Accounting

Level 3

Model Answers
Series 3 2008 (Code 3001)
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Accounting Level 3
Series 3 2008

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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.

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3001/3/08/MA Page 1 of 16
SECTION A

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

QUESTION 1

The following are the Balance Sheets of Bolts plc and its two subsidiaries, Nuts Ltd and Screws Ltd,
all at 31 March 2008:

Bolts plc £000 £000 £000

Cost Depreciation Net
Land and buildings 350 14 336
Office equipment 75 25 50
425 39 386
Investment in Nuts Ltd 150
Investment in Screws Ltd 140

Debtors 45
Bank 30
751

£000
Ordinary share capital (£1 shares) 600
Retained earnings 116
Creditors 35
751

Nuts Ltd £000 £000 £000

Cost Depreciation Net
Land and buildings 150 21 129
Machinery 450 250 200
Office equipment 15 5 10
615 276 339

Stock 50
Debtors 25
414

£000
Ordinary share capital (£1 shares) 300
Retained earnings 20
Creditors 60
Bank overdraft 34
414

Screws Ltd £000 £000 £000

Cost Depreciation Net
Machinery 235 125 110
Office equipment 35 15 20
270 140 130

Stock 70
Debtors 55
255

3001/3/08/MA Page 2 of 16
QUESTION 1 CONTINUED

£000
Ordinary share capital (£1 shares) 150
Retained earnings 35
Creditors 38
Bank overdraft 32
255

Notes

(1) Bolts plc purchased 60% of the shares of Nuts Ltd on 1 April 2007 when Nuts Ltd had a
debit balance on its retained earnings account of £60,000.
(2) Bolts plc bought 80% of the shares in Screws Ltd on 1 October 2007. Screws Ltd had retained
earnings of £25,000 at 1 April 2007 and profits in that company are assumed to accrue evenly
throughout the year.
(3) None of the three companies have declared dividends in respect of the year to 31 March 2008
and there were no inter company debts at 31 March 2008.
(4) Goodwill arising on consolidation is not to be written off.

REQUIRED

Prepare the Consolidated Balance Sheet of Bolts plc and its subsidiaries at 31 March 2008.

(Total 20 marks)

3001/3/08/MA Page 3 of 16
MODEL ANSWER TO QUESTION 1

Preliminary calculations

Investment in Nuts Ltd £000

Cost 150
Net assets [0.6 x (300 – 60)] 144
Goodwill 6

Investment in Screws Ltd £000

Cost 140
Net assets [0.8 x (150 + 25 + 0.5 (35 − 25))] 144
Negative goodwill 4

Retained earnings £000

Bolts plc 116
Nuts Ltd [0.6 x (60 + 20)] 48
Screws Ltd [0.8 x (0.5 (35 − 25))] 4
168

Minority interest £000

Nuts Ltd [0.4 x (300 + 20)] 128
Screws Ltd [0.2 x (150 + 35)] 37
165

Consolidated Balance Sheet of Bolts plc at 31 March 2008

Fixed Assets £000 £000 £000

Cost Depn Net
Land and buildings 500 35 465
Machinery 685 375 310
Office equipment 125 45 80
1,310 455 855
Goodwill (6 – 4) 2
857

Current Assets
Stock 120
Debtors 125
Bank 30 275
Less Liabilities: amounts due within 1 year
Creditors 133
Bank overdraft 66 199

Net Current Assets 76

933

Share Capital and Reserves £000

Ordinary Share Capital 600
Retained profits 168
768
Minority interest 165
933

3001/3/08/MA Page 4 of 16
SECTION A CONTINUED

QUESTION 2

The Trial Balance at 31 March 2008 of Jackson Ltd did not balance. A Suspense Account with a
credit balance of £280 was created. This was treated as a liability due within one year when preparing
the draft year end accounts.

These accounts showed the following amounts:

Gross profit of £43,450

Net profit of £17,230
Current assets of £3,250
Liabilities due within one year (including a bank overdraft of £340) £2,420.

When checking the company’s records the auditor discovered the following errors:

(1) Postal expenses of £84 had been correctly recorded in the bank account but debited in the
expense account as £48
(2) A returns inward of £72 had been credited to sales account and also credited to the customer’s
account
(3) A payment to bank from cash of £180 had been debited to cash account and credited to the bank
account
(4) The balance on a supplier’s account of £460 had been omitted from the trial balance.

