Examiner’s Report and

Model Answers for

Accounting

THIRD LEVEL
Series 2 (Code 3001) 2000

LCCI Examinations Board MH N T170 9 RNM

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Accounting Third Level
Series 2 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
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Typeset, printed and bound by the London Chamber of Commerce and Industry Examinations Board.

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2
Accounting Third Level
Series 2 2000

GENERAL

The overall standard was lower than expected although the level of presentation had in general
improved. There was some evidence that candidates were entering for the examination without
making adequate preparation, and in some cases indicating a lack of knowledge which they should
possess at Second Level. Although the percentage passing is probably about average the number of
Distinctions is definitely fewer than normal. Once again the main problem was that candidates omitted
either sections of questions or complete questions resulting in the need to attain a higher percentage
in those parts tried.

3
4
Accounting Third Level
Series 2 2000
QUESTION 1

Carriers Ltd is a small private company making deliveries. Its Trial Balance as at 31 December Year 9
was as follows:

All figures in the Trial Balance are in £000.

Sales 195
Motor expenses 30
Debtors and creditors 15 5
Delivery vehicles 90
Depreciation on delivery vehicles 54
General expenses 52
Wages 48
Rent of property 8
Directors' salaries 24
Office equipment 30
Depreciation on office equipment 6
Retained profits 5
Bank overdraft 2
Ordinary Share Capital ___ 30
297 297

Notes
(1) The three delivery vehicles are depreciated at 20% per annum on cost.
(2) Office equipment is depreciated at 33 31 % per annum using the reducing balance method.

REQUIRED

(a) Prepare for Carriers Ltd, using vertical layout, the Profit & Loss Account for the year ended
31 December Year 9 and the Balance Sheet as at 31 December Year 9.
(12 marks)

Stewarts plc is a manufacturing concern that uses Carriers Ltd both to collect its raw materials and
deliver its finished goods. The Trial Balance of Stewarts plc at 1 January Year 10 was as follows:

£000 £000

Leasehold buildings at cost 320

Accumulated depreciation on leasehold buildings 60
Machinery at cost 450
Accumulated depreciation on machinery 130
Office equipment at cost 110
Accumulated depreciation on office equipment 40
Motor vehicles at cost 90
Accumulated depreciation on motor vehicles 30
Stock raw material 40
Stock work in progress 45
Stock finished goods 55
Debtors and creditors 90 125
Bank 15
Share Capital £1 Ordinary Shares 600
Retained profit ____ 230
1,215 1,215

5 CONTINUED
QUESTION 1 CONTINUED
On 1 January Year 10 Stewarts plc purchased all the shares in Carriers Ltd for £50,000. All the assets
and liabilities were taken over at their net book value except the office equipment which was valued at
£15,000. One of the three identical vehicles was immediately sold for £4,000 cash, which was
immediately banked and Carriers Ltd's bank overdraft was paid off. At the time of the takeover
Stewarts plc owed Carriers Ltd £10,000.

REQUIRED

(b) Prepare, in vertical format, the Consolidated Balance Sheet of Stewarts plc on 1 January
Year 10 immediately after the above transactions were completed. Note the loss on
disposal of the delivery vehicle is to be added to goodwill and the goodwill is to be
immediately written off against retained earnings.
(18 marks)

Before taking over Carriers Ltd the directors of Stewarts plc made the following calculations in respect
of Year 10:

(1) The cost of delivery services provided by Carriers Ltd to Stewarts plc would have risen by 5% on
the Year 9 figure of £120,000.

(2) The sale of one delivery vehicle would reduce the drivers' wage bill by one-third. The wages
expenses for Carriers Ltd in Year 9 included £6,000 for office staff who would now have to be paid
£7,100 each year. The remaining wages in Year 9 were all for the vehicle drivers.

(3) The cost of Carriers Ltd's motor expenses would be reduced by 25% and Stewarts plc would not
carry goods for any other company.

(4) The rent expense would cease as Stewarts plc already had the necessary office and garage
space. General expenses would be reduced by £10,000 and the directors' salaries would cease.

