Examiners Report and Model Answers for

Book-keeping and Accounts

SECOND LEVEL
Series 2 (Code 2006) 2001

LCCI Examinations Board

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Book-keeping and Accounts Second Level

Series 2 2001

How to use this booklet Examiners Reports and Model Answers have been developed by LCCIEB to offer additional information and guidance to Centres, teachers and candidates as they prepare for LCCIEB examinations. The contents of this booklet are divided into 5 elements: (1) General Comments assessment of overall candidate performance in this examination, providing general guidance where it applies across the examination as a whole 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 constructive analysis of candidate error, areas of weakness and other comments that apply to each question in the examination paper where appropriate, additional guidance relating to individual questions or to examination technique

(2) (3)

Questions Model Answers

(4)

Examiners Report

(5)

Helpful Hints

Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success. The London Chamber of Commerce and Industry Examinations Board provides Model Answers to help candidates gain a general understanding of the standard required. The Board accepts that candidates may offer other answers that could be equally valid.

Note LCCIEB reserves the right not to produce an Examiners Report, either for an examination paper as a whole or for individual questions, if too few candidates were involved to make an Examiners Report meaningful.

LCCI CET 2001 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. Typeset, printed and bound by the London Chamber of Commerce and Industry Examinations Board.

Book-keeping and Accounts Second Level

Series 2 2001
GENERAL COMMENTS
In the majority of cases, most candidates managed to answer, or attempt to answer, all four questions. Candidates need to bring to the Second Level the skills they have learnt from First Level. Basic items such as Name, and correct identification of the Profit & Loss Account, as well as the Balance Sheet should be an automatic feature of the paper, but many candidates still cannot get these basic matters right, and therefore lose unnecessary marks. Candidates must note that the Balance Sheet should always be presented in vertical format. If presented in the T account format, there is the possibility of losing marks, due to an inability to identify working capital/net current assets. Another failing was that many candidates still do not bring down a balance when one has to be carried down. This elementary failure loses candidates marks in almost every paper, not just this one. In a number of questions, dates are required in Nominal Ledger accounts, and many candidates either ignore the dates or have difficulty in identifying the correct date for each entry. Candidates need great care in setting out their answers. Examples of marks being lost in a careless fashion were candidates adding or leaving off a zero and also incorrectly adding a column of figures, where the figures are correct, but an incorrect total was given. Clarity and tidiness can sometimes be improved. There were examples of poor examination techniques such as correcting figures by going over the original figure with the result being unclear, and the use of correction fluid, where the revised figure is still unclear.

HELPFUL HINTS The following Helpful Hints should enable candidates to score higher marks in future examinations:
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Always put name not only at the heading of the question, but also on Profit & Loss Accounts, Income and Expenditure Accounts and Balance Sheets Ensure the wording is correct for Profit & Loss Accounts and Balance Sheet If dates need to be used, ensure they are shown correctly for each entry if in a nominal ledger account Remember to use Surplus/Excess in Income and Expenditure Accounts Always b/d a balance if there is one to c/d, and ensure the date of the b/d balance is shown If in the answer a figure is required that is made up of a number of figures, workings should be shown. An incorrect figure without workings will not score any marks, whereas an incorrect figure with full workings may score partial marks for the correct part of the workings Candidates must carefully read the question and structure their answer to the specific requirements of the question A better understanding of journal entries, and their effect on profitability and working capital An understanding of how Suspense Accounts operate, and the purpose of Suspense Accounts

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Book-keeping and Accounts Second Level

Series 2 2001
QUESTION 1 The following is a summary of the Receipts and Payments of Happy Valley Sports and Social Club for the year ended 31 March 2001. Receipts Annual subscriptions Entrance fees, paid by new members Restaurant takings 55,900 2,700 175,500 234,100

Payments Sports equipment Restaurant supplies Restaurant staff wages Bank charges Rent Light and heat General expenses Advertising Prizes for competitions Car hire expenses 47,500 122,000 31,000 1,000 15,100 1,500 9,700 5,500 7,500 6,200 247,000

Additional information: 1 April 2000 Cash in hand Cash at bank Equipment, at valuation Subscriptions in arrears Subscriptions in advance Light and heat accrued Rent in advance Rent in arrears Creditors, for restaurant supplies Stock of restaurant supplies 51 11,000 161,000 750 600 75 300 3,800 3,500 31 March 2001 51 ? 190,000 1,750 450 85 600 4,800 5,300

25% of rent expenditure is apportioned to the restaurant. Entrance fees are transferred directly to the accumulated fund.

