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Model Answers Series 4 2010 (3902)
For further information contact us:
Tel. +44 (0) 8707 202909 Email. [email protected] www.lcci.org.uk
LCCI International Qualifications
Accounting (IAS) Level 3
3902/4/10/MA Page 1 of 19
Accounting (IAS) Level 3 Series 4 2010
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 2010 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.
3902/4/10/MA Page 2 of 19
QUESTION 1 Forth, a private company, maintains a Sales Ledger Control Account. The balance on this account is reconciled each month with the net total of the balances in the Sales Ledger. The balance on the Sales Ledger Control Account appears in the company’s Trial Balance drawn up at the end of the company’s financial year. REQUIRED (a) State (yes or no) whether or not each of the following is part of Forth’s double entry book-keeping system:
(i) Sales Ledger Control Account (ii) Sales Ledger
(iii) Sales Day Book. (3 marks)
For each of the above (a) (i) (ii) (iii): (b) state whether individual sales figures, total sales figures or both individual and total sales figures will be included (c) explain their purpose and how they are linked together in accounting for sales.
(9 marks)
On 31 March 2010 Forth’s Sales Ledger Control Account had a debit balance of $46,438 and the balances extracted from the Sales Ledger gave a net total of $41,634 debit. The accountant discovered the following errors: (1) a cheque for $3,500, received from a customer, had been entered in the customer’s
account as $5,300 (2) a page in the Sales Day Book had been over-added by $237 (3) a sales invoice for $1,200 had been completely omitted from the books (4) a sales invoice for $2,100 had been entered twice in the Sales Day Book (5) a credit balance of $40, in the list of Sales Ledger balances, had been incorrectly listed
as a debit balance (6) contras of $60 had been entered twice in both the Purchases Ledger and the Sales
Ledger accounts, but not entered in either the Purchases Ledger Control Account or the Sales Ledger Control Account.
The balance on the Sales Ledger Control Account still did not agree with the net total of the balances extracted from the Sales Ledger, after correcting the above errors. REQUIRED (d) Calculate: (i) the amended Sales Ledger Control Account balance (ii) the amended net total of the balances extracted from the Sales Ledger (iii) the difference remaining between (i) and (ii) above.
(11 marks) Forth’s accountant suggests that the difference be ignored as another reconciliation will be attempted at the end of April and the figures may then agree. REQUIRED (e) State whether or not the accountant’s suggestion is acceptable and briefly discuss whether or not the figures are likely to reconcile at the end of April 2010. (2 marks) (Total 25 marks) MODEL ANSWEWR TO QUESTION 1
3902/4/10/MA Page 3 of 19
(a) (i) Yes (ii) No (iii) No (b) (i) total sales (ii) individual sales (iii) individual and total sales (c) (i) Shows the total amount owing by receivables at any point in time. The total sales figure is derived from the Sales Day Book. The balance should reconcile with the net total of the list of Sales Ledger balances. (ii) Shows the amounts owing by individual receivables at any point in time. Individual sales
amount are posted from the Sales Day Book. The net total of the list of Sales Ledger balances should reconcile with the balance on the Sales Ledger Control Account.
(iii) Shows each individual sale and is a book of prime entry used in providing figures for both the Sales Ledger Control Account and the Sales Ledger. (d)
(i)
Sales Ledger Control Account
$
Original balance
46,438
(2) Addition error in Sales Day Book
(237)
(3) Sales invoice omitted
1,200
(4) Sales invoice entered twice in Sales Day Book
(2,100)
(6) Contras omitted
(60)
Amended balance
45,241
(ii)
Sales Ledger Balances
$
Original net total
41,634
(1) Incorrectly recorded cheque (5,300-3,500)
1,800
(3) Sales invoice omitted
1,200
(4) Sales invoice entered twice in Sales Day Book
(2,100)
(5) Credit balance listed as debit balance (40 x 2)
(80)
(6) Contras recorded twice
60
42,514
(iii)
Difference
$
Sales Ledger Control Account
45,241
Sales Ledger Balances
42,514
Difference
2,727
(e) Accountant’s suggestion Ignoring the difference is not acceptable The figures are very unlikely to reconcile next month, unless they are due to addition errors in adding the list of balances or calculating the balances themselves. In any case these should be rechecked now.
