Accounting Level 3
Model Answers Series 2 2005 (Code 3001)
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Accounting Level 3 Series 2 2005
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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
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Accounting Level 3 Series 2 2005 SECTION A (Answer Questions 1 and 2 in Section A − Compulsory) QUESTION 1 Two sole traders (A and B) had the following Trial Balances at 31 March 2005: A Purchases/Sales Machinery/Accumulated depreciation Vehicles/ Accumulated depreciation Buildings/Accumulated depreciation General expenses Rent Wages Drawings/Capital Bank Stock at 1 April 2004 Debtors/Creditors
£000 475 350 44 125 110 nil 65 22
B £000 750 145 14 5
321 12
30 50 1,271
24 1,271
£000 400 250 51 nil 85 92 nil 14 9 12 20 933
£000 645 45 21 nil
212 10 933
NOTES (1) At 31 March 2005 the stocks on hand were: A £21,000, B £16,000. (2) Both A and B depreciate machinery at 14% per year on cost and vehicles at 20% per year using the reducing balance method. A depreciates his buildings by £2,000 per year. (3) At 31 March 2005 A owed B £8,000. (4) A and B agreed to form a partnership with effect from 1 April 2005 after calculating their individual profits for the year ended 31 March 2005. They agreed the following: (i)
Assets and liabilities were to be included at book value and goodwill was to be ignored.
(ii)
The bank accounts would be amalgamated.
(iii) Fixed capital accounts would be set up, rounded down to the nearest £10,000, leaving the remaining balances in current accounts. REQUIRED (a) Prepare the Trading and Profit & Loss Account of A and of B, in columnar form, for the year ended 31 March 2005. (12 marks) (b) Prepare the opening Balance Sheet of the new partnership at 1 April 2005. (8 marks) (Total 20 marks)
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Model Answer for Question 1 (a) Trading and Profit & Loss Accounts for year ended 31 March 2005 A £000 Sales Cost of goods sold: Opening stock Purchases Closing stock Gross Profit General expenses Rent Wages Depreciation: Machinery (.14 x 350) Vehicles [.2 x (44 – 14)] Buildings Net profit
30 475 505 21
B £000 750
484 266
£000 12 400 412 16
110 65
85 92 -
49 6 2
(.14 x 250) 35 [.2 x (51 – 21)] 6 -
232 34
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£000 645
396 249
218 31
CONTINUED ON THE NEXT PAGE
Model Answer for Question 1 continued (b) Partnership Balance Sheet at 1 April 2005 £000
£000
£000
Fixed Assets Land and Buildings (125 – 5 – 2) Machinery (350 + 250 – 145 – 45 – 49 – 35) Vehicles (44 + 51 – 14 – 21 – 6 – 6)
118 326 48 492
Current Assets Stock (21 + 16) Debtors (50 + 20 – 8)
37 62
99
Creditors: amounts due within 1 year Creditors (24 + 10 – 8) Bank (12 – 9)
26 3 29
Net Current Assets
70 562
Partners' Capital Accounts:
£000
A (321 + 34 – 22) = 333 B (212 + 31 – 14) = 229
330 220
Partners Current Accounts: A (333 – 330) B (229 – 220)
3 9 562
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SECTION A CONTINUED QUESTION 2 The following are the most recent accounts of Logres Ltd: Trading and Profit & Loss Account year ended 31 March 2005 £000 Sales Cost of goods sold: Opening stock Purchases
65 690 755 85
Closing stock Gross profit Wages General expenses Selling expenses Depreciation on machinery Directors' salaries Net profit Retained earnings b/f
104 124 22 85 32
Proposed dividend Retained earnings c/f
£000 1,080
670 410
367 43 67 110 75 35
Balance Sheet at 31 March 2005 £000 Cost
£000 Depreciation
£000 NBV
300 425 725
115 255 370
185 170 355
85 90
175
Creditors: amounts falling due within one year Creditors 60 Proposed dividend 75 Bank overdraft 115
250
Fixed Assets Buildings Machinery Current Assets Stock Debtors
(75) 280
Net Current Liabilities Capital and Reserves: Ordinary shares (£1 each) Retained earnings
£000 245 35 280
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CONTINUED ON THE NEXT PAGE