CONTINUED ON NEXT PAGE

Question 1 continued REQUIRED Prepare for Happy Valley Sports and Social Club: (a) A Statement of the Accumulated Fund at 1 April 2000 (5 marks) (b) The Restaurant Trading Account for the year ended 31 March 2001 (5 marks) (c) The Income and Expenditure Account for the year ended 31 March 2001 (9 marks) (d) A Balance Sheet at 31 March 2001. (6 marks) (Total 25 marks)

Model Answer to Question 1

(a)

Happy Valley Sports and Social Club Accumulated Fund at 1 April 2000 Cash in hand Cash at bank Sports equipment Subscriptions in arrears Rent in advance Stock of restaurant supplies 51 11,000 161,000 750 300 3,500 176,601 600 75 3,800

Subscriptions in advance Light and heat accrual Creditors for restaurant supplies

4,475 172,126

(b)

Happy Valley Sports and Social Club Restaurant Trading Account for the year ended 31 March 2001 Restaurant takings, Sales 175,500

Opening stock W1 Purchases (see workings) Closing stock W2 Rent (see workings) Wages for restaurant staff Restaurant profit 4,000 31,000

3,500 123,000 126,500 5,300 121,200 35,000 156,200 19,300

Model Answer to Question 1 continued

(c)

Happy Valley Sports and Social Club Income and Expenditure Account for the year ended 31 March 2001 19,300 57,050 76,350 12,000 18,500 1,510 9,700 1,000 5,500 7,500 6,200

Restaurant profit W3 Subscriptions (see workings) W4 Rent (see workings) W5 Depreciation sports equipment (see workings) W6 Light and heat (see workings) General expenses Bank charges Advertising Competition prizes Car hire expenses Surplus/excess of income over expenditure

61,910 14,440

(d)

Happy Valley Sports and Social Club Balance Sheet at 31 March 2001 Fixed assets Sports equipment, at valuation Current assets Stock of restaurant supplies Subscriptions in arrears Cash in hand Current liabilities Light and heat accrued Restaurant suppliers Bank overdraft Rent accrued Subscriptions in advance

190,000

5,300 1,750 51

7,101

85 4,800 1,900 600 450

7,835 -734 189,266

Accumulated fund Balance at 1 April 2000 Entrance fees Surplus income over expenditure

172,126 2,700 14,440 189,266

Model Answer to Question 1 continued Workings W1 Restaurant purchases Purchases add Creditors, 31/3/01 less Creditors 1/4/00

122,000 4,800 126,800 3,800 123,000 15,100 300 600 16,000 4,000 55,900 600 56,500 750 55,750 1,750 57,500 450 57,050 16,000 4,000 12,000

W2 Rent paid Prepaid 1/4/00 In arrears 31/3/00 25% charge to restaurant W3 Subscriptions received Add in advance 1/4/00 less in arrears 1/4/00 Add in arrears 31/3/01 less in advance 31/3/01

W4 Rent (see W2) less Restaurant charge

W5 Depreciation of sports equipment Opening valuation 1/4/00 Add purchases Closing valuation 31/3/01 Depreciation for year W6 Light and heat Payments less accrued 1/4/00 Add accrued 31/3/01

161,000 47,500 208,500 190,000 18,500

1,500 75 1,425 85 1,510

Examiners Report on Question 1 Generally a well answered question. Errors included the omission of staff wages and rent from the Trading Account. In this question, a number of workings are required. If an incorrect figure is shown, and there are no workings, no marks are gained. However, if workings are shown, and part of the workings are correct, some marks may be gained for the correct part of the workings.

QUESTION 2 The Trial Balance of W Edrich at 30 June 2000 did not agree. A Suspense Account was created in order to achieve a balance. Draft Final Accounts were produced from this Trial Balance and it showed there was Working Capital of 27,381. Later, the following items were discovered: 1 2 A cheque for 1,000 received from W Smith had been credited to the account of H Smith. A cheque received from R Lindwall for 976 had been correctly entered in the Cash Book but had been posted to the Personal Account as 967. Bank charges of 720 had been correctly entered in the Cash Book but the other half of the entry had not been completed. The purchase of new machinery on 1 June 2000 for 1,500 had been posted to the Stock Account. Depreciation is to be ignored. Discounts allowed of 97 had been credited in error to the Discount Received Account. Sales of 372 to S McCabe had been posted correctly to the Personal Account, but entered in the Sales Account as 327. A sale of 679 to F Spofforth had not been posted to his personal account.

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The balance on the Suspense Account was eliminated by the corrections of the above errors.

