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Book-keeping & Accounts

Level 2

Model Answers
Series 3 2007 (Code 2006)

2006/3/07/MA

Book- Keeping & Accounts Level 2


Series 3 2007

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) (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.

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2006/3/07/MA

QUESTION 1 Peter Barnes, a retailer of arts and crafts, counted and valued his stock on 31 March 2007. This stock had a total cost value of 65,800. All of Peters goods are sold at cost plus a mark-up of 100% When Peter reviewed the results of his stock-take he discovered the following: (1) (2) (3) (4) (5) An item which had cost 80 was included in stock at a cost of 800. 5 items had been included at their selling price of 40 each. An item, included in stock at cost, was now considered worthless. This item was normally sold for 120. A sub-total on one stock sheet of 5,100 had been carried forward to the next stock sheet as 3,100. On 28 March 2007, goods costing 4,000 were sent on a sale or return basis to a customer. They were not included in the stock total of 65,800 but a sales invoice was raised in error and included in the Sales Day Book total at 31 March 2007. On 1 April 2007, the customer returned all the goods to Peter. An item, included in stock at its cost price of 80, was discovered to be damaged. It was decided that this would sell for 120 but only after repairs costing 25 had been undertaken.

(6)

REQUIRED (a) Copy the following table into your answer book and complete as appropriate. Item (1) has been completed for you by way of example. Where an item has no effect on the revised stock valuation you must make this clear by writing No Effect against the relevant item number. 65,800

Original stock value at 31 March 2007 Stock adjustments: Item Workings (1) (2) (3) (4) (5) (6) Sub-totals 800 80

Add

Deduct 720

Net addition to/(deduction from) original stock value Revised value of stock at 31 March 2007 (16 marks)

Peters draft net profit for the period ended 31 March 2007, using his original closing stock figure of 65,800, was 146,350. REQUIRED (b) Commencing with 146,350, prepare a statement showing Peters amended net profit after adjusting for his revised stock figure and any other adjustments you consider necessary. (5 marks) Briefly explain what is meant by the term Net Realisable Value. (4 marks) (Total 25 marks)

(c)

2006/3/07MA

MODEL ANSWER TO QUESTION 1 (a) Item

Workings Original stock value

Add

Deduct

65,800

[1] [2] [3] [4] [5] [6]

800 - 80 (5 x 40) x 50% 120 x 50% 5,100 - 3,100 Already at cost No Effect - NRV is greater than original cost 6,000 Net addition to original stock value Revised stock value at 31 March 2007 2,000 4,000

720 100 60

880 5,120 70,920

Note: A mark up of 100% equals a gross profit margin of 50% (b) Draft net profit Add: Increase in closing stock Less: Selling Price of Goods on sale or return Revised net profit for the year ended 31 March 2007 146,350

5,120 151,470 8,000 143,470

(c)

Selling price less the costs of bringing the item to the point of sale (repairs, delivery etc.)

2006/3/07MA

QUESTION 2 Samantha is a sole trader. All her business payments are made by cheque, and the majority of receipts, including cash sales, are paid into the business bank account. The following is a summary of her bank account for the year ended 31 December 2006: 8,900 93,730 21,060 2,000 62,200 7,400 16,000 8,000 9,000 2,800 4,000 10,500 5,790 125,690

Balance at 1 January 2006 Trade debtors Cash sales Sale of all fixtures held at the 31 December 2005

Trade creditors General expenses Drawings Rent Purchase of fixtures Travel expenses Telephone Wages Balance at 31 Dec 2006

125,690

The following information was also made available: 31 December 2005 2,500 8,750 7,900 500 1,250 300 3,100 31 December 2006 8,100 6,550 9,850 600 1,375 550 3,600

Fixtures (at valuation) Trade creditors Trade debtors General expenses owing General expenses pre-paid Rent pre-paid Telephone expenses owing Stock at cost

