PRE-LEAVING CERTIFICATE EXAMINATION, 2018 MARKING SCHEME ACCOUNTING HIGHER AND ORDINARY LEVEL

Transcription

1 *WMS15* PRE-LEAVING CERTIFICATE EXAMINATION, 2018 MARKING SCHEME ACCOUNTING HIGHER AND ORDINARY LEVEL 35 Finglas Business Park, Tolka Valley Road, Finglas, Dublin 11 T: , F: , E: W: Page 1 of 52

2 TABLE OF CONTENTS Higher Level Solutions Q1. Final Accounts Page 3 Q2. Published Accounts Page 10 Q3. Creditors Control Account Page 14 Q4. Farm Accounts Page 16 Q5. Interpretation of Accounts Page 19 Q6. Incomplete Records Page 23 Q7. Correction of Errors and Suspense Account Page 27 Q8. Product Costing Page 31 Q9. Cash Budgeting Page 33 Ordinary Level Solutions Q1. Final Accounts Page 35 Q2. Accounts of a Service Firm Page 37 Q3. Bank Reconciliation Statement Page 38 Q4. Debtors and Creditors Control Accounts Page 39 Q5. Interpretation of Accounts Page 40 Q6. Cash Flow Statement Page 43 Q7. Incomplete Records Page 45 Q8. Marginal Costing Page 48 Q9. Cash Budgeting Page 51 Page 2 of 52

3 HIGHER LEVEL Question 1. Company Final Accounts (a) Trading, Profit & Loss Account of Keldsen Ltd for the year ended 31/12/2017 (1) (70) Working Sales (3) 1,231,900 Less Cost of sales Opening stock 35,400 (3) Add purchases 1 641,625 (6) 677,025 Less closing stock 2 (86,950) (4) Cost of Sales 590,075 Gross Profit 641,825 Less Expenses: Administrative Expenses*** Salaries & gen exps 7 174,320 (4) Patent write-off 3 10,840 (4) Audit fees 22,000 (3) Loss on damaged stock (3) Depreciation on buildings 9 16,000 (4) 223,660 Selling & Distributions Expenses *** Advertising 11 6,250 (3) Bad debts 12 14,000 (3) Sales commission 13 11,595 (3) Depreciation d. van 14 59,300 (4) 91,145 Total expenses (314,805) 327,020 Add Operating Income Decrease in bad debt provision (4) Discount received 790 (2) Profit on disposal of van 6 4,250 (4) Investment income 4 7,000 (3) 12, ,188 Debenture interest payable 10 (3) (30,000) Net Profit 309,188 Less dividends paid (2) (15,000) Retained Profit 294,188 Profit & loss balance 01/01/2017 (2) 102,150 Profit & Loss Balance 31/12/2017 ** (2) 396,338 ** correct figure only Page 3 of 52

4 (b) Balance Sheet of Keldsen Ltd as at 31/12/2017 (50) Working Cost DEP NBV Total Intangible Fixed Assets Patents 3 43,360 (3) Tangible Fixed Assets Land & buildings 1,000,000 (1) 16,000 (2) 984,000 Delivery vans 15 & ,000 (3) 88,050 (3) 214,950 1,303, ,050 1,198,950 1,198,950 Financial Assets 3% Investments 400,000 (2) 1,642,310 Current Assets Stock 2 86,950 (2) Debtors 16 45,068 (5) Bank 17 43,175 (5) Insurance company due 2,500 (2) Investment income due 4 1,000 (2) Advertising prepaid 11 23,750 (2) 202,443 Creditors: Amounts falling due within one year VAT 12,400 (2) Creditors 18 96,220 (5) Sales commission due 13 11,595 (2) Debenture interest due 10 23,200 (2) 143,415 Working Capital 59,028 Total Net Assets 1,701,338 FINANCED BY: Creditors: amounts falling due after more than one year 8% Debentures 400,000 (2) Capital and Reserves Authorised Issued Ordinary share capital (1) 750, ,000 (1) 6% Preference share capital (1) 250, ,000 (1) 1,000, ,000 Revaluation reserve ,000 (1) Revenue reserves (profit & loss balance 31/12/2017) 396,338 1,301,338 Total Capital Employed 1,701,338 Page 4 of 52

5 Workings (with breakdown of individual marking scheme) *** Penalise 1 mark each for the omission of two headings in the profit & loss account and authorised capital in the balance sheet [3 1 mark] 1. Purchases 645,625 25, ,000 3,000 ( ) 641, Closing stock 64,200 4, , ,000 ( ) 86, Patents 51, ,000 10,840 (1+1+1) 43,360 Patent write-off [51, ,000] / 5 (1+1+2) 10, Investment income [400,000 3% 7/12) (3) 7,000 Investment income due 7,000 3,000 3,000 (1+1) 1, Decrease in bad debt provision 2,500 2,372 [47,440 5% = 2,372) (2+2) Profit on disposal 25,000 16,250 13,000 (1+2+1) 4, Salaries & general expenses 173, ( ) 174, Loss on damaged stock 3,000 2,500 (3) Depreciation buildings [850, , ,000] 2% ( ) 16, Debenture interest [340,000 8%] + [60,000 8% 7/12) (1+2) 30,000 Debenture Interest due 30,000 [6, ] (2) 23, Advertising 30,000 [30,000 19/24] (1+2) 6,250 Advertising prepaid 30,000 19/24 (2) 23, Bad debts 17,500 80% (3) 14, Sales commission 231,900 5% (3) 11, Depreciation d. van [290,000 20% 6/12) + [303,000 20% 6/12) (2+2) 59, Delivery vans at cost 290, ,000 25,000 (1+1+1) 303, Debtors 65, ,500 14,000 2,372 ( ) 45, Bank 37, , , ( ) 43, Creditors 71, ,000 (1+2+2) 96, Revaluation reserve 150, ,000 (1+1) 205, Accum. depreciation d. vans 45, ,300 16,250 (1+1+1) 88,050 Page 5 of 52