3902/4/10/MA Page 4 of 19
QUESTION 2 Tweed is a private company which has performed poorly in recent years. The holders of 20,000 of the shares are very unhappy with the directors. An extract from the Balance Sheet of Tweed at 31 December 2009 is as follows:
$
Ordinary share capital ($1 each) 80,000
Share premium 5,000
Accumulated profits 30,000
The Managing Director of Tweed, being aware of the unhappy shareholders, has made the following proposals, to take place in the order given: (1) increase the value of the buildings by $10,000, thereby incorporating a recent professional
revaluation in the Balance Sheet (2) make a 1 for 10 capitalisation (bonus) issue out of non-distributable reserves (3) issue for cash 20,000 shares at a premium of $0.05 and then purchase all the shares of the
unhappy shareholders at par. REQUIRED (a) Assuming that the above proposals are accepted by all parties concerned, prepare Journal entries (with narratives) to record them.
(17 marks)
In order to justify his proposals the Managing Director made the following comments: (1) revaluing the buildings makes the Balance Sheet stronger and will have no effect on profit in
future years (2) the capitalisation issue would not cost the company anything (3) the unhappy shareholders are likely to accept the $22,000 offered for their shares and
redeeming them at par is a good deal for the company (4) buying out the unhappy shareholders should mean a more united company in future. REQUIRED (b) Briefly discuss the truth or otherwise of each of the Managing Director’s comments.
(8 marks)
(Total 25 marks)
3902/4/10/MA Page 5 of 19
MODEL ANSWER TO QUESTION 2
(a) Journal Entries
$ $
DR CR
(1) Buildings 10,000
Revaluation reserve
10,000
Revaluation of buildings
(2) Share premium 5,000
Revaluation reserve 3,000
Ordinary share capital (80,000/10)
8,000
Capitalisation issue of one share for every ten
(3) Bank (20,000 x 1.05) 21,000
Ordinary share capital
20,000
Share premium
1,000
Issue of ordinary shares at $1.05
Ordinary share capital 22,000
Share purchase
22,000
Purchase of ordinary shares
Accumulated profits (W1) 1,000
Capital redemption reserve
1,000
Amount to be financed out of distributable profits
Share purchase 22,000
Bank
22,000
Payment to ordinary shareholders for shares redeemed
$
W1 Nominal value of shares redeemed (22,000 x 1.00)
22,000
Proceeds from new issue (20,000 x 1.05)
21,000
1,000
(b) Managing Director’s Comments (1) - the Balance Sheet, with a higher value for non-current assets, may well appear stronger.
- however depreciation must be provided on the revalued amount, so there will be an effect on future profits
(2) - a capitalisation issue does not involve a cash outflow and therefore would not cost the company anything
- however buying out the unhappy shareholders at par would cost an additional $2,000 as a result of the capitalisation issue
(3) - there is no evidence to suggest the unhappy shareholders will accept the company’s offer for their shares - the market value of the shares is crucial in determining shareholder acceptance and whether or not it is a good deal for the company (4) - the remaining shareholders may be more united - the unity of the Board of Directors and senior management is more important, and whether or not the company is more successful in future
3902/4/10/MA Page 6 of 19
QUESTION 3 On 1 January 2009, Wear, a public company, acquired 75% of the ordinary share capital of Tyne, a private company. Wear Plc financed the acquisition by issuing 40,000 $1 ordinary shares at a premium of $0.50, and paying $30,000 in cash. REQUIRED (a) Prepare a Journal entry, in the books of Wear Plc, recording the acquisition of the shares in Tyne. No narrative is required.
(4 marks) Wear wrote off 20% of the goodwill arising on the acquisition of Tyne non-current and depreciate tangible assets at 30% per year on a straight line basis. The draft Consolidated Balance Sheet of the Wear and Tyne Group at 31 December 2009 was as follows:
$ $
Non current assets Goodwill on consolidation
16,000
Tangible non current assets
315,000
331,000
Current assets Inventory
90,000 Receivables
54,000
Bank
19,000
163,000
Payables: amounts falling due within one year
494,000
Payables
58,000 Accruals
9,000 67,000
Net current assets
427,000
Capital and reserves Ordinary share capital ($1 shares)
200,000
Share premium 40,000
Accumulated profits
157,000
397,000
Minority interest
30,000
427,000
Adjustments to the above Balance Sheet are required in respect of the following matters:
(1) On 1 January 2009 the fair value of Tyne’s tangible non-current assets was $10,000 higher than their book value. This had not been taken into consideration in the original consolidation. Wear depreciates tangible non-current assets at 30% per year on a straight line basis.
(2) Wear sold goods costing $30,000 to Tyne during 2009 for $50,000. On 31 December 2009 half the value of these goods remained unsold.
