LCCI International Qualifications

Accounting Level 3

Model Answers
Series 4 2010 (3012)

For further information contact us:

Tel. +44 (0) 8707 202909 Email. enquiries@ediplc.com www.lcci.org.uk

Accounting 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) (2) Questions Model Answers 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, plus a fully worked example or sample answer (where applicable) where appropriate, additional guidance relating to individual questions or to examination technique

(3)

Helpful Hints

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.

3012/4/10/MA

Page 1 of 19

QUESTION 1 Forth Ltd 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 companys Trial Balance drawn up at the end of the companys financial year. REQUIRED (a) State (yes or no) whether or not each of the following is part of Forth Ltds double entry book-keeping system: (i) (ii) (iii) Sales Ledger Control Account Sales Ledger Sales Day Book. (3 marks) For each of the above (a) (i) (ii) (iii): (b) (c) state whether individual sales figures, total sales figures or both individual and total sales figures will be included explain their purpose and how they are linked together in accounting for sales. (9 marks) On 31 March 2010 Forth Ltds 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) (2) (3) (4) (5) (6) a cheque for 3,500, received from a customer, had been entered in the customers account as 5,300 a page in the Sales Day Book had been over-added by 237 a sales invoice for 1,200 had been completely omitted from the books a sales invoice for 2,100 had been entered twice in the Sales Day Book a credit balance of 40, in the list of Sales Ledger balances, had been incorrectly listed as a debit balance 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) (ii) (iii) the amended Sales Ledger Control Account balance the amended net total of the balances extracted from the Sales Ledger the difference remaining between (i) and (ii) above. (11 marks) Forth Ltds 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 accountants 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)

3012/4/10/MA

Page 2 of 19

MODEL ANSWER TO QUESTION 1 (a) (i) (ii) (iii) (b) (i) (ii) (iii) (c) (i) Yes No No total sales individual sales individual and total sales Shows the total amount owing by debtors 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. Shows the amounts owing by individual debtors 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. 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.

(ii)

(iii)

3012/4/10/MA

Page 3 of 19

QUESTION 1 CONTINUED (d) (i) (2) (3) (4) (6) Sales Ledger Control Account Original balance Addition error in Sales Day Book Sales invoice omitted Sales invoice entered twice in Sales Day Book Contras omitted Amended balance Sales Ledger Balances Original net total Incorrectly recorded cheque (5,300-3,500) Sales invoice omitted Sales invoice entered twice in Sales Day Book Credit balance listed as debit balance (40 x 2) Contras recorded twice 46,438 (237) 1,200 (2,100) (60) 45,241 41,634 1,800 1,200 (2,100) (80) 60 42,514 45,241 42,514 2,727

(ii) (1) (3) (4) (5) (6)

(iii)

Difference Sales Ledger Control Account Sales Ledger Balances Difference

(e)

Accountants 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.

3012/4/10/MA

Page 4 of 19

QUESTION 2 Tweed Ltd is a 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 Ltd at 31 December 2009 is as follows: 80,000 5,000 30,000

Ordinary share capital (1 each) Share premium Retained earnings

The Managing Director of Tweed Ltd, being aware of the unhappy shareholders, has made the following proposals, to take place in the order given: (1) (2) (3) 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) (2) (3) (4) REQUIRED (b) Briefly discuss the truth or otherwise of each of the Managing Directors comments. (8 marks) (Total 25 marks) revaluing the buildings makes the Balance Sheet stronger and will have no effect on profit in future years the capitalisation issue would not cost the company anything 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 buying out the unhappy shareholders should mean a more united company in future. increase the value of the buildings by 10,000, thereby incorporating a recent professional revaluation in the Balance Sheet make a 1 for 10 capitalisation (bonus) issue out of non-distributable reserves issue for cash 20,000 shares at a premium of 0.05 and then purchase all the shares of the unhappy shareholders at par.

