Accounting Level 3
M o de de l An s w e r s Series 2 2006 (Code 3001)
1
ASE 3001 2 06 1
Accounting Level 3 Series 2 2006
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 ai d 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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SECTION A (Answer Questions 1 and 2 in Section A
Compulsory)
QUESTION 1 The Sales Ledger Control Account of Brodsworth showed a debit balance of £ 78,784 on 31 January 2006. On that date, the list of balances extracted from the Sales Ledger had a net total of £ 79,200 debit. Neither the Sales Ledger Accounts nor the Purchase Ledger Accounts are treated as part of Brodsworth’s double entry records. The auditors discovered the following errors:
(1) An invoice for £ 60 recorded in the Sales Day Book had not been posted to the customer’s account in the Sales Ledger (2) A page in the Sales Day Book had been under-added by £ 1,000 (3) A sales invoice for £ 926 had been completely omitted from the books (4) A debit balance of £ 300 in the list of Sales Ledger balances had been wrongly listed as a credit balance (5)
Contras of £ 400 had been correctly recorded in the Purchase Ledger and Sales Ledger Accounts but no entries had been made in either Control Account
(6)
The discount allowed column in the Cash Book had been over-added by £26
(7)
A cheque for £ 1,500 received from a customer had been entered in the customer’s account as £1,050
REQUIRED (a) Prepare Journal entries (without narratives) showing the corrections necessary to the double entry records. (8 marks) (b) Calculate: (i) the corrected Sales Ledger Control Account balance (ii) the corrected net total of the balances extracted from the Sales Ledger (9 marks) (c) Calculate the change to Brodsworth’s net profit as a result of the auditor’s discoveries (3 marks) (Total 20 marks)
MODEL ANSWER TO QUESTION 1
SECTION A Questions 1 and 2 MUST be answered
(a) Journal Sales Ledger Control Sales Sales Ledger Control Sales Purchase Ledger Control Sales Ledger Control Sales Ledger Control Discounts Allowed
£ 1,000
£ 1,000
926 926 400 400 26 26
(b) (i) Sales Ledger Control Account balance per question ADD Sales Sales Discounts Allowed LESS Purchase Ledger Control Account Corrected Sales Ledger Control Account balance
£ 78,784 1,000 926 26 (400) 80,336
(ii) Net Sales Ledger Account balances per question ADD Invoice omitted Invoice omitted Wrongly extracted balance (2 x 300) LESS Wrongly entered cheque (1,500 – 1,050) Corrected net total of Sales Ledger balances
£ 79,200 60 926 600 (450) 80,336
£ (c) Change in net profit Sales under added Sales invoice omitted Discounts Allowed over-added Increase in net profit
+1,000 +926 +26 1,952
SECTION A CONTINUED QUESTION 2 The accountant of Buxton received the following print out of the Product X Stock Account for the year ended 31 December 2005. All the figures printed were correct, as were all the calculations. However, most of the figures (indicated by ’s) were missing. Buxton uses the weighted average cost method for valuing stock. *
DATE
UNITS
PRICE PER UNIT £
VALUE £
2005 1 Jan
Balance b/d
4 Feb
Creditors
*
6,000 *
20 Mar
15 Apr
Cost of goods sold
Creditors
Creditors
Cost of goods sold
*
*
*
*
2,400 *
3 July
Creditors
3,000 *
10 Aug
19 Sept
2 Oct
Cost of goods sold
Cost of goods sold
Creditors
4.50 *
*
25 June
*
*
12,000 18 May
4.00
3,000
4.50 *
4.80
24,000 *
*
1,350 *
*
*
*
*
65,520
*
*
*
54,600
*
*
5.00
*
*
*
*
*
*
*
*
*
*
1,000 *
*
5.30
*
*
5.06
*
5 Nov
Cost of goods sold
*
*
31 Dec
Balance c/d
*
*
6,072 *
SECTION A CONTINUED QUESTION 2 CONTINUED REQUIRED (a) Copy the Product X Stock Account into your answer book, replacing the appropriate figures for units, price and value.
