Accounting

Level 3

Model Answers
Series 2 2005 (Code 3001)

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Accounting Level 3
Series 2 2005

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Accounting Level 3
Series 2 2005
SECTION A (Answer Questions 1 and 2 in Section A Compulsory) QUESTION 1 Two sole traders (A and B) had the following Trial Balances at 31 March 2005: A Purchases/Sales Machinery/Accumulated depreciation Vehicles/ Accumulated depreciation Buildings/Accumulated depreciation General expenses Rent Wages Drawings/Capital Bank Stock at 1 April 2004 Debtors/Creditors NOTES (1) At 31 March 2005 the stocks on hand were: A 21,000, B 16,000. (2) Both A and B depreciate machinery at 14% per year on cost and vehicles at 20% per year using the reducing balance method. A depreciates his buildings by 2,000 per year. (3) At 31 March 2005 A owed B 8,000. (4) A and B agreed to form a partnership with effect from 1 April 2005 after calculating their individual profits for the year ended 31 March 2005. They agreed the following: (i) (ii) Assets and liabilities were to be included at book value and goodwill was to be ignored. The bank accounts would be amalgamated. 000 475 350 44 125 110 nil 65 22 30 50 1,271 000 750 145 14 5 000 400 250 51 nil 85 92 nil 14 9 12 20 933 B 000 645 45 21 nil

321 12 24 1,271

212 10 933

(iii) Fixed capital accounts would be set up, rounded down to the nearest 10,000, leaving the remaining balances in current accounts. REQUIRED (a) Prepare the Trading and Profit & Loss Account of A and of B, in columnar form, for the year ended 31 March 2005. (12 marks) (b) Prepare the opening Balance Sheet of the new partnership at 1 April 2005. (8 marks) (Total 20 marks)

Model Answer for Question 1 (a) Trading and Profit & Loss Accounts for year ended 31 March 2005 A 000 Sales Cost of goods sold: Opening stock Purchases Closing stock Gross Profit General expenses Rent Wages Depreciation: Machinery (.14 x 350) Vehicles [.2 x (44 14)] Buildings Net profit 30 475 505 21 110 65 49 6 2 000 750 000 12 400 412 16 85 92 (.14 x 250) 35 [.2 x (51 21)] 6 B 000 645

484 266

396 249

232 34

218 31

CONTINUED ON THE NEXT PAGE

Model Answer for Question 1 continued (b) Partnership Balance Sheet at 1 April 2005 000 Fixed Assets Land and Buildings (125 5 2) Machinery (350 + 250 145 45 49 35) Vehicles (44 + 51 14 21 6 6) Current Assets Stock (21 + 16) Debtors (50 + 20 8) Creditors: amounts due within 1 year Creditors (24 + 10 8) Bank (12 9) Net Current Assets Partners' Capital Accounts: A (321 + 34 22) = 333 B (212 + 31 14) = 229 Partners Current Accounts: A (333 330) B (229 220) 3 9 562 26 3 29 70 562 000 330 220 37 62 99 118 326 48 492 000 000

SECTION A CONTINUED QUESTION 2 The following are the most recent accounts of Logres Ltd: Trading and Profit & Loss Account year ended 31 March 2005 000 Sales Cost of goods sold: Opening stock Purchases Closing stock Gross profit Wages General expenses Selling expenses Depreciation on machinery Directors' salaries Net profit Retained earnings b/f Proposed dividend Retained earnings c/f 65 690 755 85 104 124 22 85 32 000 1,080

670 410

367 43 67 110 75 35

Balance Sheet at 31 March 2005 000 Cost Fixed Assets Buildings Machinery Current Assets Stock Debtors 300 425 725 85 90 000 Depreciation 115 255 370 175 000 NBV 185 170 355

Creditors: amounts falling due within one year Creditors 60 Proposed dividend 75 Bank overdraft 115 Net Current Liabilities Capital and Reserves: Ordinary shares (1 each) Retained earnings

