~~AC1025_ZA_2016_d0 This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON AC1025 ZA BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas in Economics and Social Sciences Principles of Accounting Monday, 9 May 2016 : 10:00 to 13:15 Candidates should answer FOUR of the following SEVEN questions: QUESTION 1 of Section A, QUESTION 2 of Section B, ONE question from Section C and ONE further question from either Section B or C. All questions carry equal marks. Workings should be submitted for all questions requiring calculations. Any necessary assumptions introduced in answering a question are to be stated. Extracts from compound interest tables are given after the final question on this paper. 8-column accounting paper is provided at the end of this question paper. If used, it must be detached and fastened securely inside the answer book. A calculator may be used when answering questions on this paper and it must comply in all respects with the specification given with your Admission Notice. The make and type of machine must be clearly stated on the front cover of the answer book. PLEASE TURN OVER UL16/0289 Page 1 of 12
SECTION A Answer question 1 from this section. 1. (a) Laertes Distributors Ltd began business on 1 st July 2015 as distributors of a single product. The directors plan to publish the first set of accounts for a six month period in order to establish the accounting year as 31 st December each year. The following data show the trading transactions for the six months to 31 st December 2015. 2015 Purchases Sales July 20 units at 1,000 each August 40 units at 900 each September 25 units October 20 units at 1,100 each November 10 units at 700 each December 10 units at 1,200 each 40 units The December sale occurred before the purchase in that month. The cost of a sale is calculated whenever a sale is made. Using only the data in the table above, calculate the cost of sales and closing stock figures for inclusion in the accounts for the six months to 31 st December 2015 under both the FIFO and LIFO assumptions. (6 marks) (b) Explain the objective of published financial statements and identify the two principal characteristics of financial statements which contribute to achieving this objective. (6 marks) (c) In the context of cost-volume-profit analysis explain the meaning, and give an example, of each of the following terms: i. Non-linear variable costs ii. Stepped fixed costs iii. Relevant range (6 marks) Question continues on next page. UL16/0289 Page 2 of 12
(d) Gertrude operates a small hotel. The hotel has rooms for 30 guests over an operating season of 40 weeks. The budgets for the year ended 30 th June 2016 have been prepared using the following data: Weekly income per guest 2,200 Variable weekly cost per guest 1,200 Fixed costs per annum 400,000 The company has in the past expected an average room occupancy over the season of 60% of total capacity. Gertrude is concerned about future falls in demand. i. Calculate the total contribution and net profit for the year to 30 th June 2016 if past occupancy rates are maintained. ii. Calculate the break-even point in guest weeks and margin of safety based on i. expressed in percentage terms. (7 marks) SECTION B Answer question 2 and not more than one further question from this section. 2. Ophelia Ltd s trial balance as at 31 October 2015 is shown below. 000 000 Share capital Ordinary shares of 1 20,000 Share premium 5,000 Trade payables 2,798 Land and buildings cost 35,152 Land and buildings accumulated depreciation at 1 November 2014 7,000 Plant and equipment cost 12,500 Plant and equipment accumulated depreciation at 1 November 7,400 2014 Trade receivables 5,436 Accruals,at 31 October 2015 436 8% bank loan repayable in 10 years 15,000 Cash at bank 9,774 Retained earnings 9,801 Interest paid 600 Sales 58,411 Purchases 41,620 Distribution costs 5,443 Administrative expenses 4,789 Inventories at 1 November 2014 9,032 Dividends paid 1,500 125,846 125,846 UL16/0289 Page 3 of 12
Further information 1. The inventories at the close of business on 31 October 2015 were valued at 7,878,000. 2. Depreciation is to be provided for the year as follows: Buildings 2% per annum - straight line basis Plant and equipment 20% per annum - reducing balance basis Depreciation is apportioned as follows: % Cost of sales 40 Distribution costs 40 Administrative expenses 20 Land, which is non-depreciable, is included in the trial balance at a cost of 15,152,000. 3. The company began a series of television adverts for the company s range of products on 1 October 2015 at a cost of 45,000. The adverts were to run for three months and were to be paid for in full at the end of December 2015. Advertising expenses are to be included in distribution costs. 4. Interest on the bank loan for the last six months of the year has not been included in the accounts in the trial balance. 5. Tax on profits for the year has been calculated as 970,000. 6. Management has decided that a provision for bad debts of 5% of trade receivables should be set up and charged to administrative expenses. 7. Ophelia Ltd paid an insurance premium for annual cover up to 30 June 2016. The cheque for 45,000 was incorrectly treated as a supplier payment. Insurance is an administrative expense. 8. Ophelia Ltd proposed an ordinary dividend of 10p per ordinary share on 31 October 2015. Prepare the following financial statements for Ophelia Ltd. (a) Income statement for the year ended 31 October 2015. (10 marks) (b) Statement of changes in equity for the year ended 31 October 2015. (3 marks) (c) Statement of financial position as at 31 October 2015. (12 marks) UL16/0289 Page 4 of 12
