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Nov 01, 2014

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Examiners Report and Model Answers for

Accounting

THIRD LEVELSeries 2 (Code 3001) 2000

LCCI Examinations Board

MH N T170 9 RNM >f2[[email protected]`6gBe3]E]2r2[Eo#

Accounting Third LevelSeries 2 2000

How to use this booklet Examiners Reports and Model Answers have been developed by LCCIEB to offer additional information and guidance to Centres, teachers and candidates as they prepare for LCCIEB examinations. The contents of this booklet are divided into 5 elements: (1) General assessment of overall candidate performance in this examination, providing general guidance where it applies across the examination as a whole reproduced from the printed examination paper summary of the main points that the Chief Examiner expected to see in the answers to each question in the examination paper constructive analysis of candidate error, areas of weakness and other comments that apply to each question in the examination paper where appropriate, additional guidance relating to individual questions or to examination technique

(2) (3)

Questions Model Answers

(4)

Examiners Report

(5)

Helpful Hints

Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success. The London Chamber of Commerce and Industry Examinations Board provides Model Answers to help candidates gain a general understanding of the standard required. The Board accepts that candidates may offer other answers that could be equally valid.

Note LCCIEB reserves the right not to produce an Examiners Report, either for an examination paper as a whole or for individual questions, if too few candidates were involved to make an Examiners Report meaningful.

LCCI CET 2000 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. Typeset, printed and bound by the London Chamber of Commerce and Industry Examinations Board. 1

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Accounting Third LevelSeries 2 2000GENERALThe overall standard was lower than expected although the level of presentation had in general improved. There was some evidence that candidates were entering for the examination without making adequate preparation, and in some cases indicating a lack of knowledge which they should possess at Second Level. Although the percentage passing is probably about average the number of Distinctions is definitely fewer than normal. Once again the main problem was that candidates omitted either sections of questions or complete questions resulting in the need to attain a higher percentage in those parts tried.

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Accounting Third Level Series 2 2000QUESTION 1 Carriers Ltd is a small private company making deliveries. Its Trial Balance as at 31 December Year 9 was as follows: All figures in the Trial Balance are in 000. Sales Motor expenses Debtors and creditors Delivery vehicles Depreciation on delivery vehicles General expenses Wages Rent of property Directors' salaries Office equipment Depreciation on office equipment Retained profits Bank overdraft Ordinary Share Capital 195 30 15 90 52 48 8 24 30 6 5 2 30 297 5 54

___ 297

Notes (1) The three delivery vehicles are depreciated at 20% per annum on cost. 1 (2) Office equipment is depreciated at 33 3 % per annum using the reducing balance method. REQUIRED (a) Prepare for Carriers Ltd, using vertical layout, the Profit & Loss Account for the year ended 31 December Year 9 and the Balance Sheet as at 31 December Year 9. (12 marks) Stewarts plc is a manufacturing concern that uses Carriers Ltd both to collect its raw materials and deliver its finished goods. The Trial Balance of Stewarts plc at 1 January Year 10 was as follows: 000 Leasehold buildings at cost Accumulated depreciation on leasehold buildings Machinery at cost Accumulated depreciation on machinery Office equipment at cost Accumulated depreciation on office equipment Motor vehicles at cost Accumulated depreciation on motor vehicles Stock raw material Stock work in progress Stock finished goods Debtors and creditors Bank Share Capital 1 Ordinary Shares Retained profit 320 60 450 130 110 40 90 30 40 45 55 90 15 ____ 1,215 000

