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LCCI International Qualifications

Accounting Level 3

Model Answers
Series 2 2009 (3012M) Malaysia

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Accounting Level 3 (Malaysia)


Series 2 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) (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 2009 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

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QUESTION 1 A company is planning to purchase a small aircraft. The aircraft will cost RM500,000 and will be purchased on 1 January 2010. The companys accounting year runs from 1 January to 31 December. The aircraft has an expected useful life of five years, and a residual value of RM50,000. The expected flying hours of the aircraft over the next five years are as follows: 2010 2011 2012 2013 2014 600 hours 1,800 hours 500 hours 600 hours 500 hours

The company directors are unsure of how the aircraft should be depreciated, and what impact the choice of method would have on the profit and loss account and balance sheet each year. They are considering using one of the following methods of depreciation: (1) Straight line (2) Reducing balance, at a rate of 40% per year (3) Flying hours (equivalent to machine hours) (4) Sum of the years digits. REQUIRED (a) Using each of the above methods, calculate for each of the years 2010 and 2011: (i) (ii) The depreciation charge to the profit and loss account (14 marks) The net book value to be shown in the balance sheet at the end of the year. (8 marks) (b) State which of the above methods of depreciation you regard as the most appropriate and briefly explain why. (3 marks) (Total 25 marks)

3012M/2/09/MA

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MODEL ANSWER TO QUESTION 1 (a) (i) Depreciation Charge Straight Line Method 2010 2011 (500,000 50,000) / 5 same = RM90,000

Reducing Balance Method 2010 2011 500,000 x 40% (500,000 200,000) x 40% = RM200,000 = RM120,000

Flying Hours Method (500,000 50,000) 4,000 2010 2011 600 x 112.5 1,800 x 112.5 = RM112.5 per hour = RM67,500 = RM202,500

Sum of the years Digits Method 2010 2011 (a) (ii) (500,000 50,000) x 5 (5 + 4 + 3 + 2 + 1) (500,000 50,000) x 4 (5 + 4 + 3 + 2 + 1) = RM150,000 = RM120,000

Net Book Values Straight Line Method 2010 2011 500,000 90,000 410,000 90,000 = RM410,000 = RM320,000

Reducing Balance Method 2010 2011 500,000 200,000 300,000 120,000 = RM300,000 = RM180,000

Flying Hours Method 2010 2011 500,000 67,500 432,500 202,500 = RM432,500 = RM230,000

Sum of the years Digits Method 2010 2011 500,000 150,000 350,000 120,000 = RM350,000 = RM230,000

(b) The most appropriate method is flying hours. The planned usage varies a lot over the life of the aircraft. This method charges most when it is used most.

3012M/2/09/MA

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QUESTION 2 Chan has been in business for several years as a sole trader. His accounting year runs from 1 June to 31 May. He has prepared the following budgeted profit and loss account for the four months from June to September 2009. Chan sells goods on two months credit, and pays for purchases on one months credit. Budgeted Profit & Loss Account 1 June to 30 September 2009 RM Sales less cost of sales: Opening stock Purchases Closing stock Gross profit Cash expenses Depreciation Net profit 5,000 21,000 (6,000) 20,000 10,000 4,000 2,000 6,000 4,000 RM 30,000

Chan has also provided the following information regarding his plans: (1) The sales figure is made up as follows: June July August September RM 6,000 7,000 8,000 9,000 30,000

(2) The purchases figure is made up as follows: June July August September RM 4,000 6,000 6,000 5,000 21,000

(3) Cash expenses are based on paying out RM1,000 in each of the four months June to September 2009. (4) The depreciation shown in the budgeted profit and loss account is based on depreciating equipment at 25% per year on a straight-line basis. Equipment that cost RM14,000 was purchased on 1 June 2008. Further equipment is to be bought for RM10,000 cash on 1 June 2009. (5) Chan wishes to withdraw RM1,500 from the business in both July and September 2009. (6) Bank interest is to be ignored.

3012M/2/09/MA

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QUESTION 2 CONTINUED The following is an extract from the draft Balance Sheet which has been prepared at 31 May 2009. Fixed assets Equipment Current assets Stock Debtors Bank Less Current liabilities Creditors Cost RM 14,000 Acc. Dep. RM 3,500 5,000 11,000 10,000 26,000 4,000 22,000 32,500 Notes regarding the balance sheet: (1) The debtors relate to sales of RM6,500 in April and RM4,500 in May (2) The creditors relate to May purchases (3) The business is financed entirely by Chan. REQUIRED (a) Prepare (in columnar form) a Cash Budget for each of the four months June to September 2009, showing clearly the balance at the end of each month. (9 marks) (b) Prepare a budgeted Balance Sheet at 30 September 2009. (10 marks) Chans bank has refused him overdraft facilities. (c) List six ways in which Chan might avoid the need for an overdraft in the period June to September 2009. (6 marks) (Total 25 marks) NBV RM 10,500

