LCCI International Qualifications

Certificate in Accounting
Level 2

Model Answers
Series 3 2009 (3012)

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Certificate in Accounting
Series 3 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
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Page 1 of 12
QUESTION 1

Caen Ltd started business on 1 May 2009 buying and selling a single product. Details of purchases
and sales during May 2009 were as follows:

Date Transaction Litres Purchase Price Selling Price

(per litre) (per litre)
£ £
1 Purchase 70 19.00
8 Purchase 50 19.50
15 Purchase 40 20.00
16 Sale 100 36.00
18 Purchase 50 20.25
21 Purchase 60 20.00
25 Purchase 40 20.50
31 Sale 80 38.00

REQUIRED

(a) Calculate, for Caen Ltd, the total value of closing stock at 31 May 2009 using each of the
following stock pricing methods:

(i) FIFO
(ii) periodic weighted average cost (recalculated at the end of each month and correct to 2
decimal places)
(iii) perpetual weighted average cost (recalculated after each purchase and correct to 2 decimal
places).

(16 marks)

(b) Calculate, for Caen Ltd, the gross profit for May 2009 using the FIFO method of valuing stock.

(4 marks)

(c) State whether each of the following costs should be included when calculating the cost of finished
goods stock for a manufacturer:

(i) Carriage in
(ii) Carriage out
(iii) Storage
(iv) Depreciation of factory machinery
(v) Marketing salaries.

For each item, state only ‘yes’ or ‘no’.

(5 marks)

(Total 25 marks)

3012/3/09/MA Page 2 of 12
MODEL ANSWER TO QUESTION 1

(a)

(i)
FIFO Litres
Purchases (70 + 50 + 40 + 50 + 60 + 40) 310
Sales (100 + 80) 180
Closing stock 130

£
40 litres at 20.50 820.00
60 litres at 20.00 1,200.00
∴ 30 litres at 20.25 607.50
130 2,627.50

(ii)
Periodic Weighted Average Cost
Purchases £
70 x 19.00 1,330.00
50 x 19.50 975.00
40 x 20.00 800.00
50 x 20.25 1,012.50
60 x 20.00 1,200.00
40 x 20.50 820.00
6,137.50
Average cost = 6,137.50 ÷ 310 = 19.80
∴ Stock value = 130 x 19.80 = £2,574

(iii)
Perpetual Weighted Average Cost
Litres Price Value
£ £
Purchase 70 19.00 1330.00
Purchase 50 19.50 975.00
Balance 120 ∴ 19.21 2305.00
Purchase 40 20.00 800.00
Balance 160 ∴ 19.41 3105.00
Cost of goods sold 100 19.41 1941.00
Balance 60 19.41 1164.00
Purchase 50 20.25 1012.50
Balance 110 ∴ 19.79 2176.50
Purchase 60 20.00 1200.00
Balance 170 ∴ 19.86 3376.50
Purchase 40 20.50 820.00
Balance 210 ∴ 19.98 4196.50
Cost of goods sold 80 19.98 1598.40
∴ Stock value 130 19.98 2598.10

(b)

Gross Profit (FIFO method)

Sales [(100 x 36) + (80 x 38)] – Purchases 6137.5 + Stock 2,627.5

= 6,640.0 – 6,137.5 + 2,627.5 = £3,130

(c) (i) Yes (ii) No (iii) No (iv) Yes (v) No

3012/3/09/MA Page 3 of 12
QUESTION 2

On 1 January 2006 Quorn Ltd purchased 75% of the shares in Ware Ltd for £780,000. At that time
the retained profit of Ware Ltd was £300,000. Ware Ltd’s share capital consists of 1,000,000 Ordinary
Shares of £0.50 each and retained profit is its only reserve.

The summarised Profit and Loss Accounts of the two companies for the year ended
31 December 2008 were as follows:

Quorn Ltd Ware Ltd

£000 £000 £000 £000
Turnover 2,700 1,000
Cost of goods sold 1,350 470
Gross profit 1,350 530
Distribution costs 370 150
Administrative expenses 140 510 80 230
Net profit 840 300
Dividend from Ware Ltd 75 -
915 300
Dividends paid 270 100
Retained profit for year 645 200
Retained profit brought forward 380 540
Retained profit carried forward 1,025 740

Other Information

(1) Goodwill is amortised evenly over 10 years

(2) During the year ended 31 December 2008 Quorn Ltd sold goods, which had cost Quorn Ltd
£70,000, to Ware Ltd for £120,000. At 31 December 2008 40% of the value of these goods
remained in Ware Ltd’s stock.

