Model Answers Series 2 2009 (3012M) Malaysia

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LCCI International Qualifications

Accounting Level 3

Page 1 of 14

Accounting Level 3 (Malaysia) Series 2 2009

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.

© Education Development International plc 2009 All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without prior written permission of the Publisher. The book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover, other than that in which it is published, without the prior consent of the Publisher

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QUESTION 1 A company is planning to purchase a small aircraft. The aircraft will cost RM500,000 and will be purchased on 1 January 2010. The company’s accounting year runs from 1 January to 31 December. The aircraft has an expected useful life of five years, and a residual value of RM50,000. The expected flying hours of the aircraft over the next five years are as follows: 2010 600 hours 2011 1,800 hours 2012 500 hours 2013 600 hours 2014 500 hours The company directors are unsure of how the aircraft should be depreciated, and what impact the choice of method would have on the profit and loss account and balance sheet each year. They are considering using one of the following methods of depreciation: (1) Straight line (2) Reducing balance, at a rate of 40% per year (3) Flying hours (equivalent to machine hours) (4) Sum of the year’s digits. REQUIRED (a) Using each of the above methods, calculate for each of the years 2010 and 2011: (i) The depreciation charge to the profit and loss account

(14 marks) (ii) The net book value to be shown in the balance sheet at the end of the year.

(8 marks) (b) State which of the above methods of depreciation you regard as the most appropriate and briefly

explain why. (3 marks)

(Total 25 marks)

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MODEL ANSWER TO QUESTION 1 (a) (i) Depreciation Charge Straight Line Method 2010 (500,000 – 50,000) / 5 = RM90,000 2011 same Reducing Balance Method 2010 500,000 x 40% = RM200,000 2011 (500,000 – 200,000) x 40% = RM120,000 Flying Hours Method (500,000 – 50,000) 4,000 = RM112.5 per hour 2010 600 x 112.5 = RM67,500 2011 1,800 x 112.5 = RM202,500 Sum of the year’s Digits Method 2010 (500,000 – 50,000) x 5 (5 + 4 + 3 + 2 + 1) = RM150,000 2011 (500,000 – 50,000) x 4 (5 + 4 + 3 + 2 + 1) = RM120,000

(a) (ii) Net Book Values Straight Line Method 2010 500,000 – 90,000 = RM410,000 2011 410,000 – 90,000 = RM320,000 Reducing Balance Method 2010 500,000 – 200,000 = RM300,000 2011 300,000 – 120,000 = RM180,000 Flying Hours Method 2010 500,000 – 67,500 = RM432,500 2011 432,500 – 202,500 = RM230,000 Sum of the year’s Digits Method 2010 500,000 – 150,000 = RM350,000 2011 350,000 – 120,000 = RM230,000 (b) The most appropriate method is flying hours. The planned usage varies a lot over the life of the aircraft. This method charges most when it is used most.

3012M/2/09/MA Page 4 of 14

QUESTION 2 Chan has been in business for several years as a sole trader. His accounting year runs from 1 June to 31 May. He has prepared the following budgeted profit and loss account for the four months from June to September 2009. Chan sells goods on two months’ credit, and pays for purchases on one month’s credit. Budgeted Profit & Loss Account 1 June to 30 September 2009 RM RM Sales 30,000 less cost of sales: Opening stock 5,000 Purchases 21,000 Closing stock (6,000) 20,000 Gross profit 10,000 Cash expenses 4,000 Depreciation 2,000 6,000 Net profit 4,000 Chan has also provided the following information regarding his plans: (1) The sales figure is made up as follows:

RM

June 6,000 July 7,000 August 8,000 September 9,000 30,000

(2) The purchases figure is made up as follows:

RM

June 4,000 July 6,000 August 6,000 September 5,000 21,000

(3) Cash expenses are based on paying out RM1,000 in each of the four months June to September

2009. (4) The depreciation shown in the budgeted profit and loss account is based on depreciating

equipment at 25% per year on a straight-line basis. Equipment that cost RM14,000 was purchased on 1 June 2008. Further equipment is to be bought for RM10,000 cash on

1 June 2009. (5) Chan wishes to withdraw RM1,500 from the business in both July and September 2009. (6) Bank interest is to be ignored.

