104145957 47246781-2006-lcci-level-3-series-2answer-120418031555-phpapp02

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104145957 47246781-2006-lcci-level-3-series-2answer-120418031555-phpapp02

  1. 1. AccountingLevel 3Model AnswersSeries 2 2006 (Code 3001) 1 ASE 3001 2 06 1 3001/2/06 >f0t@W9W2`?[CZBkBwSc#
  2. 2. Accounting Level 3Series 2 2006 How to use this bookletModel Answers have been developed by Education Development International plc (EDI) to offeradditional information and guidance to Centres, teachers and candidates as they prepare for LCCIInternational 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 techniqueTeachers 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 standardrequired. The general standard of model answers is one that would achieve a Distinction grade. EDIaccepts that candidates may offer other answers that could be equally valid. © Education Development International plc 2006All rights reserved; no part of this publication may be reproduced, stored in a retrieval system ortransmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwisewithout prior written permission of the Publisher. The book may not be lent, resold, hired out orotherwise disposed of by way of trade in any form of binding or cover, other than that in which it ispublished, without the prior consent of the Publisher.3001/2/06/MA 2 OVER
  3. 3. SECTION A(Answer Questions 1 and 2 in Section A − Compulsory)QUESTION 1The Sales Ledger Control Account of Brodsworth showed a debit balance of £ 78,784 on 31 January2006. On that date, the list of balances extracted from the Sales Ledger had a net total of £ 79,200debit. Neither the Sales Ledger Accounts nor the Purchase Ledger Accounts are treated as part ofBrodsworth’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 £1,050REQUIRED(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)3001/2/06/MA 3 OVER
  4. 4. MODEL ANSWER TO QUESTION 1SECTION AQuestions 1 and 2 MUST be answered(a) Journal £ £ Sales Ledger Control 1,000 Sales 1,000 Sales Ledger Control 926 Sales 926 Purchase Ledger Control 400 Sales Ledger Control 400 Sales Ledger Control 26 Discounts Allowed 26 £(b) (i) Sales Ledger Control Account balance per question 78,784 ADD Sales 1,000 Sales 926 Discounts Allowed 26 LESS Purchase Ledger Control Account (400) Corrected Sales Ledger Control Account balance 80,336 £ (ii) Net Sales Ledger Account balances per question 79,200 ADD Invoice omitted 60 Invoice omitted 926 Wrongly extracted balance (2 x 300) 600 LESS Wrongly entered cheque (1,500 – 1,050) (450) Corrected net total of Sales Ledger balances 80,336 £(c) Change in net profit Sales under added +1,000 Sales invoice omitted +926 Discounts Allowed over-added +26 Increase in net profit 1,9523001/2/06/MA 4 OVER
  5. 5. SECTION A CONTINUEDQUESTION 2The accountant of Buxton received the following print out of the Product X Stock Account for the yearended 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 methodfor valuing stock. DATE UNITS PRICE PER VALUE UNIT £ £20051 Jan Balance b/d * 4.00 24,0004 Feb Creditors 6,000 * * * 4.50 *20 Mar Cost of goods sold * * 1,350 * * *15 Apr Creditors * 4.50 * 12,000 * *18 May Creditors * 4.80 * * * 65,52025 June Cost of goods sold 2,400 * * * * 54,6003 July Creditors 3,000 * * * 5.00 *10 Aug Cost of goods sold 3,000 * * * * *19 Sept Cost of goods sold * * 1,000 * * *2 Oct Creditors * 5.30 * * 5.06 *5 Nov Cost of goods sold * * 6,07231 Dec Balance c/d * * *3001/2/06/MA 5 CONTINUED ON THE NEXT PAGE
  6. 6. SECTION A CONTINUEDQUESTION 2 CONTINUEDREQUIRED(a) Copy the Product X Stock Account into your answer book, replacing the *’s with the appropriate figures for units, price and value. (11 marks)You are given the following ratios relating to the most recent accounts of three companies: HALLAM plc SHEFFIELD plc GLAPWELL plcNet profit to sales 10% 5% 4%Return on capital employed 15% 35% 36%Stock turnover 19 times 26 times 32 timesDebtors’ collection 0 days 6 days 0 daysCreditors’ settlement 51 days 22 days 29 daysREQUIRED(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 ahigher 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 onlyfor cash and owns its own premises. It is currently experiencing cash flow difficulties. (Total 20 marks)3001/2/06/MA 6 CONTINUED ON THE NEXT PAGE
