code 2006 accounting level 2 2001 series 2

LCCI Examinations Board MH N T304 9 TNM

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Examiner’s Report andModel Answers for

Book-keeping andAccounts

SECOND LEVELSeries 2 (Code 2006) 2001

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Book-keeping and Accounts Second LevelSeries 2 2001

How to use this booklet

Examiners’ Reports and Model Answers have been developed by LCCIEB to offer additionalinformation and guidance to Centres, teachers and candidates as they prepare for LCCIEBexaminations. The contents of this booklet are divided into 5 elements:

(1) General Comments – assessment of overall candidate performance in this examination,providing general guidance where it applies across theexamination as a whole

(2) Questions – reproduced from the printed examination paper

(3) Model Answers – summary of the main points that the Chief Examiner expected tosee in the answers to each question in the examination paper

(4) Examiner’s Report – constructive analysis of candidate error, areas of weakness andother comments that apply to each question in the examinationpaper

(5) Helpful Hints – where appropriate, additional guidance relating to individualquestions 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 tohelp candidates gain a general understanding of the standard required. The Board accepts thatcandidates 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 awhole or for individual questions, if too few candidates were involved to make an Examiner’s Reportmeaningful.

© LCCI CET 2001

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system ortransmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwisewithout prior written permission of the Publisher. The book may not be lent, resold, hired out orotherwise disposed of by way of trade in any form of binding or cover, other than that in which it ispublished, without the prior consent of the Publisher.

Typeset, printed and bound by the London Chamber of Commerce and Industry Examinations Board.

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GENERAL COMMENTS

In the majority of cases, most candidates managed to answer, or attempt to answer, all four questions.

Candidates need to bring to the Second Level the skills they have learnt from First Level. Basic itemssuch as Name, and correct identification of the Profit & Loss Account, as well as the Balance Sheetshould be an automatic feature of the paper, but many candidates still cannot get these basic mattersright, and therefore lose unnecessary marks.

Candidates must note that the Balance Sheet should always be presented in vertical format. Ifpresented in the ‘T’ account format, there is the possibility of losing marks, due to an inability toidentify ‘working capital/net current assets’.

Another failing was that many candidates still do not ‘bring down’ a balance when one has to be‘carried down’. This elementary failure loses candidates marks in almost every paper, not just thisone. In a number of questions, dates are required in Nominal Ledger accounts, and many candidateseither ignore the dates or have difficulty in identifying the correct date for each entry.

Candidates need great care in setting out their answers. Examples of marks being lost in a carelessfashion were candidates adding or leaving off a ‘zero’ and also incorrectly adding a column of figures,where the figures are correct, but an incorrect total was given.

Clarity and tidiness can sometimes be improved. There were examples of poor examinationtechniques such as correcting figures by ‘going over’ the original figure with the result being unclear,and the use of correction fluid, where the revised figure is still unclear.

HELPFUL HINTS

The following ‘Helpful Hints’ should enable candidates to score higher marks in future examinations:

� Always put ‘name’ not only at the heading of the question, but also on Profit & Loss Accounts,Income and Expenditure Accounts and Balance Sheets

� Ensure the wording is correct for Profit & Loss Accounts and Balance Sheet

� If dates need to be used, ensure they are shown correctly for each entry if in a nominal ledgeraccount

� Remember to use Surplus/Excess in Income and Expenditure Accounts

� Always ‘b/d’ a balance if there is one to ‘c/d’, and ensure the date of the ‘b/d’ balance is shown

� If in the answer a figure is required that is made up of a number of figures, workings should beshown. An incorrect figure without workings will not score any marks, whereas an incorrect figurewith full workings may score partial marks for the correct part of the workings

� Candidates must carefully read the question and structure their answer to the specificrequirements of the question

� A better understanding of journal entries, and their effect on profitability and working capital

� An understanding of how Suspense Accounts operate, and the purpose of Suspense Accounts

CONTINUED ON NEXT PAGE5


QUESTION 1

The following is a summary of the Receipts and Payments of Happy Valley Sports and Social Club forthe year ended 31 March 2001.

Receipts £

Annual subscriptions 55,900Entrance fees, paid by new members 2,700Restaurant takings 175,500

234,100

Payments

Sports equipment 47,500Restaurant supplies 122,000Restaurant staff wages 31,000Bank charges 1,000Rent 15,100Light and heat 1,500General expenses 9,700Advertising 5,500Prizes for competitions 7,500Car hire expenses 6,200

247,000

Additional information:

1 April 2000 31 March 2001£ £

Cash in hand 51 51Cash at bank 11,000 ?Equipment, at valuation 161,000 190,000Subscriptions in arrears 750 1,750Subscriptions in advance 600 450Light and heat accrued 75 85Rent in advance 300 -Rent in arrears - 600Creditors, for restaurant supplies 3,800 4,800Stock of restaurant supplies 3,500 5,300

25% of rent expenditure is apportioned to the restaurant. Entrance fees are transferred directly to theaccumulated fund.

