You are on page 1of 14

LCCI International Qualifications

Accounting
Level 3

Model Answers
Series 4 2009 (3512) Hong Kong

For further Tel. +44 (0) 8707 202909


information Email. enquiries@ediplc.com
contact us: www.lcci.org.uk
Accounting (HK) Level 3
Series 4 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) Questions – reproduced from the printed examination paper

(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)

(3) Helpful Hints – where appropriate, additional guidance relating to individual


questions or to examination technique

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.

Page 1 of 12
QUESTION 1

The draft accounting statements of Yobo Ltd included the following amounts:

£
Gross profit 743,200
Net profit 215,700
Net current assets 486,100
Fixed assets 917,000
Total assets 1,564,250

The auditors of Yobo Ltd have now completed their checks and have submitted correcting Journal
entries to the Finance Director. Due to a fault in the auditor’s computer system the names of the
accounts to be debited or credited have been wiped off the Journal entries. No back-up records have
been kept by the auditor.

The Journal entries (which can be assumed to be correct) are as follows:

Dr Cr
£ £
(1) 12,000
12,000
Purchase of motor vehicle for cash not previously recorded

(2) 1,600
1,600
Value of stock included twice in closing stock value

(3) 1,200
600
600
Electricity accrual incorrectly recorded as a prepayment

(4) 3,000
3,000
Increase in provision for bad debts not previously recorded

(5) 240
240
Motor expenses incorrectly recorded as purchases

REQUIRED

(a) Copy the Journal entries into your answer book (excluding the narratives) and insert the names of
the accounts to be debited or credited.
(11 marks)

(b) Calculate the revised:

(i) Gross profit


(ii) Net profit
(iii) Net current assets
(iv) Fixed assets
(v) Total assets.
(11 marks)

(c) Give two criticisms of the auditor.


(3 marks)

(Total 25 marks)

3512/4/09MA Page 2 of 12
MODEL ANSWER TO QUESTION 1

(a) Journal Entries

Dr Cr
£ £
(1) Motor vehicles at cost 12,000
Cash 12,000

(2) Cost of goods sold 1,600


Closing stock 1,600

(3) Electricity expense 1,200


Accruals 600
Prepayments 600

(4) Bad debts expense 3,000


Provision for bad debts 3,000

(5) Motor expense 240


Cost of goods sold 240

(b) Revised Amounts

Gross Profit Net Profit Net Current Fixed Total Assets


Assets Assets
£ £ £ £ £
Draft amount 743,200 215,700 486,100 917,000 1,564,250
(1) - - ½ (12,000) ½ 12,000 -
(2) ½ (1,600) ½ (1,600) ½ (1,600) - ½ (1,600)
(3) 1 (1,200) 1 (1,200) - 1 (600)
(4) - ½ (3,000) ½ (3,000) - ½ (3,000)
(5) 240 - - - -
741,840 209,900 468,300 929,000 1,559,050

(c) Criticism of auditor

Should have corrected fault in computer system


Should have kept back up copies of Journal entries.

3512/4/09MA Page 3 of 12
QUESTION 2

The Finance Director of City Football Club is preparing the budget for the 2010/11 season. The Club
was relegated from the first division to the second division of the national league, at the end of the
2008/09 season.

Forecast figures are as follows:

Average stadium occupancy 50%


Number of home games 20
Average ticket price per supporter per home game £25
Average refreshment purchase per supporter per home game £3
Variable cost per supporter per home game (excluding refreshments) £6
Fixed costs per season £8 million

The Club’s stadium has a maximum capacity of 50,000 and refreshments are sold at cost plus 50%.

REQUIRED

Calculate for the 2010/11 season:

(a) the budgeted surplus.


(7 marks)

(b) the average attendance per home game necessary for the Club to break even.
(7 marks)

After the initial budget had been prepared City Football Club was taken over by a billionaire
businessman. The Club was therefore able to purchase a star player for £9 million in time for the start of
the 2010/11 season. His contract is for 3 years and the player will be paid £4 million each season. The
transfer fee of £9 million will be written off evenly over three seasons. This, together with the £4 million
salary, are to be treated as fixed costs.

The Finance Director now expects stadium occupancy to rise to 75% and to be able to raise average
ticket prices to £30 per supporter per home game. The forecasts for refreshment purchases, refreshment
mark-up, variable costs per supporter per home game and other fixed costs, remain unchanged.

