Accounting

Level 3

Model Answers
Series 2 2008 (Code 3001)
 Vision Statement
Our vision is to contribute to the achievements of learners around
the world by providing integrated assessment and learning services,
adapted to meet both local market and wider occupational needs
and delivered to international standards.

© Education Development International plc 2008 Company Registration No: 3914767

All rights reserved. This publication in its entirety is the copyright of Education Development International plc.
Reproduction either in whole or in part is forbidden without written permission from Education Development International plc.

International House Siskin Parkway East Middlemarch Business Park Coventry CV3 4PE
Telephone: +44 (0) 8707 202909 Facsimile: + 44 (0) 24 7651 6566
Email: enquiries@ediplc.com
Accounting Level 3
Series 2 2008

How to use this booklet

Model Answers have been developed by Education Development International plc (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 2008

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.

3001/2/08/MA Page 1 of 14
SECTION A

(Answer Questions 1 and 2 in Section A − Compulsory)

QUESTION 1

Barn plc had the following summarised Balance Sheets at 31 March 2007 and 31 March 2008
respectively:

2007 2008
£000 £000 £000 £000
Land at cost 650 850
Buildings (cost £920,000) 828 810
Machinery (cost £1,450,000) 730 440
Vehicles (cost £220,000) − 190
Stock 230 295
Debtors 285 340
Bank/Bank overdraft 35 50
Creditors 210 195
Proposed dividend 150 175
Ordinary Shares of £1 1,500 1,800
Retained profits 898 705
2,758 2,758 2,925 2,925

Notes

In the year to 31 March 2008:

(1) No fixed assets were sold and no buildings or machinery were purchased
(2) No interim dividends were paid
(3) 90,000 shares were issued at par for cash and there was also a bonus (capitalisation) issue.

REQUIRED

(a) Calculate the operating profit for the year ended 31 March 2008 and reconcile it with the net cash
inflow from operating activities.
(11 marks)

(b) Prepare the cash flow statement of Barn plc for the year ended 31 March 2008 in accordance
with FRS1 (revised).
(9 marks)

(Total 20 marks)

3001/2/08/MA Page 2 of 14
MODEL ANSWER TO QUESTION 1

(a)

Operating profit £000

Change in retained profits (705 − 898) (193)

Capitalisation issue (1,800 − 1,500 − 90) 210
Proposed dividend 175
192

Reconciliation of operating profit with net cash inflow from operating activities

£000
Operating profit 192
Add back depreciation:
Buildings (828 − 810) 18
Machinery (730 − 440) 290
Vehicles (220 − 190) 30
Increase in stock (295 − 230) (65)
Increase in debtors (340 − 285) (55)
Decrease in creditors (210 − 195) (15)
Net cash inflow from operating activities 395

(b)
Barn plc
Cash Flow Statement
for the year ended 31 March 2008

£000 £000
Net cash inflow from operating activities 395

Capital Expenditure
Purchase of land (850 − 650) 200
Purchase of vehicles 220 (420)
(25)
Equity dividends paid (150)
(175)
Financing
Ordinary share issue 90
Decrease in cash (35 + 50) (85)

3001/2/08/MA Page 3 of 14
SECTION A CONTINUED

QUESTION 2

The following are the Trial Balances of Steel plc and its two subsidiaries Brass Ltd and Copper Ltd at
31 March 2008:

Steel plc Brass Ltd Copper Ltd

£000 £000 £000
Land and buildings at cost 150 50 –
Machinery at cost – 750 235
Office equipment at cost 175 15 25
Stock at cost – 60 70
Debtors 55 21 65
Bank 45 – –
Investment in Brass Ltd 379 – –
Investment in Copper Ltd 236 – –
1,040 896 395

£000 £000 £000

Depreciation on buildings 14 11 –
Depreciation on machinery – 220 65
Depreciation on office equipment 25 5 15
Ordinary Share Capital (£1 shares) 900 500 200
Retained earnings 66 100 45
Bank overdraft – 10 32
Creditors 35 50 38
1,040 896 395

Notes

(1) Steel plc purchased 60% of the shares of Brass Ltd on 1 April 2007 when Brass Ltd had retained
earnings of £40,000.
(2) Steel plc purchased 80% of the shares in Copper Ltd on 1 October 2007. Copper Ltd
had retained earnings of £20,000 at 1 April 2007 and its profits are assumed to accrue evenly
over each year.
(3) Goodwill arising on consolidation is to be written off evenly over 5 years.
(4) At 31 March 2008 Copper Ltd owed Brass Ltd £15,000.
(5) None of the three companies has declared dividends.