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Question 1 continued

REQUIRED

Prepare for Happy Valley Sports and Social Club:

(a) A Statement of the Accumulated Fund at 1 April 2000(5 marks)

(b) The Restaurant Trading Account for the year ended 31 March 2001(5 marks)

(c) The Income and Expenditure Account for the year ended 31 March 2001(9 marks)

(d) A Balance Sheet at 31 March 2001.(6 marks)

(Total 25 marks)

Model Answer to Question 1

(a) Happy Valley Sports and Social ClubAccumulated Fund at 1 April 2000

£ £Cash in hand 51Cash at bank 11,000Sports equipment 161,000Subscriptions in arrears 750Rent in advance 300Stock of restaurant supplies 3,500

176,601

Subscriptions in advance 600Light and heat accrual 75Creditors for restaurant supplies 3,800 4,475

172,126

(b) Happy Valley Sports and Social ClubRestaurant Trading Account for the year ended 31 March 2001

£ £ £Restaurant takings, Sales 175,500

Opening stock 3,500W1 Purchases (see workings) 123,000

126,500Closing stock 5,300

121,200W2 Rent (see workings) 4,000

Wages for restaurant staff 31,000 35,000 156,200Restaurant profit 19,300

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Model Answer to Question 1 continued

(c) Happy Valley Sports and Social ClubIncome and Expenditure Account for the year ended 31 March 2001

£ £

Restaurant profit 19,300W3 Subscriptions (see workings) 57,050

76,350W4 Rent (see workings) 12,000W5 Depreciation sports equipment (see workings) 18,500W6 Light and heat (see workings) 1,510

General expenses 9,700Bank charges 1,000Advertising 5,500Competition prizes 7,500Car hire expenses 6,200 61,910Surplus/excess of income over expenditure 14,440

(d) Happy Valley Sports and Social ClubBalance Sheet at 31 March 2001

£ £ £

Fixed assetsSports equipment, at valuation 190,000

Current assetsStock of restaurant supplies 5,300Subscriptions in arrears 1,750Cash in hand 51 7,101

Current liabilitiesLight and heat accrued 85Restaurant suppliers 4,800Bank overdraft 1,900Rent accrued 600Subscriptions in advance 450 7,835

-734189,266

Accumulated fundBalance at 1 April 2000 172,126Entrance fees 2,700Surplus income over expenditure 14,440

189,266

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Workings£ £

W1 Restaurant purchasesPurchases 122,000add Creditors, 31/3/01 4,800

126,800less Creditors 1/4/00 3,800

123,000

W2 Rent paid 15,100Prepaid 1/4/00 300In arrears 31/3/00 600

16,00025% charge to restaurant 4,000

W3 Subscriptions received 55,900Add in advance 1/4/00 600

56,500less in arrears 1/4/00 750

55,750Add in arrears 31/3/01 1,750

57,500less in advance 31/3/01 450

57,050

W4 Rent (see W2) 16,000less Restaurant charge 4,000

12,000

W5 Depreciation of sports equipmentOpening valuation 1/4/00 161,000Add purchases 47,500

208,500Closing valuation 31/3/01 190,000Depreciation for year 18,500

W6 Light and heatPayments 1,500less accrued 1/4/00 75

1,425Add accrued 31/3/01 85

1,510

Examiner’s Report on Question 1

Generally a well answered question. Errors included the omission of staff wages and rent from theTrading Account. In this question, a number of ‘workings’ are required. If an incorrect figure is shown,and there are no workings, no marks are gained. However, if workings are shown, and part of theworkings are correct, some marks may be gained for the correct part of the workings.

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QUESTION 2

The Trial Balance of W Edrich at 30 June 2000 did not agree. A Suspense Account was created inorder to achieve a balance.

Draft Final Accounts were produced from this Trial Balance and it showed there was Working Capitalof £27,381.

Later, the following items were discovered:

1 A cheque for £1,000 received from W Smith had been credited to the account of H Smith.

2 A cheque received from R Lindwall for £976 had been correctly entered in the Cash Book but hadbeen posted to the Personal Account as £967.

3 Bank charges of £720 had been correctly entered in the Cash Book but the other half of the entryhad not been completed.

4 The purchase of new machinery on 1 June 2000 for £1,500 had been posted to the StockAccount. Depreciation is to be ignored.

5 Discounts allowed of £97 had been credited in error to the Discount Received Account.

6 Sales of £372 to S McCabe had been posted correctly to the Personal Account, but entered inthe Sales Account as £327.

7 A sale of £679 to F Spofforth had not been posted to his personal account.

The balance on the Suspense Account was eliminated by the corrections of the above errors.

