Accounting

Level 3

Model Answers
Series 2 2008 Malaysia (Code 3612)

3601/2/08/MA

Page 1 of 17

Vision Statement
Our vision is to contribute to the achievements of learners around the world by providing integrated assessment and learning services, adapted to meet both local market and wider occupational needs and delivered to international standards.

Education Development International plc 2008 Company Registration No: 3914767 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 written permission from Education Development International plc. International House Siskin Parkway East Middlemarch Business Park Coventry CV3 4PE Telephone: +44 (0) 8707 202909 Facsimile: + 44 (0) 24 7651 6566 Email: enquiries@ediplc.com

Accounting Level 3
Series 2 2008

How to use this booklet Model Answers have been developed by Education Development International plc (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) (2) Questions Model Answers reproduced from the printed examination paper 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) where appropriate, additional guidance relating to individual questions or to examination technique

(3)

Helpful Hints

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 2008 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.

3612/2/08/MA

Page 1 of 15

3612/2/08/MA

Page 2 of 15

Accounting Level 3
Series 2 2008
QUESTION 1 The Purchases Ledger Control Account of Granta Ltd for the month of January 2008 was prepared as shown below: Purchases Ledger Control Account Debit RM 1,253,270 12,500 Credit RM 105,000 1,600,000 4,000 12,500 1,721,500

Cash paid to suppliers Discount received

Balance b/f Credit purchases Purchases returns Interest charged

Balance c/f

455,730 1,721,500

The list of balances extracted from the Purchases Ledger at 31 January 2008 totalled RM436,735. In addition to the error in the Purchases Ledger Control Account shown above, the companys auditors discovered the following errors: (1) An invoice for RM3,000 recorded in the Purchases Daybook was not posted to the Supplier's Account in the Purchases Ledger. (2) The discount received column in the Cash Book was over-added by RM2,000. (3) The list of creditors' balances includes a credit balance of RM1,000, which was incorrectly listed as a debit balance. (4) The debit side of one Supplier's Account had been under-added by RM250. (5) A credit balance of RM3,295 has been omitted from the list of balances. (6) Purchases Ledger contras of RM4,000, representing a balance in the Purchases Ledger set off against a balance in the Sales Ledger, have been recorded in the Account of the supplier but not in the Control Account. (7) A cheque for RM14,500 paid to a supplier has been wrongly posted to the Supplier's Account as RM10,450. (8) A purchases invoice of RM30,000 was omitted from the Purchases Daybook. (9) The Purchases Daybook was over-added by RM5,000.

REQUIRED (a) (i) Prepare a statement correcting the balance at 31 January 2008 on the Purchases Ledger Control Account. An amended Purchases Ledger Control Account is not required. (10 marks) Prepare a statement correcting the original total of the list of balances extracted from the Purchases Ledger. (12 marks)

(ii)

(b) List three advantages of Control Accounts. (3 marks) (Total 25 marks) 3612/2/08/MA Page 3 of 15

MODEL ANSWER TO QUESTION 1 (a) (i) Correction of Purchases Ledger Control Balance RM Balance per question Add: Discount received adjustment Purchases omitted RM 455,730

2,000 30,000 32,000 487,730

Deduct: Contras Purchases over - added Purchases returns (4,000 x 2) Corrected balance (ii)

4,000 5,000 8,000 17,000 470,730

Correction of total of Purchases Ledger Balances RM Balance per question Add: Invoice not posted Credit balance listed as a debit (1,000 x 2) Omitted balance Purchases omitted RM 436,735

3,000 2,000 3,295 30,000 38,295 475,030

Deduct: Debit side under-added 250 Incorrect recording of cheque (14,500 10,450) 4,050 Corrected balance 4,300 470,730

(b) Control accounts: Help to locate errors Help to prevent fraud Provide a useful check on the accuracy of the list of individual debtors/creditors Facilitate the preparation of final accounts

3612/2/08/MA

Page 4 of 15

QUESTION 2 Chow and Patel are in partnership sharing profits and losses in the ratio 3:2 respectively. The partners do not maintain double entry records but have produced the following Balance Sheet at 31 December 2006: Fixed Assets Vehicles Equipment Cost RM 160,000 300,000 460,000 Depreciation RM 40,000 60,000 100,000 Net RM 120,000 240,000 360,000

