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Page 1: Accounting(IAS)/Series-4-2010(Code3902)

Model Answers Series 4 2010 (3902)

For further information contact us:

Tel. +44 (0) 8707 202909 Email. [email protected] www.lcci.org.uk

LCCI International Qualifications

Accounting (IAS) Level 3

Page 2: Accounting(IAS)/Series-4-2010(Code3902)

3902/4/10/MA Page 1 of 19

Accounting (IAS) Level 3 Series 4 2010

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.

© Education Development International plc 2010 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.

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QUESTION 1 Forth, a private company, maintains a Sales Ledger Control Account. The balance on this account is reconciled each month with the net total of the balances in the Sales Ledger. The balance on the Sales Ledger Control Account appears in the company’s Trial Balance drawn up at the end of the company’s financial year. REQUIRED (a) State (yes or no) whether or not each of the following is part of Forth’s double entry book-keeping system:

(i) Sales Ledger Control Account (ii) Sales Ledger

(iii) Sales Day Book. (3 marks)

For each of the above (a) (i) (ii) (iii): (b) state whether individual sales figures, total sales figures or both individual and total sales figures will be included (c) explain their purpose and how they are linked together in accounting for sales.

(9 marks)

On 31 March 2010 Forth’s Sales Ledger Control Account had a debit balance of $46,438 and the balances extracted from the Sales Ledger gave a net total of $41,634 debit. The accountant discovered the following errors: (1) a cheque for $3,500, received from a customer, had been entered in the customer’s

account as $5,300 (2) a page in the Sales Day Book had been over-added by $237 (3) a sales invoice for $1,200 had been completely omitted from the books (4) a sales invoice for $2,100 had been entered twice in the Sales Day Book (5) a credit balance of $40, in the list of Sales Ledger balances, had been incorrectly listed

as a debit balance (6) contras of $60 had been entered twice in both the Purchases Ledger and the Sales

Ledger accounts, but not entered in either the Purchases Ledger Control Account or the Sales Ledger Control Account.

The balance on the Sales Ledger Control Account still did not agree with the net total of the balances extracted from the Sales Ledger, after correcting the above errors. REQUIRED (d) Calculate: (i) the amended Sales Ledger Control Account balance (ii) the amended net total of the balances extracted from the Sales Ledger (iii) the difference remaining between (i) and (ii) above.

(11 marks) Forth’s accountant suggests that the difference be ignored as another reconciliation will be attempted at the end of April and the figures may then agree. REQUIRED (e) State whether or not the accountant’s suggestion is acceptable and briefly discuss whether or not the figures are likely to reconcile at the end of April 2010. (2 marks) (Total 25 marks) MODEL ANSWEWR TO QUESTION 1

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(a) (i) Yes (ii) No (iii) No (b) (i) total sales (ii) individual sales (iii) individual and total sales (c) (i) Shows the total amount owing by receivables at any point in time. The total sales figure is derived from the Sales Day Book. The balance should reconcile with the net total of the list of Sales Ledger balances. (ii) Shows the amounts owing by individual receivables at any point in time. Individual sales

amount are posted from the Sales Day Book. The net total of the list of Sales Ledger balances should reconcile with the balance on the Sales Ledger Control Account.

(iii) Shows each individual sale and is a book of prime entry used in providing figures for both the Sales Ledger Control Account and the Sales Ledger. (d)

(i)

Sales Ledger Control Account

$

Original balance

46,438

(2) Addition error in Sales Day Book

(237)

(3) Sales invoice omitted

1,200

(4) Sales invoice entered twice in Sales Day Book

(2,100)

(6) Contras omitted

(60)

Amended balance

45,241

(ii)

Sales Ledger Balances

$

Original net total

41,634

(1) Incorrectly recorded cheque (5,300-3,500)

1,800

(3) Sales invoice omitted

1,200

(4) Sales invoice entered twice in Sales Day Book

(2,100)

(5) Credit balance listed as debit balance (40 x 2)

(80)

(6) Contras recorded twice

60

42,514

(iii)

Difference

$

Sales Ledger Control Account

45,241

Sales Ledger Balances

42,514

Difference

2,727

(e) Accountant’s suggestion Ignoring the difference is not acceptable The figures are very unlikely to reconcile next month, unless they are due to addition errors in adding the list of balances or calculating the balances themselves. In any case these should be rechecked now.