REQUIRED

Prepare the Consolidated Balance Sheet of Steel plc at 31 March 2008.

(Total 20 marks)

3001/2/08/MA Page 4 of 14
MODEL ANSWER TO QUESTION 2

Preliminary calculations
Investment in Brass Ltd £000
Cost 379
Net assets [(500 + 40) x 0.6)] 324
Goodwill 55
Amortised (55 x 0.2) 11
44

Investment in Copper Ltd £000

Cost 236
Net assets {[200 + 20 + 0.5 (45 – 20)] x 0.8} 186
Goodwill 50
Less amortised (50 x 0.2 x 0.5) 5
45

Retained earnings £000

Steel plc 66
Brass Ltd [0.60 (100 – 40] 36
Copper Ltd [0.80 (45 – 20) x 0.5] 10
112
Goodwill written off (11 + 5) 16
96

Minority Interest £000

Brass Ltd [0.4 (500 + 100)] 240
Copper Ltd [0.2 (200 + 45)] 49
289

Consolidated Balance Sheet of Steel plc at 31 March 2008

£000 £000 £000

Cost Depreciation Net
Fixed Assets
Tangible Fixed Assets
Land and Buildings 200 25 175
Machinery 985 285 700
Office equipment 215 45 170
1,400 355 1,045
Goodwill (44 + 45) 89
Current Assets 1,134
Stock (60 + 70) 130
Debtors (55 + 21 + 65 – 15) 126
Bank 45
Creditors: amounts due within one year 301
Creditors (35 + 50 + 38 – 15) 108
Bank overdraft (10 + 32) 42 150
Net Current Assets 151
1,285

Capital and Reserves £000

Ordinary Share Capital 900
Retained earnings 96
996
Minority Interest 289
1,285

3001/2/08/MA Page 5 of 14
SECTION B

(Answer any THREE questions from Section B)

QUESTION 3

The following are the most recent accounts of Parsons Ltd:

Trading and Profit & Loss Account

for the year ended 31 March 2008

£000 £000
Sales 1,080
Cost of goods sold:
Opening stock 65
Purchases 690
755
Closing stock 85 670
Gross profit 410
Wages 104
General expenses 124
Selling expenses 22
Depreciation on machinery 85
Directors' salaries 32 367
Net profit 43
Retained earnings b/f 67
110
Proposed dividend 75
Retained earnings c/f 35

Balance Sheet at 31 March 2008

£000 £000 £000

Cost Depreciation NBV
Fixed Assets
Buildings 300 115 185
Machinery 425 255 170
725 370 355
Current Assets
Stock 85
Debtors 90 175

Creditors: amounts falling due within one year

Creditors 60
Proposed dividend 75
Bank overdraft 115 250

Net Current Liabilities 75

280

Capital and Reserves £000

Ordinary shares (£1 each) 245
Retained earnings 35
280

3001/2/08/MA Page 6 of 14
QUESTION 3 CONTINUED

The Trade Association to which Parsons Ltd belongs has just produced the following average ratios
for this industry:

Mark up on cost 40.00%

Net profit to sales 5.00%
Return on capital employed 12.00%
Dividend cover 1.40 times
Current 1.50:1
Acid test 1.10:1
Debtors’ collection 2.00 months
Stock turnover (based on average stock) 2.00 months
Creditors’ settlement 2.40 months

REQUIRED

(a) Calculate for Parsons Ltd, with the same degree of accuracy, the 9 ratios produced by the Trade
Association.
(12 marks)

(b) Write a short report to the Directors of Parsons Ltd comparing the ratios you have calculated in
(a) above with those produced by the Trade Association.
(8 marks)

(Total 20 marks)

3001/2/08/MA Page 7 of 14
MODEL ANSWER TO QUESTION 3

(a) Parsons Ltd Trade Association

Mark up on cost [(410/670) x 100] 61.19% 40.00%
Net profit to sales [(43/1,080) x 100] 3.98% 5.00%
Return on capital employed [(43/280) x 100] 15.36% 12.00%
Dividend cover (43/75) 0.57 times 1.40 times
Current (175/250) 0.70:1 1.50:1
Acid test (90/250) 0.36:1 1.10:1
Debtors’ collection [(90/1,080) x 12] 1.00 month 2.00 months
Stock turnover [(((65 + 85)/2)/670) x 12] 1.34 months 2.00 months
Creditors’ settlement [(60/690) x 12] 1.04 months 2.40 months

(b) REPORT

To: Directors
From: A Candidate
Date: 10 April 2008
Subject: Ratios

Parsons Ltd has a higher mark up and manages a faster stock turnover which suggests superior
quality.

