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Ac c ount i ng
Level 3






Model Answ er s
Series 2 2006 (Code 3001)
3001/2/06/MA 2 OVER
Accounting Level 3
Series 2 2006





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 2006

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.
3001/2/06/MA 3 OVER
SECTION A
(Answer Questions 1 and 2 in Section A Compulsory)

QUESTION 1

The Sales Ledger Control Account of Brodsworth showed a debit balance of 78,784 on 31 J anuary
2006. On that date, the list of balances extracted from the Sales Ledger had a net total of 79,200
debit. Neither the Sales Ledger Accounts nor the Purchase Ledger Accounts are treated as part of
Brodsworths double entry records.

The auditors discovered the following errors:


(1) An invoice for 60 recorded in the Sales Day Book had not been posted to the customers
account in the Sales Ledger

(2) A page in the Sales Day Book had been under-added by 1,000

(3) A sales invoice for 926 had been completely omitted from the books

(4) A debit balance of 300 in the list of Sales Ledger balances had been wrongly listed as a credit
balance

(5) Contras of 400 had been correctly recorded in the Purchase Ledger and Sales Ledger
Accounts but no entries had been made in either Control Account

(6) The discount allowed column in the Cash Book had been over-added by 26

(7) A cheque for 1,500 received from a customer had been entered in the customers account as
1,050


REQUIRED

(a) Prepare Journal entries (without narrati ves) showing the corrections necessary to the
double entry records.
(8 marks)

(b) Calculate:

(i) the corrected Sales Ledger Control Account balance
(ii) the corrected net total of the balances extracted from the Sales Ledger
(9 marks)

(c) Calculate the change to Brodsworths net profit as a result of the auditors discoveries
(3 marks)

(Total 20 marks)

3001/2/06/MA 4 OVER
MODEL ANSWER TO QUESTION 1


SECTION A

Questions 1 and 2 MUST be answered


(a) Journal
Sales Ledger Control 1,000
Sales 1,000
Sales Ledger Control 926
Sales 926
Purchase Ledger Control 400
Sales Ledger Control 400
Sales Ledger Control 26
Discounts Allowed 26



(b) (i) Sales Ledger Control Account balance per question 78,784
ADD Sales 1,000
Sales 926
Discounts Allowed 26
LESS Purchase Ledger Control Account (400)
Corrected Sales Ledger Control Account balance 80,336



(ii) Net Sales Ledger Account balances per question 79,200
ADD Invoice omitted 60
Invoice omitted 926
Wrongly extracted balance (2 x 300) 600
LESS Wrongly entered cheque (1,500 1,050) (450)
Corrected net total of Sales Ledger balances 80,336




(c) Change in net profit
Sales under added +1,000
Sales invoice omitted +926
Discounts Allowed over-added +26
Increase in net profit 1,952

3001/2/06/MA 5 CONTINUED ON THE NEXT PAGE
SECTION A CONTINUED

QUESTION 2

The accountant of Buxton received the following print out of the Product X Stock Account for the year
ended 31 December 2005. All the figures printed were correct, as were all the calculations. However,
most of the figures (indicated by * s) were missing. Buxton uses the weighted average cost method
for valuing stock.

DATE UNITS PRICE PER
UNIT

VALUE


2005
1 J an Balance b/d * 4.00 24,000
4 Feb Creditors 6,000 * *
* 4.50 *
20 Mar Cost of goods sold * * 1,350
* * *
15 Apr Creditors *

4.50 *
12,000 * *
18 May Creditors * 4.80 *
* * 65,520
25 J une Cost of goods sold 2,400 * *
* * 54,600
3 J uly Creditors 3,000 * *
* 5.00 *
10 Aug Cost of goods sold 3,000 * *
* * *
19 Sept Cost of goods sold * * 1,000
* * *
2 Oct Creditors * 5.30 *
* 5.06 *
5 Nov Cost of goods sold * * 6,072
31 Dec Balance c/d * * *


3001/2/06/MA CONTINUED ON THE NEXT PAGE 6
SECTION A CONTINUED

QUESTION 2 CONTINUED

REQUIRED

(a) Copy the Product X Stock Account into your answer book, replacing the * s with the
appropriate figures for units, price and value.
(11 marks)

