Model Answers Series 4 2008 Singapore (3712)

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LCCI International Qualifications

Accounting Level 3

Accounting Level 3 (Singapore) Series 4 2008

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.

© EDI 2009 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

3712/4/08/MA Page 1 of 13

QUESTION 1 The Trial Balance of Esher Ltd at 30 September 2008 was as follows: $ $

Sales 200,460 Stock at 1 October 2007 10,500 Purchases 157,200 Distribution costs 52,600 Administration expenses 38,960 Loan interest paid 200 Interim dividend 1,000 Freehold land and buildings at cost 50,000 Office equipment at cost 5,000 Depreciation on buildings at 1 October 2007 18,000 Depreciation on office equipment at 1 October 2007 2,800 Trade debtors 30,500 Bank overdraft 1,680 Trade creditors 24,770 Ordinary shares of $1 each 20,000 Suspense (note [5] below) 26,000 5% loan (borrowed on 1 October 2007) 10,000 Retained earnings at 1 October 2007 42,250 345,960 345,960 Notes: (1) Stock at 30 September 2008 was $77,000. (2) Esher Ltd depreciates buildings at 2% per year on a straight line basis. Building depreciation is

apportioned 40% to distribution costs and 60% to administration expenses. The freehold land cost $10,000.

(3) Esher Ltd depreciates office equipment at 30% per year on the reducing balance basis. Office

equipment depreciation is an administration expense. (4) A customer owing $20,000 was declared insolvent on 1 October 2008. (5) The Suspense Account balance relates to the proceeds of a fully subscribed rights issue, of 1

share for every 4 shares held, made at a price of $5.20 on 1 July 2008. (6) The 5% loan is repayable in 5 annual instalments of $2,000, starting on 1 October 2008. (7) On 30 September 2008, the company declared a final ordinary dividend of $0.10 per share on all

shares in issue at that date. REQUIRED Prepare for Esher Ltd: (a) The Trading and Profit and Loss Account for the year ended 30 September 2008.

(10 marks) (b) The Balance Sheet at 30 September 2008.

(11 marks)

3712/4/08/MA Page 2 of 13

QUESTION 1 CONTINUED A “rights issue” is an offer to existing shareholders to purchase more shares in the company in proportion to their existing shareholding. REQUIRED (c) State one reason why the existing shareholders may not welcome a rights issue. (2 marks) (d) From Esher Ltd’s perspective, state whether or not (and why) you think an offer price of $5.20

would have been appropriate if this had been a public issue and it was oversubscribed. (2 marks)

(Total 25 marks)

3712/4/08/MA Page 3 of 13

MODEL ANSWER TO QUESTION 1 (a)

Esher Ltd

Trading and Profit and Loss Account for year ended 30 September 2008

$ $ Sales 200,460 Less Cost of Sales: Opening Stock 10,500

Purchases 157,200 167,700

Closing Stock 77,000 90,700 Gross profit 109,760 Distribution costs [52,600 + (0.02 x 40,000 x 0.40)] 52,920 Administration expenses [38,960 + (0.02 x 40,000 x 0.60) + 20,000 + (0.30 x 2,200)] 60,100 113,020 Net operating loss 3,260 Loan interest (0.05 x 10,000) 500 Net loss 3,760 Dividends: Interim 1,000

Final [(20,000 + 5,000*) x 0.10] 2,500 3,500 Retained loss 7,260 Brought forward 42,250 Carried forward 34,990 *20,000/4 or 26,000/5.20

3712/4/08/MA Page 4 of 13

MODEL ANSWER TO QUESTION 1 CONTINUED (b)

Esher Ltd

Balance Sheet at 30 September 2008

$ $ $ Tangible Fixed Assets Cost Depreciation NBV

Land and buildings 50,000 (18,000 + 800) 18,800 31,200 Office equipment 5,000 (2,800 + 660) 3,460 1,540 55,000 22,260 32,740 Current Assets Stock 77,000 Trade debtors (30,500 – 20,000) 10,500 87,500 Creditors: Amounts due within one year Trade creditors 24,770 Loan interest (500 – 200) 300 5% Loan 2,000 Dividend payable 2,500 Bank overdraft 1,680 31,250 Net Current Assets 56,250 88,990 Creditors: Amounts due after one year 5% Loan 8,000 80,990 $

Share Capital and Reserves Ordinary shares of $1 each (20,000 + 5,000) 25,000 Share premium (26,000 – 5,000) 21,000 Retained earnings 34,990 80,990 (c) They will have to spend money in order to maintain their existing percentage holding in the

company. (d) If an issue is over-subscribed, the offer price has probably been set too low.

