Examiner’s Report and

Model Answers for

Accounting

THIRD LEVEL
Series 4 (Code 3001) 2000

LCCI Examinations Board MH N T321 9 RNM

>f2[EW2r@o2`FYB^3]E]2r2[Po#
Accounting Third Level
Series 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.

1
2
Accounting Third Level
Series 4 2000
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.

3
Accounting Third Level
Series 4 2000

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)

4
Model Answer to Question 1

(a)
Memorandum Joint venture
£ £
Purchases 17,500 Sales (.5 x 24,000) 12,000
Shipping 750 Sales (.5 x 21,500) 10,750
Insurance(.02 x 17,500) 350 Sales (.5 x 2,500) 1,250
Import duty(.1 x 17,500) 1,750
Transport(0.5 x 360) 180
Purchases 19,200 Sales (.5 x 55,000) 27,500
Shipping & Insurance 2,000
Import duty(.1 x 19,200) 1,920
Transport (.5(400) 200
Agent’s commission
(.5 x 55,000 x .1) 2,750
Profit Roger 2,450
Profit 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) 48,000
Transport 360 Sales 55,000
Roger 35,000
Import duty(1,920 x 2) 3,840
Transport 400
Commission (2,750 x 2) 5,500
Roger 49,500
Profit 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 of
currency 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 was
acceptable, they normally included the cash payment from James to Roger as either an income
or an expense when it was in fact neither.

5
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 30,000
Jane 25,000
Alan 10,000 65,000
Current Accounts
Robert Jane Alan
Balance at 1 Jan Year 10 5,400 8,200 6,300
less Loss for year 8,000 4,800 3,200
less Drawings 9,500 9,000 8,500
Balance at 31 Dec Year 10 (12,100) (5,600) (5,400) (23,100)
41,900
Creditors 6,000
Bank overdraft 6,350 12,350
54,250

Machinery at book value 15,000

Cars at book value 12,000
Stock at cost 14,500
Debtors 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:

Dissolution
Capital (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)

6
Model Answer to Question 2

(a)
RJA
Dissolution Account

Machinery 15,000 Bank for machinery 9,000

Vehicles 12,000 Capital Jane 7,500
Stock 14,500 Capital Alan 3,750
Debtors 12,750 Bank for stock 9,400
Costs (bank) 3,500 Bank from debtors
Creditors (bank) 5,740 (12,750 x .96) 12,240
Creditors 6,000
Loss Robert (.5) 7,800
Loss Jane (.3) 4,680
______ Loss Alan (.2) 3,120 15,600
63,490 63,490

Partners Capital Accounts

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

Bank Account
£ £
Machinery 9,000 Balance 6,350
Stock 9,400 Creditors(6,000-260) 5,740
Debtors 12,240 Robert 10,100
Alan 2,270 Jane 7,220
______ Costs 3,500
32,910 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

Examiner’s Report on Question 2

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.

7
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)

8
Model Answer to Question 3

(a)
Grocery Supplies Ltd Cash Budget
Month
1 2 3 4 5 6
£ £ £ £ £ £
Gross receipts from sales:
Month -1 15,600
Month 0 15,600 15,600
Month 1 2,600 5,200 5,200
Month 2 3,900 7,800 7,800
Month 3 5,200 10,400 10,400
Month 4 9,100 18,200 18,200
Month 5 9,100 18,200
Month 6 _____ _____ _____ _____ _____ 9,100
33,800 24,700 18,200 27,300 37,700 45,500

Payments:
Purchases
Month 0 4,000
Month 1 9,000 6,000
Month 2 12,000 8,000
Month 3 21,000 14,000
Month 4 21,000 14,000
Month 5 21,000 14,000
Month 6 12,000
Overheads 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 9,200

Receipts 33,800 24,700 18,200 27,300 37,700 45,500
48,800 57,000 53,700 48,500 47,700 54,700
Payments 16,500 21,500 32,500 38,500 38,500 29,500
Closing 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

Examiner’s Report on Question 3

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.

