Accounting

(IAS)
Level 3

Model Answers
Series 2 2006 (Code 3901) Malaysia
Accounting (IAS) Level 3 Malaysia
Series 2 2006

How to use this booklet

Model Answers have been developed by Education Development International plc (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 2006

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1
SECTION A
QUESTION 1

The financial statements of Gopa, a large retail company, are as follows:

Income Statements of Gopa for the years ended 31 December

2004 2005
$000 $000
Sales (all on credit) 6,100 8,500
Cost of sales 3,200 5,100
Gross profit 2,900 3,400
Operating expenses 1,500 1,250
Profit from operations 1,400 2,150
Interest payable 40 20
Profit for the year 1,360 2,130
Dividends (preferred and ordinary) 100 180
1,260 1,950

Balance Sheets at 31 December

2004 2005
$000 $000 $000 $000

ASSETS
Non-current assets 4,200 6,500

Current assets
Inventories 545 742
Receivables 55 98
Bank 16 87
616 927
Total assets 4,816 7,427

EQUITY AND LIABILITIES

Capital and reserves $000 $000
Ordinary shares of $1 each 2,000 2,500
Share premium account 20 175
Accumulated profits 1,768 3,718
Equity 3,788 6,393

Non-current liabilities
10% Preferred share capital 400 400
Loan 500 500
900 900

Current liabilities 128 134

Total equity and liabilities 4,816 7,427

3901/2/06/MA 2 CONTINUED ON THE NEXT PAGE

QUESTION 1 CONTINUED

REQUIRED

(a) Calculate the following ratios, (correct to 2 decimal places), for both 2004 and 2005:
(i) Gross profit to sales (expressed as a %)
(ii) Operating profit to sales (expressed as a %)
(iii) Receivables collection period (based on closing receivables and expressed in days)
(iv) Earnings per share
(v) Inventory turnover period (based on closing inventory and expressed in days)
(vi) Current
(vii) Acid test (14 marks)

(b) Suggest three reasons for the reduction in the gross profit to sales ratio during 2005
(6 marks)

(Total 20 marks)

MODEL ANSWER TO QUESTION 1

(a) 2004 2005

Gross profit to sales 2,900/6,100 x 100 47.54% 3,400/8,500 x 100 40.00%

Operating profit to sales 1,400/6,100 x100 22.95% 2,150/8,500 x 100 25.29%

Receivables collection period 55/6,100 x 365 3.29 days 98/8,500 x365 4.21 days

Earnings per share (1,360-40)/2,000 $0.66 (2130-40)/2,500 $0.84

Inventory turnover period 545/3,200 X365 62.16 days 742/5,100x365 53.10days

Current 616/128 4.81: 1 927/134 6.92 :1

Acid test (616-545)/128 0.55:1 (927 -742)/134 1.38 :1

(b) Possible reasons for the fall in the gross profit to sales ratio

(i) Fall in selling prices per unit

(ii) Increase in the bought-in costs per unit
(iii) Inventory stolen
(iv) Closing inventory undervalued
(v) Inventory-taking error
(vi) Changes in sales mix

3901/2/06/MA 3
SECTION A CONTINUED

QUESTION 2

The following Trial Balance relates to Mohatir, a public company, at 31 March 2006:
$000 $000
Sales 229,390
Inventory at 1 April 2005 12,100
Purchases 107,200
Distribution costs 20,000
Administration expenses 25,000
Debenture interest paid 300
Interim dividends - ordinary 2,900
- preferred 400
Leasehold building - cost 50,000
Plant and machinery - cost 75,000
Office equipment - cost 15,000
Depreciation at 1 April 2005 - leasehold building 20,000
- plant and machinery 28,000
- office equipment 9,600
Trade receivables 67,400
Bank 780
Trade payables 18,370
Ordinary shares of $1 each 16,000
Suspense 23,000
6% Debentures (issued on 1 July 2005) 10,000
8% Preferred shares of $1 each 10,000
Accumulated profits (1 April 2005) 10,160
375,300 375,300