6 Supplementary Page for Teachers Explanation(s) of Workings above 1. Stock Closing stock 64,200 Original cost 4,500 + Net realisable value 3,250 62,950 + Stock-in-transit 24,000 86,950 Trad & BS 2. Patents Patents 51, mths inv. income 3, kx0.03x3/12 54,200 5 year write-off to P&L 10,840 43,360 BS 3. Suspense A/C Difference 40 Discount allowed 360 Debenture interest Debenture Interest A/C Bank 6,400 Suspense 400 C/D 6,800 6,800 6,800 Debtors A/C B/D 65,300 Suspense 360 C/D to note 6 64,940 65,300 65, Delivery Van A/C B/d 290,000 Disposal 25,000 Trade in 13,000 Purchases error 25,000 c/d 303, , ,000 B/d BS 303,000 Provision for Depreciation A/C ** Disposal 16,250 B/d 45,000 Bal c/d 88,050 P & L 59,300 *** 104, ,300 B/d 88,050 BS *** 290,000 20% 6/12 = 29, ,000 20% 6/12 = 30,300 59,300 ** 25,000 20%= 5, /12 yrs = 16,250 Disposal A/C Van 25,000 Depreciation 16,250 Profit to P & L 4,250 Allowance 13,000 29,250 29,250 Page 6 of 52

7 Purchases A/C B/d 645,625 Error van A/c 25,000 Bal c/d 620, , ,625 Bal b/d note 6 620, Land & Buildings Land & Buildings A/C B/d 850,000 Reval reserve 150,000 C/d 1,000,000 1,000,000 1,000,000 B/d BS 1,000,000 Provision for Depreciation A/C Reval reserve 55,000 B/d 55,000 C/d 16,000 P & L 16,000 ** 71,000 71,000 B/d 16,000 ** 800,000 2% = 60,000 Revaluation Reserve A/C Buildings 150,000 C/d 205,000 Depreciation 55, , ,000 B/d 205,000 BS 6. Reconciliation of Bank Bank A/C Bal b/d 37,355 Electric Ireland 950 Inv income 3,000 Debtors 3,500 Cheque error 270 Bal c/d 43,175 44,125 44,125 Bal b/d 43,175 Bank Reconciliation Statement Balance per bk statement 44,375 Add: Less: cheque not presented 1,200 1,200 Balance per bank A/C 43,175 BS Investment Income A/C *** P & L 7,000 Patents error 3,000 Bank 3,000 Bal c/d 1,000 7,000 7,000 Bal b/d 1,000 *** P & L = 400,000 3% 7/12 = 7000 Page 7 of 52

8 Salaries and General Expenses A/C B/d 173,410 Suspense 40 Bank Electric Ireland 950 P & L 174, , ,360 Debtors A/C Bal b/d from note 3 64,940 Bank (CT) 3500 Bad Debt 14,000 Bal c/d 47,440 64,940 64,940 Bal b/d 47,440 ref Note 8 Bad Debts A/C Debtors 14,000 P & L 14,000 Creditors A/C Bal b/d 71,950 Bal c/d 72,220 Chq error ,220 72,220 Bal b/d ref note 7 72, Good in Transit Purchases A/C Bal b/f note 4 620,625 Creditors 24,000 Bal c/d 644, , ,625 Bal b/d 644,625 Less damaged stock 3,000 = 641,625 Creditors A/C Bal b/d ref note 6 72,220 Bal c/d 96,220 Purchases 24,000 96,220 96,220 Bal b/d 96, Advertising Advertising paid 30,000 amount prepaid 23,750 30,000 19/24 = BS 23,750 P/L 6,250 Page 8 of 52

9 9. (i) Investment Income see note 6 (ii) Debenture Interest Paid: 6,800 Total: 30,000 P&L i.e. 340,000 8% 12/12 = 27, ,000 8% 7/12 = 2,800 31/12/ ,200 BS (iii) Provision for Bad Debts Debtors B/F ref note 6 47,440 47,440 x 5% 2,372 Provision for Bad Debts A/C P & L 128 Bal b/d 2,500 Bal c/d 2,372 2,500 2,500 Bal b/d 2,372 ref note 6 Debtors = 47,440 2,372 = 45,068 BS (iv) Sales Commission: 231,900 5% = 11,595 P & L Page 9 of 52