(3) Tyne sold goods costing $20,000 to Wear during 2009 for $30,000. On 31 December 2009 a quarter of the value of these goods remained unsold.
(4) Inter company balances of $7,000 were included in the consolidated receivables and payables.
(5) A bank overdraft of $10,000 in Wear had been offset against the bank balance in hand of Tyne.
3902/4/10/MA Page 7 of 19
QUESTION 3 CONTINUED REQUIRED (b) Calculate the goodwill on consolidation at 1 January 2009, before the fair value adjustment.
(2 marks)
(c) Calculate the goodwill on consolidation at 31 December 2009, after the fair value adjustment and after the 20% write off.
(2 marks)
(d) Prepare the amended Consolidated Balance Sheet of the Wear and Tyne Group at 31 December 2009, after adjusting for items (1) to (6) above.
(17 marks)
(Total 25 marks)
3902/4/10/MA Page 8 of 19
MODEL ANSWER TO QUESTION 3
(a) Journal Entry $ $
DR CR
Investment in Tyne 90,000
Ordinary share capital
40,000
Share premium
20,000
Bank
30,000
(b) Goodwill at 1 January 2009
Goodwill per draft balance sheet (80%)
16,000
Amount written off (20%)
4,000
20,000
(c) Goodwill at 31 December 2009
Goodwill as above
20,000
Fair value adjustment (75% x 10,000)
(7,500)
Amount written off 20% (20,000 - 7,500)
(2,500)
10,000
3902/4/10/MA Page 9 of 19
QUESTION 3 CONTINUED (d)
Consolidated Balance Sheet of the Wear and Tyne Group at 31 December 2009
$ $
Non-current assets
Goodwill
10,000
Tangible non-current assets (315,000 + 10,000 - 3,000)
322,000
332,000
Current assets
Inventory (90,000 - 10,000 - 2,500 - 4,000)
73,500
Receivables (54,000 - 7,000 - 5,000)
42,000
Bank (19,000 + 10,000)
29,000
144.500
476,500
Capital and reserves
$
Ordinary share capital
200,000
Share premium
40,000
Accumulated profits (W 1)
136,625
376,625
Minority interest (W 2)
29,875
406,500
Current liabilities
Payables (58,000 - 7,000)
51,000
Accruals
9,000
Bank overdraft
10,000
70,000
476,500
W 1 – Retained earnings
$
Original
157,000
Goodwill written off (4,000 - 2,500)
1,500
Depreciation (0.75 x 3,000)
(2,250)
Unrealised profit in inventory (1)
(10,000)
Unrealised profit in inventory (2) (0.75 x 2,500)
(1,875)
Provision for obsolete inventory
(4,000)
Provision for bad debts (0.75 x 5,000)
(3,750)
136,625
W 2 – Minority interest
Original
30,000
Fair value adjustment
2,500
Depreciation (0.25 x 3,000)
(750)
Unrealised profit in inventory (2) (0.25 x 2,500)
(625)
Provision for bad debts (0.25 x 5,000)
(1,250)
29,875
3902/4/10/MA Page 10 of 19
QUESTION 4 Tay is a sole trader and retailer with only a limited understanding of accounting. He has provided his accountant with the following estimates for the purpose of preparing a budget for the three months ending 31 March 2011:
(1) Sales and Receivables Cash sales will be 5% of credit sales and will be as follows: $ January 5,000 February 6,000 March 6,500
Receivables at 31 December 2010 will be $100,000 of which $28,000 will relate to October sales, $40,000 to November sales and the rest to December sales. 50% of credit sales revenue is received in the month following sale, 25% in the second month following sale, and 25% in the third month following sale. (2) Disposal of Non-current Assets
$3,200 will be received, in February 2011, from the sale of non-current assets on 1 January 2011. These cost $12,000 and have a net book value of $4,000. Depreciation is to be changed at $3,000 per month in 2011.
(3) Other Receipts
Tay has recently had a substantial gambling win and will be paying £1,000 into the business bank account in February 2011.
(4) Purchases and Payables Cash purchases will be equal to 10% of total purchases and will be as follows:
$ January 2,700 February 3,600 March 4,500
Payables at 31 December 2010 will be $75,200 of which $32,000 will relate to November purchases and the rest to December purchases. Two thirds of credit purchases are paid in the month after purchase. One third of credit purchases are paid in the second month after purchase. (5) Wages and Drawings
Tay takes $25,000 per month out of the business bank account and uses $20,000 of this to pay wages.