(5) Both the delivery vehicles and the office equipment would be depreciated on the same basis and
at the same percentages as that used by Carriers Ltd.

REQUIRED

(c) Calculate the estimated net cost savings to Stewarts plc in Year 10 from taking over
Carriers Ltd.
(10 marks)

(d) Calculate Stewarts plc return on its investment in the first year.
(2 marks)

(e) Assuming Stewarts plc aim for a minimum return of 20% on its initial investment, mention
any two factors which might have influenced the decision other than the return on
investment.
(7 marks)

(Total 49 marks)

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Model Answer to Question 1
(a)

Trading Profit & Loss Account for Carriers Ltd

Year ending 31 December Year 9

£000 £000

Sales 195

Less

Petrol and parts 30

General expenses 52
Wages 48
Directors' emoluments 24
Rent 8
Depreciation vehicles (9 x 2) 18
Depreciation office equipment (30 - 6)/3 8 188
Net profit 7
Brought forward 5
Carried forward 12

Balance Sheet of Carriers Ltd as at 31 December Year 9

Tangible Fixed Assets £000 £000 £000

Vehicles 90 (54 + 18) 72 18

Office equipment 30 (6 + 8) 14 16
120 86 34

Current assets
Debtors 15
Liabilities due within 1 year
Creditors 5
Bank overdraft 2 7 8
42

Financed by
Capital 30
Retained profit 12
42

7 CONTINUED
Model Answer to Question 1 continued

(b)

Stewarts plc
Consolidated Balance Sheet as at 31 December Year 9

£000 £000 £000

Tangible fixed assets Cost Depreciation Net
or valuation

Leasehold and buildings 320 60 260

Machinery 450 130 320
Office equipment (110 + 15) 125 40 85
Vehicles (90 + (2/3 x 18)) 102 30 72
997 260 737

Current assets
Stock raw material 40
Stock work-in-progress 45
Stock finished goods 55
Debtors (90 + 15 - 10) 95 235
Liabilities due within one year
Bank overdraft (15 - 50 + 4 - 2) 33
Creditors (125 + 5 - 10) 120 153 82
819

Issued capital
Ordinary Shares £1 600
Profit & Loss Account (230 - 11) 219
819

Calculations
Goodwill (50,000 - 42,000 + (16,000 - 15,000)) = 9,000
Add loss on vehicle (18,000/3 - 4,000) = 2,000
11,000

(c) Net cost savings in Year 10 £000 £000

Cost saved on delivery service (120 x 1.05) 126

Less Drivers' wages 2/3 (48 – 6) 28
Office wages 7.1
Petrol and repairs (30 x .75) 22.5
General expenses (52 – 10) 42
Depreciation vehicles (2/3 x 18 x 0.2) 2.4
Office equipment 1/3 x 15 5 107
Net savings 19

(d) Return on investment 19/50 x 100 = 38%.

(e) It gives Stewarts plc control of carriage operations and costs.

There will be quicker delivery and collection
The 2 old vehicles will need replacement soon so further capital costs involved.

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Examiner’s Report on Question 1

Part (a) was a standard Trading, Profit & Loss Account and Balance Sheet. In general there were few
problems but a significant number of scripts showed a lack of awareness of the term ‘profits brought
forward’ and endeavoured to make the current years profits equal to the balance for previous years.
Layout was in general good, though there were scripts where the candidates ignored the requirement
for vertical presentation.

Part (b) required a Consolidated Balance sheet and only a minority managed to get this correct. The
calculation of Goodwill often missed the revaluation of office equipment, and some candidates
calculated a minority interest even though Stewart’s owned all the shares. Less than half the
candidates were able to deal with the inter company debt correctly and a number made errors on the
number of shares issued, adding the capital of the subsidiary to that of the parent. Finally some 20%
of candidates produced a Balance Sheet for Stewarts with no attempt at Consolidation at all.

