Book-keeping and Accounts Level 2/Series 4 2008 (2006)

LCCI International Qualifications

Book-keeping and Accounts Level 2

Model Answers Series 4 2008 (2006)

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Book- Keeping and Accounts Level 2 Series 4 2008

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.

© EDI 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 The following balances appeared in the ledger of P Tong plc following the preparation of the Profit & Loss Account for the year ended 31 December 2007: £000 Ordinary shares £0.25 3% £1 preference share capital Interim ordinary dividend paid Preference dividend paid Freehold land and buildings at cost Provision for depreciation of land and buildings Plant and machinery at cost Provision for depreciation of plant and machinery Motor vehicles at cost Provision for depreciation of motor vehicles Fixtures and fittings at cost Provision for depreciation of fixtures and fittings Debtors Creditors Bank Cash in hand Stock Share Premium Prepayments Accruals 8% Loan (repayable 30 June 2012) Loan interest accrued 5% debenture (repayable 31 March 2008) Profit & Loss Account Net profit Revaluation Reserve

£000 12,000 600

560 18 10,400 80 13,880 1,632 3,720 860 3,420 580 5,920 3,840 1,750 260 4,292 2,640 290 262 2,800 112 1,600 8,656 3,880 1,468 42,760

42,760 The directors of P Tong plc have decided to pay a final dividend of £0.04 per ordinary share. REQUIRED (a) Prepare the Appropriation Account for the year ended 31 December 2007. (b) Prepare, in vertical format, the Balance Sheet at 31 December 2007. (c) Calculate the current ratio.

(7 marks) (14 marks) (3 marks)

(d) State the purpose of calculating the current ratio.

(1 mark) (Total 25 marks)

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MODEL ANSWER TO QUESTION 1 (a) P Tong plc Appropriation Account for the year ended 31 December 2007 £000 Net profit Interim ordinary dividend Preference dividend Proposed final ordinary dividend

3,880

(48,000,000 x 0.04)

560 18 1,920 2,498 1,382

Transferred to reserves

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£000

Page 3 of 12

MODEL ANSWER TO QUESTION 1 CONTINUED (b) P Tong plc Balance Sheet at 31 December 2007 £000 Cost Fixed assets Land & buildings Plant & machinery Fixtures & fittings Motor vehicles

10,400 13,880 3,420 3,720 31,420

Current assets Stock Debtors Prepayments Cash

£000 Provision for depreciation 80 1,632 580 860 3,152

NBV

10,320 12,248 2,840 2,860 28,268

4,292 5,920 290 260 10,762

Creditors: amounts due within one year Creditors Loan interest Bank overdraft Accruals 5% debentures Proposed ordinary dividend

3,840 112 1,750 262 1,600 1,920 9,484

Net current assets

1,278 29,546

Creditors: amounts due after one year 8% loan

Shareholders' funds Capital and reserves Called up ordinary share capital: 48,000,000 £0.25 ordinary shares Share premium account Revaluation reserve Profit & Loss (8,656 + 1,382) Ordinary shareholders funds 600,000 3% £1 preference shares Total shareholders' funds

2,800 26,746

12,000 2,640 1,468 10,038 26,146 600 26,746

(c)

10,762,000/9,484,000 = 1.13:1

(d)

Illustrates the company's ability to repay its short term debts

2006/4/08/MA

£000

Page 4 of 12

QUESTION 2 A Choo, B Chang and C Mei have been in partnership sharing profits and losses in the proportion 2:2:1 respectively. The partnership Balance Sheet at 31 January 2008 was as follows: Balance Sheet at 31 January 2008 £ Fixed Assets Goodwill Fixtures and fittings Motor vehicles

£ 54,000 144,900 82,200 281,100

Current Assets Stock Debtors Cash

33,300 80,100 300 113,700

Current Liabilities Creditors Bank overdraft

5,400 26,100 31,500 82,200 363,300

Capital accounts: A Choo B Chang C Mei

105,780 136,110 121,410 363,300

On 31 January 2008, A Choo, B Chang and C Mei decided to dissolve the partnership and close the books on the following terms: (1) The goodwill and fixtures and fittings were sold to D Woo for £162,000. By agreement, D Woo paid each partner £54,000 and these amounts were paid into the partners’ private bank accounts. (2) Each partner took over a motor vehicle, valued at:

A Choo B Chang C Mei

£ 27,300 25,800 30,600

(3) All the cash in hand was used to pay dissolution expenses. The creditors were settled for an agreed sum of £5,370. (4) The remaining assets were sold for £146,400. This amount was paid into the partnership bank account. (5) The bank informed the partners that £660 interest was accrued on the bank overdraft. This amount has not been entered in the books.

2006/4/08/MA

Page 5 of 12

QUESTION 2 CONTINUED REQUIRED Prepare the following accounts on 31 January 2008 for the partnership of A Choo, B Chang and C Mei: (a) Dissolution account

(15 marks)

(b) Capital accounts

(4 marks)

(c) Bank account

(4 marks)

(d) D Woo’s account.

(2 marks) (Total 25 marks)

2006/4/08/MA

Page 6 of 12

MODEL ANSWER TO QUESTION 2 (a)

Dissolution Account

Goodwill Fixtures & fittings Motor vehicles Stock Debtors Cash: dissolution expenses Bank: interest charges

£ 54,000 144,900 82,200 33,300 80,100 300 660

£ Discount on creditors D Woo Bank Capital accounts (MV): Choo Chang Mei Capital accounts: Choo Chang Mei

30 162,000 146,400 27,300 25,800 30,600 1,332 1,332 666 395,460

395,460 (b)

Capital Accounts

Dissolution loss Dissolution: MV D Woo Bank

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Choo £ 1,332 27,300 54,000 23,148 105,780

Chang £ 1,332 25,800 54,000 54,978 136,110

Mei £ 666 30,600 54,000 36,144 121,410

Bal b/d

Choo £ 105,780

Chang £ 136,110

Mei £ 121,410

105,780

136,110

121,410

Page 7 of 12

MODEL ANSWER TO QUESTION 2 CONTINUED (c)

Bank Account

Dissolution account

£ 146,400

Bal b/d Dissolution account: interest Creditors Capital accounts: Choo Chang Mei

146,400

(d)

£ 26,100 660 5,370 23,148 54,978 36,144 146,400

D Woo

Dissolution account

£ 162,000

£ Capital accounts: Choo Chang Mei

162,000

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Page 8 of 12

54,000 54,000 54,000 162,000

QUESTION 3 The following information for the month of February 2008 was extracted from the ledgers of Ho Chang: At 1 February 2008: Purchases ledger Purchases ledger Sales ledger Sales ledger Provision for doubtful debts

Dr balances Cr balances Dr balances Cr balances

At 1 March 2008: Purchases ledger Sales ledger Provision for doubtful debts

Dr balances Cr balances

£ 291 16,428 27,066 495 690

399 642 750

For the month ended 29 February 2008: Credit sales Credit purchases Payments to suppliers Receipts from customers Returns inwards Returns outwards Discounts allowed Discounts received Bad debts written off Debit balances in sales ledger transferred to purchases ledger Legal expenses charged to customer’s account Customer’s cheque dishonoured

162,384 123,585 112,251 147,534 6,615 3,204 5,232 3,630 576 1,035 270 1,128

REQUIRED (a) Prepare for the month of February 2008: (i)

Purchases Ledger Control Account

(ii)

Sales Ledger Control Account.