You are given the following ratios relating to the most recent accounts of three companies:

HALLAM plc

SHEFFIELD plc GLAPWELL plc
Net profit to sales

10% 5% 4%
Return on capital employed

15% 35% 36%
Stock turnover

19 times 26 times 32 times
Debtors collection

0 days 6 days 0 days
Creditors settlement

51 days 22 days 29 days


REQUIRED

(b) Using the ratios given above and the background information gi ven below, identify which
company is Company A, which company is Company B and which company is Company
C.
Give reasons for each of your choices.
(9 marks)

Company A is a food supermarket, operating from rented stores and selling only for cash.

Company B is a food supermarket, which also sells a small range of clothes, (which offer a
higher mark up than food). It offers some credit and operates from rented premises.

Company C is a food supermarket, which also sells a large range of clothes. It sells only
for cash and owns its own premises. It is currently experiencing cash flow difficulties.

(Total 20 marks)


3001/2/06/MA CONTINUED ON THE NEXT PAGE 7
MODEL ANSWER TO QUESTION 2

(a)
Product X
Stock Account
Year Ended 31 December 2005

DATE UNITS PRICE PER
UNIT

VALUE


2005
J an 1 Balance b/d 6,000 4.00 24,000
Feb 4 Creditors 6,000 5.00 30,000
12,000 4.50 54,000
Mar 20 Cost of goods sold 300 4.50 1,350
11,700 4.50 52,650
Apr 15 Creditors 300 4.50 1,350
12,000 4.50 54,000
May 18 Creditors 2,400 4.80 11,520
14,400 4.55 65,520
J une 25 Cost of goods sold 2,400 4.55 10,920
12,000 4.55 54,600
J uly 3 Creditors 3,000 6.80 20,400
15,000 5.00 75,000
Aug 10 Cost of goods sold 3,000 5.00 15,000
12,000 5.00 60,000
Sept 19 Cost of goods sold 200 5.00 1,000
11,800 5.00 59,000
Oct 2 Creditors 2,950 5.30 15,635
14,750 5.06 74,635
Nov 5 Cost of goods sold 1,200 5.06 6,072
Dec 31 Balance c/d 13,550 5.06 68,563



(b) Company A =Glapwell Ltd

Selling food only would lead to highest stock turnover

Selling food only would give lowest net profit to sales

Rented stores could give high return on capital employed

Cash sales gives 0 days debt collection

3001/2/06/MA 8 OVER
SECTION A CONTINUED

MODEL ANSWER TO QUESTION 2 CONTINUED


(b) Company B =Sheffield plc

The only company offering credit and therefore has a debt collection period

As it sells only a few clothes it has the middle stock turnover ratio

As it sells only a few clothes it has the middle net profit to sales ratio

Selling from rented stores has generated a relatively high return on capital employed


Company C =Hallam plc

The only company with cash flow problems. It has the longest creditors settlement period

Selling a lot of clothes leads to the lowest stock turnover ratio

The only company owning its own stores. It has the lowest return on capital employed

Selling a lot of clothes gives the highest net profit to sales ratio



































3001/2/06/MA 9 OVER
SECTION B

(Answer any THREE questions from Section B)

QUESTION 3

The following are extracts from the Balance Sheet of Selby plc at 31 December 2005:
000
CAPITAL AND RESERVES
20,000,000 Ordinary Shares of 0.25 each 5,000
1,200,000 10% Preference Shares of 1.00 each 1,200
Share Premium 1,400
Retained Earnings 700
8,300
CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR
15% Debentures 1,000


On 1 J anuary 2006, the directors of Selby plc intend to raise 1,800,000 and invest it in a project
which they believe will increase operating profit by 400,000 per year for the foreseeable future.