10 Question 2. Published Accounts (a) Fleetwood Plc (34) Profit and Loss Account for the year ended 31/12/2017 Workings Turnover 940,000 (2) Cost of sales (552,500) W1 (4) Gross Profit 387,500 Distribution costs (63,000) W1 (3) Administrative costs (237,900) W1 (7) Other operating income 2,500 W3 (2) Operating Profit 89,100 Interest receivable 4,500 W4 (3) Profit on sale of land 36,000 (2) Interest payable (16,200) W5 (3) Profit on Ordinary Activities before Tax (1) 113,400 Taxation (22,200) (2) Profit on Ordinary Activities after Tax 91,200 Dividends paid (34,250) (2) Retained Profit 56,950 Profit & loss balance brought forward at 01/01/ ,100 (2) Profit & Loss balance carried forward at 31/12/ ,050 * (2) * Accept correct figure only Page 10 of 52

11 Workings 1. Cost of Distribution Administrative Sales Costs Costs Opening stock 18,500 Purchases 570,000 Closing stock 43,500 Patent write-off W.2 7,500 Admin 159,000 Distribution 37,600 Rent 7,200 Discount 900 Directors fees 33,500 Auditors fees 12,000 Depreciation: Delivery vans (245,000 10%) 24,500 Buildings (810,000 2%) 16,200 Patent royalties error 2,500 Legal fees 7, ,500 63, , Patent: 60,000 / 8 yrs = 7,500 pa 31/12/2017 Value: 37,5000 7,500 = 30, Other operating income: Patent royalties 2, Interest receivable: Received 2, /12 2,000 Total P & L 4,500 (150,000 3%) (3) 5. Interest payable: Paid 6, /12 10,200 Total P & L 16,200 (180,000 9%) (3) Page 11 of 52

12 1. Accounting policy note for Tangible Fixed Assets and Stock (4) (17) Buildings were revalued at the end of 2017 and were included in the accounts at their (1) revalued amount. Vehicles are shown at cost. Depreciation is calculated in order to write off the value/cost of the tangible fixed assets over their estimated useful (1) economic life as follows: Buildings 2% per annum straight line basis; (1) Delivery vans 10% of cost. Stocks are valued on a first in first out basis at the lower of cost and net realisable value. (1) 2. Operating Profit (5) Operating Profit is arrived at after charging: Depreciation on tangible assets 40,700 (1) Amortisation of patents 7,500 (1) Legal fees 7,500 (1) Directors fees 33,500 (1) Auditors fees 12,000 (1) 3. Interest Payable Interest payable on 9% debentures (repayable 2021/2022) 16, Tangible Fixed Assets Land/Buildings Vehicles Total Value 01/01/ ,000 (1) 245,000 1,135,000 Disposal (80,000) (1) (80,000) Revaluation surplus 31/12/ ,000 (1) 190,000 Value at 31/12/2017 1,000, ,000 1,245,000 (1) (7) Depreciation 01/01/ ,000 27, ,000 Charge for the year 16,200 (1) 24,500 (1) 40, ,200 51, ,700 Transfer on revaluation (301,200) (1) (301,200) 0 51,500 51,500 Net book value 01/01/ , , ,000 Net book value 31/12/2017 1,000, ,500 1,193,500 (1) Page 12 of 52

13 (b) Obligations of Limited Companies in relation to company legislation. (9) (any 3 3 marks) 1. Prepare and publish an annual report. 2. This Report must include a profit & loss A/C, a balance sheet, explanatory notes, auditor s report and a director s report. 3. It must be audited by an independent company of accountants. 4. The Report must be presented to the shareholders and debenture-holders at the AGM. 5. A copy of the report must be filed at the Company s office with the Registrar of Companies. Page 13 of 52

14 Question 3. Creditors Control Account (a) Creditors Ledger Control A/C (25) Balance b/d (2) 570 Balance b/d (1) 34,510 Contra (v) (5) 90 Discount (i) (5) 178 Interest (iii) (5) 60 Credit Note (iv) (5) 36 Balance c/d (2) 34,694 Balance c/d ,354 35,354 Balance b/d 570 Balance b/d 34,694 (b) Adjusted List (Schedule) of Creditors Balances (25) Original balance per list (2) 31,090 **** ADD: Discount disallowed (i) 178 (3) Cash purchases (ii) 345 (4) Interest (iii) 31 (3) Invoice (vi) 4,428 (4) 4,982 36,072 LESS: Credit note (iv) 648 (4) Contra (v) 1,300 (3) (1,948) Balance as per adjusted control A/C ** (2) 34,124 i.e. 34, **** Accept correct figure only. ** Accept student s own figure(s). Workings Control List 1. X 89 S/B 89 X 89 S/B ok ok X 345 S/B S/B 60 X S/B X 720 X 720 X 684 S/B S/B X 560 S/B 650 X 650 S/B 650 1, OK OK S/B 4,428 4,428 **S/B refers to should be Page 14 of 52

15 (c) (i) Books of first entry used in Creditors Control Accounts (10) Purchases book, purchases returns book, cash book, general journal. (4) (ii) Importance of Creditors Control Accounts (6) > They are used to calculate the total amount owed to creditors without having to add up all the individual accounts in the creditors ledger; [any 3 2 marks] > They are used to locate as quickly as possible errors concerning creditors; > To find out quickly the amounts owed to creditors; > Useful when finding credit purchases from incomplete records. Page 15 of 52

