2006/2/07/MA 2

Book-keeping & Accounts Level 2

Model Answers Series 2 2007 (Code 2006)

2006/2/07/MA 2

Book- Keeping & Accounts Level 2 Series 2 2007

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 2007 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.

2006/2/07/MA 3

QUESTION 1 Alan and Bob are in partnership sharing profits and losses equally. On 1 January 2007 they admitted Charlene into the partnership under the following terms and conditions: (1) All future profits and losses were to be shared between Alan, Bob and Charlene in the ratio 2:2:1

respectively (2) Certain existing partnership assets were revalued as follows:

(i) Freehold property increased in value by £50,000 (ii) Motor vehicles reduced in value by £10,000 (iii) Debtors reduced in value by £2,500 (iv) Stock increased in value by £500

(3) Charlene paid £25,000 into the partnership bank account and also transferred some machinery to

the partnership valued £4,000 (4) The goodwill of the partnership was considered to be worth £75,000 although no goodwill

account existed in the partnership books REQUIRED (a) Prepare journal entries, (including bank where appropriate) to record the following. Narrations are

not required:

(i) The revaluation of the partnership assets. A revaluation account is to be used but goodwill is not to be included in this account

(ii) The introduction by Charlene of £25,000 and the machinery worth £4,000 (iii) The goodwill adjustment. A goodwill account is not to be used

(12 marks) Denise, Eric and Felicity have been in partnership for a long time sharing profits and losses in the ratio 2:1:1 respectively. The partnership has experienced heavy trading losses for the last few years and it was therefore decided to dissolve the partnership. All partnership assets were sold and creditors paid leaving the following balances in the books of the partnership: £ Dissolution Account 80,600 Dr Fixed Capital Accounts:

Denise 100,000 Eric 50,000 Felicity 50,000

Current Accounts: Denise 40,000 Dr Eric 36,003 Dr Felicity 20,000 Dr Bank 23,397 Dr REQUIRED (b) Write up the Fixed Capital Accounts and the Bank Account to complete the dissolution of the

partnership. Eric was unable to meet any additional financial obligations to the partnership (10 marks)

(c) Name three other items, other than profit and loss sharing ratios, which a partnership agreement

might be expected to contain. (3 marks)

(Total 25 marks)

2006/2/07/MA CONTINUED ON NEXT PAGE 4

MODEL ANSWER TO QUESTION 1 (a) Dr Cr (i) £ £ Freehold property 50,000 Stock 500 Motor vehicles 10,000 Debtors 2,500 Revaluation 38,000 Revaluation 38,000 Capital: Alan 19,000 Bob 19,000 (ii) Bank 25,000 Machinery 4,000 Capital - Charlene 29,000 (iii) Capital: Charlene 15,000 Alan 7,500 Bob 7,500

(iii) - Alternative Capital: Alan 37,500 Bob 37,500 Capital: Alan 30,000 Bob 30,000 Charlene 15,000

Goodwill Workings Old New Adjustment £ £ £ Alan 37,500 -30,000 7,500 Bob 37,500 -30,000 7,500 Charlene -15,000 -15,000

2006/2/07/MA 5

MODEL ANSWER TO QUESTION 1 CONTINUED (b) Capital Accounts D E F D E F £ £ £ £ £ £ Current A/C 40,000 36,003 20,000 Bal b/d 100,000 50,000 50,000 Dissolution A/C 40,300 20,150 20,150 Contra 6,153 Contra 4,102 2,051 Bank 15,598 7,799 100,000 56,153 50,000 100,000 56,153 50,000 Bank Account £ £ Bal b/d 23,397 Capital: Denise 15,598 Capital: Felicity 7,799 23,397 23,397 (c) Examples: Interest chargeable on drawings Interest payable on capital Duration of partnership Duties of partners Salaries payable to any partner

2006/2/07/MA 6

QUESTION 2 The accountant of Paris Ltd extracted the following figures from the Trading and Profit & Loss Account for the year ended 31 March 2007 and the Balance Sheet at 31 March 2007: £ Sales 550,000 Cost of sales 200,000 Gross profit 350,000 Operational expenses 225,000 Loan interest 4,500 229,500 Net profit 120,500 Ordinary share capital (issued and fully paid) 750,000 Share premium 50,000 Profit & Loss 275,000 5% Debenture loan 90,000 Debtors 125,000 Stock 65,000 Cash 1,200 Creditors 88,000 Bank overdraft 7,500 REQUIRED (a) Copy the following table into your answer book and calculate the required ratios. The first ratio

has been calculated for you to demonstrate what is required: RATIO WORKINGS ANSWER Gross Profit to Sales