3012/4/10/MA

Page 5 of 19

MODEL ANSWER TO QUESTION 2 (a) Journal Entries (1) Buildings Revaluation reserve Revaluation of buildings Share premium Revaluation reserve Ordinary share capital (80,000/10) Capitalisation issue of one share for every ten Bank (20,000 x 1.05) Ordinary share capital Share premium Issue of ordinary shares at 1.05 Ordinary share capital Share purchase Purchase of ordinary shares Retained earnings (W1) Capital redemption reserve Amount to be financed out of distributable profits Share purchase Bank Payment to ordinary shareholders for shares redeemed W1 Nominal value of shares redeemed (22,000 x 1.00) Proceeds from new issue (20,000 x 1.05) DR 10,000 CR 10,000

(2)

5,000 3,000 8,000

(3)

21,000 20,000 1,000 22,000 22,000 1,000 1,000 22,000 22,000 22,000 21,000 1,000

(b)

Managing Directors Comments (1) - the Balance Sheet, with a higher value for fixed assets, may well appear stronger. - however depreciation must be provided on the revalued amount, so there will be an effect on future profits - 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 - there is no evidence to suggest the unhappy shareholders will accept the companys 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 - the remaining shareholders may be more united - the unity of the Board of Directors and senior management is more important, and whether the company is more successful in future

(2)

(3)

(4)

3012/4/10/MA

Page 6 of 19

QUESTION 3 On 1 January 2009, Wear Plc acquired 75% of the ordinary share capital of Tyne Ltd. 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 Ltd. No narrative is required. (4 marks) Wear Plc amortises goodwill at 20% per year on a straight line basis and depreciates tangible fixed 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: Fixed assets Goodwill on consolidation Tangible fixed assets Current assets Stock Debtors Bank Creditors: amounts falling due within one year Creditors Accruals Net current assets Capital and reserves Ordinary share capital (1 shares) Share premium Retained earnings Minority interest

16,000 315,000 331,000

90,000 54,000 19,000 163,000 58,000 9,000

67,000 96,000 427,000 200,000 40,000 157,000 397,000 30,000 427,000

Adjustments to the above Balance Sheet are required in respect of the following matters: (1) (2) (3) (4) (5) On 1 January 2009 the fair value of Tyne Ltds tangible fixed assets was 10,000 higher than their book value. This had not been taken into consideration in the original consolidation. Wear Plc sold goods costing 30,000 to Tyne Ltd during 2009 for 50,000. On 31 December 2009 half the value of these goods remained unsold. Tyne Plc sold goods costing 20,000 to Wear Plc during 2009 for 30,000. On 31 December 2009 a quarter of the value of these goods remained unsold. Inter company balances of 7,000 were included in the consolidated debtors and creditors. A bank overdraft of 10,000 in Wear Plc had been offset against the bank balance in hand of Tyne Ltd.

3012/4/10/MA

Page 7 of 19

QUESTION 3 CONTINUED (6) REQUIRED (b) (c) Calculate the goodwill on consolidation at 1 January 2009, before the fair value adjustment. (2 marks) Calculate the goodwill on consolidation at 31 December 2009, after the fair value adjustment and after amortisation. (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) A provision for obsolete stock (4,000) in Wear Plc and a provision for bad debts (5,000) in Tyne Ltd have yet to be made.

3012/4/10/MA

Page 8 of 19

MODEL ANSWER QUESTION 3 (a) Journal Entry Investment in Tyne Ltd Ordinary share capital Share premium Bank DR 90,000 CR 40,000 20,000 30,000

(b)

Goodwill at 1 January 2009 Goodwill per draft balance sheet (80%) Amortisation charged (20%)

16,000 4,000 20,000

(c)

Goodwill at 31 December 2009 Goodwill as above Fair value adjustment (75% x 10,000) Amortisation charged 20% (20,000-7,500)

20,000 (7,500) (2,500) 10,000

3012/4/10/MA

Page 9 of 19

QUESTION 3 CONTINUED (d) Consolidated Balance Sheet of the Wear and Tyne Group at 31 December 2009 Fixed assets Goodwill Tangible fixed assets (315,000+10,000-3,000) Current assets Stock (90,000-10,000-2,500-4,000) Debtors (54,000-7,000-5,000) Bank (19,000+10,000) Creditors: amounts falling due within one year Creditors (58,000-7,000) Accruals Bank overdraft Net current assets Capital and reserves Ordinary share capital Share premium Retained earnings (W 1) Minority interest (W 2) 10,000 322,000 332,000 73,500 42,000 29,000 144,500 51,000 9,000 10,000

