LCCI International Qualifications

Book-Keeping and Accounts Level 2

Model Answers
Series 4 2011 (2007)

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Book-Keeping and Accounts Level 2

Series 4 2011

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) (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 2011 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.

2007/4/11/MA

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QUESTION 1 The following information was extracted from the books of Dore Trading Ltd, at 31 March 2011: 25,000 50,000 100,000 76,250 130,000 21,875 Dr 50,125 25,000

Goodwill Fixtures and fittings at cost Motor vehicles at cost Stock at 31 March 2011 Debtors Bank Creditors General reserve Additional information:

(1) The motor vehicles and fixtures and fittings were all purchased on 1 April 2008. The depreciation policy is as follows: (i) (ii) (2) (3) (4) (5) (6) fixtures and fittings straight line over 5 years assuming a residual balance of 5,000 motor vehicles 25% per annum reducing balance

A provision for doubtful debts of 5% of debtors was created on 31 March 2011 The company has 125,000 ordinary shares of 1 each, all of which have been issued and fully paid at 1.10 a share The directors have proposed a dividend of 0.15 per share for the year ended 31 March 2011 During the year ended 31 March 2011, Dore Trading Ltd had taken out a bank loan for 50,000. This is to be repaid by equal annual amounts over 10 years, commencing 1 February 2012 The balancing figure on the Balance Sheet represents the retained profit.

REQUIRED (a) Prepare the Balance Sheet, in vertical format, at 31 March 2011. (21 marks) (b) State two differences between a public limited company and a private limited company. (4 marks) (Total 25 marks)

2007/4/11/MS

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MODEL ANSWER TO QUESTION 1 Syllabus Topic 3: Limited Liability Companies (3.2.4), (3.2.7), (3.2.8), (3.2.9), (3.2.10), (3.2.12), (3.2.13) and (3.2.14) (a) Dore Trading Ltd Balance Sheet at 31 March 2011 Cost Goodwill Fixtures and fittings Motor vehicles 50,000 100,000 150,000 27,000 57,813 84,813 [W1] 3 [W2] 3 Accumulated depreciation

1both Net book value 25,000 1 23,000 42,187 90,187

Fixed assets

Current assets Stock Debtors Less: PDD

76,250 130,000 6,500 123,500 21,875 221,625 1 1of

Creditors falling due within one year Creditors 50,125 Proposed dividends 18,750 Loan repayment (50,000 x 10%) 5,000 Net current assets 1

[W3] 1 1 73,875 1of 147,750 237,937 45,000 192,937 1of

Creditors falling due after more than one year Bank loan (50,000 - 5,000) 1 1 Capital and reserves Issued and fully paid share capital 125,000 1 Ordinary shares Share premium (125,000 x 10%) General reserve Profit and loss

125,000 12,500 25,000 30,437 192,937

1 1 1+1of

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[W1]

50,000 less: 5,000 45,000 5 years = 9,000 9,000 x 3 years 1 = 125,000 x 0.15 = 1

[W2] 1 1 27,000 18,750

100,000 x 25% = 75,000 x 25% 56,250 x 25% =

25,000 18,750 14,063 57,813

1 1 1

[W3]

(21 marks) Syllabus Topic 3.1: Formation of a Company (3.1.1) (b) Public limited company Has PLC in the name Shares are sold on the stock exchange Published report and accounts available to the public Publishes full report and accounts Minimum allotted capital of at least 50,000 Has unlimited number of Shareholders Private limited company Has Ltd in the name Shares are sold to private investors Report and accounts sent to companies house available on request Information disclosed is limited by the requirements of the Companies Act No minimum or maximum capital Has 2 to no fixed number of shareholders but usually 50

(4 marks) (Total 25 marks)

2007/4/11/MS

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QUESTION 2 Don Bates provides for doubtful debts at 3% of outstanding debtors at his year end of 30 April. The following balances of debtors are: Debtors April 30, 2009 April 30, 2010 April 30, 2011 The following bad debts had been written off: Debtor Allan Brian Carlos David Edward Frank Date written off May 15, 2009 August 16, 2009 January 7, 2010 March 21, 2010 June 13, 2010 October 30, 2010 60 109 42 101 37 29 18,700 21,400 19,600

The debt of David was partially recovered on 31 March 2011, when 36 was received.

