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LCCI International Qualifications

Accounting (IAS)
Level 3

Model Answers
Series 4 2010 (3902)

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contact us: www.lcci.org.uk
Accounting (IAS) Level 3
Series 4 2010

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 2010

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.

3902/4/10/MA Page 1 of 19
QUESTION 1

Forth, a private company, maintains a Sales Ledger Control Account. The balance on this account is
reconciled each month with the net total of the balances in the Sales Ledger. The balance on the
Sales Ledger Control Account appears in the company’s Trial Balance drawn up at the end of the
company’s financial year.

REQUIRED

(a) State (yes or no) whether or not each of the following is part of Forth’s double entry
book-keeping system:

(i) Sales Ledger Control Account


(ii) Sales Ledger
(iii) Sales Day Book.
(3 marks)
For each of the above (a) (i) (ii) (iii):

(b) state whether individual sales figures, total sales figures or both individual and
total sales figures will be included

(c) explain their purpose and how they are linked together in accounting for sales.
(9 marks)

On 31 March 2010 Forth’s Sales Ledger Control Account had a debit balance of $46,438 and the
balances extracted from the Sales Ledger gave a net total of $41,634 debit.

The accountant discovered the following errors:

(1) a cheque for $3,500, received from a customer, had been entered in the customer’s
account as $5,300
(2) a page in the Sales Day Book had been over-added by $237
(3) a sales invoice for $1,200 had been completely omitted from the books
(4) a sales invoice for $2,100 had been entered twice in the Sales Day Book
(5) a credit balance of $40, in the list of Sales Ledger balances, had been incorrectly listed
as a debit balance
(6) contras of $60 had been entered twice in both the Purchases Ledger and the Sales
Ledger accounts, but not entered in either the Purchases Ledger Control Account or the
Sales Ledger Control Account.

The balance on the Sales Ledger Control Account still did not agree with the net total of the balances
extracted from the Sales Ledger, after correcting the above errors.

REQUIRED

(d) Calculate:

(i) the amended Sales Ledger Control Account balance


(ii) the amended net total of the balances extracted from the Sales Ledger
(iii) the difference remaining between (i) and (ii) above.
(11 marks)

Forth’s accountant suggests that the difference be ignored as another reconciliation will be attempted
at the end of April and the figures may then agree.

REQUIRED

(e) State whether or not the accountant’s suggestion is acceptable and briefly discuss whether
or not the figures are likely to reconcile at the end of April 2010. (2 marks)

(Total 25 marks)

MODEL ANSWEWR TO QUESTION 1

3902/4/10/MA Page 2 of 19
(a) (i) Yes

(ii) No

(iii) No

(b) (i) total sales

(ii) individual sales

(iii) individual and total sales

(c) (i) Shows the total amount owing by receivables at any point in time. The total sales figure is
derived from the Sales Day Book. The balance should reconcile with the net total of
the list of Sales Ledger balances.

(ii) Shows the amounts owing by individual receivables at any point in time. Individual sales
amount are posted from the Sales Day Book. The net total of the list of Sales Ledger
balances should reconcile with the balance on the Sales Ledger Control Account.

(iii) Shows each individual sale and is a book of prime entry used in providing figures for
both the Sales Ledger Control Account and the Sales Ledger.

(d)
(i) Sales Ledger Control Account $
Original balance 46,438
(2) Addition error in Sales Day Book (237)
(3) Sales invoice omitted 1,200
(4) Sales invoice entered twice in Sales Day Book (2,100)
(6) Contras omitted (60)
Amended balance 45,241

(ii) Sales Ledger Balances $


Original net total 41,634
(1) Incorrectly recorded cheque (5,300-3,500) 1,800
(3) Sales invoice omitted 1,200
(4) Sales invoice entered twice in Sales Day Book (2,100)
(5) Credit balance listed as debit balance (40 x 2) (80)
(6) Contras recorded twice 60
42,514

(iii) Difference $
Sales Ledger Control Account 45,241
Sales Ledger Balances 42,514
Difference 2,727

(e) Accountant’s suggestion


Ignoring the difference is not acceptable

The figures are very unlikely to reconcile next month, unless they are due to addition errors in
adding the list of balances or calculating the balances themselves. In any case these should be
rechecked now.

3902/4/10/MA Page 3 of 19
QUESTION 2

Tweed is a private company which has performed poorly in recent years. The holders of 20,000 of the
shares are very unhappy with the directors.