(6) General Cash Expenses These will be incurred as follows: $ December (2010) 1,000 January 1,100 February 1,200 March 1,100 Half the general expenses are paid in the month incurred and half in the following month. (7) Miscellaneous
The bank balance at 31 December 2010 is expected to be an overdraft of $4,250. Inventory at 31 December 2010 is expected to of have a cost of $27,500. This figure is expected to have risen by 25% by 31 March 2011.
3902/4/10/MA Page 11 of 19
QUESTION 4 CONTINUED REQUIRED Prepare for Tay: (a) a monthly cash budget, in columnar form, showing the bank balance at the end of each month, for January, February and March 2011.
(14 marks)
(b) a budgeted Income Statement for the three month period ending 31 March 2011.
(7 marks)
Tay is due to have talks with his bank manager and intends to claim the following:
(i) paying his gambling winnings into the business bank account shows him to be a prudent and responsible businessman
(ii) the extended credit period recently offered to customers, will improve sales, improve cash flow and reduce bad debts.
REQUIRED (c) Briefly discuss whether or not the bank manager will be impressed by the above claims.
(4 marks)
(Total 25 marks)
3902/4/10/MA Page 12 of 19
MODEL ANSWER TO QUESTION 4 (a) Tay: Cash Budget for three months to 31 March 2011
January February March
Receipts $
$ $
Cash sales 5,000
6,000
6,500
Credit sales (W1)
64,000
78,000
93,000
Non-current asset disposal
3,200
Capital paid in
1,000
69,000 88,200 99,500
Payments $
$ $
Cash purchases 2,700
3,600 4,500
Credit purchases (W2)
60,800
30,600
29,700
Wages and drawings
25,000
25,000
25,000
General expenses (W3) 1,050
1,150 1,150
89,550
60,350
60,350
Net Receipt/(Payment) (20,550)
27,850 39,150
Opening balance (4,250)
(24,800) 3,050
Closing balance (24,800)
3,050 42,200
January February March
W1 Credit sales: $ $ $
October (28,000) 28,000 (100%) - -
November (40,000) 20,000 (50%) 20,000 (50%) -
December (32,000) (R) 16,000 (50%) 8,000 (25%) 8,000 (25%)
January (5,000 x 100/5 = 100,000) - 50,000 (50%) 25,000 (25%)
February (6,000 x 100/5 = 120,000) - - 60,000 (50%)
64,000 78,000 93,000
January February March
W2 Credit purchases: $ $ $
November (32,000) 32,000 (100%) - -
December (43,200) (R) 28,800 (2/3) 14,400 (1/3) -
January (2,700 x 9 = 24,300) - 16,200 (2/3) 8,100 (1/3)
February (3,600 x 9 = 32,400) - - 21,600 (2/3)
60,800 30,600 29,700
January February March
W3 General expenses: $ $ $
December (1,000) 500 (50%) - -
January (1,100) 550 (50%) 550 (50%) -
February (1,200) - 600 (50%) 600 (50%)
March (1,100) - - 550 (50%)
1,050 1,150 1,150
3902/4/10/MA Page 13 of 19
QUESTION 4 CONTINUED
(b) Tay: Budgeted Income Statement three months ending 31 March 2011
$ $
Sales [(5,000 + 6,000 + 6,500) x 100/5 + 17,500]
367,500
Less: Cost of goods sold:
Opening inventory 27,500
Purchases [(2,700 + 3,600 + 4,500) x 100/10] 108,000
135,500
Less: Closing inventory (27,500 x 1.25) 34,375 101,125
Gross profit
266,375
Less: Depreciation (30,000 x 3) 90,000
Wages [(25,000 - 5,000) x 3] 60,000
General expenses (1,100 + 1,200 + 1,100) 3,400
Loss on disposal (4,000 - 3,200) 800 154,200
Net profit
112,175
(c) Claims made to bank manager
(i) Gamblers normally lose more than they win and gambling can be addictive. Bank manager will not be impressed.
(ii) Sales may well increase but cash flow is likely to be slower and bad debts more likely to increase. Bank manager will only be impressed if sales increase significantly.