Part (c) was for the most part omitted as were parts (d) and (e). Those that did attempt part (c), in
general made the error of adding revenue and cost together rather than looking at the net cost
incurred. About half of those that tried part (c) also tried part (d) and using their figures in general
calculated the return on investment, however some candidates confused the investment in Carriers
Ltd with the share holding of the parent company and in consequence lost marks they really should
have had.

Finally the answers to part (e) ranged from excellent to non existent. The main fault among those
attempting this part lay in giving reasons that were linked to the return on investment, rather than other
factors. One point of possible significance was that failure to answer this part seemed to run in
centres. At other centres no candidate made any attempt which could indicate that candidates from
those centres had not been properly prepared in the area of written comment.

9
QUESTION 2

Ardvak plc had the following information in the "Share Capital and Reserves" section of its most recent
Balance Sheet:

£
Authorised Capital
5,100,000 £0.50 Ordinary Shares 2,550,000
200,000 9% £2 Preference Shares 400,000
2,950,000

Issued Capital
3,750,000 £0.50 Ordinary Shares 1,875,000
100,000 9% £2 Preference Shares 200,000
2,075,000

Reserves
Share Premium Account 100,000
Revaluation Reserve 100,000
General Reserve 350,000
Retained Earnings 400,000
950,000

Ardvak plc also had £300,000 of 10% Debentures.

The Directors of Ardvak plc have now made the following decisions:

(1) To issue the remaining Preference Shares at par, £1.20 per share payable on application and
£0.80 per share payable subsequently on allotment.

(2) To redeem the Debentures at a premium of 5%.

(3) To make a rights issue of two Ordinary Shares for every fifteen Ordinary Shares held at a
premium of £0.25 each. All money to be paid on application.

(4) To make a capitalisation issue of one Ordinary Share for every five Ordinary Shares held
(including those issued under (3) above).

The Directors also decided to make maximum use of the non-distributable reserves when recording
the above transactions.

Applications were received for 150,000 Preference Shares, so each applicant was allotted two-thirds
of the shares they had requested. The additional money received on application was set against the
amount payable on allotment.

All Ordinary shareholders took up their rights.

REQUIRED

Prepare Journal entries without narratives to record all the above transactions for Ardvak plc.
(17 marks)

10
Model Answer to Question 2 – Ardvak plc

Journal Entries

£000 £000

Dr bank (150,000 x 1.2) 180

Cr Application Account (100,000 x 1.2) 120
Cr Allotment Account (50,000 x 1.2) 60

Dr Bank (100,000 x 0.8) - 60,000 20

Cr Allotment Account 20

Dr Application Account 120

Dr Allotment Account 80
Cr Preference Share Capital 200

Dr Debentures 300
Dr Share Premium Account (300,000 x .05) 15
Cr Bank 315

Dr Bank (3,750,000 x 2/15 x (0.50 + 0.25) 375

Cr Ordinary Share Capital (3,750,000/15) x 2 x .5 250
Cr Share Premium Account 125

Dr Share Premium (100,000 - 15,000 + 125,000) 210

Dr Revaluation reserve 100
Dr General reserve 115
Cr Ordinary Share Capital
(3,750,000 + 500)/5 x 0.5 425

Examiner’s Report on Question 2

Journal entries relating to issue of shares and redemption of a debenture. In general well handled
although a few candidates made the entries in the ledger and not in the Journal, and a few confused
debits and credits. The only real problem lay in the last section in the calculation of the bonus shares
and the use of non distributable reserves. Overall reasonably well handled.

11
QUESTION 3

The Vanguard Sports Club started on 1 January Year 8 with eighty members. During its first three
years of operation no new members were accepted and no members resigned.

Any member paying the following year's subscription before 30 September in the current year was
allowed to pay at the current year's rate. Any member not paying the year's subscription by
31 January in the year following that when it was due was excluded from membership. Such
subscriptions were written off as bad debts.

During Year 8 the subscription rate was £80 per member. Seventy-five members paid this amount and
another two members paid for Year 8 and in advance for Year 9 before 30 September.