An extract from the Balance Sheet of Tweed at 31 December 2009 is as follows:

$
Ordinary share capital ($1 each) 80,000
Share premium 5,000
Accumulated profits 30,000

The Managing Director of Tweed, being aware of the unhappy shareholders, has made the following
proposals, to take place in the order given:

(1) increase the value of the buildings by $10,000, thereby incorporating a recent professional
revaluation in the Balance Sheet

(2) make a 1 for 10 capitalisation (bonus) issue out of non-distributable reserves

(3) issue for cash 20,000 shares at a premium of $0.05 and then purchase all the shares of the
unhappy shareholders at par.

REQUIRED

(a) Assuming that the above proposals are accepted by all parties concerned, prepare
Journal entries (with narratives) to record them.
(17 marks)

In order to justify his proposals the Managing Director made the following comments:

(1) revaluing the buildings makes the Balance Sheet stronger and will have no effect on profit in
future years

(2) the capitalisation issue would not cost the company anything

(3) the unhappy shareholders are likely to accept the $22,000 offered for their shares and
redeeming them at par is a good deal for the company

(4) buying out the unhappy shareholders should mean a more united company in future.

REQUIRED

(b) Briefly discuss the truth or otherwise of each of the Managing Director’s comments.

(8 marks)

(Total 25 marks)

3902/4/10/MA Page 4 of 19
MODEL ANSWER TO QUESTION 2

(a) Journal Entries $ $


DR CR
(1) Buildings 10,000
Revaluation reserve 10,000
Revaluation of buildings

(2) Share premium 5,000


Revaluation reserve 3,000
Ordinary share capital (80,000/10) 8,000
Capitalisation issue of one share for every ten

(3) Bank (20,000 x 1.05) 21,000


Ordinary share capital 20,000
Share premium 1,000
Issue of ordinary shares at $1.05

Ordinary share capital 22,000


Share purchase 22,000
Purchase of ordinary shares

Accumulated profits (W1) 1,000


Capital redemption reserve 1,000
Amount to be financed out of distributable profits

Share purchase 22,000


Bank 22,000
Payment to ordinary shareholders for shares
redeemed

$
W1 Nominal value of shares redeemed (22,000 x 1.00) 22,000
Proceeds from new issue (20,000 x 1.05) 21,000
1,000

(b) Managing Director’s Comments

(1) - the Balance Sheet, with a higher value for non-current assets, may well appear stronger.
- however depreciation must be provided on the revalued amount, so there will be an
effect on future profits

(2) - a capitalisation issue does not involve a cash outflow and therefore would not cost the
company anything
- however buying out the unhappy shareholders at par would cost an additional $2,000 as
a result of the capitalisation issue

(3) - there is no evidence to suggest the unhappy shareholders will accept the company’s
offer for their shares
- the market value of the shares is crucial in determining shareholder acceptance and
whether or not it is a good deal for the company

(4) - the remaining shareholders may be more united


- the unity of the Board of Directors and senior management is more important, and
whether or not the company is more successful in future

3902/4/10/MA Page 5 of 19
QUESTION 3

On 1 January 2009, Wear, a public company, acquired 75% of the ordinary share capital of Tyne, a
private company. Wear Plc financed the acquisition by issuing 40,000 $1 ordinary shares at a premium
of $0.50, and paying $30,000 in cash.

REQUIRED

(a) Prepare a Journal entry, in the books of Wear Plc, recording the acquisition of the shares
in Tyne. No narrative is required.
(4 marks)

Wear wrote off 20% of the goodwill arising on the acquisition of Tyne non-current and depreciate tangible
assets at 30% per year on a straight line basis. The draft Consolidated Balance Sheet of the Wear and
Tyne Group at 31 December 2009 was as follows:
$ $
Non current assets
Goodwill on consolidation 16,000
Tangible non current assets 315,000
331,000
Current assets
Inventory 90,000
Receivables 54,000
Bank 19,000
163,000
Payables: amounts falling due within one year 494,000
Payables 58,000
Accruals 9,000 67,000
Net current assets
427,000
Capital and reserves
Ordinary share capital ($1 shares) 200,000
Share premium 40,000
Accumulated profits 157,000
397,000
Minority interest 30,000
427,000

Adjustments to the above Balance Sheet are required in respect of the following matters:

(1) On 1 January 2009 the fair value of Tyne’s tangible non-current assets was $10,000
higher than their book value. This had not been taken into consideration in the
original consolidation. Wear depreciates tangible non-current assets at 30% per year on a
straight line basis.
(2) Wear sold goods costing $30,000 to Tyne during 2009 for $50,000.
On 31 December 2009 half the value of these goods remained unsold.
(3) Tyne sold goods costing $20,000 to Wear during 2009 for $30,000.
On 31 December 2009 a quarter of the value of these goods remained unsold.
(4) Inter company balances of $7,000 were included in the consolidated receivables and
payables.
(5) A bank overdraft of $10,000 in Wear had been offset against the bank balance
in hand of Tyne.

