You are on page 1of 17

Accounting

(IAS)
Level 3

Model Answers
Series 2 2008 (Code 3902)
Vision Statement
Our vision is to contribute to the achievements of learners around
the world by providing integrated assessment and learning services,
adapted to meet both local market and wider occupational needs
and delivered to international standards.

© Education Development International plc 2008 Company Registration No: 3914767


All rights reserved. This publication in its entirety is the copyright of Education Development International plc.
Reproduction either in whole or in part is forbidden without written permission from Education Development International plc.

International House Siskin Parkway East Middlemarch Business Park Coventry CV3 4PE
Telephone: +44 (0) 8707 202909 Facsimile: + 44 (0) 24 7651 6505
Email: enquiries@ediplc.com
Accounting (IAS) Level 3
Series 2 2008

How to use this booklet

Model Answers have been developed by Education Development International plc (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 2008

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.

Page 1 of 15
Page 2 of 15
Accounting (IAS) Level 3
Series 2 2008
QUESTION 1

The Purchases Ledger Control Account of Granta, a private company, for the month of January 2008
was prepared as shown below:
Purchases Ledger Control Account

Debit Credit
$ $
Cash paid to suppliers 1,253,270 Balance b/f 105,000
Discount received 12,500 Credit purchases 1,600,000
Purchases returns 4,000
Interest charged 12,500
Balance c/f 455,730
1,721,500 1,721,500

The list of balances extracted from the Purchases Ledger at 31 January 2008 totalled $436,735.

In addition to the error in the Purchases Ledger Control Account shown above, the company’s auditors
discovered the following errors:
(1) An invoice for $3,000 recorded in the Purchases Daybook was not posted to the Supplier's
Account in the Purchases Ledger

(2) The discount received column in the Cash Book was over-added by $2,000

(3) The list of payables' balances includes a credit balance of $1,000, which was incorrectly listed as
a debit balance

(4) The debit side of one Supplier's Account had been under-added by $250

(5) A credit balance of $3,295 has been omitted from the list of balances

(6) Purchases Ledger contras of $4,000, representing a balance in the Purchases Ledger set off
against a balance in the Sales Ledger, have been recorded in the Account of the supplier but not
in the Control Account

(7) A cheque for $14,500 paid to a supplier has been wrongly posted to the Supplier's Account as
$10,450

(8) A purchases invoice of $30,000 was omitted from the Purchases Daybook

(9) The Purchases Daybook was over-added by $5,000.

REQUIRED

(a) (i) Prepare a statement correcting the balance at 31 January 2008 on the Purchases Ledger
Control Account. An amended Purchases Ledger Control Account is not required.
(10 marks)

(ii) Prepare a statement correcting the original total of the list of balances extracted from the
Purchases Ledger.
(12 marks)

(b) List three advantages of Control Accounts.


(3 marks)

(Total 25 marks)

3902/2/08/MA Page 3 of 15
MODEL ANSWER TO QUESTION 1

(a) (i)
Correction of Purchases Ledger Control Balance
$ $
Balance per question 455,730

Add:
Discount received adjustment 2,000
Purchases omitted 30,000
32,000
487,730
Deduct:
Contras 4,000
Purchases over - added 5,000
Purchases returns (4,000 x 2) 8,000
17,000
Corrected balance 470,730

(ii)
Correction of total of Purchases Ledger Balances
$ $
Balance per question 436,735

Add:
Invoice not posted 3,000
Credit balance listed as a debit (1,000 x 2) 2,000
Omitted balance 3,295
Purchases omitted 30,000
38,295
475,030
Deduct:
Debit side under-added 250
Incorrect recording of cheque (14,500 – 10,450) 4,050
4,300
Corrected balance 470,730

(b) Control accounts:


Help to locate errors
Help to prevent fraud
Provide a useful check on the accuracy of the list of individual receivables/payables
Facilitate the preparation of final accounts

3902/2/08/MA Page 4 of 15
QUESTION 2

Chow and Patel are in partnership sharing profits and losses in the ratio 3:2 respectively. The
partners do not maintain double entry records but have produced the following Balance Sheet at 31
December 2006:

Fixed Assets Cost Depreciation Net


$ $ $
Vehicles 160,000 40,000 120,000
Equipment 300,000 60,000 240,000
460,000 100,000 360,000