16 Question 4. Farm Accounts Shane & Gina Lowry (a) Statement of Capital at 01/01/2017 (18) Assets Land & buildings 350,000 (1) Machinery 170,000 (1) Cattle 35,000 (1) Sheep 23,000 (1) Milk Cheque due 1,380 (1) Stock of fuel 610 (1) Stock of fertiliser 1,450 (1) Investments W1 9,600 (2) 591,040 Liabilities Electricity due 275 (1) Bank overdraft 5,250 (2) Loan W2 27,000 (2) Loan interest due W2 1,440 (2) (33,965) 01/01/ ,075 (2) ** ** Accept correct figure only (b) Enterprise Analysis Accounts for the year ended 31/12/2017 (20) Cattle & Milk Sheep Income & Closing Stock Closing stock 32,000 <(1)> 31,000 *** Sales: Cattle 20,000 (1) Milk W3 37,270 (2) Sheep (1) 27,000 Lambs (1) 15,300 Ewe premium (1) 11,000 Beef premium 8,900 (1) Drawings 1,050 <(2)> ,220 84,650 Expenses & Opening Stock Opening stock 35,000 <(1)> 23,000 *** Purchases: Cattle 17,500 (1) Sheep (1) 16,100 Dairy wages 6,220 (1) Fertiliser W4 2,920 <(2)> 730 General farm exps W5 7,720 <(2)> 1,930 Vet s fees W6 2,640 <(2)> ,000 42,420 Gross Profit 27,220 42,230 *** May include stock difference as one figure <(1)> implies 1 mark in total for both, i.e. 1/2 mark each, etc. Page 16 of 52

17 (c) General Profit & Loss Account for year ended 31/12/2017 (12) Income: Gross profit: Cattle & milk 27,220 Sheep 42,230 Investment interest W1 240 (1) Forestry premium 3,200 (1) Total Income 72,890 Expenses: Light & heat W7 2,835 (2) Loan interest W (2) Depreciation W9 13,875 (2) Repairs W8 3,255 (2) Bank charges W (2) Total Expenses 21,210 Net Profit 51,680 (d) Drawings A/C (6) Milk 450 Capital 8,870 Lamb > (1) 350 Beef 600 Interest (1) 315 Health insurance (1) 400 L & H (1) 945 Repairs (½) 1,085 Depreciation machinery (1) 4,625 Bank charges (½) 100 8,870 8,870 (e) Reasons for farmers preparing accounts: (4) ( ) > Calculate net profit; > Profitability of different enterprises: helps decision-making; > Calculate net worth; > Part of a business plan; > In order to calculate income tax liability. Page 17 of 52

18 Workings: 1. Investment interest = mths mths = /9 = 240 P&L > Inv int due = % investments = 240 / 2.5% = 9, Loan + interest = 29,700 > 110% = 29,700 Loan (100%) = 29, /110 = 27,000 Loan Interest 1/1 = 2,700 8/15 = 1, Milk sales = 37,000 1, ,650 = 37, Fertiliser = 3, ,450 1,200 = 3,650 80% = 2,920 20% = General farm exps = 9,650 80% = 7,720 20% = 1, Vet s fees 3,700 Health insurance 400 3,300 80% = 2,640 20% = L & H = 3, = 3,780 Drawings 945 2, Repairs 4,340 Drawings 1,085 3, Depreciation = 185,000 10% = 18,500 Drawings (4,625) 13, Loan interest = 1,260 Drawings Bank charges 400 Drawings (100) 300 Page 18 of 52

19 Question 5. Interpretation of Accounts (a) (45) (i) Cash Purchases (10) Crs x 12 = 115, = 2 (4) Cr purchases x Let x = Cr purchases 2x = 1,380,000 x = 690,000 Cost of sales = OS + Pur CS Pur = CofS OS + CS = 740,000-55, ,000 = 745,000 (4) Cash purchases = 745, ,000 = 55,000 (2) (ii) Ordinary Dividend Cover = Earnings = 334,000 (3) (7) Ord divs 40,000 (2) = 8.35 times (2) (iii) Earnings per Share = Earnings = 334,000 (9) No. Of ord shares 500,000 (3) (4) = 0,668 = 66.8c per share (2) (iv) Ordinary Dividend Yield = DPS* x 100 (3) (10) Mkt Price 1 = 8 x 100 * DPS = Ord Divs 40, (2) = No. shares 500,000 = 5.52% (2) = 8c (3) (v) Recovery present earnings = Mkt Price (3) (9) EPS = 145 (4) 66.8 = 2.17 years (2) Note: * FULL MARKS awarded for correct answer even if no workings or incorrect workings are shown. ** Figures in brackets show breakdown of marks if answer is incorrect. Page 19 of 52

