Accounting

Level 3

Model Answers
Series 4 2007 (Code 3001)

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Accounting Level 3
Series 4 2007

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Accounting Level 3
Series 4 2007
QUESTION 1 Pang, Tile and Gore are in partnership sharing profits/losses in the ratio 3:2:1 respectively, after allowing for a salary of 5,000 per year to Tile. From 1 July 2006, Pang became entitled to a salary of 3,000 per year. After calculating the draft net profit for 2006, the following matters were discovered: (i) Closing stock had been included in the accounts as 17,200, when it should have been recorded as 12,700

(ii) On 31 December 2006, Pang had taken over a vehicle (net book value 4,800) at an agreed valuation of 5,000. This had been recorded by increasing sales and debtors by 5,000. The partnership does not record accumulated depreciation separately (iii) No entries had been made in respect of accrued gas expense of 400 and prepaid rent expense of 720 (iv) In December 2006, a debt of 350, written off during 2006 as bad, was unexpectedly received in full. This had been recorded by debiting the bank and crediting the debtor, but no other entry had been made. AFTER adjusting for the matters above, the net profit of the partnership for 2006 was 84,500. REQUIRED Prepare: (a) journal entries, (without narratives), showing how matters (i) to (iv) above were corrected in the books of the partnership. (7 marks) (b) a statement showing the draft net profit of the partnership for 2006 BEFORE the corrections shown in (a) above. (5 marks) (c) the Appropriation Account of the partnership for the year ended 31 December 2006. (4 marks) Giving a salary to Pang will increase his motivation and increase the amount of profit available for Tile and Gore. REQUIRED (d) Briefly discuss the above statement. (4 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 1 (a) (i) (ii) Cost of goods sold/Trading (17,200 12,700) Stock Sales/Trading Debtors Pang Vehicles Profit and Loss/Profit on disposal (iii) Profit and loss/Gas Accruals Prepayments Profit and loss/Rent (iv) Debtors Profit and Loss/Bad Debts (b) Draft net profit (R) (i) Stock overvalued (ii) Sales reduction Profit on disposal (iii) Gas accrual Rent prepayment (iv) Bad debt recovered Adjusted net profit (c) Pang, Tile and Gore Appropriation Account for year ended 31 December 2006 Net profit Less salary: Balance: Pang (.5 x 3,000) Tile Pang (3/6) Tile (2/6) Gore (1/6) 1,500 5,000 39,000 26,000 13,000 84,500 6,500 78,000 78,000 + 200 400 720 350 1,270 9,900 (8,630) 84,500 400 400 720 720 350 350 4,500 5,000 93,130 DR 4,500 5,000 5,000 5,000 4,800 200 CR 4,500

(d) Partners salaries are supposed to reward the time spent by each partner running the business. The motivation should be provided by the profit shares, of which Pangs is the largest. Unless annual profits increase by more than 3,000, Tile and Gore will actually receive less.

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QUESTION 2 The Consolidated Balance Sheet of Didcott plc for the year ended 31 December 2006, prepared by an inexperienced accountant, was as follows: 000 000 FIXED ASSETS Tangible Land and Buildings 2,000 Plant and Machinery 400 Intangible Goodwill 700 3,100 CURRENT ASSETS Stock Debtors Bank LIABILITIES: Amounts payable within one year Creditors and Accruals NET CURRENT ASSETS CAPITAL AND RESERVES Share Capital in 1 Ordinary Shares Profit and Loss MINORITY INTEREST 512 278 14 804 260 544 3,644 000 1,500 1,820 3,320 324 3,644

Didcott plc purchased 80% of the Ordinary Shares in Parkway Ltd (its only subsidiary) on 1 January 2003. Goodwill arising on the consolidation was 1,000,000 and is being written off evenly over 10 years. The following matters require attention: (1) No goodwill on consolidation was written off in respect of 2006 (2) No depreciation has been provided in respect of plant and machinery for 2006. Depreciation of 30,000 is necessary in the accounts of Didcott plc and 20,000 in the accounts of Parkway Ltd (3) During 2006, Parkway Ltd sold goods to Didcott plc for 75,000. These goods were invoiced by Parkway Ltd at cost plus 25%. At 31 December 2006 two thirds (by value) of these goods were still in Didcott plcs stock valued at their cost to Didcott (4) It has now been decided to set up a provision for bad debts equal to 2% of Parkway Ltds debtors, which total 200,000 (5) It has been discovered that Didcott plc owed 3,000 for electricity at 31 December 2006 (6) Intercompany indebtedness of 8,000 has been included in both the consolidated debtors and the consolidated creditors. REQUIRED (a) Calculate at 31st December 2006: (i) (ii) the corrected Consolidated Profit and Loss Account balance the corrected Minority Interest balance. (10 marks)

