Certificate in Accounting Level 2/series 3-2009

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LCCI International Qualifications

Certificate in Accounting Level 2

Model Answers
Series 3 2009 (3012)

For further information contact us:

Tel. +44 (0) 8707 202909 Email. [email protected] www.lcci.org.uk

Certificate in Accounting
Series 3 2009

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 2009 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

Page 1 of 12

QUESTION 1 Caen Ltd started business on 1 May 2009 buying and selling a single product. Details of purchases and sales during May 2009 were as follows: Date 1 8 15 16 18 21 25 31 REQUIRED (a) Calculate, for Caen Ltd, the total value of closing stock at 31 May 2009 using each of the following stock pricing methods: (i) (ii) FIFO periodic weighted average cost (recalculated at the end of each month and correct to 2 decimal places) (iii) perpetual weighted average cost (recalculated after each purchase and correct to 2 decimal places). (16 marks) (b) Calculate, for Caen Ltd, the gross profit for May 2009 using the FIFO method of valuing stock. (4 marks) (c) State whether each of the following costs should be included when calculating the cost of finished goods stock for a manufacturer: (i) (ii) (iii) (iv) (v) Carriage in Carriage out Storage Depreciation of factory machinery Marketing salaries. (5 marks) (Total 25 marks) Transaction Purchase Purchase Purchase Sale Purchase Purchase Purchase Sale Litres 70 50 40 100 50 60 40 80 Purchase Price (per litre) £ 19.00 19.50 20.00 20.25 20.00 20.50 38.00 Selling Price (per litre) £

36.00

For each item, state only ‘yes’ or ‘no’.

3012/3/09/MA

Page 2 of 12

MODEL ANSWER TO QUESTION 1 (a) (i) FIFO Purchases (70 + 50 + 40 + 50 + 60 + 40) Sales (100 + 80) Closing stock 40 litres at 20.50 60 litres at 20.00 ∴ 30 litres at 20.25 130 (ii) Periodic Weighted Average Cost Purchases 70 x 19.00 50 x 19.50 40 x 20.00 50 x 20.25 60 x 20.00 40 x 20.50 Litres 310 180 130 £ 820.00 1,200.00 607.50 2,627.50

£ 1,330.00 975.00 800.00 1,012.50 1,200.00 820.00 6,137.50 = = 19.80 £2,574



Average cost Stock value

= =

6,137.50 ÷ 310 130 x 19.80

(iii) Perpetual Weighted Average Cost Litres Purchase Purchase Balance Purchase Balance Cost of goods sold Balance Purchase Balance Purchase Balance Purchase Balance Cost of goods sold ∴ Stock value 70 50 120 40 160 100 60 50 110 60 170 40 210 80 130 Price £ 19.00 19.50 19.21 20.00 19.41 19.41 19.41 20.25 19.79 20.00 19.86 20.50 19.98 19.98 19.98 Value £ 1330.00 975.00 2305.00 800.00 3105.00 1941.00 1164.00 1012.50 2176.50 1200.00 3376.50 820.00 4196.50 1598.40 2598.10

∴ ∴

∴ ∴ ∴

(b) Gross Profit (FIFO method) Sales [(100 x 36) + (80 x 38)] – Purchases 6137.5 + Stock 2,627.5 = 6,640.0 – 6,137.5 + 2,627.5 = (c) (i) Yes (ii) No (iii) No (iv) Yes (v) No £3,130

3012/3/09/MA

Page 3 of 12

QUESTION 2 On 1 January 2006 Quorn Ltd purchased 75% of the shares in Ware Ltd for £780,000. At that time the retained profit of Ware Ltd was £300,000. Ware Ltd’s share capital consists of 1,000,000 Ordinary Shares of £0.50 each and retained profit is its only reserve. The summarised Profit and Loss Accounts of the two companies for the year ended 31 December 2008 were as follows: Quorn Ltd £000 £000 2,700 1,350 1,350 370 140 510 840 75 915 270 645 380 1,025 Ware Ltd £000 £000 1,000 470 530 150 80 230 300 300 100 200 540 740

Turnover Cost of goods sold Gross profit Distribution costs Administrative expenses Net profit Dividend from Ware Ltd Dividends paid Retained profit for year Retained profit brought forward Retained profit carried forward Other Information