Current Assets Stock Trade debtors Prepayments: Advertising Insurance Bank Current Liabilities Trade creditors Accruals: Electricity Rent Net Current Assets

125,000 400,000 10,000 20,000 50,000 605,000 75,000 15,000 5,000 95,000 510,000 870,000

Financed by Capital Accounts: Chow Patel Chow Patel RM 400,000 250,000 115,000 105,000 220,000 870,000 Their summarised Bank Account for the year ended 31 December 2007 was as follows: RM 50,000 2,000,000 RM Trade creditors Carriage inwards Insurance Electricity Telephone Advertising Rent Office supplies New equipment Drawings: Chow Patel Balance c/d 1,000,000 22,500 25,000 35,000 17,500 11,250 75,000 6,250 300,000 300,000 150,000 107,500 2,050,000 RM

650,000 Current Accounts:

Balance b/d Trade debtors

2,050,000

3612/2/08/MA

Page 5 of 15

QUESTION 2 CONTINUED Additional information: (1) During the year to 31 December 2007: Settlement discounts of RM25,000 were given to debtors, settlement discounts of RM7,500 were received from creditors and bad debts of RM75,000 were written off. (2) At 31 December 2007: Stock was RM185,000, debtors were RM275,000, creditors were RM50,000, accrued electricity was RM12,500, prepaid insurance was RM5,000, vehicles had a book value of RM90,000 and equipment had a book value of RM490,000. (3) The partnership agreement included the following: Interest on drawings to be charged at 5% of total drawings for the year, interest on capital accounts to be allowed at 8% per year and Patel to be entitled to an annual salary of RM100,000.

REQUIRED Prepare the following for the partnership of Chow and Patel: (a) The Trading, Profit and Loss and Appropriation Account for the year ended 31 December 2007. (18 marks) (b) The Partners Current Accounts, in columnar form, for the year ended 31 December 2007. (7 marks) (Total 25 marks)

3612/2/08/MA

Page 6 of 15

MODEL ANSWER TO QUESTION 2

(a) Chow and Patel Trading, Profit & Loss and Appropriation Account for the year ended 31 December 2007 RM Sales (275,000 + 25,000 + 75,000 + 2,000,000 - 400,000) Cost of sales Opening stock Purchases (1,000,000 + 50,000 + 7,500 - 75,000) Carriage in Closing stock Gross profit Discounts received

RM 1,975,000

125,000 982,500 22,500 1,130,000 185,000 945,000 1,030,000 7,500 1,037,500 25,000 75,000 40,000 32,500 17,500 21,250 70,000 6,250 30,000 50,000 367,500 670,000

Discounts allowed Bad debts Insurance (25,000 + 20,000 - 5,000) Electricity (35,000 + 12,500 - 15,000) Telephone Advertising (11,250 + 10,000) Rent (75,000 - 5,000) Office supplies Depreciation: Vehicles (120,000 - 90,000) Equipment (240,000 + 300,000 - 490,000) Net profit Add: Interest on drawings: Chow (300,000 x 5%) Patel (150,000 x 5%)

15,000 7,500 22,500 692,500

Less:

Interest on capital: Chow (400,000 x 8%) Patel (250,000 x 8%) Salary - Patel

32,000 20,000 100,000 152,000 540,500

Profit share: Chow (540,500 x 3/5ths) Patel (540,500 x 2/5ths)

324,300 216,200 -540,500 0

3612/2/08/MA

Page 7 of 15

MODEL ANSWER TO QUESTION 2 CONTINUED (b) Chow RM Interest on drawings Drawings Bal c/d 15,000 300,000 156,300 Patel RM Bal b/d 7,500 Profit share 150,000 Interest on capital 283,700 Salary 100,000 32,000 20,000 324,300 216,200 Chow RM 115,000 Patel RM 105,000

