LCCI International Qualifications

Accounting
Level 3

Model Answers
Series 2 2009 (3001)

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Accounting Level 3
Series 2 2009

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 2009

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Page 1 of 20
SECTION A
(Answer Questions 1 and 2 in Section A – compulsory)

QUESTION 1

Hong Kong Plastics plc has an authorised share capital of 600,000 ordinary shares of £1 each. Some
years ago the company issued 300,000 of these shares at par and has now decided to issue the
remaining ordinary shares, payable as follows:
£
Application 0.25
Allotment (including premium) 1.15
First call 0.35
Final call 0.25
2.00

Applications were received for 360,000 shares, of which 25,000 were rejected and the application
monies refunded. The shares were allotted to the remaining applicants on a pro-rata basis and the
surplus application money was applied to the amount due on allotment.

The total amount due on allotment and first call was duly received. The entire amount due on the final
call was received from all shareholders with the exception of the holder of 8,000 shares who failed to
pay on the due date. The directors agreed to wait for payment of the outstanding balance, but it still
remains outstanding.

REQUIRED

Prepare the following accounts in the ledger of Hong Kong Plastics plc:
(a) Application

(b) Allotment

(c) First Call

(d) Final Call

(e) Share Premium

(f) Ordinary Share Capital

(Total 20 marks)

3001/2/09/MA Page 2 of 20
MODEL ANSWER TO QUESTION 1

Application Account

Bank 6,250 Bank 90,000

Ordinary Share
Capital 75,000

Allotment 8,750 _____

90,000 90,000

Allotment Account

Ordinary Share
Capital 45,000 Application 8,750

Share Premium 300,000 Bank 336,250

______ ______
345,000 345,000

First Call Account

Ordinary Share
Capital 105,000 Bank 105,000
______ ______
105,000 105,000

Final Call Account

Ordinary Share
Capital 75,000 Bank 73,000

Bal c/d 2,000

______ ______
75,000 75,000

Bal b/d 2,000

3001/2/09/MA Page 3 of 20
MODEL ANSWER TO QUESTION 1 CONTINUED

Share Premium Account

Bal c/d 300,000 Allotment 300,000

______ ______
300,000 300,000

Bal b/d 300,000

Ordinary Share Capital Account

Bal c/d 600,000 Bal b/d 300,000

Application 75,000

Allotment 45,000

First Call 105,000

______ Final Call 75,000

600,000 600,000

Bal b/d 600,000

3001/2/09/MA Page 4 of 20
SECTION A CONTINUED

QUESTION 2
The Balance Sheets of Chao Ltd at 31 December were as follows:
2006 2007
£000 £000 £000 £000 £000 £000
Fixed Assets (NBV) 500 800

Current Assets
Stock 90 75
Debtors 60 50
Bank 35 20
185 145

Creditors due in less

than one year
Creditors 45 40
Dividends 20 45
65 85
Net Current Assets 120 60
620 860
Creditors due after
more than 1 year
10% Debentures 100 200
520 660

Share Capital and Reserves £000 £000

£1 Ordinary Shares 350 450
Share Premium 100 -
General Reserve - 20
Profit and Loss 70 190
520 660

Notes:
(1) During the year ended 31 December 2007, fixed assets costing £400,000 were purchased and
fixed assets with a net book value of £50,000 were sold for £40,000
(2) All financing transactions took place on 1 January 2007
(3) Interim dividends amounting to £45,000 were paid in 2007.

REQUIRED

For Chao Ltd, for the year ended 31 December 2007:

(a) Calculate the operating profit. (5 marks)

(b) Prepare a statement reconciling operating profit to net cash inflow/outflow from operations.
(7 marks)

(c) Prepare the Cash Flow Statement in accordance with FRS 1 (Revised). (8 marks)

(Total 20 marks)

3001/2/09/MA Page 5 of 20
MODEL ANSWER TO QUESTION 2

(a) Calculation of operating profit £000 £000

P&L balance at 31 December 2007 190

Less: P&L balance at 31 December 2006 70
120

Add: Debenture interest (10% x 200) 20

Interim dividend 45

Proposed dividend 45

General Reserve 20
130
250

(b) Reconciliation of Operating Profit to Net Cash Inflow/Outflow from Operations