3712/4/08/MA Page 5 of 13

QUESTION 2 At 30 June 2008, the Trial Balance of Par plc was as follows: $000 $000

Sales (all on credit) 12,500 Cost of goods sold 9,200 Stock (at 30 June 2008) 1,000 Operating expenses 500 Interest expense 6 Trade debtors/Trade creditors 4,120 2,240 Bank 160 Tangible fixed assets 19,894 Loan (repayable 2017) 4,000 Ordinary shares of $0.50 each 10,000 Share premium 3,000 Retained profit (at 30 June 2007) 3,140 34,880 34,880 Notes: (1) Par plc’s shares traded on the Singapore stock market at $3 per share on 30 June 2008. (2) The directors of Par plc proposed to pay an ordinary dividend of $0.05 per share for the year to

30 June 2008. (3) The stock at 1 July 2007 was $1,200,000. (4) Par plc’s gross profit to sales ratio for the year to 30 June 2008 was 20% lower than that for the

previous year. REQUIRED For Par plc: (a) Calculate the retained profit for the year ended 30 June 2008 and the long term capital employed

at 30 June 2008. (5 marks)

(b) Calculate, to two decimal places, the following ratios:

(i) Gross profit to sales (ii) Net profit to sales (iii) Interest cover (iv) Return on closing long term capital employed (v) Earnings per share (vi) Stock turnover rate (based on average stock) (vii) Current/Working capital (viii) Liquidity/Acid test (ix) Debtors’ collection period (based on closing debtors and expressed in days) (x) Dividend yield (xi) Earnings yield.

(14 marks) (c) State three possible reasons for the fall in the gross profit to sales ratio. (6 marks)

(Total 25 marks)

3712/4/08/MA Page 6 of 13

MODEL ANSWER TO QUESTION 2 (a)

Retained Profit for year ended 30 June 2008

$000 Sales 12,500 Cost of goods sold 9,200 Gross profit 3,300 Operating expenses 500 Operating profit 2,800 Interest 6 Net profit 2,794 Proposed dividend (0.05 x 2 x 10,000) 1,000 1,794

Long Term Capital Employed at 30 June 2008

$000 Loan 4,000 Share capital 10,000 Share premium 3,000 Retained profit brought forward 3,140 Retained profit for year 1,794 21,934 (b) (i) Gross profit to sales [(3,300/12,500) x 100] 26.40% (ii) Net profit to sales [(2,794/12,500) x 100] 22.35% (iii) Interest cover (2,800/6) 466.67 times (iv) Return on long term capital [(2,800/21,934) x 100] 12.77% (v) Earnings per share [2,794/(2 x 10,000)] $0.14 (vi) Stock turnover rate [(9,200 x 2)/(1,200 + 1,000)] 8.36 times (vii) Current [(1,000 + 4,120 + 160)/(2,240 + 1,000)] 1.63 (viii) Liquidity [(4,120 + 160)/(2,240 + 1,000)] 1.32 (ix) Debtors collection period [(4,120/12,500) x 365] 120.30 days (x) Dividend yield [(0.05/3) x 100] 1.67% (xi) Earnings yield [(0.14/3) x 100] 4.67% (c) Reasons for fall in Gross Profit to Sales Ratio Reduction in selling prices Increase in purchase prices Stock theft Over valuation of opening stock Under valuation of closing stock Stock deterioration Change in product mix

3712/4/08/MA Page 7 of 13

QUESTION 3 On 31 August 2006, Five Ltd paid $180,000 to acquire 70% of the ordinary shares of Way Ltd. Way Ltd’s retained earnings at that date were $30,000. The summarised Balance Sheets of the two companies at the close of business on 31 August 2008 were as follows: Five Ltd Way Ltd

$000 $000

Tangible fixed assets 500 110 Investments 190 50 Stock 105 50 Trade debtors 145 95 Bank 30 25 970 330 $000 $000

Ordinary shares of $1 each 600 130 Share premium 75 40 Revaluation reserve 65 - Retained earnings 100 80 Trade creditors 85 60 Accruals 45 20 970 330 Notes: (1) On 1 September 2006, Way Ltd sold an item of plant to Five Ltd for $250,000. This plant had

cost Way Ltd $200,000. Five Ltd has depreciated the plant at 20% per annum on the cost to them of $250,000, since it was acquired from Way Ltd.

(2) During the year to 31 August 2008, Five Ltd sold goods to Way Ltd for $240,000 at a mark up on

cost of 20%. Way Ltd had one quarter of these goods remaining in stock at 31 August 2008. (3) The current accounts of the two companies (included in trade debtors and trade creditors)

disagreed due to a $5,000 cheque sent to Five Ltd on 30 August 2008, not being received until after the year end. Before adjusting for this, Way Ltd had a debit balance of $35,000 in Five Ltd’s books.

