LCCI International Qualifications

Accounting (IAS) Level 3

Model Answers
Series 4 2010 (3902)

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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) (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)

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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.

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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 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 Forths 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 Forths 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) Forths 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) MODEL ANSWEWR TO QUESTION 1 3902/4/10/MA Page 2 of 19

(a)

(i) (ii) (iii)

Yes No No total sales individual sales individual and total sales 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. 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. 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.

(b)

(i) (ii) (iii)

(c)

(i)

(ii)

(iii) (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.

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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: $ 80,000 5,000 30,000

Ordinary share capital ($1 each) Share premium Accumulated profits

The Managing Director of Tweed, 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.

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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 Accumulated profits (W1) Capital redemption reserve Amount to be financed out of distributable profits Share purchase Bank Payment to ordinary shareholders for shares redeemed $ 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

W1

Nominal value of shares redeemed (22,000 x 1.00) Proceeds from new issue (20,000 x 1.05)

$ 22,000 21,000 1,000

(b)

Managing Directors 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 - 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 or not the company is more successful in future

(2)

(3)

(4)

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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 Tangible non current assets Current assets Inventory Receivables Bank Payables: amounts falling due within one year Payables Accruals Net current assets 427,000 Capital and reserves Ordinary share capital ($1 shares) Share premium Accumulated profits Minority interest 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) On 1 January 2009 the fair value of Tynes 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. 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. 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. Inter company balances of $7,000 were included in the consolidated receivables and payables. A bank overdraft of $10,000 in Wear had been offset against the bank balance in hand of Tyne. 58,000 9,000 67,000 90,000 54,000 19,000 163,000 494,000 16,000 315,000 331,000 $

(2) (3) (4) (5)

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QUESTION 3 CONTINUED 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 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 Investment in Tyne 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%) Amount written off (20%)

16,000 4,000 20,000

(c)

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

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 Tangible non-current assets (315,000 + 10,000 - 3,000) Current assets Inventory (90,000 - 10,000 - 2,500 - 4,000) Receivables (54,000 - 7,000 - 5,000) Bank (19,000 + 10,000) $ $ 10,000 322,000 332,000 73,500 42,000 29,000 144.500 476,500 Capital and reserves Ordinary share capital Share premium Accumulated profits (W 1) Minority interest (W 2) Current liabilities Payables (58,000 - 7,000) Accruals Bank overdraft $ 200,000 40,000 136,625 376,625 29,875 406,500 51,000 9,000 10,000 70,000 476,500 W 1 Retained earnings Original Goodwill written off (4,000 - 2,500) Depreciation (0.75 x 3,000) Unrealised profit in inventory (1) Unrealised profit in inventory (2) (0.75 x 2,500) Provision for obsolete inventory Provision for bad debts (0.75 x 5,000) W 2 Minority interest Original Fair value adjustment Depreciation (0.25 x 3,000) Unrealised profit in inventory (2) (0.25 x 2,500) Provision for bad debts (0.25 x 5,000) $ 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

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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. 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 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. 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. 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) (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.

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MODEL ANSWER TO 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 (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) Non-current asset disposal Capital paid in

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)

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

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)

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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] Less: Cost of goods sold: Opening inventory Purchases [(2,700 + 3,600 + 4,500) x 100/10] Less: Closing inventory (27,500 x 1.25) Gross profit Less: Depreciation (30,000 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 90,000 60,000 3,400 800 154,200 112,175 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.

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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 Plant and machinery Motor vehicles Current assets Inventory Receivables $ 110,000 40,000 25,000 175,000 11,200 12,400 23,600 198,600 $ Payables: amounts falling due within one year Payables Bank overdraft Capital accounts Usk Wye 7,100 14,300 21,400 117,300 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) (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 receivables $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) (ii) (iii) Realisation Account Partners Capital Accounts (in columnar form) 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) (ii) (iii) Ordinary share capital Share premium Goodwill. (9 marks) The agreement between Taff 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 for five years from the date of the agreement must not work for any competitor during that period.

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

Payables Bank (vehicle) Bank (Taff) Shares in Taff: 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 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 $ 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 0.10) (2,000,000 x 0.05) 250,000 100,000 350,000

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QUESTION 5 CONTINUED (iii) Goodwill $ Purchase Consideration Cash Shares Less: Land and buildings Plant and machinery Motor vehicles Receivables (12,400 x 0.95) Stock [(11,200 - 200) x 0.90] Payables 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)

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