£000

Operating profit (from (a) above) 250

Depreciation: [500 - (800 + 50 - 400)] 50

Reduction in stock (90 – 75) 15

Reduction in debtors (60 – 50) 10

Loss on asset sale (50 – 40) 10

335

Less: Decrease in creditors (45 – 40) 5

330

(c) Chao Ltd

Cash Flow Statement for the year ended 31 December 2007

£000 £000

Net cash inflow from operating activities 330

Returns on investments and servicing of finance

Debenture interest -20

Capital expenditure and financial investment

Sale of fixed asset 40

Purchase of fixed assets -400

-360

3001/2/09/MA Page 6 of 20
MODEL ANSWER TO QUESTION 2 CONTINUED

Equity dividends paid

Proposed at 31.12.06 20

Interim for year ended 31.12.07 45

-65

Net cash flow before financing -115

Financing

Issue of debentures (200 - 100) 100

..__
Decrease in cash for the period (20 - 35) -15

3001/2/09/MA Page 7 of 20
SECTION B
(Answer any THREE questions from Section B)

QUESTION 3

Cheng Ltd buys old farming machinery, repairs it and then sells the repaired machinery to local
farmers. On 1 March 2001, the company purchased a disused barn with the intention of using it as a
warehouse. The barn required extensive work to be undertaken before it was considered fit for use
and the company incurred the following costs:
£
Purchase price 50,000
Legal fees relating to purchase 3,000
Tiles for new roof 16,000
Concrete for new floor 4,750
Electrical installation 8,250
Wood for internal partitions 5,000
Cost of own labour used 16,000
Warehouse completed in November 2002 - cost of opening party 1,800

Note: Included in the cost of wood for internal partitions was £600 spent on new panels for the
existing doors in the accounts department. The cost of own labour included £2,400 relating to repair
work on the Managing Director's private house. The cost of the land included in the barn purchase
price was £20,000. Land costs are posted to a freehold land account.

The policy of Cheng Ltd is to depreciate buildings at 2% per annum using the reducing balance
method. A full year's depreciation is charged in the year a building is ready for occupation but no
depreciation is charged in the year of disposal. The financial year of the company ends on
31 December.

REQUIRED

(a) Calculate:
(i) the capital cost of the barn to be recorded in the Buildings Account (7 marks)

(ii) the accumulated depreciation on the barn up to 31 December 2006, making your
calculations to the nearest £1. (5 marks)

On the 5 March 2007 the barn was totally destroyed by fire together with three renovated machines.
The following details relate to the renovated machines:
Purchase cost Renovation Cost Anticipated Selling Price
£ £ £
Machine A 3,000 1,500 6,000
Machine B 2,800 2,200 5,500
Machine C 7,000 4,000 10,000

The insurers agreed to pay £70,000 in respect of the loss of the barn and Cheng Ltd received this
amount on 2 February 2008. The company has yet to submit an insurance claim in respect of the
machinery destroyed in the fire.

3001/2/09/MA Page 8 of 20
QUESTION 3 CONTINUED

REQUIRED

(b) Prepare, in respect of the year ended 31 December 2007, the journal entries required to record
the destruction of the barn and the resulting insurance claim. Journal narratives are not required.

(5 marks)

(c) Calculate the value of the insurance claim for the machinery destroyed in the fire. (3 marks)

(Total 20 marks)

3001/2/09/MA Page 9 of 20
 MODEL ANSWER TO QUESTION 3

(a) (i) £

Purchase cost (50,000 - 20,000) 30,000

Legal fees 3,000

Roof tiles 16,000

Concrete 4,750

Electrical 8,250

Wood (5,000 - 600) 4,400

Own labour (16,000 - 2,400) 13,600

80,000
(7 marks)
(ii) Year end
31-Dec Dep'n NBV
£ £

2002 £80,000 x 2% 1,600 78,400

2003 £78,400 x 2% 1,568 76,832

2004 £76,832 x 2% 1,537 75,295

2005 £75,295 x 2% 1,506 73,789

2006 £73,789 x 2% 1,476 72,313

7,687
(5 marks)
(b) Dr Cr
£ £

Buildings Disposal Account 80,000

Buildings Account 80,000

Accumulated Depreciation - Buildings 7,687

Buildings Disposal Account 7,687

Insurers 70,000

Buildings Disposal Account 70,000

Profit & Loss Account 2,313

Buildings Disposal Account 2,313

(5 marks)