250 (75) 280 000 245 35 280

CONTINUED ON THE NEXT PAGE

SECTION A CONTINUED QUESTION 2 CONTINUED The Trade Association to which Logres Ltd belongs has just produced the following average ratios for this industry: Mark up on cost Net profit to sales Return on capital employed Dividend cover Current Acid test Debtors collection Stock turnover (based on average stock) Creditors settlement REQUIRED (a) Calculate for Logres Ltd, with the same degree of accuracy, the 9 ratios produced by the Trade Association. (12 marks) (b) Write a short report to the Directors of Logres Ltd comparing the ratios you have calculated in (a) above with those produced by the Trade Association. (8 marks) (Total 20 marks) 40.00% 5.00% 12.00% 1.40 times 1.50:1 1.10:1 2.00 months 2.00 months 2.40 months

Model Answer for Question 2 (a) Logres Ltd Trade Association Mark up on cost [(410/670) x 100] 61.19% 40.00% Net profit to sales [(43/1,080) x 100)] 3.98% 5.00% Return on capital employed [(43/280) x 100)] 15.36% 12.00% Dividend cover (43/75) 0.57 times 1.40 times Current (175/250) 0.70:1 1.50:1 Acid test (90/250) 0.36:1 1.10:1 Debtors collection [(90/1,080) x 12)] 1.00 month 2.00 months Stock turnover [((65 + 85)/2)/670) x 12] 1.34 months 2.00 months Creditors settlement (b) REPORT To: From: Date: Subject: Directors A Candidate 11 April 2005 Ratios [(60/690) x 12)] 1.04 months 2.40 months

Logres Ltd has a higher mark up and manages a faster stock turnover which suggests superior quality. The lower net profit to sales suggests high expenses (possibly spending above average on advertising). The net profit to capital employed is above average probably due to the high mark up combined with efficient use of capital shown by better than average stock turnover ratio. Both current and acid test ratios suggest a serious liquidity problem. The liquidity problem calls into question the size of the dividend which is not covered by the current profits. The liquidity problem also suggests it may not be necessary to pay creditors faster than average for the industry.

SECTION B (Answer any THREE questions from Section B) QUESTION 3 The following information appeared in Gresham plc's Balance Sheet at 31 March 2002: Authorised capital 20,000,000 Ordinary shares of 0.50 each 500,000 8% Preference shares of 1 each Issued capital and reserves 10,000,000 Ordinary shares of 0.50 each 250,000 8% Preference shares of 1 each Share premium Retained earnings 000 10,000 500 10,500 000 5,000 250 500 685 6,435

(1) For the year ended 31 March 2003 Gresham plc made a net profit of 680,000 and an ordinary share dividend of 0.06 per share was approved. (2) On 1 September 2003 the company's buildings were re-valued and a revaluation reserve of 400,000 was created. (3) On 1 October 2003 a bonus (capitalisation) issue of 1 ordinary share for every five held was made. Maximum use was made of non-distributable reserves. (4) For the year ended 31 March 2004 Gresham plc made a net profit of 830,000. An Ordinary dividend of 0.0625 per share was approved. (5) On 1 April 2004 the remaining Preference shares were issued at par. (6) On 1 October 2004 five million Ordinary shares were issued at a premium of 0.25 per share. (7) For the year ended 31 March 2005 Gresham plc made a net profit of 1,050,000. An Ordinary dividend of 0.05 per share was approved. REQUIRED (a) Prepare for Gresham plc the Appropriation account for each of the years ended 31 March 2003, 2004 and 2005. (13 marks) (b) Show the Issued Capital and Reserves section of Gresham plc's Balance Sheet at 31 March 2005. (7 marks) (Total 20 marks)

Model Answer for Question 3 (a) Gresham plc Appropriation Account year ended 31 March 2003 000 Net profit Less: Preference dividend (0.8 x 250,000) Ordinary dividend (0.6 x 10,000,000) Retained profit for year Retained profit brought forward Retained profit carried forward 20,000 600,000 000 680,000 620,000 60,000 685,000 745,000

