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Accounting
Level 3
Model Answers
Series 4 2008 (3001)
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:
(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)
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.
© EDI 2009
All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or
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without prior written permission of the Publisher. The book may not be lent, resold, hired out or
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published, without the prior consent of the Publisher.
Page 1 of 17
SECTION A
(Answer Questions 1 and 2 in Section A – compulsory)
QUESTION 1
Eastern Plastics Ltd was incorporated on 1 February 2007 and took over the partnership of Ping and
Ru from 1 October 2006. It was agreed that all profits made during the year ending
30 September 2007 would belong to Eastern Plastics Ltd and that Ping and Ru would be entitled to
interest on the purchase price until it was paid in full.
The following list of expenses was extracted from the books of Eastern Plastics Ltd in respect of the
year ended 30 September 2007:
£
Management salaries in respect of the
four months ended 31 January 2007 8,000
Wages and sundry expenses 87,000
Bad debts 2,000
Rent and insurance 4,500
Late payment interest on purchase price 700
Bank overdraft interest 800
Directors’ fees and expenses 20,000
Year end audit fees 2,500
Additional information:
(1) Sales for the eight month period ended 30 September 2007 were £828,000 and amounted to four
times the sales for the four month period ended 31 January 2007. Selling prices were calculated
by adding the following mark-ups to the purchase price:
1 October 2006 – 31 January 2007 25%
1 February 2007 – 30 September 2007 20%
(2) Sales commission of 4% due on all sales for the year remained unpaid and no provision had
been made in the books
(3) The bank granted an overdraft on July 7
(4) Wages, sundry expenses, rent and insurance accrued at an even rate
(5) Bad debts were written off in July 2007
(6) On 1 October 2006 all fixed assets were sold for a price that exceeded net book value by £3,000.
At the same date, fixtures costing £24,000 were purchased together with a vehicle costing
£10,000. On 1 April 2007, further fixtures were purchased for £6,000 and another vehicle was
added at a cost of £16,000. Depreciation is calculated at 50% per annum on cost for vehicles
after allowing for a residual value of 10% of original cost, and 25% per annum on cost for fixtures
assuming no residual value.
REQUIRED
Set out the Trading and Profit and Loss Account, in columnar form, showing clearly the net profit/(loss)
earned before incorporation and the net profit/(loss) earned after incorporation. Assume that all
months have an equal number of days.
(Total 20 marks)
3001/4/08/MA Page 2 of 17
MODEL ANSWER TO QUESTION 1
01-Oct-06 01-Feb-07
to to
31-Jan-07 30-Sep-07
Basis of allocation £ £ £ £
(Total 20 marks)
Working 1 If sales for the eight months to 30 September 2007 are four times the sales for
the four months to 31 January 2007, the latter must be 828,000 = 207,000
4
Working 2
207,000 = 165,600 828,000 = 690,000
1.25 1.2
3001/4/08/MA Page 3 of 17
SECTION A CONTINUED
QUESTION 2
The following information was extracted from the books of Heng Ltd:
At 30 September
2006 2007
£ £
Other information:
REQUIRED
(a) Calculate the net operating profit of Heng Ltd for the year ended 30 September 2007.
(6 marks)
(b) Prepare for Heng Ltd a reconciliation of net operating profit to net cash flow from operating
activities.
(8 marks)
The Chief Accountant of Heng Ltd has been asked to prepare the Cash Flow Statement for the year
ended 30 September 2007 in accordance with FRS 1 (revised). He is uncertain as to what information
should be provided under each of the headings and has asked for your guidance.
REQUIRED
(c) State how much the chief accountant of Heng Ltd should show in the Cash Flow Statement in
respect of equity dividends paid during the year ended 30 September 2007.
(2 marks)
(d) Suggest, for companies in general, two items that would be included under each of the
following cash flow headings:
(1) Returns on investment and servicing of finance
(2) Capital expenditure and financial investment.
