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LCCI International Qualifications

Book-keeping and Accounts


Level 2

Model Answers
Series 2 2009 (2006)

For further Tel. +44 (0) 8707 202909


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Book - Keeping and Accounts Level 2
Series 2 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
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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.

Page 1 of 10
QUESTION 1

The Trial Balance of M Mae at 31 January 2008 showed a difference which was posted to a suspense
account.

Draft final accounts for the year ended 31 January 2008 were prepared showing a net profit of
£94,480.

The following errors were subsequently discovered:


(1) The sales journal had been undercast by £4,000

(2) Repairs to a machine amounting to £980 had been charged to the machinery account

(3) Purchases, from P Wong, amounting to £1,530, had been received on 31 January 2008 and
included in the closing stock on that date, but the invoice had not been entered in the purchases
journal

(4) Sales of £900 to C Choo had been debited to S Chung

(5) A payment of £350 for telephone expenses had been entered on the debit side of the telephone
account as £550

(6) A cheque for £3,000 in respect of rent received had only been entered in the cash book.

REQUIRED

(a) Show the journal entries necessary to correct the above errors. Narratives are NOT required.

(12 marks)

(b) Prepare the Suspense Account to correct the above errors. (5 marks)

(c) Calculate the revised net profit for the year ended 31 January 2008 by showing the effects of the
above adjustments.
(6 marks)

(d) What is meant by the term ‘errors of reversal’? Give an example to support your answer.
(2 marks)

(Total 25 marks)

2006/2/09/MA Page 2 of 11
MODEL ANSWER TO QUESTION 1

(a)
£ £
DR CR
Suspense 4,000
Sales 4,000

Machine repairs 980


Machinery 980

Purchases 1,530
P Wong 1,530

C Choo 900
S Chung 900

Suspense 200
Telephone 200

Suspense 3,000
Rent received 3,000

(b) Suspense Account


£ £
Sales 4,000 Bal b/d (difference) 7,200
Telephone 200
Rent received 3,000
7,200 7,200

(c) £ £
Original net profit 94,480
Add sales 4,000
Add telephone 200
Add rent received 3,000
7,200
101,680
Less machinery repairs 980
Less purchases 1,530
2,510
Revised net profit 99,170

(d) The correct accounts are used, but the entire entry is reversed. E.g. fixtures & fittings were
purchased on credit, but incorrectly debited to the creditors account and credited to fixtures &
fittings account.

2006/2/09/MA Page 3 of 11
QUESTION 2

M Lee has not maintained complete accounting records. The following information is available at
31 December:
2006 2007
£ £
Stock 6,450 11,730
Rates prepaid 750 1,110
Equipment at NBV 74,400 81,600
Creditors 16,830 27,960
Wages accrued 1,350 2,010
Trade debtors 18,750 26,100
Motor vehicles at NBV 45,600 44,400
Bank loan (repayable 2012) 105,000 66,000
Premises at cost 127,800 153,600

The following is a summary of the bank account for the year ended 31 December 2007:
Receipts £ Payments £
Balance at 1 January 2007 52,950 Creditors 43,860
Debtors 101,520 Extension to freehold premises 25,800
Cash paid into bank 45,240 Insurance 67,200
Balance at 31 December 2007 31,050 Bank loan repayments 49,200
(including interest)
Rates 3,900
Purchase of motor vehicle 19,200
Purchase of equipment 21,600
230,760 230,760

Cash receipts and payments in the year ended 31 December 2007 were:
Receipts £ Payments £
Balance at 1 January 2007 7,500 Stationery 2,550
Debtors 10,920 Drawings 4,800
Rent 4,500 Cash purchases 48,690
Cash sales 131,430 Paid into bank 45,240
Sale of motor vehicle 6,000 Motor vehicle expenses 9,030
Wages 24,900

The following information was also available at 31 December 2007:


(1) During the year ended 31 December 2007, M Lee took goods from the business for his own
private use, valued at £5,000 cost price

(2) The motor vehicle was sold on 1 January 2007. The valuation of the vehicle at
31 December 2006 was £5,600.

