Sunteți pe pagina 1din 15
Mark Scheme GCE A Level Accounting (6002) June 2006 Mark Scheme delivered locally, recognised globally

Mark Scheme GCE A Level Accounting (6002)

June 2006

Mark Scheme

delivered locally, recognised globally

ACCOUNTING 6002, MARK SCHEME

Question 1

(a)

Larnaca Limited

Profit and loss account for year ended 31 March 2006

 
 

Working

£

£

Working

Turnover

900000

W1

 
 

√√

Cost of sales*

560751

Admin Exps

Gross profit

339249

OF

R of Auditors

800 √ 32000 √ 74800 √ 12000 √ 25500 √
800
32000
74800
12000
25500
 
W1
W1
 

√√√√

Administrative expenses* Selling and distribution costs

OF

145100

R of Directors Office Exps

 

68000

213100

 

126149

Depr on Prem Depr on Mach

Interest payable*

W2
W2

OF

2800

Profit on ordinary activities before tax

OF

123349

145100

Corporation tax

11000

W2

 

Profit on ordinary activities after tax Dividends

OF

112349

Interest payable Int on Loan S

10000

800 √ 2000 √
800
2000

Retained profit for the year

OF

102349

Int on Debs

 

2800

Retained earnings brought forward Retained earnings for the year

 

19000

102349

Retained earnings carried forward

OF

121349

20x=10 marks

Balance Sheet at 31 March 2006

 

W3

 

£

£

£

Shop at cost

180000

 

O

Fixed Assets Tangible Leasehold workshop*

 

-prov for depr

72000

F

 

108000

W3 W4
W3
W4

OF

108000

W4

   

√√

Machinery*

OF

117500

225500

Machinery

160000

 

+additions -prov for depr

10000

Current Assets Stock Prepaid expenses Debtors Cash at bank

 

-52500

 

86000

117500

700

95200

W5

 

25789

207689

OF

Creditors

50500

 

Accruals

5340

Creditors -amounts falling due within 1 year

 

Corp Tax

11000

Creditors

W5
W5

OF

76840

Prop Dividend

10000

Net current assets

OF

130849

76840

 

Total assets less current liabilities

OF

356349

(no if incorrect headings for cl and ltl)

Creditors -amounts falling due after more than 1 year 8% Debenture stock 8% Loan stock

 

25000

10000

35000

 

321349

Financed by:

Capital and reserves:

Share capital

200000

Retained earnings

OF

121349

20x=10 marks

 

321349

(b) Assess the value to Larnaca Limited of retaining profits at the end of its financial year.

Up to 12 available in total.

Award up to 6for reasons for retaining profits Award up to 4for reasons for alternatives to retaining profits (share dividend) Award up to 2for conclusion

Reasons for retaining profits To provide funds for the growth of the company To provide for the replacement of fixed assets To provide for dividends in the future if in a given period there are not enough profits Can be used to issue bonus shares

Award up to 2for a relevant point…max 3 points and max 6

Reasons for alternative

To reward shareholders for investing in firm To encourage further investment by shareholders

i.e.

paying share dividend

Award up to 2for a relevant point…max 2 points and max 4

Conclusion Award up to 2for an appropriate conclusion…must be related to Larnaca Ltd

Example Larnaca Ltd is in a position both to retain profits for the reasons given above and to distribute dividend . I would advise taking a middle line between the two so that the shareholders are satisfied with both the present (in terms of dividend) and the future (in terms of investment from retained profits)

Total 12= 6 marks

Total 26 marks

Question 2 (a) In the books of Sun Ltd

Realisation Account

Jan

1

Buildings

70000

c

Creditors

4600

c

 

SunLand Ltd

Machinery Stock Debtors Bank Sundry Shareholders (Pr on Rls)

20000

c

(PP)

148000

OF

2300

c

1500

c

18800

c

40000

0F

 

15260

0

152600

Sundry Shareholders Account

 

Jan

14800

1

SunLand Ltd

0

Share Capital

100000

c

 

Profit/loss

8000

c

Realisation

(Profit)

40000

OF

 

14800

0

148000

 

Total 14

 

(a) + (b)

Calculation of Purchase Price

 
 

Land

 

Sun Ltd

Ltd

Goodwill Buildings Machinery Vehicles (£40 000 - £3

20000

14000

c

90000

20000

80000

c

800)

