ASE3001209MA

Model Answers Series 2 2009 (3001)

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LCCI International Qualifications

Accounting Level 3

Page 1 of 20

Accounting Level 3 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 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 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.

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SECTION A (Answer Questions 1 and 2 in Section A – compulsory) QUESTION 1 Hong Kong Plastics plc has an authorised share capital of 600,000 ordinary shares of £1 each. Some years ago the company issued 300,000 of these shares at par and has now decided to issue the remaining ordinary shares, payable as follows:

£ Application 0.25 Allotment (including premium) 1.15 First call 0.35 Final call 0.25 2.00 Applications were received for 360,000 shares, of which 25,000 were rejected and the application monies refunded. The shares were allotted to the remaining applicants on a pro-rata basis and the surplus application money was applied to the amount due on allotment. The total amount due on allotment and first call was duly received. The entire amount due on the final call was received from all shareholders with the exception of the holder of 8,000 shares who failed to pay on the due date. The directors agreed to wait for payment of the outstanding balance, but it still remains outstanding. REQUIRED Prepare the following accounts in the ledger of Hong Kong Plastics plc:

(a) Application (b) Allotment (c) First Call (d) Final Call (e) Share Premium (f) Ordinary Share Capital

(Total 20 marks)

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MODEL ANSWER TO QUESTION 1 Application Account Bank 6,250 Bank 90,000 Ordinary Share

Capital 75,000 Allotment 8,750 _____ 90,000 90,000 Allotment Account Ordinary Share

Capital 45,000 Application 8,750 Share Premium 300,000 Bank 336,250 ______ ______ 345,000 345,000 First Call Account Ordinary Share

Capital 105,000 Bank 105,000 ______ ______ 105,000 105,000 Final Call Account Ordinary Share

Capital 75,000 Bank 73,000 Bal c/d 2,000 ______ ______ 75,000 75,000 Bal b/d 2,000

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MODEL ANSWER TO QUESTION 1 CONTINUED Share Premium Account Bal c/d 300,000 Allotment 300,000 ______ ______ 300,000 300,000 Bal b/d 300,000 Ordinary Share Capital Account Bal c/d 600,000 Bal b/d 300,000 Application 75,000 Allotment 45,000 First Call 105,000 ______ Final Call 75,000 600,000 600,000 Bal b/d 600,000

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SECTION A CONTINUED QUESTION 2 The Balance Sheets of Chao Ltd at 31 December were as follows:

2006 2007 £000 £000 £000 £000 £000 £000

Fixed Assets (NBV) 500 800 Current Assets Stock 90 75 Debtors 60 50 Bank 35 20 185 145 Creditors due in less than one year Creditors 45 40 Dividends 20 45 65 85 Net Current Assets 120 60 620 860 Creditors due after more than 1 year 10% Debentures 100 200 520 660 Share Capital and Reserves £000 £000 £1 Ordinary Shares 350 450 Share Premium 100 - General Reserve - 20 Profit and Loss 70 190 520 660 Notes:

(1) During the year ended 31 December 2007, fixed assets costing £400,000 were purchased and fixed assets with a net book value of £50,000 were sold for £40,000

(2) All financing transactions took place on 1 January 2007 (3) Interim dividends amounting to £45,000 were paid in 2007. REQUIRED For Chao Ltd, for the year ended 31 December 2007: (a) Calculate the operating profit. (5 marks) (b) Prepare a statement reconciling operating profit to net cash inflow/outflow from operations.

(7 marks) (c) Prepare the Cash Flow Statement in accordance with FRS 1 (Revised). (8 marks)

(Total 20 marks)

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MODEL ANSWER TO QUESTION 2 (a) Calculation of operating profit £000 £000 P&L balance at 31 December 2007 190 Less: P&L balance at 31 December 2006 70 120 Add: Debenture interest (10% x 200) 20 Interim dividend 45 Proposed dividend 45 General Reserve 20 130 250