REQUIRED

Prepare:

(a) Journal entries, without narrative or dates, to correct items 1 - 7 above(15 marks)

(b) The Suspense Account(5 marks)

(c) A statement showing the effect of the above items on the working capital, indicating the correctedfigure.

(5 marks)

(Total 25 marks)

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(a) W Edrich - Journal Entries

Dr Cr£ £

H Smith 1,000W Smith 1,000

Suspense Account 9R Lindwall 9

Bank charges 720Suspense Account 720

Machinery 1,500Stock 1,500

Discount allowed 97Discount received 97

Suspense 194

Suspense 45Sales 45

F Spofforth 679Suspense 679

(b) Suspense Account

Difference in Trial Balance 1,539 Bank charges 720R Lindwall 9 Discount allowed 97Sales 45 Discount received 97

____ F Spofforth 6791,593 1,593

(c) W Edrich - Adjustment to Working Capital at 30 June 2000

Working capital per draft accounts 27,381

Less Reduction in debtors, item 2 9Reduction in stock, item 4 1,500 1,509

25,872

Add Increase in debtors, item 7 679Revised working capital 26,551

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The topic of errors, Journals and Suspense account seem to cause problems with many students.

Many candidates reversed entries, especially with discount allowed and discount received.

Many candidates seem to get the ‘discounts’ on the wrong side, as with returns in and returns out.

There was much misunderstanding with the suspense account, and its purpose. Many candidateshad entries on the wrong side.

In part (c) of the question, working capital caused much difficulty with many candidates, and theycould not understand the effect of the adjustments on working capital. This section was not wellanswered.

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QUESTION 3

Fred Titmus is a sole trader who makes all his purchases and sales on credit. He has supplied youwith the following information:

Year ended Bad Debts Debtors at Provision for31 March Written Off Year End Doubtful Debts

£ £ %

1998 724 19,200 2.51999 968 25,000 52000 1,220 21,700 4

Fred Titmus adjusts the Provision for Doubtful Debts at the end of each year. At the end of thefinancial year 31 March 1997, the provision was £400.

REQUIRED

(a) Prepare the following accounts in the books of Fred Titmus for the years ended 31 March 1998,1999 and 2000:

(i) Bad Debts(ii) Provision for Doubtful Debts

(10 marks)

NB - Care should be taken with the correct identification of dates.

(b) Prepare Balance Sheet extracts of debtors for 31 March 1998, 1999 and 2000.(7 marks)

Jack Young was a sole trader and you are supplied with the following information:

Capital at Drawings Additional Net Capital at01 Jan during year Capital Profit 31 December

IntroducedYear £ £ £ £ £

1998 150,000 30,000 NIL 60,000 ?1999 ? ? 16,000 54,000 200,0002000 200,000 36,000 NIL ? 216,0002001 216,000 44,000 ? 66,000 260,000

REQUIRED

(c) Copy the above information, using the same format, into your answer book, and insert themissing figures indicated by a question mark (?).

(8 marks)

(Total 25 marks)

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(a) (i) In the books of Fred TitmusBad Debt

£ £

31 March 1998 Debtors 724 31 March 1998 P & L a/c 72431 March 1999 Debtors 968 31 March 1999 P & L a/c 96831 March 2000 Debtors 1,220 31 March 2000 P & L a/c 1,220

(ii) Provision for Doubtful Debts

£ £

31 March 1998 Balance c/d 480 1 April 1997 Bal b/d 400___ 31 March 1998 P & L a/c 80480 480

31 March 1999 Balance c/d 1,250 1 April 1998 Bal b/d 480____ 31 March 1999 P & L a/c 770

1,250 1,250

31 March 2000 P & L a/c 382 1 April 1999 Bal b/d 1,25031 March 2000 Bal c/d 868 ____

1,250 1,250 1 April 2000 Bal b/d 868

(b) Fred TitmusBalance Sheet Extract at 31 March

1998 1999 2000Current Assets £ £ £

Debtors 19,200 25,000 21,700Less Provision D/D 480 1,250 868

18,720 23,750 20,832

(c) In the books of Jack Young

AdditionalCapital at Drawings Capital Net Capital at

Year 01 Jan during year Introduced Profit 31 December£ £ £ £ £

1998 150,000 30,000 NIL 60,000 180,0001999 180,000 50,000 16,000 54,000 200,0002000 200,000 36,000 NIL 52,000 216,0002001 216,000 44,000 22,000 66,000 260,000

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While many candidates scored well on this question, some of the weaker ones did not understand thedifference between the Bad Debts account, and the Provision for Doubtful Debts account.

Apart from some incorrect calculations for the provisions, debtor balances were shown in bothaccounts, and in the Provision account, all entries were reversed.