125 600 230 1,215

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CONTINUED

QUESTION 1 CONTINUED On 1 January Year 10 Stewarts plc purchased all the shares in Carriers Ltd for 50,000. All the assets and liabilities were taken over at their net book value except the office equipment which was valued at 15,000. One of the three identical vehicles was immediately sold for 4,000 cash, which was immediately banked and Carriers Ltd's bank overdraft was paid off. At the time of the takeover Stewarts plc owed Carriers Ltd 10,000. REQUIRED (b) Prepare, in vertical format, the Consolidated Balance Sheet of Stewarts plc on 1 January Year 10 immediately after the above transactions were completed. Note the loss on disposal of the delivery vehicle is to be added to goodwill and the goodwill is to be immediately written off against retained earnings. (18 marks) Before taking over Carriers Ltd the directors of Stewarts plc made the following calculations in respect of Year 10: (1) The cost of delivery services provided by Carriers Ltd to Stewarts plc would have risen by 5% on the Year 9 figure of 120,000. (2) The sale of one delivery vehicle would reduce the drivers' wage bill by one-third. The wages expenses for Carriers Ltd in Year 9 included 6,000 for office staff who would now have to be paid 7,100 each year. The remaining wages in Year 9 were all for the vehicle drivers. (3) The cost of Carriers Ltd's motor expenses would be reduced by 25% and Stewarts plc would not carry goods for any other company. (4) The rent expense would cease as Stewarts plc already had the necessary office and garage space. General expenses would be reduced by 10,000 and the directors' salaries would cease. (5) Both the delivery vehicles and the office equipment would be depreciated on the same basis and at the same percentages as that used by Carriers Ltd. REQUIRED (c) Calculate the estimated net cost savings to Stewarts plc in Year 10 from taking over Carriers Ltd. (10 marks) (d) Calculate Stewarts plc return on its investment in the first year. (2 marks) (e) Assuming Stewarts plc aim for a minimum return of 20% on its initial investment, mention any two factors which might have influenced the decision other than the return on investment. (7 marks) (Total 49 marks)

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Model Answer to Question (a)

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Trading Profit & Loss Account for Carriers Ltd Year ending 31 December Year 9 000 Sales Less Petrol and parts General expenses Wages Directors' emoluments Rent Depreciation vehicles (9 x 2) Depreciation office equipment (30 - 6)/3 Net profit Brought forward Carried forward 30 52 48 24 8 18 8 000 195

188 7 5 12

Balance Sheet of Carriers Ltd as at 31 December Year 9 Tangible Fixed Assets Vehicles Office equipment 000 90 30 120 000 (54 + 18) 72 (6 + 8) 14 86 000 18 16 34

Current assets Debtors Liabilities due within 1 year Creditors Bank overdraft

15 5 2

7

8 42

Financed by Capital Retained profit

30 12 42

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CONTINUED

Model Answer to Question 1 continued (b) Stewarts plc Consolidated Balance Sheet as at 31 December Year 9 000 Cost or valuation 320 450 125 102 997 000 Depreciation 000 Net

Tangible fixed assets

Leasehold and buildings Machinery Office equipment (110 + 15) Vehicles (90 + (2/3 x 18))

60 130 40 30 260

260 320 85 72 737

Current assets Stock raw material Stock work-in-progress Stock finished goods Debtors (90 + 15 - 10) Liabilities due within one year Bank overdraft (15 - 50 + 4 - 2) Creditors (125 + 5 - 10)

40 45 55 95 33 120

235

153

82 819

Issued capital Ordinary Shares 1 Profit & Loss Account (230 - 11)

600 219 819 = 9,000 = 2,000 11,000 000 000 126

Calculations Goodwill (50,000 - 42,000 + (16,000 - 15,000)) Add loss on vehicle (18,000/3 - 4,000) (c) Net cost savings in Year 10

Cost saved on delivery service (120 x 1.05) Less Drivers' wages 2/3 (48 6) 28 Office wages 7.1 Petrol and repairs (30 x .75) 22.5 General expenses (52 10) 42 Depreciation vehicles (2/3 x 18 x 0.2) 2.4 Office equipment 1/3 x 15 5 Net savings (d) Return on investment 19/50 x 100 = 38%.

107 19

(e) It gives Stewarts plc control of carriage operations and costs. There will be quicker delivery and collection The 2 old vehicles will need replacement soon so further capital costs involved.

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Examiners Report on Question 1 Part (a) was a standard Trading, Profit & Loss Account and Balance Sheet. In general there were few problems but a significant number of scripts showed a lack of awareness of the term profits brought forward and endeavoured to make the current years profits equal to the balance for previous years. Layout was in general good, though there were scripts where the candidates ignored the requirement for vertical presentation. Part (b) required a Consolidated Balance sheet and only a minority managed to get this correct. The calculation of Goodwill often missed the revaluation of office equipment, and some candidates calculated a minority interest even though Stewarts owned all the shares. Less than half the candidates were able to deal with the inter company debt correctly and a number made errors on the number of shares issued, adding the capital of the subsidiary to that of the parent.