SECTION A CONTINUED QUESTION 2 CONTINUED The Trade Association to which Logres Ltd belongs has just produced the following average ratios for this industry: Mark up on cost Net profit to sales Return on capital employed Dividend cover Current Acid test Debtors collection Stock turnover (based on average stock) Creditors settlement
40.00% 5.00% 12.00% 1.40 times 1.50:1 1.10:1 2.00 months 2.00 months 2.40 months
REQUIRED (a) Calculate for Logres Ltd, with the same degree of accuracy, the 9 ratios produced by the Trade Association. (12 marks) (b) Write a short report to the Directors of Logres Ltd comparing the ratios you have calculated in (a) above with those produced by the Trade Association. (8 marks) (Total 20 marks)
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Model Answer for Question 2 (a)
Logres Ltd Trade Association Mark up on cost [(410/670) x 100] 61.19% 40.00% Net profit to sales [(43/1,080) x 100)] 3.98% 5.00% Return on capital employed [(43/280) x 100)] 15.36% 12.00% Dividend cover (43/75) 0.57 times 1.40 times Current (175/250) 0.70:1 1.50:1 Acid test (90/250) 0.36:1 1.10:1 Debtors collection [(90/1,080) x 12)] 1.00 month 2.00 months Stock turnover [((65 + 85)/2)/670) x 12] 1.34 months 2.00 months Creditors settlement
[(60/690) x 12)]
1.04 months
2.40 months
(b) REPORT To: From: Date: Subject:
Directors A Candidate 11 April 2005 Ratios
Logres Ltd has a higher mark up and manages a faster stock turnover which suggests superior quality. The lower net profit to sales suggests high expenses (possibly spending above average on advertising). The net profit to capital employed is above average probably due to the high mark up combined with efficient use of capital shown by better than average stock turnover ratio. Both current and acid test ratios suggest a serious liquidity problem. The liquidity problem calls into question the size of the dividend which is not covered by the current profits. The liquidity problem also suggests it may not be necessary to pay creditors faster than average for the industry.
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SECTION B (Answer any THREE questions from Section B) QUESTION 3 The following information appeared in Gresham plc's Balance Sheet at 31 March 2002: Authorised capital 20,000,000 Ordinary shares of £0.50 each 500,000 8% Preference shares of £1 each
£000 10,000 500 10,500
Issued capital and reserves 10,000,000 Ordinary shares of £0.50 each 250,000 8% Preference shares of £1 each Share premium Retained earnings
£000 5,000 250 500 685 6,435
(1) For the year ended 31 March 2003 Gresham plc made a net profit of £680,000 and an ordinary share dividend of £0.06 per share was approved. (2) On 1 September 2003 the company's buildings were re-valued and a revaluation reserve of £400,000 was created. (3) On 1 October 2003 a bonus (capitalisation) issue of 1 ordinary share for every five held was made. Maximum use was made of non-distributable reserves. (4) For the year ended 31 March 2004 Gresham plc made a net profit of £830,000. An Ordinary dividend of £0.0625 per share was approved. (5) On 1 April 2004 the remaining Preference shares were issued at par. (6) On 1 October 2004 five million Ordinary shares were issued at a premium of £0.25 per share. (7) For the year ended 31 March 2005 Gresham plc made a net profit of £1,050,000. An Ordinary dividend of £0.05 per share was approved. REQUIRED (a) Prepare for Gresham plc the Appropriation account for each of the years ended 31 March 2003, 2004 and 2005. (13 marks) (b) Show the Issued Capital and Reserves section of Gresham plc's Balance Sheet at 31 March 2005. (7 marks) (Total 20 marks)
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Model Answer for Question 3 (a)
Gresham plc Appropriation Account year ended 31 March 2003 £000
Net profit Less: Preference dividend (0.8 x 250,000) Ordinary dividend (0.6 x 10,000,000) Retained profit for year Retained profit brought forward Retained profit carried forward
20,000 600,000
£000 680,000 620,000 60,000 685,000 745,000