’s with the (11 marks)
You are given the following ratios relating to the most recent accounts of three companies: HALLAM plc
SHEFFIELD plc
GLAPWELL plc
Net profit to sales
10%
5%
4%
Return on capital employed
15%
35%
36%
19 times
26 times
32 times
Debtors’ collection
0 days
6 days
0 days
Creditors’ settlement
51 days
22 days
29 days
Stock turnover
REQUIRED (b) Using the ratios given above and the background information given below, identify which company is Company A, which company is Company B and which company is Company C. Give reasons for each of your choices. (9 marks) Company A is a food supermarket, operating from rented stores and selling only for cash. Company B is a food supermarket, which also sells a small range of clothes, (which offer a higher mark up than food). It offers some credit and operates from rented premises. Company C is a food supermarket, which also sells a large range of clothes. It sells only for cash and owns its own premises. It is currently experiencing cash flow difficulties. (Total 20 marks)
MODEL ANSWER TO QUESTION 2 (a) Product X Stock Account Year Ended 31 December 2005 DATE
UNITS
2005 Jan 1 Feb 4
Balance b/d Creditors
Mar 20
Cost of goods sold
Apr 15
Creditors
May 18
Creditors
June 25
Cost of goods sold
July 3
Creditors
Aug 10
Cost of goods sold
Sept 19
Cost of goods sold
Oct 2
Creditors
Nov 5 Dec 31
Cost of goods sold Balance c/d
PRICE PER UNIT £
6,000 6,000 12,000 300 11,700 300 12,000 2,400 14,400 2,400 12,000 3,000 15,000 3,000 12,000 200 11,800 2,950 14,750 1,200 13,550
(b) Company A = Glapwell Ltd •
Selling food only would lead to highest stock turnover
•
Selling food only would give lowest net profit to sales
•
Rented stores could give high return on capital employed
•
Cash sales gives 0 days debt collection
4.00 5.00 4.50 4.50 4.50 4.50 4.50 4.80 4.55 4.55 4.55 6.80 5.00 5.00 5.00 5.00 5.00 5.30 5.06 5.06 5.06
VALUE £ 24,000 30,000 54,000 1,350 52,650 1,350 54,000 11,520 65,520 10,920 54,600 20,400 75,000 15,000 60,000 1,000 59,000 15,635 74,635 6,072 68,563
SECTION A CONTINUED MODEL ANSWER TO QUESTION 2 CONTINUED
(b)
Company B = Sheffield plc •
The only company offering credit and therefore has a debt collection period
•
As it sells only a few clothes it has the middle stock turnover ratio
•
As it sells only a few clothes it has the middle net profit to sales ratio
•
Selling from rented stores has generated a relatively high return on capital employed
Company C = Hallam plc •
The only company with cash flow problems. It has the longest creditors’ settlement period
•
Selling a lot of clothes leads to the lowest stock turnover ratio
•
The only company owning its own stores. It has the lowest return on capital employed
•
Selling a lot of clothes gives t he highest net profit to sales ratio
SECTION B (Answer any THREE questions from Section B) QUESTION 3 The following are extracts from the Balance Sheet of Selby plc at 31 December 2005: £ 000 CAPITAL AND RESERVES 20,000,000 Ordinary Shares of £ 0.25 each 1,200,000 10% Preference Shares of £ 1.00 each Share Premium Retained Earnings
5,000 1,200 1,400 700 8,300
CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR 15% Debentures
1,000
On 1 January 2006, the directors of Selby plc intend to raise £ 1,800,000 and invest it in a project which they believe will increase operating profit by £ 400,000 per year for the foreseeable future. They are considering three possible methods of raising the £ 1,800,000: (1) A rights issue of ordinary shares at £ 0.45 each (2) Issuing more 10% preference shares at £ 1.20 each (3) Issuing 15% Debentures at £ 0.90 for £ 1.00 nominal