20 (b) Would the Debenture Holders be satisfied with Reed Plc? (40) I have analysed Reed Plc as follows: Performance (12) Profitability (9) The Return on capital employed has increased from 19% in 2016 to 27.12% in 2017 (1). The trend is very satisfactory and 27.12% is well above the return from risk-free investments of say, 1% (1) and also above current lending rates of 11%. (2) Debenture holders should be happy as the company is operating efficiently and generating sufficient profits to repay loan interest. (1) Earnings per share has increased from 11c in 2016 to 66.8c in 2017 (1). The trend is very positive and indicates that Reed Plc s earnings capacity has improved significantly (1). Debenture holders would be pleased with such strong performance from last year (2). Dividend Policy (3) Dividend Cover has increased from 5 times in 2016 to 8.35 times in 2017 (1). Debenture holders should be pleased that Reed is retaining nearly all of its profits within the company (1). It should be noted however that it is possible that shareholders may become dissatisfied with the small proportion of profits that they are getting as dividends (1). State of Affairs (17) Liquidity (5) The Quick Ratio has dropped from 0.6:1 in 2016 to 0.57:1 in 2017 (1). Though the drop is quite small the trend is a cause for concern and as it is well below the accepted standard of 1:1. Reed may have liquidity problems (1). It means that for every 1 that Reed owes on the short-term it only has 0.57 in liquid assets to repay the short-term debt (1). It essentially means that Reed may have difficulty paying its debts as they fall due (1). Debenture Holders would be concerned that the company may be overtrading (1), which could put the repayment of loans plus interest in jeopardy. It may need an injection of cash to pay its short-term creditors. Gearing (7) Capital Gearing has dropped from 55% in 2016 to 35.59% in 2017 (1). This is a satisfactory trend and as Reed is lowly geared it would be deemed to be less risky (1) with most of its long term finance coming from equity shareholders (1). Reed should also quite easily be able to borrow again in the future should it need to do so (1). Debenture holders would be happy with this. Interest Cover has increased from 7 times in 2016 to times in 2017 (1). Reed PLc would appear to be making ample profits to cover loan interest payments (1). Debenture Holders should be very satisfied that this company will have no difficulty servicing its debts, provided it takes the necessary action to sort out its liquidity problem. (1) ** Allow marks within commentary provided it is consistent with student s own figure(s). Investment Policy (2) Investments which cost the company 250,000 now have a market value of 275,000 (1).This would indicate wise investment of resources by Management. These investments could also be sold if necessary to almost clear the Debenture or to improve the liquidity situation (1). Fixed Assets/Security (3) Tangible Fixed Assets are valued at 950,000 in the Balance Sheet. (1) Debenture Holders would need to know does this figure represent their true value and has depreciation been fully accounted for (1). However, it does appear that there is ample security to cover the present Debentures of 300,000 which are due to be repaid by 2020/2021. (1) Page 20 of 52

21 Prospects (8) Market Value (2) The market value of the shares has increased from 1.25 in 2016 to 1.45 in 2017 (1). This would indicate strong confidence in the long-term future of the company by its shareholders (1). Sector (4) Reed Plc operates in the Pharmaceutical industry (1). In the short-term it is a highly profitable sector which can be quite competitive. It can be subject to much legal regulation (1). In the longer term this industry requires constant investment into scientific research in order to remain ahead of its competitors (1). That said, there will always be demand for pharmaceutical products provided they improve people s well-being (1). **** Intangible Assets (2) Intangible assets are valued at 195,000 in the Balance Sheet (1). Debenture Holders would be interested to know what this figure actually represents. Could it be Goodwill or could it be a Patent which would have a transferable value? (1). Conclusion (3) While there is a concern over liquidity, all the other indicators would suggest that Reed Plc is performing well and is ready to expand into the future (1). Debenture holders should be wellsatisfied with its performance, state of affairs and prospects for the future (1). The loan of 300,000 is performing well for them and there may be prospects of further loans to the company into the future (1). **** Other answers are also acceptable provided they are supported with relevant information. [ ] Breakdown of figures given in brackets. Page 21 of 52

22 (c) (15) (i) Gross Profit Percentage (for 2017) = Gross Profit 100% (3) Sales = 435, % 1,175,000 = 37.02% (3) (ii) Reasons for the change in the gross profit percentage and remedies (12) (any 4 marks each: 2 + 2) 1. Purchases costs increases not passed on to customers for fear of losing market share. Firm may have to increase its sales prices. 2. Incorrect valuation of closing stock. Ensure that stock is correctly valued, maybe using the FIFO method. 3. Purchase of slow-moving stock. Be sure of your market so that there will be swift movement of stock. 4. Theft of stock by customers/employees. Have proper controls in place to ensure that stock is under proper supervision. 5. Theft of cash sales by employees. Ensure that all sales are documented and that receipts are issued to customers. Workings/Calculations: Operating Profit = 381,000 Earnings = [381,000 33,000] 14,000 = 334,000 Gross Profit = 435,000 Ordinary Dividends = 54,000 14,000 = 40,000 No. Ordinary Shares = 500,000 ROCE = 381, % = 27.12% 1,405,000 Quick Ratio = 125,000 60,000 = 0.57 : 1 115,000 Gearing = 300, , % = 35.59% 1,405,000 Interest Cover = 381,000 = times 33,000 EPS = 66.8c DPS = 8c Dividend Cover = 8.35 times Page 22 of 52