Gresham plc Appropriation Account year ended 31 March 2004 £000 Net profit Less Preference dividend (0.8 x 250,000) Ordinary Dividend [1] Retained profit for year Retained profit brought forward [2] Retained profit carried forward
20,000 750,000
£000 830,000 770,000 60,000 645,000 705,000
Workings: [1] .0625 x 10,000,000 x 1.2 = 750,000 [2] 745,000 – [(5,000,000 x .2) – 500,000 – 400,000] = 645,000
Gresham plc Appropriation Account year ended 31 March 2005 £000 Net profit Less: Preference dividend (0.8 x 500,000) Ordinary Dividend [3] Retained profit for year Retained profit brought forward Retained profit carried forward
40,000 850,000
[3] .05 [(10,000,000 x 1.2) + 5,000,000] = 850,000
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£000 1,050,000 890,000 160,000 705,000 865,000
Model Answer for Question 3 continued (b)
Gresham plc Balance Sheet at 31 March 2005 £000
Capital and Reserves 17,000,000 Ordinary shares of £0.50 each 500,000 8% Preference shares of £1 each Share premium (5,000,000 x .25) Retained earnings
8,500 500 1,250 865 11,115
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SECTION B CONTINUED QUESTION 4 Mirabelle does not use control accounts. At the most recent year end the Trial Balance did not balance as the credit total exceeded the debit total by £541. A Suspense Account was opened and this balance was treated as a current asset when the draft accounts were prepared. The accounts showed a gross profit of £42,350 and a net profit of £13,400. The accountant has now found the following errors: (1) A sales return of £60 had been credited to the customer's account and credited to Sales Returns Account. (2) Postage expenses of £87 had been correctly entered in the Bank Account but entered as £78 in the Postage Expenses Account. (3) A customer, Jones, owing £240, had paid his account less 5% cash discount. Jones' account had been credited with £228, but no entry had been made in the Bank Account and the discount remained unrecorded. (4) £8,400, including £150 for the licence and £350 for insurance, was paid to the supplier of a new vehicle. The Motor Vehicles Account had been debited with £8,400 and the Bank Account credited with £8,400. A full year’s depreciation of 25% has been charged on the cost of all vehicles. (5) The Petty Cash Account had been omitted from the Trial Balance. When all the above errors had been corrected the Suspense Account was eliminated. REQUIRED (a) Show the Suspense Account of Mirabelle. (8 marks) (b) Show calculations of the revised: (i)
Gross profit
(ii) Net profit.
(12 marks) (Total 20 marks)
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Model Answer for Question 4 (a) Balance per Trial Balance
Suspense Account £ 541 Sales returns (60 x 2) Postage (87 – 78) Bank 541 Petty cash (R)
£ 120 9 228 184 541
Must include narratives (b) (i) £ 42,350 120 42,230
Gross profit as per accounts Less sales returns (60 x 2) Revised gross profit (ii) £ Net profit as per accounts Sales returns Postage Discount allowed (240 – 228) Licences Insurance Depreciation [(150 + 350) x 0.25] Revised net profit
£ 13,400
(120) ( 9) ( 12) (150) (350) 125
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(516) 12,884
SECTION B CONTINUED QUESTION 5 Turncoats Manufacturing Ltd's Trial Balance at 31 March 2005 included the following figures: £000 Sales Purchases (raw materials) Stocks at 1 April 2004: Raw materials Work in progress Finished goods Direct labour Factory machinery at cost Vehicles at cost Miscellaneous factory expenses Insurance Accumulated depreciation at 1 April 2004: Factory machinery Vehicles Indirect labour Light, heat and power Administration
£000 5,240
1,250 145 276 187 975 2,500 650 475 80 1,050 250 145 220 310
At 31 March 2005 the following prepayments and accruals had yet to be recorded:
Direct labour Indirect labour Insurance Administration
Prepayments £000 – – 30 20
Accruals £000 20 15 – 10