(4) Goodwill arising on consolidation is amortised on a straight line basis over 10 years. REQUIRED (a) Prepare the Consolidated Balance Sheet for the Five Ltd group at 31 August 2008.

(21 marks) The preparation of consolidated accounts is an example of the accounting concept of substance over form. REQUIRED (b) Explain what is meant by “substance over form” and why it is applicable to the preparation of

consolidated accounts. (4 marks)

(Total 25 marks)

3712/4/08/MA Page 8 of 13

MODEL ANSWER TO QUESTION 3 Preliminary Notes: $000 $000

Goodwill: Cost of Investment 180 Share capital 130 Share premium 40 Retained earnings 30

0.70 x 200 140 40

Amortisation [(2 x 40) ÷ 10] 8 32

Consolidated Retained Earnings $000 $000

Five Ltd 100 Way Ltd [(80 – 30) x 0.70] 35 135 Less Goodwill 8

Profit on plant (50 x 0.70) 35 Profit on stock [(240 x 0.25) ÷ 6] 10 53

82 Add Depreciation on plant [(50 ÷ 5) x 2 x 0.70] 14

96

Minority Interest $000

Capital and reserves [0.30 (130 + 40 + 80)] 75 Less Profit on plant (50 x 0.30) 15

60 Add Depreciation on plant [(50 ÷ 5) x 2 x 0.30] 6

66

3712/4/08/MA Page 9 of 13

MODEL ANSWER TO QUESTION 3 CONTINUED (a)

Five Ltd Group

Consolidated Balance Sheet at 31 August 2008

$000 $000 $000

Fixed Assets Tangible (500 + 110 – 50 + 20) 580 Goodwill 32 Investments (190 – 180 + 50) 60 672 Current Assets Stock (105 + 50 – 10) 145 Trade debtors (145 + 95 – 35) 205 Bank (30 + 25 + 5) 60 410 Creditors: Amounts due within one year Trade creditors (85 + 60 – 30) 115 Accruals (45 + 20) 65 180 Net Current Assets 230 902 Share Capital and Reserves $000 Ordinary shares of $1 each 600 Share premium 75 Revaluation reserve 65 Retained earnings 96 836 Minority Interest 66 902

(b) Accounting transactions should be treated in accordance with their commercial substance, and

not in accordance with their legal form. Consolidated accounts show the overall results of a group, representing the commercial substance that the companies concerned are under common control. However, the consolidated accounts are not those of a legal entity, as each company in the group is itself a separate entity.

3712/4/08/MA Page 10 of 13

QUESTION 4 The following information relates to the transactions of Marks Ltd for the year ended 30 September 2008: $000 Cash paid to employees and on their behalf 3,180 Cash paid for other expenses 2,150 Increase in stocks 300 Decrease in trade debtors 200 Purchases 5,080 Decrease in trade creditors 250 Sales 13,000 Operating profit 2,260 Depreciation of tangible fixed assets 580 Loss on sale of tangible fixed assets 50 REQUIRED (a) Calculate Marks Ltd’s net cash flow from operating activities for the company’s Cash Flow

Statement for the year ended 30 September 2008, using:

(i) the direct method (ii) the indirect method.

(12 marks) The following balances were extracted from the Balance Sheets of Tay Ltd at 30 June: 2007 2008 $ $ Equipment at cost 800,000 900,000 Accumulated depreciation of equipment 400,000 ? During the year ended 30 June 2008, the following transactions took place: (1) Equipment costing $50,000 was acquired on two years’ credit on 1 July. All the other new

equipment was purchased on 1 January for cash (2) Equipment which had cost $450,000 with a net book value of $100,000 was sold for $95,000 on

10 May. It is the company’s policy to charge depreciation at 10% per year on the straight line basis with a proportionate charge in the year of acquisition and no charge in the year of sale. None of the company’s equipment has been fully depreciated. REQUIRED (b) Calculate the following amounts for the year ended 30 June 2008:

(i) Cash paid for purchase of equipment (ii) Profit/loss on the disposal of equipment (iii) Depreciation expense for equipment.

(10 marks)

Fixed assets must be subdivided into tangible and intangible. REQUIRED (c) Give one example of a tangible fixed asset and two examples of intangible fixed assets.