3001/2/09/MA Page 10 of 20
MODEL ANSWER TO QUESTION 3 CONTINUED

(c)
Cost NRV Claim
Machine £ £ £

A (3,000 + 1,500) 4,500 6,000 4,500

B (2,800 + 2,200) 5,000 5,500 5,000

C (7,000 + 4,000) 11,000 10,000 10,000

_____
19,500
(3 marks)

(Total 20 marks)

3001/2/09/MA Page 11 of 20
SECTION B CONTINUED

QUESTION 4

Bao Corporate Media Ltd produced the following Balance Sheet at 31 December 2008:
Tangible Fixed Assets £ £ £
Premises 200,000
Motor vehicles 88,000
Equipment 125,000
413,000
Current Assets
Stock 15,000
Trade debtors 65,000
Prepayments 500
80,500
Creditors: Amounts falling due within 1 year
Trade creditors 16,000
Accruals 2,000
Bank overdraft 5,500
Proposed dividends 20,000
43,500
Net Current Assets 37,000
450,000
Creditors: Amounts falling due after more than 1 year
6% Debenture (2014) 25,000
425,000
Share Capital and Reserves £
200,000 £1 ordinary shares fully paid 200,000
General Reserve 50,000
Profit and Loss 175,000
425,000

The following forecasts relate to the financial year ending 31 December 2009:
(1) Sales for the year, all on credit, are estimated at £800,000. Receipts from debtors are estimated
at £825,000
(2) Credit purchases will amount to £400,000 and payments to creditors will amount to £390,000
(3) Payments for operating expenses (including interest) will amount to £450,000. Included in this
total is £24,000 in respect of insurance covering the period 1 March 2009 to 28 February 2010.
Wages accrued at the year end will amount to £3,000
(4) It is expected that stock at the 31 December 2009 will amount to 7.5% of credit purchases
(5) Motor vehicles with a net book value of £20,000 will be sold for £18,000 and new equipment
costing £30,000 acquired. At 31 December 2009, £5,000 will still be owed on the equipment and
should be treated as a creditor
(6) The General Reserve of £50,000 will be converted into bonus shares following which a rights
issue of ordinary shares will take place. The rights issue will be on the basis of 1 ordinary share
for every 5 then held. The price per share will be £1.30 payable on application. The issue is
expected to be fully subscribed and all cash received by the 31 December 2009
(7) A dividend of £0.10 per share will be proposed at 31 December 2009 on all shares then in issue
(8) It may be assumed that all receipts and payments will pass through the bank account.

REQUIRED

Prepare an extract from the forecast balance sheet of Bao Corporate Media Ltd showing the working
capital position at 31 December 2009.
(Total 20 marks)

3001/2/09/MA Page 12 of 20
MODEL ANSWER TO QUESTION 4

Bao Corporate Media Ltd

Forecast Balance Sheet extract at
31/12/2009
Current Assets £ £

[a] Stock 30,000

[b] Debtors 40,000

[c] Prepayments 4,000

[d] Bank 17,500

91,500

Creditors: amounts due within 1 year

[e] Creditors 31,000

[f] Accruals 3,000

[g] Proposed dividends 30,000

64,000
Net Current Assets/Working Capital 27,500

Workings:
[a] Stock [b] Debtors [c] Prepayments

Opening 15,000 Opening 65,000 Opening 500

To: To:
Trading -15,000 [1] 800,000 P&L -500
From: [1] -825,000
Trading [4] 30000* 40,000 [3] 4,000**
30,000 4,000

[d] Bank [e] Creditors [f] Accruals

Opening -5,500 Opening 16,000 Opening 2,000

Dividends -20,000 [2] 400,000 To:
[1] 825,000 [3] -390,000 P&L -2,000
[2] -390,000 [5] 5,000 [3] 3,000
[3] -450,000 31,000 3,000
[5] 18,000
[5] -25,000 [g] Dividends * 0.075 x 400,000

[6] 65,000*** Opening 20,000 ** 1/6th x 24,000

17,500 Bank -20,000
[7] 30,000 *** 1.3 x0.2 (200,000 + 50,000)
30,000

3001/2/09/MA Page 13 of 20
SECTION B CONTINUED

QUESTION 5

Chun and Yan share profits and losses in the ratio 3:2. Yan is entitled to an annual salary of £8,000
and both partners receive interest at 5% per annum on their capital account balances. The following
balances were extracted from the books of the partnership at 31 March 2008:
£ £
Premises 80,000 Capital Accounts:
Goodwill 36,000 Chun 90,000
Equipment 15,000 Yan 30,000
Drawings: Current Accounts:
Chun 25,000 Chun 25,000
Yan 15,000 Yan 15,000
Stock 50,000 Creditors 10,000
Debtors 24,000 Loan (2010) 30,000
Bank 3,000 Profit for year to 31.3.08 48,000
248,000 248,000