Gresham plc Appropriation Account year ended 31 March 2004 000 Net profit Less Preference dividend (0.8 x 250,000) Ordinary Dividend [1] Retained profit for year Retained profit brought forward [2] Retained profit carried forward Workings: [1] .0625 x 10,000,000 x 1.2 = 750,000 [2] 745,000 [(5,000,000 x .2) 500,000 400,000] = 645,000 20,000 750,000 000 830,000 770,000 60,000 645,000 705,000

Gresham plc Appropriation Account year ended 31 March 2005 000 Net profit Less: Preference dividend (0.8 x 500,000) Ordinary Dividend [3] Retained profit for year Retained profit brought forward Retained profit carried forward [3] .05 [(10,000,000 x 1.2) + 5,000,000] = 850,000 40,000 850,000 000 1,050,000 890,000 160,000 705,000 865,000

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Model Answer for Question 3 continued (b) Gresham plc Balance Sheet at 31 March 2005 000 Capital and Reserves 17,000,000 Ordinary shares of 0.50 each 500,000 8% Preference shares of 1 each Share premium (5,000,000 x .25) Retained earnings 8,500 500 1,250 865 11,115

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SECTION B CONTINUED QUESTION 4 Mirabelle does not use control accounts. At the most recent year end the Trial Balance did not balance as the credit total exceeded the debit total by 541. A Suspense Account was opened and this balance was treated as a current asset when the draft accounts were prepared. The accounts showed a gross profit of 42,350 and a net profit of 13,400. The accountant has now found the following errors: (1) A sales return of 60 had been credited to the customer's account and credited to Sales Returns Account. (2) Postage expenses of 87 had been correctly entered in the Bank Account but entered as 78 in the Postage Expenses Account. (3) A customer, Jones, owing 240, had paid his account less 5% cash discount. Jones' account had been credited with 228, but no entry had been made in the Bank Account and the discount remained unrecorded. (4) 8,400, including 150 for the licence and 350 for insurance, was paid to the supplier of a new vehicle. The Motor Vehicles Account had been debited with 8,400 and the Bank Account credited with 8,400. A full years depreciation of 25% has been charged on the cost of all vehicles. (5) The Petty Cash Account had been omitted from the Trial Balance. When all the above errors had been corrected the Suspense Account was eliminated. REQUIRED (a) Show the Suspense Account of Mirabelle. (8 marks) (b) Show calculations of the revised: (i) Gross profit (12 marks) (Total 20 marks)

(ii) Net profit.

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Model Answer for Question 4 (a) Balance per Trial Balance Suspense Account 541 Sales returns (60 x 2) Postage (87 78) Bank 541 Petty cash (R) 120 9 228 184 541

Must include narratives (b) (i) Gross profit as per accounts Less sales returns (60 x 2) Revised gross profit (ii) Net profit as per accounts Sales returns Postage Discount allowed (240 228) Licences Insurance Depreciation [(150 + 350) x 0.25] Revised net profit (120) ( 9) ( 12) (150) (350) 125 13,400 42,350 120 42,230

(516) 12,884

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SECTION B CONTINUED QUESTION 5 Turncoats Manufacturing Ltd's Trial Balance at 31 March 2005 included the following figures: 000 Sales Purchases (raw materials) Stocks at 1 April 2004: Raw materials Work in progress Finished goods Direct labour Factory machinery at cost Vehicles at cost Miscellaneous factory expenses Insurance Accumulated depreciation at 1 April 2004: Factory machinery Vehicles Indirect labour Light, heat and power Administration 1,250 145 276 187 975 2,500 650 475 80 1,050 250 145 220 310 000 5,240

At 31 March 2005 the following prepayments and accruals had yet to be recorded: Prepayments 000 30 20 Accruals 000 20 15 10

