CT2-PX-0 - QP-x2-x3

Subject CT2: Assignment X2
2006 Examinations
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email ActEd@bpp.com. Your ActEd Student Number
is not the same as your Faculty/Institute Actuarial
Reference Number or ARN.
Note: If you spend more than 2 hours on the

assignment, you should indicate on the assignment
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Grade:
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Score: ______%
Markers initials: ________
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The Actuarial Education Company
IFE: 2006 Examinations
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CT2: Assignment X2 Questions
Page 1
For questions 2.1 - 2.10 indicate on your answer sheet which one of the answers A, B, C
or D is correct.
Question X2.1
Which of the following might explain why post-tax profits shown in the profit and loss
account may not be available for distribution to a companys ordinary shareholders?
I
II
III
Past profits are too low.

There is a transfer to a general reserve.
Preference dividends must be paid.
A
B
C
D
I and II
II and III
I only
III only
[2]
Question X2.2
In January 2004 Nafco Ltd bought some machinery for 70,000. The machinery will be
depreciated using the reducing balance method over 10 years, assuming a scrap value of
5,000 at the end of the period. What was the value shown in the accounts on 31
December 2004 in respect of this machinery?
A
B
C
D
63,500
63,000
53,763
16,237
[2]
Page 2
Question X2.3
Which of the following might help explain why a large companys tax charge ratio is
less than 30% (in an environment in which corporation tax is payable at the rate of
30%)?
I
Capital allowances available on fixed assets are greater than the depreciation
charged by the company
II
Receipt of unfranked investment income
III
Receipt of overseas income
A
B
C
D
I and II
II and III
I only
III only
[2]
Question X2.4
A company has an issued share capital of 1m in ordinary 1 shares and reserves of
2.5m. The ordinary shares are quoted on the London Stock Exchange and stand at a
price of 500p in the market. The company has decided to capitalise 1m of the reserves
by means of a 1 for 1 scrip issue and then to make a rights issue of 200,000 new
ordinary 1 shares at 2 each in the proportion of one new share for five held prior to
the scrip issue. In theory, what will be the price of the ordinary shares after both issues
have been made, in the absence of market movements?
A
B
C
D
225p
227p
230p
245p
[2]
Page 3
Question X2.5
Which of the following does NOT have to be part of a listed companys annual report
and accounts?
A
B
C
D
cashflow statement
notes to the accounts
profit and loss account
balance sheet
[2]
Question X2.6
Which of the following is NOT a requirement for a published report and accounts?
A
The accounts should be compiled assuming that the company is a going concern.
Income and expenditure should be taken into account in the year in which it is
earned or incurred respectively.
The amounts should be calculated on a prudent basis.
The accounting policies selected must be judged to be the most appropriate for
giving a true and fair view of the financial position of the company.
[2]
Question X2.7
Which of the following changes in working capital will result in an improvement in a
companys net cash inflow from operating activities?
A
B
C
D
increase in creditors
increase in stock
increase in debtors
decrease in other current liabilities
[2]
Question X2.8
Which of the following is NOT a current asset?
A
B
C
D
stock
debtors
creditors
cash
[2]
Page 4
Question X2.9
Which of the following would NOT be included in a firms equity?
A
B
C
D
retained earnings
dividends
share capital
the revaluation of a fixed asset
[2]
Question X2.10
How are cash and long-term loans treated in the trial balance?
A
B
C
D
Cash is a credit item and a long-term loan is a debit item.

Both cash and the long-term loan are credit items.
Cash is a debit item and a long-term loan is a credit item.
Both cash and long-term loans are debit items.
[2]
Question X2.11
Describe eight accounting principles that should be applied in the production of a set of
accounts and give brief details of the aim of each of those principles.
[12]
Question X2.12
(i)
Define depreciation and explain the purpose of charging depreciation in a