The following notes are relevant:

(1) The year end inventory taking was delayed until 7 April 2006. The value of the inventory on the
premises on that date was $25 million at cost. Mohatir entered into the following transactions
between 1 April 2006 and 7 April 2006:
$
Sales at a margin on sales of 50% 1,200,000
Goods sent to agents on a sale or return basis at a mark up on
cost of 25% 500,000
Purchases at cost 700,000

All sales and purchases had been correctly recorded in the period in which they occurred.

3901/2/06/MA 4 CONTINUED ON NEXT PAGE

QUESTION 2 CONTINUED

(2) Mohatir has the following depreciation policy:

- Leasehold building - straight-line over 20 years

- Plant and machinery - straight-line over 10 years with a residual value of $5,000,000
- Office equipment - 40% per annum reducing balance
Depreciation of the leasehold building and plant and machinery are treated as part of cost of
sales; depreciation of the office equipment is an administration expense

(3) A receivable owing $4,000,000 was declared bankrupt on 1 April 2006. It was then decided to
create a provision for doubtful receivables at 31 March equal to 5% of the remaining trade
receivables

(4) The Suspense Account has been credited with the amounts of two share issues:

- The sale of four million shares on 1 April 2005 at $2 per share

- A fully subscribed rights issue on 1 July 2005 of 1 for 4 shares held at that date at a price of
$3 per share

(5) On 31 March 2006, Mohatir declared a final ordinary dividend of $0.20 per share.

REQUIRED

(a) Prepare the Income Statement of Mohatir for the year ended 31 March 2006 in a form suitable
for publication.
(15 marks)

(b) Show the capital and reserves of Mohatir as they would appear in the Balance Sheet
at 31 March 2006.
(5 marks)

(Total 20 marks)

3901/2/06/MA 5
MODEL ANSWER TO QUESTION 2

(a) Mohatir Income Statement for the year ended 31 March 2006

$000 $000
Sales 229,390
Cost of sales (W1, W2, W3) 103,500
Gross profit 125,890
Distribution costs 20,000
Admin. Expenses (25,000 + 2,160 + 4,000 + 3,170) 34,330
54,330
Operating profit 71,560
Debenture interest (6% x 10,000 x 9/12) 450
Net profit 71,110
Dividends: Preferred (.08 x 10,000) 800
Ordinary (2,900 + 5,000) 7,900 8,700
62,410

(b) Mohatir Capital and Reserves at 31 March 2006

$000
Ordinary shares of $1 each (16,000 + 4,000 + 5,000) 25,000
Share premium (4,000 + 10,000 rights issue) 14,000
Accumulated profits (62,410 + 10,160) 72,570
111,570

Workings

W1 Cost of Sales

$000
Opening inventory 12,100
Purchases 107,200
Depreciation (W2) 9,500
Closing inventory (W3) (25,300)
103,500

W2 Depreciation
Leasehold property (50,000/ 20) 2,500
Plant (75,000 – 5,000) / 10 7,000
9,500

Office equipment ((15,000– 9,600) x 40%) 2,160

W3 Closing Stock
$000
Balance as per 7 April 2006 25,000
Add Sales 1,200 x 50/100 600
Sale or return 500 x 100/125 400
Less Purchases (700)
25,300

3901/2/06/MA 6
SECTION B

(Answer any THREE questions from Section B)

QUESTION 3

On 1 January 2005 Osam opened a branch at Nário. The branch records were memorandum only.
All goods for the branch were bought by the head office and invoiced to the branch at selling prices
which were fixed to yield a gross profit of 20% on sales. The branch paid its local expenses from the
proceeds of cash sales and remitted the balance to head office.

At 31 December 2005, Osam’s accountant extracted the following information relating to the branch at
Nário from head office and branch records:

(1) On 1 January 2005, head office paid $50,000 for a 25 year lease on a shop at Nário.