3902/4/10 Page 14 of 19
QUESTION 5 Taff, a private company, was formed on 31 December 2009 to take over the partnership of Usk and Wye. On that date the Balance Sheet of the partnership was as follows:
$ $
Non-current assets Land and buildings
110,000
Plant and machinery
40,000
Motor vehicles
25,000
175,000
Current assets Inventory
11,200 Receivables
12,400
23,600
198,600
$ $
Payables: amounts falling due within one year
Payables
7,100 Bank overdraft
14,300
21,400
Capital accounts Usk
117,300
Wye
59,900
198,600
The purchase consideration consisted of $20,000 in cash and 2,000,000 shares of $0.25 each at a premium of $0.05. Usk and Wye agreed to divide the shares between them in their profit sharing ratio of 2:1 respectively. Taff took over all the assets of the partnership and assumed responsibility for the payables of the partnership, subject to the following: (1) the land and buildings were revalued at $500,000 and the plant and machinery was
revalued at $36,000 (2) the partnership sold a vehicle for $800 cash to a third party and the remaining vehicles were
revalued at $3,000 (3) a provision for bad debts was created, equal to 5% of receivables (4) $200 of inventory was written off and a provision of 10% for obsolete inventory was provided
against the remaining inventory. Before the purchase of the partnership, Taff had issued to the public, 2,500,000 ordinary shares of $0.25 each at a premium of $0.10. REQUIRED (a) Close the books of the Usk and Wye Partnership by preparing the following: (i) Realisation Account (ii) Partners’ Capital Accounts (in columnar form) (iii) Bank Account.
(11 marks)
3902/4/10/MA Page 15 of 19
QUESTION 5 CONTINUED (b) Calculate the balances on the following accounts of Taff immediately after the acquisition of the partnership:
(i) Ordinary share capital (ii) Share premium (iii) Goodwill.
(9 marks)
The agreement between Taff and the partnership also states that the partners:
(i) will be employed by Taff for five years from the date of the agreement (ii) must not work for any competitor during that period.
REQUIRED
(c) (i) Explain why these conditions would have been included in the agreement. (ii) Discuss briefly whether these conditions treat Usk and Wye fairly.
(5 marks)
(Total 25 marks)
3902/4/10/MS Page 16 of 19
MODEL ANSWER TO QUESTION 5
(a) (i) Realisation Account
$
$
Land and buildings 110,000
Payables 7,100
Plant and machinery 40,000
Bank (vehicle) 800
Motor vehicles 25,000
Bank (Taff) 20,000
Inventory 11,200
Shares in Taff:
Receivables 12,400
Usk (2) 400,000
Wye (1) 200,000
Surplus:
Usk (2) 286,200
Wye (1) 143,100
627,900
627,900
(ii) Capital Accounts
Usk Wye
Usk Wye
$ $
$ $
Realisation 400,000 200,000
Opening balance 117,300 59,900
Bank (R) 3,500 3,000
Realisation 286,200 143,100
403,500 203,000
403,500 203,000
(iii) Bank Account
$
$
Realisation 800
Opening balance 14,300
Realisation 20,000
Usk 3,500
20,800
Wye 3,000
20,800
20,800
(b) (i) Ordinary Share Capital of Taff
$
Existing shares (2,500,000 x 0.25) 625,000
Shares issued to partners (2,000,000 x 0.25) 500,000
1,125,000
(ii) Share Premium
$
Existing shares (2,500,000 x 0.10) 250,000
Shares issued to partners (2,000,000 x 0.05) 100,000
350,000
3902/4/10/MA Page 17 of 19 © Education Development International plc 2010
QUESTION 5 CONTINUED
(iii) Goodwill
$ $
Purchase Consideration Cash
20,000
Shares
600,000
620,000
Less: Land and buildings 500,000
Plant and machinery 36,000
Motor vehicles 3,000
Receivables (12,400 x 0.95) 11,780
Stock [(11,200 - 200) x 0.90] 9,900
Payables (7,100) 553,580
66,420
(c) Reasons why the two conditions were included in the agreement to purchase the partnership: (i) - to protect the interests of Taff Ltd, which requires the skills of the partners - to protect the partners, who require employment - to preserve the goodwill value, which is likely to depend on the skills and business connections of the partners
- to prevent a competitor from benefiting from the skills and experience of the partners and - their business connections
(ii) - it seems reasonable to expect the partners to work exclusively for Taff Ltd for a period of time. Whether or not five years is excessive would depend on custom and practice in
that industry.
1517/2/10/MA Page 18 of 12 © Education Development International plc 2010
EDI
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Siskin Parkway East
Middlemarch Business Park
Coventry CV3 4PE
UK
Tel. +44 (0) 8707 202909
Fax. +44 (0) 2476 516505
Email. [email protected]
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