Series 2 Examination 2010
CERTIFICATE IN ACCOUNTING Level 3 Monday 12 April Subject Code: 3012
Time allowed: 3 hours
INSTRUCTIONS FOR CANDIDATES
Answer any Answer any 4 questions. There are no compulsory questions.
All questions carry equal marks.
Study the “REQUIRED “REQUIRED”” section of each question carefully and extract from the information supplied the data required for your answers. Write your answers in blue or black ink/ballpoint. Pencil may be used only for graphs, charts, diagrams etc.
Begin your answer to each question on a new page.
All answers must be correctly numbered, but need not be in numerical order.
Workings must be shown.
You may use a calculator, provided the calculator gives no printout, has no word display facilities, is silent and cordless. The provision of batteries and their condition is your responsibility. Marks may be lost through lack of neatness and poor presentation.
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ASE 3012 2 10 1
QUESTION 1 Some categories of accounting error do not cause trial balance totals to disagree.
REQUIRED (a)
Name three categories of accounting error which do not affect the balancing of a trial balance, and give an example for each category. (6 marks)
Kuyt, a sole trader, has balanced his trial balance at 31 December 2009, after preparing his profit and loss account for the year ended 31 December 2009. Extracts from this trial balance are as follows: £000 241 121 98 41 14
Capital (less drawings) Fixed assets (net book value) Debtors (less provision) Creditors Stock The following errors have now been discovered: (1)
Kuyt paid himself a salary of £500 a month and charged it to wages.
(2)
Closing stock included an item costing £800 which Kuyt believes can now only be sold for £300. Selling costs of £20 would also have to be incurred.
(3)
Bad debts of £5,000 should have been written off and the bad debt provision of 2% should have been provided at 5%.
(4)
Motor expenses of £820 had been recorded as selling expenses.
(5)
Fixed assets, with a net book value of £8,000, were taken by Kuyt for his personal use. This had not been recorded.
(6)
Depreciation for the year had not been provided. Kuyt’s policy is to charge depreciation at 10% on the net book value of the fixed assets held at the year end.
REQUIRED (b)
Prepare Journal entries (without narratives) to record the correction of the above errors. (12 marks)
(c)
Calculate the change to net profit resulting from the correction of the errors. (4 marks)
(d)
Calculate the revised balance on Kuyt’s Capital Account resulting from the correction of the errors. (3 marks) (Total 25 marks)
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QUESTION 2 Basso and Carey are in partnership sharing profits/losses equally. At 31 December 2009 their Trial Balance was as follows: £000 DR Capital - Basso - Carey Land and buildings
– cost Plant and machinery – cost Stock Debtors Creditors Bank overdraft
£000 CR 242 191
300 – accumulated depreciation
60 120
– accumulated depreciation
65 90 140
650
50 42 650
The partnership sells toys and Orr has expressed an interest in joining Basso and Carey in business. Orr has extensive knowledge of the toy industry. It was agreed to dissolve the partnership and transfer the business to a new company BCO Ltd, on the following terms: (1)
all assets and liabilities of the partnership to be taken over at book value except land and buildings, which would be re-valued at £400,000, and stock, which would be written down by £32,000.
(2)
the share capital of the company would be 2,000,000 Ordinary Shares of £0.50 each.
(3)
Basso and Carey would take shares, issued at a premium of £0.25 each, in settlement of their capital accounts.
(4)
Orr would spend £150,000 purchasing shares in the company, also issued at a premium of £0.25 each.
REQUIRED (a)
State what is meant by the term “issued share capital”. (2 marks)
(b)
Calculate the number of shares in BCO Ltd received by: (i) (ii) (iii)
Basso Carey Orr (7 marks)
(c)
Calculate the number of shares in BCO Ltd remaining unissued. (2 marks)
(d)
Prepare the Balance Sheet of BCO Ltd on 1 January 2010, before trading commenced. (8 marks)
Many small businesses find it advantageous to operate their businesses as limited companies. REQUIRED (e)
Give four reasons why the partners might have wished to incorporate as a limited company. (6 marks) (Total 25 marks)
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QUESTION 3 The Cash Flow Statement for Cole Ltd for the year ended 31 December 2008 was as follows: £ Net cash inflow from operating activities
£ 9,072*
Returns on investment and servicing of finance Interest paid
(1,000)
Capital expenditure and financial investment Purchase of fixed assets Sale of fixed assets
(35,256) 2,400
(32,856)
Equity dividends paid
(7,894)
Net cash outflow before financing
32,678
Issue of debenture Decrease in cash and cash equivalents
10,000 22,678
*Reconciliation of Net Operating Profit to the Net Cash Inflow from Operating Activities £ Net operating profit
10,600
Depreciation
11,820
Profit on disposal of fixed assets
(840)
Increase in stock
(11,318)
Increase in debtors
(6,790)
Increase in creditors
5,600 9,072
During the year ended 31 December 2009: (1)
The net operating profit increased by 15%, after allowing for writing down obsolete stock.
(2)
Fixed assets with a net book value of £4,800 were sold at a profit of £800.
(3)
Fixed assets purchased had a net book value of £9,000 at 31 December 2009. Fixed assets are depreciated at 10% on cost with a full charge being made in the year of acquisition.
(4)
The total depreciation charge was £400 higher than for 2008.
(5)
Interest paid was the same as in 2008.