REQUIRED (a) Prepare Journal entries (including narratives) showing the effect of each of the three possible ways of raising finance (10 marks) (b) Calculate the increase in earnings per ordinary share resulting from implementing methods (2) and (3) (6 marks)
The Managing Director of Selby plc has suggested two additional ways of raising the finance: (1) Making a bonus (capitalisation) issue of ordinary shares (2) Arranging a bank overdraft with a current rate of interest of 12% per year
REQUIRED (c) Briefly discuss the Managing Director’s suggestions (4 marks) (Total 20 marks)
MODEL ANSWER TO QUESTION 3
(a)
£ 000 1,800
(i)
Bank Ordinary Share Capital (1,800 ÷ 0.45 x 0.25) Share Premium (1,800 – 1,000) Issue of Ordinary Shares at £0.45
£ 000 1,000 800
(ii) Bank 10% Preference Share Capital (1,800 ÷ 1.2) Share Premium (1,800 – 1,500) Issue of Preference Shares at £1.20
1,800
(iii) Bank Share Premium (2,000 – 1,800) 15% Debentures (1,800/.90) Issue of Debentures at £0.90
1,800 200
1,500 300
2,000
(b) Increase in earnings per share: (i)
(400,000 – 150,000) / 20,000,000
= £ 0.013
(ii) (400,000 – 300,000) / 20,000,000
= £ 0.005
(c) (i) Converting reserves into share capital does not result in the receipt of cash, so the suggestion is inappropriate. (ii) A bank overdraft is currently cheaper than the debentures though this could change. A bank overdraft is repayable on demand so it could be dangerous to use an overdraft to finance a long term project.
SECTION B CONTINUED QUESTION 4 Following are the two most recent Balance Sheets of Thackley Ltd together with the most recent Income Statement: Thackley Ltd Balance Sheet as at 31 March 2005 £ FIXED ASSETS Tangible at cost Accumulated depreciation
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Creditors Proposed dividend NET CURRENT ASSETS
CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR Debentures
FINANCED BY: Ordinary Shares of £ 1.00 each Share Premium Retained earnings
£
£
78,000 24,200 53,800 112,500 166,300
Investments at cost CURRENT ASSETS Stock Debtors Bank
2006 £ 71,700 24,600 47,100 125,100 172,200
55,080 71,420 39,580 166,080
161,187 146,703 72,150 380,040
79,280 13,000 92,280
96,140 16,000 112,140 73,800 240,100
267,900 440,100
100,000 140,100
86,000 354,100
£ 50,000 12,000 78,100 140,100
£ 62,000 22,000 270,100 354,100
SECTION B CONTINUED QUESTION 4 CONTINUED Income Statement for Thackley Ltd Year Ended 31 March 2006 £ Sales Cost of sales Gross profit Distribution expenses Administrative expenses Net operating profit Debenture interest
64,000 37,000
Dividends paid and proposed Retained profit
£ 490,000 170,000 320,000 101,000 219,000 7,000 212,000 20,000 192,000
NOTES RELATING TO THE YEAR ENDED 31 MARCH 2006: (1) Tangible fixed assets costing £ 30,000 (accumulated depreciation £ 21,000) were sold for £ 5,000. The loss on disposal was included in administrative expenses. (2) A bonus (capitalisation) issue of 2,000 shares was made, utilising the share premium account and further shares were issued for cash. (3) Fixed asset investments costing £ 6,000 were sold for £ 7,000. The profit on disposal was deducted from administrative expenses. (4) Debentures were redeemed at par. REQUIRED (a) Prepare a statement reconciling the net operating profit for the year with the net cash inflow from operating activities (8 marks) (b) Prepare the Cash Flow Statement of Thackley Ltd for the year ended 31 March 2006 (12 marks) (Total 20 marks)
MODEL ANSWER TO QUESTION 4 (a) Reconciliation:
£ 219,000
Net operating profit Loss on disposal of tangible fixed assets (30,000 – 21,000) – 5,000