(b) Reconciliation of Operating Profit to Net Cash Inflow/Outflow from Operations £000 Operating profit (from (a) above) 250 Depreciation: [500 - (800 + 50 - 400)] 50 Reduction in stock (90 – 75) 15 Reduction in debtors (60 – 50) 10 Loss on asset sale (50 – 40) 10 335 Less: Decrease in creditors (45 – 40) 5 330

(c) Chao Ltd Cash Flow Statement for the year ended 31 December 2007 £000 £000 Net cash inflow from operating activities 330 Returns on investments and servicing of finance Debenture interest -20 Capital expenditure and financial investment Sale of fixed asset 40 Purchase of fixed assets -400 -360

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MODEL ANSWER TO QUESTION 2 CONTINUED Equity dividends paid Proposed at 31.12.06 20 Interim for year ended 31.12.07 45 -65 Net cash flow before financing -115 Financing Issue of debentures (200 - 100) 100 ..__ Decrease in cash for the period (20 - 35) -15

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SECTION B (Answer any THREE questions from Section B) QUESTION 3 Cheng Ltd buys old farming machinery, repairs it and then sells the repaired machinery to local farmers. On 1 March 2001, the company purchased a disused barn with the intention of using it as a warehouse. The barn required extensive work to be undertaken before it was considered fit for use and the company incurred the following costs:

£ Purchase price 50,000 Legal fees relating to purchase 3,000 Tiles for new roof 16,000 Concrete for new floor 4,750 Electrical installation 8,250 Wood for internal partitions 5,000 Cost of own labour used 16,000 Warehouse completed in November 2002 - cost of opening party 1,800 Note: Included in the cost of wood for internal partitions was £600 spent on new panels for the existing doors in the accounts department. The cost of own labour included £2,400 relating to repair work on the Managing Director's private house. The cost of the land included in the barn purchase price was £20,000. Land costs are posted to a freehold land account. The policy of Cheng Ltd is to depreciate buildings at 2% per annum using the reducing balance method. A full year's depreciation is charged in the year a building is ready for occupation but no depreciation is charged in the year of disposal. The financial year of the company ends on 31 December. REQUIRED (a) Calculate:

(i) the capital cost of the barn to be recorded in the Buildings Account (7 marks) (ii) the accumulated depreciation on the barn up to 31 December 2006, making your

calculations to the nearest £1. (5 marks) On the 5 March 2007 the barn was totally destroyed by fire together with three renovated machines. The following details relate to the renovated machines:

Purchase cost Renovation Cost Anticipated Selling Price £ £ £

Machine A 3,000 1,500 6,000 Machine B 2,800 2,200 5,500 Machine C 7,000 4,000 10,000 The insurers agreed to pay £70,000 in respect of the loss of the barn and Cheng Ltd received this amount on 2 February 2008. The company has yet to submit an insurance claim in respect of the machinery destroyed in the fire.

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QUESTION 3 CONTINUED REQUIRED (b) Prepare, in respect of the year ended 31 December 2007, the journal entries required to record

the destruction of the barn and the resulting insurance claim. Journal narratives are not required.

(5 marks) (c) Calculate the value of the insurance claim for the machinery destroyed in the fire. (3 marks)

(Total 20 marks)

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MODEL ANSWER TO QUESTION 3

(7 marks)

(5 marks)

(5 marks)

(a) (i) £ Purchase cost (50,000 - 20,000) 30,000 Legal fees 3,000 Roof tiles 16,000 Concrete 4,750 Electrical 8,250 Wood (5,000 - 600) 4,400 Own labour (16,000 - 2,400) 13,600 80,000

(ii) Year end 31-Dec Dep'n NBV £ £ 2002 £80,000 x 2% 1,600 78,400 2003 £78,400 x 2% 1,568 76,832 2004 £76,832 x 2% 1,537 75,295 2005 £75,295 x 2% 1,506 73,789 2006 £73,789 x 2% 1,476 72,313 7,687

(b) Dr Cr £ £ Buildings Disposal Account 80,000 Buildings Account 80,000 Accumulated Depreciation - Buildings 7,687 Buildings Disposal Account 7,687 Insurers 70,000 Buildings Disposal Account 70,000 Profit & Loss Account 2,313 Buildings Disposal Account 2,313

