AC1025 ZA d1

~~AC1025 ZA d0

This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON

AC1025 ZA

BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas in Economics and Social Sciences and Access Route

Principles of Accounting

Tuesday, 14 May 2013 : 10.00am to 1.15pm

Candidates should answer FOUR of the following SEVEN questions: QUESTION 1 of Section A, QUESTION 2 of Section B, ONE question from Section C and ONE further question from either Section B or C. All questions carry equal marks. Workings should be submitted for all questions requiring calculations. Any necessary assumptions introduced in answering a question are to be stated. Extracts from compound interest tables are given after the final question on this paper. 8-column accounting paper is provided at the end of this question paper. If used, it must be detached and fastened securely inside the answer book. A calculator may be used when answering questions on this paper and it must comply in all respects with the specification given with your Admission Notice. The make and type of machine must be clearly stated on the front cover of the answer book.

PLEASE TURN OVER © University of London 2013 UL13/0001

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SECTION A Answer question 1 from this section. 1.

(a) After stocktaking for the year ended 31 May 2013 had taken place, the closing inventory of Chuzzlewit Ltd was aggregated to a figure of £87,612. During the course of the audit that followed, the following facts were discovered: i.

ii. iii.

iv. v. vi.

Some goods had been damaged and were not suitable for sale in the normal course of business. They could, however, be sold for £110 as spares after repairs estimated at £40 had been carried out. They had originally cost £200 and were in inventory at this value. Chuzzlewit Ltd had received goods costing £2,010 during the last week of May 2013 but because the invoice did not arrive until June 2013, they have not been included in inventories. Invoices totalling £638 arrived during the last week of May 2013 (and were included in the purchases and in trade payables) but, because of transport delays, the goods did not arrive until late June 2013 and were not included in closing inventory. Portable generators on hire from another company at a charge of £347 were included, at this figure, in inventories. Goods costing £418 sent to customers on a sale or return basis had been included in inventories at their selling price, £602. Goods costing £1,300 were included in inventory. These goods were half of a consignment purchased from an overseas supplier and transport cost of £130 and import duties of £260 had been incurred for the entire consignment, but not included in cost.

Required: Prepare a schedule amending the inventory figure as at 31 May 2013. State your reason for each amendment or for not making an amendment. (6 marks) (b) Companies often describe their employees as their greatest asset, but employees do not appear as an asset on the statement of financial position of almost all companies. Required: i.

Define assets and explain the difference between current and non-current assets. (4 marks)

ii. Briefly explain, using the definition in i., why employees do not usually appear as assets. (2 marks) (c) Explain the term ‘Cost-Volume-Profit analysis’ and explain the assumptions which normally apply to such analysis. Include in your answer explanations of break-even and margin of safety. (6 marks) (d) Dombey Ltd produces a product called the Zube. The standard quantity of raw material to produce one batch of Zube is 250 kg with a standard price of £5 per kg. During April the actual material used for five batches was 1,100 kg with an actual cost of £5,720. Required: i.

Give the formula form and compute the materials price and materials efficiency (usage) variances for the Zube for April and suggest one possible reason for each of the variances. (4 marks)

ii. Briefly discuss the setting of standards for budgetary control based on: I ideal standards, II attainable standards, and III current standards. © University of London 2013 UL13/0001

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(3 marks)

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SECTION B Answer question 2 and not more than one further question from this section.

2.

The following is the trial balance of Twist Ltd. at 31 December 2012: £ Authorised, issued and called-up capital: 100,000 equity shares of £1 each 60,000 7% redeemable preference shares of 50p each Freehold buildings: cost Freehold buildings: accumulated depreciation Plant and machinery: cost Plant and machinery: accumulated depreciation Development costs (cost £10,000) Interim dividend paid Provision for doubtful debts Wages and salaries Bad debts written off Goodwill Listed investments Purchases / Sales Formation expenses Directors’ remuneration Returns inwards / outwards Insurances Dividends received Retained earnings Light and heat Audit fee General reserve Share premium 10% debentures Inventories, as at 1 January 2012 Trade receivables / payables Bank

£ 100,000 30,000

150,000 13,000 75,000 12,650 6,600 1,250 860 5,948 656 10,000 4,873 78,493 250 13,000 1,629 596

130,846

1,834 310 3,522

1,520 764 30,900 5,600 30,000 9,436 11,600 £ 371,615

8,450 3,643 £ 371,615

Question continues on next page

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Additional information: 1.