Additional information:

(1) The net profit for the year was 8% of sales and the gross profit mark-up was 100%
(2) Administration costs represented 40% of the cost of sales and selling costs totalled 15% of sales
(3) The loan was taken out on 1 October 2007 at an interest rate of 10% per annum.

REQUIRED

(a) Re-create the Profit and Loss Account (in as much detail as the information provided will allow)
and prepare the Appropriation Account for the year ended 31 March 2008.
(7 marks)

On 1 April 2008 Ning was admitted as a partner on the following terms:

(1) Ning contributed £80,000 cash of which 25% represented his share of goodwill. He also
introduced some equipment valued at £4,000 and a motor vehicle valued at £10,000
(2) Goodwill was valued at 4 years' purchase of the weighted average profits/(losses) of the last 3
years. These were as follows:
£ Weights
31 March 2006 (34,000) 1
31 March 2007 35,000 2
31 March 2008 48,000 3

(3) The partners decided that the value of goodwill was no longer to be retained in the books but the
value of premises was to be increased to £100,000 and the value of stock reduced to £40,000
(4) Chun and Yan would continue to share profits/(losses) between themselves in the same ratio.

REQUIRED

(b) Prepare, at 1 April 2008 the:

(i) Capital Accounts, in columnar form, of Chun, Yan and Ning (8 marks)

(ii) Opening Balance Sheet of the new partnership in vertical format. (5 marks)

(Total 20 marks)

3001/2/09/MA Page 14 of 20
MODEL ANSWER TO QUESTION 5

(a) Initial workings:

If net profit = 8% of sales, sales must equal: 48,000 x 100 = 600,000

8

If mark-up = 100%, gross profit margin must be: 100 x 100 = 50%
200

Gross profit therefore equals sales of 600,000 x 50% = 300,000

Cost of sales therefore equals sales of 600,000 - gross profit of 300,000 = 300,000

Chun and Yan

Profit & Loss and Appropriation Account
for the year ended 31 March 2008
£ £

Gross Profit 300,000

Less:

Administration costs (300,000 x 40%) 120,000

Selling costs (600,000 x 15%) 90,000

Loan interest 30,000 x 10% 1,500

2
Other costs [R] 40,500
252,000
Net Profit 48,000

Less:

Salary - Yan 8,000

Interest on capital:

Chun (90,000 x 5%) 4,500

Yan (30,000 x 5%) 1,500

14,000
34,000
Dividend:

Chun (34,000 x 60%) 20,400

Yan (34,000 x 40%) 13,600

-34,000

3001/2/09/MA Page 15 of 20
MODEL ANSWER TO QUESTION 5 CONTINUED
(b)

Initial workings:

Revised Goodwill

2001 (34,000) x 1 = -34,000

2002 35,000 x 2 = 70,000

2003 48,000 x 3 = 144,000

6 180,000

180,000 x4= 120,000

6

To share between Chun and Yan = 120,000 - 36,000 = 84,000

60% Chun 50,400

40% Yan 33,600

Nin's share of goodwill = 80,000 x 25% = 20,000

Nin's profit share therefore = 20,000 equals one sixth

120,000

Revised profit share between Chun, Yan and Ning equals 3:2:1

Goodwill write-off therefore:

Chun one half 60,000

Yan one third 40,000
Ning one sixth 20,000

Revaluation Profit

New values: Premises 100,000

Stock 40,000
140,000
Less old values: Premises 80,000
Stock 50,000
130,000
Revaluation increase 10,000

