Model Answers Series 4 2011 (2007)

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LCCI International Qualifications

Book-Keeping and Accounts Level 2

2007/4/11/MA Page 1 of 14

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) 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 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/MS Page 2 of 14

QUESTION 1 The following information was extracted from the books of Dore Trading Ltd, at 31 March 2011:

£ Goodwill 25,000 Fixtures and fittings at cost 50,000 Motor vehicles at cost 100,000 Stock at 31 March 2011 76,250 Debtors 130,000 Bank 21,875 Dr Creditors 50,125 General reserve 25,000

Additional information: (1) The motor vehicles and fixtures and fittings were all purchased on 1 April 2008. The depreciation

policy is as follows:

(i) fixtures and fittings – straight line over 5 years assuming a residual balance of £5,000

(ii) motor vehicles – 25% per annum reducing balance

(2) A provision for doubtful debts of 5% of debtors was created on 31 March 2011

(3) The company has 125,000 ordinary shares of £1 each, all of which have been issued and fully paid at £1.10 a share

(4) The directors have proposed a dividend of £0.15 per share for the year ended 31 March 2011

(5) 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

(6) 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 Page 3 of 14

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 1both

Fixed assets Cost Accumulated Net book depreciation value

£ £ £ Goodwill 25,000 1

Fixtures and fittings 50,000 27,000 [W1] 3 23,000

Motor vehicles 100,000 57,813 [W2] 3 42,187

150,000 84,813 90,187

Current assets Stock 76,250 Debtors 130,000 Less: PDD 6,500 123,500 1 21,875

221,625 1of Creditors falling due within one year Creditors 50,125 Proposed dividends 18,750 [W3] 1 Loan repayment (50,000 x 10%) 5,000 1

73,875 1of Net current assets 1 147,750 1of

237,937 Creditors falling due after more than one year Bank loan (50,000 - 5,000) 45,000

1 1 192,937

Capital and reserves Issued and fully paid share capital

125,000 £1 Ordinary shares 125,000 1 Share premium (125,000 x 10%) 12,500 1 General reserve 25,000 Profit and loss 30,437 1+1of

192,937

2007/4/11/MS Page 4 of 14

[W1] 50,000 [W2] 100,000 x 25% = 25,000 1

less: 5,000

75,000 x 25% 18,750 1 45,000 1 56,250 x 25% = 14,063 1

÷ 5 years = 9,000 1 57,813 9,000 x 3 years 1 = 27,000

[W3] 125,000 x £0.15 = 18,750 1

(21 marks)

Syllabus Topic 3.1: Formation of a Company (3.1.1)

(b) Public limited company Private limited company

Has PLC in the name Has Ltd in the name Shares are sold on the stock exchange Shares are sold to private investors Published report and accounts available Report and accounts sent to companies house to the public available on request Publishes full report and accounts Information disclosed is limited by the

Minimum allotted capital of at least £50,000 requirements of the Companies Act Has unlimited number of Shareholders 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 Page 5 of 14

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 18,700 April 30, 2010 21,400 April 30, 2011 19,600

The following bad debts had been written off:

Debtor Date written off £ Allan May 15, 2009 60 Brian August 16, 2009 109 Carlos January 7, 2010 42 David March 21, 2010 101 Edward June 13, 2010 37 Frank October 30, 2010 29

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) Bad Debts Account (5 marks)

(iii) Provision for Doubtful Debts Account (7 marks)

(iv) David’s 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 Page 6 of 14

MODEL ANSWER TO QUESTION 2

Syllabus topic 1.1: Advanced aspects of the syllabu s for Level 1 Book-keeping

(a) (i) Bad Debts Account

£ £ 2009 May 15 Allan 60 Aug 16 Brian 1 109 2010 2010 Jan 7 Carlos 42 Mar 21 David 1 101 Apr 30 P&L A/c 1 312 312 312

2010 2011 Jun 13 Edward 1 37 Oct 30 Frank ..29 Apr 30 P&L A/c 1 ..66 ..66 ..66

(5 marks)

Syllabus topic 1.4: Bad debts and provision for dou btful debts (1.4.5)