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QUESTION 2 Tweed is a private company which has performed poorly in recent years. The holders of 20,000 of the shares are very unhappy with the directors. An extract from the Balance Sheet of Tweed at 31 December 2009 is as follows:

$

Ordinary share capital ($1 each) 80,000

Share premium 5,000

Accumulated profits 30,000

The Managing Director of Tweed, being aware of the unhappy shareholders, has made the following proposals, to take place in the order given: (1) increase the value of the buildings by $10,000, thereby incorporating a recent professional

revaluation in the Balance Sheet (2) make a 1 for 10 capitalisation (bonus) issue out of non-distributable reserves (3) issue for cash 20,000 shares at a premium of $0.05 and then purchase all the shares of the

unhappy shareholders at par. REQUIRED (a) Assuming that the above proposals are accepted by all parties concerned, prepare Journal entries (with narratives) to record them.

(17 marks)

In order to justify his proposals the Managing Director made the following comments: (1) revaluing the buildings makes the Balance Sheet stronger and will have no effect on profit in

future years (2) the capitalisation issue would not cost the company anything (3) the unhappy shareholders are likely to accept the $22,000 offered for their shares and

redeeming them at par is a good deal for the company (4) buying out the unhappy shareholders should mean a more united company in future. REQUIRED (b) Briefly discuss the truth or otherwise of each of the Managing Director’s comments.

(8 marks)

(Total 25 marks)

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MODEL ANSWER TO QUESTION 2

(a) Journal Entries

$ $

DR CR

(1) Buildings 10,000

Revaluation reserve

10,000

Revaluation of buildings

(2) Share premium 5,000

Revaluation reserve 3,000

Ordinary share capital (80,000/10)

8,000

Capitalisation issue of one share for every ten

(3) Bank (20,000 x 1.05) 21,000

Ordinary share capital

20,000

Share premium

1,000

Issue of ordinary shares at $1.05

Ordinary share capital 22,000

Share purchase

22,000

Purchase of ordinary shares

Accumulated profits (W1) 1,000

Capital redemption reserve

1,000

Amount to be financed out of distributable profits

Share purchase 22,000

Bank

22,000

Payment to ordinary shareholders for shares redeemed

$

W1 Nominal value of shares redeemed (22,000 x 1.00)

22,000

Proceeds from new issue (20,000 x 1.05)

21,000

1,000

(b) Managing Director’s Comments (1) - the Balance Sheet, with a higher value for non-current assets, may well appear stronger.

- however depreciation must be provided on the revalued amount, so there will be an effect on future profits

(2) - a capitalisation issue does not involve a cash outflow and therefore would not cost the company anything

- however buying out the unhappy shareholders at par would cost an additional $2,000 as a result of the capitalisation issue

(3) - there is no evidence to suggest the unhappy shareholders will accept the company’s offer for their shares - the market value of the shares is crucial in determining shareholder acceptance and whether or not it is a good deal for the company (4) - the remaining shareholders may be more united - the unity of the Board of Directors and senior management is more important, and whether or not the company is more successful in future

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QUESTION 3 On 1 January 2009, Wear, a public company, acquired 75% of the ordinary share capital of Tyne, a private company. Wear Plc financed the acquisition by issuing 40,000 $1 ordinary shares at a premium of $0.50, and paying $30,000 in cash. REQUIRED (a) Prepare a Journal entry, in the books of Wear Plc, recording the acquisition of the shares in Tyne. No narrative is required.

(4 marks) Wear wrote off 20% of the goodwill arising on the acquisition of Tyne non-current and depreciate tangible assets at 30% per year on a straight line basis. The draft Consolidated Balance Sheet of the Wear and Tyne Group at 31 December 2009 was as follows:

$ $

Non current assets Goodwill on consolidation

16,000

Tangible non current assets

315,000

331,000

Current assets Inventory

90,000 Receivables

54,000

Bank

19,000

163,000

Payables: amounts falling due within one year

494,000

Payables

58,000 Accruals

9,000 67,000

Net current assets

427,000

Capital and reserves Ordinary share capital ($1 shares)

200,000

Share premium 40,000

Accumulated profits

157,000

397,000

Minority interest

30,000

427,000

Adjustments to the above Balance Sheet are required in respect of the following matters:

(1) On 1 January 2009 the fair value of Tyne’s tangible non-current assets was $10,000 higher than their book value. This had not been taken into consideration in the original consolidation. Wear depreciates tangible non-current assets at 30% per year on a straight line basis.