REQUIRED (a) Prepare for each of the years ended 30 April 2010 and 30 April 2011 the: (i) (iii) (iv) Bad Debts Account (5 marks) Provision for Doubtful Debts Account (7 marks) Davids Account. (5 marks) (c) Prepare the Bad Debts Recovered Account for year ended 30 April 2011. (2 marks) (c) Prepare the Balance Sheet extracts for each of the years at 30 April 2009, 2010 and 2011. (6 marks) (Total 25 marks)

2007/4/11/MS

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MODEL ANSWER TO QUESTION 2 Syllabus topic 1.1: Advanced aspects of the syllabus for Level 1 Book-keeping (a) (i) Bad Debts Account 2009 May 15 Allan Aug 16 Brian 2010 Jan 7 Carlos Mar 21 David 60 109 2010 1 42 101 312 Apr 30 P&L A/c 1 312 312

2010 Jun 13 Edward Oct 30 Frank

2011 1 37 ..29 ..66 Apr 30 P&L A/c 1 ..66 ..66 (5 marks)

Syllabus topic 1.4: Bad debts and provision for doubtful debts (1.4.5) (ii) Provision for Doubtful Debts Account 642 2009 May 1 Balance b/d(18,700 x 3%) 1 561 2010 April 30 P&L A/c 1 of 81 .. 642 May 1 Balance b/d 1 of 642 .. 642 2011 May 1 Balance B/D 1 of 588 (7 marks) (iii) Davids Account 2010 Mar 1 Balance b/d 2011 Mar 31 Bad Debts Recovered 1 1 1 101 ..36 2010 Mar 21 Bad Debts 2011 Mar 31 Bank 1 101 1 ..36 (5 marks) (b) Bad Debts Recovered Account 2011 Apr 30 P&L A/c 1 36 2011 Mar 31 David 1 36 (2 marks)

2010 April 30 Balance c/d (21,400 x 3%)

.. 642 2011 April 30 P&L A/c April 30 Balance c/d (19,600 x 3%) 1 of ..54 1 588 .. 642

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MODEL ANSWER TO QUESTION 2 CONTINUED Syllabus topic 1.4: Bad Debts and provision for doubtful debts (1.4.6) (c) Balance Sheet Extracts 30 April 2009 Debtors Less provision for doubtful debts 18,700 .561 1 of 18,139 1 of

30 April 2010 Debtors Less provision for doubtful debts

21,400 .....642 1 of 20,758 1 of

30 April 2011 Debtors Less provision for doubtful debts

19,600 .....588 1 of 19,012 1 of (6 marks) (Total 25 marks)

2007/4/11/MS

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QUESTION 3 Amy and Bill are in partnership sharing profits and losses in the ratio 2:1. Their Balance Sheet is as follows: Balance Sheet at 30 June 2011 Fixed assets Premises Equipment Current assets Stock Debtors Bank Creditors falling due within one year Creditors Net current assets 50,000 15,250 65,250 8,500 7,800 550 16,850 7,150 9,700 74,950 40,000 30,000 70,000 Current Accounts: Amy Bill 5,400 (450) 4,950 74,950 Additional information: (1) On 1 July, Charles was admitted into the partnership. Future profits and losses were to be shared by Amy, Bill and Charles in the ratio 2:1:1 respectively. Goodwill was valued at 9,000 at 30 June 2011. The partners agreed that goodwill would not be retained in the books of the partnership. Charles brought into the partnership vehicles at a valuation of 13,500, stock 1,500 and cash 7,500. The cash was deposited in the business bank account. It was agreed that Charles would make an additional payment by cheque into the partnership bank account, to pay for his share of the goodwill. It was decided to revalue the premises at 110,000 at 30 June 2011.