3012M/2/09/MA

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MODEL ANSWER TO QUESTION 2 (a) Cash Budget for June to September 2009 June RM Receipts Payments: Purchases Expenses Equipment Drawings Total payments Movement for Month Balance bf Balance cf 6,500 4,000 1,000 10,000 15,000 (8,500) 10,000 1,500 July RM 4,500 4,000 1,000 1,500 6,500 (2,000) 1,500 (500) August RM 6,000 6,000 1,000 7,000 (1,000) (500) (1,500) Sept RM 7,000 6,000 1,000 1,500 8,500 (1,500) (1,500) (3,000)

(b) Budgeted Balance Sheet as at 30 September 2009 Fixed assets Equipment Current assets Stock Debtors Less Current liabilities Creditors Bank Overdraft 5,000 3,000 8,000 15,000 33,500 Capital Opening Balance Add profit for period Less drawings RM 32,500 4,000 36,500 (3,000) 33,500 Cost RM 24,000 Acc. Dep. RM 5,500 6,000 17,000 23,000 NBV RM 18,500

(c) Ways of avoiding overdraft Reduce credit to customers by one month Increase credit from suppliers by one month Forego drawings Borrow Buy equipment on deferred payment terms Introduce more capital himself Take a partner who would introduce capital Increase selling prices Reduce stock holding

3012M/2/09/MA

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QUESTION 3 On 1 September 2008, Exe plc acquired 80,000 of the 100,000 RM1 ordinary shares in Wye Ltd for RM260,000. At the date of acquisition the retained profit of Wye Ltd was RM150,000. The following Profit and Loss Accounts have been prepared for the two companies for the year ended 31 December 2008. All sales and expenses in Wye Ltds accounts accrued evenly over 2008. Exe plc RM000 950 320 630 110 100 420 560 980 Wye Ltd RM000 300 180 120 30 60 30 130 160

Sales Cost of sales Gross profit Selling expenses Administration expenses Retained profit Retained profit brought forward Retained profit carried forward

There were no sales between the two companies. Goodwill arising on consolidation is to be amortised over five years from the date of acquisition and recorded as a separate expense in the Consolidated Profit and Loss Account. REQUIRED (a) Calculate the goodwill arising on acquisition of Wye Ltd. (3 marks) (b) Prepare the Consolidated Profit and Loss Account for the Exe Group for the year ended 31 December 2008. (13 marks) (c) Although Exe plc did not make any sales to Wye Ltd during 2008, it may do so in 2009. Explain briefly any adjustments that will need to be made to the Consolidated Profit and Loss Account for 2009 if such sales are made, and some of these goods remain in stock at the year end. (4 marks) (d) Suppose that in 2009 Wye Ltd sold goods to Exe plc and some of these goods remained in stock at the year end. Explain briefly any adjustments that will need to be made in the Consolidated Balance Sheet at 31 December 2009. (5 marks) (Total 25 marks)

3012M/2/09/MA

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MODEL ANSWER TO QUESTION 3 (a) Goodwill on acquisition of Wye Ltd Amount invested Acquired: 80% x 100 80% x 150 RM000 260 (80) (120) 60

(b) Consolidated Profit and Loss Account for year ended 31 December 2008 Sales (950 + (300 x 4/12) Cost of sales (320 + 60) Gross profit Selling expenses (110 + 10) Administration expenses (100 + 20) Amortisation of goodwill [(60/ 5) x 4/12)] Minority interest (30 x 4/12 x 20%) Retained profit Group retained profits brought forward Group retained profits carried forward RM000 1,050 380 670 120 120 4 426 2 424 560 984

(c) All inter company sales are excluded from Sales. All inter company purchases are excluded from Cost of Sales. Unrealised profit on goods in stock is added to Cost of sales / excluded from gross profit. (d) Unrealised profits will be deducted from group stock value. The groups share of unrealised profit will be deducted from group retained earnings. The minority interests share of unrealised profits will be deducted from minority interest.

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QUESTION 4 Severn Ltd is a company with large offices. It has RM150,000 available to invest in a project that will create savings in energy costs and is considering two alternatives, a Wind Turbine or Air Conditioning. The company has a cost of capital of 10% per year, which gives the following discount factors: Year 1 Year 2 Year 3 Year 4 Year 5 0.909 0.826 0.751 0.683 0.621

Wind Turbine This involves spending RM150,000 on a wind turbine to generate electricity. The turbine would have a useful life of five years and a residual value of RM20,000. It would require maintenance costs of RM8,000 for each of the five years. Using the wind turbine would save power costs of RM60,000 per year. Maintenance costs and power costs savings can be assumed to arise at the end of each year. Air Conditioning This involves replacing the air conditioning that serves the offices with a more efficient system. The initial costs would be: Purchase of new plant Installation of new plant RM 110,000 40,000

There would also be proceeds of RM15,000 from the sale of scrap arising from the old system. This amount would be received at the end of the first year. The new air conditioning unit would generate the following savings (arising at the end of each year): Annual savings in power consumption Annual savings in maintenance costs RM 35,000 15,000