(2) Wear sold goods costing $30,000 to Tyne during 2009 for $50,000. On 31 December 2009 half the value of these goods remained unsold.

(3) Tyne sold goods costing $20,000 to Wear during 2009 for $30,000. On 31 December 2009 a quarter of the value of these goods remained unsold.

(4) Inter company balances of $7,000 were included in the consolidated receivables and payables.

(5) A bank overdraft of $10,000 in Wear had been offset against the bank balance in hand of Tyne.

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QUESTION 3 CONTINUED REQUIRED (b) Calculate the goodwill on consolidation at 1 January 2009, before the fair value adjustment.

(2 marks)

(c) Calculate the goodwill on consolidation at 31 December 2009, after the fair value adjustment and after the 20% write off.

(2 marks)

(d) Prepare the amended Consolidated Balance Sheet of the Wear and Tyne Group at 31 December 2009, after adjusting for items (1) to (6) above.

(17 marks)

(Total 25 marks)

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MODEL ANSWER TO QUESTION 3

(a) Journal Entry $ $

DR CR

Investment in Tyne 90,000

Ordinary share capital

40,000

Share premium

20,000

Bank

30,000

(b) Goodwill at 1 January 2009

Goodwill per draft balance sheet (80%)

16,000

Amount written off (20%)

4,000

20,000

(c) Goodwill at 31 December 2009

Goodwill as above

20,000

Fair value adjustment (75% x 10,000)

(7,500)

Amount written off 20% (20,000 - 7,500)

(2,500)

10,000

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QUESTION 3 CONTINUED (d)

Consolidated Balance Sheet of the Wear and Tyne Group at 31 December 2009

$ $

Non-current assets

Goodwill

10,000

Tangible non-current assets (315,000 + 10,000 - 3,000)

322,000

332,000

Current assets

Inventory (90,000 - 10,000 - 2,500 - 4,000)

73,500

Receivables (54,000 - 7,000 - 5,000)

42,000

Bank (19,000 + 10,000)

29,000

144.500

476,500

Capital and reserves

$

Ordinary share capital

200,000

Share premium

40,000

Accumulated profits (W 1)

136,625

376,625

Minority interest (W 2)

29,875

406,500

Current liabilities

Payables (58,000 - 7,000)

51,000

Accruals

9,000

Bank overdraft

10,000

70,000

476,500

W 1 – Retained earnings

$

Original

157,000

Goodwill written off (4,000 - 2,500)

1,500

Depreciation (0.75 x 3,000)

(2,250)

Unrealised profit in inventory (1)

(10,000)

Unrealised profit in inventory (2) (0.75 x 2,500)

(1,875)

Provision for obsolete inventory

(4,000)

Provision for bad debts (0.75 x 5,000)

(3,750)

136,625

W 2 – Minority interest

Original

30,000

Fair value adjustment

2,500

Depreciation (0.25 x 3,000)

(750)

Unrealised profit in inventory (2) (0.25 x 2,500)

(625)

Provision for bad debts (0.25 x 5,000)

(1,250)

29,875

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QUESTION 4 Tay is a sole trader and retailer with only a limited understanding of accounting. He has provided his accountant with the following estimates for the purpose of preparing a budget for the three months ending 31 March 2011:

(1) Sales and Receivables Cash sales will be 5% of credit sales and will be as follows: $ January 5,000 February 6,000 March 6,500

Receivables at 31 December 2010 will be $100,000 of which $28,000 will relate to October sales, $40,000 to November sales and the rest to December sales. 50% of credit sales revenue is received in the month following sale, 25% in the second month following sale, and 25% in the third month following sale. (2) Disposal of Non-current Assets

$3,200 will be received, in February 2011, from the sale of non-current assets on 1 January 2011. These cost $12,000 and have a net book value of $4,000. Depreciation is to be changed at $3,000 per month in 2011.

(3) Other Receipts

Tay has recently had a substantial gambling win and will be paying £1,000 into the business bank account in February 2011.

(4) Purchases and Payables Cash purchases will be equal to 10% of total purchases and will be as follows:

$ January 2,700 February 3,600 March 4,500

Payables at 31 December 2010 will be $75,200 of which $32,000 will relate to November purchases and the rest to December purchases. Two thirds of credit purchases are paid in the month after purchase. One third of credit purchases are paid in the second month after purchase. (5) Wages and Drawings

Tay takes $25,000 per month out of the business bank account and uses $20,000 of this to pay wages.