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MODEL ANSWER TO QUESTION 3 CONTINUED

(3 marks)

(Total 20 marks)

(c) Cost NRV Claim Machine £ £ £

A (3,000 + 1,500) 4,500 6,000 4,500

B (2,800 + 2,200) 5,000 5,500 5,000

C (7,000 + 4,000) 11,000 10,000 10,000 _____ 19,500

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SECTION B CONTINUED QUESTION 4 Bao Corporate Media Ltd produced the following Balance Sheet at 31 December 2008:

Tangible Fixed Assets £ £ £ Premises 200,000 Motor vehicles 88,000 Equipment 125,000 413,000 Current Assets Stock 15,000 Trade debtors 65,000 Prepayments 500 80,500 Creditors: Amounts falling due within 1 year Trade creditors 16,000 Accruals 2,000 Bank overdraft 5,500 Proposed dividends 20,000 43,500 Net Current Assets 37,000 450,000 Creditors: Amounts falling due after more than 1 year 6% Debenture (2014) 25,000 425,000 Share Capital and Reserves £ 200,000 £1 ordinary shares fully paid 200,000 General Reserve 50,000 Profit and Loss 175,000 425,000 The following forecasts relate to the financial year ending 31 December 2009:

(1) Sales for the year, all on credit, are estimated at £800,000. Receipts from debtors are estimated at £825,000

(2) Credit purchases will amount to £400,000 and payments to creditors will amount to £390,000 (3) Payments for operating expenses (including interest) will amount to £450,000. Included in this

total is £24,000 in respect of insurance covering the period 1 March 2009 to 28 February 2010. Wages accrued at the year end will amount to £3,000

(4) It is expected that stock at the 31 December 2009 will amount to 7.5% of credit purchases (5) Motor vehicles with a net book value of £20,000 will be sold for £18,000 and new equipment

costing £30,000 acquired. At 31 December 2009, £5,000 will still be owed on the equipment and should be treated as a creditor

(6) The General Reserve of £50,000 will be converted into bonus shares following which a rights issue of ordinary shares will take place. The rights issue will be on the basis of 1 ordinary share for every 5 then held. The price per share will be £1.30 payable on application. The issue is expected to be fully subscribed and all cash received by the 31 December 2009

(7) A dividend of £0.10 per share will be proposed at 31 December 2009 on all shares then in issue (8) It may be assumed that all receipts and payments will pass through the bank account. REQUIRED Prepare an extract from the forecast balance sheet of Bao Corporate Media Ltd showing the working capital position at 31 December 2009.

(Total 20 marks)

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MODEL ANSWER TO QUESTION 4 Bao Corporate Media Ltd Forecast Balance Sheet extract at 31/12/2009 Current Assets £ £ [a] Stock 30,000 [b] Debtors 40,000 [c] Prepayments 4,000 [d] Bank 17,500 91,500 Creditors: amounts due within 1 year [e] Creditors 31,000 [f] Accruals 3,000 [g] Proposed dividends 30,000 64,000 Net Current Assets/Working Capital 27,500

Workings:

[a] Stock [b] Debtors [c] Prepayments Opening 15,000 Opening 65,000 Opening 500 To: To:

Trading -15,000 [1] 800,000 P&L -500 From: [1] -825,000

Trading [4] 30000* 40,000 [3] 4,000** 30,000 4,000

[d] Bank [e] Creditors [f] Accruals Opening -5,500 Opening 16,000 Opening 2,000 Dividends -20,000 [2] 400,000 To:

[1] 825,000 [3] -390,000 P&L -2,000 [2] -390,000 [5] 5,000 [3] 3,000 [3] -450,000 31,000 3,000 [5] 18,000 [5] -25,000 [g] Dividends * 0.075 x 400,000

[6] 65,000*** Opening 20,000 ** 1/6th x 24,000

17,500 Bank -20,000 [7] 30,000 *** 1.3 x0.2 (200,000 + 50,000) 30,000

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SECTION B CONTINUED QUESTION 5 Chun and Yan share profits and losses in the ratio 3:2. Yan is entitled to an annual salary of £8,000 and both partners receive interest at 5% per annum on their capital account balances. The following balances were extracted from the books of the partnership at 31 March 2008:

£ £ Premises 80,000 Capital Accounts: Goodwill 36,000 Chun 90,000 Equipment 15,000 Yan 30,000 Drawings: Current Accounts:

Chun 25,000 Chun 25,000 Yan 15,000 Yan 15,000

Stock 50,000 Creditors 10,000 Debtors 24,000 Loan (2010) 30,000 Bank 3,000 Profit for year to 31.3.08 48,000

248,000 248,000 Additional information: (1) The net profit for the year was 8% of sales and the gross profit mark-up was 100% (2) Administration costs represented 40% of the cost of sales and selling costs totalled 15% of sales (3) The loan was taken out on 1 October 2007 at an interest rate of 10% per annum. REQUIRED (a) Re-create the Profit and Loss Account (in as much detail as the information provided will allow)

and prepare the Appropriation Account for the year ended 31 March 2008. (7 marks)

On 1 April 2008 Ning was admitted as a partner on the following terms:

(1) Ning contributed £80,000 cash of which 25% represented his share of goodwill. He also introduced some equipment valued at £4,000 and a motor vehicle valued at £10,000

(2) Goodwill was valued at 4 years' purchase of the weighted average profits/(losses) of the last 3 years. These were as follows:

£ Weights 31 March 2006 (34,000) 1 31 March 2007 35,000 2 31 March 2008 48,000 3

(3) The partners decided that the value of goodwill was no longer to be retained in the books but the

value of premises was to be increased to £100,000 and the value of stock reduced to £40,000 (4) Chun and Yan would continue to share profits/(losses) between themselves in the same ratio. REQUIRED (b) Prepare, at 1 April 2008 the:

(i) Capital Accounts, in columnar form, of Chun, Yan and Ning (8 marks) (ii) Opening Balance Sheet of the new partnership in vertical format. (5 marks)

(Total 20 marks)

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MODEL ANSWER TO QUESTION 5 (a) Initial workings: If net profit = 8% of sales, sales must equal: 48,000 x 100 = 600,000 8 If mark-up = 100%, gross profit margin must be: 100 x 100 = 50% 200 Gross profit therefore equals sales of 600,000 x 50% = 300,000 Cost of sales therefore equals sales of 600,000 - gross profit of 300,000 = 300,000 Chun and Yan Profit & Loss and Appropriation Account for the year ended 31 March 2008 £ £ Gross Profit 300,000 Less: Administration costs (300,000 x 40%) 120,000 Selling costs (600,000 x 15%) 90,000 Loan interest 30,000 x 10% 1,500 2 Other costs [R] 40,500 252,000 Net Profit 48,000 Less: Salary - Yan 8,000 Interest on capital: Chun (90,000 x 5%) 4,500 Yan (30,000 x 5%) 1,500 14,000 34,000 Dividend: Chun (34,000 x 60%) 20,400 Yan (34,000 x 40%) 13,600 -34,000

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MODEL ANSWER TO QUESTION 5 CONTINUED (b) Initial workings: Revised Goodwill 2001 (34,000) x 1 = -34,000 2002 35,000 x 2 = 70,000 2003 48,000 x 3 = 144,000 6 180,000 180,000 x 4 = 120,000 6 To share between Chun and Yan = 120,000 - 36,000 = 84,000 60% Chun 50,400 40% Yan 33,600 Nin's share of goodwill = 80,000 x 25% = 20,000 Nin's profit share therefore = 20,000 equals one sixth 120,000 Revised profit share between Chun, Yan and Ning equals 3:2:1 Goodwill write-off therefore: Chun one half 60,000 Yan one third 40,000 Ning one sixth 20,000 Revaluation Profit New values: Premises 100,000 Stock 40,000 140,000 Less old values: Premises 80,000 Stock 50,000 130,000 Revaluation increase 10,000 Shared: 60% Chun 6,000 40% Yan 4,000

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MODEL ANSWER TO QUESTION 5 CONTINUED (b) (i) Capital Accounts