  7. 7. MODEL ANSWER TO QUESTION 2(a) Product X Stock Account Year Ended 31 December 2005 DATE UNITS PRICE PER VALUE UNIT £ £2005Jan 1 Balance b/d 6,000 4.00 24,000Feb 4 Creditors 6,000 5.00 30,000 12,000 4.50 54,000Mar 20 Cost of goods sold 300 4.50 1,350 11,700 4.50 52,650Apr 15 Creditors 300 4.50 1,350 12,000 4.50 54,000May 18 Creditors 2,400 4.80 11,520 14,400 4.55 65,520June 25 Cost of goods sold 2,400 4.55 10,920 12,000 4.55 54,600July 3 Creditors 3,000 6.80 20,400 15,000 5.00 75,000Aug 10 Cost of goods sold 3,000 5.00 15,000 12,000 5.00 60,000Sept 19 Cost of goods sold 200 5.00 1,000 11,800 5.00 59,000Oct 2 Creditors 2,950 5.30 15,635 14,750 5.06 74,635Nov 5 Cost of goods sold 1,200 5.06 6,072Dec 31 Balance c/d 13,550 5.06 68,563(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 collection3001/2/06/MA 7 CONTINUED ON THE NEXT PAGE
  8. 8. SECTION A CONTINUEDMODEL 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 the highest net profit to sales ratio3001/2/06/MA 8 OVER
  9. 9. SECTION B(Answer any THREE questions from Section B)QUESTION 3The following are extracts from the Balance Sheet of Selby plc at 31 December 2005: £ 000CAPITAL AND RESERVES20,000,000 Ordinary Shares of £ 0.25 each 5,0001,200,000 10% Preference Shares of £ 1.00 each 1,200Share Premium 1,400Retained Earnings 700 8,300CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR15% Debentures 1,000On 1 January 2006, the directors of Selby plc intend to raise £ 1,800,000 and invest it in a projectwhich 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 nominalREQUIRED(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 yearREQUIRED(c) Briefly discuss the Managing Director’s suggestions (4 marks) (Total 20 marks)3001/2/06/MA 9 OVER
  10. 10. MODEL ANSWER TO QUESTION 3(a) £ 000 £ 000 (i) Bank 1,800 Ordinary Share Capital 1,000 (1,800 ÷ 0.45 x 0.25) Share Premium (1,800 – 1,000) 800 Issue of Ordinary Shares at £0.45 (ii) Bank 1,800 10% Preference Share Capital 1,500 (1,800 ÷ 1.2) Share Premium (1,800 – 1,500) 300 Issue of Preference Shares at £1.20 (iii) Bank 1,800 Share Premium (2,000 – 1,800) 200 15% Debentures (1,800/.90) 2,000 Issue of Debentures at £0.90(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.3001/2/06/MA 10 OVER
  11. 11. SECTION B CONTINUEDQUESTION 4Following are the two most recent Balance Sheets of Thackley Ltd together with the most recentIncome Statement: Thackley Ltd Balance Sheet as at 31 March 2005 2006 £ £ £ £FIXED ASSETS Tangible at cost 78,000 71,700 Accumulated depreciation 24,200 24,600 53,800 47,100 Investments at cost 112,500 125,100 166,300 172,200CURRENT ASSETS Stock 55,080 161,187 Debtors 71,420 146,703 Bank 39,580 72,150 166,080 380,040CREDITORS: AMOUNTS FALLINGDUE WITHIN ONE YEAR Creditors 79,280 96,140 Proposed dividend 13,000 16,000 92,280 112,140NET CURRENT ASSETS 73,800 267,900 240,100 440,100CREDITORS: AMOUNTS FALLINGDUE AFTER ONE YEAR Debentures 100,000 86,000 140,100 354,100FINANCED BY: £ £ Ordinary Shares of £ 1.00 each 50,000 62,000 Share Premium 12,000 22,000 Retained earnings 78,100 270,100 140,100 354,1003001/2/06/MA 11 CONTINUED ON THE NEXT PAGE
  12. 12. SECTION B CONTINUEDQUESTION 4 CONTINUED Income Statement for Thackley Ltd Year Ended 31 March 2006 £ £Sales 490,000Cost of sales 170,000Gross profit 320,000Distribution expenses 64,000Administrative expenses 37,000 101,000Net operating profit 219,000Debenture interest 7,000 212,000Dividends paid and proposed 20,000Retained profit 192,000NOTES 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)3001/2/06/MA 12
  13. 13. MODEL ANSWER TO QUESTION 4(a) Reconciliation: £ Net operating profit 219,000 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 78,870Returns on investment and servicing of financeDebenture interest paid (7,000)Capital expenditure and financial investmentSale of investments 7,000Sale of tangible fixed assets 5,000Purchase 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)Net cash inflow before financing 24,570FinancingIssue of shares (62,000 – 50,000 – 2,000) + (22,000 – 12,000 + 2,000) 22,000Repayment of debentures (100,000 – 86,000) (14,000)Net cash inflow 8,000Net increase in cash (72,150 – 39,580) 32,5703001/2/06/MA 13