(6) General Cash Expenses These will be incurred as follows: $ December (2010) 1,000 January 1,100 February 1,200 March 1,100 Half the general expenses are paid in the month incurred and half in the following month. (7) Miscellaneous

The bank balance at 31 December 2010 is expected to be an overdraft of $4,250. Inventory at 31 December 2010 is expected to of have a cost of $27,500. This figure is expected to have risen by 25% by 31 March 2011.

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QUESTION 4 CONTINUED REQUIRED Prepare for Tay: (a) a monthly cash budget, in columnar form, showing the bank balance at the end of each month, for January, February and March 2011.

(14 marks)

(b) a budgeted Income Statement for the three month period ending 31 March 2011.

(7 marks)

Tay is due to have talks with his bank manager and intends to claim the following:

(i) paying his gambling winnings into the business bank account shows him to be a prudent and responsible businessman

(ii) the extended credit period recently offered to customers, will improve sales, improve cash flow and reduce bad debts.

REQUIRED (c) Briefly discuss whether or not the bank manager will be impressed by the above claims.

(4 marks)

(Total 25 marks)

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MODEL ANSWER TO QUESTION 4 (a) Tay: Cash Budget for three months to 31 March 2011

January February March

Receipts $

$ $

Cash sales 5,000

6,000

6,500

Credit sales (W1)

64,000

78,000

93,000

Non-current asset disposal

3,200

Capital paid in

1,000

69,000 88,200 99,500

Payments $

$ $

Cash purchases 2,700

3,600 4,500

Credit purchases (W2)

60,800

30,600

29,700

Wages and drawings

25,000

25,000

25,000

General expenses (W3) 1,050

1,150 1,150

89,550

60,350

60,350

Net Receipt/(Payment) (20,550)

27,850 39,150

Opening balance (4,250)

(24,800) 3,050

Closing balance (24,800)

3,050 42,200

January February March

W1 Credit sales: $ $ $

October (28,000) 28,000 (100%) - -

November (40,000) 20,000 (50%) 20,000 (50%) -

December (32,000) (R) 16,000 (50%) 8,000 (25%) 8,000 (25%)

January (5,000 x 100/5 = 100,000) - 50,000 (50%) 25,000 (25%)

February (6,000 x 100/5 = 120,000) - - 60,000 (50%)

64,000 78,000 93,000

January February March

W2 Credit purchases: $ $ $

November (32,000) 32,000 (100%) - -

December (43,200) (R) 28,800 (2/3) 14,400 (1/3) -

January (2,700 x 9 = 24,300) - 16,200 (2/3) 8,100 (1/3)

February (3,600 x 9 = 32,400) - - 21,600 (2/3)

60,800 30,600 29,700

January February March

W3 General expenses: $ $ $

December (1,000) 500 (50%) - -

January (1,100) 550 (50%) 550 (50%) -

February (1,200) - 600 (50%) 600 (50%)

March (1,100) - - 550 (50%)

1,050 1,150 1,150

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QUESTION 4 CONTINUED

(b) Tay: Budgeted Income Statement three months ending 31 March 2011

$ $

Sales [(5,000 + 6,000 + 6,500) x 100/5 + 17,500]

367,500

Less: Cost of goods sold:

Opening inventory 27,500

Purchases [(2,700 + 3,600 + 4,500) x 100/10] 108,000

135,500

Less: Closing inventory (27,500 x 1.25) 34,375 101,125

Gross profit

266,375

Less: Depreciation (30,000 x 3) 90,000

Wages [(25,000 - 5,000) x 3] 60,000

General expenses (1,100 + 1,200 + 1,100) 3,400

Loss on disposal (4,000 - 3,200) 800 154,200

Net profit

112,175

(c) Claims made to bank manager

(i) Gamblers normally lose more than they win and gambling can be addictive. Bank manager will not be impressed.

(ii) Sales may well increase but cash flow is likely to be slower and bad debts more likely to increase. Bank manager will only be impressed if sales increase significantly.