REQUIRED

Prepare the following for M Lee:

(a) Trading and Profit & Loss Account for the year ended 31 December 2007. (13 marks)

(b) Balance Sheet at 31 December 2007. (12 marks)

(Total 25 marks)

2006/2/09/MA Page 4 of 11
MODEL ANSWER TO QUESTION 2

(a) M Lee
Trading and Profit & Loss Account
for the year ended 31 December 2007

£ £ £
Sales (Cash 131,430 + Credit 119,790) [1] 251,220

Less cost of goods sold


Opening stock 6,450
Add Purchases (Cash 48,690 + Credit 54,990) [2] 103,680

Less Drawings 5,000 98,680


105,130
Less Closing stock
11,730 93,400
Gross profit 157,820
Rent received 4,500
162,320
Add: Profit on sale of vehicle (6,000 – 5,600) 400
162,720
Less expenses:
Stationery 2,550

Wages (24,900 − 1,350 + 2,010) 25,560


Motor expenses 9,030
Insurance 67,200

Bank loan interest (66,000 + 49,200 – 105,000) 10,200

Rates (3,900 + 750 − 1,110) 3,540


Depreciation:
Equipment
(74,400 + 21,600 – 81,600) 14,400
Motor Vehicles

(45,600 + 19,200 – [44,400 + 5,600]) 14,800


147,280
Net profit 15,440

Workings

[1] 26,100 - 18,750 + 10,920 + 101,520 = 119,790

[2] 43,860 – 16,830 + 27,960 = 54,990

2006/2/09/MA Page 5 of 11
QUESTION 2 CONTINUED

(b) M Lee
Balance Sheet at 31 December 2007

£ £ £
Fixed Assets
Premises at cost 153,600
Equipment at NBV 81,600
Motor vehicles at NBV 44,400
279,600
Current Assets
Stock 11,730
Debtors 26,100
Prepayment 1,110
Cash 25,140
64,080

Less
Liabilities due within one year
Creditors 27,960
Wages accrued 2,010
Bank overdraft 31,050 61,020

Working capital/Net Current assets 3,060


282,660
Less
Liabilities due after more than one year
Long term loan (due 2012) 66,000
216,660

Financed by
Opening capital 211,020 [1]
Net profit for the year 15,440
Less: Drawings
Cash 4,800
Goods 5,000
9,800
5,640
216,660

Workings

[1] 127,800 + 74,400 – 16,830 – 1,350 + 750 + 6,450 + 45,600 – 105,000 + 18,750 + 7,500 + 52,950
= 211,020

2006/2/09/MA Page 6 of 11
QUESTION 3

The following balances were extracted from the books of Mae Ltd., after completion of the Trading,
Profit & Loss and Appropriation Account for the year ended 31 December 2007:
£
Goodwill 10,000
Equipment at cost 20,000
Motor vehicles at cost 40,000
Trade debtors 52,000
Trade creditors 20,050
Stock at 31 December 2007 30,500
Bank 8,750 Dr
General reserve 10,000

Additional information was also available:


(1) A Doubtful Debts Provision of 5% of trade debtors was created on 31 December 2007.

(2) The authorised share capital of the company is 50,000 Ordinary Shares of £1 each. These have
all been issued and fully paid at £1.10 a share.

(3) The directors have proposed a dividend of £0.15 per share in respect of the year ended
31 December 2007.

(4) The motor vehicles and equipment belonging to the company were all purchased on
1 January 2005. The depreciation policy of the company is as follows:
(i) Equipment – Straight line over 5 years assuming a 10% residual value
(ii) Motor vehicles – 25% per annum reducing balance.

(5) During 2007 Mae Ltd had taken out a bank loan for £20,000. This was to be repaid in equal
amounts over 10 years commencing 1 November 2007, but no payment has yet been paid.

REQUIRED

(a) Using the above list of balances, and the additional information provided, prepare the
Balance Sheet, in vertical format, of Mae Ltd at 31 December 2007.