companys accounts.
[3]
(ii)
With the aid of a simple numerical example, explain two methods of calculating
depreciation.
[4]
[Total 7]
Question X2.13
Name four users of accounting information and give examples, with reasons, of the type
of information in which they are interested.
[6]
Page 5
Question X2.14
Write short notes on:
(i)
auditors reports
(ii)
the Accounting Standards Board (ASB).
[3]
[3]
[Total 6]
Page 6
Question X2.15
The following information has been extracted from the bookkeeping records of Z plc:
Trial balance as at 30 June 2001
Administrative expenses
Advertising
Bank
Creditors
Debtors
Interest
Land and buildings - cost
Land and buildings - depreciation
Loan
Manufacturing overheads
Plant and machinery - cost
Plant and machinery - depreciation
Profit and loss as at 1 July 2000
Purchases
Sales
Share capital
Share premium
Stock as at 1 July 2000
Wages - administrative staff
Wages - distribution staff
Wages - manufacturing
000
25
200
000
6
54
140
120
983
45
600
35
550
150
180
450
1,200
200
300
18
44
30
140
2,735
2,735
Notes:
(i)
Closing stock was counted at the year end and was valued at 19,000.
(ii)
Depreciation is to be charged on the following bases:

Land and buildings - 2% of cost
Plant and machinery - 25% of reducing balance
(iii)
The directors have decided to pay a dividend of 80,000 for the year.
(iv)
The corporation tax charge has been estimated at 22,000 for the year.
Prepare Z plcs profit and loss account for the year ended 30 June 2001 and its balance
sheet as at that date. These should be in a form suitable for publication insofar as this is
possible from the information provided.
[15]
Page 7
Question X2.16
(i)
Explain the purpose of a cashflow statement
[4]
(ii)
Consider the following seemingly healthy company.

Extracts from the profit and loss account for 2003
(figures in 000s)
Gross profit
Depreciation
Other expenses
Net profit
1,350
(200)
(350)
800
Interest paid
Pre-tax profit
(500)
300
Tax
Earnings
(90)
210
Dividends to shareholders
Retained earnings
(50)
160
Extracts from the balance sheet

(figures in 000s)
01-Jan-03
01-Jan-04
9,250
11,500
250
51
13
314
360
240
54
654
350
10
20
380
120
30
60
210
Long-term debt
Total
5,000
4,184
7,600
4,344
Share capital
Profit and loss reserve
2,000
2,184
2,000
2,344
Fixed assets
Current assets:
Stock
Debtors
Cash in bank
Current Liabilities:
Creditors
Tax payable
Dividends payable
During the year the company did not sell any of its fixed assets.
Page 8
Prepare the companys cashflow statement for the year 2003 and comment on
any problems you uncover.
[10]
[Total 14]

2006 Examinations
Time allowed: 3 hours
Instructions to the candidate

1.
Please note that we only accept the current version of assignments for marking, ie you
can only submit this assignment in the sessions leading to the 2006 exams.
2.
Attempt all of the questions, leaving space in the margin and between questions for
the markers comments.
3.
Attempt the questions as far as possible under exam conditions.
4.
Please show full working to multiple choice questions so that the marker can give
helpful advice if you get any of these questions wrong.
5.
You should aim to submit this script for marking by the recommended submission
date. The recommended and deadline dates for submission of this assignment are
listed in the Study Guide for the 2006 exams, on the summary page at the back of this
pack and on our website at www.ActEd.co.uk.
Scripts received after the deadline date will not be marked. It is your responsibility to
ensure that scripts are posted in good time. ActEd will not be responsible for scripts
lost or damaged in the post or for scripts received after the deadline date.
6.
Please do not fax your script to ActEd for marking. (Scripts received by fax will not
be marked.)
7.
We recommend that you photocopy your script before posting it to ActEd for
marking.
At the end of the assignment

If your script is being marked by ActEd, please follow
the instructions on the reverse of this page.
In addition to this paper, you should have available actuarial tables

and an electronic calculator.
Submission for marking

1.
2.
3.
4.
5.
6.
7.
Write your name and address for the return of your script where indicated on the
assignment cover sheet. We will not change your address in our records as a result of
the address you write here unless you specifically ask us to.
Do not staple more than one assignment together.
Complete the checklist on the assignment cover sheet.
Please comment on your last marker. We use this information to allocate markers,
to set remuneration levels, and to improve the marking of future assignments. When
assessing your marker, please concentrate on the usefulness of his/her comments to
you. Please try to ignore the speed of marking or the grade you were given, as we
monitor these aspects of markers performance separately.
Photocopy your script before posting it to ActEd for marking. A small number of
scripts do get lost in the post each year. If you take a photocopy of your script, well
be able to mark this in the unlikely event of the original getting lost in the post.
If you are using a Marking Voucher, attach the voucher to the script.
Post your script to 31 Bath Street, Abingdon, Oxon, OX14 3FF.
Recommended submission dates and deadline dates

