LCCI International Qualifications
Book-keeping and Accounts Level 2
Model Answers Series 2 2009 (2006)
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Book - Keeping and Accounts Level 2 Series 2 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 LCCI International Qualifications. The contents of this this booklet are divided into 3 elements: (1)
Questions
– reproduced from the printed examination paper
(2)
Model Answers
– summary s ummary 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.
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QUESTION 1 The Trial Balance of M Mae at 31 January 2008 showed a difference which was posted to a suspense account. Draft final accounts for the year ended 31 January 2008 were prepared showing a net profit of £94,480. The following errors were subsequently discovered: (1) The sales sales journal had been undercast by £4,000 (2) Repairs to a machine amounting to £980 had been charged to the machinery account (3) Purchases, from P Wong, amounting to £1,530, had been received on 31 January 2008 and included in the closing stock on that date, but the invoice had not been entered in the purchases journal (4) Sales of £900 to C Choo Choo had been debited to S Chung (5) A payment of £350 for telephone expenses had been entered on the the debit side of the telephone account as £550 (6) A cheque for £3,000 in respect of rent received had only been entered in the cash book.
REQUIRED (a) Show the the journal entries necessary to correct the above errors. Narratives are NOT required. (12 marks) (b) Prepare the Suspense Account to correct the above errors. (c)
(5 marks)
Calculate the revised net profit for the year year ended 31 January 2008 by showing the effects of the above adjustments. (6 marks)
(d) What is meant by the term ‘errors of reversal’? Give an example to support your answer. answer. (2 marks) (Total 25 marks)
MODEL ANSWER TO QUESTION 1 (a)
Suspense Sales
£
£
DR
CR
4,000 4,000
Machine repairs Machinery
980 980
Purchases P Wong
1,530 1,530
C Choo S Chung
900
Suspense Telephone
200
900
200
Suspense Rent received
3,000 3,000
(b)
Suspense Account £ Sales Telephone Rent received
(c)
4,000 200 3,000 7,200 £
Original net profit Add sales Add telephone Add rent
received
£ Bal b/d (difference)
7,200
7,200 £ 94,480
4,000 200 3,000 7,200 101,680
machinery repairs Less purchases Less
Revised net profit
980 1,530 2,510 99,170
(d) The correct accounts are used, but the entire entry is reversed. E.g. fixtures & fittings were purchased on credit, but incorrectly debited to the creditors account and credited to fixtures & fittings account.
QUESTION 2 M Lee has not not maintained complete accounting records. The following information is available at 31 December: 2006 2007 £ Stock Rates prepaid Equipment at NBV Creditors Wages accrued Trade debtors Motor vehicles at NBV Bank loan (repayable 2012) Premises at cost
£
6,450 750 74,400 16,830 1,350 18,750 45,600 105,000 127,800
11,730 1,110 81,600 27,960 2,010 26,100 44,400 66,000 153,600
The following is a summary of the bank account for the year ended 31 December 2007: Receipts Balance at 1 January 2007 Debtors Cash paid into bank Balance at 31 December 2007
£
Payments
52,950 101,520 45,240 31,050
£
Creditors Extension to freehold premises Insurance Bank loan repayments (including interest) Rates Purchase of motor vehicle Purchase of equipment
230,760
43,860 25,800 67,200 49,200 3,900 19,200 21,600 230,760
Cash receipts and payments in the year ended 31 December 2007 were: Receipts Balance at 1 January 2007 Debtors Rent Cash sales Sale of motor vehicle
£ 7,500 10,920 4,500 131,430 6,000
Payments Stationery Drawings Cash purchases Paid into bank Motor vehicle expenses Wages
£ 2,550 4,800 48,690 45,240 9,030 24,900
The following information was also available at 31 December 2007: (1) During the year year ended 31 December December 2007, M Lee took goods from the business business for his own private use, valued at £5,000 cost price (2) The motor vehicle was sold on 1 January 2007. The valuation of the vehicle at 31 December 2006 was £5,600.
REQUIRED Prepare the following for M Lee: (a) Trading and Profit & Loss Account for the year ended 31 December 2007.