Current Assets
Inventory 125,000
Trade receivables 400,000
Prepayments:
Advertising 10,000
Insurance 20,000
Bank 50,000
605,000
Current Liabilities
Trade payables 75,000
Accruals:
Electricity 15,000
Rent 5,000
95,000
Net Current Assets 510,000
870,000

Financed by
$ $
Capital Accounts: Chow 400,000
Patel 250,000
650,000
Current Accounts: Chow 115,000
Patel 105,000
220,000
870,000

Their summarised Bank Account for the year ended 31 December 2007 was as follows:
$ $
Balance b/d 50,000
Trade receivables 2,000,000 Trade payables 1,000,000
Carriage inwards 22,500
Insurance 25,000
Electricity 35,000
Telephone 17,500
Advertising 11,250
Rent 75,000
Office supplies 6,250
New equipment 300,000
Drawings:
Chow 300,000
Patel 150,000
Balance c/d 107,500
2,050,000 2,050,000

3902/2/08/MA Page 5 of 15
QUESTION 2 CONTINUED

Additional information:

(1) During the year to 31 December 2007:

Settlement discounts of $25,000 were given to receivables, settlement discounts of $7,500 were
received from payables and bad debts of $75,000 were written off.

(2) At 31 December 2007:

Inventory was $185,000, receivables were $275,000, payables were $50,000, accrued
electricity was $12,500, prepaid insurance was $5,000, vehicles had a book value of $90,000 and
equipment had a book value of $490,000.

(3) The partnership agreement included the following:

Interest on drawings to be charged at 5% of total drawings for the year, interest on capital
accounts to be allowed at 8% per year and Patel to be entitled to an annual salary of $100,000.

REQUIRED

Prepare the following for the partnership of Chow and Patel:

(a) The Income Statement and Appropriation Account for the year ended 31 December 2007.
(18 marks)

(b) The Partners’ Current Accounts, in columnar form, for the year ended 31 December 2007.
(7 marks)

(Total 25 marks)

3902/2/08/MA Page 6 of 15
MODEL ANSWER TO QUESTION 2

(a)
Chow and Patel
Income Statement and Appropriation Account
for the year ended 31 December 2007
$ $
Sales (275,000 + 25,000 + 75,000 + 2,000,000 - 400,000) 1,975,000

Cost of sales
Opening inventory 125,000
Purchases (1,000,000 + 50,000 + 7,500 - 75,000) 982,500
Carriage in 22,500
1,130,000
Closing inventory 185,000
945,000
Gross profit 1,030,000
Discounts received 7,500
1,037,500

Discounts allowed 25,000


Bad debts 75,000
Insurance (25,000 + 20,000 - 5,000) 40,000
Electricity (35,000 + 12,500 - 15,000) 32,500
Telephone 17,500
Advertising (11,250 + 10,000) 21,250
Rent (75,000 - 5,000) 70,000
Office supplies 6,250
Depreciation:
Vehicles (120,000 - 90,000) 30,000
Equipment (240,000 + 300,000 - 490,000) 50,000
367,500
Net profit 670,000

Add: Interest on drawings:


Chow (300,000 x 5%) 15,000
Patel (150,000 x 5%) 7,500
22,500
692,500
Less: Interest on capital:
Chow (400,000 x 8%) 32,000
Patel (250,000 x 8%) 20,000

Salary - Patel 100,000


152,000
540,500
Profit share:
Chow (540,500 x 3/5ths) 324,300
Patel (540,500 x 2/5ths) 216,200
-540,500
0

3902/2/08/MA Page 7 of 15
MODEL ANSWER TO QUESTION 2 CONTINUED

(b) Current Accounts


Chow Patel Chow Patel
$ $ $ $
Bal b/d 115,000 105,000
Interest on drawings 15,000 7,500
Profit share 324,300 216,200
Drawings 300,000 150,000
Interest on capital 32,000 20,000
Bal c/d 156,300 283,700
Salary - 100,000

471,300 441,200 471,300 441,200

Bal b/d 156,300 283,700

3902/2/08/MA Page 8 of 15
QUESTION 3

Alpha, a private company, was formed on 1 January 2007. During the year ended 31 December
2007, the following transactions took place:

(1) Issued 500,000 Ordinary Shares of $1 each at par. All proceeds were received by 31 December
2007. No dividends were paid on these shares during the year ended 31 December 2007