REQUIRED

(c) Calculate the revised budgeted surplus for the 2010/11 season.
(7 marks)

(d) Outline one possible advantage and one possible disadvantage of purchasing the star player, other
than the immediate effects on costs and revenues.
(4 marks)

(Total 25 marks)

3512/4/09MA Page 4 of 12
MODEL ANSWER TO QUESTION 2

(a) Budgeted Surplus £ £


Ticket sales (25,000 x 20 x 25) 12,500,000
Refreshment sales (25,000 x 20 x 3) 1,500,000
14,000,000
Less Variable costs:
Refreshments (25,000 x 20 x 2) 1,000,000 2
Other (25,000 x 20 x 6) 3,000,000 1 4,000,000
10,000,000
Less Fixed costs 8,000,000
Surplus 2,000,000

(b) Break Even Attendance £


Contribution per spectator per home game
Ticket sales 25
Refreshments 3
Refreshment costs (2)
Other variable costs (6)
20

Number of spectators per home game to break even:

8,000,000 1 = 20,000
20 x 20
1 1

(c) Revised Budgeted surplus £ £


Ticket sales (37,500 x 20 x 30) 22,500,000
Refreshment sales (37,500 x 20 x 3) 2,250,000
24,750,000

Less Variable costs:


Refreshments (37,500 x 20 x 2) 1 1,500,000
Other (37,500 x 20 x 6) 1 4,500,000 6,000,000
18,750,000

Less Fixed costs:


Original 1 8,000,000
Transfer fee (9,000,000/3) 1 3,000,000
Additional salary 1 4,000,000 15,000,000
Revised surplus 3,750,000

(d) Advantage/Disadvantages
Stronger team could mean promotion and increases in future surpluses.
May attract more star players, etc.

High salary may upset other players reducing team spirit and effectiveness.
Injury to star player could reduce attendances and team effectiveness, etc.

3512/4/09MA Page 5 of 12
QUESTION 3

The following information has been extracted from the accounting records of Seers Ltd for the year to 31
December 2008:

(1) 100,000 ordinary shares of £1 each were issued at a premium of £0.60 per share. Issue expenses
of £1,000 were charged to the Share Premium Account
(2) Debentures, nominal value £40,000, were redeemed at par
(3) Debenture interest paid was £7,500 and loan interest received was £720
(4) 10,000 ordinary shares in Green plc were purchased for £5,000
(5) Dividends of £12,000 were paid
(6) Retained profits increased by £84,375
(7) Fixed assets with accumulated depreciation of £3,200 and a book value of £4,800, were sold for
£3,700
(8) Fixed assets at cost increased by £74,500 and accumulated depreciation on fixed assets increased
by £8,900
(9) Debtors at 31 December 2008 were £90,000 which was 10% lower than the beginning of the year
(10) Stock at the beginning of the year was £34,000 and stock at 31 December 2008 was 20% higher
(11) Creditors increased by £12,000 over the year, but creditors at 31 December 2008 include £4,000
relating to purchases of fixed assets.

REQUIRED

(a) Calculate the figures which would appear in the Cash Flow Statement of Seers Ltd for the year
ended 31 December 2008 in respect of:

(i) Net cash inflow from operating activities


(ii) Net cash outflow from capital expenditure and financial investment
(iii) Net cash inflow from financing
(iv) Net cash outflow from returns on investment and servicing of finance.
(17 marks)

Proceeds of share issues appear as an item in cash flow statements. Four companies have all made a
rights issue of shares in recent months. They have used these funds as follows:

Company A – to purchase a potentially profitable overseas venture

Company B – to buy new cars for directors and redecorate the board room

Company C – to acquire new fixed assets to increase production capacity

Company D – to pay off debentures.

REQUIRED

(b) For each company, explain briefly whether or not the shareholders are likely to benefit from the uses
of funds.
(8 marks)

(Total 25 marks)

3512/4/09MA Page 6 of 12
MODEL ANSWER TO QUESTION 3

(a) Extracts from Cash Flow Statement of Seers Ltd for year ended 31 December 2008:

(i) Net cash inflow from operating activities £


Increase in retained earnings 84,375
Debenture interest paid 7,500
Loan interest received (720)
Dividend paid 12,000
Operating profit 103,155
Depreciation (8,900 + 3,200) 12,100
Loss on disposal (4,800 – 3,700) 1,100
Increase in stock (34,000 x 0.2) (6,800)
Decrease in debtors (90,000/9) 10,000
Increase in creditors (12,000 – 4,000) 8,000
Inflow 127,555

