Book-keeping & Accounts

Level 2

Model Answers
Series 2 2007 (Code 2006)

2006/2/07/MA

Book- Keeping & Accounts Level 2

Series 2 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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2006/2/07/MA

QUESTION 1 Alan and Bob are in partnership sharing profits and losses equally. On 1 January 2007 they admitted Charlene into the partnership under the following terms and conditions: (1) (2) All future profits and losses were to be shared between Alan, Bob and Charlene in the ratio 2:2:1 respectively Certain existing partnership assets were revalued as follows: (i) (ii) (iii) (iv) (3) (4) Freehold property Motor vehicles Debtors Stock increased in value by 50,000 reduced in value by 10,000 reduced in value by 2,500 increased in value by 500

Charlene paid 25,000 into the partnership bank account and also transferred some machinery to the partnership valued 4,000 The goodwill of the partnership was considered to be worth 75,000 although no goodwill account existed in the partnership books

REQUIRED (a) Prepare journal entries, (including bank where appropriate) to record the following. Narrations are not required: The revaluation of the partnership assets. A revaluation account is to be used but goodwill is not to be included in this account (ii) The introduction by Charlene of 25,000 and the machinery worth 4,000 (iii) The goodwill adjustment. A goodwill account is not to be used (12 marks) Denise, Eric and Felicity have been in partnership for a long time sharing profits and losses in the ratio 2:1:1 respectively. The partnership has experienced heavy trading losses for the last few years and it was therefore decided to dissolve the partnership. All partnership assets were sold and creditors paid leaving the following balances in the books of the partnership: 80,600 Dr Denise Eric Felicity Current Accounts: Denise Eric Felicity Bank REQUIRED (b) Write up the Fixed Capital Accounts and the Bank Account to complete the dissolution of the partnership. Eric was unable to meet any additional financial obligations to the partnership (10 marks) 40,000 Dr 36,003 Dr 20,000 Dr 23,397 Dr 100,000 50,000 50,000 (i)

Dissolution Account Fixed Capital Accounts:

(c)

Name three other items, other than profit and loss sharing ratios, which a partnership agreement might be expected to contain. (3 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 1 (a) (i) Freehold property Stock Motor vehicles Debtors Revaluation Revaluation Capital: Alan Bob (ii) Bank Machinery Capital - Charlene (iii) Capital: Charlene Alan Bob (iii) - Alternative Capital: Alan Bob Capital: Alan Bob Charlene Goodwill Workings Old 37,500 37,500 New -30,000 -30,000 -15,000 Adjustment 7,500 7,500 -15,000 Dr 50,000 500 Cr

10,000 2,500 38,000 38,000 19,000 19,000

25,000 4,000 29,000

15,000 7,500 7,500

37,500 37,500 30,000 30,000 15,000

Alan Bob Charlene

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MODEL ANSWER TO QUESTION 1 CONTINUED (b) Capital Accounts F 20,000 Bal b/d 20,150 Contra 2,051 7,799 50,000

Current A/C Dissolution A/C Contra Bank

D 40,000 40,300 4,102 15,598 100,000

E 36,003 20,150

D 100,000

E 50,000 6,153

F 50,000

56,153

100,000

56,153

50,000

Bal b/d

Bank 23,397 23,397

Account Capital: Denise Capital: Felicity 15,598 7,799 23,397

(c) Examples: Interest chargeable on drawings Interest payable on capital Duration of partnership Duties of partners Salaries payable to any partner

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QUESTION 2 The accountant of Paris Ltd extracted the following figures from the Trading and Profit & Loss Account for the year ended 31 March 2007 and the Balance Sheet at 31 March 2007: 550,000 200,000 350,000 225,000 4,500 229,500 120,500 750,000 50,000 275,000 90,000 125,000 65,000 1,200 88,000 7,500

