THE ASSOCIATION OF BUSINESS EXECUTIVES

CERTIFICATE
IA

Introduction to Accounting

morning 8 December 2005

1 Time allowed: 3 hours.

2 Answer Question 1 in Section A (compulsory) and any THREE

questions from Section B.

3 Question 1 carries 31 marks. All other questions carry 23 marks.

Marks for subdivisions of questions are shown in brackets.

4 No books, dictionaries, notes or any other written materials are

allowed in this examination.

5 Calculators are allowed providing they are not programmable and

cannot store or recall information. Electronic dictionaries and
personal organisers are NOT allowed. All workings should be
shown.

6 Candidates who break ABE regulations, or commit any misconduct,

will be disqualified from the examinations.

7 Question papers must not be removed from the Examination Hall.

 Section A

Candidates must answer Question 1 (compulsory)

Q1 The following balances have been extracted from the

books of Tyson Ltd as at 30 September 2005.

£ £
Sales 360,000
Purchases 210,000
Sales returns 8,000
Purchase returns 6,000
Salaries and wages 38,000
Heating and lighting 32,000
Insurance 24,000
Travel expenses 28,000
Stock (1.10.04) 20,000
Debtors 140,000
Creditors 36,000
Bank (overdraft) 14,000
Property – cost 120,000
– depreciation 48,000
Fixtures – cost 40,000
– depreciation 10,000
Motor vehicles – cost 20,000
– depreciation 6,000
Capital £1 – ordinary shares 80,000
£1 – 5% preference shares 60,000
Reserves – general 10,000
– profit and loss 50,000
–––––––– ––––––––
680,000 680,000
–––––––– ––––––––

You are given the following information:

(1) Stock at 30 September 2005 is £32,000.

(2) Heating and lighting expenses includes a prepayment
of £2,000 for the following year.
(3) The interest on the preference shares has not yet been
paid.
(4) The ordinary shareholders are due a dividend of 8p
per share. (£1 = 100p)
(5) Depreciation needs providing for as follows:
– property – 10% on cost
– fixtures – 5% on cost
– motor vehicles – 30% on a reducing balance basis
(6) A bad debt provision of 2% needs providing for
(7) There is a Corporation Tax liability of £2,000 that has
not yet been paid.

Required:

(a) Prepare the Trading, Profit and Loss Account and

Balance Sheet for Tyson Ltd as at 30 September
2005. (23 marks)

(b) What are the differences (in a limited company

balance sheet) between authorised share capital and
issued share capital? Explain your answer. (8 marks)
(Total 31 marks)
 Section B

Answer any THREE questions from Section B

Q2 Barwell Ltd produces one product (a bird feeding table)

that sells for £50 each. Each bird table has variable costs
as follows:
– 4 hours labour at £5.25 per hour
– 3 square metres of wood at £6.10 per square
metre

The fixed costs of Barwell Ltd are £12,600 per annum.

Required:

Calculate the following:

(a) The contribution per unit towards the fixed costs of

Barwell Ltd. (5 marks)

(b) The number of units that would have to be sold to

achieve break-even. (5 marks)

(c) The profit earned if Barwell Ltd sells 2,850 units. (6 marks)

(d) The profit earned if the selling price is reduced by

10% and demand rises by 20% (from 2,850 units). (7 marks)
(Total 23 marks)
Q3 The manager of a maintenance department (that services
the maintenance requirements of a number of production
departments) wishes to develop a method of predicting his
department’s costs in any period.

The following total costs have been recorded at two

different activity levels (based on the number of
maintenance requisitions actioned).

Maintenance requisitions Total cost

actioned £
Period 1 1,380 15,332
Period 2 2,100 19,940

Required:

(a) Calculate the variable cost per maintenance

requisition. (5 marks)

(b) Calculate the fixed costs of the maintenance

department. (5 marks)

(c) What would be the total costs of the maintenance

department if the budget of 2,690 actioned
requisitions in Period 3 was achieved? (5 marks)

(d) If the total maintenance requisitions actioned, in

Period 3, was 2,550 and the average recharge, to the
Production departments, was £8.50 per requisition,
what would be the profit, or loss, of the maintenance
department? (5 marks)

(e) What would be the financial impact, on the

maintenance department, of a reduction in fixed costs
of £1,500? (3 marks)
(Total 23 marks)
Q4 The following trial balance for your organisation has been
incorrectly drawn up by an inexperienced member of staff.