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QUESTION 5 Taff, a private company, was formed on 31 December 2009 to take over the partnership of Usk and Wye. On that date the Balance Sheet of the partnership was as follows:

$ $

Non-current assets Land and buildings

110,000

Plant and machinery

40,000

Motor vehicles

25,000

175,000

Current assets Inventory

11,200 Receivables

12,400

23,600

198,600

$ $

Payables: amounts falling due within one year

Payables

7,100 Bank overdraft

14,300

21,400

Capital accounts Usk

117,300

Wye

59,900

198,600

The purchase consideration consisted of $20,000 in cash and 2,000,000 shares of $0.25 each at a premium of $0.05. Usk and Wye agreed to divide the shares between them in their profit sharing ratio of 2:1 respectively. Taff took over all the assets of the partnership and assumed responsibility for the payables of the partnership, subject to the following: (1) the land and buildings were revalued at $500,000 and the plant and machinery was

revalued at $36,000 (2) the partnership sold a vehicle for $800 cash to a third party and the remaining vehicles were

revalued at $3,000 (3) a provision for bad debts was created, equal to 5% of receivables (4) $200 of inventory was written off and a provision of 10% for obsolete inventory was provided

against the remaining inventory. Before the purchase of the partnership, Taff had issued to the public, 2,500,000 ordinary shares of $0.25 each at a premium of $0.10. REQUIRED (a) Close the books of the Usk and Wye Partnership by preparing the following: (i) Realisation Account (ii) Partners’ Capital Accounts (in columnar form) (iii) Bank Account.

(11 marks)

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QUESTION 5 CONTINUED (b) Calculate the balances on the following accounts of Taff immediately after the acquisition of the partnership:

(i) Ordinary share capital (ii) Share premium (iii) Goodwill.

(9 marks)

The agreement between Taff and the partnership also states that the partners:

(i) will be employed by Taff for five years from the date of the agreement (ii) must not work for any competitor during that period.

REQUIRED

(c) (i) Explain why these conditions would have been included in the agreement. (ii) Discuss briefly whether these conditions treat Usk and Wye fairly.

(5 marks)

(Total 25 marks)

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MODEL ANSWER TO QUESTION 5

(a) (i) Realisation Account

$

$

Land and buildings 110,000

Payables 7,100

Plant and machinery 40,000

Bank (vehicle) 800

Motor vehicles 25,000

Bank (Taff) 20,000

Inventory 11,200

Shares in Taff:

Receivables 12,400

Usk (2) 400,000

Wye (1) 200,000

Surplus:

Usk (2) 286,200

Wye (1) 143,100

627,900

627,900

(ii) Capital Accounts

Usk Wye

Usk Wye

$ $

$ $

Realisation 400,000 200,000

Opening balance 117,300 59,900

Bank (R) 3,500 3,000

Realisation 286,200 143,100

403,500 203,000

403,500 203,000

(iii) Bank Account

$

$

Realisation 800

Opening balance 14,300

Realisation 20,000

Usk 3,500

20,800

Wye 3,000

20,800

20,800

(b) (i) Ordinary Share Capital of Taff

$

Existing shares (2,500,000 x 0.25) 625,000

Shares issued to partners (2,000,000 x 0.25) 500,000

1,125,000

(ii) Share Premium

$

Existing shares (2,500,000 x 0.10) 250,000

Shares issued to partners (2,000,000 x 0.05) 100,000

350,000

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QUESTION 5 CONTINUED

(iii) Goodwill

$ $

Purchase Consideration Cash

20,000

Shares

600,000

620,000

Less: Land and buildings 500,000

Plant and machinery 36,000

Motor vehicles 3,000

Receivables (12,400 x 0.95) 11,780

Stock [(11,200 - 200) x 0.90] 9,900

Payables (7,100) 553,580

66,420

(c) Reasons why the two conditions were included in the agreement to purchase the partnership: (i) - to protect the interests of Taff Ltd, which requires the skills of the partners - to protect the partners, who require employment - to preserve the goodwill value, which is likely to depend on the skills and business connections of the partners

- to prevent a competitor from benefiting from the skills and experience of the partners and - their business connections

(ii) - it seems reasonable to expect the partners to work exclusively for Taff Ltd for a period of time. Whether or not five years is excessive would depend on custom and practice in

that industry.

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Middlemarch Business Park

Coventry CV3 4PE

UK

Tel. +44 (0) 8707 202909

Fax. +44 (0) 2476 516505

Email. [email protected]

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