The lower net profit to sales suggests high expenses (possibly spending above average on
advertising).

The return on capital employed is above average probably due to the efficient use of capital
shown by better than average stock turnover and debtors collection ratios.

Both current and acid test ratios suggest a serious liquidity problem.

The liquidity problem calls into question the size of the dividend which is not covered by the
current profits.

The liquidity problem also suggests it may not be necessary to pay creditors faster than average
for the industry.

3001/2/08/MA Page 8 of 14
SECTION B CONTINUED

QUESTION 4

Carter Ltd's Trial Balance at 31 March 2008 included the following figures:

£000 £000
Sales 5,240
Purchases (raw materials) 1,250
Stocks at 1 April 2007:
Raw materials 145
Work in progress 276
Finished goods 187
Direct labour 975
Factory machinery at cost 2,500
Vehicles at cost 650
Miscellaneous factory expenses 475
Insurance 80
Accumulated depreciation at 1 April 2007:
Factory machinery 1,050
Vehicles 250
Indirect labour 145
Light, heat and power 220
Administration 310

At 31 March 2008 the following prepayments and accruals had yet to be recorded:

Prepayments Accruals
£000 £000
Direct labour – 20
Indirect labour – 15
Insurance 30 –
Administration 20 10

Stocks at 31 March 2008 were as follows:

(1) Raw materials £130,000

(2) Work in progress £290,000
(3) Finished goods £210,000.

Notes

(1) Indirect labour is charged 40% to Manufacturing Account and the rest to Profit & Loss Account
(2) Insurance is charged 50% to Manufacturing Account and the rest to Profit & Loss Account
(3) Administration is charged 10% to Manufacturing Account and the rest to Profit & Loss Account
(4) Light, heat and power is charged 75% to Manufacturing Account and the rest to Profit & Loss
Account
(5) The depreciation on vehicles is calculated at 30% per year using the reducing balance method
and charged 30% to Manufacturing Account and the rest to Profit & Loss Account
(6) Factory machinery is depreciated at 20% per year on cost.

REQUIRED

Prepare the Manufacturing and Trading Account of Carter Ltd for the year ended 31 March 2008. The
Profit & Loss Account section is not required.
(Total 20 marks)

3001/2/08/MA Page 9 of 14
MODEL ANSWER TO QUESTION 4

Carter Ltd
Manufacturing and Trading Account
for the year ended 31 March 2008

£000 £000
Raw materials: Opening stock 145
Purchases 1,250
1,395
Closing stock 130 1,265
Direct labour (975 + 20) 995
Prime Cost 2,260

Miscellaneous factory expenses 475

Insurance [(80 – 30) x 0.5] 25
Indirect labour [(145 + 15) x 0.4] 64
Light, heat and power (220 x 0.75) 165
Administration [(310 + 10 – 20) x 0.1] 30
Depreciation:
Factory machinery (2,500 x 0.2) 500
Vehicles [(650 – 250) x 0.3) x 0.3] 36 1,295
3,555
Opening work in progress 276
3,831
Closing work in progress 290
Cost of Manufacture 3,541

£000 £000
Sales 5,240
Cost of goods sold: Opening stock 187
Cost of manufacture 3,541
3,728
Closing stock 210 3,518
Gross Profit 1,722

3001/2/08/MA Page 10 of 14
SECTION B CONTINUED

QUESTION 5

Rem plc had the following capital structure at 1 April 2007:

Authorised Capital £000

5,000,000 Ordinary Shares of £0.50 each 2,500
500,000 9% Preference Shares of £1 each 500

Issued Capital £000

3,000,000 Ordinary Shares of £0.50 each 1,500
300,000 9% Preference Shares of £1 each 300
Share Premium 150
Revaluation Reserve 100
General Reserve 125
Retained Earnings 340
2,515
Creditors: amounts due after one year
12% Debentures 200
2,715

The following transactions were carried out in the year to 31 March 2008:

(1) On 1 May 2007 Rem plc made a rights issue of 1 Ordinary Share for every 3 held at £0.70 per
share
(2) On 1 June 2007 Rem plc issued the remaining Preference Shares at par
(3) On 1 October 2007 Rem plc redeemed the 12% Debentures at a premium on redemption of 5%
and paid the 6 months' interest then due
(4) On 1 December 2007 Rem plc made a bonus (capitalisation) issue of the remaining Ordinary
Shares.

