SECOND LEVEL SERIES 3/2006 1

QUESTION 1

Masterson plc manufactures electrical components. The following partial list of balances was
extracted at 28 February 2006:
£ 000
Sales 1,550
Raw material:
Purchases 225
Returns outwards 8
Carriage inwards 6
Direct labour 200
Direct overheads 30
Factory rent 18
Office rent 4
Electricity 25
Insurance 53
Salaries:
Factory supervision 30
Office 90
Directors 110
General office costs 72
Canteen services 55
Cleaning:
Factory 25
Office 6
Stocks at 1 March 2005:
Raw materials 50
Work-in-progress 30
Finished goods (valued at transfer price) 90
Factory machinery:
Cost 240
Accumulated depreciation 60
Office equipment rental 34

Additional information:

(1) Factory rent prepaid 4

(2) Electricity accrued 10
(3) Insurance prepaid 3
(4) Stocks
Raw materials 60
Work-in-progress 39
Finished goods (at transfer price) 87

Depreciation on factory machinery is to be provided at 25% per annum using the reducing
balance method.
Electricity, insurance and canteen services are apportioned as follows: 80% factory and 20%
office. Finished goods are transferred to the Trading Account at total factory cost plus 50%.

REQUIRED
(a) Using relevant information from the above list of balance, prepare a Manufacturing Account
for the year ended 28 February 2006.
(b) Prepare the Provision for Unrealised Profit Account for the year ended 28 February 2006.
SECOND LEVEL SERIES 3/2006 2

QUESTION 2

The following financial statements relate to Philips Ltd:

Trading and Profit & Loss Accounts for the years ended 31 December
2004 2005
£ 000 £ 000
Sales 800 950
Less: Cost of sales 400 495
Gross profit 400 455
Less: expenses (including debenture interest) 325 345
Net profit 75 110
Balance Sheets at 31 December
2004 2005
£ 000 £ 000 £ 000 £ 000
Fixed assets 285 390
Current Assets:
Stock 60 90
Trade debtors 185 190
Bank 85 60
330 340
Liabilities due within 1 year:
Trade creditors 75 80

Net Current Assets 255 260

540 650
Liabilities due after more than 1 year:
10% debentures (2010) – issue 2000 100 100
440 550
Capital and Reserves
Ordinary shares of £1 each 300 300
Retained profits 140 250
440 550
Note: Stock at 1 January 2004 was £55,000

REQUIRED:

(a) Calculate the following ratios for both 2004 and 2005. All workings must be shown and
answers shown to two decimal places where necessary.
(i) Gross profit margin
(ii) Mark-up percentage
(iii) Net profit margin. Use net profit before interest
(iv) Rate of stock-turnover based upon average stock
(v) Current ratio
(vi) Liquidity ratio
(vii) Return on total capital employed. Use net profit before interest

(b) Using your answer to the stock-turnover ratio, state whether the above business is more
likely to be a supplier of computer parts or of fresh vegetables. Give a reason for your
choise.

(c) Calculate the revised liquidity ratio if a six month loan for £50,000 had been negotiated and
the cash received, immediately following the preparation of the Balance Sheet dated 31
December 2005. You may assume that no other balance sheet movements took place.
SECOND LEVEL SERIES 3/2006 3

QUESTION 3

Andrew and Brenda are in partnership, sharing profits and losses in the ratio 4:1 respectively.
The following Trial Balance was extracted from the books at 31 December 2005:

Dr Cr
£ £
Capital Accounts - Andrew 40,000
- Brenda 10,000
Office equipment - net book value 18,000
Motor vehicles - net book value 16,000
Net loss for the year ended 31 December 2005 22,390
Creditors 35,650
Debtors 28,450
Stock 19,800
Bank 8,600
Current Accounts - Andrew 5,210
- Brenda 32,800
118,450 118,450

Additional information:
In accordance with the partnership agreement, Brenda is entitled to a salary of £10,000 per
annum and both partners are entitled to 5% interest on their respective capital account balances.

REQUIRED

(a) The Appropriation Account of Andrew and Brenda for the year ended 31 December 2005.

(b) In Columnar form, the Current Accounts of Andrew and Brenda at 31 December 2005.

Following two very poor trading years, Andrew retired on 1 January 2006. On the same day,
Clive joined Brenda in partnership investing £35,000 in cash and a motor vehicle worth £5,000.

Additional Information
(1) Brenda and Clive will share profits and losses equally.
(2) The goodwill of the old partnership was valued at £25,000 although no goodwill account is to
be retained in the books of the new partnership.
(3) The Current Account balances of Andrew and Brenda were transferred to their Capital
Accounts on 1 January 2006.
(4) The amount owing to Andrew on his retirement, other than for an immediate payment of
£8,878 is to be retained as an interest free loan to the new partnership. This will be repaid in
equal instalments over five years commencing September 2006.

REQUIRED

(c) Prepare, in columnar form, the Capital Accounts of Andrew, Brenda and Clive to record
both the retirement of Andrew and the admission of Clive.

(d) Prepare the Opening Balance Sheet of Brenda and Clive at 1 January 2006.
 SECOND LEVEL SERIES 3/2006 4

QUESTION 4

Sandra prepared her Trial Balance at 31 March 2006, but found that it did not agree.
The difference was posted to a suspense account and the following errors and
omissions were subsequently discovered:

(1) Sandra had taken goods valued at £1,000 at cost for her own use but no entries had
been made in the books.
(2) A cheque of £500 for insurance was entered correctly in the Cash-Book but debited
as £800 in the Lighting and Heating account.
(3) A payment of £450 to creditor E Clair was credited both to the Bank Account and E
Clair’s account.
(4) The debit balance of £3,600 on the Travel Expenses account had been omitted from
the Trial Balance.
(5) Discounts allowed, totalling £800, had been credited to the Discounts Allowed
Account. The correct entries had been made in the individual debtors’ accounts.
(6) An invoice for petrol £150 bought from B Jolly had been omitted from the books.
(7) A computer system, costing £5,000 and purchased for use in the business, had been
credited to the Repairs Account. The correct entry had been made in the Cash-Book.
Sandra provides for a full year’s depreciation of 25% on all assets purchased during a
financial year.

REQUIRED

(a) Prepare journal entries, excluding narrations, to correct the above errors and
omissions.

(b) The provisional net profit of Sandra for the year ended 31 March 2006 was
£51,245. Prepare a statement showing the revised net profit that will result form
the correction of the above errors and omissions.