We suggest that you submit this script by the recommended submission date, which is given
in the Study Guide for the 2006 exams, on the summary page at the back of this pack and on
our website at www.ActEd.co.uk. These recommended dates have been set in order to give
you an even progression through the course and to leave plenty of time for revision.
Unless you are using a Marking Voucher, any scripts received by ActEd after the deadline
date will be returned unmarked. It is your responsibility to ensure that your script is posted in
good time to reach us from your place of posting. Details of deadline dates are set out in the
Study Guide, on the summary page at the back of this pack and on our website. If you are
using Marking Vouchers, then please make sure that your script reaches us by the Marking
Voucher deadline date to give us enough time to mark and return the script before the exam.
You should be aware that there will be enormous pressure on ActEd markers around the time
of the final deadlines. Scripts submitted at such time may have a significantly slower
turnaround time than normal.
Notes on markers section
The markers main objective is to give you advice on how to improve your answers. The
marker will also assess your script quantitatively and qualitatively. The percentage score
gives you a quantitative assessment. The grade is a qualitative assessment of how your script
might be classified in the exam. The grades are as follows:
A = Clear Pass
B = Probable Pass C = Borderline D = Probable Fail E = Clear Fail

2006 Examinations
Please complete the following information:
Name:
Address:
Attempt conditions
Time to do assignment
(see Note below):
_____ hrs _____ mins
ActEd Student Number (see Note below):
Under exam conditions

(delete as applicable):
yes / nearly / no
Note: Your ActEd Student Number is printed on all

personal correspondence from ActEd. Quoting this
number will help us to process your scripts quickly. If
you do not complete this box, your script may be delayed.
If you do not know your ActEd Student Number, please
email ActEd@bpp.com. Your ActEd Student Number
is not the same as your Faculty/Institute Actuarial
Reference Number or ARN.
Note: If you spend more than 3 hours on the

assignment, you should indicate on the assignment
how much you completed within this time so that
the marker can provide useful feedback on your
chances of success in the exam.
Score and grade for this assignment (to be completed by marker):

Grade:
A B C D E
Score: ______%
Markers initials: ________
Please grade your Assignment X2 marker by ticking the appropriate box:

[
[
[
[
]
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]
Excellent the marker provided comments that were thorough and very helpful
Good the marker provided comments that were generally helpful
Acceptable the marker provided comments that were satisfactory
Poor the marker provided comments that were generally unhelpful
Please give any additional comments here (especially if you rate the marker less than good):
Note: Giving feedback on your marker helps us to improve the quality of marking.
Please turn over
Please tick the following checklist so that your script can be marked quickly:
Have you:
[
[
[
[
[
[
[
]
]
]
]
]
]
Checked that you are using the latest version of the assignments, eg 2006 for the
sessions leading to the 2006 exams?
Written your full name and postal address in the appropriate box?
Completed your ActEd Student Number in the appropriate box?
Recorded your attempt conditions?
Stapled this cover sheet to your assignment?
Photocopied your script?
Attached your Marking Voucher or ordered Series X Marking?
Post this script to: ActEd, 31 Bath Street, Abingdon, Oxfordshire, OX14 3FF.
Feedback from marker

Comments from marker:
Page 1
For questions 3.1 - 3.10 indicate on your answer sheet which one of the answers A, B, C
or D is correct.
Question X3.1
An entry for goodwill might appear in:
A
B
C
D
the unconsolidated balance sheet of a subsidiary company.

the consolidated balance sheet of a holding company with a subsidiary.
the unconsolidated balance sheet of a holding company with a subsidiary.
the consolidated balance sheet of a holding company with an associate interest.
[2]
Question X3.2
(Current assets stocks) Current liabilities is known as:
I
II
III
Quick ratio
Acid test
Current ratio
A
B
C
D
I and II
II and III
I only
III only
[2]
Question X3.3
Last year Company X made profits before taxation of 85m. Throughout the year, the
company had a mortgage of 50m on which 6m interest was paid, and an 8%
unsecured loan stock with interest payments of 10m. The income cover on the
unsecured loan stock was:
A
B
C
D
5.3
6.3
9.5
10.1
[2]
Page 2
Question X3.4
As a rule of thumb, what is the minimum acceptable asset cover and income cover for
an unsecured loan stock?
A
B
C
D
2.5 for asset cover, 4 for income cover