471,300

441,200 Bal b/d

471,300 156,300

441,200 283,700

3612/2/08/MA

Page 8 of 15

QUESTION 3 Alpha Ltd was formed on 1 January 2007. During the year ended 31 December 2007, the following transactions took place: (1) Issued 500,000 Ordinary Shares of RM1 each at par. All proceeds were received by 31 December 2007. No dividends were paid on these shares during the year ended 31 December 2007. (2) Paid RM15,000 expenses incurred in issuing shares. (3) Purchased office equipment costing RM300,000 from Gamma Ltd and paid RM275,000. The remaining amount was paid in March 2008. (4) Bought goods on credit for RM1,000,000 and sold them on credit at a margin of 25% of selling price. (5) Received RM1,100,000 from customers and paid RM900,000 to suppliers of goods. (6) Invested RM75,000 in short term liquid assets. (7) Sold office equipment costing RM30,000 for RM27,500 cash. (8) Purchased RM250,000 9% Debentures in Zeta plc at 95. No interest was received during the year ended 31 December 2007. (9) Borrowed RM450,000 from Gnat Bank to finance the purchase of a new building, which cost RM800,000. At 31 December 2007, Alpha Ltd owed RM50,000 to the vendor of the building. (10) Paid interest on bank loan of RM15,000. (11) Paid operating expenses of RM225,000. (12) Issued 250,000 RM1 9% Preference Shares at a premium of RM0.10 per share and received all cash by 31 December 2007. No dividends were paid on these shares during the year ended 31 December 2007. (13) Issued RM500,000 5% Debentures in exchange for new plant and machinery. No interest was paid on the debentures during the year ended 31 December 2007. (14) Bought 250,000 Ordinary Shares of RM1 in Beta plc at a premium of RM0.05 per share and paid cash in full settlement by 31 December 2007. No dividends were received on these shares during the year ended 31 December 2007. (15) Wrote off RM150,000 of the cost of the new building because of a permanent diminution in value. (16) Granted a temporary overdraft facility of RM500,000 by Gnat Bank.

REQUIRED (a) Prepare the Cash Flow Statement of Alpha Ltd for the year ended 31 December 2007 in accordance with FRS 1 (revised). (21 marks) (b) Give two reasons why a company, in its first year of operation, might have a net cash outflow from operations, despite having a satisfactory gross profit margin. (4 marks) (Total 25 marks)

3612/2/08/MA

Page 9 of 15

MODEL ANSWER TO QUESTION 3 (a) Alpha Ltd Cash Flow Statement for the year ended 31 December 2007 RM Net cash outflow from operating activities Cash received from debtors Cash paid to suppliers and for operating expenses (900,000 + 225,000) 1,100,000 1,125,000 -25,000 RM

Returns on investment and servicing of finance Interest paid Capital expenditure and financial investments Purchase of tangible assets (275,000 + 750,000) Sale of tangible assets Investments (237,500 + 262,500) Net cash outflow from capital expenditure Management of liquid resources Purchase of short term liquid assets Net cash outflow before financing Financing Issue of ordinary shares for cash (500,000 15,000 expenses) Loan from bank Issue of preference shares (250,000 x 1.1) Net cash inflow from financing Net decrease in cash -75,000 -1,612,500 -1,025,000 27,500 -500,000 -1,497,500 -15,000

485,000 450,000 275,000 1,210,000 -402,500

(b) Investment in working capital Low sales High advertising required Fund raising costs, etc.

3612/2/08/MA

Page 10 of 15

QUESTION 4 A company manufactures three types of vacuum cleaner, Alpha, Gamma and Zeta. The following data applied to the year ended 31 March 2008: Alpha 2,000 RM 1,800,000 Gamma 2,000 RM 1,400,000 Zeta 5,000 RM 5,000,000

Sales in units

Total sales value Costs: Direct material Direct labour Variable overheads Fixed overheads Total costs

600,000 650,000 350,000 300,000 1,900,000 RM (100,000)

500,000 400,000 300,000 300,000 1,500,000 RM (100,000)

800,000 2,050,000 650,000 300,000 3,800,000 RM 1,200,000

Profit/(Loss)

REQUIRED (a) Calculate for each type of vacuum cleaner, the contribution per unit. (b) Calculate, for each type of vacuum cleaner: (i) (ii) the number of units required to be sold in order to break even the total sales value for (i) above. (13 marks) Both the Alpha and Gamma range of vacuum cleaners are shown as making a loss. (6 marks)

REQUIRED (c) Explain why the company should not cease production of either the Alpha or the Gamma range of vacuum cleaners. You are to consider financial reasons only. (6 marks) (Total 25 marks)

3612/2/08/MA

Page 11 of 15

MODEL ANSWER TO QUESTION 4 (a) Unit Contribution Alpha 1,800,000 - (1,900,000 - 300,000) 2,000