(1) Goodwill is amortised evenly over 10 years (2) During the year ended 31 December 2008 Quorn Ltd sold goods, which had cost Quorn Ltd £70,000, to Ware Ltd for £120,000. At 31 December 2008 40% of the value of these goods remained in Ware Ltd’s stock. REQUIRED Calculate: (a) The goodwill arising on the acquisition of Ware Ltd by Quorn Ltd on 1 January 2006. (4 marks) (b) The consolidated turnover and consolidated cost of goods sold for the Quorn Ltd group for the year ended 31 December 2008. (8 marks) (c) The retained profit brought forward of the Quorn Ltd group at 1 January 2008. (5 marks) (d) The goodwill appearing in the Balance Sheet of the Quorn Ltd group at 31 December 2008. (2 marks) Dividends are often paid by subsidiary companies. In this case, Ware Ltd has paid a dividend of £100,000. REQUIRED (e) Explain how this dividend has affected: (i) (ii) the minority shareholders of Ware Ltd the consolidated Profit and Loss Account of the Quorn Ltd group for the year ended 31 December 2008. (2 marks)

3012/3/09/MA

Page 4 of 12

QUESTION 2 CONTINUED Holding companies may acquire subsidiary companies for many reasons. An example would be to increase market share. REQUIRED (f) Give two other reasons for the acquisition of subsidiary companies. (4 marks) (Total 25 marks)

3012/3/09/MA

Page 5 of 12

MODEL ANSWER TO QUESTION 2 (a) Goodwill at Date of Acquisition Cost of acquisition Less Share capital (1,000 x 0.5) Retained profits

£000 500 300 800 x 0.75

£000 780 600 180

(b) Consolidated Turnover Quorn Ltd Ware Ltd Less Inter company sales

£000 2,700 1,000 3,700 120 3,580 £000 1,350 470 20 1,840 120 1,720

Consolidated Cost of Goods Sold Quorn Ltd Ware Ltd Unrealised profit [(120 – 70) x 0.40] Less Inter company purchases

(c) Retained Profit Brought Forward Quorn Ltd Ware Ltd [(540 – 300) x 0.75] Less Goodwill amortisation (180 x 0.10 x 2)

£000 380 180 560 36 524

(d) Goodwill at 31 December 2008 At acquisition Less amortisation (180 x 0.10 x 3)

£000 180 54 126

(e) (i)

The minority shareholders will have received £25,000, which has reduced the minority interest in the consolidated Balance Sheet. (ii) The dividend will have no effect on the consolidated profit and loss account. The £75,000 paid to the holding company will cancel out with the £75,000 received by the holding company. The £25,000 will be part of the minority interest deducted from the consolidated profit. To reduce competition, to acquire good management, to gain control over supplies, etc.

(f)

3012/3/09/MA

Page 6 of 12

QUESTION 3 Bodo Ltd manufactures and sells three products, whose selling prices and variable costs per unit are as follows: D £ 5.00 2.40 E £ 2.60 1.40 F £ 6.00 2.80

Selling price Variable cost The current annual sales volumes are: D 30,000 units, E 16,000 units,

F 12,000 units.

Bodo Ltd is currently breaking even. REQUIRED (a) Calculate Bodo Ltd’s annual fixed costs. (7 marks) It has been suggested that, if product E was discontinued, the annual sales volume of D would increase by 20% and the annual sales volume of F would increase by 5%. No fixed costs would, however, be saved. REQUIRED (b) Calculate whether or not, on financial grounds, this suggestion should be adopted. (6 marks) Alternatively it has been estimated that if Bodo Ltd entered into a contract to spend £15,000 per year on advertising, annual sales and selling prices would be as follows: D E F 40,000 units at £4.80 18,000 units at £2.40 13,000 units at £6.00

Both variable costs per unit and other annual fixed costs would remain the same. REQUIRED (c) Calculate the estimated annual profit of Bodo Ltd resulting from the advertising expenditure and selling price cuts, and advise the company as to whether or not they would be worthwhile. (9 marks) (d) State two possible disadvantages of spending £15,000 per year on advertising. (3 marks) (Total 25 marks)

