Book-keeping & Accounts

Level 2

Model Answers
Series 2 2006 (Code 2006)

2006/2/06

Book- Keeping & Accounts Level 2

Series 2 2006

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) (2) Questions Model Answers reproduced from the printed examination paper 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) where appropriate, additional guidance relating to individual questions or to examination technique

(3)

Helpful Hints

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 2006 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.

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QUESTION 1 Alice and Mary are in partnership with capital account balances of 100,000 and 50,000 respectively but they have no partnership agreement. On 1 July 2005, Mary loaned to the partnership an additional 25,000. The following incorrect partnership Appropriation Account was prepared in respect of the year ended 31 December 2005: Net Profit b/d 80,001 Add: Interest on drawings: Alice 1,000 Mary 2,600 3,600 83,601 Less: Interest on capital Alice 6,000 Mary 3,000 9,000 74,601 Less: Interest on Marys loan (25,000 x 8%) 2,000 72,601 Share of profits Alice (2/3) 48,401 Mary (1/3) 24,200 (72,601) REQUIRED (a) (i) (ii) Prepare a revised Appropriation Account for the year ended 31 December 2005 (4 marks) Give reasons for your treatment of Marys loan interest (3 marks) John, George and Christina are in partnership sharing profits and losses equally. The partners have now agreed to change their profit sharing ratio to 3:2:1 respectively. The partnership legal advisor has recommended that, before changing the profit sharing ratios, the tangible assets of the partnership should be professionally re-valued. REQUIRED (b) Suggest why the legal advisor is making such a recommendation. (6 marks)

Charles and Ken were originally sole traders who decided to form a partnership sharing profits and losses equally. At the commencement of the partnership, each partner introduced various assets including goodwill. The value of Charless goodwill was agreed at 60,000 and Kens goodwill was valued at 40,000. They have now decided, after a year of trading, to write-off the balance on the partnership goodwill account. REQUIRED (c) Prepare journal entries, without narratives, to record both the introduction and the writing-off of goodwill. (6 marks) The partnership of Peter, Kirk and Emma has been dissolved. Emma has been declared bankrupt but her partnership capital account has a debit balance. REQUIRED (d) Explain the legal ruling in Garner v Murray. (6 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 1 (a) (i)

Alice and Mary Appropriation Account for the year ended 31 December 2005 Net profit (80,001 - [25,000 x 5% x 50%]) Share of profits: Alice (50% x 79,376) Mary (50% x 79,376) 39,688 39,688 79,376 0 79,376

(ii)

(1) (2) (3)

Charge against profits and not an appropriation Interest rate is restricted to 5% on Mary's loan as no agreement Loan interest should be for 6 months and not a year

(b) (1) The values of assets in a balance sheet are partly due to the stewardship of the partners (2) Any profit or loss on the sale of any of these assets would be shared between the partners according to their profit sharing ratios (3) Any change in the profit sharing ratios prior to an asset sale would result in partners either gaining or losing compared to their old ratios An additional acceptable answer for (3) could be: A revaluation is therefore undertaken prior to a change in profit sharing ratios and any difference is posted to the asset account(s) and also to the partners' capital accounts in accordance with the old profit sharing ratios

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MODEL ANSWER TO QUESTION 1 CONTINUED Dr 100,000 Cr

(c) Goodwill Capital Account: Charles Ken Capital Account: Charles Ken Goodwill

60,000 40,000

50,000 50,000 100,000

(d)

Legal ruling in Garner v Murray Where a partner cannot make good a deficit on his capital account this should be shared by the other partners in the ratio of their capital account balances immediately prior to the commencement of the dissolution.

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QUESTION 2 The debit balance on the Sales Ledger Control Account of P Grant at 31 March 2006 was 92,875. When the balances in the Sales Ledgers were extracted they totalled 97,895. The following errors and omissions were subsequently discovered: (1) The debit balance on the Sales Ledger Control Account at 28 February 2006 was 86,500. This was brought forward on 1 March 2006 as 85,600 (2) The debit balance of 350 on a debtors account was offset against his credit balance in the purchase Ledger. This was recorded in the Sales Ledger Control Account but was omitted from the debtors personal account (3) The March 2006 total of the discount allowed column in the cash-book of 86 was not posted to the Sales Ledger Control Account. Individual postings were correctly made in the Sales Ledger (4) A bad debt of 112 was correctly written off in the individual debtors account but credited to the sales Ledger Control Account as 118 (5) The total of the Sales Returns Day Book for March 2006 of 2,900 was correctly posted to the Sales Ledger Control Account but all of the individual entries in the sales ledger were posted as debits (6) Cash sales of 1,950 were debited to sales and credited to an individual debtor REQUIRED (a) (i) (ii) Commencing with 92,875, prepare a statement correcting the balance on the Sales Ledger Control Account at 31 March 2006 (4 marks) Commencing with 97,895, prepare a statement correcting the total of the balances extracted from the individual accounts at 31 March 2006 (5 marks)