None of the balances in the above list requires amendment, as a result of the additional
information, although others will need to be created. The retained profit represents the balancing
figure.
(21 marks)

(b) Using the Balance Sheet prepared in part (a) above, calculate the following for Mae Ltd at
31 December 2007:
(i) Current (Working Capital) ratio (2 marks)

(ii) Acid Test (Liquidity) ratio. (2 marks)

(Total 25 marks)

2006/2/09/MA Page 7 of 11
MODEL ANSWER TO QUESTION 3

(a)
Mae Ltd
Balance Sheet at 31 December 2007

Fixed assets Cost Accumulated Net book


depreciation value
£ £ £
Equipment 20,000 10,800 [W2] 9,200
Motor vehicles 40,000 23,125 [W1] 16.875
60,000 33,925 26,075
Goodwill 10,000

Current assets
Stock 30,500
Trade debtors 52,000
Less: Doubtful debts provision 2,600
49,400
Bank 8,750
88,650
Creditors: amounts due within one year
Trade creditors 20,050
Proposed dividends 7,500 [W3]
Loan repayment (20,000 x10%) 2,000
29,550
Net current assets 59,100
95,175
Creditors: amounts due after more than one year
Bank loan (20,000 - 2,000) 18,000
77,175
Capital and reserves

Authorised, issued and fully paid share capital £


50,000 £1 Ordinary Shares 50,000
Share premium 5,000 [W4]
General reserve 10,000
Profit & Loss 12,175
77,175

£ £
40,000 x 25% = 10,000 20,000
30,000 x 25% = 7,500 less: 10% 2,000
22,500 x 25% = 5,625 18,000
23,125 per year = 3,600
x 3 years = 10,800

£ £
50,000 x £0.15 = 7,500 50,000 x £0.10 = 5,000

2006/2/09/MA Page 8 of 11
MODEL ANSWER TO QUESTION 3 CONTINUED

£ £
[W1] 40,000 x 25% = 10,000 1 [W2] 20,000
30,000 x 25% = 7,500 1 less: 10% 2,000 1
22,500 x 25% = 5,625 1 18,000
23,125 per year = 3,600 1
1 (for 3 yrs) x 3 years = 10,800

£ £
[W3] 50,000 x £0.15 = 7,500 [W4] 50,000 x £0.10 = 5,000
1 1 1 1

(b) (i) Current (Working Capital) ratio 88,650 =3:1


29,550

(ii) Acid test (Liquidity) ratio 58,150 = 1.97 : 1


29,550

2006/2/09/MA Page 9 of 11
QUESTION 4

On 1 May 2008, Ting plc consigned 100 cases of computer components to its agent, Choo of Hong
Kong, at a cost of £80 per case. An agreement between the two companies stated that Choo was
entitled to receive a commission of 5% on sales plus a del credere commission of 2% on sales.

On 1 May 2008, transport and insurance costs of £360 and £90 respectively, were paid by Ting plc.

Choo received the consignment on 20 June 2008 and paid import duties of £160 and landing charges
of £70.

On 31 July 2008, Choo sold 90 of the cases of computer components on credit at £190 per case, to
Wong Ltd.

Choo received all of the money due from Wong Ltd on 31 August 2008 with the exception of a
disputed invoice for £120, which Choo decided to write off as a bad debt. On 31 August 2008, Choo
transferred any money due to Ting plc on this date less any relevant costs.

The financial years for both Ting plc and Choo end on 31 August.

REQUIRED

(a) Prepare the following in the books of Ting plc:


(i) the Consignment to Choo Account (16 marks)

(ii) the personal account of Choo. (6 marks)

(b) Prepare, in the books of Choo, the account of Wong Ltd. (3 marks)

Note: Dates are not required in the preparation of the above ledger accounts.

(Total 25 marks)

2006/2/09/MA Page 10 of 11
MODEL ANSWER TO QUESTION 4

(a) (i)
Consignment to Choo Account
£ £
Goods on consignment Choo (Sales) (90 x £190) 17,100
100 x £80 8,000 Stock c/d 868
Bank: Transport 360
Insurance 90 8680* x 10
Choo: Duties 160 100
Landing 70 *(8,000 + 360 + 90 + 160 + 70)
Choo commission:
Sales (17,100 x 5%) 855
Del Credere (17,100 x 2%) 342
Profit & Loss 8,091 _____
17,968 17,968
Stock b/d 868

(ii)

Choo Account
£ £
Consignment A/c 17,100 Consignment A/c
Duties 160
Landing 70
Sales commission 855
Del Credere 342
Bank 15,673
17,100 17,100

(b)

Wong Ltd
£ £
Ting plc 17,100 Bad debts 120
_____ Bank/Cash 16,980
17,100 17,100

2006/2/09/MA Page 11 of 11 © Education Development International plc 2009


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