(4 marks)
(Total 20 marks)
3001/4/08/MA Page 4 of 17
MODEL ANSWER TO QUESTION 2
(a)
£ £
Retained profit 2004 146,500
Retained profit 2003 128,000
18,500
Add:
Debenture interest (8% x 50,000) 4,000
General reserve (70,000 – 30,000) 40,000
Interim dividends 37,500
Proposed dividends 50,000
131,500
Operating profit 150,000
£
(c) Interim 2007 37,500
Proposed 2006 25,000
62,500
Any two:
Payments to acquire tangible fixed assets
Payments for financial investments
Receipts from the sale of financial investments
Receipts from the sale of tangible fixed assets
3001/4/08/MA Page 5 of 17
SECTION B
(Answer any THREE questions from Section B)
QUESTION 3
Ning Electronics Ltd manufactures washing machines. The financial details per washing machine are
as follows:
£
Selling price 200
Costs: Materials 50
Labour 80
Other overheads (including depreciation of £5) 20
Additional information
(2) Credit sales will account for 50% of total sales and cash sales for the remainder. Debtors are
expected to pay in the month following sale for which a cash discount of 2% will be allowed
(3) Production in one month will be such as to meet the next month's sales demands
(4) Purchases of materials in one month will be such as to meet the next month's production
requirements
(5) All material purchases will be made on credit and suppliers will be paid in the month following
purchase
(6) Labour costs will be paid in the month of production less a 15% statutory deduction. This
deduction will be paid to the relevant authorities once every three months. Payment for the three
months ended 31 January 2009, estimated at £32,400 will be made on 1 February 2009 and
three monthly thereafter
(7) Other overheads will be paid in the month following the month of production
REQUIRED
(a) Prepare a cash budget, in columnar form, for February, March, April and May 2009.
(17 marks)
(Total 20 marks)
3001/4/08/MA Page 6 of 17
MODEL ANSWER TO QUESTION 3
Expenditure
Creditors -
purchases [2] 20,000 30,000 45,000 35,000
Workings:
[1] Jan Feb Mar April May
[2]
Production = next months sales
Therefore units = 400 600 900 700
As materials purchased one month ahead of production and paid for one month later, the above
represents the month of payment.
3001/4/08/MA Page 7 of 17
MODEL ANSWER TO QUESTION 3 CONTINUED
Workings: (continued)
[4]
(b)
Highlights periods when borrowings might be necessary
3001/4/08/MA Page 8 of 17
SECTION B CONTINUED
QUESTION 4
The following transactions of Zan plc took place during the year ended 31 December 2007:
2007
1 January Purchased £84,000 of 8% loan stock at 90 cd. Interest is receivable on the
1 March and 1 September each year
10 April Prince plc made a bonus issue of 1 share for every 4 held
Sold 2,000 shares of the investment in Prince plc for £1.50 a share
18 October Received an interim dividend of £0.20 per share on shares in Prince plc
12 December Prince plc made a rights issue of 1 share for every 3 held at £1 per share. Zan plc
immediately sold the rights for £0.30 per share
REQUIRED
Prepare, in the books of Zan plc, the following investment accounts for the year ended
31 December 2007:
3001/4/08/MA Page 9 of 17
MODEL ANSWER TO QUESTION 4
1.8 Capital - contra 140 1.8 Bank - sale (2) 21,000 18,900
1.8 Profit & Loss- sale (4) 700 1.8 Interest - contra (3) 140
10.4 Bonus issue 2,500 1.9 Bank - interim div (6) 2,100
10.4 Profit & Loss- sale (7) 600 12.12 Bank - sale of rights (8) 1,050
31.12 Profit & Loss 2,100 31.12 Balance c/d 10,500 11,550
3001/4/08/MA Page 11 of 17
MODEL ANSWER TO QUESTION 4 CONTINUED
Less: cost
[2] 21,000 x 90% = 18,900 2,000 x 15,000 = 2,400
12,500
600
[3] 21,000 x 8% = 140
12
[8] [ (12,500 - 2,000) x 0.30] = 1,050
[4] Income 18,900 3
Less: cost
21,000 x 73,360 18,340
84,000
700
3001/4/08/MA Page 11 of 17
SECTION B CONTINUED
QUESTION 5
The treasurer of Zhou Enterprises Social Club prepared the following Receipts and Payments Account
for the year ended 31 March 2008:
Receipts Payments
£ £
Balance at bank 1 April 800 Shop manager's wages 11,060
Received from members for the Paris trip expenses 5,700
trip to Paris 6,800 Staff salaries & wages 28,696
Shop receipts 28,759
Subscriptions for year to 31 March:
Year 2007 2,500 Operating costs 17,749
Year 2008 48,000
Year 2009 2,000 Shop purchases 5,800
New fixtures & fittings 2,000
Transfer to deposit
Balance overdrawn 31 March 8,146 account on 1 Jan 26,000
97,005 97,005
Additional information:
(2) The club's deposit account was opened on the 1 January 2008. Interest at the rate of 3%
per annum will be credited to the account on the 30 June and 31 December each year.
