44,800 421,020 50,000 471,020
Workings [1] 28,500 – 3,300 = 25,200
2506/3/07/MA
25,200 25,200
£ NBV
9
QUESTION 4 A Lam extracted a trial balance at 31 December 2006 and found that it did not balance. She posted the difference to a suspense account. Subsequently, she found the following errors, which resulted in the difference: (1)
A payment by A Lam of £87 for a telephone bill had been entered in the cash book, but the double entry had not been made.
(2)
A Lam purchased new fittings for her shop, costing £2,900, but this transaction had been posted to the purchases account.
(3)
A payment of £67 for stationery had been posted to that account as £76. The bank account entry was correct.
(4)
A Lam had paid £3,750 cash for stock for her shop but no entries had been made in her books.
(5)
A payment of £320 to A Lam from a debtor C Chung had been debited to the account of D Chang in error. The cashbook entry was correct.
(6)
The total of £76 for discount allowed had been posted to the credit side of the discount received account.
(7)
A balance of £200 for general expenses had been omitted from the trial balance.
(8)
A sale of £262 to D Mei had been posted correctly to the personal account but entered in error in the sales day book as £226.
REQUIRED (a)
Prepare journal entries, without narratives, to correct the above errors.
(b)
Prepare the suspense account.
2506/3/07/MA
10
MODEL ANSWER TO QUESTION 4 (a)
Journal entries
1
2
3
4
5
6
7
8
Telephone / Telephone bill Suspense account
2,900 2,900
Suspense account Stationery
9 9
Purchases Cash
3,750 3,750
Suspense account D Chang C Chung
640
Discount received Discount allowed Suspense account
76 76
320 320
152
No debit entry Suspense account
200
Suspense account Sales
36 36
Suspense Account 320 320 9 36
Difference on Trial Balance Telephone/Telephone Bill Discount allowed Discount received General expenses
685
2506/3/07/MA
£ Cr 87
Fittings Purchases
(b) D Chang C Chung Stationery Sales
£ Dr 87
11
246 87 76 76 200 685