  14. 14. SECTION B CONTINUEDQUESTION 5Following is the summarised Consolidated Balance Sheet of Pickering Ltd and its subsidiary Goole Ltdat 31 December 2004: £Tangible fixed assets 170,100Goodwill on consolidation 18,000Net current assets 112,200 300,300 £Share Capital 100,000Retained earnings 176,300Minority interest 24,000 300,300Pickering Ltd acquired 80% of Goole Ltd’s ordinary shares on 1 January 2001. Pickering Ltd’s policyis 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 earningson 1 January 2001 were £36,000. No dividends have been paid or proposed by either Pickering Ltd orGoole Ltd since Goole Ltd became a subsidiary company.REQUIREDCalculate:(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 anissued ordinary share capital of 4,000 £1 ordinary shares. Its retained earnings at 1 January 2005were £ 16,000.Following is the summarised Consolidated Balance Sheet of Pickering Ltd and its subsidiaries GooleLtd and Maltby Ltd at 31 December 2005: £Tangible fixed assets 248,100Goodwill on consolidation 46,000Net current assets 146,300 440,400 £Share capital 100,000Retained earnings 302,600Minority interest 37,800 440,4003001/2/06/MA 14
  15. 15. SECTION B CONTINUEDQUESTION 5 CONTINUEDNo 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.REQUIREDCalculate:(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)3001/2/06/MA 15
  16. 16. MODEL ANSWER TO QUESTION 5(a) Goodwill on the acquisition of Goole Ltd £ Goodwill at 31 December 2004 (1/5) 18,000 Goodwill written off (4 x 18,000) 72,000 ∴ Goodwill on acquisition 90,000(b) Total net profit of Goole Ltd since acquisition £ Minority interest - Share capital (20% x 20,000) 4,000 Retained earnings (R) 20,000 24,000 Retained earnings at 31 December 2004 (5 x 20,000) 100,000 Retained earnings at 1 January 2001 36,000 ∴ Total net profits since acquisition 64,000(c) Retained earnings of Pickering Ltd at 31 December 2004 £ Retained earnings as per Balance Sheet 176,300 LESS: Group share of Goole Ltd’s profits (0.80 x 64,000) 51,200 125,100 ADD: Goodwill written off 72,000 ∴ Retained earnings of Pickering Ltd 197,100(d) Goodwill on the acquisition of Maltby Ltd £ Goodwill attributable to Goole Ltd NIL ∴ Goodwill attributable to Maltby Ltd (4/5) 46,000 Goodwill written off (0.25 x 46,000) 11,500 ∴Goodwill on acquisition 57,500(e) Net profit of Maltby Ltd since acquisition £ Minority interest - Share Capital Goole Ltd (20% x 20,000) 4,000 Share Capital Maltby Ltd (30% x 4,000) 1,200 Retained earnings Goole Ltd [20,000 + (20% x 10,500)] 22,100 Retained earnings Maltby Ltd (R) 10,500 37,800 Retained earnings at 31 December 2005 (10,500 x 10/3) 35,000 Retained earnings at 1 January 2005 16,000 ∴ Net profit of Maltby Ltd - year to 31 December 2005 19,0003001/2/06/MA 16
  17. 17. QUESTION 6Blackpool has sold tables for many years. On 1 January 2005 he opened his first branch inFleetwood. All double entry records are kept at the head office. All tables are purchased by headoffice 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 parttime staff were entitled to a commission equal to 5% of sales revenue. The manager was entitled to abonus 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 Blackpool: (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)3001/2/06/MA 17
  18. 18. MODEL ANSWER TO QUESTION 6(a)(i) Branch Stock Account £ £Goods sent to branch (480 x 91) ½ 43,680 Goods sent to branch (60 x 91) ½ 5,460Branch stock adj. (480 x 39) ½ 18,720 Branch stock adj. (60 x 39) ½ 2,340Goods sent to branch (125 x 63) ½ 7,875 Goods sent to branch (5 x 63) ½ 315Branch stock adj. (125 x 27) ½ 3,375 Branch stock adj. (5 x 27) ½ 135 Bank (370* x 130) 2 48,100 Bank (114** x 90) 2 10,260 Balance c/d (50 x 130) ½ 6,500 Balance c/d (6 x 90) ½ 540 73,650 73,650 * 480-60-50 = 370 ** 125-5-6 = 114(ii) Branch Stock Adjustment Account £ £Branch stock ½ 2,340 Branch stock ½ 18,720Branch stock ½ 135 Branch stock ½ 3,375Profit and loss (R) 1 17,508Balance c/d (50 x 39) 1 1,950Balance c/d (6 x 27) 1 162 22,095 22,095(iii) Branch Profit and Loss Account £ £Rent (5,000 x 12/15) 1 4,000 Branch stock adjustment ½ 17,508Sundry (50 x 12) ½ 600Wages (20 x 52) ½ 1,040Salary (300 x 12) ½ 3,600Comm. (0.05 x 58,360) ½ 2,918Profit before bonus 5,350 17,508 17,508Bonus (0.04 x 5,350) ½ 214 Profit before bonus 5,350Net profit 5,136 5,350 5,350 (18 marks)(b) Large items like tables are easy to count and difficult to lose or steal.3001/2/06/MA 18 © Education Development International plc 2006

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