2009 / Series 4 / Accounting LEVEL THREE (New Syllabus code 3012) (Prepared by the Kolarides Institute of Accountancy) Solution

1 Viking Ltd (a) Journal entries Date 2008 (1) Oct 30 Bank Debtor (2) (3) (4) (5) (6) Oct 29 Oct 28 Oct 31 Oct Oct Bank charges Bank No entry Subscriptions (standing order) Bank Bank (under added) Suspense No entry 1.206 165

Particulars

Debit 360

Credit 360 -

1.206 -

165 3.000 3.000

(b) Corrected Bank balance in the Cash Book at 31 October 2008 Bank balance as per Cash book Lodgments not posted No effect already posted Bank charges not posted No effect already posted Subscriptions (S/O) not posted Debit side under added Adjusted Bank balance in the Cash Book 10.932 360 (1.206) (165) 3.000 12.921

(1) (2) (3) (4) (5) (6)

Add Less Less Add

(c) Bank Reconciliation Statement at 31 October 2008 Bank balance as per Bank Statement Lodgements not credited by the bank Unpresented cheques No effect already posted Lodgements not credited by the bank Subscriptions (S/O) paid twice No effect Adjusted Bank balance in the Cash Book 8.133 360 (996) 5.259 165 12.921

(1) (2) (3) (4) (5) (6)

Add Less Add Add

2009 / Series 4 / Accounting LEVEL THREE (New Syllabus code 3012) (Prepared by the Kolarides Institute of Accountancy)

(d) Answers to the trainee questions. (i) A Company is paying bank charges when a current account is kept at the bank, for sundry services rendered by the bank, such as keeping our money safely and paying on demand our cheques, standing orders, and making other payments on our behalf, also issuing cheque books and statements to the company. If a Company wants to receive interest should keep a deposit account at the bank. (ii) Deposits are entered in the Bank Statement almost at the same day when lodgements are made. Cheques are entered in the Bank Statement when they are presented for payment.

Note to students Items that appear on the bank statement and not in the cash book must be recorded in the cash book and thus adjust the cash book balance. Items that appear in the cash book and not on the bank statement should be taken into account when preparing the bank reconciliation statement. Adjustments are needed for mistakes made either in the cash book or the bank statement.

2009 / Series 4 / Accounting LEVEL THREE (New Syllabus code 3012) (Prepared by the Kolarides Institute of Accountancy)

Solution 2 Clyst Ltd (a) Total amount of Capital Cost and Revenue Expenditure. (i) (ii) Capital Revenue Cost Expenditure 120.000 11.000 5.000 6.000 12.000 21.000 50.000 25.000 13.000 2.000 500 600 900 233.500 33.500

Purchase of land Legal fees: Purchase of land Dispute with a supplier Architects fees Clearance of site Building materials Labour: Own employees at cost (100/150X75.000) Administrative expenses (75.000 50.000) Electrical installation Cost of electricity Decoration : Initial Redecoration Annual insurance

(b)

Hayle plc Depreciation for the year Straight line (120.000-8.000) / 5 years Reducing (120.000X40%)
(120.000-48.000X40%) (120.000-76.800X40%)

(i) (ii) (iii)

2009 2010 2011 Total 22.400 22.400 22.400 67.200 48.000 28.800 17.280 94.080 37.333 29.867 22.400 89.600

Sum of the years digits (1+2+3+4+5=15)

(120.000-8.000X5/15) (112.000X4/15) (112.000X3/15)

(c) Residual Value is the remainder estimated scrap or salvage value of an assets at the end of its useful life.

2009 / Series 4 / Accounting LEVEL THREE (New Syllabus code 3012) (Prepared by the Kolarides Institute of Accountancy)

(d)

Truro Ltd Valuation of Stock at Cost and Net Realisable Value at 30 June 2009 Per aircraft 7.40 0.80 (0.74) 2.10 0.80 0.30 10.66 4.050

Valuation at cost Purchase price before discounts Import taxes Trade discount received Painting Box Carriage inwards Cost per unit Total Cost of Stock (380 X 10.66)

Valuation at Net Realisable Value Selling price per unit Less: Carriage outwards Other selling cost N. R. V. per unit Total Net Realisable Value of Stock (380 X 10.90)

Per aircraft 11.80 (0.40) (0.50) 10.90 4.142

According to the principle of stock valuation that Stock should be valued at the lower of cost and net realisable value. The amount that should appear in the Balance Sheet at 30 June 2009 is 4.050

2009 / Series 4 / Accounting LEVEL THREE (New Syllabus code 3012) (Prepared by the Kolarides Institute of Accountancy)

Solution 3 Brann (a) Annual Cash Budget for 2010 Balance b/f (given) Debtors (W 2) Balance c/d (given) 000 10 Fixed assets (570-500) 566 Creditors(W 3) 9 Drawings (given) Sundry expenses (W 4) 585 Balance b/d 000 70 464 12 39 585 9

Workings W1.
Trading and Profit & Loss Account for the year ended 31 December 2010 000 Sales (100 / 10 X 60) Less Cost of Sales: Opening stock (given) Purchases (missing) Less closing stock (given) Gross Profit (25% on sales, given) Less Expenses: Depreciation (given 190-140) Sundry expenses (missing) Net Profit (given,10% on Sales) 71 461 532 (82) 000 600

(450) 150

50 40

(90) 60

W2.
balance b/f (given) Sales (W1) balance b/d

W3.
Cash (missing) Balance c/d (given)

W4.
Cash (missing) Balance c/d (given)

Debtor Control 25 Cash (missing) 600 balance c/d (given) 625 59 Creditors Control 464 Balance b/f (given) 11 Purchases (W 1) 475 balance b/d Expenses Control 39 Balance b/f (given) 7 Profit & Loss (given) (W1) 46 balance b/d

566 59 625

14 461 475 11 6 40 46 7

2009 / Series 4 / Accounting LEVEL THREE (New Syllabus code 3012) (Prepared by the Kolarides Institute of Accountancy)

(b) Three Reasons for the Overdraft.

