Book-Keeping & Accounts Level 2

Model Answers Series 4 2007 (Code 2006)

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Book- Keeping & Accounts Level 2 Series 4 2007

How to use this booklet

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. 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 2007 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.

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2006/4/07 Page 3 of 13

Book-Keeping & Accounts Level 2 Series 4 2007

QUESTION 1 The following information relates to JP Ltd: Extracted from the Trading and Profit & Loss Account for the year ended 30 September 2007 £ Sales 852,800 Cost of sales 426,900 Expenses 255,660 Note: Stock values were: £ 1 October 2006 52,000 30 September 2007 49,000

Extracted from the Balance Sheet at 30 September 2007 £

Current assets 1,099,903 Current liabilities 314,258 Long Term Loan 100,000 Ordinary Share Capital (issued and fully paid) 1,000,000 Share premium 200,000 Profit & loss 810,500 REQUIRED (a) State the formula for each of the following ratios. Figures are not required at this stage:

(i) Gross profit margin (ii) Net profit margin (iii) Current (Working Capital) ratio (iv) Liquidity (Acid Test) ratio (v) Rate of stock turnover (not stock holding in days) (vi) Return on total capital employed (use closing capital)

(10 marks) (b) Using the formula stated above, calculate to two decimal places the following ratios for JP Ltd:

(i) Gross profit margin (ii) Net profit margin (iii) Current (Working Capital) ratio (iv) Liquidity (Acid Test) ratio (v) Rate of stock turnover (not stock holding in days) (vi) Return on total capital employed

(15 marks) Note: Assume that no interest payments were due for the year ended 30 September 2007.

(Total 25 marks)

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MODEL ANSWER TO QUESTION 1 (a)

(i) Gross Profit x 100 Sales

(ii) Net Profit before interest x 100 (accept just Net Profit) Sales

(iii) Current Assets Current Liabilities

(iv) Current Assets - Stock Current Liabilities (v) Cost of Sales

Average Stock

(vi) Net Profit before interest x 100 (accept just Net Profit) Closing ordinary share capital + reserves + preference shares + long term loans (b)

Calculation Answer

(i) 425,900 x 100 49.94% 852,800

(ii) 170,240 x 100 19.96% 852,800

(iii) 1,099,903 3.5:1 314,258

(iv) 1,099,903 - 49,000 3.34:1 314,258 (v) 426,900 8.45 times

50,500 (vi) 170,240 x 100 8.07%

2,110,500

2006/4/07/MA Page 5 of 11

QUESTION 2

Green Ltd has a head office in London and a branch in Singapore. All purchases are sent and invoiced to the branch at cost plus one third, which is the selling price. Branch sales are all made on credit and any debtor payments received at the branch are sent to the head office, where the ledger records are maintained. The following information regarding the Singapore branch is available for the year ended 30 September 2007: £ Stock – 1 October 2006 (at selling price) 48,000

Debtors – 1 October 2006 9,400

Goods sent to branch (at selling price) 402,400

Returns to head office (at selling price) 2,400

Branch sales 410,100

Payments made by debtors to branch 406,200

Discount allowed to debtors 2,100

Goods returned by customers to branch 2,000

Stock – 30 September 2007 (at selling price) 32,000 REQUIRED Prepare the following accounts for the year ended 30 September 2007 in the Head Office ledger. Dates may be ignored:

(i) Branch Stock (9 marks)

(ii) Goods to Branch (3 marks)

(iii) Stock Adjustment (7 marks)

(iv) Debtors (6 marks)

(Total 25 marks)

2006/4/07/MA Page 6 of 11

MODEL ANSWER TO QUESTION 2

(a)

(i)

Branch Stock £ £ Balance b/d 48,000 Branch debtors 410,100 Goods to branch 301,800 Goods to branch 1,800 Stock adjustment 100,600 Stock adjustment 600 Branch debtors 2,000 Stock loss: Stock adjustment 1,975 Branch Profit & Loss 5,925 Balance c/d 32,000 452,400 452,400 Balance b/d 32,000

(ii)

Goods to Branch £ £ Branch stock 1,800 Branch stock 301,800 Head Office Trading 300,000 301,800 301,800

(iii) Stock Adjustment £ £ Branch stock 600 Balance b/d 12,000 Branch stock 1,975 Branch stock 100,600 Branch Profit & Loss 102,025 Balance c/d 8,000 112,600 112,600 Balance b/d 8,000

(iv) Branch Debtors £ £ Balance b/d 9,400 Bank 406,200 Branch stock 410,100 Discount allowed 2,100 Branch stock 2,000 Balance c/d 9,200 419,500 419,500 Balance b/d 9,200

2006/4/07/MA Page 7 of 11

QUESTION 3

Alice and Brenda have been in partnership for many years, sharing profits and losses equally. At 30 September 2007, their summarised Balance Sheet was as follows: Fixed Assets £ £ Goodwill 50,000 Premises (at cost) 40,000 Motor vehicles (at net book value) 24,000 114,000 Current Assets Stock 4,000 Debtors 28,000 Bank 16,000 48,000 Less: Current Liabilities Creditors 36,000 Net Current Assets 12,000 126,000 Capital Alice 66,000 Brenda 60,000 126,000 They decided to dissolve the partnership and close the books at the Balance Sheet date and on the following terms:

(i) The premises were sold for £45,000 cash (ii) Alice took a motor vehicle valued at £10,000 and Brenda the other vehicle valued at

£14,000. The partners made no payment for the vehicles (iii) The goodwill and debtors were sold for £80,000 cash (iv) The stock was sold for £2,400 cash (v) Dissolution expenses were £1,000, paid in cash (vi) Creditors were paid £33,000 cash in full and final settlement

These transactions took place on 30 September 2007 and all cash receipts and payments went through the partnership bank account. REQUIRED In the books of the partnership at 30 September 2007, prepare: (a) The Dissolution account

(12 marks) (b) The partners’ Capital Accounts in columnar form

(7 marks) (c) The Bank Account

(6 marks)

(Total 25 marks)

2006/4/07/MA Page 8 of 11

MODEL ANSWER TO QUESTION 3 (a) Dissolution Account £ £ 2007 2007 30-Sep 30-Sep Goodwill 50,000 Bank - asset sales 127,400 Premises 40,000 Capital - vehicle transfers: Motor vehicles 24,000 Alice 10,000 Stock 4,000 Brenda 14,000 Debtors 28,000 Creditors discount 3,000 Bank: expenses 1,000 Dissolution profit: Alice 3,700 Brenda 3,700 154,400 154,400 (b) 2007 Alice Brenda 2007 Alice Brenda 30-Sep £ £ 30-Sep £ £ Dissolution 10,000 14,000 Balance b/d 66,000 60,000 Bank 59,700 49,700 Dissolution - profit 3,700 3,700 69,700 63,700 69,700 63,700

(c) Bank 2007 £ 2007 £ 30-Sep 30-Sep Balance b/d 16,000 Creditors 33,000 Dissolution account 127,400 Dissolution account 1,000 Capital: Alice 59,700 Brenda 49,700 143,400 143,400

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QUESTION 4 Alex had the following assets and liabilities at 30 September 2006: £ Creditors 17,600 Debtors 19,000 Stock 3,000 Cash at bank 5,200 Dr Equipment (net book value) 8,000 After one year, during which Alex introduced additional capital of £5,000 and withdrew £10,000 for personal use, his assets and liabilities were: £ Creditors 20,900 Debtors 26,800 Stock 5,000 Cash at bank 9,100 Dr Equipment (net book value) 6,000 REQUIRED (a) Calculate the net profit or loss made by Alex for the year ended 30 September 2007.

(8 marks) The following information has been extracted from the records of Christina: £ Debtors at 30 September 2006 59,400 Debtors at 30 September 2007 48,000 For the year ended 30 September 2007: Bad debts written off 2,900 Received from debtors 210,050 Cash sales 8,750 Goods received from debtors instead of payment 1,400 Refunds made to debtors 800 Returns inwards 4,300 Discounts allowed 650 Returned cheques (originally included in receipts) 400 REQUIRED (b) Calculate Christina’s total sales for the year ended 30 September 2007.

(12 marks) Peter bought and sold antiques. He added a mark-up of 25% to all his purchases to arrive at a selling price. For the year ended 30 September 2007 Peter’s sales were £600,000, purchases amounted to £520,000 and his closing stock was £30,000 greater than his opening stock. Peter was convinced that goods had been stolen from his shop during the year but was uncertain as to how much REQUIRED

(c) Calculate the cost price of the goods stolen from Peter’s shop during the year ended 30 September 2007.

(5 marks)

(Total 25 marks)

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MODEL ANSWER TO QUESTION 4 (a) Capital Account Balance at 30 September 2006 2007 £ £ Debtors 19,000 26,800 Stock 3,000 5,000 Bank 5,200 9,100 Equipment 8,000 6,000 35,200 46,900 Less: Creditors 17,600 20,900 Capital balance at 30 September 17,600 26,000 £ Increase in capital value during 2007 therefore: 26,000 -17,600 8,400 Less: additional capital introduced 5,000 3,400 Add: Drawings 10,000 Net profit for year ended 30 September 2007 13,400 (b) Debtors Control Account £ £ Balance b/d 59,400 Bad debts 2,900 Bank 800 Bank 210,050 Bank 400 Purchases 1,400 Sales (R) 206,700 Returns inwards 4,300 Discount allowed 650 Balance c/d 48,000 267,300 267,300

∴ Total Sales £ Cash sales 8,750 Credit sales 206,700 215,450

2006/4/07/MA Page 11 of 11 © Education Development International plc 2007

MODEL ANSWER TO QUESTION 4 CONTINUED (c) £ Gross Profit should have been: 600,000 x 20% 120,000 Less: Actual Gross Profit:[ 600,000 - (520,000 - 30,000)] 110,000 Value of stolen goods 10,000