(b) Prepare the corrected Consolidated Balance Sheet of Didcott plc at 31 December 2006. (10 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 2 (a) (i) Corrected Consolidated Profit and Loss Account Balance 000 1,820 (100) (30) (16) (8) (4) (3) 1,659

Balance per question Less Goodwill Depreciation Unrealised profit Bad debt provision Accrual (ii)

(.10 x 1,000) Didcott plc Parkway Ltd (.80 x 20) (.80 x [25/125] x [2/3] x 75) (.80 x 0.025 x 200)

Corrected Minority Interest Balance 000 324 (4) (2) (1) 317

Balance per question Less Depreciation Unrealised profit Bad debt provision

(.20 x 20) (.20 x [25/125] x [2/3] x 75) (.20 x 0.025 x 200)

(b)

Consolidated Balance Sheet of Didcott plc at 31 December 2006 000 FIXED ASSETS Tangible: Land and Buildings Plant and Machinery(400 30 20) Intangible: Goodwill (700 100) CURRENT ASSETS Stock (512 8 2) Debtors (278 4 1 8) Bank CREDITORS Amounts due within 1 year Creditors and Accruals (260 8 + 3) NET CURRENT ASSETS 502 265 14 781 255 526 3,476 000 CAPITAL AND RESERVES Share Capital in 1 Ordinary Shares Profit and Loss MINORITY INTEREST 1,500 1,659 3,159 317 3,476 000 2,000 350 600 2,950

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QUESTION 3 Twyford Ltd began trading on 1 April 2005, but decided to prepare its year end accounts at 31 December each year. The following information relates to the first 21 months of operation: Nine months ended 31 December 2005 126,000 104,000 12,100 15,200 13,900 Year ended 31 December 2006 137,000 110,000 12,300 19,600 14,600

Sales Cost of goods sold Closing stock Closing trade debtors Closing trade creditors

All sales and purchases were on credit. REQUIRED (a) Calculate, to the nearest whole day and in respect of EACH of the two accounting periods, the following ratios: (i) stock turnover period (ii) debtors collection period (iii) creditors settlement period.

(10 marks)

It is often stated that companies should minimise the time that they take to collect money from debtors and maximise the time that they take to pay their creditors. REQUIRED (b) Give two advantages and two disadvantages of minimising the time taken to collect debts. (c) Give two advantages and two disadvantages of maximising the time taken to pay creditors. (5 marks) (5 marks)

(Total 20 marks)

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MODEL ANSWER TO QUESTION 3 (a) (i) 31 December 2005 STOCK TURNOVER 12,100 x 275 104,000 = 32 days (ii) DEBTORS COLLECTION PERIOD 15,200 x 275 126,000 = 33 days (ii) CREDITORS SETTLEMENT PERIOD 13,900 x 275 104,000 + 12,100 = 33 days (b) Minimising time taken to collect debtors Advantages improving cash flow reducing possibility of bad debts Disadvantages damaging relationship with customers may have to offer discounts (c) Maximising time taken to pay creditors Advantages improving cash flow minimising interest charges Disadvantages damaging relationship with suppliers missing out on discounts for prompt payment 14,600 x 365 110,000 + 12,300 12,100 = 48 days 19,600 x 365 137,000 = 52 days 12,300 x 365 110,000 = 41 days 31 December 2006

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QUESTION 4 Reading Ltd imports model trains from China, paints them and puts them in attractive boxes before selling them to retail shops. The company imports three different models, whose financial details are as follows: STEAM per train Purchase price before trade discount Import taxes Trade discount received Settlement discount received Painting Boxes Carriage outwards Carriage inwards Selling costs Selling price Trains in stock at 30 June 2007 5.20 0.52 0.78 0.26 1.40 0.60 0.50 0.30 0.40 6.10 UNITS 340 DIESEL per train 5.90 0.59 0.89 0.30 1.20 0.70 0.55 0.20 0.35 11.30 UNITS 410 ELECTRIC per train 7.20 0.72 1.04 0.36 1.10 0.40 0.60 0.22 0.60 10.90 UNITS 380