3. Yorick Ltd. The following are the draft financial statements for Yorick Ltd for the year ended 31 December 2015. Income Statement for the year ended 31 December 2015 Revenue 7,350,500 Cost of sales (4,560,600) Gross profit 2,789,900 Administrative expenses (1,060,800) Distribution costs (768,000) Profit from operations 961,100 Finance charge (75,000) Profit before tax 886,100 Income tax expense (350,000) Profit for the period 536,100 Statements of Financial Position as at 31 December ASSETS Non-current assets Property, plant and equipment Intangible assets 2015 2014 6,985,400 6,713,500 350,700 300,500 7,336,100 7,014,000 Current assets Inventories Trade receivables Investments Cash and cash equivalents 560,500 169,000 25,000 10,700 765,100 144,500 12,400 20,200 765,200 942,200 Total assets 8,101,300 7,956,200 EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Share premium account Retained earnings 4,000,000 3,500,000 1,200,000 950,000 1,342,800 2,206,700 6,542,800 6,656,700 Non-current liabilities Preference share capital (redeemable) 1,000,000 800,000 Current liabilities Trade payables Taxation 148,500 410,000 139,500 360,000 558,500 499,500 Total equity and liabilities 8,101,300 7,956,200 UL16/0289 Page 5 of 12
Statement of changes in equity for the year ended 31 December 2015 (extract) Retained earnings Profit for the period 536,100 Dividends on ordinary shares (1,400,000) Balance brought forward 2,206,700 Balance carried forward 1,342,800 The following additional information is relevant. 1. During the year Yorick Ltd issued redeemable preference shares at par. 2. The current asset investments are government bonds and management has decided to class them as cash equivalents. 3. During the year Yorick Ltd sold plant and equipment with a carrying amount of 560,500 for 600,000. Total depreciation charged for the year was 750,600. 4. Trade payables include accrued interest of 5,000 (2014 7,000). 5. Yorick Ltd acquired new intangible assets at a cost of 77,500 during the year. 6. An impairment review at 31 December 2015 identified a fall in the recoverable amount of intangible assets. As a result, an impairment loss of 15,000 was identified and written off to administrative expenses. Amortisation on intangible assets is included in expenses. 7. Included in trade payables is 10,000 which relates to the purchase of machinery. Other machinery had been purchased in cash. 8. During the year Yorick Ltd made a 1 for 100 bonus issue of its ordinary shares. There was an issue of shares for cash after the bonus issue. Prepare a statement of cash flows for Yorick Ltd for the year ended 31 December 2015. (25 marks) UL16/0289 Page 6 of 12
4. Claudius plc is a manufactruring company. In recent years, the company has faced severe competition from overseas businesses and its sales volume has hardly changed. The company has recently applied for an increase in its bank overdraft limit from 750,000 to 1,500,000. The bank manager has asked you, as the bank s credit analyst, to look at the company s application. You have the following information: Statements of financial position as at 31 December 2014 and 2015 Tangible non-current assets Freehold land and buildings, at cost Plant and equipment, at net book value Current assets Inventory Trade receivables Short-term investments 2014 2015 000 000 1,800 1,800 3,150 3,300 4,950 5,100 1,125 825 300 1,500 1,125-2,250 2,625 Total assets 7,200 7,725 Current liabilities Bank overdraft Trade payables Taxation payable Provisions 225 675 300 375 375 300 225 225 1,125 1,575 Non-current liability 8% debentures, 2017 1,500 1,500 Total liabilities 2,625 3,075 Equity Ordinary shares of 1 each Share premium account Retained earnings 2,250 750 1,575 2,250 750 1,650 4,575 4,650 Total equity and liabilities 7,200 7,725 UL16/0289 Page 7 of 12
Statements of comprehensive income for the years ended 31 December 2014 and 2015 2014 2015 000 000 000 000 Turnover 6,300 6,600 Cost of sales : materials : labour : production overheads 1,500 2,160 750 1,575 2,280 825 4,410 4,680 Gross profit 1,890 1,920 Administrative expenses 1,020 1,125 Operating profit 870 795 Investment income 15-885 795 Interest payable : debentures : bank overdraft 120 15 120 75 135 195 Profit before taxation 750 600 Taxation 375 300 Profit attributable to shareholders 375 300 You are also provided with the following information: i. The general price level rose on average by 8% between 2014 and 2015. Average wages rose by 10% during this period. ii. The debenture stock is secured by a fixed charge over the freehold land and buildings, which have recently been valued at 3,000,000. The bank overdraft is unsecured. (a) (b) (c) Calculate for the years ended 31 st December 2014 and 2015 the return on capital employed and two other ratios which provide insight into the profitability and efficiency of Claudius plc. (Answer to 2 places of decimals.) (6 marks) Calculate for the years ended 31 st December 2014 and 2015 the gearing ratio and three ratios which provide insight into the liquidity and working capital control of Claudius plc. (Answer to 2 places of decimals.) (8 marks) Based on the above calculations and the other information provided, draft a set of notes for a discussion with the bank manager which highlight the key areas she should consider when deciding upon the proposed increased overdraft limit. Indicate any further information which would be useful in reaching the decision. (11 marks) UL16/0289 Page 8 of 12