RM 100

Gamma 1,400,000 - (1,500,000 - 300,000) 2,000

RM 100

Zeta 5,000,000 - (3,800,000 - 300,000) 5,000 (b) (i)

RM 300

Number of Units Alpha 300,000 100

3,000

Gamma 300,000 100

3,000

Zeta 300,000 300 (b) (ii)

1,000

Sales Value Alpha 3,000 x 900*

RM 2,700,000

Gamma 3,000 x 700*

RM 2,100,000

Zeta 1,000 x 1,000*

RM 1,000,000

3612/2/08/MA

Page 12 of 15

MODEL ANSWER TO QUESTION 4 CONTINUED *Alpha Gamma Zeta Sales (1,800,000) divided by units (2,000) = Unit sales price (900) Sales (1,400,000) divided by units (2,000) = Unit sales price (700) Sales (5,000,000) divided by units (5,000) = Unit sales price (1,000)

(c) Both the Alpha and Gamma ranges are covering their variable costs and making a contribution towards the fixed costs. If the company ceased the manufacture of both Alpha and Gamma ranges of cleaners the variable costs of each would cease, but the fixed costs would remain, at least for a period of time. These fixed costs would be transferred to the Zeta range of cleaners, resulting in overall company profits being reduced from RM1,000,000 to RM600,000.

3612/2/08/MA

Page 13 of 15

QUESTION 5 The following are the summarised Balance Sheets of Malay International Ltd and its subsidiary Britas Ltd at 31 December 2007: Malay International Ltd Britas Ltd RM RM Investment in Britas Ltd 375,000 Stock 75,000 50,000 Other net assets 450,000 375,000 900,000 425,000 RM 250,000 650,000 900,000 RM 200,000 225,000 425,000

Ordinary shares (RM1 each) Profit & Loss

Malay International Ltd acquired 150,000 shares in Britas Ltd at 1 January 2007 when the balance on the Profit & Loss Account of Britas Ltd was RM150,000. Goodwill is to be written off over five years. During the year, Britas Ltd sold goods to Malay International Ltd for RM400,000, which included a mark up of 25%. At 31 December 2007 Malay International Ltd retained RM50,000 of these goods in stock, valued at Britas Ltds selling price.

REQUIRED (a) Calculate the balances on the following accounts at 31 December 2007: (i) goodwill (ii) minority interest (iii) consolidated retained earnings. (11 marks) (b) Prepare the summarised Consolidated Balance Sheet of Malay International Ltd and its subsidiary at 31 December 2007. (7 marks)

According to FRS 15 a tangible fixed asset, whether purchased or constructed, should initially be measured at cost.

REQUIRED (c) Explain what is meant by the term tangible fixed asset. (4 marks)

(d) State whether or not each of the following items should be considered part of the original cost of a tangible fixed asset: (i) installation costs of a new machine (ii) redecoration of an office building (iii) legal fees associated with the purchase of land. (3 marks) (Total 25 marks)

3612/2/08/MA

Page 14 of 15

MODEL ANSWER TO QUESTION 5 (a) (i) Goodwill RM Investment Less: Share Capital Profit & Loss 200,000 150,000 350,000 RM 375,000

x 75% =

Amortised - 112,500 5 (ii) Minority interest ** 425,000 - 10,000 = (iii) 415,000 x 25% =

262,500 112,500 22,500 90,000

RM 103,750

Consolidated retained earnings Malay International Ltd ** Britas Ltd (225,000 - 150,000 - 10,000) x 75% = Less: Amortised Goodwill RM 650,000 48,750 698,750 22,500 676,250 x 25 = 10,000

** Profit on inter group sales still in stock

50,000 125

(b) Summarised Balance Sheet of the Malay International Ltd Group at 31 December 2007 RM Goodwill 90,000 Stock ([75,000 + 50,000] - 10,000) 115,000 Other Net Assets 825,000 1,030,000 RM Share Capital 250,000 Profit & Loss 676,250 Minority Interest 103,750 1,030,000 (c) Tangible fixed assets are defined as assets with physical substance that are held for use in the business, for rental to others or for administrative purposes on a continuing basis.

(d) (i) Considered part (ii) Not considered part (iii) Considered part

3612/2/08/MA

Page 15 of 15

Education Development International plc 2008