Model Answers Series 4 2008 Hong Kong (3512)

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LCCI International Qualifications

Accounting Level 3

Accounting Level 3 (Hong Kong) Series 4 2008

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 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.

© EDI 2009 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.

3512/4/08/MA Page 1 of 13

QUESTION 1 The Trial Balance of Colne plc at 31 March 2008 was as follows: £000 £000 Purchases/Sales 4,275 7,376 Debtors/Creditors 820 570 Land and buildings at cost 1,400 Machinery at cost 3,720 General expenses 810 Administrative expenses 1,020 Selling expenses 710 Accumulated depreciation on buildings at 1 April 2007 144 Accumulated depreciation on machinery at 1 April 2007 1,420 10% Preference shares of £1.00 each 500 Ordinary shares of £0.25 each 1,500 15% Debentures (redeemable 2017) 600 Stock at cost on 1 April 2007 720 Interim dividends - preference shares 25 - ordinary shares 120 Retained earnings at 1 April 2007 710 Bank overdraft 800 13,620 13,620 The following additional information is available: (1) Land and buildings at cost included land costing £600,000 (2) Buildings are depreciated at 3% per year on a straight line basis (3) Machinery is depreciated at 20% per year on a reducing balance basis (4) Adjustments are necessary for prepaid administrative expenses of £8,000 and accrued selling

expenses of £11,000 (5) Stock at 31 March 2008 cost £775,000 (net realisable value £1,085,000) (6) Provisions have to be made for accrued debenture interest, the final preference dividend and a

final ordinary dividend of £0.03 per share. REQUIRED (a) Prepare the Trading, Profit and Loss and Appropriation Account of Colne plc for the year ended

31 March 2008. (12 marks)

(b) Prepare the Balance Sheet of Colne plc at 31 March 2008.

(9 marks)

The bank manager of Colne plc, after seeing the above accounts, has demanded an urgent meeting with the directors. REQUIRED (c) Give two possible reasons why the bank manager might have demanded a meeting with Colne plc’s directors.

(4 marks)

(Total 25 marks)

3512/4/08/MA Page 2 of 13

MODEL ANSWER TO QUESTION 1 (a)

Colne plc Trading, Profit and Loss and Appropriation Account

for the year ended 31 March 2008 £000 £000 Sales 7,376 Less Cost of goods sold: Opening stock 720 Purchases 4,275 4,995 Less Closing Stock 775 4,220

Gross profit 3,156 Less General expenses 810 Administrative expenses (1,020 – 8) 1,012 Selling expenses (710 + 11) 721 Debenture interest (0.15 x 600) 90

Depreciation – Buildings [0.03(1,400 – 600)] 24 – Machinery [0.20(3,720 – 1,420)] 460 3,117

Net profit 39 Less Preference dividend – Interim 25 – Final [(0.10 x 500) – 25] 25

Ordinary dividend – Interim 120 – Final (1,500 x 4 x 0.03) 180 350

Retained loss for the year (311) Retained earnings brought forward 710 Retained earnings carried forward 399

3512/4/08/MA Page 3 of 13

MODEL ANSWER TO QUESTION 1 CONTINUED (b)

Colne plc Balance Sheet at 31 March 2008

£000 Cost £000

Depreciation £000 NBV

Tangible Fixed Assets Land and buildings 1,400 168 1,232 Machinery 3,720 1,880 1,840 5,120 2,048 3,072 Current Assets Stock 775 Debtors 820 Prepayments 8 1,603 Creditors: Amounts due within one year Creditors 570 Accruals (11 + 90) 101 Proposed dividends (25 + 180) 205 Bank overdraft 800 1,676 Net Current Liabilities (73) 2,999 Creditors: Amounts due after one year 15% Debentures 600 2,399 £000 Share Capital and Reserves Ordinary shares of £0.25 each 1,500 Preference shares of £1.00 each 500 Retained earnings 399 2,399

(c) (i) High overdraft yet high ordinary dividends (ii) High overdraft and low profitability (iii) High overdraft and poor liquidity (iv) No overdraft interest explicitly disclosed in the accounts

3512/4/08/MA Page 4 of 13

QUESTION 2 The following information relates to Genica, a sole trader: (1) During the year ended 30 April 2008 sales, all on credit, were £250,000. All purchases were also on credit (2) Sales included a mark-up of 25% (3) For the year ended 30 April 2008 administration costs were £15,000 (4) At 30 April 2008 closing stock represented 36.5 days sales and this was twice the value of

opening stock (5) The debtors’ collection period at 30 April 2008 was 50 days and creditors represented 30 days’

purchases (6) The working capital ratio at 30 April 2008 was 1.4:1 (7) The fixed assets were equal to 30% of the net assets at 30 April 2008 (8) Drawings were equal to 80% of the net profit for the year. REQUIRED (a) Prepare, for Genica, in as much detail as possible: (i) The Trading and Profit & Loss Account for the year ended 30 April 2008. (8 marks) (ii) The Balance Sheet at 30 April 2008. The bank overdraft and opening capital are both

balancing figures. (13 marks)

(b) State two benefits of maintaining double-entry accounting records. (4 marks)

(Total 25 marks)

Note: Where necessary, all your calculations should be to the nearest £1.