(8 marks) (13 marks)

(b) Prepare, at 29 February 2008, a Balance Sheet extract showing the debtors’ and creditors’ figures under the current assets and current liabilities. (4 marks) (Total 25 marks)

2006/4/08/MA

Page 9 of 12

MODEL ANSWER TO QUESTION 3

(a)

(i) 2008 Feb 01 Feb 29 Feb 29 Feb 29 Feb 29 Feb 29

Mar 01

(ii) 2008 Feb 01 Feb 29 Feb 29 Feb 29 Feb 29

Mar 01

(b)

Purchases Ledger control account £ 2008 Balance b/d 291 Feb 01 Balance b/d Bank 112,251 Feb 29 Purchases Returns outwards 3,204 Feb 29 Balance c/d Discounts received 3,630 Contra Sales ledger 1,035 Balance c/d 20,001 140,412 Balance b/d

399

Mar 01

Balance b/d

Sales Ledger control account £ 2008 Balance b/d 27,066 Feb 01 Balance b/d Sales 162,384 Feb 29 Bank Legal expenses 270 Feb 29 Returns inwards Bank (dishonoured 1,128 Feb 29 Discounts allowed cheque) Balance c/d 642 Feb 29 Bad debts Contra Purchases ledger Feb29 Balance c/d 191,490 Balance b/d

30,003

Mar 01

Balance b/d

Ho Chang Balance Sheet extract at 29 February 2008 £ £ Current Assets Debtors (399 + 30,003) Less provision for doubtful debts

30,402 750

Liabilities due within one year Creditors (20,001 + 642)

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29,652

20,643

Page 10 of 12

£ 16,428 123,585 399

140,412 20,001

£ 495 147,534 6,615 5,232 576 1,035 30,003 191,490 642

QUESTION 4 Maggie Kan owns a business in Hong Kong and has a branch in London. Branch sales are all on credit, and all cash received at the branch is remitted to the head office. All purchases are made by the Hong Kong office, with goods sent to the branch being invoiced at cost plus 25%. For the year ended 31 December 2007, the following information was entered in the head office books: £ Balances at 1 January 2007: Branch debtors Branch stock at selling price Branch adjustment account

37,800 44,100 8,820

For the year ended 31 December 2007: Branch sales Goods returned by customers to branch Payments by branch debtors to branch Discounts allowed to branch debtors Goods invoiced to branch at selling price Goods returned by branch to head office Balance at 31 December 2007: Branch stock at selling price

462,900 4,565 460,050 12,390 450,000 9,000 24,750

REQUIRED Prepare the following accounts, relating to the London branch, in the head office books for the year ended 31 December 2007: (a) Branch Stock

(10 marks)

(b) Goods to Branch

(3 marks)

(c) Branch Adjustment

(6 marks)

(d) Branch Debtors

(6 marks) (Total 25 marks)

2006/4/08/MA

Page 11 of 12

MODEL ANSWER TO QUESTION 4

(a) 2007 Jan 01 Dec 31 Dec 31 Dec 31

Branch Stock Balance b/d Goods to branch Branch adjustment Branch debtors

£ 44,100 360,000 90,000 4,565

2007 Dec 31 Dec 31 Dec 31 Dec 31

Dec 31

Branch debtors/Sales Goods to branch Branch adjustment Stock loss: Branch adjustment Branch P&L Balance c/d

498,665 2008 Jan 01

Balance b/d

(b) 2007 Dec 31 Dec 31

Dec 31 Dec 31 Dec 31 Dec 31

7,200 352,800 360,000

Dec 31

£ Branch stock

360,000 _______ 360,000

Balance b/d Branch stock

8,820 90,000

Branch Adjustment £ 2007

(c) 2007 Branch stock/returns Branch stock/Loss Branch P & L [1] Balance cld

1800 403 91,667 4,950 98,820

Jan 01 Dec 31

£

______ 98,820 2008 Jan 01

Balance b/d Workings [1] 462,900 - 4,565 = 458,335 @ 20% margin = 91,667 Branch Debtors £ 2007

(d) 2007 Jan 01 Dec 31

Balance b/d Branch stock/Sales

37,800 462,900 ______ 500,700

2008 Jan 01

Balance b/d

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403 1,612 24,750 498,665

24,750

Goods to Branch £ 2007 Branch stock Head office trading a/c

£ 462,900 7,200 1800

Dec 31 Dec 31 Dec 31 Dec 31

23,695

Page 12 of 12

4,950

£ Cash/Bank Discounts allowed Branch stock/Returns Balance c/d

460,050 12,390 4,565 23,695 500,700

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2006/4/08/MA

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