4 for asset cover, 2.5 for income cover
4 for both asset cover and income cover
2.5 for both asset cover and income cover
[2]
Question X3.5
Q plc makes an offer for 75% of the shares of Z Ltd. Z has issued share capital of
500,000 25p shares, and reserves totalling 450,000. The terms of the offer are four
shares in Q each with a market value of 50p plus 2 nominal of loan stock and 12p
cash per 3 shares in Z. The amount shown as goodwill in Qs consolidated balance
sheet is:
A
B
C
D
83,750
111,667
161,667
255,417
[2]
Question X3.6
A company is usually considered to be an associate where a parent company holds
ordinary shares giving:
A
B
C
D
over 30% of the voting rights.

between 25% and 75% of the voting rights.
[2]
Page 3
Question X3.7
Unlike tangible assets, an intangible asset:
I
II
III
can be created when one company takes over another company

cannot suffer depreciation
cannot be sold
A
B
C
D
I and II
II and III
I only
III only
[2]
The next three questions are based on the following information from the accounts of
Frendo plc for 2003 and 2004:
Sales
Net profit before tax and interest
Debtors
Creditors
Total assets less current liabilities
Long-term loans
Share capital
Reserves
2003
400,000
40,000
30,000
50,000
125,000
50,000
50,000
25,000
2004
500,000
60,000
50,000
75,000
250,000
150,000
60,000
40,000
Question X3.8
The following can be said about the performance of Frendo plc:
A
The return on capital employed has risen because the profit margin has risen.
The return on capital employed has risen because the asset utilisation ratio has
risen.
The return on capital employed has fallen because the fall in the profit margin
has outweighed the rise in the asset utilisation ratio.
The return on capital employed has fallen because the fall in the asset utilisation
ratio has outweighed the rise in the profit margin.
[2]
Page 4
Question X3.9
The shareholders equity ratio has:
A
B
C
D
risen from 40% to 60%.

fallen from 60% to 40%.
[2]
Question X3.10
Assuming that half of Frendos sales are on credit, the average length of time taken by
customers to settle their bills has increased from:
A
B
C
D
23 days to 27 days.
91 days to 109 days.
27 days to 37 days.
55 days to 73 days.
[2]
Question X3.11
(i)
(ii)
Explain briefly, giving simple examples, what is meant by the following terms:
(a)
goodwill on consolidation
(b)
a subsidiary company
(c)
an associated company
(d)
minority shareholders.
[8]
Explain how a holding company would prepare a set of consolidated accounts.

[6]
[Total 14]
Question X3.12
Explain why analysts would sometimes prefer to focus on EBITDA (earnings before
interest, taxation, depreciation and amortisation) rather than EBIT (earnings before tax
and interest).
[2]
Page 5
Question X3.13
Explain why the price earnings ratio and dividend yield are often used as indicators of
the relative cheapness or dearness of a share.
[6]
Question X3.14
(i)
Discuss the complications that arise in the preparation of insurance company

accounts.
[5]
(ii)
Describe the contents of the following insurance company accounts:

(a)
the revenue accounts
[3]
(b)
the non-technical profit and loss account
[3]
(c)
the balance sheet.
[3]
[Total 14]
Page 6
Question X3.15
A friend of yours is considering buying ordinary shares in either Company A or
Company B. Some information is provided below.
Company A
Company B
Share price
180p
95p
Pre-tax profit
Net profit after tax
Dividends and interest:
Preference shareholders
Ordinary shareholders
Unsecured loan stock
420,000
360,000
320,000
240,000
60,000
200,000
75,000
40,000
150,000
30,000
Share capital:
Preference shares
Ordinary shares
Reserves
Loan capital
1,000,000
1,000,000
500,000
1,500,000
500,000
1,500,000
1,000,000
500,000
In addition you are given the information that Company A has 1 million 1 preference
share which have a coupon of 6%, 4 million 25p ordinary shares and 1.5 million
unsecured loan stock with a coupon of 5%. Company B has 500,000 1 preference
share with a coupon of 8%, 6 million 25p ordinary shares and 500,000 unsecured loan
stock with a coupon of 6%.
(i)
On the basis of this information, calculate a number of investment ratios that

