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) 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.

© EDI 2009

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QUESTION 1

The Trial Balance of Esher Ltd at 30 September 2008 was as follows:

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

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)

3712/4/08/MA Page 1 of 13
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 Ltd’s 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)

3712/4/08/MA Page 2 of 13
MODEL ANSWER TO QUESTION 1

(a)
Esher Ltd
Trading and Profit and Loss Account for year ended 30 September 2008
$ $
Sales 200,460
Less Cost of Sales: Opening Stock 10,500
Purchases 157,200
167,700
Closing Stock 77,000 90,700
Gross profit 109,760
Distribution costs [52,600 + (0.02 x 40,000 x 0.40)] 52,920
Administration expenses
[38,960 + (0.02 x 40,000 x 0.60) + 20,000 + (0.30 x 2,200)] 60,100 113,020
Net operating loss 3,260
Loan interest (0.05 x 10,000) 500
Net loss 3,760
Dividends: Interim 1,000
Final [(20,000 + 5,000*) x 0.10] 2,500 3,500
Retained loss 7,260
Brought forward 42,250
Carried forward 34,990

*20,000/4 or 26,000/5.20

3712/4/08/MA Page 3 of 13
MODEL ANSWER TO QUESTION 1 CONTINUED

(b)
Esher Ltd
Balance Sheet at 30 September 2008
$ $ $
Tangible Fixed Assets Cost Depreciation NBV
Land and buildings 50,000 (18,000 + 800) 18,800 31,200
Office equipment 5,000 (2,800 + 660) 3,460 1,540
55,000 22,260 32,740
Current Assets
Stock 77,000
Trade debtors (30,500 – 20,000) 10,500
87,500
Creditors: Amounts due within one year
Trade creditors 24,770
Loan interest (500 – 200) 300
5% Loan 2,000
Dividend payable 2,500
Bank overdraft 1,680 31,250
Net Current Assets 56,250
88,990
Creditors: Amounts due after one year
5% Loan 8,000
80,990

$
Share Capital and Reserves
Ordinary shares of $1 each (20,000 + 5,000) 25,000
Share premium (26,000 – 5,000) 21,000
Retained earnings 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.

3712/4/08/MA Page 4 of 13
QUESTION 2

At 30 June 2008, the Trial Balance of Par plc was as follows:

$000 $000
Sales (all on credit) 12,500
Cost of goods sold 9,200
Stock (at 30 June 2008) 1,000
Operating expenses 500
Interest expense 6
Trade debtors/Trade creditors 4,120 2,240
Bank 160
Tangible fixed assets 19,894
Loan (repayable 2017) 4,000
Ordinary shares of $0.50 each 10,000
Share premium 3,000
Retained profit (at 30 June 2007) 3,140
34,880 34,880

Notes:

(1) Par plc’s 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 plc’s 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)

3712/4/08/MA Page 5 of 13
MODEL ANSWER TO QUESTION 2

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

(b) (i) Gross profit to sales [(3,300/12,500) x 100] 26.40%

(ii) Net profit to sales [(2,794/12,500) x 100] 22.35%
(iii) Interest cover (2,800/6) 466.67 times
(iv) Return on long term capital [(2,800/21,934) x 100] 12.77%
(v) Earnings per share [2,794/(2 x 10,000)] $0.14
(vi) Stock turnover rate [(9,200 x 2)/(1,200 + 1,000)] 8.36 times
(vii) Current [(1,000 + 4,120 + 160)/(2,240 + 1,000)] 1.63
(viii) Liquidity [(4,120 + 160)/(2,240 + 1,000)] 1.32
(ix) Debtors collection period [(4,120/12,500) x 365] 120.30 days
(x) Dividend yield [(0.05/3) x 100] 1.67%
(xi) Earnings yield [(0.14/3) x 100] 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

3712/4/08/MA Page 6 of 13
QUESTION 3

On 31 August 2006, Five Ltd paid $180,000 to acquire 70% of the ordinary shares of Way Ltd. Way
Ltd’s 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 Way Ltd

$000 $000
Tangible fixed assets 500 110
Investments 190 50
Stock 105 50
Trade debtors 145 95
Bank 30 25
970 330

$000 $000
Ordinary shares of $1 each 600 130
Share premium 75 40
Revaluation reserve 65 -
Retained earnings 100 80
Trade creditors 85 60
Accruals 45 20
970 330

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 Ltd’s
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)

3712/4/08/MA Page 7 of 13
MODEL ANSWER TO QUESTION 3

Preliminary Notes:

$000 $000
Goodwill: Cost of Investment 180
Share capital 130
Share premium 40
Retained earnings 30
0.70 x 200 140
40
Amortisation [(2 x 40) ÷ 10] 8
32
Consolidated Retained Earnings $000 $000
Five Ltd 100
Way Ltd [(80 – 30) x 0.70] 35
135
Less Goodwill 8
Profit on plant (50 x 0.70) 35
Profit on stock [(240 x 0.25) ÷ 6] 10 53
82
Add Depreciation on plant [(50 ÷ 5) x 2 x 0.70] 14
96
Minority Interest $000
Capital and reserves [0.30 (130 + 40 + 80)] 75
Less Profit on plant (50 x 0.30) 15
60
Add Depreciation on plant [(50 ÷ 5) x 2 x 0.30] 6
66

3712/4/08/MA Page 8 of 13
MODEL ANSWER TO QUESTION 3 CONTINUED

(a)
Five Ltd Group
Consolidated Balance Sheet at 31 August 2008
$000 $000 $000
Fixed Assets
Tangible (500 + 110 – 50 + 20) 580
Goodwill 32
Investments (190 – 180 + 50) 60
672
Current Assets
Stock (105 + 50 – 10) 145
Trade debtors (145 + 95 – 35) 205
Bank (30 + 25 + 5) 60
410
Creditors: Amounts due within one year
Trade creditors (85 + 60 – 30) 115
Accruals (45 + 20) 65 180
Net Current Assets 230
902
Share Capital and Reserves $000
Ordinary shares of $1 each 600
Share premium 75
Revaluation reserve 65
Retained earnings 96
836
Minority Interest 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.

3712/4/08/MA Page 9 of 13
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 Ltd’s net cash flow from operating activities for the company’s Cash Flow
Statement for the year ended 30 September 2008, using:

(i) the direct method

(ii) the indirect method.
(12 marks)

The following balances were extracted from the Balance Sheets of Tay Ltd at 30 June:

2007 2008
$ $
Equipment at cost 800,000 900,000
Accumulated depreciation of equipment 400,000 ?

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 company’s 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
company’s 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 $000 $000
Cash received from customers (13,000 + 200) 13,200
Less Cash paid to suppliers (5,080 + 250) 5,330
Cash paid to employees or on their behalf 3,180
Cash paid for other expenses 2,150 10,660
2,540
(ii) Indirect Method $000 $000
Operating profit 2,260
Depreciation on tangible fixed assets 580
Loss on sale of tangible fixed assets 50
Decrease in trade debtors 200
3,090
Increase in stocks 300 550
Decrease in trade creditors 250 2,540

(b)
(i) Cash paid for equipment $000
Closing balance at cost 900
Add equipment sold at cost 450
Less opening balance at cost (800)
Total purchases of equipment 550
Less equipment purchased on credit (50)
Cash paid 500
(ii) Profit/Loss on Disposal of Equipment $000
Received from sale 95
Less net book value (100)
Loss 5
(iii) Depreciation expense $000
Equipment from previous year [(800 – 450) x 0.10] 35
Equipment purchased on credit (50 x 0.10) 5
Equipment purchased for cash (500 x 0.10 x .5) 25
65

(c) Tangible – Land, Buildings, Machinery, Motor vehicles, etc

Intangible – Goodwill, Patents, Trademarks, etc

3712/4/08/MA Page 11 of 13
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 Proportion of passengers

$ %
Under 16 4 20
16 - 60 8 50
Over 60 Nil 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 0.30
Other variable costs per mile (excluding depreciation) 0.15
Cost of drivers per year (60% relating to working week) 8,002,900
Other fixed costs per year (50% relating to working week) 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. (3 marks)

(b) the total fares expected to be received from customers. (6 marks)

(c) the total amount expected to be received from the government. (3 marks)

(d) the contribution to profit expected per journey during the working week. (4 marks)

(e) the contribution to profit expected per journey at the weekends. (3 marks)

(f) the break even number of journeys per year during the working week. (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)

3712/4/08/MA Page 12 of 13
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

Fares per journey: working week: 40 x 20% x 4 = 32

40 x 50% x 8 = 160
192
weekends: 192 x 0.50 = 96
$
Total fares: working week 69,888 x 5 ÷ 7 x 192 = 9,584,640
weekends 69,888 x 2 ÷ 7 x 96 = 1,916,928
11,501,568

(c) Received from Government

Per journey: working week 40 x 30% x 2 = 24
weekends 24 x .50 = 12
$
Total received: working week: 69,888 x 5 ÷ 7 x 24 = 1,198,080
weekends: 69,888 x 2 ÷ 7 x 12 = 239,616
1,437,696

(d) Contribution per journey (working week) $ $

Fares per journey 192.00
Received from government per journey 24.00
216.00

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

(e) Contribution per journey (weekends) $

Fares per journey 96.00
Received from government per journey 12.00
108.00
Less Variable costs per journey 21.40
86.60

(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

3712/4/08/MA Page 13 of 13 © Education Development International plc 2009

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