Tax on the profits for the year is estimated at £2,544.

2.

Insurances include £200 for the half-year ended on 31 March 2013.

3.

Electricity for the quarter to 31 January 2012 of £330 has not been accounted for.

4.

The provision for doubtful debts is to be adjusted to 5% of the trade receivables at the end of the year.

5.

The amounts shown in the trial balance for non-current assets (freehold buildings, plant and machinery and development costs) are balances at 1 January 2012. Provision is required for depreciation and amortisation for the year ended 31 December 2012. The Company’s depreciation and amortisation methods are as follows: Freehold buildings: Straight-line over 50 years Plant and machinery: 20% on the reducing balance method Development costs: 10% straight-line

6.

The value of goodwill has not fallen below the value recorded in the trial balance.

7.

Formation expenses are to be written off against the general reserve.

8.

Inventory at 31 December 2012 was £12,456.

9.

The preference share dividends and the debenture interest are outstanding at the end of the year.

10.

It is proposed to pay a final dividend on the equity shares of 6.25 pence per share.

11.

The directors have decided to transfer £4,000 to the general reserve.

Required: Prepare Twist Ltd’s: (a)

Income statement for the year ended 31 December 2012.

(14 marks)

(b)

Statement of Changes in equity for the year ended 31 December 2012.

(4 marks)

(c)

Statement of financial position as at 31 December 2012.

(7 marks)

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3.

The following are the financial statements of Jaggers plc for the years ended 30 June 2013 and 2012.

Non-current assets Cost Accumulated depreciation Current assets Inventory Receivables Bank Total assets Current liabilities Bank overdraft Payables Taxation Non-current liabilities Long-term loan Total liabilities Equity Share capital Share premium Retained Earnings Total equity and liabilities

2013 £000

2012 £000

2,190 895 1,295

1,310 500 810

1,500 2,680 4,180 5,475

500 890 60 1,450 2,260

1,810 1,100 280 3,190

680 320 1,000

60 3,250

260 1,260

600 15 1,610 2,225 5,475

400 600 1,000 2,260

Question continues on next page

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Income Statement for the year ended 30 June 2013 £000 Sales Opening inventory Purchases

£000 21,000

500 16,400 16,900 1,500

Closing inventory Cost of sales Gross profit Expenses (including depreciation of £395) Profit before interest and tax Interest Profit before tax Corporation tax Profit for the year

15,400 5,600 3,370 2,230 200 2,030 520 £1,510

Statement of changes in Equity for the year ended 30 June 2013

Balance at 1/7/12

Ordinary Share Capital £000 400

Share Premium £000 -

200

15

Issue of share capital Profit for year Dividends paid Balance at 30/6/13

_______ 600

_______ 15

Retained Earnings £000 600

Total £000 1,000

1,510 (500) ________ 1,610

215 1,510 (500) _______ 2,225

The following information is available: 1.

The additions to non-current assets in the year ended 30 June 2013 cost £930,000 in cash. Noncurrent assets which had orinally cost £50,000 were sold for cash of £20,000; the loss on disposal of these assets of £8,000 is included in expenses on the Income statement.

2.

Payables consists of trade payables and accrued interest. The accrued interest at 30 June 2013 was £20,000 and 2012 was £15,000.

Required: (a)

Prepare a Statement of Cash Flows for the year ended 30 June 2013 for Jaggers plc. (17 marks)

(b)

Evaluate the financial position and performance of Jaggers plc for the year ended 30 June 2013 as shown by the Statement of Cash Flows. (You are not required to calculate any accounting ratios). (8 marks)

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4.

The following are the summarised financial statements of Boffin and Drood. Summarised Statements of Financial Position Boffin £m

Drood £m

790

1,000

1,200 720 190 2,110 2,900

1,800 1,200 3,000 4,000

1,000 500 1,500

1,500 660 2,160

500

-

900 1,400 2,900

1,040 800 1,840 4,000

ASSETS Non-current assets Current assets Inventories Trade receivables Bank Total assets EQUITY AND LIABILITIES Ordinary share capital (£1 each) Retained earnings Capital at end of year Non-current liabilities Loan Current liabilities Trade payables Bank overdraft Total liabilities Total equity and liabilities

Revenue Cost of goods sold Opening inventory Add: Purchases Less: Closing inventory

Summarised Income Statements Boffin £m £m 6,000 1,000 4,760 5,760 (1,200)

£m 7,200

1,500 5,916 7,416 (1,800) (4,560) 1,440 (1,070) (30) 340

Gross profit Overhead expenses Interest Profit for the year

Drood £m

(5,616) 1,584 (1,180) 404

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You are considering investing in a new issue of shares being offered by both companies. In deciding in which company you will invest you have set the following criteria: Profitability: Liquidity: Efficiency: Gearing:

• • • • •

Target return on capital employed of 17% High gross and net profit margin with an acceptable level of asset turnover. Well managed working capital and quick assets. Sound control of inventories, receivables and payables. Low level of gearing.

