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LCCI International Qualifications

Accounting
Level 3

Model Answers
Series 4 2008 (3001)

For further Tel. +44 (0) 8707 202909


information Email. enquiries@ediplc.com
contact us: www.lcci.org.uk
Accounting Level 3
Series 4 2008

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.

© EDI 2009

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or
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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

Eastern Plastics Ltd


Trading and Profit & Loss Account for the year ended 30 Sep 07

01-Oct-06 01-Feb-07
to to
31-Jan-07 30-Sep-07
Basis of allocation £ £ £ £

Sales See working 1 207,000 828,000


Cost of sales See working 2 165,600 690,000
Gross Profit 41,400 138,000
Profit on sale of fixed assets Given 3,000 -
44,400 138,000
Commissions 4% of sales 8,280 33,120
Management salaries Given 8,000 -
Wages and salaries Time (1/3rd and 2/3rds) 29,000 58,000
Bad debts Given - 2,000
Rent and insurance Time (1/3rd and 2/3rds) 1,500 3,000
Late payment interest Given - 700
Overdraft interest Given - 800
Directors fees and expenses Given - 20,000
Audit fees Given - 2,500
Depreciation See working 3 3,500 11,350
50,280 131,470
Net Profit -5,880 6,530

(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

Working 3 1.10.06 - 1.2.07 -


31.1.07 30.9.07
Purchased £ £
1.10.04 Fixtures (24,000 x 25%) 2,000 4,000
Vehicles (10,000 x 90% x 50%) 1,500 3,000

1.4.05 Fixtures( 6,000 x 25% x 50% 750


Vehicles (16,000 x 90% x 50% x 50%) 3,600
3,500 11,350

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
£ £

Retained profit carried forward 128,000 146,500


Proposed dividends on ordinary shares 25,000 50,000
General Reserve 30,000 70,000
Total accumulated depreciation on fixed assets 120,000 174,000
8% Debentures (2008) 50,000 50,000
Trade creditors 85,000 125,000
Trade debtors 185,000 195,000
Stock in trade 92,000 98,000

Other information:

During the year ended 30 September 2007:

(1) Interim dividends of £37,500 were paid


(2) Fixed assets with an original cost of £50,000 and accumulated depreciation of £20,000 were sold
for £28,000
(3) No transfers were made from the General Reserve.

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

(b) Reconciliation of operating profit to net cash flow


from operating activities
£ £
Operating profit 150,000
Add:
Depreciation (174,000 + 20,000 - 120,000) 74,000
Loss on asset sale (50,000 - 20,000 - 28,000) 2,000
Increase in creditors (120,000 - 85,000) 40,000
266,000
Less:
Increase in debtors (195,000 - 185,000) 10,000
Increase in stock (98,000 - 92,000) 6,000
16,000
250,000

£
(c) Interim 2007 37,500
Proposed 2006 25,000
62,500

(d) Any two:


Preference dividends paid
Interest paid
Interest received
Dividends received

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

(1) Unit sales in 2009 are expected to be:

Month Jan Feb Mar April May June


Unit sales 1,000 800 400 600 900 700

(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

(8) The bank balance at 1 February 2009 is budgeted to be a £110,000 overdraft.

REQUIRED

(a) Prepare a cash budget, in columnar form, for February, March, April and May 2009.
(17 marks)

(b) State two advantages of preparing and using cash budgets.


(3 marks)

(Total 20 marks)

3001/4/08/MA Page 6 of 17
MODEL ANSWER TO QUESTION 3

(a) Ning Electronics


Cash Budget
Feb-May 2009

Details Reference February March April May Total


£ £ £ £ Marks
Income

Cash Sales [1] 80,000 40,000 60,000 90,000

Debtors [1] 98,000 78,400 39,200 58,800

Total 178,000 118,400 99,200 148,800

Expenditure

Creditors -
purchases [2] 20,000 30,000 45,000 35,000

Wages - net [3] 27,200 40,800 61,200 47,600

Statutory deductions [3] 32,400 22,800

Overheads [4] 12,000 6,000 9,000 13,500

Total 91,600 76,800 115,200 118,900

Net receipts/(payments) 86,400 41,600 -16,000 29,900

Balance b/fwd -110,000 -23,600 18,000 2,000

Balance c/fwd -23,600 18,000 2,000 31,900

Workings:
[1] Jan Feb Mar April May

Sales - units x £200 200,000 160,000 80,000 120,000 180,000

Cash sales = 50% 80,000 40,000 60,000 90,000

Debtors = last months credit 98,000 78,400 39,200 58,800


sales less 2%

[2]
Production = next months sales
Therefore units = 400 600 900 700

x unit cost of £50 = 20,000 30,000 45,000 35,000

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)

[3] Jan Feb Mar April May

Production units = 400 600 900 700

x unit labour cost of £80 = 32,000 48,000 72,000 56,000

Less: statutory deductions of 15% = 4,800 7,200 10,800 8,400

Net wages 27,200 40,800 61,200 47,600

Payment of statutory deductions 32,400 4,800


7,200
10,800
22,800

[4]

