s4 2000

Examiner’s Report and

Model Answers for

Accounting

LCCI Examinations Board MH N T321 9 RNM>f2[EW2r@o2`FYB^3]E]2r2[Po#

THIRD LEVELSeries 4 (Code 3001) 2000

Accounting Third LevelSeries 4 2000

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 – assessment of overall candidate performance in this examination, providing general guidance where it applies across the examination as a whole

(2) Questions – reproduced from the printed examination paper

(3) Model Answers – summary of the main points that the Chief Examiner expected to see in the answers to each question in the examination paper

(4) Examiner’s Report – constructive analysis of candidate error, areas of weakness and other comments that apply to each question in the examination paper

(5) 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.

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 Examiner’s Report, either for an examination paper as a whole or for individual questions, if too few candidates were involved to make an Examiner’s Report meaningful.

© LCCI CET 2000

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.

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GENERAL COMMENTS

Overall the performance was reasonable, but as usual some Centres showed indications that all candidates had been well prepared, whilst others showed a corresponding lack of preparation. This was the first examination in the new format, and unfortunately some candidates did not read the rubric which stated that Questions 1 and 2 MUST be attempted. A number of candidates merely chose to answer 5 from 6 questions and omitted either Question 1 or Question 2. Under the conditions of the examination this had to be classified as a failure. It must be stated that the vast majority of candidates who followed this route did not achieve the grade for a pass in any case.

The other major problem was the growth of the use of calculators resulting in candidates not showing any workings. Whilst this was irrelevant if they got the right answer, for those who made an error in their calculations and merely put down an incorrect answer with no workings, the result was a total loss of the marks for that section. Even where calculators have been used it is essential that workings are shown.

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QUESTION 1

Roger, a businessman, lived in Alphaland where the national currency was pounds (£) and James, another businessman, was resident in the Republic of Beta which traded in dollars ($). They decided to enter into a joint venture agreement with Roger purchasing the goods in Alphaland and shipping them to James for sale in Beta. Profits and losses were to be divided equally.

On 1 March Year 10 Roger purchased goods for £17,500. Sending them to James cost him £750, plus the cost of transit insurance which amounted to 2% of the purchase price of the goods.

James paid 10% of the purchase price of the goods in import duty and he paid a further $360 in transport charges to take them to his warehouse. Half the consignment was sold for $24,000; a further 40% of the consignment for $21,500; and the remaining 10% for only $2,500. On 31 March Year 10 James sent Roger $35,000.

On 1 April Year 10 Roger purchased more goods for £19,200. Sending them to James cost him £2,000 which included the price of insurance.

James paid import duty at 10% on the cost of the goods in the new consignment. It cost James a further $400 to transport the goods to his warehouse. James sold the entire consignment for $55,000 through an agent who charged a commission of 10% on the sale proceeds.

On 30 April James sent Roger the balance due to him.

Throughout the two month period the exchange rate of the two currencies was £1 = $2. (Ignore the cost of changing currency.)

REQUIRED

(a) Prepare for Roger and James a memorandum joint venture account using pounds (£).(13 marks)

(b) Prepare the joint venture with Roger account in the books of James.(7 marks)

(Total 20 marks)

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Model Answer to Question 1

(a)Memorandum Joint venture

£ £Purchases 17,500 Sales (.5 x 24,000) 12,000Shipping 750 Sales (.5 x 21,500) 10,750Insurance(.02 x 17,500) 350 Sales (.5 x 2,500) 1,250Import duty(.1 x 17,500) 1,750Transport(0.5 x 360) 180Purchases 19,200 Sales (.5 x 55,000) 27,500Shipping & Insurance 2,000Import duty(.1 x 19,200) 1,920Transport (.5(400) 200Agent’s commission(.5 x 55,000 x .1) 2,750Profit Roger 2,450Profit James 2,450 ______

51,500 51,500

(b)James Books

Joint venture with Rogers

$ $Import duty(1,750 x 2) 3,500 Sales (24,000+21,500+2,500) 48,000Transport 360 Sales 55,000Roger 35,000Import duty(1,920 x 2) 3,840Transport 400Commission (2,750 x 2) 5,500Roger 49,500Profit 4,900 ______

103,000 103,000

Examiner’s Report on Question 1

This required the preparation of a memorandum joint venture account, and then the account as it would appear in the books of one of the traders. The main problem in this question was the change ofcurrency with one trader operating in dollars while the other operated in pounds. A large percentage of attempts at this question showed both currencies in the same account, with the most frequent error being the recording of the sales in dollars and the purchases and expenses in pounds. This gave an excellent paper profit, but alas not the correct answer. There were also a number who produced a Profit & Loss Account rather than a memorandum joint venture. While this presentation wasacceptable, they normally included the cash payment from James to Roger as either an income or an expense when it was in fact neither.