DR CR
£’000 £’000
Sales 540
Purchases 208
Returns inwards 10
Returns outwards 12
Heating costs 18
Insurance costs 22
Rent paid 14
Opening stock 36
Carriage in 8
Carriage out 11
Discounts received 10
Discounts allowed 9
Property – cost 160
Property – cumulative depreciation 20
Wages and salaries 86
–––– ––––
336 828
–––– ––––

Required:

(a) Re-draft the trial balance correctly. (7 marks)

(b) Draft the Profit and Loss account for the organisation
at the end of the period. (Note that the closing stock
has been valued at £26,000 and the depreciation for
the year for the property, which is already included in
the cumulative depreciation figure, is £10,000) (12 marks)

(c) Explain the essential difference between the straight

line method of depreciation and the reducing balance
method. (4 marks)
(Total 23 marks)
 BLANK PAGE

TURN OVER FOR THE NEXT QUESTION

Q5 The Profit and Loss accounts and Balance Sheet of
Keswick Ltd are shown below.

Keswick Ltd
Profit and Loss Accounts for the years ending 30 September

2004 2005
£ £ £ £
Sales 800,000 1,100,000
Less: Production cost
of goods sold 600,000 808,000
Administration
expenses 105,000 166,000
Selling and
distribution
expenses 15,000 720,000 34,000 1,008,000
–––––––– –––––––– –––––––– ––––––––––
Net profit 80,000 92,000
Less: Corporation Tax 26,000 30,800
Proposed dividend 54,000 (80,000) 61,200 (92,000)
–––––––– –––––––– –––––––– ––––––––––
Retained profits nil nil

All sales and purchases are on credit terms

Keswick Ltd
Balance sheets as at 30 September

2004 2005
£ £ Fixed Assets £ £
300,000 Land and buildings 662,000
190,000 Plant and machinery 180,000
10,000 Motor vehicles 8,000
–––––––– ––––––––
500,000 850,000
Current Assets
110,000 Stock 160,000
40,000 Debtors 85,000
50,000 Bank 5,000
–––––––– ––––––––
200,000 250,000
less Current Liabilities
54,000 Proposed dividends 61,200
46,000 Creditors 138,800
–––––––– ––––––––
(100,000) (200,000)
100,000 Net Current Assets 50,000
–––––––– ––––––––
600,000 900,000
 Represented by:
2004 2005
£ £ £ £
Share Capital
Authorised:
800,000 Ordinary shares of £1 each 800,000
–––––––– ––––––––
450,000 Issued and fully paid: 750,000
Ordinary shares of £1 each

Reserves
84,000 General reserve 110,000
66,000 Profit and loss account 40,000
–––––––– ––––––––
150,000 150,000
–––––––– ––––––––
600,000 900,000

Required:

(a) Calculate the following ratios:

– capital employed
– net profit to sales
– working capital ratio
– acid test ratio
– average days to receive payment from debtors
– average days to pay creditors (18 marks)

(b) Given the different ratios you have calculated in

part (a) above, has Keswick Ltd’s financial position
improved or worsened in the year ended
30 September 2005?

Briefly explain the reasons for your answer. (5 marks)

(Total 23 marks)
Q6 Black, White and Brown are in partnership making and
selling garden furniture. The net profit of the business
(before appropriations of profit) for the year ended
30 September 2005 was £32,000.

The following information is also available:

(1) The balances on the capital accounts of Black, White

and Brown at the start of the financial period were
£50,000, £40,000 and £30,000 respectively and on
their current accounts £4,000, £6,000 and £2,000
respectively.
(2) Interest on capital is to be paid to the partners at the
rate of 10%.
(3) Brown receives a salary of £2,000 per annum.
(4) Partnership profits are distributed to Black, White
and Brown in the ratio 4:3:2 respectively.
(5) The partners’ drawings for the year were as follows:

Black – £6,000
White – £8,000
Brown – £6,500

*Appropriations of net profit include the following: interest

on capital account balances, salary payments to
partners, share of profit to partners in the agreed ratio.

Required:

(a) Draft the appropriation account for Black, White and

Brown for the period ended 30 September 2005. (9 marks)

(b) Draw up the partners’ current accounts for the period

ended 30 September 2005. (9 marks)

(c) What are the main differences between the balance

sheet of a sole trader and the balance sheet of a
partnership? (5 marks)
(Total 23 marks).
Q7 (a) Describe, with an example, what you understand by
the term ‘suspense account’ and what the main
features of suspense accounts are. (9 marks)

(b) Draft a trial balance from the figures below, using a

control account as the balancing figure.

£
Purchases 700
Sales 1,100
Rent paid 250
Cash in bank (dr) 840
Travel expenses 160
Debtors 320
Creditors 350
Capital 710 (9 marks)

(c) A trial balance fails to balance and a suspense

account with a credit balance is opened for £330.
Later the following errors are revealed:

(i) A sale, for £220, was debited to Smith instead of

Simon.
(ii) A sale for £420 was correctly entered in the sales
account but was not debited to Jones’ personal
account.
(iii) A purchase of £750 was correctly entered in the
purchase account but was not credited to White’s
personal account.