4,000
Profit on disposal of investments (7,000 – 6,000)
(1,000)
Depreciation (24,600 – 24,200 + 21,000)
21,400
Increase in stock (161,187 – 55,080)
(106,107)
Increase in debtors (146,703 – 71,420)
(75,283)
Increase in creditors (96,140 – 79,280)
16,860
NET CASH FLOW FROM OPERATIONS
78,870
(b) Thackley Ltd Cash Flow Statement year ended 31 March 2006
Net cash flow from operating activities (as above)
£
£
OF
78,870
Returns on investment and servicing of finance Debenture interest paid
(7,000)
Capital expenditure and financial investment Sale of investments
7,000
Sale of tangible fixed assets
5,000
Purchase of investments (125,100 – 112,500 + 6,000)
(18,600)
Purchase of tangible fixed assets (71,700 – 78,000 + 30,000)
(23,700)
Net cash outflow
(30,300)
Equity dividends paid (13,000 + 20,000 – 16,000)
(17,000) 24,570
Net cash inflow before financing Financing Issue of shares (62,000 – 50,000 – 2,000) + (22,000 – 12,000 + 2,000)
22,000
Repayment of debentures (100,000 – 86,000)
(14,000)
Net cash inflow Net increase in cash (72,150 – 39,580)
8,000 32,570
SECTION B CONTINUED QUESTION 5 Following is the summarised Consolidated Balance Sheet of Pickering Ltd and its subsidiary Goole Ltd at 31 December 2004: £ Tangible fixed assets 170,100 Goodwill on consolidation 18,000 Net current assets 112,200 300,300
Share Capital Retained earnings Minority interest
£ 100,000 176,300 24,000 300,300
Pickering Ltd acquired 80% of Goole Ltd’s ordinary shares on 1 January 2001. Pickering Ltd’s policy is to write goodwill off evenly over five years. Goole Ltd has an issued ordinary share capital of 20,000 £1.00 ordinary shares. Its retained earnings on 1 January 2001 were £36,000. No dividends have been paid or proposed by either Pickering Ltd or Goole Ltd since Goole Ltd became a subsidiary company. REQUIRED Calculate: (a) The goodwill arising on the acquisition of Goole Ltd
(3 marks)
(b) The total net profit made by Goole Ltd in the four years to 31 December 2004
(4 marks)
(c) The retained earnings of Pickering Ltd (alone) at 31 December 2004
(3 marks)
On 1 January 2005, Pickering Ltd acquired 70% of Maltby Ltd’s ordinary shares. Maltby Ltd has an issued ordinary share capital of 4,000 £1 ordinary shares. Its retained earnings at 1 January 2005 were £ 16,000. Following is the summarised Consolidated Balance Sheet of Pickering Ltd and its subsidiaries Goole Ltd and Maltby Ltd at 31 December 2005: £ Tangible fixed assets 248,100 Goodwill on consolidation 46,000 Net current assets 146,300 440,400
Share capital Retained earnings Minority interest
£ 100,000 302,600 37,800 440,400
SECTION B CONTINUED QUESTION 5 CONTINUED No dividends were paid or proposed by any group company in the year ended 31 December 2005. Goole Ltd’s net profit for the year was £10,500. REQUIRED Calculate: (d) The goodwill arising on the acquisition of Maltby Ltd
(3 marks)
(e) The net profit made by Maltby Ltd in the year ended 31 December 2005
(7 marks) (Total 20 marks)
MODEL ANSWER TO QUESTION 5 (a) Goodwill on the acquisition of Goole Ltd Goodwill at 31 December 2004 (1/5) Goodwill written off (4 x 18,000) Goodwill on acquisition
£
(b) Total net profit of Goole Ltd since acquisition Minority interest Share capital (20% x 20,000) Retained earnings (R)
£
Retained earnings at 31 December 2004 (5 x 20,000) Retained earnings at 1 January 2001 Total net profits since acquisition
(c) Retained earnings of Pickering Ltd at 31 December 2004 Retained earnings as per Balance Sheet LESS: Group share of Goole Ltd’s profits (0.80 x 64,000) ADD: Goodwill written off Retained earnings of Pickering Ltd