23 Question 6. Incomplete Records (a) Trading, Profit & Loss Account of Kevin Brooks for the year ended 31/12/2017 (50) Sales W.4 256,250 (6) Less cost of sales Opening stock 45,000 (2) add purchases W.5 150,280 (6) 195,280 less closing stock W.6 39,700 (4) Cost of Sales 155,580 Gross Profit 100,670 Less expenses General expenses W.7 41,100 (4) Insurance W.8 4,125 (6) College fees 2,500 (4) Charity 5,000 (2) Light & heat W.9 1,900 (6) Loan interest W.10 2,400 (6) Depreciation: van W.11 8,000 (65,025) (4) Net Profit 35,645 (b) Balance Sheet as at 31/12/2017 (35) Intangible Assets Goodwill W.1 33,000 (2) Fixed Assets Cost Dep NBV Premises 440, ,000 (1) Delivery van 43,000 8,000 35,000 (2) Equipment 25, ,000 (1) 508,000 8, , ,000 Total Fixed Assets 533,000 Current Assets Debtors (2) 22,600 Stock (1) 39,700 ** accept student s own figure Stock of heating oil (2) 550 Cash (2) 350 Bank (4) 70,200 Insurance prepaid ** accept student s own figure (2) ,375 Less Creditors (amounts falling due within 1 year) Creditors (1) 29,200 Light & heat due (1) 325 Loan instalment due (2) 20,000 Loan interest due (2) 400 (49,925) Working Capital 84,450 Total Net Assets 617,450 *** Page 23 of 52

24 FINANCED BY: Creditors (amounts falling due after 1 year) Loan (2) 220,000 Capital 01/01/2017 (1) 350,000 Add capital introduced (2) 30, ,000 Add net profit 35, ,645 Less drawings W.12 (5) (18,195) 397,450 Total Capital Employed 617,450 *** *** Accept correct figure only Workings 1. Goodwill Capital Account at 01/01/2017 Assets: Premises 250,000 Stock 45,000 Debtors 38,200 Insurance prepaid 1, ,400 Liabilities: Creditors 15,000 Wages due 2,400 17, ,000 Paid (Capital) 350,000 Goodwill 33,000 (2) 2. Dr Cash A/C Cr Sales ** 218,850 Lgts 91,000 Purchases 74,000 Exps 43,500 Drawings 10,000 C/D , , Dr Bank A/C Cr Cash lgts 91,000 Van 43,000 Drs 53,000 Crs 66,500 Inheritance 30,000 Annual insurance 3,900 Loan 240,000 College fees 5,000 Equipment 25,000 Standing order 5,000 L & H 2,600 Loan interest 2,800 Premises 190,000 C/D 70,200 (4) 414, ,000 Page 24 of 52

25 4. Sales: Cash 218,850 (3) + 37,400 (3) = 256,250 Dr Debtors A/C Cr B/D 38,200 Bank 53,000 Sales ** 37,400 C/D 22,600 *** minus goods on Sale or Return 75,600 75, Purchases Cash 74,000 (2) + Credit 80,700 ** (2) 154,700 Drawings (85 52) 4,420 (2) 150,280 Dr Creditors A/C Cr Bank 66,500 B/D 15,000 C/D 29,200 Purchases 80,700 ** 95,700 95, Closing 31/12/ ,500 (2) add back: sale or return 7,200 (i.e. 9, /125) (2) 39, General Exps 43,500 (2) Wages 01/01 2,400 (2) 41, Insurance 3,900 (2) + 01/01 1,200 (2) 5,100 31/ i.e. 3,900 3/12 (2) 4, Light & Heat 2,600 (1) + 31/ (2) 2,925 31/ (1) Used 2,375 Drawings 475 i.e % (2) 1, Loan Interest 2,800 (2) + 31/ ** (2) Payable 3,200 i.e. 240,000 8% 2/12 Drawings 800 i.e. 3,200 25% (2) 2, Depreciation on Delivery Van Cost 43,000 (2) 31/12 35,000 (2) Depreciation 8,000 Page 25 of 52

26 12. Drawings Cash 10,000 (1) Stock 4,420 (1) L& H 475 (1) College fees for daughter 2,500 (1) Loan Interest 800 (1) 18,195 (c) Liquidity position for 2017 **** (15) Current Ratio = Current assets/current liabilities = 134,375/49,925 = 2.69 : 1 (4) Quick Ratio (Acid Test) = (Current assets minus closing stock)/current liabilities = (134,375 39,700)/49,925 = 1.90 : 1 (5) The current ratio is 2.69:1. This figure is above the accepted standard of 2:1, which would suggest that Brooks is able to pay his ongoing debts as they fall due. (2) The quick ratio is 1.90:1. This is also above the accepted standard of 1:1. This means that for every 1 owed in short-term debt Brooks has 1.90 readily available. Brooks liquidity position is satisfactory as he appears to be able to pay his debts as they fall due. (2) A Quick Ratio of 1.90:1 could mean that he is using his working capital inefficiently and should consider investing some of the bank figure in order to yield a return. (2) **** Full marks to be awarded to students who use own figures from balance sheet and prepare commentary based on those figures. Page 26 of 52