REQUIRED Prepare: (a) Journal entries, without narrative or dates, to correct items 1 - 7 above (15 marks) (b) The Suspense Account (5 marks) (c) A statement showing the effect of the above items on the working capital, indicating the corrected figure. (5 marks) (Total 25 marks)

Model Answer to Question 2

(a)

W Edrich - Journal Entries Dr H Smith W Smith Suspense Account R Lindwall Bank charges Suspense Account Machinery Stock Discount allowed Discount received Suspense 97 97 194 1,500 1,500 9 9 720 720 1,000 1,000 Cr

Suspense Sales F Spofforth Suspense

45 45 679 679

(b) Difference in Trial Balance R Lindwall Sales

Suspense Account 1,539 9 45 ____ 1,593 Bank charges Discount allowed Discount received F Spofforth 720 97 97 679 1,593

(c)

W Edrich - Adjustment to Working Capital at 30 June 2000 Working capital per draft accounts Less Reduction in debtors, item 2 Reduction in stock, item 4 9 1,500 27,381

1,509 25,872 679 26,551

Add Increase in debtors, item 7 Revised working capital

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Examiners Report on Question 2 The topic of errors, Journals and Suspense account seem to cause problems with many students. Many candidates reversed entries, especially with discount allowed and discount received. Many candidates seem to get the discounts on the wrong side, as with returns in and returns out. There was much misunderstanding with the suspense account, and its purpose. Many candidates had entries on the wrong side. In part (c) of the question, working capital caused much difficulty with many candidates, and they could not understand the effect of the adjustments on working capital. This section was not well answered.

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QUESTION 3 Fred Titmus is a sole trader who makes all his purchases and sales on credit. He has supplied you with the following information: Year ended 31 March Bad Debts Written Off 724 968 1,220 Debtors at Year End 19,200 25,000 21,700 Provision for Doubtful Debts % 2.5 5 4

1998 1999 2000

Fred Titmus adjusts the Provision for Doubtful Debts at the end of each year. At the end of the financial year 31 March 1997, the provision was 400. REQUIRED (a) Prepare the following accounts in the books of Fred Titmus for the years ended 31 March 1998, 1999 and 2000: (i) (ii) Bad Debts Provision for Doubtful Debts (10 marks) NB - Care should be taken with the correct identification of dates. (b) Prepare Balance Sheet extracts of debtors for 31 March 1998, 1999 and 2000. (7 marks) Jack Young was a sole trader and you are supplied with the following information: Capital at 01 Jan Year 1998 1999 2000 2001 150,000 ? 200,000 216,000 Drawings during year 30,000 ? 36,000 44,000 Additional Capital Introduced NIL 16,000 NIL ? Net Profit 60,000 54,000 ? 66,000 Capital at 31 December ? 200,000 216,000 260,000

REQUIRED (c) Copy the above information, using the same format, into your answer book, and insert the missing figures indicated by a question mark (?). (8 marks) (Total 25 marks)

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Model Answer to Question 3 (a) (i) In the books of Fred Titmus Bad Debt 31 March 1998 31 March 1999 31 March 2000 Debtors Debtors Debtors 724 968 1,220 31 March 1998 31 March 1999 31 March 2000 P & L a/c P & L a/c P & L a/c 724 968 1,220

(ii)

Provision for Doubtful Debts 1 April 1997 31 March 1998 Bal b/d P & L a/c 400 80 480 480 770 1,250 1,250 ____ 1,250 868

31 March 1998

Balance c/d

480 ___ 480 1,250 ____ 1,250 382 868 1,250

31 March 1999

Balance c/d

1 April 1998 31 March 1999

Bal b/d P & L a/c

31 March 2000 31 March 2000

P & L a/c Bal c/d

1 April 1999

Bal b/d

1 April 2000

Bal b/d

(b)

Fred Titmus Balance Sheet Extract at 31 March 1998 19,200 480 18,720 1999 25,000 1,250 23,750 2000 21,700 868 20,832

Current Assets Debtors Less Provision D/D

(c)

In the books of Jack Young Additional Capital Introduced NIL 16,000 NIL 22,000

Year

Capital at 01 Jan 150,000 180,000 200,000 216,000

Drawings during year 30,000 50,000 36,000 44,000

Net Profit 60,000 54,000 52,000 66,000

Capital at 31 December 180,000 200,000 216,000 260,000

1998 1999 2000 2001

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Examiners Report on Question 3 While many candidates scored well on this question, some of the weaker ones did not understand the difference between the Bad Debts account, and the Provision for Doubtful Debts account. Apart from some incorrect calculations for the provisions, debtor balances were shown in both accounts, and in the Provision account, all entries were reversed. In part (c) candidates either scored well, or did not understand the principal of how capital is calculated during the year. Opening capital less drawings plus additional capital introduced plus net profit equals closing capital.