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QUESTION 2 CONTINUED The following is an extract from the draft Balance Sheet which has been prepared at 31 May 2009. Fixed assets Cost Acc. Dep. NBV RM RM RM Equipment 14,000 3,500 10,500 Current assets Stock 5,000 Debtors 11,000 Bank 10,000 26,000 Less Current liabilities Creditors 4,000 22,000 32,500 Notes regarding the balance sheet: (1) The debtors relate to sales of RM6,500 in April and RM4,500 in May (2) The creditors relate to May purchases (3) The business is financed entirely by Chan. REQUIRED (a) Prepare (in columnar form) a Cash Budget for each of the four months June to September 2009,

showing clearly the balance at the end of each month. (9 marks)

(b) Prepare a budgeted Balance Sheet at 30 September 2009.

(10 marks) Chan’s bank has refused him overdraft facilities. (c) List six ways in which Chan might avoid the need for an overdraft in the period June to

September 2009. (6 marks)

(Total 25 marks)

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MODEL ANSWER TO QUESTION 2 (a) Cash Budget for June to September 2009 June July August Sept RM RM RM RM Receipts 6,500 4,500 6,000 7,000 Payments: Purchases 4,000 4,000 6,000 6,000 Expenses 1,000 1,000 1,000 1,000 Equipment 10,000 - - - Drawings - 1,500 - 1,500 Total payments 15,000 6,500 7,000 8,500 Movement for Month (8,500) (2,000) (1,000) (1,500) Balance bf 10,000 1,500 (500) (1,500) Balance cf 1,500 (500) (1,500) (3,000)

(b) Budgeted Balance Sheet as at 30 September 2009 Fixed assets Cost Acc. Dep. NBV RM RM RM Equipment 24,000 5,500 18,500 Current assets Stock 6,000 Debtors 17,000 23,000 Less Current liabilities Creditors 5,000 Bank Overdraft 3,000 8,000 15,000 33,500 Capital RM Opening Balance 32,500 Add profit for period 4,000 36,500 Less drawings (3,000) 33,500

(c) Ways of avoiding overdraft Reduce credit to customers by one month Increase credit from suppliers by one month Forego drawings Borrow Buy equipment on deferred payment terms Introduce more capital himself Take a partner who would introduce capital Increase selling prices Reduce stock holding

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QUESTION 3 On 1 September 2008, Exe plc acquired 80,000 of the 100,000 RM1 ordinary shares in Wye Ltd for RM260,000. At the date of acquisition the retained profit of Wye Ltd was RM150,000. The following Profit and Loss Accounts have been prepared for the two companies for the year ended 31 December 2008. All sales and expenses in Wye Ltd’s accounts accrued evenly over 2008. Exe plc Wye Ltd RM000 RM000 Sales 950 300 Cost of sales 320 180 Gross profit 630 120 Selling expenses 110 30 Administration expenses 100 60 Retained profit 420 30 Retained profit brought forward 560 130 Retained profit carried forward 980 160 There were no sales between the two companies. Goodwill arising on consolidation is to be amortised over five years from the date of acquisition and recorded as a separate expense in the Consolidated Profit and Loss Account. REQUIRED (a) Calculate the goodwill arising on acquisition of Wye Ltd.

(3 marks) (b) Prepare the Consolidated Profit and Loss Account for the Exe Group for the year ended 31 December 2008.

(13 marks) (c) Although Exe plc did not make any sales to Wye Ltd during 2008, it may do so in 2009. Explain

briefly any adjustments that will need to be made to the Consolidated Profit and Loss Account for 2009 if such sales are made, and some of these goods remain in stock at the year end.