They are considering three possible methods of raising the 1,800,000:

(1) A rights issue of ordinary shares at 0.45 each

(2) Issuing more 10% preference shares at 1.20 each

(3) Issuing 15% Debentures at 0.90 for 1.00 nominal


REQUIRED

(a) Prepare Journal entries (including narrati ves) showing the effect of each of the three
possible ways of raising finance (10 marks)

(b) Calculate the increase in earnings per ordinary share resulting from implementing
methods (2) and (3) (6 marks)


The Managing Director of Selby plc has suggested two additional ways of raising the finance:

(1) Making a bonus (capitalisation) issue of ordinary shares

(2) Arranging a bank overdraft with a current rate of interest of 12% per year


REQUIRED

(c) Briefly discuss the Managing Directors suggestions
(4 marks)

(Total 20 marks)


3001/2/06/MA 10 OVER
MODEL ANSWER TO QUESTION 3


(a) 000 000
(i) Bank 1,800
Ordinary Share Capital 1,000
(1,800 0.45 x 0.25)
Share Premium (1,800 1,000) 800
Issue of Ordinary Shares at 0.45

(ii) Bank 1,800
10% Preference Share Capital 1,500
(1,800 1.2)
Share Premium (1,800 1,500) 300
Issue of Preference Shares at 1.20

(iii) Bank 1,800
Share Premium (2,000 1,800) 200
15% Debentures (1,800/.90) 2,000
Issue of Debentures at 0.90



(b) Increase in earnings per share:

(i) (400,000 150,000) / 20,000,000 = 0.013

(ii) (400,000 300,000) / 20,000,000 = 0.005



(c) (i) Converting reserves into share capital does not result in the receipt of cash, so the suggestion
is inappropriate.

(ii) A bank overdraft is currently cheaper than the debentures though this could change. A bank
overdraft is repayable on demand so it could be dangerous to use an overdraft to finance a
long term project.

3001/2/06/MA 11 CONTINUED ON THE NEXT PAGE
SECTION B CONTINUED

QUESTION 4

Following are the two most recent Balance Sheets of Thackley Ltd together with the most recent
Income Statement:

Thackley Ltd
Balance Sheet as at 31 March

2005 2006

FIXED ASSETS
Tangible at cost 78,000 71,700
Accumulated depreciation 24,200 24,600
53,800 47,100
Investments at cost 112,500 125,100
166,300 172,200
CURRENT ASSETS
Stock 55,080 161,187
Debtors 71,420 146,703
Bank 39,580 72,150
166,080 380,040
CREDITORS: AMOUNTS FALLING
DUE WITHIN ONE YEAR

Creditors 79,280 96,140
Proposed dividend 13,000 16,000
92,280 112,140
NET CURRENT ASSETS 73,800 267,900
240,100 440,100

CREDITORS: AMOUNTS FALLING
DUE AFTER ONE YEAR

Debentures 100,000 86,000
140,100 354,100

FINANCED BY:
Ordinary Shares of 1.00 each 50,000 62,000
Share Premium 12,000 22,000
Retained earnings 78,100 270,100
140,100 354,100



3001/2/06/MA 12
SECTION B CONTINUED

QUESTION 4 CONTINUED

Income Statement for Thackley Ltd
Year Ended 31 March 2006


Sales 490,000
Cost of sales 170,000
Gross profit 320,000
Distribution expenses 64,000
Administrative expenses 37,000 101,000
Net operating profit 219,000
Debenture interest 7,000
212,000
Dividends paid and proposed 20,000
Retained profit 192,000


NOTES RELATING TO THE YEAR ENDED 31 MARCH 2006:

(1) Tangible fixed assets costing 30,000 (accumulated depreciation 21,000) were sold for
5,000. The loss on disposal was included in administrative expenses.

(2) A bonus (capitalisation) issue of 2,000 shares was made, utilising the share premium account and
further shares were issued for cash.

(3) Fixed asset investments costing 6,000 were sold for 7,000. The profit on disposal was
deducted from administrative expenses.

(4) Debentures were redeemed at par.