36200

c

Stock Debtors Bank (£12 000 + £3 000)

2300

21000

c

1500

14050

c

18800

15000

c

 

152600

180250

Less Creditors PURCHASE PRICE

4600

3450

c

148000

176800

0F

Shares issued at 50p each

296000

353600

OF

 

Double

 

10 x

= 5 marks

PP

Total shares

649600

(c)

Balance Sheet of SunLand Limited at 1 January 2006 Fixed Assetsof(nc)

Buildings

90000

c

Machinery

100000

c

Vehicles

36200

c

Goodwill

34000c

260200

OF

Current Assetsof(nc) Stock Debtors

23300

c

15550

c

 

33800

Bank Less Current Liabilitiesof(nc) Creditors Net Current Assets

c

72650

OF

8050c

 

64600

OF

 

324800

Financed by Share Capital 649 600 shares of 50 p each

324800

OF

Total 16

(d) Sunland Limited intends to raise £200 000 for investment. The intention is to issue 160 000 ordinary shares at a premium of 75p per share or issue 200 000 £1 6% Redeemable Debentures. Evaluate the relative strengths of each method and recommend an appropriate course of action.

Up to 12 available in total

Award max 6for relative strengths of ordinary shares Award max 6for relative strengths of debentures Overall max 10Award up to 2for conclusion

Relative strengths of Ordinary shares In comparison to debentures there is no necessary charge on the firm …since ordinary dividend is an appropriation of profit (and need not be made) rather than a charge like debentures√√ There is no need to repay the share holders (unlike debenture holders) at some time in the future√√

Relative strengths of Debentures Since debentures do not carry a vote

there

Directors (unlike with ordinary shares) Debentures can be considered more secure than ordinary shares because debenture holders will be repaid before ordinary shareholders√√ Debentures may be secured on the fixed assets …again giving greater security in the event of winding up√√

is no possible loss of control for the

Conclusion Up to 2for an appropriate conclusion selecting and justifying a course of action.

12= 6 marks

Total 26 marks

Question 3

(a)

 

Application and Allotment Account

 

Apr 15

Ord Sh Cap Bank Ord Sh Cap

37500

Apr 15

Bank

50000

Apr 20

5000

Apr 30

Bank

67500

Apr 30

75000

 

117500

117500

Ordinary Share Capital

Mar 31

Balance c/d

595000

Apr 1

Balance b/d Applic/Allotm Applic/Allotm First & F Call Bank Bonus dividend

100000

 

Apr 15

37500

combine

Apr 30

75000

is OK

May 1

37500

Nov 14

250000

Dec 1

95000

OF

 

595000

595000

 

Apr 1

Balance b/d

595000

OF

 

Share Premium

 

Dec 1

Bonus Shares

95000

OF

Apr 1

Balance b/d

20000

cash/bank OK

 

May 1

First & F Call

75000

 

95000

95000

 

First and Final Call

May 1

Ord Sh Cap Share Prem

37500

May 31

Bank

112500

May 1

75000

 

112500

112500

 

Bonus Shares Account

Dec 1

Ord Sh Cap

95000

Dec 1

Share Prem

95000

 

OF

2for all dates correct

OF

28=14 marks

(b) Show your calculation of the dividend payable on the ordinary shares

for year ended 31 March 2006. 10% of ord share capital held for 1 Yr Ordinary share capital held for

% Divi

Dividend

one Year

250000

0.1

25000

 

√√

Rights and Bonus shares

345000

0.05

17250

OF

 

√√

T O T A L

42250

OF

6= 3 marks

(c) Give the entries required (in journal form)

Dr

Cr

Mar 31

P/L Appropriation

42250 OF

Ord Share Divi Being provision of Ordinary share dividend

 

42250 OF

 

Mar 31

Ord Share Divi

42250 OF

Bank Being payment of ordinary share dividend

 

42250 OF

 

6= 3 marks

(d) Assess the value to Paphos Limited of issuing bonus shares

Up to 12available here in total

Award up to 3for each strengths of bonus shares (max 2 points and 5)

Award up to 3for each limitations of bonus shares (max 2 points and 5)

Award up to 2for conclusion

overall

statement on value to Paphos

Some acceptable points are given below

Issuing bonus shares capitalises (turns into permanent capital) reserves that may

have built up√√ but no extra cash flows into the company

are no better off√√

company’s net assets are now spread among a greater number of shares.