18,000 72,000 90,000
4,000 20,000 24,000 100,000 36,000 64,000
£ 176,300 51,200 125,100 72,000 197,100
(d) Goodwill on the acquisition of Maltby Ltd Goodwill attributable to Goole Ltd Goodwill attributable to Maltby Ltd (4/5) Goodwill written off (0.25 x 46,000) Goodwill on acquisition
£
(e) Net profit of Maltby Ltd since acquisition Minority interest Share Capital Goole Ltd (20% x 20,000) Share Capital Maltby Ltd (30% x 4,000) Retained earnings Goole Ltd [20,000 + (20% x 10,500)] Retained earnings Maltby Ltd (R)
£
Retained earnings at 31 December 2005 (10,500 x 10/3) Retained earnings at 1 January 2005 Net profit of Maltby Ltd - year to 31 December 2005
NIL 46,000 11,500 57,500
4,000 1,200 22,100 10,500 37,800 35,000 16,000 19,000
QUESTION 6 Blackpool has sold tables for many years. On 1 January 2005 he opened his first branch in Fleetwood. All double entry records are kept at the head office. All tables are purchased by head office and invoiced to Fleetwood at selling prices fixed to give a gross profit of 30% on sales revenue. All sales are for cash. In the year ended 31 December 2005, the following occurred: (1) Head office sent 480 wooden tables costing £ 91 each and 125 metal tables costing £ 63 each to the Fleetwood branch. (2) The Fleetwood branch returned 60 wooden tables and 5 metal tables to head office as they were the wrong colour. (3) At 31 December 2005, 50 wooden tables and 6 metal tables remained in stock at the Fleetwood branch. (4) Head office made the following payments on behalf of the Fleetwood branch: £ 5,000 rent for the fifteen month period to 31 March 2006; £ 50 per month for sundry expenses; £ 20 per week for the wages of part time staff; £ 300 per month for the manager’s salary. At 31 December 2005 it was discovered that no stock had been damaged, lost or stolen. The part time staff were entitled to a commission equal to 5% of sales revenue. The manager was entitled to a bonus equal to 4% of the branch net profit before charging the bonus. REQUIRED (a) Prepare the following accounts for the year ended 31 December 2005, as they would appear in the head office books of Bl ackpool: (i) Branch Stock (ii) Branch Stock Adjustment (iii) Branch Profit and Loss (18 marks) It is unusual for a retail outlet to have no stock losses. REQUIRED (b) Suggest one reason why no stock losses occurred at the Fleetwood branch.
(2 marks)
(Total 20 marks)
MODEL ANSWER TO QUESTION 6 (a) (i)
Goods sent to branch (480 x 91) Branch stock adj. (480 x 39) Goods sent to branch (125 x 63) Branch stock adj. (125 x 27)
Branch Stock Account
½ ½ ½ ½
£ 43,680 18,720 7,875 3,375
Goods sent to branch (60 x 91) Branch stock adj. (60 x 39) Goods sent to branch (5 x 63) Branch stock adj. (5 x 27) Bank (370* x 130) Bank (114** x 90) Balance c/d (50 x 130) Balance c/d (6 x 90)
½ ½ ½ ½ 2 2 ½ ½
73,650
£ 5,460 2,340 315 135 48,100 10,260 6,500 540 73,650
* 480-60-50 = 370 ** 125-5-6 = 114
(ii) Branch stock Branch stock Profit and loss (R) Balance c/d (50 x 39) Balance c/d (6 x 27)
(iii) Rent (5,000 x 12/15) Sundry (50 x 12) Wages (20 x 52) Salary (300 x 12) Comm. (0.05 x 58,360) Profit before bonus Bonus (0.04 x 5,350) Net profit
Branch Stock Adjustment Account £ ½ 2,340 Branch stock ½ 135 Branch stock 1 17,508 1 1,950 1 162 22,095
Branch Profit and Loss Account £ 1 4,000 Branch stock adjustment ½ 600 ½ 1,040 ½ 3,600 ½ 2,918 5,350 17,508 ½ 214 Profit before bonus 5,136 5,350
(b) Large items like tables are easy to count and difficult to lose or steal.
½ ½
£ 18,720 3,375
22,095
½
£ 17,508
17,508 5,350 5,350 (18 marks)