The share price being suggested for the new investment is Boffin 408p per share and Drood 378p per share. Required: (a)

Evaluate with supporting ratios how well Boffin and Drood meet your investment criteria. (22 marks)

(b)

Calculate the price earnings ratios for Boffin and Drood based on the suggested issue price and evaluate the two potential investments. (3 marks)

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SECTION C Answer one question and no more than one further question from this section. 5.

The CEO of your company has approached you for advice on a special order for a customer that she intends to tender for. She has supplied the following cost estimates: £ 8,000 16,000 12,000 4,000 24,000 64,000

Material P Material S Direct Labour Supervision cost Variable overhead You ascertain the following: 1.

The CEO estimates she has spent time in negotiation valued at £5,000.

2.

Material P is in stock and the original cost is given above. There is no other use for material P, apart from using it on the special order within the factory and it would cost £3,500 to dispose of. Material S would have to be ordered at the cost shown above.

3.

Direct labour costs of £12,000 relate to workers who will be transferred to the special order from another project,in replacement extra labour will need to be recruited to the other project at a cost of £14,000.

4.

Supervision costs have been charged to the project on the basis of 33⅓% of labour costs. Supervision will be carried out by existing staff within their normal duties.

5.

Variable overheads have been charged to the project at the rate of 200% on direct labour.

6.

The project will need machinery that will have no other use to the company apart from the special order. The machinery will have to be purchased at a cost of £20,000 and then disposed of for £10,500 when the special order is completed.

The CEO tells you that the customer is prepared to pay up to a maximum of £60,000 and she has been informed that a competitor is prepared to fulfill the order at that price. Her costing indicates that she cannot charge less than £80,000 and this does not take into consideration the cost of the machine and profit to be taken on the project. Required: (a)

Explain the meaning of the terms incremental cost and committed cost in the context of decision making. (3 marks)

(b)

Cost the project for the CEO, clearly stating how you have arrived at your figures and giving reasons for the exclusion of other figures. (10 marks)

(c)

Explain the key issues you would raise in a report to the CEO comparing her analysis with yours. (6 marks)

(d)

Identify four non-monetary factors that should be taken into account before tendering for this project. (6 marks)

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6.

Nickleby Ltd has incurred expenditure of £5 million over the past three years researching and developing an innovative digital audio-visual teaching system. The system is now fully developed. The directors are now considering which of three mutually exclusive options should be taken to exploit the potential of the new product. The options are as follows: 1.

Nickleby Ltd could manufacture the teaching system itself. This would be a new departure, since the business has so far concentrated on research and development projects. However, the business has manufacturing space available that it currently rents to another business for £100,000 a year. A market research report, for which the business paid £50,000, indicates that the new product has an expected life of five years. Sales of the product during this period are predicted as follows:

Number of units

Predicted sales for the year ended 30 November Year 1 Year 2 Year 3 Year 4 Year 5 8,000 14,000 18,000 12,000 5,000

The selling price per unit will be £3,000 in the first year but will fall to £2,200 for the following three years. In the final year of the product’s life selling price will fall to £2,000 per unit. Variable production costs are predicted to be £1,400 per unit. Fixed production costs (including depreciation) will be £2.4 million a year. Marketing costs will be £2 million a year. Nickleby Ltd would have to purchase plant and equipment costing £9 million and invest £3 million in working capital immediately for production to begin. Nickleby Ltd intends to depreciate the plant and equipment using the straight-line method and based on an estimated residual value at the end of the five years of £1 million. The additional working capital will not be required after the end of year 5. 2.

Nickleby Ltd could agree to another business manufacturing and marketing the product under licence. A multinational business, Squeers plc, has offered to undertake the manufacture and marketing of the product and, in return, will make a royalty payment to Nickleby Ltd of £500 per unit. It has been estimated that the annual number of sales of the system will be 10 per cent higher if the multinational business, rather than Nickleby Ltd, manufactures and markets the product.