During Year 9 the subscription rate was £90 per member. Two members paid in respect of Year 8 and
also paid their Year 9 subscription before 31 January. Seventy-two members paid £90, and another
two members paid for Year 9 and in advance for Year 10 before 30 September.

The loss of subscription income in respect of the two members who had paid in advance for Year 9
was treated as a discount in the subscription account. This policy was to continue for future years.

During Year 10 the subscription rate was £95 per member and all members paid all subscriptions due
so that at 31 December there were neither subscriptions in arrears nor subscriptions in advance.

REQUIRED

Show the Subscription Account of the Vanguard Sports Club for each of Years 8, 9 and 10. You
should show clearly the annual transfers to Income and Expenditure Account and the balances
both prepaid and accrued at the end of each year.
(17 marks)

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Model Answer to Question 3 – Vanguard Sports Club

Subscriptions Account

Year 8
Income & expenditure (80 x 80) 6,400 Bank (75 + 4) x 80 6,320
Prepaid (2 x 80) 160 due (3 x 80) 240
6,560 6,560

Year 9
Balance 240 Balance 160
Income & expenditure (79 x 90) 7,110 Bank (2 x 80) + (2 x 90) 340
Income & expenditure (bad debt) 80
Bank (72 x 90) 6,480
Bank (4 x 90) 360
Income & expenditure (discount) 20
Prepaid (2 x 90) 180 Due (1 x 90) 90
7,530 7,530

Year 10
Balance 90 Balance 180
Income & expenditure (79 x 95) 7,505 Bank 90
Bank (77 x 95) 7,315
_____ Income & expenditure (discount) 10
7,595 7,595

Examiner’s Report on Question 3

This required the entries in the subscription account over a period of three years. Apart from several
candidates who had the entries on the wrong side, the main problem lay in the calculation of the
prepaid and accrued subscriptions with the balances often being inaccurate, and even more often
being entered on the wrong side of the account. It was apparent that too many candidates had leant
by rote that prepayments are debit balances and could not adjust to the fact that on an income
account they are credit balances. The bad debt was also frequently put on the wrong side of the
account as was the discount when it was included at all. Entries were also made in the incorrect year.
However on the plus side a significant number obtained full marks.

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QUESTION 4

John intends setting up in business as a retailer and has provided you with the following information.

(1) He has arranged a loan with the bank of £4,000 at 10% interest per year which is to be repaid at
the rate of £1,000 per year at the end of each year.

(2) He will introduce his own car as capital. The car is worth £6,000 and will last the business for a
further four years and then be sold for £1,000. It will be depreciated on a straight line basis.

(3) He can rent premises for £150 per month but must maintain a deposit of £450 with his landlord.

(4) Shop fittings will cost £2,500 and will last the business ten years and then be sold for £250.
These will also be depreciated on a straight line basis.

(5) The first year's sales revenue all received in cash is expected to be £91,000. His prices will be
based on a mark up on cost of 40%. Revenue is expected to be spread evenly over the year.

(6) He will purchase an initial stock of £4,000 and aims to maintain it at this level by regular
purchases. These will be made on a credit of 1.5 months.

(7) Power and other expenses are expected to amount to £580 each month.

(8) He intends to take £900 per month out of the business for his own use.

REQUIRED

Prepare for John in relation to his first year of operating:

(a) a budgeted Trading, Profit & Loss Account

(6 marks)

(b) a budgeted Bank Account

(6 marks)

(c) a budgeted Balance Sheet as at the end of the year.

