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Paper Reference(s)

6001
London Examinations GCE
Accounting (Modular Syllabus)
Advanced Subsidiary/Advanced Level
Unit 1 The Accounting System
and Costing
Tuesday 17 May 2005 Afternoon
Time: 3 hours
Materials required for examination Items included with question papers
Answer book (AB16) Accounting paper (AB34)

Instructions to Candidates
Answer FIVE questions, choosing TWO from Section A and THREE from Section B.
All calculations must be shown.
In the boxes on the answer book, write the name of the examining body (London Examinations), your
centre number, candidate number, the subject title (Accounting), the paper reference (6001), your
surname and other name(s), and signature.
Answer your questions in the answer book.
Ensure that your answers to parts of questions are clearly numbered.
Use additional answer sheets if necessary.
If the accounting paper provided does not allow you to set out your answer in the way you wish, rule
up a page of your answer book to suit your requirements.

Information for Candidates


The total mark for this paper is 100.
The marks for individual questions and the parts of questions are shown in round brackets: e.g. (2).
This paper has seven questions. There are no blank pages.
Calculators may be used.

Advice to Candidates
Write your answers neatly and in good English.

*m21711b*
Printers Log. No.

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W850/U9011/57570 5/4/4/3/2/

This publication may be reproduced only in accordance with Edexcel Limited copyright policy. 2005 Edexcel Limited.
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SECTION A

Answer TWO questions from this section

1. Ravindra commenced business as a general retailer on 1 May 2004. At that date his capital
consisted of 1 500 in the bank, shop fixtures 3 000 and stock 2 500. Ravindra has not kept a full
set of books.

Additional information for the year ended 30 April 2005:

(i) Most sales have been for cash. Where sales have been on credit these have been recorded and
invoiced.

(ii) Payments were made in cash in each of the 52 weeks of the year from the cash till;

Sales assistants wages 125 per week
Drawings 100 per week

(iii) After deducting the cash expenditure in (ii) above, all cash takings had been paid into the bank.
The following analysis of the bank account is available;


Receipts
Cheque to open the account 1 500
Cash sales 83 000
Credit sales banked 7 000

Payments
Rent and rates 7 500
General expenses 4 000
Suppliers of goods 65 000
Electricity 3 600
Telephone 800
Computer equipment 2 000

(iv) During the year Ravindra received discount of 1 000 from suppliers for prompt payment.

(v) On 30 April 2005:


z Customers owed Ravindra 3 000.
z Ravindra owed 7 700 to the suppliers of goods.
z Stock was valued at 4 200.
z Rent of 1 500 was prepaid.
z Telephone of 85 was owing.
z Depreciation was charged on fixtures at 10% and computer equipment at 30% using the
straight line method.
z Ravindra had taken goods with a cost price of 2 750 for his personal use during the year.
z A debtor has informed Ravindra that he is unable to pay his debt of 350. A provision is
to be made for the doubtful debt.

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Required:

(a) Prepare for Ravindra the:

(i) trading and profit and loss account for the year ended 30 April 2005. (8)

(ii) balance sheet as at 30 April 2005. (8)

(b) (i) Distinguish between capital expenditure and revenue expenditure. (2)

(ii) Using an accepted accounting concept, explain why only a proportion of the purchase
price of computer equipment will be recorded in the profit and loss account for a single
year. (4)

(c) Evaluate the advantages and disadvantages of keeping a full set of double entry accounts rather
than the system currently in use by Ravindra. (4)

(Total 26 marks)

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2. Antoni Chemicals operates two chemical plants, one in Newtown and one in Burnham Town. The
chemical plants are the major employers in both towns. The plant in Burnham Town is old and
inefficient and there are concerns about possible pollution from the plant.

Antoni Chemicals are considering the closure of the plant at Burnham Town because the only way
to make the plant operate profitably would be to use lower grade materials. The lower grade
materials would substantially increase the pollution from the plant.

Additional information for each chemical plant for the year ended 30 April 2005:

Newtown Burnham Town

Gross profit as a percentage of sales 60% 30%


Net profit as a percentage of sales 20% 6%
Stock turnover 12 times 7 times
Current ratio 1.6:1 2.4:1
Liquid (acid test) ratio 0.8:1 0.6:1
Sales 1 500 000 1 000 000
Owners capital 1 000 000 500 000
Fixed assets 1 200 000 600 000
Long term loans 1 000 000 1 000 000

Required:

(a) Using the figures above comment upon the following for Newtown and Burnham Town.

