LCCI International Qualifications

Accounting Level 3

Model Answers
Series 4 2008 Singapore (3712)

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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) (2) Questions Model Answers 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, plus a fully worked example or sample answer (where applicable) where appropriate, additional guidance relating to individual questions or to examination technique

(3)

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

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)

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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 Ltds 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)

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MODEL ANSWER TO QUESTION 1 (a) Esher Ltd Trading and Profit and Loss Account for year ended 30 September 2008 $ Sales Less Cost of Sales: Opening Stock Purchases Closing Stock Gross profit Distribution costs [52,600 + (0.02 x 40,000 x 0.40)] Administration expenses [38,960 + (0.02 x 40,000 x 0.60) + 20,000 + (0.30 x 2,200)] Net operating loss Loan interest (0.05 x 10,000) Net loss Dividends: Interim Final [(20,000 + 5,000*) x 0.10] Retained loss Brought forward Carried forward *20,000/4 or 26,000/5.20 10,500 157,200 167,700 77,000 52,920 60,100 113,020 3,260 500 3,760 3,500 7,260 42,250 34,990 $ 200,460

90,700 109,760

1,000 2,500

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MODEL ANSWER TO QUESTION 1 CONTINUED (b) Esher Ltd Balance Sheet at 30 September 2008 Tangible Fixed Assets Land and buildings Office equipment Current Assets Stock Trade debtors (30,500 20,000) Creditors: Amounts due within one year Trade creditors Loan interest (500 200) 5% Loan Dividend payable Bank overdraft Net Current Assets Creditors: Amounts due after one year 5% Loan $ Cost 50,000 5,000 55,000 (18,000 + 800) (2,800 + 660) $ Depreciation 18,800 3,460 22,260 77,000 10,500 87,500 24,770 300 2,000 2,500 1,680 $ NBV 31,200 1,540 32,740

31,250 56,250 88,990 8,000 80,990 $

Share Capital and Reserves Ordinary shares of $1 each (20,000 + 5,000) Share premium (26,000 5,000) Retained earnings

25,000 21,000 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.

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QUESTION 2 At 30 June 2008, the Trial Balance of Par plc was as follows: $000 Sales (all on credit) Cost of goods sold Stock (at 30 June 2008) Operating expenses Interest expense Trade debtors/Trade creditors Bank Tangible fixed assets Loan (repayable 2017) Ordinary shares of $0.50 each Share premium Retained profit (at 30 June 2007) 9,200 1,000 500 6 4,120 160 19,894 $000 12,500

2,240

34,880

4,000 10,000 3,000 3,140 34,880

Notes: (1) Par plcs 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 plcs 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)

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MODEL ANSWER TO QUESTION 2 (a) Retained Profit for year ended 30 June 2008 Sales Cost of goods sold Gross profit Operating expenses Operating profit Interest Net profit Proposed dividend (0.05 x 2 x 10,000) Long Term Capital Employed at 30 June 2008 Loan Share capital Share premium Retained profit brought forward Retained profit for year $000 4,000 10,000 3,000 3,140 1,794 21,934 $000 12,500 9,200 3,300 500 2,800 6 2,794 1,000 1,794

(b) (i) Gross profit to sales [(3,300/12,500) x 100] (ii) Net profit to sales [(2,794/12,500) x 100] (iii) Interest cover (2,800/6) (iv) Return on long term capital [(2,800/21,934) x 100] (v) Earnings per share [2,794/(2 x 10,000)] (vi) Stock turnover rate [(9,200 x 2)/(1,200 + 1,000)] (vii) Current [(1,000 + 4,120 + 160)/(2,240 + 1,000)] (viii) Liquidity [(4,120 + 160)/(2,240 + 1,000)] (ix) Debtors collection period [(4,120/12,500) x 365] (x) Dividend yield [(0.05/3) x 100] (xi) Earnings yield [(0.14/3) x 100]

26.40% 22.35% 466.67 times 12.77% $0.14 8.36 times 1.63 1.32 120.30 days 1.67% 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

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QUESTION 3 On 31 August 2006, Five Ltd paid $180,000 to acquire 70% of the ordinary shares of Way Ltd. Way Ltds 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 $000 Tangible fixed assets Investments Stock Trade debtors Bank 500 190 105 145 30 970 $000 Ordinary shares of $1 each Share premium Revaluation reserve Retained earnings Trade creditors Accruals 600 75 65 100 85 45 970 Way Ltd $000 110 50 50 95 25 330 $000 130 40 80 60 20 330

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 Ltds 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)