The closing stock of a company at 31 January 2006 amounted to 182,700. The following items were included at cost in the total: Item Description (1) 600 pairs of shoes that had cost 40 a pair and would normally sell for 90 a pair. Owing to a slight defect they were all sold after 31 January 2006 for 50% of their normal selling price and after undertaking repairs costing 2 a pair (2) 500 shirts that had cost 30 each. These were found to have faulty stitching which cost the company 5 a shirt to repair. On 5 February 2006, following the repair of the shirts, a dealer purchased all 500 for a total of 16,500 (3) 100 coats that had cost 160 each. These are now considered old-fashioned and the selling price of each coat is to be reduced to 85 (4) Goods on sale or return and with a selling price of 2,400 were omitted from stock even though they remained unsold in the debtors warehouse. These goods carried a mark-up of 50% REQUIRED (b) Commencing with the original valuation of 182,700, calculate the revised stock value at 31 January 2006 by correcting the above errors and omissions. Where a stock item requires no correction you are to write No Correction. (10 marks)

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QUESTION 2 CONTINUED When a business conducts a stock-take it often finds that the number of units physically counted of a particular product does not agree with the stock records. REQUIRED (c) Give 3 possible reasons for this difference. (6 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 2 (a) (i) Original balance on Sales Ledger Control at 31 March 2006 Add: Understated opening balance 86,500 - 85,600) Overstated bad debt (118 - 112) 92,875

900 6 906 93,781

Less: Omission of discount allowed Revised balance (ii) Original total of individual debtor balances at 31 March 2006 Add: Cash sales incorrectly posted Less: Omission of contra Incorrect posting of sales returns (2,900 x 2) Revised total of balances

86 93,695

97,895

1,950 99,845 350 5,800 6,150 93,695

(b) Original stock valuation at 31 January 2006 Add Item (1) (2) (3) (4) No Correction (500 x 30) - (16,500 - 2,500) (100 x 160) - 8,500 2,400 150 x 100 1,600 1,600 1,000 7,500 Deduct

182,700

8,500

6,900 175,800

Revised stock valuation at 31 January 2006

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MODEL ANSWER TO QUESTION 2 CONTINUED (c) (1) (2) (3) Incorrect recording Incorrect stock count Pilferage

An additional acceptable answer could be: (4) Breakages

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QUESTION 3 Caplan Ltd has a head office in Oxford and a branch in Wakefield. All purchases are made by head office and invoiced to the Wakefield branch at cost plus one third. All financial records of the branch are maintained in the head office ledgers. The following details related to the Wakefield branch in respect of the year ended 30 June 2005: Goods sent to branch at selling prices Branch returns to head office at selling prices Sales Total of authorised price reductions during the year Stocks valued at selling prices: 30 June 2004 30 June 2005 212,000 1,600 211,200 2,000 10,600 6,800

The manager of the Wakefield branch is aware that stock thefts have occurred during the year but is uncertain as to the value of these thefts. REQUIRED (a) Calculate, at selling price, the total value of stock thefts from the Wakefield branch for the year ended 30 June 2005. (7 marks) (b) Prepare the Wakefield Branch Stock Adjustment Account for the year ended 30 June 2005. No other accounts are required. (7 marks) On 1 October 2005, G Parker of London consigned 200 cases of goods costing 85,000 to S Choi, his agent in Hong Kong. The terms of Chois agreement entitled him to a commission of 3% of the gross sales value. Parker incurred the following costs in relation to the consignment: Freight Insurance Container hire 2,900 800 500

Additional information: (1) On receipt of the consignment, Choi paid import duties of 600 and landing charges of 200 (2) On 31 December 2005, Choi informed Parker that he had sold 165 cases at 600 a case REQUIRED (c) Prepare, in the ledger of G Parker, the Consignment to Choi Account. You are to show the transfer to Parkers Profit and Loss Account in respect of the year ended 31 December 2005. (11 marks) (Total 25 marks)

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MODEL ANSWER TO QUESTION 3 (a) Opening stock Goods sent to branch