(2) Paid $15,000 expenses incurred in issuing shares

(3) Purchased office equipment costing $300,000 from Gamma and paid $275,000. The
remaining amount was paid in March 2008

(4) Bought goods on credit for $1,000,000 and sold them on credit at a margin of 25% of selling
price

(5) Received $1,100,000 from customers and paid $900,000 to suppliers of goods

(6) Invested $75,000 in short term liquid assets

(7) Sold office equipment costing $30,000 for $27,500 cash

(8) Purchased $250,000 9% Debentures in Zeta, a public company, at 95. No interest was received
during the year ended 31 December 2007

(9) Borrowed $450,000 from Gnat Bank to finance the purchase of a new building, which cost
$800,000. At 31 December 2007, Alpha owed $50,000 to the vendor of the building

(10) Paid interest on bank loan of $15,000

(11) Paid operating expenses of $225,000

(12) Issued 250,000 $1 9% Preferred Shares at a premium of $0.10 per share and received all
cash by 31 December 2007. No dividends were paid on these shares during the year ended 31
December 2007

(13) Issued $500,000 5% Debentures in exchange for new plant and machinery. No interest was
paid on the debentures during the year ended 31 December 2007

(14) Bought 250,000 Ordinary Shares of $1 in Beta, a public company, at a premium of $0.05 per
share and paid cash in full settlement by 31 December 2007. No dividends were received on
these shares during the year ended 31 December 2007

(15) Wrote off $150,000 of the cost of the new building because of a permanent diminution in value

(16) Granted a temporary overdraft facility of $500,000 by Gnat Bank.

REQUIRED

(a) Prepare the Cash Flow Statement of Alpha for the year ended 31 December 2007 in accordance
with IAS 7.
(21 marks)

(b) Give two reasons why a company, in its first year of operation, might have a net cash outflow
from operations, despite having a satisfactory gross profit margin.
(4 marks)

(Total 25 marks)

3902/2/08/MA Page 9 of 15
MODEL ANSWER TO QUESTION 3

(a)
Alpha
Cash Flow Statement for the year ended 31 December 2007

$ $
Operating activities

Loss from operations -25,000


-25,000
(W1)
Cash generated by operations

Interest paid -15,000


-40,000
Net cash from operating activities

Investing activities
Purchase of tangible assets (275,000 + 750,000) -1,025,000
Sale of tangible assets 27,500
Purchase of investments (237,500 + 262,500) -500,000
Purchase of short term liquid assets -75,000
Net cash from investing activities -1,572,500
-1,612,500

Financing activities

Issue of ordinary shares for cash


(500,000 – 15,000 expenses) 485,000
Loan from bank 450,000
Issue of preferred shares (250,000 x 1.1) 275,000
Net cash used in financing activities 1,210,000

Net decrease in cash -402,500


Cash at beginning of year 0
Cash at end of year -402,500

(W1)

Cash received from receivables 1100000


Cash paid to payables (900000)
Cash paid for operating expenses (225000)
(25000)

(b) Investment in working capital


Low sales
High advertising required
Fund raising costs, etc.

3902/2/08/MA Page 10 of 15
QUESTION 4

A company manufactures three types of vacuum cleaner, Alpha, Gamma and Zeta. The following
data applied to the year ended 31 March 2008:

Alpha Gamma Zeta


Sales in units 2,000 2,000 5,000

$ $ $
Total sales value 1,800,000 1,400,000 5,000,000

Costs:
Direct material 600,000 500,000 800,000
Direct labour 650,000 400,000 2,050,000
Variable overheads 350,000 300,000 650,000
Fixed overheads 300,000 300,000 300,000
Total costs 1,900,000 1,500,000 3,800,000

$ $ $
Profit/(Loss) (100,000) (100,000) 1,200,000

REQUIRED

(a) Calculate for each type of vacuum cleaner, the contribution per unit. (6 marks)

(b) Calculate, for each type of vacuum cleaner:


(i) the number of units required to be sold in order to break even
(ii) the total sales value for (i) above.
(13 marks)

Both the Alpha and Gamma range of vacuum cleaners are shown as making a loss.