(3 marks)

(Total 25 marks)

3712/4/08/MA Page 11 of 13

MODEL ANSWER TO QUESTION 4 (a)

Net Cash Inflow from Operating Activities

(i) Direct Method $000 $000 Cash received from customers (13,000 + 200) 13,200 Less Cash paid to suppliers (5,080 + 250) 5,330

Cash paid to employees or on their behalf 3,180 Cash paid for other expenses 2,150 10,660

2,540 (ii) Indirect Method $000 $000 Operating profit 2,260 Depreciation on tangible fixed assets 580 Loss on sale of tangible fixed assets 50 Decrease in trade debtors 200 3,090 Increase in stocks 300 550 Decrease in trade creditors 250 2,540 (b) (i) Cash paid for equipment $000 Closing balance at cost 900 Add equipment sold at cost 450 Less opening balance at cost (800) Total purchases of equipment 550 Less equipment purchased on credit (50) Cash paid 500 (ii) Profit/Loss on Disposal of Equipment $000 Received from sale 95 Less net book value (100) Loss 5 (iii) Depreciation expense $000 Equipment from previous year [(800 – 450) x 0.10] 35 Equipment purchased on credit (50 x 0.10) 5 Equipment purchased for cash (500 x 0.10 x .5) 25 65

(c) Tangible – Land, Buildings, Machinery, Motor vehicles, etc Intangible – Goodwill, Patents, Trademarks, etc

3712/4/08/MA Page 12 of 13

QUESTION 5 Cheam, a bus operator, is considering introducing a new service between Bath and Bristol, a journey of 12 miles. This service would start on 1 January 2009 and consist of 96 daily journeys in each direction. It would run on every day of 2009, except Friday 25 December. The service will require four new buses costing $1,000,000 each. Each bus can carry a maximum of 60 passengers on each journey and is expected to have a life of 750,000 miles. The buses will be depreciated on a rate per mile basis, assuming zero residual value. Cheam budgets that the average number of passengers per journey will be 40 during the working week (5 days) and 20 at the weekends (2 days). Fares charged will be as follows:

Age in years Fare per journey Proportion of passengers

$ %

Under 16 4 20 16 - 60 8 50 Over 60 Nil 30

For passengers over 60, the government pays Cheam $2 per journey. Costs associated with the new service are budgeted as follows: $

Fuel costs per mile 0.30 Other variable costs per mile (excluding depreciation) 0.15 Cost of drivers per year (60% relating to working week) 8,002,900 Other fixed costs per year (50% relating to working week) 5,341,800 REQUIRED Calculate the following amounts for 2009 in respect of the new service: (a) the total number of miles expected to be covered. (3 marks) (b) the total fares expected to be received from customers. (6 marks) (c) the total amount expected to be received from the government. (3 marks) (d) the contribution to profit expected per journey during the working week. (4 marks) (e) the contribution to profit expected per journey at the weekends. (3 marks) (f) the break even number of journeys per year during the working week. (3 marks) Cheam is interested in any suggestions which may increase the profit per journey. REQUIRED (g) Give two suggestions for increasing profit per journey. (3 marks)

(Total 25 marks)

3712/4/08/MA Page 13 of 13 © Education Development International plc 2009

MODEL ANSWER TO QUESTION 5 (a) Number of miles covered Journeys x miles x days = (96 x 2) x 12 x 364 = 838,656 (b) Fares received Number of journeys 838,656/12 = 69,888 Fares per journey: working week: 40 x 20% x 4 = 32 40 x 50% x 8 = 160 192 weekends: 192 x 0.50 = 96 $ Total fares: working week 69,888 x 5 ÷ 7 x 192 = 9,584,640 weekends 69,888 x 2 ÷ 7 x 96 = 1,916,928 11,501,568 (c) Received from Government Per journey: working week 40 x 30% x 2 = 24 weekends 24 x .50 = 12 $ Total received: working week: 69,888 x 5 ÷ 7 x 24 = 1,198,080 weekends: 69,888 x 2 ÷ 7 x 12 = 239,616 1,437,696 (d) Contribution per journey (working week) $ $ Fares per journey 192.00 Received from government per journey 24.00 216.00 Less Fuel cost per journey (12 x 0.30) 3.60 Other costs per journey (12 x 0.15) 1.80 Depreciation (1,000,000 ÷ 750,000 x 12) 16.00 21.40 194.60 (e) Contribution per journey (weekends) $ Fares per journey 96.00 Received from government per journey 12.00 108.00 Less Variable costs per journey 21.40 86.60 (f) Break even number of journeys (working week) Fixed costs [(0.60 x 8,002,900) + (0.50 x 5,341,800)] Contribution 194.60 = 4,801,740 + 2,670,900 = 7,472,640 194.60 194.60 = 38,400 journeys (g) Increase fares (assuming little competition) Reduce fares (assuming highly competitive) Reduce number of journeys (increasing occupancy) Sell advertising on/in buses, etc

3712/4/08/MA Page 13 of 13 © Education Development International plc 2009

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