might help to analyse the companies from an ordinary shareholders point of
view and state which companys ordinary shares you would advise your friend
to invest in, and why.
[12]
(ii)
Explain, justifying your comments, why such a comparison might yield tenuous
results.
[4]
(iii)
What further information would you like and how would it help you to reach a
decision?
[4]
[Total 20]
Page 7
Question X3.16
The profit and loss account for the year ending 31 December 2002 and the balance sheet
as at 31 December 2001 are shown below for company XYZ, a UK manufacturer.
Profit and loss account for 2002
000
Sales
Cost of sales:
Purchases
less Increase in stock
Depreciation
Gross profit
Expenses:
Rent and rates
Salaries
Trading profit
Long-term loan interest
Pre-tax profit
Tax
Earnings
Dividends
Retained earnings
000
4,000
1,300
(100)
500
(1,700)
2,300
500
200
(700)
1,600
(48)
1,552
(512)
1,040
(364)
676
Page 8
Balance sheet as at 31 December 2001

000
Fixed assets
Current assets:
Stocks
Debtors
Cash
Creditors: amounts falling due within one year:
Taxation
Trade creditors
Dividends
Net current assets
Total assets less current liabilities
Creditors: amounts falling due after more than one
year:
12% loan stock 2015
Capital and reserves:
Ordinary shares of 10p
Reserves
000
3,000
1,300
700
200
400
1,200
300
300
3,300
(400)
2,900
1,100
1,800
2,900
During the year 2002 the following additional financial events occurred (figures in
000s):
Increase in trade creditors
300
Decrease in debtors
100
Tax paid
200
Purchase of fixed assets
500
During 2002 net ordinary dividends of 300,000 were paid. The tax outstanding in the
31 December 2001 balance sheet that was not paid during 2002 was carried forward to
the 31 December 2002 balance sheet. In addition, a half of the sales recorded in 2002
were for cash and a half were on credit terms.

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Subject CT2: Assignment X2

Under exam conditions

Note: Your ActEd Student Number is printed on all

Note: If you spend more than 2 hours on the

Score and grade for this assignment (to be completed by marker):

Markers initials: ________

Please grade your Assignment X1 marker by ticking the appropriate box:

Please turn over

The Actuarial Education Company

IFE: 2006 Examinations

Feedback from marker

IFE: 2006 Examinations

The Actuarial Education Company

CT2: Assignment X2 Questions

Past profits are too low.

The Actuarial Education Company

IFE: 2006 Examinations

CT2: Assignment X2 Questions

Receipt of unfranked investment income

Receipt of overseas income

IFE: 2006 Examinations

The Actuarial Education Company

CT2: Assignment X2 Questions

The amounts should be calculated on a prudent basis.

The Actuarial Education Company

IFE: 2006 Examinations

CT2: Assignment X2 Questions

Cash is a credit item and a long-term loan is a debit item.

Define depreciation and explain the purpose of charging depreciation in a

IFE: 2006 Examinations

The Actuarial Education Company

CT2: Assignment X2 Questions

the Accounting Standards Board (ASB).

The Actuarial Education Company

IFE: 2006 Examinations

CT2: Assignment X2 Questions

Depreciation is to be charged on the following bases:

IFE: 2006 Examinations

The Actuarial Education Company

CT2: Assignment X2 Questions

Explain the purpose of a cashflow statement

Consider the following seemingly healthy company.

Extracts from the balance sheet

The Actuarial Education Company

IFE: 2006 Examinations

CT2: Assignment X2 Questions

IFE: 2006 Examinations

The Actuarial Education Company

Subject CT2: Assignment X3

Time allowed: 3 hours

Instructions to the candidate

Attempt the questions as far as possible under exam conditions.

At the end of the assignment

In addition to this paper, you should have available actuarial tables

The Actuarial Education Company

IFE: 2006 Examinations

Submission for marking

Recommended submission dates and deadline dates

B = Probable Pass C = Borderline D = Probable Fail E = Clear Fail

IFE: 2006 Examinations

The Actuarial Education Company

Subject CT2: Assignment X3

Under exam conditions