(i) Stock levels. (2)

(ii) Purchasing costs of raw materials. (2)

(b) (i) Calculate for Newtown and for Burnham Town the:

z fixed assets to sales percentage


z return on capital employed. (4)

(ii) Calculate for the business as a whole, the return on capital employed. (1)

(iii) Comment upon the sufficiency of the ratios calculated in (i) and (ii) above. (3)

(c) (i) Explain the term social accounting. (3)

(ii) Social accounting will always be sacrificed by businesses as they strive for profit
maximisation.
With reference to the above statement, discuss how social accounting and profit
maximisation can play an equal part in the decision making of businesses. (3)

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(d) State two implications of closing the Burnham Town plant for each of the following:

(i) the local community (2)

(ii) material suppliers. (2)

(e) Evaluate the action that Antoni Chemicals could now take in respect of the Burnham Town
chemical plant. Your evaluation should give consideration to both the financial and non
financial factors to be considered. (4)

(Total 26 marks)

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3. Basic Manufacturing has two production departments: Machining and Finishing; and two service
departments: Administration and Stores. Budgeted overheads have been allocated and apportioned
to the four departments as follows:


Machining 20 000
Finishing 30 000
Administration 6 000
Stores 4 000

The budgeted use of the two service departments will be as follows:

Machinery Finishing Stores Administration


Administration 40% 40% 20%
Stores 60% 30% 10%

Additional information:
Machining Finishing
Budgeted direct labour hours 8 550
Budgeted machine hours 4 300

Actual direct labour hours 8 300


Actual machine hours 4 850
Actual overhead cost 26 650 34 250

Required:

(a) (i) Explain the terms fixed and semi-fixed costs, giving an example of each. (4)

(ii) Most overhead costs are fixed or semi-fixed.


Comment upon the validity of the above statement. (2)

(b) Distinguish between allocation and apportionment in overhead recovery. (4)

(c) Re-apportion the overheads of the service departments to the production departments using the
continuous allotment method. (6)

(d) Calculate for the machining and finishing departments the:

(i) projected overhead absorption rates. (2)


Note: Calculations should be made to the nearest pound.

(ii) actual under or over absorption of overhead. (4)

(e) Evaluate the advantages and disadvantages of calculating separate overhead recovery rates for
the machining and finishing departments as an alternative to calculating a single overhead
recovery rate for the business as a whole. (4)

(Total 26 mark)

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SECTION B

Answer THREE questions from this section

4. The following trial balance was prepared for the business of Kassam on 30 April 2005. The trial
balance was prepared by an inexperienced bookkeeper and contains both errors in drafting and
errors of double entry.

Debit Credit

Sales 96 450
Purchases 42 000
Stock at 1 May 2004 5 700
Purchase returns 800
Salaries and trade expenses 45 200
Telephone charges 1 540
Capital 15 000
Bank overdraft 1 600
Fixtures (at cost) 40 000
Fixtures provision for depreciation 1 800
Debtors 12 920
Creditors 15 050
Provision for doubtful debts 600

The following errors in double entry were found in the books:

(i) Goods purchased on credit valued at 200 were returned on 28 April 2005 but no entries had
been made in the books to record the return.

(ii) New fixtures costing 1 500 had been posted to the purchases account.

(iii) Goods sold to a customer for 8 000 had been debited to both the sales account and the
customers account.

(iv) Telephone charges of 60 had been paid by cheque and correctly recorded in the telephone
charges account, but no other entries had been made.

Required:

(a) Prepare for Kassam:

(i) journal entries to correct the errors. Narrations are not required. (4)

(ii) the suspense account showing clearly the opening balance. (2)

(b) Draft the revised trial balance following the correction of all errors. (7)

(c) A trial balance is a checking device. Identify one other checking device used in accounting and
evaluate its benefits. (3)

(Total 16 marks)

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5. Shah Manufacturing produces a single product. The business is considering changing the methods
of valuing stock and of remunerating its production workers. Shah Manufacturing values its stock
on the Last In First Out (LIFO) basis. All production staff are paid on a day-work basis. The
following are being considered:

z changing the stock valuation to the First In First Out (FIFO) method.
z changing the remuneration for production workers to piecework.

Additional information at 1 May 2005:

(i) Stock records show that 2 000 items were in stock at the beginning of the current period and
were valued on the basis of:

z 500 items purchased in February at a cost of 3.


z 500 items purchased in March at a cost of 4.
z 1 000 items purchased in April at a cost of 5.