REQUIRED

Calculate:

(a) The goodwill arising on the acquisition of Ware Ltd by Quorn Ltd on 1 January 2006.
(4 marks)

(b) The consolidated turnover and consolidated cost of goods sold for the Quorn Ltd group for the
year ended 31 December 2008.
(8 marks)

(c) The retained profit brought forward of the Quorn Ltd group at 1 January 2008.
(5 marks)

(d) The goodwill appearing in the Balance Sheet of the Quorn Ltd group at 31 December 2008.
(2 marks)

Dividends are often paid by subsidiary companies. In this case, Ware Ltd has paid a dividend of
£100,000.

REQUIRED

(e) Explain how this dividend has affected:

(i) the minority shareholders of Ware Ltd

(ii) the consolidated Profit and Loss Account of the Quorn Ltd group for the year ended
31 December 2008.
(2 marks)

3012/3/09/MA Page 4 of 12
QUESTION 2 CONTINUED

Holding companies may acquire subsidiary companies for many reasons. An example would be to
increase market share.

REQUIRED

(f) Give two other reasons for the acquisition of subsidiary companies.
(4 marks)

(Total 25 marks)

3012/3/09/MA Page 5 of 12
MODEL ANSWER TO QUESTION 2

(a)
Goodwill at Date of Acquisition £000 £000
Cost of acquisition 780
Less Share capital (1,000 x 0.5) 500
Retained profits 300
800 x 0.75 600
180

(b)
Consolidated Turnover £000
Quorn Ltd 2,700
Ware Ltd 1,000
3,700
Less Inter company sales 120
3,580

Consolidated Cost of Goods Sold £000

Quorn Ltd 1,350
Ware Ltd 470
Unrealised profit [(120 – 70) x 0.40] 20
1,840
Less Inter company purchases 120
1,720

(c)
Retained Profit Brought Forward £000
Quorn Ltd 380
Ware Ltd [(540 – 300) x 0.75] 180
560
Less Goodwill amortisation (180 x 0.10 x 2) 36
524

(d)
Goodwill at 31 December 2008 £000
At acquisition 180
Less amortisation (180 x 0.10 x 3) 54
126

(e) (i) The minority shareholders will have received £25,000, which has reduced the
minority interest in the consolidated Balance Sheet.
(ii) The dividend will have no effect on the consolidated profit and loss account. The
£75,000 paid to the holding company will cancel out with the £75,000 received by the
holding company. The £25,000 will be part of the minority interest deducted from the
consolidated profit.

(f) To reduce competition, to acquire good management, to gain control over supplies, etc.

3012/3/09/MA Page 6 of 12
QUESTION 3

Bodo Ltd manufactures and sells three products, whose selling prices and variable costs per unit are
as follows:

D E F
£ £ £
Selling price 5.00 2.60 6.00
Variable cost 2.40 1.40 2.80

The current annual sales volumes are:

D 30,000 units, E 16,000 units, F 12,000 units.

Bodo Ltd is currently breaking even.

REQUIRED

(a) Calculate Bodo Ltd’s annual fixed costs.

(7 marks)

It has been suggested that, if product E was discontinued, the annual sales volume of D would
increase by 20% and the annual sales volume of F would increase by 5%. No fixed costs would,
however, be saved.

REQUIRED

(b) Calculate whether or not, on financial grounds, this suggestion should be adopted.
(6 marks)

Alternatively it has been estimated that if Bodo Ltd entered into a contract to spend £15,000 per year
on advertising, annual sales and selling prices would be as follows:

D 40,000 units at £4.80

E 18,000 units at £2.40
F 13,000 units at £6.00

Both variable costs per unit and other annual fixed costs would remain the same.