3012/3/09/MA

Page 7 of 12

MODEL ANSWER TO QUESTION 3 (a) Annual Fixed Costs As Bodo Ltd is breaking even the total contributions from the three products must equal the fixed costs: £ Contribution from - D 30,000 (5.00 – 2.40) = 78,000 E 16,000 (2.60 – 1.40) = 19,200 F 12,000 (6.00 – 2.80) = 38,400 135,600 (b) Effect of Discontinuing Product E Contribution from - D 0.20 x 30,000 (5.00 – 2.40) = F 0.05 x 12,000 (6.00 – 2.80) = E all contribution lost £ 15,600 1,920 17,520 (19,200) (1,680)



Suggestion should not be adopted £ 96,000 18,000 41,600 155,600 135,600 20,000 15,000 5,000

(c) Effect of Advertising on Profit Contribution from - D 40,000 (4.80 – 2.40) = E 18,000 (2.40 – 1.40) = F 13,000 (6.00 – 2.80) = Less other fixed costs Less advertising Revised profit Advertising worthwhile as the profit was originally zero



(d) Disadvantages Outcome uncertain Contract means Bodo Ltd is committed to an additional fixed cost of £15,000 per year

3012/3/09/MA

Page 8 of 12

QUESTION 4 Following are the summarised Balance Sheets of Diss Ltd at 31 December: 2007 Land and buildings - cost - acc dep. Machinery - cost - acc dep. Vehicles - cost - acc dep. Investments - cost Stock Debtors Bank £000 800 112 430 170 150 80 217 380 72 £000 688 260 70 490 1,508 669 2,177 £000 950 200 47 1,197 730 250 2,177 2008 £000 £000 800 120 680 620 191 429 150 90 60 470 1,639 251 320 147 718 2,357 £000 £000 1,100 350 124 1,574 500 283 2,357

£000 Ordinary shares of £1 Share premium Retained earnings 10% Debentures Bank loan Creditors Final dividend Notes relating to 2008 (1) (2) (3) (4) (5) (6) 700 30 220 30

500 247 36

Machinery, costing £80,000, was sold for £31,000, resulting in a loss of £12,000 Some debentures were redeemed at par on 31 December The bank loan was repaid on 1 January The investments sold during the year produced a profit of £9,000 Investment income for the year, received during the year, was £8,000 An interim dividend of £14,000 was paid in June.

REQUIRED For the year ended 31 December 2008 in respect of Diss Ltd: (a) Calculate the operating profit. (5 marks) (b) Prepare the Reconciliation of Operating Profit to Net Cash Inflow/Outflow from Operating Activities. (10 marks) (c) Prepare a Cash Flow Statement in accordance with FRS1 (revised). No other notes to the cash flow statement are required. (10 marks) (Total 25 marks)

3012/3/09/MA

Page 9 of 12

MODEL ANSWER TO QUESTION 4 (a) Operating Profit Increase in retained earnings (124 – 47) Interim dividend Final dividend Interest on debentures (0.10 x 700) Investment income

£000 77 14 36 70 197 8 189

(b) Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities £000 Operating profit Add Depreciation – Land and buildings (120 – 112) 8 Machinery [191 – 170 + (80 – 31 – 12)] 58 Vehicles (90 – 80) 10 Loss on machinery disposal Reduction in debtors (380 – 320) Increase in creditors (247 – 220) Profit on investment disposal Increase in stock (251 – 217) Net Cash Inflow from Operating Activities Less 9 34

£000 189 76 12 60 27 364 43 321

(c) Diss Ltd – Cash Flow Statement for the year ended 31 December 2008 £000 Net Cash Inflow from Operating Activities Returns on Investment and Servicing of Finance Investment income received 8 Debenture interest paid (70) Capital Expenditure and Financial Investment Purchase of machinery (620 – 430 + 80) (270) Sale of machinery 31 Sale of investments (490 – 470 + 9) 29 Equity Dividends Paid (30 + 14) Net Cash Inflow before Financing Financing Issue of shares [(1,100 – 950) + (350 – 200)] 300 Debenture redemption (700 – 500) (200) Repayment of bank loan (30) Net Increase in Cash (147 – 72)

£000 321 (62)