Capital Accounts:

Amy Bill

(2)

(3)

(4)

(5)

REQUIRED (a) Prepare the journal entries recording the admission of the new partner. Narratives are not required. (10 marks) (b) (d) (e) Prepare the Balance Sheet of the new partnership at 1 July 2011. (11 marks) Explain the rule of Garner v Murray. (2 marks) Name the type of asset used to describe goodwill. (2 marks) (Total 25 marks)

2007/4/11/MS

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MODEL ANSWER TO QUESTION 3 Syllabus Topic 2.4: Partnerships (a) Premises (110,000-50,000) Capital: Amy 2/3 Bill 1/3 Vehicles Stock Bank Capital: Charles Bank (9,000 x ) Capital: Amy (9,000 x ) 9,000 x ) Bill (9,000 x ) (9,000 x ) Dr 60,000 Cr 1 40,000 1 20,000 1 1 1 1 22,500 1 1 1,500 1 750 1 (10 marks) (b) Amy, Bill and Charles Balance Sheet at 1 July 2011 Fixed assets Premises Equipment Vehicles Current assets Stock Debtors 1 1 Bank (550 + 7,500 + 2,250) 110,000 1 15,250 13,500 1 138,750 10,000 7,800 10,300 28,100 1

13,500 1,500 7,500

2,250

Creditors falling due within 1 year Creditors Net current assets

.7,150 ..20,950 1 of must be labelled 159,700

Capital Accounts Amy (40,000 + 40,000 + 1,500) Bill (30,000 + 20,000 + 750) Charles Current Accounts Amy Bill

81,500 50,750 22,500

1 of 1 of 154,750 1 of

5,400 450)

1 ...4,950 1 159,700 (11 marks)

(c)

The Garner v Murray rule states that if a partner is unable to clear their debt to the partnership, then the amount of the deficiency is shared amongst the other partners in the ratio of their last agreed capital. (2 marks) Intangible fixed assets (accept noncurrent assets) 1 + 1

(d)

(2 marks) (Total 25 marks)

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QUESTION 4 The following information is available from the books of Goodwin Ltd: At 31 August 2010 14,830 7,605 Dr 205 Cr At 31 August 2011 17,055 ? Dr 295 Cr

Stock Sales ledger balances:

For the year ended 31 August 2011 Sales Purchases Sales returns Purchases returns Discounts allowed Discounts received Payments to suppliers Receipts from customers Bad debts written off Interest charged on customers overdue accounts Purchases ledger balance set off against sales ledger balance Refunds to customers All sales and purchases are on credit. REQUIRED (a) Prepare for the year ended 31 August 2011 the: (i) (ii) Sales Ledger Control Account (14 marks) Trading Account. (5 marks) (b) Identify three areas, other than debtors, where control accounts are used. (3 marks) (c) State three reasons why Goodwin Ltd would choose to use control accounts. (3 marks) (Total 25 marks) 255,340 180,060 705 680 655 490 179,300 249,800 175 30 305 575

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MODEL ANSWER TO QUESTION 4 (a) (i) Syllabus topic 8: Control Accounts (8.4), (8.6) and (8.7)

Sales Ledger Control Account Balance b/d Balance b/d 7,605 1 Sales Sales returns 255,340 1 Interest Discounts allowed 30 1 Bank (refunds) Bank 575 1 Balance c/d Bad debts 295 1 Contra ............ Balance c/d 263,845 Balance b/d 12,000 1of Balance b/d Must have narrative and amount. (ii)

205 705 655 249,800 175 305 ..12,000 263,845 295 1 1 1 1 1 1 1 1 (14 marks)

Syllabus topic 1.1: Advanced Aspects of the Syllabus for Level 1 (1.1) Goodwin Ltd Trading Account for the year ended 31 August 2011

Sales Sales returns Less: Cost of sales Opening stock Purchases Purchases returns Less: Closing stock Gross profit

255,340 ......705 254,635

14,830 180,060 ......680 179,380 194,210 .17,055 1 177,155 .77,480 1 1+1of (5 marks)

(b)