REQUIRED

(c) Calculate the estimated annual profit of Bodo Ltd resulting from the advertising expenditure and
selling price cuts, and advise the company as to whether or not they would be worthwhile.
(9 marks)

(d) State two possible disadvantages of spending £15,000 per year on advertising.
(3 marks)

(Total 25 marks)

3012/3/09/MA Page 7 of 12
MODEL ANSWER TO QUESTION 3

(a) Annual Fixed Costs

As Bodo Ltd is breaking even the total contributions from the three products
must equal the fixed costs:
£
Contribution from - D 30,000 (5.00 – 2.40) = 78,000
E 16,000 (2.60 – 1.40) = 19,200
F 12,000 (6.00 – 2.80) = 38,400
135,600

(b) Effect of Discontinuing Product E £

Contribution from - D 0.20 x 30,000 (5.00 – 2.40) = 15,600
F 0.05 x 12,000 (6.00 – 2.80) = 1,920
17,520
E all contribution lost (19,200)
(1,680)
∴ Suggestion should not be adopted

(c) Effect of Advertising on Profit £

Contribution from - D 40,000 (4.80 – 2.40) = 96,000
E 18,000 (2.40 – 1.40) = 18,000
F 13,000 (6.00 – 2.80) = 41,600
155,600
Less other fixed costs 135,600
20,000
Less advertising 15,000
Revised profit 5,000
∴ Advertising worthwhile as the profit was originally zero

(d) Disadvantages
Outcome uncertain
Contract means Bodo Ltd is committed to an additional fixed cost of £15,000 per year

3012/3/09/MA Page 8 of 12
QUESTION 4

Following are the summarised Balance Sheets of Diss Ltd at 31 December:

2007 2008
£000 £000 £000 £000
Land and buildings - cost 800 800
- acc dep. 112 688 120 680
Machinery - cost 430 620
- acc dep. 170 260 191 429
Vehicles - cost 150 150
- acc dep. 80 70 90 60
Investments - cost 490 470
1,508 1,639
Stock 217 251
Debtors 380 320
Bank 72 669 147 718
2,177 2,357

£000 £000 £000 £000

Ordinary shares of £1 950 1,100
Share premium 200 350
Retained earnings 47 124
1,197 1,574
10% Debentures 700 500
Bank loan 30 730 - 500
Creditors 220 247
Final dividend 30 250 36 283
2,177 2,357

Notes relating to 2008

(1) Machinery, costing £80,000, was sold for £31,000, resulting in a loss of £12,000
(2) Some debentures were redeemed at par on 31 December
(3) The bank loan was repaid on 1 January
(4) The investments sold during the year produced a profit of £9,000
(5) Investment income for the year, received during the year, was £8,000
(6) An interim dividend of £14,000 was paid in June.

REQUIRED

For the year ended 31 December 2008 in respect of Diss Ltd:

(a) Calculate the operating profit.

(5 marks)

(b) Prepare the Reconciliation of Operating Profit to Net Cash Inflow/Outflow from Operating
Activities.
(10 marks)

(c) Prepare a Cash Flow Statement in accordance with FRS1 (revised). No other notes to the cash
flow statement are required.
(10 marks)

(Total 25 marks)

3012/3/09/MA Page 9 of 12
MODEL ANSWER TO QUESTION 4

(a)
Operating Profit £000
Increase in retained earnings (124 – 47) 77
Interim dividend 14
Final dividend 36
Interest on debentures (0.10 x 700) 70
197
Investment income 8
189

(b)
Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities
£000 £000
Operating profit 189
Add Depreciation – Land and buildings (120 – 112) 8
Machinery [191 – 170 + (80 – 31 – 12)] 58
Vehicles (90 – 80) 10 76
Loss on machinery disposal 12
Reduction in debtors (380 – 320) 60
Increase in creditors (247 – 220) 27
364
Less Profit on investment disposal 9
Increase in stock (251 – 217) 34 43
Net Cash Inflow from Operating Activities 321

(c)
Diss Ltd – Cash Flow Statement for the year ended 31 December 2008
£000 £000
Net Cash Inflow from Operating Activities 321
Returns on Investment and Servicing of Finance
Investment income received 8
Debenture interest paid (70) (62)
Capital Expenditure and Financial Investment
Purchase of machinery (620 – 430 + 80) (270)
Sale of machinery 31
Sale of investments (490 – 470 + 9) 29 (210)
Equity Dividends Paid (30 + 14) (44)
Net Cash Inflow before Financing 5
Financing
Issue of shares [(1,100 – 950) + (350 – 200)] 300
Debenture redemption (700 – 500) (200)
Repayment of bank loan (30) 70
Net Increase in Cash (147 – 72) 75

3012/3/09/MA Page 10 of 12
QUESTION 5

Mars and Ziggy were in partnership sharing profits/losses in the ratio 3:2 respectively after allowing for
a salary of £3,000 per year for Ziggy. On 1 July 2008, Spider joined the partnership and from that
date profits were shared equally, after allowing for a salary of £6,200 per year for Mars, and no salary
for either Ziggy or Spider.