Shared: 60% Chun 6,000

40% Yan 4,000

3001/2/09/MA Page 16 of 20
MODEL ANSWER TO QUESTION 5 CONTINUED

(b) (i)
Capital Accounts

Details C Y N Details C Y N
£ £ £ £ £ £

Goodwill write-off 60,000 40,000 20,000 Balance b/d 90,000 30,000

Balance c/d 86,400 27,600 74,000 Goodwill increase 50,400 33,600

Own figures if in correct ratio Revaluation profit 6,000 4,000

Bank 80,000

Motor vehicle 10,000

Equipment 4,000
146,400 67,600 94,000 146,400 67,600 94,000

Balance b/d 86,400 27,600 74,000

3001/2/09/MA Page 17 of 20
MODEL ANSWER TO QUESTION 5 CONTINUED

(b) (ii)
Chun, Yan and Ning
Balance Sheet at 1 April 2008

Fixed Assets £ £

Premises 100,000

Equipment (15,000 + 4,000) 19,000

Motor vehicles 10,000

129,000

Current Assets

Stock 40,000

Debtors 24,000

Bank (3,000 + 80,000) 83,000

147,000

Current Liabilities

Creditors 10,000
Net Current Assets 137,000
266,000

Long term Liabilities

Loan 30,000
236,000

Financed by: £

Capital Accounts:

Chun 86,400

Yan 27,600

Ning 74,000
188,000

Current Accounts:

Chun (25,000 + 4,500 + 20,400 - 25,000) 24,900

Yan (15,000 + 8,000 + 1,500 + 13,600 - 15,000) 23,100

236,000

3001/2/09/MA Page 18 of 20
SECTION B CONTINUED

QUESTION 6

Brean has sold desks for many years. On 1 January 2008 he opened his first branch in Barrow. All
double entry records are kept at the head office. All desks are purchased by head office and invoiced
to Barrow at selling prices fixed to give a gross profit of 30% on sales revenue. All sales are for cash.

In the year ended 31 December 2008, the following occurred:

(1) Head office sent 480 wooden desks costing £91 each and 125 metal desks costing £63 each to
the Barrow branch.
(2) The Barrow branch returned 60 wooden desks and 5 metal desks to head office as they were the
wrong colour.
(3) At 31 December 2008, 50 wooden desks and 6 metal desks remained in stock at the Barrow
branch.
(4) Head office made the following payments on behalf of the Barrow branch:

£6,000 rent for the fifteen month period to 31 March 2009;

£40 per month for sundry expenses;
£25 per week for the wages of part time staff;
£250 per month for the manager’s salary.

At 31 December 2008 it was discovered that no stock had been damaged, lost or stolen. The part
time staff were entitled to a commission equal to 5% of sales revenue. The manager was entitled to a
bonus equal to 1% of the branch net profit before charging the bonus.

REQUIRED

(a) Prepare the following accounts for the year ended 31 December 2008, as they would appear in
the head office books of Brean:

(i) Branch Stock

(ii) Branch Stock Adjustment

(iii) Branch Profit and Loss

(18 marks)

(b) Suggest one reason why the manager might be dissatisfied with the bonus system.
(2 marks)

(Total 20 marks)

3001/2/09/MA Page 19 of 20
 MODEL ANSWER TO QUESTION 6

(a)
(i) Branch Stock Account

£ £
Goods sent to branch (480 x 91) 43,680 Goods sent to branch (60 x 91) 5,460
Branch stock adj. (480 x 39) 18,720 Branch stock adj. (60 x 39) 2,340
Goods sent to branch (125 x 63) 7,875 Goods sent to branch (5 x 63) 315
Branch stock adj. (125 x 27) 3,375 Branch stock adj. (5 x 27) 135
Bank (370* x 130) 48,100
Bank (114** x 90) 10,260
Balance c/d (50 x 130) 6,500
………. Balance c/d (6 x 90) 540
73,650 73,650

* 480-60-50 = 370
** 125-5-6 = 114

(ii) Branch Stock Adjustment Account

£ £
Branch stock 2,340 Branch stock 18,720
Branch stock 135 Branch stock 3,375
Profit and loss (R) 17,508
Balance c/d (50 x 39) 1,950
Balance c/d (6 x 27) 162
22,095 22,095

(iii) Branch Profit and Loss Account

£ £
Rent (6,000 x 12/15) 4,800 Branch stock adjustment 17,508
Sundry (40 x 12) 480
Wages (25 x 52) 1,300
Salary (250 x 12) 3,000
Comm. (0.05 x 58,360) 2,918
Profit before bonus 5,010
17,508 17,508
Bonus (0.01 x 5,010) 501 Profit before bonus 5,010
Net profit 4,509
5,010 5,010

3001/2/09/MA Page 20 of 20 © Education Development International plc 2009

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