Discounts allowed to customers during the year amounted to 800 and discounts received from suppliers during the year amounted to 480. Samantha took goods from the business for her own use at a cost price of 1,200. She also used 1,400 of the cash received from sales to pay for repairs to her private motor vehicle

REQUIRED (a) Calculate, clearly showing your workings, the value of Samanthas Capital Account at 1 January 2006 (2 marks) Prepare the Trading and Profit and Loss Account of Samantha for the year ended 31 December 2006 (17 marks) (c) Prepare the Balance Sheet of Samantha at 31 December 2006 (6 marks) (Total 25 marks)

(b)

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MODEL ANSWER TO QUESTION 2 (a) Assets Bank Fixtures Debtors Pre-paid Stock Liabilities Creditors Accruals (500 + 300) Capital at 1 Jan 2006 (b) Samantha Trading and Profit & Loss Account for the year ended 31 December 2006 Sales (93,730 + 21,060 + 9,850 - 7,900 + 800 + 1,400) 118,940 8,900 2,500 7,900 1,250 3,100

23,650 8,750 800 9,550 14,100

Cost of Sales Opening stock Purchases (6,550 + 62,200 + 480 - 1,200 - 8,750) Closing stock Gross Profit Discount received 3,100 59,280 62,380 3,600

58,780 60,160 480 60,640

Less: Discount allowed General expenses (7,400 500 600) Rent (8,000 + 1,250 1,375) Wages Travel expenses Telephone (4,000 + 550 300) Loss on sale of fixtures (2,500 2,000) Depreciation of fixtures (9,000 8,100)

800 6,300 7,875 10,500 2,800 4,250 500 900 33,925 26,715

Net Profit

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CONTINUED ON THE NEXT PAGE

MODEL ANSWER TO QUESTION 2 CONTINUED (c) Balance Sheet at 31 December 2006 Fixed Assets Fixtures (at valuation) Current Assets Stock Debtors Prepayments (600 + 1,375) Bank Current Liabilities Creditors Accrual 8,100

3,600 9,850 1,975 5,790 21,215 6,550 550 7,100

Net Current Assets

14,115 22,215

Financed by Opening capital Add: Net profit Less: Drawings (16,000 + 1,200 + 1,400)

14,100 26,715 18,600 8,115 22,215

2006/3/07MA

QUESTION 3 The following balances were extracted from the books of Colin Dent on 31 December 2006: 89,383 169,005 46,001 57,100 848 676 115,000 7,840 559 394 13,572 9,380 186 15,004 9,000 4,500 135,000

Purchases Sales Wages and Salaries Operating Expenses Returns Inwards Returns Outwards Premises Stock 1 January 2006 Discounts Allowed Discounts Received Sales Ledger Control Purchase Ledger Control Cash Bank overdraft Vehicle - Cost Vehicle Provision for Depreciation Capital

When the Trial Balance was prepared using the above balances, it did not agree and the difference was posted to a suspense account. REQUIRED (a) Calculate the opening balance on the Suspense Account clearly stating whether this is a debit balance or a credit balance. (2 marks)

The following errors were subsequently discovered: (1) (2) (2) (3) (4) (6) (7) A 40 discount, given to a customer, was correctly dealt with in the Sales Ledger Control Account but entered in the discounts received column of the Cash Book. Postage, costing 35, had been entered in the Wages Account. The Sales Day Book total had been under-added by 300. A purchases invoice for 190 had been entered in the Day Book as 290. The balance on the Operating Expenses Account had been incorrectly calculated. The correct balance was 51,090. A credit note for 200, issued by a creditor, had been posted to the wrong side of the Purchase Ledger Control Account. No entries had been made in the books in respect of a cash sale for 105.