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QUESTION 2

Robert, Jane and Alan were in partnership sharing profits (and losses) in the ratio 5:3:2 respectively. They experienced a bad trading year and their summarised Balance Sheet at 31 December Year 10 read as follows:

Capital Accounts £ £ £ £Robert 30,000Jane 25,000Alan 10,000 65,000Current Accounts

Robert Jane AlanBalance at 1 Jan Year 10 5,400 8,200 6,300less Loss for year 8,000 4,800 3,200less Drawings 9,500 9,000 8,500Balance at 31 Dec Year 10 (12,100) (5,600) (5,400) (23,100)

41,900Creditors 6,000Bank overdraft 6,350 12,350

54,250

Machinery at book value 15,000Cars at book value 12,000Stock at cost 14,500Debtors 12,750

54,250

The partners decided to dissolve the partnership on 1 January Year 11 and the following transactions took place:

(1) The machinery was sold for £9,000, and the stock for £9,400

(2) Jane took over one of the partnership’s two cars at a valuation of £7,500, and

(3) Alan took over the other car at a valuation of £3,750

(4) The debtors were allowed a settlement discount of 4% and they all settled accordingly

(5) Discounts received from creditors amounted to £260

(6) Costs incurred in carrying out the above transactions amounted to £3,500

REQUIRED

(a) Prepare for the partnership of Robert, Jane and Alan the following accounts:

DissolutionCapital (in columnar form)Bank account.

(15 marks)

(b) If one of the partners had a debit balance on his or her capital account after completing the dissolution account and the partner concerned was declared insolvent how would the resultant loss be treated and why?

(5 marks)

(Total 20 marks)

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(a)R J A

Dissolution Account

Machinery 15,000 Bank for machinery 9,000Vehicles 12,000 Capital Jane 7,500Stock 14,500 Capital Alan 3,750Debtors 12,750 Bank for stock 9,400Costs (bank) 3,500 Bank from debtorsCreditors (bank) 5,740 (12,750 x .96) 12,240

Creditors 6,000Loss Robert (.5) 7,800Loss Jane (.3) 4,680

______ Loss Alan (.2) 3,120 15,60063,490 63,490

Partners Capital AccountsR J A R J A£ £ £ £ £ £

Current 12,100 5,600 5,400 Balance 30,000 25,000 10,000Cars 7,500 3,750Dissolution loss 7,800 4,680 3,120 Bank 2,270Bank 10,100 7,220 _____ _____ _____ _____

30,000 25,000 12,270 30,000 25,000 12,270

Bank Account£ £

Machinery 9,000 Balance 6,350Stock 9,400 Creditors(6,000-260) 5,740Debtors 12,240 Robert 10,100Alan 2,270 Jane 7,220

______ Costs 3,50032,910 32,910

(b) The loss would be charged to the solvent partners in proportion to the balances on their capital accounts. (Current account balances would be ignored) Garner v Murray


This required a dissolution account and a short comment on what to do if one partner was insolvent. A number of candidates made a completely correct answer to the accounts, but very few knew how to handle the insolvent partner, and only a small minority mentioned Garner v Murray. The principal errors in the first section were the inclusion of both payments and discounts in the bank account and in the dissolution account. Rather more disturbing was the capital balances being placed on the debit side of the capital accounts. There were also some Centres where almost without exception the capital and current accounts were included in the dissolution account.

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QUESTION 3

The accountant of Grocery Suppliers Ltd is preparing the cash budget for each of the next six months.

Purchases are made from two suppliers. 40% of the company’s total purchases (by value) come from one supplier who allows one month’s credit. The other supplier is paid in cash at the time of purchase. Purchases are made one month in advance of the budgeted sales and sufficient purchases have already been made to cover the sales anticipated in Month 1.