REQUIRED

(a) Prepare the Suspense Account showing the effects of the auditor’s discoveries. (5 marks)

(b) Present a table showing the correction to gross profit, net profit, current assets and liabilities due
within one year. Your table should include the final totals which would appear in the corrected set
of accounts.
(15 marks)

(Total 20 marks)

3001/3/08/MA Page 5 of 16
MODEL ANSWER TO QUESTION 2

(a)
Suspense Account

£ £
Creditors (omitted) 460 Balance per TB 280
Postal expenses (84 − 48) 36
Sales 72
Sales returns 72
___
460 460

(b)

Gross Net Current Liabilities

Profit Profit Assets due within 1 year

Original balance 43,450 17,230 3,250 2,420

Correction (1) (36)

Correction (2) (144) (144)
Correction (3) (360) (340)
20
Correction (4) 460
Suspense account (280)
Corrected balance 43,306 17,050 2,910 2,260

Note

That on correction (3), the bank moves from an overdraft to a debit balance and so from liability to
asset.

3001/3/08/MA Page 6 of 16
SECTION B

(Answer any THREE questions from Section B)

QUESTION 3

Dyer plc had the following Balance Sheet items at 31 March:

2007 2008
£000 £000 £000 £000
Land at cost 815 815
Buildings at book value 528 515
Machinery at book value 1,840 1,920
Vehicles at book value 65 70
Stock at cost 180 95
Debtors 385 340
Bank (overdraft) 55 70
Creditors 230 215
Proposed dividend 220 265
Ordinary shares of £1 2,500 3,000
Retained earnings 808 305
3,813 3,813 3,855 3,855

Notes for year ended 31 March 2008:

(1) No fixed assets were sold and no buildings were purchased

(2) Machinery costing £380,000 and vehicles costing £25,000 were purchased
(3) No interim dividends were paid
(4) A bonus (capitalisation) issue of 500,000 £1 shares was made
(5) Bank overdraft interest of £4,000 was paid.

REQUIRED

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

(b) Prepare the Cash Flow Statement of Dyer plc for the year ended 31 March 2008 in accordance
with FRS 1 (revised).
(8 marks)

(Total 20 marks)

3001/3/08/MA Page 7 of 16
MODEL ANSWER TO QUESTION 3

(a) Operating profit £000

Change in retained earnings (305 – 808) (503)
Transfer to share capital 500
Proposed dividend 265
Bank overdraft interest 4
266

Reconciliation of Operating Profit with Net Cash Inflow from Operating Activities

£000
Operating profit (as above) 266
Buildings depreciation (528 – 515) 13
Machinery depreciation (1,840 + 380 – 1,920) 300
Vehicle depreciation (65 + 25 – 70) 20
Decrease in debtors (385 – 340) 45
Increase in stock (195 – 180) (15)
Decrease in creditors (230 – 215) (15)
Net cash inflow from operating activities 614

(b) Dyer plc

Cash Flow Statement year ended 31 March 2008

£000
Net Cash Inflow from Operating Activities (as above) 614

Returns on Investment and Servicing of Finance

Interest paid (4)

Capital Expenditure and Financial Investment

Payments to acquire tangible fixed assets (380 + 25) (405)
205

Equity Dividends Paid (220)

Decrease in cash (55 – 70) (15)

3001/3/08/MA Page 8 of 16
SECTION B CONTINUED

QUESTION 4

Rupert manufactures Products X and Y, whose direct costs per unit are as follows:

Product X Y
£ £
Material A 10 kilos at £0.50 5.00 6 kilos at £0.50 3.00
Direct Labour 20 mins at £7.50 per hour 2.50 30 mins at £7.50 per hour 3.75
7.50 6.75

On 31 March 2008 Rupert’s working capital was as follows:

£
Material A 4,000 kilos at £0.50p per kilo 2,000
X 500 units at £7.50 per unit 3,750
Y 600 units at £6.75 per unit 4,050
Debtors (Sales of Y in March) 5,980
Balance at bank 1,450
17,230
Creditors (Material A purchased February £4,200, purchased March £4,300) 8,500
8,730

The following information relates to the period 1 April – 30 September 2008:

(1) Budgeted sales in units April May June July August September
X 400 600 550 350 200 250
Y 650 600 500 750 850 800

Units of X are sold at £9.80 each on a cash basis

Units of Y are sold at £9.20 each on one month's credit

(2) Production will be 500 units of X and 600 units of Y during each of April, May and June
Production will be 300 units of X and 800 units of Y during each of July, August and September

(3) Material A is purchased on 2 months' credit, each month's purchases being sufficient to meet the
following months' production requirement

(4) Direct labour, indirect labour (£850 per month) and other expenses (£970 per month) are all paid
in the month they are incurred

(5) Depreciation per month is calculated as one twelfth (1/12) of the annual charge. Rupert uses the
reducing balance method at a rate of 25% per year. The book value of fixed assets at 31 March
2008 (his year end) was £120,000.