REQUIRED (b) Prepare Journal entries to correct the above errors and omission - narratives are not required. (13 marks) (c) Write up the Suspense Account to reflect the journal corrections. (6 marks) Correction of the above errors and omission resulted in the Suspense Account being cleared REQUIRED (d) Name two types of error which would not require the use of a suspense account. (4 marks) (Total 25 marks)

2006/3/07

MODEL ANSWER TO QUESTION 3 (a) Total of debits Total of credits Suspense Account 339,489 333,959 5,530

Credit balance

(b) Discounts allowed Discounts received Suspense Postage Wages Sales Ledger Control/Debtors Sales Purchase Ledger Control Account/Creditors Purchases Suspense No credit entry Purchase Ledger Control Account/Creditors Suspense Cash or Bank Sales

Dr 40 40

Cr

80 35 35 300 300 100 100 6,010

400 400 105 105

(c) 2006 31-Dec Operating expenses Suspense Account 2006 31-Dec Opening balance 6,010 Discounts allowed Discounts received Purchase Ledger Control 6,010 5,530 40 40 400 6,010

(d) Error of Commission Error of Principle Error of Compete Reversal Error of Omission Error of Original Entry Compensating Errors

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QUESTION 4 The following information relates to Consolidated Union Ltd for the year ended 31 December 2006: Net trading profit for the year (before deducting the debenture Interest due for the year which had been paid) Retained profit c/fwd 31 December 2005 Interim ordinary dividend paid Interim preference dividend paid 6% Debenture loan (2007) Share capital: authorised, issued and fully paid 200,000 5% 1 preference shares 800,000 1 ordinary shares General reserve Trade creditors The directors propose the following: (1) (2) (3) Payment of a final dividend on the Ordinary Shares of 0.25 per share Payment of the final dividend on the Preference Shares Transfer 80,000 to general reserve 560,000 290,700 8,000 2,500 50,000 200,000 800,000 20,000 90,000

REQUIRED (a) Prepare the Profit & Loss Appropriation Account of Consolidated Union Ltd for the year ended 31 December 2006. (11 marks) Prepare, as far as is possible from the information provided, the following sections of the Balance Sheet of Consolidated Union Ltd at 31 December 2006: (1) (2) Creditors: amounts due within 1 year Capital and reserves (8 marks) The net trading profit, before interest, of Consolidated Union Ltd for the year ended 31 December 2005 was 205,600

(b)

REQUIRED (c) Calculate the return on total capital employed for each of the years ended 31 December 2005 and 31 December 2006. Use net profit before interest and total capital employed at each yearend. (4 marks)

A director of Consolidated Union Ltd does not understand the difference between the current ratio and the liquid (acid test) ratio as they both seem to contain the same figures.

REQUIRED (d) State the difference between the current ratio and the liquid (acid test) ratio. (2 marks) (Total 25 marks)

2006/3/07

MODEL ANSWER TO QUESTION 4 (a) Consolidated Union Ltd Appropriation Account for the year ended 31 December 2006 Net Profit (560,000 - 3,000) Ordinary Share dividends: Interim Proposed (800,000 x 0.25) Preference Share dividends: Interim Proposed ([200,000 x 5%] - 2,500) General Reserve Retained Profit for the year Retained Profit b/fwd Retained Profit c/fwd 557,000

8,000 200,000

2,500 7,500 80,000 298,000 259,000 290,700 549,700

(b) Consolidated Union Ltd Balance Sheet at 31 December 2006 Creditors: Amounts due within 1 year Trade Creditors Proposed Dividends (200,000 + 7,500) Debenture (2007) 90,000 207,500 50,000 347,500

Capital and Reserves 200,000 5% Preference Shares of 1 each 800,000 Ordinary Shares of 1 each General Reserve Profit & Loss

200,000 800,000 1,000,000 100,000 549,700 1,649,700

(c)

2005 205,600 x 100% = 15.11% 50,000+1,000,000+20,000+290,700 OR 33.95% 2006 560,000 x 100% = 50,000+1,000,000+100,000+549,700

2006 560,000 x 100% = 1,000,000+100,000+549,700

32.95%

(d)

Stock for resale is included in the calculation of the current ratio but excluded in the calculation of the liquidity ratio.

2006/3/07

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Education Development International plc 2007

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