REQUIRED

(a) Prepare a statement reconciling the net operating profit for the year with the net cash
inflow from operating activities
(8 marks)

(b) Prepare the Cash Flow Statement of Thackley Ltd for the year ended 31 March 2006
(12 marks)

(Total 20 marks)

3001/2/06/MA 13
MODEL ANSWER TO QUESTION 4

(a) Reconciliation:
Net operating profit 219,000
Loss on disposal of tangible fixed assets (30,000 21,000) 5,000 4,000
Profit on disposal of investments (7,000 6,000) (1,000)
Depreciation (24,600 24,200 +21,000) 21,400
Increase in stock (161,187 55,080) (106,107)
Increase in debtors (146,703 71,420) (75,283)
Increase in creditors (96,140 79,280) 16,860
NET CASH FLOW FROM OPERATIONS 78,870

(b) Thackley Ltd Cash Flow Statement year ended 31 March 2006

Net cash flow from operating acti vities (as above) OF 78,870

Returns on investment and servicing of finance
Debenture interest paid (7,000)
Capital expenditure and financial investment
Sale of investments 7,000
Sale of tangible fixed assets 5,000
Purchase of investments (125,100 112,500 +6,000) (18,600)
Purchase of tangible fixed assets (71,700 78,000 +30,000) (23,700)
Net cash outflow (30,300)

Equity dividends paid (13,000 +20,000 16,000) (17,000)
Net cash inflow before financing 24,570
Financing
Issue of shares (62,000 50,000 2,000) +(22,000 12,000 +2,000) 22,000
Repayment of debentures (100,000 86,000) (14,000)
Net cash inflow 8,000
Net increase in cash (72,150 39,580) 32,570
3001/2/06/MA 14
SECTION B CONTINUED

QUESTION 5

Following is the summarised Consolidated Balance Sheet of Pickering Ltd and its subsidiary Goole Ltd
at 31 December 2004:

Tangible fixed assets 170,100
Goodwill on consolidation 18,000
Net current assets 112,200
300,300


Share Capital 100,000
Retained earnings 176,300
Minority interest 24,000
300,300


Pickering Ltd acquired 80% of Goole Ltds ordinary shares on 1 J anuary 2001. Pickering Ltds policy
is to write goodwill off evenly over five years.

Goole Ltd has an issued ordinary share capital of 20,000 1.00 ordinary shares. Its retained earnings
on 1 J anuary 2001 were 36,000. No dividends have been paid or proposed by either Pickering Ltd or
Goole Ltd since Goole Ltd became a subsidiary company.

REQUIRED

Calculate:

(a) The goodwill arising on the acquisition of Goole Ltd (3 marks)

(b) The total net profit made by Goole Ltd in the four years to 31 December 2004 (4 marks)

(c) The retained earnings of Pickering Ltd (alone) at 31 December 2004 (3 marks)

On 1 J anuary 2005, Pickering Ltd acquired 70% of Maltby Ltds ordinary shares. Maltby Ltd has an
issued ordinary share capital of 4,000 1 ordinary shares. Its retained earnings at 1 J anuary 2005
were 16,000.

Following is the summarised Consolidated Balance Sheet of Pickering Ltd and its subsidiaries Goole
Ltd and Maltby Ltd at 31 December 2005:

Tangible fixed assets 248,100
Goodwill on consolidation 46,000
Net current assets 146,300
440,400


Share capital 100,000
Retained earnings 302,600
Minority interest 37,800
440,400


3001/2/06/MA 15
SECTION B CONTINUED

QUESTION 5 CONTINUED

No dividends were paid or proposed by any group company in the year ended 31 December 2005.
Goole Ltds net profit for the year was 10,500.

REQUIRED

Calculate:

(d) The goodwill arising on the acquisition of Maltby Ltd (3 marks)

(e) The net profit made by Maltby Ltd in the year ended 31 December 2005 (7 marks)

(Total 20 marks)

3001/2/06/MA 16
MODEL ANSWER TO QUESTION 5

(a) Goodwill on the acquisition of Goole Ltd
Goodwill at 31 December 2004 (1/5) 18,000
Goodwill written off (4 x 18,000) 72,000
Goodwill on acquisition 90,000



(b) Total net profit of Goole Ltd since acquisition
Minority interest -
Share capital (20% x 20,000) 4,000
Retained earnings (R) 20,000
24,000

Retained earnings at 31 December 2004 (5 x 20,000) 100,000
Retained earnings at 1 J anuary 2001 36,000
Total net profits since acquisition 64,000



(c) Retained earnings of Pickering Ltd at 31 December 2004
Retained earnings as per Balance Sheet 176,300
LESS: Group share of Goole Ltds profits (0.80 x 64,000) 51,200
125,100
ADD: Goodwill written off 72,000
Retained earnings of Pickering Ltd 197,100