350,000 x 100 550,000

63.64%

Net Profit (before interest) to Sales

%

Current/Working Capital

:

Liquidity/Acid Test

:

Stock Turnover (based on closing stock)

times

Return (after interest) on Ordinary Shareholders Funds

% Return (before interest) on Total Capital Employed

%

(19 marks) The gross profit to sales ratio for the year ended 31 March 2006 was 71.64% REQUIRED (b) Give three possible reasons for the reduction of 8% in the gross profit to sales ratio between

31 March 2006 and 31 March 2007 (6 marks)

(Total 25 marks)

2006/2/07/MA 7

MODEL ANSWER TO QUESTION 2 (a)

RATIO WORKINGS ANSWER Net Profit (before interest) to Sales 120,500 + 4,500 x 100 22.73% 550,000 Current/Working Capital 125,000 + 65,000 + 1,200 2:1 88,000 + 7,500 Liquidity/Acid Test 125,000 + 1,200 1.32:1 88,000 + 7,500 Stock Turnover 200,000 3.08 times 65,000 Return (after interest) on Ordinary Shareholders Funds 120,500 x 100 11.21% 750,000 + 50,000 + 275,000 Return (before interest) on Total Capital Employed 120,500 + 4,500 x 100 10.73% 750,000 + 50,000 + 275,000 + 90,000 (b) Examples: Reduction in selling prices Increase in purchase prices Over valuation of previous year end stock Under valuation of this year's closing stock Increased pilferage, breakages etc

2006/2/07/MA 8

QUESTION 3 The following balances were extracted from the books of Prentice Ltd on 1 January 2007 Dr Cr £ £ Purchase Ledger 900 42,380 Sales Ledger 68,785 230 The balance on the Provision for Doubtful Debts Account at 1 January 2007 was £1,600 In the month of January 2007, the following transactions took place: £ Sales on credit 72,590 Discounts received 600 Cash sales 9,175 Credit purchases 47,040 Discounts allowed 1,600 Bad debts written off 750 Returns inwards from credit customers 2,900 Returns outwards to credit suppliers 1,260 Payments to credit suppliers 40,390 Receipts from credit customers 66,610 Legal fees re: debt collection charged to customers account 700 Debtor’s cheque dishonoured 395 Cash purchases 2,850 Debit balance on Sales Ledger transferred to Purchase Ledger per contra 6,200 Bill of Exchange issued by Prentice Ltd and accepted by a debtor 805 At 31 January 2007 the following information was made available: Sales Ledger credit balances 408 Purchase Ledger debit balances 420 The Provision for Doubtful Debts is to be adjusted to 4% of debtors at 31 January 2007. REQUIRED For Prentice Ltd: (a) Prepare the Sales Ledger Control Account for the month of January 2007.

(14 marks)

(b) Prepare the Purchase Ledger Control Account for the month of January 2007. (9 marks)

(c) Give two possible reasons for the credit balance of £408 on the Sales Ledger Control Account at 31 January 2007.

(2 marks)

(Total 25 marks)

2006/2/07/MA 9

MODEL ANSWER TO QUESTION 3 (a) Sales Ledger Control Account £ £ Bal b/d 68,785 Bal b/d 230 Sales 72,590 Discount allowed 1,600 Legal fees 700 Bad debts 750 Bank 395 Returns inwards 2,900 Bal c/d 408 Bank 66,610 Purchase ledger - contra 6,200 Bills receivable 805 Bal c/d 63,783 142,878 142,878 Bal b/d 63,783 Bal b/d 408 (b) Purchase Ledger Control Account £ £ Bal b/d 900 Bal b/d 42,380 Discount received 600 Purchases 47,040 Returns outwards 1,260 Bal c/d 420 Bank 40,390 Sales ledger – contra 6,200 Bal c/d 40,490 89,840 89,840 Bal b/d 420 Bal b/d 40,490 (c) Examples: Debtor pays outstanding balance before making some returns A retrospective discount is awarded to a debtor Debtor makes an overpayment in error