(210) (44) 5

70 75

3012/3/09/MA

Page 10 of 12

QUESTION 5 Mars and Ziggy were in partnership sharing profits/losses in the ratio 3:2 respectively after allowing for a salary of £3,000 per year for Ziggy. On 1 July 2008, Spider joined the partnership and from that date profits were shared equally, after allowing for a salary of £6,200 per year for Mars, and no salary for either Ziggy or Spider. Mars and Ziggy did not draw up accounts at 30 June 2008, but the Trading and Profit and Loss Account for the year ended 31 December 2008 was as follows: £ Sales Less Cost of goods sold Gross profit Less Light and heat Rent Depreciation Salaries Selling expenses General expenses Net profit Notes relating to 2008 (1) Sales were twice as high in each of the months January, February and March as they were in each of the months in the rest of the year (2) The gross profit to sales ratio was 20% to 31 March and 25% for the rest of the year (3) Light and heat and general expenses accrued evenly throughout the year (4) Rent increased by 50% on 1 May (5) Depreciation was charged at 20% per year on a reducing balance basis up to 30 June and at 30% per year on the same basis for the rest of the year. The only change in fixed assets was a purchase for £12,000 on 1 July. The book value of fixed assets at 30 June was £54,000 (6) Salaries accrued evenly over the year except that Spider, the new partner, was an employee until 30 June, earning an annual salary of £18,000 (7) Selling expenses varied directly in proportion to sales. REQUIRED Set out the Trading, Profit and Loss and Appropriation Accounts of the partnership in columnar format for the period 1 January to 30 June 2008 and for the period 1 July to 31 December 2008. Assume that all months have an equal number of days. (Total 25 marks) £ 1,500,000 1,155,000 345,000

14,000 32,000 15,900 69,000 30,000 20,000

180,900 164,100

3012/3/09/MA

Page 11 of 12

MODEL ANSWER TO QUESTION 5 Trading, Profit and Loss and Appropriation Accounts 6 months ended 6 months ended 30 June 2008 31 December 2008 £ £ £ £ Sales [W1] (3:2) 900,000 600,000 Less Cost of goods sold (R) 705,000 450,000 Gross profit [W2] 195,000 150,000 Less Light and heat (1:1) 7,000 7,000 Rent [W3] (7:9) 14,000 18,000 Depreciation [W4] 6,000 9,900 Salaries [W5] 39,000 30,000 Selling expenses (3:2) 18,000 12,000 General expenses (1:1) 10,000 94,000 10,000 86,900 Net profit 101,000 63,100 Salary - Ziggy (3,000 x 0.5) 1,500 Mars (6,200 x 0.5) 3,100 99,500 60,000 Balance - Mars (0.6 x 99,500) 59,700 Ziggy (0.4 x 99,500) 39,800 99,500 Balance - Mars (0.333 x 60,000) 20,000 Ziggy (0.333 x 60,000) 20,000 Spider (0.333 x 60,000) 20,000 60,000

[W1] Weighting

2+2+2+1+1+1=9 1+1+1+1+1+1=6 6 ÷ 9 x 0.20 x 900,000 = 3 ÷ 9 x 0.25 x 900,000 = 0.25 x 600,000 =

∴ 3:2
120,000 75,000 195,000 150,000 345,000

[W2] January to March April to June July to December

[W3] Weighting

1 + 1 + 1 + 1 + 1.5 + 1.5 =7 1.5 + 1.5 + 1.5 + 1.5 + 1.5 + 1.5 = 9

∴ 7:9
54,000 6,000 60,000 54,000 12,000 66,000 9,900 56,100

[W4] January to June NBV at 30 June (90%) Charge to 30 June (20% x 0.5 = 10%) NBV at 1 January (100%) July to December NBV at 1 July Purchase 1 July Charge 1 July to 31 Dec (30% x 0.5 = 15%) Check : 6,000 + 9,900 = 15,900 [W5] January to June Spider Others [(69,000 – 9,000) x 0.5] July to December

9,000 30,000 39,000 30,000 69,000

3012/3/09/MA

Page 12 of 12

EDI International House Siskin Parkway East Middlemarch Business Park Coventry CV3 4PE UK Tel. +44 (0) 8707 202909 Fax. +44 (0) 2476 516505 Email. [email protected] www.ediplc.com

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