(ii) Net cash outflow from capital expenditure and financial investment £
Purchase of investment (5,000)
Sale of fixed assets ½ ½ ½ 1 3,700
Purchase of fixed assets [74,500 + (3,200+4,800) - 4,000] (78,500)
Outflow (79,800)

(iii) Net cash inflow from financing £


Issue of ordinary shares (100,000 x 1.60) 160,000
Issue expenses (1,000)
Debenture redemption (40,000)
Inflow 119,000

(iv) Net cash outflow from returns on investment and servicing of finance £
Debenture interest paid (7,500)
Loan interest received 720
Outflow (6,780)

(b) Whether of not shareholders benefit


Company A – Yes, provided the overseas business is actually profitable.

Company B – No, only the directors seem to benefit, unless these improvements in their working
conditions stimulates them, so that they make more profitable decisions.

Company C – Yes, provided additional capacity can be put to profitable use.

Company D – Yes, provided the interest saved is considerable or the lower gearing makes the
shareholders’ return more secure.

3512/4/09MA Page 7 of 12
QUESTION 4

The Balance Sheet of Platt Ltd at 31 December 2008 included the following fixed assets:

Cost Accumulated Net Book


Depreciation Value
£ £ £
A 280,000 44,800 235,200
B 54,000 10,260 43,740
C 48,000 15,360 32,640
D 92,000 18,400 73,600

A different accounting policy for depreciation is applied to each of the four fixed assets, but the
accountant has forgotten which policy is applied to which asset. The policies are as follows:

(i) 10% straight line assuming zero residual value


(ii) 2% straight line assuming zero residual value
(iii) 10% reducing balance
(iv) 10% straight line, changed to 15% straight line from 1 January 2008, assuming zero residual
value.

Each fixed asset was purchased on 1 January in a year and only one is more than 3 years old.

REQUIRED

(a) State which of the four fixed assets is likely to be a building, giving two reasons for your choice.
(3 marks)

(b) Showing appropriate calculations, ascertain which accounting policy applies to which asset.
(11 marks)

Duffy Ltd has been in business for several years. On 1 January 2009, 100 units of Product Y were in
stock, valued at £25 per unit. In January 2009 the following transactions took place:

Purchases Product Y Sales Product Y


Date Units Total Cost Date Units Total Sales
£ £
Jan 14 400 10,200 Jan 15 400 12,000
Jan 21 500 13,000 Jan 30 1,000 30,000
Jan 27 600 16,200
Jan 28 700 19,600

REQUIRED

(c) Calculate Duffy Ltd’s gross profit on Product Y, for January, using each of the following alternative
stock valuation methods:

(i) FIFO
(ii) Periodic weighted average cost (with the average purchase cost rounded down to the nearest
£).
(11 marks)

(Total 25 marks)

3512/4/09MA Page 8 of 12
MODEL ANSWER TO QUESTION 4

(a) A is probably a building because:


(i) It has a high cost
(ii) A relatively small amount has been charged as depreciation

(b)
£
B Cost 54,000
Depreciation (54,000 x 0.10) 5,400
48,600
Depreciation (48,600 x 0.10) 4,860
NBV 43,740
(iii) 10% reducing balance
£
D Cost 92,000
Depreciation (92,000 x 0.10) 9,200
82,800
Depreciation (92,000 x 0.10) 9,200
NBV 73,600
(i) 10% straight line

A 44,800 =8
0.02 x 280,000
£
Cost 280,000
Depreciation (280,000 x 0.02 x 8) 44,800
NBV 235,200
(ii) 2% straight line
£
C Cost 48,000
Depreciation (48,000 x 0.10) 4,800
43,200
Depreciation (48,000 x 0.10) 4,800
38,400
Depreciation (38,400 x 0.15) 5,760
NBV 32,640
(iv) 10% straight line then 15% straight line

3512/4/09MA Page 9 of 12
MODEL ANSWER TO QUESTION 4 CONTINUED

(c) Gross Profit £ £


(i) FIFO basis
Sales (12,000 + 30,000) 42,000
Less Cost of goods sold:
Opening stock (100 x 25) 2,500
Purchases (10,200 + 13,000 + 16,200 + 19,600) 59,000
61,500
Closing stock (Note (1)) 25,000 36,500
Gross profit 5,500