Sales are made at a 30% mark up on cost. 20% of sales are made for cash, half the remaining sales are on one month’s credit and the remainder are made on two months’ credit. Total sales for the next half year (the six month period) are forecast to be £195,000. Sales will consist of £13,000 in Month 1, £19,500 in Month 2; £26,000 in Month 3; with the balance spread evenly over Months 4, 5 and 6. Sales in Month 7 are expected to be £26,000. Sales in each of the 12 months prior to the budget period amounted to £39,000.

Overheads of £3,500 are paid in cash each month. The cash balance in hand at the beginning of Month 1 is £15,000.

REQUIRED

(a) Prepare in columnar form the cash budget of Grocery Suppliers Ltd in respect of each of Months 1 to 6 showing the balance of cash at the end of each month.

(17 marks)

(b) If Grocery Suppliers Ltd has a budgeted net profit of £15,500 for the six months, calculate the total of non cash expenses for the six month period.

(3 marks)

(Total 20 marks)

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(a)Grocery Supplies Ltd Cash Budget

Month1 2 3 4 5 6£ £ £ £ £ £

Gross receipts from sales:Month -1 15,600Month 0 15,600 15,600Month 1 2,600 5,200 5,200Month 2 3,900 7,800 7,800Month 3 5,200 10,400 10,400Month 4 9,100 18,200 18,200Month 5 9,100 18,200Month 6 _____ _____ _____ _____ _____ 9,100

33,800 24,700 18,200 27,300 37,700 45,500

Payments:PurchasesMonth 0 4,000Month 1 9,000 6,000Month 2 12,000 8,000Month 3 21,000 14,000Month 4 21,000 14,000Month 5 21,000 14,000Month 6 12,000Overheads 3,500 3,500 3,500 3,500 3,500 3,500

16,500 21,500 32,500 38,500 38,500 29,500

Opening balance 15,000 32,300 35,500 21,200 10,000 9,200Receipts 33,800 24,700 18,200 27,300 37,700 45,500

48,800 57,000 53,700 48,500 47,700 54,700Payments 16,500 21,500 32,500 38,500 38,500 29,500Closing balance 32,300 35,500 21,200 10,000 9,200 25,200

(b) Non cash expenses:

Gross profit - Cash expenses - Net profit(30/130 x 195,000) (6 x 3,500) (15,500)

45,000 - 21,000 - 15,500 = £8,500


This was the least popular question on the paper. This required a columnar cash flow statement for a six month period. The main difficulties were the calculation of which month should show the figures, and also the calculation of the purchases. The point made above about lack of workings was particularly relevant in this question. A significant percentage of candidates merely showed one figure for income from sales for each month, and similarly one for payments for purchases. Almost without exception the figures were incorrect. With no workings this meant the loss of almost all the marks for the question. Other candidates who made a single figure entry in their cash flow, but showed the working, frequently obtained 10-12 marks even though their total figures were inaccurate. The calculation of the non cash expenses was very poorly handled.

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QUESTION 4

A machine costs £30,000 and has an economic life of four years. The machine’s budgeted production hours and year end expected market values are as follows:

Hours Value £

Year 1 1,550 20,000Year 2 2,250 12,500Year 3 2,500 8,000Year 4 1,700 3,888 (scrap value)

REQUIRED

(a) Copy the table below into your answer book and show the calculation of budgeted depreciation for each of the four years for each method shown. Calculations should be to the nearest £.

Depreciation method Year 1 Year 2 Year 3 Year 4

Straight line

Reducing balance at 40%

Sum of years (digits)

Machine hours

Annual revaluation

(17 marks)

(b) Give two reasons why the reducing balance method might be chosen.(3 marks)

(Total 20 marks)

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(a)

Depreciation method Year 1 Year 2 Year 3 Year 4

Straight line 6,528 6,528 6,528 6,528

Reducing balance at 40% 12,000 7,200 4,320 2,592

Sum of years (digits) 10,445 7,834 5,222 2,611

Machine hours 5,059 7,344 8,160 5,549

Annual revaluation 10,000 7,500 4,500 4,112

Calculations

Straight Line

(30,000 -3,888)/4 = 6528

Reducing Balance

30,000 x .4 =12,00018,000 x .4 = 7,20010,800 x .4 = 4,3206,480 x .4 = 2,592

Sum of years

4/(1+2+3+4) x (30,000-3,888) = 10,4453/(1+2+3+4) x (30,000-3,888) = 7,8342/(1+2+3+4) x (30,000-3,888) = 5,2221/(1+2+3+4) x (30,000-3,888) = 2,611

