Book-keeping &

Accounts
Level 2

Model Answers
Series 2 2008 (Code 2007)

2007/2/08/MA
Book-Keeping & Accounts Level 2
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) 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 2008

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or
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2007/2/08/MA
QUESTION 1

The following information is available for DMS Wholesaler at 31 March 2007. All purchases and sales
are on credit and all invoices should be paid within 30 days.

£
Sales 250,000
Stock 1 April 2006 21,000
Stock 31 March 2007 19,000
Purchases 187,500
Cost of sales 189,500
Gross profit 60,500
Net profit 30,000
Capital employed 300,000
Cash at bank 1,000
Debtors 15,000
Creditors 20,000

REQUIRED

(a) Using the above information, calculate the following ratios to one decimal place:
(i) Current/working capital
(ii) Liquidity/acid test
(iii) Gross profit margin
(iv) Net profit margin
(v) Return on capital employed
(vi) Rate of stock turnover
(vii) Debtors’ collection period in days
(viii) Creditors’ settlement period in days
(16 marks)

The following ratios have been calculated for a competitor, RHG Wholesaler:

Current/working capital 1.5:1

Liquidity/acid test 0.6:1

Gross profit margin 20%

Net profit margin 9%

Return on capital employed 8%

Debtors’ collection period 30 days

Creditors’ settlement period 42 days

REQUIRED

(b) (i) State which business performed better during the year ended 31 March 2007. (1 mark)

(ii) Compare four of the ratios that you have calculated for DMS Wholesaler with the same four
ratios provided for RHG Wholesaler to justify your answer.
(8 marks)

(Total 25 marks)

2007/2/08/MA Page 1 of 10
MODEL ANSWER TO QUESTION 1
(a)
(i) Current/working capital 35,000 1.8:1
20,000

(ii) Liquidity/acid test 16,000 0.8:1

20,000

(iii) Gross profit margin 60,500 x 100 24.2%

250,000

(iv) Net Profit margin 30,000 x 100 12%

250,000

(v) Return on capital employed 30,000 x 100 10%

300,000

(vi) Rate of stock turnover 189,500 9.5 times

20,000

(vii) Debtors' collection period 15,000 x 365 21.9 days

250,000

(viii) Creditors' settlement period 20,000 x 365 38.9 days

187,500

(b) (i) DMS Wholesaler performed better than RHG Wholesaler because:

(ii) more able to pay its short term debts

more able to pay its immediate debts
better gross profit margin
better net profit margin
better return on capital employed
collects debts faster
pays creditors quicker

2007/2/08/MA Page 2 of 10
QUESTION 2

Emma and Jack agreed to dissolve their partnership on 28 February 2007.

At 28 February 2007, the partnership had the following assets and liabilities:

£
Machinery at net book valuation 72,000
Motor vehicles at net book valuation 56,000
Stock 860
Creditors 680
Debtors 2,500
Bank 2,334

Immediately prior to dissolution, the partners’ current account balances were transferred to their
capital accounts.

The capital account balances then stood at:

£
Emma 102,638
Jack 30,376

The following information was also available:

1 The machinery was sold to Jones Ltd for £40,000.

2 The amount was settled by the issue of 40,000 ordinary shares of £1 each in Jones Ltd. The
partners received half of the shares each.
3 A vehicle with a book value of £24,000 was taken over by Jack for £18,000.
4 The remaining vehicles were sold for £30,000 cash.
5 Stock was sold for £760 cash.
6 Creditors were paid in full.
7 Debtors paid £2,300 in full settlement.
8 The costs of dissolution amounted to £4,970.
9 Profits and losses are to be shared in the ratio of 2:1 for Emma and Jack respectively.