Prepare journal entries to show the necessary

corrections for all these items. (5 marks)
(Total 23 marks)
 Certificate

Introduction to Accounting

Examiner’s Suggested Answers

Question 1

(a) Tyson Ltd. Trading and Profit and Loss Account for the year ended
30 September 2005

£ £
Sales 360,000
Less: sales returns (8,000) 352,000
––––––––

Opening stock 20,000

Add: purchases 210,000
––––––––
230,000
Less: purchase returns (6,000)
––––––––
224,000
Less: closing stock (32,000) (192,000)
–––––––– –––––––––
Gross profit 160,000
Less:
Salaries and wages 38,000
Heating and lighting 30,000
Insurance 24,000
Travel expenses 28,000
Bad debt provision 2,800
Depreciation
– property 12,000
– fixtures 2,000
– motor vehicles 4,200 (141,000)
–––––––– –––––––––
Profit before interest and tax 19,000
Interest (preference shares) (3,000)
–––––––––
Profit before tax 16,000
Corporation tax (2,000)
–––––––––
Profit after tax 14,000
Ordinary share dividend (6,400)
–––––––––
Net profit for the year 7,600
Add: retained profit b/d 50,000
–––––––––
Retained profit c/d 57,600
 Tyson Ltd Balance sheet as at 30 September 2005

Cost Cum Dep N.B.V.

£ £ £
Fixed Assets
Property 120,000 (60,000) 60,000
Fixtures 40,000 (12,000) 28,000
Motor vehicles 20,000 (10,200) 9,800
–––––––– –––––––– ––––––––
180,000 (82,200) 97,800
–––––––– ––––––––

Current Assets
Stock (30.9.05.) 32,000
Debtors 140,000
Less: provision (2,800) 137,200
––––––––
Prepayments 2,000
––––––––
171,200

Current liabilities
Creditors 36,000
Accruals – interest 3,000
– dividends 6,400
– tax 2,000
Bank overdraft 14,000 (61,400)
–––––––– ––––––––
Working capital 109,800
––––––––
Net assets 207,600
––––––––

Financed by:
Capital – ordinary shares 80,000
– preference shares 60,000
Reserves – general 10,000
– profit and loss 57,600
–––––––– ––––––––
207,600
––––––––

(b) Authorised Capital

This describes the classes and numbers of shares the company has power
to issue. It represents the maximum number of shares, for each class, that
the company can issue.

Issued capital
This describes the classes and numbers of shares that have actually been
issued. Shares may be shown either as fully paid up, or if not fully paid,
the amount called up on each class of share will be shown. Any calls in
arrears or in advance would normally be identified separately.
Question 2

(a) £
Sales price per unit 50.00
Less: variable costs
– Labour (4 x £5.25) (21.00)
– Materials (3 x £6.10) (18.30)
––––––
Contribution per unit 10.70
––––––

(b) Contribution per unit = £10.70

Fixed costs = £12,600/10.70 = 1,178 units to break even

(c) 2,850 units x £10.70 = £ 30,495 less the fixed costs of £12,600 = profit of
£17,895

(d) Selling price reduced by 10% (i.e. £5) would reduce the contribution (per
unit) to £5.70

Demand would rise by 20% to 3,420.

3,420 x £5.70 = £19,494 less fixed costs of £12,600 = profit of £6,894

Question 3

(a) Period 2 – 2,100

Period 1 – (1,380)
––––––
720
––––––

Increase in spending at the two different activity levels is £4,608

Therefore £4,608/720 = £6.40 variable cost

(b) Period 2 = 2,100 x £6.40 = £13,440

£19,940 – £13,440 = fixed costs of £6,500

–––––––

(c) 2,690 x £6.40 = £17,216

Plus fixed costs £6,500
––––––––
total costs £23,716
––––––––

(d) Recharge in period 3 = 2,550 x £8.50 = £21,675

Total costs – 2,550 x £6.40 (£16,320)
– fixed costs (£6,500)
––––––––
total loss (£1,145)
(e) The following comments could be made on the financial impact of a
reduction, in the fixed costs of £1,500.

• reduction in the breakeven point (in requisitions actioned) of the

department
• reduction in total costs of the department
• the scenario in question (d) above would change a loss into a profit.

Question 4

(a) DR CR
£’000 £’000
Sales 540
Purchases 208
Returns inwards 10
Returns outwards 12
Heating costs 18
Insurance costs 22
Rent paid 14
Opening stock 36
Carriage in 8
Carriage out 11
Discounts received 10
Discounts allowed 9
Property – cost 160
Property – cumulative depreciation 20
Wages and salaries 86
–––– ––––
582 582
–––– ––––
(b) Draft profit and loss account
£’000 £’000
Sales 540
Less: Returns inwards (10) 530
Opening stock 36
Add: purchases 208
––––
244
less: Returns outwards (12)
––––
232
less: Closing stock (26) (206)
–––– –––––
Gross profit 324
Add: Discounts received 10
Less: Expenses
Wages and salaries 86
Heating costs 18
Insurance costs 22
Rent paid 14
Carriage in 8
Carriage out 11
Discounts allowed 9
Property depreciation 10 (178)
–––– –––––
Net profit for the period £156
–––––
(c) • Straight line method of depreciation is based on the cost of an asset
which is then depreciated, by the same amount, over the estimated
useful life of the asset.