All trains in stock had been boxed, ready for dispatch. REQUIRED (a) Calculate the amount which should appear in Reading Ltds Balance Sheet at 30 June 2007 in respect of stock. (10 marks) Reading Ltd purchased a new painting machine on 1 July 2006 for 10,000. This is expected to last 5 years and have a residual value of 2,000. REQUIRED (b) Calculate, to the nearest , the depreciation charge for the painting machine for each of the 5 years ending 30 June 2007 to 2011, using each of the following methods: (i) straight line (ii) reducing balance at a rate of 50% per annum (iii) sum of the years digits. Most companies have their stocks counted at their year end. REQUIRED (c) Give three reasons why it may also be beneficial to inspect and record fixed assets at the year end. (3 marks) (Total 20 marks)

(7 marks)

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MODEL ANSWER TO QUESTION 4 (a) Reading Ltd Cost Purchase price Import taxes Trade discount received Painting Boxes Carriage inwards Excluding settlement discount Net realisable value Selling price Carriage outwards Selling costs Lower of cost and NRV 6.10 (0.50) (0.40) 5.20 5.20 Steam trains Diesel trains Electric trains 11.30 (0.55) (0.35) 10.40 7.70 (340 x 5.20) (410 x 7.70) (380 x 8.60) 10.90 (0.60) (0.60) 9.70 8.60 1,768 3,157 3,268 8,193 Stock value at 30 June 2007 STEAM /unit 5.20 0.52 (0.78) 1.40 0.60 0.30 7.24 DIESEL /unit 5.90 0.59 (0.89) 1.20 0.70 0.20 7.70 ELECTRIC /unit 7.20 0.72 (1.04) 1.10 0.40 0.22 8.60

Stock Value

(b) (i) Straight line method each year 5,000 2,500 1,250 625 313 2,667 2,133 1,600 1,067 533 1,600 (10,000 2,000) / 5 (ii) Reducing balance method 2007 2008 2009 2010 2011 10,000 x 0.5 5,000 x .5 2,500 x .5 1,250 x .5 625 x .5

(iii) Sum of the years digits method 2007 2008 2009 2010 2011 (c) (5/15) x (4/15) x (3/15) x (2/15) x (1/15) x (10,000 2,000) (10,000 2,000) (10,000 2,000) (10,000 2,000) (10,000 2,000)

Reasons for inspecting fixed assets at the year end (i) to check that fixed assets recorded still exist (ii) to check that their condition is such that their estimated lifetime and residual value are appropriate (iii) to check that all fixed assets have been recorded

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QUESTION 5 The Balance Sheets of Cholsey Ltd at 31 December 2005 and at 31 December 2006 were as follows: 2005 FIXED ASSETS Land and buildings Plant and machinery Fixtures and fittings CURRENT ASSETS Stock Debtors Bank CREDITORS: Amounts due within 1 year Creditors Bank overdraft NET CURRENT ASSETS LESS CREDITORS: Amounts due after 1 year 10% Debentures (issued 1 Jan 2006) 12,327 12,417 4,176 28,920 31,200 31,200 (2,280) 58,783 58,783 CAPITAL AND RESERVES Ordinary Shares 1 each Share premium Revaluation (related to land and buildings) General reserve Profit and Loss The following information is also available: (1) The only sale of fixed assets during 2006 was of plant and machinery, with a net book value of 780, which was sold for 1,200 (2) Creditors at 31 December 2006 include 1,200 owing for the purchase of fittings (3) Depreciation charged in respect of 2006 was: Land and buildings Plant and machinery Fixtures and fittings 380 2,300 3,230 10,000 12,000 20,000 16,783 58,783 28,400 18,927 13,736 61,063 17,986 15,812 33,798 35,200 7,163 42,363 (8,565) 77,036 5,000 72,036 30,000 12,000 12,400 17,636 72,036 2006 42,300 31,200 12,101 85, 601

(4) A bonus (capitalisation) issue of shares was made from the general reserve during 2006 (5) The net profit for the year ended 31 December 2006 was 4,800 and a dividend was proposed and paid during the year. REQUIRED Prepare; for the year ended 31 December 2006: (a) A statement reconciling the net operating profit to the net cash inflow from operating activities. (b) The Cash Flow Statement of Cholsey Ltd in accordance with FRS 1 (revised). (8 marks) (12 marks) (Total 20 marks) 3001/4/07/MA Page 11 of 15

