~~AC1025_ZB_2016_d0

This paper is not to be removed from the Examination Hall

UNIVERSITY OF LONDON AC1025 ZB

BSc degrees and Diplomas for Graduates in Economics,

Management, Finance and the Social Sciences, the Diplomas in
Economics and Social Sciences

Principles of Accounting

Thursday, 03 May 2018: 10:00 to 13:15

Section A of this examination consists of 20 Multiple Choice Questions. You

should attempt to answer ALL the questions. Each question has four possible
answers (a-d). There is only one correct answer to each of the questions.
Please mark the correct answer on the special sheet provided. The maximum
mark for this part is 30.

Sections B and C: Please answer QUESTION 21 (30 marks) of Section B; ONE

question from Section C and ONE further question from either Section B or C
(except for Question 21 all questions are worth 20 marks).

For Sections B and C only, 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.

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 SECTION A

Answer ALL questions from this section.

1. Which of the following statements is correct?

(i) a debit entry in the cash book will increase the bank overdraft
(ii) a credit entry in the cash book will increase a bank balance

a (i) is true but (ii) is false

b (i) is false but (ii) is true
c Both are true
d Both are false

2. At 31.3.18, the cash book of Company 2 showed an overdraft of £21,111

while the bank statement showed a positive balance of £2,590. On 30.3.18,
the bank wrote to Company 2 stating that a cheque of £525 received from a
customer and banked on 25.3.18 has bounced and had been dishonoured.
This letter was only received by Company 2 on 2.04.18. Receipts of
£30,555 banked on 31.3.18 were not cleared through the banking system
until April 2018, while cheques totalling £54,931, issued by the company in
March 2018 were also not cleared through the banking system until April
2018. Bank charges of £150 had not been entered in the cash book.

What was the corrected bank balance in the statement of financial position
at 31.3.18?

a £(46,162)
b £(21,786)
c £(26,291)
d £26,291

3. The selling price of the inventory of Company 3 at 30.4.18 is £200,000.

The company sells its goods at a 40% margin. One-quarter of the inventory
has been damaged in a fire and will be sold for £14,000.

Which of the following will be the correct value for closing inventory at that
date appearing in the statement of financial position?

a £104,000
b £121,143
c £294,000
d £164,000

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4. On 1.4.18, Company 4 had 10 units in inventory, costing £21 each. During
the month, the following transactions occurred:

Date Buy/sell Units Price

2.4.18 Buy 14 £25
11.4.18 Sell 16 £52
13.4.18 Buy 30 £24
17.4.18 Buy 35 £27
25.4.18 Sell 32 £55

What is the (i) value of inventory at 30.4.18 and (ii) the cost of goods sold
(COGS) for the month of April 2018 using the FIFO basis?

Inventory COGS
£ £
a 1,089 1,136
b 1,089 1,456
c 969 1,256
d 1,185 1,040

5. On 1.1.18, the equity of Company 5 was as follows:

£
Share capital: 100,000 shares of 25p each 25,000
Share premium: 4,000
Retained profits 260,000
289,000

On that day, the company made a rights issue, issuing 40,000 shares for £1.20
each and then made a 7 for 5 bonus issue. A dividend of 10p per share was
then paid. What will be the balance on the retained profits at the end of the
day, assuming the company offsets the bonus issue against the share premium,
to the extent that is possible?

Retained
profits
a £169,000
b £177,400
c £219,400
d £244,600

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6. At 1.4.18, trade payables were £64,700. Payments to trade payables in
April 2018 were £66,600. At 30.4.18 trade payables were £70,200 and
closing inventory was £44,000. Cost of goods sold in the month of April
2018 were £81,000.

What was the inventory of Company 6 at 1 April 2018?

Opening inventory
At 1.4.18
£
a 68,200
b 36,300
c 52,800
d 73,500

7. At 1.4.18, trade receivables were £156,500. Sums received from trade

receivables in April 2018 were £144,300. At 30.4.18, trade receivables
were £170,700. Cost of goods sold in the month of April 2018 were
£81,000. What was the company’s gross profit for the month of April
2018?