Note (1) Stock valuation


Quantity Price Value
£ £
Jan 1 Opening balance 100 25.00 2,500
14 Purchase 400 25.50 10,200
15 Sale (100) 25.00 (2,500)
Sale (300) 25.50 (7,650)
Balance 100 25.50 2,550
21 Purchase 500 26.00 13,000
27 Purchase 600 27.00 16,200
28 Purchase 700 28.00 19,600
30 Sale (100) 25.50 (2,550)
Sale (500) 26.00 (13,000)
Sale (400) 27.00 (10,800)
200 27.00 5,400
700 28.00 19,600
Closing balance 900 25,000

(ii) Periodic weighted average cost basis £ £


Sales 42,000
Less Cost of goods sold:
Opening stock 2,500
Purchases 59,000
61,500
Closing stock (Note (2)) 23,400 38.100
Gross profit 3,900

Note (2) Stock valuation


Average cost = 2,500 + 59,000 .
100 + 400 + 500 + 600 + 700

= 26.74 = £26 (rounded down)


900 x 26 = 23,400

3512/4/09MA Page 10 of 12
QUESTION 5

The following information relates to the accounts of two companies in respect of 2008:

Giggs plc Peart plc


Gross profit percentage on sales 20% 10%
Net profit percentage on sales 4% 3%
Cost of goods sold £800,000 ?
Opening stock £260,000 ?
Closing stock ? £48,000*
Closing creditors £36,000 ?
Creditors’ settlement period 20 days ?
Closing debtors ? £54,000
Debtors collection period ? 25 days

*20% more in value than opening stock

REQUIRED

(a) Calculate, in as much detail as possible, the Trading and Profit and Loss Account for 2008 of each
of:

(i) Giggs plc


(ii) Peart plc.
(15 marks)

The following ratios have been extracted from the accounts of two other companies for 2008:

Yeo plc Ollis plc


Stock turnover period 2 days 30 days

One of these companies is a bakery and the other sells expensive toys.

REQUIRED

(b) State which company is likely to be the bakery and explain why.
(3 marks)

(c) State which of the two companies a cautious investor is likely to buy shares in, if the economy is in
recession, and explain why.
(3 marks)

The following information relates to the accounts of Kemp plc for 2008:

Price/Earnings ratio 5.0


Dividend yield ratio 12%
Market price per share £0.20

REQUIRED

(d) Calculate for Kemp plc:

(i) Earnings per share


(ii) Dividend per share.
(4 marks)

(Total 25 marks)

3512/4/09MA Page 11 of 12
MODEL ANSWER TO QUESTION 5

(a) (i) Giggs plc Trading and Profit and Loss Account for 2008
£ £

Sales (800,000 x 10/8) 1,000,000


Less Cost of Goods sold:
Opening stock 260,000
Purchases [(36,000 x 365)/20] 657,000
917,000
Closing stock (R) 117,000 800,000
Gross profit (1,000,000 x 0.20) 200,000
Expenses (R) 160,000
Net profit (1,000,000 x 0.04) 40,000

(ii) Peart plc Trading and Profit and Loss Account for 2008
£ £
Sales [(54,000 x 365)/25] 788,400
Less Cost of Goods sold:
Opening stock (48,000 x 100/120) 40,000
Purchases (R) 717,560
757,560
Closing stock 48,000 709,560
Gross profit (788,400 x 0.10) 78,840
Expenses (R) 55,188
Net profit (788,400 x 0.03) 23,652

(b) Yeo plc is likely to be the bakery as it has a very short stock turnover period. This is necessary when
trading in perishable goods like bread. Toys would have a much longer stock turnover period,
particularly if they are expensive.

(c) In a recession a cautious investor would invest in Yeo plc, the bakery. People are far more likely to
cut down on toy purchases than on food purchases in difficult times.

(d) (i) Earnings per share

0.20 =5 Earnings per share = £0.040


Earnings per share

(ii) Dividend per share

Dividend per share = 0.12 Dividend per share = £0.024


0.20

3512/4/09MA Page 12 of 12 © Education Development International plc 2009


EDI
International House
Siskin Parkway East
Middlemarch Business Park
Coventry CV3 4PE
UK

Tel. +44 (0) 8707 202909


Fax. +44 (0) 2476 516505
Email. enquiries@ediplc.com
www.ediplc.com

© Education Development International Plc 2009.


All rights reserved. This publication in its entirety is
the copyright of Education Development
International Plc. Reproduction either in whole or
in part is forbidden without the written permission
from Education Development International Plc.