Sales Cost of sales Gross profit Operational expenses Loan interest Net profit

Ordinary share capital (issued and fully paid) Share premium Profit & Loss 5% Debenture loan Debtors Stock Cash Creditors Bank overdraft

REQUIRED (a) Copy the following table into your answer book and calculate the required ratios. The first ratio has been calculated for you to demonstrate what is required: WORKINGS 350,000 x 100 550,000 ANSWER 63.64% % : : times

RATIO Gross Profit to Sales Net Profit (before interest) to Sales Current/Working Capital Liquidity/Acid Test Stock Turnover (based on closing stock) Return (after interest) on Ordinary Shareholders Funds Return (before interest) on Total Capital Employed

% (19 marks)

The gross profit to sales ratio for the year ended 31 March 2006 was 71.64% REQUIRED (b) Give three possible reasons for the reduction of 8% in the gross profit to sales ratio between 31 March 2006 and 31 March 2007 (6 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 2 (a) RATIO Net Profit (before interest) to Sales WORKINGS 120,500 + 4,500 x 100 550,000 125,000 + 65,000 + 1,200 88,000 + 7,500 125,000 + 1,200 88,000 + 7,500 200,000 65,000 120,500 x 100 750,000 + 50,000 + 275,000 120,500 + 4,500 x 100 750,000 + 50,000 + 275,000 + 90,000 ANSWER 22.73%

Current/Working Capital

2:1

Liquidity/Acid Test

1.32:1

Stock Turnover

3.08 times

Return (after interest) on Ordinary Shareholders Funds

11.21%

Return (before interest) on Total Capital Employed

10.73%

(b) Examples: Reduction in selling prices Increase in purchase prices Over valuation of previous year end stock Under valuation of this year's closing stock Increased pilferage, breakages etc

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QUESTION 3 The following balances were extracted from the books of Prentice Ltd on 1 January 2007 Dr Purchase Ledger Sales Ledger 900 68,785 Cr 42,380 230

The balance on the Provision for Doubtful Debts Account at 1 January 2007 was 1,600 In the month of January 2007, the following transactions took place: Sales on credit Discounts received Cash sales Credit purchases Discounts allowed Bad debts written off Returns inwards from credit customers Returns outwards to credit suppliers Payments to credit suppliers Receipts from credit customers Legal fees re: debt collection charged to customers account Debtors cheque dishonoured Cash purchases Debit balance on Sales Ledger transferred to Purchase Ledger per contra Bill of Exchange issued by Prentice Ltd and accepted by a debtor 72,590 600 9,175 47,040 1,600 750 2,900 1,260 40,390 66,610 700 395 2,850 6,200 805

At 31 January 2007 the following information was made available: Sales Ledger credit balances Purchase Ledger debit balances 408 420

The Provision for Doubtful Debts is to be adjusted to 4% of debtors at 31 January 2007. REQUIRED For Prentice Ltd: (a) Prepare the Sales Ledger Control Account for the month of January 2007. (14 marks) (b) Prepare the Purchase Ledger Control Account for the month of January 2007. (9 marks) (c) Give two possible reasons for the credit balance of 408 on the Sales Ledger Control Account at 31 January 2007. (2 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 3 (a) Sales Ledger Control Account 68,785 Bal b/d 72,590 Discount allowed 700 Bad debts 395 Returns inwards 408 Bank Purchase ledger - contra Bills receivable Bal c/d 142,878 63,783 Bal b/d

Bal b/d Sales Legal fees Bank Bal c/d

230 1,600 750 2,900 66,610 6,200 805 63,783 142,878 408

Bal b/d

(b) Purchase Ledger Control Account Bal b/d 900 Bal b/d Discount received 600 Purchases Returns outwards 1,260 Bal c/d Bank 40,390 Sales ledger contra 6,200 Bal c/d 40,490 89,840 Bal b/d 420 Bal b/d

42,380 47,040 420

89,840 40,490

(c) Examples: Debtor pays outstanding balance before making some returns A retrospective discount is awarded to a debtor Debtor makes an overpayment in error