The new air conditioning system would have no residual value at the end of its five year life. REQUIRED (a) Calculate the net present value of: (i) (ii) The wind turbine project The air conditioning project. (17 marks) (b) Using your answer to (a), recommend which project should be undertaken and explain briefly the reason for your recommendation. (4 marks) (c) Calculate, to the nearest year, the payback period of: (i) (ii) The wind turbine project The air conditioning project. (4 marks) (Total 25 marks)

3012M/2/09/MA

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MODEL ANSWER TO QUESTION 4 (a) (i) Year 0 Cost Year 1 Power Saving Less Maintenance Same Same Same Same Residual value (150,000) 60,000 (8,000) 52,000 52,000 52,000 52,000 52,000 20,000 72,000 0.909 0.826 0.751 0.683 47,268 42,952 39,052 35,516 1.000 (150,000) Cash Flow RM Discount Factor Present Value RM

Year 2 Year 3 Year 4 Year 5

0.621

Net present value (ii) Cash Flow RM Year 0 Purchase Installation Year 1 Power Saving Maintenance Saving Scrap Proceeds Power Saving Maintenance Saving Same Same (110,000) (40,000) (150,000) 35,000 15,000 15,000 65,000 35,000 15,000 50,000 50,000 50,000 50,000 0.826 0.751 0.683 0.621 1.000 Discount Factor

44,712 59,500 Present Value RM

(150,000)

0.909

59,085

Year 2

41,300 37,550 34,150 31,050 53,135

Year 3 Year 4

Year 5 Same Net present value

(b) The wind turbine should be chosen. Taking into account the time-value of money at the companys cost of capital of 10% it has a higher net present value.

3012M/2/09/MA

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MODEL ANSWER TO QUESTION 4 CONTINUED (c) (i) Payback period of the wind turbine project 150,000 52,000 (ii) = 2.88 years

3 years

Payback period of the air conditioning plant 150,000 65,000 = 85,000 85,000 50,000 = 35,000 35,000 - 50,000 = (15,000)

3 years

3012M/2/09/MA

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QUESTION 5 The following data relates to a trading company, Bee plc: Profit and Loss Accounts for year ended: 31 December 2007 RM000 456 365 91 50 20 21 31 December 2008 RM000 700 595 105 60 30 15

Sales Cost of sales Gross profit Operating costs Interest payable Net profit Balance Sheets as at: Fixed assets Current assets Stock Debtors Bank Creditors: amounts due within one year: Creditors Net current assets Creditors: amounts due after one year

31 December 2007 RM000 RM000 300 76 57 10 143

31 December 2008 RM000 RM000 295 146 117 21 284

(30) 113 (200) 213 RM000

(51) 233 (300) 228 RM000 100 128 228

Share capital and reserves: Ordinary shares (RM1 each) Retained earnings Notes: (1) All sales are on credit (2) All creditors relate to purchases.

100 113 213

The company has undergone a change in operating policy in respect of 2008, during which it planned to achieve the following: (1) Increased sales through reduced selling prices without further investment in fixed assets (2) Maintain stock, debtors and creditors levels in line with the increased sales and cost of sales (3) Maintain or increase the bank balance, if necessary, through additional long term borrowing (4) Increase profitability and liquidity.

3012M/2/09/MA

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QUESTION 5 CONTINUED REQUIRED (a) Calculate the following ratios (correct to two decimal places) for each of 2007 and 2008: (i) Earnings per share (ii) Return on capital employed (iii) Gearing [Long term debt / (Long term debt + Equity)] (iv) Sales to fixed assets (v) Current (vi) Stock turnover (expressed in days and using year end stock) (vii) Debtors collection period (expressed in days) (viii) Creditors settlement period (expressed in days). (20 marks) (b) State two of the above ratios that show results in line with the change in operating policy and three ratios that do not. (5 marks) (Total 25 marks)

3012M/2/09/MA

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MODEL ANSWER TO QUESTION 5 (a) (i) (ii) Earnings per share ROCE 2007 21,000 100,000 41,000 413,000 200,000 413,000 456,000 300,000 143,000 30,000 76,000 x 365 365,000 57,000 x 365 456,000 = RM0.21 = 9.93% = 48.43% = 1.52 times = 4.77 : 1 = 76.00 days = 45.63 days 2008 15,000 100,000 45,000 528,000 300,000 528,000 700,000 295,000 284,000 51,000 146,000 595,000 117,000 700,000 x 365 x 365 = RM0.15 = 8.52% = 56.82% = 2.37 times = 5.57 : 1 = 89.56 days = 61.01 days

(iii) Gearing (iv) Sales to fixed assets (v) Current (vi) Stock turnover (vii) Debtors collection (viii) Creditors settlement

2007 30,000 (365,000 49,000 + 76,000) 2008 51,000 x 365 = 27.99 days (595,000 76,000 + 146,000) (b) Examples of ratios that show results in line with policy: Gearing Sales to fixed assets Creditors settlement Current (any 2 x 1) Examples of ratios that do not show results in line with policy: Stock turnover Debtors collection Earnings per share ROCE (any 3 x 1) x 365 = 27.93 days

3012M/2/09/MA

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Education Development International plc 2009

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