(ii) The following stock transactions took place in May:

3 May Issued 1 500 items


7 May Received 2 000 items @ 6 per item
15 May Received 1 000 items @ 7 per item
24 May Issued 1 500 items

(iii) The following details relate to a week in the month of May for two production employees.

Adnam Belinda
Actual hours worked 36 44
Hourly rate of pay 4 7
Output (items)
Small 110 120
Large 175 250

Standard time allowed (per unit) Small 6 minutes


Large 9 minutes

All hours worked above 40 in any week are paid at time and a half.
Each minute earned is valued at 0.10 for piecework calculation.

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Required:

(a) Calculate the value of the closing stock, showing all receipts and issues for the month of May,
using:

(i) Last In First Out (LIFO) (3)

(ii) First In First Out (FIFO) (3)

(b) Explain two advantages to the business of changing its stock valuation to the FIFO method.
(4)

(c) Calculate the earnings of each employee using:

(i) day-work.

(ii) piecework. (4)

(d) Evaluate one benefit to Shah Manufacturing of remuneration by piecework. (2)

(Total 16 marks)

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6. Paul Bain prepared the following balance sheet as at 30 April 2005.

Paul Bain Balance Sheet as at 30 April 2005.


Fixed assets
Premises 180 000
Office fixtures 100
Staff skill 30 000
210 100

Current assets
Stock 15 000
Debtors 19 000
Bank 5 900
39 900
less
Current liabilities
Creditors 16 000
234 000
Financed by:
Capital 160 000
Net profit 81 000
241 000
Drawings 7 000
234 000

Paul had not received any formal financial training before preparing the balance sheet. The
following information is available:

(i) The value of the premises was increased by 20 000 to take account of the increased market
value in the year. This was considered as a profit for the year.

(ii) Office fixtures had a book value of 4 000 on 1 May 2004. The usual depreciation rate of 20%
was not applied for the year ending 30 April 2005. For that year Paul had charged depreciation
writing the asset down to its scrap value at the end of the year. The asset will continue to be
used in the business for several years.

(iii) Paul Bain valued the skill of his staff at 30 000 and had placed this sum in the balance sheet
and the profit and loss account.

(iv) The closing stock was valued at resale value. The business uses a 50% mark up on goods.

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Required:

(a) Identify, for each of (i), (ii), (iii) and (iv) above, the accepted accounting concept or
convention, other than prudence, which should have been complied with. (4)

(b) Calculate the revised net profit after applying the correct interpretation of the accepted
accounting concepts and conventions. (5)

(c) Prepare a revised balance sheet as at 30 April 2005 which complies with accepted accounting
concepts and conventions. (5)

(d) Evaluate the role played in accounting by accepted accounting concepts and conventions. (2)

(Total 16 marks)

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7. The Receipts and Payments Account of the Kewside Literary Club for the year ended 31 December
2005 recorded the following:


Balance at bank, 1 January 2005 612
Subscriptions 1 815
Rental of clubroom 600
Payment for treasurers services 50
Sales of club magazine 125
Visiting speakers fees 325
Sales of books 1 240
Club magazine printing costs 80
Stationery and postage 64
New computer printer 400
General expenses 740
Investment account withdrawal 200
Cost of books for resale 1 010

Additional information:

(i) On 1 January 2005:


z rent was outstanding 50 and stationery and postage was prepaid 11.
z subscriptions outstanding for 2004 were 84 and prepaid for 2005 were 57.
z computer equipment was valued at 600.
z the club had an investment account with the bank containing 1 000.

(ii) Depreciation is to be charged at the rate of 25% on the balance of computer equipment owned
on 31 December 2005.

(iii) On 31 December 2005 subscriptions outstanding for 2005 were 50 and prepaid for 2006 were
106.

(iv) Interest on the investment account was 5% to 30 June 2005 and 4% from 1 July 2005. The
withdrawal was made on 1 July 2005.

Required:

(a) Calculate the accumulated fund balance at 1 January 2005. (4)

(b) Prepare the income and expenditure account for the year ended 31 December 2005. (10)

(c) A member has proposed that the club introduce a 10 year membership fee costing 400 payable
in full in the first year. The current annual membership fee is 60.

Evaluate the proposal of introducing 10 year membership fees at the proposed level. (2)

(Total 16 marks)

TOTAL FOR PAPER: 100 MARKS

END

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