REQUIRED

(c) Explain why the company should not cease production of either the Alpha or the Gamma range of
vacuum cleaners. You are to consider financial reasons only.
(6 marks)

(Total 25 marks)

3902/2/08/MA Page 11 of 15
MODEL ANSWER TO QUESTION 4

(a)
Unit Contribution

Alpha
1,800,000 - (1,900,000 - 300,000) = $ 100
2,000

Gamma
1,400,000 - (1,500,000 - 300,000) = $ 100
2,000

Zeta
5,000,000 - (3,800,000 - 300,000) = $ 300
5,000

(b) (i)
Number of Units

Alpha
300,000 = 3,000
100

Gamma
300,000 = 3,000
100

Zeta
300,000 = 1,000
300

(b) (ii)

Sales Value

Alpha
3,000 x 900* = $ 2,700,000

Gamma
3,000 x 700* = $ 2,100,000

Zeta
1,000 x 1,000* = $ 1,000,000

3902/2/08/MA Page 12 of 15
MODEL ANSWER TO QUESTION 4 CONTINUED

*Alpha Sales (1,800,000) divided by units (2,000) = Unit sales price (900)
Gamma Sales (1,400,000) divided by units (2,000) = Unit sales price (700)
Zeta Sales (5,000,000) divided by units (5,000) = Unit sales price (1,000)

(c) Both the Alpha and Gamma ranges are covering their variable costs and making a contribution
towards the fixed costs.

If the company ceased the manufacture of both Alpha and Gamma ranges of cleaners the
variable costs of each would cease, but the fixed costs would remain, at least for a period of time.

These fixed costs would be transferred to the Zeta range of cleaners, resulting in overall company
profits being reduced from $1,000,000 to $600,000.

3902/2/08/MA Page 13 of 15
QUESTION 5

The following are the summarised Balance Sheets of Malay International, a private company and its
subsidiary Britas, a private company, at 31 December 2007:

Malay International Britas


$ $
Investment in Britas 375,000 -
Inventory 75,000 50,000
Other net assets 450,000 375,000
900,000 425,000

$ $
Ordinary shares ($1 each) 250,000 200,000
Accumulated profits 650,000 225,000
900,000 425,000

Malay International acquired 150,000 shares in Britas at 1 January 2007 when the balance on the
accumulated profits of Britas was $150,000. Goodwill is to be written off over five years.

During the year, Britas sold goods to Malay International for $400,000, which included a mark up of
25%. At 31 December 2007 Malay International retained $50,000 of these goods in inventory, valued
at Britas’s selling price.

REQUIRED

(a) Calculate the balances on the following accounts at 31 December 2007:

(i) Goodwill
(ii) Minority interest
(iii) Consolidated accumulated profits.
(11 marks)

(b) Prepare the summarised Consolidated Balance Sheet of Malay International and its subsidiary at
31 December 2007.
(7 marks)

According to IAS 16 a tangible fixed asset, whether purchased or constructed, should initially be
measured at cost.

REQUIRED

(c) Explain what is meant by the term ‘tangible fixed asset’. (4 marks)

(d) State whether or not each of the following items should be considered part of the original cost of a
tangible fixed asset:

(i) Installation costs of a new machine


(ii) Redecoration of an office building
(iii) Legal fees associated with the purchase of land.
(3 marks)

(Total 25 marks)

3902/2/08/MA Page 14 of 15
MODEL ANSWER TO QUESTION 5

(a) (i) Goodwill


$ $
Investment 375,000
Less: Share Capital 200,000
Accumulated profits 150,000
350,000 x 75% = 262,500
112,500
Amortised - 112,500 22,500
5 90,000

(ii) Minority interest


$
**
425,000 - 10,000 = 415,000 x 25% = 103,750

(iii) Consolidated accumulated profits


$
Malay International 650,000
**
Britas (225,000 - 150,000 - 10,000) x 75% = 48,750
698,750
Less: Amortised Goodwill 22,500
676,250

** Profit on inter group sales still in inventory 50,000 x 25 = 10,000


125

(b)

Summarised Balance Sheet of the Malay International Group


at 31 December 2007
$
Goodwill 90,000
Inventory ([75,000 + 50,000] - 10,000) 115,000
Other Net Assets 825,000
1,030,000
$
Share Capital 250,000
Accumulated profits 676,250
Minority Interest 103,750
1,030,000

(c) Tangible fixed assets are defined as assets with physical substance that are held for use in the
business, for rental to others or for administrative purposes on a continuing basis.

(d) (i) Considered part


(ii) Not considered part
(iii) Considered part

3902/2/08/MA Page 15 of 15 © Education Development International plc 2008

You might also like