Issuing bonus shares can be a useful way of utilising capital reserves which cannot be used to fund dividend payments.

so

the shareholders

Indeed the market value of the shares may fall because the

Conclusion In a rapid growth situation Paphos may have a compelling need to receive and use cash to finance expansion. At this time a bonus issue probably has limited value√√

12= 6 marks

Total marks 26

Question 4

(a)

BEP

= Fixed Cost

Contribution

BEP =

360 000 £30 - £12

360 000

BEP =

18

20,000

OF

Calculation of Profit Total

Contribution

50 000 x £18

900 000

OF

less Fixed

Costs

360 000

PROFIT

540 000

OF

6 x

= 3 marks

(b) Plan 1

Selling price reduced to £27, so contribution reduced to £15OF To maintain profits, total contribution needs to stay at £900 000 So £900 000 divided by £15 gives the number of units that must be sold

Sales

needed to maintain profits at £540 000

900 000

15

is

OF

60 000

OF

(b) Plan 2

Sales

needed to maintain profits at £540 000

Selling price increased to £33, so contribution increased to £21OF To maintain profits, total contribution needs to stay at £900 000 So £900 000 divided by £21 gives the number of units that must be sold

900 000

21

is

OF

42 857

OF

(b) Plan 3

Sales

needed to maintain profits at £540 000

Fixed Costs reduced by £160 000OF means contribution now needs to be £740 000 OF

But variable costs increased by £6per unit

OF per unit So £740 000 divided by £10 gives the number of units that must be sold

so

new contribution is £12

740

000

is

61 667

OF

12

OF

 

14 x

= 7 marks

(c) BEP for Plan 3

BEP =

Fixed Costs

BEP =

Contribution

200 000 £30 - £18

200 000

BEP =

12

16,667

OF

The BEP for Plan 3 is lower than the original situation OF

6 x

= 3 marks

(d) Explain, giving one limitation, which plan Georgio should follow to maintain

current profit level

Up to 6available here in total

Award up to 3for clear reason why a named plan should be followed Award up to 3for a well argued limitation

Example Plan 2 would be the easiest to achieve because less items need to be sold to reach the required profit level√√

The most telling limitation is the reliance on actually selling this quantity at the raised price. Break even analysis assumes this and this may not be realistic. really would need to know about the demand for the product before proceeding

6 x

= 3 marks

Total 16 marks

I

Question 5

Sylett Supplies

Cash Budget for 2 months Ended 30 September 2006

Receipts

August

September

Sales

21000

15250

Dividend from investment

2000

Total Receipts Payments

21000

17250

Purchases

17000

13000

Wages

3600

3500

Expenses

2800

3200

Interim dividend

5000

Total

23400

24700

Balance b/d

1000

-1400

Receipts less Payment

-2400

-7450

 

Balance c/d

-1400

OF

-8850

0F

14= 7 marks

(b) Using the cash budget, indicate whether Sylett Supplies Ltd will be in a position to pay the interim dividend.

Sylett supplies will notOF be in a position to pay the interim dividend because if it does so it will be overdrawn on cash by £8850 according to the cash budget given above OF 2 x = 1 mark

(c)

Forecast Profit for 2 months ended 30 September 2006 Sales (15000 + 7000) less expenses

32000

Purchases (12000 + 14000)

26000

Wages (3200 + 3600)

6800

Expenses (2800 + 3200)

6000

38800

add dividend from investment

2000

Net Loss

-4800

of(nc)

 

10 x

= 5 marks

(d) Assess the value of cash budgets as a decision making aid

Up to 6 available here in total

Award up to 2for point in favour of cash budgets Award up to 2for limitation Award up to 2for conclusion

Example Cash budget is an organised way to estimate cash to be received and spent, it gives a definite and clear indication of the availability of cash at monthly stages in the future√√ Of course the quality of the information is dependent on the quality of the estimates and this is the downside of any budget …it is not a crystal ball√√ Overall I feel the cash budget is an excellent tool providing great care is taken over estimates and its limitations are understood√√ 6 x = 3 marks