(13 marks)
(b) Balance Sheet at 31 December 2007.
(12 marks) (Total 25 marks)
MODEL ANSWER TO QUESTION 2 (a)
M Lee Trading and Profit & Loss Account for the year ended 31 December 2007 £
£
Sales (Cash 131,430 + Credit 119,790) [1] cost of goods sold Opening stock Add Purchases (Cash 48,690 + Credit 54,990) [2]
£ 251,220
Less
Less
Drawings
Less
Closing stock
6,450 103,680 5,000
98,680 105,130 11,730
Gross profit Rent received Add : Less
Profit on sale of vehicle (6,000 – 5,600)
93,400 157,820 4,500 162,320 400 162,720
expenses:
Stationery
2,550
Wages (24,900 − 1,350 + 2,010) Motor expenses Insurance
25,560 9,030 67,200
Bank loan interest (66,000 + 49,200 – 105,000)
10,200
Rates (3,900 + 750 − 1,110) Depreciation: Equipment (74,400 + 21,600 – 81,600) Motor Vehicles (45,600 + 19,200 – [44,400 + 5,600]) Net profit Workings [1] 26,100 - 18,750 + 10,920 + 101,520 = 119,790 [2] 43,860 – 16,830 + 27,960 = 54,990
3,540
14,400
14,800 147,280 15,440
QUESTION 2 CONTINUED (b)
M Lee Balance Sheet at 31 December 2007 £
£
Fixed Assets Premises at cost Equipment at NBV Motor vehicles at NBV Current Assets Stock Debtors Prepayment Cash
£ 153,600 81,600 44,400 279,600
11,730 26,100 1,110 25,140 64,080
Less
Liabilities due within one year Creditors Wages accrued Bank overdraft
27,960 2,010 31,050
61,020
Working capital/Net Current assets
3,060 282,660
Less
Liabilities due after more than one year Long term loan (due 2012)
Financed by Opening capital Net profit for the year Less: Drawings Cash Goods
66,000 216,660
211,020 [1] 15,440 4,800 5,000 9,800 5,640 216,660
Workings [1] 127,800 + 74,400 – 16,830 – 1,350 + 750 + 6,450 + 45,600 – 105,000 + 18,750 + 7,500 + 52,950 = 211,020
QUESTION 3 The following balances were extracted from the books of Mae Ltd., after completion of the Trading, Profit & Loss and Appropriation Account for the year ended 31 December 2007: £ Goodwill Equipment at cost Motor vehicles at cost Trade debtors Trade creditors Stock at 31 December 2007 Bank General reserve
10,000 20,000 40,000 52,000 20,050 30,500 8,750 Dr 10,000
Additional information was also available: (1) A Doubtful Debts Provision of 5% of trade debtors was created on 31 December 2007. (2) The authorised share capital of the company is 50,000 Ordinary Shares of £1 each. These have all been issued and fully paid at £1.10 a share. (3) The directors have proposed a dividend of £0.15 per share in respect of the year ended 31 December 2007. (4) The motor vehicles and equipment belonging to the company were all purchased on 1 January 2005. The depreciation policy of the company is as follows: (i) (ii)
Equipment – Straight line over 5 years years assuming a 10% residual residual value Motor vehicles – 25% per annum reducing reducing balance.
(5) During 2007 Mae Ltd had taken out a bank loan for £20,000. This was to be repaid in equal amounts over 10 years commencing 1 November 2007, but no payment has yet been paid.
REQUIRED (a) Using the above list of balances, and the additional information provided, prepare the Balance Sheet, in vertical format, of Mae Ltd at 31 December 2007. None of the balances in the above list requires amendment, as a result of the additional information, although others will need to be created. The retained profit represents the balancing figure. (21 marks) (b) Using the Balance Sheet prepared in part (a) above, calculate the following for Mae Ltd at 31 December 2007: (i)
Current (Working Capital) ratio
(2 marks)
(ii)
Acid Test (Liquidity) ratio.