Production units - 800 400 600 900 700

x unit overhead cost of £20 - £5 12,000 6,000 9,000 13,500 10,500

Paid in following month 12,000 6,000 9,000 13,500

(b)
Highlights periods when borrowings might be necessary

Negotiating a loan in advance of requirement might yield better terms

Helps in planning the acquisition of assets i.e. when cash is available

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

20 February Purchased 10,000 £1 ordinary shares in Prince plc for £15,000

1 March Received half-year's interest on 8% loan stock

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

1 August Sold £21,000 8% loan stock at 90 xd

1 September Received half-year's interest on 8% loan stock

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:

(a) 8% Loan Stock


(13 marks)

(b) Ordinary Shares in Prince plc


(7 marks)
All workings are to be to the nearest £
(Total 20 marks)

3001/4/08/MA Page 9 of 17
MODEL ANSWER TO QUESTION 4

(a) 8% Loan Stock


Date Nominal Income Capital Date Nominal Income Capital
2007 2007
1.1 Bank - purchases (1) 84,000 2,240 73,360 1.3 Bank - interest 3,360

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

31.12 Profit & Loss 6,020 1.9 Bank - interest 3,360

31.12 Balances c/d (5) 63,000 1,680 55,020


84,000 8,400 74,060 84,000 8,400 74,060
2008
1.1 Balances b/d 73,000 1,680 55,020

(b) Ordinary Shares in Prince plc


Date Nominal Income Capital Date Nominal Income Capital
2007 2007
20.2 Bank - purchases 10,000 15,000 10.4 Bank - sale 2,000 3,000

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

12,500 2,100 15,600 12,500 2,100 15,600


2008
1.1 Balances b/d 10,500 11,550

3001/4/08/MA Page 11 of 17
MODEL ANSWER TO QUESTION 4 CONTINUED

8% Loan Stock Ordinary Shares in Prince


Workings
[1] 84,000 x 90% = 75,600 [6] £10,500 x 20% = 2,100

less: 84,000 x 8% x 4 2,240 Income


12
73,360 Capital [7] Income 3,000

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

Accrued interest 21,000 x 8% 140


12 19,040

Less: cost
21,000 x 73,360 18,340
84,000
700

[5] 63,000 x 8% x 4 1,680


12

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:

(1) At 31 March 2007 At 31 March 2008


£ £
Shop stocks at cost 3,150 2,026
Subscriptions in arrears 3,800 4,800
Subscriptions in advance - 2,000
Operating costs owing 450 -
Operating costs prepaid - 500
Paris trip expenses owing - 1,200
Shop creditors 910 1,500
Club fixtures and fittings (valuation) 8,500 7,000

(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

Prepare for Zhou Enterprises Social Club the following:

(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)

(c) A Balance Sheet at 31 March 2008.


(7 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

Less: Cost of sales


Opening stock 3,150

Purchases (5,800 + 1,500 - 910) 6,390


9,540

Closing stock 2,026


7,514

Gross Profit 21,245


Less: Expenses
Wages 11,060
10,185

Bonus (10,185 x 5) 485


[105]
Shop Net Profit 9,700

(b) Income and Expenditure Account


for the year ended 31 March 2008
£ £
Subscriptions (48,000 + 4,800) 52,800

Shop Profit 9,700

Deposit Account Interest (26,000 x 3% x 25%) 195


62,695
Less:
Paris trip (5,700 + 1,200 - 6,800) 100

Staff salaries and wages 28,696

Operating costs (17,749 - 450 - 500) 16,799

Subscriptions written off (3,800 - 2,500) 1,300

Fixtures and fittings - write down 3,500


(8,500 + 2,000 - 7,000) 50,395

Surplus for year 12,300

3001/4/08/MA Page 13 of 17
MODEL ANSWER TO QUESTION 5 CONTINUED

(c) Balance Sheet


at 31 March 2008

Fixed Assets £

Fixture and fittings - valuation 7,000

Current Assets £

Stock 2,026

Prepaid operating costs 500

Accrued interest 195

Subscriptions in arrears 4,800

Deposit account 26,000


33,521

Current Liabilities £

Creditors 1,500

Paris trip accrual 1,200

Subscriptions in advance 2,000

Bonus 485

Bank overdraft 8,146


13,331

Net Current Assets 20,190


27,190

Financed by: £

Accumulated Fund (800 + 3,150 + 3,800 + 8,


500 – 450 - 910) 14,890

Surplus for year 12,300


27,190

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 £ £

Current Assets 865,000


Add: Increase in bank balance 150,000
1,015,000
Creditors due within one year 410,000
Add: Loan repayment due within one year 15,000
425,000
Net Current Assets 590,000

Proposal B £ £

Current Assets 865,000


Add: Increase in bank balance 250,000
1,115,000
Creditors due within one year 410,000
Add:Debenture redemption due within one year 50,000
460,000
Net Current Assets 655,000

Proposal C £

Current Assets 865,000


Add: Increase in bank balance 100,000
965,000
Creditors due within one year 410,000
Net Current Assets 555,000

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.

3001/4/08/MA Page 17 of 17 © Education Development International plc 2009


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