3902/4/10/MA Page 6 of 19
QUESTION 3 CONTINUED

REQUIRED

(b) Calculate the goodwill on consolidation at 1 January 2009, before the fair value adjustment.
(2 marks)

(c) Calculate the goodwill on consolidation at 31 December 2009, after the fair value
adjustment and after the 20% write off.
(2 marks)

(d) Prepare the amended Consolidated Balance Sheet of the Wear and Tyne Group at
31 December 2009, after adjusting for items (1) to (6) above.
(17 marks)

(Total 25 marks)

3902/4/10/MA Page 7 of 19
MODEL ANSWER TO QUESTION 3

(a) Journal Entry $ $


DR CR
Investment in Tyne 90,000
Ordinary share capital 40,000
Share premium 20,000
Bank 30,000

(b) Goodwill at 1 January 2009


Goodwill per draft balance sheet (80%) 16,000
Amount written off (20%) 4,000
20,000

(c) Goodwill at 31 December 2009


Goodwill as above 20,000
Fair value adjustment (75% x 10,000) (7,500)
Amount written off 20% (20,000 - 7,500) (2,500)
10,000

3902/4/10/MA Page 8 of 19
QUESTION 3 CONTINUED

(d)

Consolidated Balance Sheet of the Wear


and Tyne Group at 31 December 2009 $ $
Non-current assets
Goodwill 10,000
Tangible non-current assets (315,000 + 10,000 - 3,000) 322,000
332,000
Current assets
Inventory (90,000 - 10,000 - 2,500 - 4,000) 73,500
Receivables (54,000 - 7,000 - 5,000) 42,000
Bank (19,000 + 10,000) 29,000
144.500
476,500

Capital and reserves $


Ordinary share capital 200,000
Share premium 40,000
Accumulated profits (W 1) 136,625
376,625
Minority interest (W 2) 29,875
406,500
Current liabilities
Payables (58,000 - 7,000) 51,000
Accruals 9,000
Bank overdraft 10,000
70,000
476,500

W 1 – Retained earnings $
Original 157,000
Goodwill written off (4,000 - 2,500) 1,500
Depreciation (0.75 x 3,000) (2,250)
Unrealised profit in inventory (1) (10,000)
Unrealised profit in inventory (2) (0.75 x 2,500) (1,875)
Provision for obsolete inventory (4,000)
Provision for bad debts (0.75 x 5,000) (3,750)
136,625
W 2 – Minority interest
Original 30,000
Fair value adjustment 2,500
Depreciation (0.25 x 3,000) (750)
Unrealised profit in inventory (2) (0.25 x 2,500) (625)
Provision for bad debts (0.25 x 5,000) (1,250)
29,875

3902/4/10/MA Page 9 of 19
QUESTION 4

Tay is a sole trader and retailer with only a limited understanding of accounting. He has provided his
accountant with the following estimates for the purpose of preparing a budget for the three months
ending 31 March 2011:

(1) Sales and Receivables


Cash sales will be 5% of credit sales and will be as follows:

$
January 5,000
February 6,000
March 6,500

Receivables at 31 December 2010 will be $100,000 of which $28,000 will relate to October sales,
$40,000 to November sales and the rest to December sales. 50% of credit sales revenue is received in
the month following sale, 25% in the second month following sale, and 25% in the third month following
sale.

(2) Disposal of Non-current Assets


$3,200 will be received, in February 2011, from the sale of non-current assets on 1 January 2011.
These cost $12,000 and have a net book value of $4,000.
Depreciation is to be changed at $3,000 per month in 2011.

(3) Other Receipts


Tay has recently had a substantial gambling win and will be paying £1,000 into the business bank
account in February 2011.

(4) Purchases and Payables


Cash purchases will be equal to 10% of total purchases and will be as follows:

$
January 2,700
February 3,600
March 4,500

Payables at 31 December 2010 will be $75,200 of which $32,000 will relate to November purchases and
the rest to December purchases. Two thirds of credit purchases are paid in the month after purchase.
One third of credit purchases are paid in the second month after purchase.