Machine Hours

1,550/(1,550+2,250+2,500 +1,700) x (30,000 - 3,888) = £5,0592,250/(1,550+2,250+2,500 +1,700) x (30,000 - 3,888) = £7,3442,500/(1,550+2,250+2,500 +1,700) x (30,000 - 3,888) = £8,1601,700/(1,550+2,250+2,500 +1,700) x (30,000 - 3,888) = £5,549

Revaluation method

30,000 - 20,000 = 10,00020,000 - 12,500 = 7,50012,500 - 8,000 = 4,500 8,000 - 3,888 = 4,112

(b) Better reflects market value Lower repair costs when machine is new means total charge to Profit & Loss is balanced

An alternative acceptable answer could be: The machine is more productive when new and better able to cover high depreciation.

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The question required the calculation of four years’ depreciation using five different methods. There were a number of candidates who obtained full marks on the calculations, but it was disturbing to find such a high percentage who could not calculate the straight line method accurately. The most frequent error was the treatment of scrap value with this often being ignored in straight line sum ofyears, and machine hours methods, and occasionally included in the reducing balance method. The annual revaluation too often saw the total loss in value being charged in each year.

The last section asking why the reducing balance method might be chosen far too often came down to the bland statement that it was the best method, with no qualification. One answer however that might make Examiners check their work was from candidates who said it could be used as it is the most frequently tested in examinations and therefore most likely to be understood by accountants when they qualify. A perfectly valid answer.

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QUESTION 5

Merchandising plc has four branches. Summary figures extracted from their last year’s accounts are as follows:

Branch Branch Branch BranchA B C D£’000 £’000 £’000 £’000

Turnover 145 160 128 130Cost of goods sold 98 107 83 84Wages 20 12 13 18Depreciation 4 7 8 6Other branch expenses 15 17 10 11Head Office charge 10 10 10 10Book value of:

Land and buildings 50 75 60 35Machinery and fittings 20 35 40 30

Head Office is considering closing one of the branches in order to raise cash for a modernisation programme. It is not however anticipated that Head Office costs would be reduced by a closure. It is anticipated that if a branch was closed:

(a) There would be a terminal payment to staff amounting to 40% of the labour cost for the previous year

(b) Land and buildings could be sold for 10% more than their book value

(c) Machinery and fittings could be transferred to other branches at their book value.

REQUIRED

(a) Calculate the following ratios for each branch (to one decimal place)

(i) Gross profit to sales (%)(ii) Net profit to sales (%)(iii) Return on book value of fixed assets (%).

(12 marks)

(b) Advise the management of Merchandising plc which of the four branches should be closed on the basis of the above information.

(4 marks)

(c) Outline two other factors that the management of Merchandising plc should consider before closing a branch.

(4 marks)

(Total 20 marks)

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(a) (i) Branch A B C DGross profit: Sales % % % %(145 -98)/145 32.4(160 -107)/160 33.1(128 - 83)/128 35.2(130 - 84)/130 35.4

(ii) Net profit: Sales(145-147)/145 (1.4)(160-153)/160 4.4(128-124)/128 3.1(130-129)/130 0.8

(iii) Return on fixed assets-2/(50+20) (2.9)7/(75+35) 6.44/(60+40) 41/(35+30) 1.5

(b)

Cash surplus on closure £000 £000 £000 £000Land and Buildings 55 82.5 66 38.5Labour terminal (8) (4.8) (5.2) (7.2)Net cash surplus 47 77.7 60.8 31.3

Branches B and C are the most profitable and even if the Head Office total charge was split over three branches they would still remain profitable.

Choice is either A or D. A will bring in the most cash from the buildings and is the least profitable. Advise close A.

(c)

Other factors, effect on public relations - is branch the only provider or employer in the area?Will closing one branch affect the others?With lower total purchases will unit price rise?Were this year’s figures typical?Is the Head Office charge justified as without it all four make a profit?