Mars and Ziggy did not draw up accounts at 30 June 2008, but the Trading and Profit and Loss
Account for the year ended 31 December 2008 was as follows:

£ £
Sales 1,500,000
Less Cost of goods sold 1,155,000
Gross profit 345,000
Less Light and heat 14,000
Rent 32,000
Depreciation 15,900
Salaries 69,000
Selling expenses 30,000
General expenses 20,000 180,900
Net profit 164,100

Notes relating to 2008

(1) Sales were twice as high in each of the months January, February and March as they were in
each of the months in the rest of the year
(2) The gross profit to sales ratio was 20% to 31 March and 25% for the rest of the year
(3) Light and heat and general expenses accrued evenly throughout the year
(4) Rent increased by 50% on 1 May
(5) Depreciation was charged at 20% per year on a reducing balance basis up to 30 June and at
30% per year on the same basis for the rest of the year. The only change in fixed assets was a
purchase for £12,000 on 1 July. The book value of fixed assets at 30 June was £54,000
(6) Salaries accrued evenly over the year except that Spider, the new partner, was an employee until
30 June, earning an annual salary of £18,000
(7) Selling expenses varied directly in proportion to sales.

REQUIRED

Set out the Trading, Profit and Loss and Appropriation Accounts of the partnership in columnar format
for the period 1 January to 30 June 2008 and for the period 1 July to 31 December 2008. Assume that
all months have an equal number of days.
(Total 25 marks)

3012/3/09/MA Page 11 of 12
MODEL ANSWER TO QUESTION 5

Trading, Profit and Loss and Appropriation Accounts

6 months ended 6 months ended
30 June 2008 31 December 2008
£ £ £ £
Sales [W1] (3:2) 900,000 600,000
Less Cost of goods sold (R) 705,000 450,000
Gross profit [W2] 195,000 150,000
Less Light and heat (1:1) 7,000 7,000
Rent [W3] (7:9) 14,000 18,000
Depreciation [W4] 6,000 9,900
Salaries [W5] 39,000 30,000
Selling expenses (3:2) 18,000 12,000
General expenses (1:1) 10,000 94,000 10,000 86,900
Net profit 101,000 63,100
Salary - Ziggy (3,000 x 0.5) 1,500
Mars (6,200 x 0.5) - 3,100
99,500 60,000
Balance - Mars (0.6 x 99,500) 59,700
Ziggy (0.4 x 99,500) 39,800 99,500
Balance - Mars (0.333 x 60,000) 20,000
Ziggy (0.333 x 60,000) 20,000
Spider (0.333 x 60,000) 20,000 60,000

[W1] Weighting 2+2+2+1+1+1=9

1+1+1+1+1+1=6 ∴ 3:2
[W2] January to March 6 ÷ 9 x 0.20 x 900,000 = 120,000
April to June 3 ÷ 9 x 0.25 x 900,000 = 75,000
195,000
July to December 0.25 x 600,000 = 150,000
345,000

[W3] Weighting 1 + 1 + 1 + 1 + 1.5 + 1.5 =7

1.5 + 1.5 + 1.5 + 1.5 + 1.5 + 1.5 = 9 ∴ 7:9

[W4] January to June

NBV at 30 June (90%) 54,000
Charge to 30 June (20% x 0.5 = 10%) 6,000
NBV at 1 January (100%) 60,000
July to December
NBV at 1 July 54,000
Purchase 1 July 12,000
66,000
Charge 1 July to 31 Dec (30% x 0.5 = 15%) 9,900
56,100
Check : 6,000 + 9,900 = 15,900

[W5] January to June

Spider 9,000
Others [(69,000 – 9,000) x 0.5] 30,000
39,000
July to December 30,000
69,000

3012/3/09/MA Page 12 of 12
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