REQUIRED

(a) Prepare for Rupert a cash budget (in columnar form) for each of the 6 months from 1 April 2008
to 30 September 2008 showing the bank balance at the end of each month.
(16 marks)

(b) Calculate for Rupert the budgeted number of units in stock of X and of Y on 30 September 2008.

(4 marks)

(Total 20 marks)

3001/3/08/MA Page 9 of 16
MODEL ANSWER TO QUESTION 4

(a)
Rupert - Cash Budget
1 April 2008 – 30 September 2008

April May June July August September

£ £ £ £ £ £
Receipts
X (units x 9.80) 3,920 5,880 5,390 3,430 1,960 2,450
Y debtors (units x 9.20) 5,980 5,980 5,520 4,600 6,900 7,820
9,900 11,860 10,910 8,030 8,860 10,270

Payments
Material A* 4,200 4,300 4,300 4,300 3,900 3,900
Direct labour ** 3,500 3,500 3,500 3,750 3,750 3,750
Indirect labour 850 850 850 850 850 850
Expenses 970 970 970 970 970 970
9,520 9,620 9,620 9,870 9,470 9,470

Opening Balance 1,450 1,830 4,070 5,360 3,520 2,910

Receipts 9,900 11,860 10,910 8,030 8,860 10,270
11,350 13,690 14,980 13,390 12,380 13,180
Payments 9,520 9,620 9,620 9,870 9,470 9,470
Closing Balance 1,830 4,070 5,360 3,520 2,910 3,710

Calculations
* Material A Jun – July [(500 x 10) + (600 x 6)] x 0.50 = 4,300
Aug – Sep [(300 x 10) + (800 x 6)] x 0.50 = 3,900

**Labour Apr – Jun [(500 x 20) + (600 x 30)/60] x 7.5 = 3,500

July – Sep [(300 x 20) + (800 x 30)/60] x 7.5 = 3,750

(b) Units in stock of X 500 + (500 x 3) + (300 x 3) – (400 + 600 + 550 + 350 + 200 + 250) = 550
Units in stock of Y 600 + (600 x 3) + (800 x 3) – (650 + 600 + 500 + 750 + 850 + 800) = 650

3001/3/08/MA Page 10 of 16
SECTION B CONTINUED

QUESTION 5

Alan, Brian and Crispin were in partnership. The partnership Trial Balance at 31 March 2008 was as
follows:

£000 £000
Purchases/Sales 780 1,250
Stock at 1 April 2007 60
Debtors/Creditors 105 65
Discounts allowed/Discounts received 25 15
Machinery at cost 745
Buildings at valuation 355
Vehicles at cost 75
General expenses 130
Sales expenses 105
Accumulated depreciation on machinery 545
Accumulated depreciation on vehicles 60
Capital Account: Alan 120
Brian 80
Crispin 70
Current Account: Alan 20
Brian 12
Crispin 8
Bank overdraft 175
2,400 2,400

Notes

(1) The stock at 31 March 2008 cost £33,000

(2) Machinery is depreciated at 20% per year on cost, and vehicles are depreciated at 12% per year
on cost
(3) Profits/losses were divided between Alan, Brian and Crispin in the ratio 4:3:3 respectively.

REQUIRED

(a) Prepare the Trading and Profit & Loss Account of the Alan, Brian and Crispin partnership for the
year ended 31 March 2008.
(8 marks)

Alan retired on 1 April 2008 and Brian and Crispin decided on that date to form a company, FG Ltd,
with an authorised and issued share capital of 300,000 £1 Ordinary Shares. The company took over
all the partnership assets and liabilities at their book value. Goodwill was valued at twice the net profit
for the year to 31 March 2008. It remained unrecorded but the necessary adjustments were made
between the partners immediately prior to the formation of FG Ltd. The amount owing to Alan on the
dissolution of the partnership was paid to him in cash and Brian and Crispin received Ordinary Shares
at par as their settlement.

The remaining Ordinary Shares were sold to friends at par.