70,000 74,500 406,500 200,000 40,000 136,625 376,625 29,875 406,500 157,000 1,500 (2,250) (10,000) (1,875) (4,000) (3,750) 136,625 30,000 2,500 (750) (625) (1,250) 29,875

W 1 Retained earnings Original Goodwill amortisation (4,000-2,500) Depreciation (.75 x 3,000) Unrealised profit in stock (1) Unrealised profit in stock (2) (.75 x 2,500) Provision for obsolete stock Provision for bad debts (.75 x 5,000) W 2 Minority interest Original Fair value adjustment Depreciation (.25 x 3,000) Unrealised profit in stock (2) (.25 x 2,500) Provision for bad debts (.25 x 5,000)

3012/4/10/MA

Page 10 of 19

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 Debtors Cash sales will be 5% of credit sales and will be as follows: January 5,000 February 6,000 March 6,500 Debtors 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 Fixed Assets 3,200 will be received, in February 2011, from the sale of fixed assets on 1 January 2011. These cost 12,000 and have a net book value of 4,000. Depreciation is to be charged at 3,000 per month in 2011. Other Receipts Tay has recently had a substantial gambling win and will be paying 1,000 into the business bank account in February 2011. Purchases and Creditors Cash purchases will be equal to 10% of total purchases and will be as follows: January 2,700 February 3,600 March 4,500 Creditors 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. General Cash Expenses These will be incurred as follows: December (2010) 1,000 January 1,100 February 1,200 March 1,100

(3)

(4)

(6)

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. Stock at 31 December 2010 is expected to have cost 27,500. This figure is expected to have risen by 25% by 31 March 2011.

3012/4/10/MA

Page 11 of 19

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 Trading and Profit and Loss Account 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) (ii) REQUIRED (c) Briefly discuss whether or not the bank manager will be impressed by the above claims. (4 marks) (Total 25 marks) paying his gambling winnings into the business bank account shows him to be a prudent and responsible businessman the extended credit period recently offered to customers, will improve sales, improve cash flow and reduce bad debts.

3012/4/10/MA

Page 12 of 19

MODEL ANSWER QUESTION 4 (a) Tay: Cash Budget for three months to 31 March 2011 January 5,000 64,000 February 6,000 78,000 3,200 69,000 Payments Cash purchases Credit purchases (W2) Wages and drawings General expenses (W3) 2,700 60,800 25,000 1,050 89,550 Net Receipt/(Payment) Opening balance Closing balance Presentation (provided no aliens) (20,550) (4,250) (24,800) 1,000 88,200 3,600 30,600 25,000 1,150 60,350 27,850 (24,800) 3,050 99,500 4,500 29,700 25,000 1,150 60,350 39,150 3,050 42,200 March 6,500 93,000

Receipts Cash sales Credit sales (W1) Fixed asset disposal Capital paid in

3012/4/10/MA

Page 13 of 19

QUESTION 4 CONTINUED January 28,000 (100%) 20,000 (50%) 16,000 (50%) 64,000 January 32,000 (100%) 28,800 (2/3) 60,800 January 500 (50%) 550 (50%) 1,050 February 20,000 (50%) 8,000 (25%) 50,000 (50%) 78,000 February 14,400 (1/3) 16,200 (2/3) 30,600 February 550 (50%) 600 (50%) 1,150 March 8,000 (25%) 25,000 (25%) 60,000 (50%) 93,000 March 8,100 (1/3) 21,600 (2/3) 29,700 March 600 (50%) 550 (50%) 1,150

W1

Credit sales: October (28,000) November (40,000) December (32,000) (R) January (5,000 x 100/5 = 100,000) February (6,000 x 100/5 = 120,000)

W2

Credit purchases: November (32,000) December (43,200) ( R) January (2,700 x 9 = 24,300) February (3,600 x 9 = 32,400)

W3

General expenses: December (1,000) January (1,100) February (1,200) March (1,100)