REQUIRED

(a) Prepare a Realisation Account on dissolution. (11 marks)

(b) Prepare partners’ capital accounts in columnar format to show the closing entries. (9 marks)

(c) State what the ruling was in the Garner v Murray case. (5 marks)

(Total 25 marks)

2007/2/08/MA Page 3 of 10
MODEL ANSWER TO QUESTION 2

(a) Realisation Account

£ £
Machinery 72,000 Capital - Jack (vehicle) 18,000
Motor Vehicles 56,000 Cash (vehicles) 30,000
Stock 860 Cash (stock) 760
Discount allowed 200 Jones 40,000
Cash - costs 4,970 Loss on realisation: E 30,180
Loss on realisation: J 15,090
134,030 134,030

(b)
Capital Accounts
Emma Jack Emma Jack
£ £ £ £
Loss on realisation 30,180 15,090 Balance b/d 102,638 30,376
Shares in Jones Ltd 20,000 20,000 Cash 22,714
Vehicle 18,000
Cash 52,458
102,638 53,090 102,638 53,090

Alternative narrative acceptable

(c) This rule states that the loss due to insolvency of a partner is to be charged to the other solvent
partners who have a credit balance in their accounts in the ratio of capitals just before
dissolution.

2007/2/08/MA Page 4 of 10
QUESTION 3

Alan is in business, manufacturing components for computers.

The following information relates to the year ended 31 December 2007:

£
Stocks at 1 January 2007: raw materials 15,368
work in progress 22,922
finished goods 84,240

Stocks at 31 December 2007: raw materials 16,984

work in progress 63,486
finished goods 96,960

Purchases of raw materials 420,864

Sales 5,000,000
Returns outwards 940
Carriage inwards 3,456
Factory wages 1,630,036
Factory rent and rates 26,524
Other factory overheads 252,680
Factory machinery at cost 800,000
Provision for depreciation of factory machinery at 1 January 2007 630,000
Provision for unrealised profit at 1 January 2007 14,040

Additional information

At 31 December 2007:
(i) factory wages accrued amounted to £3,724;
(ii) factory wages are apportioned 7/8 direct labour and 1/8 indirect labour;
(iii) factory rates prepaid amounted to £1,164;
(iv) factory machinery is to be depreciated by 20% per year using the reducing balance method.

Components are transferred from the factory to the Trading Account at cost plus 20%.

REQUIRED

(a) Prepare a Manufacturing Account for the year ended 31 December 2007. (17 marks)

(b) Prepare a Trading Account for the year ended 31 December 2007. (4 marks)

(c) Prepare the account for Provision for Unrealised Profit to be charged to the
Profit & Loss Account for the year ended 31 December 2007. (4 marks)

(Total 25 marks)

2007/2/08/MA Page 5 of 10
MODEL ANSWER TO QUESTION 3

(a) Alan
Manufacturing Account for the year ended 31 December 2007

£ £
Stock of raw materials 15,368
Purchases 420,864
Carriage inwards 3,456
424,320
Returns outwards 940 423,380
438,748
Stock of raw materials 16,984
Raw materials consumed 421,764
Direct labour [1,630,036 + (3,724) x 7/8)] 1,429,540
Prime cost 1,851,304

Factory overheads
Indirect wages [1,630,036 + (3,724 x 1/8)] 204,220
Rent & rates (26,524 - 1,164) 25,360
Other overheads 252,680
Depreciation (170,000 x 20%) 34,000 516,260
2,367,564
Opening work in progress 22,922
2,390,486
Less Closing work in progress 63,486
2,327,000
Profit 465,400
Transfer to Trading Account 2,792,400

(b) Trading Account for the year ended 31 December 2007

£ £
Sales 5,000,000
Opening stock 84,240
Cost of manufactured goods 2,792,400
2,876,640
Closing stock 96,960
Cost of goods sold 2,779,680
Gross profit 2,220,320

(c) Provision for unrealised profit

£ £
Balance c/d 16,160 Balance b/d 14,040
(96,960 x 20/120) _____ P&L A/c 2,120
16,160 16,160

2007/2/08/MA Page 6 of 10
QUESTION 4

Alison Bates and Colin Dale have been in partnership for a number of years.

The Net profit for the year ended 31 March 2008 was £151,720.

Additional information

After preparing the trial balance the following errors were discovered:

1 The purchase of a motor vehicle for £3,000 ,on 1 April 2007, has been debited to the motor
vehicle expenses account. The motor vehicle has an estimated useful life of 3 years and will
have no scrap value.
2 The total of discount allowed £457 has been credited to the discount received account.
3 The receipt of £396 from Sid Ashley, a customer, has been correctly entered in the cash book but
has been debited to Sid Ashley’s account as £369.
4 A credit sale to John Breasley of £146 has been debited to the account of Jack Brears.