Total 16 marks

Question 6

(i) Calculate the earnings per share

Earnings per share =

Net profit attributable to ordinary shareholders

Number of ordinary shares issued

£1136 - £360

16 000

4.85p

(ii) Calculate the price earnings ratio

Price earnings ratio =

Market price

of

Earnings per share

64p

(iii) Calculate the dividend yield

4.85p (OF)

13.2

of

Dividend yield =

 

Dividend per share

Market price per share

 

£800/16 000 (or 5p)

 

64p

 

7.8%

must be percentage

(iv)

Calculate gearing

Gearing =

 

Prior charge capital

 

Total capital

£9 000

x 100

 

£19 060

47.2%

of

of

(Also accept Equity: fixed interest ….fixed interest/Equity and reserves)

16= 8 marks

(b) Commenting on the price earning ratio, dividend policies, and gearing advise Andreas in which company to invest.

Up to 4for each appropriate comment made on each of the 3 elements max 12

Award 1for decision based on comments

Award up to 3for summarising …giving a conclusion

Total 16= 8 marks

Example

P/E Ratio The p/e ratio shows that investors have more confidence in the management and prospects of Athena plc√√ The chances are, therefore, that this confidence will translate into more improvement in the price of shares in Athena plc√√

Dividend policy Athena plc is pursuing a more prudent and sustainable dividend policy. While earning 6.4p per share, it is paying a dividend of only 4.5 p per share. As the dividend cover ratio shows, it will be able to maintain this level of dividend. Thessaloniki plc on the other hand is earning 4.85p per share and paying a dividend of 5p per share. Even at current levels of earnings its dividend policy is not sustainable√√

Gearing Athena plc is not geared at all. Thessaloniki plc is significantly geared (though not highly geared). √√ Any downturn in performance will, therefore, have a more than proportionate impact on the amounts available to ordinary shareholders in Thessaloniki plc.

Total 12= 6 marks

Decision and Conclusion My comments indicate that on the basis of these three ratios Andreas should invest in Athena plcThe p/e ratio is higher, the dividend per share, although lower, is sustainable√√ and the gearing protects the ordinary shareholder against a downturn in profits

Total 4= 2 marks

Question total 16 marks

Question 7

(a) Distinguish between each of the following investment appraisal methods:

(i) payback period;

(ii) accounting rate of return.

Award up to 3for acceptable definition

Example

(i) payback period is the amount of timeit takes to recover or receive the

income in cashrequired to match the amount spent on the investment

(ii) accounting rate of return is the average profit expressed as a percentage

of the capital invested in the project

6 x= 3 marks

(b) Calculate the net cash flows of the replacement

machine Cash inflow

Cash outflow

Net Cash Flow

2007 105000

75000

30000

of

2008 144000

90000

54000

of

2009 153000

102000

51000

of

8 x = 4 marks

(c) Calculate the net present value of the replacement machine

Net cash flow

Disc Factor

Present Value

Yr 0

-100000

1

-100000

2007

30000

0.926

27780

2008

54000

0.857

46278

2009

51000

0.794

40494

 

Net Present

√√ c

of(nc)

Value

14552

()

6 x

= 3 marks

(d) Evaluate whether Singh Limited should purchase the machine

Up to 6 available here in total

Award up to 2for point in favour of investment Award up to 2for limitation Award up to 2for conclusion

Example From the financial point of view the net present value indicates a return on investment significantly in excess of the 8% cost of capital faced by Singh Ltd. There may be non financial factors to take into account e.g. displacement of labour√√ Overall it would depend on the policy of Singh Limited and how this decision fitted in with its overall strategy√√

(e) (i) State how the net present value could be used to find the internal rate of return of purchasing the cutting machine. If the net present value were 0 instead of £14 552…then the exact return on the investment would have equalled the chosen discount rate (8%)

The exact rate is known as IRR. Since NPV is higher than 0 …the IRR must be

higher than 8% . It is possible to estimate the IRR by deciding how much above

0 the return is and expressing this as a percentage

(ii) Why would the internal rate of return be more valuable to Singh Limited than the net present value? It is more precise

6 x = 3 marks

Acceptable definitions for Accounting Rate of Return

Main one

Average Annual profit

Others

Average investment (Op +Closing/2)

Estimated total profit

Gearing =

Estimated initial investment

Estimated Average Profit

Estimated initial investment

It is key that Accounting rate of return is about profit …not cash