In part (c) candidates either scored well, or did not understand the principal of how ‘capital’ iscalculated during the year. Opening capital less drawings plus additional capital introduced plus netprofit equals closing capital.


QUESTION 4

Barnes, Hassett and Lindwall were partners, sharing profits and losses in the ratio 2 : 2 : 1.Their Balance Sheet at 31 March 2001 was as follows:

Barnes, Hassett and LindwallBalance Sheet at 31 March 2001

£ £ £Fixed AssetsFreehold premises 240,000Fixtures and fittings 41,000Motor vehicles 21,000 302,000

Current AssetsStock 20,000Debtors 25,200Less provisions for bad and doubtful debts 600 24,600Bank 7,700

52,300

Current liabilities - amounts falling due within 12 monthsCreditors 12,400

Working capital 39,900341,900

Financed by:

Capital AccountsBarnes 140,000Hassett 110,000Lindwall 70,000 320,000

Current AccountsBarnes 8,500Hassett 7,440Lindwall 5,960 21,900

341,900

On 1 April 2001, the partners sold the business to Dexter Ltd for £400,000.

On the same date:

Lindwall took over his partnership motor vehicle at its book value of £5,000.All other assets except the bank, were taken over, by Dexter Ltd at their book value.The creditors were taken over, at book value, by Dexter Ltd.The purchase price for the business was settled by Dexter Ltd by the issue of 200,000 OrdinaryShares of £1 at £1.75 each, and the balance was paid by cheque.

The partners divided the shares between them in the partnership profit sharing ratio. The remainingbalances on their capital account were settled from the bank account.

The current account balances are transferred to the Capital Account before making any adjustments.


QUESTION 4 CONTINUED

REQUIRED

(a) In the books of the partnership, show the following:

(i) The Realisation Account(ii) The Capital Accounts of the partners, in columnar format(iii) Dexter Ltd Account(iv) Bank Account.

(19 marks)

Douglas and Trumper are both sole traders and they agreed to form a partnership on1 January 2001.

Douglas has valued the goodwill of his business at £10,000 and Trumper has valued the goodwill of hisbusiness at £8,000. The valuations of goodwill are agreed by both Douglas and Trumper.

REQUIRED

(b) Prepare the journal entries to show the introduction of goodwill in the books of the partnership at1 January 2001.

(3 marks)

It has been agreed by Douglas and Trumper that goodwill will not remain an asset in the books of thepartnership. Douglas and Trumper have agreed to share profits and losses in the ratio of 2:1.

REQUIRED

(c) Prepare the journal entries to show the removal of goodwill as an asset in the books of thepartnership.

(3 marks)

(Total 25 marks)


(a) (i)In the books of Barnes, Hassett and Lindwall

Realisation Account

2001 £ 2001 £1 April Freehold premises 240,000 1 April Provision doubtful debts 600

Fixtures and fittings 41,000 Creditors 12,400Motor vehicles 21,000 Capital accountStock 20,000 Lindwall - MV 5,000Debtors 25,200

Capital accounts Dexter LtdBarnes 28,320 Purchase of business 400,000Hassett 28,320Lindwall 14,160 _______

418,000 418,000

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(ii)Partners Capital Account

2001 20011 April Barnes Hassett Lindwall 1 April Barnes Hassett Lindwall

£ £ £ £ £ £

Realisation a/c 5,000 Bal b/f 140,000 110,000 70,000Dexter Ltd Current a/c 8,500 7,440 5,960Shares 140,000 140,000 70,000 Realisation 28,320 28,320 14,160Bank 36,820 5,760 15,120 profit ______ ______ _____

176,820 145,760 90,120 176,820 145,760 90,120

(iii)Dexter Ltd

2001 20011 April £ 1 April £Realisation a/c Capital a/c’s sharesConsideration 400,000 Barnes 140,000

Hassett 140,000Lindwall 70,000

_______ Bank 50,000400,000 400,000

(iv)Bank Account

2001 20011 April 1 April

Capital a/cBalance b/f 7,700 Barnes 36,820Dexter Ltd 50,000 Hassett 5,760

______ Lindwall 15,12057,700 57,700

(b) £ £Goodwill 18,000Douglas - Capital Account 10,000Trumper - Capital Account 8,000

(c) Douglas - Capital Account 12,000Trumper - Capital Account 6,000

Goodwill 18,000

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This was the most challenging question. In the Realisation Account, many candidates lost markswhen the assets were shown on both sides of the account, and also many candidates left out creditorsof £12,400 on the credit side.

The Partners Capital Account was not well answered by many candidates; again a lack ofunderstanding of how the account should operate was the problem.

The journal entries for parts (b) and (c) regarding the partners’ goodwill were the parts of the paperthat scored least marks.

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code 2006 accounting level 2 2001 series 2

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