REQUIRED

(a) Prepare journal entries to correct the errors 1 – 4 above. Narratives are not required. (13 marks)

(b) Prepare a Suspense Account showing the corrections made. (4 marks)

(c) Prepare a detailed calculation showing the corrected net profit. (6 marks)

(d) Explain the use of the Suspense Account. (2 marks)

(Total 25 marks)

2007/2/08/MA Page 7 of 10
MODEL ANSWER TO QUESTION 4

(a)
Journal
£ £
Motor vehicles 3,000
Motor vehicle expenses 3,000

P & L Account 1,000

Provision for depreciation 1,000

Discount allowed 457

Discount received 457
Suspense 914

Suspense 765
Sid Ashley 765

John Breasley 146

Jack Brears 146

(b)
Suspense Account
£ £
Balance b/d 149 Discount allowed 457
Sid Ashley 765 Discount received 457
914 914

(c)
£
Draft net profit 151,720
Motor vehicle expenses 3,000
Dep’n on motor vehicle (1,000)
Discount allowed (457)
Discount received (457)
Revised net profit 152,806

(d) The suspense account is a temporary measure to balance the trial balance

2007/2/08/MA Page 8 of 10
QUESTION 5

The following is the receipts and payments account of Dalton Social Club for the year ended
31 October 2007:

Receipts £ Payments £
Income from functions 3,086 Balance at bank 1 Nov 2006 1,638
Subscriptions 23,760 Cafe suppliers 83,520
Cafe sales 135,102 Purchase of equipment 8,600
Sale of equipment 200 General expenses 23,246
Loan repayment 40,000
Interest on loan 4,000
______ Balance at bank 31 Oct 2007 1,144
162,148 162,148

Additional information

1 Cafe stocks at 1 November 2006 were valued at £60 and at 31 October 2007 were valued at
£240.
2 The equipment that was sold during the year had a book value of £900.
3 At 1 November 2006 the club owed cafe creditors £1,406. At 31 October 2007 £1,424 was owed
to café creditors.
4 Subscriptions amounting to £160 remained outstanding at 31 October 2007.
5 There was no outstanding loan interest at 31 October 2007.

REQUIRED

Prepare for the Dalton Social Club for the year ended 31 October 2007:

(a) The Cafe Trading Account (7 marks)

(b) The Club Income and Expenditure Account (7marks)

Bill Jones, a retailer, was unable to carry out his stock-take on 31 December 2007. The stock-take
was completed on 8 January 2008, when the stock was valued at £5,972.

The following transactions took place in the period 1 January 2008 to the close of business on
7 January 2008:
£

Purchases of goods for resale 2,072

Purchases returns 280
Sales (marked up by 40%) 5,040
Sales returns (marked up by 40%) 1,008
Sales to Sam Coe, a fellow retailer, at cost plus 10% 1,716

REQUIRED

(c) Calculate the value of stock at 31 December 2007, commencing with the stock as per stock-take.

(11 marks)

(Total 25 marks)

2007/2/08/MA Page 9 of 10
MODEL ANSWER TO QUESTION 5

(a)
Dalton Social Club
Cafe Trading Account for the year ended 31 October 2007

£ £
Cafe Sales 135,102

Opening stock 60

Purchases (82,520 + 1,424 - 1,406) 83,538

Less Closing stock 240

Cost of goods sold 83,358

Cafe profit 51,744

(b)
Income & Expenditure Account for the year ended 31 October 2007

£ £

Cafe profit 51,744

Subscriptions (23,760 + 160) 23,920
Income from functions 3,086
78,750
Less expenditure
Loss on equipment (900 - 200) 700
General expenses 23,246
Loan interest 4,000
27,946
Surplus 50,804

(c)
Add Less
£ £ £
Stock as per stock-take 5,972

Purchases 2,072

Purchases returns 280

Sales (5,040 / 1.4) 3,600

Sales returns (1,008 / 1.4) 720

Sales (1,716 / 1.1) 1,560 ____

5440 2,792 2,648

Stock at 31 December 8,620

2007/2/08/MA Page 10 of 10 © Education Development International plc 2008