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QUESTION 4 The following list of balances was extracted from the books of Greenacre plc on 31 December 2006: Gross profit Ordinary Share Capital - authorised issued and fully paid shares of 1 each 8% Preference Share Capital - authorised issued and fully paid shares of 1 each Freehold property Motor vehicles Fixtures Motor vehicles - depreciation provision Fixtures - depreciation provision Administrative expenses Selling expenses Distribution expenses 5% Debentures - 2010 (issued in year 2002) Interest paid to debenture holders Loss on sale of vehicle Discounts received Profit & Loss Account - 1 January 2006 (credit balance) Debtors Creditors Cash at bank (credit balance) Cash in hand Share premium Interim Dividend - Ordinary Shares Interim Dividend - Preference Shares Doubtful debts provision Stock at 31 December 2006 The following information is to be taken into account: (1) At 31 December 2006, prepaid selling expenses amounted to 5,000 and accrued administrative expenses amounted to 11,000 The Doubtful Debts Provision is to be maintained at 3% of debtors at the year-end Depreciation is to be provided as follows: Motor vehicles - 20% reducing balance. Fixtures - 25% per annum on cost The directors propose: (i) Payment of the final dividend to the preference shareholders (ii) A final dividend to the ordinary shareholders of 0.15 per share 900,300 850,000 200,000 1,500,000 200,000 50,000 72,000 20,000 185,000 154,000 81,000 70,000 1,750 2,000 660 144,000 63,000 55,000 1,900 110 85,000 37,500 8,000 1,500 118,000

(2) (3)

(4)

REQUIRED Prepare, for Greenacre plc: (a) (b) the Profit & Loss and Appropriation Account for the year ended 31 December 2006. (15 marks) the Balance Sheet at 31 December 2006. (10 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 4 (a)

Greenacre plc Profit & Loss and Appropriation Account for the year ended 31 December 2006 Gross profit Discount received 900,300 660 900,960

Less: Administrative expense (185,000 + 11,000) Selling expenses (154,000 - 5,000) Distribution expenses Loss on vehicle sale Debenture interest (1,750 + 1,750) Provision for Doubtful Debts ([63,000 x 3%] - 1,500) Depreciation: Motor vehicles ([200,000 - 72,000] x 20%) Fixtures (50,000 x 25%) Net profit Less: Interim preference dividend Proposed preference dividend Interim ordinary dividend Proposed ordinary dividend (850,000 x 0.15) Retained profit for the year Retained profit b/fwd Retained profit c/fwd

196,000 149,000 81,000 2,000 3,500 390 25,600 12,500 469,990 430,970

8,000 8,000 37,500 127,500 181,000 249,970 144,000 393,970

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MODEL ANSWER TO QUESTION 4 CONTINUED (b) Greenacre plc Balance Sheet at 31 December 2006 Fixed Assets Cost 1,500,000 200,000 50,000 1,750,000 Accumulated Depreciation 97,600 32,500 130,100 NBV 1,500,000 102,400 17,500 1,619,900

Freehold property Motor vehicles Fixtures

Current Assets Stock Debtors Less: Provision Prepayment Cash

63,000 1,890

118,000

61,110 5,000 110 184,220 55,000 12,750 135,500 1,900 205,150

Creditors: Amounts due within one year Creditors Accruals (11,000 + 1,750) Proposed dividends (8,000 + 127,500) Bank overdraft

Net Current Assets Creditors: Amounts due after more than one year 5% Debentures (2010)

-20,930 1,598,970 70,000 1,528,970

Capital and Reserves Ordinary share capital - issued and fully paid shares of 1 each Share premium account Profit and Loss Ordinary shareholders' funds 8% preference share capital - issued and fully paid shares of 1 each Total shareholders' funds 850,000 85,000 393,970 1,328,970 200,000 1,528,970

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