Accounting Principles Question Paper, Answers …

1 June 2013 continued 7B/PQP/1 Accounting Principles Question paper , Answers and Examiners Comments Level 3 Diploma June 2013 June 2013 continued 7B/PQP/2 Copyright of the Institute of Credit Management Institute of Credit Management The Water Mill, Station Road, South Luffenham, Oakham, Leicestershire LE15 8NB Bookshop Tel: 01780 722901.

2 Education Tel: 01780 722909 Switchboard Tel: 01780 722900. Fax: 01780 721333 June 2013 continued 7B/PQP/3 Accounting Principles Questions, Answers and Examiners Comments LEVEL 3 DIPLOMA IN CREDIT MANAGEMENT JUNE 2013 Instructions to candidates Answer any FIVE questions. All questions carry equal marks. Time allowed: 3 hours All ledger accounts must be prepared in continuous balance format Final accounts must be prepared in vertical format Where appropriate, VAT is to be calculated at 20% Questions start on the next page Generally candidates performed reasonably well and this assessment series witnessed an 88% pass rate.

3 Questions one, two and six were the most popular: questions five and eight the least with learner preferences equally shared between the other three questions. Although like previous years many candidates are not adequately prepared for an examination of this type. All learners and centres need to look at previous examiners comments to identify what is required. Format and presentation of Answers varied from excellent to dire. Many candidates still are confused about the differences between debits and credits and a minority fail to bracket credit balances which is disappointing. Some learners Answers to narrative questions were extremely poor with guesswork being the order of the day.

4 Nevertheless there are some very good learners taking this exam and scoring well which is to be commended. June 2013 continued 7B/PQP/4 1. a) The trial balance of UK Kneads, a sole trader, as at 31 December 2012 was as follows: Debit Credit Capital 69,585 Land and buildings 60,000 Office equipment at cost 13,000 Motor vehicles at cost 18,000 Drawings 10,100 Sales and purchase returns 1,250 1,000 Carriage in 750 Carriage out 1,125 Stock as at 9,000 Bank 1,200 Sales and purchases 101,000 142,360 Motor expenses 2,400 Provision for doubtful debt 240 Provision for depreciation.

5 Land and buildings 2,400 Office equipment 1,300 Motor vehicles 3,600 Sundry expenses 2,760 Wages and salaries 12,500 Debtors and creditors 10,200 10,000 Telephone and insurance 2,200 Bank loan 15,000 245,485 245,485 You are given the following additional information: Closing stock, as at , 10,200 Depreciation is to be charged as follows: Land and buildings 1% straight-line method Office equipment 10% straight-line method Motor vehicles 20% reducing balance method Wages owing 1,200 Insurance paid in advance 200 Provision for doubtful debts is to be maintained at 5% of debtors.

6 TASK a) Prepare the Trading & Profit & Loss Account for UK Kneads for the year ended 31 December 2012 taking into account the notes to the trial balance. (15 marks) b) Describe the merits and limitations of using a bank overdraft to finance working capital arrangements. (5 marks) Total 20 marks June 2013 continued 7B/PQP/5 Question aims To assess the candidate s knowledge and understanding of how a trial balance and adjustments are used to compile the final accounts of a sole trader To test that the candidate appreciates the alternative sources of short-term finance available to a sole trader to satisfy working capital arrangements.

7 Suggested answer a) The Trading and Profit and Loss Accounts of UK Kneads for the year ended 31 December 2012 Sales 14,2360 Sales returns 141,110 Less: Cost of sales Opening stock 9,000 Purchases 101,000 Add carriage in 750 Less purchase returns NB (1,000) 100,750 109,750 Less closing stock 10,200 99,550 Gross profit 41,560 Less expenses: Carriage out 1,125 Motor expenses 2,400 Increase in the provision for doubtful debt W1 270 Sundry expenses 2,760 Wages and salaries 13,700 Telephone and insurance 2,000 Provision for depreciation: Land and buildings W2 600 Motor vehicles W3 2,880 Office equipment W4 1,300 27,035 Net profit 14,525 June 2013 continued 7B/PQP/6 Workings W1 Provision for doubtful debt 10,200 X 5% Less provision brought forward Increase in provision 510 (240)

8 270 W2 Provision for depreciation Land and building 1% of 60,000 600 W3 Provision for depreciation Office equipment 10% of 13,000 1,300 W4 Provision for depreciation Motor vehicles Cost Less provision NBV 20% of 14,400 New NBV 18,000 3,600 14,400 2,880 11,520 b) A bank overdraft is a short-term form of bank lending which is used by many organisations to fund day-to-day operational activities, sometimes called working capital. It is used to finance short-term cash shortfalls during the period before income is received so that the bank current account will have a negative balance (credit) and is shown as a current liability on the balance sheet.

9 Advantages Fairly simple to arrange It is flexible as it can be altered to reflect changing financial situations It is relatively cheap as interest is charged on the daily amount outstanding. Disadvantages They are repayable on demand If the amount is too high, the bank might seek security and additional fees If the overdraft has not been agreed in advance then the interest charges are likely to be high. A very popular Question and in the main well answered. Most students are aware of the form and content of a trading and profit and loss account though presentation at times did let some of the candidates down.

10 Some could not distinguish between sales and purchases from balances given in the trial balance and the same could be said for returns. The calculation of depreciation in both its forms continues to cause problems for many as does Accounting adjustments for accruals and prepayments. June 2013 continued 7B/PQP/7 2. Phil Wall is a sole trader who has provided his accountant with the following account balance as at 31 December 2012: Account Balance Sales 2, Bank 3, Purchases 1, C Evans (customer) T Agale (supplier) Discount allowed Discount received VAT owing to HMRC The following transactions took place during January 2013.