3012/4/10/MA

Page 14 of 19

QUESTION 4 CONTINUED (b) Tay: Budgeted Trading and Profit and Loss Account three months ending 31 March 2011 Sales [(5,000 + 6,000 + 6,500) x 100/5 + 17,500] Less: Cost of goods sold: Opening stock Purchases [(2,700 + 3,600 + 4,500) x 100/10] Less: Closing stock (27,500 x 1.25) Gross profit Less: Depreciation (3,000 x 3) Wages [(25,000 - 5,000) x 3] General expenses (1,100 + 1,200 + 1,100) Loss on disposal (4,000 - 3,200) Net profit 9,000 60,000 3,400 800 73,200 193,175 27,500 108,000 135,500 34,375 101,125 266,375 367,500

(c)

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

3012/4/10/MA

Page 15 of 19

QUESTION 5 Taff Ltd 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: Fixed assets Land and buildings Plant and machinery Motor vehicles Current assets Stock Debtors Creditors: amounts falling due within one year Creditors Bank overdraft Net current assets 110,000 40,000 25,000 175,000 11,200 12,400 23,600 7,100 14,300

21,400 2,200 177,200 117,300 59,900 177,200

Capital accounts Usk Wye

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 Ltd took over all the assets of the partnership and assumed responsibility for the creditors of the partnership, subject to the following: (1) (2) (3) (4) the land and buildings were revalued at 500,000 and the plant and machinery was revalued at 36,000 the partnership sold a vehicle for 800 cash to a third party and the remaining vehicles were revalued at 3,000 a provision for bad debts was created, equal to 5% of debtors 200 of stock was written off and a provision of 10% for obsolete stock was provided against the remaining stock.

Before the purchase of the partnership, Taff Ltd 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) (ii) (iii) Realisation Account Partners Capital Accounts (in columnar form) Bank Account. (11 marks)

3012/4/10/MA

Page 16 of 19

QUESTION 5 CONTINUED (b) Calculate the balances on the following accounts of Taff Ltd immediately after the acquisition of the partnership: (i) (ii) (iii) Ordinary share capital Share premium Goodwill. (9 marks) The agreement between Taff Ltd and the partnership also states that the partners: (i) (ii) REQUIRED (c) (i) (ii) Explain why these conditions would have been included in the agreement. Discuss briefly whether these conditions treat Usk and Wye fairly. (5 marks) (Total 25 marks) will be employed by Taff Ltd for five years from the date of the agreement must not work for any competitor during that period.

3012/4/10/MA

Page 17 of 19

MODEL ANSWER TO QUESTION 5 (a) (i) Realisation Account Land and buildings 110,000 Plant and machinery 40,000 Motor vehicles 25,000 Stock 11,200 Debtors 12,400 Surplus: Usk (2) Wye (1)

Creditors Bank (vehicle) Bank (Taff Ltd) Shares in Taff Ltd: Usk (2) Wye (1)

7,100 800 20,000 400,000 200,000

286,200 143,100 627,900 Capital Accounts Usk 400,000 3,500 403,500 Wye 200,000 3,000 203,000 Bank Account 800 20,000 20,800 Usk 117,300 286,200 403,500

627,900

(ii)

Realisation Bank (R)

Opening balance Realisation

Wye 59,900 143,100 203,000

(iii)

Realisation Realisation

Opening balance Usk Wye

14,300 3,500 3,000 20,800

(b)

(i)

Ordinary Share Capital of Taff Ltd Existing shares Shares issued to partners (2,500,000 x 0.25) (2,000,000 x 0.25) 625,000 500,000 1,125,000

(ii)

Share Premium Existing shares Shares issued to partners (2,500,000 x .10) (2,000,000 x .05) 250,000 100,000 350,000

3012/4/10/MA

Page 18 of 19

QUESTION 5 CONTINUED (iii) Goodwill Purchase Consideration Cash Shares Less: Land and buildings Plant and machinery Motor vehicles Debtors (12,400 x .95) Stock [(11,200 - 200) x .90] Creditors 500,000 36,000 3,000 11,780 9,900 (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 - 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. 20,000 600,000 620,000

(ii)

3012/4/10/MA

Page 19 of 19

EDI International House Siskin Parkway East Middlemarch Business Park Coventry CV3 4PE UK Tel. +44 (0) 8707 202909 Fax. +44 (0) 2476 516505 Email. enquiries@ediplc.com www.ediplc.com

1517/2/10/MA

Page 20 of 12

Education Development International plc 2010