27 Question 7. Correction of Errors and Suspense Account (a) General Journal of Berger Ltd (50) Dr ( ) CR( ) (i) VAT A/C 690 (3) Purchases A/C 3,000 (3) Equipment A/C 3,690 (2) Creditors A/C 690 (2) Suspense A/C 690 (2) Being incorrect treatment of credit purchases. (1) (ii) Sales Returns A/C 1,210 (3) Debtors A/C 1,210 (3) Being incorrect recording of a credit note to a debtor (1) (iii) Purchases returns A/C 20 (2) Creditors A/C 1,530 (2) Suspense A/C 1,550 (2) Being Incorrect treatment of a credit note received from a supplier. (1) (iv) Debtors A/C 5,300 (2) Sales A/C 5,300 (2) Delivery van A/C 5,000 (2) Provision for depreciation A/C 1,200 (2) Profit & loss A/C loss on disposal 300 (2) Cash A/C 3,500 (2) Being incorrect treatment of the sale of a delivery van. (1) (v) Bank A/C 7,500 (3) Issued share capital A/C 50,000 (2) Share premium A/C 7,500 (2) Suspense A/C 50,000 (2) Being sale of shares at a premium incorrectly recorded in bank A/C only. (1) (b) Suspense A/C (8) Original difference (2) 49,140 Equipment/crs (i) (2) 690 Purchases/crs (iii) (2) 1,550 Issued shares/premium(v) (2) 50,000 50,690 50,690 * Allow marks for student s own figure if consistent with journal entries. Page 27 of 52

28 (c) Statement of Correct Net Profit (12) Original profit 102,590 (1) ADD: ** Sales (iv) 5,300 (2) 107,890 LESS: ** Purchases (i) 3,000 (2) ** Sales returns (ii) 1,210 (2) ** Purchases returns (iii) 20 (2) ** Loss on disposal (iv) 300 (2) 4,530 Corrected Profit & Loss A/C 103,360 (1) ** If entries completely wrong but transferred correctly from journal Accept correct figure only award one mark for each entry. (d) Balance Sheet as at 31/12/2017 (21) Fixed Assets Cost DEP NBV Premises 450,000 (1) 0 450,000 Equipment ( 3,690) 71,310 (1) 12,500 (1) 58,810 Motor Vehicles ( 5,000) [ 1,200] 91,000 (1) 22,300 (1) 68, ,310 34, ,510 Current Assets Stock 57,000 (1) Debtors ( 1, ,300) 30,590 (2) VAT (+ 690) 2,640 (2) Cash (+ 3,500) 4,250 (2) Bank ( 6, ,500) 600 (2) 95,080 Less: Creditors (amounts falling due within 1 year) Creditors ( 49, ,530) 11,730 (2) Financed By: 11,730 83, ,860 Issued ordinary shares (+50,000) **** (2) 550,000 Share premium (2) 7,500 Add profit & loss A/C *** (1) 103, , ,860 *** Accept student s own figure for net profit **** Allow marks for student s own figure consistent with journal entries. Note: Bank can be shown as negative liability. (e) Fundamental accounting concepts are: (9) 1. Consistency, i.e. accounting treatment of items should be the same from period to period; (2 + 1) 2. Prudence, i.e. caution should be exercised when preparing accounts. One should anticipate no gains until realised and provide for all losses; (2 + 1) 3. Going Concern, i.e. accounts should be prepared on the basis that the business will continue to operate for the foreseeable future. (2 + 1) Page 28 of 52

29 Workings 1. Equipment A/C X 3,690 3,690 Creditors A/C X 3,000 S/B 3, VAT A/C S/B 690 Purchases A/C S/B 3, Sales returns S/B 290 X 920 1,210 Debtors A/C X 920 S/B 290 1, Purchases returns A/C X 1, S/B 1,550 Creditors A/C X 1,570 X 1,550 S/B 1,550 1, Sales A/C X 5,300 5,300 Debtors A/C 5,300 X 5,300 Delivery Van A/C S/B 5,000 Depreciation A/C S/B 1,200 Disposal A/C S/B 5,000 S/B 1,200 S/B 3,500 Loss 300 5,000 5,000 Cash A/C S/B 3,500 Page 29 of 52

30 5. Bank A/C X 50,000 S/B 57,500 7,500 Issued share capital A/C S/B 50,000 Share premium A/C S/B 7,500 Page 30 of 52

31 Question 8. Product Costing (a) Overhead Analysis Sheet (23) Basis of Production Depts Service Depts Overhead Apportionment Total ( ) Assembly *** Finishing Finance *** Marketing Administration costs No. employees (½) 9,450 4,725 <(1)> 2, <(1)> 945 Material handling costs Direct materials (½) 7,200 4,000 <(1)> 3,200 Light & heat Volume (1) 39,600 16,500 <(1)> 13,200 6,600 <(1)> 3,300 Machine repairs Machine hours (½) 12,180 9,744 <(1)> 2,436 Indirect labour Labour hours (½) 18,900 12,600 <(1)> 6,300 Machinery insurance Machinery valuation (½) 8,250 4,950 <(1)> 3,300 Factory buildings insurance Floor space (½) 1, <(1)> <(1)> 85 Machinery depreciation Machinery valuation (½) 6,200 3,720 <(1)> 2,480 Rent & rates Floor space (½) 8,925 5,355 <(1)> 1,785 1,190 <(1)> 595 Supervisors salaries No. employees (½) 48,950 24,475 <(1)> 14,685 4,895 <(1)> 4,895 Canteen costs No. employees (½) 19,250 9,625 <(1)> 5,775 1,925 <(1)> 1, ,180 96,459 56,251 15,725 11,745 (b) Reapportion finance Machine hours** 12,580 (2) 3,145 (2) 15,725 Reapportion marketing Machine hours** 9,396 (2) 2,349 (2) 11, , ,435 (2) 61,745 (2) 0 0 ** Allow marks for student s own figures if consistent with previous work *** <(1)> means 1/2 mark for each of the two figures. (c) Overhead Absorption Rate* own figure = acceptable (10) 1) Assembly dept. Total overheads = 118,435 = Machine hours 60,000 = 1.97 per machine hour (5) 2) Finishing dept. Total overheads = 61,745 = Labour hours 20,000 = 3.09 per labour hour (5) (12) Page 31 of 52