Gross profit
£
a 77,500
b 85,000
c 86,300
d 90,300

8. The following information is available relating to Company 100 and

Company 200:

Company 100 Company 200

Profit before tax for the year ended £250 million £84 million
31.3.18
Profit after tax for the year ended 31.3.18 £210 million £68 million
Nominal value of 1 ordinary share 10p 25p
Share capital at 31.3.18 £80 million £120 million
Market value of one ordinary share at £4.20 £5.40
30.4.18

Which of the following describes these companies’ The Price Earnings (PE)
ratios of these two companies at 31.3.18?

Company 100 Company 200

a 16 38
b 1.6 9.5
c 19 47
d 8 17

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9. Company 300 has a PE ratio of 6 while Company 400 has a PE ratio of 40.

Assume you were advising elderly shareholders. Which of these two

companies is likely to be the more attractive investment to the majority of such
investors?

a Company 300
b Company 400
c Both companies are equally suitable
d The PE ratio has no effect on an investment
decision of such an investor

10. Company 10’s accounting period ends on 31.12.17.

Insurance for the year ended 31.10.17, paid on 1.11.16 was £84,000.

Insurance for the year ended 31.10.18, paid on 1.11.17 was £90,000.

The insurance expense in the income statement for the year ended 31.12.17
and the prepaid insurance in the statement of financial position at 31.12.17
were which of the following?

Insurance expense £ Prepaid insurance £

a 75,000 75,000
b 85,000 75,000
c 95,000 15,000
d 89,000 15,000

11. A direct cost is which of the following?

a a cost which is directly attributable to a particular

job, product or service
b a cost which varies with output
c a semi-variable cost
d a cost which is apportioned to the cost of a unit
of production

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12. In deciding which costs are direct costs and which are indirect costs for
the purposes of determining the costs in a university, is the salary and
other employment costs of the senior departmental manager of the
Department of Accounting & Finance a direct cost or an indirect cost when
the university’s Chief Financial Officer is computing (i) and (ii):

(i) The cost associated with one student studying for a degree in the
Department?

(ii) The costs of the Department of Accounting?

one student the Department

in the Department of Accounting
a Direct Direct
b Indirect Indirect
c Direct Indirect
d Indirect Direct

13. Company 13 makes and sells sushi in its fast-food stall in a local shopping
mall. The selling price of the product is £12, variable costs per meal are
£7.50. Fixed costs for 2018 such as rent are expected to be £140,000.
The company wish to make a profit for the year of £120,000. How many
meals will have to be sold in the year to achieve this objective?

a 31,112
b 26,667
c 34,667
d 57,778

14. Using the information in Question 13, if the budgeted sales are 60,000
meals sold, what is the margin of safety, expressed as a percentage?

a 3.7%
b 48.1%
c 92.9%
d 55.6%

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15. Company 15 makes expensive, hand-made dining room suites. Their
products are the ‘de-luxe’, ‘superior’ and ‘royal’ models. Unit costs and
revenues relating to the three products are as follows:

De-luxe Superior Royal

£ £ £
Selling price 2,999 3,999 4,999
Direct materials 1,000 1,000 1,500
Direct labour 800 1,100 1,600
Variable overheads 150 180 225
Fixed overheads 200 400 400
Total costs 2,150 2,680 3,725
Profit per unit 849 1,319 1,274

All three products use materials which cost £100 per kilogram but there is
not enough material to meet the demand for all three products. In what
order should these three products be produced if the company wishes to
maximise its profit?

Best 2nd best 3rd best

a De-luxe Superior Royal
b De-luxe Royal Superior
c Royal Superior De-luxe
d Superior Royal De-luxe

16. Company 16’s Cash budget shows there is likely to be a hefty cash deficit
at the end of the forthcoming quarter and the expected balance will
exceed the Company’s existing agreed overdraft limit. Which of the
following courses of action would you consider to be appropriate in these
circumstances?

(1) Delay payment to its suppliers

(2) Delay payment of the monthly salaries until the following month
(3) Offer more generous credit terms to its customers
(4) Offer customers a discount for payment within 7 days of sales invoice
date

a 1, 2 and 4
b 1 and 4
c 1,3 and 4
d 2 and 4

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17. Projects L and M have the following (costs) and revenues:

Year Project L Project M

£000 £000
0 (150) (60)
1 32 22
2 60 16
3 50 20
4 48 12
5 5 10

On the assumption that the cash inflows occur evenly throughout each
year, the payback period of these two projects is which of the following?