(d) Goodwill on the acquisition of Maltby Ltd
Goodwill attributable to Goole Ltd NIL
Goodwill attributable to Maltby Ltd (4/5) 46,000
Goodwill written off (0.25 x 46,000) 11,500
Goodwill on acquisition 57,500



(e) Net profit of Maltby Ltd since acquisition
Minority interest -
Share Capital Goole Ltd (20% x 20,000) 4,000
Share Capital Maltby Ltd (30% x 4,000) 1,200
Retained earnings Goole Ltd [20,000 +(20% x 10,500)] 22,100
Retained earnings Maltby Ltd (R) 10,500
37,800

Retained earnings at 31 December 2005 (10,500 x 10/3) 35,000
Retained earnings at 1 J anuary 2005 16,000
Net profit of Maltby Ltd - year to 31 December 2005 19,000





3001/2/06/MA 17

QUESTION 6

Blackpool has sold tables for many years. On 1 J anuary 2005 he opened his first branch in
Fleetwood. All double entry records are kept at the head office. All tables are purchased by head
office and invoiced to Fleetwood at selling prices fixed to give a gross profit of 30% on sales revenue.
All sales are for cash.

In the year ended 31 December 2005, the following occurred:

(1) Head office sent 480 wooden tables costing 91 each and 125 metal tables costing 63 each to
the Fleetwood branch.
(2) The Fleetwood branch returned 60 wooden tables and 5 metal tables to head office as they were
the wrong colour.
(3) At 31 December 2005, 50 wooden tables and 6 metal tables remained in stock at the Fleetwood
branch.
(4) Head office made the following payments on behalf of the Fleetwood branch:

5,000 rent for the fifteen month period to 31 March 2006;
50 per month for sundry expenses;
20 per week for the wages of part time staff;
300 per month for the managers salary.

At 31 December 2005 it was discovered that no stock had been damaged, lost or stolen. The part
time staff were entitled to a commission equal to 5% of sales revenue. The manager was entitled to a
bonus equal to 4% of the branch net profit before charging the bonus.

REQUIRED

(a) Prepare the following accounts for the year ended 31 December 2005, as they would
appear in the head office books of Blackpool:

(i) Branch Stock

(ii) Branch Stock Adjustment

(iii) Branch Profit and Loss
(18 marks)
It is unusual for a retail outlet to have no stock losses.

REQUIRED

(b) Suggest one reason why no stock losses occurred at the Fleetwood branch. (2 marks)

(Total 20 marks)
3001/2/06/MA Education Development International plc 2006 18
MODEL ANSWER TO QUESTION 6

(a)
(i) Branch Stock Account


Goods sent to branch (480 x 91) 43,680 Goods sent to branch (60 x 91) 5,460
Branch stock adj. (480 x 39) 18,720 Branch stock adj. (60 x 39) 2,340
Goods sent to branch (125 x 63) 7,875 Goods sent to branch (5 x 63) 315
Branch stock adj. (125 x 27) 3,375 Branch stock adj. (5 x 27) 135
Bank (370* x 130) 2 48,100
Bank (114** x 90) 2 10,260
Balance c/d (50 x 130) 6,500
Balance c/d (6 x 90) 540
73,650 73,650

* 480-60-50 =370
** 125-5-6 =114



(ii) Branch Stock Adjustment Account

Branch stock 2,340 Branch stock 18,720
Branch stock 135 Branch stock 3,375
Profit and loss (R) 1 17,508
Balance c/d (50 x 39) 1 1,950
Balance c/d (6 x 27) 1 162
22,095 22,095




(iii) Branch Profit and Loss Account

Rent (5,000 x 12/15) 1 4,000 Branch stock adjustment 17,508
Sundry (50 x 12) 600
Wages (20 x 52) 1,040
Salary (300 x 12) 3,600
Comm. (0.05 x 58,360) 2,918
Profit before bonus 5,350
17,508 17,508
Bonus (0.04 x 5,350) 214 Profit before bonus 5,350
Net profit 5,136
5,350 5,350
(18 marks)

(b) Large items like tables are easy to count and difficult to lose or steal.