(2) During 2005, head office:

- sent goods, originally costing $900,000, to the branch

- received from branch $687,000 cash
- received from branch goods returned with a selling price $9,600
- received, direct from branch receivables, $105,000 in cash
- paid branch expenses of $30,000 in cash.

(3) During 2005 in addition to items in (2) above the branch:

- allowed its customers $18,200 cash discounts

- paid its local expenses $80,900 in cash.

On 31 December 2005 the branch had inventory in hand originally invoiced for $180,000.
There were no inventory losses at the branch and all sales were at the fixed selling price.

REQUIRED

(a) Prepare Journal entries (without narratives) to record items in (1), (2) and (3) above in Osam’s
(head office) books.
(11 marks)

(b) Prepare the following accounts for the year ended 31 December 2005.

(i) Branch Inventory Adjustment

(ii) Branch Profit & Loss

(9 marks)

(Total 20 marks)

3901/2/06/MA 7
MODEL ANSWER TO QUESTION 3

(a) $ $

(1) Branch Lease 50,000

Bank (Head Office) 50,000

(2) Branch Inventory (900,000 x 100/80) 1,125,000

Branch Inventory Adjustment (900,000 x 20/80) 225,000
Goods sent to Branch 900,000

Bank (Head Office) 687,000

Bank (Branch) 687,000

Goods sent to Branch (9,600 x 0.8) 7,680

Branch Inventory Adjustment (9,600 x 0.2) 1,920
Branch Inventory 9,600

Bank (Head Office) 105,000

Branch Receivables 105,000

Branch Expenses 30,000

Bank (Head Office) 30,000

(3) Branch Discounts Allowed 18,200

Branch Receivables 18,200

Branch Expenses 80,900

Bank (Branch) 80,900

(b)
Branch Inventory Adjustment Account

$ $
Branch Inventory 1,920 Branch Inventory 225,000
Balance c/d (180,000 x 0.2) 36,000
Branch Profit & Loss A/c 187,080
225,000 225,000

Branch Profit & Loss Account

$ $
Expenses (30,000 + 80,900) 110,900 Branch Inventory 187,080
Discounts allowed 18,200 Adjustment Account
Lease (50,000 ÷ 25) 2,000
Head Office Profit & Loss (R) 55,980
187,080 187,080

3901/2/06/MA 8
SECTION B

QUESTION 4

Mochacha, a public company, purchased eight million of the ordinary shares of Yuan, a private
company, on 1 January 2005 for $30 million. The consideration was settled by a cash payment of $28
million and an ordinary share issue at a premium of $1per share. The cash element of this transaction
has been recorded, but the share issue has not. The draft Balance Sheets of the two companies at 31
December 2005 were as follows:

Mochacha plc Yuan Ltd

$000 $000 $000 $000
ASSETS
Non-current assets
Tangible 50,000 17,280
Investment in Yuan 28,000 -
78,000 17,280
Current assets
Inventory 7,450 4,310
Trade receivables 12,960 4,330
Bank - 520
20,410 9,160
98,410 26,440

EQUITY AND LIABILITIES $000 $000 $000 $000

Capital and reserves
Ordinary shares of $1 30,000 10,000
Share premium account 15,000 2,000
Accumulated profits:
At 1 January 2005 30,500 6,000
For the year to 31 December 2005 12,000 4,000
42,500 10,000
Equity 87,500 22,000

Current liabilities
Trade payables 8,010 3,640
Bank overdraft 1,700
Proposed dividend 1,200 800
98,410 26,440

The following information is relevant:

(1) The fair value of Yuan’s land at the date of acquisition was $3 million in excess of its net book
value.

(2) At the date of acquisition Mochacha sold an item of plant that had cost $4 million to Yuan
for $6 million. Yuan depreciates plant at 10% on cost.