9
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 20,000

Year 2 2,250 12,500
Year 3 2,500 8,000
Year 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)

10
Model Answer to Question 4

(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 =12,000
18,000 x .4 = 7,200
10,800 x .4 = 4,320
6,480 x .4 = 2,592

Sum of years

4/(1+2+3+4) x (30,000-3,888) = 10,445

3/(1+2+3+4) x (30,000-3,888) = 7,834
2/(1+2+3+4) x (30,000-3,888) = 5,222
1/(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) = £5,059

2,250/(1,550+2,250+2,500 +1,700) x (30,000 - 3,888) = £7,344
2,500/(1,550+2,250+2,500 +1,700) x (30,000 - 3,888) = £8,160
1,700/(1,550+2,250+2,500 +1,700) x (30,000 - 3,888) = £5,549

Revaluation method

30,000 - 20,000 = 10,000

20,000 - 12,500 = 7,500
12,500 - 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.

11
Examiner’s Report on Question 4

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 of
years, 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.

12
QUESTION 5

Merchandising plc has four branches. Summary figures extracted from their last year’s accounts are
as follows:
Branch Branch Branch Branch
A B C D
£’000 £’000 £’000 £’000

Turnover 145 160 128 130

Cost of goods sold 98 107 83 84
Wages 20 12 13 18
Depreciation 4 7 8 6
Other branch expenses 15 17 10 11
Head Office charge 10 10 10 10
Book value of:
Land and buildings 50 75 60 35
Machinery 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)

13
Model Answer to Question 5

(a) (i) Branch A B C D

Gross 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) 6.4
4/(60+40) 4
1/(35+30) 1.5

(b)

Cash surplus on closure £000 £000 £000 £000

Land and Buildings 55 82.5 66 38.5
Labour 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?

Examiner’s Report on Question 5

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.

14
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 140,500
less:
Opening stock 7,400
Purchases 88,350
95,750
Depreciation of machinery 8,400
104,150
Closing Stock 8,250 95,900
Gross profit 44,600
less:
Salaries 12,000
Drawings 13,500
General expenses 6,940
Sales expenses 3,750
Carriage on purchases 725
Depreciation on car 1,500
Rent of premises 3,300 41,715
Net profit 2,885

Balance Sheet as at 31 December Year 10

£ £ £

Machinery 42,000 19,200 22,800

Car 9,000 4,500 4,500
51,000 23,700 27,300

Stock 8,250
Debtors 12,400
Bank 2,125
50,075

Capital at start of year 39,015

add:
Net profit 2,885
41,900
Creditors 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.

15 CONTINUED ON NEXT PAGE

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)

16
Model Answer to Question 6

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

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

£ £

Sales 140,500
less Cost of Goods sold
Opening stock 7,400
plus Carriage 725
Purchases 88,350
96,475
Closing stock 8,250 88,225
Gross profit 52,275
add Profit on sale of machinery (1250 -950) 300
52,575
less:
Salaries 12,000
General expenses 6,940
Sales expenses 3,750
Rent of premises 3,300
Bad debt (.75 x 800) 600
Provision for doubtful debts
(0.05 x (12,400 - 800)) 580
Depreciation on: machinery 8,640
car 1,500 37,310
Net profit 15,265

Bill Smith
Balance Sheet as at 31 December Year 10

£ £ £

Tangible Fixed Assets

Machinery at cost 43,200 16,590 26,610
Car 9,000 4,500 4,500
52,200 21,090 31,110
Current assets
Stock at cost 8,250
Debtors(12,400 - 600) 11,800
less provision (580) 11,220
Bank 2,125 21,595
less
Liabilities - amounts due within one year
Trade Creditors 8,175
Other creditors (5,000 - 1,250) 3,750 11,925
Net current assets 9,670
40,780

Capital at start of year 39,015

add Profit 15,265
54,280
less Drawings 13,500
40,780

17
Examiner’s Report on Question 6

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.

18