(6)
Dividends paid were the final dividend for 2008 of £4,900 and an interim dividend for 2009 of £2,800. The final dividend proposed for 2009 was £5,100.
(7)
No debentures were issued or redeemed, but a rights issue of shares raised £9,000. A capitalisation (bonus) issue of 5,000 £1 shares was made.
(8)
Stock at the year end cost £12,714, an increase of £1,157 on the previous year end. However, included in the stock was obsolete stock costing £1,200, which was expected to be sold for £900.
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QUESTION 3 CONTINUED (9)
The debtors’ total has increased. Debtors at 31 December 2008 were £12,750, which was 85% of the total debtors at 31 December 2009.
(10)
The creditors’ total has decreased. Creditors at 31 December 2009 were £12,000, which is 20% lower than the total creditors at 31 December 2008.
REQUIRED (a)
Reconcile the net operating profit for 2009 to the net cash inflow from operating activities. (9 marks)
(b)
Prepare, in the format given, the Cash Flow Statement of Cole Ltd for the year ended 31 December 2009.
(12 marks)
Cash flow statements report cash inflows and cash outflows during an accounting period
REQUIRED (c)
Give two advantages of a cash flow statement over the other accounting statements. (4 marks) (Total 25 marks)
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QUESTION 4 Obi is planning to start a business on 1 July 2010, making and selling umbrellas. He will provide £5,000, in cash, as his initial capital on 30 June 2010. Obi is going to budget on a quarterly basis, with each quarter consisting of 13 weeks. Production and sales are expected to be as follows: WEEKLY PRODUCTION
WEEKLY SALES
UMBRELLAS
UMBRELLAS
Quarter 1 – ending 30 September 2010
70
60
Quarter 2 – ending 31 December 2010
90
86
Quarter 3 – ending 31 March 2011
90
94
Quarter 4 – ending 30 June 2011
40
16
There will not be any partly completed umbrellas at the end of each quarter, and materials are purchased as required. Each umbrella will be sold for £30. 75% of each quarter’s sales will be received in that quarter with the remaining 25% received in the following quarter. The materials for each umbrella will cost £12 up to 31 December 2010 and £14 subsequently. Creditors for materials are expected to be £4,000 at 30 September 2010, rise by 2% at 31 December 2010, rise a further 10% on the 31 December 2010 figure at 31 March 2011, and fall to £4,200 at 30 June 2011. Obi will do most of the work himself in his garage. However, when production exceeds 70 units per week, he will employ Mikel to help him. Mikel will be paid a fixed wage of £60 per week, when he is required. On 1 July 2010, Obi will purchase manufacturing machinery costing £4,000. This will be depreciated at 2% per quarter on cost. Other variable costs (50% of which will relate to production) are expected to be £6 per umbrella and be paid weekly in cash. Obi intends to use the FIFO basis of stock valuation, for the 442 umbrellas he expects to be in stock at 30 June 2011. However, he is uncertain how to apply it, and decides to value them at £14 each.
REQUIRED (a)
Prepare, a quarterly cash budget, in columnar form for each of the four quarters to 30 June 2011, showing the cash balance at the end of each quarter. (13 marks)
(b)
Prepare, a budgeted Trading and Profit and Loss Account for the year ended 30 June 2011. You should value closing stock on the basis of the £14 decided by Obi. (10 marks)
(c)
Give two reasons why Obi’s valuation of £14 per umbrella is unacceptable for external reporting purposes. (2 marks) (Total 25 marks)
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QUESTION 5 The following information relates to Hart plc, a car manufacturer, for 2009: Number of £1 Ordinary Shares in issue
1,000,000
Market price per share (31 December)
£1.50
Price/earnings ratio
30
Net profit percentage
40%
Gross profit percentage
65%
REQUIRED (a)
Calculate the following amounts, in respect of Hart plc, for 2009: (i) (ii) (iii) (iv)
earnings per share net profit cost of goods sold expenses (8 marks)
The following information relates to Dunne plc, a supermarket chain, for 2009: Debtors’ collection period
2 days
Sales
£730,000,000
Creditors’ settlement period
80 days
Purchases
£511,000,000
Current ratio (31 December)
0.5 : 1
Bank (balance in hand at 31 December)
£40,000,000
Opening stock was equal to closing stock There were no current assets other than debtors, stock and bank There were no liabilities due within one year other than creditors.
REQUIRED (b)
Calculate the following amounts in respect of Dunne plc at 31 December 2009: (i) (ii) (iii)
debtors creditors stock (6 marks)
(c)
Calculate (to the nearest day) the stock turnover ratio of Dunne plc for 2009. (2 marks)
Elano, an investor, is considering purchasing shares in either Hart plc or Dunne plc and has asked the following questions: (i)
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in difficult economic times is it safer to invest in Hart plc, which makes cars, or in Dunne plc, which sells mainly food?
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QUESTION 5 CONTINUED (ii)
is Dunne plc’s current ratio of 0.5 : 1 a concern, as I have heard that a safe current ratio should be at least 1 : 1?
(iii)
does Hart plc’s high price/earnings ratio of 30 mean that it will take a long time to get my money back in dividends? Does this ratio also mean that the company is not highly rated by the stock market?
REQUIRED (d)
Answer each of Elano’s questions, in a way that a non-expert investor would understand. (9 marks) (Total 25 marks)
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