32 (d) Selling Price of Job VX6515 (23) Direct Costs Direct Materials: Assembly (2) 3,600 Finishing (2) 2, Direct Labour Assembly (2) 1,800 Finishing (2) 2,750 4,550 Prime Cost 10850,00 Overheads: Assembly dept: 250 hrs (4) Finishing dept: 300 hrs (4) Total Cost of Production % of selling price (4) Selling Price 15336,88 *(3) * Accept correct figure only (e) Under/Over Absorption of Overheads (12) Actual overheads 175,000 (2) Absorbed overheads Assembly 54, (2) 106,380 Finishing 24, (2) 74, ,540 Over-Absorbed 5,540 (2) Effect on Net Profit: If overheads are over-absorbed this means that the actual Net Profit figure will be greater (4) than the budgeted figure as the overheads were less than expected. Page 32 of 52

33 Question 9. Cash Budgeting (a) Cash Budget for the 6 months Jan June 2018 (40) Jan Feb Mar Apr May June Total Receipts Credit sales/debtors (1 mth) 13,500 31,500 37,800 40,500 32,400 22, ,200 [1x6] Cash Sales 3,325 3,990 4,275 3,420 2,375 2,850 20,235 [1x6]** *** Loan 37,000 37,000 (3) 53,825 35,490 42,075 43,920 34,775 25, ,435 Payments Purchases/creditors 7,315 20,349 24,111 25,137 19,893 14, ,340 [1x6]** Machinery 40,000 40,000 (2) Rent 3,600 3,600 (2) Wages 5,250 6,000 5,500 5,800 5,000 4,500 32,050 (6) Loan repayment 18,500 18,500 (2) Loan interest W (3) 52,565 26,349 29,611 34,537 24,893 38, ,230 Net Cash 1,260 9,141 12,464 9,383 9,882 12,925 29,205 Opening Cash (2) 8,900 10,160 19,301 31,765 41,148 51,030 8,900 Closing Cash 10,160 19,301 31,765 41,148 51,030 38,105 38,105 (2)* * Accept correct figure only ** Accept own figure *** Loan can also be inserted after Net Cash (b) Budgeted Trading, Profit & Loss Account for 6 month period ended 30/06/2018 (22) Sales 213,000 (2) Less Cost of Sales Opening stock 2,100 (1) add Purchases W1 128,100 (2) 130,200 less Closing stock 2,400 (1) Cost of Sales 127,800 GROSS PROFIT 85,200 add Other Income Discount received (W7) 5,860 (2) Total Income 91,060 less Expenses Discount allowed (W2) 1,065 (2) Depreciation (W6) 5,000 (2) Rent (W3) 2,700 (2) Wages (W4) 31,550 (2) Loan interest (W5) 1,480 (2) Total Expenses 41,795 NET PROFIT 49,265 (2) * Profit & loss balance 01/01/ ,450 (2) Profit & Loss Balance 30/06/ ,715 * Correct figure only Page 33 of 52

34 Workings W1 Purchases = Cost of sales + closing stock opening stock Jan 21, ,520** 2,100 = 21,420 ** i.e. 42,000 (Feb) 60% 10%, etc. Feb 25, ,700 2,520 = 25,380 Mar 27, ,160 2,700 = 26,460 Apr 21, ,500 2,160 = 20,940 May 15, ,800 1,500 = 15,300 June 18, ,400 1,800 = 18, ,100 W2 Disc All d = (35, , , , , ,000) 10% 5% = 1,065 W3 W4 Rent Paid 3,600 + P/P 01/ ,500 P/P 30/06 1,800 i.e. 3,600 3/6 P & L 2,700 Wages Paid 32,050 due 01/01 5,250 26,800 + due 30/06 4,750 P & L 31,550 W5 Loan Interest = 37,000 8% 6/12 = 1,480 1,480 x 0.5 = 740 i.e. due W6 Depreciation = (60, ,000) 10% 6/12 = 5,000 W7 Discount Received = (7, , , , , ,300) 5% = 5,860 (c) Trade Debtors as at 30/06/2018 (6) 30,000 90% = 27,000 (3) Trade Creditors as at 30/06/2018 ( %) = 18, , = 18,600 (3) (d) What are the main differences between Financial and Cost and Mgt. Accounting (12) [any 3 4 marks] (i) (ii) (iii) (iv) Financial Accounting (FA) is concerned with historical information when preparing accounts. Cost & Management Accounting (CMA) looks forward when preparing forecasts and budgets. FA is compulsory by law companies must prepare trading, profit & loss A/C s. CMA is optional, companies use information to help with decision-making. FA must adhere to strict guidelines when being prepared as regards presentation. CMA can be laid out in any way that management require. FA reports are prepared for external readers such as shareholders, bankers, stockbrokers, etc. CMA are prepared for internal managers, perhaps every day. Page 34 of 52