A question requiring the calculation of ratios, but also needing a fairly simple calculation of gross and net profit. On the whole the calculation of gross profit to sales and net profit to sales was well done, but the return on book value of fixed assets was very poorly handled. The choice of which branch to close was normally well done, though a number closed B ‘because is was the most profitable’. Very few looked at the amount of cash that would be realised from the sale of the land and buildings or at the terminal payments to the work force. The final part asking for what other points should be considered by management was either ignored or very poorly handled. The social aspects of loss of custom, ill will from those affected and loss of trained labour were mentioned in less than 10% of the total scripts.

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QUESTION 6

Bill Smith is a wholesaler. He has used a spreadsheet to produce the following accounts from his Trial Balance:

Trading and Profit & Loss Account for the year ended 31 December Year 10

£ £

Sales 140,500less:Opening stock 7,400Purchases 88,350

95,750Depreciation of machinery 8,400

104,150Closing Stock 8,250 95,900Gross profit 44,600less:Salaries 12,000Drawings 13,500General expenses 6,940Sales expenses 3,750Carriage on purchases 725Depreciation on car 1,500Rent of premises 3,300 41,715Net profit 2,885

Balance Sheet as at 31 December Year 10

£ £ £

Machinery 42,000 19,200 22,800Car 9,000 4,500 4,500

51,000 23,700 27,300

Stock 8,250Debtors 12,400Bank 2,125

50,075

Capital at start of year 39,015add:Net profit 2,885

41,900Creditors 8,175

50,075

As Bill Smith has no knowledge of accounting practice he has been unable to adjust his accounts to include the following matters:

(1) On 1 December Year 10 Bill Smith purchased a machine at a cost of £5,000. The seller allowed him £1,250 for an old machine traded in part exchange. This machine had a book value at 1 December of £950, and an original cost of £3,800. Machinery is depreciated at 20% on the cost price of the machinery held at the year end. The balance due on the new machine was still owing at the year end.

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QUESTION 6 CONTINUED

(2) On 20 December Year 10 information was received that a debtor who owed him £800 had been made bankrupt with creditors receiving £0.25 for each £1.00 owed. No adjustment had been made for this loss. As a consequence Bill Smith has decided that he also needs to make provision for doubtful debts equal to 5% of remaining debtors.

REQUIRED

Prepare for Bill Smith a revised Trading and Profit & Loss Account for the year ended 31 December Year 10 and a revised Balance Sheet as at 31 December Year 10.

(20 marks)

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Preliminary CalculationsMachinery at cost: 42,000 -3,800 + 5,000 = £43,200Depreciation for year 43,200 x 0.2 = £8,640Accumulated depreciation 19,200 -8,400 -(3,800 -950) +8,640 = £16,590

Bill SmithTrading and Profit & Loss Account for the year ended 31 December Year 10

£ £

Sales 140,500less Cost of Goods sold Opening stock 7,400plus Carriage 725 Purchases 88,350

96,475Closing stock 8,250 88,225Gross profit 52,275add Profit on sale of machinery (1250 -950) 300

52,575less:Salaries 12,000General expenses 6,940Sales expenses 3,750Rent of premises 3,300Bad debt (.75 x 800) 600Provision for doubtful debts(0.05 x (12,400 - 800)) 580Depreciation on: machinery 8,640

car 1,500 37,310Net profit 15,265

Bill SmithBalance Sheet as at 31 December Year 10

£ £ £

Tangible Fixed AssetsMachinery at cost 43,200 16,590 26,610Car 9,000 4,500 4,500

52,200 21,090 31,110Current assetsStock at cost 8,250Debtors(12,400 - 600) 11,800less provision (580) 11,220Bank 2,125 21,595lessLiabilities - amounts due within one yearTrade Creditors 8,175Other creditors (5,000 - 1,250) 3,750 11,925Net current assets 9,670

40,780

Capital at start of year 39,015add Profit 15,265

54,280less Drawings 13,500

40,780

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A correction to a set of final accounts, to take account of a change in machinery and a bankruptcy. This should have been a routine question where candidates could obtain high marks, but instead illustrated an alarming lack of knowledge of the basic accounts. Over half the scripts included drawings as an expense, very few made the correct deduction for bad debt, the majority writing off the whole debt rather than the 600 non recoverable, and few made the correct provision for bad debts. On the balance sheet very few made the correct calculation for total depreciation, and here again workings were seldom shown so the marks for the component parts were lost if the answer was incorrect.

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