Syllabus topic 8: Control accounts (8.3) Creditors or Purchase Ledger Control Fixed assets Accumulated provision for depreciation on fixed assets Wages Stock Bank (cash book) Any 3 x 1 mark (3 marks)

(c)

Syllabus topic 8: Control accounts (8.1) to localise errors to deter frauds to give totals of debtors and/or creditors to avoid too much detail in the general ledger to assist in the preparation of the Trial Balance and balance sheet Any 3 x 1 mark (3 marks) (Total 25 marks)

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QUESTION 5 After stocktaking for the year ended 31 January 2011 had taken place, the closing stock of Jacques Ltd was valued at cost 66,550. The following adjustments are required: (i) Some items were out of date and it was decided to sell them at half the cost price. The original selling price was 9,600. Twelve items at a cost of 79 each had been incorrectly included in the stock take, at 97 each. A total of 12,900 on one stock sheet had been carried forward as 2,900 to the next stock sheet. An item, which had cost 630, was scrapped. Goods paid for and awaiting collection by a customer had been included in the stock at a valuation of 1,850. The last stock sheet, totalling 14,900, had not been included in the stock valuation. Goods sent on sale or return to Daisy Bell, recorded as a sale at 6,600, had not been returned or sold at 31 January 2011.

(ii) (iii) (iv) (v)

(vi) (vii)

Jacques Ltd applies a mark up of 50% on cost. REQUIRED (a) Copy the following layout into your answer book and calculate the revised stock value at 31 January 2011. Add Original cost of stock Item (i) (ii) (iii) (iv) (v) (vi) (vii) Net adjustment Revised stock value Deduct 66,550

-----------

-----------

-----------

--------------------(16 marks)

2007/4/11

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QUESTION 5 CONTINUED The accountant of Kings Ltd extracted the following figures from the first years Trading and Profit & Loss Account for the year ended 31 December 2010 and the Balance Sheet at 31 December 2010: Sales Cost of sales Gross profit Operational expenses Loan interest Net profit Debtors Closing stock Cash Creditors Bank overdraft 550,000 200,000 350,000

225,000 4,500 229,500 120,500 125,000 65,000 1,200 88,000 7,500

REQUIRED (b) Calculate the following ratios to one decimal place, showing your workings and answer. (i) (ii) (iii) (iv) Net profit (before interest) to sales Current/Working capital Liquidity/Acid test Stock turnover (based on closing stock). (8 marks) (c) State the purpose of calculating the current/working capital ratio. (1 mark) (Total 25 marks)

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MODEL ANSWER TO QUESTION 5 Syllabus Topic 6: Stock valuation (6.1), (6.2) (a) Jacques Ltd Adjusted Stock valuation at 31 January 2011 Add Deduct

Original cost of stock (i) Reduction to NRV 1 1 1 (9,600 3,200 / 2) Overvaluation 1 1 (97 79 x 12) Stock Sheet error 1 1 (12,900 2,900) Scrapped item Customers goods Stock sheet total Sale or return 1 1 (6,600 - 2,200) 14,900 1

66,550

(3,200)

(ii)

1 (216)

(iii)

10,000 (630) 1 (1,850) 1

(iv) (v) (vi) (vii)

..4,400 29,300

. ....... (5,896)

Net adjustment Revised stock value

1 of 23,404 1+1of 89,954 (16 marks)

(b)

Syllabus Topic 10: Calculation and interpretation of ratios (10.4.3), (10.6.3), (10.7.2) and (10.8.4) Ratio workings (i) Net profit (before interest) to sales 120,500 + 4,500 x 100 550,000 125,000 + 65,000 + 1,200 88,000 + 7,500 125,000 + 1,200 88,000 + 7,500 200,000 65,000 1 Answer 22.7% 1

(ii)

Current/Working capital

2:1

(iii)

Liquidity/Acid Test

1.3:1

(iv)

Stock turnover

3.1 times

1 (8 marks)

(c)

The current ratio measures whether a business will be able to meet its short term debts (current liabilities from its current assets).1 (1 mark) (Total 25 marks)

2003/4/11/MA

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