3512/4/08/MA Page 5 of 13

MODEL ANSWER TO QUESTION 2 (a) (i) Genica Trading and Profit & Loss Account for the year ended 30 April 2008

£ £ % Sales 250,000 125 Opening stock (half of closing) 10,000 Purchases [R] 210,000 220,000 Closing stock (250,000/365 x 36.5 x 0.80) 20,000 200,000 100 Gross Profit 50,000 25 Administration costs 15,000 Net Profit 35,000 (ii) Genica

Balance Sheet at 30 April 2008 £ £ Fixed Assets (W1) 6,642 Current Assets Stock 20,000 Debtors (250,000/365 x 50) 34,247 54,247 Current Liabilities Creditors (210,000/365 x 30) 17,260 Bank [R] 21,488 38,748 Net Current Assets 15,499 Net Assets (W1) 22,141 Financed by: £ Capital Opening capital [R] 15,141 Net profit 35,000 50,141 Drawings (0.80 x 35,000) 28,000 22,141

3512/4/08/MA Page 6 of 13

MODEL ANSWER TO QUESTION 2 CONTINUED W1 Net Current Assets must be 70% of Net Assets if fixed assets represent 30% of net assets.

£ Therefore Net Assets = 15,499/0.70 22,141 Less: Net Current Assets 15,499 Fixed Assets 6,642

(b) Any two reasonable suggestions, e.g.

Provides an arithmetical check on entries Makes it easier to prepare final accounts Can provide an immediate check on what is owed by debtors and what is owed to creditors Makes it more difficult to commit fraud

3512/4/08/MA Page 7 of 13

QUESTION 3 The Balance Sheets of JK plc at 30 September 2007 and 30 September 2008 were as follows: 2007 2008 £000 £000 £000 £000 Tangible Fixed Assets Cost 180 270 Less depreciation 56 90 124 180 Current Assets Stock 42 50 Debtors 33 40 Cash 11 - a 86 90 Creditors: Amounts due within one year Creditors 24 33 Proposed dividend 26 28 Bank overdraft 17 29 67 90 Net Current Assets 19 - a 143 180 Creditors: Amounts due after more than 1 year 15% Debentures (repayable 2010) 60 80 83 100 Represented by: £000 £000 Share Capital and Reserves Ordinary shares of £1 each 20 25 Share premium 8 10 Profit and loss 55 65 83 100 Notes: (1) The additional debentures were issued on 1 October 2007 (2) No interim dividends were paid during the year ended 30 September 2007 or the year ended 30 September 2008 (3) There were no fixed asset disposals during the year ended 30 September 2008. REQUIRED For JK plc, for the year ended 30 September 2008: (a) Calculate the operating profit.

(3 marks) (b) Reconcile the operating profit with the net cash inflow from operating activities.

(5 marks) (c) Prepare the Cash Flow Statement in accordance with FRS1 (Revised).

(9 marks) (d) Comment upon the financial position revealed by the Cash Flow Statement and the Balance

Sheets. (8 marks)

(Total 25 marks)

3512/4/08/MA Page 8 of 13

MODEL ANSWER TO QUESTION 3 (a) Operating Profit £000

Profit & loss change (65 – 55) 10 Debenture interest (0.15 x 80) 12 Dividend 28 50

(b) Reconciliation £000 Operating profit 50 Depreciation (90 – 56) 34 Increase in stocks (50 – 42) (8) Increase in debtors (40 – 33) (7) Increase in creditors (33 – 24) 9 Net cash inflow from operating activities 78

(c)

JK plc Cash Flow Statement for the year ended 30 September 2008

£000 £000 Net cash inflow from operating activities 78 Returns on investment and servicing of finance Interest paid (12) Capital expenditure and financial investment Purchase of fixed assets (270 - 180) (90) Equity dividends paid (26) Net cash outflow before financing (50) Financing Issue of ordinary shares [(25 + 10) – (20 + 8)] 7 Issue of debentures (80 - 60) 20 27 Net decrease in cash (29 - 17 + 11) (23)

(d) Financial Position Liquidity has deteriorated Debentures are repayable in 2010 Shares and debentures have been issued to finance the additional fixed assets Hopefully the investment in fixed assets will increase cash flow in the future Could be asked whether increasing the dividend is appropriate.

3512/4/08/MA Page 9 of 13

QUESTION 4 The accounts of Chang Ltd, in respect of the year ended 30 June 2008, revealed a gross profit of £305,600, a net profit of £141,860 and net current assets of £74,900. Stocktaking had taken place on 7 July 2008. The stock counted on that day cost £66,000 and this figure had been used in the preparation of the accounts as stock of goods for resale. During the week’s delay, the following transactions had taken place: (1) Sales, at selling price, £36,000, of which £2,700 was still in the company’s warehouse on 7 July (2) Purchases, at cost, £6,250, all received (3) Returns inwards, at selling price £600, all received (4) Returns outwards, at cost £900, all despatched. Chang Ltd calculates selling prices by adding 50% to cost. In addition it was discovered that: (5) Goods on sale or return had been invoiced to a customer for £330. This customer has still to

decide whether or not to buy these goods (6) Included in the stocktaking were damaged goods costing £1,800. These were sold in August

2008 for £1,900 after repairing them at a cost of £200 (7) One of the stocksheets used on 7 July 2008 had been over-added by £1,500 (8) Included in the £66,000 was stationery stock costing £4,000. It was estimated that between 1 July and 7 July 20% of the value of the stationery stock existing at 30 June would have been

used. It is company policy to include stationery stock in the stock valuation. REQUIRED (a) Calculate the corrected valuation of the stock of goods for resale of Chang Ltd at 30 June 2008.