(5) Wages and Drawings


Tay takes $25,000 per month out of the business bank account and uses $20,000 of this to pay
wages.

(6) General Cash Expenses


These will be incurred as follows:
$
December (2010) 1,000
January 1,100
February 1,200
March 1,100

Half the general expenses are paid in the month incurred and half in the following month.

(7) Miscellaneous
The bank balance at 31 December 2010 is expected to be an overdraft of $4,250. Inventory at
31 December 2010 is expected to of have a cost of $27,500. This figure is expected to have risen
by 25% by 31 March 2011.

3902/4/10/MA Page 10 of 19
QUESTION 4 CONTINUED

REQUIRED

Prepare for Tay:

(a) a monthly cash budget, in columnar form, showing the bank balance at the end of each
month, for January, February and March 2011.
(14 marks)

(b) a budgeted Income Statement for the three month period ending
31 March 2011.
(7 marks)

Tay is due to have talks with his bank manager and intends to claim the following:

(i) paying his gambling winnings into the business bank account shows him to be a prudent
and responsible businessman
(ii) the extended credit period recently offered to customers, will improve sales,
improve cash flow and reduce bad debts.

REQUIRED

(c) Briefly discuss whether or not the bank manager will be impressed by the above claims.
(4 marks)

(Total 25 marks)

3902/4/10/MA Page 11 of 19
MODEL ANSWER TO QUESTION 4

(a) Tay: Cash Budget for three months to 31 March 2011

January February March


Receipts $ $ $

Cash sales 5,000 6,000 6,500

Credit sales (W1) 64,000 78,000 93,000

Non-current asset disposal 3,200

Capital paid in 1,000


69,000 88,200 99,500

Payments $ $ $

Cash purchases 2,700 3,600 4,500

Credit purchases (W2) 60,800 30,600 29,700

Wages and drawings 25,000 25,000 25,000

General expenses (W3) 1,050 1,150 1,150

89,550 60,350 60,350


Net Receipt/(Payment) (20,550) 27,850 39,150

Opening balance (4,250) (24,800) 3,050

Closing balance (24,800) 3,050 42,200

January February March


W1 Credit sales: $ $ $
October (28,000) 28,000 (100%) - -
November (40,000) 20,000 (50%) 20,000 (50%) -
December (32,000) (R) 16,000 (50%) 8,000 (25%) 8,000 (25%)
January (5,000 x 100/5 = 100,000) - 50,000 (50%) 25,000 (25%)
February (6,000 x 100/5 = 120,000) - - 60,000 (50%)
64,000 78,000 93,000

January February March


W2 Credit purchases: $ $ $
November (32,000) 32,000 (100%) - -
December (43,200) (R) 28,800 (2/3) 14,400 (1/3) -
January (2,700 x 9 = 24,300) - 16,200 (2/3) 8,100 (1/3)
February (3,600 x 9 = 32,400) - - 21,600 (2/3)
60,800 30,600 29,700

January February March


W3 General expenses: $ $ $
December (1,000) 500 (50%) - -
January (1,100) 550 (50%) 550 (50%) -
February (1,200) - 600 (50%) 600 (50%)
March (1,100) - - 550 (50%)
1,050 1,150 1,150

3902/4/10/MA Page 12 of 19
QUESTION 4 CONTINUED

(b) Tay: Budgeted Income Statement


three months ending 31 March 2011
$ $
Sales [(5,000 + 6,000 + 6,500) x 100/5 + 17,500] 367,500
Less: Cost of goods sold:
Opening inventory 27,500
Purchases [(2,700 + 3,600 + 4,500) x 100/10] 108,000
135,500
Less: Closing inventory (27,500 x 1.25) 34,375 101,125
Gross profit 266,375
Less: Depreciation (30,000 x 3) 90,000
Wages [(25,000 - 5,000) x 3] 60,000
General expenses (1,100 + 1,200 + 1,100) 3,400
Loss on disposal (4,000 - 3,200) 800 154,200
Net profit 112,175

(c) Claims made to bank manager

(i) Gamblers normally lose more than they win and gambling can be addictive.
Bank manager will not be impressed.

(ii) Sales may well increase but cash flow is likely to be slower and bad debts more
likely to increase. Bank manager will only be impressed if sales increase significantly.