SECTION C Answer one question and no more than one further question from this section. 5. Osric Ltd manufactures components for the motor industry. A specialist luxury car company has offered Osric a contract to supply a component identified as RSport. The contract is for 400 RSport s over the next 12 months. The initial price suggested by the car company is 145 for each RSport. The data relating to the production of each RSport is: 1. Material requirements: 3 kg material M1 see note (i) below. 2 kg material M2 see note (ii) below. 1 part P2 see note (iii) below. Note (i) Note (ii) Material M1 is in continuous use by the company. 1,000 kg are currently held in stock at a book value of 4.70 per kg but it is known that future purchases will cost 5.50 per kg. 1,200 kg of material M2 are held in stock. The original cost of this material was 4.30 per kg but, as the material has not been required for the last two years, it has been written down to 1.50 per kg scrap value. The only foreseeable alternative use is as a substitute for material M4 (in current use) but this would involve further processing costs of 1.60 per kg. The current cost of material M4 is 3.60 per kg. Note (iii) It is estimated that Part P2 could be bought for 50 each. 2. Labour requirements: Each RSport would require five hours of skilled labour and five hours of semi-skilled. An employee possessing the necessary skills is available and is currently paid 5 per hour. A replacement would, however, have to be obtained at a rate of 4 per hour for the work which would otherwise be done by the skilled employee. The current rate for semi-skilled work is 3 per hour and an additional employee could be appointed for this work. 3. Osric Ltd absorbs overhead by a machine hour rate, currently 20 per hour of which 7 is for variable overhead and 13 for fixed overhead. If this contract is undertaken it is estimated that fixed costs will increase for the duration of the contract by 3,200. Spare machine capacity is available and each component would require four machine hours. (a) Prepare a statement showing the contribution from the contract to produce RSport at the suggested price. (12 marks) (b) Explain each figure of cost included in the statement in (a). (7 marks) (c) Comment briefly on three factors which management should consider before making a final decision on the contract. (6 marks) UL16/0289 Page 9 of 12
6. Fortinbras Ltd manufactures a single product. The following information relates to the actual selling price and actual cost of the product for March 2016. 000 Sales (50,000) units 2,250 Direct materials (240,000 litres) 528 Direct labour (250,000 hours) 1,375 Variable production overhead 245 Total variable costs 2,148 Fixed production overhead 650 Total costs 2,798 Loss (548) The budgeted selling price and standard cost of each unit were as follows. Selling price 55 Direct materials (5 litres) 10 Direct labour (4 hours) 20 Variable production overhead (recovered on direct labour hours) 5 Total variable standard cost 35 Standard contribution 20 The total budgeted sales for March were 40,000 units and the budgeted fixed overheads for the month were 600,000. (a) Prepare an operating statement for Fortinbras Ltd which reconciles budgeted profit with the actual loss showing two variances for each cost including fixed overheads. (18 marks) (b) Briefly comment on the method of calculating fixed overhead variances as required in (a) and its usefulness for performance evaluation and identify an alternative approach. (7 marks) UL16/0289 Page 10 of 12
7. Polonius Manufacturing makes components for the telecoms industry. The development department has designed a new product and incurred development costs of 30,000. The following information is available. 1. The new product is expected to have an initial life span of four years and demand has been estimated at 10,200 units in year 1 with sales increases of 10% in each of years 2 and 3 and sales of 9,000 units in year 4. The unit selling price will be 34. There will be no stocks of finished goods. 2. Since the production cycle is very short, both production and sales could start immediately, should the production go ahead. Each unit of the new product will require 2 hours of labour which will need to be hired. There will be no problem hiring at 8.00 per hour. 3. Each unit of the new product will require one component, a capacitor. The company has a stock of 15,000 capacitors which were purchased two years ago for 4.00 each. These have no resale value or alternative use. Any capacitors to be purchased from now on will cost 5.00 each. 4. Each unit produced will also require 8.00 of sundry raw materials such as wire and a circuit board. The company holds no stock of the sundry raw materials. 5. The company already owns the machinery that could be used in the manufacture of this product. If it is not used for this product it will be sold immediately for 200,000. If it is used for this production, after four years it is likely to have a residual value of 40,000. 6. Fixed production overheads allocated to this project will cost 40,000 per annum. The cost of capital is 15% per annum. Assume all cash flows occur on the last day of each year except for the immediate disposal of the existing machinery. (a) Calculate the Net Present Value (NPV) of this project. (14 marks) (b) (c) Calculate the payback period of this project using both nominal and discounted cash flow. (4 marks) Advise Polonius Company on the project and outline two other factors that you would take into account in your decision. (7 marks) END OF PAPER UL16/0289 Page 11 of 12
Extracts from compound interest tables Present value of 1 % 1 2 3 4 5 6 7 8 9 10 Period 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 % 11 12 13 14 15 16 17 18 19 20 Period 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 Annuity of 1 % 1 2 3 4 5 6 7 8 9 10 Period 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 % 11 12 13 14 15 16 17 18 19 20 Period 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 UL16/0289 Page 12 of 12