(ii) Provision for Doubtful Debts Account 2010 £ 2009 £ April 30 Balance c/d (21,400 x 3%) 1 642 May 1 Balance b/d(18,700 x 3%) 1 561 2010 April 30 P&L A/c 1 of 81 ….. ….. 642 642 2011 April 30 P&L A/c 1 of ..54 May 1 Balance b/d 1 of 642 April 30 Balance c/d (19,600 x 3%) 1 588 ….. ….. 642 642 2011 May 1 Balance B/D 1 of 588

(7 marks)

(iii) David’s Account £ £ 2010 2010 Mar 1 Balance b/d 1 101 Mar 21 Bad Debts 1 101 2011 2011 Mar 31 Bad Debts Recovered 1 1 ..36 Mar 31 Bank 1 ..36

(5 marks)

(b) Bad Debts Recovered Account £ £ 2011 2011 Apr 30 P&L A/c 1 36 Mar 31 David 1 36

(2 marks)

2007/4/11/MS Page 7 of 14

MODEL ANSWER TO QUESTION 2 CONTINUED

Syllabus topic 1.4: Bad Debts and provision for dou btful debts (1.4.6)

(c) Balance Sheet Extracts

£ 30 April 2009 Debtors 18,700 Less provision for doubtful debts ….561 1 of 18,139 1 of

30 April 2010 Debtors 21,400 Less provision for doubtful debts .....642 1 of 20,758 1 of

30 April 2011 Debtors 19,600 Less provision for doubtful debts .....588 1 of 19,012 1 of

(6 marks)

(Total 25 marks)

2007/4/11/MS Page 8 of 14

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 50,000 Equipment 15,250 65,250 Current assets Stock 8,500 Debtors 7,800 Bank 550 16,850 Creditors falling due within one year Creditors 7,150 Net current assets 9,700 74,950

Capital Accounts: Amy 40,000 Bill 30,000 70,000 Current Accounts: Amy 5,400 Bill (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.

(2) 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.

(3) 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.

(4) 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.

(5) It was decided to revalue the premises at £110,000 at 30 June 2011.

REQUIRED (a) Prepare the journal entries recording the admission of the new partner.

Narratives are not required. (10 marks)

(b) Prepare the Balance Sheet of the new partnership at 1 July 2011. (11 marks)

(d) Explain the rule of Garner v Murray. (2 marks)

(e) Name the type of asset used to describe ‘goodwill’. (2 marks)

(Total 25 marks)

2007/4/11/MS Page 9 of 14

MODEL ANSWER TO QUESTION 3 Syllabus Topic 2.4: Partnerships

(a) Dr Cr £ £ Premises (110,000-50,000) 60,000 1

Capital: Amy 2/3 40,000 1 Bill 1/3 20,000 1

Vehicles 13,500 1 Stock 1,500 1 Bank 7,500 1

Capital: Charles 22,500 1

Bank (9,000 x ¼) 2,250 1 Capital: Amy (9,000 x ⅔) – 9,000 x ½) 1,500 1 Bill (9,000 x ⅓) – (9,000 x ¼) 750 1

(10 marks)

(b) Amy, Bill and Charles Balance Sheet at 1 July 2011

£ £ Fixed assets Premises 110,000 1 Equipment 15,250 Vehicles 13,500 1 138,750 Current assets Stock 10,000 1 Debtors 7,800 1 1 Bank (550 + 7,500 + 2,250) 10,300 28,100

Creditors falling due within 1 year Creditors .7,150 Net current assets ..20,950 1 of must be labelled 159,700

Capital Accounts Amy (40,000 + 40,000 + 1,500) 81,500 1 of Bill (30,000 + 20,000 + 750) 50,750 1 of Charles 22,500 154,750 1 of

Current Accounts Amy 5,400 1 Bill ( 450) ...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)

(d) Intangible fixed assets (accept noncurrent assets) 1 + 1 (2 marks)

(Total 25 marks)

2007/4/11/MS Page 10 of 14

QUESTION 4

The following information is available from the books of Goodwin Ltd:

At 31 August 2010 At 31 August 2011

£ £ Stock 14,830 17,055 Sales ledger balances: 7,605 Dr ? Dr 205 Cr 295 Cr

For the year ended 31 August 2011 £

Sales 255,340 Purchases 180,060 Sales returns 705 Purchases returns 680 Discounts allowed 655 Discounts received 490 Payments to suppliers 179,300 Receipts from customers 249,800 Bad debts written off 175 Interest charged on customers’ overdue accounts 30 Purchases ledger balance set off against sales ledger balance 305 Refunds to customers 575 All sales and purchases are on credit. REQUIRED (a) Prepare for the year ended 31 August 2011 the:

(i) Sales Ledger Control Account (14 marks)

(ii) 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)

2007/4/11/MS Page 11 of 14

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 7,605 1 Balance b/d 205 1 Sales 255,340 1 Sales returns 705 1 Interest 30 1 Discounts allowed 655 1 Bank (refunds) 575 1 Bank 249,800 1 Balance c/d 295 1 Bad debts 175 1 Contra 305 1 ............ Balance c/d ..12,000 1 263,845 263,845 Balance b/d 12,000 1of Balance b/d 295 1

Must have narrative and amount. (14 marks)

(ii) Syllabus topic 1.1: Advanced Aspects of the Syllabu s for Level 1 (1.1)

Goodwin Ltd Trading Account for the year ended 31 August 2011

£ £ £ Sales 255,340 Sales returns ......705 254,635 1 Less: Cost of sales Opening stock 14,830 Purchases 180,060 Purchases returns ......680 179,380 1 194,210 Less: Closing stock .17,055 177,155 1 Gross profit .77,480 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)

2007/4/11 Page 12 of 14

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.

(ii) Twelve items at a cost of £79 each had been incorrectly included in the stock take, at £97 each.

(iii) A total of £12,900 on one stock sheet had been carried forward as £2,900 to the next stock sheet.

(iv) An item, which had cost £630, was scrapped.

(v) Goods paid for and awaiting collection by a customer had been included in the stock at a valuation of £1,850.

(vi) The last stock sheet, totalling £14,900, had not been included in the stock valuation.

(vii) 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.

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 Deduct £

Original cost of stock 66,550

Item (i) (ii) (iii) (iv) (v) (vi)

(vii) ----------- ----------- -----------

Net adjustment -----------

Revised stock value ----------- (16 marks)

2007/4/11 Page 13 of 14

QUESTION 5 CONTINUED

The accountant of King’s 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 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

Debtors 125,000 Closing stock 65,000 Cash 1,200 Creditors 88,000 Bank overdraft 7,500

REQUIRED (b) Calculate the following ratios to one decimal place, showing your workings and answer.

(i) Net profit (before interest) to sales (ii) Current/Working capital (iii) Liquidity/Acid test (iv) Stock turnover (based on closing stock).

(8 marks)

(c) State the purpose of calculating the current/working capital ratio. (1 mark)

(Total 25 marks)

2003/4/11/MA Page 14 of 14 © Education Development International plc 2011

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 66,550

(i) Reduction to NRV 1 1 1 (9,600 – 3,200 / 2) (3,200)

(ii) Overvaluation 1 1 1 (97 – 79 x 12) (216)

(iii) Stock Sheet error 1 1 (12,900 – 2,900) 10,000

(iv) Scrapped item (630) 1

(v) Customer’s goods (1,850) 1

(vi) Stock sheet total 14,900 1

(vii) Sale or return 1 1 (6,600 - 2,200) ..4,400 . ....... 29,300 (5,896)

Net adjustment 1 of 23,404

Revised stock value 1+1of 89,954 (16 marks)

(b) Syllabus Topic 10: Calculation and interpretation o f ratios (10.4.3), (10.6.3), (10.7.2) and (10.8.4)

Ratio workings Answer

(i) Net profit (before interest) to sales 120,500 + 4,500 x 100 1 22.7% 1 550,000

(ii) Current/Working capital 125,000 + 65,000 + 1,200 1 2:1 1 88,000 + 7,500

(iii) Liquidity/Acid Test 125,000 + 1,200 1 1.3:1 1 88,000 + 7,500

(iv) Stock turnover 200,000 1 3.1 times 1 65,000

(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 Page 14 of 14 © Education Development International plc 2011

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