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MODEL ANSWER TO QUESTION 3 Preliminary Notes: $000 Goodwill: Cost of Investment Share capital Share premium Retained earnings 130 40 30 0.70 x 200 $000 180

Amortisation [(2 x 40) 10] Consolidated Retained Earnings Five Ltd Way Ltd [(80 30) x 0.70] Less Goodwill Profit on plant (50 x 0.70) Profit on stock [(240 x 0.25) 6] Add Depreciation on plant [(50 5) x 2 x 0.70] Minority Interest Capital and reserves [0.30 (130 + 40 + 80)] Less Profit on plant (50 x 0.30) Add Depreciation on plant [(50 5) x 2 x 0.30] 8 35 10 $000

140 40 8 32 $000 100 35 135

53 82 14 96 $000 75 15 60 6 66

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MODEL ANSWER TO QUESTION 3 CONTINUED (a) Five Ltd Group Consolidated Balance Sheet at 31 August 2008 $000 Fixed Assets Tangible (500 + 110 50 + 20) Goodwill Investments (190 180 + 50) Current Assets Stock (105 + 50 10) Trade debtors (145 + 95 35) Bank (30 + 25 + 5) Creditors: Amounts due within one year Trade creditors (85 + 60 30) Accruals (45 + 20) Net Current Assets Share Capital and Reserves Ordinary shares of $1 each Share premium Revaluation reserve Retained earnings Minority Interest $000 $000 580 32 60 672 145 205 60 410 115 65

180 230 902 $000 600 75 65 96 836 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.

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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 Ltds net cash flow from operating activities for the companys Cash Flow Statement for the year ended 30 September 2008, using: (i) (ii) the direct method the indirect method. (12 marks) The following balances were extracted from the Balance Sheets of Tay Ltd at 30 June: 2007 $ 800,000 400,000 2008 $ 900,000 ?

Equipment at cost Accumulated depreciation of equipment

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 companys 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 companys 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 10 of 13

MODEL ANSWER TO QUESTION 4 (a) Net Cash Inflow from Operating Activities (i) Direct Method Cash received from customers (13,000 + 200) Less Cash paid to suppliers (5,080 + 250) Cash paid to employees or on their behalf Cash paid for other expenses (ii) Indirect Method Operating profit Depreciation on tangible fixed assets Loss on sale of tangible fixed assets Decrease in trade debtors Increase in stocks Decrease in trade creditors (b) (i) Cash paid for equipment Closing balance at cost Add equipment sold at cost Less opening balance at cost Total purchases of equipment Less equipment purchased on credit Cash paid (ii) Profit/Loss on Disposal of Equipment Received from sale Less net book value Loss (iii) Depreciation expense Equipment from previous year [(800 450) x 0.10] Equipment purchased on credit (50 x 0.10) Equipment purchased for cash (500 x 0.10 x .5) 300 250 $000 5,330 3,180 2,150 $000 $000 13,200

10,660 2,540 $000 2,260 580 50 200 3,090 550 2,540

$000 900 450 (800) 550 (50) 500 $000 95 (100) 5 $000 35 5 25 65

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

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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 $ Under 16 16 - 60 Over 60 4 8 Nil Proportion of passengers % 20 50 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 Other variable costs per mile (excluding depreciation) Cost of drivers per year (60% relating to working week) Other fixed costs per year (50% relating to working week) 0.30 0.15 8,002,900 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. (b) the total fares expected to be received from customers. (c) the total amount expected to be received from the government. (d) the contribution to profit expected per journey during the working week. (e) the contribution to profit expected per journey at the weekends. (f) the break even number of journeys per year during the working week. (3 marks) (6 marks) (3 marks) (4 marks) (3 marks) (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)

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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 32 160 192 96 $ 9,584,640 1,916,928 11,501,568

Fares per journey: working week: 40 x 20% x 4 = 40 x 50% x 8 = weekends: 192 x 0.50 =

Total fares: working week 69,888 x 5 7 x 192 = weekends 69,888 x 2 7 x 96 =

(c) Received from Government Per journey: working week 40 x 30% x 2 = weekends 24 x .50 = Total received: working week: 69,888 x 5 7 x 24 weekends: 69,888 x 2 7 x 12

24 12 $ = 1,198,080 = 239,616 1,437,696 $ 192.00 24.00 216.00

(d) Contribution per journey (working week) Fares per journey Received from government per journey

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 $ 96.00 12.00 108.00 21.40 86.60

(e) Contribution per journey (weekends) Fares per journey Received from government per journey Less Variable costs per journey

(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

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