3902/4/10/MA Page 13 of 19
QUESTION 5

Taff, a private company, was formed on 31 December 2009 to take over the partnership of Usk and Wye.
On that date the Balance Sheet of the partnership was as follows:

$ $
Non-current assets
Land and buildings 110,000
Plant and machinery 40,000
Motor vehicles 25,000
175,000
Current assets
Inventory 11,200
Receivables 12,400
23,600
198,600

$ $
Payables: amounts falling due within one year

Payables 7,100
Bank overdraft 14,300
21,400
Capital accounts
Usk 117,300
Wye 59,900

198,600

The purchase consideration consisted of $20,000 in cash and 2,000,000 shares of $0.25 each at a
premium of $0.05. Usk and Wye agreed to divide the shares between them in their profit sharing ratio
of 2:1 respectively.

Taff took over all the assets of the partnership and assumed responsibility for the payables of the
partnership, subject to the following:

(1) the land and buildings were revalued at $500,000 and the plant and machinery was
revalued at $36,000

(2) the partnership sold a vehicle for $800 cash to a third party and the remaining vehicles were
revalued at $3,000

(3) a provision for bad debts was created, equal to 5% of receivables

(4) $200 of inventory was written off and a provision of 10% for obsolete inventory was provided
against the remaining inventory.

Before the purchase of the partnership, Taff had issued to the public, 2,500,000 ordinary shares
of $0.25 each at a premium of $0.10.

REQUIRED

(a) Close the books of the Usk and Wye Partnership by preparing the following:

(i) Realisation Account


(ii) Partners’ Capital Accounts (in columnar form)
(iii) Bank Account.
(11 marks)

3902/4/10 Page 14 of 19
QUESTION 5 CONTINUED

(b) Calculate the balances on the following accounts of Taff immediately after the acquisition of
the partnership:

(i) Ordinary share capital


(ii) Share premium
(iii) Goodwill.
(9 marks)

The agreement between Taff and the partnership also states that the partners:

(i) will be employed by Taff for five years from the date of the agreement
(ii) must not work for any competitor during that period.

REQUIRED

(c) (i) Explain why these conditions would have been included in the agreement.

(ii) Discuss briefly whether these conditions treat Usk and Wye fairly.
(5 marks)

(Total 25 marks)

3902/4/10/MA Page 15 of 19
MODEL ANSWER TO QUESTION 5

(a) (i) Realisation Account


$ $
Land and buildings 110,000 Payables 7,100
Plant and machinery 40,000 Bank (vehicle) 800
Motor vehicles 25,000 Bank (Taff) 20,000
Inventory 11,200 Shares in Taff:
Receivables 12,400 Usk (2) 400,000
Wye (1) 200,000
Surplus:
Usk (2) 286,200
Wye (1) 143,100
627,900 627,900

(ii) Capital Accounts

Usk Wye Usk Wye


$ $ $ $
Realisation 400,000 200,000 Opening balance 117,300 59,900
Bank (R) 3,500 3,000 Realisation 286,200 143,100
403,500 203,000 403,500 203,000

(iii) Bank Account

$ $
Realisation 800 Opening balance 14,300
Realisation 20,000 Usk 3,500
20,800 Wye 3,000
20,800 20,800

(b) (i) Ordinary Share Capital of Taff


$
Existing shares (2,500,000 x 0.25) 625,000
Shares issued to partners (2,000,000 x 0.25) 500,000
1,125,000

(ii) Share Premium


$
Existing shares (2,500,000 x 0.10) 250,000
Shares issued to partners (2,000,000 x 0.05) 100,000
350,000

3902/4/10/MS Page 16 of 19
QUESTION 5 CONTINUED

(iii) Goodwill
$ $
Purchase Consideration Cash 20,000
Shares 600,000
620,000
Less: Land and buildings 500,000
Plant and machinery 36,000
Motor vehicles 3,000
Receivables (12,400 x 0.95) 11,780
Stock [(11,200 - 200) x 0.90] 9,900
Payables (7,100) 553,580
66,420

(c) Reasons why the two conditions were included in the agreement to purchase the partnership:

(i) - to protect the interests of Taff Ltd, which requires the skills of the partners
- to protect the partners, who require employment
- to preserve the goodwill value, which is likely to depend on the skills and business
connections of the partners
- to prevent a competitor from benefiting from the skills and experience of the partners and
- their business connections

(ii) - it seems reasonable to expect the partners to work exclusively for Taff Ltd for a period
of time. Whether or not five years is excessive would depend on custom and practice in
that industry.

3902/4/10/MA Page 17 of 19 © Education Development International plc 2010


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