2006/2/07MA 10

QUESTION 4 The following list of balances was extracted from the books of Greenacre plc on 31 December 2006:

£ Gross profit 900,300 Ordinary Share Capital - authorised issued and fully paid shares of £1 each 850,000 8% Preference Share Capital - authorised issued and fully paid shares of £1 each 200,000 Freehold property 1,500,000 Motor vehicles 200,000 Fixtures 50,000 Motor vehicles - depreciation provision 72,000 Fixtures - depreciation provision 20,000 Administrative expenses 185,000 Selling expenses 154,000 Distribution expenses 81,000 5% Debentures - 2010 (issued in year 2002) 70,000 Interest paid to debenture holders 1,750 Loss on sale of vehicle 2,000 Discounts received 660 Profit & Loss Account - 1 January 2006 (credit balance) 144,000 Debtors 63,000 Creditors 55,000 Cash at bank (credit balance) 1,900 Cash in hand 110 Share premium 85,000 Interim Dividend - Ordinary Shares 37,500 Interim Dividend - Preference Shares 8,000 Doubtful debts provision 1,500 Stock at 31 December 2006 118,000 The following information is to be taken into account: (1) At 31 December 2006, prepaid selling expenses amounted to £5,000 and accrued administrative

expenses amounted to £11,000 (2) The Doubtful Debts Provision is to be maintained at 3% of debtors at the year-end (3) Depreciation is to be provided as follows: Motor vehicles - 20% reducing balance. Fixtures - 25% per annum on cost (4) The directors propose:

(i) Payment of the final dividend to the preference shareholders (ii) A final dividend to the ordinary shareholders of £0.15 per share

REQUIRED Prepare, for Greenacre plc: (a) the Profit & Loss and Appropriation Account for the year ended 31 December 2006.

(15 marks) (b) the Balance Sheet at 31 December 2006.

(10 marks)

(Total 25 marks)

2006/2/07MA 11 CONTINUED ON NEXT PAGE

MODEL ANSWER TO QUESTION 4 (a) Greenacre plc Profit & Loss and Appropriation Account for the year ended 31 December 2006 £ £ Gross profit 900,300 Discount received 660 900,960 Less: Administrative expense (185,000 + 11,000) 196,000 Selling expenses (154,000 - 5,000) 149,000 Distribution expenses 81,000 Loss on vehicle sale 2,000 Debenture interest (1,750 + 1,750) 3,500 Provision for Doubtful Debts ([63,000 x 3%] - 1,500) 390 Depreciation: Motor vehicles ([200,000 - 72,000] x 20%) 25,600 Fixtures (50,000 x 25%) 12,500 469,990 Net profit 430,970 Less: Interim preference dividend 8,000 Proposed preference dividend 8,000 Interim ordinary dividend 37,500 Proposed ordinary dividend (850,000 x 0.15) 127,500 181,000 Retained profit for the year 249,970 Retained profit b/fwd 144,000 Retained profit c/fwd 393,970

2006/2/07MA 12 © Education Development International plc 2007

MODEL ANSWER TO QUESTION 4 CONTINUED (b) Greenacre plc Balance Sheet at 31 December 2006 Fixed Assets Cost Accumulated NBV Depreciation £ £ £ Freehold property 1,500,000 - 1,500,000 Motor vehicles 200,000 97,600 102,400 Fixtures 50,000 32,500 17,500 1,750,000 130,100 1,619,900 Current Assets £ £ Stock 118,000 Debtors 63,000 Less: Provision 1,890 61,110 Prepayment 5,000 Cash 110 184,220 Creditors: Amounts due within one year £ Creditors 55,000 Accruals (11,000 + 1,750) 12,750 Proposed dividends (8,000 + 127,500) 135,500 Bank overdraft 1,900 205,150 Net Current Assets -20,930 1,598,970 Creditors: Amounts due after more than one year 5% Debentures (2010) 70,000 1,528,970 Capital and Reserves Ordinary share capital - issued and fully paid shares of £1 each 850,000 Share premium account 85,000 Profit and Loss 393,970 Ordinary shareholders' funds 1,328,970 8% preference share capital - issued and fully paid shares of £1 each 200,000 Total shareholders' funds 1,528,970