Details C Y N Details C Y N £ £ £ £ £ £ Goodwill write-off 60,000 40,000 20,000 Balance b/d 90,000 30,000 Balance c/d 86,400 27,600 74,000 Goodwill increase 50,400 33,600 Own figures if in correct ratio Revaluation profit 6,000 4,000 Bank 80,000 Motor vehicle 10,000 Equipment 4,000 146,400 67,600 94,000 146,400 67,600 94,000

Balance b/d 86,400 27,600 74,000

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MODEL ANSWER TO QUESTION 5 CONTINUED (b) (ii) Chun, Yan and Ning Balance Sheet at 1 April 2008 Fixed Assets £ £ Premises 100,000 Equipment (15,000 + 4,000) 19,000 Motor vehicles 10,000 129,000 Current Assets Stock 40,000 Debtors 24,000 Bank (3,000 + 80,000) 83,000 147,000 Current Liabilities Creditors 10,000 Net Current Assets 137,000 266,000 Long term Liabilities Loan 30,000 236,000 Financed by: £ Capital Accounts: Chun 86,400 Yan 27,600 Ning 74,000 188,000 Current Accounts: Chun (25,000 + 4,500 + 20,400 - 25,000) 24,900 Yan (15,000 + 8,000 + 1,500 + 13,600 - 15,000) 23,100 236,000

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SECTION B CONTINUED QUESTION 6

Brean has sold desks for many years. On 1 January 2008 he opened his first branch in Barrow. All double entry records are kept at the head office. All desks are purchased by head office and invoiced to Barrow 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 2008, the following occurred: (1) Head office sent 480 wooden desks costing £91 each and 125 metal desks costing £63 each to

the Barrow branch. (2) The Barrow branch returned 60 wooden desks and 5 metal desks to head office as they were the

wrong colour. (3) At 31 December 2008, 50 wooden desks and 6 metal desks remained in stock at the Barrow

branch. (4) Head office made the following payments on behalf of the Barrow branch:

£6,000 rent for the fifteen month period to 31 March 2009; £40 per month for sundry expenses; £25 per week for the wages of part time staff; £250 per month for the manager’s salary. At 31 December 2008 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 1% of the branch net profit before charging the bonus. REQUIRED

(a) Prepare the following accounts for the year ended 31 December 2008, as they would appear in

the head office books of Brean:

(i) Branch Stock (ii) Branch Stock Adjustment (iii) Branch Profit and Loss

(18 marks)

(b) Suggest one reason why the manager might be dissatisfied with the bonus system. (2 marks)

(Total 20 marks)

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MODEL ANSWER TO QUESTION 6 (a) (i) Branch Stock Account

£ £ Goods sent to branch (480 x 91) 43,680 Goods sent to branch (60 x 91) 5,460Branch stock adj. (480 x 39) 18,720 Branch stock adj. (60 x 39) 2,340Goods sent to branch (125 x 63) 7,875 Goods sent to branch (5 x 63) 315Branch stock adj. (125 x 27) 3,375 Branch stock adj. (5 x 27) 135 Bank (370* x 130) 48,100 Bank (114** x 90) 10,260 Balance c/d (50 x 130) 6,500 ………. Balance c/d (6 x 90) 540 73,650 73,650 * 480-60-50 = 370 ** 125-5-6 = 114 (ii) Branch Stock Adjustment Account £ £ Branch stock 2,340 Branch stock 18,720Branch stock 135 Branch stock 3,375Profit and loss (R) 17,508 Balance c/d (50 x 39) 1,950 Balance c/d (6 x 27) 162 22,095 22,095 (iii) Branch Profit and Loss Account £ £ Rent (6,000 x 12/15) 4,800 Branch stock adjustment 17,508Sundry (40 x 12) 480 Wages (25 x 52) 1,300 Salary (250 x 12) 3,000 Comm. (0.05 x 58,360) 2,918 Profit before bonus 5,010 17,508 17,508Bonus (0.01 x 5,010) 501 Profit before bonus 5,010Net profit 4,509 5,010 5,010

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