Direct labour Indirect labour Insurance Administration

Stocks at 31 March 2005 were as follows: (1) Raw materials 130,000 (2) Work in progress 290,000 (3) Finished goods 210,000 Notes (1) Indirect labour is charged 40% to Manufacturing Account and the rest to Profit & Loss Account. (2) Insurance is charged 50% to Manufacturing Account and the rest to Profit & Loss Account. (3) Administration is charged 10% to Manufacturing Account and the rest to Profit & Loss Account. (4) Light, heat and power is charged 75% to Manufacturing Account and the rest to Profit & Loss Account. (5) The depreciation on vehicles is calculated at 30% per year using the reducing balance method and charged 30% to Manufacturing Account and the rest to Profit & Loss Account. (6) Factory machinery is depreciated at 20% per year on cost. REQUIRED Prepare the Manufacturing and Trading Account of Turncoats Manufacturing Ltd for the year ended 31 March 2005. Note: the Profit & Loss Account section is not required. (20 marks)

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Model Answer for Question 5 Turncoats Manufacturing Ltd Manufacturing Account and Trading Account for the year ended 31 March 2005 Raw materials: Opening stock Purchases Closing stock Direct labour (975 + 20) Prime Cost Miscellaneous factory expenses Insurance [(80 30) x 0.5] Indirect labour [(145 + 15) x 0.4] Light, heat and power (220 x 0.75) Administration [(310 + 10 20) x 0.1] Depreciation: Factory machinery (2,500 x 0.2) Vehicles [(650 250) x 0.3) x 0.3] Opening work in progress Closing work in progress Cost of Manufacture 000 Sales Cost of goods sold: Opening stock Cost of manufacture Closing stock Gross Profit 187 3,541 3,728 210 000 145 1,250 1,395 130 000

1,265 995 2,260

475 25 64 165 30 500 36 1,295 3,555 276 3,831 290 3,541 000 5,240

3,518 1,722

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SECTION B CONTINUED QUESTION 6 At 1 March 2005 Victor Ltd had a debit balance of 23,450 on its Debtors Ledger Control Account and a credit balance of 17,450 on its Creditors Ledger Control Account. Both balances had been reconciled with the individual accounts. During March 2005 the following transactions took place: Credit sales Credit purchases Bad debt written off Increase in bad debt provision Sales returns Purchase returns Cash received from credit customers Cash sales Cash paid to credit suppliers Cash purchases Debit balance in the Sales Ledger set off against credit balance in the Purchase Ledger Discounts allowed Discounts received REQUIRED (a) Prepare the Debtors Ledger Control Account and the Creditors Ledger Control Account of Victor Ltd for March 2005. (10 marks) (b) At 31 March 2005 the individual suppliers accounts had a net total balance of 17,773 and the individual customers accounts had a net total balance of 23,499. Suggest the most likely reasons for these differing from those calculated in (a) above. (4 marks) (c) Give 2 important reasons for having Debtors and Creditors Ledger Control Accounts. (6 marks) (Total 20 marks) 19,670 17,320 450 2,000 523 187 18,478 1,450 16,425 850 650 620 385

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Model Answer for Question 6 (a) Opening balance Credit sales Debtors Control Account 23,450 Bad debts 19,670 Sales returns Cash received Contra Discounts allowed Closing balance (R) 43,120 Creditors Control Account Purchase returns Cash paid Contra Discounts received Closing balance (R) 187 16,425 650 385 17,123 34,770 Opening balance Credit purchases 17,450 17,320 450 523 18,478 650 620 22,399 43,120

34,770

NO marks for closing figures if aliens included (b) Individual debtors Debtors Control Account 23,499 22,399 1,100 Individual creditors Creditors Control Account 17,773 17,123 650

Excess of individual balances suggests that the contra item has not been recorded in the individual accounts. This would reconcile the creditors. The bad debt may not have been recorded in the individual account. This with the contra reconciles the debtors (650 + 450 = 1,100). (c) Prevention of fraud, location of errors, control of total credit, preparation of interim accounts.

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