Project L Project M
a 3 years and 8 months 3 years and 4 months
b 3 years and 4 months 3 years and 6 months
c 3 years and 2 months 3 years and 2 months
d 4 years 4 years

18. With reference to the information in Question 17 for Project L, but

assuming the machine will be sold at the end of the project for £25,000,
the accounting rate of return of Project L, using the average investment
method, is which of the following?

a 16.0%
b 22.4%
c 31.2%
d 44.6%

19. Company 19 is considering replacing all its machinery. The financial

controller has computed Net Present Value (NPV) of the project at two
different discount rates. The NPV at a discount rate of 6% is £190,500
positive and at a discount rate of 20%, it is £64,400 negative. You are
required to compute the Internal Rate of Return (IRR) using linear
interpolation or extrapolation.

The Internal Rate of Return of this project is which of the following?

a 16.5%
b 9.6%
c 16.0%
d More information is needed to compute the IRR

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20. The budgeted costs of Company 20, for the year ended 31.12.18, were as
follows:
£
Direct materials 200,000
Direct labour 1,200,000
Indirect costs 720,000
Total costs 2,120,000

Budgeted direct labour hours for the year were 100,000 while budgeted
machine hours were 90,000. The Company absorbs its indirect costs on
the machine hour basis.

The details of Job 401 were as follows:

Raw materials £25,000

Direct labour hours 4,000
Machine hours 1,900

The full cost of Job 401 was which of the following?

a £73,000
b £88,200
c £101,800
d £30,900

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SECTION B

Answer QUESTION 21 and NOT MORE THAN ONE further question from this
section.

Question 21

Answer both parts of the question in this section.

Lestrade Ltd is a builders’ merchants, selling items to tradesmen and the

wholesale trade. The company’s trial balance at 31.12.17, before any
adjustments have been made, is as follows:

Dr Cr
£ £
Land 120,000
Buildings at cost 280,000
Buildings, accumulated depreciation at 1 January 80,000
2017
Delivery vans at cost 65,000
Delivery vans, accumulated depreciation at 1 January 23,000
2017
Inventory at 1 January 2017 74,820
Trade receivables 91,200
Provision for bad debts at 1 January 2017 2,750
Prepayments at 1 January 2017 3,250
Bank balance 7,380
Trade payables 48,400
12% debenture loan repayable in 2030 50,000
Ordinary share capital of £1 each 70,000
Retained profits at 1 January 2017 111,200
Sales revenue 1,095,440
Purchases 643,200
Administrative expenses 96,400
Distribution costs 87,100
Rent 21,600
Interim dividend paid 5,600 ________
1,488,170 1,488,170

The following additional information is available:

1. The figure for prepayments in the trial balance is in respect of two months’
rent paid in advance at 1.1.17. As from 1.9.17, rent had been increased to
£24,000 per year, payable quarterly, in advance.

2. Provision is to be made for the audit fee of £3,000. A full year’s debenture
interest which was due on 31.12.17 was paid on 5.1.2018.

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 3. In 2017 the company sold a delivery van for £2,000 in cash. The vehicle was
purchased in 2015 for £15,000. The cash received from the sale was paid
into the business bank account and credited to sales revenue.

4. Depreciation is to be provided on the non-current assets using the following

annual rates:
Land nil
Buildings 1% per year on a straight line basis
Delivery vans 20% per year on a reducing balance basis

A full year’s depreciation is provided in the year of acquisition and no

depreciation is provided in the year of disposal.

5. The inventory was counted on 31.12.17 and valued, at cost, at £71,220.

Included in this were some damaged goods which had cost £3,250 and
which would normally be sold for £5,500. However, they were sold in a
clearance sale in January 2018 for £1,200.

6. A customer notified the company on 28.12.17 that he was returning goods

with the wrong specification for which he had been invoiced the sum of
£5,200. The returned goods were received into the shop on 2.1.18 on
which date the return was recorded in the accounting records. The goods
had cost Lestrade Ltd £2,580 and were returned in good condition.

7. A customer owing £2,700 has recently been declared bankrupt. The

company does not expect to recover any of this. A provision for bad debts of
5% of remaining trade receivables is to be provided.