(3) Any outstanding subscriptions for the year to 31 March Year 2007 or earlier, were written
off on 31 March Year 2008 and the members involved removed from the list of members.
(4) The shop manager is entitled to a bonus equivalent to 5% of the shop profits after
deduction of the bonus.
REQUIRED
(a) A Shop Trading Account for the year ended 31 March 2008.
(3 marks)
(b) An Income and Expenditure Account for the year ended 31 March 2008.
(10 marks)
(Total 20 marks)
3001/4/08/MA Page 12 of 17
MODEL ANSWER TO QUESTION 5
(a) Zhou Enterprises Social Club
Shop Trading Account for the year ended 31 March 2008
£ £
Sales 28,759
3001/4/08/MA Page 13 of 17
MODEL ANSWER TO QUESTION 5 CONTINUED
Fixed Assets £
Current Assets £
Stock 2,026
Current Liabilities £
Creditors 1,500
Bonus 485
Financed by: £
3001/4/08/MA Page 14 of 17
SECTION B CONTINUED
QUESTION 6
HJK Ltd wishes to raise money in order to purchase additional fixed assets and provide additional
working capital. The proposals are:
Proposal A
HJK Ltd would borrow £150,000 in the form of a bank loan on 1 July 2008. The loan would be
repayable in equal amounts over a ten-year period commencing 30 June 2009 and annually
thereafter. HJK Ltd would also pay, on the 30 June each year, interest at the rate of 8% per
annum on the balance outstanding immediately prior to the annual loan payment.
Proposal B
HJK Ltd would issue at par £250,000 4% debentures on 1 July 2008. £50,000 of these
debentures would have to be redeemed on each of 30 June 2009 and 30 June 2010.
Proposal C
HJK Ltd would issue at par £100,000 5% Preference Shares on 1 July 2008, redeemable on
1 July 2018.
REQUIRED
(a) For each of the years ending 30 June 2009, 2010 and 2011, show how much interest would be
charged to HJK’s Profit and Loss Account in respect of each of the three proposals.
(9 marks)
The Balance Sheet of HJK Ltd at 30 June 2008 revealed the following:
£
The total value of current assets amounted to 865,000
The total value of creditors due within one year amounted to 410,000
Net current assets 455,000
REQUIRED
(b) Show what effect each of the above proposals would have had upon the working capital position
of HJK Ltd on 30 June 2008, if they had taken place on that date. A separate calculation is
required for each of the three proposals. Assume that any investment in fixed assets is not
immediate.
(8 marks)
The two liquidity ratios most frequently used are the current/working capital ratio and the acid
test/quick ratio.
REQUIRED
(c) State the fundamental difference between the two liquidity ratios and the main reason for this
difference.
(3 marks)
(Total 20 marks)
3001/4/08/MA Page 15 of 17
MODEL ANSWER TO QUESTION 6
(a)
Proposal A
Year Charge
£
2009 150,000 x 8% = 12,000
2010 (150,000 -15,000) x 8% = 10,800
2011 (150,000 - 30,000) x 8% = 9,600
Proposal B
Year Charge
£
2009 250,000 x 4% = 10,000
2010 (250,000 - 50,000) x 4% = 8,000
2011 (250,000 - 100,000) x 4% = 6,000
Proposal C
There will be no charge to the profit and loss account as dividends represent an
appropriation of profit and preference shareholders do not receive interest.
(b)
Proposal A £ £
Proposal B £ £
Proposal C £
3001/4/08/MA Page 16 of 17
MODEL ANSWER TO QUESTION 6 CONTINUED
(c)
The current ratio includes stock in its calculation whereas the acid test ratio
excludes it.
As the least liquid of current assets, stock is omitted from a calculation which is
concerned with the ability of a business to pay current liabilities as they become
due.