(2 marks) (Total 25 marks)
MODEL ANSWER TO QUESTION 3 (a) Mae Ltd Balance Sheet at 31 December 2007 Fixed assets
Equipment Motor vehicles
Cost
Accumulated depreciation
£
£
20,000 40,000 60,000
Net book value £
10,800 [W2] 23,125 [W1] 33,925
9,200 16.875 26,075 10,000
Goodwill Current assets Stock Trade debtors Less: Doubtful debts provision
30,500 52,000 2,600 49,400 8,750 88,650
Bank Creditors: amounts due within one year Trade creditors 20,050 Proposed dividends 7,500 [W3] Loan repayment (20,000 x10%) 2,000
29,550 Net current assets
59,100 95,175
Creditors: amounts due after more than one year Bank loan (20,000 - 2,000)
18,000 77,175
Capital and reserves Authorised, issued and fully paid share capital
£
50,000 £1 Ordinary Shares Share premium General reserve Profit & Loss
50,000 5,000 [W4] 10,000 12,175 77,175 £
40,000 x 25% = 30,000 x 25% = 22,500 x 25% =
10,000 7,500 5,625 23,125
£ 50,000 x £0.15 =
7,500
£ less:
10%
per year = x 3 years =
20,000 2,000 18,000 3,600 10,800 £
50,000 x £0.10 = 5,000
MODEL ANSWER TO QUESTION 3 CONTINUED £ [W1]
40,000 x 25% = 30,000 x 25% = 22,500 x 25% =
10,000 1 7,500 1 5,625 1 23,125
£ [W2] less:
per year = 1 (for 3 yrs) x 3 years =
£ 7,500
£ [W4]
[W3]
50,000 x £0.15 = 1 1
(b) (i)
Current (Working Capital) ratio
88,650 29,550
=3:1
Acid test (Liquidity) ratio
58,150 29,550
= 1.97 : 1
(ii)
10%
20,000 2,000 1 18,000 3,600 1 10,800
50,000 x £0.10 = 5,000 1 1
QUESTION 4 On 1 May 2008, Ting plc consigned 100 cases of computer components to its agent, Choo of Hong Kong, at a cost of £80 per case. An agreement between the two companies stated that Choo was entitled to receive a commission of 5% on sales plus a del credere commission of 2% on sales. On 1 May 2008, transport and insurance costs of £360 and £90 respectively, were paid by Ting plc. Choo received the consignment on 20 June 2008 and paid import duties of £160 and landing charges of £70. On 31 July 2008, Choo sold 90 of the cases of computer components on credit at £190 per case, to Wong Ltd. Choo received all of the money due from Wong Ltd on 31 August 2008 with the exception of a disputed invoice for £120, which Choo decided to write write off as a bad debt. On 31 August 2008, Choo transferred any money due to Ting plc on this date less any relevant costs. The financial years for both Ting plc and Choo end on 31 August.
REQUIRED (a) Prepare the following in the books of Ting plc: (i)
the Consignment to Choo Account
(ii)
the personal account of Choo.
(b) Prepare, in the books of Choo, the account of Wong Ltd. Note:
(16 marks) (6 marks) (3 marks)
Dates are not required in the preparation of the above ledger accounts. (Total 25 marks)
MODEL ANSWER TO QUESTION 4 (a) (i) Consignment to Choo Account £ Goods on consignment 100 100 x £80 £80 Bank: Transport Insurance Choo: Duties Landing Choo commission: Sales (17,100 x 5%) Del Credere (17,100 x 2%) Profit & Loss Stock b/d
8,00 8,000 0 360 90 160 70
£
Choo (Sales) (90 x £190) Stoc Stock k c/d c/d
17,100 868 868
8680* x 10 100 *(8,000 + 360 + 90 + 160 + 70)
855 342 8,091 17,968 868
_____ 17,968
(ii) Choo £ Cons Consign ignmen mentt A/c A/c
17,10 17,100 0
Account £ Cons Consig ignme nment nt A/c A/c Duties Landing Sales commission Del Credere Bank
160 70 855 342 15,673 17,100
17,100 (b) Wong Ltd £ Ting Ting plc plc
17,1 17,100 00 17,100
£
Bad Bad debt debts s
120 120 _____ ___ __
Bank Bank/C /Cas ash h 17,100
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