(3) Mochacha has not recorded the dividend receivable from Yuan. All proposed
dividends were declared by the directors before 31 December 2005.

(4) Consolidated goodwill is to be written off on a straight-line basis over five years.

REQUIRED

Prepare the Consolidated Balance Sheet of Mochacha at 31 December 2005.

(Total 20 marks)

3901/2/06/MA 9
MODEL ANSWER TO QUESTION 4

Workings
Goodwill Minority Con P/L
Interest
$000 $000 $000
Per draft accounts
42,500
Cost of investment 30,000
Share capital (80% x 10,000) - 8,000 (20% x 10,000) 2,000
Pre-acquisition profit (80% x 6,000) - 4,800 (20% x 6,000) 1,200
Fair value adjustment (80% x 3,000) - 2,400 (20% x 3,000) 600
Post-acquisition profit (20% x 4,000) 800 3,200 80% x 4,000
Share premium (80% x 2,000) - 1,600 (20% x 2,000) 400
Unrealised profit on plant (6,000 – 4,000) -2,000
Excess depreciation (10% x 2,000) 200
Dividend receivable (80% x 800) 640

Goodwill 13,200
Goodwill w/o (13,200/5) -2,640 -2,640
10,560 5,000 41,900

Mochacha
Consolidated Balance Sheet at 31 December 2005

Non current assets $000 $000

Tangible (50,000 + 17,280 - 2,000 + 200 + 3,000) 68,480
Goodwill 10,560
79,040
Current assets
Inventories (7,450 + 4,310) 11,760
Trade receivables (12,960 + 4,330) 17,290
Bank 520
29,570
108,610

Capital and reserves

Ordinary shares of $1 (30,000 + 1,000) 31,000
Share premium account (15,000 + 1,000) 16,000
Accumulated profits 41,900
88,900

Minority interest 5,000

Current liabilities
Trade payables (8,010 +3,640) 11,650
Bank overdraft 1,700
Proposed dividend 1,200
Proposed dividend to minority shareholders (.20 x 800) 160
14,710
108,610

3901/2/06/MA 10
SECTION B CONTINUED

QUESTION 5

Musa, a private company, invested some of its surplus funds in the 8% debentures of Patel, a public
company. Interest on these debentures is paid on 30 April and 31 October. Transactions in respect of
the 2005 financial year were as follows:

January 1 Purchased $800,000 8% debentures at 105 cum interest

April 15 Sold $200,000 8% debentures at 109 ex interest
June 15 Sold $400,000 8% debentures at 95 cum interest
November 30 Sold $100,000 8% debentures at 104 cum interest

REQUIRED

(a) Prepare the Investment in 8% Debentures of Patel Account in the books of Musa for the year
ended 31 December 2005. Profits/Losses on disposal are to be calculated and entered in this
account at the date of each sale.
(16 marks)
(b) List two uses of the balance on a Share Premium Account.
(4 marks)

(Total 20 marks)

3901/2/06/MA 11
MODEL ANSWER TO QUESTION 5
(a)
8% Debentures in Patel
Date Description Nom Income Capital Description Nom Income Capital
$ $ $ $ $ $
Jan 1 Bank 800,000 10,6671 829,3332
April 15 Bank 200,000 218,0003
4 4
April 15 Contra 667 Contra 667
April 15 P&L 11,3345
April 30 Bank 32,0006
7 8
June 15 Bank 400,000 4,000 376,000
June 15 P&L 38,6679
Oct 31 Bank 8,00010
11 12
Nov 30 Bank 100,000 667 103,333
Nov 30 P&L 33413
Dec 31 P & L (R) ______ 34,666 Bal c/d 100,000 1,33314 103,66615
800,000 46,000 840,667 800,000 46,000 840,667

Notes:

(1) 2/12 x 800,000 x 8/100 = 10,667

(2) (800,000 x 1.05) − 10,667 = 829, 333

(3) 200,000 x 1.09 = 218, 000

(4) .5/12 x 8/100 x 200,000 = 667

(5) (218,000 + 667) − (200,000/800,000) x 829,333 = 11,334

(6) 8/100 x 800,000 x 6/12 = 32,000

(7) 1.5/12 x400,000 x 0.8 = 4,000

(8) 400,000 x .95) − (4,000) = 376,000

(9) 400,000/800,000 X 829,333) − 376,000 = 38,667

(10) 8/100 x 200,000 x 6/12 = 8000

(11) 1/12 x 100,000x.08 = 667

(12) (100,000 x 1.04) − (667) = 103,333

(13) 103,333 − (100,000/800,000 X 829,333) = 334

(14) 100,000 x 8/100 x 2/12 = 1,333

(15) 100,000/800,000 x 829,333 = 103,666

(b)
(i) Capitalisation issue of ordinary shares
(i) Write off preliminary expenses
(ii) Write off discount on the issue of debentures
(iii) Write off premium on the redemption of preference shares

3901/2/06/MA 12
QUESTION 6

Mossod, a public company, purchased a vehicle for $54,000 on 1 October 2005. To finance this
Mossod borrowed $54,000 from its bank. This loan was to be repaid in 8 equal quarterly instalments
starting on 31 December 2005. Interest was to be paid with each instalment at the rate of 5% of the
amount owing immediately before each instalment.

Mossod depreciates vehicles on a usage basis using mileage as the measure of usage. The new
vehicle is expected to be used for 70,000 miles and then sold for $5,000. During the period 1 October
2005 to 31 March 2006 the vehicle covered 10,000 miles.

REQUIRED

(a) Calculate the amounts which appeared in Mossod’s Profit & Loss Account for the
year ended 31 March 2006 in respect of the vehicle and its financing.
(6 marks)
(b) Calculate the balances relating to the vehicle and its financing at 31 March 2006 and show how
these would appear in the company’s Balance Sheet at that date.
(6 marks)

On 1 October 2005, Santo purchased a large machine from Galapo, the details of which are as
follows:
$ $
List price of the machine 200,000
Trade discount applicable to Santo 10% on list price
Delivery handling costs 3,000
Maintenance contract for four years 8,000
Cost of pre-production testing 24,000

Site preparation costs -

Electrical cable installation 15,000
Concrete reinforcement 9,500
Own labour 7,500 32,000

Insurance for one year 1,000

Santo paid for the machine itself within two weeks of delivery, thereby obtaining an early settlement
discount of 5%.

The machine is expected to last 10 years. At the end of this period, it will cost $25,000 to dismantle
the machine and $13,000 to restore the site to its original condition.

Santo charges a full year’s depreciation on all assets purchased during the year and uses the straight
line method.

REQUIRED

(c) Calculate the annual amount to be shown as depreciation expense for the machine.
(8 marks)

(Total 20 marks)

3901/2/06/MA 13
MODEL ANSWER TO QUESTION 6

$
(a) Depreciation 10,000/70,000 x (54,000-5000) = 7,000

Finance charge Quarter 1 (5% x 54,000) 2,700

Quarter 2 (5% x (7/8 x 54,000) 2,363
5,063

(b) Balance Sheet

Non-current asset Vehicle at cost 54,000
Accumulated depreciation 7,000
47,000

Non-current liability
Loan (.25 x 54,000) 13,500

Current liability
Loan (.50 x 54,000) 27,000

(c) Depreciation of Machinery

$ $
List price 200,000
Less trade discount of 10% on list price 20,000
180,000
Delivery 3,000
Pre-production testing 24,000
Electrical cable installation 15,000
Concrete reinforcement 9,500
Own labour costs 7,500
Dismantling costs & restoration costs (25,000 +13,000) 38,000 97,000
277,000

∴ Depreciation of plant 277,000/10

27,700

3901/2/06/MA 14 © Education Development International plc 2006