MODEL ANSWER TO QUESTION 5 (a) Reconciliation Net operating profit Depreciation Profit on disposal Increase in stock Increase in debtors Increase in creditors Net cash inflow from operating activities (b) Cholsey Ltd Cash Flow Statement for the year ended 31 December 2006 Net cash inflow from operating activities Returns on investment and servicing of finance Interest paid Capital expenditure Purchases of fixed assets (1,880* + 15,353** + 395***) Sale of fixed assets Net cash outflow from capital expenditure (16,783 + 4,800 17,636) Equity dividends paid Financing Issue of debentures (4,176 + 7,163) Decrease in cash * Purchase of land and buildings ** Purchase of plant and machinery *** Purchase of fixtures and fittings 4,536 (500) (17,628) 1,200 (16,428) (3,947) 5,000 (11,339) (4,800 + [.10 x 5,000]) (380 + 2,300 + 3,230) (1,200 780) (17,986 12,327) (15,812 12,417) (35,200 1,200 31,200) 5,300 5,910 (420) (5,659) (3,395) 2,800 4,536

(42,300 + 380 28,400 12,400) = 1,880 (31,200 + 2,300 + 780 18,927) = 15,353 (12,101 + 3,230 13,736 1,200) = 395

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QUESTION 6 Banbury is a retailer of cabinets with a head office in Southam. On 1 January 2006, he opened a branch in Leamington. He set up the following system for the branch: 1. 2. 3. All double entry records would be kept in the head office books Cabinets, all purchased by head office, would be invoiced to Leamington at a selling price set to earn a gross profit on sales of 20% When purchase prices fell, the value of the existing stock would be reduced to reflect this fall.

During the year ended 31 December 2006, the following occurred in relation to the Leamington branch: (1) Head office purchased 1,200 cabinets for 120 each in the first nine months, and sent 90% of them to the Leamington branch (2) Head office purchased 400 cabinets for 100 each in the last three months, and sent 80% of them to the Leamington branch (3) Branch sales were 1,000 cabinets in the first nine months and 240 cabinets in the last three months (4) Faulty cabinets returned to head office totalled 60 in the first nine months, and 40 in the last three months (5) Head office made the following payments on behalf of the Leamington branch: 4,200 rent for the first fifteen months 20 per week for sundry expenses 90 per week for staff salaries 1,750 per month for the Branch Managers salary 10% of salaries to a pension fund for staff and manager (6) Staff were entitled to a commission of 1% of sales revenue. The manager did not share in this (7) No stock was lost or damaged during 2006. REQUIRED (a) Prepare the following Accounts, in respect of the Leamington branch of Banbury, for the year ended 31 December 2006, as they would appear in the head office books: (i) Branch Stock (ii) Branch Stock Adjustment (iii) Branch Profit and Loss.

(18 marks) (2 marks) (Total 20 marks)

(b) State two reservations that you might have about the arrangements for the commission.

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MODEL ANSWER TO QUESTION 6 (a) Branch stock account Debtors/Bank (1,000 x 150) 129,600 Debtors/Bank (240 x 125) 32,400 Goods sent to branch (60 x 120) 32,000 Branch stock adjustment (60 x 30) 8,000 Goods sent to branch (40 x 100) Branch stock adjustment (40 x 25) Profit and loss (1,080 1,000 60)(120 100) Branch stock adjustment (20 x 20 x .25) Closing balance (1,080 + 320 1,240 100)(125) 202,000 Branch stock adjustment account 1,800 Branch stock 1,000 Branch stock 100 36,000* 1,500 40,400

Goods sent to branch (1,200 x .90 x 120) Branch stock adjustment (1,200 x .90 x 30) Goods sent to branch (400 x .80 x 100) Branch stock adjustment (400 x .80 x 25)

150,000 30,000 7,200 1,800 4,000 1,000 400 100 7,500 202,000 32,400 8,000

Branch stock Branch stock Branch stock Profit and loss Closing balance (60 x 25)

40,400

(1000 X 30) + (240 x 25)

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MODEL ANSWER TO QUESTION 6 CONTINUED Branch profit and loss account 400 Branch stock adjustment 3,360 1,040 4,680 21,000 2,568 1,800 1,152 36,000

36,000

Branch stock written down Rent (4,200 x 12/15) Sundry expenses (20 x 52) Staff salaries (90 x 52) Managers salary (1,750 x 12) Pension fund (25,680 x .10) Commission (180,000 x .01) Net profit (b) Reservations about commission

36,000

seems strange to exclude manager, who bears the most responsibility for the success, or otherwise, of the branch staff are rewarded, even if the net profit is poor (or even a loss) is 1% sufficient to motivate?

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Education Development International plc 2007