Maximum use was made of the non-distributable reserves.

REQUIRED

(a) A statement of the non-distributable reserves at 1 April 2007. (2 marks)

(b) A statement of the change in the bank balance caused by the four transactions. (6 marks)

(c) A Journal entry in respect of transaction (4). (6 marks)

(d) The Capital and Reserves section of Rem plc’s Balance Sheet on 2 December 2007 assuming
that no other transactions had taken place in the period.
(6 marks)

(Total 20 marks)

3001/2/08/MA Page 11 of 14
MODEL ANSWER TO QUESTION 5

(a) Non-distributable reserves at 1 April 2007

£000
Share Premium 150
Revaluation Reserve 100
250

(b) Change in Bank balance

£000
(1) Rights issues (1/3 x 3,000,000 x 0.7) 700
(2) Preference Share issue (500,000 – 300,000) 200
(3) Debenture redemption (200,000 x 1.05) (210)
Debenture interest (200,000 x 0.12 x 0.5) (12)
∴Net change +678

(c) Journal entry

£000 £000

Share premium (150,000 + 200,000 – 10,000) 340

Revaluation reserve 100
General reserve (R)* 60
Ordinary Share Capital 500
(2,500,000 – 1,500,000 – 500,000)

(d) Share Capital and Reserves of Rem plc at 2 December 2007

£000
5,000,000 Ordinary Shares of £0.50 each authorised and issued 2,500
500,000 9% Preference Shares of £1 each authorised and issued 500
General Reserve (125,000 – 60,000*) 65
Retained Earnings (340,000 – 12,000) 328
3,393
*Could also be deducted from retained earnings

3001/2/08/MA Page 12 of 14
SECTION B CONTINUED

QUESTION 6

Godfrey, Hannah and Jane have been in partnership for three years, working without a partnership
agreement. At the commencement of the partnership, Godfrey contributed £20,000, Hannah £15,000
and Jane £25,000. At the end of Year 1 Hannah contributed a further £2,000. At the end of Year 2
Hannah again contributed £2,000, but Jane withdrew £3,000. All the above transactions were
recorded in the partners' fixed capital accounts.

At the end of Year 3, prior to dividing that year’s profits, the partners’ current account balances were
as follows:

Godfrey £3,750 (Dr)

Hannah £4,000 (Cr)
Jane £500 (Cr)

The partnership profits for the first 3 years were as follows:

Year 1 £3,600; Year 2 £15,900 and Year 3 £23,700.

The partners have now drawn up a partnership agreement under which the profits for Year 3 are to be
divided as follows:

(1) Jane to receive a salary of £4,000.

(2) Interest on fixed capital account balances is to be allowed at 8%.
(3) Residual profits/losses are to be divided between Godfrey, Hannah and Jane in the ratio 2:2:1
respectively.

REQUIRED

(a) Calculate the total drawings made by each partner up to the end of Year 3. (5 marks)

(b) Prepare the Appropriation Account of the partnership for Year 3. (8 marks)

(c) Calculate the gain or loss each partner has made in Year 3 from the change from having no
agreement to having a partnership agreement.
(7 marks)

(Total 20 marks)

3001/2/08/MA Page 13 of 14
MODEL ANSWER TO QUESTION 6

(a) Total drawings of each partner

Godfrey Hannah Jane

£ £ £ £
Profit Year 1 3,600
Profit Year 2 15,900
19,500/3 6,500 6,500 6,500
Current A/C balances +3,750 Dr –4,000 Cr –500 Cr
∴ Drawings 10,250 2,500 6,000

(b) Partnership Appropriation Account for Year 3

£ £
Net Profit 23,700
Salary – Jane 4,000
Interest on capital:
Godfrey (0.08 x 20,000) 1,600
Hannah [0.08 x (15,000 + 2,000 + 2,000)] 1,520
Jane [0.08 x (25,000 – 3,000)] 1,760 8,880
14,820

Residual Profit:
Godfrey (0.4 x 14,820) 5,928
Hannah (0.4 x 14,820) 5,928
Jane (0.2 x 14,820) 2,964 14,820

(c) Effect of new partnership agreement

£ £ £
Godfrey Hannah Jane
If no agreement (23,700/3) 7,900 7,900 7,900

Under agreement Salary – – 4,000

Interest 1,600 1,520 1,760
Balance 5,928 5,928 2,964
7,528 7,448 8,724
Difference -372 -452 +824

3001/2/08/MA Page 14 of 14 © Education Development International plc 2008