10,600 212,000 222,600

Less: Sales Goods returned to head office Price reductions Book stock Actual stock Stock loss at selling prices

211,200 1,600 2,000 214,800 7,800 6,800 1,000

Award marks if correct function used - any format acceptable (b) Branch Stock Adjustment Account Balance b/d [4] 2,000 Branch Stock a/c [5] 250 400 1,700 51,300 55,650 2,650 53,000

Branch Stock Account: Price reductions Stock loss [1] HO returns [2] Balance c/d [3] Branch Profit & Loss: Gross Profit

55,650

Notes: Cost plus a third equates to 25% on selling [1] [2] [3] [4] [5] 1,000 x 25% 1,600 x 25% 6,800 x 25% 10,600 x 25% 212,000 x 25%

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MODEL ANSWER TO QUESTION 3 CONTINUED

(c) Consignment to Choi Goods on consignment 85,000 Bank/cash: Freight 2,900 Insurance 800 Container hire 500 Choi: Import duties 600 Landing charges 200 Commission (3% x 99,000) 2,970 Parker P& L 21,780 114,750 Choi: Sales (165 x 600) Stock c/d (35 x 450) [1] 99,000 15,750

114,750

Workings [1] [85,000 + 2,900 + 800 + 500 + 600 + 200] = 450 200

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QUESTION 4 Gordon Marshall does not maintain double-entry records but has produced the following cash book summary for the year ended 31 December 2005: Bank Receipts Receipts from debtors Cash sales Cash banked Payments Payments to creditors Cash purchases Expenses Drawings Delivery van (purchased 1 Jan 2005) Cash banked Assets and liabilities were as follows: 1 Jan 2005 7,800 4,000 1,800 3,400 70 2,000 31 Dec 2005 9,350 5,950 2,050 8,500 30 2,400 82,500 3,000 62,000 7,400 3,000 8,000 Cash 5,200 400 500 Unknown 3,000

Debtors Creditors Expense accruals Expense prepayments Bank balance Cash balance Stock

Additional information: (i) (ii) Gordon has decided to depreciate the van on a straight-line basis over 5 years and estimates that the van will have a resale value of 1,000 at the end of five years A Doubtful Debts Provision of 2% of debtors is to be created at 31 December 2005

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QUESTION 4 CONTINUED REQUIRED (a) Calculate the following for the year ended 31 December 2005: (i) (ii) Total sales Total purchases (6 marks) (b) Prepare for Gordon Marshall a Trading and Profit & Loss Account for the year ended 31 December 2005. (7 marks) (c) Prepare for Gordon Marshall a Balance Sheet at 31 December 2005. (6 marks) Gordon wishes to compare his business results with that of a competitor. REQUIRED (d) Using figures extracted from the above final accounts, calculate the following ratios. Clearly show all workings: (i) (ii) Gross Profit Margin (2 marks) Current/Working Capital (2 marks) (iii) Liquidity/Acid Test (2 marks) (Total 25 marks)

(iii) The value of cash drawings

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MODEL ANSWER TO QUESTION 4 (a) (i) (ii) (iii) 9,350 + 82,500 + 5,200 - 7,800 = 89,250 5,950 + 62,000 + 400 4,000 = 64,350 70 + 5,200 - 3,000 - 400 -500 - 30 = 1,340

(b)

Gordon Marshall Trading and Profit & Loss Account for the year ended 31 December 2005 Sales Cost of Sales Opening stock Purchases Closing stock Gross Profit Less: Expenses (7,400 + 500 1,800 2,050) Depreciation (8,000 1,000) x 25% 5 Doubtful debts provision (9,350 x 2%) Net Profit 89,250

2,000 64,350 66,350 2,400 63,950 25,300

4,050 1,400 187 5,637 19,663

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MODEL ANSWER TO QUESTION 4 CONTINUED (c) Balance Sheet at 31 December 2005 Cost Depreciation 1,400 8,000 Net 6,600

Fixed Assets Van

Current Assets Stock Debtors (9,350 - 187) Prepayment Bank Cash Current Liabilities Creditors

2,400 9,163 2,050 8,500 30 22,143 5,950 16,193 22,793

Represented by: Opening capital (7,800 + 3,400, + 70 + 2,000 4,000 -1,800) Add: Net Profit for year Less: Drawings (3,000 + 1,340)

7,470 19,663 27,133 4,340 22,793

(d) (i) 25,300 89,250 22,143 5,950 22,143 - 2,400 5,950 x 100 28.35%

(ii)

3.72:1

(iii)

3.32:1

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