(4 marks)

(d) Suppose that in 2009 Wye Ltd sold goods to Exe plc and some of these goods remained in stock

at the year end. Explain briefly any adjustments that will need to be made in the Consolidated Balance Sheet at 31 December 2009.

(5 marks)

(Total 25 marks)

3012M/2/09/MA Page 8 of 14

MODEL ANSWER TO QUESTION 3 (a) Goodwill on acquisition of Wye Ltd RM000 Amount invested 260 Acquired: 80% x 100 (80) 80% x 150 (120) 60

(b) Consolidated Profit and Loss Account for year ended 31 December 2008 RM000 Sales (950 + (300 x 4/12) 1,050 Cost of sales (320 + 60) 380 Gross profit 670 Selling expenses (110 + 10) 120 Administration expenses (100 + 20) 120 Amortisation of goodwill [(60/ 5) x 4/12)] 4 426 Minority interest (30 x 4/12 x 20%) 2 Retained profit 424 Group retained profits brought forward 560 Group retained profits carried forward 984 (c) All inter company sales are excluded from ‘Sales’. All inter company purchases are excluded from ‘Cost of Sales’. Unrealised profit on goods in stock is added to ‘Cost of sales’ / excluded from gross profit. (d) Unrealised profits will be deducted from group stock value. The group’s share of unrealised profit will be deducted from group retained earnings. The minority interest’s share of unrealised profits will be deducted from minority interest.

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QUESTION 4 Severn Ltd is a company with large offices. It has RM150,000 available to invest in a project that will create savings in energy costs and is considering two alternatives, a Wind Turbine or Air Conditioning. The company has a cost of capital of 10% per year, which gives the following discount factors: Year 1 0.909 Year 2 0.826 Year 3 0.751 Year 4 0.683 Year 5 0.621 Wind Turbine This involves spending RM150,000 on a wind turbine to generate electricity. The turbine would have a useful life of five years and a residual value of RM20,000. It would require maintenance costs of RM8,000 for each of the five years. Using the wind turbine would save power costs of RM60,000 per year. Maintenance costs and power costs savings can be assumed to arise at the end of each year. Air Conditioning This involves replacing the air conditioning that serves the offices with a more efficient system. The initial costs would be: RM Purchase of new plant 110,000 Installation of new plant 40,000 There would also be proceeds of RM15,000 from the sale of scrap arising from the old system. This amount would be received at the end of the first year. The new air conditioning unit would generate the following savings (arising at the end of each year): RM Annual savings in power consumption 35,000 Annual savings in maintenance costs 15,000 The new air conditioning system would have no residual value at the end of its five year life. REQUIRED (a) Calculate the net present value of: (i) The wind turbine project

(ii) The air conditioning project.

(17 marks)

(b) Using your answer to (a), recommend which project should be undertaken and explain briefly the reason for your recommendation.

(4 marks) (c) Calculate, to the nearest year, the payback period of: (i) The wind turbine project

(ii) The air conditioning project. (4 marks)

(Total 25 marks)

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MODEL ANSWER TO QUESTION 4 (a) (i) Cash Flow Discount Factor Present Value RM RM Year 0 Cost (150,000) 1.000 (150,000) Year 1 Power Saving 60,000 Less Maintenance (8,000) 52,000 0.909 47,268 Year 2 Same 52,000 0.826 42,952 Year 3 Same 52,000 0.751 39,052 Year 4 Same 52,000 0.683 35,516 Year 5 Same 52,000 Residual value 20,000 72,000 0.621 44,712 Net present value 59,500 (ii) Cash Flow Discount Factor Present Value RM RM Year 0 Purchase (110,000) Installation (40,000) (150,000) 1.000 (150,000) Year 1 Power Saving 35,000 Maintenance Saving 15,000 Scrap Proceeds 15,000 65,000 0.909 59,085 Year 2 Power Saving 35,000 Maintenance Saving 15,000 50,000 0.826 41,300 Year 3 Same 50,000 0.751 37,550 Year 4 Same 50,000 0.683 34,150 Year 5 Same 50,000 0.621 31,050 Net present value 53,135

(b) The wind turbine should be chosen. Taking into account the time-value of money at the company’s cost of capital of 10% it has a higher net present value.