3001/3/08/MA Page 11 of 16
QUESTION 5 CONTINUED

REQUIRED

(b) Calculate the amount of cash received by Alan, and the number of Ordinary Shares issued to
Brian and Crispin respectively.
(5 marks)

(c) Prepare the Balance Sheet of FG Ltd at 1 April 2008 assuming all transactions indicated above
had been completed and no trading had taken place.
(7 marks)

(Total 20 marks)

3001/3/08/MA Page 12 of 16
MODEL ANSWER TO QUESTION 5

(a) Alan, Brian and Crispin

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

£000 £000
Sales 1,250

Opening stock 60
Add Purchases 780
840
Less Closing stock 33 807
Gross profit 443
Discount received 15
458

Less
Discount allowed 25
General expenses 130
Sales expenses 105
Depreciation on machinery (0.2 x 745) 149
Depreciation on vehicles (0.12 x 75) 9 418
Net profit 40

(b) Alan Brian Crispin

Amounts due to Partners £000 £000 £000
Capital Accounts 120 80 70
Current Accounts 20 (12) (8)
Share of profit (4 : 3 : 3) 16 12 12
Goodwill (40 x 2) (4 : 3 : 3) 32 24 24
Goodwill written off - (40) (40)
188 64 58

Cash received by Alan £188,000

Ordinary shares issued to Brian
& Crispin 64,000 58,000

3001/3/08/MA Page 13 of 16
MODEL ANSWER TO QUESTION 5 CONTINUED

(c) FG Ltd Balance Sheet

at 1 April 2008

Fixed Assets £000 £000 £000

Buildings 355
Machinery (745 − 545 − 149) 51
Vehicles (75 − 60 − 9) 6
412
Current assets
Stock 33
Debtors 105 138

Liabilities: amounts due within one year

Creditors 65
Bank * 185 250
Net Current Liabilities (112)
300

Share Capital and Reserves £000

Ordinary Shares of £1 each 300

*Bank
175 + 188 − (300 – 64 – 58)

3001/3/08/MA Page 14 of 16
SECTION B CONTINUED

QUESTION 6

At 1 March 2008, Valiant Ltd had a debit balance of £23,450 on its Debtors Ledger Control Account
and a credit balance of £17,450 on its Creditors Ledger Control Account. Both balances had been
reconciled with the individual accounts.

During March 2008 the following transactions took place:

£
Credit sales 19,670
Credit purchases 17,320
Bad debt written off 450
Increase in bad debt provision 2,000
Sales returns 523
Purchase returns 187
Cash received from credit customers 18,478
Cash sales 1,450
Cash paid to credit suppliers 16,425
Cash purchases 850
Debit balance in the Sales Ledger set off against credit balance in the Purchase Ledger 650
Discounts allowed 620
Discounts received 385

REQUIRED

(a) Prepare the Debtors Ledger Control Account and the Creditors Ledger Control Account of Valiant
Ltd for March 2008.
(10 marks)

(b) At 31 March 2008, the individual suppliers’ accounts had a net total balance of £17,773 and the
individual customers’ accounts had a net total balance of £23,499.

Suggest the most likely reasons for these totals differing from those calculated in (a) above.

(4 marks)

(c) Give 2 important reasons for having a Debtors Ledger Control Account and a Creditors Ledger
Control Account.
(6 marks)

(Total 20 marks)

3001/3/08/MA Page 15 of 16
MODEL ANSWER TO QUESTION 6

(a) Debtors Control Account

£ £
Opening balance 23,450 Bad debts 450
Credit sales 19,670 Sales returns 523
Cash received 18,478
Contra 650
Discounts allowed 620
Closing balance (R) 22,399
43,120 43,120

Creditors Control Account

£ £
Purchase returns 187 Opening balance 17,450
Cash paid 16,425 Credit purchases 17,320
Contra 650
Discounts received 385
Closing balance (R) 17,123
34,770 34,770

(b) £ £
Individual debtors 23,499 Individual creditors 17,773
Debtors Control Account 22,399 Creditors Control Account 17,123
1,100 650

Excess of individual supplier balances suggests that the contra item has not been recorded in the
individual accounts. This would reconcile the creditors. The bad debt may not have been
recorded in the individual customer account. This with the contra reconciles the debtors
(650 + 450 = £1,100).

(c) Prevention of fraud, location of errors, control of total credit, preparation of interim accounts.

3001/3/08/MA Page 16 of 16