(14 marks) (b) Using the increase/decrease in stock valuation derived from your answer to (a) above and any

other necessary adjustments, calculate the corrected figures for Chang Ltd in respect of gross profit and net profit for the year ended 30 June 2008 and the net current assets at 30 June 2008.

(11 marks)

(Total 25 marks)

3512/4/08/MA Page 10 of 13

MODEL ANSWER TO QUESTION 4 (a) £ Original stock valuation 66,000 Add Deduct £ £ 1 Sales 36,000 Less: 2,700 33,300 x 100 22,200 150 2 Purchases 6,250 3 Returns inwards 600 x 100 400 150 4 Returns outwards 900 5 Sale or return 330 x 100 220 150 6 Damaged goods: Cost 1,800 Less NRV (1,900 – 200) 1,700 100 7 Overadded stock sheet 1,500 8 Stationery stock 4,000 23,320 12,250 + 11,070 Revised stock valuation 77,070

(b) Gross Net Net Current Profit Profit Assets £ £ £ Original 305,600 141,860 74,900 Add: Stationery stock (4,000 ÷ 0.8) - 5,000 5,000 Stock of goods for resale 11,070 11,070 11,070 316,670 157,930 90,970 Less: Sale or return 330 330 330 316,340 157,600 90,640

3512/4/08/MA Page 11 of 13

QUESTION 5 Cherian plc has an Authorised Share Capital consisting of 10,000,000 0rdinary Shares of £0.25 each and 1,000,000 6% Preference Shares of £1 each. The following figures were extracted from the Balance Sheet at 30 September 2008: £000 4,000,000 Ordinary Shares of £0.25 each 1,000 600,000 6% Preference Shares of £1 each 600 Share premium 256 Revaluation reserve 300 Profit & loss 340 10% Debentures (repayable 2010) 500 For the year ended 30 September 2008 the directors proposed a dividend payment to ordinary shareholders of £0.03 per share. The net profit for the year ended 30 September 2008 was equal to the value of the proposed dividends. No interim dividends were paid during the year. REQUIRED (a) Calculate the net operating profit of Cherian plc for the year ended 30 September 2008.

(3 marks) In October 2008 the directors decided to: (1) Make a capitalisation issue of 4 ordinary shares for every 5 ordinary shares in issue, making

maximum use of non-distributable reserves (2) Make a rights issue at £0.30 per share of all the remaining unissued ordinary shares (3) Issue a further 200,000 preference shares at a premium of £0.05 (4) Redeem the 10% Debentures early at a premium of 5 per cent. These debentures were originally

issued at a premium of 5 per cent (5) Buy a fleet of new vehicles from MN Ltd at a cost of £300,000, paying an immediate 10 per cent deposit, with the balance becoming due on 1 March 2009. REQUIRED (b) Prepare Journal entries (without narratives) to record the above transactions. These transactions

took place in the order shown in (1) to (5) above. (17 marks)

(c) Calculate the revised balance on the company’s bank account after completion of the above

transactions. The balance appearing in Cherian plc’s Balance Sheet at 30 September 2008 was £74,000.

(5 marks)

(Total 25 marks)

3512/4/08/MA Page 12 of 13

MODEL ANSWER TO QUESTION 5 (a)

Net Operating Profit £000 Debenture interest (500 x 10%) 50 Preference dividend (600 x 6%) 36 Ordinary dividend (4,000 x 0.03) 120 206

(b) Journal Entries Dr Cr £000 £000

[1] Share premium 256 Revaluation reserve 300 Profit and loss [R] 244 Ordinary share capital (1,000 x 0.8) 800

[2] Bank [(10,000 - 4,000 - 3,200) x 0.3] 840 Ordinary shares (2,800 x 0.25) 700 Share premium (2,800 x 0.05) 140

[3] Bank (200 x 1.05) 210 Preference share capital 200 Share premium (200 x 0.05) 10

[4] Debentures 500 Share premium (500 x 5%) 25 Bank (500 x 1.05) 525

[5] Vehicles 300 MN Ltd 300 MN Ltd 30 Bank 30 Alternative Vehicles 300 MN Ltd 270 Bank 30

3512/4/08/MA Page 13 of 13 © Education Development International plc 2009

MODEL ANSWER TO QUESTION 5 CONTINUED (c)

£000 £000 Opening balance 74 Journal [2] 840 Journal [3] 210 1,124 Journal [4] 525 Journal [5] 30 -555 Closing balance 569

3512/4/08/MA Page 13 of 13 © Education Development International plc 2009

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