1. 2.

The purchase of fixed asset. (570.000-500.000=70.000) The long credit period allowed to Debtors. (59.000-25.000=34.000) 3. The keeping of a large quantity of stock. (82,000-71.000=11.000)

(c) Six actions to avoid requesting overdraft facilities. 1. 2. 3. 4. 5. 6. Sell some fixed assets. (Dispose of Fixed assets) Sell goods at reduced prices. (Decrease in Stock) Collect debts earlier offering cash discounts. (Decrease in Debtors) Negotiate better period allowed by Creditors. (Increase in Creditors) Reduce Drawings to minimum. Increase Sales by reducing Gross Profit.

2009 / Series 4 / Accounting LEVEL THREE (New Syllabus code 3012) (Prepared by the Kolarides Institute of Accountancy) Solution 4 Wick Ltd (a) Items appearing in the Cash Flow Statement for the year ended 31 December 2008 (i) Reconciliation of operating profit to net cash inflow from operations. Operating Profit [50.000 -3.000 + (3.000+4.000)] Depreciation charges (Note 1) or 56.000 (78.000-48.000) Loss on sale of Motor vehicles (32.000 - 24.000) Increase in stock (30.000 25.000) Increase in debtors (84.000 70.000) Decrease in creditors (50.000 40.000) (40.000x 20 / 80) Net cash inflow from operating activities
Note 1 Provision for depreciation of Fixed Assets Account Disposal of M. V. (80.000-32.000) 48.000 Balance b /f Balance c/d 56.000 Depreciation (P+L) 104.000 Balance b/d

54.000 26.000 8.000 (5.000) (14.000) (10.000) 59.000

78.000 26.000 104.000 56.000

(ii) Net cash outflow from returns on investment and servicing of finance. Dividends received Interest paid (3.000 + 4.000) 3.000 (7.000) (4.000)

(iii) Net cash outflow from capital expenditure and financial investment. Receipts from sale of Motor vehicles Payments to acquire of Plant & Machinery 24.000 (84.000) (60.000)

(iv) Net cash inflow from financing. Receipts from a five year Bank loan Receipts from issue of Ordinary Shares (200.000+ bonus = 300.000+100.000) 100.000 X 1.25 40.000 125.000 165.000

(b) Advantages and disadvantages of reducing the amount of stock held. Advantages: 1. Free up cash for investments. 2. Save warehouse and administrative expenses. 3. Decrease in Creditors. Disadvantage: 1. Risk of fall of supply and unable to satisfy customers.

2009 / Series 4 / Accounting LEVEL THREE (New Syllabus code 3012) (Prepared by the Kolarides Institute of Accountancy)

Solution 5 Lazio plc Ratio

(i) Gross profit to sales Gross profit X 100 Net total sales 2007 2008 105 X 100 / 225 = 46.66% 100 X100 / 250 = 40.00%

(ii) Stock turnover Closing Stock X 365 Cost of sales

2007 2008

4 X 365 / (225-105) = 12.16 days 7 X 365 / (250-100) = 17.03 days

(iii)
Debtors collection period 2007 2008 (10 X 365) / 225 = 16.22 days (30 X 365) / 250 = 43.80 days

Debtors X Days Credit Sales

(iv) Earnings per share (EPS) Net Profit after interest Pref. Dividend Number of Ordinary shares

2007 2008

55 / 100 = 0.55 48 / 150 = 0.32

(v) Price Earnings (P/E) Market price per share Earnings per share

2007 2008

2.50 / 0.55 = 4.54 times 1.50 / 0.32 = 4.68 times

(vi) Dividend cover Net Profit Pref. Dividend Ordinary Dividend

2007 2008

55 / 15 = 3.66 times 48 / 15 = 3.20 times

(vii) Interest cover Net profit before interest Interest charges

2007 2008

65 / 10 = 6.50 times 55 / 7 = 7.85 times

2009 / Series 4 / Accounting LEVEL THREE (New Syllabus code 3012) (Prepared by the Kolarides Institute of Accountancy) (b) Possible success or otherwise of the changes (1) Loyalty credit cards will create for the Business the following changes: 1. Increase in the administrative expenses. 2. Reduce the Gross and Net Profit. 3. Increase debtors collection period. 4. Decrease the cash at bank. (2) Closing down ten poorly performing stores and the rest refurbished will create for the Business the following changes: 1. Decrease in the administrative expenses. 2. More happy customers in refurbished stores and more sales. 3. Selling prices could be the same as administrative expenses will be reduced. 4. Increase in the Net profit ratio.

(c) Explanation of terms. (i) Bonus issue: New shares issued free of charge to the existing ordinary shareholders in proportion to their present holdings.

(ii)

One for two: is the ratio of issuing the new shares to existing shareholders and it means that for every two shares they now hold they get one new share.