8. Corporation tax for the year ended 31.12.17 is estimated to be £40,000 and
is to be paid on 1.10.18.

9. The directors plan to pay a dividend in respect of the current year of 12p per
share, payment to be made in January 2018.

Required:

(a) Prepare an income statement for Lestrade Ltd for the year ended 31.12.17,
statement of financial position at 31.12.17 and statement of movements in
equity for the year ended 31.12.17 in a form suitable for presentation to the
directors.
(26 marks)

(b) Answer to the following email you have recently received from the company’s
sales director:

“Why do you value the inventory at cost? Surely it would be much more
helpful to the shareholders to know its current value which is a much
higher total figure. Don’t you agree?”
(4 Marks)
(Total 30 marks)

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Question 22

The statements of financial position of Moran Limited as at 31 December 2017

and 2016 and a summary of the income statement for the year ended 31
December 2017 appear below:

Statements of financial position at 31 December

2017 2016
£ £
Non-current assets
Land and buildings 150,000 60,000
Plant and machinery 27,950 23,100
177,950 83.100
Current Assets
Inventory 39,500 22,540
Trade receivables 55,500 45,670
Cash at bank 6,110 10,900
101,110 79,110
Total assets 279,060 162,210

Equity & liabilities

Equity
Ordinary share capital 26,000 20,000
Share premium 13,000 3,000
Revaluation reserve 75,000 10,000
Retained earnings 30,175 13,285
Total equity 144,175 46,285

Non-current liabilities
Long-term loans 27,000 50,000
Current liabilities
Trade payables 21,090 44,555
Interest accrued 2,000 7,000
Tax 41,000 4,270
Bank overdraft 43,795 10,100
107,885 65,925
Total equity and liabilities
279,060 162,210

Summary Income Statement for the Year Ended 31.12.17

£
Operating profit (after depreciation on plant and machinery of 160,425
£13,350)
Loss on sale of plant and machinery (1,250)
Interest expense (4,200)
Profit before tax 154,975
Tax (39,085)
Profit after tax 115,890

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You are given the following information:

(i) During the year items of machinery were sold. The machines had originally
cost £12,000 and had a net book value at the disposal date of £7,250.

(ii) A dividend was paid during the year.

Required:

(a) Prepare a cash flow statement, together with the reconciliation statements of
operating profit and cash balance, for Moran Limited for the year ended
31.12.17.
(16 marks)

(b) Critically evaluate this company’s cash flow statement.

(4 marks)

(Total: 20 marks)

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Question 23

Max Moriarty has been told that Holmes & Watson plc is a fast growing
company and he seeks your advice on whether to buy shares in the company.
He has provided you with the following summarised information taken from the
recent annual accounts of Holmes & Watson plc:

£000
Income statement:
Sales revenue 6,200
Gross profit 1,800
Profit for the year 200

£000
Statement of financial position:
Non-current assets 2,290
Inventory 600
Trade receivables 300
Cash at bank 200
Trade payables 700
Share capital (25p shares, fully 600
paid)
Retained profits 190

The share price of Holmes & Watson plc is presently trading at 120p and it has
been around this level for the past few months. The dividend paid during the
year was £100,000. The trade association to which Holmes & Watson plc
belongs compiles statistics taken from the annual accounts of its members and
from other sources. You have obtained the following recently prepared data
which give the industry averages for seven statistics as:

Gross profit percentage 34%

Current ratio 1.2
Quick (acid test) ratio 0.5
Trade receivables period (days) 25
Inventory period (days) 60
Trade payables period (days) 40
Price earnings ratio 9.9

Required:

(a) Compute the above seven statistics for Holmes & Watson plc.
(8 marks)

Question continues on next page

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(b) Comment on how the company’s overall performance compares to the
average for its industry, pointing out any significant features.
(7 marks)

(c) What other information would you advise Max to seek about the company
before he decides whether or not to buy shares in Holmes & Watson plc?
(5 marks)

(Total: 20 marks)