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MODEL ANSWER TO QUESTION 4 CONTINUED (c) (i) Payback period of the wind turbine project 150,000 52,000 = 2.88 years ∴3 years (ii) Payback period of the air conditioning plant

150,000 – 65,000 = 85,000 85,000 – 50,000 = 35,000 35,000 - 50,000 = (15,000) ∴3 years

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QUESTION 5 The following data relates to a trading company, Bee plc: Profit and Loss Accounts for year ended: 31 December 2007 31 December 2008 RM000 RM000 Sales 456 700 Cost of sales 365 595 Gross profit 91 105 Operating costs 50 60 Interest payable 20 30 Net profit 21 15 Balance Sheets as at: 31 December 2007 31 December 2008 RM000 RM000 RM000 RM000 Fixed assets 300 295 Current assets Stock 76 146 Debtors 57 117 Bank 10 21 143 284 Creditors: amounts due within one year: Creditors (30) (51) Net current assets 113 233 Creditors: amounts due after one year (200) (300) 213 228 RM000 RM000 Share capital and reserves: Ordinary shares (RM1 each) 100 100 Retained earnings 113 128 213 228 Notes: (1) All sales are on credit (2) All creditors relate to purchases. The company has undergone a change in operating policy in respect of 2008, during which it planned to achieve the following: (1) Increased sales through reduced selling prices without further investment in fixed assets (2) Maintain stock, debtors and creditors levels in line with the increased sales and cost of sales (3) Maintain or increase the bank balance, if necessary, through additional long term borrowing (4) Increase profitability and liquidity.

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QUESTION 5 CONTINUED REQUIRED (a) Calculate the following ratios (correct to two decimal places) for each of 2007 and 2008: (i) Earnings per share (ii) Return on capital employed (iii) Gearing [Long term debt / (Long term debt + Equity)] (iv) Sales to fixed assets (v) Current (vi) Stock turnover (expressed in days and using year end stock) (vii) Debtors’ collection period (expressed in days) (viii) Creditors’ settlement period (expressed in days).

(20 marks) (b) State two of the above ratios that show results in line with the change in operating policy and

three ratios that do not. (5 marks)

(Total 25 marks)

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MODEL ANSWER TO QUESTION 5 (a) 2007 2008 (i) Earnings per share 21,000 = RM0.21 15,000 = RM0.15 100,000 100,000 (ii) ROCE 41,000 = 9.93% 45,000 = 8.52% 413,000 528,000 (iii) Gearing 200,000 = 48.43% 300,000 = 56.82% 413,000 528,000 (iv) Sales to fixed assets 456,000 = 1.52 times 700,000 = 2.37 times 300,000 295,000 (v) Current 143,000 = 4.77 : 1 284,000 = 5.57 : 1 30,000 51,000 (vi) Stock turnover 76,000 x 365 = 76.00 days 146,000 x 365 = 89.56 days 365,000 595,000 (vii) Debtors’ collection 57,000 x 365 = 45.63 days 117,000 x 365 = 61.01 days 456,000 700,000 (viii) Creditors’ settlement 2007 30,000 x 365 = 27.93 days (365,000 – 49,000 + 76,000) 2008 51,000 x 365 = 27.99 days (595,000 – 76,000 + 146,000) (b) Examples of ratios that show results in line with policy: Gearing Sales to fixed assets Creditors’ settlement Current (any 2 x 1) Examples of ratios that do not show results in line with policy: Stock turnover Debtors’ collection Earnings per share ROCE (any 3 x 1)

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