• Reducing balance method of depreciation is based on a percentage

depreciation charge on the Net Book Value (NBV) of the asset. This
results in a higher depreciation charge in the earlier years of the
asset’s estimated useful life.

Question 5

(a) Ratio calculations 2004 2005

– Capital employed 80 92
–––– = 13.33% –––– = 10.22%
600 900

– Net profit to sales 80 92

–––– = 10.00% –––– = 8.36%
800 1100

– Working capital ratio 200:100 = 2:1 250:200 = 1.25:1

– Acid test ratio 90:100 = 0.9:1 90:200 = 0.45:1

– Debtor days 40 85
–––– x 365 = 18.25 ––––– x 365 = 28.20
800 days 1,100 days

– Creditor days 46 138.8

–––– x 365 = 27.98 ––––– x 365 = 62.70
600 days 808 days

(b) The financial position of Keswick Ltd has worsened in the year to
30 September 2005. Capital employed (i.e. profitability) has reduced from
13.33% to 10.22% alongside a reduced net profit percentage.

The two principal measures of liquidity have also worsened and in

particular the acid test ratio demonstrates a poor overall liquidity position.

The business takes an additional 10 days (compared to 2004) to receive

funds from its debtors and it takes an additional 35 days to pay its
creditors.

The financial position in 2005 is significantly poorer than in 2004.

Question 6

(a) Appropriation account for Black, White and Brown for the period ended 30
September 2005

£ £
Net profit 32,000
Less: Interest on capital
– Black 5,000
– White 4,000
– Brown 3,000 (12,000)
–––––––
: Salary – Brown (2,000)
: Profit share
– Black (4/9) 8,000
– White (3/9) 6,000
– Brown (2/9) 4,000 (18,000)
––––––– ––––––––
nil

(b) Partners’ Current Accounts

Dr Black White Brown Cr Black White Brown

£ £ £ £ £ £
Drawings 6,000 8,000 6,500 B/d 4,000 6,000 2,000
Int. on 5,000 4,000 3,000
capital
C/d 11,000 8,000 4,500 Salary 2,000
Profit 8,000 6,000 4,000
share
Total 17,000 16,000 11,000 17,000 16,000 11,000
b/d 11,000 8,000 4,500

(c) The main point of difference between the balance sheet of a sole trader and
a partnership lies in the capital and current accounts. While the sole trader
may merge profit, losses and drawings and so on, this would be
inappropriate in a partnership account where individual partner capital
accounts are used to show partners’ capital contributions and individual
partner current accounts are used to record shares of profits or losses,
interest on capital, salaries and drawings and so on.

Question 7

(a) A suspense account is an account to which you put that aspect of a

transaction with which, through lack of information, experience or
guidance, you feel unable to deal satisfactorily. For example, you might
credit to a suspense account the double entry for a postal order or cash
received (the cash book would be debited), if the name of the sender were
not known. When this information became known, you would use the
journal to transfer the item out of the suspense account and into the
account of the customer who had sent it.

Similarly, if a firm has a substantial bill for repairs and improvements, the
double entry (corresponding to the payment in the cash book) might be
 made in a suspense account until the correct proportion of revenue and
capital expenditure had been agreed, when transfers would be made from
the suspense account to the repairs account and the appropriate asset
accounts.

A further use of a suspense account is that of the temporary location for a

trial balance difference. In order to prepare a set of final accounts from an
unbalanced trial balance, the trial balance is made to agree artificially by
putting into the suspense account a balancing debit or credit entry.

The main features of suspense accounts are that:

• They are temporary

• They are a substitute for the missing balance or balances in the trial
balance
• They are closed as soon as the problem has been resolved
• They fulfill the basic rules of double entry

(b) Trial Balance

DR CR
£ £
Purchases 700
Sales 1,100
Rent paid 250
Cash in bank 840
Travel expenses 160
Debtors 320
Creditors 350
Capital 710
Suspense Account 110
–––––– ––––––
2,270 2,270
–––––– ––––––

(c) Journal entries

DR CR
£ £
(1) Simon 220
Smith 220
Being an adjustment of misposting to Smith instead of Simon

(2) Jones 420

Suspense 420
Being debit to personal account omitted from the books.

(3) Suspense 750

White 750
Being credit to personal account omitted from the books.