(5 marks)

(Total 17 marks)

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Model Answer to Question 4

(a)
Budgeted Trading, Profit & Loss Account for John

£ £
Sales 91,000
Less cost of sales (100/140 x 91,000) 65,000
Gross profit (40/140 x 91,000) 26,000
Less Rent (12 x 150) 1,800
Power, etc (12 x 580) 6,960
Loan interest (4,000 x 0.1) 400
Depreciation
Fittings (2,500 - 250)/10 225
Car (6,000 - 1,000)/4 1,250 10,635
Net profit 15,365

(b) Budgeted Bank Account

Bank balance Loan 4,000

Sales 91,000
95,000
Less rent (1,800 + 450) 2,250
Fittings 2,500
Purchases (65,000/12 x 10.5 + 4,000) 60,875
Power, etc 6,960
Drawings (12 x 900) 10,800
Loan interest 400
Loan repayment 1,000 84,785
Balance at year end 10,215

(c) Budgeted Balance Sheet at end of first year

£ £ £
Tangible Fixed Assets Cost Depreciation Net

Car 6,000 1,250 4,750

Fittings 2,500 225 2,275
8,500 1,475 7,025
Current Assets
Stock 4,000
Prepaid rent 450
Bank 10,215 14,665
Less Liabilities due within one year
Creditors (65,000 ÷ 12 x 1.5) 8,125
Bank loan 1,000 9,125 5,540
12,565
Less bank loan 2,000
10,565
Capital 6,000
Plus retained profit 15,365
21,365
Less Drawings 10,800
10,565

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Examiner’s Report on Question 4

In general a reasonable standard was obtained for most candidates with the major problem being the
allocation of the loan into current and long term liabilities, but there were a significant number of
papers where the bank figures replicated the Profit and Loss account, making no adjustment for
creditors, nor for the deposit on the rent. In too many cases depreciation was included as an expense
on the bank account as well as in the profit and loss. Most candidates passed on this question but
very few obtained full marks.

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QUESTION 5

The trial balances of Peters plc were as follows:

31 December Year 5 31 December Year 6

£000 £000 £000 £000

Freehold land and buildings 300 400

Machinery at cost 500 565
Accumulated depreciation on machinery 235 280
Stock at cost 75 80
Debtors 90 86
Creditors 60 58
Proposed dividend 10 13
Bank 15 20
Share capital 600 670
Retained earnings ___ 75 ____ 90
980 980 1,131 1,131

The summarised Trading, Profit & Loss and Appropriation Account of Peters plc for the year ended
31 December Year 6 was as follows:

£000 £000

Sales 1,320
Cost of sales 950
Selling expenses 10
General expenses 152
Depreciation on machinery 75
Profit on sale of machine* (5)
Salaries 110
Proposed dividend 13 1,305
Addition to retained earnings 15

* Note: the machine sold cost originally £65,000

REQUIRED

(a) Prepare for Peters plc for Year 6 a reconciliation of operating profit to net cash flow from
operating activities.
(5 marks)

(b) Prepare for Peters plc a cash flow statement in the format laid down in Financial Reporting
Standard (FRS) 1 as revised.
(12 marks)

(Total 17 marks)

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Model Answer to Question 5 – Peters plc

(a) Reconciliation of Operating Profit to Net Cash Flow from operating activities for Year 6

£000

Operating profit (15 + 13) 28

Add back depreciation 75
Less profit on sale (5)
98
Increase in stocks (75 - 80) (5)
Decrease in debtors (90 - 86) 4
Decrease in creditors (60 - 58) (2)
Net cash inflow from operating activities 95

(b) Peters plc Cash Flow Statement for Year 6

£000 £000

Net cash inflow from operating activities 95

Net cash outflow from returns on investment and
servicing of finance - Dividend paid (10)

Investing activities
Purchase of machinery (565 - 500 + 65) 130
Purchase of land and building (400 - 300) 100
Receipt from sale of machine* (40)
Net cash outflow from investing activities 190
Net cash outflow before financing (105)
Net cash inflow from financing
Ordinary Shares issued 70
Decrease in cash and equivalents (15 + 20) 35

* Cost of machine sold 65

* Depreciation (235 + 75 - 280) 30
35
Profit on sale 5
Sale proceeds 40

Examiner’s Report on Question 5

Rather surprisingly this was the question with the best overall level of answers. Though layout was at
times not totally clear the underlying principles appeared to be understood, and the majority of papers
were Credit to Distinction level on this question. The major error was in the calculation of the amount
received from sale of assets, and the amount spent on new fixed assets, but overall well handled.

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