Stocks at 31 March 2005 were as follows: (1) Raw materials £130,000 (2) Work in progress £290,000 (3) Finished goods £210,000 Notes (1) Indirect labour is charged 40% to Manufacturing Account and the rest to Profit & Loss Account. (2) Insurance is charged 50% to Manufacturing Account and the rest to Profit & Loss Account. (3) Administration is charged 10% to Manufacturing Account and the rest to Profit & Loss Account. (4) Light, heat and power is charged 75% to Manufacturing Account and the rest to Profit & Loss Account. (5) The depreciation on vehicles is calculated at 30% per year using the reducing balance method and charged 30% to Manufacturing Account and the rest to Profit & Loss Account. (6) Factory machinery is depreciated at 20% per year on cost. REQUIRED Prepare the Manufacturing and Trading Account of Turncoats Manufacturing Ltd for the year ended 31 March 2005. Note: the Profit & Loss Account section is not required. (20 marks)
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Model Answer for Question 5 Turncoats Manufacturing Ltd Manufacturing Account and Trading Account for the year ended 31 March 2005 Raw materials: Opening stock Purchases Closing stock Direct labour (975 + 20) Prime Cost
£000 145 1,250 1,395 130
Miscellaneous factory expenses Insurance [(80 – 30) x 0.5] Indirect labour [(145 + 15) x 0.4] Light, heat and power (220 x 0.75) Administration [(310 + 10 – 20) x 0.1] Depreciation: Factory machinery (2,500 x 0.2) Vehicles [(650 – 250) x 0.3) x 0.3]
500 36
Closing work in progress Cost of Manufacture £000
Closing stock
1,265 995 2,260
475 25 64 165 30
Opening work in progress
Sales Cost of goods sold: Opening stock Cost of manufacture
£000
187 3,541 3,728 210
Gross Profit
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1,295 3,555 276 3,831 290 3,541 £000 5,240
3,518 1,722
SECTION B CONTINUED QUESTION 6 At 1 March 2005 Victor Ltd had a debit balance of £23,450 on its Debtors Ledger Control Account and a credit balance of £17,450 on its Creditors Ledger Control Account. Both balances had been reconciled with the individual accounts. During March 2005 the following transactions took place: Credit sales Credit purchases Bad debt written off Increase in bad debt provision Sales returns Purchase returns Cash received from credit customers Cash sales Cash paid to credit suppliers Cash purchases Debit balance in the Sales Ledger set off against credit balance in the Purchase Ledger Discounts allowed Discounts received
£ 19,670 17,320 450 2,000 523 187 18,478 1,450 16,425 850 650 620 385
REQUIRED (a) Prepare the Debtors Ledger Control Account and the Creditors Ledger Control Account of Victor Ltd for March 2005. (10 marks) (b) At 31 March 2005 the individual suppliers accounts had a net total balance of £17,773 and the individual customers accounts had a net total balance of £23,499. Suggest the most likely reasons for these differing from those calculated in (a) above. (4 marks) (c) Give 2 important reasons for having Debtors and Creditors Ledger Control Accounts. (6 marks) (Total 20 marks)
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Model Answer for Question 6 (a) Opening balance Credit sales
Debtors Control Account £ 23,450 Bad debts 19,670 Sales returns Cash received Contra Discounts allowed Closing balance (R) 43,120
£ 450 523 18,478 650 620 22,399 43,120
Creditors Control Account £ Purchase returns Cash paid Contra Discounts received Closing balance (R)
187 16,425 650 385 17,123 34,770
Opening balance Credit purchases
£ 17,450 17,320
34,770
NO marks for closing figures if aliens included (b) Individual debtors Debtors Control Account
£ 23,499 22,399 1,100
Individual creditors Creditors Control Account
£ 17,773 17,123 650
Excess of individual balances suggests that the contra item has not been recorded in the individual accounts. This would reconcile the creditors. The bad debt may not have been recorded in the individual account. This with the contra reconciles the debtors (650 + 450 = £1,100). (c) Prevention of fraud, location of errors, control of total credit, preparation of interim accounts.
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