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QUESTION 4 Barnes, Hassett and Lindwall were partners, sharing profits and losses in the ratio 2 : 2 : 1. Their Balance Sheet at 31 March 2001 was as follows: Barnes, Hassett and Lindwall Balance Sheet at 31 March 2001 Fixed Assets Freehold premises Fixtures and fittings Motor vehicles Current Assets Stock Debtors Less provisions for bad and doubtful debts Bank 240,000 41,000 21,000

302,000

20,000 25,200 600 24,600 7,700 52,300

Current liabilities - amounts falling due within 12 months Creditors Working capital

12,400 39,900 341,900

Financed by: Capital Accounts Barnes Hassett Lindwall Current Accounts Barnes Hassett Lindwall

140,000 110,000 70,000

320,000

8,500 7,440 5,960

21,900 341,900

On 1 April 2001, the partners sold the business to Dexter Ltd for 400,000. On the same date: Lindwall took over his partnership motor vehicle at its book value of 5,000. All other assets except the bank, were taken over, by Dexter Ltd at their book value. The creditors were taken over, at book value, by Dexter Ltd. The purchase price for the business was settled by Dexter Ltd by the issue of 200,000 Ordinary Shares of 1 at 1.75 each, and the balance was paid by cheque. The partners divided the shares between them in the partnership profit sharing ratio. The remaining balances on their capital account were settled from the bank account. The current account balances are transferred to the Capital Account before making any adjustments.

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CONTINUED ON NEXT PAGE

QUESTION 4 CONTINUED REQUIRED (a) In the books of the partnership, show the following: (i) (ii) (iii) (iv) The Realisation Account The Capital Accounts of the partners, in columnar format Dexter Ltd Account Bank Account. (19 marks) Douglas and Trumper are both sole traders and they agreed to form a partnership on 1 January 2001. Douglas has valued the goodwill of his business at 10,000 and Trumper has valued the goodwill of his business at 8,000. The valuations of goodwill are agreed by both Douglas and Trumper. REQUIRED (b) Prepare the journal entries to show the introduction of goodwill in the books of the partnership at 1 January 2001. (3 marks) It has been agreed by Douglas and Trumper that goodwill will not remain an asset in the books of the partnership. Douglas and Trumper have agreed to share profits and losses in the ratio of 2:1. REQUIRED (c) Prepare the journal entries to show the removal of goodwill as an asset in the books of the partnership. (3 marks) (Total 25 marks)

Model Answer to Question 4 (a) (i) In the books of Barnes, Hassett and Lindwall Realisation Account 2001 1 April 240,000 41,000 21,000 20,000 25,200 2001 1 April Provision doubtful debts Creditors Capital account Lindwall - MV 600 12,400 5,000

Freehold premises Fixtures and fittings Motor vehicles Stock Debtors Capital accounts Barnes Hassett Lindwall

28,320 28,320 14,160 418,000

Dexter Ltd Purchase of business

400,000 _______ 418,000

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CONTINUED ON NEXT PAGE

Model Answer to Question 4 continued (ii) Partners Capital Account 2001 1 April 2001 1 April

Barnes

Hassett

Lindwall 5,000

Barnes

Hassett 110,000 7,440 28,320 ______ 145,760

Lindwall 70,000 5,960 14,160 _____ 90,120

Realisation a/c Dexter Ltd Shares 140,000 Bank 36,820 176,820

140,000 5,760 145,760

70,000 15,120 90,120

Bal b/f 140,000 Current a/c 8,500 Realisation 28,320 profit ______ 176,820

(iii) Dexter Ltd 2001 1 April Realisation a/c Consideration 2001 1 April Capital a/cs shares Barnes Hassett Lindwall Bank

400,000

140,000 140,000 70,000 50,000 400,000

_______ 400,000

(iv) Bank Account 2001 1 April Balance b/f Dexter Ltd 7,700 50,000 ______ 57,700 2001 1 April Capital a/c Barnes Hassett Lindwall

36,820 5,760 15,120 57,700

(b) Goodwill Douglas - Capital Account Trumper - Capital Account (c) Douglas - Capital Account Trumper - Capital Account Goodwill

18,000

10,000 8,000

12,000 6,000 18,000

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Examiners Report on Question 4 This was the most challenging question. In the Realisation Account, many candidates lost marks when the assets were shown on both sides of the account, and also many candidates left out creditors of 12,400 on the credit side. The Partners Capital Account was not well answered by many candidates; again a lack of understanding of how the account should operate was the problem. The journal entries for parts (b) and (c) regarding the partners goodwill were the parts of the paper that scored least marks.

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