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 SECTION C
Answer ONE question from this section and ONE further question from either
Section B or Section C.
Question 24
Oldacre plc is planning to launch a home shopping page on the internet.
Customers would be able to place their orders via the company’s new website
and the goods would be delivered within 72 hours.
1. To prepare for the launch, Oldacre has spent £200,000 developing the
website. At launch, a marketing campaign will be instigated which is likely to
cost £1,000,000, payable in advance. To support the project, £440,000 would
be spent on advertising each year from year 2 onwards, payable in advance.
2. Oldacre expects demand to be initially low, but to build up once the reputation
of the company is established. In the first year of operation, it is anticipated
that 50,000 orders will be made. Orders will then be expected to increase by
30% per year for the next three years before falling by 50% in year 5 after
which the project will be terminated.
3. The average sales revenue per order is anticipated to be £40 in year 1 which
will rise in line with inflation which is anticipated to be 3% per year. The cost
of goods sold is 76% of sales revenue, excluding delivery costs. The
company will not hold any inventory.
4. Oldacre will make a fixed charge of £5 per order for delivery which is
anticipated to remain unchanged throughout the 5 year life of the project.
5. One van and driver will be required for each 7,500 deliveries per year, or part
thereof. Drivers will each be paid £25,000 per year.
6. The activity relating to the new product will occupy an empty floor occupying
one quarter of the company’s rented office building. The annual rental of the
building is £800,000 per year. Oldacre has received an offer to rent out the
spare floor of the building for £120,000 per annum, payable, in advance.
7. Overheads are charged to products at the rate of 5% of sales revenue. An
additional administrator whose salary is £40,000 will be employed if this new
project proceeds.
8. The appropriate discount rate is 12% per year.
9. Assume that all transactions are in cash and that all cash flows arise at the
end of the year concerned, except where indicated above.
Required:

(a) Assess whether Oldacre plc should proceed with the website.
(14 marks)
(b) Briefly explain why discounted cash flow analysis is appropriate when
evaluating long-term projects.
(6 marks)

. (Total: 20 marks)

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Question 25

Baskerville Cereals manufactures dog biscuits. The standard costs and

revenues of each tonne of their most popular product is as follows:

Selling price £160 per tonne

Materials 1.2 tonnes @ £30 per tonne
Labour 2 hours @ £22.50 per hour
Variables production overheads 2 hours @ £10 per hour
Fixed production costs £175,000

Budgeted production and sales for the month of January 2018 were 25,000
tonnes.

Fixed overheads are absorbed on the basis of budgeted units.

In fact, 26,500 tonnes were produced and sold for £4,160,500.

Costs incurred were as follows:

Materials 30,475 tonnes £956,915
Labour 58,300 hours £1,270,940
Variable production overheads £606,320
Fixed production overheads £164,000

Required:

(a) Produce a statement reconciling the actual profit with the budgeted profit.
Calculate all the appropriate variances using the contribution approach with
just one fixed overhead variance.
(14 marks)

(b) Present a brief report summarising possible reasons for each variance
including any possible inter-connection between any of these variances.
(6 marks)

(Total: 20 marks)

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Question 26

Miss Violet Smith began to trade in 2016 producing racing bicycles. Her
accountants, Woodleigh and Carruthers, have drawn up accounts for the
business but she is not entirely convinced these accounts give an accurate
picture of the performance of the business for decision-making purposes.
Hence, Violet has asked you to look at the accounting records and draw up
alternative income statements for 2016 and 2017.

The selling price of each bicycle was £500 per unit in 2016 and £550 in 2017.

2016 2017
Sales (units) 3,000 4,000
Production (units) 3,800 3,600
£ £
Costs
Factory: fixed 570,000 590,000
Factory: variable 380,000 330,000
Administration: fixed 200,000 220,000
Selling: variable 180,000 240,000

Violet values inventory on a FIFO basis.

Requirements:

(a) Prepare income statements using absorption costing, for each of the years
2016 and 2017.
(8 marks)

(b) Prepare income statements using marginal costing, showing clearly your
calculation of contribution, for each of the years 2016 and 2017.
(8 marks)

(c) Reconcile to profits calculated on a marginal costing basis with the profits
calculated on an absorption costing basis for 2016 only. You are required
to reconcile the figures with a numerical computation and also to explain the
difference in a brief written statement for the directors of the business.

(4 marks)

(Total: 20 marks)

END OF PAPER

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Extracts from compound interest tables

Present value of £1
P

%
R 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

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