3.

Nickleby Ltd could sell the patent rights to Squeers plc for £24 million, payable in two equal instalments. The first instalment would be payable immediately and the second at the end of two years. This option would give Squeers the exclusive right to manufacture and market the new product.

The business has a cost of capital of 10 per cent a year. Assume unless otherwise stated, that cash flows occur at the end of each year. Required: (a)

Calculate the net present value of each of the options available to Nickleby Ltd.

(b)

State what you consider to be the most suitable option and why. Identify and discuss any other factors that Nickleby Ltd should consider before arriving at a decision. (8 marks)

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(17 marks)

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7.

Jarndyce Ltd. produces several products which pass through the two production departments in its factory. These two departments are concerned with filling and sealing operations. There are two service departments in the factory, maintenance and canteen. Predetermined overhead absorption rates, based on direct labour hours, are established for the two production departments. The budgeted expenditure for these departments for the period just ended, including the apportionment of service department overheads, was £110,040 for filling, and £53,300 for sealing. Budgeted direct labour hours were 13,100 for filling and 10,250 for sealing. Service department overheads are apportioned as follows: Maintenance

- Filling - Sealing

70% 30%

Canteen

- Filling - Sealing - Maintenance

60% 32% 8%

During the period just ended, actual overhead costs and activity were as follows:

Filling Sealing Maintenance Canteen

Direct labour £ hours 74,260 12,820 38,115 10,075 25,050 24,375

One of the products made in the period was the W2, details of which are as follows: Direct cost per unit Direct labour hours Unit sales for period

Filling Sealing

= = = =

£24 2 per unit 4 per unit 1,500

Selling price is calculated at 20% mark up on total cost.

Required: (a)

Calculate the overheads absorbed in the period and the extent of the under/over absorption in each of the two production departments. (12 marks)

(b)

Calculate the selling price and profit for the year on sales of product W2.

(c)

State, and critically assess, the objectives of overhead apportionment and absorption. (8 marks)

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(5 marks)

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Extracts from compound interest tables (1) Present value of £1 P

%: Period 1 2 3 4 5

%: Period 1 2 3 4 5

1 0.990 0.980 0.971 0.961 0.951

2

3

4

5

6

7

8

9

10

0.980 0.961 0.942 0.924 0.906

0.971 0.943 0.915 0.888 0.863

0.962 0.925 0.889 0.855 0.822

0.952 0.907 0.864 0.823 0.784

0.943 0.890 0.840 0.792 0.747

0.935 0.873 0.816 0.763 0.713

0.926 0.857 0.794 0.735 0.681

0.917 0.842 0.772 0.708 0.650

0.909 0.826 0.751 0.683 0.621

11

12

13

14

15

16

17

18

19

20

0.901 0.812 0.731 0.659 0.593

0.893 0.797 0.712 0.636 0.567

0.885 0.783 0.693 0.613 0.543

0.877 0.769 0.675 0.592 0.519

0.870 0.756 0.658 0.572 0.497

0.862 0.743 0.641 0.552 0.476

0.855 0.731 0.624 0.534 0.456

0.847 0.718 0.609 0.516 0.437

0.840 0.706 0.593 0.499 0.419

0.833 0.694 0.579 0.482 0.402

7

8

(2) Annuity of £1 %: Period 1 2 3 4 5

%: Period 1 2 3 4 5

1

2

3

4

5

6

9

10

0.990 1.970 2.941 3.902 4.853

0.980 1.942 2.884 3.808 4.713

0.971 1.913 2.829 3.717 4.580

0.962 1.886 2.775 3.630 4.452

0.952 1.859 2.723 3.546 4.329

0.943 1.833 2.673 3.465 4.212

0.935 1.808 2.624 3.387 4.100

0.926 1.783 2.577 3.312 3.993

0.917 1.759 2.531 3.240 3.890

0.909 1.736 2.487 3.170 3.791

11

12

13

14

15

16

17

18

19

20

0.901 1.713 2.444 3.102 3.696

0.893 1.690 2.402 3.037 3.605

0.885 1.668 2.361 2.974 3.517

0.877 1.647 2.322 2.914 3.433

0.870 1.626 2.283 2.855 3.352

0.862 1.605 2.246 2.798 3.274

0.855 1.585 2.210 2.743 3.199

0.847 1.566 2.174 2.690 3.127

0.840 1.547 2.140 2.639 3.058

0.833 1.528 2.106 2.589 2.991

END OF PAPER

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